Swap out of SL Green short-dated convertibles for SL Green's long-dated option: Barclays analysts

By Rebecca Melvin

New York, Aug. 18 - Investors could swap out of SL Green Realty Corp.'s 4% convertibles due 2025 in favor of SL Green's 3% convertibles due 2027, because even though the position has more risk, it's highly likely that the company has cash to cover the longer-dated paper, according to Barclays Capital convertibles analysts Manoj Shivdasani, Venu Krishna, and Peng Cheng.

The SL Green 4% convertibles, which are putable in June 2010, have just 0.8 of a year to put and a yield of 7.2%, while SL Green 3% convertibles, putable in March 2012, have 2.6 years to put and an 8.7% yield.

"Investors with somewhat higher risk-appetite should consider swapping out of the 4% and into the 3% to pick up the additional 1.5% yield," the analysts wrote in a research note.

The Manhattan office real estate investment trust currently has 94.8% occupancy, which is projected to go down marginally to 92% by 2010. Approximately 5% of leases roll over each year over the next three years and Barclays equity research analysts assume 75% renewal of the space albeit at lower rates.

The REIT has $1.27 billion in recourse liabilities expected to mature in 2012. This includes $448 million of debt, including two convertibles through March 2012 and $750 million of the fully drawn $1.4 billion credit facility outstanding, which matures in June 2012. Conservatively, $650 million of the facility is assumed extended, the Barclays analysts wrote in their note.

SL Green's current cash balance is $677 million. Dividends were cut over the last year; the company raised $387.4 million via equity in May; and SL Green is expected to retain $210 million per year in cash after dividend payout over the next few years.

"Per our estimates recourse, unsecured liabilities through 2012 including the 3% convert can be funded through operations," the analysts said.

Barclays' horizon analysis to June 15, 2010 shows that the 3% bond need only rise to 89.7 to achieve the same total return as the 4% bond implying a forward 9.4% yield and 1.8 years to put for the 4% bond as of June 15, 2010.

This is wider than the current 8.7% yield to put on the 4% paper. Given a current upward sloping term, the 4% bonds have adequate cushion to outperform the 3% through the June 15 put, according to the analysts.

Furthermore, low delta Boston Properties and Vornado convertibles investors consider owning the SL Greens for higher yield, the analysts wrote.

"While acknowledging the higher credit quality of BXP/VNO (not the focus of this note) relative to SLG, we recommend that investors with higher risk-appetite consider swapping out of the lower yielding BXP/VNO converts into the higher yielding SLG converts," the analysts said.

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