SL Green Realty Corp. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. SL Green is a REIT focused on owning, operating, developing and financing real estate, primarily in the New York metropolitan area. It reported 50 consolidated and 27 unconsolidated property interests, totaling approximately 29.5 million square feet; portfolio occupancy was 93.2%.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $313.0 million | $301.1 million | $617.3 million | $602.8 million |
| Net income | $173.7 million | $115.9 million | $226.5 million | $229.7 million |
| Net income attributable to common stockholders | $161.1 million | $103.6 million | $204.9 million | $205.3 million |
| Diluted EPS | $1.94 | $1.19 | $2.46 | $2.31 |
| Nareit FFO attributable to common stockholders | $159.2 million | $155.6 million | $306.7 million | $313.3 million |
- Q2 revenue rose 4.0%; rental revenue increased 2.8%, and investment income increased 4.7%. Same-store operating income rose 3.2% to $138.8 million. For the first half, same-store operating income increased 1.6% to $269.1 million.
- Q2 net income included a $67.6 million fair-value adjustment on the acquisition of a controlling interest in 460 West 34th Street and a $59.0 million gain on the sale of the company’s interest in 521 Fifth Avenue. These items contributed to the year-over-year increase in GAAP net income.
- Six-month FFO declined 2.1% despite higher revenue; six-month GAAP net income was also lower year over year. The filing cautions that FFO is a non-GAAP measure and is not a measure of cash available for distributions.
- Operating cash flow was $217.9 million for the first half, down from $246.2 million. Investing activities used $466.4 million, while financing activities provided $210.5 million. Cash, cash equivalents and restricted cash ended at $241.1 million, down from $279.1 million at year-end 2018.
Balance sheet, debt and liquidity
- At June 30, total assets were $13.63 billion and total liabilities were $7.06 billion. Consolidated debt was $6.14 billion, versus $5.59 billion at December 31, 2018; these figures exclude debt at unconsolidated joint ventures.
- Debt was 57.7% fixed-rate and 42.3% variable-rate, with a 4.07% effective interest rate and a 3.63-year weighted average term to maturity. Variable-rate exposure, net of variable-rate investments, was approximately $1.30 billion. A 100-basis-point rate increase was estimated to raise annual consolidated interest cost, net of investment income, by $12.3 million, plus $14.8 million for the company’s share of joint-venture debt.
- The $1.5 billion revolving credit facility had $670 million drawn and $830 million of undrawn capacity. Management reported $179 million of consolidated cash on hand inclusive of $30 million in marketable securities. The balance sheet separately reports $149.0 million in cash and equivalents and $92.2 million in restricted cash.
- The company’s share of joint-venture debt was $3.80 billion. Management’s maturity schedule, including the company’s share of joint-venture debt, showed $9.94 billion in combined principal maturities and obligations. The company was in compliance with its debt covenants at quarter-end.
- Debt and preferred equity investments totaled $2.23 billion, with a 9.00% weighted average current yield for debt investments and 9.51% for preferred equity investments. The portfolio’s estimated weighted-average risk rating was 1.3 on the company’s scale.
Material changes, outlook and risks
- 2019 acquisitions included a controlling 70.87% interest in 460 West 34th Street, 106 Spring Street and the remaining 10% interest in 110 Greene Street. The 460 West acquisition generated the $67.6 million fair-value adjustment noted above. The company also recorded a $57.9 million share of gain on the 521 Fifth Avenue sale.
- New lease accounting guidance adopted January 1, 2019 resulted in recognition of $389.1 million of operating-lease right-of-use assets and related liabilities. It also required expensing certain internal leasing costs, adding $2.2 million of expense in Q2 and $4.4 million in the first half; prior-year balances were not restated.
- Two mezzanine loans were in maturity default at June 30; management said it expected to collect contractual principal and interest and recorded no impairment for those loans. Separately, a $28.4 million financing receivable had been on non-accrual since August 2018; management said collateral value exceeded its carrying amount. The total loan-loss reserve was $1.75 million.
- Management expected positive operating cash flow and planned to fund liquidity needs through operations, available liquidity, asset or investment dispositions, and secured or unsecured financing. For the remainder of 2019 it estimated $50.3 million of recurring and $51.8 million of development or redevelopment spending at consolidated properties, plus $244.1 million as its share of joint-venture capital expenditures. The company stated an annual common dividend rate of $3.40 per share and intended to continue regular quarterly dividends; future payments remain subject to cash availability, debt terms and REIT requirements.
- Principal risks include concentration in the New York market, leasing and occupancy conditions, tenant and borrower credit, development costs and delays, access to capital, interest-rate exposure, joint-venture obligations and insurance availability. Credit Suisse accounted for 8.3% of the company’s share of annualized cash rent. Management reported no material litigation and no material change to previously disclosed risk factors.
Important facts for investors to verify
- How much of Q2 earnings growth reflects recurring property operations versus the 460 West fair-value adjustment and property-sale gains.
- Performance and resolution plans for the two maturity-default mezzanine loans, and collectability of the separately non-accrual financing receivable.
- Near-term refinancing needs, including the 2020–2023 maturity schedule, and capacity to meet consolidated and joint-venture obligations while funding development spending.
- Leasing and occupancy trends, especially New York office demand, tenant concentration and leasing costs.
- Cash available for dividends and repurchases after operating needs, debt service and committed capital expenditures; reported cash measures differ depending on whether restricted cash and marketable securities are included.