Key Topics: We were going to focus on PSA in this note, but this morning SL Green Realty (SLG) had a pretty important announcement regarding One Vanderbilt Avenue (OVA) so a pivot. More on PSA tomorrow.
OVA secures CMBS refinancing:
- This morning SLG announced that it had completed a $3 billion, 10-year, fixed-rate single-asset CMBS refinancing of OVA, which is SLG's flagship development project next to Grand Central Station, with the new debt stacking up to ~$1,800psf on a last-dollar basis. The deal is the largest non-portfolio, single-asset, single-borrower CMBS securitization in history which is obviously notable, and the secured debt market clearly remains open for institutional-quality, new construction trophy office assets. SLG owns 71% of OVA
- Coupon rate is 2.855%, with a total rate of 2.947% inclusive of hedging costs
- Replaces the previous $1.75 billion construction facility, which had an outstanding balance of $1.54 billion, with the tower now just under ~90% leased
- Just some thoughts on the deal as it relates to the REIT, especially as we will look to sharpshoot office ideas later this year - we have heard the financing was completed at a 60% LTV, which implies a total asset value of ~$5 billion or roughly ~$3,000psf versus a total construction budget of ~$2,000psf. If we were to bracket the stabilized NOI at $175-200 million once the tower hits a mid-90s occupancy %, the stabilized nominal cap rate implied is 3.5-3.6% at the ~$5 billion valuation
- It is important to consider a few factors, and we are going to be brutally honest: (1) SLG followed a developer/PE model on the deal in finding development partners, using a bankruptcy-remote JV and refinancing out its equity, (2) we know that several tenants brought into the asset were "induced" with concessions to relocate to OVA and help achieve the lease-up at targeted gross rents, which in-turn helped this structure work, (3) SLG itself took some space in the tower, and (4) the NOIs above don't factor these concessions or other maintenance capex, so "true" cash-on-cash yields are lower than the 3.5-3.6%.
- We would also highlight that there is this push-pull between "we love this project and its going to be the greatest ever and will be the best office building in New York," and then selling down some of the equity to third parties versus the REIT owning 100%. We always wondered why not just own 100%, if in fact the economics were so great? Also important to note and remember that the CEO and CIO were able to buy into the project personally at nominal dollar amounts early on, in exchange for promoted interests based on future monetization events. As a common shareholder, you the reader were never given the option to show up to SLG and say "Hey, we'd like to kick in a couple million and earn the same promote!" In its totality this is a good outcome for SLG, especially given COVID was dropped in towards the end of the project, and in general there was great skepticism on how successful the lease-up would be given the targeted premium rents. But it is also important to consider that not all incentives are totally aligned with common shareholders here, which candidly is very typical for NYC office.
Please call or e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
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