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, 2002

 

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

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ý No o.

 

As of March 3, 2003, there were 30,811,990 shares of the Registrant’s common stock outstanding. The aggregate market value of common stock held by non-affiliates of the Registrant (30,210,902 shares) at March 3, 2003, was $898,774,335.  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 7, 2003 and to be filed within 120 days after the close of the Registrant’s fiscal year are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 



 

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 Registrant’s Common Equity and Related Stockholders Matters

6.  Selected Financial Data

7.  Management’s Discussion and Analysis of Financial Condition and Results of Operation

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

14.  Controls and Procedures

 

PART IV

 

15.  Exhibits, Financial Statements, 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, or REIT, with in-house capabilities in property management, acquisitions, financing, development, construction and leasing.  We were formed in June 1997 for the purpose of continuing the commercial real estate business of S.L. Green Properties, Inc., our predecessor entity.  S.L. Green Properties, Inc., which was founded in 1980 by Stephen L. Green, our 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.  From 1980 to 1997, S.L. Green Properties had been involved in the acquisition of an aggregate of 31 office properties in Manhattan containing approximately 4.0 million square feet and the management of an aggregate of 50 office properties in Manhattan containing approximately 10.5 million square feet.

 

As of December 31, 2002, our portfolio, which included interests in 25 properties aggregating 11.5 million square feet, consisted of 19 wholly-owned commercial properties (the “Properties”) and six partially-owned commercial properties encompassing approximately 6.9 million and 4.6 million rentable square feet, respectively, located primarily in midtown Manhattan.  Our wholly-owned interests in these properties represent fee ownership (15 properties), including ownership in condominium units, leasehold ownership (two properties) and operating sublease ownership (two properties).  Pursuant to the operating sublease arrangements, we, as tenant under the operating sublease, perform the functions traditionally performed by landlords with respect to its subtenants.  We are responsible for not only collecting rent from subtenants, but also maintaining the property and paying expenses relating to the property.  As of December 31, 2002, the weighted average occupancy (total occupied square feet divided by total available square feet) of our wholly-owned properties was 96.6%.  Our six partially-owned properties, which we own through unconsolidated joint ventures, were 97.3% occupied as of December 31, 2002, (collectively, with the Properties, the “Portfolio”).  See Note 6 to the consolidated financial statements for a further discussion on our ownership interests in One Park Avenue, one of our joint venture properties.  We also own one triple-net leased retail property located in Shelton, Connecticut.  In addition, we manage three office properties owned by third-parties and affiliated companies encompassing approximately 1.0 million rentable square feet.

 

Our corporate offices are located in midtown Manhattan at 420 Lexington Avenue, New York, New York 10170.  Our corporate staff consists of 124 persons, including 96 professionals experienced in all aspects of commercial real estate.  We can be contacted at (212) 594-2700.  We maintain a website at www.slgreen.com.  On our website, you can obtain a copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as practicable after we file such material electronically with, or furnish it to, the Securities and Exchange Commission.

 

Unless the content requires otherwise, all references to “we,” “our,” and “us” in this annual report 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 our initial public offering (“IPO”) in August 1997, our 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.  We refer to this management entity as the “Service Corporation.”  We are organized so as to qualify and have elected to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”).

 

Substantially all of our assets are held by, and all of our operations are conducted through, our Operating Partnership, a Delaware limited partnership.  We are the sole managing general partner of, and as of December 31, 2002, was the owner of approximately 93.4% of the economic interests in, our Operating Partnership.  All of the management and leasing operations with respect to our wholly-owned properties are conducted through SL Green Management LLC (“Management LLC”).  Our Operating Partnership owns a 100% interest in Management LLC.

 

3



 

In order to maintain our qualification 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 the Service Corporation.  We, through our Operating Partnership, own 100% of the non-voting common stock (representing 95% of the total equity) of the Service Corporation.  Through dividends on our equity interest, we expect 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.  We account for our investment in the Service Corporation on the equity basis of accounting because we have significant influence with respect to management and operations, but do not control the entity.  Therefore, the operations of the Service Corporation are not consolidated into our financial results.  Effective January 1, 2001, the Service Corporation elected to be taxed as a taxable REIT subsidiary.

 

Business and Growth Strategies

Our primary business objective is to maximize total return to shareholders through growth in funds from operations and appreciation in the value of our assets.  We seek 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 which 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, we focus on properties that are within a ten minute walk of midtown Manhattan’s primary commuter stations, which we believe is a competitive advantage throughout the business cycle.

 

Property Acquisitions. We acquire properties for long term appreciation and earnings growth (core assets) or for shorter term holding periods where we attempt to create significant increases in value which, when sold, result in capital gains that increase our investment capital base (non-core assets).  In acquiring (core and non-core) properties, directly or through joint ventures with the highest quality institutional investors, we believe that we have the following advantages over our competitors: (i) senior management’s 20 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. We believe that there are properties that may be acquired which could greatly benefit from our 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 us an opportunity to meet market needs and generate favorable returns.

 

Property Dispositions. We continuously evaluate our properties to identify which are most suitable to meet our long term earnings growth objectives and contribute to increasing portfolio value.  Properties such as smaller side-street properties or properties that simply no longer meet our earnings objectives are identified as non-core holdings, and are targeted for sale to create investment capital.  We believe that we 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.

 

Leasing and Property Management. We seek to capitalize on our 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.  We believe proactive leasing efforts have contributed to average occupancy rates in our portfolio exceeding the market average.

 

4



 

Structured FinanceWe seek to invest in high-yield structured finance investments.  These investments generally 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 our unhedged floating rate debt.  We intend to invest up to 10% of our 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, we may in the future compete with such other REITs.  In addition, we 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 we do or that are willing to acquire properties in transactions which are more highly leveraged or are less attractive from a financial viewpoint than we are 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.

 

We seek to fill a niche between these two market categories by creating what we describe as a new class of space.  This is captured in our branded image “Better than A, Greater than B.”  We seek 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.  We have historically attracted many smaller growth oriented firms and have 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 occupied space in our properties at December 31, 2002, included Viacom International Inc., The City of New York, Visiting Nurse Services, BMW of Manhattan, Inc., Phillip Morris Management Corp., City University of New York, J&W Seligman & Co., Inc., CBS, Inc., Segal Company, Loews Corp., Metro North, St. Luke’s Roosevelt Hospital, Coty, Inc., Minskoff/Nederlander JV, Ross Stores, Ketchum, Inc., CHF Industries, New York Life Insurance Company, and New York Presbyterian Hospital.

 

Manhattan Office Market Demand

The properties in our Portfolio 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 of 387 million square feet with 229 million square feet in midtown.  Over the next five years, we estimate that Manhattan has approximately 4.7 million square feet of new construction coming on line.  This represents approximately 1.2 percent of total Manhattan inventory.  A majority of the new construction represents entirely pre-leased properties.  Midtown vacancy rates continued to increase during 2002.  The market has been impacted by 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, we believe that vacancy rates may continue to increase and rent may continue to decrease while tenant concession packages may increase.  Additionally, in order for us to maintain our current occupancy levels, we believe that ongoing capital improvements to the common areas and physical infrastructures will be required at our 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 seven to ten 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 periodic increases 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).

 

5



 

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 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 or increases in the consumer price index over the index value 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, 2002, we were able to recover approximately 89% of our 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.

 

Occupancy

The following table sets forth the leased rates at our properties as of December 31, 2002, 2001 and 2000:

 

 

 

Percent Leased as of December 31,

 

Property

 

2002

 

2001

 

2000

 

Same Store Properties(1)

 

97.1

%

97.4

%

98.4

%

Joint Venture Properties

 

97.3

%

98.4

%

96.9

%

Portfolio

 

96.9

%

97.7

%

98.6

%

 


(1)  Represents 15 our of 19 wholly-owned Properties owned by us at December 31, 2000 and still owned at December 31, 2002.

 

Rent Growth

Previous strength in the New York City economy fueled the demand for quality commercial space in our submarkets.  Over the past several years healthy demand paired with virtually no new supply resulted in upward pressure on market rents.  These increases provided us with the opportunity to generate positive rent growth during 2002 as these market rents have been significantly above the escalated in-place rents on expiring leases.  This rent growth for our Same-Store Properties, measured as the difference between effective (average) rents on new and renewed leases as compared to the expiring rent on those same spaces, was 41.0% for 2002.  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, we estimate that rents currently in place in our wholly-owned properties are approximately 6.6% below current market asking rents.  We estimate that rents currently in place in our properties owned through joint ventures are approximately 20.8% below current asking rents.  We refer to this premium over our current in-placed rents as embedded growth.  Embedded growth was 31.9% at December 31, 2001 for the wholly-owned properties and 36.0% for the joint venture properties. As of December 31, 2002, 34.7% and 31.4% of all leases in-place in our wholly-owned and joint venture properties are scheduled to expire during the next four years.  We expect 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 our estimates of current market rents are accurate, that market rents currently prevailing will not erode in the future or that we will realize any rent growth.  However, we believe the degree that rents in the current portfolio are below market provides a potential for long-term income growth.

 

Industry Segments

We are a REIT that owns, manages, leases and repositions office properties in Manhattan and have two reportable segments, office real estate and structured finance investments.  We evaluate real estate performance and allocate resources based on operating earnings.

 

6



 

Our real estate portfolio is primarily 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, 2002, no single tenant in our wholly-owned properties contributed more than 2.0% of our annualized revenue.  In addition, one property, 420 Lexington Avenue, contributed in excess of 10% of our consolidated revenue for 2002.  See Item 2 “Properties – 420 Lexington Avenue” for a further discussion on this property.  In addition, one tenant at 1515 Broadway, a joint venture property, contributes approximately 10.0% of Portfolio Annualized Rent.  This includes our consolidated annualized revenue and our share of joint venture annualized revenue.  Further, four borrowers each accounted for more than 10.0% of the revenue earned on structured finance investments at December 31, 2002.

 

Employees

At December 31, 2002, the Company employed approximately 570 employees, over 102 of whom were managers and professionals, approximately 436 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 which cover the workforce that services substantially all of our properties.

 

Acquisitions

We acquired the property located at 1515 Broadway, Manhattan in May 2002 through a joint venture for approximately $483.5 million.  We hold a 55% interest in this property.  The property is a 1.75 million square foot office tower.  The acquisition was financed with $335.0 million of mortgage debt and mezzanine loans and the balance was funded through borrowings under our unsecured revolving credit facility and our joint venture partner’s contribution to the joint venture.

 

Dispositions

Through a joint venture, we sold the 253,000 square foot property located at 469 Seventh Avenue in June, 2002 for $53.1 million.  The joint venture realized a gain of approximately $4.8 million.  We held a 35% interest in the joint venture which owned the property. As part of the sale, we made a preferred equity investment of $6.0 million in the entity acquiring the asset.  As a result of this continuing investment, we will defer recognition of our share of the gain until our preferred investment has been redeemed.

 

Offering/Financings

On December 5, 2002, we obtained a $150.0 million unsecured term loan.  This new unsecured credit facility matures on December 5, 2007.  We immediately borrowed $100.0 million under this term loan to repay approximately $100.0 million of the outstanding balance under our 2000 unsecured revolving credit facility.  As of March 3, 2003, we had $100.0 million outstanding under the term loan at the rate of 150 basis points over the London Interbank Borrowing Rate (“LIBOR”).  To limit our exposure to the variable LIBOR rate we entered into two swap agreements to fix the LIBOR rate on this loan.  The LIBOR rates were fixed at 1.637% for the first year and 4.06% for years two through five for a blended rate of 5.06%.  Under the terms of this term loan, at any time prior to December 5, 2005, we have an option to increase the total commitment to $200.0 million.

 

Recent Developments

On December 9, 2002, we entered into an agreement to acquire condominium interests in 125 Broad Street for approximately $90.0 million.  We intend to assume the $76.9 million first mortgage currently encumbering this property.  The mortgage matures on October 2007 and bears interest at 8.29%.  The transaction is expected to close in the first quarter of 2003, although there can be no assurance that this acquisition will be consummated on these terms or at all.

 

On January 24, 2003, we made a $15.0 million mezzanine loan.  This is a two year loan with three one-year extensions.  Interest is payable at 10% above a 2% LIBOR floor.

 

On January 28, 2003, we entered into an agreement to sell one of our wholly-owned properties located at 50 West 23rd Street for $66.0 million, before selling costs.  We expect to use a portion of the proceeds from the sale to pay off an existing $20.9 million mortgage on the property and the remaining proceeds to be reinvested in 220 East 42nd Street and 125 Broad Street to effectuate a partial 1031 tax-deferred exchange.  We expect that the sale, which is subject to customary closing conditions, will be completed during the first quarter of 2003.  However, there can be no assurance that the sale will be completed by that time or at all.

 

On February 6, 2003, we obtained a new $35.0 million first mortgage collateralized by the property located at 673 First Avenue.  This ten-year mortgage bears interest at 5.67% and is interest-only for the first two years.

 

7



 

On February 13, 2003, we completed the previously announced acquisition of the 1.1 million square foot office property located at 220 East 42nd Street known as The News Building, a property located in the Grand Central and United Nations marketplace, for a purchase price of $265.0 million.  Prior to the acquisition, we held a preferred equity investment in the property.  In connection with this acquisition, we assumed a $158.0 million mortgage, which matures in September 2004 and bears interest at LIBOR plus 1.76%, and issued approximately 376,000 units of limited partnership interest in our operating partnership having an aggregate value of approximately $11.3 million.  In addition, our $53.5 million preferred equity investment in The News Building was redeemed in full.  The remaining $42.2 million of the purchase price was funded from borrowing under our unsecured revolving credit facility.  This included the repayment of a $28.5 million mezzanine loan on the property.

 

Forward-Looking Statements May Prove Inaccurate

This document and the documents that are incorporated by reference herein contain forward-looking statements that are subject to risks and uncertainties.  Forward-looking statements include information concerning possible or assumed future results of our operations, including any forecasts, projections and plans and objectives for future operations.  You can identify forward-looking statements by the use of forward-looking expressions such as “may,” “will,” “should,” “expect,” “believe,” “anticipate,” “estimate,” “intend,” “project,” or “continue” or any negative or other variations on such expressions.  Many factors could affect our actual financial results, and could cause actual results to differ materially from those in the forward-looking statements.  These factors include, among others, the following:

 

                  general economic or business conditions, either nationally or in New York City, being less favorable than expected;

                  the continuing impact of the September 11, 2001 terrorist attacks on the national, regional and local economies including, in particular, the New York City area and our tenants;

                  reduced demand for office space;

                  risks of real estate acquisitions;

                  availability and creditworthiness of prospective tenants;

                  adverse changes in the real estate markets, including increasing vacancy, decreasing rental revenue and increasing insurance costs;

                  availability of capital (debt and equity);

                  unanticipated increases in financing and other costs, including a rise in interest rates;

                  our ability to satisfy complex rules in order for us to qualify as a real estate investment trust, for federal income tax purposes, our Operating Partnership’s ability to satisfy the rules in order for it to qualify as a partnership for federal income tax purposes, and the ability of certain of our subsidiaries to qualify as real estate investments trusts and certain of our subsidiaries to qualify as taxable REIT subsidiaries for federal income tax purposes, and our ability and the ability of our subsidiaries to operate effectively within the limitations imposed by these rules;

                  competition with other companies;

                  legislative or regulatory changes adversely affecting real estate investment trusts and the real estate business; and

                  environmental, regulatory and/or safety requirements.

 

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this document might not occur and actual results, performance or achievement could differ materially from that anticipated or implied in the forward-looking statements.

 

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ITEM 2.   PROPERTIES

 

The Portfolio

 

General. As of December 31, 2002, we owned direct interests in 19 office properties encompassing approximately 6.9 million rentable square feet located primarily in midtown Manhattan. Certain of these properties include at least a small amount of retail space on the lower floors, as well as basement/storage space. As of December 31, 2002, our portfolio also included ownership interests in six unconsolidated joint ventures which own six office properties in Manhattan, encompassing approximately 4.6 million rentable square feet.  As of December 31, 2002, we also owned one triple-net leased retail property located in Shelton, Connecticut.

 

9



 

The following table sets forth certain information with respect to each of the Manhattan properties in the portfolio as of December 31, 2002:

 

Property

 

Wholly-Owned

 

Year Built/
Renovated

 

Sub-market

 

Approximate
Rentable Square
Feet

 

Percentage of
Portfolio
Rentable Square
Feet (%)

 

Percent
Leased (%)

 

Annualized
Rent(1)

 

Percentage of
Portfolio
Annualized
Rent (%) (2)

 

Number of
Tenants

 

Annualized
Rent Per
Leased Square
Foot(3)

 

Annualized Net
Effective Rent
Per Leased
Square Foot(4)

 

17 Battery Place North

 

1972

 

World Trade/Battery Place

 

419,000

 

3.6

 

100.0

 

$

9,342,932

 

3.2

 

7

 

$

22.33

 

$

29.52

 

50 West 23rd Street

 

1892/1992

 

Chelsea

 

333,000

 

2.9

 

97.2

 

8,055,542

 

2.8

 

16

 

$

24.93

 

$

22.15

 

70 West 36th Street

 

1923/1994

 

Times Square South

 

151,000

 

1.3

 

92.3

 

3,560,395

 

1.2

 

31

 

$

23.31

 

$

29.27

 

110 East 42nd Street

 

1921/—

 

Grand Central No.

 

181,000

 

1.6

 

98.6

 

6,083,404

 

2.1

 

27

 

$

33.78

 

$

30.74

 

470 Park Avenue South(5)

 

1912/1994

 

Park Avenue South

 

260,000

 

2.3

 

99.7

 

7,681,610

 

2.6

 

25

 

$

29.88

 

$

18.65

 

673 First Avenue(6)

 

1928/1990

 

Grand Central So.

 

422,000

 

3.7

 

99.8

 

13,286,134

 

4.6

 

15

 

$

31.15

 

$

22.31

 

1140 Ave. of Americas

 

1926/1998

 

Rockefeller Center

 

191,000

 

1.7

 

97.8

 

7,466,239

 

2.6

 

25

 

$

37.90

 

$

35.41

 

1372 Broadway

 

1914/1998

 

Times Square South

 

508,000

 

4.4

 

97.9

 

14,728,918

 

5.0

 

26

 

$

28.69

 

$

23.13

 

1414 Ave. of Americas

 

1923/1998

 

Rockefeller Center

 

111,000

 

1.0

 

94.3

 

4,015,170

 

1.3

 

23

 

$

37.35

 

$

34.64

 

1466 Broadway

 

1907/1982

 

Times Square

 

289,000

 

2.5

 

88.6

 

9,584,754

 

3.3

 

96

 

$

40.21

 

$

36.45

 

420 Lexington Avenue(7)

 

1927/1999

 

Grand Central No.

 

1,188,000

 

10.3

 

95.0

 

44,836,838

 

15.3

 

241

 

$

37.52

 

$

31.03

 

440 Ninth Avenue

 

1927/1989

 

Times Square South

 

339,000

 

2.9

 

92.3

 

7,436,062

 

2.5

 

12

 

$

22.42

 

$

25.02

 

711 Third Avenue(6)(8)

 

1955/—

 

Grand Central No.

 

524,000

 

4.5

 

99.1

 

19,918,348

 

6.8

 

19

 

$

36.38

 

$

32.01

 

555 West 57th Street(6)

 

1971/—

 

Midtown West

 

941,000

 

8.2

 

100.0

 

20,303,719

 

6.9

 

21

 

$

21.47

 

$

13.75

 

286 Madison Avenue

 

1918/1997

 

Grand Central So.

 

112,000

 

1.0

 

93.0

 

3,423,402

 

1.2

 

36

 

$

33.16

 

$

29.17

 

290 Madison Avenue

 

1952/—

 

Grand Central So.

 

37,000

 

0.3

 

100.0

 

1,418,067

 

0.5

 

4

 

$

37.23

 

$

38.64

 

292 Madison Avenue

 

1923/—

 

Grand Central So.

 

187,000

 

1.6

 

99.7

 

6,510,761

 

2.2

 

19

 

$

35.08

 

$

35.50

 

1370 Broadway

 

1922/

 

Times Square South

 

255,000

 

2.2

 

89.5

 

6,991,993

 

2.4

 

28

 

$

31.78

 

$

28.57

 

317 Madison Avenue

 

1920/—

 

Grand Central

 

450,000

 

3.8

 

93.4

 

13,318,569

 

4.6

 

100

 

$

33.87

 

$

31.90

 

Total/Weighted average wholly-owned(9)

 

 

 

 

 

6,898,000

 

59.8

 

96.6

 

$

207,962,857

 

71.1

 

771

 

$

30.70

 

$

26.67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Joint Ventures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

321 West 44th St.(10)

 

1929/—

 

Times Square

 

203,000

 

1.8

 

90.6

 

$

4,427,571

 

0.5

 

27

 

$

22.95

 

$

28.31

 

1250 Broadway(6)(11)

 

1968/—

 

Penn Station

 

670,000

 

5.8

 

98.5

 

19,503,925

 

3.7

 

26

 

$

28.55

 

$

27.41

 

100 Park Avenue(12)

 

1950—

 

Grand Central So.

 

834,000

 

7.2

 

99.0

 

30,273,546

 

5.2

 

36

 

$

36.73

 

$

35.63

 

180 Madison Avenue(12)

 

1926/—

 

Grand Central So.

 

265,000

 

2.3

 

82.0

 

6,845,687

 

1.2

 

50

 

$

32.18

 

$

22.28

 

1515 Broadway(6)(11)

 

1972/—

 

Times Square

 

1,750,000

 

15.2

 

98.5

 

62,947,201

 

11.9

 

17

 

$

37.45

 

$

29.41

 

One Park Avenue(13)

 

1925/1986

 

Grand Central So.

 

913,000

 

7.9

 

98.6

 

34,116,955

 

6.4

 

18

 

$

37.33

 

$

37.18

 

Total/Weighted average joint ventures(14)

 

 

 

 

 

4,635,000

 

40.2

 

97.3

 

$

158,114,885

 

28.9

 

174

 

$

35.08

 

$

31.43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grand Total/ Weighted average portfolio

 

 

 

 

 

11,533,000

 

100.0

 

96.9

 

$

366,077,742

 

 

945

 

$

32.45

 

$

28.58

 

Grand Total/

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

our share of annualized rent

 

 

 

 

 

 

 

 

 

 

 

$

292,147,449

 

100.0

 

 

 

 

 

 

 

 

10



 


(1)          Annualized Rent represents the monthly contractual rent under existing leases as of December 31, 2002 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, 2002 for the 12 months ending December 31, 2003 are approximately $1,245,000 for our wholly-owned properties and $602,000 for our joint venture properties.

 

(2)          Includes our share of unconsolidated joint venture annualized rent calculated on a consistent basis.

 

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

 

(4)          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 us, the remaining lease payments under the lease from the acquisition date (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 us, 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 us 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.

 

(5)          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).

 

(6)          Includes a parking garage.

 

(7)          We hold an operating sublease interest in the land and improvements.

 

(8)          We hold a leasehold mortgage interest, a net sub-leasehold interest and a co-tenancy interest in this property.

 

(9)          Includes approximately 6,172,998 square feet of rentable office space, 628,464 square feet of rentable retail space and 112,190 square feet of garage space.

 

(10)    We own a 35% economic interest in this joint venture.

 

(11)    We own a 55% interest in this joint venture.

 

(12)    We own a 49.9% interest in this joint venture.

 

(13)    We own a 55% interest in this joint venture which acquired various ownership and mortgage interests in this property.

 

(14)    Includes approximately 3,971,934 square feet of rentable office space, 507,488 square feet of rentable retail space and 120,509 square feet of garage space.

 

11



 

Historical Occupancy.  We have historically achieved consistently higher occupancy rates in comparison to the overall Midtown markets, as shown over the last five years in the following table:

 

 

 

Percent of
Portfolio
Leased (1)

 

Occupancy Rate of
Class A
Office Properties
In The Midtown
Markets (2)

 

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

 

 

 

 

 

 

 

 

 

December 31, 2002

 

97

%

94

%

89

%

December 31, 2001

 

97

%

96

%

92

%

December 31, 2000

 

99

%

98

%

96

%

December 31, 1999

 

97

%

96

%

93

%

December 31, 1998

 

93

%

95

%

92

%

 


(1)          Includes space for leases that were executed as of the relevant date in our wholly-owned and joint venture properties owned by us 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 our 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, 2007, the average annual rollover at our wholly-owned properties and joint venture properties is approximately 548,000 square feet and 340,000 square feet, respectively, representing an average annual expiration of 8.1% and 7.5% 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 our wholly-owned properties and joint venture properties, respectively, with respect to leases in place as of December 31, 2002 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)

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

166

 

689,543

 

10.18

 

$

20,598,480

 

$

29.87

 

2004

 

139

 

621,181

 

9.17

 

20,140,104

 

32.42

 

2005

 

134

 

580,961

 

8.58

 

19,012,176

 

32.73

 

2006

 

72

 

461,522

 

6.81

 

14,399,268

 

31.20

 

2007

 

81

 

386,694

 

5.71

 

12,982,068

 

33.57

 

2008

 

44

 

373,892

 

5.52

 

12,672,539

 

33.89

 

2009

 

39

 

567,345

 

8.38

 

17,913,996

 

31.58

 

2010

 

46

 

999,227

 

14.75

 

31,145,904

 

31.17

 

2011

 

23

 

300,169

 

4.43

 

12,415,944

 

41.36

 

2012

 

22

 

825,688

 

12.19

 

16,729,404

 

20.26

 

2013 & thereafter

 

32

 

967,953

 

14.28

 

29,952,974

 

30.94

 

Total/weighted average

 

798

 

6,774,175

 

100.00

 

$

207,962,857

 

$

30.70

 

 

12



 


(1)          Annualized Rent of Expiring Leases represents the monthly contractual rent under existing leases as of December 31, 2002 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, 2002 for the 12 months ending December 31, 2003 are approximately $1,245,000 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.

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

36

 

490,269

 

10.88

 

$

19,657,008

 

$

40.09

 

2004

 

19

 

152,935

 

3.39

 

5,177,844

 

33.86

 

2005

 

27

 

401,390

 

8.90

 

11,308,716

 

28.17

 

2006

 

26

 

368,543

 

8.18

 

10,560,744

 

28.66

 

2007

 

15

 

286,432

 

6.35

 

9,981,264

 

34.85

 

2008

 

15

 

341,100

 

7.57

 

10,881,612

 

31.90

 

2009

 

16

 

524,865

 

11.64

 

18,136,236

 

34.55

 

2010

 

14

 

1,281,675

 

28.43

 

51,404,448

 

40.11

 

2011

 

5

 

101,393

 

2.25

 

4,073,772

 

40.18

 

2012

 

7

 

147,685

 

3.28

 

3,720,636

 

25.19

 

2013 & thereafter

 

11

 

411,384

 

9.13

 

13,212,605

 

32.12

 

Total/weighted average

 

191

 

4,507,671

 

100.00

 

$

158,114,885

 

$

35.08

 

 


(1)          Annualized Rent of Expiring Leases represents the monthly contractual rent under existing leases as of December 31, 2002 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, 2002 for the 12 months ending December 31, 2003 are approximately $602,000 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.

 

13



 

Tenant Diversification

Our portfolio is currently leased to approximately 945 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 25 largest tenants in our portfolio, based on the amount of square footage leased by our tenants as of December 31, 2002:

 

Tenant(1)

 

Properties

 

Remaining
Lease Term
in Months(2)

 

Total Leased
Square Feet

 

Percentage
of
Aggregate
Portfolio
Leased
Square
Feet (%)

 

Our
Share Of
Annualized
Rent(3)

 

Percentage
of
Aggregate
Portfolio
Annualized
Rent (%)

 

Viacom International, Inc.(4)

 

1515 Broadway

 

128

 

1,280,108

 

11.10

 

$

29,297,096

 

10.03

 

City of New York

 

17 Battery Place Nort

 

120

 

325,664

 

2.82

 

5,701,920

 

1.95

 

Visiting Nurse Services(5)

 

1250 Broadway

 

104

 

254,323

 

2.21

 

3,901,583

 

1.34

 

BMW of Manhattan, Inc.

 

555 West 57th Street

 

115

 

227,782

 

1.98

 

3,072,360

 

1.05

 

Philip Morris Mgmt. Co.

 

100 Park Avenue

 

60

 

175,887

 

1.53

 

3,378,741

 

1.16

 

City University of NY-CUNY(6)

 

555 West 57th Street

 

145

 

171,732

 

1.49

 

4,703,976

 

1.61

 

J&W Seligman & Co., Inc.

 

100 Park Avenue

 

83

 

168,390

 

1.46

 

2,647,834

 

0.91

 

CBS, Inc.(7)

 

555 West 57th Street

 

90

 

165,214

 

1.43

 

3,756,864

 

1.29

 

Segal Company

 

One Park Avenue

 

84

 

157,944

 

1.37

 

3,147,137

 

1.08

 

Loews Corporation

 

One Park Avenue

 

 

155,765

 

1.35

 

3,696,475

 

1.27

 

MTA(8)

 

420 Lexington Avenue

 

157

 

134,687

 

1.17

 

3,928,716

 

1.34

 

St. Luke’s Roosevelt Hospital

 

555 West 57th Street

 

138

 

133,700

 

1.16

 

3,205,656

 

1.10

 

Coty, Inc.

 

1 Park Avenue

 

150

 

102,654

 

0.89

 

2,113,426

 

0.72

 

Minskoff/Nederlander JV

 

1515 Broadway

 

257

 

102,452

 

0.89

 

115,500

 

0.04

 

Ross Stores

 

1372 Broadway

 

89

 

101,741

 

0.88

 

2,761,752

 

0.95

 

Ketchum, Inc.

 

711 Third Avenue

 

155

 

100,876

 

0.87

 

4,343,568

 

1.49

 

CHF Industries

 

One Park Avenue

 

25

 

100,000

 

0.87

 

1,931,853

 

0.66

 

New York Presbyterian Hospital(9)

 

555 West 57th Street and 673 First Avenue

 

84

 

99,650

 

0.86

 

2,734,932

 

0.94

 

MCI/WorldCom(10)

 

17 Battery Place & 110 East 42nd Street

 

46

 

93,025

 

0.81

 

2,362,688

 

0.81

 

Ann Taylor(11)

 

1372 Broadway

 

91

 

93,020

 

0.81

 

2,703,552

 

0.93

 

Crain Communications, Inc.

 

711 Third Avenue

 

73

 

90,531

 

0.78

 

3,455,772

 

1.18

 

Information Builders, Inc.

 

1250 Broadway

 

3

 

88,571

 

0.77

 

1,135,081

 

0.39

 

Advanstar Communications

 

One Park Avenue

 

88

 

85,284

 

0.74

 

1,656,343

 

0.57

 

Parade Publications

 

711 Third Avenue

 

92

 

82,444

 

0.71

 

2,491,908

 

0.85

 

UNICEF

 

673 First Avenue

 

132

 

81,100

 

0.70

 

2,695,632

 

0.92

 

Total/Weighted Average(12)

 

 

 

 

 

4,572,544

 

39.65

 

$

100,940,365

 

34.55

 

 


(1)         This list is not intended to be representative of our tenants as a whole.

(2)         Lease term from December 31, 2002 until the date of the last expiring lease.

(3)         Annualized Rent represents the monthly contractual rent under existing leases as of December31, 2002 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 rentabatements for leases in effect as of December 31, 2002 for the 12 months ending December 31, 2003 are approximately $1,245,000 for wholly-owned properties and $602,000 for the joint venture properties.

(4)         4,172 square feet expire May 2004; 5,153 square feet expire November 2006; 123,264 square feet expire July 2008; 32,700 square feet expire December 2009; 1,009,077 square feet expire May 2010; 105,742 square feet expire August 2013.

(5)         14,131 square feet expire May 2005; 171,078 square feet expire August 2006; 69,114 square feet expire August 2011.

(6)         93,061 square feet expire May 2010; 4,200 square feet expire July 2010; 24,471 square feet expire September 2011; 50,000 square feet expire January 2015.

(7)         106,644 square feet expire December 2003; 4,894 square feet expire April 2005; 33,000 square feet expire June 2007; 20,676 square feet expire June 2010.

(8)         22,467 square feet expire May 2008; 112,220 square feet expire January 2016.

(9)         76,000 square feet expire August 2006; 23,650 square feet expire December 2009.

(10)       43,752 square feet expire August 2004; 9,105 square feet expire December 2004; 40,168 square feet expire October 2006. This tenant is currently in bankruptcy and has rejected a 9,105 square foot lease at 110 East 42nd Street.

(11)       34,045 square feet expire January 2010; 58,975 square feet expire July 2010.

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

 

14



 

420 Lexington Avenue (The Graybar Building)

 

We 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 1,133,000 square feet of office space, and 60,000 square feet of mezzanine and retail space), with floor plates ranging from 17,000 square feet to 50,000 square feet.  We restored the grandeur of this building through the implementation of an $11.9 million capital improvement program geared toward certain cosmetic upgrades, including a 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.  Our 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 the operating lease through which we hold our interest in this property.  This operating lease which expires December 31, 2008 is subject to renewal by us through December 31, 2029 (the “Ground Lease”).  We control 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 wholly-owned property.  It contributes Annualized Rent of approximately $44.8 million, or 15.3% of our portfolio’s Annualized Rent at December 31, 2002.

 

As of December 31, 2002, 95% of the rentable square footage in the Graybar Building was leased.  The following table sets forth certain information with respect to this property:

 

Year-End

 

Percent Leased

 

Annualized
Rent per Leased
Square Foot

 

 

 

 

 

 

 

2002

 

95

%

$

37.52

 

2001

 

95

%

33.48

 

2000

 

100

%

32.81

 

1999

 

97

%

29.63

 

1998

 

98

%

25.30

 

 

As of December 31, 2002, the Graybar Building was leased to 241 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 8.8% 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 6.4% of this property’s Annualized Rent.

 

15



 

The following table sets out a schedule of the annual lease expirations at the Graybar Building for leases executed as of December 31, 2002 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)

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

48

 

149,930

 

12.6

 

$

4,986,948

 

$

33.26

 

2004

 

43

 

91,617

 

7.7

 

3,629,640

 

39.62

 

2005

 

46

 

116,250

 

9.7

 

4,554,780

 

39.18

 

2006

 

24

 

63,852

 

5.3

 

2,595,804

 

40.65

 

2007

 

41

 

110,075

 

9.2

 

4,141,368

 

37.62

 

2008

 

11

 

104,962

 

8.8

 

4,222,463

 

40.23

 

2009

 

8

 

99,111

 

8.3

 

3,752,088

 

37.86

 

2010

 

11

 

161,421

 

13.5

 

6,501,456

 

40.28

 

2011

 

9

 

87,805

 

7.4

 

3,231,648

 

36.80

 

22012

 

4

 

26,716

 

2.2

 

999,516

 

37.41

 

2013 & thereafter

 

6

 

183,287

 

15.3

 

6,221,126

 

33.94

 

Subtotal/Weighted average

 

251

 

1,195,026

 

100.0

 

$

44,836,837

 

$

37.52

 

 


(1)                                  Annualized Rent of Expiring Leases represents the monthly contractual rent under existing leases as of December 31, 2002  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, 2002 for the 12 months ending December 31, 2003 are approximately $338,500 for this 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.

 

The aggregate undepreciated tax basis of depreciable real property at the Graybar Building for Federal income tax purposes was $148.1 million as of December 31, 2002. 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 $11.644 per $100 of assessed value. The total annual tax for the Graybar Building at this rate, including the applicable BID tax for the 2002/2003 tax year, is $8.2 million (at a taxable assessed value of $70.2 million).

 

Environmental Matters

We engaged independent environmental consulting firms to perform Phase I environmental site assessments on our 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 our Portfolio 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 we believe will have a material adverse effect on our results of operations or financial condition.

 

16



 

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 us at each of these properties. At all of our 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.  We have 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.  We do not believe that any actions that may be required as a result of these releases will have a material adverse effect on our results of operations or financial condition.

 

ITEM 3.   LEGAL PROCEEDINGS

 

As of December 31, 2002, we were not involved in any material litigation nor, to management’s knowledge, is any material litigation threatened against us or our 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 we manage, but do not own.  Personal injury claims have been filed against us and others by 11 persons.  We believe 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

 

No matters were submitted to a vote of our stockholders during the fourth quarter ended December 31, 2002.

 

17



 

PART II

 

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

 

Our common stock began trading on the New York Stock Exchange (“NYSE”) on August 15, 1997 under the symbol “SLG.” On March 3, 2003, the reported closing sale price per share of common stock on the NYSE was $29.75 and there were approximately 74 holders of record of our 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 us with respect to the periods indicated.

 

 

 

2002

 

2001

 

Quarter Ended

 

High

 

Low

 

Dividends

 

High

 

Low

 

Dividends

 

March 31

 

$

33.60

 

$

30.40

 

$

0.4425

 

$

28.75

 

$

26.37

 

$

0.3875

 

June 30

 

$

36.50

 

$

33.60

 

$

0.4425

 

$

30.31

 

$

25.30

 

$

0.3875

 

September 30

 

$

35.40

 

$

29.23

 

$

0.4425

 

$

31.52

 

$

28.60

 

$

0.3875

 

December 31

 

$

31.87

 

$

27.65

 

$

0.4650

 

$

31.37

 

$

29.53

 

$

0.4425

 

 

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

 

UNITS

 

At December 31, 2002 there were 2,145,190 units of limited partnership interest of the Operating Partnership outstanding.  These units received distributions per unit in the same manner as dividends per share were distributed to common stockholders.

 

SALE OF UNREGISTERED AND REGISTERED SECURITIES

 

We issued 17,500, 165,500, and 20,000 shares of our common stock in 2002, 2001 and 2000 respectively, for deferred stock-based compensation in connection with employment contracts.  These transactions 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.

 

See Notes 15 and 17 to Consolidated Financial Statements in Item 8 for a description of our stock option plan and other compensation arrangements.

 

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

 

18



 

ITEM 6.     SELECTED FINANCIAL DATA

 

The following table sets forth our selected financial data and should be read in conjunction with our 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.

 

In connection with this Annual Report on Form 10-K, we are restating our historical audited consolidated financial statements as a result of the adoption of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) and Statement of Financial Accounting Standards No. 145, “Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”).  During 2002, we classified a property as held for sale and, in compliance with SFAS 144, have reported revenue and expenses from this property as discontinued operations, net of minority interest for each period presented in our Annual Report on Form 10K.  This reclassification has no effect on our reported net income or funds from operations.

 

During 2001, 2000, 1999 and 1998, we recognized extraordinary losses from early extinguishment of debt. In compliance with SFAS 145, these extraordinary losses have been reclassified to interest expense in the consolidated statements of income for each of the five years ended December 31, 2002. This reclassification has no effect on our reported net income, but reduces funds from operations by the amount of the extraordinary loss.

 

We are also providing updated summary selected financial information, which is included below reflecting the prior period reclassification as discontinued operations of the property classified as held for sale during 2002 and the prior period reclassification to interest expense of extraordinary losses from early extinguishment of debt.

 

19



 

The Company

(In thousands, except per share data)

 

 

 

Year Ended December 31,

 

Operating Data

 

2002

 

2001

 

2000

 

1999

 

1998

 

Total revenue

 

$

246,155

 

$

249,687

 

$

222,531

 

$

198,859

 

$

128,048

 

Property operating expenses

 

57,703

 

56,718

 

53,322

 

48,234

 

33,156

 

Real estate taxes

 

29,451

 

29,828

 

27,772

 

28,137

 

20,215

 

Ground rent

 

12,637

 

12,579

 

12,660

 

12,754

 

11,082

 

Interest

 

36,656

 

45,107

 

39,787

 

28,038

 

12,032

 

Depreciation and amortization

 

39,063

 

37,117

 

31,525

 

26,380

 

14,638

 

Loss on terminated project

 

 

 

 

 

1,065

 

Loss on hedge transaction

 

 

 

 

 

176

 

Marketing, general and administration

 

13,282

 

15,374

 

11,561

 

10,922

 

5,760

 

Total expenses

 

188,792

 

196,723

 

176,627

 

154,465

 

98,124

 

Operating income

 

57,363

 

52,964

 

45,904

 

44,394

 

29,924

 

Equity in net income (loss) from affiliates

 

292

 

(1,054

)

378

 

730

 

387

 

Equity in net income of unconsolidated joint ventures

 

18,383

 

8,607

 

3,108

 

377

 

 

Income before minority interest and gain on sales

 

76,038

 

60,517

 

49,390

 

45,501

 

30,311

 

Minority interest

 

(4,545

)

(4,419

)

(7,179

)

(4,895

)

(2,805

)

Income before gains on sale and cumulative effect of accounting charge

 

71,493

 

56,098

 

42,211

 

40,606

 

27,506

 

Gain on sale of properties/preferred investments

 

 

4,956

 

41,416

 

 

 

Cumulative effect of change in accounting principle

 

 

(532

)

 

 

 

Income from continuing operations

 

71,493

 

60,522

 

83,627

 

40,606

 

27,506

 

Discontinued operations (net of minority interest)

 

2,838

 

2,479

 

2,590

 

2,250

 

1,946

 

Net income

 

74,331

 

63,001

 

86,217

 

42,856

 

29,452

 

Preferred dividends and accretion

 

(9,690

)

(9,658

)

(9,626

)

(9,598

)

(5,970

)

Income available to common shareholders

 

$

64,641

 

$

53,343

 

$

76,591

 

$

33,258

 

$

23,482

 

Net income per common share – Basic

 

$

2.14

 

$

1.98

 

$

3.14

 

$

1.37

 

$

1.19

 

Net income per common share – Diluted

 

$

2.09

 

$

1.94

 

$

2.93

 

$

1.37

 

$

1.19

 

Cash dividends declared per common share

 

$

1.7925

 

$

1.605

 

$

1.475

 

$

1.41

 

$

1.40

 

Basic weighted average common shares outstanding

 

30,236

 

26,993

 

24,373

 

24,192

 

19,675

 

Diluted weighted average common shares and common share equivalents outstanding

 

37,786

 

29,808

 

31,818

 

26,680

 

22,145

 

 

20



 

 

 

As of December 31,

 

Balance Sheet Data
(In thousands)

 

2002

 

2001

 

2000

 

1999

 

1998

 

Commercial real estate, before accumulated depreciation

 

$

975,777

 

$

984,375

 

$

895,810

 

$

908,866

 

$

697,061

 

Total assets

 

1,473,170

 

1,371,577

 

1,161,154

 

1,071,242

 

777,796

 

Mortgages and notes payable, revolving credit facilities and term loan

 

541,503

 

504,831

 

460,716

 

435,693

 

162,162

 

Minority interest

 

44,718

 

46,430

 

43,326

 

41,494

 

41,491

 

Preferred Income Equity Redeemable Shares SM

 

111,721

 

111,231

 

110,774

 

110,348

 

109,950

 

Stockholders’ equity

 

626,645

 

612,908

 

455,073

 

406,104

 

404,826

 

 

 

 

Year Ended December 31,

 

Other Data
(In thousands)

 

2002

 

2001

 

2000

 

1999

 

1998

 

Funds from operations after distributions to preferred shareholders(1)

 

$

116,230

 

$

94,416

 

$

74,698

 

$

61,656

 

$

42,336

 

Funds from operations before distributions to preferred shareholders(1)

 

125,430

 

103,616

 

83,898

 

70,856

 

48,056

 

Net cash provided by operating activities

 

107,395

 

80,588

 

53,806

 

48,013

 

22,665

 

Net cash (used in) investment activities

 

(57,776

)

(420,061

)

(38,699

)

(228,678

)

(376,593

)

Net cash (used in) provided by financing activities

 

(4,793

)

341,873

 

(25,875

)

195,990

 

347,382

 

 


(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.  We believe 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 our ability to incur and service debt, to make capital expenditures and to fund other cash needs.  We compute 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 us.  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 our financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including its ability to make cash distributions.

 

A reconciliation of FFO to net income computed in accordance with GAAP is provided under the heading of “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Funds From Operations.”

 

21



 

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 (the “Act”), and Section 21E of the Securities Exchange Act of 1934, as amended  (the “Exchange Act”).  Such forward-looking statements relate to, without limitation, our future capital expenditures, dividends and acquisitions (including the amount and nature thereof) and other development trends of the real estate industry and the Manhattan office market, business strategies, and the expansion and growth of our operations.  These statements are based on certain assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate.  We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Act and 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,” “continue,” 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 we have made assumptions are general economic and business (particularly real estate) conditions either nationally or in New York City being less favorable than expected, the continuing impact of the September 11, 2001 terrorist attacks on the national, regional and local economies including in particular, the New York City area and our tenants, the business opportunities that may be presented to and pursued by us, changes in laws or regulations (including changes to laws governing the taxation of REITs), risk of acquisitions, 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 our control.  We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of future events, new information or otherwise.

 

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.  Unless the context requires otherwise, all references to “we,” “our”, and “us” means the Company and all entities owned or controlled by the Company, including the Operating Partnership.

 

The following discussion related to our consolidated financial statements should be read in conjunction with the financial statements appearing in Item 8 of this Annual Report on Form 10-K.

 

As of December 31, 2002, our 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, 2002, the weighted average occupancy (total occupied square feet divided by total available square feet) of our wholly-owned properties was 96.6%.  Our portfolio (the “Portfolio”) also includes ownership interests in unconsolidated joint ventures which own six commercial properties in Manhattan, encompassing approximately 4.6 million rentable square feet.  These properties were 97.3% occupied as of December 31, 2002.  We also own one triple-net leased property located in Shelton, Connecticut (“Shaws”).  In addition, we continue to manage three office properties owned by third-parties and affiliated companies encompassing approximately 1.0 million rentable square feet.

 

22



 

2002 proved to be a challenging year.  The country continued to experience a prolonged national recession and all of the major stock indices declined.  New York City witnessed a sharp reduction in business activity, well-publicized layoffs in the securities industry and a significant increase in sublease space.  Insurance costs rose in response to the attack on the World Trade Center.  New York City was forced to raise real estate taxes by 18% for the 2002-2003 fiscal year to meet rising budget deficits.  The Federal Reserve Bank  significantly reduced interest rates on multiple occasions which lowered overall borrowing costs.  This, however, failed to provide immediate stimulus to the economy.

 

Despite these overall trends, the Midtown office market ended the year with an overall vacancy rate of 11.1% compared to a national average of 14.8%.  Overall rents did decline and concession packages increased.  Midtown continues to benefit from the absence of meaningful new construction.  In 2002, 425,000 square feet of office space was delivered in Midtown, or only 0.19% of the nearly 230 million square feet of total inventory.

 

In this environment, we registered 2002 year end same store occupancy of 97.1% versus 97.4% at the end of 2001.  Additionally, we achieved a mark-to-market on our same store leases of approximately 41% for the year.

 

The acquisition market witnessed record prices in heated auctions.  Much of the activity was fueled by continued strong investor interest in Midtown Manhattan and historically low borrowing costs.  Despite this environment, we purchased 1515 Broadway with a joint venture partner for $483.5 million, or $276 per square foot, a significant discount to the building’s replacement cost.  Additionally, the Company entered into agreements to purchase 220 East 42nd Street for $265.0 million and condominium interests in 125 Broad Street for approximately $90.0 million.  The acquisition of 220 East 42nd Street closed February 13, 2003 and 125 Broad Street condominium unit is scheduled to close in the first quarter of 2003.

 

Midtown vacancy rates continued to increase during 2002.  While there is a relative lack of supply, the market has been impacted by 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, we believe that vacancy rates may continue to increase and rents may continue to decrease while tenant concession packages may increase.  Additionally, in order for us to maintain our current occupancy levels, we believe that ongoing capital improvements to the common areas and physical infrastructures will be required at our properties.

 

Critical Accounting Policies

Our discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  We evaluate our assumptions and estimates on an ongoing basis.  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.  We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

 

Rental Property

On a periodic basis, our management team assesses whether there are any indicators that the value of our real estate properties, including joint venture properties, and structured finance investments may be impaired.  If the carrying amount of the property is greater than the estimated expected future cash flow (undiscounted and without interest charges) of the asset, impairment has occurred.  We will then record an impairment loss equal to the difference between the carrying amount and the fair value of the asset.  We do not believe that the value of any of our rental properties or structured finance investments were impaired at December 31, 2002 and 2001.

 

23



 

Revenue Recognition

Rental revenue is recognized on a straight-line basis over the term of the lease. The excess of rents recognized over amounts contractually due pursuant to the underlying leases are included in deferred rents receivable on the accompanying balance sheets.  We establish, on a current basis, an allowance for future potential tenant credit losses, which may occur against this account.  The balance reflected on the balance sheet is net of such allowance.

 

Interest income on structured finance investments is recognized over the life of the investment using the effective interest method and recognized on the accrual basis.  Fees received in connection with loan commitments are deferred until the loan is funded and are then recognized over the term of the loan as an adjustment to yield.  Anticipated exit fees are also recognized over the term of the loan as an adjustment to yield.  Fees on commitments that expire unused are recognized at expiration.

 

Income recognition is generally suspended for loans at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful.  Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed.

 

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our tenants to make required rent payments. If the financial condition of a specific tenant were to deteriorate, resulting in an impairment of its ability to make payments, additional allowances may be required.

 

Reserve for Possible Credit Losses

The reserve for possible credit losses in connection with structured finance investments is the charge to earnings to increase the allowance for possible credit losses to the level that we estimate to be adequate considering delinquencies, loss experience and collateral quality.  Other factors considered relate to geographic trends and product diversification, the size of the portfolio and current economic conditions.  Based upon these factors, we establish the provision for possible credit losses by category of asset.  When it is probable that we will be unable to collect all amounts contractually due, the account is considered impaired.

 

Where impairment is indicated, a valuation write-down or write-off is measured based upon the excess of the recorded investment amount over the net fair value of the collateral, as reduced by selling costs.  Any deficiency between the carrying amount of an asset and the net sales price of repossessed collateral is charged to the allowance for credit losses.  No reserve for impairment was required at December 31, 2002 or 2001.

 

Derivative Financial Instruments

In the normal course of business, we use a variety of derivative financial instruments to manage, or hedge, interest rate risk.  We require that hedging derivative instruments are effective in reducing the interest rate risk exposure that they are designated to hedge.  This effectiveness is essential for qualifying for hedge accounting.  Some derivative instruments are associated with an anticipated transaction.  In those cases, hedge effectiveness criteria also require that it be probable that the underlying transaction occurs.  Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract.

 

To determine the fair values of derivative instruments, we use a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date.  For the majority of financial instruments including most derivatives, long-term investments and long-term debt, standard market conventions and techniques such as discounted cash flow analysis, option-pricing models, replacement cost, and termination cost are used to determine fair value.  All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.

 

24



 

Results of Operations

 

Comparison of the year ended December 31, 2002 to the year ended December 31, 2001

 

The following comparison for the year ended December 31, 2002 (“2002”) to the year ended December 31, 2001 (“2001”) makes reference to the following:  (i) the effect of the “Same-Store Properties,” which represents all properties owned by us at January 1, 2001 and at December 31, 2002 and total 15 of our 19 wholly-owned properties, representing approximately 83% of our annualized rental revenue, (ii) the effect of the “2001 Acquisitions,” which represents all properties acquired in 2001, namely, 1370 Broadway (January 2001) and 317 Madison Avenue (June 2001), (iii) the effect of the “2001 Dispositions,” which represents 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), and (iv) “Other,” which represents corporate level items not allocable to specific properties, eEmerge and Shaws, and assets of which a portion was sold, namely, 110 East 42nd Street.  Assets classified as held for sale are excluded from the following discussion.

 

Rental Revenues (in millions)

 

2002

 

2001

 

$
Change

 

%
Change

 

Rental revenue

 

$

187.5

 

$

197.7

 

$

(10.2

)

(5.2

)%

Escalation and reimbursement revenue

 

28.3

 

30.4

 

(2.1

)

(6.9

)

Signage revenue

 

1.5

 

1.5

 

 

 

Total

 

$

217.3

 

$

229.6

 

$

(12.3

)

(5.4

)%

 

 

 

 

 

 

 

 

 

 

Same-Store Properties

 

$

186.5

 

$

184.3

 

$

2.2

 

1.2

%

2001 Acquisitions

 

23.1

 

15.5

 

7.6

 

49.0

 

2001 Dispositions

 

 

21.3

 

(21.3

)

(100.0

)

Other

 

7.7

 

8.5

 

(0.8

)

(9.4

)

Total

 

$

217.3

 

$

229.6

 

$

(12.3

)

(5.4

)%

 

Rental revenue in the Same-Store Properties was primarily flat despite a decrease in occupancy from 97.4% in 2001 to 97.1% in 2002.  The revenue increase is primarily due to annualized rents from replacement rents on previously occupied space at Same-Store Properties being 41.0% higher than previous fully escalated rents.

 

We estimate that the current market rents on our wholly-owned properties are approximately 6.6% higher than existing in-place fully escalated rents.  Approximately 10.2% of the space leased at wholly-owned properties expires during 2003.  We believe that occupancy rates will remain relatively flat at the Same-Store Properties in 2003.

 

The decrease in escalation and reimbursement revenue was primarily due to the 2001 Dispositions ($4.1 million).  This was partially offset by increased recoveries at the Same-Store Properties ($1.0 million) and the 2001 Acquisitions ($1.1 million).  On an annualized basis, we recovered approximately 89% of our electric costs at our Same-Store Properties.

 

Investment and Other Income (in millions)

 

2002

 

2001

 

$
Change

 

%
Change

 

Equity in net income of unconsolidated joint ventures

 

$

18.4

 

$

8.6

 

$

9.8

 

114.0

%

Investment and preferred equity income

 

23.2

 

17.4

 

5.8

 

33.3

 

Other

 

5.7

 

2.8

 

2.9

 

103.6

 

Total

 

$

47.3

 

$

28.8

 

$

18.5

 

64.2

%

 

The increase in equity in net income of unconsolidated joint ventures is due to an increase in the square footage of our joint venture properties from 3.1 million square feet in 2001 to 4.6 million square feet in 2002.  The increase was primarily due to One Park Avenue being included for all of 2002, but only seven months of 2001 and 1515 Broadway being included for seven months in 2002 and none in 2001.  This was partially offset by 469 Seventh Avenue, which was sold in June 2002.  Occupancy at the joint venture properties decreased from 98.4% in 2001 to 97.3% in 2002.  We estimate that current market rents are approximately 20.8% higher than existing in-place fully escalated rents at our joint venture properties.  Approximately 10.9% of the space leased at joint venture properties expires during 2003.

 

25



 

The increase in investment income primarily represents interest income from structured finance transactions ($6.8 million).  The weighted average loan balance outstanding and yield were $160.4 million and 13.1%, respectively, for 2002 compared to $94.2 million and 15.6%, respectively, for 2001.  This was offset by a decrease in interest income from excess cash on hand ($1.0 million).

 

The increase in other income was primarily due to management and asset management fees earned from joint ventures ($2.2 million) due to the increase in the size of the joint venture portfolio compared to prior periods.  The balance of the increase was due to the receipt of an acquisition break-up fee ($0.3 million) and a gain on the sale of mortgage recording tax credits ($0.6 million).

 

Property Operating Expenses (in millions)

 

2002

 

2001

 

$
Change

 

%
Change

 

Operating expenses (excluding electric)

 

$

42.0

 

$

38.6

 

$

3.4

 

8.8

%

Electric costs

 

15.7

 

18.1

 

(2.4

)

(13.3

)

Real estate taxes

 

29.5

 

29.8

 

(0.3

)

(1.0

)

Ground rent

 

12.6

 

12.6

 

 

 

Total

 

$

99.8

 

$

99.1

 

$

0.7

 

0.7

%

 

 

 

 

 

 

 

 

 

 

Same-Store Properties

 

$

84.0

 

$

81.1

 

$

2.9

 

3.6

%

2001 Acquisitions

 

9.3

 

6.1

 

3.2

 

52.5

 

2001 Dispositions

 

 

7.2

 

(7.2

)

(100.0

)

Other

 

6.5

 

4.7

 

1.8

 

38.3

 

Total

 

$

99.8

 

$

99.1

 

$

0.7

 

0.7

%

 

Same-Store Properties operating expenses, excluding real estate taxes, were relatively flat.  There were increases in security costs and insurance ($1.5 million), advertising ($0.2 million), operating payroll ($0.2 million), management ($0.9 million) and repairs and maintenance ($0.5 million).  These increases were partially offset by decreases in professional fees ($0.3 million), electric costs ($1.0 million), and lower steam costs ($0.5 million).

 

The decrease in electric costs was primarily due to lower electric rates in 2002 compared to 2001.

 

The decrease in real estate taxes was primarily attributable to the 2001 Dispositions which decreased real estate taxes by $2.8 million.  This was partially offset by an increase in real estate taxes attributable to the Same-Store Properties ($1.5 million) due to higher assessed property values and the 2001 Acquisitions ($1.0 million).

 

Other Expenses (in millions)

 

2002

 

2001

 

$
Change

 

%
Change

 

Interest expense

 

$

36.7

 

$

45.1

 

$

(8.4

)

(18.6

)%

Depreciation and amortization expense

 

39.1

 

37.1

 

2.0

 

5.4

 

Marketing, general and administrative expense

 

13.3

 

15.4

 

(2.1

)

(13.6

)

Total

 

$

89.1

 

$

97.6

 

$

(8.5

)

(8.7

)%

 

The decrease in interest expense was primarily attributable to lower average debt levels due to dispositions ($10.6 million) and reduced interest costs on floating rate debt ($3.6 million).  The 2001 balance also includes $0.3 million associated with the reclassification of an extraordinary item related to the early extinguishment of debt to interest expense.  This was partially offset by increases due to costs associated with new investment activity ($5.2 million), and the funding of ongoing capital projects and working capital reserves ($0.5 million).  The weighted average interest rate decreased from 6.91% at December 31, 2001 to 6.17% at December 31, 2002 and the weighted average debt balance increased from $492.0 million to $571.6 million for these same periods.

 

Marketing, general and administrative expense decreased primarily due to a one time $1.0 million donation made in 2001 to the Twin Towers Fund and a decrease in corporate advertising ($0.5 million) in 2002.  We have reduced our marketing, general and administrative costs to 5.4% of total revenues in 2002 compared to 6.2% in 2001.

 

26



 

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 us at January 1, 2000 and at December 31, 2001 and total 16 of our 19 wholly-owned properties, representing approximately 82% of our annualized rental revenue, (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), and (iv) “Other,” which represents corporate level items not allocable to specific properties, Shaws, and assets of which a portion was sold, namely 110 East 42nd Street and 17 Battery Place North.  The information presented in this comparison has not been restated to reflect the adoption of SFAS 144 and SFAS 145.

 

Rental Revenues (in millions)

 

2001

 

2000

 

$
Change

 

%
Change

 

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

 

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.

 

We estimate that current market rents on our wholly-owned properties are approximately 31.9% higher than existing in-place fully escalated rents.  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, we recovered approximately 90% of our electric costs.

 

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

 

Investment and Other Income (in millions)

 

2001

 

2000

 

$
Change

 

%
Change

 

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

%

 

27



 

The increase in equity in net income of unconsolidated joint ventures was due to an increase from four joint venture investments in 2000 comprising 2.0 million square feet, 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.  We estimate that current market rents are approximately 36.0% higher than existing in-place fully escalated rents   Approximately 12.2% of the space leased at joint venture properties expired in 2002.

 

The increase in investment income primarily represented 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.  In addition, we wrote down our investment in a technology company and a technology fund ($1.5 million).

 

Property Operating Expenses (in millions)

 

2001

 

2000

 

$
Change

 

%
Change

 

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

 

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 (in millions)

 

2001

 

2000

 

$
Change

 

%
Change

 

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 our 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 resulted in interest savings on our variable rate debt.

 

28



 

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 6.2% of total revenue in 2001.

 

Liquidity and Capital Resources

We currently expect that our principal sources of working capital and funds for acquisition and redevelopment of properties and for structured finance investments will include: (1) cash flow from operations; (2) borrowings under our secured and unsecured revolving credit facilities; (3) other forms of secured or unsecured financing; (4) proceeds from common or preferred equity or debt offerings by us or the Operating Partnership (including issuances of limited partnership units in the Operating Partnership); and (5) net proceeds from divestitures of properties.  Additionally, we believe that our joint venture investment programs will also continue to serve as a source of capital for acquisitions and structured finance investments.  We believe that our sources of working capital, specifically our cash flow from operations and borrowings available under our unsecured and secured revolving credit facilities, and our ability to access private and public debt and equity capital, are adequate for us to meet our short-term and long-term liquidity requirements for the foreseeable future.

 

Cash Flows

2002 Compared to 2001

Net cash provided by operating activities increased $26.8 million to $107.4 million for the year ended December 31, 2002 compared to $80.6 million for the year ended December 31, 2001.  Operating cash flow was primarily generated by the Same-Store Properties and 2001 Acquisitions, as well as the structured finance investments, but was reduced by the decrease in operating cash flow from the 2001 Dispositions and contributions to a joint venture.

 

Net cash used in investing activities decreased $362.3 million to $57.8 million for the year ended December 31, 2002 compared to $420.1 million for the year ended December 31, 2001.  The decrease was due primarily to the acquisitions of One Park Avenue ($233.9 million) and 1370 Broadway ($50.5 million) in January 2001 compared to no acquisitions of wholly-owned properties in 2002.  Approximately $50.2 million of the 2001 acquisitions was funded out of restricted cash set aside from the sale of 17 Battery Place South.  The investing activity in 2002 related primarily to the joint venture investment in connection with the acquisition of 1515 Broadway in May 2002.  The change in structured finance investments relates primarily to the timing of originations and repayments or participations of these investments.

 

Net cash used in financing activities decreased $346.7 million to $4.8 million for the year ended December 31, 2002 compared to $341.9 million for the year ended December 31, 2001.  The decrease was primarily due to lower borrowing requirements due to the decrease in acquisitions, which would have been funded with mortgage debt and draws under the line of credit.  In addition, the 2001 financing activities include the $148.4 million in net proceeds from a common stock offering.

 

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.

 

29



 

Net cash used in investing activities increased $381.4 million to $420.1 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).

 

Capitalization

On July 25, 2001, we sold 5,000,000 shares of common stock under our shelf registration statement.  The net proceeds from this offering ($148.4 million) were used to pay down our 2000 Unsecured Credit Facility.  After this offering, we still have the ability to issue up to an aggregate amount of $251 million of our common and preferred stock under our existing effective registration statement.

 

Rights Plan

On February 16, 2000, our Board of Directors authorized a distribution of one preferred share purchase right (“Right”) for each outstanding share of common stock under a shareholder rights plan.  This distribution was made to all holders of record of the common stock on March 31, 2000. Each Right entitles the registered holder to purchase from us one one-hundredth of a share of Series B junior participating preferred stock, par value $0.01 per share (“Preferred Shares”), at a price of $60.00 per one one-hundredth of a Preferred Share (“Purchase Price”), subject to adjustment as provided in the rights agreement.  The Rights expire on March 5, 2010, unless the expiration date is extended or the Right is redeemed or exchanged earlier by us.

 

The Rights are attached to each share of common stock.  The Rights are generally exercisable only if a person or group becomes the beneficial owner of 17% or more of the outstanding common stock or announces a tender offer for 17% or more of the outstanding common stock (“Acquiring Person”).  In the event that a person or group becomes an Acquiring Person, each holder of a Right, excluding the Acquiring Person, will have the right to receive, upon exercise, common stock having a market value equal to two times the Purchase Price of the Preferred Shares.

 

Dividend Reinvestment and Stock Purchase Plan

We filed a registration statement with the SEC for our dividend reinvestment and stock purchase plan (“DRIP”) which was declared effective on September 10, 2001.  The DRIP commenced on September 24, 2001.  We registered 3,000,000 shares of common stock under the DRIP.

 

During the year ended December 31, 2002, we issued 71 common shares and received approximately $2,000 of proceeds from dividend reinvestments and/or stock purchases under the DRIP.

 

30



 

Indebtedness

At December 31, 2002, borrowings under our mortgage loans and credit facilities (excluding our share of joint venture debt of $396.4 million) represented 32.96% of our market capitalization of $1.7 billion (based on a common stock price of $31.60 per share, the closing price of our common stock on the New York Stock Exchange on December 31, 2002).  Market capitalization includes consolidated debt, common and preferred stock and conversion of all operating partnership units, but excludes our share of joint venture debt.

 

The table below summarizes our mortgage debt, including a $20.9 million mortgage on an asset held for sale, lines of credit indebtedness and term loan outstanding at December 31, 2002 and 2001, respectively (in thousands).

 

 

 

December 31,

 

 

 

2002

 

2001

 

Debt Summary:

 

 

 

 

 

 

 

 

 

 

 

Balance

 

 

 

 

 

Fixed rate

 

$

232,972

 

$

253,792

 

Variable rate - hedged

 

233,254

 

133,930

 

Total fixed rate

 

466,226

 

387,722

 

Variable rate

 

74,000

 

60,000

 

Variable rate-supporting variable rate assets

 

22,178

 

57,109

 

Total variable rate

 

96,178

 

117,109

 

Total

 

$

562,404

 

$

504,831

 

 

 

 

 

 

 

Percent of Total Debt:

 

 

 

 

 

Total fixed rate

 

82.90

%

76.80

%

Variable rate

 

17.10

%

23.20

%

Total

 

100.00

%

100.00

%

 

 

 

 

 

 

Effective Interest Rate at End of Period:

 

 

 

 

 

Fixed rate

 

7.90

%

8.23

%

Variable rate

 

3.00

%

3.49

%

Effective interest rate

 

7.06

%

7.13