SL Green Realty Corp. — Q1 2015 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2015; results are unaudited and compare with Q1 2014. SL Green is a REIT focused on commercial and residential real estate in the New York metropolitan area, primarily Manhattan. It reported 118 properties totaling approximately 34.8 million square feet, including consolidated and unconsolidated interests; total portfolio occupancy was 88.7%. The Company and its operating partnership are managed and operated as one entity, so figures below are consolidated unless noted.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Total revenue | $396.3 million | $362.4 million |
| Net income | $55.6 million | $156.6 million |
| Net income attributable to common stockholders | $43.3 million; $0.44 diluted EPS | $146.1 million; $1.53 diluted EPS |
| Common-stockholder income from continuing operations before sale gains and discontinued operations | $30.4 million; $0.31 per diluted share | $39.1 million; $0.41 per diluted share |
| Same-store NOI | $165.6 million, up 2.7% | $161.3 million |
| Funds from operations attributable to common stockholders and noncontrolling interests | $154.4 million | $150.0 million |
| Cash provided by operating activities | $91.0 million | $88.1 million |
| Cash and cash equivalents | $330.8 million at quarter-end | $281.4 million at Dec. 31, 2014; $447.2 million at Mar. 31, 2014 |
| Consolidated debt | $8.09 billion; effective rate 3.95% | $8.43 billion at Dec. 31, 2014 |
| Quarterly common dividend | $0.60 per share | $0.50 per share |
Revenue increased 9.4%, led by acquired properties and higher same-store rents and occupancy. Same-store NOI rose 2.7%, as revenue growth was partly offset by higher property costs. Same-store consolidated office occupancy improved: Manhattan to 95.7% from 93.7%, and Suburban to 81.0% from 78.7% (excluding signed leases not yet commenced). Rental revenue grew 18.5%; investment income fell 22.2% to $42.1 million.
Reported net income and EPS declined sharply because Q1 2014 included a $104.6 million gain on a sale of an unconsolidated joint-venture interest. Q1 2015 included a $13.0 million gain on sale of discontinued operations, associated with 180 Maiden Lane. Depreciation and amortization increased 25.2% to $108.3 million, and interest expense plus deferred financing-cost amortization increased to $82.4 million from $79.8 million. The weighted-average consolidated debt balance rose to $8.3 billion from $7.1 billion, while the weighted-average interest rate declined to 3.94% from 4.60%.
Investing activities provided $230.3 million, principally reflecting $485.5 million of disposition proceeds, including the January sale of 180 Maiden Lane for $470 million. Financing activities used $271.9 million; operating activities provided $91.0 million. The quarter-end cash balance increased $49.4 million from year-end 2014. Cash plus marketable securities was $378.5 million.
Material changes, liquidity, and capital
- SL Green sold 180 Maiden Lane in January 2015; the filing reports a $17.0 million sale gain before certain related items and a $13.0 million gain on sale of discontinued operations. Assets and liabilities held for sale at year-end were no longer reported at March 31.
- Rental revenue benefited from the 2014 consolidation of 388-390 Greenwich Street. The acquisition added property revenue and expenses, including depreciation and financing costs.
- Debt and preferred equity investments had a $1.55 billion carrying value, with weighted-average current yields of 10.27% for debt and 10.20% for preferred equity. The portfolio’s weighted-average term to maturity was 1.9 years. One acquired junior mortgage participation was on non-accrual and had a carrying value of zero; the filing says other investments were performing and none were 90 days past due.
- The $1.2 billion revolving facility had $520 million drawn, $107.6 million of letters of credit, and $572.4 million of undrawn capacity. The separate $300 million master repurchase facility was undrawn. The company also reported $833 million outstanding on its term loan.
- Debt was 74.4% fixed-rate and 25.6% variable-rate; weighted-average debt maturity was 5.82 years. SL Green’s share of joint-venture debt was approximately $1.71 billion. Management reported compliance with debt covenants. Principal maturities are concentrated in 2016–2019, including $1.31 billion of consolidated and joint-venture debt shown for 2017 in the filing’s maturity schedule.
- Equity funding included $120.6 million of common-stock issuance proceeds and $99.5 million from the dividend reinvestment and stock purchase plan. A new $300 million at-the-market program began in March, with $292.5 million remaining at quarter-end. The Operating Partnership issued $40 million of Series M preferred units in connection with a property-interest acquisition.
Outlook, management commentary, and risks
Management expected positive operating cash flow for the foreseeable future and intended to continue regular quarterly dividends. It estimated 2015 spending of $229.1 million for recurring capital expenditures, $145.5 million for development and redevelopment at existing consolidated properties, and $74.9 million for its share of joint-venture capital expenditures. These are estimates, not earnings guidance; the filing provides no specific earnings or FFO forecast.
Management cited New York-area market dependence, tenant and borrower credit, occupancy and rental demand, development cost overruns, access to capital, refinancing and interest-rate exposure, joint-venture funding, REIT qualification, and insurance availability and cost as key risks. A 100-basis-point rate increase was estimated to increase annual interest cost by $11.5 million net of variable-rate investment income, plus $7.1 million for SL Green’s joint-venture share. The filing notes that insurance may not cover all catastrophic losses and that terrorism coverage and premiums remain relevant considerations. No material litigation was reported; management said there were no material changes to the risk factors in the 2014 Form 10-K.
Related-party transactions include $4.0 million of quarterly expenses for services from Alliance-affiliated providers; Alliance is partially owned by the chairman’s son. Management stated disclosure controls were effective and reported no significant changes in internal control over financial reporting.
Important facts for investors to verify
- How much of the reported earnings decline reflects the absence of the prior-year $104.6 million joint-venture sale gain, and how underlying recurring earnings and FFO are trending.
- Leasing progress, occupancy, rent spreads, tenant-improvement and leasing-commission costs, and the outlook for Suburban properties.
- Refinancing plans and available liquidity for scheduled maturities, particularly the 2016–2019 concentration, alongside covenant headroom and variable-rate exposure.
- Performance, maturity extensions, repayments, and credit quality of the $1.55 billion debt and preferred-equity investment portfolio.
- Execution and funding of the stated capital-spending plans, and whether asset sales, equity issuance, or borrowing are needed to support investment and dividends.
- Terms and ongoing costs of preferred units, equity programs, related-party services, and material insurance coverage or renewal changes.