SL Green Realty Corp. — 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016. The filing combines SL Green Realty Corp. and SL Green Operating Partnership, L.P. Their consolidated results are substantially the same. The filing is an annual report, not a standalone fourth-quarter filing.
Business context and portfolio
SL Green is a self-managed REIT focused primarily on owning, leasing, managing, developing and financing commercial real estate in Manhattan and the surrounding New York metropolitan area. Its two reportable segments are real estate and debt and preferred equity investments. At year-end, it held interests in 109 properties totaling approximately 32.9 million square feet; portfolio occupancy was 90.6%, including 94.9% for Manhattan office properties and 82.6% for suburban office properties. Debt and preferred equity investments had a reported book value of $2.0 billion, including investments carried in other balance-sheet lines.
Financial results and liquidity
| Metric | 2016 | 2015 | Change or context |
|---|---|---|---|
| Total revenue | $1.864 billion | $1.663 billion | Up 12.1% |
| Net income attributable to common stockholders | $234.9 million | $269.1 million | Down 12.7% |
| Diluted EPS | $2.34 | $2.70 | Down 13.3% |
| Funds from operations (FFO), attributable to common stockholders and noncontrolling interests | $869.9 million | $661.8 million | Up 31.4%; non-GAAP supplemental measure |
| Net operating income (NOI) | $1.162 billion | $989.3 million | Up 17.5%; same-store NOI rose 0.3% |
| Cash from operating activities | $634.7 million | $526.5 million | Up $108.2 million |
| Cash and cash equivalents | $279.4 million | $255.4 million | Year-end balances |
| Consolidated debt, principal amount | $6.6 billion | $10.4 billion | Lower following asset sales and debt repayment |
Net income was affected by substantial property-related noncash charges, notably accelerated depreciation associated with the 388-390 Greenwich Street sale; it also included sizeable disposition gains and other unusual income. Revenue growth reflected acquisitions and lease-related items as well as same-store rental growth. The filing reports $2.123 billion of net investing cash inflow, primarily reflecting real estate dispositions, and $2.733 billion of net financing cash outflow; cash increased by $24.0 million during the year.
At December 31, consolidated debt was 83.1% fixed rate and 16.9% variable rate. The company reported $1.5 billion of undrawn capacity under its $2.8 billion credit facility, subject to facility terms, and $364.6 million of cash and marketable securities combined. Its share of unconsolidated joint-venture debt was $2.7 billion and was reported as non-recourse. Combined debt-to-market capitalization, including its share of joint-venture debt, was 43.3%. The company was in compliance with debt covenants at year-end.
Material changes versus the prior comparable period
- Revenue increased 12.1%, while common-stockholder net income and diluted EPS declined. Depreciation and amortization rose to $821.0 million from $560.9 million, in part because of accelerated depreciation at 388-390 Greenwich Street.
- FFO increased 31.4%, but FFO is not GAAP net income or a measure of cash available for dividends.
- Same-store NOI increased only 0.3%, despite higher same-store rental revenue, as operating costs rose.
- Cash from operations rose to $634.7 million. The company sold or partially sold several properties, including 388-390 Greenwich Street for approximately $2.0 billion and a 40% interest in 11 Madison Avenue, and applied disposition proceeds primarily toward debt reduction.
- Consolidated debt declined by approximately $3.9 billion from year-end 2015. Total assets also fell, largely reflecting dispositions and deconsolidations.
- Manhattan portfolio occupancy at year-end was 94.9%, compared with 92.8% in 2015; suburban occupancy was 82.6%, compared with 79.5%.
Outlook, management commentary, risks and unusual items
- Management described New York City commercial real estate conditions as strong in 2016. Manhattan office leases signed during the year were marked 27.6% above prior fully escalated rents on the same spaces; management cautioned that asking-rent estimates may not be realized.
- One Vanderbilt construction began in 2016. The approximately 1.7 million-square-foot project had a stated total development budget of $3.17 billion; $2.30 billion remained to be spent at year-end. A $1.5 billion construction facility was obtained, and partners committed at least $525 million of aggregate equity. The project was expected to be completed by the third quarter of 2020. In January 2017, partners acquired interests totaling 29%.
- For 2017, management estimated recurring capital expenditures of $120.1 million and development/redevelopment expenditures of $266.7 million on consolidated properties, plus the company’s $307.8 million share of joint-venture capital expenditures. These amounts were expected to be funded through operating cash flow, liquidity and borrowings.
- Management intended to continue quarterly dividends. The 2016 declared dividend was $2.94 per common share; the filing cited a then-current annual rate of $3.10. Future dividends remain discretionary and depend on cash flow, financial condition, capital needs and REIT distribution requirements.
- Important risks include dependence on the New York metropolitan office market; tenant concentration and lease expirations; refinancing and interest-rate exposure; development delays or cost overruns; joint-venture and debt-investment risks; and possible limits on insurance coverage. Five properties generated 33.3% of portfolio annualized cash rent, and the five largest tenants represented 20.4%.
- Approximately 43.5% of consolidated-property rentable area was scheduled to expire by December 31, 2021, associated with $496.4 million of annualized escalated rent. The filing also identifies long-term ground-lease exposure; certain leasehold properties accounted for 21.8% of the company’s share of portfolio annualized cash rent.
- Unusual items included a $238.1 million net gain on real estate sales; $94.0 million of lease termination income associated with 388-390 Greenwich Street; and $172.4 million of noncash below-market lease amortization recognized in rental revenue upon the accelerated sale process. The filing reports no material litigation and no loan-loss reserves at year-end.
- Related-party matters include $23.4 million of 2016 expenses for services from Alliance Building Services and affiliates, partially owned by the chairman’s son. Management stated it believed the contracts resulted from arm’s-length negotiations. The filing also describes an executive co-investment in One Vanderbilt.
Fourth-quarter reference
Unaudited fourth-quarter 2016 revenue was $374.2 million, and net income attributable to SL Green common stockholders was $44.0 million, or $0.44 per diluted share. For fourth-quarter 2015, the corresponding figures were $425.4 million and $101.3 million, or $1.01 per diluted share. The filing does not provide a standalone quarterly cash-flow statement.
Most important facts for investors to verify
- Reconcile GAAP earnings with FFO and assess recurring earnings after property-sale gains, lease termination income, and accelerated depreciation or lease amortization.
- Review the 2017 maturity schedule and subsequent refinancing or repayments. The filing gives different maturity presentations, and several year-end maturities were addressed after December 31, 2016.
- Assess One Vanderbilt’s remaining funding needs, committed partner equity, construction debt terms, pre-leasing progress and exposure to delay or cost overruns.
- Monitor Manhattan and suburban occupancy, tenant concentration, upcoming lease expirations, rent mark-to-market assumptions, and tenant improvement and leasing commission costs.
- Confirm liquidity after required capital spending and debt service, and evaluate dividend coverage using cash flow rather than FFO alone.
- Review joint-venture leverage and guarantees, variable-rate debt exposure, debt-investment collateral and concentrations, related-party arrangements, and the scope and limits of insurance coverage.