<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 June 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 24,191,826 at August 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 June 30, 1999 (unaudited) and
December 31, 1998 ............................................................................................ 3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1999
and 1998 (unaudited) ......................................................................................... 5
Condensed Consolidated Statement of Stockholders' Equity for the Six
Months Ended June 30, 1999 (unaudited) ....................................................................... 7
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 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 ........................................................................ 20
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS............................................................ 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................................. 21
SIGNATURES............................................................................................................... 22
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
SL Green Realty Corp.
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ----------------
(Unaudited) (Note 1)
<S> <C> <C>
ASSETS
Commercial real estate properties, at cost:
Land and land interests .............................................. $ 144,044 $ 112,123
Buildings and improvements ........................................... 639,970 488,914
Building leasehold ................................................... 117,421 83,816
Property under capital lease.......................................... 12,208 12,208
----------- -----------
913,643 697,061
Less accumulated depreciation......................................... (47,338) (37,355)
----------- -----------
866,305 659,706
Cash and cash equivalents............................................. 10,068 6,236
Restricted cash....................................................... 26,948 18,635
Tenant receivables net of allowance of $747 and $100 in 1999 and 1998,
respectively ......................................................... 4,694 3,951
Related party receivables ............................................ 516 182
Deferred rents receivable net of provision for doubtful
accounts of $4,082 and $2,369 in 1999 and 1998, respectively ...... 30,787 20,891
Investment in and advances to Service Corporations ................... 4,714 10,694
Mortgage loans receivable and preferred investment ................... 40,901 26,401
Deferred costs, net ................................................. 25,297 15,282
Other assets ......................................................... 21,371 15,755
----------- -----------
----------- -----------
Total assets ......................................................... $ 1,031,601 $ 777,733
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part to these financial statements.
3
<PAGE>
SL Green Realty Corp.
Condensed Consolidated Balance Sheets
(Dollars in Thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
(Unaudited) (Note 1)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable...................................................... $ 314,303 $ 50,862
Revolving credit facility .................................................. 88,000 23,800
Secured bridge facilities .................................................. -- 87,500
Accrued interest payable.................................................... 2,354 494
Accounts payable and accrued expenses....................................... 11,666 5,588
Capitalized lease obligations............................................... 14,876 14,741
Deferred land lease payable................................................. 10,829 9,947
Dividend and distributions payable ......................................... 11,670 11,585
Security deposits........................................................... 16,847 16,949
----------- -----------
Total liabilities........................................................... 470,545 221,466
----------- -----------
Minority interests.......................................................... 45,646 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.............................................. 110,149 109,950
Commitments, contingencies and other matters
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
Officers' loans ............................................................ (428) (528)
Deferred compensation plans ................................................ (7,787) (3,266)
Distributions in excess of earnings ........................................ (8,894) (8,559)
----------- -----------
Total stockholders' equity................................................... 405,261 404,826
----------- -----------
Total liabilities and stockholders' equity .................................. $ 1,031,601 $ 777,733
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part to these financial statements.
4
<PAGE>
SL Green Realty Corp.
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in Thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Rental revenue, net ......................... $ 43,915 $ 28,713 $ 84,342 $ 48,730
Escalation and reimbursement revenues ....... 5,080 4,022 10,012 6,150
Investment income ........................... 1,424 928 2,262 1,565
Other income ................................ 390 -- 855 4
-------- -------- -------- --------
Total revenues .............................. 50,809 33,663 97,471 56,449
-------- -------- -------- --------
Equity in income (loss) from Service
Corporations ........................... 117 (91) 328 (49)
EXPENSES
Operating expenses (see Note 8 for
affiliate transactions) ................ 11,264 8,259 22,485 14,512
Ground rent ................................. 3,183 3,536 6,390 4,724
Interest .................................... 6,711 3,877 11,949 7,371
Depreciation and amortization ............... 6,590 3,951 12,028 6,644
Real estate taxes ........................... 7,339 5,471 14,422 8,754
Marketing, general and administrative ....... 2,771 1,344 5,416 2,382
-------- -------- -------- --------
Total expenses .............................. 37,858 26,438 72,690 44,387
-------- -------- -------- --------
Income before minority
interest-preferred stock dividends
and extraordinary item ................. 13,068 7,134 25,109 12,013
Minority interests .......................... (1,664) (762) (3,093) (1,552)
-------- -------- -------- --------
Income before extraordinary item and
preferred stock dividends and
accretion .............................. 11,404 6,372 22,016 10,461
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt,
net of minority interest of ($57) and
($52) in 1999 and 1998, respectively.... (628) (522) (628) (522)
-------- -------- -------- --------
Net income .................................. 10,776 5,850 21,388 9,939
Preferred stock dividends ................... (2,300) (1,120) (4,600) (1,120)
Preferred stock accretion ................... (99) (71) (198) (71)
-------- -------- -------- --------
-------- -------- -------- --------
Net income available to common
shareholders ........................... $ 8,377 $ 4,659 $ 16,590 $ 8,748
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
5
<PAGE>
SL Green Realty Corp.
Condensed Consolidated Statements of Operations -- Continued
(Unaudited)
(Dollars in Thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
PER SHARE DATA (BASIC AND DILUTED):
Income per share before extraordinary
item ................................ $ 0.37 $ 0.28 $ 0.70 $ 0.60
Extraordinary item per share ............. (0.02) (0.03) (0.02) (0.03)
--------- --------- --------- ----------
--------- --------- --------- ----------
Net income available per common share .... $ 0.35 $ 0.25 $ 0.68 $ 0.57
--------- --------- --------- ----------
--------- --------- --------- ----------
Basic weighted average common shares
outstanding ......................... 24,192 18,358 24,192 15,342
--------- --------- --------- ----------
--------- --------- --------- ----------
Diluted weighted average common shares and
common share equivalents outstanding 24,260 18,420 24,248 15,434
--------- --------- --------- ----------
--------- --------- --------- ----------
Dividends declared per common share ...... $ 0.35 $ 0.35 $ 0.70 $ 0.70
--------- --------- --------- ----------
--------- --------- --------- ----------
</TABLE>
The accompanying notes are an integral part to these financial statements.
6
<PAGE>
SL Green Realty Corp.
Condensed Consolidated Statement of Stockholders' Equity
(Dollars in Thousands)
<TABLE>
<CAPTION>
Additional Deferred Distributions
Common Paid- Officers' Compensation in Excess of
Stock In Capital Loans Plans 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 ............................... -- -- -- -- 21,388 21,388
Preferred dividend and accretion
requirement............................. -- -- -- -- (4,798) (4,798)
Deferred compensation plan ............... 2 5,189 -- (5,191) -- --
Cash distributions declared ($0.70 per
common share) .......................... -- -- -- -- (16,925) (16,925)
Amortization of deferred compensation plan
and officers' loans..................... -- -- 100 670 -- 770
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Balance at June 30, 1999 (unaudited)...... $ 242 $ 422,128 $ (428) $ (7,787) $ (8,894) $ 405,261
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part to these financial statements.
7
<PAGE>
SL Green Realty Corp.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ............................................................ $ 21,388 $ 9,939
--------- ---------
Adjustments: To reconcile net income with net cash provided
by operating activities:...............................................
Minority interests .................................................. 3,093 1,500
Depreciation and Amortization........................................ 11,817 6,644
Equity in net (income) loss from Service Corporations................ (328) 49
Deferred rents receivable............................................ (11,769) (4,109)
Provision for deferred rents and bad debts .......................... 2,131 974
Extraordinary loss .................................................. 628 574
Amortization of Officers' loans and deferred compensation............ 770 33
Changes in operating assets and liabilities:
Restricted cash...................................................... (2,008) (7,749)
Receivables.......................................................... (1,116) (2,821)
Related party receivables............................................ (334) (749)
Deferred costs....................................................... (7,097) (1,939)
Other assets......................................................... (4,201) (580)
Accounts payable and accrued expenses................................ 2,976 9,335
Deferred land lease payable.......................................... 882 584
--------- ---------
Net cash provided by operating activities........................... 16,832 11,685
--------- ---------
INVESTING ACTIVITIES:
Additions to land, building leasehold, buildings and improvements.... (171,554) (244,964)
Advances from Service Corporations .................................. 6,308 --
Mortgage loan receivable, net ....................................... (14,500) (6,269)
--------- ---------
Net cash used in investing activities ............................... (179,746) (251,233)
--------- ---------
FINANCING ACTIVITIES:
Payments of mortgage notes payable and loans......................... (2,109) (960)
Proceeds from mortgage notes payable ................................ 220,550 --
Net proceeds from sale of common shares ............................. -- 243,110
Net proceeds from sale of 8% preferred shares ....................... -- 110,400
Payment of revolving credit facility ................................ (39,300) (93,000)
Proceeds from revolving credit facility ............................. 103,500 17,000
Payments on secured bridge facilities ............................... (87,500) --
Proceeds from acquisition facility .................................. -- 239,960
Repayment of acquisition facility ................................... -- (239,960)
Deferred loan costs ................................................. (5,380) (1,156)
Cash dividends and distributions paid on common stock................ (23,150) (10,273)
Capital lease ....................................................... 135 123
--------- ---------
Net cash provided by financing activities............................ 166,746 265,244
--------- ---------
Net increase in cash and cash equivalents............................ 3,832 25,696
Cash and cash equivalents at beginning of period .................... 6,236 12,782
--------- ---------
--------- ---------
Cash and cash equivalents at end of period .......................... $ 10,068 $ 38,478
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information:
Cash paid for interest: ............................................... $ 10,089 $ 7,560
--------- ---------
--------- ---------
Supplemental disclosure of non-cash investing and financing activities:
Assumption of mortgage note payable in connection with joint venture
acquisition ......................................................... $ 45,500
---------
---------
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.
8
<PAGE>
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
JUNE 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 believes it
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 held, 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 the 1999
presentation.
EXTRAORDINARY ITEMS
As a result of the Company's April 1999 refinancing activities (see
note 4), 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 has been 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 has been classified as an extraordinary loss
during the quarter ended June 30, 1998.
9
<PAGE>
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
JUNE 30, 1999
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.
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 on the basis that it has significant influence with respect
to management and operations.
All of the management and leasing with respect to the properties owned
by the Company are conducted through the Management LLC which is owned 100% by
the Operating Partnership.
PARTNERSHIP AGREEMENT
In accordance with the partnership agreement of the Operating
Partnership (the "Operating Partnership Agreement"), all allocations of
distributions and profits and losses are made in proportion to the percentage
ownership interests of their respective partners. As the managing general
partner of the Operating Partnership, the Company is required to take such
reasonable efforts, as determined by it in its sole discretion, to cause the
Operating Partnership to distribute sufficient amounts to enable the payment of
sufficient dividends by the Company (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
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 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. The FASB issued Statement No. 137 which
extended the effective date of this statement to June 15, 2000 and, therefore,
the Company will adopt the new statement effective January 1, 2001.
10
<PAGE>
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
JUNE 30, 1999
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 555 West 57th Street (the "BMW Building").
The Company's operating results for the six months ended June 30, 1999
are presented as if the BMW Building were wholly-owned.
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.
2. 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 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
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.
The following table summarizes, on an unaudited pro forma basis, the
combined results of operations of the Company for the six months ended June 30,
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 .................................. $103,660 $94,987
Pro forma income before extraordinary items...... $ 17,127 $12,458
Pro forma net income ............................ $ 16,499 $11,936
Pro forma earnings per share (basic and diluted). $ 0.68 $ 0.50
</TABLE>
3. 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 loan has a term of six months with an expected
yield of 16% which may be extended for an additional three months. 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. 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 an initial yield in of
12%
11
<PAGE>
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
JUNE 30, 1999
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.
4. 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, 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 June 30, 1999). The second
loan was $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 June 30, 1999).
5. 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.
6. NET INCOME PER COMMON SHARE
Net income per common share-basic is computed with the weighted average
number of common shares outstanding during the period. To arrive at the diluted
per common share, the common stock equivalents, represnting options computed in
accordance with the treasury stock method, resulted in increasing the number of
shares outstanding.
7. COMMITMENTS AND CONTINGENCIES
The Company and the Operating Partnership are not presently involved in
any material litigation nor, to their knowledge, is any material litigation
threatened against them or their properties, other than routine litigation
arising in the ordinary course of business. Management believes the costs, if
any, incurred by the Company and the Operating Partnership related to the
routine litigation will not materially affect the financial position, operating
results or liquidity of the Company and the Operating Partnership.
8. RELATED PARTY TRANSACTIONS
There are business relationships with related parties which involve
maintenance expenses in the ordinary course of business. The Company's
transactions with the related parties amounted to $879 and $1,635 for the three
and six month periods ended June 30, 1999. The Company's transactions with the
related parties amounted to $460 and $496 for the three and six month periods
ended June 30, 1998.
9. 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 evaluated real estate
performance and allocates resources based on net income.
12
<PAGE>
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
JUNE 30, 1999
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 ompany has no tenant with rental revenue greater
than 4% of the Company's annual revenues, the reporting threshold for which
is 10%.
10. SUBSEQUENT EVENTS
On July 14, 1999, the Company signed an agreement to purchase the fee
interest in 1250 Broadway, a 670,000 square foot office building in Manhattan,
for $93 million. The Company expects the acquisition to close in the third
quarter of 1999.
On August 3, 1999, the Company announced a joint venture agreement with
Morgan Stanley Real Estate Fund III, LP whereby the Company retained a 48%
equity interest and a 35% economic interest in 90 Broad Street, New York. The
339,000 square foot office building was purchased by SL Green in May 1999 as a
part of the multi-property purchase from Tower Realty. The Company has been
appointed the operating member of the venture and managing agent for the
property. The Company received $9.6 million from the joint venture member to
acquire the 65% economic interest in the property.
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 period ended March 31, 1999.
FINANCIAL CONDITION
Commercial real estate properties before accumulated depreciation
increased approximately $217 million from December 31, 1998 to June 30, 1999
primarily as a result of the consolidation of 555 West 57th Street for $79.5
million (the "BMW Building"), an operating leasehold position at 420 Lexington
Avenue purchased for $27.3 million, the properties purchased in May 1999 at 90
Broad Street, 286, 290 and 292 Madison Avenue for $84.5 million (the "Tower
Properties") and property redevelopment, including tenant improvements ($25.7
million). These acquisitions were funded through the Company's revolving credit
facility (the "Credit Facility") and mortgage note financings.
Total liabilities increased $249 million to $470.5 million at June 30,
1999 compared to $221.5 million at December 31, 1998 primarily due to (i) $263.4
million increase in mortgage notes payable from the mortgage at the BMW Building
($44 million) the mortgage notes to finance the Tower Properties ($52.8
million), the secured debt financing at 420 Lexington Avenue ($65 million) and
$102.8 million in additional secured mortgage debt. These increases are
partially offset by principal amortization on various mortgage notes, (ii) a
$64.2 million increase in the revolving credit facility and (iii) a $8.9 million
increase in other liabilities. These increases were partially offset by the
$87.5 million decrease in secured bridge facilities that were refinanced with
mortgage note proceeds.
RESULTS OF OPERATIONS
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 TO THE SIX MONTHS
ENDED JUNE 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 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, an
acquired operating lease position at 420 Lexington Avenue (both acquired January
1999), 90 Broad Street, and the properties located at 286, 290 and 292 Madison
Avenue (all acquired May 1999) (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.
The rental revenue for the six months ended June 30, 1999 totaled $84.3
million representing an increase of $35.6 million compared to $48.7 million for
the six months ended June 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 $18.8 million, (ii) 1998 leasing
activity in the 1998 acquisitions ($5.4 million), (iii) the 1999 acquisitions
which increased rental revenue by $10.0 million and (iv) increased rental
revenue from the Same Store portfolio due to increased annualized rent from
rollover ($0.4 million) and increased occupancy ($1.0 million).
Escalation and reimbursement revenue for the six months ended June 30,
1999 totaled $10.0 million representing an increase of $3.8 million compared to
$6.2 million for the six months ended June 30, 1998. The increase is primarily
attributable to the revenue associated with the 1998 Acquisitions which
increased revenue by $2.5 million, and the 1999 Acquisitions which increased
revenue by $1.4
14
<PAGE>
million. The increases were partially offset by a $0.1 million reduction in
escalation and reimbursement revenue of $0.1 million at Same Store.
Investment income for the six months ended June 30, 1999 totaled $2.3
million, representing an increase of $0.7 million compared to $1.6 million for
the six months ended June 30, 1998. The increase is primarily attributable to
the 636 11th Avenue mortgage ($0.5 million), the second mortgage at 521 Fifth
Avenue ($0.5 million) and the preferred equity interest at 1370 Avenue of the
Americas ($0.3 million). These investments were all completed subsequent to June
30, 1998 and were partially offset by a reduction in interest income earned on
excess cash on hand generated in 1998 from the excess proceeds received from the
May 1998 public offerings.
Equity in income (loss) from Service Corporations for the six months
ended June 30, 1999 contributed $0.3 million compared to a small loss for the
six months ended June 30, 1998. The income generated from the Service
Corporations is primarily due to increased tenant-rep leasing activity.
Operating expenses for the six months ended June 30, 1999 totaled $22.5
million representing an increase of $8.0 million compared to $14.5 million for
the six months ended June 30, 1998. The increase was primarily attributable to:
(i) the normalization of the 1998 Acquisitions which increased operating
expenses by $4.8 million and the 1999 Acquisitions which increased operating
expenses by $3.2 million.
Ground rent for the six months ended June 30, 1999 totaled $6.4 million
representing an increase of $1.7 million compared to $4.7 million for the six
months ended June 30, 1998. The increase is attributable to the normalization of
the ground leases at 420 Lexington Avenue ($1.2 million) and 711 Third Avenue
($0.5 million).
Interest expense for the six months ended June 30, 1999 totaled $11.9
million representing an increase of $4.5 million compared to $7.4 million for
the six months ended June 30, 1998. The increase is primarily attributable to
(i) the debt assumed in connection with the acquisition of the BMW Building
($2.2 million), (ii) the secured bridge facilities completed in the fourth
quarter 1998 ($1.9 million), (iii) increased debt from the Tower Property
financings and the mezzanine debt program ($1.2 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 six months ended June 30, 1999
totaled $12.0 million representing an increase of $5.4 million compared to $6.6
million for the six months ended June 30, 1998. The increase is primarily
attributable to: (i) the 1998 Acquisitions which increased depreciation by $3.4
million (ii) the 1999 Acquisitions which increased depreciation by $1.1 million
(iii) the 1999 same store portfolio which increased depreciation by $0.4
million, (iv) and an increase in the amortization of deferred finance costs
totaling $0.5 million associated with fees incurred on the Company's refinancing
activities.
Real estate taxes for the six months ended June 30, 1999 totaled $14.4
million representing an increase of $5.6 million compared to $8.8 million for
the six months ended June 30, 1997. The increase is primarily attributable to
(i) the 1998 Acquisitions which increased real estate taxes by $3.9 million and
the 1999 Acquisitions which increased real estate taxes by $1.7 million.
Marketing, general and administrative expense for the six months ended
June 30, 1999 totaled $5.4 million representing an increase of $3.0 million
compared to $2.4 million for the six months ended June 30, 1998. The increase is
due to increased personnel costs associated with the Company's rapid growth and
higher public entity costs.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1999 TO THE THREE MONTHS
ENDED JUNE 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 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, an
acquired operating lease position at 420 Lexington Avenue (both acquired January
1999), 90 Broad Street, (acquired May 1999) and the properties located at 286,
290 and 292 Madison Avenue (acquired May 1999) (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.
The rental revenue for the three months ended June 30, 1999 totaled
$43.9 million representing an increase of $15.2 million compared to $28.7
million for the three months ended June 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 $5.3 million, (ii) 1998
and 1999 leasing activity in the 1998 acquisitions ($3.3 million), (iii) the
1999 Acquisitions which increased rental revenue by $5.4 million and (iv) the
increased rental revenue from the Same Store portfolio due to increased
annualized rent from rollover ($0.3 million) and increased occupancy ($0.9
million).
15
<PAGE>
Escalation and reimbursement revenue for the three months ended June
30, 1999 totaled $5.1 million representing an increase of $1.1 million compared
to $4.0 million for the three months ended June 30, 1998. The increase is
primarily attributable to the revenue associated with the 1998 Acquisitions
which increased revenue by $0.5 million and the 1999 Acquisitions which
increased revenue by $0.8 million. This increase was partially offset by a $0.2
million decrease in escalations and reimbursements from the Same Store
portfolio.
Investment income for the three months ended June 30, 1999 totaled $1.4
million, representing an increase of $0.5 million compared to $0.9 million for
the three months ended June 30, 1999. The increase is primarily attributable to
the 636 11th Avenue mortgage ($0.2 million), and second mortgage at 521 Fifth
Avenue ($0.5 million) and the preferred equity interest at 1370 Avenue of the
Americas ($0.3 million). These investments were all completed subsequent to June
30, 1998 and were partially offset by a reduction in interest income earned in
excess cash on hand generated in 1998 from excess proceeds from the May 1998
public offerings.
Equity in income (loss) from Service Corporations for the three months
ended June 30, 1999 contributed $0.1 million compared to a $0.1 million loss for
the six months ended June 30, 1998. The income generated from the Service
Corporations is primarily due to increased tenant-rep leasing activity.
Operating expenses for the three months ended June 30, 1999 totaled
$11.3 million representing an increase of $3.0 million compared to $8.3 million
for the three months ended June 30, 1998. The increase was primarily
attributable to: (i) the 1998 Acquisitions which increased operating expenses by
$0.8 million (ii) the 1999 Acquisitions which increased operating expenses by
$1.6 million and (iii) the 1999 same store portfolio which increased $0.6
million primarily attributable to 17 Battery Place as a result of increased
occupancy and the shift in allocated building costs between the Company's
condominium unit and a third party condominium unit being vacated for
development.
Ground rent for the three months ended June 30, 1999 totaled $3.2
million representing a decrease of $0.3 million compared to $3.5 million for the
three months ended June 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 ($0.5 million) due to the Company's January
1999 acquisition of a subleasehold position.
Interest expense for the three months ended June 30, 1999 totaled $6.7
million representing an increase of $2.8 million compared to $3.9 million for
the three months ended June 30, 1998. The increase is primarily attributable to
(i) debt assumed in connection with the acquisition of the BMW Building ($1.4
million), (ii) $1.2 million increase in interest expense from the Tower
Properties and the mezzanine debt program and (iii) the increased interest rates
associated with additional mortgage financings completed in the second quarter
1999, a portion of which paid down the outstanding balance of the unsecured line
of credit ($0.2 million).
Depreciation and amortization for the three months ended June 30, 1999
totaled $6.6 million representing an increase of $2.6 million compared to $4.0
million for the three months ended June 30, 1998. The increase is primarily
attributable to: (i) the 1998 Acquisitions which increased depreciation by $1.4
million (ii) the 1999 Acquisitions which increased depreciation by $0.7 million,
(iii) and 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) $0.2 million increase from the Same Store portfolio.
Real estate taxes for the three months ended June 30, 1999 totaled $7.3
million representing an increase of $1.8 million compared to $5.5 million for
the three months ended June 30, 1998. The increase is primarily attributable to
the normalization of the 1998 Acquisitions which increased real estate taxes by
$0.8 million and the 1999 Acquisitions which increased real estate taxes by $1.0
million.
Marketing, general and administrative expense for the three months
ended June 30, 1999 totaled $2.8 million representing an increase of $1.5
million compared to $1.3 million for the three months ended June 30, 1998. The
increase is due to higher costs associated with the Company's rapid growth and
higher public entity costs.
16
<PAGE>
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 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 June 30, 1999 the mortgage loans and revolving credit facility
represent approximately 37.9% 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 $1,061
million (based on a common stock price of $20.44 per share, the closing price of
the Company's common stock on the New York Stock Exchange on June 30, 1999). The
Company's principal debt maturities are scheduled to be $1.1 million and $91.2
million for the remaining six 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 six months ended December 31, 1999
and the 12 months ending December 31, 2000, it will incur approximately $47.4
million and $26.5 million, respectively, of capital expenditures on properties
currently owned. In 1999 and 2000, in excess of $16.2 million and $11.7 million,
respectively, of the capital investments are associated with the redevelopment
costs associated with properties at or after the Company's IPO. The Company
expects to fund these capital expenditures with the Credit Facility, operating
cash flow and cash on hand. Future property acquisitions may require substantial
capital investments in such properties for refurbishment and leasing costs. The
Company expects that these financing requirements will be provided primarily
from the Credit Facility, from additional borrowings secured by the acquisition
property and from future issuances of equity and debt. The Company believes that
it will have sufficient capital resources to satisfy its obligations during the
next 12 month period. Thereafter, the Company expects that capital needs will be
met through a combination of net cash provided by operations, borrowings and
additional equity issuances.
CASH FLOWS
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 TO THE SIX MONTHS
ENDED JUNE 30, 1998
Net cash provided by operating activities increased $5.1 million to
$16.8 million for the six months ended June 30, 1999 as compared to $11.7
million for the six months ended June 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 $71.5 million to $179.7 million for the six
months ended June 30, 1999 compared to $251.2 million for the six months
ended June 30, 1998. The decrease was due primarily to the decrease in
acquisition activity in 1999 as compared to 1998 activity (approximately $78
million) and advances from Service Corporations ($6.3 million) partially
offset by the increase in mezzanine debt and mortgage investment ($8.2
million) and increased property-level capital spending. Net cash provided by
financing activities decreased $98.5 million to $166.7 million for the six
months ended June 30, 1999 compared to $265.2 million cash used in financing
activities for the six months ended June 30, 1998. The decrease is primarily
due to the net proceeds from the Company's 1998 equity offerings generating
$353 million with no corresponding offering in 1999. The Company received
$126 million in net proceeds from mortgage loan financings during 1999 with
no corresponding proceeds in 1998. The Company borrowed $64 million from the
credit facility during 1999 and repaid $76 million in 1998 from the May 1998
offering proceeds. The Company's common stock dividends increased $12.9
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
17
<PAGE>
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 six months ended June 30, 1999
and 1998, respectively, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Income before minority interest, preferred
dividends and extraordinary item .......................... $ 13,068 $ 7,134 $ 25,019 $ 12,013
Add:
Depreciation and amortization ............................. 6,590 3,951 12,028 6,644
Less:
Preferred stock dividend .................................. (2,300) (1,120) (4,600) (1,120)
Minority interest in commercial real estate ............... (838) -- (1,410) --
Amortization of deferred financing costs
and Depreciation of non-real estate
assets .................................................... (694) (384) (1,263) (625)
------- -------- -------- --------
FFO........................................................ $15,826 $ 9,581 $ 29,864 $ 16,912
------- -------- -------- --------
------- -------- -------- --------
</TABLE>
INFLATION
Substantially all of the office leases provide for separate real estate
tax and operating expense escalations over a base amount. In addition, many of
the leases provide for fixed base rent increases or indexed escalations. The
Company believes that inflationary increases may be at least partially offset by
the contractual rent increases described above.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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. The FASB issued statement No.
137 which extended the effective date of this statement to June 15, 2000 and,
therefore, the Company will adopt the statement effective January 1, 2001.
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
18
<PAGE>
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
almost completed internal testing of 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 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.
The Company has not assessed the compliance status of the properties
acquired from Reckson Associates. The Company will test these properties for
Year 2000 compliance using the same procedures performed on the current
portfolio and is expected to be completed by September 30, 1999.
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.
<TABLE>
<CAPTION>
ASSESSMENT REMEDIATION DIRECT INDIRECT IMPLEMENTATION
---------- ----------- ------ -------- --------------
TESTING TESTING
------- -------
<S> <C> <C> <C> <C> <C>
Information 100% 100% 95% complete 100% complete 100% complete
Technology complete complete expected based on
completion representations
date 9/30/99 received from
third party
vendor
Property 100% 100% 90% Not applicable 100% complete
Operating complete complete complete
Equipment (on expected
currently completion
owned date 9/30/99
properties)*
Third Party 100% Not yet Not 75% complete 75% complete
Service complete fully applicable based on on assessed
Providers assessed representations items
received from expected
third party completion
vendors 9/30/99
</TABLE>
19
<PAGE>
* 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.
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; however, the Company is currently drafting limited contingency procedures
to address certain events for property-level system problems. 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 June 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 $2.5 million annually.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
The Company held an annual meeting of stockholders on May 19, 1999, at
which the following matters were voted upon:
1. To elect two class I directors of the Company to service until
the 2001 Annual Meeting of stockholders.
2. To ratify the selection of Ernst & Young LLP as the independent
auditors of the Company for the fiscal year ending December 31,
1999.
3. To approve the Company's amended 1998 stock option and
incentive plan.
The results of the meeting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
Directors: Benjamin P. Feldman
John S. Levy 14,479,652 5,625 4,203
Proposal 2 13,097,336 1,355,631 36,513
Proposal 3 11,262,507 2,370,516 556,457
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
1. Form 8-K/n in dated January 25, 1999, Item 7.
2. Form 8-K dated May 24, 1999, Item 2.
21
<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: August 13, 1999
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 10,068
<SECURITIES> 0
<RECEIVABLES> 5,441
<ALLOWANCES> 747
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 913,643
<DEPRECIATION> 47,338
<TOTAL-ASSETS> 1,031,601
<CURRENT-LIABILITIES> 0
<BONDS> 402,303
110,149
0
<COMMON> 242
<OTHER-SE> 405,019
<TOTAL-LIABILITY-AND-EQUITY> 1,031,601
<SALES> 0
<TOTAL-REVENUES> 97,471
<CGS> 0
<TOTAL-COSTS> 60,741
<OTHER-EXPENSES> 328
<LOSS-PROVISION> 1,758
<INTEREST-EXPENSE> 11,949
<INCOME-PRETAX> 17,218
<INCOME-TAX> 0
<INCOME-CONTINUING> 17,218
<DISCONTINUED> 0
<EXTRAORDINARY> 628
<CHANGES> 0
<NET-INCOME> 16,590
<EPS-BASIC> 0.68
<EPS-DILUTED> 0.68
</TABLE>
