SL Green Realty Corp (SLG) 2009 Q3 法說會逐字稿

Thank you, everybody, for joining us and welcome to the SL Green Realty Corp's third 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 can cause such differences appear in the MD&A section of the Company's Form 10-Q, and the 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 the SEC Regulation G. The GAAP financial measures most directly compare to each non-GAAP financial measures discussed and reconciliation of the differences between Non-GAAP financial measures and the comparable GAAP financial measures can be found at the Company's website at www.SLGreen.com, by selecting the press release regarding the Company's third 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 today to please limit your questions to two per person. Thank you and go ahead, Mr. Holliday.

Thank you. Good afternoon everyone, and thank you for calling in today. I am joined by Andrew Mathias, Greg Hughes, and others at SL Green, and we will be discussing the quarter's activities and take your questions.

I thought we had a good quarter during the third quarter, and one that shouldn't have contained surprises for anyone. Core performance was solid, particularly in light of the current economic climate. All of the so-called one timers and trends associated with this quarter have been surfaced and discussed in prior calls and from my vantage point, the quarter is very much in line with our expectations and management's guidance. Some of the important highlights from the quarter include substantial NOI growth on a same store basis, positive mark-to-market on Manhattan leases, maintenance of our occupancy rate, reduction of our balance sheet indebtedness, extension of certain liabilities and obtaining control of 100 Church Street. However, the results also reflect the significant battering of the New York City economy and resulting impact on real estate fundamentals in our market.

Availabilities in midtown during the third quarter inched up to a total of approximately 13%, with 9% directly offered by landlords and 4% representing sublet availabilities. This is within the range of the 12 to 14% we have been forecasting. While the rate of increase is slowing dramatically, and will hopefully soon cease, the high level of availability is obviously negatively impacting rental levels and specifically the sublet availabilities have caused all New York City landlords to substantially widen out concession packages in order to compete with fully built-out space. The effects of this competition for tenants can be clearly seen by a low mark-to-market of 5% for the third quarter. However, this is right within the range of 0 to 10% we had forecasted at our December investor meeting last year, and was consistently reinforced throughout the year.

While much of our mark-to-market has been eroded, I still think it speaks volumes to the fact that we can maintain a positive leasing spread on new and renewal leases in Manhattan during the worst economic climate in possibly the last 40 years, and it also underscore strategic rationale of our acquisitions throughout the last decade where embedded rents that were well below market primarily drove our investment decisions to acquire. So with that as the background, it may at first sound contradictory to hear that I, for one, believe after 2.5 very bearish years that 2010 will be a transitional year and one in which we will see a return of job growth in New York and a shrinking of tenant concession packages during the second half of the year. I believe this to be the case because when you look through the numbers, there are some encouraging signs of stabilization that are occurring today but may take six months or so to filter through the indicators.

First of all, I think the office sector jobs picture in New York City is better than the national picture and improvement will occur first in New York before most or all other commercial markets in the US. Private sector job losses for the year in the city are trending about 100,000 jobs less than what was originally forecasted by New York City budget and public sector job loss in our market has been negligible, although could possibly increase in the ensuing year. While durable goods meltdown has directly affected manufacturing construction jobs around the country, manufacturing jobs account for only a small portion of the Manhattan market, particularly the office market, to begin with, and they are not really a factor in the numbers. While we have our share of construction job losses as well, it has been mitigated by the amount of public construction projects being undertaken within the state.

I estimate that an increased 30,000 private sector office jobs over the course of 2010 and 2011 would bring the midtown market back into equilibrium, and job creation beyond that would shift the market back to where landlords have the pricing advantage. The good news is, because job losses are less than initially projected, tax receipts to date are ahead of schedule in New York City, and as a result the budget remains in at least a balanced position until the fiscal year ending in June 2010.

While there is likely to be a significant deficit that will have to be tackled for the first year ending in 2011, the mayor has stated his goal of not having that deficit closed through personal income taxes or other forms of taxes increased, and we are hopeful that through structural cost savings, deferred stimulus dollars and other one-timers, that the budget will again be balanced through mid-2011. In Albany where the picture is not quite as good, the legislature will be in session in first week in November to effectuate a deficit reduction plan which will eliminate a $3 billion imbalance in the state's budget and indicators are this will be accomplished on or prior to November 10th.

With a rebounding economy in 2010, I believe you will start to see an inflection point in the leasing market as well. Most of the prime well-built sublet space that has approximately 10 years of term has or will be absorbed over the next six to nine months. What would be left is a large amount of sublet space that may have five years or less remaining or not have the necessary improvements to be competitive with spaces directly offered by landlords, and at that point, you will start to see the major New York City landlords pull in the concession packages that are currently being offered. In the specific example of our portfolio, our free rent increased to 6.9 months for the quarter and tenant improvements increased to $56 per square foot, but if you pull out just two of the 28 deals we did in that Manhattan statistic, one located at 1515 Broadway and the other located at 100 Park Avenue, the statistics for the remaining 26 office deals would result in four months of free rent and $40 per square foot in concessions.

In the case of the deals at 1515 and 100 Park Avenue, we were particularly motivated to get deals done in those buildings, which in the case of 100 Park, was recently refinanced and the case of 1515 Broadway is pending refinancing, in order to increase in place cash flow and maximize the refinancing execution. Clearly, in the case of 100 Park Avenue, that strategy worked out well and we were more than benefited for the expense of lease that we installed to a very efficient refinancing of that property.

Monthly leasing rates in the city have essentially doubled to more than a million square feet per month, almost a million and a quarter square feet per month and that's doubled the beginning of the year when the pace of leasing was extraordinarily anemic, and that pace will pick up even further as the economy starts to strengthen again, and as tenants who are holding off their decisions in order to try to bottom tick the market, will fear the risk of losing that opportunity if they don't act decisively in the next six to 12 months to lock in these favorable terms. While the next two or three quarters of results will continue to reflect the market forces of current, I do believe the second half of 2010 will begin to tell a different and better story.

In the suburban portfolio, the results exceeded our expectations, although clearly shows more signs of stresses that I think are endemic to markets outside Manhattan. Velocity is very strong as approximately 160,000 square feet was leased during the quarter, exceeding the historical average for that portfolio, and not reflective of two additional leases for approximately 33,000 square feet that were inked in the third quarter but have commencement dates beyond, and also doesn't include about 50,000 square feet executed in the suburbs since the end of the third quarter. Mark-to-market in the suburbs was negative, although on a whole dollar basis not a very material diminution to SL Green's NOI performance, given the smaller rental base that will work off of.

I believe our team in White Plains will continue to do the best job of any tri-state suburban management team in keeping the buildings well leased. However, they will be fighting a trend of continued tenant fall out as some faller to mid-sized businesses who have been holding on throughout the recession may or may not be able to make it through completely without having to down size some of their existing space. We're watching approximately 100,000 square feet or a little under that we're monitoring in the suburbs to see what direction these companies will take during the next six months or so, but like Manhattan, the overall bad debt and distress rate in the suburbs has been very, very low, given what you would expect because of the economic conditions.

In our structured finance portfolio, balances were kept relatively level when compared to last quarter at around $615 million of carrying value. Of that amount, approximately $500 million or 80% of those outstanding are represented by office or retail collateral located in New York City, and of that amount, approximately $350 million is solely comprised of Manhattan office collateral totaling 9 1/2 million square feet of collateral interest and having an in place NOI debt yield of approximately 6.5%. When eliminating just one property from that Manhattan office database, which represents one high grade net lease new construction project, then the outstanding debt amount per square foot for all other such collateral is approximately $320 per square foot, and the NOI debt yield rises to approximately 7%. These properties are generally fully levered and, therefore, the borrowers on such facilities will either have to find new forms of take-out financings, in many cases requiring an equity paydown, or work out a restructuring with us and the lender groups, or in certain cases will be at risk for losing the properties to us in the lender groups.

As an example, we recently and successfully took control of 100 Church Street during the third quarter on terms that Andrew Mathias will brief you on shortly. Certainly there is a subset of this collateral which will represent proprietary pipeline situations as final maturity dates or other monument dates approach, without a corresponding increase in liquidity in the debt markets. The balances I just mentioned include only a $1 million carrying value for our loan on [Steivesontown], which we have all but fully reserved at this moment, given the adverse New York State Court ruling against the borrower group in control of that property and the deteriorated market conditions. Our view is that in light of the current court decision it would be challenging to impossible for the borrower group to meet their original business plan, and therefore, our debt position is likely impaired. However, we will actively monitor the situation very closely and the potential exists to be a part of some form of restructuring or resolution of this investment and we'll just keep you apprised as that unfolds.

I believe that our presence in the Manhattan marketplace as a structured debt provider, combined with our rated special servicing group, will present us with significant opportunities over the next 12 to 24 months that we will look to capitalize on. As this quarter was consistent with our expectations, we are leaving our estimates for full year FFO unchanged, at a range of $4.35 to $4.50 per share. The determining factor between where we wind up within that range will be largely driven by the level of loan loss reserves we may establish during the fourth quarter, continuing a general downward trend from peak loan loss levels over the last six to 12 months, but still a factor until credit becomes more readily available to provide refinancing for real estate projects in and around the city.

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

Thanks, Marc. Not surprisingly, capital markets activity in the third quarter continued to be virtually nonexistent versus prior year's levels. The one notable exception in our portfolio was the announcement of our contract to sell certain interests in 485 Lexington to a partnership of Optibase and Gilmore, USA. More on that later.

Additionally, HSBC entered into a contract to sell their US headquarters building located at 452 Fifth Avenue. In a positive sign for the market, this deal was struck with no financing in place and reportedly the purchaser intends to close the deal all cash at a price of $330 million, approximately $381 per square foot. The purchase price and the transaction is structured in such a way that HSBC committed to a short-term one year leaseback on certain tower office space. The base of the Fifth Avenue building and the significantly older Class C building, both of which are included in the overall transaction square footage, were leased back for a ten year period by HSBC. Clearly, the buyers are anticipating firming demand for space will allow them to spend the necessary capital and lease up the property when HSBC leaves the tower. The property was bought by a foreign group, continuing the trend of foreign capital being the dominant buyers in the Manhattan market.

The only other notable transaction in the market currently is UBS's sale of a minority interest in 299 Park Avenue, which is a unique offering given Fisher Brothers' managing positioning with the partnership. While this deal has yet to go to contract, we would not be surprised to see private, high net worth capital be a successful purchaser here as well, if Fisher Brothers elects not to exercise certain contractual rights they have in their partnership agreement, and we expect the price in excess of $600 per square foot. Aside from these two transactions, there continues to be a dearth of sellers in the marketplace and a growing bench of capital impatiently waiting on the sidelines to put money to work. The weak dollar is again becoming a strong factor in people's asset allocation strategies as well.

With this in mind, we continued our global outreach this quarter with SLG personnel completing a one week road show in Asia where we found very encouraging investor interest, in US real estate in Manhattan, in particularly, and Expo Real in Germany, where the story was similar, too much capital with too few investment opportunities. We're guardedly optimistic that banks are starting to again mark assets down to closer to market value, and recent changes in CMBS regulations giving special servicers more flexibility to modify and dispose of assets will again facilitate more transaction flow. Initially in the debt space, but ultimately on the equity side as well.

Our activity in the quarter centered around the purchase and sale agreement for interest in 485 Lexington, an opportunistic debt investment where we added to an existing position we have in 450 West 33rd Street and the sale of a small property in Westchester. On 485 Lexington, our buyer has obtained all internal approvals and is ready, willing and able to close. However, the assumption of the loan as a condition to closing and we have found servicers in this environment to be highly unpredictable, even though assumption of the loan is permitted in the loan documents. We are currently in discussions both the master servicer and the special servicer for the transaction, and hope to reach resolution on the assumption issue shortly, as it is the only closing condition left unsatisfied.

Additionally on the disposition side, we sold a small non-core asset in Westchester, which was a multi-tenanted, highly management intensive property. Particularly in this environment, we were happy to dispose of the asset. Despite the challenges within the property's rent roll, it still sold for an 8.3% cap rate, giving a bit of visibility into current suburban cap rates.

On the investment side, we took advantage of an opportunity to buy out our partner's 50% interest in the mezzanine loan secured by 450 West 33rd. We purchased the interest at a significant discount to par value, such that our expected lead to maturity on the paper is approximately 20%. Our last dollar basis in the asset is approximately $250 per square foot, a level which we feel very comfortable owning this property and the significant air rights attached to it, should that arise.

Additionally, in the quarter, as Marc mentioned, we reached a consensual agreement with our borrower on 100 Church Street in downtown Manhattan, taking over management leasing of the property in August and we expect to assume formal legal ownership in the first quarter of 2010. This property is over 1 million square feet in a prime location on Church Street, with approximately 600,000 square feet of vacancy to be leased up. We're very confident in our leasing team is up to this challenge and our basis in the asset of about $175 per square foot should allow us to structure highly competitive deals to get more than our fair share of tenants in the downtown market.

As we have indicated on prior calls, we expect this market environment to produce additional opportunities within our mezzanine portfolio like 100 Church, giving us an opportunity to grow our portfolio with quality assets at an attractive basis. The other notable asset level activity for the quarter revolved around a slew of refinancings we closed on four of the Company's assets. These financings clearly demonstrate that for high quality sponsors with reasonably levered assets, there are many lenders willing to do business in Manhattan. These lenders range from German landesbanks, to US life insurance companies to pension funds, and we continue to see the tangible fruit of our global outreach program I described earlier in the form of new relationships and an ability to source capital in a market environment where capital is very hard to come by. We thank all of our lenders in these transactions for their confidence in us and the liquidity with which they provided the Company, and continue to work on additional transactions to address upcoming maturities.

In conclusion, we're guardedly optimistic that we may see a pickup in transaction volume with market confidence growing that a bottom has been reached in the leasing market, and banks beginning to again make money, giving them the flexibility to take marks and move assets. We still do not expect to see many direct sellers of real estate, as the larger owners were fortunate enough to not enter the cycle with excessive leverage are generally holders, and the less fortunate, highly levered owners don't have the option of selling, and are in fact negotiating with their creditors, including in many cases SL Green.

And with that I'll turn the call over to Greg for further insight on the financials.

Thanks, Andrew. We start out by taking a look at our balance sheet. The balance sheet at 9/30 actually reflects many of the benefits office our continued efforts to raise liquidity and deleverage the balance sheet. As of 9/30, we had approximately $780 million of cash, restricted cash and marketable securities. Note that during the quarter, we invested some of our cash in short-term bonds in an effort to gain some additional yield. With a decent cash position and most of our short-term debt maturities having been addressed, we decided to hold you off on the sale of any future structured finance investments.

Accordingly, $59.7 million of structured finance investments, previously classified as held for sale have been reclassified to the structured finance balances. This, coupled with the $16.1 million of new originations during the quarter, accounted for most of the increase from the $534 million at 9/30 to the $615 million at 9/30. Note that the $615 million is substantially below the $725 million targeted balance we established during our investor conference last December. During the quarter we continued our deleveraging efforts with the repurchase of $33 million of our outstanding bonds and $48 million of our credit facility. Since the inception of this buyback program roughly a year ago, we have been able to repurchase $802 million of our debt for approximately $595 million, and have been able to realize $162.9 million of gains on these repurchases.

During the quarter, we successfully closed on the refinancing of our 100 Park Avenue project with a $215 million loan which enabled us to recoup a portion of the $72 million used to renovate that project. The loan had a maturity -- this loan has a maturity date of 2014 and carries two one-year extensions and has a fixed interest rate of approximately 6.7%. This loan repaid the previous mortgage of $175 million that was outstanding. Recall that last quarter we discussed in detail the refinancing of 420 Lexington and 625 Madison, and as Andrew pointed out, these refinancings during the worst credit environment in 20 years demonstrate lenders' commitment to Manhattan real estate.

During the quarter, we generated funds available for distribution of $0.76, which brings our year-to-date total to approximately $2.61. At our new dividend rate $0.10 per quarter, which we believe will be sustained at least through 2010, the Company is positioned to generate funds available for distribution after dividends of $150 million to $200 million. This free cash flow will be a major contribute to the further deleveraging of our balance sheet and provide capital for future investment. Before leaving the balance sheet, I would like to quickly review the covenant ratios on page 27 of our supplemental. There had been some concern that we might come close to breaching some of these covenants. However, I'm happy to report that when one reviews our positions with respect to these covenants, we are in good shape and have substantial cushion.

Our total debt to total assets as computed under our credit facility is 47.7%, compared to the requirement of 60%. Our fixed charge coverage sits at 2.71 times, compared to the 1.5 times requirement. Our unsecured debt as a function of our unencumbered assets which will be a critical metric as we look to refinancing our underlying credit in 2012 sits at 49.3%, compared to the requirement of 60%. And our unencumbered interest coverage sits at a healthy three times compared to the 1.7 times requirement. While these covenants would suggest that we have room for additional debt capacity, we continue to work towards our targeted debt to EBITDA multiple of eight times.

Now I would like to spend a moment discussing the P&L results for the quarter. The results for the quarter include a number of one-time items. As previously mentioned, we realized a gain of $8.4 million on the early extinguishment of debt. Offsetting this gain was a $16.1 million reserve against the structured loan portfolio related to our Steivesontown investment. Our interest expense includes approximately $10.5 million of defeasance costs incurred in connection with the refinancing of 420 Lexington, and during the quarter, we realized lease termination income of $6.6 million related principally to the termination of a lease at 220 East 42nd Street.

Turning to the core operations, we were pleased to finish the quarter at 95.7% occupancy. As previously discussed, the decline from last quarter is principally attributable to the expiration of the Citicorp lease at 34th Street. Interestingly enough, I had someone complain to me a few weeks ago that there was no upside in our portfolio because our scheduled lease expirations over the next couple of years were very limited. I had to point out that this was by design, and we were actually very happy to have limited expirations here at the bottom of the market. Note that when the market does recover, which we believe will happen towards the end of next year, we have always been very successful on executing our early renewals and leasing substantially in excess of what our scheduled.

As expected, the mark-to-market decline from the 20%-plus that we had been realizing during the first half of the year and was down to 5.2% for the quarter. We are pleased that it continues to be positive, and this is one of the reasons you continue to see solid same store NOI growth within the portfolio. During the quarter, we realized same store NOI growth of 5.9%, including 5.6% on the consolidated portfolio, and 6.5% on the joint venture portfolio. Income from the structured finance portfolio remained constant at about $16.2 million for the quarter. Note that the pending foreclosure of 100 Church and other anticipated restructurings, we would expect that the quarterly run rate from the structured finance portfolio will decline in future quarters. As of 9/30, there were five loans with a book balance of $59.2 million that were on nonaccrual.

When we foreclose on the 100 Church asset which we expect to occur in early 2010, we will own approximately a 50% economic interest in the property, subject to $140 million first mortgage. We currently expect this investment to be accounted for under the equity method, and we would expect that there would be a de minimus contribution to earnings in 2010 from this asset.

Our G&A for the quarter was $18.9 million, bringing us to $54.7 million year-to-date and putting us in line to achieve savings in excess of 20% over last year. Note that this is achieved notwithstanding a new accounting pronouncement that requires the expensing of virtually all transaction costs. As a result of this new pronouncement, our G&A includes approximately $1 million of cost to date which would have otherwise been capitalized prior to the implementation of this announcement. Our interest expense for the quarter totaled $85.5 million, which included the aforementioned $10.5 million of defeasance paid on 420 Lexington Avenue.

In conclusion, as Marc pointed out, we are reaffirming our guidance of $4.35 to $4.50 which would imply a fourth quarter FFO per share of between $0.80 and $0.93 and as Marc said, within the range will be largely dependent on the reserves related to the structured book and the other two variables would be the floating rate borrowings where we've benefited from historically low LIBOR rates and also restructurings within the structured finance book, where the income recognition might be reduced on the prospective basis. With that, I'd like to turn it back over to Marc for some --

Okay. Why don't we open it up for questions you now and at the end of the questions for those that stay on, I'll have some just closing remarks concerning our December investor meeting that is coming up in just over a month's time, but for now, we'll take questions.

(Operator Instructions). Your first question comes from the line of Ian Weissman with ISI Group.

The first question I guess is for Steve Durels if he's on the line. Steve, talking about or looking at the pace of leasing this quarter, if you look at the deals that tenants are taking, how much of that is growth space? They're taking advantage of obviously rents down in the marketplace, 50%, so I'm trying to get a sense of utilization on leases and are tenants taking growth space given how far rents have dropped?

I don't have a number for you but I can tell you intuitively that a good deal of the transactions that we do where it's a new tenant coming into the building, rather than just a renewal transaction, that a large number of those deals seem to have some component of growth. It's modest, though. It's generally 10 to 15% of the space. It's rarely a driver of people's decision as to why they're moving. There's a couple of examples out in the marketplace like the CV Star deal which is done on Park Avenue and some of the recent financial service deals that were done on Park Avenue that were driven by growth but I think generally speaking, new deals have a growth component. It's rare that it's the driver. But the big news is that guys are really making decisions to take long-term deals and they're making decisions to actually relocate rather than just to renew in place.

On that, the deals that you're seeing or the strength in demand, is there a particular sector? Is financial services driving it this time around?

No, the good news is that it seems to be pretty broad based. We're seeing user groups from law firms who are doing consolidations, financial -- smaller financial service businesses that are actually out there expanding. We've had a couple small guys that have picked up five, 10,000-foot and accounting firms seem to be active in the marketplace. We've had growth from healthcare, some from education. So it seems to be that it's no one -- not dominated by a particular industry but pretty broad based.

For this quarter, you broke out marketable securities and looks like there was a big pickup sequentially from the second quarter. What exactly was the cause of that?

That's what I alluded to when I was talking about my cash, restricted cash and marketable securities.

Right.

Short term bonds come due within the next 12 months, just to get some additional yield on our cash balances.

All right. Thanks so much.

Your next question comes from the line of Jamie Feldman with Banc of America. Please proceed.

Thank you. Another question on fundamentals. Marc, you had mentioned a good amount of sublease space in the market that is built out and ready to go and once that sort of dries up, that's what really would turn market conditions. How much space would you say that is?

How much space of the 4% is highly competitive?

Correct.

I don't have an exact number for you. I will have that when we meet in December because we're going to have to do a space by space inventory. I would estimate that to be at least half but not three quarters. So within that range. I can't be more specific. But I would say maybe half of that space is competitive, it's not ten years, it's long enough, call it seven to ten years. Got to be seven to ten years, well located, got to have decent assignment sublet deals in the lease, got to be generally built out, not requiring much capital, if not the deal gets tougher and I think half is probably a good proxy, maybe a little over, try to get more specific with you in a month.

Did you have something to add?

I'm sorry?

It sounded like Steve was going to say something.

You have something to add?

The only think thing that may help on some color of that, 25 to 30% of the sublease space out there has a term of five years or less, which is a big handicap as far as it making that part of the inventory marketable, which from an owner's perspective turns those kinds of spaces into opportunities that we convert on a pretty frequent basis.

That's why it can't mathematically exceed more than 3% of the four and I would guess it's somewhere between 2 and 3%, probably closer to 2. Okay. And just a --

Thank you very much. Every point in midtown is a little over 2 million feet. Let's call it somewhere around 4 to 5 million feet. Let's say competitive sublet space.

Okay. Thank you.

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

Hi, it's Josh Attie with Michael. Can you talk about the upcoming refinancing of the mortgage on 1515 Broadway next year in terms of the level of debt you thing you can achieve, the level of amortization you think might be necessary and if you think you might need to put equity into that property and how the lenders are thinking about it given that there's a million square feet of lease expiring in 2015.

Yes, I think, Josh, it's -- we're still pretty comfortable with the estimates we made for the sources and uses that we did at our equity offering in May. And I think there we modeled --

$125 million payout.

$125 million amortization payment.

That would be our portion of it.

Our share. And we -- the new loan I would say will likely have an amortization component because Viacom as you know is a 2015 expiration but we're working hard on addressing that situation and are still comfortable with the estimates we made.

Okay. Thanks. And then just one more question on the line of credit buybacks. Are any of the other of the 30 lenders in your bank line do you think willing to sell their commitments back to you?

Look, I think everybody has reached the conclusion that it's obviously a money good credit at this point in the game so I don't know that we would expect a lot more activity. I think you've got to wait and see what happens here at year end. It's certainly possible. You heard a lot of the banks talk about and foreshadowing additional marks going forward, whether this would be a position that they would mark is entirely possible. You may have people that may clean up their balance sheets and look for liquidity at year end. We're not counting on it being a big number, but certainly a possibility.

How are you thinking about with sitting on the cash on your balance sheet and obviously a fully drawn line of credit and sounds like from Marc's comments things in the city and financial markets have gotten better, are we sort of past the -- do you think the lines are going to be pulled that you just effectively pay back the line a little bit?

Well, I think if you -- look, if you look for $9 billion companies to be carrying cash balances of 6 or $700 million in today's environment, a large piece of that's going to go towards -- we have some convertible notes that come due in 2010, and so I think that the cash balance relative to the size of the Company, some of the pending maturities and some of the other capital work that we have going on, I think is kind of -- is a pretty appropriate level as we sit right now.

When you think about next year in terms of having to put $125 million into 1515 Broadway and some other cash needs, that effectively is going to take a lot of the free cash flow that you're generating, where do you sort of get in terms of having the capital if the line's fully drawn, and you want to keep that level of cash, where is the other capital going to come from?

I would say a couple things. The sum of the things you mentioned would still leave us with a pretty ample cash position, even net of 1515 paydown and net of the bond retirement. We could still be in a position of north of $500 million, so I guess it's all relative as to whether you call that a lot or a little but I think north of $500 million balance in my book is still a decent chunk of change and we are, because of the dividend policy we've adopted, we'll be increasing those balances organically through cash flow. We also have the ability to receive repayments and/or pay downs of structured finance positions, and/or we could sell those positions as we've done in the past and we've shown I think demonstrated an ability to raise money pretty readily, even in very bad markets, through that structured finance portfolio by monetizing through note sales. So all in all, whether we do it through refinancings as we've just completed, upsized refinancings in three out of four projects that are contained in today's release, or otherwise, I think access to capital, given our cash position and the things we have available to us going forward, I feel like we're in a pretty decent position.

I was going to say, remember, we have a cash balance that we're expected to use those monies to retire the corporate obligations, so the 2010 converts and 2011 notes that come due, you know, it's a very different environment than just from the last quarter call, the unsecured debt markets are very, very much opened at this point in time and so you could see those corporate obligations being refinanced because there's heavy demand now as you've seen from a bunch of our brethren accessing the unsecured market.

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

Hi, guys. Good afternoon, here with Rob Salisbury. Marc, I thought I heard in your commentary that you thought potentially the balance of power could come back to landlords by 2012 if we saw 30,000 new jobs created in 2010 and 2011. What should we infer from that comment in terms of your view on net effective rental rates in Manhattan over the next 12 to 24 months?

I think it's going to be a two-step. The first part, which is obviously nearer term, is going to be absorption within 2010 of what I'm calling the primer sublet space which will have to get a better answer to you on exactly how much but I estimated earlier, about 4 to 5 million square feet. And as that occurs, I think you'll see a tightening of the net effectives through a tightening of the concession packages, trim down the free rent, trim down the work letters and it won't be the peak levels they are now, nor will it be the trough levels they were when we had a 5, 6% vacancy rate in Manhattan, but it will be back to let's say a market equilibrium for the moment.

The second shoe, which I think will start to increase nominal rental rates, will be job growth. It's anyone's prediction as to whether that will or won't occur in 2010 but I think the fact that we've been through such a draconian period, if you will, in the various business sectors in the country and certainly in New York, and yet the job base, the service, the office service job base in Manhattan was hit but not hit so much more catastrophically so than what we experienced in 2001, 2002, 2003, or the early 2009s, that I think it will be resilient, we will get job growth again as financial service firms drive business in and around our city and all the other business sectors that have reported to us that their businesses are picking up in terms of ad revenues and such, and that will I think start to drive nominal rental growth. So I think we're hoping in 2010 to see concession packages trimming and then I guess you could see rental growth and I think before 2012, I don't know why you couldn't start to see that in 2011, because you don't have to be at equilibrium in order to drive that, you just have to be trending there and when tenants see you trending there, I think they'll be called into action to do something in what they will perceive to be a rising rental environment. So we need competition for space and I think competition for space will result when we start to see job growth again.

If I could follow up to that. What impact if any do you think is going to have on rental rates from the Worldwide Plazas and the 452 Fifth Avenues trading at 400 or sub-400 a foot levels to the extent where you've got new owners with low cost basis who can undercut the current market rents? If we see banks taking assets back in the hand of new owners, is that an increasing pressure that has some offsetting factor?

I think the pressure is supply and demand, primarily. A lot of what you've seen I think is priced into those deals.

Those deals are trading with the expectation of leasing at current market rents, not below current market rents, and in some cases with growth off of current market rents.

So I don't think you're going to see further pressure. I think it's more of an inventory issue, whether it's in the hands of the borrower or a lender. It's just -- if it's available. And I would say once the deal trades and there's new money in the deal, they're going to try and maximize those returns.

They're not just going to be cutting and running to put low rents in, certainly not lower than today. I think the only thing that would cause rents to go lower would be accelerating job losses in the private office sector, not necessarily or not at all the trading of properties to lenders. I don't think that's going to be a factor. Lenders are going to put it out. The brokers going to work the market and they're going to get -- they're going to get market rents.

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

Hey, good afternoon. Here with Sloan as well. Back to the line of credit, could you give us a sense of what your target would be for the end of next year? I moon mean, you mentioned the $800 million of delevering so far but is that a realistic target for the next 12 months or so. I know you've deferred some of your asset sales but why not take advantage of liquidity in today's market.

We're borrowing at LIBOR plus 80, right, so we're borrowing at around 1% and I think if you look at the projections that we've laid out for people, we're targeting getting to in 2012 that the line would be paid down to kind of $900 million to $1 billion. And obviously, we're going to look to retire the most expensive debt first.

Okay. And then separately, you mentioned your trip to Asia. Can you give us give us a sense of what sort of cap rates foreign buyers are interested in New York.

I think it's -- Jay, obviously totally depends on the opportunity and the flavor of the opportunity whether it's a vacant lease subplay, whether it's a core property that's stabilized and whether the rents in the building are at or above or below market but I would say generally we feel very comfortable around a 6 to 6.5% cap rate. There are many, many groups that expressed a great desire to find core midtown properties around that level.

And Marc, just to be clear, are you still expecting positive lease spreads even until the market bottoms as you sort of forecast mid-next year?

I'm going to stick to my range to the end of the year, 0 to 10, 0, I'm not sure, I think it's positive. I think that something in and around that range is where we will expect to end the year. In December, we're going to roll up all our budgets which we're working feverishly on in October. We go through them, tenant by tenant in November and first week in December we'll have a you view as to where we're going to be in 2010. And it really just depends on what's coming due in 2010 so we really just have to look. You could have -- if there's a lot of low rate rents coming due, we'll still have sizable mark-to-market. If there's some high rate deals from the year 2000, it might be modest. But I just -- we don't have that number for you now. We will in a month. But I do certainly stand by that for Q4.

(Operator Instructions). Your next question comes from the line of John Guinee with Stifel Nicolaus. Please proceed.

Nice job, guys. Couple quick questions on just sources and uses. Park, I think you quoted about $56 in tenant improvement costs. What's the associated leasing commissions on the most recent deals? Should we figure $10, $15 a square foot?

Well, in New York, it's really arithmetic. The good news is it hasn't gapped out because of the market. It decreases as the rent decreases and the per foot is just a translation of whether we're doing a 40, 50, 60 or 70-dollar deal. Can you ballpark it.

32%.

32% of first year's rent is sort of a ballpark.

$50 rent, 15 bucks in leasing commissions.

That's on new deals.

Renewals.

Renewals will be less.

Then of the structured finance income, how much of that is pure cash actually being generated by the properties? How much of it is accrual? And how much of it is coming from some sort of reserve account.

When you say it, which it are you referring to?

You've got $600 million, $610 million of structured finance assets generate I think $16 million last quarter and income weighted average yield, somewhere in the nines. But that's not all cash generated from these particular structured finance loans. A lot of that is in a reserve account when you originally set up the deal or it's on a pay accrue. So how much of that is actually hard cash that the properties are generating?

Let me break it down to two levels. There's a question about how much of the interest is being serviced by cash. I'm going to leave that to Greg and/or Matt if we have that statistic. The statistic I quoted earlier on that New York portfolio, 6.5 debt yield overall, NOI debt yield or 7% when pulling out one property, those are cash NOI yields.

Yes, of the income recognition, you should assume that 60 to 70% of the structured finance is a cash number.

Okay. All right. So 30% is either a reserve or an accrual?

That may be in terms of interest recognition, but in terms of hard cash divided by outstanding debt balance on Manhattan office, that's 6.5 to 7% yield.

And then --

by the way, coincides because 10% is the rough average yield and that's the 25 to 30% so it all sort of --

That math makes sense.

That works.

Of your $500 million of sort of cash after all the expected paydowns, et cetera, how much would you expect to use to unwind some of the structured finance deals, pay down the debt senior to you?

In an example like 100 Church, how much would we expect? There, we don't -- it's a lease-up situation. We expect that the equity that goes into the property will be for lease-up and not for debt paydown.

There's also a significant reserve at the first mortgage level at 100 Church which we expect to be able to access to defray those lease-up costs.

It would be on a case by case basis, but I would say generally if we're going to come into a situation, take it over, put our resources behind it, and we're putting cash in that's going to be something that's accretive to the property to make it more valuable.

If you think about it in terms of our liquidity, we would say at this point in time it's not a meaningful number. We would put it based upon what we think we might take back between now and next year, would be $50 million or less.

We have certain situations, John, where we'll -- the mezz will be in restructuring discussions and the first mortgage may still be performing based on the asset-level performance. But there, you could potentially, because of intercredit agreements which are preexisting, you could potentially foreclose the equity and assume the first mortgage as it sits with remaining terms.

Your last question comes from the line of Jordan Sadler with KeyBanc. Please proceed.

Thanks. Just given your comments on capital being on the sidelines, sounds like you're in the camp that opportunities down the road from either debt default or the wave of maturities may be limited, so I'm just curious, if that's correct and if it is, your view, where would you expect to see opportunities?

Yes, I think we believe that the opportunity pipeline is going to open up, which I mentioned in my comments. We see banks beginning to take marks on their assets again and we see special servicers beginning to start to move loan situations, in other words, sell whole loans, and resolve other situations. And that we think will be the beginning of a transactional pipeline opening up. So we're very hopeful that in 2010, you'll see a more transaction-rich environment where we may be able to find some opportunities.

And so just as a follow-up, given that much of your capital sounds like it's earmarked for debt reduction through 2012 or so, how do you expect to capitalize on the opportunities you might see? And does Asia factor into that, your tour through Asia.

In part of that, I had addressed earlier in terms of -- I still see that we have substantial cash balances, we're going to have more cash coming via the non-dividend payment. We have opportunities to either finance real estate or as Greg added, possibly pass the unsecured markets and we have the whole potential of monetizing structured finance and/or doing these deals in a JV format in some cases, which in part was reflective of the efforts in Asia. So I think we have a lot of -- we're very resourceful I think in that regard and we grew very substantially when we were just a tiny Company at inception 12 years ago and we never found access to capital to be an inhibitor to growth. We're starting from a much better spot today for this next cycle of opportunity, with cash and balance sheet so I'm confident we'll be able to capitalize the deals. To me, the hard part is always in finding the deals. If you find a good deal in midtown Manhattan on core real estate, we will find and/or have the capital resources available to do it.

That's helpful. Thank you. For Steve, curious about the lease buyouts during the quarter. You may have mentioned it. I didn't hear. What was the sort of source and timing? Who's doing sort of lease terminations these days?

Well, the one that really drove the number was Pfizer bought out of their lease at 220 42nd street where they had 40,000 square feet and they paid us $0.94 on the dollar of the remaining obligation which had roughly seven years left on the term. So obviously in that kind of situation, that's a great opportunity. We now have almost all of our money and can take the space back to the market and even if we rent it at substantially discounted number we're way ahead of the game.

Lease buyouts expected to slow down?

We haven't done that many buyouts where it wasn't backed up with a replacement tenant simultaneously. In this case the number was so compelling that we took advantage of it but almost every deal that we do a buyout other than that where it's an elective on our part is a coordinated transaction with a replacement tenant.

That's helpful. Thank you.

Operator, are we -- are we done with questions?

Yes, we're done with questions.

Okay. Thank you everyone for calling in today and listening throughout. I just in closing, Heidi Gillette is going to give you some details on what we're doing this year for our investor meeting and how to coordinate so that you can attend if you choose to. So Heidi.

Yes, good afternoon, all. As indicated in the press release from last night, our investor conference this year will be December 7th which is a Monday. We will be serving lunch at 12 and there will be a presentation at 1 by management. To find out if you're eligible to attend, please send your contact information to SLG.2009@SLGreen.com. Again, that's SLG.2009@SLGreen.com. Thanks.

Thank you everyone.

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