SL Green Realty Corp (SLG) 2007 Q4 法說會逐字稿

Thank you, everybody, for joining us and welcome to SL Green Realty Corporation's fourth quarter and full-year 2007 earnings results conference call. This conference call is being recorded. At this time the Company would like to remind the listeners that during the call management may make forward-looking statements. Actual results may differ from predictions that management may make today. Additional information regarding the factors that could cause such differences appear in the MD&A section of the Company's form 10-K and other reports filed with the Securities and Exchange Commission.

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 fourth quarter earnings.

Before turning the call over to Marc Holliday, Chief Executive Officer of SL Green Realty Corporation, we would like to ask both 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.

Thank you, and thanks everyone for dialing in today. You wouldn't think that much would have transpired in just six weeks since our annual investor conference that we held on December third. But that clearly is not the case. We have quite a bit of news to report to you on the fourth quarter performance and achievements that we were not in a position to discuss on December third, but can now, almost all of which is quite positive. And also there has been on the sort of the converse side of things a continued downward trend that has accelerated over those six weeks that one can argue is the market behaving as you would expect it to behave given the current conditions of the credit markets. But clearly warrants some more time and attention on this call as a follow-up to December third.

So just again take a moment to thank the over 400 people who either attended or dialed into that call and presentation back in December. We covered an hour and a half of ground. Hopefully people found it very productive. The feedback was good. All of that still stands today but for whatever we modify on the call given always tweaking our strategies in light of current market conditions. So with that we will sort of jump into things and take some questions at the end. I already see the queue is buzzing with about 10 or so people with questions lined up, which is interesting because we haven't gotten to the meat of the call yet. But let me sort of dive in.

Clearly the fourth quarter results were I thought especially satisfying, and we were really proud not just of what we achieved, but what we achieved in a market environment that is very, very tough. It is tough for you guys, it is tough for us, tough for everyone. But with that said we continued our motivation throughout the year to try and put even more performance on the table on top of everything we went through on December third. And I think hopefully those results are obvious, too, when you read through the release.

Occupancy held relatively steady at around 96.6% while new lease rents replacing expiring rents had a 43% mark to market. We sold two buildings for gains aggregating $225 million while also acquiring the $1.6 billion assets located at 388 and 390 Greenwich Street from Citicorp, on terms that we believe are reflective of today's current credit crisis, and Andrew will discuss a little more about that later on.

We also received a record amount of fees, dividends from SL Green's investment in Gramercy Capital Corporation and that is even before factoring in Gramercy's special dividend payment, which was paid out to Gramercy shareholders and therefore received by SL Green among others in January. And SL Green's share of the One Madison Avenue incentive fee which we did receive throughout the year but accounted for in a different fashion as Greg will tell you and not included in the fees and dividends.

We also signed three major retail leases during the quarter, one of which was awarded happily to report the most expensive retail deal ever by the New York Post. And Andrew has a little bit more to say on that. Add in the fact we increased our structured finance portfolio by almost $120 million net, and increased our quarterly common dividend by 12.5%. And you have the makings of what I would call an exceptionally good quarter to cap off what was an exceptionally good year.

However, there were no champagne corks popping at the end of the year due primarily to the fact that in the face of all that we accomplished in Q4, and on top of that full-year's worth of achievements outlined in December, our stock price was down considerably along with the rest of the REIT sector as investors seem to be looking past all of this performance and instead are using SL Green's currency which many consider a proxy on the health of the New York real estate market, commercial real estate market to make directional bets on New York City rental rates and Manhattan office prices.

Therefore I will take a moment to discuss more fully these two areas and try to contrast the current market conditions that we see now at the beginning of 2008 with the last US recession in 2001 and on into 2002. Turning our attention to leasing first, you will recall that since June 2007 we have been sounding cautionary signals on our earnings calls regarding what we believe would be a gradual slowing in the leasing market as a result of the anticipated pullback in space requirements from the financial services sector. This is a fairly logical conclusion, so we didn't go out on a limb I don't think, certainly not in hindsight to reach these conclusions given the negative events surrounding financial services firms and clearly many market participants, shareholders investors have gone far beyond our cautionary signals as is currently reflected in our stock price.

To our surprise and pleasure the leasing market held up well during the second half of 2007 with SL Green leasing over 620,000 square feet space during that period of time as an average mark to market of approximately 51%. More broadly during the last 75 days I guess beginning sometime around beginning to middle of November, looking at all properties, all leases in Manhattan we are aware of eighteen new and renewal transactions, totaling 4.1 million square feet that have been closed comprised of blocks of space of 100,000 square feet on up. Whether new or renewal leases almost in every instance these leases included not only existing needs, but growth and expansion over and above what existed before the leasing. The eighteen tenants are made up almost exclusively of law firms, advertising and PR firms and government users with only a handful of financial service sector tenants.

This demonstrates one of Manhattan's greatest strengths, which is the diversity of its businesses and the ability for one sector to fill in the void when another is in decline. While we can't forecast whether Q1 leasing activity will be consistent with the past 75 days, we are aware the number of transactions that are close to signing as we speak and we do believe that in general the Q1 leasing stats will continue to look reasonably good, especially when you adjust it in light of current conditions it will look surprisingly good, we believe.

While these leasing statistics appear strong, there are other visible signs that the momentum is slowing, and those signs are clearly the absence of the financial service users with their large requirements that had not just absorbed inventory, but really drove rents to their current levels. While rental increases have abated, nominal rents have not yet begun to decline, nor would we expect phenomenal rents to decline before landlords begin to expand their concession packages. So I think keeping your eye on concession packages first because that would be the first indicator that there is something structurally pulling the net effective rents in a different direction. We didn't really have materially different concession packages in Q4, nor do we expect to in Q1.

So again, we are not seeing this yet occurring in the market but clearly that is what you would look for and what we would anticipate to happen if the demand were to subside. In shaping our projections of where we see leasing performance not looking back over 75 or 180 days, but looking forward over 2008 and contrasting that against where we were in January of 2002, I think there is a lot of interesting comparators to make. At each point in time today versus January of '02 we were approximately nine months into an economic downturn that eventually became a full-fledged recession. However, you should note the following. First, we are starting off in a much better position now than '01 and '02. We have a 6% total vacancy rate versus 9% then in midtown and downtown, we are currently at a 7% vacancy rate as contrasted against approximately 12% at that time. So we are starting off obviously from a much better position with much less inventory. That is probably as meaningful a statistic as anything.

The other one that I would say ranks number two is that the component of total availability represented by sublet space is almost negligible. And each case is only about 1% of the total vacancy that consists of sublet space. So for midtown which has a 6% total vacancy, approximately -- I want to get this number exact here -- approximately a little over 1% is sublet space, and for downtown it is actually 0.9% of the 7% I spoke of earlier. So why is that so important?

Direct landlords who have strength, have capacity are in a much better position to market, hold rents, work the leasing market in a way that sublet tenants do not. Sublet tenants will put it on the market. They will often put on fully built space. They will cut the rents to move and move quickly. And it is not a driving economic consideration what they get for the space. With us our business line is the renting of space. We are highly focused on it, and us along with our peers, I believe, are most focused on not cannibalizing ourselves in the market and having an approach where we know that direct blocks of direct space are still hard to come by in this market. We are going to hold out for the right deals at the right rents without being reckless in terms of letting good opportunities go by. But I don't think you're going to see panic leasing, one, because the vacancy rates don't warrant it. And two, because most of that space is in the hands of the landlords, not the sublet holders.

Another interesting statistic is that new construction today is much scarcer than it was back in '01, '02, '03 when there was about 10 million square feet of space delivered to the market. Today there is only about 6.5 million square feet slated for completion in '08 and '09. And of that amount only about 25% is currently available with no new starts scheduled to start beyond. So much less overhang even though the overhang, even the 10 million feet on the market this size is not that significant; 6.5 is even less so and one million and a half available is almost negligible.

Financial service firms are much leaner than they were back in '01, '02. I think that the combination of them getting much smarter about their space uses and being able to double up and triple up bodies, along with the knowledge that if they were to give back space in size today to try and go out and replicate getting that space back in two or three or four years could be very, very expensive and also very hard to locate within one building. We have not seen significant sublet space coming back from these financial service tenants. There are security issues that are more heightened today than I think there were back in the beginning of 2000. And I think as a result you will -- it is not to say everyone is not bottom line focused, and you will see space being put on the market. I simply think it will be in much less volume than you saw back in the beginning of 2000.

Foreign demand in general because of the dollar and just because of the way the economy has been transforming itself most definitely I think in Manhattan at least for domestic cities, there is still a lot of demand coming from foreign tenants, foreign companies. Some are in size, some are not in size, but there has been several leases that we've seen that have gotten signed on that basis. And we would hope that that, not just demand for commercial office space but also just the economic support in the residential market and the retail markets from these companies and these, in certain cases these tourists who come to us, vacation here, spend money here and buy second homes here, has clearly had a buffering effect on our economy. And our portfolio in general is now what I would call much more of a fortress portfolios than we had in early 2000 with very strong credits on average.

And the absence of some of the smaller, non-core, less creditworthy space users that portfolio is evidenced by back then. So for all of these reasons we are more optimistic on the outlook for the New York City leasing market then clearly some of our investors appear to be, while a 10% to 15% decline in net effective rents over the next 12 to 18 months is possible. We would hope and expect to maintain not less than a 25% mark to market on renewals, which would continue to drive organic earnings for the Company and maintain our status as a growth stock during a period of time where not many sectors and/or companies will have that amount of embedded growth on a market adjusted basis that we believe we will have.

Turning to the investment market, before turning it over to Andrew, while our leasing management construction groups certainly will have their end of the bargain to hold up by leasing and retaining our tenants, the investment group is also working diligently at finding ways to deploy our $1 billion of cash availability in ways that will continue to drive external growth. There seems to be prevailing views that asset values must have decreased sizably along with the credit market dislocation; to the contrary, in the past six months there have been 19 buildings that have traded hands for a total aggregate purchase price of around $7.5 billion, representing roughly $860 per square foot at an average cap rate under 4%.

We are aggressively looking for growth opportunities and had combed each of these situations often concluding that we should either pass or making proposals that were below the prices ultimately achieved by sellers. And in some cases that pricing that we put on was around 15% below the ultimate accepted asking price. That is why when we seized upon an opportunity like Citigroup properties on Greenwich Street we were able to act quickly and decisively for something we thought fit our current and long-term growth profile and gave us an opportunity to select what we think was the best of these opportunities, only one out of 19 by number but about 20% by size of opportunity. So obviously we made efficient use of our time and effort by striking on something that was of a scale opportunity where we also think we have very, very good returns.

Once again as in 2002, I would expect the effect of reducing debt costs to have a sustaining effect on property values even if there is mitigation in the net effective rental rates that we get. Recall that in '01, '02, '03 rents were down as much as 25 to 30%, although in conditions that I think were measurably different than today. And I just went through those specific reasons why I think there were differences. However, as a result of falling LIBOR which briefly hit 1% and the ten-year treasury which flirted with 3%, asset values then held steady and in certain cases increased over what was then a pretty difficult period of time.

In its simplest form the cap rate is nothing more than the blended cost of funds minus expected growth in NOI. Clearly a declining rental market should result in higher cap rates unless offset partially or completely by a reduced cost of funds. While we are not necessarily projecting that rate reductions will be sufficient to inflate values, we clearly see the rate reductions as the stabilizing effect to mitigate any potential or forecasted rental rate decline which in and of itself we would view as a temporary phenomenon for one to two years, until the market recovers and strong tenant demand returns to New York City, which we still think is the best, deepest, most diverse and most attractive office CBD in the country.

This would be -- this view that we hold would be entirely consistent with 2001, 2002 and 2003 and also consistent with what we've seen so far in 2007. And the first quarter of 2008. Obviously current market conditions are no secret, and yet as I stated earlier, 19 deals, $7.5 billion at very aggressive cap rates, all those people are sophisticated buyers looking at the same metrics we all look at, and they have decided that with falling cost of funds and with more equity requirement still getting to prices that are very, very healthy asset prices, notwithstanding I think everyone's recognition that the leasing market will be tougher in '08 and '09.

While the ten-year rate is approaching levels last seen in '02, the shorter term rates consisting of two-year treasury and the ninety-day LIBOR have a long way to run. As a case in point the longer-term forward curve for LIBOR would predict a LIBOR rate below 2.5%, down from 5.5% when the current credit crisis began. Albeit now I guess roughly 3.7%. We would hope to see LIBOR follow suit with U.S. Treasury rates, short-term rates, once Interbank lending policies loosened throughout the year, which I think one would expect to happen after banks have written down their debt inventories. So given all of that our basic conclusion for '08 is that it is going to be a very tough year where we are going to have to -- it is a cliche, but I guess roll up our sleeves and work very hard to keep harvesting the embedded growth that we have. And to find new opportunities that will once again be accretive out of the blocks or near term as opposed to having to wait for that accretion over a longer period of time. And we have a fortress portfolio and a balance sheet that we've put together over the last ten years that was really designed for this moment in time.

We are guardedly optimistic that we will demonstrate to the market how our evolving strategies have come to put us in a position where we are able to maintain market leading embedded growth rates with sufficient capital to take advantage of new opportunities, and to keep recycling our mature properties into new growth opportunities that will generate external growth at a time where we have falling interest costs. And nobody is more focused on rebuilding our stock price back to prior levels than myself, Steve, Andrew, Greg and the rest of the management team and employees at SL Green. We will do everything possible to recover and exceed those prior levels.

With that I would like to turn it over to Andrew Mathias.

Thanks, Marc. As we mentioned at the investor conference, we continue to see strength in the Manhattan investment sales market at pricing consistent with fall of 2007 levels. On the investment front we finished up 2007 with an exciting fourth quarter capped off by our purchase of 388, 390 Greenwich Street from Citigroup. This deal represented the most compelling economics we have seen in a New York City transaction in several years, economics that thus far look like they were a result of tenacious deal making rather than indicative of a dramatically softening investment sales market. At a 6.3% going in return with a 13-year noncancelable lease with CPI escalators, and just as importantly at a per square foot base of $600 per square foot, we are less than 50% of replacement costs for these properties, we believe this investment will pay enormous dividends to our shareholders both on a current and residual basis.

Layer on an innovative financing structure giving us 68.5% leverage at 5.19% and our joint venture with our long-time partners at SITQ, and we think the transaction is really on all fronts an out and out winner. The transaction also presents our partnership with the opportunity to reverse exchange into the deal a strategy we actively deployed on the Reckson acquisition. And a strategy we will continue consider employing here depending on the bidding level for 1250 Broadway, an asset and a venture with SITQ which we are currently considering selling.

Our sales program continued to be very active in the fourth quarter as well with the closing of the 470 Park Avenue South sale and the hard contract for 449th Avenue which we expect to close in the coming weeks. As we indicated at our December investor conference, strong interest in these properties gave us renewed confidence in the sales market.

In our retail program we had our strongest quarter ever. The American Eagle lease we announced on the heels of our investor conference was the highlight as we found the credit anchor tenant we've been searching for at our Howard Johnson site at Times Square. The site will be improved with a spectacular retail store and cutting-edge signage installation. When completed in 2009 this will be the third goalpost in the heart of Times Square. In other news we completed the leasing of the remaining 50 feet of our 34th Street site signing Aldo and Geox to long-term leases at very compelling economics. Demolition on the site has begun, and this additional leasing completes an economic homerun for the company and our partner, Jeff Sutton.

Just tenacity in completing this leasing was truly extraordinary with some strong assistance and backup from SLG's investments and construction operations teams. Great job to everybody involved there. The power of this partnership was on full view with our results in the fourth quarter.

Finally on the structured finance front we continue to take advantage of market dislocation primarily through coinvestments with our Gramercy Capital Corporation affiliate. The investing environment improved with some year-end specials, notably from dealers who needed to get assets off their books by year-end and needed to hurry to close deals. Gramercy and SL Green's team was ready and took full advantage of these opportunities. We continue to scour the landscape for additional investment opportunities and see a fairly active 2008 on the structure finance front where new opportunities seem to be presenting themselves daily.

And with that I would like to turn the call over to Greg to take you through the numbers.

Thanks, Andrew. I guess probably the biggest change since the investor conference is the fact that the credit crunch has intensified, and that the new year did not bring with it the relief to that that many had predicted. And as a result of this, you are seeing out in the marketplace continued scrutiny and focus on Company's balance sheets. We have the good fortune of monitoring this closely in any market including when there is an abundance of capital, and there should be no surprise that we finished the year with a very strong and liquid balance sheet. Benefiting from the active asset sales and capital raising efforts that we undertook during 2007.

We finished the year with $750 million of availability under our credit facilities, and this amount will increase to approximately $900 million upon the sale of 449th Avenue scheduled for the end of this month. Our debt carries a weighted average maturity of approximately six years, having termed out the lion's share of our debt as we transformed the balance sheet during the year. Our debt at 1250 Broadway and 1515 Broadway which had initial 2008 maturities, both carry as a right extensions which could take those maturities out to 2009 and 2010, respectively. Of course we currently expect the debt on 1250 will be repaid from the sale of that asset. Accordingly, the only meaningful near-term maturity that needs to be addressed is at 717 Fifth Avenue. Discussions for this are already underway, and we expect that our recent deal with Armani should make this a fairly straightforward exercise.

So as you can see, we have no near-term maturities to be concerned with, and we remain very liquid. As we have often talked about this liquidity enables us to be opportunistic on the investment front. This liquidity helped us close quickly on the Citigroup acquisition and the structured finance opportunities that we alluded to in December started to take shape with the $120 million of investments that Andrew referenced, all of which closed principally during the last two weeks of December.

Last but not least this liquidity enables us to buy back our stock at levels which we think are very attractive. In addition to being accretive to us on an NAV basis as we outlined during our December meeting, it is also now very accretive on an earnings basis given that our stock trades at at an FFO yield of approximately 7.5%. Today we have bought back $188 million of stock under the $300 million plan which has been authorized by the Board, and at an implicit caprate of 6.5% and a price per foot of approximately $460 a foot, we would expected to be continued buyers.

Other items of note on the balance sheet include the following. Our investment in Citigroup headquarter building shows up as a $535 million investment in joint venture along with the $277 million of consolidated debt, reflecting a partnership loan from SITQ. So our $818 million gross investment for the 50.6% interest in that building was funded with $258 million of cash, a $277 million partnership loan from SITQ, and $283 million of mortgage financing representing our share of the venture's underlying first mortgage. This attractive acquisition with an innovative capital structure provides us with an initial cash return on equity of 8.6%.

As we have discussed throughout the year we completed our 141 analysis with respect to our 2007 acquisitions most notably the Reckson assets. The recording of this adjustment is the primary contributor to the increase in building other assets for the quarter as well as the deferred revenue you see recorded during the quarter. As we mentioned in December, we expect the amortization of these deferred revenues related to the Reckson acquisition to contribute approximately $15 million of incremental revenue in 2008.

As we leave the balance sheet we feel comfortable that we remain liquid, flexible and modestly levered. Though these metrics have received lesser attention given the ample capital that has been available over the last four years, they will become more important as we move forward, and we believe in this area we stack up very favorably.

Turning to the P&L the quarter provided a strong finish to an extraordinary year in which the Company posted sector leading FFO growth of 25.4%. Leasing remained healthy with a mark to market of 42.7% on the close to 300,000 square feet of office space signed during the quarter. These leases were achieved with TI packages that averaged just $15 and free rent of 1.4 months so the concessions on these leases remain modest in response to and as people think about the concession commentary that Marc had provided. These leases carried an average rental rate of $65.68, the highest quarterly average in the Company's history, a testament to the rental growth that we have seen as well as the transformation of the property portfolio to a higher quality portfolio that carries higher average rents and higher operating margins.

Portfolio finished at 96.6% occupancy even with the scheduled occupancy declines at 420 Lexington Avenue, 317 Madison and 711 Third Avenue. The occupancy numbers also include 100 Park Avenue at just 74% occupancy and 1221 Avenue of the Americas at 93% occupancy. The vacancy at 100 Park represents the assemblage of a large block of space which had been under negotiation for seven months but which has not been consummated to date. The vacancy at 1221 is a result of us holding a block of space there available at very high rents. The vacancies at 420, 317, 711, 100 Park and 1221 contributed to the modest same-store NOI growth that we saw during the first quarter.

We expect that the same-store NOI numbers will rebound during the first quarter of 2008 although the occupancy at 317 will likely continue to lag as that property is managed with an eye toward future redevelopment and income recognition on the vacant space at 100 Park will likely not occur until the fourth quarter of 2008 at the earliest.

The Company's other income for the quarter included approximately $5 million of lease cancellation income from one of our properties in Connecticut. This was in addition to realizing -- excuse me -- this was realized and then we were subsequently able to release a substantial portion of this space to a major financial institution which was a real coup and one of the reasons why you saw good economics coming out of the suburban portfolio for the fourth quarter.

Our other income also included approximately $10.4 million in fees from Gramercy. The incentive fee from Gramercy was down modestly for the quarter as GKK focused on building its liquidity and preparing for its merger with AFR. However, you can see that the GKK contributions remain substantial and should continue to grow following the merger. As Marc noted these metrics exclude over $30 million that SLG received related to its incentive fee on One Madison and the special dividend that was paid out by Gramercy in January.

Our structured finance investments provided $20.8 million of interest income for the quarter but reflect little to no benefit from the current quarter's investments since the majority of those investments were made at the end of the quarter.

Interest expense was higher principally as a result of having the One Madison Avenue debt consolidated for a full quarter. In addition during the quarter we stopped capitalizing interest on certain projects, and we also recorded a $1.6 million mark on an interest rate hedge accelerating the recognition of interest expense which otherwise would have been realized in 2008.

In closing we remain confident about our ability to meet the guidance set forth at our December investor meeting and are optimistic that our strong liquidity will enable us to capitalize on investment opportunities. As people continue to ask whether the Manhattan market is headed for a repeat of 2001 and 2002, it is worth remembering in those years that the Company was able to generate average FFO per-share growth of 11.5% during that timeframe.

And with that, I would like to turn it back over to Marc.

Okay, thank you, Greg. Before we open up for Q&A, two things I would like to come back and address; spent a lot of time talking about the Manhattan metrics. And I think it is important we also acknowledge the great efforts this year of our management team up in White Plains who oversee the suburban portfolio. They did an excellent job this year, 4.3 million square foot portfolio in Westchester and Connecticut to remind listeners. We exceeded NOI projections for the 11 months of ownership by 14%. And also in terms of new and renewal leasing there was about 500,000 feet of leasing that this group did, broken down almost equally between new and renewal leases and in the aggregate those leases were 19.5% above plan.

So excellent leasing stats in markets that don't quite have the same dynamics as we enjoy in Manhattan, so harder to pull those results together. Occupancy is slightly above 90% in markets that are roughly 85 to 86% leased on average in Westchester and Connecticut, respectively. And we had over 10% mark to market on that leasing activity again across Connecticut and Westchester.

Greg mentioned a lease termination that we received over at Rye Brook, too, when MCI terminated. And within two months of termination there were leases signed with a major financial services company and another advisory company for over 39,000 square feet at rent substantially higher than MCI was paying. So the pay blend and extend is not limited only to Manhattan, and these guys pulled it off twice up in Westchester and I want to congratulate them on that. We are strategically ramping up our cross selling efforts. Diamond Back came to New York City this year. It was 20,000 feet. Lustig & Brown, we exported to White Plains or they chose to export themselves to White Plains. We helped. That was 10,000 square feet.

We have four projects currently underway, total capital budget around $10 million that we are sprucing up to obtain higher rents, two in White Plains, one in Rye Brook and sorry, one in White Plains, one in Rye Brook, one in Greenwich and one in New Jersey. So we look forward to those capital dollars bearing some fruit in '09. And across the portfolio we have very strong credit tenancies. Only one tenant on the watchlist that is about 25,000 square foot homebuilder. Other than that we feel very good about the credit in that suburban portfolio. So I wanted to bring you up to speed on that.

Lastly, we mentioned one of the big projects for us this year on a value add basis, we talked about investments in leasing but also on the redevelopment side, 1515 Broadway, we expect to kick that redevelopment off sometime midyear. That will be probably 1.5 to 2 year full swing. But that is going to be the most ambitious redevelopment project we've undertaken to date, and we look forward to giving you more details about how that unfolds on the next conference call.

With that, we thank you for your time and open it up for questions.

(OPERATOR INSTRUCTIONS) John Stewart, Credit Suisse.

Marc, I was hoping I could get you to amplify on your comment that financial service firms are much leaner today than they were going into the last downturn. I was hoping I could get you to kind of quantify that a bit, and address how much you think that we will see come out of the market as subleased space.

I would have to work to quantify for you. I can only do it at this moment by feel. Citigroup, JPMorgan were big downsizers back in 01/02. Buildings like 522 Fifth, no, the one that went full building to --.

522 5th, 245 Park.

Andrew, the other ones that Chase downsized out of.

1166 Avenue of the Americas and 245 Park were notable.

Also Marsh Mac had a bit block of space. They have sublet some of that. I consider them financial services. There was a block at 450 West 33rd. So again, there was much more identifiable big blocks where I can just rattle off on the top of my head -- JPMorgan, Chase, Citi, Marsh Mac.

Goldman Sachs, Goldman Sachs at One Liberty had I think two to three floors of technology group ready space which they immediately dumped on the sublet market in 2002.

So when you add that all up that is quite, that is several million square feet of space that just -- that overhang doesn't exist now just because as I said, they got very lean. They grew. Space got expensive so they probably didn't grow -- there were a lot more requirements on the table in '07 that will ultimately get done now as a result of the credit situation. But that space demand was a result of the fact they had gotten very lean. They had very 5, 6 successful years back to back. And were -- they are tight, so now they will be less tight, but they are still not going to be at a point where I think you're going to see big blocks come back.

From what we've heard from our tenants is that the space seems to be more Swiss cheese. I hate to use that terminology, but that is what it is with little pockets of space throughout a building, the cost to restack, create the contiguous space, then the cost to sublet only to then have to pay for growth again in 2, 3, 4 years -- I think a lot of these folks are deciding it is going to be too prohibitive and they are not ready yet to make that kind of wholesale judgment.

Without names I'll give you an example of one tenant we called recently, we thought it was a no-brainer because we heard there was some downsizing. We said we will take back some space for you because we have a requirement we can fill it with and uptake it for ourselves. And the response was we have nowhere to put them, thank you very much. Which was surprising. But maybe that will change but right now they didn't take us on our offer to take back fairly sizable chunk of space. So that is the best I can do for you right now. We can maybe try and get you harder statistics after the call, but clearly I can make that statement confidently that they are leaner.

Marc, we've heard that from the two -- our two largest financial service tenants have both told us that they do not have access space, and were not interested in giving back any space as part of those conversations.

That's helpful. Thank you. My second question would be obviously another strong leasing quarter in the fourth quarter and I suspect some of that activity was deals that would have been negotiated previously. So my question is when you look at net effective rents on deals that are being negotiated today, what is your sense for the change from a year ago?

Not radically different. The deals that we are doing today a little bit more concession we think where it is going to trend to a little bit more concession. The fourth quarter transactions that we did were a combination of deals that were started sort of midyear, and also a number of deals that were commenced and executed on a very fast-track basis. The things that we have in the pipeline right now pretty consistent with what we saw in the fourth quarter, but I will say that the sense is that we are some like a lot of owners are going to be a little more defensive. We're going to do a few more prebuilds in advance. If we have to stretch for an extra $5 in TI or an extra month of free rent it is going to happen. But more I think as the market settles and as demand settles down because you got to take it in the context of all of last year was still massive rent increases. And as the economy softens and demand slows down, there has got to be an impact on net effective rents and even on the asking rents because we are coming off of such a high.

And do you have a sense for what that change is today?

I don't think you can really quantify it yet because the stats clearly are trailing reality. If you looked at the end of '07 rents across the board in Manhattan were still up 25, 27%. If you compare that over two years rents are up over 50% over the last twenty-four months. So I think right now you're going to see kind of a flatline for a bit of time and it will be more on the net effective that you see rents trail off a bit.

Okay. Thanks, guys.

Kristin Brown, Deutsche Bank.

Good afternoon. I just wanted to ask if you're starting to see any opportunities from distressed private sellers in the market.

Not really. There are a couple of notable debt maturities this year which I am sure you've seen in the press, which have put some assets into play. None of those I would call distressed or got to raise cash so willing to take any price type opportunities. They are more professionally marketed processes. And aside from those couple of situations the sellers in the market are generally patient and running broker processes where as Marc mentioned in his section we are continuing to see incredibly strong per foot prices and cap rates being (technical difficulty)

Okay, and then my second question is just as to the timing of the FAS 141 adjustment, is that evenly spread through the year, or what is the timing?

Yes. It should be evenly spread through 2008.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Anthony Paolone, JPMorgan.

Greg, last quarter you talked about $9 million I think annualized FFO or NOI that was kind of on the sidelines until leases actually commenced that weren't in numbers. I'm just wondering if you can update that number, give us a sense as to if any of that came in in the fourth quarter.

I would say that the contribution in the fourth quarter from those was modest, maybe $1 to $2 million of the $9 million actually making its way through and you should really look to see that coming through in the first quarter of 2008.

Okay, thanks. And my second question is, I was wondering if you can maybe for Andrew -- give us a little sense as to something like the GM building which is reportedly up for sale. How SL Green might go about underwriting an asset like that in terms of IRR's where you think market rents are, cap rates, residual cap rates, just anything along how you're thinking would go in underwriting right now.

Obviously it is a unique property and one which is fairly unlikely will be competitive for that type of property. It has not been our bread and butter fully auction process for that type of thing but I think the buyer there and who CB Richard Ellis is hoping to find is going to be somebody who will underwrite rents between 150 and $200 per square foot, from low to high in the building. And I think that type of buyer would be a 7.5 to 8% IRR type player looking to experience significant rent growth in that asset, although the growth really comes between years 10 and 12 with relatively little until then. Because there are some notable below market leases which will about ten or twelve years out.

Okay, thank you.

Jordan Sadler, KeyBanc Capital Markets.

Marc or maybe Andrew, could you just give us a little bit of flavor for how the investor market is shaping up sort of real-time? I know you did talk about cap rates over the last six months, transactions in the last six months, but what are we seeing sort of last 30 to 60 days? Are investors still clamoring, and has the mix of people changed at all?

Continued strength. Unlike leasing where Steve Durels gave you an answer earlier, it was a little bit of a we will have to wait and see; here is what could happen; here is what we are seeing now. We can tell you real-time data, the appetite for Manhattan office buildings is strong.

I'll let Andrew discuss the mix, but -- we can discuss the mix in a moment. There is clearly a lot of foreign buyers, but there are a lot of domestic buyers. Cap rates not appreciably higher than they were over the past six months. And that is just based on our testing the market now with some current offerings and some other properties that we are aware of that are out there and available, all sort of confirming or reaffirming the comments we made earlier about the 19 trade that had gotten done.

Marc, I think the mix of buyers has been very consistent with our investor conference slide where you are still seeing a good diversity of buyers, foreign players; local -- very wealthy local players who are not deterred by the fact that generally they are levering these buildings at 60% to 65%, maybe 70% as opposed to 80% or 85% before the credit crisis.

Okay, that's helpful. And my follow-up is having listened to Gramercy's call last week, I guess one of the themes I took away from there is that they are hoarding liquidity. And I was curious to know if that thought process had bled over into SL Green a little bit? And maybe if you can sort of comment on what your current liquidity is today.

Yes, I think on Gramercy, we had raised money there. We do have a $3.5 billion acquisition over there that is scheduled to close the end of March. And the opportunities, particularly in the mezzanine and preferred positions that we were seeking out, didn't really start to present themselves in large fashion until the end of December.

So that was very much by design there, and we are very focused on closing the AFR transaction. At Green, I think went kind of through the numbers. As we think about it with 449 scheduled to close here in a couple of weeks, we will basically have $900 million of liquidity available under our line at L plus 90. So kind of at those levels, you can easily put it out into kind of any investment and it be very accretive, but we are naturally being selective. There is no urgency to put money out. We think we can meet our earnings expectations with kind of what we have on the plate currently. And so we have the luxury of being able to be patient and wait for things to shake loose.

Thank you.

Jay Haberman, Goldman Sachs.

I guess Marc or perhaps Steve, but Marc in your comments you mentioned that you could perhaps see a 10% to 15% drop in the net effective rent. I know you touched on it earlier, but can you just give us a sense of what you need to see in the market for that to take place, what level of layoffs or where do you think vacancy needs to go?

It is hard to -- you need to see sublet space. Layoffs unto themselves is not going to drive it. I know you are asking how do the layoffs translate to sublet space. You can't -- I couldn't tell you that. I don't know that Steve can either. There are people who make attempts at it, but it really relates back to my prior comment of how under capacity were these folks to begin with. And then of these layoffs, how many are really layoffs, what is sort of natural attrition, how much is New York, which is non New York? When is it going to occur, and if these institutions wind up with space is it going to be contiguous such that it can be sublet, or is it Swiss cheese in which case they are going to be much more loathe to do it. So I think you're going to have to see a pretty high volume of layoffs.

And by high I would mean something in the range of 25 to 50,000 folks that are -- when I say purely New York City in the primary space that otherwise wasn't slated to be gone or replaced or moved, and that aren't replaced with new people; because sometimes people are laid off and others are rehired, it is just a switching, it is called firing, not laying off. And also you have to recognize that those 25 to 50,000 people, they get jobs. Some of the great -- a lot of the financial boutique firms and hedge funds today that are occupying a lot of space and paying the big rents in Manhattan, a lot of them came out of the 2001, 2002, 2003 decline. So it is not like they go and are gone forever.

So it has got -- I can only say it has got to be a big number. I say 25 to 50,000 people would start to make an impact. It certainly -- I don't think that would account for three to four points of vacancy because you would need about 3 points or a 9% total vacancy rate to get back to a level that where tenants would have, would be in the driver's seat again. But it is a little bit of speculation. I think you're better served really just watching the sublet availability because that will directly impact the direct space.

Okay, thanks. And also in terms of acquisition opportunities I guess how far are you willing to push leverage in this environment? I know, Greg, you mentioned obviously the higher scrutiny on the balance sheet, but I am just curious would you look more at structured finance, and how far would you move that area? And number two, what sort of leverage level are you comfortable at?

Well structured finance I think Andrew went through at the December investor conference; we very much expect that is going to generate a lot of opportunity in 2008. In terms of how high could we go with our leverage, a lot of our assets are with credit, long-term leases, so a lot of people would argue that they should be higher levered to begin with. So would you take that comfortably up to 60%? Yes, that's a possibility. Again we are going to continue with the investment demand being very hard to sell assets as a source of capital, which has always served to help delever when we are in the market with 1250 currently; but if you had to circle could we go up to 60%? I think that is certainly a level we would be comfortable with.

Yes, and by that I mean Greg is referring to our value. So we have our own independent view of value I think on that basis we are below 50% today. So that is a lot of debt capacity if we were so inclined. I think if you look back historically we have never really been much above 50 or low 50s.

Thank you.

Michael Bilerman, Citi.

Good afternoon. Greg, you talked about 610 to 620 as reiteration of guidance. Can you just clarify -- my understanding was that the 388, 390 Greenwich was not in those numbers before, and I think you took some write-offs in this quarter that you said were part of '08. So I am trying to understand why guidance is not up.

Well, no, I think we had talked about in December that the guidance included some acquisitions. So I would say that that would count towards that, and I mentioned that we are expecting some delay in leasing over at 100 Park. So that would be going in the other direction. So net-net and given the uncertainties in the market as we sit today, we are reaffirming where we guided six weeks ago.

And where is your sense of acquisitions in terms of the FFO impact? It looked like this build at 388, 390 is probably north of $0.10 on an annualized basis. What else is in your guidance for acquisitions both in terms of on the structured finance or on just straight property that is embedded in your guidance?

Not much in the way of additional acquisitions, and we probably have a couple hundred million dollars more of structured finance sort of embedded. But things changed around, so we may exceed those levels which would be more accretive. There may be other areas that we would look to take our time on harvesting.

And we've been active sellers, as well.

You got to remember everything we do -- it could be one of two things, Michael. It could be either accelerate earnings or it could accelerate our ability to harvest, create more what I call free capital because it is not dilutive on a share basis and then redeploy for future years. Our goal is always 10% a year. I think our compounded to date is over 11% per year. We were up 25% last year. I think our guidance for this year is around 6%.

And we may do things that would cause us to go above that this year. I hope we do. But then we may use that as opportunities to be more patient in other areas to try and create as much positive momentum into '09 and '10 as possible. So last year we took the same approach but there was so much going on we were not very successful in trying to keep a measured pace there. And obviously we were up 25%. Maybe we will be this year, too, but that is not our objective.

And just remind me on 1250 which you're looking to sell when you guys refinanced you sort of took the promote and got a higher interest in the asset. I guess when you look to sell at the levels you're looking today is there any promote that would float into FFO?

There could be, yes.

And is that included in the guidance right now or not?

I think if you look back to the slide that we presented it definitely contemplated that there would be absolutely some promote income flowing through. I think we mentioned it might come from 1250. It might come from 55 corporate. But we gave you a whole list without being very specific as to where it is going to come from.

Okay, thank you.

John Guinee, Stifel Nicolaus.

One quick question. I have never in all the years I've been in the business seen so much negative expectations on a 6% vacant market with virtually no new product delivered in the next couple years. Can you kind of walk-through just a real four or five quick soundbites as to the bull case for the Midtown market?

The bull case is LIBOR drops to 1, treasuries drop to 3, rental declines are modest 10, 15% or less, and therefore the cost of funds decline has a much more pronounced impact than the rental decline where no -- or even rent is flat. Foreign demand is unabated, and we are selling assets, recycling, putting it into deals that are accretive out of the blocks. And you take the accretion that we can create internally and externally, and we can be seeing supercharged growth rates. Greg said it before, I assume -- I am going to repeat it. I think it was that important, Greg, 2001, 2002, 2003?

2001 and 2002, which are the --.

2001 and 2002 our FFO was up 11.5% compounded, I guess you know, two years. That is pretty damn good. There is not a lot of platforms out there that can take advantage of down markets and keep churning out 10, 11% a year, year after year. We've been doing it for a decade now and hope to carry that forward. And there is a case where we take our billion dollars, we can lay the tracks for the next two to four years on what could be explosive capital gains like we saw over the past two to four years, rents that don't really drift down that much and a falling cost of funds. That would be a bull scenario.

Thank you very much, great.

Chris Haley, Wachovia.

It is Brendan Maiorana with Chris. Marc or Greg just to follow-up on that comment in terms of the company and the position for growth now relative to six or seven years ago, how do you feel SL Green is positioned for that type of FFO per-share growth going forward?

Let me make sure I understand the core of the question. Are we as well positioned now as we were in '05, '06 for that kind of growth?

Well, more in the 2001, 2002 timeframe when there was another down market or a similar down market.

Well, look, our properties are better. We've got an equivalent amount of embedded rents so I can't say more or less. We are 40% plus embedded today. We were 40% plus embedded then. So that 40% kind of disappeared down to like 5% if you recall and that was because of all the factors that I went through earlier. I don't see those same factors here, so if we are more in the '20s than the single digits, which I think I don't want to call it a worst-case because I am not making that kind of market call. But let's call it a reasonable case, then in that sense we should have better organic growth.

We didn't have $1 billion of liquidity relative to our total size then as we do now, so our ability to grow externally is much better. So I would have to say at least I feel sort of equally as good. I don't know about better because look, we are a $13 billion company today, and it is I guess that is market cap is close to around the equity cap is around 6.5 or 7. And that is just a much tougher and bigger, not to make those kind of earnings on, but we do do it. And we have a gameplay where we see capital gains, incentive fees, retail opportunities, embedded growth in our rents, Gramercy, the suburban platform which I think as markets heal there will be some gains in that portfolio down the road. There are a lot of good things to point to, and I think we will be able to keep it up.

Thanks for the color on that. And just last question in terms of relative opportunities between on the structured finance opportunities and direct property investments, how would you guys place the risk to reward ratio between those two investments on current pricing? And just where are more of the opportunities aligned? It sounds like it is more in the structured finance sides but just wanted to.

Yes, structured finance -- and it comes and goes. There were times we have been big, big property buyers and last year, until the credit sort of dislocated, we were doing very little structured and green. We were doing a ton of real estate. Now put aside Greenwich because that unto itself is a massive investment, but in terms of the opportunities set out there risk-adjusted basis to do mezzanine, pref, secondary market buys along with Gramercy for deals that are just too big in a market where scale dictates attention, there's a lot of people who can write 25 to $50 million checks. There is not a lot who can write $200, $250 million checks for debt today, and the combination of Green Gramercy can, and we get preferred pricing. If you listen to Gramercy's call we got a lot of product at the end of December that went either entirely for the benefit of Gramercy or in some cases it was participated to SL Green. So Andrew, why don't you weigh in, but I think clearly I think the opportunity today.

I would agree it is shifting back, a bit toward structured finance. Although look, as I said, I think 388 Greenwich was the most compelling real estate opportunity we've seen in several years.

Thank you.

James Feldman, UBS.

Thank you very much. Can you just talk a little bit about your credit watchlist in terms of both the structured finance portfolio and any changes to the core portfolio?

Any changes to the core portfolio meaning the real estate?

Yes, I mean physical tenants.

Let's take it in reverse order, Steve, tenants, delinquency, bankruptcy, etc.

We haven't seen -- we monitor very closely. We have every 30 days we have a large group that assembles to go through every single tenant in the portfolio. Anybody who is trailing behind in payments. We haven't seen any material erosion on that. We've had a couple of small tenants who have come to us and said I need to work with the space what I'm going to downsize or get rid of my space. We've actually converted each and every one of those into an opportunity to replace the tenancy with higher rent paying tenants.

But just to quantify that, it is a handful of deals leasing fairly modest amount of space. So we haven't seen any real shift on the aging of arrears or those tenants coming to us expressing concerns who are sort of getting out in front of a problem. And I think that is testimony to a couple things. One is it is a different dynamic today than it was in the last market downturn where you had the tech rack and the telecom guys who were in industries that were weak and going out of business. Today the majority of tenants are much healthier businesses and certainly the tenants within our portfolio given the quality of the buildings, the quality of the tenants and the extensive amount of effort that we have put into it over the last couple years to vet out the credit of our tenants upon leasing space, I think proves out we are in pretty good stead right now.

That is on the tenant side. On the structured finance side I would say anything directly originated by us or us and Gramercy, or I should say Gramercy and then participated to us, I think we have nothing in the way of any kind of credit exposure. And Andrew can confirm -- Andrew, is that accurate?

Yes, in the structured finance portfolio.

And then via Reckson, which we inherited, two smallish kind of positions, but we inherited them and one of them I think is Glencove, Long Island. How big is that position, Andrew?

I would have to come back to you on that, I think it is about $15 million or less.

There is a $10 million position we have. There may be a small amount of exposure. This is immaterial in the grand scheme but just for because you asked the question, I think we are somewhere between covered or there is a very de minimus exposure we may have on a $10 million investment. And the other one is this RSVP situation which we kind of stepped into when we bought the New York asset in the suburban platform. That, we have a, I would say a quasi passive position there, which we are going to focus on more intently. Again, not a big position. I think it is okay but again, I feel better about the stuff we originated than the stuff we've taken over. And those are the only two areas that I would call soft spots in the entire structured finance portfolio which today stands at $800 million. So we are pretty proud of that record.

Okay, thanks. And then in terms of the guidance, what does it assume for same-store growth for both the consolidated and the JV portfolios?

Around 6%.

6% blended?

Yes.

I guess there was a 4% decline in JV this quarter. That should turn or do you think that stays negative?

Yes, well I think the numbers are a little misleading; on one of the properties you had substantial lease calculation income in the fourth quarter last year. I think you will see a significant turn coming out of 1221 Avenue of the Americas and likely an uptick from 100 Park which was under redevelopment for the balance of 2007.

So you think they both end up around 6 or you are still consolidated much higher --

Probably those ones not quite as high as that, but they will be picked up by some of the other assets in the portfolio.

Okay, and then year-end occupancy, what is the guidance assumed?

I got to check for you. I think it is around 96%.

Pretty much flat from where we are?

Yes.

And total square feet lease, I think you guys were at 282 this quarter. That seemed kind of low for -- you think it ramps up or is this kind of the New World?

I think we have kind of three-quarters of one million square feet of scheduled lease expirations next year, and we have always been -- we've always exceeded the scheduled lease expirations but those have been in up markets. So we will have to wait and see how 2008 unfolds to see whether we are more aggressive or just deal with the scheduled expirations.

You've got to remember that our scheduled expirations for '08 were 1,200,000 square feet. We knocked off at the end of '07 over almost a quarter million square feet of that, 20% of our '08 role was already put to bed before we started the year. So as a year this is a fairly light year of leasing. So I think we will still do a lot of production for the year, and I think we will also see a good deal of opportunities that come our way that are outside of role, where we take space back and convert it into, on selected basis into opportunities for upticks. Because at the end of the day we still have massive mark to market to harvest.

Michael Knott, Green Street Advisors.

I may be the only one left by now. A couple quick questions. I think that you had told me before that the Graybar Building is a good barometer for smaller tenants. And I've noticed that over the past several quarters we've lost about 400 basis points of occupancy there. Could you just talk about that particular building for a moment?

It is more timing than anything else. Graybar is actually a very light year. Our biggest tenant that was scheduled to roll this year was Bank Leumi. We renewed them last year. That was over 50,000 square feet. They upticked their rent. They did it early. We are in negotiation with our second biggest tenant to renew them right now of about 25,000 square feet. After that the largest piece of space that rolls in the building I think is about 8000 square feet this year.

So we are sitting on a couple of points of vacancy in the building. I think we will -- I think it will be pretty steady throughout the year. We are still seeing tenants come to the building with modest expansion needs, still starting new businesses. I think it remains a very good barometer. You haven't seen material subleases coming on to the market through this particular building. So a year where we got ahead of it and really took care of business last year and I think we are in very good shape for the balance of the year.

Michael, the building is not yet -- it is about 1.4 million rentable plus or minus, 7 points of vacancy would be about 100,000 square feet. Steve, does that sound -- you know what would comprise the figures -- component of the 100 or is there a lot of little spaces?

It is a lot of little spaces. Right now we've got about 45,000 feet of current vacancy. We've got another 27,000 feet of space that is just rolling over the next month or so. And then another 72,000 feet through the end of the year. Not a lot of to talk about. The biggest piece of space that we've got to knock off, and I'll correct one thing is that we moved the tenants from Graybar over to 485 Lexington Avenue late last year, Konica Minolta, who needed to expand so we moved them within the portfolio. And therefore we've got their 20,000 feet back that was.

On top of the 45,000.

Yes, that was scheduled to roll before -- out of the couple of years of remaining term on it. But still very solid demand, rents popped into this building second half of last year where the average deals that we are doing today are in the high 50s to low '60s per square foot. And to give you a little color on it, Andrew asked me -- maybe it was last July or August -- whether I ever thought this building would be a $60 building. I said I don't ever see it, and two months later I was proven wrong. And those rents are still holding as we speak.

And my last question is can you just talk a little bit about some of the deals in the structured finance portfolio that were added this quarter? It looked like the financing senior to your investment almost doubled to about $20 billion. Can you just talk a little bit about that?

Financing senior I'm not sure where 20 billion --.

What do you mean 20 billion, Michael? Can you just expand on that?

On page 31 of the supplemental, just curious it looks like maybe the riskiness of that pool increased significantly if I am reading that page right.

From the Gramercy call and we've actually decreased, lowered our last dollar LTV inflection point on our deals because we are generally buying more senior mezzanine interests for yields that the most junior mezzanine used to carry. So most of the positions we've taken have been second, third or fourth losses as opposed to first losses. So it surprises me. I don't think it is --.

Andrew, I think extended stay is probably one that is a more -- that is just.

(multiple speakers) large transaction.

A very large transaction; a lot of senior financials but a very small relatively small piece of that.

It is a very small position in a very large financing so you have that aggregating on top.

(multiple speakers) I would say by and large, Michael, you will see us in, I am looking at about five or six deals we did in the quarter they were generally down the capital stack in terms of riskiness. That was one monster financing. I wouldn't imply that $7 billion of underlying debt in any way crossed the structured finance portfolio. I think it's limited to that investment. But it would otherwise skew how much is subordinate if you're looking at in the aggregate. Does that make sense?

Right, right, okay.

I think you've got to almost carve that one deal out and look at it; without that you would have 13 billion relative to all the balance and then I think if anything we would be the same or less on an exposure basis.

Okay, thanks.

Operator, that is all the time we have for questions. Thank you for whoever has been with us the full hour and a half. We appreciate seeing you in December and rejoining us today to give you a commentary on the market and we look forward to speaking to you again in three months. Thanks.

Thank you for attending today's conference; this concludes the presentation. You may now disconnect. Good day.