<PAGE>
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 September 30, 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 No .
The number of shares outstanding of the registrant's common stock, $0.01 par
value was 24,203,633 at November 12, 1999.
<PAGE>
SL GREEN REALTY CORP.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Condensed Consolidated Balance Sheets as of September 30, 1999 (unaudited)
and December 31, 1998.................................................... 3
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1999 and 1998 (unaudited)..................... 5
Condensed Consolidated Statement of Stockholders' Equity for the Nine
Months Ended September 30, 1999 (unaudited).............................. 7
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 (unaudited) ................................. 8
Notes to Condensed Consolidated Financial Statements (unaudited).......... 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................... 14
ITEM 3. MARKET RISK AND RISK MANAGEMENT POLICIES............................... 21
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................... 22
SIGNATURES...................................................................... 23
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
SL Green Realty Corp.
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
September 30, December 31,
1999 1998
------------- ------------
(Unaudited) (Note 1)
<S> <C> <C>
ASSETS
Commercial real estate properties, at cost:
Land and land interests $ 137,144 $ 112,123
Buildings and improvements 618,886 488,914
Building leasehold 126,974 83,816
Property under capital lease 12,208 12,208
----------- -----------
895,212 697,061
Less accumulated depreciation (53,335) (37,355)
----------- -----------
841,877 659,706
Cash and cash equivalents 8,409 6,236
Restricted cash 27,931 18,635
Tenant receivables net of allowance of
$867 and $374 in 1999 and 1998, 8,386 3,951
respectively
Related party receivables 728 182
Deferred rents receivable net of provision
for doubtful accounts of $4,625 and
$2,369 in 1999 and 1998, respectively 33,821 20,891
Investment in and advances to Service
Corporations 4,886 10,694
Mortgage loans receivable and preferred
investment 40,901 26,401
Investments in unconsolidated joint ventures 22,534 --
Deferred costs, net 26,978 15,282
Other assets 13,790 15,755
----------- -----------
Total assets $ 1,030,241 $ 777,733
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
SL Green Realty Corp.
Condensed Consolidated Balance Sheets
(Dollars in Thousands, except per share data)
September 30, December 31,
1999 1998
------------- ------------
(Unaudited) (Note 1)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable $ 337,190 $ 50,862
Revolving credit facility 61,000 23,800
Secured bridge facilities --- 87,500
Accrued interest payable 2,341 494
Accounts payable and accrued expenses 12,094 5,588
Capitalized lease obligation 14,946 14,741
Deferred land lease payable 11,170 9,947
Dividend and distributions payable 11,672 11,585
Security deposits 18,481 16,949
----------- -----------
Total liabilities 468,894 221,466
Minority interests 45,558 41,491
8% Preferred Income Equity Redeemable
Stock $0.01 par value, $25.00 mandatory
liquidation preference, 25,000 shares
authorized, 4,600 issued and outstanding
in 1999 and 1998 110,248 109,950
Commitments, contingencies and other matters
STOCKHOLDERS' EQUITY
Common stock, $.01 par value 100,000 shares
authorized, 24,204 and 23,952 issued and
outstanding in 1999 and 1998, respectively 242 240
Additional paid-in capital 422,377 416,939
Officers' loans (378) (528)
Deferred compensation plans (7,410) (3,266)
Distributions in excess of earnings (9,290) (8,559)
----------- -----------
Total stockholders' equity 405,541 404,826
----------- -----------
Total liabilities and stockholders' equity $ 1,030,241 $ 777,733
=========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
SL Green Realty Corp.
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in Thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Rental revenue, net $ 45,080 $ 33,600 $ 129,267 $ 81,354
Escalation and reimbursement revenues 6,856 5,281 16,473 11,432
Signage Rent 559 -- 1,112 --
Investment income 1,469 851 3,731 2,419
Other income 688 18 1,545 20
--------- --------- --------- ---------
Total revenues 54,652 39,750 152,128 95,225
Equity in income (loss) from Service
Corporations 223 (22) 551 (70)
Equity in income of unconsolidated Joint
Ventures 151 -- 151 --
EXPENSES
Operating expenses (see Note 10 for
affiliate transactions) 14,293 11,049 36,778 24,585
Ground rent 3,183 3,428 9,572 8,152
Interest 7,772 2,419 19,722 9,790
Depreciation and amortization 7,677 4,069 19,705 10,714
Real estate taxes 7,481 6,134 21,904 14,888
Marketing, general and administrative 2,979 1,571 8,387 3,954
--------- --------- --------- ---------
Total expenses 43,385 28,670 116,068 72,083
--------- --------- --------- ---------
Income before minority interest-
preferred stock dividends and
accretion and extraordinary items 11,641 11,058 36,762 23,072
Minority interests (1,169) (802) (4,262) (2,354)
--------- --------- --------- ---------
Income before extraordinary items and
preferred stock dividends and
accretion 10,472 10,256 32,500 20,718
EXTRAORDINARY ITEMS:
Loss on early extinguishment of debt, net
of minority interest of ($57) and ($52) in
1999 and 1998, respectively -- -- (628) (522)
--------- --------- --------- ---------
Net income 10,472 10,256 31,872 20,196
Preferred stock dividends (2,300) (2,300) (6,900) (3,420)
Preferred stock accretion (99) (133) (298) (204)
--------- --------- --------- ---------
Net income available to common
shareholders $ 8,073 $ 7,823 $ 24,674 $ 16,572
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
<TABLE>
<CAPTION>
SL Green Realty Corp.
Condensed Consolidated Statements of Operations -- Continued
(Unaudited)
(Dollars in Thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
PER SHARE DATA (BASIC AND DILUTED):
Income per share before extraordinary
item $ 0.33 $ 0.33 $ 1.05 $ 0.94
Extraordinary item per share -- -- (0.03) (0.03)
----------- --------- --------- --------
Net income available per common share $ 0.33 $ 0.33 $ 1.02 $ 0.91
----------- --------- --------- --------
Basic weighted average common shares
outstanding 24,200 23,922 24,195 18,233
----------- --------- --------- --------
Diluted weighted average common shares and
common share equivalents outstanding 24,278 23,928 24,258 18,295
----------- --------- --------- --------
Dividends declared per common share $ 0.35 $ 0.35 $ 1.05 $ 1.05
----------- --------- --------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
SL Green Realty Corp.
Condensed Consolidated Statement of Stockholders' Equity
(Dollars in Thousands)
Addition 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 -- -- -- -- 31,872 31,872
Preferred dividend and accretion requirement -- -- -- -- (7,198) (7,198)
Cash distributions declared ($1.05 per
common share) -- -- -- -- (25,405) (25,405)
Issuance of common stock -- 249 -- -- -- 249
Deferred compensation plan 2 5,189 -- (5,191) -- --
Amortization of deferred compensation plan and
officers' loans -- -- 150 1,047 -- 1,197
--------- --------- --------- --------- --------- ---------
Balance at September 30, 1999 (unaudited) $ 242 $ 422,377 $ (378) $ (7,410) $ (9,290) $ 405,541
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
SL Green Realty Corp.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in Thousands)
NINE MONTHS ENDED
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 31,872 $ 20,196
--------- ---------
Adjustments: To reconcile net income to net cash provided by operating
activities:
Minority interests 4,262 2,302
Depreciation and amortization 19,705 10,714
Equity in net income of unconsolidated joint ventures (151) --
Equity in net (income) loss from Service Corporations (551) 70
Deferred rents receivable (15,642) (8,309)
Provision for deferred rents and bad debts 2,983 1,685
Extraordinary loss 628 574
Amortization of officers' loans and deferred compensation 1,197 83
Changes in operating assets and liabilities:
Restricted cash (2,991) (7,024)
Tenant receivables (4,958) (3,794)
Related party receivables (546) 753
Deferred costs (10,371) (4,397)
Other assets 3,374 (3,263)
Accounts payable and accrued expenses 5,024 7,876
Deferred land lease payable 1,223 876
--------- ---------
Net cash provided by operating activities 35,058 18,342
--------- ---------
INVESTING ACTIVITIES:
Additions to land, buildings and improvements and building leasehold (178,705) (349,419)
Investment in unconsolidated joint ventures (17,604) --
Advances from (to) Service Corporations 6,359 (6,159)
Mortgage loan receivable, net (14,500) (10,901)
--------- ---------
Net cash used in investing activities (204,450) (366,479)
--------- ---------
FINANCING ACTIVITIES:
Repayments of mortgage notes payable (7,647) (1,451)
Proceeds from mortgage notes payable 269,775 --
Net proceeds from sale of common shares -- 242,948
Net proceeds from sale of 8% preferred shares -- 110,400
Repayment of revolving credit facility (79,300) (106,000)
Proceeds from revolving credit facility 116,500 112,000
Repayments on secured bridge facilities (87,500) --
Proceeds from acquisition facility -- 239,960
Repayment of acquisition facility -- (239,960)
Deferred loan costs (5,700) (1,194)
Cash dividends and distributions paid (34,768) (20,558)
Capitalized lease obligation 205 186
--------- ---------
Net cash provided by financing activities 171,565 336,331
--------- ---------
Net increase (decrease) in cash and cash equivalents 2,173 (11,806)
Cash and cash equivalents at beginning of period 6,236 12,782
--------- ---------
Cash and cash equivalents at end of period $ 8,409 $ 976
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest: $ 17,875 $ 9,961
========= =========
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 $ 5,438
=========
Contribution of property to joint venture $ 25,501
=========
Mortgage note payable assumed by joint venture $ 20,800
=========
Land acquired for units $ 1,000
=========
</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)
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, 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 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 9.1% limited partnership interest
in the Operating Partnership.
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 periods
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 annual report on Form 10-K for the year ended December 31, 1998.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES
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. Joint
venture entities where the Company does not control are not consolidated into
the company's financial statements. All significant intercompany balances and
transactions have been eliminated.
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
does 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 because 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 Management LLC which is owned 100% by the
Operating Partnership.
9
<PAGE>
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, 1999
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 partner level. Under the Operating Partnership Agreement each limited
partner will have the right to redeem limited partnership Units ("Units") for
cash, or if the Company so elects, shares of common stock. Pursuant to the terms
of the Operating Partnership Agreement, the Units issued to the Company's
management and continuing investors at the IPO could 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. Under the
Operating Partnership Agreement, the Company is prohibited from selling 673
First Avenue and 470 Park Avenue South through August 2009.
UNCONSOLIDATED JOINT VENTURES
For the entities accounted for on the equity method, the Company records
its investments at cost and adjusts the investment accounts for its share of the
entities' income or loss and for cash distributions and contributions.
EXTRAORDINARY ITEMS
As a result of the Company's April 1999 refinancing activities (see note
6), the Company repaid the secured bridge facilities prior to the scheduled
maturity dates. The Company's early extinguishment of the secured bridge
facilities resulted in the write-off of unamortized deferred financing costs
totaling approximately $685 which were classified as an extraordinary loss
during the quarter ended June 30, 1999.
As a result of the Company's May 1998 equity offerings, on May 18, 1998
the Company repaid the acquisition facility prior to its scheduled maturity date
on March 18, 1999. The Company's early extinguishment of the acquisition
facility resulted in the write-off of unamortized deferred financing costs
totaling approximately $574 which were classified as an extraordinary loss
during the quarter ended June 30, 1998.
RECENTLY ISSUED PRONOUNCEMENTS
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which was required to be adopted in years
beginning after June 15, 1999. The FASB issued Statement No. 137 which extended
the effective date of this statement to June 15, 2000 (January 1, 2001 for the
Company). 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.
RECLASSIFICATION
Certain 1998 balances have been reclassified to conform with the 1999
presentation.
10
<PAGE>
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, 1999
3. PROPERTY ACQUISITIONS
During May 1999, the Company acquired four Manhattan properties located at
90 Broad Street, 286, 290 and 292 Madison Avenue (the "Tower Properties") for
$84.5 million. The properties total 675,000 square feet and were approximately
89% leased as of the acquisition date. During July 1999 the Company contributed
90 Broad Street into a joint venture arrangement (see note 5).
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% controlling interest in
555 West 57th Street (the "BMW Building") for approximately $66.7 million
(including 65% interest in the previously existing third-party 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 (see note
12).
The following table summarizes, on an unaudited pro forma basis, the
combined results of operations of the Company for the nine months ended
September 30, 1999 and 1998 as though each acquisition since January 1, 1998 and
the May 1998 public offerings were completed at January 1, 1998.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Total revenues $155,770 $139,500
Pro forma income before extraordinary items $ 25,096 $ 21,773
Pro forma net income $ 24,468 $ 21,251
Pro forma earnings per share (basic and diluted) $ 1.01 $ 0.89
</TABLE>
4. MORTGAGE LOANS RECEIVABLE AND PREFERRED INVESTMENT
During April 1999, the Company 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 Manhattan office building located at 521 Fifth Avenue. The
second mortgage bridge loan which had an initial term of six months with a yield
of 16%, has been extended for an additional three months with an expected yield
of 17%. Goldman Sachs Mortgage Company purchased a 50% participation in the
investment.
During May 1999, the Company acquired a $20 million preferred equity
interest in a venture holding the loan secured by fee title of 1370 Avenue of
the Americas located in 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. The venture 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 an initial yield of 12% preferentially on a current basis. In
addition to receiving its preferred return, the Company may 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.
5. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
During August 1999, the Company entered into a joint venture agreement
with Carlyle Realty to purchase 1250 Broadway located in Manhattan for $93
million. The property is 670,000 square feet and was 97% leased at acquisition.
The Company holds a 49.9% stake in the venture and provides management, leasing
and construction services at the property on a fee basis. The acquisition was
partially financed with a floating rate mortgage totaling $64.7 million maturing
in 3 years. This facility has the ability to be increased to $69.7 million as
funding of capital requirements is needed. The interest rate is 300 basis points
over 30-day LIBOR.
11
<PAGE>
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, 1999
During July 1999, the Company entered into a joint venture agreement with
Morgan Stanley Real Estate Fund III, L.P. to own 90 Broad Street located in
Manhattan. The property was contributed to the venture by the Company and the
Company retained a 35% interest in the venture. At the time of the contribution
the property was valued at $34.6 million which approximated the Company's cost
basis in the asset. In addition, the venture assumed the existing $20.8 million
first mortgage that was collateralized by the property. The Company will
continue to provide management, leasing and construction services at the
property on a fee basis.
The condensed statement of operations for the unconsolidated joint
ventures is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------
(unaudited)
<S> <C>
Total Revenues $2,906
------
Operating expense 933
Real estate taxes 410
Interest 770
Depreciation and amortization 456
------
Total Expenses $2,569
------
Net income before outside partners'
interest 337
Outside partners' share of income (186)
------
Net income allocate to
the Company $ 151
======
</TABLE>
6. MORTGAGE NOTES PAYABLE AND SECURED BRIDGE FACILITIES
During April 1999, the Company closed on fixed-rate mortgage financings
totaling $102.8 million with maturities of 7 years ($50.8 million secured by
1414 Avenue of the Americas, 633 Third Avenue and 70 West 36th Street) and 10
years ($52 million secured by 1412 Broadway). 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.
During May 1999, the Company closed on 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 (7.69% at September 30, 1999). The
second loan was a $52.7 million one-year floating rate facility, secured by the
Tower properties and bears interest at a rate of 150 basis points over the
30-day LIBOR rate (6.43% at September 30, 1999).
During September 1999, the Company closed a $49.2 million fixed rate
financing secured by the property located at 711 Third Avenue. This mortgage
matures in 5 years and carries a fixed interest rate of 8.13%. The proceeds were
used to repay a $5.0 million existing financing on the property with the balance
used to reduce the amount outstanding under the Company's revolving credit
facility.
7. 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.
12
<PAGE>
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, 1999
8. NET INCOME PER COMMON SHARE
Basic net income per common share is computed using the weighted average
number of common shares outstanding during the period. To arrive at the diluted
net income per common share, the common stock equivalents, representing options
computed in accordance with the treasury stock method, resulted in increasing
the number of shares outstanding.
9. 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.
10. 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 $956 and $2,591 for the three
and nine month periods ended September 30, 1999. The Company's transactions with
the related parties amounted to $781 and $1,277 for the three and nine month
periods ended September 30, 1998.
11. 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
consist primarily of security, maintenance, utility costs, real estate taxes 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.
12. SUBSEQUENT EVENTS
On November 5, 1999 the Company acquired the remaining 35% interest in the
BMW Building for $34.1 million. Simultaneous with this closing, the Company
obtained a new $70 million first mortgage from Bank of New York. The mortgage
has a term of five years with a floating interest rate of 200 basis points over
30-day LIBOR. At the time of the financing, the Company entered into an interest
rate protection agreement with Bank of New York. The agreement has fixed the
LIBOR interest rate at 6.10%; however, the LIBOR interest rate on the loan will
begin floating if the actual LIBOR rate exceeds 6.10% and is capped at a maximum
LIBOR rate of 6.58%. At closing the loan's effective interest rate inclusive of
the collar arrangement was 8.17%. This interest rate "collar" agreement is in
effect for five years to correspond with the term of the loan.
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 should be read in conjunction with the financial statements
appearing elsewhere in this report, the financial statements included in the
Company's annual report on Form 10-K for the year ended December 31, 1998 and
the financial statements included in the Company's report on Form 10-Q for the
quarterly periods ended March 31, 1999 and June 30, 1999.
FINANCIAL CONDITION
Commercial real estate properties before accumulated depreciation
increased approximately $198.1 million from December 31, 1998 to September 30,
1999 primarily as a result of the acquisition of a controlling interest in 555
West 57th Street for $79.5 million (including minority interest of $12.8
million) (the "BMW Building"), an operating leasehold position at 420 Lexington
Avenue purchased for $27.3 million, the properties purchased in May 1999 located
at, 286, 290 and 292 Madison Avenue for $50.0 million and $41.3 million from
property redevelopment, including tenant improvements. These acquisitions were
funded primarily through the Company's revolving credit facility (the "Credit
Facility") and mortgage note financings.
Total liabilities increased $247.4 million to $468.9 million at September
30, 1999 compared to $221.5 million at December 31, 1998 primarily due to (i)
$286.3 million increase in mortgage notes payable from the mortgage at the BMW
Building ($44 million), the net mortgage notes to finance the Tower Properties
($27.0 million), the secured debt financing at 420 Lexington Avenue ($65
million), the secured debt financing at 711 Third Avenue ($49.2 million) and
$102.8 million in additional secured mortgage debt with these increases
partially offset by principal amortization on various mortgage notes, (ii) a
$37.2 million increase in the revolving credit facility and (iii) a $11.4
million increase in other liabilities. These increases were partially offset by
the $87.5 million decrease in secured bridge facilities that were refinanced
with secured mortgage note proceeds.
RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1999 TO THE NINE MONTHS
ENDED SEPTEMBER 30, 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, 1466 Broadway 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), 90 Broad Street, acquired May 1999 and subsequently
contributed to a joint venture in July 1999 in which the Company retained a
35% interest, the properties located at 286, 290 and 292 Madison Avenue (all
acquired May 1999) and the Company's 49.9% interest in the 1250 Broadway
joint venture (the "1999 Acquisitions") which are included for a portion of
1999 and 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.
Rental revenue for the nine months ended September 30, 1999 totaled $129.3
million representing an increase of $47.9 million compared to $81.4 million for
the nine months ended September 30, 1998. The increase is primarily attributable
to the revenue associated with the following: (i) the normalization of the
1998 Acquisitions which increased rental revenue by $20.2 million, (ii) 1998
and 1999 leasing activity in the 1998 acquisitions ($7.3 million), (iii) the
1999 Acquisitions which increased rental revenue by $17.8 million and (iv)
increased rental revenue from the Same Store portfolio due to increased
annualized rent from rollover ($1.2 million) and increased occupancy ($1.4
million).
14
<PAGE>
Signage rent for the nine months ended September 30, 1999 totaled $1.1
million which represents income from temporary outdoor signs placed at portfolio
properties. There was no corresponding income during 1998.
Escalation and reimbursement revenue for the nine months ended September
30, 1999 totaled $16.5 million representing an increase of $5.1 million compared
to $11.4 million for the nine months ended September 30, 1998. The increase is
primarily attributable to the revenue associated with the 1998 Acquisitions
which increased revenue by $2.8 million, and the 1999 Acquisitions which
increased revenue by $2.4 million. The increases were partially offset by a $0.1
million reduction in escalation and reimbursement revenue at the Same Store
properties.
Investment income for the nine months ended September 30, 1999 totaled
$3.7 million, representing an increase of $1.3 million compared to $2.4 million
for the nine months ended September 30, 1998. The increase is primarily
attributable to the 636 11th Avenue mortgage ($0.5 million), the second mortgage
at 521 Fifth Avenue ($0.9 million) and the preferred equity interest at 1370
Avenue of the Americas ($0.9 million). These investments were partially offset
by a reduction in interest income from the May 1999 repayment of the mortgage
note at 17 Battery Place and reduced income earned on higher levels of cash on
hand in 1998 from the excess proceeds received from the May 1998 public
offering.
Equity in income (loss) from Service Corporations for the nine months
ended September 30, 1999 contributed $0.6 million compared to a small loss for
the nine months ended September 30, 1998. The income generated from the Service
Corporations is primarily due to increased tenant-rep leasing activity and
management fees from the 1999 joint venture properties.
Equity in income from joint ventures for the nine months ended September
30, 1999 contributed $0.2 million. This income resulted from the joint ventures
in 90 Broad Street and 1250 Broadway, both of which commenced in the third
quarter of 1999.
Operating expenses for the nine months ended September 30, 1999 totaled
$36.8 million representing an increase of $12.2 million compared to $24.6
million for the nine months ended September 30, 1998. The increase was primarily
attributable to: (i) the normalization of the 1998 Acquisitions which increased
operating expenses by $5.0 million, the 1999 Acquisitions which increased
operating expenses by $6.5 million, and an increase in Same Store operating
expenses of $0.7 million.
Ground rent for the nine months ended September 30, 1999 totaled $9.6
million representing an increase of $1.4 million compared to $8.2 million for
the nine months ended September 30, 1998. The increase is attributable to the
normalization of the ground leases at 420 Lexington Avenue ($0.7 million) and
711 Third Avenue ($0.7 million).
Interest expense for the nine months ended September 30, 1999 totaled
$19.7 million representing an increase of $9.9 million compared to $9.8 million
for the nine months ended September 30, 1998. The increase is primarily
attributable to (i) the debt assumed in connection with the acquisition of the
BMW Building ($2.4 million), (ii) the secured facilities completed since the
fourth quarter 1998 ($7.4 million), (iii) increased debt from the Tower Property
financings ($0.9 million) and (iv) the balance represents the net interest
incurred on the Credit Facility during 1999 as compared to interest incurred on
the Credit Facility and acquisition facility during 1998.
Depreciation and amortization for the nine months ended September 30, 1999
totaled $19.7 million representing an increase of $9.0 million compared to $10.7
million for the nine months ended September 30, 1998. The increase is primarily
attributable to: (i) the 1998 Acquisitions which increased depreciation by $5.2
million (ii) the 1999 Acquisitions which increased depreciation by $2.1 million
(iii) the 1999 Same Store portfolio which increased depreciation by $1.0
million, (iv) and an increase in the amortization of deferred finance costs
totaling $0.7 million associated with fees incurred on the Company's refinancing
activities.
Real estate taxes for the nine months ended September 30, 1999 totaled
$21.9 million representing an increase of $7.0 million compared to $14.9 million
for the nine months ended September 30, 1998. The increase is primarily
attributable to (i) the 1998 Acquisitions which increased real estate taxes by
$4.3 million, (ii) the 1999 Acquisitions which increased real estate taxes by
$2.9 million and (iii) a decrease in Same Store real estate taxes by $0.2
million.
Marketing, general and administrative expense for the nine months ended
September 30, 1999 totaled $8.4 million representing an increase of $4.4 million
compared to $4.0 million for the nine months ended September 30, 1998. The
increase is due to increased personnel costs associated with the Company's rapid
growth.
15
<PAGE>
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1999 TO THE THREE
MONTHS ENDED SEPTEMBER 30, 1998. The following transactions have occurred that
have a material impact on the comparison of the 1999 and 1998 results: (i) 1412
Broadway (acquired August 1998) which was included in the 1999 results and was
included for only a portion of the 1998 results (the "1998 Acquisition") and
(ii) the acquisition of a controlling interest in 555 West 57th Street, an
acquired operating lease position at 420 Lexington Avenue (both acquired January
1999), 90 Broad Street, acquired May 1999 and subsequently contributed to a
joint venture in July 1999 in which the Company retained a 35% interest, the
properties located at 286, 290 and 292 Madison Avenue (acquired May 1999) and
the joint venture at 1250 Broadway (the "1999 Acquisitions") which are included
for all or a portion of 1999 and 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.
Rental revenue for the three months ended September 30, 1999 totaled $45.1
million representing an increase of $11.5 million compared to $33.6 million for
the three months ended September 30, 1998. The increase is primarily
attributable to the revenue associated with the following: (i) the normalization
of the 1998 Acquisitions which increased rental revenue by $1.4 million, (ii)
1998 and 1999 leasing activity attributable to the 1998 Acquisitions ($1.9
million), (iii) the 1999 Acquisitions which increased rental revenue by $7.0
million and (iv) the increased rental revenue from the Same Store portfolio due
to increased annualized rent from rollover ($0.8 million) and increased
occupancy ($0.4 million).
Signage rent for the three months ended September 30, 1999 totaled $0.6
million which represents income from temporary outdoor signs placed at portfolio
properties. There was no corresponding income during 1998.
Escalation and reimbursement revenue for the three months ended September
30, 1999 totaled $6.9 million representing an increase of $1.6 million compared
to $5.3 million for the three months ended September 30, 1998. The increase is
primarily attributable to the revenue associated with the 1998 Acquisitions
which increased revenue by $0.3 million, the 1999 Acquisitions which increased
revenue by $1.2 million and a $0.1 million increase in escalations and
reimbursements from the Same Store portfolio.
Investment income for the three months ended September 30, 1999 totaled
$1.5 million, representing an increase of $0.6 million compared to $0.9 million
for the three months ended September 30, 1998. The increase is primarily
attributable to the 636 11th Avenue mortgage ($0.1 million), the second mortgage
at 521 Fifth Avenue ($0.4 million) and the preferred equity interest at 1370
Avenue of the Americas ($0.6 million). These investments were partially offset
by a reduction in interest income from 17 Battery Place ($0.5 million).
Equity in income (loss) from Service Corporations for the three months
ended September 30, 1999 contributed $0.2 million compared to breakeven for the
three months ended September 30, 1998. The income generated from the Service
Corporations is primarily due to increased tenant-rep leasing activity and
management fees of the 1999 joint venture properties.
Equity in income from joint ventures for the three months ended September
30, 1999 contributed $0.2 million. This income resulted from the joint ventures
in 90 Broad Street and 1250 Broadway, both of which commenced during the third
quarter of 1999.
Operating expenses for the three months ended September 30, 1999 totaled
$14.3 million representing an increase of $3.3 million compared to $11.0 million
for the three months ended September 30, 1998. The increase was attributable to
the normalization of the 1998 Acquisitions ($0.5 million) and the 1999
Acquisitions ($3.3 million). This increase was partially offset by a $0.5
million decrease in operating expenses over the balance of the portfolio.
Ground rent for the three months ended September 30, 1999 totaled $3.2
million representing a decrease of $0.2 million compared to $3.4 million for the
three months ended September 30, 1998. The change is attributable to the
normalization of the ground lease at 711 Third Avenue ($0.2 million) offset by a
decrease at 420 Lexington Avenue ($0.4 million) due to the Company's January
1999 acquisition of a subleasehold position.
Interest expense for the three months ended September 30, 1999 totaled
$7.8 million representing an increase of $5.4 million compared to $2.4 million
for the three months ended September 30, 1998. The increase is primarily
attributable to (i) debt assumed in connection with the acquisition of the BMW
Building ($1.4 million), (ii) $1.1 million increase in interest expense from the
Tower Properties, (iii) $0.7 million for the full quarter effect of borrowings
associated with the purchase of the property located at 1412 Broadway, (iv) $0.6
million for financing the acquisition of mortgage notes receivable, preferred
investments and the funding of the Company's equity in joint ventures and (v)
$1.6 million for increased borrowings to fund capital projects and working
capital requirements.
Depreciation and amortization for the three months ended September 30,
1999 totaled $7.7 million representing an increase of $3.6 million compared to
$4.1 million for the three months ended September 30, 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 $1.0 million, (iii) an increase in the amortization of deferred
finance costs totaling $0.3 million associated with fees incurred on the
Company's 1998 and 1999 refinancings and (iv) a $0.6 million increase from the
Same Store portfolio.
Real estate taxes for the three months ended September 30, 1999 totaled
$7.5 million representing an increase of $1.4 million compared to $6.1 million
for the three months ended September 30, 1998. The increase is primarily
attributable to the normalization of the 1998 Acquisitions which increased real
estate taxes by $0.2 million and the 1999 Acquisitions which increased real
estate taxes by $1.2 million.
16
<PAGE>
Marketing, general and administrative expense for the three months ended
September 30, 1999 totaled $3.0 million representing an increase of $1.4 million
compared to $1.6 million for the three months ended September 30, 1998. The
increase is due to higher costs associated with the Company's rapid growth.
LIQUIDITY AND CAPITAL RESOURCES
During April 1999 the Company closed on fixed-rate mortgage financings
totaling $102.8 million with maturities of 7 years ($50.8 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 recorded $0.6 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.
During April 1999 and May 1999 the Company received 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 funded the
acquisition of the Tower Properties ($84.5 million). The second loan was a $52.7
million one-year floating rate acquisition facility, secured by these four
acquired properties and bears interest at 150 basis points over LIBOR.
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. This mortgage was funded
through the Company's Credit Facility. The second mortgage bridge loan has a
term of six months which has been 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%, growing to 17% during the extension period.
On May 13, 1999 the Company announced it had acquired a $20 million
preferred equity interest in a venture holding the loan secured by 1370 Avenue
of the Americas. The investment, funded through the Company's Credit Facility,
bears a floating interest rate of 700 basis points over LIBOR for a term of
three years.
During September, 1999 the Company closed on an 8.13% fixed rate mortgage
financing of $49.2 million with a maturity of 6 years. The loan is secured by
the Company's interest in 711 Third Avenue. The proceeds were used to repay an
existing $5 million financing on the property and the balance reduced the amount
outstanding under the Company's Credit Facility.
At September 30, 1999 the mortgage loans and revolving credit facility
represented approximately 37.6% 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 $1,059 million
(based on a common stock price of $20.50 per share, the closing price of the
Company's common stock on the New York Stock Exchange on September 30, 1999).
The Company's principal debt maturities are scheduled to be $0.5 million and
$64.3 million for the remaining three months ending December 31, 1999 and the
twelve months 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, 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 investment income from mortgage loans and preferred
investments and fees generated by the Service Corporations.
The Company estimates that for the three months ended December 31, 1999
and the 12 months ending December 31, 2000, it will incur approximately $6.9
million and $24.3 million, respectively, of capital expenditures on
properties currently owned. In 1999 and 2000, approximately $6.1 million and
$18.5 million, respectively, of the capital investments are associated with
the redevelopment costs associated with properties acquired at or after the
Company's initial public offering. 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 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.
17
<PAGE>
CASH FLOWS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1999 TO THE THREE
MONTHS ENDED SEPTEMBER 30, 1998.
Net cash provided by operating activities increased $16.4 million to $34.7
million for the nine months ended September 30, 1999 as compared to $18.3
million for the nine months ended September 30, 1998. The increase was due
primarily to the operating cash flow generated by the 1998 Acquisitions and 1999
Acquisitions and an increase in investment income. Net cash used in investing
activities decreased $162.4 million to $204.1 million for the nine months ended
September 30, 1999 compared to $366.5 million for the nine months ended
September 30, 1998. The decrease was due primarily to the decrease in
acquisition activity in 1999 as compared to 1998 (approximately $171 million)
and advances from Service Corporations ($12.5 million) partially offset by the
increase in mezzanine debt and mortgage investment ($3.6 million) and
investments in joint ventures ($17.6 million). Net cash provided by financing
activities decreased $164.7 million to $171.6 million for the nine months ended
September 30, 1999 compared to $336.3 million for the nine months ended
September 30, 1998. The decrease is primarily due to the net proceeds from the
Company's 1998 equity offerings generating $353.3 million with no corresponding
offering in 1999. The Company received $174.6 million in net proceeds from
mortgage loan financings during 1999. The Company borrowed $37.2 million from
the credit facility during 1999 and $6.0 million in 1998. The Company's common
stock dividend increased $14.2 million due to the increased common shares
outstanding which increased primarily from the 1998 common equity offering.
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.
Funds from Operations for the three and nine months ended September 30,
1999 and 1998, respectively, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income before minority interest, preferred
dividends and extraordinary items $ 11,641 $ 11,058 $ 36,762 $ 23,072
Add:
Depreciation and amortization 7,677 4,069 19,705 10,714
Joint Venture adjustment 120 -- 120 --
Less:
Preferred stock dividend (2,300) (2,300) (6,900) (3,420)
Minority interest in commercial real estate (354) -- (1,765) --
Amortization of deferred financing costs
and Depreciation of non-real estate
assets (878) (186) (2,140) (811)
-------- -------- -------- --------
FFO $ 15,906 $ 12,641 $ 45,782 $ 29,555
======== ======== ======== ========
Basic weighted average shares/units
outstanding 26,628 26,350 26,623 20,631
Diluted weighted average shares/units
outstanding 31,405 26,356 31,385 20,693
</TABLE>
18
<PAGE>
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 was required to be adopted in years
beginning after June 15, 1999. The FASB issued Statement No. 137 which extended
the effective date of this statement to June 15, 2000 (January 1, 2001 for the
Company). 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.
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 exceeds Year 2000 compliance requirements. The Company has
completed internal testing of the financial systems, although there is no
assurance this test will confirm Year 2000 compliance. The Company has contacted
other software and hardware providers and received 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 100%
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.
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 obtained a majority of the documentation
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 which
the Company believes provides only limited assurances. However, the Company
cannot represent that these responses are accurate and may result in lost
services if these vendors are not Year 2000 compliant.
19
<PAGE>
<TABLE>
<CAPTION>
DIRECT INDIRECT
ASSESSMENT REMEDIATION TESTING TESTING IMPLEMENTATION
---------- ----------- ------- -------- --------------
<S> <C> <C> <C> <C> <C>
Information 100% 100% 100% 100% complete 100% complete
Technology complete complete complete based on
representations
received from
third party
vendor
Property 100% 100% 100% Not applicable 100% complete
Operating complete complete complete
Equipment
(on currently
owned
properties)*
Third Party 100% 100% Not 100% complete 100%
Service complete complete applicable based on complete on
Providers representations assessed items
received from
third party
vendors
</TABLE>
* Will change with new acquisitions on a quarterly basis.
COSTS
The Company has not incurred material direct costs related to Year 2000.
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.
RISKS
The Company believes that it has effectively identified and resolved Year
2000 issues. In the event that certain third-party servicers are not Year 200
compliant, 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 has completed all phases of its Year 2000 program and
currently has no contingency plan in place; however, the Company is currently
drafting limited contingency procedures to address certain events for
property-level system problems.
20
<PAGE>
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 September 30, 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.
21
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
1. Form 8-K/A dated May 24, 1999, Item 7
22
<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/ THOMAS E. WIRTH
------------------------
Thomas E. Wirth
Executive Vice President and Chief Financial Officer
Date: November 15, 1999
23
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