SL GREEN REALTY CORP quarterly report, Q1 FY2014

Full document

SL Green Realty Corp. — Q1 2014 Form 10-Q

Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are to December 31, 2013. The filing combines SL Green Realty Corp. and its operating partnership, which are managed as one business. SL Green is a REIT focused primarily on commercial real estate in the New York metropolitan area.

Business context and portfolio

  • At quarter-end, the portfolio comprised 101 properties totaling 34.3 million square feet, including consolidated and unconsolidated interests; weighted average occupancy was 89.5%.
  • Commercial properties totaled 33.6 million square feet and were 89.4% occupied. Manhattan office occupancy was 94.3%; suburban office occupancy was 80.9%.
  • The company also held $1.5 billion of debt and preferred equity investments, with a weighted average current yield of 10.69% on debt investments and 9.74% on preferred equity investments.

Financial performance and position

  • Revenue: $381.1 million, up 5.9% from $360.0 million. Rental revenue increased 4.0% to $272.1 million; investment income rose 2.7% to $54.1 million.
  • Profit: Net income was $156.6 million versus $30.3 million. Net income attributable to common stockholders was $146.1 million versus $18.9 million; diluted EPS was $1.53 versus $0.21. Q1 2014 results included $104.6 million in equity gains on joint-venture/property-interest sales. EPS from continuing operations before sale gains and discontinued operations was $0.46 versus $0.19.
  • Funds from operations: NAREIT FFO was $150.0 million versus $109.2 million. FFO is a supplemental measure, not a substitute for GAAP earnings or operating cash flow.
  • Cash flow: Operating activities provided $88.1 million versus $89.6 million. Investing activities used $71.8 million versus $169.1 million; financing activities provided $224.1 million versus $109.6 million. Cash and cash equivalents ended the quarter at $447.2 million, compared with $206.7 million at year-end 2013.
  • Liquidity: Management reported $479.3 million of consolidated cash and marketable securities. The $1.2 billion revolving credit facility had $1.1 billion of undrawn capacity, with $71.6 million of letters of credit outstanding.
  • Debt: Consolidated debt was $7.20 billion, up from $6.92 billion at year-end. The effective interest rate was 4.60%; 77.7% of consolidated debt was fixed rate. Weighted average debt maturity was 5.7 years. Debt and the company’s share of joint-venture debt represented 47.2% of combined market capitalization.
  • Dividends: The quarterly common dividend was $0.50 per share, compared with $0.33 in Q1 2013. Management stated an annual rate of $2.00 per share.

Changes versus the prior comparable period

  • Revenue increased $21.2 million, while total expenses rose $18.0 million. Same-store NOI decreased 1.5% to $168.5 million; same-store revenue was down 0.8%.
  • GAAP income growth was driven substantially by $104.6 million of sale-related equity gains. Q1 2013 included an $18.5 million loss on early extinguishment of debt, also affecting the comparison.
  • Occupancy in same-store consolidated offices edged up to 91.0% from 90.9%; Manhattan was 94.1% versus 94.2%, and suburban occupancy was 78.7% versus 77.4%.
  • Debt and preferred equity investments increased to $1.49 billion from $1.30 billion. Management reported that all such investments were performing to contractual terms and none were 90 days past due.

Outlook, risks and unusual items

  • Management expected positive operating cash flow and believed resources would be sufficient for capital needs over the next 12 months, subject to access to financing and other funding sources. For the remaining nine months of 2014, it estimated its share of recurring capital expenditures at $134.8 million, development expenditures at $74.6 million, and joint-venture capital expenditures at $157.3 million.
  • In March, SL Green contracted to acquire its partner’s interest in 388–390 Greenwich Street at a stated gross valuation of $1.6 billion, with closing expected in Q2 2014 subject to customary conditions. The filing does not state that the transaction had closed by the reporting date.
  • SL Green sold its interests in the West Coast Office portfolio and 21–25 West 34th Street during Q1, recognizing gains of $85.5 million and $20.9 million, respectively. It also agreed to sell 673 First Avenue for $145.0 million; that sale closed in May 2014.
  • The March amendment to the credit facility increased the term-loan portion by $383 million to $783 million, reduced its interest-rate margin by 25 basis points, and extended its maturity to June 30, 2019. The revolving facility matures in March 2017, with extension options. The company reported compliance with debt covenants at March 31.
  • A hypothetical 100-basis-point rate increase was estimated to raise annual net interest cost by approximately $9.1 million, plus approximately $8.0 million for SL Green’s share of joint-venture interest cost.
  • Management cited risks including concentration in the New York market, tenant and borrower credit, property development and leasing, access to capital, rising interest rates, joint-venture obligations, REIT qualification, and insurance availability and cost. The filing reported no material litigation and no material changes to previously disclosed risk factors.
  • Management reported effective disclosure controls and no significant changes to internal control over financial reporting during the quarter.

Important facts for investors to verify

  • How much of reported earnings and FFO is attributable to recurring operations rather than the Q1 disposition gains and other unusual items.
  • Whether same-store NOI weakness persists, and whether leasing, occupancy and rent spreads support management’s outlook.
  • Whether the 388–390 Greenwich Street acquisition closed as expected, and its financing, capital requirements and effect on leverage.
  • How upcoming debt maturities—particularly the $75.9 million note due August 2014 and significant 2016–2017 maturities—are refinanced or repaid.
  • Whether debt and preferred equity investment yields remain collectible and whether concentrated borrower, property and interest-rate exposures change.
  • Whether planned capital expenditures and the stated dividend remain supportable from operating cash flow and available financing.