Business context and reporting period
SL Green Realty Corp. and SL Green Operating Partnership, L.P. filed a combined Form 10-K for the fiscal year ended December 31, 2018. SL Green is a REIT focused primarily on owning, operating, developing and financing New York metropolitan-area real estate, particularly Manhattan office properties. The Company owned 95.3% of the Operating Partnership at year-end.
At December 31, the portfolio comprised interests in 81 properties totaling approximately 30.2 million square feet, with weighted average occupancy of 92.9%. The Company also held $2.1 billion of debt and preferred equity investments and $3.0 billion of investments in unconsolidated joint ventures.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $1.227 billion | $1.511 billion |
| Net income | $270.9 million | $101.1 million |
| Net income attributable to common stockholders | $232.3 million; $2.67 per diluted share | $86.4 million; $0.87 per diluted share |
| FFO attributable to common stockholders and noncontrolling interests | $605.7 million | $667.3 million |
| Cash provided by operating activities | $441.5 million | $543.0 million |
| Cash provided by investing activities | $681.7 million | $22.0 million |
| Cash used in financing activities | $1.094 billion | $685.0 million |
Same-store operating income increased 3.7% to $537.1 million from $517.8 million. Same-store Manhattan office occupancy, including leases signed but not commenced, was 95.7%, compared with 95.8% in 2017. Manhattan office leases replacing previously occupied space achieved a 6.5% mark-to-market increase.
At year-end, total assets were $12.75 billion and total equity was $5.95 billion. Debt was $5.59 billion principal amount ($5.54 billion net carrying amount); 63.4% was fixed-rate and 36.6% variable-rate. The weighted average consolidated interest rate was 4.06%, versus 4.00% in 2017. Cash and cash equivalents were $129.5 million; cash, cash equivalents and restricted cash totaled $279.1 million. The $1.5 billion credit facility had $1.0 billion of undrawn capacity. The declared 2018 common dividend was $3.2875 per share.
Material changes versus the prior year
- Revenue decreased 18.8%, mainly reflecting property sales and deconsolidations, including 1515 Broadway and 919 Third Avenue; same-store revenue grew.
- Net income rose substantially, but was affected by large transaction and valuation items. FFO declined about 9.2%, and operating cash flow fell about 18.7%.
- Sales and partial-interest dispositions had gross valuations totaling approximately $5.0 billion. Net cash proceeds from real estate and joint-venture dispositions were $1.231 billion, compared with $692.8 million in 2017.
- The Company repurchased 9.7 million common shares during 2018 at an average $96.22 per share; the repurchase authorization was increased to $2.5 billion.
- Consolidated debt decreased from $5.91 billion to $5.59 billion, while the share of variable-rate debt rose. Cash and restricted cash increased by $29.1 million.
Outlook, management commentary and risks
- Management expected positive operating cash flow and intended to maintain quarterly dividends, subject to available cash, debt service, covenants and REIT distribution requirements. No specific earnings or FFO guidance was provided in the supplied filing text.
- One Vanderbilt was 52% leased at year-end and was expected to be completed in 2020. Its total development budget was $3.17 billion; $1.58 billion remained to be spent, including $1.38 billion of available construction financing. For 2019, estimated capital spending was $151.1 million for recurring consolidated-property expenditures, $65.2 million for consolidated development/redevelopment, and $449.6 million as the Company’s share at joint ventures.
- Management cited a concentrated exposure to the New York office market, significant lease expirations, reliance on major properties and tenants, development cost and completion risks, and competition for tenants. Credit Suisse accounted for 8.2% of the Company’s share of portfolio annualized cash rent; five major properties represented 32.4%.
- Interest-rate exposure is material: a hypothetical 100-basis-point increase was estimated to raise annual net interest costs by $7.1 million on consolidated instruments and $14.3 million for the Company’s share of joint ventures. The filing also discusses LIBOR transition uncertainty, refinancing and covenant risks.
- Unusual 2018 items included $304.0 million of equity gains on joint-venture/property sales, $57.4 million of purchase-price and fair-value adjustments, $227.5 million of real estate reserves and impairment, a $30.8 million net loss on real estate sales, and a $17.1 million loss on early debt extinguishment. The $227.5 million impairment included $221.9 million related to suburban office properties the Company intended to dispose of.
- Adoption of the partial-sale accounting guidance produced a $570.5 million cumulative adjustment to opening retained earnings related to 1515 Broadway; it was not current-year operating income. The fourth quarter recorded a $61.2 million net loss attributable to common stockholders, largely reflecting the fourth-quarter impairment charge.
- The Company reported compliance with debt covenants, no material litigation, and unqualified audit opinions on its financial statements and internal control over financial reporting. Related-party service arrangements and other potential conflicts are disclosed in the filing.
Important facts for investors to verify
- Reconcile reported GAAP earnings with FFO and assess the effect of sale gains, impairment charges, deconsolidations and accounting changes on recurring performance.
- Review lease rollover, rent mark-to-market, tenant improvement and leasing commission costs, including the 2020 expiration of substantial Credit Suisse space at One Madison Avenue.
- Assess liquidity and refinancing needs against debt maturities, joint-venture obligations, variable-rate exposure, and planned 2019 capital and development expenditures.
- Monitor One Vanderbilt’s leasing, construction progress, remaining funding needs and expected completion timing.
- Evaluate whether planned asset dispositions and the large share repurchase program support durable per-share value while preserving balance-sheet flexibility and dividend capacity.