SL Green Realty Corp. — Q3 2014 Form 10-Q
Business context and period. This unaudited filing covers the quarter and nine months ended September 30, 2014, compared with the corresponding 2013 periods. SL Green is a self-managed REIT focused on commercial real estate in the New York metropolitan area; substantially all operations are conducted through SL Green Operating Partnership, L.P. At quarter-end, the portfolio comprised 99 properties totaling 33.9 million square feet, with weighted-average occupancy of 87.0%.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $390.3 million | $338.8 million | $1,133.4 million | $1,020.6 million |
| Income from continuing operations | $40.1 million | $24.1 million | $320.8 million | $72.2 million |
| Net income attributable to SL Green common stockholders | $64.7 million | $37.0 million | $446.3 million | $64.2 million |
| Diluted earnings per share | $0.68 | $0.40 | $4.66 | $0.70 |
| FFO | $127.5 million | $127.4 million | $438.3 million | $357.1 million |
| Cash from operating activities | Not separately presented | Not separately presented | $377.2 million | $310.5 million |
Q3 revenue rose 15.2%; nine-month revenue rose 11.1%. Same-store NOI increased 10.3% in Q3 and 3.6% for the first nine months. Nine-month net income included $122.6 million of gains on joint-venture/property interest sales, a $67.4 million purchase-price fair-value adjustment, and $144.2 million of gains on sales reported in discontinued operations. Q3 included a $24.5 million loss on early debt extinguishment.
Nine-month investing cash outflow was $825.3 million and financing cash inflow was $494.9 million. Cash and cash equivalents were $253.5 million at September 30; management reported $292.8 million of consolidated cash including marketable securities. Restricted cash was $159.3 million. The credit facility had $0.8 billion of undrawn capacity, with $244 million drawn and $113.3 million of letters of credit outstanding.
Reported consolidated debt was $8.736 billion, excluding joint-venture debt; SL Green’s share of joint-venture debt was $1.412 billion. The debt table reported a 4.35% effective interest rate, a 5.8-year weighted-average term to maturity, and 70.2% fixed-rate debt. The filing cites market capitalization debt of 49.3%, a measure that includes SL Green’s share of joint-venture debt. Common dividends were $0.50 per share for Q3 and $1.50 year to date.
Material changes versus prior periods
- Growth reflected higher occupancy and acquired properties, notably consolidation of 388-390 Greenwich Street from May 2014. Same-store consolidated office occupancy was 91.7%, up from 90.4% a year earlier; Manhattan same-store office occupancy was 94.9% versus 93.8%.
- SL Green acquired its partner’s interest in 388-390 Greenwich Street, refinanced the property with a $1.5 billion mortgage, and recorded a $71.4 million purchase-price fair-value gain. Other 2014 acquisitions included 635 Madison Avenue and 752 Madison Avenue.
- Nine-month investment income declined to $137.8 million from $143.9 million, as the weighted-average yield on debt and preferred equity investments fell to 10.6% from 13.5%, despite a higher average investment balance.
- Debt and other borrowing balances increased alongside acquisitions and the consolidation of 388-390 Greenwich. The weighted-average debt balance for Q3 rose to $8.7 billion from $6.9 billion a year earlier, while the reported weighted-average interest rate decreased to 4.12% from 4.77%.
- Disposition activity generated material gains: the company sold interests including the West Coast Office portfolio and 180 Broadway, and sold 673 First Avenue and 985-987 Third Avenue. 180 Maiden Lane and 2 Herald Square were classified as held for sale, with sales contracted for $470 million and $365 million, respectively, and expected to close in Q4, subject to customary conditions.
Outlook, risks and unusual items
- No earnings or FFO guidance is provided. Management expected positive operating cash flow and believed resources would be sufficient for capital needs over the next 12 months, while noting that capital-market access at efficient levels was not assured.
- For Q4 2014, management estimated its share of recurring capital expenditures and development expenditures on consolidated properties at $103.2 million and $45.3 million, respectively, plus $44.7 million at joint ventures. Expected funding sources included operating cash flow, property financing and cash on hand.
- Management intended to continue regular quarterly dividends. At the then-current annual rate of $2.00 per share, annual common dividends were estimated at approximately $193 million, subject to available cash, operating needs, debt service and covenant restrictions.
- A 100-basis-point increase in interest rates was estimated to increase annual interest costs, net of related investment income, by approximately $20.1 million for the company and $7.8 million for its share of joint ventures. The filing also highlights exposure to the New York-area market, tenant and borrower credit, refinancing and capital availability, development costs, joint-venture obligations, and insurance availability and coverage.
- Debt covenants were reported in compliance at September 30, 2014. Management reported no material litigation and no material change to previously disclosed risk factors. The company’s and partnership’s disclosure controls were considered effective.
- After quarter-end, the partnership redeemed its Series H Preferred Units on October 28. Subsequent ATM share sales generated $115.4 million of net proceeds; approximately $142.4 million of gross issuance capacity remained as of November 5.
Key facts for investors to verify
- How much reported earnings growth is recurring: reconcile continuing operations and FFO with sale gains, discontinued operations, and the 388-390 Greenwich fair-value adjustment.
- Whether the contracted sales of 180 Maiden Lane and 2 Herald Square closed on schedule and what proceeds were ultimately realized.
- Debt maturities and refinancing exposure, particularly the 2016–2017 maturity concentration, alongside the company’s share of joint-venture debt and available borrowing capacity.
- Leasing performance, including occupancy trends, Manhattan rent spreads, tenant-improvement and leasing costs, and office-space expirations.
- Performance and credit quality of the $1.4 billion debt and preferred-equity investment portfolio; the filing identifies one newly acquired nonperforming junior mortgage participation.
- Equity issuance and dilution from ATM sales, partnership units and incentive awards, and the sustainability of the dividend relative to cash flow and capital requirements.