SL Green Realty Corp. (SLG) posted strong results yet again with a positive earnings surprise of 14.1% in second-quarter 2014. In particular, the company’s funds from operations (FFO), including transaction costs, came in at $1.62 per share exceeding the Zacks Consensus Estimate by 20 cents and the prior-year quarter figure by 35 cents.
The 27.6% year-over-year growth in FFO per share came on the back of significant top-line improvement and strong portfolio enhancement activity. Moreover, excluding transaction costs, the reported FFO per share came in at $1.64 per share, which rose from $1.29 per share in the prior-year quarter.
Total revenue for the second quarter climbed 9.4% year over year to $387.2 million and significantly surpassed the Zacks Consensus Estimate of $296 million.
Quarter in Detail
Same-store cash net operating income (NOI), on a combined basis, rose 3.5% year over year to $170.8 million. As of Jun 30, 2014, same-store occupancy for SL Green's Manhattan portfolio moved up 70 basis points (bps) year over year to 94.9%. On the other hand, same-store occupancy for the Suburban portfolio rose 350 bps year over year to 82.8%.
In the Manhattan portfolio, SL Green inked 64 office leases for 272,645 square feet of space. The replacement lease’s average initial rent was 10.5% higher than the earlier full rents increment on the same spaces. Additionally, in the Suburban portfolio, SL Green penned 34 office lease deals for 163,777 square feet of space. The average initial rent on the replacement leases was 3.2% higher in comparison to fully escalated rents on the same spaces, on the prior occasion.
In tune with its portfolio restructuring activity, SL Green completed several transactions in the second quarter. This includes acquisition of its joint venture partner’s stake in 388-390 Greenwich Street assets for a consolidated investment of $1.585 billion; inking of a deal to buy the fee interest at 635 Madison Avenue for $145.0 million; and divestitures of its JV interest in 747 Madison Avenue for $160.0 million and leasehold interest in 673 First Avenue for $145.0 million.
As of Jun 30, 2014, SL Green’s debt and preferred equity investment portfolio totaled $1.5 billion, same as of Mar 31, 2014. In the quarter, the company originated and retained new debt and preferred equity investments worth $219.3 million.
SL Green exited second-quarter 2014 with cash and cash equivalents of $308.1 million, compared to $447.2 million as of Mar 31, 2014.
Our Take
We are encouraged with yet another strong quarterly performance at SL Green headed by the successful execution of its strategic initiatives. Besides outpacing the Zacks Consensus Estimate in the second quarter, this real estate investment trust (REIT) boasts a positive earnings surprise of 6.17% in the last four quarters.
Particularly, 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. As part of such moves, in a separate announcement, SL Green disclosed deals to sell 3 Manhattan assets and expects to reap $240 million in proceeds from it.
SL Green currently carries a Zacks Rank #2 (Buy). Investors interested in the REIT industry may consider stocks like W. P. Carey Inc. (WPC), FelCor Lodging Trust Incorporated (FCH) and Aviv REIT, Inc. (AVIV). 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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