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 March 31, 2009 |
|
|
|
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
(Registrants 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x |
Accelerated filer o |
Non-accelerated filer o |
Smaller Reporting Company o |
|
(Do not check if a smaller reporting company) |
|
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 registrants common stock, $0.01 par value, was 57,266,834 as of April 30, 2009.
SL GREEN REALTY CORP.
2
PART I. |
|
ITEM 1. |
Financial Statements |
SL Green Realty Corp.
Condensed Consolidated Balance Sheets
(Amounts in thousands, except per share data)
|
|
March 31, |
|
December 31, |
|
||
|
|
(Unaudited) |
|
|
|
||
Assets |
|
|
|
|
|
||
Commercial real estate properties, at cost: |
|
|
|
|
|
||
Land and land interests |
|
$ |
1,385,101 |
|
$ |
1,386,090 |
|
Building and improvements |
|
5,547,522 |
|
5,544,019 |
|
||
Building leasehold and improvements |
|
1,255,573 |
|
1,259,472 |
|
||
Property under capital lease |
|
12,208 |
|
12,208 |
|
||
|
|
8,200,404 |
|
8,201,789 |
|
||
Less: accumulated depreciation |
|
(586,029 |
) |
(546,545 |
) |
||
|
|
7,614,375 |
|
7,655,244 |
|
||
Assets held for sale |
|
106,543 |
|
184,035 |
|
||
Cash and cash equivalents |
|
433,654 |
|
726,889 |
|
||
Restricted cash |
|
97,401 |
|
105,954 |
|
||
Tenant and other receivables, net of allowance of $14,001 and $16,898 in 2009 and 2008, respectively |
|
33,459 |
|
30,882 |
|
||
Related party receivables |
|
14,119 |
|
7,676 |
|
||
Deferred rents receivable, net of allowance of $20,172 and $19,648 in 2009 and 2008, respectively |
|
152,126 |
|
145,561 |
|
||
Structured finance investments, net of discount of $7,870 and $18,764 in 2009 and 2008, respectively |
|
589,267 |
|
679,814 |
|
||
Investments in unconsolidated joint ventures |
|
976,572 |
|
975,483 |
|
||
Deferred costs, net |
|
134,297 |
|
133,052 |
|
||
Other assets |
|
349,320 |
|
339,763 |
|
||
Total assets |
|
$ |
10,501,133 |
|
$ |
10,984,353 |
|
|
|
|
|
|
|
||
Liabilities |
|
|
|
|
|
||
Mortgage notes payable |
|
$ |
2,585,592 |
|
$ |
2,591,358 |
|
Revolving credit facility |
|
1,389,067 |
|
1,389,067 |
|
||
Senior unsecured notes |
|
1,151,556 |
|
1,501,134 |
|
||
Accrued interest payable and other liabilities |
|
54,478 |
|
70,692 |
|
||
Accounts payable and accrued expenses |
|
133,937 |
|
133,100 |
|
||
Deferred revenue/gain |
|
401,848 |
|
427,936 |
|
||
Capitalized lease obligation |
|
16,747 |
|
16,704 |
|
||
Deferred land leases payable |
|
17,740 |
|
17,650 |
|
||
Dividend and distributions payable |
|
26,420 |
|
26,327 |
|
||
Security deposits |
|
34,865 |
|
34,561 |
|
||
Liabilities related to assets held for sale |
|
|
|
106,534 |
|
||
Junior subordinate deferrable interest debentures held by trusts that issued trust preferred securities |
|
100,000 |
|
100,000 |
|
||
Total liabilities |
|
5,912,250 |
|
6,415,063 |
|
||
|
|
|
|
|
|
||
Commitments and Contingencies |
|
|
|
|
|
||
Noncontrolling interest in operating partnership |
|
89,600 |
|
89,089 |
|
||
|
|
|
|
|
|
||
Equity |
|
|
|
|
|
||
SL Green stockholders equity: |
|
|
|
|
|
||
Series C preferred stock, $0.01 par value, $25.00 liquidation preference, 6,300 issued and outstanding at March 31, 2009 and December 31, 2008, respectively |
|
151,981 |
|
151,981 |
|
||
Series D preferred stock, $0.01 par value, $25.00 liquidation preference, 4,000 issued and outstanding at March 31, 2009 and December 31, 2008, respectively |
|
96,321 |
|
96,321 |
|
||
Common stock, $0.01 par value 160,000 shares authorized and 60,619 and 60,404 issued and outstanding at March 31, 2009 and December 31, 2008, respectively (including 3,360 shares at both March 31, 2009 and December 31, 2008, held in Treasury, respectively) |
|
606 |
|
604 |
|
||
Additional paid-in-capital |
|
3,087,123 |
|
3,079,159 |
|
||
Treasury stock at cost |
|
(302,705 |
) |
(302,705 |
) |
||
Accumulated other comprehensive loss |
|
(53,089 |
) |
(54,747 |
) |
||
Retained earnings |
|
989,476 |
|
978,180 |
|
||
Total SL Green stockholders equity |
|
3,969,713 |
|
3,948,793 |
|
||
Noncontrolling interests in other partnerships |
|
529,570 |
|
531,408 |
|
||
Total equity |
|
4,499,283 |
|
4,480,201 |
|
||
Total liabilities and equity |
|
$ |
10,501,133 |
|
$ |
10,984,353 |
|
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 |
|
||||
|
|
March 31, |
|
||||
|
|
2009 |
|
2008 |
|
||
Revenues |
|
|
|
|
|
||
Rental revenue, net |
|
$ |
196,468 |
|
$ |
193,840 |
|
Escalation and reimbursement |
|
33,758 |
|
29,960 |
|
||
Preferred equity and investment income |
|
16,898 |
|
20,398 |
|
||
Other income |
|
16,281 |
|
10,504 |
|
||
Total revenues |
|
263,405 |
|
254,702 |
|
||
Expenses |
|
|
|
|
|
||
Operating expenses (including approximately $3,432 (2009) and $3,571 (2008) paid to affiliates) |
|
55,481 |
|
53,672 |
|
||
Real estate taxes |
|
36,949 |
|
32,524 |
|
||
Ground rent |
|
8,046 |
|
8,249 |
|
||
Interest expense, net of interest income |
|
60,264 |
|
76,046 |
|
||
Amortization of deferred financing costs |
|
1,436 |
|
1,632 |
|
||
Depreciation and amortization |
|
54,798 |
|
53,434 |
|
||
Loan loss reserves |
|
62,000 |
|
1,250 |
|
||
Loss equity investment in marketable securities |
|
807 |
|
|
|
||
Marketing, general and administrative |
|
17,922 |
|
24,460 |
|
||
Total expenses |
|
297,703 |
|
251,267 |
|
||
|
|
|
|
|
|
||
Income (loss) from continuing operations before equity in net income of unconsolidated joint ventures and discontinued operations |
|
(34,298 |
) |
3,435 |
|
||
Equity in net income from unconsolidated joint ventures |
|
13,073 |
|
19,425 |
|
||
Income (loss) from continuing operations before gain on sale and discontinued operations |
|
(21,255 |
) |
22,860 |
|
||
Equity in net gain on sale of interest in unconsolidated joint ventures/ real estate |
|
9,541 |
|
|
|
||
Gain on early extinguishment of debt |
|
47,712 |
|
|
|
||
Income from continuing operations |
|
36,028 |
|
22,860 |
|
||
Net income (loss) from discontinued operations |
|
(66 |
) |
2,760 |
|
||
Gain on sale of discontinued operations |
|
6,572 |
|
110,232 |
|
||
Net income |
|
42,534 |
|
135,852 |
|
||
Net income attributable to noncontrolling interests in operating partnership |
|
(1,320 |
) |
(5,037 |
) |
||
Net income attributable to noncontrolling interests in other partnerships |
|
(3,477 |
) |
(4,752 |
) |
||
Net income attributable to SL Green |
|
37,737 |
|
126,063 |
|
||
Preferred stock dividends |
|
(4,969 |
) |
(4,969 |
) |
||
Net income attributable to SL Green common stockholders |
|
$ |
32,768 |
|
$ |
121,094 |
|
|
|
|
|
|
|
||
Basic earnings per share: |
|
|
|
|
|
||
Net income from continuing operations before gain on sale and discontinued operations |
|
$ |
0.30 |
|
$ |
0.24 |
|
Net income from discontinued operations, net of noncontrolling interest |
|
|
|
0.02 |
|
||
Gain on sale of discontinued operations, net of noncontrolling interest |
|
0.11 |
|
1.81 |
|
||
Gain on sale of unconsolidated joint ventures/ real estate |
|
0.16 |
|
|
|
||
Net income attributable to SL Green common stockholders |
|
$ |
0.57 |
|
$ |
2.07 |
|
|
|
|
|
|
|
||
Diluted earnings per share: |
|
|
|
|
|
||
Net income from continuing operations before gain on sale and discontinued operations |
|
$ |
0.30 |
|
$ |
0.24 |
|
Net income from discontinued operations |
|
|
|
0.02 |
|
||
Gain on sale of discontinued operations |
|
0.11 |
|
1.80 |
|
||
Gain on sale of unconsolidated joint ventures/ real estate |
|
0.16 |
|
|
|
||
Net income attributable to SL Green common stockholders |
|
$ |
0.57 |
|
$ |
2.06 |
|
|
|
|
|
|
|
||
Amounts attributable to SL Green common stockholders: |
|
|
|
|
|
||
Income from continuing operations |
|
$ |
26,518 |
|
$ |
13,791 |
|
Discontinued operations |
|
(63 |
) |
1,312 |
|
||
Gain on sale of discontinued operations |
|
6,313 |
|
105,991 |
|
||
Net income |
|
$ |
32,768 |
|
$ |
121,094 |
|
|
|
|
|
|
|
||
Dividends per share |
|
$ |
0.375 |
|
$ |
0.7875 |
|
Basic weighted average common shares outstanding |
|
57,178 |
|
58,482 |
|
||
Diluted weighted average common shares and common share equivalents outstanding |
|
59,555 |
|
61,221 |
|
The accompanying notes are an integral part of these financial statements.
4
SL Green Realty Corp.
Condensed Consolidated Statement of Equity
(Unaudited, and amounts in thousands, except per share data)
|
|
SL Green Realty Corp. Stockholders |
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
|
Series C |
|
Series D |
|
Common |
|
Additional |
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
Preferred |
|
Preferred |
|
Shares |
|
Par |
|
Paid- |
|
Treasury Stock |
|
Comprehensive |
|
Retained |
|
Noncontrolling |
|
Total |
|
Comprehensive |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Balance at December 31, 2008 |
|
$ |
151,981 |
|
$ |
96,321 |
|
57,044 |
|
$ |
604 |
|
$ |
3,079,159 |
|
$ |
(302,705 |
) |
$ |
(54,747 |
) |
$ |
978,180 |
|
$ |
531,408 |
|
$ |
4,480,201 |
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,737 |
|
3,477 |
|
41,214 |
|
$ |
41,214 |
|
|||||||||
Net unrealized loss on derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
5,951 |
|
|
|
|
|
5,951 |
|
5,951 |
|
||||||||||
SL Greens share of joint venture net unrealized loss on derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,501 |
) |
|
|
|
|
(4,501 |
) |
(4,501 |
) |
||||||||||
Unrealized gain on marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
208 |
|
|
|
|
|
208 |
|
208 |
|
||||||||||
Preferred dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,969 |
) |
|
|
(4,969 |
) |
|
|
||||||||||
Redemption of units and DRIP proceeds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Deferred compensation plan & stock award, net |
|
|
|
|
|
215 |
|
2 |
|
371 |
|
|
|
|
|
|
|
|
|
373 |
|
|
|
||||||||||
Amortization of deferred compensation plan |
|
|
|
|
|
|
|
|
|
7,593 |
|
|
|
|
|
|
|
|
|
7,593 |
|
|
|
||||||||||
Cash distributions to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,315 |
) |
(5,315 |
) |
|
|
||||||||||
Cash distribution declared ($0.375 per common share of which none represented a return of capital for federal income tax purposes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,472 |
) |
|
|
(21,472 |
) |
|
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Balance at March 31, 2009 |
|
$ |
151,981 |
|
$ |
96,321 |
|
57,259 |
|
$ |
606 |
|
$ |
3,087,123 |
|
$ |
(302,705 |
) |
$ |
(53,089 |
) |
$ |
989,476 |
|
$ |
529,570 |
|
$ |
4,499,283 |
|
$ |
42,872 |
|
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)
|
|
Three Months |
|
||||
|
|
Ended March 31, |
|
||||
|
|
2009 |
|
2008 |
|
||
Operating Activities |
|
|
|
|
|
||
Net income |
|
$ |
42,534 |
|
$ |
134,457 |
|
Adjustment to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
||
Depreciation and amortization |
|
56,917 |
|
57,494 |
|
||
Gain on sale of discontinued operations |
|
(6,572 |
) |
(110,232 |
) |
||
Equity in net income from unconsolidated joint ventures |
|
(13,073 |
) |
(19,425 |
) |
||
Equity in net gain on sale of unconsolidated joint ventures |
|
(9,541 |
) |
|
|
||
Distributions of cumulative earnings from unconsolidated joint ventures/ real estate |
|
9,249 |
|
26,410 |
|
||
Loan loss reserves |
|
62,000 |
|
|
|
||
Loss on equity investment in marketable securities |
|
807 |
|
|
|
||
Deferred rents receivable |
|
(7,089 |
) |
(12,955 |
) |
||
Other non-cash adjustments |
|
(2,586 |
) |
8,867 |
|
||
Changes in operating assets and liabilities: |
|
|
|
|
|
||
Restricted cash operations |
|
8,016 |
|
5,676 |
|
||
Tenant and other receivables |
|
320 |
|
3,265 |
|
||
Related party receivables |
|
(6,443 |
) |
634 |
|
||
Deferred lease costs |
|
(4,677 |
) |
(6,221 |
) |
||
Other assets |
|
(23,232 |
) |
(21,604 |
) |
||
Accounts payable, accrued expenses and other liabilities |
|
(2,183 |
) |
(51,668 |
) |
||
Deferred revenue and land leases payable |
|
(1,286 |
) |
5,679 |
|
||
Net cash provided by operating activities |
|
103,161 |
|
20,377 |
|
||
Investing Activities |
|
|
|
|
|
||
Acquisitions of real estate property |
|
|
|
(32,351 |
) |
||
Additions to land, buildings and improvements |
|
(17,570 |
) |
(24,250 |
) |
||
Escrowed cash capital improvements/acquisition deposits |
|
537 |
|
(44,328 |
) |
||
Investments in unconsolidated joint ventures |
|
(8,310 |
) |
(11,662 |
) |
||
Distributions in excess of cumulative earnings from unconsolidated joint ventures |
|
6,482 |
|
12,741 |
|
||
Net proceeds from disposition of real estate/ partial interest in property |
|
17,154 |
|
152,933 |
|
||
Other investments |
|
(1,935 |
) |
(14,956 |
) |
||
Structured finance and other investments net of repayments/participations |
|
406 |
|
3,765 |
|
||
Net cash (used in) provided by investing activities |
|
(3,236 |
) |
41,892 |
|
||
Financing Activities |
|
|
|
|
|
||
Proceeds from mortgage notes payable |
|
1,112 |
|
30,061 |
|
||
Repayments of mortgage notes payable |
|
(6,878 |
) |
(7,113 |
) |
||
Proceeds from revolving credit facility and senior unsecured notes |
|
|
|
212,000 |
|
||
Repayments of revolving credit facility and senior unsecured notes |
|
(353,104 |
) |
(200,000 |
) |
||
Proceeds from stock options exercised |
|
|
|
598 |
|
||
Purchases of Treasury Stock |
|
|
|
(49,911 |
) |
||
Distributions to noncontrolling interests in other partnerships |
|
(5,315 |
) |
(6,276 |
) |
||
Contributions from noncontrolling interests in other partnerships |
|
|
|
13,259 |
|
||
Distributions to noncontrolling interest in operating partnership |
|
(876 |
) |
(1,842 |
) |
||
Dividends paid on common and preferred stock |
|
(26,441 |
) |
(50,990 |
) |
||
Deferred loan costs and capitalized lease obligation |
|
(1,658 |
) |
(1,226 |
) |
||
Net cash used in financing activities |
|
(393,160 |
) |
(61,440 |
) |
||
Net (decrease) increase in cash and cash equivalents |
|
(293,235 |
) |
829 |
|
||
Cash and cash equivalents at beginning of period |
|
726,889 |
|
45,964 |
|
||
Cash and cash equivalents at end of period |
|
$ |
433,654 |
|
$ |
46,793 |
|
The accompanying notes are an integral part of these financial statements.
6
SL Green Realty Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2009
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 March 31, 2009, noncontrolling investors held, in the aggregate, a 3.9% 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. We paid approximately $6.0 billion, inclusive of transaction costs, for Reckson. 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 Recksons former executive management, or the Buyer, for a total consideration of approximately $2.0 billion.
As of March 31, 2009, we owned the following interests in commercial office properties in the New York Metro area, primarily in midtown Manhattan, a borough of New York City, or Manhattan. Our investments in the New York Metro area also include investments in Brooklyn, Queens, Long Island, Westchester County, Connecticut and New Jersey, which are collectively known as the Suburban assets:
Location |
|
Ownership |
|
Number of |
|
Square Feet |
|
Weighted Average |
|
Manhattan |
|
Consolidated properties |
|
21 |
|
13,782,200 |
|
97.2 |
% |
|
|
Unconsolidated properties |
|
8 |
|
9,429,000 |
|
94.7 |
% |
|
|
|
|
|
|
|
|
|
|
Suburban |
|
Consolidated properties |
|
26 |
|
4,008,000 |
|
87.8 |
% |
|
|
Unconsolidated properties |
|
6 |
|
2,941,700 |
|
94.1 |
% |
|
|
|
|
61 |
|
30,160,900 |
|
94.8 |
% |
(1) The weighted average occupancy represents the total leased square feet divided by total available rentable square feet.
We also own investments in eight retail properties encompassing approximately 400,212 square feet, three development properties encompassing approximately 399,800 square feet and two land interests. In addition, we manage three office properties owned by third parties and affiliated companies encompassing approximately 1.0 million rentable square feet.
As of March 31, 2009, we also owned approximately 12.48% of the outstanding common stock of Gramercy Capital Corp. (NYSE: GKK), or Gramercy, as well as all the units of the Class B limited partner interest in Gramercys operating partnership, which were subsequently transferred to Gramercy on April 24, 2009. 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 interests 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 before August 2009, under certain circumstances.
7
SL Green Realty Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2009
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 2009 operating results for the period presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. These financial statements should be read in conjunction with the financial statements and accompanying notes included in our annual report on Form 10-K and Form 10-K/A No. 1 for the year ended December 31, 2008.
The balance sheet at December 31, 2008 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. 46R, or FIN 46R, Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51. 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. We have two variable interest entities for which we are considered to be the primary beneficiary as a result of loans we made to our joint venture partner to fund our partners equity in the joint venture. The interest that we do not own is included in Noncontrolling Interests in Other Partnerships on the balance sheet. All significant intercompany balances and transactions have been eliminated.
Effective January 1, 2009, we adopted SFAS 160, or SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements an amendment of ARB No. 51, which defines a non-controlling interest in a consolidated subsidiary as the portion of the equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent and requires non-controlling interests to be presented as a separate component of equity in the consolidated balance sheet subject to the provisions of EITF Topic D-98, or EITF D-98, Classification and Measurement of Redeemable Securities. SFAS No. 160 also modifies the presentation of net income by requiring earnings and other comprehensive income to be attributed to controlling and non-controlling interests. Below are the steps we have taken as a result of the implementation of this standard:
· We have reclassified the non-controlling interests of other consolidated partnerships from the mezzanine section of our balance sheets to equity. This reclassification totaled approximately $529.6 million and $531.4 million as of March 31, 2009 and December 31, 2008, respectively.
· Non-controlling interests of our operating partnership will continue to be classified in the mezzanine section of the balance sheet as these redeemable OP Units do not meet the requirements for equity classification under EITF D-98. The redemption feature requires the delivery of cash or shares of stock. See Note 13.
· Net income attributable to non-controlling interests of our operating partnership and of other consolidated partnerships is no longer included in the determination of net income. We reclassified prior year amounts to reflect this requirement. The adoption of this standard has no effect on our earnings per share.
· We adjust the non-controlling interests of our operating partnership each period so that the carrying value equals the greater of its carrying value based on the accumulation of historical cost or its redemption value as prescribed by EITF D-98. Net income is allocated to the non-controlling partners of our operating partnership based on their weighted average ownership percentage during the period.
8
SL Green Realty Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2009
Investment in Commercial Real Estate Properties
On a periodic basis, we assess whether there are any indicators that the value of our real estate properties may be impaired or that its carrying value may not be recoverable. A propertys value is considered impaired if managements estimate of the aggregate future cash flows (undiscounted and without interest charges for consolidated properties and discounted for unconsolidated properties) to be generated by the property are less than the carrying value of the property. To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount of the property over the fair value of the property. We do not believe that the value of any of our rental properties was impaired at March 31, 2009 and December 31, 2008.
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 and from one to 14 years, respectively. 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 term of the associated lease, which range from one to 14 years. The value associated with in-place leases are amortized over the expected term of the associated lease and its estimated term, which range from one to 14 years. 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.
As a result of our evaluations, under SFAS No. 141, of acquisitions made, we recognized an increase of approximately $5.4 million and $5.7 million in rental revenue for the three months ended March 31, 2009 and 2008, respectively, for the amortization of aggregate below-market rents in excess of above-market leases and a reduction in lease origination costs, resulting from the allocation of the purchase price of the applicable properties. We recognized a reduction in interest expense for the amortization of the above-market rate mortgages of approximately $1.8 million and $1.7 million for the three months ended March 31, 2009 and 2008, respectively.
9
SL Green Realty Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2009
The following summarizes our identified intangible assets (acquired above-market leases and in-place leases) and intangible liabilities (acquired below-market leases). Amounts in thousands:
|
|
March 31, |
|
December 31, |
|
||
Identified intangible assets (included in other assets): |
|
|
|
|
|
||
Gross amount |
|
$ |
236,594 |
|
$ |
236,594 |
|
Accumulated amortization |
|
(71,173 |
) |
(60,074 |
) |
||
Net |
|
$ |
165,421 |
|
$ |
176,520 |
|
|
|
|
|
|
|
||
Identified intangible liabilities (included in deferred revenue): |
|
|
|
|
|
||
Gross amount |
|
$ |
480,770 |
|
$ |
480,770 |
|
Accumulated amortization |
|
(118,108 |
) |
(101,585 |
) |
||
Net |
|
$ |
362,662 |
|
$ |
379,185 |
|
Reserve for Possible Credit Losses
The expense 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 loan. When it is probable that we will be unable to collect all amounts contractually due, the investment is considered impaired.
Where impairment is indicated, a valuation allowance 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 expense. We recorded approximately none and $1.3 million in loan loss reserves during the three months ended March 31, 2009 and 2008, respectively.
Structured finance investments held for sale are carried at the lower of cost or fair market value using available market information obtained through consultation with dealers or other originators of such investments as well as discounted cash flow models based on Level 3 data pursuant to SFAS No. 157. During the three months ended March 31, 2009, we redesignated loans with a gross carrying value of $95.5 million from structured finance investments to assets held for sale. We recorded a mark-to-market adjustment of approximately $62.0 million against our held for sale investments during the three months ended March 31, 2009.
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, and may in the future, elect to treat certain of our existing or newly created corporate subsidiaries as taxable REIT subsidiaries, or a TRS. In general, a TRS of ours may perform non-customary services for our tenants, hold assets that we cannot hold directly and generally may engage in any real estate or non-real estate related business. Our TRSs generate income, resulting in Federal income tax liability for these entities. Our TRSs recorded approximately $2.5 million and $1.2 million in Federal, state and local tax expense during the three months ended March 2009 and 2008, respectively, of which $0.5 million and $0.4 million, respectively, had been paid.
Stock-Based Employee Compensation Plans
We have a stock-based employee compensation plan, described more fully in Note 13. We account for this plan under SFAS No. 123-R Shared Based Payment, revised, or SFAS No. 123-R. We adopted SFAS No. 123, Accounting from Stock-Based Compensation on January 1, 2003.
10
SL Green Realty Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2009
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 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 March 31, 2009 and 2008.
|
|
2009 |
|
2008 |
|
Dividend yield |
|
5.79 |
% |
3.37 |
% |
Expected life of option |
|
5 years |
|
5 years |
|
Risk-free interest rate |
|
1.55 |
% |
4.04 |
% |
Expected stock price volatility |
|
55.07 |
% |
22.31 |
% |
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.
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 New York Metro 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 tenants 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 Brooklyn, Queens, Long Island, Westchester County, Connecticut and New Jersey. The tenants located in our buildings operate in various industries. Other than one tenant who accounts for approximately 9.6% of our annualized rent, no other tenant in our portfolio accounts for more than 5.8% of our annualized rent, including our share of joint venture annualized rent, at March 31, 2009. Approximately 7%, 6%, 6%, 7% 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, 1185 Avenue of the Americas and One Madison Avenue, respectively, for the quarter ended March 31, 2009. One borrower accounted for more than 10.0% of the revenue earned on structured finance investments during the three months ended March 31, 2009.
Reclassification
Certain prior year balances have been reclassified to conform with the current year presentation primarily in order to comply with SFAS No. 144 for discontinued operations presentation and the adoption of FSP 14-1 (see below).
11
SL Green Realty Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2009
New Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. This statement changes the accounting for acquisitions specifically eliminating the step acquisition model, changing the recognition of contingent consideration from being recognized when it is probable to being recognized at the time of acquisition, disallowing the capitalization of transaction costs and delays when restructurings related to acquisitions can be recognized. The standard is effective for fiscal years beginning after December 15, 2008 and will only impact the accounting for acquisitions we make after our adoption of this standard. The adoption of this standard on January 1, 2009 did not have any impact on our historical financial statements.
In May 2008, the FASB issued FASB Staff Position, or FSP, No. APB 14-1, or FSP 14-1, Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion. FSP 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuers nonconvertible debt borrowing rate. FSP 14-1 will significantly affect the accounting for instruments commonly referred to as Instruments B and C in EITF No. 90-19, Convertible Bonds with Issuer Option to Settle for Cash upon Conversion, which is nullified by FSP 14-1, and any other convertible debt instruments that require or permit settlement in any combination of cash and shares at the issuers option, such as those sometimes referred to as Instrument X. The resulting debt discount will be amortized over the period during which the debt is expected to be outstanding (i.e., through the first optional redemption dates) as additional non-cash interest expense. This amount (before netting) will increase in subsequent reporting periods through the first optional redemption dates as the debt accretes to its par value over the same period. FSP 14-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption was not permitted. Upon adoption, FSP 14-1 required companies to retrospectively apply the requirements of the pronouncement to all periods presented. Adoption of FSP 14-1 had the following impact on our financial statements:
|
|
December 31, |
|
December 31, |
|
||
Senior unsecured notes |
|
$ |
1,535,948 |
|
$ |
1,501,134 |
|
Total liabilities |
|
6,449,875 |
|
6,415,063 |
|
||
Additional paid-in-capital |
|
2,999,456 |
|
3,079,159 |
|
||
Retained earnings |
|
1,023,071 |
|
978,180 |
|
||
|
|
March 31, 2008 |
|
March 31, 2008 |
|
||
Interest expense |
|
$ |
78,518 |
|
$ |
83,316 |
|
Net income attributable to SL Green common stockholders |
|
125,891 |
|
121,094 |
|
||
Net income per share attributable to common stockholders - basic |
|
$ |
2.15 |
|
$ |
2.07 |
|
Net income per share attributable to common stockholders - diluted |
|
$ |
2.14 |
|
$ |
2.06 |
|
EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share, or EPS, under the two-class method described in paragraphs 60 and 61 of SFAS No. 128, Earnings per Share. We adopted EITF 03-6-1 on January 1, 2009 and it did not have a material effect on our financial statements.
In April 2009, the FASB issued SFAS No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. SFAS No. 107-1 amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments to require disclosure about fair value of financial instruments in interim financial statements. SFAS No. 107-1 and APB 28-1 are effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. We will include the disclosures required under this standard beginning in our June 30, 2009 Condensed Consolidated Financial Statements.
In April 2009, the FASB released FSP SFAS No. 157- 4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability has Significantly Decreased and Identifying Transactions that are Not Orderly, or FSP SFAS No. 157-4. FSP SFAS No. 157-4 was issued contemporaneously with FSP SFAS No. 115-2 and SFAS No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, or FSP SFAS 115-2 and FSP SFAS No. 107-1 and APB 28-1.
12
SL Green Realty Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2009
FSP SFAS No. 157-4 amends FASB Statement No. 157, Fair Value Measurements, or SFAS No. 157, to provide additional guidance on estimating fair value when the volume and level of transaction activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability. The FSP also provides additional guidance on circumstances that may indicate that a transaction is not orderly.
FSP SFAS No. 157-4 also require additional disclosures about fair value measurements in annual and interim reporting periods. FSP SFAS No. 157-4 is effective for interim and annual reporting periods ending after 15 June 2009. We will apply the provisions of FSP SFAS No. 157-4 beginning in our June 30, 2009 Condensed Consolidated Financial Statements. We do not believe that adoption of the FSP will have a material impact on our financial statements.
In March 2008, the FASB issued SFAS No. 161, or SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. SFAS No. 161 requires entities to provide greater transparency about (a) how and why and entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entitys financial position, results of operations, and cash flows. SFAS No. 161 is effective on January 1, 2009. The adoption of SFAS No. 161 did not have a material impact on our consolidated financial statements.
3. Property Acquisitions
We did not acquire any real estate during the three months ended March 31, 2009.
4. Property Dispositions and Assets Held for Sale
In January 2009, we, along with our joint venture partner, Gramercy, sold 100% of our interests in 55 Corporate Drive, NJ for $230.0 million. The property is approximately 670,000 square feet. We recognized a gain of approximately $6.6 million in connection with the sale of our 50% interest in the joint venture.
At March 31, 2009, discontinued operations included the results of operations of real estate assets sold prior to that date. This included 440 Ninth Avenue, which was sold in January 2008, 100/120 White Plains Road and 1372 Broadway, which were sold in October 2008, 55 Corporate Drive, NJ which was sold in January 2009, and the membership interests in GKK Manager LLC which were sold in April 2009 (See Note 6).
The following table summarizes income from discontinued operations and the related realized gain on sale of discontinued operations for the three months ended March 31, 2009 and 2008 (in thousands).
|
|
Three Months Ended |
|
||||
|
|
March 31, |
|
||||
|
|
2009 |
|
2008 |
|
||
Revenues |
|
|
|
|
|
||
Rental revenue |
|
$ |
584 |
|
$ |
8,351 |
|
Escalation and reimbursement revenues |
|
(7 |
) |
916 |
|
||
Other income |
|
4,886 |
|
8,424 |
|
||
Total revenues |
|
5,463 |
|
17,691 |
|
||
Operating expense |
|
24 |
|
1,925 |
|
||
Real estate taxes |
|
|
|
1,460 |
|
||
Interest |
|
329 |
|
5,524 |
|
||
Marketing, general and administrative |
|
5,176 |
|
4,008 |
|
||
Depreciation and amortization |
|
|
|
2,014 |
|
||
Total expenses |
|
5,529 |
|
14,931 |
|
||
Income (loss) from discontinued operations |
|
(66 |
) |
2,760 |
|
||
Gain on sale of discontinued operations |
|
6,572 |
|
110,232 |
|
||
Income from discontinued operations |
|
$ |
6,506 |
|
$ |
112,992 |
|
13
SL Green Realty Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2009
5. Structured Finance Investments
During the three months ended March 31, 2009 and 2008, our structured finance and preferred equity investments (net of discounts) increased approximately $7.1 million and $4.8 million, respectively, due to originations and accretion of discount. There were approximately $63.6 million and $33.5 million in repayment, participations, sales and loan loss reserves recorded during those periods, respectively, which offset the increases in structured finance investments.
As of March 31, 2009 and December 31, 2008, we held the following structured finance investments, excluding preferred equity investments, with an aggregate weighted average current yield of approximately 9.4% (in thousands):
Loan |
|
Gross |
|
Senior |
|
2009 |
|
2008 |
|
Initial |
|
||||
Other Loan (1) |
|
$ |
3,500 |
|
$ |
15,000 |
|
$ |
3,500 |
|
$ |
3,500 |
|
September 2021 |
|
Mezzanine Loan (1) (2) |
|
85,000 |
|
210,572 |
|
96,510 |
|
95,626 |
|
December 2020 |
|
||||
Mezzanine Loan (1) |
|
60,000 |
|
235,000 |
|
58,393 |
|
58,349 |
|
February 2016 |
|
||||
Mezzanine Loan (1) |
|
25,000 |
|
200,000 |
|
25,000 |
|
25,000 |
|
May 2016 |
|
||||
Mezzanine Loan (1) |
|
35,000 |
|
165,000 |
|
38,616 |
|
38,332 |
|
October 2016 |
|
||||
Mezzanine Loan (1) (3) (9) (10) (11) |
|
75,000 |
|
4,229,461 |
|
70,092 |
|
70,092 |
|
December 2016 |
|
||||
Other Loan (1) (5) (9) (11) |
|
5,000 |
|
|
|
5,350 |
|
5,350 |
|
May 2011 |
|
||||
Whole Loan (2) (3) |
|
9,815 |
|
|
|
9,526 |
|
10,126 |
|
February 2010 |
|
||||
Mezzanine Loan (1) (2) (4) (9) (11) |
|
25,000 |
|
315,293 |
|
27,742 |
|
27,742 |
|
November 2009 |
|
||||
Mezzanine Loan (1) |
|
16,000 |
|
90,000 |
|
15,676 |
|
15,670 |
|
August 2017 |
|
||||
Mezzanine Loan (3) |
|
41,398 |
|
221,549 |
|
40,481 |
|
40,171 |
|
August 2009 |
|
||||
Other Loan (1) |
|
1,000 |
|
|
|
1,000 |
|
1,000 |
|
January 2010 |
|
||||
Other Loan |
|
500 |
|
|
|
500 |
|
500 |
|
December 2009 |
|
||||
Junior Participation (1) (6) (9) (11) |
|
14,189 |
|
|
|
9,938 |
|
9,938 |
|
April 2008 |
|
||||
Mezzanine Loan (1) (12) |
|
67,000 |
|
1,139,000 |
|
77,939 |
|
75,856 |
|
March 2017 |
|
||||
Mezzanine Loan (3) (9) (10) |
|
23,145 |
|
365,000 |
|
25,446 |
|
24,961 |
|
July 2009 |
|
||||
Mezzanine Loan (3) (9) (10) |
|
44,733 |
|
930,678 |
|
47,219 |
|
46,372 |
|
August 2009 |
|
||||
Mezzanine Loan (3) (9) (10) (11) |
|
22,644 |
|
7,099,849 |
|
23,511 |
|
23,847 |
|
June 2009 |
|
||||
Junior Participation (1) (9) |
|
11,000 |
|
53,000 |
|
11,000 |
|
11,000 |
|
November 2009 |
|
||||
Junior Participation (7) (9) |
|
12,000 |
|
61,250 |
|
10,875 |
|
10,875 |
|
June 2010 |
|
||||
Junior Participation (9) |
|
9,948 |
|
48,198 |
|
5,866 |
|
5,866 |
|
December 2010 |
|
||||
Junior Participation (8) |
|
50,000 |
|
2,227,136 |
|
48,175 |
|
48,709 |
|
April 2010 |
|
||||
Mezzanine Loan (3) |
|
90,000 |
|
325,000 |
|
93,485 |
|
92,325 |
|
July 2010 |
|
||||
Whole Loan (1) (3) |
|
9,375 |
|
|
|
9,283 |
|
9,324 |
|
February 2015 |
|
||||
Loan loss reserve (9) |
|
|
|
|
|
(134,666 |
) |
(74,666 |
) |
|
|
||||
|
|
$ |
736,247 |
|
$ |
17,930,986 |
|
$ |
620,457 |
|
$ |
675,865 |
|
|
|
(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 this asset. |
(4) |
This loan has been in default since December 2007. We are pursuing our remedies and expect to recover the full value of our investment. |
(5) |
The original loan which was scheduled to mature in February 2010 was replaced with two loans which mature in May 2011. The total principal balance remained unchanged. Approximately $10.4 million was redeemed in October 2008. |
(6) |
This loan is in default. We have begun foreclosure proceedings. Our partner holds a $12.2 million pari-pasu interest in this loan. |
(7) |
This loan was extended for two years to June 2010. |
(8) |
Gramercy is the borrower under this loan. This loan consists of mortgage and mezzanine financing. |
(9) |
This represents specifically allocated loan loss reserves. Our reserves reflect managements judgment of the probability and severity of losses. We cannot be certain that our judgment will prove to be correct and that reserves will be adequate over time to protect against potential future losses. |
(10) |
This investment was classified as held for sale at March 31, 2009. |
(11) |
This loan is on non-accrual status. |
(12) |
Interest is added to the principal balance for this accrual only loan. |
14
SL Green Realty Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2009
Preferred Equity Investments
As of March 31, 2009 and December 31, 2008, we held the following preferred equity investments, with an aggregate weighted average current yield of approximately 2.9% (in thousands):
Type |
|
Gross |
|
Senior |
|
2009 |
|
2008 |
|
Initial |
|
||||
Preferred equity (1) (3) |
|
$ |
15,000 |
|
$ |
2,350,000 |
|
$ |
15,000 |
|
$ |
15,000 |
|
February 2015 |
|
Preferred equity (1) (2) (3) (4) |
|
51,000 |
|
212,782 |
|
51,000 |
|
51,000 |
|
February 2014 |
|
||||
Preferred equity (3) (4) |
|
34,120 |
|
88,000 |
|
31,178 |
|
30,268 |
|
March 2010 |
|
||||
Loan loss reserve (3) |
|
|
|
|
|
(26,250 |
) |
(24,250 |
) |
|
|
||||
|
|
$ |
100,120 |
|
$ |
2,650,782 |
|
$ |
70,928 |
|
$ |
72,018 |
|
|
|
(1) |
This is a fixed rate investment. |
(2) |
Gramercy holds a mezzanine loan on the underlying asset. This investment was classified as held for sale at March 31, 2009. |
(3) |
This represents specifically allocated loan loss reserves. Our reserves reflect managements judgment of the probability and severity of losses. We cannot be certain that our judgment will prove to be correct and that reserves will be adequate over time to protect against potential future losses. |
(4) |
The junior preferred equity portion of the investment is on non-accrual status. |
The following table is a rollforward of our total loan loss reserves at March 31, 2009 and December 31, 2008 (in thousands):
|
|
2009 |
|
2008 |
|
||
Balance at beginning of year |
|
$ |
98,916 |
|
$ |
|
|
|
|
|
|
|
|
||
Expensed |
|
62,000 |
|
101,166 |
|
||
Charge-offs |
|
|
|
(2,250 |
) |
||
|
|
|
|
|
|
||
Balance at end of period |
|
$ |
160,916 |
|
$ |
98,916 |
|
At March 31, 2009 and December 31, 2008, all structured finance investments, other than as noted above, were performing in accordance with the terms of the loan agreements.
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.
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 ventures 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.
15
SL Green Realty Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2009
The table below provides general information on each joint venture as of March 31, 2009 (in thousands):
Property |
|
Partner |
|
Ownership |
|
Economic |
|
Square |
|
Acquired |
|
Acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1221 Avenue of the Americas (2) |
|
RGII |
|
45.00 |
% |
45.00 |
% |
2,550 |
|
12/03 |
|
$ |
1,000,000 |
|
1515 Broadway (3) |
|
SITQ |
|
55.00 |
% |
68.45 |
% |
1,750 |
|
05/02 |
|
$ |
483,500 |
|
100 Park Avenue |
|
Prudential |
|
49.90 |
% |
49.90 |
% |
834 |
|
02/00 |
|
$ |
95,800 |
|
379 West Broadway |
|
Sutton |
|
45.00 |
% |
45.00 |
% |
62 |
|
12/05 |
|
$ |
19,750 |
|
Mack-Green joint venture (4) |
|
Mack-Cali |
|
48.00 |
% |
48.00 |
% |
900 |
|
05/06 |
|
$ |
127,500 |
|
21 West 34th Street (5) |
|
Sutton |
|
50.00 |
% |
50.00 |
% |
30 |
|
07/05 |
|
$ |
22,400 |
|
800 Third Avenue (6) |
|
Private Investors |
|
42.95 |
% |
42.95 |
% |
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 (7) |
|
Onyx/Sutton |
|
45.00 |
% |
63.00 |
% |
30 |
|
11/05 |
|
$ |
4,400 |
|
1745 Broadway (8) |
|
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 (9) |
|
Gramercy |
|
55.00 |
% |
55.00 |
% |
354 |
|
04/07 |
|
$ |
225,000 |
|
885 Third Avenue (10) |
|
Gramercy |
|
55.00 |
% |
55.00 |
% |
607 |
|
07/07 |
|
$ |
317,000 |
|
16 Court Street |
|
CIF |
|
35.00 |
% |
35.00 |
% |
318 |
|
07/07 |
|
$ |
107,500 |
|
The Meadows |
|
Onyx |
|
25.00 |
% |
25.00 |
% |
582 |
|
09/07 |
|
$ |
111,500 |
|
388 and 390 Greenwich Street (11) |
|
SITQ |
|
50.60 |
% |
50.60 |
% |
2,600 |
|
12/07 |
|
$ |
1,575,000 |
|
27-29 West 34th Street (12) |
|
Sutton |
|
50.00 |
% |
50.00 |
% |
41 |
|
01/06 |
|
$ |
30,000 |
|
1551-1555 Broadway (13) |
|
Sutton |
|
10.00 |
% |
10.00 |
% |
26 |
|
07/05 |
|
$ |
80,100 |
|
717 Fifth Avenue (14) |
|
Sutton/Nakash |
|
32.75 |
% |
32.75 |
% |
120 |
|
09/06 |
|
$ |
251,900 |
|
(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 14.8% of the propertys annualized rent at March 31, 2009. We do not manage this joint venture. |
(3) |
|
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 primarily end between 2009 and 2015, represents approximately 79.2% of this joint ventures annualized rent at March 31, 2009. |
(4) |
|
We wrote off the net book value of this investment of approximately $2.1 million in December 2008. See Note 19. |
(5) |
|
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. |
(6) |
|
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 propertys ownership, with an option to convert the loan to an equity interest. Certain existing members had the right to re-acquire approximately 4% of the propertys equity. These interests were re-acquired in December 2008 and reduced our interest to 42.95% |
(7) |
|
Effective April 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. |
(8) |
|
We have the ability to syndicate our interest down to 14.79%. |
(9) |
|
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. |
(10) |
|
We, along with Gramercy, together as tenants-in-common, acquired a fee and leasehold interest in 885 Third Avenue. The fee and leasehold interests are subject to a long-term operating lease. |
(11) |
|
The property is subject to a 13-year triple-net lease arrangement with a single tenant. |
(12) |
|
Effective May 2008, 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. |
(13) |
|
Effective August 2008, we deconsolidated this investment. As a result of the sale of 80% of our interest, we were no longer the primary beneficiary under FIN 46(R). |
(14) |
|
Effective September 2008, we deconsolidated this investment. As a result of the recapitalization of the property, the joint venture was no longer a VIE under FIN 46(R). |
16
SL Green Realty Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2009
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 March 31, 2009 and December 31, 2008, respectively, are as follows (in thousands):
Property |
|
Maturity |
|
Interest |
|
2009 |
|
2008 |
|
||
|
|
|
|
|
|
|
|
|
|
||
1221 Avenue of the Americas (2) |
|
12/2010 |
|
2.85 |
% |
$ |
170,000 |
|
$ |
170,000 |
|
1515 Broadway (3) |
|
11/2009 |
|
1.35 |
% |
$ |
625,000 |
|
$ |
625,000 |
|
100 Park Avenue |
|
11/2015 |
|
6.52 |
% |
$ |
175,000 |
|
$ |
175,000 |
|
379 West Broadway |
|
01/2010 |
|
2.11 |
% |
$ |
20,991 |
|
$ |
20,991 |
|
Mack-Green joint venture (4) |
|
08/2014 |
|
3.81 |
% |
$ |
102,159 |
|
$ |
102,195 |
|
21 West 34th Street |
|
12/2016 |
|
5.75 |
% |
$ |
100,000 |
|
$ |
100,000 |
|
800 Third Avenue |
|
07/2017 |
|
6.00 |
% |
$ |
20,910 |
|
$ |
20,910 |
|
521 Fifth Avenue |
|
04/2011 |
|
1.57 |
% |
$ |
140,000 |
|
$ |
140,000 |
|
One Court Square |
|
06/2015 |
|
4.91 |
% |
$ |
315,000 |
|
$ |
315,000 |
|
2 Herald Square |
|
04/2017 |
|
5.36 |
% |
$ |
191,250 |
|
$ |
191,250 |
|
1604-1610 Broadway |
|
03/2012 |
|
5.66 |
% |
$ |
27,000 |
|
$ |
27,000 |
|
1745 Broadway |
|
01/2017 |
|
5.68 |
% |
$ |
340,000 |
|
$ |
340,000 |
|
1 and 2 Jericho Plaza |
|
05/2017 |
|
5.65 |
% |
$ |
163,750 |
|
$ |
163,750 |
|
885 Third Avenue |
|
07/2017 |
|
6.26 |
% |
$ |
267,650 |
|
$ |
267,650 |
|
The Meadows |
|
09/2012 |
|
1.81 |
% |
$ |
84,527 |
|
$ |
84,527 |
|
388 and 390 Greenwich Street (5) |
|
12/2017 |
|
5.14 |
% |
$ |
1,138,379 |
|
$ |
1,138,379 |
|
16 Court Street |
|
10/2010 |
|
2.13 |
% |
$ |
84,112 |
|
$ |
83,658 |
|
27-29 West 34th Street (6) |
|
05/2011 |
|
2.55 |
% |
$ |
40,348 |
|
$ |
38,596 |
|
1551-1555 Broadway (7) |
|
10/2009 |
|
2.49 |
% |
$ |
114,320 |
|
$ |
106,222 |
|
717 Fifth Avenue (8) |
|
09/2011 |
|
5.25 |
% |
$ |
245,000 |
|
$ |
245,000 |
|
(1) |
Interest rate represents the effective all-in weighted average interest rate for the quarter ended March 31, 2009. |
(2) |
This loan has an interest rate based on the 30-day 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 carries an interest rate of 90 basis points over the 30-day LIBOR. The mortgage is subject to a one-year as-of-right renewal option. The joint venture extended this loan for another year. |
(4) |
Comprised of $91.1 million variable rate debt that matures in May 2009 and $11.1 million fixed rate debt that matures in August 2014. Gramercy provided the variable rate debt. See Note 19. |
(5) |
Comprised of a $576.0 million mortgage and a $562.4 million mezzanine loan, both of which are fixed rate loans, except for $16.0 million of the mortgage which is floating. Up to $200.0 million of the mezzanine loan, secured indirectly by these properties, is recourse to us. |
(6) |
This construction loan facility has a committed amount of $55.0 million. |
(7) |
This construction loan has a committed amount of $138.6 million. |
(8) |
This loan has a committed amount of $285.0 million. |
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, 1 and 2 Jericho Plaza and The Meadows. We are entitled to receive fees for providing management, leasing, construction supervision and asset management services to our joint ventures. We earned approximately $9.8 million and $4.7 million from these services for the three months ended March 31, 2009, and 2008, 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. Gramercy is an integrated commercial real estate specialty finance and property investment company. Gramercys commercial real estate finance business, which operates under the name Gramercy Finance, focuses on the direct origination and acquisition of whole loans, subordinate interests in whole loans, mezzanine loans, preferred equity, commercial mortgage backed securities and other real estate related securities. Gramercys property investment business, which operates under the name Gramercy Realty, focuses on the acquisition and management of commercial properties net leased primarily to financial institutions and affiliated users throughout the United States. Gramercy qualified as a REIT for federal income tax purposes and expects to qualify for its current fiscal year. During the term of the origination agreement between Gramercy and us, which was terminated as of April 24, 2009 in connection with Gramercys internalization of GKK Manager LLC, or the Manager, which we refer to as the GKK Internalization, we had the right to purchase up to 25% of the shares in any future offering of Gramercys common stock in order to maintain our percentage ownership interest in Gramercy. At March 31, 2009, we held 6,219,370 shares, or approximately 12.48% of Gramercys common stock. Our total investment had a net book value of zero at March 31, 2009. The market value of our
17
SL Green Realty Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2009
common stock investment in Gramercy was approximately $6.0 million at March 31, 2009. Gramercy is a variable interest entity, but we are not the primary beneficiary. Due to the significant influence we had over Gramercy as of March 31, 2009, we accounted for our investment under the equity method of accounting.
In connection with Gramercys initial public offering, the Manager, which at the time was 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, we and Gramercy entered into an amended and restated management agreement, and Gramercys board of directors approved, among other things, an extension of the management agreement through December 2009. The management agreement was further amended in September 2007 and amended and restated in October 2008 and was subsequently terminated on April 24, 2009 in connection with the GKK Internalization. Prior to the GKK Internalization, Gramercy paid the Manager an annual management fee equal to 1.75% (1.50% effective October 1, 2008) of their gross stockholders equity (as defined in the management agreement), inclusive of trust preferred securities issued by Gramercy or its affiliates. In addition, Gramercy also paid the Manager a collateral management fee (as defined in the management agreement). In connection with any and all collateralized debt obligations, or CDOs, except for the 2005 CDO, or other securitization vehicles formed, owned or controlled, directly or indirectly, by Gramercy, which provided for a collateral manager to be retained, the Manager with respect to such CDOs and other securitization vehicles, received management, service and similar fees equal to (i) 0.25% per annum of the principal amount outstanding of bonds issued by a managed transitional CDO that are owned by third-party investors unaffiliated with Gramercy or the Manager, which CDO is structured to own loans secured by transitional properties, (ii) 0.15% per annum of the book value of the principal amount outstanding of bonds issued by a managed non-transitional CDO that are owned by third-party investors unaffiliated with Gramercy or the Manager, which CDO is structured to own loans secured by non-transitional properties, (iii) 0.10% per annum of the principal amount outstanding of bonds issued by a static CDO that are owned by third party investors unaffiliated with Gramercy or the Manager, which CDO is structured to own non-investment grade bonds, and (iv) 0.05% per annum of the principal amount outstanding of bonds issued by a static CDO that are owned by third-party investors unaffiliated with Gramercy or the Manager, which CDO is structured to own investment grade bonds. For the purposes of the management agreement, a managed transitional CDO meant a CDO that is actively managed, has a reinvestment period and is structured to own debt collateral secured primarily by non-stabilized real estate assets that are expected to experience substantial net operating income growth, and a managed non-transitional CDO meant a CDO that is actively managed, has a reinvestment period and is structured to own debt collateral secured primarily by stabilized real estate assets that are not expected to experience substantial net operating income growth. Both managed transitional and managed non-transitional CDOs may at any given time during the reinvestment period of the respective vehicles invest in and own non-debt collateral (in limited quantity) as defined by the respective indentures. In connection with the closing of Gramercys first CDO in July 2005, Gramercy entered into a collateral management agreement with the Manager. Pursuant to the collateral management agreement, the Manager agreed to provide certain advisory and administrative services in relation to the collateral debt securities and other eligible investments securing the CDO notes. The collateral management agreement provided for a senior collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.15% per annum of the net outstanding portfolio balance, and a subordinate collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.25% per annum of the net outstanding portfolio balance. Net outstanding portfolio balance is the sum of the (i) aggregate principal balance of the collateral debt securities, excluding defaulted securities, (ii) aggregate principal balance of all principal proceeds held as cash and eligible investments in certain accounts, and (iii) with respect to the defaulted securities, the calculation amount of such defaulted securities. As compensation for the performance of its obligations as collateral manager under the first CDO, Gramercys board of directors had allocated to the Manager the subordinate collateral management fee paid on securities not held by Gramercy. The senior collateral management fee and balance of the subordinate collateral management fee was allocated to Gramercy. For the three months ended March 31, 2009 and 2008 we received an aggregate of approximately $4.9 million and $4.2 million, respectively, in fees under the management agreement and none and $1.3 million, respectively, under the collateral management agreement. Fees payable to the Manager under the collateral management agreement were remitted to Gramercy for the three months ended March 31, 2009. In 2008, we, as well as Gramercy, each formed special committees comprised solely of independent directors to consider whether the GKK Internalization and/or amendment to the management agreement would be in the best interest of each company and its respective shareholders. The GKK Internalization was completed on April 24, 2009 through the direct acquisition by Gramercy of the Manager.
18
SL Green Realty Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2009
On October 27, 2008, the Manager entered into a Second Amended and Restated Management Agreement (the Second Amended Management Agreement) with Gramercy and GKK Capital LP. The Second Amended Management Agreement generally contained the same terms and conditions as the Amended and Restated Management Agreement, dated as of April 19, 2006, except for the following material changes: (i) reduced the annual base management fee payable by Gramercy to the Manager to 1.50% of Gramercys stockholders equity (effective October 1, 2008); (ii) reduced the termination fee to an amount equal to the management fee earned by the Manager during the 12-month period immediately preceding the effective date of the termination; and (iii) provided that all management, service and similar fees relating to Gramercys CDOs that the Manager was entitled to receive were to be remitted by the Manager to Gramercy for any period from and after July 1, 2008. The Second Amended Management Agreement was terminated in connection with the GKK Internalization.
Prior to the GKK Internalization, to provide an incentive for the Manager to enhance the value of Gramercys common stock, we, along with the other holders of Class B limited partnership interests in Gramercys operating partnership, were entitled to an incentive return payable through the Class B limited partner interests in Gramercys operating partnership, equal to 25% of the amount by which funds from operations (as defined in Gramercys 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 four to adjust for quarterly calculations). We recorded distributions on the Class B limited partner interests as incentive distribution income in the period when earned and when receipt of such amounts became probable and reasonably estimable in accordance with Gramercys amended and restated partnership agreement as if such agreement had been terminated on that date. We earned approximately none and $2.5 million under this agreement for the three months ended March 31, 2009 and 2008, respectively. During the fourth quarter of 2008, we entered into an agreement with Gramercy which, among other matters, obligated Gramercy and us to use commercially reasonable efforts to obtain the consents of certain lenders to Gramercy and its subsidiaries to the GKK Internalization. Consent was received by Gramercy and the GKK Internalization was completed in April 2009. Amounts payable to the Class B limited partnership interests were waived since July 1, 2008. Due to the control we had over the Manager prior to the GKK Internalization, we consolidated the accounts of the Manager into ours.
On October 27, 2008, the Manager entered into a letter agreement (the Letter Agreement) with the operating partnership, Gramercy, GKK Capital LP and the individual limited partners of GKK Capital LP party thereto, pursuant to which the holders of the Class B limited partner interests of GKK Capital LP agreed to waive their respective rights to receive distributions payable on the Class B limited partner interests in respect of the period commencing July 1, 2008 and ending on December 31, 2008. For all periods from and after January 1, 2009, the holders of the Class B limited partner interests were entitled to receive distributions from GKK Capital LP in accordance with the partnership agreement of GKK Capital LP, except that Gramercy could, at its option, elect to assume directly and satisfy the right of the holders to receive distributions, if permissible under applicable law or the requirements of the exchange on which the shares of common stock trade, in shares of common stock. In addition, the Letter Agreement provided that Gramercy would not amend certain provisions of its charter and bylaws related to indemnification of directors and officers in a manner that was adverse to the operating partnership or any of the individuals party to the Letter Agreement, other than any amendments that would only apply to acts or omissions occurring after the date of such amendment.
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, which at the time was an affiliate of ours, as well as in the Class B limited partner interests in Gramercys operating partnership. The vesting of these awards was dependent upon, among other things, tenure of employment and the performance of our investment in Gramercy. These awards vested in May 2008. We recorded compensation expense of approximately none and $0.8 million for the three months ended March 31, 2009 and 2008, respectively, related to these awards. The officers and employees who received the awards owned 15.6 units, or 15.6%, of the Class B limited partner interests and 15.6% of the Manager. During the second quarter of 2008, we acquired an additional 12.42% ownership interest in the Manager. Pursuant to an agreement dated December 30, 2008, all the Class B limited partner interests and the remaining 15.6% interest in the Manager were transferred to us. On April 24, 2009, Gramercy acquired all the interests in the Manager and all the Class B limited partner interests from us.
Prior to the GKK Internalization, Gramercy was 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, provided for an annual fee payable to us of 0.05% of the book value of all Gramercys credit tenant lease assets and non-investment grade bonds and 0.15% of the book value of all other Gramercy assets. The outsourcing agreement provided for a fee of $2.7 million per year, increasing 3% annually over the prior year. For the three months ended March 31, 2009 and 2008, the Manager received an aggregate of approximately $0.8 million and $1.3 million, respectively, under the outsourcing and asset servicing agreements. On October 27, 2008, the Manager and SLG Gramercy Services LLC (the Servicer) entered into an agreement, which
19
SL Green Realty Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2009
was also acknowledged and agreed to by Gramercy, to terminate, effective as of September 30, 2008, the Amended and Restated Asset Servicing Agreement, dated as of April 19, 2006. On October 27, 2008, the Manager and the operating partnership entered into an agreement to terminate, effective as of September 30, 2008, the Amended and Restated Outsource Agreement, dated as of April 19, 2006.
On October 27, 2008, we, Gramercy and GKK Capital LP entered into a services agreement (the Services Agreement) pursuant to which we provided consulting and other services to Gramercy. We made certain members of management available in connection with the provision of the services until the completion of the GKK Internalization on April 24, 2009. In consideration for the consulting services, we received from Gramercy a fee of $200,000 per month, payable, at Gramercys option, in cash or, if permissible under applicable law or the requirements of the exchange on which the shares of Gramercys common stock trade, in shares of common stock. We also provided Gramercy with certain other services described in the Services Agreement for a fee of $100,000 per month in cash until April 24, 2009. The Services Agreement was terminated in connection with the GKK Internalization. From October 27, 2008 until April 24, 2009, an affiliate of ours served as special servicer for certain assets held by Gramercy or its affiliates and assigned its duties to a subsidiary of the Manager.
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 years with rents of approximately $249,000 per annum for year one rising to $315,000 per annum in year ten. Gramercy also leases approximately 5,200 square feet pursuant to two leases which are on a month-to-month basis. The annual rent under these two leases is approximately $270,600.
Gramercy holds tenancy-in-common interests along with us in 2 Herald Square and 885 Third Avenue. See Note 5 for information on our structured finance investments in which Gramercy also holds an interest.
One of our affiliates held an investment in Gramercys preferred stock with a book value of approximately $0.2 million at March 31, 2009.
In April 2008, Gramercy completed the acquisition of American Financial Realty Trust, or AFR, in a transaction with a total value of approximately $3.3 billion. In addition, Gramercy assumed an aggregate of approximately $1.3 billion of AFR secured debt. We provided $50.0 million of financing as part of an $850.0 million loan to Gramercy in connection with this acquisition (See note 5). As a result of this acquisition, the Board of Directors of Gramercy awarded 644,787 restricted shares of Gramercys common stock to us, subject to a one-year vesting period, in respect of services rendered. We recognized income of approximately $6.6 million from these shares, which was recorded in other income in the accompanying statements of income.
On October 27, 2008, Marc Holliday, our Chief Executive Officer, Andrew Mathias, our President and Chief Investment Officer and Gregory F. Hughes, our Chief Financial Officer and Chief Operating Officer resigned as Chief Executive Officer, Chief Investment Officer and Chief Credit Officer, respectively, of Gramercy. Mr. Holliday also resigned as President of Gramercy effective as of October 28, 2008. Mr. Holliday and Mr. Mathias agreed to remain as consultants to Gramercy through the earliest of (i) September 30, 2009, (ii) the termination of the Second Amended Management Agreement or (iii) the termination of their respective employment with us. This agreement was terminated in connection with the GKK Internalization.
On October 28, 2008, Gramercy announced the appointment of Roger M. Cozzi, as President and Chief Executive Officer, effective immediately. Effective as of November 13, 2008, Timothy J. OConnor was appointed as President of Gramercy.
20
SL Green Realty Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2009
The condensed combined balance sheets for the unconsolidated joint ventures, including estimates for Gramercy, at March 31, 2009 and December 31, 2008, are as follows (in thousands):
|
|
2009 |
|
2008 |
|
||
Assets |
|
|
|
|
|
||
Commercial real estate property, net |
|
$ |
9,586,739 |
|
$ |
9,739,017 |
|
Structured finance investments |
|
2,904,174 |
|
3,226,922 |
|
||
Other assets |
|
1,784,065 |
|
1,556,593 |
|
||
Total assets |
|
$ |
14,274,978 |
|
$ |
14,522,532 |
|
|
|
|
|
|
|
||
Liabilities and members equity |
|
|
|
|
|
||
Mortgages payable |
|
$ |
6,710,371 |
|
$ |
6,768,594 |
|
Other loans |
|
2,837,360 |
|
3,026,262 |
|
||
Other liabilities |
|
1,633,421 |
|
1,458,256 |
|
||
Members equity |
|
3,093,826 |
|
3,269,420 |
|
||
Total liabilities and members equity |
|
$ |
14,274,978 |
|
$ |
14,522,532 |
|
Companys net investment in unconsolidated joint ventures |
|
$ |
976,572 |
|
$ |
975,483 |
|
The condensed combined statements of operations for the unconsolidated joint ventures, including estimates for Gramercy, from acquisition date through March 31, 2009 and 2008, are as follows (in thousands):
|
|
Three Months Ended |
|
||||
|
|
March 31, |
|
||||
|
|
2009 |
|
2008 |
|
||
Total revenues |
|
$ |
332,906 |
|
$ |
255,032 |
|
Operating expenses |
|
131,647 |
|
54,190 |
|
||
Real estate taxes |
|
35,326 |
|
20,130 |
|
||
Interest |
|
119,056 |
|
95,142 |
|
||
Depreciation and amortization |
|
67,119 |
|
35,770 |
|
||
Other income/ expenses |
|
(19,975 |
) |
|
|
||
Total expenses |
|
333,173 |
|
205,232 |
|
||
Net income (loss) before gain on sale |
|
$ |
(267 |
) |
$ |
49,800 |
|
Companys equity in net income of unconsolidated joint ventures |
|
$ |
13,073 |
|
$ |
19,425 |
|
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 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 Corporations 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 months ended March 31, 2009 and 2008, the Service Corporation earned approximately $8.6 million and $3.7 million of revenue and incurred approximately $2.6 million and $2.8 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 March 31, 2002, we consolidated the operations of eEmerge. Effective January 1, 2001, eEmerge elected to be taxed as a TRS.
21
SL Green Realty Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2009
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 for its 50,200 square foot premises, which is located at 440 Ninth Avenue, Manhattan, and which was previously owned by our operating partnership. ENYC entered into another 10-year lease with our operating partnership for its 21,500 square foot premises at 28 West 44th 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.
8. Deferred Costs
Deferred costs at March 31, 2009 and December 31, 2008 consisted of the following (in thousands):
|
|
2009 |
|
2008 |
|
||
Deferred financing |
|
$ |
64,861 |
|
$ |
63,262 |
|
Deferred leasing |
|
149,449 |
|
146,951 |
|
||
|
|
214,310 |
|
210,213 |
|
||
Less accumulated amortization |
|
(80,013 |
) |
(77,161 |
) |
||
|
|
$ |
134,297 |
|
$ |
133,052 |
|
9. Mortgage Notes Payable
The first mortgage notes payable collateralized by the respective properties and assignment of leases at March 31, 2009 and December 31, 2008, respectively, were as follows (in thousands):
Property |
|
Maturity |
|
Interest |
|
2009 |
|
2008 |
|
||
711 Third Avenue (1) |
|
06/2015 |
|
4.99 |
% |
$ |
120,000 |
|
$ |
120,000 |
|
420 Lexington Avenue (1) |
|
11/2010 |
|
8.44 |
% |
109,268 |
|
110,013 |
|
||
673 First Avenue (1) |
|
02/2013 |
|
5.67 |
% |
32,191 |
|
32,388 |
|
||
220 East 42nd Street (1) |
|
12/2013 |
|
5.24 |
% |
201,784 |
|
202,780 |
|
||
625 Madison Avenue (1) |
|
11/2015 |
|
6.27 |
% |
97,014 |
|
97,583 |
|
||
609 Fifth Avenue (1) |
|
10/2013 |
|
5.85 |
% |
98,965 |
|
99,319 |
|
||
609 Partners, LLC (1) |
|
07/2014 |
|
5.00 |
% |
63,891 |
|
63,891 |
|
||
485 Lexington Avenue (1) |
|
02/2017 |
|
5.61 |
% |
450,000 |
|
450,000 |
|
||
120 West 45th Street (1) |
|
02/2017 |
|
6.12 |
% |
170,000 |
|
170,000 |
|
||
919 Third Avenue (1) (3) |
|
07/2011 |
|
6.87 |
% |
227,329 |
|
228,046 |
|
||
300 Main Street (1) |
|
02/2017 |
|
5.75 |
% |
11,500 |
|
11,500 |
|
||
399 Knollwood Rd (1) |
|
03/2014 |
|
5.75 |
% |
18,648 |
|
18,728 |
|
||
500 West Putnam (1) |
|
01/2016 |
|
5.52 |
% |
25,000 |
|
25,000 |
|
||
141 Fifth Avenue (1) (4) |
|
06/2017 |
|
5.70 |
% |
25,000 |
|
25,000 |
|
||
One Madison Avenue (1) (5) |
|
05/2020 |
|
5.91 |
% |
660,210 |
|
663,071 |
|
||
Total fixed rate debt |
|
|
|
|
|
2,310,800 |
|
2,317,319 |
|
||
180/182 Broadway (1) (6) |
|
02/2011 |
|
2.70 |
% |
22,272 |
|
21,183 |
|
||
Landmark Square (1) (7) |
|
02/2010 |
|
2.30 |
% |
128,000 |
|
128,000 |
|
||
28 West 44th Street (1) |
|
08/2013 |
|
3.43 |
% |
124,520 |
|
124,856 |
|
||
Total floating rate debt |
|
|
|