What’s Happening at SL Green?
New York City’s biggest private office landlord just had a big shakeup with the departure of Andrew Mathias. Is everything OK?
Stepping into the lobby of One Vanderbilt — the 93-story skyscraper owned by New York City commercial real estate giant SL Green (SLG) Realty — it’s easy to be awed by the shimmering glass panels running 1,400 feet into the air and a series of angular pavilions dedicated to green space, public observation, outdoor dining and terra-cotta moldings. The weight of more than 1.7 million square feet of Class A office space seems pleasantly luxurious, if not appropriate, to bask in.
Since opening in September 2020, One Vanderbilt has quickly staked its claim as the prime office property in all of New York City. The building gave SL Green -– a publicly traded real estate investment trust (REIT) and New York City’s largest private office landlord — a much-needed boost at a time when work from home and rising interest rates seemed to herald a potential death knell for the beleaguered asset class.
“SL Green has one of the highest-quality portfolios of any office REIT that we rate,” said Michael Souers, director at S&P Global Ratings. “I’d put One Vanderbilt against any building in Manhattan.”
Perhaps this is why, beyond the glitz of One Vanderbilt and SL Green’s 33 million-square-foot portfolio of 60 buildings, recent developments with the eminent landlord seem so surprising.
On Oct. 9, the company revealed that Andrew Mathias, SL Green’s president since 2007, would step down at the end of the year, after more than two decades at the company. As president, Mathias stood second only to CEO Marc Holliday in terms of power and influence at SL Green. He had previously served as vice president, director of investments and chief investment officer since joining the firm in 1999.
Mathias didn’t leave to take another gig; rather, he will remain a board member and receive $100,000 per year to advise Holliday.
“His contract’s coming to an end, and we, meaning me and my board, decided at this point in time not to renew Andrew’s contract,” Holliday told CO during an Oct. 23 interview. “I did that in conjunction with discussions with Andrew where it led me and my board to believe this was kind of the right time for a move.
“It’s the right thing for the company, and I think it’s the right thing for Andrew,” he added.
The news of Mathias’s departure has reverberated across all channels of commercial real estate.
“I was very surprised,” said John Kim, a managing director of U.S. real estate at BMO (BMO) Capital Markets. “Andrew was a very well-respected president of the company, and most people thought he’d be the eventual CEO of SL Green. It was a big surprise, and not a positive one.”
Alexander Goldfarb, managing director at investment bank Piper Sandler, noted that Mathias’s hefty salary may have contributed to the firm’s decision. The 49-year-old Mathias earned nearly $12 million in compensation in 2022, largely through stock shares, according to a letter to investors.
“Honestly, it’s cost cutting. SL Green has been on a focused tear to prune noncore assets and trim corporate costs,” explained Goldfarb. “Andrew, God bless him, is a big number from a compensation standpoint, and the company is skimming down.”
That skimming seems to involve several of the REIT’s core staff. Mathias is the third major departure from SL Green senior leadership in as many years: former co-CIO Isaac Zion left in July 2020, while former CIO David Schonbraun stepped down in May 2021. Zion joined Acram Group, an acquisition and development firm, as managing principal, while Schonbraun is managing partner at GreenBarn Investment Group, a CRE investment firm.
“Yes, it’s a surprise, and, yes, it makes sense with what the company is trying to achieve,” Goldfarb added. “But it’s all part of a plan to make the company as efficient as they can be and also own the best assets that they can.”
Like every landlord in Gotham, SL Green has not been impervious to the rocky waters of the office market.
The firm’s stock currently trades at $31 per share, 69 percent less than its pre-pandemic era high of $100 per share in February 2020. The firm’s stock hit a post-pandemic low of $20.50 in March during the regional banking crisis, and had traded as high as $160 per share in 2007.
On Oct. 18, the firm announced third-quarter earnings data that reported a net loss of $24 million as compared to net income of $7.4 million in the same quarter in 2022. Perhaps more troubling, the company reported a net loss attributable to common shareholders — essentially a decline of shareholder value — for the first nine months of the year of $423.9 million, compared to a net loss of $28.7 million for that same period in 2022.
Funds from operations (FFO) — which REITs typically use as a proxy measurement of cash flow — came out at $87.7 million for the quarter, compared to an FFO of $114.2 million in third quarter 2022.
And while occupancy is at a number many office landlords would kill for (89.9 percent) it still fell short of the 92 percent level the firm forecast at the start of 2023.
During the Oct.19 earnings call with investors, Holliday said the firm currently has 1.1 million square feet of pipeline leasing activity.
“This is an important moment that signifies the stabilizing of the operating portfolio assets,” he said. “The trend is in our favor as companies continue calling people back to work.”
During his interview with CO, Holliday touched on reasons for Mathias’s departure, noting that the move will allow younger SL Green executives “to step up and take positions of heightened responsibility and ownership” over an improved market the firm forecasts for 2024.
However, another industry source, who requested anonymity, speculated: “I don’t think it’s the last head to roll. I think it’s the first.”
Mathias joined SL Green shortly after graduating from the Wharton School, the prestigious business school at the University of Pennsylvania. Holliday had met the younger Mathias at Capital Trust Group, an investment bank, where he mentored Mathias as they worked together on a deal advising Stephen Green, the founder and former chairman of SL Green, during the firm’s initial public offering in 1997. Within a year, both men were working for the venerable real estate icon.
As he climbed the corporate ladder, Mathias helped guide SL Green through the Global Financial Crisis, when the firm’s stock cratered to $12 per share in February 2009 and questions about solvency turned into bothersome whispers.
Mathias, who specialized in acquisitions, led the firm’s charge back from the brink of death through coordinated purchases of 11 Madison Avenue for $2.2 billion in 2015, and 50 percent stakes in One Worldwide Plaza and 650 Fifth Avenue to be shared with RXR Realty and Jeff Sutton, respectively. He also spearheaded the $3 billion development of One Vanderbilt beginning in the early 2010s. That development forced him to solve a zoning jigsaw (some might say nightmare) that encompassed the Metropolitan Transportation Authority’s plans to build East Side Access, and required not just the purchase of multiple land tracts but also the cooperation of local authorities surrounding neighboring Grand Central Terminal.
“Andrew is a really smart guy and he’s done very well at Green,” said Gavin Evans, founder and co-head of investments at Skylight Real Estate Partners, and formerly of Columbia Property Trust, another REIT. “I think that One Vanderbilt is one of the best buildings around, maybe the best in the city, and they got 1 Madison Avenue, 11 Madison Avenue. Some of this super high-end, new or like-new space, really does resonate with people.”
But things took a turn over the last year once it became clear that New York City’s office market was stubbornly not returning to normal following the end of the pandemic.
First, there were the issues surrounding Holliday’s compensation. In April, Holliday had elected to take half of his 2022 performance bonus in shares of company stock, rather than cash, to appease a wary board. In June, Crain’s New York Business reported that Institutional Investor Services, a proxy advisory firm, recommended to the SL Green board that they reject Holliday’s $15.4 million annual package, citing “unmitigated pay-for-performance misalignment.”
“I would imagine a lot of their investors have given them a hard time about executive compensation,” said BMO’s Kim. “Given the size of the company today, the market cap has shrunk considerably. It’s no longer an S&P 500 company, so there was probably a lot of investor pressure to reduce overhead costs.”
Looking beyond compensation, several weeks spanning mid-August and early September this year likely played an even bigger role in the company’s shakeup.
In September 2022, Mathias helped lead the charge for SL Green’s acquisition of 245 Park Avenue, a 56-year-old, 1.8 million-square-foot office tower that rises 44 stories in the center of Manhattan. The firm previously had a preferred equity position and handled the building’s day-to-day operations and maintenance prior to acquisition.
Less than a year later, in a bid to raise capital, SL Green sold a 49.9 percent stake in 245 Park to Mori Trust, a Japanese firm, in a deal that placed a $2 billion valuation on the property.
245 Park emerged as a potentially troubled asset on Aug. 11, shortly after the sale, when its $1.7 billion loan entered the CRED iQ special servicing watchlist due to its low debt service coverage ratio (or DSCR, a measurement of cash flow for debt obligations) and a recent bout in special servicing from November 2021 to November 2022 when SL Green was in the process of taking it over.
The building’s DSCR stands at 0.96, below break even, with occupancy at 80 percent, while the loan was underwritten for a DSCR of 1.42 and occupancy of 91 percent, according to an internal report supplied by CREDiQ.
“At this point, it doesn’t have enough proceeds to pay its debt service,” said one credit analyst, who did not want to be identified. “The loan is current, but it has all the variables of a defaulted loan.”
Holliday rejected concerns surrounding 245 Park’s low DSCR by noting that SL Green plans a multimillion-dollar renovation of the property that will provide “significant coverage” both on a debt service and a loan-to-value basis.
“DSCR is not a relevant metric in my eyes for buildings that are going through, in this case, what might be a $300 million-plus redevelopment program of improvement,” he said. “What’s most important is not the current state of the project in its underdeveloped and unleased state, but in its stabilized, fully redeveloped, fully re-leased state.”
Things are worrisome for SL Green a bit further down Park Avenue.
In September, a $1.1 billion loan secured by 280 Park Avenue, a 60-year-old, 1.25 million-square-foot, Class A office property operated jointly by SL Green and Vornado Realty Trust, did not pay off on its original maturity date of Sept. 9, 2023. It is not clear whether the loan was sent to special servicing.
Manus Clancy, Trepp’s senior managing director, categorized the loan as “in purgatory.”
“It’s past its maturity date, but we don’t know what’s happening next,” Clancy said. “It’s not in heaven, and it’s not in hell. It’s not being foreclosed upon, and it’s not being extended. It’s waiting for a resolution.”
Clancy noted that the borrower has previously exercised four extension options on the loan, has one remaining option, and has not yet identified plans for the upcoming year-end maturity.
“To have five extensions is humongous,” said one credit analyst, who asked not to be identified, but reviewed the data. “Those are ones you just cannot hide, unfortunately.”
Holliday dismissed any anxiety around the multiple loan extensions, describing the structure of floating-rate loans on large commercial assets as customarily having short initial terms with a series of multiyear extensions.
“The more extensions you get on a loan like that, it’s a sign of attractive underlying property and collateral, because lenders, for less than AAA properties in AAA locations, might not give loan extension options, or will only give one or two,” he said. “The mere exercising of those options is more customary in the ordinary course as opposed to anything notable.”
Holliday would not comment on whether SL Green would extend or refinance its debt on 280 Park, but he did emphasize that the building currently has 94 percent occupancy.
“At this point I’d say the loan is very secure, our lenders feel good about the asset,” he said. “The property is well leased, and we are in dialogue with new tenants and existing tenants with maintaining that level of occupancy.”
Then there’s One Worldwide Plaza — a 2 million-square-foot office tower at 825 Eighth Avenue with a $1.2 billion mortgage. SL Green and RXR acquired a 49.9 percent ownership stake in the property in 2017, when they valued the 33-year-old, postmodern brick tower at $1.7 billion.
The debt’s largest piece, a $616 million single-borrower loan, was added to the CRED iQ special servicing watchlist on Sept. 5, 2023.
The building’s largest tenant, law firm Cravath, Swaine & Moore, occupies 30 percent of the building and is moving to Hudson Yards next year, while another anchor tenant, Nomura Holdings, is reportedly looking to leave as well.
CREDiQ special servicing data states that the “loan has entered the watchlist due to an upcoming tenant lease expiration which has subsequently caused a cash management period to occur. Cash management accounts are in process of being set up.”
During cash management, any excess cash flow to the borrower is cut off and the special servicer keeps the proceeds because asset performance has deteriorated from original underwriting standards.
Holliday said that SL Green and RXR are working on redevelopment plans for One Worldwide Plaza, and added that as Cravath, Swaine & Moore rolls out, the two owners plan to make the 500,000 square feet of office space at the top of the building “as attractive as can be to the market.”
“It was kind of a state-of-the-art building when it was constructed back in the 1980s,” explained Holliday, “And I think, with a little attention paid to modernizing and creating some amenities in the building, it will be competitive.”
One more headache
Even more pressing on SL Green’s bottom line have been the ratings declines issued by S&P Global and Fitch Ratings over the last 10 months.
S&P Global dropped SL Green’s credit rating from BBB- to BB+ in December 2022. The ratings agency said that SL Green’s ability to lower leverage metrics through asset sales “remains uncertain” over the next two years, and added that “deteriorating credit metrics” could combine with a recession and work-from-home patterns to “heighten risks for SL Green.”
“It’s a high-quality portfolio that came into this now secular downturn highly leveraged,” explained James Fielding, senior director at S&P Global Ratings. “So they’re probably not as positioned as their peers to weather [the storm] at a high level.”
REITs like SL Green are often challenged by the difference between their intrinsic leverage — what they borrow to buy each asset — and the extrinsic leverage — what the market says their leverage ratio is, which is based on the market valuation of their equity.
The firm’s leverage played a considerable role in Fitch’s decision to downgrade the REIT to BB+ with a negative outlook, outlined in a Sept. 18 report. SL Green’s debt was roughly 10 times its EBITDA (earnings before interest, taxes, depreciation and amortization), according to Fitch, who said a healthier level would be below seven times EBITDA for the higher BBB- level.
“In 2022, when we downgraded SL Green and maintained a negative outlook, we signaled that in all likelihood we will be downgrading this again, barring a meaningful turnaround in their story,” said Christopher Wimmer, senior director at Fitch Ratings, who added that any future ratings decision is contingent on SL Green improving its unencumbered asset coverage of unsecured debt (UA/UD) while maintaining a lower leverage level and showing an ability to execute on dispositions.
“We certainly see the direction SL Green wants to go in,” Wimmer added. “Our problem right now is, at this point in the cycle, among other things, they had high leverage and we didn’t see any near-term resolution to that problem.”
SL Green currently has more secured debt — classic mortgages on single assets — than unsecured debt — loans not backed by specific property-level collateral. But the firm has been selling off unencumbered assets that it deems will no longer contribute to net operating income — a decision that conversely impacts future liquidity inflows.
“So they are paying off debt, but it’s limiting flexibility going forward to the extent they won’t have as many unencumbered assets to provide contingent financing,” said Peter Siciliano, a director at Fitch Ratings. “It limits their overall access to a fuller array of capital markets options.”
More than anything on their balance sheet, SL Green’s current headaches have to do with the persistence of work-from-home trends. These are causing what some say will be a permanent drop in demand for office space.
“Now the economics of office buildings is much more challenging,” said Tomasz Piskorski, a professor of real estate finance at Columbia Business School. “Stock prices of public REITs tell us the value of office buildings is down by about third since 2020.”
SL Green is still SL Green
Even with these headwinds, Fitch’s Siciliano noted that SL Green’s reported occupancy is essentially 90 percent, and they’ve kept their offices well amenitized at a time when flight to quality is a true saving grace for the asset class.
Moreover, SL Green’s prime assets are among the most desirable office properties in the entire city, according to BMO’s Kim, who noted that 1 Madison is a premier new development and 245 Park is going through a massive renovation.
“They have lots of leasing activity they want to accomplish,” he said. “And I’d say New York office is probably the strongest office market today in terms of tenant demand, and return to work, and the number of leading companies that are mandating employees come back to work.”
That’s not even taking into account their gamble to secure Manhattan’s first casino at 1515 Broadway, a 54-story Times Square office tower that hosts the famous Lion King show at the Minskoff Theater. SL Green is aligned with Caesar’s and hip-hop mogul Jay-Z on the bid, which has sparked fierce competition for three licenses across the five boroughs, two of which are likely to be granted to existing racinos.
“Strategically, it would be strong, if not excellent, for them [to win the bid],” said Kim. “It would probably be hugely successful for them given their joint-venture partners.”
The other feather in SL Green’s cap is the critical element to any successful real estate venture: location. Several of the firm’s most valuable properties — One Vanderbilt, 245 Park, 280 Park, and 220 West 42nd Street — sit directly in the Grand Central Terminal neighborhood, which now has direct access to Long Island rail commuters to add to its Metro North train lines that run through the northern New York suburbs and Connecticut.
“The stock price in our view will work as people come to realize that the most attractive office in New York, and arguably the country, is right around Grand Central, and they are starting to see pricing power on Park Avenue,” said Piper Sandler’s Goldfarb. “It will expand to other addresses.”
Others like Jesse M. Keenan, professor of sustainable real estate and urban planning at Tulane University, also expressed a lack of concern regarding the turnover up top at SL Green, mainly due to who remains at the helm.
“Marc Holliday is still running the show and that is what matters,” said Keenan. “His life is invested in the success of this firm, and the decisions that they made years ago to focus on quality assets means that they are in a much better position than most despite the geographic concentration risks.”
Ultimately, as the market finds its footing following COVID and office experiences its drawn-out reorientation, SL Green will remain a titanic ship sluicing through uncertain waters, steered by Holliday now that Mathias has left the captain’s quarters.
“The jury is out on where it will all shake out for New York City office,” said Skylight Real Estate’s Evans. “All landlords, even big REITs, will have to fight for tenants and fight for liquidity, and it won’t be a great experience for landlords who have not reset their cost basis.”
Brian Pascus can be reached at email@example.com.