SL Green Realty Corp. — Q3 2016 Form 10-Q
Business context and period. This combined filing covers SL Green Realty Corp. and its operating partnership for the quarter and nine months ended September 30, 2016. SL Green is a REIT focused on commercial and residential real estate in the New York metropolitan area. Its portfolio comprised 109 properties totaling approximately 32.9 million square feet, with 90.3% weighted average occupancy; commercial occupancy was 91.4%. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless indicated otherwise.
Financial performance and position
- Q3 revenue and earnings: Revenue was $416.7 million, down 3.6% from $432.1 million. Net income was $43.3 million versus $176.8 million; net income attributable to common stockholders was $34.3 million, or $0.34 per diluted share, versus $163.7 million, or $1.64. The prior-year quarter included $159.7 million in real estate sale gains and $15.3 million in joint-venture sale gains; Q3 2016 recorded only $0.4 million and $0.2 million, respectively.
- Nine-month results: Revenue was $1.490 billion, up 20.4%; net income was $224.9 million versus $203.2 million, and common-stockholder income was $190.9 million, or $1.90 diluted EPS, versus $167.8 million, or $1.68. Results included $210.8 million of real estate sale gains and $43.6 million of joint-venture sale gains. Before sale gains, real estate reserves and discontinued operations, common-stockholder results were a loss of $0.43 per share versus income of $0.04 per share in 2015.
- Operating measures: Same-store NOI decreased 9.5% in Q3 and 1.0% for the nine months. Same-store cash NOI increased 1.7% and 6.0%, respectively. Same-store Manhattan and suburban office occupancy, including signed leases not yet commenced, was 97.5% and 85.4%, up from 97.3% and 84.3% a year earlier.
- Cash flow: Nine-month operating cash flow was $508.8 million, up from $323.0 million. Investing activities provided $2.405 billion, largely reflecting dispositions; financing activities used $2.763 billion, principally debt repayments and distributions. Cash and cash equivalents ended the period at $405.9 million.
- Debt and liquidity: Consolidated debt was approximately $6.505 billion, down from $10.435 billion at year-end 2015. The effective interest rate was 3.79%, and 84.5% of consolidated debt was fixed rate. The company reported $466.2 million of cash and marketable securities, no revolving-credit borrowings, and $1.5 billion of undrawn capacity under its 2012 credit facility. Consolidated debt plus SL Green’s share of joint-venture debt represented 43% of reported combined market capitalization.
- Dividends: Common dividends were $0.72 per share for Q3 and $2.16 for the nine months. Management stated an annual dividend rate of $2.88 per share and intends to continue regular quarterly dividends.
Material changes and unusual items
- Rental revenue fell 11.6% in Q3, primarily reflecting the sale of 388-390 Greenwich Street and other property dispositions, partly offset by acquired and consolidated properties. Nine-month revenue growth also reflected acquisitions and higher investment and other income.
- The 388-390 Greenwich Street sale generated a $206.5 million gain. The tenant’s purchase option and accelerated sale also caused $172.4 million of below-market lease amortization to be recognized in nine-month rental revenue, and accelerated depreciation contributed to the year-over-year increase in depreciation and amortization.
- In August, SL Green sold a 40% interest in 11 Madison Avenue for consideration of approximately $482 million. The transaction did not meet sale-accounting criteria at quarter-end, so the property was accounted for under the profit-sharing method; management expected lender consent to modifications during Q4. If consent was not obtained, the company could have to repurchase the interest at the sale price.
- In August, the board authorized a stock repurchase plan of up to $1.0 billion; no shares had been repurchased as of September 30. A $1.5 billion construction facility for One Vanderbilt was closed in September; it bears interest at LIBOR plus 350 basis points, subject to reductions under specified conditions.
- Management estimated 2016 recurring capital expenditures of $71.6 million and development or redevelopment expenditures of $57.5 million, plus its $16.5 million share of joint-venture capital expenditures.
Outlook, risks and contingencies
- Management expected positive operating cash flow and believed cash, operations, asset-sale proceeds, refinancing and available financing could meet obligations and capital needs, while noting that future capital-market access was not assured.
- A key near-term funding risk is Belmont’s $229 million of Federal Home Loan Bank advances. Under the stated rule, its membership could terminate in February 2017, requiring repayment unless the rule changes or other arrangements are made.
- Debt maturities, property-level refinancing needs, interest-rate changes, repurchase-facility margin calls, and the company’s ability to satisfy financial covenants are material risks. The company reported covenant compliance at September 30, 2016. A 100-basis-point rate increase was estimated to reduce annual interest cost on company variable-rate debt, net of related investment income, by $2.8 million, while increasing its joint-venture share of annual interest cost by $11.5 million.
- Other disclosed risks include concentration in New York-area real estate, tenant or borrower credit issues, leasing demand, development costs and delays, joint-venture partner obligations, REIT qualification, and insurance availability or losses exceeding coverage. Management reported no material litigation and no material changes to previously disclosed risk factors.
Investor verification priorities
- Reconcile reported earnings to recurring performance, including the 388-390 Greenwich lease amortization, accelerated depreciation, property-sale gains and joint-venture accounting.
- Review the 11 Madison lender-consent outcome and any resulting sale accounting or repurchase obligation.
- Assess debt maturities and refinancing plans, the February 2017 FHLB repayment exposure, and liquidity after planned development and leasing costs.
- Check debt and preferred-equity investment performance, collateral and maturities; the filing reports a 9.29% weighted average current yield on debt investments and says investments were performing except for a non-accrual loan with zero carrying value.
- Monitor same-store NOI, cash NOI, occupancy, lease commencements and tenant-credit exposure, as well as the execution and funding implications of the authorized stock repurchase plan and dividend.