SL Green Realty Corp (SLG) 2009 Q1 法說會逐字稿

Thank you, everybody, for joining us, and welcome to SL Green Realty Corp's first quarter 2009 earnings results conference call. This conference call is being recorded. At this time, the Company would like to remind listeners that during the call, management may make forward-looking statements. Actual results may differ from predictions that management may make today. Additional information regarding the factors that could cause such differences appear in the MD&A section of the Company's Form 10-Q and other reports filed with the Securities and Exchange Commission.

Also, during today's conference call, the Company may discuss non-GAAP financial measures as defined by SEC Regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure discussed and the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found on the Company's website at www.slgreen.com by selecting the press release regarding the Company's first quarter earnings.

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

Good afternoon and thank you for joining us today. Andrew, Greg, and I will take you through some of the important developments during the first quarter and summarize for you our financial and operating results.

There were a number of noteworthy achievements which were realized throughout the first quarter during an extremely difficult economic climate. Such notable achievements include significant debt reduction, a modest reduction in overall vacancy, same-store NOI increases, mark to market on new rents in excess of 23%, continued husbanding of cash through sharp G&A savings, operating expense controls and curtailment of discretionary capital spending, the long anticipated sale of the GKK Manager to Gramercy Capital Corp completed as part of the recently announced internalization, and reduced structured finance balances at quarter end. In the aggregate, these results are consistent with or exceed the guidance we gave back in December, with the exception of a sizable reserve on one structured finance investment that Andrew Mathias will discuss with you later in the call.

These accomplishments demonstrate the seriousness and determination with which we are approaching our major business objectives -- that is, overall debt reduction in light of falling asset values, cash conservation measures, occupancy maintenance through aggressive management of the rent roll, and a reduction in the speculation surrounding SL Green's structured finance activities through the internalization of Gramercy, loan sales, and loan reserves. Through our affirmative actions, we have in excess of $400 million of cash on hand at quarter end, and we have ample and increasing covenant cushion as a result of our debt reduction efforts as Greg will elaborate on. Over $700 million of debt has been retired in the past 12 months. The cash dividend has been reduced by over 50% with flexibility to make further reductions as a result of our very low taxable income projected for 2009 and 2010, and our property portfolios remain well leased. In Manhattan, in excess of 96%; in the suburbs, in excess of 90% occupancy. Our still sizeable mark to market and embedded in-place rents means that we should still enjoy same-store NOI increases throughout the remainder of 2009.

In any typical market, I'd be pleased with these results. However, in the worst market that I've experienced in 20 years, I believe these results to be very compelling. With that said, we do recognize the significant challenges that lie ahead and the deteriorating market fundamentals that we expect to experience throughout the remainder of 2009, which will make it more and more difficult to achieve our objectives. Vacancy in midtown Manhattan now stands at approximately 10% -- that's direct and sublet -- and is expected to rise to as much as 12% or beyond in 2010. Concession packages have been widening out as predicted, and most of the current leasing activity is renewal in nature, not new or expansion deals.

While the deteriorating fundamentals are disappointing, nobody who has been on our prior calls should be surprised by any of this as we explicitly and clearly stated our belief that we would see a combination of rental declines, increases in concessions, occupancy slippage, and emphasis on renewal leasing. Although we can't change or influence market fundamentals, we can accurately predict those trends and adapt our business plan accordingly. In our specific circumstance, we sold almost all of our B building, which will be hardest hit in this downturn; renewed and extended early expiring leases in 2006, 2007, and 2008 to act as a buffers again 2009 and 2010 scheduled lease expirations; redeveloped many of our assets to make them more competitive in a down market; and generally acquired buildings with low embedded in place rents which enabled to us grow NOI even in very difficult market conditions.

For our glass is half full listeners, the market news is not all that negative. There are several examples of space that was being included in future availability statistics that have or will be eliminated. First, as I mentioned previously, a portion of Merrill Lynch's investment banking division has been moved up to One Bryant to absorb unused BofA space in that new project. Second, Pfizer pulled off the market 750,000 square feet of space available for sublet in the Grand Central submarket when it announced the pending acquisition with Wyeth would result in the backfilling of that space. Also Credit Suisse had approximately 100,000 square feet at One Madison available for sublet, but has since removed that space from the market and backfilled it as we understand it. Lastly, there have been published reports circulating about Citigroup's attempts and intentions to lease or sublease 300,000 square feet at 485 Lexington. But as recently as this morning, we received verification from sources within Citi that at least three floors covering 121,000 square feet at 485 Lex will be retained as a result of Morgan Stanley utilizing that space through -- at least until the 2017 lease expiration. Also, Citi will be keeping two other floors for its own use, such that only three floors totaling a little over 100,000 square feet are likely to hit the market, and that's assuming plans don't change again. As you can see, looking at listed availabilities won't always give you an accurate picture of what is truly available for rent and also doesn't give you any implication as to how, when, and why financial institutions and other businesses will change their minds as to their staffing needs as the economy bottoms and hopefully business picks up over the next few years.

Turning attention to the suburban portfolio, mark to market was essentially flat. Occupancy held steady at around 90.4%. Over 124,000 square feet of leases were signed in 32 different deals, the largest of which was the renewal of Deloitte, at 37,000 square feet. I'm also pleased to announce this morning that a brand-new lease has been executed in Stamford with a major law firm for 16,000 square feet. It's a deal that has in excess of 10 years of term over a $30 starting rent with annual bumps, and notwithstanding its full-size concession package is an indication that we're able to compete as effectively in the suburbs as we can in Manhattan in combating market forces and attracting new tenants to our buildings.

Being as Manhattan-centric as we are, we get a lot of questions and we know there's a lot of concern regarding the fiscal health of New York City. I think many of those questions will be addressed this Friday when Mayor Bloomberg unveils his budget. Based on information previously disseminated by the city, the city was projecting up to 300,000 total job losses from the peak of August 2008 to the projected trough of September 2010, 70,000 of which are estimated to be in the finance, insurance, and real-estate industry.

I believe first quarter statistics through March will show actual job losses to be on track or light of those original projections, which is good news, but doesn't necessarily answer the question of what's in store for the future. When put into the context of prior job losses, the projected losses for this recession equals approximately 8.5% of prior peak employment, whereas in 2002, job losses were approximately 6.5% of prior peak, and in the early 90's it was 10% of its prior peak. So this would put the current projection somewhere in between the severity of 2002 and the early 90's. That's in terms of job loss.

As it relates to stimulus dollars, the city is anticipating receiving as much as $4 billion over the next two years for certain categorical expenditures like Medicaid and education and other individual initiatives like transportation projects and block grants. Stimulus dollars will presumably be reflected in the mayor's budget along with first quarter tax receipts from financial institutions, which seem to be tracking somewhat ahead of January's projections. All told, I would expect that the plus or minus $60 billion budget for New York City will be able to be balanced without any significant increase in real estate taxes and/or personal income taxes, but we will all wait to see the budget plans on Friday and hope that this is accurate.

In summary, I believe that working through these tough times in a well measured but determined way will enable us to keep our properties well leased, maintain our substantial earnings base, address near term debt maturities as and when they come due, and build up out cash resources in order to begin stockpiling cash for future opportunities. Cash resources will come from the areas I mentioned earlier, including reduced dividend, reduced G&A, increase retained earnings, and reduction in capital projects, but also may come through continuation of asset sales and refinancings with the potential for equity issuance in the future.

We believe that an incremental $600 million to $700 million on top of the existing cash reserves that we currently have would be sufficient to meet all of our maturing debt obligations through 2012. Our preference is to raise that capital in the ways previously described while not foreclosing the issuance of equity at an earlier date, especially if it is tied to a compelling opportunity to retire debt on attractive terms. We are fortunate not to be one of the many companies that have high levels of debt maturities in 2009, 2010, and 2011, and therefore we have to date taken a more patient approach between balancing the raising of capital tied to its effective deployment. With that said, everything we do today is with a focus on raising efficiently priced capital, to retire near term debt maturities and/or extend out those same maturities. Now let me turn the call over to Andrew Mathias, who will provide you with more insight on our asset level activities as well as capital transactions within the New York market.

Thanks, Marc. The capital markets in New York continued to be gridlocked throughout the first and beginning of the second quarters. There was one transaction of note signed and closed in the first quarter -- Deutsche Bank's sale of the office condominium interest in 1540 Broadway. Deutsche provided the buyer with financing on roughly market terms in all but the size of the loan, where in a third party market sale, it likely would have taken several lenders and a club to reach $227 million aggregate proceed level provided to the buyer in that instance, CB Richard Ellis Investors.

Otherwise, we were encouraged by the terms of this sale, with the buyer going in at a sub 6% tap rate and expecting a stabilized cash on cost return around 7.5% to 8% based on our underwriting, and reportedly modeling a sale in seven to 10 years at a 6.5% to 7% exit cap rate. If that kind of underwriting held up, and the financing market returned to some level of normalcy, we believe New York City pricing would reset to a level that would surpass most people's very draconian expectations of the market at this time. Keep in mind this was an office condominium interest which requires substantial lease-up capital selling at an end price of $387 per square foot, as the retail portion of the property was condoed when Equity Office purchased the office component several years ago.

Other than that sale, activity in New York has been limited to the sale-leaseback of the New York Times building, which was really more of a financing transaction, and a UCC foreclosure sale of 1336 Avenue, with the balance of activity being a lot of tire kicking without actual transactions taking place or materializing. We continue to speak with groups interested in purchasing assets in New York City and believe once a financing market returns, and first movers move in, others will come off the sidelines once they determine the water is safe. Foreign capital is still showing a lot of interest in New York. In fact, I met with a German closed end fund operator this morning who said they're confident in their ability to raise capital in Germany for New York deals, and they'd be happy and interested in doing New York deals if the right asset and structure presented itself.

On SL Green's capital markets front, we have had some success selling structured finance positions, with three or so deals completed and several more in process. On the real estate side, as widely, we're having selective off market conversations with several different prospective purchasers about several of our assets. While some of these discussions have promise, our conclusion thus far is that it is still too early, and while we're incentivized to transact, we haven't yet been able to get anything done at prices we deemed to be reasonable. There's also more interested parties today than there were 60 days ago, a trend we see as continuing as equity on the sidelines becomes impatient and more confident. We continue to have ongoing dialogue with different sources of capital on different structure and outright sale transactions and hope to have more progress to report on our next call.

The other news of the quarter was a $62 million charge-off we took on our structured finance balance, the majority of which was our write-down of approximately 75% of the balance of our interest in the [Stiveson Town] mezzanine loan. In the first quarter, there was a wholly unexpected, highly adverse court ruling regarding ownership's ability to bring stabilized rents to market rents at that property, which had a material impact on efforts to recapitalize the asset. This ruling, which is pending appeal in New York State's highest court, the Court of Appeals, has such negative implications for the property and the $2 billion of common equity that sits subordinate to our position that we decided a writedown was appropriate here. The other write-downs from the quarter were a result of assets being moved to held for sale in anticipation of possible sales transactions which I mentioned earlier. Certainly without data points as to where values ultimately shake out, when a healthy competitive market returns, buyers are cautious about purchasing debt positions as well.

Notwithstanding the cautious nature of buyers on the market, there's not been the wave of distressed selling that many expected. Sellers are generally getting the time they need from their lenders to try to wait out some real price discovery in the markets, and banks are generally holding on to loan positions rather than sell them at market clearing prices, either for credit or return reasons. Even the foreclosure auctions we've seen thus far have seen mezzanine lenders credit bid and protect their positions and be the successful bidder at those foreclosures, committing new equity capital to the properties in each instance. This was the case for both 1336 Avenue, which I mentioned earlier, and in the foreclosure of the John Hancock Tower in Boston and 10 Universal City Plaza in Los Angeles, a situation where we were hired as a special servicer because of our large asset workout expertise. We've used special servicing as both a lucrative fee opportunity in the interim, which we intend to grow, and ultimately a platform from which principal investment opportunities will arise. With that, I would like to turn the call over to Greg to take you to the numbers.

Great, thanks, Andrew. During the quarter we made what we think is good initial progress towards de-leveraging and shoring up the balance sheet. I think as Marc alluded to, since October we have repurchased $487 million of our bonds and realized gains of $135 million from those repurchases. $225 million of these repurchases had occurred in 2009, when we've recognized $57.5 million worth of gains. So you can see while the initial distressed selling has subsided, we continue to find attractive opportunities in the discount and repurchase of our debt.

While the gains of these purchases are certainly impressive, the true benefit from these repurchases is best evidenced by a review of their impact on our senior unsecured line of credit covenants. Prior to commencing the buyback program, our unencumbered assets to unencumbered debt ratio, a highly scrutinized covenant, sat at 55.6%. This ratio has been reduced to 45.7% at quarter end, comfortably lower than the 60% requirement and with plenty of cushion for the covenant cap reset scheduled for third quarter 2009. With $434 million of cash on hand at quarter end, we continue to maintain enough cash to repay our corporate maturities through 2011. Accordingly, we have already turned our attention to addressing the June 2012 maturity of our line of credit. We have had preliminary discussions with most of our major line lenders as we seem to explore ways to enhance their credit, extend our maturities, and pay down the credit facility.

In addition to the asset sales that you have already heard about, key to these paydowns will be the internally generated cash flow from our portfolio. In December, we projected that for 2009, the portfolio would generate over $110 million of free cash flow after paying dividends. With over $28 million generated for the first quarter of 2009, we are well on our way to meeting this objective.

Additionally, you will note from the review of our taxable income estimate on page 18 of our supplemental that as a result of some efficient tax planning, we are currently well ahead of our distribution requirements for 2009, which should enable to us potentially retain additional cash flow going forward. We currently anticipate that even with the payment of our dividend at its existing level, the portfolio should generate $350 million to $400 million of incremental cash flow between now and June 2012, which can be used to further de-lever the Company.

On the secured debt front, we are in the marketplace to refinance 420 Lexington, which doesn't mature until November 2012, and have received good interest so far. In addition, we've been encouraged by the number of successful extensions that other borrowers have been able to achieve in the securitized debt market. Needless to say, we along with the rest of the industry are highly focused on reducing our leverage. I think it is important to point out that our leverage statistics, though, are often overstated as our debt to EBITDA statistics are frequently quoted with the exclusion of earnings from our structured finance portfolio as well as earnings from our unconsolidated joint ventures. By our estimates, our debt to EBITDA sits at approximately 9.5 times, which appears to be in line with our peers and the office sector as a whole, many of whom have more near term maturities than we do. Based upon this, we are hard-pressed to understand the dramatic multiple disparity that exists between us and our peers.

Other items of note on the balance sheet include the following. Five structured finance investments have been marked to market and reclassified to assets held for sale as we attempt to monetize a number of these positions. Including the assets held for sale, the structured finance portfolio totaled $691 million at quarter end, of which $84.5 million were on nonaccrual for the quarter. These balances are net of reserves, including $62 million which were recorded during the second quarter that Andrew alluded to.

During the quarter we adopted FAS 160, which resulted in the minority interest of our consolidated joint ventures being reclassified into the equity section of the balance sheet. We also implemented APB 14-1, which changed the accounting for our convertible notes. The adoption of this pronouncement resulted in the reclassification of $35 million of convertible notes, which are to be amortized into interest expense over their estimated life. For the first quarter, this resulted in additional interest expense of $3.5 million. Note that this new pronouncement also resulted in $11.1 million of fourth quarter 2008 bond gains being reclassified directly into equity. Also, I would point out that interest earned on cash balances is now reflected netted against our interest expense for this quarter and will be so prospectively. Also, changes in the balance sheet as a result of the recently announced internalization -- the results of the GKK Manager have been reclassified into discontinued operations, and the carrying value of our 6.2 million share investment in GKK is carried at zero as of quarter end.

Now I would like to take a moment to focus on the P&L for the quarter. Excluding bond gains and reserves on structured finance, our results were substantially ahead of the guidance we provided in December as we benefited from historically low LIBOR rates and realized substantial G&A savings, which were well in excess of those that were advertised in December. We are on pace to reduce G&A by over 30% from 2008 and over 17% when one excludes the OPP and option charge from the fourth quarter of 2008. These savings have been achieved principally from the reduction of incentive based compensation as well as headcount reductions and other cost containment measures. Later this week, we will be sending out our proxy and annual report. Out scaled down bare-bones approach to this year's annual report is indicative of the cost containment measures being implemented firmwide.

Some of the G&A savings discussed here will be evidenced in the proxy. However, it is important to remember that the proxy tables require much of the stock-based compensation to be reported based upon values in place at the original grant date. Accordingly, much of the compensation described therein is dramatically overstated and reflective of amounts that we can only wish we had realized. At roughly $75 million, our G&A represents just 4.7% of our total combined revenues, which is very much in line for a fully integrated real estate operating company.

Most importantly for the quarter, our core operations performed solidly and in line with our expectations and guidance. The stronger than expected leasing activity offset scheduled lease expirations at 485 Lexington and move-outs at 100 Park and 521 Fifth. We were encouraged by the solid 24% mark to market achieved on new leases, which bolsters our belief that there is limited roll-down risk to the NOI of our portfolio, absent major credit issues within our tenant base.

Naturally, in this environment, we monitor tenants closer than ever. While we have seen an uptick in the tenant watch list, it has been concentrated in a handful of older buildings with smaller tenants. Like everyone else, we await the results of the government stress test that's due out Friday. While there appears in the news today to be disagreements over how the capital requirements will be computed, we remain confident that Citi will remain a viable rent paying tenant.

Marc alluded to the fact that we continue to anticipate increases in TI and free rent concession packages as we move forward. However, it is worth noting that the actual TI and free rent that we realized in the first quarter 2009 was largely consistent with what we experienced in 2008, and was driven principally by two large long-term deals that were signed at 100 Park and 810 Seventh Avenue.

Our same-store NOI increased by a respectable 2.9%, notwithstanding a substantial increase in real estate taxes. In December we projected a 10% increase in real estate taxes for the year, and we are currently conservatively accruing for an even higher increase as we await the new millage rates for the fiscal tax year commencing July 1, as well as news on the New York City budget. Our GAAP NOI for the quarter reflects terms of the newly signed lease at 1515 Broadway with Viacom. Recall that this lease includes approximately four months of free rent, which accounts for the significant difference between GAAP and cash NOI that you see for the JV properties during the quarter.

Lastly, our other income includes approximately $800,000 of consulting and special servicing fees from Gramercy and approximately $8 million of fees from the successful completion and delivery of the American Eagle Store in Times Square. We recorded no FFO from Gramercy this quarter and expect that any future income from Gramercy would be de minimis if it at all.

In conclusion, we remain highly focused on addressing the leverage concerns and identifying new sources of capital, but would also focus people on the solid long-term earnings that are being generated from this high quality portfolio. And with that, I would like to turn it back to Marc.

Great. That concludes the portion of this call where we want to set out for everybody really what we've achieved during the quarter and where we think we're headed from here. And I think now we will turn it over to questions, if the operator can open up the line.

Thank you. (Operator Instructions). And your first question will come from the line of Anthony Paolone from JPMorgan.

Thank you. Marc, I was wondering, with respect to the balance sheet, you said you thought you could use $600 million to $700 million of capital to get you through 2012. I was wondering, one, how much would you need to not just get through 2012 but feel pretty good about being out in the market and being able to actually look at potential opportunities? And then two, why not hit the equity markets sooner rather than later or even take action on the dividend now?

Three different thoughts in that question. As it relates to the number, $600 million to $700 million plus our available for cash for approximately $400 million, brings it up into the $1 billion to $1.1 billion range. We have in terms of recourse indebtedness maturing in 2010 and 2011, about $300 million, and then another $350 million to $360 million of converts remaining in 2012. So clearly the excess of the $1.1 billion or so over those amounts would represent money available to address the line of credit, and there's lots of different ways that can and may be addressed between now and 2012. Plus, we are generating positive cash flow between over the next three to 3.5 years. We've talked about that publicly --

I think I mentioned $350 million to $400 million of free cash flow after the existing dividend level between now and [2010].

So between the excess of the cash I was referring -- call that an extra $300 million to $400 million, plus the incremental cash flow that Greg is referring to, I think that's there to address the line of credit and new opportunities. So new opportunities are going to be in a joint venture format. I think if that's not self-evident, I would go out on a limb and say that. We're not going to be raising public equity at these -- at 2.5 times earnings multiple to then go out and do wholly owned real-estate transactions. I think we would look to, as we did when we were first starting out in 1997, 1998, 1999 look to coordinate more limited equity dollars with joint venture capital and attack larger deals that way if and when they materialize. You heard Andrew's comments on the state of that market. We do think there will be some sizable opportunities, but maybe not as many as people think. We're going to have to work as hard to dig those out as we have in the past years. I think that addresses the computation of -- at least the range, as I look at it. It does have embedded in that assumption two things. We have existing cash balances, which were $430 million or so at quarter end, and we are cash flow positive and expect to generate without a dividend cut, a further dividend cut, $300 million of incremental cash flow. A further dividend cut would just enhance that. So I think that takes care -- or should take care of what we expect to see through 2012 with some equity left over for a JV format investment.

Okay. And I just had one question with respect to NOI. You talked about the environment getting more difficult, and thus far it seems like your positive rent spreads and contractual bumps have have kept NOI still growing positively. Do you think in the next year or two will you cross a point where NOI growth goes negative?

Do I think it'll cross -- I don't think so. I think we've seen a lot of the rental decline. That's not to say that rents can't go down further. They may. We have a lot of excess from prior years that's bleeding in this year. We're signing leases this year with excess that will be bleeding in next year, and even if our mark to market goes to zero, which we hope it doesn't, but could if there are further rental declines, that won't result in us going negative. I mean, I think negative would have to be a coupling of significant additional rental decline with significant expense growth, and that's not something we're seeing or forecasting at this time.

Okay, thanks.

Thanks a lot.

Your next question will come from the line of Jay Habermann with Goldman Sachs.

Hey guys. I'm here with Sloan as well. Marc, to follow up on Tony's question a bit more, the concerns seem to be on the investors' part, at least New York City, structured finance, then obviously the leverage. Coming back to the leverage issue, why not essentially do more now? I know you mentioned again the 2 to 2.5 times multiple, but it would appear you probably could close that multiple gap if you attack that probably sooner than later, and obviously you said this is the worst market in 20 years, so perhaps it could continue to get worse for the next two to three years.

I would agree with you. When you say why not attack it now, the question is when to attack it. And I don't know that anyone has a right or wrong answer on whether that's April of 2009, March of 2010, January of 2011, or May of 2012. I think what I have said was we've dimensioned an amount of capital that I think would comfortably get us through 2012 and leave some cash over for a JV equity format, and that's in current market conditions. So not dramatically better, not dramatically worse, but current, which are not so good. We are working very hard and diligently on either extending out some of those maturities and/or selling real estate, pieces of real estate, or structured finance investments to generate maybe not all of that $600 million to $700 million, but maybe a chunk of it.

And I think that while we're looking closely at that alternative, so it's not as though we're not looking at that. I'm sure, like many other REITs, we're studying it hard, and we're weighing all the different possibilities. I don't think there's an easy answer to the question of does it justify the potential risk of what may occur in 2010, 2011, and 2012, versus today given where the price is. And everything is related to price. If the price were at a much higher multiple, like some of the peers in our trading group, then I think we might have a different view on timing, sizing, execution. So I think it all relates back to price, and it all relates back to the probability and certainty in getting some of these other transactions done that we're looking.

So if you read into my statements earlier to Tony that we're not going to do it -- I didn't say that, nor say we're going to do it. I just said it's not our preference. We do have some other things we're working on, which are our preference. If we can get those done, we think that's just a better execution for the Company. I think -- unstated, but I think the obvious conclusion would be if we can't get those executed, then we would probably look harder at that alternative.

So I don't know that we're seeing anything that's not in sync with what you're saying. If your point is timing, why not today, why not yesterday, why not tomorrow -- it is 2012, and we don't like -- we don't want to miss markets, but there's no certainty that this is the only window that will exist in the next 3.5 years, either. We just don't know.

You have to look at the fact, too that we are unique in the position that you can sell -- because of the size of our assets, you can sell one or two assets, so two transactions, and raise a substantial amount of equity dollars -- which is different than a lot of the other people that you've seen come to market who would have to sell 20 or 30 properties to raise the kind of capital that they did.

I guess it was more a comment about the asset sales market just remains very slow. It may still take six, seven, who knows, 12 months for it to fully come back, and even then investors are looking for pricing that's probably well above certainly what we're seeing today.

I guess I would say -- I don't disagree with that, but let's say did it take 12 months to come back. We have no more debt maturities this year. If you felt it was coming back 12 months, why -- don't read into that. I'm not sure we're going to do that. It's not an easy question. If it's going come to back in 12 months, it's got a shot at coming back, well, if you have no debt maturities, you certainly could wait and see how that develops before pulling the trigger and something the kind of size we're talking about. I'm not saying it's the right call. I'm just saying I don't think it's a black-and-white issue. That's all I'm saying.

Can you walk through or maybe Andrew walk through the loan loss reserve again? You mentioned Sti Town, but any upcoming or anticipated reserves? Are all of those still current?

The balance of the portfolio is performing. Sti Town's actually still current. In that case, there was a court decision that was very unexpected from everybody in the deal's underwriting, and there we thought that the write-down was appropriate. There are still some positions we have a careful eye on. Certainly we have an investment in the portfolio we have in Los Angeles, the Arden portfolio. Our out of New York investments are what we've said for the last six months or nine months we have the closest eye on. So we continue to evaluate those situations where there are pending maturities, and they're likely to be restructurings rather than takeouts. I would say 25% of the New York City portfolio is performing as underwritten, and we think we're getting down to a core portfolio, which ultimately will be recoverable.

Thanks, guys.

Your next question will come from the line of Michael Knott from Green Street Advisors.

Hey, guys, I had a question on move-outs. Looked like there were three buildings that had some vacancy increases because of the moveouts you mentioned due to lease expirations. I wondered if you can contrast with what looked like pretty steady at the Graybar Building. I know you guys have said before that you view that as a leading indicator. Can you help reconcile those two different schools of thought?

Sure. It's Steve Durels Graybar we always view as a barometer of the overall market because of its prominent location in Grand Central, the diversity of the tenant base, and also the size of tenants, everything from 300 feet to 200,000 square foot tenants in the property. Generally speaking, the activity in the building remains strong. We're running in the building, I think it's something in the order of about a 3% occupancy right now. Maybe actually a hair less than that. And we're seeing -- we're still seeing a lot of traffic come through the doors.

Overall, though, I'll say that in the past 45 to 60 days, we've seen a tremendous uptick in prospective tenants coming through the door, whether it be through inspections, brokering queries, proposals that are being exchanged, deals that are actually being negotiated right now, where we have some fairly significant leases that are out, and for both renewal and new deals. And that's in contrast to where we saw the world at the end of December going into January, where the phones were very quiet. We were basically wrapping up fourth quarter business at that point in time.

But I guess I'm somewhat cautiously optimistic that given all of the activity that's got us busy right now, that's a good indicator that there's life out there. A lot of it is driven from, as we've said end of last year, a lot of it is driven by tenants who are -- who had put off decisions and deferred their decisions, solved their lease expiration problems with Band-Aids of six to 12-month extensions. We're seeing some of those tenants come into the market. We're also seeing tenants with 2010 expirations that are now having to deal with it, and a lot of that is generating the volume right now.

Then in terms of your loan book, can you just give us a sense of what you think the future might look like? Is there going to be some work-outs where you become one of these mez lenders that put in a little bit more capital and you own the building? Do you think some of them are going to pay off? Can you, highlight, a, what you think the future looks there over the next year or two? Then also, Andrew mentioned I think three sales out of that book. I don't remember all three of those. Can you just remind of us the details there?

Sure. Michael, I would say the question is a little bit linked into where the financing market ultimately shakes out on its return. There's significant term remaining on many of our mez assets. So I think we anticipate most of the New York City assets paying off at maturity. There will be a couple where we may make the strategic decision not to extend, not to restructure, but to actually foreclose and take equity -- and I think we've, at the investor day we had a slide up of potential pipeline of assets which we consider desirable, strategic assets where we think we may be able to take over and do better than the current ownership, or our basis may represent the compelling opportunity. So I'd say on whole, we expect most to pay off, but there will be some targeted foreclosures. Then I would say on the asset sales, we didn't close three this quarter, I would say. That was the three we closed to date. There were no closings of new structured finance assets last quarter.

If I can, real quickly on that -- what's the status of the one held for sale?

There's five of them in held for sale. So we're in the market with those, and we think you'll see something close in the second quarter.

Okay, thanks.

Your next question will come from the line of Michael Bilerman from Citi.

Thanks. Irwin Guzman is on the phone with me as well. Greg, you talked about the line of credit, and having renegotiating with your lenders on that $1.3 billion, and maybe providing them added collateral, maybe making it quasi secured facility or having some recourse. Can you talk about how you're thinking of size of that facility? Because it plays into the whole de-leveraging and capital, given the fact that that is fully drawn, and you will need to come up with some capital to get downsized.

Sure. Look, any discussions at this point are obviously very preliminary, and interestingly enough, the feedback that we've gotten is from our lenders is that 2012 is a lifetime away and we have a lot of other issues we have to deal with before we get to you. I think if you look at what's -- if you look at some of the deals that are getting done in the marketplace, you are seeing facilities being reduced by 30% to 40%. But again, that depends on a lot of things, in terms of how long you are extending for, are you providing additional collateral and security or not. And it's funny, because all of the banks have different interests at some level in terms of how they want to move forward. So it's a little bit tough to tell, but I think down by 30% is probably a reasonable way to think about it.

And so when you are thinking about your $600 million to $700 million of cash, that takes you -- that takes care of all of 2010 and 2011 maturities, both secured and unsecured, and the remaining converts, again no additional financing, no additional sale. I guess then looking at 2012 with that $1.9 billion, which is the line of credit, the remaining convert and the secured piece, you would have to come up with some capacity -- let's call it 30% of the $1.3 billion at that point, and you're talking about selling assets rather than selling equity to get it That a fair assumption?

Just to make sure that the numbers are syncing out. What we talked about was converts and bonds, 2010, 2011, and 2012, that's roughly $660 million. And that plus, call it some paydown on the line, you can pick your number. I would hazard that if it it's 30% today, that may be something less in 2012 if the world is a fraction better, or at least the prospects of the world were a fraction better in 2012. That would sort of get it up to $1 billion as against the $1.1 billion that we talked about of capital that we would have by raising $600 million to $700 million, plus there's another $300 million that we earn internally. So I want to make sure those numbers are the ones that will tie to our recourse indebtedness for 2009, 2010, 2011, and 2012. If you're getting other numbers, I don't know what else you have in there.

Greg, you talked about the covenant cap reset in the third quarter. What specific -- and how are they different from the covenant calculations on page 26?

The assets are specifically valued under the credit facility by applying cap rates to trailing NOI. And those adjust in the third quarter, they adjust one time in the third quarter, and then they're set for the balance of the facility.

And the cap rate is already set, so it's just a matter of NOI decline. Given the lagging nature as we move, the value should hold steady?

Yes. But what you are seeing now is the NOI is going up as evidenced by the same-store increase that you are seeing. So the NOI that's being capitalized is actually increasing.

If we run that covenant today.

Again, we're not -- I threw out the one covenant to show you how far away from the actual limitation we are. Even when you adjust for that we're still 6 points shy of what the restriction is. So still a lot of room with the NOI on the uptick.

And just the last question on structured finance. When you look at that $700 million balance, and I realize some of that $100 million is held for sale, but on that $700 million balance, you mentioned a little over $80 million is nonaccrual today. How much on the remaining, call it $600 million, is accrued interest versus cash interest?

Oh, we'll have to -- let us come back to you with that number.

Okay, thank you.

Thank you, Michael.

Your next question will come from the line of John Guinee from Stifel Nicolaus.

My questions have been answered. Thank you very much.

Your next question will come from the line of Jordan Sadler from KeyBanc Capital Markets.

Hi, guys. Just circling back on that $600 million to $700 million equity -- capital raising, rather -- as you were laying it out, can you maybe handicap it for us in terms of what you envisioned sitting here today in terms of the sources, like what percent from asset sales versus equity versus debt from refinancing?

I can't handicap it. I would hope it would all be asset sales, where we are, but I don't know that we -- by the way, asset sales and refis, just to be clear. So I would hope it's all that. I can't handicap that. I think it's challenging. We certainly have some visibility for a portion of that. You're talking 3.5 years of time to do that if we were that patient, and I'm not saying we would be, but it's very difficult to handicap. We have a number of deals where if we were to make them all, we could clean the whole thing out. If you're half, then you're half. If you don't make any, then you got to really shift the way you're thinking.

On the asset sales, where do you think we are in terms of the cycle of asset valuation in New York City relative to the bottom? And then what type of asset sales are you looking to sell, leveraged versus unleveraged?

The issue is, there's not been a lot of price discoveries. As I said in my prepared remarks, we were very encouraged by the 1540 Broadway sale, and we think that could be an indicator of where in the intermediate time the market may shake out before tightening further as more competition comes into the market, but it's not there yet. It's tough to say, because there hasn't been a new market pricing level established yet.

Would you look to do a seller financing type transaction like the Deutsche Bank transaction? Would that make sense here?

It depends on how much -- we have a lot of properties with in place, very attractive financing, so we'd probably look to sell one of those first, because if we were to sell an unencumbered asset with seller financing, it likely wouldn't generate enough proceeds to be of interest to us.

Lastly, I think you mentioned Sti Town is still current. Could you give us color of the $84 million that are on nonaccrual? Are those all non New York City assets?

By the way, Andrew made the point that the loan as structured is current. Within our portfolio, we have that on nonaccrual. So I should point out that of the $84 million, we actually are still getting payments on some of those that are nonaccrual, but we used that cash to sync the principal balance.

What was the question?

So the $84 million that are on nonaccrual that are not Sti Town -- are those New York City assets or non New York City assets?

There is one other non-New York City asset. All the rest are New York City.

Could you give me a number or percent?

In terms of dollars?

Yes.

30% of the $84 million.

I would sort of invert it. Only $25 million of that amount is a New York office building. The rest is non-New York office. So $25 million of the $84 million is a New York office building, which we inherited as part of the Reckson trade. I think we talked about that before as part of two nonperforming assets that we inherited when we acquired Reckson. One of those, or both of them actually are on the nonaccrual list. One's a New York office. One's an outside of New York. Both are on non accrual.

That's helpful. Thank you.

Okay, is that it, operator? One more question, operator?

Your last question is a follow-up from the line of Michael Bilerman from Citi.

When you're thinking about, I think Marc had talked about being 9.5 times debt to EBITDA, what do you think about that ratio relative to a more normalized level, which I think I would argue should be lower? And when you're thinking about your denominator, your EBITDA, is that a cash EBITDA number that's adjusted for straight line rents and all the FAS 141, or is it a GAAP EBITDA number?

The 9.5 is we think probably long term should migrate closer to eight times, is the right way to think about it, and it's based upon the earnings guidance that we provided.

Is that GAAP or cash?

GAAP.

It's GAAP. So arguably, when you adjust down for the higher straight line, and FAS from the prior Reckson deal -- ?

It's probably a little bit higher. The point is you do an apple to apples comparison, because it's GAAP for everybody else.

There's people that run the numbers different way. If you run your numbers all on cash --

If we did it cash, we would then be comfortable with a higher multiple than eight. So eight is the GAAP equivalent to the question you're asking.

Just last question, I think you talked about the proxy being released on Friday, and you talked about the significant savings you made on G&A. Marc, how are you thinking about potential new incentive compensation plans and how that all factors into G&A load?

I guess the last incentive plan we put in place was back in 2006. I think that is expired, or if not expired -- ?

Retired.

Expired or retired by its terms in 2009. So I would say right now there are no incentive plans in place, so I would expect over the next period of time, not doing it at the current time, but maybe in the second half of the year, year end, to put some kind of new incentive plan in place and or option plan. There's been very little in the way of option issuances also in the past couple years. So I do think that consistent with our program in the past, all the incentive programs that looked -- that were very controversial at the time of input in terms of size, they turned out mostly to be as you would expect them to be in a falling stock environment, they're either worthless or dramatically less than the stated values put in place, and that's appropriate. That's the way they were intended to operate. With that said, we would expect for the next two to three year period of time that we'll be working the assets will be some form of new incentive plans. But right now we're not working on anything, so I can't give you any description or sizing or timing.

And just if I can squeeze in one last one, just on 1515 and the mortgage that's coming due, I know you have a little bit of an extension option. I didn't know if you thought about -- ?

Comes due in the middle to end of 2010, and we're planning to go out with our JV partner sometime in the beginning of 2010 for refinancing.

Thank you. Thank you, operator.

Everyone, we're off to a pretty decent start in the second quarter, one month into it. Look forward to speaking with you all again in three months. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.