SL GREEN REALTY CORP quarterly report, Q1 FY2011

SL Green Realty Corp. — Q1 2011 Form 10-Q

Reporting period: Three months ended March 31, 2011. Financial statements are unaudited. SL Green is a self-managed REIT focused on commercial office and retail properties in the New York metropolitan area, with debt and preferred-equity investments.

Business context

At quarter-end, the company reported interests in 61 office properties totaling approximately 29.1 million square feet, with 91.7% weighted-average occupancy. Its portfolio also included nine stand-alone retail properties, six development properties and three land interests. The filing reports 91.7% occupancy overall; Manhattan stabilized portfolio occupancy was 94.9%, while suburban portfolio occupancy was 86.3%.

Key financial metrics

Metric	Q1 2011	Q1 2010 / comparison
Total revenue	$334.3 million	$250.9 million; up 33.2%
Rental revenue	$229.0 million	$192.2 million; up 19.1%
Income from continuing operations	$93.2 million	$24.2 million
Net income attributable to common stockholders	$80.9 million	$15.1 million
Diluted EPS	$1.01	$0.19
FFO, as reported by the company	$142.8 million	$85.0 million
Cash provided by operating activities	$79.8 million	$66.7 million
Cash and cash equivalents at quarter-end	$234.0 million	$332.8 million at Dec. 31, 2010
Cash plus marketable securities	$298.4 million	Company’s stated liquidity figure at March 31

FFO is a non-GAAP supplemental measure and is not equivalent to operating cash flow or cash available for distributions. The quarter’s results included a $13.8 million purchase-price fair-value adjustment and substantial gains/income from debt investment sales, repayments and contributions; the company said such transactions generated $46.2 million of additional investment and preferred-equity income. Common-stockholder income from continuing operations included $13.5 million attributable to the purchase-price adjustment.

Debt, liquidity and cash flows

• Consolidated debt was approximately $5.02 billion, including property mortgages and other loans, a $500 million revolver balance, senior unsecured notes and $100 million of trust preferred securities. The filing reports 82% fixed-rate and 18% variable-rate debt, with a 4.98% effective interest rate and a 5.2-year weighted-average term to maturity.
• The $1.5 billion unsecured revolving facility matures in June 2012; $500 million was drawn and approximately $26 million of letters of credit reduced availability. The company reported compliance with debt covenants.
• Cash declined by $98.8 million during the quarter. Operating cash inflow of $79.8 million and investing cash inflow of $31.0 million were more than offset by $209.6 million used in financing. Investing inflows included $95.7 million of joint-venture distributions and net repayments/participations in debt investments.
• Management identified cash flow from operations, cash on hand, borrowings, asset and investment dispositions, and debt or equity issuance as expected funding sources. It believed liquidity sources and potential refinancing would allow it to meet obligations, while acknowledging access to capital at efficient terms was not assured.
• The company estimated $515.3 million of combined company property and corporate debt maturities in 2011 and $827.7 million in 2012, including the $500 million revolving facility; its share of joint-venture debt adds separate maturities. Debt maturities and refinancing remain important liquidity considerations.

Changes versus the prior-year quarter

• Revenue and common-stockholder earnings increased materially, with rental revenue up 19.1%. Same-store rental and reimbursement revenue rose 1.9%; acquisitions contributed substantially to overall growth.
• Investment and preferred-equity income rose to $67.8 million from $20.4 million, mainly due to investment sales and repayments. Equity income from unconsolidated joint ventures fell to $8.2 million from $15.4 million, partly reflecting prior-year contributions from a property later sold.
• Interest expense, net, increased to $65.1 million from $56.8 million. Management cited higher average debt balances ($7.1 billion versus $5.0 billion) and a higher average interest rate (4.98% versus 4.80%).
• No loan-loss reserves were recorded in Q1 2011, compared with $6.0 million in Q1 2010; the company also reported approximately $3.2 million of recoveries during Q1 2011.

Outlook, commentary, risks and unusual items

• Management expected positive operating cash flow and believed resources would be sufficient for capital needs over the following 12 months. It estimated approximately $105.3 million of capital expenditures for the remaining nine months of 2011 on wholly owned properties and $19.2 million for its share of joint-venture properties.
• Leasing indicators were mixed: Manhattan office leases signed during the quarter had starting rents 10.6% above prior fully escalated rents, while suburban leases commenced at rents 3.2% below prior fully escalated rents. Same-store occupancy was 89.7%, up from 89.2% a year earlier.
• Q1 transactions included acquiring the remaining 49.9% interest in 521 Fifth Avenue, which brought the property under full ownership, and contributing a debt investment with a $286.6 million carrying value to a new 50%-owned joint venture, recognizing $38.7 million of additional income. The 521 Fifth Avenue purchase generated a $13.8 million fair-value adjustment.
• After quarter-end, the company sold approximately 1.1 million shares under its first ATM program for $85.6 million gross proceeds, and launched a second $275 million ATM program. It reported $360.6 million in aggregate net proceeds under the two programs through May 5, 2011, with $160.7 million still available. Proceeds were used for debt repayment, investments and general corporate purposes.
• After quarter-end, SL Green also reported refinancing 521 Fifth Avenue, acquiring SITQ’s interest in 1515 Broadway and refinancing its 3 Columbus Circle joint venture. These transactions changed ownership, financing and capital requirements after the reporting date.
• Key disclosed risks include dependence on the New York metropolitan market, tenant and borrower creditworthiness, refinancing and capital-market availability, interest-rate exposure, joint-venture partner obligations, and insurance availability and coverage. A 100-basis-point rate increase was estimated to raise annual company interest costs by about $7.5 million and its share of joint-venture interest costs by about $7.3 million. Management reported no material litigation and no material change to previously disclosed risk factors.

Important facts for investors to verify

1. How much of the sharp earnings and FFO increase is repeatable, given the investment-sale income and purchase-price fair-value adjustment?
2. Whether the 2011–2012 maturities, especially the revolver, are refinanced or repaid on acceptable terms and how much liquidity remains after subsequent transactions.
3. The effect of ATM share issuance on per-share results, ownership dilution and leverage, alongside the use of proceeds.
4. Credit quality, non-accrual exposure and recoverability of debt and preferred-equity investments: the filing reports $113.6 million of non-accrual financing receivables and a $58.2 million loan-loss allowance.
5. Whether leasing and occupancy trends, particularly the weaker suburban portfolio, support projected rental growth and capital spending.