SL Green Realty Corp. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. SL Green is a REIT focused primarily on office properties in the New York metropolitan area; the company and its operating partnership are managed as one business. Its 72-property portfolio comprised approximately 29.8 million square feet, with 93.2% weighted-average occupancy at quarter-end.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $253.7 million | $313.0 million | $568.0 million | $617.3 million |
| Net income | $66.6 million | $173.7 million | $193.7 million | $226.5 million |
| Net income attributable to common stockholders | $56.4 million | $161.1 million | $171.2 million | $204.9 million |
| Diluted EPS | $0.74 | $1.94 | $2.22 | $2.46 |
| FFO attributable to common stockholders | $136.1 million | $159.2 million | $308.1 million | $306.7 million |
- Q2 revenue declined 18.9% and net income declined 61.7% year over year. Six-month revenue fell 8.0% and net income fell 14.5%. The comparison is affected by substantial 2019 joint-venture sale gains and purchase-price fair-value adjustments, as well as 2020 property-sale gains.
- Rental revenue was $195.9 million in Q2, down 20.0%; investment income was $39.9 million, down 22.7%. Q2 net interest expense was $30.1 million versus $47.2 million. The filing does not present a single consolidated operating-margin metric.
- Six-month cash from operations was $224.3 million, versus $217.9 million. Investing activities provided $403.8 million, principally reflecting asset sales and debt-investment repayments; financing activities provided $231.7 million. Cash, cash equivalents and restricted cash totaled $1.10 billion at June 30.
- Reported consolidated debt was approximately $6.19 billion at quarter-end. The effective interest rate was 2.77%; 45.4% of debt was variable-rate before considering variable-rate investments that partially offset exposure. Consolidated assets were $13.07 billion and liabilities were $7.28 billion.
- Management reported $1.6 billion of liquidity: $1.0 billion of consolidated cash on hand (including marketable securities) and $0.6 billion of revolver availability. The $1.5 billion term loans were outstanding, and $950 million was drawn on the revolving facility; total undrawn credit-facility capacity was $550 million. The company said it was in compliance with debt covenants.
Material changes versus the prior comparable period
- Q2 rental revenue fell due to sold properties, Credit Suisse’s early departure from One Madison Avenue ahead of redevelopment, increased vacancy at 625 Madison Avenue, and tenant-receivable and straight-line-rent reserves. Same-store rental revenue declined 5.5% in Q2.
- Lower investment income reflected a smaller average debt and preferred-equity portfolio and lower yields. The six-month average balance and yield were $1.7 billion and 8.3%, versus $2.2 billion and 8.9% in 2019.
- Lower LIBOR, debt repayments and property dispositions reduced interest expense; the six-month weighted-average consolidated interest rate fell to 3.20% from 4.06%. Depreciation and amortization increased, including accelerated depreciation associated with One Madison Avenue redevelopment.
- For the six months, the company recorded $137.5 million in gains on real estate sales, including 315 West 33rd Street and the 609 Fifth Avenue retail condominium. It also repurchased 5.6 million shares at an average $64.42 per share. Cash used for common-stock repurchases was $352.0 million.
Outlook, risks and unusual items
- COVID-19: Management warned the pandemic could materially adversely affect operations, liquidity, cash flows and prospects, potentially beyond the pandemic period. By the filing date, Q2 gross tenant billings collected were 91.1% overall (96.0% office; 70.2% retail). July collections were 89.3% overall (94.2% office; 62.7% retail). Retail collections were notably weaker.
- Capital spending: For the remainder of 2020, management estimated $58.6 million of recurring and $135.1 million of development or redevelopment spending on consolidated properties. Its expected share of joint-venture capital expenditures was $259.2 million. Funding was expected from operations, liquidity and construction facilities.
- Credit quality: The company recorded $18.1 million of loan-loss and other investment reserves for the first half and adopted the expected-credit-loss standard with a $39.2 million cumulative reduction to retained earnings. Three debt or preferred-equity investments with $37.6 million of net carrying value were not performing according to their terms; a separate $27.7 million financing receivable remained on non-accrual. A property loan was also disclosed as in default, with discussions underway with the lender.
- Maturities and interest exposure: Aggregate scheduled maturities for consolidated debt and the company’s share of joint-venture debt were $1.59 billion in 2021 and $3.13 billion in 2023; total shown through all periods was $10.42 billion. These totals include joint-venture debt and should not be read as solely parent-company obligations. Management estimated a 100-basis-point rate increase would raise annual consolidated net interest cost by $22 million and its share of joint-venture interest cost by $19 million.
- The company agreed to sell 400 East 58th Street for $62 million, with closing expected in Q3 subject to customary conditions. No material litigation was reported. The filing provided no specific earnings guidance; management’s outlook emphasized pandemic uncertainty and expected positive operating cash flow.
Important facts for investors to verify
- Subsequent tenant collections, rent concessions, receivable reserves and the relative performance of office and retail tenants.
- Status, collateral and reserve adequacy for the nonperforming investments, non-accrual receivable and defaulted property loan.
- Leasing, vacancy, construction costs and timing at One Madison Avenue, 625 Madison Avenue and other redevelopment projects.
- Refinancing plans and covenant headroom for near-term maturities, including joint-venture obligations; confirm the distinction between consolidated and proportionate debt.
- Whether reported liquidity remains available after capital spending, dividends, share repurchases and any further deterioration in tenant or borrower payments.