SL Green Realty Corp (SLG) 2009 Q2 法說會逐字稿

Thank you everybody for joining us and welcome to the SL Green Realty Corp. second quarter 2009 earnings results conference call. This conference call is being recorded.

At this time the Company would like to remind the listeners that during the call, management may make forward-looking statements. Actual results may differ from predictions that management may make today. Additional information regarding the factors that could cause such differences appear in the MD&A section in 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 measures most directly comparable to each non-GAAP financial measure discussed, and reconciliation of the differences between non-GAAP financial measure and the comparable financial measures, can be found on the Company's website at www.slgreen.com by selecting the press release regarding the Company's second 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.

Thank you. Good afternoon, and thank you for calling in today.

We recently concluded a pivotal quarter in which substantial progress was made towards addressing our near-term debt maturities, while producing solid operating results in our real estate portfolio. More than two years into what is arguably the worst downturn we have faced in the past 30, we have taken affirmative actions to stabilize our assets while reducing our liabilities and increasing our cash liquidity. While more challenges lie ahead, I believe the steps we have taken to preserve and raise capital better positions the Company to be a net beneficiary of the market upturn that will inevitably occur.

The extent to which we will look to take advantage of key market opportunities will be guided largely by where we believe we are in the cycle relative to underlying market fundamentals. To that end, we continue to see a receding in the panic and fear that gripped much of New York's financial services industry during 2008 and early 2009, with certain commercial and investment banks returning to profitable for the second quarter in a row. We are also beginning to see a slowing in the pace of contributed sublet space.

The rate of job losses appears to be declining according to New York City budget data, and there is evidence of financial firms with relatively stronger balance sheets capitalizing on the opportunities presented by the market, resulting in sporadic new hirings and a realignment in power among New York's major financial firms. The average of available statistics show that the vacancy rate has risen to approximately 12% to 12.5%, with sublet space comprising approximately 4.5% of that total near its historic highs. The rental direction over the past 12 to 18 months has been sharp and painful for all landlords, but I believe we will see evidence of a bottoming in 2010, which would be consistent with the long end of the range of peak to trough cycles when compared with prior economic downturns. The rental reductions, only partly evidenced by rate declines, are further evidenced by a significant increase in tenant allowances, which have to be competitive with turnkey sublet space in this market.

From a landlord perspective, owners will continue to be divided among two camps, those like SL Green that can shoulder the burden of temporary but increased capital expenditures to maintain occupancy and those that can't, many of whom will ultimately wind up losing their properties to their lenders. However, I am confident that for the first category of owners who have the financial wherewithal to press ahead in this market, we will be rewarded in future years, when most competitive sublet space has been eliminated or reabsorbed into the market, and landlords again will be able to curtail tenant concessions and increase rents in a recovering market. You can see the strategy playing out in SL Green's own portfolio, where over 500,000 square feet of leases were signed during the quarter, with the majority of that in midtown Manhattan at rental levels that are more than 20% above replacement rents.

Notably, we maintain our occupancy at 96.2% as of quarter end, albeit holding occupancy required us to grant higher levels of tenant concessions for both new and renewal tenants. However, even in this market, the existing landlord still has the decided advantage with existing tenants, due to a general desire for tenants to want to make deals with existing landlords, and avoid disruption and moving costs associated with business relocations. That effort goes into maintaining our occupancy base, and pricing advantage in this market is only partially told by the occupancies statistic. A lot of the work happens behind the scenes, as we work with existing tenants to manage the reoccupation of sublet space in an orderly manner, so as not to give rise to excessive competition for space within our own buildings. With 24 million square feet owned in Manhattan and seven million square feet more owned in the suburbs, this is a massive undertaking, but one in which our leasing and management teams have risen to the challenge, and our outperformance will become even more notable in future quarters when the market finally bottoms out.

Not to be outdone, and consistent with the competitive spirit we try to foster within SL Green, the suburban division delivered in a very big way this quarter, with total lease volume of 217,000 square feet signed in 31 deals, the highest volume quarter since being affiliated with SL Green. The mark to market on that leasing activity was a muscular 0.8%, but positive is positive in this market, and we were very pleased with that result. The most notable transaction was a deal signed with ConEd Solutions in Valhalla, right at the end of the quarter. Important to note that this deal literally began as a cold call one year ago, and was brought to its conclusion in part given SL Green's strong relationships and buying power on the utility side, aggregated between New York City and the suburbs. Notwithstanding vacancy rates of upwards of 20% in Westchester and 18% in Connecticut, the suburban portfolio weighs in at a 90% occupancy rate, and my hat's off to the folks in our White Plains office for holding up their end of the bargain in this very tough economic climate.

Advancements with the balance sheet is another area of achievement where progress accelerated during the second quarter. Over the last nine months we have reduced SL Green's balance sheet leverage by over $1 billion, through a combination of early and scheduled debt retirement. This sizable amount of deleveraging was funded through cash on hand, asset sales and reduction in dividend. Gains on this activity have exceeded $150 million, making the deleveraging not only prudent but economically attractive during these difficult times. However, we recognize that, given reduced rents in our market and asset value declines, that a further reduction in our indebtedness is necessary to get to a targeted debt to EBITDA multiple of approximately eight times EBITDA going forward.

We have a plan that I believe is readily executable to achieve this goal, which consists of deploying some but not all of our cash on hand for further corporate debt reduction, combined with certain secured refinancings, which will produce excess proceeds, significant internal cash flow as a result of the reduced dividend, and potential additional asset sales that will create liquidity and also reduce balance sheet indebtedness meaningfully. That game plan, which was executable but tight one quarter ago, became much more manageable with the completed equity raise in the amount of $400 million during the second quarter; a very difficult but ultimately correct decision by Management and the Board of Directors to execute a significant but right-sized amounts of equity to address all four debt concerns that we believe is prudent through 2013. The offering was well received by both existing and new shareholders, and on a relative basis SL Green's stock is significantly outperforming the REIT index since the date of issuance.

Turning now to another strategic objective discussed at the outset of the year, we have reduced our structured finance balances from approximately $1 billion to just over $600 million in the past six months, through a combination of loan sales, paydowns and loan reserves. The single largest contributor to the loan reserves this quarter was the sale of a single mezzanine note. This type of sale, which was done to generate capital as opposed to mitigate underlying credit risk, will be de-emphasized going forward, due to SL Green's materially-improved balance sheet position. Loan loss reserves, which peaked in the fourth quarter of 2008, have trended downward in Q1 and Q2, and I expect that downward trend to continue in subsequent quarters.

At this point in time, over 80% of the remaining book is located in Manhattan, with under 20% held for sale in markets outside of New York City. In fact, we are now looking at the remaining positions we have in Manhattan assets as a source of potential growth in opportunity, as we have several positions in Manhattan office buildings, encompassing nearly 10 million square feet of potential pipeline, at average debt yields in the range of 6.5% to 7%. I would fully expect that certain of these positions will be foreclosed upon, providing SL Green with the ability to reposition and approve these underlying properties, such that future gains will be realized either through incremental NOI, if we decide to hold those assets, or through gain on sale if we ultimately decide to dispose of those assets in better markets.

All in all, it was a good quarter. Still, however, our headlines will be dominated over the next few quarters by a lack of credit in the market, and the excess sublet inventory. I would continue to encourage everyone to watch for improvement in these two key metrics, as a leading indication of market inflection which has not yet occurred but draws nearer and nearer.

With that, let me turn it over to Andrew Mathias.

Thanks, Marc.

The stand-off between buyers and sellers continues in the Manhattan market, with a couple of notable exceptions. The Worldwide Plaza sale closed within the last few weeks, which was the last of the EOP assets to trade out of Deutsche Bank. Deutsche did provide seller financing on that sale; however, this sale does demonstrate a well-capitalized buying group comprised of family and opportunity fund money was prepared to take on upwards of 600,000 square feet of leasing risk in this market, and write a check we estimate in upwards of $200 million of cash equity.

The other notable property on the market at the moment is a sale lease-back of a major financial institution on Fifth Avenue. This offering also drew considerable buyer interest, and is reportedly close to going to contract after getting bids in excess of -- from 20 or so different groups. Both of these deals have large elements of vacant space, giving us insight into the buyers' mindset that rents have at a minimum stabilized; if not, these buyers are undoubtedly projecting a rental recovery in the near term, which they will be leasing this vacant space into.

There continues to be a broad based group of buyers, both foreign and domestic, looking for bargains in Manhattan. As we have entertained various proposals with respect to 485 Lexington, we have seen first-hand this eclectic mix. This depth keeps us very confident about the markets' ultimate recovery. However, we don't see a breaking of this logjam until credit in size returns to the market. [Health] and other programs to date have not have any measurable impact on the market, and until there's a return of financing on a large scale, it is difficult to see buyers and sellers have a meeting of the minds.

Our own activity for the quarter consisted of our sale of mezzanine and equity interest in 1166 Sixth Avenue, and a new structured finance investment in 1330 Sixth Avenue. First, the sale. We sold an 11-year instrument, with approximately a 15% return to the buyer. The charge-off we took on the loan was solely related to a mark to market discount on the note, as the purchaser is underwriting a par recovery on the loan at maturity. While we feel the note represented an attractive risk return, the duration profile was a bit long for SL Green, and the sale freed up capital to pursue more opportunistic investing, whether in our own balance sheet or external investment activity. As Marc indicated, it is unlikely we will be selling further positions in the near future, as we are nearing our core group of assets we have either targeted for hold to maturity or foreclosure.

During the quarter, we also bought an interest in the mortgage at 1330 Sixth Avenue. This building was recently foreclosed by a mezzanine lender who stepped into the ownership shoes, and is continuing the full building redevelopment undertaken by prior ownership. We are the special servicer on the loan now, and this represents a good example of the types of opportunities we see going forward, as the market presents us with unique situations where we can utilize our debt and special servicing expertise to get involved in troubled capital structures.

To this end, during the quarter we received our second formal rating on our special servicing business, adding Fitch's CSS2 rating. SLG is one of only 17 servicers in the country to attain that rating, and the only equity REIT on the list. Additionally, Standard and Poor's upgraded our rating to their select list of servicers during the quarter. We are finding this business to be a valuable source of information, in addition to a profitable enterprise for the Company. We are actively tracking quite a number of these developing situations as loans hurdle toward maturity, and we intend on using a small and prudent portion of our balance sheet to pursue the best of these opportunities, as we did this quarter.

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

Great. Thanks, Andrew.

During the quarter, we were able to make good progress in strengthening our balance and continuing the deleveraging process. The highlight for the quarter was of course the equity raise, which netted us $387.3 million. As we laid out in the marketing materials for that raise, we sized this offering based upon our belief that there were other sources of liquidity within our portfolio. A number of these sources were realized during the second quarter, with the $40 million upsize of the 625 Madison loan, the $58.5 million realized from the sale of structured finance, and the $55 million of internally-generated cash flow after deducting the payment of the newly established dividend from our second quarter FAD. In addition, through the vigorous contraction of our rights, we were able to obtain a $30 million of fundings under our credit facility, which had been previously withheld by one of the participants.

During the quarter we also signed a term sheet with an insurance company for the refinancing of our 420 Lexington property, which we expect to close during the third quarter. The term sheet calls for a seven year, $145 million loan that bears interest at 7.5%, with two one-year extensions and a 30-year amortization schedule. This loan will replace the existing $108.5 million mortgage that bears interest at 8.44%. This financing helps demonstrate that even in the worst of credit markets, our buildings can get refinanced and in certain instances generate incremental liquidity. Similarly, we were pleased to have a major pension fund provide us with $40 million of increment financing at 625 Madison Avenue for six years, which resulted in a blended rate on that loan of approximately 7.22%.

As Marc mentioned, since last October we have repaid $1 billion of debt, including $700 million which has been repaid here in 2009. Our combined debt load for the year has been reduced by almost 9%, with our average debt maturity being extended from five years to closer to 5.5 years. Through the bond buyback program, which was commenced in October 2008, we have repurchased $732 million of bonds. It is worth noting that the new convert accounting allows us to recognize only $155.2 million of gains, when in reality the Company has saved approximately $200 million, having achieved these repurchases with only $532.7 million of cash.

Despite our concerted efforts to simplify our business and provide detailed disclosure, our debt to EBITDA multiple remains a great mystery to the Street, with estimates ranging anywhere from about 10 times to more than 27 times. Much of the confusion seems to occur as a result of the GAAP presentation of our JV interest and depreciation. We would refer people to page 12 of our supplemental where, with a little simple math, you can put a help put an end to this great mystery.

Here it is easy to calculate EBITDA for the six months ended June 30, 2009. Here you can see that our consolidated properties generated $257.4 million of NOI, our share of our JV properties generated $108 million of NOI, our structured finance portfolio generated $32.4 million of NOI, and we had other income of $29.4 million of NOI. It caused us to run the Company at $35.9 million of G&A, leaving us an EBITDA amount for the first six months of $391.3 million.

Our combined debt at June 30th is clearly set forth there at $6.85 billion, and when you net the $377 million of cash on the balance sheet which will be used to retire debt, our net debt balance is $6.475 billion. With a little annualization of this EBITDA number, one can see that the EBITDA multiple is 8.3 times. And when one backs out the straight line rent included in these earnings numbers, it is 9.15 times; a far cry from 27 at the high end of the range.

Much also been written regarding the appropriate debt to EBITDA multiple at which a REIT should operate. Of course, this one-shoe-fits-all approach to real estate is hardly appropriate, as it is a unique and complicated asset class. For example, 20% of our combined net debt resides in two assets, 1 Madison Avenue and 388/390 Greenwich. These assets are fully occupied, with net-type leases to credit tenants that have an average remaining lease term of 11.5 years. Such assets naturally lend themselves to a higher leverage point, which need not be a bad thing if structured appropriately with some amortization and long-dated maturities. The average remaining maturity on these financings is 9.8 years. Interestingly enough, the EBITDA multiple that we just calculated would drop from 8.3 times to 7.7 times if these two assets were excluded. This may be one of the reasons that our targeted EBITDA multiple is higher than others.

Turning to the P&L, it was a solid quarter, particularly for our core operations. We were able to maintain our Manhattan occupancy at 96.2%, with gains at 100 Park, 1350 Sixth Avenue, 485 Lexington and 420 Lexington, offsetting scheduled lease expirations at 750 Third. As Marc mentioned, we continue to see an uptick in PI dollars, which averaged $53 for the quarter. This increase was most notable at 461 Fifth Avenue and 1356, where we made use of our pre-built strategy. The pre-built attracted a number of high quality tenants, and these installations often last well beyond their initial lease terms.

Notwithstanding the tough operating environment, our same-store NOI continued to grow, posting an increase of 2.1% for the quarter. Note that these results were achieved inclusive of $2.5 million of additional receivable reserves, which were recorded during the quarter. These reserves were not necessarily related to tenant-specific collection issues, but rather a precautionary approach to a challenged operating environment. Our structured finance income for the quarter was down approximately $1.5 million this quarter versus last quarter, as a result of lower LIBOR and one additional loan that was placed on non-accrual.

During the quarter, we recorded reserves of $45.6 million against three structured finance positions, the largest of which was $38.5 million resulting from the decision to sell our 1166 Sixth Avenue mezzanine position. With the successful sale of 1166, we also made the decision to hold to maturity another New York asset which was removed from held for sale at quarter end. To summarize, at 630 we have four assets held for sale with a carrying value of approximately $73.8 million, and 25 assets which we intend to hold to maturity with a carrying value of $534.5 million, or a total structured book of $608.3 million.

Our other income for the second quarter includes approximately $4.8 million of incentive fees, which became recognizable with the sale of the Mack-Green joint venture. This sale also enabled us to eliminate $49 million of combined mortgage debt. Our MG&A for the quarter was $17.9 million, which is consistent with the first quarter year, and keeps us on pace for a 30% reduction over 2008. This over $30 million of projected savings has been principally achieved through the reduction of incentive-based compensation, as well as head count reductions and cost containment measures. Interest expense for the quarter was down $3.4 million, reflecting the benefits of our deleveraging efforts as well as lower LIBOR.

As we head into the second half of the year, there are several items to keep in mind when projecting our earnings. The weighted average shares outstanding for the third and fourth quarter will be approximately 79 million shares, representing a full quarter's impact of the May equity raise. There is, as we have discussed historically, some seasonality to our operating expenses, which generally run higher in the third quarter summer months.

As previously announced, Citigroup will be vacating approximately 193,000 square feet at our 34th Street property during the third quarter. As Andrew mentioned, we may foreclose on selected structure finance assets, or we may be required to take some additional structured finance reserves. Also during the first half of the year, we have benefited from historically low LIBOR rates, and we will incur certain defeasance costs associated with the repayment of the 420 Lexington loan. Giving consideration to these variables, we are reaffirming our FFO guidance of $4.35 to $4.50 a share for 2009.

And with that, I would like to turn it back to Marc for some closing comments.

Okay. We will hold off on closing comments first, and we will go straight to questions, Operator. It is 2:30, so we have left some additional time for questions if there are any from the listeners.

(Operator Instructions)

Our first question is from James Feldman with Banc of America. Please proceed.

Hi. Thank you very much. Marc, you talked about how it seems like the market may be nearing the bottom; can you just give us an update on what you saw in the second quarter, in terms of the type of demand from users that maybe you hadn't seen thus far this far this cycle, and then also the type of space that was being given back in terms of sectors and types of companies?

I can take you through some observations, I'm here with Steve Durels also, who can add to that, but we saw what I would call sharp contraction in financial services through almost all of '08, and again the first month, two or three in '09. That sharp contraction is much more mollified right now; I don't want to say it's gone, but it's not nearly as forceful as it was over that sort of 15-month period, so that unto itself is the basis for a lot of my speculation that we may be nearing the bottom.

In terms of new activity, what we are seeing is expansion in selected healthier firms, who are picking up business lines, divisions, resources from some of the companies that had to shed, and as a result there is movement and expansion that we're seeing in -- certainly within some of these consulting firms, accounting firms, law firms, certain hedge funds that we see are sort of back in the market, whereas there was a void there for six months or so. I would say those service industries which have been sidelined for much of the year are kind of sporadically back. I don't want to say with any kind of forcefulness, the occupancy -- or the vacancy rate did increase quarter to quarter, so we are still heading in the wrong direction. It is just with less ferocity, and because of that we are seeing in our own portfolios, and we think the market generally, signs that we are getting near a bottom. That's the best, the best feeling and pulse we have for it. It kind of feels like the ebb that we've noticed in two or three prior cycles, where you are not yet there but heading in the right direction. Steve, do you want to add to that?

I will add, you know, the big takeaway on it is we are not seeing demand by any one industry; it is a lot of -- it is a lot of different industries. In addition to the list that Marc provided, we are seeing demand from education groups, we're seeing demand from Government, and a lot of general basic line businesses. It is not just law firms, it's not just financial services, the way you heard us talk about it a couple of years ago.

Specific deals, you saw deals that were done in our building at 750 Third Avenue with an accounting firm, [Markham and Cleeman], that was 67,000 feet. There was a deal done with Geller & Company on Third Avenue. The Consulate General of Japan for a government deal. Edison Schools did a big sublease on Lexington Avenue. So -- InBev, which is Budweiser, did a big deal on Park Avenue. So it is really broad across-the-board.

Okay. Can you just discuss your current bankruptcy watch list or credit watch list, kind of how deep it goes right now?

We were going through that just before the call. Depending on your point of view, it is either not so bad or certainly worse than in any prior quarter we've had, but still we have three tenants over 25,000 feet that are what I would call either in significant arrears or bankrupt, and that's out of 1,000 tenants in total -- I don't know how many of those are over 25,000 feet, but there are three that are currently in that camp. When we drill down to top 10, the tenth biggest tenant that fits that category is 4,000 feet.

So we have been very fortunate, I would say to date, at keeping our bad debt and/or bankruptcy, or tenant litigation risk -- material tenant litigations down to a very small percentage of our rent roll and of our lease space. And I would like to credit that to a number of things, anything from our proactive ability at blending and extending people who we think are survivors, or cycling out of our properties companies we thought were not survivors, or just for tenants that have gone bad we have quickly replaced them in this market, albeit at an increased cost. As a result, we do have some work ahead of us with these tenants, but I think anecdotally I would say this is probably a much more manageable watch list that we have in front of us now than many of your peers are dealing with, and in part I think the strategy -- our portfolio management strategies have paid off because I don't think we could have predicted, envisioned or prepared for a much worse market than we are currently in.

Let me just add to that. There is one interesting stat, because everybody always asks us, you know, how -- what do we do when we are confronted with a scenario of a tenant knocks on our door and says I need rent relief, how frequently are we doing that, and how are we handling the situations? Before the call, we added up the total square footage tenants where we've either provided rent relief in the form of a deferral agreement, which is essentially a short-term loan, or a modest amount of rent reduction, or more frequently, an early lease renewal where we blended extended, that total square footage of deals that we have done year-to-date only covers 132,000 square feet, which I think is testimony to the fact we have a pretty strong portfolio.

Okay. Thank you very much.

Thanks.

Your next question comes from Ian Weissman with ISI Group. Please proceed.

Good afternoon. I was wondering if maybe you can -- given the drop in rents in New York City, the dramatic drop in rents, especially in the Plaza, maybe you can talk a little bit about how some of the fringe markets in midtown will perform, as tenants might seek out quality? And particularly, your assets let's say in and around Grand Central?

Just out of curiosity, are you referring to Grand Central as a core location or a fringe location?

I am saying -- my assumption is that the Plaza District, which is probably some of the most desirable space in New York City, has seen rents drop about 50%. The cost differential is no longer $125; you can get space in the Plaza District today for $50 or $60. So we haven't seen that dramatic of a drop in rent, I think in the fringe markets, let's call it Grand Central, Third Avenue, the West Side. I just want to know how do you think your assets -- or let's just put it, how do you think assets outside the Plaza District will perform in this market?

Got it. I am going to refer to Grand Central as the Grand Central market, and it is still a highly desirable market, in our minds. There has been a rent correction. It is not 50%; it didn't have the run up that the Plaza did. It also doesn't have, let's say, the absolute top-end Class A in general that the Plaza District has, which is partially the reason that the run up was so much more pronounced in plaza than Grand Central. But I would say Grand Central, which is our biggest sub-market, is performing reasonably well all things considered, meaning the buildings tend to be fairly well occupied. Our biggest vacancies in that market is 100 Park Avenue, which has to do more with the redevelopment timing and warehouse more than anything else, which we are making great inroads with, as you have seen the leasing activity. Most recently, I don't know if it has been announced or not --

Wells-Fargo and then --

Okay. And -- on the heels of that, and --

Hello?

Sorry.

At [UCT] which we closed for 20,000 a week ago.

I had a cold that one [and sneezed]. Just managed to, we slipped -- a 20,000-footer slipped his mind, but we just signed a 20,000 footer at UCT at 100 Park Avenue. So there's good demand there, Graybar well leased, and this is a great barometer for the Grand Central market. Third -- so anyway, Grand Central I would say hasn't experienced the rent declines that the Plaza has, and velocity is good, and I think it is a stable market.

Third Avenue, I would agree with you, there's -- there's just a lot of inventory on Third avenue, not necessary because it's a fringe market; I think you've had the culmination of a couple of big occupants on Third Avenue that have just unfortunately at the same time put back a lot of space on to the market, be it in the form of Teachers, who probably led the charge there with how much -- you know.

Let me ask the question another way. I mean, is it safe to assume that the Plaza District will recover faster than some of the other fringe markets or markets outside the Plaza District? I don't want to call your markets fringe, but other midtown markets, just given the desirability of the locations?

Let me address it this way. It's dangerous if you look at a sub-market and sort of the general steps to get published the way you see the rents in Plaza District. It is important to remember that rents in the Plaza District rose the highest of any of the other sub-markets in Manhattan, driven largely by financial services, and largely by the rents that were being asked and the leases that were being signed for the top third of those building. There was a real night and day pricing difference between the top of the house versus the middle and the bottom of the house in a lot of the Plaza District buildings.

And if you take a couple of our buildings in that district like 810 Seventh or 1350 Avenue of the Americas, you saw there was a short period of time where there was astronomical increases in rents, driven largely by financial services as those industries went forth at the best rents, and it got very competitive. When that part of the market disappeared, you had a huge price correction. So I think we're now seeing good demand in that market, and at the same time, during the whole chaos of the past seven or eight months, Grand Central, Third Avenue and the rest of the midtown market has still, you know, treaded pretty decently.

Finally, I think it is a very impressive feat that you guys have been able to maintain occupancy at 96% in this environment and market. If you said you are going to bottom, or at least the market is going to bottom, sometime in 2010, what is your expectation for where your occupancy will end at that bottom?

Where Green's occupancy will end?

Green's, yes.

Well, I'm hopeful not to lose more than a point a year of occupancy, so I think we're holding to our projection of 95% at year end, although it certainly would appear that we have a chance of exceeding that at this point. And, you know, unstated, but I think it would be fair to extrapolate somewhere around 94%-ish next year, if things are sort of consistent with the views that I expressed. If they're a lot worse, then it could be lower than that, and if it is, you know, more quickly moderates in the second half of this year and next year, then maybe we don't even touch 94%, but I guess that would be my best guess at this moment.

And that's against the backdrop of a market which could be at 15% availability, is that correct?

Yes, up to, you know -- and again, availability versus vacancy, I tend to quote vacancy; there is a lot of conjecture on availability. So right now, working off of what I am saying is around 12% to 12.5%, and maybe there's a couple -- you know, 100 to 200 more points coming, then that would be consistent with the numbers I just said.

Remember, our leasing to date is ahead of schedule. When you look at our 2010 expirations, we only have around a million square feet of space actually expiring.

Thank you very much.

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

Hey guys, good afternoon. Here with Sloan as well. You commented on reducing leverage, and then Greg gave some specifics on sort of leverage and debt to EBITDA. It sounds like you are sort of close to that target of eight times, but I am just curious how much you guys are thinking about in terms of asset sales, excess proceeds from refinancing, because you do have the benefit obviously of having reduced the dividend, so you are saving a couple hundred million a year, but should we expect to see much more in the way of deleveraging over the next 12 months or so?

Well, there's two levels of deleveraging. There is one that I would say is almost certain, which is coming out of the cash on hand that we are holding, which I think Greg referred to and gave you some specific parameters on how we intend to deploy that cash over and above the amount we intend to hold in corporate for general use and for growth. So that amount I think is relatively certain, and then how much beyond to hit our target is sort of a function of what the EBITDA is going forward.

So I can't give you an exact number, but I would say if you run it through, there's probably another $500 million to $900 million of reduction coming over the next two two three years, which we would do either internally or, just by way of example, if we sell a building like 485 Lex, which is a building we've have off-again/on-again considered selling in this market, there's $450 million of balance sheet reduction in one fell swoop. So it's -- we have to work through to get to an exact number, but I think looking over a two to three-year period, out of cash flow, out of further asset sales, both the proceeds we get and the debt it relieves us of, somewhere in that $500 million to $900 million range is probably a fair number.

Your next question is from Michael Bilerman with Citigroup. Please proceed.

Good afternoon. Maybe just continuing on the rent theme, as you think about the market, and you talked about trying to really push occupancy and sort of accepting what the market is in terms of higher inducement packages, free rent, but you are going for term on those leases, how do you think about I guess encumbering the portfolio with those net-effective rents today under that duration, and sort of what that means from a value perspective?

Fortunately, we don't have a lot maturing in -- fortunately, we don't have a lot maturing annually as it relates to our whole. So if we have 23.5 million, 24 million square feet in total, we may be look at a million feet a year. Next year or the year after, the balance of this year it is under a million square feet remaining. So yes, to use your words, we are encumbering that portion of the properties with some pretty uninspiring net-effective rents, but it still represents a small fraction of our investment in that portfolio, and I do think member that when that sublet space starts to attrition, then you are going to see the net-effectives bounce back, maybe not to levels two years ago, two and-a-half years ago, but certainly to a normalized level that will be very economic.

So one, we are trying to -- where we are doing big capital credit deals, we are trying to get 15 years out of those tenants, which one, it kind of caps the upside -- but we are getting rental bumps. Remember, everything we quote to you guys on the -- to The Street, on a quarterly basis on mark to market is a starting rent figure, not an average rent. Steve and his team are doing a very good job of getting embedded rental increases that we are going to enjoy as the market recovers. Contractually, plus we are getting term, so we are amortizing a lot of that excess tenant concession, in certain cases over 10 or 15 years. I think we have one of the longest lease durations in the office sector.

So the numbers are big, appear big, but when you sort of carve it down for those factors, rent bumps and term, it is not as bad as it seems, and hopefully this is not more than another year or so phenomenon until sublet space is absorbed a year, a year and-a-half, two years, then -- I think it is unfortunate, but it is what it is.

We ask that you please limit your questions to one per person. Your next question comes from the line of Brendan Maiorana with Wells-Fargo Securities. Please proceed.

Good afternoon. With respect to opportunities that you're looking at, understanding you are likely to delever a little bit over the next couple of years, but as you think about the cash that you have on your balance sheet, and potentially deploying that cash, how do you see the opportunities between the structured finance book and then looking at wholly -- or property acquisitions? And then thinking about that with potential investment partners, and how that stands?

I think on -- in terms of the equity opportunities, the challenges, as I outlined it, there's not sort of a healthy, active market between buyers and sellers. It is still very fractured because a lot of it -- the properties that would trade are encumbered with legacy leverage, and it is really up to the lenders the ultimate disposition of those properties. So our JV focus would be on the equity side. To the extent we start to see some good equity opportunities, you know, we have a big stable JV partners, we have -- you know, we have done joint ventures since 1999, and we have a lot of very long successful partnerships, and all of our guys sort of have capital and are ready to jump into the market at the first -- first sign of an opportunity. So, you know, we've had all of those conversations, and I think we have a good understanding of where our partners want to see opportunities. Nothing has emerged yet.

And then in terms of the structured finance, I mean I think it is similar to 1330, where we are making a small sort of pry-the-door-open investment, if you will, taking over special servicing of the asset in certain instances. So in the case of 1330, we are the special servicer for a $240 million capital structure there with a, you know, a $10 to $15 million investment. And those -- those opportunities we're probably likely to be pursuing on our own. Although I wouldn't rule out a joint venture partner, but historically we have done them more ourselves.

Anything else?

Next question.

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

Hey guys, can you talk about 485 Lex a little bit more? From what we had read in some trade rags, it sounded like the nominal price on the deal was over $500 million. Can you just comment on strategically how you are thinking about that deal, and what would sort of push you one way or the other?

Sure. I think that obviously one of the challenges there is we have a very attractive piece of financing on that property, which is why it was a good candidate for sale when we first started entertaining interest on the property. I think we have a very attractive after-debt cash flow from that asset. So we are certainly weighing the benefit of continuing to hold it and being the beneficiary of that after-debt cash flow, versus the offers we've gotten to date. And we are working with a couple of groups, and I would expect to probably in the third quarter make a definitive decision one way or another in terms of the direction we are going with the asset. But I think it's -- it's probably pretty likely that it winds up under contract to one of the groups that's looking at it.

Thank you.

Your next question comes from the line of Ross Nussbaum with UBS. Please proceed.

Hi, guys. It is Ross Nussbaum here. Marc or Andrew, a question on the structured finance side, I think you talked about the possibility of foreclosing at some point on a couple of the investments. How should we be thinking about the subsequent capital requirements on your part, to the extent that you're foreclosing as the mez lender and need to pay down a portion of the first? How can we think about potential capital requirements and timing there?

I think it sort of depends on the situation. But most -- most of our -- where it's a mezzanine investment and we have a senior loan in place, I would say generalizing, most of those senior lenders are not interested in sort of taking back real estate right now, and they're generally inclined to extend out. So we think -- we certainly wouldn't be in a position of having to take out a senior loan or give it a very significant paydown.

I think it is more likely going to be in the circumstances where the assets have lease-up requirements, and prior ownership, prior sponsorship, has not done a good job of filling up those holes in the rent roll, we step in. I think the conversations with senior lenders have more been along the lines of give us some comfort in the form of funded reserves or whatever it is, that you're going to write checks for capital to complete the lease-up of the building. We have a couple of situations like that, I would say, that are the most likely-driven type of situations we're in.

I think Rob Salisbury has a question as well.

Hey guys, it is Rob Salisbury. Actually, just to kind of follow up on the structured finance stuff. I think last quarter you guys were carrying that at about $0.80 on the dollar. Just wanted to know sort of where is that mark now at the end of the Q2? And maybe if you could help us understand where you came up with that valuation? Thanks.

Yes, we go through -- well, there's two different buckets. There's the held for sale, which are marked to market in anticipation of a sale, and then there's held to maturity, evaluated for whether there is a credit loss or not. So that is -- you know those are -- with those parameters, as dictated by GAAP, that's how you come up with $608 million carrying value that we have at 6/30.

So as a percentage of face value, what would that be today?

As a percentage of face value -- hang on a few seconds.

Thanks. I think at the end of 1Q, it was $691 million on a face value of $852 million?

The 608 is approximately 78% of the original base.

So it went down by about 3%, roughly?

From what, 81%?

Yes.

The answer, that's mathematically probably correct, but there's a much higher proportion of reserves on the held for sale, and that's appropriate and also guided. On the hold to maturity bucket, there's a number of those loans where we believe they are par position. Now, if we were to sell those positions today, like 1166, and that was very long-dated, these aren't as long-dated, but they'd be at discounts, but we're not selling them. And if we're not selling them, we expect to collect par. So I'm not sure how you would look at them, however you want to look at those.

The stuff that we intend to market, sell, monetize, liquidate, have to reflect real deal today reserved. The mid-town Manhattan office portfolio, we intend to either stay with the properties or possibly foreclose. We look at those based on what we think the underlying value of the assets are at the time we're going to resolve them, and in many cases that's a pretty high proportion of our debt balance. So, if you -- you're aggregating them together, which you can, but we look at them as two separate buckets.

Okay. Thanks.

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

Thanks, just a follow up, and Sloan has a question as well. Marc, your comments that the market could bottom sometime mid-next year, are you anticipating that the tenant concession packages are going to remain at that $53-a-foot over that time?

It's tough to say, because you really have to look at the blend between new and renewal, and I frankly don't have that at my fingertips for Q2 to know if that blend is going to hold. I think for new tenants, we are certainly going to try to hold the line at around $50 or so; but for longer term deals, or for higher-rent deals, as long as the sublet space is out there, we will get pushed on that a bit.

On the renewal deals, it really just depends. It can be in some cases, if the installation works for the tenant, and the space is a desirable space, we may have relatively low -- higher, but low concessions that we'll make. In some cases if it is a gut and rebuild, and the tenant -- existing tenant has the ability to move to a sublet, then we will have to be more aggressive with it. But I guess on average -- I don't want to speculate. I would hope it is not going to be too much greater than that, but I will tell you certainly I don't want to underplay the severity of the situation, with 4.5% sublet space, maybe rising to 5% on the market, that is built, attractive, well-located space, not all 5% of it but let's say even half of it, 2.5%, if that is the case, you are going to have to -- you are competing against turnkey space, and for a period of time, you are going to spend money to retain tenants. So I am hopeful, but I certainly would not say that $53 is going to be a peak quarter for us; we will just have to see what the third quarter brings.

By the way, just to give you a little bit of a leading indicator for those of you that have hung on the phone an hour into the call we will give you something, we just signed a 65,000-foot deal that hasn't been previously announced, and there that's a 15-year deal, and amortized over 15 years, I would say it's a regular market concession, it is about $70 a foot over 15 years. So that will fall somewhere within our strike zone on a 10-year basis. That's a 65,000-footer, brand new tenant, sopping up space over at 1515 Broadway.

So, yes, we are going to do what we have to do within reason to make deals work. We are focusing on the higher rent buildings, where we are going to do significant concessions. And then lower-rent buildings, we are just going to hold the space, which we haven't really done in prior markets, but we are not going to spend big TI on low-rent space, just not going to do it.

All right. Then just a quick one, if I can, for probably Andrew and Mark, as you think about the $500 million to $900 million of asset sales, and you think about the timing of that, how do you consider pricing in today's market versus say in a year or two's time, when there might be more distressed assets in the market?

I would be careful. The $500 million to $900 million, I want to make sure we are clear on this. To give you an example, a lot of that is going to come over the next two to three years internally, because of the reduced dividend. That could be upwards of $150 million to $200 million per annum. So over two to three years, that could be $500 million right there.

So we are not projecting -- if we did a 485 Fifth -- I am sorry, 485 Lex, there's a number right there that may be at the low end of that range. But I wouldn't state that we are looking to do those sales, and I think we can get there with very modest sales, maybe a large one, but modest in number. Maybe one sale, if that wasn't clear.

We have a follow up question from Michael Bilerman with Citigroup. Please proceed.

I just want to go back to the structured book for a second. Maybe, Greg, you can split out, your health maturity is $535 million, the current balance, and then another $74 million that's held for sale.

Yes.

You've had about $230 million of reserves the last six quarters, obviously some of that is for stuff that you have already sold. But maybe just sort of -- sort of bridge the gap between the two, and then maybe just some commentary -- obviously, you sold the 1166 at $0.60 a book; clearly that was probably -- you know, you said it was long-dated, but that reflected sort of the market. It could have reflected also your desire to get as much proceeds as you can, so the most marketable of the pieces, and why we shouldn't be marking the book to market at a minimum of $0.60 on the dollar from where it is today?

Again, you have to break down the two, so -- because that, the held for sale are actually based upon market quotes that we go out and look for. We do have -- on the held to maturity, we have taken a 10% reserve against the face amount of those -- of those loans. You know, the 1166 deal, the negotiations for that actually commenced before we embarked upon our equity offering, when we were moving toward forward with trying to find liquidity on all fronts.

So just like you have seen a tightening in the spreads on our bonds, and a lot of the other real estate paper, I think similarly, you have seen that on our structured book. So for a lot of people that were marking our book at $0.30 and $0.50 on the dollar, to sell 1166 at $0.65 on the dollar, which is 90-day old pricing, you know, we think is you know, it is -- it gives a good indicator for, and makes us feel good about, the carrying value here at 630. So -- or said another way, as Marc alluded to, we think the reserves that will be required going forward should diminish considerably off of what you have seen in the - the last three quarters.

Just a clarification on the G&A. Your comment on being down 30, just because last year had a GKK and also had the $18 million charge for redeeming the forward options --

That's without regard to that charge, though.

Right. So the down 30 is just the SL Green G&A piece, or is it comparing the total with GKK last year? Just trying to get a sense --

Just G&A.

So apples-to-apples.

Just Green's.

Just Green's G&A. Okay, thank you.

All right. We will take two more questions, Operator.

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

Hi. Great job answering at least 15 questions on the structured finance portfolio, which I guess is somewhere between 3% and 6% of your total enterprise value. Question for you, Greg. It looks like you financed out on 420 Lex at, if I am doing the math right, at about $120 a square foot. And you financed out on 650 Madison at, if I'm doing the math right, it looks like about $240 a square foot, which seemed sort of light to me. Can you kind of walk through why there's such low dollar per square foot on your loan?

Again, both assets carry ground leases with them. So in terms of how they're underwritten, you know, you get dinged for that. And if you look, notwithstanding that Graybar, as a for instance, has operated at 95%-plus occupancy for the last ten years, that was underwritten at an 89% occupancy level by the people doing the underwriting, under the presumption that that is what the market is. So I think given the environment, that they were very good executions. In terms of the debt yields that you would see, I think the ground leases that were in place made the debt yields that we achieved there a little bit higher than you'd otherwise see for a conventional [feet] property.

Like everything, it is a matter of perspective. I have always said I am not a big per-foot person. It does represent a -- you know, roughly on average a 40% increase in proceeds over debt that was put into place in not the too distant past, I mean within the past 10 years or so.

So I guess the point is in this environment, where there literally is almost no credit out there, to go out and nail to non-[TAL] loans at 40% upsides, when I think the market is generally just trying to refinance current outstandings or even make paydowns, I think is evidence that these are good assets, they're desirable. Pension funds and insurance companies are willing to finance mid-town Manhattan, they're willing to finance sponsorship, and they're even willing to finance up investments if they think they're getting well protected today, which on these two assets they clearly are. You hit it on the head. These are not maxed leverage loans, nor do we typically do that on a -- with our secured financings. So that is not to say we couldn't put more on in a better market, but these met our objectives.

Okay. And then the next question, looks like you paid out about $0.45 or $0.50 in dividends so far this year. What is the taxable minimum be, per your current projections?

If you look, we paid out -- if you look on page 19 of the supplemental, we have already paid out 139% of what the requirement is for the year. So we are kind of well ahead of where we -- way beyond where we need to be, you know, and part of that is the benefit of having taken last year's fourth quarter dividend, and being able to shift it into 2009. Recall that had a January record date, so we are getting the benefit of that deduction this year. So again, that's part of the tax plan that went into being able to take the dividend down to its new level.

Right. Okay. Thanks. Wonderful job. Thanks.

Thank you, John.

Operator, unfortunately -- I hope the queue is empty, because that's about all we have got right now. We have to, unfortunately, be somewhere, we are a little late for, and if there's anyone left in the queue we will call you later this afternoon, but hopefully that's it.

Thank you, and look forward to speaking to everyone again in three months.

Very good.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Great day, everyone.