UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to_____.
Commission File No. 1-13199
SL GREEN REALTY CORP.
(Exact name of registrant as specified in its charter)
Maryland 13-3956775
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
70 West 36th Street, New York, New York 10018-8007
(Address of principal executive offices - zip code)
(212) 594-2700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the restraint was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days Yes |X| No |_|.
The number of shares outstanding of the registrant's common stock, $0.01 par
value was 12,292,311 at May 12, 1998.
<PAGE>
SL GREEN REALTY CORP.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SL Green Realty Corp. PAGE
----
Condensed Consolidated Balance Sheets as of March 31,
1998 (unaudited) and December 31, 1997............................... 3
Condensed Consolidated Statement of Operations for the Three
Months Ended March 31, 1998 (unaudited).............................. 5
Condensed Consolidated Statement of Stockholders' Equity............. 6
Condensed Consolidated Statement of Cash Flows for the Three
Months Ended March 31, 1998 (unaudited).............................. 7
Notes to Condensed Consolidated Financial Statements
(unaudited).......................................................... 8
SL Green Predecessor
Condensed Combined Statement of Operations for the Three Months
Ended March 31, 1997 (unaudited)..................................... 5
Condensed Combined Statement of Cash Flows for the Three Months
Ended March 31, 1997 (unaudited)..................................... 7
Notes to Condensed Combined Financial Statements
(unaudited)...........................................................8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................ 13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................... 19
Signatures................................................................... 20
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SL Green Realty Corp.
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
March 31, December 31,
1998 1997
---------- -----------
(Unaudited)
Assets
Commercial real estate properties, at cost:
Land ................................................... $ 68,902 $ 53,834
Buildings and improvements ............................. 341,892 272,776
Building leasehold ..................................... 84,699 --
Property under capital lease ........................... 12,208 12,208
--------- ---------
507,701 338,818
Less accumulated depreciation .......................... (26,111) (23,800)
--------- ---------
481,590 315,018
Cash and cash equivalents .............................. 10,625 12,782
Restricted cash ........................................ 13,341 10,310
Receivables ............................................ 3,383 738
Related party receivables .............................. 1,557 1,971
Deferred rents receivable net of provision for doubtful
accounts of $784 and $399 in 1998 and 1997,
respectively ......................................... 12,690 11,563
Investment in Service Corporations ..................... 1,523 1,480
Mortgage loan receivable ............................... 15,500 15,500
Deferred costs, net .................................... 7,950 6,099
Other assets ........................................... 8,195 7,314
--------- ---------
Total assets ........................................... $ 556,354 $ 382,775
========= =========
The accompanying notes are an integral part to these financial statements.
3
<PAGE>
SL Green Realty Corp.
Condensed Consolidated Balance Sheets
(Dollars in Thousands, except per share data)
March 31, December 31,
1998 1997
--------- -----------
(Unaudited)
Liabilities and Stockholders' Equity
Mortgage notes payable ................................. $ 52,340 $ 52,820
Revolving credit facility .............................. -- 76,000
Acquisition facility ................................... 239,960 --
Accrued interest payable ............................... 1,016 552
Accounts payable and accrued expenses .................. 9,318 3,340
Accounts payable to related parties .................... 614 367
Capitalized lease obligations .......................... 14,550 14,490
Deferred land lease payable ............................ 8,773 8,481
Dividend and distributions payable ..................... 5,136 5,136
Security deposits ...................................... 15,452 11,475
--------- ---------
Total liabilities ...................................... 347,159 172,661
--------- ---------
Minority interest ...................................... 33,864 33,906
--------- ---------
Commitments, contingencies and other matters ...........
Stockholders' Equity
Preferred stock, $.01 par value 25,000 shares
Authorized, none outstanding ...............
Common stock, $.01 par value 100,000 shares
authorized, 12,292 issued and outstanding .. 123 123
Additional paid - in capital ................. 178,669 178,669
Officers' loans ............................... (661) --
Distributions in excess of earnings ........... (2,800) (2,584)
--------- ---------
Total stockholders' equity ............................. 175,331 176,208
--------- ---------
Total liabilities and stockholders' equity ............. $ 556,354 $ 382,775
========= =========
The accompanying notes are an integral part to these financial statements.
4
<PAGE>
SL Green Realty Corp.
Condensed Statements of Operations
(Unaudited)
(Dollars in Thousands, except per share data)
Three Months Ended
------------------
SL Green SL Green
Realty Corp. Predecessor
March 31, March 31,
1998 1997
------------- -----------
(Consolidated) (Combined)
Revenues
Rental revenue ...................................... $ 19,428 $1,489
Escalation and reimbursement
revenues ........................................ 2,128 149
Management revenues ................................. -- 779
Leasing commissions ................................. -- 1,475
Construction revenues ............................... -- 74
Investment income ................................... 637 --
Other income ........................................ 4 5
-------- ------
Total revenues ...................................... 22,197 3,971
-------- ------
Equity in income from Service
Corporations .................................... 42 --
Equity in net loss from uncombined joint
ventures ........................................ -- 287
Expenses
Operating expenses .................................. 5,664 814
Ground rent ......................................... 1,188 --
Interest ............................................ 3,494 345
Depreciation and amortization ....................... 2,693 271
Real estate taxes ................................... 3,283 243
Marketing, general and administrative ............... 1,038 896
-------- ------
Total expenses ...................................... 17,360 2,569
-------- ------
Income before minority interest ..................... 4,879 1,115
Minority interest ................................... (790) --
======== ======
Net income .......................................... $ 4,089 $1,115
======== ======
Per share data:
Net income per share (basic and
diluted) ........................................ $ 0.33
========
Basic weighted average common shares
outstanding ..................................... 12,292
========
Diluted weighted average common shares and
common share equivalents
outstanding ..................................... 12,404
========
The accompanying notes are an integral part to these financial statements.
5
<PAGE>
SL Green Realty Corp.
Condensed Consolidated Statement of Stockholders' Equity
(Dollars in Thousands)
<TABLE>
<CAPTION>
Additional Distributions
Common Paid- Officer in Excess of
Stock In Capital Loans Earnings Total
----- ---------- ----- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 ........... $123 $178,669 -- $(2,584) $ 176,208
Net Income ............................. -- -- 4,089 4,089
Cash distributions declared ($0.35 per
Common share) .......................... -- -- -- (4,305) (4,305)
Officers' loans, net $(661) (661)
---- -------- ----- ------- ---------
Balance at March 31, 1998 .............. $123 $178,669 $(661) $(2,800) $ 175,331
==== ======== ===== ======= =========
</TABLE>
The accompanying notes are an integral part to these financial statements.
6
<PAGE>
SL Green Realty Corp.
Condensed Statements of Cash Flows
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
SL Green SL Green
Realty Corp. Predecessor
March 31, 1998 March 31, 1997
-------------- ---------------
(Consolidated) (Combined)
<S> <C> <C>
Operating Activities:
Net income ................................................. $ 4,089 $ 1,115
--------- -------
Adjustments: To reconcile net income with net cash provided
by operating activities:
Minority interest ........................................ 790 --
Depreciation and Amortization ............................ 2,693 271
Equity in net loss from uncombined joint ventures ........ -- 376
Equity in net income from Service Corporations ........... (42)
Deferred rents receivable ................................ (1,128) (39)
Changes in operating assets and liabilities:
Restricted cash .......................................... (853) (15)
Receivables .............................................. (2,644) (669)
Related party receivables ................................ (247) 351
Deferred lease costs ..................................... (691) 27
Other assets ............................................. (882) 12
Accounts payable and accrued expenses .................... 5,977 (227)
Accounts payable to related parties ...................... 247 (446)
Accrued interest payable ................................. 464 --
Deferred land lease payable .............................. 292 --
Security deposits payable ................................ 1,798 13
--------- -------
Net cash provided by operating activities ................ 9,863 769
--------- -------
Investing Activities:
Additions to land, buildings and improvements ............ (168,884) (112)
--------- -------
Net cash used in investing activities .................... (168,884) (112)
--------- -------
Financing Activities:
Proceeds from acquisition facility ....................... 239,960 --
Payments of mortgage notes payable and loans ............. (480) (66)
Payment of credit facility ............................... (76,000) --
Cash distributions to owners ............................. -- (286)
Cash contributions from owners ........................... -- 13
Deferred loan costs ...................................... (1,541) --
Cash dividends paid on stock ............................. (5,136) --
Capital lease ............................................ 61 --
--------- -------
Net cash provided by (used in) financing activities ...... 156,864 (339)
--------- -------
Net increase (decrease) in cash and cash equivalents ..... (2,157) 318
Cash and cash equivalents at beginning of period ......... 12,782 476
--------- -------
Cash and cash equivalents at end of period ............... $ 10,625 $ 794
========= =======
Supplemental disclosure of cash flow information:
Cash paid for interest: .................................... $ 3,030 $ 345
========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
SL Green Realty Corp.
Notes To Condensed Consolidated Financial Statements
(Unaudited)
March 31, 1998
1. Organization and Basis of Presentation - SL Green Realty Corp.
Initial Public Offering and Formation Transactions
SL Green Realty Corp. (the "Company"), a Maryland corporation, and SL
Green Operating Partnership, L.P., (the "Operating Partnership"), were formed in
June 1997 for the purpose of combining the commercial real estate business of
S.L. Green Properties, Inc. and its affiliated partnerships and entities ("SL
Green"). The Operating Partnership received a contribution of interest in the
real estate properties, as well as 95% of the economic interest in the
management, leasing and construction companies (the "Service Corporations"). The
Company qualifies as a real estate investment trust ("REIT") under the Internal
Revenue Code of 1986, as amended; and operates as a fully integrated,
self-administered, self-managed REIT. A REIT is a legal entity that holds real
estate interests and, through payments of dividends to shareholders, is
permitted to reduce or avoid the payment of federal income taxes at the
corporate level.
The authorized capital stock of the Company consists of 200 million shares
of capital stock, $.01 par value, of which the Company has authorized the
issuance of up to 100 million shares of Common Stock, $.01 par value per share,
75 million shares of Excess Stock, at $.01 par value per share, and 25 million
shares of Preferred Stock, par value $.01 per share. On August 20, 1997, the
Company issued 11.615 million shares of its Common Stock (including the
underwriters' over-allotment option of 1.52 million shares) to the public
through a public offering (the "Offering"). Concurrently with the consummation
of the Offering, the Company issued 38,095 shares of restricted common stock
pursuant to stock loans and 85,600 shares of restricted common stock to a
financial advisor. In addition, the Company previously issued to its executive
officers approximately 553,616 shares, as founders' shares. As of March 31,
1998, no shares of Excess Stock or Preferred Stock are issued and outstanding.
Concurrently with the consummation of the Offering, the Company and the
Operating Partnership, together with the partners and members of the affiliated
partnerships of the SL Green Predecessor and other parties which held ownership
interests in the properties contributed to the Operating Partnership
(collectively, the "Participants"), engaged in certain Formation Transactions
(the "Formation Transactions").
The net cash proceeds received by the Company from the Offering (after
deducting underwriting discounts) was $228.7 million. The Company utilized
approximately $42.6 million of the Offering proceeds to repay mortgage
indebtedness encumbering the properties, including $1.5 million for prepayment
penalties and other financing fees and expenses, approximately $6.6 million to
purchase the direct or indirect interests of certain participants in the
properties, approximately $95.5 million to acquire properties, approximately
$3.4 million to pay certain expenses incurred in the Formation Transactions,
$35.6 million to repay a loan from Lehman Brothers Holdings, Inc. ("LBHI")
(which includes $20 million to repay a loan that was made to a Company
indirectly owned by Stephen L. Green), $1.8 million to fund the advisory fee
payment to Lehman Brothers, Inc. and $41.7 million to fund capital expenditures,
general working capital needs and future acquisitions (See note 2).
Substantially all of the Company's assets are held by, and its operations
conducted through, the Operating Partnership, a Delaware limited partnership.
The Company is the sole managing general partner of the Operating Partnership.
Continuing investors hold, in the aggregate, a 16.2% limited partnership
interest in the Operating Partnership.
Principles of Combination - SL Green Predecessor
The SL Green Predecessor is not a legal entity but rather a combination of
real estate properties and affiliated real estate management, construction and
leasing entities under common control and management of Stephen L. Green; and
interests owned and managed by Stephen L. Green in entities accounted for on the
equity method (see below) that are organized as partnerships and a limited
liability company. The entities included in this unaudited combined financial
statement have been combined for only the periods that they were under common
control and management. All significant intercompany transactions and balances
have been eliminated in combination. Capital contributions, distributions and
profits and losses are allocated in accordance with the terms of the applicable
agreements.
8
<PAGE>
The accompanying combined financial statements include partnerships and
corporations which were under common control as follows:
<TABLE>
<CAPTION>
Stephen L. Green
Entity Property/Service Percentage Ownership Ownership Type
------ ---------------- -------------------- --------------
<S> <C> <C> <C>
Office Property Entities:
64-36 Realty Associates 70 West 36th Street 95% General partner
1414 Management Associates, LP 1414 Avenue of the Americas 100% General partner
Service Corporations:
S.L. Green Management, Corp. Management and leasing 100% Sole shareholder
S.L. Green Leasing, Inc. Management 100% Sole shareholder
Emerald City Construction Corp. Construction 100% Sole shareholder
</TABLE>
For the entities accounted for on the equity method, the SL Green
Predecessor records its investments in partnerships and limited liability
company at cost and adjusts the investment accounts for its share of the
entities' income or loss and for cash distributions and contributions.
Condensed Statement of Operations for the Uncombined Joint Ventures is as
follows:
Three months ended
March 31, 1997
------------------
(Unaudited)
Condensed statement of operations
Rental revenue and escalations ............................... $ 5,447
Other revenue ................................................ 10
-------
Total revenue ................................................ 5,457
-------
Interest ..................................................... 2,069
Depreciation and amortization ............................... 969
Operating and other expenses ................................. 2,972
-------
Total expenses ............................................... 6,010
-------
Operating loss before outside partner's interest ............. (553)
Elimination of inter-company management fees ................. 89
Other partner share of income ................................ 177
-------
Loss allocated to the SL Green Predecessor ................... $ (287)
=======
9
<PAGE>
Basis of Quarterly Presentation
The accompanying unaudited condensed consolidated and combined financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and notes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for fair
presentation have been included. The 1998 operating results for the period
presented are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998. These financial statements should be read in
conjunction with the financial statements and accompanying notes included in the
Company's annual report on Form 10-K and the Company's registration statement on
Form S-11 dated August 14, 1997.
Management
In order to maintain the Company's qualification as a REIT while realizing
income from management leasing and construction contracts from third parties,
all of the management operations with respect to properties in which the Company
will not own a 100% interest are conducted through the Service Corporations. The
Company, through the Operating Partnership, owns 100% of the non-voting common
stock (representing 95% of the total equity) of the Service Corporations.
Through dividends on its equity interest, the Operating Partnership receives
substantially all of the cash flow from the Service Corporations' operations.
All of the voting common stock of the Service Corporations (representing 5% of
the total equity) is held by an SL Green affiliate. This controlling interest
gives the SL Green affiliate the power to elect all directors of the Service
Corporations. The Company accounts for its investment in the Service
Corporations on the equity basis of accounting on the basis that it has
significant influence with respect to management and operations.
All of the management and leasing with respect to the properties
contributed and acquired by the Company is conducted through the Management LLC
which is owned 100% by the Operating Partnership.
Partnership Agreement
In accordance with the partnership agreement of the Operating Partnership
(the "Operating Partnership Agreement"), all allocations of distributions and
profits and losses are made in proportion to the percentage ownership interests
of their respective partners. As the managing general partner of the Operating
Partnership, the Company is required to take such reasonable efforts, as
determined by it in its sole discretion, to cause the Operating Partnership to
distribute sufficient amounts to enable the payment of sufficient dividends by
the Company to avoid any federal income or excise tax at the Company level as a
consequence of a sale of SL Green property. Under the Operating Partnership
Agreement each limited partner will have the right to redeem limited partnership
interest for cash, or if the Company so elects, shares of common stock. Under
the Operating Partnership Agreement, the Company is prohibited from selling 673
First Avenue and 470 Park Avenue South through August 2009. Pursuant to the
terms of the Operating Partnership Agreement, the Units issued to the Company's
management and continuing investors at the IPO may not, for up to two years from
the IPO date, transfer any of their rights or redeem their Units as a limited
partner without the consent of the Company.
2. Property Acquisitions
During March 1998, the Company purchased the operating interest in the
property located at 420 Lexington Avenue (the "Graybar Building") and the fee
interest in the property located at 1466 Broadway from the Helmsley organization
for $142 million. The Graybar Building is located adjacent to Grand Central
Station and encompasses approximately 1.2 million square feet and the property
at 1466 Broadway is located at 42nd Street and Broadway encompassing
approximately 290,000 square feet.
During March 1998 the Company purchased the property located at 321 West
44th Street for approximately $17 million, comprised of approximately 209,000
square feet.
On January 8, 1998, the Company acquired fee title to its property located
at 1372 Broadway. Prior to this date the Company held a mortgagee's interest in
this property with a right to acquire the fee without additional cost.
10
<PAGE>
The following table summarizes, on an unaudited pro forma basis, the
combined results of operations of the Company for the three months ended March
31, 1998 and 1997 as though each acquisition since January 1, 1997 was completed
at the beginning of such period. The pro forma revenues are based upon the
Company utilizing the Bridge Facility and does not reflect the Company's recent
public offering (see note 9).
1998 1997
---- ----
Total revenues...................................... $31,105 $30,759
Pro forma net income................................ $3,449 $3,418
Pro forma earnings per share (basic and diluted)
Per common share - basic............................ $0.28 $0.28
Per common and common equivalent share - diluted.... $0.28 $0.28
3. Hypothecated Loans
During the period, the Company repaid the outstanding balance on its
hypothecated mortgage recording tax loan. The tax credits secured by this loan
were used to secure the Bridge Facility. Upon re-payment of the Bridge Facility
a new hypothecated loan ($122 million) will be put in place to preserve these
credits for future use.
4. Revolving Credit Facility and Acquisition Facility
During March 1998, the Company asked the Credit Facility banking group to
temporarily relieve the Company from its obligations under the financial
covenants of the Credit Facility, in order to close an additional financing
necessary to acquire the Helmsley properties (the "Bridge Facility"). The Bridge
Facility, which closed on March 18, 1998, financed the acquisition of the
Helmsley properties, paid-off the outstanding balance on the Company's Credit
Facility and will provide on going liquidity for future acquisition and
corporate needs. The term of the Bridge Facility is one year with an interest
rate that is determined by a schedule of the percent of loan commitment
outstanding and the duration of the outstanding commitments, ranging from 170
basis points over LIBOR to 300 basis points over LIBOR (7.3875% at March
31, 1998). The Bridge Loan is secured by the unencumbered assets of the Company
including mortgage tax credits previously associated with the Company's
hypothecated loan. The original Credit Facility will remain committed but unused
until the Bridge Facility is paid off through either permanent debt or an equity
financing and the Company's financial covenant obligations are restored.
5. Income Taxes
No provision has been made for income taxes in the accompanying combined
financial statements of SL Green Predecessor since such taxes, if any, are the
responsibility of the individual partners.
6. Net Income Per Common Share
Net income per common share-basic is computed in accordance with the
treasury stock method and is based on the weighted average number of common
shares and common stock equivalent shares outstanding during the period. The
common stock equivalent shares represent options outstanding. To arrive at the
diluted per common share, the common stock equivalents resulted in increasing
the number of shares outstanding by approximately 112,000 shares.
7. Commitments and Contingencies
The Company and the Operating Partnership are not presently involved in
any material litigation nor, to their knowledge, is any material litigation
threatened against them or their properties, other than routine litigation
arising in the ordinary course of business. Management believes the costs, if
any, incurred by the Company and the Operating Partnership related to the
routine litigation will not materially affect the financial position, operating
results or liquidity of the Company and the Operating Partnership.
11
<PAGE>
8. Related Party Transactions
There are business relationships with related parties which involve
maintenance expenses in the ordinary course of business. The Company's
transactions with the related parties amounted to $36,000 for the three month
period ended March 31, 1998. SL Green Predecessor's transactions with the
related parties amounted to $123,000 for the three month period ended March 31,
1997.
9. Subsequent Events
On March 19, 1998, the Board of Directors of the Company declared a $0.35
per share distribution to stockholders of record on March 31, 1998. The
distribution, together with the distribution to the Unit holders of the
Operating Partnership amounted to $5.1 million and was paid on April 15, 1998.
On April 14, 1998, the Company converted its mortgage interest in 36 West
44th Street into a fee interest and its mortgage interest in 36 West 43rd Street
into a leasehold interest (collectively known as the Bar Building) for an
additional cost of approximately $800,000.
On May 13, 1998 the Company completed the sale of 10,000,000 shares of
common stock and 4,000,000 shares of 8% Preferred Mandatory Income Redeemable
shares with a liquidation preference of $25.00 per share ("the PIERS"). Gross
proceeds from these equity offerings ($307 million, after underwriters discount)
will be used principally to repay the Bridge Facility and acquire additional
properties. These offerings resulted in a reduction of continuing investors
interest in the Operating Partnership from 16.2% to 9.8%. If the overallotment
options are exercised, the Company will issue an additional 1,500,00 shares of
common stock and 600,000 shares of PIERS resulting in additional gross proceeds
of $46.1 million.
12
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
This report includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. All statements, other than statements of historical facts, included
in this report that address activities, events or developments that the Company
expects, believes or anticipates will or may occur in the future, including such
matters as future capital expenditures, dividends and acquisitions (including
the amount and nature thereof), expansion and other development trends of the
real estate industry, business strategies, expansion and growth of the Company's
operations and other such matters are forward-looking statements. These
statements are based on certain assumptions and analyses made by the Company in
light of its experience and its perception of historical trends, current
conditions, expected future developments and other factors it believes are
appropriate. Such statements are subject to a number of assumptions, risks and
uncertainties, general economic and business conditions, the business
opportunities that may be presented to and pursued by the Company, changes in
laws or regulations and other factors, many of which are beyond the control of
the Company. Any such statements are not guarantees of future performance and
actual results or developments may differ materially from those anticipated in
the forward-looking statements.
The following discussion related to the consolidated financial statements
of the Company and the combined financial statements of SL Green Predecessor
should be read in conjunction with the financial statements appearing elsewhere
in this report, financial statements included in the Company's annual report on
Form 10-K and the financial statements and related notes thereto included in the
Company's registration statement on Form S-11 dated August 14, 1997. In
connection with the Formation Transactions as described in Note 1 to the
financial statements there were significant changes in the financial condition
and results of operations of the Company which are outlined below, consequently,
the comparison of the historical periods prior to August 21, 1997 provides only
limited information regarding the operations of the Company. Therefore, in
addition to the historical comparison, the Company has provided a comparison of
the results of operations on a pro forma basis.
Financial Condition
Commercial real estate properties before accumulated depreciation
increased approximately $168.9 million from March 31, 1998 to December 31, 1997
primarily as a result of the purchase of the operating position in 420 Lexington
Avenue, and the property purchases of 1466 Broadway and 321 West 44th Street.
These acquisitions were funded through a Bridge Facility and cash on hand. The
Bridge Facility also repaid $93 million that was outstanding on the Company's
revolving credit facility.
Results of Operations
Comparison of the three months ended March 31, 1998 to the three months
ended March 31, 1997. For discussion purposes, the results of operations from
the three months ended March 31, 1998 represent the operations of SL Green
Realty Corp and the results of operations for the three months ended March 31,
1997 represent solely the operating results of the SL Green Predecessor. Since
March 31, 1997, the following transactions have occurred that have a material
impact on the comparison of the 1998 and 1997 results: (i) the Formation
Transactions resulted in three buildings previously accounted for under the
equity method (673 Third Avenue, 470 Park Avenue South and 29 West 35th Street)
which are now reported as property results, three acquired buildings (50 West
23rd Street, 1140 Avenue of the Americas and 1372 Broadway) collectively the
"IPO Acquisitions" being included in the 1998 results which were not included in
1997 results, (ii) the results of 110 East 42nd Street (acquired September
1997), 17 Battery Place (acquired December 1997) and 633 Third Avenue (acquired
December 1997) "the 1997 Acquisitions" are included in the consolidated results
for the three months ended March 31, 1998, not included in the 1997 results and
(iii) the results of 420 Lexington Avenue (acquired March 1998), 1466 Broadway
(acquired March 1998) and 321 West 44th Street (acquired March 1998) (the "1998
Acquisitions") which are included for a portion of first quarter 1998 results,
not included in the 1997 results.
The rental revenue for the three months ended March 31, 1998 totaled $19.4
million representing an increase of $17.9 million compared to $1.5 million for
the three months ended March 31, 1997. The increase is primarily attributable to
the revenue associated with the following: (i) the IPO Acquisitions which
increased rental revenue $10.4 million (ii) the 1997 Acquisitions which
increased rental revenue by $5.1 million, (iii) the 1998 Acquisitions which
increased rental revenue by $2.0 million.
Escalation and reimbursement revenue for the three months ended March 31,
1998 totaled $2.1 million representing an increase of $2.0 million compared to
$149,000 for the three months ended March 31, 1997. The increase is primarily
attributable to
13
<PAGE>
the revenue associated with the following: (i) the IPO Acquisitions which
increased revenue by $1.4 million, (ii) the 1997 Acquisitions which increased
revenue by $442,000, (iii) the 1998 Acquisitions which increased revenue by
$88,000.
Investment income totaled $637,000 which represents interest income from
the Battery Park mortgage ($465,000) and remainder form excess cash on hand with
no income during the comparable period in 1997.
As of the IPO date, third party management, leasing and construction
revenues and related expense are incurred by the Service Corporations, which are
95% owned subsidiaries of the Company, which is accounted for on the equity
method. This change in recognition of income and expense from third party
business activities was made in order to be consistent with the REIT qualifying
income test, as defined by the IRS. This change resulted in no management fees,
leasing commissions or construction fee, being recorded by the Company, compared
to the 1997 third party revenue recorded by the predecessor.
Operating expenses for the three months ended March 31, 1998 totaled $5.7
million representing an increase of $4.9 million compared to $.8 million for the
three months ended March 31, 1997. The increase was primarily attributable to:
(i) the IPO Acquisitions which increased operating expenses by $2.6 million (ii)
the 1997 Acquisitions which increased operating expenses by $1.7 million and
(iii) the 1998 Acquisition expenses which increased operating expenses by
$600,000.
Ground rent for the three months ended March 31, 1998 totaled $1.2 million
compared to none for the three months ended March 31, 1997 since ground rent is
being incurred by properties acquired subsequent to March 31, 1997.
Interest expense for the three months ended March 31, 1998 totaled $3.5
million representing an increase of $3.2 million compared to $345,000 for the
three months ended March 31, 1997. The increase is primarily attributable to
interest incurred on the Company's revolving line of credit, and Bridge Facility
($1.7 million) and additional mortgage debt, including interest on the Company's
ground lease and capital lease obligations, ($1.5 million).
Depreciation and amortization for the three months ended March 31, 1998
totaled $2.7 million representing an increase of $2.4 million compared to
$271,000 for the three months ended March 31, 1997. The increase is primarily
attributable to: (i) the IPO Acquisitions which increased depreciation by $1.6
million (ii) the 1997 Acquisitions which increased depreciation by $500,000
(iii) the 1998 Acquisitions which increased depreciation by $150,000, (iv) and
an increase in the amortization of deferred finance costs totaling $200,000
associated with fees incurred on the Company's revolving credit facility and
acquisition facility.
Real estate taxes for the three months ended March 31, 1998 totaled $3.3
million representing an increase of $3.1 million compared to $243,000 for the
three months ended March 31, 1997. The increase is primarily attributable to (i)
the IPO Acquisitions which increased real estate taxes by $1.7 million (ii) the
1997 Acquisitions which increased real estate taxes by $1.0 million and (iii)
the 1998 Acquisitions which increased real estate taxes by $300,000.
Marketing, general and administrative expense for the three months ended
March 31, 1998 totaled $1.0 million representing an increase of $104,000
compared to $896,000 for the three months ended March 31, 1997. The increase is
due to higher costs associated with the Company's recent growth. This increase
is partially off-set by the 1998 third party related costs incurred during 1998
which have been classified to the Service Corporations to correspond with the
classification of third party revenue.
Pro Forma Results of Operations
Comparison of the three months ended March 31, 1998 to the three months
ended March 31, 1997. The Pro forma statements of operations for the three
months ended March 31, 1998 and 1997, respectively, are presented as if the
Company's IPO and the Formation Transactions occurred on January 1, 1997 and the
effect thereof was carried forward through March 31, 1998. In addition to the
IPO and Formation Transactions, the following transactions also affect the 1998
and 1997 comparable results: (i) the results of 110 East 42nd Street (acquired
September 1997), 17 Battery Place (acquired December 1997) and 633 Third Avenue
(acquired December 1997) "the 1997 Acquisitions" are included in the
consolidated results for the three months ended March 31, 1998 and not included
in the 1997 results and (ii) the results of 420 Lexington Avenue (acquired March
1998), 1466 Broadway (acquired March 1998) and 321 West 44th Street (acquired
March 1998) the "1998 Acquisitions" are included in a portion of the 1998
results and not included in the 1997 results.
The pro forma results of operations do not purport to represent what the
Company's results would have been assuming the completion of the Formation
Transactions and the Company's IPO at the beginning of the period indicated, nor
do they purport to
14
<PAGE>
project the Company's financial results of operations at any future date or for
any future period. The pro forma statements of operations should be read in
conjunction with the combined financial statements of SL Green Predecessor
included in the Company's registration statement on Form S-11 dated August 14,
1997 and the condensed consolidated financial statements of the Company's.
included elsewhere herein.
Three months ended March 31, 1998 compared to three months ended March 31, 1997
(in thousands except percentage data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, Dollar Percent
1998 1997 Change Change
---- ---- -------------------
(Historical) (Pro Forma)
<S> <C> <C> <C> <C>
Revenue
Rental revenue ...................................... $19,428 $11,470 $ 7,958 69.4%
Escalations & reimbursement revenues ................ 2,128 1,137 991 87.2
Investment income ................................... 637 -- 637 --
Other income ........................................ 4 1,497 (1,493) (99.7)
------- ------- ------- -------
Total revenues .......................... 22,197 14,104 8,093 57.4
------- ------- ------- -------
Equity in net income of Service Corporations ........ 42 376 (334) (88.8)
------- ------- ------- -------
Expenses
Operating expenses .................................. 5,664 2,907 2,757 94.8
Ground rent ......................................... 1,188 1,059 129 12.2
Interest............................................. 3,494 1,478 2,016 136.4
Depreciation and amortization ....................... 2,693 1,688 1,005 59.5
Real estate taxes ................................... 3,283 2,028 1,255 61.9
Marketing, general and administrative ............... 1,038 714 324 45.4
------- ------- ------- -------
Total expenses .......................... 17,360 9,874 7,486 75.8
------- ------- ------- -------
Income before minority interest ......... $ 4,879 $ 4,606 $ 273 5.9%
======= ======= ======= =======
</TABLE>
15
<PAGE>
The rental revenue for the three months ended March 31, 1998 totaled $19.4
million an increase of $8.0 million versus March 31, 1997. The increase is
primarily attributable to the revenue associated with the following: (i) the
1997 acquisitions which increased rental revenue by $5.1 million, (ii) the 1998
acquisitions which increased rental revenue by $2.0 million and (iii) increased
occupancy of the other portfolio buildings increased revenue $800,000.
Escalation and reimbursement revenue for the three months ended March 31,
1998 totaled $2.1 million an increase of $1.0 million versus March 31, 1997. The
increase is attributable to the revenue associated with: (i) the 1997
Acquisitions which increased revenue by $400,000, (ii) the 1998 Acquisitions
which increased revenue by $100,000 and (iii) the core portfolio where revenue
increased by $500,000.
Investment income totaled $637,000 which represents interest income on the
Battery Place mortgage ($465) and the balance earned from excess cash on hand.
There was no income during the comparable period in 1997.
Other income for the three months ended March 31, 1998 totaled $4,000
representing a decrease of $1.5 million compared to March 31, 1997. The decrease
is primarily attributable to 1997 lease termination income (primarily at 1372
Broadway) that did not have corresponding activity during 1998.
Operating expenses for the three months ended March 31, 1998 totaled $5.7
million representing an increase of $2.8 million compared to $2.9 million for
the three months ended March 31, 1997. The increase was primarily attributable
to: (i) the 1997 Acquisitions which increased operating expenses by $1.7 million
and (ii) the 1998 Acquisitions which increased operating expenses by $800,000.
Interest expense for the three months ended March 31, 1998 totaled $3.5
million representing an increase of $2.0 million compared to $1.5 million for
the three months ended March 31, 1997. The increase is primarily attributable to
interest incurred on the Company's revolving line of credit and acquisition
facility ($1.7 million) and additional mortgage loans ($300,000).
Depreciation and amortization for the three months ended March 31, 1998
totaled $2.7 million representing an increase of $1.0 million compared to $1.7
million for the three months ended March 31, 1997. The increase is primarily
attributable to: (i) the 1997 Acquisitions which increased depreciation by
$500,000 and (ii) the 1998 Acquisitions which increased depreciation by
$200,000, additionally amortization of financing costs increased $200,000 due to
fees recognized on the Company's revolving line of credit and acquisition
facility.
Real estate taxes for the three months ended March 31, 1998 totaled $3.3
million representing an increase of $1.3 million compared to $2.0 million for
the three months ended March 31, 1997. The increase is primarily attributable to
(i) the 1997 Acquisitions which increased real estate taxes by $1 million and
(ii) the 1998 Acquisitions which increased real estate taxes by $300,000.
Marketing, general and administrative expense for the three months ended
March 31, 1998 totaled $1.0 million representing an increase of $324,000
compared to $714,000 for the three months ended March 31, 1997. The increase is
due to higher costs associated with higher public entity costs ($100,000) and
increased costs associated with the Company's recent growth ($186,000).
Liquidity and Capital Resources
The SL Green Predecessor historically relied on fixed and floating rate
mortgage financing plus the use of its capital for the acquisition,
redevelopment and renovation of the Company's properties. The proceeds from the
Offering, as well as the new mortgage loan in the amount of $14 million, which
is secured by 50 West 23rd Street, were utilized to repay existing mortgage
loans, acquire properties, pay Offering and Formation Transaction expenses and
provide working capital. Total outstanding mortgage loans amounted to $46.3
million as a result of the Formation Transactions. All mortgage loans
encumbering the Company's properties have fixed interest rates ranging from
7.47% to 9.0%.
The Company asked the revolving Credit Facility, the "Credit Facility",
banking group to temporarily relieve the Company from its obligations under the
financial covenants of the Credit Facility, in order to close an additional
financing necessary to acquire the Helmsley Properties (the "Bridge Facility").
This Bridge Facility closed on March 18, 1998 financed the Helmsley Properties
acquisition, paid-off the outstanding balance on the Company's Credit Facility
and provides on-going liquidity for future acquisition and corporate needs. The
term of the Bridge Facility is one year. The interest rate is determined by a
schedule of the percent of the loan commitment
16
<PAGE>
outstanding and the duration of the loan commitment outstanding ranging from 170
basis points over LIBOR to 300 basis points over LIBOR (7.3875% at March 31,
1998). The original Credit Facility will remain committed but unused until the
Bridge Facility is paid off through either permanent debt or an equity financing
and the Company's financial covenant obligations are restored.
At March 31, 1998 the mortgage loans and Bridge Facility represent
approximately 46% of the Company's market capitalization based on an estimated
total market capitalization (debt and equity, assuming conversion of all
operating partnership units) of $638.8 million (based on a common stock price of
$25.5625 per share, the closing price of the Company's common stock on the New
York Stock Exchange on March 31, 1998). The Company's principal debt maturities
are scheduled to be $1.49 million and $2.23 million for the nine months ending
December 31, 1998 and the twelve months ending December 31, 1999, respectively.
The Company expects to make distributions to its stockholders primarily
based on its distributions received from the Operating Partnership or, if
necessary, from working capital or borrowings. The Operating Partnership income
will be derived primarily from lease revenue from the Properties and, to a
limited extent, from fees generated by the Service Corporations.
The Company estimates that for the nine months ended December 31, 1998 and
the 12 months ending December 31, 1999, it will incur approximately $14.8
million and $11.8 million, respectively, of capital expenditures on properties
currently owned. In 1998 and 1999, over $12.8 million and $9.7 million,
respectively, of the capital investments are associated with capital investment
dedicated to redevelopment costs associated with properties at or after the
Company's IPO. The Company expects to fund these capital expenditures with the
Credit Facility, operating cash flow and cash on hand. Future property
acquisitions may require substantial capital investments in such properties for
refurbishment and leasing costs. The Company expects that these financing
requirements will be provided primarily from the Credit Facility (once
obtained), from additional borrowings secured by the target property and from
future issuances of equity and debt. The Company believes that it will have
sufficient capital resources to satisfy its obligations during the next 12 month
period. Thereafter, the Company expects that capital needs will be met through a
combination of net cash provided by operations, borrowings and additional equity
issuances.
Cash Flows
Comparison of the three months ended March 31, 1998 to the three months
ended March 31, 1997
Net cash provided by (used in) operating activities increased $10.1
million to $9.9 million provided by operations from $(231,000) used in
operations for the three months ended March 31, 1998 compared to the three
months ended March 31, 1997. The increase was due primarily to the operating
cash flow generated by the IPO Acquisitions, 1997 Acquisitions and 1998
Acquisitions, increased income from other properties and an increase in
investment income. Net cash used in investing activities increased $168.8
million to $168.9 million from $112,000 for the three months ended March 31,
1998 compared to the three months ended March 31, 1997. The increase was due
primarily to the purchase of (i) certain properties in connection with the
Offering (ii) the 1997 Acquisitions and (iii) the 1998 Acquisitions. Net cash
provided by financing activities increased $157.2 million to $156.9 million for
the three months ended March 31, 1998 compared to $339,000 cash used in
financing activities for the three months ended March 31, 1997. The increase was
primarily due to net proceeds from the Company's Bridge Facility ($240.0
million) which were used to pay-off the Company's Credit Facility and purchase
the 1998 acquisitions. This increase was partially off-set by the $5.1 million
dividend distribution payment and $1.5 million in deferred loan cost payments.
Funds from Operations
The White Paper on Funds from Operations approved by the Board of
Governors of NAREIT in March 1995 defines Funds from Operations as net income
(loss) (computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. The Company believes that Funds from Operations is helpful to
investors as a measure of the performance of an equity REIT because, along with
cash flow from operating activities, financing activities and investing
activities, it provides investors with an indication of the ability of the
Company to incur and service debt, to make capital expenditures and to fund
other cash needs. The Company computes Funds from Operations in accordance with
standards established by NAREIT which may not be comparable to Funds from
Operations reported by other REIT's that do not define the term in accordance
with the current NAREIT definition or that interpret the current NAREIT
definition differently than the Company. Funds from Operations does not
represent cash generated from operating activities in accordance with GAAP and
should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indication of the Company's financial performance or
to cash flow from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds available to
fund the Company's cash needs, including its ability to make cash distributions.
17
<PAGE>
On a pro forma basis after giving effect to the [ILLEGIBLE] Transactions,
Funds from Operations for the three months ended March 31, 1998 and 1997
respectively, are as follows:
<TABLE>
<CAPTION>
1998 1997
------- --------
(Historical) (Pro Forma)
<S> <C> <C>
Income before extraordinary item ....................... $ 4,879 $ 4,606
Add:
Depreciation and amortization .......................... 2,693 1,688
Amortization of deferred financing costs and
Depreciation of non-real estate assets ........... (241) (84)
------- -------
FFO .................................................... $ 7,331 $ 6,210
======= =======
</TABLE>
Inflation
Substantially all of the office leases provide for separate real estate
tax and operating expense escalations over a base amount. In addition, many of
the leases provide for fixed base rent increases or indexed escalations. The
Company believes that inflationary increases may be at least partially offset by
the contractual rent increases described above.
Recently Issued Accounting Pronouncements
Financial Accounting Standards Board Statement No. 131 ("FAS No. 131")
"Disclosure about segments of an Enterprise and Related Information" is
effective for financial statements issued for periods beginning after December
15, 1997. FAS No. 131 requires disclosures about segments of an enterprise and
related information regarding the different types of business activities in
which an enterprise engages and the different economic environments in which it
operates.
The Company does not believe that the implementation of FAS No. 131 will
have a material impact on its financial statements.
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
1. Form 8-K dated December 19, 1997, Items 2 and 5.
2. Form 8-K/A No. 1 dated December 19, 1997, Items 2 and 5.
3. Form 8-K/A No. 2 dated December 19, 1997, Item 7.
4. Form 8-K dated February 3, 1998, Items 5 and 7.
5. Form 8-K dated March 18, 1998, Items 2 and 5.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SL GREEN REALTY CORP.
By: /s/ David J. Nettina
-----------------------------
David J. Nettina
Executive Vice President, Chief Operating
Officer and Chief Financial Officer
Date: May 15, 1998
20
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,625
<SECURITIES> 0
<RECEIVABLES> 3,383
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 507,701
<DEPRECIATION> 26,111
<TOTAL-ASSETS> 556,354
<CURRENT-LIABILITIES> 0
<BONDS> 293,022
0
0
<COMMON> 123
<OTHER-SE> 178,667
<TOTAL-LIABILITY-AND-EQUITY> 556,354
<SALES> 22,197
<TOTAL-REVENUES> 22,197
<CGS> 0
<TOTAL-COSTS> 17,360
<OTHER-EXPENSES> 130
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 385
<INCOME-PRETAX> 3,494
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,089
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,089
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
