SL Green's Golden Earnings

SL Green Realty (NYSE: SLG  ) reported first-quarter earnings following Monday's closing bell, and it didn't pause long before announcing two office-building sales and an acquisition the next morning.

That pace and focus on prized Manhattan properties epitomizes SL Green's operations. Judging from the company's latest earnings report, its methods seem to be working.

SL Green reported recorded revenue of $295.8 million and EBITDA of $182.8 million -- respective 154.2% and 190.5% increases over the year-ago period -- thanks to strong leasing activity and acquisitions. Its 25% stake in realty finance company Gramercy Capital accounted for $11.3 million in dividends and fees. Funds from operations grew 88%, accounting for a $77.2 million distribution from a prior property sale. The company also raised its full-year earnings forecast by $0.10, to $5.40 per share.

The quarter had been a busy one, with the company closing approximately $4.1 billion in transactions. Most significantly, its net $4 billion acquisition of Reckson Associates in January added 4.2 million square feet in the city, and 3.6 million square feet in nearby Westchester County and Stamford, Conn.

The future looks solid, given Manhattan's tight office supply and rising rents. SL Green claims to be the city's largest office landlord, owning 32 properties totaling 23.5 million square feet. Manhattan office leases totaled 409,748 square feet, and occupancy was 97.3%. The company's average rent on new office space climbed 37%, thanks to the renegotiation of expired leases.

That said, even Manhattan must take a dose of reality now and then. A multitude of risk factors could lead to a real estate downturn here, and with an estimated 390 million square feet of office space in the Big Apple, the market's simply too large for SL Green to exert real upward pressure on rent. While the company can add value by redeveloping and repositioning properties, its fortunes are undoubtedly tied to the city's health. That makes the company's expansion into suburban office space especially appealing, although SL Green seems unenthusiastic in pursuing that sector.

Just as its investments largely concentrate on the Manhattan area, SL Green doesn't look far in selecting candidates for management, either. It announced several top-level internal promotions last week, and the company sealed nine new employment agreements over the quarter, representing a $13 million one-time charge. While you may feel that management justly deserves rewards, note that CEO Marc Holliday received total compensation of $16.8 million in 2006, while President and Chief Investment Officer Andrew Mathias took home $9.9 million. Related-party transactions included fees paid to Chairman Stephen Green's wife for undisclosed consulting services, and to cleaning and security companies run by Green's son.

SL Green remains committed to its niche as the only public REIT on Manhattan commercial properties. Given its fine performance, this company might just deserve a special niche of its own in your portfolio.

Brush up on SL Green with its most recent year in review, and discover more stocks with the REIT stuff with a free 30-day trial to Motley Fool Income Investor.

Fool contributor S.J. Caplan does not own shares of SL Green. The Fool has a disclosure policy.


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