SL Green Realty Corp (SLG) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the third quarter, 2010 SL Green Realty Corp. earnings conference call. My name is Erica and I'll be your coordinator for today. (Operator Instructions). We will be facilitating a question-and-answer session towards the end of the conference. (Operator Instructions).

I will now like to turn the presentation over to your host for today's call, Ms. Heidi Gillette, with SL Green. Please proceed.

Thank you, everybody, for joining us and welcome to SL Green Realty Corp.'s third quarter 2010 earnings results conference call. This conference call is being recorded.

At this time, the Company would like to remind the listeners that during the call, management may make forward looking statements. Actual results may differ from predictions that management may make today. Additional information regarding the factors that could cause such differences appear on 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 call, the Company may discuss non-GAAP financial measure as defined by FCC Regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure discussed and the reconciliation of the differences between each non-GAAP financial measure, and the comparable GAAP financial measure can be found on the Company's website at www.slgreen.com by selecting the Press Release regarding the Company's third quarter earnings.

Before turning the call over to Marc Holliday, Chief Executive Officer of SL Green Realty Corp., I would like to announce that the SL Green 2010 annual investor conference will be held in New York City on Monday December 6th. To find out if you are eligible to attend this event or if you're an institutional investor and you would like to receive further information regarding the details of the event, please e-mail SLG2010@SLGreen.com, again that is SLG2010@SLGreen.com.

For today's call, I would like to ask those of you participating in the Q&A portion of the call to please limit your questions to two per person.

Thank you. I will now turn the call over to Marc Holliday. Please go ahead, Marc.

Thank you very much, Heidi. Please mark that date down for the date coming up in December for our investor conference. Hope many or all of you can attend. I want to welcome you to today's call to review our third quarter earnings and activity.

We had a number of notable accomplishments over the summer. First and foremost, our core portfolio operating results were very much in line with our increasingly optimistic outlook as market fundamentals at Manhattan continue to improve in rising levels of business earnings, confidence, and space demand are translating into reduced concessions and modestly increasing rents. We held steady our same store occupancy at about 94.5% and we expect that figure will begin to rise in the ensuing quarters, indicating a bottom of what turned out to be only a marginal occupancy decline over the past three years of somewhere at or under 300 basis points in total. Also new rents on deals signed in the third quarter slightly exceeded expired rents, but it's more important not for the magnitude of the increase, but where the average rents currently sit in the portfolio, which for those expiring leases were only in the low $40 per square foot, leaving substantial room for upside as average rents in our buildings increased to over $50 per square foot over the next several years beginning in '011.

For 2010, the visible improvements have been in our tenant concessions which have serially declined each quarter in 2010, and free rent on leases that commenced in the third quarter which averaged just somewhere between three and four months. While it is apparent in the operating metrics which are firming; what is less apparent but more important to note, is that market activity over the next three to six months should drive midtown Manhattan vacancy levels to under 11% and result in somewhere between 5% and 10% increases in the face amount of rents in 2011.

One of the leading stats underlying our rental forecast is the amount of vacant sublease space available for rent, which is now under 5 million square feet in midtown after peaking at double that number less than 18 months ago. We currently have multiple offers in for space at 100 Church Street, which continues to demonstrate that we have the flexibility to price space at the market clearing levels tenants will migrate towards, and even pay a premium for these buildings with well capitalized ownership. Notwithstanding what we believe to be pent up demand, current indicators appear more muted as private sector job gains have been slow to accelerate.

New York's largest leading businesses are generally sitting on sizable sums of cash in some cases, holding on to, in other cases, dividending it out to shareholders, but hesitant generally to invest that cash in growth and new business lines and new employees until they have a clear and more acceptable picture in the political landscape taxation and new regulations. Conventional wisdom would say new regulations might have a detrimental impact on our business, but we have seen to date that the disaggregation of business lines resulting from Dodd/Frank has in many cases resulted in increased business activity for us, as new businesses have been taking space within our properties or other established financial firms have been picking up trading groups and trading lines and expanding. So, on a net basis, this had some time to play out but we're confident that, with time, these metrics will only get better for us.

So it's within this framework of what we see is improving market fundamentals. But where the indicators are still not showing any material degree of market recovery that we are actively and aggressively making investments, recycling capital via asset sales, accessing the capital markets for debt and equity securities, and deploying into new deals that we believe on average will minimally contribute double digit returns.

Three Columbus Circle is yet another example of our execution of this strategy. Capitalizing on our established market presence in both debt and equity in Manhattan and our long-standing and mutually beneficial relationship with Joe Moinian, we negotiated with him a recapitalization of 3 Columbus. This was another one on one preemptive opportunity where we were able to bring debt and equity capital to the table to ensure completion of construction and lease up of the property over a reasonable period of time in order to get this done. We have a mutuality vision for the property. We're both long term owners and we think this will be a very successful venture for us.

While this is a project whose profits will likely be measured over a period of years, at the other end of the spectrum, we had a favorable resolution on 510 Madison Avenue that only took a period of months. In fact, three months ago when we last spoke, we had just settled with Harry Macklowe after a fairly contentious court proceeding. Dial forward three months later, and our investments in the mortgage and mezzanine positions have been paid off at 100 cents on the dollar, plus reimbursement of most of our expenses. This certainly demonstrates the velocity with which debt and equity capital is re-engaging in the midtown market and the resulting compression of cap rates that we are now seeing.

We refrain from hitting up -- from bidding up the price of the assets due to our belief that we would be better served by [repaying] our investment plus gains and reinvesting into projects where we felt we had a much better opportunity to make our threshold returns yields like 3 Columbus Circle. That's not to say, however, that we don't believe in Boston Properties' ability to lease up 510 Madison; possibly it rents into the triple digits, that rents that we think will actually surprise most analysts and be consistent with our view of a recovering market. However, we simply have a different approach and a different strategy for the business, and are targeting more opportunistic returns than we believed we could have earned on reinvesting in essence on the 510 transaction.

The other investment of note during the quarter was a mortgage investment that we purchased on an asset located in City Center in London. This was an opportunity that came to us through conversions of several channels. The building has cross over tendency to a major company that does business here in New York and who we know well. It was sourced through one of the big US based commercial banks with whom we have a deeply established relationship, and we did it in conjunction with a London based asset manager who we have transacted with in the past.

We paid a fairly sizable discount for the loan. It has a debt yield that we thought was a very attractive debt yield on an absolute risk adjusted basis. Given that it's secured by a long term credit net lease for this relatively new construction property. And net of an in-place financing that we put on the investment when we closed, we have about $20 million plus or minus of equity in the deal, which affords us, I thought, a relatively good entry point in both size and product quality, and a place holder in a market where we thought we had relatively safe risk adjusted returns, and would give us the ability to see if there were more opportunities that fit alongside this type of investment, or whether it would just be a one off opportunity that was a unique moment in time for us to take advantage of and what I'm quite confident will be a good investment for us.

With that, I'm going to turn this over to Andrew, who will give you more background and stats on the quarter.

Thanks, Marc. We had a very active third quarter on the acquisition of this position front. As Marc mentioned yesterday, we announced our strategic joint venture with Joe Moinian on 3 Columbus Circle. This off market transaction on a 770,000 square foot Class A property is the culmination of our 10 plus year relationship as a buyer, seller, and lender to Joe. The terms of our investment include a $250 million standby mortgage commitment and a future equity interest in the building. The deal will play out in more detail as Joe contests the activities of an aggressive lender including a Complaint being served today and a detailed Answer to the pending foreclosure, an action he believes is inappropriate. We look forward to jointly completing the redevelopment of the building with Joe, and believe it's important for the tenant market to know the building is not being demolished and is a prime big block of space available for lease in Midtown.

In September we closed our sale of 19 West 44th Street -- another highly successful repositioning by our leasing and management teams. We were emboldened to see foreign institutional buyers step up for a very well located but mid-block asset. At over $420 per square foot and a sub-6% 2011 return to the buyer, we believe 19 West was a strong statement for the market. And the final chapter for SL Green has not yet been written on the building, as the buyer asked our team to stay on as an incentivized managing and leasing agent of the building. The proceeds from that sale were reinvested by a reverse 1031 exchange into 125 Park Avenue.

The quarter also saw us complete the final phase of our capitalization of 600 Lexington with our closing of a $125 million refinancing of that building. This loan is a good indication of one of the contributors to the resurgence of the New York market. The loan material exceeds our underwriting in terms of proceeds, rates and term, and will help us optimize our joint venture on that asset with CPP.

The fourth quarter should also give us significant additional insight into the market with several major buildings currently on the market, including 111 8th Avenue and 13 36th Avenue. The majority of the trading activity, however, continues to be in structure finance, both within the debt stacks of existing buildings and in new capital structures. Our own structure finance program gives us a powerful seat at many of these tables. In the quarter, among other things, we added to our position 280 Park Avenue and originated a mezzanine loan on a new acquisition of a 5th Avenue building that we had bid for but were unsuccessful in buying. We continue to see great relative value in this business today.

And with that, I'd like to turn the call over to Greg.

Great. Thanks, Andrew. I think, as everybody can see from what we've been through so far, it's been a very, very active quarter for the Company.

When you look at the sale of 19 West 44th Street, the repayment of 510 Madison, the refinancing of 600 Lexington, and our $345 million convertible note issuance, people can once again see that the Company enjoys very, very stong access to various sources of capital. In fact, year to date, we have raised over $2 billion through property sales, structured finance pay offs, property refinancings, unsecured note issuances, convertible note issuances, prep equity issuances, and of course, the free cash-flow from the Company's operations. This access to various sources of capital, coupled with the solid performance of our portfolio during a very difficult time and the substantial deleveraging that has taken place over the last two years, are the primary reasons we believe our balance sheet is in solid shape as we close out the quarter.

As of quarter end, we have $343 million of cash on hand, which did not include the $337 million of proceeds from our convertible note issuance that settled the second week of October. At quarter end, our debt to EBITDA was approximately 8 times, which is in line with our targeted debt to EBITDA multiple established last December. Our credit facility, which many had perceived to be a refinancing risk, had $800 million outstanding at quarter end and has been subsequently repaid down to $700 million in October -- roughly half of where it was just 10 months ago. This, coupled with the strength in the bad credit markets, should alleviate any concerns surrounding the refinanceability in that facility.

It does remain the case that we operated a slightly higher debt to EBITDA ratio than many of our peers but we believe there is good reason for this. The demand for New York City assets clearly demonstrates that our assets are among the most liquid in REITland. With cap rates ranging from 5% to 6%, the real estate markets clearly ascribing much higher value to the NOI underpending our EBITDA than most of our peers. The average term of our office leases is approximately 8 years, making it the longest in the office sector. The credit composition of our tenants is one of the best in the industry and continues to improve. Our largest tenant, Citigroup, continues to show solid improvement and the credit ratings for two of our largest tenants, Viacom and Amerada Hess, have been upgraded this year. Accordingly, in comparing leverage and credit metrics, it is important to remember that all cash-flows are not created equally.

Other quick items of note on the balance sheet, the balance sheet at quarter end, of course, reflects the sale of 19th West 44th Street and the closing of 125 Park Avenue, which included the assumption of $146 million mortgage. Our structured finance balance ended the quarter at $907 million, increased principally for the new investments at 280 Park as well as the structured finance investment in London that Marc had mentioned, offset by the retirement of our first mortgage of mezzanine investments at 510 Madison. Note that the London investment was executed through joint venture and has been financed with $62.8 million of nonrecourse lending. So the Company's equity investment sits at around $23 million, although the gross investment of [$86.3 million] is reflected in the structured finance balance.

Turning to the P&L, it was obviously a very successful quarter, highlighted by the gain we realized at 510 Madison. Excluding this gain, the quarter was right on top of what we reported last quarter, which is a solid result, given the seasonal increases and expenses that we once again saw during the third quarter. The third quarter trends were as expected and continue to point to the recovery that we previously projected. The mark-to-market on our New York rents for the quarter was 1.3%, but as Marc alluded to and more importantly, we started to see a decline in concessions, with TIs averaging just $18 and free rent at three months, compared to $56 and 6.9 months a year ago, and $21 and 3 months free rent during the first half of this year. Our occupancy remained at 94.4%. Originally we had expected to see a dip in occupancy during the third quarter, but as a result of the strong leasing activity, we are ahead of schedule and expect to finish the year higher than our original goal of 94%.

Our same store NOI for the quarter was down [2.8%, 3%], but as always, this includes the lease cancellation income in this calculation. If one were to exclude the lease cancellation income from the third quarter of last year, same store NOI was actually up 1% for the quarter.

In the suburbs, our rents declined by 9%, which is principally attributable to our decision to aggressively pursue the retention of Pepsi at 100 Summit, where we realized a significant roll-down in rents on their 75,000 square foot renewal. Excluding this, the suburbs actually realized a 3% increase in the mark-to-market rents on the balance of the leases during the quarter. SLG share of property NOI from JV's was down for the quarter, which is principally attributable to the sale of 1221 Avenue of the Americas during the middle of the second quarter. This investment had contributed roughly $10 million per quarter of NOI.

Our structured finance income for the quarter, of course, includes the gain from 510 Madison. In addition, during the quarter, we recorded a $5 million reserve on a mezzanine position related to a non-New York City asset. This reserve was offset in part by a $3.6 million gain on an asset which we had previously fully reserved. Other income for the quarter was down slightly from last quarter, which included leasing commissions at 1515 Broadway, realized during the second quarter.

MG&A for the quarter was approximately $18.4 million, consistent with the previous two quarters and in line with our original guidance. As we look forward to the fourth quarter, we seem well on track to meet our revised guidance of $4.75 for the year, needing just $0.84 during the first quarter to meet this target. We have not adjusted guidance at this point and time, pending the deployment of the proceeds from our convertible note issuance. Note that the coupon on these notes is 3%, but the actual interest charge for accounting purposes is 5.6% to give effect of the costs associated with the conversion feature. We expect some temporary dilution from this issuance until we -- until the proceeds are fully deployed.

We continue to be very active on the investment front for which we are penalized under the new accounting rules. While we do not have a current estimate of the fourth quarter transaction expenses, we expect them to be higher than in the third quarter. The timing of structured finance repayments as well as interest rates represent additional variables to the fourth quarter results. Based upon these variables, we continue to maintain our guidance for the year and we'll give greater color surrounding 2011 at the investor conference on December 6th.

With that, I'd like to turn it back to Marc.

Okay. We tried to keep our remarks relatively brief today because we thought we wanted to leave enough time for a full amount of questions, which we're prepared to answer now.

The one thing I would just add since not everybody makes it to the end of the Q and A session, we will do as we've done in the past, a very thorough market perspective and outlook for '011 at the December meeting, which is about a little less than a month and a half away. So it's -- you can't do justice on a call like this to anything other than really a review of the results. But in that form we'll have an opportunity to look at a lot of the trends that we see going on in the market right now, and try and pinpoint fairly accurately, as we tried to do in the past for you, where we see premium rents heading to what degree, what we think the drivers of those things are, maybe some more anecdotal information from a lot of the tenants in our portfolio that we see either actively approaching us for space now or looking to lock in early renewals out two, three years or more from now, and try to quantify what kind of effect that will have on our earnings, and hopefully share price in the positive sense as we move forward. So -- but for now I would say let's just open it up to questions and we'll try and get to as many as we can.

(Operator Instructions)

As a reminder please limit your question to two per person. Our first question comes from the line of John Guinee with Steeple. Please proceed.

Very, very nice job. Two quick questions. One is, Greg, I guess, you've figured out your tax planning and dividend treatment for the next few years now. Can you keep the dividend as low as you have retaining cash? And then the second question is, I was looking over your ground lease summary on page 30. Every few quarters you come up with buying back the ground lessor, do you have any issues or concerns with your ground leases going forward?

I would say, first as it relates to the dividend, obviously we have a significant amount of taxable income from the sale of 1221, which was not sheltered through 1031, and from the gain on the repayment of 510. We're fine with the distribution level through 2010. I think, originally, we would have thought that there would be no adjustment required to dividend to until at least 2012.

I think given the acceleration of a significant amount of taxable income into this year, we'll have to re-evaluate it in 2011. We're in the process of doing various taxable income estimates for 2011, and I think in December, we'll be able to offer you a better point of view as to if the dividend needs to be adjusted in 2011. Certainly fine for this year in the fourth quarter and in the process of redoing 2011 estimates. As it relates to the ground leases, I think there was a modification at 670 -- sorry, at 711 3rd, and we periodically have opportunities to take in pieces of that and consolidate it, which we did there and we've done previously at 420.

So I wouldn't say it's a problem. It's we had the capital and sometimes those opportunities present themselves. They're generally small and we just kind of take advantage of them when they're out there.

I would add to that, we extended out the lease on 420, as Greg just mentioned. We acquired in the fee on 919 3rd during this downturn that we had an opportunity to do that, modified 711; we have the absolute right to acquire the fees on 379 West Broadway and also 461 5th. Short of that, I don't think there are any other near-term situations that we would characterize as warranting any intense scrutiny at this moment, unless you're looking at a specific one that you want to know about.

Well, will 711 3rd transition to a fee in 2012? I just noticed that the cash payment dissipated after '11.

It's Andy Levine. No, 711 is actually owned in fee by a tenancy in common and that partner has never expressed an interest to sell and doesn't look to.

We own half of the (multiple speakers) --

Thank you.

We own half of the fee there, John. The other half is held by a third party.

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

Marc, you mentioned with trends improving -- I'm just wondering with your stock now trading still at an implied value per square foot of around $500 or $520, is this a more compelling investment, say, than originating structured finance at this point in the cycle?

Is what a more compelling investment?

Buying back your own stack versus originating structured finance investments?

We get - we've bought back stock in the past. We've done it with mixed results. I think we've been rewarded much more from shareholders by reinvesting our equity and making very sizable returns in some cases and sizable returns in others, and there's been a few bumps along the way, but on a net-net basis it's been very profitable and has afforded us five or six good properties, and it keeps us embedded. Without the structured finance program, Jay, I don't think we get 1775 equity deal, 3 Columbus Circle, I don't think we get it. I think that's -- what you saw there was six or eight incremental transactions with Joe Moinian, all successful and all of which created a moment in time for us to step in on a one-on-one and get that deal done. So I think that's a better use of the Company's capital. But it's always -- in hindsight, the stock -- we could be proven wrong on that or maybe the real estate values will compress to a 5% or sub-5% cap and we'll be happy we bought the real estate.

I think generally we've certainly done both, we've invested in our structure, we've invested in our stock. And at the moment we're more interested in this point in the cycle in asset growth than we are shrinking the equity base.

Okay. Just second question, can you comment on -- I guess you left open the guidance for the full year. Can you talk about some of the moving pieces? Are you expecting any of your top 10 structured finance investments to get repaid in the next couple of months? And just I guess use the proceeds from the senior exchangeable notes?

Well, I guess we hadn't anticipated that we'd get 510 back as early as we did. So we want to provide some room in there for repayments that might occur. We've talked about 666 possibly repaying, although we think at this point that probably will be out for the balance of the quarter but want to provide some room there in case it gets paid down. I think you will see us carry a large cash balance through the fourth quarter, depending upon when some of the proceeds for 1775 actually get deployed, so that higher cash balance will be somewhat dilutive during the fourth quarter. I would say probably the biggest variable are these transaction costs that have to be expensed now and are very, very hard to budget for.

We have people that run around here every week trying to estimate what those costs are going to be. But when you're trying to pin down what brokerage costs are going to be, and transfer tax costsare going to be and what you have to pay professional fees, it's very, very hard to do. We have 1775, we have 280, we have a lot of other investments that we're evaluating. So all I can tell you is, I know that number is going to be higher and it may be a lot higher than it was in the third quarter, and unfortunately we would have to expense that. So, it's $0.15 off of what our third quarter run rate was, so could you see $0.05 of dilution from carry and cash proceeds and then another $0.10 of dilution related to transaction expenses? I think there is absolutely the possibility you could see that, which is why I think we're set with just sticking with the 4.75% for the year.

Okay. Thank you, guys.

Our next question comes from the line of Rob Stevenson with Macquarie Capital. Please proceed.

Thanks, guys. Just a quick question on the structured finance business. Where have you seen pricing trended and has that narrowed over the last couple of quarters?

Yes. I think it certainly has narrowed. The easiest example is in the publicly traded securities where last -- in 2009 we were very aggressive buying rate bond positions in several Manhattan buildings. We were purchasing those between I would say 11% and 14% yield to maturity. Today those trade for anywhere between 5% and 7%. So you've see a lot of yield compression in rate bonds. Then, I think on mezzanine it's more just availability of capital, overall pricing seems to be holding at 10% plus, but there are a lot more providers of capital out there.

Okay. And then as a follow-up question, when you take a look at the balance sheet after the notes deal, what do you guys look at in terms or think your acquisition capacity before you have to do something with whether it be an equity deal or some other capital raise?

Well, you're kind of at -- you're at eight times EBITDA. So we're right at where we had targeted it to be. We have now $700 million or $800 million available under the line, so we have that liquidity available to us to fund investment, so I would say we have $700 million to $800 million available. And then we probably go out -- and so you might see us draw on that to fund it but then do additional property sales to pay that back down.

So we have that type of immediate liquidity, I think, plus $300 million of cash on hand. So you can make the case that we have $1 billion dollars of liquidity; if we fully drew the line, we'd probably be at a leverage point that's -- we could be there and be covenant compliant. We'd probably -- we'd be above our eight times and may look to sell assets and pay that back down. But if you're thinking about it in terms of what liquidity we have available to do deals now, I think $1 billion is probably the right number.

Okay. Thanks, guys.

Our next question comes from the line of Rob Salisbury with UBS. Please proceed.

Hi, it's Ross Nussbaum. I'm here with Rob. Marc, question regarding London. I guess, strategically, is it your intent to continue to pursue office investments in other cities and other countries?

Well, I think that this investment is particularly interesting, not because it was simply another market but because we consider it to be a gateway market that had more similarities in some respects to a market we're accustomed to on the commercial side, as in New York as London. So I think it's interesting, time will tell whether there are enough opportunities like this or whether it's too competitive a market and whether we have access to those opportunities and want to deploy capital there.

I mean, this -- I wouldn't say this is part of any programmatic intent to expand in London, but I certainly -- we spend a lot of time there meeting with investors, raising debt and equity capital. We've come to know the market and we thought this was a very good opportunity and if more presents itself, I would say we'll look at more. That's not to say this is the first one we've ever looked at either; it's just one of those moments where everything came together on what we thought was a transaction with very substantial upside and limited downside. So we went ahead and for $20 million, $22 million US, we thought it was a good entry point. But I can't say that there's any strategic desire or intent to do more than that, but we have looked in the past and will continue.

Andrew, the second question on 280 Park and on 666 5th, can you just talk about what the end game on both those investments are? I know we were expecting something to happen on 666 5th and it didn't come to fruition in the second half of the year.

Sure. I think the -- they're both -- 666 was in the market and they continue to, in that marketing process, for some or all of that property and we expect to get repaid on our investment as part of that sale. So that process is ongoing.

I think on 280, it's a good risk-adjusted return. We're looking at it as a debt investment and we -- there's likely to be an interim event on that building, but we see no reason why we won't be repaid there and we're looking at it as a debt investment until it turns into anything different.

Thank you.

Our next question comes from the line of Jamie Feldman. Please proceed.

Thank you. I was hoping we could talk a little bit more about this same-store NOI comparison. And just as you think about next year, is there any quarter where you think it starts to turn meaningfully positive? Or is that just going to be difficult given the change in occupancy?

Boy, I don't see how it could be meaningfully positive in the next six to nine months. The rents, we think, are going to be up around 25% over a three-year period, you may see 5% to 10% top line growth in rents next year, but those are for leases that will be leased throughout the year. If they're new leases they have free-run associated. So I don't know what meaningful means. To me, positive would be great, to be back into the plus category on same-store next year in the low-single-digit numbers. If that's meaningful, then yes, but if you're talking about something (multiple speakers) --

No, that is meaningful. Above zero.

Okay -- oh, above zero. Okay. We'll give -- I'm sorry -- different -- I didn't understand the definition of meaningful. Above zero, we can't unfortunately give you the color right now on the phone, because we will have that for December. We're finishing our budgets. But I would say if that's the standard, I would say surely there's a shot and that shuld be a goal we're striving to. Whether we believe we will be there or not, I think we need another month or so to sort through our '011 numbers and we'll have a firm view on that.

Yes, Matt, I think you have to remember the leases that we're signing here in the first three quarters work their way into the NOI numbers in subsequent periods. So if you look at the mark-to-markets of -- to the last three quarters of negative 5, negative 4, and 1, at least for the first half of the year next year, I mean you -- we'll, as Marc said, we'll have a better number for you and a specific number the first week in December. But one shouldn't think that you'll see significant NOI -- same-store NOI growth through at least the first half of next year.

Okay. Can you give a little bit more color on the suburbs, just in terms of how the third quarter was in terms of new demand and what you see heading into the end of the year?

The suburbs, it's unfortunate, it was very -- in some respects it was very solid, there were 18 deals done, 17 of which, taken together, had a fairly impressive mark-to-market and then we did one deal with Pepsi which kind of dragged down those metrics. So if you're looking at median kind of numbers, mean numbers, the suburbs pretty much held their own, 267,000 feet, 18 deals that outpaced the amount of square footage we had projected to be leased during the quarter, I think the supplemental showed it around 207,000 square feet. Citi renewed for about 82,000 square feet.

And the mark-to-market would have been positive 3.3% but for the Pepsi transaction, 75,000 square feet in Valhalla, which as I said dragged down those numbers. I think the Connecticut properties are faring somewhat better than Westchester. And frankly, what you're seeing is just an inability or unwillingness for New York state to compete for these tenants in suburban locations, the way Connecticut and New Jersey but really Connecticut, competes for these businesses with major, major tax incentives to locate them into Fairfield County and otherwise. So it helps us on the Stanford side, it hurts us on the New York and Westchester side of the equation.

Those subsidies for businesses today, tax breaks, incentives, job perks, those are critical for any business that's looking to renew or relocate its space commitment today. And we unfortunately work with all of the various agencies set up to try and track and retain these tenants, but there just doesn't seem to be a lot of money or emphasis on doing that as much so as in, as I mentioned, Connecticut.

So it works for us in some respects, it works against us in other respects, but all in all, I would say it's holding its own at around 87% occupancy; the rents I think for the quarter were somewhat stabilized at around $29, high $20s, $29 or so a foot. And the good news is we have very little credit concern in that portfolio; the tenants we have by and large, we think are in good shapes from a credit worthy perspectiveness and not in abundance of arrears or collection procedures.

Okay. Thank you.

Our 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. Marc, just wanted to come back to London and whether there's other markets that you're potentially putting placeholders in, and I think I get why you think the London investment makes sense just from the size and how it came together. But, I guess, is there other things that you're thinking about or have targeted?

Well, I mean, we've -- I would say of all the REITs out there, we're as probably monastic as anyone out there. So I can't say we're sitting here with designs or intents on major expansion plans. London, we think is somewhat of a unique gateway city, like New York, considered by many to be a world capital like New York, and we just happen to have a pretty interesting commonality of tenant, seller and asset managers, so it made sense and we think we're going to do -- hopefully we'll do quite well in that investment.

So I would say there's no -- we're not looking at other markets in that same way, because frankly there is very few other gateway markets, gateway cities like that that I think we will feel as comfortable doing business. We did a lot of diligence for this asset getting up to speed and I think have become very well-versed in the collection process for mortgage loans, the laws are similar in some respects, in other respects we actually think exercise of remedies is probably better in London than in the US. There were structural ways we set up the investment, which worked efficiently from a tax perspective and also we had some portion of the currency risk for our equity investment.

So, we were just -- it was a comfortable way to invest that business. There are other great cities, other world capitals out there. I can't say that it would be as easy for us to invest in those markets and we're not really looking at any other markets at this time outside of London, even if you want to say we're looking at London, which is a bit of a stretch.

And do you have -- I guess what's the cap structure in place on the asset and what the timing is of your maturities and your financing?

Well, the loan is about GBP85 million, first mortgage loan. We purchased that at a discount to face. We're 90/10 -- actually we're 87/13 with our asset management partner. And the financing on that is approximately, I don't know, 65% financing, something along those lines.

And, Marc, this is Josh. Some of the large financial services firms in New York have seen slowdown in trading volume, even some modest downsizings over the last few months. It doesn't sound like it, but is that having any impact on the tone of the leasing market from your view?

Well, it is -- it's not -- it's keeping the acceleration from happening. It's not backing us up. I mean, we have positive absorption, we're chipping away at the vacancy. So it is a problem, if you will, from just delaying or constraining what we think is going to be potentially explosive demand in the city for space. Because we are getting back to, as I mentioned earlier, very little sublease space available that's vacant and has term and is available to lease. No new product that can deliver in any reasonable period of time in what I will call core Midtown.

Corporate profits are generally quite substantial and we've -- this is coming directly from our top 1020 shareholders -- 1020 tenants that we meet with and are telling us about the, in some cases, record monies that they're making right now and they're just not yet investing, because they don't have the confidence to invest in making big commitments to space and to people. But we do think that that's coming. And if it were not for the reduction of velocity, we might be seeing that now, but if we have to wait until '11, we'll wait until '11. We don't -- the trends are in the right direction.

And, Greg, are any of the proceeds from the convert offering earmarked to pay down the line of credit?

Well, we -- cash is obviously fundable so we had cash on hand. We brought in another $300 million, and given that, that's one of the reasons we decided to pay down the line by a $100 million. We could have paid it down by more, but we're still sitting on significant cash balances; certainly as a result of having those monies in the house, we paid it down further.

Our next question comes from the line of Brendon Metrano with Wells Fargo. Please proceed.

Thanks, good afternoon. Two relatively quick questions. First, on your mark-to-market on the signed deals. You guys have moved from, as you stated, negative 5% towards the beginning of year to plus 1% in New York City for Q3. And as I look at the embedded growth on the forward 12 months leasing schedule, those numbers have generally been around plus 5% to plus 10%. So why is there the difference between the re-leasing spreads on the signed deals versus the embedded growth? And then second question is, about what percent of your leases contain in-place rent bumps, in-place contractual rent bumps?

Let's hit the second one first. I want to make sure I understand your first one. I would say almost all of our office leases of 10 years or greater will have at least one, if not two or more, contractual rent bumps on top of expense escalation. So we do have fairly sizable rent bumps for term deals.

The first question, as to -- there's some forward metric that's showing a 5% to 10% embedded rent growth, what (multiple speakers) --

You mean in our lease expiration schedule in the supplemental?

Yes, exactly, [that's kind of it].

That's comparing in-place rents to market asking rents, which don't always necessarily translate into pegging rents and that's for future periods. So -- and it's building specific. So it's an indication of where it could end up; it doesn't -- that doesn't always translate exactly into the mark-to-markets that we actually realize.

So would you guys expect that spread to narrow as the market firms up?

Well, what you'll see is we'll start increasing the asking rent. So, I don't know -- if you're looking for convergence, I mean, I think in any market it's pretty customary to see somewhere between a small to a sometimes not-so-small discount between taking and asking. We can only give you in terms of guidance looking out what we're asking for rents, we do it building by building, space by space. And it's all listed, it's out there in the market, we publish it. The taking is generally less, I would say in a tight market it may be a little closer, a loose market further, but (multiple speakers) they're never on top of each other.

In 2006 and 2007, because we were actually ahead of them in the number of instances, because we weren't updating the market rents quickly enough to catch up with it, so our mark-to-markets were actually exceeding the spread that you saw there in the supplemental.

So the answer is, I mean, it can happen, but we're also increasing those rents along the way and I guess if you have a period of rapid, rapid increase, you may see convergence or even inflection, but generally I think asking rents tend to be somewhat in excess of taken.

Sure. Thanks for the color.

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

Good afternoon. Question about the structured finance business. First, I think it was Andrew, you mentioned that you see great relative value. I was just curious if you could help us understand a little better how you guys think about that? Is it relative to other fixed income alternatives, or better value relative to equity real estate investments? Just curious how you think about that.

We look at everything risk-adjusted, and when we risk-adjust versus a lot of the equity opportunities that are out there in the market, we're finding relative value in structured financing in a lot of cases. I think that's -- we're obviously -- we don't have a broader fixed-income mandate, so the only fixed income investments we're considering are real estate investments. But when we look at something like the 5th Avenue property which we bid for, we lost the bid because we weren't prepared to reach high enough on price, we found what we feel to be better relative value at about 60% loan to acquisition cost in the mezzanine loan we purchased. That's sort of a live example.

That's helpful. And then, I guess somewhat similar, do you consider the possibility that you might go over the, I think, historical 10% of asset value threshold that you guys have outlined for that business line?

I doubt it. I mean, we never have -- I think we are right around 7% or maybe sub-7%. I think we've always bounced around between 6% and 9%. So I don't want to ever say never, it's a self-imposed cap. But I think it's been pretty good guidance -- it's been accurate guidance since we started the program. We've never exceeded it, I'm not even sure we've come close to it. I'll have to look back. But that's where the program is now and we think it's the right balance.

Thank you.

Our next question comes from the line of Jordan Sadler with KeyBanc. Please proceed.

Thank you and good afternoon. Just as it relates to the investment activity, are you guys seeing good relative value in fee-simple investment opportunities, given what's happened in the New York market in terms of appetite for assets here?

I think the short answer is yes. Obviously we've had a very active year on the acquisition front, so we feel very good about our investments in 600 Lex and 125 Park at this point. And in an investment like a 3 Columbus Circle, which is a fee-simple investment at its core, we're still finding very attractive opportunities out there where we think there's -- rent rolls have set up very well to take advantage of what we feel the leasing market fundamentals that are to come.

And then on the leasing market fundamentals, Marc, I heard you say -- mention reduction in velocity in response to Josh's question, and I wasn't sure if you were referring to what you're seeing out of the tenants very recently or if that was just specifically as it relates to some of the financial services?

No, I'm not -- if I -- I have to think back, what I thought the question was, as a result of the reduction in volatility, I might have said velocity, trading volatility because the trading volumes are down very sharply, have we seen that translate into a reduction of demand from let's say the Wall Street banks? The Wall Street bank demand has been pretty anemic, if you will, to begin with, so the point I was trying to make was, I haven't seen a reduction in that demand; we just haven't seen that low demand pick up like we hoped it would have.

But the rest of the market that's not part of the trading market, we see reasonable -- reasonably good velocity, and I think that's just evidenced by the amount of lease signings. We're going to exceed our goal this year by about one million feet. And, as a result that's why you'll -- that's why we've traded in those concessions and we're starting to move up our asking rents. That trend I see continuing. But it won't become -- what I referred to before, it's explosive, I think, was until the trading firms and the users demanding 500,000 square feet and above get back into the market in a meaningful way, which right now they just are not, because those jobs are not being created at the moment.

Historically at what point are you able to start pressing rent? Midtown? In terms of any vacancy?

Another 150 to 200 basis points. Somewhere between 9% and 10% vacancy. We're at 11% or just under now. So we're certainly not at a level we can start really pressing and recapturing materially the rental declines that we've experienced over the past three years, but we are moving them -- starting to move them steadily and in the right direction towards equilibrium first, where rents should be in kind of a static market. And then if that excess demand kicks in that I'm speaking of, that's when you see it turn into a landlord's market somewhere south of 9% to 10% vacancy.

Thank you.

Our next question comes from the line of Suzanne Kim for Credit Suisse. Please proceed.

Hi, I have a couple of questions. On page 33 of the structured finance description, how many of these are actually accruing rent at this time, and which are on a cash basis? It's the 10 largest structured finance investments.

One of them is on non-accrual. The rest of them we're realizing income on, and then within the income component, some of them have a cash piece and some of them have a pay-in-kind piece, or at discount decreasing piece and we'd have to separately break that down for you.

Okay.

But I think the rule of thumb historically has been that around 60% or 70% of the yield is cash and the balance is an accrual-type feature.

Okay. And then also about the First -- Healthfirst lease that's kicking in on 100 Church Street. Has any of the TI spending kicked in yet and what is the occupancy after Healthfirst moves in? How does that change the number there?

Steve Durels?

Right now -- this is Steve Durels. Right now we're preparing the space for delivery to the tenant, so the base building work is just being finished. The space will be handed over to them at the end of December, and at that point Healthfirst will begin their construction, and when they submit pit invoices, then you'll start to see the TI be pulled down.

Okay. But what will the occupancy be post for Healthfirst?

The asset's around 70% lease and we won't see the Healthfirst numbers kick into the numbers until the fourth quarter. The lease commencement isn't until the fourth quarter.

Okay.

So it's around 70% lease now, sometime in the next three or four months the occupancy should be up around that level.

Okay. Great. And the last question is the stock earnings and the reports of various financial services tenants, notably your third largest tenant, have been less than stellar. Does this impact the real estate demand or is this just observation, just academic at this point?

I think as it relates to most of our financial services, tenants are locked into very, very long-term leases, so the interim results have little impact on it. I would say the one impact is how people think about the credit risk and, as they alluded to, the biggest one being Citigroup, which has raised capital for selling businesses, has done some additional capital offerings here and who actually posted better-than-expected results. I think -- obviously they're on for another 10 or so years, so it doesn't impact, but the story there is getting better.

Okay. Great, thanks.

Thank you. Is that -- any more questions, Operator?

Yes, our next question comes from the line of Sri Nagarajan from FBR Capital Markets. Please proceed.

Yes, thanks. A quick question on the -- I think you said in your prepared markets about some letter intent signed for the 100 Church Street space, I'm wondering kind of -- what percentage lease would that put you at or what kind of square footage are we talking about there?

We do have good activity on that space with multiple people trading proposals with us and we see a path to get into north of 70% occupancy in the relatively near future.

So that kind of details with your remarks that it was about 70% leased already with its held-first lease?

Yes. Sri, with some of the activity, which I would -- I don't know why you say letter of intent. These are proposals, term sheets, in some cases early-stage leases, so nothing we would be comfortable in quoting a deal. But, but Steve, the amount of activity -- if what do you think reasonably the 70% may increase to in next six months or so?

I think as a good shot by the end of this year or first -- early first quarter next year, that we get the building up to 80% to 85% occupied. And there's a reasonable shot that we get a lot further than that based upon the deal that we've got. We have offers in that are actively being negotiated or short-listed for three or four tenants of very large size, which if all of them were to make it, it would actually take the building 100%.

That's very helpful. My second question is on the 510 Madison gain, obviously this has increased your FFO well above your expectations. If you can share with us what the compensation impact would be for 2010 and 2011? Just based on the gains, that will be helpful.

Well, the compensation program is not directly tied to these gains. There's a component of performance-based RSUs, restricted stock units, that are based on either increases in share price above thresholds or increases above FFO above thresholds, but the total return to shareholders has so dramatically exceeded the threshold to date, now the FFO will as well. That just -- that's those shares but there's no incremental comp program or strategy that's tied to that FFO generation.

So just to sum it up, your stock performance overrides anything at this point in time?

Stock performance -- could you repeat that, Sri?

Yes, I was just saying that your stock performance year-to-date overrides your -- any other factor such as FFO at this point in time?

Yes, for 2010, and 2011's a new ball game.

Okay. All right. Thanks.

I have no further questions at this time. I will now like to turn the call over to Marc Holliday for any closing remarks.

Great, well, I appreciate for those still listening, glad we left time for the questions. Hope that was informative and look forward to spending some quality time with everybody in December. Speak to you later.

Thank you for your participation in today's conference, this concludes the presentation. Everyone have a great day.