SL Green Realty Corp (SLG) 2006 Q4 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. fourth-quarter 2006 earnings conference call. This conference call is being recorded.

At this time, the Company would like to remind their 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-K 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 measures 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 fourth-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 all for joining us today. I am sure that many of you have seen our earnings release and various other announcements and know by now that we had another terrific quarter of performance to finish off 2006. A number of you today were also in attendance at our 2006 December investor conference that we held in New York City last month. I want to thank again those of you that did participate. The turnout was excellent, and that forum gives us an opportunity to discuss in a great level of detail our business plan and our strategies, much more so than we could ever accomplish on a quarterly earnings call.

But because we sent so much ground at that meeting, we are going to focus today on the events that transpired over the last seven weeks since that meeting. You would think that would typically be a brief discussion. But we packed a lot of performance into that short period of time, and we would like today to go through that with you.

Most notably, I am very proud to report that on January 25, 2007, SL Green closed on the acquisition of Reckson Associates after a very long drawn-out and hard-fought process. First, I want to officially welcome all Reckson shareholders who, as of last Thursday, became SL Green shareholders. In the end, it was their support for the deal that enabled us to conclude the transaction, with the resulting Company being an even more dominant force in New York City, as we now have ownership interest in 42 commercial properties located throughout Manhattan, comprising 25 million square feet. With a market capitalization of approximately $14 billion, SL Green will become the third-largest office REIT in the country, after the departure, one way or the other, of Equity Office Properties.

I'm extremely proud of our entire team, both employees and professionals, who remained energized, supportive, and confident -- most importantly, confident -- throughout the transaction. The direction of asset prices over the past seven months, as well as the crushing amount of capital in the real estate sector supports my belief that the Reckson acquisition was well timed, well priced, and well played. The addition of five prime Manhattan office towers at an average allocated cost of approximately $650 per square foot and containing significant embedded growth in rents, bolsters our ability to continue to drive high-quality future earnings growth through continued asset recycling and operational outperformance.

As evidence of the substantial contribution that these Reckson properties in Manhattan will provide, consider the early results on major leases that have been signed in New York City since we announced the transaction. I am looking at 1185 Sixth Avenue, where we recently signed a lease with Hess for 53,000 square feet at an average rent of approximately $80 per square foot; and another piece for Hess at $95 per square foot on a higher floor with no free rent and as-is on that one.

Also, a hedge fund located at 1350 Sixth Avenue, 31,000 feet, at $91 and $96 a foot, so a blend in the mid-90s. Lastly, a deal at 810 Seventh with Cingular on a $75 a foot as-is basis for 15,000 feet. All of those are probably somewhere around $7, in some cases as much as $10 in excess of the originally underwritten rents back in June and July of last year.

All of which gives me the confidence that between Steve Durels, Larry Swiger, and now joined by former Reckson executive Bill Elder, will oversee a leasing portfolio in the leasing team here at SL Green to maximize the rents not only in those buildings but in the rest of the SL Green buildings.

No one appears more excited than the men and women who work at SL Green, along with the former Reckson employees, who now have joined our ranks to continue our tradition of operational excellence. If you will indulge me for 30 seconds, I would just like to read to you an e-mail I received the morning after the Reckson closing.

It starts off -- Just a quick update. The portfolio managers have personally visited the buildings to ensure that all SL Green signage, stanchions, [captivate], decals, upgraded lobby flowers, etc., have been installed at the five New York City properties. On the coldest day of the year we have fully branded all of the new buildings, with no indication of Reckson in sight. The team worked through the night to guarantee that tenants arriving to work today know that SL Green is the now owner at these properties.

Additionally, regarding staffing reassignments, all on-site management throughout the portfolio are in place and have been fully transitioned seamlessly. As is our standard, all changes have been communicated to our tenants. The action plan we persistently worked on over the past six months has been fully executed.

And now in big bold letters at the end -- Getting slow; what is next?

So I can't think of any other way to sum up the spirit and drive of SL Green employees across the Company and the pride it has in this transaction. That was actually sent to me at 0.800 by Ed Piccinich, our EVP and head of construction and operations. That is [enbemic] of the spirit across all groups within this Company.

Another exciting component of the Reckson transaction is that we now have a very high performing operating platform at 360 Hamilton Avenue in White Plains, overseeing the Company's approximately $1 billion investment in Stamford and Westchester assets. I visited those offices at an impromptu get-together on Friday afternoon, and I can tell you that all of the employees there are re-energized. There are several SL Green people who will be temporarily stationed at White Plains to work on a smooth integration. The early returns on Stamford, it looks like we will be on or ahead of underwriting with regards to our leasing efforts there.

Westchester now looks like it's right on track as well, with the recent 22,000 square foot expansion of Heineken at 360 Hamilton Avenue at rents that are averaging around $35 per foot. There was also another lease signed back during the contract period with the Compass Group at the Rye Brook Executive Park for 31,000 feet on rents that were right on budget. So feeling very good about that at this moment.

Before moving on from the Reckson transaction I would like to wish the best of luck to Scott Reckler and his team, who are embarking on the next phase of their real estate careers and put a lot of energy into building a great portfolio of assets. We will certainly uphold our mandate in achieving exceptional performance out of the buildings we acquired.

Turning now to our fourth-quarter performance, we finished the year on a very strong note with $1.18 per share of FFO, which was both ahead of consensus and ahead of management estimates. That growth put us at $4.61 per share for the full year, a full $0.06 above the high end of management's guidance; and that guidance was as recent as seven weeks ago. But that shows you how strong we finished up the year; and a 10.8% increase over the prior year, so slightly in excess of our overriding corporate goal of 10% a year.

Consistent with the earlier quarters and throughout this year, this performance was driven primarily by core internal growth, consisting of an extraordinary 29% mark-to-market in the fourth-quarter replacement rents and solid same store NOI growth of approximately 16%.

These numbers should not come as a surprise to anyone who attended the conference in December, as we spent a great deal of time talking about all of the market dynamics which are driving operating results in this direction, including overall vacancy rates of 7% and falling; lack of competing sublet space; and minimal immediately-deliverable new development. Combine that with a strong economic climate and a portfolio of properties that stands to benefit from these market forces, and you can see why we have the level of enthusiasm and confidence that we do.

As to the new investment activity, I believe that the statistics and announcements we have made over the past month or two -- and many of them over the past day or two -- speak for themselves. However, in addition to the Reckson transaction, it was an extraordinarily busy December as we continued to optimize return on investment through aggressive recapitalizations, triggering a property gain, substantial property gains, and incentive fees; and also through opportunistic sales as well as investment in off-market acquisitions and investments such as we accomplished at 800 Third Avenue, a prime midtown office building.

Going forward in 2007, we will continue to capitalize on many of the same strengths as we did in 2006. Specifically, the combination of significant mark-to-market with an accelerated leasing strategy, combined with the recycling of mature assets into the Reckson portfolio and other high-quality new acquisitions will continue our earnings trajectory and hopefully keep us right at the top of the pack in 2007.

Post consummation of sales, we expect to have essentially full availability on our now expanded line of credit; and our balance sheet is otherwise in very good shape. Gramercy Capital Corp., which had their conference call about a week ago, continues to exceed all expectations and has turned into the most highly successful finance company within its sector, posting returns of over 150% since IPO just two and a half years ago. Gramercy's asset base is now approaching $3 billion. The fees and dividends SL Green receives on that investment is yet another factor behind our optimistic outlook for 2007.

One final note. You may recall in December we mentioned that after having led our sector in total returns in 2004 and 2005, we were coveting that prize again in 2006 to make it an official three-peat. In fact, we did end the year with a total return of 77%, which not only led all other office REITs but was actually the highest level of performance among all public REITs.

Said in another fashion, this year shareholder wealth was increased by a staggering $3.2 billion. That is based on stock price and dividends alone, and that is after netting out the equity issuances over the course of this year. This is a truly remarkable achievement in isolation, but even more notable on the heels of two prior market-leading years, I think it stands out as probably one of our crowning achievement.

It goes without saying that we will attempt to repeat this feat yet again in 2007, in a drive that Greg Hughes has labeled -- one more for four. But obviously we can control performance of earnings and generation of earnings, but not stock price multiples. But with that said, we certainly hope at a minimum to be at or near the top of our sector once again.

When measured over a period of five years, total return is nearly 490% or a compounded growth rate of approximately 37% per annum, which we would stack up not only against other REITs, but against any private equity firm or hedge fund in our competitive set. We are extremely proud of those results, and we're all committed to making 2007 a success. With that, I would like to turn it over to Andrew Mathias.

Thank you, Marc. As Mark mentioned, since our December investor meeting, the main focus of our investment activities has been the closing of the Reckson transaction completed last Thursday. I would like to echo Marc's sentiment of the extraordinary pride we feel in our team effort in getting this deal closed. The individual efforts were extraordinary, and we think the resulting Company is a unique platform for growth.

As we had indicated in our last conference call and at the investor meeting, asset sales have taken on a new priority internally in light of the Reckson transaction and the opportunity to tax-efficiently redeploy proceeds from mature existing assets into our new Reckson assets.

To this end, this morning we announced the execution of two major sales contracts on properties slated for disposition, One Park Avenue and 70 West 36th Street.

First, One Park Avenue. In 2004 we sourced a unique opportunity to recapitalize our ownership of One Park Avenue, significantly reducing our basis in the asset and retaining, through a unique incentive structure, a large percentage of the future upside in the asset. With our sale announced today, we have essentially sold this building for a second time. Just as we had planned, our leasing group continued to add significant value at the asset level after our 2004 restructuring; and we were able to capitalize on that value creation in an extraordinary sale transaction for about $550 million or $602 per square foot, a near record-setting number in One Park's Park Avenue South submarket, and with a going-in cap rate of about 3.5%, a strong reflection on the depth of demand for Manhattan office buildings today.

SL Green's levered IRRs on the One Park Avenue transaction are an incredible 33.1% since acquisition over six years ago; and an even more staggering 109% since our 2004 recapitalization.

Additionally, this morning we announced the definitive agreement to sell 70 West 36th Street, one of the original assets from our IPO portfolio. 70 West is another great example of market appreciation in Manhattan values, as the property's price appreciated more then sixfold from the basis at which was contributed at the IPO.

Unlevered internal rates of returns for our hold over almost a 10-year period total a very impressive 22.6%, with a price of almost $400 per square foot and a cap rate on sale sub-4%. This asset is essentially one of our last small garment district buildings.

We're currently marketing our office condominium at 110 East 42nd Street for sale, which, should the sale perform up to our expectations, allow us to reach our goal of $750 million of dispositions this quarter. However, given market conditions, we're actively evaluating additional properties for disposition. We anticipate expanding the sale program with the goal of increasing aggregate sales above the $1 billion mark.

Also this morning, we announced our first strategic acquisitions in the Stamford and White Plains markets, to be managed by our new operating platform out of White Plains. We saw this off-market opportunity as a perfect complement to the properties we acquired in these markets as part of the Reckson portfolio and intend to begin to institute SL Green's value-add strategy with respect to acquisitions and dispositions in these markets, acquiring growth where it's attractively priced and disposing of mature assets where our management and leasing skills have been able to optimize value.

On the structured finance front in the fourth quarter, in addition to an extraordinary amount of tri-state origination which found its home on Gramercy's balance sheet, Green was also able to add to its balances in the fourth quarter. These investments took the form of our previously-announced investment in what we consider to be a very unique opportunity, in Tishman Speyer's acquisition of Stuyvesant Town Peter Cooper Village, in joint venture with Gramercy, and our previously-disclosed mezzanine investment in 720 Fifth Avenue.

There is the question, for 2007 we have our work cut out for us, as the market continues to be highly competitive and flush with capital. We remain confident as always that our long lead pipeline and our creativity and flexibility will allow us to have another great year on the acquisition front.

I would also like to mention a key addition in the investments group with the hiring of Isaac Zion. Isaac's focus will be leading the charge on New York property investments. He brings an exciting background with some of the leading real estate firms in the city to bear here. Isaac joins our already deep bench of talent in investments led by his new partners, [Christina Doe] and David Schonbraun.

With that, I would like to turn the call over to Greg to take you through the numbers.

Great, Andrew. Thanks very much. As Marc alluded to, we finished the year with our balance sheet in impeccable shape. With a combined debt to market capitalization of just 29%, we were clearly subsidizing the industry average of 42%. We also finished the year with over $250 million of investable cash on the balance sheet. This tremendous liquidity was achieved through timely visits to the capital markets, property sales, and an operating machine that generated approximately $50 million of free cash flow.

This stockpile of liquidity was of course used in part to fund the acquisition of Reckson which closed last week. The $4 billion of assets we retained from Reckson were funded with the $250 million of cash we had on hand; $1.3 billion of newly issued stock; a new $500 million unsecured three-year term loan; approximately $540 million of new and assumed mortgage financing that will be secured by certain of the Reckson assets; the assumption of $1.3 billion of Reckson's unsecured notes; with the balance coming from the Company's line of credit.

Even after providing for the pro forma effects of the Reckson transaction, we will have a combined debt to market capitalization of just 39% and substantial availability under our lines of credit, which were just expanded to $800 million.

As evidenced by the investment activity during the fourth quarter on top of the Reckson merger, it is important for us to be liquid.

With respect to the composition of our debt, note that after giving pro forma effect to the Reckson transaction, approximately 26.5% of our debt will be floating rate. As we have mentioned in the past, we elect to float not based on a view on interest rates, but rather to preserve our financial flexibility in order to maximize the value for our investments.

This strategy was once again on display with the refinancing of 485 Lexington. Prior to the financing that was announced last evening, 485 had long represented one of our largest floating rate positions. With 90.5% of the building now leased, the opportunity was ripe to lock in a long-term fixed-rate financing. As a reflection of the value creation achieved at 485, we were able to borrow twice what we paid for the building just 2.5 years ago at an effective interest rate of 5.57% interest-only for 10 years. An excellent execution.

Thus the 26% floating-rate debt that we have in place for Reckson will again be to preserve our flexibility with an eye towards paying some of that down from asset sales that Andrew alluded to.

Other items of note on the balance sheet include the following. With the acquisition of additional interest in 485, that property has been reduced from investment in joint ventures and is now consolidated on our books and records.

In addition, during the fourth quarter, 485 was placed back in service as revenue recognition commenced and capitalization of interest ceased. 485 capitalized interest for the fourth quarter was $700,000 compared to $1.6 million during the third quarter.

Simultaneously with the acquisition of the remaining interest in 485, we also sold an interest in 521 that is now reported as an investment in joint venture. Also contributing to the increase in the investment in joint venture accounts are our new investment at 800 Third Avenue and the Apple site at 21 West 34th Street.

Additionally, 55 Corporate, which had originally classified as an asset held for sale, has now been removed from that category and is consolidated in our books and records.

As Andrew alluded to, the increase in structured finance investments that you see on our balance sheet represents the investment in the retail component at 720 and the participation in the Stuyvesant Town loan.

Turning to the P&L, it was another strong quarter and a quarter which helped position us for solid 2007 results as well. As Marc mentioned, we ended the year at $4.61 a share or approximately $0.06 ahead of the previous guidance that we had provided to you.

We were able to exceed our guidance thanks to outperformance in all facets of our business. The highlight, of course, was the 28.7% mark-to-market on new leases signed during the quarter, which brings us to five quarters in a row of double-digit rent growth. This rent growth was experienced throughout the portfolio, with double-digit increases being achieved at 1221 Avenue of the Americas, 521 Fifth Avenue, 461 Fifth Avenue, and 110 East 42nd Street. Most importantly, this rent growth is translating into same-store NOI growth, where we posted a robust 16.4% increase.

Property NOI from the quarter obviously benefited from the same-store growth. We saw 750 Third Avenue reaching a stabilized NOI number for the first time. We started to see commencement of income recognition at 485 Lexington Avenue and 55 Corporate. We had a full quarter's worth of operating activity from the 717 acquisition which closed in late September.

During the quarter, we also addressed one of the few vacancies we had been carrying with the signing of a lease for 65,000 square feet at 673 First Avenue. This enabled us to finish the year at our targeted goal of 97% occupancy. This 15-year lease did include a $37 work letter which contributed to the slight uptick that you saw in tenant improvement allowances this quarter. While these amounts were relatively high compared to the prior two quarters, they represent a represent a very positive trend in comparison to 12 months ago.

New production on the structured finance front enabled our structured finance income to remain comparable with last quarter, a quarter which had benefited from exit fees associated with certain loans that paid off during the third quarter.

As Marc mentioned and for those of you who listened to the Gramercy call 11 days ago, you know that GKK enjoyed a strong finish to 2006 as well. As a 25% owner of that company, we were the principal beneficiaries. Our share of FFO from Gramercy increased by 23% to over $5 million compared to last quarter. This strong performance also served to increase started to increase our incentive fee from GKK, which totaled over $3 million for the quarter. For the quarter, we received a total of approximately $7.9 million in fees from GKK which are included in other income.

Other income from the quarter also benefited from approximately $6 million of lease buyout income as well as $8.8 million of incentive fees. The buyout income was especially beneficial since, in addition to getting paid, those deals helped facilitate the repositioning of the retail space at 521 Fifth Avenue, and allowed for the expansion of an existing tenant at the BMW building.

The $8.8 million of incentive fees related principally to 485 Lexington, where the lease up of that building, coupled with the resolution of the [SIP] partnership, allowed for the income recognition of that incentive fees.

As set forth in our press release, G&A for the quarter reflects an incremental $10 million addition to what was already being accrued for the 2006 bonus pool. This amount was provided for to compensate great employees for their extraordinary efforts and the Company's performance during 2006.

Combined interest for the quarter was approximately $50 million. This includes increases associated with a full-quarter ownership of 717 Fifth Avenue and the related debt on that investment, as well as the impact of 485 Lexington and 55 Corporate being placed in service, along with higher interest rates in general.

At our December meeting, we reviewed our 2007 earnings summary, which reflected an FFO estimate of $5.05, representing the midpoint of our initial guidance. As we mentioned at that time, we expected the Reckson transaction to add approximately $0.20 to that estimate if it were to close. That continues to be our best current estimate. This estimate will be most influenced by the timing of pending property sales that Andrew alluded to, the proceeds of which will serve to retire some of the acquisition financing in an accretive fashion.

We are in the process of finalizing the incentive fee we expect to receive from the One Park sale that was announced this morning, and currently anticipate that it will be higher than the amounts included in our December estimates. Accordingly, we are raising our 2007 estimate to $5.30 or a 15% increase over the 2006 results.

It is worth noting that our December guidance also included an estimate of an incentive fee related to 55 Corporate, which now appears more likely to be a 2008 event.

All in all, a very strong year in 2006. More than ever, we appear to be well positioned to deliver on the 2007 estimates, based principally upon internal growth that is now on our plate. So with that, I would like to turn it back to Marc for some closing comments.

Okay, thank you. Just before we take some questions, I want to take one more minute to acknowledge an important event today in our Company. I want to give congratulations to Andrew Mathias, who was just named by Crain's as one of the select New York superstars in their 40 Under 40. I can tell you after eight years at SLG, his efforts have been certainly -- they have earned him the accolades that he is receiving. Having worked with Andrew for over 10 years, I can tell you he is completely deserving of this recognition by Crain's and by New York.

I don't even hold even hold it against them that he repeatedly tells me that he reached this milestone several years ahead of me. That is just his competitive nature. But anyway, congratulations, Andrew. With that, let's open up for some questions and answers.

(OPERATOR INSTRUCTIONS) James Feldman with UBS.

Looking at your results reminds us a lot of [Speaker's] performance at the height of the last cycle. Could you talk a little bit about the sustainability of your internal growth rate? Your sequential internal growth rate, in terms of how long these leasing spreads can continue, margin improvement, and anything else that might drive those numbers?

Well, James, this is Marc. I think our feeling is twofold. One, we are not suggesting that anybody underwrite 16% same-store growth and 30% mark-to-market growth; because we don't think those kinds of numbers are sustainable. Certainly we may experience them in 2007, but we don't underwrite for them, we don't budget for them in our earnings guidance.

We are just are certainly exploiting the opportunities to the extent that those dynamics exist. But I think we have always said that the way we look at our portfolio in terms of mark-to-market was something along the lines of achieving a 30% to 35% increase over two to three years. We think that is completely achievable.

The market right now, until there is new construction, is clearly converging on rents of $100 a foot and more for the best buildings. I said that on my last call, that where it used to be one or two or three buildings, star buildings that would get those rents, now there is a dozen or more, probably now 15 to 20, that can achieve rents of $100 or more?

Many in our portfolio now, we are experiencing 70s, 80s, 90s as a new market level. So I would say to you that until there is new construction -- and there is really nothing of any material nature scheduled for 2007, 2008 -- that it should be sustainable. Not the rate of growth, but to roll our existing portfolio up from average rents today that are probably at around -- 60?

$61.

$61 a foot. Converging on the rents I just said, $70, $80, $90, to even $100 or more. That is a lot of embedded growth. We certainly don't see those rents going down.

If you are asking whether we think those rents are going to go to $120, $130, $150 a foot, I certainly wouldn't underwrite it. We're not suggesting that. But the reality is we will see how good this economy is over the next 12 to 18 months, whether it can continue the pace that it is on, because it is very solid right now.

If there is no new supply, you're going to reach a physical limit where tenants start looking at other alternatives, like downtown or out of Manhattan. But I don't feel we have hit that yet. You haven't seen those kind of major announcements. Although downtown has picked up, it is certainly not coming at the expense of growth in midtown. There has been no major moveouts to speak of yet.

I do think once you get into the low hundreds, $120, $130, $140 a foot, you're going to reach a limit with tenants. There are certain tenants who aren't in the financial industry who can't pay those rents and who won't pay those rents. The question is going to be, is the financial industry there to backfill those spaces? I don't know if that has answered your question, James, but that is how we look at it.

Okay. Just one quick follow-up. Can you talk a little bit about your current yield or expected yield for the Reckson assets versus when you first announced the transaction?

I think if you dial back to August, we talked about kind of a 5.6% gap yield on the investments. I think -- we think that that is probably still the right number to be thinking about.

Okay, so the reworking of leases you guys discussed is kind of baked into the FAS 141?

The rework and the leasing we talked about probably bridges the gap between -- difference between the cash and the gap yields. But I think the 5.6 is probably a number I would go with.

You also have to remember, those leases while sizable, it is a 5.5 million square foot New York City portfolio. There were only a couple of leases. So the good news is as they roll we are hitting really good numbers. But it is not enough yet where we could tell you that we should be expecting material increased performance.

Jay Habermann with Goldman Sachs.

Just a question following up on that last question on Reckson. I know you had mentioned the $0.20 to $0.40 of potential accretion from the Reckson transaction. Is what's holding you back from sort of the high end of that range, is that really due to the asset sales, the north of $1 billion you are anticipating?

Yes, I think if you look at the bridge financing that we just put in place and the credit facility, where you are borrowing it at LIBOR plus 125 [call], which is a 650 number, is decidedly over where our assets are selling at 3.5 to 4% cap rates. So obviously the timing of those assets which will be used to pay down that floating-rate debt will have a significant impact on where we end up.

Following along on that question, where is occupancy today for the Reckson assets? Where do you anticipate it being at year-end?

Well, the Reckson -- you want to break that into New York and the suburbs? Let us look that up and get it to you when we have that.

Okay. Lastly, can you update us on 1515 Broadway? I know on the last call you mentioned the redevelopment there and (multiple speakers).

The Reckson assets in New York I know are pretty well [leased numbers] (inaudible).

The entire portfolio is around 95%, and we are targeting to get it up to 97% by the end of the year. That includes, obviously, Westchester and Connecticut.

Okay, thank you.

Michael Bilerman with Citigroup.

Jon Litt is on the phone with me as well. Greg, what is the level of promote for One Park Avenue that is included in your guidance?

I don't have any specific number as yet. Remember that SITQ is in the partnership with us, that just sold One Park; so they are going to participate in the amount of the promote. So I think we put in the press release it is around $108 million gain and we are working our way through how much of that is going to be representative of promote dollars and then what portion of ours that will be. I would say it is going to be north of a $50 million number.

Then I guess, your guidance back at the investor conference was about $90 million for the structured finance and the gains. You're already on pace for $70 million of structured finance income; and there is probably some level of lease term fees. A $50 million number would take you way in excess of that. I'm just wondering why guidance didn't go up by a much, much bigger number?

But remember, I mentioned a couple things. There is going to be some runoff in the structured finance portfolio. We have a sizable investment on a Manhattan office tower that matures I think during the third quarter. We had in our guidance originally incentive income from 55 Corporate, which we are probably going to push back to 2008, because the likely buyer of that will wait for the free rent period to burn off. So that is why we have kind of pushed that back to 2008 now.

What was the level of 55 Corporate in terms of promote?

I would have to go back and check for you.

Okay. Then can you just -- there has been talk in the marketplace that Apple wants to sublease on 34th Street, and I know you have a signed lease, so you must feel pretty comfortable. But can you just talk a little bit about what may be happening?

You know, we have had some conversations with Apple and they're exploring their alternatives. They have not made a formal decision yet either to go ahead and build their building or to sublease the space. They do have an obligation under the lease to build a brand-new building there.

So obviously, the lease gives them the right to sublet this part of sort of the standard give and take in signing up a credit like Apple to a 15-year commitment. And we are -- we still own the 50 feet next door; could be, obviously, some additional upside there, which we will explore as rents in that area moved pretty significantly since Apple took the plunge and there has been some more recent data points on that block at actually higher rental levels. But it is definitely a situation we're monitoring.

Gary Boston with ABP Investments.

Good afternoon. In terms of the One Park promote, are you expecting there to be any sort of excess comp payout from the gain that you guys are generating on that?

When you say excess comp, Gary, we have no comp plan tied specifically to One Park, if that is what you are asking.

Okay.

Any 2007 comp we'll do at the end of 2007, but there is nothing engineered into that promote.

Okay. Then just looking at, I think, what you had in your guidance for G&A for the balance of '07 at your Investor Day, it looked like it was only going to be up about 9%, and it has been going up at a much faster rate than that. I was just wondering if you could comment on why you think it is going to slow down the momentum.

I think if you look at the fourth quarter as a proxy and say, given where the year fell out, we added this $10 million to the bonus pool, if you dial that out you are kind of at a $15 million run rate, which is $60 million. If you add in, call it, $20 million of G&A related to Reckson, I think that would put you kind of right on top of the guidance that we did give it off the 2007 numbers.

I think we had put in for kind of $1 a share, which would have been $55 million of G&A. So if you add on the Reckson $20 million on top of that, which wasn't in our December guidance, you are kind of 70, 75-ish. Then you have incremental stuff coming through on Gramercy. So that it is kind of I think the way that we are thinking about the G&A.

Are there any other questions, operator?

Jordan Sadler with KeyBanc.

Marc, in your comments, in answer to Jamie's question on rents, I was just curious, it sounded like you may be getting some pushback on rent increases. I was just curious; it sounds like sort of the first time we are hearing that. I recognize that there are tenants out there that can't pay sort of the $100-plus rents. But anything different you're seeing in the market? Has the trajectory changed in terms of (multiple speakers)?

I'm really -- I was more speculating, Jordan, as to -- if the rents continue at the pace they are going, and you start looking at rents of $110, $120, $130 a foot, I would say for the average middle market tenant that is a very big rent. That might start to either result in pushback or some kind of displacement, which may or may not be backfilled by financial companies, which seem to have a pure ability to pay those kinds of rents. They have demonstrated that for core trophy buildings and non-trophy buildings.

So I would not tell you we are seeing that pushback, particularly because the rental levels we are dealing with are more in the nature of anywhere between -- we have such a wide range now, $50 a foot at the low end, all the way up to maybe $90 to $100 a foot at the high end. The acquisition of some of the Reckson assets may command something just north of $100. 1350 -- I mentioned that $95 deal to you.

So we are not seeing it. I was just, I think, James had asked me to speculate as to whether that would be sustainable into the coming years. I would say you will hit -- there is no magic in that statement that you're going to reach a limit. I don't know what that limit is where you will start to get pushback from some tenants.

I think given our average rents in the low 60s, we have an extraordinary way to roll and to go well into '07, well into '08, hopefully longer than that, and achieve the benefits of that embedded growth.

Okay. You mentioned the EOP going away in your opening comments. Do you see any opportunities from that transaction?

Opportunities?

For you guys to --?

We are not involved; beyond that I can't really comment.

Okay, that's all. I will come back to you. Thank you.

Steve Sakwa with Merrill Lynch.

Andrew, could you talk a little bit about the investment market, what you are seeing out there today, and just in terms of types of product and volume; and what you expect maybe in the first half of the year on the acquisition front, and types of deals that are in the market?

Sure, Steve. It is definitely slow out there with respect to product that is on the market, which is one of the reasons I think we have had terrific success with the properties we have had out there; and we are evaluating some additional sales in the short term.

There are not very many listings out there now. Those that are out there are getting sort of aggressively bid. There's a tremendous amount of competition. I think we saw most recently on 666 Fifth Avenue was a record price for a single asset of $1.8 billion. Record price per foot for an office building at $1200 per square foot. Also, the buyer there agreed to a 30-day time of essence close, if that gives you any type of indication of the kind of leverage sellers have in this market.

But I think we continue to mine our existing portfolio and then also offmarket acquisitions, which is where we have made our focus and we tend to find the best opportunities. From that cross perspective, we have quite a few different situations in pipeline which we are in active discussions on; and we still hope to be active on the acquisition front in the first six months of the year.

Okay. Then secondly, Marc, could you maybe just address a little bit more the $10 million of I guess special comp that you paid out to employees? Can you just help us understand how it was filtered through the organization? Maybe how much was given to the top four or five executives, and maybe how much want to the balance of the Company, and maybe how many people it was spread to.

Steve, it is not that specific. We increased the bonus pool. Obviously when we made our initial accruals in the beginning of -- actually at the end of 2005, I guess, December 2005, we certainly didn't project then or have any reason to know the year we were about to embark upon, between Reckson and all the other achievements, acquisitions, leases. So I think we had modified it during the year. But I think the bonus pool was -- when we got to December comp committee meetings it was inadequate in light of the production and the performance.

We raised that pool and it was dispersed companywide. I can't attach an amount or a name. It was just we increased the accrual. It was done certainly not as a run rate for '07 and beyond, unless we are going to double the stock again to $300 a share. Then I guess at the end of '07 we will sit down again and figure what the right accrual is.

But it was really an increase to the accrual in light of Reckson and the outperformance, and it was done companywide.

I guess just a follow-up, you have put in LTIP plans, which I guess are attempting to capture some of that outperformance and to pay the senior management teams for that. I guess, some investors have expressed some just concern about the pay. I guess I am trying to understand. Some of it I understand was for maybe retention, and things are fairly competitive in the New York market. I'm just trying to understand how much of it was for kind of that versus just paying senior management for obviously a job well done; but --?

I guess there's two questions in that. One, the first question I think -- I don't want to repeat the answer -- is really just a question of what is the proper bonus level, executive and nonexecutive, for the level of -- basically we looked at three things. It was the Company performance; individual performance; we looked at Reckson certainly as a sort of unique undertaking that everybody put in 24/7 throughout the year on. Or least since August, I should say.

As it relates to OPP, OPP is primarily a retention tool. I can tell you like the first OPP we put in place was 2002. That OPP in 2002 has not yet vested at all for any one of the participants, which maybe was a little too extreme looking back on it. But it clearly, I think is a good retention tool. I think it aligns shareholder and recipient.

Sometimes it doesn't align, it doesn't do its job. I can tell you that we have had four people drop, who were OPP participants who dropped -- who have left the Company and therefore dropped out of the pool. Two of whom were seven-figure participants.

So while OPP is a great means of long-term retention, any notion that OPP comes at the exclusion of just regular salary and bonus and significant bonuses to compensate for significant outperformance, the two are not exclusive. I just look at those in tandem. If I relied on OPP alone, I would be speaking to you in an empty room right now.

Ross Nussbaum with Banc of America Securities.

Greg, this one might be for you. I want to follow-up on One Park promote, again, just so I understand it. In your prior guidance, the $50 million plus incentive fee -- not a promote, I guess. Was that in the prior guidance?

It was in the prior guidance, probably not at that level, smaller than that.

Okay, so you're saying that number is up; but it's being offset by 55 Corporate? Is that the math?

55 Corporate is being pushed out into 2008, yes. In a nutshell, yes.

Okay. Then the other question I have is with respect to Stuy Town on the $97 million of structured finance. What piece of the capital stack was that? Can you give us a sense of where you are in terms of loan to value?

We are right around 70, 73% loan to acquisition cost. It is a lower leverage position.

And the term of that investment?

A 10-year fixed rate.

Thank you.

Lou Taylor with Deutsche Bank.

Congratulations on the quarter and the year, guys. Andrew or Greg, can you talk about the asset sales and then use of proceeds in terms of percent that you think goes toward the Reckson acquisitions debt; or future 1031 exchanges; or repayment of some of the higher-cost debt that you have got on the balance sheet right now?

Yes, I think we are in the position of having 1185, 1350, and 810 Seventh as unencumbered receiver. So we are in probably the most unique position we have ever been in of having kind of unlimited receivers. So the sales proceeds would be redeployed into those assets.

From a cash management perspective, probably pay down whatever is left outstanding on our line and then probably attack the bridge facility. Which the line is probably around 125 over LIBOR currently and then the bridge at 110 over. So both of which float and are awaiting repayment from property sales.

Okay. The second question just pertains to --I would stay with you, Greg. In terms of the mark-to-market adjustment for the Reckson leases, when do you think that you will have that process done?

You know, we have to embark -- we are embarking upon it as we speak. We have to do it as of last Thursday. I think when we meet to discuss first-quarter results, we will be able to give you good color on that.

Great, thank you.

Sri Nagarajan with RBC Capital Markets.

A couple of bookkeeping questions here. What was the reason for the high first cycle leasing cost? I know, Greg, you mentioned 673 First Avenue; but is there any other component of that?

I would say that was one of the principal ones; and then we did a long-term 10-year deal over at 1221 with a credit tenant at an $80-plus rent number. That was probably the other contributing factor.

Okay. Can you give us some color on the 104,000 square feet of space you got back on 1221, actually? This is a contiguous block of space and given that Greg mentioned about $80 to $90 rents here, are you expecting these kinds of rents here?

It is actually two noncontiguous floors, but there is clearly a big upside. The rents, what was rolling off was, as I recollect, something in the $60 range. Market in that building is easily into the $80s, near $90 a square foot.

Okay, one last question. In terms of your lease expiration, obviously your combined portfolio has less expiration than last year. You did talk about accelerated leasing. Even on the Investor Day I think you talked about blend and extend. Can you just again remind us of what percentage of the portfolio has some opportunities there? Or just qualitatively talk about the square feet, including Reckson; that would be useful.

It's pretty tough to quantify what opportunities there are on a percentage basis. But as far as total roll that is scheduled for the year, between what we have in the portfolio and then now with the addition of the Reckson buildings, there is just under 1 million square feet of contractual roll.

We are actively in negotiation, with I would say probably four deals in the pipeline right now, which would be either blend and extends, or buyouts of leases, and got to be probably 125,000 to 150,000 square feet of transactions that are being negotiated. My guess is between now and the end of the year, that we're going to see a regular diet of that. I certainly know that it is the focus of our attention.

Okay, great. Thanks.

Michael Knott with Green Street Advisors.

I am wondering if you can comment on why the joint venture same-store numbers have lagged the wholly-owned portfolio, especially given that the mark-to-market that you show at the back of the supplemental tends to be greater for the joint venture pool.

I think, well, you have two things there. One, you have 1515 which has been buttoned up for quite some time. So you're not currently seeing any mark-to-market in that building, which is a sizable piece.

You have 100 Park, which is under redevelopment. So there we are actually holding some of the floors off-line; and so you're actually -- the same-store NOI related to that building is actually down within the numbers that you're looking at.

So I guess temporarily flat over at 1515 with a lot of future upside there; and down during redevelopment at 100 Park is probably why you're not seeing the growth as high as the wholly-owned.

Okay. Then can you also just remind us, now that One Park has sold, are your promoted interest opportunities now limited to 1250 Broadway and One Madison? Are we missing anything else?

We have some promote in the retail portfolio.

And the new promote in 521.

New promote in 521 Fifth; and then also promoted interest in 55 Corporate.

Okay. Then one last question if I may. Can you update us on any changes in allocation of responsibilities after the departure of Gerry Nocera?

Well, the answer is, I'm reviewing right now a change of responsibilities and really a recognition of the efforts that people have put in here over the years to grow the Company to the size and the level of success it is now. I wouldn't -- it is not connected, per se, to Gerry's departure.

What I would say is we have been at this now for I guess almost a decade. Our anniversary is coming up in about six months. We have not had what I would call a seismic shift of people's roles, responsibilities. We do recognize and I recognize that it is important for people to grow, be recognized, assume new responsibilities and positions. Most definitely, you will see that come to fruition possibly within the first -- if not the first, the first or second quarter of this year, in a way that I think will be very positive and as much as possible be based on people who are internal to the Company.

So it is something I'm focused on, I'm working on with the Board and with Steve in terms of figuring out the right way to put this together, to really put our best foot forward for what now is a larger and somewhat more diverse Company. More than anything else I think, as I said earlier, recognition for a job well done, so that you will see.

Thank you.

This concludes the question-and-answer session. I would now like to turn the call over to management for closing remarks.

Long call, great questions. We appreciate the participation and look forward to speaking with everyone again in several months. Bye-bye.

Ladies and gentlemen, this concludes the conference. You may now disconnect and have a great day.