SL Green Shares Boosted As It Hangs Tough In DownturnLast update: 1/27/2009 11:20:29 AM
By A.D. Pruitt
Of Dow Jones Newswires
NEW YORK (Dow Jones)--Despite growing doom-and-gloom about New York City's commercial real estate market, SL Green Realty Corp. (SLG) heartened Wall Street with better-than-expected fourth quarter results. Although the Big Apple's largest commercial landlord is seeing some pain amid mounting vacancy rates and corporate layoffs, the results point to SL Green's durability in this economic downturn, analysts say. "The underlying market conditions were modestly better than people had anticipated," said Dave Rodgers, an analyst at RBC Capital Markets. "It proved...that commercial real estate is not necessarily residential," where people default on their mortgages and then they're gone. SL Green's stock price soared over 8% in early trading, but differing opinions of the writedowns and property performance deflated some of those gains, Rodgers said. The company's share price was recently up 22 cents, or 1.42%, at $15.68 in recent and volatile trading. The company reported after Monday's market close that fourth-quarter net income dropped 29%, while revenue came in above Wall Street expectations. However, funds from operations, a key measure of profitability for real-estate investment trusts, fell a penny a share short of estimates. SL Green is expected to bear the brunt of layoffs in financial services this year. The company also is a big lender to other landlords, both from its balance sheet and through ailing Gramercy Capital Corp. (GKK), a commercial real estate finance and property investment company that got caught flatfooted in the credit crunch. The company's Manhattan exposure, comprising the bulk of its portfolio, had served SL Green well during boom times. SL Green was able to deliver impressive returns while becoming a star in the REIT industry. Concerns about SL Green come as the outlook for commercial real estate gets more dire amid few indications that frozen credit markets will thaw soon. National office vacancies stood at 14.19% at the end of the fourth quarter of 2008, compared to 12.6% at the same period in the prior year, according to a recent report by Colliers International. For Manhattan, the vacancy rate rose to 10.2% last year in downtown and midtown from 6.8% in 2007, the report said. To preserve capital, SL Green last month cut its quarterly dividend by more than half. The company said the move would generate about $95 million in savings which would go toward investments or paying down debt. SL Green reported net income of $91.6 million, or $1.60 a share, down from $128.7 million, or $2.16 a share, a year earlier. The latest results included a $238.6 million gain on a property sale, gains of $117.9 million on early retirement of debt and a loss of $147.5 million on its investment in its ailing spinoff, Gramercy Capital Corp. (GKK). The prior-year quarter's results benefited from a gain of $114.7 million from a property sale. Excluding items, funds from operations, a key measure of REIT profitability, rose to $1.30 a share from $1.24. Revenue grew 9.1% to $276.1 million, and net rental revenue rose 5.4%. Analysts' estimates were for per-share funds from operations of $1.31 on revenue of $212.1 million, according to a poll by Thomson Reuters. "The results confirm our view that SLG should outperform NYC in downturn," UBS said in a report. The REIT record $84.8 million of loan loss reserves, primarily against non-New York City structured finance investments. In its Manhattan portfolio, SL Green signed 53 leases totaling 1.5 million square feet, finishing the quarter at 96.7% occupancy compared with 96.5% on Sept. 30. The leases' average starting rent was up 65% from a year earlier to $71.49 per rentable square foot. In its suburban portfolio, the REIT signed 19 leases totaling 154,319 square feet and had 90.8% occupancy at the end of the quarter, compared with 91.9% on Sept. 30. Average starting rent was up 1.7% at $29.35 per rentable square foot. "SL Green's....fourth quarter results were messy, as the structured finance investment exposure and an objective to delever produced a series of gains and losses," wrote Jordan Sadler of KeyBanc Capital Markets. "Importantly, the core portfolio held up well and should remain a strong driver of cash flow in 2009, though signs of weakness continue to crop up," he added. -By A.D. Pruitt, Dow Jones Newswires, 201-938-2269, angela.pruitt@dowjones.com (Kathy Shwiff contributed to this report) (END) Dow Jones Newswires
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