SL Green Realty Corp. — FY2010 Form 10-K
Business context and reporting period
Annual report for the year ended December 31, 2010; this is a full-year filing, not a standalone fourth-quarter report. SL Green is a self-managed REIT focused on owning, leasing and managing commercial office and retail properties, primarily in Manhattan and the New York metropolitan area, with additional debt and preferred equity investments.
At year-end, its office portfolio comprised 61 consolidated and unconsolidated properties totaling about 29.1 million square feet, with 91.6% weighted-average occupancy. The company also held interests in retail, development and land assets.
Financial and operating highlights
| Metric | FY2010 | FY2009 |
|---|---|---|
| Total revenue | $1.101 billion | $995.8 million |
| Net income attributable to SL Green common stockholders | $270.8 million | $37.7 million |
| Diluted earnings per common share | $3.45 | $0.54 |
| Funds from operations (FFO), available to all stockholders | $386.4 million | $318.8 million |
| Cash from operating activities | $321.1 million | $275.2 million |
| Cash and cash equivalents at year-end | $332.8 million | $343.7 million |
| Consolidated debt | $5.251 billion | $4.893 billion |
- Revenue increased 10.6%; FFO increased 21.2%. Rental revenue rose 4.6% to $796.7 million, while preferred equity and investment income more than doubled to $147.9 million.
- Reported earnings included substantial gains: $126.8 million on the sale of the 1221 Avenue of the Americas joint-venture interest and $35.5 million on the sale of 19 West 44th Street. The repayment of loans secured by 510 Madison Avenue generated approximately $64.8 million of additional investment income.
- Total expenses declined to $990.1 million from $1.078 billion, principally because loan-loss and other investment reserves fell to $20.5 million from $150.5 million. Interest expense, net of interest income, was $233.6 million.
- Occupancy weakened: total portfolio occupancy declined to 91.6% from 93.6%; Manhattan occupancy fell to 92.9% from 95.0%. Same-store occupancy was 91.5%, down from 93.5%.
- Cash from investing activities was $18.8 million, compared with cash used of $345.4 million in 2009, reflecting $623.1 million of real-estate disposition proceeds. Financing activities used $350.8 million.
- Including SL Green’s share of joint-venture debt, reported debt was approximately $6.855 billion. Fixed-rate debt represented 78.8% of consolidated debt; the effective interest rate was 4.76%. A 100-basis-point rate increase was estimated to add $11.0 million to annual consolidated interest costs and $6.7 million to the company’s share of joint-venture interest costs.
- Year-end cash plus marketable securities totaled approximately $366.9 million. The company reported $776.9 million available to draw on its revolving credit facility at year-end.
- Common dividends declared were $0.40 per share for 2010, versus $0.675 for 2009. The company stated an annualized common dividend rate of $0.40 per share and said future dividends remain subject to board discretion and financial conditions.
Material changes and unusual items
- During 2010, SL Green acquired 125 Park Avenue for $330.0 million, acquired 600 Lexington Avenue through a joint venture for $193.0 million, completed a foreclosure at 100 Church Street, and acquired additional leased-fee interests in three properties for an aggregate investment of $349.7 million, including assumed debt.
- It sold 19 West 44th Street and its interest in 1221 Avenue of the Americas. It also originated or acquired approximately $520.7 million of debt and preferred equity investments; recorded about $20.9 million of related loan-loss reserves; and reported a $61.4 million ending allowance for loan losses.
- Financing included $250 million of 7.75% senior unsecured notes due 2020 and $345 million of 3.00% exchangeable senior notes due 2017. The company also issued $122.0 million net proceeds from Series C preferred stock and closed 12 mortgages and other loans totaling approximately $1.3 billion.
- The filing reclassified certain properties as held for sale and presented their results as discontinued operations in the periods shown. It states this restatement had no effect on reported net income or FFO.
- Subsequent to year-end, the company repaid $84.8 million of notes at maturity, completed a $138 million equity investment in the recapitalization of 3 Columbus Circle, and launched a $250 million at-the-market common-stock offering. By February 22, 2011, approximately 2.0 million shares had been sold for $144.1 million.
Outlook, risks and contingencies
- Management described New York’s commercial real-estate market as recovering in 2010 and expected positive leasing momentum to continue in 2011. Midtown vacancy declined, but asking rents increased only modestly; new leases commenced at rents below prior fully escalated rents in both Manhattan and suburban portfolios.
- Management estimated 2011 capital expenditures, tenant improvements and leasing commissions of $120.5 million for existing wholly owned properties, plus $23.4 million for SL Green’s share of joint-venture properties. It expected to fund these needs with operating cash flow, property financing and cash on hand, and stated it believed resources were sufficient for the next 12 months. No specific earnings or FFO guidance was provided.
- Lease rollover is significant: about 34.7% of consolidated-property leases and 32.1% of joint-venture-property leases were scheduled to expire by the end of 2015, representing annualized rents of approximately $283.8 million and $157.4 million, respectively.
- Tenant and asset concentration are material risks. Financial-services tenants represented about 39% of portfolio annualized revenue, and seven properties accounted for approximately 41% of portfolio annualized rent. Citigroup represented about 8.0% of portfolio annualized rent.
- Refinancing and liquidity risks include the revolving facility’s June 2011 maturity (with a one-year extension option management expected to exercise), property and corporate debt maturities, covenant restrictions, and dependence on capital markets and asset sales. The company reported compliance with debt covenants at year-end.
- Other principal risks include a downturn in New York-area office demand, tenant defaults and lower rents, floating-rate debt exposure, loan-investment losses, joint-venture partner dependence, ground-lease expirations, terrorism and insurance costs, environmental and accessibility requirements, and maintaining REIT qualification. Belmont, the company’s captive insurer, is a form of self-insurance.
- No material litigation was reported. The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective as of year-end.
Important facts for investors to verify
- How much of the 2010 increase in net income and FFO reflects recurring property operations versus property-sale gains and the $64.8 million loan-repayment income?
- Whether the revolving-credit extension was exercised and how the 2011 corporate and property debt maturities were refinanced or repaid.
- Subsequent common-stock issuance under the at-the-market program, its dilution, and the use of proceeds.
- Progress on leasing and occupancy, especially near-term expirations, financial-services exposure, and the lower occupancy of suburban consolidated properties.
- Credit performance and collateral values for nonaccrual and impaired loans, including whether the $61.4 million loan-loss allowance proves adequate.
- Whether the stated capital-expenditure plan, dividend level and liquidity remain supportable after debt service, leasing costs and redevelopment commitments.