SL GREEN REALTY CORP quarterly report, Q3 FY2013

SL Green Realty Corp. — Q3 2013 Form 10-Q

Reporting period: Three and nine months ended September 30, 2013. SL Green is a REIT whose operations are conducted primarily through SL Green Operating Partnership, L.P.; the two registrants report substantially the same consolidated assets and liabilities.

Business context and operating performance

SL Green owns, manages, leases, acquires and repositions commercial real estate, primarily in the New York metropolitan area. Its portfolio also includes suburban and West Coast offices, retail, development and residential properties, and debt and preferred equity investments. Consolidated office portfolio occupancy was 91.9% at quarter-end: 93.8% in Manhattan and 79.1% in the suburbs. The company also held debt and preferred equity investments with a book value of approximately $1.3 billion.

Financial results

Cash flow: For the first nine months, operating cash flow was $310.5m, investing cash outflow was $242.5m and financing cash outflow was $48.9m. Cash and cash equivalents were $209.1m at September 30. The company separately reported approximately $242.0m of consolidated cash and marketable securities combined.

Margins and property operations: Same-store NOI was $159.1m in Q3, down 3.2% from $164.4m; nine-month same-store NOI was $502.3m, essentially flat with $502.4m. Q3 consolidated NOI rose 6.2% to $202.4m, while nine-month consolidated NOI rose 9.8% to $619.9m. These supplemental NOI measures are not GAAP net income or cash flow measures.

Debt and liquidity: Consolidated debt was $6.82bn, versus $6.52bn at year-end 2012; the company’s share of joint venture debt was approximately $2.17bn. Fixed-rate debt represented 82.2% of consolidated debt, and the reported effective interest rate was 4.77%. The $1.6bn credit facility had $340m drawn on its revolver, $400m outstanding under its term loan and approximately $0.9bn of undrawn capacity, alongside $79.1m of letters of credit. Management reported compliance with debt covenants. Debt and the company’s share of JV debt represented 50.8% of reported combined market capitalization.

Material changes versus the prior comparable period

• Q3 revenue increased 1.9%; nine-month revenue increased 5.6%, supported by higher investment and preferred equity income and property acquisitions. Investment and preferred equity income increased to $143.9m for nine months from $87.7m, including $12.9m from selling part of an investment and $6.4m recognized on repayment of an investment.
• Q3 common earnings and EPS increased substantially, partly because of a $13.8m gain on the sale of 333 West 34th Street. Nine-month net income and FFO fell materially from 2012, when results included significant joint-venture income, including $67.9m from a 717 Fifth Avenue recapitalization and $10.8m from a discounted debt repayment.
• Rental revenue was lower in Q3, primarily due to the West Coast portfolio’s change from consolidation to equity-method accounting. Same-store occupancy improved modestly overall, but higher property expenses—particularly real estate taxes and ground rent—contributed to lower Q3 same-store NOI.
• Consolidated debt increased, while the fixed-rate proportion rose from 75.5% at year-end 2012 to 82.2%. The company redeemed its remaining Series C preferred stock in June, paying $192.5m in the period and recording $12.2m of redemption costs.

Outlook, commentary, risks and unusual items

• No earnings or FFO guidance is stated. Management expected positive operating cash flow and said available liquidity sources were expected to meet debt obligations and near-term capital needs, subject to access to financing and refinancing markets.
• Management estimated fourth-quarter 2013 capital expenditures of approximately $91.1m for consolidated properties and $31.4m for its share of joint-venture properties. It expected to fund these with operating cash flow, property financing and cash on hand.
• The company had contracted to acquire 315 West 33rd Street for $386m, with closing expected in Q4 2013 subject to customary conditions. Subsequent to quarter-end, it closed a $275m, seven-year mortgage financing for 220 East 42nd Street. In November, it completed a common-stock offering with net proceeds of approximately $249.4m.
• Q3 included a $13.8m gain on sale of 333 West 34th Street. The company recorded a $2.2m impairment on 300 Main Street in Q2 and a $18.5m loss on early extinguishment of debt related to the 1515 Broadway refinancing. A former tenant’s bankruptcy also led to write-offs of lease-related balances and tenant improvements.
• Key disclosed risks include New York-area market concentration, tenant or borrower credit deterioration, property leasing and development risks, access to capital, interest-rate changes, debt covenant compliance, joint-venture partner obligations, REIT qualification, and the availability and cost of adequate insurance. Management reported no material litigation and no material change to previously disclosed risk factors.

Important facts for investors to verify

1. Separate recurring operating performance from sale gains, investment realizations, joint-venture items and other nonrecurring effects when assessing earnings and FFO.
2. Review debt maturities and refinancing needs, especially the near-term 2013–2014 obligations, the November 2013 maturity of the Master Repurchase Agreement, and the extended 16 Court Street loan maturity.
3. Assess leasing trends and occupancy by market, including suburban occupancy and the reported rents on new and renewed leases versus prior escalated rents.
4. Evaluate credit concentration and performance in the $1.3bn debt and preferred equity portfolio, including investment yields, maturities, unfunded commitments and the adequacy of the $4m loan-loss reserve.
5. Track funding and execution of the 315 West 33rd Street acquisition, planned capital spending, and the use of post-quarter-end mortgage and equity proceeds.