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, 2010

 

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 x    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 ¨

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 78,215,826 as of July 31, 2010.

 

 

 



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, 2010 (unaudited) and December 31, 2009

3

 

 

Condensed Consolidated Statements of Income for the three and six months ended June 30, 2010 and 2009 (unaudited)

4

 

 

Condensed Consolidated Statement of Equity for the six months ended June 30, 2010 (unaudited)

5

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009 (unaudited)

6

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

7

 

 

 

 

 

ITEM 2.

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

34

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

51

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

51

 

 

 

PART II.

OTHER INFORMATION

52

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

52

 

 

 

ITEM 1A.

RISK FACTORS

52

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

53

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

53

 

 

 

ITEM 4.

(REMOVED AND RESERVED)

53

 

 

 

ITEM 5.

OTHER INFORMATION

53

 

 

 

ITEM 6.

EXHIBITS

53

 

 

 

SIGNATURES

54

 

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,
2010

 

December 31,
2009

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Commercial real estate properties, at cost:

 

 

 

 

 

Land and land interests

 

$

1,392,730

 

$

1,379,052

 

Building and improvements

 

5,647,490

 

5,585,584

 

Building leasehold and improvements

 

1,280,882

 

1,280,256

 

Property under capital lease

 

12,208

 

12,208

 

 

 

8,333,310

 

8,257,100

 

Less: accumulated depreciation

 

(832,436

)

(738,422

)

 

 

7,500,874

 

7,518,678

 

Assets held for sale

 

 

992

 

Cash and cash equivalents

 

339,577

 

343,715

 

Restricted cash

 

157,515

 

94,495

 

Investment in marketable securities

 

72,993

 

58,785

 

Tenant and other receivables, net of allowance of $13,893 and $14,271 in 2010 and 2009, respectively

 

22,734

 

22,483

 

Related party receivables

 

6,026

 

8,570

 

Deferred rents receivable, net of allowance of $24,603 and $24,347 in 2010 and 2009, respectively

 

184,739

 

166,981

 

Structured finance investments, net of discount of $86,896 and $46,802 and allowance of $103,837 and $93,844 in 2010 and 2009, respectively

 

867,393

 

784,620

 

Investments in unconsolidated joint ventures

 

775,765

 

1,058,369

 

Deferred costs, net

 

147,605

 

139,257

 

Other assets

 

332,813

 

290,632

 

Total assets

 

$

10,408,034

 

$

10,487,577

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Mortgage notes and other loans payable

 

$

2,800,866

 

$

2,595,552

 

Revolving credit facility

 

800,000

 

1,374,076

 

Senior unsecured notes

 

858,081

 

823,060

 

Accrued interest payable and other liabilities

 

24,645

 

34,734

 

Accounts payable and accrued expenses

 

144,168

 

125,982

 

Deferred revenue/gains

 

325,228

 

349,669

 

Capitalized lease obligation

 

16,979

 

16,883

 

Deferred land leases payable

 

18,140

 

18,013

 

Dividend and distributions payable

 

14,228

 

12,006

 

Security deposits

 

39,617

 

39,855

 

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

 

100,000

 

100,000

 

Total liabilities

 

5,141,952

 

5,489,830

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

Noncontrolling interests in operating partnership

 

66,640

 

84,618

 

 

 

 

 

 

 

EquityU

 

 

 

 

 

SL Green stockholders’ equity:

 

 

 

 

 

Series C preferred stock, $0.01 par value, $25.00 liquidation preference, 11,700 and 6,300 issued and outstanding at June 30, 2010 and December 31, 2009, respectively

 

274,000

 

151,981

 

Series D preferred stock, $0.01 par value, $25.00 liquidation preference, 4,000 issued and outstanding at June 30, 2010 and December 31, 2009, respectively

 

96,321

 

96,321

 

Common stock, $0.01 par value 160,000 shares authorized and 81,570 and 80,875 issued and outstanding at June 30, 2010 and December 31, 2009, respectively (including 3,360 shares at both June 30, 2010 and December 31, 2009, held in Treasury, respectively)

 

816

 

809

 

Additional paid-in-capital

 

3,563,980

 

3,525,901

 

Treasury stock at cost

 

(302,705

)

(302,705

)

Accumulated other comprehensive loss

 

(30,305

)

(33,538

)

Retained earnings

 

1,081,895

 

949,669

 

Total SL Green stockholders’ equity

 

4,684,002

 

4,388,438

 

Noncontrolling interests in other partnerships

 

515,440

 

524,691

 

Total equity

 

5,199,442

 

4,913,129

 

Total liabilities and equity

 

$

10,408,034

 

$

10,487,577

 

 

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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Revenues

 

 

 

 

 

 

 

 

 

Rental revenue, net

 

$

199,719

 

$

191,917

 

$

398,306

 

$

387,547

 

Escalation and reimbursement

 

29,961

 

31,390

 

61,429

 

65,019

 

Preferred equity and investment income

 

20,788

 

15,533

 

41,167

 

32,431

 

Other income

 

9,253

 

13,165

 

17,453

 

29,444

 

Total revenues

 

259,721

 

252,005

 

518,355

 

514,441

 

Expenses

 

 

 

 

 

 

 

 

 

Operating expenses (including approximately $3,077 and $6,180 (2010) and $4,293 and $7,725 (2009) paid to affiliates)

 

54,619

 

52,110

 

113,385

 

107,204

 

Real estate taxes

 

38,608

 

36,519

 

76,995

 

73,269

 

Ground rent

 

7,679

 

8,046

 

15,501

 

16,092

 

Interest expense, net of interest income

 

57,649

 

56,743

 

115,128

 

116,740

 

Amortization of deferred financing costs

 

1,792

 

1,476

 

4,308

 

2,912

 

Depreciation and amortization

 

56,905

 

54,888

 

113,957

 

109,352

 

Loan loss and other investment reserves

 

4,985

 

45,577

 

10,985

 

107,577

 

Transaction related costs

 

4,104

 

 

5,162

 

 

Marketing, general and administrative

 

18,379

 

17,946

 

36,778

 

35,868

 

Total expenses

 

244,720

 

273,305

 

492,199

 

569,014

 

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

 

15,001

 

(21,300

)

26,156

 

(54,573

)

Equity in net income from unconsolidated joint ventures

 

10,005

 

16,828

 

25,381

 

29,901

 

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

 

126,769

 

(2,693

)

126,769

 

6,848

 

Gain (loss) on equity investment in marketable securities

 

 

126

 

(285

)

(681

)

Gain (loss) on early extinguishment of debt

 

(1,276

)

29,321

 

(1,389

)

77,033

 

Income from continuing operations

 

150,499

 

22,282

 

176,632

 

58,528

 

Net loss from discontinued operations

 

 

(705

)

 

(990

)

Gain on sale of discontinued operations

 

 

 

 

6,572

 

Net income

 

150,499

 

21,577

 

176,632

 

64,110

 

Net income attributable to noncontrolling interests in the operating partnership

 

(2,467

)

(382

)

(2,758

)

(1,702

)

Net income attributable to noncontrolling interests in other partnerships

 

(3,449

)

(3,683

)

(7,097

)

(7,160

)

Net income attributable to SL Green

 

144,583

 

17,512

 

166,777

 

55,248

 

Preferred stock dividends

 

(7,545

)

(4,969

)

(14,660

)

(9,938

)

Net income attributable to SL Green common stockholders

 

$

137,038

 

$

12,543

 

$

152,117

 

$

45,310

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to SL Green common stockholders:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

12,385

 

$

15,827

 

$

27,605

 

$

33,330

 

Discontinued operations

 

 

(681

)

 

(954

)

Gain on sale of discontinued operations

 

 

 

 

6,334

 

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

 

124,653

 

(2,603

)

124,512

 

6,600

 

Net income

 

$

137,038

 

$

12,543

 

$

152,117

 

$

45,310

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

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

 

$

0.16

 

$

0.24

 

$

0.35

 

$

0.54

 

Net loss from discontinued operations, net of noncontrolling interest

 

 

(0.01

)

 

(0.02

)

Gain on sale of discontinued operations, net of noncontrolling interest

 

 

 

 

0.10

 

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

 

1.60

 

(0.04

)

1.60

 

0.11

 

Net income attributable to SL Green common stockholders

 

$

1.76

 

$

0.19

 

$

1.95

 

$

0.73

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

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

 

$

0.16

 

$

0.23

 

$

0.35

 

$

0.54

 

Net loss from discontinued operations

 

 

(0.01

)

 

(0.02

)

Gain on sale of discontinued operations

 

 

 

 

0.10

 

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

 

1.59

 

(0.04

)

1.59

 

0.11

 

Net income attributable to SL Green common stockholders

 

$

1.75

 

$

0.18

 

$

1.94

 

$

0.73

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

0.10

 

$

0.10

 

$

0.20

 

$

0.475

 

Basic weighted average common shares outstanding

 

78,046

 

67,363

 

77,936

 

62,298

 

Diluted weighted average common shares and common share equivalents outstanding

 

79,791

 

69,742

 

79,771

 

64,679

 

 

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, 2009

 

$

151,981

 

$

96,321

 

77,515

 

$

809

 

$

3,525,901

 

$

(302,705

)

$

(33,538

)

$

949,669

 

$

524,691

 

$

4,913,129

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

166,777

 

7,097

 

173,874

 

$

173,874

 

Net unrealized loss on derivative instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,305

)

 

 

 

 

(3,305

)

(3,305

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,346

)

 

 

 

 

(2,346

)

(2,346

)

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

8,884

 

 

 

 

 

8,884

 

8,884

 

Preferred dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,660

)

 

 

(14,660

)

 

 

Redemption of units and DRIP proceeds

 

 

 

 

 

464

 

5

 

23,336

 

 

 

 

 

 

 

 

 

23,341

 

 

 

Reallocation of noncontrolling interest in the operating partnership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,940

)

 

 

(3,940

)

 

 

Deferred compensation plan & stock award, net

 

 

 

 

 

139

 

1

 

401

 

 

 

 

 

 

 

 

 

402

 

 

 

Amortization of deferred compensation plan

 

 

 

 

 

 

 

 

 

11,600

 

 

 

 

 

 

 

 

 

11,600

 

 

 

Deconsolidation of real estate investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,532

)

(9,532

)

 

 

Net proceeds from preferred stock offering

 

122,019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

122,019

 

 

 

Proceeds from stock options exercised

 

 

 

 

 

91

 

1

 

2,742

 

 

 

 

 

 

 

 

 

2,743

 

 

 

Cash distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,816

)

(6,816

)

 

 

Cash distribution declared ($0.20 per common share of which none represented a return of capital for federal income tax purposes)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,951

)

 

 

(15,951

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2010

 

$

274,000

 

$

96,321

 

78,209

 

$

816

 

$

3,563,980

 

$

(302,705

)

$

(30,305

)

$

1,081,895

 

$

515,440

 

$

5,199,442

 

$

177,107

 

 

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,

 

 

 

2010

 

2009

 

Operating Activities

 

 

 

 

 

Net income

 

$

176,632

 

$

64,110

 

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

 

 

 

 

 

Depreciation and amortization

 

118,265

 

112,896

 

(Gain) loss on sale of discontinued operations

 

 

(6,572

)

Equity in net income from unconsolidated joint ventures

 

(25,381

)

(29,901

)

Equity in net gain on sale of unconsolidated joint ventures

 

(126,769

)

(6,848

)

Distributions of cumulative earnings from unconsolidated joint ventures

 

15,965

 

18,384

 

Loan loss and other investment reserves

 

10,985

 

107,577

 

Loss on equity investment in marketable securities

 

285

 

681

 

(Gain) loss on early extinguishment of debt

 

1,389

 

(77,033

)

Deferred rents receivable

 

(19,177

)

(13,858

)

Other non-cash adjustments

 

(11,851

)

3,127

 

Changes in operating assets and liabilities:

 

 

 

 

 

Restricted cash — operations

 

(5,468

)

24,814

 

Tenant and other receivables

 

3,893

 

1,494

 

Related party receivables

 

2,671

 

(1,843

)

Deferred lease costs

 

(13,775

)

(9,768

)

Other assets

 

12,109

 

(13,704

)

Accounts payable, accrued expenses and other liabilities

 

16,705

 

(7,982

)

Deferred revenue and land leases payable

 

(3,824

)

(13,200

)

Net cash provided by operating activities

 

152,654

 

152,374

 

Investing Activities

 

 

 

 

 

Acquisitions of real estate property

 

 

(8,340

)

Additions to land, buildings and improvements

 

(34,594

)

(38,348

)

Escrowed cash — capital improvements/acquisition deposits

 

(54,076

)

(6,014

)

Investments in unconsolidated joint ventures

 

(81,903

)

(12,677

)

Distributions in excess of cumulative earnings from unconsolidated joint ventures

 

10,339

 

13,334

 

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

 

504,172

 

26,007

 

Other investments

 

(7,611

)

(4,656

)

Structured finance and other investments net of repayments/participations

 

(89,428

)

55,864

 

Net cash provided by investing activities

 

246,899

 

25,170

 

Financing Activities

 

 

 

 

 

Proceeds from mortgage notes and other loans payable

 

104,100

 

1,301

 

Repayments of mortgage notes payable

 

(20,925

)

(22,574

)

Proceeds from revolving credit facility and senior unsecured notes

 

250,000

 

30,433

 

Repayments of revolving credit facility and senior unsecured notes

 

(792,543

)

(556,619

)

Proceeds from stock options exercised and DRIP issuance

 

13,989

 

 

Net proceeds from sale of preferred/common stock

 

122,019

 

387,324

 

Distributions to noncontrolling interests in other partnerships

 

(6,814

)

(9,827

)

Contributions from noncontrolling interests in other partnerships

 

 

 

Redemption of noncontrolling interests in operating partnership

 

(11,096

)

 

Distributions to noncontrolling interests in operating partnership

 

(262

)

(1,752

)

Dividends paid on common and preferred stock

 

(28,223

)

(52,822

)

Deferred loan costs and capitalized lease obligation

 

(33,936

)

(3,129

)

Net cash used in financing activities

 

(403,691

)

(227,665

)

Net decrease in cash and cash equivalents

 

(4,138

)

(50,121

)

Cash and cash equivalents at beginning of period

 

343,715

 

726,889

 

Cash and cash equivalents at end of period

 

$

339,577

 

$

676,768

 

 

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, 2010

 

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.  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.  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, 2010, noncontrolling investors held, in the aggregate, a 1.5% limited partnership interest in the operating partnership.  We refer to this as the noncontrolling interests in the operating partnership.  See Note 13.

 

Reckson Associates Realty Corp., or Reckson, and Reckson Operating Partnership, L.P., or ROP, are subsidiaries of our operating partnership.

 

As of June 30, 2010, 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

 

22

 

14,829,700

 

91.0

%

 

 

Unconsolidated properties

 

8

 

7,182,515

 

93.8

%

 

 

 

 

 

 

 

 

 

 

Suburban

 

Consolidated properties

 

25

 

3,863,000

 

83.3

%

 

 

Unconsolidated properties

 

6

 

2,941,700

 

93.9

%

 

 

 

 

61

 

28,816,915

 

91.0

%

 


(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 374,812 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 has 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.

 

7



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2010

 

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 2010 operating results for the period presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.  These financial statements should be read in conjunction with the financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2009.

 

The balance sheet at December 31, 2009 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. Entities which we do not control through our voting interest and entities which are variable interest entities, but where we are not the primary beneficiary, are accounted for under the equity method or as structured finance investments.  See Note 5 and Note 6.  All significant intercompany balances and transactions have been eliminated.

 

In June 2009, the FASB amended the guidance 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. Adoption of this guidance on January 1, 2010 did not have a material impact on our consolidated financial statements.

 

A noncontrolling interest in a consolidated subsidiary is defined as the portion of the equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent.  Noncontrolling interests are required to be presented as a separate component of equity in the consolidated balance sheet and modifies the presentation of net income by requiring earnings and other comprehensive income to be attributed to controlling and noncontrolling interests.

 

We assess the accounting treatment for each joint venture and structured finance investment.  This assessment includes a review of each joint venture or limited liability company agreement to determine which party has what rights and whether those rights are protective or participating.  For all VIE’s, we review such agreements in order to determine which party has the power to direct the activities that most significantly impact the entities economic performance.  In situations where we or our partner approves, among other things, the annual budget, received a detailed monthly reporting package from us, meets 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 that result in shared power of the activities that most significantly impact the performance of our joint venture.  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.  We have no VIE’s for which we are the primary beneficiary.

 

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 and is considered to be other than temporary, the loss will be measured as the excess of the carrying amount of the property over the calculated fair value of the property.  We do not believe that the value of any of our consolidated or unconsolidated rental properties was impaired at June 30, 2010 and December 31, 2009, respectively.

 

8



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2010

 

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 generally range from one to 14 years.  The value associated with in-place leases are amortized over the expected term of the associated lease, which generally 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.

 

We recognized an increase of approximately $6.2 million, $12.6 million, $5.1 million and $10.4 million in rental revenue for the three and six months ended June 30, 2010 and 2009, respectively, for the amortization of aggregate below-market leases 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 assumed of approximately $0.6 million, $0.9 million, $0.3 million and $2.1 million for the three and six months ended June 30, 2010 and 2009, 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,
2010

 

December 31, 2009

 

Identified intangible assets (included in other assets):

 

 

 

 

 

Gross amount

 

$

 254,137

 

$

 236,594

 

Accumulated amortization

 

(114,488

)

 (98,090

)

Net

 

$

 139,649

 

$

 138,504

 

 

 

 

 

 

 

Identified intangible liabilities (included in deferred revenue):

 

 

 

 

 

Gross amount

 

$

487,750

 

$

 480,770

 

Accumulated amortization

 

(191,520

)

(164,073

)

Net

 

$

296,230

 

$

 316,697

 

 

Investment in Marketable Securities

 

We invest in marketable securities. At the time of purchase, we are required to designate a security as held-to-maturity, available-for-sale, or trading depending on ability and intent. We do not have any securities designated as held-to-maturity or trading at this time. Securities available-for-sale are reported at fair value pursuant to ASC 820-10, with the net unrealized gains or losses reported as a component of accumulated other comprehensive loss.  Unrealized losses that are determined to be other-than-temporary are recognized in earnings. Included in accumulated other comprehensive loss at June 30, 2010 is approximately $4.8 million in net unrealized gains related to marketable securities.

 

At June 30, 2010, we held the following marketable securities (in thousands):

 

Level 1 — Equity marketable securities

$

8,310

 

Level 2 — Bonds

64,683

 

Total marketable securities available-for-sale

$

72,993

 

 

9



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2010

 

Fair Value Measurements

 

The methodologies used for valuing financial instruments have been categorized into three broad levels as follows:

 

Level 1 — Quoted prices in active markets for identical instruments.

 

Level 2 — Valuations based principally on other observable market parameters, including

·                                             Quoted prices in active markets for similar instruments,

·                                             Quoted prices in less active or inactive markets for identical or similar instruments,

·                                             Other observable inputs (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates), and

·                                             Market corroborated inputs (derived principally from or corroborated by observable market data).

 

Level 3 — Valuations based significantly on unobservable inputs.

·                                             Valuations based on third party indications (broker quotes or counterparty quotes) which were, in turn, based significantly on unobservable inputs or were otherwise not supportable as Level 2 valuations.

·                                                 Valuations based on internal models with significant unobservable inputs.

 

These levels form a hierarchy. We follow this hierarchy for our financial instruments measured at fair value on a recurring basis. The classifications are based on the lowest level of input that is significant to the fair value measurement.

 

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, based on Level 3 data, 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.  Any deficiency between the carrying amount of an asset and the calculated value of the collateral is charged to expense.  We recorded approximately $4.0 million, $10.0 million, $5.0 million and $5.0 million in loan loss reserves during the three and six months ended June 30, 2010 and 2009, respectively, on investments being held to maturity and $1.0 million, $1.0 million , $40.6 million and $102.6 million on investments held for sale during the three and six months ended June 30, 2010 and 2009, 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 ASC 820-10. As circumstances change, management may conclude not to sell an investment designated as held for sale.  In such situations, the loan will be reclassified at its net carrying value to structured finance investments held to maturity. For these reclassified loans, the difference between the current carrying value and the expected cash to be collected at maturity will be accreted into income over the remaining term of the loan.

 

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 $1.3 million and $2.1 million in Federal, state and local tax expense during the six months ended June 30, 2010 and 2009, respectively.  We made estimated tax payments of $0.3 million and $0.4 million during the six months ended June 30, 2010 and 2009, respectively.

 

10



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2010

 

Stock-Based Employee Compensation Plans

 

We have a stock-based employee compensation plan, described more fully in Note 12.

 

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 over the benefit period based on the fair value of the stock on the grant date.

 

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model based on historical information with the following weighted average assumptions for grants during the six months ended June 30, 2010 and 2009.

 

 

 

2010

 

2009

 

Dividend yield

 

2.00

%

5.79

%

Expected life of option

 

5.9 years

 

5 years

 

Risk-free interest rate

 

2.84

%

1.55

%

Expected stock price volatility

 

50.47

%

55.07

%

 

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 8.3% of our annualized rent, no other tenant in our portfolio accounts for more than 6.2% of our annualized rent, including our share of joint venture annualized rent at June 30, 2010.  Approximately 6%, 6%, 7% and 6% of our annualized rent, including our share of joint venture annualized rent, was attributable to 1515 Broadway, 420 Lexington Avenue, 1185 Avenue of the Americas and One Madison Avenue, respectively, for the quarter ended June 30, 2010.  Two investments accounted for more than 10.0% of the revenue earned on structured finance investments during the three months ended June 30, 2010.

 

Reclassification

 

Certain prior year balances have been reclassified to conform with the current year presentation primarily in order to eliminate discontinued operations from income from continuing operations.

 

11



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2010

 

Accounting Standards Updates

 

In June 2009, the FASB issued guidance on accounting for transfers of financial assets. This guidance amends various components of the existing guidance 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, this guidance removes the exemption for qualifying special purpose entities from the consolidation guidance.  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. Adoption of this guidance on January 1, 2010 did not have a material impact on our consolidated financial statements.

 

In July 2010, the FASB issued updated guidance on disclosures about the credit quality of financing receivables and the allowance for credit losses which will require a greater level of information disclosed about the credit quality of loans and allowance for loan losses, as well as additional information related to credit quality indicators, past due information, and information related to loans modified in trouble debt restructuring.  This guidance is effective for the fourth quarter of 2010 and it only amends existing disclosure requirements.

 

In March 2010, the FASB issued updated guidance on embedded credit derivatives for contracts containing an embedded credit derivative feature related to the transfer of credit risk that is not solely in the form of subordination.  This guidance is effective for the third quarter of 2010, though early adoption is permitted. We do not expect the adoption of this guidance to have a material effect on our consolidated financial statements.

 

In January 2010, the FASB issued updated guidance on fair value measurements and disclosures, which requires disclosure of details of significant asset or liability transfers in and out of Level 1 and Level 2 measurements within the fair value hierarchy and inclusion of gross purchases, sales, issuances, and settlements in the rollforward of assets and liabilities valued using Level 3 inputs within the fair value hierarchy.  The guidance also clarifies and expands existing disclosure requirements related to the disaggregation of fair value disclosures and inputs used in arriving at fair values for assets and liabilities using Level 2 and Level 3 inputs within the fair value hierarchy.  These disclosure requirements were effective for interim and annual reporting periods beginning after December 15, 2009. The gross presentation of the Level 3 rollforward is required for interim and annual reporting periods beginning after December 15, 2010.

 

3.  Property Acquisitions

 

In January 2010, we became the sole owner of 100 Church Street, a 1.05 million square-foot office tower located in downtown Manhattan, following the successful foreclosure of the senior mezzanine loan at the property.  Our initial investment totaled $40.9 million which was comprised of a 50% interest in the senior mezzanine loan and two other mezzanine loans at 100 Church Street, which we acquired from Gramercy in the summer of 2007.  At closing of the foreclosure, we funded an additional $15.0 million of capital into the project as part of our agreement with Wachovia Bank, N.A. to extend and restructure the existing financing.  The restructured $139.7 million mortgage carries an interest rate of 350 basis points over the 30-day LIBOR.  The mortgage matures in January 2013 and has a one-year extension option.  Gramercy declined to fund its share of this capital and instead entered into a transaction whereby it transferred its interests in the investment to us at closing, subject to certain future contingent payments to Gramercy.

 

12



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2010

 

The following summarizes our allocation of the purchase price of the assets acquired and liabilities assumed upon the completion of the foreclosure of 100 Church Street (in thousands):

 

Land

 

$

32,494

 

Building

 

86,806

 

Acquired above-market leases

 

118

 

Acquired in-place leases

 

17,380

 

Restricted cash

 

53,735

 

Assets acquired

 

190,533

 

 

 

 

 

Mortgage note payable

 

139,672

 

Acquired below-market leases

 

8,025

 

Other liabilities, net of other assets

 

1,674

 

Liabilities assumed

 

149,371

 

Net assets

 

$

41,162

 

 

4.  Property Dispositions and Assets Held for Sale

 

At June 30, 2009, discontinued operations included the results of operations of real estate assets sold prior to that date.  This included 55 Corporate Drive, NJ which was sold in January 2009, the membership interests in GKK Manager LLC which were sold in April 2009 (See Note 6) and 399 Knollwood Road, Westchester, which was sold in August 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 (in thousands).  No assets were considered as held for sale during the six months ended June 30, 2010.

 

 

 

Three Months
Ended

 

Six Months
Ended

 

 

 

June 30,

 

June 30,

 

 

 

2009

 

2009

 

Revenues

 

 

 

 

 

Rental revenue

 

$

818

 

$

2,240

 

Escalation and reimbursement revenues

 

147

 

269

 

Other income

 

1,632

 

6,517

 

Total revenues

 

2,597

 

9,026

 

Operating expense

 

378

 

789

 

Real estate taxes

 

232

 

430

 

Interest expense, net of interest income

 

270

 

867

 

Marketing, general and administrative

 

2,124

 

7,299

 

Depreciation and amortization

 

298

 

631

 

Total expenses

 

3,302

 

10,016

 

Loss from discontinued operations

 

(705

)

(990

)

Gain on sale of discontinued operations

 

 

6,572

 

Income (loss) from discontinued operations

 

$

(705

)

$

5,582

 

 

5.  Structured Finance Investments

 

During the six months ended June 30, 2010 and 2009, our structured finance and preferred equity investments (net of discounts), including investments classified as held-for-sale, increased approximately $181.2 million and $36.5 million, respectively, due to originations, purchases, accretion of discounts and paid-in-kind interest.  There were approximately $99.4 million and $176.1 million in repayments, participations, sales, foreclosures and loan loss reserves recorded during those periods, respectively, which offset the increases in structured finance investments.

 

13



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2010

 

As of June 30, 2010 and December 31, 2009, we held the following structured finance investments, excluding preferred equity investments, with an aggregate weighted average current yield of approximately 7.9% (in thousands):

 

Loan
Type

 

Gross
Investment

 

Senior
Financing

 

2010
Principal
Outstanding

 

2009
Principal
Outstanding

 

Initial
Maturity
Date

 

Other Loan(1)

 

$

3,500

 

$

15,000

 

$

3,500

 

$

3,500

 

September 2021

 

Mezzanine Loan(1)

 

60,000

 

205,000

 

58,646

 

58,760

 

February 2016

 

Mortgage/ Mezzanine Loan(1)

 

50,000

 

174,840

 

46,363

 

25,000

 

May 2016

 

Mezzanine Loan(1)

 

35,000

 

165,000

 

39,628

 

39,125

 

October 2016

 

Mezzanine Loan(1)(3)(9)(10)(11)

 

75,000

 

4,264,940

 

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)

 

9,815

 

 

9,275

 

9,636

 

December 2010

 

Mezzanine Loan(1)(2)(4)(9)(11)

 

25,000

 

312,676

 

27,422

 

26,605

 

January 2013

 

Mezzanine Loan(1)

 

16,000

 

90,000

 

15,697

 

15,697

 

August 2017

 

Mezzanine Loan(3)(13)

 

 

 

 

40,938

 

 

Other Loan(1)

 

1,000

 

 

1,000

 

1,000

 

December 2010

 

Junior Participation(1)(6)(9)(11)

 

14,189

 

 

9,938

 

9,938

 

April 2008

 

Mezzanine Loan(1)(11) (12)

 

67,000

 

1,139,000

 

84,636

 

84,636

 

March 2017

 

Mezzanine Loan(14)

 

23,145

 

 

 

35,908

 

July 2010

 

Mezzanine Loan(3)(9)(11)

 

22,644

 

7,099,849

 

 

 

 

Junior Participation(1)(9)

 

11,000

 

53,000

 

11,000

 

11,000

 

November 2011

 

Junior Participation(7)(9)

 

12,000

 

61,250

 

10,875

 

10,875

 

June 2012

 

Junior Participation(9)(11)

 

9,948

 

48,198

 

5,866

 

5,866

 

December 2010

 

Junior Participation(8)(9)

 

50,000

 

2,214,727

 

47,540

 

47,691

 

April 2011

 

Mortgage/ Mezzanine Loan(2)(16)

 

146,164

 

285,000

 

137,223

 

104,431

 

July 2012

 

Whole Loan(1)(3)

 

9,375

 

 

9,913

 

9,902

 

February 2015

 

Junior Participation

 

35,041

 

210,000

 

39,834

 

30,548

 

January 2012

 

Mortgage/mezzanine loan(15)

 

185,160

 

 

191,406

 

167,717

 

September 2010

 

Whole loan(1)

 

10,859

 

 

10,956

 

 

November 2013

 

Junior Participation

 

8,058

 

70,800

 

8,565

 

 

October 2010

 

Mezzanine Loan(1)

 

60,000

 

755,000

 

60,000

 

 

June 2016

 

Loan loss reserve(9)

 

 

 

(106,851

)

(101,866

)

 

 

 

$

944,898

 

$

17,164,280

 

$

797,874

 

$

712,349

 

 

 

 


(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 had been in default since December 2007. We reached an agreement with the borrower to, amongst other things, extend the maturity date to January 2013.

(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. The lender has begun foreclosure proceedings. Another participant holds a $12.2 million pari-pasu interest in this loan.

(7)

 

This loan was extended for two years to June 2012.

(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 based on Level 3 data. 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. This includes a $1.0 million and $69.1 million mark-to-market adjustment against our held for sale investment during the three months ended June 30, 2010 and the year ended December 31, 2009, respectively.

(10)

 

This investment was classified as held for sale at June 30, 2010 and December 31, 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 in default as it was not repaid upon maturity. We were designated as special servicer for this loan and took over management and leasing of the property under a forbearance agreement in August 2009. We foreclosed on this property in January 2010.

(14)

 

We acquired Gramercy’s interest in this investment in July 2009 for approximately $16.0 million.

(15)

 

The outstanding principal balance on the first mortgage was $177.4 million at June 30, 2010. We have a commitment to fund up to an additional $70.1 million as of June 30, 2010.

(16)

 

Gramercy holds a pari passu interest in the mezzanine loan.

 

14



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2010

 

Preferred Equity Investments

 

As of June 30, 2010 and December 31, 2009, we held the following preferred equity investments, with an aggregate weighted average current yield of approximately 9.1% (in thousands):

 

Type

 

Gross
Investment

 

Senior
Financing

 

2010
Amount
Outstanding

 

2009
Amount
Outstanding

 

Initial
Mandatory
Redemption

 

Preferred equity(1)(3)(5)

 

$

15,000

 

$

2,350,000

 

$

15,000

 

$

15,000

 

February 2015

 

Preferred equity(1)(2)(6)(7)

 

51,000

 

208,181

 

44,047

 

41,791

 

February 2014

 

Preferred equity(3)(5)

 

34,120

 

88,000

 

31,178

 

31,178

 

March 2010

 

Preferred equity(3)(4)

 

44,733

 

984,708

 

46,372

 

46,372

 

August 2012

 

Loan loss reserve(3)

 

 

 

(67,078

)

(61,078

)

 

 

 

$

144,853

 

$

3,630,889

 

$

69,519

 

$

73,263

 

 

 

 


(1)

 

This is a fixed rate investment.

(2)

 

Gramercy holds a mezzanine loan on the underlying asset.

(3)

 

This represents specifically allocated loan loss reserves. Our reserves reflect management’s judgment of the probability and severity of losses based on Level 3 data. 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 loan was converted from a mezzanine loan to preferred equity in July 2009.

(5)

 

This investment is on non-accrual status.

(6)

 

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

(7)

 

This investment was classified as held for sale at June 30, 2009, but as held-to-maturity at December 31, 2009. The reserve previously taken against this loan is being accreted up to the face amount through the maturity date.

 

The following table is a rollforward of our total loan loss reserves at June 30, 2010 and December 31, 2009 (in thousands):

 

 

 

2010

 

2009

 

Balance at beginning of year

 

$

93,844

 

$

98,916

 

Expensed

 

10,985

 

145,855

 

Charge-offs

 

(992

)

(150,927

)

Balance at end of period

 

$

103,837

 

$

93,844

 

 

At June 30, 2010 and December 31, 2009, 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 City Investment Fund, or CIF, SITQ Immobilier, a subsidiary of Caisse de depot et placement du Quebec, or SITQ, Canada Pension Plan Investment Board, or CPPIB, 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 Capital Corp. (NYSE: GKK), or Gramercy, as well as private investors. As we do not control these joint ventures, we account for them under the equity method of accounting.

 

In May 2010, Green Hill Acquisition LLC, a wholly owned subsidiary of ours, sold its 45% beneficial interest in the property known as 1221 Avenue of the Americas, located in Manhattan to a wholly owned subsidiary of CPPIB, for total consideration of $577.4 million, of which approximately $95.9 million represents payment for existing reserves and the assumption of our pro-rata share of in-place financing. The sale generated proceeds to us of approximately $500.9 million.  We recognized a gain of approximately $126.8 million on the sale of our interest.

 

15



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2010

 

The table below provides general information on each joint venture as of June 30, 2010 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property

 

Partner

 

Ownership
Interest

 

Economic
Interest

 

Square
Feet

 

Acquired

 

Acquisition
Price(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1515 Broadway(2)

 

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

 

Sutton

 

50.00

%

50.00

%

30

 

07/05

 

$

22,400

 

800 Third Avenue(3)

 

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

 

Onyx/Sutton

 

45.00

%

63.00

%

30

 

11/05

 

$

4,400

 

1745 Broadway(4)

 

Witkoff/SITQ/Lehman Bros.

 

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(5)

 

Gramercy

 

55.00

%

55.00

%

354

 

04/07

 

$

225,000

 

885 Third Avenue(6)

 

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(7)

 

Onyx

 

50.00

%

50.00

%

582

 

09/07

 

$

111,500

 

388 and 390 Greenwich Street(8)

 

SITQ

 

50.60

%

50.60

%

2,600

 

12/07

 

$

1,575,000

 

27-29 West 34th Street

 

Sutton

 

50.00

%

50.00

%

41

 

01/06

 

$

30,000

 

1551-1555 Broadway

 

Sutton

 

10.00

%

10.00

%

26

 

07/05

 

$

80,100

 

717 Fifth Avenue

 

Sutton/Nakash

 

32.75

%

32.75

%

120

 

09/06

 

$

251,900

 

141 Fifth Avenue

 

Sutton/Rapport

 

45.00

%

45.00

%

22

 

09/05

 

$

13,250

 

180/182 Broadway and 63 Nassau Blvd

 

Sutton

 

50.00

%

50.00

%

71

 

02/08

 

$

43,600

 

600 Lexington Avenue

 

CPPIB

 

55.00

%

55.00

%

304

 

05/10

 

$

193,000

 

 


(1)

 

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

(2)

 

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 in 2015, represents approximately 88.2% of this joint venture’s annualized rent at June 30, 2010.

(3)

 

We invested approximately $109.5 million in this asset through the origination of a loan secured by up to 47% of the interests in the property’s ownership, with an option to convert the loan to an equity interest. Certain existing members have the right to re-acquire approximately 4% of the property’s equity. These interests were re-acquired in December 2008 and reduced our interest to 42.95%

(4)

 

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

(5)

 

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.

(6)

 

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.

(7)

 

We, along with Onyx, acquired the remaining 50% interest on a pro-rata basis in September 2009.

(8)

 

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

 

16



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2010

 

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, 2010 and December 31, 2009, respectively, are as follows (in thousands):

 

Property

 

Maturity
date

 

Interest
rate(1)

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

1515 Broadway(2)

 

12/2014

 

3.46

%

$

469,001

 

$

475,000

 

100 Park Avenue(3)

 

09/2014

 

6.64

%

$

200,000

 

$

200,000

 

379 West Broadway

 

07/2011

 

1.94

%

$

20,991

 

$

20,991

 

21 West 34th Street

 

12/2016

 

5.76

%

$

100,000

 

$

100,000

 

800 Third Avenue

 

08/2017

 

6.00

%

$

20,910

 

$

20,910

 

521 Fifth Avenue

 

04/2011

 

1.29

%

$

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(4)

 

04/2012

 

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

 

1.64

%

$

87,034

 

$

85,478

 

388 and 390 Greenwich Street(5)

 

12/2017

 

5.09

%

$

1,138,379

 

$

1,138,379

 

16 Court Street

 

10/2013

 

2.79

%

$

87,208

 

$

88,573

 

27-29 West 34th Street

 

05/2011

 

1.94

%

$

54,600

 

$

54,800

 

1551-1555 Broadway(6)

 

10/2011

 

4.30

%

$

131,100

 

$

133,600

 

717 Fifth Avenue(7)

 

09/2011

 

5.25

%

$

245,000

 

$

245,000

 

141 Fifth Avenue

 

06/2017

 

5.70

%

$

25,000

 

$

25,000

 

180/182 Broadway and 63 Nassau Street(8)

 

02/2011

 

2.54

%

$

22,634

 

$

22,534

 

600 Lexington Avenue

 

03/2014

 

5.74

%

$

49,850

 

$

 

 


(1)

Interest rate represents the effective all-in weighted average interest rate for the quarter ended June 30, 2010.

(2)

In December 2009 the $625.0 million mortgage was repaid and replaced with a $475.0 million mortgage. In connection with the refinancing, the partners made an aggregate $163.9 million capital contribution to the joint venture.

(3)

This loan was refinanced in September 2009, and replaced a $175.0 million construction loan which was scheduled to mature in November 2015 and which carried a fixed interest rate of 6.52%. The new loan has a committed amount of $215.0 million.

(4)

This loan went into default in November 2009 due to the non-payment of debt service. The joint venture is in discussions with the special servicer to resolve this default.

(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 and $15.6 million of the mezzanine loan which are floating. Up to $200.0 million of the mezzanine loan, secured indirectly by these properties, is recourse to us. We believe it is unlikely that we will be required to perform under this guarantee.

(6)

This construction loan had a committed amount of $138.6 million. This loan was fully funded in September 2009 at the reduced committed amount of $133.6 million.

(7)

This loan has a committed amount of $285.0 million.

(8)

This loan has a committed amount of $31.0 million.

 

We act as the operating partner and day-to-day manager for all our joint ventures, except for 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 $6.6 million, $9.1 million, $3.3 million and $21.4 million from these services for the three and six months ended June 30, 2010, and 2009, respectively. In addition, we have the ability to earn incentive fees based on the ultimate financial performance of certain of the joint venture properties.

 

17



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2010

 

Gramercy Capital Corp.

 

In April 2004, we formed Gramercy as a commercial real estate finance business.  Gramercy qualified as a REIT for federal income tax purposes and expects to qualify for its current fiscal year.

 

At June 30, 2010, we held 6,219,370 shares, or approximately 12.47% of Gramercy’s common stock.  Our total investment of approximately $7.8 million is based on the market value of our common stock investment in Gramercy at June 30, 2010.  As we no longer have any significant influence over Gramercy, we account for our investment as available-for-sale securities.

 

Prior to Gramercy’s internalization of GKK Manager LLC, or the Manager (our former wholly-owned subsidiary which was the external manger to Gramercy), which we refer to as the GKK Internalization, we 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).  This arrangement was terminated when the GKK Internalization was completed in April 2009.  Amounts payable to the Class B limited partnership interests were waived since July 1, 2008.

 

In connection with Gramercy’s initial public offering, the Manager entered into a management agreement with Gramercy, which provided for an initial term through December 2007, and which was subsequently extended 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.  In addition, Gramercy also paid the Manager a collateral management fee. For the three and six months ended June 30, 2009, we received an aggregate of approximately $1.6 million and $6.5 million, respectively, and no such fees in 2010 under the management agreement, and we received nothing under the collateral management agreement in either period.  Fees payable to the Manager under the collateral management agreement were remitted to Gramercy for all periods subsequent to June 30, 2008.  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.

 

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, but 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 subsequent to July 1, 2008.  The Second Amended Management Agreement was terminated in connection with the GKK Internalization.

 

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.  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 outsourcing agreement provided for a fee of $2.7 million per year, increasing 3% annually over the prior year. For the three and six months ended June 30, 2009, the Manager received an aggregate of approximately $0.2 million and $1.0 million, respectively, under the outsourcing and asset servicing agreements.

 

18



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2010

 

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.  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.  Since October 27, 2008, an affiliate of ours has served as special servicer for certain assets held by Gramercy or its affiliates and assigned its duties to a subsidiary of ours.

 

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

 

Effective May 2005, June 2009 and October 2009, Gramercy entered into lease agreements with an affiliate of ours, for their corporate offices at 420 Lexington Avenue, New York, NY.  The first lease is for approximately 7,300 square feet and carries a term of ten years with rents of approximately $249,000 per annum for year one increasing to $315,000 per annum in year ten.  The second lease is for approximately 900 square feet pursuant to a lease which ends in April 2015, with annual rent under this lease of approximately $35,300 per annum for year one increasing to $42,800 per annum in year six.  The third lease is for approximately 1,400 square feet pursuant to a lease which ends in April 2015, with annual rent under this lease of approximately $67,300 per annum for year one increasing to $80,500 per annum in year six.

 

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.

 

An affiliate of ours held an investment in Gramercy’s preferred stock with a market value of approximately $0.5 million at June 30, 2010.

 

On October 27, 2009, 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, 2009.  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, 2009, Gramercy announced the appointment of Roger M. Cozzi, as President and Chief Executive Officer, effective immediately.  Effective as of November 13, 2009, Timothy J. O’Connor was appointed as President of Gramercy.  Mr. Holliday remains a board member of Gramercy.

 

In 2009, we, as well as an affiliate of ours, entered into consulting agreements with Gramercy whereby Gramercy provides services required for the evaluation, acquisition, disposition and portfolio management of CMBS investments.  We pay 10 basis points and our affiliate pays 25 basis points of the principal amount of all trades executed.  We and our affiliate paid approximately $48,000 in fees for such services during the six months ended June 30, 2010.

 

19



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2010

 

The condensed combined balance sheets for the unconsolidated joint ventures, at June 30, 2010 and December 31, 2009, are as follows (in thousands):

 

 

 

2010

 

2009

 

Assets

 

 

 

 

 

Commercial real estate property, net

 

$

5,397,505

 

$

6,095,668

 

Other assets

 

593,229

 

665,065

 

Total assets

 

$

5,990,734

 

$

6,760,733

 

 

 

 

 

 

 

Liabilities and members’ equity

 

 

 

 

 

Mortgages payable

 

$

4,096,357

 

$

4,177,382

 

Other liabilities

 

248,091

 

276,805

 

Members’ equity

 

1,646,286

 

2,306,546

 

Total liabilities and members’ equity

 

$

5,990,734

 

$

6,760,733

 

Company’s net investment in unconsolidated joint ventures

 

$

775,765

 

$

1,058,369

 

 

The condensed combined statements of operations for the unconsolidated joint ventures for the three and six months ended June 30, 2010 and 2009, or partial period for acquisitions which closed during these periods, are as follows (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010