SL Green Realty Corp. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; comparative periods ended September 30, 2018. SL Green is a self-managed REIT focused on commercial and residential real estate in the New York metropolitan area, primarily Manhattan. Results consolidate the Operating Partnership, through which substantially all assets and operations are held.
Financial and operating performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $313.6 million | $307.5 million | $930.9 million | $910.4 million |
| Net income | $40.7 million | $99.5 million | $267.2 million | $329.2 million |
| Net income attributable to common stockholders | $33.2 million | $88.2 million | $238.1 million | $293.5 million |
| Diluted EPS | $0.40 | $1.03 | $2.87 | $3.34 |
| FFO attributable to common stockholders | $151.4 million | $149.8 million | $458.1 million | $463.1 million |
| Cash provided by operating activities | Not separately stated for the quarter | Not separately stated for the quarter | $299.4 million | $317.5 million |
- Q3 revenue rose 2.0%, while net income fell 59.1% and diluted EPS declined from $1.03 to $0.40. For the first nine months, revenue increased 2.3%, net income declined 18.8%, and diluted EPS fell to $2.87 from $3.34.
- Rental revenue was nearly flat in Q3 at $248.0 million, down 1.2%; nine-month rental revenue increased 0.3% to $733.1 million. Same-store rental revenue grew 1.0% in Q3 and 2.3% year to date. Total portfolio occupancy was 93.5% at quarter-end.
- Investment income rose 5.1% in Q3 and 6.8% year to date. Management attributed the Q3 increase mainly to a higher weighted-average yield; the nine-month increase reflected a larger average investment balance.
- Interest expense, net of interest income, was $48.1 million in Q3 and $145.8 million year to date, down from $55.2 million and $156.7 million, respectively. Q3 consolidated average debt was $6.1 billion at a 4.04% weighted-average rate.
- At September 30, total assets were $13.3 billion and total liabilities were $6.8 billion. Cash and cash equivalents were $121.8 million; restricted cash was $94.8 million. Reported liquidity was $1.4 billion, including $1.2 billion of revolver availability and $152.0 million of consolidated cash on hand, including marketable securities.
- Consolidated debt was $5.9 billion: 60.1% fixed-rate and 39.9% variable-rate. After variable-rate investments, net exposure to variable-rate debt was 27.4% of total debt. The company reported $1.2 billion of undrawn capacity under its credit facility and compliance with debt covenants.
- Nine-month investing cash flow was a $240.9 million use, versus $500.2 million provided in 2018; financing used $121.1 million, versus $809.2 million used in 2018. Cash, cash equivalents and restricted cash totaled $216.5 million at period-end.
Material changes and notable items
- Net income was pressured by substantially lower gains on joint-venture and real-estate sales than in 2018. Nine-month equity gains on joint-venture/real-estate sales were $76.2 million, compared with $136.5 million; Q3 2018 included $70.9 million of such gains, with none recorded in Q3 2019.
- Q3 2019 included a $7.0 million impairment charge for 1010 Washington Boulevard. Nine-month results also included a $67.6 million fair-value adjustment associated with the acquisition of a controlling interest in 460 West 34th Street. The filing reports $69.4 million of total purchase-price and other fair-value adjustments for the first nine months.
- Acquisitions included 106 Spring Street, 460 West 34th Street and the remaining 10% interest in 110 Greene Street. The company sold a 49% interest in 115 Spring Street and recognized the retained interest at fair value.
- Agreements were signed to sell 220 East 42nd Street for $815.0 million, with closing expected in Q1 2020, and 1010 Washington Boulevard for $23.1 million; the latter sale closed in November 2019.
- The company repurchased about 2.18 million shares during the first nine months for approximately $175.0 million; Q3 repurchases averaged $81.31 per share. Common shares outstanding were 81.5 million at September 30.
Outlook, risks and contingencies
- Management expected positive operating cash flow and identified operations, liquidity, asset dispositions, investment repayments and borrowings as funding sources. No specific earnings or revenue forecast was provided.
- For the remainder of 2019, management estimated $25.9 million of recurring capital expenditures and $38.8 million of development/redevelopment spending on consolidated properties, plus its $123.4 million share of joint-venture capital expenditures.
- Management intended to continue regular quarterly dividends. The stated annualized common dividend was $3.40 per share, subject to available cash, debt-service needs, covenants and REIT requirements.
- Debt and preferred-equity investments totaled $2.0 billion, with a weighted-average current yield of 8.89% for debt investments and 9.51% for preferred equity. Three investments were identified as exceptions to otherwise performing investments; two were in maturity default, and the $41.6 million investment in maturity default was repaid in October. A separate $28.4 million financing receivable remained on non-accrual, with management stating collateral fair value exceeded its carrying value.
- Combined principal maturities, including the company’s share of joint-venture debt and extension options, totaled $9.8 billion; $1.3 billion was scheduled for 2020 and $1.3 billion for 2021. The filing warns that refinancing and capital-market access are not assured.
- Interest-rate sensitivity: a hypothetical 100-basis-point increase was estimated to raise annual consolidated interest cost, net of variable-rate investment income, by $12.7 million and the company’s share of joint-venture interest cost by $16.1 million.
- Key risks include New York market and geographic concentration, tenant and borrower credit, office-space demand and vacancy, development cost overruns, joint-venture funding, interest rates, access to capital, insurance availability and maintaining REIT status. Credit Suisse was 8.1% of the company’s share of annualized cash rent. Management reported no material litigation and no material change to previously disclosed risk factors.
- Adoption of lease-accounting guidance in 2019 added operating right-of-use assets and lease liabilities; internal leasing costs that no longer qualified for capitalization increased expense by $6.6 million for the first nine months. Management said the identified accounting updates were not expected to have a material impact, except that the impact of the forthcoming expected-credit-loss standard remained under evaluation.
Important facts for investors to verify
- Whether the planned 220 East 42nd Street sale closed on schedule and at the agreed consideration, and the final proceeds and accounting treatment.
- Leasing, occupancy and same-store rent trends, especially Manhattan office availability and major-tenant concentration.
- Performance, repayment status and collateral coverage of the three identified investment exceptions and the non-accrual financing receivable.
- Debt maturities, refinancing terms, covenant headroom, variable-rate exposure and the availability of the stated revolver liquidity.
- How recurring and joint-venture capital spending, dividends and buybacks affect liquidity and leverage, and whether FFO translates into sustainable distributable cash.