SL Green Realty Corp (SLG) 2007 Q3 法說會逐字稿

Thank you everybody for joining us, and welcome to SL Green Corp.'s third quarter 2007 earnings results conference call. This conference call is being recorded. At this time, the company would like to remind any 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 company's Form 10-Q and other reports. Also during today's conference call, the company may discuss non-GAAP financial measures, as defined by SEC Regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure discussed and the reconciliation of the differences between each non-GAAP financial measure, and the comparable GAAP financial measure, can be found on the company's website at www.slgreen.com by selecting the press release regarding the company's third quarter earnings.

Before turning the call over to Marc Holliday, Chief Executive Officer of SL Green Realty Corp., we would like to ask those of you participating in the Q&A portion of the call to please limit your questions to two per person. Thank you. Go ahead, Mr. Holliday.

Okay. Thank you and good afternoon, everyone. Welcome to SL Green's third quarter earnings call. We're pleased you have chosen to join us today to hear our commentary on the outlook for the Manhattan commercial property markets and SL Green's portfolio performance.

When we last spoke in July, I discussed the tumultuous credit market environment and the potential effects on Manhattan's real estate market, as it was too early then to provide any clear guidance. During the last three months, many of the country's largest commercial lenders and finance dealers have announced multi-billion dollar writedowns in the carrying values of their investment portfolios, making new credit hard to obtain, and the cost of such credit more expensive where obtainable. In this volatile market environment, we recognize that our primary responsibility to SL Green's shareholders is to protect portfolio value and to protect our earnings. However, we also recognize that this economic climate will provide investment opportunities and enable SL Green to further differentiate itself by increasing its market share, increasing its velocity of earnings growth and increasing net asset value. We have made subtle and not-so-subtle changes to our business strategy in recent months that we believe will enable us to accomplish all of our objectives, and the first evidence of that can be seen in SL Green's third quarter earnings results.

Andrew, Greg, and I will take you through this quarter's achievements and discuss with you the current market dynamics as we see them. The most significant highlight from the quarter's results is the continuing earnings increases underscored by strong organic growth in SL Green's revenues and margins. An average of 60% mark to market on new leases signed in the third quarter is quite simply an outstanding statistic, especially when noting that the mark to market is not the result of one or two outliers or aberration, but rather the aggregate result of 62 separate leasing transactions executed in the third quarter, for approximately 350,000 square feet. To best convey the enormity of this achievement, I will give you several data points to put it in context. Two leases signed at the Graybar Building, including the early renewal of the bank, totaling over 62,000 square feet, with rents averaging in excess of $50 per square foot representing a 47% mark to market. Two new leases at 461 5th Avenue totaling over 18,000 square feet with average rents of $90 per square foot, resulting in a 54% average mark to market. Early renewal at 1185 Avenue of the Americas totaling 34,000 square feet, starting at $80 per square foot, representing 110% mark to market, and at 100 Park Avenue we signed two leases with new tenants totaling over 13,000 feet, with the top rent averaging $105 per square foot and mark to market averaging in excess of 100%. And the previously announced new lease with a national retailer for 46,000 square feet at 1372 Broadway for $50 per square foot average, representing a 75% mark to market.

While market participants were searching for indicators as to the health of the lease marketing in New York, SL Green was busy signing 350,000 square feet of new and renewal leases at unprecedented levels for this company. As are more impressive than these statistics is the leasing activity completed by SL Green during the first three weeks of the month of October.

Leasing activity not included in the statistics that we released last night and ones that I didn't just go through but for which I will update you now, include the following. A new lease with the real estate services firm at 100 Park Avenue for an additional 11,000 at $81 per square foot net effective, no TI, no free rent, and in addition we are in active negotiations on over 100,000 square feet of leasing at that property. A full floor lease for the entire 33rd floor for approximately 17,000 square feet with $86 rent and $90 per square foot average. A new signing this week with a company that is a hedge fund, who is leasing the entire 37th floor at 810 7th Avenue, comprised at a rental rate of $92 per square foot and $101 per square foot.

And on a related note, we just signed a lease with a law firm at 150 Grant Street in White Plains for approximately 11,000 square feet at an average rent of $31 per square foot for 10 years. You may ask: what does the law firm lease in White Plains have to do with the hedge fund lease at 810 7th Avenue? Good question, but the connection is quite simple. Both leases represent the first of what we hope will be many developed synergies between the suburban portfolio in Westchester and Stamford with SL Green's midtown Manhattan portfolio. The hedge fund is an existing tenant of SL Green's at 1 Landmark Square in Stamford, and through that we were able to make the 17,000 square foot company expansion in to our Manhattan portfolio.

Likewise, the law firm with a tenant at 28 West 44th Street, an SL Green building, and we were able to relocate them to the newly acquired 150 Grand Street in White Plains once it became evident that the law firm wanted to move its business. We early-terminated the law firm's space at 28 West 44th Street, thereby unlocking a new leasing opportunity with a 45% potential mark to market that we hope to achieve in future quarters. We spoke with of these potential synergies back in February of this year, when we closed the Reckson deal and now we have the transactions to support our thesis. Additionally, breaking news as of last night, we have settled an FMV renewal with one of the country's largest hedge funds for 10 years at a new rent of $76 per square foot on an as-is, no concession basis. The deal is for 71,450 square feet, includes growth in the square footage to reflect today's market dynamics, and represents a 54% mark to market over the previous inflation escalated rents.

I'm giving you more granular detail on SL Green's leasing achievements than I normally do, simply because this seems to account for half of the questions, if not more, than we get these days, and this data frames our view of the market. We recognize that financial services firms account for approximately 35% of office space users in Manhattan, and comprise 25% of the overall payroll taxes to New York City workers. The coupling of significant layoffs with material amounts of sublet space being thrown back on to the market would obviously have a deleterious effect on the leasing market. However, we are now five months in to the current credit crunch, and the amount of layoffs so far has been modest, and the appearance of sublet space is so far de minimus. Even if there are ultimately 10,000 layoffs between now and sometime in 2008, this would add only approximately 1% to the vacancy rate in Manhattan. The fact is no one knows how protracted the current credit climate will be, nor how much of a pullback we will actually experience in the financial services sector, but it is fair to say we have only seen a modest amount of layoffs to date and very little in the way of new sublet space competing with the primary direct space of owners.

In making assessments for the near term, we look at our current leasing velocity and performance, which I just covered, and try to estimate the size and depth of supply of future demand. Along those lines, we have assembled a comprehensive list of tenants for 333 West 34th Street, the building we acquired earlier this year from Citigroup, which will provide us with full building leasing opportunity in 2009. We have already begun advance marketing this property while still fully tenanted by Citigroup, and now have an exhaustive list of tenants in the market seeking 100,000 square foot or more for occupancy within the next 24 months. This list totals 64 different tenants, totaling in excess of 13,000 square feet of demand.

While this demand is divided into both relocation space and expansion space, and not all of it will obviously materialize, the sheer scale of the potential demand outstrips the availability of contiguous blocks in Manhattan that can accommodate such space, and even if a significant portion of that demand attenuates, we believe there will still be a healthy balance of supply and demand which will mitigate any material erosion in rents. In an optimistic scenario, landlords will hold rents or experience modest gains, which may or may not be offset by slightly widening concession packages to attract tenants. In a conservative scenario, net effective rents could be down 10%. However, in either of those two scenarios, the mark to market in SL Green's portfolio will be substantial.

Results like these don't happen by accident. We have continuously stressed that our acquisition. redevelopment, operational and leasing strategy was targeted toward creating a long-term pipeline of embedded rental growth. SL Green also finds itself in the enviable position of having approximately $1.25 billion of immediately available funds on its line of credit. Greg will take you through the steps of how we were able to amass such enormous capacity while being such active investors in 2006 and 2007, including the acquisition of Reckson and SL Green's continued investment in Gramercy Capital Corp.

The bottom line is we enjoy record capacity going in to a market that we believe will yield better opportunities than we have seen in the recent past. We categorize these baskets of opportunities in a different manner than we have previously. First, we have been active in buying back our own stock, and have deployed over $100 million at levels we believe represent a sizable discount to SL Green's underlying net asset value. Second, we are always plying any market for new opportunities and there is no reason to expect that SL Green won't be an acquirer of significant Manhattan assets as we have been in the past. While earnings growth, return on equity and NAV expansion are all primary goals, we also understand that SL Green is considered to be in many respects a proxy on the New York City office market, and as such we would continue to expect to be net acquirers over time, increasing our already dominant market share beyond the current 24 million square feet. Third, we expect to be investing opportunistically in and around our core market, as we have always done in the past, in order to make shorter-term capital gains by bringing intellectual capital to bear on transitional situations and being rewarded with outsized returns and incentive fees while mitigating the amount of monetary capital allocated to this opportunistic bucket.

Based on our established track record, I believe the company will be able to successfully execute this business plan and create a pipeline of opportunities for external growth, capital gains and organic mark to market. Lastly, as the external manager of Gramercy Capital Corp., we spent time in the third quarter shoring up Gramercy's balance sheet and creating a record amount of liquidity in that company as well, while generating record earnings for Gramercy that was announced last week. Gramercy's earnings guidance was increased for a third consecutive quarter to range of $3 to $3.05 per share which, when combined with all the other accomplishments during the quarter, enable SL Green to increase its earnings guidance to 5.75 per share, a full 25% ahead of 2006 FFO.

While I have covered the near-term market dynamics that I see affecting the company, I would be remiss if I didn't mention the positive longer-term prospects for the New York City economy that we see. We are confident that Manhattan will maintain its leadership position among all commercial office markets in the country. People want to be here. It's exciting. It's an intellectual capital as well as financial capital. It was voted the safest big city for a second year in a row, as crime rates continue to be reduced. There are 34 million visitors to the city-- or there were 34 million visitors to the city in 2006, and this number is projected to increase to 50 million visitors by 2015. The population is also projected to increase by 1 million people over the next 10 to 15 years. These are all great statistics for housing, retail, the lodging industry, in addition to the commercial office market. A constantly improving quality of life and workplace ensures us that our continued investment in Manhattan's real estate will produce the most attractive, absolute, relative and risk-adjusted returns in the industry. Now let me turn the call over to Andrew Mathias.

Thank you, Marc.

With our announcement of the sale of 470 Park Avenue South this morning, the consensus seems to be that the log jam in the Manhattan sales market has been broken. An institutional all-cash buyer stepping up to purchase a class B asset at North of $600 per square foot and a 4.5% cap rate should set a more positive tone for many more pending deals. As always in the deep Manhattan market, as one class of buyer, in this case highly leveled entrepreneurs, fall off the playing field, another groups in aggressively. With a couple of exceptions, August and September essentially featured a standstill, with sellers waiting out the usual summer slowdown and the credit crunch before testing the market, and buyers speculating about where the lack of financing would push cap rates. We continue to believe this answer is not more than 50 basis points of cap-rate widening.

The market is now packed with offerings to clear out this backlog with everything from Class A towers to corporate headquarters dispositions, to Class B assets, to desperation recaps of overleveraged capital structures from those heady days of spring 2007. We're back to burning the midnight oil, evaluating all of these situations, and trying to pick our spot as always. But those who predicted a collapse in values or across-the-board distressed selling have thus far been proven sorely mistaken. Bidding on assets is robust and there's still a lot of money to be put to work out there. That coupled with continue strength in the leasing market, which Marc discussed, is making for a competitive acquisition environment.

It was against this backdrop that we completed our slate of new, mostly previously announced transactions on both the acquisitions and dispositions fronts. Included in this group is the acquisition of 16 Court in joint venture with the City Investment Fund. Early returns are very positive in Brooklyn, and we haven't even kicked off our capital improvement and retail repositioning programs. With the right JV capital structure in place, and great acquisition financing closed, we feel very confident in this investment. In two notable additional acquisitions, we continued our innovative fee acquisition program in purchasing 55% of a newly-created land position we originated with Gramercy Capital Corp. under The Lipstick Building, a class A architecturally-renowned trophy asset on the booming 3rd Avenue corridor in midtown.

Given the capital markets environment, we were able to drive even more attractive economics than our prior fee positions, giving us a highly-protected, stable and secure stream of cash flows for the foreseeable future. Additionally we closed on our acquisition of 180 Broadway downtown, a notable new addition to our retail program with Jeff Sutton. We have another site in the immediate vicinity under contract, and look forward to sharing more details about this exciting development opportunity at our investor meeting in December.

On the disposition front, we closed on the previously announced sales of 85% of 1372 Broadway, and 100% of 292 Madison Avenue. More importantly, as I mentioned earlier, we just announced the contract to sell 470 Park Avenue South. The proceeds from this sale will be reinvested on a tax-free basis into our purchase of Gramercy's tenancy in common interest at One Madison Avenue that we closed in July. It is not hard to see how selling 470 Park Avenue South at a 4.5% cap rate and over $600 per square foot, and reinvesting it in Credit Suisse's corporate headquarters, an institutional Class A asset at a 5.5% cap rate makes good business sense. We will continue to avail ourselves of this quality arbitrage aggressively, so long as it exists in our market.

On the structure finance front, the primary thrust of our activities continues to be through our Gramercy Capital Corp. affiliate. The additions to our balances were mostly deals originated in partnership with Gramercy, where GKK's Board determined thank investment size or profile was not appropriate for 100% investment on their balance sheet, and we wound up JVing the positions with them. As the capital markets continue to shake out, with spreads riding the roller coaster and widening out again at the end of last week, we continue to see major opportunities for SL Green, derivatively through GKK and from co-investment in some of the evolving situations in the financing markets. With that, I would like to turn the call over to Greg Hughes to take you through the numbers.

Great. Thanks, Andrew. Good afternoon, everybody.

The third quarter was chock full of positive activity and results at SL Green. Many of these results directly answered questions and concerns that investors have expressed over the last three months, and we believe the answers are resoundingly positive. Gramercy is very much in business, liquid and well positioned to take advantage of a opportunistic environment. And with the closing of a new CDO, and a recently completed $125 million equity raise, not only are the fees from GKK sustainable but should continue to grow.

This morning's announcement of the sale of 470 Park Avenue South, which Andrew referenced, provides a new data point to where the private market is valuing Manhattan real estate. Interestingly enough, the $602 per foot sales price we achieved was right on top of the published value used for 470 by two analysts in deriving their company-wide NAV. These NAVs were in excess of $156 per share. We believe that our current stock price, the implicit price per foot for the entire portfolio, is below what we just achieved on the sale of an original IPO asset.

Given these metrics, it should come as no surprise that we continue to be active buyers of our stock during the quarter. Purchases under our $300 million buyback program now exceed $100 million, with buybacks since July 1st having an average purchase fries of $116. We regularly evaluate stock repurchases versus other opportunities in the marketplace and as a function of our available liquidity. Given our price and given our liquidity position, one should expect to see more stock purchases going forward.

Additional property sales, plus the recent expansion of our credit facility to $1.5 billion, finds us in a very liquid position. With pending sales, we expect to finish 2007 with close to full availability on our credit facilities. At a current interest rate of LIBOR plus 80, we would expect to be able to put in money to work accretively in 2008. The expansion of our credit facility in some very choppy capital markets is a testament to the company's lenders, and the strong following we enjoy in the capital markets. Even with a 25% drop in our stock price, and the consolidate of One Madison Avenue onto our balance sheet during the quarter, our consolidated debt to market capitalization sits at just 41%. Contrast this with the second quarter of 2005, when OMA was originally purchased. Had we acquired 100% of OMA at that time, our consolidated debt to market capitalization would have increased by 10%. In short, even with the assumption of this additional debt, the balance sheet continues to be liquid and strong.

Our combined fixed charge coverages for the quarter did tick down, principally as the result of the leverage associated with 2 Herald and 885 3rd, which totals approximately $252 million and carries significant amortization. While these leverage transactions-- while these are highly leveraged transactions, they carry little to no risk, as the positions are termed-financed for 10 years, secured by the underlying land and have claims that are senior to over $565 million of leasehold improvements.

Other items of note on the balance sheet include the following. Other assets includes a bridge loan to the 16 Court joint venture which was repaid during October, with proceeds from a permanent mortgage. The 55% interest in 885 3rd Avenue is accounted for as investment in JV. Deferred revenue includes approximately $291 million of gain, which is being deferred as a result of a purchase option we retain under our JV arrangement. The gain will be recognized upon the termination of that option. Treasury stock at 9/30 was $94 million. The balance of the aforementioned $100 million in repurchases settled during October.

Turning to the P&L we had a very strong quarter, which prompted the increase in guidance to $5.75. If we are successful in meeting this guidance, we will have generated a 25% year-over-year growth in FFO per share. This explosive growth has received limited recognition with a focus instead on the sustainability of these earnings, and how we will replace the incentive fees earned on 1 Park Avenue and the Clock Tower sale.

This quarter's results helped demonstrate why we believe these earnings levels are sustainable and have further room to grow. Our optimism in this regard stems from the strength of our core real estate operations. Our consolidated same-store NOI grew by a strong 9% during the quarter. Growth of this magnitude contributes approximately $0.25 per share of annual incremental FFO. It is worth noting that the benefits of leases signed during the quarter often don't make their way to our bottom line for three to six months after signing. This bodes very well for future NOI growth, when one reviews the mark to market trend over the last five quarters. Starting at 25.8% a year ago, we have seen it grow to 28.7%, followed by 37%, then to 40.5%, and finally 59.5% in the most recent quarter. The delayed benefits of our leasing activity can be seen this quarter as rental revenues increase from $176 million last quarter to $190 million this quarter, as OMA was consolidated and revenue recognition commenced on several major leases.

There is more of where this came from, as at quarter end there were leases that have been signed who's annual rent totaled approximately $9 million, where income recognition has yet to commence. Property level margins for the quarter were 55%, up significantly from a year ago, when they were 48%. These margins reflect the benefits of strong same-store NOI growth, coupled with the transformation of our portfolio to a high-quality, more profitable set of buildings. Occupancy for the quarter dipped slightly to 97%, with scheduled lease expirations at 810 7th, 1185 6th and 711 3rd being the principal contributors to the decline. Marc has taken you through the significant activity that we have seen at the properties during the fourth quarter, and would expect to see a rebound at these properties at the end of the fourth quarter.

While leasing activity was down compared to last quarter, it is worth remembering that the last quarter included over $300,000 of early renewals. True to form, the $1.5 million-- the 1.5 million square feet of leasing that we have announced year-to-date has exceeded the scheduled expirations that we began the year with by over 800,000 square feet of leasing.

A couple of points to embellish, the leases that Marc mentioned, the new leases at 100 Park enabled that building to be the first building south of Grand Central to get rents over $100 a foot, and shattered the pro forma rents that we had originally established in the mid-to-upper 50s, when we decided to embark upon the redevelopment of that building. Similarly, the lease that was signed over at 1185 6th Avenue was achieved with just $18 of TI work, easily beating our net effective rents that we had underwritten in connection with the acquisition of Reckson.

Our structured finance income for the quarter was approximately $21.8 million, realizing a weighted average coupon of roughly 10.5% on the $715 million of outstanding investments. Other income for the quarter was $15 million, 65% of which represented fees from GKK. GKK fees were up approximately $600,000 over the prior quarter. Other income included $1 million of lease cancellation income, and included no other incentive fees or promotes, except for the 3.9 million incentive fee realized from Gramercy. The company also received a $19 million incentive fee related to GKK's gain on its sale of One Madison Avenue, but did not recognize this fee as income. The accounting literature specifically provides for gains related to the asset to be recorded as a reduction in the acquirer's basis. This pronouncement was also applied to a portion of the incentive fee attributable to the gain.

MG&A was down for the quarter was down compared to last quarter, as a result of the decline in cost for certain stock base compensation. Combined interest for the quarter increased over last quarter, as the result of the new debt associated with One Madison and the 885 3rd acquisitions, as well as a full quarter of interest associated with JV investments at 1745 Broadway and 2 Herald. We look forward to seeing everybody at our investor day on December 3rd, where we would anticipate providing detailed guidance for 2008 earnings, and establishing the company's new quarterly dividend level. And with that, would like to turn it back over to Marc for some closing comments.

Okay. Thank you. We're going to take some questions in just a moment.

As Andrew and Greg both alluded to, we are holding our annual investor conference in New York City on Monday, December 3rd, the first Monday in December. Every year this event has grown in attendance, it has grown in importance, and we work very hard at the end of November to make sure that the time with our investors and analysts and bankers is well spent, by providing incite in to the market and our strategies that we simply cannot-- that simply cannot be condensed into an abbreviated earnings call such as this. So we certainly encourage everyone to come. It will be a joint SL Green and Gramercy Capital Corp. investor day, much in the same format as we did last year. I'm told we promise to feed you somewhat better than we did last year, as we I think have Carmine's catering the event for us. So come hungry, come ready, and we promise it will be worthwhile if you can make it work on your calendars. With that, let's open it up for questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) And the first question comes from the line of Michael Bilerman with Citigroup. Please proceed.

Good afternoon, guys. Marc, in your opening comments you talked about the city space and actively trying to market that now. I think you talked about 64 tenants of over 100,000 square feet or more, and the totality was a pretty big number. How much of that, when you sort of developed that list, is net absorption versus just people moving chairs?

You know, very-- I can't really give you an answer because the requirements are not always so specific themselves. Tenants don't come and tell you exactly what their plans are. The brokers will say, "I'm representing X tenant, and we're looking for X amount of square feet." I can't even hazard a guess. Everyone has a story. I would say at least half of that is expansion, with tenants first moving in to the city from outside locations. They could easily wind up being more than half, but that's like the best I can do. Sometimes we're not even told who the tenant is. Sometimes it's just represented, sometimes-- you know, these requirements change over time. The user groups don't always know, but I would say, for a lack of a better answer, at least half, probably more, is expansion or relocation into Manhattan.

And then as a follow-up, you talked about rental levels, obviously with a lot of the detail you provided, remain very strong in the city, and I think you said your expectation, at the most conservative level you could see a 10% decrease in net effective rents.

Right.

How are you-- and you also said you are remaining active on the acquisition side on being opportunistic. How are you underwriting your deals today in terms of where rental levels are going?

Well, I mean, I assume you are talk about core Manhattan product?

Yes.

When you ask where we are underwriting-- Andrew, why don't you run through what our working assumption is today for most of the deals we are looking at.

I think-- you know, we were never one to underwrite large rental spikes. A lot of the properties that were sold on the early portion of this year had very aggressive, you know sort of 10% growth for maybe the next year or two, and then 5%, and then moderating to a more inflation-adjusted level going forward. I think today our general outlook for underwriting is probably flat for the next, you know, 12 months or so, and then going to more of that inflation-adjusted growth rate. We don't foresee any spikes. We never underwrote any spikes in any of our acquisitions, and we think that's turning out to be an accurate assumption. We see today's levels holding, which is how we are underwriting it.

Great. Thank you.

The next question comes from the line of Michael Knott with Green Street Advisors. Please proceed.

Hey, guys, Marc or Andrew I'm just curious if you can walk us through sort of what you learned from the sales process of 470 Park Avenue South as you go to bid on some of these other projects on the market.

Yeah, it was -- I think it was a little bit pioneering on our part. We put this out for market in August, before Labor Day. We were advised against it because, if nothing else, it was the summer, and summer is not typically a good time to market, and to compare on that problem, it was a very choppy month. But in retrospect we think we made the absolute right call, because we were out there early with product when really nobody else had product out there. We marketed through the month of September, which-- you know, I would say initially the first week or two, we got a lot of showings, but I was uncertain where it was going to price because, if nothing else, people were uncertain where they were going to get the debt to buy it.

And then I would say by the end of September, early October, debt quotes started appearing, I think there were multiple debt quotes at, you know, very good levels, probably not as good as they were in the previous six to nine months, but still very good debt levels by traditional standards, and that enabled for multiple bids. We went round 1, round 2, had multiple parties to choose from, different structures, different pricing, ultimately went with the institutional all-cash bid quick close. Probably could have held out for more pricing if we wanted to, but felt that the incremental million dollars or so or -- you know, would have cut against our desire to get it closed quickly, efficiently and ensure we would reinvest those proceeds in a 10/31 basis into One Madison Avenue, which has a ticking clock. That's not an indefinite time period that we can do that. So we accelerated that process. We will invest those proceeds tax-free into One Madison Avenue. We're very happy with the outcome.

Any thoughts on what type of unlevered return buyers in today's market might be either expecting or maybe what a realistic expectation is?

What do you think, based on that trade alone, you know, how would you characterize it?

My guess would be 7.5 to 8% unlevered return.

With sort of a 4.5-ish going in, cap.

My last question is any comments on 449th, which we believe is for sale, and then also the suburban Westchester portfolio?

449th, we are marketing. The early expectations there is that pricing will be in line with our expectations. If they are, then we'll transact, if they are not, we won't. But, you know, we're not in a fire sale over here. We're trying to do this in a pretty prudent approach of selling, recycling, reinvesting. So I would say that we'll know within the next two to four weeks what direction we'll take on 440. But at this moment we're as optimistic as we were on 470 a few weeks ago. As to Western Westchester, it's more complicated. We went out with a portfolio of properties, giving people different options to think about, look at. There again, I would say if we get our pricing, we'll transact on at least a subset of the properties. I don't think we'll transact on the whole portfolio, nor did we really intend to. But so far to date, I would say the response we're getting in Westchester for the assets that we are contemplating are in line with what we expected going out.

Thank you.

And the next question comes from the line of Jay Haberman with Goldman Sachs. Please proceed.

Hey, good afternoon. Here with [Sloan Bowen] as well. Greg or Marc, can you walk through the increase in guidance for the full year? Was that all due to the one-time fee from Gramercy? And just sort of walk through the components of that increase.

Yeah, the fee that was realized from Gramercy was really consistent with what we saw last quarter. The fee related to the gain has been excluded, so it's really principally a function of the strong operating results from the assets themselves. So it's really the NOI growth that we're seeing at the assets. I mean, Gramercy did exceed earnings estimates last week by $0.10, so that's a benefit as well, but it's principally driven by the strong mark to market on the leases, the strong NOI growth, and the-- the property income being well ahead of where we expected it to be.

Just to reiterate, the $19 million incentive fee on Gramercy was excluded from FFO, so it doesn't account for any of that mark to market-- of that increase in guidance.

There's not another fee to anticipate going forward in terms of Q4?

That's right.

Okay. And then I guess Marc in your comments you mentioned perhaps some distress opportunities in continuing to make significant acquisitions in Manhattan. Can you give a sense of the current market today and what is out there and what you are looking at?

I don't want to mince words. I talked about opportunistic, not necessarily distressed. If I did say distressed, I would say that's an overstatement. Think as Andrew pointed out, in Manhattan I think that the opportunities will come more on the structured finance and structured equity side. In terms of equity, it still seems to be plentiful and available in the city. It's the debt that's not available. So the only thing that is creating the stress in the system is the lack of financing, and GKK on the debt side, Green on the structured equity side, are perfectly adept to fill that void for what I would call [core-at-hand] properties for people who are, let's call it, miscapitalized for the current market, or improperly capitalized for the current market.

In and around Manhattan, as we have shown in the past, our ability to buy opportunistically on either non-core Manhattan product or outside of Manhattan product, that's where I think you'll see a little more pressure, markets that are more dependent on residential housing for business and retail activity are probably the markets where you're going to see the most weakness in housing and retail and office. That's not really the case in Manhattan. Manhattan is not very much residential housing dependent. In terms of obviously, you know, single for sales from-- housing, and the condo, co-op and rental market in Manhattan is actually holding up very well relative to other markets. So I think it would be outside Manhattan that you would see the more opportunistic-- opportunities coming to light. We have done in the past and continue to do those kind of deals to the margins. We don't devote a lot of capital to those situations but tend to make a lot of money on those situations. We hope we can replicate that going forward. You know, with generally taking minority interest but getting big incentive fees in those situations.

And the slight decline in the JV NOI, is that something that gets amended next quarter with the lease up of the assets you mentioned?

It is. Actually if you dial out some of the lease cancellation that was included in the third quarter last year, it was actually modestly positive. And remember 100 Park is included in that, which is under redevelopment. So I guess a case could be made for us to dial 100 Park out of those stats, we leave it in and 100 Park is actually down year-over-year. So I would expect to see a, you know, good movement in the JV numbers if not-- if not in the fourth quarter, then certainly in early '08.

That's helpful. Thank you.

And the next question comes from the line of Jordan Sadler with KeyBanc Capital Markets. Please proceed.

Hey, guys.

You did a good job on quantifying demand and talking about what you guys are seeing in terms of new leasing activity so far in the fourth quarter. Could you give us a little bit of sense of what you're seeing in terms of availability? Maybe talk about the big blocks of space that remain available outside of maybe what is in your portfolio. I think you guys have-- 100 Park you have some space, and 1185, obviously you have a little bit there today, but anything else?

You know, what, Jordan, Steve Durels is with us. Let him best address that because he's got it all right at the tip of his fingers.

You know, the bigger picture in Manhattan is it's still a big block-constrained market. True of our portfolio, true of the market in general. Our biggest blocks that we have got right now, we're marketing future vacancy at 100 Park Avenue, and we have very strong demand and, you know, some very sizable ongoing lease negotiations for that space. Other than that, it's sort of a couple of pockets of space in our portfolio, where we have got three floors at 1185. We were earlier in the year marketing five floors at 810 7th, we have been able to knock off two of those floors, we have leases out on some of the remaining space. And then there's the future big block now really two years out at 333 West 34th Street, which-- where, I mean showing that probably almost every day to perspective tenants, and getting surprisingly good interest for what is a-- you know, long-term future availability. And then, you know, try to knock off some of our future block of space going in to '08, and when we have already completed about 160,000 square feet of transactions for next year, and are really not confronted with any noticeable future big blocks other than those spaces that we're already focused on, you know, at 810 and 100 Park Avenue and 1185.

Okay. Great.

Outside of that, the rest of the markets-- each of the submarkets from Penn Station, Grand Central Plaza, are very tight. There's more demand than there is for-- availability of big block space right now.

Could you maybe also just clarify from second quarter to the third quarter, looking at the mark to market schedule that you guys provide in the supplement, it looks like the mark to market estimate of the consolidated portfolio went from 45% last quarter to 40% this quarter. I would imagine some of that decline was a function of capturing some of that gain? But maybe could you flesh that out a little bit?

That's right. I think embedded in what you saw this quarter, where you saw the 59% mark to market coming through, when those leases came out of that computation, you have saw a slight drop-off in the overall portfolio.

That makes sense, the base goes up. And just clarifying, the guidance, it excludes a FAS 141 adjustment for Reckson?

It includes some nominal 141 adjustments that you'll see coming through in the fourth quarter to address what is out there, but you won't see the preponderance of that coming through until next year. So nothing has been booked to date. A little bit in the fourth quarter, but you'll see it materializing next year.

And as a reminder participants are asked to limit themselves to two questions. Our next question comes from the line of Jamie Feldman with UBS. Please proceed.

Thank you very much. Good afternoon. Can you talk a little bit about the buyers? You guys certainly laid out that there's properties coming back on the market, but I'm just as to, you know, characterization. Is it foreign money? Is it domestic money? Just more color on that?

As I said I think it's really across all spectrums, there's-- everybody is speculating there is going to be a lot foreign capital looking to get in to the Manhattan market because of the weakness of the dollar. We're seeing a lot of those buyers. This buyer on 470 Park Avenue South was a pension fund, somebody who has not purchased a building in Manhattan probably for the last 10 years, and is now re-entering the market. There are still entrepreneurial buyers on every deal. Actually, 321 West 44th Street traded to a entrepreneur buyer who had a 1031 requirement. So there is still a great cross-section of buyers for every piece of property, and, you know, the-- certainly the highly-levered guys who are borrowing 95% of acquisition from-- from the banks, those guys are not bidding today. They are more working out their problems from the fall but, you know, there's opportunity funds, foreign buyers, pension funds, you see it really across the spectrum.

Okay. And then, where do you see occupancy ending the year? It ticked on a little bit. Is that just a matter of timing of leases? Or it is the 60 basis points down going to [turn around] --

I think a lot of that 60 BIPS was probably program. We took back some space, examples like the law firm situation in [Manhattan West] --

Yeah, we have got a couple of blocks that we know -- we have known all along the tenants had previously either vacated but their expiration, they had been paying the rent and the expiration is scheduled either for October 1st or between now and the end of the year. So I think, you know, it will be a timing issue. We have actually taken, as Marc was alluding to, we have taken some space back proactively because we have confidence in the market. Specifically at 100 Park Avenue, where we just took a half of floor back at a space that had 12 years left to go on it, and we think is a good 30 to $40 below the market. We have a piece of space at 711 3rd Avenue, which is 32,000 square feet, it just came back to us. Already in negotiation with a perspective tenant for it. So it takes some time to close out those transactions, but we're still feeling pretty bullish about it because of the level of demand we have for tenants knocking on our door.

Jamie, I think we would say that 97% is a very full number so that, you know, plus or minus 50 basis points around that, just depending on the timing of when people actually sign, is where you will probably end up the quarter.

I agree with you. I was just curious. Thank you very much.

Thank you.

And the next question comes from the line of David Thodey with Lehman Brothers. Please proceed.

Good afternoon, guys. My first question relates to some of the new investments that you originated in the structured finance portfolio. And you mentioned that they were not appropriate for Gramercy, and I wonder if you could just describe the differences and what led you to the decision to include them on your balance sheet directly?

Sure. The ones that we did close were closed in partnership with Gramercy. I said the investment size was not appropriate. So Gramercy's Board generally tries to limit his investment side probably to between 35 and $50 million, and a lot of the positions we have been considering are larger positions where they'll look to take on a partner. So when they take on a partner, obviously SL Green is first call given our relationship because of the obvious synergies there, so we have co-originated several investments with Gramercy where we'll take 50%, they'll take 50%. It's the same kind of relationship we have with Gramercy on the credit tenant lease program where, for example, One Madison, or in these fee positions we've been taking on, they are a little bit large and concentrated for SL Green's balance sheet, so we brought in Gramercy as a JV partner and, you know, the fairly synergistic relationship, two-way flow of business there.

Great. And my second question relates to the [air rights] at One Madison. Is there any update in terms of what was happening at that project?

It is still very long-term project where we're doing a lot of preliminary feasibility studies and planning, and, you know, nothing-- nothing really to update at this time. It's an asset of the company we're obviously looking to continue to figure out how to take best advantage of.

Great. Thank you.

And the next question comes from the line of Anthony Paolone with J.P. Morgan, please proceed.

Thanks. Greg, the $9 million of annual revenues, I think you noted that were on the sidelines, that haven't commenced yet, was that incremental to what was like in the third quarter run rate or is that just the total for those leases?

Incremental.

Okay. And then Andrew, if you look back over the last 12 months or so at the deals you bid on and didn't win, what do you think your pricing would be today for those transactions? Would they be the same or has underwriting of yours changed, such that you might be higher or lower, and what might those changes have been?

I think typically the transactions that we were bidding in the beginning part of this year, we were losing by anywhere between 20 and 30% of purchase price. So, you know, we looked at a lot of transactions that traded and transacted in the 3, 3.5, you know, south of 4% cap rate range, and we were typically far, far off in terms of valuation. I'm not sure our valuations today are much different than our bids were. It's just we were not winning a lot of marketed deals. You know, we saw every large transaction in the market and, you know, generally came up with a price and a bid for it. It's just we were nowhere close to being competitive in a lot of those situations. But, you know, as I said, I think market-clearing cap rates are probably backed up 50 basis points and, you know, those 3.5 cap rate transactions of-- of yester-year are now 4% or so today.

Okay. Thanks.

And the next question comes from the line of Christian Brown with Deutsche Bank. Please proceed.

This question is for Andrew, I was just wondering if you could reconcile your outlook on pricing, whether you think cap rates can hold up, even if [desperate] in the same way?

Well, I mean the only reconciling factor is the rents, the mark to market. So clearly in a stable market if you had debt rates in the 6s, and equity rates in the 7s or whatever you want to apply to it, or 8s on leverage, you couldn't justify 4.5 or 4% cap rates, but for the dramatic mark to markets that are embedded in many of the properties that come to market. So with the, you know, kind of supernormal growth that you get typically over a three to seven-year period, a lot of these pro formas that we see are, without [for] conservative assumptions, you are see your way towards doubling NOI, you know, in five, seven, 10 years -- 10 years typically more. And that is what people are paying up for in the cap rate, is the embedded growth. I mean, I think-- that's it. That's simply-- if-- if it wasn't for that extraordinary growth in the rent role that people expect to achieve once they own the property, they could not-- could not pay those kind of cap rates, given the cost of capital structure that we have and that our competitors have.

Okay. And then Greg, I was wondering if you could clarify at all the impact of the FAS 141 adjustment for next year for Reckson?

Again, we're in the process of finalizing that. But I think we have talked in the past about a number on the order of 10 to $15 million on an annual basis.

Okay, thank you.

And the next question comes from the line of John Stewart with Credit Suisse, please proceed.

Thank you. Marc, I appreciate the granularity on the mark to market during the quarter but, given the big roll you have coming at 1515 Broadway, can you share with us what the rent was on the 27,000 square feet you leased at 1515 Broadway?

Interesting enough, that was one that was left out. It was a $75 rent up from-- in place of $38. And that wa-- that was done with, by the way with no work, so an as is deal at $75. -- that was done with, by the way with no work, so an as is deal at $75. So up close to 100%, which we think is great news as the roll-in starts to kick in next year.

Yeah, that was just missed, there was no intention to miss it, I don't know how we missed that one, but that's actually on the the better comps.

Yeah, that's helpful. And Greg, while I have got you, so obviously you have got 10 to $15 million from the FAS 141, and then $9 million of run rate from the lease contributions that haven't picked up yet. And I realize you are not going to give '08 until the investor day, but you buys have typically targeted a 10% growth in earnings, and I guess the question is: what will be the base that you are going to use? Are you going to exclude, say, the One Park promote or are you going to grow up the 575?

I think we would-- I think we would just prefer to wait until December to talk about it. But, look, we're going to report 575 for the year, so that will clearly will the base, and everyone needs to be cognizant of the fact that that's up 25% from last year.

Fair enough, thank you.

Perhaps I'll have, you know, better color on the 3rd.

Got it.

The next question comes from the line of Chris Haley with Wachovia Securities. Please proceed.

Good afternoon, guys, it me along with [Chris]. Greg, along those same lines if you could give us a sense of what the headwinds are in terms of the accounting impact change for convertible debt going into 2008?

Well, I mean, really, what it does is it takes the-- it takes the benefit out of-- the straight economics are still very beneficial because you still benefit from a low coupon. What is being proposed, and I don't think it has been finalized yet, is that the option value associated with the conversion would have to be amortized in as part of interest as well, which basically takes away some of the benefit. I don't think they have rendered yet-- the option on our particular issuance is so far out of the money at this time, that it's unclear at this point that it would have any impact. But that's kind of what is being put on the table, is that you would add in to the interest charge, the-- the cost of the derivative associated with the conversion feature.

Okay. Appreciate that color. And then just quickly in terms of the G&A, it looks like it went down a little bit sequentially. Is that solely attributable to a decline in equity-based comp or is there something else going on there?

There is some compensation that is affected by what the stock price is. So with the stock price being down, you saw a corresponding reduction in the small piece that is kind of variable there.

Okay. Great. Thanks.

And the next question comes from the line of Mitchell Germain with Banc of America. Please proceed.

Andrew, I appreciate the comments on the composition of buyers and the changes. Any changes in the number of bidders at 470 or any of the other deals you are working on?

I think-- look, there's, I would say, modestly less people actually bidding. Only because, you know, there was a subset of people who were reliant on getting "80% plus leverage", which is just not attainable today, even on a 1st and mezzanine basis. So I think the universe of bidders is smaller, and the guys who actually bid are smaller, but that's not-- we had at least 10 credible bids on 470. You know, that may be down from 15 six months ago, but it is still 10 credible bidders and more than enough to get the transaction done on a-- you know, on a no due diligence contract.

Great. Thank you, guys.

Sure. Any more questions operator?

At this time I would like to turn it back to Mr. Holliday for closing remarks.

We'll keep it short. We appreciate everyone's time. It was a nice, quick efficient call, and hopefully we were able to give a little bit more clarity than we were on the last call as to at least how we see things shaping up in the market. Obviously we'll being watching year-end as closely as everybody else will be to try to gain further color on the direction of the markets in 2008, but just-- you know, rest assured we're doing everything we possibly can on our end to be both prudent and opportunistic at the same time, and we really look forward to seeing everyone in December at the investor meeting, where we can go through a lot of the topics we sort of touched upon today in greater depth and by then we'll certainly have another month and-a-half under our belts of visibility, so we'll be able to share information on what we have gleaned over that period of time. With that said, good-bye and we'll see you in December.

Ladies and gentlemen, this does conclude the presentation. You may now disconnect. Thank you very much, and have a great afternoon.