SL Green Realty Corp. — Q1 2017 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2017, with comparison to Q1 2016. SL Green is a REIT focused on commercial and residential real estate in the New York metropolitan area; substantially all operations are conducted through SL Green Operating Partnership, L.P. At quarter-end, its portfolio comprised 103 properties totaling approximately 32.3 million square feet, with 90.6% weighted-average occupancy.
Key financial results
Amounts below are in millions, except per-share data and percentages.
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $377.4 | $455.4 | Down 17.1% |
| Rental revenue, net | $281.3 | $345.6 | Down 18.6% |
| Investment income | $40.3 | $54.7 | Down 26.3% |
| Total expenses | $332.7 | $456.7 | Down 27.2% |
| Net income | $0.9 | $32.5 | Down 97.2% |
| Net income attributable to common stockholders | $11.4 | $23.2 | Down 51.1% |
| Diluted earnings per share | $0.11 | $0.23 | Down $0.12 |
| FFO attributable to common stockholders and noncontrolling interests | $165.9 | $191.8 | Down 13.5% |
- Cash flow: Operating activities provided $116.2 million, versus $114.1 million. Investing activities provided $29.8 million, versus $338.9 million; financing activities provided $42.6 million, compared with $392.1 million used in Q1 2016.
- Liquidity: Quarter-end cash and cash equivalents were $468.0 million; management reported $497.3 million of cash and marketable securities combined. The revolving credit facility had no borrowings and approximately $1.5 billion of undrawn capacity, subject to $84.8 million of outstanding letters of credit.
- Debt: Consolidated debt was approximately $6.66 billion. The effective interest rate was 4.08% for Q1 2017 versus 3.79% for Q1 2016; 82.9% of consolidated debt was fixed-rate. The company reported debt equal to 43.8% of combined market capitalization, including its share of joint-venture debt.
- Dividends: The quarterly common dividend was $0.775 per share, or a stated annual rate of $3.10.
- Operating performance: Same-store NOI increased 3.5% to $176.7 million. Same-store revenue rose 3.1%, while same-store property operating expenses rose 2.1%.
Material changes versus the prior comparable period
- Reported revenue fell largely because of disposed or partially sold properties, including 388 Greenwich Street and the partial sale and deconsolidation of 11 Madison Avenue. Same-store rental revenue increased $9.1 million.
- Q1 2017 included a $56.3 million depreciable real estate reserve related to 520 White Plains Road and 680/750 Washington Boulevard. The reserve was the principal reason reported net income was low; management said the reserve reflected property impairment and sale-related considerations.
- Depreciation and amortization declined to $94.1 million from $179.3 million, primarily reflecting disposed properties. Net interest expense and financing-cost amortization also declined, while the effective interest rate increased.
- Investment income declined, reflecting the absence of certain accelerated income recognized on early loan repayments in 2016, as well as a lower average investment balance and yield. The weighted-average debt and preferred-equity investment balance and yield were $1.6 billion and 9.4%, compared with $1.7 billion and 10.4%.
- FFO, a non-GAAP measure, declined despite excluding real-estate depreciation and specified sale and reserve items. It should not be treated as GAAP earnings or cash available for distributions.
Outlook, risks, contingencies, and unusual items
- Capital spending outlook: For the remainder of 2017, management estimated $45.0 million of recurring capital expenditures and $171.0 million of development or redevelopment expenditures on consolidated properties and its share of joint ventures, plus $305.4 million for its share of joint-venture capital expenditures. The filing does not provide quantified earnings guidance.
- Management outlook: Management expected positive operating cash flow and believed cash, operating cash flow, financing access, and potential asset sales or refinancings would support obligations and capital needs. Access to capital and refinancing at acceptable terms is not assured.
- Upcoming debt maturities: The maturity schedule shows $345 million of corporate obligations remaining in 2017, $250 million in 2018, and $1.183 billion in 2019, in addition to property-level and joint-venture maturities. The 2019 amount includes the unsecured term loan.
- Transactions after quarter-end: In April, SL Green closed sales of 520 White Plains Road and a 90% interest in 102 Greene Street. It also expected to deconsolidate One Vanderbilt Avenue into investments in unconsolidated joint ventures in Q2 after partner interests were admitted, and expected to deconsolidate 885 Third Avenue in Q2 following the buyer’s mortgage refinancing.
- Key risks: Results depend on New York-area property demand, occupancy and rent levels, tenant and borrower credit, development costs, access to capital, interest rates, debt covenant compliance, and joint-venture partners. Insurance availability and potential losses exceeding coverage—including terrorism and catastrophe risks—are also noted. A 100-basis-point rate increase was estimated to reduce consolidated annual interest cost net of investment income by $1.9 million and increase SL Green’s share of joint-venture annual interest cost by $13.7 million.
- Contingencies and controls: Management reported no material litigation and no material change in risk factors from the 2016 Form 10-K. It reported compliance with debt covenants and effective disclosure controls; no significant change in internal control over financial reporting was reported.
Important facts for investors to verify
- Review the valuation assumptions and sale outcomes underlying the $56.3 million real estate reserve, including the April dispositions.
- Track same-store occupancy, leasing spreads, concessions, tenant improvements, and the effect of portfolio dispositions on reported revenue.
- Assess refinancing plans and liquidity for the 2017–2019 maturities, especially the $1.183 billion 2019 term-loan maturity, and monitor covenant headroom.
- Review joint-venture debt, capital requirements, guarantees, and the effects of planned One Vanderbilt deconsolidation; joint-venture obligations are not fully reflected in consolidated debt.
- Compare FFO with GAAP earnings and operating cash flow, and confirm the company’s ability to fund dividends and projected capital spending without relying on asset sales or new financing.