BMO Capital Raises Price Target on SL Green Realty (SLG) to $132 Following Announced PGIM Deal
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BMO Capital reiterated an Outperform rating on SL Green Realty (NYSE: SLG), and raised the price target to $132.00 (from $129.00), following the company's announced 40% sale in 11 Madison Ave.. The sale is to PGIM Real Estate for cash proceeds of $480 million, valuing the asset at $2.6 billion; and a $1 billion share repurchase program.
Analyst John Kim commented, "We view SLG's announcements as a new chapter for the company, as it shows management's commitment to reducing leverage on a Net Debt to EBITDA basis, perhaps as it looks to attract more general equity investors. We estimate this metric moderates to 6.7x at year-end 2016 vs. 8.7x in 2015, post this JV and its recent sale of Citigroup global HQ for $1.8 billion. Management mentioned it feels comfortable operating in the 6.5-7.5x range going forward; 2.) The JV sale was done at the same valuation ($2.6 billion, 4.6% cap rate, $1,130 psf) SLG acquired the asset in 2015, which is not the typical high ROC it achieves on asset sales, but improves leverage and allows SLG to buy back stock accretively to partially offset near-term dilution from asset sales, as we estimate SLG trades at an implied cap rate of 5.4%. This also provides SLG downside protection in any market weakness, as seen earlier this year. We estimate SLG buys back $300 million of stock in 2H16 (sensitivity table, Exhibit 2); and 3.) We believe this sale puts less near-term pressure on SLG to find an equity partner at the $3.1 billion One Vanderbilt, which it still is committed to do in 2017 post construction loan financing."
Shares of SL Green Realty closed at $118.84 yesterday.
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