Business context and reporting period
SL Green Realty Corp. and its operating partnership filed this combined, unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The company is a REIT focused primarily on commercial real estate in the New York metropolitan area. At quarter-end, its portfolio comprised 99 properties totaling 33.9 million square feet, with weighted average occupancy of 86.7%.
Financial results and key metrics
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $387.2 | $353.9 | $762.8 | $707.6 |
| Income from continuing operations | $131.2 | $27.4 | $284.0 | $52.0 |
| Net income | $250.3 | $31.2 | $406.9 | $61.6 |
| Net income attributable to common stockholders | $235.5 | $8.3 | $381.6 | $27.2 |
| Diluted EPS | $2.46 | $0.09 | $3.99 | $0.30 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $276.6 | $209.7 |
- Revenue increased 9.4% in Q2 and 7.8% in the first half. Same-store NOI rose 1.9% in Q2 but only 0.4% for the first half.
- Quarterly diluted EPS included $1.15 per share from the gain on sale of discontinued operations and $71.4 million from a purchase-price fair-value adjustment. First-half results also included $106.1 million of gains on sales of joint-venture interests/real estate. Reported earnings therefore include substantial transaction and accounting gains.
- Cash used in investing activities was $318.0 million in the first half, principally reflecting acquisitions, capital spending and new investments. Financing activities provided $142.9 million; cash and cash equivalents ended the period at $308.1 million.
- At June 30, total assets were $16.72 billion and total liabilities were $9.02 billion. Consolidated debt was $8.36 billion, excluding the company’s share of joint-venture debt; its share of that debt was $1.43 billion. Debt was 72.9% fixed rate and 27.1% variable rate, with a 5.4-year weighted average maturity.
- Liquidity included $308.1 million of cash, $39.9 million of marketable securities, $1.1 billion of undrawn revolving-credit capacity and $300 million of undrawn capacity under the master repurchase agreement. The company reported compliance with its debt covenants.
- The common dividend was $0.50 per share in Q2; management stated an annual rate of $2.00 per share. Debt and preferred-equity investments totaled $1.55 billion, with reported weighted average current yields of 10.69% for debt and 9.75% for preferred equity.
Material changes versus the prior comparable period
- Revenue growth reflected acquisitions, higher occupancy and the May consolidation of 388-390 Greenwich Street. Same-store consolidated office occupancy improved to 90.9% from 90.5% a year earlier.
- In May, SL Green acquired its partner’s 49.65% economic interest in 388-390 Greenwich Street, consolidating the 2.4-million-square-foot property. The transaction included a $1.5 billion, four-year mortgage and generated a $71.4 million purchase-price fair-value adjustment.
- Rental revenue increased, while investment income declined year over year in the first half, reflecting prior-year loan sale/repayment income partly offset by a higher investment balance in 2014.
- Operating cash flow improved from $209.7 million to $276.6 million for the first half, while investing outflows increased substantially. Cash rose to $308.1 million from $206.7 million at year-end 2013.
- Debt increased from $6.92 billion at year-end 2013 to $8.36 billion at June 30, 2014, in part due to property financing and the 388-390 Greenwich consolidation. The share of debt at variable rates increased from 19.1% to 27.1%.
Outlook, commentary, risks and unusual items
- Management expected positive operating cash flow and stated it believed resources would be sufficient for capital needs over the next 12 months. Estimated second-half 2014 spending included $174.7 million of recurring capital expenditures, $76.5 million of development expenditures and $66.1 million for joint-venture properties.
- Management planned to continue regular quarterly dividends, subject to cash availability, operating needs, debt service and financing restrictions. No specific earnings or revenue guidance was provided.
- SL Green sold its leasehold interest in 673 First Avenue for $145 million and recognized a $117.8 million gain. It had contracted to sell 2 Herald Square for $365 million, with closing expected in Q4 2014 subject to customary conditions; the $68.7 million sale of 985-987 Third Avenue closed in July 2014.
- Near-term maturities warrant attention: the debt schedule listed $75.9 million of senior notes due August 2014 and a $146.3 million mortgage due October 2014. The filing does not state the outcome of these maturities.
- A hypothetical 100-basis-point increase in rates was estimated to raise annual interest costs, net of income from variable-rate investments, by $14.9 million, plus approximately $8.0 million for the company’s share of joint ventures’ costs. A major risk is the company’s concentration in the New York metropolitan market.
- Management cited risks involving leasing and tenant credit, acquisitions and development, access to debt and equity capital, interest rates, joint-venture partners and insurance. Terrorism-risk insurance authorization was scheduled to expire December 31, 2014; the filing cautioned that future coverage availability and cost were uncertain. Management reported no material litigation or environmental liability and no material change in previously disclosed risk factors.
Important facts for investors to verify
- How much of reported earnings is recurring: distinguish property and investment operations from the 673 First Avenue sale gain, joint-venture sale gains and the 388-390 Greenwich fair-value adjustment.
- Whether the August and October 2014 debt maturities were repaid, refinanced or otherwise addressed, and the resulting borrowing costs and liquidity.
- Progress and final economics of the 2 Herald Square sale, expected in Q4 2014, and the effect of asset dispositions on cash flow and portfolio performance.
- Leasing, occupancy and rent trends, particularly suburban properties, and whether leasing costs and capital spending affect same-store NOI and cash available for distributions.
- Exposure to variable rates, debt maturities and joint-venture obligations, alongside renewal and affordability of terrorism and other property insurance.