SL Green Realty Corp. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. SL Green is a New York-focused office REIT operating through SL Green Operating Partnership, L.P.; the combined filing reports substantially the same underlying operations. Amounts below are U.S. dollars.
Financial performance and key metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $173.2 million | $212.5 million | $617.9 million | $601.9 million |
| Net income (loss) | $(21.7) million | $12.2 million | $(439.3) million | $(12.3) million |
| Net income (loss) attributable to common stockholders | $(24.0) million | $7.4 million | $(423.9) million | $(28.7) million |
| Basic/diluted EPS | $(0.38) | $0.11 | $(6.63) | $(0.47) |
| Funds from Operations attributable to common stockholders and unit holders | $87.7 million | $114.2 million | $291.6 million | $358.8 million |
For the nine months, rental revenue rose 12.2% to $532.0 million, while investment income fell 60.2% to $27.8 million. Net loss included a $305.5 million real estate reserve and impairment charge, mainly the write-down of the 625 Madison Avenue leasehold, and a $6.9 million loan-loss provision. Interest expense, net, increased to $109.7 million from $51.9 million.
- Cash flow: Nine-month operating cash flow was $181.3 million, down from $249.6 million. Investing activities provided $271.7 million, including disposition proceeds; financing activities used $527.8 million. Cash, cash equivalents and restricted cash totaled $309.3 million at period-end, versus $385.1 million a year earlier.
- Debt and liquidity: Consolidated debt was $3.37 billion at September 30, down from $5.54 billion at year-end 2022. The company reported $1.0 billion of liquidity: $850 million of undrawn revolver capacity and $199.4 million of consolidated cash and marketable securities. This excludes $165.8 million representing its share of joint-venture cash. SL Green’s share of joint-venture debt was approximately $7.35 billion; this is separate from consolidated debt.
- Interest rates: Consolidated weighted-average interest rate was 4.64% for the first nine months, versus 3.28% in 2022. At quarter-end, 96.4% of consolidated debt was classified as fixed-rate, including hedged variable-rate debt. Management estimated a 100-basis-point rate increase would reduce annual consolidated interest cost, net of investment income, by $0.4 million but increase its share of joint-venture annual interest cost by $12.2 million.
- Portfolio and leasing: Manhattan office leased occupancy was 89.3%; suburban office occupancy was 77.4%. In the first nine months, 1.21 million rentable square feet of leases commenced at average initial cash rent of $76.66 per square foot, compared with prior escalated rent of $75.51. The company’s quarterly common dividend/distribution declared was $0.812 per share/unit, versus $0.932 in Q3 2022.
Material changes versus the prior comparable period
- Q3 revenue declined 18.5%, chiefly reflecting lower investment income and the deconsolidation of 245 Park Avenue after selling a 49.9% interest in the second quarter. Nine-month revenue increased 2.7%, mainly because 245 Park had been acquired and consolidated in 2022 before its 2023 deconsolidation.
- Nine-month net loss widened substantially, principally due to the 625 Madison Avenue impairment, higher interest costs, and increased depreciation and amortization. The reported FFO measure also declined year over year.
- SL Green sold a 49.9% interest in 245 Park Avenue; the filing gives a gross property valuation of $1.995 billion and reports a $28.3 million loss on sale, plus a $17.0 million fair-value adjustment on the retained interest.
- Consolidated assets fell to $9.69 billion from $12.36 billion at December 31, 2022, alongside a decline in consolidated debt. The filing attributes key movements to property dispositions, deconsolidation and debt repayments.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings or FFO guidance. Management expects liquidity sources to include operating cash flow, cash, asset and investment dispositions, revolver borrowings and potential secured or unsecured financing; access to capital is not assured.
- Management estimated remaining-2023 consolidated recurring capital expenditures of $19.5 million and development/redevelopment expenditures of $26.5 million. Its estimated share of joint-venture capital expenditures was $62.9 million.
- 625 Madison Avenue: A ground-rent appraisal proceeding reset annual rent from $4.61 million to $20.25 million, effective July 1, 2022. After review, SL Green recorded a $305.9 million charge in Q2 2023 and wrote its leasehold carrying value down to zero. In September, following foreclosure, it converted mezzanine debt investments into a 90.43% ownership interest in the property.
- Debt and refinancing watch points: The filing says joint-venture loans on 717 Fifth Avenue and 11 West 34th Street were in maturity default as of the filing date, with discussions underway with lenders. SL Green had requested an extension for a 650 Fifth Avenue joint-venture loan; it believed the extension would be granted, but reported that lenders were unable to respond at that time. Consolidated property debt on 7 Dey Street/185 Broadway also had a November 2023 maturity.
- Three investments with net carrying values totaling $88.8 million were not performing according to their terms, compared with one investment of $6.9 million at year-end 2022. The total allowance for loan losses was $13.5 million.
- Management cited New York office demand and vacancy, refinancing and capital availability, higher interest rates, tenant/borrower credit, development costs, joint-venture obligations and insurance availability among key risks. It reported compliance with debt covenants, no material litigation, and no material changes to previously disclosed risk factors. Disclosure controls were judged effective.
Important facts for investors to verify
- How 625 Madison Avenue’s new ownership and ground-rent burden affect future costs, value and any recovery prospects.
- Resolution and refinancing status of the disclosed joint-venture maturity defaults, the 650 Fifth Avenue extension request and the 7 Dey/185 Broadway maturity.
- Near-term consolidated and joint-venture maturities, available refinancing options, and whether reported liquidity remains adequate after capital needs and distributions.
- Office leasing, occupancy, concessions and tenant demand, including whether new lease rents translate into durable cash flow.
- Credit performance of the debt and preferred-equity portfolio and the potential for additional reserves or non-accruals.
- Underlying operating trends apart from impairments, dispositions, deconsolidation and other nonrecurring or noncash items; FFO is a non-GAAP measure and is not cash flow available for distributions.