SL Green Realty Corp. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; financial statements are unaudited. SL Green is a REIT focused on commercial real estate in the New York metropolitan area. Its portfolio included 65 office properties totaling approximately 30.8 million square feet, with 92.0% weighted-average occupancy, plus retail, development and residential assets and $982.2 million of debt and preferred-equity investments.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $349.0 million | $298.7 million | $688.2 million | $627.9 million |
| Net income attributable to common stockholders | $103.0 million | $526.5 million | $128.3 million | $607.3 million |
| Diluted EPS | $1.14 | $6.26 | $1.45 | $7.40 |
| FFO, as reported by the company | $179.0 million | $92.9 million | $278.3 million | $235.6 million |
| Cash from operations | Not separately stated here | Not separately stated here | $197.9 million | $176.8 million |
Revenue increased 16.8% in Q2 and 9.6% for the first half. Rental revenue plus escalations and reimbursements rose 13.0% and 15.2%, respectively. Common-stockholder earnings fell sharply against 2011, when results included a $475.1 million purchase-price fair-value adjustment related to consolidating 1515 Broadway. In 2012, income also benefited from a $67.9 million contribution tied to refinancing proceeds at the 717 Fifth Avenue joint venture and gains on property or joint-venture sales. FFO is a non-GAAP measure and is not cash available for distribution.
Same-store net operating income increased 0.6% in Q2 but declined 1.3% for the first half. Same-store revenue was broadly flat in the first half, while operating costs rose. Manhattan same-store occupancy was 92.3%; suburban occupancy was 80.6%. For first-half new leases, Manhattan rents on leases replacing occupied space increased 7.3% over prior fully escalated rents, while suburban rents declined 13.8%.
At June 30, total assets were $14.14 billion and total equity was $6.81 billion. Balance-sheet cash was $256.8 million; cash plus marketable securities was approximately $280.3 million. Six-month investing cash outflow was $558.0 million, principally reflecting acquisitions, property improvements and joint-venture and financing investments. Financing provided $478.7 million, including equity proceeds. The company reported $6.28 billion of consolidated debt, including $80 million drawn on its revolving facility; approximately $1.3 billion of revolving capacity remained undrawn after letters of credit. Company-reported debt represented 50.8% of combined market capitalization, including its share of joint-venture debt.
Material changes and significant transactions
- In June, SL Green acquired 304 Park Avenue South for $135 million, funded with approximately $102 million cash and $33 million in Operating Partnership units; purchase-price allocation remained preliminary.
- The company increased its investment in unconsolidated joint ventures, whose reported net investment rose to $1.01 billion from $893.9 million at year-end 2011. The 2012 equity-income increase was substantially influenced by 717 Fifth Avenue refinancing proceeds, rather than solely recurring property operations.
- Consolidated debt increased from $6.09 billion at December 31, 2011 to $6.28 billion at June 30, 2012. The company refinanced 1515 Broadway in April with a $775 million, seven-year mortgage.
- SL Green sold its leased-fee interest at 292 Madison Avenue in February for $85 million, recording a $6.6 million gain. After quarter-end, One Court Square sold for $481.1 million, with the purchaser assuming $315 million of debt; the sale closed July 19.
- After quarter-end, the company redeemed all Series D preferred shares for $25 per share plus accrued dividends.
Outlook, risks and contingencies
The filing provides no specific earnings guidance. Management expected positive operating cash flow and believed liquidity sources would be sufficient for capital needs over the next 12 months. It estimated second-half 2012 capital expenditures, including tenant improvements and leasing commissions, at approximately $71.2 million for wholly owned properties and $20.8 million for its share of joint-venture properties. Management stated an intent to continue regular quarterly dividends; the then-current annual rate was $1.00 per share.
Near-term debt maturities include approximately $567.1 million in 2013 and $297.4 million in 2014 for consolidated obligations, plus the company’s share of joint-venture debt. Management cited refinancing, asset-sale and capital-market access as liquidity sources, but noted that financing may not be available on attractive terms or at all. A 100-basis-point interest-rate increase was estimated to add approximately $12.7 million to annual company interest costs and $5.1 million to its share of joint-venture interest costs.
Key risks include concentration in the New York metropolitan market, leasing and occupancy conditions, tenant and borrower credit, real-estate investment valuations, joint-venture obligations, refinancing and interest-rate exposure, covenant compliance, and the availability and cost of insurance. Three tenants accounted for approximately 7.4%, 6.9% and 6.0% of annualized cash rent, respectively. Loan-loss allowances rely on management estimates; $41.1 million of reserves remained at June 30. Some investments were on non-accrual status. The company reported covenant compliance and no material litigation, and said it was unaware of environmental liabilities expected to materially affect results. It also disclosed related-party service arrangements and insurance through a consolidated captive insurer, which is a form of self-insurance.
Important facts for investors to verify
- Separate recurring property performance from one-time joint-venture refinancing proceeds, property-sale gains and other unusual items; assess FFO using the company’s reconciliation and definition.
- Review the 2013–2016 maturity schedule, refinancing assumptions, remaining revolver availability and joint-venture debt exposure.
- Track same-store NOI, occupancy, lease expirations, tenant concessions and the divergent Manhattan and suburban rent trends.
- Evaluate the credit quality, non-accrual positions, collateral and reserve adequacy within the $982.2 million debt and preferred-equity portfolio.
- Confirm the post-quarter One Court Square sale proceeds and debt assumption, and the cash and capital effects of the Series D redemption.