SL Green Realty's (SLG) Big Bath Was This Quarter - Jefferies

Jefferies analyst, Jonathan Petersen, thinks that SL Green Realty (NYSE: SLG) took the big bath this quarter and that future estimate reductions are unlikely. He reduced his 2017 earnings estimate to account for the more conservative outlook but believes future cuts are unlikely. No change to Buy rating but PT drops to $116 from $127.

SLG's 4Q15 results and management commentary told a different story on the state of NYC fundamentals. While acknowledging recent success, SLG expects market leasing volumes to decelerate in 2H16, which caught investors by surprise given more bullish comments during the Dec 2015 Investor Day

SS NOI remained high at +5.0% in 4Q15, compared to the prior four quarter average of +4.7%. That said, spreads on office renewals were +20.5% (vs. prior four quarter average of +14.5%) with the respective replacement leases.

While leasing volumes are strong today, management raised concerns on the earnings call that slowing job creation in 2016 could slow leasing activity in the NYC office market. The most recent CBRE forecasts do show a 60 bps slowdown in office-using job growth in 1H16 vs 2H15, to 1.0% from 1.6%, respectively. However, this is in line with a similar magnitude slowdown expected nationally, so NYC is not singled out as a relative underperformer. Most importantly, the analyst does not see this as an issue that could result in SLG cutting guidance later in the year, which is the primary reason the stock is off 13.7% since earnings and down 22.3% YTD. Also of note, BXP's management noted on their call that their outlook for Manhattan remains unchanged, and small blocks of space are easier to lease than large blocks, which face competition from new developments.

No change to the 2016 estimate of $6.93, and lowering 2017 estimates to $7.23, from $7.39 to reflect the impact of slower leasing volume in 2H 2016. Due to the lower 2017 estimate, we are lowering our PT to $116, from $127.

For an analyst ratings summary and ratings history on SL Green Realty click here. For more ratings news on SL Green Realty click here.

Shares of SL Green Realty closed at $87.75 yesterday.

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