Table of Contents

 

 

 

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, 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
incorporation or organization)

 

(I.R.S. Employer
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 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 x

 

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 ¨

Non-accelerated filer ¨

Smaller Reporting Company ¨

 

(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 registrant’s common stock, $0.01 par value, was 76,833,561 as of July 31, 2009.

 

 

 



Table of Contents

 

SL GREEN REALTY CORP.

 

INDEX

 

 

 

PAGE

 

 

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2009 (unaudited) and December 31, 2008

3

 

 

Condensed Consolidated Statements of Income for the three and six months ended June 30, 2009 and 2008 (unaudited)

4

 

 

Condensed Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2009 (unaudited)

5

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008 (unaudited)

6

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

7

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

36

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

53

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

53

 

 

 

PART II.

OTHER INFORMATION

54

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

54

 

 

 

ITEM 1A.

RISK FACTORS

54

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

55

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

55

 

 

 

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

55

 

 

 

ITEM 5.

OTHER INFORMATION

55

 

 

 

ITEM 6.

EXHIBITS

55

 

 

 

SIGNATURES

56

 

2



Table of Contents

 

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,
2009

 

December 31,
2008

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Commercial real estate properties, at cost:

 

 

 

 

 

Land and land interests

 

$

1,385,182

 

$

1,386,090

 

Building and improvements

 

5,560,966

 

5,544,019

 

Building leasehold and improvements

 

1,268,022

 

1,259,472

 

Property under capital lease

 

12,208

 

12,208

 

 

 

8,226,378

 

8,201,789

 

Less: accumulated depreciation

 

(635,415

)

(546,545

)

 

 

7,590,963

 

7,655,244

 

Assets held for sale

 

76,657

 

184,035

 

Cash and cash equivalents

 

676,768

 

726,889

 

Restricted cash

 

87,154

 

105,954

 

Tenant and other receivables, net of allowance of $14,508 and $16,898 in 2009 and 2008, respectively

 

31,666

 

30,882

 

Related party receivables

 

9,519

 

7,676

 

Deferred rents receivable, net of allowance of $22,382 and $19,648 in 2009 and 2008, respectively

 

156,685

 

145,561

 

Structured finance investments, net of discount of $14,308 and $18,764 and allowance of $71,666 and $57,016 in 2009 and 2008, respectively

 

534,518

 

679,814

 

Investments in unconsolidated joint ventures

 

978,340

 

975,483

 

Deferred costs, net

 

135,520

 

133,052

 

Other assets

 

317,260

 

339,763

 

Total assets

 

$

10,595,050

 

$

10,984,353

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Mortgage notes payable

 

$

2,570,085

 

$

2,591,358

 

Revolving credit facility

 

1,419,500

 

1,389,067

 

Senior unsecured notes

 

873,046

 

1,501,134

 

Accrued interest payable and other liabilities

 

38,177

 

70,692

 

Accounts payable and accrued expenses

 

125,267

 

133,100

 

Deferred revenue/gain

 

376,143

 

427,936

 

Capitalized lease obligation

 

16,791

 

16,704

 

Deferred land leases payable

 

17,831

 

17,650

 

Dividend and distributions payable

 

12,014

 

26,327

 

Security deposits

 

36,737

 

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

 

5,585,591

 

6,415,063

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

Noncontrolling interests in operating partnership

 

89,035

 

87,330

 

 

 

 

 

 

 

Equity

 

 

 

 

 

SL Green stockholders’ equity:

 

 

 

 

 

Series C preferred stock, $0.01 par value, $25.00 liquidation preference, 6,300 issued and outstanding at June 30, 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 June 30, 2009 and December 31, 2008, respectively

 

96,321

 

96,321

 

Common stock, $0.01 par value 160,000 shares authorized and 80,180 and 60,404 issued and outstanding at June 30, 2009 and December 31, 2008, respectively (including 3,360 shares at both June 30, 2009 and December 31, 2008, held in Treasury, respectively)

 

802

 

604

 

Additional paid-in-capital

 

3,481,518

 

3,079,159

 

Treasury stock at cost

 

(302,705

)

(302,705

)

Accumulated other comprehensive loss

 

(32,285

)

(54,747

)

Retained earnings

 

996,051

 

979,939

 

Total SL Green stockholders’ equity

 

4,391,683

 

3,950,552

 

Noncontrolling interests in other partnerships

 

528,741

 

531,408

 

Total equity

 

4,920,424

 

4,481,960

 

Total liabilities and equity

 

$

10,595,050

 

$

10,984,353

 

 

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

 

3



Table of Contents

 

SL Green Realty Corp.

Condensed Consolidated Statements of Income

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

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Revenues

 

 

 

 

 

 

 

 

 

Rental revenue, net

 

$

192,735

 

$

192,575

 

$

389,203

 

$

386,416

 

Escalation and reimbursement

 

31,534

 

30,007

 

65,292

 

59,966

 

Preferred equity and investment income

 

15,533

 

22,654

 

32,431

 

41,801

 

Other income

 

13,166

 

45,486

 

29,447

 

55,990

 

Total revenues

 

252,968

 

290,722

 

516,373

 

544,173

 

Expenses

 

 

 

 

 

 

 

 

 

Operating expenses (including approximately $4,293 and $7,725 (2009) and $3,405 and $6,977 (2008) paid to affiliates)

 

52,441

 

54,744

 

107,923

 

108,415

 

Real estate taxes

 

36,751

 

32,760

 

73,700

 

65,284

 

Ground rent

 

8,046

 

7,826

 

16,092

 

16,075

 

Interest expense, net of interest income

 

57,012

 

73,604

 

117,276

 

149,650

 

Amortization of deferred financing costs

 

1,476

 

1,538

 

2,912

 

3,171

 

Depreciation and amortization

 

55,186

 

54,685

 

109,984

 

108,119

 

Loan loss reserves

 

45,577

 

5,000

 

107,577

 

5,000

 

Loss (gain) on equity investment in marketable securities

 

(126

)

 

681

 

 

Marketing, general and administrative

 

17,946

 

25,434

 

35,868

 

49,893

 

Total expenses

 

274,309

 

255,591

 

572,013

 

505,607

 

Income (loss) from continuing operations before equity in net income of unconsolidated joint ventures and discontinued operations

 

(21,341

)

35,131

 

(55,640

)

38,566

 

Equity in net income from unconsolidated joint ventures

 

16,828

 

17,822

 

29,901

 

37,247

 

Net gain (loss) on sale of interest in unconsolidated joint ventures/ real estate

 

(2,693

)

93,481

 

6,848

 

93,481

 

Gain on early extinguishment of debt

 

29,321

 

 

77,033

 

 

Income from continuing operations

 

22,115

 

146,434

 

58,142

 

169,294

 

Net income (loss) from discontinued operations

 

(538

)

1,566

 

(604

)

2,931

 

Gain on sale of discontinued operations

 

 

 

6,572

 

110,232

 

Net income

 

21,577

 

148,000

 

64,110

 

282,457

 

Net income attributable to noncontrolling interests in operating partnership

 

(382

)

(5,383

)

(1,702

)

(10,235

)

Net income attributable to noncontrolling interests in other partnerships

 

(3,683

)

(3,457

)

(7,160

)

(6,815

)

Net income attributable to SL Green

 

17,512

 

139,160

 

55,248

 

265,407

 

Preferred stock dividends

 

(4,969

)

(4,969

)

(9,938

)

(9,938

)

Net income attributable to SL Green common stockholders

 

$

12,543

 

$

134,191

 

$

45,310

 

$

255,469

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

Net income from continuing operations before gain on sale and discontinued operations

 

$

0.24

 

$

0.73

 

$

0.53

 

$

0.97

 

Net income (loss) from discontinued operations, net of noncontrolling interest

 

(0.01

)

0.03

 

(0.01

)

0.05

 

Gain on sale of discontinued operations, net of noncontrolling interest

 

 

 

0.10

 

1.81

 

Gain (loss) on sale of unconsolidated joint ventures/ real estate

 

(0.04

)

1.54

 

0.11

 

1.54

 

Net income attributable to SL Green common stockholders

 

$

0.19

 

$

2.30

 

$

0.73

 

$

4.37

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Net income from continuing operations before gain on sale and discontinued operations

 

$

0.23

 

$

0.73

 

$

0.53

 

$

0.96

 

Net income (loss) from discontinued operations

 

(0.01

)

0.03

 

(0.01

)

0.05

 

Gain on sale of discontinued operations

 

 

 

0.10

 

1.81

 

Gain (loss) on sale of unconsolidated joint ventures/ real estate

 

(0.04

)

1.53

 

0.11

 

1.53

 

Net income attributable to SL Green common stockholders

 

$

0.18

 

$

2.29

 

$

0.73

 

$

4.35

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to SL Green common stockholders:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

15,666

 

$

42,809

 

$

32,958

 

$

56,785

 

Discontinued operations

 

(520

)

1,506

 

(582

)

2,818

 

Gain on sale of discontinued operations

 

 

 

6,334

 

105,986

 

Gain (loss) on sale of unconsolidated joint ventures/ real estate

 

(2,603

)

89,876

 

6,600

 

89,880

 

Net income

 

$

12,543

 

$

134,191

 

$

45,310

 

$

255,469

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

0.10

 

$

0.7875

 

$

0.475

 

$

1.575

 

Basic weighted average common shares outstanding

 

67,363

 

58,329

 

62,298

 

58,406

 

Diluted weighted average common shares and common share equivalents outstanding

 

69,742

 

61,014

 

64,679

 

61,120

 

 

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

 

4



Table of Contents

 

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
Stock

 

Additional

 

 

 

Accumulated
Other

 

 

 

 

 

 

 

 

 

 

 

Preferred
Stock

 

Preferred
Stock

 

Shares

 

Par
Value

 

Paid-
In-Capital

 

Treasury
Stock

 

Comprehensive
Loss

 

Retained
Earnings

 

Noncontrolling
Interests

 

Total

 

Comprehensive
Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2008

 

$

151,981

 

$

96,321

 

57,044

 

$

604

 

$

3,079,159

 

$

(302,705

)

$

(54,747

)

$

979,939

 

$

531,408

 

$

4,481,960

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

55,248

 

7,160

 

62,408

 

$

62,408

 

Net unrealized gain on derivative instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

20,165

 

 

 

 

 

20,165

 

20,165

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

1,700

 

 

 

 

 

1,700

 

1,700

 

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

597

 

 

 

 

 

597

 

597

 

Preferred dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,938

)

 

 

(9,938

)

 

 

Net proceeds from common stock offering

 

 

 

 

 

19,550

 

196

 

387,128

 

 

 

 

 

 

 

 

 

387,324

 

 

 

Redemption of units and DRIP proceeds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan & stock award, net

 

 

 

 

 

226

 

2

 

431

 

 

 

 

 

 

 

 

 

433

 

 

 

Amortization of deferred compensation plan

 

 

 

 

 

 

 

 

 

14,800

 

 

 

 

 

 

 

 

 

14,800

 

 

 

Cash distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,827

)

(9,827

)

 

 

Cash distribution declared ($0.475 per common share of which none represented a return of capital for federal income tax purposes)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(29,198

)

 

 

(29,198

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2009

 

$

151,981

 

$

96,321

 

76,820

 

$

802

 

$

3,481,518

 

$

(302,705

)

$

(32,285

)

$

996,051

 

$

528,741

 

$

4,920,424

 

$

84,870

 

 

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

 

5



Table of Contents

 

SL Green Realty Corp.

Condensed Consolidated Statements of Cash Flows

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

 

 

 

Six Months Ended
June 30,

 

 

 

2009

 

2008

 

Operating Activities

 

 

 

 

 

Net income

 

$

64,110

 

$

282,457

 

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

 

 

 

 

 

Depreciation and amortization

 

112,896

 

115,199

 

Gain on sale of discontinued operations

 

(6,572

)

(110,232

)

Equity in net income from unconsolidated joint ventures

 

(29,901

)

(37,247

)

Net gain on sale of unconsolidated joint ventures/ real estate

 

(6,848

)

(93,481

)

Distributions of cumulative earnings from unconsolidated joint ventures

 

18,384

 

48,374

 

Loan loss reserves

 

107,577

 

5,000

 

Loss on equity investment in marketable securities

 

681

 

 

Gain on early extinguishment of debt

 

(77,033

)

 

Deferred rents receivable

 

(13,858

)

(21,524

)

Other non-cash adjustments

 

3,127

 

14,147

 

Changes in operating assets and liabilities:

 

 

 

 

 

Restricted cash — operations

 

24,814

 

504

 

Tenant and other receivables

 

1,494

 

7,001

 

Related party receivables

 

(1,843

)

1,499

 

Deferred lease costs

 

(9,768

)

(17,883

)

Other assets

 

(13,704

)

(7,587

)

Accounts payable, accrued expenses and other liabilities

 

(7,982

)

(52,048

)

Deferred revenue and land leases payable

 

(13,200

)

2,879

 

Net cash provided by operating activities

 

152,374

 

137,598

 

Investing Activities

 

 

 

 

 

Acquisitions of real estate property

 

(8,340

)

(67,751

)

Additions to land, buildings and improvements

 

(38,348

)

(65,241

)

Escrowed cash — capital improvements/acquisition deposits

 

(6,014

)

3,089

 

Investments in unconsolidated joint ventures

 

(12,677

)

(18,767

)

Distributions in excess of cumulative earnings from unconsolidated joint ventures

 

13,334

 

416,370

 

Net proceeds from disposition of real estate/ partial interest in property

 

26,007

 

152,933

 

Other investments

 

(4,656

)

(16,132

)

Structured finance and other investments net of repayments/participations

 

55,864

 

(58,505

)

Net cash provided by investing activities

 

25,170

 

345,996

 

Financing Activities

 

 

 

 

 

Proceeds from mortgage notes payable

 

1,301

 

35,826

 

Repayments of mortgage notes payable

 

(22,574

)

(13,166

)

Proceeds from revolving credit facility and senior unsecured notes

 

30,433

 

592,518

 

Repayments of revolving credit facility and senior unsecured notes

 

(556,619

)

(933,167

)

Net proceeds from sale of common stock

 

387,324

 

 

Proceeds from stock options exercised

 

 

7,108

 

Purchases of Treasury Stock

 

 

(68,056

)

Distributions to noncontrolling interests in other partnerships

 

(9,827

)

(20,220

)

Contributions from noncontrolling interests in other partnerships

 

 

30,593

 

Distributions to noncontrolling interests in operating partnership

 

(1,752

)

(3,683

)

Dividends paid on common and preferred stock

 

(52,822

)

(101,856

)

Deferred loan costs and capitalized lease obligation

 

(3,129

)

(1,889

)

Net cash used in financing activities

 

(227,665

)

(475,991

)

Net (decrease) increase in cash and cash equivalents

 

(50,121

)

7,603

 

Cash and cash equivalents at beginning of period

 

726,889

 

45,964

 

Cash and cash equivalents at end of period

 

$

676,768

 

$

53,567

 

 

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

 

6



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 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 June 30, 2009, noncontrolling investors held, in the aggregate, a 3.0% 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 Reckson’s former executive management, or the Buyer, for a total consideration of approximately $2.0 billion.

 

As of June 30, 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
Properties

 

Square Feet

 

Weighted Average
Occupancy
(1)

 

Manhattan

 

Consolidated properties

 

21

 

13,782,200

 

97.0

%

 

 

Unconsolidated properties

 

8

 

9,429,000

 

95.0

%

 

 

 

 

 

 

 

 

 

 

Suburban

 

Consolidated properties

 

26

 

4,008,000

 

87.5

%

 

 

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.

 

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.

 

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Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 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 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, Form 10-K/A No. 1 and Form 10-K/A No. 2 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 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 partner’s 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 noncontrolling 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 noncontrolling 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 noncontrolling interests. Below are the steps we have taken as a result of the implementation of this standard:

 

·                  We have reclassified the noncontrolling interests of other consolidated partnerships from the mezzanine section of our balance sheet to equity. This reclassification totaled approximately $531.4 million as of December 31, 2008.

·                  Noncontrolling 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 noncontrolling 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 noncontrolling 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 noncontrolling partners of our operating partnership based on their weighted average ownership percentage during the period.

 

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Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 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 property’s value is considered impaired if management’s 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 consolidated rental properties or equity investments in rental properties was impaired at June 30, 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 $5.1 million, $10.5 million, $4.0 million and $9.6 million in rental revenue for the three and six months ended June 30, 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 $0.3 million, $2.1 million, $1.7 million and $3.4 million for the three and six months ended June 30, 2009 and 2008, respectively.

 

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:

 

 

 

June 30,
2009

 

December 31,
2008

 

Identified intangible assets (included in other assets):

 

 

 

 

 

Gross amount

 

$

236,594

 

$

236,594

 

Accumulated amortization

 

(79,768

)

(60,074

)

Net

 

$

156,826

 

$

176,520

 

 

 

 

 

 

 

Identified intangible liabilities (included in deferred revenue):

 

 

 

 

 

Gross amount

 

$

480,770

 

$

480,770

 

Accumulated amortization

 

(131,808

)

(101,585

)

Net

 

$

348,962

 

$

379,185

 

 

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Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2009

 

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 $45.6 million, $107.6 million, $5.0 million and $5.0 million in loan loss reserves and charge offs during the three and six months ended June 30, 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. As of June 30, 2009, loans with a gross carrying value of $73.8 million had been designated as assets held for sale. We recorded a mark-to-market adjustment of approximately $64.2 million against our held for sale investments during the six months ended June 30, 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 $2.1 million and none in Federal, state and local tax expense during the six months ended June 30, 2009 and 2008, respectively, of which $0.7 million and $0.6 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.

 

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.

 

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Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2009

 

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 six months ended June 30, 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 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 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 9.1% 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 June 30, 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 June 30, 2009.  Two borrowers accounted for more than 10.0% of the revenue earned on structured finance investments during the three months ended June 30, 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) and SFAS 160 for noncontrolling interests.

 

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.

 

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Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2009

 

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 issuer’s 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 issuer’s 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 consolidated financial statements (in thousands):

 

 

 

December 31,
2008

As Reported

 

December 31,
2008

As Restated

 

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

 

979,939

 

 

 

 

Three Months
Ended June 30,
2008

As Reported

 

Three Months
Ended June 30,
2008

As Restated

 

Six Months
Ended June
30, 2008

As Reported

 

Six Months
Ended June
30, 2008

As Restated

 

Interest expense

 

$

73,833

 

$

78,700

 

$

152,351

 

$

162,015

 

Net income attributable to SL Green common stockholders

 

138,870

 

134,191

 

264,761

 

255,469

 

Net income per share attributable to common stockholders - basic

 

$

2.38

 

$

2.30

 

$

4.53

 

$

4.37

 

Net income per share attributable to common stockholders - diluted

 

$

2.37

 

$

2.29

 

$

4.51

 

$

4.35

 

 

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 consolidated 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 included the disclosures required under this standard in Note 16.

 

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.

 

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.

 

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Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2009

 

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 June 15, 2009. The adoption of the FSP did not 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 entity’s 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.

 

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, “Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140,” or SFAS 166. SFAS 166 amends various components of the guidance under SFAS 140 governing sale accounting, including the recognition of assets obtained and liabilities assumed as a result of a transfer, and considerations of effective control by a transferor over transferred assets. In addition, SFAS 166 removes the exemption for qualifying special purpose entities from the guidance of FIN 46(R), as amended by SFAS 167 below. SFAS 166 is effective January 1, 2010, with early adoption prohibited. While the amended guidance governing sale accounting is applied on a prospective basis, the removal of the qualifying special purpose entity exception will require us to evaluate certain entities for consolidation under SFAS 167, as defined below. While we are evaluating the effect of adoption of SFAS 166, we currently believe that the adoption of SFAS 166 will not have a material impact on our consolidated financial statement.

 

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R),” or SFAS 167, which amends guidance in FIN 46(R) for determining whether an entity is a variable interest entity, or VIE, and requires the performance of a qualitative rather than a quantitative analysis to determine the primary beneficiary of a VIE. Under this guidance, an entity would be required to consolidate a VIE if it has (i) the power to direct the activities that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. SFAS 167 is effective for the first annual reporting period that begins after November 15, 2009, with early adoption prohibited. While we are currently evaluating the effect of adoption of SFAS 167, we currently believe that the adoption of SFAS 167 will not have a material impact on our consolidated financial statements.

 

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, “The FASB Accounting Condification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 168,” or SFAS 168. SFAS 168 establishes the FASB Accounting Standards Codification, or the Codification, as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP, and states that all guidance contained in the Codification carries equal level of authority.  Rules and interpretive releases of the Securities and Exchange Commissions, or SEC, under federal securities laws are also sources of authoritative GAAP for SEC registrants.  The Condification does not change GAAP, however it does change the way in which it is to be researched and referenced.  SFAS 168 is effective for financial statements issued for interim and annual periods ending September 15, 2009. We do not expect the adoption of SFAS 168 to have a material impact on our consolidated financial statements.

 

3.  Property Acquisitions

 

We did not acquire any real estate during the six months ended June 30, 2009.

 

4.  Property Dispositions and Assets Held for Sale

 

In January 2009, we, along with our joint venture partner, Gramercy Capital Corp. (NYSE:GKK), or 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 June 30, 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).

 

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Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2009

 

The following table summarizes income from discontinued operations and the related realized gain on sale of discontinued operations for the three and six months ended June 30, 2009 and 2008 (in thousands).

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Revenues

 

 

 

 

 

 

 

 

 

Rental revenue

 

$

 

$

8,185

 

$

583

 

$

16,535

 

Escalation and reimbursement revenues

 

3

 

1,094

 

(3

)

2,010

 

Other income

 

1,628

 

9,709

 

6,514

 

18,133

 

Total revenues

 

1,631

 

18,988

 

7,094

 

36,678

 

Operating expense

 

46

 

1,551

 

71

 

3,475

 

Real estate taxes

 

 

1,316

 

 

2,777

 

Interest

 

 

4,499

 

329

 

10,023

 

Marketing, general and administrative

 

2,123

 

6,628

 

7,298

 

10,636

 

Depreciation and amortization

 

 

1,895

 

 

3,909

 

Total expenses

 

2,169

 

15,889

 

7,698

 

30,820

 

Income (loss) from discontinued operations before gains on sale and noncontrolling interests

 

(538

)

3,098

 

(604

)

5,858

 

Gain on sale of discontinued operations

 

 

 

6,572

 

110,232

 

Noncontrolling interest in other partnerships

 

 

(1,533

)

 

(2,927

)

Net income (loss) from discontinued operations

 

$

(538

)

$

1,566

 

$

5,968

 

$

113,163

 

 

5.  Structured Finance Investments

 

During the six months ended June 30, 2009 and 2008, our structured finance and preferred equity investments (net of discounts) increased approximately $36.5 million and $77.0 million, respectively, due to originations, purchases and accretion of discount.  There were approximately $176.1 million and $42.4 million in repayment, participations, sales and loan loss reserves recorded during those periods, respectively, which offset the increases in structured finance investments.

 

14



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2009

 

As of June 30, 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 9.0% (in thousands):

 

Loan
Type

 

Gross
Investment

 

Senior
Financing

 

2009
Principal
Outstanding

 

2008
Principal
Outstanding

 

Initial
Maturity
Date

 

Other Loan (1)

 

$

3,500

 

$

15,000

 

$

3,500

 

$

3,500

 

September 2021

 

Mezzanine Loan (1) (2) (13)

 

 

 

 

95,626

 

December 2020

 

Mezzanine Loan (1)

 

60,000

 

235,000

 

58,441

 

58,349

 

February 2016

 

Mezzanine Loan (1)

 

25,000

 

200,000

 

25,000

 

25,000

 

May 2016

 

Mezzanine Loan (1)

 

35,000

 

165,000

 

38,769

 

38,332

 

October 2016

 

Mezzanine Loan (1) (3) (9) (10) (11)

 

75,000

 

4,236,945

 

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

 

 

9,563

 

10,126

 

February 2010

 

Mezzanine Loan (1) (2) (4) (9) (11)

 

25,000

 

315,218

 

27,151

 

27,742

 

January 2013

 

Mezzanine Loan (1)

 

16,000

 

90,000

 

15,683

 

15,670

 

August 2017

 

Mezzanine Loan (3)

 

41,398

 

221,549

 

40,800

 

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

 

80,099

 

75,856

 

March 2017

 

Mezzanine Loan (3) (9) (10)

 

23,145

 

365,000

 

25,950

 

24,961

 

August 2009

 

Mezzanine Loan (3) (9) (14)

 

44,733

 

931,860

 

46,372

 

46,372

 

August 2012

 

Mezzanine Loan (3) (9) (10) (11)

 

22,644

 

7,099,849

 

23,214

 

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) (11)

 

9,948

 

48,198

 

5,866

 

5,866

 

December 2010

 

Junior Participation (8)

 

50,000

 

2,217,170

 

48,060

 

48,709

 

April 2010

 

Mezzanine Loan (3)

 

90,000

 

325,000

 

100,957

 

92,325

 

July 2010

 

Whole Loan (1) (3)

 

9,375

 

 

9,244

 

9,324

 

February 2015

 

Junior Participation

 

11,700

 

225,000

 

11,840

 

 

January 2012

 

Loan loss reserve (9)

 

 

 

(136,882

)

(74,666

)

 

 

 

$

662,947

 

$

17,944,039

 

$

542,382

 

$

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 reached an agreement with the borrower and expect to recover the full carrying 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 management’s 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 June 30, 2009.

(11)    This loan is on non-accrual status.

(12)    Interest is added to the principal balance for this accrual only loan.

(13)    This loan was sold in June 2009, resulting in a realized loss of approximately $38.4 million. This realized loss is included in loan loss reserves.

(14)    As part of a restructuring, this mezzanine loan was converted to preferred equity in July 2009. This investment had been classified as held for sale at December 31, 2008.

 

15



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2009

 

Preferred Equity Investments

 

As of June 30, 2009 and December 31, 2008, we held the following preferred equity investments, with an aggregate weighted average current yield of approximately 2.10% (in thousands):

 

Type

 

Gross
Investment

 

Senior
Financing

 

2009
Amount
Outstanding

 

2008
Amount
Outstanding

 

Initial
Mandatory Redemption

 

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)

 

 

 

(31,250

)

(24,250

)

 

 

 

$

100,120

 

$

2,650,782

 

$

65,928

 

$

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 June 30, 2009.

(3)       This represents specifically allocated loan loss reserves. Our reserves reflect management’s 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)       This investment is on non-accrual status.

 

The following table is a rollforward of our total loan loss reserves at June 30, 2009 and December 31, 2008 (in thousands):

 

 

 

2009

 

2008

 

Balance at beginning of year

 

$

98,916

 

$

 

 

 

 

 

 

 

Expensed

 

107,577

 

101,166

 

Charge-offs

 

(38,363

)

(2,250

)

 

 

 

 

 

 

Balance at end of period

 

$

168,130

 

$

98,916

 

 

At June 30, 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, 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 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.

 

16



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2009

 

The table below provides general information on each joint venture as of June 30, 2009 (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

 

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

 

21 West 34th Street (4)

 

Sutton

 

50.00

%

50.00

%

30

 

07/05

 

$

22,400

 

800 Third Avenue (5)

 

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 (6)

 

Onyx/Sutton

 

45.00

%

63.00

%

30

 

11/05

 

$

4,400

 

1745 Broadway (7)

 

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 (8)

 

Gramercy

 

55.00

%

55.00

%

354

 

04/07

 

$

225,000

 

885 Third Avenue (9)

 

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 (10)

 

SITQ

 

50.60

%

50.60

%

2,600

 

12/07

 

$

1,575,000

 

27-29 West 34th Street (11)

 

Sutton

 

50.00

%

50.00

%

41

 

01/06

 

$

30,000

 

1551-1555 Broadway (12)

 

Sutton

 

10.00

%

10.00

%

26

 

07/05

 

$

80,100

 

717 Fifth Avenue (13)

 

Sutton/Nakash

 

32.75

%

32.75

%

120

 

09/06

 

$

251,900

 

 


(1)       Acquisition price represents the actual or implied purchase price for the entire 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 15.0% of the property’s annualized rent at June 30, 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 79.8% of this joint venture’s annualized rent at June 30, 2009.

(4)       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.

(5)       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 had the right to re-acquire approximately 4% of the property’s equity. These interests were re-acquired in December 2008 and reduced our interest to 42.95%

(6)       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.

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

(8)       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.

(9)       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.

(10)    The property is subject to a 13-year triple-net lease arrangement with a single tenant.

(11)    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.

(12)    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).

(13)    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).

 

17



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 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 June 30, 2009 and their corresponding balance at December 31, 2008, respectively, are as follows (in thousands):

 

Property

 

Maturity
date

 

Interest
rate
(1)

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

1221 Avenue of the Americas (2)

 

12/2010

 

2.80

%

$

170,000

 

$

170,000

 

1515 Broadway (3)

 

11/2009

 

1.27

%

$

625,000

 

$

625,000

 

100 Park Avenue

 

11/2015

 

6.52

%

$

175,000

 

$

175,000

 

379 West Broadway

 

01/2010

 

2.06

%

$

20,991

 

$

20,991

 

21 West 34th Street

 

12/2016

 

5.76

%

$

100,000

 

$

100,000

 

800 Third Avenue

 

07/2017

 

6.00

%

$

20,910

 

$

20,910

 

521 Fifth Avenue

 

04/2011

 

1.44

%

$

140,000

 

$

140,000

 

One Court Square

 

09/2015

 

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

 

1.72

%

$

84,527

 

$

84,527

 

388 and 390 Greenwich Street (4)

 

12/2017

 

5.14

%

$

1,138,379

 

$

1,138,379

 

16 Court Street

 

10/2010

 

2.01

%

$

86,615

 

$

83,658

 

27-29 West 34th Street (5)

 

05/2011

 

2.41

%

$

42,354

 

$

38,596

 

1551-1555 Broadway (6)

 

10/2009

 

2.42

%

$

120,271

 

$

106,222

 

717 Fifth Avenue (7)

 

09/2011

 

5.25

%

$

245,000

 

$

245,000

 

 


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

(5)       This construction loan facility has a committed amount of $55.0 million.

(6)       This construction loan has a committed amount of $138.6 million.

(7)       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, 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 $3.3 million, $21.4 million, $4.2 million and $8.9 million from these services for the three and six months ended June 30, 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.

 

In April 2009, we sold our remaining 50 percent partnership interest in 55 Corporate Drive, NJ (pad IV) to Mack-Cali Realty Corporation (NYSE: CLI).  We received total proceeds of $4.5 million and recognized a gain on sale of approximately $4.0 million.  In connection with this transaction, we also sold our interest in the Mack-Green joint venture to Mack-Cali for $500,000.

 

In June 2009, we sold an equity interest in 1166 Avenue of the Americas for $5.0 million and recognized a loss of approximately $5.2 million on the sale.

 

Gramercy Capital Corp.

 

In April 2004, we formed Gramercy.  Gramercy is an integrated commercial real estate specialty finance and property investment company.  Gramercy’s 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.  Gramercy’s property investment business, which operates under the name Gramercy Realty, focuses on the acquisition and management of commercial properties net leased primarily to financial

 

18



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2009

 

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 Gramercy’s internalization of GKK Manager LLC, or the Manager, (our former wholly-owned subsidiary was the external manager to Gramercy) 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 Gramercy’s common stock in order to maintain our percentage ownership interest in Gramercy.  At June 30, 2009, we held 6,219,370 shares, or approximately 12.48% of Gramercy’s common stock.  Our total investment had a net book value of zero at June 30, 2009.  The market value of our common stock investment in Gramercy was approximately $10.0 million at June 30, 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 June 30, 2009, we accounted for our investment under the equity method of accounting.

 

In connection with Gramercy’s 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 Gramercy’s 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 Gramercy’s 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, Gramercy’s 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 and six months ended June 30, 2009 and 2008 we received an aggregate of approximately $1.6 million, $6.5 million, $5.8 million and $10.0 million, respectively, in fees under the management agreement and none, none, $1.3 million and $2.6 million, respectively, under the collateral management agreement.  Fees payable to the Manager under the collateral management agreement were remitted to Gramercy for the three and six months ended June 30, 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

 

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SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2009

 

Gramercy of the Manager.

 

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 Gramercy’s 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 Gramercy’s 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 Gramercy’s common stock, we, along with the other holders of Class B limited partner interests in Gramercy’s operating partnership, were 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 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 Gramercy’s amended and restated partnership agreement as if such agreement had been terminated on that date.  We earned approximately none, none, $2.6 million and $5.1 million under this agreement for the three and six months ended June 30, 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 partner 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 Gramercy’s 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, none, $0.4 million and $1.2 million for the three and six months ended June 30, 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 for no consideration.

 

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 Gramercy’s 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

 

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SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2009

 

fee of $2.7 million per year, increasing 3% annually over the prior year. For the three and six months ended June 30, 2009 and 2008, the Manager received an aggregate of approximately $0.2 million, $1.0 million, $2.0 million and $3.3 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 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 Gramercy’s option, in cash or, if permissible under applicable law or the requirements of the exchange on which the shares of Gramercy’s 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 Gramercy’s preferred stock with a book value of approximately $0.3 million at June 30, 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 Gramercy’s 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. O’Connor was appointed as President of Gramercy.  Mr. Holliday remains a board member of Gramercy.

 

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SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2009

 

The condensed combined balance sheets for the unconsolidated joint ventures, including estimates for Gramercy, at June 30, 2009 and December 31, 2008, are as follows (in thousands):

 

 

 

2009

 

2008

 

Assets

 

 

 

 

 

Commercial real estate property, net

 

$

9,459,427

 

$

9,739,017

 

Structured finance investments

 

2,724,971

 

3,226,922

 

Other assets

 

1,793,745

 

1,556,593

 

Total assets

 

$

13,978,143

 

$

14,522,532

 

 

 

 

 

 

 

Liabilities and members’ equity

 

 

 

 

 

Mortgages payable

 

$

6,618,673

 

$

6,768,594

 

Other loans

 

2,823,151

 

3,026,262

 

Other liabilities

 

1,481,789

 

1,458,256

 

Members’ equity

 

3,054,530

 

3,269,420

 

Total liabilities and members’ equity

 

$

13,978,143

 

$

14,522,532

 

Company’s net investment in unconsolidated joint ventures

 

$

978,340

 

$

975,483

 

 

The condensed combined statements of operations for the unconsolidated joint ventures, including estimates for Gramercy, from acquisition date through June 30, 2009 and 2008, are as follows (in thousands):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2009

 

2008

 

2009