UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A No. 1
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to _____.
Commission File No. 1-13199
SL GREEN REALTY CORP.
(Exact name of registrant as specified in its charter)
Maryland 13-3956775
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
70 West 36th Street, New York, New York 10018-8007
(Address of principal executive offices - zip code)
(212) 594-2700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
restraint was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No ___.
-
The number of shares outstanding of the registrant's common stock, $0.01 par
value was 12,292,311 at November 7, 1997.
SL GREEN REALTY CORP.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SL Green Realty Corp.
PAGE
Condensed Consolidated Balance Sheet as of September 30, 1997 (unaudited)..................................... 3
Condensed Consolidated Statement of Operations for the period August 21, 1997 (inception)
to September 30, 1997 (unaudited)............................................................................. 5
Condensed Consolidated Statement of Cash Flows for the period August 21, 1997 (inception)
to September 30, 1997 (unaudited)............................................................................. 6
Notes to Condensed Consolidated Financial Statements (unaudited).............................................. 8
SL Green Predecessor
Condensed Combined Balance Sheet as of December 31, 1996...................................................... 3
Condensed Combined Statements of Operations for the periods January 1, 1997 to August 20, 1997,
July 1, 1997 to August 20, 1997 and the nine months ended September 30, 1996 (unaudited)...................... 5
Condensed Combined Statement of Cash Flows for the period January 1, 1997 to August 20, 1997,
and the nine months ended September 30, 1996 (unaudited)...................................................... 6
Notes to Condensed Combined Financial Statements (unaudited).................................................. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................................................ 12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................................................................... 20
Signatures......................................................................................................... 21
Item 1. This 10-Q/A is filed to amend certain information contained in note 9
of the Notes to Condensed Consolidated Financial Statements of SL
Green Realty Corp.
SL Green Realty Corp.
Balance Sheets
(Unaudited)
(Dollars in Thousands, except per share data)
SL Green SL Green
Realty Corp. Predecessor
September 30, December 31,
1997 1996
-------------- ------------
(Consolidated) (Combined)
ASSETS
Commercial real estate properties, at cost Land...... $39,958 $4,465
Buildings and improvements........................... 215,818 21,819
Property under capital lease......................... 12,208 ---
----------- ----------
267,984 26,284
Less accumulated depreciation........................ (22,006) (5,721)
----------- ----------
245,978 20,563
Cash and cash equivalents............................ 15,363 476
Restricted cash...................................... 2,902 1,227
Receivables.......................................... 675 914
Related party receivables............................ 1,341 1,186
Deferred rents receivable net of provision for
doubtful accounts of $124 in 1997............... 10,824 1,265
Investment in service corporations................... 1,315 ---
Investment in uncombined joint venture............... --- 1,730
Deferred costs, net.................................. 4,016 1,371
Other assets......................................... 7,538 1,340
----------- ----------
Total assets......................................... $289,952 $30,072
----------- ----------
See accompanying notes.
SL Green Realty Corp.
Balance Sheets
(Unaudited)
(Dollars in Thousands, except per share data)
SL Green SL Green
Realty Corp. Predecessor
September 30, December 31,
1997 1996
-------------- ------------
(Consolidated) (Combined)
Liabilities and Stockholders' Equity (Owners'Deficit)
Mortgage notes payable................................. $46,252 $16,610
Accrued interest payable............................... 225 90
Accounts payable and accrued expenses.................. 2,689 1,037
Accounts payable to related parties.................... 487 2,213
Excess of distributions and share of losses over
investments in uncombined joint venture........... --- 17,300
Capitalized lease obligations.......................... 14,431 ---
Deferred land lease payable............................ 8,188 ---
Security deposits...................................... 4,262 1,227
-------- -------
Total liabilities...................................... 76,534 38,477
-------- -------
Commitments, contingencies and other matters...........
Minority interest...................................... 34,444 ---
-------- -------
Stockholders' Equity
Preferred stock, $.01 par value 25,000 shares
Authorized, none outstanding....................
Common stock, $.01 par value 100,000 shares
authorized, 12,292 issued and outstanding....... 123 ---
Paid - in capital................................. 178,669 ---
Retained earnings................................. 182 ---
--------- --------
Total stockholders'equity.............................. 178,974 ---
--------- --------
Owners' deficit........................................ --- (8,405)
--------- --------
Total liabilities and stockholders' equity (owners'
deficit)............................................. $289,952 $30,072
--------- --------
See accompanying notes.
SL Green Realty Corp.
Statements of Operations
(Unaudited)
(Dollars in Thousands, except per share data)
SL Green Predecessor
---------------------------------------------------------------
SL Green
Realty Corp.
August 21 to July 1 to July 1 to January 1 to January 1 to
September 30, August 20, September 30, August 20, September 30,
1997 1997 1996 1997 1996
-------------- ---------- ------------- ------------ -------------
(Consolidated)
Revenues
Rental revenue . . . . . . . . . $ 5,415 $ 1,307 $ 1,498 $ 4,107 $ 2,813
Escalation and reimbursement
revenues . . . . . . . . . . 1,043 336 462 792 747
Management revenues . . . . . . --- 302 564 1,268 1,627
Leasing commissions . . . . . . 484 376 256 3,464 1,538
Construction revenues . . . . . --- 69 50 77 89
Investment income . . . . . . . 207 --- --- --- ---
Other income . . . . . . . . . . --- --- 33 16 147
------- -------- ------- -------- -------
Total revenues . . . . . . . . . 7,149 2,390 2,863 9,724 6,961
------- -------- ------- -------- -------
Share of loss from uncombined
joint ventures:
Operating loss . . . . . . . (130) (206) (169) (770) (986)
------- -------- ------- -------- -------
Expenses
Operating expenses . . . . . . . 1,190 1,084 970 2,709 2,200
Ground rent . . . . . . . . . . 491 13 --- 13 ---
Interest . . . . . . . . . . . . 593 349 429 1,062 871
Depreciation and amortization . 846 212 327 811 733
Real estate taxes . . . . . . . 1,009 223 240 705 472
Marketing, general and
administrative . . . . . . . 437 354 651 2,189 2,680
------- -------- ------- -------- -------
Total expenses . . . . . . . . . 4,566 2,235 2,617 7,489 6,956
------- -------- ------- -------- -------
Income (loss) before minority
interest and extraordinary
items . . . . . . . . . . . . 2,453 (51) 77 1,465 (981)
Minority interest . . . . . . . (397) --- --- --- ---
Income (loss) before
extraordinary item . . . . . 2,056 (51) 77 1,465 (981)
Extraordinary items:
Gain on the forgiveness of
debt from uncombined joint
ventures . . . . . . . . . . --- 22,087 --- 22,087 ---
Loss on extinguishment of
debt net of minority
interest in the amount of
$362 . . . . . . . . . . . . (1,874) --- --- --- ---
------- -------- ------- -------- -------
Net income (loss) . . . . . . . $ 182 $ 22,036 $ 77 $ 23,552 $ (981)
------- -------- ------- -------- -------
Per share data:
Income per share before
extraordinary item . . . . . $ 0.17
Extraordinary item per share . . (0.16)
-------
Net income per share . . . . . . $ 0.01
-------
Weighted average common
shares and common share
equivalents outstanding . . . 12,417
-------
See accompanying notes.
SL Green Realty Corp.
Statements of Cash Flows
(Unaudited)
(Dollars in Thousands)
SL Green Predecessor
----------------------------------------
SL Green
Realty Corp.
August 21 to January 1 to January 1 to
September 30, August 20, September 30,
1997 1997 1996
-------------- ----------------------------------------
(Consolidated) (Combined)
Operating Activities:
Net Income (loss)............................ $ 182 $ 23,552 $ (981)
--------- ---------- -------
Adjustments:
Depreciation and Amortization............. 846 811 733
Equity in net loss (income) of investees.. 130 (21,072) 1,253
Deferred rents receivalbes................ (208) (102) (303)
Extraordinary Items - Non-Cash Portion.... 776 --- ---
Changes in operating assets and liabilities:
Restricted cash........................... (29) --- ---
Receivables............................... (551) (190) (189)
Related party receivables................. (541) (365) (134)
Deferred lease costs...................... (93) (279) (1,094)
Other assets.............................. (2,549) 579 (366)
Accounts payable and accrued expenses..... 2,689 118 (359)
Accounts payable to related parties....... 487 (201) 782
Accrued interest payable.................. 225 (23) 133
Deferred land lease payable............... 4 --- 199
Security deposits......................... --- 77 (567)
Security deposits payable................. --- (67) 586
--------- ---------- -------
Net cash provided by (used in)
operating activities............. 1,368 2,838 (307)
--------- ---------- -------
Investing Activities:
Additions to land, buildings and
improvements............................. (146,330) (7,411) (14,822)
Purchases of equipment, auto,
furniture and fixtures................... --- --- (208)
Contributions to partnership
investments.............................. --- (25) (1,188)
Distribution from partnership
investments.............................. --- 1,877 ---
--------- ---------- -------
Net cash used in investing
activities....................... (146,330) (5,559) (16,218)
--------- ---------- -------
Financing Activities:
Proceeds from mortgage notes
payable.................................. 14,000 7,000 15,000
Payments of mortgage notes payable and
loans.................................... (76,389) (219) (150)
Cash distributions to owners.............. --- (4,024) (552)
Cash contributions from owners............ --- 25 2,273
Deferred loan costs....................... (775)
Net proceed from sale of common stock..... 228,704 --- ---
Formation expenses........................ (5,215) --- ---
--------- ---------- -------
Net cash provided by financing
activities....................... 160,325 2,782 16,571
--------- ---------- -------
Net increase (decrease) in cash
and cash equivalents............. 15,363 61 46
Cash and Cash equivalents at beginning of
period................................... 0 476 620
--------- ---------- -------
Cash and cash equivalents at end of
period................................... $ 15,363 $ 537 $ 666
--------- ---------- -------
Supplemental disclosure of cash flow
information:
Cash paid for interest:
Net of Interest Capitalized $ 368 $ 1,085 $ 738
--------- ---------- -------
Supplemental disclosure of non-cash
investing and financing activities:
Formation transaction activity:
Assets Acquired
Commercial real estate, net $ 91,123
Other assets $ 16,751
Liabilities assumed
Mortgage notes payable $ 73,073
Capitalized lease obligation $ 14,431
Deferred land lease $ 8,184
Security deposits payable $ 4,262
SL Green Realty Corp.
Notes To Condensed Consolidated Financial Statements
(Unaudited)
September 30, 1997
1. Organization and Basis of Presentation - SL Green Realty Corp.
Formation and Initial Public Offering
SL Green Realty Corp. (the "Company"), a Maryland corporation, and SL
Green Operating Partnership, L.P., (the "Operating Partnership"), were formed
in June 1997 for the purpose of combining the commercial real estate business
of S.L. Green Properties, Inc. and its affiliated partnerships and entities
("SL Green"). The Operating Partnership received a contribution of interest
in the real estate properties as well as 95% of the economic interest in the
management, leasing and construction companies (the "Service Corporations").
The Company qualifies as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986, as amended; and operates as a fully
integrated, self-administered, self-managed REIT. A REIT is a legal entity
that holds real estate interests and, through payments of dividends to
shareholders, is permitted to reduce or avoid the payment of federal income
taxes at the corporate level.
The authorized capital stock of the Company consists of 200 million shares
of capital stock, $.01 par value, of which the Company has authorized the
issuance of up to 100 million shares of Common Stock, $.01 par value per
share, 75 million shares of Excess Stock, at $.01 par value per share, and 25
million shares of Preferred Stock, par value $.01 per share. On August 20,
1997, the Company issued 11.62 million shares of its Common Stock (including
the underwriters' over-allotment option of 1.52 million shares) to the public
through a public offering (the "Offering"). Concurrently with the
consummation of the Offering, the Company issued 38,095 shares of restricted
common stock pursuant to stock loans and 85,600 shares of restricted common
stock to a financial advisor. In addition, the Company previously issued to
its executive officers approximately 553,616 shares, as founders' shares. As
of September 30, 1997, no shares of Excess Stock or Preferred Stock are
issued and outstanding.
Concurrently with the consummation of the Offering, the Company and the
Operating Partnership, together with the partners and members of the
affiliated partnerships of the SL Green Predecessor and other parties which
held ownership interests in the properties contributed to the Operating
Partnership (collectively, the "Participants"), engaged in certain Formation
Transactions (the "Formation Transactions").
The net cash proceeds received by the Company from the Offering (after
deducting underwriting discounts) was $228.7 million. The Company utilized
approximately $42.6 million of the Offering proceeds to repay mortgage
indebtedness encumbering the properties, including $1.5 million for
prepayment penalties and other financing fees and expenses, approximately
$6.6 million to purchase the direct or indirect interests of certain
participants in the properties, approximately $95.5 million to acquire
properties approximately $3.4 million to pay certain expenses incurred in the
Formation Transactions, $35.6 million to repay a loan from Lehman Brothers
Holdings, Inc. ("LBHI"), $1.8 million to fund the advisory fee payment to
Lehman Brothers, Inc. and $41.7 million to fund capital expenditures, general
working capital needs and future acquisitions (See note 2).
Substantially all of the Company's assets are held by, and its operations
conducted through, the Operating Partnership, a Delaware limited partnership.
The Company is the sole managing general partner of the Operating
Partnership. Continuing investors hold, in the aggregate, a 16.2% limited
partnership interest in the Operating Partnership.
Principles of Combination - SL Green Predecessor
The SL Green Predecessor is not a legal entity but rather a combination of
real estate properties and affiliated real estate management, construction
and leasing entities under common control and management of Stephen L. Green;
and interests owned and managed by Stephen L. Green in entities accounted for
on the equity method (see below) that are organized as partnerships and a
limited liability company. The entities included in this unaudited combined
financial statement have been combined for only the periods that they were
under common control and management. All significant intercompany
transactions and balances have been eliminated in combination. Capital
contributions, distributions and profits and losses are allocated in
accordance with the terms of the applicable agreements.
The accompanying combined financial statements include partnerships and
corporations which were under common control as follows:
Stephen L. Green
----------------
Entity Property/Service Percentage Ownership Ownership Type
------ ---------------- -------------------- --------------
Office Property Entities:
64-36 Realty Associates 70 West 36th Street 95%(A) General partner
1414 Management Associates, LP 1414 Avenue of the Americas 100% General partner
Service Corporations:
S.L. Green Management, Corp. Management and leasing 100% Sole shareholder
S.L. Green Leasing, Inc. Management 100% Sole shareholder
Emerald City Construction Corp. Construction 100% Sole shareholder
(A) The minority interest is not material.
On June 30, 1997, the majority owner of SL Green Predecessor purchased the
remaining 90% interest in Praedium Bar Associated LLC ("Praedium"), which was
funded by a loan from LBHI, which as of that date is included in the combined
financial statements. Prior to that date, the purchase of the 10% ownership
interest in Praedium was accounted for under the equity method.
For the entities accounted for on the equity method, the SL Green
Predecessor records its investments in partnerships and limited liability
company at cost and adjusts the investment accounts for its share of the
entities' income or loss and for cash distributions and contributions.
Condensed Statement of Operations for the Uncombined Joint Ventures is as
follows:
(Unaudited)
Period
January 1 - August Nine months ended
20, 1997 September 30, 1996
------------------ ------------------
Condensed statements of operations
Rental revenue and escalations.......................... $ 13,552 $ 13,480
--------- ---------
Interest................................................ 5,320 5,620
Depreciation and amortization........................... 2,510 2,611
Operating and other expenses............................ 7,142 6,996
--------- ---------
Total expenses.......................................... 14,972 15,227
--------- ---------
Operating loss before outside partner's interest and
Extraordinary item................................... (1,420) (1,747)
Elimination of inter-company management fees............ 240 267
Extraordinary gain on forgiveness of debt............... 33,419 ----
Other partner share of income........................... (10,922) 494
--------- ---------
Income (loss) allocated to the SL Green Predecessor..... $ 21,317 $ (986)
--------- ---------
Basis of Presentation
The accompanying unaudited condensed consolidated and combined financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and notes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for fair presentation have been included. The
1997 operating results for the combined periods presented are not necessarily
indicative of the results that may be expected for the year ending December
31, 1997. These financial statements should be read in conjunction with the
financial statements and accompanying notes included in the Company's
registration statement on Form S-11 dated August 14, 1997.
Management
In order to maintain the Company's qualification as a REIT while realizing
income from management leasing and construction contracts from third parties,
all of the management operations with respect to properties in which the
Company will not own 100% of the interest are conducted through the Service
Corporations. The Company, through the Operating Partnership, owns 100% of
the non-voting common stock (representing 95% of the total equity) of the
Service Corporations. Through dividends on its equity interest, the
Operating Partnership receives substantially all of the cash flow from the
Service Corporations' operations. All of the voting common stock of the
Service Corporations (representing 5% of the total equity) is held by an SL
Green affiliate. This controlling interest gives the SL Green affiliate the
power to elect all directors of the Service Corporations. All of the
management and leasing with respect to the properties contributed and
acquired by the Company is conducted through the Management LLC. The
Operating Partnership owns 100% interest in the Management LLC. 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.
Partnership Agreement
In accordance with the partnership agreement of the Operating Partnership
(the "Operating Partnership Agreement"), all allocations of distributions and
profits and losses are made in proportion to the percentage ownership
interests of their respective partners. As the managing general partner of
the Operating Partnership, the Company is required to take such reasonable
efforts, as determined by it in its sole discretion, to cause the Operating
Partnership to distribute sufficient amounts to enable the payment of
sufficient dividends by the Company to avoid any federal income or excise tax
at the Company level as a consequence of a sale of SL Green property.
2. Property Acquisition
On September 15, 1997, the Operating Partnership, acquired the land and
building at 110 East 42nd Street for $30 million. The cash used by the
Operating Partnership in the acquisition was from proceeds of an LBHI loan
and the Offering.
3. Temporary Loans
The Operating Partnership received loans totaling approximately $69.5
million from LBHI. These loans are collateralized by the mortgages
encumbering the Operating Partnership's interests in 1140 Avenue of the
Americas and 110 East 42nd Street. The loans are also collateralized by an
equivalent amount of the Company's cash which is held by LBHI and invested in
US Treasury securities. Interest earned on the cash collateral is applied by
Lehman to service the loans which interest rate is commensurate with that of
the portfolio of US Treasury securities, which mature on January 15, 1998.
The Operating Partnership and LBHI each have the right of offset and
therefore the loans and the cash collateral have been presented net in the
consolidated balance sheet at September 30, 1997. The purpose of these loans
is to temporarily preserve mortgage recording tax credits for future
potential acquisitions of real property which the Company may make, the
financing of which may include property based debt, for which these credits
would be applicable and provide a financial savings.
4. Income Taxes
No provision has been made for income taxes in the accompanying combined
financial statements of SL Green Predecessor since such taxes, if any, are
the responsibility of the individual partners.
5. Net Income Per Common Share
Net income per common share is computed in accordance with the treasury
stock method and is based on the weighted average number of common shares and
common stock equivalent shares outstanding during the period. The common
stock equivalent shares represent options outstanding. To arrive at the
fully diluted share value, the common stock equivalents resulted in
increasing the number of shares outstanding by approximately 125,000 shares.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted for
fiscal years ending after December 15, 1997. At that time the Company will
be required to change the method currently used to compute earnings per share
and to restate all prior periods. Management does not believe the adoption
of Statement No. 128 will have a material impact on earnings per share.
6. Commitments and Contingencies
The Company and the Operating Partnership are not presently involved in
any material litigation nor, to their knowledge, is any material litigation
threatened against them or their properties, other than routine litigation
arising in the ordinary course of business. Management believes the costs,
if any, incurred by the Company and the Operating Partnership related to this
litigation will not materially affect the financial position, operating
results or liquidity of the Company and the Operating Partnership.
The Operating Partnership became the contract vendee to acquire ownership
of certain interests in the property known as 17 Battery North. The Company
has a $3.6 million deposit associated with the expected acquisition of 17
Battery North.
7. 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 parties amounted to $34,000 for the period August 21 to
September 30, 1997. SL Green Predecessor's transactions with the parties
amounted to $62,000 and $81,000 for the periods July 1 to August 20, 1997 and
July 1 to September 30, 1996, respectively and $255,000 and $214,000 for the
periods January 1 to August 20, 1997 and January 1 to September 30, 1996,
respectively.
8. Extraordinary Items
Forgiveness of mortgage debt totaling $22,087,000 (net of minority
interest of $11,332,000) is reflected in the accompanying SL Green
Predecessor financial statements as an extraordinary gain.
Prepayment penalties of $1,071,000 (net of minority interest of $207,000)
and unamortized deferred charges of $803,000 (net of minority interest of
$155,000) related to mortgages paid in connection with the Formation
Transactions were expensed and are reflected in the Company's financial
statements as an extraordinary loss.
9. Subsequent Event
On November 5, 1997, the Board of Directors of the Company declared a
$0.16 per share distribution to stockholders of record on November 17, 1997.
The distribution, together with the distribution with respect to the
outstanding units of partnership interest in the Operating Partnership, totals
$2.35 million and is payable on November 19, 1997.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
This report includes certain statements that may be deemed to be "forward-
looking statements" within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. All statements, other than statements of historical facts,
included in this report that address activities, events or developments that
the Company expects, believes or anticipates will or may occur in the future,
including such matters as future capital expenditures, dividends and
acquisitions (including the amount and nature thereof), expansion and other
development trends of the real estate industry, business strategies,
expansion and growth of the Company's operations and other such matters are
forward-looking statements. These statements are based on certain
assumptions and analyses made by the Company in light of its experience and
its perception of historical trends, current conditions, expected future
developments and other factors it believes are appropriate. Such statements
are subject to a number of assumptions, risks and uncertainties, general
economic and business conditions, the business opportunities that may be
presented to and pursued by the Company, changes in laws or regulations and
other factors, many of which are beyond the control of the Company. Any such
statements are not guarantees of future performance and actual results or
developments may differ materially from those anticipated in the forward-
looking statements.
The following discussion related to the consolidated financial statements
of the Company and the combined financial statements of SL Green Predecessor
should be read in conjunction with the financial statements appearing
elsewhere in this report and the financial statements and related notes
thereto included in the Company's registration statement on Form S-11 dated
August 14, 1997. In connection with the Formation Transactions as described
in Note 1 to the financial statements there were significant changes in the
financial condition and results of operations of the Company which are
outlined below, consequently, the comparison of the historical periods
provides only limited information regarding the operations of the Company.
Therefore, in addition to the historical comparison, the Company has provided
a comparison of the results of operations on a pro forma basis.
Financial Condition
Commercial real estate properties increased approximately $225 million
from December 31, 1997 to September 30, 1996 as a result of the purchase of
the remaining partnership interests in the uncombined joint ventures that
were previously accounted for under the equity method and the acquisition of
four buildings one of which was acquired subsequent to the Formation
Transactions. The acquisitions were funded from the proceeds of the
Offering.
Cash increased $14.9 million from December 31, 1996 to September 30, 1997.
The increase represents the remaining proceeds from the Offering after the
funding of the Formation Transactions. As a result of the purchase of the
remaining partnership interests in the uncombined joint ventures, deferred
rent receivable, capital lease obligations and deferred land lease payable
increased $9.7 million, $14.4 million and $8.2 million respectively from
December 31, 1996 to September 30, 1997.
Results of Operations
Comparison of the nine months ended September 30, 1997 to the nine months
ended September 30, 1996. For discussion purposes, the results of operations
from the nine months ended September 30, 1997 combined the operating results
of SL Green Predecessor for the period January 1, 1997 to August 20, 1997 and
the operating results of the Company for the period August 21, 1997 to
September 30, 1997. The results of operations for the nine months ended
September 30, 1996 represent solely the operating results of the SL Green
Predecessor.
Rent revenue and escalation and reimbursement revenue increased $6.7
million and $1.1 million, respectively, for the nine months ended September
30, 1997 compared to the nine months ended September 30, 1996. The increases
are primarily attributable to the Formation Transactions. In connection with
the Formation Transactions, three buildings previously accounted for on the
equity method are consolidated in the financial statements of the Company for
the period August 21, 1997 to September 30, 1997. In addition, the results
of operations of three of the acquisition buildings and the results of 110
East 42nd Street for the period September 15, 1997 to September 30, 1997 are
included in the consolidated financial statements for the period August 21,
1997 to September 30, 1997.
Leasing commission increased $2.4 million for the nine months ended
September 30, 1997 compared to the nine months ended September 30, 1996 due
to strong leasing activity in the current market.
Equity in net income of uncombined joint ventures totaled $21.1 million
for the nine months ended September 30, 1997 compared to a loss of $1.0
million for the nine months ended September 30, 1996 due to the extraordinary
income recorded by the uncombined joint ventures as a result of the
forgiveness of mortgage debt in the amount of $22.1 million.
Expenses increased $5.1 million for the nine months ended September 30,
1997 compared to the nine months ended September 30, 1996 due to the
Formation Transactions and the acquisition of 110 East 42nd Street as
discussed above.
Comparison of the three months ended September 30, 1997 to the three
months ended September 30, 1996. For discussion purposes, the results of
operations from the three months ended September 30, 1997 combined the
operating results of SL Green Predecessor for the period July 1, 1997 to
August 20, 1997 and the operating results of the Company for the period
August 21, 1997 to September 30, 1997. The results of operations for the
three months ended September 30, 1996 represent solely the operating results
of the SL Green Predecessor.
Rent revenue and escalation and reimbursement revenue increased $5.2
million and $0.9 million, respectively, for the three months ended September
30, 1997 compared to the three months ended September 30, 1996. The
increases are primarily attributable to the Formation Transactions. In
connection with the Formation Transactions, three buildings previously
accounted for on the equity method are consolidated in the financial
statements of the Company for the period August 21, 1997 to September 30,
1997. In addition, the results of operations of three of the acquisition
buildings are included in the financial statements for the period August 21,
1997 to September 30, 1997 and the results of 110 East 42nd Street for the
period September 15, 1997 to September 30, 1997 are included in the
consolidated financial statements of SL Green Realty Corp. and not in the
corresponding 1996 results of SL Green Predecessor.
Leasing commission increased $0.6 million for the three months ended
September 30, 1997 compared to the three months ended September 30, 1996 due
to strong leasing activity in the current market.
Equity in net income of investees totaled $21.8 million for the three
months ended September 30, 1997 compared to a loss of $0.2 million for the
three months ended September 30, 1996 due to the extraordinary income
recorded by the uncombined joint ventures as a result of forgiveness of
mortgage debt in the amount of $22.1 million.
Expenses increased $4.2 million for the three months ended September 30,
1997 compared to the three months ended September 30, 1996 due to the
Formation Transactions and the acquisition of 110 East 42nd Street as
discussed above.
Pro Forma Results of Operations
Comparison of the nine months ended September 30, 1997 to the nine months
ended September 30, 1996. The Pro forma statements of operations for the
nine months ended September 30, 1997 and 1996, respectively, are presented as
if the Offering and the Formation Transactions occurred on January 1, 1996
and the effect thereof was carried forward through September 30, 1997.
The pro forma results of operations do not purport to represent what the
Company's results would have been assuming the completion of the Formation
Transactions and the Offering at the beginning of the period indicated, nor
do they purport to project the Company's financial results of operations at
any future date or for any future period. The pro forma statements of
operations should be read in conjunction with the combined financial
statements of SL Green Predecessor included in the Company's registration
statement on Form S-11 dated August 14, 1997 and the consolidated financial
statements of SL Green Realty Corp. included elsewhere herein.
Nine months ended September 30, 1997 compared to nine months ended September 30, 1996
(in thousands except percentage data)
Nine Months Ended
September 30, Dollar Percent
(Unaudited) Change Change
----------------------- ------ -------
1997 1996
Revenue
- -------
Rental revenue............................ $ 34,855 $ 33,024 $ 1,831 5.5%
Escalations & reimbursement revenues...... 4,338 5,048 (710) (14.1)
Leasing commissions....................... 2,251 1,026 1,225 119.4
Investment income......................... 207 207 0 0.0
Other income.............................. 1,676 170 1,506 885.9
--------- --------- -------- ------
Total revenues........... 43,327 39,475 3,852 9.8
--------- --------- -------- ------
Share of net income (loss) of service
corporations............................. 139 (773) 912 -----
--------- --------- -------- ------
Expenses
- --------
Operating expenses........................ 8,838 9,032 (194) (2.1)
Ground rent............................... 3,228 3,228 0 0.0
Interest.................................. 3,967 4,078 (111) (2.7)
Depreciation and amortization............. 5,444 5,239 205 3.9
Real estate taxes......................... 6,169 5,982 187 3.1
Marketing, general and administrative..... 2,066 1,932 134 6.9
--------- --------- -------- ------
Total expenses........... 29,712 29,491 221 .7
--------- --------- -------- ------
Net income............... $ 13,754 $ 9,211 $ 4,543 49.3%
--------- --------- -------- ------
Rental revenue increased approximately $1,831,000 or 5.5% for the nine
months ended September 30, 1997 compared to the nine months ended September
30, 1996. Rental revenue increased $1,532,000 in 1997 compared to 1996 due
to 1414 Avenue of the Americas (the "1996 Acquisition") acquired in mid 1996
being included for the full nine months ended September 30, 1997, and
$237,000 as a result of the 110 East 42nd Street acquisition (the "1997
Acquisition") in September of 1997. Rental revenue from properties owned for
the same periods in 1996 and 1997 increased approximately $63,000 for the
nine months ended September 30, 1997 compared to the prior year, primarily
representing the impact of frictional vacancies associated with the
retenanting or reletting downtime of office space between comparative periods
and overall increased tenant occupancy.
Tenant reimbursements decreased $710,000 or 14.1% for the nine months
ended September 30, 1997 compared to the nine months ended September 30,
1996. Tenant reimbursements from the properties included for all of 1996 and
1997 decreased approximately $817,000 during the period as a result of
reduced real estate tax escalations ($266,000) due to decreased assessed
values and changes in tenants base years due to retenanting and renewals for
the properties. The remaining decrease represents reduced porter wage
escalations revenue as a result of retenanting and tenant renewals which
results in changes in tenant base years and a loss of reimbursement revenue
from expiring leases. The decrease in reimbursements was off set by an
increase of approximately $107,000 of reimbursement revenue for the full nine
months of 1997 provided by the 1996 Acquisition.
Leasing commission income increased $1,225,000 or 119.4% for the nine
months ended September 30, 1997 over the prior years due to a large tenant
rep assignment being completed in 1997 and strong leasing activity in the
current market.
Investment income in the amount of $207,000 for the nine months ended
September 30, 1997 was due to temporary investment of proceeds from the
Offering, and is reported as the same amount for the nine months ended
September 30, 1996 on a pro forma basis.
Other income increased approximately $1,506,000 or 885.9% for the nine
months ended September 30, 1997 compared to the nine months ended September
30, 1996 due primarily to a lease buyout by a tenant in one of the
acquisition properties.
Operating expenses decreased approximately $194,000 or 2.1%. For the nine
months ended September 30, 1997, total operating expenses were approximately
$8,838,000, or 22.5% of revenues from rental operations, compared with total
operating expenses of approximately $9,032,000 or 23.7% in the prior year.
Property expenses from the properties included for all of 1996 and 1997
decreased approximately $721,000 for the nine months ended September 30, 1997
compared to the prior year. This decrease in total property expenses
resulted from a decrease in third party management fees for one of the
acquisition properties, overall decreases in utilities due primarily to the
weather, reductions in payroll and cleaning costs due to an overall reduction
in department hours worked and decreased repairs and maintenance due to work
performed in 1996 and not recurring in 1997. The decrease in total operating
expenses was partially offset by increases associated with the 1996
Acquisition of approximately $443,000, reflecting a full nine months of the
property's expenses and property expenses from the 1997 Acquisition of
approximately $84,000.
Interest expense decreased by approximately $111,000 or 2.7% for the nine
months ended September 30, 1997 compared to the nine months ended September
30, 1996, primarily as a result of the decrease in mortgage loans payable due
to amortization of principal.
Depreciation and amortization increased approximately $205,000 or 3.9%
for the nine months ended September 30, 1997 compared to the nine months
ended September 30, 1996. The increase was due primarily to the 1996
Acquisition, additions for building and tenant improvements and the
amortization of financing costs associated with the LBHI loan in 1997.
Real estate taxes increased approximately $187,000 or 3.1% for the nine
months ended September 30, 1997 compared to the nine months ended September
30, 1996. The 1996 Acquisition accounted for approximately $284,000 of the
increase over 1996 and the 1997 Acquisition accounted for approximately
$83,000 of the increase. The increases were offset by a net decrease of
approximately $180,000 for buildings included for all of 1996 and 1997 due to
management's efforts to obtain reductions in assessed values.
Marketing general and administrative expense increased approximately
$134,000 or 6.9% for the nine months ended September 30, 1997 compared to the
nine months ended September 30, 1996. The increase was due primarily to
increases in staff in the service corporations due to public company
requirements and the acquisition of properties.
Comparison of the three months ended September 30, 1997 to the three
months ended September 30, 1996.
The pro forma statement of operations for the three months ended September
30, 1997 and 1996 are presented as if the completion of the Offering and the
Formation Transactions occurred on January 1, 1996 and the effect thereof was
carried forward through September 30, 1997.
The pro forma financial statements do not purport to represent what the
Company's financial position or results of operations would have been
assuming the completion of the Formation Transactions and the Offering on
such date or at the beginning of the period indicated, nor do they purport to
project the Company's financial position or results of operations at any
future date or for any future period. The pro forma statements of operations
should be read in conjunction with the combined financial statements of SL
Green Predecessor included in the Company's registration statement on Form S-
11 dated August 14, 1997 and the consolidated financial statements of SL
Green Realty Corp. included elsewhere herein.
Three months ended September 30, 1997 compared to three months ended September 30, 1996
(in thousands except percentage data)
Three Months Ended Dollar Percent
September 30, Change Change
-------------------------------- ------ -------
1997 1996
Revenue
Rental revenue............................. $ 11,837 $ 11,271 $ 566 5.0%
Escalations & reimbursement revenues....... 1,864 1,873 (9) (0.50)
Leasing commissions........................ 726 397 329 82.9
Investment income.......................... 207 207 -- --
Other income............................... 139 101 38 37.6
--------- ---------- ------- ------
Total revenues............ 14,773 13,849 924 6.7
--------- ---------- ------- ------
Share of net income (loss) of investees.... (243) (521) 278 53.4
--------- ---------- ------- ------
Expenses
Operating expenses......................... 3,127 3,063 64 2.1
Ground rent................................ 1,076 1,076 0 0.0
Interest................................... 1,322 1,353 (31) (2.3)
Depreciation and amortization.............. 1,814 1,791 23 1.3
Real estate taxes.......................... 2,091 1,928 163 8.5
Marketing, general and administrative...... 671 677 (6) (.9)
--------- ---------- ------- ------
Total expenses............ 10,101 9,888 213 2.2
--------- ---------- ------- ------
Net income................ $ 4,429 $ 3,440 $ 989 28.8%
--------- ---------- ------- ------
Rental revenue increased approximately $566,000 or 5.0% for the three
months ended September 30, 1997 compared to the three months ended September
30, 1996. The increase in rental revenue attributable to the 1997
Acquisition was $237,000, while revenue from the other properties included
for all of the 1996 and 1997 third quarters increased approximately $329,000,
primarily due to increased occupancy.
Leasing commission income increased approximately $329,000 or 82.9% for
the three months ended September 30, 1997 compared to the three months ended
September 30, 1996. The increase reflects continued strong leasing activity
in the market.
Investment income in the amount of $207,000 for the three months ended
September 30, 1997 was due to temporary investment of proceeds from the
Offering, and is reported as the same amount for the three months ended
September 30, 1996 on a pro forma basis.
Other income increased approximately $38,000 or 37.6% for the three months
ended September 30, 1997 compared to the quarter ended September 30, 1996.
Other income is primarily generated by the three acquisition properties and
includes tenant lease buy outs and various other non recurring tenant
charges. Due to the erratic nature of this type of income it is not
consistent from quarter to quarter.
Operating expenses increased approximately $64,000 or 2.1% primarily as a
result of the 1997 Acquisition ($84,000).
Interest expense decreased by approximately $31,000 or 2.3% for the
quarter ended September 30, 1997 compared to the three months ended September
30, 1996, primarily as a result of the decrease in mortgage loans payable due
to amortization of principal.
Depreciation and amortization increased approximately $23,000 or 1.3% for
the three months ended September 30, 1997 compared to the three months ended
September 30, 1996. The increase in depreciation was due to the amortization
of financing costs associated with the LBHI loan received in 1997.
Real estate taxes increased approximately $163,000 or 8.5% for the three
months ended September 30, 1997 compared to the three months ended September
30, 1996. The 1997 Acquisition accounted for approximately $83,000 of the
increase. Two of the acquisition properties had increases totaling
approximately $39,000 for the nine months ended September 30, 1997 which
impacted the third quarter due to the New York City tax year commencing July
1, 1997. In addition, properties with overall tax decreases due to
reductions in assessed value reflected larger decreases in the third quarter
1996 than in the third quarter 1997 due to the New York City fiscal year.
Liquidity and Capital Resources
The SL Green Predecessor historically relied on fixed and floating rate
mortgage financing plus the use of its capital for the acquisition,
redevelopment and renovation of the Company's properties. The proceeds from
the Offering as well as the new mortgage loan in the amount of $14 million,
which is secured by 50 West 23rd Street, were utilized to repay existing
mortgage loans, acquire properties, pay Offering and Formation Transaction
expenses and provide working capital. Total outstanding mortgage loans
amounted to $46.3 million as a result of the Formation Transactions. All
mortgage loans encumbering the Company's properties have fixed interest rates
ranging from 7.47% to 9.0%. Subsequent to the Formation Transactions the
mortgage loans represent approximately 11.03% of the Company's market
capitalization based on an estimated total market capitalization (debt and
equity, assuming conversion of all operating partnership units) of $426.7
million at September 30, 1997 (based on a common stock price of $25.875 per
share, the closing price of the Company's common stock on the New York Stock
Exchange on September 30, 1997). The Company's principal debt maturities are
scheduled to be $433,000 and $1,958,000 for the three months ending December
31, 1997 and the twelve months ending December 31, 1998, respectively.
The Operating Partnership has received loans totaling approximately $69.5
million from Lehman Brothers Holdings, Inc. ("LBHI"). These loans are
collateralized by the mortgages encumbering the Operating Partnership's
interests in 1140 Avenue of the Americas and 110 East 42nd Street. The loans
are also collateralized by an equivalent amount of the Company's cash which
is held by LBHI. Interest on the cash collateral is applied by Lehman to
service the loans, which mature on January 15, 1998. The Operating
Partnership and LBHI each have the right of offset and therefore the loans
and the cash collateral have been presented net for the condensed
consolidated balance sheet. These loans, except for an $132,000 origination
fee, have no cost to the Company. The purpose of the loans is to maintain
certain mortgage escrow tax credits which may be utilized on future
acquisitions which require debt financing that require a mortgage interest to
qualify a lender.
The Company is currently negotiating with Lehman the terms of a credit
facility (the "Credit Facility"), which the Company expects to be placed
shortly, although there is no assurance that the Credit Facility will be
obtained. The Company expects to utilize the Credit Facility to facilitate
acquisitions and fund associated tenant improvements and leasing commissions
and other working capital needs.
The Company expects to make distributions to its stockholders primarily
based on its distributions received from the Operating Partnership or, if
necessary, from working capital or borrowings. The Operating Partnership
income will be derived primarily from lease revenue from the Properties and,
to a limited extent, from fees generated by the Service Corporations.
The Company estimates that for the 12 months ending September 30, 1998, it
will incur approximately $5.11 million of capital expenditures on properties
currently owned. 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
(once obtained), from additional borrowings secured by the target 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 nine months ended September 30, 1997 to nine months ended
September 30, 1996
Net cash provided by (used in) operating activities increased $4,513 to
$4,206 from $(307) for the nine months ended September 30, 1997 compared to
the nine months ended September 30, 1996. The increase was due primarily
to the net income generated by the 1996 Acquisition, increased income
from other properties and an increase in leasing commission income. Net
cash used in investing activities increased $135,671 to $151,889 from $16,218
for the nine months ended September 30, 1997 compared to the nine months
ended September 30, 1996. The increase was due primarily to the purchase
of certain properties in connection with the Offering and the purchase
of the 1997 Acquisition, partially offset by a net contribution from
partnership investments of $1,852 in 1997 compared to a net distribution to
partnership investments of $1,188 in 1996. Net cash provided by
financing activities increased $146,536 to $163,107 from $16,571 for
the nine months ended September 30, 1997 compared to the nine months ended
September 30, 1996. The increase was due primarily to net proceeds
received from the Offering ($228,704) and increased proceeds from loans
($6,000) in 1997 compared to 1996, off-set by increased payments on
mortgages and loans ($76,458) in 1997 compared to 1996, 1997 formation
expenses $(5,215) and net distributions to owners increased $5,720 in
1997 compared to 1996.
Funds from Operations
The White Paper on Funds from Operations approved by the Board of
Governors of NAREIT in March 1995 defines Funds from Operations as net income
(loss) (computed in accordance with GAAP), excluding gains (or losses) from
debt restructuring and sales of properties, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. The Company believes that Funds from
Operations is helpful to investors as a measure of the performance of an
equity REIT because, along with cash flow from operating activities,
financing activities and investing activities, it provides investors with an
indication of the ability of the Company to incur and service debt, to make
capital expenditures and to fund other cash needs. The Company computes
Funds from Operations in accordance with standards established by NAREIT
which may not be comparable to Funds from Operations reported by other REIT's
that do not define the term in accordance with the current NAREIT definition
or that interpret the current NAREIT definition differently than the Company.
Funds from Operations does not represent cash generated from operating
activities in accordance with GAAP and should not be considered as an
alternative to net income (determined in accordance with GAAP) as an
indication of the Company's financial performance or to cash flow from
operating activities (determined in accordance with GAAP) as a measure of the
Company's liquidity, nor is it indicative of funds available to fund the
Company's cash needs, including its ability to make cash distributions.
On a pro forma basis after giving effect to the Offering, Funds from
Operations for the nine months ended September 30, 1997 and 1996
respectively, are as follows:
Pro Forma
-----------------------------------------
1997 1996
------------ ------------
Net income before minority interest and
extraordinary item................................ $ 13,754 $ 9,211
Add:
Depreciation and amortization........................ 5,444 5,239
Amortization of deferred financing costs and
Depreciation of non-real estate assets............ (136) (117)
---------- ----------
FFO.................................................. $ 19,062 $ 14,333
---------- ----------
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
Financial Accounting Standards Board Statement No. 128 ("FAS No. 128")
"Earnings Per Share" is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. The Company
intends to adopt the requirements of this pronouncement in its financial
statements for the year ended December 31, 1997. FAS No. 128 specifies the
computation, presentation and disclosure requirements for net income per
share.
Financial Accounting Standards Board Statement No. 131 ("FAS No. 131")
"Disclosure about segments of an Enterprise and Related Information" is
effective for financial statements issued for periods beginning after
December 15, 1997. FAS No. 131 requires disclosures about segments of an
enterprise and related information regarding the different types of business
activities in which an enterprise engages and the different economic
environments in which it operates.
The Company does not believe that the implementation of FAS No. 128 or FAS
No. 131 will have a material impact on its financial statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
1. Form 8-K dated September 15, 1997, Item 2.
2. Form 8-K/A dated September 15, 1997, Item 7.
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/ David J. Nettina
------------------------
David J. Nettina
Executive Vice President, Chief
Operating Officer and Chief
Financial Officer
Date: November 14, 1997
