Fitch Affirms SL Green's IDR at 'BB+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the Issuer Default Rating (IDR) of SL Green Realty Corp. (NYSE: SLG) and its subsidiaries SL Green Operating Partnership, L.P., and Reckson Operating Partnership, L.P. as follows:

SL Green Realty Corp.

--IDR at 'BB+';

--Senior unsecured notes at 'BB+' (as co-obligor);

--Perpetual preferred stock at 'BB-'.

SL Green Operating Partnership, L.P.

--IDR at 'BB+';

--Unsecured revolving credit facility at 'BB+';

--Senior unsecured notes at 'BB+' (as co-obligor);

--Exchangeable senior notes at 'BB+';

--Junior subordinated notes at 'BB'.

Reckson Operating Partnership, L.P.

--IDR at 'BB+';

--Senior unsecured notes at 'BB+' (as co-obligor for certain issuances);

--Exchangeable senior debentures at 'BB+'.

The Rating Outlook is Stable.

KEY RATINGS DRIVERS

The affirmation of SLG's and Reckson's ratings reflect the company's credit strengths, including its staggered lease maturity and manageable debt expiration schedules, good contingent liquidity in the form of unencumbered assets and the company's maintenance of leverage and fixed charge coverage appropriate for the rating category. These positive rating elements are balanced by broader concerns regarding the midtown Manhattan office leasing environment, which remains somewhat dependent on the growth of large financial institutions and supporting industries such as law and accounting firms.

APPROPRIATE LEVERAGE

SLG's leverage ratio is strong for the 'BB+' rating at 7.8x as of Dec. 31, 2012, down from 8.3x and 8.4x as of Dec. 31, 2011 and 2010, respectively. Leverage has improved primarily due to growth in operating property portfolio cash flows and interest income from SLG's structured finance investments. Fitch expects leverage to sustain in the high 7.0x's level over the next few years. Fitch defines leverage as net debt divided by recurring operating EBITDA, including Fitch's estimate of recurring cash flow distributions from unconsolidated joint ventures.

APPROPRIATE FIXED-CHARGE COVERAGE

The company's fixed-charge coverage ratio was 1.7x for the year ended Dec. 31, 2012, as compared to 1.6x in 2011 and 1.8x in 2010. Coverage has remained in-line for the rating primarily due to free rent periods offered to tenants, combined with recurring capital expenditure costs related to new leases. Fitch expects coverage to improve slightly as the Manhattan leasing environment remains relatively subdued and landlords continue to offer attractive tenant improvement packages. Fitch expects this operating softness will be offset by lower debt and preferred stock funding costs. Fixed-charge coverage is defined as recurring operating EBITDA including Fitch's estimate of recurring cash flow distributions from unconsolidated joint ventures less recurring capital expenditures and straight-line rents, divided by interest incurred and preferred stock distributions.

STRONG AND DIVERSIFIED TENANT BASE

The company's portfolio benefits from tenant diversification with the top 10 tenants representing only 30% of annual base rent. The largest tenant, Citigroup, N.A. ('A' IDR with a Stable Outlook by Fitch), comprises 6.4% of SLG's share of annual cash rent. All of SLG's top 30 tenants that are rated by Fitch have investment grade ratings.

MANAGEABLE LEASE EXPIRATION PROFILE

The company has a manageable lease expiration schedule with only 37% of consolidated Manhattan rents expiring over the next five years. While approximately 56% of the company's consolidated suburban property rents expire over the next five years, the suburban portfolio represents a fairly limited portion of the company's total assets and only 9% of 2012 cash rent.

MANAGEABLE DEBT MATURITIES

Further supporting the ratings is the company's manageable debt maturity schedule. Over the next five years, 2017 is the largest year of debt maturities with 28% of pro rata debt expiring, with no other year greater than 16%. In addition, the company's ratios under its unsecured credit facilities' financial covenants do not hinder the company's financial flexibility at this point in time.

SOLID UNENCUMBERED ASSET COVERAGE OF DEBT

The affirmations are further supported by SLG's unencumbered property pool coverage of unsecured debt, which gives the company financial flexibility as a source of contingent liquidity. Consolidated unencumbered asset coverage of net unsecured debt (calculated as annualized 4Q 2012 unencumbered property net operating income divided by a stressed 7% capitalization rate) results in coverage of 1.9x. This ratio is strong for the rating, particularly given that Midtown Manhattan assets are highly sought after by secured lenders and foreign investors, resulting in stronger contingent liquidity relative to many asset classes.

STRONG MANAGEMENT TEAM

The ratings also point to the strength of SLG's management team given their knowledge of the Manhattan office sector. This expertise has been demonstrated by the company's ability to identify off-market acquisition opportunities, and its maintenance of portfolio occupancy and balance sheet liquidity throughout the downturn.

ADEQUATE LIQUIDITY

The Stable Rating Outlook is driven in part by SLG's liquidity profile. For the period Jan. 1, 2013 to Dec. 31, 2014, the company's base case liquidity coverage ratio is 1.4x. Fitch calculates liquidity coverage as sources of liquidity (cash, availability under the company's unsecured revolving credit facility, Fitch's expectation of retained cash flows from operating activities after dividends and distributions) divided by uses of liquidity (pro rata debt maturities and Fitch's expectation of recurring capital expenditures).

If secured debt were refinanced at 80% of the maturing balance, liquidity coverage would improve to 3.4x. The company's liquidity is also strengthened by its conservative common dividend policy, which enables it to retain substantial operating cash flow. The company's AFFO payout ratio is low at approximately 34% and provides the company with additional financial flexibility.

MIDTOWN LEASING CONCERNS

Offsetting these strengths are Fitch's concerns regarding the uncertain Midtown Manhattan leasing environment. While the New York City leasing environment has strengthened over the last few years and SLG experienced robust leasing volumes in 2012, the company continues to incur significant costs in the form of tenant improvements, leasing commissions and free rent incentives as tenant inducements, which has placed pressure on the company's fixed charge coverage. In addition, a downturn in space demands from the financial services industry, which accounts for 36% of SLG's share of base rental revenue, may result in reduced cash flows or values of SLG's properties.

RECKSON'S IDR LINKED TO SLG'S

Consistent with Fitch's criteria, 'Parent and Subsidiary Rating Linkage' dated Aug. 8, 2012 and available on 'www.fitchratings.com', Reckson's IDR is linked and synchronized with SLG's due to strong legal and operational ties between SLG and Reckson, including each entity guaranteeing certain corporate debt of the other. These equal IDRs are based on the consolidated credit profile.

PREFERRED STOCK NOTCHING

The two-notch differential between SLG's IDR and preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BB+'. Based on Fitch Research on 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis', available on Fitch's web site at www.fitchratings.com, these preferred securities are deeply subordinated and have loss absorption elements that would likely result in poor recoveries in the event of a corporate default.

JUNIOR SUBORDINATED NOTES NOTCHING

The one-notch differential between SLG's IDR and junior subordinated notes (trust preferred securities) is consistent with Fitch's criteria for corporate entities with an IDR of 'BB+'. These securities are senior to SLG's perpetual preferred stock but subordinate to SLG's corporate debt. Holders of such notes have the ability to demand full repayment of principal and interest in the event of unpaid interest.

RATING SENSITIVITIES

The following factors may have a positive impact on SLG's Ratings and/or Outlook:

--Fitch's expectation of leverage sustaining below 8.0x for several quarters. This factor was previously 7.5x and was changed to 8.0x to reflect the consistently lower capitalization rates for midtown Manhattan office buildings relative to other asset classes (leverage was 7.8x as of Dec. 31, 2012);

--Fitch's expectation of fixed charge coverage sustaining above 1.8x for several quarters (coverage was 1.7x for the 12 months ended Dec. 31, 2012);

--Growth in the size of the unencumbered pool.

The following factors may have a negative impact on SLG's Ratings and/or Outlook:

--Fitch's expectation of leverage sustaining above 9.0x for several quarters;

--Fitch's expectation of fixed charge coverage sustaining below 1.5x for several quarters;

--A liquidity shortfall (base case liquidity coverage was 1.4x for the period Jan. 1, 2013 to Dec. 31, 2014)

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Criteria for Rating U.S. Equity REITs and REOCs,' Feb. 26, 2013;

--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis,' Dec. 13, 2012;

--'Recovery Rating and Notching Criteria for Equity REITs,' Nov. 12, 2012;

--'Corporate Rating Methodology,' Aug. 8, 2012;

--'Parent and Subsidiary Rating Linkage,' Aug. 8, 2012.

Applicable Criteria and Related Research

Criteria for Rating U.S. Equity REITs and REOCs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700091

Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696670

Recovery Ratings and Notching Criteria for Equity REITs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693751

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

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Contacts

Fitch Ratings
Primary Analyst
Steven Marks, +1-212-908-9161
Managing Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
George Hoglund, CFA, +1-212-908-9149
Associate Director
or
Committee Chairperson
Sean Pattap, +1-212-908-0642
Senior Director
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Steven Marks, +1-212-908-9161
Managing Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
George Hoglund, CFA, +1-212-908-9149
Associate Director
or
Committee Chairperson
Sean Pattap, +1-212-908-0642
Senior Director
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com