If we are truly in a Fed easing cycle as much of the world seems to think, SL Green is one of the biggest beneficiaries due to the private market cap rate of its assets and the discount at which it trades.
As of today, the consensus NAV for SLG is $122.88 and SLG is trading at about 64% of its NAV with a closing price of $79.17.
If the Fed lowers rates and the 10 year Treasury remains low, the NAV will grow due to simple cap rate compression. That $122.88 NAV is based on a 4.76% cap rate which SLG has demonstrated to be plausible through asset sales. A 50 basis point compression in NYC class A office cap rates would increase SLG’s NAV materially. Valuing SLG’s $869.7mm NOI (MRQ X4) at a 4.25% cap rate, we get an NAV of $20.46B which after factoring in debt and diluted sharecount results in about $150 a share.
All real estate stands to grow in value if cap rates compress with interest rates. However, SLG has 2 unique aspects that make it benefit more.
- Its NYC only portfolio has a lower starting cap rate which makes each basis point of change more impactful. A 50 basis point drop from 4.76% is mathematically a bigger deal than a 50 basis point drop from say 7.0%.
- SLG is translating the property value into value for shareholders through a combination of dividend increases and an aggressive share buyback. Sharecount has decreased by nearly 20% as SLG buys back shares at steep discounts to NAV. Each share bought back at a discount to NAV further increases NAV per share.
SLG’s management is arguably the best among office REITs and we believe they can successfully navigate the challenging supply situation facing NYC. SLG also serves as a diversifier for 2CHYP as we have minimal direct office exposure.