SL Green Realty Corp (SLG) 2008 Q2 法說會逐字稿

Thank you everybody for joining us and welcome to the SL Green Realty Corp. second quarter 2008 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 the predictions the 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 10Q 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 must directly comparable to each non-GAAP financial measure discussed and the reconciliation of the differences between each non-GAAP financial measure and a comparable GAAP financial measure can be found on the company's web site at www.slgreen.com by selecting the press release regarding the Q1 earnings. Before turning to call over to Mark Holliday, Chief Executive Officer of SL Green Realty Corp., we would like to ask those of you participate 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. Thank you, everyone, for joining this afternoon. Last night SL Green released its earnings for the second quarter. We had results that were in line with our projections and consistent with prior guidance. It was a very balanced quarter where we posted good results, exhibited strong leasing performance, had various sources of other income, and executed on approximately $100 million of external activity consisting primarily of the acquisition of the fee interest in 919 Third Avenue and origination of two separate structured finance investments. Clearly, now the company is benefiting from the strategy of buying core assets with near-term end long dated embedded rental growth.

Now with addition to harvesting profits, as we have done so over the past several years, we are also harvesting rental growth and the results are pretty powerful as you saw last night. We achieved these results in part through the early leasing of space which would have otherwise expired in 2009 and 2010. In the aggregate, since the beginning of this year, we have early renewed or preleased 433,000 square feet of space, thus accelerating the realization of the embedded mark to market and mitigating future role risk. Our total leasing performance for the first half of the year is impressive with approximately 940,000 square feet leased with an approximate 48% rental uptick and an excess of 10% growth in same-store NOI. We now reduced or scheduled lease expirations for the balance of the year to 421,000 square feet of space which will get much of our attention.

With so little exposure for the balance of 2008 and only a million square feet expiring 2009, we are in the enviable position of focusing on 2010 leasing opportunities. Our occupancy climbed by nearly 50 basis points during the quarter to 96.7%, and that's without the benefit of any leasing activity at 100 Park Avenue which houses our largest block of vacancy totaling 280,000 square feet. Given our early successes in leasing the mid and upper floors at 100 Park Avenue on the heels of a successful redevelopment, we have been patient with the leasing of remaining blocks in an attempt to find the right tenants at rents which are commensurate with this repositioned building.

Other remaining vacancy beyond the 100 Park tends to be scattered throughout the portfolio and we have again made some forward progress with our leasing in July, a typically slow summer month where we have already signed 82,000 square feet of leases. Highlighted in our press release are the five largest lease deals that we transacted in the quarter which notably excludes any financial service tenants. While this demonstrates the vibrancy and diversity of Manhattan space users it also foreshadows lower rents in the future due to lack of demand for Manhattan's largest business sector. While this softening is not evident in our year-to-date performance, we are still anticipating a 10% to 15% across the board drop in net effective rents as businesses continue to work they way through the current economic environment.

However, every quarter we put behind us eliminates more and more near-term role and potential exposure to increasing vacancies. Our primary focus is on moving space of 15,000 square feet and under where we are still seeing relatively good demand for built and available space. Fortunately, space falls within the smaller size, not generally compete with the sublet space being put on the market by the larger financial services companies which tend to be of much larger blocks. The companies that have either put sublease space into the market or indicated an intention to do to consists of Banc of America, Citigroup and JPMorgan Chase. Others, such as Lehman Brothers and UBS are rumored to be weighing their options but not made space available.

Last quarter I mentioned that financial services sublet space was between 2 and 3 million square feet. That number holds today with the exception of an additional potential 750,000 square feet coming from the nonfinancial service firm of Pfizer. However, a number of these sublet availabilities are in active discussions with tenants that may result in several blocks becoming notable signed transactions by year end. In total, the vacancy and availability rates stands at approximately 7.4% today, approximately 200 basis points above the lows achieved in 2007, but still decidedly a landlord's market. We will continue to monitor the sublet availabilities with you quarter to quarter and use this as our guide in directing our leasing strategies for our own portfolio.

We received a few questions this morning regarding SL Green's structured finance portfolio, so I would like to take a few minutes to discuss composition of that portfolio and how it fits in to our overall strategy. At June 30, SL Green structured finance balance stood at approximately $839 million. That balance is expected to grow modestly throughout the third quarter, topping out at approximately $900 million. Of that amount, approximately 77% of such loans are collateralized by mortgages or other interest many properties located in Manhattan. Of the non-New York City investments, approximately 25 million relates to loan positions inherited in the acquisition of Reckson in 2007 against which 2 million was reserved in Q2, the balance of the exposures related other investments generally originated in participation with Gramercy. Accordingly, the vast majority of these loans are secured by commercial office properties located in mid town Manhattan which have aggregate last dollar exposure per square foot of $355 and generate a current yield of approximately 9.6%. The loan secured by Manhattan office properties represents the majority of our outstandings and are seasoned loans made in connection with 13.2 million square feet of Manhattan office properties.

As I mentioned earlier, the loan exposure is only $355 per square foot. As such, we view the likelihood of collectibility is high. However, in the event of a protracted downturn, some of these investments would represent proprietary future pipeline for the company. Recall that back in the late 90s and early 2000, SL Green benefited through its structured finance program by converting to equity ownership 1250 Broadway, 521 5th Avenue, 609 5th Avenue and the news building at 220 East 42nd Street. We continue to view that this program has the double edged advantage for our shareholders of high current yield with potential for future opportunities dependant on prevailing market conditions. This program has been enormously profitable at Green over the years. Two of the three non-accrual loans that green has on its books relate to investments inherited through the Reckson transaction, one of which is a $27 or $28 million mesonine loan on a Manhattan office property that has a last dollar exposure of $618 per square foot. That is a core midtown avenue Manhattan property Class A. We believe we are properly reserved given current market conditions.

Before turning the call over the Andrew Mathias, I would like to discuss SL Green's investment in Gramercy capital corp. As you recall Sl green owns 16% of Gramercy and is the external manager. On a earnings call last week, Gramercy issued downed revised earnings guidance as a result primarily of non-performing loans and loan loss provisioning taken predominantly in connection with certain of its non-New York exposures. We see the effects of a deteriorating credit market in several sub markets around the country and know that for the next 12 to 18 months Gramercy will be very focused on asset managing its investments to mitigate the effects of the market as much as possible and taking advantage of new opportunities on a selected basis. While Gramercy has been strong earnings contributor since its inception four years ago, we are expecting earnings contribution from Gramercy going forward to be much more muted than in the past and have adjusted our projections accordingly. Further, as are result of the closing of the AFR transaction, both companies, Gramercy and SL Green, have established independent committees which are contemplating a possible internalization of the GKK manager or a modification of the existing management agreement.

As I stated on last week's call, we are considering internalization because to have management in house is consistent with the progression of GKK. Both companies have committees made up of independent directors looking at this. No decisions have been made yet to proceed. Anything that does happen would obviously have to be acceptable two both parties. If the committee determines not to internalize at this time, then it's possible with 18 months remaining the management agreement would be modified and extended.

I would just also like to add that on the heels of the AFR merger, the infrastructure within Gramercy has expanded to a size both in terms of people resources, in terms of systems and IT that, along with additional strategic hires that we made such as John Roche, who is Gramercy's new CFO, Michael Berman who is head of Gramercy's leasing and asset management, we made great strides in being able to make this consideration for internalization at this time. But, as I said, whether we do that now or the committee determines to do that in the future, we think Gramercy has the right infrastructure in place to carry it through for the foreseeable future to take advantage of this market with its existing liquidity base. With that I would like to turn the call over to Andrew Mathias.

Thanks, Marc. Transaction volume in the market continues to slow with fewer assets changing hands due to the stand off between buyers and sellers. With sellers still achieving their leasing targets, they are just less inclined to part with assets and anything other than prices that reflect continued roll to market potential of their rents, i.e. lower cap rates. Foreign interest in Manhattan assets has remained strong with overseas money playing a role in most of the major transactions announced this quarter including GM, Chrysler and 13016. Each of those sales also featured in place or seller financing which continues to be a major consideration for the universe of buyers out there. When class B assets have traded, prices have softened modestly with prevailing cap rates seemingly in the 5% to 5.5% range. Unclear if this is a trend that will carry over to A assets or if this just represents the market returning to its historical number of wider B cap rates. Either way it was the convergence of B&A cap rates that was the thesis of our aggressive class B sales program over the last 18 months taking advantage of these historically low cap rates in B assets.

To this end, second quarter investment activity was highlighted by the continuation of our sales program. In May we closed on the previously announced sale of 1250 Broadway, triggering a large gain in incentive fee and reverse 1031ing all proceeds of that sale on a tax freebases in to 388, 390 Greenwich. In July entered in to a non-contingent to sell our remaining 15% interest in 1372 Broadway. Recall that in lieu of selling 100% of the asset last summer, we accepted an offer from Wachovia to purchase 85% of the equity interest in the property. Wachovia elected to discontinue its equity program recently and we were able to quickly arrange a sale of the the property at continued very attractive valuation metrics, namely a 4.25% cap rate and about $514 per square foot at the $294 million purchase price for the asset. This sale was clearly helped by some very attractive assumable financing we put in place at the time of the recapitalization last year.

On the acquisition front, in June we completed our consolidation of the fee interest in 919 Third Avenue. Recalled this building acquired as part of the Reckson acquisition is owned in a 50/50 joint venture with NYSTERS. Our investment team, lead by Brett Hershenfeld, was able to privately negotiate the consolidation of disparate interest in two separate transactions greatly improving our ownership structure. We clearly took advantage of the complexity of this structure and the off market nature of the transaction as based on our projections in three years the cash yields to the positions we purchased at the basis we purchased them at will be over 10.5%.

We continue to be conservative with capital as we believe our best opportunities will be ahead of us. In the direct real estate side, we continue to mine off market highly structured opportunities where we made our best deals in the past. Broadly marketed headline transactions of this quarter just didn't meet our return expectations for our capital. We see additional pipeline through our robust book of existing structured finance positions, as Marc went through. We are being very selective about asset quality and sponsorship in the new structure finance originations and purely focusing on the Manhattan area as we believe our third quarter originations will show. With that, here is Greg to go through the numbers.

Great. Thanks, Andrew. The second quarter was once again highlighted by strong internal growth as we continue to benefit from the repositioning of our portfolio last year and capitalized on opportunities within our existing portfolio. Our balance sheet at quarter end reflects modest changes from 331. A couple other noteworthy changes are as follows, our land balances were up slightly principally as a result of the consolidation of the fee positions at 919 Third Avenue. Our structured finance investments were up approximately $65 million for two new investments, and our investment in joint ventures were down as a result of the sale of 1250 Broadway and the deconsolidation of a portion of the 388 Greenwich investment. During the quarter we were successful in modifying the structure of our partnership arrangement there which resulted in the entire investment being deconsolidated from our balance sheet. Previously, approximately $276 million of the debt associated with this investment was shown as a corporate obligation.

During the quarter we spent $13.9 million on redevelopment costs bringing the total year to date to $20.2 million. We continue to reinvest in our properties based upon the returns we achieved through the redevelopment of 485 Lexington and 100 Park Avenue. Major initiatives currently under way include the lobby renovations at 1350, 1185 and 810, 7th Avenues, the build out of the American Eagle space at 1551 Broadway, the build out of the [Geox] and [aldospaces] at 34th Street and most recently the commencement of our $160 million renovation at 1515 Broadway.

During the quarter we bought back $29.4 million of our stock at an average price of $85 as we continue to believe our stock represents an attractive investment opportunity. Our balance sheet continues to be strong and flexible. The sale of 1250 Broadway this quarter helped pay down our credit facilities which ended with $818 million of availability. This availability provides us with purchasing power in excess of $1billion. Our debt to total market capitalization on a combined basis finished the quarter at 57%; however, the actual leverage pursuant to our corporate covenants which values our assets higher than the market does, has us currently at approximately 50% leverage.

We expect to announce shortly the terms of our refinancing at 717 5th Avenue which represents our only remaining maturity this year. As we look out to 2009, we have only one scheduled maturity of note which is a $200 million unsecured bond obligation we assumed in connection with the Reckson transaction. As we have stated before, the company remains very financially flexible with over $3.8 billion of unincumbered assets. These assets are eminently financable even in a difficult credit environment, so we believe the balance sheet is sound and very liquid for any opportunity.

Turning to the P&L, it was obviously another very strong quarter which contributed to our exceeding first call guidance by $0.29. The highlight of the quarter was the $25 million incentive fee recognized on 1250 Broadway. This fee came in substantially ahead of the $15 million estimate we originally provided as the final cash waterfall benefited from certain escrow reserves which dropped right to the bottom line. Even when one excludes the $10 million additional incentive fee during the quarter, we were still substantially ahead of guidance thanks in large part to the strong operating activity of the portfolio.

As with the first quarter of this year, the operating results for once again strong. With over 400,000 square feet of leasing activity and a 53% mark to market we continue to benefit from strong leasing activity. The average rent of $65.89 during the quarter was the highest ever recorded by the company during any one quarter. Tenant concessions average $17.70 and free rent approximately two months which once again remained relatively modest. Our consolidating same-store NOI increased by approximately 9%. Note that our results were achieved notwithstanding $2 million of FAS 141 receivables which were written off in connection with the take back and releasing of a floor at 1185 6th Avenue. Additionally, the quirky accounting for 1372 resulted in the property operating expenses being $2 million higher than they otherwise would be to reflect the 85% joint venture participation in 1372. Excluding these two non-recurring items would have resulted in quarter over quarter combined NOI being sequentially higher rather than the slight decline reflected in our supplemental.

We expect the NOI to continue to grow over the balance of the year benefiting from strong leasing activity and commencement of income recognition on over 400,000 square feet of signed leases with an average rent of $63 a foot. With a more modest investment climate, our operations team has been able to redouble efforts on maximizing recoveries and generating incremental revenue opportunities. One final point to clarification as it relates to 1372 since the sale of our 15% partnership interest created some confusion. We expect to recognize again the sale of our remaining 15% interest of approximately $31 million, so with the sale of our 15% interest will not be as lucrative of our 85% interest which generated a $211 million gain there will still be sizable gain. Occupancy for the quarter finished at 96.7%m reflecting gains at 11856, 420 Lexington and 800 Third. As Marc mentioned, this occupancy level was achieved with 100 Park Avenue at just 67% occupancy.

461 5th Avenue and 810 7th Avenue also finished down for the quarter as a result of scheduled lease expirations. The space at 461 5th Avenue has already been released at very favorable terms which has given us a good head start on the third quarter. SL Green's share of FFO from Gramercy declined during the quarter and based upon the new guidance from Gramercy there is is a expectation that will continue over the balance of the year. The midpoint guidance of $0.50 per quarter provided on Gramercy's call would suggest that SL Green's share of Gramercy's FFO would be approximately $4 million per quarter for the balance of the year compared to the 5.1 million FFO contribution recognized during the second quarter.

The structured finance income for the quarter was $18.3 million. This amount is net of approximately $6 million of loan reserves which were taken during the quarter on four different loan positions. Other income for the quarter was up substantially and included $25 million incentive fee on 1250 Broadway, $4 million lease cancellation income, a $6.6 million acquisition advisory fee received from Gramercy, and $11.7 million of management fees from Gramercy. Based upon Gramercy's new guidance, we currently expect the incentive fees for the balance of the year to be modest, if any at all.

MG&A for the quarter was up $5 million. This increase is principally attributable to $3 million of incremental personnel cost at the GKK manager for AFR related personnel as well as a $2 million one-time expense associated with the pursuit of a redevelopment project. Consolidated interest was down approximately $5 million, reflecting lower LIBOR rates and coupled with average balance on our credit facilities. With $3.44 FFO per share half way through the year, we naturally feel good about our ability to meet the high end of our currently established guidance. This would represent 8.1% increase over 2007, a year in which we grew FFO per share by over 25%.

As I mentioned, we expect to see a reduction in FFO contributions from Gramercy for the balance of the year and this will also translate in to substantial reductions in the incentive fees received from them. This could reduce FFO per share by up to $0.06 per quarter. As a result, at this point in time we are not increasing our guidance. We may also look to sell certain assets during the second half of the year to redeploy these monies in to higher growth opportunities. Such transactions could be temporarily dilutive depending on sales prices achieved and the timing and nature and redeployment of these monies. Additionally, inflationary concerns may send rates higher which could result in higher interest expense over the balance of the year on our $1.5 million of floating rate date. While we are disappointed by the expected declines in contributions from GKK, we are pleased that it's being offset in part by the strong performance of our core operations, a trend which we expect will continue given the size of mark to market which is still embedded in our portfolio. With that, I would like to turn it back to Marc for some closing comments.

Okay. Thanks, Greg. From what you've heard, today, before we get to questions, I certainly believe we are taking the appropriate steps in response to the current environment and the expectation for significant opportunities down the road. These steps consist of mitigating leasing exposure and maximizing mark to market of rents by actively pursuing early renewals of near-term lease maturities, continuing to sell interest and non-core properties like 1250 Broadway and the remainder of 1372 Broadway, new structured finance investments, and the continuation of stored liquidity and capacity for what may be substantial opportunities down the road. Implementing the strategy in the current environment is very challenging but, as you heard, we are making headway on many fronts, notwithstanding a very tough economic climate. With that, we would like to end up the call to questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Chris Haley with Wachovia. Please proceed.

Good afternoon. Impressive congratulations on the results and I'm also encouraged to hear the commentary regarding Gramercy and the internalization potential. I wanted to know if you could find a little bit of color on some of the considerations in the timing of those considerations and how you expect to communicate those to us over the next 6 to 12 months, so specifically could you comment on overhead levels or the expense levels at SL Green that would be potentially duplicative or could be say to a management agreement change, if you can? And also how you think about the time allocation of the SL Green executives to the Gramercy to the effort of the challenges in the specialty finance market, how that might impact or be alleviated to the parent SL Green as I call it.

Okay. Let's sort of break that down to a couple of responses, Chris. Your last question which was time considerations, obviously I think throughout the four years we've had, the four-year run we had at Gramercy and Green, we have been able to devote sufficient time to both platforms and I think that there is a expectation if there an internalization or otherwise a restructuring of the management agreement, there would be some continuity of the senior management people at SL Green working to transition ultimate full independence of Gramercy over a period of time so there is no notion of what I would call a change in that MO but clearly set up a path towards a ultimate independence pursuant to a time frame that everybody was on board with.

So that, again, is in its very stages of discussion, but that's certainly one of the items being discussed but I think that in terms of alleviation of time, the closing of AFR and the hiring of substantial number of people to support the realty exercise, the asset management exercise which are full-time Gramercy people, I mentioned earlier John Roche and Michael Berman, you know about [Foley], one of the founding members and continues to be full-time partner with John, we have guys like Mike [Cavoria], [Shawn Townsend], Jim Gregory and [Joe Romano] and I'm going to forget to mention a couple of others, but these are all very senior members of the team, [John Clark], [Chris Barone] on the AFR side along with Ed [Maty] who is general council of real estate and [Allen Rothchild] brought in to do transactions, the list goes on and on. Point is all these people are kind of SVP level and up full-time Gramercy people that many of which didn't exist before AFR and, therefore, now give us the ability to seriously consider this. As to your other part of your question as it relates to just the economics of what Green could save by shifting out resources, I think we could answer that. In terms of what Gramercy could incur going forward, that's really up to Gramercy. I don't think we would be in a position to respond to that.

If you look at the metrics, we took in for the quarter $11.7 million of fees included the 2.6 which probably goes down from there, you can see in the manager's statement that we provide you, there is $7 million of G&A expense related directly to GKK and probably another million dollars of shared costs that would be transferred over. So the quarterly metrics are probably $12 million of revenues and $8 million of expenses. A run rate of $16 million bottom line, but that number may be diminishing, as I mentioned, over the balance. That is the current quarterly metrics.

Thank you

Your next question comes from the line of Anthony Paolone with JPMorgan. Please proceed.

Thank you. First question, Andrew you mentioned potential for some of the structured book investments to become opportunities. When do you think we might start to see those and can you give us any property level details on some of the bigger exposures?

It is tough to tell when they mature. We have, as Marc went through, we have a long track record of doing it and it is sort of taking a lot of different forms, but generally because of familiarity with these properties, when they go to market or when there is a situation, we're ownerships first call and we are able to do something privately and off market. That was the case certainly with some of these examples Marc went through earlier. We do have positions in quite a number of buildings around the city and are constantly monitoring those positions, monitoring asset level performance and the ownership's current feelings to see when might be a good time to consolidate assets in.

You think it's something that we might see by the end of this year?

Probably relatively unlikely. I think when the most would be when the senior financing matures. And most of those maturities are '09, '010, '011 and after. A good deal of our positions are fixed rate positions with longer term maturities. We did -- in sort of in advance of falling LIBOR did lock up a bunch of the positions with fixed rates and generally the fixed rate positions have longer maturities, even into '014, '015, '016, '017.

Okay. Then just my other question on GKK. If you all stepped back and just looked at how much you invested in GKK's common and then just compare it with cash back to SLG with respect to fees, dividends and given the current stock prices at $6, any sense to what the IRR on the whole thing has been at this point for SLG?

Yes. We could get you the exact number that is bouncing around, but we have done it and if you take all the net fees that we received, the dividends, the IRR, if you were to liquidate your stock position at today's price, it would be north of the 20% IRR.

Okay. Great, thanks.

Your next question comes from the line of Jay Habermann with Goldman Sachs. Please proceed.

Good afternoon. You guys talked about dispositions possibly coming in the back half of the year. Can you give us a sense of the dollar magnitude and will this continue to be suburban assets or are you looking at some of your midtown assets as well?

I think we are focused on both some suburban assets probably of the near term priorities, probably in the order of magnitude 100 million or so. Then also probably in the back half of the year looking at sort of where the market is and New York City assets, sort of judging where we think where we see value, where we see good leasing upside and whether more properties should go. 1372 was sort of the end of a long string of dispositions totaling more than $2.5 billion. We are taking a bit of a breather now in New York City sales.

Okay. Then back to Marc's comments along the lines of the 10% to 15% decline in net effective rents, how far along in that process do you think we are, and then a second part to that question, do you think we are going to see more subletting of space by non-financial services tenants?

Well, I would say rents have held up pretty well so far. Other than for the biggest of blocks where most landlords really haven't begun to discount their rents with the belief that since there is so little new inventory scheduled to come online in midtown, almost none except for really one project, that whatever dislocation there will be, there won't necessarily be a need to discount those block rents. So we've only got one such block like that. That's at 100 Park. I mentioned that. We have been fairly patient as have others, but for all the other space certainly in our portfolio in the leases we see getting done around town, the rents have held up strong, I think you see this that in our results. As it relates to will there be more sublet space, I think we can say certainly will be. Nonfinancial tenants as well as financial tenants, we would think certainly. So I wouldn't assume that we are going to be sitting at this 7.25%, 7.5% vacancy rate. If we were, you would still see rising rents because that's still a landlord's market. You have to assume that at a minimum we are going to drift back towards equilibrium and we're projecting a little past equilibrium where rents or net effectives would be down 10% to 15%. That could be as high as 9% or greater with the additional sublet space that may come.

Do you have any updates on the [Vicom] lease and the progress there for 2010?

We gave an update on the last call and no updates since then. They have renewal options as I believe people know certainly we discussed the five-year renewal option that they have. We would expect they will be exercising. That really isn't something that st going to be addressed by them or by us until much later in this year or next year. At this point there is no update.

Next question comes from the line of Michael Knott with Green Tree Advisors.

Can you comment on the economics of the gross leasing spread? Is there a trade off with the old base years rolling off in terms of the net NOI impact?

The mark to market quoted to you is 53% we realized during the quarter is -- take that into consideration because we are using the fully escalated in place rent as the jumping off point for measuring that.

Okay.

Mike, does that answer your question?

That's on a gross basis, right?

The replacement rent is a new gross rent with a today base year, but when we measure that gross rent as against the expiring old rent, we do it off the fully escalated base plus expenses. So it is an apples-to-apples comparison of that differential drops to the bottom line. Right?

Okay. Thanks. Then --

Drops to the bottom line. I add one other thing to that, maybe mentioned it on prior calls that mark to market does not include just by convention that we use remeasurement. Steve Durels is here and I would say that on most of these deals you're getting remeasurement upticks on top of that.

Yes. Without a doubt. Majority of deals that we do, we -- it's a market driven number but we have taken the most aggressive stance on the remeasurement of space and for those who don't know the concept is Manhattan real estate a percentage of tenants rentable area is dedicated to a share of the common area of the building and it is defined as a loss factor. The amount of loss factor is specific to buildings but also influenced by the market and there is a lot of our product that we've bought over the years and that is rolling off that has loss factors as low as 15% to 18%, and traditionally gets remeasured recently in the 25% to 27% loss factor, which the consequence of that is a bigger annual rent that the tenant's paying as a reflection of artificial remeasurement of the space.

Okay, my second question is on Gramercy. Obviously the market seems to have some concern about Gramercy being a growing concern. Can you talk about a summary liquidity position for the company? I know you had a call last week, but can you give us summary 30,000-foot point of view on the liquidity, would Green step up to provide liquidity if that were needed? Could you talk about that dynamic a little bit?

Michael, on this one I'm going to regretfully punt on this because it's a -- it can't be done, it's not a short conversation. W did an hour and a half call on Thursday going through everything from liquidity, balance sheet, opportunities, loan portfolio dividends, earnings, it's pretty fully detailed. The question as to is Green going to inject liquidity, I think that might have been asked on the Gramercy call. We're a shareholder and we will do always as an investor what any investor would do in the best interest of investments. We have in the past participated in equity offerings when there was a offering. We have not done anything traditionally unusual in terms of injecting liquidity. I think you should look at us as you would at any shareholder making a decision on any incremental exposure on Gramercy as would a third party investor, the management agreement stands on its own. The investment in Gramercy stands on its own. Right now Gramercy is raising capital, not via equity but via sales of AFR real estate which was programmed sales and syndication of loan assets that it had been doing since June of last year and continues to do. Repayments both within and outside of its CDO that it's not reinvesting in new originations and that's by design as well, and other things to raise liquidity including reevaluating its dividend which it stated on the last call. All of those things go towards an effort to enhance the balance sheet and put it in a position to take advantage of a pretty fertile environment to do new loans and make investments on the AFR side, but predominantly new loans and high-grade CMBS, that's the strategy it's embarked.

Thank you.

Your next question comes from the line of Michael Bilerman of Citi. Please proceed.

Good afternoon. For Marc or for Greg, as you think about the trajectory of growth in earnings going forward, you obviously have the embedded mark and market in the core which continues to be strong. How do you deal with the head winds of potentially the net 16 million of fees that you are receiving from Gramercy potentially going away, dealing with getting over the $25 million promote that you got this year, you have 200 million of structured finance investments rolling next year as well. I'm just trying to piece together how your growth moves forward.

I think the biggest piece that you're going to point to is the property NOI and the same-store numbers, I reference close to 400,000 square feet of space. It's already been signed up at a average rent of $63 which you haven't seen make its way in to our NOI numbers yet because we have to finish TI work before income recognition commences. We also have this 285,000 square feet of vacant space over at 100 Park Avenue which represents tremendous opportunity.

If you look at just that universe itself, that stands on a run rate basis to add $0.40 to $0.50 per share of FFO on top of what you're existing run rate is, so that's going a long, long way towards replacing those fees. Again, we are sitting on over a billion dollars worth of investment powder to do new external investment opportunities, We talked in December, we talked on the last call as well about new structured finance investments which will more than likely replace whatever it is that's rolling off or very attractively priced and when you're funding those with LIBOR plus 100 money or 3.5% money it's obviously very, very accretive to do those type of investments. I think core NOI at the end of the day and future external opportunities will more than serve to offset the diminution and some of the fees that we might see.

You would almost expect the composition FFO even if the growth rate may decelerate if you're not able to overcome all the lost fees and other promote income the composition of your FFO will be weighted towards property operations?

Yes. I think you're seeing that, I think you're seeing that already. If you compare kind of this year to last year.

Then do you have any other incentive fees booked or expected to come in your guidance for the back half of the year?

Probably not. The $25 million is roughly, a little bit higher than guided at year end. I think we said around 20 from non-Gramercy related items. If you think you may see half a million -- excuse me, 5 million of incentive fees roll off from Gramercy, you may see us harvest one or two other small ones but more than likely the existing guidance realized just on the incentive fee from 1250.

Greg, it's (inaudible) here. I'm just curious, the redevelopment write off that you reported in the quarter, what project was that related to?

Principally related to the [acquiduct raceway] bid that we have been pursuing where the outcome is, we are waiting to hear. We took the opportunity to just expense it during the quarter until we hear firmly where that bid ends up.

Thank you.

Next question comes from the line of Jamie Feldman with UBS. Please proceed.

Great. Thank you very much. Marc, you mentioned that you given there is a lot of sublease space in the market but there are tenants looking. Can you give us color on what is going on in the market and who may be filling that space and how many users are looking at each space? You said there would be sublease coming out. How bad you think it might get?

On the question of what kind of activity is out there as it relates to space, I don't like to talk about other people's deals which are rumored or for whatever reason, so I think we can generically describe to you what we see happening on the bigger block of space, I'm going to let Steve Durels take that.

There has been a number of tenants that have been in market for about 6 or 12 months looking for big blocks of space because of the limited supply of not finding homes for themselves. The names that are familiar to people from the headlines that in publications that are -- we have seen them come through our door and inquire about availability. NBC is out there looking at space. There are a couple big law firms looking at space. [Paul Wise] or [Harrington], a couple of investment banks looking for space, Deutsche Bank is reportedly on a deal but they've been floating around. HSBC has made the headlines today about a big block of space. They are apparently zeroed in downtown. There is business goes on and there is a lot of activity out there. Most of these are driven by tenants who have lease expirations or a need to consolidate. Some of the law firms are driven by growth. The recent deals that you seen signed by ad firms were lease expirations and some growth. But most of them are generally not growth driven, it's more people that deal with expirations or strategic reasons.

All right. As to how much do we think the sublet will get to, I think that's a hard question to answer. We are just monitoring it and looking both at what is out there and then what sort of rumored to be out there beyond that. It's easier said than done because by the time they restack and reorganize and the space actually available, often you're at the beginning of a different business cycle and things change. Space comes rumored on, comes rumored off, it changes. It's never linear, but I think we do expect there to be at least several million feet of addition of sublet space from institutions we haven't named yet. But that's offset by some level of absorption you're going to see by the kinds of deals that Steve Durels was talking about, whether it's relocation, expansion, new requirements. That's not a net number, that's a gross number which will be netted down to incremental addition. So that's what we look at when we derive our estimate of our moderate reduction in rents off of their highs. That's something that will have to be monitored quarter to quarter.

It's also worth noting that most of the space, and Marc said it earlier, that's coming on the market are big blocks of space. You seen in a lot of the stats lately where there is a divergence where supply has increased but rents have also increased which you would have thought it would be the opposite. That's driven largely by the fact that it's big chunks of high end expensive space coming onto the market that's moving everybody's statistics. The good news is there has been a pent up demand from guys that haven't been able to fine homes for themselves. This is going to create a opportunity to satisfy that need and specifically to our portfolio, a lot of this space is not directly competitive because of either location or size or price point, so a lot of what we are dealing with today in the portfolio by the vacancy or when I look forward to the '09 schedule and even to '010, we are chipping away at it more at the sort of small mid size blocks, that's what we got rolling off. We have locked away a lot of our big spaces already.

Okay. Thank you very much.

Your next question comes from the line of Lou Taylor with Deutsche Bank. Please proceed.

Thanks. Good afternoon. Marc, just somewhat of a hypothetical question. We don't have a lot of comps here when a advisor like you or when there is an internalization of management like between GKK and SLG and the last time we saw one of these things there was a payment to the advisor. If that were to occur again, do you have any preference whether that payment would be in cash or in GKK stock?

Well, I think that there are a number of comps out there that the committees are looking at, I think more often than not it's in equity or equity-linked securities account for the bulk of the consideration or in some cases all the consideration. So I think preference aside, that certainly seems to be the norm and I think even here so where we have a board presence, we have a substantial pre-existing investment in the company, there would still be an alignment of interest and, as I said, interim continuity of management no matter what we do. I think it would err towards equity, equity-linked securities. I just want to caveat it's really going to be hashed out at the independence level on both sides and I guess they will have to balance all sorts of different factors such as price consideration, accretion dilution and the rest to come to the right balance if they can. That's one path not a restructuring of the agreement is also definitely being looked at.

All right. Any sense on when that review will conclude?

I would expect by the next quarter by next conference call we would have more light to shed on it. Whether it's concluded or not, I can't tell you. I think certainly there will be a lot more lightened direction on where that particular issue is headed by the next call.

Great. Thank you.

Next question comes from the line of Mitch Germain with Banc of America. Please proceed.

Andrew, is the 1372 sale widely marketed?

It was conducted through a broker, it was not widely marketed. They made calls mostly to people who had been interested in the building last summer and were able to reengage with one party. I think Wachovia felt comfortable that they had seen enough bids and enough interest that they felt comfortable transacting at the $294 million level. We certainly advised them that based on market conditions, that 4.25 cap was an attractive level to transact.

Great. Steve can you just talk about the interest in the large block at 100 Park, I guess today relative to where we were six months ago maybe?

It's a tougher struggle today's because it's raw space for the big block. But we had a lot of you guys coming through and we had some very advanced discussions. We're feeling pretty good about our prospects of one large deal in particular. We've got, on the smaller pieces upstairs where we are looking at single floors in the tower, that stuff has still gotten huge demand. We got active negotiations at big rents upstairs right now and I'm pretty hopeful we are going to have good news in the near term.

Thanks.

Your next question comes from the line of John Guinee with Stifel. Please proceed.

I love you guys but as a fiduciary to the shareholders I have got to ask you to walk through the proxy which came out between these two calls.

Question, John?

Whatever comments you want to make on it.

On which proxy? On the -- on the -- on the AFR merger proxy or on the --

SL Green proxy.

Which particular area would you like me to comment on?

Compensation.

I think the compensation was based on all the factors that we laid out last year, we had a reasonably good year, we thought on the compensation committee level, board level, evidenced by record FFO, big increase in FFO, dividend increase, $2 billion of sales, three- and five-year performance that was market leading at the time and I think it's still among where the market leading performance today. So all of that goes in to the level of comp that was done for the year.

Good, thank you.

Your next question comes from the line of Jordan Sadler with KeyBanc Capital Markets, please proceed.

Thanks. Good afternoon. Andrew, could you give us maybe talk about the character, the structured finance opportunities in the pipeline you mentioned maybe in terms of sponsorship or structure and maybe pricing?

Sure, I think it's a fairly target-rich environment because there is a lack of providers of this type of capital out there in the market and, as I said in my prepared remarks, we have been fairly conservative in terms of not going out there and doing a lot of deals because we want to continue to see how the market evolves and make sure our capital is being priced as advantageously for us as possible. There has been a bunch of high-profile transactions done, and most of them have featured some mesonine capital, it's just -- it hasn't been the pricing in a lot of cases not been attractive enough for us. The situations we found we think the risk reward is there. We have gone after them aggressively. We have one sort of large transaction lined up for the third quarter which will be able to give more detail on in the next call.

That one is already closed?

Yes.

Okay. And pricing relative to the spreads on the existing portfolio.

Pretty materially higher. I would say our existing book Marc said at a 9.5% return, I would say most of the opportunities we are looking at today are more in the low to mid to upper teens range depending on the opportunities.

Then just moving over to the existing portfolio. Any new additions to the watch list, any delinquencies to note? I know you took some reserves, I think that might have been on some properties you previously talked about. Anything new coming up?

We have three non-accrual loans. And I mean in terms of -- two of those three are non-New York loans. That sort of eats into some of the non-New York loans. Everything that's in the New York bucket or New York commercial bucket for sure. We don't see anything upcoming. I think the non-New York stuff, it's relatively small by amount. I think it's probably under $3 a share in terms of amount, but that's going to require high scrutiny because as we have come to see, everything that's in markets that are less liquid than here in Manhattan, the assets may be fine but there is no refinancabilities, no credit out there, so these have to be watched carefully. Nothing in particular we could point to and say as something that we think may become a problem if it were I think we would already have it non-accrued or on the watch list. I would say non-New York exposure is what we are watching specifically.

Non-New York is a percent of that 840 you said was how much?

Under 20%.

Lastly for Greg, is it safe to say that you've not factored the termination of a GKK manager, as management contract in to guidance whatsoever, is there any way you can give us rough around the edges guidance as to what the impact might be from an earnings perspective?

I think we walked through the metrics of what is contributing currently which is kind of call it away from our stock investment 12 million of fees, 8 million of expense, 4 million of bottom lines, so call it $16 million of net fees, and so the guidance does not factor in any termination and I think it will be premature until we hear how the independent committees come back in terms of how they are thinking about the value of that fee stream and what form the consideration would take and when specifically the consideration might be earned. I think wild cards I wouldn't want to venture or guess at this point other than to say it's definitely not included in our guidance.

Your annual net fees you've got at about 16 million?

Kind of a current one rate basis over the second quarter.

Okay. Thank you.

Is that it, operator?

Yes, at this time, you do not have anymore questions. I like to turn the call back to you for closing remarks.

I just want to clarify one thing I said earlier which someone has looked in to and slipped me a note. The mark to market calculation does include the remeasurement, so the bulk of that mark to market 53% is the gross number if we do grow the space that is included in that front number also which is again apples-to-apples because it's all rental revenue deferential, it drops the bottom line. I wanted to clarify that one piece. With that, appreciate everyone dialing in today and look forward to speaking to you all after the summer. Thank you.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Good day.