2006 in Review: SL Green Realty

The words "office space" conjure up images of reports, pieces of flair, and Swingline staplers. But for SL Green Realty (NYSE: SLG  ) , office space represents big bucks. In a year when real estate investment trusts made up one of the market's top-performing sectors, SL Green Realty was an absolute beast, returning 76% plus dividends. Office space REITs in particular were sizzling. Competitors such as Boston Properties (NYSE: BXP  ) , Vornado Realty Trust (NYSE: VNO  ) , and Brookfield Properties (NYSE: BPO  ) finished the year up 55%, 48%, and 30% respectively.

In the first quarter, SL Green reported a 9.1% increase in funds from operations (FFO) on a per-share basis compared with the first quarter in 2005. Occupancy stood at 95%. In the quarter, the company signed 65 office leases totaling more than 530,000 square feet. One major positive trend this year was the soaring prices for rentals in the Big Apple. During the first quarter, the company hiked average office starting rents by 17% over previously fully escalated rents.

SL Green followed with another big quarter. FFO increased 19.6% on a per-share basis and occupancy increased to 96%. Same-store net operating income under GAAP increased by 5% and average office starting rents rose 10% over previously fully escalated rents. The REIT remained proactive, making about $546 million in new investments, including $15.3 million for a 50% ownership interest in a joint venture with Mack-Cali Realty (NYSE: CLI  ) . The joint venture acquired interests in seven class A office properties valued at about $127.5 million and spanning about 900,000 square feet.

The third quarter was a landmark one. Of paramount importance was the REIT's decision to acquire Reckson Associates Realty (NYSE: RA  ) for around $6 billion. The seemingly relentless expansion effort netted the company another 9.2 million square feet, with 4.2 million square feet in Manhattan. Marc Holliday, the CEO of SL Green, noted, "The acquisition of Reckson Associates provides SL Green with a huge step forward as one of the nation's largest office REITs as we seek to continue being the sector's outstanding performer."

When excluding a $10.8 million incentive fee earned in the third quarter of 2005, the company's 2006 Q3 FFO increased by 36% on a per-share basis. Occupancy and pricing power both remained strong: There was the 96% occupancy rate, and average office starting rents increased by 25.8% over previously fully escalated rents. SL Green also raised $269.1 million in equity through the issuance of 2.5 million common shares in July. The offering had a minimal impact on the stock price, which finished slightly up for the quarter.

Shareholders approved the Reckson transaction in the fourth quarter. The deal is expected to close during the first quarter of 2007. In November, the REIT priced an additional public offering of 3.7 million common shares for gross proceeds of $498 million. The company also said it was increasing the dividend on its common shares by about 17% during the quarter. The dividend yield is 2.1% now.

This was an incredible year for SL Green. Its acquisition of Reckson Associates locked in the company's position as the largest office landlord in New York City. Occupancy rates remained close to 96% and FFO were decisively higher than in 2005.

So what will next year hold for SL Green? Our Motley Fool CAPS community members have offered their viewpoints. This is how their overall sentiment stacks up:

CAPS summary Data

Total Bulls

19

Total Bears

5

Bull Ratio

79%

Bear Ratio

21%



Most CAPS players like SL Green, which has a two-star rating. With the price of any form of real estate in Manhattan being prohibitive for many citizens, CAPS player Metaforummo writes, "There's no better way to own a piece of Manhattan than to invest in this REIT."

I believe the company will have another strong year. What with the company's past operational trends and the state of the New York City office space rental market, it would be difficult for me to arrive at a conclusion to the contrary. The company has clearly demonstrated its intent and ability to successfully expand.

With the stock trading at a price/FFO ratio of 30, one could argue that the valuation is a concern, given that Boston Properties trades at a slightly cheaper multiple of 27 and SL Green was trading at a multiple of only 25 as recently as August. However, I think this premium is justified by the improved market position gained through the Reckson deal as well as the growth initiatives.

SL Green has also proved successful in boosting its rents. Its pricing power may very well be one of its strongest assets. Given the tight conditions in the Manhattan rental market, companies similar to Initech in the movie Office Space may not be able to afford upscale office property -- they may very well be relegated to Storage Room B.

How can the Fool help you spruce up your portfolio for the new year? Take a risk-free look atStocks 2007, or visit our new CAPS investment community for stock ideas.

Check out the other companies included in "The Motley Fool's 2006 in Review and 2007 Preview" special.

Fool contributor Billy Fisher does not own shares of any of the companies mentioned. The Motley Fool has a disclosure policy.


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