SL Green Realty Corp. — Q1 2020 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2020; filed May 11, 2020. SL Green is a REIT focused on office and other real estate in the New York metropolitan area. It reported jointly with its operating partnership; the entities are managed as one business. At quarter-end, its 72-property portfolio comprised approximately 29.9 million square feet, with weighted average occupancy of 93.6%.
Financial and operating performance
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Total revenue | $314.3 million | $304.3 million |
| Rental revenue | $222.6 million | $240.1 million |
| Investment income | $38.5 million | $50.0 million |
| Net income | $127.1 million | $52.8 million |
| Net income attributable to common stockholders | $114.8 million; $1.47 per diluted share | $43.8 million; $0.52 per diluted share |
| Cash from operating activities | $42.0 million | $62.3 million |
| Cash, cash equivalents and restricted cash | $621.0 million | $241.4 million at December 31, 2019 |
| Consolidated debt | $6.16 billion | $5.55 billion at December 31, 2019 |
| Total assets | $13.22 billion | $12.77 billion at December 31, 2019 |
Revenue increased 3.3%, but rental revenue fell 7.3% and investment income fell 23.0%. Net income included a $72.6 million gain on the sale of The Olivia and a $51.1 million lease-termination payment from Credit Suisse at One Madison Avenue. These items materially affect the comparison with the prior year. The filing does not provide a directly comparable overall operating margin.
Net cash used in investing activities was $129.4 million; financing activities provided $467.0 million. Management reported $0.8 billion of liquidity at quarter-end, including $579.5 million of consolidated cash and marketable securities and $0.2 billion of unused revolving-credit capacity; its liquidity calculation excludes its share of cash held at unconsolidated joint ventures. Operating cash flow declined year over year.
Consolidated debt was 49.2% fixed-rate and 50.8% variable-rate. The weighted average term to maturity was 3.21 years. The company had drawn $1.3 billion of its $1.5 billion revolving facility and reported $0.2 billion of remaining capacity. A hypothetical 100-basis-point increase in floating rates was estimated to add $21.9 million to annual consolidated net interest cost, plus $18.0 million to the company’s share of joint-venture interest cost. The company reported covenant compliance at March 31.
Material changes versus the prior comparable period
- Net income rose substantially, primarily reflecting the property-sale gain and lease-termination payment; these are not evidence by themselves of improved recurring performance.
- Same-store rental revenue rose 2.3%, but total rental revenue declined, principally due to Credit Suisse vacating space at One Madison Avenue and lower revenue from disposed properties.
- Investment income declined as the average debt and preferred-equity investment balance and yield fell: $1.8 billion and 8.3% versus $2.2 billion and 8.8% a year earlier.
- Interest expense, net of interest income, decreased to $37.5 million from $50.5 million; the reported consolidated weighted-average interest rate was 3.62%, compared with 4.04%.
- The company repurchased 2.64 million shares for $219.6 million at an average $83.25 per share and declared a quarterly common dividend of $0.295 per share. The prior-year quarter’s declared dividend was $0.85 per share.
- Adoption of the expected-credit-loss standard produced a $39.2 million cumulative retained-earnings adjustment. The company also recorded $11.2 million of loan-loss and other investment reserves in Q1.
Outlook, risks and unusual items
- Management warned that COVID-19 could materially adversely affect operations, liquidity, cash flows and outlook during the pandemic and possibly longer. The duration and severity of the impact were uncertain. As of the filing date, the company had collected 87.8% of April rent due, including 93.4% from office tenants and 63.4% from retail tenants.
- One debt investment with a reported carrying value of $70.0 million was not performing in accordance with its terms and was in default as of the filing date. The filing also identifies a $28.5 million financing receivable on non-accrual since 2018.
- Beginning in April, a joint venture’s 1552 Broadway debt-service and ground-rent payments were not made, primarily because its principal tenant failed to pay rent; the company reported discussions with the lessor and lender.
- After quarter-end, the company contracted to sell the retail condominium at 609 Fifth Avenue for a gross asset valuation of $168.0 million, subject to closing conditions. It also closed the sale of a 49.5% interest in One Madison Avenue; the project partners committed at least $492.2 million of aggregate equity to the $2.3 billion development.
- For the remainder of 2020, management estimated $80.5 million of recurring and $138.8 million of development or redevelopment spending on consolidated properties. Its expected share of joint-venture capital expenditures was $361.0 million. Management expected to fund needs through operating cash flow, liquidity, financing and potential asset sales, while cautioning that capital availability was not assured. No specific earnings guidance was provided in the filing.
- The company reported no material litigation and stated that disclosure controls were effective.
Important facts for investors to verify
- Subsequent rent collections, tenant concessions, delinquencies and occupancy, particularly for retail and office tenants affected by COVID-19.
- Performance, collateral value and recovery prospects for the defaulted $70.0 million investment and non-accrual receivable; clarify any changes in status or reserves.
- Liquidity, revolver availability, covenant headroom and refinancing plans as debt maturities approach, including obligations at joint ventures.
- Whether the 609 Fifth Avenue sale closes on the expected terms and how proceeds and the One Madison Avenue transaction affect funding needs.
- Recurring operating results excluding the large sale gain and lease-termination payment, and the sustainability of cash generation and distributions.