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SL Green Realty Corp. (NYSE:SLG)

Q3 2007 Earnings Call

Oct 23, 2007, 2:00 p.m. ET

Executives

Mr. Marc Holliday - Chief Executive Officer

Mr. Andrew Mathias - Chief Investment Officer

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

Steven M. Durels - Executive Vice President

Analysts

Brandon Meyer - Wachovia Capital Markets, Llc

Jonathan Habermann - Goldman Sachs

James Feldman - UBS

Mitchell Germain - Banc Of America Securities

Anthony Paolone - J.P. Morgan

Jordan Sadler - Keybanc Capital Markets

John Stewart - Credit Suisse

Michael Bilerman - Citigroup

Michael Knott - Green Street Advisors

David Todie - Lehman Brothers

Kristine Brownwith - Deutsche Bank

Operator

Thank you everybody for joining us and welcome to SL Green Realty Corp’s Third Quarter 2007 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 third quarter earnings.

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

Marc Holliday

Okay, thank you and good afternoon everyone, welcome to SL Green’s Third Quarter Earnings Call. We’re pleased you have chosen to join us today to hear our commentary on the outlook for the Manhattan Commercial Property markets and SL Green’s portfolio performance.

When we last spoke in July, I discussed the tumultuous credit market environment and the potential effects on Manhattan’s real estate market as it was too early then to provide any clear guidance.

During the last three months, many of the country’s largest commercial vendors and finance dealers have announced multi-billion dollar write-downs in the carrying values of their investment portfolios making new credit hard to obtain and the cost of such credit more expensive where obtainable.

In this volatile market environment, we recognize that our primary responsibility to SL Green shareholders is to protect portfolio value and to protect our earnings. However, we also recognize that this economic climate will provide investment opportunities and enable SL Green to further differentiate itself by increasing its market share, increasing its velocity of earnings growth and increasing net asset value.

We have made subtle and not so subtle changes to our business strategy in recent months that we believe will enable us to accomplish all of our objectives and the first evidence of that can be seen in SL Green’s Third Quarter Earnings results.

Andrew, Greg and I will take you through this quarter’s achievements and discuss with you the current market dynamics as we see them.

The most significant highlight from the quarter’s results is the continuing earnings increases underscored by strong organic growth in SL Green’s revenues and margins.

An average of 60% mark-to-market on new leases signed in the third quarter is quite simply an outstanding statistic especially when noting that the mark-to-market is not the result of one or two outliers or aberrations, but rather, the aggregate result of 62 separate leasing transactions executed in the third quarter for approximately 350,000 square feet.

To best convey the enormity of this achievement, I will give you several data points to put it in context.

Two leases signed at the Graybar Building including the early renewal of the bank totalling over 62,000 square feet with rents averaging in excess of $50.00 per square foot representing a 47% mark-to-market.

Two new leases at 461 Fifth Avenue totalling over 18,000 square feet with average rents of $90.00 per square foot resulting in a 54% average mark-to-market. An early renewal at 1185 Avenue to Americus totalling 34,000 square feet starting at $80.00 per square foot representing 110% mark-to-market. At 100 Park Avenue, we signed two leases with new tenants totalling over 13,000 feet with the top rent averaging $105.00 per square foot and mark-to-market in excess averaging upto 100% and the previously announced new lease with a National Retailer for 46,000 square feet at 1372 Broadway for $50.00 per square foot average representing a 75% mark-to-market.

While market participants were searching for indicators as to the health of the leasing market in New York, SL Green was busy signing 350,000 square feet of new and renewal leases at unprecedented levels for this company.

More impressive than these statistics is the leasing activity completed by SL Green during the first three weeks of the month of October. Leasing activity not included in the statistics that we released last night and the ones that I did not just go through, but for which I will update you now include the following: A new lease with the real estate services firm at 100 Park Avenue for an additional 11,000 square feet at $81.00 per square foot net effective, no TI, no free rent and in addition, we are on active negotiations on over a 100,000 square feet of leasing of that property.

A full floor lease for the entire 33rd floor at 810 Seventh Avenue for approximately 17,000 square feet with $86.00 rent and $90.00 per square foot average. A new signing this week with the company that is a hedge fund who is leasing the entire 37th floor at 810 Seventh Avenue at a rental rate of $92.00 per square foot and $101.00 per square foot. And on a related note, we just signed a lease with a law firm at 150 Grand Street in White Plains for approximately 11,000 square feet at an average rent of $31.00 per square foot for ten years. You may ask what the law firm lease in White Plains has to do with the hedge fund lease at 810 Seventh Avenue. Good question, but the connection is quite simple.

Both leases represent the first of what we hope will be many developed synergies between the suburban portfolio in Westchester and Stanford with SL Green’s midtown Manhattan portfolio. The hedge fund is an existing tenant of SL Green’s at 1 Landmark Square in Stanford and through that relationship, we were able to make the 17,000 square foot company expansion in to our Manhattan portfolio. Likewise, the law firm was a tenant at 28 West 44 Street, an SL Green building and we were able to relocate them to the newly acquired 150 Grand Street in White Plains once it became evident that the law firm wanted to move its business.

We early terminated the law firm space at 28 West 44 Street thereby unlocking a new leasing opportunity with the 45% potential mark-to-market that we hope to achieve in future quarters. We spoke of these potential synergies back in February of this year when we closed the Rexon deal, and now we have the transactions to support our thesis.

Additionally, great news as of last night, we have settled an FMV renewal with one of the country’s largest hedge funds for ten years at a new rent of $76.00 per square foot on an as is, no concession basis, the deal is for 71,450 square feet that includes growth in the square footage to reflect today’s market dynamics and represents a 54% mark-to-market over the previous in place escalated rents.

I am giving you more granular detail on SL Green’s leasing achievements than I normally do simply because this seems to account for half of the questions if not more than we get these days, and this data frames our view of the market.

We recognize that financial services firms account for approximately 35% of office space users in Manhattan and comprise 25% of the overall payroll taxes for New York City workers. The coupling of significant layoffs with material amounts of sublet space being thrown back onto the market would obviously have a deleterious effect on the leasing market. However, we are now five months into the current credit crunch and the amount of layoffs so far has been modest and the appearance of sublet space is so far to minimum. Even if there are ultimately 10,000 layoffs between now and some time in 2008, this would add only approximately 1% to the vacancy rate in Manhattan. The fact is, no one knows how protracted the current credit climate will be, nor how much of a pull back we will actually experience in the financial services sector, but it is fair to say that we have only seen a modest amount of layoffs to date and very little in the way of new sublet space competing with the primary direct space of owners.

In making assessments for the near term, we look at our current leasing velocity and performance which I just covered and try to estimate the size and depth of supply of future demand. Along those lines, we have assembled a comprehensive list of tenants for 333 West 34 Street, the building we acquired earlier this year from CitiGroup which will provide us with full building leasing opportunity in 2009.

We have already begun advanced marketing this property while still fully tenanted by CitiGroup and now have an exhaustive list of tenants in the market seeking 100,000 square foot or more for occupancy within the next 24 months.

This list totals 64 different tenants, totalling in excess of 13,000 square feet of demand. While this demand is divided into both relocation space and expansion space and not all of it will obviously materialize the sheer scale of the potential demand outstrips the availability of contiguous blocks in Manhattan can accommodate such space and even if a significant portion of that demand attenuates, we believe there will still be healthy balance of supply and demand which will mitigate any material erosion in rents.

In an optimistic scenario, landlords will hold rents or experience amount of things which may or may not be offset by slightly widening concession packages to attract tenants.

In a conservative scenario, net effect of rents could be down 10%, however, in either of those two scenarios, the mark-to-market in SL Green’s portfolio will be substantial. Results like these do not happen by accident. We have continuously stressed at our acquisition redevelopment, operational and leasing strategy was targeted toward creating long-term pipeline of embedded rental growth.

SL Green also finds itself in the envy of all position of having approximately $1.25 billion of immediately available funds on its line of credit. Greg will take you through the steps of how we were able to amass such enormous capacity while being such active investors in 2006 and 2007 including the acquisition of Rexon and SL Green’s continued investment and Gramercy Capital Corp.

The bottom line is that we now enjoy record capacity going into a market that we believe will yield better opportunities than we have seen in the recent past. We categorize these baskets of opportunities in a different manner than we have previously. First we have been active in buying back our own stock and have deployed over $100 million at levels we believe represent a sizeable discount to SL Green’s underlying net asset value.

Second, we are always plying the market for new opportunities and there is no reason to expect that SL Green won’t be an acquirer of significant Manhattan assets as we have been in the past.

While earnings growth, return on equity in any of the expansion are all primary goals, we also understand that SL Green is considered to be in many respects a proxy on the New York City office market and as such, we would continue to expect to be net acquirers over time increasing our already dominant market share beyond the current 24 million square feet.

Third, we expect to be investing opportunistically in and around our core market as we have always done in the past in order to make shorter term capital gains by bringing intellectual capital to bear on transitional situations and being rewarded with outside returns and incentive fees while mitigating the amount of monetary capital allocated to this opportunistic bucket.

Based on our established track record, I believe the company will be able to successfully execute this business plan and create a pipeline of opportunities for external growth, capital gains and organic mark-to market.

Lastly, as the external manager of Gramercy Capital Corp. we spent time in the third quarter assuring of Gramercy’s balance sheet and creating a record amount of liquidity in that company as well while generating record earnings for Gramercy that was announced last week.

Gramercy’s earnings guidance was increased for a third consecutive quarter to a range of $3.00 to $3.05 per share which when combined with all the other accomplishments during the quarter enable SL Green to increase its earnings guidance to $5.75 per share, a full 25% ahead of 2006 FFO.

While I’ve covered the near-term market dynamics that I see affecting the company, I would be remiss if I didn’t mention the positive longer term prospects for the New York City economy that we see.

We are confident that Manhattan will maintain its leadership position among all commercial office markets in the country. People want to be here, it’s exciting, it’s an intellectual capital, as well as a financial capital. It was voted the safest big city for a second year in a row with crime rates continue to be reduced. There were 34 million visitors to the city in 2006, and this number is projected to increase to 50 million visitors by 2015. The population is also projected to increase by one million people over the next ten to 15 years. These are all great statistics for housing, retail, the lodging industry, in addition to the commercial office market.

A constantly improving quality of life and work place assures us that our continued investment in Manhattan’s real estate will produce most attractive absolute relative and risk adjusted returns in the industry.

Now let me turn the call over to Andrew Mathias.

Andrew Mathias

Thank you, Marc. With our announcement of the sale of 470 Park Avenue South this morning, consensus seems to be that the logjam in the Manhattan sales market has been broken. An institutional all cash buyer stepping up to purchase a class-B asset at north of $600.00 per square foot and a 4.5% cap rate should set a more positive tone for many more pending deals.

As always in the deep Manhattan market has one class of buyer, in this case, highly levered entrepreneurs fall off the playing field and other groups steps in aggressively.

With a couple of exceptions, August and September essentially featured a standstill with sellers waiting out the usual summer slowdown and the credit crunch before testing the market and buyers speculating about where the lack of financing would push cap rates.

We continue to believe this answer is not more than 50 basis points of cap rate widening. The market is now packed with offerings to clear out this backlog with everything from class-A towers to corporate headquarters dispositions to class-B assets to desperation re-caps of over leveraged capital structures from those heady days of spring of 2007.

We’re back to burning the midnight oil evaluating all of these situations and trying to pick our spot as always, but those who predict that a collapse in values or across the board distress selling have thus far been proven sorely mistaken. Bidding on assets is robust and there is still a lot of money to be put to work out there. That coupled with continued strength in the leasing market which Marc discussed is making for a competitive acquisition environment. It was against this backdrop that we completed our slate of new, previously announced transactions on both the acquisitions and dispositions fronts.

Included in this group is the acquisition of 16 Court and joint venture with the City Investment Fund. Early returns are very positive in Brooklyn and we haven’t even kicked off our capital improvement and retail repositioning programs. With the right JV capital structure in place and great acquisition financing closed, we feel very confident in this investment.

In two notable additional acquisitions, we continued our innovative fee acquisition program in purchasing 55% of a newly created land position we originated with Gramercy Capital Corp. under the Lipstick building. The class-A architecturally renowned trophy asset on the booming Third Avenue corridor in midtown.

Given the capital markets environment, we were able to drive even more attractive economics than our prior fee positions giving us a highly protected stable and secure stream of cash flows for the foreseeable future.

Additionally, we closed on our acquisition of 180 Broadway downtown, a notable new addition to our retail program with Jeff Sutton. We have another site in the immediate vicinity under contract and look forward to sharing more details about this exciting development opportunity at our investor meeting in December.

On the disposition front, we closed on the previously announced sales of 85% of 1372 Broadway and 100% of 292 Madison Avenue. More importantly, as I mentioned earlier, we just announced the contract to sell 470 Park Avenue South. The proceeds from this sale will be reinvested on a tax-free basis into our purchase of Gramercy’s tenancy and common interest at One Madison Avenue that we closed in July.

It is not hard to see how selling 470 Park Avenue South at 4.5% cap rate and over $600.00 per square foot and re-investing in Credit Suisse’s corporate headquarters, an institutional class-A asset at 5.5% cap rate makes good business sense. We will continue to avail ourselves of this quality arbitrage aggressively so long as they exist in our market.

On the structured finance front, the primary thrust of our activities continues to be through our Gramercy Capital Corp. affiliate. The additions to our balances where mostly deals originated in partnership with Gramercy where GKK’s board determined that investment size or profile was not appropriate for 100% investment on their balance sheet and we would up JV-ing the positions with them.

As the capital markets continue to shake out with spreads riding the rollercoaster and widening out again at the end of last week, we continue to see major opportunities for SL Green derivatively through GKK and from co-investment in some of the evolving situations in the financing markets.

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

Greg Hughes

Great, thanks, Andrew. Good afternoon everybody. The third quarter was chockfull of positive activity and results at SL Green. Many of these results directly answered questions and concerns that investors have expressed over the last three months and we believe the answers are resoundingly positive.

Gramercy is very much in business, liquid and well-positioned to take advantage of an opportunistic environment and with the closing of a new CDO and a recently completed $125 million equity raise, not only had feed from GKK sustainable, but should continue to grow.

This morning’s announcement of the sale of 470 Park Avenue South which Andrew referenced provided new data point to where the private market is valuing Manhattan Real Estate.

Interestingly enough, the $602.00 per foot sales price we achieved was right on top of the published value used for 470 by two analysts in deriving their company-wide NAV. These NAVs were in excess of $156.00 per share. We believe that our current stock price, the implicit price per foot for the entire portfolio is below what we just achieved on the sale of an original IPO asset.

Given these metrics, it should come as no surprise that we continue to be active buyers of our stock during the quarter. Purchases under our $300 million buy-back program now we see $100 million with buy-back since July 1st having an average purchase price of $116.00. We regularly evaluate stock re-purchases versus other opportunities in the marketplace and as a function of our available liquidity. Given our price and given our liquidity position, one should expect to see more stock purchases going forward.

Additional property sales plus the recent expansion of our credit facility to $1.5 billion find us in a very liquid position. With pending sales, we expect to finish 2007 with close to full availability on our credit facilities. At a current interest rate of LIBOR plus 80, we would expect to be able to put this money to work equitably in 2008. The expansion of our credit facility in some very shabby capital markets is a testament to the company’s lenders and the strong following we enjoy in the capital markets.

Even with a 25% drop in our stock price and the consolidation of One Madison Avenue onto our balance sheet during the quarter, our consolidated debt to market capital vision sits at just 41%. Contrast this with the second quarter of 2005 when OMA was originally purchased. Had we acquired a 100% of OMA at that time, our consolidated debt to mortgage capitalization would have increased by 10%. In short, even with the assumption of this additional debt, the balance sheet continues to be liquid and strong.

Our combined fixed charge coverages for the quarter did tick down principally as a result of the leverage associated with Two Herald and 885 Third which totals approximately $252 million and carry significant amortization.

While these are highly leveraged transactions, they carry little to no risk as the positions are term financed for ten years, secured by the underlying land and have claims that are senior to over $565 million of leasehold improvements.

Other items of note on the balance sheet include the following: Other assets include a bridge loan to the 16 core joint venture which was re-paid during October with proceeds from a permanent mortgage. The 55% interest in 885 Third Avenue is accounted for an investment in JV. The third revenue includes approximately $291 million of gain which is being deferred as a result of a purchase option we retained under our JV arrangement. The gain will be recognized upon the termination of that option.

Treasury stock at 9/30 was $94 million. The balance of the aforementioned $100 million in repurchases settled during October.

Turning to the P&L, we had a very strong quarter which prompted the increase in guidance to $5.75. If we are successful in meeting this guidance, we will have generated a 25% year-over-year growth in FFO per share. This explosive growth has received limited recognition with a focus instead on the sustainability of these earnings and how we will replace the incentive fees earned on One Park Avenue and the Clock Tower sale.

This quarter’s results helped demonstrate why believe these earnings levels are sustainable and have further room to grow. Our optimism in this regard stems from the strength of our core real estate operations. Our consolidated same store NOI grew by a strong 9% during the quarter. Growth of this magnitude contributes approximately $0.25 per share of annual incremental FFO. It is worth noting that the benefits of leases signed during the quarter often do not make their way to our bottom line for three to six months after signing. This bodes very well for future NOI growth when one reviews the mark-to-market trend over the last five quarters.

Starting at 25.8% a year ago, we have seen it grow to 28.7% followed by 37% then to 40.5% and finally 59.5% in the most recent quarter. The delayed benefits of our leasing activity can be seen in this quarter as rental revenues increase from $176 million last quarter to $190 million this quarter as OMA was consolidated and revenue recognition commenced on several major leases.

There is more where this came from. At the quarter end, there were leases that have been signed whose annual rent totalled approximately $9 million where income recognition has yet to commence.

Property level margins for the quarter were 55% of significantly from a year ago when they were 48%. These margins reflect the benefits of strong same store NOI growth coupled with a transformation of our portfolio to a high quality more profitable set of buildings.

Occupancy for the quarter dipped slightly to 97% with scheduled lease expirations at 810 Seventh, 1185 Sixth and 711 Third, being the principal contributors to the decline.

Marc has already taken you through this significant activity that we see at these properties during the fourth quarter and would expect to see a rebound at these properties at the end of the fourth quarter.

While leasing activity was down compared to last quarter, it is worth remembering that the last quarter included over $300,000.00 early renewals. True to form, the 1.5 million square feet of leasing that we have announced year-to-date has exceeded the scheduled expirations that we began the year with by over 800,000 square feet of leasing.

A couple of points to embellish the leases that Marc mentioned, the new leases at 100 Park enabled that building to be the first building south of Grand Central to get rents over $100.00 a foot and shattered the proforma rents that we had originally established in the mid to upper fifties when we decided to embark upon the redevelopment of that building.

Similarly, the lease that was signed over to 1185 Sixth Avenue was achieved with just $18.00 of TI work easily beating on net effective rents that we had underwritten in connection with the acquisition of Rexon.

Our structured finance income for the quarter was approximately $21.8 million realizing a weighted average coupon of roughly 10.5% on the $715 million of outstanding investments.

Other income for the quarter was $15 million, 65% of which represented fees from GKK.

GKK fees were up approximately $600,000.00 over the prior quarter. Other income included $1 million of lease cancellation income and included no other incentive fees or promotes except for the $3.9 million incentive fee realized from Gramercy.

The company also received a $19 million incentive fee related to GKK’s gain on its sale of One Madison Avenue, but did not recognize this fee as income. The accounting literature specifically provides for gains related to the asset to be recorded as a reduction in the acquirer’s basis, this pronouncement was also applied to the portion of the incentive fee attributable to the gain.

MG&A for the quarter was down compared to last quarter as a result of the decline in cost for certain stock base, compensation, combined interest for the quarter increased over the last quarter as a result of the new debt associated with One Madison and the 885 Third acquisitions as well as a full quarter of interest associated with JV investments at 1745 Broadway and Two Herald.

We look forward to seeing everybody at our Investor Day on December 3rd where we would anticipate providing a detailed guidance for 2008 earnings and establishing the company’s new quarterly dividend level.

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

Marc Holliday

Okay, thank you. We’re going to take some questions in just a moment. As Andrew and Greg both alluded to, we are holding our Annual Investor Conference in New York City on Monday, December 3rd, first Monday in December.

Every year this event has grown in attendance. It has grown in importance and we work very hard at the end of November to make sure that the time with our investors and analysts and bankers is well spent by providing insight into the market and our strategies that simply cannot be condensed into an abbreviated earnings call such as this.

So we certainly encourage everyone to come. It will be joint SL Green and Gramercy Capital Corp investor day, much in the same format as we did last year. I’m told we promised to feed you somewhat better than we did last year as we, I think had Carmines’ catering the event for us, so come hungry, come ready and we promise that it will be worthwhile if you could make it work on your calendars.

With that, let’s open up for questions.

Question-and-Answer Session

Operator

(Operator instructions)

And the first question comes from the line of Michael Bilerman with Citigroup. Please proceed.

Michael Bilerman - Citigroup

Good afternoon, guys. Marc, in your opening comments you talked about the city space and actively trying to market that now, and you did talk about the 64 tenants over 100,000 square feet or more and in totality it was a pretty big number of square footage. How much of that, when you sort of develop that list, is net absorption versus just people moving chairs.

Marc Holliday

I can’t really give you an answer because the requirements are not always so specific themselves. Tenants don’t come and tell you exactly what their plans are, the brokerage will say, “I’m representing X tenant and we’re looking for X amount of square feet.” I can’t even hazard to guess. I mean, I’m looking at the list right now, everyone has a story. I would say, at least half of that expansion or tenants first moving into the city from outside locations. It could easily would have been more than half, but that’s like the best I can do.

Sometimes we’re not even told who the tenant is. Sometimes it is just represented. These requirements change over time. The user groups don’t always know, but I would say for lack of a better answer, at least half probably more is expansion or relocation in the map.

Michael Bilerman - Citigroup

And then as a follow up, you talked about rental levels, obviously, with a lot of the detail you provided, remain very strong in the city, and I think you said, your expectation at the most conservative level you could see a 10% decrease in net effect of rents, and you also said that you’re remaining active on the position side on being opportunistic, how are you underwriting your deals today in terms of where rental levels are going?

Marc Holliday

Well, I assume you’re talking about core Manhattan products.

Michael Bilerman - Citigroup

Yes.

Marc Holliday

So when you ask where we’re underwriting, Andrew why don’t you run through with our working assumption is today for most of the deals we’re looking at.

Andrew Mathias

I think, we we’re never one to underwrite large rental spikes. A lot of the properties that were sold on the early portion of this year had very aggressive sort of 10% growth for many the next year or two than 5% and then moderating to a more inflation adjusted level going forward. I think today, our general outlook for underwriting is probably flat for the next 12 months or so and then going through more of that inflation-adjusted growth rate. We don’t foresee any spikes. We never really underwrote any spikes on any of our acquisitions and we think that’s turning out to be an accurate assumption. We see today’s levels holding which is how we are underwriting it.

Michael Bilerman -Citigroup

Great, thank you.

Operator

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

Michael Knott - Green Street Advisors

Hey guys, Marc or Andrew, I am just curious if you can walk us through sort of what you’ve learned from the sales process of 470 Park Avenue South as you go to bed on some of these other projects in the market.

Marc Holliday

I think it was a little bit pioneering on our part. We put this out for market in August before Labor Day, we were advised against it because, if nothing else, it was the summer and summer is not typically a good time to market and to compound on that problem, it always was a very choppy month. But in retrospect, we think we made the absolute right call because we were out there early with product, when really nobody else had product out there. We marketed through the month of September.

I would say, initially the first week or two, we had a lot of showings but it was uncertain where it was going to price because if nothing else, people were uncertain where they were going to get the debt to buy it and then I would say by the end of September or early October, debt quotes started appearing. I think they were multiple debt quotes at very good levels probably not as good as they were in the previous six to nine months but still very good debt level by traditional standards and that enabled for multiple bids. We went round one, round two at multiple parties to choose from different structures, different pricing, ultimately went with the institutional or cash paid quick loads.

We probably could’ve held out for more pricing if we wanted too, but felt that the incremental million dollars or so, or what if cut against our desire to get it closed quickly, efficiently and ensure that we could reinvest those proceeds in a 1031 basis, into One Madison Avenue, which has a ticking clock. That’s not an indefinite time period that we can do that, s0 we accelerated that process. We will invest those proceeds tax free into One Madison Avenue. We are very happy with the outcome.

Michael Knott - Green Street Advisors

Any thoughts on what type of un-levered return buyers in today’s market might be either expecting or what maybe a realistic expectation is.

Andrew Mathias

My guess would be 7.5% to 8% un-levered return..

Marc Holiday

With sort of 4.5 ish going in cap.

Michael Knott - Green Street Advisors

Okay and then, my last question, if I may, is just any comments on 449th, which is we believe is for sale and then also the Suburban Westchester portfolio.

Marc Holiday

449th we are marketing, the early expectations there is that pricing will be in line with our expectations if they are, then we will transact, if they are not we won’t. But we’re not in a fire sale over here. We are trying to do this in a pretty prudent approach of selling, recycling and reinvesting, so I would say that we’ll know within the next two to four weeks what direction we are going to take on 440, but at this moment, we’re as optimistic as we were on 470 a few weeks ago.

And as to Western Westchester, it’s more complicated. We went out with portfolio properties to give people different options to think about, look at. There again, I would say if we get our pricing, we’ll transact on at least a subset of the properties. I don’t think we’ll transact on the whole portfolio more than we really intend to.

But, so far to date, I would say, the response we’re getting in Westchester for the assets that we are contemplating are in line with what we expected going out.

Michael Knott - Green Street Advisors

Thank you.

Operator

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

Jay Habermann - Goldman Sachs

Hey good afternoon, here with Sloan Boan as well. I guess, Greg or Marc. Can you walk through the increase in guidance for the full year? I guess, was that all due to the one time fee from Gramercy and just sort of walk through the components of that increase.

Marc Holliday

The fee that was realized from Gramercy was really consistent with what we saw last quarter. The fee related to the gain has been excluded and so, it is really principally a function of the strong operating results, from the assets themselves. So it’s really the NOI growth that we’re seeing at the assets. I mean Gramercy did exceed earnings estimate last week by $0.10 so that’s a benefit as well, but it’s principally driven by the strong mark to market on the leases, the strong NOI growth and the property income being well ahead of where we expected it to be.

Greg Hughes

Just to reiterate, the $90 million incentive fee on Gramercy was excluded from FFO. It doesn’t account for any of that increase.

Jay Habermann - Goldman Sachs

Okay, there is no other fee anticipated going forward in terms of Q4.

Marc Holliday

That is right.

Jay Habermann - Goldman Sachs

Okay, and then I guess, you know Marc in your comments you mentioned perhaps some distress opportunities in continuing to make significant acquisitions in Manhattan. Can you just give a sense of the current market today and just what is out there and what you’re looking at?

Marc Holliday

Yes, I do not want to mince words, I think I talked about opportunistic, not necessarily distressed. If I did say distressed, I would say that’s an overstatement. I think as Andrew pointed out, in Manhattan, I think that the opportunities will come more in a structured financing structured equity side as in terms of equity, it still seems to be plentiful and available in the city.

It’s the debt that’s not available. So the only thing that is creating the stress in the system is the lack of financing and GKK on the debt side, Green on the structured equity side, we’re perfectly adept to fill that void for other core Manhattan properties, for people who are, let’s call it mis-capitalized for the current market or improperly capitalized for the current market.

In and around Manhattan, as we have shown in the past our ability to buy opportunistically, either non-core Manhattan product or outside of Manhattan product, that’s where I think you’ll see a little more pressure, markets that are more dependent on residential housing for business and retail activity or probably the markets where you’re going to see the most weakness in housing and retail and office. That’s not really the case of Manhattan. Manhattan is not very much residential housing dependent.

In terms of obviously single for sales per housing and the condo coop and rental market in Manhattan is actually, holding a very well relative to other markets. So, I think it would be outside Manhattan that you would see the more opportunistic opportunities coming to light.

We have done in the past and continue to do those kinds of deals at the margins, don’t devote a lot of capital to those situations, but tend to make a lot of money on those situations we hope. We can replicate that going forward, generally taking minority interest by getting big incentive fees in those situations.

Jay Habermann - Goldman Sachs

And the slight decline at JBNY. Is that something that gets amended next quarter with the lease off of the assets you mentioned?

Marc Holliday

It is, actually if you dial out some of the lease cancellation. It primarily was included in the third quarter last year, it was actually moderately positive and remember, 100 Park is included in that which is under redevelopment. So, I guess a case can be made for us to dial 100 Park out of that. We leave it in and 100 Park is actually down year over year. I would expect to see a good movement in the JV numbers, if not in the fourth quarter then certainly in earlier ‘08.

Jay Habermann - Goldman Sachs

That’s helpful. Thank you.

Operator

And the next question comes from the line of Jordan Sadler with Keybanc Capital Markets. Please proceed.

Jordan Sadler - Keybanc Capital Markets

Hey guys, you did a good job on quantifying demand and talking about what you guys are seeing in terms of new leasing activities so far in the fourth quarter. Could you give us a little bit of sense of what you are seeing in terms of availability? Maybe, talk about the big blocks of space that remain available outside of maybe what is in your portfolio. I think you guys have 100 Park, and some space in 1185, a little bit there today, but anything else.

Marc Holiday

Yeah, you know what Jordan. Steve Durels is with us, let him best address that because he has got it all right at the tip of his fingers.

Steve Durels

The bigger picture in Manhattan is still is a big blocked constrained market. True of our portfolio, true of the market in general, our biggest blocks that we’ve got right now, we’re marketing future vacancy at 100 Park Avenue and we have very strong demand and some very sizeable ongoing lease negotiations for that space. Other than that, it is just sort of a couple of pockets and space in our portfolio. We’ve got three floors at 1185, we were earlier in the year marketing five floors and at 810 Seventh, we’ve been able to knock off two of those floors. We’ve got leases out on some of the remaining space, and then there’s the future of big blocks that are really two years out at 333 West 34 Street which we’re showing that probably almost everyday to prospective tenants and getting surprisingly good interest for what is a long term future availability, and then sort of to knock off some of our future block with space going into ’08. I mean, we’ve already completed about a 160,000 square feet of transactions for next year, and are really not confronted with any noticeable future big blocks other than those spaces that we’re already focused on at 810 and at 100 Park Avenue and 1185.

Jordan Sadler - Keybanc Capital Markets

Okay, great.

Steve Durels

And then, outside of that, the rest of the market, each of the submarkets from Penn Station, Grand Central parts are very tight. There’s more demand than there is for availability of big block spaces right now.

Jordan Sadler - Keybanc Capital Markets

Could you maybe also just clarify from second quarter to the third quarter looking at the mark-to-market schedule that you guys provide in the supplement? It looks like the mark-to-market estimate in the consolidated portfolio went from 45% last quarter to 40% this quarter. I would imagine some of that decline was a function of capturing some of that gain, but maybe could you flush that out a little bit.

Marc Holliday

That’s right, I think, embedded in what you saw this quarter where you saw the 59% mark-to-market coming through, one of those leases came out of that computation, you saw a slight drop off in the overall portfolio.

Jordan Sadler - Keybanc Capital Markets

That makes sense, the base goes up, and then just clarifying, the guidance, it excludes a FAS 141 adjustment for Rexon?

Marc Holliday

It includes some nominal 141 adjustment that you’ll see coming through in the fourth quarter to address this out there, but you won’t see the preponderance of that coming through until next year.

So nothing has been booked today and a little bit of the fourth quarter, but you’ll see it materializing next year.

Operator

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

Jamie Feldman – UBS

Thank you very much and good afternoon. Can you talk a little bit about the buyers? You guys certainly pointed out that there’s a lot of those properties coming back on the market, but I’m just curious as to characterization, is it foreign money, is it domestic money? Just kind of more color on that?

Andrew Mathias

As I said, I think, it’s really across all spectrums; I mean everybody is speculating there’s going to be a lot of foreign capital looking to get into Manhattan because of the weakness of the dollar. We’re seeing a lot of those buyers. This buyer on 470 Park Avenue was a pension fund. Somebody who has not purchased a building in Manhattan prior to the last ten years and is now reentering the market, there are still entrepreneurial buyers on every deal, actually 3211 West 44 Street traded to an entrepreneurial buyer with a 1031 requirement, so there’s still a great cross section of buyers for every piece of property, certainly the highly-levered guys who are sort of borrowing 95% of acquisition from the banks, those guys are not bidding today, they’re more working out their problems from the fall, but there’s opportunity funds, foreign buyers, pension funds, you see it really across the spectrum.

Jamie Feldman – UBS

Okay, and then where do you see occupancy ending the year, if you’d picked on a little bit, that’s just a matter of timing of leases or this 60 basis points down?

Andrew Mathias

Well, I think a lot of that 60 dips was probably programmed, we took out some space, examples like the law firms, situation in 19 West.

Steve Durels

We’ve got a couple of blocks that we’ve known all along that tenants had previously had it vacated, but their expiration, didn’t pay the rent, an expiration schedule either for October 1st or between now and the end of the year, so I think, it’ll be a timing issue. We’ve actually taken, as Marc was alluding to, we’ve taken some space back proactively because we’ve got confidence in the market specifically at 100 Park Avenue where we just took half a floor back at a space that had 12 years left to go at it, and we think it’s a good $30.00 to $40.00 below the market. We’ve got a piece of space at 711 Third Avenue which is 32,000 square feet, just came back to us already in negotiation with a perspective tenant for it.

It takes some time to close out this transactions but we’re still feeling pretty bullish about it because of the level of demand we’ve got for tenants knocking on our door.

Marc Holiday

Jamie, I think we would say that 97% is a very full number, so that plus or minus 50 basis points around that, just depending on the timing of when people actually saw in is where you’ll probably end up the quarter.

Jamie Feldman – UBS

No, I agree with you, I was just curious. Thank you very much.

Operator

And the next question comes from the line of David Todie with Lehman Brothers. Please proceed.

David Todie - Lehman Brothers

Good afternoon, guys. My first question relates to some of the new investments that you originated in the structured finance portfolio and you mentioned that they were not appropriate for Gramercy and I wondered if you could just describe the differences and what led you to the decision to include them on your balance sheet directly?

Marc Holliday

The ones that we did close were closed in partnership with Gramercy. I said, the investment size was not appropriate. So Gramercy’s board generally tries to limit its investment size between $35 and $50 million and a lot of the positions we’ve been considering are larger positions, where they’ll look to take on a partner, so when they take on a partner, obviously SL Green is first call, given our relationship because of the obvious synegies there, so we have co-originated several investments with Gramercy or we’ll take 50%, they’ll take 50%. It’s the same kind of relationship we have with Gramercy on the credit tenant lease program where for example, One Madison or these fee positions we’ve been taking on. They’re a little bit large and concentrated for our self, Green’s balance sheet, so brought in Gramercy as a JV partner and that fairly synergistic relationship two-way flow of business there.

David Todie-Lehman Brothers

Great, and then my second question relates to the area rights at One Madison, is there any update in terms of what is happening at that project.

Marc Holliday

It’s still a very long-term project where we’re doing a lot of preliminary feasibility studies and planning and nothing really is updated at this time. It’s an asset of the company. We’re obviously looking to continue to figure out and take best advantage of.

David Todie-Lehman Brothers

Great, thank you.

Operator

And the next question comes from the line Anthony Paolone with J.P. Morgan. Please proceed.

Anthony Paolone - J.P. Morgan

Thanks, Greg. The $9 million of annual revenues, I think you noted that we’re on the sidelines not having commenced yet, was that incremental to what was in like the third quarter run rate or is that just the total for those leases?

Greg Hughes

Incremental.

Anthony Paolone - J.P. Morgan

Okay, and then Andrew, if you look back over the last 12 months or so at the deals you bid on and didn’t win, what do you think your pricing would be today for those transactions, would they be the same or has underwriting of yours changed such that you might be higher or lower and what might those changes have been?

Andrew Mathias

I think, typically the transactions that we are bidding in the beginning part of this year, we were losing by anywhere between 20% and 30% of purchase price. So we’ve looked at a lot of transactions that traded and transacted in the 3 to 3.5 or 4% cap rate range and we were typically far, far off in terms of valuation. I’m not sure our valuations today are much different than our bids were, it’s just we were not winning a lot of marketed deals. We saw every large transaction in the market and generally came up with a price and a bid for it, it’s just we we’re nowhere close to being competitive in a lot of those situations, but as I said, I think market clearing cap rates are probably backed up 50 basis points, and those 3.5 cap rate transactions of yesteryear are now 4% or so today.

Anthony Paolone - J.P. Morgan

Okay, thanks.

Operator

And the next question comes from the line of Kristine Brownwith of Deutsche Bank. Please proceed.

Kristine Brownwithe- Deutsche Bank

This question is for Andrew, I was just wondering if you could reconcile your outlook on price, what do you think cap rates can hold up even if that is for statewide?

Andrew Mathias

Well, I mean, the only reconcile we’ve back there is rents and mark-to-market, so clearly, a stable market if you had debt ranging in the sixes and equity rates in the sevens or whatever you want to apply on leverage you could not justify 4.5% or 4% cap rates, but for the dramatic, mark-to-market that are embedded in many of the properties that come to market.

So, with the kind of supernormal growth that you get typically over a three to seven year period, a lot of these proformas that we see and are with our full conservative assumptions, you can see your way towards doubling in a line, in five, seven, ten years typically more, and that is what people are paying up for in cap rate is the embedded growth. I mean I think that’s it, if it wasn’t for that, extraordinary growth that people expect to achieve once they own the property, they could not pay those kinds of capitals, given the cost of capital structure that we have and that our competitors have.

Kristine Brownwithe- Deutsche Bank

Okay, and then Greg, I was just wondering if you could clarify all the impact of the FAS 141 adjustments for next year for Roxen?

Greg Hughes

Again we are in the process of finalizing that but I think we thought and talked about being in number on the order of $10 to $15 million on an annual basis.

Kristine Brownwithe- Deutsche Bank

Okay, thank you.

Operator

And come from the line of John Stewart with Credit Suisse.

John Stewart – Credit Suisse

Thank you. Marc, I appreciate the granularity on the mark-to-market during the quarter, but given the big role you’ve got coming at 1515 Broadway can you show us what the rent was on a 27,000 square feet you leased at 1515 Broadway?

Marc Holliday

It was a $75.00 rent, up from in place of $38.00 and that was done by the way with no work. So an as is deal of $75.00, so, up close to 100% which is, we think, the great news is, as the word will start to kick in next year.

Steven Durels

That was just missed.

John Stewart – Credit Suisse

Anyway that is helpful, and Greg while I have got you, so obviously you got $10 to $15 million from the FAS 141 and then the $9 million run rate from the lease contributions that haven’t picked up yet, and I realize you’re not going to give ’08 until the investor day, but you guys have typically targeted a 10% growth in earnings and I guess the question is, what will be the base that you are going to use? Or are you going to exclude the One Park promote or are you going to grow up the 575.

Greg Hughes

I think we’ll just prefer to wait until December, but we are going to report 575 for the year. So, that will clearly be the base and just everyone needs to b congnizant of the fact that its up 25% from last year.

John Stewart – Credit Suisse

Okay fair enough, thank you.

Operator

And the next question comes from the line of Chris Halley with Wachovia Securities.

Brandon Meyer – Wachovia Securities

Good afternoon guys, it is Brandon Meyer on now with Chris. Greg, along that same line, if you can give us a sense of what the head winds are in terms of the accounting impact change for a convertible debt going into 2008.

Greg Hughes

Well, I mean, really what it does is it takes the benefit out of it. The straight economics are still very beneficial because you still benefit from a low coupon, what’s being proposed, I do not think it’s been finalized yet, is that the option value associated with the conversion would have to be advertised and as part of interest as well which would basically take away some of the benefit.

Now, I don’t think that they’ve rendered yet the option on our particular issuance in so far out of the money at this point in time, that it’s unclear at this point that it would have any impact. But that is kind of what’s being frozen payable debt is that you would add in to the interest charge the cost of derivative, derivative associated with the conversion feature.

Brandon Meyer –Wachovia Securities

Okay. I appreciate that color. And just quickly in terms of the G&A, looks like it went down a little bit sequentially, is that fully attributable to a decline in equity based compensation or something else going down there?

Greg Hughes

Yes, there’s some competition that’s affected, so the stock price being down. You saw a corresponding reduction in the small piece that’s kind of variable there.

Brandon Meyer –Wachovia Securities

Okay, great, thanks.

Operator

And the next question comes from the line of Mitchell Germain with Banc of America. Please proceed.

Mitchell Germain - Banc of America Securities

Andrew, I appreciate the comments on the compositions of buyers and the changes. Any changes in the number of bidders at 470 or any other deals you’re working on?

Andrew Mathias

I would say modestly less people actually bidding only because there was a subset of people who were reliant on getting caught 80% plus leverage which is just not obtainable today even on a first and mezzanine basis.

So, I think the universe of bidders is smaller and the guys who actually bid smaller, we had at least 10 credible bids on 470, that maybe down from 15 six months ago, but it’s still time credible bidders and more than enough to get the transaction done on a no due diligence contract.

Mitchell Germain - Banc of America Securities

Great. Thank you guys.

Marc Holliday

Any more questions, operator?

Operator

And at this time, I would like to turn it back to Mr. Holliday for closing remarks.

Marc Holliday

Okay. Well, I’ll keep it short. We appreciate everyone’s time. It was a nice, quick, efficient call and hopefully we were able to give a little bit more clarity than we were on the last call on how things are shaping up in the market. Obviously, we will be watching yearend as closely as everybody else will be, to train and gain further color on the direction of the markets in 2008, but rest assured, we’re doing everything we possibly can on our end to be both prudent and opportunistic at the same time and we really look forward to seeing you everyone in December at the Investor Meeting where we can go through a lot of the topics we sort of touched upon today in greatest depth and by then we’ll certainly have another month and a half under our belts of visibility, so we’ll be able to share information on what we have gleaned over that period of time.

And that is it, goodbye and we will see you on December.

Operator

Ladies and gentlemen, this thus conclude the presentation. You may now disconnect. Thank you very much and have a great afternoon.

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Source: SL Green Realty Corp. Q3 2007 Earnings Call Transcript
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