SL Green Realty Corp. — FY 2012 Form 10-K
Business context and reporting period. SL Green is a self-managed REIT focused primarily on Manhattan commercial real estate, with suburban, retail, residential, development, West Coast office, and debt and preferred equity investments. This filing covers the fiscal year ended December 31, 2012; quarterly figures below refer to the fourth quarter. The audited statements received an unqualified opinion, and management and the auditor reported effective internal control over financial reporting.
The filing reclassifies properties sold or held for sale as discontinued operations in the comparative periods. The company states the reclassification did not change net income or FFO.
Financial and operating performance
| Metric | FY 2012 | Prior comparable period |
|---|---|---|
| Total revenue | $1,400.3 million | $1,263.4 million in 2011; up 10.8% |
| Net income attributable to common stockholders | $156.0 million; diluted EPS $1.74 | $617.2 million; diluted EPS $7.33 in 2011 |
| Funds from operations (FFO) | $490.3 million | $413.8 million in 2011; up 18.5% |
| Net cash from operating activities | $353.7 million | $312.9 million in 2011 |
| Cash and cash equivalents | $190.0 million | $138.2 million at year-end 2011 |
| Total assets | $14.39 billion | $13.48 billion at year-end 2011 |
| Consolidated debt | $6.52 billion | $6.09 billion at year-end 2011 |
| Common dividends declared per share | $1.08 | $0.55 in 2011 |
Revenue growth reflected acquisitions and consolidation effects: rental revenue increased 12.1% and escalation and reimbursement revenue increased 15.0%. Total expenses rose to $1.32 billion from $1.14 billion. Same-store net operating income declined 1.2%, to $574.9 million from $582.0 million, despite same-store occupancy increasing to 90.3% from 89.6%.
Common-stockholder net income fell sharply year over year, but the comparison is affected by a $498.2 million purchase-price fair-value adjustment recognized in 2011. FY 2012 also included $37.1 million of equity gains on joint-venture/property sales, $6.6 million of gains on discontinued operations, and a $7.0 million loss on early debt extinguishment. FFO, a non-GAAP measure, increased; the filing cautions it is not a substitute for GAAP earnings or operating cash flow.
Fourth-quarter revenue was $350.7 million versus $328.9 million in Q4 2011. Net income attributable to common stockholders was $20.0 million, or $0.23 diluted EPS, versus $2.8 million, or $0.03, in Q4 2011.
Portfolio, financing, and liquidity
- The office portfolio comprised 66 consolidated and unconsolidated properties totaling approximately 29.7 million square feet, with 91.7% weighted average occupancy at year-end. Manhattan occupancy was 94.1%; suburban occupancy was 81.3%. Suburban consolidated occupancy decreased to 79.9% from 86.2% in 2011.
- In 2012, the company acquired 12 properties for $641.3 million and invested in five properties through joint ventures with aggregate gross purchase prices of $626.7 million. It also obtained a 27.63% interest in a 31-property, 4.5-million-square-foot West Coast portfolio. Dispositions included sales of 292 Madison Avenue and the 49.5% interest in 521 Fifth Avenue, plus joint-venture asset sales.
- Debt and preferred equity investments had a year-end carrying value of approximately $1.36 billion and a weighted average current yield of about 9.8%. The company originated or acquired approximately $672.9 million of these investments and recorded $3.0 million of loan-loss reserves in 2012.
- Cash and cash equivalents were $190.0 million; management cited $211.4 million of cash and marketable securities combined. The new $1.6 billion credit facility had $1.1 billion of undrawn capacity at year-end. Investing activities used $1.17 billion of cash, while financing activities provided $868.4 million.
- Consolidated debt was approximately 75.5% fixed-rate and 24.5% variable-rate. A hypothetical 100-basis-point rate increase was estimated to add $15.4 million to annual consolidated interest costs and $8.5 million to the company’s share of joint-venture interest costs.
- 2013 scheduled maturities identified by management included approximately $116.7 million of corporate debt, $182.3 million of consolidated-property mortgage debt, and $176.5 million representing its share of joint-venture mortgage debt. Management intended to extend, repay, or refinance obligations as appropriate.
Outlook, risks, and unusual items
- Management described 2013 employment and office-demand expectations as modestly lower following tax changes and financial-sector cost reductions, while still characterizing leasing conditions as solid and fundamentals as potentially improving. No specific earnings or FFO guidance is provided in the supplied filing text.
- Management estimated 2013 capital expenditures, including tenant improvements and leasing commissions, of $167.1 million for existing wholly owned properties and $44.9 million as its share of joint-venture spending. It expected to fund these with operating cash flow, property financing, and cash on hand.
- Lease rollover and tenant credit are significant exposures. Approximately 40.2% of rentable area at consolidated properties and 46.2% at unconsolidated joint ventures was scheduled to expire by year-end 2017. Financial services tenants represented approximately 36% of portfolio annualized cash rent; the five largest tenants represented 22.1%.
- Hurricane Sandy caused heavy flooding at 180 Maiden Lane; operations were restored within three weeks. The company expected full insurance coverage, while noting broader catastrophe, flood-insurance availability, and captive-insurance risks.
- Other disclosed risks include concentrated exposure to the New York-area office market, variable interest rates, refinancing and covenant risk, joint-venture and debt-investment losses, long-term ground leases, and maintaining REIT qualification. The company reported compliance with debt covenants at year-end and no material litigation or known environmental liability expected to materially affect results.
- Related-party transactions included $17.9 million paid to Alliance Building Services for property services. Alliance is partially owned by the chairman’s son; the company disclosed that these contracts were not negotiated at arm’s length.
Important facts for investors to verify
- Reconcile the 2011-to-2012 GAAP earnings comparison for the prior-year fair-value adjustment, disposition gains, discontinued operations, and 2012 debt-extinguishment loss; assess recurring results alongside FFO and cash flow.
- Review the 2013 maturity schedule, refinancing progress, available credit capacity, and any extension or repayment of joint-venture debt.
- Track Manhattan and suburban occupancy, same-store NOI, lease rollover, tenant concessions, and renewal spreads—especially suburban performance and major-tenant concentration.
- Assess the credit quality, collateral, maturity profile, and reserve adequacy of the $1.36 billion debt and preferred equity portfolio.
- Verify the cost, availability, and limits of property and flood insurance, including the company’s retained exposure through its captive insurer, and the outcome of the 180 Maiden Lane insurance claim.
- Review the terms and governance of related-party service arrangements and the company’s dependence on external capital and continued REIT qualification.