UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 


 

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2001

or

 

o

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

 

13-3956755

(State or other jurisdiction incorporation or organization)

 

(I.R.S. Employer of Identification No.)

 

 

 

420 Lexington Avenue, New York, NY  10170

(Address of principal executive offices - zip code)

 

 

 

(212) 594-2700

(Registrant's telephone number, including area code)

 

 

 

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock $.01 par value

 

New York Stock Exchange

 

 

 

8% Preferred Income Equity Redeemable SharesSM  ,$0.01 par value, $25.00 mandatory liquidation preference

 

New York Stock Exchange

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

 

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 ý No o.

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

As of February 28, 2002, there were 30,007,139 shares of the Registrant's common stock outstanding. The aggregate market value of common stock held by non-affiliates of the Registrant (29,533,051 shares) at February 28, 2002, was $942,694,988.  The aggregate market value was calculated by using the closing price of the common stock as of that date on the New York Stock Exchange.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant's Proxy Statement for the Annual Stockholders' Meeting to be held May 14, 2002 are incorporated by reference into Part III.

 

 


 

 

SL GREEN REALTY CORP.

FORM 10-K

TABLE OF CONTENTS

 

10-K PART AND ITEM NO.

 

 

PART I

 

 

1.

Business

2.

Properties

3.

Legal Proceedings

4.

Submission of Matters to a Vote of Security Holders

 

 

PART II

 

 

5.

Market for Registrants Common Equity and Related Stockholders Matters

6.

Selected Financial Data

7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

7A.

Quantitative and Qualitative Disclosures about Market Risk

8.

Financial Statements and Supplementary Data

9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

 

PART III

 

 

10.

Directors and Executive Officers of the Registrant

11.

Executive Compensation

12.

Security Ownership of Certain Beneficial Owners and Management

13.

Certain Relationships and Related Transactions

 

 

PART IV

 

 

14.

Exhibits, Financial Statements and Schedules, and Reports on Form 8-K

 

2



 

PART I

 

ITEM 1.  BUSINESS

 

General

SL Green Realty Corp. is a self-managed real estate investment trust ("REIT") with in-house capabilities in property management, acquisitions, financing, development, construction and leasing and was formed in June 1997 for the purpose of continuing the commercial real estate business of SL Green Properties, Inc.  SL Green Properties, Inc. which was founded in 1980 by Stephen L. Green, its Chairman and Chief Executive Officer, had been engaged in the business of owning, managing, leasing, acquiring and repositioning office properties in Manhattan (“Manhattan”), a borough of New York City.  SL Green Properties had been involved in the acquisition of 31 office properties in Manhattan containing approximately four million square feet and the management of 50 office properties in Manhattan containing approximately 10.5 million square feet.

 

As of December 31, 2001, SL Green Realty Corp.’s portfolio, which included interests in 25 properties aggregating 10 million square feet, consisted of 19 wholly-owned commercial properties (the "Properties") encompassing approximately 6.9 million rentable square feet located primarily in midtown Manhattan.  The Company’s wholly-owned interests in the Properties represent fee ownership (15 properties), including ownership in condominium units, leasehold ownership (2 properties) and operating sublease ownership (2 properties).  Pursuant to the operating sublease arrangements, the Company, as tenant under the operating sublease, performs the functions traditionally performed by landlords with respect to its subtenants.  The Company is responsible for not only collecting rent from its subtenants, but also maintaining the property and paying expenses relating to the property.  As of December 31, 2001, the weighted average occupancy (total occupied square feet divided by total available square feet) of the Properties was 97.4%.  The Company’s portfolio also includes ownership interests in unconsolidated joint ventures which own six office properties in Manhattan, encompassing approximately 3.1 million rentable square feet which were 98.4% occupied as of December 31, 2001, (collectively, with the Properties, the “Portfolio”).  See Note 6 to the consolidated financial statements for a further discussion on the Company’s ownership interests in One Park Avenue.  The Company also owns one triple-net leased property located in Shelton, Connecticut.  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.

 

The Company's corporate offices are located in midtown Manhattan at 420 Lexington Avenue, New York, New York 10170. The Company's corporate staff consists of 107 persons, including 78 professionals experienced in all aspects of commercial real estate.  The Company can be contacted at (212) 594-2700 or visit the Company’s website at www.slgreen.com.

 

The "Company" means SL Green Realty Corp., a Maryland corporation, and one or more of its subsidiaries (including SL Green Operating Partnership, L.P. (the “Operating Partnership”)), and the predecessors thereof (the “SL Green Predecessor”) or, as the context may require, SL Green Realty Corp. only or SL Green Operating Partnership, L.P. only and "SL Green Properties" means SL Green Properties, Inc., a New York corporation, as well as the affiliated partnerships and other entities through which Stephen L. Green has historically conducted commercial real estate activities.

 

Corporate Structure

In connection with the Company's initial public offering (“IPO”) in August 1997, the Operating Partnership received a contribution of interests in real estate properties as well as a 95% economic, non-voting interest in the management, leasing and construction companies affiliated with S.L. Green Properties (the "Service Corporation").  The Company is organized so as to qualify and has elected to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”).

 

Substantially all of the Company's assets are held by, and all of its operations are conducted through, the Operating Partnership, a Delaware limited partnership.  The Company is the sole managing general partner of, and as of December 31, 2001, was the owner of approximately 93.0% of the economic interests in, the Operating Partnership.  All of the management and leasing operations with respect to the Properties are conducted through SL Green Management LLC (“Management LLC”).  The Operating Partnership owns a 100% interest in Management LLC.

 

3



 

In order to maintain the Company’s qualifications as a REIT while realizing income from management, leasing and construction contracts with third parties and joint venture properties, all of these service 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 expects to receive 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 taxable REIT subsidiary.

 

Business and Growth Strategies

The Company’s primary business objective is to maximize total return to shareholders through growth in funds from operations and appreciation in the value of its assets.  The Company seeks to achieve this objective by assembling a compelling portfolio of Manhattan office properties by capitalizing on current opportunities in the Manhattan office market through (i) property acquisitions (including through joint ventures) - acquiring office properties at significant discounts to replacement costs with market rents at a significant premium to fully escalated in place rents.  These acquisitions provide attractive initial yields and the potential for cash flow growth, (ii) property repositioning - repositioning acquired properties that are under performing through renovations, active management and proactive leasing, (iii) property dispositions, (iv) integrated leasing and property management and (v) structured finance investments.  Generally, the Company is focused on properties that are within a ten minute walk of midtown Manhattan’s primary commuter stations, which the Company believes is a competitive advantage throughout the business cycle.

 

Property Acquisitions. The Company acquires properties for long term appreciation and earnings growth (core assets) or for shorter term holding periods where it attempts to create significant increases in value which, when sold, result in capital gains that increase the Company’s investment capital base.  In acquiring (core and non-core) properties, directly or through joint ventures with the highest quality institutional investors, the Company believes that it has the following advantages over its competitors: (i) senior management's 21 years of experience as a full service, fully integrated real estate company focused on the office market in Manhattan, (ii) enhanced access to capital as a public company (as compared to the generally fragmented institutional or venture oriented sources of capital available to private companies) and (iii) the ability to offer tax-advantaged structures to sellers through the exchange of ownership interests as opposed to solely cash transactions.

 

Property Repositioning. The Company believes that there are properties that may be acquired which could greatly benefit from management's experience in enhancing property cash flow and value by renovating and repositioning properties to be among the best in their submarkets.  Many office buildings are located in or near submarkets which are undergoing major reinvestment and where the properties in these markets have relatively low vacancy rates compared to other sub-markets.  Featuring unique architectural design, large floor plates or other amenities and functionally appealing characteristics, reinvestment in these properties provides an opportunity to the Company to meet market needs and generate favorable returns.

 

Property Dispositions. The Company continuously evaluates its properties to identify which are most suitable to meet its long term earnings growth objectives and contribute to increasing portfolio value.  Properties such as smaller side-street properties, properties located downtown or properties that simply no longer meet the Company’s earnings objectives are identified as non-core holdings, and are targeted for sale to create investment capital.  The Company believes that it will be able to redeploy the capital generated from the disposition of non-core holdings into property acquisitions or investments in high-yield structured finance investments which will provide enhanced future capital gain and earnings growth opportunities.

 

4



 

Leasing and Property Management. The Company seeks to capitalize on management's extensive knowledge of the Manhattan marketplace and the needs of the tenants therein by continuing a proactive approach to leasing and management, which includes (i) the use of in-depth market research, (ii) the utilization of an extensive network of third-party brokers, (iii) comprehensive building management analysis and planning and (iv) a commitment to tenant satisfaction by providing high quality tenant services at affordable rental rates.  The Company believes proactive leasing efforts have contributed to average occupancy rates in the Portfolio exceeding the market average.

 

Structured Finance. The Company seeks to invest in high-yield structured finance investments.  These investments provide high current returns and a potential for future capital gains.  These investments are typically floating rate investments and, therefore, serve as a natural hedge for the Company’s unhedged floating rate debt.  The Company intends to invest up to 10% of its total market capitalization in structured finance investments.  Structured finance investments include first mortgages, mortgage participations, subordinate loans and preferred equity investments.

 

Competition

The Manhattan office market is a competitive marketplace.  Although currently no other publicly traded REITs have been formed solely to own, operate and acquire Manhattan office properties, the Company may in the future compete with such other REITs.  In addition, the Company may face competition from other real estate companies (including other REITs that currently invest in markets other than or in addition to Manhattan) that may have greater financial resources or access to capital than the Company or that are willing to acquire properties in transactions which are more highly leveraged or are less attractive from a financial viewpoint than the Company is willing to pursue.

 

Manhattan Office Market Background

The term "Class B" is generally used in the Manhattan office market to describe office properties that are more than 25 years old but that are in good physical condition, enjoy widespread acceptance by high-quality tenants and are situated in desirable locations in Manhattan.  Class B office properties can be distinguished from Class A properties in that Class A properties are generally newer properties with higher finishes and obtain the highest rental rates within their markets.

 

The Company seeks to fill a niche between these two market categories by creating what the Company describes as a new class of space.  This is captured in the Company’s branded image “Better than A, Greater than B.”  The Company seeks to deliver real value to tenants by offering the amenities, quality and service of fully modernized office buildings in highly desirable midtown locations at affordable rents.  The Company has historically attracted many smaller growth oriented firms and has played a critical role in satisfying the space requirements of particular industry groups in Manhattan, such as the advertising, apparel, business services, engineering, not-for-profit, smaller law firms, hospital back office support and publishing industries.  By way of example, some of the tenants that currently occupy space in Company owned properties include The City of New York, BMW of Manhattan, Inc., Metro North, New York Life Insurance Company, St. Luke’s Roosevelt Hospital, CBS, Inc., J&W Seligman & Co., Inc., Crain Communications, Ann Taylor, City University of New York, Ketchum, Inc., New York Presbyterian Hospital, Phillip Morris Management Corp., Ross Stores and Visiting Nurse Services.

 

5



 

Manhattan Office Market Demand

All of the Properties are located in highly developed areas of Manhattan that include a large number of other office properties.  Manhattan is by far the largest office market in the United States and contains more rentable square feet than the next five largest central business district office markets in the United States combined.  Manhattan has a total inventory 379 million square feet with 229 million square feet in midtown.  Over the next five years, the Company estimates that Manhattan has approximately 4.9 million square feet of new construction coming on line.  This represents approximately 1.3 percent of total Manhattan inventory.  A majority of the new construction represents entirely pre-leased properties.  The Company believes that midtown vacancy rates are likely to remain stable over the coming years. While there is a relative lack of supply, the market will be impacted by potential layoffs from financial mergers, acquisitions, downsizings and bankruptcies, whether the result of current economic conditions, the effect of the September 11, 2001 terrorist attacks, or otherwise.  In this challenging environment, the Company believes that rents will remain relatively stable while tenant concession packages may increase.  Additionally, there may be a need to make ongoing capital improvements to the common areas and physical infrastructures of the properties.

 

General Terms of Leases in the Midtown Manhattan Markets

Leases entered into for space in the midtown Manhattan markets typically contain terms which may not be contained in leases in other U.S. office markets.  The initial term of leases entered into for space in excess of 10,000 square feet in the midtown markets generally is 7 to 10 years.  The tenant often will negotiate an option to extend the term of the lease for one or two renewal periods of five years each.  The base rent during the initial term often will provide for agreed upon increases periodically over the term of the lease.  Base rent for renewal terms, and base rent for the final years of a long-term lease (in those leases which do not provide an agreed upon rent during such final years), often is based upon a percentage of the fair market rental value of the premises (determined by binding arbitration in the event the landlord and the tenant are unable to mutually agree upon the fair market value), but not less than the base rent payable at the end of the prior period.  Leases typically do not provide for increases in rent based upon increases in the consumer price index.

 

In addition to base rent, the tenant also generally will pay the tenant’s pro rata share of increases in real estate taxes and operating expenses for the building over a base year.  In some leases, in lieu of paying additional rent based upon increases in real estate taxes and building operating expenses, the tenant will pay additional rent based upon increases in the wage rate paid to porters over the porters’ wage rate in effect during a base year.

 

Electricity is most often supplied by the landlord either on a submetered basis or rent inclusion basis (i.e., a fixed fee is included in the rent for electricity, which amount may increase based upon increases in electricity rates or increases in electrical usage by the tenant).  Base building services other than electricity (such as heat, air conditioning and freight elevator service during business hours, and base building cleaning) typically are provided at no additional cost, with the tenant paying additional rent only for services which exceed base building services or for services which are provided other than during normal business hours.  During the year ended December 31, 2001, the Company was able to recover 90% of its electric costs.

 

In a typical lease for a new tenant, the landlord will deliver the premises with all existing improvements demolished and any asbestos abated.  The landlord also typically will provide a tenant improvement allowance, which is a fixed sum that the landlord makes available to the tenant to reimburse the tenant for all or a portion of the tenant’s initial construction of its premises.  Such sum typically is payable as work progresses, upon submission of invoices for the cost of construction.  However, in certain leases (most often for relatively small amounts of space), the landlord will construct the premises for the tenant.

 

6



 

Occupancy

The following table sets forth occupancy rates at December 31, 2001, 2000 and 1999:

 

 

 

Occupancy Percent December 31,

 

Property

 

2001

 

2000

 

1999

 

Same Store Properties (1)

 

97.4

%

98.4

%

97.7

%

Joint Venture Properties

 

98.4

%

96.9

%

95.4

%

Portfolio

 

97.7

%

98.6

%

98.2

%

 


(1) Represents properties owned by the Company at December 31, 1999 and still owned at December 31, 2001.

 

Rent Growth

Previous strength in the New York City economy fueled the demand for quality commercial space in the Company’s submarkets.  Over the past several years healthy demand paired with virtually no new supply has resulted in upward pressure on market rents.  These increases provided the Company with the opportunity to generate positive rent growth during 2001 as these market rents have been significantly above the escalated in-place expiring rents.  This rent growth, measured as the difference between effective (average) rents on new and renewed leases as compared to the expiring rent on those same spaces, was 43.7% for 2001.  Recent softening of the national and New York City economic outlook may have an adverse effect on our future rent growth.

 

Despite the changes to the New York City economy, the Company estimates that rents currently in place in the Company’s Properties are approximately 31.9% below current market asking rents.  Properties owned in joint ventures reflect a similar statistic as those rents are approximately 36.0% below current asking rents.  As of December 31, 2001, 32.8% and 35.0% of all leases in-place in the Properties and joint ventures are scheduled to expire during the next four years.  The Company expects to capitalize on embedded rent growth as these leases and future leases expire by renewing or replacing these tenant leases at higher prevailing market rents.  There can be no assurances that the Company’s estimates of current market rents are accurate, that market rents currently prevailing will not erode in the future or that the Company will realize any rent growth.  However, the Company believes the depth of the degree that rents in the current portfolio are below market provides a significant potential for long-term income growth.

 

Industry Segments

The Company is a REIT engaged in owning, managing, leasing and repositioning office properties in Manhattan and has two reportable segments, office real estate and structured finance investments.  The Company evaluates real estate performance and allocates resources based on net operating income.

 

The Company’s real estate portfolio is located in one geographical market of 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).  As of December 31, 2001, no single tenant contributed more than 2.4% of the Company’s annual revenue, however, one property, 420 Lexington Avenue, contributed in excess of 10.0% of the Company’s revenue.  See Item 2 “Properties – 420 Lexington Avenue” for a further discussion on this property.  In addition, three borrowers each accounted for more than 10.0% of the revenue earned on structured finance investments.

 

Employees

At December 31, 2001, the Company employed approximately 487 employees, over 84 of whom were managers and professionals, approximately 371 of whom were hourly paid employees involved in building operations and approximately 32 of whom were clerical, data processing and other administrative employees. There are currently three collective bargaining agreements relating to 25 of the Company's Portfolio covering 371 employees of the Company.

 

7



 

Acquisitions

The Company acquired the following properties during the year ended December 31, 2001.

 

 

 

 

 

 

 

Net Rentable S/F

 

Total Acquisition Price($s)

 

Acquisiton Price

Per S/F

 

 

 

 

 

Ownership

Interest (%)

 

 

 

 

Date Acquired

 

Property

 

 

 

 

 

Jan-01

 

1370 Broadway

 

100.0

 

255,000

 

50,500,000

 

$

198

 

Jan-01

 

One Park Avenue

 

100.0

 

913,000

 

233,900,000

 

$

256

 

Jan-01

 

469 7th Avenue

 

35.0

 

253,000

 

45,700,000

 

$

181

 

Jun-01

 

317 Madison Avenue

 

100.0

 

450,000

 

105,600,000

 

$

235

 

Total

 

 

 

1,871,000

 

435,700,000

 

$

233

 

 

In addition, the Company acquired the joint venture interest of its partner at 1250 Broadway in September 2001. 

 

Dispositions

The Company sold the following properties during the year ended December 31, 2001.

 

 

 

 

 

 

Net Rentable S/F

 

 

 

Sales Price Per S/F

 

 

Ownership

Interest (%)

 

 

Sale Price($s)

 

 

Date Sold

 

Property

 

 

 

 

 

Jan-01

 

633 Third Avenue

 

100.0

 

40,623

 

13,250,000

 

$

326

 

May-01

 

One Park Avenue-45% JV

 

45.0

 

913,000

 

233,900,000

 

$

256

 

Jun-01

 

1412 Broadway

 

100.0

 

389,000

 

 91,500,000

 

$

233

 

Total

 

 

 

1,342,623

 

338,650,000

 

$

252

 

 

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 $14,500,000.  This transaction closed on July 23, 2001.

 

Offering/Financings

In July 2001, the Company completed the sale of 5,000,000 shares of common stock and raised net proceeds of $148.4 million.  The proceeds were used to pay down the unsecured credit facility and will be used to fund future acquisition and investment activities.

 

On December 20, 2001, the Company obtained a $75 million secured credit facility.  This facility replaced the $60 million secured credit facility which was due to mature on December 27, 2001.  This new secured credit facility has a term of two years with a one year renewal option.  It bears interest at the rate of 150 basis points over LIBOR.  This facility will be used to fund structured finance investments.

 

On August 16, 2001, the Company obtained a $65 million mortgage secured by the property located at 317 Madison Avenue.  The three year mortgage has two one-year extension options and bears interest at the rate of 180 basis points over LIBOR.  On October 18, 2001, the Company entered into a swap agreement effectively fixing the LIBOR rate at 4.01% for four years.  The proceeds were used to pay down the Company’s unsecured credit facility.

 

Recent Developments

Tax Matters

The Tax Relief Extension Act of 1999 was recently enacted and contains several tax provisions regarding REITs, including a reduction of the annual distribution requirement for REIT taxable income from 95% to 90%.  The act also changes the 10% voting securities test under current law to a 10% vote or value test.  Thus, subject to certain exceptions, a REIT will no longer be allowed to own more than 10% of the vote or value of the outstanding securities of any issuer, other than a qualified REIT subsidiary or another REIT.  One exception to this new test, which is also an exception to the 5% asset test, allows a REIT to own any or all of the securities of a “taxable REIT subsidiary.”  A taxable REIT subsidiary can perform non-customary services for tenants of a REIT without disqualifying rents received from such tenants for purposes of the REIT’s gross income tests and can also undertake third-party management and development activities as well as non-real-estate-related activities.  A taxable REIT subsidiary will be taxed as a regular C corporation but will be subject to earnings stripping limitations on the deductibility of interest paid to its REIT.  In addition, a REIT will be subject to a 100% excise tax on certain excess amounts to ensure that (i) tenants who pay a taxable REIT subsidiary for services are charged an arm’s-length amount by the taxable REIT subsidiary for the service, rather than paying an excessive amount to the REIT as rent, (ii) shared expenses of a REIT and its taxable REIT subsidiary are allocated fairly between the two, and (iii) interest paid by a taxable REIT subsidiary to its REIT is commercially reasonable.  These new tax provisions became effective January 1, 2001.

 

8



 

Securities of a taxable REIT subsidiary will constitute non-real-estate assets for purposes of determining whether at least 75% of a REIT’s assets consist of real estate.  In addition, under current law, no more than 5% of a REIT’s total assets can consist of securities of a single issuer.  The new tax law increases this with respect to taxable REIT subsidiaries, so that no more than 20% of a REIT’s total assets can consist of securities of one or more taxable REIT subsidiaries.  As of December 31, 2001, the amount of the Company’s assets attributable to its taxable subsidiaries was approximately 0.6%.

 

For a discussion of the use, import, risks and uncertainties of  “Forward-Looking Statements” relating to, without limitation, the Company’s future economic performance, plans and objectives of management for future operations and projections of revenue and other financial items, See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview”.

 

9



 

ITEM 2.   PROPERTIES

 

The Portfolio

 

General. As of December 31, 2001, the Company owned interests in 19 office properties encompassing approximately 6.9 million rentable square feet located primarily in midtown Manhattan. Certain of the Properties include at least a small amount of retail space on the lower floors, as well as basement/storage space. As of December 31, 2001, the Company’s portfolio also included ownership interests in unconsolidated joint ventures which own six office properties in Manhattan, encompassing approximately 3.1 million rentable square feet.  As of December 31, 2001, the Company also owns one triple-net leased property located in Shelton, Connecticut.

 

10



 

The following table sets forth certain information with respect to each of the Manhattan properties in the portfolio as of December 31, 2001:

 

Property

 

 

 

 

 

 

 

Percentage of Portfolio Rentable Square Feet (%)

 

 

 

 

 

 

 

 

Approximate Rentable Square Feet

 

 

 

 

 

Year Built/ Renovated

 

 

 

 

 

Percent Leased (%)

 

 

 

Sub-market

 

 

 

 

Wholly Owned

 

 

 

 

 

 

 

 

 

 

 

17 Battery Place North

 

1972

 

World Trade/Battery Place

 

419,000

 

6.1

 

100.0

 

50 West 23rd Street

 

1892/1992

 

Chelsea

 

333,000

 

4.8

 

99.2

 

70 West 36th Street

 

1923/1994

 

Garment

 

151,000

 

2.2

 

98.5

 

110 East 42nd Street

 

1921/—

 

Grand Central No.

 

181,000

 

2.6

 

99.9

 

470 Park Avenue South (4)

 

1912/1994

 

Park Avenue South

 

260,000

(4)

3.8

 

99.4

 

673 First Avenue (5)

 

1928/1990

 

Grand Central So.

 

422,000

 

6.1

 

99.8

 

1140 Ave. of Americas

 

1926/1998

 

Rockefeller Center

 

191,000

 

2.8

 

95.5

 

1372 Broadway

 

1914/1998

 

Garment

 

508,000

 

7.4

 

99.3

 

1414 Ave. of Americas

 

1923/1998

 

Rockefeller Center

 

111,000

 

1.6

 

96.2

 

1466 Broadway

 

1907/1982

 

Times Square

 

289,000

 

4.2

 

88.9

 

420 Lexington Avenue(6))

 

1927/1999

 

Grand Central No.

 

1,188,000

 

17.2

 

94.8

 

440 Ninth Avenue

 

1927/1989

 

Garment

 

339,000

 

4.9

 

91.1

 

711 Third Avenue (5) (7)

 

1955/—

 

Grand Central No.

 

524,000

 

7.6

 

100.0

 

555 West 57th Street (5)

 

1971/—

 

Midtown West

 

941,000

 

13.6

 

100.0

 

286 Madison Avenue

 

1918/1997

 

Grand Central So.

 

112,000

 

1.6

 

100.0

 

290 Madison Avenue

 

1952/—

 

Grand Central So.

 

36,800

 

0.5

 

100.0

 

292 Madison Avenue

 

1923/—

 

Grand Central So.

 

187,000

 

2.7

 

100.0

 

1370 Broadway

 

1922/—

 

Garment

 

255,000

 

3.7

 

97.3

 

317 Madison Avenue

 

1920/—

 

Grand Central

 

450,000

 

6.6

 

94.6

 

Total Weighted average wholly-owned (8)

 

 

 

 

 

6,897,800

 

100.0

 

97.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Joint Ventures

 

 

 

 

 

 

 

 

 

 

 

321 West 44th St. (9)

 

1929/—

 

Times Square

 

203,000

 

 

 

97.2

 

1250 Broadway (5) (10)

 

1968/—

 

Penn Station

 

670,000

 

 

 

99.5

 

100 Park Avenue (11)

 

1950—

 

Grand Central So.

 

834,000

 

 

 

100.0

 

180 Madison Avenue (11)

 

1926/—

 

Grand Central So.

 

265,000

 

 

 

92.8

 

469 7th Avenue (9)

 

1926/—

 

Penn Station

 

253,000

 

 

 

96.8

 

1 Park Avenue (10)

 

1925/1986

 

Grand Central So.

 

913,000

 

 

 

98.3

 

Total/Weighted average joint ventures

 

 

 

 

 

3,138,000

 

 

 

98.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Grand Total/ Weighted average portfolio

 

 

 

 

 

10,035,800

 

 

 

97.7

 

 

Property

 

 

 

Percentage of Portfolio Annualized Rent (%)

 

 

 

Annualized Rent Per Leased Square Foot (2)

 

Annualized Net Effective Rent Per Leased  Square Foot (3)

 

 

 

 

 

 

 

 

 

 

Annualized Rent (1)

 

 

Number of Leases

 

 

 

 

 

 

 

 

 

Wholly-Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17 Battery Place North

 

$

9,326,210

 

4.8

 

6

 

$

22.23

 

$

23.83

 

50 West 23rd Street

 

7,800,699

 

4.0

 

19

 

$

23.25

 

$

12.90

 

70 West 36th Street

 

3,688,304

 

1.9

 

29

 

$

24.80

 

$

21.97

 

110 East 42nd Street

 

5,849,915

 

3.0

 

28

 

$

32.33

 

$

22.07

 

470 Park Avenue South (4)

 

7,056,505

 

3.6

 

26

 

$

27.32

 

$

22.51

 

673 First Avenue (5)

 

12,834,062

 

6.6

 

14

 

$

30.49

 

$

22.86

 

1140 Ave. of Americas

 

6,802,510

 

3.5

 

27

 

$

37.30

 

$

36.33

 

1372 Broadway

 

13,857,209

 

7.2

 

27

 

$

26.72

 

$

25.15

 

1414 Ave. of Americas

 

3,905,970

 

2.0

 

28

 

$

36.59

 

$

43.96

 

1466 Broadway

 

8,502,171

 

4.4

 

92

 

$

33.11

 

$

39.99

 

420 Lexington Avenue(6)

 

39,472,740

 

20.4

 

251

 

$

33.48

 

$

34.90

 

440 Ninth Avenue

 

7,935,202

 

4.1

 

14

 

$

25.69

 

$

22.33

 

711 Third Avenue (5) (7)

 

18,362,410

 

9.5

 

21

 

$

35.04

 

$

32.96

 

555 West 57th Street (5)

 

18,724,322

 

9.7

 

26

 

$

19.88

 

$

21.55

 

286 Madison Avenue

 

3,372,594

 

1.7

 

41

 

$

30.04

 

$

27.52

 

290 Madison Avenue

 

1,322,244

 

0.7

 

4

 

$

35.93

 

$

37.83

 

292 Madison Avenue

 

6,267,750

 

3.2

 

18

 

$

33.54

 

$

33.48

 

1370 Broadway

 

6,835,576

 

3.5

 

30

 

$

27.55

 

$

32.81

 

317 Madison Avenue

 

12,063,472

 

6.2

 

107

 

$

28.35

 

$

27.64

 

Total Weighted average wholly-owned (8)

 

$

193,979,865

 

100.0

 

808

 

$

28.53

 

$

27.56

 

 

 

 

 

 

 

 

 

 

 

 

 

Joint Ventures

 

 

 

 

 

 

 

 

 

 

 

321 West 44th St. (9)

 

4,021,547

 

 

 

26

 

$

20.39

 

$

17.63

 

1250 Broadway (5) (10)

 

17,041,892

 

 

 

31

 

$

25.59

 

$

24.15

 

100 Park Avenue (11)

 

28,529,204

 

 

 

45

 

$

34.22

 

$

33.25

 

180 Madison Avenue (11)

 

6,302,821

 

 

 

54

 

$

25.63

 

$

21.51

 

469 7th Avenue (9)

 

6,505,933

 

 

 

22

 

$

26.56

 

$

26.37

 

1 Park Avenue (10)

 

32,522,146

 

 

 

17

 

$

36.24

 

$

32.26

 

Total/Weighted average joint ventures

 

$

94,923,543

 

 

 

195

 

$

31.24

 

$

28.52

 

 

 

 

 

 

 

 

 

 

 

 

 

Grand Total/ Weighted average portfolio

 

$

288,903,408

 

 

 

1,003

 

$

28.79

 

$

27.86

 

 

11



 


(1) Annualized Rent represents the monthly contractual rent under existing leases as of December 31, 2001 multiplied by 12. This amount reflects total rent before any rent abatements and includes expense reimbursements, which may be estimated as of such date. Total rent abatements for leases in effect as of December 31, 2001 for the 12 months ending December 31, 2002 are approximately $1,307,000 for the Properties and $695,000 for the joint venture properties.

 

(2) Annualized Rent Per Leased Square Foot represents Annualized Rent, as described in footnote (1) above, presented on a per leased square foot basis.

 

(3) Annual Net Effective Rent Per Leased Square Foot represents (a) for leases in effect at the time an interest in the relevant property was first acquired by the Company, the remaining lease payments under the lease (excluding operating expense pass-throughs, if any) divided by the number of months remaining under the lease multiplied by 12 and (b) for leases entered into after an interest in the relevant property was first acquired by the Company, all lease payments under the lease (excluding operating expense pass-throughs, if any) divided by the number of months in the lease multiplied by 12, and, in the case of both (a) and (b), minus tenant improvement costs and leasing commissions, if any, paid or payable by the Company and presented on a per leased square foot basis. Annual Net Effective Rent Per Leased Square Foot includes future contractual increases in rental payments and therefore, in certain cases, may exceed Annualized Rent Per Leased Square Foot.

 

(4) 470 Park Avenue South is comprised of two buildings, 468 Park Avenue South (a 17-story office building) and 470 Park Avenue South (a 12-story office building).

 

(5) Includes a parking garage.

 

(6) The Company holds an operating sublease interest in the land and improvements.

 

(7) The Company holds a leasehold mortgage interest, a net sub-leasehold interest and a co-tenancy interest in this property.

 

(8) Includes approximately 6,303,206 square feet of rentable office space, 482,404 square feet of rentable retail space and 112,190 square feet of garage space.

 

(9) The Company owns a 35% economic interest in this joint venture which acquired various ownership and mortgage interest in this property

 

(10) The Company owns a 55% interest in this joint venture which acquired various ownership and mortgage interests in the property.

 

(11) The Company owns a 49.9% interest in this joint venture.

 

Historical Occupancy.  The Company has historically achieved consistently higher occupancy rates in comparison to the overall Class B Midtown markets, as shown over the last 5 years in the following table:

 

 

 

Percent Leased at the Properties (1)

 

Occupancy Rate of Class B Office Properties in the Midtown Markets (2)

 

December 31, 2001

 

97

%

92

%

December 31, 2000

 

99

%

96

%

December 31, 1999

 

97

%

93

%

December 31, 1998

 

93

%

92

%

December 31, 1997

 

94

%

90

%

 

12



 


(1)                   Includes space for leases that were executed as of the relevant date in Properties owned by the Company as of that date.

 

(2)                   Includes vacant space available for direct lease, but does not include vacant space available for sublease, which if included, would reduce the occupancy rate as of each date shown.  Source: Cushman & Wakefield.

 

Lease Expirations

Leases in the Portfolio, as at many other Manhattan office properties, typically extend for a term of seven to ten years, compared to typical lease terms of five to ten years in other large U.S. office markets.  For the five years ending December 31, 2006, the average annual rollover at the Properties and joint venture properties is approximately 543,000 square feet and 276,800 square feet, respectively, representing an average annual expiration of 8.0% and 9.1% of the total leased square feet at the Properties and joint venture properties, respectively, per year (assuming no tenants exercise renewal or cancellation options and there are no tenant bankruptcies or other tenant defaults).

 

The following tables set forth a schedule of the annual lease expirations at the Properties and joint venture properties, respectively, with respect to leases in place as of December 31, 2001 for each of the next ten years and thereafter (assuming that no tenants exercise renewal or cancellation options and that there are no tenant bankruptcies or other tenant defaults):

 

Wholly-owned Properties

Year of Lease Expiration

 

Number of Expiring Leases

 

Square Footage of Expiring Leases

 

Percentage of Total Leased Square Feet (%)

 

Annualized Rent of Expiring Leases (1)

 

Annualized Rent Per Leased Square Foot of Expiring Leases (2)

 

2002

 

150

 

448,114

 

6.59

 

$

12,204,672

 

$

27.24

 

2003

 

132

 

567,419

 

8.35

 

16,041,396

 

28.27

 

2004

 

131

 

625,952

 

9.21

 

19,116,156

 

30.54

 

2005

 

104

 

585,272

 

8.61

 

18,044,328

 

30.83

 

2006

 

66

 

486,043

 

7.15

 

14,448,392

 

29.73

 

2007

 

46

 

306,664

 

4.51

 

8,251,140

 

26.91

 

2008

 

42

 

398,856

 

5.87

 

12,499,008

 

31.34

 

2009

 

35

 

550,710

 

8.10

 

16,413,252

 

29.80

 

2010

 

42

 

1,050,848

 

15.46

 

29,586,460

 

28.15

 

2011

 

28

 

352,236

 

5.18

 

12,123,972

 

34.42

 

2012 & thereafter

 

32

 

1,425,973

 

20.97

 

35,251,089

 

24.72

 

Total/weighted average

 

808

 

6,798,087

 

100.00

 

$

193,979,865

 

$

28.53

 

 


(1)                   Annualized Rent of Expiring Leases represents the monthly contractual rent under existing leases as of December 31, 2001 multiplied by 12.  This amount reflects total rent before any rent abatements and includes expense reimbursements, which may be estimated as of such date.  Total rent abatements for leases in effect as of December 31, 2001 for the 12 months ending December 31, 2002 are approximately $1,307,000 for the Properties.

 

(2)      Annualized Rent Per Leased Square Foot of Expiring Leases represents Annualized Rent of Expiring Leases, as described in footnote (1) above, presented on a per leased square foot basis.

 

13



 

Joint Venture Properties

Year of Lease Expiration

 

Number of Expiring Leases

 

Square Footage of Expiring Leases

 

Percentage of Total Leased Square Feet (%)

 

Annualized Rent of Expiring Leases (1)

 

Annualized Rent Per Leased Square Foot of Expiring Leases (2)

 

2002

 

39

 

369,580

 

12.16

 

$

13,436,328

 

$

36.36

 

2003

 

18

 

230,252

 

7.58

 

5,860,200

 

25.45

 

2004

 

24

 

176,496

 

5.81

 

5,592,156

 

31.68

 

2005

 

17

 

288,422

 

9.49

 

9,122,100

 

31.63

 

2006

 

24

 

319,215

 

10.51

 

8,927,712

 

27.97

 

2007

 

11

 

298,696

 

9.83

 

10,057,140

 

33.67

 

2008

 

14

 

170,690

 

5.62

 

4,925,772

 

28.86

 

2009

 

18

 

570,327

 

18.77

 

18,350,172

 

32.17

 

2010

 

14

 

299,746

 

9.86

 

10,677,696

 

35.62

 

2011

 

6

 

67,912

 

2.24

 

1,351,680

 

19.90

 

2012 & thereafter

 

10

 

247,181

 

8.13

 

6,622,587

 

26.79

 

Total/weighted average

 

195

 

3,038,517

 

100.00

 

$

94,923,543

 

$

31.24

 

 


(1)                   Annualized Rent of Expiring Leases represents the monthly contractual rent under existing leases as of December 31, 2001 multiplied by 12.  This amount reflects total rent before any rent abatements and includes expense reimbursements, which may be estimated as of such date.  Total rent abatements for leases in effect as of December 31, 2001 for the 12 months ending December 31, 2002 are approximately $695,000 for the joint venture properties.

 

(2)                   Annualized Rent Per Leased Square Foot of Expiring Leases represents Annualized Rent of Expiring Leases, as described in footnote (1) above, presented on a per leased square foot basis.

 

14



Tenant Diversification

The Portfolio is currently leased to approximately 986 tenants which are engaged in a variety of businesses, including professional services, financial services, media, apparel, business services and government/non-profit.  The following table sets forth information regarding the leases with respect to the 20 largest tenants in the Portfolio, based on the amount of square footage leased by such tenants as of December 31, 2001:

 

Tenant (1)

 

Properties

 

Remaining Lease Term in Months

 

Total Leased Square Feet

 

Percentage of Aggregate Portfolio Leased Square Feet (%)

 

Annualized Rent (10)

 

Percentage of Aggregate Portfolio Annualized Rent (%)

 

City of New York (2)

 

17 Battery Place North and 1250 Broadway

 

132

 

317,867

 

3.17

 

$

6,348,480

 

2.20

 

BMW of Manhattan, Inc.

 

555 West 57th Street

 

127

 

227,782

 

2.27

 

2,806,224

 

0.97

 

Visiting Nurse Services (3)

 

1250 Broadway

 

116

 

213,120

 

1.70

 

4,382,280

 

1.52

 

Philip Morris Mgmt. Co.

 

100 Park Avenue

 

72

 

175,887

 

1.75

 

6,445,140

 

2.23

 

J&W Seligman & Co., Inc.

 

100 Park Avenue

 

85

 

168,390

 

1.68

 

5,133,144

 

1.78

 

City University of NY-CUNY (4)

 

555 West 57th Street

 

101

 

168,014

 

1.67

 

3,972,312

 

1.37

 

Segal Company

 

1 Park Avenue

 

96

 

157,944

 

1.57

 

5,508,612

 

1.91

 

Loews Corporation

 

1 Park Avenue

 

12

 

155,765

 

1.55

 

6,910,344

 

2.39

 

MTA. (5)

 

420 Lexington Avenue

 

169

 

134,687

 

1.34

 

3,838,836

 

1.33

 

St. Luke’s Roosevelt Hospital

 

555 West 57th Street

 

150

 

133,700

 

1.33

 

2,993,196

 

1.04

 

CBS, Inc. (6)

 

555 West 57th Street

 

102

 

127,320

 

1.27

 

2,402,580

 

0.83

 

Ross Stores

 

1372 Broadway

 

77

 

101,741

 

1.01

 

2,605,176

 

0.90

 

Ketchum, Inc.

 

711 Third Avenue

 

167

 

100,876

 

1.01

 

3,984,780

 

1.38

 

CHF Industries

 

1 Park Avenue

 

37

 

100,000

 

1.00

 

3,370,272

 

1.17

 

Coty, Inc.

 

1 Park Avenue

 

162

 

100,000

 

1.00

 

3,542,028

 

1.23

 

New York Presbyterian Hospital (7)

 

555 West 57th Street and 673 First Avenue

 

96

 

99,650

 

0.99

 

2,595,660

 

0.90

 

Ann Taylor (8)

 

11372 Broadway

 

103

 

93,020

 

0.93

 

2,357,496

 

0.82

 

Crain Communications, Inc.

 

711 Third Avenue

 

85

 

90,531

 

0.90

 

3,263,172

 

1.13

 

Information Builders, Inc.

 

1250 Broadway

 

15

 

88,571

 

0.88

 

2,115,708

 

0.73

 

Advanstar Communications

 

1 Park Avenue

 

100

 

85,284

 

0.85

 

2,893,488

 

1.00

 

Total/Weighted Average(9)

 

 

 

 

 

2,798,107

 

27.87

 

$

77,468,928

 

26.83

 

 


(1)  This list is not intended to be representative of the Company’s tenants as a whole.

(2)  48,000 square feet expire September 2007; 269,867 square feet expire December 2012.

(3)  171,078 square feet expire August 2006; 42,042 square feet expire August 2011.

(4)  93,061 square feet expire May 2010; 50,000 square feet expire January 2015.

(5)  22,467 square feet expire May 2008; 112,220 square feet expire January 2016.

(6)  106,644 square feet expire December 2003; 20,676 square feet expire June 2010.

(7)  76,000 square feet expire August 2006; 23,650 square feet expire December 2009.

(8)  34,045 square feet expire January 2010; 58,975 square feet expire August 2010.

(9)  Weighted average calculation based on total rentable square footage leased by each tenant.

(10) Annualized Rent represents the monthly contractual rent under existing leases as of December 31, 2001 multiplied by 12. This amount reflects total rent before any rent abatements and includes expense reimbursements, which may be estimated as of such date.  Total rent abatements for leases in effect as of December 31, 2001 for the 12 months ending December 31, 2002 are approximately $1,307,000 for Properties and $695,000 for the joint venture properties.

 

15



 

420 Lexington Avenue (The Graybar Building)

 

The Company purchased the tenant's interest in the operating sublease (the “Operating Sublease”) at 420 Lexington Avenue, also known as the Graybar Building, in March 1998. This 31-story office property sits at the foot of Grand Central Terminal in the Grand Central North sub–market of the midtown Manhattan office market. The Graybar Building was designed by Sloan and Robertson and completed in 1927.  The building takes its name from its original owner, the Graybar Electric Company.  The Graybar Building contains approximately 1.2 million rentable square feet (including approximately 1,135,000 square feet of office space, and 53,000 square feet of mezzanine and retail space), with floor plates ranging from 17,000 square feet to 50,000 square feet.  The Company restored the grandeur of this building through the implementation of an $11.9 million capital improvement program geared toward certain cosmetic upgrades, including new entrance and storefronts, new lobby, elevator cabs, and elevator lobbies and corridors.

 

The Graybar Building offers unsurpassed convenience to transportation.  The Graybar Building enjoys excellent accessibility to a wide variety of transportation options with a direct passageway to Grand Central Station. Grand Central Station is the major transportation destination for commutation from southern Connecticut and Westchester, Putnam and Dutchess counties.  Major bus and subway lines serve this property as well.  The property is ideally located to take advantage of the renaissance of Grand Central Terminal, which has been redeveloped into a major retail/transportation hub containing restaurants such as Michael Jordan's Steakhouse and retailers such as Banana Republic and Kenneth Cole.

 

The Graybar Building consists of the building at 420 Lexington Avenue and fee title to a portion of the land above the railroad tracks and associated structures which form a portion of the Grand Central Terminal complex in midtown Manhattan.  The Company's interest consists of a tenant's interest in a controlling sublease, as described below.

 

Fee title to the building and the land parcel is owned by an unaffiliated third party, who also owns the landlord's interest under a lease expiring December 31, 2008 subject to renewal by the tenant through December 31, 2029 (the “Ground Lease”).  The Company controls the exercise of this renewal option through the terms of subordinate leases which have corresponding renewal option terms and control provisions and which culminate in the Operating Sublease.  An unaffiliated third-party owns the landlord's interest in the Operating Sublease.

 

The Graybar Building is our largest property.  It contributes Annualized Rent of approximately $39.5 million, or 20.4% of the Portfolio’s Annualized Rent at December 31, 2001.

 

16



 

As of December 31, 2001, 94.8% of the rentable square footage in the Graybar Building was leased.  The following table sets forth certain information with respect to the property:

 

Year–End

 

Percent Occupied

 

Annualized Rent per Leased Square Foot

 

2001

 

95

%

$

33.48

 

2000

 

100

 

32.81

 

1999

 

97

 

29.63

 

1998

 

98

 

25.30

 

1997

 

86

 

26.80

 

 

As of December 31, 2001, the Graybar Building was leased to 249 tenants operating in various industries, including legal services, financial services and advertising.  One tenant occupied approximately 11.3% of the rentable square footage at this property and accounted for approximately 9.7% of this property's Annualized Rent.  The next largest tenant occupied approximately 6.3% of the rentable square footage at this property and accounted for approximately 7.2% of this property’s Annualized Rent.

 

The following table sets out a schedule of the annual lease expirations at the Graybar Building for leases executed as of December 31, 2001 with respect to each of the next ten years and thereafter (assuming that no tenants exercise renewal or cancellation options and that there are no tenant bankruptcies or other tenant defaults):

 

Year of Lease Expiration

 

Number of Expiring Leases

 

Square Footage of Expiring Leases

 

Percentage of Total Leased Square Feet (%)

 

Annualized Rent of Expiring Leases (1)

 

Annualized Rent Per Leased Square Foot of Expiring Leases (2)

 

2002

 

44

 

113,608

 

9.6

 

$

3,446,532

 

$

30.34

 

2003

 

40

 

80,484

 

6.8

 

3,025,464

 

37.59

 

2004

 

40

 

98,845

 

8.4

 

3,353,112

 

33.92

 

2005

 

45

 

112,056

 

9.5

 

4,342,392

 

38.75

 

2006

 

21

 

100,251

 

8.5

 

3,428,100

 

34.20

 

2007

 

18

 

76,679

 

6.5

 

1,854,024

 

24.18

 

2008

 

10

 

101,987

 

8.7

 

3,858,780

 

37.84

 

2009

 

8

 

97,361

 

8.3

 

3,502,524

 

35.97

 

2010

 

10

 

139,834

 

11.9

 

4,505,808

 

32.22

 

2011

 

10

 

90,851

 

7.7

 

3,208,392

 

35.31

 

2012 & thereafter

 

5

 

167,001

 

14.1

 

4,947,612

 

29.63

 

Subtotal/Weighted average

 

251

 

1,178,957

 

100.0

 

$

39,472,740

 

$

33.48

 

 


(1)    Annualized Rent of Expiring Leases represents the monthly contractual rent under existing leases as of December 31, 2001 multiplied by 12.  This amount reflects total rent before any rent abatements and includes expense reimbursements, which may be estimated as of such date.  Total rent abatements for leases in effect as of December 31, 2001 for the 12 months ending December 31, 2002 are approximately $84,000 for the Property.

 

(2)    Annualized Rent Per Leased Square Foot of Expiring Leases represents Annualized Rent of Expiring Leases, as described in footnote (1) above, presented on a per leased square foot basis.

 

17



 

The aggregate undepreciated tax basis of depreciable real property at the Graybar Building for Federal income tax purposes was $136.5 million as of December 31, 2001. Depreciation and amortization are computed for Federal income tax purposes on the straight-line method over lives which range up to 39 years.

 

The current real estate tax rate for all Manhattan office properties is $9.656 per $100 of assessed value. The total annual tax for the Graybar Building at this rate, including the applicable BID tax for the 2001/02 tax year, is $6.5 million (at a taxable assessed value of $64.5 million).

 

Environmental Matters

The Company engaged independent environmental consulting firms to perform Phase I environmental site assessments on the Portfolio, in order to assess existing environmental conditions. All of the Phase I assessments have been conducted since March 1997. All of the Phase I assessments met the ASTM Standard. Under the ASTM Standard, a Phase I environmental site assessment consists of a site visit, an historical record review, a review of regulatory agency data bases and records, interviews, and a report, with the purpose of identifying potential environmental concerns associated with real estate. The Phase I assessments conducted at the Properties also addressed certain issues that are not covered by the ASTM Standard, including asbestos, radon, lead-based paint and lead in drinking water. These environmental site assessments did not reveal any known environmental liability that the Company believes will have a material adverse effect on the Company's results of operations or financial condition.

 

The following summarizes certain environmental issues described in the Phase I environmental site assessment reports:

 

The asbestos surveys conducted as part of the Phase I site assessments identified immaterial amounts of damaged, friable asbestos-containing material (“ACM”) in isolated locations in three properties (470 Park Avenue South, 1140 Avenue of the Americas and 1372 Broadway). At each of these properties, the environmental consultant recommended abatement of the damaged, friable ACM and this was completed by the Company at each of these properties. At all of the properties except 50 West 23rd Street, non-friable ACM, in good condition, was identified. For each of these properties, the consultant recommended preparation and implementation of an asbestos Operations and Maintenance (“O & M”) program to monitor the condition of ACM and to ensure that any ACM that becomes friable and damaged is properly addressed.  The Company has implemented such an O & M program.

 

The Phase I environmental site assessments identified minor releases of petroleum products at 70 West 36th Street.  The consultant recommended implementation of certain measures to further investigate, and to clean up, these releases.  The Company does not believe that any actions that may be required as a result of these releases will have a material adverse effect on the Company's results of operations or financial condition.

 

ITEM 3.   LEGAL PROCEEDINGS

 

As of December 31, 2001, the Company was not involved in any material litigation nor, to management's knowledge, is any material litigation threatened against it or its Portfolio other than routine litigation arising in the ordinary course of business or litigation that is adequately covered by insurance.

 

On October 24, 2001, an accident occurred at 215 Park Avenue South, a property which the Company manages, but does not own.  Personal injury claims have been filed against the Company and others by 12 persons.  The Company believes that there is sufficient insurance coverage to cover the cost of such claims, as well as any other personal injury or property claims which may arise.

 

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

During the fourth quarter ended December 31, 2001, no matter was submitted to a vote of security holders.

 

18



PART II

 

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

The common stock of the Company began trading on the New York Stock Exchange ("NYSE") on August 15, 1997 under the symbol "SLG". On February 28, 2002, the reported closing sale price per share of common stock on the NYSE was $31.92 and there were approximately 73 holders of record of the Company's common stock.  The table below sets forth the quarterly high and low closing sales prices of the common stock on the NYSE and the distributions paid by the Company with respect to the periods indicated.

 

 

 

2001

 

2000

 

Quarter Ended

 

High

 

Low

 

Dividends

 

High

 

Low

 

Dividends

 

March 31

 

$

28.75

 

$

26.37

 

$

0.3875

 

$

23.54

 

$

19.87

 

$

0.3625

 

June 30

 

$

30.31

 

$

25.30

 

$

0.3875

 

$

26.60

 

$

22.34

 

$

0.3625

 

September 30

 

$

31.52

 

$

28.60

 

$

0.3875

 

$

29.59

 

$

25.99

 

$

0.3625

 

December 31

 

$

31.37

 

$

29.53

 

$

0.4425

 

$

30.00

 

$

24.41

 

$

0.3875

 

 

If dividends are declared  in a quarter, those dividends will be paid during the subsequent quarter.

 

UNITS

 

At December 31, 2001 there were 2,271,404 units of limited partnership interest of the Operating Partnership outstanding.  These units received distributions per unit in the same manner as dividends were distributed per share to common stockholders.

 

SALE OF UNREGISTERED AND REGISTERED SECURITIES

 

The Company's issuance of securities in the transactions referenced below were not registered under the Securities Act of 1933, pursuant to the exemption contemplated by Section 4(2) thereof for transactions not involving a public offering.

 

The Company issued 240,000, 20,000 and 165,500 shares of its common stock in 1999, 2000 and 2001, respectively, for deferred stock-based compensation in connection with employment contracts.

 

On July 25, 2001, the Company completed the sale of 5,000,000 shares of common stock under its shelf registration statement.  The net proceeds from this offering ($148.4 million) were used to pay down the 2000 Unsecured Credit Facility.

 

19



 

ITEM 6.     SELECTED FINANCIAL DATA

 

The following table sets forth selected financial data for the Company, and on an historical combined basis for the SL Green Predecessor, and should be read in conjunction with the Company’s Financial Statements and notes thereto included in Item 8, “Financial Statements and Supplementary Data” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K.  The balance sheet information as of December 31, 2001, 2000, 1999, 1998 and 1997 represents the consolidated balance sheet of the Company and the statement of income for the years ended December 31, 2001, 2000, 1999 and 1998 and the period August 21, 1997 to December 31, 1997 represents consolidated results of the Company since the IPO. The combined statement of income for the period January 1, 1997 to August 20, 1997 of the SL Green Predecessor was derived from the historical combined financial statements.

 

The SL Green Predecessor consisted of the assets, liabilities and owners’ deficits and results of operations of two properties, 1414 Avenue of the Americas and 70 West 36th Street, equity interests in four other properties, namely, 673 First Avenue, 470 Park Avenue South, 29 West 35th Street and the Bar Building (which interests are accounted for under the equity method) and of the assets, liabilities and owners’ equity and results of operations of the Company’s affiliated Service Corporation.

 

20



 

The Company and SL Green Predecessor

(In thousands, except per share data)

 

Operating Data:

 

The Company

 

SL GreenPredecessor January 1, to August 20,1997

 

 

Year ended December 31

 

August 21 to December 31, 1997

 

 

 

2001

 

2000

 

1999

 

1998

 

 

 

Total revenue.

 

$

257,685

 

$

230,323

 

$

206,017

 

$

134,552

 

$

23,207

 

$

9,724

 

Property operating expenses

 

70,720

 

67,304

 

62,168

 

45,207

 

7,077

 

2,722

 

Real estate taxes

 

30,963

 

28,850

 

29,198

 

21,224

 

3,498

 

705

 

Interest

 

46,238

 

40,431

 

28,610

 

13,086

 

2,135

 

1,062

 

Depreciation and amortization

 

38,336

 

32,511

 

27,260

 

15,404

 

2,815

 

811

 

Loss on terminated project

 

 

 

 

1,065

 

 

 

Loss on hedge transaction

 

 

 

 

176

 

 

 

Marketing, general and administration

 

15,374

 

11,561

 

10,922

 

5,760

 

948

 

2,189

 

Total expenses

 

201,631

 

180,657

 

158,158

 

101,922

 

16,473

 

7,489

 

Operating income

 

56,054

 

49,666

 

47,859

 

32,630

 

6,734

 

2,235

 

Equity in net (loss) income from affiliates

 

(1,054

)

378

 

730

 

387

 

(101

)

 

Equity in net income of unconsolidated joint ventures

 

8,607

 

3,108

 

377

 

 

 

 

Equity in net loss of uncombined joint ventures

 

 

 

 

 

 

(770

)

Income before minority interest, extraordinary items and gain on sales

 

63,607

 

53,152

 

48,966

 

33,017

 

6,633

 

1,465

 

Minority interest

 

(4,600

)

(7,430

)

(5,121

)

(3,043

)

(1,074

)

 

Income before extraordinary items and gain on sale

 

59,007

 

45,722

 

43,845

 

29,974

 

5,559

 

1,465

 

Gain on sale of properties/Preferred investments

 

4,956

 

41,416

 

 

 

 

 

Extraordinary items (net of minority interest)

 

(430

)

(921

)

(989

)

(522

)

(1,874

)

22,087

 

Cumulative effect of change in accounting principle

 

(532

)

 

 

 

 

 

Net income

 

63,001

 

86,217

 

42,856

 

29,452

 

3,685

 

23,552

 

Preferred dividends and accretion

 

(9,658

)

(9,626

)

(9,598

)

(5970

)

 

 

Income available to common shareholders

 

$

53,343

 

$

 76,591

 

$

 33,258

 

$

 23,482

 

$

 3,685

 

$

 23,552

 

Net income per common share basic

 

$

 1.98

 

$

 3.14

 

$

 1.37

 

$

 1.19

 

$

 0.45

 

 

 

Net income per common share dilated

 

$

 1.94

 

$

 2.93

 

$

 1.37

 

$

 1.19

 

$

 0.30

 

 

 

Cash dividends declared per common share

 

$

 1.605

 

$

 1.475

 

$

 1.41

 

$

 1.40

 

$

 0.51

 

 

 

Basic weighted average common shares outstanding

 

26,993

 

24,373

 

24,192

 

19,675

 

12,292

 

 

 

Diluted weighted average common share and common share equivalents outstanding

 

29,808

 

31,818

 

26,680

 

22,145

 

12,404

 

 

 

 

 

21



 

 

Balance Sheet Data:

 

The Company

 

 

December 31.

 

 

 

 

2001

 

2000

 

1999

 

1998

 

1997

 

 

 

(in thousands)

 

Commercial real estate, before accumulated depreciation

 

$

984,375

 

$

895,810

 

$

908,866

 

$

697,061

 

$

338,818

 

Total assets

 

1,371,577

 

1,161,154

 

1,071,242

 

777,796

 

382,775

 

Mortgages and notes payable

 

504,831

 

460,716

 

435,693

 

162,162

 

128,820

 

Accrued interest payable

 

1,875

 

2,349

 

2,650

 

494

 

552

 

Minority interest

 

46,430

 

43,326

 

41,494

 

41,491

 

33,906

 

Preferred income equity Redeemable shares (SM)

 

111,231

 

110,774

 

110,348

 

109,950

 

 

Stockholders' equity

 

614,357

 

455,073

 

406,104

 

404,826

 

176,208

 

 

 

Other Data:

 

The Company

 

SL Green  Predecessor January 1, to August 20,

 

 

 

 

 

Year Ended Decenber 31,

 

August 21, to December 31,

 

 

 

 

 

 

 

 

2001

 

2000

 

1999

 

1998

 

1997

 

1997

 

 

 

(in thousands)

 

Funds from operations after distributions to preferred share holders (1)

 

$

94,844

 

$

75,619

 

$

62,645

 

$

42,858

 

$

9,355

 

$

––

 

Funds from operations before distributions to preferred shareholders(l)

 

104,044

 

84,819

 

71,845

 

48,578

 

9,355

 

––

 

Net cash provided by operating activities

 

80,588

 

53,806

 

48,013

 

22,665

 

5,713

 

2,838

 

Net cash (used in) investing activities

 

(420,061

)

(38,699

)

(228,678

)

(376,593

)

(217,165

)

(5,559

)

Net cash provided by (used in) financing activities

 

341,873

 

(25,875

)

195,990

 

347,382

 

224,234

 

2,782

 

 


(1)      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.

 

22



 

ITEM 7.                        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  (the “Exchange Act”).  Such forward-looking statements relate to, without limitation, the Company’s 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.  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.  The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Exchange Act.  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.  Readers are cautioned not to place undue reliance on these forward-looking statements.  Among the factors about which the Company has made assumptions are 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, tenants’ ability to pay rent at current or increased levels, accounting principles, policies and guidelines applicable to REITs, environmental risks, tenant bankruptcies and defaults, the availability and cost of comprehensive insurance, including coverage for terrorist acts, and other factors, many of which are beyond the control of the Company.

 

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 December 31, 2001, the Company’s wholly-owned portfolio (the “Properties”) consisted of 19 commercial properties encompassing approximately 6.9 million rentable square feet located primarily in midtown Manhattan (“Manhattan”), a borough of New York City.   As of December 31, 2001, the weighted average occupancy (total occupied square feet divided by total available square feet) of the Properties was 97.4%.  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 which were 98.4% occupied as of December 31, 2001.  The Company also owns one triple-net leased property located in Shelton, Connecticut.  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.

 

The tragedy of September 11, 2001 had a significant effect on New York City real estate.  A majority of the Company’s portfolio is located in midtown Manhattan.  There was no resulting damage to any of our properties.  The current operating results of the properties were not impacted by the tragedy and resulted in a minimal increase to operating expenses through increased building security.

 

The real estate industry has, however, been experiencing a significant change in the property insurance markets that has resulted in significantly higher premiums for landlords whose policies are subject to renewal in 2002, primarily in the area of terrorism insurance coverage.  The Company’s current insurance policy does not expire until October 2002 and under that policy, the Company’s current portfolio is covered for acts of terrorism.  The Company does not know if sufficient insurance coverage will be available when the current policy expires, or the costs for obtaining a policy containing terms similar to our current policy.  The Company’s policy may not cover newly acquired properties, and additional insurance may need to be obtained prior to October 2002.  This may have an impact on the availability and cost of secured financing in the future.

 

23



 

The following discussion related to the consolidated financial statements of the Company should be read in conjunction with the financial statements appearing in Item 8.

 

Results of Operations

 

Comparison of year ended December 31, 2001 to year ended December 31, 2000

 

The following comparison of the year ended December 31, 2001 (“2001”) to the year ended December 31, 2000 (“2000”) makes reference to the following:  (i) the effect of the “Same-Store Properties,” which represent all properties owned by the Company at January 1, 2000 and at December 31, 2001, (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 (February 2000), 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 which was contributed to a joint venture (May 2001) and 1412 Broadway (June 2001).

 

Rental Revenues

 

 

 

 

 

$ Change

 

% Change

 

 

 

2001

 

2000

 

 

 

 

 

(in millions)

 

Rental revenue

 

$

204.6

 

$

189.0

 

$

15.6

 

8.3

%

Escalation and reimbursement revenue

 

31.3

 

24.7

 

6.6

 

26.7

 

Signage revenue

 

1.5

 

2.1

 

(0.6

)

(28.6

)

Total

 

$

237.4

 

$

215.8

 

$

21.6

 

10.0

%

 

 

 

 

 

 

 

 

 

 

Same-Store Properties

 

$

183.3

 

$

173.6

 

$

9.7

 

5.6

%

2001 Acquisitions

 

30.3

 

 

30.3

 

 

Dispositions

 

6.6

 

18.6

 

(12.0

)

(64.5

)

Other properties

 

17.2

 

23.6

 

(6.4

)

(27.1

)

Total

 

$

237.4

 

$

215.8

 

$

21.6

 

10.0

%

 

The increase in rental revenue occurred even though occupancy levels decreased at Same-Store Properties from 98.4% at December 31, 2000 to 97.4% at December 31, 2001.  Annualized rents from replacement rents on previously occupied space at Same-Store Properties were 43.0% higher than previous fully escalated rents.  The Company estimates that the difference between existing in-place fully escalated rents and current market rents on its wholly-owned properties is approximately 31.9%.  Approximately 6.6% of the space leased at wholly-owned properties expires during 2002.

 

The increase in escalation and reimbursement revenue was primarily due to higher operating expense recoveries ($5.3 million) and utility recoveries ($1.3 million).  On an annualized basis, the Company recovered approximately 90% of its electric costs.

 

The decrease in signage revenue was primarily attributable to 1466 Broadway as several temporary signs were not fully leased during 2001 ($0.6 million).

 

Investment and Other Income

 

 

 

 

 

$ Change

 

% Change

 

 

 

2001

 

2000

 

 

 

 

 

(in millions)

 

Equity in net income of unconsolidated joint ventures

 

$

8.6

 

$

3.1

 

$

5.5

 

177.4

%

Investment income

 

17.4

 

13.3

 

4.1

 

30.8

 

Other

 

2.8

 

1.1

 

1.7

 

154.6

 

Total

 

$

28.8

 

$

17.5

 

$

11.3

 

64.6

%

 

24



 

The increase in equity in net income of unconsolidated joint ventures is due to the Company having had 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 increased from 98.0% in 2000 to 98.4% in 2001.  Annualized rent and annualized net effective rent per leased square foot increased 10.9% and 1.4%, respectively, over 2000 rates.  The Company estimates that the difference between existing in-place fully escalated rents and current market rents is approximately 36.0%.  Approximately 12.2% of the space leased at joint venture properties expires in 2002.

 

The increase in investment income primarily represents interest income from structured finance transactions ($8.3 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 ($2.5 million) and a decrease in interest from excess cash on hand ($0.2 million).  For 2001, the weighted average loan balance outstanding and yield were $105,256 and 14.18%, respectively, compared to $55,250 and 21.08%, respectively, for 2000.  The Company wrote down its investment in a technology company and a technology fund ($1.5 million).

 

Property Operating Expenses

 

 

 

 

 

$ Change

 

% Change

 

 

 

2001

 

2000

 

 

 

 

 

(in millions)

 

Operating expenses (excluding electric)

 

$

39.7

 

$

37.9

 

$

1.8

 

4.7

%

Electric costs

 

18.4

 

16.7

 

1.7

 

10.2

 

Real estate taxes

 

31.0

 

28.9

 

2.1

 

7.3

 

Ground rent

 

12.6

 

12.7

 

(0.1

)

(0.8

)

Total

 

101.7

 

$

96.2

 

$

5.5

 

5.7

%

 

 

 

 

 

 

 

 

 

 

Same-Store Properties

 

$

78.9

 

$

76.4

 

$

2.5

 

3.3

%

2001 Acquisitions

 

10.7

 

 

10.7

 

 

Dispositions

 

2.6

 

6.9

 

(4.3

)

(62.3

)

Other properties

 

9.5

 

12.9

 

(3.4

)

(26.4

)

Total

 

$

101.7

 

$

96.2

 

$

5.5

 

5.7

%

 

The increase in operating expenses, excluding electric, was primarily due to  increased security measures implemented ($0.6 million), advertising ($0.4 million), insurance ($0.2 million) and cleaning costs ($1.1 million).  This was offset by a decrease in repairs and maintenance ($0.9 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 ($4.0 million), and Same-Store Properties which increased real estate taxes by $0.5 million (2%) as the assessed values on these properties increased.  This increase was partially offset by a decrease in real estate taxes due to the Dispositions ($2.4 million).

 

Other Expenses

 

 

 

 

 

$ Change

 

% Change

 

 

 

2001

 

2000

 

 

 

 

 

(in millions)

 

Interest expense

 

$

46.2

 

$

40.4

 

$

5.8

 

14.4

%

Depreciation and amortization expense

 

38.3

 

32.5

 

5.8

 

17.9

 

Marketing, general and administrative expense

 

15.4

 

11.6

 

3.8

 

32.7

 

Total

 

$

99.9

 

$

84.5

 

$

15.4

 

18.2

%

 

The increase in interest expense was primarily attributable to new secured mortgage financing being placed on Same-Store Properties ($2.1 million), mortgage financing associated with the 2001 Acquisitions ($5.5 million) and an increase in interest expense at the corporate level ($1.2 million).  This was partially offset by the interest savings from the Dispositions ($3.0 million).  The weighted average interest rate for the Company’s indebtedness was 6.91% at December 31, 2001 compared to 8.2% at December 31, 2000.  The 30-day LIBOR at December 31, 2001 was 1.87% compared to 6.82% at December 31, 2000 and this resulted in interest savings on the Company’s variable rate debt.

 

25



 

Marketing, general and administrative expense increased primarily due to increased personnel costs primarily related to several executive management changes, and higher year-end compensation and severance costs ($1.6 million), a donation to assist the victims and families of the World Trade Center tragedy ($1.0 million), professional fees ($0.2 million), income taxes ($0.2 million), and telecommunications expense ($0.2 million).  Marketing, general and administrative expense increased from 5.0% in 2000 to 6.0% of total revenue in 2001.

 

Comparison of year ended December 31, 2000 to year ended December 31, 1999

 

The following comparison of the year ended December 31, 2000 (“2000”) to the year ended December 31, 1999 (“1999”) makes reference to the following:  (i) the effect of the “Same-Store Properties,” which represent all properties owned by the Company at January 1, 1999, (ii) the effect of the “1999 Acquisitions,” which represent all properties acquired in 1999, namely, 555 West 57th Street (January 1999) and 286, 290 and 292 Madison Avenue (May 1999), and (iii) the effect of the “2000 Dispositions,” which represent all properties disposed of in 2000, namely, 29 West 35th Street (February 2000), 36 West 44th Street (March 2000) and 321 West 44th Street (May 2000) which was contributed to a joint venture.

 

Rental Revenues

 

 

 

 

 

$ Change

 

% Change

 

 

 

2000

 

1999

 

 

 

 

 

(in millions)

 

Rental revenue

 

$

189.0

 

$

174.9

 

$

14.1

 

8.1

%

Escalation and reimbursement revenue

 

24.7

 

21.9

 

2.8

 

12.8

 

Signage revenue

 

2.1

 

1.7

 

0.4

 

23.5

 

Total

 

$

215.8

 

$

198.5

 

$

17.3

 

8.7

%

 

 

 

 

 

 

 

 

 

 

Same-Store Properties

 

$

163.8

 

$

144.8

 

$

19.0

 

13.1

%

1999 Acquisitions

 

50.0

 

43.0

 

7.0

 

16.3

 

2000 Dispositions

 

2.0

 

10.7

 

(8.7

)

(81.3

)

Total

 

$

215.8

 

$

198.5

 

$

17.3

 

8.7

%

 

The increase in rental revenues was primarily due to an overall increase in occupancy at the Properties from 98% in 1999 to 99% in 2000.  In addition, annualized rents from replacement rents on previously occupied space at Same-Store Properties and portfolio wide were 49% and 41% higher than previous fully escalated rents, respectively.

 

The increase in escalation and reimbursement revenue was primarily due to the recovery of higher utility costs ($2.6 million).

 

The increase in signage revenue was primarily attributable to 1466 Broadway ($0.4 million).

 

Investment and Other Income

 

 

 

 

 

$ Change

 

% Change

 

 

 

2000

 

1999

 

 

 

 

 

(in millions)

 

Equity in net income of unconsolidated joint ventures

 

$

3.1

 

$

0.4

 

$

2.7

 

675.0

%

Investment income

 

13.3

 

5.3

 

8.0

 

150.9

 

Other

 

1.1

 

2.3

 

(1.2

)

(52.2

)

Total

 

$

17.5

 

$

8.0

 

$

9.5

 

118.8

%

 

The increase in equity in net income of unconsolidated joint ventures is due to the Company having had two joint venture investments in 1999 comprising one million square feet compared to four joint venture investments in 2000 comprising two million square feet.  In addition, the Company had a larger average equity interest in the joint ventures compared to the prior year.  Occupancy at the joint ventures increased from 94% in 1999 to 98% in 2000.  Annualized rent and annualized net effective rent per leased square foot increased 17% and 18%, respectively, over 1999 rates.  The Company estimated that the difference between existing in-place fully escalated rents and current market rents was approximately 71.6%.

 

26



 

The increase in investment income primarily represented interest income from 2 Grand Central Tower ($8.4 million).  The balance of the change in investment income was due to investments in 1370 Avenue of the Americas ($1.7 million, which included $0.7 million interest prepayment in connection with its early redemption), 17-29 West 44th Street ($0.7 million) and interest from excess cash on hand ($1.0 million).  This was partially offset by a decrease in investment income ($3.0 million) due to loans on 636 11th Avenue, 521 Fifth Avenue and 17 Battery Place being repaid in 1999.

 

Property Operating Expenses

 

 

 

 

 

$ Change

 

% Change

 

 

 

2000

 

1999

 

 

 

 

 

(in millions)

 

Operating expenses (excluding electric)

 

$

37.9

 

$

35.5

 

$

2.4

 

6.8

%

Electric costs

 

16.7

 

13.9

 

2.8

 

20.1

 

Real estate taxes

 

28.9

 

29.2

 

(0.3

)

(1.0

)

Ground rent

 

12.7

 

12.8

 

(0.1

)

(0.8

)

Total

 

$

96.2

 

$

91.4

 

$

4.8

 

5.3

%

 

 

 

 

 

 

 

 

 

 

Same-Store Properties

 

$

71.1

 

$

66.2

 

$

4.9

 

7.4

%

1999 Acquisitions

 

23.1

 

20.1

 

3.0

 

14.9

 

2000 Dispositions

 

2.0

 

5.1

 

(3.1

)

(60.8

)

Total

 

$

96.2

 

$

91.4

 

$

4.8

 

5.3

%

 

The increase in operating expenses, excluding electric, was primarily due to higher fuel costs ($0.6 million), higher cleaning costs ($0.9 million) and repairs and maintenance ($0.9 million).

 

The decrease in real estate taxes attributable to the 2000 Dispositions ($1.0 million) was partially offset by an increase in real estate taxes of $0.7 million due to the 1999 Acquisitions.  Overall, real estate taxes increased due to increases in property assessments which were partially offset by a reduction in tax rates over the prior year.

 

Other Expenses

 

 

 

 

 

$ Change

 

% Change

 

 

 

2000

 

1999

 

 

 

 

 

(in millions)

 

Interest expense

 

$

40.4

 

$

28.6

 

$

11.8

 

41.3

%

Depreciation and amortization expense

 

32.5

 

27.3

 

5.2

 

19.1

 

Marketing, general and administrative expense

 

11.6

 

10.9

 

0.7

 

6.4

 

Total

 

$

84.5

 

$

66.8

 

$

17.7

 

26.5

%

 

Interest expense increased due to increased borrowings in 2000 compared to 1999.  In addition, the weighted average interest rate at December 31, 2000 was 8.2% compared to 8.0% at December 31, 1999.

 

Depreciation and amortization increased primarily due to depreciation on the 1999 Acquisitions ($1.3 million) and capital expenditures and tenant improvements incurred on the Same-Store Properties ($3.7 million).  This was partially offset by the Dispositions ($1.1 million).

 

Marketing, general and administrative expense decreased as a percentage of total revenues, representing approximately 5.0% and 5.3% of total revenues for 2000 and 1999, respectively.

 

27



 

Liquidity and Capital Resources

 

Cash Flows

2001 Compared to 2000

Net cash provided by operating activities increased $26.8 million to $80.6 million for the year ended December 31, 2001, compared to $53.8 million for the year ended December 31, 2000.  Operating cash flow was primarily generated by the Same-Store Properties and 2001 Acquisitions, but was reduced by the decrease in operating cash flow from the Dispositions.

 

Net cash used in investing activities increased $381.3 million to $420.0 million for the year ended December 31, 2001 compared to $38.7 million for the year ended December 31, 2000.  The increase was due primarily to the higher dollar volume of acquisitions and capital improvements in 2001 ($390.0 million and $29.9 million, respectively) as compared to 2000 ($16.6 million and $38.9 million, respectively).  This relates primarily to the acquisitions of One Park Avenue and 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.  In 2001 approximately $50.2 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 $24.4 million due to the purchase of a 49.9% interest in 100 Park Avenue and a 49.9% interest in 180 Madison Avenue in 2000 compared to the purchase of a 35% interest in 469 Seventh Avenue and a 49.9% interest in 1250 Broadway in 2001.  In addition, 90 Broad Street was sold in December 2000 and a 45% interest in 1250 Broadway was sold in November 2001.  Refinancing proceeds from 1250 Broadway were also distributed.  Net proceeds from dispositions increased $26.0 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, 321 West 44th Street, 17 Battery South and our interest in 1370 Avenue of the Americas totaling $121.1 million in 2000.  The Company also had approximately $106.1 million in net new structured finance originations.

 

Net cash provided by financing activities increased $367.8 million to $341.9 million for the year ended December 31, 2001 compared to $(25.9) million for the year ended December 31, 2000.  The increase was primarily due to net proceeds from the common stock offering ($148.4 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 ($336.2 million), which was partially offset by higher debt repayments ($115.2 million).

 

2000 Compared to 1999

Net cash provided by operating activities increased $5.8 million to $53.8 million for the year ended December 31, 2000 compared to $48.0 million for the year ended December 31, 1999.  The increase was due primarily to operating cash flow generated by the Same-Store Properties and the 1999 Acquisitions which was partially offset by the decrease in operating cash flow from the 2000 Dispositions.

 

Net cash used in investing activities decreased $190.0 million to $38.7 million for the year ended December 31, 2000 compared to $228.7 million for the year ended December 31, 1999.  The decrease was primarily due to fewer acquisitions of wholly-owned properties and lower levels of capital improvements in 2000 ($16.6 million and $38.9 million, respectively) as compared to 1999 ($133.5 million and $45.2 million, respectively).  In addition, the Company had a $50.2 million acquisition deposit held in an escrow account for a transaction which closed in January 2001.  The net increase in investment in unconsolidated joint ventures ($32.6 million) and mortgage loans ($34.2 million) was partially offset by the proceeds from the dispositions of 29 West 35th Street, 36 West 44th Street, 321 West 44th Street, 17 Battery Place South and our interest in 1370 Avenue of the Americas, totaling $121.1 million and distributions from the joint ventures ($25.6 million).

 

Net cash provided by financing activities decreased $221.9 million to $(25.9) million for the year ended December 31, 2000 compared to $196.0 million for the year ended December 31, 1999.  The decrease was primarily due to lower borrowing requirements ($64.3 million) due to fewer acquisitions, and higher debt repayments ($160.0 million).

 

28



 

Capitalization

On July 25, 2001, the Company completed the sale of 5,000,000 shares of common stock under its shelf registration statement.  The net proceeds from this offering ($148.4 million) were used to pay down the