SL Green Realty Corp. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Unaudited results. SL Green is a REIT focused primarily on office properties in the New York metropolitan area; its portfolio comprised 62 office properties totaling 30.2 million square feet, with 91.3% weighted average occupancy.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $300.7 million | $251.6 million | $631.8 million | $502.5 million |
| Net income attributable to common stockholders | $526.5 million | $137.0 million | $607.3 million | $152.1 million |
| Basic EPS | $6.30 | $1.76 | $7.44 | $1.95 |
| Funds from operations (FFO) | $92.9 million | $81.5 million | $235.6 million | $166.4 million |
| Cash from operating activities | Not separately stated for quarter | Not separately stated for quarter | $176.8 million | $152.7 million |
Q2 rental revenue was $240.6 million, up 24.5%; six-month rental revenue was $469.6 million, up 21.8%. Much of the growth came from acquisitions and consolidation, while same-store rental revenue was nearly flat in Q2 and up 0.8% for the half. Q2 common-stockholder earnings included a $475.1 million purchase-price fair-value adjustment and a $46.1 million gain on sale of discontinued operations. These unusual gains substantially inflate reported GAAP income; FFO, which excludes the purchase-price adjustment and property-sale gain, increased to $92.9 million for Q2.
Net interest expense was $69.0 million in Q2 and $134.1 million for the half. The company attributed higher interest expense year over year mainly to higher average debt balances; six-month average debt rose to $5.2 billion from $4.8 billion, while the average interest rate rose to 4.89% from 4.71%. The filing does not provide a single consolidated operating-margin measure.
Balance sheet, debt and liquidity
- At June 30, 2011, total assets were $12.64 billion, total liabilities $6.22 billion, and total equity $6.26 billion.
- Consolidated debt was approximately $5.60 billion, including mortgages and other loans, $500 million drawn on the revolving facility, senior unsecured notes, and $100 million of trust-preferred-related debentures. SL Green’s share of joint-venture debt was approximately $1.78 billion; combined debt including that share was approximately $7.38 billion.
- Cash and cash equivalents were $390.2 million; marketable securities were $55.4 million. Management described cash plus marketable securities as approximately $445.6 million. The $1.5 billion revolving facility had $500 million outstanding and $54.8 million of letters of credit reducing availability.
- About 79.6% of consolidated debt was fixed rate. The weighted average term to maturity was approximately 5.9 years. The company reported compliance with debt covenants at quarter-end. A $500 million revolving facility maturity in June 2012 is a key near-term refinancing item; combined scheduled maturities for 2012, including SL Green’s share of joint-venture debt, were approximately $760.7 million.
- Six-month investing cash flow was an outflow of $64.7 million, including $332.0 million for real estate acquisitions; financing cash flow was an outflow of $54.7 million. Cash increased $57.4 million from year-end.
Material changes and operating developments
- SL Green acquired the remaining interest in 1515 Broadway in April and consolidated the property, recognizing the $475.1 million fair-value adjustment. It also acquired full ownership of 521 Fifth Avenue and took control of 110 East 42nd Street.
- The company sold 28 West 44th Street in May for $161.0 million, recognizing a $46.1 million gain.
- Same-store occupancy was 90.0%, versus 89.2% at June 30, 2010. Same-store Manhattan occupancy was 93.6%, while Suburban portfolio occupancy was 86.4%, down from 87.9% a year earlier. Manhattan signed-leasing rents generally improved; Suburban signed rents declined against prior fully escalated rents.
- Six-month investment and preferred-equity income rose to $79.8 million from $41.2 million, including $43.0 million of additional income associated with loan sales or repayments. The carrying balance of debt and preferred-equity investments fell to $582.4 million from $963.8 million at year-end.
Outlook, risks and contingencies
- No specific earnings or FFO guidance was provided. Management expected positive operating cash flow and stated it believed resources would be sufficient for capital needs over the next 12 months. Estimated remaining-2011 capital expenditures were $70.1 million for wholly owned properties and $12.9 million for SL Green’s share of joint ventures.
- Management expected to fund obligations through operating cash flow, cash, borrowings, refinancing, asset and investment dispositions, and debt or equity offerings, but cautioned that capital-market access and financing terms are not assured. It intended to continue regular quarterly dividends; the stated annual common dividend rate was $0.40 per share.
- A 100-basis-point increase in interest rates was estimated to increase annual interest cost by $11.1 million for the company and $4.2 million for its share of joint ventures.
- Credit exposures include non-accrual financing receivables of $85.9 million and one financing receivable with $9.9 million past due 90 days. A joint-venture loan associated with 1604–1610 Broadway was in default and being addressed with the special servicer. The filing also describes a potential guarantee of up to $200 million related to 388 and 390 Greenwich Street debt; management said it believed a payment was unlikely.
- Other stated risks include concentration in the New York metropolitan market, tenant and borrower credit risk, refinancing and interest-rate exposure, joint-venture partner performance, property-market conditions, and the cost or adequacy of insurance, including terrorism coverage. Management reported no material litigation and no material change in previously disclosed risk factors.
- Subsequent to quarter-end, SL Green sold 1.2 million shares through its existing ATM program for $98.6 million gross proceeds, entered a new $250 million ATM program, and issued $250 million of 5.00% senior notes due 2018 on August 5, 2011.
Important facts for investors to verify
- Separate recurring operating performance from the $475.1 million fair-value adjustment and the $46.1 million property-sale gain; reconcile GAAP earnings with FFO.
- Review refinancing plans for the June 2012 revolving-facility maturity and other 2012 obligations, including joint-venture debt.
- Track occupancy, leasing spreads, concessions and tenant-improvement costs, especially the weaker Suburban trends.
- Assess the status and recovery prospects of non-accrual loans, past-due receivables, the Broadway joint-venture default and any guarantees.
- Confirm post-quarter equity and debt issuance, resulting dilution and leverage, and the company’s ability to fund dividends and planned capital expenditures.