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 March 31, 2013
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 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 91,597,800 as of April 30, 2013.
INDEX
PAGE
PART I.
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2013 (unaudited) and December 31, 2012
3
Consolidated Statements of Income for the three months ended March 31, 2013 and 2012 (unaudited)
4
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2012 (unaudited)
5
Consolidated Statement of Equity for the three months ended March 31, 2013 (unaudited)
6
Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012 (unaudited)
7
Notes to Consolidated Financial Statements (unaudited)
8
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
39
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
55
ITEM 4.
CONTROLS AND PROCEDURES
PART II.
OTHER INFORMATION
56
LEGAL PROCEEDINGS
ITEM 1A.
RISK FACTORS
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
DEFAULTS UPON SENIOR SECURITIES
MINE SAFETY DISCLOSURES
ITEM 5.
ITEM 6.
EXHIBITS
57
SIGNATURES
58
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
SL Green Realty Corp.
Consolidated Balance Sheets
(Amounts in thousands, except per share data)
March 31, 2013
December 31, 2012
(Unaudited)
Assets
Commercial real estate properties, at cost:
Land and land interests
$
2,886,099
Building and improvements
7,452,347
7,389,766
Building leasehold and improvements
1,346,481
1,346,748
Properties under capital lease
47,179
40,340
11,732,106
11,662,953
Less: accumulated depreciation
(1,461,775
)
(1,393,323
10,270,331
10,269,630
Assets held for sale
—
4,901
Cash and cash equivalents
220,104
189,984
Restricted cash
130,233
136,071
Investment in marketable securities
22,994
21,429
Tenant and other receivables, net of allowance of $20,947 and $21,652 in 2013 and 2012, respectively
41,950
48,544
Related party receivables
11,169
7,531
Deferred rents receivable, net of allowance of $28,475 and $29,580 in 2013 and 2012, respectively
355,250
340,747
Debt and preferred equity investments, net of discount of $11,251 and $13,572 and allowance of $7,000 both in 2013 and 2012, respectively
1,443,834
1,357,203
Investments in unconsolidated joint ventures
1,073,130
1,032,243
Deferred costs, net
252,018
261,145
Other assets
722,952
718,326
Total assets
14,543,965
14,387,754
Liabilities
Mortgages and other loans payable
4,815,485
4,615,464
Revolving credit facility
30,000
70,000
Term loan and senior unsecured notes
1,732,588
1,734,956
Accrued interest payable and other liabilities
73,666
73,769
Accounts payable and accrued expenses
143,812
159,598
Deferred revenue
322,317
321,764
Capitalized lease obligations
43,404
37,518
Deferred land leases payable
19,750
20,897
Dividend and distributions payable
37,737
37,839
Security deposits
49,803
46,253
Liabilities related to assets held for sale
136
Junior subordinate deferrable interest debentures held by trusts that issued trust preferred securities
100,000
Total liabilities
7,368,562
7,218,194
Commitments and contingencies
Noncontrolling interest in the Operating Partnership
220,174
212,907
Series G preferred units, $25.00 liquidation preference, 1,902 issued and outstanding at both March 31, 2013 and December 31, 2012, respectively
47,550
Series H preferred units, $25.00 liquidation preference, 80 issued and outstanding at both March 31, 2013 and December 31, 2012, respectively
2,000
Equity
SL Green stockholders’ equity:
Series C preferred stock, $0.01 par value, $25.00 liquidation preference, 7,700 issued and outstanding at both March 31, 2013 and December 31, 2012, respectively
180,340
Series I preferred stock, $0.01 par value, $25.00 liquidation preference, 9,200 issued and outstanding at both March 31, 2013 and December 31, 2012, respectively
221,932
221,965
Common stock, $0.01 par value 160,000 shares authorized and 95,201 and 94,896 issued and outstanding at March 31, 2013 and December 31, 2012, respectively (including 3,646 and 3,646 shares held in Treasury at March 31, 2013 and December 31, 2012, respectively)
953
950
Additional paid-in-capital
4,697,528
4,667,900
Treasury stock at cost
(322,858
Accumulated other comprehensive loss
(26,117
(29,587
Retained earnings
1,665,468
1,701,092
Total SL Green stockholders’ equity
6,417,246
6,419,802
Noncontrolling interests in other partnerships
488,433
487,301
Total equity
6,905,679
6,907,103
Total liabilities and equity
The accompanying notes are an integral part of these financial statements.
Consolidated Statements of Income
(Unaudited, and amounts in thousands, except per share data)
Three Months Ended March 31,
2013
2012
Revenues
Rental revenue, net
270,489
260,762
Escalation and reimbursement
41,000
41,656
Investment and preferred equity income
52,708
26,338
Other income
5,774
10,377
Total revenues
369,971
339,133
Expenses
Operating expenses, including approximately $4,150 (2013) and $3,471 (2012) paid to related parties
73,633
73,254
Real estate taxes
53,688
51,480
Ground rent
10,990
8,806
Interest expense, net of interest income
81,336
80,137
Amortization of deferred financing costs
4,463
3,580
Depreciation and amortization
80,683
77,069
Loan loss and other investment reserves, net of recoveries
564
Transaction related costs
1,358
1,056
Marketing, general and administrative
21,067
20,196
Total expenses
327,218
316,142
Income from continuing operations before equity in net income (loss) from unconsolidated joint ventures, equity in net gain on sale of interest in unconsolidated joint venture/real estate, noncontrolling interests and discontinued operations
42,753
22,991
Equity in net income (loss) from unconsolidated joint ventures
5,073
(1,560
Equity in net gain on sale of interest in unconsolidated joint venture/real estate
7,260
Loss on sale of investment in marketable securities
(57
Loss on early extinguishment of debt
(18,513
Income from continuing operations
29,256
28,691
Net loss from discontinued operations
(32
(161
Gain on sale of discontinued operations
1,113
6,627
Net income
30,337
35,157
Net income attributable to noncontrolling interests:
Noncontrolling interests in the Operating Partnership
(555
(888
(2,901
(1,071
Preferred unit distributions
(565
(397
Net income attributable to SL Green
26,316
32,801
Perpetual preferred stock dividends
(7,407
(7,545
Net income attributable to SL Green common stockholders
18,909
25,256
Amounts attributable to SL Green common stockholders:
17,859
11,997
7,014
(31
(157
1,081
6,402
Basic earnings per share:
Net income from continuing operations before discontinued operations
0.20
0.14
0.08
0.01
0.07
0.21
0.29
Diluted earnings per share:
Dividends per share
0.33
0.25
Basic weighted average common shares outstanding
91,399
86,744
Diluted weighted average common shares and common share equivalents outstanding
94,302
90,173
Consolidated Statements of Comprehensive Income
(Unaudited, and amounts in thousands)
Other comprehensive income:
Net unrealized loss on derivative instruments
(41
(146
Reclassification of net realized loss on derivatives designated as cashflow hedges into interest expense
468
460
SL Green’s share of joint venture net unrealized gain on derivative instruments
221
Reclassification of SL Green’s share of joint venture net realized loss on derivatives designated as cashflow hedges into equity in net income from unconsolidated joint ventures
1,240
2,743
Unrealized gain on marketable securities
1,641
770
Other comprehensive income
3,529
3,885
Comprehensive income
33,866
39,042
Net income attributable to noncontrolling interests
(4,021
(2,356
Other comprehensive (loss) income attributable to noncontrolling interests in the Operating Partnership
(59
184
Comprehensive income attributable to SL Green common stockholders
29,786
36,870
Consolidated Statement of Equity
SL Green Realty Corp. Stockholders
Series C
Series I
Common Stock
Additional
Accumulated Other
Preferred Stock
Shares
Par Value
Paid- In-Capital
Treasury Stock
Comprehensive Income (Loss)
Retained Earnings
Noncontrolling Interests
Total
Balance at December 31, 2012
91,250
2,901
29,217
3,470
Preferred dividends
DRIP proceeds
13
Conversion of units of the Operating Partnership to common stock
224
17,285
17,287
Reallocation of noncontrolling interest in the Operating Partnership
(24,016
Amortization of deferred compensation plan
7,822
Preferred stock issuance costs
(33
Common stock issuance costs
(24
Proceeds from stock options exercised
79
1
4,532
4,533
Contributions to consolidated joint venture
3,110
Cash distributions to noncontrolling interests
(4,879
Cash distribution declared ($0.33 per common share, none of which represented a return of capital for federal income tax purposes)
(30,517
Balance at March 31, 2013
91,555
Consolidated Statements of Cash Flows
Operating Activities
Adjustments to reconcile net income to net cash provided by operating activities:
85,146
80,663
Equity in net (income) loss from unconsolidated joint ventures
(5,073
1,560
Distributions of cumulative earnings from unconsolidated joint ventures
6,901
4,408
Equity in net gain on sale of interest in unconsolidated joint venture interest/real estate
(7,260
(1,113
(6,627
18,513
Deferred rents receivable
(13,923
(21,123
Other non-cash adjustments
(22,115
5,554
Changes in operating assets and liabilities:
Restricted cash — operations
5,447
(12,771
Tenant and other receivables
7,409
14
(3,638
(3,664
Deferred lease costs
(4,646
(7,152
(21,185
(24,230
Accounts payable, accrued expenses and other liabilities
869
4,118
Deferred revenue and land leases payable
19,596
7,620
Net cash provided by operating activities
102,525
56,831
Investing Activities
Acquisitions of real estate property
(48,500
(145,558
Additions to land, buildings and improvements
(11,617
(32,561
Escrowed cash — capital improvements/acquisition deposits
191
(1,533
(49,996
(105,633
Distributions in excess of cumulative earnings from unconsolidated joint ventures
5,333
16,652
Net proceeds from disposition of real estate/joint venture interest
5,852
23,088
Other investments
(10,146
(40,016
Debt and preferred equity and other investments, net of repayments/participations
(65,607
(8,631
Net cash used in investing activities
(174,490
(294,192
Financing Activities
Proceeds from mortgages and other loans payable
980,333
108,500
Repayments of mortgages and other loans payable
(787,887
(13,526
Proceeds from credit facility and senior unsecured notes
155,000
300,000
Repayments of credit facility and senior unsecured notes
(199,960
(352,454
Proceeds from stock options exercised and DRIP issuance
4,546
102,089
Net proceeds from sale of common stock/preferred stock
122,953
Purchases of treasury stock
(11,158
Distributions to noncontrolling interests in other partnerships
(7,117
Contributions from noncontrolling interests in other partnerships
18,331
Distributions to noncontrolling interests in the Operating Partnership
(853
(762
Dividends paid on common and preferred stock
(38,591
(28,453
Deferred loan costs and capitalized lease obligations
(8,677
(5,569
Net cash provided by financing activities
102,085
232,834
Net increase (decrease) in cash and cash equivalents
30,120
(4,527
Cash and cash equivalents at beginning of period
138,192
Cash and cash equivalents at end of period
133,665
Notes to Consolidated Financial Statements
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 are 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 the 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 “we,” “our” and “us” means the Company and all entities owned or controlled by the Company, including the Operating Partnership.
Substantially all of our assets are held by, and our operations are conducted through, the Operating Partnership. The Company is the sole managing general partner of the Operating Partnership. As of March 31, 2013, noncontrolling investors held, in the aggregate, a 2.75% 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 March 31, 2013, 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. Our investments in the New York Metropolitan area also include investments in Brooklyn, Long Island, Westchester County, Connecticut and Northern New Jersey, which are collectively known as the Suburban assets:
Location
Ownership
Number of Properties
Square Feet
Weighted Average Occupancy(1)
Manhattan
Consolidated properties
27
18,347,945
93.8
%
Unconsolidated properties
9
5,934,434
95.3
Suburban
26
3,899,800
78.4
1,539,700
84.7
67
29,721,879
91.6
(1) The weighted average occupancy represents the total leased square feet divided by total available rentable square feet.
As of March 31, 2013, we also owned investments in 14 stand-alone retail properties encompassing approximately 465,207 square feet, 15 development properties encompassing approximately 2,580,691 square feet, three residential properties encompassing 468 units (approximately 497,093 square feet), two land interests encompassing 961,400 square feet and 31 west coast office properties encompassing approximately 4,473,603 square feet. In addition, we manage two office properties owned by third parties and affiliated companies encompassing approximately 626,415 rentable square feet. As of March 31, 2013, we also held debt and preferred equity investments with a book value of $1.4 billion.
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
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 March 31, 2013 and the results of operations for the periods presented have been included. The 2013 operating results for the period presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. 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, 2012.
The balance sheet at December 31, 2012 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, “Investments in Unconsolidated Joint Ventures.” All significant intercompany balances and transactions have been eliminated.
We consolidate variable interest entities, or VIEs, in which we are considered the primary beneficiary. The primary beneficiary of a VIE is the entity that 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. Included in commercial real estate properties on our consolidated balance sheets as of March 31, 2013 and December 31, 2012 are approximately $596.1 million and $607.4 million, respectively, related to our consolidated VIEs. Included in mortgages and other loans payable on our consolidated balance sheets as of March 31, 2013 and December 31, 2012 are approximately $377.4 million and $379.6 million, respectively, related to our consolidated VIEs.
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 and 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. We do not believe that the values of any of our consolidated properties or equity investments were impaired at either March 31, 2013 or December 31, 2012.
We allocate the purchase price of real estate to land and building (inclusive of tenant improvements) 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 (inclusive of tenant improvements) 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 amortize such below market lease value into rental income over the renewal period.
We recognized an increase of approximately $3.9 million and $2.1 million in rental revenue for the three months ended March 31, 2013 and 2012, 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 $1.3 million and $1.0 million for the three months ended March 31, 2013 and 2012, respectively.
The following summarizes our identified intangible assets (acquired above-market leases and in-place leases) and intangible liabilities (acquired below-market leases) as of March 31, 2013 and December 31, 2012 (amounts in thousands):
Identified intangible assets (included in other assets):
Gross amount
725,708
725,861
Accumulated amortization
(279,714
(263,107
Net
445,994
462,754
Identified intangible liabilities (included in deferred revenue):
652,117
651,921
(374,239
(357,225
277,878
294,696
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 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 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.
10
We use the following methods and assumptions in estimating fair value disclosures for financial instruments.
· 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.
· Derivative instruments: The fair value of derivative instruments is based on current market data received from financial sources that trade such instruments and are based on prevailing market data and derived from third party proprietary models based on well-recognized financial principles and reasonable estimates about relevant future market conditions.
· 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 March 31, 2013 and December 31, 2012 is approximately $5.0 million and $3.3 million, respectively, in net unrealized gains related to marketable securities.
The cost of bonds and marketable securities sold was determined using the specific identification method.
At March 31, 2013 and December 31, 2012, we held the following marketable securities (in thousands):
Level 1 — Equity marketable securities
3,903
2,202
Level 2 — Commercial mortgage-backed securities
15,521
15,575
Level 3 — Rake bonds
3,570
3,652
Total marketable securities available-for-sale
The cost basis of the Level 3 securities was $3.7 million at March 31, 2013 and December 31, 2012. There were no sales of Level 3 securities during the three months ended March 31, 2013. The Level 3 securities mature at various times through 2030.
Revenue Recognition
Rental revenue is recognized on a straight-line basis over the term of the lease. Rental revenue recognition commences when the
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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 amounts funded to construct the tenant improvements as a capital asset. For these tenant improvements, management records amounts reimbursed by tenants as a reduction of the capital asset. 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 consolidated 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 consolidated 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) are typically 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 interest income and principal becomes doubtful. Interest 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.
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
12
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 no loan loss reserves during the three months ended March 31, 2013. During the three months ended March 31, 2012, we recorded loan loss reserves of $3.0 million on investments being held to maturity and approximately $2.4 million in recoveries in connection with the sale of our 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 and state income tax liability for these entities. Our TRSs recorded Federal, state and local tax provisions of $1.6 million and zero during the three months ended March 31, 2013 and 2012, respectively, and made estimated tax payments of $0.1 million and zero during the three months ended March 31, 2013 and 2012, 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 13, “Equity.”
Our stock options are recorded at fair value at the time of issuance. Fair value of the stock options is determined using the Black-Scholes option-pricing model. The Black-Scholes 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.
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, adopts any relevant performance measures and communicates the award to the employees. 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 our 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 the 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 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 Suburban properties located in Brooklyn, Long Island, Westchester County, Connecticut, Northern New Jersey and the west coast. The tenants located in our buildings operate in various industries. Other than three tenants who account for approximately 6.0%, 6.5% and 7.0% of our share of annualized cash rent, 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 March 31, 2013. Approximately 9%, 7%, 6% and 6% of our annualized cash rent for consolidated properties for the three months ended March 31, 2013 was attributable to 1515 Broadway, 1185 Avenue of the Americas, 420 Lexington Avenue and One Madison Avenue, respectively. In addition, two debt and preferred equity investments accounted for more than 10% of the income earned on debt and preferred equity investments during the three months ended March 31, 2013.
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 February 2013, the FASB issued guidance on the presentation and disclosure of reclassification adjustments out of accumulated other comprehensive income, or AOCI. The standard requires an entity to present information about significant items reclassified out
of AOCI by component either on the face of the statement where net income is presented or as a separate disclosure in the notes to financial statements. The guidance became effective for calendar year-end public companies beginning in the first quarter of 2013 and its adoption did not have a material impact on our consolidated financial statements.
3. Property Acquisitions
2013 Acquisitions
In March 2013, we, along with Magnum Real Estate Group, acquired 84 residential apartment units, consisting of 72 apartment units and 12 townhouses, located at 248-252 Bedford Avenue, Williamsburg, Brooklyn for $54.9 million. Simultaneous with the closing, the joint venture closed on a five-year $22.0 million mortgage loan which carries a floating rate of interest of 225 basis points over LIBOR. The property sits on top of a commercial property already owned by us. We hold a 90% controlling interest in this joint venture. We are currently in the process of analyzing the fair value of the investment. Therefore, the purchase price allocation is preliminary and subject to change.
2012 Acquisitions
In December 2012, we acquired a 68,000 square foot (unaudited) mixed use retail, office and residential building located at 131-137 Spring Street for $122.3 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 December 2012, we acquired the aggregate 42,000 square foot (unaudited) vacant retail buildings located at 985-987 Third Avenue for $18.0 million.
In October 2012, we, along with Stonehenge Partners, acquired a 99-year leasehold position covering an 82,250 square foot (unaudited), 96 unit residential building located at 1080 Amsterdam Avenue which we plan to redevelop into luxury residential units.
In September 2012, we acquired the aggregate 267,000 square foot (unaudited) office buildings located at 635 and 641 Sixth Avenue for $173.0 million.
In June 2012, we acquired a 215,000 square foot (unaudited) office building located 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 of 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 of the Operating Partnership. Simultaneous with the closing, we financed the multifamily component, which encompasses 385 units and 488,000 square feet (unaudited), with an aggregate 12-year $100.0 million fixed rate mortgage which bears interest at 4.125% and one of the retail properties financed with a five-year $8.5 million fixed rate mortgage which bears interest at 3.75%. We hold an 80% interest in this joint venture, which we consolidate as a VIE since we have been designated as the primary beneficiary.
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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):
635-641 Sixth Avenue
304 Park Avenue South
Stonehenge Properties
Land
69,848
54,189
65,533
Building and building leasehold
104,474
75,619
128,457
Above market lease value
2,824
594
Acquired in-place leases
7,727
8,265
9,573
Other assets, net of other liabilities
2,190
Assets acquired
182,049
140,897
206,347
Fair value adjustment to mortgage note payable
Below market lease value
9,049
5,897
13,239
Liabilities assumed
Purchase price allocation
173,000
135,000
193,108
Net consideration funded by us at closing
78,121
Equity and/or debt investment held
Debt assumed
4. Property Dispositions and Assets Held for Sale
In February 2013, we, along with our joint venture partner, sold our property located at 44 West 55th Street for $6.3 million. We recognized a gain of $1.1 million on the sale.
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.
Discontinued operations included the results of operations of real estate assets sold prior to March 31, 2013. This included 44 West 55th Street, which was sold in February 2013 and 292 Madison Avenue, which was sold in February 2012.
The following table summarizes income from discontinued operations for the three months ended March 31, 2013 and 2012, respectively (in thousands).
Rental revenue
(10
568
Escalation and reimbursement revenues
575
Operating expenses
18
598
95
22
736
5. Debt and Preferred Equity Investments
During the three months ended March 31, 2013 and 2012, our debt and preferred equity investments (net of discounts) increased approximately $208.6 million and $76.3 million, respectively, due to originations, purchases, accretion of discounts and paid-in-kind interest. We recorded repayments, participations and sales of approximately $121.9 million and $59.7 million, respectively, and loan loss reserves of zero and $3.0 million during the three months ended March 31, 2013 and 2012, respectively, which offset the increases in debt and preferred equity investments.
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As of March 31, 2013 and December 31, 2012, we held the following debt investments with an aggregate weighted average current yield of approximately 11.1% at March 31, 2013 (in thousands):
Loan Type
March 31, 2013 Senior Financing
March 31, 2013 Carrying Value, Net of Discounts
December 31, 2012 Carrying Value, Net of Discounts
Initial Maturity Date
Other Loan
399,500
15,000
March 2015
Mezzanine Loan
205,000
66,936
66,544
February 2016
Mortgage/Mezzanine Loan
168,567
46,511
46,496
May 2016
177,000
15,644
15,906
Junior Participation
133,000
49,000
June 2016
165,000
71,119
71,067
November 2016
Mortgage/Mezzanine Loan(1)
1,109,000
73,292
115,804
March 2017
3,500
September 2021
Mortgage(2)
218,270
218,068
Total fixed rate
2,372,067
559,272
586,385
Junior Participation(3)
60,250
10,875
June 2013
Mezzanine Loan(4)
75,000
7,650
July 2013
Mezzanine Loan(5)
December 2013
Mortgage/Mezzanine Loan(6)
330,000
132,000
July 2014
Mezzanine Loan(7)
62,500
37,500
170,000
60,000
August 2014
Mortgage
September 2014
Mortgage/Mezzanine Loan(8)
50,439
47,679
February 2015
Mezzanine Loan(9)
92,711
56,289
December 2015
Mezzanine Loan(10)
775,000
March 2016
55,000
35,000
July 2016
Mezzanine Loan(11)
81,000
35,202
34,940
October 2016
Total floating rate
1,701,461
544,955
436,933
4,073,528
1,104,227
1,023,318
Loan loss reserve(3)
(7,000
1,097,227
1,016,318
(1) Interest is added to the principal balance for this accrual only loan. In January 2013, we sold 50% of the mezzanine loan for $57.8 million and recognized additional income of $12.9 million, which is included in investment and preferred equity income on the consolidated statements of income. The unaccrued interest during the period in which the loan was on non-accrual status is being accrued as of January 2013.
(2) In November 2012, we acquired this non-performing loan with an original balance of $219.0 million, which accrues interest at its default rate. This loan matured in June 2012.
(3) 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.
(4) 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.
(5) In February 2013, we entered into a loan participation agreement in the amount of $30.0 million on a $100.0 million mortgage. The note has two one-year extension options.
(6) 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 $182.0 million on the $462.0 million outstanding senior mortgage which maturity was extended to July 2014. In September 2012, we sold $50.0 million of our interest in the senior mortgage to a third party.
(7) In November 2012, we entered into a loan participation agreement in the amount of $5.0 million on a $37.5 million mortgage. As a result of the transfer not meeting the conditions for sale accounting, the portion that was participated out has been recorded in other liabilities in the accompanying consolidated balance sheet.
(8) As of March 31, 2013, we were committed to fund an additional $8.3 million in connection with this loan.
(9) As of March 31, 2013, we were committed to fund an additional $28.7 million in connection with this loan.
(10) In March 2013, we originated a $150.0 million junior mezzanine loan and simultaneously sold one-half of our interest at par.
(11) As of March 31, 2013, we were committed to fund an additional $14.8 million in connection with this loan.
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Preferred Equity Investments
As of March 31, 2013 and December 31, 2012, we held the following preferred equity investments, with an aggregate weighted average current yield of approximately 11.4% at March 31, 2013 (in thousands):
Type
Initial Mandatory Redemption
Preferred equity(1)(2)
480,000
103,437
100,831
Preferred equity
10,000
October 2014
Preferred equity(1)(3)
57,087
20,238
19,136
April 2016
Preferred equity(1)
926,260
212,932
210,918
1,533,347
346,607
340,885
(1) The difference between the pay and accrual rates is included as an addition to the principal balance outstanding.
(2) 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.
(3) As of March 31, 2013, we are committed to fund an additional $5.7 million on this loan.
The following table is a rollforward of our total loan loss reserves at March 31, 2013 and December 31, 2012 (in thousands):
Balance at beginning of year
7,000
50,175
Expensed
3,000
Recoveries
(2,436
Charge-offs and reclassifications
(43,739
Balance at end of period
At March 31, 2013 and December 31, 2012, 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 March 31, 2013 and December 31, 2012 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 $129.0 million at March 31, 2013 and $121.3 million at December 31, 2012. No financing receivables were 90 days past due or on non-accrual status at March 31, 2013.
The following table presents impaired loans, which may include non-accrual loans, as of March 31, 2013 and December 31, 2012, respectively (in thousands):
Unpaid Principal Balance
Recorded Investment
Allowance Allocated
With no related allowance recorded:
Commercial real estate
With an allowance recorded:
10,750
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 months ended March 31, 2013 and 2012, respectively (in thousands):
Average recorded investment in impaired loans
10,864
79,937
Investment and preferred equity income recognized
227
1,562
On an ongoing basis, we monitor the credit quality of our financing receivables based on payment activity. We assess credit quality indicators based on the underlying collateral.
6. Investments 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, 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, Harel Insurance and Finance, or Harel, Louis Cappelli, or Cappelli, The Moinian Group, or Moinian, Vornado Realty Trust (NYSE: VNO), or Vornado, Blackstone Real Estate Partners VII, or Blackstone, Square Mile Capital Management LLC, or Square Mile, Plaza Global Real Estate Partners LP or Plaza, Angelo Gordon Real Estate Inc., or AG, as well as private investors. All the investments below are voting interest entities, except for 33 Beekman, 3 Columbus Circle and 180/182 Broadway which are VIEs in which we are not the primary beneficiary. Our net equity investment in these three VIEs was $124.5 million and $117.7 million at March 31, 2013 and December 31, 2012, respectively. As we do not control the joint ventures listed below, we account for them under the equity method of accounting. We assess the accounting treatment for each joint venture on a stand-alone basis. This includes a review of each joint venture or limited liability company agreement to determine which party has what rights and whether those rights are protective or participating. In situations where we and our partner are involved in some or all of the following: approving the annual budget, receiving a detailed monthly reporting package from us, meeting with us on a quarterly basis to review the results of the joint venture, reviewing and approving the joint venture’s tax return before filing, and approving all leases that cover more than a nominal amount of space relative to the total rentable space at each property, we do not consolidate the joint venture as we consider these to be substantive participation rights. Our joint venture agreements typically contain certain protective rights such as the requirement of partner approval to sell, finance or refinance the property and the payment of capital expenditures and operating expenditures outside of the approved budget or operating plan.
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The table below provides general information on each of our joint ventures as of March 31, 2013 (amounts in thousands):
Property
Partner
Ownership Interest
Economic Interest
Acquired
Acquisition Price($)(1)
100 Park Avenue
Prudential
49.90
834
02/00
95,800
21 West 34th Street
Sutton
50.00
30
07/05
22,400
1604-1610 Broadway(14)
Onyx
90.00
11/05
4,400
27-29 West 34th Street
41
01/06
717 Fifth Avenue(2)
Sutton/Private Investor
10.92
120
09/06
251,900
800 Third Avenue
Private Investors
42.95
526
12/06
285,000
1745 Broadway
Witkoff/SITQ/Lehman Bros.
32.26
674
04/07
520,000
1 and 2 Jericho Plaza
Onyx/Credit Suisse
20.26
640
210,000
16 Court Street
CIF
35.00
318
07/07
107,500
The Meadows(3)
582
09/07
111,500
388 and 390 Greenwich Street(4)
SITQ
50.60
2,600
12/07
1,575,000
180/182 Broadway(5)
Harel/Sutton
25.50
71
02/08
43,600
600 Lexington Avenue
CPPIB
55.00
304
05/10
193,000
11 West 34th Street
Private Investor/Sutton
30.00
12/10
10,800
7 Renaissance
Cappelli
37
4,000
3 Columbus Circle(7)
Moinian
48.90
769
01/11
500,000
280 Park Avenue(8)
Vornado
1,237
03/11
400,000
1552-1560 Broadway(9)
49
08/11
136,550
747 Madison Avenue
33.33
09/11
66,250
724 Fifth Avenue
65
01/12
223,000
10 East 53rd Street
390
02/12
252,500
33 Beekman(10)
Harel/Private Investor
45.90
145
08/12
31,000
West Coast office portfolio(11)
Blackstone/SquareMile
36.01
4,474
09/12
880,103
521 Fifth Avenue(12)
Plaza
50.50
11/12
315,000
21 East 66th Street(13)
32.28
12/12
315 West 36th Street
35.50
148
45,000
Herald Center(6)
AG
40.00
365
01/13
50,000
(1) Acquisition price represents the actual or implied gross purchase price for the joint venture.
(2) In June 2012, this retail condominium was recapitalized. The recapitalization triggered a promote which resulted in a reduction of our economic interest. In addition, we sold 50% of our remaining interest at a property valuation of $617.6 million. We recognized $67.9 million of additional cash income, equivalent to profit, due to the distribution of refinancing proceeds and a gain on sale of $3.0 million. The refinancing replaced the $245.0 million floating rate mortgage loan, which bore interest at 275 basis points over LIBOR and was due to mature in September 2012, with a $300.0 million mortgage loan and $290.0 million mezzanine loan.
(3) In August 2012, Onyx made a capital contribution to the joint venture, which was distributed to us in full redemption of our preferred equity interest.
(4) The property is subject to a 13-year triple-net lease arrangement with a single tenant. The lease commenced in 2007.
(5) In August 2011, the joint venture sold the property located at 63 Nassau Street for $2.8 million.
(6) The joint venture acquired a preferred equity interest in an entity that holds interest in a retail property located in Manhattan. The preferred equity bears interest at a rate of 8.75% per annum and matures in June 2016.
(7) We had an obligation to fund an additional $47.5 million to the joint venture, of which $46.8 million has been funded as of March 31, 2013. This liability is recorded in accrued interest payable and other liabilities. In addition, we made a $125.0 million bridge loan to this joint venture which bore interest at a rate of 7.5%. This loan was repaid when the joint venture refinanced its debt in April 2011. In September 2012, the joint venture sold to Young & Rubicam, Inc. a portion of the property, generally floors three through eight, through a condominium form of ownership, or Y&R units, for $143.6 million. As the joint venture has an option to repurchase the Y&R unit, no gain was recognized as a result of this transaction.
(8) In March 2011, we contributed our debt investment with a carrying value of $286.6 million to a newly formed joint venture in which we hold a 50% interest. We realized $38.7 million of additional income upon the contribution. This income is included in preferred equity and investment income. The joint venture paid us approximately $111.3 million and also assumed $30.0 million of related floating rate financing which matures in June 2016. In May 2011, this joint venture took control of the underlying property as part of a recapitalization transaction which valued the investment at approximately $1.1 billion. We hold an effective 49.5% ownership interest in the joint venture.
(9) In connection with this acquisition, the joint venture also acquired a long-term leasehold interest in the retail space and certain other spaces at 1560 Broadway, which is adjacent to 1552 Broadway. The purchase price relates only to the purchase of the 1552 Broadway interest which comprises 13,045 square feet. In May 2012, we, along with Sutton, acquired the property at 155 West 46th Street for $8.4 million. In January 2013, we conveyed this property, which is adjacent to 1552 and 1560 Broadway, to the fee owner of 1560 Broadway.
(10) The joint venture acquired the fee interest in the property and will develop an approximately 30 story building for student housing. Upon completion of the development, the joint venture will convey a long-term ground lease condominium interest in the building to
20
Pace University.
(11) In September 2012, we, together with an affiliate of Blackstone, Gramercy Capital Corp., who in April 2013, changed its name to Gramercy Property Trust Inc. (NYSE: GPT), or Gramercy, and Square Mile, formed a joint venture to recapitalize a 31-property, 4.5-million-square-foot West Coast office portfolio. Following the recapitalization, Blackstone became the majority owner of the joint venture, with Equity Office Properties, a Blackstone affiliate, being responsible for the portfolio’s management and leasing. Prior to the recapitalization, the Company held $26.7 million in mezzanine and preferred equity positions in the entity that owned the portfolio. The new joint venture extended the $678.8 million mortgage secured by the portfolio for a term of two years with a one-year extension option. In addition, the joint venture entered into a new $68.0 million mezzanine loan for a term of two years. See Note 5, “Debt and Preferred Equity Investments.” In February 2013, we acquired Gramercy’s 10.73% interest in the joint venture and simultaneously sold 20.78% of the newly acquired interest to Square Mile.
(12) In November 2012, we sold our 49.5% partnership interest in 521 Fifth Avenue to Plaza Global Real Estate Partners for a gross valuation price of $315.0 million for this property. We recognized a gain of $19.4 million on the sale. We also refinanced the existing $150.0 million loan with a $170.0 million seven-year mortgage loan, which bears interest at 220 basis points over LIBOR. Following the sale, we deconsolidated the entity effective November 30, 2012 and accounted our investment under the equity method because of lack of control.
(13) We hold a 32.28% interest in the three retail and two residential units and a 16.14% in four residential units.
(14) In March 2013, Sutton conveyed its interest to us.
In July 2012, we, along with our joint venture partner, sold One Court Square for $481.1 million, which included the assumption by the purchaser of $315.0 million of existing debt. We recognized a gain of $1.0 million on the sale of this property.
In April 2012, we, along with our joint venture partner, Jeff Sutton, sold the property located at 379 Broadway for $48.5 million, inclusive of the fee position which was acquired for $13.5 million. We recognized a gain on sale of this investment of $6.5 million.
In March 2012, we, along with our joint venture partner, Jeff Sutton, sold the property located at 141 Fifth Avenue for $46.0 million. We recognized a gain on sale of this investment of $7.3 million.
21
We generally finance our joint ventures with non-recourse debt. However, in certain cases we have provided guarantees or master leases for tenant space. These guarantees and master leases terminate upon the satisfaction of specified circumstances or repayment of the underlying loans. The first mortgage notes and other loans payable collateralized by the respective joint venture properties and assignment of leases at March 31, 2013 and December 31, 2012, respectively, are as follows (amounts in thousands):
Maturity Date
Interest Rate(1)
21 East 66th Street(11)
04/2013
5.63
12,000
09/2014
6.64
211,673
212,287
02/2015
10.00
856
01/2016
4.82
17,418
17,491
280 Park Avenue
06/2016
6.57
710,000
12/2016
5.76
01/2017
5.68
340,000
05/2017
5.65
163,750
08/2017
6.00
20,910
388 and 390 Greenwich Street(2)
12/2017
3.20
996,082
3.04
25,000
717 Fifth Avenue
07/2022
4.45
06/2024
9.00
296,803
294,509
1604-1610 Broadway(3)
5.66
27,000
Total fixed rate debt
3,221,492
3,219,885
27-29 West 34th Street(4)
05/2013
2.20
53,238
53,375
1552 Broadway(5)
08/2013
3.18
119,322
113,869
10/2013
2.70
84,731
84,916
180/182 Broadway(6)
12/2013
2.96
76,862
71,524
West Coast office portfolio
3.94
742,112
745,025
10/2014
3.00
33,125
The Meadows(7)
09/2015
7.75
57,000
3 Columbus Circle(8)
04/2016
2.41
245,275
247,253
Other loan payable
1.10
2.56
120,000
02/2017
2.71
125,000
33 Beekman(9)
18,362
10/2017
2.31
123,454
124,384
1.36
142,297
521 Fifth Avenue(10)
11/2019
21 East 66th Street
06/2033
2.88
2,033
Total floating rate debt
2,142,811
2,138,163
Total mortgages and other loan payable
5,364,303
5,358,048
(1) Effective weighted average interest rate for the three months ended March 31, 2013, taking into account interest rate hedges in effect during the period.
(2) These loans comprised of a $576.0 million mortgage and a $562.4 million mezzanine loan, both of which are fixed rate loans, except for $72.0 million of the mortgage and $70.3 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.
(3) This loan went into default in November 2009 due to the non-payment of debt service.
(4) This loan was refinanced at maturity.
(5) This loan has a committed amount of $125.0 million. In April 2013, we refinanced the existing loan with a $200.0 million three-year loan comprised of a $170.0 million mortgage loan, which carries a floating rate of interest of 270 basis points over LIBOR, and a $30.0 mezzanine loan, which carries a floating rate of interest of 9.35% over LIBOR. The loan has two one-year extension options.
(6) This loan has a committed amount of $90.0 million.
(7) As a result of the refinancing and restructuring in August 2012, we replaced the existing loan with a $60.0 million, three-year mortgage and recognized additional income of $10.8 million due to the repayment of the previous mortgage at a discount. As of March 31, 2013, $3.0 million of the existing loan remained unfunded.
(8) In April 2011, our joint venture with The Moinian Group which owns the property located at 3 Columbus Circle, New York, obtained a $260.0 million five-year mortgage with the Bank of China, which carries a floating rate of interest of 210 basis points over the 30-day LIBOR. The joint venture has the ability to increase the mortgage by $40.0 million based on meeting certain performance hurdles. In connection with this obligation, we executed a master lease agreement. Our partner has
executed a contribution agreement to reflect its pro rata obligation under the master lease. In February 2012, the terms of the mortgage were modified to remove the Y&R condominium from the mortgage lien and from the existing master lease. See Note 7 of prior table.
(9) This loan has a committed amount of $75.0 million, which is recourse to us. Our partner has indemnified us for its pro rata share of the recourse guarantee. A portion of the guarantee terminates upon the joint venture reaching certain milestones. We believe it is unlikely that we will be required to perform under this guarantee.
(10) In connection with the sale of our 49.5% membership interest in the entity, the existing loan was refinanced with a $170.0 million seven-year mortgage. As we no longer control the entity, we deconsolidated the entity effective November 30, 2012. See Note 12 of prior table.
(11) In April 2013, this loan was refinanced and its maturity was extended to April 2023. The new loan bears interest at a fixed rate of 3.6% per annum.
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, 3 Columbus Circle 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 $2.6 million and $1.9 million from these services for the three months ended March 31, 2013, and 2012, respectively. In addition, we have the ability to earn incentive fees based on the ultimate financial performance of certain of the joint venture properties.
The combined balance sheets for the unconsolidated joint ventures, at March 31, 2013 and December 31, 2012, are as follows (in thousands):
Commercial real estate property, net
6,965,366
6,910,991
789,684
728,113
7,755,050
7,639,104
Liabilities and members’ equity
Other liabilities
405,820
406,929
Members’ equity
1,984,927
1,874,127
Total liabilities and members’ equity
Company’s net investment in unconsolidated joint ventures
The combined statements of income for the unconsolidated joint ventures, from acquisition date through the three months ended March 31, 2013 and 2012 are as follows (in thousands):
Three Months Ended
March 31,
151,231
120,048
28,611
16,766
657
918
17,305
13,374
Interest, net of interest income
56,407
54,868
46,894
38,550
268
149,874
124,744
Net income (loss)
1,357
(4,696
Company’s equity in net income (loss) of unconsolidated joint ventures
23
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 March 31, 2013, we held 0.7 million shares, or approximately 1.3% of Gramercy’s common stock. Our total investment of approximately $3.9 million is based on the market value of our common stock investment in Gramercy at March 31, 2013. As we no longer have any significant influence over Gramercy, we account for our investment as available-for-sale securities.
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, New York. 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.
Effective June 2012, the first and third leases were amended and replaced with a new lease for approximately 8,100 square feet pursuant to a lease which ends in April 2015, with annual rent under this lease of approximately $345,000 for year one increasing to $357,000 in year three.
Marc Holliday, our chief executive officer, remains a board member of Gramercy.
7. Deferred Costs
Deferred costs at March 31, 2013 and December 31, 2012 consisted of the following (in thousands):
Deferred financing
148,662
152,596
Deferred leasing
289,678
285,931
438,340
438,527
Less accumulated amortization
(186,322
(177,382
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8. Mortgages and Other Loans Payable
The first mortgages and other loans payable collateralized by the respective properties and assignment of leases at March 31, 2013 and December 31, 2012, respectively, were as follows (amounts in thousands):
220 East 42nd Street
11/2013
5.25
184,698
185,906
609 Partners, LLC(2)
07/2014
5.00
125 Park Avenue
5.75
146,250
711 Third Avenue
06/2015
4.99
625 Madison Avenue
11/2015
7.22
124,481
125,603
500 West Putnam
5.52
23,930
24,060
420 Lexington Avenue
09/2016
7.50
184,612
184,992
Landmark Square
4.00
84,097
84,486
485 Lexington Avenue
5.61
450,000
120 West 45th Street
6.12
300 Main Street
11,500
762 Madison Avenue
3.75
8,331
8,371
2 Herald Square
04/2017
5.36
191,250
885 Third Avenue
07/2017
6.26
267,650
Other loan payable(3)
09/2019
8.00
One Madison Avenue
05/2020
5.91
602,584
607,678
100 Church
4.68
230,000
919 Third Avenue(4)
06/2023
5.12
400 East 57th Street
02/2024
4.13
400 East 58th Street
1515 Broadway(5)
03/2025
3.93
900,000
4,349,406
3,457,769
Master repurchase(6)
09/2013
3.21
174,966
116,667
180 Maiden Lane(7)
11/2016
269,113
271,215
248-252 Bedford Avenue
03/2018
2.46
22,000
769,813
466,079
1,157,695
Total mortgages and other loans payable
(2) As part of an acquisition, the Operating Partnership issued 63.9 million units of our 5.0% Series E preferred units, or the Series E units, with a liquidation preference of $1.00 per unit. As of March 31, 2013, 63.8 million Series E units had been redeemed.
(3) This loan is secured by a portion of a preferred equity investment.
(4) We own a 51% controlling interest in the joint venture that is the borrower on this loan. This loan is non-recourse to us.
(5) We have consolidated this investment since we acquired the remaining interest in this joint venture in April 2011. In April 2012, we refinanced the $447.2 million mortgage that was due in December 2014 with a $775.0 million seven-year mortgage, which carried interest at the rate equal to the greater of (a) 285 basis points over 90-day LIBOR or (b) 3.6% per annum. In February 2013, we refinanced the $775.0 million mortgage with a new $900.0 million 12-year mortgage, which carries a rate of interest of 3.93% per annum and realized a net loss on early extinguishment of debt of approximately $18.5 million, including a prepayment penalty of $7.6 million.
(6) In September 2012, we entered into a Master Repurchase Agreement, or MRA, with a financial institution, with a maximum facility capacity of $175.0 million, under which we agreed to sell certain debt investments in exchange for cash with a simultaneous agreement to repurchase the same debt investments at a certain date or on demand. The MRA’s interest rate is based on 1-month LIBOR plus 300 basis points. The MRA matures in September 2013, and has a one-year extension option.
(7) In connection with this consolidated joint venture obligation, we executed a master lease agreement. Our partner has executed a contribution agreement to reflect its pro rata share of the obligation under the master lease.
At March 31, 2013 and December 31, 2012, the gross book value of the properties and debt and preferred equity investments collateralizing the mortgages and other loans payable was approximately $7.8 billion and $7.6 billion, respectively.
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9. Corporate Indebtedness
2012 Credit Facility
In November 2012, we entered into a $1.6 billion credit facility, or the 2012 credit facility, which refinanced, extended and upsized the previous 2011 revolving credit facility. The 2012 credit facility consists of a $1.2 billion revolving credit facility, or the revolving credit facility, and a $400.0 million term loan, or the term loan facility. The revolving credit facility matures in March 2017 and includes two six-month extension options, subject to certain conditions and the payment of an extension fee of 10 basis points for each such extension. We also have an option, subject to customary conditions, without the consent of existing lenders, to increase the capacity under the revolving credit facility to $1.5 billion at any time prior to the maturity date for the revolving credit facility, by obtaining additional commitments from our current lenders and other financial institutions. The term loan facility matures on March 30, 2018.
The 2012 credit facility bears interest at a spread over LIBOR ranging from (i) 100 basis points to 175 basis points for loans under the revolving credit facility and (ii) 115 basis points to 200 basis points for loans under the term loan facility, in each case based on the credit rating assigned to the senior unsecured long term indebtedness of ROP. At March 31, 2013, the applicable spread was 145 basis points for revolving credit facility and 165 basis points for the term loan facility. We are required to pay quarterly in arrears a 15 to 35 basis point fee on the unused balance of the commitments under the revolving credit facility. As of March 31, 2013, the facility fee was 30 basis points. At March 31, 2013, we had approximately $91.9 million of outstanding letters of credit, $30.0 million borrowings under the revolving credit facility and $400.0 million outstanding under the term loan facility, with undrawn capacity of $1.2 billion under the 2012 credit facility.
We, ROP and the Operating Partnership are all borrowers jointly and severally obligated under the 2012 credit facility. No other subsidiary of ours is an obligor under the 2012 credit facility.
The 2012 credit facility includes certain restrictions and covenants (see Restrictive Covenants below).
2011 Revolving Credit Facility
The 2012 credit facility replaced our $1.5 billion revolving credit facility, or the 2011 revolving credit facility, which was terminated concurrently with the entering into the 2012 credit facility. The 2011 revolving credit facility bore interest at a spread over LIBOR ranging from 100 basis points to 185 basis points, based on the credit rating assigned to the senior unsecured long term indebtedness of ROP, and required us to pay quarterly in arrears a 17.5 to 45 basis point facility fee on the total commitments under the 2011 revolving credit facility. The 2011 revolving credit facility included certain restrictions and covenants and, as of the time of the termination of the 2011 revolving credit facility and as of November 2012, we were in compliance with all such restrictions and covenants.
Senior Unsecured Notes
The following table sets forth our senior unsecured notes and other related disclosures as of March 31, 2013 and December 31, 2012, respectively by scheduled maturity date (amounts in thousands):
Issuance
March 31, 2013 Unpaid Principal Balance
March 31, 2013 Accreted Balance
December 31, 2012 Accreted Balance
Coupon Rate(1)
Effective Rate
Term (in Years)
Maturity
August 13, 2004(2)(3)
75,898
5.88
August 15, 2014
March 31, 2006(2)(3)
255,308
255,175
255,165
6.02
March 31, 2016
October 12, 2010(4)
345,000
289,919
287,373
7.13
October 15, 2017
August 5, 2011(5)
250,000
249,636
249,620
5.03
August 15, 2018
March 16, 2010(5)
March 15, 2020
November 15, 2012(5)
200,000
4.50
December 1, 2022
June 27, 2005(2)(6)
June 15, 2025
March 26, 2007(7)
11,953
16,893
March 30, 2027
1,388,166
1,332,588
1,334,956
(1) Interest on the senior unsecured notes is payable semi-annually with principal and unpaid interest due on the scheduled maturity dates.
(2) Issued by ROP.
(3) On December 27, 2012, we repurchased $42.4 million of aggregate principal amount of these notes, consisting of $22.7 million of the 5.875% Notes and $19.7 million of the 6.0% Notes, for a total consideration of $46.4 million and realized a net loss on early extinguishment of debt of approximately $3.8 million.
(4) In October 2010, the Operating Partnership issued $345.0 million of these exchangeable notes. Interest on these notes is payable semi-annually on April 15 and October 15. The notes had an initial exchange rate representing an exchange price that was set at a 30.0% premium to the last reported sale price of our common stock on October 6, 2010, or $85.81. The initial exchange rate is subject to adjustment under certain circumstances. The current exchange rate is 11.6800 shares of our common stock per $1,000 principal amount of these notes. The notes are senior unsecured obligations of the Operating Partnership and are exchangeable upon the occurrence of specified events and during the period beginning on the twenty-second scheduled trading day prior to the maturity date and ending on the second business day prior to the maturity date, into cash or a combination of cash and shares of our common stock, if any, at our option. The notes are guaranteed by ROP. On the issuance date, $78.3 million of the debt balance was recorded in equity. As of March 31, 2013, approximately $55.1 million remained to be amortized into the debt balance.
(5) Issued by us, the Operating Partnership and ROP, as co-obligors.
(6) Exchangeable senior debentures which are currently callable at par. In addition, the debentures can be put to ROP, at the option of the holder at par plus accrued and unpaid interest, on June 15, 2015 and 2020 and upon the occurrence of certain change of control transactions. As a result of the acquisition of all outstanding shares of common stock of Reckson, or the Reckson Merger, the adjusted exchange rate for the debentures is 7.7461 shares of our common stock per $1,000 of principal amount of debentures and the adjusted reference dividend for the debentures is $1.3491. During the year ended December 31, 2012, we repurchased $650,000 of these bonds at par.
(7) In March 2007, the Operating Partnership issued $750.0 million of these exchangeable notes. Interest on these notes is payable semi-annually on March 30 and September 30. The notes have an initial exchange rate representing an exchange price that was set at a 25.0% premium to the last reported sale price of our common stock on March 20, 2007, or $173.30. The initial exchange rate is subject to adjustment under certain circumstances. The notes are senior unsecured obligations of the Operating Partnership and are exchangeable upon the occurrence of specified events and during the period beginning on the twenty-second scheduled trading day prior to the maturity date and ending on the second business day prior to the maturity date, into cash or a combination of cash and shares of our common stock, if any, at our option. The notes are currently redeemable at the Operating Partnership’s option. The Operating Partnership may be required to repurchase the notes on March 30, 2017 and 2022, and upon the occurrence of certain designated events. On March 30, 2012, we repurchased $102.2 million of aggregate principal amount of the exchangeable notes pursuant to a mandatory offer to repurchase the notes. On the issuance date, $66.6 million was recorded in equity and was fully amortized into the debt balance as of March 31, 2012. On January 2, 2013, we repurchased $4.9 million of aggregate principal amount of exchangeable notes at 99.6% of the principal amount.
Restrictive Covenants
The terms of the 2012 credit facility and certain of our senior unsecured notes include certain restrictions and covenants which may limit, among other things, our ability to pay dividends, make certain types of investments, incur additional indebtedness, incur liens and enter into negative pledge agreements and dispose of assets, and which require compliance with financial ratios relating to the minimum amount of tangible net worth, a maximum ratio of total indebtedness to total asset value, a minimum ratio of EBITDA to fixed charges, a maximum ratio of secured indebtedness to total asset value and a maximum ratio of unsecured indebtedness to unencumbered asset value. The dividend restriction referred to above provides that we will not during any time when a default is continuing, make distributions with respect to common stock or other equity interests, except to enable us to continue to qualify as a REIT for Federal income tax purposes. As of March 31, 2013 and December 31, 2012, we were in compliance with all such covenants.
Junior Subordinate Deferrable Interest Debentures
In June 2005, we issued $100.0 million in unsecured floating rate trust preferred securities through a newly formed trust, SL Green Capital Trust I, or the Trust, which is a wholly-owned subsidiary of the Operating Partnership. The proceeds from the security offering were transferred to the Operating Partnership as a loan. The securities mature in 2035 and bear interest at a fixed rate of 5.61% for the first ten years ending July 2015. Interest payments may be deferred for a period of up to eight consecutive quarters if the Operating Partnership exercises its right to defer such payments. The trust preferred securities are redeemable, at the option of the Operating Partnership, in whole or in part, with no prepayment premium. We do not consolidate the Trust even though it is a variable interest entity as we are not the primary beneficiary. Because the Trust is not consolidated, we have recorded the debt on our balance sheet and the related payments are classified as interest expense.
Principal Maturities
Combined aggregate principal maturities of mortgages and other loans payable, revolving credit facility, trust preferred securities, term loan and senior unsecured notes and our share of joint venture debt as of March 31, 2013, including as-of-right extension options, were as follows (in thousands):
Scheduled Amortization
Principal Repayments
Revolving Credit Facility
Trust Preferred Securities
Term Loan and Senior Unsecured Notes
Joint Venture Debt
30,878
357,308
388,186
185,130
2014
43,668
146,273
265,839
364,191
2015
46,325
229,537
275,869
36,886
2016
56,839
516,667
828,681
527,682
2017
60,897
1,098,064
301,872
1,460,833
933,612
Thereafter
367,307
1,861,722
1,099,636
3,458,665
151,642
605,914
4,209,571
6,678,073
2,199,143
Consolidated interest expense, excluding capitalized interest, was comprised of the following (in thousands):
Interest expense
81,789
80,547
Interest income
(453
(410
Interest expense, net
Interest capitalized
3,062
2,536
10. Fair Value of Financial Instruments
The following disclosures of estimated fair value were determined by management, using available market information and appropriate valuation methodologies as discussed in Note 2, “Significant Accounting Policies.” Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts we could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Cash and cash equivalents, restricted cash, accounts receivable and accounts payable balances reasonably approximate their fair values due to the short maturities of these items. Mortgages and other loans payable, junior subordinate deferrable interest debentures and the senior unsecured notes had an estimated fair value based on discounted cash flow models, based on Level 3 inputs, of approximately $6.3 billion, compared to the book value of the related fixed rate debt of approximately $5.8 billion at March 31, 2013. Our floating rate debt, inclusive of our 2012 credit facility, but excluding $30.0 million of which was swapped, had an estimated fair value based on discounted cash flow models, based on Level 3 inputs, of approximately $0.9 billion, compared to the book value of the related floating rate debt of approximately $0.9 billion at March 31, 2013. Our debt and preferred equity investments had an estimated fair value ranging between $1.4 billion and $1.5 billion, compared to the book value of the related debt and preferred equity investments of approximately $1.4 billion at March 31, 2013, based on Level 3 inputs.
Disclosure about fair value of financial instruments is based on pertinent information available to us as of March 31, 2013. Although we are not aware of any factors that would significantly affect the reasonable fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.
11. Related Party Transactions
Cleaning/ Security/ Messenger and Restoration Services
Through Alliance Building Services, or Alliance, First Quality Maintenance, L.P., or First Quality, provides cleaning, extermination and related services, Classic Security LLC provides security services, Bright Star Couriers LLC provides messenger services, and Onyx Restoration Works provides restoration services with respect to certain properties owned by us. Alliance is partially owned by Gary Green, a son of Stephen L. Green, the chairman of our board of directors. In addition, First Quality has the non-exclusive
28
opportunity to provide cleaning and related services to individual tenants at our properties on a basis separately negotiated with any tenant seeking such additional services. The Service Corporation has entered into an arrangement with Alliance whereby it will receive a profit participation above a certain threshold for services provided by Alliance to certain tenants at certain buildings above the base services specified in their lease agreements. Alliance paid the Service Corporation approximately $1.0 million and $0.8 million for the three months ended March 31, 2013 and 2012, respectively. We paid Alliance approximately $4.1 million and $3.5 million for the three months ended March 31, 2013 and 2012, respectively, for these services (excluding services provided directly to tenants).
Marketing Services
A-List Marketing, LLC, or A-List, provides marketing services to us. Ms. Deena Wolff, a sister of Mr. Marc Holliday, is the owner of A-List. The aggregate amount of fees we paid to A-List for these marketing services was approximately $2,400 and $11,700 for the three months ended March 31, 2013 and 2012, respectively.
Leases
Nancy Peck and Company leases 1,003 square feet of space at 420 Lexington Avenue under a lease that ends in August 2015. Nancy Peck and Company is owned by Nancy Peck, the wife of Stephen L. Green. The rent due pursuant to the lease was $35,516 per annum for year one increasing to $40,000 in year seven.
Management Fees
S.L. Green Management Corp., a consolidated entity, receives property management fees from an entity in which Stephen L. Green owns an interest. The aggregate amount of fees paid to S.L. Green Management Corp. from such entity was approximately $118,200 and $89,000 for the three months ended March 31, 2013 and 2012, respectively.
Other
Amounts due from/to related parties at March 31, 2013 and December 31, 2012 consisted of the following (in thousands):
Due from joint ventures
4,032
511
7,137
7,020
Due to a joint venture (included in Accounts payable and accrued expenses)
(8,401
See Note 6, “Investments in Unconsolidated Joint Ventures — Gramercy Capital Corp.,” for disclosure on related party transactions between Gramercy and us.
12. Stockholders’ Equity
Our authorized capital stock consists of 260,000,000 shares, $0.01 par value, of which we have authorized the issuance of up to 160,000,000 shares of common stock, $0.01 par value per share, 75,000,000 shares of excess stock, at $0.01 par value per share, and 25,000,000 shares of preferred stock, par value $0.01 per share. As of March 31, 2013, 91,555,082 shares of common stock and no shares of excess stock were issued and outstanding.
In July 2011, we, along with the Operating Partnership, entered into an “at-the-market” equity offering program, or ATM Program, to sell an aggregate of $250.0 million of our common stock. As of March 31, 2013, we had $45.4 million available to issue under the ATM Program.
Perpetual Preferred Stock
We have 9,200,000 shares of our 6.50% Series I cumulative redeemable preferred stock, or the Series I preferred stock, outstanding with a mandatory liquidation preference of $25.00 per share. The Series I preferred stockholders receive annual dividends of $1.625 per share paid on a quarterly basis and dividends are cumulative, subject to certain provisions. We are entitled to redeem the Series I preferred stock at par for cash at our option on or after August 10, 2017. In August 2012, we received $221.9 million in net proceeds from the issuance of the Series I preferred stock, which were recorded net of underwriters’ discount and issuance costs.
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We have 7,700,000 shares of our 7.625% Series C cumulative redeemable preferred stock, or the Series C preferred stock, outstanding with a mandatory liquidation preference of $25.00 per share. The Series C preferred stockholders receive annual dividends of $1.90625 per share paid on a quarterly basis and dividends are cumulative, subject to certain provisions. We are entitled to redeem the Series C preferred stock at par for cash at our option. The Series C preferred stock was recorded net of underwriters discount and issuance costs. In September 2012, we redeemed 4,000,000 shares of our 11,700,000 shares of Series C preferred stock at a redemption price of $25.00 per share plus $0.3707 in accumulated and unpaid dividends on such preferred stock through September 24, 2012 and recognized $6.3 million of costs to redeem partially the Series C preferred stock.
In July 2012, we redeemed all 4,000,000 shares of our 7.875% Series D cumulative redeemable preferred stock, or Series D preferred stock, at a redemption price of $25.00 per share plus $0.4922 in accumulated and unpaid dividends on such preferred stock through July 14, 2012 and recognized $3.7 million of costs to redeem the Series D preferred stock. The Series D preferred stockholders received annual dividends of $1.96875 per share paid on a quarterly basis and dividends were cumulative, subject to certain provisions.
Dividend Reinvestment and Stock Purchase Plan
In March 2012, we filed a registration statement with the SEC for our dividend reinvestment and stock purchase plan, or DRIP, which automatically became effective upon filing. We registered 3,500,000 shares of our common stock under the DRIP. The DRIP commenced on September 24, 2001.
During the three months ended March 31, 2013 and 2012, we issued approximately 170 shares and 1.3 million shares of our common stock and received approximately $13,000 and $99.5 million of proceeds, respectively, from dividend reinvestments and/or stock purchases under the DRIP. DRIP shares may be issued at a discount to the market price.
Second Amended and Restated 2005 Stock Option and Incentive Plan
We have a stock option and incentive plan. The Second Amended and Restated 2005 Stock Option and Incentive Plan, or the 2005 Plan, was approved by our board of directors in April 2010 and our stockholders in June 2010 at our annual meeting of stockholders. The 2005 Plan authorizes the issuance of stock options, stock appreciation rights, unrestricted and restricted stock, phantom shares, dividend equivalent rights and other equity-based awards. Subject to adjustments upon certain corporate transactions or events, awards with respect to up to a maximum of 10,730,000 fungible units may be granted under the 2005 Plan. Currently, different types of awards count against the limit on the number of fungible units differently, with (1) full-value awards (i.e., those that deliver the full value of the award upon vesting, such as restricted stock) counting as 1.65 fungible units per share subject to such award (2) stock options, stock appreciation rights and other awards that do not deliver full value and expire five year from the date of grant counting as 0.79 fungible units per share subject to such award and (3) all other awards (e.g., ten-year stock options) counting as 1.0 fungible units per share subject to such award. Awards granted under the 2005 Plan prior to the approval of the second amendment and restatement in June 2010 continue to count against the fungible unit limit based on the ratios that were in effect at the time such awards were granted, which may be different than the current ratios. As a result, depending on the types of awards issued, the 2005 Plan may result in the issuance of more or less than 10,730,000 shares. If a stock option or other award granted under the 2005 Plan expires or terminates, the common stock subject to any portion of the award that expires or terminates without having been exercised or paid, as the case may be, will again become available for the issuance of additional awards. Shares of our common stock distributed under the 2005 Plan may be treasury shares or authorized but unissued shares. Currently, unless the 2005 Plan has been previously terminated by the board of directors, new awards may be granted under the 2005 Plan until June 15, 2020, which is the tenth anniversary of the date that the 2005 Plan was most recently approved by our stockholders. As of March 31, 2013, no fungible units were available for issuance under the 2005 Plan after reserving for shares underlying outstanding restricted stock units, phantom stock units granted pursuant to our Non-Employee Directors’ Deferral Program and LTIP Units, including, among others, outstanding LTIP Units issued under our 2011 Long-Term Outperformance Plan, which remain subject to performance-based vesting.
Options are granted under the plan at the fair market value on the date of grant and, subject to termination of employment, generally expire ten years from the date of grant, are not transferable other than on death, and generally vest in one to five years commencing one year from the date of grant.
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 three months ended March 31, 2013 and the year ended December 31, 2012.
Dividend yield
2.00
Expected life of option
4.7 years
3.7 years
Risk-free interest rate
0.68
0.46
Expected stock price volatility
37.40
A summary of the status of our stock options as of March 31, 2013 and December 31, 2012 and changes during the three months ended March 31, 2013 and the year ended December 31, 2012 are presented below:
Options Outstanding
Weighted Average Exercise Price
1,201,000
75.05
1,277,200
63.37
Granted
201,000
76.67
361,331
75.36
Exercised
(79,036
50.22
(382,612
36.65
Lapsed or cancelled
(4,000
67.64
(54,919
72.99
1,318,964
76.81
Options exercisable at end of period
585,786
81.38
479,913
86.85
Weighted average fair value of options granted during the period
3,867,342
6,602,967
All options were granted within a price range of $20.67 to $137.18. The remaining weighted average contractual life of the options outstanding was 4.45 years and the remaining average contractual life of the options exercisable was 3.75 years.
During the three months ended March 31, 2013 and 2012, we recognized approximately $1.3 million and $1.7 million of compensation expense, respectively, for these options. As of March 31, 2013, there was approximately $11.6 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of three years.
Stock-based Compensation
Effective January 1, 1999, we implemented a deferred compensation plan, or the Deferred Plan, covering certain of our employees, including our executives. The shares issued under the Deferred Plan were granted to certain employees, including our executives, and vesting will occur annually upon the completion of a service period or our meeting established financial performance criteria. Annual vesting occurs at rates ranging from 15% to 35% once performance criteria are reached.
A summary of our restricted stock as of March 31, 2013 and December 31, 2012 and charges during the three months ended March 31, 2013 and the year ended December 31, 2012 is presented below:
2,804,901
2,912,456
92,729
Cancelled
(300
(200,284
2,804,601
Vested during the period
500
408,800
Compensation expense recorded
1,464,223
6,930,381
Weighted average fair value of restricted stock granted during the period
7,023,942
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The fair value of restricted stock that vested during the three months ended March 31, 2013 and year ended December 31, 2012 was $0.02 million and $22.4 million, respectively. As of March 31, 2013, there was $10.5 million of total unrecognized compensation cost related to unvested restricted stock, which is expected to be recognized over a weighted-average period of approximately 2.2 years.
For each of the three months ended March 31, 2013 and 2012, approximately $1.0 million was capitalized to assets associated with compensation expense related to our long-term compensation plans, restricted stock and stock options.
2010 Notional Unit Long-Term Compensation Plan
In December 2009, the compensation committee of our board of directors approved the general terms of the SL Green Realty Corp. 2010 Notional Unit Long-Term Compensation Program, or the 2010 Long Term Compensation Plan. The 2010 Long-Term Compensation Plan is a long-term incentive compensation plan pursuant to which award recipients could earn, in the aggregate, from approximately $15 million up to approximately $75 million of LTIP Units in the Operating Partnership based on our stock price appreciation over three years beginning on December 1, 2009; provided that, if maximum performance had been achieved, approximately $25 million of awards could be earned at any time after the beginning of the second year and an additional approximately $25 million of awards could be earned at any time after the beginning of the third year. In order to achieve maximum performance under the 2010 Long-Term Compensation Plan, our aggregate stock price appreciation during the performance period had to equal or exceed 50%. The compensation committee determined that maximum performance had been achieved at or shortly after the beginning of each of the second and third years of the performance period and for the full performance period and, accordingly, 366,815 LTIP Units, 385,583 LTIP Units and 327,416 LTIP Units were earned under the 2010 Long-Term Compensation Plan in December 2010, 2011 and 2012, respectively. Substantially in accordance with the original terms of the program, 50% of these LTIP Units vested on December 17, 2012 (accelerated from the original January 1, 2013 vesting date) and the remainder is scheduled to vest ratably on January 1, 2014 and 2015 based on continued employment. In accordance with the terms of the 2010 Long-Term Compensation Plan, distributions were not paid on any LTIP Units until they were earned, at which time we paid all distributions that would have been paid on the earned LTIP Units since the beginning of the performance period.
The cost of the 2010 Long Term Compensation Plan (approximately $31.7 million, subject to forfeitures) will be amortized into earnings through the final vesting period. We recorded compensation expense of approximately $1.9 million during each of the three months ended March 31, 2013 and 2012, respectively, related to the 2010 Long-Term Compensation Plan.
2011 Outperformance Plan
In August 2011, the compensation committee of our board of directors approved the general terms of the SL Green Realty Corp. 2011 Outperformance Plan, or the 2011 Outperformance Plan. Participants in the 2011 Outperformance Plan may earn, in the aggregate, up to $85 million of LTIP Units in the Operating Partnership based on our total return to stockholders for the three-year period beginning September 1, 2011. Under the 2011 Outperformance Plan, participants will be entitled to share in a “performance pool” comprised of LTIP Units with a value equal to 10% of the amount, if any, by which our total return to stockholders during the three-year period exceeds a cumulative total return to stockholders of 25%, subject to the maximum of $85 million of LTIP Units; provided that if maximum performance has been achieved, approximately one-third of each award may be earned at any time after the beginning of the second year and an additional approximately one-third of each award may be earned at any time after the beginning of the third year. LTIP Units earned under the 2011 Outperformance Plan will be subject to continued vesting requirements, with 50% of any awards earned vesting on August 31, 2014 and the remaining 50% vesting on August 31, 2015, subject to continued employment with us through such dates. Participants will not be entitled to distributions with respect to LTIP Units granted under the 2011 Outperformance Plan unless and until they are earned. If LTIP Units are earned, each participant will also be entitled to the distributions that would have been paid had the number of earned LTIP Units been issued at the beginning of the performance period, with such distributions being paid in the form of additional LTIP Units. Thereafter, distributions will be paid currently with respect to all earned LTIP Units, whether vested or unvested.
The cost of the 2011 Outperformance Plan (approximately $26.1 million, subject to forfeitures) will be amortized into earnings through the final vesting period. We recorded compensation expense of approximately $2.8 million and $1.2 million during the three months ended March 31, 2013 and 2012, respectively, related to the 2011 Outperformance Plan.
Deferred Stock Compensation Plan for Directors
Under our Independent Director’s Deferral Program, which commenced July 2004, our non-employee directors may elect to defer up to 100% of their annual retainer fee, chairman fees and meeting fees. Unless otherwise elected by a participant, fees deferred under the program shall be credited in the form of phantom stock units. The phantom stock units are convertible into an equal number of shares of common stock upon such directors’ termination of service from the board of directors or a change in control by us, as defined by the program. Phantom stock units are credited to each non-employee director quarterly using the closing price of our
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common stock on the applicable dividend record date for the respective quarter. Each participating non-employee director’s account is also credited for an equivalent amount of phantom stock units based on the dividend rate for each quarter.
During the three months ended March 31, 2013, no phantom stock units were earned. As of March 31, 2013, there were approximately 72,706 phantom stock units outstanding.
Employee Stock Purchase Plan
On September 18, 2007, our board of directors adopted the 2008 Employee Stock Purchase Plan, or ESPP, to encourage our employees to increase their efforts to make our business more successful by providing equity-based incentives to eligible employees. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Code, and has been adopted by the board to enable our eligible employees to purchase our shares of common stock through payroll deductions. The ESPP became effective on January 1, 2008 with a maximum of 500,000 shares of the common stock available for issuance, subject to adjustment upon a merger, reorganization, stock split or other similar corporate change. We filed a registration statement on Form S-8 with the SEC with respect to the ESPP. The common stock is offered for purchase through a series of successive offering periods. Each offering period will be three months in duration and will begin on the first day of each calendar quarter, with the first offering period having commenced on January 1, 2008. The ESPP provides for eligible employees to purchase the common stock at a purchase price equal to 85% of the lesser of (1) the market value of the common stock on the first day of the offering period or (2) the market value of the common stock on the last day of the offering period. The ESPP was approved by our stockholders at our 2008 annual meeting of stockholders. As of March 31, 2013, approximately 66,323 shares of our common stock had been issued under the ESPP.
Earnings per share for the three months ended March 31, 2013 and 2012 is computed as follows (amounts in thousands):
Numerator (Income)
Basic Earnings:
Income attributable to SL Green common stockholders
Effect of Dilutive Securities:
Redemption of units to common shares
555
888
Stock options
Diluted Earnings:
19,464
26,144
Denominator (Weighted Average Shares)
Shares available to common stockholders
2,687
3,049
3.0% exchangeable senior debentures due 2017
3.0% exchangeable senior debentures due 2027
4.0% exchangeable senior debentures due 2025
Stock-based compensation plans
216
380
Diluted Shares
We have excluded approximately 988,887 and 785,929 common stock equivalents from the diluted shares outstanding for the three months ended March 31, 2013 and 2012, respectively, as they were anti-dilutive.
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13. Noncontrolling Interests in Operating Partnership
The noncontrolling interest ownership in the Operating Partnership represents interests held by entities other than the Company. As of March 31, 2013 and December 31, 2012, the noncontrolling interest unit holders owned 2.75% (2,585,675 units) and 2.94% (2,759,758 units) of the Operating Partnership, respectively. At March 31, 2013, there were also 16,667 performance -based LTIP units outstanding. At March 31, 2013, 2,602,342 shares of our common stock were reserved for issuance upon redemption of units of limited partnership interest of the Operating Partnership.
We record the carrying value of the noncontrolling interests in the Operating Partnership at fair market value based on the closing stock price of our common stock at the end of the reporting period. The carrying value of such noncontrolling interests will not be adjusted below its cost basis.
In January 2012, as part of an acquisition, the Operating Partnership issued 1,902,000 4.5% Series G preferred units of limited partnership interest, or the Series G preferred units, with a liquidation preference of $25.00 per unit. The Series G preferred unitholders receive annual dividends of $1.125 per unit paid on a quarterly basis and dividends are cumulative, subject to certain provisions. The Series G preferred units are convertible into a number of common units of limited partnership interest in the Operating Partnership equal to (i) the liquidation preference plus accumulated and unpaid distributions on the conversion date divided by (ii) $88.50. The common units of limited partnership interest in the Operating Partnership may be redeemed in exchange for our common stock on a 1-to-1 basis. The Series G preferred units also provide the holder with the right to require the Operating Partnership to repurchase the Series G preferred units for cash before January 31, 2022.
In November 2011, as part of an acquisition, the Operating Partnership issued 80,000 6.0% Series H preferred units, or the Series H preferred units, with a mandatory liquidation preference of $25.00 per unit. The Series H preferred unitholders receive annual dividends of $1.50 per unit paid on a quarterly basis and dividends are cumulative, subject to certain provisions. The Series H preferred units can be redeemed at any time at par for cash at the Operating Partnership’s option or the option of the unitholder.
We have included a rollforward analysis of the activity relating to the noncontrolling interests in the Operating Partnership below (in thousands):
Three Months Ended March 31, 2013
Year Ended December 31, 2012
Balance at beginning of period
195,030
Distributions
(3,296
Issuance of common units
777
42,239
Redemption of common units
(17,287
(87,513
5,597
Accumulated other comprehensive income (loss) allocation
59
(388
Fair value adjustment
24,016
61,238
14. Commitments and Contingencies
We and the Operating Partnership are not presently involved in any material litigation nor, to our knowledge, is any material litigation threatened against us or our properties, other than routine litigation arising in the ordinary course of business. Management believes the costs, if any, incurred by us related to this litigation will not materially affect our financial position, operating results or liquidity.
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The following is a schedule of future minimum lease payments under capital lease and non-cancellable operating leases with initial terms in excess of one year as of March 31, 2013 (in thousands):
Capital leases
Non-cancellable operating leases
2013 (9 months)
1,589
26,484
2,268
35,412
2,339
35,568
2,480
35,985
2,630
36,231
353,908
1,188,068
Total minimum lease payments
365,214
1,357,748
Less amount representing interest
(321,810
Present value of net minimum lease payments
15. Financial Instruments: Derivatives and Hedging
We recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges are adjusted to fair value through earnings. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings. Reported net income and equity may increase or decrease prospectively, depending on future levels of interest rates and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows.
The following table summarizes the notional and fair value of our derivative financial instruments at March 31, 2013 based on Level 2 information pursuant to ASC 810-10. The notional value is an indication of the extent of our involvement in these instruments at that time, but does not represent exposure to credit, interest rate or market risks (amounts in thousands).
Notional Value
Strike Rate
Effective Date
Expiration Date
Fair Value
Interest Rate Cap
3.650
04/2012
271,912
6.000
11/2012
Interest Rate Swap
2.295
07/2010
(1,761
8,500
0.740
02/2012
(70
Certain interest rate caps are not designated as a hedging instrument and changes in the value are marked to market through earnings.
On March 31, 2013, the derivative instruments were reported as an obligation at their fair value of approximately $1.8 million. This is included in other liabilities on the consolidated balance sheet at March 31, 2013. Included in accumulated other comprehensive loss at March 31, 2013 was approximately $16.4 million from the settlement of hedges, which are being amortized over the remaining term of the related mortgage obligation, and active hedges and our share of joint venture accumulated other comprehensive loss of approximately $14.7 million. Currently, all of our designated derivative instruments are effective hedging instruments.
In March 2010, we terminated forward swaps which resulted in a net loss of approximately $19.5 million from the settlement of the hedges. This loss will be amortized over the 10-year term of the related financing. This loss is included in the $16.4 million balance noted above. The balance in accumulated other comprehensive loss relating to derivatives, including our share of joint venture accumulated other comprehensive loss, was $31.1 million and $32.9 million at March 31, 2013 and December 31, 2012, respectively.
Over time, the realized and unrealized gains and losses held in accumulated other comprehensive loss will be reclassified into earnings as an adjustment to interest expense in the same periods in which the hedged interest payments affect earnings. We estimate that approximately $2.1 million of the current balance held in accumulated other comprehensive loss will be reclassified into interest expense and $4.9 million of the portion related to our share of joint venture accumulated other comprehensive loss will be reclassified into equity in net income (loss) from unconsolidated joint ventures within the next 12 months.
We are hedging exposure to variability in future cash flows for forecasted transactions in addition to anticipated future interest payments on existing debt.
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The following table presents the effect of our derivative financial instruments and our share of our joint venture’s derivative financial instruments on the consolidated statements of income as of March 31, 2013 and 2012, respectively (in thousands):
Amount of (Loss) or Gain Recognized in Other Comprehensive Loss (Effective Portion) For the Three Months Ended
Amount of (Loss) or Gain Reclassified from Accumulated Other Comprehensive Loss into Interest Expense/ Equity in net income of unconsolidated joint ventures (Effective Portion) For the Three Months Ended
Amount of (Loss) or Gain Recognized in Interest Expense/Equity in Net Income (Loss) of Unconsolidated Joint Ventures (Ineffective Portion) For the Three Months Ended
Designation\Cash Flow
Derivative
March 31, 2012
Qualifying
Interest Rate Swaps/Caps
180
(88
(1,708
(3,203
Non-qualifying
Interest Rate Caps
(15
(711
16. Environmental Matters
Our management believes that the properties are in compliance in all material respects with applicable Federal, state and local ordinances and regulations regarding environmental issues. Management is not aware of any environmental liability that it believes would have a materially adverse impact on our financial position, results of operations or cash flows. Management is unaware of any instances in which it would incur significant environmental cost if any of our properties were sold.
17. Segment Information
We are a REIT engaged in owning, managing, leasing, acquiring and repositioning commercial properties in the New York Metropolitan area and have two reportable segments, real estate and debt and preferred equity investments. We evaluate real estate performance and allocate resources based on earnings contribution to income from continuing operations.
Our real estate portfolio is primarily located in the geographical markets of the New York Metropolitan area. The primary sources of revenue are generated from tenant rents and escalations and reimbursement revenue. Real estate property operating expenses consist primarily of security, maintenance, utility costs, real estate taxes and ground rent expense (at certain applicable properties). See Note 5, “Debt and Preferred Equity Investments,” for additional details on our debt and preferred equity investments.
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Selected results of operations for the three months ended March 31, 2013 and 2012, and selected asset information as of March 31, 2013 and December 31, 2012, regarding our operating segments are as follows (in thousands):
Real Estate Segment
Debt and Preferred Equity Segment
Total Company
Three months ended:
317,263
312,795
(Loss) income from continuing operations before equity in net gain on sale of unconsolidated joint venture/real estate
(14,559
43,815
516
20,915
21,431
As of:
13,085,589
1,458,376
13,021,095
1,366,659
Income from continuing operations represents total revenues less total expenses for the real estate segment and total investment income less allocated interest expense for the debt and preferred equity segment. Interest costs for the debt and preferred equity segment are imputed assuming 100% leverage at our 2012 credit facility borrowing cost as well as the interest under the MRA. We also allocate loan loss reserves, net of recoveries to the debt and preferred equity segment. We do not allocate marketing, general and administrative expenses and transaction related costs (totaling approximately $22.4 million and $21.3 million for the three months ended March 31, 2013 and 2012, respectively) to the debt and preferred equity segment since we base performance on the individual segments prior to allocating marketing, general and administrative expenses. All other expenses, except interest, relate entirely to the real estate assets.
There were no transactions between the above two segments.
The table below reconciles income from continuing operations to net income attributable to SL Green common stockholders for the three months ended March 31, 2013 and 2012 (in thousands):
Income from continuing operations before equity in net gain on sale of interest in unconsolidated joint venture/real estate
Net income attributable to noncontrolling interests in the Operating Partnership
Net income attributable to noncontrolling interests in other partnerships
18. Supplemental Disclosure of Non-Cash Investing and Financing Activities
The following table provides information on non-cash investing and financing activities for the three months ended March 31, 2013 and 2012, respectively (in thousands):
Issuance of common stock as deferred compensation
473
Issuance of units in the Operating Partnership
1,131
Redemption of units in the Operating Partnership
275
Derivative instruments at fair value
128
288
Mortgage assigned upon asset sale
59,099
Tenant improvements and capital expenditures payable
9,136
11,941
Fair value adjustment to noncontrolling interest in the Operating Partnership
41,935
Deferred leasing payable
741
2,457
Capital leased asset
6,839
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
SL Green Realty Corp., which is referred to as SL Green or the Company, 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. We are a self-managed real estate investment trust, or REIT, with in-house capabilities in property management, acquisitions, financing, development, construction and leasing. 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.
The following discussion related to our consolidated financial statements should be read in conjunction with the financial statements appearing in this Quarterly Report on Form 10-Q and in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2012.
Critical Accounting Policies
Refer to our 2012 Annual Report on Form 10-K for a discussion of our critical accounting policies, which include investment in commercial real estate properties, investment in unconsolidated joint ventures, revenue recognition, allowance for doubtful accounts, reserve for possible credit losses and derivative instruments. There have been no changes to these policies during the three months ended March 31, 2013.
Results of Operations
Comparison of the three months ended March 31, 2013 to the three months ended March 31, 2012
The following comparison for the three months ended March 31, 2013, or 2013, to the three months ended March 31, 2012, or 2012, makes reference to the following: (i) the effect of the “Same-Store Properties,” which represents all operating properties owned by us in the same manner at January 1, 2012 and at March 31, 2013 and totaled 51 of our 53 consolidated properties, representing approximately 85% of our share of annualized rental revenue, (ii) the effect of the “Acquisitions,” which represents all properties or interests in properties acquired in 2013 and 2012 and all non-Same-Store Properties, including properties deconsolidated during the period, and (iii) “Other,” which represents corporate level items not allocable to specific properties, as well as the Service Corporation and eEmerge Inc. Assets classified as held for sale, are excluded from the following discussion.
Same-Store
Acquisition
Consolidated
Rental and escalation revenues (in millions)
$ Change
% Change
259.1
251.6
7.5
3.0
13.0
10.6
(1.6
(1.4
270.5
260.8
9.7
3.7
40.1
40.4
(0.3
(0.7
0.9
1.2
0.1
41.0
41.7
(1.7
299.2
292.0
7.2
2.5
13.9
11.8
(1.3
311.5
302.5
9.0
Occupancy in the Same-Store consolidated properties was 91.1% at March 31, 2013 compared to 91.3% at March 31, 2012. Occupancy for our Same-Store Manhattan consolidated portfolio was 93.9% at March 31, 2013 compared to 93.5% at March 31, 2012. Occupancy for our Suburban consolidated portfolio was 78.4% at March 31, 2013 compared to 80.8% at March 31, 2012.
Rental revenues depends on our ability to maintain the occupancy rates of currently leased space and to lease currently available space and space available from unscheduled lease termination.
The following table presents a summary of the leasing activity for the three months ended March 31, 2013, excluding early renewals, in our Manhattan and Suburban portfolio:
Useable SF
Rentable SF
New Cash Rent ($ per rentable SF) (1)
Prev. Escalated Rent ($ per rentable SF) (2)
TI/LC per rentable SF ($)
Free Rent (in months)
Average Lease Term (in years)
Vacancy at beginning of period
1,438,147
Space which became available during the quarter(3)
· Office
181,407
· Retail
13,162
· Storage
1,060
195,629
Total space available
1,633,776
Space leased during the quarter:
· Office(4)
210,057
229,206
50.25
57.58
55.35
4.2
7.4
17,921
86.49
78.18
64.03
6.0
20.5
239
25.00
2.3
225,296
247,366
52.85
60.72
55.93
4.3
8.4
Total available space at end of period
1,408,480
Early renewals
285,868
306,895
58.39
53.79
9.79
0.7
3.9
11,810
16,613
151.69
84.46
3.8
4,190
4,918
26.92
24.83
4.83
301,868
328,426
62.64
54.91
9.22
4.0
Total commenced leases, including replaced previous vacancy
536,101
54.72
29.27
2.2
5.4
34,534
117.85
81.20
33.23
3.1
12.5
5,157
26.83
4.61
6.9
575,792
58.43
56.44
29.29
5.9
40
1,106,957
167,663
679
3,151
171,493
1,278,450
· Office(5)
109,341
112,588
28.39
34.12
23.16
1.9
5.6
818
150.00
248.40
5.0
2,751
3,326
11.82
9.60
6.7
112,771
116,732
28.77
36.87
22.34
1,165,679
111,728
112,484
32.27
25.05
8.6
740
940
12.00
11.00
9.8
112,468
113,424
32.11
32.10
24.85
225,072
30.34
32.74
24.11
7.1
4,266
11.86
9.98
230,156
30.42
33.36
23.57
(1) Annual initial base rent.
(2) Escalated rent is calculated as total annual income less electric charges.
(3) Includes expiring space, relocating tenants and move-outs where tenants vacated. Excludes lease expirations where tenants held over.
(4) Average starting office rent excluding new tenants replacing vacancies was $52.96 per rentable square feet for 99,460 rentable square feet. Average starting office rent for office space (leased and early renewals, excluding new tenants replacing vacancies) was $57.06 per rentable square feet for 406,355 rentable square feet.
(5) Average starting office rent excluding new tenants replacing vacancies was $33.21 per rentable square feet for 37,613 rentable square feet. Average starting office rent for office space (leased and early renewals, excluding new tenants replacing vacancies) was $32.51 per rentable square feet for 150,097 rentable square feet.
At March 31, 2013, approximately 4.6% and 8.6% of the space leased at our consolidated Manhattan and Suburban properties, respectively, is expected to expire during the remainder of 2013. Based on our estimates, the current market asking rents on these expected 2013 lease expirations at our consolidated Manhattan and Suburban properties would be approximately 12.6% and 2.1% higher, respectively, than the existing in-place fully escalated rents while the current market asking rents on all our consolidated Manhattan and Suburban properties were approximately 15.3% and 3.9% higher, respectively, than the existing in-place fully escalated rents on leases that are scheduled to expire in all future years.
The increase in escalation and reimbursement revenue was due to slightly lower recoveries at both the Same-Store Properties ($0.3 million) and Acquisitions ($0.3 million). The decrease in recoveries at the Same-Store Properties was primarily due to lower electric reimbursements ($1.2 million) and operating expense escalations ($0.3 million) which were offset by higher real estate tax recoveries ($1.2 million).
Property Operating Expenses (in millions)
67.2
66.7
0.5
2.1
73.6
73.3
0.3
0.4
50.7
49.2
1.5
2.9
53.7
51.5
11.2
24.4
(0.2
11.0
8.8
25.0
129.1
124.9
3.4
6.6
2.0
138.3
133.6
4.7
3.5
The increase in property operating expenses at the Same-Store Properties was due to higher real estate taxes ($1.5 million), ground rent ($2.2 million) and payroll costs ($0.7 million). The increase in real estate taxes was primarily due to higher assessed value and higher tax rates.
Non-property Revenues (in millions)
Equity in net income (loss) of unconsolidated joint ventures
5.1
418.8
52.7
26.3
26.4
100.4
5.8
10.4
(4.6
(44.2
63.6
35.1
28.5
81.2
The increase in equity in net income of unconsolidated joint ventures was due to higher net income contributions primarily from our investments in 388-390 Greenwich Street ($3.7 million), which was due mainly to the reset of interest rate on its fixed rate loan from 5.19% to 3.2% beginning December 2012, 3 Columbus Circle ($2.0 million), which was under development beginning in 2012, 521 Fifth Avenue ($0.4 million), which was deconsolidated following the sale of 49.5% of our interest in November 2012, 724 Madison Avenue ($0.4 million), which was acquired in January 2012 and 100 Park Avenue ($0.7 million). This increase was partially offset by lower net income contributions from the west coast portfolio ($5.1 million), 1552-1560 Broadway ($1.3 million), which was under development since January 2012, and 717 Fifth Avenue ($0.9 million), which was due to the refinancing in June 2012. Occupancy at our joint venture properties was 93.1% at March 31, 2013 and 93.8% at March 31, 2012. At March 31, 2013, approximately 0.7% and 16.3% of the space leased at our Manhattan and Suburban joint venture properties are expected to expire during the remainder of 2013. We estimated that current market asking rents on these expected 2013 lease expirations at our Manhattan and Suburban joint venture properties were approximately 11.0% higher and 3.8% lower, respectively, than then existing in-place fully escalated rents.
Investment and preferred equity income increased during the three months ended March 31, 2013 primarily due to a higher invested balance in 2013 and sale of 50% of our interest in one of our debt investments, in which we recognized an additional income of $12.9 million. During the three months ended March 31, 2013, we originated or purchased $198.9 million of new debt investments at an average current yield of 12.8% compared to $70.5 million of new debt investments at an average current yield of 8.7%. The weighted average investment balance outstanding and weighted average yield were $1.4 billion and 10.6%, respectively, for the three months ended March 31, 2013 compared to $1.0 billion and 9.0%, respectively, for the three months ended March 31, 2012. As of March 31, 2013, the debt and preferred equity investments had a weighted average term to maturity of approximately 1.9 years.
The decrease in consolidated other income was primarily due to a lower lease buy-out income ($0.8 million), fee and other income ($2.2 million) and higher taxes ($1.6 million).
Same-Store other income decreased by $0.8 million from $3.6 million for the three months ended March 31, 2012 to $2.8 million for the three months ended March 31, 2013 due to lower lease buy-out income.
Other Expenses (in millions)
85.8
83.7
Depreciation and amortization expense
80.7
77.1
3.6
0.6
(0.6
(100.0
1.4
1.1
27.3
Marketing, general and administrative expense
21.1
20.2
4.5
189.0
182.7
6.3
The increase in interest expense was primarily attributable to higher average consolidated debt balances outstanding during the period due to the refinancing at 1515 Broadway ($3.9 million) and 100 Church Street ($2.8 million). The increase was partially offset by
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lower interest expense due to the repayment of debt balances at 609 Fifth Avenue ($1.8 million), 110 East 42nd Street ($1.0 million) and 673 First Avenue ($0.4 million) and deconsolidation of 521 Fifth Avenue ($1.1 million) following the sale of 49.5% of our interest. The weighted average debt balance outstanding was $6.7 billion during the three months ended March 31, 2013 compared to $6.4 billion during the three months ended March 31, 2012. The weighted average interest rate decreased from 4.88% for the three months ended March 31, 2012 to 4.86% for the three months ended March 31, 2013.
No loan loss and other investment reserves were recorded during the three months ended March 31, 2013. During the three months ended March 31, 2012, we recorded $3.0 million in reserves and $2.4 million in recoveries.
Marketing, general and administrative expenses for the three months ended March 31, 2013 were $21.1 million or 4.88% of total revenues including our share of joint venture revenue compared to $20.2 million, or 5.16% for the three months ended March 31, 2012.
Reconciliation of Same-Store Operating Income to Net Operating Income
We present Same-Store net operating income, or Same-Store NOI, because we believe that these measures provide investors with useful information regarding the operating performance of properties that are comparable for the periods presented. For properties owned since January 1, 2012 and still owned in the same manner at the end of the current quarter, we determine Same-Store net operating income by subtracting Same-Store property operating expenses and ground rent from Same-Store recurring rental and tenant reimbursement revenues. Our method of calculation may be different from methods used by other REITs, and, accordingly, may not be comparable to such other REITs. None of these measures is an alternative to net income (determined in accordance with GAAP) and Same-Store performance should not be considered an alternative to GAAP net income performance.
Same-Store NOI is determined as follows (amounts in millions):
Rental revenues
302.1
295.6
Property operating expenses
Operating income
173.0
170.7
Less: Non-building revenue
Same-Store NOI
172.1
169.8
Same-Store NOI increased by $2.3 million, or 1.4%, from $169.8 million for the three months ended March 31, 2012 to $172.1 million for the three months ended March 31, 2013.
Liquidity and Capital Resources
We currently expect that our principal sources of funds to meet our short-term and long-term liquidity requirements for working capital and funds for acquisition and redevelopment of properties, tenant improvements, leasing costs, repurchases or repayments of outstanding indebtedness (which may include exchangeable debt) and for debt and preferred equity investments will include:
(1) Cash flow from operations;
(2) Cash on hand;
(3) Borrowings under our 2012 credit facility;
(4) Other forms of secured or unsecured financing;
(5) Net proceeds from divestitures of properties and redemptions, participations and dispositions of debt and preferred equity investments; and
(6) Proceeds from common or preferred equity or debt offerings by us, the Operating Partnership (including issuances of units of limited partnership interest in the Operating Partnership and trust preferred securities) or ROP.
Cash flow from operations is primarily dependent upon the occupancy level of our portfolio, the net effective rental rates achieved on our leases, the collectability of rent and operating escalations and recoveries from our tenants and the level of operating and other costs. Additionally, we believe that our debt and preferred equity investment program will continue to serve as a source of capital.
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The combined aggregate principal maturities of our property mortgages and other loans payable, corporate obligations and our share of joint venture debt, including as-of-right extension options, as of March 31, 2013 are as follows (in thousands):
Property mortgages and other loans
189,941
275,862
573,506
1,158,961
2,229,029
Corporate obligations
1,229,636
1,862,588
Joint venture debt-our share
573,316
630,030
312,755
1,356,363
2,394,445
3,610,307
8,877,216
As of March 31, 2013, we had approximately $243.1 million of consolidated cash on hand, inclusive of approximately $23.0 million of marketable securities. We expect to generate positive cash flow from operations for the foreseeable future. We may seek to access private and public debt and equity capital when the opportunity presents itself, although there is no guarantee that this capital will be made available to us at efficient levels or at all. Management believes that these sources of liquidity, if we are able to access them, along with potential refinancing opportunities for secured debt, will allow us to satisfy our debt obligations, as described above, upon maturity, if not before.
We also have investments in several real estate joint ventures with various partners who we consider to be financially stable and who have the ability to fund a capital call when needed. Most of our joint ventures are financed with non-recourse debt. We believe that property level cash flows along with unfunded committed indebtedness and proceeds from the refinancing of outstanding secured indebtedness will be sufficient to fund the capital needs of our joint venture properties.
Cash Flows
The following summary discussion of our cash flows is based on our consolidated statements of cash flows in “Item 1. Financial Statements” and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below.
Cash and cash equivalents were $220.1 million and $133.7 million at March 31, 2013 and 2012, respectively, representing an increase of $86.4 million. The increase was a result of the following changes in cash flows (in thousands):
Three months ended March 31,
Increase (Decrease)
45,694
119,702
(130,749
Our principal source of operating cash flow is related to the leasing and operating of the properties in our portfolio. Our properties provide a relatively consistent stream of cash flow that provides us with resources to pay operating expenses, service debt and fund quarterly dividend and distribution payment requirements. At March 31, 2013, our portfolio was 91.6% occupied. Our debt and preferred equity and joint venture investments also provide a steady stream of operating cash flow to us.
Cash is used in investing activities to fund acquisitions, redevelopment projects and recurring and nonrecurring capital expenditures. We selectively invest in new projects that enable us to take advantage of our development, leasing, financing and property management skills and invest in existing buildings that meet our investment criteria. During the three months ended March 31, 2013, when compared to the three months ended March 31, 2012, we used cash primarily for the following investing activities (in thousands):
Acquisitions of real estate
97,058
Capital expenditures and capitalized interest
20,944
Escrow cash-capital improvements/acquisition deposits
1,724
Joint venture investments
55,637
Distributions from joint ventures
(11,319
Proceeds from sales of real estate/partial interest in property
(17,236
Debt and preferred equity and other investments
(27,106
Decrease in net cash provided by investing activities
Funds spent on capital expenditures, which comprise building and tenant improvements, decreased from $32.6 million for the three months ended March 31, 2012 to $11.6 million for the three months ended March 31, 2013. The capital expenditures relate primarily to costs incurred in connection with the redevelopment of properties and the build-out of space for tenants resulting from new leasing activity.
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We generally fund our investment activity through property-level financing, our 2012 credit facility, senior unsecured notes, convertible or exchangeable securities, construction loans, sales of real estate and from time to time, we issue common or preferred stock, or the Operating Partnership may issue common or preferred units of limited partnership interest. During the three months ended March 31, 2013, when compared to the three months ended March 31, 2012, we used cash for the following financing activities (in thousands):
Proceeds from our debt obligations
726,833
Repayments under our debt obligations
(621,867
Noncontrolling interests, contributions in excess of distributions
(13,074
Other financing activities
(89,493
Proceeds from issuance of common stock
(123,010
Dividends and distributions paid
(10,138
Increase in net cash used in financing activities
Capitalization
As of March 31, 2013, we had 91,555,082 shares of common stock, 2,585,675 units of limited partnership interest in the Operating Partnership held by persons other than the Company, 16,667 performance -based LTIP Units, 7,700,000 shares of our 7.625% Series C cumulative redeemable preferred stock, or Series C preferred stock, and 9,200,000 shares of our 6.50% Series I cumulative redeemable preferred stock, or Series I preferred stock, outstanding. In addition, we also had preferred units of limited partnership interests in the Operating Partnership having aggregate liquidation preferences of $49.6 million held by persons other than the Company.
In September 2012, we redeemed 4,000,000 shares, or $100.0 million, of 11,700,000 shares of our Series C preferred stock at a redemption price of $25.00 per share plus $0.3707 in accumulated and unpaid dividends on such preferred stock through September 24, 2012 and recognized $6.3 million of costs to partially redeem the Series C preferred stock. As a result of this redemption, we have 7,700,000 shares of Series C preferred stock outstanding.
In August 2012, we issued 9,200,000 shares of our Series I preferred stock with a mandatory liquidation preference of $25.00 per share. The Series I preferred shareholders receive annual distributions of $1.625 per share paid on a quarterly basis and distributions are cumulative, subject to certain provisions. We are entitled to redeem our Series I preferred stock at par for cash at our option on or after August 10, 2017. Net proceeds from the Series I preferred stock ($221.9 million) was recorded net of underwriters’ discount and issuance costs.
In July 2012, we redeemed all 4,000,000 shares, or $100.0 million, of our 7.875% Series D cumulative redeemable preferred stock, or Series D preferred stock, at a redemption price of $25.00 per share plus $0.4922 in accumulated and unpaid dividends on such preferred stock through July 14, 2012 and recognized $3.7 million of costs to fully redeem the Series D preferred stock.
During the three months ended March 31, 2013 and 2012, we issued approximately 170 shares and 1.3 million shares of our common stock and received approximately $13,000 and $99.5 million of net proceeds, respectively, from dividend reinvestments and/or stock purchases under the DRIP. DRIP shares may be issued at a discount to the market price.
Subject to adjustments upon certain corporate transactions or events, up to a maximum of 10,730,000 fungible units may be granted as options, restricted stock, phantom shares, dividend equivalent rights and other equity-based awards under the Second Amended and Restated 2005 Stock Option and Incentive Plan, or the 2005 Plan. As of March 31, 2013, no fungible units were available for issuance under the 2005 Plan after reserving for shares underlying outstanding restricted stock units, phantom stock units granted pursuant to our Non-Employee Directors’ Deferral Program and LTIP Units, including, among others, outstanding LTIP Units issued under our 2011 Long-Term Outperformance Plan, which remain subject to performance-based vesting.
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The cost of the 2010 Long Term Compensation Plan (approximately $31.7 million, subject to forfeitures) will be amortized into earnings through the final vesting period. We recorded compensation expense of approximately $1.9 million during each of the three months ended March 31, 2013 and 2012 related to the 2010 Long-Term Compensation Plan.
Under our Independent Director’s Deferral Program, which commenced July 2004, our non-employee directors may elect to defer up to 100% of their annual retainer fee, chairman fees and meeting fees. Unless otherwise elected by a participant, fees deferred under the program shall be credited in the form of phantom stock units. The phantom stock units are convertible into an equal number of shares of common stock upon such directors’ termination of service from the board of directors or a change in control by us, as defined by the program. Phantom stock units are credited to each non-employee director quarterly using the closing price of our common stock on the applicable dividend record date for the respective quarter. Each participating non-employee director’s account is also credited for an equivalent amount of phantom stock units based on the dividend rate for each quarter.
On September 18, 2007, our board of directors adopted the 2008 Employee Stock Purchase Plan, or ESPP, to encourage our employees to increase their efforts to make our business more successful by providing equity-based incentives to eligible employees.
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The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Code, and has been adopted by the board to enable our eligible employees to purchase our shares of common stock through payroll deductions. The ESPP became effective on January 1, 2008 with a maximum of 500,000 shares of the common stock available for issuance, subject to adjustment upon a merger, reorganization, stock split or other similar corporate change. We filed a registration statement on Form S-8 with the SEC with respect to the ESPP. The common stock is offered for purchase through a series of successive offering periods. Each offering period will be three months in duration and will begin on the first day of each calendar quarter, with the first offering period having commenced on January 1, 2008. The ESPP provides for eligible employees to purchase the common stock at a purchase price equal to 85% of the lesser of (1) the market value of the common stock on the first day of the offering period or (2) the market value of the common stock on the last day of the offering period. The ESPP was approved by our stockholders at our 2008 annual meeting of stockholders. As of March 31, 2013 approximately 66,323 shares of our common stock had been issued under the ESPP.
Market Capitalization
At March 31, 2013, borrowings under our mortgages and other loans payable, our 2012 credit facility, senior unsecured notes and trust preferred securities and our share of joint venture debt represented 50.9% of our combined market capitalization of approximately $17.4 billion (based on a common stock price of $86.11 per share, the closing price of our common stock on the New York Stock Exchange on March 28, 2013). Market capitalization includes our consolidated debt, common and preferred stock and the conversion of all units of limited partnership interest in the Operating Partnership, and our share of joint venture debt.
Indebtedness
The table below summarizes our consolidated mortgages and other loans payable, our 2012 credit facility, senior unsecured notes and trust preferred securities outstanding at March 31, 2013 and December 31, 2012, respectively (amounts in thousands):
Debt Summary:
Balance
Fixed rate
5,773,663
4,884,354
Variable rate — hedged
38,331
38,371
5,811,994
4,922,725
Variable rate
311,124
1,150,762
Variable rate—supporting variable rate assets
554,955
446,933
Total variable rate
866,079
1,597,695
6,520,420
Percent of Total Debt:
87.0
75.5
24.5
100.0
Effective Interest Rate for the period:
5.56
5.78
2.89
Effective interest rate
4.86
5.08
The variable rate debt shown above generally bears interest at an interest rate based on 30-day LIBOR (0.20% and 0.24% at March 31, 2013 and 2012, respectively). Our consolidated debt at March 31, 2013 had a weighted average term to maturity of approximately 6.5 years.
Certain of our debt and preferred equity investments, with a face amount of approximately $555.0 million at March 31, 2013, are variable rate investments which mitigate our exposure to interest rate changes on our unhedged variable rate debt at March 31, 2013.
Mortgage Financing
As of March 31, 2013, our total mortgage debt (excluding our share of joint venture debt of approximately $2.2 billion) consisted of approximately $4.3 billion of fixed rate debt, including hedged variable rate debt, with an effective weighted average interest rate of approximately 5.3% and approximately $0.5 billion of variable rate debt with an effective weighted average interest rate of approximately 2.7%.
Corporate Indebtedness
In November 2012, we entered into a $1.6 billion credit facility, or the 2012 credit facility, which refinanced, extended and upsized the previous 2011 revolving credit facility. The 2012 credit facility consists of a $1.2 billion revolving credit facility, or the revolving
47
credit facility, and a $400.0 million term loan, or the term loan facility. The revolving credit facility matures in March 2017 and includes two six-month extension options, subject to certain conditions and the payment of an extension fee of 10 basis points for each such extension. We also have an option, subject to customary conditions, without the consent of existing lenders, to increase the capacity under the revolving credit facility to $1.5 billion at any time prior to the maturity date for the revolving credit facility, by obtaining additional commitments from our current lenders and other financial institutions. The term loan facility matures on March 30, 2018.
Master Repurchase Agreement
In September 2012, we entered into a Master Repurchase Agreement, or MRA, with a financial institution, with a maximum facility capacity of $175.0 million, under which we agreed to sell certain debt investments in exchange for cash with a simultaneous agreement to repurchase the same debt investments at a certain date or on demand. The MRA’s interest rate is based on one-month LIBOR plus 300 basis points. The MRA matures in September 2013, and has a one-year extension option. At March 31, 2013, we had approximately $175.0 million outstanding under this facility, which is included in mortgages and other loans payable.
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(3) On December 27, 2012, we repurchased $42.4 million aggregate principal amount of these notes, consisting of $22.7 million of the 5.875% Notes and $19.7 million of the 6.0% Notes, for a total consideration of $46.4 million and realized a net loss on early extinguishment of debt of approximately $3.8 million.
The terms of the 2012 credit facility and certain of our senior unsecured notes include certain restrictions and covenants which may limit, among other things, our ability to pay dividends (as discussed below), make certain types of investments, incur additional indebtedness, incur liens and enter into negative pledge agreements and dispose of assets, and which require compliance with financial ratios relating to the minimum amount of tangible net worth, a maximum ratio of total indebtedness to total asset value, a minimum ratio of EBITDA to fixed charges, a maximum ratio of secured indebtedness to total asset value and a maximum ratio of unsecured indebtedness to unencumbered asset value. The dividend restriction referred to above provides that we will not during any time when a default is continuing, make distributions with respect to common stock or other equity interests, except to enable us to continue to qualify as a REIT for Federal income tax purposes. As of March 31, 2013 and December 31, 2012, we were in compliance with all such covenants.
In June 2005, we issued $100.0 million of Trust Preferred Securities, which are reflected on the balance sheet as Junior Subordinate Deferrable Interest Debentures. The proceeds were used to repay our revolving credit facility. The $100.0 million of junior subordinate deferrable interest debentures have a 30-year term ending July 2035. They bear interest at a fixed rate of 5.61% for the first 10 years ending July 2015. Thereafter, the rate will float at three month LIBOR plus 1.25%. The securities are redeemable at par.
Market Rate Risk
We are exposed to changes in interest rates primarily from our floating rate borrowing arrangements. We often use interest rate derivative instruments to manage exposure to interest rate changes. A hypothetical 100 basis point increase in interest rates along the entire interest rate curve for 2013 would increase our annual interest cost by approximately $8.4 million and would increase our share of joint venture annual interest cost by approximately $9.1 million, respectively.
We recognize most derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is considered a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings.
Approximately $5.8 billion of our long-term debt bears interest at fixed rates, and therefore the fair value of these instruments is affected by changes in the market interest rates. The interest rate on our variable rate debt and variable rate joint venture debt as of
March 31, 2013 was based on a spread of LIBOR plus 90 basis points to LIBOR plus 950 basis points.
Contractual Obligations
Refer to our 2012 Annual Report on Form 10-K for a discussion of our contractual obligations. There have been no material changes, outside the ordinary course of business, to these contractual obligations during the three months ended March 31, 2013.
Off-Balance Sheet Arrangements
We have a number of off-balance sheet investments, including joint ventures and debt and preferred equity investments. These investments all have varying ownership structures. Substantially all of our joint venture arrangements are accounted for under the equity method of accounting as we have the ability to exercise significant influence, but not control over the operating and financial decisions of these joint venture arrangements. Our off-balance sheet arrangements are discussed in Note 5, “Debt and Preferred Equity Investments” and Note 6, “Investments in Unconsolidated Joint Ventures” in the accompanying consolidated financial statements.
Capital Expenditures
We estimate that for the nine months ending December 31, 2013, we expect to incur approximately $141.0 million of capital expenditures, which are net of loan reserves, (including tenant improvements and leasing commissions) on existing consolidated properties and our share of capital expenditures at our joint venture properties, net of loan reserves, will be approximately $26.8 million. We expect to fund these capital expenditures with operating cash flow, additional property level mortgage financings and cash on hand. Future property acquisitions may require substantial capital investments for refurbishment and leasing costs. We expect that these financing requirements will be met in a similar fashion. We believe that we will have sufficient resources to satisfy our capital needs during the next 12-month period. Thereafter, we expect our capital needs will be met through a combination of cash on hand, net cash provided by operations, borrowings, potential asset sales or additional equity or debt issuances.
Dividends
We expect to pay dividends to our stockholders based on the distributions we receive from the Operating Partnership primarily from property revenues net of operating expenses or, if necessary, from working capital or borrowings.
To maintain our qualification as a REIT, we must pay annual dividends to our stockholders of at least 90% of our REIT taxable income, determined before taking into consideration the dividends paid deduction and net capital gains. We intend to continue to pay regular quarterly dividends to our stockholders. Based on our current annual dividend rate of $1.32 per share, we would pay approximately $120.9 million in dividends to our common stockholders on an annual basis. Before we pay any dividend, whether for Federal income tax purposes or otherwise, which would only be paid out of available cash to the extent permitted under our 2012 credit facility and senior unsecured notes, we must first meet both our operating requirements and scheduled debt service on our mortgages and loans payable.
Related Party Transactions
Through Alliance Building Services, or Alliance, First Quality Maintenance, L.P., or First Quality, provides cleaning, extermination and related services, Classic Security LLC provides security services, Bright Star Couriers LLC provides messenger services, and Onyx Restoration Works provides restoration services with respect to certain properties owned by us. Alliance is partially owned by Gary Green, a son of Stephen L. Green, the chairman of our board of directors. In addition, First Quality has the non-exclusive opportunity to provide cleaning and related services to individual tenants at our properties on a basis separately negotiated with any tenant seeking such additional services. The Service Corporation has entered into an arrangement with Alliance whereby it will receive a profit participation above a certain threshold for services provided by Alliance to certain tenants at certain buildings above the base services specified in their lease agreements. Alliance paid the Service Corporation approximately $1.0 million and $0.8 million for the three months ended March 31, 2013 and 2012, respectively. We paid Alliance approximately $4.1 million and $3.5 million for the three months ended March 31, 2013 and 2012, respectively, for these services (excluding services provided directly to tenants).
Nancy Peck and Company leases 1,003 square feet of space at 420 Lexington Avenue under a lease that ends in August 2015. Nancy
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Peck and Company is owned by Nancy Peck, the wife of Stephen L. Green. The rent due under the lease was $35,516 per annum for year one increasing to $40,000 in year seven.
Our related party transactions with Gramercy are discussed in Note 6, “Investments in Unconsolidated Joint Ventures—Gramercy Capital Corp.,” in the accompanying financial statements.
Insurance
We maintain “all-risk” property and rental value coverage (including coverage regarding the perils of flood, earthquake and terrorism) within two property insurance portfolios and liability insurance. As of March 31, 2013, the first property portfolio maintains a blanket limit of $950.0 million per occurrence, including terrorism, for the majority of the New York City properties in our portfolio. The second portfolio maintains a limit of $700.0 million per occurrence, including terrorism, for some New York City properties and the majority of the Suburban properties. Both policies expire on December 31, 2013. Each policy includes $100.0 million of flood coverage, with a lower sublimit for locations in high hazard flood zones. We maintain liability policies which cover all our properties and provide limits of $201.0 million per occurrence and in the aggregate per location. The liability policies expire on October 31, 2013. Additional coverage may be purchased on a stand-alone basis for certain assets.
In October 2006, we formed a wholly-owned taxable REIT subsidiary, Belmont Insurance Company, or Belmont, to act as a captive insurance company and be one of the elements of our overall insurance program. Belmont is a subsidiary of ours. Belmont was formed in an effort to, among other reasons, stabilize to some extent the fluctuations of insurance market conditions. Belmont is licensed in New York to write Terrorism, NBCR (nuclear, biological, chemical, and radiological), General Liability, Environmental Liability, Flood and D&O coverage.
· Terrorism: Belmont acts as a direct property insurer with respect to a portion of our terrorism coverage for the New York City properties. Belmont has a terrorism coverage limit of $850.0 million in a layer in excess of $100.0 million. In addition, Belmont purchased reinsurance to reinsure the retained insurable risk not otherwise covered under Terrorism Risk Insurance Program Reauthorization and Extension Act of 2007, or TRIPRA, as detailed below.
· NBCR: Belmont has acted as a direct insurer of NBCR coverage and since December 31, 2011, has provided coverage up to $750.0 million on our entire property portfolio for certified acts of terrorism above a program trigger of $100.0 million. Belmont is responsible for a small deductible and 15% of a loss, with the remaining 85% covered by the Federal government.
· General Liability: For the period commencing October 31, 2010, Belmont insures a retention on the general liability insurance of $150,000 per occurrence and a $2.1 million annual aggregate stop loss limit. We have secured excess insurance to protect against catastrophic liability losses above the $150,000 retention. Prior policy years carried a higher per occurrence deductible and/or higher aggregate stop loss. Belmont has retained a third-party administrator to manage all claims within the retention and we anticipate that direct management of liability claims will improve loss experience and ultimately lower the cost of liability insurance in future years. In addition, we have an umbrella liability policy of $200.0 million per occurrence and in the aggregate on a per location basis.
· Environmental Liability: Belmont insures a deductible of $975,000 per occurrence in excess of $25,000 on a $25.0 million per occurrence and $30.0 million aggregate environmental liability policy covering our entire portfolio.
· Flood: For the period commencing December 31, 2012, Belmont insures a portion of the high hazard flood deductible on the New York City portfolio. Belmont insurance reduces the average deductible from $3.0 million to $1.0 million.
As long as we own Belmont, we are responsible for its liquidity and capital resources, and the accounts of Belmont are part of our consolidated financial statements. If we experience a loss and Belmont is required to pay under its insurance policy, we would ultimately record the loss to the extent of Belmont’s required payment. Therefore, insurance coverage provided by Belmont should not be considered as the equivalent of third-party insurance, but rather as a modified form of self-insurance.
The Terrorism Risk Insurance Act, or TRIA, which was enacted in November 2002, was renewed December 31, 2005 and again on
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December 31, 2007. Congress extended TRIA, now called TRIPRA (Terrorism Risk Insurance Program Reauthorization and Extension Act of 2007) until December 31, 2014. The law extends the federal Terrorism Insurance Program that requires insurance companies to offer terrorism coverage and provides for compensation for insured losses resulting from acts of certified terrorism, subject to the current program trigger of $100.0 million. There is no assurance that TRIPRA will be extended. Our debt instruments, consisting of mortgage loans secured by our properties (which are generally non-recourse to us), mezzanine loans, ground leases, our 2012 credit facility, senior unsecured notes and other corporate obligations, contain customary covenants requiring us to maintain insurance. Although we believe that we currently maintain sufficient insurance coverage to satisfy these obligations, there is no assurance that in the future we will be able to procure coverage at a reasonable cost. In such instances, there can be no assurance that the lenders or ground lessors under these instruments will not take the position that a total or partial exclusion from “all-risk” insurance coverage for losses due to terrorist acts is a breach of these debt and ground lease instruments allowing the lenders or ground lessors to declare an event of default and accelerate repayment of debt or recapture of ground lease positions. In addition, if lenders prevail in asserting that we are required to maintain full coverage for these risks, it could result in substantially higher insurance premiums.
We monitor all properties that are subject to triple net leases to ensure that tenants are providing adequate coverage. Certain joint ventures may be covered under policies separate from our policies, at coverage limits, which we deem to be adequate. We continually monitor these policies. Although we consider our insurance coverage to be appropriate, in the event of a major catastrophe, we may not have sufficient coverage to replace certain properties.
Funds From Operations
Funds From Operations, or FFO, is a widely recognized measure of REIT performance. We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts, or NAREIT, which may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or that interpret the NAREIT definition differently than we do. The revised White Paper on FFO approved by the Board of Governors of NAREIT in April 2002, and as subsequently amended, defines FFO as net income (loss) (computed in accordance with Generally Accepted Accounting Principles, or GAAP), excluding gains (or losses) from debt restructuring, sales of properties and real estate related impairment charges, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. We present FFO because we consider it an important supplemental measure of our operating performance and believe that it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, particularly those that own and operate commercial office properties.
We also use FFO as one of several criteria to determine performance-based bonuses for members of our senior management. FFO is intended to exclude GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO excludes depreciation and amortization unique to real estate, gains and losses from property dispositions and extraordinary items, it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, interest costs, providing perspective not immediately apparent from net income. FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income (determined in accordance with GAAP), as an indication of our financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make cash distributions.
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FFO for the three months ended March 31, 2013 and 2012 is as follows (in thousands):
Add:
Discontinued operations depreciation adjustments
Unconsolidated joint ventures depreciation and noncontrolling interest adjustments
7,527
9,141
3,456
1,959
Less:
Equity in net gain on sale of joint venture property/real estate
Depreciation on non-rental real estate assets
245
267
109,224
99,285
Net cash flows provided by operating activities
Net cash flows used in investing activities
Net cash flows provided by financing activities
Inflation
Substantially all of the office leases provide for separate real estate tax and operating expense escalations as well as operating expense recoveries based on increases in the Consumer Price Index or other measures such as porters’ wage. In addition, many of the leases provide for fixed base rent increases. We believe that inflationary increases may be at least partially offset by the contractual rent increases and expense escalations described above.
The Accounting Standards Updates are discussed in Note 2, “Significant Accounting Policies—Accounting Standards Updates” in the accompanying consolidated financial statements.
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Forward-Looking Information
This report includes certain statements that may be deemed to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and are intended to be covered by the safe harbor provisions thereof. All statements, other than statements of historical facts, included in this report that address activities, events or developments that we expect, believe or anticipate will or may occur in the future, including such matters as future capital expenditures, dividends and acquisitions (including the amount and nature thereof), development trends of the real estate industry and the Manhattan, Brooklyn, Westchester County, Connecticut, Long Island and Northern New Jersey office markets, business strategies, expansion and growth of our operations and other similar matters, are forward-looking statements. These forward-looking statements are based on certain assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate.
Forward-looking statements are not guarantees of future performance and actual results or developments may differ materially, and we caution you not to place undue reliance on such statements. Forward-looking statements are generally identifiable by the use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” “project,” “continue,” or the negative of these words, or other similar words or terms.
Forward-looking statements contained in this report are subject to a number of risks and uncertainties that may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by forward-looking statements made by us. These risks and uncertainties include:
· the effect of general economic, business and financial conditions, and their effect on the New York metropolitan real estate market in particular;
· dependence upon certain geographic markets;
· risks of real estate acquisitions, dispositions and developments, including the cost of construction delays and cost overruns;
· risks relating to debt and preferred equity investments;
· availability and creditworthiness of prospective tenants and borrowers;
· bankruptcy or insolvency of a major tenant or a significant number of smaller tenants;
· adverse changes in the real estate markets, including reduced demand for office space, increasing vacancy, and increasing availability of sublease space;
· availability of capital (debt and equity);
· unanticipated increases in financing and other costs, including a rise in interest rates;
· our ability to comply with financial covenants in our debt instruments;
· our ability to maintain our status as a REIT;
· risks of investing through joint venture structures, including the fulfillment by our partners of their financial obligations;
· the continuing threat of terrorist attacks, in particular in the New York Metropolitan area and on our tenants;
· our ability to obtain adequate insurance coverage at a reasonable cost and the potential for losses in excess of our insurance coverage, including as a result of environmental contamination; and
· legislative, regulatory and/or safety requirements adversely affecting REITs and the real estate business, including costs of compliance with the Americans with Disabilities Act, the Fair Housing Act and other similar laws and regulations.
Other factors and risks to our business, many of which are beyond our control, are described in other sections of this report and in our other filings with the SEC. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of future events, new information or otherwise.
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ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
For quantitative and qualitative disclosures about market risk, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 2012. Our exposures to market risk have not changed materially since December 31, 2012.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rule 13a-15(e) of the Exchange Act. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports. Also, we have investments in certain unconsolidated entities. As we do not control these entities, our disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to give reasonable assurance to the timely collection, evaluation and disclosure of information relating to the Company that would potentially be subject to disclosure under the Exchange Act and the rules and regulations promulgated thereunder.
Changes in Internal Control over Financial Reporting
There have been no significant changes in our internal control over financial reporting during the three months ended March 31, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of March 31, 2013, we were not involved in any material litigation nor, to management’s knowledge, any material litigation threatened against us or our portfolio other than routine litigation arising in the ordinary course of business or litigation that is adequately covered by insurance.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in “Item 1A. Part I. Risk Factors” in our 2012 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
(a) Exhibits:
31.1
Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
31.2
Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.1
Certification by the Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.2
Certification by the Chief Financial Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
101.1
The following financial statements from SL Green Realty Corp.’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013, formatted in XBRL: (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of Comprehensive Income (unaudited), (iv) Consolidated Statement of Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited), and (vi) Notes to Consolidated Financial Statements (unaudited), detail tagged and filed herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
By:
/s/ James Mead
James Mead
Chief Financial Officer
Date: May 10, 2013