SL GREEN REALTY CORP quarterly report, Q3 FY2012

SL Green Realty Corp. — Q3 2012 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2012. SL Green is a self-managed REIT focused primarily on commercial real estate in the New York metropolitan area. Its portfolio included 65 office properties totaling approximately 29.5 million square feet, with 91.4% weighted average occupancy, plus retail, development, residential and West Coast assets and debt and preferred equity investments.

Financial performance

Metric	Q3 2012	Q3 2011	Nine months 2012	Nine months 2011
Total revenue	$361.4 million	$306.6 million	$1,049.6 million	$934.6 million
Net income attributable to SL Green common stockholders	$7.7 million	$7.1 million	$136.0 million	$614.4 million
Diluted EPS	$0.09	$0.08	$1.52	$7.36
Funds from Operations (FFO)	$104.8 million	$87.9 million	$383.1 million	$323.5 million
Cash from operating activities	Not presented quarterly	Not presented quarterly	$266.0 million	$237.7 million

Q3 rental revenue rose 15.9% to $281.5 million; rental revenue plus escalations and reimbursements increased 15.0% to $324.3 million. Much of the growth reflected acquisitions and two months of consolidation of the West Coast portfolio, rather than same-store growth.
Same-store net operating income rose 0.9% in Q3 to $143.3 million, but declined 0.6% for the nine-month period to $435.2 million.
Q3 total expenses increased 17.0% to $342.1 million. Net interest expense was $85.8 million and depreciation and amortization was $83.4 million. Q3 common earnings included $10.0 million of preferred-stock redemption costs.
Nine-month common earnings were substantially below 2011, primarily because 2011 included a $489.9 million purchase-price fair-value adjustment and larger gains on discontinued-operation sales. Nine-month 2012 also included a $67.9 million contribution from refinancing proceeds at the 717 Fifth Avenue joint venture.
Dividends were $0.25 per common share for Q3 and $0.75 for the nine months, unchanged from 2011 comparable periods.

Balance sheet, debt and liquidity

At September 30, 2012, total assets were $14.28 billion, total liabilities were $7.11 billion and total equity was $6.86 billion. Cash and cash equivalents were $162.4 million; marketable securities were $21.5 million and restricted cash was $143.1 million.
Debt summary reported total debt of $6.39 billion, up from $6.09 billion at year-end 2011. Fixed-rate debt represented 77.6%; the weighted average debt maturity was approximately 5.73 years and the quarter-end effective interest rate was 5.06%.
The $1.5 billion revolving credit facility had $200 million drawn, $92.2 million of letters of credit and approximately $1.2 billion of undrawn capacity. The separate $175 million master repurchase facility was unutilized.
Combined scheduled maturities of property and corporate debt and SL Green’s share of joint-venture debt totaled $8.42 billion. The filing shows $721.2 million due in 2013 and $1.58 billion in 2016; amounts include joint-venture debt and reflect extension options.
Management reported approximately $183.9 million of cash and marketable securities and stated it expected positive operating cash flow and believed resources would be sufficient for capital needs over the next 12 months. It cited operating cash flow, cash, credit facilities, financing, asset dispositions and equity or debt issuance as potential funding sources.
Operating, investing and financing cash flows for the first nine months were $266.0 million, negative $829.2 million and positive $587.4 million, respectively. Investing outflows included real estate acquisitions and joint-venture and debt investments.
At September 30, debt represented 51.5% of the company’s approximately $16.4 billion combined market capitalization, as defined by the company.

Material changes and operating developments

Revenue growth reflected acquisitions, including 635 and 641 Sixth Avenue, acquired in September for $173 million, and 304 Park Avenue South, acquired in June for $135 million. The purchase-price allocation for Sixth Avenue was preliminary.
In September, SL Green recapitalized a 31-property West Coast office portfolio with partners, contributing debt and preferred equity positions and retaining a 27.63% joint-venture interest. It consolidated the portfolio for August and September, then accounted for it under the equity method after control changed.
Manhattan same-store occupancy was 92.9%, down from 93.2% a year earlier; suburban occupancy was 79.6%, down from 80.1%. Nine-month signed lease spreads were positive 7.1% in Manhattan and negative 10.9% in the suburbs versus prior fully escalated rents.
SL Green issued $222.2 million net proceeds of 6.50% Series I preferred stock, redeemed all $100 million of Series D preferred stock and redeemed $100 million of Series C preferred stock in part. It also raised approximately $201.3 million net through its common-stock ATM program during the nine months.
Subsequent to quarter-end, the company agreed to sell 49.5% of its interest in 521 Fifth Avenue at a stated gross valuation of $315 million and expected to refinance the existing mortgage; closing was expected in November 2012.

Outlook, risks and contingencies

No specific earnings or FFO guidance was provided. Management estimated Q4 2012 capital expenditures of $36.9 million on wholly owned properties and $3.7 million as its share of joint-venture expenditures, and said it expected sufficient resources for the next 12 months.
A hypothetical 100-basis-point increase in interest rates was estimated to increase annual interest cost by approximately $13.8 million for the company and $5.0 million for its share of joint ventures. Variable-rate debt, refinancing needs, access to capital and property-market conditions remain relevant risks.
Management identified geographic concentration, tenant and borrower credit, leasing demand and occupancy, acquisitions and development execution, joint-venture partner obligations, debt covenants, REIT qualification, and insurance availability and cost among its risks. It warned that terrorism or other catastrophe losses could exceed insurance coverage; certain coverage is provided through its own captive insurer.
Debt covenant compliance was reported at September 30, 2012. The filing reported no material litigation, no material changes to previously disclosed risk factors, and effective disclosure controls. Management reported no material environmental liability known to it.
Loan-loss reserves declined to $7.0 million from $50.2 million at year-end. Management cautioned that reserve estimates rely on judgment and may not cover future losses. One property-backed London loan was not repaid at maturity; the collateral entity was consolidated and classified as held for sale.

Investor facts to verify

How much of revenue and FFO growth reflects recurring same-store operations versus acquisitions, temporary consolidation and one-time joint-venture or debt-restructuring gains?
Whether the 2013 and 2016 debt maturities, including joint-venture obligations, are refinanced or repaid on acceptable terms, and whether stated revolver availability remains accessible.
Suburban leasing trends and same-store NOI, given lower occupancy and negative lease spreads, compared with Manhattan performance.
Credit quality, collateral values and repayment prospects for the $1.1 billion debt and preferred equity investment portfolio, including the London asset held for sale.
Completion and final accounting for the Sixth Avenue acquisition, the 521 Fifth Avenue interest sale and refinancing, and the West Coast portfolio recapitalization.