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 September 30, 2012

 

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.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o
(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

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

 

The number of shares outstanding of the registrant’s common stock, $0.01 par value, was 90,366,509 as of October 31, 2012.

 

 

 



Table of Contents

 

SL GREEN REALTY CORP.

 

INDEX

 

 

 

PAGE

 

 

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011

3

 

 

 

 

Consolidated Statements of Income for the three and nine months ended September 30, 2012 and 2011 (unaudited)

4

 

 

 

 

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011 (unaudited)

5

 

 

 

 

Consolidated Statement of Equity for the nine months ended September 30, 2012 (unaudited)

6

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 (unaudited)

7

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

8

 

 

 

ITEM 2.

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

40

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

57

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

57

 

 

 

PART II.

OTHER INFORMATION

58

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

58

 

 

 

ITEM 1A.

RISK FACTORS

58

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

58

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

58

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

58

 

 

 

ITEM 5.

OTHER INFORMATION

58

 

 

 

ITEM 6.

EXHIBITS

59

 

 

 

SIGNATURES

60

 

2



Table of Contents

 

PART I.                                                  FINANCIAL INFORMATION

 

ITEM 1.                                                Financial Statements

 

SL Green Realty Corp.

Consolidated Balance Sheets

(Amounts in thousands, except per share data)

 

 

 

September 30,
2012

 

December 31,
2011

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Commercial real estate properties, at cost:

 

 

 

 

 

Land and land interests

 

$

2,937,866

 

$

2,684,626

 

Building and improvements

 

7,438,364

 

7,147,527

 

Building leasehold and improvements

 

1,331,190

 

1,302,790

 

Property under capital lease

 

12,208

 

12,208

 

 

 

11,719,628

 

11,147,151

 

Less: accumulated depreciation

 

(1,339,324

)

(1,136,603

)

 

 

10,380,304

 

10,010,548

 

Assets held for sale

 

91,574

 

76,562

 

Cash and cash equivalents

 

162,363

 

138,192

 

Restricted cash

 

143,058

 

86,584

 

Investment in marketable securities

 

21,549

 

25,323

 

Tenant and other receivables, net of allowance of $21,575 and $16,772 in 2012 and 2011, respectively

 

35,315

 

32,107

 

Related party receivables

 

 

4,001

 

Deferred rents receivable, net of allowance of $30,076 and $29,156 in 2012 and 2011, respectively

 

330,349

 

281,974

 

Debt and preferred equity investments, net of discount of $13,207 and $24,996 and allowance of $7,000 and $50,175 in 2012 and 2011, respectively

 

1,071,641

 

985,942

 

Investments in unconsolidated joint ventures

 

1,020,790

 

893,933

 

Deferred costs, net

 

253,137

 

210,786

 

Other assets

 

774,859

 

737,900

 

Total assets

 

$

14,284,939

 

$

13,483,852

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Mortgages and other loans payable

 

$

4,849,233

 

$

4,314,741

 

Revolving credit facility

 

200,000

 

350,000

 

Senior unsecured notes

 

1,176,252

 

1,270,656

 

Accrued interest payable and other liabilities

 

100,528

 

126,135

 

Accounts payable and accrued expenses

 

147,452

 

142,428

 

Deferred revenue/gains

 

360,752

 

357,193

 

Capitalized lease obligation

 

17,167

 

17,112

 

Deferred land leases payable

 

18,833

 

18,495

 

Dividend and distributions payable

 

29,154

 

28,398

 

Security deposits

 

47,698

 

46,367

 

Liabilities related to assets held for sale

 

63,202

 

61,988

 

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

 

100,000

 

100,000

 

Total liabilities

 

7,110,271

 

6,833,513

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

Noncontrolling interests in operating partnership

 

265,093

 

195,030

 

Series H Preferred Units, $25.00 liquidation preference, 80 issued and outstanding at September 30, 2012 and December 31, 2011, respectively

 

2,000

 

2,000

 

Series G Preferred Units, $25.00 liquidation preference, 1,902 issued and outstanding at September 30, 2012

 

47,550

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

SL Green stockholders’ equity:

 

 

 

 

 

Series C preferred stock, $0.01 par value, $25.00 liquidation preference, 7,700 and 11,700 issued and outstanding at September 30, 2012 and December 31, 2011, respectively

 

180,340

 

274,022

 

Series D preferred stock, $0.01 par value, $25.00 liquidation preference, none and 4,000 issued and outstanding at September 30, 2012 and December 31, 2011, respectively

 

 

96,321

 

Series I preferred stock, $0.01 par value, $25.00 liquidation preference, 9,200 issued and outstanding at September 30, 2012

 

222,245

 

 

Common stock, $0.01 par value 160,000 shares authorized and 93,970 and 89,210 issued and outstanding at September 30, 2012 and December 31, 2011, respectively (including 3,607 and 3,427 shares at September 30, 2012 and December 31, 2011, held in Treasury, respectively)

 

940

 

892

 

Additional paid-in-capital

 

4,589,423

 

4,236,959

 

Treasury stock at cost

 

(319,905

)

(308,708

)

Accumulated other comprehensive loss

 

(29,281

)

(28,445

)

Retained earnings

 

1,728,150

 

1,704,506

 

Total SL Green stockholders’ equity

 

6,371,912

 

5,975,547

 

Noncontrolling interests in other partnerships

 

488,113

 

477,762

 

Total equity

 

6,860,025

 

6,453,309

 

Total liabilities and equity

 

$

14,284,939

 

$

13,483,852

 

 

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

 

3



Table of Contents

 

SL Green Realty Corp.

Consolidated Statements of Income

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenues

 

 

 

 

 

 

 

 

 

Rental revenue, net

 

$

281,496

 

$

242,938

 

$

810,001

 

$

708,593

 

Escalation and reimbursement

 

42,804

 

39,176

 

126,050

 

104,446

 

Investment and preferred equity income

 

27,869

 

18,433

 

87,655

 

98,256

 

Other income

 

9,272

 

6,076

 

25,932

 

23,256

 

Total revenues

 

361,441

 

306,623

 

1,049,638

 

934,551

 

Expenses

 

 

 

 

 

 

 

 

 

Operating expenses (including approximately $4,668 and $12,856 (2012) and $4,335 and $10,948 (2011) paid to affiliates)

 

83,980

 

69,093

 

226,168

 

191,792

 

Real estate taxes

 

53,595

 

44,915

 

157,662

 

128,957

 

Ground rent

 

8,874

 

8,463

 

26,570

 

24,110

 

Interest expense, net of interest income

 

85,828

 

74,603

 

248,292

 

207,042

 

Amortization of deferred financing costs

 

4,493

 

2,986

 

11,626

 

9,469

 

Depreciation and amortization

 

83,429

 

73,358

 

238,324

 

202,394

 

Loan loss and other investment reserves, net of recoveries

 

 

 

564

 

(1,870

)

Transaction related costs

 

1,372

 

169

 

4,493

 

3,820

 

Marketing, general and administrative

 

20,551

 

18,900

 

61,469

 

61,375

 

Total expenses

 

342,122

 

292,487

 

975,168

 

827,089

 

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

 

19,319

 

14,136

 

74,470

 

107,462

 

Equity in net income (loss) from unconsolidated joint ventures

 

11,658

 

(2,728

)

80,988

 

7,663

 

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

 

(4,807

)

3,032

 

11,987

 

3,032

 

Purchase price fair value adjustment

 

 

999

 

 

489,889

 

Gain (loss) on investment in marketable securities

 

2,237

 

 

2,237

 

(133

)

Depreciable real estate reserves, net of recoveries

 

 

 

5,789

 

 

Gain (loss) on early extinguishment of debt

 

 

(67

)

 

904

 

Income from continuing operations

 

28,407

 

15,372

 

175,471

 

608,817

 

Net income from discontinued operations

 

223

 

1,116

 

145

 

4,665

 

Gain on sale of discontinued operations

 

 

 

6,627

 

46,085

 

Net income

 

28,630

 

16,488

 

182,243

 

659,567

 

Net income attributable to noncontrolling interests

 

 

 

 

 

 

 

 

 

Noncontrolling interests in the operating partnership

 

(567

)

(170

)

(4,876

)

(13,946

)

Noncontrolling interests in other partnerships

 

(1,835

)

(1,694

)

(6,792

)

(8,564

)

Preferred units distributions

 

(571

)

 

(1,533

)

 

Net income attributable to SL Green

 

25,657

 

14,624

 

169,042

 

637,057

 

Preferred stock redemption costs

 

(10,010

)

 

(10,010

)

 

Preferred stock dividends

 

(7,915

)

(7,545

)

(23,004

)

(22,634

)

Net income attributable to SL Green common stockholders

 

$

7,732

 

$

7,079

 

$

136,028

 

$

614,423

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to SL Green common stockholders:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

12,153

 

$

2,045

 

$

117,919

 

$

82,769

 

Purchase price fair value adjustment

 

 

977

 

 

479,062

 

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

 

(4,636

)

2,966

 

11,572

 

2,965

 

Net income from discontinued operations

 

215

 

1,091

 

139

 

4,560

 

Gain on sale of discontinued operations

 

 

 

6,398

 

45,067

 

Net income

 

$

7,732

 

$

7,079

 

$

136,028

 

$

614,423

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

Net income from continuing operations before discontinued operations

 

$

0.14

 

$

0.04

 

$

1.33

 

$

6.77

 

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

 

(0.05

)

0.03

 

0.13

 

0.03

 

Net income from discontinued operations

 

 

0.01

 

 

0.06

 

Gain on sale of discontinued operations

 

 

 

0.07

 

0.54

 

Net income attributable to SL Green common stockholders

 

$

0.09

 

$

0.08

 

$

1.53

 

$

7.40

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Net income from continuing operations before discontinued operations

 

$

0.14

 

$

0.04

 

$

1.32

 

$

6.73

 

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

 

(0.05

)

0.03

 

0.13

 

0.04

 

Net income from discontinued operations

 

 

0.01

 

 

0.05

 

Gain on sale of discontinued operations

 

 

 

0.07

 

0.54

 

Net income attributable to SL Green common stockholders

 

$

0.09

 

$

0.08

 

$

1.52

 

$

7.36

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

0.25

 

$

0.25

 

$

0.75

 

$

0.75

 

Basic weighted average common shares outstanding

 

90,241

 

85,696

 

88,929

 

83,001

 

Diluted weighted average common shares and common share equivalents outstanding

 

93,891

 

88,081

 

92,485

 

85,384

 

 

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

 

4



Table of Contents

 

SL Green Realty Corp.

Consolidated Statements of Comprehensive Income

(Unaudited, and amounts in thousands)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

28,630

 

$

16,488

 

$

182,243

 

$

659,567

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Net unrealized gain (loss) on derivative instruments

 

190

 

(1,398

)

493

 

(4,389

)

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

 

(292

)

(3,070

)

(1,128

)

319

 

Unrealized gain (loss) on marketable securities

 

(825

)

1,528

 

(597

)

2,094

 

Other comprehensive income (loss)

 

(927

)

(2,940

)

(1,232

)

(1,976

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

27,703

 

13,548

 

181,011

 

657,591

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to noncontrolling interests

 

(2,973

)

(1,864

)

(13,201

)

(22,510

)

Other comprehensive income attributable to noncontrolling interests

 

59

 

67

 

396

 

173

 

Preferred stock redemption costs

 

(10,010

)

 

(10,010

)

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to SL Green

 

$

14,779

 

$

11,751

 

$

158,196

 

$

635,254

 

 

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

 

5



Table of Contents

 

SL Green Realty Corp.

Consolidated Statement of Equity

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

 

 

 

SL Green Realty Corp. Stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Series C

 

Series D

 

Series I

 

Common Stock

 

Additional

 

 

 

Other

 

 

 

 

 

 

 

 

 

Preferred
Stock

 

Preferred
Stock

 

Preferred
Stock

 

Shares

 

Par
Value

 

Paid-
In-Capital

 

Treasury
Stock

 

Comprehensive
Loss

 

Retained
Earnings

 

Noncontrolling
Interests

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2011

 

$

274,022

 

$

96,321

 

$

 

85,783

 

$

892

 

$

4,236,959

 

$

(308,708

)

$

(28,445

)

$

1,704,506

 

$

477,762

 

$

6,453,309

 

Net income after allocation to noncontrolling interests in SLGOP and preferred stock redemption costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

159,032

 

6,792

 

165,824

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(836

)

 

 

 

 

(836

)

Preferred dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23,004

)

 

 

(23,004

)

Redemption of units and DRIP proceeds

 

 

 

 

 

 

 

1,523

 

15

 

117,007

 

 

 

 

 

 

 

 

 

117,022

 

Redemption of preferred stock

 

(93,682

)

(96,321

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(190,003

)

Reallocation of noncontrolling interest in the Operating Partnership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(44,893

)

 

 

(44,893

)

Deferred compensation plan & stock award, net

 

 

 

 

 

 

 

66

 

2

 

629

 

(11,197

)

 

 

 

 

 

 

(10,566

)

Amortization of deferred compensation plan

 

 

 

 

 

 

 

 

 

 

 

20,667

 

 

 

 

 

 

 

 

 

20,667

 

Proceeds from issuance of preferred stock

 

 

 

 

 

222,245

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

222,245

 

Proceeds from issuance of common stock

 

 

 

 

 

 

 

2,640

 

27

 

201,272

 

 

 

 

 

 

 

 

 

201,299

 

Proceeds from stock options exercised

 

 

 

 

 

 

 

351

 

4

 

12,889

 

 

 

 

 

 

 

 

 

12,893

 

Consolidation of joint venture interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19,181

 

19,181

 

Cash distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,622

)

(15,622

)

Cash distribution declared ($0.75 per common share, none of which represented a return of capital for federal income tax purposes)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(67,491

)

 

 

(67,491

)

Balance at September 30, 2012

 

$

180,340

 

$

 

$

222,245

 

90,363

 

$

940

 

$

4,589,423

 

$

(319,905

)

$

(29,281

)

$

1,728,150

 

$

488,113

 

$

6,860,025

 

 

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

 

6



Table of Contents

 

SL Green Realty Corp.

Consolidated Statements of Cash Flows

(Unaudited, and amounts in thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2012

 

2011

 

Operating Activities

 

 

 

 

 

Net income

 

$

182,243

 

$

659,567

 

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

 

 

 

 

 

Depreciation and amortization

 

249,950

 

212,558

 

Depreciable real estate reserves, net of recoveries

 

(5,789

)

 

Equity in net income from unconsolidated joint ventures

 

(80,988

)

(7,663

)

Equity in net gain on sale of interest in unconsolidated joint venture

 

(11,987

)

(3,032

)

Gain on sale of discontinued operations

 

(6,627

)

(46,085

)

Distributions of cumulative earnings from unconsolidated joint ventures

 

84,182

 

9,787

 

Preferred stock redemption costs

 

(10,010

)

 

Purchase price fair value adjustment

 

 

(489,889

)

Gain on sale of debt securities

 

 

(19,840

)

Loan loss and other investment reserves, net of recoveries

 

564

 

(1,870

)

(Gain) loss on sale of investments in marketable securities

 

(2,237

)

133

 

Gain on early extinguishment of debt

 

 

(904

)

Deferred rents receivable

 

(50,910

)

(64,600

)

Other non-cash adjustments

 

1,718

 

3,158

 

Changes in operating assets and liabilities:

 

 

 

 

 

Restricted cash — operations

 

(12,557

)

1,757

 

Tenant and other receivables

 

(8,500

)

(3,130

)

Related party receivables

 

(3,792

)

524

 

Deferred lease costs

 

(37,885

)

(25,483

)

Other assets

 

(44,915

)

(11,994

)

Accounts payable, accrued expenses and other liabilities

 

11,309

 

12,692

 

Deferred revenue and land leases payable

 

12,187

 

12,010

 

Net cash provided by operating activities

 

265,956

 

237,696

 

Investing Activities

 

 

 

 

 

Acquisitions of real estate property

 

(405,318

)

(331,972

)

Additions to land, buildings and improvements

 

(107,425

)

(111,485

)

Escrowed cash — capital improvements/acquisition deposits

 

(68,692

)

39,886

 

Investments in unconsolidated joint ventures

 

(159,524

)

(95,611

)

Distributions in excess of cumulative earnings from unconsolidated joint ventures

 

48,510

 

107,753

 

Net proceeds from disposition of real estate/joint venture interest

 

70,367

 

160,548

 

Other investments

 

(28,911

)

(16,374

)

Debt and preferred equity and other investments, net of repayments/participations

 

(178,183

)

(254,264

)

Net cash used in investing activities

 

(829,176

)

(501,519

)

Financing Activities

 

 

 

 

 

Proceeds from mortgages and other loans payable

 

1,113,500

 

740,000

 

Repayments of mortgages and other loans payable

 

(484,518

)

(754,358

)

Proceeds from revolving credit facility and senior unsecured notes

 

813,339

 

1,401,068

 

Repayments of revolving credit facility and senior unsecured notes

 

(1,065,793

)

(1,393,144

)

Proceeds from stock options exercised and DRIP issuance

 

112,447

 

8,278

 

Net proceeds from issuance of preferred/common stock

 

423,544

 

516,350

 

Redemption of preferred stock

 

(190,003

)

 

Purchase of treasury stock

 

(11,197

)

(4,313

)

Distributions to noncontrolling interests in other partnerships

 

(15,622

)

(143,474

)

Contributions from noncontrolling interests in other partnerships

 

19,181

 

 

Distributions to noncontrolling interests in Operating Partnership

 

(2,385

)

(572

)

Dividends paid on common and preferred stock

 

(91,272

)

(47,684

)

Deferred loan costs and capitalized lease obligation

 

(33,830

)

3,347

 

Net cash provided by financing activities

 

587,391

 

325,498

 

Net increase in cash and cash equivalents

 

24,171

 

61,675

 

Cash and cash equivalents at beginning of period

 

138,192

 

332,830

 

Cash and cash equivalents at end of period

 

$

162,363

 

$

394,505

 

 

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

 

7



Table of Contents

 

SL Green Realty Corp.

Notes to Consolidated Financial Statements

September 30, 2012

(Unaudited)

 

1.  Organization and Basis of Presentation

 

SL Green Realty Corp., which is referred to as the Company or SL Green, a Maryland corporation, and SL Green Operating Partnership, L.P., which is referred to as SLGOP 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 is referred to as the Service Corporation, a consolidated variable interest entity.  All of the management, leasing and construction services with respect to the properties which are 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 minimize the payment of Federal income taxes at the corporate level.  Unless the context requires otherwise, all references to the “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 September 30, 2012, noncontrolling investors held, in the aggregate, a 3.53% limited partnership interest in the Operating Partnership.  We refer to these interests as the noncontrolling interests in the Operating Partnership.  See Note 13, “Noncontrolling Interests in Operating Partnership.”

 

Reckson Associates Realty Corp., or Reckson, and Reckson Operating Partnership, L.P., or ROP, are wholly-owned subsidiaries of the Operating Partnership.

 

As of September 30, 2012, we owned the following interests in commercial office properties in the New York Metropolitan area, primarily in midtown Manhattan, a borough of New York City, or Manhattan.  Our investments in the New York Metropolitan area also include investments in Brooklyn, 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

 

28

 

18,807,945

 

92.9

%

 

 

Unconsolidated properties

 

7

 

5,326,815

 

96.1

%

 

 

 

 

 

 

 

 

 

 

Suburban

 

Consolidated properties

 

25

 

3,863,000

 

79.6

%

 

 

Unconsolidated properties

 

5

 

1,539,700

 

86.2

%

 

 

 

 

65

 

29,537,460

 

91.4

%

 


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

 

We also owned investments in 12 stand-alone retail properties encompassing approximately 388,686 square feet, 13 development properties encompassing approximately 2,521,563 square feet, two residential properties encompassing 385 units (approximately 430,482 square feet) and two land interests as of September 30, 2012.  At September 30, 2012, we also owned investments in 31 West Coast office properties encompassing approximately 4,473,603 square feet. In addition, we manage three office properties owned by third parties and affiliated companies encompassing approximately 0.9 million rentable square feet. As of September 30, 2012, we also held $1.1 billion in debt and preferred equity investments.

 

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 minimize 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.

 

Basis of Quarterly Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally

 

8



Table of Contents

 

SL Green Realty Corp.

Notes to Consolidated Financial Statements

September 30, 2012

(Unaudited)

 

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 the fair presentation of the financial position of the Company at September 30, 2012, and the results of operations for the periods presented have been included.  The 2012 operating results for the period presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.  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, 2011.

 

The balance sheet at December 31, 2011 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 debt and preferred equity investments.  See Note 5, “Debt and Preferred Equity Investments” and Note 6, “Investment in Unconsolidated Joint Ventures.”  All significant intercompany balances and transactions have been eliminated.

 

The Financial Accounting Standards Board’s, or FASB, guidance for determining whether an entity is a variable interest entity, or VIE, 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.

 

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 the presentation of net income was modified to require earnings and other comprehensive income to be attributed to controlling and noncontrolling interests.

 

We assess the accounting treatment for each joint venture and debt and preferred equity 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 entity’s economic performance.  In situations where we or our partner approves, among other things, the annual budget, receives 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 typically 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.

 

Investment in Commercial Real Estate Properties

 

On a periodic basis, we assess whether there are any indications that the value of our real estate properties may be impaired or that their 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) to be generated by the property is 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 calculated fair value of the property.  In addition, we assess our investments in unconsolidated joint ventures for recoverability, and if it is determined that a loss in value of the investment is other than temporary, we write down the investment to its fair value.  We evaluate our equity investments for impairment based on the joint venture’s projected discounted cash flows. In November 2011, we recorded a $5.8 million impairment charge in connection with the expected sale of one of our equity investments. In June 2012, we reversed this entire impairment charge. See Note 6, “Investments in Unconsolidated Joint Ventures.” No impairment charge was recorded on our consolidated properties during the three or nine months ended September 30, 2012 and 2011. We do not believe that the value of any of our consolidated properties or equity investments was impaired at September 30, 2012 and December 31, 2011.

 

9



Table of Contents

 

SL Green Realty Corp.

Notes to Consolidated Financial Statements

September 30, 2012

(Unaudited)

 

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 is amortized over the expected term of the associated lease, which generally ranges 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. To the extent acquired leases contain fixed rate renewal options that are below market and determined to be material, we amortized such below market lease value into rental income over the renewal period.

 

We recognized an increase of approximately $2.6 million, $7.5 million, $3.4 million, $15.8 million in rental revenue for the three and nine months ended September 30, 2012 and 2011, 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 reduction in interest expense for the amortization of the above-market rate mortgages assumed of approximately $1.2 million, $0.7 million, $0.3 million and $3.3 million for the three and nine months ended September 30, 2012 and 2011, 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):

 

 

 

September 30,
2012

 

December 31,
2011

 

Identified intangible assets (included in other assets):

 

 

 

 

 

Gross amount

 

$

744,782

 

$

673,495

 

Accumulated amortization

 

(252,152

)

(193,442

)

Net

 

$

492,630

 

$

480,053

 

 

 

 

 

 

 

Identified intangible liabilities (included in deferred revenue):

 

 

 

 

 

Gross amount

 

$

668,999

 

$

622,029

 

Accumulated amortization

 

(346,154

)

(290,893

)

Net

 

$

322,845

 

$

331,136

 

 

Fair Value Measurements

 

Fair value is a market-based measurement, not an entity-specific measurement, and should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, FASB guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within levels one and two of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within level three of the hierarchy).

 

We determined the fair value of our current investments in marketable securities using Level 1, Level 2 and Level 3 inputs. Additionally, we determined the valuation allowance for loan losses based on Level 3 inputs. See Note 5, “Debt and Preferred Equity Investments.”

 

The estimated fair values of tangible and intangible assets and liabilities recorded in connection with business combinations are based on Level 3 inputs. We estimate fair values based on cash flow projections utilizing appropriate discount and/or capitalization rates and available market information.

 

We determine impairment in real estate investments and debt and preferred equity investments, including intangibles, utilizing cash flow projections that apply estimated revenue and expense growth rates, discount rates and capitalization rates, which are classified as Level 3 inputs.

 

We use the following methods and assumptions in estimating fair value disclosures for financial instruments.

 

10



Table of Contents

 

SL Green Realty Corp.

Notes to Consolidated Financial Statements

September 30, 2012

(Unaudited)

 

·                  Cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses, and other assets and liabilities:  The carrying amount of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses, and other assets and liabilities reported in our consolidated balance sheets approximates fair value due to the short-term nature of these instruments.

 

·                  Debt and preferred equity investments:  The fair value of debt and preferred equity investments is estimated by discounting the future cash flows using current interest rates at which similar loans with the same maturities would be made to borrowers with similar credit ratings. See “Reserve for Possible Credit Losses” below regarding valuation allowances for loan losses.

 

·                  Mortgage and other loans payable and other debt:  The fair value of borrowings is estimated by discounting the future cash flows using current interest rates at which similar borrowings could be made by us.

 

The methodologies used for measuring fair value 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 assets and liabilities measured at fair value on a recurring and nonrecurring basis. The classifications are based on the lowest level of input that is significant to the fair value measurement.

 

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 up to their credit component. Included in accumulated other comprehensive loss at September 30, 2012 is approximately $6.3 million in net unrealized gains related to marketable securities.

 

The cost of bonds and marketable securities sold is determined using the specific identification method.

 

At September 30, 2012 and December 31, 2011, we held the following marketable securities (amounts in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

Level 1 — Equity marketable securities

 

$

6,125

 

$

8,065

 

Level 2 — Commercial mortgage-backed securities

 

11,689

 

13,369

 

Level 3 — Rake bonds

 

3,735

 

3,889

 

Total marketable securities available-for-sale

 

$

21,549

 

$

25,323

 

 

During the nine months ended September 30, 2012, we disposed of some of our Level 1 securities for aggregate net proceeds of $3.2 and realized gains of $2.2 million, which is included in gain (loss) on investments in marketable securities on the consolidated statements of income.

 

The cost basis of the Level 3 securities was $3.7 million at September 30, 2012 and $3.9 million at December 31, 2011. There were no sales of Level 3 securities during the nine months ended September 30, 2012. The Level 3 securities mature at various times through 2030.

 

11



Table of Contents

 

SL Green Realty Corp.

Notes to Consolidated Financial Statements

September 30, 2012

(Unaudited)

 

Revenue Recognition

 

Rental revenue is recognized on a straight-line basis over the term of the lease. Rental revenue recognition commences when the tenant takes possession or controls the physical use of the leased space. In order for the tenant to take possession, the leased space must be substantially ready for its intended use. To determine whether the leased space is substantially ready for its intended use, management evaluates whether we are or the tenant is the owner of tenant improvements for accounting purposes. When management concludes that we are the owner of tenant improvements, rental revenue recognition begins when the tenant takes possession of the finished space, which is when such tenant improvements are substantially complete. In certain instances, when management concludes that we are not the owner (the tenant is the owner) of tenant improvements, rental revenue recognition begins when the tenant takes possession of or controls the space. When management concludes that we are the owner of tenant improvements for accounting purposes, management records the cost to construct the tenant improvements as a capital asset. In addition, management records the cost of certain tenant improvements paid for or reimbursed by tenants as capital assets when management concludes that we are the owner of such tenant improvements. For these tenant improvements, management records the amount funded or reimbursed by tenants as deferred revenue, which is amortized on a straight-line basis as additional rental revenue over the term of the related lease. When management concludes that the tenant is the owner of tenant improvements for accounting purposes, management records our contribution towards those improvements as a lease incentive, which is included in deferred leasing costs on our consolidated balance sheets and amortized as a reduction to rental revenue on a straight-line basis over the term of the lease. The excess of rents recognized over amounts contractually due pursuant to the underlying leases are included in deferred rents receivable on the accompanying balance sheets. We establish, on a current basis, an allowance for future potential tenant credit losses, which may occur against this account. The balance reflected on the balance sheet is net of such allowance.

 

In addition to base rent, our tenants also generally will pay their pro rata share of increases in real estate taxes and operating expenses for the building over a base year. In some leases, in lieu of paying additional rent based upon increases in building operating expenses, the tenant will pay additional rent based upon increases in the wage rate paid to porters over the porters’ wage rate in effect during a base year or increases in the consumer price index over the index value in effect during a base year. In addition, many of our leases contain fixed percentage increases over the base rent to cover escalations. Electricity is most often supplied by the landlord either on a sub-metered basis, or rent inclusion basis (i.e., a fixed fee is included in the rent for electricity, which amount may increase based upon increases in electricity rates or increases in electrical usage by the tenant). Base building services other than electricity (such as heat, air conditioning and freight elevator service during business hours, and base building cleaning) typically are provided at no additional cost, with the tenant paying additional rent only for services which exceed base building services or for services which are provided outside normal business hours.

 

These escalations are based on actual expenses incurred in the prior calendar year. If the expenses in the current year are different from those in the prior year, then during the current year, the escalations will be adjusted to reflect the actual expenses for the current year.

 

We record a gain on sale of real estate when title is conveyed to the buyer, subject to the buyer’s financial commitment being sufficient to provide economic substance to the sale and we have no substantial economic involvement with the buyer.

 

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

 

Income recognition is generally suspended for debt and preferred equity investments at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful.  Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. Interest is recorded as income on impaired loans only to the extent cash is received. Several of the debt and preferred equity investments provide for accrual of interest at specified rates, which differ from current payment terms. Interest is recognized on such loans at the accrual rate subject to management’s determination that accrued interest and outstanding principal are ultimately collectible, based on the underlying collateral and operations of the borrower. If management cannot make this determination, interest income above the current pay rate is recognized only upon actual receipt.

 

If we purchase a debt or preferred equity investment at a discount, intend to hold it until maturity and expect to recover the full value of the investment, we accrete the discount into income as an adjustment to yield over the term of the investment. If we purchase a debt or preferred equity investment at a discount with the intention of foreclosing on the collateral, we do not accrete the discount.

 

12



Table of Contents

 

SL Green Realty Corp.

Notes to Consolidated Financial Statements

September 30, 2012

(Unaudited)

 

Reserve for Possible Credit Losses

 

The expense for possible credit losses in connection with debt and preferred equity 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 loss on each individual investment.  When it is probable that we will be unable to collect all amounts contractually due, the investment is considered impaired.

 

Where impairment is indicated on an investment that is held to maturity, 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.  The write-off of the reserve balance is called a charge off.  We recorded loan loss reserves of zero, $3.0 million, zero and $2.5 million on investments being held to maturity during the three and nine months ended September 30, 2012 and 2011, respectively.  We also recorded recoveries of approximately zero, $2.4 million, zero and $4.4 million during the three and nine months ended September 30, 2012 and 2011, respectively, in connection with the sale of investments. This is included in loan loss and other investment reserves, net of recoveries in the accompanying consolidated statements of income.

 

Debt and preferred equity 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 investment will be reclassified at its net carrying value to debt and preferred equity investments held to maturity.  For these reclassified investments, 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 investment.

 

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 Federal, state and local tax provision of $0.2 million and $0.2 million during the nine months ended September 30, 2012 and 2011, respectively, and made estimated tax payments of zero and $0.1 million during the nine months ended September 30, 2012 and 2011, respectively.

 

We follow a two-step approach for evaluating uncertain tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines the amount of benefit that is more-likely-than-not to be realized upon settlement. Derecognition of a tax position that was previously recognized would occur when a company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. The use of a valuation allowance as a substitute for derecognition of tax positions is prohibited.

 

Stock-Based Employee Compensation Plans

 

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

 

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

 

13



Table of Contents

 

SL Green Realty Corp.

Notes to Consolidated Financial Statements

September 30, 2012

(Unaudited)

 

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.

 

For share-based awards with a performance or market measure, we recognize compensation cost over the requisite service period, using the accelerated attribution expense method. The requisite service period begins on the date the compensation committee of our board of directors authorizes the award and adopts any relevant performance measures. For programs with performance measures, the total estimated compensation cost is based on the fair value of the award at the applicable reporting date estimated using a binomial model. For share-based awards for which there is no pre-established performance measure, we recognize compensation cost over the service vesting period, which represents the requisite service period, on a straight-line basis. In accordance with the provisions of our share-based incentive compensation plans, we accept the return of shares of Company common stock, at the current quoted market price, from certain key employee to satisfy minimum statutory tax-withholding requirements related to shares that vested during the period.

 

Awards can also be made in the form of a separate series of units of limited partnership interest in our Operating Partnership called long-term incentive plan units, or LTIP units. LTIP units, which can be granted either as free-standing awards or in tandem with other awards under our stock incentive plan, are valued by reference to the value of our common stock at the time of grant, and are subject to such conditions and restrictions as the compensation committee of our board of directors may determine, including continued employment or service, computation of financial metrics and/or achievement of pre-established performance goals and objectives.

 

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 attributable to common stockholders by the weighted average number of common shares outstanding during the period. Basic EPS includes participating securities, consisting of unvested restricted stock that receive nonforfeitable dividends similar to shares of common stock. 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. The dilutive effect of the outstanding nonvested shares of common stock, or nonvested shares, and restricted stock units, or RSUs, that have not yet been granted, but are contingently issuable under the share-based compensation programs, is reflected in the weighted average diluted shares calculation by application of the treasury stock method at the beginning of the quarterly period in which all necessary conditions have been satisfied. The dilutive effect of stock options is reflected in the weighted average diluted outstanding shares calculation by application of the treasury stock method. There is no dilutive effect for the exchangeable senior debentures as the conversion premium will be paid in cash.

 

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, debt and preferred equity investments and accounts receivable.  We place our cash investments in excess of insured amounts with high quality financial institutions.  The collateral securing our debt and preferred equity investments is primarily located in the New York Metropolitan area. See Note 5, “Debt and Preferred Equity Investments.” We perform ongoing credit evaluations of our tenants and require most 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, Long Island, Westchester County, Connecticut and New Jersey.  The tenants located in our buildings operate in various industries.  Other than three tenants who account for approximately 6.9%, 6.4% and 6.0% of our share of annualized cash rent, respectively, no other tenant in our portfolio accounted for more than 1.9% of our annualized cash rent, including our share of joint venture annualized cash rent at September 30, 2012. Approximately 10%, 5%, 6%, 5% and 6% of our annualized cash rent, including our share of joint venture annualized cash rent, was attributable to 1515 Broadway, 420 Lexington Avenue, 1185 Avenue of the Americas, 485 Lexington Avenue and One Madison Avenue, respectively, for the three months ended September 30, 2012.  In addition, three debt and preferred equity investments accounted for more than 10.0% of the income earned on debt and preferred equity investments during the three months ended September 30, 2012.

 

14



Table of Contents

 

SL Green Realty Corp.

Notes to Consolidated Financial Statements

September 30, 2012

(Unaudited)

 

Reclassification

 

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

 

Accounting Standards Updates

 

In May 2011, the FASB issued updated guidance on fair value measurement which amends U.S. GAAP to conform to IFRS measurement and disclosure requirements.  The amendments change the wording used to describe the requirements in U.S. GAAP for measuring fair value, changes certain fair value measurement principles and enhances disclosure requirements.  This guidance was effective as of the first quarter of 2012 and its adoption did not have a material impact on our consolidated financial statements.

 

In June 2011, the FASB issued guidance to increase the prominence of other comprehensive income, or OCI, in the financial statements. The standard gives businesses two options for presenting OCI, which previously had been included within the statement of equity. An OCI statement may be included with the statement of income, and together the two will make a statement of total comprehensive income. Alternatively, businesses may have an OCI statement separate from the statement of income, but the two statements will have to appear consecutively within a financial report. These requirements related to the presentation of OCI became effective for interim and annual reporting periods beginning after December 15, 2011. We adopted this guidance and presented a separate Statement of Comprehensive Income in our consolidated financial statements. In December 2011, the FASB temporarily delayed those requirements that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. During the deferral period, the FASB plans to re-evaluate the requirement, with a final decision expected in the fourth quarter of 2012.

 

In December 2011, the FASB issued guidance that concluded when a parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity must apply the accounting guidance for sales of real estate to determine whether it should derecognize the in substance real estate. The reporting entity is precluded from derecognizing the real estate until legal ownership has been transferred to the lender to satisfy the debt. The guidance is effective for calendar year-end public and nonpublic companies in 2013 and is to be applied on a prospective basis. Early adoption of the guidance is permitted. Adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

 

3.  Property Acquisitions

 

2012 Acquisitions

 

In September 2012, we acquired the aggregate 267,000 square foot office buildings at 635 and 641 Sixth Avenue for $173.0 million. We are currently in the process of analyzing the fair value of the in-place leases; and consequently, no value has yet been assigned to the leases. Therefore, the purchase price allocation is preliminary and subject to change.

 

In June 2012, we acquired a 215,000 square foot mixed-use office and retail building at 304 Park Avenue South for $135.0 million. The property was acquired with approximately $102.0 million in cash and $33.0 million in units of limited partnership interest in the Operating Partnership.

 

In October 2011, we formed a joint venture with Stonehenge Partners and, in January 2012, we acquired five retail and two multifamily properties in Manhattan for $193.1 million, inclusive of the issuance of $47.6 million aggregate liquidation preference of 4.5% Series G preferred units of limited partnership interest in the Operating Partnership. Simultaneous with the closing, we financed the residential component, which encompasses 385 units and 488,000 square feet, with an aggregate 12-year $100.0 million fixed rate mortgage which bears interest at 4.125% and one of the retail properties was financed with a 5-year $8.5 million mortgage. We hold an 80% interest in this joint venture which we consolidate as it is a VIE and we have been designated as the primary beneficiary.

 

15



Table of Contents

 

SL Green Realty Corp.

Notes to Consolidated Financial Statements

September 30, 2012

(Unaudited)

 

The following summarizes our allocation of the purchase price of the assets acquired and liabilities assumed upon the closing of these 2012 acquisitions (amounts in thousands):

 

 

 

304 Park
Avenue
South

 

Stonehenge
Properties

 

 

 

 

 

 

 

Land

 

$

54,189

 

$

65,533

 

Building and building leasehold

 

75,619

 

128,457

 

Above market lease value

 

2,824

 

594

 

Acquired in-place leases

 

8,265

 

9,573

 

Other assets, net of other liabilities

 

 

2,190

 

Assets acquired

 

140,897

 

206,347

 

 

 

 

 

 

 

Fair value adjustment to mortgage note payable

 

 

 

Below market lease value

 

5,897

 

13,239

 

Liabilities assumed

 

5,897

 

13,239

 

 

 

 

 

 

 

Purchase price allocation

 

$

135,000

 

$

193,108

 

 

 

 

 

 

 

Net consideration funded by us at closing

 

$

135,000

 

$

78,121

 

Equity and/or debt investment held

 

$

 

$

 

Debt assumed

 

$

 

$

 

 

2011 Acquisitions

 

In November 2011, we acquired all of the interests in 51 East 42nd Street, a 142,000 square-foot office building for approximately $80.0 million, inclusive of the issuance of $2.0 million aggregate liquidation preference of 6.0% Series H preferred units of limited partnership interest in the Operating Partnership.

 

In November 2011, we, along with The Moinian Group, formed a joint venture to recapitalize 180 Maiden Lane, a fully-leased, 1.1 million-square-foot Class A office tower. The consideration for our 49.9% stake in the joint venture included $41.0 million in cash and Operating Partnership units valued at $31.7 million. In connection with the issuance of these Operating Partnership units, we recorded an $8.3 million fair value adjustment due to changes in our stock price. Simultaneous with the closing of the recapitalization, the joint venture refinanced the existing $344.2 million indebtedness with a five-year $280-million mortgage. We consolidate this joint venture, which is a VIE and in which we have been designated as the primary beneficiary, due to the control we exert over leasing activities at the property.

 

In May 2011, we acquired a substantial ownership interest in the 205,000-square-foot office condominium at 110 East 42nd Street, along with control of the asset. We had previously provided a $16.0 million senior mezzanine loan as part of our sale of the condominium unit in 2007. The May 2011 transaction included a consensual modification of that loan. In conjunction with the transaction, we successfully restructured the in-place mortgage financing, which had previously been in default.

 

In April 2011, we purchased SITQ Immobilier, a subsidiary of Caisse de depot et placement du Quebec, or SITQ’s, 31.5% economic interest in 1515 Broadway, thereby consolidating full ownership of the 1,750,000 square foot building. The transaction valued the consolidated interests at $1.23 billion. This valuation was based on a negotiated sales agreement and took into consideration such factors as whether this was a distressed sale and whether a minority discount was warranted. We acquired the interest subject to the $458.8 million mortgage encumbering the property. We recognized a purchase price fair value adjustment of $475.1 million upon the closing of this transaction. This property, which we initially acquired in May 2002, was previously accounted for as an investment in unconsolidated joint ventures.

 

In January 2011, we purchased City Investment Fund, or CIF’s, 49.9% interest in 521 Fifth Avenue, thereby assuming full ownership of the 460,000 square foot building. The transaction valued the consolidated interests at approximately $245.7 million, excluding $4.5 million of cash and other assets acquired. We acquired the interest subject to the $140.0 million mortgage encumbering the property. We recognized a purchase price fair value adjustment of $13.8 million upon the closing of this transaction. In April 2011, we refinanced the property with a new $150.0 million 2-year mortgage which carries a floating rate of interest of 200 basis points over the 30-day LIBOR.  In connection with that refinancing, we acquired the fee interest in the property for $15.0 million.

 

16



Table of Contents

 

SL Green Realty Corp.

Notes to Consolidated Financial Statements

September 30, 2012

(Unaudited)

 

The following summarizes our allocation of the purchase price of the assets acquired and liabilities assumed upon the closing of these 2011 acquisitions (amounts in thousands):

 

 

 

51 East
42nd
Street

 

180
Maiden
Lane

 

110 East
42
nd
Street

 

1515
Broadway

 

521
Fifth
Avenue

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

$

44,095

 

$

191,523

 

$

34,000

 

$

462,700

 

$

110,100

 

Building

 

33,470

 

233,230

 

46,411

 

707,938

 

146,686

 

Above market lease value

 

5,616

 

7,944

 

823

 

18,298

 

3,318

 

Acquired in-place leases

 

4,333

 

29,948

 

5,396

 

98,661

 

23,016

 

Other assets, net of other liabilities

 

 

 

 

27,127

 

 

Assets acquired

 

87,514

 

462,645

 

86,630

 

1,314,724

 

283,120

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value adjustment to mortgage note payable

 

 

 

 

(3,693

)

 

Below market lease value

 

7,514

 

20,320

 

2,326

 

84,417

 

25,977

 

Liabilities assumed

 

7,514

 

20,320

 

2,326

 

80,724

 

25,977

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase price allocation

 

$

80,000

 

$

442,325

 

$

84,304

 

$

1,234,000

 

$

257,143

 

 

 

 

 

 

 

 

 

 

 

 

 

Net consideration funded by us at closing

 

$

81,632

 

$

81,835

 

$

2,744

 

$

259,228

 

$

70,000

 

Equity and /or debt investment held

 

 

 

$

16,000

 

$

40,942

 

$

41,432

 

Debt assumed

 

$

 

$

 

$

65,000

 

$

458,767

 

$

140,000

 

 

4.  Property Dispositions and Assets Held for Sale

 

An entity that holds the property which served as collateral for our loan position, which is collateralized by a property in London, was determined to be a VIE under a reconsideration event and we have been determined to be the primary beneficiary. As a result of this determination, we consolidated the entity and reclassified the investment to assets held for sale on the consolidated balance sheet in June 2012.

 

In February 2012, we sold our leased fee interest at 292 Madison Avenue for $85.0 million. We recognized a gain of $6.6 million on the sale.

 

In May 2011, we sold our property located at 28 West 44th Street for $161.0 million. The property is approximately 359,000 square feet. We recognized a gain of $46.1 million on the sale.

 

Discontinued operations includes the results of operations of real estate assets sold prior to, or held for sale as of, September 30, 2012. This includes 28 West 44th Street, which was sold in May 2011, 292 Madison Avenue, which was sold in February 2012, and the London property, which is held for sale.

 

17



Table of Contents

 

SL Green Realty Corp.

Notes to Consolidated Financial Statements

September 30, 2012

(Unaudited)

 

The following table summarizes income from discontinued operations for the three and nine months ended September 30, 2012 and 2011, respectively (amounts in thousands).

 

 

 

Three
Months

Ended

 

Three
Months
Ended

 

Nine
Months

Ended

 

Nine
Months
Ended

 

 

 

September
30,

 

September
30,

 

September
30,

 

September
30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenues

 

 

 

 

 

 

 

 

 

Rental revenue

 

$

1,626

 

$

1,950

 

$

2,142

 

$

10,685

 

Escalation and reimbursement revenues

 

 

 

 

873

 

Other income (loss)

 

(376

)

 

(376

)

60

 

Total revenues

 

1,250

 

1,950

 

1,766

 

11,618

 

Operating expense

 

435

 

3

 

431

 

1,648

 

Real estate taxes

 

 

 

 

1,034

 

Transaction related costs

 

65

 

 

65

 

 

Interest expense, net of interest income

 

527

 

825

 

1,125

 

3,429

 

Amortization of deferred financing costs

 

 

6

 

 

166

 

Depreciation and amortization

 

 

 

 

676

 

Total expenses

 

1,027

 

834

 

1,621

 

6,953

 

Net income from discontinued operations

 

$

223

 

$

1,116

 

$

145

 

$

4,665

 

 

5.  Debt and Preferred Equity Investments

 

During the nine months ended September 30, 2012 and 2011, our debt and preferred equity investments (net of discounts) increased approximately $374.0 million and $516.1 million, respectively, due to originations, purchases, accretion of discounts and paid-in-kind interest.  We recorded approximately $288.3 million and $582.8 million in repayments, participations, sales, foreclosures and loan loss reserves during those periods, respectively, which offset the increases in debt and preferred equity investments.

 

As of September 30, 2012 and December 31, 2011, we held the following debt investments with an aggregate weighted average current yield of approximately 9.3% (amounts in thousands):

 

Loan
Type

 

September
30, 2012

Senior
Financing

 

September 30,
2012
Carrying Value,
Net of Discounts

 

December 31,
2011
Carrying Value,
Net of Discounts

 

Initial
Maturity
Date

 

Other Loan

 

$

15,000

 

$

3,500

 

$

3,500

 

September 2021

 

Mortgage/Mezzanine Loan(1)

 

1,109,000

 

113,828

 

108,817

 

March 2017

 

Mezzanine Loan

 

165,000

 

71,015

 

40,375

 

November 2016

 

Junior Participation

 

133,000

 

49,000

 

49,000

 

June 2016

 

Mortgage/Mezzanine Loan

 

169,822

 

46,476

 

46,416

 

May 2016

 

Mezzanine Loan

 

177,000

 

16,205

 

17,112

 

May 2016

 

Mezzanine Loan

 

205,000

 

66,147

 

64,973

 

February 2016

 

Junior Participation(2)(4)

 

 

 

8,725

 

 

Junior Participation(3)(4)

 

 

 

11,000

 

 

Total fixed rate

 

$

1,973,822

 

$

366,171

 

$

349,918

 

 

 

Mezzanine Loan(5)

 

$

81,000

 

$

34,940

 

$

34,940

 

October 2016

 

Mezzanine Loan

 

55,000

 

35,000

 

35,000

 

July 2016

 

Mortgage/Mezzanine Loan

 

 

41,647

 

 

February 2015

 

Mezzanine Loan

 

45,000

 

10,000

 

10,000

 

January 2015

 

Mortgage

 

 

15,000

 

 

September 2014

 

Mezzanine Loan

 

170,000

 

60,000

 

60,000

 

August 2014

 

Mortgage/Mezzanine Loan(9)

 

330,000

 

132,000

 

30,747

 

July 2014

 

Mezzanine Loan

 

62,500

 

37,500

 

 

July 2014

 

Mezzanine Loan(6)

 

75,000

 

7,650

 

7,650

 

July 2013

 

Junior Participation(4)

 

60,250

 

10,875

 

10,875

 

June 2013

 

Mortgage(7)

 

28,500

 

3,000

 

3,000

 

February 2013

 

Mezzanine Loan(8)

 

 

 

8,392

 

 

Mortgage(10)

 

 

 

86,339

 

 

Other Loan

 

 

 

3,196

 

 

Total floating rate

 

$

907,250

 

$

387,612

 

$

290,139

 

 

 

Total

 

2,881,072

 

753,783

 

640,057

 

 

 

Loan loss reserve(4)

 

 

(7,000

)

(19,125

)

 

Total

 

$

2,881,072

 

$

746,783

 

$

620,932

 

 

 

 

 

18



Table of Contents

 

SL Green Realty Corp.

Notes to Consolidated Financial Statements

September 30, 2012

(Unaudited)

 


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

(2)          This loan was in default and on non-accrual status.  We sold our interest in the loan in February 2012 and recovered $0.4 million against the reserve on this loan.

(3)          In March 2012, we sold our interest in this loan and recovered $2.0 million against the reserve on this loan.

(4)          Loan loss reserves are specifically allocated to investments.  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 or that reserves will be adequate over time to protect against potential future losses.

(5)          As of September 30, 2012, we were committed to fund an additional $15.0 million in connection with this loan.

(6)          In November 2011, we entered into a loan participation agreement in the amount of $7.4 million on a $15.0 million mortgage. Due to our continued involvement with the loan, the portion that was participated out has been recorded in other assets and other liabilities in the accompanying consolidated balance sheet.

(7)          In June 2011, we funded an additional $5.5 million and extended the maturity date of this loan to February 2013. In September 2011, we entered into a loan participation in the amount of $28.5 million on a $31.5 million mortgage. We have assigned our right as servicer to a third party. Due to our continued involvement with the loan, the portion that was participated out has been recorded in other assets and other liabilities in the accompanying consolidated balance sheet.

(8)          In connection with the extension of this loan, a portion of the mezzanine loan was converted to preferred equity. See note 4 to the next table. This mezzanine loan was on non-accrual status as of January 2012. In June 2012, we acquired an additional 38.6% participation interest in this mezzanine loan. As a result of this acquisition, we have complete control over this position and can, therefore, control any restructuring. On July 26, 2012, the mezzanine holders foreclosed out the equity position and  as a result, we consolidated the operations of this investment in August and September 2012. In September 2012, we, together with Blackstone Real Estate Partners VII, or Blackstone, Gramercy Capital Corp. and Square Mile Capital Management LLC, formed a joint venture to recapitalize the underlying West Coast office portfolio and restructure the senior and mezzanine loans that expired in August 2012. We contributed our debt and preferred equity investment to the joint venture, and accounted for our investment under the equity method as of September 28, 2012 because we no longer controlled the joint venture. We own a 27.63% ownership interest in the joint venture. Blackstone, holding a 56.3% ownership interest in the joint venture, will oversee the portfolio’s management and leasing activities through its Equity Office Properties affiliate. See Note 6, “Investments in Unconsolidated Joint Ventures.”

(9)          As a result of the acquisition of the remaining 50% interest in November 2011 in the joint venture which held an investment in a debt position on the property located at 450 West 33rd Street, we have reclassified our investment as a debt investment. See Note 6, “Investments in Unconsolidated Joint Ventures.” As part of the restructuring and refinancing of the related senior mortgage in July 2012, our outstanding investment in the amount of $49.9 million was repaid in full at maturity and we also entered into a loan participation in the amount of $182 million on the $462 million outstanding senior mortgage which maturity was extended to July 2014. In September 2012, we sold $50 million of our interest in the senior mortgage to a third party.

(10)   We hold an 88% interest in the consolidated joint venture that acquired this loan. This investment is denominated in British Pounds. This loan was not repaid on its maturity date and was placed in receivership. The entity that holds the property which served as collateral for our loan position was determined to be a VIE under a reconsideration event and we have been determined to be the primary beneficiary. As a result of this determination, we consolidated the entity and reclassified the investment to assets held for sale on the consolidated balance sheet in June 2012.

 

Preferred Equity Investments

 

As of September 30, 2012 and December 31, 2011, we held the following preferred equity investments, with an aggregate weighted average current yield of approximately 10.11% (amounts in thousands):

 

 

 

Type

 

September
30,
2012

Senior
Financing

 

September 30,
2012

Carrying
Value, Net of
Discounts

 

December 31,
2011

Carrying
Value, Net of
Discounts

 

Initial
Mandatory
Redemption

 

Preferred equity(1)

 

$

926,260

 

$

208,903

 

$

203,080

 

July 2016

 

Preferred equity(1)(2)

 

57,087

 

17,747

 

 

April 2016

 

Preferred equity(1)(3)

 

480,000

 

98,208

 

141,980

 

July 2014

 

Preferred equity(1)(4)(5)

 

 

 

51,000

 

 

Loan loss reserve(5)

 

 

 

(31,050

)

 

 

 

$

1,463,347

 

$

324,858

 

$

365,010

 

 

 

 

19



Table of Contents

 

SL Green Realty Corp.

Notes to Consolidated Financial Statements

September 30, 2012

(Unaudited)

 


(1)

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

(2)

We are committed to fund an additional $10.0 million on this loan. As of September 30, 2012, we had funded $2.2 million of this commitment.

(3)

This is a fixed rate investment. This investment was classified as held for sale at June 30, 2009, but as held-to-maturity for all periods subsequent to June 30, 2009. The reserve previously taken against this loan is being accreted up to the face amount through the maturity date. In connection with a recapitalization of the investment, our mezzanine loan was converted to preferred equity in 2011. We also made an additional $50.0 million junior preferred equity loan. This junior preferred equity loan was repaid at par in February 2012.

(4)

This investment was on non-accrual status. In connection with the extension of this loan, a portion of the mezzanine loan was converted to preferred equity in 2011. See Note 8 of the prior table. In June 2012, we acquired 100% of the interests in the most senior preferred equity position. In September 2012, we have reclassified our debt and preferred equity investments as investments in unconsolidated joint ventures as part of the recapitalization and refinancing transaction discussed in Note 8 of the prior table.

(5)

Loan loss reserves are specifically allocated to investments. 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.

 

The following table is a rollforward of our total loan loss reserves at September 30, 2012 and December 31, 2011 (in thousands):

 

 

 

September 30,
2012

 

December 31,
2011

 

Balance at beginning of year

 

$

50,175

 

$

61,361

 

Expensed

 

3,000

 

10,875

 

Recoveries

 

(2,436

)

(4,370

)

Charge-offs and reclassifications

 

(43,739

)

(17,691

)

Balance at end of period

 

$

7,000

 

$

50,175

 

 

At September 30, 2012 and December 31, 2011, all debt and preferred equity investments, other than as noted above, were performing in accordance with the terms of the loan agreements.

 

We have determined that we have one portfolio segment of financing receivables at September 30, 2012 and December 31, 2011 comprising commercial real estate, which is primarily recorded in debt and preferred equity investments. Included in other assets is an additional amount of financing receivables totaling approximately $120.1 million at September 30, 2012 and $108.7 million at December 31, 2011. The nonaccrual balance of financing receivables at September 30, 2012 and December 31, 2011 was zero and $102.6 million, respectively. No financing receivables were 90 days past due at September 30, 2012. The recorded investment for financing receivables past due 90 days associated with two financing receivables was $17.3 million at December 31, 2011. All financing receivables are individually evaluated for impairment.

 

The following table presents impaired loans, which may include non-accrual loans, as of September 30, 2012 and December 31, 2011, respectively (amounts in thousands):

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Unpaid Principal
Balance

 

Recorded
Investment

 

Allowance
Allocated

 

Unpaid
Principal
Balance

 

Recorded
Investment

 

Allowance
Allocated

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

 

$

 

$

 

$

106,623

 

$

83,378

 

$

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

10,750

 

10,750

 

7,000

 

86,121

 

81,475

 

50,175

 

Total

 

$

10,750

 

$

10,750

 

$

7,000

 

$

192,744

 

$

164,853

 

$

50,175

 

 

The following table presents the average recorded investment in impaired loans, which may include non-accrual loans and the related investment and preferred equity income recognized during the three and nine months ended September 30, 2012 and 2011, respectively (amounts in thousands):

 

 

 

Three Months
Ended

September 30,
2012

 

Three Months
Ended

September 30,
2011

 

Nine Months
Ended

September 30,
2012

 

Nine Months
Ended

September 30,
2011

 

 

 

 

 

 

 

 

 

 

 

Average recorded investment in impaired loans

 

$

40,304

 

$

174,790

 

$