The market for office space has had a tough run over the past few years. The pandemic ushered in a new era of working from home, putting the office industry in limbo. Many thought office closures would be temporary, but nearly two years after the start of coronavirus, mass reopenings seem a long way off, with many offices across the country sitting empty.
One of the hardest-hit office real estate investment trusts (REITs) is SL Green Realty Corp (SLG -9.72%). Share prices have fallen 23% over the last three years. But the shares were sliding even before COVID, leaving investors to wonder whether the company is battling a temporary setback or more serious long-term trouble.
SL Green Realty Corp today
SL Green Realty specializes in the ownership, leasing, and management of high-end office space in the greater Manhattan area, with tenants like entertainment and media giant ViacomCBS (PARA 0.45%), banking and financial service providers Credit Suisse Group (CS) and TD Bank (TD -1.52%), and electronics maker Sony (SONY -2.60%).
At the start of 2022, the company owned or had interests in 73 buildings totaling 34.9 million square feet of office space, 93% of which was occupied at the end of 2021. Unsurprisingly, with the number of offices that were closed, 2021 was not a great year for SL Green. Total revenue for full-year 2021 was down nearly 20% year over year (YOY), and funds from operations (FFO) fell 8% YOY.
It's a tough time to be in NYC
New York City has remained one of the strictest cities regarding COVID-19 policies -- shutting down almost entirely for 2020. This spurred hundreds of thousands of people to flee that year, in one of the largest mass exoduses the city has ever experienced. In 2021, New York slowly began to reopen, welcoming vaccinated residents and tourists to dine, shop, and even enjoy a Broadway show again.
Things were looking up for the city, office space included -- with many big operators, including ViacomCBS, announcing plans to return to the office at the start of 2022. But after the surge in omicron cases, much of the progress the city had made was erased, with major employers putting the brakes on returning to the office. Reduced demand has driven rental rates down for office REITs, while vacancy rates have crept higher.
Will SL Green Recover?
The rise of e-commerce over the past decade has drastically changed demand for traditional retail real estate. With more people shopping online, brick-and-mortar retail needs less space. This scenario may be what's in store for office space too. Less demand, lower rental rates, higher vacancies, and, ultimately, lower overall performance. Now, more people are moving to the city than before the pandemic, showing demand for NYC living is back. The unknown variable here is whether SL Green can ride it out in the meantime.
SL Green is bullish on the future of New York and office space as a whole. In 2021, the company repurchased 5.1 million shares of its stock at discounted prices, part of its bigger $3.5 billion repurchase program. It also sold stakes in five buildings. But debt is 7.9 times earnings before interest, taxes, depreciation, and amortization (EBITDA), signaling that it's fairly highly leveraged -- not great, considering its revenue decline.
The company has three major debt maturities totaling $1.367 billion coming due in 2022 and $1.089 billion of cash and equivalents on hand, something it plans to address by refinancing or extending the loan terms. It also has 84 leases that will expire in 2022, which again isn't great, considering demand and rental rates are down today.
SL Green holds some of New York City's most desirable high-rise office buildings in premier locations throughout the city. Its top-notch real estate portfolio makes it one of the leading office landlords in the area, something that shouldn't be discounted when considering investing. But it has a tough road ahead. I wouldn't be surprised to see more asset sales in 2022 and sluggish performance for the company, at least until there are long-term solutions for the pandemic.