SL Green Realty Corp. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. SL Green is a self-managed REIT focused mainly on commercial office properties in the New York metropolitan area. Its portfolio comprised 61 office properties totaling approximately 29.1 million square feet, with weighted-average occupancy of 90.9%.
Financial performance and key metrics
- Revenue: Q3 revenue was $323.3 million, up 31.5% from $245.8 million a year earlier. Nine-month revenue was $834.0 million, up 10.8% from $752.8 million. The increase was driven primarily by preferred equity and investment income, including significant loan repayment income.
- Earnings: Q3 net income attributable to common stockholders was $111.5 million, or $1.43 per diluted share, versus a $2.5 million loss, or $0.03 per diluted share, in Q3 2009. Nine-month common income was $263.6 million, or $3.36 diluted EPS, versus $42.8 million, or $0.64, a year earlier.
- Cash flow and FFO: Nine-month operating cash flow was $254.0 million, compared with $214.8 million. Investing activities provided $175.0 million, primarily reflecting asset-sale proceeds; financing activities used $502.0 million. Cash and cash equivalents declined to $270.8 million from $343.7 million at year-end 2009. NAREIT FFO was $145.3 million for Q3 and $311.7 million for nine months, versus $78.1 million and $249.7 million, respectively, in 2009. FFO is a non-GAAP measure and is not cash flow or a measure of liquidity.
- Debt and liquidity: Consolidated debt was approximately $4.63 billion at quarter-end; SL Green’s share of joint-venture debt was approximately $1.82 billion. Approximately 72.6% of consolidated debt was fixed-rate. The $1.5 billion revolving facility had $800 million drawn, matures in June 2011, and has a one-year extension option. Cash plus marketable securities was approximately $342.9 million. Management said it expected positive operating cash flow and believed available resources would meet capital needs over the next 12 months, while noting access to capital markets and refinancing is not assured.
- Property and distributions: Same-store occupancy fell to 91.9% at September 30, 2010, from 94.8% a year earlier. The declared common dividend was $0.30 per share for the first nine months of 2010; the current annualized rate was $0.40 per share.
Changes versus the prior comparable period
- Q3 rental revenue rose 5.6% to $230.8 million, but same-store occupancy weakened. Nine-month rental revenue rose 2.9% to $683.0 million.
- Investment and preferred equity income rose sharply: to $84.4 million in Q3 from $16.3 million, and to $125.5 million for nine months from $48.7 million. This included approximately $64.8 million of income when loans secured by 510 Madison Avenue were repaid.
- Loan-loss and other investment reserves fell to $12.3 million for nine months from $123.7 million in 2009. Interest expense also declined to $172.4 million from $182.1 million, despite a higher reported weighted-average borrowing rate.
- Results included substantial disposition gains: a $35.5 million gain on the September sale of 19 West 44th Street and a $127.3 million nine-month gain on sales of joint-venture interests/real estate, including approximately $126.8 million from SL Green’s sale of its 45% interest in 1221 Avenue of the Americas.
Outlook, risks, and unusual items
- Management estimated approximately $30.9 million of capital expenditures for wholly owned properties and $4.8 million for its share of joint ventures in Q4 2010. It expected to fund these needs with operating cash flow, property financing, and cash on hand.
- Debt maturities and refinancing are material risks. The filing lists approximately $550 million of combined company and joint-venture maturities in 2011 and approximately $1.13 billion in 2012, including the revolver shown in the maturity schedule with its extension option. SL Green reported compliance with debt covenants at quarter-end.
- Structured finance investments were approximately $907.9 million net on the balance sheet; the filing reported estimated fair value of $544.8 million to $817.1 million. The loan-loss allowance was $87.8 million. Certain loans were on non-accrual or in default, and management cautioned that reserve estimates may prove inadequate.
- Management cited the difficult credit environment, office-space demand, tenant and borrower creditworthiness, interest rates, capital availability, property values, and insurance costs as risks. A hypothetical 100-basis-point rate increase was estimated to raise annual interest costs by $12.5 million for SL Green and $6.1 million for its share of joint ventures.
- Subsequent to quarter-end, the operating partnership issued $345 million of 3.00% exchangeable notes due 2017, receiving approximately $336.5 million net. The 600 Lexington Avenue joint venture refinanced its mortgage, and SL Green agreed to a recapitalization involving Three Columbus Circle.
- The company reported no material litigation, no material change to its previously disclosed risk factors, and effective disclosure controls. It also disclosed related-party service-provider arrangements and ongoing transactions with affiliates.
Important facts for investors to verify
- How much of reported earnings and FFO is recurring, given the loan-repayment and property-sale gains and the sharp decline in reserves?
- Whether the revolver extension is exercised and how the 2011–2013 company and joint-venture maturities will be refinanced or repaid.
- Whether occupancy and leasing spreads stabilize; same-store occupancy declined, and nine-month starting office rents were below previously fully escalated rents in Manhattan and the suburbs.
- The credit quality, non-accrual status, collateral values, and reserve adequacy of structured finance investments.
- The final purchase-price allocation and operating contribution of the $330 million 125 Park Avenue acquisition, as well as funding and completion risks for Three Columbus Circle.