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Portfolio Repositioning Amid High Supply to Aid SL Green (SLG)

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SL Green Realty Corp. SLG is making efforts to enhance its office portfolio on the back of portfolio-repositioning efforts and non-core asset divestures. However, rising supply of office properties and a competitive landscape might curb its pricing power. 

Notably, SL Green’s enviable footprint and significant presence in the large and high-barrier to entry markets, like New York, has enabled the company to enjoy high occupancy at its portfolio. Further, a diversified tenant base will help it generate stable rental revenues over the long term.

Also, with a resilient economy and stable job-market environment, healthy growth in demand for office spaces is expected to continue. Amid this, with substantial high-quality office properties in key markets, the company is well poised to bank on the emerging office-space demand. 

In fact, early lease renewals and tenant expansions across the portfolio continue to drive leasing activities, rent growth and space absorption for SL Green. Also, it has inked a renewal lease with BMW of Manhattan for nearly 227,000 square feet of space at 555 West 57th Street in the ongoing quarter.

Moreover, the company aims to reduce its debt and preferred equity balance, and will use these proceeds to repay debt and for share buybacks. Such match-funding initiatives indicate SL Green’s prudent capital-management practices and will relieve pressure from its investment-grade balance sheet. 

The company’s commitment to increase shareholder value through share buybacks also boosts optimism in the stock. In fact, under its $2.5-billion share-buyback program, it has repurchased a combined 2.7 million shares of common stock, year to date.

SL Green currently carries a Zacks Rank #3 (Hold). Over the past three months, shares of the company have underperformed the industry. The stock has gained 6%, as against the industry’s decline of 3% during this period. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

However, rising supply of office space in SL Green’s markets is a concern for the company. It is also facing high leasing expenses. Hence, amid near-term tenant move-outs, higher leasing costs and elevated supply of office assets will impact the company’s ability to backfill these spaces.

Furthermore, geographic concentration of assets is another concern for SL Green. In fact, majority of the company’s assets are situated in mid-town Manhattan. Hence, its performance is susceptible to the condition of the New York City economy as well as the market for office space in mid-town Manhattan.

Amid changing consumer preferences, right-sizing of footprints and store closures have been making it to front-page news, while the ones unable to cope with competition are resorting to bankruptcy filing. These have emerged as pressing concerns for retail landlords, including Kimco Realty Corp. KIM, Macerich Company (MAC - Free Report) and Taubman Centers, Inc. TCO. SL Green’s retail properties too are not immune to this choppy environment and its retail leasing activities might be affected.

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