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 June 30, 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 23,792,311 at August 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 June 30, 1998 (unaudited)
and December 31, 1997. ................................................ 3
Condensed Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 1998 (unaudited) ................................ 5
Condensed Consolidated Statement of Stockholders' Equity for the Six
Months Ended June 30, 1998 (unaudited) ................................ 7
Condensed Consolidated Statement of Cash Flows for the Six Months
Ended June 30, 1998 (unaudited) ....................................... 8
Notes to Condensed Consolidated Financial Statements
(unaudited) ........................................................... 9
SL Green Predecessor
Condensed Combined Statements of Operations for the Three and Six
Months Ended June 30, 1997 (unaudited) ................................ 5
Condensed Combined Statement of Cash Flows for the Six Months Ended
June 30, 1997 (unaudited) ............................................. 8
Notes to Condensed Combined Financial Statements
(unaudited) ........................................................... 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ........................................... 14
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS ............... 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .................................... 23
Signatures .................................................................. 24
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SL Green Realty Corp.
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
June 30, December 31,
1998 1997
--------- ---------
(Unaudited)
Assets
Commercial real estate properties, at cost:
Land ........................................... $ 76,395 $ 53,834
Buildings and improvements ..................... 411,917 272,776
Building leasehold ............................. 83,263 --
Property under capital lease ................... 12,208 12,208
--------- ---------
583,783 338,818
Less accumulated depreciation .................. (29,523) (23,800)
--------- ---------
554,260 315,018
Cash and cash equivalents ...................... 38,478 12,782
Restricted cash ................................ 20,237 10,310
Receivables .................................... 3,559 738
Related party receivables ...................... 2,382 1,971
Deferred rents receivable net of provision
for doubtful accounts of $1,317 and $399
in 1998 and 1997, respectively ............... 14,698 11,563
Investment in Service Corporations ............. 1,432 1,480
Mortgage loans receivable ...................... 21,769 15,500
Deferred costs, net ............................ 7,689 6,099
Other assets ................................... 7,902 7,314
--------- ---------
Total assets ................................... $ 672,406 $ 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)
June 30, December 31,
1998 1997
--------- ---------
(Unaudited)
Liabilities and Stockholders' Equity
Mortgage notes payable ............................ $ 51,860 $ 52,820
Revolving credit facility ......................... -- 76,000
Accrued interest payable .......................... 363 552
Accounts payable and accrued expenses ............. 12,378 3,340
Accounts payable to related parties ............... 690 367
Capitalized lease obligations ..................... 14,612 14,490
Deferred land lease payable ....................... 9,065 8,481
Dividend and distributions payable ................ 10,281 5,136
Security deposits ................................. 16,140 11,475
--------- ---------
Total liabilities ................................. 115,389 172,661
--------- ---------
Minority interest ................................. 40,699 33,906
8% Preferred Income Equity Redeemable Stock
$0.01 par value, $25.00 liquidation preference
25 million shares authorized, 4.6 million
outstanding in 1998 ............................. 109,771 --
Commitments, contingencies and other matters ......
Stockholders' Equity
Common stock, $.01 par value 100,000 shares
authorized, 23,792 and 12,292
issued and outstanding in 1998 and 1997,
respectively .............................. 238 123
Additional paid - in capital ................ 413,404 178,669
Officers' loans ............................. (627) --
Distributions in excess of earnings ......... (6,468) (2,584)
--------- ---------
Total stockholders' equity ........................ 406,547 176,208
--------- ---------
Total liabilities and stockholders' equity ........ $ 672,406 $ 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)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
SL Green SL Green SL Green SL Green
Realty Corp. Predecessor Realty Corp. Predecessor
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
-------- ------- -------- -------
(Consolidated) (Combined) (Consolidated) (Combined)
<S> <C> <C> <C> <C>
Revenues
Rental revenue ............... $ 29,302 $ 1,311 $ 48,730 $ 2,800
Escalation and reimbursement
revenues ................... 4,022 302 6,150 456
Management revenues .......... -- 187 -- 966
Leasing commissions .......... -- 1,552 -- 3,088
Construction revenues ........ -- -- -- 8
Investment income ............ 928 -- 1,565 --
Other income ................. -- 11 4 16
-------- ------- -------- -------
Total revenues ............... 34,252 3,363 56,449 7,334
-------- ------- -------- -------
Equity in loss from Service
Corporations ............... (91) -- (49) --
Equity in net loss from
uncombined joint
ventures .................. (277) -- (564)
Expenses
Operating expenses ........... 8,848 811 14,512 1,625
Ground rent .................. 3,536 -- 4,724 --
Interest ..................... 3,877 368 7,371 713
Depreciation and
amortization ............... 3,951 328 6,644 599
Real estate taxes ............ 5,471 239 8,754 482
Marketing, general and
administrative ............. 1,344 939 2,382 1,835
-------- ------- -------- -------
Total expenses ............... 27,027 2,685 44,387 5,254
-------- ------- -------- -------
Income before minority
interest-Preferred stock
dividends and
extraordinary item ......... 7,134 401 12,013 1,516
Minority interest ............ (762) -- (1,552) --
-------- ------- -------- -------
Income before extraordinary
item and preferred stock
dividends and accretion .... 6,372 401 10,461 1,516
Extraordinary Item:
Loss on early extinguishment
of debt, net of minority
interest ($52).............. (522) -- (522) --
-------- ------- -------- -------
Net income ................... 5,850 401 9,939 1,516
Preferred stock
dividends ................. (1,120) -- (1,120) --
Preferred stock
accretion ................. (71) -- (71) --
-------- ------- -------- -------
Net income available to
common shareholders ........ $ 4,659 $ 401 $ 8,748 $ 1,516
======== ======= ======== =======
</TABLE>
5
<PAGE>
SL Green Realty Corp.
Condensed Statements of Operations -- Continued
(Unaudited)
(Dollars in Thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
SL Green SL Green SL Green
Realty Predecessor Realty SL Green
Corp. June 30, Corp. Predecessor
June 30, 1997 June 30, June 30,
1998 1998 1997
------------ ----------- ----------- ----------
(Consolidated) (Combined) (Consolidated) (Combined)
<S> <C> <C> <C> <C>
Per share data (basic and diluted):
Income per share before extraordinary
item ..................................... $ 0.28 $ 0.60
Extraordinary item per share ................ (0.03) (0.03)
---------- -------
Net income available per common share ....... $ 0.25 $ 0.57
========== =======
Basic weighted average common shares
outstanding .............................. 18,358 15,342
========== =======
Diluted weighted average common shares and
common share equivalents outstanding ..... 18,420 15,434
========== =======
</TABLE>
The accompanying notes are an integral part to these financial statements.
6
<PAGE>
SL Green Realty Corp.
Condensed Consolidated Statement of Stockholders' Equity
(Dollars in Thousands)
<TABLE>
<CAPTION>
Distributions
Common Additional Paid- Officers' 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 .................................... -- -- -- 9,939 9,939
Preferred dividend and accretion requirement .. (1,191) (1,191)
Issuance of common stock net of offering cost
($2,000) and revaluation increase in minority
interest ($6,260) ........................... 115 234,735 234,850
Cash distributions declared ($0.70 per
Common share) ............................... -- -- -- (12,632) (12,632)
Officers' loans, Net .......................... -- -- $ (627) -- (627)
---- -------- --------- -------- ---------
Balance at June 30, 1998 (unaudited) .......... $238 $413,404 $ (627) $ (6,468) $ 406,547
==== ======== ========= ======== =========
</TABLE>
The accompanying notes are an integral part to these financial statements.
7
<PAGE>
SL Green Realty Corp.
Condensed Statements of Cash Flows
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------------
SL Green SL Green
Realty Corp. Predecessor
June 30, 1998 June 30, 1997
-------------- -------------
(Consolidated) (Combined)
<S> <C> <C>
Operating Activities:
Net income .............................................................. $ 9,939 $ 1,516
--------- -------
Adjustments: To reconcile net income with net cash provided by operating
activities:
Minority interest ..................................................... 1,500 --
Depreciation and Amortization ......................................... 6,644 599
Equity in net loss from uncombined joint ventures ..................... -- 744
Equity in net loss from Service Corporations .......................... 49
Deferred rents receivable ............................................. (4,109) (80)
Provision for doubtful accounts ....................................... 974 --
Extraordinary loss .................................................... 574 --
Amortization of Officers' loans ....................................... 33 --
Preferred stock accretion ............................................. 71 --
Changes in operating assets and liabilities:
Restricted cash ....................................................... (7,749) (42)
Receivables ........................................................... (2,821) (112)
Related party receivables ............................................. (1,072) (472)
Deferred lease costs .................................................. (1,939) (191)
Other assets .......................................................... (580) 12
Accounts payable and accrued expenses.................................. 6,966 22
Accounts payable to related parties ................................... 323 (915)
Accrued interest payable .............................................. (189) 19
Deferred land lease payable ........................................... 584 --
Security deposits payable ............................................. 2,487 40
--------- -------
Net cash provided by operating activities ............................ 11,685 1,140
--------- -------
Investing Activities:
Additions to land, buildings and improvements ......................... (244,964) (7,206)
Contribution to partnership investments ............................... -- (25)
Distribution to partnership investments ............................... -- 86
Mortgage loan receivable .............................................. (6,269) --
--------- -------
Net cash used in investing activities ................................. (251,233) (7,145)
--------- -------
Financing Activities:
Payments of mortgage notes payable and loans .......................... (960) (164)
Proceeds from mortgage notes payable .................................. 7,000
Net proceeds from sale of common shares ............................... 243,110 --
Net proceeds from sale of 8% preferred shares ......................... 110,400 --
Payment of revolving credit facility .................................. (93,000) --
Proceeds from revolving credit facility ............................... 17,000 --
Proceeds from bridge loan ............................................. 239,960 --
Repayment of bridge loan .............................................. (239,960) --
Cash distributions to owners .......................................... -- (286)
Cash contributions from owners ........................................ 25
Deferred loan costs ................................................... (1,156) --
Cash dividends and distributions paid on common stock ................. (10,273) --
Capital lease ......................................................... 123 --
--------- -------
Net cash provided by financing activities ............................. 265,244 6,575
--------- -------
Net increase in cash and cash equivalents ............................. 25,696 570
Cash transfer related to Praedium Bar Associates, LLC presented as
combined entity .................................................... -- 185
Cash and cash equivalents at beginning of period ...................... 12,782 476
--------- -------
Cash and cash equivalents at end of period ............................ $ 38,478 $ 1,231
========= =======
Supplemental disclosure of cash flow information:
Cash paid for interest: ................................................. $ 7,560 $ 694
========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
SL Green Realty Corp.
Notes To Condensed Consolidated Financial Statements
(Unaudited)
June 30, 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 believes it 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 "IPO"). Concurrently with the consummation of the
IPO, 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 June 30, 1998, no
shares of Excess Stock are issued and outstanding.
Concurrently with the consummation of the IPO, 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 IPO (after
deducting underwriting discounts) was $228.7 million. The Company utilized
approximately $42.6 million of the IPO 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 held, in the aggregate, a 16.2% limited partnership
interest in the Operating Partnership until May 1998.
May 1998 Public Offerings
On May 12, 1998 the Company completed the sale of 11,500,000 shares of
common stock and 4,600,000 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 ($353 million, net of underwriter's
discount) were used principally to repay the Bridge Facility (see note 4) and
acquire additional properties. These offerings resulted in the reduction of
continuing investor's interest in the Operating Partnership from 16.2% to 9.1%.
Extraordinary Loss
As a result of the Company's May 1998 equity offerings, on May 18, 1998
the Company repaid the Bridge Loan Facility prior to its scheduled maturity date
on March 18, 1999. The Company's early extinguishment of the Bridge Facility
resulted in the write-off of unamortized deferred financing costs totaling
approximately $574,000 which been classified as an extraordinary loss during the
quarter ended June 30, 1998.
9
<PAGE>
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.
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:
Six months Three months
ended June ended June
30, 1997 30, 1997
-------- -------
(Unaudited) (Unaudited)
Condensed statement of operations
Rental revenue and escalations .................... $ 10,918 $ 5,477
Other income ...................................... 10 10
-------- -------
10,928 5,471
-------- -------
Interest .......................................... 4,163 2,094
Depreciation and amortization ..................... 1,982 1,013
Operating and other expenses ...................... 5,822 2,850
-------- -------
Total expenses .................................... 11,967 5,957
-------- -------
Operating loss before outside partner's interest .. (1,039) (486)
Elimination of inter-company management fees ...... 180 91
Other partner share of income ..................... 295 118
-------- -------
Loss allocated to the SL Green Predecessor ........ $ (564) $ (277)
======== =======
10
<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 periods
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 statements
on Form S-11 dated May 12, 1998 and 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
does 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 owned by
the Company are 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 Partner 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
On June 1, 1998 the Company acquired the property located at 440 Ninth
Avenue for approximately $32 million in cash. The 18-story, 340,000 square foot
building was 75% occupied at the date of acquisition. In connection with this
purchase, the Company obtained a $6.2 million mortgage note receivable secured
by the property located at 38 East 30th Street. The note bears interest at 8%
and is due October 1998.
On May 21, 1998 the Company acquired the outstanding mortgage of the
property located at 711 Third Avenue for approximately $44.6 million in cash.
The 20-story, 520,000 square foot building was 78% occupied at the date of
acquisition. The Company's outstanding mortgage position provides for the
Company to receive 100% of the economic benefit from the property, and
accordingly for the period owned, the Company has recorded the operating results
of the property in the statement of operations.
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.
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.
11
<PAGE>
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.
The following table summarizes, on an unaudited pro forma basis, the
combined results of operations of the Company for the six months ended June 30,
1998 and 1997 as though each acquisition and the Formation Transactions since
January 1, 1997 was completed at the beginning of such period. The pro forma
results are based upon the Company utilizing the Bridge Facility and does not
contemplate the Company's recent Public Offering (see note 5).
1998 1997
---- ----
Total revenues ................................. $ 73,350 $ 68,275
Pro forma net income ........................... $ 13,828 $ 13,335
Pro forma earnings per share (basic and diluted)
Per common share - basic ....................... $ 0.58 $ 0.56
Per common and common equivalent share - diluted $ 0.58 $ 0.56
3. Hypothecated Loans
The loans total approximately $173 million and are collateralized by the
mortgages encumbering the Operating Partnership's interests, in 633 Third
Avenue. The loans are collateralized by an equivalent amount of US Treasury
securities, which mature on November 30, 1998. Due to the right of off-set, the
mortgages and related securities are not presented on the balance sheet.
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 provided 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 to 300 basis points over LIBOR.
The Bridge Facility was secured by the unencumbered assets of the Company
including mortgage tax credits previously associated with the Company's
hypothecated loan. The Bridge Facility was repaid through the Company's May 1998
equity financings and resulted in an extraordinary charge to earnings. (See note
1). As of June 30, 1998 the Company's revolving credit facility was reinstated
with an availability of $140 million with a 6.97% borrowing rate. All previously
unencumbered assets were also released from the Credit Facility collateral pool.
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 during the period. To arrive at the diluted per common share, the common
stock equivalents resulted in increasing the number of shares outstanding by
approximately 62 and 92 shares for the three and six months ended June 30, 1998,
respectively. The common stock equivalent shares represent options outstanding
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.
12
<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 $460 and $496 for the three
and six month periods ended June 30, 1998. SL Green Predecessor's transactions
with the related parties amounted to $70 and $193 for the three and six month
periods ended June 30, 1997.
9. Subsequent Events
On July 2, 1998 the Company acquired 50% of the fee interest in 711 Third
Avenue for $20 million and 44,772 Operating Partnership Units. In addition, the
Company's ownership of the outstanding mortgage was converted into an operating
sub-leasehold.
On August 6, 1998 the Company closed the acquisition of an existing first
mortgage on 636 11th Avenue, which is a 469,000 square foot industrial and
warehouse block front property located between 46th and 47th Streets for $10
million. The acquisition was funded through borrowings on the Company's line of
credit. This acquisition is the first step in acquiring the entire fee interest
in the property, which is contracted to occur in January 1999. Total acquisition
costs, inclusive of the mortgage interest in the property will be approximately
$32.5 million.
On August 13, 1998 the Company purchased 1412 Broadway - The Fashion
Gallery Building - for $72 million, plus approximately $5 million for
reimbursement of loan prepayment charges and $5 million related to capital
expenditures, commissions and other closing costs. The acquisition was funded
through borrowings on the Company's line of credit. The property is a 25-story
office building totaling 309,000 and current occupancy, including pending leases
of 89.5%.
On June 26, 1998, the Company's Board of Directors declared a $0.35 per
share dividend to stockholders of record on June 30, 1998. The dividend,
together with the distribution with respect to outstanding units of partnership
interest in the Operating Partnership, totals $9.2 million and was paid July 15,
1998. The Company's Board of Directors declared the 8% dividend on the Company's
PIERS for the period May 18, 1998 (issuance date) to June 30, 1998 which totals
$1.1 million and was paid on July 15, 1998.
13
<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 statements on Form S-11 dated May 12, 1998 and 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 $245 million from December 31, 1997 to June 30, 1998
primarily as a result of the purchase of the operating position in 420 Lexington
Avenue and 711 Third Avenue, and the property purchases of 1466 Broadway, 321
West 44th Street and 440 Ninth Avenue. These acquisitions were funded through a
Bridge Facility and cash on hand. The Bridge Loan also repaid $93 million that
was outstanding on the Company's revolving credit facility. The Company
completed two equity offerings on May 12, 1998, which included the issuance of
11,500,000 shares of common stock and 4,600,000 shares of 8% Preferred Income
Equity Redeemable Shares with a liquidation preference of $25.00 per share. The
offerings raised net proceeds to the Company of $353 million, after underwriters
discount. Proceeds from the offerings were used to repay the Bridge Facility
($240 million), acquire 440 Ninth Avenue ($32 million) and the outstanding
mortgage on 711 Third Avenue ($44.6 million) and the remainder was retained as
cash on hand. A substantial amount of the proceeds retained as cash at June 30,
1998 were subsequently used to complete the acquisition of a 50% interest in the
fee at 711 Third Avenue in July 1998.
Results of Operations
Comparison of the six months ended June 30, 1998 to the six months ended
June 30, 1997. For discussion purposes, the results of operations from the six
months ended June 30, 1998 represent the operations of SL Green Realty Corp and
the results of operations for the six months ended June 30, 1997 represent
solely the operating results of the SL Green Predecessor (represented by 70 West
36th Street, 1414 Avenue of the Americas). Since June 30, 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 1998 and were not
included in the 1997 results (iii) the results of 420 Lexington Avenue (acquired
March 1998), 1466 Broadway (acquired March 1998), 321 West 44th Street (acquired
March 1998) 711 Third Avenue (acquired May 1998) and 440 Ninth Avenue (acquired
June 1998) (the "1998 Acquisitions") which are included for a portion of the
1998 results, and were not included in the 1997 results.
The rental revenue for the six months ended June 30, 1998 totaled $48.7
million representing an increase of $45.9 million compared to $2.8 million for
the six months ended June 30, 1997. The increase is primarily attributable to
the revenue associated with the following: (i) the IPO Acquisitions which
increased rental revenue $22.0 million (ii) the 1997 Acquisitions which
increased rental revenue by $10.1 million, (iii) the 1998 Acquisitions which
increased rental revenue by $13.6 million and (iv) $0.2 million due to increased
rental revenue in the Predecessor buildings.
14
<PAGE>
Escalation and reimbursement revenue for the six months ended June 30,
1998 totaled $6.2 million representing an increase of $5.7 million compared to
$0.5 million for the six months ended June 30, 1997. The increase is primarily
attributable to the revenue associated with the following: (i) the IPO
Acquisitions which increased revenue by $2.5 million, (ii) the 1997 Acquisitions
which increased revenue by $0.9 million, (iii) the 1998 Acquisitions which
increased revenue by $2.3 million.
Investment income totaled $1.6 million, which represents interest income
from the 17 Battery Park mortgage ($0.9 million) 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 are 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. Consequently, management fees, leasing
commissions and construction fees, were recorded on these operating
subsidiaries, compared to the 1997 third party revenue, which was recorded on
the predecessor entity.
Operating expenses for the six months ended June 30, 1998 totaled $14.5
million representing an increase of $12.9 million compared to $1.6 million for
the six months ended June 30, 1997. The increase was primarily attributable to:
(i) the IPO Acquisitions which increased operating expenses by $5.2 million (ii)
the 1997 Acquisitions which increased operating expenses by $3.4 million and
(iii) the 1998 Acquisition expenses which increased operating expenses by $4.3
million.
Ground rent for the six months ended June 30, 1998 totaled $4.7 million
compared to none for the six months ended June 30, 1997 since ground rent is
being incurred by properties acquired subsequent to June 30, 1997.
Interest expense for the six months ended June 30, 1998 totaled $7.4
million representing an increase of $6.7 million compared to $0.7 million for
the six months ended June 30, 1997. The increase is primarily attributable to
(i) interest incurred on the Company's revolving line of credit, and Bridge
Facility ($4.3 million) and (ii) additional mortgage debt, including interest on
the Company's capital lease obligations, ($2.4 million).
Depreciation and amortization for the six months ended June 30, 1998
totaled $6.6 million representing an increase of $6.0 million compared to $0.6
million for the six months ended June 30, 1997. The increase is primarily
attributable to: (i) the IPO Acquisitions which increased depreciation by $3.1
million (ii) the 1997 Acquisitions which increased depreciation by $1.0 million
(iii) the 1998 Acquisitions which increased depreciation by $1.4 million, (iv)
and an increase in the amortization of deferred finance costs totaling $0.5
million associated with fees incurred on the Company's revolving credit facility
and Bridge Loan.
Real estate taxes for the six months ended June 30, 1998 totaled $8.8
million representing an increase of $8.3 million compared to $0.5 million for
the six months ended June 30, 1997. The increase is primarily attributable to
(i) the IPO Acquisitions which increased real estate taxes by $3.4 million (ii)
the 1997 Acquisitions which increased real estate taxes by $2.0 million and
(iii) the 1998 Acquisitions which increased real estate taxes by $2.9 million.
Marketing, general and administrative expense for the six months ended
June 30, 1998 totaled $2.4 million representing an increase of $0.6 million
compared to $1.8 million for the six months ended June 30, 1997. The increase is
due to increased personnel 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 reclassification of third party revenue.
Comparison of the three months ended June 30, 1998 to the three months
ended June 30, 1997. For discussion purposes, the results of operations from the
three months ended June 30, 1998 represent the operations of SL Green Realty
Corp and the results of operations for the three months ended June 30, 1997
represent solely the operating results of the SL Green Predecessor (represented
by 70 West 36th Street, 1414 Avenue of the Americas). Since June 30, 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 June 30, 1998, not included in the 1997 results and (iii) the results of
420 Lexington Avenue (acquired March 1998), 1466 Broadway (acquired March 1998),
321 West 44th Street (acquired March 1998) 711 Third Avenue (acquired May 1998)
and 440 Ninth Avenue (acquired June 1998) (the "1998 Acquisitions") which are
included for all or a portion of second quarter 1998 results, and not included
in the 1997 results.
15
<PAGE>
The rental revenue for the three months ended June 30, 1998 totaled $29.3
million representing an increase of $28.0 million compared to $1.3 million for
the three months ended June 30, 1997. The increase is primarily attributable to
the revenue associated with the following: (i) the IPO Acquisitions which
increased rental revenue $11.1 million (ii) the 1997 Acquisitions which
increased rental revenue by $5.0 million, (iii) the 1998 Acquisitions which
increased rental revenue by $11.7 million and (iv) the Predecessor portfolio
which increased $0.2 million due to increased occupancy.
Escalation and reimbursement revenue for the three months ended June 30,
1998 totaled $4.0 million representing an increase of $3.7 million compared to
$0.3 million for the three months ended June 30, 1997. The increase is primarily
attributable to the revenue associated with the following: (i) the IPO
Acquisitions which increased revenue by $0.9 million, (ii) the 1997 Acquisitions
which increased revenue by $0.5 million, (iii) the 1998 Acquisitions which
increased revenue by $2.3 million.
Investment income totaled $0.9 million, which represents interest income
from the 17 Battery Park mortgage ($0.5 million) 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 June 30, 1998 totaled $8.8
million representing an increase of $8.0 million compared to $0.8 million for
the three months ended June 30, 1997. The increase was primarily attributable
to: (i) the IPO Acquisitions which increased operating expenses by $2.7 million
(ii) the 1997 Acquisitions which increased operating expenses by $1.7 million
and (iii) the 1998 Acquisition expenses which increased operating expenses by
$3.6 million.
Ground rent for the three months ended June 30, 1998 totaled $3.5 million
compared to none for the three months ended June 30, 1997 since ground rent is
being incurred by properties acquired subsequent to June 30, 1997.
Interest expense for the three months ended June 30, 1998 totaled $3.9
million representing an increase of $3.5 million compared to $0.4 million for
the three months ended June 30, 1997. The increase is primarily attributable to
interest incurred on the Company's Bridge Facility ($2.4 million) and additional
mortgage debt, including interest on the Company's capital lease obligations,
($1.1 million).
Depreciation and amortization for the three months ended June 30, 1998
totaled $4.0 million representing an increase of $3.7 million compared to $0.3
million for the three months ended June 30, 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 $0.5 million
(iii) the 1998 Acquisitions which increased depreciation by $1.2 million, (iv)
and an increase in the amortization of deferred finance costs totaling $0.4
million associated with fees incurred on the Company's revolving credit facility
and Bridge Loan Facility.
Real estate taxes for the three months ended June 30, 1998 totaled $5.5
million representing an increase of $5.3 million compared to $0.2 million for
the three months ended June 30, 1997. The increase is primarily attributable to
(i) the IPO Acquisitions which increased real estate taxes by $1.8 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 $2.5 million.
Marketing, general and administrative expense for the three months ended
June 30, 1998 totaled $1.3 million representing an increase of $0.4 million
compared to $0.9 million for the three months ended June 30, 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 reclassification of third party revenue.
Pro Forma Results of Operations
Comparison of the six months ended June 30, 1998 to the six months ended
June 30, 1997. The Pro forma statements of operations for the six months ended
June 30, 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 June 30, 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), 321 West 44th Street (acquired March 1998) 711
Third
16
<PAGE>
Avenue (acquired May 1998) and 440 Ninth Avenue (acquired June 1998) the "1998
Acquisitions" are included in a portion of the 1998 results and not included in
the 1997 results. During May 1998, the Company completed two public offerings
for 11.5 million common shares and 4.6 million of preferred shares resulting in
net proceeds of $353 million, net of underwriting costs.
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 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 statements on Form S-11 dated
May 12, 1998 August 14, 1997 and the condensed consolidated financial statements
of the Company, included elsewhere herein.
Six months ended June 30, 1998 compared to six months ended June 30, 1997
(in thousands except percentage data)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30, Dollar
1998 1997 Change
-------- ------- --------
(Historical) (Pro Forma)
<S> <C> <C> <C>
Revenue
Rental revenue ............................. $ 48,730 $23,018 $ 25,712
Escalations & reimbursement revenues ....... 6,150 2,474 3,676
Investment income .......................... 1,565 -- 1,565
Other income ............................... 4 1,537 (1,533)
-------- ------- --------
Total revenues ................ 56,449 27,029 29,420
-------- ------- --------
Equity in net (loss) income of Service
Corporations ............................. (49) 1,907 (1,956)
-------- ------- --------
Expenses
Operating expenses ......................... 14,512 5,711 8,801
Ground rent ................................ 4,724 2,152 2,572
Interest ................................... 7,371 2,645 4,726
Depreciation and amortization .............. 6,644 3,630 3,014
Real estate taxes .......................... 8,754 4,078 4,676
Marketing, general and administrative ...... 2,382 1,395 987
-------- ------- --------
Total expenses ................ 44,387 19,611 24,776
-------- ------- --------
Income before minority interest
Preferred stock dividend and
extraordinary loss ............ $ 12,013 $ 9,325 $ 2,688
======== ======= ========
</TABLE>
17
<PAGE>
The rental revenue for the six months ended June 30, 1998 totaled $48.7
million an increase of $25.7 million compared to June 30, 1997. The increase is
primarily attributable to the revenue associated with the following properties
not previously owned or acquired at the IPO date: (i) the 1997 acquisitions
which increased rental revenue by $10.1 million, (ii) the 1998 acquisitions
which increased rental revenue by $13.6 million and (iii) increased occupancy of
the other portfolio buildings increased revenue $2.0 million.
Escalation and reimbursement revenue for the six months ended June 30,
1998 totaled $6.2 million an increase of $3.7 million compared to June 30, 1997.
The increase is attributable to the revenue associated with: (i) the 1997
Acquisitions which increased revenue by $0.9 million, (ii) the 1998 Acquisitions
which increased revenue by $2.4 million and (iii) the properties owned or
acquired at the IPO date where revenue increased by $0.4 million.
Investment income totaled $1.6 million, which represents interest income
on the 17 Battery Place mortgage ($0.9 million), and the balance earned from
excess cash on hand. There was no investment income during the comparable period
in 1997.
Other income for the six months ended June 30, 1998 totaled $0.04 million
representing a decrease of $1.5 million compared to June 30, 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 six months ended June 30, 1998 totaled $14.5
million representing an increase of $8.8 million compared to $5.7 million for
the six months ended June 30, 1997. The increase was primarily attributable to
properties not previously owned or acquired at eh IPO date: (i) the 1997
Acquisitions which increased operating expenses by $3.4 million and (ii) the
1998 Acquisitions which increased operating expenses by $4.3 million (iii) $1.1
million of increased costs from the core and IPO properties primarily due to the
provision for bad debts which totals $0.6 million.
Ground rent for the six months ended June 30, 1998 totaled $4.7 million
representing an increase of $2.6 million compared to $2.1 million for the six
months ended June 30, 1997. The increase is primarily attributable to the ground
rent on 420 Lexington Avenue ($2.5 million) and 711 Third Avenue ($0.1 million).
Interest expense for the six months ended June 30, 1998 totaled $7.4
million representing an increase of $4.7 million compared to $2.7 million for
the six months ended June 30, 1997. The increase is primarily attributable to
interest incurred on the Company's revolving line of credit and Bridge Loan
($4.3 million) and additional mortgage loans ($0.4 million).
Depreciation and amortization for the six months ended June 30, 1998
totaled $6.6 million representing an increase of $3.0 million compared to $3.6
million for the six months ended June 30, 1997. The increase is primarily
attributable to properties not previously owned or acquired at the IPO date: (i)
the 1997 Acquisitions which increased depreciation by $1.0 million and (ii) the
1998 Acquisitions which increased depreciation by $1.4 million, additionally
amortization of financing costs increased $0.6 million due to fees recognized on
the Company's revolving line of credit and acquisition facility.
Real estate taxes for the six months ended June 30, 1998 totaled $8.8
million representing an increase of $4.7 million compared to $4.1 million for
the six months ended June 30, 1997. The increase is primarily attributable to
properties not previously owned or acquired at the IPO date (i) the 1997
Acquisitions which increased real estate taxes by $2.0 million and (ii) the 1998
Acquisitions which increased real estate taxes by $2.8 million. These increases
were partially off-set by a $0.2 million reduction in taxes related to the core
and IPO properties primarily from lower tax rates and management's effort to
obtain reductions in assessed values.
Marketing, general and administrative expense for the six months ended
June 30, 1998 totaled $2.4 million representing an increase of $1.0 million
compared to $1.4 million for the six months ended June 30, 1997. The increase is
due to additional staffing, and incremental absorption of lost third party
management related costs ($0.6 million), costs associated with management
information systems and year 2000 compliance ($0.1 million) and higher public
entity costs ($0.3 million).
Comparison of the three months ended June 30, 1998 to the three months
ended June 30, 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 June 30, 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), 321 West 44th Street (acquired March 1998) 711
Third Avenue (acquired May 1998) and 440 Ninth Avenue (acquired June 30, 1998)
are included in the entire or in a portion of the 1998 results and not included
in the 1997 results. During May 1998, the Company completed two public offerings
for 11.5 million common shares and 4.6 million of preferred shares resulting in
net proceeds of $353 million, net of underwriting costs.
18
<PAGE>
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 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 consolidated financial statements of SL Green Realty
Corp. included elsewhere herein.
Three months ended June 30, 1998 compared to three months ended June 30, 1997
(in thousands except percentage data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30, Dollar
1998 1997 Change
-------- ------- --------
(Historical) (Pro Forma)
<S> <C> <C> <C>
Revenue
Rental revenue ............................. $ 29,302 $11,548 $ 17,754
Escalations & reimbursement revenues ....... 4,022 1,337 2,685
Investment income .......................... 928 -- 928
Other income ............................... -- 40 (40)
-------- ------- --------
Total revenues ................. 34,252 12,925 21,327
-------- ------- --------
Equity in net income of service corporations (91) 1,531 (1,622)
-------- ------- --------
Expenses
Operating expenses ......................... 8,848 2,804 6,044
Ground rent ................................ 3,536 1,093 2,443
Interest ................................... 3,877 1,167 2,710
Depreciation and amortization .............. 3,951 1,942 2,009
Real estate taxes .......................... 5,471 2,050 3,421
Marketing, general and administrative ...... 1,344 681 663
-------- ------- --------
Total expenses ................. 27,027 9,737 17,290
-------- ------- --------
Income before minority interest,
Preferred dividends and
Extraordinary loss ............. $ 7,134 $ 4,719 $ 2,415
======== ======= ========
</TABLE>
The rental revenue for the three months ended June 30, 1998 totaled $29.3
million an increase of $17.8 million compared to June 30, 1997. The increase is
primarily attributable to the revenue associated with the following properties
not previously owned or acquired at the IPO date: (i) the 1997 acquisitions
which increased rental revenue by $5.0 million, (ii) the 1998 acquisitions which
increased rental revenue by $11.7 million and (iii) increased occupancy of the
other portfolio buildings increased revenue $1.1 million.
Escalation and reimbursement revenue for the three months ended June 30,
1998 totaled $4.0 million an increase of $2.7 million compared to June 30, 1997.
The increase is attributable to the revenue associated with properties not
previously owned or acquired at the IPO date: (i) the 1997 Acquisitions which
increased revenue by $0.4 million and (ii) the 1998 Acquisitions which increased
revenue by $2.3 million.
Investment income totaled $0.9 million, which represents interest income
on the 17 Battery Place mortgage ($0.5 million), and the balance earned from
excess cash on hand. There was no investor income during the comparable period
in 1997.
Operating expenses for the three months ended June 30, 1998 totaled $8.8
million representing an increase of $6.0 million compared to $2.8 million for
the three months ended June 30, 1997. The increase was primarily attributable to
properties not previously owned or acquired at the IPO date: (i) the 1997
Acquisitions which increased operating expenses by $1.7 million and (ii) the
1998 Acquisitions which increased operating expenses by $3.6 million and (iii)
the remaining $0.6 million increase represents increased operating costs in the
core and IPO portfolio with $0.3 million representing the 1998 bad debt
provision.
19
<PAGE>
Ground rent for the three months ended June 30, 1998 totaled $3.5 million
representing an increase of $2.4 million compared to $1.1 million for the three
months ended June 30, 1997. The increase is attributable to ground rent on 420
Lexington Avenue ($2.3 million) and 711 Third Avenue ($0.1 million).
Interest expense for the three months ended June 30, 1998 totaled $3.9
million representing an increase of $2.7 million compared to $1.2 million for
the three months ended June 30, 1997. The increase is primarily attributable to
interest incurred on the Company's revolving line of credit and acquisition
facility ($2.3 million) and additional mortgage loans ($0.4 million).
Depreciation and amortization for the three months ended June 30, 1998
totaled $4.0 million representing an increase of $2.1 million compared to $1.9
million for the three months ended June 30, 1997. The increase is primarily
attributable to properties not previously owned or acquired at the IPO date: (i)
the 1997 Acquisitions which increased depreciation by $0.5 million and (ii) the
1998 Acquisitions which increased depreciation by $1.2 million, additionally
amortization of financing costs increased $0.4 million due to fees recognized on
the Company's revolving line of credit and acquisition facility.
Real estate taxes for the three months ended June 30, 1998 totaled $5.5
million representing an increase of $3.4 million compared to $2.1 million for
the three months ended June 30, 1997. The increase is primarily attributable to
properties not previously owned or acquired at the IPO date (i) the 1997
Acquisitions which increased real estate taxes by $1.0 million and (ii) the 1998
Acquisitions which increased real estate taxes by $2.4 million.
Marketing, general and administrative expense for the three months ended
June 30, 1998 totaled $1.3 million representing an increase of $0.6 million
compared to $0.7 million for the three months ended June 30, 1997. The increase
is due to additional staffing and incremental absorption of lost third party
management related costs ($0.4 million), costs associates with management
information systems and year 2000 compliance ($0.1 million) and higher public
entity costs ($0.2 million).
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 requested 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 was one year. The interest rate was
determined by a schedule of the percent of the loan commitment outstanding and
the duration of the loan commitment outstanding ranging from 170 basis points to
300 basis points over LIBOR. The Bridge Facility was paid off on May 18, 1998
through proceeds from the 1998 public offerings. The Company's revolving Credit
Facility has been restored, currently there are no borrowings outstanding and
total availability is $140 million the effective borrowing at June 30, 1998 was
6.97%.
At June 30, 1998 the mortgage loans represent approximately 6.86% of the
Company's market capitalization based on an estimated total market
capitalization (debt and equity including preferred stock), assuming conversion
of all operating partnership units) of $755.8 million (based on a common stock
price of $22.50 per share, the closing price of the Company's common stock on
the New York Stock Exchange on June 30, 1998). The Company's principal debt
maturities are scheduled to be $1.0 million and $2.23 million for the remaining
six 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 six months ended December 31, 1998 and
the 12 months ending December 31, 1999, it will incur approximately $12.8
million and $13.8 million, respectively, of capital expenditures on properties
currently owned. In 1998 and 1999, over $11.3 million and $11.6 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, from
additional borrowings secured by the acquisition property and from future
issuances of equity and debt. The Company believes that it will
20
<PAGE>
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 six months ended June 30, 1998 to the six months ended
June 30, 1997
Net cash provided by (used in) operating activities increased $10.6
million to $11.7 million provided by operations from $1.1 million provided by
operations for the six months ended June 30, 1998 compared to the six months
ended June 30, 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 $244.1 million to $251.2 million
from $7.1 million for the six months ended June 30, 1998 compared to the six
months ended June 30, 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 $258.6 million to $265.2 million for the six months ended
June 30, 1998 compared to $6.6 million cash used in financing activities for the
six months ended June 30, 1997. The increase was primarily due to net proceeds
from the Company's Public Offerings of common stock ($241.7 million) and
preferred stock ($109.7 million) which were used to pay-off the Company's Bridge
Loan Facility ($240 million) and purchase the 1998 acquisitions. The repayment
in the Bridge Loan resulted in an extraordinary loss of $0.6 million. This
increase was partially off-set by the $9.1 million common stock and OP Unit
dividend distribution payments and $1.2 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.
On a pro forma basis after giving effect to the Formation Transactions,
Funds from Operations for the three and six months ended June 30, 1998 and 1997
respectively, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- -------------------------
1998 1997 1998 1997
------- ------- -------- --------
(Historical) (Pro Forma) (Historical) (Pro Forma)
<S> <C> <C> <C> <C>
Income before minority interest and
extraordinary item .......................... $ 7,134 $ 4,719 $ 12,013 $ 9,325
Add:
Depreciation and amortization ............... 3,951 1,942 6,644 3,630
Less:
Preferred stock dividend .................... (1,120) -- (1,120) --
Amortization of deferred financing costs
and Depreciation of non-real estate
assets ...................................... (384) (10) (625) (73)
------- ------- -------- --------
FFO ......................................... $ 9,581 $ 6,651 $ 16,912 $ 12,882
======= ======= ======== ========
</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
21
<PAGE>
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.
Year 2000 Compliance
The Company has determined that it will need to modify or replace
significant portions of it software so that its computer systems will function
properly with respect to dates in the year 2000 and beyond. The Company's
comprehensive Year 2000 initiative is being managed by a team of internal staff
and outside consultants. The team's activities are designed to ensure that there
is no adverse effect on the Company's core business operations and that
transactions with customers, suppliers, and financial institutions are fully
supported. The Company expects to have all accounting and financial data systems
year 2000 compliant by the end of the third quarter of 1998 through an on-going
accounting and computer network systems conversion. The Company is currently
developing a plan to assess the year 2000 effect, if any, on other operating
systems (i.e.: HVAC and elevator systems). In addition, the Company is assessing
third-party compliance with year 2000 compliance issues. While the Company
believes its planning efforts are adequate to address its Year 2000 concerns,
there can be no guarantee that the systems of other companies on which the
Company's systems and operations rely will be converted on a timely basis and
will not have a material effect on the Company. The cost of the Year 2000
initiatives is not expected to be material to the Company's results of operation
or financial position.
22
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.
The Company held an annual meeting of stockholders on May 28, 1998, at
which the following matters were voted upon:
1. To elect one class I director of the Company to service until the
2001 Annual Meeting of stockholders.
2. To ratify the selection of Ernst & Young LLP as the independent
auditors of the Company for the fiscal year ending December 31,
1998.
3. To approve the Company's amended 1998 stock option and incentive
plan.
The results of the meeting were as follows:
FOR AGAINST ABSTAIN
--- ------- -------
Director: Edwin Thomas Burton, III 7,176,564 -- 11,551
Proposal 2 7,182,895 2,900 2,520
Proposal 3 6,974,038 58,226 185,851
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
4. Form 8-K dated March 18, 1998, Item 7.
5. Form 8-K dated April 24, 1998, Items 2 and 7.
23
<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/ Ann Iseley
----------------------------------
Ann Iseley
Executive Vice President and Chief
Financial Officer
Date: August 13, 1998
24
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 38,478
<SECURITIES> 0
<RECEIVABLES> 3,559
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 583,783
<DEPRECIATION> 29,523
<TOTAL-ASSETS> 672,406
<CURRENT-LIABILITIES> 0
<BONDS> 51,860
109,771
0
<COMMON> 238
<OTHER-SE> 406,309
<TOTAL-LIABILITY-AND-EQUITY> 672,406
<SALES> 56,449
<TOTAL-REVENUES> 56,449
<CGS> 0
<TOTAL-COSTS> 37,016
<OTHER-EXPENSES> 49
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,371
<INCOME-PRETAX> 10,767
<INCOME-TAX> 0
<INCOME-CONTINUING> 10,767
<DISCONTINUED> 0
<EXTRAORDINARY> (522)
<CHANGES> 0
<NET-INCOME> 9,939
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
