SL Green Realty Corp. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; this is an annual report, not a standalone fourth-quarter filing. The filing presents restated comparative information reflecting properties sold or classified as held for sale as discontinued operations; the reclassifications did not change net income or FFO.
Business context
SL Green is a self-managed REIT focused primarily on Manhattan commercial real estate, with suburban New York metropolitan properties and debt and preferred equity investments. At year-end, its office portfolio comprised 64 consolidated and unconsolidated properties totaling 31.4 million square feet, with 91.2% weighted occupancy. It also held retail, development and land interests.
Financial and operating performance
| Metric | FY2011 | FY2010 |
|---|---|---|
| Total revenue | $1,263.4 million | $1,084.4 million |
| Rental revenue | $961.9 million | $782.5 million |
| Escalation and reimbursement revenue | $145.6 million | $118.2 million |
| Net income attributable to common stockholders | $617.2 million; $7.37 basic EPS, $7.33 diluted EPS | $270.8 million; $3.47 basic EPS, $3.45 diluted EPS |
| FFO available to all stockholders | $413.8 million | $389.2 million |
| Cash from operating activities | $312.9 million | $321.1 million |
| Cash and cash equivalents at year-end | $138.2 million | $332.8 million |
| Total assets | $13.48 billion | $11.30 billion |
| Consolidated debt | Approximately $6.1 billion | $5.25 billion |
Revenue rose about 16.5%; rental and reimbursement revenue increased 23.0% in total. Same-store rental revenue grew 0.8%, while acquisition-related revenue contributed substantially to reported growth. FFO increased about 6.3%, while operating cash flow declined about 2.6%. The filing does not provide a single comparable operating-margin measure.
Common-stock dividends declared were $0.55 per share for FY2011, including $0.25 in the fourth quarter, versus $0.40 for FY2010. Management cited a then-current annual common dividend rate of $1.00 per share; future dividends remain subject to board approval and financial conditions.
Fourth-quarter revenue was $328.9 million versus $262.8 million in Q4 2010. Fourth-quarter net income attributable to common stockholders was $2.8 million, or $0.03 per diluted share, versus $7.2 million, or $0.09 per diluted share.
Material changes and unusual items
- FY2011 common net income included a $498.2 million purchase-price fair-value adjustment, principally associated with obtaining control of 1515 Broadway. It also included $46.1 million of gain on the sale of 28 West 44th Street. These items materially affect the year-over-year comparison; FFO was $413.8 million.
- SL Green consolidated 1515 Broadway in April and acquired or consolidated interests in other properties, including 521 Fifth Avenue and 110 East 42nd Street. It reported $2.0 billion of gross purchase prices for five acquisitions or consolidated interests and $1.8 billion for four joint-venture investments.
- The company sold 28 West 44th Street for $161.0 million and recognized a $46.1 million gain; it also sold its interest in 1551/1555 Broadway and recognized a $4.0 million gain. One Court Square and other assets were under sale agreements, subject to conditions.
- Net cash used in investing activities was $739.6 million, reflecting investment and acquisition activity. Financing activities provided $232.1 million. The company raised $517.1 million net through at-the-market common-stock sales and issued $250 million of 5.00% senior notes due 2018.
- At year-end, consolidated debt was approximately 79.3% fixed-rate and 20.7% variable-rate; the reported effective interest rate for the year was 4.87%. A 100-basis-point rate increase was estimated to raise annual interest cost by $12.3 million, plus $4.8 million for the company’s share of joint ventures.
Liquidity, outlook and risks
SL Green had $138.2 million of cash and $25.3 million of marketable securities at year-end, plus approximately $1.1 billion of undrawn capacity under its $1.5 billion revolving credit facility. The facility matures in November 2015, with a one-year extension option. The company reported compliance with its debt covenants. Its debt-to-market-capitalization measure, including its share of joint-venture debt, was 55.7%.
Management expected positive operating cash flow and stated that available liquidity and refinancing options should support near-term obligations, while noting that access to capital markets is not assured. Expected 2012 capital expenditures were approximately $148.6 million for wholly owned properties and $44.1 million for its share of joint ventures. No formal earnings or FFO guidance was provided.
Management described Manhattan leasing conditions as stronger in 2011, with improved absorption, lower vacancy and rising asking rents, but cautioned that weaker financial-sector results and European credit-market concerns could temper 2012 recovery expectations. Portfolio occupancy eased to 91.2% from 91.6%; Manhattan occupancy was 92.5% and suburban occupancy 86.2%. Same-store occupancy improved to 90.3% from 89.4%.
- Concentration and leasing: Financial services represented about 39% of portfolio annualized cash rent; the largest tenant represented 7.2%. Approximately 40% of consolidated rentable space was scheduled to expire by year-end 2016, with $448.6 million of annualized escalated rent associated with those leases.
- Debt and refinancing: 2012 maturities included $119.4 million of corporate debt and $176.5 million of the company’s share of joint-venture debt. The filing also details substantial later-year maturities and interest-rate exposure.
- Credit investments: Debt and preferred equity investments had a $985.9 million net book value. Non-accrual financing receivables were $102.6 million; loans past due more than 90 days totaled $17.3 million. The allowance for loan losses was $50.2 million.
- Other exposures: Risks include leasehold interests, joint-venture partner dependence, property-market concentration, potential tenant distress, insurance and catastrophe exposure, REIT qualification, and related-party conflicts. Management reported no material litigation beyond ordinary-course matters and no environmental liability believed likely to have a material adverse effect.
Most important facts for investors to verify
- Separate recurring operating performance from the $498.2 million purchase-price fair-value adjustment and property-sale gains; reconcile GAAP earnings with FFO and operating cash flow.
- Review the company’s near-term and later debt maturities, refinancing assumptions, available revolver capacity and variable-rate exposure, including joint-venture debt.
- Assess upcoming lease expirations, renewal and re-leasing assumptions, tenant concessions, occupancy trends and exposure to financial-services tenants.
- Check the performance and collectability of non-accrual and impaired debt and preferred equity investments, and whether reserves remain adequate.
- Confirm the status and proceeds of announced asset sales and post-year-end acquisitions, and monitor equity issuance and dilution. The auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective.