Fitch Affirms SL Green's IDR at 'BB+'; Outlook Stable
NEW YORK -- March 4, 2013
Fitch Ratings has affirmed the Issuer Default Rating (IDR) of SL Green Realty
Corp. (NYSE: SLG) and its subsidiaries SL Green Operating Partnership, L.P.,
and Reckson Operating Partnership, L.P. as follows:
SL Green Realty Corp.
--IDR at 'BB+';
--Senior unsecured notes at 'BB+' (as co-obligor);
--Perpetual preferred stock at 'BB-'.
SL Green Operating Partnership, L.P.
--IDR at 'BB+';
--Unsecured revolving credit facility at 'BB+';
--Senior unsecured notes at 'BB+' (as co-obligor);
--Exchangeable senior notes at 'BB+';
--Junior subordinated notes at 'BB'.
Reckson Operating Partnership, L.P.
--IDR at 'BB+';
--Senior unsecured notes at 'BB+' (as co-obligor for certain issuances);
--Exchangeable senior debentures at 'BB+'.
The Rating Outlook is Stable.
KEY RATINGS DRIVERS
The affirmation of SLG's and Reckson's ratings reflect the company's credit
strengths, including its staggered lease maturity and manageable debt
expiration schedules, good contingent liquidity in the form of unencumbered
assets and the company's maintenance of leverage and fixed charge coverage
appropriate for the rating category. These positive rating elements are
balanced by broader concerns regarding the midtown Manhattan office leasing
environment, which remains somewhat dependent on the growth of large financial
institutions and supporting industries such as law and accounting firms.
SLG's leverage ratio is strong for the 'BB+' rating at 7.8x as of Dec. 31,
2012, down from 8.3x and 8.4x as of Dec. 31, 2011 and 2010, respectively.
Leverage has improved primarily due to growth in operating property portfolio
cash flows and interest income from SLG's structured finance investments.
Fitch expects leverage to sustain in the high 7.0x's level over the next few
years. Fitch defines leverage as net debt divided by recurring operating
EBITDA, including Fitch's estimate of recurring cash flow distributions from
unconsolidated joint ventures.
APPROPRIATE FIXED-CHARGE COVERAGE
The company's fixed-charge coverage ratio was 1.7x for the year ended Dec. 31,
2012, as compared to 1.6x in 2011 and 1.8x in 2010. Coverage has remained
in-line for the rating primarily due to free rent periods offered to tenants,
combined with recurring capital expenditure costs related to new leases. Fitch
expects coverage to improve slightly as the Manhattan leasing environment
remains relatively subdued and landlords continue to offer attractive tenant
improvement packages. Fitch expects this operating softness will be offset by
lower debt and preferred stock funding costs. Fixed-charge coverage is defined
as recurring operating EBITDA including Fitch's estimate of recurring cash
flow distributions from unconsolidated joint ventures less recurring capital
expenditures and straight-line rents, divided by interest incurred and
preferred stock distributions.
STRONG AND DIVERSIFIED TENANT BASE
The company's portfolio benefits from tenant diversification with the top 10
tenants representing only 30% of annual base rent. The largest tenant,
Citigroup, N.A. ('A' IDR with a Stable Outlook by Fitch), comprises 6.4% of
SLG's share of annual cash rent. All of SLG's top 30 tenants that are rated by
Fitch have investment grade ratings.
MANAGEABLE LEASE EXPIRATION PROFILE
The company has a manageable lease expiration schedule with only 37% of
consolidated Manhattan rents expiring over the next five years. While
approximately 56% of the company's consolidated suburban property rents expire
over the next five years, the suburban portfolio represents a fairly limited
portion of the company's total assets and only 9% of 2012 cash rent.
MANAGEABLE DEBT MATURITIES
Further supporting the ratings is the company's manageable debt maturity
schedule. Over the next five years, 2017 is the largest year of debt
maturities with 28% of pro rata debt expiring, with no other year greater than
16%. In addition, the company's ratios under its unsecured credit facilities'
financial covenants do not hinder the company's financial flexibility at this
point in time.
SOLID UNENCUMBERED ASSET COVERAGE OF DEBT
The affirmations are further supported by SLG's unencumbered property pool
coverage of unsecured debt, which gives the company financial flexibility as a
source of contingent liquidity. Consolidated unencumbered asset coverage of
net unsecured debt (calculated as annualized 4Q 2012 unencumbered property net
operating income divided by a stressed 7% capitalization rate) results in
coverage of 1.9x. This ratio is strong for the rating, particularly given that
Midtown Manhattan assets are highly sought after by secured lenders and
foreign investors, resulting in stronger contingent liquidity relative to many
STRONG MANAGEMENT TEAM
The ratings also point to the strength of SLG's management team given their
knowledge of the Manhattan office sector. This expertise has been demonstrated
by the company's ability to identify off-market acquisition opportunities, and
its maintenance of portfolio occupancy and balance sheet liquidity throughout
The Stable Rating Outlook is driven in part by SLG's liquidity profile. For
the period Jan. 1, 2013 to Dec. 31, 2014, the company's base case liquidity
coverage ratio is 1.4x. Fitch calculates liquidity coverage as sources of
liquidity (cash, availability under the company's unsecured revolving credit
facility, Fitch's expectation of retained cash flows from operating activities
after dividends and distributions) divided by uses of liquidity (pro rata debt
maturities and Fitch's expectation of recurring capital expenditures).
If secured debt were refinanced at 80% of the maturing balance, liquidity
coverage would improve to 3.4x. The company's liquidity is also strengthened
by its conservative common dividend policy, which enables it to retain
substantial operating cash flow. The company's AFFO payout ratio is low at
approximately 34% and provides the company with additional financial
MIDTOWN LEASING CONCERNS
Offsetting these strengths are Fitch's concerns regarding the uncertain
Midtown Manhattan leasing environment. While the New York City leasing
environment has strengthened over the last few years and SLG experienced
robust leasing volumes in 2012, the company continues to incur significant
costs in the form of tenant improvements, leasing commissions and free rent
incentives as tenant inducements, which has placed pressure on the company's
fixed charge coverage. In addition, a downturn in space demands from the
financial services industry, which accounts for 36% of SLG's share of base
rental revenue, may result in reduced cash flows or values of SLG's
RECKSON'S IDR LINKED TO SLG'S
Consistent with Fitch's criteria, 'Parent and Subsidiary Rating Linkage' dated
Aug. 8, 2012 and available on 'www.fitchratings.com', Reckson's IDR is linked
and synchronized with SLG's due to strong legal and operational ties between
SLG and Reckson, including each entity guaranteeing certain corporate debt of
the other. These equal IDRs are based on the consolidated credit profile.
PREFERRED STOCK NOTCHING
The two-notch differential between SLG's IDR and preferred stock rating is
consistent with Fitch's criteria for corporate entities with an IDR of 'BB+'.
Based on Fitch Research on 'Treatment and Notching of Hybrids in Nonfinancial
Corporate and REIT Credit Analysis', available on Fitch's web site at
www.fitchratings.com, these preferred securities are deeply subordinated and
have loss absorption elements that would likely result in poor recoveries in
the event of a corporate default.
JUNIOR SUBORDINATED NOTES NOTCHING
The one-notch differential between SLG's IDR and junior subordinated notes
(trust preferred securities) is consistent with Fitch's criteria for corporate
entities with an IDR of 'BB+'. These securities are senior to SLG's perpetual
preferred stock but subordinate to SLG's corporate debt. Holders of such notes
have the ability to demand full repayment of principal and interest in the
event of unpaid interest.
The following factors may have a positive impact on SLG's Ratings and/or
--Fitch's expectation of leverage sustaining below 8.0x for several quarters.
This factor was previously 7.5x and was changed to 8.0x to reflect the
consistently lower capitalization rates for midtown Manhattan office buildings
relative to other asset classes (leverage was 7.8x as of Dec. 31, 2012);
--Fitch's expectation of fixed charge coverage sustaining above 1.8x for
several quarters (coverage was 1.7x for the 12 months ended Dec. 31, 2012);
--Growth in the size of the unencumbered pool.
The following factors may have a negative impact on SLG's Ratings and/or
--Fitch's expectation of leverage sustaining above 9.0x for several quarters;
--Fitch's expectation of fixed charge coverage sustaining below 1.5x for
--A liquidity shortfall (base case liquidity coverage was 1.4x for the period
Jan. 1, 2013 to Dec. 31, 2014)
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Criteria for Rating U.S. Equity REITs and REOCs,' Feb. 26, 2013;
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis,' Dec. 13, 2012;
--'Recovery Rating and Notching Criteria for Equity REITs,' Nov. 12, 2012;
--'Corporate Rating Methodology,' Aug. 8, 2012;
--'Parent and Subsidiary Rating Linkage,' Aug. 8, 2012.
Applicable Criteria and Related Research
Criteria for Rating U.S. Equity REITs and REOCs
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
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Steven Marks, +1-212-908-9161
Fitch Ratings, Inc.
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George Hoglund, CFA, +1-212-908-9149
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