SL GREEN REALTY CORP annual report, FY2017

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SL Green Realty Corp. — 2017 Form 10-K

Business context and period. This combined annual report covers SL Green Realty Corp. and SL Green Operating Partnership, L.P. for the fiscal year ended December 31, 2017. SL Green is a REIT focused primarily on owning, operating, developing and financing commercial real estate in the New York metropolitan area. At year-end, its portfolio included 98 properties and interests totaling approximately 33.3 million square feet, with 91.4% weighted average occupancy.

Financial and operating performance

  • Revenue: $1.51 billion, down 18.9% from $1.86 billion in 2016. Rental revenue declined 16.8%, primarily reflecting property dispositions and partial sales; investment income fell 9.0% and other income fell 66.5%.
  • Earnings: GAAP net income was $101.1 million versus $278.9 million; net income attributable to common stockholders was $86.4 million, or $0.88 per diluted share, versus $234.9 million, or $2.34. Results included $178.5 million of depreciable real estate reserves, compared with $10.4 million in 2016, and lower property-sale gains ($73.2 million versus $238.1 million).
  • FFO: $667.3 million, down from $869.9 million. FFO is a non-GAAP measure and is not a substitute for GAAP earnings or operating cash flow.
  • Cash flow: Operating cash flow was $548.4 million, down from $634.7 million. Investing activities used $18.9 million, versus $2.12 billion provided in 2016; financing activities used $681.1 million. Cash and cash equivalents ended the year at $127.9 million.
  • Same-store operations and leasing: Same-store operating income was $612.9 million versus $615.4 million. Same-store Manhattan office occupancy was 95.3%, compared with 95.9% in 2016. The mark-to-market on signed Manhattan office leases replacing previously occupied space was 11.3% positive; suburban office leases were 2.9% positive.
  • Debt and liquidity: Consolidated debt principal was approximately $5.9 billion; SL Green’s share of non-recourse joint-venture debt was $4.2 billion. Combined debt-to-market capitalization, including its share of joint-venture debt, was 49.4%. The effective consolidated interest rate was 4.00%, and 27.2% of consolidated debt was variable-rate. The amended $3.0 billion credit facility had $1.4 billion of undrawn capacity at year-end; cash on hand inclusive of marketable securities was reported as $156.5 million.
  • Dividends and repurchases: Common dividends declared were $3.1375 per share for 2017, up from $2.94. The board increased the repurchase authorization to $1.5 billion; 8.3 million shares were repurchased during 2017 at an average $101.64 per share.

Material changes and notable items

  • Portfolio sales and partial dispositions reduced consolidated property exposure and contributed to the year-over-year revenue decline. SL Green acquired an interest in Worldwide Plaza and continued leasing and development activity.
  • Construction began vertically at One Vanderbilt. The project is expected to be completed by the third quarter of 2020; its stated development budget was $3.17 billion, with $1.97 billion remaining to be spent at year-end, including $1.14 billion of construction financing available.
  • The 2017 credit facility was amended and expanded to $3.0 billion, with a $1.5 billion revolver and term loans. SL Green also issued $500 million of 3.25% senior notes due 2022 and an additional $100 million of 4.50% notes due 2022.
  • In 2018, adoption of the new partial-sale accounting guidance was expected to result in an approximately $0.6 billion gain related to the 1515 Broadway transaction, recorded as an adjustment to beginning retained earnings. The filing also says an additional 12.87% interest in the property closed in February 2018.
  • A $250 million mortgage investment acquired while in maturity default was placed on non-accrual in August 2017; the balance including accrued interest was $259.3 million. SL Green reported no impairment reserve, citing its view that collateral value exceeded the loan carrying amount, and said it had initiated foreclosure proceedings.

Outlook, commentary and risks

Management expects positive operating cash flow and intends to continue quarterly dividends, subject to earnings, capital needs, financial condition, debt service and REIT distribution requirements. No specific 2018 earnings or FFO guidance is provided. Estimated 2018 capital expenditures include $147.3 million of recurring and $108.8 million of development or redevelopment spending on consolidated properties, plus SL Green’s $502.7 million share of joint-venture capital expenditures.

  • The portfolio is concentrated in the New York metropolitan area and office assets, exposing results to local economic conditions, office demand, rental rates and vacancy.
  • Lease rollover is a key risk: approximately 50.7% of rentable square feet at consolidated properties and 17.0% at unconsolidated joint ventures were scheduled to expire by December 31, 2022.
  • Debt maturities, variable interest rates, refinancing conditions and financial covenants may constrain liquidity and distributions. Management disclosed $164.8 million of consolidated mortgage debt and $187.7 million of joint-venture debt scheduled to mature in 2018 after specified subsequent repayments and refinancings.
  • Other material risks include One Vanderbilt construction delays or cost overruns; tenant concentration; credit and collateral risk in debt investments; joint-venture dependence; ground-lease obligations; insurance, environmental and climate-related risks; and maintaining REIT qualification. The filing reports no material litigation and no recorded loan-loss reserves.

Investor facts to verify

  • Assess recurring earnings and cash generation apart from property-sale gains, the $178.5 million real estate reserves and other nonrecurring items; compare GAAP net income with FFO and same-store performance.
  • Review the 2018 maturity schedule, available revolver capacity, covenant headroom and exposure to higher interest rates, including joint-venture debt.
  • Track leasing outcomes and tenant improvements for upcoming expirations, particularly the Manhattan 2020–2021 rollover and the stated consolidated portfolio exposure through 2022.
  • Confirm the accounting, cash proceeds and retained ownership economics for the 1515 Broadway transaction and the expected approximately $0.6 billion accounting gain.
  • Monitor One Vanderbilt’s remaining funding needs, construction progress, committed partner equity and leasing, as well as the recovery and foreclosure outcome for the non-accrual mortgage investment.