SL Green Realty Corp. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. SL Green is a self-managed REIT focused on office and other commercial properties in the New York metropolitan area. Its portfolio included 62 office properties totaling 30.2 million square feet, with 91.4% weighted average occupancy. Financial statements are unaudited.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $308.6 million | $319.2 million | $940.4 million | $821.6 million |
| Net income attributable to common stockholders | $7.1 million | $111.5 million | $614.4 million | $263.6 million |
| Diluted EPS | $0.08 | $1.42 | $7.36 | $3.36 |
| Funds from operations (FFO) | $87.9 million | $145.3 million | $323.5 million | $311.7 million |
| Cash from operating activities | Not stated separately for the quarter | Not stated separately for the quarter | $237.7 million | $254.0 million |
Revenue and operating performance: Q3 rental revenue rose 25.0% to $244.9 million, while escalation and reimbursement revenue increased 27.3% to $39.2 million. Nine-month rental revenue increased 22.9% to $714.4 million. Growth largely reflected acquisitions and consolidation, while same-store rental and reimbursement revenue grew 0.5% in Q3 and 0.8% year to date. Same-store occupancy was 90.0%; Manhattan same-store occupancy was 92.7%, versus 85.9% for the suburban portfolio. Manhattan leases signed in Q3 averaged 6.7% above prior fully escalated rents; suburban leases signed year to date averaged 2.4% below prior rents.
Profit and margins: Common-stockholder earnings fell sharply in Q3 despite higher rental revenue. The prior-year quarter included substantial investment income and gains on sales. Nine-month earnings included a $489.9 million purchase-price fair-value adjustment, principally tied to gaining control of 1515 Broadway, as well as property and joint-venture sale gains. These unusual items make reported earnings and year-over-year comparisons less indicative of recurring performance. The filing reports FFO, a non-GAAP measure, of $87.9 million for Q3 and $323.5 million year to date. It does not provide a directly comparable operating margin measure.
Cash, assets, and liquidity: Cash and cash equivalents were $394.5 million at September 30, 2011, versus $332.8 million at year-end 2010; restricted cash was $102.1 million. Management separately described approximately $449.5 million of cash on hand inclusive of about $55.0 million of marketable securities. Total assets were $13.16 billion, up from $11.30 billion at year-end. Nine-month operating cash flow was $237.7 million; investing activities used $501.5 million, and financing activities provided $325.5 million. Management expected positive operating cash flow and said it believed resources would be sufficient for capital needs over the next 12 months, while noting access to capital markets was not assured.
Debt and leverage: Consolidated debt was $5.89 billion, compared with $5.25 billion at year-end 2010. Approximately 80.7% was fixed-rate; the weighted average term to maturity was 5.7 years and the effective interest rate was 5.06%. The $1.5 billion revolving facility had $500 million drawn and $101.4 million of letters of credit reducing availability; it matures in June 2012. Combined scheduled maturities for consolidated debt and SL Green’s share of joint-venture debt were $837.5 million in 2012, including the revolver, and $650.2 million in 2013. Debt represented 58.4% of stated market capitalization, including the company’s share of joint-venture debt. Covenants were reported in compliance at quarter-end.
Material changes versus comparable periods
- Q3 total revenue declined 3.3% despite materially higher rental revenue, as investment and preferred equity income fell to $18.4 million from $84.4 million. The prior-year quarter included $64.8 million of additional income following repayment of loans secured by 510 Madison Avenue.
- Nine-month total revenue increased 14.4%, but investment and preferred equity income decreased 21.7% and equity income from unconsolidated joint ventures fell 76.6%. Nine-month common earnings rose, substantially reflecting the $489.9 million fair-value adjustment and sale-related gains rather than rental growth alone.
- Interest expense, net, increased 32.9% in Q3 and 24.0% year to date, primarily due to higher average debt balances associated with acquisitions and investment activity. Depreciation and amortization also increased.
- Acquisitions and control changes included full ownership of 521 Fifth Avenue and 1515 Broadway. SL Green sold 28 West 44th Street for $161.0 million in May, recording a $46.1 million gain, and sold its 10% interest in a Broadway joint venture in August.
- The company raised approximately $517.1 million net through an at-the-market common-stock program, issuing 6.7 million shares; a separate $250 million ATM program had not been used by quarter-end.
Outlook, risks, and contingencies
- No specific earnings or FFO guidance was provided. Management expected positive operating cash flow, regular quarterly dividends, and sufficient resources for near-term capital needs. Estimated Q4 2011 capital expenditures, including tenant improvements and leasing commissions, were $24.1 million for wholly owned properties and $6.6 million for its share of joint ventures.
- Management cited reliance on New York-area real estate markets, leasing and occupancy conditions, capital availability, refinancing and interest-rate exposure, borrower and tenant credit, joint-venture partner performance, and the ability to maintain REIT status as risks. A 100-basis-point increase in rates was estimated to increase annual interest costs by approximately $11.1 million for SL Green and $4.7 million for its share of joint ventures.
- Credit risks remain in the lending portfolio: $85.9 million of financing receivables were on non-accrual, and $20.4 million was at least 90 days past due. Total loan-loss reserves were $41.8 million. Management cautioned that reserves depend on estimates and may not cover future losses.
- One joint-venture loan was in default and under discussion with the special servicer. A separate financing exposure carried a recourse guarantee of up to $200 million, although management believed performance under it was unlikely. The filing reported no material litigation and no material environmental liability known to management.
- Insurance policies covering major property portfolios were due to expire December 31, 2011. The company warned that terrorism coverage may become unavailable or more costly, and that coverage may be insufficient in a major catastrophe. Its captive insurer represents a form of self-insurance.
- Subsequent to quarter-end, SL Green agreed to pursue a $416 million joint-venture acquisition of eight Manhattan retail and multifamily properties, expected to close in Q1 2012. Agreements to sell interests at 292 Madison Avenue and 141 Fifth Avenue remained subject to closing conditions, including lender approval.
Important facts for investors to verify
- How much of reported nine-month earnings came from the 1515 Broadway fair-value adjustment and property or joint-venture sale gains, versus recurring operations and FFO.
- The refinancing plan and available committed liquidity for the $500 million revolver maturing in June 2012 and other near-term maturities.
- Current performance, collateral values, and recovery prospects for non-accrual and past-due loans, including the defaulted joint-venture exposure.
- Whether Manhattan leasing strength can offset weaker suburban rent trends and occupancy, and the effect of tenant concessions and leasing costs on cash returns.
- Completion, financing, and expected economics of the announced acquisitions and dispositions, and the renewal and adequacy of property and terrorism insurance.