SL Green Realty Corp (SLG) 2006 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you, everyone, for joining us and welcome to the SL Green Realty Corp. third-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 must directly compare 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 Web site at www.SLGreen.com, by selecting the press release regarding the Company's third-quarter earnings.

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

Thank you and good afternoon, everyone. I am pleased that you can join me and the rest of the management team today to review SL Green's third-quarter results and outlook.

Following my remarks, Andrew Mathias and Greg Hughes will provide further insight into SL Green's activity for the quarter, as well as provide an overview of our operating results. I'm also joined by Steve Green, our Chairman, Andy Levine, our General Counsel, and Steve Durels, our Director of Leasing, all of whom will be available for questions and answers at the end of this call.

I believe the highlights for the third quarter speak for itself, as we improved in almost all meaningful areas of the business and in some cases, those improvements were dramatic. These results are primarily a confluence of three main influences. First, we have assembled a talented and deep management team that has a passion for the business and demonstrate leadership within their respective areas. Second, we have developed a multi-faceted business strategy in office, retail, and structured finance, enabling us to combine growth with scale and high returns with a focused strategy. Third, we are fortunate enough to be doing business in the single-best office market in the country with attractive market and economic dynamics.

The results of executing this three-pronged approach is quite evidenced. First, a mark-to-market on new leases that is in excess of 25%, SL Green laid the foundation for this by acquiring properties with embedded rents that are dramatically below market and then executing value-added strategies that allowed us to achieve the highest levels of rents upon retenanting.

Same-store NOI growth of 7.5% during the third quarter, this is attributable to SL Green's demonstrated ability to create new leasing opportunities throughout the year, even when there are no contractual expirations. For example, SL Green's contractual expirations in 2006 were 627,000 square feet, but year-to-date, we have done over 1.7 million square feet of leasing and expect to eclipse the 2 point million square feet mark of leasing by end of year. Our ability to accelerate this leasing activity is clearly a driver of same-store NOI growth.

Also, a 9% increase in FFO for the first nine months in 2006 with an expectation that growth rates will increase to 10% by year-end, given the high end of our guidance. And we may even wind up a few pennies beyond the top end of our guidance by the end of 2006. This number should sound familiar to long-term listeners who know that we develop our investment strategy to balance near-term earnings growth with longer-term growth opportunities in order to generate 10% per year growth in earnings, year-in, year-out, which we believe will consistently keep us at the top of our sector in terms of performance.

Most importantly, year-to-date total return to shareholders exceeding 55% for the year and over 380% for the past five years is the best reflection of a coherent overall business strategy that is centered around driving total return on shareholder equity. More subtly, increasing internally generated cash for low-dividend payouts, tax-free reinvestments and joint venture investments will all contribute significantly towards maintaining our position within the sector. As is usually the case, however, our sights are set for two to three years down the road, where we are actively working on methods and strategies for ensuring that this market-leading total performance and relative performance is continued.

The most noteworthy strategic move along these lines was out recently announced merger agreement with Reckson Associates. This was not business as usual for SL Green, but rather a statement to the market that we believe the fundamentals in New York City, which are very solid right now, will continue to evidence strength over the next several years, benefiting us with an increasing concentration of Manhattan trophy properties, which will give us an unprecedented scale in an otherwise very competitive landscape for investment product.

The Reckson acquisition looks to be in good shape, and we look forward to completing it. Since the signing of the merger agreement, we have fully scrubbed all 30 properties that we will be acquiring, having done full building inspections, preparation of 2007 operating budgets, and meetings with certain of the tenants. Our leasing operations and capital teams have been integrating with Reckson's personnel and things at the properties are going as smooth or smoother than we had hoped or anticipated. We have interviewed nearly all members of the Reckson staff and are finalizing our post-closing organization structure. Many offers of continuing employment have been made with a high acceptance ratio. We are confident that our incremental G&A, as a result of the Reckson transaction in 2007, will be within the ranges we'd originally set forth on our conference call in August.

While the closing of the Reckson acquisition is our number one priority, this by no means was our sole and exclusive focus over the summer and into early fall. In addition to the signing of the Reckson merger agreement and the associated contract to sell $2 billion of assets, we were also able to accomplish, just over the past four months, the following, sale of three properties totaling $160 million at purchase price; a tremendous amount of retail investment and leasing accomplishments that you may have seen in this morning's press release and which Andrew Mathias will expand on momentarily; the leasing by Steve Durels and his leasing team of over 580,000 square feet of office space in 56 separate lease transactions; the recapitalization of 1250 Broadway to increase our economic ownership to 67.5% from 55% with no additional consideration paid; the oversight of the Gramercy Capital Corp. operations, which in and of itself had a very solid third quarter; origination of more structured finance investments for SL Green; the establishment of a captive insurance company to give SL Green the option of self-insuring certain risks of the Company; and finally, we went through the rating agency process to obtain a designation as an approved special servicer for rated debt to transaction. So lest anyone think we've been focusing our efforts exclusively on the Reckson merger, you can see that the activity level, which what I just went through basically encompasses everything from July 1, continues on a very, very high level, very high pitch, and we expect it to remain so for the foreseeable future.

Now, turning to a more in-depth look at the state of the leasing market, most of the major brokerage firms have overall vacancy pegged somewhere between 7% and 8% with one major firm as low as 6.5%. We call the average roughly 7.5% of total vacancy of which just under 5% is directly available and the remainder is available only through sublease.

As you know from prior calls, we consider 8% and 9% total availability to be roughly equilibrium. Therefore, we believe we're at a point today which is tipped in favor of landlords in midtown Manhattan. As a direct result, rents are on a long road towards repricing to levels that will eventually justify replacement costs of $1000 per square foot and more in Manhattan. This is a self-corrective action that was apparent only within our trophy properties. At the very high end did we see this kind of rental increase and correction, but now we are just starting to see that the affordable rental levels, which is really the meat of the market, is starting to experience similar percentage increases.

Net absorption in Midtown was 1.8 million square feet for the third quarter. In a market where every 2 million square feet of absorption is roughly equivalent to a 1% reduction in the vacancy rate with no new construction on the horizon, you can see why we continue to maintain an optimistic outlook for the direction and sustainability of increases in Manhattan office rents.

The positive aspects of this market condition are being felt within the Company. Of the five largest availabilities in the SL Green portfolio, I expect two of these, 673 First Avenue and One Park Avenue, to be rented by year-end. Our largest block of space at 480 Lexington Avenue, consisting of 155,000 square feet, will also be substantially eliminated by year-end. That, at least, is our projection.

Looking out further in time, one of SL Green's biggest leasing opportunities will be with its investment in 1515 Broadway, which houses Viacom's world headquarters. Viacom is in approximately 1.4 million square feet with first expiration of 121,000 square feet in the middle of 2008 and a more substantial expiration of 1 million square feet in 2010. You should note that there is about 265,000 square feet that expires on a staggered basis after 2010 at dates leading up to 2020. With an average rent below $50 per square foot in place for Viacom, there is obviously the internal expectation that there will be substantial growth in these rents, whether through a renewal of Viacom or with an outside tenancy. I understand that there have been many rumors concerning Viacom's tenancy, and while I don't know and I don't think anybody necessarily knows, at this point, the ultimate direction Viacom will take, I feel confident that Viacom is doing what any rational large tenant would do, which is evaluating all of its options, of which 1515 Broadway is clearly one.

However, recognizing that this situation may remain uncertain for a year or more, we have proactively embarked on a complete redevelopment and feasibility study for 1515 Broadway. We have retained the architectural firm of KPF. This is a world-renowned architectural firm who is going to analyze the building improvements and infrastructure, and develop a series of redevelopment studies, some of which may be fairly comprehensive in scope, for purposes of being able to deliver an updated, Class A product to achieve the highest rents possible by 2010. This is a long-term project with many variables, so there is no detail to convey at this moment. However, we did want you to know that we are on top of the situation and view most if not all potential outcomes as a good event for the Company.

Another investment that is in its early growth trajectory is Gramercy Capital Corp. For those of you that were not able to listen in on Gramercy's earnings call last Thursday, I would encourage you to listen to the replay, as Gramercy had a very good quarter and spent the better part of an hour reviewing its operations for Q3 and business strategy for 2007. Gramercy's quarter was punctuated by nearly 600 million of newly originated debt investments, which represents the highest amount of production achieved by Gramercy in a single quarter. More impressively, after loan repayments, sales and syndications, the net loan production for the third quarter was over $380 million, also a record level for the Company. With over $2 billion of loans in the Company's debt portfolio and over $2.5 billion of total assets, Gramercy continues to scale the Company's balance sheet, resulting in increased diversity, increased liquidity, decreased volatility, better market penetration, and improvement in Gramercy's operating margins. Also, with almost $10 million per quarter of dividends and fees coming from the Gramercy platform, we definitely believe Gramercy will be a key contributor to SL Green's success over the next several years.

Furthermore, during the quarter, you saw that we announced the establishment of Belmont Insurance Company, which is a New York State registered and licensed captive insurance company. We formed this company for the specific purpose of being able to self-insure up to $100 million of losses. We have established this company notwithstanding there is currently ample Property and Casualty insurance and liability insurance in the marketplace. We took this step because we recognized that, when events occur, the insurance market reacts almost immediately, and we have seen capacity ebb and flow, particularly since 9/11. Therefore with the guidance of our Risk Management team, we have set up this captive to evaluate risks that seem remote in nature and self-insure or for those risks instead of paying premiums that are demanded by the market that can, from time to time, seem excessive.

Also recall that, in the last conference call, I mentioned that the Company's outperformance plan, established at the end of 2005, had reached its maximum and that the Company was considering establishing a new outperformance plan in 2006. In August, we announced the approval by the Board of Directors of a new outperformance plan, which was structured in almost identical fashion to the prior outperformance plan, that being, among other things, a 10% annual hurdle rate before any management participation and five-year total vesting from the date of plan approval.

Since the award amounts in 2005 plan reached its cap, management's participation in the continued profitability of the Firm would be reduced without having instituted the new plan. Such an outcome is counterproductive to the culture and environment that we have created at the Company, specifically that management participate as the Company generates total returns and profits above a baseline level of outperformance. The Board of Directors took note of SL Green's performance over the last 12, 36 and 60 months, and believes that the compensation programs that are at least as competitive as peer companies are warranted and necessary to act as an incentive and retention tool for company's management, not only with its executive management team but also senior management and in many cases middle management. The 2006 plan has almost 40 participants, and we think that is a hallmark of our philosophy of motivating people to achieve the kind of successes we achieved not only during this quarter but quarter after quarter.

With that, I'd like to turn the call over to Andrew, who is going to take you through the investment activity and the retail program activity during the quarter, and then to Greg Hughes and then back for some further remarks.

Thank you, Marc.

The Reckson transaction obviously was the focus of the third quarter's activities but far from the sole focus. We were active on the acquisition, disposition, structured finance fronts as well during the quarter.

This morning, we made a series of major announcements with the respect to our growing retail platform. These include strategic investments in 717 Fifth Avenue and 720 Fifth Avenue, two of the most prime corners in Manhattan, and our announcement of the execution of a major lease with Apple Computer on 34th Street in our redevelopment project there. 717 Fifth Avenue is a retail condominium anchored by Hugo Boss and Escada's Manhattan flagship stores. Both leases are approximately 50% below market based on today's market rents and although long-term in nature, represent a storehouse of value at this prime property.

In addition, there is ancillary retail space and approximately 63,000 square feet of office space, 50% of which is vacant. Our plan is simple. Jeff Sutton will work the retail portion in his unique style, and SL Green's office team will go to work leasing up the vacant office space. Our aggregate $46 million of investment required a tremendous amount of structural creativity and was achieved on a completely off-market basis. We love the win-win element of this transaction. The location is only getting better, so we can afford to be patient, yet our venture has clearly shown an ability to unlock value early in under-market leased situations.

720 Fifth Avenue is a consolidation of the leasehold position at the property, which Jeff Sutton controlled with the fee interest of the property, which is owned by third parties. This was achieved in another highly structured off-market transaction. Jeff had already worked his magic on the retail portion of the property, buying out Fendi in 2005 and replacing them with Abercrombie's flagship Manhattan store. Our attraction came with the office space of the property, where we saw a unique opportunity with Jeff to take advantage of a cluster of tenant expirations and reposition the office space at the property to prime boutique status befitting of its unbelievable Plaza district location. Since going to contract for the asset, we've signed over 52,000 square feet of leases at average rents in excess of $65 per square foot. The building is well on its way to a new identity. Our investment is in the form of a participating mezzanine loan, which entitles us to 25% of the cash flow from the asset in addition to an ability to purchase a 25% equity interest in the future.

At closing, we capitalized the venture with a new $165 million first mortgage provided by a third party. The value creation from contract to close was so pronounced that we actually monetized several million dollars of our participation interest at closing in addition to originating a great earning asset for the structured finance balance sheet.

The Apple lease, which we announced today, caps off a long and arduous development exercise involving all of the collective creativity and acumen of the SL Green organization and our partner, Jeff Sutton. In order to meet Apple's specific design requirements, the team had to negotiate more than six separate transactions and explore the outer reaches of the New York City building code with help of several consultants and expediters. Kudos to Ed Piccinich and his development team, Neil Kessner and his legal team, and Brett Herschenfeld of the Investments Group in pulling together this extraordinary lease, which started with a 50 by 100 square foot floor plan and grew by more than 50% to 75 feet by 100 feet by the time it was complete. I will go through more detail on the economics of the transaction at our investor meeting in December, where I am confident we'll clearly demonstrate the extraordinary earning potential of the retail program.

On the disposition front, we closed on our previously announced sale at 1140 Sixth Avenue. A quick refresher, the assets sold at $500 per square foot and at an NOI cap rate of less than 4.75% for our leasehold interest in the property. These statistics are consistent with continuing market tightening fundamentals in the investment market across Manhattan.

Elsewhere in this market, this quarter saw the trades of 575 Lexington, 121 Sixth and 340 Madison Avenue, and the pending sale of 5 Times Square. Each of these transactions priced at stabilized valuations well in excess of $800 per square foot, and in certain cases, in excess of $900 and $1000 per square foot with stabilized cap rates in the 4 to 4.5% range. There are several additional office properties on the market now where pricing expectations either meet or exceed these metrics, clearly demonstrating the depth of buyers and resilience at those pricing levels.

One needs to no further than the over $75 billion of capital which was chasing the Peter Cooper (indiscernible) transaction, $70 billion of which will need to be allocated elsewhere, as in real estate there are no door prizes for losing bidders.

As we saw firsthand, this capital is patient and willing to accept 0 or negative returns in exchange for a shot at residual upside. Most of these players feel Manhattan is their best chance of getting that residual upside in the long-term.

As we spoke about on the Reckson call, we expect to roll several properties out for sale to take advantage of this market. We structured the Reckson acquisition to be able to accommodate 1031 exchanges into some of their trophy assets, which we view as long-term shelters for the gains we expect to generate on our divestitures. We would expect to complete at least $750 million of sales in the next six months.

Finally, on the structured finance front, in addition to the Fifth Avenue originations, we come [unvested] with Gramercy on a side-by-side basis on a high leverage, preferred equity investment on a trophy New York office property in a $32.5 million co-origination, once again demonstrating the synergies we are able to create with the Gramercy platform. The bulk of our efforts on the structured finance front in the tri-state area were also dedicated to Gramercy's continued growth where we were able to actively source much of Gramercy's deal flow in the third quarter, which Marc went through earlier.

With that, I'd like to turn the call over to Greg Hughes.

Great, Andrew. Thanks very much.

In what would have to be described as a somewhat concerning trend, the summer months at SLG again proved to be short on sun and fun. With our annual report card due to our shareholders in less than 45 days, the Company seems to excel during the third quarter.

As set forth in the press release, FFO for the nine months ended September 30 was $3.42, an 8.9% increase over the same nine-month period in 2005. For the third quarter itself, FFO per share was 26% higher when one excludes the $10.8 million incentive fee earned during the third quarter last year from the resolution of the mezz (indiscernible) joint venture.

The quarter was highlighted by the August announcement of our $6 billion pending acquisition with Reckson Associates Realty Corp. Shareholder vote is scheduled for November 22 with a closing anticipated the first week in January. The acquisition will solidify our position as the largest landlord in Manhattan, with approximately 24 million square feet, and provide meaningful earnings contributions going forward, as Marc described.

For those of you who have had the opportunity to study the proxy which was mailed out last week, you will note that the pro forma impact of the Reckson transaction for the six months ended June 30, 2006 reflects FFO accretion of approximately $0.10 for the six months. SEC guidelines limit the amount of synergies which can be projected, so the G&A savings presented therein we believe to be conservative.

Without a contract, we are also precluded from reflecting the benefits of anticipated property sales. Accordingly, we are very comfortable with the $0.20 to $0.40 accretion estimate we provided in August and expect to have more specific guidance for our December investor conference as we work with Reckson to finalize their 2007 property budgets and as we finalize the timing and proceeds for pending SLG property sales.

The mark-to-market for the quarter was a record 25.8%, benefiting from strong gains at 1221 Avenue of the Americas, where taking rent reached $87 a foot, and at 45 Lexington, where we signed a deal on the tower for $63.70 a foot. Recall that our original acquisition underwriting projected this space to lease up in the mid to upper 40s just two years ago. It is also important to note that this mark-to-market was achieved on a significant volume of leasing activity in excess of 500,000 square feet of space.

Our scheduled lease expirations often minimizes the amount of opportunity in the portfolio. As Marc mentioned, at December 31, this schedule showed just 627,000 square feet of scheduled expirations. 1221 Avenue of the Americas provides a terrific example of this. Acquired in December of 2003 at 99% occupancy, there was no meaningful [roll] scheduled for years and just 126,000 square feet of expirations scheduled through 2006. Notwithstanding this, we have signed 13 leases for 659,000 square feet of new leases since that property was acquired, which will increase the free-and-clear yield on that investment by approximately 100 basis points.

In short, changing tenant needs, active management, alternative property options translate into enhanced returns. This strong leasing activity translated into the strong same-store NOI growth of 7.5% that you saw for the quarter, which we would achieve notwithstanding the higher utility and insurance costs we experienced during the quarter.

This morning's press release and Andrew's description of the retail platform should help shed significant light on the opportunity there. The principle earnings benefits from these investments will not begin until 2007, as work associated with the Apple lease first needs to be completed. While many dismissed our very profitable investment at 141 Fifth Avenue as being small and insignificant, there should be no confusion that these investments have the potential to generate significant earnings and dollar profits.

As anticipated, investment income for the quarter declined compared to last quarter as the result of repayments in the structured finance portfolio, most notably the Bellmeade portfolio. This decline was mitigated in part by a $32 million new structured finance investment, as well as the recognition of interest income on loans to Jeff Sutton, which had been deferred prior to the signing of the Apple lease.

Other income for the quarter was $9.5 million, which includes $6.2 million of fees from Gramercy. As expected, other income was down compared to last quarter, which included fees related to the resolution of the Gale's/Bellmeade venture.

MG&A for the quarter was up approximately $600,000. This increase is principally attributable to the amortization of the costs associated with the 2006 outperformance plan. As a reminder, this plan is independently valued by a third-party appraiser upon adoption of the plan. The value of the plan is then amortized through G&A expense, based upon the vesting period under the plan, which currently carries a final vesting date of July 2011. The number of shares anticipated to be issued under the plan, which is currently estimated at 460,000 shares, are also included in the diluted share count on a weighted average basis. This, coupled with the 2.5 million shares issued in our July equity raise, account for the increased share count during the quarter.

Combined interest for the quarter was up approximately $4 million over last quarter. This increase is the result of higher interest rates, higher interest on debt associated with the acquisition of 717, 609 and 521. In addition, interest associated with 485 Lexington is now being expensed in part, as this building is being placed back into service.

This morning, we announced the recapitalization of our JV at 1250 Broadway resulting from the substantial increase in the property value there, which has more than doubled since acquisition, coupled with the distributions that have been made to date. Much has been written regarding views of the joint venture structure. For us, the structure represents a source of attract capital, where we can substantially enhance our returns through incentive fees and promotes. The power of these arrangements can also be seen during the quarter from our returns on GKK. The incentive arrangement at Gramercy Capital Corp. produced $1.8 million of incentive fees for the quarter, which when added to the dividend to base management fee totaled $9.5 million for the quarter. (indiscernible) and dividends are being generated on an original investment of $113 million.

The Green capital recycling machine was in full swing with the close of 286, 290 and 1140 Sixth Avenue during the quarter. These sales generated gains in excess of $2 per share. Additionally, with [FAD] of $0.81 per share, the Company generated $10.3 million of free cash flow after payment of its dividends during the quarter, which can be reinvested in our business.

Note that the property sale proceeds are being held with the receiver and will create some temporary earnings drag until redeployed into the Reckson acquisition. As previously discussed and as Andrew mentioned, we are also exploring other property sales, some of which could close during the fourth quarter.

Now, I would like to spend a moment discussing our balance sheet. As we prepare to close on the Company's largest acquisition ever, the balance sheet remains liquid and strong. As of 9/30, we had cash on hand of $176.4 million with proceeds from our July equity offering raise having not yet been fully deployed. We also had restricted cash balances which included approximately $156 million from the asset sales that we mentioned that will be used to effectuate a 10-31 exchange into the Reckson acquisition.

Our credit facility is undrawn as of 9/30 and demand for participation in the credit facility upsize and the bridge loan we received to effectuate the Reckson acquisition have been strong.

For those of you who had the opportunity to review the pro forma balance sheet and the proxy that was mailed last week, you will note that we project and expect that all $1.2 billion of senior unsecured note obligations at Reckson will remain outstanding following the merger.

It should also be noted, from the pro forma financials, that we do not give effect for the other property sales, which we are currently evaluating. These sales are expected to delever the Company and be accretive. We expect that our debt to market capitalization to be approximately 45% following the closure of the merger.

Other items of note on the balance sheet include the following. The increase in real estate and mortgage notes payable reflect the consolidation of 717 Fifth Avenue in our financial statements. Asset held for sale at 9/30 represent the Company's investment in 55 Corporate Drive located in Bridgewater, New Jersey.

Capitalized interest for the quarter was approximately $5 million. This balance reflects increased capitalization at the 1 Madison Avenue clock tower, and 55 Corporate, offset by declining capitalized amounts at 485 Lexington, as that asset is placed back in service. The increase in other assets includes the investment deposit on 720 Fifth Avenue, as well as a $3 million capital investment required for the formation of the Belmont Insurance captive.

These strong results position us well to meet our existing guidance. While $4.55 may currently appear as a lay-up, is worth remembering that we do anticipate some fourth-quarter property sales which could result in a temporary drag until redeployed in January. Furthermore, we are always evaluating ways to create additional value and long-term growth, which could be temporary dilutive. A great example of this would be some of the lease buyout opportunities we have explored in the attempt to accumulate big blocks of space. We fully expect a strong fourth quarter of 2006 but our focus has turned to 2007 and beyond.

Lastly, you will note, from our supplemental, that as of 9/30 we had paid out just 70% of our taxable income as a result of significant gains on property sales. We expect to address this issue by investing (indiscernible) sales through 10-31 exchanges and additional distributions. As we have done historically, we anticipate establishing a new dividend level in December of this year.

With that, I'd like to turn it back over to Marc for some closing comments.

Okay, thank you, Greg.

Just a couple of final thoughts here before we begin to take some questions, first, yesterday's release announced that Gerry Nocera, our Chief Operating Officer, is leaving the Company at the end of November. Gerry started at SL Green in 1991 and was a key catalyst in SLG's phenomenal growth over the past 15 years. His leadership will be sorely missed. And on behalf of myself personally, our founder, Steve Green, all of the employees at the Company and all of our shareholders, we just want to take this moment to thank Gerry for a job well done and wish him the best on his future endeavors in his career and his life.

I also wanted to also mention that we will be having SL Green's investor meeting on December 4. We look forward to seeing as many of our investors and analysts at the December 4 meeting as possible. We promise to make it a lively and informative event. We will be giving our first detailed presentation for 2007, so I would encourage everyone to come, as in years past it has always been pretty well attended. I look forward to seeing you. That will be here before you know it, a little over a month.

So with that, we'd like to finalize this portion of the call and take some questions.

(OPERATOR INSTRUCTIONS). Lou Taylor, Deutsche Bank.

Congrats on another good quarter. Let's see. Marc or Greg, can you talk a little bit about the leases that expired during the third quarter, the leases that you signed? When did the prior lease, when was that signed? Are these five-year-old leases or are they ten-year-old leases? Just, can you give us a sense, please?

For the expiring leases that were marked-to-market, I don't know if we have, we should look. I don't know if we have the actual length, average length for all those leases that expired during the quarter. I can tell you, on average for the portfolio, it's about seven years is I think where our weighted average lease expiration currently stands. So I have to believe that's a pretty good proxy for what we are seeing now, but I can't tell you that with certainty. I don't know, do we have that?

The answer is we can get the number. I think 7 is probably a good estimate and we will double back with the exact number. But I think 7, given the mix of properties and kind of a ten-year average life on some of the bigger deals, I think 7 is a good number to use.

So that would probably put it back to, call it '99, the late '90s vintage, on average.

All right. The second question just pertains with, given the strength of the market, what do you think your ability is to maybe get a better capture rate of higher expenses and getting more of that reimbursed by tenants rather than you having to absorb it? Is there any trends in the market along those lines?

Well, I think, in that area, there are a couple of things we do which there are certainly trends and I think we are also creating our own trends in that area. But as much as we do capture, and I will come back to that in the second, when those tenants do roll and expire, the unfortunate part is everything resets itself. So you can only capture it for the term of the lease. It's not bad but it does get eventually absorbed back into the market price on a lease turnover.

But with that said, we have come up with different buckets or categories of defining things like insurance and utilities, and also other compliance with law like local law (indiscernible) and facade work. And we strip that way for ordinary OpEx pools, which have been going up at a fairly modest pace. When you look at simply labor and repairs and maintenance, [rubbishable] things like that, it has been a fairly modest inflationary growth. Where the real increases have been is in obviously fuel, utilities, steam, insurance, to some extent security but that's just because we are putting more security in the buildings, and the façade work, the local (indiscernible) work. Because there's just so much of it going on in the city right now, the cost of doing that work has gone up. So we do give those separate buckets. We are recapturing a greater proportion of those expenses, but that capture has a beginning and an end.

Okay.

I think, too, if you look, because there has been a, we've been reasonably successful at recouping those expenses because there have been significant expense increases and we have been able to, when you look at the reimbursables, we have been able to recapture the lion's share of that.

Excellent.

The last question, just pertaining to Gerry's departure, can you give us a little color in terms of where he may be going and prospects for a replacement?

Well, I mean, as to where he may, I mean, Gerry is not leaving to take another position, so I can't speak for Gerry but I can tell you that I think, after 15 years in the trenches and these are fairly ambitious trenches, he is taking this as an opportunity to reassess goals, opportunities, career objectives. And where that will lend him, I'm not sure if he knows. I certainly don't know.

But in terms of what we are doing internally, this is something we have prepared ourselves for over a number of months now. Basically, there's a whole management team here that really has stepped up and taken, either has taken over or will be taking over a large part of those responsibilities, a lot of that falling to Steve Durels, Director of Leasing, Ed Piccinich, who is the Director of Operations and Construction, and Neil Kessner, who is right now very active on the legal leasing but also does a tremendous amount as it relates to just general real estate operational activities and asset management. So, I expect that you will see certainly the three of them to take an even bigger role than they've already been taking, over time. We may look to enhance that with one or two individuals from inside the shop or outside.

Michael Bilerman, Citigroup.

Good afternoon. Jon Litt is on the phone with me as well. Greg, can you just review, on the investment income, that 15.7 million in the quarter? Can you break it up between the pieces? I think you said they were something, a deferred interest piece on Jeff Sutton's loans?

Yes, we had a new structured finance investment of around $32 million for the quarter, which bought the balance up, which was not reflected last quarter. I think it's probably around the $1 million of income on loans to Jeff, which with no cash flow in place, we had deferred the recognition of that income.

Effectively, the run-rate of that line item effectively goes down then to the fourth quarter?

It doesn't necessarily go down, because it currently, the loans to Jeff are still outstanding but depending upon, you know, we may look to recapitalize those investments, in which case those loans might be paid off. So there will be some, there will likely be some income from those loans. Unclear whether they will make it outstanding through the balance in the fourth quarter.

Effectively, the income that's being generated there is above and beyond the 350 million that you have (technical difficulty) in mezz?

Correct.

Okay. Thinking about the retail investment, how much money do you think you have out today? What do you think the current yield is on those investments? How much of a drag do you think is affecting your FFO, and sort of when you think, one year out or two years out, where do you think that yield will go to in terms of acting as a real [fully] for numbers?

We would have to come back to you with the exact amount of dollars outstanding. I think, as we lease up vacancy, the investments start paying dividends, but the retail is primarily a residual play. The pay-off will more likely come in the form of recapitalizations and taking essentially profits out in the form of either property sales or refinancings at well in excess of our basis. We would expect to be able to demonstrate a couple of those types of transactions coming up in the near future, particularly looking at recapitalizing 34th Street with the Apple lease and looking at recapitalizing our 141 Fifth Avenue investment with the HSBC lease, which we've disclosed previously.

Do you think you are under water today, just from like a cost-to carry-perspective, relative to the income you are receiving?

Well, I mean, I certainly wouldn't use the term "under water". You know, on the Howard Johnson's side, as an example, where we don't have a tenant in there yet, we are of course capitalizing the interest as we prep that site for lease. So although, if you use the Apple lease as a proxy, we're going to get a double-digit free and clear return investment on our cost basis there.

On the Reckson transaction, I think you talked about that $0.20 to $0.40 as being very comfortable with the FFO accretion. Have you gone back and been able to calculate what you think the cash impact when you strip out the, resetting the straight line and the FAS 141 and layering the CapEx for the portfolio, and what that number would be?

You know, I think we will have excellent color for you at the December 4 meeting on that. The answer is obviously we took a crack at that as we needed to for the proxy, so you can take a look at how we handled it in there. You know, like I said, I think, for December 4, we will be able to lay out the complete specifics, including the 141 adjustment of the transaction.

Thank you.

Ian Weissman, Merrill Lynch.

Yes, good afternoon. I was wondering if you guys can give us an update on the condo development at 1 Madison. Has there been any change, also in your pro forma numbers, in terms of sales per square foot, given the softness in the market?

Hi Ian. It's Andrew. No, no change from the last quarter. I think we are, the development is proceeding apace. We are finalizing plans and ready for a submission to the Attorney General. We still expect to be marketing units next year and closing units the year following in 2008. The development team, being Ian Schrager and Aby Rosen are still confident that, at the very high-end, which is the market they play in, they are still seeing decent demand. Even if absorption has slowed a bit, they don't see pricing softness.

What is the pricing they're pro-forming?

I think what we've said before it is north of $2000 a foot.

Okay. I'm not refuting the strength of Manhattan in terms of office fundamentals at all, but there has certainly been a few call it negative press articles in Cranes talking about some of the issues facing the hedge fund industry. Certainly, downtown has had a resurgence maybe at the pushback of high rents in midtown Manhattan. Also, I think it was reported today that New York Times is putting 155,000 square feet back on the market at its new headquarters. Maybe you could just address some of the negative press surrounding Manhattan. Are there any areas of concern? Are you getting pushback from tenants?

Well, I think that everybody is looking for weakness in the market, but as much as they try, it's really not coming our way yet. We are doing a number of deals with hedge funds right now. They don't seem to be pulling back away. Having said that, they are a fairly small proportion of the marketplace. They do the deals that are sort of the headline-grabbing, small-space, top-of-the-building type deals. The one good thing that's, or the several good things about the market that we are in right now, it's not dependent upon any single industry. We are seeing strengths from financial services; we are seeing strength from law firms. More importantly, we are seeing it from broad-based old line businesses that are driven by growth.

The New York Times space that was announced coming back on the market, that was planned; most people knew about it. Certainly the brokerage community was anticipating it. For 150,000 square feet that hit the market, it's so nominal with respect to the demand out there as to, you know, it's probably actually received as good news because there are more tenants looking for big blocks than there is availability.

Okay, thank you very much.

Ross Nussbaum, Banc of America Securities.

Good afternoon. Which buildings are you planning to sell that comprise the 750 million number you threw out?

I think we are still evaluating the portfolio and trying to figure out sort of the lowest-hanging fruit and which are most fun for sale, so we have not announced anything yet.

Have you put anything on the market? I think you said you expected this to be done in the next six months. I would assume that means they're going on the market ASAP.

They are going on the market (inaudible) yes. You know, the ones that we identify, that we pick, we have a team of brokers lined up ready to attack (technical difficulty).

Is the Viacom building a possibility? Would you monetize that now as opposed to doing a redevelopment?

No, I think we said we seek too much upside in that asset. We are more focused on selling stabilized assets that are sort of peaked in terms of year-over-year growth potential. You know, assets like 70 West 36th Street is certainly a consideration, possibly 1 Park Avenue, where we recapitalized a couple of years back but may be another sale candidate.

Okay. On the recap at 1250 Broadway, I think it raises an interesting topic which is we hear all these numbers being thrown around about 800 to $1000 per square foot values, but the value that you are suggesting in your press release on the recap there is just under $400 a foot. Is that where you think, I don't know if you want to use the word Class B or I know it's the Penn Station submarket, but where would you consider the lower end of the market to be on the quality scale, value-wise, these days?

There's two answers there. Don't confuse a deemed value with our partner for purposes of splitting up economics as the trading value of that property, okay. There are two very different exercises, two very different numbers.

What we did, which is I think fairly unusual by ways of how these JV's operate, is we were able to sit down with our partner and rather than sell the property and/or rather than leverage the property, came to an agreement with them on what we call a deemed value, which kick our ownership interest up from 55 to 67.5. That obviously, the 0 sum game, that was probably something we were very desirous of doing. It's good, in the long run, for our parties because it means they've made a lot of money, but it also means that their ownership interest is going down. I would look at that number as a settled number, not where that would trade if we were to sell it. That number does not by any way, shape or form represent a 4 cap or 4.5 cap on NOI because that is where the market is and that would be a number much in excess of 260. That's one.

Two, in terms of where do we see the lower end of value, I think you should only look to maybe our last two or three sales because those are what we consider to be the lower-end buildings in our portfolio. I don't consider 1250 among them, by the way, but 286 Madison, 290 Madison, those were both about 4.25 to 4.50 a foot. Then there was 1140 Sixth Avenue, which was somewhere in the 500 (multiple speakers) 500 and change a foot. I would say that's the anchor but I would not put 1250 at the bottom.

Okay. Greg, a question for you on the dividend, and I know it's going to get addressed in December but if I am looking at the supplemental correctly, there is obviously a pretty big gap between where your taxable net income is and where your dividend is. Is the math just simply going to be ratcheting the dividend up to 90% of taxable net? Is there anything going on in the fourth quarter?

Again, the 9/30 numbers include the taxable income from the property sales in the third quarter. We assume that we are going to be able to shelter that by rolling it into, by rolling it into Reckson. We haven't included that deemed 10-31 as part of that analysis. It's not done until it's done, but we expect to be able to do that, which would solve a big piece of that differential.

I got it, okay. Then finally, Marc, just in terms of your time allocation these days, how much time is being spent on the green side versus Gramercy? Has that changed at all?

I would say it's constant at around (LAUGHTER). When we get asked these questions, it's always tough to do it. Call it 75/25, 70/30, in that range.

Jordan Sadler, Keybanc Capital Markets.

Could you reconcile for me? There is the loan that you made on 717 Fifth Avenue, the principal amount I think you said 40-something million, but I guess in your supplement, you've got a stated value of $235 million is the acquisition price. I was just curious what the difference was.

Yes, if you take the 235 less the mortgage debt that's in-place, the 46, which is structured as a loan in the structure, basically represents our equity in the deal.

So basically the full value or the enterprise value or the total value of the asset is 235 million?

Right.

Okay, and it's 76,000 square feet. Is that 76,000 square feet, what was the retail component of that?

There's about 50 or 55,000 square feet of retail there.

Okay. So I guess your basis overall, well, what do you the market rents are there? What was sort of the recent leases that Jeff had signed across the street in that neighborhood?

The best comp is across the street at Trump Tower. Donald has the entire Asbury space, which is available for lease. He is asking about 1400 a foot at grade.

Anthony Paolone, JPMorgan.

With respect to the leasing activity, I think about 600,000 square feet in the quarter, and you talked about 2 million for the full year, how much of that, particularly for the third-quarter activity, actually hit the numbers versus having a later commencement date?

I would say the lion's share of that will have a later commencement date, so the biggest lease being the Morgan Stanley one at 1221 was clearly a September event. So, I think you won't see the lion's share of the benefit of that at least until the fourth quarter.

Okay. Does much extend off into, say, 2007?

Some of it may, because remember we had this nuance that where there's TI dollars involved, you can't begin income recognition until the TI dollars are substantially complete, so that might even push some of the recognition into first quarter of 2007.

Okay. Then on the CapEx, side, your TIs and leasing commissions came down a bit sequentially. Is that something that was just a matter of mix or where do you see those costs running on a go-forward basis?

Again, I do think it varies from quarter to quarter depending upon which buildings you are in. We have made a substantial amount of headway on renewals, pushing renewal TIs down to the $10 level. On new deals, we are still looking on a ten-year deal and kind of a $45 work letter for (multiple speakers).

Yes, trending down. You know, depending on, to your point, it depends on which building you're in and how big a deal it is. Certainly, renewals today are carrying. It's the rare exception where any free rent is given. TI is normally a cosmetic contribution and nothing beyond that. On new deals, where they were, 18 months ago, 50 to $55 a foot, they have come down to $45. Now, it's pretty common to see deals at $40 a foot. So, concessions across the board are tight.

Okay. Then the last question on the Apple lease, any sense as to when that commences or is it contingent on construction or?

It is contingent, potentially contingent on construction. We are working kind of through that. My guess is that there will be some income recognition starting the end of the first quarter of 2007.

Okay, thank you.

Michael Knott, Green Street Advisors.

The first question, can you update us with respect to the strategy on disposing or joint venturing the non-Midtown assets of Reckson?

Disposing or joint venturing the non-Midtown, meaning Westchester and Stanford?

Right.

So, there's no contemplated strategy to dispose or JV those assets at this time. What we said on the call back in August was that we had paired the portfolio down to what we thought were the most synergistic markets with our 11 million square feet in Grand Central, that being essentially White Plains, the surrounding area in Stanford. We've actually made great efforts to retain most if not substantially all of the personnel in those buildings and up at the Westchester office, such that we will be able to operate that platform going forward and try to leverage off of our attendance here in the Grand Central area and see if we can get some synergies in the suburbs.

With that said, I would expect but certainly not now but maybe in the first year or two that you will see us prune and reinvest much in the way we do it here in Manhattan to try to identify what we think are the weaker buildings in those submarkets, get rid of them, and then reinvest those proceeds in what we think are the best buildings in those markets with the highest embedded rental growth.

Okay, thanks. That's helpful. Then Marc, with your comments on the meat of the market with respect to leasing conditions in New York, is that a relatively new development, where you're seeing the rental rate growth on sort of the B kind of assets?

Yes, I wouldn't even call it B. I mean, to me, it's A and B assets. What I'm differentiating is what Steve Durels referred to earlier, which is the trophy, top-of-the-building, $100-plus rents, the hedge funds or other profile users. Those went up, went up sharply and went up early, but now we are seeing, in both B and A buildings, which I would define as rents, anywhere from around $35 all the way up into around $75. I term that kind of the meat of the market. That's where, by number and square footage, that's where most of your tenants and businesses exist. That's where we are starting to see increases that are parallel to the increases that took place at the top end of the market, let's say, over the past 9 to 12 months.

Do you see that spread between those, the meat of the market and the top end narrowing?

It's too early. I mean, this is something that I think we will see happening over a period of years. It's not going to be instantaneous because the rollover just doesn't permit it to, but I do think that, every quarter when you have net absorption of 1 million square feet or more, that just puts more pressure on the rents, and that will take it up a notch. That's what we are seeing right now. So the answer is yes, I see that gap narrowing but not now or not next quarter or the quarter after that to a level where I think it's equalized.

Okay, thanks. Then last question, Andrew, can you comment on the strike prices on the option retail investments this morning? Should we think of those as favorable strike prices or are they sort of at market today?

You know, I think they are at market today in terms of where we got the assets. They are longer-term but I don't really think of them as favorable because I think we made good deals in buying the assets. They are not subject to increase in the future, though, for future increases in market value.

James Feldman, UBS Financial.

Thank you. Can you talk a little bit more about the captive insurance company and what the potential risks are to the Company, SL Green?

Sure. Well, I mean, in terms of, I'll start with the second question, the potential risk. It's $100 million maximum of insurance that we would be able to write for ourselves at any one time, so that is the sum and substance of our exposure. We have not utilized that amount of coverage at this point. I believe we've utilized about $50 million at this point. The way you further mitigate those risks is to write an insurance layer that's actually not the primary layer. So much in the way debt in today's world has first loss, second loss, third loss and most senior pieces, insurance is no different. Rather than take the first loss risk, which is called the primary risk, the $50 million policy we wrote to ourselves only kicks in after $100 million of lawsuits has already been incurred. That's a very, very substantial amount of losses at $100 million, far in excess of anything the Company has ever even come close to experiencing in years past. Then the $50 million layer would kick in after that. Beyond that, we have insurance all the way up to about $600 million beyond. We could have written that $50 million anywhere between dollar 1 and Dollar 600. We chose what they call 50 ex-100 or 50 after the first 100, because that's where we saw the best cost benefit savings to the Company.

Okay. Then secondly, the special servicer status, is that something that you could turn into an eventual business line, or is that more just the overseas Gramercy activity?

Absolutely, it could be; it's on separate a business line. In fact, today, it doesn't just service for Gramercy; it services primarily for Gramercy, also for Green, and also has joint venture investments that it overseas on behalf of other institutional partners, I think several of those investments. So I think it's a real business line because there's a lot of room for improvement in this area, there's not a lot of people that occupy this space. When you have the combination of real estate expertise, debt expertise and asset management/servicing expertise, there's very few companies out there I think that do it at a high level. We think we do. I guess S&P agreed with us because, in a very limited track record, they approved us to be a rated special servicer. Our goal is, over a period of several years, to attain the highest rating, which I think they call, I don't know, above average, and be able then to leverage that into a third-party business.

Chris Haley, Wachovia Securities.

Good afternoon. It's Brendan Maiorana for Chris. I just wanted to go back to the rent growth question. I think, on the last call, you guys had stated that you expected cumulative rent growth over the next three years to be 25% or higher. Marc, in light of your B comments, do you think that forecast still holds?

I definitely think it still holds. I guess you're asking might it be too light?

Yes.

Well, we were right on target for Q3! I certainly don't think you should be looking for more than those kind of increases rolling out over the next couple of years, so we have to now try to maintain those levels as the rest of the space rolls, quarter-after-quarter. I think this quarter was an exceptionally good quarter; we never expected 25% in such a short period of time. So, I still think 25 to 30%, 7 to 10%, 8 to 10% growth per year, over a three-year period, is a pretty reasonable projection. It may be somewhat front-loaded and then taper off. I don't think you're going to get to levels that are dramatically in excess of that because I just think that would be unsustainable. But we're going to be testing new highs in a year or so, and then we will see how the market reacts.

Okay. Then thinking about the mark-to-market, on your combined portfolio, I guess it's around, somewhere around that 30% number, at least on an asking rate basis. How do you think that compares to the Reckson assets that you intend to keep?

I mean, if you look at what they published in their supplemental, I think they identify the mark-to-market, at least at 6/30, at kind of 25% for their Midtown assets.

Jay Habermann, Goldman Sachs.

Good afternoon, just a couple of questions here. I guess, Marc, can you give a sense of the difference in NOI growth between sort of your Class A trophy assets and perhaps the more Class B type assets?

Well, on a percentage basis, I would say it's roughly equivalent because we don't really differentiate between class A and Class B; we differentiate between high-growth and low growth, and we pair away the low growth and that's everything you've seen us sell. Everything we retain is high-growth, and by high-growth I mean same-store NOI growth averaging 7% or higher. That's very high-growth, and that's where the trendline currently is. But that's made up of As and Bs, so I don't think there's a clear distinction between the two. I mean, clearly the buildings we've sold had very mature profiles, and the buildings we will be selling, some of which Andrew mentioned earlier, which 70 West is a B and 1 Park is an A, but both of them have somewhat mature NOI profiles that are both on the block, or will be, whereas there's a building like, I will give you an example of a B building with high rent growth. 292 Madison, okay, it is a building that probably has low to mid 30s in-place rents with.

(inaudible) we sold the rest of the block (technical difficulty) likely to keep that asset because we still like the growth from it.

Right, the growth profile there is very, very strong, as strong or stronger than an A asset. It's really just a function of in-place rents versus market. I would say, on the margins, the A assets are probably, those are the ones we are retaining; those probably have slightly better metrics. But everything we have post sell-bound of the 750 million you should assume are pretty high-growth NOI assets.

Okay. Just switching gears, in terms of the early renewals, most of your rent roll, you see a big role really in '08 through 2010. Can you just give us a sense, excluding the Viacom lease, of the sort of types of conversations you're having and I guess how those terms, how you are structuring those deals?

Yes. I mean we are very cognizant of our lease rollover, and good market or bad quite frankly, we try to manage future expirations. Given the market today, we are definitely in front of tenants with expirations two, three, four years out and peppering them with the ideas of doing early blended extends where we renew their lease, averaging in their in-place rents with market rents. There's a compelling argument for them. There's obviously a compelling reason why we would do it. It has been pretty receptive, pretty well received by a lot of tenants. A lot of that is sometimes driven by us proactively going in and saying the market is moving against a tenant and say, and taking advantage of a broad portfolio, moving them within the portfolio to better cost space or to a better profile space for them, but then also working with them to extend their lease expirations and manage our exposure to the market down the road as well. So with 600,000 square feet of scheduled rollover but a lot more leasing activity, a good portion of that is driven by that effort.

Okay, thank you.

John Guinee, Stifel Nicolaus.

Good day. A couple of things, first, can you go over the capital stack on 720 Fifth Avenue? It wasn't in the supplemental.

Yes. It's a $165 million first mortgage held by a third party, $35 million participating mezzanine loan held by (technical difficulty) common equity.

Got you. Second is I think, per the S-4, you're going to make the number of loans to Reckson or to the new entity, [Scott and Mike Maturro]. Can you go through the size and terms and security of those loans very briefly?

We are providing acquisition financing for their acquisition of the Eastridge portfolio in Westchester, which we estimate to be around $200 million at closing, a first mortgage acquisition loan. We are providing an acquisition loan to the venture that is purchasing the RSVP assets, which we estimate to be about $32.5 million, of which we are going to be 50% of the borrower, so we will show it really is a $16 million loan to new Reckson on their 50% of that venture.

The terms on, say, the Eastridge deal?

We are paying, and we are going to have a $30 million loan on their Australian entity. So and I guess the only point, though, on the Eastridge loan, you'll more than likely see us sell off a senior piece of that loan. So we will be (inaudible).

Okay, and the basic terms on that, on the Eastridge loan?

I think it's disclosed specifically in the S-4; I don't have it in front of me, John.

Second, you are quoting $1000 a foot for development costs. Can you do two things? One, break down how you see that land base building TIs and then (indiscernible) costs? Then second, do you see it a $1000 a foot still in Times Square West or in Penn Station West?

Times Square and Penn Station West. Only speaking primarily to the developments that are underway. I cannot give you any kind of cause estimates for Penn Station, because we have not really looked at that for potential development at any level. But I think you are looking at somewhere around 250 to 300 a foot for land. And the balance is construction costs and commission and TI installs.

Okay. You don't have any sense, how that would, you are considering that a prime Midtown location? Or are you considering those numbers when you are considering Times Square West? I misunderstood.

Well, I consider, when you say Times Square West, I'm not sure. Times Square I consider prime Midtown in today's world. Times Square West, are you talking Eighth Avenue?

Exactly, yes.

I would say Eighth Avenue will be about the same. There's a Milstein site there that was just sold, 42nd and 8th. I would think that would be all-in plus or minus right around that number. I don't know the number on the New York Times building; I don't know if anyone here does. I would guess obviously their land costs will be a little less and they bought all their materials earlier before the price increases, so that one probably is not 1000 a foot, but I would be guessing if I took a shot at that one.

Got you. All right, thank you.

Okay, is that it, operator. Thank you, everyone. We ran exceptionally long today, a lot of good questions. We appreciate everybody dialing in (technical difficulty) remaining, and look forward to seeing as many of you as possible in December.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation. You may now disconnect and have a great day.