SL GREEN REALTY CORP annual report, FY2019

SL Green Realty Corp. — 2019 Form 10-K

Business context and reporting period: Annual report for the fiscal year ended December 31, 2019, filed jointly with SL Green Operating Partnership, L.P. SL Green is a REIT focused principally on owning, leasing, developing and financing commercial real estate in the New York metropolitan area, especially Manhattan. At year-end, its portfolio included 71 properties and interests totaling approximately 27.6 million square feet, with weighted-average occupancy of 94.3%. The company also held debt and preferred equity investments with a book value of $1.7 billion. The company and operating partnership are managed as one entity; the figures below generally refer to the consolidated company.

Financial performance and position

Revenue: $1.239 billion in 2019, up 0.9% from $1.227 billion in 2018. Rental revenue was $983.6 million, investment income $195.6 million and other income $59.8 million.
Profit: Net income was $291.5 million versus $270.9 million in 2018. Net income attributable to common stockholders was $255.5 million, or $3.10 per diluted share, compared with $232.3 million, or $2.67 per share. Results included $76.2 million of gains on sales of joint venture interests and a $69.4 million purchase-price/fair-value adjustment, principally related to acquiring control of 410 Tenth Avenue.
FFO: Funds from operations available to all stockholders were $605.7 million, essentially unchanged from $605.7 million in 2018. FFO is a non-GAAP measure and is not cash flow or a measure of liquidity.
Cash flow: Operating cash flow was $376.5 million, down from $441.5 million. Investing activities provided $114.5 million, versus $681.7 million, reflecting lower net disposition proceeds. Financing activities used $528.7 million, compared with $1.094 billion used in 2018. Cash, cash equivalents and restricted cash ended the year at $241.4 million, down $37.7 million.
Margins and costs: Same-store revenue rose 2.8%, while same-store property operating expenses increased 3.1%. Company-wide operating expenses and real estate taxes also rose; no formal margin guidance was provided. General and administrative expense increased to $100.9 million from $92.6 million, including approximately $10 million of additional expense from lease-accounting changes.
Debt and liquidity: Consolidated debt principal was approximately $5.6 billion at year-end; the balance-sheet carrying amount, net of financing costs, was $5.55 billion. The company reported $1.5 billion of liquidity: $1.3 billion of undrawn revolving-credit capacity and $196.0 million of consolidated cash, including marketable securities. Its share of joint-venture debt was $4.0 billion; total joint-venture debt was $9.0 billion and generally non-recourse. Consolidated weighted-average debt maturity was 3.72 years. The company reported compliance with debt covenants.
Dividends and repurchases: Common dividends declared were $3.435 per share for 2019, up from $3.2875 in 2018. The company repurchased 4.6 million shares at an average $83.62 and expanded its buyback authorization to $3.0 billion.

Material changes versus 2018

Same-store Manhattan office occupancy, including signed leases not yet commenced, improved to 96.2% from 96.0%; overall portfolio occupancy was 94.3% versus 94.2%. Suburban office occupancy fell to 85.7% from 91.3%.
Manhattan office leasing totaled approximately 2.5 million square feet. Leases replacing previously occupied space achieved a 38.1% mark-to-market increase over prior fully escalated rents. Manhattan market vacancy rose to 11.1% from 9.2%, while average asking rents increased 1.6% to $73.41 per square foot.
Interest expense, net of interest income, declined to $190.5 million from $208.7 million, despite a higher average consolidated debt balance, as the weighted-average interest rate fell to 4.00% from 4.06% and development interest capitalization increased.
Equity in income from unconsolidated joint ventures shifted to a $34.5 million loss from $7.3 million of income. Gains recognized on joint-venture interest sales were $76.2 million, down from $304.0 million in 2018.
2018 included $227.5 million of real estate reserves and impairment charges, mainly for suburban properties; 2019 charges were $7.0 million. The lower impairment burden helped reported net income rise, while FFO remained flat.
Debt and preferred equity investments declined to $1.58 billion from $2.10 billion after $1.19 billion of sales, repayments and participations, partly offset by $0.67 billion of originations and accretion.

Outlook, management commentary and key risks

Capital spending: Management estimated 2020 recurring capital expenditures of $145.3 million, development and redevelopment spending of $298.5 million on existing consolidated properties, and the company’s share of joint-venture capital expenditures of $485.5 million. Funding was expected from operations, liquidity, asset sales and/or borrowing.
Development: One Vanderbilt, a 1.7 million-square-foot project, was anticipated to be completed in Q3 2020; its total budget was $3.3 billion, with $1.0 billion remaining at year-end, expected to be funded by the construction facility. 410 Tenth Avenue and 185 Broadway were expected to complete in Q2 2021. Completion timing, cost and leasing remain execution risks.
Leasing and tenant event: Credit Suisse terminated its lease and vacated One Madison Avenue in January 2020. Its share of portfolio annualized cash rent was reported to fall from 8.2% to approximately 3.3%. The termination is a significant re-leasing and cash-flow item to monitor.
Debt maturities: Management intended to repay, refinance or extend debt as it matured. The filing identified $55 million of consolidated mortgage debt and $105 million of joint-venture debt scheduled to mature in 2020 after specified extensions and subsequent-period transactions. Refinancing could carry higher rates or be unavailable on acceptable terms.
Interest-rate exposure: A hypothetical 100-basis-point increase was estimated to raise annual consolidated net interest costs by $13.3 million and the company’s share of joint-venture interest costs by $17.0 million. Management also highlighted uncertainty from the planned transition away from LIBOR after 2021.
Concentration and market risks: Operations are heavily concentrated in New York office real estate. Five properties represented 33.7% of portfolio annualized cash rent; the five largest tenants represented 19.0%. Lease expirations, tenant credit, market vacancy, rent levels, construction costs, joint-venture decisions, property values and access to capital could affect earnings, liquidity and distributions.
Other risks and contingencies: The filing cites climate and natural-disaster exposure, terrorism and insurance limits, environmental and regulatory obligations, potential REIT qualification failure, related-party conflicts and cyber risks. Management reported no material litigation or environmental liability known to it at year-end. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.

Important facts for investors to verify

Progress on leasing, rent concessions and cash-flow replacement for the vacated Credit Suisse space at One Madison Avenue.
2020 maturities, refinancing or extension outcomes, covenant headroom and actual borrowing costs.
Liquidity after development funding, capital expenditures, dividends and repurchases; compare operating cash flow with FFO and distributions.
One Vanderbilt and other project completion dates, remaining funding sources, construction costs and lease-up performance.
Manhattan and suburban occupancy trends, upcoming lease expirations, tenant concentration and realized rents versus asking rents.
Credit quality, collateral values, repayments and reserve adequacy in the debt and preferred equity portfolio, including the investment carrying a $1.8 million reserve.
Actual joint-venture debt obligations, capital calls, guarantees and refinancing exposure, which are not fully reflected in consolidated debt.