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SL Green Realty Corp. (NYSE:SLG)

Q1 2009 Earnings Call

April 28, 2009 2:00 pm ET

Executives

Marc Holliday - Chief Executive Officer

Andrew W. Mathias - President and Chief Investment Officer

Gregory F. Hughes - Chief Operating Officer and Chief Financial Officer

Steven M. Durels - Executive Vice President

Analysts

Anthony Paolone - J.P. Morgan.

Jonathan Habermann - Goldman Sachs

Michael Knott - Green Street Advisors

Michael Bilerman - Citigroup

John Guinee - Stifel Nicolaus & Co.

Jordan Sadler - Keybanc Capital Markets

Operator

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

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

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

Marc Holliday

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

There were a number of noteworthy achievements which were realized throughout the first quarter during an extremely difficult economic climate. Such notable achievements include significant debt reduction, a modest reduction in overall vacancy, same store NOI increases, mark-to-market on new rents in excess of 23%, continued husbanding of cash through sharp G&A savings, operating expense controls and curtailment of discretionary capital spending, the long anticipated sale of the GKK Manager to Gramercy Capital Corp. completed as part of the recently announced internalization and reduced structured finance balances at quarter end.

In the aggregate, these results are consistent with or exceed the guidance we gave back in December with the exception of a sizable reserve on one structured finance investment that Andrew Mathias will discuss with you later in the call.

These accomplishments demonstrate the seriousness and determination with which we are approaching our major business objectives, that is, overall debt reduction in light of falling asset values, cash conservation measures, occupancy maintenance through aggressive management of the rent roll, and a reduction in the speculation surrounding SL Green’s structured finance activities through the internalization of Gramercy, loan sales, and loan reserves.

Through our affirmative actions we have an excess of $400 million of cash on hand at quarter end, and we had ample and increasing covenant cushion as a result of our debt reduction efforts as Greg will elaborate on. Over $700 million of debt has been retired in the past 12 months. The cash dividend has been reduced by over 50% with the flexibility to make further reductions as a result of our very low taxable income projected for ’09 and ’10, and our property portfolios remain well-leased, in Manhattan in excess of 96% and in the suburbs in excess of 90% occupancy. Our still sizable mark-to-market in embedded in-place rents means that we should still enjoy same store NOI increases throughout the remainder of 2009. In any typical market, I’d be pleased with these results; however, in the worse market that I have experienced in 20 years, I believe these results to be very very compelling.

With that said, we do recognize the significant challenges that lie ahead and the deteriorating market fundamentals that we expect to experience throughout the remainder of 2009 which will make it more and more difficult to achieve our objectives.

Vacancy in mid-town Manhattan now stands at approximately 10%, that’s direct and sublet, and is expected to rise to as much as 12% or beyond in 2010. Concession packages have been widening out as predicted, and most of the current leasing activity is renewal in nature, not new or expansion deals.

While the deteriorating fundamentals are disappointing, nobody who has been on our prior calls should be surprised by any of this as we explicitly and clearly stated our belief that we would see a combination of rental declines, increases in concessions, occupancy slippage, and emphasis on renewal leasing. Although we can’t change or influence market fundamentals, we can accurately predict those trends and adapt our business plan accordingly.

In our specific circumstance, we sold almost all of our B buildings which will be the hardest hit in this downturn, renewed and extended early expiring leases in 2006, 2007, and 2008 that act as a buffer against ’09 and ’10 scheduled lease expirations. We developed many of our assets to make them more competitive in a down market, and generally acquired buildings with low embedded in-place rents which enabled us to grow NOI even in very difficult market conditions.

For our glass-is-half-full listeners, the market news is not all that negative. There are several examples of space that was being included in future availability statistics that have or will be eliminated. First, as I mentioned previously, a portion of Merrill Lynch’s Investment Banking Division has been moved up to One Bryant Park to absorb unused Bank of America space in that new project.

Second, Pfizer pulled off the market 750,000 square feet of space available for sublet in the Grand Central submarket when it announced the pending acquisition with Wyeth would result in the backfilling of that space. Also, Credit Suisse had approximately 10,000 square feet at One Madison Avenue available for sublet, but has since removed that space from the market and backfilled it as we have the stand-up.

Lastly, there have been published reports circulating about Citigroup’s attempts and intentions to sublease 300,000 square feet at 485 Lexington Avenue, but as recently as this morning, we received verification from sources within Citi that at least 3 floors covering 121,000 square feet at 485 Lexington Avenue will be retained as a result of Morgan Stanley utilizing that space through at least until the 2017 lease expiration. Also, Citi will be keeping two other floors for its own use such that only 3 floors totaling little over 100,000 square feet are likely to hit the market, and that’s assuming plans don’t change again.

As you can see, looking at listed availabilities, one always will give you an accurate picture of what is truly available for rent and also doesn’t give you any implication as to how, when, and why financial institutions and other businesses will change their minds as to their staffing needs as the economy bottoms and hopefully business picks up over the next few years.

Turning attention to the suburban portfolio, mark-to-market was essentially flat, occupancy held steady at around 90.4%, and over 124,000 square feet of leases were signed in 32 different deals, the largest of which was the renewal of Deloitte to 37,000 square feet.

I’m also pleased to announce this morning that a brand new lease has been executed in Stamford with a major law firm for 16,000 square feet, a deal that has an excess of 10 years of term over a $30 starting rent with annual bumps and notwithstanding its full size concession package is an indication that we’re able to compete as effectively in the suburbs as we can in Manhattan in combating market forces and attracting new tenants to our buildings.

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

I believe first quarter statistics through March will show actual job losses to be on track or light of those original projections which is good news but doesn’t necessarily answer the question of what’s in store for the future. When put into the context of prior job losses, the projected losses for this recession equals approximately 8.5% of prior peak employment, whereas in 2002 job losses were approximately 6.5% of prior peak, and in the early 1990s it was 10% of its prior peak. So, this would put the current projection somewhere in between the severity of ’02 and the early 1990s as it relates in terms of job loss.

As it relates to stimulus dollars, the city is anticipating receiving as much as $4 billion over the next 2 years for certain categorical expenditures like Medicaid and education, and other individual initiatives like transportation projects and block rents.

Stimulus dollars will presumably be reflected in the Mayor’s budget along with first quarter tax receipts from financial institutions which seem to be tracking somewhat ahead of January’s projections. All told, I would expect that $60 billion plus or minus budget for New York City will be able to be balanced without any significant increase in real estate taxes and/or personal income taxes, but we will all wait to see the budget plans on Friday, and hope that this is accurate.

In summary, I believe that working through these tough times in a well measured but determined way will enable us to keep our properties well leased, maintain our substantial earnings base, address near-term debt maturities as and when they come due, and build up our cash resources in order to begin stock piling cash for future opportunities.

Cash resources will come from the areas I mentioned earlier including reduced dividend, reduced G&A, increased retained earnings, and reduction in capital projects, but also may come through continuation of asset sales and refinancings with a potential for equity issuance in the future. We believe that an incremental $600 to $700 million on top of the existing cash reserves that we currently have would be sufficient to meet all of our maturing debt obligations through 2012. Our preference is to raise that capital in the ways previously described while not foreclosing the issuance of equity an earlier date, especially if it is tied to a compelling opportunity to retire debt on attractive terms.

We are fortunate not to be one of the many companies that have high levels of debt maturities in ’09, ’10, ’11, and therefore we have to-date taken a more patient approach between balancing the raising of capital tied to its effective deployment.

With that said, everything we do today is with a focus on raising efficiently priced capital, to retire near-term debt maturities, and/or extend out those same maturities.

Now, let me turn the call over to Andrew Mathias who will provide you with more insight on our asset level activities as well as capital transactions within the New York market.

Andrew W. Mathias

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

Otherwise, we were encouraged by the terms of this sale with the buyer going into the sub 6% cap rate and expecting a stabilized cash on cost return around 7.5% to 8% based on our underwriting and reportedly modeling a sale in 7 to 10 years at 6.5% to 7% exit cap rate. If that kind of underwriting held up and the financing market returned to some level of normalcy, we believe New York City pricing would reset to a level that would surpass most people’s expectations of the market at this time.

Keep in mind that this was an office condominium interest which required substantial lease-up capital selling at an in-price of $387 per square foot as the retail portion of the property was a condo when equity office purchased the office component several years ago.

Other than that sale, activity in New York has been limited to the sale lease back of the New York Times building which is really more of a financing transaction and UCC for closure sale at 1336th Avenue with the balance of activity being a lot of player kicking without actual transactions taking place or materializing.

We continue to speak with groups interested in purchasing assets in New York City, and believe once a financing market returns and first movers move in, others will come off the side lines once they determine the water is safe.

Foreign capital is still showing a lot of interest in New York. In fact, I met with a German closed-end fund operator this morning who said they are confident in their ability to raise capital in Germany for New York deals and they’d be happy and interested in doing New York deals if the right asset and structure presented itself.

On SL Green’s capital markets front, we have had some success selling structured finance positions with three or so deals completed and several more in process. On the real estate side, as widely reported, we’re having selective off-market conversations with several different perspective purchasers about several of our assets. While some of these discussions have promised, our conclusion thus far is that it’s still too early and while we’re incentivized to transact, we haven’t yet been able to get anything done at prices we deem to be reasonable. There are also more interested parties today than there were 60 days ago, a trend we see as continuing as equity on the side lines becomes impatient and more confident.

We continue to have ongoing dialogue with different sources of capital on different structure and outright sale transactions and hope to have more progress to report on our next call.

The other news of the quarter was a $62 million charge-off we took on our structured finance balance, the majority of which was our write-down of approximately 75% of the balance of our interest in the Stuyvesant Town mezzanine loan. In the first quarter there was a wholly unexpected, high adverse court ruling regarding ownership’s ability to bring stabilized rents to market rents at that property which had a material impact on efforts to re-capitalize the asset. This ruling which is pending appeal at New York State’s highest court, the Court of Appeals, has such negative implications for the property and the $2 billion of common equity that sits subordinate to our position that we decided a write-down was appropriate here.

The other write-down from the quarter was as a result of assets being moved to held-for-sale in anticipation of possible sale transactions which I mentioned earlier. Certainly without data points as to where values ultimately shake out when a healthy competitive market returns, buyers are cautious about purchasing debt positions as well.

Notwithstanding the cautious nature of buyers in the market, there’s not been the wave of distress selling that many expected. Sellers are generally getting the time they need from their lenders to try to wait out some real price discovery in the market and banks are generally holding on to loan positions rather than sell them at market clearing prices either for credit or return reasons.

Even the foreclosure options we’ve seen thus far has seen mezzanine lenders credit bid and protect their positions and be the successful bidder at those foreclosures, committing new equity capital to the properties in each instance. This was the case for both 1336 Avenue which I mentioned earlier and in the foreclosure of the John Hancock Tower in Boston and 10 Universal City Plaza in Los Angeles, a situation where we were hired as a special servicer because of our large asset workout expertise.

We’ve used special servicing as both a lucrative fee opportunity in the interim which we intend to grow and ultimately a platform from which principal investment opportunities will arise.

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

Gregory F. Hughes

During the quarter we made what we think is good initial progress towards deleveraging and insuring up the balance sheet. I think as Marc alluded to since October we have repurchased $487 million of our bonds and realized gains of $135 million from those repurchases; $225 million of these repurchases had occurred in 2009 when we recognized $57.5 million worth of gains. And so you can see while the initial distress selling has subsided, we continue to find attractive opportunities in the discounted repurchase of our debt.

While the gains of these purchases are certainly impressive, true benefit from these repurchases is best evidenced by a review of their impact on our senior unsecured line of credit covenants.

Prior to commencing the buyback program, our unencumbered assets to unencumbered debt ratio, a highly scrutinized covenant, sat at 55.6%. This ratio has been reduced to 45.7% at quarter end, comfortably lower than the 60% requirement, and with plenty of cushion for the covenant cap reset scheduled for the third quarter of 2009.

With $434 million of cash on hand at quarter end, we continue to maintain enough cash to repay our corporate maturities through 2011. Accordingly, we have already turned our attention towards addressing the June 2012 maturity of our line of credit. We have had preliminary discussions with most of our major line lenders as we seek to explore ways to enhance their credit, extend our maturities, and pay down the credit facility.

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

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

On the secured debt front we are in the marketplace to refinance 420 Lexington Avenue which doesn’t mature until November 2012 and have received good interest so far. In addition, we have been encouraged by the number of successful extensions that other borrowers have been able to achieve in the securitized debt market.

Needless to say, we along with the rest of the industry are highly focused on reducing our leverage. I think it is important to point out that our leverage statistics are often over-stated as our debt-to-EBITDA statistics are frequently quoted with the exclusion of earnings from our structured finance portfolio as well as earnings from our unconsolidated joint ventures. By our estimates, our debt-to-EBITDA sits at approximately 9.5 times which appears to be in line with our peers and the office sector as a whole, many of whom have more near-term maturities than we do. Based upon this, we are hard-pressed to understand the dramatic multiple disparity that exists between us and our peers.

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

During the quarter, we adopted SFAS 160 which resulted in the minority interest of our consolidated joint ventures being re-classified into the equity section of the balance sheet. We also implemented APB 14-1 which changed the accounting for our convertible notes. The adoption of this pronouncement resulted in the re-classification of $35 million of convertible notes which were to be amortized into interest expense over their estimated life.

For the first quarter, this resulted in additional interest expense of $3.5 million. Note that this new pronouncement also resulted in $11.1 million of fourth quarter 2008 bond gains being re-classified directly into equity. Also, I would point out that interest that is earned on cash balances is now reflected netted against our interest expense for this quarter and will be so prospectively.

Also, changes in the balance sheet as a result of the recently announced internalization, the results of the GKK Manager had been re-classified into discontinued operations and the carrying value of our 6.2 million shares investment in GKK is carried at zero as at quarter end.

Now, we’d like to take a moment to focus on the P&L for the quarter.

Excluding bond gains and reserves on structured finance, our results were substantially ahead of the guidance we provided in December as we benefited from historically low LIBOR rates and realized substantial G&A savings which were well in excess of those that were advertised in December.

We are on pace to reduce G&A by over 30% from 2008 and over 17% when one excludes the OPP and option charges from the fourth quarter of 2008. These savings have been achieved principally from the reduction of incentive based compensation as well as headcount reductions and other cost containment measures. Later this week, we will be sending out our proxy and annual report. Our scaled down bare-bones approach to this year’s annual report is indicative of the cost containment measures being implemented firm-wide. Some of the G&A savings discussed here will be evidenced in the proxy; however, it is important to remember that the proxy tables require much of the stock-based compensation to be reported based upon values in place at the original grant date. Accordingly, much of the compensation described therein is dramatically overstated and reflective of amounts that we can only wish we had realized. At roughly $75 million our G&A represents just 4.7% of our total combined revenues, which is very much in line for a fully integrated real estate operating company.

Most importantly for the quarter, our core operations performed solidly and in line with our expectations and guidance. The stronger-than-expected leasing activity offset scheduled lease expirations at 485 Lexington Avenue and move out to the 100 Park Avenue and 521 Fifth Avenue. We were encouraged by the solid 24% mark-to-market achieved on new leases which bolsters our belief that there is limited roll-down risk to the NOI of our portfolio, absent major credit issues within our tenant base. Naturally in this environment we monitor tenants closer than ever. While we have seen an uptick in the tenant watch list, it has been concentrated in a handful of older buildings with smaller tenants.

Like everyone else, we await the results of the government stress test that’s due out Friday. While there appears in the news today to be disagreements over how the capital requirements will be computed, we remain confident that Citi will remain a viable rent paying tenant.

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

Our same-store NOI increased by a respectable 2.9%, notwithstanding a substantial increase in real estate taxes. In December we projected a 10% increase in real estate taxes for the year, and we’re currently conservatively accruing for an even higher increase as we await the new millage rates for the fiscal tax year commencing July 1st as well as news on the New York City budget.

Our GAAP NOI for the quarter reflects terms of the newly signed lease at 1515 Broadway with Viacom. Recall that this lease includes approximately four months of free rent which accounts for the significant difference between GAAP and cash NOI that you see for the JV properties during the quarter.

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

In conclusion we remain highly focused on addressing leverage concerns and identifying new sources of capital. I would also focus people on the solid long-term earnings that are being generated from this high-quality portfolio.

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

Marc Holliday

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

Question-and-Answer Session

Operator

(Operator Instructions). Your first question will come from the line of Anthony Paolone - J.P. Morgan.

Anthony Paolone - J.P. Morgan

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

Marc Holliday

Well, three different thoughts in that question. So, as it relates to the number $600 to $700, plus our available cash of approximately $400, brings it up into the $1 billion or $1.1 billion range. We have in terms of recourse indebtedness maturing in 2010 and 2011 about $300 million and then another $350 million or $360 of converts remaining in 2012, so clearly the excess of the $1.1 billion or so over those amounts would represent money available to address the line of credit, and there are lots of different ways that can and may be addressed between now and 2012. Plus, we are generating positive cash flow over the next 3 or 3-1/2 years. I think we have talked about that publicly.

Anthony Paolone - J.P. Morgan

I had mentioned $350 to $400 million of free cash flow after the existing dividend level between now and 2012.

Marc Holliday

So between the excess of the cash that I was referring to, call that an extra $300 to $400 million, plus the incremental cash flow that Greg is referring to, I think that is really there to address the line of credit and new opportunities. So, new opportunities are going to be in a joint venture format. I think if that is not self evident, I would go out on a limb and say that; we are not going to be raising public equity at 2-1/2 times earnings multiple to then go out and do wholly-owned real estate transactions. I think we would look to, as we did when were first starting out in 1997, 1998, and 1999, look to coordinate more limited equity dollars with joint venture capital and attack larger deals that way, if and when they materialize, and you heard Andrew’s comments on the state of that market. We do think there will be some sizable opportunities but may be not as many as people think, and we are going to have to work as hard to dig those out as we have in the past years, so I think that addresses the computation of at least the range as I look at it. It does have embedded in that assumption, two things. We have existing cash balances which were $430 million or so at quarter end, and we are cash flow positive and expect to generate without a further dividend cut, $300 million of incremental cash flow, a further dividend cut would just enhance that, so I think that should take care of what we expect to see through 2012 with some equity left over for JV format investment.

Anthony Paolone - J.P. Morgan

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

Marc Holliday

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

Operator

Your next question will come from the line of Jonathan Habermann - Goldman Sachs.

Jonathan Habermann - Goldman Sachs

I guess, Marc, to follow up on Tony’s question a bit more, you know, the concern seems to be on the investors part, at least New York City structured finance and obviously the leverage. Coming back to the leverage issue, why not essentially do more now. I know you have mentioned again that 2 or 2-1/2 times multiple, but it would appear that you probably could close that multiple gap if you attack that probably sooner than waiting later and obviously you said that is the worst market in 20 years, so perhaps it could continue to get worse for the next 2 to 3 years.

Marc Holliday

I would agree with you. When you say why not attack it now, the question is when to attack it? I don’t know that anyone has a right or wrong answer on whether that is April 2009, March of 2010, January 2011, or May of 2012, I think what I had said was we have dimensioned an amount of capital that I think would comfortably get us through 2012 and leave some cash over for a JV equity format and that is in current market conditions, so not dramatically better and not dramatically worse, but current which are not so good. We are working very hard and diligently on either extending out some of those maturities and/or selling pieces of real estate or structured finance investments to generate may be not all of that 600 to 700, but may be a chunk of it, and I think that while we are looking closely at that alternative, so I do not want to, it is not as though we are not looking at that. I am sure like many other wreaths, we are studying it hard, and we are weighing all the different possibilities. I do not think there is an easy answer to the question of does it justify the potential risk of what may occur in 2010, 2011, or 2012 versus today, given where the price is, and everything is related to price. If the price were at a much higher multiple like some of the peers in our training group, then I think we might have a different view on timing, sizing, execution, so I think it all relates back to price, and it all relates back to the probability and certainty of getting some of these other transactions done that we are looking, so if you read into my statements early to Tony that we are not going to do it, I didn’t say that, nor I said we are going to do it. I just said it is not our preference. We do have some other things we are working on, which are our preference. If we can get those done, we think that is just a better execution for the company, and I think, unstated, but I think the obvious conclusion will be if we cannot get those executed then we would probably look harder at that alternative, so I do not know that we are seeing anything that is not in sync with what you’re saying. If your point is timing, why not today, why not yesterday, why not tomorrow, it is 2012, and we don’t to want to miss markets, but there is no certainty that this is the only window that would exist in the next 3-1/2 years either. We just do not know.

Jonathan Habermann - Goldman Sachs

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

Marc Holliday

I guess it was more a comment about the asset sales market, it has just remained very, very slow. You know, it may still take 6,7, who knows 12 months for it to fully come back and even then, investors are looking for pricing that is probably well above what certainly we are seeing today.

Jonathan Habermann - Goldman Sachs

I do not disagree with that, but let’s say you did take 12 months to come back. We have no more dept maturities this year. If you felt it was coming back in 12 months.

Marc Holliday

I am not saying we are going to do that. It is not an easy question. If it is going to come back in 12 months, or it has got a shot of coming back in 12 months, well if you have no debt maturities this year, you certainly could wait and see how that develops before pulling the trigger and/or pulling the trigger on something of the kind of size we are talking about. I am not saying it is the right call, I am just saying, I don’t think it is a black and white issue. That’s all I’m saying.

Jonathan Habermann - Goldman Sachs

Okay, and can you walk through, I guess, or may Andrew walk through the loan loss reserve. Again, you mentioned Stuyvesant Town, but any upcoming or anticipated reserves? Are all of those still current?

Marc Holliday

The balance of the portfolios performing and Stuyvesant Town actually are still current. In that case, there was a court decision that was very unexpected from everybody in the deals under writing and there, we felt that the write down was appropriate. I think there are still some positions we have a careful eye on. Certainly, we have an investment portfolio on Los Angeles, the Ardent portfolio; our out of New York investments are what we have said for the last 6 months or 9 months, we have the closest eye on. So, we continue to evaluate those situations where there are pending maturities, and they are likely to be restructurings rather than takeouts. I would say the core of the New York City portfolio is performing as underwritten, and we think we are getting down to a core portfolio which will ultimately be recoverable.

Operator

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

Michael Knott - Green Street Advisors

I had a question on move-outs. It looked like there were 3 buildings that had some vacancy increases because of move-outs you mentioned due to lease expirations. I was just wondering if you can contrast that with what looked like pretty steady at the Gra Mar Building. I know you guys have said that you sort of view that as a leading indicator. Can you just help reconcile those two different schools of thought?

Steven M. Durels

You know Gra Mar, you know we always view a barometer of the overall market because of its prominent location in Grand Central, it diversity of the tenant base, and also the size of tenants that are in the building, everything from 300 feet from 200,000 square foot tenants in the property.

Generally speaking, the activity in the building remains strong. We are running in this building, I think it is something in the order of about of a 3% vacancy right now, may be actually a hair less than that, and we are still seeing a lot of traffic come through the doors. Overall though, I will say that in the past kind of 45 to 60 days, we have seen a tremendous uptake in perspective tenants coming through the door, whether it would be through inspections, broker enquiries, proposals that are being exchanged, deals that are actually being negotiated right now where we have some fairly significant leases that are out for both renewal and new deals, and that is in contrast to where we saw the world at the end of December going into the January where the phones were very quiet. We were basically wrapping up fourth quarter business at that point in time, but I guess I am somewhat cautiously optimistic that given all of the activity that has got us busy right now that is a good indicator that there is life out there. A lot of it is driven from as we have said, end of last year. A lot of it is driven by tending to our put-off decisions and to further decisions that had solved their lease expiration problems with band-aids of 6 to 12-month extensions that are seeing some of those tenants come into the market. We are also seeing from 2010 expirations that are now having to deal with it, and a lot of that is generating the volume right now.

Michael Knott - Green Street Advisors

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

Andrew W. Mathias

Micheal, I would say the question is a little bit linked into where the financing market ultimately shakes out on its return. There is significant term remaining on many of our mezzanine assets, so we anticipate most of the New York City assets paying off in maturity. There will be a couple where we may make the strategic decision not to extend, not to restructure, but to actually foreclose and take equity, and I think we have, at the investor date, we are going to slide up a potential pipeline of assets which we consider desirable, strategic assets where we think we may be able to take over and do better than the current ownership or our basis may represent the compelling opportunity. So, I would say on a whole, we expect most to pay off, but there will be some targeted for closures, and then I would say on the assets sales, we didn’t close three this quarter, that was three we closed to date. There were no closings of new structure finance assets last quarter.

Michael Knott - Green Street Advisors

If I can just go really quickly on that, what’s the status of the one that is held for sale?

Steven M. Durels

There are five of them held for sale, so we are in the market with those, and we think you will see something close in the second quarter.

Operator

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

Michael Bilerman - Citigroup

I think Greg, you talked a little bit about the line of credit, and of having re-negotiation with your lenders on that $1.3 billion of may be providing them added collateral, I guess may be making it a quasi-secured facility or having some recourse. Can you talk a little bit more about how you’re thinking about the size of that facility, because I think it plays into the whole de-leveraging and capital given the fact that is fully drawn and you will need to come up with some capitals to get the downsize.

Marc Holliday

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

Michael Bilerman - Citigroup

So, when you’re thinking about your $600 million to $700 million of cash, that takes care of all the 2010 and 2011 sort of maturities both secured and unsecured and the remaining converts, assuming again, no additional financing, no additional sales. I guess, then, looking at 2012 with the $1.9 billion which is the line of credit, the remaining convert, and the secured piece, you would have to come up with some capacity that spells 30% of the $1.3 billion at that point, and you’re talking about selling assets rather than selling equity to get to a fair assumption.

Marc Holliday

I think it is just to make sure that the numbers are sinking. What we talking about earlier was converts in bonds, 10, 11, and 12, that is roughly $660 million, and that plus, call it some pay down on the line, you can pick your number, I would hazard that if it is 30% today, that may be something less in 2012, if the world is a fraction better or at least the prospects of the world are a fraction better in 2012. That would sort of get it up to $1 billion as against a $1.1 billion or so that we talked about capital that we would have by raising $600 million to $700 million plus there is another $300 million that we have internally. So, I wanted to make sure those numbers, I think, are the ones that will tie to our recourse indebtedness for 2009, 2010, 2011, and 2012. If you’re getting other numbers, I don’t know what else you have in there.

Michael Bilerman - Citigroup

Greg, you talked a little bit about the covenant cap recess in the third quarter, what specifics, and how are they different from the covenant calculations on page 26?

Gregory F. Hughes

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

Michael Bilerman - Citigroup

And the cap rates already set, this is just a matter of NOI declines, given the lagging nature, the valuation of the setting.

Gregory F. Hughes

What you’re seeing now is the NOI is actually going up as evidenced by the same-store increase that you’re seeing. So, the NOI that is being capitalized is actually in a free run on that covenant today. I threw out the one covenant to show you how far away from the actual limitation we are; even when you adjust for that, we’re still six points shy of what the restriction is. So, still a lot of room with the NOI on the uptick.

Michael Bilerman - Citigroup

Last question on structured finance; when you look at that $700 million balance and I realize that 100 is held for sale, but on that $700 million balance, you mentioned a little over $80 million is non-accrual today. How much on the remaining, call it $600 million, is accrued interest versus cash interest?

Andrew W. Mathias

Let us come back to you with that number.

Operator

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

John Guinee - Stifel Nicolaus & Co.

My questions have been answered. Thank you very much.

Operator

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

Jordan Sadler - Keybanc Capital Markets

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

Marc Holliday

I can’t handicap it, I would hope it would all be asset sales where we are, but either way it’s asset sales and refinance, just to be clear. I would hope it’s all that. I can’t handicap that. I think it’s challenging. We certainly have some visibility for a portion of that. You’re talking 3-1/2 years of time to do that. If we were that patient, and I’m not saying we would be, but it’s very difficult to handicap it. We have a number of deals where if we were to make them all we could clean the whole thing out. When you have, then you have, and if you don’t make any, then you got to really shift the way you’re thinking.

Jordan Sadler - Keybanc Capital Markets

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

Marc Holliday

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

Jordan Sadler - Keybanc Capital Markets

Would you look into a seller financing type transaction like the Deutsche Bank transaction; will that make sense here?

Gregory F. Hughes

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

Jordan Sadler - Keybanc Capital Markets

Lastly, I think you mentioned Stuyvesant Town is still current; maybe if you could just give us a little bit of color of the $84 million that are non-accrual; are those all non New York City assets?

Marc Holliday

Andrew made a point that the loan structure is current. Within our portfolio we have that on non-accrual. I should point out that of the $84 million we actually are still getting payments on some of those that are non-accrual while we use that cash to sink the principal balance.

Jordan Sadler - Keybanc Capital Markets

So, the $84 million that are on non-accruals that are not Stuyvesant Town; are those New York City assets or non-New York City assets?

Andrew W. Mathias

There is one other New York City asset, all the rest if non-New York.

Jordan Sadler - Keybanc Capital Markets

Can you give me a number or percent?

Andrew W. Mathias

In terms of dollars? About 30% of the $84 million.

Marc Holliday

I would sort of invert it. Only $25 million of that amount is a New York office building, the rest is non-New York office. Only $25 million of the $84 million is a New York office building, which we inherited as part of the Reckson trade. I think we talked about that before; two non-performing assets that we inherited when we acquired Reckson and both of those are actually on the non-accrual list, one is a New York office and one is outside of New York, both are non-accrual.

Operator

Your last question is a followup from the line of Michael Bilerman - Citigroup.

Michael Bilerman - Citigroup

When you are thinking about; I think Marc was talking about, being in 9.5 times debt-to-EBITDA, I guess what do you think about that ratio relative to a more normalized bubble which I think I would argue should be lower, and when you’re thinking about your denominator, your EBITDA, is that a cash EBITDA number that’s just with the straight line rents and all the SFAS 141 or the GAAP EBITDA number?

Andrew W. Mathias

The 9.5 we think probably long-term should migrate closer to 8 times. That is the right way to think about it, and it’s based upon the earnings guidance that we provided.

Michael Bilerman - Citigroup

Is that GAAP or cash?

Andrew W. Mathias

GAAP.

Michael Bilerman - Citigroup

So arguably when you’re down for the higher straight line and SFAS from the prior Reckson deal, that number goes a little higher?

Gregory F. Hughes

Yes, it’s probably a little bit higher, but the point is when you do an apples to apples comparison, it’s GAAP for everybody else.

Michael Bilerman - Citigroup

People run the numbers different ways, and if you run your numbers all in cash, it gets…

Marc Holliday

If we did it cash we would then be comfortable with a higher multiple than 8. So, 8 is the GAAP equivalent to the question you are asking.

Michael Bilerman - Citigroup

I think you talked about the proxy being released on Friday and you talked about the significant savings you made on G&A; I guess Marc, how are you thinking about potential new incentives, compensation plans, and how that all factors into G&A levels?

Marc Holliday

I guess the last incentive plan we put in place was back in 2006. I think that has expired or retired by its terms in 2009. I would say right now there are no incentive plans in place. So, I would expect over the next period of time not doing it at the current time, but maybe in the second half of the year or year end to put some kind of new incentive plan in place and/or option plan. There has been very little in the way of option issuances also in the past couple of years. So, I do think that consistent with our program in the past, all the incentive programs that looked and that were very controversial at the time of input in terms of size they turned out mostly to be as you would expect them to be in a falling stock environment. They are either worthless or dramatically less than stated values when put in place and that’s appropriate. That’s the way they were intended to operate. With that said we would expect for the next two- to three-year period of time that we’ll be working the assets, there will be some form of new incentive plans, but right now we’re not working on anything. So, I can’t give you any description or sizing or comment.

Michael Bilerman - Citigroup

If I can squeeze in one last one, just on 1515 and the mortgages coming through, I know you have a little bit of an extension option, I just didn’t know if you thought about it.

Andrew W. Mathias

It comes to I think in the middle to end of ’10, and we’re planning to go out with our JV partner some time in the beginning of ’10 for refinancing.

Marc Holliday

Thank you, operator. We’re off to a pretty decent start of the second quarter, one month into it. Look forward to speaking with you all again in three months.

Operator

Thank you for your participation in today’s conference. This concludes the presentation.

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Source: SL Green Realty Corp., Q1 2009 Earnings Call Transcript
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