SL Green Realty Corp. — Q3 2015 Form 10-Q
Business and period. SL Green is a self-managed REIT focused on commercial and residential real estate in the New York metropolitan area, primarily Manhattan. This combined filing covers SL Green Realty Corp. and its operating partnership for the quarter and nine months ended September 30, 2015. Unless indicated otherwise, amounts below are in millions of dollars.
Financial performance and position
- Revenue: Q3 revenue was $432.1, up 10.7% from $390.3. Nine-month revenue was $1,237.4, up 9.2% from $1,133.4. Rental revenue rose 12.0% year to date, reflecting acquisitions and improved same-store occupancy; investment income edged down to $136.6 from $137.8.
- Profit and EPS: Q3 net income was $176.8 versus $73.6; common-stockholder net income was $163.7 versus $64.7, and diluted EPS was $1.64 versus $0.68. Nine-month net income was $203.2 versus $480.5; common-stockholder net income was $167.8 versus $446.3, and diluted EPS was $1.68 versus $4.66. The filing’s common-stockholder income before purchase-price adjustments, gains on sales and discontinued operations was $13.8 in Q3 ($0.14 diluted EPS) and $4.4 for nine months ($0.04 diluted EPS).
- Operating measures: Same-store NOI increased 4.3% in Q3 and 5.6% for nine months. Same-store office occupancy was 93.7%, up from 91.7% a year earlier; Manhattan same-store office occupancy was 96.6% and suburban occupancy was 82.0%.
- FFO: FFO attributable to common stockholders and noncontrolling interests was $171.5 in Q3 versus $127.5, and $494.6 for nine months versus $438.3. FFO is a non-GAAP supplemental measure, not a substitute for cash flow or net income.
- Cash flow: Nine-month operating cash flow was $323.0, down from $377.2. Investing used $1,986.4, primarily reflecting acquisitions; financing provided $1,626.4. Cash and cash equivalents were $244.4 at September 30, compared with $281.4 at year-end 2014. Restricted cash was $279.6; marketable securities were $46.4.
- Debt and liquidity: Consolidated debt was $10.13 billion, up from $8.43 billion at year-end 2014. Effective interest rate was 3.85%, and weighted-average maturity was 5.81 years. The company had $569.8 of undrawn capacity under its $1.6 billion revolving facility and term loan, after $949.0 drawn on the revolver, $933.0 outstanding on the term loan and $81.2 of letters of credit. Management reported compliance with debt covenants. Consolidated cash plus marketable securities was $290.8.
- Equity and distributions: The quarterly common dividend was $0.60 per share, up from $0.50; management stated an annualized rate of $2.40 per share. The company issued $211.6 of preferred units during the first nine months, largely in connection with acquisitions.
Material changes and unusual items
- SL Green acquired 11 Madison Avenue in August for approximately $2.43 billion, financed in part with a $1.4 billion, 10-year, interest-only fixed-rate mortgage at 3.838%. Other 2015 acquisitions included 187 Broadway/5 & 7 Dey Street, 110 Greene Street, residential assets on the Upper East Side and 1640 Flatbush Avenue.
- Q3 included a $159.7 gain on real estate sales, principally 120 West 45th Street and an 80% interest in 131–137 Spring Street, partly offset by a $19.2 depreciable real estate reserve related to two expected property sales. These items materially lifted GAAP Q3 earnings. Nine-month 2015 earnings also included the sale gains, while nine-month 2014 benefited from substantial joint-venture sale gains, a purchase-price fair-value adjustment and discontinued-operation sale gains; this makes headline year-over-year earnings comparisons uneven.
- Depreciation and amortization rose sharply, including accelerated depreciation of $141.7 for the nine months related to vacating properties at the One Vanderbilt development site. The site’s vacating also reduced rental income.
- Management cited higher same-store rents and occupancy, but same-store property operating expenses increased faster than same-store revenue in the nine-month period, mainly due to real estate taxes, repairs and maintenance, and professional fees.
Outlook, risks and contingencies
- No specific earnings or FFO guidance is provided. Management expects positive operating cash flow and intends to continue regular quarterly dividends, subject to cash availability, operating needs, debt service and financing covenants.
- For 2015, management estimated $145.5 of recurring and $50.1 of development/redevelopment capital expenditures on consolidated properties, plus a $35.3 share of joint-venture capital expenditures. Funding sources were expected to include operating cash, existing liquidity and property-level borrowing.
- Consolidated debt and the company’s share of joint-venture debt had aggregate scheduled maturities of approximately $1.51 billion in 2016 and $1.72 billion in 2017. Management noted reliance on operations, refinancing, asset sales and access to debt and equity markets to fund obligations; access to capital is not assured.
- A 100-basis-point increase in interest rates was estimated to increase annual interest cost, net of variable-rate investment income, by $20.0 for SL Green and $7.1 for its share of joint ventures. Derivatives had a net liability fair value of approximately $18.9; a breach-triggered settlement could have required payment of that amount.
- A joint-venture loan on Jericho Plaza was in default as of June 30, 2015 due to nonpayment of debt service. The filing also describes potential exposure from joint-venture guarantees, repurchase-agreement margin calls, refinancing needs and the concentration of assets in the New York region. Management reported no material litigation or known material environmental liability.
- Management identified risks including economic and real-estate market conditions, tenant and borrower credit, development costs and delays, interest rates, covenant compliance, REIT qualification, joint-venture partner performance, terrorism and insurance availability or adequacy. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported earnings and FFO reflects recurring property operations versus asset-sale gains, reserves and other nonrecurring items.
- Progress on leasing, occupancy and rent growth, especially suburban offices and the One Vanderbilt redevelopment site.
- Funding and refinancing plans for 2016–2017 maturities, including the use of available revolver capacity and expected asset dispositions.
- Status and potential exposure of the Jericho Plaza joint-venture loan default, guarantees and other off-balance-sheet joint-venture obligations.
- Whether acquisition-related debt, preferred-unit issuance and the increased dividend remain supported by recurring cash generation and liquidity.