SL Green Realty Corp. — Q2 2023 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2023; filed August 3, 2023. SL Green is a REIT focused primarily on owning, developing, leasing and managing New York metropolitan-area commercial real estate, especially Manhattan offices. The filing combines SL Green Realty Corp. and its operating partnership, which are managed and reported as one entity.
- Portfolio: 51 properties totaling approximately 29.7 million square feet, including consolidated and unconsolidated interests. Manhattan office leased occupancy was 88.9%; suburban office occupancy was 78.4%.
- Results below are consolidated. Unless otherwise noted, amounts are in U.S. dollars.
Financial performance and position
| Metric | Q2 2023 | Prior-year comparison |
|---|---|---|
| Total revenue | $221.1 million | $201.4 million; up 9.7% |
| Rental revenue | $185.9 million | $155.2 million; up 19.8% |
| Investment income | $9.1 million | $20.4 million |
| Total expenses | $228.4 million | $164.2 million |
| Net loss | $379.2 million | $37.9 million |
| Net loss attributable to common stockholders | $360.2 million; $5.63 per share | $43.9 million; $0.70 per share |
| FFO attributable to common stockholders and unit holders | $98.4 million | $128.8 million |
- For the six months ended June 30, revenue was $444.6 million versus $389.4 million; net loss was $417.6 million versus $24.5 million; and FFO was $203.9 million versus $244.5 million. FFO is a non-GAAP measure and is not a substitute for net income or operating cash flow.
- Q2 results included a $305.9 million impairment charge on the 625 Madison Avenue leasehold, a $26.7 million loss on sale of real estate, a $21.9 million equity-method loss from joint ventures, and $17.4 million of purchase-price and fair-value adjustments.
- Six-month operating cash flow was $104.0 million, down from $182.4 million. Investing activities used $38.9 million, compared with $135.3 million provided in the prior-year period; financing activities used $138.1 million, versus $377.7 million used.
- At June 30, cash and cash equivalents were $192.0 million and restricted cash was $119.1 million. Management reported $1.0 billion of liquidity, including $820.0 million of undrawn revolving-credit capacity and $201.8 million of consolidated cash on hand, including marketable securities.
- Consolidated debt was $3.83 billion, down from $5.54 billion at year-end 2022, largely reflecting the sale and deconsolidation of 245 Park Avenue. The weighted-average consolidated interest rate was 4.51% for the first half versus 3.12% a year earlier. Debt had a 2.92-year weighted-average term to maturity; 86.3% was fixed-rate, and net variable-rate exposure was 10.1% of total debt after considering variable-rate investments.
- Unconsolidated joint-venture debt was $14.48 billion in aggregate; the filing’s schedule of the Company’s share of joint-venture debt maturities totals $7.11 billion. These obligations are generally non-recourse but may involve guarantees or other commitments.
Material changes versus the prior comparable period
- Rental revenue grew, mainly because SL Green acquired 245 Park Avenue in 2022. Same-store rental revenue declined 2.8% in Q2 and 1.8% for the first half.
- Higher interest rates, increased debt balances and 245 Park Avenue ownership drove higher interest expense. Q2 interest expense, net of interest income, rose to $40.6 million from $15.0 million; the first-half amount rose to $82.3 million from $30.0 million.
- Depreciation and amortization rose to $69.1 million in Q2 from $46.9 million, primarily due to 245 Park Avenue. Investment income fell as the debt and preferred-equity portfolio balance and weighted-average yield declined.
- In June, SL Green sold a 49.9% interest in 245 Park Avenue for a gross sale price of $1.995 billion, lost control and deconsolidated the property, retaining a 50.1% interest accounted for as a joint venture. The transaction resulted in a $28.3 million sale loss and a $17.0 million fair-value adjustment.
- Six-month debt and preferred-equity investment reserves increased by $6.9 million. The portfolio had $636.5 million carrying value, of which $435.3 million was rated watch list; four investments were not performing according to their terms.
Outlook, risks and unusual items
- Management identified operating cash flow, cash, asset and investment dispositions, credit facilities, and additional debt or equity financing as potential liquidity sources. It stated these sources and refinancing opportunities were expected to support obligations, while noting capital may not be available on efficient terms or at all. No earnings guidance was provided in the supplied filing text.
- The 625 Madison Avenue ground-rent appraisal reset annual ground rent from $4.61 million to $20.25 million, effective July 1, 2022. Following a strategic review, the Company wrote the leasehold investment down to zero. It also recorded $14.5 million of additional rental revenue in the first half from acquired below-market lease amortization.
- Near-term refinancing and maturity exposure is material: the $425 million 2022 term loan was due October 6, 2023, with a six-month extension option; consolidated mortgages included maturities in 2023; and the filing disclosed maturity defaults on certain joint-venture loans, including 717 Fifth Avenue and 11 West 34th Street. The Company reported discussions with lenders or borrowers regarding resolutions.
- Some debt investments were in default or on non-accrual, including two loans with carrying values of $225.4 million and $50.0 million for which no allowance was recorded. Management was in discussions with borrowers on several troubled loans.
- Management estimated that a 100-basis-point increase in floating rates would raise annual consolidated interest cost, net of variable-rate investment income, by $3.5 million, and its share of joint-venture interest cost by $6.7 million.
- Management cited office demand, vacancy and sublease availability, financing costs and access to capital, tenant and borrower credit, development costs, REIT qualification, joint-venture obligations, and insurance availability and cost as risks. It reported compliance with debt covenants and effective disclosure controls; no material litigation or material change in risk factors was reported.
- After quarter-end, the filing says the 115 Spring Street loan maturity was extended to March 2025 and its rate changed to 5.50% in August; it also reports a July modification to the One Madison Avenue construction facility.
Important facts for investors to verify
- Confirm the status and terms of the 2022 term loan and other 2023 maturities, including any extensions, repayments or refinancing completed after the filing date.
- Review current occupancy, leasing commencements, tenant improvement and leasing costs, and the trajectory of same-store rents and expenses.
- Assess 625 Madison Avenue’s ground-rent dispute and strategic alternatives, and whether any further charges or obligations arise.
- Track the performance, collateral values, defaults and recoveries for the troubled debt and preferred-equity investments, including the adequacy of reserves.
- Evaluate joint-venture debt maturities and lender discussions, the Company’s potential guarantees or capital commitments, and the effect of the 245 Park Avenue transaction on recurring cash flows.
- Reconcile reported liquidity with restricted cash, upcoming debt service, dividends and projected development and capital spending; distinguish consolidated debt from joint-venture debt.