SL Green's (SLG) Q2 FFO Beats Estimates, Revenues Rise

SL Green Realty Corp. (NYSE:SLG) reported second-quarter 2016 adjusted funds from operations (“FFO”) of $3.41 per share, exceeding the Zacks Consensus Estimate of $3.18. In the prior-year quarter, the company reported adjusted FFO of $1.65 per share. A rise in combined same-store net operating income (“NOI”) aided the better-than-expected results in the quarter.

Net rental revenue for the second quarter rose 37% year over year to around $416.8 million. Further, it surpassed the Zacks Consensus Estimate of $345 million.

Quarter in Detail

For the quarter, combined same-store cash NOI rose 6.5% year over year to $186.1 million.

In the Manhattan portfolio, SL Green inked 50 office leases for 621,150 square feet of space. As of Jun 30, 2016, Manhattan same-store occupancy increased 30 basis points (bps) year over year to 97.4%. Importantly, in the second quarter, the mark-to-market on signed Manhattan office leases was 16.1% higher than the previously fully escalated rents of the same spaces.

On the other hand, in the Suburban portfolio, SL Green signed 19 office lease deals for 177,684 square feet of space. Same-store occupancy for the Suburban portfolio was 83%, down 60 bps year over year. Moreover, in the second quarter, mark-to-market on signed Suburban office leases was 2.5% higher than the previously fully escalated rents of the same spaces.

SL Green exited second-quarter 2016 with cash and cash equivalents of $276.2 million, up from $255.4 million at the end of 2015.

Notable Investment Activities

In June, SL Green closed the sale of 388-390 Greenwich Street to an affiliate of Citigroup, Inc. (NYSE:C) , for $2 billion.

In May, the company along with its joint venture partner closed the sale of the Pace University dormitory tower at 33 Beekman Street for $196.0 million.

In April, SL Green closed the acquisition of a 20% interest in a 1,176 unit ‘Sky’ residential tower, at 605 West 42nd Street.

Again, in April, the company inked a deal to sell 500 West Putnam Avenue, located in Greenwich, CT, for $41.0 million.

Finally, in the second quarter, the company originated new debt and preferred equity investments of $458.5 million in total, of which $120.5 million was retained.

Our Take

We are encouraged by SL Green’s earnings beat this quarter. The company has been actively pursuing portfolio enhancement initiatives through investment in opportunistic assets, and debt and preferred equities. Yet, stiff competition and interest rate issues remain concerns.

Both SL Green and Citigroup currently carry a Zacks Rank #3 (Hold).

We now look forward to the results of other REITs such as Avalonbay Communities Inc. (NYSE:AVB) and Simon Property Group Inc. (NYSE:SPG) , which are scheduled to report their earnings next week.

Note: All EPS numbers presented in this write up represent funds from operations (“FFO”) per share. FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.