SL Green Realty Corp.'s 30% Fall Since June, Bank on Sinatra?

SL Green Realty Corp. (NYSE:SLG) shares have fallen close to 30% since the start of June, from the high $26 level to today's price of around $19 a share.  REITs have lost their luster, but what makes SL Green so compelling is its assets in New York, and they have some of the most valuable properties in the world a la midtown Manhattan.  Start spreading the news, with Q2 earnings due out on July 28th, do you bet on Sinatra's stomping grounds?

Commercial Real Estate is a big fear and unknown question that is just waiting to either kill or rally our economy and equity markets.  However all the news we hear about the commercial space these days is bad, worse, and terrible.  Just last week  U.S. office market vacancy rate reached 15.9% in the second quarter, the highest level in four years, and rent fell by the largest amount in more than seven years as demand remained weak, according to a leading real estate research firm.

"It's bad," Reis Inc director of research Victor Calanog said. "It's decaying and getting worse. Given the depth and magnitude of the recession, you can argue that we are facing a storm of epic proportions and we're only at the beginning.

The average weighted U.S. office vacancy rate rose by 0.70 percentage point during the quarter and by 2.7 percentage points compared with a year earlier, according to a Reis report released on Tuesday.

ITS UP TO YOU NEW YORK, NEW YORK 

Vacancy in the New York area, which includes all the New York City boroughs except Staten Island, rose 1.2% points to 10.8%, the highest level since 1996, and effective rent slid 5.2%. 

"As far as we can tell for New York, the next two years will be murder," Calanog said.

PUT A CORK IN IT CALANOG

Frank Sinatra once said:

 “The best revenge is massive success.” 

He also said:

"I feel sorry for people who don't drink. When they wake up in the morning, that's as good as they're going to feel all day.”

Fellow Masters, why I even bring SLG to your attention is that just like Frank, being early to the party with cocktail in hand is the way to taste sweet success.  Are things going to get better before they get worse? 

Most likely, Yes. 

SL Green Realty Corp.'s CEO Marc Holliday said on June 29th:
“A lot of the correction has already occurred,” Holliday said in an interview in his Midtown office. “Everybody thinks the world is falling apart -- it is tough out there -- but I can see that in the next six to 12 months we’ll be at an inflection point.”

Manhattan office prices dropped 13 percent in March from a year ago while rents are down an average of 28 percent from their peak, according to CB Richard Ellis Group Inc. and Moody’s Investors Service. Holliday said rents may decline another 10 percent to 15 percent before stabilizing next year.

SL Green, Manhattan’s biggest office landlord with 23.2 million square feet of space, is riding out the real estate recession by focusing on being the low-cost provider of space and hanging on to tenants with expiring leases.

SL Green has been able to sign about 300,000 square feet of new leases a quarter at rents that are 20 to 25 percent above the expiring rents, Holliday said. That leasing rate should continue for the next three to four quarters, he said.

Holliday said SL Green, owner of the Graybar Building and Viacom Inc.’s Times Square headquarters, “aggressively” reduced rents to retain some tenants, helping to keep the vacancy rate in its Manhattan buildings at 3.8 percent at the end of the first quarter. The Manhattan rate is currently about 9 percent, according to CB Richard Ellis.

Masters, read Bloomberg's article SL Green Chief Sees Manhattan Office Market Recovery (Update1) for the full picture, but the point I am trying to make here is that SLG will be first to the party when the recovery hits and its share price is going right back up with it, thanks to the Big Apple.

Risky Play?  No doubt, expect SLG's share price to bounce all over the place in the coming months, but this massive REIT which has a heavy stake in New York should not be thrown in the trash, just because every talking head says they are garbage.  Again, “The best revenge is massive success” and cocktails help as well. 

SLG 101:

Recent analyst take on SLG and chart (thanks to Finviz.com)

SOURCE: http://www.bloomberg.com/apps/news?pid=20601103&sid=aCQvqhnL52bU

Disclaimer: No positions in any of the securities mentioned in this publication.