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SL Green Posts Robust Q1 FFO, Ups View

Zacks Equity Research

SL Green Realty Corp. (SLG) reported a positive earnings surprise of 11.6% in first-quarter 2014. In particular, the company’s adjusted funds from operations (:FFO) came in at $1.54 per share, exceeding the Zacks Consensus Estimate by 16 cents and the prior-year quarter figure by 37 cents.

The 32% year-over-year growth in FFO per share came on the back of notable top-line growth and strong portfolio enhancement activity. Encouragingly, SL Green increased its 2014 FFO per share guidance range. Moreover, including transaction costs, the reported FFO per share came in at $1.52 per share, which rose from $1.16 per share in the prior-year quarter.

Total revenue for the first quarter climbed 5.9% year over year to $381.1 million and also comfortably surpassed the Zacks Consensus Estimate of $300 million.

Quarter in Detail

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Same-store cash net operating income (:NOI), on a combined basis, rose 1% year over year to $186.2 million. As of Mar 31, 2014, same-store occupancy for SL Green's Manhattan portfolio moved up 80 basis points year over year to 95.6%. On the other hand, same-store occupancy for the Suburban portfolio rose 230 basis points year over year to 81.2%.

In the Manhattan portfolio, SL Green inked 75 office leases for 548,062 square feet of space. The replacement lease average initial rent were 15.1% higher than the earlier full rents increment on the same spaces. Additionally, in the Suburban portfolio, SL Green penned 33 office lease deals for 159,134 square feet of space. The replacement leases average initial rent was 0.8% higher in comparison to fully escalated rents on the same spaces, on the prior occasion.

Notable Portfolio Activity in Q1

SL Green inked a deal with Ivanhoe Cambridge to buy the latter’s stake in 388-390 Greenwich Street properties and fully own this 2.6 million square foot Tribeca-based asset. The consolidated investment interest is valued at $1.585 billion. The property is housed by an affiliate of Citigroup Inc. (C). The deal is anticipated to close during the second quarter of 2014.

On the other hand, SL Green offloaded its 43.7% stake in a Southern California office portfolio for $100 million and reaped a gain of $85.5 million.

Debt and Preferred Equity Investments in 1Q

As of Mar 31, 2014, SL Green’s debt and preferred equity investment portfolio totaled $1.5 billion, up from $1.3 billion as of Dec 31, 2013. In the quarter, the company originated and retained new debt and preferred equity investments worth $160.4 million. The portfolio had a weighted average yield of 10.6% during first-quarter 2014.

Liquidity

As of Mar 31, 2014, SL Green had $447.2 million of cash and cash equivalents, up from $206.7 million as of Dec 31, 2013 and $220.1 million as of Mar 31, 2013.

2014 Outlook Raised

Based on its first-quarter performance as well as its portfolio outlook and investment activities, SL Green has raised its 2014 FFO per share guidance. The company now expects it to be in the range of $5.90 to $5.96, up from $5.62 to $5.72 guided earlier. This range is well above the Zacks Consensus Estimate of $5.68 for the same.

Our Take

We are encouraged by yet another strong quarterly performance of SL Green on the back of successful execution of strategic initiatives and notable operating portfolio performance. In particular, SL Green has been seeking to tap opportunities to boost its overall portfolio quality, through the acquisition of premium assets and divestiture of non-core ones. Also, the company’s debt and preferred portfolio investments bodes well. Moreover, the raised outlook enhances investors’ confidence in this Zacks Rank #2 (Buy) stock.

We are looking forward to the results of other REITs – Taubman Centers, Inc. (TCO) and Ventas, Inc. (VTR) – that are scheduled to report this week.

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.

Read the Full Research Report on VTR
Read the Full Research Report on C
Read the Full Research Report on TCO
Read the Full Research Report on SLG


Zacks Investment Research