SL Green Realty Corp. (SLG - Analyst Report) – an office real estate investment trust (REIT) – reported third-quarter 2013 funds from operations (FFO) of $1.34 per share, beating the Zacks Consensus Estimate of $1.28 by 4.7% and the prior-year quarter figure of $1.12 by 19.6%.
The results came on the back of better-than-expected revenue growth and strong leasing activity. It reflected non-recurring, non-cash charge of 7 cents per share related to previous tenant. Consequently, SL Green raised its quarterly dividend by 52% as well as the 2013 FFO per share outlook.
Total revenue for the third quarter climbed 1.9% to $363.8 million from $357.0 million in the year-ago quarter. Moreover, total revenue substantially surpassed the Zacks Consensus Estimate of $312 million.
Inside the Headlines
During third-quarter 2013, same-store cash net operating income (NOI), on a combined basis, rose 1.6% year over year to $176.6 million.
In the Manhattan portfolio, SL Green inked 52 office leases for 441,338 square feet of space during the quarter under review. The average lease term of the deals penned was 9.4 years. Notably, in the quarter, the mark-to-market on replacement lease deals was 1.0% higher than the earlier full rents increment on the same spaces.
Additionally, in the Suburban portfolio, SL Green penned 28 office lease deals for 142,384 square feet of space during third-quarter 2013. The average lease term of the deals was 8 years. Noticeably, the mark-to-market on replacement lease deals was 0.2% high in comparison to fully escalated rents on the same spaces, on the prior occasion.
As of Sep 30, 2013, same-store occupancy for SL Green's Manhattan portfolio (including inked lease deals for 370,113 square feet of space that is yet to start) increased to 95.8%. On the other hand, for the Suburban portfolio same-store occupancy (including inked lease deals for 57,412 square feet of space that is yet to start) rose to 81.2%.
Portfolio Restructuring Activity
During the said quarter, SL Green inked a deal to acquire a mixed-use residential and commercial asset at 315 West 33rd Street in New York for $386.0 million. The buyout of the 36-story, 492,987 square foot asset is likely to close in fourth-quarter 2013.
On the other hand, SL Green shed several assets during the quarter. This includes the divestiture of a property (345,400 square foot) at 333 West 34th Street in Manhattan for $220.3 million; and an asset (130,000 square foot) at 300 Main Street in Stamford, Conn. for $13.5 million. In addition, SL Green disposed 2 properties of its West Coast Office portfolio for $112.4 million. Notably, in Jul 2012, the company took the equity ownership position in the portfolio and since then has sold 3 assets for a total of $224.3 million.
Debt and Preferred Equity Investments
During the third quarter, SL Green originated new debt and preferred equity investments worth $180.8 million, all of which were secured by the New York City commercial office assets. Moreover, SL Green recorded principal reductions of $110.0 million from investments that were sold or paid off. As of Sep 30, 2013, SL Green’s debt and preferred equity investment portfolio totaled $1.3 billion, compared with $1.2 billion as of Jun 30, 2013.
Concurrent with its earnings release, SL Green increased the quarterly dividend by 52% to 50 cents from 33 cents in the last quarter. Consequently, the annual dividend elevated 52% to $2.00 from $1.32. This fourth-quarter 2013 dividend will be paid in Jan 2014.
2013 Outlook Increased
Encouraged with its quarterly performance and outlook for the rest of the year, SL Green raised its FFO per share outlook for full-year 2013 to $5.12 – $5.16, from the previous guidance of $4.90 – $5.00.
As of Sep 30, 2013, SL Green had $209.1 million of cash and cash equivalents, up from $199.0 million as of Jun 30, 2013.
Subsequent to the quarter-end, Fitch Ratings upgraded the rating outlook of SL Green to ‘Positive’ from ‘Stable’. This was based on the company’s increasing mortgage-free assets base and credit strengths.
We are encouraged with SL Green’s third-quarter 2013 results that benefitted from the successful execution of strategic initiatives and notable operating portfolio performance. In addition, the ratings upgrade of the company’s outlook by Fitch owing to its strong balance sheet position is noteworthy. Moreover, the dividend hike and increased full-year outlook boost investors’ confidence in this Zacks Rank #2 (Buy) stock.
We are looking forward to the results of other REITs that are scheduled to report early next week after the market closes. These include Highwoods Properties Inc. (HIW - Analyst Report), PS Business Parks Inc. (PSB - Analyst Report) and Boston Properties Inc. (BXP - Analyst Report).
Note: Funds from operations, a widely accepted and reported measure of REITs performance, are derived by adding depreciation, amortization and other non-cash expenses to net income.