UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 29,958,705 on November 2, 2001.
SL GREEN REALTY CORP.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAGE
----
Condensed Consolidated Balance Sheets as of
September 30, 2001 (unaudited) and December 31, 2000........................ 3
Condensed Consolidated Statements of Income for the three
and nine months ended September 30, 2001 and 2000 (unaudited)............... 4
Condensed Consolidated Statement of Stockholders' Equity
and Comprehensive Income for the nine months ended
September 30, 2001 (unaudited).............................................. 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 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 OF OPERATIONS.......................................... 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ........ 28
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................. 29
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.......................... 29
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................... 29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 29
ITEM 5. OTHER INFORMATION.................................................. 29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................... 29
SIGNATURES.................................................................. 30
2
SL GREEN REALTY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
------------- ------------
2001 2000
---- ----
(UNAUDITED) (Note 1)
ASSETS
Commercial real estate properties, at cost:
Land and land interests ......................................................... $ 138,337 $ 125,572
Buildings and improvements ...................................................... 679,821 618,637
Building leasehold .............................................................. 143,198 139,393
Property under capital lease .................................................... 12,208 12,208
----------- -----------
973,564 895,810
Less accumulated depreciation ................................................... (93,339) (78,432)
----------- -----------
880,225 817,378
Property held for sale .......................................................... -- 10,895
Cash and cash equivalents ....................................................... 5,991 10,793
Restricted cash ................................................................. 37,104 86,823
Tenant and other receivables, net of allowance of $3,905
and $1,723 in 2001 and 2000, respectively ..................................... 12,229 7,580
Related party receivables ....................................................... 1,883 917
Deferred rents receivable, net of allowance for tenant
credit loss of $4,813 and $4,860 in 2001 and 2000, respectively ............... 50,060 45,816
Investment in and advances to affiliates ........................................ 8,570 6,373
Structured finance investments, net of $1,039 and $3,321
discount in 2001 and 2000, respectively ....................................... 157,901 51,293
Investments in unconsolidated joint ventures .................................... 143,049 65,031
Deferred costs, net ............................................................. 36,066 40,113
Other assets .................................................................... 13,093 18,142
----------- -----------
Total assets .............................................................. $ 1,346,171 $ 1,161,154
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable .......................................................... $ 411,393 $ 414,342
Revolving credit facilities ..................................................... 72,738 46,374
Derivative instruments at fair value ............................................ 4,987 --
Accrued interest payable ........................................................ 1,935 2,349
Accounts payable and accrued expenses ........................................... 20,827 24,818
Deferred compensation awards .................................................... 1,838 2,833
Deferred revenue ................................................................ 1,363 1,112
Capitalized lease obligations ................................................... 15,505 15,303
Deferred land lease payable ..................................................... 13,926 13,158
Dividend and distributions payable .............................................. 14,775 12,678
Security deposits ............................................................... 18,903 19,014
----------- -----------
Total liabilities ........................................................ 578,190 551,981
Commitments and Contingencies
Minority interest in Operating Partnership ...................................... 46,474 43,326
8% Preferred Income Equity Redeemable SharesSM ("PIERS") $0.01 par value
$25.00 mandatory liquidation preference, 25,000 authorized and 4,600
outstanding at September 30, 2001 and December 31, 2000 ...................... 111,117 110,774
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 100,000 shares
authorized, 29,945 and 24,516 issued and outstanding at
September 30, 2001 and December 31, 2000 respectively ........................ 300 246
Additional paid-in-capital ...................................................... 582,874 428,698
Deferred compensation plans ..................................................... (8,400) (5,037)
Accumulated other comprehensive loss ............................................ (4,500) --
Retained earnings ............................................................... 40,116 31,166
----------- -----------
Total stockholders' equity ............................................... 610,390 455,073
----------- -----------
Total liabilities and stockholders' equity ...................................... $ 1,346,171 $ 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 Nine months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
REVENUES
Rental revenue ............................................... $ 47,971 $ 47,647 $ 156,379 $ 140,998
Escalation and reimbursement revenues ........................ 9,114 7,593 24,467 18,941
Signage rent ................................................. 424 496 953 1,593
Investment income ............................................ 3,306 3,696 11,626 7,324
Preferred equity income ...................................... 630 1,272 630 2,579
Other income ................................................. 479 170 1,339 693
--------- --------- --------- ---------
Total Revenues ............................................ 61,924 60,874 195,394 172,128
--------- --------- --------- ---------
EXPENSES
Operating expenses (See Note 13) ............................. 15,076 15,260 44,983 41,893
Real estate taxes ............................................ 7,452 7,299 23,590 21,688
Ground rent .................................................. 3,101 3,164 9,419 9,505
Interest ..................................................... 9,785 10,698 36,853 30,243
Depreciation and amortization ................................ 9,047 8,300 27,956 24,519
Marketing, general and administrative ........................ 4,116 2,540 11,331 8,517
--------- --------- --------- ---------
Total Expenses ............................................ 48,577 47,261 154,132 136,365
--------- --------- --------- ---------
Income before equity in net income (loss) from
affiliates, equity in net income of unconsolidated joint
ventures, gain on sale, minority interest, extraordinary
item and cumulative effect adjustment ................... 13,347 13,613 41,262 35,763
Equity in net income (loss) from affiliates .................. (57) 71 (984) 609
Equity in net income of unconsolidated joint ventures ........ 2,752 586 6,020 2,209
Gain on sale of rental properties, net of transaction and
deferred compensation costs .......................... 647 5,624 5,164 24,646
--------- --------- --------- ---------
Income before minority interest, extraordinary item and
cumulative effect adjustment ............................ 16,689 19,894 51,462 63,227
Minority interest in operating partnership ................... (1,010) (1,496) (3,496) (4,964)
--------- --------- --------- ---------
Income before extraordinary item and cumulative effect
adjustment .............................................. 15,679 18,398 47,966 58,263
Extraordinary item, net of minority interest of ($32) and
($40) in 2001 and ($38) 2000, respectively .............. (332) -- (430) (430)
Cumulative effect of change in accounting principle
Net income ................................................ -- -- (532) --
--------- --------- --------- ---------
15,347 18,398 47,004 57,833
Preferred stock dividends .................................... (2,300) (2,300) (6,900) (6,900)
Preferred stock accretion .................................... (114) (107) (343) (320)
--------- --------- --------- ---------
Net income available to common shareholders ............... $ 12,933 $ 15,991 $ 39,761 $ 50,613
========= ========= ========= =========
BASIC EARNINGS PER SHARE:
Net income before gain on sale and extraordinary item ..... $ 0.44 $ 0.42 $ 1.37 $ 1.09
Gain on sale .............................................. 0.02 0.23 0.20 1.01
Extraordinary item ........................................ (0.01) -- (0.02) (0.02)
Cumulative effect of change in accounting principle ....... -- -- (0.02) --
--------- --------- --------- ---------
Net income ................................................... $ 0.45 $ 0.65 $ 1.53 $ 2.08
--------- --------- --------- ---------
DILUTED EARNINGS PER SHARE:
Net income before gain on sale and extraordinary item ..... $ 0.43 $ 0.44 $ 1.35 $ 1.21
Gain on sale .............................................. 0.02 0.18 0.18 0.78
Extraordinary item ........................................ (0.01) -- (0.01) (0.01)
Cumulative effect of change in accounting principle ....... -- -- (0.02) --
--------- --------- --------- ---------
Net income ................................................... $ 0.44 $ 0.62 $ 1.50 $ 1.98
========= ========= ========= =========
Dividends declared per common share .......................... $ 0.3875 $ 0.3625 $ 1.1625 $ 1.0875
========= ========= ========= =========
Basic weighted average common shares outstanding ............. 28,511 24,458 25,988 24,329
========= ========= ========= =========
Diluted weighted average common shares and
common share equivalents outstanding ................... 31,373 31,999 28,792 31,762
========= ========= ========= =========
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)
Change
Comprehensive Income:
Net income 47,004 47,004 47,004
Unrealized loss on
derivative Instruments (3,689) (3,689) (3,689)
Preferred dividend and
Accretion (7,243) (7,243)
Deferred compensation plans 1 3,704 (4,410) (705)
Amortization of deferred
compensation plans 1,047 1,047
Redemption of units 547 547
Proceeds from common stock
offering and revaluation
of minority
interest ($2,927) 50 144,874 144,924
Proceeds from stock options
Exercised 3 5,051 5,054
Cash distributions declared
($1.1625 per common share) (30,811) (30,811)
---- -------- ------- -------- --------- -------- -------
BALANCE AT SEPTEMBER 30, 2001
(UNAUDITED) $300 $582,874 $(8,400) $ (4,500) $ 40,116 $610,390 $ 43,315
==== ======== ======= ======== ========= ======== =========
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)
Nine months ended September 30,
2001 2000
--------- ---------
OPERATING ACTIVITIES:
Net income ............................................................ $ 47,004 $ 57,833
Adjustments to reconcile net income with net cash provided by operating
activities:
Depreciation and amortization ....................................... 27,956 24,519
Amortization of discount on mortgage receivable ..................... (1,458) (2,405)
Gain on sale of rental property ..................................... (5,164) (24,646)
Cumulative effect of change in accounting principle ................. 532 --
Extraordinary loss, net of minority interest ........................ 430 430
Equity in net loss (income) from affiliates ......................... 984 (609)
Equity in net income from unconsolidated joint ventures ............. (6,020) (2,209)
Minority interest ................................................... 3,496 4,964
Deferred rents receivable ........................................... (8,091) (10,920)
Provision for deferred rents and bad debts .......................... 2,410 1,664
Amortization of officer loans and deferred compensation ............. 1,047 1,222
Changes in operating assets and liabilities:
Restricted cash - operations ........................................ 6,525 (2,105)
Tenant and other receivables ........................................ (5,574) (4,377)
Related party receivables ........................................... (1,043) (501)
Deferred lease costs ................................................ (3,559) (6,790)
Other assets ........................................................ 4,787 3,204
Accounts payable, accrued expenses and other liabilities ............ (5,511) 1,254
Deferred revenue .................................................... 251 1,138
Deferred land lease payable ......................................... 768 1,194
--------- ---------
Net cash provided by operating activities ........................... 59,770 42,860
--------- ---------
INVESTING ACTIVITIES:
Additions to land, buildings and improvements........................ (409,102) (65,396)
Restricted cash - capital improvements .............................. 43,194 1,690
Investment in and advances to affiliates ............................ (3,181) (2,356)
Investments in unconsolidated joint ventures ........................ (25,544) (43,722)
Distributions from unconsolidated joint ventures .................... 2,406 16,765
Net proceeds from disposition of rental property .................... 95,079 70,424
Structured finance investments, net ................................. (104,326) (27,498)
--------- ---------
Net cash used in investing activities ............................... (401,474) (50,093)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from mortgage notes payable ................................ 237,178 14,917
Repayments of mortgage notes payable ................................ (38,185) (22,259)
Proceeds from revolving credit facilities ........................... 432,053 254,424
Repayment of revolving credit facilities ............................ (405,688) (210,672)
Net proceeds from sale of common stock .............................. 148,689 --
Capitalized lease obligation ........................................ 202 225
Dividends and distributions paid .................................... (38,276) (35,918)
Proceeds from stock options exercised ............................... 5,054 3,805
Deferred loan costs ................................................. (4,125) (4,786)
--------- ---------
Net cash provided by (used in) financing activities ................. 336,902 (264)
--------- ---------
Net decrease in cash and cash equivalents ........................... (4,802) (7,497)
Cash and cash equivalents at beginning of period .................... 10,793 21,561
--------- ---------
Cash and cash equivalents at end of period .......................... $ 5,991 $ 14,064
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ................................................ $ 37,267 $ 29,824
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock as deferred officer compensation ............. $ 3,705 $ 746
========= =========
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 AND SQUARE FOOT DATA)
SEPTEMBER 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 September 30, 2001, minority
investors held, in the aggregate, an 7.1% limited partnership interest in the
Operating Partnership.
As of September 30, 2001, the Company's wholly-owned portfolio consisted of 19
commercial properties (the "Properties") encompassing approximately 6.9 million
rentable square feet located primarily in midtown Manhattan ("Manhattan"), a
borough of New York City and one triple-net leased property located in Shelton,
Connecticut. As of September 30, 2001, the weighted average occupancy (total
occupied square feet divided by total available square feet) of the Properties
was 97.7%. 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 (97.1% occupied as
of September 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 AND SQUARE FOOT DATA)
SEPTEMBER 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.
In the normal course of business, the Company is exposed to the effect of
interest rate changes. The Company limits these risks by following established
risk management policies and procedures including the use of derivatives. The
Company utilizes derivatives primarily to fix the rate on debt based on
floating-rate indices and to manage the cost of borrowing obligations.
The Company uses a variety of commonly used derivative products that are
considered plain vanilla derivatives. These derivatives typically include
options, interest rate swaps, caps, collars and floors. The Company avoids the
use of exotic derivative instruments and the use of derivative instruments for
trading or speculative purposes. Further, the Company has a policy of entering
into contracts exclusively with major financial institutions based upon their
credit ratings and other factors. When viewed in conjunction with the underlying
and offsetting exposure that the derivatives are designed to hedge, the Company
does not anticipate any material adverse effect on its net income or financial
position in the future from the use of derivatives.
The following table summarizes the notional value and fair value of the
Company's derivative financial instruments at September 30, 2001. The notional
value is an indication of the extent of the Company's involvement in these
instruments at that time, but does not represent exposure to credit, interest
rate or market risks.
NOTIONAL VALUE INTEREST RATE MATURITY FAIR VALUE
-------------- ------------- -------- ----------
Interest Rate Collar $70,000,000 6.580% 11/2004 $(4,987)
On September 30, 2001, the derivative instrument was reported as an obligation
at its fair value of $4,987 on the balance sheet.
Over time, the unrealized gains and losses held in Accumulated Other
Comprehensive Income will be reclassified into earnings as interest expense in
the same periods in which the hedged interest payments affect earnings.
8
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AND SQUARE FOOT DATA)
SEPTEMBER 30, 2001
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 became effective January 1, 2001, the
Company has elected to treat certain of its existing or newly created corporate
subsidiaries as taxable REIT subsidiaries ("TRSs"). 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 provision to any person, 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.
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 du 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, Manhattan ("317
Madison") for an aggregate purchase price of $105,600. 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.
9
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AND SQUARE FOOT DATA)
SEPTEMBER 30, 2001
PRO FORMA
The following table summarizes, on an unaudited pro forma basis, the combined
results of operations of the Company for the nine months ended September 30,
2001 and 2000 as though the 2001 acquisition of 317 Madison Avenue (June) and
the 5,000 common stock offering (July 2001) were completed on January 1, 2000.
2001 2000
---- ----
Pro forma revenues.......................................... $202,190 $198,179
Pro forma net income........................................ $39,279 $49,309
Pro forma basic earnings per common share................... $1.32 $1.68
Pro forma diluted earnings per common share................. $1.31 $1.67
Common share - basic........................................ 29,761 29,329
Common and common equivalent share - diluted................ 32,565 36,743
4. PROPERTY DISPOSITIONS
During the nine months ended September 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 41,000 $13,250 $1,401
6/29/01 1412 Broadway Times Square 389,000 $91,500 $3,115
In June, 2001, Cipriani, a tenant at 110 East 42nd Street occupying 70,000
square feet, notified the Company that it was exercising the purchase option
under its lease agreement. The gross purchase price of the option to acquire the
condominium interest was $14,500. This transaction closed on July 23, 2001 and
the Company realized a gain of $647.
5. STRUCTURED FINANCE INVESTMENTS
During the nine months ended September 30, 2001, the Company entered into the
following structured finance investments:
ORIGINATIONS
PRINCIPAL
LOAN TYPE ORIGINATION DATE OUTSTANDING MATURITY DATE
- --------- ---------------- ----------- -------------
First Mortgage (1) March 30, 2000 $45,210 September 30, 2001
First Mortgage April 14, 2000 4,461 April 13, 2002
Mezzanine Loan March 21, 2001 39,194 January 1, 2003
Mezzanine Loan (2) May 10, 2001 50,000 April 9, 2004
Junior Participation (3) July 20, 2001 27,723 November 1, 2002
------
$166,588
--------
Preferred Equity (4) June 29, 2001 $8,000 May 1, 2006
Preferred Equity September 7, 2001 53,500 September 7, 2006
------
$61,500
-------
$228,088
========
10
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AND SQUARE FOOT DATA)
SEPTEMBER 30, 2001
REPAYMENTS AND PARTICIPATIONS
LOAN TYPE REPAYMENT DATE PRINCIPAL REDEEMED
- --------- -------------- ------------------
First Mortgage (1) April 2, 2001 $(51,900)
Mezzanine Loan (5) July 20, 2001 (25,000)
--------
$(76,900)
========
Issuance costs, net of unamortized accretion 6,713
--------
Balance as of September 30, 2001 (6) $157,901
========
(1) The mortgage was acquired at a discount to the face amount of $3,250. The
discount 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. This loan, including $1,165 of
unamortized discount, was repaid and the proceeds were used to pay down the
revolving credit facilities.
(2) 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. See (5) below.
(3) In connection with the acquisition of a subordinate first mortgage
interest, the Company obtained $22,178 of financing from the senior
participant which is co-terminous with the mortgage loan. This financing
carries a variable interest rate of 100 basis points over the 30-day LIBOR.
(4) The investment entitles the Company to receive a yield preferentially
on a current basis. This investment is being amortized on a 25 year
schedule. The Company will also participate in the appreciation of the
property upon sale to a third party above a specified threshold.
(5) On July 20, 2001, the Company announced a mezzanine co-investment program
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. The Company
contributed a previously originated loan to the venture to satisfy its
initial investment and received $25,000 from PREI representing their share
of the investment. See (2) above.
(6) The weighted average yield was 14.88% at September 30, 2001, net of
seller financing in (3) above.
On October 5, 2001, the Company made a $30,000 junior participation investment
secured by a first mortgage loan on a 2,300,000 square foot Manhattan office
property.
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 managing member 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%.
CARLYLE JOINT VENTURE
On September 21, 2001, the Company acquired Carlyle's interest in the venture
for approximately $29,500, leaving Carlyle with a 0.2% interest and the Company
with a 99.8% interest. In the transaction, the property was valued at
approximately $121,500. In conjunction with the transaction, the Company repaid
the existing mortgage of $69,650 and replaced it with an $85,000 first mortgage.
The new mortgage, which matures on October 21, 2004, carries a variable interest
rate of 250 basis points over the 30-day LIBOR. The Company recorded a $332
extraordinary loss, net of the minority interest share of the loss ($25), for
the early
11
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AND SQUARE FOOT DATA)
SEPTEMBER 30, 2001
extinquishment of debt related to the write-off of unamortized financing costs
associated with the $69,650 mortgage. On November 1, 2001, the Company sold a
45% interest to SITQ Immobilier based on the property's valuation of
approximately $121,500. As a result of this temporary control, the Company did
not consolidate its investment in the joint venture at September 30, 2001.
SITQ IMMOBILIER
See Note 3 for a description of the investment in One Park.
See Carlyle Joint Venture above for a description of the investment in 1250
Broadway.
The condensed combined balance sheets for the unconsolidated joint ventures at
September 30, 2001 and December 31, 2000 are as follows:
SEPTEMBER 30, December 31,
2001 2000
---- ----
ASSETS
Commercial real estate property, net........................... $661,679 $360,347
Other assets................................................... 62,087 31,641
-------- --------
Total assets................................................... $723,766 $391,988
======== ========
LIABILITIES AND MEMBERS' EQUITY
Mortgage payable............................................... $445,000 $238,650
Other liabilities.............................................. 26,402 15,043
Members' equity................................................ 252,364 138,295
-------- -------
Total liabilities and members' equity.......................... $723,766 $391,988
======== ========
Company's net investment in unconsolidated joint ventures...... $143,049 $65,031
======== =======
The condensed combined statements of operations for the unconsolidated joint
ventures for the three and nine months ended September 30, 2001 and 2000 is as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
2001 2000 2001 2000
---- ---- ---- ----
Total revenues ...................... $27,770 $16,628 $66,751 $43,809
------- ------- ------- -------
Operating expenses .................. 6,845 5,595 16,548 12,377
Real estate taxes ................... 4,264 2,695 10,439 7,221
Interest ............................ 7,159 5,166 18,570 13,515
Depreciation and amortization ....... 4,279 2,047 9,488 5,840
Extraordinary item .................. 332 -- 332 108
------- ------- ------- -------
Total expenses ................. 22,879 15,503 55,377 39,061
======= ======= ======= =======
Net income .......................... $ 4,891 $ 1,125 $11,374 $ 4,748
======= ======= ======= =======
Company's equity in earnings of
unconsolidated joint ventures . $ 2,752 $ 586 $ 6,020 $ 2,209
======= ======= ======= =======
7. INVESTMENT IN AND ADVANCES TO AFFILIATES
2001 2000
---- ----
Investment in and advances to Service Corporation, net $ 4,323 $ 4,166
Investment in and advances to eEmerge, net ........... 4,247 2,207
------- -------
Investments in and advances to affiliates ...... $ 8,570 $ 6,373
======= ======
12
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AND SQUARE FOOT DATA)
SEPTEMBER 30, 2001
SERVICE CORPORATION
In order to maintain the Company's qualification as a REIT while realizing
income from management, leasing and construction contracts from third parties
and joint venture properties, all of the management operations are conducted
through an unconsolidated company, the Service Corporation. The Company, through
the Operating Partnership, owns 100% of the non-voting common stock
(representing 95% of the total equity) of the Service Corporation. Through
dividends on its equity interest, the Operating Partnership receives
substantially all of the cash flow from the Service Corporation's operations.
All of the voting common stock of the Service Corporation (representing 5% of
the total equity) is held by a Company affiliate. This controlling interest
gives the affiliate the power to elect all directors of the Service Corporation.
The Company accounts for its investment in the Service Corporation on the equity
basis of accounting because it has significant influence with respect to
management and operations, but does not control the entity. Effective January 1,
2001, the Service Corporation elected to be taxed as a TRS.
All of the management, leasing and construction services with respect to the
properties wholly-owned by the Company are conducted through Management LLC
which is 100% owned by the Operating Partnership.
eEMERGE
On May 11, 2000, the Operating Partnership formed eEmerge, Inc., a Delaware
corporation ("eEmerge"), in partnership with Fluid Ventures LLC ("Fluid"). In
March 2001, the Company bought out Fluid's entire ownership interest in eEmerge.
eEmerge is a separately managed, self-funded company that provides fully-wired
and furnished office space, services and support to help e-businesses grow.
The Company, through the Operating Partnership, owns 100% of the non-voting
common stock of eEmerge. Through dividends on its equity interest, the Operating
Partnership receives approximately 100% of the cash flow from eEmerge
operations. All 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 $2,672 to eEmerge as of September 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 at 440 Ninth Avenue.
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") wherein eEmerge
has a 95% interest and Eureka has a 5% interest. 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 .......... $ 16,666 $ 19,277
Deferred leasing ............ 39,712 37,413
-------- --------
56,378 56,690
Less accumulated amortization (20,312) (16,577)
-------- --------
$ 36,066 $ 40,113
======== ========
13
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AND SQUARE FOOT DATA)
SEPTEMBER 30, 2001
9. MORTGAGE NOTES PAYABLE
The mortgage notes payable collateralized by the respective properties and
assignment of leases at September 30, 2001 and December 31, 2000, respectively,
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..................................................... 9,757 11,992
470 Park Avenue South First mortgage note with interest payable at 8.25%, due
April 1, 2004......................................................... 9,463 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)................................................... 26,104 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) ............................................... 48,916 49,172
875 Bridgeport Ave., First mortgage note with interest payable at 8.32%, due
Shelton, CT May 10, 2025.......................................................... 14,876 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 8.10%, due
November 4, 2004 (4) ................................................. 69,099 69,606
-------- --------
Total fixed rate debt............................................ 324,215 387,392
-------- --------
317 Madison Avenue First mortgage note with interest payable at LIBOR + 1.8%, due
August 20, 2004 (1) (6)............................................... 65,000 --
Madison Properties First mortgage note with interest payable at 8.32%, due
May 31, 2001 (5) ..................................................... -- 26,950
-------- --------
Total floating rate debt........................................ 65,000 26,950
-------- --------
Total mortgage notes payable (7)...................................... $389,215 $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 September 30, 2001
since 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.
(6) Based on LIBOR rate of 2.64% at September 30, 2001. On October 18,
2001, the Company entered into a swap agreement effectively fixing
the LIBOR rate at 4.01% for four years.
(7) Excludes $22,178 loan obtained to fund a structured finance
transaction (See Note 5(3)).
PRINCIPAL MATURITIES
Combined aggregate principal maturities of mortgages and notes payable and
revolving credit facilities as of September 30, 2001 are as follows:
Scheduled Principal
Amortization Repayments Total
------------ ---------- -----
2001 ..... $ 1,493 $ 19,738 $ 21,231
2002 ..... 6,916 22,178 29,094
2003 ..... 7,772 55,002 62,774
2004 ..... 3,863 140,300 144,163
2005 ..... 3,366 47,247 50,613
Thereafter 24,335 151,921 176,256
-------- -------- --------
$ 47,744 $436,387 $484,131
======== ======== ========
14
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AND SQUARE FOOT DATA)
SEPTEMBER 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 scheduled to mature on December 27, 2000, was extended for one year, and
increased to $60,000.
At September 30, 2001, the Company had $19,738 outstanding under its PSCC
Facility (interest rate of 4.98%). The PSCC Facility was secured by $51,194 in
three structured finance assets.
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 increased the capacity under this
credit facility to $300,000 in March 2001. The 2000 Unsecured Credit Facility
has a term of three years and bears interest at rates ranging from 137.5 basis
points to 175 basis points over LIBOR, based on the Company's leverage ratio. If
the Company were to receive an investment grade rating, the spread over LIBOR
will be reduced to 125 basis points. At September 30, 2001, $53,000 was
outstanding and carried a weighted average interest rate of 5.64%. Availability
under the 2000 Unsecured Credit Facility at September 30, 2001 was further
reduced by the issuance of letters of credit in the amount of $5,000 for a fee
purchase option.
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% 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 (the "$140 Million 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 September 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.
15
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AND SQUARE FOOT DATA)
SEPTEMBER 30, 2001
11. STOCKHOLDERS' EQUITY
COMMON STOCK
On July 25, 2001, the Company completed the sale of 5,000 shares of common
stock. The net proceeds from this offering $148,689 were initially used to pay
down the 2000 Unsecured Credit Facility.
The following table presents the changes in the Company's issued and outstanding
shares of common stock since December 31, 2000 (excluding 2,278 and 2,307 Units
outstanding at September 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 stock offering............................. 5,000
Issued through exercise of stock options.................. 249
Issued through redemption of units........................ 29
Issued through deferred compensation plan................. 151
------
Outstanding at September 30, 2001......................... 29,945
======
OWNERSHIP OF OPERATING PARTNERSHIP
The minority interest in the Operating Partnership was approximately 7.1% and
8.6% as of September 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.
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.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The Company filed a registration statement with the SEC for the Company's
dividend reinvestment and stock purchase plan ("DRIP") which was declared
effective on September 10, 2001, and commenced on September 24, 2001. The
Company registered 3,000 shares of common stock under the DRIP.
During the nine months ended September 30, 2001, no shares were issued and no
proceeds were received from dividend reinvestments and/or stock purchases under
the DRIP.
16
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, AND AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AND SQUARE FOOT DATA)
SEPTEMBER 30, 2001
EARNINGS PER SHARE
Earnings per share is computed as follows:
FOR THE QUARTER ENDED SEPTEMBER 30, 2001 For the Quarter Ended September 30, 2000
---------------------------------------- ----------------------------------------
INCOME SHARES PER SHARE Income Shares Per Share
(NUMERATOR) (DENOMINATOR) AMOUNT (Numerator) (Denominator) Amount
- ----------------------------------------------------------------------------------------------------------------------------
Basic Earnings:
Income available to common
shareholders $12,933 28,511 $0.45 $15,991 24,458 $0.65
Effect of Dilutive Securities:
Redemption of Units to
common shares 1,010 2,280 1,496 2,346
Preferred Stock (if converted to
common stock) -- -- 2,407 4,699
Stock Options -- 582 -- 496
- ----------------------------------------------------------------------------------------------------------------------------
Diluted Earnings:
Income available to common
Shareholders $13,943 31,373 $0.44 $19,894 31,999 $0.62
- ----------------------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, For the Nine Months Ended September 30,
--------------------------------------- ---------------------------------------
2001 2000
---- ----
INCOME SHARES PER SHARE Income Shares Per Share
(NUMERATOR) (DENOMINATOR) AMOUNT (Numerator) (Denominator) Amount
- ----------------------------------------------------------------------------------------------------------------------------
Basic Earnings:
Income available to common
Shareholders $39,761 25,988 $1.53 $50,613 24,329 $2.08
Effect of Dilutive Securities:
Redemption of Units to
common shares 3,496 2,286 4,964 2,385
Preferred Stock (if converted to
common stock) -- -- 7,220 4,699
Stock Options -- 518 -- 349
- ----------------------------------------------------------------------------------------------------------------------------
Diluted Earnings:
Income available to common
shareholders $43,257 28,792 $1.50 $62,797 31,762 $1.98
- ----------------------------------------------------------------------------------------------------------------------------
The PIERS outstanding in 2001 were excluded from the 2001 computation of
earnings per share as they were anti-dilutive during that period.
12. COMMITMENTS AND CONTINGENCIES
The Company and the Operating Partnership are not presently involved in any
material litigation nor, to their knowledge, is any material litigation
threatened against them or their properties, other than routine litigation
arising in the ordinary course of business. Management believes the costs, if
any, incurred by the Company and the Operating Partnership related to the
routine litigation will not materially affect the financial position, operating
results or liquidity of the Company and the Operating Partnership.
On October 24, 2001, an accident occurred at 215 Park Avenue South, a property
which a Company affiliate manages, but does not own. The Company believes that
there is sufficient insurance coverage to cover the cost of any personal injury
or property claims which may arise.
17
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, AND AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AND SQUARE FOOT DATA)
SEPTEMBER 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 nine month period
ended September 30, include the following:
2001 2000
---- ----
Management revenues............................................ $ 219 $ 204
Maintenance and security expense............................... 4,123 3,384
Rental revenue................................................. 1,197 265
Amounts due from/(to) related parties at September 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....................................................... 1,077 77
SLG 100 Park LLC............................................... 338 121
One Park Realty Corp........................................... (310) --
Other.......................................................... 129 116
14. DEFERRED COMPENSATION AWARD
Contemporaneous with the closing of the 1370 Avenue of the Americas transaction,
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 September 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 September 30, 2001, no single tenant
contributed more than 3% of the Company's annual revenues.
18
SL GREEN REALTY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED, AND AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AND SQUARE FOOT DATA)
SEPTEMBER 30, 2001
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 September 30,
2001:
Ticker Capital Shares Warrants Book
Company Symbol Investment Received (1) Received (1) Value (2)
- ------- ------ ---------- ------------ ------------ ---------
Captivate Network (3) Privately Held $ 750 98.6 234 $ 750
Internet Realty Partners (4) Privately Held 1,500 -- -- 1,254
(1) Preferred shares and warrants received may include amounts allocable to
joint venture partners. The Company may earn additional preferred shares or
warrants based upon the achievement of certain thresholds in accordance with the
respective investment agreements or upon the signing of additional license
agreements for properties.
(2) The Company's investments in privately-held entities were recorded at
estimated fair values when the investments were made and are valued at the lower
of cost or market.
(3) 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.
(4) Through September 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.
19
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 which may cause our actual results, performance or achievements to
be materially different from future results, performance or achievements
expressed or implied by these forward-looking statements. Forward-looking
statements are generally identifiable by the use of the words "may," "will."
"should," "expect," "anticipate," "estimate," "believe," "intend," "project," or
the negative of these words, or other similar words or terms. Factors which
could materially and adversely affect us include, but are not limited to,
general economic and business (particularly real estate) conditions, the
business opportunities that may be presented to and pursued by the Company,
changes in laws or regulations (including changes to laws governing the taxation
of REITs), availability of capital (debt and equity), interest rate
fluctuations, competition, supply and demand for properties in our current and
any proposed market areas, accounting principles, policies and guidelines
applicable to REITs, environmental risks, tenant bankruptcies 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 September 30, 2001, the Company's wholly-owned portfolio consisted of 19
commercial properties (the "Properties") encompassing approximately 6.9 million
rentable square feet located primarily in midtown Manhattan ("Manhattan"), a
borough of New York City and one triple-net leased property located in Shelton,
Connecticut. As of September 30, 2001, the weighted average occupancy (total
occupied square feet divided by total available square feet) of the Properties
was 97.7%. 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 (97.1% occupied as
of September 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 nine months ended September 30, 2001
("2001") compared to the three and nine months ended September 30, 2000 ("2000")
make reference to the following: (i) the effect of the "Same-Store Properties,"
which represent all properties owned by the Company at January 1, 2000, (ii) the
effect of the "2001 Acquisitions," which represent 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 represent all
properties disposed of in 2000, namely, 29 West 35th Street, 36 West 44th Street
(March 2000), 321 West 44th Street which was contributed to a joint venture (May
2000), and 17 Battery Place South (December 2000), and all properties disposed
of in 2001, namely, 633 Third Avenue (January 2001), One Park Avenue (May 2001)
which was contributed to a joint venture and 1412 Broadway (June 2001).
20
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2001 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 2000
RENTAL REVENUES (in millions) $ %
2001 2000 Change Change
--------------------------------------------
Rental revenue $48.0 $47.6 $ 0.4 $0.8%
Escalation and reimbursement revenue 9.1 7.6 1.5 19.7%
Signage revenue 0.4 0.5 (0.1) (20.0)%
--------------------------------------------
Total $57.5 $55.7 $ 1.8 3.2%
============================================
Same Store $46.6 $45.4 $ 1.2 26.4%
2001 Acquisitions 5.4 -- 5.4 540.0%
Dispositions 4.2 10.4 (6.2) (59.6)%
Other 1.3 (0.1) 1.4 1400.0%
--------------------------------------------
Total $57.5 $55.7 $ 1.8 3.2%
============================================
The increase in rental revenue occurred even though occupancy at Same-Store
Properties was 97.6% in both 2000 and 2001. Annualized rents from replacement
rents on previously occupied space at Same-Store Properties were 52% 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 51%.
The increase in escalation and reimbursement revenue was primarily due to higher
operating expense recoveries ($0.5 million) and utility recoveries ($1.0
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
($0.1 million).
INVESTMENT AND OTHER INCOME (in millions) $ %
2001 2000 Change Change
-----------------------------------------
Equity in net income of unconsolidated joint ventures $2.8 $0.6 $2.2 366.7%
Investment income 3.9 5.0 (1.1) 22.0%
Other 0.5 0.1 0.4 400.0%
-----------------------------------------
Total $7.2 $5.7 $1.5 26.3%
=========================================
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 99.0% in
2000 to 97.1% in 2001. The Company estimates that the difference between
existing in-place fully escalated rents and current market rents is
approximately 56%.
The decrease in investment income is primarily due to lower LIBOR rates and
yields as well as structured finance investments, which were previously held by
the Company, now being held in a mezzanine fund ($1.7 million). The balance of
the decrease in investment income is due to interest from excess cash on hand
($0.1 million), the loan on 1370 Avenue of the Americas being repaid in 2000
($1.3 million) and the sale of a participation interest in 17-29 West 44th
Street in September 2000 ($0.2 million). This was offset by investment income on
newly originated structured finance investments ($2.2 million).
21
PROPERTY OPERATING EXPENSES (in millions) $ %
2001 2000 Change Change
-------------------------------------------------
Operating expenses (excluding electric) $ 9.2 $ 9.1 $ 0.1 1.1%
Electric costs 5.8 6.1 (0.3) (4.9)%
Real estate taxes 7.5 7.3 0.2 2.7%
Ground rent 3.1 3.2 (0.1) (3.0)%
-------------------------------------------------
Total $25.6 $25.7 $(0.1) (0.4)%
=================================================
Same Store $20.9 $20.7 $0.2 0.1%
2001 Acquisitions 2.4 -- 2.4 240.0%
Dispositions -- 5.0 (5.0) (500.0)%
Other 2.3 -- 2.3 230.0%
-------------------------------------------------
Total $25.6 $25.7 $(0.1) (0.4)%
=================================================
The increase in operating expenses, excluding electricity was primarily due to
higher advertising costs ($0.2 million), which were offset by a decrease in
repairs and maintenance ($0.1 million).
The decrease in electric costs was primarily due to lower electric consumption
due to a cool summer. This was offset by 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 Same Store
Properties ($0.2 million) and the 2001 Acquisitions ($0.8 million), which
increased real estate taxes, 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 $ 9.8 $10.7 $(0.9) (8.4)%
Depreciation and amortization expense 9.0 8.3 0.7 8.4%
Marketing, general and administrative expense 4.1 2.5 1.6 64.0%
------------------------------------------
Total $22.9 $21.5 $ 1.4 6.5%
==========================================
This decrease in interest expense was primarily attributable to the repayment
under the revolving credit facilities due to the common stock offering, offset
by new secured mortgage financing being placed on Same-Store assets ($0.8
million), mortgage financing associated with the 2001 Acquisitions ($0.5
million) and a decrease in interest expense at the corporate level, which
includes borrowings for working capital purposes as well as acquisition and
structured finance transaction funding ($1.1 million). This was partially offset
by the interest savings from the Dispositions ($1.1 million) and a reduction in
the weighted average interest rate to 7.29% at September 30, 2001 compared to
8.15% at September 30, 2000. LIBOR at September 30, 2001 was 2.64% compared to
6.62% at September 30, 2000. This resulted in significant interest savings on
the Company's variable rate debt.
Depreciation and amortization increased primarily due to depreciation on
properties acquired, capital expenditures and tenant improvements incurred
during the period.
Marketing, general and administrative expense increased primarily due to
increased personnel costs ($0.3 million) and a donation to assist the victims
and families of the World Trade Center tragedy ($1.0 million). Marketing,
general and administrative expense increased as a percentage of total revenue to
6.6% from 4.2%.
22
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2001 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
RENTAL REVENUES (in millions) $ %
2001 2000 Change Change
---------------------------------------------
Rental revenue $156.4 $141.0 $15.4 10.9%
Escalation and reimbursement revenue 24.5 18.9 5.6 29.6%
Signage revenue 1.0 1.6 (0.6) (37.5)%
---------------------------------------------
Total $181.9 $161.5 $20.4 12.6%
=============================================
Same Store $138.5 $129.2 $ 9.3 7.2%
2001 Acquisitions 24.7 -- 24.7 2,470.0%
Dispositions 19.9 33.7 (13.8) (40.1)%
Other (1.2) (1.4) (0.2) (14.3)%
---------------------------------------------
Total $181.9 $161.5 $20.4 12.6%
=============================================
The increase in rental revenue occurred even though occupancy at Same-Store
Properties was 97.6% in both 2000 and 2001. Annualized rents from replacement
rents on previously occupied space at Same-Store Properties were 45% 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 51%.
The increase in escalation and reimbursement revenue was primarily due to higher
operating expense recoveries ($4.1 million) and utility recoveries ($1.5
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
($0.6 million).
INVESTMENT AND OTHER INCOME (in millions) $ %
2001 2000 Change Change
---------------------------------------------
Equity in net income of unconsolidated joint ventures $ 6.0 $ 2.2 $3.8 172.7%
Investment income 12.3 9.9 2.4 24.2%
Other 1.3 0.7 0.6 85.7%
---------------------------------------------
Total $19.6 $12.8 $6.8 53.1%
=============================================
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 99.0% in
2000 to 97.1% in 2001. The Company estimates that the difference between
existing in-place fully escalated rents and current market rents is
approximately 56%.
The increase in investment income primarily represents interest income from
structured finance transactions ($4.8 million) and interest from excess cash on
hand ($0.2 million). This was offset by a decrease in investment income due to
the repayment of the loan on 1370 Avenue of the Americas in 2000 ($2.6 million).
In addition, the Company wrote down its investment in a technology company ($0.2
million).
23
PROPERTY OPERATING EXPENSES (in millions)
2001 2000 $ Change % Change
-------------------------------------------------
Operating expenses (excluding electric) $29.7 $28.8 $0.9 3.1%
Electric costs 15.3 13.1 2.2 16.8%
Real estate taxes 23.6 21.7 1.9 8.8%
Ground rent 9.4 9.5 (0.1) (1.1)
-------------------------------------------------
Total $78.0 $73.1 $4.9 6.7%
=================================================
Same Store $59.7 $57.5 $2.2 3.8%
2001 Acquisitions 8.5 -- 8.5 850.0%
Dispositions 9.5 14.9 (5.4) (36.2)%
Other 0.3 0.7 (0.4) (57.1)%
-------------------------------------------------
Total $78.0 $73.1 $4.9 6.7%
=================================================
The increase in operating expenses, excluding electricity, was primarily due to
higher fuel costs ($0.2 million), contract maintenance ($0.3 million), day
payroll ($0.2 million) and cleaning costs ($0.8 million). This was offset by a
decrease in repairs and maintenance ($0.8 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 $3.2 million, and Same-Store
Properties ($0.3), but was partially offset by a decrease in real estate taxes
due to the Dispositions ($1.6 million).
OTHER EXPENSES (in millions)
2001 2000 $ Change % Change
-----------------------------------------------
Interest expense $36.9 $30.2 $ 6.7 22.2%
Depreciation and amortization expense 28.0 24.5 3.5 14.3%
Marketing, general and administrative expense 11.3 8.5 2.8 32.9%
-----------------------------------------------
Total $76.2 $63.2 $13.0 20.6%
===============================================
This increase in interest expense was primarily attributable to new secured
mortgage financing being placed on Same-Store assets ($2.8 million), mortgage
financing associated with the 2001 Acquisitions ($7.4 million) and an increase
in interest expense at the corporate level ($1.0 million). This was partially
offset by the interest savings from the Dispositions ($1.9 million) and a
reduction in the weighted average interest rate to 7.29% at September 30, 2001
compared to 8.15% at September 30, 2000. LIBOR at September 30, 2001 was 2.64%
compared to 6.62% at September 30, 2000. This resulted in significant interest
savings on the Company's variable rate debt.
Depreciation and amortization increased primarily due to depreciation on
properties acquired, capital expenditures and tenant improvements incurred
during the period.
Marketing, general and administrative expense increased primarily due to
increased personnel costs ($0.7 million), professional fees ($0.2 million) and a
donation to assist the victims and families of the World Trade Center tragedy
($1.0 million). Marketing, general and administrative expense increased from
5.0% to 5.8% of total revenue for the comparable periods.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Net cash provided by operating activities increased $16.9 million to $59.8
million for the nine months ended September 30, 2001, compared to $42.9 million
for the nine months ended September 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 $351.4 million to $401.5 million for the nine
months ended September 30, 2001 compared to $50.1 million for the nine months
ended September 30, 2000. The increase was due primarily to the higher dollar
volume of acquisitions and capital improvements in 2001 ($390.0 and $19.1
million, respectively) as compared to 2000 ($16.6 and $26.6 million,
respectively). This relates primarily to the acquisitions of One Park Avenue,
1370 Broadway in January 2001 and 317 Madison Avenue in June 2001. The balance
in 2000 also included approximately $22.2 million in acquisition deposits.
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 $18.2 million due
24
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 and a 49.9% interest in 1250 Broadway in
2001. Net proceeds from the dispositions increased $24.7 million due to the
sales of 633 Third Avenue, One Park Avenue, 1412 Broadway and a condominium
interest in 110 East 42nd Street totaling $95.1 million in 2001 compared to the
dispositions of 29 West 35th Street, 36 West 44th Street and 321 West 44th
Street totaling $70.4 million in 2000. Net cash provided by financing activities
increased $337.2 million to $336.9 million for the nine months ended September
30, 2001 compared to $(0.3) million for the nine months ended September 30,
2000. The increase was primarily due to net proceeds from the common stock
offering ($148.7 million) as well as higher borrowing requirements due to the
higher volume of acquisitions funded with mortgage debt and draws under the line
of credit ($399.9 million), which was partially offset by higher debt repayments
($210.9 million).
CAPITALIZATION
On July 25, 2001, the Company completed the sale of 5,000,000 shares of common
stock. The net proceeds from this offering ($148.7 million, were used to pay
down the 2000 Unsecured Credit Facility.
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.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The Company filed a registration statement with the SEC for the Company's
dividend reinvestment and stock purchase plan ("DRIP") which was declared
effective on September 10, 2001, and commenced on September 24, 2001. The
Company registered 3,000,000 shares of common stock under the DRIP.
During the nine months ended September 30, 2001, no shares were issued and no
proceeds were received from dividend reinvestments and/or stock purchases under
DRIP.
At September 30, 2001, borrowings under the mortgage loans and credit facilities
(excluding our share of joint venture debt of $263.5 million) represented 29.98%
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 $1.9 billion (based on a common stock price of
$31.52 per share, the closing price of the Company's common stock on the New
York Stock Exchange on September 30, 2001).
The tables below summarize the Company's mortgage debt and line of credit
indebtedness outstanding at September 30, 2001and December 31, 2000,
respectively (in thousands).
SEPTEMBER 30, December 31,
DEBT SUMMARY 2001 2000
---- ----
BALANCE
Fixed rate .................................. $255,116 $317,786
Variable rate - hedged ...................... 69,099 69,606
-------- --------
Total fixed rate ......................... 324,215 387,392
-------- --------
Variable rate ............................... 118,000 49,950
Variable rate-supporting variable rate assets 41,916 23,374
-------- --------
Total variable rate ...................... 159,916 73,324
-------- --------
Total ....................................... $484,131 $460,716
======== ========
PERCENT OF TOTAL DEBT:
Total fixed rate ......................... 66.97% 84.08%
Variable rate ............................ 33.03% 15.92%
-------- --------
Total ....................................... 100.00% 100.00%
======== ========
EFFECTIVE INTEREST RATE AT END OF PERIOD
Total fixed rate ......................... 8.21% 8.22%
Variable rate ............................ 5.31% 8.20%
-------- --------
Effective interest rate ..................... 7.25% 8.21%
======== ========
25
A majority of the variable rate debt shown above bears interest at an interest
rate based on LIBOR (2.64% at September 30, 2001). The Company's total debt at
September 30, 2001 had a weighted average term to maturity of approximately 5.25
years.
As of September 30, 2001, the Company had three structured finance investments
securing the PSCC Facility. These structured finance investments totaling $51.2
million mitigate the Company's exposure to interest rate changes on its unhedged
variable rate debt.
MORTGAGE FINANCING
As of September 30, 2001, the Company's total mortgage debt (excluding the
Company's share of joint venture debt of approximately $263.5 million) consisted
of approximately $324.2 million of fixed rate debt with an effective interest
rate of approximately 8.21% and $65.0 million of variable rate debt with an
effective interest rate of approximately 5.38%. The Company's mortgage debt
(excluding $22,178 of structured finance funding) at September 30, 2001,
encumbering 10 properties, will mature as follows (in thousands):
2001 $ 1,493
2002 6,916
2003 9,774
2004 144,163
2005 50,612
Thereafter 176,257
--------
Total $389,215
========
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 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 increased the capacity
under this credit facility to $300 million in March 2001. The 2000 Unsecured
Credit Facility has a term of three years and bears interest at rates ranging
from 137.5 basis points to 175 basis points over LIBOR, based on the Company's
leverage ratio. If the Company were to receive an investment grade rating, the
spread over LIBOR will be reduced to 125 basis points. At September 30, 2001,
$53.0 million was outstanding and carried a weighted average interest rate of
5.64%. Availability under the 2000 Unsecured Credit Facility at September 30,
2001 was further reduced by the issuance of letters of credit in the amount of
$5 million for acquisition deposits.
The terms of the 2000 Unsecured Credit Facility include certain restrictions and
covenants which limit, among other things, the payment of dividends (as
discussed below), the incurrence of additional indebtedness, the incurrence of
liens and the disposition of assets, and which require compliance with financial
ratios relating to the minimum amount of tangible net worth, the minimum amount
of debt service coverage, the minimum amount of fixed charge coverage, the
minimum amount of unsecured indebtedness, the minimum amount of unencumbered
property debt service coverage and certain investment limitations. The dividend
restriction referred to above provides that, except to enable the Company to
continue to qualify as a REIT under the Code, the Company will not, during any
four consecutive fiscal quarters, make distributions with respect to common
stock or other equity interests in an aggregate amount in excess of 90% 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.
26
$140 MILLION CREDIT FACILITY
The $140 million unsecured credit facility (the "$140 Million Credit Facility")
was repaid in full and retired in June 2000 in connection with the Company's
attainment of the 2000 Unsecured Credit Facility, as described above. In the
quarter ended September 30, 2000, the Company recorded a $430,000 extraordinary
loss, net of the minority interest's share of the loss ($38,000), for the early
extinguishment of debt related to the write-off of unamortized financing costs
associated with the $140 Million Credit Facility.
PSCC FACILITY
On December 28, 1999, the Company closed on a $30 million credit facility with
Prudential Securities Credit Corp. ("PSCC Facility"). On March 30, 2000, PSCC
increased the secured PSCC Facility by $20 million to $50 million. No other
terms were changed from the original $30 million secured PSCC Facility.
Interest-only is payable based on the 1-Month LIBOR plus 125 basis points. The
PSCC Facility may be prepaid at any time during its term without penalty. The
PSCC Facility, which was scheduled to mature on December 27, 2000, was extended
for one year, and increased to $60 million.
At September 30, 2001, the Company had $19.7 million outstanding under its PSCC
Facility (interest rate of 4.98%). The PSCC Facility is secured by the $51.2
million in three structured finance investments.
CAPITAL EXPENDITURES
The Company estimates that for the three months ending December 31, 2001, it
will incur approximately $10.8 million of capital expenditures (including tenant
improvements) on properties currently owned. Of that total, over $1.2 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 cash on hand.
To maintain its qualification as a REIT, the Company must make annual
distributions to its stockholders of at least 90% (95% prior to January 1, 2001)
of its REIT taxable income, before considering 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 $46.4 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 REITs 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.
27
FFO for the three and nine months ended September 30, 2001 and 2000,
respectively, are as follows (in thousands):
Three months ended Nine months ended
2001 2000 2001 2000
---- ---- ---- ----
Income before minority interest, extraordinary items, gain on
sale, preferred stock dividend and cumulative effect adjustment $ 16,042 $ 14,270 $ 46,298 $ 38,581
Add:
Depreciation and amortization 9,047 8,300 27,956 24,519
FFO adjustment for unconsolidated joint ventures 2,225 842 4,579 2,468
Less:
Dividends on preferred shares (2,300) (2,300) (6,900) (6,900)
Amortization of deferred financing costs and depreciation of
non-rental real estate assets (1,059) (1,042) (3,371) (3,105)
--------- --------- --------- ---------
Funds From Operations - basic 23,955 20,070 68,562 55,563
Dividends on preferred shares 2,300 2,300 6,900 6,900
--------- --------- --------- ---------
Funds From Operations - diluted $ 26,255 $ 22,370 $ 75,462 $ 62,463
========= ========= ========= =========
Cash flows provided by operating activities $ 24,598 $ 22,801 $ 59,770 $ 42,860
Cash flows (used in) provided by investing activities $ (64,563) $ 7,346 $(401,474) $ (50,093)
Cash flows provided by(used in) financing activities $ 2,214 $ (31,400) $ 336,902 $ (264)
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 $2.0 million
annually.
The Company recognizes 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 are
immediately recognized in earnings.
Approximately $324.2 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 September
30, 2001 ranged from LIBOR plus 100 basis points to LIBOR plus 200 basis points.
LONG-TERM DEBT, INCLUDING FAIR
CURRENT PORTION (IN THOUSANDS) 2001 2002 2003 2004 2005 THEREAFTER TOTAL VALUE
---- ---- ---- ---- ---- ---------- ----- -----
Fixed Rate................ $1,493 $6,916 $9,774 $ 79,163 $50,612 $176,257 $324,215 $341,627
Average Interest Rate..... 8.21% 8.20% 8.19% 8.21% 8.24% 8.33% 8.30%
Variable Rate............. $19,738 $22,178 $53,000 $65,000 -- -- $159,916 $159,916
Average Interest Rate..... 5.18% 5.20% 5.50% 5.38% 5.29%
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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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10 Underwriting Agreement dated July 19, 2001, by and among the
Registrant, SL Green Operating Partnership, L.P., SL Green Management
LLC and Salomon Smith Barney Inc.*
* Incorporated by reference to the Registrant's Form 8-K, dated July 19,
2001, filed with the Commission on July 26, 2001.
(b) Reports on Form 8-K:
o The Registrant filed a Current Report on Form 8-K/A on July
13, 2001 in order to file pro-forma financial statements in
connection with its acquisition of an office building located
at 317 Madison Avenue.
o The Registrant filed a Current Report on Form 8-K on July 24,
2001 in connection with its second quarter 2001 earnings
release.
o The Registrant filed a Current Report on Form 8-K on July 25,
2001 in connection with its second quarter 2001 supplemental
package.
o The Registrant filed a Current Report on Form 8-K on July 26,
2001 in connection with its underwritten public offering of
common stock.
29
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: November 14, 2001
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