SL GREEN REALTY CORP quarterly report, Q2 FY2015

Abrir documento

SL Green Realty Corp. — Q2 2015 Form 10-Q

Business context and period. For the quarter and six months ended June 30, 2015. SL Green is a self-managed REIT focused on commercial and residential real estate in the New York metropolitan area, with a substantial Manhattan presence. It reported a portfolio of 119 properties, approximately 34.9 million square feet, and 89.7% weighted average occupancy. The filing combines SL Green Realty Corp. and its operating partnership; their consolidated results are substantially the same.

Financial performance and position

  • Q2 revenue: $409.1 million, up 7.5% year over year. Rental revenue rose 8.8% to $304.2 million; investment income increased 13.9% to $45.2 million.
  • Q2 earnings: Consolidated net loss was $29.2 million; loss attributable to common stockholders was $39.1 million, or $0.39 per diluted share, compared with net income attributable to common stockholders of $235.5 million, or $2.46 per diluted share, in Q2 2014. The prior-year period included substantial acquisition and property-sale gains.
  • First-half earnings: Revenue was $805.4 million, up 8.4%. Net income attributable to common stockholders was $4.2 million, or $0.04 per diluted share, versus $381.6 million, or $3.99 per diluted share, in 2014.
  • Property operations: Same-store NOI increased 10.2% in Q2 and 6.3% in the first half. Same-store consolidated office occupancy was 93.7%, versus 90.9% a year earlier; Manhattan same-store office occupancy was 96.8%.
  • Cash flow: First-half operating cash flow was $233.5 million, down from $276.6 million. Investing used $257.9 million and financing used $41.0 million. Cash and cash equivalents ended at $215.9 million, versus $281.4 million at year-end 2014. Management reported $262.1 million of cash on hand inclusive of marketable securities.
  • Debt and liquidity: Consolidated debt was $8.376 billion, versus $8.433 billion at year-end; the effective interest rate was 3.90%, and 71.8% of debt was fixed rate. The credit facility had $705 million drawn and $405.6 million of undrawn capacity after letters of credit. In July, the facility was expanded by $500 million to $2.533 billion. SL Green reported compliance with debt covenants.
  • Distributions: Common dividends were $0.60 per share for Q2, up from $0.50; first-half dividends were $1.20 per share. Management stated an annualized common dividend rate of $2.40 per share.

Material changes versus the prior comparable period

  • Q2 depreciation and amortization rose to $199.6 million from $93.4 million, primarily due to $99.1 million of accelerated depreciation associated with vacating the One Vanderbilt development site. This was a key factor in the quarterly loss.
  • First-half results also lacked the prior-year $71.4 million purchase-price fair-value adjustment, $106.1 million of equity gains on sales, and $114.7 million gain on discontinued operations. The 2015 first half included a $13.0 million gain on sale of discontinued operations.
  • Rental growth reflected acquisitions, including the 2014 consolidation of 388-390 Greenwich Street, and improved occupancy; same-store real estate taxes and operating expenses also increased.
  • Debt and preferred equity investments increased to $1.685 billion from $1.409 billion at year-end. Their reported weighted average current yields were 10.15% for debt and 10.18% for preferred equity.

Outlook, commentary and risks

  • No specific full-year earnings or FFO guidance is provided. Management expected positive operating cash flow and identified operating cash, credit facilities, financing, asset dispositions, and debt or equity offerings as potential liquidity sources.
  • For 2015, management estimated $184.7 million of recurring capital expenditures and $121.8 million of development/redevelopment expenditures on consolidated properties, plus a $39.1 million share of joint-venture capital expenditures.
  • In May, SL Green agreed to acquire Eleven Madison Avenue for $2.285 billion plus approximately $300 million of lease-stipulated improvement costs; closing was expected in Q3 2015, subject to customary conditions.
  • The company classified 120 West 45th Street, under a $365 million sale agreement, and an 80% interest in 131-137 Spring Street, based on a $277.8 million gross asset valuation, as held for sale. The Spring Street transaction closed in August; the West 45th Street closing was expected in the second half of 2015. SL Green sold 180 Maiden Lane for $470 million in January.
  • One Vanderbilt construction had commenced and was expected to take several years. Management cautioned about potential delays, cost overruns, and changes in market, leasing, or geographic conditions.
  • Risk factors include concentration in New York-area real estate, tenant and borrower creditworthiness, development and joint-venture risks, access to capital, interest-rate exposure, debt covenant compliance, REIT qualification, and the availability and cost of insurance. A 100-basis-point rate increase was estimated to raise annual net interest cost by $13.1 million, plus $7.1 million on SL Green’s share of joint-venture debt.
  • A joint-venture loan secured by Jericho Plaza was in default for nonpayment of debt service; the joint venture was discussing the matter with the special servicer. Management reported no material litigation and no significant environmental liability known to it.

Important facts for investors to verify

  • Whether One Vanderbilt’s accelerated depreciation and construction spending affect subsequent earnings, cash needs, and project timing.
  • Completion, financing, and improvement costs for the Eleven Madison Avenue acquisition, and closing proceeds and timing for held-for-sale assets.
  • Upcoming maturities and refinancing exposure, including the substantial scheduled 2017 debt maturities, and the effect of the July credit-facility expansion.
  • Status and potential consequences of the Jericho Plaza joint-venture loan default, alongside performance and credit quality of the expanded debt and preferred equity investment portfolio.
  • Whether occupancy, same-store NOI growth, and lease spreads persist, particularly in the suburban portfolio and as leases expire.