UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to _____.
Commission File No. 1-13199
SL GREEN REALTY CORP.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 13-3956755
(State or other jurisdiction (I.R.S. Employer of
incorporation or organization) Identification No.)
420 Lexington Avenue, New York, New York 10170
--------------------------------------------------------------------------------
(Address of principal executive offices - zip code)
(212) 594-2700
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class Name of Each Exchange On Which Registered
------------------- -----------------------------------------
Common Stock $.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the restraint was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days Yes |X| No |_|.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of February 21, 2001, there were 24,543,829 shares of the Registrant's common
stock outstanding. The aggregate market value of common stock held by
non-affiliates of the Registrant (23,271,684 shares) at February 21, 2001, was
$650,210,851. The aggregate market value was calculated by using the closing
price of the stock as of that date on the New York Stock Exchange.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Stockholders'
Meeting to be held May 15, 2001 are incorporated by reference into Part III.
SL GREEN REALTY CORP.
FORM 10-K REPORT INDEX
10-K PART AND ITEM NO. PAGE
PART I
1. BUSINESS .......................................................... 3
2. PROPERTIES ........................................................ 8
3. LEGAL PROCEEDINGS ................................................. 15
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............... 15
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS........................................................ 16
6. SELECTED FINANCIAL DATA ........................................... 16
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ..................................... 19
7a QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......... 27
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ....................... 29
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE ...................................... 60
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ............... 60
11. EXECUTIVE COMPENSATION ........................................... 60
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ... 60
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................... 60
PART IV
14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES, AND REPORTS
ON FORM 8-K ................................................... 60
The "Company" means SL Green Realty Corp., a Maryland corporation, and one or
more of its subsidiaries (including SL Green Operating Partnership, L.P. (the
"Operating Partnership")), and the predecessors thereof (the "SL Green
Predecessor") or, as the context may require, SL Green Realty Corp. only or SL
Green Operating Partnership, L.P. only and (ii) "S. L. Green Properties" means
SL Green Properties, Inc., a New York corporation, as well as the affiliated
partnerships and other entities through which Stephen L. Green has historically
conducted commercial real estate activities.
INFORMATION CONTAINED IN THIS FINANCIAL REPORT CONTAINS "FORWARD-LOOKING
STATEMENTS" RELATING TO, WITHOUT LIMITATION, FUTURE ECONOMIC PERFORMANCE, PLANS
AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS AND PROJECTIONS OF REVENUE
AND OTHER FINANCIAL ITEMS, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING
TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE"
OR "FACTORS THAT MAY INFLUENCE RESULTS AND ACCURACY OF FORWARD LOOKING
STATEMENTS" AND ELSEWHERE IDENTIFY IMPORTANT FACTORS WITH RESPECT TO SUCH
FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING
STATEMENTS.
PART I
ITEM 1. BUSINESS
GENERAL
SL Green Realty Corp. is a self-managed real estate investment trust ("REIT")
with in-house capabilities in property management, acquisitions, financing,
development, construction and leasing and was formed in June 1997 for the
purpose of continuing the commercial real estate business of S. L. Green
Properties, Inc. S. L. Green Properties, which was founded in 1980 by Stephen L.
Green, its Chairman and Chief Executive Officer, had been engaged in the
business of owning, managing, leasing, acquiring and repositioning Class B
office properties in Manhattan, a borough of New York City ("Manhattan"). S. L.
Green Properties had been involved in the acquisition of 31 Class B office
properties in Manhattan containing approximately four million square feet and
the management of 50 Class B office properties in Manhattan containing
approximately 10.5 million square feet.
As of December 31, 2000, the Company's portfolio consisted of 19 Class B
commercial properties encompassing approximately 6.7 million rentable square
feet located primarily in midtown Manhattan (the "Properties") and one
triple-net leased property located in Shelton, Connecticut. The Company's
wholly-owned interests in the Properties represent fee ownership (15), including
ownership in condominium units, leasehold ownership (2) and operating sublease
ownership (2). Pursuant to the operating sublease arrangements, the Company, as
tenant under the operating sublease, performs the functions traditionally
performed by landlords with respect to its subtenants. The Company is
responsible for not only collecting rent from its subtenants, but also
maintaining the property and paying expenses relating to the property. As of
December 31, 2000, the weighted average occupancy (total occupied square feet
divided by total available square feet) of the Properties was 99%. The Company's
portfolio also includes ownership interests in unconsolidated joint ventures
which own four Class B office properties in Manhattan, encompassing
approximately 2.0 million rentable square feet. In addition, the Company
continues to manage four office properties owned by third-parties and affiliated
companies encompassing approximately 1.0 million rentable square feet.
The Company's corporate offices are located in midtown Manhattan at 420
Lexington Avenue, New York, New York 10170. The Company's corporate staff
consists of 94 persons, including 65 professionals experienced in all aspects of
commercial real estate. The Company can be contacted at (212) 594-2700 or visit
the Company's website at www.slgreen.com.
CORPORATE STRUCTURE
In connection with the Company's initial public offering ("IPO") in August 1997,
the Operating Partnership received a contribution of interests in real estate
properties as well as 95% of the economic non-voting interest in the management,
leasing and construction companies affiliated with S.L. Green Properties (the
"Service Corporation"). The Company is organized so as to qualify and has
elected to qualify as a REIT under the Internal Revenue Code of 1986, as amended
(the "Code").
Substantially all of the Company's assets are held by, and all of its operations
are conducted through, the Operating Partnership, a Delaware limited
partnership. The Company is the sole managing general partner of, and as of
December 31, 2000, the owner of approximately 91.4% of the economic interests in
the Operating Partnership. All of the management and leasing operations with
respect to the Properties are conducted through SL Green Management LLC (the
"Management LLC"). The Operating Partnership owns a 100% interest in Management
LLC.
3
In order to maintain the Company's qualifications as a REIT while realizing
income from management, leasing, tenant representation and construction
contracts with third parties, all of these service operations with respect to
properties in which the Company will not own 100% of the interest are conducted
through the Service Corporation. The Company, through the Operating Partnership,
owns 100% of the non-voting common stock (representing 95% of the total equity)
of the Service Corporation. Through dividends on its equity interest, the
Operating Partnership expects to receive substantially all of the cash flow from
the Service Corporation's operations. All of the voting common stock of the
Service Corporation (representing 5% of the total equity) is held by a Company
affiliate. This controlling interest gives the affiliate the power to elect all
directors of the Service Corporation.
BUSINESS AND GROWTH STRATEGIES
The Company's primary business objective is to maximize total return to
shareholders through growth in funds from operations and appreciation in the
value of its assets. The Company plans to achieve this objective by assembling
the most compelling portfolio of Class B Manhattan office properties by
capitalizing on current opportunities in the Class B Manhattan office market
through (i) property acquisitions (including through joint ventures) -
continuing to acquire Class B office properties at significant discounts to
replacement costs that provide attractive initial yields and the potential for
cash flow growth, (ii) property repositioning - repositioning acquired
properties that are underperforming through renovations, active management and
proactive leasing (iii) property dispositions and (iv) integrated leasing and
property management. Over the past year, the Company has completed a program of
repositioning its assets, through a focused effort of disposing of smaller,
mid-block properties to those which are larger, and avenue oriented. Generally,
these properties are within a ten minute walk to midtown's primary commuter
stations, which the Company believes is a competitive advantage throughout the
business cycle.
PROPERTY ACQUISITIONS. The Company acquires properties for long term
appreciation and earnings growth (core assets) or for shorter term holding
periods where it attempts to create significant increases in value which when
sold result in capital gains which increase the Company's investment capital
base. In acquiring (core and non-core) properties, directly or through joint
ventures with the highest quality institutional investors, the Company believes
that it has the following advantages over its competitors: (i) management's 20
years of experience as a full service, fully integrated real estate company
focused on the Class B office market in Manhattan, (ii) enhanced access to
capital as a public company, (as compared to the generally fragmented
institutional or venture oriented sources of capital available to private
companies) and (iii) the ability to offer tax-advantaged structures to sellers
through the exchange of ownership interests as opposed to solely cash
transactions. In addition, the Company may benefit from the Tax Relief Extension
Act of 1999 (see "Recent Developments") and from tax law developments reducing
the transfer tax rates applicable to certain REIT acquisition transactions.
These previous barriers to the sale of real property have been greatly reduced
or eliminated, making transactions more economically viable for sellers of
property.
PROPERTY REPOSITIONING. The Company believes that there are properties that may
be acquired which could greatly benefit from management's experience in
enhancing property cash flow and value by renovating and repositioning
properties to be among the best in their submarkets. Many Class B buildings are
located in or near submarkets which are undergoing major reinvestment and where
the properties in these markets have low vacancy rates. Featuring unique
architectural design, large floor plates or other amenities and functionally
appealing characteristics, reinvestment in these properties poses an opportunity
to the Company to meet market needs.
PROPERTY DISPOSITIONS. The Company continuously evaluates its properties to
identify which are best retained to meet its long term earnings growth
objectives and contribute to increasing portfolio value. Properties such as
smaller side-street properties, properties located downtown or which simply no
longer meet the Company's earnings objectives may provide short term profit
opportunities resulting from their sale. These properties become non-core
holdings and are sold to create investment capital. The Company believes that by
disposing these non-core holdings at attractive prices, they will be able to
redeploy the capital by making other property acquisitions or investments in
high-yield structured finance investments which will provide future capital gain
and earnings growth opportunities.
LEASING AND PROPERTY MANAGEMENT. The Company seeks to capitalize on management's
extensive knowledge of the Class B Manhattan marketplace and the needs of the
tenants therein by continuing a proactive approach to leasing and management,
which includes (i) the use of in-depth market research, (ii) the utilization of
an extensive network of third-party brokers, (iii) comprehensive building
management analysis and planning and (iv) a commitment to tenant satisfaction by
providing "Class A" tenant services at affordable "Class B" rental rates. The
Company believes proactive leasing efforts have contributed to average occupancy
rates at the Properties exceeding the market average.
4
STRUCTURED FINANCE. The Company seeks to invest in high-yield structured finance
investments. These investments provide current earnings growth and a potential
for future capital gains.These investments are typically floating rate
investments and therefore, serve as a natural hedge for the Company's unhedged
floating rate debt.
ACQUISITIONS
The Company acquired the following properties during the year ended December 31,
2000.
Net Total Acquisition
Ownership Rentable Acquisition Price
Date Property Submarket Interest % S/F Price ($s) PSF
---- -------- --------- --------- --- ---------- ---
Feb-00 100 Park Avenue Grand Central South 49.9 834,000 192,000,000 $230
Dec-00 180 Madison Avenue Grand Central South 49.9 265,000 41,250,000 $156
------- -----------
TOTAL 2000
ACQUISITIONS 1,099,000 233,250,000
========= ===========
In addition, the Company contributed 321 West 44th Street to a joint venture in
May 2000. The 203,000 square foot property was valued at $28.4 million at the
time of sale. SL Green retained a 35% interest in the property.
DISPOSITIONS
The Company sold the following properties during the year ended December 31,
2000.
Net Sales
Ownership Rentable Price Sales Price
Date Property Submarket Interest % S/F ($s) Per S/F
---- -------- --------- --------- --- ---- -------
Feb-00 29 West 35th Street Garment 100.0 78,000 11,700,000 $150
Mar-00 36 West 44th Street Grand Central 100.0 178,000 31,500,000 $177
May-00 321 West 44th Street Times Square 100.0 203,000 28,400,000 $140
Nov-00 90 Broad Street Financial 35.0 339,000 60,000,000 $177
Dec-00 17 Battery South Financial 100.0 392,000 53,000,000 $135
--------- -----------
TOTAL 2000
DISPOSITIONS 1,190,000 184,600,000
========= ===========
FINANCING
In April 2000, the Company extended the maturity date of the $26.9 million
mortgage encumbering the properties located at 286, 290 and 292 Madison Avenue,
Manhattan by one year to May 31, 2001. On January 16, 2001, the Company repaid
the $3.3 million mortgage encumbering 290 Madison Avenue. On February 21, 2001,
the Company repaid the balance on this mortgage and added the properties located
at 286 and 290 Madison Avenue to the unencumbered asset pool under the Company's
$250 million unsecured credit facility.
On October 2, 2000, the Company obtained a $125.0 million mortgage encumbering
the property located at 420 Lexington Avenue. The 8.44% fixed rate loan has a 10
year term. Interest only is payable for the first 12 months. The proceeds were
used to repay the $55.0 million loan on the property which was due to mature on
May 21, 2001. The balance of the proceeds was used to pay down the $250 Million
Credit Facility.
On June 27, 2000, the Company repaid in full and terminated its $140 Million
Credit Facility and obtained a new unsecured revolving credit facility in the
amount of $250 million ("$250 Million Credit Facility") from a group of 9 lender
banks. The $250 Million Credit Facility has a term of three years and bears
interest at a spread ranging from 137.5 basis points to 175 basis points over
the London Interbank Offered Rate ("LIBOR"), based on the Company's leverage
ratio. If the Company receives an investment grade rating, the spread over LIBOR
will be reduced to 125 basis points. At December 31, 2000, $23 million was
outstanding under the facility and carried an interest rate of 8.17 percent.
Availability under the $250 Million Credit Facility at December 31, 2000 was
further reduced by the issuance of letters of credit in the amount of $21
million for acquisition deposits. The Company is currently negotiating with the
bank group to upsize the facility to $300 million.
The Company also has a $60.0 million secured revolving credit facility from
Prudential Securities Credit Corp. This facility, which has a one year term
expiring December 2001, is used to fund the Company's high yield structured
finance investments. As of December 31, 2000, the Company had $23.4 million
outstanding under this facility.
MANHATTAN OFFICE MARKET BACKGROUND
The term "Class B" is generally used in the Manhattan office market to describe
office properties which are more than 25 years old but which are in good
physical condition, enjoy widespread acceptance by high-quality tenants and are
situated in desirable locations in Manhattan. Class B office properties can be
distinguished from Class A properties in that Class A properties are generally
newer properties with higher finishes and obtain the highest rental rates within
their markets.
A variety of tenants who do not require, desire or cannot afford Class A space
are attracted to Class B office properties due to their prime locations,
excellent amenities, distinguished architecture and relatively less expensive
rental rates. Class B office space has
5
historically attracted many smaller growth oriented firms and has played a
critical role in satisfying the space requirements of particular industry groups
in Manhattan, such as the advertising, apparel, business services, engineering,
not-for-profit, "new media" and publishing industries. By way of example, some
of the tenants that currently occupy space in Company owned properties include
The City of New York, BMW of Manhattan, Inc., Metro North, New York Life
Insurance Company, St. Luke's Roosevelt Hospital, CBS, Inc., Parade
Publications, Dow Jones, Crain Communications, Ann Taylor, Escada, Cowles
Business Media, Kallir, Philips, Ross Inc., MCI International, New York
Presbyterian Hospital, Ross Stores, UNICEF, Gibbs & Cox Inc. and Young and
Rubicam, Inc.
The Company's management team has developed a comprehensive knowledge of the
Manhattan Class B office market, an extensive network of tenant and other
business relationships and experience in acquiring underperforming office
properties and repositioning them into profitable Class B properties through
intensive full service management and leasing efforts.
COMPETITION IN ITS MARKETPLACE
All of the Properties are located in highly developed areas of Manhattan that
include a large number of other office properties. Manhattan is by far the
largest office market in the United States and contains more rentable square
feet than the next six largest central business district office markets in the
United States combined. Of the total inventory of 379 million rentable square
feet in Manhattan, approximately 172 million rentable square feet is comprised
of Class B office space and 207 million rentable square feet is comprised of
Class A office space. Over the next five years, the Company estimates that
Manhattan has approximately 13.9 million square feet of new construction coming
on line. This represents approximately 4.0 percent of total Manhattan inventory.
A majority of the new construction represents entirely pre-leased properties.
The Company believes that midtown vacancy rates are likely to increase over the
coming years due to the return of internet related space to the market,
potential layoffs from financial mergers, acquisitions and downsizings.
Many tenants have been attracted to Class B properties in part because of their
relatively less expensive rental rates (as compared to Class A properties) and
the tightening of the Class A office market in midtown Manhattan. Consequently,
an increase in vacancy rates and/or a decrease in rental rates for Class A
office space would likely have an adverse effect on rental rates for Class B
office space. Also, the number of competitive Class B office properties in
Manhattan could have a materially adverse effect on the Company's ability to
lease office space at its properties, and on the effective rents the Company is
able to charge.
The Manhattan office market is a competitive marketplace. Although currently no
other publicly traded REITs have been formed solely to own, operate and acquire
Manhattan Class B office properties, the Company may in the future compete with
such other REITs. In addition, the Company may face competition from other real
estate companies (including other REITs that currently invest in markets other
than Manhattan) that may have greater financial resources than the Company or
that are willing to acquire properties in transactions which are more highly
leveraged than the Company is willing to undertake. In addition, certain
requirements for REIT qualification may in the future limit the Company's
ability to increase operations conducted by the Service Corporation without
jeopardizing the Company's qualifications as a REIT.
LEASING ACTIVITY
The following represents the change in occupancy rates of the Properties from
December 31, 1998 (or their date of acquisition in 1999 or 2000) as compared to
December 31, 2000:
OCCUPANCY PERCENT
DECEMBER 31,
PROPERTY 2000 1999 1998
-------- ---- ---- ----
Same 98% 97% 93%
Store(1)
ACQUIRED 1999 December 31
--------------------------------------
2000 1999 At Acquisition Acquisition Date
---- ---- -------------- ----------------
555 West 57th Street 100% 100% 100% January 1999
286 Madison Avenue 98% 94% 99% May 1999
290 Madison Avenue 100% 86% 86% May 1999
292 Madison Avenue 100% 100% 97% May 1999
(1) Represents properties owned by the Company at December 31, 1998 and still
owned at December 31, 2000.
RENT GROWTH
The strength in the New York City economy fueled the demand for quality
commercial space in the Company's submarkets. Healthy demand pared
6
with virtually no new supply resulted in upward pressure on market rents. These
increases provided the Company with the opportunity to generate positive rent
growth during the year. This rent growth, measured as the difference between
effective (average) rents on new and renewed leases as compared to the expiring
rent on those same spaces, was 41% for 2000.
The Company estimates that rents currently in place in the Company's Portfolio
are approximately 50.5% below current market asking rents. Properties owned in
joint ventures reflect a similar statistic as those rents are generally 71.6%
below current asking rents. As of December 31, 2000, 24.9% and 30.4% of all
leases in-place in the Portfolio and joint ventures are scheduled to expire
during the next four years. The Company expects to capitalize on embedded rent
growth as these leases and future leases expire by renewing or replacing these
tenant leasesat higher prevailing market rents. There can be no assurances that
market rents will not erode in the future or that the Company will realize all
of the embedded rent growth. The Company believes the depth of the degree that
these rents in the current portfolio are below market provides a significant
potential for long-term income growth.
EMPLOYEES
At December 31, 2000, the Company employed approximately 437 employees, over 75
of whom were managers and professionals, approximately 323 of whom were hourly
paid employees involved in building operations and approximately 39 of whom were
clerical, data processing and other administrative employees. There are
currently three collective bargaining agreements relating to 19 of the Company's
properties covering 323 employees of the Company.
RECENT DEVELOPMENTS
The Company acquired the following properties during January 2001.
2001 ACQUISITIONS
Total
Net Acquisition Acquisition
Ownership Rentable Price Price
Date Property Submarket Interest % S/F ($s) Per S/F
---- -------- --------- ---------- --- ---- -------
Jan-01 1370 Broadway Garment 100.0 255,000 50,500,000 $198
Jan-01 One Park Avenue Grand Central South 100.0 913,000 233,900,000 $256
Jan-01 469 7th Avenue Penn Station 35.0 253,000 45,700,000 $181
TAX MATTERS
The Tax Relief Extension Act of 1999 was recently enacted and contains several
tax provisions regarding REITs, including a reduction of the annual distribution
requirement for REIT taxable income from 95% to 90%. The act also changes the
10% voting securities test under current law to a 10% vote or value test. Thus,
subject to certain exceptions, a REIT will no longer be allowed to own more than
10% of the vote or value of the outstanding securities of any issuer, other than
a qualified REIT subsidiary or another REIT. One exception to this new test,
which is also an exception to the 5% asset test, allows a REIT to own any or all
of the securities of a "taxable REIT subsidiary." A taxable REIT subsidiary can
perform non-customary services for tenants of a REIT without disqualifying rents
received from such tenants for purposes of the REIT's gross income tests and can
also undertake third-party management and development activities as well as
non-real-estate-related activities. A taxable REIT subsidiary will be taxed as a
regular C corporation but will be subject to earnings stripping limitations on
the deductibility of interest paid to its REIT. In addition, a REIT will be
subject to a 100% excise tax on certain excess amounts to ensure that (i)
tenants who pay a taxable REIT subsidiary for services are charged an
arm's-length amount by the taxable REIT subsidiary for the service, rather than
paying an excessive amount to the REIT as rent, (ii) shared expenses of a REIT
and its taxable REIT subsidiary are allocated fairly between the two, and (iii)
interest paid by a taxable REIT subsidiary to its REIT is commercially
reasonable.
These new tax provisions became effective January 1, 2001. In addition,
grandfather protection is provided with respect to the 10% value test for
securities of a corporation held by a REIT on July 12, 1999, but such protection
ceases to apply after the corporation engages in a substantial new line of
business or acquires any substantial asset and also ceases to apply after the
acquisition of additional securities of the corporation by the REIT after July
12, 1999. The Company intends to convert its management subsidiary and eEmerge,
Inc. into a taxable REIT subsidiary of SL Green in 2001. Furthermore, the
Company may decide to simplify its capital structure, including that of its
management subsidiary and eEmerge, Inc. If so, the Company then could
consolidate its financial statements. None of the actions the Company may take
will require shareholder approval.
Securities of a taxable REIT subsidiary will constitute non-real-estate assets
for purposes of determining whether at least 75% of a REIT's assets consist of
real estate. In addition, under current law, no more than 5% of a REIT's total
assets can consist of securities ofa single issuer. The new tax law increases
this with respect to taxable REIT subsidiaries, so that no more than 20% of a
REIT's total assets can consist of securities of one or more taxable REIT
subsidiaries. As of December 31, 2000 the amount of the Company's assets
attributable to its taxable subsidiaries was approximately 0.5%.
7
ITEM 2. PROPERTIES
THE PORTFOLIO
GENERAL. As of December 31, 2000, the Company owned interests in 19 Class B
office properties encompassing approximately 6.7 million rentable square feet
located primarily in midtown Manhattan. Certain of the Properties include at
least a small amount of retail space on the lower floors, as well as
basement/storage space. The Company's portfolio also includes ownership
interests in unconsolidated joint ventures which own four Class B office
properties in Manhattan, encompassing approximately 2.0 million rentable square
feet. These four properties were approximately 98% leased at December 31, 2000.
The following table sets forth certain information with respect to each of the
Manhattan properties in the portfolio as of December 31, 2000:
Percentage
of
Approximate Portfolio
Year Rentable Rentable
Built/ Square Square Percent Annualized
Property Renovated Submarket Feet Feet Leased Rent(1)
-------- --------- --------- ---- ---- ------ -------
Wholly-Owned
------------
17 Battery Place North.. 1972 World Trade/ 419,000 6.26% 100 $8,470,644
Battery Place
50 W. 23rd Street...... 1892/1992 Chelsea 333,000 4.98 99 7,548,793
70 W. 36th Street...... 1923/1994 Garment 151,000 2.26 96 3,441,436
110 E. 42nd Street..... 1921/---- Grand Central No. 251,000 3.75 100 7,749,165
470 Park Avenue Park Avenue
South(4).............. 1912/1994 South 260,000(4) 3.88 99 6,820,252
633 Third Avenue (6).... 1962/1996 Grand Central No. 41,000 0.61 100 1,570,711
673 First Avenue (10)... 1928/1990 Grand Central So. 422,000 6.31 100 12,637,543
1140 Avenue of the Rockefeller
Americas.............. 1926/1998 Center 191,000 2.85 100 6,162,298
1372 Broadway .......... 1914/1998 Garment 508,000 7.59 99 13,514,776
1414 Avenue of the Rockefeller
Americas.............. 1923/1998 Center 111,000 1.66 99 3,987,492
1466 Broadway........... 1907/1982 Times Square 289,000 4.32 84 10,261,482
420 Lexington (7)....... 1927/1999 Grand Cent.No. 1,188,000 17.75 100 38,977,297
440 Ninth Avenue........ 1927/1989 Garment 339,000 5.07 94 7,058,669
711 Third Avenue(8)..... 1955/------ Grand Cent.No. 524,000 7.83 100 17,001,870
1412 Broadway .......... 1927/1998 Times Square 389,000 5.81 97 10,828,639
555 West 57th Street (10) 1971/---- Midtown West 941,000 14.06 100 18,093,737
286 Madison Avenue...... 1918/1997 Grand Central So 112,000 1.67 98 2,976,434
290 Madison Avenue...... 1952/---- Grand Central So 36,800 0.55 100 1,255,395
292 Madison Avenue...... 1923/---- Grand Central So 187,000 2.79 100 5,307,819
------- ------ ---- ---------
Total/Weighted
average wholly-owned... 6,692,800(5) 100.0% 99% $183,664,452
========= ====== ==== ============
JOINT VENTURES
321 West 44th Street (11) 1929/---- Times Square 203,000 97% 3,515,106
1250 Broadway (9)(10)... 1968/---- Penn Station 670,000 100 16,340,958
100 Park Avenue (9)..... 1950/---- Grand Central S 834,000 100 28,748,818
180 Madison Avenue (9).. 1926/---- Grand Central S 265,000 87 5,314,812
------- ---- -----------
Total/Weighted
average joint ventures 1,972,000 98% $53,919,694
--------- ---- -----------
Grand Total/Weighted
average portfolio..... 8,664,800 98% $237,584,146
========= ==== ============
Annual
Net
Annualized Effective
Percentage Rent Rent
of Per Per
Portfolio Number Leased Leased
Annualized of Square Square
Property Rent Leases Foot(2) Foot(3)
-------- ---- ------ ------- -------
Wholly-Owned
------------
17 Battery Place North.. 4.61 7 $20.77 $20.38
50 W. 23rd Street...... 4.11 17 22.45 21.01
70 W. 36th Street...... 1.87 33 23.84 18.27
110 E. 42nd Street..... 4.22 32 31.65 30.56
470 Park Avenue
South(4).............. 3.71 29 26.39 20.81
633 Third Avenue (6).... 0.86 3 38.31 38.24
673 First Avenue (10)... 6.88 13 30.04 24.36
1140 Avenue of the
Americas.............. 3.36 28 33.00 31.87
1372 Broadway .......... 7.36 26 25.90 25.82
1414 Avenue of the
Americas.............. 2.17 30 35.79 33.24
1466 Broadway........... 5.59 105 45.51 39.02
420 Lexington (7)....... 21.22 258 31.15 30.76
440 Ninth Avenue........ 3.84 16 21.34 23.15
711 Third Avenue(8)..... 9.26 23 32.32 31.35
1412 Broadway .......... 5.90 119 29.21 28.04
555 West 57th Street (10) 9.85 27 19.55 21.00
286 Madison Avenue...... 1.62 38 27.29 23.75
290 Madison Avenue...... 0.68 5 34.11 36.89
292 Madison Avenue...... 2.89 17 32.28 29.71
---- -- ----- -----
Total/Weighted..........
average wholly-owned... 100.0% 826 $27.71 $26.59
===== === ====== ======
JOINT VENTURES
321 West 44th Street (11) 26 17.95 18.64
1250 Broadway (9)(10)... 30 24.23 23.85
100 Park Avenue (9)..... 41 34.61 34.80
180 Madison Avenue (9).. 60 24.91 24.44
-- ----- -----
Total/Weighted
average joint ventures 157 $28.17 $28.12
--- ------ ------
Grand Total/Weighted
average portfolio..... 983 $27.81 $26.94
=== ====== ======
----------
(1) Annualized Rent represents the monthly contractual rent under
existing leases as of December 31, 2000 multiplied by 12. This
amount reflects total rent before any rent abatements and includes
expense reimbursements, which may be estimated as of such date.
Total rent abatements for leases in effect as of December 31, 2000
for the 12 months ending December 31, 2001 are approximately
$5,646,000 for the wholly-owned Properties and $334,500 for the
joint ventures.
8
(2) Annualized Rent Per Leased Square Foot represents Annualized Rent,
as described in footnote (1) above, presented on a per leased square
foot basis.
(3) Annual Net Effective Rent Per Leased Square Foot represents (a) for
leases in effect at the time an interest in the relevant property
was first acquired by SL Green, the remaining lease payments under
the lease (excluding operating expense pass-throughs, if any)
divided by the number of months remaining under the lease multiplied
by 12 and (b) for leases entered into after an interest in the
relevant property was first acquired by SL Green or the Company, all
lease payments under the lease (excluding operating expense
pass-throughs, if any) divided by the number of months in the lease
multiplied by 12, and, in the case of both (a) and (b), minus tenant
improvement costs and leasing commissions, if any, paid or payable
by the Company and presented on a per leased square foot basis.
Annual Net Effective Rent Per Leased Square Foot includes future
contractual increases in rental payments and therefore, in certain
cases, may exceed Annualized Rent Per Leased Square Foot.
(4) 470 Park Avenue South is comprised of two buildings, 468 Park Avenue
South (a 17-story office building) and 470 Park Avenue South (a
12-story office building).
(5) Includes approximately 6,094,784 square feet of rentable office
space, 448,282 square feet of rentable retail space and 149,734
square feet of garage space.
(6) The Company holds fee interests in condominium units. This property
was sold on January 9, 2001.
(7) The Company holds an operating sublease interest in the land and
improvements.
(8) The Company holds a leasehold mortgage interest, a net sub-leasehold
interest and a co-tenancy interest in this property.
(9) The Company owns a 49.9% interest in this joint venture.
(10) Includes a parking garage.
(11) The Company owns a 35% economic interest in this joint venture.
HISTORICAL OCCUPANCY. The Company has historically achieved consistently higher
occupancy rates in comparison to the overall Class B Midtown Markets, as shown
in the following table:
OCCUPANCY RATE OF CLASS B
PERCENT OFFICE PROPERTIES
LEASED AT THE IN THE MIDTOWN
PROPERTIES (1) MARKETS (2)
-------------- -----------
% %
December 31, 2000............... 99 96
December 31, 1999............... 97 93
December 31, 1998............... 93 92
December 31, 1997............... 94 90
December 31, 1996............... 95 89
December 31, 1995............... 95 87
----------
(1) Includes space for leases that were executed as of the relevant date in
Properties owned by the Company or SL Green Properties as of that date.
(2) Includes vacant space available for direct lease, but does not include
vacant space available for sublease; including vacant space available for
sublease would reduce the occupancy rate as of each date shown. Sources:
Cushman & Wakefield.
LEASE EXPIRATIONS. Leases at the Properties, as at many other Manhattan office
properties, typically extend for a term of ten or more years, compared to
typical lease terms of 5-10 years in other large U.S. office markets. For the 5
years ending December 31, 2005, the average annual rollover at the Properties is
approximately 480,000 square feet, representing an average annual expiration of
7.2% of the total leased square feet at the Properties per year (assuming no
tenants exercise renewal or cancellation options and no tenant bankruptcies or
other tenant defaults).
9
The following tables set forth a schedule of the annual lease expirations at the
wholly-owned Properties and joint ventures, respectively, with respect to leases
in place as of December 31, 2000 for each of the next ten years and thereafter
(assuming that no tenants exercise renewal or cancellation options and that
there are no tenant bankruptcies or other tenant defaults):
ANNUALIZED
RENT
WHOLLY-OWNED PROPERTIES PERCENTAGE PER
SQUARE OF ANNUALIZED LEASED
NUMBER FOOTAGE TOTAL RENT SQUARE
OF OF LEASED OF FOOT OF
YEAR OF LEASE EXPIRING EXPIRING SQUARE EXPIRING EXPIRING
EXPIRATION LEASES LEASES FEET LEASES(1) LEASES(2)
------------- ------------ ------------ --------- ------------ ---------
2001 ............. 177 461,968 6.97% $ 12,534,777 $ 27.13
2002 ............. 126 382,491 5.77 10,570,173 27.64
2003 ............. 128 506,887 7.65 14,447,701 28.50
2004 ............. 78 297,161 4.48 8,536,010 28.73
2005 ............. 90 749,837 11.31 22,769,627 30.37
2006 ............. 39 332,339 5.01 9,325,452 28.06
2007 ............. 36 497,490 7.50 12,268,550 24.66
2008 ............. 39 589,467 8.89 17,283,954 29.32
2009 ............. 34 542,870 8.19 14,013,430 25.81
2010 ............. 39 989,790 14.93 26,804,913 27.08
2011 & thereafter 40 1,278,823 19.29 35,109,865 27.45
------------ ------------ --------- ------------ ---------
Total/weighted
average .... 826 6,629,123 100.00% $183,664,452 $ 27.71
============ ============ ========= ============ =========
ANNUALIZED
RENT
JOINT VENTURES PERCENTAGE PER
SQUARE OF ANNUALIZED LEASED
NUMBER FOOTAGE TOTAL RENT SQUARE
OF OF LEASED OF FOOT OF
YEAR OF LEASE EXPIRING EXPIRING SQUARE EXPIRING EXPIRING
EXPIRATION LEASES LEASES FEET LEASES(1) LEASES(2)
------------- ------------ ------------ --------- ------------ ---------
2001 ............. 20 35,007 1.83% $ 798,254 $ 22.80
2002 ............. 32 166,220 8.68 4,005,413 24.10
2003 ............. 19 223,291 11.67 5,194,069 23.26
2004 ............. 19 156,391 8.17 5,069,817 32.42
2005 ............. 13 146,120 7.63 4,419,993 30.25
2006 ............. 11 261,153 13.64 5,631,477 21.56
2007 ............. 5 251,662 13.15 8,449,948 33.58
2008 ............. 10 144,757 7.56 3,801,568 26.26
2009 ............. 12 325,927 17.03 10,391,102 31.88
2010 ............. 11 138,553 7.24 4,772,488 34.45
2011 & thereafter 5 65,048 3.40 1,385,565 21.30
------------ ------------ --------- ------------ ---------
Total/weighted
average .... 157 1,914,129 100.00% $ 53,919,694 $ 28.17
============ ============ ========= ============ =========
-----------
(1) Annualized Rent of Expiring Leases, as used throughout this report,
represents the monthly contractual rent under existing leases as of
December 31, 2000 multiplied by 12. This amount reflects total rent before
any rent abatements and includes expense reimbursements, which may be
estimated as of such date. Total rent abatements for leases in effect as
of December 31, 2000 for the 12 months ending December 31, 2001 are
approximately $5,646,000 for the wholly-owned Properties and $334,500 for
the joint venture properties.
(2) Annualized Rent Per Leased Square Foot of Expiring Leases, as used
throughout this report, represents Annualized Rent of Expiring Leases, as
described in footnote (1) above, presented on a per leased square foot
basis.
10
TENANT DIVERSIFICATION. The wholly-owned Properties currently are leased to
approximately 800 tenants which are engaged in a variety of businesses,
including publishing, health services, retailing and banking. The following
table sets forth information regarding the leases with respect to the 20 largest
tenants at the Properties, based on the amount of square footage leased by such
tenants as of December 31, 2000:
REMAINING
LEASE TERM TOTAL LEASED
TENANT(1) PROPERTIES IN MONTHS SQUARE FEET
--------- ---------- --------- -----------
City Of New York 17 Battery Place North 84 257,189
BMW of Manhattan, Inc. 555 West 57th Street 139 227,782
City University of NY-CUNY (3) 555 West 57th Street 169 143,061
MTA.(4) 420 Lexington Avenue 181 134,687
St. Luke's Roosevelt Hospital 555 West 57th Street 162 133,700
CBS, Inc. (5) 555 West 57th Street 114 127,320
New York Presbyterian 555 West 57th Street and
Hospital (6) 673 First Avenue 108 99,650
Ross Stores 1372 Broadway 113 98,830
Ann Taylor 1372 Broadway 115 93,020
Crain Communications, Inc. 711 Third Avenue 97 90,531
Parade Publications, Inc. 711 Third Avenue 116 82,444
Ketchum, Inc. 711 Third Avenue 179 80,971
Kallir, Phillips, Ross, Inc. 673 First Avenue 42 80,000
UNICEF (7) 673 First Avenue 144 80,000
New York Life Insurance Company 420 Lexington Avenue 114 75,373
Greater New York Hospital 555 West 57th Street 159 74,937
Gibbs & Cox Inc. 50 West 23rd Street 56 69,782
Cirpriani 42nd Street, LLC 110 East 42nd Street 96 69,703
Young & Rubicam (8) 290/292 Madison Avenue 177 67,097
MCI International 17 Battery Place North 10 40,167
------ ---------
TOTAL/Weighted Average(2).............. 119 2,126,244
====== =========
JOINT VENTURE PROPERTIES
The City of New York (if 1250 Broadway and
combined) 17 Battery Place North 84 305,189
Philip Morris Management Corp. 100 Park Avenue 84 175,645
J&W Seligman & Co., Inc. 100 Park Avenue 97 175,346
Visiting Nurse Service of NY 1250 Broadway 68 168,000
Information Builders Inc. 1250 Broadway 27 88,571
---------
TOTAL 912,751
=========
PERCENTAGE
OF PERCENTAGE
AGGREGATE OF
PORTFOLIO AGGREGATE
LEASED PORTFOLIO
SQUARE ANNUALIZED ANNUALIZED
TENANT(1) FEET RENT RENT
--------- ---- ---- ----
City Of New York 3.88% $5,401,020 2.94%
BMW of Manhattan, Inc. 3.44 2,771,952 1.51
City University of NY-CUNY (3) 2.16 3,373,812 1.84
MTA.(4) 2.03 3,251,712 1.77
St. Luke's Roosevelt Hospital 2.02 2,993,196 1.63
CBS, Inc. (5) 1.92 2,396,016 1.30
New York Presbyterian
Hospital (6) 1.50 2,447,534 1.33
Ross Stores 1.49 2,445,048 1.33
Ann Taylor 1.40 2,526,792 1.38
Crain Communications, Inc. 1.37 2,978,840 1.62
Parade Publications, Inc. 1.24 1,978,656 1.08
Ketchum, Inc. 1.22 3,091,480 1.68
Kallir, Phillips, Ross, Inc. 1.21 2,635,292 1.43
UNICEF (7) 1.21 2,592,750 1.41
New York Life Insurance Company 1.14 2,523,438 1.37
Greater New York Hospital 1.13 2,187,019 1.19
Gibbs & Cox Inc. 1.05 1,871,052 1.02
Cirpriani 42nd Street, LLC 1,95 2,500,000 1.36
Young & Rubicam (8) 1.01 2,322,886 1.26
MCI International 0.61 692,438 0.38
-------- ----------- -----
TOTAL/Weighted Average(2).............. 32.07% $52,980,933 28.85%
======= =========== =====
JOINT VENTURE PROPERTIES
The City of New York (if
combined) $6,485,016
Philip Morris Management Corp. 6,083,448
J&W Seligman & Co., Inc. 5,343,960
Visiting Nurse Service of NY 3,360,000
Information Builders Inc. 1,957,956
-----------
TOTAL $23,230,380
===========
----------
(1) This list is not intended to be representative of the Company's tenants as a
whole.
(2) Weighted average calculation based on total rentable square footage
leased by each tenant.
(3) 93,061 square feet expire May 2010; 50,000 square feet expire January 2015.
(4) 22,467 square feet expire January 2008; 112,220 square feet expire January
2016.
(5) 106,644 square feet expire December 2003; 20,676 square feet expire June
2010.
(6) 76,000 square feet expire August 2006; 23,650 square feet expire December
2009.
(7) 40,000 square feet expire December 2003; 40,000 square feet expire December
2012.
(8) 5,483 square feet expire August 2015; 61,614 square feet expire September
2015.
11
420 LEXINGTON AVENUE (THE GRAYBAR BUILDING)
The Company purchased the operating sublease at 420 Lexington Avenue, a.k.a. the
Graybar Building in March 1998. This 31-story office property sits at the foot
of Grand Central Terminal in the Grand Central North sub-market of the midtown
Manhattan office market. The Property was designed by Sloan and Robertson and
completed in 1927. The building takes its name from its original owner, the
Graybar Electric Company. The Property contains approximately 1.2 million
rentable square feet (including approximately 1,135,000 square feet of office
space, and 53,000 square feet of mezzanine and retail space), with floor plates
ranging from 17,000 square feet to 50,000 square feet. The Company restored the
grandeur of this building through the implementation of an $11.9 million capital
improvement program geared toward certain cosmetic upgrades including new
entrance and storefronts, new lobby, elevator cabs, and elevator lobbies and
corridors.
The Graybar Building offers unsurpassed convenience to transportation. This
property enjoys excellent accessibility to a wide variety of transportation
options with a direct passageway to Grand Central Station. Grand Central Station
is the major transportation destination for commutation from southern
Connecticut and Westchester County. Major bus and subway lines serve this
property, as well. The property is ideally located to take advantage of the
renaissance of Grand Central Terminal, which has been redeveloped into a major
retail/transportation hub containing restaurants such as Michael Jordan's
Steakhouse and retailers such as Banana Republic and Kenneth Cole.
The Graybar Building consists of the building at 420 Lexington Avenue and fee
title to a portion of the land above the railroad tracks and associated
structures which form a portion of the Grand Central Terminal complex in midtown
Manhattan. The Company's interest consists of a tenant's interest in a
controlling sublease, as described below. The ownership structure of the Graybar
Building is as follows.
Fee title to the building and the land parcel is owned by an unaffiliated third
party, who also owns the landlord's interest under a lease expiring December 31,
2008 subject to renewal by the tenant through December 31, 2029 (the "Ground
Lease"). The Company controls the exercise of this renewal option through the
terms of the subordinate leases described below.
The tenant under the Ground Lease is the holder of the landlord's interest under
a lease (the "Ground Sublease") which is coterminous (except that it ends on
December 30, 2029) and has a complementary renewal option term structure and
control to the Ground Lease. The tenant's interest under the Ground Sublease is
held by the Company. The tenant under the Ground Sublease is the holder of the
landlord's interest under a lease (the "Operating Lease") which is coterminous
(except that it ends on December 28, 2029) and has a complementary renewal
option term structure and control to the Ground Lease. The tenant's interest
under the Operating Lease is held by an unaffiliated third party. The tenant
under the Operating Lease is the holder of the landlord's interest under a lease
(the "Operating Sublease") which is coterminous and has a complementary renewal
option term structure and control to the Ground Lease. The tenant's interest
under the Operating Sublease is held by the Company.
As of December 31, 2000, approximately 100% of the rentable square footage in
the Graybar Building was leased. The following table sets forth certain
information with respect to the property:
ANNUALIZED
RENT PER LEASED
YEAR-END PERCENT OCCUPIED SQUARE FOOT
-------- ---------------- -----------
2000....................................... 100% $32.81
1999....................................... 97 29.63
1998....................................... 98 25.30
1997....................................... 86 26.80
1996....................................... 88 27.26
1995....................................... 91 28.97
As of December 31, 2000, the Graybar Building was leased to 248 tenants
operating in various industries, including legal services, financial services
and advertising, none of whom occupied 10% or more of the rentable square
footage at the Property.
The following table sets out a schedule of the annual lease expirations at the
Graybar Building for leases executed as of December 31, 2000 with respect to
each of the next ten years and thereafter (assuming that no tenants exercise
renewal or cancellation options and that there are no tenant bankruptcies or
other tenant defaults):
12
ANNUALIZED
SQUARE PERCENTAGE ANNUALIZED RENT PER
NUMBER FOOTAGE OF RENT LEASED
OF OF TOTAL OF SQUARE FOOT OF
EXPIRING EXPIRING LEASED EXPIRING EXPIRING
YEAR OF LEASE EXPIRATION LEASES LEASES SQUARE FEET LEASES LEASES
------------------------ ------ ------ ----------- ------ ------
2001 .............. 47 147,354 11.8% $ 4,050,516 $ 27.49
2002 .............. 37 98,730 7.9% 2,926,692 29.64
2003 .............. 37 72,955 5.8% 3,135,168 42.97
2004 .............. 34 100,859 8.1% 3,300,240 32.72
2005 .............. 46 160,271 12.8% 6,297,312 39.29
2006 .............. 8 73,863 5.9% 1,956,036 26.48
2007 .............. 18 61,336 4.9% 2,251,008 36.70
2008 .............. 7 94,402 7.5% 2,998,860 31.77
2009 .............. 8 94,281 7.5% 1,871,364 19.85
2010 .............. 9 143,667 11.5% 5,071,176 35.30
2011 and thereafter 7 203,516 16.3% 5,118,925 25.15
------- ---------- ------- ------------ ---------
Subtotal/Weighted . 258 1,251,244 100% $38,977,297 $ 31.15
average ......... ======= ========== ======= ============ =========
The aggregate undepreciated tax basis of depreciable real property at the
Graybar Building for Federal income tax purposes was $139.5 million as of
December 31, 2000. Depreciation and amortization are computed for Federal income
tax purposes on the straight-line method over lives which range up to 39 years.
The current real estate tax rate for all Manhattan office properties is $9.547
per $100 of assessed value. The total annual tax for the Graybar Building at
this rate including the applicable BID tax for the 2000/01 tax year is $6.2
million (at a taxable assessed value of $61.7 million).
ENVIRONMENTAL MATTERS
The Company engaged independent environmental consulting firms to perform Phase
I environmental site assessments on the Properties, in order to assess existing
environmental conditions. All of the Phase I assessments have been conducted
since March 1997. All of the Phase I assessments met the ASTM Standard. Under
the ASTM Standard, a Phase I environmental site assessment consists of a site
visit, an historical record review, a review of regulatory agency data bases and
records, interviews, and a report, with the purpose of identifying potential
environmental concerns associated with real estate. The Phase I assessments
conducted at the Properties also addressed certain issues that are not covered
by the ASTM Standard, including asbestos, radon, lead-based paint and lead in
drinking water. These environmental site assessments did not reveal any known
environmental liability that the Company believes will have a material adverse
effect on the Company's financial condition or results of operations or would
represent a material environmental cost.
The following summarizes certain environmental issues described in the Phase I
environmental site assessment reports:
The asbestos surveys conducted as part of the Phase I site assessments
identified immaterial amounts of damaged, friable asbestos-containing material
("ACM") in isolated locations in three properties (470 Park Avenue South, 1140
Avenue of the Americas and 1372 Broadway). At each of these Properties, the
environmental consultant recommended abatement of the damaged, friable ACM and
this was completed by the Company at each of these properties. At all of the
Properties except 50 West 23rd Street, non-friable ACM, in good condition, was
identified. For each of these Properties, the consultant recommended preparation
and implementation of an asbestos Operations and Maintenance ("O & M") program,
to monitor the condition of ACM and to ensure that any ACM that becomes friable
and damaged is properly addressed and as of this date the Company has
implemented such an Operations and Maintenance program.
The Phase I environmental site assessments identified minor releases of
petroleum products at 70 West 36th Street. The consultant recommended
implementation of certain measures to further investigate, and to clean up,
these releases. The Company does not believe that any actions that may be
required as a result of these releases will have a material adverse effect on
the Company's business.
13
GENERAL TERMS OF LEASES IN THE MIDTOWN MARKETS
Leases entered into for space in the midtown markets typically contain terms
which may not be contained in leases in other U.S. office markets. The initial
term of leases entered into for space in excess of 10,000 square feet in the
midtown markets generally is ten to 15 years. The tenant often will negotiate an
option to extend the term of the lease for one or two renewal periods of five
years each. The base rent during the initial term often will provide for agreed
upon increases periodically over the term of the lease. Base rent for renewal
terms, and base rent for the final years of a long-term lease (in those leases
which do not provide an agreed upon rent during such final years), often is
based upon a percentage of the fair market rental value of the premises
(determined by binding arbitration in the event the landlord and the tenant are
unable to mutually agree upon the fair market value), but not less than the base
rent payable at the end of the prior period. Leases typically do not provide for
increases in rent based upon increases in the consumer price index.
In addition to base rent, the tenant also generally will pay the tenant's pro
rata share of increases in real estate taxes and operating expenses for the
building over a base year. In some leases, in lieu of paying additional rent
based upon increases in real estate taxes and building operating expenses, the
tenant will pay additional rent based upon increases in the wage rate paid to
porters over the porters' wage rate in effect during a base year.
Electricity is most often supplied by the landlord either on a submetered basis
or rent inclusion basis (i.e., a fixed fee is included in the rent for
electricity, which amount may increase based upon increases in electricity rates
or increases in electrical usage by the tenant). Base building services other
than electricity (such as heat, air conditioning and freight elevator service
during business hours, and base building cleaning) typically are provided at no
additional cost, with the tenant paying additional rent only for services which
exceed base building services or for services which are provided other than
during normal business hours. During the year ended December 31, 2000, the
Company was able to recover 83% of its electric costs.
In a typical lease for a new tenant, the landlord, at its expense, will deliver
the premises with all existing improvements demolished and any asbestos abated.
The landlord also typically will provide a tenant improvement allowance, which
is a fixed sum which the landlord will make available to the tenant to reimburse
the tenant for all or a portion of the tenant's initial construction of its
premises. Such sum typically is payable as work progresses, upon submission of
invoices for the cost of construction. However, in certain leases (most often
for relatively small amounts of space), the landlord will construct the premises
for the tenant.
MORTGAGE INDEBTEDNESS
The Company has outstanding approximately $414.3 million of indebtedness secured
by 14 of the Properties. Of this total, $387.4 million was fixed rate debt or
floating rate debt subject to a derivative instrument which effectively fixed
the interest rate (weighted average interest rate of 8.22%) and $26.9 million
was floating rate debt (weighted average interest rate of 8.32%). The mortgage
notes payable collateralized by the respective properties and assignment of
leases at December 31, 2000 are as follows (in thousands):
PROPERTY MORTGAGE NOTES 2000 1999
-------- -------------- ---- ----
50 West 23rd Street Note payable to GMAC with interest at 7.33% due
August 1, 2007........................................................ $21,000 $21,000
29 West 35th Street First mortgage note with interest payable at 8.46%, due
February 1, 2001...................................................... -- 2,825
673 First Avenue First mortgage note with interest payable at 9.0%, due
December 13, 2003..................................................... 11,992 14,740
470 Park Avenue South First mortgage note with interest payable at 8.25%, due
April 1, 2004......................................................... 9,771 10,153
1414 Avenue of Americas,
633 Third Avenue and First mortgage note with interest payable at 7.9%, due
70 West 36th Street May 1, 2009 ......................................................... 33,950 50,800
1412 Broadway First mortgage note with interest payable at 7.62%, due
May 1, 2006........................................................... 52,000 52,000
711 Third Avenue First mortgage note with interest payable at 8.13%, due
September 10, 2005.................................................... 49,172 49,225
875 Bridgeport Ave., First mortgage note with interest payable at 8.32%, due
Shelton, CT May 10, 2025.......................................................... 14,901 --
420 Lexington Avenue First mortgage note with interest payable at 8.44%, due
November 1, 2010...................................................... 125,000 --
14
555 West 57th Street First mortgage note with interest payable at 8.58%, due
November 4, 2004 (1) ................................................. 69,606 70,000
-------- --------
Total fixed rate debt.............................................. 387,392 270,743
-------- --------
420 Lexington Avenue First mortgage note with interest payable at 9.25%, due
May 21, 2001.......................................................... -- 55,000
Madison Properties First mortgage note with interest payable at 8.32%, due
May 31, 2001.......................................................... 26,950 26,950
-------- --------
Total floating rate debt........................................... 26,950 81,950
-------- --------
Total mortgage notes payable.......................................... $414,342 $352,693
======== ========
(1) The Company entered into an interest rate protection agreement which fixed
the LIBOR interest rate at 6.58% at December 31, 2000. If LIBOR exceeds
6.10%, the rate on the loan will float until the maximum rate of 6.58% is
reached.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 2000 the Company was not involved in any material litigation
nor, to management's knowledge, is any material litigation threatened against
them or their properties other than routine litigation arising in the ordinary
course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, no matter
was submitted to a vote of security holders.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company began trading on the New York Stock Exchange
("NYSE") on August 15, 1997 under the symbol "SLG". On February 21, 2001, the
reported closing sale price per share of Common Stock on the NYSE was $27.94 and
there were approximately 73 holders of record of the Company's Common Stock. The
table below sets forth the quarterly high and low closing sales prices of the
Common Stock on the NYSE and the distributions paid by the Company with respect
to the periods indicated.
QUARTER ENDED HIGH LOW DISTRIBUTIONS
------------- ---- --- -------------
March 31, 1999 $22.19 $17.75 $0.35
June 30, 1999 $22.25 $17.69 $0.35
September 30, 1999 $21.63 $19.50 $0.35
December 31, 1999 $22.00 $17.87 $0.3625
March 31, 2000 $23.54 $19.87 $0.3625
June 30, 2000 $26.60 $22.34 $0.3625
September 30, 2000 $29.59 $25.99 $0.3625
December 31, 2000 $30.00 $24.41 $0.3875
Dividends are declared during each quarter and the dividend is paid during the
subsequent quarter.
UNITS
At December 31, 2000 there were 2,307,515 units of limited partnership interest
of the Operating Partnership outstanding. These units received distributions per
unit in the same manner as dividends were distributed per share to common
stockholders.
SALE OF UNREGISTERED SECURITIES
The Company's issuance of securities in the transactions referenced below were
not registered under the Securities Act of 1933, pursuant to the exemption
contemplated by Section 4(2) thereof for transactions not involving a public
offering.
The Company issued 159,515 and 240,000 shares of its Common Stock in July 1998
and January 1999, respectively, for deferred stock-based compensation in
connection with employment contracts.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company, and on
an historical combined basis for the SL Green Predecessor (as defined below),
and should be read in conjunction with the Company's Financial Statements and
notes thereto included in Item 8, "Financial Statements and Supplementary Data"
and Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in this Form 10-K. The balance sheet information as of
December 31, 2000, 1999, 1998 and 1997 represents the consolidated balance sheet
of the Company and the statement of income for the years ended December 31,
2000, 1999 and 1998 and the period August 21, 1997 to December 31, 1997
represents consolidated results of the Company since the IPO. The combined
balance sheet information as of December 31, 1996, and statements of income for
the period January 1, 1997 to August 20, 1997 and for the year ended December
31, 1996, of the SL Green Predecessor have been derived from the historical
combined financial statements.
The "SL Green Predecessor" consisted of the assets, liabilities, and owners'
deficits and results of operations of two properties, 1414 Avenue of the
Americas and 70 West 36th Street, equity interests in four other properties, 673
First Avenue, 470 Park Avenue South, 29 West 35th Street and the Bar Building
(which interests are accounted for under the equity method) and of the assets,
liabilities and owners' equity and results of operations of the Company's
affiliated Service Corporation.
16
THE COMPANY AND THE SL GREEN PREDECESSOR
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THE COMPANY SL GREEN PREDECESSOR
---------------------------------------------- ----------------------------
AUGUST 21 - JANUARY 1 - YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, AUGUST 20, DECEMBER 31,
2000 1999 1998 1997 1997 1996
---- ---- ---- ---- ---- ----
Operating Data:
Total revenue ...................... $ 230,323 $ 206,017 $ 134,552 $ 23,207 $ 9,724 $ 10,182
--------- --------- --------- --------- --------- ---------
Property operating
expenses ......................... 67,304 62,168 45,207 7,077 2,722 3,197
Real estate taxes .................. 28,850 29,198 21,224 3,498 705 703
Interest ........................... 40,431 28,610 13,086 2,135 1,062 1,357
Depreciation and
amortization ..................... 32,511 27,260 15,404 2,815 811 975
Loss on terminated
project .......................... -- -- 1,065 -- -- --
Loss on hedge transaction .......... -- -- 176 -- -- --
Marketing, general and
administration ................... 11,561 10,922 5,760 948 2,189 3,250
--------- --------- --------- --------- --------- ---------
Total expenses ..................... 180,657 158,158 101,922 16,473 7,489 9,482
--------- --------- --------- --------- --------- ---------
Operating income ................... 49,666 47,859 32,630 6,734 2,235 700
Equity in net income (loss)
from affiliates .................. 378 730 387 (101) -- --
Equity in net income of
unconsolidated joint
ventures ......................... 3,108 377 -- -- -- --
Equity in net loss of
uncombined joint ventures ........ -- -- -- -- (770) (1,408)
--------- --------- --------- --------- --------- ---------
Income (loss) before minority
interest, extraordinary
items and gain on sale ........... 53,152 48,966 33,017 6,633 1,465 (708)
Minority interest .................. (7,430) (5,121) (3,043) (1,074) --
--------- --------- --------- --------- --------- ---------
Income (loss) before
extraordinary items and
gain on sale ..................... 45,722 43,845 29,974 5,559 1,465 (708)
Gain on sale of properties/
Preferred investments ............ 41,416 -- -- -- -- --
Extraordinary items (net of
minority interest) ............... (921) (989) (522) (1,874) 22,087 8,961
--------- --------- --------- --------- --------- ---------
Net income (loss) .................. 86,217 42,856 29,452 3,685 23,552 8,253
Preferred dividends and
accretion ........................ (9,626) (9,598) (5,970) -- -- --
--------- --------- --------- --------- --------- ---------
Income available to common
shareholders ..................... $ 76,591 $ 33,258 $ 23,482 $ 3,685 $ 23,552 $ 8,253
--------- --------- --------- --------- --------- ---------
Net income per common share
basic ............................ $ 3.14 $ 1.37 $ 1.19 $ 0.45
--------- --------- --------- ---------
Net income per common share
diluted .......................... $ 2.93 $ 1.37 $ 1.19 $ 0.30
--------- --------- --------- ---------
Cash dividends declared per
common share ..................... $ 1.475 $ 1.41 $ 1.40 $ 0.51
--------- --------- --------- ---------
Basic weighted average common
shares outstanding ........... 24,373 24,192 19,675 12,292
--------- --------- --------- ---------
Diluted weighted average
common share and common
share equivalents outstanding .... 31,818 26,680 22,145 12,404
--------- --------- --------- ---------
17
THE COMPANY SL GREEN PREDECESSOR
-------------------------------------------------------------- --------------------
DECEMBER 31,
------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Balance Sheet Data:
Commercial real estate,
before accumulated
depreciation .................... $ 895,810 $ 908,866 $ 697,061 $ 338,818 $ 26,284
Total assets .....1,161,154 ....... 1,071,242 777,796 382,775 30,072
Mortgages and notes payable ....... 460,716 435,693 162,162 128,820 16,610
Accrued interest payable .......... 2,349 2,650 494 552 90
Minority interest ................. 43,326 41,494 41,491 33,906 --
Stockholders' equity/owners'
(deficit) ....................... 455,073 406,104 404,826 176,208 (8,405)
THE COMPANY SL GREEN PREDECESSOR
------------------------------------------------------------ --------------------
YEAR ENDED YEAR ENDED YEAR ENDED AUGUST 21 - JANUARY 1 YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, AUGUST 20, DECEMBER 31,
2000 1999 1998 1997 1997 1996
---- ---- ---- ---- ---- ----
Other Data:
Funds from operations
after distributions
to preferred share-
holders (1) ................... $ 75,619 $ 62,645 $ 42,858 $ 9,355 $ -- $ --
Funds from operations
before distributions to
preferred shareholders(1) 84,819 71,845 48,578 9,355 -- --
Net cash provided by
operating activities .......... 53,806 48,013 22,665 5,713 2,838 272
Net cash (used in)
investing activities .......... (38,699) (228,678) (376,593) (217,165) (5,559) (12,375)
Net cash (used in) provided
by financing activities ....... (25,875) 195,990 347,382 224,234 2,782 11,960
-----------
(1) The White Paper on Funds from Operations ("FFO") approved by the
Board of Governors of the National Association of Real Estate
Investment Trusts ("NAREIT") in March 1995 defines FFO as net income
(loss) (computed in accordance with GAAP), excluding gains (or
losses) from debt restructuring and sales of properties and
significant non-recurring events that materially distort the
comparative measurement of the Company's performance over time, plus
real estate related depreciation and amortization and after
adjustments for unconsolidated partnerships and joint ventures. In
October 1999, NAREIT revised the definition of FFO to include
non-recurring events. This revised definition is effective for all
periods beginning on or after January 1, 2000. The Company believes
that FFO is helpful to investors as a measure of the performance of
an equity REIT because, along with cash flow from operating
activities, financing activities and investing activities, it
provides investors with an indication of the ability of the Company
to incur and service debt, to make capital expenditures and to fund
other cash needs. The Company computes FFO in accordance with the
current standards established by NAREIT which may not be comparable
to FFO reported by other REITs that do not define the term in
accordance with the current NAREIT definition or that interpret the
current NAREIT definition differently than the Company. FFO does not
represent cash generated from operating activities in accordance
with GAAP and should not be considered as an alternative to net
income (determined in accordance with GAAP) as an indication of the
Company's financial performance or to cash flow from operating
activities (determined in accordance with GAAP) as a measure of the
Company's liquidity, nor is it indicative of funds available for the
Company's cash needs, including its ability to make cash
distributions. For a reconciliation of net income and FFO, see
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Funds from Operations."
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
This report includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. All statements, other than statements of historical facts, included
in this report that address activities, events or developments that the Company
expects, believes or anticipates will or may occur in the future, including such
matters as future capital expenditures, dividends and acquisitions (including
the amount and nature thereof), expansion and other development trends of the
real estate industry, business strategies, expansion and growth of the Company's
operations and other such matters are forward-looking statements. These
statements are based on certain assumptions and analyses made by the Company in
light of its experience and its perception of historical trends, current
conditions, expected future developments and other factors it believes are
appropriate. Such statements are subject to a number of assumptions, risks and
uncertainties, general economic and business conditions, the business
opportunities that may be presented to and pursued by the Company, changes in
laws or regulations and other factors, many of which are beyond the control of
the Company. Any such statements are not guarantees of future performance and
actual results or developments may differ materially from those anticipated in
the forward-looking statements.
GENERAL
SL Green Realty Corp. (the "Company"), a Maryland corporation, and SL Green
Operating Partnership, L.P. (the "Operating Partnership"), a Delaware limited
partnership, were formed in June 1997 for the purpose of combining the
commercial real estate business of S.L. Green Properties, Inc. and its
affiliated partnerships and entities.
As of December 31, 2000, the Company's wholly-owned portfolio consisted of 19
Class B commercial properties encompassing approximately 6.7 million rentable
square feet located primarily in midtown Manhattan, a borough of New York City
("Manhattan") (the "Properties") and one triple-net leased property located in
Shelton, Connecticut. As of December 31, 2000, the weighted average occupancy
(total occupied square feet divided by total available square feet) of the
Properties was 99%. The Company's portfolio also includes ownership interests in
unconsolidated joint ventures which own four Class B commercial properties in
Manhattan, encompassing approximately 2.0 million rentable square feet (98%
occupied as of December 31, 2000). In addition, the Company continues to manage
four office properties owned by third-parties and affiliated companies
encompassing approximately 1.0 million rentable square feet.
The following discussion related to the consolidated financial statements of the
Company should be read in conjunction with the financial statements appearing in
Item 8.
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 2000 TO YEAR ENDED DECEMBER 31, 1999
The following comparison for the year ended December 31, 2000 ("2000") compared
to the year ended December 31, 1999 ("1999") makes reference to the following:
(i) the effect of the "Same-Store Properties," which represents all properties
owned by the Company at January 1, 1999, (ii) the effect of the "1999
Acquisitions," which represents all properties acquired in 1999, namely, 286,
290 and 292 Madison Avenue (May 1999) and 555 West 57th Street (November 1999),
and (iii) the effect of the "2000 Dispositions," which represents all properties
disposed of in 2000, namely, 29 West 35th Street (February 2000), 36 West 44th
Street (March 2000), and 321 West 44th Street (May 2000) which was contributed
to a joint venture.
$ %
RENTAL REVENUES (in millions) 2000 1999 Change Change
----------------------------------
Rental revenue $189.0 $174.9 $14.1 8.1%
Escalation and reimbursement
revenue 24.7 21.9 2.8 12.8
Signage revenue 2.1 1.7 0.4 23.5
----------------------------------
Total $215.8 $198.5 $17.3 8.7%
===========================-======
Same Store $163.8 $144.8 $19.0 13.1%
1999 Acquisitions 50.0 43.0 7.0 16.3
2000 Dispositions 2.0 10.7 (8.7) (81.3)
----------------------------------
Total $215.8 $198.5 $17.3 8.7%
----------------------------------
19
The increase in rental revenues was primarily due to an overall increase in
occupancy at the Properties from 98% in 1999 to 99% in 2000. In addition,
annualized replacement rents on previously occupied space at Same-Store
Properties and portfolio wide were 49% and 41% higher than previous fully
escalated rents, respectively.
The increase in escalation and reimbursement revenue was primarily due to the
recovery of higher utility costs ($2.6 million).
The increase in signage revenue is primarily attributable to 1466 Broadway ($0.4
million).
INVESTMENT AND OTHER INCOME $ %
(in millions) 2000 1999 Change Change
-----------------------------------------
Equity in net income of ..... $ 3.1 $ 0.4 $ 2.7 675.0%
unconsolidated joint ventures
Investment income ........... 13.3 5.3 8.0 150.9
Other ....................... 1.1 2.3 (1.2) (52.2)
-----------------------------------------
Total .................... $ 17.5 $ 8.0 $ 9.5 118.8%
==========================================
The increase in equity in net income of unconsolidated joint ventures is due to
the Company having two joint venture investments in 1999 comprising 1 million
square feet compared to four joint venture investments in 2000 comprising 2
million square feet. In addition, the Company has a larger average equity
interest in the joint ventures compared to the prior year. Occupancy at the
joint ventures increased from 94% in 1999 to 98% in 2000. Annualized rent and
annualized net effective rent per leased square foot has increased 17% and 18%,
respectively, over 1999 rates. The Company estimates that the difference between
existing in-place fully escalated rents and current market rents is
approximately 71.6%.
The increase in investment income primarily represents interest income from 2
Grand Central Tower ($8.4 million). The balance of the change in investment
income is due to investments in 1370 Avenue of the Americas ($1.7 million, which
includes $0.7 million interest prepayment in connection with its early
redemption), 17-29 West 44th Street ($0.7 million) and interest from excess cash
on hand ($1.0 million). This was offset by a decrease in investment income ($3.0
million) due to loans on 636 11th Avenue, 521 Fifth Avenue and 17 Battery Place
being repaid in 1999.
PROPERTY OPERATING EXPENSES $ %
(in millions) 2000 1999 Change Change
-----------------------------------------
Operating expenses
(excluding electric) 37.9 $ 35.5 $ 2.4 6.8%
Electric costs 16.7 13.9 2.8 20.1
Real estate taxes 28.9 29.2 (0.3) (1.0)
Ground rent 12.7 12.8 (0.1) (1.0)
-----------------------------------------
Total $ 96.2 $ 91.4 $ 4.8 5.3%
=========================================
Same Store $ 71.1 $ 66.2 $ 4.9 7.4%
1999 Acquisitions 23.1 20.1 3.0 14.9
2000 Dispositions 2.0 5.1 (3.1) (60.8)
-----------------------------------------
Total $ 96.2 $ 91.4 $ 4.8 5.3%
=========================================
The increase in operating expenses, excluding electricity, were primarily due to
higher fuel costs ($0.6 million), higher cleaning costs ($0.9 million) and
repairs and maintenance ($0.9 million).
The decrease in real estate taxes attributable to the 2000 Dispositions ($1.0
million) was partially offset by an increase in real estate taxes of $0.7
million due to the 1999 Acquisitions. Overall, real estate taxes have increased
due to increases in property assessments which were offset by a reduction in tax
rates over the prior year.
OTHER EXPENSES $ %
(in millions) 2000 1999 Change Change
-----------------------------------------
Interest expense $ 40.4 $ 28.6 $ 11.8 41.3%
Depreciation and
amortization expense . 32.5 27.3 5.2 19.1
Marketing, general and
administrative expense 11.6 10.9 0.7 6.4
-----------------------------------------
Total $ 84.5 $ 66.8 $ 17.7 26.5%
=========================================
Interest expense increased due to increased borrowings in 2000 compared to 1999.
In addition, the weighted average interest rate at December 31, 2000 was 8.2%
compared to 8.0% at December 31, 1999.
Depreciation and amortization increased primarily due to depreciation on
properties acquired and capital expenditures and tenant
20
improvements incurred during the periods.
Marketing, general and administrative expenses have decreased as a percentage of
total revenues, representing approximately 5.0% and 5.3% of total revenues for
2000 and 1999, respectively.
COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO YEAR ENDED DECEMBER 31, 1998
The following comparison for the year ended December 31, 1999 compared to the
year ended December 31, 1998 makes reference to the following: (i) the effect of
the "Same-Store Properties," which represents all properties owned by the
Company at January 1, 1998, (ii) the effect of the "1998 Acquisitions," which
represents all properties acquired in 1998, and (iii) the effect of the "1999
Acquisitions," which represents all properties acquired in 1999.
$ %
RENTAL REVENUES (in millions) 1999 1998 Change Change
---------------------------------------
Rental revenue $174.9 $114.9 $60.0 52.2%
Escalation and
reimbursement revenue 21.9 15.9 6.0 37.7
Signage revenue 1.7 0.1 1.6 1600.0
---------------------------------------
Total $198.5 $130.9 $67.6 51.6%
=======================================
Same Store $ 82.2 $ 76.9 $ 5.3 6.9%
1998 Acquisitions 88.1 54.0 34.1 63.1
1999 Acquisitions 28.2 --- 28.2 ---
---------------------------------------
Total $198.5 $130.9 $67.6 51.6%
=======================================
The increase in rental revenue is primarily attributable to the revenue
associated with the following: (i) Same-Store Properties which increased rental
revenue $5.5 million, (ii) the 1998 Acquisitions which increased rental revenue
by $30.0 million, and (iii) the 1999 Acquisitions which increased rental revenue
by $24.5 million.
The increase in escalation and reimbursement revenue is primarily attributable
to the revenue associated with the following: (i) the 1998 Acquisitions which
increased revenue by $2.7 million, and (ii) the 1999 Acquisitions which
increased revenue by $3.4 million, partially offset by the Same-Store Properties
which decreased revenue by $0.1 million.
The increase in signage revenue is primarily attributable to 1466 Broadway ($1.4
million) and 1414 Avenue of the Americas ($0.2 million).
INVESTMENT AND OTHER INCOME $ %
(in millions) 1999 1998 Change Change
--------------------------------------
Equity in net income of
unconsolidated joint
ventures $0.4 $ -- $0.4 --
Investment income 5.3 3.3 2.0 60.6%
Other 2.3 0.4 1.9 475.0
--------------------------------------
Total $8.0 $3.7 $4.3 116.2%
======================================
The investment income for 1999 primarily represents interest income from the 17
Battery Park mortgage ($0.7 million), 521 Fifth Avenue ($1.3 million), 636 11th
Avenue ($0.9 million), 1370 Avenue of the Americas ($1.6 million), interest on
other mortgage notes ($0.3 million) and interest from excess cash on hand ($0.5
million).
PROPERTY OPERATING EXPENSES $ %
(in million 1999 1998 Change Change
-------------------------------------
Operating expenses
(excluding electric) $35.5 $24.6 $10.9 44.3%
Electric costs 13.9 9.5 4.4 46.3
Real estate taxes 29.2 21.2 8.0 37.7
Ground rent 12.8 11.1 1.7 15.3
-------------------------------------
Total $91.4 $66.4 $25.0 37.7%
=====================================
Same Store $35.7 $35.1 $0.6 1.7%
1998 Acquisitions 43.0 31.3 11.7 37.4
1999 Acquisitions 12.7 --- 12.7 ---
-------------------------------------
Total $91.4 $66.4 $25.0 37.7%
=====================================
The increase in operating expenses was primarily attributable to: (i) Same-Store
Properties which increased operating expenses
21
by $0.9 million, (ii) the 1998 Acquisitions which increased operating expenses
by $5.7 million and (iii) the 1999 Acquisition properties which increased
operating expenses by $8.7 million.
The increase in real estate taxes is primarily attributable to: (i) the 1998
Acquisitions which increased real estate taxes by $4.3 million, and (ii) the
1999 Acquisitions which increased real estate taxes by $4.0 million, partially
offset by a decrease in real estate taxes at Same-Store Properties ($0.3
million) due to reduced tax rates.
This increase in ground rent primarily resulted from increases at 420 Lexington
Avenue ($1.2 million), and 711 Third Avenue ($0.5 million).
$ %
OTHER EXPENSES (in millions) 1999 1998 Change Change
----------------------------------
Interest expense $28.6 $13.1 $15.5 118.3%
Depreciation and
amortization expense 27.3 15.4 11.9 77.3
Marketing, general and
administrative expense 10.9 5.8 5.1 87.8
----------------------------------
Total $66.8 $34.3 $32.5 94.8%
==================================
The increase in interest expense is primarily attributable to: (i) Same-Store
Properties ($2.6 million) as new secured mortgage financing was placed on assets
in this portfolio, (ii) 1998 Acquisitions ($6.8 million) due to financing placed
on 420 Lexington Avenue, 711 Third Avenue and 1412 Broadway, (iii) 1999
Acquisitions ($5.0 million) due to mortgage financing associated with these
purchases and (iv) $1.1 million higher interest expense at the corporate level.
The increase in depreciation and amortization is primarily attributable to: (i)
Same-Store Properties which increased depreciation by $1.3 million, (ii) the
1998 Acquisitions which increased depreciation by $6.4 million, (iii) the 1999
Acquisitions which increased depreciation by $3.2 million, and (iv) an increase
in the amortization of deferred finance costs totaling $1.0 million associated
with fees incurred on the Company's 1999 secured mortgage financings.
The increase in marketing, general and administrative is primarily due to
increased personnel costs associated with the Company's recent growth ($3.3
million) and increased public entity and technology costs ($0.9 million).
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Net cash provided by operating activities increased $5.8 million to $53.8
million for the year ended December 31, 2000 compared to $48.0 million for the
year ended December 31, 1999. The increase was due primarily to operating cash
flow generated by the Same-Store Properties and 1999 Acquisitions which was
partially offset by the decrease in operating cash flow from the 2000
Dispositions. Net cash used in investing activities decreased $190.0 million to
$38.7 million for the year ended December 31, 2000 compared to $228.7 million
for the year ended December 31, 1999. The decrease was due primarily to the
lower dollar volume of acquisitions of wholly-owned properties and capital
improvements in 2000 ($16.6 million and $38.9 million, respectively) as compared
to 1999 ($133.5 million and $45.2 million, respectively). In addition, the
Company had a $50.2 million acquisition deposit held in an escrow account for a
transaction which closed in January 2001. The net increase in investment in
unconsolidated joint ventures ($32.6 million) and mortgage loans ($34.2 million)
was partially offset by the proceeds from the dispositions of 29 West 35th
Street, 36 West 44th Street, 321 West 44th Street, 17 Battery Place South and
our interest in 1370 Avenue of the Americas, totaling $121.1 million and
distributions from the joint ventures ($25.6 million). Net cash provided by
financing activities decreased $221.9 million to $(25.9) million for the year
ended December 31, 2000 compared to $196.0 million for the year ended December
31, 1999. The decrease was primarily due to lower borrowing requirements ($64.3
million) due to lower volume of acquisitions, and higher debt repayments ($160.0
million).
Net cash provided by operating activities increased $25.3 million to $48.0
million for the year ended December 31, 1999 compared to $22.7 million for the
year ended December 31, 1998. The increase was due primarily to the operating
cash flow generated by the Same-Store Properties, 1998 Acquisitions and 1999
Acquisitions as a result of higher occupancy rates, rents which have been marked
to market and flat property operating expense trends and an increase in
investment income. Net cash used in investing activities decreased $147.9
million to $228.7 million for the year ended December 31, 1999 compared to
$376.6 million for the year ended December 31, 1998. The decrease was due
primarily to the decreased amount of property acquisitions in 1999 ($223
million) as compared to the amount of property acquisitions in 1998 ($357
million). Net cash provided by financing activities decreased $151.4 million to
$196.0 million for the year ended December 31, 1999 compared to $347.4 million
provided by financing activities for the year ended December 31, 1998. The
decrease was primarily due to net
22
proceeds from the Company's 1998 public offerings of common stock ($242.1
million) and preferred stock ($109.7 million) which were used to pay-off the
Company's Acquisition Facility ($240 million) and purchase certain 1998
acquisitions as well as an increase in the dividends and distributions paid
($14.3 million).
CAPITALIZATION
On February 16, 2000, the Board of Directors of the Company authorized a
dividend distribution of one preferred share purchase right ("Right") for each
outstanding share of common stock under a shareholder rights plan. This dividend
was distributed to all holders of record of the common stock on September 30,
2000. Each Right entitles the registered holder to purchase from the Company one
one-hundredth of a share of Series B junior participating preferred stock, par
value $0.01 per share ("Preferred Shares"), at a price of $60.00 per one
one-hundredth of a Preferred Share ("Purchase Price"), subject to adjustment as
provided in the rights agreement. The Rights expire on March 5, 2010, unless the
expiration date is extended or the Right is redeemed or exchanged earlier by the
Company.
The Rights are attached to each share of common stock. The rights are generally
exercisable only if a person or group becomes the beneficial owner of 17% or
more of the outstanding common stock or announces a tender offer for 17% or more
of the outstanding stock ("Acquiring Person"). In the event that a person or
group becomes an Acquiring Person, each holder of a Right, excluding the
Acquiring Person, will have the right to receive, upon exercise, common stock
having a market value equal to two times the Purchase Price of the Preferred
Shares.
The Company has an effective shelf registration with the SEC for an aggregate
amount of $400 million in equity securities and preferred stock of the Company.
At December 31, 2000, borrowings under the mortgage loans and credit facilities,
(excluding our share of joint venture debt of $115.8 million), represented
34.72% of the Company's market capitalization based on a total market
capitalization (debt and equity including preferred stock), assuming conversion
of all operating partnership units, of $1.33 billion (based on a common stock
price of $28.00 per share, the closing price of the Company's common stock on
the New York Stock Exchange on December 31, 2000).
The tables below summarize the Company's mortgage debt and line of credit
indebtedness outstanding at December 31, 2000 and 1999, respectively (in
thousands).
December 31,
2000 1999
-------- -----------
DEBT SUMMARY:
BALANCE
Fixed rate ............................. $317,786 $ 145,743
Variable rate - hedged ................. 69,606 125,000
-------- -----------
Total fixed rate .................... 387,392 270,743
-------- -----------
Variable rate .......................... 49,950 164,950
Variable rate-supporting variable
rate assets ............................ 23,374 --
-------- -----------
Total variable rate ................. 73,324 164,950
-------- -----------
Total .................................. $460,716 $ 435,693
======== ===========
PERCENT OF TOTAL DEBT:
Total fixed rate .................... 84.08% 62.00%
Variable rate ....................... 15.92% 38.00%
-------- -----------
Total .................................. 100.00% 100.00%
======== ===========
EFFECTIVE INTEREST RATE AT END OF PERIOD
Total fixed rate .................... 8.22% 7.97%
Variable rate ....................... 8.20% 8.08%
-------- -----------
Effective interest rate ................ 8.21% 8.01%
======== ===========
A majority of the variable rate debt shown above bears interest at an interest
rate based on LIBOR (6.82% at December 31, 2000). Variable rate debt, net of the
variable rate debt supporting variable rate assets, constitutes 10.8% of total
debt outstanding. The Company's total debt at December 31, 2000 had a weighted
average term to maturity of approximately 6.32 years.
23
As of December 31, 2000, the Company has two mortgage loans receivable. The
first loan, which has a face value of $51.9 million and matures on September 30,
2001, carries a weighted average interest rate of 793 basis points over the
30-day LIBOR. The second loan, which has a face value of $2.4 million and
matures on April 16, 2001, carries a 400 basis point spread over the 30-day
LIBOR. These variable rate mortgage loans receivable mitigate the Company's
exposure to interest rate changes on its unhedged variable rate debt.
MORTGAGE FINANCING
As of December 31, 2000, the Company's total mortgage debt (excluding the
Company's share of unconsolidated debt of approximately $115.8 million)
consisted of approximately $387.4 million of fixed rate debt with an effective
interest rate of approximately 8.22% and $26.9 million of variable rate debt
with an effective interest rate of 8.32%. The Company's mortgage debt at
December 31, 2000, encumbering 14 properties, will mature as follows (in
thousands):
Scheduled Principal
Amortization Repayments Total
------------ ---------- -----
2001................................................. $ 5,387 $ 26,950 $32,337
2002................................................. 7,770 --- 7,770
2003................................................. 8,694 2,003 10,697
2004................................................. 4,857 75,300 80,157
2005................................................. 4,440 47,247 51,687
Thereafter........................................... 25,167 206,527 231,694
------ ------- -------
Total................................ $ 56,315 $358,027 $ 414,342
======== ======== ========
On October 2, 2000, the Company obtained a $125.0 million mortgage encumbering
the property located at 420 Lexington Avenue. The 8.44% fixed rate loan has a 10
year term. Interest only is payable for the first 12 months. The proceeds were
used to repay the $55 million loan on the property which bore interest at 9.25%
at December 31, 1999 and was due to mature on May 21, 2001. The balance of the
proceeds was used to pay down the $250 Million Credit Facility (see below).
The $26.9 million mortgage encumbering the properties located at 286, 290 and
292 Madison Avenue was extended for one year to May 31, 2001. This extension was
done in order to match the term of this financing and availability to add these
properties to the unencumbered asset pool which collateralizes the Company's
$250 Million Credit Facility. This credit facility had not yet closed at the
time of this term financing expiration. On January 16, 2001, the Company repaid
the mortgage encumbering 290 Madison Avenue. The remaining balance on this note
was repaid on February 21, 2001 with proceeds from the $250 Million Credit
Facility (see below). In February 2001, the bank group approved the addition of
286 and 292 Madison Avenue to the unencumbered asset pool.
$250 MILLION CREDIT FACILITY
On June 27, 2000, the Company repaid in full and terminated the $140 Million
Credit Facility (see below) and obtained a new senior unsecured revolving credit
facility in the amount of $250.0 million (the "$250 Million Credit Facility")
from a group of 9 lender banks. The $250 Million Credit Facility has a term of
three years and bears interest at a spread ranging from 137.5 basis points to
175 basis points over LIBOR, based on the Company's leverage ratio. If the
Company receives an investment grade rating, the spread over LIBOR will be
reduced to 125 basis points. The Company has the ability to upsize this credit
facility to $300.0 million. At December 31, 2000, $23.0 million was outstanding
and carried an interest rate of 8.17 percent. Availability under the $250
Million Credit Facility at December 31, 2000 was further reduced by the issuance
of letters of credit in the amount of $21.0 million for acquisition deposits. On
February 9, 2001, $123.0 million was outstanding under the facility. The Company
is currently negotiating with the bank group to upsize the facility to $300.0
million. This upsizing is expected to close in the second quarter 2001.
The terms of the $250 Million Credit Facility include certain restrictions and
covenants which limit, among other things, the payment of dividends (as
discussed below), the incurrence of additional indebtedness, the incurrence of
liens and the disposition of assets, and which require compliance with financial
ratios relating to the minimum amount of tangible net worth, the minimum amount
of debt service coverage, the minimum amount of fixed charge coverage, the
minimum amount of unsecured indebtedness, the minimum amount of unencumbered
property debt service coverage and certain investment limitations. The dividend
restriction referred to above provides that, except to enable the Company to
continue to qualify as a REIT under the Code, the Company will not during any
four consecutive fiscal quarters make distributions with respect to common stock
or other equity interests in an aggregate amount in excess of 90 percent of
funds from operations for such period, subject to certain other adjustments. The
$250 Million Credit Facility also requires a 15 to 25 basis point fee on the
unused balance payable quarterly in arrears.
24
The lending group for the $250 Million Credit Facility consists of Fleet
National Bank, NA, as administrative agent, Citibank/Salomon Smith Barney, Inc,
as syndication agent, Deutsche Banc Alex Brown, as documentation agent,
Commerzbank Aktiengesellschaft, New York Branch, The Bank of New York, Wells
Fargo Bank, N.A., Bank Leumi USA, PNCBank, N.A., and Key Bank, N.A.
$140 MILLION CREDIT FACILITY
The $140 million unsecured credit facility was repaid in full and retired in
June 2000 in connection with the Company obtaining the $250 Million Credit
Facility, as described above. The Company recorded a $430,000 extraordinary
loss, net of the minority interest's share of the loss ($38,000) for the early
extinguishment of debt related to the write-off of unamortized financing costs
associated with the $140 Million Credit Facility.
PSCC FACILITY
On December 28, 1999, the Company closed on a $30 million credit facility with
Prudential Securities Credit Corp. ("PSCC"). The borrowing capacity was $15
million of which none was drawn down at December 31, 1999. The PSCC Facility was
secured by the Company's preferred equity interest in 1370 Avenue of the
Americas and a repurchase mortgage participation interest in the mortgage at 420
Lexington Avenue. On March 30, 2000, PSCC increased the secured PSCC Facility by
$20 million to $50 million. No other terms were changed from the original $30
million secured PSCC Facility. Interest-only is payable based on the 1-Month
LIBOR plus 125 basis points. The PSCC Facility may be prepaid at any time during
its term without penalty. The PSCC Facility, which was to mature on December 27,
2000, was extended for one year. At that time, the PSCC Facility was increased
to $60 million.
At December 31, 2000, the Company had $23.4 million outstanding under its PSCC
Facility (interest rate of 8.07 percent). The PSCC Facility is secured by the
$51.9 million in mortgage loans receivable on 2 Grand Central Tower.
CAPITAL EXPENDITURES
The Company estimates that for the year ending December 31, 2001, it will incur
approximately $34.7 million of capital expenditures (including tenant
improvements) on properties currently owned. Of that total, over $12.6 million
of the capital investments are dedicated to redevelopment costs, including local
law 11, associated with properties acquired at or after the Company's IPO. The
Company expects to fund these capital expenditures with the credit facility,
additional property level mortgage financings, operating cash flow and cash on
hand. Future property acquisitions may require substantial capital investments
in such properties for refurbishment and leasing costs. The Company expects that
these financing requirements will be met in a similar fashion. The Company
believes that it will have sufficient capital resources to satisfy its
obligations during the next 12 month period. Thereafter, the Company expects
that capital needs will be met through a combination of net cash provided by
operations, borrowings, potential asset sales or additional equity or debt
issuances.
DISTRIBUTIONS
The Company expects to make distributions to its stockholders primarily based on
its distributions received from the Operating Partnership primarily from
property revenues or, if necessary, from working capital or borrowings.
To maintain its qualification as a REIT, the Company must make annual
distributions to its stockholders of at least 95 percent (90 percent effective
January 1, 2001) of its REIT taxable income, determined without regard to the
dividends paid deduction and by excluding net capital gains. Moreover, the
Company intends to continue to make regular quarterly distributions to its
stockholders which, based upon current policy, in the aggregate would equal
approximately $38.0 million on an annualized basis. However, any such
distribution, whether for Federal income tax purposes or otherwise, would only
be paid out of available cash after meeting both operating requirements and
scheduled debt service on mortgages and loans payable.
TECHNOLOGY INVESTMENTS AND ALLIANCES
Through December 31, 2000, the Company had received 476,705 warrants from Onsite
Access Inc. ("Onsite") in exchange for providing Onsite with access to its
portfolio of properties. This arrangement provides certain marketing preferences
to Onsite in exchange for which the Company will receive a share in the revenues
of the service provider. The Company is also entitled to receive up to an
additional 405,648 warrants based on the terms of the Warrant Issuance
Agreement. Onsite provides comprehensive communications solutions for small and
medium-sized business customers in multi-tenant commercial office buildings. The
warrants had an estimated fair value of $306,000 at date of issuance. This was
recorded as Deferred Revenue at December 31, 1999 and will be amortized over the
term of the agreement. The warrants are held in an LLC of which the Company owns
a 75 percent managing member interest, and the remaining interest is held by
certain members of management.
25
On March 29, 2000, the Company entered into an agreement with Broadband Office,
Inc. ("Broadband") to provide telecommunication and internet services to its
tenants. In exchange for providing Broadband with access to tenants at some of
the Company's properties, the Company received 164,000 shares of common stock
with a fair value of $235,000 on that date.
Through December 2000, the Company made a $1.5 million limited partnership
investment in Internet Realty Partners, L.P. ("IRP"). The Company is committed
to fund an additional $0.5 million. IRP invests in real estate-related internet,
technology and e-commerce companies.
On June 6, 2000, the Company entered into a marketing and cooperation agreement
with Eureka to provide telecommunication and internet services to its tenants.
In exchange for providing Eureka with access to tenants at some of the Company's
properties, the Company will receive warrants based on the square footage of
property provided. As of December 31, 2000, 58,000 warrants had been received.
Such warrants had no value at December 31, 2000.
On August 22, 2000, the Company entered into an agreement with Verticore
Communications Ltd. ("Verticore") to participate in the elevator news network
program. In exchange for providing Verticore with access to the Company's
properties, the Company will receive warrants based on the number of qualifying
elevator cabs. As of December 31, 2000, 195,000 warrants had been received by
the Company. Such warrants had no value at December 31, 2000. In addition, the
Company made a $750,000 capital investment in exchange for 150,000 shares of
Series 2 Class C Convertible Preferred Stock of Verticore.
FUNDS FROM OPERATIONS
The White Paper on FFO approved by the Board of Governors of NAREIT in March
1995 defines FFO as net income (loss) (computed in accordance with GAAP),
excluding gains (or losses) from debt restructuring and sales of properties and
significant non-recurring events that materially distort the comparative
measurement of the Company's performance over time, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. In October 1999, NAREIT revised the definition
of FFO to include non-recurring events. This revised definition is effective for
all periods beginning on or after January 1, 2000. The Company believes that FFO
is helpful to investors as a measure of the performance of an equity REIT
because, along with cash flow from operating activities, financing activities
and investing activities, it provides investors with an indication of the
ability of the Company to incur and service debt, to make capital expenditures
and to fund other cash needs. The Company computes FFO in accordance with the
current standards established by NAREIT which may not be comparable to FFO
reported by other REITs that do not define the term in accordance with the
current NAREIT definition or that interpret the current NAREIT definition
differently than the Company. FFO does not represent cash generated from
operating activities in accordance with GAAP and should not be considered as an
alternative to net income (determined in accordance with GAAP) as an indication
of the Company's financial performance or to cash flow from operating activities
(determined in accordance with GAAP) as a measure of the Company's liquidity,
nor is it indicative of funds available to fund the Company's cash needs,
including its ability to make cash distributions.
Funds from Operations for the years ended December 31, 2000, 1999 and 1998 on a
historical basis, are as follows (in thousands):
Year ended
December 31
-------------------------------------------
2000 1999 1998
---- ---- ----
Income before minority interest, extraordinary
item, gain on sales and preferred stock dividends...... $ 53,152 $ 48,966 $33,017
Add:
Depreciation and amortization ......................... 32,511 27,260 15,404
Loss on hedge transaction.............................. -- -- 176
Loss on terminated transaction......................... -- -- 1,065
FFO adjustment for unconsolidated joint ventures....... 3,258 433 --
Less:
Dividends on preferred shares.......................... (9,200) (9,200) (5,720)
Minority interest in the BMW Building.................. -- (1,765) --
Amortization of deferred financing costs and
depreciation of non-rental real estate assets........ (4,102) (3,049) (1,084)
-------- --------- ---------
Funds From Operations ................................... $ 75,619 $ 62,645 $ 42,858
======== ========= =========
Cash flows provided by operating activities.............. $ 53,806 $ 48,103 $22,665
Cash flows used in investing activities.................. $(38,699) $(228,678) $(376,593)
Cash flows (used in) provided by financing activities.... $(25,875) $ 195,990 $ 347,382
26
In compliance with the White Paper issued by NAREIT in March 1995, the Company
has excluded a loss from a hedge transaction ($176,000) and loss on terminated
transaction ($1.1 million) from the calculation of FFO in 1998. The Company
believes these transactions are non-recurring in nature based on the Company's
operating history of not entering into these types of transactions and,
therefore, are non-recurring and would materially distort the Company's
performance if included in the calculation of FFO. In accordance with the
revised White Paper issued by NAREIT in October 1999, these transactions would
be included in the calculation of FFO.
INFLATION
Substantially all of the office leases provide for separate real estate tax and
operating expense escalations over a base amount. In addition, many of the
leases provide for fixed base rent increases or indexed escalations. The Company
believes that inflationary increases may be at least partially offset by the
contractual rent increases and expense escalations described above.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities," effective January 1, 2001. The Statement requires the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged asset, liability, or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company will record a cumulative effect
adjustment upon the adoption of this Statement. This adjustment, of which the
intrinsic value of the hedge will be recorded in other comprehensive income
($811,000) and the time value component will be recorded in the statement of
operations ($483,667), will be an unrealized loss of $1.3 million. This
cumulative effect adjustment will have no impact on FFO. The transition amounts
were determined based on the interpretive guidance issued by the Financial
Accounting Standards Board to date. The FASB continues to issue interpretive
guidance that could require changes in the Company's application of the standard
and adjustments to the transition amounts. SFAS No. 133 may increase or decrease
reported net income and stockholders' equity prospectively, depending on future
levels of interest rates and other variables affecting the fair values of
derivative instruments and hedged items, but will have no effect on cash flows.
The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
(SAB) 101, "Revenue Recognition in Financial Statements," in December 1999. The
SAB summarizes certain of the SEC staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. In June
2000, the SEC issued SAB 101B, which delays the implementation date of SAB 101
until no later than the fourth fiscal quarter of fiscal years beginning after
December 15, 1999. The adoption of this SAB did not have a significant impact on
the Company's financial statements.
ITEM 7A. MARKET RISK AND RISK MANAGEMENT POLICIES
The Company is exposed to changes in interest rates primarily from its floating
rate debt arrangements. The Company uses interest rate derivative instruments to
manage exposure to interest rate changes. A hypothetical 100 basis point adverse
move (increase) in interest rates along the entire interest rate curve would
adversely affect the Company's annual interest cost by approximately $1.1
million annually.
The Company may enter into derivative financial instruments such as interest
rate swaps and interest rate collars in order to mitigate its interest rate risk
on a related financial instrument. The Company may designate these derivative
financial instruments as hedges and apply deferral accounting. Gains and losses
related to the termination of such derivative financial instruments are deferred
and amortized to interest expense over the term of the debt instrument. The
Company may also utilize interest rate contracts to hedge interest rate risk on
anticipated debt offerings. These anticipatory hedges are designated as
effective hedges for identified debt issuances which have a high probability of
occurring. Gains and losses resulting from changes in the market value of these
contracts are deferred and amortized into interest expense over the life of the
related debt instrument. The cost of hedges determined to be ineffective and
hedges not correlated to financings are charged to operations.
Approximately $387.4 million of the Company's long-term debt bears interest at
fixed rates, and therefore the fair value of these instruments is affected by
changes in the market interest rates. The following table presents principal
cash flows (in thousands) based upon maturity dates of the debt obligations and
the related weighted-average interest rates by expected maturity dates for the
fixed rate debt. The interest rate on the variable rate debt as of December 31,
2000 ranged from LIBOR plus 125 basis points to LIBOR plus 150 basis points.
27
LONG-TERM DEBT,
INCLUDING CURRENT .... FAIR
PORTION (IN THOUSANDS) 2001 2002 2003 2004 2005 THEREAFTER TOTAL VALUE
---------------------- ---------- --------- ---------- ------- ------- ----------- -------- --------
Fixed Rate ........... $ 5,387 $ 7,770 $ 10,697 $80,157 $51,687 $ 231,694 $387,392 $388,327
Average Interest Rate 8.21% 8.20% 8.19% 8.10% 8.10% 8.33% 8.29%
Variable Rate ........ $ 50,324 -- $ 23,000 -- -- -- $ 73,324 $ 73,324
Average Interest Rate 8.19% 8.17% 8.19%
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
SL GREEN REALTY CORP
Report of Independent Auditors........................................................................... 30
Consolidated Balance Sheets as of December 31, 2000 and 1999............................................. 31
Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998................... 32
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998..... 33
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998............... 34
Notes to Consolidated Financial Statements .............................................................. 35
Schedule
Schedule III Real Estate and Accumulated Depreciation as of December 31, 2000 ........................... 58
29
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
SL Green Realty Corp.
We have audited the accompanying consolidated balance sheets of SL Green Realty
Corp. as of December 31, 2000 and 1999, and the related consolidated statements
of income, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2000. Our audits also included the financial
statement schedule listed in the Index as Item 14(a)(2). These financial
statements and schedule are the responsibility of SL Green Realty Corp.'s
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SL Green Realty
Corp. at December 31, 2000 and 1999, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
/s/ Ernst & Young LLP
New York, New York
February 5, 2001
30
SL GREEN REALTY CORP.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
December 31,
2000 1999
----------- -----------
ASSETS
Commercial real estate properties, at cost:
Land and land interests ............................................................................ $ 125,572 $ 132,081
Buildings and improvements ......................................................................... 618,637 632,004
Building leasehold ................................................................................. 139,393 132,573
Property under capital lease ....................................................................... 12,208 12,208
----------- -----------
895,810 908,866
Less accumulated depreciation ...................................................................... (78,432) (56,983)
----------- -----------
817,378 851,883
Properties held for sale ........................................................................... 10,895 25,835
Cash and cash equivalents .......................................................................... 10,793 21,561
Restricted cash .................................................................................... 86,823 34,168
Tenant and other receivables, net of allowance of $1,723 and $938 in 2000 and 1999, respectively ... 7,580 5,747
Related party receivables .......................................................................... 917 463
Deferred rents receivable, net of allowance for tenant credit loss of $4,860 and $5,337 in 2000
and 1999, respectively ........................................................................... 45,816 37,015
Investment in and advances to affiliates ........................................................... 6,373 4,978
Mortgage loans receivable and preferred equity investment, net of $3,321 discount in 2000 .......... 51,293 20,000
Investments in unconsolidated joint ventures ....................................................... 65,031 23,441
Deferred costs, net ................................................................................ 40,113 30,540
Other assets ....................................................................................... 18,142 15,611
----------- -----------
Total assets ................................................................................. $ 1,161,154 $ 1,071,242
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable ............................................................................. $ 414,342 $ 352,693
Revolving credit facilities ........................................................................ 46,374 83,000
Accrued interest payable ........................................................................... 2,349 2,650
Accounts payable and accrued expenses .............................................................. 24,818 17,167
Deferred compensation awards ....................................................................... 2,833 --
Deferred revenue ................................................................................... 1,112 306
Capitalized lease obligations ...................................................................... 15,303 15,017
Deferred land lease payable ........................................................................ 13,158 11,611
Dividend and distributions payable ................................................................. 12,678 11,947
Security deposits .................................................................................. 19,014 18,905
----------- -----------
Total liabilities ........................................................................... 551,981 513,296
Commitments and Contingencies
Minority interest in Operating Partnership ......................................................... 43,326 41,494
8% Preferred Income Equity Redeemable SharesSM $0.01 par value
$25.00 mandatory liquidation preference, 25,000 authorized and 4,600
outstanding at December 31, 2000 and 1999 ....................................................... 110,774 110,348
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value 100,000 shares
authorized, 24,516 and 24,184 issued and outstanding at December 31, 2000 and 1999, respectively 246 242
Additional paid - in-capital ....................................................................... 428,698 421,958
Deferred compensation plans ........................................................................ (5,037) (6,610)
Officers' loans, net ............................................................................... -- (64)
Retained earnings/(distributions in excess of earnings) ............................................ 31,166 (9,422)
----------- -----------
Total stockholders' equity .................................................................. 455,073 406,104
----------- -----------
Total liabilities and stockholders' equity ......................................................... $ 1,161,154 $ 1,071,242
=========== ===========
The accompanying notes are an integral part of these financial statements.
31
SL GREEN REALTY CORP.
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
SL Green Realty Corp.
-----------------------------------
Years ended December 31,
2000 1999 1998
--------- --------- ---------
REVENUES
Rental revenue ........................................... $ 189,048 $ 174,939 $ 114,884
Escalation and reimbursement revenues .................... 24,732 21,902 15,923
Signage rent ............................................. 2,137 1,660 100
Investment income ........................................ 13,271 5,266 3,267
Other income ............................................. 1,135 2,250 378
--------- --------- ---------
Total revenues ........................................ 230,323 206,017 134,552
--------- --------- ---------
EXPENSES
Operating expenses including $4,644 (2000),
$4,707(1999), and $2,118 (1998), to affiliates ......... 54,644 49,414 34,125
Real estate taxes ........................................ 28,850 29,198 21,224
Ground rent .............................................. 12,660 12,754 11,082
Interest ................................................. 40,431 28,610 13,086
Depreciation and amortization ............................ 32,511 27,260 15,404
Loss on terminated project ............................... -- -- 1,065
Loss on hedge transaction ................................ -- -- 176
Marketing, general and administrative .................... 11,561 10,922 5,760
--------- --------- ---------
Total expenses ........................................ 180,657 158,158 101,922
--------- --------- ---------
Income before equity in net income from affiliates,
equity in net income of unconsolidated joint
ventures, gain on sale, minority interest and
extraordinary items .................................... 49,666 47,859 32,630
Equity in net income from affiliates ..................... 378 730 387
Equity in net income of unconsolidated joint ventures .... 3,108 377 --
Equity in net gain on sale of joint venture property ..... 6,025 -- --
Gain on sale of rental property/preferred investment ..... 35,391 -- --
Minority interest:
Operating partnership .................................. (7,430) (3,356) (3,043)
Partially owned properties ............................. -- (1,765) --
Extraordinary items, net of minority interest of $81, $90,
and $52 in 2000, 1999, and 1998, respectively .......... (921) (989) (522)
--------- --------- ---------
Net income ............................................... 86,217 42,856 29,452
Preferred stock dividends ................................ (9,200) (9,200) (5,720)
Preferred stock accretion ................................ (426) (398) (250)
--------- --------- ---------
Net income available to common shareholders ............ $ 76,591 $ 33,258 $ 23,482
========= ========= =========
BASIC EARNINGS PER SHARE:
Net income before gain on sale and extraordinary item ... $ 1.48 $ 1.41 $ 1.22
Gain on sales ........................................... 1.70 -- --
Extraordinary items ..................................... (0.04) (0.04) (0.03)
--------- --------- ---------
Net income ................................................. $ 3.14 $ 1.37 $ 1.19
========= ========= =========
DILUTED EARNINGS PER SHARE:
Net income before gain on sale and extraordinary item ... $ 1.66 $ 1.41 $ 1.22
Gain on sales ........................................... 1.30 -- --
Extraordinary items ..................................... (0.03) (0.04) (0.03)
--------- --------- ---------
Net income ................................................. $ 2.93 $ 1.37 $ 1.19
========= ========= =========
Basic weighted average common shares outstanding ......... 24,373 24,192 19,675
========= ========= =========
Diluted weighted average common shares and common
share equivalents outstanding ....................... 31,818 26,680 22,145
========= ========= =========
The accompanying notes are an integral part of these financial statements.
32
SL GREEN REALTY CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Retained Earnings/
Additional Deferred (Distributions In
Common Paid-In Compensation Officers' Excess of
Stock Capital Plan Loans Earnings) Total
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 ....... $ 123 $ 178,669 -- -- $ (2,584) $ 176,208
Net income ......................... -- -- -- -- 29,452 29,452
Preferred dividend and accretion
requirement ........................ -- -- -- -- (5,970) (5,970)
Issuance of common stock net
offering cost ($1,615) and
revaluation increase in minority
interest ($6,934) .................. 115 234,709 -- -- -- 234,824
Deferred compensation plan ......... 2 3,561 $ (3,563) -- -- --
Amortization of deferred
compensation plan .................. -- -- 297 -- -- 297
Cash distributions declared ($1.40
per common share of which none
represented a return of capital for
federal income tax
purposes) .......................... -- -- -- -- (29,457) (29,457)
Amortization of officers' loans .... -- -- $ (528) -- (528)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1998 ....... 240 416,939 (3,266) (528) (8,559) 404,826
Net income ......................... -- -- -- -- 42,856 42,856
Preferred dividend and accretion
requirement ........................ -- -- -- -- (9,598) (9,598)
Deferred compensation plan and stock
award .............................. 2 5,019 (4,771) -- -- 250
Amortization of deferred
compensation plan .................. -- -- 1,427 -- -- 1,427
Cash distributions declared ($1.41
per common share of which $0.10
represented a return of capital for
federal income tax purposes) ....... -- -- -- -- (34,121) (34,121)
Amortization of officers' loans .... -- -- -- 464 -- 464
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1999 ....... 242 421,958 (6,610) (64) (9,422) 406,104
Net income ......................... -- -- -- -- 86,217 86,217
Preferred dividend and accretion
requirement ........................ -- -- -- -- (9,626) (9,626)
Deferred compensation plan and stock
award .............................. -- 253 6 -- -- 259
Amortization of deferred
compensation plan .................. -- -- 1,567 -- -- 1,567
Redemption of units ................ 1 2,128 -- -- -- 2,129
Proceeds from options exercised .... 3 4,359 -- -- -- 4,362
Cash distributions declared ($1.475
per common share of which none
represented a return of capital for
federal income tax purposes) ....... -- -- -- -- (36,003) (36,003)
Amortization of officers' loans .... -- -- -- 64 -- 64
--------- --------- --------- --------- --------- ---------
Balance at December 31, 2000 ....... $ 246 $ 428,698 $ (5,037) $ -- $ 31,166 $ 455,073
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
33
SL GREEN REALTY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
SL Green Realty Corp.
-----------------------------------
Years ended December 31,
2000 1999 1998
--------- --------- ---------
OPERATING ACTIVITIES
Net income ...................................................................... $ 86,217 $ 42,856 $ 29,452
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................. 32,511 27,260 15,404
Amortization of discount on mortgage receivable ............................... (3,524) -- --
Gain on sale of rental property/preferred investment .......................... (41,416) -- --
Extraordinary item net of minority interest ................................... 921 989 574
Equity in net (income) from affiliates ........................................ (378) (730) (387)
Equity in net (income) from unconsolidated joint ventures ..................... (3,108) (377) --
Minority interest ............................................................. 7,430 5,121 2,991
Deferred rents receivable ..................................................... (13,741) (20,363) (11,748)
Provision for deferred rents and bad debts .................................... 1,976 3,883 2,420
Amortization for officer loans and deferred compensation ...................... 1,632 1,891 747
Changes in operating assets and liabilities:
Restricted cash - operations .................................................. (2,500) (9,229) (6,147)
Tenant and other receivables, net ............................................. (2,764) (2,391) (3,213)
Related party receivables ..................................................... (454) (204) 619
Deferred costs ................................................................ (9,273) (14,578) (5,810)
Other assets .................................................................. (3,250) 1,393 (8,441)
Accounts payable, accrued expenses and other liabilities ...................... 1,174 10,829 4,738
Deferred revenue .............................................................. 806 306 --
Deferred land lease payable ................................................... 1,547 1,663 1,466
--------- --------- ---------
Net cash provided by operating activities ....................................... 53,806 48,013 22,665
--------- --------- ---------
INVESTING ACTIVITIES
Additions to land, buildings and improvements ................................... (55,475) (223,240) (357,243)
Restricted cash - capital improvements/acquisitions ............................. (50,155) -- --
Investment in and advances to affiliates ........................................ (1,017) 6,446 (8,449)
Investments in unconsolidated joint ventures .................................... (50,918) (18,285) --
Distributions from unconsolidated joint ventures ................................ 25,550 -- --
Net proceeds from disposition of rental property ................................ 121,085 -- --
Mortgage loans receivable, net .................................................. (27,769) 6,401 (10,901)
--------- --------- ---------
Net cash used in investing activities ........................................... (38,699) (228,678) (376,593)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from mortgage notes payable ............................................ 139,917 339,775 --
Repayments of mortgage notes payable and loans .................................. (78,268) (62,144) (1,958)
Proceeds from bridge financings ................................................. -- -- 327,460
Repayments of bridge financings ................................................. -- (87,500) (239,960)
Proceeds from revolving credit facilities ....................................... 274,046 138,500 155,250
Repayments of revolving credit facilities ....................................... (310,672) (79,300) (207,450)
Capitalized lease obligation .................................................... 286 276 251
Net proceeds from sale of 8% mandatory preferred stock .......................... -- -- 109,700
Dividends and distributions paid ................................................ (47,942) (46,389) (32,144)
Deferred loan costs ............................................................. (7,603) (7,228) (5,822)
Net proceeds from sale of common stock .......................................... -- -- 242,055
Proceeds from stock options exercised ........................................... 4,361 -- --
--------- --------- ---------
Net cash (used in) provided by financing activities ............................. (25,875) 195,990 347,382
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ........................... (10,768) 15,325 (6,546)
Cash and cash equivalents at beginning of period ................................ 21,561 6,236 12,782
--------- --------- ---------
Cash and cash equivalents at end of period ...................................... $ 10,793 $ 21,561 $ 6,236
========= ========= =========
Supplemental cash flow disclosures
Interest paid ............................................................... $ 40,732 $ 26,454 $ 13,144
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Land interest acquired for operating partnership units .......................... $ 1,000
Assets acquired .................................................................. $ 7,714
Liabilities assumed ............................................................. $ 4,861
Issuance of common stock as deferred compensation ............................... $ 253 $ 5,019 $ 3,561
Contribution of property to joint venture ....................................... $ 9,133 $ 25,579
Mortgage notes payable assumed by joint venture ................................. $ 45,000
Mortgage notes payable assigned to joint venture ................................ $ 20,800
In December 2000, 1999, and 1998 the Company declared distributions per share of
$0.3875, $0.3625, and $0.35, respectively. These distributions were paid in
January 2001, 2000, and 1999, respectively.
The accompanying notes are an integral part of these financial statements.
34
SL GREEN REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SQUARE FEET AND PER SHARE DATA)
1. ORGANIZATION AND BASIS OF PRESENTATION
SL Green Realty Corp. (the "Company" or "SL Green"), a Maryland corporation, and
SL Green Operating Partnership, L.P. (the "Operating Partnership"), a Delaware
limited partnership, were formed in June 1997 for the purpose of combining the
commercial real estate business of S.L. Green Properties, Inc. and its
affiliated partnerships and entities. The Operating Partnership received a
contribution of interest in the real estate properties, as well as 95% of the
economic interest in the management, leasing and construction companies (the
"Service Corporation"). The Company qualifies as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"), and
operates as a self-administered, self-managed REIT. A REIT is a legal entity
that holds real estate interests and, through payments of dividends to
shareholders, is permitted to reduce or avoid the payment of Federal income
taxes at the corporate level.
Substantially all of the Company's assets are held by, and its operations are
conducted through, the Operating Partnership. The Company is the sole managing
general partner of the Operating Partnership. As of December 31, 2000, minority
investors held, in the aggregate, an 8.6% limited partnership interest in the
Operating Partnership.
As of December 31, 2000, the Company's wholly-owned portfolio consisted of 19
Class B commercial properties encompassing approximately 6.7 million rentable
square feet located primarily in midtown Manhattan, a borough of New York City
("Manhattan") (the "Properties") and one triple-net leased property located in
Shelton, Connecticut. As of December 31, 2000, the weighted average occupancy
(total occupied square feet divided by total available square feet) of the
Properties was 99%. The Company's portfolio also includes ownership interests in
unconsolidated joint ventures which own four Class B commercial properties in
Manhattan, encompassing approximately 2.0 million rentable square feet (98%
occupied as of December 31, 2000). In addition, the Company continues to manage
four office properties owned by third-parties and affiliated companies
encompassing approximately 1.0 million rentable square feet.
PARTNERSHIP AGREEMENT
In accordance with the partnership agreement of the Operating Partnership (the
"Operating Partnership Agreement"), all allocations of distributions and profits
and losses are made in proportion to the percentage ownership interests of the
respective partners. As the managing general partner of the Operating
Partnership, the Company is required to take such reasonable efforts, as
determined by it in its sole discretion, to cause the Operating Partnership to
distribute sufficient amounts to enable the payment of sufficient dividends by
the Company to avoid any Federal income or excise tax at the Company level.
Under the Operating Partnership Agreement each limited partner will have the
right to redeem limited partnership units ("Units") for cash, or if the Company
so elects, shares of common stock. Under the Operating Partnership Agreement,
the Company is prohibited from selling 673 First Avenue and 470 Park Avenue
South through August 2009.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries, which are wholly-owned or controlled by the Company. Entities
which are not controlled by the Company are accounted for under the equity
method (see Note 6). All significant intercompany balances and transactions have
been eliminated.
35
SL GREEN REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SQUARE FEET AND PER SHARE DATA)
INVESTMENT IN COMMERCIAL REAL ESTATE PROPERTIES
Rental properties are stated at cost less accumulated depreciation and
amortization. Costs directly related to the acquisition and redevelopment of
rental properties are capitalized. Ordinary repairs and maintenance are expensed
as incurred; major replacements and betterments, which improve or extend the
life of the asset, are capitalized and depreciated over their estimated useful
lives.
Properties are depreciated using the straight-line method over the estimated
useful lives of the assets. The estimated useful lives are as follows:
CATEGORY TERM
-------- ----
Building (fee ownership) 40 years
Building improvements shorter of remaining life of the building or
useful life Building (leasehold interest) lesser of 40 years or remaining life of the lease
Property under capital lease 49 years (lease
term) Furniture and fixtures four to seven years
Tenant improvements shorter of remaining life of the lease or useful life
Depreciation expense (including amortization of the capital lease asset)
amounted to $25,547, $22,672 and $13,555 for the years ended December 31, 2000,
1999 and 1998, respectively.
On a periodic basis, management assesses whether there are any indicators that
the value of the real estate properties may be impaired. A property's value is
considered impaired if management's estimate of the aggregate future cash flows
(undiscounted and without interest charges) to be generated by the property are
less than the carrying value of the property. To the extent impairment has
occurred, the loss shall be measured as the excess of the carrying amount of the
property over the fair value of the property. Management does not believe that
the value of any of its rental properties is impaired.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
The Company accounts for its investments in unconsolidated joint ventures under
the equity method of accounting as the Company exercises significant influence,
but does not control these entities. These investments are recorded initially at
cost, as investments in unconsolidated joint ventures, and subsequently adjusted
for equity in earnings (loss) and cash contributions and distributions. Any
difference between the carrying amount of these investments on the balance sheet
of the Company and the underlying equity in net assets is amortized as an
adjustment to equity in earnings (loss) of unconsolidated joint ventures over 40
years. See Note 6.
RESTRICTED CASH
Restricted cash primarily consists of security deposits held on behalf of
tenants. In 2000, this account also includes $50,200 in sales proceeds held
by a qualified intermediary pursuant to a like-kind tax deferred exchange
transaction.
DEFERRED LEASE COSTS
Deferred lease costs consist of fees and direct costs incurred to initiate and
renew operating leases and are amortized on a straight-line basis over the
related lease term. Certain of the employees of the Company provide leasing
services to the Properties. A portion of their compensation, approximating
$2,071 $1,572, and $645 for the years ended December 31, 2000, 1999 and 1998,
respectively, was capitalized and is amortized over an estimated average lease
term of seven years.
36
SL GREEN REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SQUARE FEET AND PER SHARE DATA)
DEFERRED FINANCING COSTS
Deferred financing costs represent commitment fees, legal and other third party
costs associated with obtaining commitments for financing which result in a
closing of such financing. These costs are amortized over the terms of the
respective agreements. Unamortized deferred financing costs are expensed when
the associated debt is refinanced before maturity. Costs incurred in seeking
financial transactions which do not close are expensed in the period. Deferred
costs associated with the Company's forward treasury lock (see Note 8) are
classified as deferred financing costs and are being amortized over the term of
the related mortgage financings.
REVENUE RECOGNITION
Rental revenue is recognized on a straight-line basis over the term of the
lease. The excess of rents recognized over amounts contractually due pursuant to
the underlying leases are included in deferred rents receivable on the
accompanying balance sheets. The Company establishes, on a current basis, a
reserve for future potential tenant credit losses which may occur against this
account. The balance reflected on the balance sheet is net of such allowance.
RENT EXPENSE
Rent expense is recognized on a straight-line basis over the initial term of the
lease. The excess of the rent expense recognized over the amounts contractually
due pursuant to the underlying lease is included in the deferred land lease
payable in the accompanying balance sheet.
INCOME TAXES
The Company is taxed as a REIT under Section 856(c) of the Internal Revenue Code
of 1986, as amended. As a REIT, the Company generally is not subject to Federal
income tax. To maintain qualification as a REIT, the Company must distribute at
least 95% (90% effective 2001) of its REIT taxable income to its stockholders
and meet certain other requirements. If the Company fails to qualify as a REIT
in any taxable year, the Company will be subject to Federal income tax on its
taxable income at regular corporate rates. The Company may also be subject to
certain state and local taxes on its income and property. Under certain
circumstances, Federal income and excise taxes may be due on its undistributed
taxable income.
UNDERWRITING COMMISSIONS AND COSTS
Underwriting commissions and costs incurred in connection with the Company's
stock offerings are reflected as a reduction of additional paid-in-capital.
STOCK -BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations ("APB No. 25"). Under
APB No. 25, compensation cost is measured as the excess, if any, of the quoted
market price of the Company's stock at the date of grant over the exercise price
of the option granted. Compensation cost for stock options, if any, is
recognized ratably over the vesting period. The Company's policy is to grant
options with an exercise price equal to the quoted closing market price of the
Company's stock on the business day preceding the grant date. Accordingly, no
compensation cost has been recognized for the Company's stock option plans.
Awards of stock, restricted stock or employee loans to purchase stock, which may
be forgiven over a period of time, are expensed as compensation on a current
basis over the benefit period.
EXTRAORDINARY ITEM
Extraordinary item represents the effect resulting from the early settlement of
certain debt obligations, including related deferred financing costs, prepayment
penalties, yield maintenance payments and other related items.
37
SL GREEN REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SQUARE FEET AND PER SHARE DATA)
INTEREST RATE HEDGE TRANSACTIONS
The Company may enter into derivative financial instruments such as interest
rate swaps and interest rate collars in order to mitigate its interest rate risk
on a related financial instrument. The Company may designate these derivative
financial instruments as hedges and apply deferral accounting. Gains and losses
related to the termination of such derivative financial instruments are deferred
and amortized to interest expense over the term of the debt instrument.
The Company may also utilize interest rate contracts to hedge interest rate risk
on anticipated debt offerings. These anticipatory hedges are designated, and
effective, as hedges of identified debt issuances which have a high probability
of occurring. Gains and losses resulting from changes in the market value of
these contracts are deferred and amortized into interest expense over the life
of the related debt instrument. Hedges determined to be ineffective and hedges
not correlated to financings are charged to operations.
EARNINGS PER SHARE
The Company presents both basic and diluted earnings per share ("EPS"). Basic
EPS excludes dilution and is computed by dividing net income available to common
stockholders by the weighted average number of shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock, where such exercise or conversion would result in a lower EPS
amount.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash investments, mortgage loans receivable and
accounts receivable. The Company places its cash investments with high quality
institutions. Management of the Company performs ongoing credit evaluation of
its tenants and requires certain tenants to provide security deposits. Though
these security deposits are insufficient to meet the terminal value of a
tenant's lease obligation, they are a measure of good faith and a source of
funds to offset the economic costs associated with lost rent and the costs
associated with retenanting the space. Although the SL Green Predecessors'
buildings and new acquisitions are all located in Manhattan, a borough of New
York City ("Manhattan"), the tenants located in these buildings operate in
various industries and no single tenant represents 10% of the Company's revenue.
Approximately 19% and 11% of the Company's total revenue was derived from 420
Lexington Avenue and 17 Battery Place, respectively, for the year ended December
31, 1998. Approximately 18% and 10% of the Company's total revenue was derived
from 420 Lexington Avenue and 555 West 57th Street, respectively, for the year
ended December 31, 1999. Approximately 21% of the Company's total revenue was
derived from 420 Lexington Avenue for the year ended December 31, 2000. The
Company currently has 74% of its workforce covered by three collective
bargaining agreements which service all of the Company's properties.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities," effective January 1, 2001. The Statement requires the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged asset, liability, or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company
38
SL GREEN REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SQUARE FOOT AND PER SHARE DATA)
will record a cumulative effect adjustment upon the adoption of this Statement.
This cumulative effect adjustment, of which the intrinsic value of the hedge
will be recorded in other comprehensive income ($811) and the time value
component will be recorded in the statement of operations ($484), will be an
unrealized loss of $1,300. The transition amounts were determined based on the
interpretive guidance issued by the Financial Accounting Standards Board to
date. The FASB continues to issue interpretive guidance that could require
changes in the Company's application of the standard and adjustments to the
transition amounts. SFAS No. 133 may increase or decrease reported net income
and stockholders' equity prospectively, depending on future levels of interest
rates and other variables affecting the fair values of derivative instruments
and hedged items, but will have no effect on cash flows.
The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
(SAB) 101, "Revenue Recognition in Financial Statements," in December 1999. The
SAB summarizes certain of the SEC staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. In June
2000, the SEC issued SAB 101B, which delays the implementation date of SAB 101
until no later than the fourth fiscal quarter of fiscal years beginning after
December 15, 1999. The adoption of this SAB did not have a significant impact on
the Company's financial statements.
MARKETABLE SECURITIES
Marketable securities held by the preferred stock subsidiaries in 1998 were
classified as available for sale. The cost of these securities approximated
their fair value.
RECLASSIFICATION
Certain prior year balances have been reclassified to conform with the 2000
presentation.
3. PROPERTY ACQUISITIONS
2000 ACQUISITIONS
On June 20, 2000, the Company acquired a 64,195 square foot retail building
located in the City of Shelton, Fairfield County, Connecticut for approximately
$16,600. The Company redeployed the proceeds from the sale of 29 West 35th
Street, through a like-kind tax deferred exchange, to fund this acquisition. The
property is triple-net leased to Shaw's Supermarkets, Inc. for 25 years. The
Shaw's lease is guaranteed by J Sainsbury PLC, an investment grade corporation
with a long-term issued credit rating of "A" by Standard & Poor's and "A1" by
Moody's. The property is encumbered by a $14,900 mortgage. The 25 year mortgage
has a fixed annual interest rate of 8.32 percent.
The Company entered into an agreement to purchase 1370 Broadway, Manhattan, a
16-story, 254,573 square foot office building for $50,400, excluding closing
costs. The Company redeployed the proceeds from the sale of 17 Battery Place
South, through a like-kind tax deferred exchange, to fund this acquisition. The
transaction closed on January 16, 2001.
On September 29, 2000, the Company entered into an agreement to acquire various
ownership and mortgage interests in the 913,000 square foot, 20-story office
building at One Park Avenue, Manhattan. The Company acquired the fee interest in
the property, which is subject to a ground lease position held by third-parties,
and certain mortgage interests in the property for $233,900, excluding closing
costs. As part of the transaction, SL Green acquired an option to purchase the
ground lease position. The acquisition was financed with a $150,000 mortgage
loan provided by Lehman Brothers Holdings Inc. ("LBHI") and funds provided by
the Company's unsecured line of credit. The LBHI interest-only mortgage, which
matures on January 10, 2004, carries an interest rate of 150 basis points over
the 30-day London Interbank Offered Rate ("LIBOR"). The transaction closed on
January 10, 2001.
1999 ACQUISITIONS
During January 1999, the Company purchased a sub-leasehold interest in 420
Lexington Avenue for $27,300. The sub-leasehold expires on December 30, 2008
with one 21-year renewal term expiring on December 30, 2029.
39
SL GREEN REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SQUARE FEET AND PER SHARE DATA)
During January 1999, the Company acquired a 65% controlling interest in 555 West
57th Street (the "BMW Building") for approximately $66,700 (including a 65%
interest in the previously existing third-party mortgage debt totaling $45,000).
The 941,000 square foot property was approximately 100% leased as of the
acquisition date. On November 5, 1999 the Company acquired the remaining 35%
interest in the BMW Building for $34,100. Simultaneous with this closing, the
Company obtained a new $70,000 first mortgage from Bank of New York and repaid
the $45,000 debt assumed (see Note 9).
During May 1999, the Company acquired four Manhattan properties located at 90
Broad Street ("90 Broad"), 286, 290 and 292 Madison Avenue (the "Madison
Properties") (collectively, the "Tower Properties") for $84,500. The properties
total 675,000 square feet and were approximately 89% leased as of the
acquisition date. During July 1999, the Company contributed 90 Broad into a
joint venture arrangement (see Note 6).
1998 ACQUISITIONS
On January 8, 1998, the Company acquired fee title to its property located at
1372 Broadway. Prior to this date the Company held a mortgagee's interest in
this property with a right to acquire the fee.
During March 1998, the Company purchased the operating leasehold interest in the
property located at 420 Lexington Avenue (the "Graybar Building") and the fee
interest in the property located at 1466 Broadway from the Helmsley organization
(together the "Helmsley Properties") for $142,000. The Graybar Building is
located adjacent to Grand Central Station and encompasses approximately 1.2
million square feet and the property at 1466 Broadway is located at 42nd Street
and Broadway encompassing approximately 290,000 square feet.
During March 1998 the Company purchased the property located at 321 West 44th
Street for approximately $17,000, consisting of approximately 209,000 square
feet (see Note 4).
On April 14, 1998, the Company converted its mortgage interest in 36 West 44th
Street into a fee interest and its mortgage interest in 36 West 43rd Street into
a leasehold interest (collectively the "Bar Building") for an additional cost of
approximately $1,000. (See Note 4)
On May 21, 1998 the Company acquired the outstanding mortgage of the property
located at 711 Third Avenue for approximately $44,600 in cash. The 20-story,
524,000 square foot building was 79% occupied at the date of acquisition. The
Company's outstanding mortgage position provides for the Company to receive 100%
of the economic benefit from the property, and accordingly for the period owned,
the Company has recorded the operating results of the property in the statement
of operations. On July 2, 1998 the Company acquired 50% of the fee interest in
711 Third Avenue for $20,000 and 44,772 units of the Operating Partnership.
On June 1, 1998 the Company acquired the property located at 440 Ninth Avenue
for approximately $32,000 in cash. The 18-story, 340,000 square foot building
was 76% occupied at the date of acquisition. In connection with this purchase,
the Company obtained a $6,200 mortgage note receivable secured by the property
located at 38 East 30th Street. The note's interest rate was 8% and was paid
back during September 1998.
On August 14, 1998 the Company purchased the property located at 1412 Broadway
(The Fashion Gallery Building) for $72,000, plus approximately $5,000 for
reimbursement of loan prepayment charges and $5,000 related to capital
expenditures, commissions and other closing costs. The property is a 25-story
office building totaling 389,000 square feet and had an occupancy rate at the
date of acquisition, including pending leases, of 89.5%.
PRO FORMA
The following table summarizes, on an unaudited pro forma basis, the combined
results of operations of the Company for the year ended December 31, 1999 as
though the 1999 acquisitions, including the 90 Broad Street, 286, 290 and 292
Madison Avenue (May 1999) and the minority interest in 555 West 57th Street
(November 1999), were made on January 1, 1999. There were no material
acquisitions during 2000.
40
SL GREEN REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SQUARE FEET AND PER SHARE DATA)
1999
----
Pro forma revenues ............................................ $212,206
Pro forma net income .......................................... $ 33,470
Pro forma basic earnings per common share ..................... $ 1.38
Pro forma diluted earnings per common share ................... $ 1.38
Common and common equivalent share - basic .................... 24,184
Common and common equivalent share - diluted .................. 26,612
4. PROPERTY DISPOSITIONS
During the quarter ended March 31, 2000, the Company sold the properties located
at 29 West 35th Street and 36 West 44th Street for a gross sales price of
$43,200. The Company realized a gain of $14,225 on the sales.
On May 4, 2000, the Company sold a 65% interest in the property located at 321
West 44th Street to Morgan Stanley Real Estate Fund III, ("MSREF"),valuing the
property at $28,000. The Company realized a gain of $4,797 on this transaction
and retained a 35% interest in the property (with a carrying value of $6,500),
which was contributed to the joint venture with MSREF ("MSSG Realty Partners I,
LLC" or "MSSG I"). The property, a 203,000 square foot building located in the
Times Square submarket of Manhattan, was acquired by the Company in March 1998.
Simultaneous with the closing of this joint venture, the venture received a
$22,000 mortgage for the acquisition and capital improvement program, which is
estimated at $3,300. The interest only mortgage matures on April 30, 2003 and
has an interest rate based on LIBOR plus 250 basis points (9.32% at December 31,
2000). The venture intends to substantially improve and reposition the property.
In addition to retaining a 35% economic interest in the property, SL Green,
acting as the operating partner for the venture, is responsible for
redevelopment, construction, leasing and management of the property. The venture
agreement provides the Company with the opportunity to gain certain economic
benefits based on the financial performance of the property.
On December 20, 2000, the Company sold 17 Battery Place South for a gross sales
price of $53,000. The Company realized a gain of $10,822 on the sale. These
proceeds were used to acquire 1370 Broadway (see Note 3 - 2000 Acquisitions)
through a like-kind tax deferred exchange.
At December 31, 2000, the Company had one property, 633 Third Avenue, comprising
approximately 41,000 rentable square feet, held for sale. This property was
under contract for sale in the aggregate gross amount of $13,250, with deposits
of $1,325. This property was sold on January 9, 2001 for a gain of approximately
$1,537.
The following table discloses certain information regarding the property held
for sale by the Company:
2000 1999
------- -------
Total Revenues ....................................... $ 1,630 $ 1,637
Operating Expenses ................................... 485 491
Depreciation and Amortization ........................ 156 235
Other ................................................ 622 415
------- -------
Net Income ........................................... $ 367 $ 496
======= =======
Net Carrying Value (including related costs)
at December 31, 2000 ............................. $10,895
=======
41
SL GREEN REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SQUARE FEET AND PER SHARE DATA)
5. MORTGAGE LOANS RECEIVABLE AND PREFERRED EQUITY INVESTMENT
On April 14, 2000, the Company made a loan in the amount of $10,000 to DPSW West
14 LLC. The loan, which can be increased to $14,000, is secured by the property
located at 17-29 West 14th Street, Manhattan. On September 27, 2000, the Company
sold an $8,000 senior participation interest in this loan to Manufacturers and
Traders Trust Company (MT). Once the loan is fully drawn down, MT will purchase
an additional $2,000 senior participation interest. The initial term of the loan
ends on April 16, 2001, but a one-year extension is available. Interest, payable
monthly, is based on the 30-day LIBOR plus 400 basis points (10.82% as of
December 31, 2000). The loan is prepayable subject to yield maintenance. The
Company will receive a fee for servicing the loan.
On March 30, 2000, the Company acquired a $51,900 interest in an existing first
mortgage loan collateralized by 2 Grand Central Tower, Manhattan (2GCT) at a
discount. The discount to the face amount of $3,250 and the back-end fees of
$3,440 are being amortized into investment income over the extended term of the
loan, resulting in a total yield on the investment of approximately 22%. This is
a subordinate participation interest in an existing first mortgage loan
currently held by Credit Suisse First Boston Mortgage Capital, LLC. The loan
which was initially due to mature on September 30, 2000, provided the borrower a
one year extension option which was exercised on August 30, 2000. The final
maturity date of the loan is September 30, 2001. The loan carries a weighted
average interest rate of 793 basis points over the 30-day LIBOR (14.75% as of
December 31, 2000). 2 GCT also known as 140-148 East 45th Street and 147-151
East 44th Street, is an approximately 620,000 square foot commercial office
building located in the heart of the Grand Central submarket.
On July 19, 2000, the Company acquired an additional $9,344 interest in an
existing first mortgage loan collateralized by 2GCT at a $1,000 discount. The
terms of this note were identical to those of the previous note. On September
29, 2000, the Company sold its interest in this loan for approximately $8,492.
During May 1999, the Company acquired a $20,000 preferred equity interest in a
venture holding the loan secured by fee title of 1370 Avenue of the Americas
located in Manhattan. The venture was entitled to receive all of the cash flows
from the building, in addition to shared control over the management and leasing
of the property. The venture also had the right to obtain fee title to the
property after a prescribed period of time. The Company was reappointed manager
of the property. The investment entitled the Company to receive a yield of 700
basis points over 30-day LIBOR preferentially on a current basis. In addition to
receiving its preferred return, the Company was entitled to participate in the
value it created through a purchase option, entitling it to acquire 50% of the
common equity of the venture at a fixed price, based on today's estimate of
market value of the property. Further, the Company had the right to obtain 100%
of the venture through the exercise of a right of first offer.
On September 15, 2000, the Company's preferred equity interest of $20,000 in
1370 Avenue of the Americas was redeemed. In connection with the early
redemption, the Company received a prepayment of interest of $692. As a result
of the sale of the ownership interest in the property, the Company realized a
gain of approximately $8,600 The gain on sale ($5,624) is presented in the
financial statements net of transaction and compensation costs (see Note 15).
During April 1999, the Company originated and funded a $20,000 second mortgage
bridge loan to finance 521 Fifth Avenue Partners, LLC's acquisition of a 440,000
square foot Manhattan office building located at 521 Fifth Avenue. The second
mortgage bridge loan which had an initial term of six months with a yield of
16%, was extended for an additional three months with an expected yield of 17%.
Goldman Sachs Mortgage Company purchased a 50% participation in the investment.
This loan was repaid in full in December 1999.
On August 6, 1998 the Company closed the acquisition of an existing first
mortgage secured by the property located at 636 11th Avenue, which is a 469,000
square foot industrial and warehouse block front property located between 46th
and 47th Streets for $10,900. The mortgage bore interest at 8.875% at December
31, 1998. The Company had contracted to buy this mortgage on June 11, 1998 and
simultaneously entered into an agreement to purchase the property during January
1999. This property was in Chapter 11 bankruptcy
42
SL GREEN REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SQUARE FEET AND PER SHARE DATA)
proceedings. During January 1999 the Company terminated this purchase agreement.
The unrecoverable project costs and settlement costs resulted in a $1,100 charge
to 1998 earnings. This loan was repaid in full in December 1999.
6. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
MORGAN STANLEY JOINT VENTURE
During July 1999, the Company entered into a joint venture agreement with MSREF
to own 90 Broad. The property was contributed to MSSG I by the Company and the
Company retained a 35% economic interest in the venture. At the time of the
contribution the property was valued at $34,600 which approximated the Company's
cost basis in the asset. In addition, the venture assumed the existing $20,800
first mortgage that was collateralized by the property. The Company provided
management, leasing and construction services at the property on a fee basis.
During 2000 and 1999, the Company earned $226 and $62, respectively, for such
services. The venture agreement provided the Company with an opportunity to
receive a promotional interest with respect to sales proceeds and cash
distributions once a fixed hurdle rate is achieved.
On March 1, 2000, the $20,800 mortgage on 90 Broad was assigned to a new lender.
The new lender advanced an additional $11,200 to the joint venture. The two
loans were then consolidated, amended and restated into a consolidated $32,000
mortgage which was to mature on March 1, 2002. Interest only was payable on the
loan at the rate of LIBOR plus 175 basis points. On November 13, 2000, MSSG I
sold 90 Broad for a gross sales price of $60,000 and repaid the loan. The joint
venture realized a gain of $16,446 on the sale. The Company's share of this gain
was $6,025.
See Note 3 for a description of the investment in 321 West 44th Street.
On November 13, 2000, the Company and MSREF, through its MSSG I joint venture,
acquired 180 Madison Avenue, Manhattan, for $41,250, excluding closing costs.
The property is a 264,960 square foot, 23-story building. In addition to having
a 49.9 percent ownership interest in the property, SL Green will act as the
operating partner for the venture, and will be responsible for leasing and
managing the property. The acquisition was partially funded by a $32,000
mortgage from M&T Bank. The loan, which matures on December 1, 2005, carries a
fixed interest rate of 7.81 percent. The mortgage is interest only until January
1, 2002, at which time principal payments begin. The loan can be upsized to
$34,000.
The Company and MSREF, through its MSSG II joint venture, entered into a
contract to acquire 469 Seventh Avenue, Manhattan, for $45,700, excluding
closing costs. The property is a 253,000 square foot, 16-story office building.
In addition to having a 35% ownership interest in the property, SL Green will
act as the operating partner for the venture, and will be responsible for
leasing and managing the property. The transaction closed on January 31, 2001.
The acquisition was partially funded by a $36,000 mortgage from LBHI. The loan,
which matures on February 10, 2003, carries a fixed interest rate of 7.84%.
CARLYLE REALTY JOINT VENTURE
During August 1999, the Company entered into a joint venture agreement with
Carlyle Realty to purchase 1250 Broadway located in Manhattan for $93,000. The
property is 670,000 square feet and was 97% leased at acquisition. The Company
holds a 49.9% stake in the venture and provides management, leasing and
construction services at the property on a fee basis. During 2000 and 1999, the
Company earned $624 and $371, respectively, for such services. The acquisition
was partially financed with a floating rate mortgage totaling $64,700 maturing
in 3 years. This facility has the ability to be increased to $69,700 as funding
of capital requirements is needed. The mortgage, which was syndicated into a
$57,000 tranche and a $7,650 tranche, carries a weighted average interest rate
of 300 basis points over 30-day LIBOR (9.82% at December 31, 2000). The venture
agreement provides the Company with an opportunity to receive a promotional
interest with respect to sales proceeds and cash distributions once a fixed
hurdle rate is achieved.
43
SL GREEN REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SQUARE FEET AND PER SHARE DATA)
PRUDENTIAL REALTY JOINT VENTURE
On February 18, 2000, the Company acquired a 49.9% interest in a joint venture
which owned 100 Park Avenue ("100 Park") for $95,800. 100 Park is an 834,000
square foot, 36-story property, located in Manhattan. The purchase price was
funded through a combination of cash and a seller provided mortgage on the
property of $112,000 ($55,888 represents SL Green's share of the debt). On
August 11, 2000 AIG/SunAmerica issued a $120,000 mortgage collateralized by the
property located at 100 Park, which replaced the pre-existing $112,000 mortgage.
The 8.00% fixed rate loan has a 10 year term. Interest only is payable through
October 1, 2001. The Company will provide managing and leasing services for 100
Park. During 2000, the Company earned $479 for such services.
The condensed combined balance sheets for the unconsolidated joint ventures at
December 31, 2000, is as follows:
ASSETS 2000 1999
-------- --------
Commercial real estate property .................. $360,347 $130,585
Other assets ..................................... 31,641 14,236
-------- --------
Total Assets .................................... $391,988 $144,821
======== ========
LIABILITIES AND MEMBERS' EQUITY
Mortgage payable ................................. $238,650 $ 85,450
Other liabilities ................................ 15,043 7,278
Members' equity .................................. 138,295 52,093
-------- --------
Total liabilities and members' equity ........... $391,988 $144,821
======== ========
Company's net investment in
unconsolidated joint ventures .................. $ 65,031 $ 23,441
======== ========
The condensed combined statements of operations for the unconsolidated joint
ventures from acquisition date through December 31, 2000 is as follows:
2000 1999
------- -------
Total revenues ................................. $60,429 $ 9,433
------- -------
Operating expense .............................. 17,460 3,069
Real estate taxes .............................. 9,881 1,522
Interest ....................................... 18,733 2,606
Depreciation and amortization .................. 7,869 1,356
------- -------
Total expenses ................................. 53,943 8,553
------- -------
Net income before gain on sale ................. $ 6,486 $ 880
======= =======
Company's equity in earnings of
unconsolidated joint ventures .............. $ 3,108 $ 377
======= =======
7. INVESTMENT IN AND ADVANCES TO AFFILIATES
2000 1999
------ ------
Investment in and advances to Service Corporation, net ..... $4,166 $4,978
Investment in and advances to eEmerge, net ................. 2,207 --
------ ------
Investments in and advances to affiliates ............ $6,373 $4,978
====== ======
44
SL GREEN REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SQUARE FEET AND PER SHARE DATA)
SERVICE CORPORATION
In order to maintain the Company's qualification as a REIT while realizing
income from management, leasing and construction contracts from third parties
and joint venture properties, all of the management operations are conducted
through an unconsolidated company, the Service Corporation. The Company, through
the Operating Partnership, owns 100% of the non-voting common stock
(representing 95% of the total equity) of the Service Corporation. Through
dividends on its equity interest, the Operating Partnership receives
substantially all of the cash flow from the Service Corporation's operations.
All of the voting common stock of the Service Corporation (representing 5% of
the total equity) is held by a Company affiliate. This controlling interest
gives the affiliate the power to elect all directors of the Service Corporation.
The Company accounts for its investment in the Service Corporation on the equity
basis of accounting because it has significant influence with respect to
management and operations, but does not control the entity.
All of the management, leasing and construction services with respect to the
properties wholly-owned by the Company, are conducted through Management LLC
which is 100% owned by the Operating Partnership.
eEMERGE
On May 11, 2000, the Operating Partnership formed eEmerge, Inc., a Delaware
corporation ("eEmerge"), in partnership with Fluid Ventures LLC. eEmerge is a
separately managed, self-funded company that provides fully-wired and furnished
office space, services and support to help e-businesses grow.
The Company, through the Operating Partnership, owns 96.5% of the non-voting
common stock (representing 87% of the total equity) of eEmerge. Through
dividends on its equity interest, the Operating Partnership receives
approximately 87% of the cash flow from eEmerge operations. Approximately 96.5%
of the voting common stock (representing 9.5% of the total equity) is held by a
Company affiliate. This controlling interest gives the affiliate the power to
elect all the directors of eEmerge. The Company accounts for its investment in
eEmerge on the equity basis of accounting because it has significant influence
with respect to management and operations, but does not control the entity. The
Company has funded approximately $2,207 to eEmerge as of December 31, 2000 out
of a total commitment of $3,425. In addition, the Company made a landlord
contribution of $787 for the build-out of one floor and has committed to fund an
additional $787 for the build-out of a second floor.
On June 8, 2000, eEmerge and EUREKA BROADBAND CORPORATION ("Eureka") formed
eEmerge.NYC LLC, a Delaware limited liability company ("ENYC") whereby eEmerge
has a 95% interest and Eureka has a 5% interest in ENYC. ENYC was formed to
build and operate a 45,000 square foot fractional office suites business
marketed to the technology industry. ENYC entered into a 10-year lease with the
Operating Partnership for its premises, which is located at 440 Ninth Avenue,
Manhattan. Allocations of net profits, net losses and distributions shall be
made in accordance with the Limited Liability Company Agreement of ENYC.
8. DEFERRED COSTS
Deferred costs consist of the following: 2000 1999
-------- --------
Deferred financing ........................... $ 19,277 $ 15,096
Deferred leasing ............................. 37,413 26,682
-------- --------
56,690 41,778
Less accumulated amortization ................ (16,577) (11,238)
-------- --------
$ 40,113 $ 30,540
======== ========
45
SL GREEN REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SQUARE FEET AND PER SHARE DATA)
9. MORTGAGE NOTES PAYABLE
The mortgage notes payable collateralized by the respective properties and
assignment of leases at December 31, 2000 and 1999 are as follows:
PROPERTY MORTGAGE NOTES 2000 1999
--------- -------------- ---- ----
50 West 23rd Street Note payable to GMAC with interest at 7.33%, due
August 1, 2007.............................................. $21,000 $21,000
29 West 35th Street First mortgage note with interest payable at 8.46%, due
February 1, 2001 (2)........................................ --- 2,825
673 First Avenue First mortgage note with interest payable at 9.0%, due
December 13, 2003........................................... 11,992 14,740
470 Park Avenue South First mortgage note with interest payable at 8.25%, due
April 1, 2004............................................... 9,771 10,153
1414 Avenue of Americas,
633 Third Avenue and First mortgage note with interest payable at 7.9%, due
70 West 36th Street May 1, 2009 (3)............................................. 33,950 50,800
1412 Broadway First mortgage note with interest payable at 7.62%, due
May 1, 2006................................................. 52,000 52,000
711 Third Avenue First mortgage note with interest payable at 8.13%, due
September 10, 2005 (3)...................................... 49,172 49,225
875 Bridgeport Ave., First mortgage note with interest payable at 8.32%, due
Shelton, CT May 10, 2025................................................ 14,901 ---
420 Lexington Avenue First mortgage note with interest payable at 8.44%, due
November 1, 2010 (3)........................................ 125,000 ---
555 West 57th Street First mortgage note with interest payable at 8.58%, due
November 4, 2004 (1) ....................................... 69,606 70,000
-------- --------
Total fixed rate debt................................. 387,392 270,743
-------- --------
420 Lexington Avenue First mortgage note with interest payable at 9.25%, due
May 21, 2001................................................ --- 55,000
Madison Properties First mortgage note with interest payable at 8.32%, due
May 31, 2001................................................ 26,950 26,950
-------- --------
Total floating rate debt.............................. 26,950 81,950
-------- --------
Total mortgage notes payable................................ $414,342 $352,693
======== ========
(1) The Company entered into an interest rate protection agreement which fixed
the LIBOR interest rate at 6.58% at December 31, 2000. If LIBOR exceeds
6.10%, the loan will float until the maximum rate of 6.58% is reached.
(2) This mortgage was repaid on February 11, 2000.
(3) Held in bankruptcy remote special purpose entity.
At December 31, 2000, the net carrying value of the properties collateralizing
the mortgage notes was $578,401.
2000 FINANCING
In April, 2000, the Company extended the maturity date of the $26,950 mortgage
encumbering the properties located at 286, 290 and 292 Madison Avenue, Manhattan
by one year to May 31, 2001. On January 16, 2001, the Company repaid the $3,300
mortgage encumbering 290 Madison Avenue.
On October 2, 2000, the Company obtained a $125,000 mortgage encumbering the
property located at 420 Lexington Avenue. The 8.44% fixed rate loan has a 10
year term. Interest only is payable for the first 12 months. The proceeds were
used to repay the
46
SL GREEN REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SQUARE FEET AND PER SHARE DATA)
$55,000 loan on the property which was due to mature on May 21, 2001. The
balance of the proceeds was used to pay down the $250 Million Credit Facility.
1999 FINANCING
During April 1999, the Company closed on two fixed-rate mortgage financings
totaling $102,800 with maturities of 10 years ($50,800 secured by 1414 Avenue of
the Americas, 36 West 44th Street, 633 Third Avenue and 70 West 36th Street) and
7 years ($52,000 secured by 1412 Broadway). The weighted average interest rate
on these financings is 7.78%. These mortgages replaced $87,500 in secured
floating-rate bridge financings (see 1998 Financings) and provided approximately
$13,000 in additional liquidity that was used to reduce the amount outstanding
under the Company's revolving credit facility. The Company recorded a $600
extraordinary loss during the quarter ended June 30, 1999 for the early
extinguishment of debt related to the write-off of unamortized deferred
financing costs associated with these secured bridge loans.
During May 1999, the Company closed on loans totaling $117,700. The first loan
of $65,000 was secured by the Company's interest in 420 Lexington Avenue. The
term of this loan was two years and bore interest at a rate of 275 basis points
over the 30-day LIBOR rate. In October 1999, the Company repurchased a $10,000
non-investment grade tranche lowering the effective spread from LIBOR plus 275
basis points to LIBOR plus 203 basis points. This loan was repaid in connection
with the refinancing of the loan encumbering 420 Lexington Avenue (see 2000
Financing above). Simultaneous with the closing, the Company entered into an
interest rate protection agreement which capped LIBOR at 6.5% for the term of
the loan. The second loan was a $52,700 one-year floating rate facility, secured
by the Madison Properties ($26,950), 90 Broad ($20,800) and 711 Third Avenue
($5,000) and bears interest at a rate of 150 basis points over the 30-day LIBOR
rate (8.32% at December 31, 2000).
During September 1999, the Company closed a $49,200 fixed rate financing secured
by the property located at 711 Third Avenue. This mortgage matures in 6 years
and carries a fixed interest rate of 8.13%. The proceeds were used to repay a
$5,000 existing financing on the property (see above) with the balance used to
reduce the amount outstanding under the Company's revolving credit facility.
During November 1999, simultaneous with the closing of the remaining 35 percent
interest in the BMW Building, the Company obtained a new $70,000 first mortgage
from Bank of New York. The mortgage has a term of five years with a floating
interest rate of 200 basis points over 30-day LIBOR (8.58% at December 31,
2000). At the time of the financing, the Company entered into an interest rate
protection agreement with Bank of New York. The agreement has fixed the LIBOR
interest rate at 6.10% however, the LIBOR interest rate on the loan will begin
floating if the actual LIBOR rate exceeds 6.10% and is capped at a maximum LIBOR
rate of 6.58%. At closing the loan's effective interest rate inclusive of the
collar arrangement was 8.17%. This interest rate "collar" agreement is in effect
for five years to correspond with the term of the loan. The Company recorded a
$400 extraordinary loss during the quarter ended December 31, 1999 for the early
extinguishment of debt related to prepayment penalties incurred as a result of
the early repayment of the $45,000 debt assumed in January 1999.
1998 FINANCINGS
During March 1998, the Company converted the notes payable that were
collateralized by 50 West 23rd Street into fixed rate obligations at an interest
rate of 7.33%.
During December 1998, the Company closed two short-term bridge financings. The
first financing was a $51,500 bridge loan with Prudential Securities at an
interest rate equal to 200 basis points over the current one-month LIBOR (7.58%
at December 31, 1998). The loan which was secured by the properties located at
1412 Broadway and 633 Third Avenue was repaid in April 1999. The second
financing was a $36,000 bridge loan with Lehman Brothers at an interest rate
equal to 275 basis points over the current one-month LIBOR (8.29% at December
31, 1998). The loan which was secured by the properties located at 70 West 36th
Street, 1414 Avenue of the Americas and The Bar Building was repaid in April
1999.
47
SL GREEN REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SQUARE FEET AND PER SHARE DATA)
PRINCIPAL MATURITIES
Combined aggregate principal maturities of mortgages and notes payable and
revolving credit facilities as of December 31, 2000 are as follows:
TOTAL
-----
2001 .................................................. $ 55,711
2002 .................................................. 7,770
2003 .................................................. 33,697
2004 .................................................. 80,157
2005 .................................................. 51,687
Thereafter 231,694
--------
$460,716
========
MORTGAGE RECORDING TAX - HYPOTHECATED LOAN
The Operating Partnership mortgage tax credit loans totaled approximately
$134,000 from LBHI at December 31,1998. These loans were collateralized by the
mortgages encumbering the Operating Partnership's interests in 711 Third Avenue.
The loans were also collateralized by an equivalent amount of the Company's cash
which was held by LBHI and invested in US Treasury securities. Interest earned
on the cash collateral was applied by LBHI to service the loans with interest
rate commensurate with that of the portfolio of six month US Treasury
securities, which matured on May 18, 1999. The Operating Partnership and LBHI
each had the right of offset and therefore the loans and the cash collateral
were presented on a net basis in the consolidated balance sheet at December 31,
1998. The purpose of these loans was to temporarily preserve mortgage recording
tax credits for future potential acquisitions of real property which the Company
may make, the financing of which may include property based debt, for which
these credits would be applicable and provide a financial savings. These
mortgage tax credit loans were fully utilized during 1999.
10. REVOLVING CREDIT FACILITIES
PSCC FACILITY
On December 28, 1999, the Company closed on a $30,000 credit facility with
Prudential Securities Credit Corp. ("PSCC"). The borrowing capacity was $15,000,
of which none was drawn down at December 31, 1999. The PSCC Facility was secured
by the Company's preferred equity interest in 1370 Avenue of the Americas and a
repurchase mortgage participation interest in the mortgage at 420 Lexington
Avenue. On March 30, 2000, PSCC increased the secured PSCC Facility by $20,000
to $50,000. No other terms were changed from the original $30,000 secured PSCC
Facility. Interest-only is payable based on the 1-Month LIBOR plus 125 basis
points. The PSCC Facility may be prepaid at any time during its term without
penalty. The PSCC Facility, which was to mature on December 27, 2000, was
extended for one year. At that time, the PSCC Facility was increased to $60,000.
At December 31, 2000, the Company had $23,374 outstanding under its PSCC
Facility (interest rate of 8.07 percent). The PSCC Facility is secured by the
$51,905 in mortgage loans receivable on 2 GCT.
$250 MILLION CREDIT FACILITY
On June 27, 2000, the Company repaid in full and terminated the $140 Million
Credit Facility (defined below) and obtained a new unsecured revolving credit
facility in the amount of $250,000 ("$250 Million Credit Facility") from a group
of 9 lender banks. The $250 Million Credit Facility has a term of three years
and bears interest at a spread ranging from 137.5 basis points to 175 basis
points over LIBOR, based on the Company's leverage ratio. If the Company
receives an investment grade rating, the spread over LIBOR will be reduced to
125 basis points. The Company has the ability to upsize this credit facility to
$300,000. At December 31, 2000, $23,000 was outstanding and carried an interest
rate of 8.17 percent. Availability under the $250 Million
48
SL GREEN REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SQUARE FEET AND PER SHARE DATA)
Credit Facility at December 31, 2000 was further reduced by the issuance of
letters of credit in the amount of $21,000 for acquisition deposits.
The terms of the $250 Million Credit Facility include certain restrictions and
covenants which limit, among other things, the payment of dividends (as
discussed below), the incurrence of additional indebtedness, the incurrence of
liens and the disposition of assets, and which require compliance with financial
ratios relating to the minimum amount of tangible net worth, the minimum amount
of debt service coverage, the minimum amount of fixed charge coverage, the
minimum amount of unsecured indebtedness, the minimum amount of unencumbered
property debt service coverage and certain investment limitations. The dividend
restriction referred to above provides that, except to enable the Company to
continue to qualify as a REIT under the Code, the Company will not during any
four consecutive fiscal quarters make distributions with respect to common stock
or other equity interests in an aggregate amount in excess of 90 percent of
funds from operations for such period, subject to certain other adjustments. The
$250 Million Credit Facility also requires a 15 to 25 basis point fee on the
unused balance payable quarterly in arrears.
The lending group for the $250 Million Credit Facility consists of Fleet
National Bank, NA, as administrative agent, Citibank/Salomon Smith Barney, Inc,
as syndication agent, Deutsche Banc Alex Brown, as documentation agent,
Commerzbank Aktiengesellschaft, New York Branch, The Bank of New York, Wells
Fargo Bank, N.A., Bank Leumi USA, PNCBank, N.A., and Key Bank, N.A.
$140 MILLION CREDIT FACILITY
On December 19, 1997, the Company entered into a $140,000 three year senior
unsecured revolving credit facility (the"$140 Million Credit Facility") due
December 2000. Availability under the $140 Million Credit Facility was limited
to an amount less than the $140,000 which was calculated by several factors
including recent acquisition activity and most recent quarterly property
performance. Outstanding loans under the $140 Million Credit Facility bore
interest on a graduated rate per annum equal to the LIBOR rate applicable to
each interest period plus 120 basis points to 145 basis points per annum. The
$140 Million Credit Facility required the Company to comply with certain
covenants, including but not limited to, maintenance of certain financial
ratios. At December 31, 1999, the outstanding amount of indebtedness under the
$140 Million Credit Facility was $83,000 and the interest rate on such
indebtedness was 7.82% per annum. Availability under the $140 Million Credit
Facility was reduced further by the issuance of letters of credit in the amount
of $7,500 for acquisition deposits for the year ended December 31, 1999. At
December 31, 1999, the Company's borrowing capacity under the $140 Million
Credit Facility was $49,500.
The $140 Million Credit Facility was repaid in full and retired in June 2000, in
connection with the Company obtaining the new $250 Million Credit Facility, as
described above. The Company recorded a $430 extraordinary loss, net of the
minority interest's share of the loss ($38) for the early extinguishment of debt
related to the write-off of unamortized financing costs associated with the $140
Million Credit Facility.
ACQUISITION FACILITY
In March 1998, the Company requested the $140 Million Credit Facility banking
group to temporarily relieve the Company from its obligations under the
financial covenants of the $140 Million Credit Facility in order to close an
additional financing necessary to acquire the Helmsley Properties (the
"Acquisition Facility"). This Acquisition Facility closed on March 18, 1998,
financed the Helmsley Properties acquisition, paid-off the outstanding balance
on the Company's Credit Facility and provided on-going liquidity for future
acquisition and corporate needs. The term of the Acquisition Facility was one
year. The interest rate was determined by a schedule of the percent of the loan
commitment outstanding and the duration of the loan commitment outstanding
ranging from 170 basis points to 300 basis points over LIBOR. As a result of the
Company's May 1998 Public Equity Offerings, on May 18, 1998, the Company repaid
the Acquisition Facility prior to its scheduled maturity date of March 18, 1999.
The Company's early extinguishment of the Acquisition Facility results in the
write-off of unamortized deferred financing costs totaling approximately $522
(net of minority interest of $52) which were classified as an extraordinary loss
during the quarter ended June 30, 1998.
49
SL GREEN REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SQUARE FEET AND PER SHARE DATA)
INTEREST RATE PROTECTION AGREEMENTS
In anticipation of financing properties, the Company executed a forward treasury
rate lock on September 2, 1998 for $100,000 of future financing. The underlying
rate for that position was 5.13%. On December 3, 1998 this rate lock expired and
was not renewed. The negative value of this hedge at expiration was $3,200. In
connection with the hedge, the Company had commitments to complete five
permanent mortgage financings totaling $103,000 on properties located at 70 West
36th Street, 36 West 44th Street, 1414 Avenue of the Americas, 633 Third Avenue
and 1412 Broadway. The hedge cost represents a deferred financing cost which
will be amortized over the life of these financings, except for $200 which
related to a mismatch in terms resulting in a charge to 1998 earnings.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair value were determined by management,
using available market information and appropriate valuation methodologies.
Considerable judgment is necessary to interpret market data and develop
estimated fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize on disposition
of the financial instruments. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
Cash equivalents, accounts receivable, mortgage receivables, accounts payable,
and mortgage notes payable and revolving credit facilities amounts reasonably
approximate their fair values based on discounted cash flow models.
Disclosure about fair value of financial instruments is based on pertinent
information available to management as of December 31, 2000. Although management
is not aware of any factors that would significantly affect the reasonable fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since that date and current estimates of fair
value may differ significantly from the amounts presented herein.
12. RENTAL INCOME
The Operating Partnership is the lessor and the sublessor to tenants under
operating leases with expiration dates ranging from 2001 to 2020. The minimum
rental amounts due under the leases are generally either subject to scheduled
fixed increases or adjustments. The leases generally also require that the
tenants reimburse the Company for increases in certain operating costs and real
estate taxes above their base year costs. Approximate future minimum rents to be
received over the next five years and thereafter for non-cancelable operating
leases in effect at December 31, 2000 are as follows:
2001 ............................................ $ 178,540
2002 ............................................ 170,537
2003 ............................................ 163,047
2004 ............................................ 147,456
2005 ............................................ 135,030
Thereafter ...................................... 613,304
----------
$1,407,914
==========
13. RELATED PARTY TRANSACTIONS
There are several business relationships with related parties, entities owned by
Stephen L. Green or relatives of Stephen L. Green exclusive of the uncombined
joint ventures which involve management, leasing, and construction fee revenues,
rental income and maintenance expenses in the ordinary course of business. These
transactions for the years ended December 31, include the following:
2000 1999 1998
------ ------ ------
Management revenues ..................... $ 209 $ 171 $ 178
Leasing commission revenues ............. -- 107 181
Maintenance expense ..................... 4,644 4,707 2,118
Rental revenue .......................... 123 -- --
50
SL GREEN REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SQUARE FEET AND PER SHARE DATA)
Amounts due from related parties at December 31, consist of .. 2000 1999
---- ----
17 Battery Condominium Association ........................... $127 $176
Morgan Stanley Real Estate Funds ............................. 464 197
Carlyle Group ................................................ 12 13
Officers ..................................................... 77 141
SLG 100 Park LLC ............................................. 121 --
---- ----
$801 $527
==== ====
14. STOCKHOLDERS' EQUITY
The authorized capital stock of the Company consists of 200,000,000 shares, $.01
par value, of which the Company has authorized the issuance of up to 100,000,000
shares of Common Stock, $.01 par value per share, 75,000,000 shares of Excess
Stock, at $.01 par value per share, and 25,000,000 shares of Preferred Stock,
par value $.01 per share. On August 20, 1997, the Company issued 11,615,000
shares of its Common Stock (including the underwriters' over-allotment option of
1,520,000 shares) through an initial public offering (the "Offering").
Concurrently with the consummation of the Offering, the Company issued 38,095
shares of restricted common stock pursuant to officer stock loans and 85,600
shares of restricted common stock to a financial advisor. In addition, the
Company previously issued to its executive officers approximately 553,616
shares, as founders' shares. As of December 31, 2000, no shares of Excess Stock
were issued and outstanding.
On May 12, 1998 (the "May 1998 Offering"), the Company completed the sale of
11,500,000 shares of common stock and 4,600,000 shares of 8% Preferred Income
Equity Redeemable Shares with a mandatory liquidation preference of $25.00 per
share (the "PIERS"). Gross proceeds from these equity offerings ($353,000, net
of underwriter's discount) were used principally to repay the Acquisition
Facility (see Note 10) and acquire additional properties. These offerings
resulted in the reduction of continuing investor's interest in the Operating
Partnership from 16.2% to 9.2%.
As of December 31, 2000 and 1999, the minority interest unitholders owned 8.6%
(2,307,515 units) and 9.1% (2,428,217 units) of the Operating Partnership,
respectively.
At December 31, 2000, 10,275,480 shares of common stock were reserved for the
conversion of 2,307,515 units, 3,268,965 stock options and 4,699,000 PIERS.
RIGHTS PLAN
On February 16, 2000, the Board of Directors of the Company authorized a
dividend distribution of one preferred share purchase right ("Right") for each
outstanding share of common stock which was distributed to all holders of record
of the common stock on June 30, 2000. Each Right entitles the registered holder
to purchase from the Company one one-hundredth of a share of Series B junior
participating preferred stock, par value $0.01 per share ("Preferred Shares"),
at a price of $60.00 per one one-hundredth of a Preferred Share ("Purchase
Price"), subject to adjustment as provided in the rights agreement. The Rights
expire on March 5, 2010, unless the expiration date is extended or the Right is
redeemed or exchanged earlier by the Company.
The Rights are attached to each share of common stock. The rights are generally
exercisable only if a person or group becomes the beneficial owner of 17% or
more of the outstanding common stock or announces a tender offer for 17% or more
of the outstanding stock ("Acquiring Person"). In the event that a person or
group becomes an Acquiring Person, each holder of a Right, excluding the
Acquiring Person, will have the right to receive, upon exercise, common stock
having a market value equal to two times the Purchase Price of the Preferred
Shares.
51
SL GREEN REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SQUARE FEET AND PER SHARE DATA)
STOCK OPTION PLANS
During August 1997, the Company instituted the 1997 Stock Option and Incentive
Plan (The "Stock Option Plan"). The Stock Option Plan authorizes (i) the grant
of stock options that qualify as incentive stock options under Section 422 of
the Code ("ISOs"), (ii) the grant of stock options that do not so qualify
("NQSOs"), (iii) the grant of stock options in lieu of cash Directors' fees and
employee bonuses, (iv) grants of shares of Common Stock, in lieu of
compensation; and (v) the making of loans to acquire shares of Common Stock, in
lieu of compensation. The exercise price of stock options will be determined by
the Compensation Committee, but may not be less than 100% of the fair market
value of the shares of Common Stock on the date of grant in the case of ISOs;
provided that, in the case of grants of NQSOs granted in lieu of cash Director's
fees and employee bonuses, the exercise price may not be less than 50% of the
fair market value of the shares of Common Stock on the date of grant. At
December 31, 2000, approximately 3,268,965 shares of Common Stock were reserved
for exercise of warrants and stock options.
Options granted under the 1997 qualified stock option plan are exercisable at
the fair market value on the date of grant and, subject to termination of
employment, expire ten years from the date of grant, are not transferable other
than on death, and are exercisable in three equal annual installments commencing
one year from the date of grant (with the exception of 10,000 options which had
a vesting period of one year).
The Company applies APB No. 25 and related interpretations in accounting for its
plan. Statement of Financial Accounting Standards No. 123 ("FAS 123") was issued
by the Financial Accounting Standards Board in 1995 and, if fully adopted,
changes the methods for recognition of cost on plans similar to that of the
Company. Adoption of FAS 123 is optional,however, pro forma disclosure, as if
the Company adopted the cost recognition requirements under FAS 123, are
presented below. The Company did not record any compensation expense under APB
25.
A summary of the status of the Company's stock options as of December 31, 2000
and 1999 and changes during the years ended December 31, 2000 and 1999 are
presented below:
OUTSTANDING WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
----------- ----------------
Balance at December 31, 1998 ...................... 1,798,000 $21.19
Granted ........................................... 609,000 $20.59
Exercised ......................................... -- --
Lapsed or cancelled ............................... (356,000) $22.41
---------- ------
Balance at December 31, 1999 ...................... 2,051,000 $20.80
Granted ........................................... 626,000 $24.98
Exercised ......................................... (206,035) $20.99
Lapsed or cancelled ............................... (29,999) $21.58
---------- ------
Balance at December 31, 2000 ...................... 2,440,966 $21.85
========== ======
Options exercisable at December 31, 1999 .......... 529,364 $21.06
Options exercisable at December 31, 2000 .......... 742,993 $20.95
The weighted average exercise price of the 742,993 options exercisable was
$20.95 at December 31, 2000. All options were granted within a price range of
$17.75 to $27.75. The remaining weighted average contractual life of the options
was 8.31 years. The weighted average fair value of options granted during the
year was $2,405 and $2,300 for the years ended December 31, 2000 and 1999,
respectively. The fair value of each share option granted is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 2000, 1999, and 1998.
52
SL GREEN REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SQUARE FEET AND PER SHARE DATA)
2000 1999 1998
-------------------------------------------------------------------------
Dividend yield 5.50% 5.00% 5.00%
Expected life of option 4 years 4 years 4 years
Risk-free interest rate 5.00% 5.00% 5.00%
Expected stock price volatility 25.35% 28.76% 36.95%
The compensation cost under FAS 123 for the stock performance-based plan would
have been $2,455, $1,600 and $2,600 in 2000, 1999, and 1998, respectively. Had
compensation cost for the Company's grants for stock-based compensation plans
been determined consistent with FAS 123, the Company's net income and net income
per common share for 2000, 1999, and 1998 would approximate the pro forma
amounts below:
2000 1999 1998
-------------------------------------------------------------------------
Net income available to common shareholders $74,136 $31,705 $20,900
Basic earnings per common share $3.04 $1.31 $1.06
Diluted earnings per common share $2.85 $1.31 $1.06
The effects of applying FAS 123 in this pro forma disclosure are not indicative
of future amounts.
EARNINGS PER SHARE
Earnings per share is computed as follows:
FOR THE YEAR ENDED DECEMBER 31, 2000
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------------------------------------------------------------------------------------
Basic Earnings:
Income available to common
shareholders $ 76,591 24,373,000 $3.14
Effect of Dilutive Securities:
Redemption of Units to common shares 7,430 2,365,000
Preferred Stock (if converted to common stock) 9,200 4,698,900
Stock Options -- 381,000
--------------------------------------------------------------------------------------
Diluted Earnings:
Income available to common
shareholders $ 93,221 31,817,900 $2.93
--------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1999
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------------------------------------------------------------------------------------
Basic Earnings:
Income available to common
shareholders $ 33,258 24,192,000 $1.37
Effect of Dilutive Securities:
Redemption of Units to common shares 3,356 2,428,000
Stock Options -- 60,000
-------------------------------------------------------------------------------------------
Diluted Earnings:
Income available to common
shareholders $ 36,614 26,680,000 $1.37
-------------------------------------------------------------------------------------------
53
SL GREEN REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SQUARE FEET AND PER SHARE DATA)
FOR THE YEAR ENDED DECEMBER 31, 1998
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-----------------------------------------------------------------------------------------
Basic Earnings:
Income available to common
shareholders $ 23,482 19,675,000 $1.19
Effect of Dilutive Securities:
Redemption of Units to common shares 3,043 2,406,000
Stock Options -- 64,000
-----------------------------------------------------------------------------------------
Diluted Earnings:
Income available to common
shareholders $ 26,525 22,145,000 $1.19
-----------------------------------------------------------------------------------------
The PIERS outstanding in 1999 and 1998 were not included in the 1999 and 1998
computations of earnings per share as they were anti-dilutive during those
periods.
PREFERRED STOCK
The Company's 8% PIERS are non-voting and are convertible at any time at the
option of the holder into the Company's common stock at a conversion price of
$24.475 per share. The conversion of all PIERS would result in the issuance of
4,699,000 of the Company's common stock which has been reserved for issuance.
The PIERS receive annual dividends of $2.00 per share paid on a quarterly basis
and dividends are cumulative. On or after July 15, 2003 the PIERS may be
redeemed at the option of the Company at a redemption price of $25.889 and
thereafter at prices declining to the par value of $25.00 on or after July 15,
2007, with a mandatory redemption on April 15, 2008 at a price of $25.00 per
share. The PIERS were recorded net of underwriters discount and issuance costs.
These costs are being accreted over the expected term of the PIERS using the
interest method.
15. BENEFIT PLANS
The building employees are covered by multi-employer defined benefit pension
plans and post-retirement health and welfare plans. Contributions to these plans
amounted to $825, $644, and $366, during the years ended December 31, 2000, 1999
and 1998, respectively. Separate actuarial information regarding such plans is
not made available to the contributing employers by the union administrators or
trustees, since the plans do not maintain separate records for each reporting
unit.
EXECUTIVE STOCK COMPENSATION
During July 1998, the Company issued 150,000 shares in connection with an
employment contract. These shares vest annually at rates of 15% to 35% and were
recorded at fair value. At December 31, 2000, 45,000 of these shares had vested.
The Company recorded compensation expense of approximately $534 for each of the
years ended December 31, 2000 and 1999.
Effective January 1, 1999 the Company implemented a deferred compensation plan
(the "Deferred Plan") covering certain executives of the Company. In connection
with the Deferred Plan the Company issued 240,000 restricted shares. The shares
issued under the Deferred Plan were granted to certain executives and vesting
will occur annually upon the Company meeting established financial performance
criteria. Annual vesting occurs at rates ranging from 15% to 35% once
performance criteria are reached. As of December 31, 2000, 80,320 of these
shares had vested. The Company recorded compensation expense of approximately
$880 and $893 for the years ended December 31, 2000 and 1999, respectively.
DEFERRED COMPENSATION AWARD
Contemporaneous with the closing of 1370 Avenue of the Americas, an award of
$2,833 was granted to several members of management earned in connection with
the realization of this investment gain. This award, which will be paid out over
a three-year period, is presented as Deferred Compensation Award on the balance
sheet.
54
SL GREEN REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SQUARE FEET AND PER SHARE DATA)
401(k) PLAN
During August 1997, the Company implemented a 401(k) Savings/Retirement Plan
(the "401(k) Plan") to cover eligible employees of the Company and any
designated affiliate. The 401(k) Plan permits eligible employees of the Company
to defer up to 15% of their annual compensation, subject to certain limitations
imposed by the Code. The employees' elective deferrals are immediately vested
and non-forfeitable upon contribution to the 401(k) Plan. As of December 31,
1999, the Company had not made any contributions to the 401(k) Plan. During
2000, the Company amended its 401(k) Plan to include a matching contribution,
subject to ERISA limitations, equal to 50% of the first 4% of annual
compensation deferred by an employee. For the year ended December 31, 2000, the
Company made a matching contribution of $54.
16. COMMITMENTS AND CONTINGENCIES
The Company and the Operating Partnership are not presently involved in any
material litigation nor, to their knowledge, is any material litigation
threatened against them or their properties, other than routine litigation
arising in the ordinary course of business. Management believes the costs, if
any, incurred by the Company and the Operating Partnership related to this
litigation will not materially affect the financial position, operating results
or liquidity of the Company and the Operating Partnership.
The Company has entered into employment agreements with certain executives.
Seven executives have employment agreements which expire between October 2001
and January 2007. The cash based compensation associated with these employment
agreements totals approximately $2,075 annually.
During March 1998, the Company acquired an operating sub-leasehold position at
420 Lexington Avenue. The operating sub-leasehold position requires annual
ground lease payments totaling $6,000 and sub-leasehold position payments
totaling $1,100 (excluding an operating sub-lease position purchased January
1999 - see Note 3). The ground lease and sub-leasehold positions expire 2008.
The Company may extend the positions through 2029 at no additional cost.
The property located at 1140 Avenue of the Americas operates under a net ground
lease ($348 annually) with a term expiration date of 2016 and with an option to
renew for an additional 50 years.
The property located at 711 Third Avenue operates under an operating sub-lease
which expires in 2083. Under the sub-lease, the Company is responsible for
ground rent payments of $1,600 annually increasing to $3,100 in July 2001 for
ten years. The ground rent is reset after year ten based on the estimated fair
market value of the property.
In April 1988, the SL Green Predecessor entered into a lease agreement for
property at 673 First Avenue in New York City, which has been capitalized for
financial statement purposes. Land was estimated to be approximately 70% of the
fair market value of the property. The portion of the lease attributed to land
is classified as an operating lease and the remainder as a capital lease. The
initial lease term is 49 years with an option for an additional 26 years.
Beginning in lease years 11 and 25, the lessor is entitled to additional rent as
defined by the lease agreement.
The Company continues to lease the 673 First Avenue property which has been
classified as a capital lease with a cost basis of $12,208 and cumulative
amortization of $3,035 and $2,782 at December 31, 2000 and 1999, respectively.
The following is a schedule of future minimum lease payments under capital
leases and noncancellable operating leases with initial terms in excess of one
year as of December 31, 2000.
55
SL GREEN REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SQUARE FEET AND PER SHARE DATA)
NONCANCELLABLE
DECEMBER 31, CAPITAL LEASES OPERATING LEASES
------------ -------------- ----------------
2001 $ 1,290 $ 11,594
2002 1,290 11,982
2003 1,290 11,982
2004 1,290 11,982
2005 1,322 11,982
Thereafter 59,009 320,242
-------- --------
Total minimum lease
payments 65,491 $379,764
========
Less amount
representing interest (50,188)
--------
Present value of net
minimum lease payments $ 15,303
========
17. TECHNOLOGY INVESTMENTS AND ALLIANCES
Through December 31, 2000, the Company had 476,705 warrants from Onsite Access
Inc. ("Onsite") in exchange for providing Onsite with access to its portfolio of
properties. This arrangement provides certain marketing preferences to Onsite in
exchange for which the Company will receive a share in the revenues of the
service provider. The Company is also entitled to receive up to an additional
405,648 warrants based on the terms of the Warrant Issuance Agreement. Onsite
provides comprehensive communications solutions for small and medium-sized
business customers in multi-tenant commercial office buildings. The warrants had
an estimated fair value of $306 at December 31, 1999. This was recorded as
Deferred Revenue at December 31, 1999 and will be amortized over the term of the
agreement. The warrants are held in an LLC of which the Company owns a 75
percent managing member interest, and the remaining interest is held by certain
members of management.
On March 29, 2000, the Company entered into an agreement with Broadband Office,
Inc. ("Broadband") to provide telecommunication and internet services to its
tenants. In exchange for providing Broadband with access to tenants at some of
the Company's properties, the Company received 164,000 shares of common stock
with a fair value of $235 on that date.
Through December 31, 2000, the Company made a $1,500 limited partnership
investment in Internet Realty Partners, L.P. ("IRP"). The Company is committed
to fund an additional $500. IRP invests in real estate-related internet,
technology and e-commerce companies.
On June 6, 2000, the Company entered into a marketing and cooperation agreement
with Eureka to provide telecommunication and internet services to its tenants.
In exchange for providing Eureka with access to tenants at some of the Company's
properties, the Company will receive warrants based on the square footage of
property provided. As of December 31, 2000, 58,000 warrants had been received.
Such warrants had no value at December 31, 2000.
On August 22, 2000, the Company entered into an agreement with Verticore
Communications Ltd. ("Verticore") to participate in the elevator news network
program. In exchange for providing Verticore with access to the Company's
properties, the Company will receive warrants based on the number of qualifying
elevator cabs. As of December 31, 2000, 195,000 warrants had been received by
the Company. Such warrants had no value at December 31, 2000. In addition, the
Company made a $750 capital investment in exchange for 150,000 shares of Series
2 Class C Convertible Preferred Stock.
18. ENVIRONMENTAL MATTERS
The management of the Company believes that the properties are in compliance in
all material respects with applicable Federal, state and local ordinances and
regulations regarding environmental issues. Management is not aware of any
environmental liability that management believes would have a materially adverse
impact on the Company's financial position, results of operations or cash flows.
Management is unaware of any instances in which it would incur significant
environmental cost if any of the properties were sold.
56
SL GREEN REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SQUARE FEET AND PER SHARE DATA)
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly data for the last two years is presented in the tables below:
2000 QUARTER ENDED DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
------------------ ----------- ------------ ------- --------
Total revenues $ 58,195 $ 60,874 $ 56,494 $ 54,759
======== ======== ======== ========
Income net of minority interest and before gain
on sale and extraordinary item 12,104 12,774 11,028 9,815
Gain on sale 16,770 5,624 4,797 14,225
Extraordinary item (491) -- (430) --
-------- -------- -------- --------
Net income before preferred dividends 28,383 18,398 15,395 24,040
Preferred dividends and accretion (2,407) (2,407) (2,407) (2,407)
-------- -------- -------- --------
Income available to common shareholders $ 25,976 $ 15,991 $ 12,988 $ 21,633
======== ======== ======== ========
Net income per common share - Basic $ 1.07 $ 0.65 $ 0.53 $ 0.89
Diluted $ 0.89 $ 0.58 $ 0.49 $ 0.76
======== ======== ======== ========
1999 QUARTER ENDED DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
------------------ ----------- ------------ ------- --------
Total revenues $ 53,890 $ 54,652 $ 50,809 $ 46,662
======== ======== ======== ========
Income net of minority interest and before
extraordinary item 11,345 10,472 11,404 10,613
Extraordinary item (361) -- (628) --
-------- -------- -------- --------
Net income before preferred dividends 10,984 10,472 10,776 10,613
Preferred dividends and accretion (2,399) (2,399) (2,399) (2,399)
-------- -------- -------- --------
Income available to common shareholders $ 8,585 $ 8,073 $ 8,377 $ 8,214
======== ======== ======== ========
Net income per common share - basic and
diluted $ 0.35 $ 0.33 $ 0.35 $ 0.34
======== ======== ======== ========
20. SEGMENT INFORMATION
The Company is a REIT engaged in owning, managing, leasing and repositioning
class B office properties in Manhattan and has one reportable segment, office
real estate. The Company evaluates real estate performance and allocates
resources based on net income.
The Company's real estate portfolio is located in one geographical market of
Manhattan. The primary sources of revenue are generated from tenant rents and
escalations and reimbursement revenue. Real estate property operating expenses
primarily consist of security, maintenance, utility costs and ground rent
expense (at certain applicable properties) and real estate taxes. The single
office real estate business segment meets the quantitative threshold for
determining reportable segments. The Company has no tenant with rental revenue
greater than 10% of the Company's revenue.
57
SL GREEN REALTY CORP.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
INITIAL COST COST CAPITALIZED GROSS AMOUNT AT WHICH CARRIED AT CLOSE
SUBSEQUENT TO ACQUISITION OF PERIOD
BUILDING AND BUILDING AND BUILDING AND
DESCRIPTION (1)(4) ENCUMBRANCE LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL
------------------- ----------- ---- ------------ ---- ------------ ---- ------------ -----
70 West 36th St. (2) -- $1,517 $7,700 $13 $7,997 $1,530 $15,697 $17,227
1414 Avenue of the
Americas (2) -- 2,948 6,790 60 2,901 3,008 9,691 12,699
673 First Avenue $11,992 -- 43,618 -- 1,056 -- 44,674 44,674
470 Park Avenue South 9,771 3,750 30,718 1 2,126 3,751 32,844 36,595
1372 Broadway -- 10,478 41,912 67 6,977 10,545 48,889 59,434
1140 Avenue of the
Americas -- -- 21,035 -- 3,345 -- 24,380 24,380
50 West 23rd Street 21,000 7,217 28,866 43 2,318 7,260 31,184 38,444
17 Battery Place North -- 7,237 29,080 20 5,802 7,257 34,882 42,139
110 East 42nd Street -- 6,000 24,070 26 3,209 6,026 27,279 33,305
1466 Broadway -- 11,643 53,608 -- 3,100 11,643 56,708 68,351
420 Lexington Ave 125,000 -- 83,272 -- 58,419 -- 141,691 141,691
440 Ninth Avenue -- 6,326 25,172 -- 7,926 6,326 33,098 39,424
711 Third Avenue 49,172 19,843 40,342 -- 13,688 19,843 54,030 73,873
1412 Broadway 52,000 16,221 64,886 3 2,473 16,224 67,359 83,583
555 West 57th Street 69,606 18,845 83,353 -- 5,770 18,845 89,123 107,968
286 Madison Avenue (3) -- 2,474 9,887 -- 1,982 2,474 11,869 14,343
290 Madison Avenue (3) -- 1,576 6,305 -- 811 1,576 7,116 8,692
292 Madison Avenue (3) 5,949 23,798 2,621 5,949 26,419 32,368
875 Bridgeport Ave.
Shelton, CT 14,901 3,315 13,305 -- 3,315 13,305 16,620
-------- -------- -------- ----- -------- -------- -------- --------
$353,442 $125,339 $637,717 $ 233 $132,521 $125,572 $770,238 $895,810
======== ======== ======== ===== ======== ======== ======== ========
COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I
-------- -------- -------- -------- --------
LIFE ON WHICH
ACCUMULATED DATE OF DATE DEPRECIATION IS
DESCRIPTION (1)(4) DEPRECIATION CONSTRUCTION ACQUIRED COMPUTED
------------------- ------------ ------------ -------- ---------------
70 West 36th St. (2) $7,954 12/19/84 Various
1414 Avenue of the
Americas (2) 1,155 6/18/96 Various
673 First Avenue 13,116 8/20/97 Various
470 Park Avenue South 10,914 8/20/97 Various
1372 Broadway 4,444 8/20/97 Various
1140 Avenue of the
Americas 1,746 8/20/97 Various
50 West 23rd Street 2,692 8/20/97 Various
17 Battery Place North 2,730 12/19/97 Various
110 East 42nd Street 2,612 9/15/97 Various
1466 Broadway 4,196 3/18/98 Various
420 Lexington Ave 10,225 3/18/98 Various
440 Ninth Avenue 2,209 6/1/98 Various
711 Third Avenue 3,719 5/20/98 Various
1412 Broadway 4,316 8/14/98 Various
555 West 57th Street 4,458 1/1/99 Various
286 Madison Avenue (3) 453 5/24/99 Various
290 Madison Avenue (3) 295 5/24/99 Various
292 Madison Avenue (3) 1,033 5/24/99 Various
875 Bridgeport Ave.
Shelton, CT 165 6/20/00 Various
-------
$78,432
=======
-------------------
(1) All properties located in New York, New York, except for 875 Bridgeport
Avenue, Shelton, CT
(2) Mortgage loan totaling $26,200 encumbers 1414 Avenue of Americas, and 70
West 36th Street
(3) Mortgage loan totaling $26,950 encumbers 286 Madison Avenue, 290 Madison
Avenue and 292 Madison Avenue
(4) Excludes properties held for sale with gross cost of $10,697 encumberances
of $7,750 and accumulated depreciation of $578.
58
SL GREEN REALTY CORP.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
The changes in real estate for the three years ended December 31, 2000, are as
follows:
2000 1999 1998
--------- --------- ---------
Balance at beginning of year $ 908,866 $ 697,061 $ 338,818
Property Acquisitions 16,620 152,187 339,072
Improvements 38,855 86,598 19,171
Retirements/disposals (68,531) (26,980) --
--------- --------- ---------
Balance at end of year $ 895,810 $ 908,866 $ 697,061
========= ========= =========
The aggregate cost of land, buildings and improvements for Federal income tax
purposes at December 31, 2000 was approximately $847,617.
The changes in accumulated depreciation, exclusive of amounts relating to
equipment, autos, and furniture and fixtures, for the three years ended December
31, 2000, are as follows:
2000 1999 1998
-------- -------- --------
Balance at beginning of year $ 56,983 $ 37,317 $ 23,800
Depreciation for year 24,620 22,110 13,517
Retirements/disposals (3,171) (2,444) --
-------- -------- --------
Balance at end of year $ 78,432 $ 56,983 $ 37,317
======== ======== ========
59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "Election of Directors" and
"Principal and Management Stockholders -- Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in the Company's definitive Proxy Statement
for its 2001 Annual Meeting of Stockholders, to be filed pursuant to
Regulation 14A under the Securities and Exchange Act of 1934, as amended,
prior to April 30, 2000 (the "2001 Proxy Statement"), is incorporated
herein by reference.
ITEM 11. EXECUTIVE AND DIRECTOR COMPENSATION
The information set forth under the captions "Election of Directors -- Director
Compensation" and "Executive Compensation" in the 2001 Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the 2001 Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Principal and Management
Stockholders" in the 2001 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULE, AND REPORTS ON FORM 8-K
(a)(1) Consolidated Financial Statements
SL GREEN REALTY CORP
Report of Independent Auditors.............................................................................30
Consolidated Balance Sheets as of December 31, 2000 and 1999...............................................31
Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998.....................32
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998.......33
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998.................34
Notes to Consolidated Financial Statements ................................................................35
(a)(2) Financial Statement Schedule
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 2000..............................58
Schedules other than those listed are omitted as they are not applicable or the
required or equivalent information has been included in the financial statements
or notes thereto.
60
INDEX TO EXHIBITS
(a)
EXHIBITS PAGE
-------- ----
2.1 Form of Purchase and Sale Agreement between The Prudential Insurance
Company of America, as Seller, and SL Green 100 Park LLC, as Buyer***
2.2 Form of Second Amended and Restated Operating Agreement of SLG 100 Park
LLC between The Prudential Insurance Company of America and SL Green 100
Park LLC***
2.3 Form of Agreement of Spreader, Consolidation and Modification of Mortgage
by SLG 100 Park LLC, as Borrower to The Prudential Insurance Company of
America, as Lender***
2.4 Form of Amended, Restated and Consolidated Mortgage Note by SLG 100 Park
LLC, as Borrower, to The Prudential Insurance Company of America, as
Lender***
3.1 Articles of Incorporation of the Company*
3.2 Bylaws of the Company*
4.0 Rights Agreement, dated as of March 6, 2000, between SL Green Realty Corp.
and American Stock Transfer & Trust Company which includes as Exhibit B
thereto, the Form of Rights Certificates****
4.1 Specimen Share Certificate*
10.1 Form of Agreement of Limited Partnership of the Operating Partnership*
10.2 Form of Articles of Incorporation and Bylaws of the Management
Corporation*
10.3 Form of Employment and Noncompetition Agreement among the Executive
Officers and the Company*
10.4 Employment and Noncompetition Agreement between David J. Nettina and the
Company*
10.5 Form of Registration Rights Agreement between the Company and the persons
named therein*
10.6 Amended 1997 Stock Option and Incentive Plan**
10.7 Form of June 27, 2000 Revolving Credit and Guaranty Agreement*****
10.8 Form of Purchase and Sale Agreement between ARE One Park Avenue LLC, One
Park Avenue Fee LLC, One Park Avenue SPE Inc. and One Park Avenue Manager
LLC, as Sellers, and SL Green Diamond LLC, as buyer******
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
----------
* Incorporated by reference to the Company's Registration Statement on
Form S-11 (333-29329) declared effective by the Commission on August 14,
1997.
** Incorporated by reference to the Company's Registration Statement on
Form S-11 (333-50309) declared effective by the Commission on May 12,
1998.
*** Incorporated by reference to the Company's Form 8-K dated February 18,
2000, filed with the Commission on March 3, 2000
**** Incorporated by reference to the Company's Form 8-K dated February 16,
2000, filed with the Commission on March 16, 2000
***** Incorporated by reference to the Company's Form 8-K dated June 27, 2000,
filed with the Commission on July 12, 2000
****** Incorporated by reference to the Company's Form 8-K dated September 29,
2000, filed with the Commission on October 4, 2000.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter ended December
31, 2000:
1. Form 8-K dated October 4, 2000, Items 5 and 7
2. Form 8-K dated October 25, 2000, Items 7 and 9
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SL GREEN REALTY CORP.
Dated: March 16, 2001 By: /s/ THOMAS E. WIRTH
------------------------------
Thomas E. Wirth
Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and directors
of SL Green Realty Corp. hereby severally constitute Stephen L. Green, and
Thomas E. Wirth, and each of them singly, our true and lawful attorneys and with
full power to them, and each of them singly, to sign for us and in our names in
the capacities indicated below, the Annual Report on Form 10-K filed herewith
and any and all amendments to said Annual Report on Form 10-K, and generally to
do all such things in our names and in our capacities as officers and directors
to enable SL Green Realty Corp. to comply with the provisions of the Securities
Exchange Act of 1934, and all requirements of the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be signed
by our said attorneys, or any of them, to said Annual Report on Form 10-K and
any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
Signatures Title Date
---------- ----- ----
/s/ Stephen L. Green*
---------------------------- Chairman of the Board of Directors March 16, 2001
Stephen L. Green Chief Executive Officer
/s/ David J. Nettina*
---------------------------- President and Chief Operating Officer March 16, 2001
David J. Nettina (Principal Executive Officer)
/s/ Thomas E. Wirth*
---------------------------- Executive Vice President and March 16, 2001
Thomas E. Wirth Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Benjamin P. Feldman*
---------------------------- Director March 16, 2001
Benjamin P. Feldman
/s/ John H. Alschuler, Jr*
---------------------------- Director March 16, 2001
John H. Alschuler, Jr.
/s/ Edwin Thomas Burton, III*
---------------------------- Director March 16, 2001
Edwin Thomas Burton, III
/s/ John S. Levy*
---------------------------- Director March 16, 2001
John S. Levy
*By Power of Attorney
62