SL Green Realty Corp. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. SL Green is a New York metropolitan-area REIT focused primarily on office properties; it operates through SL Green Operating Partnership, L.P. The financial statements are unaudited.
Business context and portfolio
At quarter-end, the portfolio comprised 61 properties totaling approximately 28.0 million square feet, including consolidated and unconsolidated interests. Weighted average occupancy was 92.1% overall, 92.5% for Manhattan office properties, and 80.5% for suburban office properties. The company also held $1.1 billion of debt and preferred equity investments.
Financial performance and position
- Q3 revenue: $205.2 million, down 17.8% from $249.8 million a year earlier. Rental revenue was $155.4 million, down 20.5%.
- Q3 net income: $415.5 million versus $20.7 million; net income attributable to common stockholders was $388.2 million and diluted EPS was $5.75, versus $13.9 million and $0.19, respectively. The 2021 result included $208.8 million of purchase-price and other fair-value adjustments and $187.8 million of real estate sale gains.
- Q3 FFO: $127.0 million, compared with $135.5 million. FFO is a non-GAAP measure and is not cash flow from operations.
- Nine-month results: Revenue was $649.4 million versus $817.8 million; net income was $528.8 million versus $214.4 million; diluted EPS was $7.04 versus $2.50; and FFO was $373.0 million versus $443.6 million.
- Cash flow, nine months: Operating activities provided $191.0 million, down from $327.9 million. Investing activities provided $886.9 million, including $750.0 million of excess distributions from unconsolidated joint ventures and $541.3 million of net property and joint-venture disposition proceeds. Financing activities used $1.105 billion. Cash, cash equivalents and restricted cash totaled $345.9 million at period-end.
- Debt and liquidity: Consolidated debt was $4.15 billion, down from $4.96 billion at year-end 2020; 86.2% was fixed-rate or hedged. Liquidity was reported at $1.6 billion, including $1.3 billion of undrawn revolving capacity and $0.3 billion of consolidated cash and marketable securities. The company’s share of joint-venture debt was $5.79 billion; total joint-venture debt was $11.16 billion.
- Balance sheet: Total assets were $10.86 billion and total liabilities were $5.21 billion. Investments in unconsolidated joint ventures were $3.03 billion.
Material changes and drivers
- Lower rental revenue reflected dispositions, properties moved into redevelopment, and increased vacancies at several same-store buildings, partly offset by the addition of 885 Third Avenue.
- Lower investment income reflected reduced average debt and preferred equity balances and, for the nine-month period, a lower average yield.
- Net income rose sharply because of real estate dispositions and fair-value adjustments, including the retained interest in 220 East 42nd Street after selling a 49% interest and deconsolidating the property. This drove reported earnings well above FFO.
- Interest expense declined as average debt balances fell and interest capitalization increased. Q3 weighted-average consolidated debt was $4.3 billion versus $5.6 billion; the reported weighted-average interest rate was 3.06% versus 2.91%.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management expected $48.0 million of recurring capital spending and $47.1 million of development or redevelopment spending on consolidated properties for the remainder of 2021, plus a $61.0 million share of joint-venture capital expenditures.
- Management identified COVID-19, New York office demand and vacancy, tenant and borrower credit, development costs, financing availability and interest rates, joint-venture funding, and insurance availability and cost as material risks.
- On October 31, 2021, an HNA affiliate filed for Chapter 11 protection in connection with its investment in 245 Park Avenue. SL Green said it would contest the filing. A third party also asserted ownership rights to the fee at 1591–1597 Broadway, which the company is contesting.
- One debt investment with a carrying value of $225.4 million was on non-accrual without an allowance; another investment with a carrying value of $6.8 million, net of reserves, was identified as not performing in accordance with its terms. The filing also disclosed a separate $27.7 million financing receivable on non-accrual, recorded in other assets.
- There were no properties classified as held for sale at September 30. The October 2021 sale of 590 Fifth Avenue for $103.0 million occurred after quarter-end.
- The company reported compliance with debt covenants and no material litigation as of September 30, while noting the disputes above. It also stated disclosure controls were effective.
Important facts for investors to verify
- How much of reported earnings depends on property-sale gains and fair-value adjustments, and how recurring operating performance compares using FFO and cash flow.
- Leasing demand, vacancy trends, concessions and rent levels, particularly for Manhattan and suburban office properties.
- Near-term refinancing and maturity needs, including the 2022 corporate maturities, and the availability of the reported revolving-credit capacity.
- Joint-venture leverage, capital needs and distributions, as well as the company’s actual economic share of associated debt and cash.
- Credit recovery and legal outcomes for the non-accrual investments, the HNA-related 245 Park Avenue exposure, and the contested Broadway ownership claim.