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Rating Action:

Moody's affirms SL Green's ratings, revises outlook to negative

28 Jul 2020

New York, July 28, 2020 -- Moody's Investors Service ("Moody's") has affirmed SL Green Operating Partnership, L.P.'s Baa3 senior unsecured debt rating, (P)Baa3 senior unsecured debt shelf rating, and (P)Ba1 subordinate shelf and junior subordinate shelf ratings. In the same action, all ratings of its parent REIT, SL Green Realty Corp. (collectively 'SL Green' or 'the REIT') have also been affirmed. The rating outlook has been revised to negative from stable.

The affirmations reflect the REIT's solid operating track record in the New York office real estate market, good liquidity position relative to capital needs over the next 1-2 years and sizeable but mostly preleased development pipeline. A weakening trend in operating metrics due to the pandemic and new supply, elevated leverage metrics that would likely deteriorate meaningfully as SL Green invests in its projects under construction over the next few quarters, a weak fixed charge coverage and an aggressive share buyback policy are key reasons for the change in outlook.

The following ratings have been affirmed:

Affirmations:

.Issuer: SL Green Operating Partnership, L.P.

....Junior Subordinated Shelf, Affirmed (P)Ba1

....Subordinated Shelf, Affirmed (P)Ba1

....Senior Unsecured Shelf, Affirmed (P)Baa3

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

..Issuer: SL Green Realty Corp.

....Junior Subordinated Shelf, Affirmed (P)Ba1

....Subordinated Shelf, Affirmed (P)Ba1

....Preferred Shelf, Affirmed (P)Ba1

....Preferred Shelf Non-cumulative, Affirmed (P)Ba1

....Senior Unsecured Shelf, Affirmed (P)Baa3

....Pref. Stock Preferred Stock, Affirmed Ba1

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

Outlook Actions:

..Issuer: SL Green Operating Partnership, L.P.

....Outlook, Changed to Negative from Stable

..Issuer: SL Green Realty Corp.

....Outlook, Changed to Negative from Stable

RATINGS RATIONALE

SL Green's Baa3 senior unsecured rating reflects its leadership position in the large and high barrier to entry New York office real estate market, laddered lease maturity schedule and good liquidity position while also considering its elevated leverage metrics, modest fixed charge coverage and consequential stock buyback program. A significant decline in office space usage in New York and drop-off in prospective tour activity, both due to the pandemic, will affect office leasing volume and net effective rents such that office REITs' same-store NOI trends would likely be under pressure in the next few quarters. Lack of geographic diversification, a materially preleased development pipeline and a modest yet valuable unencumbered asset base are some other key credit considerations incorporated in SL Green's rating.

The revision of the rating outlook to negative reflects the increased likelihood of meaningful deterioration in some credit metrics such as the net debt + preferred to EBITDA, to about 12x, and fixed charge coverage, to below 2x, when the REIT's prorata share of unconsolidated joint ventures are included. Sustained weakness in leasing volume and pricing that would affect occupancy in the same-store pool and remaining lease-up of the construction projects are other credit concerns.

At the end of Q2 2020, SL Green's same-store Manhattan office portfolio was 95.2% occupied while occupancy in the same-store retail and residential pools were 95.4% and 90% respectively. The REIT's 28-asset Manhattan office portfolio generates approximately 85% of operating property NOI. The increase in supply in the New York office market is creating leasing challenges for SL Green and its office landlord peers. The post-pandemic decline in physical occupancy in the buildings and tour activity is further straining the operating environment. The REIT's manageable lease maturity schedule, 12% through YE 2021, and diversified tenant base, well over 800 tenants, continue to be important credit strengths in the current environment.

The modest upside from limited mobility during the pandemic is that many tenants are reluctant to make sweeping changes to their office space strategies and therefore short-term lease renewals, 1-2 years generally and upto 5 years in some instances, have become more common. Higher tenant retention will have a favorable impact on the office REITs' releasing capex. Trends such as higher proportion of remote working, distributed office locations and migration to economical office markets could reduce demand in high cost markets like New York, however, many are yet to be proven and are not expected to influence leasing decisions in the next 2-4 quarters.

SL Green has a sizeable development pipeline with a capital outlay of $4.3 billion for its three new properties, however preleasing in its two large projects mitigates earnings risk. The One Vanderbilt project, a 1.7 million square feet development in the Grand Central submarket, accounts for over 76% of the budget and was 67% preleased at the end of Q2 2020. The $650 million 410 10th Avenue property was 98.6% preleased and over 70% funded. The remaining equity contribution for all three projects is modest at $101 million of which the REIT's share is $79 million. SL Green has announced a large-scale redevelopment/expansion of its One Madison Ave property with an aggregate budget of $2.3 billion. The joint venture partners for the project who own a combined 49.5% interest will contribute almost $500 million of equity capital and SL Green's contribution would likely be much lower.

At the end of Q2 2020, SL Green's net debt + preferred to EBITDA is estimated to be about 10.4x and fixed charge coverage was 2.2x. The REIT's secured leverage, 31%, and effective leverage ( debt + preferred as a % of gross assets), 55%, are also moderately elevated for the rating level, in part due to higher leverage, especially secured leverage, in the unconsolidated joint ventures. The aggregate leverage ratios are 15% stronger if GAAP financials are used and secured leverage is 15%. The REIT's track record in the New York office market, diversified capital structure that includes a meaningful proportion of non-recourse debt and preferred stock and a substantially preleased development pipeline supports higher leverage tolerance than similarly rated peers, however consistently high leverage due to an aggressive capital strategy or ambitious plans with significant execution risk will create rating pressure.

SL Green's sound liquidity position is supported by over 36% availability on its $1.5 billion unsecured revolving credit facility at the end of Q2 2020, approximately $1.1 billion of cash balance, a valuable unencumbered asset base and manageable unfunded near-term capital needs. With less than $600 million of debt maturities through YE 2021, considering available extension options, and available committed capital sources for the development projects, the REIT's liquidity profile is good.

Year-to date, the REIT has repurchased 6.2 million shares for approximately $400 million and has approximately 14% remaining capacity on the $3.0 billion authorization. Using asset sale proceeds to buyback shares limits pressure on liquidity, nevertheless it weakens the leverage metrics. The REIT's share buyback strategy in the face of the challenging operating environment and weakening leverage metrics would influence our assessment of their financial policy and commitment to an investment grade credit profile.

The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on SL Green of the deterioration in credit quality it has triggered, given its exposure to office real estate located in high density metro areas, which has left it vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

A rating upgrade is unlikely and would likely require net debt + preferred to EBITDA below 9.0x including pro-rata share of joint ventures, fixed charge coverage above 2.5x, both on a sustained basis. Maintaining strong operating performance and development exposure below 15% of gross assets are some other factors that could lead to an upgrade.

SL Green's rating could be downgraded if net debt + preferred to EBITDA remains above 10.5x after the stabilization of the One Vanderbilt and 410 10th Avenue projects. Fixed charge coverage remaining below 2.0x or further deterioration in operating performance would also pressure the ratings.

SL Green Realty Corp. (NYSE: SLG) is a real estate investment trust that is focused primarily on acquiring and operating commercial office properties in the New York metropolitan area, mainly the Manhattan submarket. As of June 30, 2020, SL Green held interests in 96 buildings totaling 41 million square feet via ownership interests and debt and preferred equity.

The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1095505. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Ranjini Venkatesan
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Philip Kibel
Assoicate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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