SL Green Realty Corp. — Q2 2010 Form 10-Q
Business context and period. This unaudited filing covers the quarter and six months ended June 30, 2010. SL Green is a REIT focused on commercial office and retail properties and structured-finance investments in the New York metropolitan area. Its 61 office properties and interests covered approximately 28.8 million square feet, with weighted-average occupancy of 91.0%.
Financial results and key metrics
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $259.7 million | $252.0 million | $518.4 million | $514.4 million |
| Net income attributable to common stockholders | $137.0 million | $12.5 million | $152.1 million | $45.3 million |
| Diluted EPS | $1.75 | $0.18 | $1.94 | $0.73 |
| Funds from operations (FFO) | $81.5 million | $83.5 million | $166.4 million | $171.6 million |
| Cash from operating activities | Not separately provided for the quarter | $152.7 million | $152.4 million |
Reported earnings were significantly affected by a $126.8 million gain on the sale of the company’s 45% interest in 1221 Avenue of the Americas. Excluding that sale gain, diluted EPS from continuing operations before property-sale gains and discontinued operations was $0.16 for Q2 2010 versus $0.23 for Q2 2009, and $0.35 for the first half of both years.
Q2 rental revenue was $199.7 million, up 4.1%; escalation and reimbursement revenue fell 4.5% to $30.0 million. Same-store rental revenue and recoveries increased 0.6% for the quarter, while same-store occupancy declined to 92.5% from 94.8% a year earlier. Q2 Manhattan office leases commenced or signed at average starting rent of $40.09 per square foot, 4.4% below prior fully escalated rent; Suburban rents were $30.80, down 2.6%.
At June 30, total assets were $10.4 billion and total equity was $5.2 billion. Cash and cash equivalents were $339.6 million; cash plus marketable securities was approximately $412.6 million. Structured-finance investments were $867.4 million, net of reserves and discounts. Loan-loss reserves totaled $103.8 million.
Consolidated debt was $4.56 billion, comprising $2.80 billion of mortgage and other loans, $800 million drawn on the $1.5 billion revolving facility, $858.1 million of senior unsecured notes and $100 million of trust-preferred debt. Including SL Green’s share of joint-venture debt, debt was approximately $6.38 billion. 71.3% of consolidated debt was fixed-rate; the weighted-average term to maturity was about five years. The revolver matures in June 2011, with a one-year extension option; $800 million was scheduled for 2012 in the filing’s maturity table. The company reported compliance with debt covenants.
First-half investing cash flow was $246.9 million provided, primarily reflecting $504.2 million of disposition proceeds; financing used $403.7 million. The common dividend was $0.10 per share in Q2 and $0.20 for the first half, versus $0.10 and $0.475 in the comparable 2009 periods.
Material changes and unusual items
- In May 2010, SL Green sold its 45% interest in 1221 Avenue of the Americas for approximately $577.4 million of total consideration, generating about $500.9 million in proceeds and the $126.8 million gain.
- In January 2010, the company took sole ownership of 100 Church Street following foreclosure of its mezzanine loan; it funded an additional $15 million and assumed a restructured $139.7 million mortgage.
- Loan-loss and investment-reserve expense fell to $5.0 million in Q2 from $45.6 million, and to $11.0 million in the first half from $107.6 million. Lower reserves materially improved reported comparisons.
- In March 2010, SL Green issued $250 million of 7.75% senior notes due 2020. It also completed debt tenders and repurchases; first-half debt repayments and the reduction in revolver borrowings contributed to lower debt balances.
- In January, the company raised approximately $122 million net from a Series C preferred-stock offering, priced at an 8.101% yield. Preferred dividends increased year over year.
Outlook, commentary and risks
- Management cited continuing difficult credit conditions, though it noted positive signs. It expected positive operating cash flow and believed available liquidity and potential refinancing would support obligations; access to future debt or equity capital was not assured.
- Management estimated approximately $77.9 million of capital expenditures for wholly owned properties and $15.5 million for its share of joint ventures during the second half of 2010, including tenant improvements and leasing commissions. It stated it expected sufficient resources for capital needs over the next 12 months.
- The company expected to continue quarterly dividends. Its stated annual common dividend rate was $0.40 per share; payment remains subject to available cash, debt restrictions and operating and debt-service needs.
- Management agreed to acquire 125 Park Avenue for $330 million, assuming $146.25 million of financing; closing was expected in Q3 2010 subject to conditions.
- Key operating and credit exposures include weaker office demand, declining same-store occupancy, tenant concessions, rising property taxes, refinancing and interest-rate risk, structured-finance borrower losses, and concentration in New York-area real estate. Citigroup represented approximately 8.3% of annualized rent; management said it monitored the exposure.
- Structured-finance fair value was estimated at $520.4 million to $780.7 million against a carrying value of $867.4 million. Certain investments were in default or on non-accrual status; management cautioned that reserves based on Level 3 estimates may prove inadequate.
- A 100-basis-point increase in interest rates was estimated to raise annual interest costs by $12.9 million for SL Green and $6.1 million for its share of joint ventures. Insurance availability and cost, including terrorism coverage, were also identified as risks.
- The filing reported no material litigation, no material change in disclosed risk factors, and effective disclosure controls. It provided no specific earnings guidance.
Most important facts for investors to verify
- How much of reported earnings and EPS growth depends on the 1221 Avenue of the Americas gain, and how underlying FFO and continuing operations are trending.
- Whether occupancy, lease spreads and tenant concessions stabilize, particularly given lower same-store occupancy and rents below prior escalated levels.
- Refinancing plans for the 2011 revolver maturity and other near-term debt, and the company’s ability to maintain liquidity and covenant compliance.
- Whether structured-finance reserves adequately reflect default, non-accrual and collateral-value risks, including the gap between carrying value and estimated fair value.
- Completion and financing of the planned 125 Park Avenue acquisition, and actual capital spending relative to management’s estimates.