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, 1999
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.)
420 Lexington Avenue, New York, New York
10170 (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| N0 |_|.
The number of shares outstanding of the registrant's common stock, $0.01 par
value was 24,191,826 at May 12, 1999.
<PAGE>
SL GREEN REALTY CORP.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAGE
----
Condensed Consolidated Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998..............................................3
Condensed Consolidated Statements of Income for the three months
ended March 31, 1999 and 1998 (unaudited)......................................5
Condensed Consolidated Statement of Stockholders' Equity for the
three months ended March 31, 1999 (unaudited)..................................6
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 1998 (unaudited)...............................7
Notes to Condensed Consolidated Financial Statements
(unaudited)....................................................................8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................12
ITEM 3. MARKET RISK AND RISK MANAGEMENT POLICIES.............................18
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS ...................................................19
ITEM 2 CHANGES IN SECURITIES ...............................................19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................19
Signatures....................................................................20
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SL Green Realty Corp.
Condensed Consolidated Balance Sheets
(Dollars in thousands)
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
Assets
Commercial real estate properties, at cost:
Land and land interests ............................... $ 128,016 $ 112,123
Buildings and improvements ............................ 566,633 492,568
Building leasehold .................................... 107,561 80,162
Property under capital lease .......................... 12,208 12,208
--------- ---------
814,418 697,061
Less accumulated depreciation ......................... (41,911) (37,355)
--------- ---------
772,507 659,706
Cash and cash equivalents ............................. 21,411 6,236
Restricted cash ....................................... 23,863 18,635
Receivables net of allowance of $597 and $100 in 1999
and 1998, respectively .............................. 5,847 3,951
Related party receivables ............................. 362 182
Deferred rents receivable net of provision for doubtful
accounts of $3,101 and $2,369 in 1999 and 1998,
respectively ........................................ 25,940 20,891
Investment in and advances to Service Corporations .... 9,249 10,694
Mortgage loans receivable ............................. 26,401 26,401
Deferred costs, net ................................... 22,108 15,282
Other assets .......................................... 12,619 15,755
--------- ---------
Total assets .......................................... $ 920,307 $ 777,733
========= =========
The accompanying notes are an integral part to these financial statements.
<PAGE>
SL Green Realty Corp.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
Liabilities and Stockholders' Equity
Mortgage notes payable ................................. $ 94,278 $ 50,862
Revolving credit facility .............................. 112,800 23,800
Secured bridge facilities .............................. 87,500 87,500
Accrued interest payable ............................... 1,711 494
Accounts payable and accrued expenses .................. 9,428 5,588
Capitalized lease obligations .......................... 14,808 14,741
Deferred land lease payable ............................ 10,388 9,947
Dividend and distributions payable ..................... 11,670 11,585
Security deposits ...................................... 17,805 16,949
--------- ---------
Total liabilities ...................................... 360,388 221,466
--------- ---------
Minority interests ..................................... 44,949 41,491
Commitments, contingencies and other matters ...........
8% Preferred Income Equity Redeemable Shares (SM) $0.01
par value $25.00 mandatory liquidation preference,
25,000 authorized, 4,600 outstanding in 1999 and 1998 .. 110,049 109,950
Stockholders' Equity
Common stock, $.01 par value 100,000 shares
authorized, 24,192 and 23,952 issued and outstanding
in 1999 and 1998, respectively ......................... 242 240
Additional paid - in capital ........................... 422,128 416,939
Deferred compensation plans ............................ (8,160) (3,266)
Officers' loans ........................................ (478) (528)
Distributions in excess of earnings .................... (8,811) (8,559)
--------- ---------
Total stockholders' equity ............................. 404,921 404,826
--------- ---------
Total liabilities and stockholders' equity ............. $ 920,307 $ 777,733
========= =========
The accompanying notes are an integral part to these financial statements.
<PAGE>
SL Green Realty Corp.
Condensed Consolidated Statements of Income
(Unaudited)
(Dollars in thousands, except per share data)
Three Months ended
March 31,
1999 1998
-------- --------
Revenues
Rental revenue ....................................... $ 41,244 $ 19,428
Escalations and reimbursements revenues .............. 4,932 2,128
Investment income .................................... 837 637
Other income ......................................... 466 4
-------- --------
Total revenues ....................................... 47,479 22,197
Equity in net income from Service
Corporations ..................................... 211 42
Expenses
Operating expenses including $756 (1999) and
$36 (1998) to affiliates ......................... 12,037 5,664
Ground rent .......................................... 3,207 1,188
Interest ............................................. 5,238 3,494
Depreciation and amortization ........................ 5,438 2,693
Real estate taxes .................................... 7,083 3,283
Marketing, general and administrative ................ 2,645 1,038
-------- --------
Total expenses ....................................... 35,648 17,360
-------- --------
Income before minority interests and preferred
stock dividends .................................. 12,042 4,879
Minority interests ................................... (1,429) (790)
-------- --------
Net income before preferred stock dividends .......... 10,613 4,089
Preferred stock dividends ............................ (2,300) --
Preferred stock accretion ............................ (99) --
-------- --------
Net income available to common
shareholders ..................................... $ 8,214 $ 4,089
======== ========
Per share data:
Net income per common share (basic and diluted ....... $ 0.34 $ 0.33
======== ========
Dividends declared per common share .................. $ 0.35 $ 0.35
======== ========
Basic weighted average common shares
outstanding ...................................... 24,192 12,292
======== ========
Diluted weighted average common shares and common
share equivalents outstanding .................... 24,236 12,404
======== ========
The accompanying notes are an integral part to these financial statements.
<PAGE>
SL Green Realty Corp.
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Additional Deferred Distributions
Common Paid- Officers' Compensation in Excess of
Stock In Capital Loans Plan Earnings Total
-------- ---------- ------ ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 .................... $240 $416,939 $(528) $(3,266) $ (8,559) $ 404,826
Net income ...................................... -- -- -- -- 10,613 10,613
Preferred dividend and accretion ................ -- -- -- -- (2,399) (2,399)
Amortization of deferred compensation
and officers' loan .............................. -- -- 50 297 -- 347
Deferred compensation plan ...................... 2 5,189 -- (5,191) -- --
Cash distributions declared ($0.35
per common share) ............................... -- -- -- -- (8,466) (8,466)
---- -------- ----- ------- -------- ---------
Balance at March 31, 1999 ....................... $242 $422,128 $(478) $(8,160) $ (8,811) $ 404,921
==== ======== ===== ======= ======== =========
</TABLE>
The accompanying notes are an integral part to these financial statements
<PAGE>
SL Green Realty Corp.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months ended March 31,
1999 1998
-------- ----------
<S> <C> <C>
Operating Activities:
Net income ............................................................ $ 10,613 $ 4,089
Adjustments: To reconcile net income with net cash provided
by operating activities:
Minority interests .................................................. 1,429 790
Depreciation and Amortization ....................................... 5,438 2,693
Equity in net income from Service Corporations ...................... (211) (42)
Deferred rents receivable ........................................... (5,865) (1,128)
Provision for straight-line credit loss ............................. 816 --
Provision for bad debts ............................................. 223 --
Amortization of officer loans and deferred compensation ............. 347 --
Changes in operating assets and liabilities:
Restricted cash ..................................................... 1,077 (853)
Receivables ......................................................... (2,119) (2,644)
Related party receivables ........................................... (180) --
Deferred costs ...................................................... (4,694) (691)
Other assets ........................................................ 4,545 (882)
Accounts payable, accrued expenses and other liabilities ............ 1,054 8,239
Deferred land lease payable ......................................... 441 292
-------- ---------
Net cash provided by operating activities .......................... 12,914 9,863
-------- ---------
Investing Activities:
Additions to land, buildings and improvements ....................... (72,330) (168,884)
Investment in and advances to Service Corporations .................. 1,655 --
-------- ---------
Net cash used in investing activities ............................... (70,675) (168,884)
-------- ---------
Financing Activities:
Proceeds from acquisition facility .................................. -- 239,960
Payments of mortgage notes payable and loans ....................... (1,584) (480)
Payment of senior revolving credit facility ......................... (9,500) (76,000)
Proceeds from senior revolving credit facility ...................... 98,500 --
Deferred loan costs ................................................. (3,014) (1,541)
Cash dividends and distributions paid ............................... (11,533) (5,136)
Capital lease ....................................................... 67 61
-------- ---------
Net cash provided by financing activities .......................... 72,936 156,864
-------- ---------
Net increase (decrease) in cash and cash equivalents ................ 15,175 (2,157)
Cash and cash equivalents at beginning of period ................... 6,236 12,782
-------- ---------
Cash and cash equivalents at end of period .......................... $ 21,411 $ 10,625
======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest: ............................................... $ 4,021 $ 3,030
======== =========
Supplemental disclosure of non-cash investing and financing activities:
Assumption of mortgage note payable in connection with joint
venture acquisition ............................................... $ 45,000 --
========
Acquired Assets ....................................................... $ 7,714 --
========
Assumed Liabilities ................................................... $ 4,861 --
========
Issuance of common shares as deferred officer compensation ............ $ 5,190 --
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SL Green Realty Corp.
Notes To Condensed Consolidated Financial Statements
(Unaudited)
March 31, 1999
1. Organization and Basis of Presentation
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. 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.
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 9.2% limited partnership interest
in the Operating Partnership.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly-owned or majority-owned. All
significant intercompany balances and transactions have been eliminated.
Reclassification
Certain 1998 balances have been reclassified to conform with 1999
presentation.
Basis of Quarterly Presentation
The accompanying unaudited condensed consolidated 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 1999 operating results for the period
presented are not necessarily indicative of the results that may be expected for
the year ending December 31, 1999. These financial statements should be read in
conjunction with the financial statements and accompanying notes included in the
Company's 1998 annual report on Form 10-K for the year ended December 31, 1998.
Service Corporations
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 three unconsolidated
companies (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
(if any) 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.
<PAGE>
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 (95% of taxable income) 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, until August 20, 1999 (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.
Recently Issued Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted in years
beginning after June 15, 1999. The Statement permits early adoption as of the
beginning of any fiscal quarter after its issuance. The Company expects to adopt
the new Statement effective January 1, 2000. The Statement will require the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged asset, liability, or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company does not anticipate that the
adoption of this Statement will have a significant effect on its results of
operations or financial position.
Minority Interests
The minority interests captioned in the statement of operations represent
the 9.2% continuing investors interest in the Operating Partnership and a 35%
minority interest in the operating results of 555 West 57th Street (the "BMW
Building") and the related property level mortgage debt. The Company's operating
results for the three months ended March 31, 1999 are presented as if the BMW
Building were wholly-owned.
2. Property Acquisitions
During January 1999 the Company purchased a sub-leasehold interest in 420
Lexington Avenue for $27.3 million. The sub-leasehold expires on December 30,
2008 with one 21-year renewal term expiring on December 30, 2029.
During January 1999 the Company acquired a 65% interest in the BMW
Building for approximately $66.7 million (including an acquired controlling 65%
interest in existing mortgage debt totaling $45 million). The 941,000 square
foot property was approximately 100% leased as of the acquisition date. The
assets, liabilities and operating results of the property are included in the
consolidated financial statements.
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, 1999 and 1998 as though each acquisition since January 1, 1998 was completed
at the beginning of such period. The pro forma results are based upon the
Company's May public offerings.
1999 1998
---- ----
Total revenues ........................................ $47,479 $42,917
<PAGE>
Pro forma net income .................................. $ 8,214 $ 5,936
Pro forma earnings per common share (basic and diluted) $ 0.34 $ 0.25
Per common share - basic .............................. 24,192 23,792
Per common and common equivalent share - diluted ...... 24,236 23,904
3. Mortgage Recording Tax - Hypothecated Loans
The Operating Partnership mortgage tax credit loans totaled approximately
$118.8 million from Lehman Brothers Holdings, Inc. ("LBHI") at March 31, 1999.
These loans are collateralized by the mortgages encumbering the Operating
Partnership's interests in 711 Third Avenue. The loans are also collateralized
by an equivalent amount of the Company's cash which is held by LBHI and invested
in US Treasury securities. Interest earned on the cash collateral is applied by
LBHI to service the loans which interest rate commensurate with that of the
portfolio of six month US Treasury securities, which mature on May 18, 1999. The
Operating Partnership and LBHI each have the right of offset and therefore the
loans and the cash collateral have been presented o a net basis in the
consolidated balance sheet at March 31, 1999. The purpose of these loans is to
temporarily preserve mortgage recording tax credits for future potential
acquisitions of real property which the Company may make, the financing of which
may include property based debt, for which these credits would be applicable and
provide a financial savings. In connection with anticipated acquisitions and
related financings, the Company expects to utilize all remaining mortgage tax
credits by June 30, 1999. Once fully utilized, the mortgage tax credit program
reduced the Company's mortgage recording fee by approximately $5.6 million since
1997 which would have otherwise been paid to close various acquisition
financings.
4. Income Taxes
The Company is taxed as a REIT under Section 856 through Section 860 of
the Internal Revenue Code of 1986, as amended. As a REIT, the Company is
generally not subject to Federal Income Tax. The preferred stock subsidiaries
are C-Corporations and may be subject to federal, state and local income taxes.
5. Net Income Per Common Share
Net income per common share-basic is computed with the weighted average
number of common shares and common stock equivalent shares outstanding during
the period. To arrive at the diluted per common share, the common stock
equivalents resulted in increasing the number of shares outstanding which
represents the common stock equivalents for options computed in accordance with
the treasury stock method.
6. 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 routine
litigation will not materially affect the financial position, operating results
or liquidity of the Company and the Operating Partnership.
On March 12, 1999, the Company entered into an agreement with Reckson
Associates Realty Corp. to purchase four office properties totaling 675,000
square feet for approximately $84.5 million and expects to finance these
acquisitions through two financing commitments (see note 9). The Company expects
to complete the acquisition prior to June 1999.
7. Related Party Transactions
There are business relationships with related parties which involve
maintenance and security expenses in the ordinary course of business. The
Company's transactions with the related parties amounted to $756 and $36 for the
three month period ended March 31, 1999 and 1998, respectively.
<PAGE>
8. Segment Information
The Company is a REIT engaged in owning, managing, leasing and
repositioning class B office properties in Manhattan, New York and has one
reportable segment, office real estate. The Company evaluates real estate
performance and allocates resources based on net income.
The Company's real estate portfolio is located in one geographical market
of Manhattan. The primary sources of revenue are generated from tenant rents and
escalations and reimbursement revenue. Real estate property operating expenses
primarily consist of security, maintenance, utility costs and ground rent
expense (at certain applicable properties). The single office real estate
business segment meets the quantitative threshold for determining reportable
segments. Additionally, the Company has no tenant with rental revenue greater
than 4% of the Company's annual revenues, the reporting threshold for which is
10%.
9. Subsequent Events
During April 1999 the Company closed on fixed-rate mortgage financings
totaling $103 million with maturities of 7 years ($51 million) and 10 years ($52
million). The weighted average interest rate on these financings is 7.78%. These
mortgages replaced $87.5 million in secured floating-rate bridge financings and
provided approximately $13 million in additional liquidity that was used to
reduce the amount outstanding under the Company's revolving credit facility. The
Company will record a $0.7 million extraordinary loss during the quarter ended
June 30, 1999 for the early extinguishment of debt related to unamortized
origination fees and transaction costs associated with these secured bridge
loans.
The Company has received commitments for loans totaling $117.7 million.
The first loan of $65 million is secured by the Company's interest in 420
Lexington Avenue. The term of this loan is two years and bears interest at a
rate of 275 basis points over the 30-day LIBOR rate. The loan was closed in
escrow during April without a draw of funds. Funding is expected to occur with
the acquisition of the four office properties from Reckson Associates Realty
Corp. (see note 6). The second loan will be a $52.7 million one-year floating
rate acquisition facility, secured by the acquired assets and will bear interest
at 150 basis points over LIBOR and will be funded upon the closing of the
acquisition.
On April 12, 1999 the Company announced that it had originated and funded
a $20 million second mortgage bridge loan to finance 521 Fifth Avenue Partners,
LLC's acquisition of a 440,000 square foot office building located at 521 Fifth
Avenue in the Grand Central District of New York City. The second mortgage loan
has a term of six months which may be extended for an additional three months.
Subsequently, Goldman Sachs Mortgage Company purchased a 50% participation in
the mortgage for $10 million. The Company will manage the mortgage investment
asset. Average yield over six months is expected to be 16%.
In connection with the acquisition of 17 Battery Place, the Company loaned
$15.5 million to the co-tenant. The mortgage receivable has an interest at 12%
and was due March 31, 1999 and is secured by a first mortgage on the mortgagor's
condominium interest in the property. The borrower did not make the scheduled
payment on March 31, 1999 and the loan is now in default. The Company has begun
collection proceedings and expects to collect the principal in full in addition
to collecting all accrued interest. All interest due on the loan through March
31, 1999 was received by the Company.
On May 13, 1999 The Company announced that it has acquired a $20 million
preferred equity interest in a venture holding the loan secured by fee title of
1370 Avenue of the Americas, a prime New York office tower located at 56th
Street and Avenue of the Americas in midtown Manhattan. The venture is entitled
to receive all of the cash flows from the building, in addition to shared
control over the management and leasing of the property. It also has the right
to obtain fee title to the property after a prescribed period of time. The
Company has also been reappointed manager of the property.
The investment entitles the Company to receive a yield in excess of 12%
preferentially on a current basis. In addition to receiving its preferred
return, the Company will participate in the value it creates through a purchase
option, entitling it to acquire 50% of the common equity of the venture at a
fixed price, based on today's estimate of market value of the property. Further,
the Company may obtain 100% of the venture through exercise of a right of first
offer. The investment was financed from borrowings on the Company's Credit
Facility.
<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 should be read in conjunction with the financial statements
appearing elsewhere in this report and the financial statements included in the
Company's 1998 annual report on Form 10-K.
Financial Condition
Commercial real estate properties before accumulated depreciation
increased approximately $117.3 million to $814.4 million at March 31, 1999
compared to $697.1 million December 31, 1998 primarily as a result of the
purchase and consolidation of a 65% controlling interest in 555 West 57th Street
($79.5 million) (the "BMW Building"), an operating leasehold position at 420
Lexington Avenue ($27.3 million) and property redevelopment, including tenant
improvements ($10.5 million). These acquisitions were funded through the
Company's revolving credit facility (the "Credit Facility"). Cash and cash
equivalents increased $15.2 million to $21.4 million at March 31, 1999 compared
to $6.2 million at December 31, 1998 in anticipation of originating a $20
million second mortgage bridge loan financing which was closed on April 5, 1999.
Total liabilities increased $138.9 million to $360.4 million at March 31,
1999 compared to $221.5 million at December 31, 1998 primarily due to (i) a
$43.7 million increase in mortgage notes payable from the consolidation of the
mortgage at the BMW Building ($45 million) partially offset by principal
amortization, (ii) an $89 million increase in the revolving credit facility to
finance 420 Lexington Avenue ($27.3 million), cash portion of BMW Building
($38.1 million), the second mortgage secured by 521 Fifth Avenue ($20 million),
general working capital needs ($3.6 million) and (iii) $6.2 million in other
liabilities.
Results of Operations
Comparison of the three months ended March 31, 1999 to the three months
ended March 31, 1998. Since March 31, 1998, the following transactions have
occurred that have a material impact on the comparison of the 1999 and 1998
results: (i) the results of 420 Lexington Avenue (acquired March 1998), 1466
Broadway (acquired March 1998) and 321 West 44th Street (acquired March 1998)
711 Third Avenue (acquired May 1998), 440 Ninth Avenue (acquired June 1998) and
1412 Broadway (acquired August 1998) (the "1998 Acquisitions") which are
included in the 1999 results and were not included, or included for only a
portion of, the 1998 results and (ii) the results of 555 West 57th Street and an
acquired operating lease position at 420 Lexington Avenue (both acquired January
1999) (the "1999 Acquisitions") which are not included in the 1998 results. For
purposes of this discussion, the Company defines "Same Store" as the results of
properties owned at January 1, 1998.
<PAGE>
The rental revenue for the three months ended March 31, 1999 totaled $41.2
million representing an increase of $21.8 million compared to $19.4 million for
the three months ended March 31, 1998. The increase is primarily attributable to
the revenue associated with the following: (i) normalization of the 1998
Acquisitions which increased rental revenue by $13.0 million, (ii) 1998 and 1999
leasing activity in the 1998 acquisitions ($3.3 million), (iii) the 1999
Acquisitions which increased rental revenue by $4.7 million and (iv) increased
annualized rent from rollover tenants in the 1999 Same Store portfolio totaling
$0.8 million.
Escalation and reimbursement revenue for the three months ended March 31,
1999 totaled $4.9 million representing an increase of $2.8 million compared to
$2.1 million for the three months ended March 31, 1998. The increase is
primarily attributable to the revenue associated with the following: (i) the
1998 Acquisitions which increased revenue by $2.3 million and (ii) the 1999
Acquisitions which increased revenue by $0.5 million.
Investment income totaled $0.9 million which represents interest income
from the Battery Park mortgage ($0.5 million) 636 11th Avenue mortgage ($0.2
million) and from excess cash on hand ($0.2 million).
Operating expenses (including real estate taxes) increased $10.2 million
reflecting (i) the normalization of 1998 acquisitions ($7.8 million), (ii)
first-time impact of the 1999 acquisition ($2.3 million) and (iii) an increase
in Same Store operating expenses ($0.1 million). The Same Store expense increase
resulted from 17 Battery Place ($0.4 million) due to an increased allocation of
building costs, as the Company increased occupancy and therefore increased its
pro-rata share in common area charges as defined by a joint development
agreement which was partially offset by decreases throughout the remainder of
the Same Store portfolio.
Ground rent for the three months ended March 31, 1999 totaled $3.2 million
representing a $2.0 million increase compared to $1.2 million for the three
months ended March 31, 1998. The increase is due to normalization of 420
Lexington Avenue ($1.7 million) and May 1998 acquisition of 711 Third Avenue
($0.3 million).
Interest expense increased $1.7 million to $5.2 million for the three
months ended March 31, 1999 compared to $3.5 million for the three months ended
March 31, 1998 primarily due to the debt assumed in connection with the
acquisition of the BMW Building ($0.8 million) and the secured bridge financings
completed in the fourth quarter 1998 ($1.6 million). Compared to prior year,
these increases were offset partially by the interest expense incurred in the
first quarter 1998 of $0.7 million related to an acquisition facility ($240
million at March 31, 1998), which was repaid in May 1998 from equity offering
proceeds.
Depreciation and amortization for the three months ended March 31, 1999
totaled $5.4 million representing an increase of $2.7 million compared to $2.7
million for the three months ended March 31, 1998. The increase is primarily
attributable to: (i) the 1998 Acquisitions which increased depreciation by $1.7
million (ii) the 1999 Acquisitions which increased depreciation by $0.4 million,
(iii) the 1999 Same Store which increased depreciation by $0.2 million, (iv) and
an increase in the amortization of deferred finance costs totaling $0.4 million
associated with fees incurred on the Company's secured bridge facilities.
MG&A increased $1.6 million to $2.6 million for the three months ended
March 31, 1999 from $1.0 million for the three months ended March 31, 1998
primarily from (i) increased headcount, commensurate with the over 100% increase
in the portfolio ($0.4 million), (ii) $0.3 million from a long-term stock
ownership plan to key employees, (iii) lower costs allocated to the Company's
third party business ($0.4 million), (iv) increased public entity costs ($0.3
million) and (v) one-time costs incurred in conjunction with the relocation and
consolidation of the Company's corporate offices ($0.2 million).
<PAGE>
Liquidity and Capital Resources
During December 1998, the Company closed two short-term bridge financings.
The first financing was a $51.5 million bridge loan with Prudential Securities
at an interest rate equal to 200 basis points over the current one-month LIBOR
(6.96% at March 31, 1999). The loan had a maturity date of December 30, 1999 and
was secured by the properties located at 1412 Broadway and 633 Third Avenue. The
second financing was a $36 million bridge loan with Lehman Brothers at an
interest rate equal to 275 basis points over the current one-month LIBOR (7.71%
at March 31, 1999). The scheduled maturity date was December 15, 1999 which was
secured by the properties located at 70 West 36th Street, 1414 Avenue of the
Americas and The Bar Building.
During April 1999 the Company closed on fixed-rate mortgage financings
totaling $103 million with maturities of 7 years ($51 million) and 10 years ($52
million). The weighted average interest rate on these financings is 7.78%. These
mortgages replaced the aforementioned $87.5 million in secured floating-rate
bridge financings and provided approximately $13 million in additional liquidity
that was used to reduce the amount outstanding under the Company's revolving
credit facility. The Company will record a $0.7 million extraordinary loss
during the quarter ended June 30, 1999 for the early extinguishment of debt
related to unamortized origination fees and transaction costs associated with
these secured bridge loans.
The Company has received commitments for loans totaling $117.7 million.
These commitments have not been drawn. The first loan of $65 million is secured
by the Company's interest in 420 Lexington Avenue. The term of this loan is two
years and bears interest at a rate of 275 basis points over the 30-day LIBOR
rate. The loan was closed in escrow during April without a draw of funds.
Funding is expected to occur with the acquisition of the four office properties
from Reckson Associates Realty Corp. ($84.5 million). The second loan will be a
$52.7 million one-year floating rate acquisition facility, secured by these four
acquired properties and will bear interest at 150 basis points over LIBOR and
will be funded upon the closing of the acquisition.
On April 12, 1999 the Company announced that it had originated and funded
a $20 million second mortgage bridge loan to finance 521 Fifth Avenue Partners,
LLC's acquisition of a 440,000 square foot office building located at 521 Fifth
Avenue in the Grand Central District of New York City. The second mortgage loan
has a term of six months which may be extended for an additional three months.
Goldman Sachs Mortgage Company purchased a 50% participation in the investment.
SL Green will manage the mortgage investment asset. Average yield over six
months is expected to be 16%.
At March 31, 1999 fixed rate mortgage debt totaled $50.3 million with an
8.12% weighted average interest rate and floating rate mortgage debt totaled
$49.3 million with an effective interest rate of 6.69%. The balance of the
Company's Credit Facility at March 31, 1999 was $112.8 million with availability
of $20.6 million after $6.6 million in letters of credit. The weighted average
interest on the Credit Facility was 6.15% at March 31, 1999.
At March 31, 1999 the mortgage notes, Credit Facility and secured bridge
facilities represent approximately 32.4% of the Company's market capitalization
based on an estimated total market capitalization (debt and equity, assuming
conversion of all Operating Partnership Units) of $910.4 million (based on a
common stock price of $18.81 per share, the closing price of the Company's
common stock on the New York Stock Exchange on March 31, 1999). The Company's
principal debt maturities are scheduled to be $1.6 million and $116.3 million
for the nine months ending December 31, 1999 and the year ending December 31,
2000, respectively.
The Company expects to make distributions to its stockholders primarily
based on its distributions received from the Operating Partnership or, if
necessary, 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.
<PAGE>
The Company estimates that for the nine months ended December 31, 1999 and
the year ending December 31, 2000, it will incur approximately $23.0 million and
$5.9 million, respectively, of capital expenditures on properties currently
owned. For the remainder of 1999 and for 2000, over $21.6 million and $3.8
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, additional property level mortgage financings,
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 met in a
similar fashion. 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, potential asset
sales or additional equity issuances.
On May 13, 1999 The Company announced that it has acquired a $20 million
preferred equity interest in a venture holding the loan secured by fee title of
1370 Avenue of the Americas, a prime New York office tower located at 56th
Street and Avenue of the Americas in midtown Manhattan. The venture is entitled
to receive all of the cash flows from the building, in addition to shared
control over the management and leasing of the property. It also has the right
to obtain fee title to the property after a prescribed period of time. The
Company has also been reappointed manager of the property.
The investment entitles the Company to receive a yield in excess of 12%
preferentially on a current basis. In addition to receiving its preferred
return, the Company will participate in the value it creates through a purchase
option, entitling it to acquire 50% of the common equity of the venture at a
fixed price, based on today's estimate of market value of the property. Further,
the Company may obtain 100% of the venture through exercise of a right of first
offer. The investment was financed from borrowings on the Company's Credit
Facility.
Cash Flows
Comparison of the three months ended March 31, 1999 to the three months
ended March 31, 1998
Net cash provided by operating activities increased $3.0 million to $12.9
million for the three months ended March 31, 1999 compared to $9.9 million for
the three months ended March 31, 1998. Net cash used in investing activities
decreased $98.2 million to $70.7 million for the three months ended March 31,
1999 compared to $168.9 for the three months ended March 31, 1998. The decrease
was due primarily to the lower dollar volume of acquisitions in 1999 ($94
million) as compared to 1998 ($159 million). Net cash provided by financing
activities decreased $84 million to $72.9 million for the three months ended
March 31, 1999 compared to $156.9 million for the three months ended March 31,
1998. The decrease was primarily due to lower borrowing requirements due to
lower volume of acquisitions. This decrease was partially off-set by the $6.4
million dividend distribution payment and $1.5 million increase from 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.
433
<PAGE>
Funds from Operations for the three months ended March 31, 1999 and 1998
respectively, are as follows:
1999 1998
-------- -------
Income before minority interest and preferred dividends .... $ 12,042 $ 4,879
Less:
Preferred stock dividends .................................. (2,300) --
Minority interest in commercial property ................... (572) --
Add:
Depreciation and amortization .............................. 5,438 2,693
Amortization of deferred financing costs and
depreciation of non-real estate assets ................ (569) (241)
-------- -------
FFO......................................................... $ 14,039 $ 7,331
======== =======
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
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted in years
beginning after June 15, 1999. The Statement permits early adoption as of the
beginning of any fiscal quarter after its issuance. The Company expects to adopt
the new Statement effective January 1, 2000. The Statement will require the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through the
income statement. If a derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the derivative will either be offset against
the change in fair value of the hedged asset, liability, or firm commitment
through earnings, or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The Company does not
anticipate that the adoption of this Statement will have a significant effect on
its results of operations or financial position.
Year 2000 Compliance
The Company is providing the following disclosure pursuant to the
Securities and Exchange Commission's interpretation titled "Disclosure of Year
2000 Issues and Consequences by Public Companies, Investment Advisers Investment
Companies, and Municipal Securities Issuers" effective August 4, 1998.
State of Readiness
The Company has identified three areas of focus for Year 2000 Compliance:
internal information technology, property operating equipment, and third party
service suppliers.
Information Technology: In 1997, the Company began a project to update its
information technology resources by installing new hardware and software
throughout the Company. The Company completed the implementation of the systems
during 1998. All hardware components and software were acquired from major U.S.
manufacturers. The manufacturer of the new financial systems has supplied the
Company with documentation of Year 2000 testing to demonstrate that their
software meets and
<PAGE>
exceeds Year 2000 compliance requirements. The Company plans to internally test
the financial systems, although there is no assurance this test will confirm
Year 2000 compliance. The Company is currently contacting other software and
hardware providers for confirmation of Year 2000 compliance with regard to its
network and operating systems.
Property Operating Equipment: The Company inquired regarding compliance
status from all vendors providing systems identified as having potential Year
2000 compliance problems. The Company then tested each system with these
vendors. The Company believes that it has identified all building operating
systems (primarily elevators and fire safety systems) that contain embedded
chips or use software that require Year 2000 testing. The Company received
confirmation from these vendors and manufacturers that the equipment and related
systems are Year 2000 compliant. In addition, the Company has since tested
approximately 95% of these identified systems. During the course of this
testing, the fire command station at one of the Company's properties failed due
to a CPU chip which was subsequently replaced at no cost. The system was
retested and found to be fully functional. The Company does not plan further
testing of property operating equipment at properties currently in the
portfolio.
The Company has not assessed the compliance status of the properties
anticipated to be acquired from Reckson Associates. Once acquired, the Company
will access the properties for Year 2000 compliance using the same procedures
performed on the current portfolio.
Third Party Service Suppliers: At present, the Company has no automated
interfaces from third party service providers into the Company's financial
systems. However, the Company does rely on information from two types of third
parties service providers: financial institutions and a payroll and benefits
processing company. The Company has begun the process of confirming with the
third parties that systems that relate to the Company are Year 2000 compliant.
The Company will not be able to test the systems of these service providers and
will have to rely on these confirmation responses. However, the Company cannot
represent that these responses are accurate and may result in lost services if
these vendors are not Year 2000 compliant.
<TABLE>
<CAPTION>
Assessment Remediation Direct Indirect Implementation
---------- ----------- Testing Testing --------------
------- -------
<S> <C> <C> <C> <C> <C>
Information 100% 75%complete 0% complete 100% complete 75% complete
Technology complete Expected Expected based on Expected
completion completion representations completion
6/30/99 9/30/99 received from 6/30/99
third party
vendor
Property 100% 100% complete 100% Not applicable 100% complete
Operating complete complete
Equipment
(on
currently
owned
properties)*
Third Party 100% Not yet Not 25% complete 50% complete on identified items
Service complete fully applicable based on Expected
Providers assessed representations completion
received from 9/30/99
third party
vendors
</TABLE>
* Will change with new acquisitions on a quarterly basis.
Costs
The Company does not expect the direct costs related to Year 2000 to be
material. These direct costs exclude the costs to replace the hardware and
software systems, as the decision to replace these systems was not accelerated
by the Year 2000 issues.
<PAGE>
Risks
The Company believes that it has an effective program in place to identify
and resolve Year 2000 issues in a timely manner. As noted above, the Company has
not yet completed all necessary phases of the Year 2000 program. In the event
that the Company does not complete any additional phases, the Company may be
unable to collect rents, process Company payroll, and disburse funds. The
Company also does not have any plan, and cannot make any assurances regarding
any loss of governmental, utility services or financial market functionality
that may be lost as a result of Year 2000. The Company cannot make any
assurances that its tenants will be able to disburse funds to pay rental
invoices due to Year 2000 compliance deficiencies.
Contingencies
The Company expects to complete all phases of its Year 2000 program by the
end of the third quarter 1999 and currently has no contingency plan in place.
The Company plans to evaluate the status of completion in June 1999 and
determine whether such a plan is necessary.
ITEM 3 MARKET RISK AND RISK MANAGEMENT POLICIES
The Company is exposed to changes in interest rates primarily from its
floating rate debt arrangements. The Company currently does not have any rate
derivative instruments currently in place to manage exposure to interest rate
changes on outstanding floating rate obligations. At March 31, 1999, a
hypothetical 100 basis point adverse move (increase) in interest rates along the
entire interest rate curve would adversely affect the Company's annual interest
cost by approximately $2.4 million annually. Based on the April 1999 completed
refinancings, the interest cost on a 100 basis point increase in interest rates
would result in a $1.6 million increase in annual interest costs.
<PAGE>
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
None
ITEM 2 Changes in Securities
Sale of Unregistered Securities
The Company's issuance of securities in the transactions referenced below
were not registered under the Securities Act of 1933, pursuant to the exemption
contemplated by Section 4(2) thereof for transactions not involving a public
offering.
The Company issued 240,000 shares of its Common Stock in January 1999 for
deferred stock-based compensation in connection with employment contracts.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
1. Form 8-K dated January 25, 1999, Items 2 and 5
2. Form 8-K/A dated January 25, 1999, Items 2 and 5.
<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,
Chief Financial Officer
Date: May 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 21,411
<SECURITIES> 0
<RECEIVABLES> 6,444
<ALLOWANCES> 597
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 814,418
<DEPRECIATION> 41,911
<TOTAL-ASSETS> 920,307
<CURRENT-LIABILITIES> 0
<BONDS> 207,078
110,049
0
<COMMON> 242
<OTHER-SE> 404,679
<TOTAL-LIABILITY-AND-EQUITY> 920,307
<SALES> 0
<TOTAL-REVENUES> 47,479
<CGS> 0
<TOTAL-COSTS> 35,648
<OTHER-EXPENSES> 211
<LOSS-PROVISION> 1,039
<INTEREST-EXPENSE> 5,238
<INCOME-PRETAX> 8,214
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,214
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<NET-INCOME> 8,214
<EPS-PRIMARY> 0.34
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</TABLE>
