UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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 24,705,163 at April 16, 2001.
1
SL GREEN REALTY CORP.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAGE
Condensed Consolidated Balance Sheets as of March 31, 2001 (unaudited) and December 31, 2000................. 3
Condensed Consolidated Statements of Income for the three months ended March 31, 2001 and 2000
(unaudited)................................................................................................ 4
Condensed Consolidated Statement of Stockholders' Equity for the three months ended March 31, 2001
(unaudited)................................................................................................ 5
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2000
(unaudited)................................................................................................ 6
Notes to Condensed Consolidated Financial Statements
(unaudited)................................................................................................ 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................................................... 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................................. 23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS....................................................................................... 24
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................................... 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................................. 24
SIGNATURES............................................................................................................ 25
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SL GREEN REALTY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31,
----------- ------------
2001 2000
----------- ------------
(UNAUDITED) (Note 1)
ASSETS
Commercial real estate properties, at cost:
Land and land interests ....................................................... $ 165,814 $ 125,572
Buildings and improvements .................................................... 785,280 618,637
Building leasehold ............................................................ 140,951 139,393
Property under capital lease .................................................. 12,208 12,208
----------- -----------
1,104,253 895,810
Less accumulated depreciation ................................................. (81,409) (78,432)
----------- -----------
1,022,844 817,378
Property held for sale ........................................................ 82,153 10,895
Cash and cash equivalents ..................................................... 8,078 10,793
Restricted cash ............................................................... 43,445 86,823
Tenant and other receivables, net of allowance of $2,141 and $1,723 in 2001
and 2000, respectively ...................................................... 8,940 7,580
Related party receivables ..................................................... 1,046 917
Deferred rents receivable, net of allowance for tenant credit loss of $5,334
and $4,860 in 2001 and 2000, respectively ................................... 46,843 45,816
Investment in and advances to affiliates ...................................... 6,919 6,373
Mortgage loans receivable, net of $2,562 and $3,321 discount in 2001 and 2000,
respectively ................................................................ 92,982 51,293
Investments in unconsolidated joint ventures .................................. 72,673 65,031
Deferred costs, net ........................................................... 40,940 40,113
Other assets .................................................................. 16,650 18,142
----------- -----------
Total assets ............................................................ $ 1,443,513 $ 1,161,154
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable ........................................................ $ 528,535 $ 414,342
Revolving credit facilities ................................................... 211,926 46,374
Derivative instruments at fair value .......................................... 2,814 --
Accrued interest payable ...................................................... 3,676 2,349
Accounts payable and accrued expenses ......................................... 22,122 24,818
Deferred compensation awards .................................................. 1,838 2,833
Deferred revenue .............................................................. 2,073 1,112
Capitalized lease obligations ................................................. 15,369 15,303
Deferred land lease payable ................................................... 13,512 13,158
Dividend and distributions payable ............................................ 12,746 12,678
Security deposits ............................................................. 20,137 19,014
----------- -----------
Total liabilities ...................................................... 834,748 551,981
Commitments and Contingencies
Minority interest in Operating Partnership .................................... 43,062 43,326
8% Preferred Income Equity Redeemable SharesSM $0.01 par value
$25.00 mandatory liquidation preference, 25,000 authorized and 4,600
outstanding at March 31, 2001, and December 31, 2000 ....................... 110,888 110,774
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value 100,000 shares
authorized, 24,705 and 24,516 issued and outstanding at March 31, 2001 and
December 31, 2000 respectively ............................................. 248 246
Additional paid - in-capital .................................................. 433,482 428,698
Deferred compensation plans ................................................... (8,393) (5,037)
Officers' loans, net .......................................................... (1,007) --
Accumulated other comprehensive loss .......................................... (2,409) --
Retained earnings ............................................................. 32,894 31,166
----------- -----------
Total stockholders' equity ............................................. 454,815 455,073
----------- -----------
Total liabilities and stockholders' equity .................................... $ 1,443,513 $ 1,161,154
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
SL GREEN REALTY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended
March 31,
2001 2000
-------- --------
REVENUES
Rental revenue ................................................ $ 55,003 $ 46,941
Escalation and reimbursement revenues ......................... 8,057 5,981
Signage rent .................................................. 350 500
Investment income ............................................. 3,274 1,013
Other income .................................................. 310 324
-------- --------
Total Revenues ............................................. 66,994 54,759
-------- --------
EXPENSES
Operating expenses including $893 (2001) and $935 (2000)
to affiliates ............................................ 15,826 13,190
Real estate taxes ............................................. 8,180 7,335
Ground rent ................................................... 3,159 3,183
Interest ...................................................... 13,897 9,492
Depreciation and amortization ................................. 9,720 7,816
Marketing, general and administrative ......................... 3,547 2,788
-------- --------
Total Expenses ............................................. 54,329 43,804
-------- --------
Income before equity in net (loss) income from affiliates,
equity in net income of unconsolidated joint ventures, 12,665 10,955
gain on sale, minority interest, extraordinary item and
cumulative effect adjustment
Equity in net (loss) income from affiliates ................... (269) 170
Equity in net income of unconsolidated joint ventures ......... 1,513 841
Gain on sale of rental property ............................... 1,514 14,225
-------- --------
Income before minority interest, extraordinary item and
cumulative effect adjustment ............................. 15,423 26,191
Minority interest in operating partnership .................... (1,081) (2,151)
-------- --------
Income before extraordinary items and cumulative effect
adjustment ............................................... 14,342 24,040
Extraordinary item, net of minority interest of $8 in ......... (98) --
2001
Cumulative effect of change in accounting principle ........... (532) --
-------- --------
Net income .................................................... 13,712 24,040
Preferred stock dividends ..................................... (2,300) (2,300)
Preferred stock accretion ..................................... (114) (107)
-------- --------
Net income available to common shareholders ................ $ 11,298 $ 21,633
======== ========
BASIC EARNINGS PER SHARE:
Net income before extraordinary item and cumulative
effect adjustment ........................................ $ 0.48 $ 0.89
Extraordinary item ......................................... -- --
Cumulative effect of change in accounting
principle ................................................ (0.02) --
-------- --------
Net income .................................................... $ 0.46 $ 0.89
======== ========
DILUTED EARNINGS PER SHARE:
Net income before extraordinary item and cumulative
effect adjustment ........................................ $ 0.47 $ 0.83
Extraordinary item ......................................... -- --
Cumulative effect of change in accounting principle ........ (0.02) --
-------- --------
Net income .................................................... $ 0.45 $ 0.83
======== ========
Dividends per common share .................................... $ 0.3875 $ 0.3625
======== ========
Basic weighted average common shares outstanding .............. 24,639 24,220
======== ========
Diluted weighted average common shares and
common share equivalents outstanding .................... 27,403 31,531
======== ========
The accompanying notes are an integral part of these financial statements.
4
SL GREEN REALTY CORP.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Accumulated
Additional Deferred Other
Common Paid-In Compensation Officers' Comprehensive Retained Comprehensive
Stock Capital Plans Loans Loss Earnings Total Income
----- ------- ----- ----- ---- -------- ----- --------------
Balance at December 31, 2000 $246 $428,698 $(5,037) $ --- $ --- $31,166 $455,073 $ --
Cumulative effect of
accounting change (811) (811)
Comprehensive Income:
Net income 13,712 13,712 13,712
Unrealized loss on
derivative instruments (1,598) (1,598) (1,598)
Total comprehensive
income
Preferred dividend and
accretion requirement (2,414) (2,414)
Deferred compensation plan
and officers' loans 1 3,704 (3,705) (1,007) (1,007)
Amortization of deferred
compensation plan 349 349
Redemption of units 460 460
Proceeds from options
exercised 1 620 621
Cash distributions declared
($0.3875 per common share) (9,570) (9,570)
==== ======== ======== ======== ======== ======= ======== -------
BALANCE AT MARCH 31, 2001
(UNAUDITED) $248 $433,482 $(8,393) $(1,007) $(2,409) $32,894 $454,815 $12,114
==== ======== ======== ======== ======== ======= ======== =======
The accompanying notes are an integral part of these financial statements.
5
SL GREEN REALTY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended March 31,
2001 2000
--------- --------
OPERATING ACTIVITIES:
Net income ............................................................ $ 13,712 $ 24,040
Adjustments to reconcile net income with net cash provided by operating
activities:
Depreciation and amortization ....................................... 9,720 7,816
Amortization of discount on mortgage receivable ..................... (759) (24)
Gain on sale of rental property ..................................... (1,514) (14,225)
Cumulative effect of accounting change .............................. 532 --
Extraordinary item net of minority interest ......................... 98 --
Equity in net loss (income) from affiliates ......................... 269 (170)
Equity in net income from unconsolidated joint ventures ............. (1,513) (841)
Minority interest ................................................... 1,081 2,151
Deferred rents receivable ........................................... (4,170) (3,470)
Provision for deferred rents and bad debts .......................... 1,124 494
Officer loans and Amortization of deferred compensation ............. (658) 365
Changes in operating assets and liabilities:
Restricted cash - operations ........................................ 978 61
Tenant and other receivables, net ................................... (1,778) 273
Related party receivables ........................................... (129) 17
Deferred costs ...................................................... (2,098) (2,629)
Other assets ........................................................ 1,593 3,889
Accounts payable, accrued expenses and other liabilities ............ (1,241) (2,301)
Deferred revenue .................................................... 961 1,174
Deferred land lease payable ......................................... 354 441
--------- --------
Net cash provided by operating activities ........................... 16,562 17,061
--------- --------
INVESTING ACTIVITIES:
Additions to land, buildings and improvements ....................... (292,263) (6,895)
Restricted cash - capital improvements .............................. 42,400 (4,606)
Investment in and advances to affiliates ............................ (815) (547)
Investments in unconsolidated joint ventures ........................ (6,991) (41,826)
Distributions from unconsolidated joint ventures .................... 862 4,077
Net proceeds from disposition of rental property .................... 12,431 40,582
Mortgage loans receivable, net ...................................... (40,930) (45,655)
--------- --------
Net cash used in investing activities ............................... (285,306) (54,870)
--------- --------
FINANCING ACTIVITIES:
Proceeds from mortgage notes payable ................................ 150,000 --
Repayments of mortgage notes payable and loans ...................... (35,807) (20,431)
Proceeds from revolving credit facilities ........................... 193,348 85,252
Repayment of revolving credit facilities ............................ (27,796) (26,500)
Capitalized lease obligation ........................................ 66 73
Dividends and distributions paid .................................... (12,700) (11,954)
Proceeds from stock options exercised ............................... 621 380
Deferred loan costs ................................................. (1,703) (425)
--------- --------
Net cash provided by financing activities ........................... 266,029 26,395
--------- --------
Net decrease in cash and cash equivalents ........................... (2,715) (11,414)
Cash and cash equivalents at beginning of period .................... 10,793 21,561
--------- --------
Cash and cash equivalents at end of period .......................... $ 8,078 $ 10,147
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ................................................ $ 12,570 $ 8,984
========= ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock as deferred officer compensation ............. $ 3,705 $ 352
========= ========
The accompanying notes are an integral part of these financial statements.
6
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2001
1. ORGANIZATION AND BASIS OF PRESENTATION
SL Green Realty Corp. (the "Company" or "SL Green"), a Maryland
corporation, and SL Green Operating Partnership, L.P. (the "Operating
Partnership"), a Delaware limited 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 Corporation").
The Company qualifies as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986, as amended (the "Code"), 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
are conducted through, the Operating Partnership. The Company is the sole
managing general partner of the Operating Partnership. As of March 31,
2001, minority investors held, in the aggregate, an 8.5% limited
partnership interest in the Operating Partnership.
As of March 31, 2001, the Company's wholly-owned portfolio consisted of 20
Class B commercial properties encompassing approximately 7.8 million
rentable square feet located primarily in midtown Manhattan, a borough of
New York City ("Manhattan") (the "Properties") and one triple-net leased
property located in Shelton, Connecticut. As of March 31, 2001, the
weighted average occupancy (total occupied square feet divided by total
available square feet) of the Properties was 99%. The Company's portfolio
also includes ownership interests in unconsolidated joint ventures which
own five Class B commercial properties in Manhattan, encompassing
approximately 2.2 million rentable square feet (97% occupied as of March
31, 2001). In addition, the Company continues to manage four office
properties owned by third-parties and affiliated companies encompassing
approximately 1.0 million rentable square feet.
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 the respective partners. As the managing general partner of
the Operating Partnership, the Company is required to take such reasonable
efforts, as determined by it in its sole discretion, to cause the Operating
Partnership to distribute sufficient amounts to enable the payment of
sufficient dividends by the Company to avoid any Federal income or excise
tax at the Company level. 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.
Under the Operating Partnership Agreement, the Company is prohibited from
selling 673 First Avenue and 470 Park Avenue South through August 2009.
BASIS OF QUARTERLY PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted
in the United States 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 accounting
principles generally accepted in the United States 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 2001 operating results for the period presented is not
necessarily indicative of the results that may be expected for the year
ending December 31, 2001. 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,
2000.
The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all the information
and footnotes required by accounting principles generally accepted in the
United States for complete financial statements.
7
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2001
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries, which are wholly-owned or controlled by the Company. Entities
which are not controlled by the Company are accounted for under the equity
method. All significant intercompany balances and transactions have been
eliminated.
DERIVATIVE INSTRUMENTS
Financial Accounting Standards Board's ("FASB") Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities," ("SFAS 133") which became
effective January 1, 2001 requires 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 recorded a cumulative effect adjustment upon the adoption of SFAS
133. This cumulative effect adjustment, of which the intrinsic value of the
hedge was recorded in other comprehensive income ($811) and the time value
component was recorded in the statement of income ($532), was an unrealized loss
of $1,343. The transition amounts were determined based on the interpretive
guidance issued by the FASB to date. The FASB continues to issue interpretive
guidance that could require changes in the Company's application of the standard
and adjustments to the transition amounts. SFAS 133 may increase or decrease
reported net income and stockholders' equity prospectively, depending on future
levels of interest rates and other variables affecting the fair values of
derivative instruments and hedged items, but will have no effect on cash flows.
INCOME TAXES
The Company is taxed as a REIT under Section 856(c) of the Code. As a REIT, the
Company generally is not subject to Federal income tax. To maintain
qualification as a REIT, the Company must distribute at least 90% (95% prior to
January 1, 2001) of its REIT taxable income to its stockholders and meet certain
other requirements. If the Company fails to qualify as a REIT in any taxable
year, the Company will be subject to Federal income tax on its taxable income at
regular corporate tax rates. The Company may also be subject to certain state
and local taxes. Under certain circumstances, Federal income and excise taxes
may be due on its undistributed taxable income.
Pursuant to amendments to the Code that are effective January 1, 2001, the
Company has elected to treat certain of its existing or newly created corporate
subsidiaries as a taxable REIT subsidiary ("TRS"). In general, a TRS of the
Company may perform additional services for tenants of the Company and generally
may engage in any real estate or non-real estate related business (except for
the operation or management of health care facilities or lodging facilities or
the providing to any personal, under a franchise, license or otherwise, rights
to any brand name under which any lodging facility or health care facility is
operated). A TRS is subject to corporate Federal income tax.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATION
Certain prior year balances have been reclassified to conform with the current
year presentation.
8
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA))
MARCH 31, 2001
3. PROPERTY ACQUISITIONS
The Company entered into an agreement to purchase 1370 Broadway, Manhattan, a
16-story, 254,573 square foot office building for $50,400, excluding closing
costs. The Company redeployed the proceeds from the sale of 17 Battery Place
South, through a like-kind tax deferred exchange, to fund this acquisition. The
transaction closed on January 16, 2001.
On September 29, 2000, the Company entered into an agreement to acquire various
ownership and mortgage interests in the 913,000 square foot, 20-story office
building at One Park Avenue, Manhattan ("One Park"). The Company acquired the
fee interest in the property, which is subject to a ground lease position held
by third-parties, and certain mortgage interests in the property for $233,900,
excluding closing costs. As part of the transaction, SL Green acquired an option
to purchase the ground lease position. The acquisition was financed with a
$150,000 mortgage loan provided by Lehman Brothers Holdings Inc. ("LBHI") and
funds provided by the Company's unsecured line of credit. The LBHI interest-only
mortgage, which matures on January 10, 2004, carries an interest rate of 150
basis points over the 30-day London Interbank Offered Rate ("LIBOR"). The
transaction closed on January 10, 2001.
PRO FORMA
The following table summarizes, on an unaudited pro forma basis, the combined
results of operations of the Company for the quarter ended March 31, 2000 as
though the 2001 acquisition of One Park was made on January 1, 2000.
2000
----
Pro forma revenues ........................................... $62,196
Pro forma net income ......................................... $21,011
Pro forma basic earnings per common share .................... $ 0.87
Pro forma diluted earnings per common share .................. $ 0.81
Common share - basic ......................................... 24,220
Common and common equivalent share - diluted ................. 31,531
4. PROPERTY DISPOSITIONS
During the quarter ended March 31, 2001, the Company disposed of the following
office property to unaffiliated parties.
RENTABLE GROSS GAIN
DATE SQUARE SALES ON
SOLD PROPERTY SUBMARKET FEET PRICE SALE
- ---- -------- --------- ---- ----- ----
1/9/01 633 Third Avenue Grand Central 41 $13,250 $1,514
At March 31, 2001, the Company had one property, 1412 Broadway, comprising
approximately 389,000 rentable square feet, held for sale. This property was
under contract for sale in the aggregate gross amount of $91,500. As part of the
transaction, the company will retain a preferred equity position of up to
$13,000 in the property. The purchase price is subject to adjustment based on
the ultimate size of the preferred equity, but in no event shall the purchase
price be reduced below $90,200.
The following table discloses certain information regarding the property held
for sale by the Company as of March 31:
2001 2000
------- ------
Total Revenues $ 3,384 $3,339
Operating Expenses 843 746
Interest 991 991
Depreciation and Amortization 527 478
Other 446 432
------- ------
Net Income $ 577 $ 692
------- ------
Net carrying value (including
related costs) at March 31, 2001 $82,153
=======
9
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA))
MARCH 31, 2001
5. MORTGAGE LOANS RECEIVABLE AND PREFERRED INVESTMENT
On March 30, 2000, the Company acquired a $51,900 interest in an existing first
mortgage loan collateralized by the property located at 2 Grand Central Tower,
Manhattan at a discount. The discount to the face amount of $3,250 and the
back-end fees of $3,440 are being amortized into investment income over the term
of the loan. This is a subordinate participation interest in an existing first
mortgage loan currently held by Credit Suisse First Boston Mortgage Capital,
LLC. The loan matured on September 30, 2000, but was extended until September
30, 2001. Two Grand Central Tower, also known as 140-148 East 45th Street and
147-151 East 44th Street, is an approximately 620,000 square foot commercial
office building located in the heart of the Grand Central submarket. This loan
was repaid in full on April 3, 2001 and the proceeds were used to pay down the
revolving credit facilities.
On March 21, 2001, the Company acquired an existing $39,194 mezzanine loan
collateralized by a 770,000 square foot, 25-story Class B office building in
Manhattan. The loan, which carries a rate of 900 basis points over the 30-day
LIBOR, will mature in January 2003.
6. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
MORGAN STANLEY JOINT VENTURE
The Company and the Morgan Stanley Real Estate Fund ("MSREF"), through its MSSG
II joint venture, entered into a contract to acquire 469 Seventh Avenue,
Manhattan, for $45,700, excluding closing costs. The property is a 253,000
square foot, 16-story office building. In addition to having a 35% ownership
interest in the property, SL Green will act as the operating partner for the
venture, and will be responsible for leasing and managing the property. The
transaction closed on January 31, 2001. The acquisition was partially funded by
a $36,000 mortgage from LBHI. The loan, which matures on February 10, 2003,
carries a fixed interest rate of 7.84%.
The condensed combined balance sheets for the unconsolidated joint ventures at
March 31, 2001 and December 31, 2000 are as follows:
MARCH 31, December 31,
2001 2000
-------- --------
ASSETS
Commercial real estate property ......................... $404,885 $360,347
Other assets ............................................ 35,603 31,641
-------- --------
Total assets ............................................ $440,488 $391,988
======== ========
LIABILITIES AND MEMBERS' EQUITY
Mortgage payable ........................................ $274,650 $238,650
Other liabilities ....................................... 14,347 15,043
Members' equity ......................................... 151,491 138,295
-------- --------
Total liabilities and members' equity ................... $440,488 $391,988
======== ========
Company's net investment in unconsolidated joint ventures $ 72,673 $ 65,031
======== ========
The condensed combined statements of operations for the unconsolidated joint
ventures for the three months ended March 31, 2001 and 2000 is as follows:
10
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2001
2001 2000
------- -------
Total revenues.................................... 18,270 $12,013
------- -------
Operating expenses ................................... 4,688 2,966
Real estate taxes .................................... 2,855 1,873
Interest ............................................. 5,371 3,475
Depreciation and amortization ........................ 2,289 1,644
Extraordinary item ................................... -- 108
------- -------
Total expenses .................................. $15,203 $10,066
------- -------
Net income ........................................... $ 3,067 $ 1,947
======= =======
Company's equity in earnings of
unconsolidated joint ventures .................. $ 1,513 $ 841
======= =======
7. INVESTMENT IN AND ADVANCES TO AFFILIATES
2001 2000
------- -------
Investment in and advances to Service Corporation, net $ 4,620 $ 4,166
Investment in and advances to eEmerge, net ........... 2,299 2,207
------- -------
Investments in and advances to affiliates ...... $ 6,919 $ 6,373
======= =======
SERVICE CORPORATION
In order to maintain the Company's qualification as a REIT while realizing
income from management, leasing and construction contracts from third parties
and joint venture properties, all of the management operations are conducted
through an unconsolidated company, the Service Corporation. The Company, through
the Operating Partnership, owns 100% of the non-voting common stock
(representing 95% of the total equity) of the Service Corporation. Through
dividends on its equity interest, the Operating Partnership receives
substantially all of the cash flow from the Service Corporation's operations.
All of the voting common stock of the Service Corporation (representing 5% of
the total equity) is held by a Company affiliate. This controlling interest
gives the affiliate the power to elect all directors of the Service Corporation.
The Company accounts for its investment in the Service Corporation on the equity
basis of accounting because it has significant influence with respect to
management and operations, but does not control the entity. Effective January 1,
2001, the Service Corporation elected to be taxed as a TRS.
All of the management, leasing and construction services with respect to the
properties wholly-owned by the Company, are conducted through Management LLC
which is 100% owned by the Operating Partnership.
EEMERGE
On May 11, 2000, the Operating Partnership formed eEmerge, Inc., a Delaware
corporation ("eEmerge"), in partnership with Fluid Ventures LLC ("Fluid"). In
March 2001, the Company bought out Fluid's entire ownership interest in eEmerge.
eEmerge is a separately managed, self-funded company that provides fully-wired
and furnished office space, services and support to help e-businesses grow.
The Company, through the Operating Partnership, owns 100% of the non-voting
common stock of eEmerge. Through dividends on its equity interest, the Operating
Partnership receives approximately 100% of the cash flow from eEmerge
operations. 100% of the voting common stock is held by a Company affiliate. This
controlling interest gives the affiliate the power to elect all the directors of
eEmerge. The Company accounts for its investment in eEmerge on the equity basis
of accounting because it has significant influence with respect to management
and operations, but does not control the entity. The Company has funded
approximately $2,299 to eEmerge as of March 31, 2001 out of a total commitment
of $3,425. In addition, the Company made a landlord contribution of $1,575 for
the build-out of two floors.
Effective January 1, 2001, eEmerge elected to be taxed as a TRS.
11
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2001
On June 8, 2000, eEmerge and EUREKA BROADBAND CORPORATION ("Eureka") formed
eEmerge.NYC LLC, a Delaware limited liability company ("ENYC") whereby eEmerge
has a 95% interest and Eureka has a 5% interest in ENYC. ENYC was formed to
build and operate a 45,000 square foot fractional office suites business
marketed to the technology industry. ENYC entered into a 10-year lease with the
Operating Partnership for its premises, which is located at 440 Ninth Avenue,
Manhattan. Allocations of net profits, net losses and distributions shall be
made in accordance with the Limited Liability Company Agreement of ENYC.
8. DEFERRED COSTS
Deferred costs consist of the following:
2001 2000
-------- --------
Deferred financing .......... $ 17,591 $ 19,277
Deferred leasing ............ 38,415 37,413
-------- --------
56,006 56,690
Less accumulated amortization (15,066) (16,577)
-------- --------
$ 40,940 $ 40,113
======== ========
9. MORTGAGE NOTES PAYABLE
The mortgage notes payable collateralized by the respective properties and
assignment of leases at March 31, 2001 and December 31, 2000 are as follows:
PROPERTY MORTGAGE NOTES 2001 2000
- -------- -------------- ---- ----
50 West 23rd Street Note payable to GMAC with interest at 7.33%, due
August 1, 2007........................................................ $21,000 $21,000
673 First Avenue First mortgage note with interest payable at 9.0%, due
December 13, 2003..................................................... 11,260 11,992
470 Park Avenue South First mortgage note with interest payable at 8.25%, due
April 1, 2004......................................................... 9,671 9,771
1414 Avenue of Americas,
633 Third Avenue and First mortgage note with interest payable at 7.9%, due
70 West 36th Street May 1, 2009 (2) (3)................................................... 26,200 33,950
1412 Broadway First mortgage note with interest payable at 7.62%, due
May 1, 2006........................................................... 52,000 52,000
711 Third Avenue First mortgage note with interest payable at 8.13%, due
September 10, 2005 (2) ............................................... 49,074 49,172
875 Bridgeport Ave., First mortgage note with interest payable at 8.32%, due
Shelton, CT May 10, 2025.......................................................... 14,893 14,901
420 Lexington Avenue First mortgage note with interest payable at 8.44%, due
November 1, 2010 (2).................................................. 125,000 125,000
555 West 57th Street First mortgage note with interest payable at 8.58%, due
November 4, 2004 (1) ................................................. 69,437 69,606
-------- --------
Total fixed rate debt............................................ 378,535 387,392
-------- --------
One Park Avenue First mortgage note with interest payable at 6.73%, due
January 10, 2004 (LIBOR plus 150 basis points)........................ 150,000 --
Madison Properties First mortgage note with interest payable at 8.32%, due
May 31, 2001 (4) ..................................................... -- 26,950
-------- --------
Total floating rate debt........................................ 150,000 26,950
-------- --------
Total mortgage notes payable.......................................... $528,535 $414,342
======== ========
(1) The Company entered into an interest rate protection agreement
which fixed the LIBOR interest rate at 6.10% at March 31, 2001 as
LIBOR was 4.98% at that date. If LIBOR exceeds 6.10%, the loan
will float until the maximum rate of 6.58% is reached.
(2) Held in bankruptcy remote special purpose entity.
(3) 633 Third Avenue was sold in January 2001 and the $7,750 mortgage
was repaid.
(4) This mortgage was repaid in full in February 2001.
12
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2001
PRINCIPAL MATURITIES
Combined aggregate principal maturities of mortgages and notes payable and
revolving credit facilities as of March 31, 2001 are as follows:
Scheduled Principal
Amortization Repayments Total
------------ ---------- -----
2001............... $4,227 $44,926 $49,153
2002............... 7,671 --- 7,671
2003............... 8,587 169,002 177,589
2004............... 4,742 225,300 230,042
2005............... 4,314 47,247 51,561
Thereafter......... 24,669 199,776 224,445
------- -------- -------
$54,210 $686,251 $740,461
======= ======== ========
MORTGAGE RECORDING TAX - HYPOTHECATED LOAN
The Operating Partnership mortgage tax credit loans totaled approximately
$56,950 from LBHI at March 31, 2001. These loans were collateralized by the
mortgage encumbering the Operating Partnership's interests in 290 Madison
Avenue. The loans were also collateralized by an equivalent amount of the
Company's cash which was held by LBHI and invested in US Treasury securities.
Interest earned on the cash collateral was applied by LBHI to service the loans
with interest rate commensurate with that of the portfolio of six month US
Treasury securities, which will mature on January 15, 2002. The Operating
Partnership and LBHI each had the right of offset and therefore the loans and
the cash collateral were presented on a net basis in the consolidated balance
sheet at March 31, 2001. The purpose of these loans was to temporarily preserve
mortgage recording tax credits for future potential acquisitions of real
property which the Company may make, the financing of which may include property
level debt, for which these credits would be applicable and provide a financial
savings. None of these mortgage tax credit loans had been utilized as of March
31, 2001.
10. REVOLVING CREDIT FACILITIES
PSCC FACILITY
On December 28, 1999, the Company closed on a $30,000 credit facility with
Prudential Securities Credit Corp. ("PSCC Facility"). On March 30, 2000, PSCC
increased the secured PSCC Facility by $20,000 to $50,000. No other terms were
changed from the original $30,000 secured PSCC Facility. Interest-only is
payable based on the 1-Month LIBOR plus 125 basis points. The PSCC Facility may
be prepaid at any time during its term without penalty. The PSCC Facility, which
was to mature on December 27, 2000, was extended for one year. At that time, the
PSCC Facility was increased to $60,000.
At March 31, 2001, the Company had $44,926 outstanding under its PSCC Facility
(interest rate of 7.00 percent). The PSCC Facility was secured by the $92,982 in
mortgage loans receivable on two Manhattan properties.
2000 UNSECURED CREDIT FACILITY
On June 27, 2000, the Company repaid in full and terminated the $140 Million
Credit Facility (defined below) and obtained a new unsecured revolving credit
facility in the amount of $250,000 from a group of 9 lender banks (the "2000
Unsecured Credit Facility"). The Company upsized this credit facility to
$300,000 in March 2001. The 2000 Unsecured Credit Facility has a term of three
years and bears interest at a spread ranging from 137.5 basis points to 175
basis points over LIBOR, based on the Company's leverage ratio. If the Company
receives an investment grade rating, the spread over LIBOR will be reduced to
125 basis points. At March 31, 2001, $167,000 was outstanding and carried a
weighted average interest rate of 7.19 percent. Availability under the 2000
Unsecured Credit Facility at March 31, 2001 was further reduced by the issuance
of letters of credit in the amount of $5,000 for acquisition deposits.
13
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2001
The terms of the 2000 Unsecured Credit Facility include certain restrictions and
covenants which limit, among other things, the payment of dividends (as
discussed below), the incurrence of additional indebtedness, the incurrence of
liens and the disposition of assets, and which require compliance with financial
ratios relating to the minimum amount of tangible net worth, the minimum amount
of debt service coverage, the minimum amount of fixed charge coverage, the
minimum amount of unsecured indebtedness, the minimum amount of unencumbered
property debt service coverage and certain investment limitations. The dividend
restriction referred to above provides that, except to enable the Company to
continue to qualify as a REIT under the Code, the Company will not during any
four consecutive fiscal quarters make distributions with respect to common stock
or other equity interests in an aggregate amount in excess of 90 percent of
funds from operations for such period, subject to certain other adjustments. The
2000 Unsecured Credit Facility also requires a 15 to 25 basis point fee on the
unused balance payable quarterly in arrears.
The lending group for the 2000 Unsecured Credit Facility consists of Fleet
National Bank, NA, as administrative agent, Citibank/Salomon Smith Barney, Inc,
as syndication agent, Deutsche Banc Alex Brown, as documentation agent,
Commerzbank Aktiengesellschaft, New York Branch, The Bank of New York, Wells
Fargo Bank, N.A., Bank Leumi USA, PNCBank, N.A., and Key Bank, N.A.
$140 MILLION CREDIT FACILITY
The $140 million unsecured credit facility was repaid in full and retired in
June 2000 in connection with the Company obtaining the 2000 Unsecured Credit
Facility, as described above. In the quarter ended June 30, 2000, the Company
recorded a $430 extraordinary loss, net of the minority interest's share of the
loss ($38) for the early extinguishment of debt related to the write-off of
unamortized financing costs associated with the $140 Million Credit Facility.
11. STOCKHOLDERS' EQUITY
COMMON SHARES
The following table presents the changes in the Company's issued and outstanding
shares of common stock since December 31, 2000 (excluding 2,283 and 2,307 Units
outstanding at March 31, 2001 and December 31, 2000, respectively, which are
convertible into shares of common stock on a one-for-one basis, or the cash
equivalent thereof, subject to certain restrictions):
Outstanding at December 31, 2000................................... 24,516
Issued through exercise of options................................. 30
Issued through redemption of units................................. 24
Issued through deferred compensation plan.......................... 135
--------
Outstanding at March 31, 2001...................................... 24,705
======
OWNERSHIP OF OPERATING PARTNERSHIP
The minority interest in the Operating Partnership was approximately 8.5% and
8.6% as of March 31, 2001 and December 31, 2000, respectively.
RIGHTS PLAN
On February 16, 2000, the Board of Directors of the Company authorized a
dividend distribution of one preferred share purchase right ("Right") for each
outstanding share of common stock which was distributed to all holders of record
of the common stock on March 31, 2000. Each Right entitles the registered holder
to purchase from the Company one one-hundredth of a share of Series B junior
participating preferred stock, par value $0.01 per share ("Preferred Shares"),
at a price of $60.00 per one one-hundredth of a Preferred Share ("Purchase
Price"), subject to adjustment as provided in the rights agreement. The Rights
expire on March 5, 2010, unless the expiration date is extended or the Right is
redeemed or exchanged earlier by the Company.
14
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2001
The Rights are attached to each share of common stock. The rights are generally
exercisable only if a person or group becomes the beneficial owner of 17% or
more of the outstanding common stock or announces a tender offer for 17% or more
of the outstanding stock ("Acquiring Person"). In the event that a person or
group becomes an Acquiring Person, each holder of a Right, excluding the
Acquiring Person, will have the right to receive, upon exercise, common stock
having a market value equal to two times the Purchase Price of the Preferred
Shares.
EARNINGS PER SHARE
Earnings per share is computed as follows:
FOR THE QUARTER ENDED MARCH 31, 2001 For the Quarter Ended March 31, 2000
------------------------------------ ------------------------------------
INCOME SHARES PER SHARE Income Shares Per Share
(NUMERATOR) (DENOMINATOR) AMOUNT (Numerator) (Denominator) Amount
====================================================================================================================================
Basic Earnings:
Income available to common
shareholders $11,298 24,639 $0.46 $21,633 24,220 $0.89
Effect of Dilutive Securities:
Redemption of Units to
common shares 1,081 2,296 2,151 2,419
Preferred Stock (if converted
to common stock) --- --- 2,300 4,699
Stock Options --- 468 --- 193
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings:
Income available to common
shareholders $12,379 27,403 $0.45 $26,084 31,531 $0.83
- ------------------------------------------------------------------------------------------------------------------------------------
The PIERS outstanding in 2001 were not included in the 2001 computation of
earnings per share as they were anti-dilutive during that period.
12. 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.
13. RELATED PARTY TRANSACTIONS
There are several business relationships with related parties, entities owned by
Stephen L. Green or relatives of Stephen L. Green which involve management,
leasing, and construction fee revenues, rental income and maintenance expenses
in the ordinary course of business. These transactions for the period ended
March 31, include the following:
2001 2000
---- ----
Management revenues .......................... $ 67 $ 66
Maintenance expense .......................... 893 935
Rental revenue ............................... 38 23
Amounts due from related parties at
March 31, 2001 and December 31, 2000,
respectively, consist of: 2001 2000
---- ----
17 Battery Condominium Association ........... $143 $127
Morgan Stanley Real Estate Funds ............. 664 464
Carlyle Group ................................ 12 12
Officers ..................................... 77 77
SLG 100 Park LLC ............................. 121 121
15
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2001
14. DEFERRED COMPENSATION AWARD
Contemporaneous with the closing of 1370 Avenue of the Americas, an award of
$2,833 was granted to several members of management earned in connection with
the realization of this investment gain. This award, which will be paid out over
a three-year period, is presented as Deferred compensation award on the balance
sheet. As of March 31, 2001, $995 had been paid against this compensation award.
15. SEGMENT INFORMATION
The Company is a REIT engaged in owning, managing, leasing and repositioning
class B office properties in Manhattan 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,
namely, 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, no single tenant contributes more
than 3% of the Company's annual revenues.
16. TECHNOLOGY INVESTMENTS AND ALLIANCES
The Company owns equity interests in several companies that provide
communication services or amenities to tenants. The equity interests are in the
form of preferred stock, and vested and unvested warrants to acquire common
stock. These investments are included in Other Assets on the Consolidated
Balance Sheets. Below is a summary of these investments as of March 31, 2001:
Square Feet Ticker Capital Shares Warrants Book
Company (MM) (1) Symbol Investment Received (2) Received (2) Value (3)
- ------- -------- ------ ---------- ------------ ------------ ---------
Eureka Broadband 4.4 Privately Held $ -- -- 35 --
Verticore (4) 9.7 Privately Held 750 241 234 $750
Broadband Office 9.0 Privately Held -- 219 -- --
OnSite (5) 7.0 Privately Held -- -- 491 --
- ----------
(1) The Square Feet (in millions) represents the portion of the Company's
portfolio that is anticipated to be wired by each company in accordance with
their respective agreements. These approximate square footage amounts are
subject to change upon the signing of additional licensing agreements. As of
March 31, 2001, approximately 70% of the Company's portfolio was wired and
operational by at least one of SL Green's strategic telecommunications
providers.
(2) Preferred shares and warrants received may include amounts allocable to
joint venture partners. The Company may earn additional preferred shares or
warrants based upon achieving certain thresholds in accordance with the
respective investment agreements or upon the signing of additional license
agreements for properties.
(3) The Company's investments in privately held entities were recorded at
estimated fair values when the investment was made and are valued at the lower
of cost or market.
(4) In 2001, Verticore announced plans to merge with Captivate Networks. The
merger was completed in April 2001.
(5) The Company entered into an agreement with On-Site Access, Inc. ("OnSite"),
a facilities-based provider of broadband data, video and voice communications
services, delivered over fiber optic networks designed, constructed and owned by
OnSite in large- and medium-sized office buildings. OnSite will provide its
services to tenants in certain Properties. In return for access to the
Properties, Onsite is obligated to grant the Company warrants to acquire shares
of common stock of OnSite for $2.36 per share.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
This report includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. All statements, other than statements of historical facts, included
in this report that address activities, events or developments that the Company
expects, believes or anticipates will or may occur in the future, including such
matters as future capital expenditures, dividends and acquisitions (including
the amount and nature thereof), expansion and other development trends of the
real estate industry, business strategies, expansion and growth of the Company's
operations and other such matters are forward-looking statements. These
statements are based on certain assumptions and analyses made by the Company in
light of its experience and its perception of historical trends, current
conditions, expected future developments and other factors it believes are
appropriate. Such statements are subject to a number of assumptions, risks and
uncertainties, general economic and business conditions, the business
opportunities that may be presented to and pursued by the Company, changes in
laws or regulations and other factors, many of which are beyond the control of
the Company. Any such statements are not guarantees of future performance and
actual results or developments may differ materially from those anticipated in
the forward-looking statements.
The following discussion related to the consolidated financial statements of the
Company should be read in conjunction with the financial statements appearing
elsewhere in this report and the financial statements included in the Company's
2000 annual report on Form 10-K.
GENERAL
SL Green Realty Corp. (the "Company"), a Maryland corporation, and SL Green
Operating Partnership, L.P. (the "Operating Partnership"), a Delaware limited
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.
As of March 31, 2001, the Company's wholly-owned portfolio consisted of 20 Class
B commercial properties encompassing approximately 7.8 million rentable square
feet located primarily in midtown Manhattan, a borough of New York City
("Manhattan") (the "Properties") and one triple-net leased property located in
Shelton, Connecticut. As of March 31, 2001, the weighted average occupancy
(total occupied square feet divided by total available square feet) of the
Properties was 99%. The Company's portfolio also includes ownership interests in
unconsolidated joint ventures which own five Class B commercial properties in
Manhattan, encompassing approximately 2.2 million rentable square feet (97%
occupied as of March 31, 2001). In addition, the Company continues to manage
four office properties owned by third-parties and affiliated companies
encompassing approximately 1.0 million rentable square feet.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2001 TO THE THREE MONTHS ENDED
MARCH 31, 2000
The following comparison for the three months ended March 31, 2001 ("2001")
compared to the three months ended March 31, 2000 ("2000") makes reference to
the following: (i) the effect of the "Same-Store Properties," which represents
all properties owned by the Company at January 1, 2000, (ii) the effect of the
"2001 Acquisitions," which represents all properties acquired in 2001, namely,
One Park Avenue and 1370 Broadway (January 2001), (iii) the effect of the "2000
Dispositions," which represents all properties disposed of in 2000, namely, 29
West 35th Street, 36 West 44th Street (March 2000), 321 West 44th Street (May
2000) which was contributed to a joint venture, and 17 Battery Place South
(December 2000), and (iv) the effect of the "2001 Dispositions," which
represents all properties disposed of in 2001, namely, 633 Third Avenue (January
2001).
RENTAL REVENUES (in millions) $ %
2001 2000 Change Change
---------------------------------
Rental revenue $55.0 $46.9 $8.1 17.3%
Escalation and reimbursement revenue 8.1 6.0 2.1 35
Signage revenue 0.3 0.5 (0.2) (40)
---------------------------------
Total $63.4 $53.4 $10.0 19.0%
=================================
17
Same Store $52.9 $48.1 $4.8 10%
2001 Acquisitions 10.5 --- 10.5 ---
2000 Dispositions --- 4.9 (4.9) ---
2001 Dispositions --- 0.4 (0.4) ---
---------------------------------
Total $63.4 $53.4 $10.0 19%
=================================
The increase in rental revenue was primarily due to an increase in occupancy at
Same-Store Properties from 97% in 2000 to 99% in 2001. In addition, annualized
rents from replacement rents on previously occupied space at Same-Store
Properties were 47% higher than previous fully escalated rents. The Company
estimates that the difference between existing in-place fully escalated rents
and current market rents is approximately 53.6%.
The increase in escalation and reimbursement revenue was primarily due to the
recovery of operating expenses ($1.7 million) and higher utility costs ($0.4
million). On an annualized basis, the Company expects to recover
approximately 80% of its electric costs.
The decrease in signage revenue was primarily attributable to 1466 Broadway
($0.1 million).
INVESTMENT AND OTHER INCOME (in millions) $ %
2001 2000 Change Change
-----------------------------
Equity in net income of unconsolidated joint ventures $1.6 $0.8 $0.8 100%
Investment income 3.3 1.0 2.3 230
Other 0.3 0.3 --- ---
-----------------------------
Total $5.2 $2.1 $3.1 148%
=============================
The increase in equity in net income of unconsolidated joint ventures is due to
the Company having three joint venture investments in 2000 comprising 1.8
million square feet compared to five joint venture investments in 2001
comprising 2.2 million square feet. Occupancy at the joint ventures decreased
from 98% in 2000 to 97% in 2001. The Company estimates that the difference
between existing in-place fully escalated rents and current market rents is
approximately 63.1%.
The increase in investment income primarily represents interest income from 2
Grand Central Tower ($2.5 million). The balance of the change in investment
income is due to investments in 17-29 West 44th Street ($0.1 million), 1440
Broadway ($0.1 million) and interest from excess cash on hand ($0.2 million).
This was offset by a decrease in investment income ($0.6 million) due to the
loan on 1370 Avenue of the Americas being repaid in 2000.
PROPERTY OPERATING EXPENSES (in millions) $ %
2001 2000 Change Change
----------- --------- --------- ----------
Operating expenses (excluding electric) $10.8 $10.2 $0.6 6%
Electric costs 5.0 3.0 2.0 67
Real estate taxes 8.2 7.3 0.9 12
Ground rent 3.2 3.2 --- ---
----------- --------- --------- ----------
Total $27.2 $23.7 $3.5 15%
----------- --------- --------- ----------
Same Store $23.6 $21.1 $2.5 12%
2001 Acquisitions 3.4 --- 3.4 ---
2000 Dispositions --- 2.3 (2.3) ---
Other 0.2 0.3 (0.1) (33)
----------- --------- --------- ----------
Total $27.2 $23.7 $3.5 15%
----------- --------- --------- ----------
The increase in operating expenses, excluding electricity, were primarily due to
higher fuel costs ($0.2 million) and cleaning costs ($0.4 million).
The increase in electric costs was primarily due to higher electric rates as
well as the 2001 Acquisitions and was partially offset by the 2000
Dispositions.
The increase in real estate taxes was primarily attributable to the 2000
Acquisitions which increased real estate taxes by $1.3 million, but was
partially offset by a decrease in real estate taxes due to the 2000 Dispositions
($0.4 million).
18
OTHER EXPENSES (in millions) $ %
2001 2000 Change Change
---------- --------- --------- ---------
Interest expense $13.9 $9.5 $4.4 46%
Depreciation and amortization expense 9.7 7.8 1.9 24
Marketing, general and administrative expense 3.5 2.8 0.7 25
---------- --------- --------- ---------
Total $27.1 $20.1 $7.0 35%
---------- --------- --------- ---------
This increase in interest expense was primarily attributable to new secured
mortgage financing being placed on Same-Store assets ($1.0 million), mortgage
financing associated with the 2001 Acquisitions ($2.7 million) and an increase
in interest expense at the corporate level ($1.2 million). This was partially
offset by the interest savings from the 2000 Dispositions ($0.5 million) and a
reduction in the weighted average interest rate of 7.49% at March 31, 2001
compared to 7.76% at March 31, 2000.
Depreciation and amortization increased primarily due to depreciation on
properties acquired, namely One Park Avenue, and capital expenditures and tenant
improvements incurred during the period.
Marketing, general and administrative expense increased primarily due to
increased personnel costs ($0.4 million) and professional fees ($0.2 million).
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Net cash provided by operating activities decreased $0.5 million to $16.6
million for the three months ended March 31, 2001 compared to $17.1 million for
the three months ended March 31, 2000. Operating cash flow was primarily
generated by the Same-Store properties and 2001 Acquisitions, but was reduced by
the decrease in operating cash flow from the 2001 Dispositions. Net cash used in
investing activities increased $230.4 million to $285.3 million for the three
months ended March 31, 2001 compared to $54.9 million for the three months ended
March 31, 2000. The increase was due primarily to the higher dollar volume of
acquisitions and capital improvements in 2001 ($286.4 and $5.8 million,
respectively) as compared to 2000 (none and $6.9 million, respectively). This
relates primarily to the acquisitions of One Park Avenue and 1370 Broadway in
January 2001. Approximately $51 million was funded out of restricted cash set
aside from the sale of 17 Battery Place South. The net investment in
unconsolidated joint ventures decreased $35 million due to the purchase of a
49.9% interest in 100 Park in 2000 compared to the purchase of a 35% interest in
469 Seventh Avenue in 2001. Net proceeds from the dispositions decreased $28.1
million due to the sale of 633 Third Avenue totaling $13.2 million in 2001
compared to the dispositions of 29 West 35th Street and 36 West 44th Street
totaling $40.6 million in 2000. Net cash provided by financing activities
increased $239.6 million to $266 million for the three months ended March 31,
2001 compared to $26.4 million for the three months ended March 31, 2000. The
increase was primarily due to higher borrowing requirements due to the higher
volume of acquisitions funded with mortgage debt and draws under the line of
credit, which was partially offset by higher debt repayments ($16.7 million).
CAPITALIZATION
On February 16, 2000, the Board of Directors of the Company authorized a
dividend distribution of one preferred share purchase right ("Right") for each
outstanding share of common stock under a shareholder rights plan. This dividend
was distributed to all holders of record of the common stock on March 31, 2000.
Each Right entitles the registered holder to purchase from the Company one
one-hundredth of a share of Series B junior participating preferred stock, par
value $0.01 per share ("Preferred Shares"), at a price of $60.00 per one
one-hundredth of a Preferred Share ("Purchase Price"), subject to adjustment as
provided in the rights agreement. The Rights expire on March 5, 2010, unless the
expiration date is extended or the Right is redeemed or exchanged earlier by the
Company.
The Rights are attached to each share of common stock. The rights are generally
exercisable only if a person or group becomes the beneficial owner of 17% or
more of the outstanding common stock or announces a tender offer for 17% or more
of the outstanding stock ("Acquiring Person"). In the event that a person or
group becomes an Acquiring Person, each holder of a Right, excluding the
Acquiring Person, will have the right to receive, upon exercise, common stock
having a market value equal to two times the Purchase Price of the Preferred
Shares.
At March 31, 2001, borrowings under the mortgage loans and credit facilities
(excluding our share of joint venture debt of $128 million) represented 46% of
the Company's market capitalization based on a total market capitalization (debt
and equity including preferred stock), assuming conversion of all operating
partnership units, of $1.6 billion (based on a common stock price of $27.45 per
share, the closing price of the Company's common stock on the New York Stock
Exchange on March 31, 2001).
19
The tables below summarize the Company's mortgage debt and line of credit
indebtedness outstanding at March 31, 2001 and December 31, 2000, respectively
(in thousands).
March 31 December 31,
2001 2000
-------- -----------
DEBT SUMMARY:
BALANCE
Fixed rate ............................................................. $309,098 $ 317,786
Variable rate - hedged ................................................. 69,437 69,606
-------- -----------
Total fixed rate .................................................... 378,535 387,392
-------- -----------
Variable rate .......................................................... 317,000 49,950
Variable rate-supporting variable rate assets .......................... 44,926 23,374
-------- -----------
Total variable rate ................................................. 361,926 73,324
-------- -----------
Total................................................................... $740,461 $ 460,716
======== ===========
PERCENT OF TOTAL DEBT:
Total fixed rate .................................................... 51.12% 84.08%
Variable rate ....................................................... 48.88% 15.92%
-------- -----------
Total .................................................................. 100.00% 100.00%
======== ===========
EFFECTIVE INTEREST RATE AT END OF PERIOD
Total fixed rate .................................................... 7.99% 8.22%
Variable rate ....................................................... 6.98% 8.20%
-------- -----------
Effective interest rate ................................................ 7.49% 8.21%
======== ===========
A majority of the variable rate debt shown above bears interest at an interest
rate based on LIBOR (4.98% at March 31, 2001). Variable rate debt, excluding the
variable rate debt supporting variable rate assets, constitutes 20.3% of total
debt outstanding. The Company's total debt at March 31, 2001 had a weighted
average term to maturity of approximately 4.98 years.
As of March 31, 2001, the Company has three mortgage loans receivable. The first
loan, which has a face value of $51.9 million and matures on September 30, 2001,
carries a weighted average interest rate of 793 basis points over the 30-day
LIBOR. The second loan, which has a face value of $2.4 million and matures on
April 16, 2001, carries a 400 basis point spread over the 30-day LIBOR. The
third loan, which has a face value of $39.1 million and matures in January 2003,
carries a 900 basis point spread over the 30-day LIBOR. These variable rate
mortgage loans receivable mitigate the Company's exposure to interest rate
changes on its unhedged variable rate debt.
MORTGAGE FINANCING
As of March 31, 2001, the Company's total mortgage debt (excluding the Company's
share of joint venture debt of approximately $128 million) consisted of
approximately $378.5 million of fixed rate debt with an effective interest rate
of approximately 7.99% and $150 million of variable rate debt with an effective
interest rate of 6.73%. The Company's mortgage debt at March 31, 2001,
encumbering 11 properties, will mature as follows (in thousands):
2001................................................................. $ 4,227
2002................................................................. 7,671
2003................................................................. 10,589
2004................................................................. 230,042
2005................................................................. 51,561
Thereafter.......................................................... 224,445
---------
Total..................................................... $ 528,535
=========
2000 UNSECURED CREDIT FACILITY
On June 27, 2000, the Company repaid in full and terminated the $140 Million
Credit Facility (see below) and obtained a new senior unsecured revolving credit
facility in the amount of $250 million (the "2000 Unsecured Credit Facility")
from a group of 9 lender banks. The Company upsized this credit facility to $300
million in March 2001. The 2000 Unsecured Credit Facility has a term of three
years and bears interest at a spread ranging from 137.5 basis points to 175
basis points over LIBOR, based on the Company's
20
leverage ratio. If the Company receives an investment grade rating, the spread
over LIBOR will be reduced to 125 basis points. At March 31, 2001, $167 million
was outstanding and carried a weighted average interest rate of 7.19 percent.
Availability under the 2000 Unsecured Credit Facility at March 31, 2001 was
further reduced by the issuance of letters of credit in the amount of $5 million
for acquisition deposits.
The terms of the 2000 Unsecured Credit Facility include certain restrictions and
covenants which limit, among other things, the payment of dividends (as
discussed below), the incurrence of additional indebtedness, the incurrence of
liens and the disposition of assets, and which require compliance with financial
ratios relating to the minimum amount of tangible net worth, the minimum amount
of debt service coverage, the minimum amount of fixed charge coverage, the
minimum amount of unsecured indebtedness, the minimum amount of unencumbered
property debt service coverage and certain investment limitations. The dividend
restriction referred to above provides that, except to enable the Company to
continue to qualify as a REIT under the Code, the Company will not during any
four consecutive fiscal quarters make distributions with respect to common stock
or other equity interests in an aggregate amount in excess of 90 percent of
funds from operations for such period, subject to certain other adjustments. The
2000 Unsecured Credit Facility also requires a 15 to 25 basis point fee on the
unused balance payable quarterly in arrears.
The lending group for the 2000 Unsecured Credit Facility consists of Fleet
National Bank, NA, as administrative agent, Citibank/Salomon Smith Barney, Inc,
as syndication agent, Deutsche Banc Alex Brown, as documentation agent,
Commerzbank Aktiengesellschaft, New York Branch, The Bank of New York, Wells
Fargo Bank, N.A., Bank Leumi USA, PNCBank, N.A., and Key Bank, N.A.
$140 MILLION CREDIT FACILITY
The $140 million unsecured credit facility was repaid in full and retired in
June 2000 in connection with the Company obtaining the 2000 Unsecured Credit
Facility, as described above. In the quarter ended June 30, 2000, the Company
recorded a $430,000 extraordinary loss, net of the minority interest's share of
the loss ($38,000) for the early extinguishment of debt related to the write-off
of unamortized financing costs associated with the $140 Million Credit Facility.
PSCC FACILITY
On December 28, 1999, the Company closed on a $30 million credit facility with
Prudential Securities Credit Corp. ("PSCC Facility"). On March 30, 2000, PSCC
increased the secured PSCC Facility by $20 million to $50 million. No other
terms were changed from the original $30 million secured PSCC Facility.
Interest-only is payable based on the 1-Month LIBOR plus 125 basis points. The
PSCC Facility may be prepaid at any time during its term without penalty. The
PSCC Facility, which was to mature on December 27, 2000, was extended for one
year. At that time, the PSCC Facility was increased to $60 million.
At March 31, 2001, the Company had $44.9 million outstanding under its PSCC
Facility (interest rate of 7.00 percent). The PSCC Facility is secured by the
$92.9 million in mortgage loans receivable on two Manhattan properties.
CAPITAL EXPENDITURES
The Company estimates that for the nine months ending December 31, 2001, it will
incur approximately $24.1 million of capital expenditures (including tenant
improvements) on properties currently owned. Of that total, over $6.7 million of
the capital investments are dedicated to redevelopment costs, including local
law 11, associated with properties acquired at or after the Company's IPO. The
Company expects to fund these capital expenditures with the unsecured credit
facility, additional property level mortgage financings, operating cash flow and
cash on hand. Future property acquisitions may require substantial capital
investments in such properties for refurbishment and leasing costs. The Company
expects that these financing requirements will be met in a similar fashion. The
Company believes that it will have sufficient capital resources to satisfy its
obligations during the next 12 month period. Thereafter, the Company expects
that capital needs will be met through a combination of net cash provided by
operations, borrowings, potential asset sales or additional equity or debt
issuances.
DISTRIBUTIONS
The Company expects to make distributions to its stockholders primarily based on
its distributions received from the Operating Partnership primarily from
property revenues or, if necessary, from working capital or borrowings.
21
To maintain its qualification as a REIT, the Company must make annual
distributions to its stockholders of at least 90 percent (95 percent prior to
January 1, 2001) of its REIT taxable income, determined without regard to the
dividends paid deduction and by excluding net capital gains. Moreover, the
Company intends to continue to make regular quarterly distributions to its
stockholders which, based upon current policy, in the aggregate would equal
approximately $38.3 million on an annualized basis. However, any such
distribution, whether for Federal income tax purposes or otherwise, would only
be paid out of available cash after meeting both operating requirements and
scheduled debt service on mortgages and loans payable.
FUNDS FROM OPERATIONS
The revised White Paper on Funds from Operations ("FFO") approved by the Board
of Governors of NAREIT in October 1999 defines FFO 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 FFO 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 FFO
in accordance with the current standards established by NAREIT which may not be
comparable to FFO 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. FFO 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.
FFO for the three months ended March 31, 2001 and 2000, respectively, are as
follows (in thousands):
2001 2000
--------- --------
Income before minority interest, extraordinary
item, gain on sale, preferred stock dividend and
cumulative effect adjustment ................... $ 13,909 $ 11,966
Add:
Depreciation and amortization .................. 9,720 7,816
FFO adjustment for unconsolidated joint ventures 996 709
Less:
Dividends on preferred shares .................. (2,300) (2,300)
Amortization of deferred financing costs and
depreciation of non-rental real estate assets (1,155) (1,023)
--------- --------
Funds From Operations - basic .................... 21,170 $ 17,168
Dividends on preferred shares .................. 2,300 2,300
--------- --------
Funds From Operations - diluted .................. $ 23,470 $ 19,468
========= ========
Cash flows provided by operating activities ...... $ 16,562 $ 17,061
Cash flows used in investing activities .......... $(285,306) $(54,870)
Cash flows provided by financing activities ...... $ 266,029 $ 26,395
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 and expense escalations described above.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates primarily from its floating
rate debt arrangements. The Company uses interest rate derivative instruments to
manage exposure to interest rate changes. A hypothetical 100 basis point adverse
move (increase) in interest rates along the entire interest rate curve would
adversely affect the Company's interest cost by approximately $4 million
annually.
The Company will 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.
Approximately $378.5 million of the Company's long-term debt bears interest at
fixed rates, and therefore the fair value of these instruments is affected by
changes in the market interest rates. The following table presents principal
cash flows (in thousands) based upon maturity dates of the debt obligations and
the related weighted-average interest rates by expected maturity dates for the
fixed rate debt. The interest rates on the variable rate debt as of March 31,
2001 ranged from LIBOR plus 125 basis points to LIBOR plus 200 basis points.
LONG-TERM DEBT, INCLUDING
CURRENT PORTION (IN THOUSANDS) FAIR
----
2001 2002 2003 2004 2005 THEREAFTER TOTAL VALUE
---- ---- ---- ---- ---- ---------- ----- -----
Fixed Rate ............ $ 4,227 $ 7,671 $ 10,589 $ 80,042 $ 51,561 $ 224,445 $ 378,535 $379,470
Average Interest Rate.. 8.13% 8.12% 8.11% 8.11% 8.11% 8.33% 8.28%
Variable Rate ......... $ 44,926 -- $ 167,000 $ 150,000 -- -- $ 361,926 $361,926
Average Interest Rate.. 6.87% 6.78% 6.78% 6.77%
23
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
SALE OF UNREGISTERED SECURITIES
The Company's issuance of securities in the transactions referenced below
were not registered under the Securities Act of 1933, pursuant to the exemption
contemplated by Section 4(2) thereof for transactions not involving a public
offering.
The Company issued 30,000 and 3,000 shares of its common stock in February
2001 and March 2001, respectively, for deferred stock-based compensation.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Form of Purchase and Sale Agreement between ARE One Park Avenue LLC,
One Park Avenue Fee LLC, One Park Avenue SPE Inc. and One Park
Avenue Manager LLC, as Sellers, and SL Green Diamond LLC, as Buyer*
* Incorporated by reference to the Company's Form 8-K dated January 25,
2001, filed with the Commission on January 25, 2001.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the quarter ended March 31,
2001:
1. Form 8-K dated January 25, 2001, Items 2 and 7
2. Form 8-K dated February 8, 2001, Items 7 and 9
3. Form 8-K dated February 8, 2001, Items 7 and 9
4. Form 8-K No. 1 dated March 26, 2001, Item 7
5. Form 8-K/A No. 2 dated March 27, 2001, Item 7
6. Form 8-K/A No. 3 dated March 29, 2001, Item 7
24
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,
Chief Financial Officer
Date: May 2, 2001
25