Business context and reporting period
SL Green Realty Corp. and its operating partnership filed this unaudited Form 10-Q for the three months ended March 31, 2019. SL Green is a REIT focused on commercial and residential real estate, primarily in the New York metropolitan area, and also originates debt and preferred equity investments. Its portfolio comprised 78 properties totaling approximately 30.0 million square feet, with 93.0% weighted average occupancy. The Company owned 95.13% of the Operating Partnership at quarter-end.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $304.3 million | $301.7 million |
| Net income | $52.8 million | $113.8 million |
| Net income attributable to common stockholders | $43.8 million | $101.8 million |
| Diluted EPS | $0.52 | $1.12 |
| Funds from Operations attributable to common stockholders | $147.5 million | $157.7 million |
| Cash provided by operating activities | $62.3 million | $94.5 million |
- Revenue rose 0.8%; rental revenue declined 0.7% to $240.1 million, while investment income increased 10.4% to $50.0 million. Same-store operating income was unchanged at $130.3 million; same-store rental revenue grew 2.0%.
- Net income margin was approximately 17.3%, versus 37.7% a year earlier. The comparison is affected by prior-year gains, including a $49.3 million fair-value adjustment and a $23.5 million real estate sale gain. Q1 2019 included a $17.2 million gain on a joint venture interest sale.
- Interest expense, net of interest income, increased to $50.5 million from $47.9 million. Consolidated weighted-average debt was $5.9 billion; the weighted-average interest rate was 4.04%.
- At March 31, total assets were $13.4 billion and total liabilities were $6.8 billion. Consolidated debt was $5.94 billion, excluding the Company’s share of joint venture debt. Its share of joint venture debt was $3.82 billion.
- Cash and cash equivalents were $144.3 million, restricted cash was $151.4 million, and marketable securities were $29.4 million. Management cited $173.7 million of consolidated cash on hand, including marketable securities, and $0.7 billion of undrawn credit facility capacity.
- Debt and preferred equity investments totaled $2.27 billion; investments in unconsolidated joint ventures were $3.06 billion. Consolidated debt had a weighted-average remaining term of 4.31 years. A 100-basis-point increase in floating rates was estimated to raise annual consolidated net interest cost by $10.2 million and the Company’s share of joint venture interest cost by $14.0 million.
Material changes versus the prior comparable period
- Net income and EPS fell substantially, primarily reflecting the prior-year fair-value and property-sale gains; FFO and operating cash flow also declined year over year.
- Investment income grew as the average debt and preferred equity investment balance increased to $2.2 billion from $2.0 billion, although weighted-average yield declined to 8.8% from 9.2%.
- Net cash used in investing activities was $291.8 million, compared with $456.0 million provided in Q1 2018, when disposition proceeds were much higher. Financing activities provided $246.1 million, versus $422.3 million used in the prior-year quarter.
- Common shares repurchased in Q1 totaled approximately 398,000 at an average $86.07 per share. The quarter’s declared common dividend was $0.85 per share.
Outlook, commentary, risks and unusual items
- Management expects positive operating cash flow for the foreseeable future and intends to continue regular quarterly dividends, subject to operating needs, debt service, available cash and financing covenants. No earnings guidance is provided in the filing.
- For the remainder of 2019, the Company estimated $102.5 million of recurring capital expenditures and $49.1 million of development or redevelopment spending on consolidated properties, plus $318.7 million as its share of joint venture capital expenditures.
- The Company adopted the new lease accounting standard in January 2019, recording $389.1 million of operating lease right-of-use assets and related liabilities. It also recorded approximately $2.2 million of additional expense for internal leasing costs that were no longer eligible for capitalization.
- One mezzanine loan was in maturity default at quarter-end; the Company reported no impairment and, in April 2019, accepted the property’s equity interests in lieu of repayment. Separately, a $28.4 million financing receivable remained on nonaccrual after an interest default in August 2018; management said collateral value exceeded its carrying amount.
- Key risks include concentration in the New York real estate market, tenant and borrower creditworthiness, refinancing and interest-rate exposure, capital availability, joint venture funding needs, and the availability and adequacy of insurance. Credit Suisse Securities (USA), Inc. represented 8.2% of the Company’s share of annualized cash rent. The Company reported covenant compliance and no material litigation at quarter-end.
Important facts for investors to verify
- How much of the year-over-year earnings decline reflects prior-period gains rather than changes in recurring property and investment operations.
- The status, valuation and ultimate recovery from the mezzanine loan transferred into property ownership after quarter-end, and the separate nonaccrual financing receivable.
- Upcoming corporate and joint venture debt maturities, refinancing plans, and the effect of higher interest rates on cash interest expense.
- Funding sources and returns for the substantial 2019 consolidated and joint venture capital spending plans, alongside dividends and share repurchases.
- Whether occupancy, leasing spreads, tenant concentration and same-store performance remain consistent with the reported portfolio metrics.