Business context and reporting period
SL Green Realty Corp. and its operating partnership filed a combined Form 10-K for the fiscal year ended December 31, 2015. SL Green is a self-managed REIT focused primarily on owning, leasing, developing and financing commercial real estate in the New York metropolitan area, especially Manhattan. At year-end, it held interests in 113 properties totaling approximately 35.6 million square feet, with a reported weighted-average portfolio occupancy of 90.1%. The Company owned 96.39% of the Operating Partnership.
Financial results and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $1.663 billion | $1.520 billion | +9.4% |
| Net operating income (NOI) | $989.3 million | $886.4 million | +11.6% |
| Same-store NOI | $689.1 million | $655.2 million | +5.2% |
| Income from continuing operations | $302.9 million | $363.7 million | -16.7% |
| Net income attributable to SL Green common stockholders | $269.1 million | $503.1 million | -46.5% |
| Diluted earnings per share | $2.70 | $5.23 | Lower |
| FFO available to all stockholders | $661.8 million | $583.0 million | +13.5% |
| Net cash from operating activities | $526.5 million | $490.4 million | +7.4% |
| Cash dividends declared per common share | $2.52 | $2.10 | +20.0% |
Revenue growth reflected acquisitions, including 11 Madison Avenue and the consolidation of 388-390 Greenwich Street, as well as improved same-store occupancy. Interest expense, net, was $323.9 million; depreciation and amortization rose to $560.9 million from $371.6 million. FFO is a non-GAAP REIT measure and is not equivalent to cash available for distributions.
At December 31, total assets were $19.86 billion and consolidated debt was approximately $10.4 billion, up from $8.18 billion of debt a year earlier. The reported weighted-average debt maturity was 5.53 years and the effective interest rate for 2015 was 3.78%, versus 4.24% in 2014. Variable-rate consolidated debt was $3.20 billion; management estimated that a 100-basis-point rate increase would add $19.5 million to annual interest costs, net of investment income, plus $6.5 million on its share of joint-venture debt.
Cash and cash equivalents were $255.4 million; management also reported $300.5 million of cash on hand inclusive of $45.1 million of marketable securities. The revolving credit facility had $532.9 million of undrawn capacity. Operating cash flow was $526.5 million; investing activities used $2.27 billion and financing activities provided $1.71 billion.
Material changes versus the prior comparable period
- Portfolio expansion included the acquisition of 11 Madison Avenue for approximately $2.285 billion, plus about $300 million of lease-stipulated improvement costs, and additional acquisitions and investments in office, retail and residential assets.
- Management reported 2015 same-store Manhattan office occupancy of 97.1% based on leases signed, compared with 95.7% in 2014. Same-store consolidated Manhattan office occupancy excluding leases signed but not commenced was 96.5%, versus 94.8%; suburban same-store occupancy was 80.6%, versus 80.1%.
- Lower 2015 GAAP earnings reflected substantially higher depreciation and amortization, including accelerated depreciation associated with clearing the One Vanderbilt site, and much smaller gains from joint-venture and discontinued-property sales than in 2014. In 2015, SL Green recorded $176.0 million of real estate sale gains and $15.8 million of gains on joint-venture interests; 2014 included $123.3 million of joint-venture sale gains and $163.1 million of gains on discontinued operations.
- Investing cash use increased sharply, primarily reflecting acquisitions. Property acquisitions used $2.65 billion of cash in 2015, compared with $1.04 billion in 2014.
- The filing reclassified certain property results as discontinued operations under updated accounting guidance and revised historical presentation. It states these reclassifications did not affect reported net income or FFO. It also describes equity classification corrections that did not affect prior-period operating results or cash flows.
Outlook, management commentary, risks and unusual items
- Management said the New York City commercial real estate market strengthened in 2015 and expected positive operating cash flow to continue. It did not provide a specific earnings or FFO forecast in the supplied filing text.
- For 2016, management estimated recurring capital expenditures of $215.4 million and development/redevelopment expenditures of $280.9 million for consolidated properties, plus $82.9 million as its share of joint-venture capital expenditures. It intended to fund these needs with operating cash flow, liquidity, financing and/or asset sales.
- Management intended to continue regular quarterly dividends. At the stated annual rate of $2.88 per share, annual common dividends would total approximately $288.2 million; future dividends remain subject to board discretion, cash needs, debt service, capital availability and REIT requirements.
- In January 2016, Citigroup exercised its option to buy 388-390 Greenwich Street for $2.0 billion, net of unfunded tenant concessions; closing was scheduled for December 2017 and remained subject to customary conditions. The transaction would materially reduce Citigroup’s rent contribution if completed.
- One Vanderbilt had received required approvals and demolition had commenced. The multi-year development carries risks of delays, cost increases, leasing uncertainty and changes in market conditions. The project also drove $131.8 million of accelerated depreciation in 2015.
- Debt maturities and refinancing are important liquidity considerations: the filing identifies approximately $253.4 million under the master repurchase facility, $146.1 million of consolidated property mortgage debt and $529.6 million of the Company’s share of joint-venture mortgage debt maturing in 2016. Management planned to extend, repay or refinance obligations as appropriate. The master repurchase facility’s $253.4 million balance matured in June 2016.
- Key risks include concentration in the New York office market, tenant and property concentration, lease rollover and reletting costs, leverage and interest-rate exposure, development execution, reliance on external capital, joint-venture and lending risks, and potential uninsured catastrophe losses. Five large properties represented 35.9% of portfolio annualized cash rent; the five largest tenants represented 28.4%.
- 2015 included a $19.2 million depreciable-real-estate reserve related to a property sale and a $6.6 million loss associated with 885 Third Avenue. Several other income items were non-recurring, including lease termination income, settlement fees and tax benefits. The filing reported no material litigation and no loan-loss reserves at year-end; one acquired junior mortgage participation had a carrying value of zero and was on non-accrual.
- Moody’s upgraded the Company’s corporate credit rating to investment grade in 2015; S&P raised its outlook to Positive in 2015 and upgraded the rating to investment grade in January 2016. The filing reported compliance with debt covenants at year-end.
Most important facts for investors to verify
- Reconcile recurring operating performance and FFO growth with the sharp decline in GAAP net income, including the effects of property-sale gains, acquisition accounting and One Vanderbilt depreciation.
- Track the 2016 debt maturities, repurchase-facility extension or repayment, available credit capacity, refinancing terms and covenant headroom.
- Confirm the timing and conditions of the 388-390 Greenwich sale, expected proceeds and the resulting change in tenant concentration and cash flow.
- Assess One Vanderbilt’s remaining development budget, funding plan, leasing progress and exposure to cost overruns or delays.
- Monitor lease expirations, occupancy and market-rent assumptions, particularly in suburban properties and among major tenants; management cautioned that its market-rent estimates may not be realized.
- Review the effect of elevated capital spending, tenant improvements, leasing commissions and dividend commitments on cash available for debt reduction and distributions.