Keeping its winning streak alive, SL Green Realty Corp. SLG reported third-quarter 2015 adjusted funds from operations (“FFO”) of $1.71 per share, comfortably exceeding the Zacks Consensus tally of $1.57. In the prior-year quarter, the company had reported adjusted FFO per share of $1.55.
Better-than-expected results of the REIT were driven by a rise in combined same-store net operating income (“NOI”).
Net rental revenue for the third quarter rose 9.3% year over year to $318.5 million. However, it lagged the Zacks Consensus Estimate of $341 million.
Quarter in Detail
For the quarter, combined same-store cash NOI rose 6.5% year over year to $178.6 million.
In the Manhattan portfolio, SL Green inked 51 office leases for 533,697 square feet of space. As of Sep 30, 2015, Manhattan same-store occupancy increased 200 basis points (bps) year over year to 97.3%. Importantly, in the third quarter, the mark-to-market on signed Manhattan office leases was 15.6% higher than the previously fully escalated rents on the same spaces.
On the other hand, in the Suburban portfolio, SL Green signed 23 office lease deals for 131,366 square feet. Same-store occupancy for the Suburban portfolio was 81.6%, up 10 bps year over year. However, in the third quarter, mark-to-market on signed Suburban office leases was 3.8% below from the previously fully escalated rents on the same spaces.
SL Green exited third-quarter 2015 with cash and cash equivalents of $244.4 million, down from $281.4 million as of Dec 31, 2014.
Notable Investment Activities
Third-quarter 2015 has been a notable one with the company completing the acquisition of Eleven Madison Avenue in Midtown South. The purchase was made for $2.285 billion, along with around $300 million in costs related to the lease stipulated improvements to the property.
On the other hand, SL Green closed the sales of Tower 45, the Meadows Office Complex, 315 West 36th Street and its interest in 131-137 Spring Street for a total gross asset valuation of $878.9 million. These deals helped the company reap cash proceeds of above $440.0 million and total gains on sale of $174.4 million.
Moreover, in the third quarter the company originated new debt and preferred equity investments of $78.0 million in total, of which $48.0 million was retained.
Our Take
We are encouraged by better-than-expected earnings at SL Green in the third quarter. The company has been actively pursuing portfolio enhancement initiatives through investment in opportunistic assets, and debt and preferred equities.
Also, we believe that the Eleven Madison Avenue buyout is a strategic fit as this property is well-leased for the long term and is positioned in one of the city's strongest commercial office submarkets, offering the company ample growth prospects. But, stiff competition and an anticipated rise in interest rates keep us concerned.
SL Green currently has a Zacks Rank #3 (Hold).
We now forward to results of other REITs such as Avalonbay Communities Inc. AVB, Plum Creek Timber Co. Inc. PCL and Simon Property Group Inc. SPG, which are scheduled to report earnings next 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.
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