SL Green Realty Corp. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. SL Green is a self-managed REIT focused on commercial real estate in the New York metropolitan area. It reported interests in 64 office properties totaling 30.6 million square feet, with weighted average occupancy of 92.2%.
Financial results and key metrics
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Total revenue | $339.2 million | $329.2 million |
| Net income | $35.2 million | $93.9 million |
| Net income attributable to common stockholders | $25.3 million | $80.9 million |
| Diluted EPS | $0.29 | $1.01 |
| Funds from Operations (FFO) | $99.3 million | $142.8 million |
| Cash from operating activities | $56.8 million | $76.7 million |
- Rental revenue rose 14.9% to $260.8 million; escalation and reimbursement revenue increased 37.6% to $41.7 million. Acquisitions drove much of the growth, while same-store rental and recovery revenue was down 1.0% overall.
- Investment and preferred equity income fell to $26.3 million from $64.7 million. Management attributed the decline largely to prior-year investment sales and repayments that generated additional income.
- Total expenses rose to $316.3 million from $259.1 million. Interest expense increased 22.9% in management’s comparison, reflecting a higher average debt balance; the average interest rate declined to 4.88% from 4.97%. Depreciation and amortization also increased.
- Operating cash flow declined, while investing activities used $294.2 million, primarily for acquisitions and joint-venture investments. Financing activities provided $232.8 million. Cash and cash equivalents ended at $133.7 million, versus $138.2 million at year-end 2011.
- Total assets were $13.76 billion and total equity was $6.65 billion at March 31, 2012. Consolidated debt was $6.08 billion; SL Green’s share of joint-venture debt was reported separately at $1.94 billion. Fixed-rate debt represented 78.5% of consolidated debt.
- Liquidity included approximately $159.4 million of cash and marketable securities and $1.0 billion of undrawn revolving-credit capacity. The $1.5 billion revolver matures in November 2015, with a one-year extension option. The company reported compliance with debt covenants.
Material changes and unusual items
- Revenue growth largely reflected acquisitions, including the January 2012 purchase of five retail and two multifamily properties for $193.1 million, partly funded through Series G preferred operating partnership units. Acquisition-related costs and financing contributed to higher expenses.
- Net income included a $7.3 million gain on sale of a joint-venture real estate interest and a $6.6 million gain on sale of 292 Madison Avenue. Q1 2011 included a $13.8 million purchase-price fair-value adjustment. These items affect comparability.
- Common stock sales through the at-the-market program generated about $123.1 million of net proceeds during the quarter. The dividend reinvestment plan issued approximately 1.3 million shares for about $99.5 million. These equity issuances supported liquidity and investment needs but increased share count.
- The quarterly common dividend was $0.25 per share, compared with $0.10 a year earlier. Management stated an intent to continue regular quarterly dividends; its then-current annualized rate was $1.00 per share.
Outlook, risks and contingencies
- No earnings or FFO guidance was provided. Management expected positive operating cash flow and said it believed available liquidity and financing sources would meet debt obligations and near-term capital needs, subject to access to capital markets and refinancing.
- Management estimated approximately $126.2 million of capital expenditures for wholly owned properties and $36.5 million for its share of joint-venture properties for the remaining nine months of 2012, including tenant improvements and leasing commissions.
- Debt maturities, including the company’s share of joint-venture debt, totaled approximately $8.02 billion across the disclosed maturity schedule; $1.76 billion was scheduled in 2016. A 100-basis-point increase in rates was estimated to raise annual interest costs by about $12.6 million for the company and $4.6 million for its share of joint ventures.
- Credit and valuation risks remain in the debt and preferred equity portfolio. The allowance for possible credit losses was $41.1 million; some investments were on non-accrual, and management cautioned that reserves may not cover future losses. Two investments generated more than 10% each of investment income.
- Key disclosed risks include dependence on the New York-area market, tenant and borrower credit, refinancing and capital availability, interest rates, development costs, joint-venture obligations, REIT qualification, and the cost or adequacy of terrorism and other insurance. One tenant accounted for approximately 7.5% of annualized cash rent.
- Management reported no material litigation, no material change to previously disclosed risk factors, and no material environmental liability known to it. It also noted that captive-insurer coverage is a form of self-insurance and may not fully protect against catastrophic losses.
Important facts for investors to verify
- How much of revenue and operating growth is recurring same-store performance versus acquired assets and transaction-related gains?
- Whether occupancy and leasing trends, especially weaker suburban leasing economics, translate into durable rent and cash-flow growth.
- The repayment, refinancing, and extension plans for the large 2016 maturity concentration and other scheduled debt maturities.
- Credit performance, non-accrual status, collateral values, and adequacy of reserves for debt and preferred equity investments.
- The effects of ATM and DRIP share issuance, preferred securities, and the higher dividend on per-share results and future capital needs.