SL Green Realty Corp. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; unaudited. SL Green is a REIT focused primarily on commercial real estate in the New York metropolitan area. Its portfolio included 67 office properties totaling about 29.7 million square feet, with weighted average occupancy of 91.7%, plus retail, development, residential, West Coast office and real estate debt and preferred equity investments.
Financial performance and liquidity
- Revenue: Q2 revenue was $365.1 million, up 6.0% from $344.5 million; first-half revenue was $730.6 million, up 7.6% from $679.1 million. Rental revenue grew 3.6% in Q2 and 3.7% in the first half. Investment and preferred equity income rose to $46.7 million in Q2 and $99.4 million in the first half.
- Earnings: Q2 net income was $31.2 million versus $118.5 million a year earlier; net income attributable to common stockholders was $8.3 million versus $103.0 million, or $0.09 per diluted share versus $1.14. First-half net income was $61.6 million versus $153.6 million; common-stockholder income was $27.2 million versus $128.3 million, or $0.30 per diluted share versus $1.45.
- Key operating measure: Same-store NOI increased 1.6% to $173.9 million in Q2 and 1.6% to $343.2 million in the first half. Same-store consolidated occupancy was 91.3%, up from 91.0% a year earlier; Manhattan occupancy improved while suburban occupancy declined.
- Cash flow: First-half operating cash flow was $213.5 million, versus $197.9 million in 2012. Investing activities used $46.5 million, compared with $558.0 million in the prior-year period; financing activities used $158.0 million, versus providing $478.7 million. Cash and cash equivalents were $199.0 million at June 30. Cash plus marketable securities was approximately $225.2 million.
- Debt and liquidity: Consolidated debt was approximately $6.72 billion. Fixed-rate debt represented 86.4% of total debt, compared with 75.5% at year-end 2012; the effective interest rate was 4.89%, down from 5.08%. The company reported approximately $1.2 billion of undrawn capacity under its $1.6 billion credit facility and compliance with debt covenants. Its share of joint-venture debt was approximately $2.15 billion.
- Dividends: Common dividends were $0.33 per share for Q2 and $0.66 for the first half, compared with $0.25 and $0.50, respectively, in 2012. Management said it intended to continue regular quarterly dividends.
Changes and unusual items
- The sharp year-over-year decline in earnings largely reflects prior-year income from the 717 Fifth Avenue joint-venture recapitalization: approximately $67.9 million of additional income was recognized in 2012. Joint-venture equity results were a $3.8 million loss in Q2 2013, versus $70.9 million of income in Q2 2012.
- First-half investment income benefited from a $12.9 million gain-related income item on the sale of half of a debt investment and $6.4 million of additional income on repayment of another investment.
- SL Green redeemed its remaining $200 million of Series C preferred stock in June, recording $12.2 million in redemption costs. It also recorded an $18.5 million first-half loss on early extinguishment of debt, primarily related to refinancing the 1515 Broadway mortgage.
- Same-store operating costs increased, including property operating expenses, taxes and ground rent. Depreciation and amortization also rose. First-half same-store revenue growth was partly offset by lower tenant expense recoveries.
- The company agreed to sell 333 West 34th Street for $220.3 million and 300 Main Street for $13.5 million, with both transactions expected to close in Q3 2013. It recorded a $2.2 million impairment on 300 Main Street. The filing reports a $2.3 million purchase-price fair-value adjustment when it consolidated 16 Court Street.
- NAREIT FFO was $120.5 million in Q2 versus $179.0 million, and $229.7 million for the first half versus $278.3 million. FFO is a supplemental measure, not a substitute for GAAP income or cash flow.
Outlook, risks and contingencies
- Management expected positive operating cash flow and said available liquidity, potential refinancing and other funding sources should support obligations and capital needs. It estimated remaining-2013 capital expenditures of approximately $131.4 million on consolidated properties and $41.8 million as its share of joint-venture expenditures. No specific earnings guidance was provided.
- A 100-basis-point increase in interest rates was estimated to raise annual interest costs by about $8.9 million for SL Green and $8.6 million for its share of joint ventures. Floating-rate debt, refinancing needs and significant maturities—including substantial company and joint-venture debt due in 2016–2017—remain relevant risks.
- Principal disclosed risks include economic and real-estate-market conditions, geographic concentration, leasing and tenant credit, investment and development execution, access to capital, joint-venture partner performance, REIT qualification and insurance availability or cost. The company noted that a major catastrophe could exceed available coverage; certain coverage is provided through its captive insurer and is a form of self-insurance.
- Management reported no material litigation, no material change in previously disclosed risk factors, and effective disclosure controls. It reported no material changes in market-risk exposure since year-end 2012.
Most important facts for investors to verify
- Separate recurring property and lending performance from the prior-year 717 Fifth Avenue item and 2013 investment-repayment income.
- Track same-store NOI, leasing spreads, occupancy—especially the weaker suburban portfolio—and leasing costs.
- Review the timing and net proceeds of the planned property sales and their effect on debt, liquidity and earnings.
- Assess debt maturities, floating-rate exposure, credit-facility availability and refinancing needs, including joint-venture obligations and guarantees.
- Evaluate whether operating cash flow can support planned capital spending and dividends, and monitor related-party transactions and preferred-stock redemption costs.