Shares of SL Green Realty Corp. (SLG) rose around 2% in the regular trading session on Oct 23, following the third-quarter 2014 earnings announcement. In particular, the company’s funds from operations (FFO), including transaction costs, came in at $1.52 per share, exceeding the Zacks Consensus Estimate of $1.45 by 7 cents and the prior-year quarter figure of $1.30 by 22 cents.
The 16.9% year-over-year growth in FFO per share came on the back of significant top-line improvement and strong ongoing portfolio enhancement activity. Moreover, excluding transaction costs, the reported FFO per share came in at $1.55 per share, which rose from $1.32 per share in the prior-year quarter.
Total revenue for the second quarter climbed 15.2% year over year to $390.3 million and significantly surpassed the Zacks Consensus Estimate of $297 million.
Quarter in Detail
In the Manhattan portfolio, SL Green inked 46 office leases for 664,727 square feet of space. The replacement lease’s average initial rent was 17.2% higher than the earlier full rents increment on the same spaces. Additionally, in the Suburban portfolio, SL Green penned 28 office lease deals for 165,331 square feet of space. The average initial rent on the replacement leases was 0.6% higher in comparison to fully escalated rents on the same spaces, on the prior occasion.
Same-store cash net operating income (NOI), on a combined basis, rose 5.7% year over year to $167.7 million. As of Sep 30, 2014, same-store occupancy for SL Green's Manhattan portfolio moved up 40 basis points (bps) sequentially to 95.3%. On the other hand, same-store occupancy for the Suburban portfolio dipped 40 bps sequentially to 82.4%.
In tune with its portfolio restructuring activity, SL Green completed several transactions in the quarter under review. These include the acquisition of the retail condominium at 121 Greene Street in SoHo for $27.2 million; fee interest at 635 Madison Avenue for $145 million; and shedding all interests in the mixed-use college dormitory/retail property at 180 Broadway for $222.5 million. Moreover, SL Green invested $50 million in its large residential rental project in Manhattan, in the quarter.
As of Sep 30, 2014, SL Green’s debt and preferred equity investment portfolio totaled $1.4 billion, compared to $1.5 billion as of Jun 30, 2014. In the quarter, the company originated and retained new debt and preferred equity investments worth $155.1 million.
SL Green exited third-quarter 2014 with cash and cash equivalents of $253.5 million, compared to $308.1 million as of Jun 30, 2014.
Our Take
Keeping its winning streak alive, SL Green came up with another impressive quarterly performance. Encouragingly, this real estate investment trust (REIT) boasts a positive earnings surprise of 8.18% in the last four quarters. SL Green has been dedicatedly accelerating its portfolio enhancement initiative through investment in opportunistic assets, and debt and preferred equities. Further, the company is seeking to tap opportunities in New York City’s premium retail locations with its retail investments. Although such activities are encouraging for SL Green’s future growth, it increase operational risks in the near term, till they materialize.
SL Green currently carries a Zacks Rank #3 (Hold). Investors interested in the REIT industry may consider stocks like W. P. Carey Inc. (WPC), Cousins Properties Incorporated (CUZ) and DCT Industrial Trust Inc. (DCT). All these stocks carry a Zacks Rank #1 (Strong Buy).
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.
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