SL Green Realty Corp (SLG) 2006 Q2 法說會逐字稿

Welcome to the SL Green Realty Corp. second-quarter 2006 earnings conference call. This conference call is being recorded. At this time, the Company would like to remind the listeners that during the call management may make forward-looking statements. Actual results may differ from predictions that management may make today. Additional information regarding the factors that could cause such differences appear in the MD&A section of the Form 10-Q and other reports filed with the Securities and Exchange Commission.

Also, during today's conference call the call may discuss non-GAAP financial measures as defined by the SEC Regulation G. The GAAP financial measures most directly compared to each non-GAAP financial measure discussed, and the recollection of the differences between each non-GAAP financial measure and the compared GAAP financial measures can be found on the Company's website at www.SLGreen.com by selecting the press release regarding the Company's second-quarter earnings.

I would now like to turn the call over to your host, Mr. Marc Holliday, President and Chief Executive Officer of SL Green Realty Corp. Please proceed, sir.

Okay, thank you, and good afternoon, everyone. We are all pleased that you have able to join us today for SL Green's midyear conference call. With me today is Andrew Mathias, Greg Hughes, Gerry Nocera, as well as Steve Green, and we would like to run you through today our thoughts and observations on the market, second-quarter performance, and then we will turn it over towards the end of the call for questions and answers.

Through the first half of the year, we experienced dramatic improvements in almost all areas of our business, as we will highlight for you. The second quarter continues our trend of record Company performance, with FFO per share of $1.22, which is the highest ever for SL Green and represents a 20% improvement year-over-year and 13% improvement over just last quarter.

This quarter's drivers of growth largely consisted of increasing Manhattan office rents, net occupancy gains in the portfolio, achievement of additional efficiencies on the right-hand side of the balance sheet, and strong earnings growth from SL Green's investment in Gramercy Capital Corp.

It is important to note that these impressive operating results were achieved while continuing to source and close several new investments totaling over $600 million that we are confident will be drivers of earnings growth in their own right in 2007, 2008, and beyond.

Underpinning this operating performance is an extremely landlord-favorable market, evidenced by a 6.9% vacancy rate in midtown, which is the lowest vacancy rate that has been achieved in the past five years and clearly sets the stage for continuing improvements in rental rates and shrinkage in tenant concession packages.

More importantly, sublet space makes up less than 1.5% of such total, which puts pricing power back in the hands of landlords after many years of competing with built space being disposed of at below-market rents.

Year to date absorption is over 1 million square feet, generated by almost 10 million square feet of leasing activity, much of which activity occurred in the second quarter after a somewhat slower first quarter.

The top five leases signed in the market accounted for over 1.3 million square feet of activity and are comprised of businesses in a cross-section of industries, such as financial services, law firms, fashion and apparel, and government. This activity was also reflected in SL Green's portfolio, with 60 leases signed during the quarter for 438,000 square feet of new and renewal activity.

Clearly, we have benefited from our early decision to transition the portfolio from B properties to big Avenue A buildings which are now enjoying significantly higher rental growth. While the largest and most dramatic rental increases over the past six to nine months were first occurring in the trophy buildings, we are now experiencing competition for space throughout the entire portfolio. We are using this market as the backdrop within which to lock in a higher quality revenue base with good credit tenancies.

We have signed approximately 1 million square feet of leases throughout the first half of this year, which puts us on track to substantially exceed our scheduled and contractual lease expirations of 627,000 square feet for all of 2006. Ultimately, the amount by which our actual leasing activity exceeds our scheduled lease expirations is emblematic of SL Green's success in achieving early renewals and relocations to further enhance near-term earnings growth.

At the beginning of the year, we projected that office rents in Manhattan would rise by 25% to 30% over a three-year period. Just six months later, that prognostication looks to be conservative as we reassess the market climate. Average rental increases realized on expiring leases have been in the range of 10% to 16% for the first half of the year, and we expect to maintain or increase these spreads during the second half of the year as there is no foreseeable new construction that would alter these same metrics.

Our redevelopment of 100 Park Avenue seems to be well-timed in light of prevailing market conditions. As many as you may recall, in December we announced the commencement of an approximately $70 million redevelopment of the 850,000 square foot building. Physical work commenced in May as planned, and we expect to be substantially complete by the end of 2007. We will begin aggressively marketing the space in the second half of 2006 and hope to capitalize on the embedded value and rental opportunity in this property.

In place escalated rents in the building are approximately $43.85 -- I guess to be exact -- and market rents are at least $10 to $15 per square foot higher.

As big blocks of space continue to carry premiums in this market, we are working or stacking within 100 Park Avenue to make available one or more blocks of 100,000 square feet in order to meet what is currently a very deep demand for space by financial service firms, law firms, and other industries throughout the city.

On the same theme, we're finalizing our budgets and conceptual plans for 521 Fifth Avenue and would expect to announce later this year the formal kickoff of a complete building redevelopment in this latest addition to our portfolio. 521 Fifth is also a sizable building, in excess of 500,000 square feet, and carries average rents that are just in the high $30s to almost $40 a foot.

It is notable that a large block of space in the property directly across the street has commanded rents at or around $80 per square foot; and with the proper redevelopment plan we believe 521 Fifth will prove to be a very smart value-added play.

Turning now to the structured finance portfolio, we have excellent fundamentals and new investments driving the real estate; but we are experiencing an equal degree of success in our structured finance portfolio, consisting primarily of our investment in Gramercy Capital Corp. and the portfolio of debt investments that continue on SL Green's books.

Gramercy released earnings last Wednesday and announced strong growth in FFO on an expanding loan portfolio and investment portfolio of credit tenant leases. Gramercy's assets now stand at approximately $2 billion in total, with an equity base of over $500 million.

During Gramercy's conference call on Thursday, the company increased the midpoint of its earnings guidance by approximately $0.07 per share and left the door open for further improvements with the planned CDO financing some time during the second half of this year.

SL Green's share of dividends and fees from Gramercy were in excess of $8 million for the quarter, an 11% increase from just last quarter. The pairing of Gramercy Capital Corp.'s highly focused debt origination platform with SL Green's established public company infrastructure is proving to be a winning combination, as demonstrated by Gramercy's expanding asset base, access to efficient debt and equity capital, and overall company performance.

If you look at the investment portfolio of structured finance on balance sheet, you will note that there were five loans that paid off in SL Green's portfolio in the second quarter. However, if you peel away one layer you will see that two of those investments were converted into direct equity investments, one in 609 Fifth Avenue and the other being the Mack-Cali joint venture which Andrew will talk about a little bit later.

One other loan we refinanced and it actually turned out to be a new origination for the quarter; and two others went away entirely. So it is important to note that with the existing book business that we have on balance sheet and structured finance, some of it may and will convert to equity over time, which was part of the rationale for SL Green's initiation into the program from the outset; and others we will have a chance to refinance over time.

Interestingly, since Gramercy's IPO, SL Green's on balance sheet structured finance investments have increased from $318 million in August 2004, to $333 million as we sit today.

Underscoring the firm's success, SL Green issued 2.5 million shares of common stock earlier this month, raising approximately $270 million. We believe this equity raise was very timely and astute, as proceeds either will have to be used to pay down high-rate debt, fund a pipeline of investments that we expect to close over the next six to 12 months, and to strengthen the Company's equity base.

As many of our long-term investors know, we issue equity seldom and judiciously. In fact, our last issuance was exactly two years ago, where we raised just $60 million of common equity. Since that time, SL Green has consummated over $2 billion of investment activity and saw its market capitalization more than double.

An issuance of 2.5 million shares, representing approximately 5% of the outstanding shares of the Company, was deemed by us to be completely necessary for our planned future growth. The fact that we have traded up since the equity issuance emphasizes investors' favorable reaction to this capital market activity.

Also in the second quarter, we disclosed that as a result of SL Green's sector-leading total return to shareholders since inception of the Company's second outperformance plan, the maximum performance amount was met. Notwithstanding that this performance was achieved in a relatively short time frame, Company participants do not begin to vest this award for three years from program inception and don't finally vest the award from the program until five years from program inception.

As many of you know, Steve and I are big proponents of the pay-for-performance method of compensation; and we believe there is no greater alignment between management and shareholders than total return. The fact that the award amount has been met in a short period of time simply underscores the $1.4 billion of increased value and equity market capitalization over that period of time.

I can tell you that one of the greatest retention tools is to have an award that has been achieved subject to long-term vesting. And there is no greater disincentive than having an award program reach its maximum without the ability to close it out and begin a new one.

This incentive-based arrangement focuses management's attention on the impact on stock price for every material decision that we make; and ultimately we believe shareholders profit from this core compensation philosophy.

I'm proud to say that throughout the entire Company we have an employee base that is energized by coming to work every day and pursuing the goal of constantly improving Company performance. That energy and performance as you can see has translated its way into our earnings.

With respect to earnings, for many of the reasons I have just been through, and for more detail that Andrew and Greg will go through, we are reiterating our guidance from earlier in the year. But we do now expect it will be at the very high end of the range.

Originally, you may recall that we had guided towards $4.45 to $4.55 per share. We fully expect, based on performance to date and the visibility of opportunity between now and year end, that we will be at the highest ends of that range, notwithstanding the equity raise that was consummated this past week or two ago.

More importantly, we are setting our sights right now on building value for 2007 and 2008, and making sure that we can continue SL Green's track record of sector leading and very high levels of FFO growth, earnings growth, and value creation.

With that, I would like to turn it over to Andrew Mathias, SL Green's Chief Investment Officer, who will expand on the Company's investment activities during the second quarter.

Thank you, Marc. The second quarter continued 2006's active pace on the investment side of the business. As the sales of 280 Park Avenue, 450 Lexington, 1211 Sixth Avenue, 1540 Broadway, and 522 Fifth Avenue all demonstrate -- and all in excess of $750 per square foot -- the market for investment sales in Manhattan is as healthy as it's ever been in its history.

The showcase of our quarter was the complete recapitalization of our joint venture with the Gale Companies and our investment in the Bellmeade portfolio. In early May, we completed the sale of the entire New Jersey portion of the Bellmeade portfolio to Mack-Cali for approximately $505 million.

The properties were sold in two tranches, a core portfolio of 13 stabilized assets, which Mack-Cali purchased 100% of, and a value-add portfolio of seven properties with current occupancy of approximately 66%, which we structured as a 50-50 joint venture between SL Green and Mack-Cali.

The aggregate capitalization of the value-add joint venture, as we call it, is approximately $126 million, the bulk of which was capitalized with a new highly flexible loan structured by our Gramercy Capital Corp. affiliate. We have certain incentive returns within that venture which we hope will further enhance our yields on our remaining $16 million investment.

We believe there is terrific upside in continuing the lease-up and repositioning of this portfolio of prime, well-located properties in very hard to replicate New Jersey, infill, suburban markets. Had we elected not to reinvest these assets, our investment in the Bellmeade portfolio would have yielded us more than $20 million in gains and given the Company an aggregate IRR on the Bellmeade investment in excess of 20%.

Additionally in May, we closed a recapitalization of our investment in 55 Corporate Drive, the Sanofi-Aventis U.S. headquarters building we acquired last May. As in the Bellmeade portfolio, we were able to bring to bear all the strengths of our powerful growing platform in this transaction.

As I indicated at our investor meeting, the equity joint venture we structured on this asset included an ability to consolidate in our capital partners' interest at a low fixed return.

In a series of transactions this May, we closed a new 10-year fixed-rate loan with Goldman Sachs, a buyout of the aforementioned capital partner, and a sale of our partner Stan Gale's interest in the property to Gramercy Capital Corp., which together achieved a consolidation of SL Green's interest in the property from 10% to 50%. Gramercy obviously was -- also purchased a 50% interest in this trophy property.

The highlight for SL Green was a consolidation of 40% additional equity interest in the property with no additional cash investment from the Company. We expect this investment to be a meaningful cash contributor in 2007 and beyond.

From an NAV perspective, let me just mention again our aggregate cash investment in this property is $4.5 million for our now-50% interest, translating into a very material embedded gain.

In June, we closed on our previously announced investment in 609 Fifth Avenue. We look at this condominiumized property as two distinct investments, a long-term leased retail portion with a credit tenant in Mattel, and a boutique office building on the upper floors. As we thought both interests provide very meaningful upside, albeit more immediate on the office component, rather than disaggregate the property we elected to keep both interests, resulting in above-market cash on cash return on the retail portion of the property and a very low going-in basis of approximately $460 per square foot, and a healthy going-in return of more than 5.5% on the office portion of the property. The in-place rents for the entire building, both retail and office, are well below market; and the asset adds nicely to our growing presence in the Fifth Avenue corridor.

In addition to building future value on the investment front, we also continue to harvest gains by selling noncore assets. This quarter, in addition to closing our previously announced disposition of 286 and 290 Madison Avenue, we announced the execution of a contract to sell the leasehold interest in 1140 Sixth Avenue for $97.5 million. At $510 per square foot and an NOI cap rate of less than 4.75%, this sale is a prime example of the benefits of harvesting ripe assets.

As Marc mentioned, we continue to have confidence in our ability to redeploy this capital into higher quality assets, more cash flow growth, and more consistent upside for our future.

The Company's internal rate of return on this asset will exceed 26% on an unlevered basis over our nine-year hold period and generate a gain on sale approaching $60 million.

On the structured finance front, as expected we received substantial repayments, led by the repatriation of the bulk of our capital investment in the Bellmeade transaction. These repayments were partially offset by new originations, including the refinancing of an existing structured finance investment and a new origination which Gramercy deemed inadequate from a current pay yield perspective.

The bulk of our efforts in structured finance were devoted to Gramercy's continued growth, which Marc outlined earlier. With that, I would like to turn the call over to Greg Hughes to take you through the numbers.

Great, thanks, Andrew. I would like to spend a minute discussing how the strategic achievements and investment opportunities outlined by Marc and Andrew translate into another strong quarter of earnings.

During our December investor conference and more recently during the NAREIT conferences, we discussed the internal growth engines we see for the Company, noting that the company no longer depends solely on external opportunities to fund its earnings growth. Our second-quarter results reflect the benefit of these growth engines and are the reason we remain optimistic about our ability to continue to deliver 10% earnings growth year-over-year.

Same store NOI is and is expected to continue to be a driving force behind our earnings growth. The quarter was highlighted by a 10.3% mark-to-market on new leases signed during the quarter, coupled with a 5.3% increase in same store NOI. Note that the 10.3% increase in mark-to-market rents understates the success of the second-quarter leasing activity, unless one looks to net effective rents.

At 485 Lexington, we signed a 54,000 square foot lease at a 7% increase to the previously fully escalated rent, with zero TI dollars. Had we leased this at the $50 [per-en] with a work letter, which we have achieved elsewhere in the building, the mark-to-market for the quarter would have been 13.8%. However, net effective rents remain our principal focus, particularly where we are able to accommodate the growth for the fourth-largest tenant in our portfolio.

One should also note that this was a short-term three-year lease which affords us the flexibility to accommodate expansion from our anchor tenants in this building, which include Citigroup and Travelers.

As with the broader Manhattan market, we benefited from the financial services' strong demand for space. This was most notably evident at 1221 Avenue of the Americas, where we renewed a financial services firm at a 13% increase to the previously escalated rents. We believe that this demand will continue.

You will note from a review of the lease expiration schedule in our portfolio as set forth on page 35 of our supplemental that the mark-to-market within our portfolio continues to grow and sits at over 30% based upon our estimate of market rents as of 6/30.

Occupancy in the portfolio continued to increase, finishing the quarter at 95.9%, benefiting from the commencement of the final portion of the Polo lease at 625 Madison Avenue and the previously-discussed Cardinia lease at 485 Lexington.

Note that our same store NOI growth was achieved notwithstanding the significant increase in insurance premiums we discussed during our January call. We continue to explore ways to reduce these premiums, which account for the majority of the operating expense increases you are seeing in your numbers.

As always, we like to tout the benefits of organic cash flow to fund growth. You'll note previously we had talked about generating $50 million of free cash flow from operations. As you can see from this quarter, with a payout ratio of just 49% and a FAD payout ratio of 64%, we are well on our way to accomplishing this goal.

Our Funds from Operations available for reinvestment -- a new profitability measure that we offer up for your consideration -- was approximately $16 million this quarter.

As Marc and Andrew both outlined, the Gramercy and structured finance portfolio continue to be a strong growth engine. Green, you will recall, is a 25% shareholder in Gramercy and therefore is the largest beneficiary of the successes of that company. The earnings which we had originally projected was approximately -- Gramercy's earnings of $2.35 on our 6.4 million shares were increased to a range of $2.40 to $2.44 last week.

We also benefit, as Marc alluded to, to the collections of fees under the management contract. For the quarter we received $5.4 million in fees, which is included in the other income caption of our financials and is the principal reason for the increase in this quarter's other income.

As we alluded to during the first-quarter call, the recapitalization and resolution of our investments with The Gale Company turned out to be very profitable, as you have heard here this afternoon. In addition to the 10% preferred dividend which we have been collecting since the inception of that investment, we realized $4.9 million of fees and other income. Note that because of the continued involvement that we have through these assets, through various partnerships, we are unable to recognize the entire gain that Andrew alluded to for accounting purposes. This is the primary reason you see an $18 million increase in deferred revenues on the balance sheet for the second quarter. These amounts will we realized as those investments are monetized in the future.

Last on our list of growth engines, but not least, is the accretive recycling of capital. Although no longer the principal focus, accretive recycling of capital through prudent investments and selective asset sales remains an important component of SLG's earnings arsenal.

With $600 million of real estate investments today and $132 million of investments in Gramercy and structured finance, we continue to find attractive investments. As we have successfully done in the past, these investments are funded in large part on an accretive basis with proceeds from asset dispositions. The sale of 1140 Avenue of the Americas at a 4.7% cap rate represents the latest example of us executing this strategy.

Note that with certain of these investments, we may see temporary dilution before the lease-up of vacant space, mark-to-market of rents, and the use of transitional financing. As an example, we acquired 521 Fifth Avenue at a going-in 5% cap rate which was financed with a floating-rate mortgage and draws under our line. The blended financing cost for the quarter on this asset averaged 6%, resulting in temporary dilution until the transitional financing can be repaid with proceeds from our pending asset sales, and until this asset reaches a stabilized return.

That is a summary of our growth engines that worked for you during the second quarter. Note that these results were achieved notwithstanding a substantial increase in interest expense. LIBOR for the quarter was up 48 basis points and is up over 200 basis points since the second quarter of last year, which increased interest expense on our $979 million of floating-rate debt. The interest expense also increased for the acquisition financing used to acquire 521 Fifth Avenue.

G&A for the quarter was up slightly over last quarter, which is principally a result of higher stock-based compensation charges resulting from the increase in SLG's stock price.

Note that there is no special charge associated with the accelerated measurement of the [OPP] plan. We began recording expense in connection with the plan when it was adopted in December 2005 in accordance with FAS 123. These charges will continue through the vesting period in 2010, and the shares that are to be issued in connection with this plan have been included in the fully diluted share count since December of 2005.

Now I would like to spend a moment discussing our balance sheet. We continue to carefully manage our liquidity, focusing on the cost, term, and diversity of our capital. During the quarter, we refinanced the debt associated with the acquisition of 521 at a savings of 62.5 basis points. Our acquisition of 609 Fifth Avenue was funded in part through the $64 million issuance of preferred units in our operating partnership bearing a coupon of 5%.

As I mentioned, we contracted to sell 1140 Avenue of the Americas as we continue to be active sellers, taking advantage of the strong liquidity in the marketplace. While we continue to view property sales as our cheapest cost of equity, we did take the opportunity as Marc mentioned to raise some common equity here in July. This infrequent visit to the common equity markets was prompted by a robust investment pipeline and the fact that our sales to date and our low payout ratio have generated substantial taxable income.

Even with a dividend increase in December which is expected to be north of 10%, we could potentially have excess taxable income. With the prospect of having to potentially defer additional asset sales until early 2007, we made the decision to issue some equity so that our second-half investments would not be funded exclusively with debt.

A portion of the proceeds from the equity raise will be used to repay our unsecured lines of credit.

With a 50 basis point increase in LIBOR and 200 basis point increases last year, as I have mentioned, we are of course watching our floating-rate exposure closer than ever. Our largest floating-rate exposures remain at 1515 Broadway, 485 Lexington, 1551 Broadway, and 521 Fifth Avenue. Given the value creation that still exists in these assets, we continue to believe that it's appropriate to maintain our flexibility with floating-rate debt on these assets.

Other items of note on the balance sheet include the increase in real estate assets, which of course reflects the acquisition of 609 Fifth Avenue, offset in part by the reclassification of 286, 290 Madison and 1140 Avenue of the Americas, which are now classified as held for sale pending their dispositions.

As Marc and Andrew mentioned, the decrease in structured finance reflects $176 million in redemptions, net of $44 million of new originations during the quarter.

It should be noted that while Gramercy maintains its exclusivity for our real estate lending businesses, there have been a number of structured finance investments that have not been within its business plan. As a result, SLG has continued to make structured finance investments, including approximately $290 million of investments since Gramercy's IPO. We do expect that there will be additional structured finance investments going forward.

Our joint venture balances increased to reflect the $16 million of equity we invested in the Mack-Cali joint venture that Andrew alluded to, and a $20 million investment in the incremental add-on GKK stock offering.

Note that the $16 million investment will serve in part to offset the roll-down in the structured finance portfolio. You will just see these returns coming through equity on consolidated joint ventures rather than through investment income.

Lastly, it should be noted that during the quarter, we capitalized $4.3 million of interest related principally to 485 Lexington and 1551 Broadway.

With combined debt to market capitalization of just 37%, completion of a successful equity raise, and improving coverage ratios, we believe the Company's balance sheet is in excellent shape. All in all, it was a very strong quarter.

As we look at the balance of the year, variables which could impact our future earnings include the timing of property sales and the redeployment of proceeds from those sales and from our recent equity offering into new investments; the timing on the lease-up of the balance of the space at 485 Lexington; and the respositioning of 521 Fifth and 100 Park; interest expense on our floating-rate debt, which represents approximately 33% of our combined debt.

Also as a reminder, I would point out that our operating expenses generally trend higher during the third quarter as we attempt to keep our buildings cool and comfortable for our tenants.

With these caveats in place, I would again say, as Marc said, that we are comfortable with the high end of our original guidance at $4.55. With that, I would like to turn it over to the operator to open up the floor for any questions that you might have.

(OPERATOR INSTRUCTIONS) Michael Bilerman of Citigroup.

Good afternoon. Jon Litt is on the phone with me as well. I was wondering if maybe you could comment a little bit about the investment pipeline, and what you're seeing. You've talked a little bit about using the equity offering to fund that growth. What are you seeing, and how much do you expect in the back half of the year?

Well, in terms of what we are seeing, Michael, it's I would say pretty consistent with the kinds of deals that we have done so far this year. I would (inaudible) if you look at 609 Fifth, 521, some of the retail properties, we obviously have an investment pipeline, which was a big part of a reason for the raise.

We don't really give out any type of volume guidance, never have; and the reason for that is simply you can never really time these investments month-to-month or quarter-to-quarter. But we have a sufficient amount that we believe we will convert -- some of which will be in the second half of this year -- that the equity raise was necessary.

In terms of the character of these investments, I think if you look at the deals that we do typically, they tend to be more of the highly structured deals and ones that are not part of the number of deals that have been done in the city lately, which are more of the auction type deals.

As a result, we think we get some better yield advantage, both going in and as stabilized. But they tend to also be not necessarily 1031-friendly, 1031 tax-free exchange friendly, because they may involve partnership interests or OP units, of which we are using more and more of, or other creative structures which we think net-net are good for the Company; but also which just makes the deals a little bit longer to close due to the highly structured nature.

Then on the flip side, on the sell side, you have 170 held for sale. How much more does that represent outside of 1140 in the Madison Avenue asset?

I think that is the bulk of what we term held for sale. There is one other property in there that probably comprises no more than maybe $25 million plus or minus of that amount.

But just aside from the held for sale, we do have other dispositions beyond that 170-some-odd million dollars that we do intend to roll out in the second half of this year and beginning first quarter of '07.

That incremental amount of additional dispositions could amount to several hundred million dollars.

So in the past, we have typically been doing about 150 to 200 per year. We have come close to meeting that for this year. We're going to be going a little deeper now, taking advantage of some of the pricing in this market and optimizing the portfolio by selling off some properties that we think we can roll into bigger better properties with more earnings growth. So, you may see another $200 million plus on top of that.

This year?

I would say it was end of this year or into the first quarter of '07.

Yes. How did you judge raising the $300 million of equity versus maybe really increasing the disposition plans, either selling them outright or into joint ventures?

In part, it is timing, right? Because if we are not closing some of these opportunities until the first quarter of '07, that is not going to work for '06 pipeline.

Second, you have to remember we have already -- I think this is maybe one of the things you need to take a look at is we just did $600 million worth of transactions. So there is a notion of reloading the pipe. You can only do so much on property dispositions when you are doing $1 billion a year plus or minus of acquisitions, but you're only disposing a couple hundred million. That math doesn't work.

So we have been sort of doling it out in very small increments over time. But eventually you do have to raise some more equity.

Understood. Just a question on early renewals and relocations. You talked a little bit about how that is driving the increased lease activity. How much more aggressive are you going to be in the back half of this year, given your rollover is pretty low this year and next?

I don't think it is going to be dramatically different from what you have seen over the past several years. I think if you look last year, we did about 2 million square feet total. We have done about 1 million square feet this year year-to-date. So if you extrapolate that out, that would imply plus or minus another million square feet for the balance of the year.

We are not accelerating the program, nor are we playing the market and avoiding the program for hopes of higher and higher rents. Where we see tenants within that 12 to 18 month window, we are very aggressively in front of them for blending and extending those leases, and generally in this market with a high degree of success. But there's only a certain amount of tenants that fall into that category.

John Guinee of Stifel, Nicolaus.

Andrew, a couple of questions on the market. What is the status of the various buildings under construction in midtown? What is the status of proposed development in midtown?

There is very little new product coming online, and that is being filled up rapidly. The New York Times building has signed several leases over the last eight or 12 weeks and is on its way towards being fully spoken for, for the space that New York Times is not occupying.

The Banc of America Tower, I think as you know, Banc of America stepped up and committed to a large portion of the balance of the remaining space for within that tower.

Then 505 Fifth, at 46nd and Fifth, is essentially entirely spoken for. There is a site at 42nd and Eighth, which was the Milstein site, which is under contract to be traded. It is future pipeline, but construction there has not commenced yet.

We saw in the Drake Hotel site on 56th and Park a land comp there in the neighborhood of $1,200 or so per foot. So that will essentially eliminate that site for office construction and really focus that, I think, on hotel, retail, residential, higher-rent type uses.

So you have very, very little new construction product that is available for tenancy and mostly tenants competing within the existing envelopes.

Okay. Then the follow-up question, can you just pick a midtown submarket and kind of walk through the gap on a gross or net rent basis between trophy, versus A versus B versus C quality product? To give everyone an understanding of the gap.

Sure. In the Grand Central area, my guess is you're seeing trophy properties lease sort of average $80 or so per square foot. Class A properties leasing in the $60s, $60 to $70 per square foot. Class B properties trade in the $40 to $50 per square foot.

Below that, obviously, it really depends on product class. But you're typically seeing $10 or so type spreads between the various levels of properties. Those are gross rents I quoted you.

Okay, great. One last question. Greg, the fact that your share price is so astoundingly high, did that have anything to do with your decision to sell shares?

No, no. As I said, it was more focus on being able to fund second-half acquisition activity and not use exclusively debt. We are monitoring our taxable income; and so, as I said, we may need to push some of the property sales, which is our traditional equity source, into 2007.

So with an eye towards -- we could go to contract and not close for tax purposes until early 2007; but with an eye towards having to potentially defer those, we thought it would be prudent to raise some equity.

Thank you.

Jim Sullivan of Green Street Advisors.

Question regarding rent growth on the new leases that you have been signing. Greg, you said the mark-to-market for rents is in the 30% range, yet you reported 10% rent growth for the quarter, 13.8 adjusted for low TI deals; 17% in the first quarter; 20% in 4Q '05.

Why is the rent growth that you are achieving not closer to the mark-to-market? Why is the rent growth percentage decreasing rather than increasing given the strength of the market?

Jim, first, the 30% -- you have to differentiate -- that is for the entire portfolio regardless of whether leases expire today or nine years from now. That is embedded rents today versus essentially the asking rents, not taking rents on the portfolio.

You have to differentiate that from taking rents as it relates to leases expiring this year. So that is the first element of your question. As you can see, that number jumps around. I think end of fourth quarter, I think that number was closer to 20%-plus; and it was 16 and 10.

So I don't think you can look at -- the number isn't 10 and it's not 30; but it is certainly a meaningful double-digit somewhere in between 10 and 30. And that 30 is based on asking.

Second, as it relates to any given quarter, you are subject to the vagaries of what rents are expiring in that particular quarter. So you may have a quarter where you have one deal that is coming off of a $55 or $60 rent as escalated. We may even take a drop down to $50; because you have to remember there are still some rents that were signed on five-year deals in 2000 and even the beginning of 2001 at levels that were higher than today's market.

I think there is a misconception that the prices today are at record levels. Rents today are at record levels. They are not. They are below, and in some cases, still materially below where they were back in 2000, 2001.

We have several examples of buildings that we underwrote at rental levels that are still a good, I would say, 20% above when we acquired them, where they are today.

So that is not the case of all buildings all locations. But when you have 60 leases you can be swayed by one or two big leases which don't have the same mark-to-market as the rest of the portfolio. I think you have to look at it over a longer period of time than quarter-to-quarter.

Understood. So rents aren't at a record level, but building prices are. On the buildings that you're trying to buy and the buildings that you are trying to sell, do you see any slowdown in terms of the demand either measured by pricing, cap rate, (inaudible) quantity and quality of the bidders pursuing those deals?

It's Andrew, Jim. Absolutely none. The trophy sales that I cited to you are all at record levels. Those were all auction situations with multiple bidders and I would say sort of perfect information, and you saw prices unrelenting in their firmness.

Do you still own 286, 290 Madison at the end of the quarter? Did you say it closed subsequent to the end of the quarter?

It closed subsequent to the end of the quarter, yes.

It did close?

It is closed, yes.

Okay, then finally you did some additional leasing at 485 Lex. Can you provide an update on your expectations for what your stabilized yield on costs will ultimately be on that project, and what sort of time frame is involved in getting to stabilization?

We haven't -- we did that analysis in December; and I think back then we were looking at stabilized yields in the 9 to 10 range.

(indiscernible)Also again, we are formulating our 2007 budgets as we speak, and it looks like it will be north of 10% free and clear. So -- and we had thought that 485 might come online in the third quarter of this year. More likely with the market moving in our favor that will be a fourth-quarter event. Thanks, Jim.

John Stewart of Credit Suisse.

Maybe we could just touch on the mark-to-market again quickly. What do you expect for the second half given that it looks like the expiration -- the leases that are rolling in the third and fourth quarter are closer to $35 a foot versus $51 in the second quarter?

Yes, I think we are -- as I mentioned earlier, we are looking for levels that are going to be at or around 15%. So possibly higher, but we won't know till we get the leases done; and in excess of the 10% of this quarter. That is just the nature of where the lease rollovers fall out.

Right, okay. Greg, I think you referenced your target of 10% year-over-year FFO growth. Were you were referring specifically to '06 guidance or looking forward?

Well, forward and back. But yes, we think we are going to hit 2006 numbers which will put us at 10%; and yes, for 2007 we think, without giving guidance, the growth engines that we outlined during the call are there.

Okay, thanks. Do I understand the incentive on Gale was $4.9 million? Is that right?

Not just -- I mean, the total fees and incentive. It was not all incentive.

And I thought that was -- I thought you said on the last-quarter call that it was going to be $3.5 million.

Yes, we had estimated that it was going to be $3.5 million, but the resolution actually turned out to be better than expected.

Sorry if I missed it, but did you give the IRR on Gale?

It was north of 20%.

Lastly, Marc, last quarter I think you kind of spoke to what buyers were underwriting in the market in terms of going-in cap rate, cost of capital, and rent growth and exit cap rate. Then today you are saying that the rent growth you were talking about then is probably coming out conservative.

Can you give us a sense for what you think people are underwriting today, and also speak to how realistic you think the exit cap rate is that people are modeling?

I think people are underwriting, generally, 4.5% going-in, plus or minus. We are talking about not value-added place, right? We're talking about generally well leased but below-market leased properties in good locations -- 4.5 going-in with the expectation that over five to 10 years that gets to maybe 7, 6.5, 7 on total cost with unleveraged IRRs in the 6% to 7% range.

And your view of the realism of the exit cap rate?

I'm sorry, my view of the --?

How realistic do you think it is that people will hit the exit cap rates that they are modeling?

I don't -- it really depends on if market conditions are similar to like they have been, they are today, and have been for several years, I don't think -- we are not modeling any substantial expansion in cap rates. Nor do we model 4.5%.

So I have seen numbers anywhere from 5 to 6. We are certainly not seeing 7s and 8s in this market for exit cap rates. Because it has just been now a six-year period where, as a result of plentiful debt, plentiful equity, and much more efficient equity securitization, debt securitization markets, there seems to be less volatility. And people have taken that volatility out of their discount rates and out of their cap rates.

In high-growth environments you're going to have low exit caps, because growth is an important part of cap rates, not just interest rates. Expected growth is as important as where you expect the weighted average cost of capital to be.

So if you think weighted average cost of capital is somewhere around 7, but you think long-term growth rates are 2 to 3, you're going to have cap rates in that 5% range. So that isn't necessarily the way we underwrite; but I think you are asking about -- how does the market underwrite? And that is how the market underwrites.

Ian Weissman of Merrill Lynch.

I was wondering if you guys could talk a little bit about the progress made at One Madison in terms of the condos. Have you seen pricing for condos in Manhattan soften at all?

Sure. The project is still in the design development phase, so they are actively engaged in designing the unit layouts and developing the plans for the physical alterations that are going to be made to the building.

From our partners, we read probably the same things you do and our partners, Ian Schrager and Aby Rosen, are obviously very active with other projects in the market now. They have not seen any slippage in terms of pricing in the market. Possibly a little bit more delay in terms of selling units, but they still are happy with the velocity of sales in other projects of theirs, and they haven't seen prices slip at all.

When can you expect to deliver the first unit?

I think we have indicated, that the delivery of the units -- completion will likely be end of '07 or first half of '08.

Okay. A question on 34th Street and your retail play there. I understand that there's an opportunity to go vertical on a number of those storefronts. So have you -- I mean, A, is that true, and what are the opportunities? Would it be office, hotel? What is your thinking there?

Sure. There is quite a bit of square footage on that block, a lot of which we control, and we are exploring all the options for highest and best use of the site. We are not particularly constrained by the zoning in that area. So we are enthusiastic about the prospects for what we put together there.

Then you are implying that there are air rights on the property. So how much square footage could you add on your 34th Street storefront?

Material. I mean, all in all, we control well in excess of 100,000 square feet there.

Okay, thank you.

Jamie Feldman of UBS.

Can you talk a little bit more about TIs? I know you said the environment is really improving. But maybe you could look out through '07, kind of what numbers you expect to see?

It's Gerry Nocera. We expect as the market continues to tighten a reduction in the general TIs as the period goes on. Six months ago we were actively looking at a market of $45 a foot for raw space; now we're down to approximately $40 a foot; and we expect to see that continuing trend.

So how much better do think you can get through the end of '07? Is 40 kind of the bottom?

Yes, pretty much the bottom.

I would say, it depends; because as I mentioned on 485 we are managing to the best net effective deal. So what you saw over at 485, we did a new deal with zero TI dollars. But it will depend upon the specific building and specific instance.

But the new ones, as we have said before, we are making great progress on the renewals. The new building, brand-new 10-year leases, we are still seeing $40 to $50 a foot.

You had mentioned renewals, actually. How would you characterize tenant perspective now in the market? Are they coming to you more aggressively to get early renewals done, given where they think market rents are going? Or are they less aware than maybe you and I are?

It is starting now, Jamie. The market is tight to the degree that really over the last 60 days you have started to see an improvement in those tenants coming towards us. There is a sense in the tenant community now that what is here today won't be around tomorrow. Prices will be worse for them. So there is a bit of a snowball effect happening now.

Okay. Then finally, in terms of the increased investment in New Jersey, is this a sign that the Manhattan market's difficult to find good deals for you guys, and you are now willing to look outside?

I think is this a very unique opportunity to continue our investments with properties we already had a basis in. That doesn't really signal anything in terms of Manhattan. It just was an extraordinary opportunity to participate in some great value-add situation with properties we are comfortable with.

These are probably not long-term holds?

No, this JV is designed to be for -- at least for our involvement a short-term hold.

Tony Paolone of JPMorgan.

Greg, can you go through the $11.5 million of other income in the quarter? How much of that was from Gramercy fees, and just other items, just to get a breakout?

Sure, the lion's share of it is roughly $5.5 million from Gramercy fees. Then you probably have about call it $750,000 of lease cancellation in there for the quarter. Then the balance is for asset management and leasing fees that we get on our joint venture arrangements.

Okay, so that last piece, the asset management and leasing, that should be pretty stable?

It should be. I mean, it moves around a little bit depending upon the leasing velocity of the JV assets for the quarter. But it has been reasonably consistent. So I think the run rate that you are seeing there in the second quarter -- or excuse me, the rate that you're seeing for the second quarter is a good sustainable run rate.

Okay. Then you mentioned like GKK I think doing a CDO in the second half of the year. Does SL Green pick up fees from that?

Indirectly through the manager.

Okay, but nothing big incremental? That just goes directly for structuring or anything like that?

It is meaningful; but it is not a structuring fee. There is a CDO management fee essentially that Gramercy manager gets for overseeing and executing the CDO. So that obviously wends its way through to us. But it is 25 basis points on total CDO amounts. So it is nice and meaningful, but it's not a onetime pop.

Okay, just want to understand at 485 Lex, was there any NOI that is being recognized yet in the numbers?

There is de minimis NOI in the numbers.

Okay, then just last question, any update on 1551, 1555 Broadway redevelopment?

No update. No update really. We continue to have discussions with multiple tenants and talk about different concepts for a development plan for the site.

Ross Nussbaum of Banc of America Securities.

Let me ask John Stewart's question another way, which is -- what do you think most buyers are underwriting in terms of market rent growth over the next three years? What are you guys specifically underwriting when you look at acquisitions?

I think the market is underwriting probably 30% to 50%. We have sort of gone through what are our views of that, where it is not quite as aggressive as the market in those views. But we do expect minimum 25% to 30% over three years, and it's bearing out that it could be possibly more than that. So that is a good range.

So if the market is doing, let's say, assuming 30% to 50% rent growth and that may ultimately prove optimistic, wouldn't that ultimately force cap rates a little higher? Just as buyers would say, look, I need a higher going-in yield to compensate for some lower growth versus what I was expecting.

I'm sorry, say that again? You're saying if growth doesn't materialize?

Yes, if market expectations are for 30% to 50% rent growth over the next three years and that doesn't necessarily happen, doesn't that sort of force cap rates higher on its own?

It certainly would. But I think certainly what you have seen this year, it would support that level of growth. So that is -- again, we were up 16, 10, so call it, I don't know, 13.5 average. That would certainly support the bottom half of the range.

I think we mentioned earlier our expectation is that that spread may widen in the second half to 15%, which would be 45% over three years. So the answer is yes, but we are certainly not at that point.

Sri Nagarajan of RBC Capital Markets.

Most of my questions have been answered. However, I was wondering if I may have missed this. On the Gale promote [fees] that you booked, could you share with us how much of it was deferred or related to the seven properties that you still hold JV with Mack-Cali?

Sorry, how much of the 4.9 relates?

No, how much -- yes, how much of the 4.9 was related? Or in addition to that, is there anything that has been deferred here?

As I mentioned, if you look at the deferred revenue caption on our balance sheet, it is up by about $18 million. The preponderance of that is related to the resolution of that investment which we had to defer.

So I think Andrew talked about had we liquidated the entire thing we would have recognized close to a $20 million gain. We took in 4.9 of it this quarter. The balance of that has been deferred until those assets are resolved in the future or monetized in the future.

Okay, great. My second question is, while it may not be significant, you don't seem to be including the Mack-Cali JV properties in any of your unconsolidated operating statistics. Specifically, I'm just trying to understand here what the NOI impact of your NJ portfolio stream would be versus your various development-redevelopment activities in the unconsolidated JV would be?

Again, it is not meaningful at this point. As Andrew mentioned, those value-add properties are roughly 70% occupied. So the contribution at this point in time is not meaningful.

All right, thanks.

Chris Haley of Wachovia.

Question, just when you mentioned the initial rates of return and I'm assuming you were referring to midtown and the core product, in the 4.5% to 5% range, granted there is not as much product when you go south, midtown south, downtown. What has been your experience, or what does your historical or your gut tell you the appropriate spread is versus downtown versus midtown?

It is a little difficult, Chris, only because there haven't been many trades on office spaces downtown. The preponderance of trades have been for other uses; you know, conversions to residential. But my gut would be a 50 to 100 basis point gap probably between midtown and downtown. But I can't really point to a whole lot of velocity downtown to count that (inaudible).

Okay. When you look at the rent pricing versus actual rent movement and the spread, my assumption -- maybe your assumption also -- would be the spreads are going to widen before they tighten between deal rents in midtown versus downtown.

Is there a point in time or an opportunity in the short run that you see for companies saying -- I just can't pay $80, $100; and they are going to pay $30, $40, $50, or they're going to go kind of out of the boroughs?

I mean, Chris, there definitely is a point, and I think that point clearly varies by industry and size of company. The bigger companies dealing in the higher-margin businesses can absorb more of this rental increases than some of the smaller companies or ones that are operating very thinly.

So I can't really generalize. But what I can give you is just our experience is that, in instances where we are not landing tenants, it is generally to competing product, often at the same or sometimes even higher rates. Tenants seem to be very locationally specific at this moment, and price seems to be not the lightning rod. It is somewhat of a secondary issue in many cases that we see, which is why we have been able to push the pricing along with other landlords.

But we haven't lost tenants to saying -- we are moving out of the city. It is between you and New Jersey, it is between you and Westchester.

With that said, obviously, you will reach that point. We don't think we are there yet, and we don't think we are close to there now. But if you extrapolate out this kind of demand with no new construction in '07, '08, '09, clearly after the rents go to the levels that we were talking about -- whether it be 30%, 40% 50% -- they will get to a level where it will get too expensive. Then I think alternate locations will become a factor.

If you -- there have been a number of articles recently that have shown that back office tenants are in fact leaving New York, but we are gaining a lot of corporate headquarters are relocating to New York. So that bodes well for midtown and for rent increases, the corporate relocations into New York City.

They are corporate offices, executive offices that have been paying higher rent. So the tenants that we're losing are lower rent tenants and may be losing to the suburbs, Connecticut, New Jersey, Long Island, etc.; but we're certainly gaining a lot of corporate headquarters.

Is that it, operator?

Scott Craig of Eaton Vance.

I will just make it one quick one since we are running a bit long here. A question about the long-term incentive plan, which is -- you mentioned in the call that I think there was -- [where] without the ability to close it out and commence a new one. Am I correct to understand that there shouldn't be a new announcement of a long-term incentive plan until the end of '08, which would become effective beginning early '09?

When you say that, is that you're saying that is what you thought I said, or that is what you're questioning?

I think that is what I heard you say.

No, no, that is definitely not what I said. What I said is that -- that is exactly -- in my mind and the way we operate, that is a disincentive.

The idea, it is a very parallel idea, which is as shareholder value increases, we want the management team here at the Company to be able to be aligned and participating in that success. That has been a core philosophy of ours for -- since the outset. We think it works, and we think it works well.

If we were to cap a program in '06 and say, guess what, there is no new incentive until '09 -- we think that is counterproductive. Now that is our view and it is the way we operate. Other companies may have different views.

That concludes our question-and-answer session. I would like to turn the call back over to management for closing remarks.

Okay, thank you. We ran extremely long today. We thank you for the excellent questions. It shows with every call there seems to be greater and greater interest in the Company and in this market. We appreciate everyone's attention and questions, and look forward to speaking with you after the summer, in October. Everyone enjoy and look forward to that. Bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a wonderful day.