Canada Pension Buys Stake in New York Tower From SL Green for $576 Million

SL Green Realty Corp., New York’s biggest landlord, agreed to sell its minority stake in McGraw- Hill Cos. headquarters building in Midtown for $576 million to help pay for purchasing two other Manhattan office towers.

The company will sell its 45 percent non-managing ownership interest in the building at 1221 Avenue of the Americas to the Canada Pension Plan Investment Board, according to a statement today. The pension board also said it formed a joint venture with SL Green to acquire a 45 percent stake in 600 Lexington Ave. in Manhattan.

SL Green will use proceeds from the McGraw-Hill sale to buy 125 Park Ave., which occupies the block between 41st and 42nd streets across from Grand Central Terminal, for $330 million. The purchase signals SL Green expects to raise rents, said Dan Fasulo, managing director of New York property research firm Real Capital Analytics Inc.

“They’re really shocking a lot of investors who didn’t realize the market had come back this violently,” Fasulo said. “You don’t buy an asset at this type of yield unless you think you can raise the income over time. The pricing wouldn’t make sense if you were expecting rents to fall.”

Meredith Corp. is the biggest tenant at 125 Park Ave., with 151,000 square feet of offices and a lease expiring in December of next year, according to data compiled by Bloomberg. That creates an opportunity for SL Green to raise revenue by re- leasing the space at a higher rate, Fasulo said.

Little Room

The McGraw-Hill building, one block from Rockefeller Center and across the street from Radio City Music Hall, is fully leased through 2020, leaving little room for SL Green to increase income, Fasulo said.

“They have a history of maximizing the value of their real estate assets and they also have a history of selling when they think there’s nothing else they can do,” Fasulo said.

The McGraw-Hill transaction price represents a 28 percent premium over the value implied by SL Green’s 2003 purchase of its stake in the property, Fasulo said. The sale to the Canadian pension board values the tower at about $1.28 billion, or about $500 a square foot, for the 2.5 million square foot skyscraper, he said.

Graeme Eadie, senior vice president for real estate investments at the Canadian fund, confirmed the valuation in a telephone interview and said his employer had been looking to enter the New York market for several years.

The Canadian pension board’s time horizon is “very long,” Eadie said.

Seeing Opportunity

“We do think there are opportunities with the leases that are there,” he said. “We think the market itself has bottomed.”

The deals announced today may set the stage for sales picking up later this year, Fasulo said.

“Right now, for an office offering, it’s too close to summer,” he said. “It takes a few months to get these things going. But if this pricing level holds, barring a contagion in the financial markets, after Labor Day you’re going to see a huge wave of offerings.”

So far this year, 17 Manhattan office buildings worth at least $5 million either sold or are under contract, according to Real Capital data. That compares with 32 such transactions in all of last year.

Deals Surpass 2009

The $2.12 billion aggregate value of this year’s contracts and closings already exceeds last year’s total of $2.02 billion, according to Real Capital.

Manhattan office rents may rise 25 percent in the next three years after falling to a three-year low, Marc Holliday, SL Green’s chief executive officer, said last week on a conference call. The company’s pending acquisition of 600 Lexington Ave. was underwritten with that assumption, he said.

Asking rents in Manhattan slid to $55.38 a square foot in the first quarter, a 24 percent decline from their peak in the third quarter of 2008, according to Cushman & Wakefield Inc. Companies are now seeking 100,000 to 300,000 square-foot spaces, after a year dominated by demand from smaller tenants, Holliday said.

SL Green rose $5.60, or 9.5 percent, to $64.85 in New York Stock Exchange composite trading today. The company was the second best performer in the Bloomberg REIT Office Property Index, which climbed 6.7 percent.

The Avenue of the Americas and Lexington Avenue deals are expected to close this month, while the proposed Park Avenue purchase will probably close in the third quarter, SL Green said.

To contact the reporters on this story: Chris Bourke in London at cbourke4@bloomberg.net; Oshrat Carmiel in New York at ocarmiel1@bloomberg.net.

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