SL Green Realty Corp (SLG) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2010 SL Green Realty earnings conference call. My name is Gerri, and I'll be your coordinator today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session at the end of the conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Heidi Gillette, Director of Investor Relations. Please proceed.

Thank you everybody for joining us and welcome to SL Green Realty Corps first quarter 2010 earnings results conference call. This 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 of the Company's Form 10-Q and other reports filed with the Securities and Exchange Commission.

Also during today's conference call, the Company may discuss non-GAAP financial measures as defined by SEC Regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure discussed in the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure, can be found on the Company's website at www.SLgreen.com by selecting the press release regarding the Company's first quarter earnings. Before turning the call over to Marc Holliday, Chief Executive Officer of SL Green Realty Corp., we would like to remind 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, all, for joining us this afternoon. We appreciate you tearing yourselves away from the Goldman Sachs Senate hearings, to allow us to review with you the quarter's results that were announced early last evening. We had another solid quarter that was very much in-line with the guidance we gave out in December at our investor meeting, and again, when we reinforced it with everyone on our last call in January.

As forecasted, 2010 is proving to be a transitional year for this Company as we continue to raise capital through the issuance of securities for continued deleveraging, but also demonstrating a renewed focus on deploying capital into new opportunities, which we believe will position us for success and growth into the next phase of this business cycle. Through the issuance of unsecured debt and preferred equity, we were able to term out our liabilities, reduce overall indebtedness, and execute on over $700 million of new investment activity in the past seven months. This investment activity is comprised of completing the foreclosure and commencement of repositioning at 100 Church Street, the newly contracted investment in 600 Lexington Avenue, the investment in 510 Madison Avenue mortgage and mezzanine positions and another $140 million of other new structured finance investments secured by New York City Commercial Properties. This brings our total amount of structured finance investments to $787 million, an amount that's roughly equivalent to last quarter, $500 million of which is secured by 7.2 million square feet of Manhattan office properties.

Notwithstanding the dilutive effects of the capital raising and deleveraging, I believe, that through our strategic debt repurchases, new investment activity and careful management of operating expenses in capital improvements, we remain on track with our prior earnings guidance. The investments that we are now making follow a belief that we began conveying to the market back in December. That market fundamentals had bottomed out and were beginning to improve, that the city's economic activity was beginning to pick up as evidenced by certain leading indicators we follow and that pent up capital for well located prime Manhattan assets, would emerge and begin driving cap rates down to 5.5% to 6%. During the first quarter, we have acted on these convictions and have been pleased to see that the city's rebound continues at a slow, but steadily, improving pace.

On the jobs front in New York City, March was strong across the board with the addition of 12,700 private sector jobs. 3,000 of which were created in the professional business services sector, which is essentially the heart of the SLG portfolio. There were also gains in banking and real estate as well as temporary job services, education and health and 1,700 new jobs in leisure and hospitality. Even construction posted 2,500 additional jobs in March, which is typically very cyclical, but certainly headed in the right direction, and we're very hopeful that this will continue to be the case in the future, but the jobs growth is definitely pointing towards a renewed vibrancy in New York City. And the improving job picture has resulted in a modestly improving leasing market as well.

During the first quarter, approximately 3.5 million square feet was leased in Midtown, chipping away at Midtown's vacancy rate, which hovers now at around 12.6%, 12.7%. Notably of this amount the sublet rate is down to around 3% right now, with close to 2 million square feet of sublet space having been taken off the market in the past nine months. So, the market has shifted more towards directly available space from landlords, much less towards built and unnaturally competitive sublet space, which is going to work to landlord's advantage in 2010 as we try to drive tenant concessions back to what we would call, more of a normalized state of being, as opposed to what's been the case for the past two years. There are certainly a large number of requirements in the market right now that should result in continuing improvement in the overall vacancy rate as demand picks up. This demand and these requirements are generally falling into one of four categories; those that are looking to consolidate, those that are looking for growth, those that are simply looking to lock in long-term, what are believed to be cyclically low rents and those tenants that are just looking to trade up in quality. Examples of such requirements include, a large insurance company in the market for 120,000 square feet, several law firms we are negotiating with, with requirements from 80,000 feet to 270,000 square feet, two foreign investments banks in the market for 350,000 square feet to 450,000 square feet respectively, an entertainment company in the market for 300,000 square feet and a publishing company in the market for 225,000 square feet. What's notable about these deals, is that the size is falling into that 100,000 to 300,000 square foot block, which is much different than the type of demand we have seen over the past two years, which was decidedly 100,000 square feet, and below, as the -- sort of the meat or the center of the activity. Now, we're seeing larger block demand, which typically have somewhere around 20% growth factors built-in to those requirements, so again, slow but steady. There is not many, but a few, that are 500,000 feet and over, but there is a lot of deals that we consider very real in that 100,000 to 300,000 foot range.

We're seeing this in our own portfolio as well. At 333 West 34th Street, on the heels of the MTA lease signing for 125,000 square feet, we're now negotiating three different proposals which would take up the balance of the space in that building. At 100 Park Avenue, where it had been slow to finish off the redevelopment leasing in the base, we are now negotiating two proposals for the fifth and sixth floors of that property. More importantly, up in the tower where we are seeing real competition for space, we have raised our taking rents in the tower and started to trim our concessions. At Tower 45, where we recently inked a 75,000 square foot deal with D.E. Shaw Research, we've made the decision to go forward with a capital improvement program, targeted mostly on the plaza, lobby and elevators in order to generate more demand for the 150,000 square feet that will be rolling over the next two-and-a-half years. In fact, since our December investor meeting, we have inked over one million square feet of leases through the end of April, 500,000 square feet of which was in the first quarter of 2010 alone, which puts us well on track to meet or exceed our goal of a million-and-a-half square feet of leasing for the year.

Going forward for the balance of the year, we have about 925,000 square feet in the portfolio that will expire through the balance of 2010, with an average expiring rent of about $50 per square foot which is roughly in-line with our portfolio average. When we look at the suburbs, they also had a particularly solid quarter with over 200,000 square feet of leasing and while rents were off around 10% and 11% in the suburbs, they did, they were able to reduce concessions, TI and free rent to as low as they have been in the last three quarters, TI concessions averaging $11 a foot and free rent averaging about three and-a-half months per lease. So very consistent with our strategy to reduce the amount of capital out lay, manage net effective rents to take lower face rents, but preserve capital, and deploy the capital in a way we think is most efficient for this Company.

We continue to believe in the resiliency of New York and its ability to out perform most major other office markets and that confidence and resiliency, I think, is demonstrated by the fact there is enormous foreign and domestic demand for property. We're seeing lenders come back into this market and starting to make conventional loans at reasonable rates, which we think, will certainly facilitate the trading market, which Andrew is going to speak to in just a moment, and one, produce more opportunity for us and companies like us to take advantage of those improving markets and more liquid markets over the next year or two, but as importantly it will help to turn around and resurrect property values which I think have only just begun. I know a lot of people are looking at the values today, the firming up that is going on in Manhattan, thinking that maybe values have gotten ahead of the fundamentals. I think, when you really look back at where the market peaks were, in 2000, and in 2006, 2007, I don't even think we have begun to scratch the surface of what, I hope, will be significant growth in demand, rental rates, property values, and getting back to a well functioning market. With that, let me turn it over to Andrew who is going to talk about a few of the more notable transactions that we were able to complete recently.

Thanks, Marc. Good afternoon, everybody. The Manhattan sales market has begun to pick up as we expected it would in 2010. This includes both core office offerings, in addition to, retail and transitional properties and structured finance offerings. The buyer interest in all of these offerings has been very high with capital jumping at the opportunity to come off the sidelines and participate in what's widely perceived to be a recovering market. We have been hard at work taking strategic actions in both our real estate and our structured finance books.

In April, we announced our first office acquisition since December 2007 with our purchase of 600 Lexington. There were several key strategic objectives in purchasing this asset, a very attractive price per foot for a Class A asset in a prime location. This building was completed in 1985 making it a relatively young building in the Manhattan market. A very strong and compelling going in yield with the opportunity for significant upside given the lease rollover profile on this asset and gaining first mover advantage in the market as liquidity in the sales market continues to increase and real price discovery has had in the Manhattan market. The property is encumbered with an approximately $50 million fixed rate mortgage, which we intend to assume as part of the deal, and we will be rebranding the property and doing some targeted capital upgrades focusing on the property's great location in Lexington's power alley, and its ability to offer small tenants a full floor presence, which is a much sought-after feature in good markets and bad.

In addition, I am pleased to announce today that we have entered into a letter of intent with a major foreign pension fund to become our 45% partner in the deal. This letter of intent is subject only to definitive documentation, which we expect to complete shortly. It will be our first venture with this partner and the deal structure provides for our typical package of fees and incentive returns, which should further enhance SL Green's return on this investment. In addition to 600 Lexington, we had an active quarter on the structured finance front, including the deployment of $80 million into five different assets. Some notable developments in our largest structure finance investment bear mention. During the quarter we executed a swap of our $36 million mezzanine position in another asset, a position we had added to in 2009 for the C-note position, in the retail condo at 666 Fifth Avenue. Recall that we already own the mezzanine position, junior to the C position on that asset, and we took an opportunity through this swap to consolidate our investments on this single asset. The swap generated a gain on that portion of the asset we traded that we had purchased in 2009.

Subsequent to the swap, ownership announced a major lease at the property with the retailer Uniqlo, one that's been characterized as the largest retail lease in Manhattan history. This lease, with an A-rated tenant, significantly enhances our collateral value and we believe further shores up this investment which now totals $146 million of the structured finance book. We continue, as always, to actively seek ways to add value on both the real estate equity and structured finance fronts. And now here's Greg with some color on the numbers.

Great. Thanks, Andrew. The quarter was highlighted by our continued efforts to strengthen the balance sheet by increasing liquidity, terming out debt obligations and further deleveraging the balance sheet. In January, we priced a preferred equity transaction at 8.125, a premium to the then trading value of our securities. This transaction added $127 million of permanent equity capital to our balance sheet. Consistent with our stated objectives from December, from the December investor meeting, we have spent time with the rating agencies and were able to achieve an upgrade to the ratings outlook for our Reckson operating partnership. This upgrade enabled us to access a new source of capital with the issuance of our first senior unsecured bond deal. The $250 million issuance helped us term out pending debt maturities, and freed up some $300 million of cash on hand, that had been previously earmarked for the repayment of pending obligations. We will continue to pursue an investment grade rating, which should further enhance the pricing associated with these securities and continue to have access to an important new source of capital through the unsecured markets.

During the quarter we generated funds available for distribution of $52 million. As we have stated before, this significant internally generated cash flow is our cheapest source of capital, and a key component towards the deleveraging that has taken place over the last 18 months. These activities have helped increase the weighted average life of our debt obligations, to 5.8 years, and have enabled us to reduce our outstanding line of credit balance down to $900 million at quarter end. As Andrew mentioned, we invested $82.5 million in five new structured finance investments. The structured finance balance outstanding, of course, stayed relatively constant with year end, given the swap out of the one position into 666 that Andrew discussed, and of course with the foreclosure of 100 Church, which was converted into a real estate owned asset in January of this year. The foreclosure of 100 Church accounts for the increase in real estate assets that you see on the balance sheet during the quarter, as well as the increase in the mortgage notes payable. 100 Church is recorded on our books for approximately $197 million, included in the assumption of $140 million mortgage note. 100 Church also accounts for the sizable increase in our restricted cash balances as we have approximately $60 million of reserves set aside for the lease up of that asset.

With respect to the structured finance portfolio, we had originally projected no repayments of that portfolio in 2010. However, given the successes that Andrew alluded to over at 666 Fifth Avenue, that asset is now being marketed for sale. Based upon the sale, there is a strong likelihood that a portion, or all, of the $146 million outstanding position could be repaid on or before its initial maturity of July in 2010.

Turning to the P&L, the results for the quarter, as Marc alluded to, were largely in line with the expectations and the guidance that we had previously provided. Occupancy for the quarter declined to 94%, principally from the scheduled expiration of [Fendi] at 800 Third Avenue, and the rejection of the Nortel lease, at 485 Lexington Avenue, one of the few casualties in our portfolio from the recent downturn. Combined same store NOI remained positive with a 2.4% increase. This increase includes the benefits of the BMW lease signed during the fourth quarter of 2009. Note that that lease included a four-month free rent period, which accounts for the free rent increase, which you're seeing during the first quarter here.

The mark-to-market of negative 5% was right in-line with our 2010 goals and objectives, and the average free rent period of 5.5 months, remained relatively high compared to historic levels but was consistent with our expectations. The quarter included approximately $5.5 million of lease cancelation income, $2.6 million of which is included in other income, and the remaining $2.9 million comes through in the income from our unconsolidated joint ventures. This structured finance income includes the benefits of the new originations and the $2.8 million gain that Andrew alluded to on the conversion of our 33rd Street investment during the quarter. Note, as mentioned during the fourth quarter call, the structured finance income does not include any accretion of the discounts and the 510 Madison structured finance positions. During the quarter, we also recorded a $6 million reserve against one of our structured finance positions, a corporate position on a non-New York asset where the lack of clarity and information on that credit led us to reserve the balance of the loan. Interest expense for the quarter reflects the benefits of historically low LIBOR rates which average just 23 basis points for the quarter and our G&A, which remained constant with the previous quarter includes approximately $1 million of aqueduct related costs that were written off during the quarter.

As Mark mentioned, notwithstanding certain of dilutive capital initiatives that were undertaken during the quarter, we continue to maintain our guidance of $3.90 to $4.10, which we provided in December. It is important to remember that this guidance could be impacted by interest rates, the possibility of asset sales and the timing of the redeployment of proceeds from asset sales, as well as, the timing and amount of possible structured finance repayments. With that, I'm going to turn it back to Marc.

Great. Thank you. Sort of keeping to the format that we did in January, keeping these prepared remarks relatively brief, trying to explain as much of the quarter's activity as we thought you would need in order to decipher certain of the impacts on our balance sheet and P&L, we wanted to leave most of the time available for questions-and-answers. With that Operator, why don't we open it up for some questions.

(Operator Instructions) Your first question comes from the line of Steve Sakwa with ISI Group. Please proceed.

Thank you. Greg, could you maybe just talk a little bit more about the leverage? I just want to try and understand. You said you're not changing guidance, but it could be impacted by potential asset sales or repayment from the, I guess, structured finance business and it sounds like that loan at Fifth Avenue is likely to get paid off. I guess how do you think about leverage? Where do you want it and is it likely to assume that you will take some deleveraging activities into account?

I think you -- you're going to have, of course, you have the unsecured note issuance that occurred in March. So you only have half month's effect of that for the quarter, so you are going to have a full month effect going forward. Asset sales -- and we talked about we're always going to have asset sales and you should look for that to happen this year. Hopefully, we'll time it so that that money gets redeployed very quickly and so there is no temporary dilution, if you will from that, but there is obviously no guarantee because it is real estate that we're trafficking in. We are, we didn't expect we were going to get structure finance repayments. We likely will, but we're kind of ahead of the game already in terms of originations for the first quarter, so those should hopefully offset that. If we do get $146 million back in July on 666, we'd would obviously need to redeploy that. In terms of overall leverage, the debt to EBITDA is around 8.4 times. We had talked about getting that down to 8, and of course, if you dial out the 1 Madison and 388 Greenwich buildings, the debt to EBITDA is closer to 7.5, but so we have 8.4. We want to get down to 8, and that should principally come from free cash flow. I alluded to the FAD of $52 million, even when you take $8 million of dividends out of that number, that's $40 plus million dollars that's going to deleveraging the Company. If you do that over the next two-to-three years, that kind of gets to you the 8, so a lot of the capital initiatives that you will see should be designed to fund external activities and growth.

Okay. And then, just I guess, a technical question. How much NOI was in the quarter from 100 Church Street?

The NOI is basically a push. It was negative. It was around $3.5 million of revenues and a comparable amount of expenses.

Okay. Thanks.

Your next question comes from the line of Jamie Feldman with Bank of America Merrill Lynch. Please proceed.

Thank you. I was hoping you could provide a little bit more color on potential investment activity? I mean, it sounds like you think there is more assets coming to market. How big is the pool that you would be interested in and then also what kind of returns do you think you would be looking for?

Jamie, I think as Greg said, we've already exceeded the investment object objectives we've set out for this year. So anything we do from now through the balance of the year will be things that we consider either opportunistic or good core investment opportunities, which I am almost certain, we will see just based on the pipeline that we look at in front of us. And I think we're pretty consistent on the yields that we're looking to make at this part of the cycle. We talked about un-levered yields of around 8% to 9%, levered yields of around 12% for straight office property investments, and on the structure for subordinated debt investments, anywhere between could be 8% and 15% as a wide range, 10% to 12% as a narrow range, really just depends on the position and the exposure and the coverage. It is hard to generalize, but I think our book of business is somewhere around 9% or so, average yield on a mixture of first mortgages and subordinate investments and it has been very profitable as Greg said. The loan loss reserve this quarter was down to around $6 million, which I think is the lowest it has been in a number of quarters and we expect if to remain at those levels or hopefully less. So, with that behind us this is -- this can be a very profitable business line in the market where there is very few debt providers.

Okay. Then, maybe just a question for Steve if he is on the line, but just update on how negotiations are today versus say last quarter in terms of what tenants are looking for, free rent versus TI's, and then how much do you think you guys will spend in CapEx this year?

It seems that on the concession side there hasn't been a whole lot of change yet, a bit of a different market as far as coming out of prior recessions where, what we're seeing is that there is more movement on improving the taking rents, rather than closing out the concessions. But I think that's a temporary thing because we're such a wide gap between a lot of owners, what they had in their asking rents versus their taking rents. I think by the end of the year you are going to see us, and a lot of other owners, start to pull back on concessions. It is still going to be very competitive as far as tenants seeking built space or looking for landlords to put enough capital in to build the space, and there will be -- it will remain a competitive market, but at the same time, there is clearly a change in perception on both the brokerage community and a changing perception in perspective tenants. We see a lot of tenants with 2012, 2013 and 2014 lease expirations, that are making the decision to try and do early lease negotiations because they fear that they're going to miss the bottom of the market. So I think, the psychology is definitely changing and it is allowing us to begin to level the playing field.

Greg, do you have an assumption for leasing spend this year?

If you look at overall capital, and dial 100 Church out of the equation because that's separate unto itself and going to be self funded by the reserves, and including our share of capital from JV's, the total capital will be around $80 million to $100 million.

Thank you.

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

Thank you very much. Nice job, guys. Can you give us just to clarify, Marc, or Andrew, Greg, you paid $193 million for 600 Lexington. By the time you add in closing costs, base build and CapEx and TI leasing commission to stabilize it, what do you think your entire basis will be in that asset and then the same question for 510 Madison and the same question for 100 Church, so we can get a sense for your stabilized investment in all three?

John, Andrew can give you the numbers, can run you through those basis calculations on 600 and 100. I think 510, given it is a straight debt investment, it is not -- it is really not appropriate for us to go through that analysis, other than we can tell you how much is in reserve on the loan but the borrowers, the one who is executing that program will ultimately derive what that investment basis will be in 510, so long as he owns the property.

John, the question is basis per foot in these assets?

Or total basis. We can do the rest of the math. For example, at 600 Lexington is your closing cost $300,000 or $3 million or are you going to put another $200,000 or $2 million into the base building and then what kind of costs do you have to get it up to full occupancy?

Let me come back to you with the cost to get it to full occupancy. The closing capitalization is going to be around $197 million or so, and I will give you the five and ten-year costs in one second. 100 Church is going to be around $225 million of total capitalization fully leased with appropriate credit and vacancy. And we anticipate around $22 million of NOI on that number, between $20 million and $22 million.

Okay. And then, Marc, I appreciate your comment on 510 Madison. I guess it is safe to assume the $75 million will be spent, if and only if, leasing occurs by your borrower in the next twelve months?

It is more complicated, John. The loan is in default, and therefore, what we will or won't fund out of that amount of money is really going to be determined in another venue. Some may be funded, but we'll have to just see how that all gets decided in the courts.

And is it safe to say that you would treat that borrower as you expect to be treated?

I have lived up to a servicing standard all my life that has gained this company an above average rating from S&P, and a brand new designation from Fitch, which I can't even pronounce. It is CSS2 equivalent or something. We go through rigorous inspections by the rating agencies to our servicing standards and are found to be at the highest levels.

Senator Guinee, we're going to have to make that your last question.

Thank you.

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

Good afternoon. Here with Sloan as well. Marc, you talked about the number of requirements especially for large blocks ticking up and you mentioned four items, the consolidation, some growth, locking in the long-term rates at current levels and trading up in quality. But, I am just wondering when do you start seeing some pricing power come back and when do you think about leasing spreads actually turning positive? Is that something you think we could see by the end of this year?

What I think I might have said in January, or sometime between the two calls, is that this recovering leasing market so far has been on the backs of the non-financials. So, roughly 40% of the market is driven by financial banking, insurance and those big requirements have not for growth -- those big new growth requirements have not really surfaced on the market yet. It has been a whole smattering of other sectors that I named previously all expanding by 10,000, 20,000, 25,000, 35,000, 45,000 feet, but in order to really see that pricing pressure and really see that vacancy start to come down to 10,000 or below, we're going to need to see some new requirements coming from financials in the quarter million to half million square foot range to take some big blocks off the table, and I will let Steve give you his opinion on that. I can tell you that I haven't seen a lot of that yet in terms of growth. We have seen a lot of relocate, ones that fall into the four buckets, but that's only going to chip away a couple of tenths of a point per quarter, which by the way is not so bad. In a couple of years, all of a sudden, you're going to have that type of competition you're talking about.

But what we're under writing now for deals like 600 and others is around 25% rented growth over the next three years. So, we think there will be significant growth in rents. We're underwriting that growth into beleaguered rents. Even with that kind of growth the rents are still relatively low, as compared to past peaks, but it is going to be driven by demand that we don't really see today. Steve, do you want to add?

I think to add to it, we are seeing on the margins, we're seeing rental growth for small space. It's got to start somewhere. Right now the smaller space meaning, 10,000 square feet or less, for Park Avenue or the best buildings on Madison and Fifth Avenues, largely financial services, largely international firms, are driving prices up and there is real competition. You've seen a couple of buildings for quality space raise their rents a couple of times already in the past two or three months. From Marc's point until we get that wholesale big block absorption going, that's when you will really see material pricing changes but the psychology is changing. The competition is changing. The high-end part of the market, meaning the best parts of the buildings is clearly becoming more competitive. I think we're right on the bubble.

Just I guess, following on that question, you talked about CapEx costs coming down, but I am wondering if we could actually see CapEx increase, given that the focus is now shifting to these larger blocks?

I don't think so. I don't think so, because there is a couple of tenants in the market right now and you really got to segregate the market between certain price points. If you're a tenant looking for $65 space, and you're a couple hundred thousand square feet, your choices are dramatically different than if you're a tenant looking for $40, $45 space. It is all a little relative as to how much your CapEx relative to the rent you're paying. But, then you're seeing certain parts of the market tighten up. So, I don't think you're going to see CapEx increase at all.

If you look at the renewal on BMW and if you look at some of the renewals over at 800 Third this quarter, we've been actually very successful in keeping the capital and the renewal deals very, very low.

Great. Thanks, guys.

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

Curious, when you said you have had about 500,000 feet of subsequent leasing since the quarter end, should we take that to mean that the occupancy in Manhattan will come back up a little bit? Because, I think you said before, the 94% was your goal to hope to stay above 94% through the whole cycle, so I am curious how to think about that?

I think if we stayed on that cycle and wound up doing 2 million square feet instead of a million and-a-half square feet of leasing, that could nudge it up beyond the 94% we projected for year end. But it depends whether that leasing is targeted to existing vacant, in which case the answer is yes. In some cases, we're talking early renewals, so you're really chipping away at '11 and '12 in which case the answer is no. I don't know if I have a breakdown of half a million feet how much of that was for existing vacant, or to be expired, in the '10 or how much of that was for future roll. Steve, you may --

New leases versus renewal leases, it was basically 50/50.

I think the question -- (multiple speakers) how much of it was future leasing. My gut feeling (inaudible) -- parsing through the numbers, I would take a look at we can -- I think that level of disclosure is in the Sup, I think, as to the leases we've done. And if there is more than I would say a million-and-a-half feet of leasing of existing vacant of '10 expiree's, then mathematically, certain it will be better than 94%.

Thanks. Also, can you just repeat what you mentioned about aqueduct and I thought you mentioned a writedown, Greg, a writing off cost? Can you comment about what you're thinking about with that project coming back being available, again, is my understanding?

We had roughly $2 million capitalized, and so there is legal and architectural costs that will benefit us going forward. In a subsequent bid, there is other costs, lobbying and advertising costs, which would have to be repeated in connection with a new bid. Those that would have to be repeated, we went ahead and wrote off during the quarter.

Got it. Thanks.

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

Good afternoon, guys. Greg, I am curious when you think about the capital structure and the costs of your alternatives, like common equity doesn't fit into the equation, particularly from a risk reward perspective with a sub 4% AFFO yield and a sub 6% cap rate, why not issue equity and start paying the dividend?

I think, if you look back historically what has made us -- what has distinguished us and I think made us most profitable, is harvesting gains on existing assets and redeploying that money. I think, our sense is that given the demand that you're seeing on the private side that we're better off getting our equity funding, at this point if you will, from asset sales rather than from the sale of common stock. I think that's served us very, very well during most of the time that we have been public and I think that's what we'll look to continue to do.

And then Andrew or Marc, with respect to your recent acquisition at 600 Lexington, can you walk us through what in particular attracted you to be the winning bidder on that asset, as opposed to, say, 340 Madison or 417 Fifth, 888 or 885 Third, I guess is going to be in play here? What was it about that asset that caused you to be willing to pay more than others?

I guess I went through a couple of the points, Ross, and those points distinguish this building a bit from the other assets that are on the market. I think the ability to offer full floor presence for small tenants is very attractive. The location of this asset and sort of its positioning on Lexington with its neighbors 599 and 601, we think gives it a very wide shoe, high-end type of feel. We're certainly looking at all the other assets on the market. This asset presented a good opportunity to -- there's some roll in the rent roll, and the rents today are roughly, at to a little bit below market, so it gives us a chance to roll the rent up, as opposed to, some of the other offerings where we feel rents are significantly above market and there may be some roll down in the future.

To add to that, the personal experience that we're seeing right now as far as the type of tenants and where the demand is in the market, this building sits right in the sweet spot. We're seeing a lot of demand for those small boutiquish financial services, international, legal type tenants and 600 Lexington fits right into that. This, in our mind, is going to compete head on with Park Avenue, with Fifth Avenue, with the whole Plaza District, and you can name off six or seven buildings which are experiencing price increase, Tower 56, 375 Park, 450 Park, 712 Fifth, a couple of corridor that this building lies right in. Additional to that, is it is a building that I think suffered disproportionately over the past year or year-and-a-half, because next door there was a demolition site where they were tearing down a building. Then they went through a lobby renovation, then they hit the recession, and for a small space building those were death knells to the leasing program. But now we're past all of that and I think the building sits in a perfect situation to really benefit from an improving market.

Is the JV just straight up [pari-passu] or have you structured with it some up's?

We have incentive returns in a joint venture, as is typical in our JVs.

Thanks, guys.

Your next question comes from the line of Mitch Germain with JMP Securities. Please proceed.

Hi, Andrew. Just curious about bidders. Who's out there? Who has got the most money? Who's being the most aggressive?

I think what we're hearing is that people are seeing bids from all different sources, domestic and foreign, closed end funds, open ended funds, pension funds, I can tell you when we announce the 600 contract signing we had a bunch of call from folks inquiring about the potential to partner on the deal, and that was a wide variety of capital sources. There was domestic core funds, foreign capital sources, German equity sources. It has been really across the board and that's sort of what we have been saying for the last nine months, which is everywhere we travel, people are saying how do we get property in Manhattan? How do we get on the playing field here?

Great. And, Greg, your G&A guidance for the year was $0.95. Any change considering you just did the 600 deal or was that all baked in?

No. That should all be baked in. One caveat that I would give to that is there was a change in the accounting rules last year that transaction related cost can't be capitalized to the yield any longer, that they have to be expensed. Now that we're back in the -- actively in the investment mode, you might see some expenses related to that, and we'll just track that separately for you, but on an apples-to-apples basis it is consistent where we had guided.

Thank you.

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

Thanks. Just as a follow-up to some of the commentary, you guys have been pretty active since the investor conference and as you said ahead of your original investment objectives for the year. You sound very confident in sort of the New York City market and expectations for values. So, could you maybe just frame up what you're seeing in terms of sort of rent growth? I know you mentioned on 600 Lexington, do you think rent growth will now be better than you thought it was five, six months ago, and what about cap rates? You mentioned the 5.5% to 6% in your opening commentary, but do you think terminal cap rates will be lower and that's driving some of the increased investment opportunity here for you guys?

I think on rental rates, what we had said in December, was shrinking concessions through the back half of '10 and face rental increases, sharp face rental increases in '11 and beyond, so I think we're on track with that. That will vary building by building, but I think a ballpark of 25% over a three-year period is probably as good an assessment as any that we have now and we'll just have to monitor that. You can't really -- you're not going to see that in our results. It is going to be lagging because remember deals we're reporting today were incubated three and six months ago. So, really the full effect of what we're seeing today, which may not fully come through in the numbers, you will probably see in the third and fourth quarters and certainly into '11. Again, it has to by a certain respect if the job growth is there, so I just watched monthly job growth and try and tie those, connect those dots to how strong we think the rental demand could be, but it is definitely headed in the right direction. As to cap rates, it is too much of a crystal ball. I think long-term cap rates for Class A properties between 5% and 6% is a pretty reliable barometer if you have to use a crystal ball and predict cap rates.

I think it will depend on interest rates and it will depend on rental growth.

Right.

If you get rental growth without interest rate movement up, then you may see cap rates dip down lower.

Fair to say you're not terribly worried about long-term interest rates moving up?

It depends. If long-term interest rates are accompanied with long-term big nominal rent growth, you may not see the cap rates rise all that much. I think it is not just about interest rates, it is interest rates and rents. You got to have a view on where both are going to have a view on where cap rates are going. If you get increased interest rates and not much rent growth, then that's not a good recipe, but I think we're looking more towards the fundamentals and saying that if the job growth is there, then the rental increases have to follow. If there is little inflation on top of that, that should also increase the rents further.

Just a detail on 600 Lexington, is that a fee simple deal or a ground lease?

It is a fee simple. It was misreported as a ground lease in the paper.

Then lastly, Greg, the structured finance portfolio. I'm eyeballing the maturities, I know it is in your filings as well, but on page 31 of your supplement you've got the maturity schedule. It looks like there is north of $300 million coming due this year. What are the big pieces there and the expectations?

Really, the two big ones are 666 Fifth which I alluded to, so that's a July maturity, $146 million. (multiple speakers). Yes, they have extension options and our original anticipation was that that would be extended. You might have seen in the paper earlier this week that it is being marketed for sale, so that's why we think we may see some of that money coming back. The other big piece that's in there is 510 Madison Avenue. It is really those two positions. Tough to say exactly what we are expecting there. You can follow in the newspapers how that plays out.

The 146 on 666, is that face?

Yes.

Okay. Thank you.

Your next question comes from the line of Brendan Maiorana with Wells Fargo. Please proceed.

Thanks. Just to follow up, in the structured finance portfolio other than 510 Madison, are there investments in there where you think there is a reasonable likelihood they could convert over to a direct real estate investment?

Yes. Well, first we have no comment on 510 whatsoever, so if you just re-ask the question, so -- the structure --.

Other, than just if we took that out of the portfolio and looked at the remainder, are there -- can you give us a sense of how much of those investments, you think, there is a possibility that may convert over to direct?

That's really in control of the borrowers. These are straight debt positions, no different than any lender has in their book. We've done billions and billions of originations of this kind of property. We have had one foreclosure. That's 100 Church. I would say to you the vast majority of what we originate and what in the past and the future, are going to be loans that we expect will either fully perform that will be restructured to performance, that we may sell if we think we get a good bid, they're rarely going to result in a foreclosure. Occasionally, the borrowers have sold us properties and what we would call friendly acquisitions, which we have done over the years on deals like 220 East 42nd and 609 Fifth. So, that's how we think of the program.

We're lenders, we have been lenders, we have done over 100 loans. There has only been one foreclosure, and we tried to restructure that loan frankly, and finally came to the determination that the foreclosure was the only and best path to pursue, but I would look at that book of business as a yield business. If opportunities arise, we would expect, more often than not, they're going to be what the people [here are calling] friendly acquisitions as we've done in the past.

Sure. That's helpful. Thanks. In terms of that investment balance, as we look out the opportunity set over the remainder of the year, should that be about in line with where it is if you're going to recycle the proceeds from 666 should you get them?

I think it is roughly right. We have always had a 10% of total market cap, self imposed parameters that we've done on it. I think we're still working with that. The only change now is we're refocusing squarely on New York as a market, whereas in the past as part of that pool we had done deals outside of the city with some very mixed results. The New York portfolio has, in the past current and we think in the future, done extremely well and that's where we'll focus those investments and use that 10% as a guide stick.

Thank you.

Your next question comes from the line of Suzanne Kim with Credit Suisse. Please proceed.

Hi. I am just questioning your structured finance and other income lines and I am just wondering what you think it would look over the course of the year given what you have talked about with the $146 million?

I think if you take what we reported to the quarter and back out the $2.8 million one-time gain from the sale of one asset that that ought to be representative of what it looks like on a quarterly basis going forward.

You're saying about $28 million is a good run rate for the remainder of the year?

No, no. I was commenting about structured finance specifically.

Okay.

And on other income, other income on the financial statements includes $2.8 million -- $2.5 million of lease cancelation income.

Yes.

Back that out, that's probably a good run rate as well. Although you may see some -- if history repeats you will likely see some additional lease cancelation income at some point during the year, but in terms of run rate, I think that's the right way to think about it.

Also, regarding 600 Lexington, what do you think is the 141 adjustment on that?

We will have that for you next quarter. It is in the process of being formulated. So, that will be a second quarter closing and we'll give that number on the next call.

Okay. Great. Thanks.

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

Good afternoon. Josh Attie is on the phone with me as well. Greg, in some of your comments you talked a little bit about the dividend and having call it $40 million, $45 million of free cash flow a quarter given the fact you're only paying a $0.10 dividend, which is effectively what the taxable net income was in the first quarter. I guess, how long I think you mentioned two to three years dialing that in is, do you have the ability for the next two to three years to continue to pay such a low dividend and harvest that free cash flow to de-lever and sort of what are going to be the push points on that?

I think clearly for 2010, that's the case and probably I think as we've said 2011 it is probably the case as well. I think you have to start revisiting that probably in 2012, and again, it is somewhat contingent upon how much we earn. It is also contingent upon if we have property sales, which you are likely going to see, those can generate taxable income and that amount of taxable income would have to be factored in. But I think, certainly for '10 and '11 we look to be in good shape on that front and probably would have to reevaluate it again in 2012.

Is there any short-term things you're doing on taxable net income that sort of have an effect as you move, as they start to wear off, so that effectively, you're taking additional depreciation or additional amortization on a short-term basis that then reverses itself in a few years?

Yeah. We always talk about the cost segregation studies that we do. Which if you look at the Reckson transaction you're able to segregate a piece of the purchase price and accelerate the depreciation. You can do kind of up to 12% of the purchase price and allocate that to personal property which can be depreciated over a much, much shorter period of time, call it five to seven years, so that naturally burns off over five-year period. There is also some losses that we recorded during 2008 and 2009, which we can use to offset taxable income in future periods and that again, will burn off likely over a two to three-year period, so the NOLs over a two to three year period, the accelerated depreciation over call it a five-year period. But, again, we'll do a similar type exercise to the extent that we have new acquisitions that could replace that.

My second question is relating to the cost of capital. If you think about the unsecured debt and the preferred that you raised during the quarter almost $400 million, or close to 8%, and you think about the investments that you're making in the low to mid 5s, at least initial and then, as you think about the debt that rolls and that the eventual line of credit renewal, how do you think about all the stuff coming together in terms of accretion, dilution, in terms of your numbers?

Look, we're perpetually evaluating what it is that we think that the cheapest source of capital is. I don't know that I would tie directly the unsecured note issuance to new acquisitions. It is a corporate finance for us where we're able to access a very important new pool of capital. When we gave our guidance in December, with respect to interest expense, I think we were pretty clear that we thought interest expense would absolutely be going up, A because, we thought floating rates where LIBOR would increase and also in anticipation we would have to refinance some of this very low floating rate debt that we have in place. So, we did it that's part of the reason we can do those financings that you're alluding to but at the same time not to have to change our guidance. I think in terms of when you look forward at the revolver and what's happened in the Capital Markets, it has been a dramatic dramatic transformation in the last twelve months. We have a number of people seeking us out now wanting to be involved in our line and extend us credit because they know that that's important for doing business with the company going forward. I think the pricing on that type of credit has already dramatically improved in the last twelve months. We still have another two years to go before we have to specifically deal with the refinancing of the line, so I think you have to wait and see. The credit markets are improving dramatically. You have a lot of life companies out there looking to extend money because they haven't put out money in a number of years. You have the CMBS markets coming back, so I think that we're going to manage that in over time. Like I said, we provide for it in our guidance originally in anticipation of that.

Thank you.

This concludes the time we have for Question and Answer Session. I would now like to turn the call over to Mr. Marc Holliday for closing remarks. Please go ahead, sir.

Thank you, everyone. We appreciate all of your questions today and we hope to have some equally robust news to report back to you all in about three months time and look forward to speaking with you again then. Thank you.

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