SL Green Realty Corp. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. SL Green is a New York metropolitan-area REIT focused primarily on office properties. The filing combines SL Green Realty Corp. and its operating partnership, which are managed as one business. Unless noted, amounts below are in U.S. dollars.
Financial performance and operating metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $301.7 million | $377.4 million |
| Net income | $113.8 million | $0.9 million |
| Net income attributable to common stockholders | $101.8 million; $1.12 per diluted share | $11.4 million; $0.11 per diluted share |
| Funds from Operations (FFO), attributable to common stockholders | $157.7 million | $165.9 million |
| Same-store operating income | $132.1 million | $132.4 million |
| Cash provided by operating activities | $94.5 million | $113.1 million |
| Dividends per common share | $0.8125 | $0.775 |
- Reported revenue fell 20.1%, mainly reflecting property sales and deconsolidations. Same-store revenue increased 1.5%, while same-store operating income was essentially flat.
- Net income included a $49.3 million fair-value adjustment associated with the deconsolidation of 919 Third Avenue and a $23.5 million gain on real estate sales. The sharp year-over-year increase in GAAP earnings therefore does not represent a comparable increase in recurring operations.
- Reported net income in Q1 2017 was reduced by $56.3 million of depreciable real estate reserves. FFO, a non-GAAP measure, declined about 5% year over year.
- Portfolio occupancy was 91.4% overall and 91.6% for commercial properties. Manhattan office occupancy was 94.2%; suburban office occupancy was 83.1%.
Financial position, debt and liquidity
- Total assets were $13.38 billion at March 31, 2018, versus $13.98 billion at year-end 2017. Cash and cash equivalents were $288.8 million; restricted cash was $89.5 million; marketable securities were $28.3 million.
- Consolidated debt was approximately $5.46 billion, down from $5.91 billion at December 31, 2017. The weighted-average maturity was 5.05 years and the effective interest rate was 3.99%. About 69.5% was fixed-rate, including hedged debt.
- The $1.5 billion revolving credit facility was undrawn, with $1.5 billion of total undrawn credit-facility capacity reported. Consolidated cash plus marketable securities was approximately $317.1 million; management also cited access to asset sales, refinancing and other capital sources.
- Operating cash flow was $94.5 million. Investing activities provided $456.0 million, including $409.9 million of net proceeds from real estate or joint-venture dispositions. Financing activities used $422.3 million, including $382.7 million for common-stock repurchases.
- SL Green’s share of joint-venture debt was $4.33 billion. The filing’s combined schedule of consolidated and its share of joint-venture debt shows $398.0 million of maturities for the remainder of 2018 and $1.61 billion in 2020; maturity totals include stated extension options.
- Management estimated remaining-2018 recurring capital expenditures of $149.8 million, development/redevelopment expenditures of $48.6 million, and its share of joint-venture capital expenditures of $389.1 million.
Material changes and notable items
- Adoption of ASC 610-20 on January 1, 2018 resulted in a $570.5 million cumulative adjustment to beginning retained earnings for the previously reported partial sale of 1515 Broadway. The filing also reports a February sale of an additional 13% interest in that property.
- SL Green sold 600 Lexington Avenue in January for $305 million and reported a $23.8 million gain on the disposition. It also completed sales of two Stonehenge Portfolio properties during the quarter.
- Following a change to the 919 Third Avenue partnership agreement, SL Green no longer controlled the investment and deconsolidated it effective January 1, 2018. It recognized a $49.3 million fair-value adjustment.
- At quarter-end, debt and preferred equity investments had a carrying value of $2.09 billion and a reported weighted-average current yield of 9.19% for debt investments, excluding Two Herald Square. The Two Herald Square loans, with $250.5 million principal and $7.7 million accrued interest, were in maturity default and on non-accrual. In May 2018, SL Green was the successful bidder for the leasehold interest at foreclosure and subsequently agreed to joint venture the asset.
- The company repurchased 3.65 million shares in Q1 at an average $97.07 per share. Approximately $297.2 million remained under its $1.5 billion repurchase authorization at March 31.
- Agreements to sell 115-117 Stevens Avenue and 1-6 International Drive were reported at $12 million and $55 million, respectively. In May, SL Green agreed to sell 635 Madison Avenue for $151 million and expected to record a $14 million charge, subject to closing conditions.
Outlook, risks and contingencies
- No earnings guidance was provided. Management expected positive operating cash flow and intended to continue regular quarterly dividends; it noted the REIT requirement to distribute at least 90% of REIT taxable income, subject to debt terms and available cash.
- Management said liquidity needs could be met through operating cash flow, cash, dispositions, credit facilities, secured or unsecured financing, and equity or debt offerings, but cautioned that capital may not be available on acceptable terms or at all.
- A 100-basis-point increase in interest rates was estimated to increase annual consolidated interest costs, net of variable-rate investment income, by $3.5 million and SL Green’s share of joint-venture interest costs by $17.3 million.
- Key stated risks include dependence on the New York-area real estate market, leasing demand and tenant credit, interest rates and capital availability, development costs and delays, financing and covenant compliance, joint-venture partner performance, REIT qualification, and the cost or availability of insurance. The company reported compliance with debt covenants and no material litigation as of March 31, 2018.
- Management reported effective disclosure controls and no significant changes in internal control over financial reporting during the quarter. Interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much of Q1 GAAP earnings came from the 919 Third Avenue fair-value adjustment, the 1515 Broadway accounting transition and property-sale gains, versus recurring operations; compare these with FFO and same-store results.
- Leasing, occupancy and rent trends, particularly suburban office occupancy and the costs and timing of leasing available space.
- Repayment, foreclosure and collateral recovery outcomes for the non-accrual Two Herald Square loans, and progress on the May 2018 leasehold acquisition and joint venture.
- Completion, proceeds and any losses or charges from announced property sales, including 635 Madison Avenue.
- Near-term debt maturities, joint-venture obligations, planned capital spending, access to financing and sensitivity to higher rates.
- The sustainability of the dividend and the pace of share repurchases relative to liquidity and investment needs.