SL Green Realty Corp (SLG) 2008 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 2008 earnings results conference call. This conference call is being recorded. At this time, the Company would like to remind the listeners 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 differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found in the Company's web site 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 those of you participating in the Q&A portion of the call to please limit your questions to two per person. Thank you. Go ahead, Mr. Holliday.

Okay. Thank you for joining us today. Greg and I will take you through the highlights for the fourth quarter, and particularly in light of today's challenging economic challenges, I was quite satisfied with our quarterly results. It was a mixture of strong operating performance with one-time gains, as offset against some disappointing but not unanticipated write-downs. Later in the call, Greg will take you through the earnings release and hopefully be able to make sense of all of the ins and outs of the quarter. And at the end, hopefully you also will conclude that the platform really evidenced its strength in the fourth quarter by outperforming what we had anticipated in terms of results in our core portfolio in the Manhattan commercial office properties.

Many of the highlights and achievements in the fourth quarter were foreshadowed at our December investor meeting which we held in the first week of December. And, I'm pleased to report that in under two months since that conference, we are well on our way to meeting or exceeding many of the objectives we set forth that day. Looking at the Manhattan leasing fundamentals which drives a significant portion of what we have to talk about today, we were able to increase occupancy by 20 basis points to almost 97% which is a great jumping off point as we enter 2009. Most notable during the quarter, we renewed Viacom at 1515 Broadway, ensuring that that building's continuing stability will be in place at least through 2015. This took a significant risk item off the table, and it's a great example how we were able to capitalize on meeting the market with a net effective deal netting down all the capital that worked for us, worked for the tenant, and that we were able to do uniquely because of our low basis in that particular asset, low-cost basis. That's a low-cost basis that we have universally throughout the portfolio that will benefit us and enable us to lease where others in the city can't or are going to have to defer to their lenders in making important leasing decisions like the one we were able to make quickly and adeptly at 1515 Broadway.

Outside of that lease, we maintained a positive mark-to-market in Q4 averaging 65% plus or minus mark-to-market. Obviously, far in excess of what we would have expected or forecasted, but again, an example of how the portfolio has an extraordinary amount of embedded growth in rents that were done in the late '90s -- early, mid-to-late '90s -- and are now maturing in late 2000. And, we are experiencing big mark-to-market, notwithstanding the rents in this market have been falling throughout 2008. Even this morning's announcement of Wells Fargo taking a full floor at 100 Park Avenue -- a base floor, 44,000 square feet -- at a mark-to-market of around 47%, which is the result primarily of an extraordinarily successful repositioning effort that took what was an unrenovated Class B building in a great location at 100 Park and renovated it to BOMA Building of the Year for renovated building standard. And enabled us to land Wells Fargo as a great new addition to our portfolio. And that deal comes on the heels of another significant transaction we did in 2008. Previously announced, the [PDO] lease. So that project is well on its way to paying dividends on the redevelopment program notwithstanding the economic climate.

Clearly, this is a market where we are relooking at the ways we lease and do business with tenants. We are more cautious today. We have increased our security deposit requirements for tenants that are less than obviously creditworthy, and this is something that we have done in other bad markets. It's paid off for us. It's kept our credit losses to a minimum in good and bad markets. We are also doing more net effective deals where we put out less capital and pay less commission on slightly lower rents, but rents that still provide for uptick relative to prior escalated rents.

Where we feel the need to do prebuilts to get velocity in leasing certain buildings where we had space that has not moved, we are doing prebuilts. It's an effective program for us in a down market. It's what leases, and notably, we are saving as much as 20% to 25% on our construction costs of these prebuilts. So as rents are falling, we are still able to make economic leases with this prebuilt space.

The market, however, is certainly feeling the pressure of job losses, financial services contraction, sublet space, and a limited but growing number of business failures. We can't help but expect that vacancy rate in Midtown is going to rise beyond where we had originally forecasted, those vacancy rates to be at around 10% to 12%. At the moment, those rates seem to be at around 8% to 9% vacant currently. Maybe even 10% if you take into account whatever space we think will be coming available directly or indirectly online in 2009. And we think that that vacancy rate could easily now hit 12% or more over the next 24 months. So, there are predictions that are all over the place. Some think 10 %, some think low to mid-teens. I think we are firmly in the middle of that because not all space that is rumored to come will come, and you always discount the positives that will inevitably occur in a market like this.

An example where a company buys an out of state company, that could result in backfilling of space in the market that was previously garnered for sublet. Alternatively, I think we have to see what the full effect of the Obama stimulus package will be for New York City. Where I believe New York will be a well-represented recipient of the stimulus monies in order to get some of the bigger infrastructure projects back off the ground and working again, whereas they had stalled in prior years.

Notwithstanding these market challenges, we do expect to lease in excess of 1 million square feet of new and renewal space in 2009 with a high degree of emphasis on renewal spaces. The credit loss is something that we will look at closely until 2009. While we do believe that having the well-leased portfolio, fortress properties, repositioned properties to good credit worthy tenants is what will protect us. We can't discount the impact that we could see of business failures and-or bankruptcies. Traditionally, our credit loss has been very low, half a percentage point in 1998 and 2002. And right now, stands at just 14 basis points. 0.14%. But, there was notable increase in delinquencies and bankruptcy filings in the fourth quarter continuing into January, and I think that we have to expect that one of the risks we will have to guard against and be very proactive on is monitoring our tenants carefully. Making deals where appropriate, not making deals where appropriate and looking to switch out tenants early who we think will pose the greatest risks for the portfolio.

Speaking of the portfolio, I think it was not by chance that you saw the results, the very positive core results that you saw in the fourth quarter going into this downturn, I just want to remind you that we took several steps to fortify the real estate portfolio. First, we sold over a dozen properties amounting to $2.5 billion of gross product sold. These were typically properties believed to be the most exposed in a recessionary environment that we are currently experiencing. Second, we advanced leased 1.6 million square feet of space that would have otherwise expired in 2009 and 2010. As a result, only 800,000 square feet will role in 2009, much of which we expect to renew. Third, we redeveloped and repositioned buildings throughout the peak market such that our inventory will be highly competitive in a down market. Over the past five years, inclusive of 2009, we have done or are doing significant renovations at fifteen properties totaling more than $350 million in the aggregate. When tenants have an ability to make choices, this level of property improvement and renovation weighs heavily in those decisions as well as the rent at both of which have we are well-positioned to take advantage of.

Lastly, we made substantial balance sheet improvements in our operations such that tenants when surveyed consistently ranked SL Green's performance as excellent and well above industry and local benchmarks. That is the culmination of portfolio-wide efforts over the last five to six years that have taken place and have enabled us to increase our retention ratios, increase referral rates, and garner new tenants. More than our fair share in a market like this.

Turning our attention to structured finance, you can see that given the lack of liquidity in the market, we worked hard in the fourth quarter to sell $100 million of structured finance positions at attractive prices relative to our investment alternatives. These sales were mostly of New York City paper which still has a degree of liquidity contrary to opinion that New York has been hardest hit and lacks any liquidity. In fact, we are finding that SLG's non-New York investments are more impaired and suffer in markets without any meaningful liquidity which is why we recorded an $85 million charge predominantly against these types of non-New York investments. The cumulative effect of the sales and write downs was to reduce structured finance investment balances to under $750 million with more sales planned throughout the year. Notwithstanding these write-downs since inception, the structured finance program has been very profitable, generating in excess of $400 million of aggregate interest income through 2009 and has led to the acquisition of four Manhattan office properties comprising in excess of 2 million square feet.

One of the greatest challenges that we have faced during these frozen credit markets has been the management and transition of Gramercy Capital Corp. Throughout 2008, as GKK's loan book grew and the merger and integration with AFR was finalized, we have worked closely with the company to reduce G&A costs, resolve problem assets, and reorganize around a new management team that can take the reins over from SL Green on a fully, self-managed basis. The additions of Roger Cozzi as CEO and Tim O'Connor as President have been extraordinarily positive steps toward self-management no later than the end of this year. The special committees for both companies have agreed to approach Gramercy's banks to seek approval for an internalization that is deemed to be favorable for the long-term prospects for GKK, and the company is awaiting bank group consent. Recall that during the third quarter, SLG reduced its management fees to roughly cost, and in the fourth quarter SLG reimbursed GKK for incentive fees that had been accrued in 2008. All of these steps were undertaken to put GKK in the best position to succeed in increasing cash flow and improving its balance sheet position. In light of current market conditions, we decided to write down SLG's investment in GKK stock, and write off our investment in the manager. As GKK's largest investor, we have seen our stake rise and fall over the past five years, but we have concluded that after much effort, it was appropriate to take the write down in our investment with limited near-term market relief in site.

Turning away from the investment portfolio and toward things we can more easily control -- our cash flow. There are several areas where we took decisive steps to increase cash flow in the fourth quarter and continuing into 2009. First, we did a top-to-bottom review of our capital expenditures for 2009, and through a combination of mostly value engineering but also taking advantage of declining materials and labor prices, we were able to save significant dollars on our capital expenditure program projected for 2009. And, we are estimating that it will be $50 million or more below our 2008 program. These savings at first are very difficult to come by. I personally met with about 75 of the Company's contractors, professionals, subs sheet, at a meeting where we put on the table the Company's goals and objectives for achieving these savings and the result of that meeting was extraordinarily positive. People came back within days with ideas on how to achieve value engineering solutions. Some were just concessions that were put on the table in light of the fact that we work with these contractors during good times, and they are willing to work alongside with us in tough times. And, the result has been very positive to date, and I believe that those -- the fruits of those types of efforts will show themselves at the end of this year when we meet again to analyze the work done and the costs incurred.

Second, G&A, we made substantial balance sheet reduction in MG&A in 2008 with more reductions budgeted for 2009. Savings are the result of lower compensation levels, reduction in headcount, elimination of certain accounting expenses, and departmental savings achieved primarily through straightforward belt tightening. In 2009, we expect MG&A to be reduced by more than $5 million over 2008 and by $15 million off of its peak expense in 2007. These reductions are being achieved without any material reduction in assets under management. So, an already lean staff has been asked to operate even more efficiently, work harder, pick up more tasks, and I'm happy to say that Company-wide, people have risen to this calling and have kept up good spirits, good morale in this tough environment and has enabled us to make the reductions that I just reviewed with you.

Lastly, dividends. During the fourth quarter as you know, we made the difficult but we believe prudent decision to reduce our quarterly dividend. Simply put, we did this because we could and we believed we should and not because we had to. Note that our fourth quarter FFO and FAD easily covered the old dividend level. However in making this decision, we listened closely to our shareholders, who overwhelmingly held stated opinion that the cash flow would be better retained by the Company for a reduction of liabilities or new opportunistic investments than to simply be paid out to shareholders at the rate of 20% on current share price. Opinions may differ, but we ultimately agreed that the benefits of conserving cash in this economic environment outweighed the reasons against reducing the dividend. Merely the funding of the buyback of our own bonds at implicit returns north of 20% presented reason enough to take this action. The dividend reduction combined with the previously mentioned MG&A savings and capital expenditure reductions will produce significant incremental internally generated cash flow over the next several years which will be deployed in a manner to strengthen SLG's balance sheet, P&L, and maximize its stock price.

In summary, we demonstrated in the fourth quarter adherence to our strategy stated back in December. Maximize the core Manhattan portfolio, liquidate structured finance in non-core positions, increase cash flow with the Company, reduce near-term recourse maturities, and build a war chest for opportunities in the coming years. Over time, we are confident that these steps will be well rewarded and that taking these early and decisive actions will result in the best for the Company, shareholders, and stock price. With that I'd like to turn it over to Greg Hughes to take you through in detail the quarterly results.

Great. Thanks, Marc, and good afternoon everybody. I am going to actually reverse the order of the financial review this go-around and start with the P&L which receives little focus these days, and then finish up with the balance sheet and the liquidity position which is what everybody wants to talk about. The operating results for the quarter were solid as Marc mentioned. The combined same store NOI for the portfolio was up 4.2%. If you exclude roughly $7.4 million of accounts receivable reserves that were recorded during the quarter, the same store NOI growth would have been up 7.9%. That $7.4 million is a reflected as a reduction in property revenues and is the reason you're seeing a decline in property NOI this quarter versus last quarter. At this point in time, we do not expect that those will be recurring quarterly reductions in 2009, and I should note that they do relate to multiple properties. I should also take the opportunity to point out that Citigroup, our largest tenant and the subject of much inquiry, is expected to contribute roughly 13% of our property operating income during 2009.

As Marc mentioned, a strong leasing quarter highlighted by Viacom and the 249,000 square feet of additional leasing where we realized a mark-to-market of over 65%. You will note from our lease expiration table that our quarterly review of market rents has reduced the embedded mark-to-market in our portfolio to approximately 21% on a combined basis. While down significantly from 40% in Q2 of 2007, we believe that an average in-place rent of approximately $53.59 per foot, that there is still rental growth to be achieved within the portfolio. Today's announcement of the full floor deal at 100 Park with a 47% mark-to-market puts us well on our way to achieving our 2009 goal of 10% mark-to-market. Perhaps even more important from a review of this schedule is the fact that as we head into an economic downturn just 14% of our Manhattan portfolio is scheduled to turn over during the next three years. This is a testament to the proactive leasing efforts we have set forth during the last 24 months.

Our structured finance income for the quarter was $42 million which included roughly $9 million of gains on the disposition of selected assets as well as $7 million from the resolution of our RSVP investment. Other income for the quarter was $9 million which consisted principally of recurring JV leasing commissions and asset management fees. During the quarter, we repatriated $5.1 million incentive fees earned from Gramercy earned during the first six months of 2008 which served to offset the base management fee earned from GKK during the quarter. Accordingly, other income effectively excludes any fee income from GKK for the quarter.

During the quarter, we recognized $88.5 billion of gains from the early extinguishment of debt when we repurchased $102 million and $160 million of bonds which were puttable to us in 2010 and 2012 respectively. The yield-to-put on these repurchases averaged in excess of 22% which we viewed to be a good use of capital while simultaneously deleveraging our balance sheet. Subsequent to year-end, we purchased an additional $86 million of notes on which we expect to recognize a gain of $29.4 million during 2009.

Loan loss and other investment reserves include $85.4 million reserves against the structured finance portfolio, a $14.9 million write-off of our investment in GKK manager, and a $2.4 million write-off for our remaining investment interest in the [Madcali] JV. G&A for the quarter was $33 million and included the write-off of $18 million related to the cancellation of certain employee stock options, as well as a portion of the Company's 2006 long-term outperformance plan. This chart represents the remaining unamortized costs associated with those plans. This chart is offset in part by the reversal of certain over-accrued incentive-based compensation. Excluding these one-time adjustments, the quarterly G&A would have been approximately $21.9 million. We believe that this is an appropriate run rate as we head into 2009 and should result in us achieving savings well in excess of the $5 million that we identified during Investor Day.

In an effort to sort through the various moving parts this quarter or the junk in the trunk as it has been described, Page Ten of our press release tends to remove certain of the one-time items from this quarter's operating results. This reconciliation results in a quarterly run rate FFO per share of approximately $1.40 or $5.60 on an annual basis. This run rate coupled with increased 2009 property NOI, reduced G&A and interest expense savings, enable us to reconfirm our run rate guidance of $5.75 that we provided on Investor Day. Recall that this amount was further adjusted down to a range of $5.25 to $5.50 to provide for possible additional reserves on our structured finance portfolio. We are also reaffirming that guidance range today. It is worth noting as Marc alluded to as we revert back to focus on core operations that of the $1.40 run rate of FFO, approximately 94% of that is being generated from our core real estate operations.

Before we leave earnings, I want to spend a minute reviewing our taxable income which we summarize on Page Eighteen of our supplemental and which is a significant consideration in establishing our dividend. You will note from a review of this analysis that through effective tax planning, we were able to meet all of our 2008 distribution requirements with the first three quarters of dividends. Accordingly, the fourth quarter dividend carried a record date of January 2nd and will be utilized to meet our 2009 distribution requirements. This flexibility enabled us to reduce our dividend and use the $95 million of distributions that we would have otherwise made in 2009 to delever the Company and generate substantial gains.

Even with the early extinguishment of $262 million of debt during 2008, we finished the year with $726 million of cash. We also have $55 million of availability remaining on our line, $73 million of restricted cash that can be used for capital projects in certain operating expenses, and we expect that the Company will generate over $100 million of cash flow during 2009 after the payment of dividends.

As we mentioned on Investor Day, cash-on-hand that we have already covers the $532 million of corporate obligations that come due during the next three years. This $532 million includes our only major 2009 maturity of $200 million which comes due in March. Also, as we mentioned on Investor Day, we had six major property mortgages which mature over the next three years. Our share of which totals $786 million. Although none of these mortgages matures this year, we would expect to be in the market this year taking advantage of the historically low interest rates.

Even in this lousy credit environment, we remain optimistic that not only can many of these assets be refinanced but that in a number of instances, we may realize excess financing proceeds as a result of the modest leverage currently in place on these assets. A review of our all-important debt covenants for the quarter shows us well within compliance on all our major covenants. Our ratio is actually strengthened during the quarter as a result of improved property performance, early extinguishment of debt, and lower interest rates. It is worth noting that our unsecured debt to unencumbered asset leverage ratio, which had been our tightest covenant, declined to 52.3% versus the maximum allowable of 60%.

Other items of note on the balance sheet include the following. Our investment in joint venture was down by approximately $169 million principally as a result of the $147 million write-down of our GKK stock position to its closing price at December 31st, as well as the aforementioned write-off of the GKK manager investment. Our structured finance balance finished the quarter at $748 million reduced by $99 million of sales during the quarter as well as $85 million of reserves. Note that $68 million of the structured finance portfolio is now classified as assets held for sale, which also includes our 55 corporate investment, that is scheduled to close in the first quarter of 2009.

As previously mentioned, we booked additional accounts receivable reserves during the quarter. Given the current economic climate that Marc alluded to and the increase in delinquencies, we took the opportunity to to top up our reserves related to tenant receivables and deferred rent receivables. These reserves amount to $16.9 million and $19.6 million respectively at year-end. Our mortgage notes payable declined during the quarter principally from the reclass of the 55 corporate mortgage, to liabilities related to held for sale, and our term and unsecured notes decreased obviously as a result of the $262 million of debt repurchase we made during the quarter. While there remains substantial wood to chop, we feel that we have made good progress during the quarter in cleaning up our balance sheet, delevering the Company, and positioning ourselves for the challenges at hand. And with that I'd like to turn it back to Marc for some closing thoughts.

Thank you. I think I was remiss earlier in mentioning that Andrew is on the road today. He is dialed in, listening in, and available for Q&A, but because of the logistics was not a part of the commentary that we just went through. But, anything related to the investments, or anything else for Andrew -- he is on the line. And with that, I think we would like to open it up for questions, Operator?

(Operator Instructions). Your first question comes from the line of Jamie Feldman from UBS. Please proceed.

Great, thank you very much. I was hoping you could walk us through your largest leases with Citi and the conversations you are having with them? And what exactly are they doing in that space?

Why don't we handle this three ways. Let Greg run you through, or run everyone through, what leases we have with the company, and Steve Durels can describe what they are doing in the space. And I can just mention briefly the conversations we've had. So, we have that chart?

Jamie, and if people want to refer back, we have -- at Investor Day, we had a separate Citigroup tenancy slide, and it's really six major positions. They have 330 dozen square feet of space over at 34th Street which we actually had signed up with them knowing that they were going to move out of that space in June of this year. And, we actually have already subleased a bunch of the space to the Siegel Company. So, that was something that we knew was going to occur. 485 Lexington, roughly 297,000 square feet of space, that has some private banking over there and some of the --

Wealth Management --

-- folks in there.

485 has Wealth Management and a good deal of the people in there related to the group being bought by Morgan Stanley. And just to go back at 333 because I will layer it as Greg goes through these. 333, as he said, we bought it with the knowledge and intention that they would be exiting out of the building. In fact, they should be out a little early although they have a rent obligation that they will continue to pay through the end of August. And, we've pre-let 160,000 square feet of that space to the [Siegel] Company.

So those are two in the wholly owned portfolio. In the JVs, we have -- at 803rd, we have a small retail space over there for 7,000 square feet. Of course, the biggest position, 388, 390 Greenwich Street, we have 2.6 million square feet. We own that in joint venture, and we are a 50.6% owner of that building. Again, our understanding is that that's a building that they are backfilling into, and Steve can walk you through some of the high-end space that they are actually looking to sublease.

Yes, at Greenwich Street, it's a mixed group that's over there. None of them are related to Wealth Management or any of the people that will be part of the Morgan Stanley acquisition. But it's investment banking, it's some of their tax and planning groups. And there are three or four other user groups. But again all corporate headquarters type people. It is their beachhead facility, of which case between that and Long Island City, are the two facilities that they have been moving people into as they either let spaces -- leases expire around town. Or, as they let other satellite offices, they take that space to the sublease market. They have got a wide variety of spaces, 666 Fifth Avenue, Citicorp Center, space on Seventh Avenue, where they've got space that's anywhere from 100,000 square feet to 400,000 square feet. And those are the facilities that you hear and that you read in the headlines where they are subleasing space and consolidating back into Greenwich and Long Island City.

So that's the headquarters building. Then, we have a small block of space up at 750 Washington, which we have a 108,000 square feet of which we have a 51% ownership stake. And then lastly, Long Island City which Steve was referring to, or 1 Port Square as we call it. 1.4 million square feet space, we own a 30% stake in that building. Again, that sounds like a building that they are backfilling into. Different than the headquarter building, that is a building that they do have some shedding rights in as we move into the latter part of 2009 and 2010.

A lot of facilities people are located over there, a lot of their back offices located over there. And many of you may know that next door to One [Quart] Square is a building that CitiBank about a year and a half ago just finished building as a second property, not part of the facility that we own but both properties are linked. And those are really the two buildings that they've been migrating all of their back office people to.

So I guess net-net when you carve away the JV ownership and carve away 333 which expires this year, it's about 225 million square feet of space that we have on a pro-rated basis at the Company, and it's relatively inexpensive space for Citi, relatively well occupied. So that's the status with them.

Okay. Thank you. I'll pass it along.

And again I think it is an important point because when you look at the -- when you pick up our supplemental and look and say, Citi has 4.7 million square feet of space on a 25 million square foot portfolio, it's actually reduced considerably when you look at the JV structures, the Long Island City NOI contributions are actually very low, and that's why I took the opportunity to point out that 13% of our income is going to be coming from Citi. Not the 25% that you might look at on a square footage basis if you are just paging through the supplemental.

Your next question comes from the line of Chris Haley from Wachovia. Please proceed.

Good afternoon, it's Brendan Maiorana on with Chris. Marc, as you mentioned in your prepared remarks, the market-wide vacancy assumptions that you were using which I think was in the Investor Day, which I think was data from Cushman, was around 12% at the peak or maybe 12% by year-end. Are there a number of other brokerage services that are higher than that up to 16%? And, it seems as though the market has probably gotten a little bit worse since your Investor Day almost two months ago. If you used -- what is the updated expectation that you are using for market-wide vacancy levels by year-end or into 2010? And, how does that impact your expectation to achieve 10% mark-to-market on new rents for this year?

Well, what I said earlier, which I think is consistent with what you just said, is that the market may be around somewhere 8% to 9%, maybe even 8% to 10%, looking out some period of time now, and that could rise to 12% or 12% plus, and I think that's where our current thinking is. There are some people who maybe think that it will be worse than that, there are some that think it's going to be better than that. But I think that everybody is pricing in the negative news. There's no positive news priced into that, and I do think that ultimately the announcements exceed the actuality in terms of what space will be delivered, and so I think as we sit here today, we are still in single digits. And, we will go to double digits we think by the end of the year.

We don't think that's going to make a dramatic difference in rents today. I think the rents you are seeing today are already reflective of that expectation. And when you said earlier the market has gotten worse since December, I don't think -- I think it's just playing out as we envisioned it. I'm not sure that it's worse than we envisioned it. What we are envisioning is -- more and more space coming to market, and I think you are seeing that play out. I wouldn't say that our sentiment today is worse than it was 50 or 60 days ago. I think that we will be able to achieve our mark-to-market because we are getting leases done right now, and as you know, people have a strong preference to deal direct as opposed to sublet. Sublet is not necessarily on the market as forcefully as tenants who are looking to move into new space and need it in terms of contiguous available space with concessions and with options in term for some of the bigger tenants. And I think that the leasing is a lot tougher.

Right now I would say, it's not tougher than it was back in '01, '02. It was tough then. We expect it will get tougher even than that, but it's not yet. And I think that maybe 2010 is where you'll experience more of that rental decline and vacancy increase, but we think through '09, the numbers we gave out previously in terms of expected occupancy and average mark-to-market throughout the year and vacancy levels -- we think those are in the right ballpark.

Thank you for that,and just --

Let me just add to Marc's comments because I think it will be useful to give people a little bit of color and understanding as to how some of these stats come out. As everybody throws around the current vacancy, and too frequently people confuse that with what's called the availability rate in the market and depending upon which brokerage firm you're talking to both numbers are thrown around. To understand the market right now, the current vacancy is between sublease and direct space that's vacant. In Midtown, it's about 9% in total.

By contrast, the availability rate and what that availability means is space that's yet to become vacant but is being marketed. And depending on whose stats you're looking at is anywhere from space available in the next six to all the way out eighteen months. And that number right now, by most accounts, is somewhere between 11% and 12% available space that's being marketed. Some of that space may be converted over to spaces that are renewed by those tenants, but I think it's useful to differentiate between availability and vacancy. And as far as meeting the mark-to-market, a couple things. In the availability rate right now, 70% of the space that's on the market through the availability rate is for space that's 50,000 square feet or larger. And if you look at our portfolio and the number of spaces that we are really dealing with that are that size, it's really a handful of spaces spread around throughout our 24 million square feet. That's really a testament to the fact that over the last year, year and a half ,we were very vigilant trying to renew a lot of our big tenants that were rolling between 2009, 2010.

And last point just to drive home, is where rates have declined and clearly they have declined over a period of time, or in the past twelve months, we were way ahead of the market as far as dropping our rents and have continued to do so. So, I think we've really taken the lead as far as the market goes, as far as adjusting our asking rents and therefore, our expected taking rents. And that too has served us well as far as being able to keep the portfolio full.

Thank you. And then just quickly, can you -- maybe you can't really do this because it's your portfolio. But, give us a sensitivity of, if vacancy moves either to the plus side or the downside by 100 or 200 basis points what that might mean for your portfolio in terms of rents -- rental rate achievement growth.

I think it's impossible to quantify because it's so specific as to which submarkets, and then what size space and therefore which building? The impact of available space coming in on Graybar Building versus available space coming in at 1350 Avenue of the Americas can be wildly different, and in that case it can be how big a piece of space? Is it built? Is it not built? Is it big? Is it small? So, I think it's virtually impossible for anybody to give you a clear answer.

Okay. Thank you.

Your next question comes from the line of Ian Weissman from Merrill Lynch. Please proceed.

Yes, good afternoon. Just two questions. You talked about taking impairments for your structure finance business outside of New York. If we think about some of these loans like on Sty Town or the retail components, 666 what would be the trigger points for you to consider impairing these loans?

Andrew, you want to take those? You are closest to this.

Sure, I think we monitor all the positions carefully. And Sty Town ownership has indicated publicly that they intend to contribute additional equity to the project, and if that situation changes obviously that would be a good reason to take a closer look there. But, we track property performance and sponsor -- sponsor attitude and what they will publicly say about their investments. Certainly 666, an investment we made last summer. Still feel very comfortable with that investment. It was the bulk of the investment decision that was made around the lease with Abercrombie and Fitch which was executed. So, most of the speculative lease-up component of that investment is completed. There is some additional leasing to do with the property, but I think we are still very comfortable with our basis on that property. But, we evaluate each of the investments quarterly, and try and project where current values and current market metrics are in each of these different markets and where impairments are called for.

And final -- .

Ian, that's one of the reasons why we had the drop down in a range of guidance. So, we continue to evaluate how sponsors are going to behave, what's happening with the values, that you could see some additional reserves as we go into 2009.

This might be another question for Andy. You guys in the past have been known to test the market for asset sales. I mean, clearly, it's not the environment for that, but there was a recent press article which talked about a potential deal on 485 Lex at a -- I would say a pretty healthy number. Can you just talk about that asset in particular, or are there other assets that you think you could test the market in '09 and sell?

Sure, sure. We are looking carefully at the portfolio and obviously assets that have relatively healthy amounts of in-place asset level leverage are most attractive candidates for sale. In the case of the 485 Lex, we put on new, ten-year fixed rate financing in the beginning of 2007, so you still have significant term left on that financing. I would say we are constantly in discussions with different market participants, both on a JV and a sale basis on the different assets, and it's really just a question of when a buyer is of like minds with us as a seller. We haven't -- we are not there yet on 485 or some of the other assets that we are talking about , but those are certainly the assets we are focusing on in this market environment are those that are the highest levels of in-place asset level financing because going out and getting new financing is so difficult for buyers unless the seller is

The article suggests that an asset, this asset could achieve $600 a foot. Is there a market for assets of this quality at $600 a foot in New York City today?

Tough to tell because nothing is traded. A very high quality asset with a high quality tenant roster and a great, very in the money in-place first mortgage would -- we would certainly hope it would fetch those kind of numbers.

Thank you very much.

Sure.

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

Thank you. I just had a question regarding the G&A. I think, Greg, you went over it quickly. I didn't catch-all the detail there, but maybe, Marc, could you just give us a little bit of color. I don't know if the decision was joint or several, but the decision of management team members to relinquish or cancel some of the options that were granted?

Well, it was a decision that everybody thought made sense, given they were so far out of the money as we sit today. They were a very significant expense on earnings, and people were willing inclusive of myself, all the executive management teams, Steve, Andrew, Greg, and others just turned them back sort of with the recognition that they may or may not be worth something in the next eight, nine, or ten years because those are typically ten-year options. But again the cost to the Company was so severe for something that as it sat today was so far out of the money that as part of looking at year-end and looking at establishing a new run rate MG&A for '09 and beyond, we thought it made sense to just turn those back.

And rather than do, I think, what some other companies are either doing or looking at -- exchanging, buying back, repricing or doing anything of the like. We thought it was easiest to just keep it simple. Hand them back to the Company, really reflective of, at least, what their current value seemed to be. And just keep going from there, and I think the Company will experience a big benefit from that part of the G&A savings is from that non-cash options in OPP that have been turned back. And, I think that was inflating our MG&A to levels that people in the street were interpreting to be out of whack. And, I think when you look at it, it was because our stock price had risen so much we were a little bit of a victim of our own success. The more our stock price rose, the higher the MG& A went in a non-cash sense, in an accounting sense. And as a result, when the price came all the way back down, we didn't get that same relief on issued options, and we thought that turning it back made sense. So that was -- that's the rationale behind it.

Did everybody follow yours and Steve's lead, or was this a mandatory decision?

No, not mandatory. It was purely voluntary. There was no mandate. We -- I talked to people. I gave them the choice to do it or not do it. It was only done with a small percentage of the firm, but where many of the options were held. And people, I think, universally, didn't blink an eye. They saw the merit in it and did it. But, it was not mandatory, not coerced.

Greg, maybe -- what's the accounting on that? I don't understand why there would be an expense if you are reversing an option that you have already --?

Two separate exercises. What it requires you to do on both the OPP plan and the options is, when those are issued there is a deferred cost that's set up, it's amortized over the divesting period. So when those become canceled, unfortunately, that cost even though it's obviously completely non-cash, doesn't go away. All of those deferred unamortized costs need to be immediately expensed which is what we did during the quarter and that's the $18 million that you saw come through. Offsetting that was through September 30th, both at Green and Gramercy, we had accrued incentive compensation to a certain level in anticipation of where we might end up for the year. Those accruals through September 30th, turned out to be higher than was necessary based upon where the actual bonuses ended up. So, you had you some of those reversing or offsetting that -- that $18 million charge. Which is why if you look at our reconciliation table, we have kind of a net of those two, or roughly $12 million that we're adding back as non-recurring G&A-related.

That's perfect. My follow-up is just on the repurchases you did in 2009. I know you said $86 million. Were you -- were those, how were those split between the 2010s and '12s?

You have to wait until next quarter to see because it, it creates competition for the repurchase of those. So, we will disclose it at the end of the first quarter.

Could you maybe talk about given the focus on maintaining liquidity, the thought process behind retiring or actually going after some of the 2012s given the maturities you have got in front of you?

It's sort of circular, Jordan, if you are retaining liquidity to pay off in recourse indebtedness to some extent. So, using liquidity to pay off recourse indebtedness particularly at discounts and pretty attractive prices, we don't look at as depleting our liquidity. It's what the liquidity is there for now. At least, the way we look at it. Others may differ and choose to do other things with their liquidity. But what I went through earlier today was the various steps we are taking, and various significant steps we are taking with dividend, MGA, and capital, all oriented toward embellishing what's already a pretty sizable cash balance for the near-term retirement of recourse debt. So, it is using liquidity, but it is using liquidity for what it has to be used for, we think, and that's just our philosophy. Others may differ with it, but that's how we do it.

That makes sense. Thank you.

Thank you.

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

John Guinee here. Very nice job, guys. Three questions, squeezed into two. One, should we expect going forward the debt gains to be offset by impairment charges for the structured finance portfolio? And then, is there an earnest money deposit on 55 Corporate Drive, and is that 100% assured of closing? And then Andrew, what's the status to the best of your knowledge on 1540 Broadway -- pricing, buyer evaluation metrics, etcetera?

Andrew, why don't you hit those two first? On 55, and I don't know what you can or can't say about 1540?

Sure, 55 Corporate -- we do have a nonrefundable earnest money deposit. And, that closing is proceeding at pace, obviously, complicated by the fact that it's a securitized mortgage. And, it's a servicer, so those approvals can be laborious. But, we expect to complete that sale, certainly in the first quarter. On 1540, there's been nothing official in the market. There's been a bunch of articles with speculation. We do -- we know at the rumored price of $375 million or so, on our numbers, that would represent a 5.5% going in cap rate. There's some significant vacancy which that asset has had quite a bit of vacancy for a long period of time. If you lease up the vacancy, you are probably stabilizing between 7% and 8%, and I think the buyer there is likely modeling exit cap rates in the 6%, 6.5% range in order to make the mid-teens IRRs that buyers are supposedly expecting today.

So, clearly if the sale happens, the head line per foot is deceptive. It's an office condo. There's no retail. The retail was sold to a different company. There is a significant amount of vacancy. 193,000 square feet. So, the basis per foot going in is going to increase substantially as that vacant space is leased. And there's no retail associated with it, and we would call it -- we would be encourage to see somebody purchase it on this basis and be modeling those kind of exit cap rates in order to make their anticipated investment returns.

Great. And, Greg -- ?

On the -- look, the gains on the bonds and the reserves on the structured book are not tied at all nor could they be. If you look at the guidance, we did say in the Investor Day presentation that there are reserves net of promotes and gains. So, there certainly was a contemplation and is a contemplation that you would see some bond games and possibly some miscellaneous promotes. And those would be offset, or maybe offset in part, by additional reserves. But, the two are certainly not tied together.

Great. Thank you.

Thanks.

Your next question comes from the line of Vincent [Chow] from Deutsche Bank. Please proceed.

Hi, guys. Just a question on the structured finance portfolio. Just trying to understand in terms of the payments or the maturities that are coming due in '09, what your expectations are around those maturities? And, do you expect any repayments to result from those?

Yes, and I think certainly we do expect some repayments. Many of the maturities are initial maturities with extension options. So in that case, we will fully expect borrowers to avail themselves of their extension options. And, as far as the final maturities that occur, we will carefully evaluate those on a case-by-case basis, and where we feel either the sponsor is willing to invest additional capital to reinforce his equity interest in the asset, we may evaluate extending our positions. And if they are not, then we may ask to be -- ask to be taken out. We've done both with maturing positions thus far.

Just to elaborate on that, because I have the sheet in front of me here, Vincent. I would, as Andrew said, whether it's paid off or restructured and extended as a function of sometimes how -- what posture we want to take to a particular situation. I would say -- I would hope at a minimum that most of what comes due this year, we would be in a position to restructure and extend. So, you may not see payoffs, you may see pay downs. You may see enhanced terms. You may see out of one, two, three, four, five, six -- it looks like about eight or nine or so potentials. Maybe you will see one or two payoffs, but I think you are much more likely to see either, as-of-right extensions as Andrew alluded to -- .

Many of those nine have as-of-right extensions -- .

Many have as-of-right, but even if they're not as-of-right, you may see extensions with paydowns and kicked-up rates. And you may see a couple of payoffs. So, I think in terms of forecasting liquidity from that batch of this year's maturities whether it be initial or final maturity, I would think about it in those terms.

Okay. Can you just give us a sense, it looks like just under $175 million maturing in '09, what percentage of that has got -- are first maturities?

What percent are initial maturities?

Yes. Exactly.

I think that one we would have to call you on because we would have to go through each one. The sheet I'm looking at doesn't make that distinction.

Okay. Just on the $68 million that's in held-for-sale at the moment, can you give some color on the status of those sales? Are they just initially starting, or are you close to a -- ?

It's across the board. We did a significant amount of marketing in the fall which resulted in the closed sales that we disclosed today, and there are other sales where we've identified buyers in the closing process. Many of our investments sit behind securitized loans. As I mentioned in 65 Corporate, it does involve the first mortgage approving the transfer as well. And then a lot of -- where we are initiating new conversations on additional assets which moved to held-for-sale this quarter.

Okay. And, is that a continuous process? Could that go up from the $68 million, or have you looked through the portfolio and that's what you are looking to do this year?

I think it definitely could go up, just based on asset level developments, borrower level developments, a lot of different factors. As I said, we are evaluating all our positions, debt and equity sort of continuously, and trying to find pockets of opportunity out there.

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

Good afternoon. Marc, you talked a little bit about the proactive leasing you've done over the lease to narrow down this year's maturities to just under 1 million square feet. You talked a little bit about how you expect to have a very high renewal rate. Can you just talk about the confidence that led to you that decision in terms of tenants being lured to some of the sublease space, to some of the direct vacancy, to perhaps some of the tenant failures going on? But also, maybe these tenants that wanted to take -- to reduce their square footage -- so renewing but at a lower number just as you sort of look at that 1 million square feet this year.

I think the confidence in the ability to renew is simply -- one, I think they will be satisfied. Two, we can meet the market, and, three, it's expensive to move. And a lot of tenants today don't want to incur the cost to move, and there are landlords today who can't really afford to be too aggressively -- bring in the tenants. Because of that, there were -- I think I may have mentioned this in December -- there were tenants who originally we thought were going to move and consolidate into other space, maybe even other Green buildings. Many of them came back to us and just said, what rent do I have to pay to stay put? And, we are seeing more and more of that.

Your point about, could they be consolidating? Absolutely. So, the renewal rate for a tenant may be high. That doesn't mean we are going to be able to renew in every case the entire footage, but also it's not always so simple to take smaller space which many of our tenants by number are, smaller space tenants. Steve Durels stated earlier that we don't have more than a handful of 50,000 foot and over maturities this year. So, we may be dealing with a lot of 5,000 square foot, 10,000 square foot, 15,000 square foot spaces. And, we are not really always able to, or desirous of subdividing that space.

We may encourage the tenant to renew all the space, and then look to sublet that portion which it doesn't need. Or, the tenant will make do with its existing condition. But, you're right. We could be renewing for less in those instances. So the confidence factor , I don't want to sound overly confident because it's hand-to-hand combat out there. You know that. But the confidence is, we are getting good results. The good results give you a level of confidence, and too, we have what I think are the right elements that are necessary to retain tenants. Now, there are times it just can't happen. Tenants going out of business, tenants moving out of the city -- that's unavoidable. But, we don't expect to lose many tenants to other

And then just going back to the cancellation of the options and the (inaudible). Marc, over the years you've expressed a desire to pay people and retain talent, and it's important to have those plans and to have those compensation levels. And I can understand why these things were so far out of the money, it was a huge drag on reported earnings of some of the rationale of just giving them up. Can you talk about the other side of it of how you've talked with the Board and how you've talked with your management team about potential new plans that you are thinking about instituting? And how you are thinking of rewarding from here on out.

Well, I don't think -- there's no change in philosophy, if that's what you are asking. I mean, we put OPP programs into place -- gee, the first one might have been '03, and then I think we did '05 and '06. We elected not to put anything in place in '07 and '08. And the original intention was, once per year, once every other year because they roll. Ironically the '03 deal, we are still in a vesting period. My whole management team who was part of that '03 program -- that was a seven-year deal so that's not even fully vested. That fully vests, I guess, next year in 2010. '05 is in a vesting period, and the '06 plan has retired. Well, it's -- I guess still technically, it will retire presumably valueless, and many of those interests have been turned back.

So, I would think that having people motivated primarily by the upside was what enabled me to amass the talent team that I have and put together what I still believe today is the best New York City platform. It's the biggest by size. I think it's the best by product, and it's widely regarded by people in this market, tenants, brokers, as an exceptional team. So, a big part of that program was equity incentives on the upside. Everyone, including myself, has now been formally and thoroughly introduced to equity participation on the downside which is just a fact of life. It's what our shareholders are experiencing. It's what we as employees have experienced, but I mean clearly a motivating factor in looking out over the next two, three, five years, is the notion that if we do things right, that we will be able to participate in equity on the upside and looking out in time OPP, options, and restricted stock are always a part of compensation packages.

They are just in these days at levels reflective of today's return to shareholders as opposed to where it was when we were at very high prices. So, I don't think philosophically look at it the same way. The amounts are different. But, I think the equity incentives are what keep morale and people motivated, and hopefully, the team together for the next three to five years. Are there any other questions, or follow up?

Your next question comes from the line of Sloan Bohlen from Goldman Sachs. Please proceed.

Hi, guys, just one quick one for Greg and Andrew. Just thinking about -- how we should think about write-downs and the structured finance portfolio going forward? I think, Greg, you had mentioned that the debt yield on the portfolio was around a low 6% last quarter. And likely that was lower because of lease-up and a lot of the assets that the loans were on. Were those the types of situations that you were writing down? Or, was it mostly just non-New York versus New York assets?

It was certainly focused on non-New York assets where we see the most valued diminution and the asset types, the lease-up has not occurred the way it has in New York assets as projected and the markets are softer. Softer than -- significantly softer than New York's market. So that's how I would summarize it, Greg.

Yes, and I don't think that those numbers have changed dramatically as a result of the reserves and-or dispositions. We obviously moved some of the more liquid positions, and as we've said a couple of times focused heavily on reserving on the stuff outside of New York. Because, naturally those are assets that don't fall in the category of stuff that we would be interested in owning which is a very different exercise when we look at the New York portfolio.

Okay. Thank you, guys.

Is that it, operator?

At this time, you have no further questions in queue.

Thank you all for calling today, and we look forward to speaking with you next time. Thank you.

Thank you for participating in today's conference. This concludes the presentation. You may now disconnect. Good day.