UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to _____.
Commission File No. 1-13199
SL GREEN REALTY CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Maryland 13-3956775
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
420 Lexington Avenue, New York, New York 10170
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES - ZIP CODE)
(212) 594-2700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the restraint was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days Yes /X/ No / /.
The number of shares outstanding of the registrant's common stock, $0.01 par
value was 29,863,566 at July 25, 2001.
SL GREEN REALTY CORP.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAGE
Condensed Consolidated Balance Sheets as of June 30, 2001 (unaudited) and December 31, 2000................... 3
Condensed Consolidated Statements of Income for the three and six months ended June 30, 2001 and
2000 (unaudited).............................................................................................. 4
Condensed Consolidated Statement of Stockholders' Equity and Comprehensive Income for the six
months ended June 30, 2001 (unaudited)........................................................................ 5
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000
(unaudited)................................................................................................... 6
Notes to Condensed Consolidated Financial Statements (unaudited).............................................. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OFOPERATIONS............................................................................ 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................................... 27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................................................... 28
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................................................... 28
ITEM 3. DEFAULTS UPON SENIOR SECURITIES..................................................................... 28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................. 28
ITEM 5. OTHER INFORMATION................................................................................... 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................................... 28
SIGNATURES.................................................................................................... 29
2
SL GREEN REALTY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
2001 2000
---- ----
(UNAUDITED) (Note 1)
ASSETS
Commercial real estate properties, at cost:
Land and land interests.................................................................. $140,657 $125,572
Buildings and improvements .............................................................. 683,889 618,637
Building leasehold....................................................................... 141,670 139,393
Property under capital lease............................................................. 12,208 12,208
---------- ----------
978,424 895,810
Less accumulated depreciation............................................................. (86,585) (78,432)
---------- ----------
891,839 817,378
Property held for sale................................................................... -- 10,895
Cash and cash equivalents ............................................................... 43,742 10,793
Restricted cash ......................................................................... 37,516 86,823
Tenant and other receivables, net of allowance of $3,049 and $1,723 in 2001 and 2000,
respectively .......................................................................... 7,008 7,580
Related party receivables ............................................................... 1,983 917
Deferred rents receivable, net of allowance for tenant credit loss of $5,441 and
$4,860 in 2001 and 2000, respectively.................................................. 49,354 45,816
Investment in and advances to affiliates ................................................ 7,932 6,373
Mortgage loans receivable, net of $1,216 and $3,321 discount in 2001 and 2000,
respectively........................................................................... 97,832 51,293
Investments in unconsolidated joint ventures............................................. 124,495 65,031
Deferred costs, net ..................................................................... 37,446 40,113
Other assets ............................................................................ 21,546 18,142
---------- ----------
Total assets ....................................................................... $1,320,693 $1,161,154
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Mortgage notes payable ................................................................... $325,411 $ 414,342
Revolving credit facilities .............................................................. 283,238 46,374
Derivative instruments at fair value...................................................... 2,383 --
Accrued interest payable ................................................................. 2,533 2,349
Accounts payable and accrued expenses .................................................... 20,922 24,818
Deferred compensation awards.............................................................. 1,838 2,833
Deferred revenue.......................................................................... 1,587 1,112
Capitalized lease obligations............................................................. 15,437 15,303
Deferred land lease payable............................................................... 13,866 13,158
Dividend and distributions payable ....................................................... 12,796 12,678
Security deposits......................................................................... 20,776 19,014
---------- ----------
Total liabilities.................................................................. 700,787 551,981
Commitments and Contingencies.............................................................
Minority interest in Operating Partnership................................................ 43,546 43,326
8% Preferred Income Equity Redeemable SharesSM $0.01 par value
$25.00 mandatory liquidation preference, 25,000 authorized and 4,600
outstanding at June 30, 2001 and December 31, 2000..................................... 111,002 110,774
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value 100,000 shares
authorized, 24,859 and 24,516 issued and outstanding at June 30, 2001 and
December 31, 2000 respectively......................................................... 249 246
Additional paid-in-capital................................................................ 436,262 428,698
Deferred compensation plans............................................................... (8,044) (5,037)
Accumulated other comprehensive loss...................................................... (1,896) --
Retained earnings......................................................................... 38,787 31,166
---------- ----------
Total stockholders' equity ........................................................ 465,358 455,073
---------- ----------
Total liabilities and stockholders' equity................................................ $1,320,693 $1,161,154
========== ==========
The accompanying notes are an integral part of these financial statements.
3
SL GREEN REALTY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---- ---- ---- ----
REVENUES
Rental revenue ................................................. $ 53,405 $ 46,410 $ 108,408 $ 93,351
Escalation and reimbursement revenues .......................... 7,296 5,367 15,353 11,348
Signage rent ................................................... 179 597 529 1,097
Investment income .............................................. 5,046 3,923 8,320 4,936
Other income ................................................... 550 197 860 521
--------- --------- --------- ---------
Total Revenues .............................................. 66,476 56,494 133,470 111,253
--------- --------- --------- ---------
EXPENSES
Operating expenses (See Note 13) ............................... 14,081 13,443 29,907 26,633
Real estate taxes .............................................. 7,958 7,053 16,138 14,388
Ground rent .................................................... 3,159 3,159 6,318 6,342
Interest ....................................................... 13,171 10,053 27,068 19,545
Depreciation and amortization .................................. 9,189 8,403 18,909 16,219
Marketing, general and administrative .......................... 3,668 3,190 7,215 5,978
--------- --------- --------- ---------
Total Expenses .............................................. 51,226 45,301 105,555 89,105
--------- --------- --------- ---------
Income before equity in net (loss) income from affiliates,
equity in net income of unconsolidated joint ventures,
gain on sale, minority interest, extraordinary item
and cumulative effect adjustment........................... 15,250 11,193 27,915 22,148
--------- --------- --------- ---------
Equity in net (loss) income from affiliates .................... (658) 369 (927) 539
Equity in net income of unconsolidated joint ventures .......... 1,756 782 3,269 1,623
Gain on sale of rental property ................................ 3,002 4,797 4,516 19,022
--------- --------- --------- ---------
Income before minority interest, extraordinary item and
cumulative effect adjustment .............................. 19,350 17,141 34,773 43,332
Minority interest in operating partnership ..................... (1,405) (1,316) (2,486) (3,467)
--------- --------- --------- ---------
Income before extraordinary item and cumulative effect
adjustment ................................................ 17,945 15,825 32,287 39,865
Extraordinary item, net of minority interest of ($8) and
($38) in 2001 and 2000, respectively ...................... -- (430) (98) (430)
Cumulative effect of change in accounting principle ............ -- -- (532) --
--------- --------- --------- ---------
Net income .................................................. 17,945 15,395 31,657 39,435
Preferred stock dividends ...................................... (2,300) (2,300) (4,600) (4,600)
Preferred stock accretion ...................................... (115) (107) (229) (214)
--------- --------- --------- ---------
Net income available to common shareholders ................. $ 15,530 $ 12,988 $ 26,828 $ 34,621
========= ========= ========= =========
BASIC EARNINGS PER SHARE:
Net income before gain on sale and extraordinary item ....... $ 0.51 $ 0.35 $ 0.93 $ 0.67
Gain on sale ................................................ 0.12 0.20 0.18 0.78
Extraordinary item .......................................... -- (0.02) -- (0.02)
Cumulative effect of change in accounting principle ......... -- -- (0.02) --
--------- --------- --------- ---------
Net income ..................................................... $ 0.63 $ 0.53 $ 1.09 $ 1.43
--------- --------- --------- ---------
DILUTED EARNINGS PER SHARE:
Net income before gain on sale and extraordinary item ....... $ 0.51 $ 0.39 $ 0.94 $ 0.77
Gain on sale ................................................ 0.09 0.15 0.14 0.60
Extraordinary item .......................................... -- (0.01) -- (0.01)
Cumulative effect of change in accounting principle ......... -- -- (0.02) --
--------- --------- --------- ---------
Net income ..................................................... $ 0.60 $ 0.53 $ 1.06 $ 1.36
========= ========= ========= =========
Dividends declared per common share ............................ $ 0.3875 $ 0.3625 $ 0.7750 $ 0.7250
========= ========= ========= =========
Basic weighted average common shares outstanding ............... 24,706 24,309 24,706 24,265
========= ========= ========= =========
Diluted weighted average common shares and
common share equivalents outstanding ..................... 32,183 31,744 32,170 31,628
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
4
SL GREEN REALTY CORP.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCUMULATED
ADDITIONAL DEFERRED OTHER
COMMON PAID-IN COMPENSATION COMPREHENSIVE RETAINED COMPREHENSIVE
STOCK CAPITAL PLANS LOSS EARNINGS TOTAL INCOME
----- ------- ----- ---- -------- ----- ------
Balance at December 31, 2000 $ 246 $ 428,698 $ (5,037) $ -- $ 31,166 $ 455,073 $ --
Cumulative effect of
accounting change ....... (811) (811)
Comprehensive Income:
Net income .............. 31,657 31,657 31,657
Unrealized loss on
derivative instruments (1,085) (1,085) (1,085)
Preferred dividend and
accretion ............... (4,829) (4,829)
Deferred compensation plans 1 3,704 (3,705) --
Amortization of deferred
compensation plans ...... 698 698
Redemption of units ........ 497 497
Proceeds from stock options
exercised ............... 2 3,363 3,365
Cash distributions declared
($0.775 per common share) (19,207) (19,207)
--------- --------- --------- --------- --------- --------- ---------
BALANCE AT JUNE 30, 2001
(UNAUDITED) ............. $ 249 $ 436,262 $ (8,044) $ (1,896) $ 38,787 $ 465,358 $ 30,572
========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
5
SL GREEN REALTY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Six Months Ended June 30,
2001 2000
------------- -----------
OPERATING ACTIVITIES:
Net income ............................................................ $ 31,657 $ 39,435
Adjustments to reconcile net income with net cash provided by operating
activities:
Depreciation and amortization ....................................... 18,909 16,219
Amortization of discount on mortgage receivable ..................... (2,105) (1,131)
Gain on sale of rental property ..................................... (4,516) (19,022)
Cumulative effect of change in accounting principle ................. 532 --
Extraordinary loss, net of minority interest ........................ 98 430
Equity in net loss (income) interest from affiliates ................ 927 (539)
Equity in net income from unconsolidated joint ventures ............. (3,269) (1,623)
Minority interest ................................................... 2,486 3,467
Deferred rents receivable ........................................... (7,576) (7,412)
Provision for deferred rents and bad debts .......................... 2,165 1,179
Amortization of deferred compensation ............................... 698 787
Changes in operating assets and liabilities:
Restricted cash - operations ........................................ 4,650 (364)
Tenant and other receivables......................................... (754) (1,979)
Related party receivables ........................................... (1,066) (318)
Deferred lease costs ................................................ (2,872) (5,004)
Other assets ........................................................ (3,030) (4,775)
Accounts payable, accrued expenses and other liabilities ............ (2,945) (1,705)
Deferred revenue .................................................... 475 1,532
Deferred land lease payable ......................................... 708 882
--------- ---------
Net cash provided by operating activities ........................... 35,172 20,059
--------- ---------
INVESTING ACTIVITIES:
Additions to land, buildings and improvements........................ (404,100) (29,554)
Restricted cash - capital improvements .............................. 44,657 3,406
Investment in and advances to affiliates ............................ (2,486) (2,011)
Investments in unconsolidated joint ventures ........................ (9,741) (43,622)
Distributions from unconsolidated joint ventures .................... 2,406 11,860
Net proceeds from disposition of rental property .................... 80,997 58,313
Mortgage loans receivable, net ...................................... (48,644) (55,831)
--------- ---------
Net cash used in investing activities ............................... (336,911) (57,439)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from mortgage notes payable ................................ 150,000 14,917
Repayments of mortgage notes payable ................................ (29,240) (21,316)
Proceeds from revolving credit facilities ........................... 343,053 220,252
Repayment of revolving credit facilities ............................ (106,188) (157,500)
Capitalized lease obligation ........................................ 134 148
Dividends and distributions paid .................................... (25,457) (23,913)
Proceeds from stock options exercised ............................... 3,365 2,852
Deferred loan costs ................................................. (979) (4,304)
--------- ---------
Net cash provided by financing activities............................ 334,688 31,136
--------- ---------
Net increase/(decrease) in cash and cash equivalents................. 32,949 (6,244)
Cash and cash equivalents at beginning of period..................... 10,793 21,561
--------- ---------
Cash and cash equivalents at end of period .......................... $ 43,742 $ 15,317
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ................................................ $ 26,884 $ 20,372
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock as deferred officer compensation ............. $ 3,705 $ 352
========= =========
The accompanying notes are an integral part of these financial statements.
6
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2001
1. ORGANIZATION AND BASIS OF PRESENTATION
SL Green Realty Corp. (the "Company" or "SL Green"), a Maryland
corporation, and SL Green Operating Partnership, L.P. (the "Operating
Partnership"), a Delaware limited partnership, were formed in June 1997
for the purpose of combining the commercial real estate business of S.L.
Green Properties, Inc. and its affiliated partnerships and entities. The
Operating Partnership received a contribution of interest in the real
estate properties, as well as 95% of the economic interest in the
management, leasing and construction companies (the "Service
Corporation"). The Company qualifies as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"),
and operates as a self-administered, self-managed REIT. A REIT is a legal
entity that holds real estate interests and, through payments of dividends
to shareholders, is permitted to reduce or avoid the payment of Federal
income taxes at the corporate level.
Substantially all of the Company's assets are held by, and its operations
are conducted through, the Operating Partnership. The Company is the sole
managing general partner of the Operating Partnership. As of June 30,
2001, minority investors held, in the aggregate, an 8.4% limited
partnership interest in the Operating Partnership.
As of June 30, 2001, the Company's wholly-owned portfolio consisted of 19
commercial properties encompassing approximately 7.0 million rentable
square feet located primarily in midtown Manhattan, a borough of New York
City ("Manhattan") (the "Properties") and one triple-net leased property
located in Shelton, Connecticut. As of June 30, 2001, the weighted average
occupancy (total occupied square feet divided by total available square
feet) of the Properties was 98.5%. The Company's portfolio also includes
ownership interests in unconsolidated joint ventures which own six
commercial properties in Manhattan, encompassing approximately 3.1 million
rentable square feet (97.0% occupied as of June 30, 2001). In addition,
the Company continues to manage four office properties owned by
third-parties and affiliated companies encompassing approximately 1.0
million rentable square feet.
PARTNERSHIP AGREEMENT
In accordance with the partnership agreement of the Operating Partnership
(the "Operating Partnership Agreement"), all allocations of distributions
and profits and losses are made in proportion to the percentage ownership
interests of the respective partners. As the managing general partner of
the Operating Partnership, the Company is required to take such reasonable
efforts, as determined by it in its sole discretion, to cause the
Operating Partnership to distribute sufficient amounts to enable the
payment of sufficient dividends by the Company to avoid any Federal income
or excise tax at the Company level. Under the Operating Partnership
Agreement each limited partner will have the right to redeem limited
partnership units ("Units") for cash, or if the Company so elects, shares
of common stock. Under the Operating Partnership Agreement, the Company is
prohibited from selling 673 First Avenue and 470 Park Avenue South through
August 2009.
BASIS OF QUARTERLY PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required
by accounting principles generally accepted in the United States for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for fair presentation have been included. The 2001 operating results for
the period presented is not necessarily indicative of the results that may
be expected for the year ending December 31, 2001. These financial
statements should be read in conjunction with the financial statements and
accompanying notes included in the Company's annual report on Form 10-K
for the year ended December 31, 2000.
The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all the information
and footnotes required by accounting principles generally accepted in the
United States for complete financial statements.
7
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2001
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries, which are wholly-owned or controlled by the Company. Entities
which are not controlled by the Company are accounted for under the equity
method. All significant intercompany balances and transactions have been
eliminated.
DERIVATIVE INSTRUMENTS
Financial Accounting Standards Board's ("FASB") Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities," ("SFAS 133") which became
effective January 1, 2001 requires the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If a derivative is a hedge, depending on
the nature of the hedge, changes in the fair value of the derivative will either
be offset against the change in fair value of the hedged asset, liability, or
firm commitment through earnings, or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company recorded a cumulative effect adjustment upon the adoption of SFAS
133. This cumulative effect adjustment, of which the intrinsic value of the
hedge was recorded in other comprehensive income ($811) and the time value
component was recorded in the statement of income ($532), was an unrealized loss
of $1,343. The transition amounts were determined based on the interpretive
guidance issued by the FASB to date. The FASB continues to issue interpretive
guidance that could require changes in the Company's application of the standard
and adjustments to the transition amounts. SFAS 133 may increase or decrease
reported net income and stockholders' equity prospectively, depending on future
levels of interest rates and other variables affecting the fair values of
derivative instruments and hedged items, but will have no effect on cash flows.
INCOME TAXES
The Company is taxed as a REIT under Section 856(c) of the Code. As a REIT, the
Company generally is not subject to Federal income tax. To maintain
qualification as a REIT, the Company must distribute at least 90% (95% prior to
January 1, 2001) of its REIT taxable income to its stockholders and meet certain
other requirements. If the Company fails to qualify as a REIT in any taxable
year, the Company will be subject to Federal income tax on its taxable income at
regular corporate tax rates. The Company may also be subject to certain state
and local taxes. Under certain circumstances, Federal income and excise taxes
may be due on its undistributed taxable income.
Pursuant to amendments to the Code that are effective January 1, 2001, the
Company has elected to treat certain of its existing or newly created corporate
subsidiaries as a taxable REIT subsidiary ("TRS"). In general, a TRS of the
Company may perform additional services for tenants of the Company and generally
may engage in any real estate or non-real estate related business (except for
the operation or management of health care facilities or lodging facilities or
the providing to any personal, under a franchise, license or otherwise, rights
to any brand name under which any lodging facility or health care facility is
operated). A TRS is subject to corporate Federal income tax.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATION
Certain prior year balances have been reclassified to conform with the current
year presentation.
8
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2001
3. PROPERTY ACQUISITIONS
The Company entered into an agreement to purchase 1370 Broadway, Manhattan, a
16-story, 254,573 square foot office building for $50,400, excluding closing
costs. The Company redeployed the proceeds from the sale of 17 Battery Place
South, through a like-kind tax deferred exchange, to fund this acquisition. The
transaction closed on January 16, 2001.
On September 29, 2000, the Company entered into an agreement to acquire various
ownership and mortgage interests in the 913,000 square foot, 20-story office
building at One Park Avenue, Manhattan ("One Park"). The Company acquired the
fee interest in the property, which is subject to a ground lease position held
by third-parties, and certain mortgage interests in the property for $233,900,
excluding closing costs. As part of the transaction, SL Green acquired an option
to purchase the ground lease position. The acquisition was financed with a
$150,000 mortgage loan provided by Lehman Brothers Holdings Inc. ("LBHI") and
funds provided by the Company's unsecured line of credit. The LBHI interest-only
mortgage, which matures on January 10, 2004, carries an interest rate of 150
basis points over the 30-day London Interbank Offered Rate ("LIBOR"). The
transaction closed on January 10, 2001.
On May 25, 2001, the Company entered into a joint venture with respect to the
ownership of SL Green's interests in One Park with SITQ Immobilier, a subsidiary
of Caisse de depot et placement due Quebec ("SITQ"). Under the terms of the
joint venture, SITQ purchased a 45% interest in SL Green's interests in the
property based upon a gross aggregate price of $233,900, inclusive of closing
costs and reimbursements. The $150,000 mortgage was assigned to the joint
venture. The Company will provide management and leasing services for One Park.
On June 7, 2001, the Company acquired 317 Madison Avenue for an aggregate
purchase price of $105.6 million. The 22-story building contains approximately
450,000 square feet and is located at the Northeast corner of Madison Avenue and
42nd Street with direct access to Grand Central Station. The acquisition was
funded, in part, with proceeds from the sale of 1412 Broadway in a reverse 1031
tax-free exchange, thereby deferring capital gain resulting from such sale. The
balance of the acquisition was funded using the Company's line of credit.
PRO FORMA
The following table summarizes, on an unaudited pro forma basis, the combined
results of operations of the Company for the six months ended June 30, 2001 and
2000 as though the 2001 acquisition of 317 Madison Avenue (June) was made on
January 1, 2000.
2001 2000
---- ----
Pro forma revenues ......................... $140,266 $133,912
Pro forma net income ....................... $ 26,346 $ 33,669
Pro forma basic earnings per common share .. $ 1.07 $ 1.39
Pro forma diluted earnings per common share $ 1.04 $ 1.32
Common share - basic ....................... 24,706 24,265
Common and common equivalent share - diluted 32,170 31,628
4. PROPERTY DISPOSITIONS
During the six months ended June 30, 2001, the Company disposed of the following
office properties to unaffiliated parties.
RENTABLE GROSS GAIN
DATE SQUARE SALES ON
SOLD PROPERTY SUBMARKET FEET PRICE SALE
- ---- -------- --------- ---- ----- ----
1/9/01 633 Third Avenue Grand Central 41 $13,250 $1,401
6/29/01 1412 Broadway Times Square 389 $91,500 $3,115
In June, 2001, Cipriani, a tenant at 110 East 42nd Street notified the Company
that he is exercising the purchase option under his lease agreement. The gross
purchase price of the option is $14,500. For the six months ended June 30, 2001
and 2000, Cipriani paid approximately $1,404 and $1,385, respectively for rental
revenue and escalation and recoveries. This transaction closed on July 23, 2001.
9
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2001
5. MORTGAGE LOANS RECEIVABLE AND PREFERRED INVESTMENT
On March 30, 2000, the Company acquired a $51,900 interest in an existing first
mortgage loan collateralized by the property located at Two Grand Central Tower,
Manhattan ("2GCT") at a discount. The discount to the face amount of $3,250 and
the exit fees of $3,440 were being amortized into investment income over the
term of the loan. This was a subordinate participation interest in an existing
first mortgage loan currently held by Credit Suisse First Boston Mortgage
Capital, LLC. The loan matured on September 30, 2000, but was extended until
September 30, 2001. 2GCT, also known as 140-148 East 45th Street and 147-151
East 44th Street, is an approximately 620,000 square foot commercial office
building located in the heart of the Grand Central submarket. This loan,
including $2,165 of unamortized discount, was repaid in full on April 2, 2001
and the proceeds were used to pay down the revolving credit facilities.
On March 21, 2001, the Company acquired an existing $39,194 mezzanine loan
collateralized by a 770,000 square foot, 25-story Class B office building in
Manhattan. The loan, which carries a rate of 900 basis points over the 30-day
LIBOR, will mature in January 2003.
On May 10, 2001, the Company acquired a $47,000 mezzanine loan collateralized by
a Manhattan office property. The loan, which carries a rate of 800 basis points
over the 30-day LIBOR, will mature on April 9, 2004. The loan may be extended at
the borrower's option for two 1-year periods, upon payment of an extension fee.
The origination fee of $940 is being amortized into income over the term of the
loan. On June 29, 2001, the Company increased this loan by $3,000 to $50,000. No
other terms were changed.
On June 29, 2001, the Company made an $8,000 preferred equity investment in an
entity that owns 1412 Broadway. The investment entitles the Company to receive a
yield of 10% preferentially on a current basis. This investment is being
amortized over 25 years. The Company will also participate in the appreciation
of the property upon sale to a third party above a specified threshold.
On July 20, 2001, the Company formed a mezzanine co-investment partnership with
the Prudential Real Estate Investors ("PREI"). The first investment program will
be approximately $250,000 and will be funded equally by the members on a
deal-by-deal basis. The Company will receive asset management fees as well as
have the ability to receive incentive returns. On July 20, 2001 the Company
contributed its investment in a $50,000 investment to the venture as the initial
investment and received $25,000 from PREI for their share of the investment.
On July 20, 2001, the Company acquired an existing $27,723 junior participation
interest secured by a first mortgage loan on three Manhattan office properties
totaling 508,610 square feet. The mortgage loan matures on November 1, 2002. The
Company obtained approximately $22,178 of financing from the senior participant
in the form of a repurchase agreement which is co-terminous with the mortgage
loan.
6. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
MORGAN STANLEY JOINT VENTURE
The Company and the Morgan Stanley Real Estate Fund ("MSREF"), through its MSSG
II joint venture, entered into a contract to acquire 469 Seventh Avenue,
Manhattan, for $45,700, excluding closing costs. The property is a 253,000
square foot, 16-story office building. In addition to having a 35% ownership
interest in the property, SL Green will act as the operating partner for the
venture, and will be responsible for leasing and managing the property. The
transaction closed on January 31, 2001. The acquisition was partially funded by
a $36,000 mortgage from Lehman Brothers Holdings, Inc. The loan, which matures
on February 10, 2003, carries a fixed interest rate of 7.84%.
SITQ IMMOBILIER
See Note 3 for a description of the investment in One Park.
10
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2001
The condensed combined balance sheets for the unconsolidated joint ventures at
June 30, 2001 and December 31, 2000 are as follows:
June 30, December 31,
2001 2000
---- ----
ASSETS
Commercial real estate property, net .................... $646,819 $360,347
Other assets ............................................ 52,410 31,641
-------- --------
Total assets ............................................ $699,229 $391,988
======== ========
LIABILITIES AND MEMBERS' EQUITY
Mortgage payable ........................................ $429,748 $238,650
Other liabilities ....................................... 21,902 15,043
Members' equity ......................................... 247,579 138,295
-------- --------
Total liabilities and members' equity ................... $699,229 $391,988
======== ========
Company's net investment in unconsolidated joint ventures $124,495 $ 65,031
======== ========
The condensed combined statements of operations for the unconsolidated joint
ventures for the three and six months ended June 30, 2001 and 2000 is as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
2001 2000 2001 2000
---- ---- ---- ----
Total revenues ...................... $20,711 $15,167 $38,981 $27,181
------- ------- ------- -------
Operating expenses .................. 5,015 3,816 9,703 6,782
Real estate taxes ................... 3,320 2,653 6,175 4,526
Interest ............................ 6,040 4,874 11,411 8,349
Depreciation and amortization ....... 2,920 2,149 5,209 3,793
Extraordinary item .................. -- -- -- 108
------- ------- ------- -------
Total expenses ................. 17,295 13,492 32,498 23,558
======= ======= ======= =======
Net income .......................... $ 3,416 $ 1,675 $ 6,483 $ 3,623
======= ======= ======= =======
Company's equity in earnings of
unconsolidated joint ventures.. $ 1,756 $ 782 $ 3,269 $ 1,623
======= ======= ======= =======
7. INVESTMENT IN AND ADVANCES TO AFFILIATES
2000 2001
---- ----
Investment in and advances to Service Corporation, net ..... $3,843 $4,166
Investment in and advances to eEmerge, net ................. 4,089 2,207
----- -----
Investments in and advances to affiliates ............ $7,932 $6,373
====== ======
SERVICE CORPORATION
In order to maintain the Company's qualification as a REIT while realizing
income from management, leasing and construction contracts from third parties
and joint venture properties, all of the management operations are conducted
through an unconsolidated company, the Service Corporation. The Company, through
the Operating Partnership, owns 100% of the non-voting common stock
(representing 95% of the total equity) of the Service Corporation. Through
dividends on its equity interest, the Operating Partnership receives
substantially all of the cash flow from the Service Corporation's operations.
All of the voting common stock of the Service Corporation (representing 5% of
the total equity) is held by a Company affiliate. This controlling interest
gives the affiliate the power to elect all directors of the Service Corporation.
The Company accounts for its investment in the Service Corporation on the equity
basis of accounting because it has significant influence with respect to
management and operations, but does not control the entity. Effective January 1,
2001, the Service Corporation elected to be taxed as a TRS.
11
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2001
All of the management, leasing and construction services with respect to the
properties wholly-owned by the Company, are conducted through Management LLC
which is 100% owned by the Operating Partnership.
eEMERGE
On May 11, 2000, the Operating Partnership formed eEmerge, Inc., a Delaware
corporation ("eEmerge"), in partnership with Fluid Ventures LLC ("Fluid"). In
March 2001, the Company bought out Fluid's entire ownership interest in eEmerge.
eEmerge is a separately managed, self-funded company that provides fully-wired
and furnished office space, services and support to help e-businesses grow.
The Company, through the Operating Partnership, owns 100% of the non-voting
common stock of eEmerge. Through dividends on its equity interest, the Operating
Partnership receives approximately 100% of the cash flow from eEmerge
operations. 100% of the voting common stock is held by a Company affiliate. This
controlling interest gives the affiliate the power to elect all the directors of
eEmerge. The Company accounts for its investment in eEmerge on the equity basis
of accounting because it has significant influence with respect to management
and operations, but does not control the entity. The Company has funded
approximately $2,514 to eEmerge as of June 30, 2001 out of a total commitment of
$3,425. In addition, the Company made a landlord contribution of $1,575 for the
build-out of two floors.
Effective January 1, 2001, eEmerge elected to be taxed as a TRS.
On June 8, 2000, eEmerge and EUREKA BROADBAND CORPORATION ("Eureka") formed
eEmerge.NYC LLC, a Delaware limited liability company ("ENYC") whereby eEmerge
has a 95% interest and Eureka has a 5% interest in ENYC. ENYC was formed to
build and operate a 45,000 square foot fractional office suites business
marketed to the technology industry. ENYC entered into a 10-year lease with the
Operating Partnership for its premises, which is located at 440 Ninth Avenue,
Manhattan. Allocations of net profits, net losses and distributions shall be
made in accordance with the Limited Liability Company Agreement of ENYC.
8. DEFERRED COSTS
Deferred costs consist of the following: 2001 2000
---- ----
Deferred financing........................ $16,714 $19,277
Deferred leasing.......................... 38,717 37,413
------- -------
55,431 56,690
Less accumulated amortization............. (17,985) (16,577)
------- -------
$37,446 $40,113
======= =======
12
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2001
9. MORTGAGE NOTES PAYABLE
The mortgage notes payable collateralized by the respective properties and
assignment of leases at June 30, 2001 and December 31, 2000 are as follows:
PROPERTY MORTGAGE NOTES 2001 2000
- -------- -------------- ---- ----
50 West 23rd Street First mortgage note with interest payable at 7.33%, due
August 1, 2007........................................................ $21,000 $21,000
673 First Avenue First mortgage note with interest payable at 9.0%, due
December 13, 2003..................................................... 10,517 11,992
470 Park Avenue South First mortgage note with interest payable at 8.25%, due
April 1, 2004......................................................... 9,568 9,771
1414 Avenue of Americas,
633 Third Avenue and First mortgage note with interest payable at 7.9%, due
70 West 36th Street May 1, 2009 (1) (2)................................................... 26,177 33,950
1412 Broadway First mortgage note with interest payable at 7.62%, due
May 1, 2006 (3 )...................................................... -- 52,000
711 Third Avenue First mortgage note with interest payable at 8.13%, due
September 10, 2005 (1) ............................................... 48,996 49,172
875 Bridgeport Ave., First mortgage note with interest payable at 8.32%, due
Shelton, CT May 10, 2025.......................................................... 14,885 14,901
420 Lexington Avenue First mortgage note with interest payable at 8.44%, due
November 1, 2010 (1).................................................. 125,000 125,000
555 West 57th Street First mortgage note with interest payable at 8.58%, due
November 4, 2004 (4) ................................................. 69,268 69,606
------- ------
Total fixed rate debt............................................ 325,411 387,392
------- -------
Madison Properties First mortgage note with interest payable at 8.32%, due
May 31, 2001 (5) ..................................................... -- 26,950
------- -------
Total floating rate debt........................................ -- 26,950
------- -------
Total mortgage notes payable.......................................... $325,411 $414,342
======== ========
- -------------
(1) Held in bankruptcy remote special purpose entity.
(2) 633 Third Avenue was sold in January 2001 and the $7,750 mortgage
was assigned to the purchaser.
(3) This property was sold in June 2001 and the mortgage was assigned to
the purchaser.
(4) The Company entered into an interest rate protection agreement which
fixed the LIBOR interest rate at 6.10% at June 30, 2001 as LIBOR was
3.86% at that date. If LIBOR exceeds 6.10%, the loan will float
until the maximum rate of 6.58% is reached.
(5) This mortgage was repaid in full in February 2001.
PRINCIPAL MATURITIES
Combined aggregate principal maturities of mortgages and notes payable and
revolving credit facilities as of June 30, 2001 are as follows:
SCHEDULED PRINCIPAL
AMORTIZATION REPAYMENTS TOTAL
------------ ---------- -----
2001 .............. $ 2,689 $ 45,238 $ 47,927
2002 .............. 6,916 -- 6,916
2003 .............. 7,772 240,002 247,774
2004 .............. 3,863 75,300 79,163
2005 .............. 3,366 47,247 50,613
Thereafter......... 24,335 151,921 176,256
-------- -------- --------
$ 48,941 $559,708 $608,649
======== ======== ========
13
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2001
MORTGAGE RECORDING TAX - HYPOTHECATED LOAN
The Operating Partnership mortgage tax credit loans totaled approximately
$56,950 from LBHI at June 30, 2001. These loans were collateralized by the
mortgage encumbering the Operating Partnership's interests in 290 Madison
Avenue. The loans were also collateralized by an equivalent amount of the
Company's cash which was held by LBHI and invested in US Treasury securities.
Interest earned on the cash collateral was applied by LBHI to service the loans
with interest rate commensurate with that of the portfolio of six month US
Treasury securities, which will mature on January 15, 2002. The Operating
Partnership and LBHI each had the right of offset and therefore the loans and
the cash collateral were presented on a net basis in the consolidated balance
sheet at June 30, 2001. The purpose of these loans was to temporarily preserve
mortgage recording tax credits for future potential acquisitions of real
property which the Company may make, the financing of which may include property
level debt, for which these credits would be applicable and provide a financial
savings. None of these mortgage tax credit loans had been utilized as of June
30, 2001.
10. REVOLVING CREDIT FACILITIES
PSCC FACILITY
On December 28, 1999, the Company closed on a $30,000 credit facility with
Prudential Securities Credit Corp. ("PSCC Facility"). On March 30, 2000, PSCC
increased the secured PSCC Facility by $20,000 to $50,000. No other terms were
changed from the original $30,000 secured PSCC Facility. Interest-only is
payable based on the 1-Month LIBOR plus 125 basis points. The PSCC Facility may
be prepaid at any time during its term without penalty. The PSCC Facility, which
was to mature on December 27, 2000, was extended for one year. At that time, the
PSCC Facility was increased to $60,000.
At June 30, 2001, the Company had $45,238 outstanding under its PSCC Facility
(interest rate of 5.77 percent). The PSCC Facility was secured by the $89,194 in
mortgage loans receivable on two Manhattan properties. As of July 18, 2001, this
facility had a balance of $21,738.
2000 UNSECURED CREDIT FACILITY
On June 27, 2000, the Company repaid in full and terminated the $140 Million
Credit Facility (defined below) and obtained a new unsecured revolving credit
facility in the amount of $250,000 from a group of 9 lender banks (the "2000
Unsecured Credit Facility"). The Company upsized this credit facility to
$300,000 in March 2001. The 2000 Unsecured Credit Facility has a term of three
years and bears interest at a spread ranging from 137.5 basis points to 175
basis points over LIBOR, based on the Company's leverage ratio. If the Company
receives an investment grade rating, the spread over LIBOR will be reduced to
125 basis points. At June 30, 2001, $238,000 was outstanding and carried a
weighted average interest rate of 6.09 percent. Availability under the 2000
Unsecured Credit Facility at June 30, 2001 was further reduced by the issuance
of letters of credit in the amount of $5,000 for a fee purchase option. As of
July 27, 2001, this facility had a balance of $55,000 as the proceeds from the
common stock offering (see Note 11) were used to pay down the outstanding
balance.
The terms of the 2000 Unsecured Credit Facility include certain restrictions and
covenants which limit, among other things, the payment of dividends (as
discussed below), the incurrence of additional indebtedness, the incurrence of
liens and the disposition of assets, and which require compliance with financial
ratios relating to the minimum amount of tangible net worth, the minimum amount
of debt service coverage, the minimum amount of fixed charge coverage, the
minimum amount of unsecured indebtedness, the minimum amount of unencumbered
property debt service coverage and certain investment limitations. The dividend
restriction referred to above provides that, except to enable the Company to
continue to qualify as a REIT under the Code, the Company will not during any
four consecutive fiscal quarters make distributions with respect to common stock
or other equity interests in an aggregate amount in excess of 90 percent of
funds from operations for such period, subject to certain other adjustments. The
2000 Unsecured Credit Facility also requires a 15 to 25 basis point fee on the
unused balance payable quarterly in arrears.
The lending group for the 2000 Unsecured Credit Facility consists of Fleet
National Bank, NA, as administrative agent, Citibank/Salomon Smith Barney, Inc,
as syndication agent, Deutsche Banc Alex Brown, as documentation agent,
Commerzbank Aktiengesellschaft, New York Branch, The Bank of New York, Wells
Fargo Bank, N.A., Bank Leumi USA, PNCBank, N.A., and Key Bank, N.A.
14
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2001
$140 MILLION CREDIT FACILITY
The $140 million unsecured credit facility was repaid in full and retired in
June 2000 in connection with the Company obtaining the 2000 Unsecured Credit
Facility, as described above. In the quarter ended June 30, 2000, the Company
recorded a $430 extraordinary loss, net of the minority interest's share of the
loss ($38), for the early extinguishment of debt related to the write-off of
unamortized financing costs associated with the $140 Million Credit Facility.
11. STOCKHOLDERS' EQUITY
COMMON SHARES
The following table presents the changes in the Company's issued and outstanding
shares of common stock since December 31, 2000 (excluding 2,281 and 2,307 Units
outstanding at June 30, 2001 and December 31, 2000, respectively, which are
convertible into shares of common stock on a one-for-one basis, or the cash
equivalent thereof, subject to certain restrictions):
Outstanding at December 31, 2000.......................... 24,516
Issued through exercise of options........................ 166
Issued through redemption of units........................ 26
Issued through deferred compensation plan................. 151
--------
Outstanding at June 30, 2001............................... 24,859
========
On July 25, 2001, the Company completed the sale of 5,000 shares of common
stock. The gross proceeds from this offering ($149,000, net of underwriter's
discount) will initially be used to pay down the 2000 Unsecured Credit Facility.
This offering resulted in the reduction of the minority interest in the
Operating Partnership to approximately 7.1% from 8.4% at June 30, 2001.
OWNERSHIP OF OPERATING PARTNERSHIP
The minority interest in the Operating Partnership was approximately 8.4% and
8.6% as of June 30, 2001 and December 31, 2000, respectively.
RIGHTS PLAN
On February 16, 2000, the Board of Directors of the Company authorized a
dividend distribution of one preferred share purchase right ("Right") for each
outstanding share of common stock which was distributed to all holders of record
of the common stock on March 31, 2000. Each Right entitles the registered holder
to purchase from the Company one one-hundredth of a share of Series B junior
participating preferred stock, par value $0.01 per share ("Preferred Shares"),
at a price of $60.00 per one one-hundredth of a Preferred Share ("Purchase
Price"), subject to adjustment as provided in the rights agreement. The Rights
expire on March 5, 2010, unless the expiration date is extended or the Right is
redeemed or exchanged earlier by the Company.
15
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2001
The Rights are attached to each share of common stock. The rights are generally
exercisable only if a person or group becomes the beneficial owner of 17% or
more of the outstanding common stock or announces a tender offer for 17% or more
of the outstanding stock ("Acquiring Person"). In the event that a person or
group becomes an Acquiring Person, each holder of a Right, excluding the
Acquiring Person, will have the right to receive, upon exercise, common stock
having a market value equal to two times the Purchase Price of the Preferred
Shares.
EARNINGS PER SHARE
Earnings per share is computed as follows:
FOR THE QUARTER ENDED JUNE 30, 2001 FOR THE QUARTER ENDED JUNE 30, 2000
----------------------------------- -----------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
==================================================================================================================================
Basic Earnings:
Income available to common
shareholders .................... $15,530 24,706 $ 0.63 $12,988 24,309 $ 0.53
Effect of Dilutive Securities:
Redemption of Units to
common shares ................. 1,405 2,295 1,316 2,391
Preferred Stock (if converted to
common stock .................. 2,415 4,699 2,407 4,699
Stock Options ................... -- 483 -- 345
=================================================================================================================================
Diluted Earnings:
Income available to common
shareholders .................. $19,350 32,183 $ 0.60 $16,711 31,744 $ 0.53
=================================================================================================================================
FOR THE SIX MONTHS ENDED JUNE 30, 2001 FOR THE SIX MONTHS ENDED JUNE 30, 2000
-------------------------------------- --------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
==================================================================================================================================
Basic Earnings:
Income available to common
shareholders .................... $26,828 24,706 $ 1.09 $34,621 24,265 $1.43
Effect of Dilutive Securities:
Redemption of Units to
common shares ................. 2,486 2,289 3,467 2,404
Preferred Stock (if converted to
common stock .................. 4,829 4,699 4,814 4,699
Stock Options ................... -- 476 -- 260
==================================================================================================================================
Diluted Earnings:
Income available to common
shareholders .................. $34,143 32,170 $1.06 $42,902 31,628 $1.36
==================================================================================================================================
The PIERS outstanding in 2001 were included in the 2001 and 2000 computation of
earnings per share as they were dilutive during those periods.
12. COMMITMENTS AND CONTINGENCIES
The Company and the Operating Partnership are not presently involved in any
material litigation nor, to their knowledge, is any material litigation
threatened against them or their properties, other than routine litigation
arising in the ordinary course of business. Management believes the costs, if
any, incurred by the Company and the Operating Partnership related to the
routine litigation will not materially affect the financial position, operating
results or liquidity of the Company and the Operating Partnership.
16
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2001
13. RELATED PARTY TRANSACTIONS
There are several business relationships with related parties, entities owned by
Stephen L. Green or relatives of Stephen L. Green which involve management,
leasing, and construction fee revenues, rental income and maintenance expenses
in the ordinary course of business. These transactions for the six month period
ended June 30, include the following:
2001 2000
---- ----
Management revenues .......................................... $ 136 $ 136
Maintenance and security expense ............................. 2,796 2,149
Rental revenue ............................................... 117 69
Amounts due from related parties at June 30, 2001 and
December 31, 2000, respectively, consist of: 2001 2000
------- -------
17 Battery Condominium Associations .......................... $ 143 $ 127
Morgan Stanley Real Estate Funds ............................. 494 464
Carlyle Group ................................................ 12 12
Officers ..................................................... 1,105 77
SLG 100 Park LLC ............................................. 338 121
One Park Realty Corp. ........................................ (316) --
14. DEFERRED COMPENSATION AWARD
Contemporaneous with the closing of 1370 Avenue of the Americas, an award of
$2,833 was granted to several members of management earned in connection with
the realization of this investment gain. This award, which will be paid out over
a three-year period, is presented as Deferred compensation award on the balance
sheet. As of June 30, 2001, $995 had been paid against this compensation award.
15. SEGMENT INFORMATION
The Company is a REIT engaged in owning, managing, leasing and repositioning
older, classic style office properties in Manhattan and has one reportable
segment, office real estate. The Company evaluates real estate performance and
allocates resources based on net income.
The Company's real estate portfolio is located in one geographical market,
namely, Manhattan. The primary sources of revenue are generated from tenant
rents and escalations and reimbursement revenue. Real estate property operating
expenses consist primarily of security, maintenance, utility costs, real estate
taxes and ground rent expense (at certain applicable properties). The single
office real estate business segment meets the quantitative threshold for
determining reportable segments. As of June 30, 2001, no single tenant
contributed more than 3% of the Company's annual revenues.
16. TECHNOLOGY INVESTMENTS AND ALLIANCES
The Company owns equity interests in several companies that provide
communication services or amenities to tenants. The equity interests are in the
form of preferred stock, and vested and unvested warrants to acquire common
stock. These investments are included in Other Assets on the Consolidated
Balance Sheets. Below is a summary of these investments as of June 30, 2001:
SQUARE FEET TICKER CAPITAL SHARES WARRANTS BOOK
COMPANY (MM) (1) SYMBOL INVESTMENT RECEIVED (2) RECEIVED (2) VALUE (3)
- ------- -------- ------ ---------- -------------- ------------- ---------
Eureka Broadband 4.4 Privately Held --- --- 35 ---
Captivate Network (4) 9.7 Privately Held $750 98.6 236 $750
Internet Realty Partners (5) --- Privately Held 1,500 --- --- 1,254
- ----------
(1) The Square Feet (in millions) represents the portion of the Company's
portfolio that is anticipated to be wired by each company in accordance with
their respective agreements. These approximate square footage amounts are
subject to change upon the signing of additional licensing agreements. As of
June 30, 2001, approximately 70% of the Company's portfolio was wired and
operational by at least one of SL Green's strategic telecommunications
providers.
17
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2001
(2) Preferred shares and warrants received may include amounts allocable to
joint venture partners. The Company may earn additional preferred shares or
warrants based upon achieving certain thresholds in accordance with the
respective investment agreements or upon the signing of additional license
agreements for properties.
(3) The Company's investments in privately held entities were recorded at
estimated fair values when the investment was made and are valued at the lower
of cost or market.
(4) In April 2001, Verticore merged with Captivate Networks. The Company's 241
shares were converted into 98.6 shares of the new company. The Company is
entitled to receive additional shares upon completion of the recapitalization of
the new company.
(5) Through June 30, 2001, the Company made a $1,500 limited partnership
investment in Internet Realty Partners, L.P. ("IRP"). The Company is committed
to fund an additional $500. IRP invests in privately-held and publicly traded
real estate-related internet, technology and e-commerce companies.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
This report includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. All statements, other than statements of historical facts, included
in this report that address activities, events or developments that the Company
expects, believes or anticipates will or may occur in the future, including such
matters as future capital expenditures, dividends and acquisitions (including
the amount and nature thereof), expansion and other development trends of the
real estate industry, business strategies, expansion and growth of the Company's
operations and other such matters are forward-looking statements. These
statements are based on certain assumptions and analyses made by the Company in
light of its experience and its perception of historical trends, current
conditions, expected future developments and other factors it believes are
appropriate. Such statements are subject to a number of assumptions, risks and
uncertainties, general economic and business conditions, the business
opportunities that may be presented to and pursued by the Company, changes in
laws or regulations and other factors, many of which are beyond the control of
the Company. Any such statements are not guarantees of future performance and
actual results or developments may differ materially from those anticipated in
the forward-looking statements.
The following discussion related to the consolidated financial statements of the
Company should be read in conjunction with the financial statements appearing
elsewhere in this report and the financial statements included in the Company's
2000 annual report on Form 10-K.
GENERAL
SL Green Realty Corp. (the "Company"), a Maryland corporation, and SL Green
Operating Partnership, L.P. (the "Operating Partnership"), a Delaware limited
partnership, were formed in June 1997 for the purpose of combining the
commercial real estate business of S.L. Green Properties, Inc. and its
affiliated partnerships and entities.
As of June 30, 2001, the Company's wholly-owned portfolio consisted of 19
commercial properties encompassing approximately 7.0 million rentable square
feet located primarily in midtown Manhattan, a borough of New York City
("Manhattan") (the "Properties") and one triple-net leased property located in
Shelton, Connecticut. As of June 30, 2001, the weighted average occupancy (total
occupied square feet divided by total available square feet) of the Properties
was 98.5%. The Company's portfolio also includes ownership interests in
unconsolidated joint ventures which own six commercial properties in Manhattan,
encompassing approximately 3.1 million rentable square feet (97.0% occupied as
of June 30, 2001). In addition, the Company continues to manage four office
properties owned by third-parties and affiliated companies encompassing
approximately 1.0 million rentable square feet.
RESULTS OF OPERATIONS
The following comparisons for the three and six months ended June 30, 2001
("2001") compared to the three and six months ended June 30, 2000 ("2000") make
reference to the following: (i) the effect of the "Same-Store Properties," which
represents all properties owned by the Company at January 1, 2000, (ii) the
effect of the "2001 Acquisitions," which represents all properties acquired in
2001, namely, One Park Avenue and 1370 Broadway (January 2001) and 317 Madison
Avenue (June 2001), (iii) the effect of the "Dispositions," which represents all
properties disposed of in 2000, namely, 29 West 35th Street, 36 West 44th Street
(March 2000), 321 West 44th Street (May 2000) which was contributed to a joint
venture, and 17 Battery Place South (December 2000), and all properties disposed
of in 2001, namely, 633 Third Avenue (January 2001) and One Park Avenue (May
2001) which was contributed to a joint venture.
19
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2001 TO THE THREE MONTHS ENDED
JUNE 30, 2000
RENTAL REVENUES (in millions) $ %
2001 2000 Change Change
----------- ---------- ------------ -----------
Rental revenue $53.4 $46.4 $7.0 15%
Escalation and reimbursement revenue 7.3 5.4 1.9 35%
Signage revenue 0.2 0.6 (0.4) (67)%
----------- ---------- ------------ -----------
Total $60.9 $52.4 $8.5 16%
=========== ========== ============ ===========
Same Store $50.8 $47.9 $2.9 6%
2001 Acquisitions 8.7 -- 8.7 870%
Dispositions 2.3 5.3 (3.0) (57)%
Other (0.9) (0.8) (0.1) 12%
----------- ---------- ------------ -----------
Total $60.9 $52.4 $8.5 16%
=========== ========== ============ ===========
The increase in rental revenue was primarily due to an increase in occupancy at
Same-Store Properties from 97.9% in 2000 to 98.6% in 2001. In addition,
annualized rents from replacement rents on previously occupied space at
Same-Store Properties were 55% higher than previous fully escalated rents. The
Company estimates that the difference between existing in-place fully escalated
rents and current market rents is approximately 54%.
The increase in escalation and reimbursement revenue was primarily due to the
recovery of operating expenses ($2.0 million). On an annualized basis, the
Company expects to recover approximately 90% of its electric costs.
The decrease in signage revenue was primarily attributable to 1466 Broadway
($0.4 million).
INVESTMENT AND OTHER INCOME (in millions) $ %
2001 2000 Change Change
--------- --------- --------- ------------
Equity in net income of unconsolidated joint ventures $1.8 $0.8 $1.0 125%
Investment income 5.0 3.9 1.1 28%
Other 0.6 0.2 0.4 200%
--------- --------- --------- ------------
Total $7.4 $4.9 $2.5 51%
========= ========= ========= ============
The increase in equity in net income of unconsolidated joint ventures is due to
the Company having four joint venture investments in 2000 comprising 2.0 million
square feet compared to six joint venture investments in 2001 comprising 3.1
million square feet. Occupancy at the joint ventures decreased from 98.9% in
2000 to 97.0% in 2001. The Company estimates that the difference between
existing in-place fully escalated rents and current market rents is
approximately 58%.
The increase in investment income primarily represents interest income from 2
Grand Central Tower ($1.4 million). The balance of the change in investment
income is due to investments in other structured finance transactions ($0.6
million) and interest from excess cash on hand ($0.1 million). This was offset
by a decrease in investment income ($0.7 million) due to the loan on 1370 Avenue
of the Americas being repaid in 2000 and the sale of a participation interest in
17-29 West 44th Street in September 2000 ($0.2 million). In addition, the
Company wrote down it's investment in a technology investment ($0.2 million).
20
PROPERTY OPERATING EXPENSES (in millions)
2001 2000 $ Change % Change
----------- --------- ------------ -------------
Operating expenses (excluding electric) $9.6 $9.4 $0.2 2%
Electric costs 4.5 4.0 0.5 12%
Real estate taxes 8.0 7.1 0.9 13%
Ground rent 3.2 3.2 --- ---
----------- --------- ------------ -------------
Total $25.3 $23.7 $1.6 7%
=========== ========= ============ =============
Same Store $21.3 $20.8 $0.5 2%
2001 Acquisitions 2.7 --- 2.7 270%
Dispositions 1.1 2.3 (1.2) (52)%
Other 0.2 0.6 (0.4) (67)%
----------- --------- ------------ -------------
Total $25.3 $23.7 $1.6 7%
=========== ========= ============ =============
The increase in operating expenses, excluding electricity, were primarily due to
higher fuel costs ($0.1 million) and cleaning costs ($0.4 million) which were
offset by a decrease in repairs and maintenance ($0.4 million).
The increase in electric costs was primarily due to higher electric rates as
well as the 2001 Acquisitions and was partially offset by the Dispositions.
The increase in real estate taxes was primarily attributable to the 2001
Acquisitions which increased real estate taxes by $1.1 million, but was
partially offset by a decrease in real estate taxes due to the Dispositions
($0.2 million).
OTHER EXPENSES (in millions)
2001 2000 $ Change % Change
---------- --------- ----------- --------------
Interest expense $13.2 $10.0 $3.2 32%
Depreciation and amortization expense 9.2 8.4 0.8 9%
Marketing, general and administrative expense 3.7 3.2 0.5 16%
---------- --------- ----------- --------------
Total $26.1 $21.6 $4.5 21%
========== ========= =========== ==============
This increase in interest expense was primarily attributable to new secured
mortgage financing being placed on Same-Store assets ($0.9 million), mortgage
financing associated with the 2001 Acquisitions ($1.6 million) and an increase
in interest expense at the corporate level, which includes borrowings for
working capital purposes as well as, acquisition and structured finance
transaction funding ($0.8 million). This was partially offset by the interest
savings from the Dispositions ($0.2 million) and a reduction in the weighted
average interest rate to 7.20% at June 30, 2001 compared to 7.93% at June 30,
2000.
Depreciation and amortization increased primarily due to depreciation on
properties acquired, namely One Park Avenue, and capital expenditures and tenant
improvements incurred during the period.
Marketing, general and administrative expense increased primarily due to
increased personnel costs ($0.3 million). Marketing, general and administrative
expense decreased as a percentage of total revenue from 5.7% to 5.5%.
21
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2001 TO THE SIX MONTHS ENDED JUNE
30, 2000
RENTAL REVENUES (in millions) $ %
2001 2000 Change Change
----------- ---------- ------------ -----------
Rental revenue $108.4 $93.4 $15.0 16%
Escalation and reimbursement revenue 15.4 11.3 4.1 36%
Signage revenue 0.5 1.1 (0.6) (55)%
----------- ---------- ------------ -----------
Total $124.3 $105.8 $18.5 17%
=========== ========== ============ ===========
Same Store $102.5 $94.3 $8.2 9%
2001 Acquisitions 19.2 --- 19.2 1,920%
Dispositions 4.7 12.7 (8.0) (63)%
Other (2.1) (1.2) (0.9) (75)%
----------- ---------- ------------ -----------
Total $124.3 $105.8 $18.5 17%
=========== ========== ============ ===========
The increase in rental revenue was primarily due to an increase in occupancy at
Same-Store Properties from 97.9% in 2000 to 98.6% in 2001. In addition,
annualized rents from replacement rents on previously occupied space at
Same-Store Properties were 46% higher than previous fully escalated rents. The
Company estimates that the difference between existing in-place fully escalated
rents and current market rents is approximately 54%.
The increase in escalation and reimbursement revenue was primarily due to the
recovery of higher operating expenses ($3.7 million) and utility costs ($0.3
million). On an annualized basis, the Company expects to recover approximately
90% of its electric costs.
The decrease in signage revenue was primarily attributable to 1466 Broadway
($0.5 million).
INVESTMENT AND OTHER INCOME (in millions) $ %
2001 2000 Change Change
--------- --------- --------- ------------
Equity in net income of unconsolidated joint ventures $3.3 $1.6 $1.7 106%
Investment income 8.3 4.9 3.4 69%
Other 0.9 0.5 0.4 80%
--------- --------- --------- ------------
Total $12.5 $7.0 $5.5 79%
========= ========= ========= ============
The increase in equity in net income of unconsolidated joint ventures is due to
the Company having four joint venture investments in 2000 comprising 2.0 million
square feet compared to six joint venture investments in 2001 comprising 3.1
million square feet. Occupancy at the joint ventures decreased from 98.9% in
2000 to 97.0% in 2001. The Company estimates that the difference between
existing in-place fully escalated rents and current market rents is
approximately 58%.
The increase in investment income primarily represents interest income from 2
Grand Central Tower ($4.0 million). The balance of the change in investment
income is due to investments in other structured finance transactions
($0.7 million) and interest from excess cash on hand ($0.3 million). This was
offset by a decrease in investment income ($1.3 million) due to the loan on
1370 Avenue of the Americas being repaid in 2000. In addition, the Company
wrote down it's investment in a technology company ($0.2 million).
22
PROPERTY OPERATING EXPENSES (in millions)
2001 2000 $ Change % Change
----------- --------- ------------ -------------
Operating expenses (excluding electric) $20.4 $19.6 $0.8 4%
Electric costs 9.5 7.0 2.5 36%
Real estate taxes 16.1 14.4 1.7 12%
Ground rent 6.3 6.3 --- ---
----------- --------- ------------ -------------
Total $52.3 $47.3 $5.0 11%
=========== ========= ============ =============
Same Store $43.5 $41.1 $2.4 6%
2001 Acquisitions 6.1 --- 6.1 610%
Dispositions 2.5 5.5 (3.0) (55)%
Other 0.2 0.7 (0.5) (71)%
----------- --------- ------------ -------------
Total $52.3 $47.3 $5.0 11%
=========== ========= ============ =============
The increase in operating expenses, excluding electricity, was primarily due to
higher fuel costs ($0.3 million), contract maintenance ($0.3 million) and
cleaning costs ($0.8 million). This was offset by a decrease in repairs and
maintenance ($0.6 million).
The increase in electric costs was primarily due to higher electric rates as
well as the 2001 Acquisitions and was partially offset by the Dispositions.
The increase in real estate taxes was primarily attributable to the 2001
Acquisitions which increased real estate taxes by $2.5 million, but was
partially offset by a decrease in real estate taxes due to the Dispositions
($0.8 million).
OTHER EXPENSES (in millions)
2001 2000 $ Change % Change
---------- --------- ----------- --------------
Interest expense $27.1 $19.5 $7.6 39%
Depreciation and amortization expense 18.9 16.2 2.7 17%
Marketing, general and administrative expense 7.2 6.0 1.2 20%
---------- --------- ----------- --------------
Total $53.2 $41.7 $11.5 28%
========== ========= =========== ==============
This increase in interest expense was primarily attributable to new secured
mortgage financing being placed on Same-Store assets ($1.9 million), mortgage
financing associated with the 2001 Acquisitions ($4.3 million) and an increase
in interest expense at the corporate level ($2.0 million). This was partially
offset by the interest savings from the Dispositions ($0.6 million) and a
reduction in the weighted average interest rate to 7.20% at June 30, 2001
compared to 7.93% at June 30, 2000.
Depreciation and amortization increased primarily due to depreciation on
properties acquired, namely One Park Avenue, and capital expenditures and tenant
improvements incurred during the period.
Marketing, general and administrative expense increased primarily due to
increased personnel costs ($0.6 million) and professional fees ($0.2 million).
Marketing, general and administrative expense remained level at 5.4% of total
revenue for the comparable periods.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Net cash provided by operating activities increased $15.1 million to $35.2
million for the six months ended June 30, 2001 compared to $20.1 million for the
six months ended June 30, 2000. Operating cash flow was primarily generated by
the Same-Store properties and 2001 Acquisitions, but was reduced by the decrease
in operating cash flow from the Dispositions. Net cash used in investing
activities increased $279.5 million to $336.9 million for the six months ended
June 30, 2001 compared to $57.4 million for the six months ended June 30, 2000.
The increase was due primarily to the higher dollar volume of acquisitions and
capital improvements in 2001 ($390.0 and $14.1 million, respectively) as
compared to 2000 ($16.6 and $13.4 million, respectively). This relates primarily
to the acquisitions of One Park Avenue, 1370 Broadway in January 2001 and 317
Madison Avenue in June 2001. Approximately $50.9 million was funded out of
restricted cash set aside from the sale of 17 Battery Place South. The net
investment in unconsolidated joint ventures decreased $33.9 million due to the
purchase of a 49.9% interest in 100 Park in 2000 compared to the purchase of a
35% interest in 469 Seventh Avenue in 2001. Net proceeds from the dispositions
increased $22.7 million due to the sales of 633 Third Avenue, One Park Avenue
and 1412
23
Broadway totaling $81.0 million in 2001 compared to the dispositions of
29 West 35th Street, 36 West 44th Street and 321 West 44th Street totaling $58.3
million in 2000. Net cash provided by financing activities increased $303.6
million to $334.7 million for the six months ended June 30, 2001 compared to
$31.1 million for the six months ended June 30, 2000. The increase was primarily
due to higher borrowing requirements due to the higher volume of acquisitions
funded with mortgage debt and draws under the line of credit ($257.9 million),
which was partially offset by lower debt repayments ($43.4 million).
CAPITALIZATION
On July 25, 2001, the Company completed the sale of 5,000,000 shares of common
stock. The gross proceeds from this offering ($149.0 million, net of
underwriter's discount) will initially be used to pay down the 2000 Credit
Facility. This offering resulted in the reduction of the minority interest in
the Operating Partnership to approximately 7.1% from 8.4% at June 30, 2001.
On February 16, 2000, the Board of Directors of the Company authorized a
dividend distribution of one preferred share purchase right ("Right") for each
outstanding share of common stock under a shareholder rights plan. This dividend
was distributed to all holders of record of the common stock on March 31, 2000.
Each Right entitles the registered holder to purchase from the Company one
one-hundredth of a share of Series B junior participating preferred stock, par
value $0.01 per share ("Preferred Shares"), at a price of $60.00 per one
one-hundredth of a Preferred Share ("Purchase Price"), subject to adjustment as
provided in the rights agreement. The Rights expire on March 5, 2010, unless the
expiration date is extended or the Right is redeemed or exchanged earlier by the
Company. The Rights are attached to each share of common stock. The rights are
generally exercisable only if a person or group becomes the beneficial owner of
17% or more of the outstanding common stock or announces a tender offer for 17%
or more of the outstanding stock ("Acquiring Person"). In the event that a
person or group becomes an Acquiring Person, each holder of a Right, excluding
the Acquiring Person, will have the right to receive, upon exercise, common
stock having a market value equal to two times the Purchase Price of the
Preferred Shares.
At June 30, 2001, borrowings under the mortgage loans and credit facilities
(excluding our share of joint venture debt of $213.5 million) represented 39.4%
of the Company's market capitalization based on a total market capitalization
(debt and equity including preferred stock), assuming conversion of all
operating partnership units, of $1.55 billion (based on a common stock price of
$30.31 per share, the closing price of the Company's common stock on the New
York Stock Exchange on June 30, 2001).
The tables below summarize the Company's mortgage debt and line of credit
indebtedness outstanding at June 30, 2001 and December 31, 2000, respectively
(in thousands).
June 30, December 31,
2001 2000
---- ----
DEBT SUMMARY:
BALANCE
Fixed rate .................................. $256,143 $317,786
Variable rate - hedged ...................... 69,268 69,606
-------- --------
Total fixed rate ......................... 325,411 387,392
-------- --------
Variable rate ............................... 238,000 49,950
Variable rate-supporting variable rate assets 45,238 23,374
-------- --------
Total variable rate ...................... 283,238 73,324
-------- --------
Total ....................................... $608,649 $460,716
======== ========
PERCENT OF TOTAL DEBT:
Total fixed rate ......................... 53.46% 84.08%
Variable rate ............................ 46.54% 15.92%
-------- --------
Total ....................................... 100.00% 100.00%
======== ========
EFFECTIVE INTEREST RATE AT END OF PERIOD
Total fixed rate ......................... 8.21% 8.22%
Variable rate ............................ 6.04% 8.20%
-------- --------
Effective interest rate ..................... 7.20% 8.21%
======== ========
A majority of the variable rate debt shown above bears interest at an interest
rate based on LIBOR (3.86 % at June 30, 2001). Variable rate debt, excluding the
variable rate debt supporting variable rate assets, constitutes 39.1% of total
debt outstanding. The Company's total debt at June 30, 2001 had a weighted
average term to maturity of approximately 4.73 years.
24
As of June 30, 2001, the Company had two mortgage loans receivable securing the
PSCC Facility. The first loan, which has a face value of $50 million and matures
on April 9, 2004, carries a weighted average interest rate of 800 basis points
over the 30-day LIBOR. The second loan, which has a face value of $39.1 million
and matures in January 2003, carries a 900 basis point spread over the 30-day
LIBOR. These variable rate mortgage loans receivable mitigate the Company's
exposure to interest rate changes on its unhedged variable rate debt.
MORTGAGE FINANCING
As of June 30, 2001, the Company's total mortgage debt (excluding the Company's
share of joint venture debt of approximately $213.5 million) consisted of
approximately $325.4 million of fixed rate debt with an effective interest rate
of approximately 8.21% and no variable rate debt. The Company's mortgage debt at
June 30, 2001, encumbering 9 properties, will mature as follows (in thousands):
2001....................................... $ 2,689
2002....................................... 6,916
2003....................................... 9,774
2004....................................... 79,163
2005....................................... 50,612
Thereafter................................. 176,257
--------
Total............................ $325,411
========
2000 UNSECURED CREDIT FACILITY
On June 27, 2000, the Company repaid in full and terminated the $140 Million
Credit Facility (see below) and obtained a new senior unsecured revolving credit
facility in the amount of $250 million (the "2000 Unsecured Credit Facility")
from a group of 9 lender banks. The Company upsized this credit facility to $300
million in March 2001. The 2000 Unsecured Credit Facility has a term of three
years and bears interest at a spread ranging from 137.5 basis points to 175
basis points over LIBOR, based on the Company's leverage ratio. If the Company
receives an investment grade rating, the spread over LIBOR will be reduced to
125 basis points. At June 30, 2001, $238 million was outstanding and carried a
weighted average interest rate of 6.09 percent. Availability under the 2000
Unsecured Credit Facility at June 30, 2001 was further reduced by the issuance
of letters of credit in the amount of $5 million for acquisition deposits. As of
July 27, 2001, this facility had a balance of $55.0 million as the proceeds from
this common stock offering were used to pay down the outstanding balance.
The terms of the 2000 Unsecured Credit Facility include certain restrictions and
covenants which limit, among other things, the payment of dividends (as
discussed below), the incurrence of additional indebtedness, the incurrence of
liens and the disposition of assets, and which require compliance with financial
ratios relating to the minimum amount of tangible net worth, the minimum amount
of debt service coverage, the minimum amount of fixed charge coverage, the
minimum amount of unsecured indebtedness, the minimum amount of unencumbered
property debt service coverage and certain investment limitations. The dividend
restriction referred to above provides that, except to enable the Company to
continue to qualify as a REIT under the Code, the Company will not during any
four consecutive fiscal quarters make distributions with respect to common stock
or other equity interests in an aggregate amount in excess of 90 percent of
funds from operations for such period, subject to certain other adjustments. The
2000 Unsecured Credit Facility also requires a 15 to 25 basis point fee on the
unused balance payable quarterly in arrears.
The lending group for the 2000 Unsecured Credit Facility consists of Fleet
National Bank, NA, as administrative agent, Citibank/Salomon Smith Barney, Inc,
as syndication agent, Deutsche Banc Alex Brown, as documentation agent,
Commerzbank Aktiengesellschaft, New York Branch, The Bank of New York, Wells
Fargo Bank, N.A., Bank Leumi USA, PNCBank, N.A., and Key Bank, N.A.
$140 MILLION CREDIT FACILITY
The $140 million unsecured credit facility was repaid in full and retired in
June 2000 in connection with the Company obtaining the 2000 Unsecured Credit
Facility, as described above. In the quarter ended June 30, 2000, the Company
recorded a $430,000 extraordinary loss, net of the minority interest's share of
the loss ($38,000), for the early extinguishment of debt related to the
write-off of unamortized financing costs associated with the $140 Million Credit
Facility.
25
PSCC FACILITY
On December 28, 1999, the Company closed on a $30 million credit facility with
Prudential Securities Credit Corp. ("PSCC Facility"). On March 30, 2000, PSCC
increased the secured PSCC Facility by $20 million to $50 million. No other
terms were changed from the original $30 million secured PSCC FACILITY.
Interest-only is payable based on the 1-Month LIBOR plus 125 basis points. The
PSCC Facility may be prepaid at any time during its term without penalty. The
PSCC Facility, which was to mature on December 27, 2000, was extended for one
year. At that time, the PSCC Facility was increased to $60 million.
At June 30, 2001, the Company had $45.2 million outstanding under its PSCC
Facility (interest rate of 5.77 percent). The PSCC Facility is secured by the
$89.2 million in mortgage loans receivable on two Manhattan properties. As of
July 18, 2001, this facility had a balance of $21.7 million.
CAPITAL EXPENDITURES
The Company estimates that for the six months ending December 31, 2001, it will
incur approximately $17.1 million of capital expenditures (including tenant
improvements) on properties currently owned. Of that total, over $3.1 million of
the capital investments are dedicated to redevelopment costs, including local
law 11, associated with properties acquired at or after the Company's IPO. The
Company expects to fund these capital expenditures with the unsecured credit
facility, additional property level mortgage financings, operating cash flow and
cash on hand. Future property acquisitions may require substantial capital
investments in such properties for refurbishment and leasing costs. The Company
expects that these financing requirements will be met in a similar fashion. The
Company believes that it will have sufficient capital resources to satisfy its
obligations during the next 12 month period. Thereafter, the Company expects
that capital needs will be met through a combination of net cash provided by
operations, borrowings, potential asset sales or additional equity or debt
issuances.
DISTRIBUTIONS
The Company expects to make distributions to its stockholders primarily based on
its distributions received from the Operating Partnership primarily from
property revenues or, if necessary, from working capital or borrowings.
To maintain its qualification as a REIT, the Company must make annual
distributions to its stockholders of at least 90 percent (95 percent prior to
January 1, 2001) of its REIT taxable income, determined without regard to the
dividends paid deduction and by excluding net capital gains. Moreover, the
Company intends to continue to make regular quarterly distributions to its
stockholders which, based upon current policy, in the aggregate would equal
approximately $46.3 million on an annualized basis. However, any such
distribution, whether for Federal income tax purposes or otherwise, would only
be paid out of available cash after meeting both operating requirements and
scheduled debt service on mortgages and loans payable.
FUNDS FROM OPERATIONS
The revised White Paper on Funds from Operations ("FFO") approved by the Board
of Governors of NAREIT in October 1999 defines FFO as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. The Company believes that FFO is helpful to investors as a measure of
the performance of an equity REIT because, along with cash flow from operating
activities, financing activities and investing activities, it provides investors
with an indication of the ability of the Company to incur and service debt, to
make capital expenditures and to fund other cash needs. The Company computes FFO
in accordance with the current standards established by NAREIT which may not be
comparable to FFO reported by other REIT's that do not define the term in
accordance with the current NAREIT definition or that interpret the current
NAREIT definition differently than the Company. FFO does not represent cash
generated from operating activities in accordance with GAAP and should not be
considered as an alternative to net income (determined in accordance with GAAP)
as an indication of the Company's financial performance or to cash flow from
operating activities (determined in accordance with GAAP) as a measure of the
Company's liquidity, nor is it indicative of funds available to fund the
Company's cash needs, including its ability to make cash distributions.
26
FFO for the three and six months ended June 30, 2001 and 2000, respectively, are
as follows (in thousands):
Three months ended Six months ended
2001 2000 2001 2000
---- ---- ---- ----
Income before minority interest, extraordinary items, gain on
sale, preferred stock dividend and cumulative effect adjustment $ 16,348 $ 12,344 $ 30,257 $ 24,310
Add:
Depreciation and amortization 9,189 8,403 18,909 16,219
FFO adjustment for unconsolidated joint ventures 1,358 917 2,354 1,626
Less:
Dividends on preferred shares (2,300) (2,300) (4,600) (4,600)
Amortization of deferred financing costs and depreciation of
non-rental real estate assets (1,157) (1,040) (2,312) (2,063)
--------- --------- --------- ---------
Funds From Operations - basic 23,438 18,324 44,608 35,492
Dividends on preferred shares 2,300 2,300 4,600 4,600
--------- --------- --------- ---------
Funds From Operations - diluted $ 25,738 $ 20,624 $ 49,208 $ 40,092
========= ========= ========= =========
Cash flows provided by operating activities $ 18,610 $ 2,998 $ 35,172 $ 20,059
Cash flows used in investing activities $ (51,605) $ (2,569) $(336,911) $ (57,439)
Cash flows provided by financing activities $ 68,659 $ 4,741 $ 334,688 $ 31,136
INFLATION
Substantially all of the office leases provide for separate real estate tax and
operating expense escalations over a base amount. In addition, many of the
leases provide for fixed base rent increases or indexed escalations. The Company
believes that inflationary increases may be at least partially offset by the
contractual rent increases and expense escalations described above.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates primarily from its floating
rate debt arrangements. The Company uses interest rate derivative instruments to
manage exposure to interest rate changes. A hypothetical 100 basis point adverse
move (increase) in interest rates along the entire interest rate curve would
adversely affect the Company's interest cost by approximately $3.2 million
annually.
The Company will recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged asset, liability, or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings.
Approximately $325.4 million of the Company's long-term debt bears interest at
fixed rates, and therefore the fair value of these instruments is affected by
changes in the market interest rates. The following table presents principal
cash flows (in thousands) based upon maturity dates of the debt obligations and
the related weighted-average interest rates by expected maturity dates for the
fixed rate debt. The interest rates on the variable rate debt as of June 30,
2001 ranged from LIBOR plus 125 basis points to LIBOR plus 200 basis points.
LONG-TERM DEBT, FAIR
INCLUDING CURRENT ----
PORTION (IN THOUSANDS) 2001 2002 2003 2004 2005 THEREAFTER TOTAL VALUE
- ---------------------- ---- ---- ---- ---- ---- ---------- ----- -----
Fixed Rate .......... $ 2,689 $ 6,916 $ 9,774 $ 79,163 $ 50,612 $ 176,257 $325,411 $329,136
Average Interest Rate 8.21% 8.20% 8.19% 8.21% 8.24% 8.33% 8.30%
Variable Rate ....... $ 45,238 -- $ 238,000 -- -- -- $283,238 $283,238
Average Interest Rate 6.04% 6.09% 6.07%
27
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on May 15, 2001, at
which the following matters were voted upon:
1. To elect one Class I director of the Company to serve until
the 2004 Annual Meeting of Stockholders and until his
successor is duly elected and qualified.
2. To ratify the selection of Ernst & Young LLP as the
independent auditors of the Company for the fiscal year ending
December 31, 2001.
The results of the meeting were as follows:
FOR AGAINST ABSTAIN
--- ------- -------
Proposal 1: Edwin Thomas Burton, III 21,608,943 158,505 0
Proposal 2: 21,656,742 87,142 23,564
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Sale-Purchase Agreement, dated as of June 7, 2001, between Richfield
Investment Company and Green 317 Madison LLC *
10.2 Qualified Exchange Accommodation Agreement, dated as of June 7, 2001,
between Green 1412 Broadway LLC and BEC 317 LLC *
* Incorporated by reference to the Company's Form 8-K, dated June 7,
2001, filed with the Commission on June 18, 2001.
(b) Reports on Form 8-K:
o The Registrant filed a Current Report on Form 8-K on April 24,
2001 in connection with its first quarter 2001 earnings
release.
o The Registrant filed a Current Report on Form 8-K on April 25,
2001 in connection with its first quarter 2001 supplemental
package.
o The Registrant filed a Current Report on Form 8-K on June 6,
2001 in connection with its sale of One Park Avenue to a joint
venture with SITQ Immobilier.
o The Registrant filed a Current Report on Form 8-K on June 18,
2001 in connection with its acquisition of 317 Madison Avenue.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SL GREEN REALTY CORP.
By: /s/ Thomas E. Wirth
-------------------------------
Thomas E. Wirth
Executive Vice President,
Chief Financial Officer
Date: August 1, 2001
29
