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SL Green Realty 10-Q 2009

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2

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, 2009

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

 

THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                to                 .

 

Commission File Number: 1-13199

 


 

SL GREEN REALTY CORP.

(Exact name of registrant as specified in its charter)

 


 

Maryland

 

13-3956775

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

420 Lexington Avenue, New York, New York 10170

(Address of principal executive offices) (Zip Code)

 

(212) 594-2700

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x     NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o    NO  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller Reporting Company o

 

(Do not check if a smaller reporting company)

 

 

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

 

The number of shares outstanding of the registrant’s common stock, $0.01 par value, was 57,266,834 as of April 30, 2009.

 

 

 



Table of Contents

 

SL GREEN REALTY CORP.

 

INDEX

 

 

 

 

PAGE

 

 

 

 

PART I.

FINANCIAL INFORMATION

 

3

 

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

 

3

 

 

 

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

 

3

 

 

 

Condensed Consolidated Statements of Income for the three months ended March 31, 2009 and 2008 (unaudited)

 

4

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2009 (unaudited)

 

5

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008 (unaudited)

 

6

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

7

 

 

 

ITEM 2.

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

 

34

 

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

48

 

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

 

48

 

 

 

 

PART II.

OTHER INFORMATION

 

49

 

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

 

49

 

 

 

 

ITEM 1A.  

RISK FACTORS

 

49

 

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

50

 

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

50

 

 

 

 

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

50

 

 

 

 

ITEM 5.

OTHER INFORMATION

 

50

 

 

 

 

ITEM 6.

EXHIBITS

 

50

 

 

 

 

SIGNATURES

 

51

 

2



Table of Contents

 

PART I.

FINANCIAL INFORMATION

ITEM 1.
Financial Statements

 

SL Green Realty Corp.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except per share data)

 

 

 

March 31,
2009

 

December 31,
2008

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Commercial real estate properties, at cost:

 

 

 

 

 

Land and land interests

 

$

1,385,101

 

$

1,386,090

 

Building and improvements

 

5,547,522

 

5,544,019

 

Building leasehold and improvements

 

1,255,573

 

1,259,472

 

Property under capital lease

 

12,208

 

12,208

 

 

 

8,200,404

 

8,201,789

 

Less: accumulated depreciation

 

(586,029

)

(546,545

)

 

 

7,614,375

 

7,655,244

 

Assets held for sale

 

106,543

 

184,035

 

Cash and cash equivalents

 

433,654

 

726,889

 

Restricted cash

 

97,401

 

105,954

 

Tenant and other receivables, net of allowance of $14,001 and $16,898 in 2009 and 2008, respectively

 

33,459

 

30,882

 

Related party receivables

 

14,119

 

7,676

 

Deferred rents receivable, net of allowance of $20,172 and $19,648 in 2009 and 2008, respectively

 

152,126

 

145,561

 

Structured finance investments, net of discount of $7,870 and $18,764 in 2009 and 2008, respectively

 

589,267

 

679,814

 

Investments in unconsolidated joint ventures

 

976,572

 

975,483

 

Deferred costs, net

 

134,297

 

133,052

 

Other assets

 

349,320

 

339,763

 

Total assets

 

$

10,501,133

 

$

10,984,353

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Mortgage notes payable

 

$

2,585,592

 

$

2,591,358

 

Revolving credit facility

 

1,389,067

 

1,389,067

 

Senior unsecured notes

 

1,151,556

 

1,501,134

 

Accrued interest payable and other liabilities

 

54,478

 

70,692

 

Accounts payable and accrued expenses

 

133,937

 

133,100

 

Deferred revenue/gain

 

401,848

 

427,936

 

Capitalized lease obligation

 

16,747

 

16,704

 

Deferred land leases payable

 

17,740

 

17,650

 

Dividend and distributions payable

 

26,420

 

26,327

 

Security deposits

 

34,865

 

34,561

 

Liabilities related to assets held for sale

 

 

106,534

 

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

 

100,000

 

100,000

 

Total liabilities

 

5,912,250

 

6,415,063

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

Noncontrolling interest in operating partnership

 

89,600

 

89,089

 

 

 

 

 

 

 

Equity

 

 

 

 

 

SL Green stockholders’ equity:

 

 

 

 

 

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

 

151,981

 

151,981

 

Series D preferred stock, $0.01 par value, $25.00 liquidation preference, 4,000 issued and outstanding at March 31, 2009 and December 31, 2008, respectively

 

96,321

 

96,321

 

Common stock, $0.01 par value 160,000 shares authorized and 60,619 and 60,404 issued and outstanding at March 31, 2009 and December 31, 2008, respectively (including 3,360 shares at both March 31, 2009 and December 31, 2008, held in Treasury, respectively)

 

606

 

604

 

Additional paid-in-capital

 

3,087,123

 

3,079,159

 

Treasury stock at cost

 

(302,705

)

(302,705

)

Accumulated other comprehensive loss

 

(53,089

)

(54,747

)

Retained earnings

 

989,476

 

978,180

 

Total SL Green stockholders’ equity

 

3,969,713

 

3,948,793

 

Noncontrolling interests in other partnerships

 

529,570

 

531,408

 

Total equity

 

4,499,283

 

4,480,201

 

Total liabilities and equity

 

$

10,501,133

 

$

10,984,353

 

 

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

 

3



Table of Contents

 

SL Green Realty Corp.

Condensed Consolidated Statements of Income

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2009

 

2008

 

Revenues

 

 

 

 

 

Rental revenue, net

 

$

196,468

 

$

193,840

 

Escalation and reimbursement

 

33,758

 

29,960

 

Preferred equity and investment income

 

16,898

 

20,398

 

Other income

 

16,281

 

10,504

 

Total revenues

 

263,405

 

254,702

 

Expenses

 

 

 

 

 

Operating expenses (including approximately $3,432 (2009) and $3,571 (2008) paid to affiliates)

 

55,481

 

53,672

 

Real estate taxes

 

36,949

 

32,524

 

Ground rent

 

8,046

 

8,249

 

Interest expense, net of interest income

 

60,264

 

76,046

 

Amortization of deferred financing costs

 

1,436

 

1,632

 

Depreciation and amortization

 

54,798

 

53,434

 

Loan loss reserves

 

62,000

 

1,250

 

Loss equity investment in marketable securities

 

807

 

 

Marketing, general and administrative

 

17,922

 

24,460

 

Total expenses

 

297,703

 

251,267

 

 

 

 

 

 

 

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

 

(34,298

)

3,435

 

Equity in net income from unconsolidated joint ventures

 

13,073

 

19,425

 

Income (loss) from continuing operations before gain on sale and discontinued operations

 

(21,255

)

22,860

 

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

 

9,541

 

 

Gain on early extinguishment of debt

 

47,712

 

 

Income from continuing operations

 

36,028

 

22,860

 

Net income (loss) from discontinued operations

 

(66

)

2,760

 

Gain on sale of discontinued operations

 

6,572

 

110,232

 

Net income

 

42,534

 

135,852

 

Net income attributable to noncontrolling interests in operating partnership

 

(1,320

)

(5,037

)

Net income attributable to noncontrolling interests in other partnerships

 

(3,477

)

(4,752

)

Net income attributable to SL Green

 

37,737

 

126,063

 

Preferred stock dividends

 

(4,969

)

(4,969

)

Net income attributable to SL Green common stockholders

 

$

32,768

 

$

121,094

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

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

 

$

0.30

 

$

0.24

 

Net income from discontinued operations, net of noncontrolling interest

 

 

0.02

 

Gain on sale of discontinued operations, net of noncontrolling interest

 

0.11

 

1.81

 

Gain on sale of unconsolidated joint ventures/ real estate

 

0.16

 

 

Net income attributable to SL Green common stockholders

 

$

0.57

 

$

2.07

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

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

 

$

0.30

 

$

0.24

 

Net income from discontinued operations

 

 

0.02

 

Gain on sale of discontinued operations

 

0.11

 

1.80

 

Gain on sale of unconsolidated joint ventures/ real estate

 

0.16

 

 

Net income attributable to SL Green common stockholders

 

$

0.57

 

$

2.06

 

 

 

 

 

 

 

Amounts attributable to SL Green common stockholders:

 

 

 

 

 

Income from continuing operations

 

$

26,518

 

$

13,791

 

Discontinued operations

 

(63

)

1,312

 

Gain on sale of discontinued operations

 

6,313

 

105,991

 

Net income

 

$

32,768

 

$

121,094

 

 

 

 

 

 

 

Dividends per share

 

$

0.375

 

$

0.7875

 

Basic weighted average common shares outstanding

 

57,178

 

58,482

 

Diluted weighted average common shares and common share equivalents outstanding

 

59,555

 

61,221

 

 

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

 

4



Table of Contents

 

SL Green Realty Corp.

Condensed Consolidated Statement of Equity

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

 

 

 

SL Green Realty Corp. Stockholders

 

 

 

 

 

 

 

 

 

Series C

 

Series D

 

Common
Stock

 

Additional

 

 

 

Accumulated
Other

 

 

 

 

 

 

 

 

 

 

 

Preferred
Stock

 

Preferred
Stock

 

Shares

 

Par
Value

 

Paid-
In-Capital

 

Treasury Stock

 

Comprehensive
Loss

 

Retained
Earnings

 

Noncontrolling
Interests

 

Total

 

Comprehensive
Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2008

 

$

151,981

 

$

96,321

 

57,044

 

$

604

 

$

3,079,159

 

$

(302,705

)

$

(54,747

)

$

978,180

 

$

531,408

 

$

4,480,201

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

37,737

 

3,477

 

41,214

 

$

41,214

 

Net unrealized loss on derivative instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

5,951

 

 

 

 

 

5,951

 

5,951

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,501

)

 

 

 

 

(4,501

)

(4,501

)

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

208

 

 

 

 

 

208

 

208

 

Preferred dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,969

)

 

 

(4,969

)

 

 

Redemption of units and DRIP proceeds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan & stock award, net

 

 

 

 

 

215

 

2

 

371

 

 

 

 

 

 

 

 

 

373

 

 

 

Amortization of deferred compensation plan

 

 

 

 

 

 

 

 

 

7,593

 

 

 

 

 

 

 

 

 

7,593

 

 

 

Cash distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,315

)

(5,315

)

 

 

Cash distribution declared ($0.375 per common share of which none represented a return of capital for federal income tax purposes)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(21,472

)

 

 

(21,472

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2009

 

$

151,981

 

$

96,321

 

57,259

 

$

606

 

$

3,087,123

 

$

(302,705

)

$

(53,089

)

$

989,476

 

$

529,570

 

$

4,499,283

 

$

42,872

 

 

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

 

5



Table of Contents

 

SL Green Realty Corp.

Condensed Consolidated Statements of Cash Flows

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

 

 

 

Three Months

 

 

 

Ended March 31,

 

 

 

2009

 

2008

 

Operating Activities

 

 

 

 

 

Net income

 

$

42,534

 

$

134,457

 

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

 

 

 

 

 

Depreciation and amortization

 

56,917

 

57,494

 

Gain on sale of discontinued operations

 

(6,572

)

(110,232

)

Equity in net income from unconsolidated joint ventures

 

(13,073

)

(19,425

)

Equity in net gain on sale of unconsolidated joint ventures

 

(9,541

)

 

Distributions of cumulative earnings from unconsolidated joint ventures/ real estate

 

9,249

 

26,410

 

Loan loss reserves

 

62,000

 

 

Loss on equity investment in marketable securities

 

807

 

 

Deferred rents receivable

 

(7,089

)

(12,955

)

Other non-cash adjustments

 

(2,586

)

8,867

 

Changes in operating assets and liabilities:

 

 

 

 

 

Restricted cash — operations

 

8,016

 

5,676

 

Tenant and other receivables

 

320

 

3,265

 

Related party receivables

 

(6,443

)

634

 

Deferred lease costs

 

(4,677

)

(6,221

)

Other assets

 

(23,232

)

(21,604

)

Accounts payable, accrued expenses and other liabilities

 

(2,183

)

(51,668

)

Deferred revenue and land leases payable

 

(1,286

)

5,679

 

Net cash provided by operating activities

 

103,161

 

20,377

 

Investing Activities

 

 

 

 

 

Acquisitions of real estate property

 

 

(32,351

)

Additions to land, buildings and improvements

 

(17,570

)

(24,250

)

Escrowed cash — capital improvements/acquisition deposits

 

537

 

(44,328

)

Investments in unconsolidated joint ventures

 

(8,310

)

(11,662

)

Distributions in excess of cumulative earnings from unconsolidated joint ventures

 

6,482

 

12,741

 

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

 

17,154

 

152,933

 

Other investments

 

(1,935

)

(14,956

)

Structured finance and other investments net of repayments/participations

 

406

 

3,765

 

Net cash (used in) provided by investing activities

 

(3,236

)

41,892

 

Financing Activities

 

 

 

 

 

Proceeds from mortgage notes payable

 

1,112

 

30,061

 

Repayments of mortgage notes payable

 

(6,878

)

(7,113

)

Proceeds from revolving credit facility and senior unsecured notes

 

 

212,000

 

Repayments of revolving credit facility and senior unsecured notes

 

(353,104

)

(200,000

)

Proceeds from stock options exercised

 

 

598

 

Purchases of Treasury Stock

 

 

(49,911

)

Distributions to noncontrolling interests in other partnerships

 

(5,315

)

(6,276

)

Contributions from noncontrolling interests in other partnerships

 

 

13,259

 

Distributions to noncontrolling interest in operating partnership

 

(876

)

(1,842

)

Dividends paid on common and preferred stock

 

(26,441

)

(50,990

)

Deferred loan costs and capitalized lease obligation

 

(1,658

)

(1,226

)

Net cash used in financing activities

 

(393,160

)

(61,440

)

Net (decrease) increase in cash and cash equivalents

 

(293,235

)

829

 

Cash and cash equivalents at beginning of period

 

726,889

 

45,964

 

Cash and cash equivalents at end of period

 

$

433,654

 

$

46,793

 

 

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

 

6



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

March 31, 2009

 

1.  Organization and Basis of Presentation

 

SL Green Realty Corp., also referred to as the Company or SL Green, a Maryland corporation, and SL Green Operating Partnership, L.P., or the operating partnership, a Delaware limited partnership, were formed in June 1997 for the purpose of combining the commercial real estate business of S.L. Green Properties, Inc. and its affiliated partnerships and entities.  The operating partnership received a contribution of interest in the real estate properties, as well as 95% of the economic interest in the management, leasing and construction companies which are referred to as the Service Corporation.  The Company has qualified, and expects to qualify in the current fiscal year, as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Code, and operates as a self-administered, self-managed REIT.  A REIT is a legal entity that holds real estate interests and, through payments of dividends to stockholders, is permitted to reduce or avoid the payment of Federal income taxes at the corporate level.  Unless the context requires otherwise, all references to “we,” “our” and “us” means the Company and all entities owned or controlled by the Company, including the operating partnership.

 

Substantially all of our assets are held by, and our operations are conducted through, the operating partnership.  The Company is the sole managing general partner of the operating partnership.  As of March 31, 2009, noncontrolling investors held, in the aggregate, a 3.9% limited partnership interest in the operating partnership.

 

On January 25, 2007, we completed the acquisition, or the Reckson Merger, of all of the outstanding shares of common stock of Reckson Associates Realty Corp., or Reckson, pursuant to the terms of the Agreement and Plan of Merger, dated as of August 3, 2006, as amended, the Merger Agreement, among SL Green, Wyoming Acquisition Corp., or Wyoming, Wyoming Acquisition GP LLC, Wyoming Acquisition Partnership LP, Reckson and Reckson Operating Partnership, L.P., or ROP. We paid approximately $6.0 billion, inclusive of transaction costs, for Reckson.  ROP is a subsidiary of our operating partnership.

 

On January 25, 2007, we completed the sale, or Asset Sale, of certain assets of ROP to an asset purchasing venture led by certain of Reckson’s former executive management, or the Buyer, for a total consideration of approximately $2.0 billion.

 

As of March 31, 2009, we owned the following interests in commercial office properties in the New York Metro area, primarily in midtown Manhattan, a borough of New York City, or Manhattan.  Our investments in the New York Metro area also include investments in Brooklyn, Queens, Long Island, Westchester County, Connecticut and New Jersey, which are collectively known as the Suburban assets:

 

Location

 

Ownership

 

Number of
Properties

 

Square Feet

 

Weighted Average
Occupancy
(1)

 

Manhattan

 

Consolidated properties

 

21

 

13,782,200

 

97.2

%

 

 

Unconsolidated properties

 

8

 

9,429,000

 

94.7

%

 

 

 

 

 

 

 

 

 

 

Suburban

 

Consolidated properties

 

26

 

4,008,000

 

87.8

%

 

 

Unconsolidated properties

 

6

 

2,941,700

 

94.1

%

 

 

 

 

61

 

30,160,900

 

94.8

%

 


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

 

We also own investments in eight retail properties encompassing approximately 400,212 square feet, three development properties encompassing approximately 399,800 square feet and two land interests.  In addition, we manage three office properties owned by third parties and affiliated companies encompassing approximately 1.0 million rentable square feet.

 

As of March 31, 2009, we also owned approximately 12.48% of the outstanding common stock of Gramercy Capital Corp. (NYSE: GKK), or Gramercy, as well as all the units of the Class B limited partner interest in Gramercy’s operating partnership, which were subsequently transferred to Gramercy on April 24, 2009.  See Note 6.

 

Partnership Agreement

 

In accordance with the partnership agreement of the operating partnership, or the operating partnership agreement, we allocate all distributions and profits and losses in proportion to the percentage ownership interests of the respective partners.  As the managing general partner of the operating partnership, we are required to take such reasonable efforts, as determined by us in our sole discretion, to cause the operating partnership to distribute sufficient amounts to enable the payment of sufficient dividends by us to avoid any Federal income or excise tax at the Company level. Under the operating partnership agreement each limited partner will have the right to redeem units of limited partnership interests for cash, or if we so elect, shares of our common stock on a one-for-one basis.  In addition, we are prohibited from selling 673 First Avenue before August 2009, under certain circumstances.

 

7



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

March 31, 2009

 

Basis of Quarterly Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included.  The 2009 operating results for the period presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.  These financial statements should be read in conjunction with the financial statements and accompanying notes included in our annual report on Form 10-K and Form 10-K/A No. 1 for the year ended December 31, 2008.

 

The balance sheet at December 31, 2008 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

 

2.  Significant Accounting Policies

 

Principles of Consolidation

 

The consolidated financial statements include our accounts and those of our subsidiaries, which are wholly-owned or controlled by us or entities which are variable interest entities in which we are the primary beneficiary under the Financial Accounting Standards Board, or FASB, Interpretation No. 46R, or FIN 46R, “Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51.”  See Note 5, Note 6 and Note 7.  Entities which we do not control and entities which are variable interest entities, but where we are not the primary beneficiary are accounted for under the equity method.  We consolidate variable interest entities in which we are determined to be the primary beneficiary.  We have two variable interest entities for which we are considered to be the primary beneficiary as a result of loans we made to our joint venture partner to fund our partner’s equity in the joint venture.  The interest that we do not own is included in “Noncontrolling Interests in Other Partnerships” on the balance sheet.  All significant intercompany balances and transactions have been eliminated.

 

Effective January 1, 2009, we adopted SFAS 160, or SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51,” which defines a non-controlling interest in a consolidated subsidiary as “the portion of the equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent” and requires non-controlling interests to be presented as a separate component of equity in the consolidated balance sheet subject to the provisions of EITF Topic D-98, or EITF D-98, “Classification and Measurement of Redeemable Securities.” SFAS No. 160 also modifies the presentation of net income by requiring earnings and other comprehensive income to be attributed to controlling and non-controlling interests. Below are the steps we have taken as a result of the implementation of this standard:

 

·                  We have reclassified the non-controlling interests of other consolidated partnerships from the mezzanine section of our balance sheets to equity. This reclassification totaled approximately $529.6 million and $531.4 million as of March 31, 2009 and December 31, 2008, respectively.

 

·                  Non-controlling interests of our operating partnership will continue to be classified in the mezzanine section of the balance sheet as these redeemable OP Units do not meet the requirements for equity classification under EITF D-98. The redemption feature requires the delivery of cash or shares of stock. See Note 13.

 

·                  Net income attributable to non-controlling interests of our operating partnership and of other consolidated partnerships is no longer included in the determination of net income. We reclassified prior year amounts to reflect this requirement. The adoption of this standard has no effect on our earnings per share.

 

·                  We adjust the non-controlling interests of our operating partnership each period so that the carrying value equals the greater of its carrying value based on the accumulation of historical cost or its redemption value as prescribed by EITF D-98. Net income is allocated to the non-controlling partners of our operating partnership based on their weighted average ownership percentage during the period.

 

8



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

March 31, 2009

 

Investment in Commercial Real Estate Properties

 

On a periodic basis, we assess whether there are any indicators that the value of our real estate properties may be impaired or that its carrying value may not be recoverable.  A property’s value is considered impaired if management’s estimate of the aggregate future cash flows (undiscounted and without interest charges for consolidated properties and discounted for unconsolidated properties) to be generated by the property are less than the carrying value of the property.  To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount of the property over the fair value of the property.  We do not believe that the value of any of our rental properties was impaired at March 31, 2009 and December 31, 2008.

 

In accordance with SFAS No. 141, “Business Combinations,” we allocate the purchase price of real estate to land and building and, if determined to be material, intangibles, such as the value of above-, below- and at-market leases and origination costs associated with the in-place leases.  We depreciate the amount allocated to building and other intangible assets over their estimated useful lives, which generally range from three to 40 years and from one to 14 years, respectively.  The values of the above- and below-market leases are amortized and recorded as either an increase (in the case of below-market leases) or a decrease (in the case of above-market leases) to rental income over the remaining term of the associated lease, which range from one to 14 years.  The value associated with in-place leases are amortized over the expected term of the associated lease and its estimated term, which range from one to 14 years.  If a tenant vacates its space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balance of the related intangible will be written off.  The tenant improvements and origination costs are amortized as an expense over the remaining life of the lease (or charged against earnings if the lease is terminated prior to its contractual expiration date).  We assess fair value of the leases based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information.  Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property.

 

As a result of our evaluations, under SFAS No. 141, of acquisitions made, we recognized an increase of approximately $5.4 million and $5.7 million in rental revenue for the three months ended March 31, 2009 and 2008, respectively, for the amortization of aggregate below-market rents in excess of above-market leases and a reduction in lease origination costs, resulting from the allocation of the purchase price of the applicable properties.  We recognized a reduction in interest expense for the amortization of the above-market rate mortgages of approximately $1.8 million and $1.7 million for the three months ended March 31, 2009 and 2008, respectively.

 

9



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

March 31, 2009

 

The following summarizes our identified intangible assets (acquired above-market leases and in-place leases) and intangible liabilities (acquired below-market leases).  Amounts in thousands:

 

 

 

March 31,
2009

 

December 31,
2008

 

Identified intangible assets (included in other assets):

 

 

 

 

 

Gross amount

 

$

236,594

 

$

236,594

 

Accumulated amortization

 

(71,173

)

(60,074

)

Net

 

$

165,421

 

$

176,520

 

 

 

 

 

 

 

Identified intangible liabilities (included in deferred revenue):

 

 

 

 

 

Gross amount

 

$

480,770

 

$

480,770

 

Accumulated amortization

 

(118,108

)

(101,585

)

Net

 

$

362,662

 

$

379,185

 

 

Reserve for Possible Credit Losses

 

The expense for possible credit losses in connection with structured finance investments is the charge to earnings to increase the allowance for possible credit losses to the level that we estimate to be adequate considering delinquencies, loss experience and collateral quality.  Other factors considered relate to geographic trends and product diversification, the size of the portfolio and current economic conditions.  Based upon these factors, we establish the provision for possible credit losses by loan.  When it is probable that we will be unable to collect all amounts contractually due, the investment is considered impaired.

 

Where impairment is indicated, a valuation allowance is measured based upon the excess of the recorded investment amount over the net fair value of the collateral, as reduced by selling costs.  Any deficiency between the carrying amount of an asset and the net sales price of repossessed collateral is charged to expense.  We recorded approximately none and $1.3 million in loan loss reserves during the three months ended March 31, 2009 and 2008, respectively.

 

Structured finance investments held for sale are carried at the lower of cost or fair market value using available market information obtained through consultation with dealers or other originators of such investments as well as discounted cash flow models based on Level 3 data pursuant to SFAS No. 157. During the three months ended March 31, 2009, we redesignated loans with a gross carrying value of $95.5 million from structured finance investments to assets held for sale. We recorded a mark-to-market adjustment of approximately $62.0 million against our held for sale investments during the three months ended March 31, 2009.

 

Income Taxes

 

We are taxed as a REIT under Section 856(c) of the Code.  As a REIT, we generally are not subject to Federal income tax.  To maintain our qualification as a REIT, we must distribute at least 90% of our REIT taxable income to our stockholders and meet certain other requirements.  If we fail to qualify as a REIT in any taxable year, we will be subject to Federal income tax on our taxable income at regular corporate rates.  We may also be subject to certain state, local and franchise taxes.  Under certain circumstances, Federal income and excise taxes may be due on our undistributed taxable income.

 

Pursuant to amendments to the Code that became effective January 1, 2001, we have elected, and may in the future, elect to treat certain of our existing or newly created corporate subsidiaries as taxable REIT subsidiaries, or a TRS.  In general, a TRS of ours may perform non-customary services for our tenants, hold assets that we cannot hold directly and generally may engage in any real estate or non-real estate related business.  Our TRSs’ generate income, resulting in Federal income tax liability for these entities.  Our TRSs’ recorded approximately $2.5 million and $1.2 million in Federal, state and local tax expense during the three months ended March 2009 and 2008, respectively, of which $0.5 million and $0.4 million, respectively, had been paid.

 

Stock-Based Employee Compensation Plans

 

We have a stock-based employee compensation plan, described more fully in Note 13.  We account for this plan under SFAS No. 123-R “Shared Based Payment,” revised, or SFAS No. 123-R.  We adopted SFAS No. 123, “Accounting from Stock-Based Compensation” on January 1, 2003.

 

10



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

March 31, 2009

 

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable.  In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.  Because our plan has characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in our opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options.

 

Compensation cost for stock options, if any, is recognized ratably over the vesting period of the award.  Our policy is to grant options with an exercise price equal to the quoted closing market price of our stock on the grant date.  Awards of stock or restricted stock are expensed as compensation on a current basis over the benefit period.

 

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for grants during the three months ended March 31, 2009 and 2008.

 

 

 

2009

 

2008

 

Dividend yield

 

5.79

3.37

%

Expected life of option

 

5 years

 

5 years

 

Risk-free interest rate

 

1.55

%

4.04

%

Expected stock price volatility

 

55.07

%

22.31

%

 

Earnings Per Share

 

We present both basic and diluted earnings per share, or EPS.  Basic EPS excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, where such exercise or conversion would result in a lower EPS amount.  This also includes units of limited partnership interest.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash investments, structured finance investments and accounts receivable.  We place our cash investments in excess of insured amounts with high quality financial institutions.  The collateral securing our structured finance investments is primarily located in the New York Metro area. (See Note 5). We perform ongoing credit evaluations of our tenants and require certain tenants to provide security deposits or letters of credit.  Though these security deposits and letters of credit are insufficient to meet the total value of a tenant’s lease obligation, they are a measure of good faith and a source of funds to offset the economic costs associated with lost rent and the costs associated with re-tenanting the space.  Although the properties in our real estate portfolio are primarily located in Manhattan, we also have properties located in Brooklyn, Queens, Long Island, Westchester County, Connecticut and New Jersey.  The tenants located in our buildings operate in various industries.  Other than one tenant who accounts for approximately 9.6% of our annualized rent, no other tenant in our portfolio accounts for more than 5.8% of our annualized rent, including our share of joint venture annualized rent, at March 31, 2009.  Approximately 7%, 6%, 6%, 7% and 6% of our annualized rent, including our share of joint venture annualized rent, was attributable to 1221 Avenue of the Americas, 1515 Broadway, 420 Lexington Avenue, 1185 Avenue of the Americas and One Madison Avenue, respectively, for the quarter ended March 31, 2009.  One borrower accounted for more than 10.0% of the revenue earned on structured finance investments during the three months ended March 31, 2009.

 

Reclassification

 

Certain prior year balances have been reclassified to conform with the current year presentation primarily in order to comply with SFAS No. 144 for discontinued operations presentation and the adoption of FSP 14-1 (see below).

 

11



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

March 31, 2009

 

New Accounting Pronouncements

 

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.”  This statement changes the accounting for acquisitions specifically eliminating the step acquisition model, changing the recognition of contingent consideration from being recognized when it is probable to being recognized at the time of acquisition, disallowing the capitalization of transaction costs and delays when restructurings related to acquisitions can be recognized. The standard is effective for fiscal years beginning after December 15, 2008 and will only impact the accounting for acquisitions we make after our adoption of this standard. The adoption of this standard on January 1, 2009 did not have any impact on our historical financial statements.

 

In May 2008, the FASB issued FASB Staff Position, or FSP, No. APB 14-1, or FSP 14-1, “Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion.” FSP 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate. FSP 14-1 will significantly affect the accounting for instruments commonly referred to as Instruments B and C in EITF No. 90-19, “Convertible Bonds with Issuer Option to Settle for Cash upon Conversion,” which is nullified by FSP 14-1, and any other convertible debt instruments that require or permit settlement in any combination of cash and shares at the issuer’s option, such as those sometimes referred to as “Instrument X.” The resulting debt discount will be amortized over the period during which the debt is expected to be outstanding (i.e., through the first optional redemption dates) as additional non-cash interest expense.  This amount (before netting) will increase in subsequent reporting periods through the first optional redemption dates as the debt accretes to its par value over the same period. FSP 14-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption was not permitted. Upon adoption, FSP 14-1 required companies to retrospectively apply the requirements of the pronouncement to all periods presented.  Adoption of FSP 14-1 had the following impact on our financial statements:

 

 

 

December 31,
2008
As Reported

 

December 31,
2008
As Restated

 

Senior unsecured notes

 

$

1,535,948

 

$

1,501,134

 

Total liabilities

 

6,449,875

 

6,415,063

 

Additional paid-in-capital

 

2,999,456

 

3,079,159

 

Retained earnings

 

1,023,071

 

978,180

 

 

 

 

March 31, 2008
As Reported

 

March 31, 2008
As Restated

 

Interest expense

 

$

78,518

 

$

83,316

 

Net income attributable to SL Green common stockholders

 

125,891

 

121,094

 

Net income per share attributable to common stockholders - basic

 

$

2.15

 

$

2.07

 

Net income per share attributable to common stockholders - diluted

 

$

2.14

 

$

2.06

 

 

EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share, or EPS, under the two-class method described in paragraphs 60 and 61 of SFAS No. 128, “Earnings per Share”.  We adopted EITF 03-6-1 on January 1, 2009 and it did not have a material effect on our financial statements.

 

In April 2009, the FASB issued SFAS No. 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” SFAS No. 107-1 amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” to require disclosure about fair value of financial instruments in interim financial statements. SFAS No. 107-1 and APB 28-1 are effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009.  We will include the disclosures required under this standard beginning in our June 30, 2009 Condensed Consolidated Financial Statements.

 

In April 2009, the FASB released FSP SFAS No. 157- 4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability has Significantly Decreased and Identifying Transactions that are Not Orderly”, or FSP SFAS No. 157-4. FSP SFAS No. 157-4 was issued contemporaneously with FSP SFAS No. 115-2 and SFAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”, or FSP SFAS 115-2 and FSP SFAS No. 107-1 and APB 28-1.

 

12



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

March 31, 2009

 

FSP SFAS No. 157-4 amends FASB Statement No. 157, “Fair Value Measurements”, or SFAS No. 157, to provide additional guidance on estimating fair value when the volume and level of transaction activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability. The FSP also provides additional guidance on circumstances that may indicate that a transaction is not orderly.

 

FSP SFAS No. 157-4 also require additional disclosures about fair value measurements in annual and interim reporting periods. FSP SFAS No. 157-4 is effective for interim and annual reporting periods ending after 15 June 2009. We will apply the provisions of FSP SFAS No. 157-4 beginning in our June 30, 2009 Condensed Consolidated Financial Statements. We do not believe that adoption of the FSP will have a material impact on our financial statements.

 

In March 2008, the FASB issued SFAS No. 161, or SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.” SFAS No. 161 requires entities to provide greater transparency about (a) how and why and entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations, and cash flows.  SFAS No. 161 is effective on January 1, 2009.  The adoption of SFAS No. 161 did not have a material impact on our consolidated financial statements.

 

3.  Property Acquisitions

 

We did not acquire any real estate during the three months ended March 31, 2009.

 

4.  Property Dispositions and Assets Held for Sale

 

In January 2009, we, along with our joint venture partner, Gramercy, sold 100% of our interests in 55 Corporate Drive, NJ for $230.0 million. The property is approximately 670,000 square feet. We recognized a gain of approximately $6.6 million in connection with the sale of our 50% interest in the joint venture.

 

At March 31, 2009, discontinued operations included the results of operations of real estate assets sold prior to that date.  This included 440 Ninth Avenue, which was sold in January 2008, 100/120 White Plains Road and 1372 Broadway, which were sold in October 2008, 55 Corporate Drive, NJ which was sold in January 2009, and the membership interests in GKK Manager LLC which were sold in April 2009 (See Note 6).

 

The following table summarizes income from discontinued operations and the related realized gain on sale of discontinued operations for the three months ended March 31, 2009 and 2008 (in thousands).

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2009

 

2008

 

Revenues

 

 

 

 

 

Rental revenue

 

$

584

 

$

8,351

 

Escalation and reimbursement revenues

 

(7

)

916

 

Other income

 

4,886

 

8,424

 

Total revenues

 

5,463

 

17,691

 

Operating expense

 

24

 

1,925

 

Real estate taxes

 

 

1,460

 

Interest

 

329

 

5,524

 

Marketing, general and administrative

 

5,176

 

4,008

 

Depreciation and amortization

 

 

2,014

 

Total expenses

 

5,529

 

14,931

 

Income (loss) from discontinued operations

 

(66

)

2,760

 

Gain on sale of discontinued operations

 

6,572

 

110,232

 

Income from discontinued operations

 

$

6,506

 

$

112,992

 

 

13



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

March 31, 2009

 

5.  Structured Finance Investments

 

During the three months ended March 31, 2009 and 2008, our structured finance and preferred equity investments (net of discounts) increased approximately $7.1 million and $4.8 million, respectively, due to originations and accretion of discount.  There were approximately $63.6 million and $33.5 million in repayment, participations, sales and loan loss reserves recorded during those periods, respectively, which offset the increases in structured finance investments.

 

As of March 31, 2009 and December 31, 2008, we held the following structured finance investments, excluding preferred equity investments, with an aggregate weighted average current yield of approximately 9.4% (in thousands):

 

Loan
Type

 

Gross
Investment

 

Senior
Financing

 

2009
Principal
Outstanding

 

2008
Principal
Outstanding

 

Initial
Maturity
Date

 

Other Loan (1)

 

$

3,500

 

$

15,000

 

$

3,500

 

$

3,500

 

September 2021

 

Mezzanine Loan (1) (2)

 

85,000

 

210,572

 

96,510

 

95,626

 

December 2020

 

Mezzanine Loan (1)

 

60,000

 

235,000

 

58,393

 

58,349

 

February 2016

 

Mezzanine Loan (1)

 

25,000

 

200,000

 

25,000

 

25,000

 

May 2016

 

Mezzanine Loan (1)

 

35,000

 

165,000

 

38,616

 

38,332

 

October 2016

 

Mezzanine Loan (1) (3) (9) (10) (11)

 

75,000

 

4,229,461

 

70,092

 

70,092

 

December 2016

 

Other Loan (1) (5) (9) (11)

 

5,000

 

 

5,350

 

5,350

 

May 2011

 

Whole Loan (2) (3)

 

9,815

 

 

9,526

 

10,126

 

February 2010

 

Mezzanine Loan (1) (2) (4) (9) (11)

 

25,000

 

315,293

 

27,742

 

27,742

 

November 2009

 

Mezzanine Loan (1)

 

16,000

 

90,000

 

15,676

 

15,670

 

August 2017

 

Mezzanine Loan (3)

 

41,398

 

221,549

 

40,481

 

40,171

 

August 2009

 

Other Loan (1)

 

1,000

 

 

1,000

 

1,000

 

January 2010

 

Other Loan

 

500

 

 

500

 

500

 

December 2009

 

Junior Participation (1) (6) (9) (11)

 

14,189

 

 

9,938

 

9,938

 

April 2008

 

Mezzanine Loan (1) (12)

 

67,000

 

1,139,000

 

77,939

 

75,856

 

March 2017

 

Mezzanine Loan (3) (9) (10)

 

23,145

 

365,000

 

25,446

 

24,961

 

July 2009

 

Mezzanine Loan (3) (9) (10)

 

44,733

 

930,678

 

47,219

 

46,372

 

August 2009

 

Mezzanine Loan (3) (9) (10) (11)

 

22,644

 

7,099,849

 

23,511

 

23,847

 

June 2009

 

Junior Participation (1) (9)

 

11,000

 

53,000

 

11,000

 

11,000

 

November 2009

 

Junior Participation (7) (9)

 

12,000

 

61,250

 

10,875

 

10,875

 

June 2010

 

Junior Participation (9)

 

9,948

 

48,198

 

5,866

 

5,866

 

December 2010

 

Junior Participation (8)

 

50,000

 

2,227,136

 

48,175

 

48,709

 

April 2010

 

Mezzanine Loan (3)

 

90,000

 

325,000

 

93,485

 

92,325

 

July 2010

 

Whole Loan (1) (3)

 

9,375

 

 

9,283

 

9,324

 

February 2015

 

Loan loss reserve (9)

 

 

 

(134,666

)

(74,666

)

 

 

 

$

736,247

 

$

17,930,986

 

$

620,457

 

$

675,865

 

 

 

 


(1)

This is a fixed rate loan.

(2)

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

(3)

Gramercy holds a pari passu interest in this asset.

(4)

This loan has been in default since December 2007. We are pursuing our remedies and expect to recover the full value of our investment.

(5)

The original loan which was scheduled to mature in February 2010 was replaced with two loans which mature in May 2011. The total principal balance remained unchanged. Approximately $10.4 million was redeemed in October 2008.

(6)

This loan is in default. We have begun foreclosure proceedings. Our partner holds a $12.2 million pari-pasu interest in this loan.

(7)

This loan was extended for two years to June 2010.

(8)

Gramercy is the borrower under this loan. This loan consists of mortgage and mezzanine financing.

(9)

This represents specifically allocated loan loss reserves. Our reserves reflect management’s judgment of the probability and severity of losses. We cannot be certain that our judgment will prove to be correct and that reserves will be adequate over time to protect against potential future losses.

(10)

This investment was classified as held for sale at March 31, 2009.

(11)

This loan is on non-accrual status.

(12)

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

 

 

14



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

March 31, 2009

 

Preferred Equity Investments

 

As of March 31, 2009 and December 31, 2008, we held the following preferred equity investments, with an aggregate weighted average current yield of approximately 2.9% (in thousands):

 

Type

 

Gross
Investment

 

Senior
Financing

 

2009
Amount
Outstanding

 

2008
Amount
Outstanding

 

Initial
Mandatory
Redemption

 

Preferred equity (1) (3)

 

$

15,000

 

$

2,350,000

 

$

15,000

 

$

15,000

 

February 2015

 

Preferred equity (1) (2) (3) (4)

 

51,000

 

212,782

 

51,000

 

51,000

 

February 2014

 

Preferred equity (3) (4)

 

34,120

 

88,000

 

31,178

 

30,268

 

March 2010

 

Loan loss reserve (3)

 

 

 

(26,250

)

(24,250

)

 

 

 

$

100,120

 

$

2,650,782

 

$

70,928

 

$

72,018

 

 

 

 


(1)

This is a fixed rate investment.

(2)   

Gramercy holds a mezzanine loan on the underlying asset.  This investment was classified as held for sale at March 31, 2009.

(3)

This represents specifically allocated loan loss reserves.  Our reserves reflect management’s judgment of the probability and severity of losses.  We cannot be certain that our judgment will prove to be correct and that reserves will be adequate over time to protect against potential future losses.

(4)

The junior preferred equity portion of the investment is on non-accrual status.

 

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

 

 

 

2009

 

2008

 

Balance at beginning of year

 

$

98,916

 

$

 

 

 

 

 

 

 

Expensed

 

62,000

 

101,166

 

Charge-offs

 

 

(2,250

)

 

 

 

 

 

 

Balance at end of period

 

$

160,916

 

$

98,916

 

 

At March 31, 2009 and December 31, 2008, all structured finance investments, other than as noted above, were performing in accordance with the terms of the loan agreements.

 

6.  Investment in Unconsolidated Joint Ventures

 

We have investments in several real estate joint ventures with various partners, including The Rockefeller Group International Inc., or RGII, The City Investment Fund, or CIF, SITQ Immobilier, a subsidiary of Caisse de depot et placement du Quebec, or SITQ, a fund managed by JP Morgan Investment Management, or JP Morgan, Prudential Real Estate Investors, or Prudential, Onyx Equities, or Onyx, The Witkoff Group, or Witkoff, Credit Suisse Securities (USA) LLC, or Credit Suisse, Mack-Cali Realty Corporation, or Mack-Cali, Jeff Sutton, or Sutton, and Gramercy, as well as private investors. As we do not control these joint ventures, we account for them under the equity method of accounting.

 

We assess the accounting treatment for each joint venture on a stand-alone basis. This includes a review of each joint venture or partnership LLC agreement to determine which party has what rights and whether those rights are protective or participating under EITF 04-5 and EITF 96-16. In situations where our minority partner approves the annual budget, receives a detailed monthly reporting package from us, meets with us on a quarterly basis to review the results of the joint venture, reviews and approves the joint venture’s tax return before filing, and approves all leases that cover more than a nominal amount of space relative to the total rentable space at each property we do not consolidate the joint venture as we consider these to be substantive participation rights. Our joint venture agreements also contain certain protective rights such as the requirement of partner approval to sell, finance or refinance the property and the payment of capital expenditures and operating expenditures outside of the approved budget or operating plan.

 

15



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

March 31, 2009

 

The table below provides general information on each joint venture as of March 31, 2009 (in thousands):

 

Property

 

Partner

 

Ownership
Interest

 

Economic
Interest

 

Square
Feet

 

Acquired

 

Acquisition
Price
(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1221 Avenue of the Americas (2)

 

RGII

 

45.00

%

45.00

%

2,550

 

12/03

 

$

1,000,000

 

1515 Broadway (3)

 

SITQ

 

55.00

%

68.45

%

1,750

 

05/02

 

$

483,500

 

100 Park Avenue

 

Prudential

 

49.90

%

49.90

%

834

 

02/00

 

$

95,800

 

379 West Broadway

 

Sutton

 

45.00

%

45.00

%

62

 

12/05

 

$

19,750

 

Mack-Green joint venture (4)

 

Mack-Cali

 

48.00

%

48.00

%

900

 

05/06

 

$

127,500

 

21 West 34th Street (5)

 

Sutton

 

50.00

%

50.00

%

30

 

07/05

 

$

22,400

 

800 Third Avenue (6)

 

Private Investors

 

42.95

%

42.95

%

526

 

12/06

 

$

285,000

 

521 Fifth Avenue

 

CIF

 

50.10

%

50.10

%

460

 

12/06

 

$

240,000

 

One Court Square

 

JP Morgan

 

30.00

%

30.00

%

1,402

 

01/07

 

$

533,500

 

1604-1610 Broadway (7)

 

Onyx/Sutton

 

45.00

%

63.00

%

30

 

11/05

 

$

4,400

 

1745 Broadway (8)

 

Witkoff/SITQ

 

32.26

%

32.26

%

674

 

04/07

 

$

520,000

 

1 and 2 Jericho Plaza

 

Onyx/Credit Suisse

 

20.26

%

20.26

%

640

 

04/07

 

$

210,000

 

2 Herald Square (9)

 

Gramercy

 

55.00

%

55.00

%

354

 

04/07

 

$

225,000

 

885 Third Avenue (10)

 

Gramercy

 

55.00

%

55.00

%

607

 

07/07

 

$

317,000

 

16 Court Street

 

CIF

 

35.00

%

35.00

%

318

 

07/07

 

$

107,500

 

The Meadows

 

Onyx

 

25.00

%

25.00

%

582

 

09/07

 

$

111,500

 

388 and 390 Greenwich Street (11)

 

SITQ

 

50.60

%

50.60

%

2,600

 

12/07

 

$

1,575,000

 

27-29 West 34th Street (12)

 

Sutton

 

50.00

%

50.00

%

41

 

01/06

 

$

30,000

 

1551-1555 Broadway (13)

 

Sutton

 

10.00

%

10.00

%

26

 

07/05

 

$

80,100

 

717 Fifth Avenue (14)

 

Sutton/Nakash

 

32.75

%

32.75

%

120

 

09/06

 

$

251,900

 

 


(1)

 

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

(2)

 

We acquired our interest from The McGraw-Hill Companies, or MHC.  MHC is a tenant at the property and accounted for approximately 14.8% of the property’s annualized rent at March 31, 2009.  We do not manage this joint venture.

(3)

 

Under a tax protection agreement established to protect the limited partners of the partnership that transferred 1515 Broadway to the joint venture, the joint venture has agreed not to adversely affect the limited partners’ tax positions before December 2011.  One tenant, whose leases primarily end between 2009 and 2015, represents approximately 79.2% of this joint venture’s annualized rent at March 31, 2009.

(4)

 

We wrote off the net book value of this investment of approximately $2.1 million in December 2008.  See Note 19.

(5)

 

Effective November 2006, we deconsolidated this investment.  As a result of the recapitalization of the property, we were no longer the primary beneficiary under FIN 46(R).  Both partners had the same amount of equity at risk and neither partner controlled the joint venture.

(6)

 

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

(7)

 

Effective April 2007, we deconsolidated this investment.  As a result of the recapitalization of the property, we were no longer the primary beneficiary under FIN 46(R).  Both partners had the same amount of equity at risk and neither partner controlled the joint venture.

(8)

 

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

(9)

 

We, along with Gramercy, together as tenants-in-common, acquired a fee interest in 2 Herald Square.  The fee interest is subject to a long-term operating lease.

(10)

 

We, along with Gramercy, together as tenants-in-common, acquired a fee and leasehold interest in 885 Third Avenue.  The fee and leasehold interests are subject to a long-term operating lease.

(11)

 

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

(12)

 

Effective May 2008, we deconsolidated this investment.  As a result of the recapitalization of the property, we were no longer the primary beneficiary under FIN 46(R).  Both partners had the same amount of equity at risk and neither partner controlled the joint venture.

(13)

 

Effective August 2008, we deconsolidated this investment.  As a result of the sale of 80% of our interest, we were no longer the primary beneficiary under FIN 46(R).

(14)

 

Effective September 2008, we deconsolidated this investment.  As a result of the recapitalization of the property, the joint venture was no longer a VIE under FIN 46(R).

 

16



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

March 31, 2009

 

We finance our joint ventures with non-recourse debt. The first mortgage notes payable collateralized by the respective joint venture properties and assignment of leases at March 31, 2009 and December 31, 2008, respectively, are as follows (in thousands):

 

Property

 

Maturity
date

 

Interest
rate
(1)

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

1221 Avenue of the Americas (2)

 

12/2010

 

2.85

%

$

170,000