UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


x

 

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

 

 

 

 

 

 

For the quarterly period ended June 30, 2007

 

 

 

 

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 Number: 1-13199


SL GREEN REALTY CORP.

(Exact name of registrant as specified in its charter)


Maryland

 

13-3956775

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

420 Lexington Avenue, New York, New York

 

10170

(Address of principal executive offices)

 

(Zip Code)

 

(212) 594-2700

(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x     NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES
o     NO x

The number of shares outstanding of the registrant’s common stock, $0.01 par value, was 59,509,803 as of July 31, 2007.

 




 

SL GREEN REALTY CORP.

INDEX

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

ITEM 1. FINANCIAL STATEMENTS

 

 

 

PAGE

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2007 (unaudited) and December 31, 2006

 

3

 

 

 

Condensed Consolidated Statements of Income for the three and six months ended June 30, 2007 and 2006 (unaudited)

 

4

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2007 (unaudited)

 

5

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006 (unaudited)

 

6

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

7

 

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

 

 

 

 

AND RESULTS OF OPERATIONS

 

33

 

 

 

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

47

 

 

 

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

 

47

 

 

 

 

 

 

PART II.

OTHER INFORMATION

 

48

 

 

 

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

 

48

 

 

 

 

 

 

ITEM 1A.

RISK FACTORS

 

48

 

 

 

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

48

 

 

 

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

48

 

 

 

 

 

 

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

48

 

 

 

 

 

 

ITEM 5.

OTHER INFORMATION

 

49

 

 

 

 

 

 

ITEM 6.

EXHIBITS

 

49

 

 

 

 

Signatures

 

50

 

2




PART I.                         FINANCIAL INFORMATION

ITEM 1.                                                                             Financial Statements

SL Green Realty Corp.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except per share data)

 

 

June 30,
2007

 

December 31,
2006

 

Assets

 

(Unaudited)

 

 

 

Commercial real estate properties, at cost:

 

 

 

 

 

Land and land interests

 

$

1,285,915

 

$

439,986

 

Building and improvements

 

5,082,758

 

2,111,970

 

Building leasehold and improvements

 

1,201,786

 

490,995

 

Property under capital lease

 

12,208

 

12,208

 

 

 

7,582,667

 

3,055,159

 

Less: accumulated depreciation

 

(324,756

)

(279,436

)

 

 

7,257,911

 

2,775,723

 

Assets held for sale

 

21,040

 

 

Cash and cash equivalents

 

80,300

 

117,178

 

Restricted cash

 

131,247

 

252,272

 

Tenant and other receivables, net of allowance of $12,729 and $11,079 in 2007 and 2006, respectively

 

41,657

 

34,483

 

Related party receivables

 

10,943

 

7,195

 

Deferred rents receivable, net of allowance of $12,308 and $10,925 in 2007 and 2006, respectively

 

111,740

 

96,624

 

Structured finance investments, net of discount of $18,590 and $14,804 in 2007 and 2006, respectively

 

661,720

 

445,026

 

Investments in unconsolidated joint ventures

 

839,087

 

686,069

 

Deferred costs, net

 

113,885

 

97,850

 

Other assets

 

182,815

 

119,807

 

Total assets

 

$

9,452,345

 

$

4,632,227

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Mortgage notes payable

 

$

2,173,460

 

$

1,190,379

 

Revolving credit facilities

 

587,000

 

 

Term loans and unsecured notes

 

1,792,914

 

525,000

 

Accrued interest payable and other liabilities

 

42,286

 

10,008

 

Accounts payable and accrued expenses

 

148,158

 

138,181

 

Deferred revenue/gain

 

42,382

 

43,721

 

Capitalized lease obligation

 

16,466

 

16,394

 

Deferred land leases payable

 

16,829

 

16,938

 

Dividend and distributions payable

 

47,557

 

40,917

 

Security deposits

 

39,475

 

27,913

 

Liabilities related to assets held for sale

 

 

 

 

Junior subordinate deferrable interest debentures held by trusts that issued trust preferred securities

 

100,000

 

100,000

 

Total liabilities

 

5,006,527

 

2,109,451

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

Minority interest in Operating Partnership

 

77,429

 

71,731

 

Minority interests in other partnerships

 

592,449

 

56,162

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

Series C preferred stock, $0.01 par value, $25.00 liquidation preference, 6,300 issued and outstanding at June 30, 2007 and December 31, 2006, respectively

 

151,981

 

151,981

 

Series D preferred stock, $0.01 par value, $25.00 liquidation preference, 4,000 issued and outstanding at June 30, 2007 and December 31, 2006, respectively

 

96,321

 

96,321

 

Common stock, $0.01 par value 160,000 shares authorized and 59,923 and 49,840 issued and outstanding at June 30, 2007 and December 31, 2006, respectively (including 312 shares at June 30, 2007 held in Treasury)

 

598

 

498

 

Additional paid-in-capital

 

2,905,765

 

1,809,893

 

Treasury stock at cost

 

(40,368

)

 

Accumulated other comprehensive income

 

9,287

 

13,971

 

Retained earnings

 

652,356

 

322,219

 

Total stockholders’ equity

 

3,775,940

 

2,394,883

 

Total liabilities and stockholders’ equity

 

$

9,452,345

 

$

4,632,227

 

The accompanying notes are an integral part of these financial statements.

3




 

SL Green Realty Corp.

Condensed Consolidated Statements of Income

(Unaudited, and amounts in thousands, except per share data)

 

 

Three months Ended

 

Six months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Revenues

 

 

 

 

 

 

 

 

 

Rental revenue, net

 

$

176,761

 

$

80,486

 

$

328,681

 

$

156,086

 

Escalation and reimbursement

 

30,298

 

14,467

 

58,334

 

27,797

 

Preferred equity and investment income

 

27,443

 

17,305

 

49,152

 

30,784

 

Other income

 

23,204

 

11,382

 

113,089

 

21,190

 

Total revenues

 

257,706

 

123,640

 

549,256

 

235,857

 

Expenses

 

 

 

 

 

 

 

 

 

Operating expenses including approximately $3,961, $6,978 (2007) and $3,038, $6,131 (2006) paid to affiliates

 

54,581

 

26,247

 

102,570

 

52,662

 

Real estate taxes

 

34,652

 

17,686

 

65,202

 

34,721

 

Ground rent

 

7,766

 

4,921

 

15,031

 

9,842

 

Interest

 

62,595

 

21,528

 

120,186

 

39,019

 

Amortization of deferred financing costs

 

9,242

 

1,242

 

12,543

 

1,956

 

Depreciation and amortization

 

44,623

 

16,720

 

81,981

 

31,793

 

Marketing, general and administrative

 

24,131

 

13,257

 

58,378

 

26,243

 

Total expenses

 

237,590

 

101,601

 

455,891

 

196,236

 

Income from continuing operations before equity in net income of unconsolidated joint ventures, minority interest and discontinued operations

 

20,116

 

22,039

 

93,365

 

39,621

 

Equity in net income from unconsolidated joint ventures

 

12,059

 

10,596

 

21,413

 

20,564

 

Income from continuing operations before minority interest and discontinued operations

 

32,175

 

32,635

 

114,778

 

60,185

 

Equity in net gain on sale of interest in unconsolidated joint ventures/ real estate

 

 

 

31,509

 

 

Minority interest in other partnerships

 

(4,655)

 

(1,115

)

(8,578

)

(1,966

)

Minority interest in Operating Partnership attributable to continuing operations

 

(1,081)

 

(1,309

)

(5,360

)

(2,421

)

Income from continuing operations

 

26,439

 

30,211

 

132,349

 

55,798

 

Net income from discontinued operations, net of minority interest

 

2,505

 

3,818

 

4,297

 

6,932

 

Gain on sale of discontinued operations, net of minority interest

 

241,906

 

 

286,600

 

 

Net income

 

270,850

 

34,029

 

423,246

 

62,730

 

Preferred stock dividends

 

(4,969)

 

(4,969

)

(9,938

)

(9,938

)

Net income available to common stockholders

 

$

265,881

 

$

29,060

 

$

413,308

 

$

52,792

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

Net income from continuing operations before discontinued operations

 

$

0.36

 

$

0.58

 

$

1.56

 

$

1.07

 

Net income from discontinued operations

 

0.04

 

0.09

 

0.07

 

0.16

 

Gain on sale of discontinued operations, net of minority interest

 

4.07

 

 

4.92

 

 

Gain on sale of unconsolidated joint venture

 

 

 

0.54

 

 

Net income available to common stockholders

 

$

4.47

 

$

0.67

 

$

7.09

 

$

1.23

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Net income from continuing operations before discontinued operations

 

$

0.36

 

$

0.57

 

$

1.55

 

$

1.03

 

Net income from discontinued operations

 

0.04

 

0.08

 

0.07

 

0.16

 

Gain on sale of discontinued operations, net of minority interest

 

3.98

 

 

4.81

 

 

Gain on sale of unconsolidated joint venture

 

 

 

0.50

 

 

Net income available to common stockholders

 

$

4.38

 

$

0.65

 

$

6.93

 

$

1.19

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

0.70

 

$

0.60

 

$

1.40

 

$

1.20

 

Basic weighted average common shares outstanding

 

59,513

 

43,191

 

58,258

 

43,026

 

Diluted weighted average common shares and common share equivalents outstanding

 

63,275

 

46,901

 

62,215

 

46,775

 

 

The accompanying notes are an integral part of these financial statements.

4




 

SL Green Realty Corp.

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited, and amounts in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Series C

 

Series D

 

Stock

 

Additional

 

 

 

Other

 

 

 

 

 

 

 

 

 

Preferred

 

Preferred

 

 

 

Par

 

Paid-

 

Treasury

 

Comprehensive

 

Retained

 

 

 

Comprehensive

 

 

 

Stock

 

Stock

 

Shares

 

Value

 

In-Capital

 

Stock

 

Income

 

Earnings

 

Total

 

Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2006

 

$

151,981

 

$

96,321

 

49,840

 

$

498

 

$

1,809,893

 

$

 

$

13,971

 

$

322,219

 

$

2,394,883

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

423,246

 

423,246

 

$

423,246

 

Net unrealized loss on derivative instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,684

)

 

 

(4,684

)

(4,684

)

SL Green’s share of joint venture net unrealized loss on derivative instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(407

)

Preferred dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,938

)

(9,938

)

 

 

Redemption of units and DRIP proceeds

 

 

 

 

 

377

 

3

 

16,482

 

 

 

 

 

 

 

16,485

 

 

 

Deferred compensation plan & stock award, net

 

 

 

 

 

414

 

4

 

532

 

 

 

 

 

 

 

536

 

 

 

Amortization of deferred compensation plan

 

 

 

 

 

 

 

 

 

19,766

 

 

 

 

 

 

 

19,766

 

 

 

Proceeds from stock options exercised

 

 

 

 

 

279

 

3

 

10,504

 

 

 

 

 

 

 

10,507

 

 

 

Common stock issued in connection with Reckson Merger

 

 

 

 

 

9,013

 

90

 

1,048,588

 

 

 

 

 

 

 

1,048,678

 

 

 

Treasury stock-at cost

 

 

 

 

 

(312

)

 

 

 

 

(40,368

)

 

 

 

 

(40,368

)

 

 

Cash distribution declared ($1.40 per common share of which none represented a return of capital for federal income tax purposes)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(83,171

)

(83,171

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2007

 

$

151,981

 

$

96,321

 

59,611

 

$

598

 

$

2,905,765

 

$

(40,368

)

$

9,287

 

$

652,356

 

3,775,940

 

$

418,155

 

 

The accompanying notes are an integral part of these financial statements.

 

5




 

SL Green Realty Corp.

Condensed Consolidated Statements of Cash Flows

(Unaudited, and amounts in thousands, except per share data)

 

 

Six months

 

 

 

Ended June 30,

 

 

 

2007

 

2006

 

Operating Activities

 

 

 

 

 

Net income

 

$

423,246

 

$

62,730

 

Adjustment to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Non-cash adjustments related to income from discontinued operations

 

14,271

 

3,495

 

Depreciation and amortization

 

94,524

 

31,793

 

Gain on sale of real estate

 

(299,180

)

 

Equity in net income from unconsolidated joint ventures

 

(21,413

)

(20,564

)

Equity in net gain on sale of unconsolidated joint ventures

 

(31,509

)

 

Distributions of cumulative earnings from unconsolidated joint ventures

 

22,227

 

21,666

 

Minority interest

 

13,938

 

6,343

 

Deferred rents receivable

 

(23,518

)

(8,717

)

Other non-cash adjustments

 

22,212

 

7,398

 

Changes in operating assets and liabilities:

 

 

 

 

 

Restricted cash — operations

 

(13,025

)

(2,426

)

Tenant and other receivables

 

(8,801

)

(6,394

)

Related party receivables

 

(3,748

)

(623

)

Deferred lease costs

 

(11,288

)

(10,104

)

Other assets

 

14,722

 

17,875

 

Accounts payable, accrued expenses and other liabilities

 

57,935

 

2,715

 

Deferred revenue and land lease payable

 

(1,122

)

(2,111

)

Net cash provided by operating activities

 

249,471

 

103,076

 

Investing Activities

 

 

 

 

 

Acquisitions of real estate property

 

(5,055,663

)

(253,758

)

Proceeds from Asset Sale

 

1,964,914

 

 

Additions to land, buildings and improvements

 

(39,111

)

(26,697

)

Escrowed cash — capital improvements/acquisition deposits

 

123,146

 

1,513

 

Investments in unconsolidated joint ventures

 

(192,827

)

(55,482

)

Distributions in excess of cumulative earnings from unconsolidated joint ventures

 

74,743

 

36,791

 

Proceeds from disposition of real estate/ partial interest in property

 

441,419

 

8,847

 

Other investments

 

(63,075

)

(13,935

)

Structured finance and other investments net of repayments/participations

 

(220,480

)

52,620

 

Net cash used in investing activities

 

(2,966,934

)

(250,101

)

Financing Activities

 

 

 

 

 

Proceeds from mortgage notes payable

 

809,914

 

152,591

 

Repayments of mortgage notes payable

 

(118,724

)

(3,875

)

Proceeds from revolving credit facilities, term loans and unsecured notes

 

2,352,503

 

440,645

 

Repayments of revolving credit facilities, term loans and unsecured notes

 

(1,754,313

)

(418,000

)

Net proceeds from common stock issued for Reckson Merger

 

1,010,078

 

 

Purchases of Treasury Stock

 

(40,368

)

 

 

Proceeds from stock options exercised

 

10,507

 

13,004

 

Minority interest in other partnerships

 

524,011

 

16,384

 

Dividends and distributions paid

 

(85,420

)

(59,497

)

Deferred loan costs and capitalized lease obligation

 

(27,603

)

(4,147

)

Net cash provided by financing activities

 

2,680,585

 

137,105

 

Net decrease in cash and cash equivalents

 

(36,878

)

(9,920

)

Cash and cash equivalents at beginning of period

 

117,178

 

24,104

 

Cash and cash equivalents at end of period

 

$

80,300

 

$

14,184

 

The accompanying notes are an integral part of these financial statements.

6




 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2007

1.  Organization and Basis of Presentation

SL Green Realty Corp., also referred to as the Company or SL Green, a Maryland corporation, and SL Green Operating Partnership, L.P., or the operating partnership, a Delaware limited partnership, were formed in June 1997 for the purpose of combining the commercial real estate business of S.L. Green Properties, Inc. and its affiliated partnerships and entities.  The operating partnership received a contribution of interest in the real estate properties, as well as 95% of the economic interest in the management, leasing and construction companies which are referred to as the Service Corporation.  The Company has qualified, and expects to qualify in the current fiscal year, as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Code, and operates as a self-administered, self-managed REIT.  A REIT is a legal entity that holds real estate interests and, through payments of dividends to stockholders, is permitted to reduce or avoid the payment of Federal income taxes at the corporate level.  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.

Substantially all of our assets are held by, and our operations are conducted through, the operating partnership.  The Company is the sole managing general partner of the operating partnership.  As of June 30, 2007, minority investors held, in the aggregate, a 3.8% limited partnership interest in the operating partnership.

On January 25, 2007, we completed the acquisition, or the Reckson Merger, of all of the outstanding shares of common stock of Reckson Associates Realty Corp., or Reckson, pursuant to the terms of the Agreement and Plan of Merger, dated as of August 3, 2006, as amended, the Merger Agreement, among SL Green, Wyoming Acquisition Corp., or Wyoming, Wyoming Acquisition GP LLC, Wyoming Acquisition Partnership LP, Reckson and Reckson Operating Partnership, L.P., or ROP. Pursuant to the terms of the Merger Agreement, each of the issued and outstanding shares of common stock of Reckson were converted into (i) $31.68 in cash, (ii) 0.10387 of a share of the common stock, par value $0.01 per share, of SL Green and (iii) a prorated dividend in an amount equal to approximately $0.0977 in cash. We also assumed an aggregate of approximately $226.3 million of Reckson mortgage debt, approximately $287.5 million of Reckson convertible public debt and approximately $967.8 million of Reckson public unsecured notes.  ROP is a subsidiary of our operating partnership.

On January 25, 2007, we completed the sale, or Asset Sale, of certain assets of ROP to an asset purchasing venture led by certain of Reckson’s former executive management, or the Buyer, for a total consideration of approximately $2.0 billion. SL Green caused ROP to transfer the following assets to the Buyer in the Asset Sale: (1) certain real property assets and/or entities owning such real property assets, in either case, of ROP and 100% of certain loans secured by real property, all of which are located in Long Island, New York; (2) certain real property assets and/or entities owning such real property assets, in either case, of ROP located in White Plains and Harrison, New York; (3) all of the real property assets and/or entities owning 100% of the interests in such real property assets, in either case, of ROP located in New Jersey; (4) the entity owning a 25% interest in Reckson Australia Operating Company LLC, Reckson’s Australian management company (including its Australian licensed responsible entity), and other related entities, and ROP and ROP subsidiaries’ rights to and interests in, all related contracts and assets, including, without limitation, property management and leasing, construction services and asset management contracts and services contracts; (5) the direct or indirect interest of Reckson in Reckson Asset Partners, LLC, an affiliate of RSVP and all of ROP’s rights in and to certain loans made by ROP to Frontline Capital Group, the bankrupt parent of RSVP, and other related entities, which will be purchased by a 50/50 joint venture with an affiliate of SL Green; (6) a 50% participation interest in certain loans made by a subsidiary of ROP that are secured by four real property assets located in Long Island, New York; and (7) 100% of certain loans secured by real property located in White Plains and New Rochelle, New York.

As of June 30, 2007, we owned the following interests in commercial office properties primarily in midtown Manhattan, a borough of New York City, or Manhattan, as well as Long Island City, Westchester County, Connecticut and New Jersey, which are collectively known as the Suburban assets:

Location

 

Ownership

 

Number of
Properties

 

Square Feet

 

Weighted
Average
Occupancy 
(1)

 

Manhattan

 

Consolidated properties

 

24

 

13,899,300

 

98.1 %

 

 

 

Unconsolidated properties

 

8

 

8,640,900

 

96.8 %

 

 

 

 

 

 

 

 

 

 

 

Suburban

 

Consolidated properties

 

30

 

4,925,800

 

91.5 %

 

 

 

Unconsolidated properties

 

3

 

2,042,000

 

99.5 %

 

 

 

 

 

65

 

29,508,000

 

 

 


(1)                The weighted average occupancy represents the total leased square feet divided by total available square feet.

7




SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2007

 

We also own an aggregate of approximately 285,000 square feet of retail (nine) properties.  In addition, we manage three office properties owned by third parties and affiliated companies encompassing approximately 1.0 million rentable square feet.

We also own approximately 25% of the outstanding common stock of Gramercy Capital Corp. (NYSE: GKK), or Gramercy, as well as 64.83 units of the Class B limited partner interest in Gramercy’s operating partnership.  See Note 6.

Partnership Agreement

In accordance with the partnership agreement of the Operating Partnership, or the Operating Partnership Agreement, we allocate all distributions and profits and losses in proportion to the percentage ownership interests of the respective partners.  As the managing general partner of the Operating Partnership, we are required to take such reasonable efforts, as determined by us in our sole discretion, to cause the Operating Partnership to distribute sufficient amounts to enable the payment of sufficient dividends by us to avoid any Federal income or excise tax at the Company level. Under the Operating Partnership Agreement each limited partner will have the right to redeem units of limited partnership interest for cash, or if we so elect, shares of our common stock on a one-for-one basis.  In addition, we are prohibited from selling 673 First Avenue and 470 Park Avenue South before August 2009.

Basis of Quarterly Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included.  The 2007 operating results for the period presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.  These financial statements should be read in conjunction with the financial statements and accompanying notes included in our annual report on Form 10-K for the year ended December 31, 2006.

The balance sheet at December 31, 2006 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

2.  Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include our accounts and those of our subsidiaries, which are wholly-owned or controlled by us or entities which are variable interest entities in which we are the primary beneficiary under the Financial Accounting Standards Board, or FASB, Interpretation No. 46, or FIN 46, “Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51,” and FIN 46, “Interpretation No. 46R, or FIN 46R.” See Note 5, Note 6 and Note 7.  Entities which we do not control and entities which are variable interest entities, but where we are not the primary beneficiary are accounted for under the equity method.  We consolidate variable interest entities in which we are determined to be the primary beneficiary.  The interest that we do not own is included in “Minority Interest-Other Partnerships” on the balance sheet.  All significant intercompany balances and transactions have been eliminated.

In June 2005, the FASB ratified the consensus in EITF Issue No. 04-5, or EITF 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights,” which provides guidance in determining whether a general partner controls a limited partnership. EITF 04-5 states that the general partner in a limited partnership is presumed to control that limited partnership. The presumption may be overcome if the limited partners have either (1) the substantive ability to dissolve the limited partnership or otherwise remove the general partner without cause or (2) substantive participating rights, which provide the limited partners with the ability to effectively participate in significant decisions that would be expected to be made in the ordinary course of the limited partnership’s business and thereby preclude the general partner from exercising unilateral control over the partnership. Our adoption of EITF 04-5 did not have any effect on net income or stockholders’ equity.

We consolidate our investment in 919 Third Avenue as we own a 51% controlling interest.

Investment in Commercial Real Estate Properties

In accordance with SFAS No. 141, “Business Combinations,” we allocate the purchase price of real estate to land and building and, if determined to be material, intangibles, such as the value of above, below and at-market leases and origination costs associated with the in-place leases.  We depreciate the amount allocated to building and other intangible assets over their estimated useful lives, which generally range from three to 40 years.  The values of the above and below market leases are amortized and recorded as either an increase (in the case of below market leases) or a decrease (in the case of above market leases) to rental income over the remaining

8




SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2007

 

term of the associated lease.  The value associated with in-place leases and tenant relationships are amortized over the expected term of the relationship, which includes an estimated probability of the lease renewal, and its estimated term.  If a tenant vacates its space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balance of the related intangible will be written off.  The tenant improvements and origination costs are amortized as an expense over the remaining life of the lease (or charged against earnings if the lease is terminated prior to its contractual expiration date).  We assess fair value of the leases based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information.  Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property.

We have not yet obtained all the information necessary to finalize our estimates to complete the purchase price allocations in accordance with SFAS No. 141 related to the Reckson Merger.  The purchase price allocations will be finalized once the information we identified has been received, which should not be longer than one year from the date of acquisition.

As a result of our evaluations, under SFAS No. 141, of acquisitions made, we recognized an increase of approximately $636,000, $1.3 million, $581,000 and $921,000 in rental revenue for the three and six months ended June 30, 2007 and 2006, respectively, for the amortization of below market leases and a reduction in lease origination costs, resulting from the reallocation of the purchase price of the applicable properties.  We recognized a reduction in interest expense for the amortization of the above market rate debt of approximately $1.6 million, $2.7 million, $192,000 and $381,000 for the three and six months ended June 30, 2007 and 2006, respectively.

Scheduled amortization on existing intangible liabilities on real estate investments is as follows (in thousands):

 

Intangible
Liabilities

 

2007

 

$

1,304

 

2008

 

2,605

 

2009

 

2,356

 

2010

 

1,857

 

2011

 

1,540

 

Thereafter

 

2,753

 

 

 

$

12,415

 

 

Income Taxes

We are taxed as a REIT under Section 856(c) of the Code.  As a REIT, we generally are not subject to Federal income tax.  To maintain our qualification as a REIT, we must distribute at least 90% of our REIT taxable income to our stockholders and meet certain other requirements.  If we fail to qualify as a REIT in any taxable year, we will be subject to Federal income tax on our taxable income at regular corporate rates.  We may also be subject to certain state, local and franchise taxes.  Under certain circumstances, Federal income and excise taxes may be due on our undistributed taxable income.

Pursuant to amendments to the Code that became effective January 1, 2001, we have elected or may elect to treat certain of our existing or newly created corporate subsidiaries as taxable REIT subsidiaries, or TRS.  In general, a TRS of ours may perform non-customary services for our tenants, hold assets that we cannot hold directly and generally engage in any real estate or non-real estate related business.  A TRS is subject to corporate Federal income tax.  Our TRS’s generate income, resulting in Federal income tax liability for these entities.  Our TRS’s paid approximately $0.8 million and $1.1 million in estimated federal, state and local taxes during the six months ended June 30, 2007 and 2006.

Stock-Based Employee Compensation Plans

We have a stock-based employee compensation plan, described more fully in Note 12.  We account for this plan under SFAS No. 123 “Shared Based Payment,” revised, or SFAS No. 123-R.

9




SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2007

 

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable.  In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.  Because our plan has characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in our opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options.

Compensation cost for stock options, if any, is recognized ratably over the vesting period of the award.  Our policy is to grant options with an exercise price equal to the quoted closing market price of our stock on the grant date.  Awards of stock options or restricted stock are expensed as compensation on a current basis over the benefit period.

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for grants during the three months ended June 30, 2007 and 2006.

 

2007

 

2006

 

Dividend yield

 

2.1

%

2.40

%

Expected life of option

 

5 years

 

5 years

 

Risk-free interest rate

 

4.61

%

4.80

%

Expected stock price volatility

 

21.48

%

16.61

%

 

The following table illustrates the effect on net income available to common stockholders and earnings per share if the fair value method had been applied to all outstanding and unvested stock options for the three and six months ended June 30, 2007 and 2006 (in thousands, except per share amounts):

 

 

Three months Ended

 

Six months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Net income available to common stockholders

 

$

265,881

 

$

29,060

 

$

413,308

 

$

52,792

 

Deduct stock option expense-all awards

 

(1,944

)

(960

)

(3,642

)

(1,447

)

Add back stock option expense included in net income

 

1,746

 

726

 

3,267

 

952

 

Allocation of compensation expense to minority interest

 

87

 

47

 

186

 

72

 

Pro forma net income available to common stockholders

 

$

265,770

 

$

28,873

 

$

413,119

 

$

52,369

 

Basic earnings per common share-historical

 

$

4.47

 

$

0.67

 

$

7.09

 

$

1.23

 

Basic earnings per common share-pro forma

 

$

4.47

 

$

0.67

 

$

7.09

 

$

1.22

 

Diluted earnings per common share-historical

 

$

4.38

 

$

0.65

 

$

6.93

 

$

1.19

 

Diluted earnings per common share-pro forma

 

$

4.38

 

$

0.65

 

$

6.92

 

$

1.18

 

 

The effects of applying SFAS No. 123-R in this pro forma disclosure are not indicative of the impact future awards may have on our results of operations.

Earnings Per Share

We present both basic and diluted earnings per share, or EPS.  Basic EPS excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, where such exercise or conversion would result in a lower EPS amount.  This also includes units of limited partnership interest.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

10




SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2007

Concentrations of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash investments, structured finance investments and accounts receivable.  We place our cash investments in excess of insured amounts with high quality financial institutions.  The collateral securing our structured finance investments is primarily located in the greater New York area. (See Note 5).  We perform ongoing credit evaluations of our tenants and require certain tenants to provide security deposits or letters of credit.  Though these security deposits and letters of credit are insufficient to meet the total value of a tenant’s lease obligation, they are a measure of good faith and a source of funds to offset the economic costs associated with lost rent and the costs associated with re-tenanting the space.  Although the properties in our real estate portfolio are primarily located in Manhattan, we also have properties located in Westchester, Connecticut, New Jersey and Long Island.  The tenants located in our buildings operate in various industries.  Other than one tenant at 1515 Broadway who contributed approximately 5.3% of our annualized rent, no other tenant in the portfolio contributed more than 5.1% of our annualized rent, including our share of joint venture annualized rent, at June 30, 2007.

Approximately 7%, 6%, 6% and 6% of our annualized rent, including our share of joint venture annualized rent, was attributable to 1221 Avenue of the Americas, 1515 Broadway, 420 Lexington Avenue and 1185 Avenue of the Americas, respectively, for the quarter ended June 30, 2007.  One borrower accounted for more than 10.0% of the revenue earned on structured finance investments during the three months ended June 30, 2007.

Reclassification

Certain prior year balances have been reclassified to conform with the current year presentation.

New Accounting Pronouncements

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” or FIN 48. This interpretation, among other things, creates a two-step approach for evaluating uncertain tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines the amount of benefit that more-likely-than-not will be realized upon settlement. Derecognition of a tax position that was previously recognized would occur when a company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for derecognition of tax positions, and it has expanded disclosure requirements.  FIN 48 is effective for fiscal years beginning after December 15, 2006, in which the impact of adoption should be accounted for as a cumulative-effect adjustment to the beginning balance of retained earnings. The adoption of FIN 48, did not have a material impact on our consolidated financial statements.

3.  Property Acquisitions

In January 2007, we acquired Reckson for approximately $6.0 billion, inclusive of transaction costs.  Simultaneously, we sold approximately $2.0 billion of the Reckson assets to an asset purchasing venture led by certain of Reckson’s former executive management.  The transaction included the acquisition of 30 properties encompassing approximately 9.2 million square feet, of which five properties encompassing approximately 4.2 million square feet are located in Manhattan.

In January 2007, we acquired 300 Main Street in Stamford, Connecticut and 399 Knollwood Road in White Plains, New York for approximately $46.6 million, from affiliates of RPW Group.  These commercial office buildings encompass 275,000 square feet, inclusive of 50,000 square feet of garage parking at 300 Main Street.

In April 2007, we completed the acquisition of 331 Madison Avenue and 48 East 43rd Street for a total of $73.0 million. Both 331 Madison Avenue and 48 East 43rd Street are located adjacent to 317 Madison Avenue, a property that SL Green acquired in 2001. 331 Madison Avenue is an approximately 92,000-square foot, 14-story office building. The 22,850-square-foot 48 East 43rd Street property is a seven-story loft building that was later converted to office use.

In April 2007, we acquired the fee interest in 333 West 34th Street for approximately $183.0 million from Citigroup Global Markets Inc. The property encompasses approximately 345,000 square feet. At closing, Citigroup entered into a full building triple net lease through December 2009.

11




SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2007

 

In June 2007, we, through a joint venture, acquired the second and third floors in the office tower at 717 Fifth Avenue for approximately $16.9 million.

In June 2007, we acquired 1010 Washington Avenue, CT, a 143,400 square foot office tower. The fee interest was purchased for approximately $38.0 million.

In June 2007, we acquired an office property located at 500 West Putnam Avenue in Greenwich, Connecticut. The Greenwich property, a four-story, 121,500-square-foot office building, was purchased for approximately $56.0 million.

Pro Forma

The following table (in thousands, except per share amounts) summarizes, on an unaudited pro forma basis, our combined results of operations for the six months ended June 30, 2007 and 2006 as though the acquisitions of 521 Fifth Avenue (March 2006), the investment in 609 Fifth Avenue, the July and November 2006 common stock offerings as well as the Reckson Merger were completed on January 1, 2006.  The supplemental pro forma operating data is not necessarily indicative of what the actual results of operations would have been assuming the transactions had been completed as set forth above, nor do they purport to represent our results of operations for future periods.  In addition, the following supplemental pro forma operating data does not present the sale of assets through June 30, 2007.  The Company accounted for the acquisition of assets utilizing the purchase method of accounting.

 

2007

 

2006

 

Pro forma revenues

 

$

583,705

 

$

454,903

 

Pro forma net income

 

$

410,507

 

$

35,086

 

Pro forma earnings per common share-basic

 

$

6.92

 

$

0.60

 

Pro forma earnings per common share and common share equivalents-diluted

 

$

6.57

 

$

0.58

 

Pro forma common shares-basic

 

59,280

 

58,545

 

Pro forma common share and common share equivalents-diluted

 

63,238

 

62,295

 

 

4.  Property Dispositions and Assets Held for Sale

In February 2007, we sold the fee interests in 70 West 36th Street for approximately $61.5 million, excluding closing costs.  The property is approximately 151,000 square feet.  We recognized a gain on sale of approximately $47.2 million.

In June 2007, we sold our office condominium interest in floors six through eighteen at 110 East 42nd Street for approximately $111.5 million, excluding closing costs. The property encompasses approximately 181,000 square feet. The sale does not include approximately 112,000 square feet of developable air rights, which we retained along with the ability to transfer these rights off-site. We recognized a gain on sale of approximately $84.0 million.

In June 2007, we sold our condominium interests in 125 Broad Street for approximately $273.0 million, excluding closing costs.  The property is approximately 525,000 square feet.  We recognized a gain on sale of approximately $167.9 million.

At June 30, 2007, discontinued operations included the results of operations of real estate assets sold prior to that date.  This included 286 and 290 Madison Avenue, sold in July 2006, 1140 Avenue of the Americas, sold in August 2006, and 125 Broad Street and 110 East 42nd Street sold in June 2007, and 292 Madison Avenue, which was considered as held for sale at June 30, 2007.

12




SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2007

 

The following table summarizes income from discontinued operations (net of minority interest) and the related realized gain on sale of discontinued operations (net of minority interest) for the three and six months ended June 30, 2007 and 2006 (in thousands).

 

Three months Ended

 

Six months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Revenues

 

 

 

 

 

 

 

 

 

Rental revenue

 

$

6,557

 

$

10,629

 

$

14,030

 

$

21,215

 

Escalation and reimbursement revenues

 

1,407

 

2,477

 

3,064

 

4,784

 

Other income

 

29

 

118

 

70

 

227

 

Total revenues

 

7,993

 

13,224

 

17,164

 

26,226

 

Operating expense

 

2,860

 

4,214

 

6,279

 

8,687

 

Real estate taxes

 

1,076

 

2,117

 

2,362

 

4,206

 

Ground rent

 

 

87

 

 

173

 

Interest

 

1,208

 

1,373

 

2,535

 

2,733

 

Depreciation and amortization

 

240

 

1,418

 

1,502

 

3,129

 

Total expenses

 

5,384

 

9,209

 

12,678

 

18,928

 

Income from discontinued operations

 

2,609

 

4,015

 

4,486

 

7,298

 

Gain on disposition of discontinued operations

 

251,950

 

 

299,180

 

 

Minority interest in operating partnership

 

(10,148

)

(197

)

(12,769

)

(366

)

Income from discontinued operations, net of minority interest

 

$

244,411

 

$

3,818

 

$

290,897

 

$

6,932

 

 

5.  Structured Finance Investments

During the three months ended June 30, 2007 and 2006, we originated approximately $63.8 million and $44.3 million in structured finance and preferred equity investments (net of discount), respectively.  In addition, we assumed approximately $136.9 million of structured finance investments as part of the Reckson Merger.  There were approximately $90.4 million and $176.5 million in repayments and participations during those periods, respectively.  At June 30, 2007 and December 31, 2006 all loans were performing in accordance with the terms of the loan agreements.

Preferred equity and investment income consists of the following (in thousands):

 

Three months Ended

 

Six months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Preferred Equity and Investment income

 

$

23,854

 

$

16,860

 

$

43,153

 

$

29,406

 

Interest income

 

3,589

 

445

 

5,999

 

1,378

 

Total

 

$

27,443

 

$

17,305

 

$

49,152

 

$

30,784

 

 

13




SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2007

 

As of June 30, 2007 and December 31, 2006, we held the following structured finance investments, excluding preferred equity investments, with an aggregate weighted average current yield of approximately 10.5% (in thousands):

Loan
Type

 

Gross
Investment

 

Senior
Financing

 

2007
Principal
Outstanding

 

2006
Principal
Outstanding

 

Initial
Maturity
Date

 

Mezzanine Loan (1)

 

$

3,500

 

$

15,000

 

$

3,500

 

$

3,500

 

September 2021

 

Mezzanine Loan (1) (2)

 

85,000

 

225,000

 

90,723

 

31,226

 

December 2020

 

Mezzanine Loan (1)

 

28,500

 

 

28,500

 

28,500

 

August 2008

 

Mezzanine Loan (1)

 

60,000

 

205,000

 

58,094

 

58,013

 

February 2016

 

Mezzanine Loan (1)

 

25,000

 

200,000

 

25,000

 

25,000

 

May 2016

 

Mezzanine Loan (1)

 

35,000

 

165,000

 

33,139

 

33,082

 

October 2016

 

Mezzanine Loan (1) (3)

 

75,000

 

4,200,000

 

64,497

 

64,100

 

December 2016

 

Mezzanine Loan (1)

 

15,000

 

 

15,000

 

 

February 2010

 

Mezzanine Loan (1)

 

10,000

 

4,500

 

10,000

 

 

October 2007

 

Mezzanine Loan (3)

 

30,500

 

1,007,908

 

30,500

 

 

February 2008

 

Mezzanine Loan (1)(2)

 

25,000

 

314,830

 

27,059

 

 

November 2009

 

Mezzanine Loan (1)

 

1,000

 

 

1,000

 

 

January 2010

 

Mezzanine Loan

 

500

 

 

500

 

 

December 2009

 

Mezzanine Loan (1)

 

14,189

 

15,661

 

9,938

 

 

April 2008

 

Mezzanine Loan (1)

 

67,000

 

1,139,000

 

62,680

 

 

March 2017

 

Junior Participation (1)

 

37,500

 

477,500

 

37,500

 

37,500

 

January 2014

 

Junior Participation (1) (4)

 

4,000

 

44,000

 

3,896

 

3,911

 

August 2010

 

Junior Participation (1)

 

11,000

 

53,000

 

11,000

 

11,000

 

November 2009

 

Junior Participation (1)

 

21,000

 

115,000

 

21,000

 

21,000

 

November 2009

 

Junior Participation

 

12,000

 

73,000

 

12,000

 

12,000

 

December 2007

 

 

 

$

560,689

 

$

8,254,399

 

$

545,526

 

$

328,832

 

 

 


(1)                This is a fixed rate loan.

(2)                The difference between the pay and accrual rates is included as an addition to the principal balance outstanding.

(3)                Gramercy holds a pari passu interest in a mezzanine loan on this asset.

(4)                This is an amortizing loan.

Preferred Equity Investments

As of June 30, 2007 and December 31, 2006, we held the following preferred equity investments with an aggregate weighted average current yield of approximately 11.2% (in thousands):

Type

 

Gross
Investment

 

Senior
Financing

 

2007
Amount
Outstanding

 

2006
Amount
Outstanding

 

Initial
Mandatory
Redemption

 

Preferred equity (1)

 

$

75,000

 

$

69,724

 

$

3,694

 

$

3,694

 

July 2014

 

Preferred equity (1)

 

15,000

 

2,350,000

 

15,000

 

15,000

 

February 2015

 

Preferred equity (1)(2)

 

51,000

 

224,000

 

51,000

 

51,000

 

February 2014

 

Preferred equity (1)

 

7,000

 

75,000

 

7,000

 

7,000

 

August 2015

 

Preferred equity (1)

 

7,000

 

 

7,000

 

7,000

 

June 2009

 

Preferred equity (3)

 

32,500

 

385,000

 

32,500

 

32,500

 

July 2007

 

 

 

$

187,500

 

$

3,103,724

 

$

116,194

 

$

116,194

 

 

 


(1)                This is a fixed rate investment.

(2)                Gramercy holds a mezzanine loan on this asset.

(3)                Gramercy held a pari passu preferred equity investment in this asset.  This investment was redeemed in July 2007.

6.  Investment in Unconsolidated Joint Ventures

We have investments in several real estate joint ventures with various partners, including The Rockefeller Group International Inc., or RGII, The City Investment Fund, or CIF, SITQ Immobilier, a subsidiary of Caisse de depot et placement du Quebec, or SITQ, a fund managed by JP Morgan Investment Management, or JP Morgan, Prudential Real Estate Investors, or Prudential, Onyx Equities, or Onyx, The Witkoff Group, or Witkoff, Credit Suisse Securities (USA) LLC, or Credit Suisse, Mack-Cali Realty Corporation, or Mack-Cali, Jeff Sutton, or Sutton, and Gramercy, as well as private investors. As we do not control these joint ventures, we account for them under the equity method of accounting.

14




SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2007

We assess the accounting treatment for each joint venture on a stand-alone basis. This includes a review of each joint venture or partnership LLC agreement to determine which party has what rights and whether those rights are protective or participating under EITF 04-5 and EITF 96-16. In situations where our minority partner approves the annual budget, receives a detailed monthly reporting package from us, meets with us on a quarterly basis to review the results of the joint venture, reviews and approves the joint venture’s tax return before filing, and approves all leases that cover more than a nominal amount of space relative to the total rentable space at each property we do not consolidate the joint venture as we consider these to be substantive participation rights. Our joint venture agreements also contain certain protective rights such as the requirement of partner approval to sell, finance or refinance the property and the payment of capital expenditures and operating expenditures outside of the approved budget or operating plan.

The table below provides general information on each joint venture as of June 30, 2007 (in thousands):

Property

 

Partner

 

Ownership
Interest

 

Economic
Interest

 

Square
Feet

 

Acquired

 

Acquisition
Price 
(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

1221 Avenue of the Americas (2)

 

RGII

 

45.00%

 

45.00%

 

2,550

 

12/03

 

$

1,000,000

1250 Broadway (3)

 

SITQ

 

55.00%

 

66.18%

 

670

 

08/99

 

$

121,500

1515 Broadway (4)

 

SITQ

 

55.00%

 

68.45%

 

1,750

 

05/02

 

$

483,500

100 Park Avenue

 

Prudential

 

49.90%

 

49.90%

 

834

 

02/00

 

$

95,800

One Madison Avenue — South Building (5)

 

Gramercy

 

55.00%

 

55.00%

 

1,176

 

04/05

 

$

803,000

379 West Broadway

 

Sutton

 

45.00%

 

45.00%

 

62

 

12/05

 

$

19,750

Mack-Green joint venture

 

Mack-Cali

 

48.00%

 

48.00%

 

900

 

05/06

 

$

127,500

21 West 34th Street (6)

 

Sutton

 

50.00%

 

50.00%

 

30

 

07/05

 

$

22,400

800 Third Avenue (7)

 

Private Investors

 

47.34%

 

47.34%

 

526

 

12/06

 

$

285,000

521 Fifth Avenue

 

CIF

 

50.10%

 

50.10%

 

460

 

12/06

 

$

240,000

One Court Square

 

JP Morgan

 

30.00%

 

30.00%

 

1,402

 

01/07

 

$

533,500

1604-1610 Broadway (8)

 

Onyx/Sutton

 

45.00%

 

63.00%

 

30

 

11/05

 

$

4,400

1745 Broadway (9)

 

Witkoff/SITQ

 

32.26%

 

32.26%

 

674

 

04/07

 

$

520,000

1 and 2 Jericho Plaza

 

Onyx/Credit Suisse

 

20.26%

 

20.26%

 

640

 

04/07

 

$

210,000

2 Herald Square (10)

 

Gramercy

 

55.00%

 

55.00%

 

354

 

04/07

 

$

225,000


(1)                Acquisition price represents the actual or implied purchase price for the joint venture.

(2)                We acquired our interest from The McGraw-Hill Companies, or MHC.  MHC is a tenant at the property and accounted for approximately 14.6% of property’s annualized rent at June 30, 2007.  We do not manage this joint venture.

(3)                As a result of exceeding the performance thresholds set forth in our joint venture agreement with SITQ, our economic stake in the property was increased to 66.175% in August 2006.

(4)                Under a tax protection agreement established to protect the limited partners of the partnership that transferred 1515 Broadway to the joint venture, the joint venture has agreed not to adversely affect the limited partners’ tax positions before December 2011.  One tenant, whose leases end between 2008 and 2015, represents approximately 85.4% of this joint venture’s annualized rent at June 30, 2007.

(5)                We entered into an agreement to acquire Gramercy’s interest at an implied value of $1.0 billion.  This transaction closed in August 2007.

(6)                Effective November 2006, we deconsolidated this investment.  As a result of the recapitalization of the property, we were no longer the primary beneficiary under FIN 46(R).  Both partners had the same amount of equity at risk and neither partner controlled the joint venture.

(7)                We invested approximately $109.5 million in this asset through the origination of a loan secured by up to 47% of the interests in the property’s ownership, with an option to convert the loan to an equity interest. Certain existing members have the right to re-acquire approximately 4% of the property’s equity.

(8)                Effective April 1, 2007, we deconsolidated this investment.  As a result of the recapitalization of the property, we were no longer the primary beneficiary under FIN 46(R).  Both partners had the same amount of equity at risk and neither partner controlled the joint venture.

(9)                We have the ability to syndicate our interest down to 14.79%.

(10)           We, along with Gramercy, together as tenants-in-common, acquired a fee interest in 2 Herald Square.  The fee interest is subject to a long-term operating lease.

 

15




SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2007

 

In March 2007, a joint venture between our company, SITQ and SEB Immobilier — Investment GmbH sold One Park Avenue for $550.0 million. We received approximately $108.7 million in proceeds from the sale, approximately $77.2 million of which represented an incentive distribution under our joint venture arrangement with SEB and the balance of approximately $31.5 million was recognized as gain on sale.

In June 2007, a joint venture between our company, Ian Schrager, RFR Holding LLC and Credit Suisse, sold Five Madison Avenue-Clock Tower for $200.0 million. We realized an incentive distribution of approximately $5.5 million upon the winding down of the joint venture.

We finance our joint ventures with non-recourse debt. The first mortgage notes payable collateralized by the respective joint venture properties and assignment of leases at June 30, 2007 and December 31, 2006, respectively, are as follows (in thousands):

Property

 

Maturity
date

 

Interest
rate 
(1)

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

1221 Avenue of the Americas (2)

 

12/2010

 

5.86

%

$

170,000

 

$

170,000

 

1250 Broadway (3)

 

08/2008

 

6.12

%

$

115,000

 

$

115,000

 

1515 Broadway (4)

 

11/2007

 

6.23

%

$

625,000

 

$

625,000

 

100 Park Avenue

 

11/2015

 

6.52

%

$

175,000

 

$

175,000

 

One Madison Avenue — South Building

 

05/2020

 

5.91

%

$

678,440

 

$

683,374

 

379 West Broadway

 

12/2007

 

7.57

%

$

13,095

 

$

12,872

 

Mack-Green joint venture (5)

 

08/2014

 

7.86

%

$

102,450

 

$

102,519

 

21 West 34th Street

 

12/2016

 

5.75

%

$

100,000

 

$

100,000

 

800 Third Avenue

 

08/2008

 

5.95

%

$

20,910

 

$

20,910

 

521 Fifth Avenue

 

04/2011

 

6.32

%

$

140,000

 

$

140,000

 

One Court Square

 

12/2010

 

4.91

%

$

315,000

 

 

2 Herald Square

 

04/2017

 

5.36

%

$

191,250

 

 

1604-1610 Broadway

 

03/2012

 

5.66

%

$

27,000

 

 

1745 Broadway

 

01/2017

 

5.68

%

$

340,000

 

 

1 and 2 Jericho Plaza

 

03/2017

 

5.65

%

$

163,750

 

 


(1)                Interest rate represents the effective all-in weighted average interest rate for the quarter ended June 30, 2007.

(2)                This loan has an interest rate based on the LIBOR plus 75 basis points.  $65.0 million of this loan has been hedged through December 2010.  The hedge fixed the LIBOR rate at 4.8%.

(3)                The interest only loan carried an interest rate of 120 basis points over the 30-day LIBOR, but was reduced to 80 basis points over the 30-day LIBOR in December 2006. The loan is subject to two one-year as-of-right renewal extensions.  The joint venture extended this loan for one year.

(4)                The interest only loan carries an interest rate of 90 basis points over the 30-day LIBOR.  The mortgage is subject to three one-year as-of-right renewal options.

(5)                Comprised of $90.5 million variable rate debt that matures in May 2008 and $12.0 million fixed rate debt that matures in August 2014.  Gramercy provided the variable rate debt.

We act as the operating partner and day-to-day manager for all our joint ventures, except for 1221 Avenue of the Americas, Mack-Green, 800 Third Avenue and 1 and 2 Jericho Plaza. We are entitled to receive fees for providing management, leasing, construction supervision and asset management services to our joint ventures. We earned approximately $2.5 million, $5.5 million, $2.7 million and $4.2 million from these services for the three and six months ended June 30, 2007, and 2006, respectively. In addition, we have the ability to earn incentive fees based on the ultimate financial performance of certain of the joint venture properties.

Gramercy Capital Corp.

In April 2004, we formed Gramercy as a commercial real estate specialty finance company that focuses on the direct origination and acquisition of whole loans, subordinate interests in whole loans, mezzanine loans, preferred equity and net lease investments involving commercial properties throughout the United States.  Gramercy also established a real estate securities business that focuses on the acquisition, trading and financing of commercial mortgage backed securities and other real estate related securities.  Gramercy qualified as a REIT for federal income tax purposes and expects to qualify for its current fiscal year.  In August 2004, Gramercy sold 12.5 million shares of common stock in its initial public offering at a price of $15.00 per share, for a total offering of $187.5 million.  As part of the offering, which closed on August 2, 2004, we purchased 3,125,000 shares, or 25%, of Gramercy, for a total investment of approximately $46.9 million.  During the term of Gramercy’s amended and restated origination agreement, we have the right to

16




SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2007

 

purchase 25% of the shares in any future offering of Gramercy’s common stock in order to maintain our percentage ownership interest in Gramercy.  At June 30, 2007 we held 6,418,333 shares of Gramercy’s common stock representing a total investment of approximately $120.7 million.  The market value of our investment in Gramercy was approximately $176.8 million at June 30, 2007.

Gramercy is a variable interest entity, but we are not the primary beneficiary.  Due to the significant influence we have over Gramercy, we account for our investment under the equity method of accounting.

In connection with Gramercy’s initial public offering, GKK Manager LLC, or the Manager, an affiliate of ours, entered into a management agreement with Gramercy, which provided for an initial term through December 2007, with automatic one-year extension options and certain termination rights.  In April 2006, Gramercy’s board of directors approved, among other things, an extension of the management agreement through December 2009.  Gramercy pays the Manager an annual management fee equal to 1.75% of their gross stockholders’ equity (as defined in the amended and restated management agreement), inclusive of the trust preferred securities.  In addition, Gramercy also pays the Manager a collateral management fee (as defined in the collateral management agreement) of 0.25% per annum on the outstanding investment grade bonds in Gramercy’s July 2005 collateralized debt obligation.  The amended and restated management agreement provides that in connection with formations of future collateralized debt obligations, or CDO, or other securitization vehicles, if a collateral manager is retained, the Manager or an affiliate will be the collateral manager and will receive the following fees:  (i) 0.25% per annum of the book value of the assets owned for transitional “managed” CDOs, (ii) 0.15% per annum of the book value of the assets owned for non-transitional “managed” CDOs, (iii) 0.10% per annum of the book value of the assets owned for static CDOs that own primarily non-investment grade bonds, and (iv) 0.05% per annum of the book value of the assets owned for static CDOs that own primarily investment grade bonds; limited in each instance by the fees that are paid to the collateral manager. Collateral manager fees paid on Gramercy’s CDO that closed in August 2006 are governed by the amended and restated management agreement as a “transitional managed” CDO, as defined in the amended and restated management agreement, consisting primarily of debt investments secured by non-stabilized real estate.  The amended and restated management agreement provides that in connection with formations of collateralized debt obligations or other securitization vehicles after the execution of the amended and restated management agreement, if a collateral manager is retained, the Manager or an affiliate will be the collateral manager and will receive the following fees:  (i) 0.25% per annum of the book value of the assets owned for “transitional managed” CDOs, (ii) 0.15% per annum of the book value of the assets owned for “non-transitional managed” CDOs, (iii) 0.10% per annum of the book value of the assets owned for static CDOs that own primarily non-investment grade bonds, and (iv) 0.05% per annum of the book value of the assets owned for static CDOs that own primarily investment grade bonds; limited in each instance by the fees that are paid to the collateral manager. For the three and six months ended June 30, 2007 and 2006, we received an aggregate of approximately $3.1 million, $5.8 million, $2.5 million and $4.7 million, respectively, in fees under the management agreement and $1.1 million, $2.2 million, $0.5 million and $1.0 million under the collateral management agreement.

To provide an incentive for the Manager to enhance the value of Gramercy’s common stock, we, along with the other holders of Class B limited partnership interests in Gramercy’s operating partnership, are entitled to an incentive return payable through the Class B limited partner interests in Gramercy’s operating partnership, equal to 25% of the amount by which funds from operations (as defined in Gramercy’s amended and restated partnership agreement) plus certain accounting gains exceed the product of the weighted average stockholders’ equity of Gramercy multiplied by 9.5% (divided by 4 to adjust for quarterly calculations).  We will record any distributions on the Class B limited partner interests as incentive distribution income in the period when earned and when receipt of such amounts have become probable and reasonably estimable in accordance with Gramercy’s amended and restated partnership agreement as if such agreement had been terminated on that date.  We earned approximately $3.8 million, $6.6 million, $1.6 million and $2.8 million under this agreement for the three and six months ended June 30, 2007, and 2006, respectively.  Due to the control we have over the Manager, we consolidate the accounts of the Manager into ours.

In May 2005, our Compensation Committee approved long-term incentive performance awards pursuant to which certain of our officers and employees, including some of whom are our senior executive officers, were awarded a portion of the interests previously held by us in the Manager as well as in the Class B limited partner interests in Gramercy’s operating partnership.  These awards are dependent upon, among other things, tenure of employment and the performance by SL Green Realty Corp. of its investment in Gramercy.  We recorded compensation expense of approximately $0.7 million, $1.4 million, $0.4 million and $0.7 million for the three and six months ended June 30, 2007 and 2006, respectively, related to these awards.  After giving effect to these awards, we own 64.83 units of the Class B limited partner interests and 65.83% of the Manager.  The officers and employees who received these awards own 15.75 units of the Class B limited partner interests and 15.75% of the Manager.

Gramercy is obligated to reimburse the Manager for its costs incurred under an asset servicing agreement and an outsourcing agreement between the Manager and us.  The asset servicing agreement, which was amended and restated in April 2006, provides for an annual fee payable to us of 0.05% of the book value of all Gramercy’s credit tenant lease assets and non-investment grade bonds

17




SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2007

 

and 0.15% of the book value of all other Gramercy assets.  We may reduce the asset-servicing fee for fees that Gramercy pays directly to outside servicers. The outsourcing agreement currently provides for a fee of $1.33 million per year, increasing 3% annually over the prior year. For the three and six months ended June 30, 2007 and 2006, the Manager received an aggregate of approximately $1.2 million, $2.3 million, $0.9 million and $1.6 million, respectively, under the outsourcing and asset servicing agreements.

During the three months ended March 31, 2006, we paid our proportionate share of an advisory fee of approximately $162,500 to Gramercy in connection with a transaction.

All fees earned from Gramercy are included in other income in the Consolidated Statements of Income.

Effective May 1, 2005 Gramercy entered into a lease agreement with an affiliate of ours, for their corporate offices at 420 Lexington Avenue, New York, NY.  The lease is for approximately five thousand square feet with an option to lease an additional approximately two thousand square feet and carries a term of ten year with rents of approximately $249,000 per annum for year one rising to $315,000 per annum in year ten.

See above for a discussion on Gramercy’s joint venture investment, along with us, in One Madison Avenue-South Building.  Gramercy, along with us, also has tenancy-in-common interests in 55 Corporate Drive, NJ and 2 Herald Square.  See Note 5 for information of our structured finance investments in which Gramercy also holds an interest.

The condensed combined balance sheets for the unconsolidated joint ventures, including Gramercy, at June 30, 2007 and December 31, 2006, are as follows (in thousands):

 

 

June 30,
2007

 

December 31,
2006

 

Assets

 

 

 

 

 

Commercial real estate property, net

 

$

4,824,919

 

$

3,760,477

 

Structured finance investments

 

2,635,115

 

2,144,151

 

Other assets

 

770,836

 

783,754

 

Total assets

 

$

8,230,870

 

$

6,688,382

 

Liabilities and members’ equity

 

 

 

 

 

Mortgages payable

 

$

3,271,421

 

$

2,605,023

 

Other loans

 

2,510,909

 

2,156,662

 

Other liabilities

 

146,874

 

141,504

 

Members’ equity

 

2,301,666

 

1,785,193

 

Total liabilities and members’ equity

 

$

8,230,870

 

$

6,688,382

 

Company’s net investment in unconsolidated joint ventures

 

$

839,087

 

$

686,069

 

 

The condensed combined statements of operations for the unconsolidated joint ventures, including Gramercy from acquisition date through June 30, 2007 and 2006 are as follows (in thousands):

 

Three months Ended

 

Six months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Total revenues

 

$

215,195

 

$

152,852

 

$

406,319

 

$

298,411

 

Operating expenses

 

44,256

 

33,077

 

86,418

 

65,460

 

Real estate taxes

 

19,797

 

17,605

 

39,994

 

35,022

 

Interest

 

89,005

 

55,511

 

165,364

 

105,126

 

Depreciation and amortization

 

27,925

 

17,784

 

50,750

 

35,892

 

Total expenses

 

180,983

 

123,977

 

342,526

 

241,500

 

Net income before gain on sale

 

$

34,212

 

$

28,875

 

$

63,793

 

$

56,911

 

Company’s equity in net income of unconsolidated joint ventures

 

$

12,059

 

$

10,596

 

$

21,413

 

$

20,564

 

 

7.  Investment in and Advances to Affiliates

Service Corporation

Income from management, leasing and construction contracts from third parties and joint venture properties is realized by the Service

18




SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2007

Corporation.  In order to maintain our qualification as a REIT, we, through our operating partnership, own 100% of the non-voting common stock (representing 95% of the total equity) of the Service Corporation our operating partnership receives substantially all of the cash flow from the Service Corporation’s operations through dividends on its equity interest.  All of the voting common stock of the Service Corporation (representing 5% of the total equity) is held by our affiliate.  This controlling interest gives the affiliate the power to elect all directors of the Service Corporation.  Effective July 1, 2003, we consolidated the operations of the Service Corporation because it is considered to be a variable interest entity under FIN 46 and we are the primary beneficiary.  For the three and six months ended June 30, 2007 and 2006, the Service Corporation earned approximately $2.8 million, $6.3 million, $2.4 million and $3.7 million of revenue and incurred approximately $2.1 million, $4.7 million, $1.6 million and $3.6 million in expenses, respectively. Effective January 1, 2001, the Service Corporation elected to be treated as a TRS.

All of the management, leasing and construction services with respect to the properties wholly-owned by us are conducted through SL Green Management LLC which is 100% owned by our Operating Partnership.

eEmerge

In May 2000, our operating partnership formed eEmerge, Inc., a Delaware corporation, or eEmerge.  eEmerge is a separately managed, self-funded company that provides fully-wired and furnished office space, services and support to businesses.

In March 2002, we acquired all the voting common stock of eEmerge Inc.  As a result, we control all the common stock of eEmerge.  Effective with the quarter ended June 30, 2002, we consolidated the operations of eEmerge.  Effective January 1, 2001, eEmerge elected to be taxed as a TRS.

In June 2000, eEmerge and Eureka Broadband Corporation, or Eureka, formed eEmerge.NYC LLC, a Delaware limited liability company, or ENYC, whereby eEmerge has a 95% interest and Eureka has a 5% interest in ENYC.  During the third quarter of 2006, ENYC acquired the interest held by Eureka.  As a result, eEmerge owns 100% of ENYC.  ENYC operates a 71,700 square foot fractional office suites business.  ENYC entered into a 10-year lease with our Operating Partnership for its 50,200 square foot premises, which is located at 440 Ninth Avenue, Manhattan.  ENYC entered into another 10-year lease with our Operating Partnership for its 21,500 square foot premises at 28 West 44PthP Street, Manhattan.  Allocations of net profits, net losses and distributions are made in accordance with the Limited Liability Company Agreement of ENYC.  Effective with the quarter ended March 31, 2002, we consolidated the operations of ENYC.

The net book value of our investment as of June 30, 2007 and December 31, 2006 was approximately $3.1 million and $3.6 million, respectively.

8.  Deferred Costs

Deferred costs at June 30, 2007 and December 31, 2006 consisted of the following (in thousands):

 

2007

 

2006

 

Deferred financing

 

$

54,828

 

$

28,584

 

Deferred leasing

 

119,869

 

115,147

 

 

 

174,697

 

143,731

 

Less accumulated amortization

 

(60,812

)

(45,881

)

 

 

$

113,885

 

$

97,850

 

 

19




SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2007

9.  Mortgage Notes Payable

The first mortgage notes payable collateralized by the respective properties and assignment of leases at June 30, 2007 and December 31, 2006, respectively, were as follows (in thousands):

Property

 

Maturity
Date

 

Interest
Rate 
(2)

 

2007

 

2006

 

 

711 Third Avenue (1)

 

06/2015

 

4.99

%

$

120,000

 

$

120,000

 

 

420 Lexington Avenue (1)

 

11/2010

 

8.44

%

113,951

 

115,182

 

 

673 First Avenue (1)

 

02/2013

 

5.67

%

33,471

 

33,816

 

 

125 Broad Street (3)

 

 

 

 

73,985

 

 

220 East 42nd Street (1)

 

12/2013

 

5.24

%

208,240

 

210,000

 

 

625 Madison Avenue (1)

 

11/2015

 

6.27

%

100,821

 

101,834

 

 

55 Corporate Drive

 

12/2015

 

5.75

%

95,000

 

95,000

 

 

609 Fifth Avenue (1)

 

10/2013

 

5.85

%

101,200

 

101,807

 

 

609 Partners, LLC

 

07/2014

 

5.00

%

63,891

 

63,891

 

 

485 Lexington Avenue

 

02/2017

 

5.61

%

450,000