Morgan Stanley's REIT Pair Trade: SL Green Upgraded, Boston Properties Downgraded

Shares of New York office REITs have declined due to market concerns surrounding “a finance-driven demand slowdown and new supply,” Morgan Stanley's Vikram Malhotra said in a report. While expecting SL Green Realty Corp SLG to rerate due to strong NOI growth, Malhotra mentioned that the positives at Boston Properties, Inc. BXP seemed priced in.

NY office REITs are trading at a 13 percent discount to NAV, versus a 5 percent discount for office REITs overall.

Investors Have Overreacted

Although new supply is likely, the market seems to have overreacted to the treat, analyst Vikram Malhotra commented, while adding that SL Green is “more insulated than valuations imply.”

Brexit Is A Positive

The analyst believes that Brexit is a near-term positive for New York City asset values. Foreign demand for US assets in the core CBD markets may continue to rise “in a flight to safety.” Moreover, the rate environment is accommodative, providing a boost to NAV and “modest multiple expansion for select names.”

Related Link: An Investor's Toolbox: The Pair Trade

Upgrading SL Green

The rating on the company has been upgraded from Equal-weight to Overweight, while the price target has been raised from $110 to $130.

Malhotra said that the stock reflects:

1. About 1.5 percent NY job growth for office users during the next 4 quarters compared to more than 2 percent for peers / sector
2. Not enough credit for the company’s quality NYC office portfolio.

The analyst mentioned the catalysts for re-rating as:

1. Leasing volumes that could beat expectations and record y/y growth, given SL Green’s proactive approach and track record
2. Progress on the company's largest development, One Vanderbilt
3. Job growth exceeding 1.5 percent

Downgrading Boston Properties

The rating on the company has been downgraded from Overweight to Equal-weight, while the price target has been raised from $140 to $145.

“The company still screens as one of the more stable growth stories among large-cap office REITs with solid defensive traits, which we believe are priced,” Malhotra wrote. He mentioned that the stock already prices in:

1. More than 2 percent NY job growth, “the highest among peers and modestly lower growth than seen in the last 4 quarters
2. Maximum credit for its NYC office portfolio

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