UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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 registrant 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 23,951,826 at November 13, 1998.
SL GREEN REALTY CORP.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SL GREEN REALTY CORP. PAGE
Condensed Consolidated Balance Sheets as of September 30, 1998 (unaudited) and
December 31, 1997................................................................................... 3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 1998
and the period August 21, 1997 to September 30, (unaudited)......................................... 5
Condensed Consolidated Statement of Stockholders' Equity for the Nine Months Ended September 30, 1998
(unaudited)......................................................................................... 7
Condensed Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 1998 and
the period August 21, 1997 to September 30, 1997 (unaudited)........................................ 8
Notes to Condensed Consolidated Financial Statements (unaudited)...................................... 10
SL GREEN PREDECESSOR
Condensed Combined Statements of Operations for the period January 1, 1997 to August 20, 1997
and the period July 1, 1997 to August 20, 1997(unaudited)........................................... 5
Condensed Combined Statement of Cash Flows for the period January 1, 1997 to August 20, 1997
(unaudited)......................................................................................... 8
Notes to Condensed Combined Financial Statements (unaudited).......................................... 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................................................... 16
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS................................................ 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................................................... 26
SIGNATURES..................................................................................................... 27
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
SL Green Realty Corp.
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
ASSETS
Commercial real estate properties, at cost:
Land and land interest............................................ $ 112,119 $ 53,834
Buildings and improvements........................................ 481,638 272,776
Building leasehold................................................ 83,272 ---
Property under capital lease...................................... 12,208 12,208
------------ ------------
689,237 338,818
Less accumulated depreciation..................................... (33,177) (23,800)
------------ ------------
656,060 315,018
Cash and cash equivalents......................................... 976 12,782
Restricted cash................................................... 19,512 10,310
Receivables....................................................... 4,532 738
Related party receivables......................................... 362 1,971
Deferred rents receivable net of provision for doubtful
accounts of $1,733 and $399 in 1998 and 1997, respectively..... 18,187 11,563
Investment in and advances to Service Corporations................ 7,569 1,480
Mortgage loans receivable ........................................ 26,401 15,500
Deferred costs, net............................................... 9,753 6,099
Other assets...................................................... 10,577 7,314
------------ ------------
Total assets...................................................... $ 753,929 $ 382,775
============ ============
The accompanying notes are an integral part to these financial statements.
3
SL Green Realty Corp.
Condensed Consolidated Balance Sheets
(Dollars in Thousands, except per share data)
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable........................................... $ 51,369 $ 52,820
Revolving credit facility........................................ 82,000 76,000
Accrued interest payable......................................... 381 552
Accounts payable and accrued expenses............................ 9,149 3,340
Accounts payable to related parties.............................. 172 367
Capitalized lease obligations.................................... 14,676 14,490
Deferred land lease payable...................................... 9,357 8,481
Dividend and distributions payable............................... 11,585 5,136
Security deposits................................................ 17,666 11,475
------------ ------------
Total liabilities................................................ 196,355 172,661
------------ ------------
Minority interest................................................ 41,652 33,906
8% Preferred Income Equity Redeemable shares SM $0.01 par
value, $25.00 liquidation preference 25,000 shares
authorized, 4,600 outstanding in 1998.......................... 109,904 ---
Commitments, contingencies and other matters.....................
STOCKHOLDERS' EQUITY
Common stock, $.01 par value 100,000 shares
authorized, 23,952 and 12,292 issued and
outstanding in 1998 and 1997, respectively.................. 240 123
Additional paid-in capital.................................... 417,003 178,669
Deferred compensation......................................... (3,562) ---
Officers' loans............................................... (578) ---
Distributions in excess of earnings........................... (7,085) (2,584)
------------ ------------
Total stockholders' equity....................................... 406,018 176,208
------------ ------------
Total liabilities and stockholders' equity....................... $ 753,929 $ 382,775
============ ============
The accompanying notes are an integral part to these financial statements.
4
SL Green Realty Corp.
Condensed Statements of Operations
(Unaudited)
(Dollars in Thousands, except per share data)
SL Green SL Green
Realty Corp. SL Green SL Green Realty Corp. SL Green
Three Months Realty Corp. Predecessor Nine Months Predecessor
Ended August 21 to July 1 to Ended January 1
September 30, September 30, August 20, September 30, to August 20,
1998 1997 1997 1998 1997
-------------- -------------- ----------- -------------- -------------
(Consolidated) (Consolidated) (Combined) (Consolidated) (Combined)
REVENUES
Rental revenue.......................... $ 34,310 $ 5,415 $ 1,307 $ 83,039 $ 4,107
Escalation and reimbursement revenues... 5,281 1,043 336 11,432 792
Management revenues..................... --- --- 302 --- 1,268
Leasing commissions..................... --- 484 376 --- 3,464
Construction revenues................... --- --- 69 --- 77
Investment income....................... 851 207 --- 2,419 ---
Other income............................ 18 --- --- 20 16
--------- --------- --------- --------- ---------
Total revenues.......................... 40,460 7,149 2,390 96,910 9,724
Equity in net loss from Service
Corporations....................... (22) (130) --- (70) ---
Equity in net loss from uncombined
joint ventures..................... --- --- (206) --- (770)
EXPENSES
Operating expenses...................... 11,759 1,190 1,084 26,270 2,709
Ground rent............................. 3,428 491 13 8,152 13
Interest................................ 2,419 593 349 9,790 1,062
Depreciation and amortization........... 4,069 846 212 10,714 811
Real estate taxes....................... 6,134 1,009 223 14,888 705
Marketing, general and administrative... 1,571 437 354 3,954 2,189
--------- --------- --------- --------- ---------
Total expenses.......................... 29,380 4,566 2,235 73,768 7,489
--------- --------- --------- --------- ---------
Income (loss) before minority
interest-Preferred stock dividends
and extraordinary item............. 11,058 2,453 (51) 23,072 1,465
Minority interest....................... (802) (397) --- (2,354) ---
--------- --------- --------- --------- ---------
Income (loss) before extraordinary
item and preferred stock dividends
and accretion...................... 10,256 2,056 (51) 20,718 1,465
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt,
net of minority interest $52 in 1998
and $362 in 1997................... --- (1,874) --- (522) ---
Gain on the forgiveness of debt
from uncombined joint ventures..... --- --- 22,087 --- 22,087
--------- --------- --------- --------- ---------
Net income.............................. 10,256 182 22,036 20,196 23,552
Preferred stock dividends............... (2,300) --- --- (3,420) ---
Preferred stock accretion............... (133) --- --- (204) ---
--------- --------- --------- --------- ---------
Net income available to common
shareholders..................... $ 7,823 $ 182 $ 22,036 $ 16,572 $ 23,552
========= ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements
5
SL Green Realty Corp.
Condensed Statements of Operations -- Continued
(Unaudited)
SL Green SL Green
Realty Corp. SL Green SL Green Realty Corp. SL Green
Three Months Realty Corp. Predecessor Nine Months Predecessor
Ended August 21 to July 1 to Ended January 1
September 30, September 30, August 20, September 30, to August 20,
1998 1997 1997 1998 1997
-------------- -------------- ----------- -------------- -------------
(Consolidated) (Consolidated) (Combined) (Consolidated) (Combined)
PER SHARE DATA (BASIC AND DILUTED):
Income per share before extraordinary
item............................ $ 0.33 $ 0.17 $ 0.94
Extraordinary item per share............ --- (0.16) (0.03)
--------- --------- ---------
Net income available per common share $ 0.33 $ 0.01 $ 0.91
========= ========= =========
Basic weighted average common shares
outstanding........................ 23,922 12,292 18,233
========= ========= =========
Diluted weighted average common shares
and common share equivalents
outstanding........................ 23,928 12,417 18,295
========= ========= =========
The accompanying notes are an integral part to these financial statements.
6
SL Green Realty Corp.
Condensed Consolidated Statement of Stockholders' Equity
(Dollars in Thousands)
(Unaudited)
Distributions
Additional in Excess Deferred
Common Paid- Officers' of Compen-
Stock In Capital Loans Earnings sation Total
----- ---------- ----- -------- ------ -----
Balance at December 31, 1997...... $ 123 $178,669 --- $ (2,584) --- $176,208
Net income........................ --- --- --- 20,196 --- 20,196
Preferred dividend and accretion
requirement.................... --- --- --- (3,624) --- (3,624)
Issuance of common stock net of
offering cost ($2,161) and
revaluation increase in
minority interest ($6,260)..... 115 234,774 --- --- --- 234,889
Deferred compensation............ 2 3,560 --- --- $(3,562) ---
Cash distributions declared
($1.05 per Common share)....... --- --- --- (21,073) --- (21,073)
Officers' loans, net............. --- --- $(578) --- --- (578)
------ -------- ----- -------- ------- --------
Balance at September 30, 1998
(unaudited).................... $ 240 $417,003 $(578) $ (7,085) $(3,562) $406,018
====== ======== ===== ======== ======= ========
The accompanying notes are an integral part to these financial statements.
7
SL Green Realty Corp.
Condensed Statements of Cash Flows
(Unaudited)
(Dollars in Thousands)
SL Green SL Green
Realty Corp. Realty Corp. SL Green
Nine Months August 21 to Predecessor
Ended September 30, January 1 to
Sept. 30, 1998 1997 August 20, 1997
--------------- -------------- ---------------
(Consolidated) (Consolidated) (Combined)
OPERATING ACTIVITIES:
Net income................................................. $ 20,196 $ 182 $ 23,552
Adjustments: To reconcile net income to net cash provided
by operating activities:
Minority interest........................................ 2,302 --- ---
Depreciation and amortization............................ 10,714 846 811
Equity in net loss from uncombined joint ventures........ --- --- (21,072)
Equity in net loss from Service Corporations............. 70 130 ---
Deferred rents receivable................................ (8,309) (208) (102)
Provision for doubtful accounts.......................... 1,685 --- ---
Extraordinary items - non cash portion................... 574 776 ---
Amortization of officers' loans.......................... 83 --- ---
Preferred stock accretion................................ 204 --- ---
Changes in operating assets and liabilities:
Restricted cash.......................................... (7,024) (29) ---
Receivables.............................................. (3,794) (551) (190)
Related party receivables................................ 948 (541) (365)
Deferred lease costs..................................... (4,397) (93) (279)
Other assets............................................. (3,263) (2,549) 656
Accounts payable and accrued expenses.................... 3,830 2,689 118
Accounts payable to related parties...................... (195) 487 (201)
Accrued interest payable................................. (171) 225 (23)
Deferred land lease payable.............................. 876 4 ---
Security deposits payable................................ 4,013 --- (67)
------------ ------------ ------------
Net cash provided by operating activities............... 18,342 1,368 2,838
------------ ------------ ------------
INVESTING ACTIVITIES:
Additions to land, buildings and improvements............ (349,419) (146,330) (7,411)
Contribution to partnership investments.................. --- --- (25)
Distribution to partnership investments.................. --- --- 1,877
Investment in and advances to Service Corporations....... (6,159) --- ---
Mortgage loan receivable, net............................ (10,901) --- ---
------------ ------------ ------------
Net cash used in investing activities.................... (366,479) (146,330) (5,559)
------------ ------------ ------------
FINANCING ACTIVITIES:
Payments of mortgage notes payable and loans............. (1,451) (76,389) (219)
Proceeds from mortgage notes payable..................... 14,000 7,000
Net proceeds from sale of common stock................... 242,948 228,704 ---
Net proceeds from sale of 8% preferred income equity
redeemable shares...................................... 110,400 --- ---
Formation costs.......................................... --- (5,215) ---
Payment of revolving credit facility..................... (106,000) --- ---
Proceeds from revolving credit facility.................. 112,000 --- ---
Proceeds from bridge loan................................ 239,960 --- ---
Repayment of bridge loan................................. (239,960) --- ---
Cash distributions to owners............................. --- --- (4,024)
Cash contributions from owners........................... --- --- 25
Deferred loan costs...................................... (1,194) (775) ---
Cash dividends and distributions paid on common stock.... (20,558) --- ---
Capital lease............................................ 186 --- ---
------------ ------------ ------------
Net cash provided by financing activities................ 336,331 160,325 2,782
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents..... (11,806) 15,363 61
Cash and cash equivalents at beginning of period......... 12,782 --- 476
------------ ------------ ------------
Cash and cash equivalents at end of period............... $ 976 $ 15,363 $ 537
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest:.................................... $ 9,961 $ 368 $ 1,085
============ ============ ============
The accompanying notes are an integral part to these financial statements.
8
SL Green Realty Corp.
Condensed Statements of Cash Flows
(Unaudited)
(Dollars in Thousands)
SL Green SL Green
Realty Corp. Realty Corp. SL Green
Nine Months August 21 to Predecessor
Ended September 30, January 1 to
Sept. 30, 1998 1997 August 20, 1997
--------------- -------------- ---------------
(Consolidated) (Consolidated) (Combined)
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS INVESTING AND
FINANCING ACTIVITIES:
Land acquired for units $1,000 --- ---
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 deposit payable --- $4,262 ---
The accompanying notes are an integral part of these financial statements.
9
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 1998
1. ORGANIZATION AND BASIS OF PRESENTATION - SL GREEN REALTY CORP.
INITIAL PUBLIC OFFERING AND FORMATION TRANSACTIONS
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 Predecessor"). The Operating Partnership received a contribution of
interest in the real estate properties, as well as 95% of the economic interest
in the management, leasing and construction companies (the "Service
Corporations"). The Company believes it qualifies as a real estate investment
trust ("REIT") under the Internal Revenue Code of 1986, as amended; and operates
as a 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 11.615 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 "IPO"). Concurrently with the consummation of the
IPO, 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, 1998, no
shares of Excess Stock are issued and outstanding.
Concurrently with the consummation of the IPO, 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 IPO (after
deducting underwriting discounts) was $228.7 million. The Company utilized
approximately $42.6 million of the IPO 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") (which includes $20
million to repay a loan that was made to a Company indirectly owned by Stephen
L. Green), $1.8 million to fund an advisory fee payment to Lehman Brothers, Inc.
and $41.7 million to fund capital expenditures, general working capital needs
and future acquisitions.
Substantially all of the Company's assets are held by, and its
operations conducted through, the Operating Partnership, a Delaware limited
partnership. The Company is the sole managing general partner of the Operating
Partnership. Continuing investors held, in the aggregate, a 16.2% limited
partnership interest in the Operating Partnership until May 1998.
MAY 1998 PUBLIC OFFERINGS
On May 12, 1998 the Company completed the sale of 11.5 million shares
of common stock and 4.6 million shares of 8% Preferred Income E quity Redeemable
Shares with a liquidation preference of $25.00 per share (the "PIERS"). Gross
proceeds from these equity offerings ($353 million, net of underwriter's
discount) were used principally to repay the Bridge Facility (see note 4) and
acquire additional properties. These offerings resulted in the reduction of
continuing investor's interest in the Operating Partnership from 16.2% to 9.1%.
10
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% General partner
1414 Management Associates, LP 1414 Avenue of the Americas 100% General partner
Service Corporations:
S.L. Green Management, Corp. Management 100% Sole shareholder
S.L. Green Leasing, Inc. Management and leasing 100% Sole shareholder
Emerald City Construction Corp. Construction 100% Sole shareholder
For the entities accounted for on the equity method, the SL Green
Predecessor recorded 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:
Period January 1 -
August 20, 1997
---------------
(Unaudited)
CONDENSED STATEMENT OF OPERATIONS
Rental revenue and escalations.................. $ 13,552
-----------
Interest........................................ 5,320
Depreciation and amortization................... 2,510
Operating and other expenses.................... 7,142
-----------
Total expenses.................................. 14,972
-----------
Operating loss before outside partner's interest
and extraordinary item.. (1,420)
Extraordinary Gain on Forgiveness of Debt 33,419
Elimination of inter-company management fees.... 240
Other partner share of income................... (10,922)
-----------
Income allocated to the SL Green Predecessor.... $ 21,317
===========
11
BASIS OF QUARTERLY 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 1998 operating results
for the periods presented are not necessarily indicative of the results that may
be expected for the year ending December 31, 1998. 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 and the Company's
registration statements on Form S-11 dated May 12, 1998 and 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 does not own a 100% 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. The Company accounts for its
investment in the Service Corporations on the equity basis of accounting on the
basis that it has significant influence with respect to management and
operations.
All of the management, leasing and construction with respect to the
properties owned by the Company are conducted through the Management LLC
which is owned 100% by the Operating Partnership.
PARTNERSHIP AGREEMENT
In accordance with the partnership agreement of the Operating
Partnership (the "Operating Partnership Agreement"), all allocations of
distributions and profits and losses are made in proportion to the percentage
ownership interests of their respective partners. As the sole 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 distributions by the Company for any federal income or excise tax
incurred by the Partners as a consequence of a sale of SL Green property. Under
the Operating Partnership Agreement each limited partner will have the right to
redeem limited partnership interest for cash, or if the Company so elects,
shares of common stock. Under the Operating Partnership Agreement, the Company
is prohibited from selling 673 First Avenue and 470 Park Avenue South through
August 2009. Pursuant to the terms of the Operating Partnership Agreement, the
Units issued to the Company's management and continuing investors at the IPO may
not, for up to two years from the IPO date, transfer any of their rights or
redeem their Units as a limited partner without the consent of the Company.
2. PROPERTY ACQUISITIONS
On August 14, 1998 the Company purchased the property located at 1412
Broadway - The Fashion Gallery Building - for $72 million, plus approximately $5
million for reimbursement of loan prepayment charges and $5 million related to
capital expenditures, commissions and other closing costs. The property is a
25-story office building totaling 389,000 square feet and current occupancy,
including pending leases of 89.5%.
On August 6, 1998 the Company closed the acquisition of an existing
first mortgage on the property located at 636 11th Avenue, which is a 469,000
square foot industrial and warehouse block front property located between
46th and 47th Streets for $10.9 million. The Company had contracted to buy
this mortgage on June 11, 1998 and simultaneously entered into an agreement
to purchase the property during January 1999. This property is currently in
Chapter 11 bankruptcy proceedings.
On June 1, 1998 the Company acquired the property located at 440 Ninth
Avenue for approximately $32 million in cash. The 18-story, 340,000 square foot
building was 75% occupied at the date of acquisition. In connection with this
purchase, the Company obtained a $6.2 million mortgage note receivable secured
by the property located at 38 East 30th Street. The note bears interest at 8%
and was paid back during September 1998.
On May 21, 1998 the Company acquired the outstanding mortgage of the
property located at 711 Third Avenue for approximately $44.6 million in cash.
The 20-story, 520,000 square foot building was 78% occupied at the date of
acquisition. The Company's outstanding mortgage position provides for the
Company to receive 100% of the economic benefit from the property, and
accordingly for the period
12
owned, the Company has recorded the operating results of the property in the
statement of operations. On July 2, 1998 the Company acquired 50% of the fee
interest in 711 Third Avenue for $20 million and 44,772 Operating Partnership
Units. In addition, the Company's ownership of the outstanding mortgage was
converted to an operating sub-leasehold.
On April 14, 1998, the Company converted its mortgage interest in 36
West 44th Street into a fee interest and its mortgage interest in 36 West 43rd
Street into a leasehold interest (collectively known as the Bar Building) for an
additional cost of approximately $800,000.
During March 1998, the Company purchased the operating leasehold
interest in the property located at 420 Lexington Avenue (the "Graybar
Building") and the fee interest in the property located at 1466 Broadway from
the Helmsley organization for $142 million. The Graybar Building is located
adjacent to Grand Central Station and encompasses approximately 1.2 million
square feet and the property at 1466 Broadway is located at 42nd Street and
Broadway encompassing approximately 290,000 square feet.
During March 1998 the Company purchased the property located at 321
West 44th Street for approximately $17 million, comprised of approximately
209,000 square feet.
On January 8, 1998, the Company acquired fee title to its property
located at 1372 Broadway. Prior to this date the Company held a mortgagee's
interest in this property with a right to acquire the fee without additional
cost.
The following table summarizes, on an unaudited pro forma basis, the
combined results of operations of the Company for the nine months ended
September 30, 1998 and 1997 as though each acquisition since January 1, 1997 and
the Formation Transactions were completed as of January 1, 1998 and 1997,
respectively. The pro forma results are based upon the proceeds from the
Company's May 1998 Public Offering (see note 1) repaying the Bridge Facility
during May 1998.
1998 1997
---- ----
Total revenues.................................. $120,047 $110,552
Pro forma net income............................ $21,697 $19,622
Pro forma earnings per share (basic and diluted)
Per common share - basic........................ $0.91 $0.83
Per common and common equivalent share - diluted $0.91 $0.83
3. HYPOTHECATED LOANS
The loans total approximately $222 million and are collateralized by
the mortgages encumbering the Operating Partnership's interests, in 633 Third
Avenue. The mortgage tax loan and associated of U.S. Treasury collateral
expire on November 18, 1998. The Company intends to renew the collateralized
securities for an additional six months. Due to the right of off-set, the
mortgages and related securities are not presented on the balance sheet. These
mortgage tax credits, if utilized in secured financing transactions of an equal
amount, would save the Company $6.2 million in capital proceeds necessary to
close such financings.
4. REVOLVING CREDIT FACILITY AND BRIDGE FACILITY
During March 1998, the Company asked the revolving credit facility
(the "Credit Facility") banking group to temporarily relieve the Company from
its obligations under the financial covenants of the Credit Facility in order
to close an additional financing necessary to acquire the Helmsley properties
(the "Bridge Facility"). The Bridge Facility, which closed on March 18, 1998,
financed the acquisition of the Helmsley properties, paid-off the outstanding
balance on the Credit Facility and provided liquidity for future acquisition
and corporate needs. The term of the Bridge Facility is one year with an
interest rate that is determined by a schedule of the percent of loan
commitment outstanding and the duration of the outstanding commitments,
ranging from 170 to 300 basis points over LIBOR. The Bridge Facility was
secured by the unencumbered assets of the Company including mortgage tax
credits previously associated with the Company's hypothecated loan. The
Bridge Facility was repaid through the Company's May 1998 equity financings,
resulting in an extraordinary charge to earnings (see note 9) and all assets
were released to the Credit Facility unencumbered asset pool. The Company's
Credit Facility was then reinstated during the second quarter. As of
September 30, 1998 current borrowings on the $140 million Credit Facility
totaled $82 million, with remaining availability of $58 million with a
current effective interest rate of 6.93%.
5. 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. Income taxes are provided
for on any projected taxable income on the service corporations.
13
6. NET INCOME PER COMMON SHARE
Net income per common share-basic and diluted is computed in accordance
with the treasury stock method and is based on the weighted average number of
common shares outstanding during the period. To arrive at the diluted net income
per common share, the common stock equivalents resulted in increasing the number
of shares outstanding by approximately 6 and 62 shares for the three and nine
months ended September 30, 1998, respectively. The common stock equivalent
shares resulting solely from options outstanding.
7. COMMITMENTS AND CONTINGENCIES
The Company and the Operating Partnership are not presently involved in
any material litigation nor, to their knowledge, is any material litigation
threatened against them or their properties, other than routine litigation
arising in the ordinary course of business. Management believes the costs, if
any, incurred by the Company and the Operating Partnership related to the
routine litigation will not materially affect the financial position, operating
results or liquidity of the Company and the Operating Partnership.
In anticipation of financing future acquisitions, the Company
entered into an interest rate protection agreement on September 2, 1998, with
a major U.S. financial institution for $100 million of future indebtedness.
As a result of this arrangement, the Company essentially "locked into" U.S.
Treasury rates in effect as of September 2, 1998, or 5.13%, for $100 million
of future indebtedness. As of September 30, 1998, U.S. Treasury rates were
lower than 5.13% and as a result, the then present value of future cash
payments which the Company would be obligated to make on $100 million of
indebtedness (at the interest rate protection agreement rate) in excess of
the present value of future cash payments which the Company would be
obligated to make on $100 million of debt (at the then current U.S. Treasury
rate) (the "excess payment amount") was approximately $5.5 million. As of
November 11, 1998, due to rising U.S. Treasury rates, the spread between the
U.S. Treasury rate and the rate of the Company's interest rate protection
agreement had narrowed and the excess payment amount had decreased to $2.3
million. Upon completion of those financings, the Company will recognize any
market rate difference between debt financing and the Company's hedged
position. It is the Company's objective to match future financings with the
term of its hedged position; such gain or loss is expected to be amortized
over the life of the new debt.
8. RELATED PARTY TRANSACTIONS
There are business relationships with related parties which involve
security and maintenance expenses in the ordinary course of business. The
Company's transactions with the related parties amounted to $781 and $1,277 for
the three and nine month periods ended September 30, 1998 and $34 for the period
August 21, 1997 to September 30, 1997. SL Green Predecessor's transactions with
the related parties amounted to $62 for the July 1, 1997 to August 20, 1997
period and $255 for the period January 1, 1997 to August 20, 1997.
9. EXTRAORDINARY ITEMS
As a result of the Company's May 1998 public equity offerings, on
May 18, 1998 the Company repaid the Bridge Facility prior to its scheduled
maturity date of March 18, 1999. The Company's early extinguishment of the
Bridge Facility resulted in the write-off of unamortized deferred financing
costs totaling approximately $574 and was classified as an extraordinary loss
during the quarter ended June 30, 1998.
Forgiveness of mortgage debt totaling $22.1 million (net of minority
interest of $11.3 million) is reflected in the accompanying SL Green Predecessor
financial statements as an extraordinary gain for the period ended August 20,
1997.
Prepayment penalties of $1.1 million (net of minority interest of
$207) and unamortized deferred charges of $803 (net of minority interest of
$155) 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 for the period ended August 20, 1997.
10. SUBSEQUENT EVENTS
On November 10, 1998 the Company announced that it has signed a
contract to purchase a 65% controlling interest for $66.7 million (which is
comprised of $38 million cash payment and the remainder being the assumption of
debt) in 555 West 57th Street, a 20-story Midtown Manhattan property known as
the BMW Building. Located on the easterly block front of 11th Avenue between
West 57th and West 58th Streets in Manhattan's Midtown West submarket, the BMW
Building offers 950,000 square feet of rentable space, including three subgrade
floors, two of which comprise a 190-car garage. The property is currently 95%
leased. The Company is currently seeking
14
financing to fund this transaction.
On November 9, 1998 the seller having failed to meet certain
conditional obligations relating to various bankruptcy court approvals, the
Company terminated its contract to purchase 636 11th Avenue. The Company
believes the mortgage note receivable ($10.9 million) is fully recoverable
and will result in no significant impact to the Company's financial position.
In conjunction with the contract, the Company has provided a deposit of $1.5
million the return of which the Company is in the process of negotiating its
recovery with the seller.
On September 18, 1998, the Company's Board of Directors declared a
$0.35 per share dividend on its common stock to stockholders of record on
September 30, 1998. The dividend, together with the distribution with respect to
outstanding units of partnership interest in the Operating Partnership, totaled
$9.2 million and was paid October 15, 1998. The Company's Board of Directors
declared a $0.50 dividend per share dividend on the PIERS for the three-month
period ended September 30, 1998 which totaled $2.3 million and was paid on
October 15, 1998.
15
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, financial statements included in the
Company's annual report on Form 10-K and the financial statements and related
notes thereto included in the Company's registration statements on Form S-11
dated May 12, 1998 and 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 prior to August 21, 1997 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 before accumulated depreciation
increased approximately $350 million from December 31, 1997 to September 30,
1998 primarily as a result of the purchase of the leasehold operating position
in 420 Lexington Avenue and 711 Third Avenue (including a 50% fee interest), and
the property purchases of 1466 Broadway, 321 West 44th Street, 440 Ninth Avenue
and 1412 Broadway. These acquisitions were funded through a bridge loan facility
(the "Bridge Facility"), cash on hand and funds available under the Company's
revolving credit facility (the "Credit Facility"). The Bridge Facility also
repaid $93 million that was outstanding on the Company's Credit Facility. The
Company completed two public equity offerings on May 12, 1998, which included
the issuance of 11.5 million shares of common stock and 4.6 million shares of 8%
Preferred Income Equity Redeemable Shares with a liquidation preference of
$25.00 per share. These offerings raised net proceeds to the Company of $353
million, after underwriters discount. Proceeds from the offerings were used to
repay the Bridge Facility ($240 million), acquire 440 Ninth Avenue ($32 million)
and the outstanding mortgage and 50% fee interest in 711 Third Avenue ($60.5
million) with the remainder used for working capital purposes. The company
acquired 1412 Broadway ($82 million) during August 1998 and funded this
acquisition with proceeds from borrowings on the Company's Credit Facility.
RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1997. For discussion purposes, the results of
operations from the nine months ended September 30, 1998 represent the
operations of SL Green Realty Corp and the results of operations for the nine
months ended September 30, 1997 represent (i) the operating results of the SL
Green Predecessor (represented by 70 West 36th Street, 1414 Avenue of the
Americas and 36 West 44th Street (since acquisition date in July 1997)) for the
period January 1, 1997 to August 20, 1997 and (ii) the results of the Company
from August 21, 1997 to September 30, 1997. Since July 1, 1997, the following
transactions have occurred that have had a material impact on the comparison of
the 1998 and 1997 results: (i) the Formation Transactions resulted in three
buildings previously accounted for under the equity method (673 Third Avenue,
470 Park Avenue South and 29 West 35th Street) which are now reported as
property results, three acquired buildings (50 West 23rd Street, 1140 Avenue of
the Americas and 1372 Broadway) collectively the "IPO Acquisitions" being
included in the 1998 results which were included in the 1997 results of the
Company as of August 21, 1997; (ii) the results of 110 East 42nd Street
(acquired September 1997) included in 1998 results and a portion of the 1997
results (iii) 17 Battery Place (acquired December 1997) and 633 Third Avenue
(acquired December 1997) "the 1997 Acquisitions" are included in the
consolidated results for 1998 and were not included in the 1997 results (iv) the
results of 420 Lexington Avenue (acquired March 1998), 1466 Broadway (acquired
March 1998), 321 West 44th Street (acquired March 1998), 711 Third Avenue
(acquired May 1998), 440 Ninth Avenue (acquired June 1998) and 1412 Broadway
(acquired August 1998) (the "1998 Acquisitions") which are included for a
portion of the 1998 results, and were not included in the 1997 results.
Rental revenue for the nine months ended September 30, 1998 totaled
$83.0 million representing an increase of $73.5 million
16
compared to $9.5 million for the nine months ended September 30, 1997. The
increase is primarily attributable to the revenue associated with the
following: (i) the IPO Acquisitions which increased rental revenue $29.8
million (ii) the 1997 Acquisitions which increased rental revenue by $12.6
million, (iii) the 1998 Acquisitions which increased rental revenue by $30.1
million and (iv) $1.0 million due to increased rental revenue in the SL Green
Predecessor buildings.
Escalation and reimbursement revenue for the nine months ended
September 30, 1998 totaled $11.4 million representing an increase of $9.6
million compared to $1.8 million for the nine months ended September 30, 1997.
The increase is primarily attributable to the revenue associated with the
following: (i) the IPO Acquisitions which increased revenue by $1.2 million,
(ii) the 1997 Acquisitions which increased revenue by $1.3 million, (iii) the
1998 Acquisitions which increased revenue by $7.1 million.
Investment income totaled $2.4 million for the nine months ended
September 30, 1998 representing an increase of $2.2 million compared to $0.2
million for the three months ended September 30, 1997. This amount primarily
represents interest income from the 17 Battery Park mortgage ($1.4 million),
interest on other mortgage notes ($0.3 million) and remainder is interest from
excess cash on hand ($0.5 million).
As of the IPO date, third party management, leasing and construction
revenues and related expenses are incurred by the Service Corporations, which
are 95% owned subsidiaries of the Company, which are accounted for on the equity
method. This change in recognition of income and expense from third party
business activities was made in order to be consistent with the REIT qualifying
income test, as defined by the IRS. Consequently, management fees, leasing
commissions and construction fees, were recorded on these operating
subsidiaries, compared to the 1997 third party revenue, which was recorded on
the predecessor entity.
Operating expenses for the nine months ended September 30, 1998
totaled $26.3 million representing an increase of $22.4 million compared to
$3.9 million for the nine months ended September 30, 1997. The increase was
primarily attributable to: (i) the IPO Acquisitions which increased operating
expenses by $6.2 million (ii) the 1997 Acquisitions which increased operating
expenses by $5.7 million and (iii) the 1998 Acquisition expenses which
increased operating expenses by $10.5 million.
Ground rent for the nine months ended September 30, 1998 totaled
$8.2 million representing an increase of $7.7 million compared to $0.5
million for the nine months ended September 30, 1997. This increase primarily
represents ground rent at 420 Lexington Avenue ($4.6 million), 673 First
Avenue ($2.5 million), 711 Third Avenue ($0.4 million) and 1140 Avenue of the
Americas ($0.2 million).
Interest expense for the nine months ended September 30, 1998 totaled
$9.8 million representing an increase of $8.1 million compared to $1.7 million
for the nine months ended September 30, 1997. The increase is primarily
attributable to (i) interest incurred on the Company's revolving line of credit,
and Bridge Facility ($5.4 million) principally to acquire new properties and
(ii) additional secured mortgage debt, including interest on the Company's
capital lease obligations which was previously accounted for under the equity
method, ($2.7 million).
Depreciation and amortization for the nine months ended September 30,
1998 totaled $10.7 million representing an increase of $9.0 million compared to
$1.7 million for the nine months ended September 30, 1997. The increase is
primarily attributable to: (i) the IPO Acquisitions which increased depreciation
by $4.0 million (ii) the 1997 Acquisitions which increased depreciation by $1.5
million (iii) the 1998 Acquisitions which increased depreciation by $2.8
million, (iv) and an increase in the amortization of deferred finance costs
totaling $0.7 million associated with fees incurred on the Company's Credit
Facility and Bridge Facility.
Real estate taxes for the nine months ended September 30, 1998 totaled
$14.9 million representing an increase of $13.2 million compared to $1.7 million
for the nine months ended September 30, 1997. The increase is primarily
attributable to (i) the IPO Acquisitions which increased real estate taxes by
$4.3 million (ii) the 1997 Acquisitions which increased real estate taxes by
$2.8 million and (iii) the 1998 Acquisitions which increased real estate taxes
by $6.1 million.
Marketing, general and administrative expense for the nine months ended
September 30, 1998 totaled $4.0 million representing an increase of $1.4 million
compared to $2.6 million for the nine months ended September 30, 1997. The
increase is due to increased personnel costs associated with the Company's
recent growth ($2.0 million) and increased public entity and technology costs
($0.6 million). This increase is partially off-set by third party costs included
in the 1997 expense which have been reclassified to the Service Corporations in
1998 to correspond with the reclassification of third party revenue which has
been included in equity in net loss from Service Corporations since August 21,
1997.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998 TO THE THREE
MONTHS ENDED SEPTEMBER 30, 1997. For discussion purposes, the results of
operations from the three months ended September 30, 1998 represent the
operations of SL Green Realty Corp and the results of operations for the three
months ended September 30, 1997 represent the operating results of the SL Green
Predecessor
17
(represented by 70 West 36th Street, 1414 Avenue of the Americas and 36 West
44th Street) 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.
Since July 1, 1997, the following transactions have occurred that have a
material impact on the comparison of the 1998 and 1997 results: (i) the
Formation Transactions resulted in three buildings previously accounted for
under the equity method (673 Third Avenue, 470 Park Avenue South and 29 West
35th Street) which are now reported as property results, three acquired
buildings (50 West 23rd Street, 1140 Avenue of the Americas and 1372
Broadway) collectively the "IPO Acquisitions" being included in the 1998
results which were not included in 1997 results, (ii) the results of 110 East
42nd Street (acquired September 1997), 17 Battery Place (acquired December
1997) and 633 Third Avenue (acquired December 1997) "the 1997 Acquisitions"
are included in the consolidated results for the three months ended September
30, 1998, not included in the 1997 results (with the exception of 15 days for
110 East 42nd Street acquired September 15, 1997) and (iii) the results of
420 Lexington Avenue (acquired March 1998), 1466 Broadway (acquired March
1998), 321 West 44th Street (acquired March 1998) 711 Third Avenue (acquired
May 1998), 440 Ninth Avenue (acquired June 1998) and 1412 Broadway (acquired
August 1998) (the "1998 Acquisitions") which are included for all or a
portion of third quarter 1998 results, and not included in the 1997 results.
The rental revenue for the three months ended September 30, 1998
totaled $34.3 million, an increase of $27.6 million compared to $6.7 million for
the three months ended September 30, 1997. The increase is primarily
attributable to the revenue associated with the following: (i) the IPO
Acquisitions which increased rental revenue $6.0 million (ii) the 1997
Acquisitions which increased rental revenue by $4.9 million, (iii) the 1998
Acquisitions which increased rental revenue by $16.5 million and (iv) the
Predecessor portfolio which increased $0.2 million due to increased occupancy.
Escalation and reimbursement revenue for the three months ended
September 30, 1998 totaled $5.3 million representing an increase of $3.9 million
compared to $1.4 million for the three months ended September 30, 1997. The
increase is primarily attributable to the revenue associated with the following:
(i) the IPO Acquisitions which increased revenue by $0.5 million, (ii) the 1997
Acquisitions which increased revenue by $0.4 million, (iii) the 1998
Acquisitions which increased revenue by $3.0 million.
Investment income totaled $0.9 million for the three months ended
September 30, 1998, which represents an increase of $0.7 million compared to
$0.2 million for the three months ended September 30, 1997. The increase in
interest income is due primarily to the 17 Battery Park mortgage ($0.5 million)
and interest earned from other mortgage notes ($0.2 million).
As of the IPO date, third party management, leasing and construction
revenues and related expenses are incurred by the Service Corporations, which
are 95% owned subsidiaries of the Company, which is accounted for on the equity
method. This change in recognition of income and expense from third party
business activities was made in order to be consistent with the REIT qualifying
income test. This change resulted in the sources of revenue being recorded by
the Company in the Service Corporations which were $0.7 million during the 1998
period.
Operating expenses for the three months ended September 30, 1998
totaled $11.8 million representing an increase of $9.5 million compared to $2.3
million for the three months ended September 30, 1997. The increase was
primarily attributable to: (i) the IPO Acquisitions which increased operating
expenses by $1.7 million (ii) the 1997 Acquisitions which increased operating
expenses by $2.1 million and (iii) the 1998 Acquisition expenses which increased
operating expenses by $5.7 million.
Ground rent for the three months ended September 30, 1998 totaled $3.4
million which represents an increase of $2.9 million compared to $0.5 million
for the three months ended September 30, 1997. This increase is primarily due to
420 Lexington Avenue ($2.2 million), 673 First Avenue ($0.5 million) and 711
Third Avenue ($0.2 million).
Interest expense for the three months ended September 30, 1998 totaled
$2.4 million representing an increase of $1.5 million compared to $0.9 million
for the three months ended September 30, 1997. The increase is primarily
attributable to interest incurred on the Company's Credit Facility ($1.0
million) and additional mortgage debt, including interest on the Company's
capital lease obligations, ($0.5 million).
Depreciation and amortization for the three months ended September 30,
1998 totaled $4.1 million representing an increase of $3.0 million compared to
$1.1 million for the three months ended September 30, 1997. The increase is
primarily attributable to: (i) the IPO Acquisitions which increased depreciation
by $0.8 million (ii) the 1997 Acquisitions which increased depreciation by $0.5
million (iii) the 1998 Acquisitions which increased depreciation by $1.5
million, (iv) and an increase in the amortization of deferred finance costs
totaling $0.2 million associated with fees incurred on the Company's Credit
Facility.
Real estate taxes for the three months ended September 30, 1998 totaled
$6.1 million representing an increase of $4.9 million compared to $1.2 million
for the three months ended September 30, 1997. The increase is primarily
attributable to (i) the IPO Acquisitions which increased real estate taxes by
$0.8 million (ii) the 1997 Acquisitions which increased real estate taxes by
$0.9 million and (iii) the 1998
18
Acquisitions which increased real estate taxes by $3.2 million.
Marketing, general and administrative expense for the three months
ended September 30, 1998 totaled $1.6 million representing an increase of $0.8
million compared to $0.8 million for the three months ended September 30, 1997.
The increase is due to higher costs associated with the Company's recent growth.
This increase is partially off-set by the 1998 third party related costs
incurred during 1998, which have been classified to the Service Corporations to
correspond with the reclassification of third party revenue.
PRO FORMA RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1997. The Pro forma statements of operations for the
nine months ended September 30, 1998 and 1997, respectively, are presented as if
the Company's IPO and the Formation Transactions occurred on January 1, 1997 and
the effect thereof was carried forward through September 30, 1998. In addition
to the IPO and Formation Transactions, the following transactions also affect
the 1998 and 1997 comparable results: (i) the results of 110 East 42nd Street
(acquired September 1997), 17 Battery Place (acquired December 1997) and 633
Third Avenue (acquired December 1997) "the 1997 Acquisitions" are included in
the consolidated results for the three months ended September 30, 1998 and not
included in the 1997 results (with the exception of 15 days for 110 East 42nd
Street acquired September 15, 1997) and (ii) the results of 420 Lexington Avenue
(acquired March 1998), 1466 Broadway (acquired March 1998), 321 West 44th Street
(acquired March 1998) 711 Third Avenue (acquired May 1998), 440 Ninth Avenue
(acquired June 1998) and 1412 Broadway (acquired August 1998) the "1998
Acquisitions" are included in a portion of the 1998 results and not included in
the 1997 results. During May 1998, the Company completed two public offerings
for 11.5 million shares of common stock and 4.6 million of preferred shares
resulting in net proceeds of $353 million, net of underwriting costs.
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 Company's IPO 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 statements on Form S-11 dated
May 12, 1998 and August 14, 1997 and the condensed consolidated financial
statements of the Company, included elsewhere herein.
Nine months ended September 30, 1998
compared to nine months ended September 30, 1997
(in thousands except percentage data)
(Unaudited)
Nine Months Ended
September 30, Dollar
1998 1997 Change
---- ---- ---------
(Historical) (Pro Forma)
REVENUE
Rental revenue.............................. $ 83,039 $ 34,855 $ 48,184
Escalations & reimbursement revenues........ 11,432 4,338 7,094
Investment income........................... 2,419 207 2,212
Leasing Commissions......................... --- 2,251 (2,251)
Other income................................ 20 1,676 (1,656)
-------- -------- --------
Total revenues............ 96,910 43,327 53,583
-------- -------- --------
Equity in net (loss) income from Service
Corporations.............................. (70) 139 (209)
-------- -------- --------
EXPENSES
Operating expenses.......................... 26,270 8,838 17,432
Ground rent................................. 8,152 3,228 4,924
Interest.................................... 9,790 3,967 5,823
Depreciation and amortization............... 10,714 5,444 5,270
Real estate taxes........................... 14,888 6,169 8,719
Marketing, general and administrative....... 3,954 2,066 1,888
-------- -------- --------
Total expenses............ 73,768 29,712 44,056
-------- -------- --------
Income before minority interest
Preferred stock dividend and
extraordinary items $ 23,072 $ 13,754 $ 9,318
======== ======== ========
19
Rental revenue for the nine months ended September 30, 1998 totaled
$83.0 million representing an increase of $48.2 million compared to $34.8
million for the three months ended September 30, 1997. The increase is primarily
attributable to the revenue associated with the following properties not
previously owned or acquired at the IPO date: (i) the 1997 acquisitions which
increased rental revenue by $15.0 million, (ii) the 1998 acquisitions which
increased rental revenue by $30.1 million and (iii) increased occupancy and
additional rollover rental income in the other portfolio buildings which
increased $3.1 million.
Escalation and reimbursement revenue for the nine months ended
September 30, 1998 totaled $11.4 million an increase of $7.1 million compared to
$4.3 million during the nine months ended September 30, 1997. The increase is
attributable to the revenue associated with: (i) the 1997 Acquisitions which
increased revenue by $1.3 million, (ii) the 1998 Acquisitions which increased
revenue by $5.3 million and (iii) the properties owned or acquired at the IPO
date where revenue increased by $0.5 million.
Investment income for the nine months ended September 30, 1998
totaled $2.4 million, which represents an increase of $2.2 million as
compared to $0.2 million for the nine months ended September 30, 1997. The
increase in interest income is primarily due to the 17 Battery Place mortgage
($1.4 million), other mortgage notes receivable ($0.3 million) and the
balance ($0.5 million) earned from excess cash on hand.
Leasing commission income decreased $2.3 million. Leasing income as
reported in the Pro Forma represents Tenant-Rep income which has been
reclassified to-equity in net (loss) income from service corporations in the
comparable 1998 period in which tenant-rep revenue totaled $1.3 million, a
decrease of $1.0 million. This decrease is due to timing and strong results
in the 1997 period.
Other income for the nine months ended September 30, 1998 totaled $0.02
million representing a decrease of $1.7 million as compared to September 30,
1997. The decrease is the result of 1997 lease termination income (primarily at
1372 Broadway) which did not occur at the same rate in 1998.
Operating expenses for the nine months ended September 30, 1998
totaled $26.3 million representing an increase of $17.5 million compared to
$8.8 million for the nine months ended September 30, 1997. The increase was
primarily attributable to properties not previously owned or acquired at the
IPO date: (i) the 1997 Acquisitions which increased operating expenses by
$5.7 million and (ii) the 1998 Acquisitions which increased operating
expenses by $10.5 million (iii) $1.3 million of increased costs from the
core and IPO properties primarily due to the provision for tenant credit loss
which totaled $0.6 million.
Ground rent for the nine months ended September 30, 1998 totaled $8.2
million representing an increase of $5.0 million compared to $3.2 million for
the nine months ended September 30, 1997. The increase is primarily attributable
to the ground rent on our new acquisitions at 420 Lexington Avenue ($4.6
million) and 711 Third Avenue ($0.4 million).
Interest expense for the nine months ended September 30, 1998 totaled
$9.8 million representing an increase of $5.8 million compared to $4.0 million
for the nine months ended September 30, 1997. The increase is primarily
attributable to interest incurred on the Company's Credit Facility and Bridge
Loan ($5.4 million) and additional mortgage loans ($0.4 million).
Depreciation and amortization for the nine months ended September 30,
1998 totaled $10.7 million representing an increase of $5.3 million compared to
$5.4 million for the nine months ended September 30, 1997. The increase is
primarily attributable to properties not previously owned or acquired at the IPO
date: (i) the 1997 Acquisitions which increased depreciation by $1.5 million and
(ii) the 1998 Acquisitions which increased depreciation by $2.8 million, (iii)
amortization of financing costs increased $0.7 million primarily due to fees
recognized on the Company's revolving line of credit and acquisition facility
and (iv) the properties owned or acquired at the IPO date which increased $0.3
million primarily due to increased tenant improvement amortization.
Real estate taxes for the nine months ended September 30, 1998 totaled
$14.9 million representing an increase of $8.7 million compared to $6.2 million
for the nine months ended September 30, 1997. The increase is primarily
attributable to properties not previously owned or acquired at the IPO date (i)
the 1997 Acquisitions which increased real estate taxes by $2.8 million and (ii)
the 1998 Acquisitions which increased real estate taxes by $6.1 million. These
increases were partially off-set by a $0.2 million reduction in taxes related to
the core and IPO properties primarily from lower tax rates and management's
effort to obtain reductions in assessed values.
Marketing, general and administrative expense for the nine months ended
September 30, 1998 totaled $4.0 million representing an increase of $1.9 million
compared to $2.1 million for the nine months ended September 30, 1997. The
increase is due to additional staffing, and incremental absorption of lost third
party management related costs ($1.5 million), costs associated with management
information systems and year 2000 compliance and higher public entity costs
($0.4 million).
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998 TO THE THREE
MONTHS ENDED SEPTEMBER 30, 1997. The Pro forma
20
statements of operations for the three months ended September 30, 1998 and
1997, respectively, are presented as if the Company's IPO and the Formation
Transactions occurred on January 1, 1997 and the effect thereof was carried
forward through September 30, 1998. In addition to the IPO and formation
transactions, the following transactions also affect the 1998 and 1997
comparable results: (i) the results of 110 East 42nd Street (acquired
September 1997), 17 Battery Place (acquired December 1997) and 633 Third
Avenue (acquired December 1997) "the 1997 acquisitions" are included in the
consolidated results for the three months ended September 30, 1998 and not
included in the 1997 results and (ii) the results of 420 Lexington Avenue
(acquired March 1998), 1466 Broadway (acquired March 1998), 321 West 44th
Street (acquired March 1998), 711 Third Avenue (acquired May 1998), 440 Ninth
Avenue (acquired June 30, 1998) and 1412 Broadway (acquired August 1998) are
included in the entire or in a portion of the 1998 results and not included
in the 1997 results. During May 1998, the Company completed two public
offerings for 11.5 million common shares and 4.6 million of preferred shares
resulting in net proceeds of $353 million, net of underwriting costs.
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 Company's IPO 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.
Three months ended September 30, 1998 compared to
three months ended September 30, 1997
(in thousands except percentage data)
(Unaudited)
Three Months Ended
September 30, Dollar
1998 1997 Change
---- ---- ---------
(Historical) (Pro Forma)
REVENUE
Rental revenue..................................... $ 34,310 $ 11,837 $ 22,473
Escalations & reimbursement revenues............... 5,281 1,864 3,417
Investment income.................................. 851 207 644
Leasing commissions................................ --- 726 (726)
Other income....................................... 18 139 (121)
-------- -------- --------
Total revenues................... 40,460 14,773 25,687
-------- -------- --------
Equity in net (loss) income of Service
Corporations...................................... (22) (243) 221
-------- -------- --------
EXPENSES
Operating expenses................................. 11,759 3,127 8,632
Ground rent........................................ 3,428 1,076 2,352
Interest........................................... 2,419 1,322 1,097
Depreciation and amortization...................... 4,069 1,814 2,255
Real estate taxes.................................. 6,134 2,091 4,043
Marketing, general and administrative.............. 1,571 671 900
-------- -------- --------
Total expenses................... 29,380 10,101 19,279
-------- -------- --------
Income before minority interest,
Preferred dividends and
Extraordinary items.............. $ 11,058 $ 4,429 $ 6,629
======== ======== ========
The rental revenue for the three months ended September 30, 1998
totaled $34.3 million an increase of $22.5 million compared to $11.8 million
during the three months ended September 30, 1997. The increase is primarily
attributable to the revenue associated with the following properties not
previously owned or acquired at the IPO date: (i) the 1997 acquisitions which
increased rental revenue by $4.9 million, (ii) the 1998 acquisitions which
increased rental revenue by $16.5 million and (iii) an increase of $1.1 million
in properties owned/acquired at the IPO date primarily due to higher occupancy
rates which increased revenue at 1372 Broadway by $0.7 million and 36 West 44th
Street by $0.1 million.
Escalation and reimbursement revenue for the three months ended
September 30, 1998 totaled $5.3 million an increase of $3.4
21
million compared to $1.9 million during the three months ended September 30,
1997. The increase is attributable to the revenue associated with properties
not previously owned or acquired at the IPO date: (i) the 1997 Acquisitions
which increased revenue by $0.4 million and (ii) the 1998 Acquisitions which
increased revenue by $3.0 million.
Investment income totaled $0.9 million, an increase of $0.7 million
compared to $0.2 million during the three months ended September 30, 1997 which
represents interest income on the 17 Battery Place mortgage ($0.5 million), and
interest earned on other mortgages ($0.2 million).
Operating expenses for the three months ended September 30, 1998
totaled $11.8 million representing an increase of $8.7 million compared to $3.1
million for the three months ended September 30, 1997. The increase was
primarily attributable to properties not previously owned or acquired at the IPO
date: (i) the 1997 Acquisitions which increased operating expenses by $2.2
million and (ii) the 1998 Acquisitions which increased operating expenses by
$5.5 million and (iii) the remaining $1.0 million increase represents increased
operating costs in the core and IPO portfolio of which $0.7 million resulted
primarily from the 1998 provision for tenant credit loss.
Ground rent for the three months ended September 30, 1998 totaled $3.4
million representing an increase of $2.3 million compared to $1.1 million for
the three months ended September 30, 1997. The increase is attributable to
ground rent on 420 Lexington Avenue ($2.1 million) and 711 Third Avenue ($0.2
million).
Interest expense for the three months ended September 30, 1998 totaled
$2.4 million representing an increase of $1.1 million compared to $1.3 million
for the three months ended September 30, 1997. The increase is primarily
attributable (Ito interest incurred on the Company's Credit Facility.
Depreciation and amortization for the three months ended September 30,
1998 totaled $4.1 million representing an increase of $2.3 million compared to
$1.8 million for the three months ended September 30, 1997. The increase is
primarily attributable to (i) properties previously owned or acquired at the IPO
date by $0.2 million (ii) the 1997 Acquisitions which increased depreciation by
$0.5 million and (iii) the 1998 Acquisitions which increased depreciation by
$1.5 million, additionally amortization of financing costs increased $0.3
million due to fees recognized on the Company's Credit Facility and Bridge
Facility and Hypothecated Loan.
Real estate taxes for the three months ended September 30, 1998 totaled
$6.1 million representing an increase of $4.0 million compared to $2.1 million
for the three months ended September 30, 1997. The increase is primarily
attributable to (i) the 1997 Acquisitions which increased real estate taxes by
$0.8 million and (ii) the 1998 Acquisitions which increased real estate taxes by
$3.2 million.
Marketing, general and administrative expense for the three months
ended September 30, 1998 totaled $1.6 million representing an increase of $0.9
million compared to $0.7 million for the three months ended September 30, 1997.
The increase is due to additional staffing and incremental absorption of
personnel previously involved in third party management which has been phased
out in favor of direct property ownership ($0.7 million), costs associated with
management information systems and year 2000 compliance and higher public entity
costs ($0.2 million).
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%.
The Company requested the Credit Facility banking group to temporarily
relieve the Company from its obligations under the financial covenants of the
Credit Facility, in order to close an additional financing necessary to acquire
the Helmsley Properties (the "Bridge Facility"). This Bridge Facility closed on
March 18, 1998 financed the Helmsley Properties acquisition, paid-off the
outstanding balance on the Company's Credit Facility and provides on-going
liquidity for future acquisition and corporate needs. The term of the Bridge
Facility was one year. The interest rate was determined by a schedule of the
percent of the loan commitment outstanding and the duration of the loan
commitment outstanding ranging from 170 basis points to 300 basis points over
LIBOR. The Bridge Facility was paid off on May 18, 1998 through proceeds from
the 1998 public offerings. The Company's Credit Facility was restored during May
1998; currently there is $82 million of borrowings outstanding and remaining
availability is $58 million. The effective borrowing rate at September 30, 1998
was 6.93%.
At September 30, 1998 the mortgage loans and Credit Facility borrowings
represent approximately 16.6% of the Company's market capitalization based on an
estimated total market capitalization (debt and equity including preferred
stock), assuming conversion of all operating partnership units) of $802 million
(based on a common stock price of $21.00 per share, the closing price of the
Company's common stock on the
22
New York Stock Exchange on September 30, 1998). The Company's principal debt
maturities are scheduled to be $0.5 million and $2.23 million for the
remaining three months ending December 31, 1998 and the twelve months ending
December 31, 1999, respectively, which represents monthly loan amortization on
regularly scheduled secured debt.
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 three months ending December 31,
1998 and the 12 months ending December 31, 1999, it will incur approximately
$9.5 million and $26.5 million, respectively, of capital expenditures on
properties currently owned. In 1998 and 1999, over $9.4 million and $24.3
million, respectively, of the capital investments are associated with capital
investment dedicated to redevelopment costs associated with properties acquired
at or after the Company's IPO. The Company expects to fund these capital
expenditures with the Credit Facility, operating cash flow and cash on hand.
Future property acquisitions may require substantial capital investments in such
properties for refurbishment and leasing costs. The Company expects that these
financing requirements will be provided primarily from the Credit Facility, from
additional borrowings secured by the properties 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.
In ancitipcation of financing future acquisitions, the Company entered
into an interest rate protection agreement on September 2, 1998, with a major
U.S. financial institution for $100 million of future indebtedness. As a result
of this arrangement, the Company essentially "locked into" U.S. Treasury rates
in effect as of September 2, 1998, or 5.13%, for $100 million of future
indebtedness. As of September 30, 1998, U.S. Treasury rates were lower than
5.13% and as a result, the then present value of future cash payments which the
Company would be obligated to make on $100 million of indebtedness (at the
interest rate protection agreement rate) in excess of the present value of
future cash payments which the Company would be obligated to make on $100
million of debt (at the then current U.S. Treasury rate) (the "excess payment
amount") was approximately $5.5 million. As of November 11, 1998, due to rising
U.S. Treasury rates, the spread between the U.S. Treasury rate and the rate of
the Company's interest rate protection agreement had narrowed and the excess
payment amount had decreased to $2.3 million. It is the Company's intention to
continue to pursue financing alternatives for its properties. Upon completion of
those financings, the Company will recognize any market rate difference between
debt financing and the Company's hedged position. It is the Company's objective
to match future financings with the term of its hedged position; such gain or
loss is expected to be amortized over the life of the new debt.
CASH FLOWS
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1997
Net cash provided by operating activities increased $14.1 million to
$18.3 million provided by operations from $4.2 million provided by operations
for the nine months ended September 30, 1998 compared to the nine months ended
September 30, 1997. The increase was due primarily to the operating cash flow
generated by the IPO Acquisitions, 1997 Acquisitions and 1998 Acquisitions,
increased income from other properties and an increase in investment income. Net
cash used in investing activities increased $214.6 million to $366.5 million
from $151.9 million for the nine months ended September 30, 1998 compared to the
nine months ended September 30, 1997. The increase was due primarily to the
purchase of (i) certain properties in connection with the Offering (ii) the 1997
Acquisitions and (iii) the 1998 Acquisitions. Net cash provided by financing
activities increased $173.2 million to $336.3 million for the nine months ended
September 30, 1998 compared to $163.1 million cash provided by financing
activities for the nine months ended September 30, 1997. The increase was
primarily due to net proceeds from the Company's Public Offerings of common
stock ($242.9 million) and preferred stock ($110.4 million) which were used to
pay-off the Company's Bridge Loan Facility ($240 million) and purchase the 1998
acquisitions. The repayment in the Bridge Loan resulted in an extraordinary loss
of $0.6 million. This increase was partially off-set by the $20.6 million common
stock and OP Unit dividend distribution payments and $1.2 million in deferred
loan cost payments.
FUNDS FROM OPERATIONS
The White Paper on Funds from Operations approved by the Board of
Governors of NAREIT in March 1995 defines Funds from Operations as net income
(loss) (computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. The Company believes that Funds from Operations is helpful to
investors as a measure of the performance of an equity REIT because, along with
cash flow from operating activities, financing activities and investing
activities, it provides investors with an indication of the ability of the
Company to incur and service debt, to make capital expenditures and to fund
other cash needs. The Company computes Funds from Operations in accordance with
standards established by NAREIT which may not be comparable to Funds from
Operations reported by other REIT's that do not define the term in accordance
with the current NAREIT definition or that interpret the current NAREIT
definition differently than the
23
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 historical pro forma basis after giving effect to the Formation
Transactions, Funds from Operations for the three and nine months ended
September 30, 1998 and 1997 respectively, are as follows:
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(Historical) (Pro Forma) (Historical) (Pro Forma)
Income before minority interest and
extraordinary item...................... $ 11,058 $ 4,429 $ 23,072 $ 13,754
Add:
Depreciation and amortization........... 4,069 1,814 10,714 5,444
Less:
Preferred stock dividend................ (2,300) --- (3,420) ---
Amortization of deferred financing costs
and Depreciation of non-real estate
assets.................................. (186) (73) (811) (136)
----------- ----------- ----------- -----------
FFO..................................... $ 12,641 $ 6,170 $ 29,555 $ 19,062
=========== =========== =========== ===========
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. 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. 131
will have a material impact on its financial statements.
YEAR 2000 COMPLIANCE
The Company is providing the following disclosure pursuant to the
Securities and Exchange Commission's interpretation titled "Disclosure of Year
2000 Issues and Consequences by Public Companies, Investment Advisers Investment
Companies, and Municipal Securities Issuers" effective August 4, 1998.
STATE OF READINESS
The Company has identified three areas of focus for Year 2000
Compliance: information technology, property operating equipment, and third
party service suppliers.
INFORMATION TECHNOLOGY: In 1997, the Company began a project to update
its information technology resources by installing new hardware and software
throughout the Company. The Company expects to complete the implementation of
the systems by December 1998. All hardware components and software were acquired
from major U.S. manufacturers. The manufacturer of the new financial systems has
supplied the Company with documentation of Year 2000 testing to demonstrate that
their software meets and exceeds Year 2000 compliance requirements. The company
plans to rely on the documentation furnished. The Company is currently
contacting other software and hardware providers for confirmation of Year 2000
compliance.
PROPERTY OPERATING EQUIPMENT: The Company believes that it has
identified building operating systems (primarily elevators and fire safety
systems) that contain embedded chips or use software that require Year 2000
testing. The Company received
24
confirmation from these vendors and manufacturers that the equipment and
related systems are Year 2000 compliant. In addition, the Company has since
tested approximately 70% of these identified systems and found them
functional. Further testing is being scheduled to be completed by 3/31/99.
THIRD PARTY SERVICE SUPPLIERS: At present, the Company has no automated
interfaces from third party service providers into the Company's financial
systems. However, the Company does rely on information from two types of third
parties service providers: financial institutions and a payroll and benefits
processing company. The company has begun the process of confirming with the
third parties that systems that relate to the Company are Year 2000 compliant.
The Company will not be able to test the systems of these service providers and
will have to rely on these confirmation responses. However, the Company cannot
represent that these responses are accurate and may result in lost services if
these vendors are not Year 2000 compliant.
Assessment Remediation Direct Testing Indirect Testing Implementation
---------- ----------- -------------- ---------------- --------------
Information Technology 100% complete 75% complete Not planned 75% complete based on 75% complete
Expected completion representations Expected completion
6/30/99 received from third 6/30/99
party vendor
Property Operating 90% complete 70% complete 70% complete Not applicable 70% complete
Equipment
Third Party Service 100% complete Not yet fully Not applicable 25% complete based on 50% complete
Providers assessed representations Expected completion
received from third 9/30/99
party vendors
COSTS
The Company does not expect the direct costs related to Year 2000 to be
material. These direct costs exclude the costs to replace the hardware and
software systems, as the decision to replace these systems was not accelerated
by the Year 2000 issues.
RISKS
The Company believes that it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company
has not yet completed all necessary phases of the Year 2000 program. In the
event that the Company does not complete any additional phases, the Company
may be unable to collect rents, process Company payroll, and disburse funds.
The Company also does not have any plan, and cannot make any assurances
regarding any loss of governmental, utility services or financial market
functionality that may be lost as a result of Year 2000. The Company cannot
make any assurances that its tenants will be able to disburse funds to pay
rental invoices due to Year 2000 compliance deficiencies.
CONTINGENCIES
The Company expects to complete all phases of its Year 2000 program by
the end of the third quarter 1999 and currently has no contingency plan in
place. The Company plans to evaluate the status of completion in June 1999 and
determine whether such a plan is necessary.
25
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
1. Form 8-K dated August 14, 1998, Items 2 and 7.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SL GREEN REALTY CORP.
By: /s/ Ann Iseley
--------------------------
Ann Iseley
Executive Vice President and
Chief Financial Officer
Date: November 13, 1998
27
5
6-MOS
DEC-31-1998
SEP-30-1998
976
0
4,532
0
0
0
689,237
33,177
753,929
0
51,369
109,904
0
240
405,778
753,929
56,449
56,449
0
40,460
(22)
0
4,852
7,823
0
7,823
0
0
0
7,823
0.33
0.33
