SL Green Realty Corp. — Q3 2018 Form 10-Q
Business context and reporting period. This combined filing covers SL Green Realty Corp. and its operating partnership for the quarter and nine months ended September 30, 2018. SL Green is a REIT focused on owning, operating, developing, and financing commercial and residential real estate, primarily in the New York metropolitan area. Its portfolio comprised 84 properties totaling approximately 30.6 million square feet, with 93.0% weighted-average occupancy.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $307.5 million | $374.6 million | $910.4 million | $1,150.1 million |
| Net income | $99.5 million | $45.8 million | $329.2 million | $62.7 million |
| Net income attributable to common stockholders | $88.2 million | $38.9 million | $293.5 million | $58.4 million |
| Diluted EPS | $1.03 | $0.40 | $3.34 | $0.59 |
| Same-store operating income | $134.9 million | $127.1 million | $399.5 million | $388.2 million |
- Cash flow: For the first nine months, operating cash flow was $317.5 million, investing activities provided $500.2 million, and financing activities used $809.2 million. Cash, cash equivalents, and restricted cash totaled $258.6 million at September 30, 2018, versus $349.3 million a year earlier.
- Balance sheet and debt: Total assets were $13.46 billion and total liabilities $6.42 billion. Consolidated debt was $5.63 billion, down from $5.91 billion at year-end 2017; 62.2% was fixed-rate and the weighted-average maturity was 4.71 years. Debt was 50.7% of combined market capitalization, including SL Green’s share of joint-venture debt.
- Liquidity: The company reported $1.3 billion of undrawn capacity under its 2017 credit facility and $188.8 million of consolidated cash on hand including marketable securities. Management expected positive operating cash flow and identified asset dispositions and borrowing capacity as potential funding sources.
- Operating performance: Same-store operating income increased 6.1% in Q3 and 2.9% for the nine-month period. Manhattan office occupancy was 94.5%; total portfolio occupancy was 93.0%.
Material changes and unusual items
- Revenue fell 17.9% in Q3 and 20.8% for the nine months, mainly reflecting property dispositions and the partial sale/deconsolidation of 1515 Broadway and deconsolidation of 919 Third Avenue. Same-store rental revenue nevertheless rose 3.2% in Q3 and 1.5% year to date.
- Reported earnings benefited from property and joint-venture gains. Q3 included $70.9 million of equity in gains on sales of joint-venture interests/real estate; the nine-month amount was $136.5 million. Nine-month results also included $57.4 million of purchase-price and other fair-value adjustments.
- Adoption of ASC 610-20 produced a $570.5 million adjustment to opening retained earnings in 2018 related to the 1515 Broadway partial-interest sale and fair-value step-up. This was an opening-equity adjustment, not current-period operating revenue.
- For the nine months, net income was substantially above 2017, which included $85.3 million of depreciable real estate reserves; 2018 included a $6.7 million reserve charge related to the Upper East Side Residential Assemblage. The company also recorded a $2.2 million loss on early debt extinguishment and $1.1 million in loan and investment reserves.
- Share repurchases totaled $760.1 million in the first nine months. The board’s repurchase authorization was $2.0 billion, with $433.6 million remaining at September 30. Common dividends declared were $2.4375 per share for the first nine months.
Outlook, risks, and contingencies
- Management expected positive operating cash flow and intended to continue regular quarterly dividends, subject to cash availability, debt service, and financing covenants. It estimated remaining-2018 recurring capital expenditures of $49.4 million and development/redevelopment expenditures of $20.3 million on consolidated properties, plus $126.5 million for its share of joint-venture capital expenditures.
- The company expected to adopt the new lease standard on January 1, 2019 and estimated it would increase assets and liabilities by $0.4–$0.5 billion, principally from ground leases.
- Interest-rate exposure is material: a hypothetical 100-basis-point increase was estimated to raise annual consolidated net interest cost by $6.6 million and SL Green’s share of joint-venture interest cost by $13.6 million. Variable-rate debt represented 37.8% of consolidated debt.
- Principal risks include dependence on the New York-area market, office demand and occupancy, tenant and borrower credit, access to capital, interest rates, development costs and delays, joint-venture obligations, REIT qualification, and insurance availability and coverage. Management reported compliance with debt covenants and no material litigation or material changes to previously disclosed risk factors.
- The Upper East Side Residential Assemblage and 1231 Third Avenue were held for sale at quarter-end; their sale closed in October 2018. A sale of SL Green’s interest in 3 Columbus Circle was expected to close in Q4 2018.
Important facts for investors to verify
- Reconcile reported earnings and EPS to recurring property operations, separating sale gains, fair-value adjustments, and the prior-year impairment charges.
- Review the effect of asset sales and deconsolidations on the revenue base, alongside same-store rent growth, leasing costs, occupancy, and lease commencements.
- Assess consolidated debt maturities and refinancing needs together with joint-venture debt, which is largely outside the consolidated balance sheet; confirm availability of credit capacity and asset-sale proceeds.
- Monitor variable-rate exposure, debt covenants, and the expected balance-sheet impact of ground-lease accounting adoption.
- Evaluate the pace of share repurchases and dividends against operating cash flow, capital needs, and the company’s planned development and joint-venture funding.