Business context and reporting period
SL Green Realty Corp. is a self-managed REIT focused primarily on office, retail and residential real estate in the New York metropolitan area; substantially all operations are conducted through SL Green Operating Partnership, L.P. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018. At quarter-end, the portfolio comprised 90 consolidated and unconsolidated properties totaling approximately 31.2 million square feet, with weighted average occupancy of 91.9%.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $301.1 million | $398.2 million | $602.8 million | $775.5 million |
| Net income | $115.9 million | $16.0 million | $229.7 million | $16.9 million |
| Net income attributable to common stockholders | $103.6 million; $1.19 per diluted share | $8.2 million; $0.08 per diluted share | $205.3 million; $2.31 per diluted share | $19.6 million; $0.19 per diluted share |
| Funds from operations attributable to common stockholders | $155.6 million | $186.8 million | $313.3 million | $352.7 million |
| Cash provided by operating activities | Not separately stated for the quarter in the filing excerpt | $246.2 million | $310.9 million |
Same-store operating income increased 3.9% to $136.2 million in Q2 and 1.8% to $266.8 million for the first half. Q2 consolidated revenue declined 24.3% and first-half revenue declined 22.3% year over year. Reported net income rose sharply, but included sale gains, fair-value adjustments and other nonrecurring items; FFO declined in both periods.
- Margins and operating trends: Same-store income growth reflected same-store revenue gains, partly offset by higher property expenses. The filing does not provide a single comparable GAAP operating-margin measure.
- Assets and liquidity: Total assets were $13.71 billion at June 30, versus $13.98 billion at year-end 2017. Cash and cash equivalents were $287.2 million, restricted cash $92.7 million, and marketable securities $28.6 million. Management reported $315.8 million of consolidated cash on hand inclusive of marketable securities and $1.1 billion of undrawn capacity under the credit facility.
- Debt: Consolidated debt was $5.90 billion, broadly unchanged from year-end. The effective interest rate was 4.03%; 36.2% of debt was variable-rate, partly offset by $1.6 billion of variable-rate debt and preferred equity investments. A 100-basis-point rate increase was estimated to raise annual consolidated net interest cost by $4.9 million and the Company’s share of joint-venture interest cost by $14.9 million. Debt represented 50.9% of combined market capitalization, including the Company’s share of joint-venture debt.
- Distributions and repurchases: Common dividends were $1.625 per share for the first half. The Company repurchased approximately 7.13 million shares during the first half for about $724.7 million; $458.9 million remained authorized under the $2.0 billion repurchase plan at quarter-end.
Material changes versus the prior comparable period
- Revenue fell primarily because of the partial sale and deconsolidation of 1515 Broadway, deconsolidation of 919 Third Avenue, and property sales. Same-store revenue nevertheless increased 4.1% in Q2 and 2.8% for the first half.
- Q2 and first-half net income benefited from $72.0 million and $65.6 million, respectively, of gains on sales of joint-venture interests or real estate, as well as fair-value adjustments of $11.1 million and $60.4 million. These items make reported earnings less indicative of recurring operating performance.
- Adoption of ASC 610-20 on January 1, 2018 resulted in a $570.5 million cumulative adjustment to beginning retained earnings related to the 1515 Broadway partial-interest sale and remeasurement of the retained interest; it was not recorded as current-period operating revenue.
- First-half operating cash flow declined by $64.6 million. Investing cash flow was positive $268.1 million, compared with negative $237.6 million a year earlier, substantially reflecting $760.3 million of disposition proceeds. Financing cash outflow increased to $384.3 million, including significant share repurchases.
- The Company acquired the leasehold interest in 2 Herald Square through foreclosure for $266.0 million and classified it as held for sale after agreeing to sell a partial interest. It also classified 1–6 International Drive as held for sale; that sale closed in July.
Outlook, commentary, risks and unusual items
- Management expects positive operating cash flow and intends to continue regular quarterly dividends, subject to available cash, operating needs, debt service and financing covenants. The filing provides no specific earnings or FFO guidance.
- For the remainder of 2018, management estimated $114.7 million of recurring capital expenditures and $31.5 million of development or redevelopment expenditures on consolidated properties and the Company’s share of joint ventures; its share of joint-venture capital expenditures was estimated at $221.9 million. Funding sources may include operations, asset sales, borrowings and debt or equity issuance.
- In August 2018, after quarter-end, the Operating Partnership issued $350 million of senior unsecured floating-rate notes due August 2021 at three-month LIBOR plus 98 basis points.
- Risks highlighted include New York market and geographic concentration, office demand and vacancy, tenant or borrower credit, development costs and delays, higher interest rates, refinancing and capital availability, covenant compliance, joint-venture obligations, REIT qualification, and insurance availability or coverage limitations. Substantially all debt covenants were reported in compliance at June 30.
- Management reported no material litigation or material changes to previously disclosed risk factors. The filing also notes related-party service arrangements and the use of estimates and Level 3 valuations for certain fair-value measurements.
Important facts for investors to verify
- How much of reported earnings and FFO reflects recurring property and investment operations versus dispositions, fair-value adjustments and the accounting adoption benefit.
- Whether same-store leasing, occupancy and rent trends can offset revenue reductions from asset sales and deconsolidations; Manhattan office occupancy was 94.1%, compared with 87.0% for suburban office properties.
- The schedule and refinancing plan for near-term maturities, exposure to LIBOR and joint-venture debt, and availability of the stated liquidity.
- Whether planned capital expenditures, development commitments, dividends and repurchases remain supportable from operating cash flow and other funding sources.
- The closing and proceeds from held-for-sale assets and subsequent transactions, including the 2 Herald Square partial-interest sale and the August 2018 note issuance.