SL GREEN REALTY CORP annual report, FY2014

Business context and reporting period

SL Green Realty Corp. and its operating partnership filed a combined Form 10-K for the year ended December 31, 2014. SL Green is a REIT focused primarily on owning, leasing, developing and financing commercial real estate in Manhattan and the surrounding New York metropolitan area. At year-end, its portfolio included interests in 101 properties totaling approximately 33.9 million square feet; portfolio occupancy was 85.8% including development and redevelopment properties. The companies operate as one entity, with substantially all assets and operations held through the Operating Partnership.

Financial performance and liquidity

• Revenue rose 10.9%; same-store net operating income increased 3.5% to $657.7 million. Same-store occupancy improved to 91.7% from 90.8%.
• GAAP net income included $163.1 million of gains on sales of discontinued operations, $123.3 million of equity gains on joint-venture/property sales and a $67.4 million purchase-price fair-value adjustment. Income from continuing operations was $363.7 million. FFO, which excludes key property-sale gains and purchase-price adjustments, increased 18.6%.
• Net cash used in investing activities was $796.8 million, primarily reflecting acquisitions, capital spending and joint-venture investments. Financing activities provided $381.2 million.
• Consolidated debt was 72.8% fixed rate and 27.2% variable rate; the effective interest rate was 4.24%, down from 4.81%. A 100-basis-point rate increase was estimated to add $15.2 million to annual interest cost, plus $8.1 million for SL Green’s share of joint-venture costs.
• The company reported $320.8 million of cash and marketable securities combined and $701.8 million of undrawn capacity under its credit facility at year-end. Its share of unconsolidated joint-venture debt was approximately $1.62 billion, mostly non-recourse.
• Common dividends declared increased to $2.10 per share from $1.49. The year-end quarterly dividend was $0.60; the company cited a current annual rate of $2.40 per share, subject to board approval and financial conditions.

Material changes versus the prior period

• Results benefited from stronger Manhattan leasing and higher occupancy, acquisitions, and significant disposition gains. The company acquired its partner’s interest in 388-390 Greenwich Street, consolidating the property and refinancing it with a $1.45 billion mortgage.
• Debt increased by approximately $1.51 billion year over year, including debt associated with 388-390 Greenwich Street and higher credit-facility borrowings. Cash from operations improved, while investing outflows also increased.
• Manhattan office leases signed in 2014 replacing previously occupied space achieved a 14.9% mark-to-market increase over prior fully escalated rents. Suburban office lease mark-to-market was 1.4%.
• The filing reclassified properties sold or held for sale as discontinued operations in the periods presented. The reclassification changed presentation, not reported net income or FFO.

Outlook, commentary, risks and unusual items

• Management said the New York City commercial real estate market strengthened in 2014 and cited improved occupancy and leasing. It expected positive operating cash flow but cautioned that future results and capital access are uncertain.
• For 2015, management estimated capital expenditures of $259.3 million for recurring work and $138.1 million for development or redevelopment at consolidated properties, plus $88.7 million for its share of joint-venture capital expenditures. It expected to fund these needs with operating cash flow, financing and cash on hand.
• One Vanderbilt remained a proposed large-scale development awaiting approval; its long development timeline creates approval, leasing, cost and market risks. TD Bank signed a long-term lease for approximately 200,000 square feet there.
• Key exposures include concentration in the New York metropolitan market; tenant, property and large-building concentration; lease rollover and reletting costs; interest-rate and refinancing risk; development execution; joint-venture partner decisions; environmental, disaster and insurance risks; and continued REIT qualification. Six properties accounted for 42.2% of portfolio annualized cash rent, and the five largest tenants accounted for 27.4%.
• Approximately 29.6% of consolidated rentable area and 41.2% of joint-venture rentable area was scheduled to expire by the end of 2019. Management estimated in-place rents on future expirations at consolidated Manhattan properties were 13.6% below current asking rents; these are estimates, not assured achievable rents.
• 2015 debt maturities included $100 million under the master repurchase facility, $120 million of consolidated property mortgage debt and $44.7 million of SL Green’s share of joint-venture debt. Management intended to extend, repay or refinance maturities. The revolving credit facility was subsequently extended in January 2015, and 180 Maiden Lane was sold for $470 million that month.
• No material litigation was reported, and management recorded no loan-loss reserves in 2014. The independent auditor issued unqualified opinions on the financial statements and internal controls; management also concluded disclosure controls and internal controls were effective.

Important facts for investors to verify

• How much of the $503.1 million common-stockholder income and $5.23 diluted EPS reflects recurring operations versus property-sale gains and the 388-390 Greenwich Street fair-value adjustment; compare with FFO and continuing-operations results.
• Whether leasing gains, occupancy and estimated rent mark-to-market are realized after tenant improvements, leasing commissions, free rent and rent abatements; 2015 abatements were estimated to reduce cash rent by $98.2 million at consolidated properties and $17.5 million at unconsolidated properties.
• The refinancing plan and actual cost for near-term debt maturities, covenant headroom, variable-rate exposure and the availability of the reported undrawn credit capacity.
• Progress, approvals, financing, leasing and total projected commitments for One Vanderbilt and other development projects.
• Whether dividends remain supported by recurring cash flow after capital spending, debt service and REIT distribution requirements; FFO is not a measure of cash available for dividends.
• Confirm the effect of discontinued-operations reclassifications and the post-year-end credit-facility amendment and 180 Maiden Lane sale when comparing reported periods.