UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


 

FORM 10-Q


 

þ            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

o            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to ________.

Commission File Number: 1-13199


 

SL GREEN REALTY CORP.

(Exact name of registrant as specified in its charter)


 

Maryland

 

T13-3956775T

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

420 Lexington Avenue, New York, New York 10170
(Address of principal executive offices) (Zip Code)

(212) 594-2700
(Registrant’s telephone number, including area code)


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x     NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o   NO x

The number of shares outstanding of the registrant’s common stock, $0.01 par value, was 45,818,570 as of October 31, 2006.

 

 




 

SL GREEN REALTY CORP.

INDEX

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2006 (unaudited) and
   December 31, 2005

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the three and nine months ended
   September 30, 2006 and 2005 (unaudited)

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended
   September 30, 2006 (unaudited)

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three and nine months ended
   September 30, 2006 and 2005 (unaudited)

 

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

 

 

 

 

 

ITEM 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

 

 

 

 

AND RESULTS OF OPERATIONS

 

 

 

 

 

 

 

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

 

 

 

 

 

 

ITEM 4.

 

CONTROLS AND PROCEDURES

 

 

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

LEGAL PROCEEDINGS

 

 

 

 

 

 

 

ITEM 1A.

 

RISK FACTORS

 

 

 

 

 

 

 

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

 

 

 

 

 

 

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

 

 

 

 

 

 

 

ITEM 4.

 

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

 

 

 

 

 

 

ITEM 5.

 

OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 6.

 

EXHIBITS

 

 

 

 

 

 

 

Signatures

 

 

 

 

 

 

 

 

2




 

PART I.                   FINANCIAL INFORMATION

ITEM 1.                    Financial Statements

SL Green Realty Corp.
Condensed Consolidated Balance Sheets
(Amounts in thousands, except per share data)

 

 

September 30,
2006

 

December 31,
2005

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Commercial real estate properties, at cost:

 

 

 

 

 

Land and land interests

 

$

349,073

 

$

288,239

 

Building and improvements

 

1,671,234

 

1,440,584

 

Building leasehold and improvements

 

705,900

 

481,891

 

Property under capital lease

 

12,208

 

12,208

 

 

 

2,738,415

 

2,222,922

 

Less: accumulated depreciation

 

(253,136

)

(219,295

)

 

 

2,485,279

 

2,003,627

 

Assets held for sale

 

121,962

 

 

Cash and cash equivalents

 

176,444

 

24,104

 

Restricted cash

 

227,482

 

60,750

 

Tenant and other receivables, net of allowance of $12,608 and $9,681 in 2006 and 2005, respectively

 

32,037

 

23,722

 

Related party receivables

 

9,563

 

7,707

 

Deferred rents receivable, net of allowance of $10,298 and $8,698 in 2006 and 2005, respectively

 

85,242

 

75,294

 

Structured finance investments, net of discount of $2,027 and $1,537 in 2006 and 2005, respectively

 

347,558

 

400,076

 

Investments in unconsolidated joint ventures

 

549,040

 

543,189

 

Deferred costs, net

 

74,223

 

79,428

 

Other assets

 

117,976

 

91,880

 

Total assets

 

$

4,226,806

 

$

3,309,777

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Mortgage notes payable

 

$

1,255,325

 

$

885,252

 

Revolving credit facilities

 

—-

 

32,000

 

Term loans

 

525,000

 

525,000

 

Accrued interest payable

 

9,353

 

7,711

 

Accounts payable and accrued expenses

 

96,741

 

87,390

 

Deferred revenue/gain

 

63,358

 

25,691

 

Capitalized lease obligation

 

16,359

 

16,260

 

Deferred land leases payable

 

16,782

 

16,312

 

Dividend and distributions payable

 

33,247

 

31,103

 

Security deposits

 

28,368

 

24,556

 

Liabilities related to assets held for sale

 

95,379

 

 

Junior subordinate deferrable interest debentures held by trusts that issued trust preferred securities

 

100,000

 

100,000

 

Total liabilities

 

2,239,912

 

1,751,275

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

Minority interest in Operating Partnership

 

71,910

 

74,049

 

Minority interests in other partnerships

 

56,929

 

25,012

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

Series C preferred stock, $0.01 par value, $25.00 liquidation preference, 6,300 issued and outstanding at September 30, 2006 and December 31, 2005, respectively

 

151,981

 

151,981

 

Series D preferred stock, $0.01 par value, $25.00 liquidation preference, 4,000 issued and outstanding at September 30, 2006 and December 31, 2005, respectively

 

96,321

 

96,321

 

Common stock, $0.01 par value 100,000 shares authorized and 45,774 and 42,456 issued and outstanding at September 30, 2006 and December 31, 2005, respectively

 

458

 

425

 

Additional paid-in-capital

 

1,268,491

 

959,858

 

Accumulated other comprehensive income

 

13,060

 

15,316

 

Retained earnings

 

327,744

 

235,540

 

Total stockholders’ equity

 

1,858,055

 

1,459,441

 

Total liabilities and stockholders’ equity

 

$

4,226,806

 

$

3,309,777

 

 

The accompanying notes are an integral part of these financial statements.

3




 

SL Green Realty Corp.
Condensed Consolidated Statements of Income
(Unaudited, and amounts in thousands, except per share data)

 

 

 

Three Months Ended
September 30,

 

Nine months Ended
September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Revenues

 

 

 

 

 

 

 

 

 

Rental revenue, net

 

$

93,233

 

$

72,575

 

$

263,904

 

$

210,972

 

Escalation and reimbursement

 

19,891

 

15,474

 

51,171

 

39,553

 

Preferred equity and investment income

 

15,714

 

10,652

 

46,499

 

33,723

 

Other income

 

9,517

 

16,897

 

30,892

 

29,805

 

Total revenues

 

138,355

 

115,598

 

392,466

 

314,053

 

Expenses

 

 

 

 

 

 

 

 

 

Operating expenses including approximately $3,400, $9,600 (2006) and $3,000, $7,600 (2005) paid to affiliates

 

34,920

 

27,213

 

93,662

 

72,529

 

Real estate taxes

 

19,101

 

14,638

 

56,613

 

43,553

 

Ground rent

 

4,846

 

4,835

 

14,687

 

14,089

 

Interest

 

24,764

 

20,580

 

66,515

 

57,253

 

Amortization of deferred financing costs

 

1,140

 

1,887

 

3,096

 

3,586

 

Depreciation and amortization

 

19,289

 

14,763

 

53,493

 

42,779

 

Marketing, general and administrative

 

13,829

 

13,418

 

40,072

 

32,250

 

Total expenses

 

117,889

 

97,334

 

328,138

 

266,039

 

Income from continuing operations before equity in net income of unconsolidated joint ventures, minority interest and discontinued operations

 

20,466

 

18,264

 

64,328

 

48,014

 

Equity in net income from unconsolidated joint ventures

 

9,679

 

13,250

 

30,244

 

38,643

 

Income from continuing operations before minority interest and discontinued operations

 

30,145

 

31,514

 

94,572

 

86,657

 

Equity in net gain on sale of interest in unconsolidated joint ventures

 

 

11,550

 

 

11,550

 

Minority interest in other partnerships

 

(1,392

)

(38

)

(3,359

)

(252

)

Minority interest in Operating Partnership attributable to continuing operations

 

(1,321

)

(2,142

)

(3,733

)

(4,727

)

Income from continuing operations

 

27,432

 

40,884

 

87,480

 

93,228

 

Net income from discontinued operations, net of minority interest

 

1,595

 

1,415

 

4,497

 

4,530

 

Gain on sale of discontinued operations, net of minority interest

 

94,631

 

 

94,410

 

33,856

 

Net income

 

123,658

 

42,299

 

186,387

 

131,614

 

Preferred stock dividends

 

(4,969

)

(4,969

)

1(14,906

)

(14,906

)

Net income available to common stockholders

 

$

118,689

 

$

37,330

 

$

171,481

 

$

116,708

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

Net income from continuing operations before discontinued operations

 

$

0.50

 

$

0.58

 

$

1.66

 

$

1.60

 

Net income from discontinued operations

 

0.03

 

0.03

 

0.10

 

0.11

 

Gain on sale of discontinued operations

 

2.09

 

 

2.16

 

0.81

 

Gain on sale of unconsolidated joint ventures

 

 

0.28

 

 

0.28

 

Net income available to common stockholders

 

$

2.62

 

$

0.89

 

$

3.92

 

$

2.80

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Net income from continuing operations before discontinued operations

 

$

0.48

 

$

0.58

 

$

1.60

 

$

1.57

 

Net income from discontinued operations

 

0.03

 

0.03

 

0.10

 

0.11

 

Gain on sale of discontinued operations

 

2.02

 

 

2.08

 

0.79

 

Gain on sale of unconsolidated joint ventures

 

 

0.26

 

 

0.25

 

Net income available to common stockholders

 

$

2.53

 

$

0.87

 

$

3.78

 

$

2.72

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

0.60

 

$

0.54

 

$

1.80

 

$

1.62

 

Basic weighted average common shares outstanding

 

45,277

 

41,923

 

43,784

 

41,674

 

Diluted weighted average common shares and common share equivalents outstanding

 

49,215

 

45,674

 

47,718

 

45,426

 

 

The accompanying notes are an integral part of these financial statements.

 

4




 

SL Green Realty Corp.
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited, and amounts in thousands, except per share data)

 

 

 

 

 

 

 

Common
Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

Series C
Preferred
Stock

 

Series D
Preferred
Stock

 

Shares

 

Par
Value

 

Additional 
Paid-
In-Capital

 

Accumulated
Other
Comprehensive
Income

 

Retained
Earnings

 

Total

 

Comprehensive
Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2005

 

$

151,981

 

$

96,321

 

42,456

 

$

425

 

$

959,858

 

$

15,316

 

$

235,540

 

$

1,459,441

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

186,387

 

186,387

 

$

186,387

 

Net unrealized loss on derivative instruments

 

 

 

 

 

 

 

 

 

 

 

(2,256

)

 

 

(2,256

)

(2,256

)

SL Green’s share of joint venture net unrealized gain on derivative instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,945

 

Preferred dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,906

)

(14,906

)

 

 

Redemption of units and DRIP proceeds

 

 

 

 

 

307

 

3

 

15,565

 

 

 

 

 

15,568

 

 

 

Deferred compensation plan & stock award, net

 

 

 

 

 

94

 

1

 

380

 

 

 

 

 

381

 

 

 

Amortization of deferred compensation plan

 

 

 

 

 

 

 

 

 

7,297

 

 

 

 

 

7,297

 

 

 

Proceeds from stock options exercised

 

 

 

 

 

417

 

4

 

13,515

 

 

 

 

 

13,519

 

 

 

Net proceeds from common stock offering

 

 

 

 

 

2,500

 

25

 

268,471

 

 

 

 

 

268.496

 

 

 

Stock-based compensation — fair value

 

 

 

 

 

 

 

 

 

3,405

 

 

 

 

 

3,405

 

 

 

Cash distribution declared ($1.80 per common share of which none represented a return of capital for federal income tax purposes)

 

 

 

 

 

 

 

 

 

 

 

 

 

(79,277

)

(79,277

)

 

 

Balance at September 30, 2006

 

$

151,981

 

$

96,321

 

45,774

 

$

458

 

$

1,268,491

 

$

13,060

 

$

327,744

 

$

1,858,055

 

$

186,076

 

 

The accompanying notes are an integral part of these financial statements.

5




 

SL Green Realty Corp.
Condensed Consolidated Statements of Cash Flows
(Unaudited, and amounts in thousands, except per share data)

 

 

 

Nine months

 

 

 

Ended September 30,

 

 

 

2006

 

2005

 

Operating Activities

 

 

 

 

 

Net income

 

$

186,387

 

$

131,614

 

Adjustment to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Non-cash adjustments related to income from discontinued operations

 

5,808

 

3,918

 

Depreciation and amortization

 

56,589

 

46,365

 

Gain on sale of discontinued operations

 

(94,410

)

(33,856

)

Equity in net income from unconsolidated joint ventures

 

(30,244

)

(38,643

)

Equity in net gain on sale of unconsolidated joint ventures

 

—-

 

(11,550

)

Distributions of cumulative earnings from unconsolidated joint ventures

 

31,110

 

34,969

 

Minority interest

 

7,092

 

4,979

 

Deferred rents receivable

 

(12,398

)

(14,334

)

Other non-cash adjustments

 

7,950

 

4,046

 

Changes in operating assets and liabilities:

 

 

 

 

 

Restricted cash — operations

 

(4,376

)

(9,452

)

Tenant and other receivables

 

(11,242

)

(7,905

)

Related party receivables

 

(1,856

)

1,429

 

Deferred lease costs

 

(12,227

)

(11,793

)

Other assets

 

(3,155

)

4

 

Accounts payable, accrued expenses and other liabilities

 

14,168

 

16,404

 

Deferred revenue and land lease payable

 

3,115

 

2,800

 

Net cash provided by operating activities

 

142,311

 

118,995

 

Investing Activities

 

 

 

 

 

Acquisitions of real estate property

 

(466,762

)

(422,149

)

Additions to land, buildings and improvements

 

(38,405

)

(30,524

)

Escrowed cash — capital improvements/acquisition deposits

 

(169,556

)

7,679

 

Investments in unconsolidated joint ventures

 

(55,482

)

(122,251

)

Distributions in excess of cumulative earnings from unconsolidated joint ventures

 

39,102

 

33,669

 

Proceeds from disposition of real estate

 

161,036

 

59,673

 

Other investments

 

(15,288

)

(27,207

)

Structured finance and other investments net of repayments/participations

 

40,538

 

(43,534

)

Net cash used in investing activities

 

(504,817

)

(544,644

)

Financing Activities

 

 

 

 

 

Proceeds from mortgage notes payable

 

327,968

 

315,546

 

Repayments of mortgage notes payable

 

(2,927

)

(63,382

)

Proceeds from revolving credit facilities, and term loans

 

490,645

 

897,000

 

Repayments of revolving credit facilities and term loans

 

(522,645

)

(672,900

)

Net proceeds from sale of common stock

 

268,496

 

—-

 

Proceeds from stock options exercised

 

13,519

 

15,788

 

Other financing activities

 

35,842

 

—-

 

Dividends and distributions paid

 

(87,688

)

(72,432

)

Deferred loan costs and capitalized lease obligation

 

(8,364

)

(15,573

)

Net cash provided by financing activities

 

514,846

 

404,047

 

Net increase (decrease) in cash and cash equivalents

 

152,340

 

(21,602

)

Cash and cash equivalents at beginning of period

 

24,104

 

35,795

 

Cash and cash equivalents at end of period

 

$

176,444

 

$

14,193

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

6




 

SL Green Realty Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2006

1.  Organization and Basis of Presentation

SL Green Realty Corp., also referred to as the Company or SL Green, a Maryland corporation, and SL Green Operating Partnership, L.P., or the Operating Partnership, a Delaware limited partnership, were formed in June 1997 for the purpose of combining the commercial real estate business of S.L. Green Properties, Inc. and its affiliated partnerships and entities.  The Operating Partnership received a contribution of interest in the real estate properties, as well as 95% of the economic interest in the management, leasing and construction companies which are referred to as the Service Corporation.  The Company has qualified, and expects to qualify in the current fiscal year, as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Code, and operates as a self-administered, self-managed REIT.  A REIT is a legal entity that holds real estate interests and, through payments of dividends to stockholders, is permitted to reduce or avoid the payment of Federal income taxes at the corporate level.  Unless the context requires otherwise, all references to “we,” “our” and “us” means the Company and all entities owned or controlled by the Company, including the Operating Partnership.

Substantially all of our assets are held by, and our operations are conducted through, the Operating Partnership.  The Company is the sole managing general partner of the Operating Partnership.  As of September 30, 2006, minority investors held, in the aggregate, a 4.6% limited partnership interest in our Operating Partnership.

As of September 30, 2006, our wholly-owned properties consisted of 20 commercial office properties encompassing approximately 9.6 million rentable square feet located primarily in midtown Manhattan, a borough of New York City, or Manhattan.  As of September 30, 2006, the weighted average occupancy (total leased square feet divided by total available square feet) of the wholly-owned properties was 97.0%.  Our portfolio also includes ownership interests in unconsolidated joint ventures, which own seven commercial office properties in Manhattan, encompassing approximately 8.8 million rentable square feet, and which had a weighted average occupancy of 95.2% as of September 30, 2006.  We also own approximately 516,000 square feet of retail and development properties.  In addition, we manage three office properties owned by third parties and affiliated companies encompassing approximately 1.0 million rentable square feet.

We also own approximately 25% of the outstanding common stock of Gramercy Capital Corp. (NYSE: GKK), or Gramercy.  See Note 6.

Partnership Agreement

In accordance with the partnership agreement of the Operating Partnership, or the Operating Partnership Agreement, we allocate all distributions and profits and losses in proportion to the percentage ownership interests of the respective partners.  As the managing general partner of the Operating Partnership, we are required to take such reasonable efforts, as determined by us in our sole discretion, to cause the Operating Partnership to distribute sufficient amounts to enable the payment of sufficient dividends by us to avoid any Federal income or excise tax at the Company level. Under the Operating Partnership Agreement each limited partner will have the right to redeem units of limited partnership interest for cash, or if we so elect, shares of our common stock on a one-for-one basis.  In addition, we are prohibited from selling 673 First Avenue and 470 Park Avenue South before August 2009.

Basis of Quarterly Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included.  The 2006 operating results for the period presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.  These financial statements should be read in conjunction with the financial statements and accompanying notes included in our annual report on Form 10-K for the year ended December 31, 2005.

The balance sheet at December 31, 2005 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

2.  Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include our accounts and those of our subsidiaries, which are wholly-owned or controlled by us or entities which are variable interest entities in which we are the primary beneficiary under the Financial Accounting Standards Board, or FASB, Interpretation No. 46, or FIN 46, “Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51,” and FIN

7




 

46, “Interpretation No. 46R.” See Note 5, Note 6 and Note 7.  Entities which we do not control and entities which are variable interest entities, but where we are not the primary beneficiary are accounted for under the equity method.  We consolidate variable interest entities in which we are determined to be the primary beneficiary.  All significant intercompany balances and transactions have been eliminated.

Investment in Commercial Real Estate Properties

In June 2005, the FASB ratified the consensus in EITF Issue No. 04-5, or EITF 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights,” which provides guidance in determining whether a general partner controls a limited partnership. EITF 04-5 states that the general partner in a limited partnership is presumed to control that limited partnership. The presumption may be overcome if the limited partners have either (1) the substantive ability to dissolve the limited partnership or otherwise remove the general partner without cause or (2) substantive participating rights, which provide the limited partners with the ability to effectively participate in significant decisions that would be expected to be made in the ordinary course of the limited partnership’s business and thereby preclude the general partner from exercising unilateral control over the partnership. If the criteria in EITF 04-5 are met, the consolidation of existing joint ventures accounted for under the equity method may be required. Our adoption of EITF 04-5 did not have any effect on net income or stockholders’ equity.

In accordance with SFAS No. 141, “Business Combinations,” we allocate the purchase price of real estate to land and building and, if determined to be material, intangibles, such as the value of above, below and at-market leases and origination costs associated with the in-place leases.  We depreciate the amount allocated to building and other intangible assets over their estimated useful lives, which generally range from three to 40 years.  The values of the above and below market leases are amortized and recorded as either an increase (in the case of below market leases) or a decrease (in the case of above market leases) to rental income over the remaining term of the associated lease.  The value associated with in-place leases and tenant relationships are amortized over the expected term of the relationship, which includes an estimated probability of the lease renewal, and its estimated term.  If a tenant vacates its space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balance of the related intangible will be written off.  The tenant improvements and origination costs are amortized as an expense over the remaining life of the lease (or charged against earnings if the lease is terminated prior to its contractual expiration date).  We assess fair value of the leases based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information.  Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property.

As a result of our evaluations, under SFAS No. 141, of acquisitions made, we recognized an increase of approximately $591,000, $1.5 million, $237,000 and $793,000 in rental revenue for the three and nine months ended September 30, 2006 and 2005, respectively, for the amortization of below market leases and a reduction in lease origination costs, resulting from the reallocation of the purchase price of the applicable properties.  We recognized a reduction in interest expense for the amortization of the above market rate mortgage of approximately $196,000, $577,000, $180,000 and $530,000 for the three and nine months ended September 30, 2006 and 2005, respectively.

Scheduled amortization on existing intangible liabilities on real estate investments is as follows (in thousands):

 

 

Intangible
Liabilities

 

2006

 

$

850

 

2007

 

3,378

 

2008

 

3,374

 

2009

 

3,125

 

2010

 

2,626

 

Thereafter

 

5,210

 

 

 

$

18,563

 

 

Income Taxes

We are taxed as a REIT under Section 856(c) of the Code.  As a REIT, we generally are not subject to Federal income tax.  To maintain our qualification as a REIT, we must distribute at least 90% of our REIT taxable income to our stockholders and meet certain other requirements.  If we fail to qualify as a REIT in any taxable year, we will be subject to Federal income tax on our taxable income at regular corporate rates.  We may also be subject to certain state, local and franchise taxes.  Under certain circumstances, Federal income and excise taxes may be due on our undistributed taxable income.

8




 

Pursuant to amendments to the Code that became effective January 1, 2001, we have elected or may elect to treat certain of our existing or newly created corporate subsidiaries as taxable REIT subsidiaries, or TRS.  In general, a TRS of ours may perform non-customary services for our tenants, hold assets that we cannot hold directly and generally engage in any real estate or non-real estate related business.  A TRS is subject to corporate Federal income tax.  Our TRS’s generate income, resulting in Federal income tax liability for these entities.  Our TRS’s paid approximately $1.3 million and $0.4 million in federal, state and local taxes during the nine months ended September 30, 2006 and 2005.

Stock-Based Employee Compensation Plans

We have a stock-based employee compensation plan, described more fully in Note 12.  Prior to 2003, we accounted for this plan under Accounting Principles Board Opinion No. 25, or APB 25, “Accounting for Stock Issued to Employees,” and related interpretations.  No stock-based employee compensation cost was reflected in net income prior to January 1, 2003, as all awards granted under such plan had an intrinsic value of zero on the date of grant.  Effective January 1, 2003, we adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.”  Under the prospective method of adoption we selected under the provisions of  SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure,” the recognition provisions applied to all employee awards granted, modified, or settled after January 1, 2003.  In December 2004, the FASB revised SFAS No. 123 through the issuance of SFAS No. 123 “Shared Based Payment,” revised, or SFAS No. 123-R.  SFAS No. 123-R became effective for us in the first quarter of 2006.  SFAS No. 123-R, among other things, eliminates the alternative to use the intrinsic value method of accounting for stock-based compensation and requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions).  The fair-value based method in SFAS No. 123-R is similar to the fair-value based method in SFAS No. 123 in most respects, subject to certain key differences.  The adoption of SFAS No. 123-R did not have any impact on us, as we have applied the fair value method of accounting for stock-based compensation since January 1, 2003.

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable.  In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.  Because our plan has characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in our opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options.

Compensation cost for stock options, if any, is recognized ratably over the vesting period of the award.  Our policy is to grant options with an exercise price equal to the quoted closing market price of our stock on the grant date.  Awards of stock, restricted stock or employee loans to purchase stock, which may be forgiven over a period of time, are expensed as compensation on a current basis over the benefit period.

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for grants in 2006 and 2005.  

 

2006

 

2005

 

Dividend yield

 

2.40

%

3.60

%

Expected life of option

 

5 years

 

6 years

 

Risk-free interest rate

 

4.80

%

3.70

%

Expected stock price volatility

 

16.61

%

17.23

%

 

 

 

 

 

 

The following table illustrates the effect on net income available to common stockholders and earnings per share if the fair value method had been applied to all outstanding and unvested stock options for the three and nine months ended September 30, 2006 and 2005 (in thousands, except per share amounts):

 

 

Three Months Ended

 

Nine months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Net income available to common stockholders

 

$

118,689

 

$

37,330

 

$

171,481

 

$

116,708

 

Deduct stock option expense-all awards

 

(670

)

(416

)

(2,117

)

(1,164

)

Add back stock option expense included in net income

 

416

 

155

 

1,367

 

384

 

Allocation of compensation expense to minority interest

 

31

 

23

 

104

 

66

 

Pro forma net income available to common stockholders

 

$

118,466

 

$

37,092

 

$

170,835

 

$

115,994

 

Basic earnings per common share-historical

 

$

2.62

 

$

0.89

 

$

3.92

 

$

2.80

 

Basic earnings per common share-pro forma

 

$

2.62

 

$

0.88

 

$

3.91

 

$

2.78

 

Diluted earnings per common share-historical

 

$

2.53

 

$

0.87

 

$

3.78

 

$

2.72

 

Diluted earnings per common share-pro forma

 

$

2.52

 

$

0.86

 

$

3.76

 

$

2.70

 

 

9




 

The effects of applying SFAS No. 123-R in this pro forma disclosure are not indicative of the impact future awards may have on our results of operations.

Earnings Per Share

We present both basic and diluted earnings per share, or EPS.  Basic EPS excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, where such exercise or conversion would result in a lower EPS amount.  This also includes units of limited partnership interest.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Concentrations of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash investments, structured finance investments and accounts receivable.  We place our cash investments in excess of insured amounts with high quality financial institutions.  The collateral securing our structured finance investments is primarily located in the greater New York area. See Note 5.  We perform ongoing credit evaluations of our tenants and require certain tenants to provide security deposits or letters of credit.  Though these security deposits and letters of credit are insufficient to meet the total value of a tenant’s lease obligation, they are a measure of good faith and a source of funds to offset the economic costs associated with lost rent and the costs associated with re-tenanting the space.  Although the properties in our real estate portfolio are primarily located in Manhattan, the tenants located in these buildings operate in various industries.  Other than one tenant at 1515 Broadway that contributes approximately 8.3% of our annualized rent, no other tenant in the portfolio contributes more than 4.1% of our annualized rent, including our share of joint venture annualized rent, at September 30, 2006.  Approximately 14%, 10% and 11% of our annualized rent was attributable to 420 Lexington Avenue, 625 Madison Avenue and 220 East 42nd Street, respectively, for the quarter ended September 30, 2006.  One borrower accounted for more than 10.0% of the revenue earned on structured finance investments during the nine months ended September 30, 2006.

Reclassification

Certain prior year balances have been reclassified to conform with the current year presentation.

New Accounting Pronouncements

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — An Amendment of FASB No. 133 and 140.”  The purpose of SFAS statement No. 155 is to simplify the accounting for certain hybrid financial instruments by permitting fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation.  SFAS No. 155 also eliminates the restriction on passive derivative instruments that a qualifying special-purpose entity may hold.  SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year beginning after September 15, 2006.  We believe that the adoption of this standard on January 1, 2007 will not have a material effect on our consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets, an Amendment of SFAS No. 140.”   SFAS No. 156 requires separate recognition of a servicing asset and a servicing liability each time an entity undertakes an obligation to service a financial asset by entering into a servicing contract.  This statement also requires that servicing assets and liabilities be initially recorded at fair value and subsequently adjusted to the fair value at the end of each reporting period.  This statement is effective in fiscal years beginning after September 15, 2006.  We believe that the adoption of this standard on January 1, 2007 will not have a material effect on our consolidated financial statements.

In April 2006, the FASB issued a FASB Staff Position, or FSP, which addresses how a reporting enterprise should determine the variability to be considered in applying FIN 46. The variability that is considered in applying FIN 46 affects the determination of (a) whether the entity is a variable interest entity, or VIE, (b) which interests are variable interests in the entity, and (c) which party, if any, is the primary beneficiary of the VIE. That variability will affect any calculation of expected losses and expected residual returns, if such a calculation is necessary. We will be considering the factors discussed in this FSP when assessing our VIE’s in accordance with FIN 46.

10




 

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” or FIN 48. This interpretation, among other things, creates a two-step approach for evaluating uncertain tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines the amount of benefit that more-likely-than-not will be realized upon settlement. Derecognition of a tax position that was previously recognized would occur when a company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for derecognition of tax positions, and it has expanded disclosure requirements.  FIN 48 is effective for fiscal years beginning after December 15, 2006, in which the impact of adoption should be accounted for as a cumulative-effect adjustment to the beginning balance of retained earnings. We are evaluating FIN 48, but do not believe it will have a material impact on our consolidated financial statements.

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements, or SFAS No. 157. SFAS No. 157 provides guidance for using fair value to measure assets and liabilities. This statement clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing the asset or liability. SFAS No. 157 establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority to unobservable data. SFAS No. 157 applies whenever other standards require assets or liabilities to be measured at fair value. This statement is effective in fiscal years beginning after November 15, 2007. We believe that the adoption of this standard on January 1, 2008 will not have a material effect on our consolidated financial position or results of operations.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, or SAB 108, which becomes effective beginning on January 1, 2007. SAB 108 provides guidance on the consideration of the effects of prior period misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 provides for the quantification of the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. If a misstatement is material to the current year financial statements, the prior year financial statements should also be corrected, even though such revision was, and continues to be, immaterial to the prior year financial statements. Correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. Such correction should be made in the current period filings. We believe that the adoption of this standard on January 1, 2008 will not have a material effect on our consolidated financial position or results of operations.

3.  Property Acquisitions

TIn January 2006, we, through a joint venture with Jeff Sutton, acquired the fee interests in three adjoining buildings at 25-27 and 29 West 34th Street for an aggregate purchase price of $30.0 million, excluding closing costs. The buildings comprise approximately 50,900 square feet. We own approximately 50% of the equity in the joint venture. We loaned approximately $13.3 million to Jeff Sutton to fund a portion of his equity.  These loans are secured by a pledge of Jeff Sutton’s partnership interest in the joint venture.  As we have been designated as the primary beneficiary of the joint venture under FIN 46(R), we have consolidated the accounts of the joint venture.

In March 2006, we entered into a long term operating net leasehold interest in 521 Fifth Avenue — a 40-story, 460,000-square-foot office building — with an ownership group led by RFR Holding LLC, which retained fee ownership of the property.  We also purchased an option to acquire fee ownership of the property in five years for $15.0 million.  Assuming we exercise our option, the total cost would be $225.0 million. The acquisition was financed with a $140.0 million loan and proceeds drawn under our revolving credit facility.  The loan, which was for two years and bore interest at the London Interbank Offered Rate, or LIBOR, plus 162.5 basis points, was replaced in April with a five-year loan that bears interest at LIBOR plus 100 basis points.

In May 2005, we acquired a 10% interest in a joint venture that acquired a 670,000 square feet property located at 55 Corporate Drive, N.J.  The acquisition was funded with an $86.0 million interest-only mortgage, which was to mature in June 2007 and carried an interest rate of 215 basis points over the 30-day LIBOR.  This mortgage was acquired by Gramercy in March 2006.  In June 2006, the mortgage was repaid and replaced with a $190.0 million, ten-year interest-only mortgage with a fixed interest rate of 5.75%.  The property is net-leased to a single tenant until 2023.  In connection with the refinancing, the joint venture distributed out all the capital and preferred return to its majority partner.  This resulted in our interest increasing from 10% to 50%.  Simultaneous with this, Gramercy acquired a 49.75% interest from the other partners.  These interests are held as tenant-in-common interests.  This transaction valued the property at $236.0 million.  As we expect to sell our interest in the near term, we have classified this investment in assets and liabilities held for sale on the balance sheet.

11




 

On June 30, 2006, we completed the investment in the previously announced transaction involving 609 Fifth Avenue — a mixed-use property that includes New York City’s American Girl Store and approximately 100,000 square feet of Class A office space — in a transaction that valued the property at approximately $182.0 million. We issued approximately 64 million preferred units in SL Green Operating Partnership, L.P., valued at $1.00 per unit, to subsidiaries of 609 Partners, LLC, the partnership that indirectly holds the property, and acquired all of its common partnership interests. The property remains subject to a $102.0 million mortgage loan held by Morgan Stanley Mortgage Capital, Inc. The mortgage has a fixed annual interest rate of 5.85% and will mature in October 2013.

In September 2006, we, along with Jeff Sutton, were able to consolidate several partnership interests totaling 92.25% in the retail portion and one floor of office space at 717 Fifth Avenue. 717 Fifth Avenue has 47,000 square feet of rentable retail space, approximately 90% of which is currently occupied.  This transaction, which valued the property at $235.0 million, was financed with our investment of approximately $46.0 million and a $175.0 million loan from a third party at a blended rate of LIBOR plus 160 basis points.  We also have an option to acquire up to 33% of the ownership interests in the property.  We are consolidating our investment in 717 Fifth due to our significant economic interest resulting from the financing we provided.

Pro Forma

The following table (in thousands, except per share amounts) summarizes, on an unaudited pro forma basis, our combined results of operations for the nine months ended September 30, 2006 and 2005 as though the acquisitions of 28 West 44th (February 2005) and 521 Fifth Avenue (March 2006), the investment in 609 Fifth Avenue and the July 2006 common stock offering were completed on January 1, 2005.  The supplemental pro forma operating data is not necessarily indicative of what the actual results of operations of the Company would have been assuming the transactions had been completed as set forth above, nor do they purport to represent the Company’s results of operations for future periods.  In addition, the following supplemental pro forma operating data does not present the sale of assets through September 30, 2006.  The Company accounted for the acquisition of assets utilizing the purchase method of accounting.

 

2006

 

2005

 

Pro forma revenues

 

$

403,779

 

$

340,490

 

Pro forma net income

 

$

168,022

 

$

108,934

 

Pro forma earnings per common share-basic

 

$

3.68

 

$

2.47

 

Pro forma earnings per common share and common share equivalents-diluted

 

$

3.46

 

$

2.36

 

Pro forma common shares-basic

 

45,607

 

44,174

 

Pro forma common share and common share equivalents-diluted

 

49,541

 

47,926

 

 

4.  Property Dispositions and Assets Held for Sale

In July 2006, we sold the fee interests in 286 Madison Avenue and 290 Madison Avenue for approximately $63.0 million, excluding closing costs.  The properties are approximately 149,000 square feet.  We recognized a gain on sale of approximately $34.3 million.

In August 2006, we sold the leasehold interest in 1140 Avenue of the Americas for approximately $97.5 million, excluding closing costs.  The property is approximately 191,000 square feet.  We recognized a gain on sale of approximately $65.0 million.

At September 30, 2006, discontinued operations included the results of operations of real estate assets sold prior to that date.  This included 1414 Avenue of the Americas, which was sold in April 2005 and 286 and 290 Madison Avenue, sold in July 2006, 1140 Avenue of the Americas, sold in August 2006, and 55 Corporate Drive, which was considered as held for sale at September 30, 2006.

12




 

The following table summarizes income from discontinued operations (net of minority interest) and the related realized gain on sale of discontinued operations (net of minority interest) for the three and nine months ended September 30, 2006 and 2005 (in thousands).

 

 

Three Months Ended

 

Nine months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Revenues

 

 

 

 

 

 

 

 

 

Rental revenue

 

$

1,867

 

$

3,142

 

$

8,497

 

$

10,748

 

Escalation and reimbursement revenues

 

641

 

884

 

1,942

 

2,299

 

Other income

 

343

 

2

 

385

 

50

 

Total revenues

 

2,851

 

4,028

 

10,824

 

13,097

 

Operating expense

 

683

 

1,238

 

3,294

 

4,034

 

Real estate taxes

 

420

 

648

 

1,834

 

2,212

 

Ground rent

 

75

 

87

 

249

 

261

 

Interest

 

 

 

 

188

 

Depreciation and amortization

 

 

555

 

719

 

1,599

 

Total expenses

 

1,178

 

2,528

 

6,096

 

8,294

 

Income from discontinued operations

 

1,673

 

1,500

 

4,728

 

4,803

 

Gain on disposition of discontinued operations

 

99,268

 

 

99,268

 

35,900

 

Minority interest in operating partnership

 

(4,715

)

(85

)

(5,089

)

(2,317

)

Income from discontinued operations, net of minority interest

 

$

96,226

 

$

1,415

 

$

98,907

 

$

38,386

 

 

5.  Structured Finance Investments

During the nine months ended September 30, 2006 and 2005, we originated approximately $143.2 million and $147.9 million in structured finance and preferred equity investments (net of discount), respectively.  There were approximately $195.7 and $97.9 million in repayments and participations during those periods, respectively.  At September 30, 2006 and December 31, 2005 all loans were performing in accordance with the terms of the loan agreements.

As of September 30, 2006 and December 31, 2005, we held the following structured finance investments, excluding preferred equity investments, with an aggregate weighted average current yield of approximately 9.52% (in thousands):

Loan
Type

 

Gross
Investment

 

Senior
Financing

 

2006
Principal
Outstanding

 

2005
Principal
Outstanding

 

Initial
Maturity
Date

 

Mezzanine Loan (1)

 

$

3,500

 

$

15,000

 

$

3,500

 

$

3,500

 

September 2021

 

Mezzanine Loan (1) (2)

 

29,750

 

225,000

 

30,973

 

30,249

 

December 2020

 

Mezzanine Loan (1)

 

28,500

 

 

28,500

 

28,500

 

August 2008

 

Mezzanine Loan

 

60,000

 

205,000

 

57,973

 

 

February 2016

 

Mezzanine Loan

 

25,000

 

200,000

 

25,000

 

 

May 2016

 

Mezzanine Loan (1) (3) (4)

 

 

 

 

13,927

 

 

Mezzanine Loan

 

 

 

 

20,000

 

 

Junior Participation (1)

 

37,500

 

477,500

 

37,500

 

37,500

 

January 2014

 

Junior Participation (1) (3)

 

4,000

 

44,000

 

3,918

 

3,939

 

August 2010

 

Junior Participation (1)(5)

 

 

 

 

5,336

 

June 2014

 

Junior Participation (1)

 

11,000

 

53,000

 

11,000

 

11,000

 

November 2009

 

Junior Participation (1)

 

21,000

 

115,000

 

21,000

 

21,000

 

November 2009

 

Junior Participation (1)

 

12,000

 

73,000

 

12,000

 

 

June 2007

 

Junior Participation (4)

 

 

 

 

36,000

 

 

Junior Participation (4)

 

 

 

 

25,000

 

 

 

 

$

232,250

 

$

1,407,500

 

$

231,364

 

$

235,951

 

 

 

 


(1)        This is a fixed rate loan.

(2)        The difference between the pay and accrual rates is included as an addition to the principal balance outstanding.

(3)        This is an amortizing loan.

(4)        This investment was repaid during the second quarter of 2006.

(5)        This investment was redeemed in September 2006.

13




 

Preferred Equity Investments

As of September 30, 2006 and December 31, 2005, we held the following preferred equity investments with an aggregate weighted average current yield of approximately 10.17% (in thousands):

Type

 

Gross
Investment

 

Senior
Financing

 

2006
Amount
Outstanding

 

2005
Amount
Outstanding

 

Initial
Mandatory
Redemption

 

Preferred equity (1) (2)

 

$

75,000

 

$

69,724

 

$

3,694

 

$

75,000

 

July 2014

 

Preferred equity (1)

 

15,000

 

2,350,000

 

15,000

 

15,000

 

February 2015

 

Preferred equity (3)

 

51,000

 

224,000

 

51,000

 

51,000

 

February 2014

 

Preferred equity (1)

 

7,000

 

75,000

 

7,000

 

7,000

 

August 2015

 

Preferred equity (1)

 

7,000

 

 

7,000

 

 

June 2009

 

Preferred equity (4)

 

32,500

 

385,000

 

32,500

 

 

July 2007

 

Preferred equity (5)

 

 

 

 

10,000

 

 

Preferred equity (1) (2) (5)

 

 

 

 

6,125

 

 

 

 

$

187,500

 

$

3,103,724

 

$

116,194

 

$

164,125

 

 

 

 


(1)        This is a fixed rate investment.

(2)        Gramercy owned an interest in the first mortgage of the underlying property.

(3)        Gramercy holds a mezzanine loan on this asset.

(3)        Gramercy holds a mezzanine loan on this asset.

(4)        Gramercy holds a preferred equity investment in this asset.

(5)        This investment was repaid during the second quarter of 2006.

14




 

6.  Investment in Unconsolidated Joint Ventures

We have investments in several real estate joint ventures with various partners, including The Rockefeller Group International Inc., or RGII, The City Investment Fund, or CIF, the Witkoff Group, or Witkoff, SITQ Immobilier, a subsidiary of Caisse de depot et placement du Quebec, or SITQ, SEB Immobilier — Investment GmbH, or SEB, Prudential Real Estate Investors, or Prudential, Ian Schrager, or Schrager, RFR Holding LLC, or RFR, Credit Suisse Securities (USA) LLC, or Credit Suisse, Mack-Cali Realty Corporation, or Mack-Cali, Jeff Sutton, and Gramercy. As we do not control these joint ventures, we account for them under the equity method of accounting. The table below provides general information on each joint venture as of September 30, 2006 (in thousands):

Property

 

Partner

 

Ownership
Interest

 

Economic
Interest

 

Square
Feet

 

Acquired

 

Acquisition
Price
(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1221 Avenue of the Americas (2)

 

RGII

 

45.00

%

45.00

%

2,550

 

12/03

 

$

1,000,000

 

485 Lexington Avenue (3)

 

CIF and Witkoff

 

30.00

%

50.00

%

921

 

07/04

 

225,000

 

One Park Avenue (4)

 

SEB

 

16.67

%

16.67

%

913

 

05/01

 

318,500

 

1250 Broadway (5)

 

SITQ

 

55.00

%

66.18

%

670

 

08/99

 

121,500

 

1515 Broadway (6)

 

SITQ

 

55.00

%

68.45

%

1,750

 

05/02

 

483,500

 

100 Park Avenue

 

Prudential

 

49.90

%

49.90

%

834

 

02/00

 

95,800

 

One Madison Avenue
 — South Building

 

Gramercy

 

55.00

%

55.00

%

1,176

 

04/05

 

803,000

 

One Madison Avenue
 — Clock Tower
(7)

 

Schrager/RFR
/Credit Suisse

 

30.00

%

30.00

%

220

 

04/05

 

116,000

 

379 West Broadway

 

Jeff Sutton

 

45.00

%

45.00

%

62

 

12/05

 

19,750

 

Mack-Green joint venture

 

Mack-Cali

 

48.00

%

48.00

%

900

 

05/06

 

127,500

 

 


(1)        Acquisition price represents the actual or implied purchase price for the joint venture.

(2)        We acquired our interest from The McGraw-Hill Companies, or MHC.  MHC is a tenant at the property and accounted for approximately 14.4% of property’s annualized rent at September 30, 2006.  We do not manage this joint venture.

(3)        As a result of exceeding the performance thresholds set forth in our joint venture agreement with CIF, our economic stake in the property increased to 50% in January 2006.

(4)        In May 2004, Credit Suisse, through a wholly owned affiliate, acquired a 75% interest in One Park.  The interest was acquired from a joint venture comprised of SITQ and us. Credit Suisse’s affiliated entity transferred its interest to SEB in April 2005.

(5)        As a result of exceeding the performance thresholds set forth in our joint venture agreement with SITQ, our economic stake in the property was increased to 66.175% in August 2006.

(6)        Under a tax protection agreement established to protect the limited partners of the partnership that transferred 1515 Broadway to the joint venture, the joint venture has agreed not to adversely affect the limited partners’ tax positions before December 2011.  One tenant, whose leases end between 2008 and 2015, represents approximately 85.6% of this joint venture’s annualized rent at September 30, 2006.

(7)        In March 2006, we, along with Credit Suisse, sold a 40.0% interest in the joint venture to Schrager and RFR.  They will perform the redevelopment and residential conversion of the Clock Tower.  The arrangement provides Schrager and RFR with the ability to increase their ownership interest if certain incentive return thresholds are achieved.

 

15




 

We finance our joint ventures with non-recourse debt. The first mortgage notes payable collateralized by the respective joint venture properties and assignment of leases at September 30, 2006 and December 31, 2005, respectively, are as follows (in thousands):

property

 

Maturity
Date

 

Interest
Rate 
(1)

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

1221 Avenue of the Americas (2)

 

12/2010

 

5.78

%

$

170,000

 

$

170,000

 

485 Lexington Avenue (3)

 

01/2009

 

6.70

%

$

335,702

 

$

188,347

 

One Park Avenue

 

05/2014

 

5.80

%

$

238,500

 

$

238,500

 

1250 Broadway (4)

 

08/2007

 

6.56

%

$

115,000

 

$

115,000

 

1515 Broadway (5)

 

11/2007

 

6.24

%

$

625,000

 

$

625,000

 

100 Park Avenue (6)

 

11/2015

 

6.52

%

$

175,000

 

$

135,998

 

One Madison Avenue — South Building

 

05/2020

 

5.91

%

$

685,150

 

$

687,984

 

379 West Broadway

 

12/2007

 

7.59

%

$

12,838

 

$

12,837

 

One Madison Avenue — Clock Tower (7)

 

11/2007

 

6.99

%

$

127,323

 

 

Mack-Green joint venture (8)

 

08/2014

 

7.86

%

$

102,550

 

 

 


(1)        Interest rate represents the effective all-in weighted average interest rate for the quarter ended September 30, 2006.

(2)        This loan has an interest rate based on the LIBOR plus 75 basis points.  $65.0 million of this loan has been hedged through December 2010.  The hedge fixed the LIBOR rate at 4.8%.

(3)        Simultaneous with the closing, the joint venture closed on a $240.0 million loan.  The loan, which bore interest at 200 basis points over the 30-day LIBOR, was for three years and had two one-year extension options.  At closing, the joint venture drew down approximately $175.3 million.  In January 2006, the joint venture obtained a $390.0 million three-year loan, which bears interest at LIBOR plus 1.35%, and which can be extended for an additional two years. The initial funding of the loan was approximately $293.0 million, which was used to repay the existing loan.

(4)        The interest only loan carries an interest rate of 120 basis points over the 30-day LIBOR. The loan is subject to three one-year as-of-right renewal extensions.  The joint venture extended this loan for one year.

(5)        The interest only loan carries an interest rate of 90 basis points over the 30-day LIBOR.  The mortgage is subject to three one-year as-of-right renewal options.

(6)        In October 2005, the loan was increased by $60.0 million to $175.0 million.  It will mature in 2015 and carries an interest rate of approximately 6.52%.  Proceeds from the refinancing will be used to redevelop the property.

(7)        The interest only loan carried an interest rate of 160 basis points over the 30-day LIBOR.

(8)        Comprised of $90.3 million variable rate debt that matures in May 2008 and $12.2 million fixed rate debt that matures in August 2014.  Gramercy provided the variable rate debt.

 

We act as the operating partner and day-to-day manager for all our joint ventures, except for 1221 Avenue of the Americas and Mack-Green. We are entitled to receive fees for providing management, leasing, construction supervision and asset management services to our joint ventures. We earned approximately $2.7 million, $6.9 million, $2.5 million and $8.9 million from these services for the three and nine months ended September 30, 2006 and 2005, respectively. In addition, we have the ability to earn incentive fees based on the ultimate financial performance of the joint venture properties.

Gramercy Capital Corp.

In April 2004, we formed Gramercy as a national commercial real estate specialty finance company that focuses on the direct origination and acquisition of whole loans, subordinate interests in whole loans, mezzanine loans, preferred equity and net lease investments involving commercial properties throughout the United States.  Gramercy qualified as a REIT under the Code commencing with its taxable year ended December 31, 2004 and expects to qualify for its current fiscal year.  In July 2004, Gramercy completed its initial public offering.  As part of the offering we purchased 25% of Gramercy’s common stock, for a total investment of approximately $46.9 million.  In January 2005, we purchased an additional 1,275,000 shares of common stock of Gramercy, increasing our total investment to approximately $68.9 million.  In September 2005, we purchased an additional 958,333 shares of common stock of Gramercy, increasing our total investment to approximately $93.6 million.  In May 2006, we purchased an additional 750,000 shares of common stock of Gramercy, increasing our total investment to approximately $113.7 million.  We currently hold 6,418,333 shares of Gramercy’s common stock.  The market value of our investment in Gramercy was approximately $161.8 million at September 30, 2006.

Gramercy is a variable interest entity, but we are not the primary beneficiary.  Due to the significant influence we have over Gramercy, we account for our investment under the equity method of accounting.

16




 

GKK Manager LLC, or the Manager, an affiliate of ours, entered into a management agreement with Gramercy, which provides for an initial term through December 2007, with automatic one-year extension options and is subject to certain termination rights.  Gramercy pays the Manager an annual management fee equal to 1.75% of their gross stockholders’ equity (as defined in the amended and restated management agreement).  In addition, Gramercy also pays the Manager a collateral management fee (as defined in the collateral management agreement) of 0.25% per annum on the outstanding investment grade bonds in Gramercy’s July 2005 collateralized debt obligation.  The amended and restated management agreement provides that in connection with formations of future collateralized debt obligations, or CDO, or other securitization vehicles, if a collateral manager is retained, the Manager or an affiliate will be the collateral manager and will receive the following fees:  (i) 0.25% per annum of the book value of the assets owned for transitional “managed” CDOs, (ii) 0.15% per annum of the book value of the assets owned for non-transitional “managed” CDOs, (iii) 0.10% per annum of the book value of the assets owned for static CDOs that own primarily non-investment grade bonds, and (iv) 0.05% per annum of the book value of the assets owned for static CDOs that own primarily investment grade bonds; limited in each instance by the fees that are paid to the collateral manager.  For the three and nine months ended September 30, 2006 and 2005, we received an aggregate of approximately $2.7 million, $7.4 million, $1.7 million and $4.2 million, respectively, in fees under the management agreement and $0.8 million, $1.8 million, none and none under the collateral management agreement.  In April 2006, Gramercy’s board of directors approved, among other things, an extension of the management agreement through December 2009.

To provide an incentive for the Manager to enhance the value of the common stock, we, along with the Manager and other holders of Class B limited partner interests in Gramercy’s operating partnership, are entitled to an incentive return payable through the Class B limited partner interests in Gramercy’s operating partnership, equal to 25% of the amount by which funds from operations (as defined in Gramercy’s partnership agreement) plus certain accounting gains exceed the product of the weighted average stockholders’ equity of Gramercy multiplied by 9.5% (divided by 4 to adjust for quarterly calculations).  We will record any distributions on the Class B limited partner interests as incentive distribution income in the period when earned and when receipt of such amounts have become probable and reasonably estimable in accordance with Gramercy’s partnership agreement as if such agreement had been terminated on that date.  We earned approximately $1.8 million, $4.6 million, $1.0 million and $1.0 million under this agreement for the three and nine months ended September 30, 2006 and 2005, respectively.  Due to the control we have over the Manager, we consolidate the accounts of the Manager into ours.

In May 2005, our Compensation Committee approved long-term incentive performance awards pursuant to which certain of our officers and employees, including some of whom are our senior executive officers, were awarded a portion of the interests previously held by us in the Manager as well as in the Class B limited partner interests in Gramercy’s operating partnership.  These awards are dependent upon, among other things, tenure of employment and the performance by SL Green Realty Corp. and its investment in Gramercy.  We recorded compensation expense of $0.5 million, $1.2 million, none and none, respectively, for the three and nine months ended September 30, 2006 and 2005, related to these awards.  After giving effect to these awards, we own 65.83 units of the Class B limited partner interests and 65.83% of the Manager.  The officers and employees who received these awards own 15.75 units of the Class B limited partner interests and 15.75% of the Manager.

Gramercy is obligated to reimburse the Manager for its costs incurred under an asset servicing agreement and an outsource agreement between the Manager and us.  The asset servicing agreement, which was amended and restated in April 2006, provides for an annual fee payable to us of 0.05% of the book value of all Gramercy’s credit tenant lease assets and non-investment grade bonds and 0.15% of the book value of all other Gramercy assets.  We may reduce the asset-servicing fee for fees that Gramercy pays directly to outside servicers. The outsourcing agreement currently provides for a fee of $1.29 million per year, increasing 3% annually over the prior year. For the three and nine months ended September 30, 2006 and 2005, the Manager received an aggregate of approximately $1.0 million, $2.6 million, $0.6 million and $1.6 million, respectively, under the outsourcing and asset servicing agreements.

During the three months ended March 31, 2006, we paid our proportionate share of an advisory fee of approximately $162,500 to Gramercy in connection with a transaction.

All fees earned from Gramercy are included in other income in the Consolidated Statements of Income.

Effective May 1, 2005, Gramercy entered into a lease agreement with an affiliate of ours, for their corporate offices at 420 Lexington Avenue, New York, NY.  The lease is for approximately five thousand square feet with an option to lease an additional approximately two thousand square feet and carries a term of ten year with rents of approximately $249,000 per annum for year one rising to $315,000 per annum in year ten.

See above for a discussion on Gramercy’s joint venture investment, along with us, in One Madison Avenue-South Building and Note 3 for a discussion on 55 Corporate Drive.

17




 

The condensed combined balance sheets for the unconsolidated joint ventures, including Gramercy, at September 30, 2006 and December 31, 2005, are as follows (in thousands):

 

 

September 30,
2006

 

December 31,
2005

 

Assets

 

 

 

 

 

Commercial real estate property, net

 

$

3,522,412

 

$

3,327,691

 

Structured finance investments

 

2,064,058

 

1,205,745

 

Other assets

 

653,459

 

424,468

 

Total assets

 

$

6,239,929

 

$

4,957,904

 

 

 

 

 

 

 

Liabilities and members’ equity

 

 

 

 

 

Mortgages payable

 

$

2,681,586

 

$

2,257,667

 

Other loans

 

1,922,989

 

1,068,866

 

Other liabilities

 

151,617

 

120,959

 

Members’ equity

 

1,483,737

 

1,510,412

 

Total liabilities and members’ equity

 

$

6,239,929

 

$

4,957,904

 

Company’s net investment in unconsolidated joint ventures

 

$

549,040

 

$

543,189

 

 

The condensed combined statements of operations for the unconsolidated joint ventures, including Gramercy from acquisition date through September 30, 2006 and 2005 are as follows (in thousands):

 

 

Three Months Ended

 

Nine months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Total revenues

 

$

169,007

 

$

141,106

 

$

467,551

 

$

360,933

 

Operating expenses

 

36,269

 

30,452

 

102,065

 

79,501

 

Real estate taxes

 

17,706

 

15,983

 

52,727

 

47,814

 

Interest

 

63,043

 

39,940

 

168,169

 

87,302

 

Depreciation and amortization

 

21,680

 

19,942

 

57,572

 

52,319

 

Total expenses

 

138,698

 

106,317

 

380,533

 

266,936

 

Net income before gain on sale

 

$

30,309

 

$

34,789

 

$

87,018

 

$

93,997

 

Company’s equity in net income of unconsolidated joint ventures

 

$

9,679

 

$

13,250

 

$

30,244

 

$

38,643

 

 

7.  Investment in and Advances to Affiliates

Service Corporation

In order to maintain our qualification as a REIT while realizing income from management, leasing and construction contracts from third parties and joint venture properties, all of the management operations are conducted through the Service Corporation.  We, through our Operating Partnership, own 100% of the non-voting common stock (representing 95% of the total equity) of the Service Corporation.  Through dividends on its equity interest, our Operating Partnership receives substantially all of the cash flow from the Service Corporation’s operations.  All of the voting common stock of the Service Corporation (representing 5% of the total equity) is held by one of our affiliates.  This controlling interest gives the affiliate the power to elect all directors of the Service Corporation.  The Service Corporation is considered to be a variable interest entity under FIN 46 and we are the primary beneficiary.  Therefore, effective July 1, 2003, we consolidated the operations of the Service Corporation.  For the three and nine months ended September 30, 2006 and 2005, the Service Corporation earned approximately $2.4 million, $6.1 million, $2.4 million and $8.5 million of revenue and incurred approximately $1.9 million, $5.4 million, $2.1 million and $6.1 million in expenses, respectively.  Effective January 1, 2001, the Service Corporation elected to be taxed as a TRS.

All of the management, leasing and construction services with respect to the properties wholly-owned by us are conducted through SL Green Management LLC which is 100% owned by our Operating Partnership.

18




 

eEmerge

In May 2000, eEmerge, Inc., a Delaware corporation, or eEmerge, was formed.  eEmerge is a separately managed, self-funded company that provides fully-wired and furnished office space, services and support to businesses.

In March 2002, we acquired all the voting common stock of eEmerge Inc.  As a result, we control all the common stock of eEmerge.  Effective with the quarter ended March 31, 2002, we consolidated the operations of eEmerge.  Effective January 1, 2001, eEmerge elected to be taxed as a TRS.

In June 2000, eEmerge and Eureka Broadband Corporation, or Eureka, formed eEmerge.NYC LLC, a Delaware limited liability company, or ENYC, whereby eEmerge has a 95% interest and Eureka has a 5% interest in ENYC.  During the third quarter of 2006, ENYC acquired the interest held by Eureka.  As a result, eEmerge owns 100% of ENYC.  ENYC operates a 71,700 square foot fractional office suites business.  ENYC entered into a 10-year lease with our Operating Partnership for its 50,200 square foot premises, which is located at 440 Ninth Avenue, Manhattan.  ENYC entered into another 10-year lease with our Operating Partnership for its 21,500 square foot premises at 28 West 44th Street, Manhattan.  Allocations of net profits, net losses and distributions are made in accordance with the Limited Liability Company Agreement of ENYC.  Effective with the quarter ended March 31, 2002, we consolidated the operations of ENYC.

The net book value of our investment as of September 30, 2006 and December 31, 2005 was approximately $3.2 million and $3.9 million, respectively.

8.  Deferred Costs

Deferred costs at September 30, 2006 and December 31, 2005 consisted of the following (in thousands):

 

2006

 

2005

 

Deferred financing

 

$

32,758

 

$

40,118

 

Deferred leasing

 

83,147

 

78,086

 

 

 

115,905

 

118,204

 

Less accumulated amortization

 

(41,682

)

(38,776

)

 

 

$

74,223

 

$

79,428

 

 

9.  Mortgage Notes Payable

The first mortgage notes payable collateralized by the respective properties and assignment of leases at September 30, 2006 and December 31, 2005, respectively, were as follows (in thousands):

Property

 

Maturity
Date

 

Interest
Rate

 

2006

 

2005

 

70 West 36th Street (1)

 

5/2009

 

7.87

%

$

11,255

 

$

11,414

 

711 Third Avenue (1)

 

6/2015

 

4.99

%

120,000

 

120,000

 

420 Lexington Avenue (1)

 

11/2010

 

8.44

%

115,777

 

117,466

 

673 First Avenue (1)

 

2/2013

 

5.67

%

33,986

 

34,474

 

125 Broad Street (2)

 

10/2007

 

8.29

%

74,196

 

74,787

 

220 East 42nd Street (1)

 

12/2013

 

5.23

%

210,000

 

210,000

 

625 Madison Avenue (1)

 

11/2015

 

6.27

%

102,000

 

102,000

 

609 Fifth Avenue (1)

 

10/2013

 

5.85

%

102,000

 

 

609 Partners, LLC

 

7/2014

 

5.00

%

63,891

 

 

Total fixed rate debt

 

 

 

 

 

833,105

 

670,141

 

One Madison Avenue — Clock Tower (3)

 

 

 

 

113,546

 

521 Fifth Avenue (1)

 

4/2011

 

6.35

%

140,000

 

 

1551/1555 Broadway and 21 West 34th Street (4)

 

8/2008

 

7.36

%

96,763

 

91,532

 

141 Fifth Avenue (4)

 

9/2007

 

7.59

%

10,457

 

10,033

 

717 Fifth Avenue (5)

 

9/2008

 

6.93

%

175,000

 

 

Total floating rate debt

 

 

 

 

 

422,220

 

215,111

 

Total mortgage notes payable

 

 

 

 

 

$

1,255,325

 

$

885,252

 

 


(1)        Held in bankruptcy remote special purpose entity.

(2)        This mortgage has an initial maturity date of October 2007 and a contractual maturity date of October 2030.

(3)        This mortgage was assumed by the joint venture.  See Note 6.

(4)        We own a 50% interest in the joint venture that is the borrower on these loans.  These loans are non-recourse to us.  See Note 6.

(5)        See Note 3 for a description of our ownership interest in this property.

19




 

At September 30, 2006 and December 31, 2005 the gross book value of the properties collateralizing the mortgage notes was approximately $1.8 billion and $1.2 billion, respectively.

For the three and nine months ended September 30, 2006 and 2005, we incurred approximately $25.9 million, $69.6 million, $22.5 million and $60.8 million of interest expense, respectively, excluding interest which was capitalized of approximately $3.8 million, $9.8 million, $2.7 million and $3.7 million, respectively.

Principal Maturities

Combined aggregate principal maturities of mortgages and notes payable, 2005 unsecured revolving credit facility, term loans and trust preferred securities and our share of joint venture debt as of September 30, 2006, excluding extension options, were as follows (in thousands):

 

 

Scheduled
Amortization

 

Principal
Repayments

 

Revolving
Credit
Facility

 

Term
Loans and
Trust
Preferred
Securities

 

Total

 

Joint
Venture
Debt

 

2006

 

$

1,408

 

$

 

$

 

$

 

$

1,408

 

$

64,348

 

2007

 

10,688

 

83,798

 

 

 

94,486

 

393,558

 

2008

 

10,931

 

271,763

 

 

1,766

 

284,460

 

49,486

 

2009

 

11,544

 

10,628

 

 

327,648

 

349,820

 

107,284

 

2010

 

11,380

 

104,691

 

 

195,586

 

311,657

 

83,558

 

Thereafter

 

33,289

 

705,205

 

 

100,000

 

838,494

 

483,162

 

 

 

$

79,240

 

$

1,176,085

 

$

 

$

625,000

 

$

1,880,325

 

$

1,181,396

 

 

10.  Credit Facilities

2005 Unsecured Revolving Credit Facility

We have a $500.0 million unsecured revolving credit facility.  We have an option to increase the capacity under the 2005 unsecured revolving credit facility to $800.0 million at any time prior to the maturity date in September 2008.  The 2005 unsecured revolving credit facility bears interest at a spread ranging from 85 basis points to 125 basis points over LIBOR, based on our leverage ratio, and has a one-year extension option.  The 2005 unsecured revolving credit facility also requires a 12.5 to 25 basis point fee on the unused balance payable annually in arrears.  The 2005 unsecured revolving credit facility had no outstanding balance and carried a spread over LIBOR of 110 basis points at September 30, 2006.  Availability under the 2005 unsecured revolving credit facility was further reduced by the issuance of approximately $13.5 million in letters of credit.  The effective all-in interest rate on the 2005 unsecured revolving credit facility was 6.43% for the three months ended September 30, 2006.  The 2005 unsecured revolving credit facility includes certain restrictions and covenants (see restrictive covenants below).

Term Loans

We have a $325.0 million unsecured term loan, which matures in August 2009.  This term loan bears interest at a spread ranging from 110 basis points to 140 basis points over LIBOR, based on our leverage ratio. As of September 30, 2006, we had $325.0 million outstanding under the unsecured term loan at the rate of 140 basis points over LIBOR.  To limit our exposure to the variable LIBOR rate we entered into various swap agreements to fix the LIBOR rate on the entire unsecured term loan.  The LIBOR rate was fixed for a blended all-in rate of 4.50%.  The effective all-in interest rate on the unsecured term loan was 5.07% for the three months ended September 30, 2006.

We have a $200.0 million five-year non-recourse term loan secured by a pledge of our ownership interest in 1221 Avenue of the Americas.  This term loan has a floating rate of 125 basis points over the current LIBOR rate and matures in May 2010.  The effective all-in interest rate on this secured term loan was 5.78% for the three months ended September 30, 2006.

Restrictive Covenants

The terms of the 2005 unsecured revolving credit facility and the term loans include certain restrictions and covenants which limit, among other things, the payment of dividends (as discussed below), the incurrence of additional indebtedness, the incurrence of liens and the disposition of assets, and which require compliance with financial ratios relating to the minimum amount of tangible net worth, the minimum amount of debt service coverage, and fixed charge coverage, the maximum amount of unsecured indebtedness, the minimum amount of unencumbered property debt service coverage and certain investment limitations.  The dividend restriction

20




 

referred to above provides that, except to enable us to continue to qualify as a REIT for Federal Income Tax purposes, we will not during any four consecutive fiscal quarters make distributions with respect to common stock or other equity interests in an aggregate amount in excess of 90% of funds from operations for such period, subject to certain other adjustments.  As of September 30, 2006 and December 31, 2005, we were in compliance with all such covenants.

Junior Subordinate Deferrable Interest Debentures

In June 2005, we issued $100.0 million in unsecured floating rate trust preferred securities through a newly formed trust, SL Green Capital Trust I, or Trust, which is a wholly-owned subsidiary of our Operating Partnership.  The securities mature in 2035 and bear interest at a fixed rate of 5.61% for the first ten years ending July 2015, a period of up to eight consecutive quarters if our Operating Partnership exercises its right to defer such payments.  The trust preferred securities are redeemable, at the option of our Operating Partnership, in whole or in part, with no prepayment premium any time after July 2010.  Our interest in the Trust is accounted for using the equity method and the assets and liabilities of that entity is not consolidated into our financial statements.  Interest on the junior subordinated notes is included in interest expense on our consolidated statements of income while the value of the junior subordinated notes, net of our investment in the trusts that issued the securities, is presented as a separate item in our consolidated balance sheets.

11.  Related Party Transactions

Cleaning/ Security/ Messenger and Restoration Services

Through Alliance Building Services, or Alliance, First Quality Maintenance, L.P., or First Quality, provides cleaning, extermination and related services, Classic Security LLC provides security services, Bright Star Couriers LLC provides messenger services, and Onyx Restoration Works provides restoration services with respect to certain properties owned by us. Alliance is owned by Gary Green, a son of Stephen L. Green, the chairman of our board of directors.  First Quality also provides additional services directly to tenants on a separately negotiated basis.  In addition, First Quality has the non-exclusive opportunity to provide cleaning and related services to individual tenants at our properties on a basis separately negotiated with any tenant seeking such additional services.  In the first quarter of 2006, First Quality expanded its space leased to 26,800 square feet of space at 70 West 36th Street pursuant to a lease that expires on December 31, 2015 and provides for annual rental payments of approximately $629,000. We paid Alliance approximately $3.4 million, $9.6 million, $3.0 million and $7.6 million for the three and nine months ended September 30, 2006 and 2005 respectively, for these services (excluding services provided directly to tenants).

Leases

Nancy Peck and Company leases 2,013 square feet of space at 420 Lexington Avenue, pursuant to a lease that expired on June 30, 2005 and provided for annual rental payments of approximately $66,000.  This space is now leased on a month-to-month basis.  Nancy Peck and Company is owned by Nancy Peck, the wife of Stephen L. Green.  The rent due pursuant to the lease is offset against a consulting fee of $11,025 per month an affiliate pays to her pursuant to a consulting agreement, which is cancelable upon 30-days notice.

Brokerage Services

Sonnenblick-Goldman Company, or Sonnenblick, a nationally recognized real estate investment banking firm, provided mortgage brokerage services to us.  Mr. Morton Holliday, the father of Mr. Marc Holliday, was a Managing Director of Sonnenblick at the time of the financings.  In 2005, we paid approximately $457,000 to Sonnenblick in connection with securing a $120.0 million first mortgage for the property located at 711 Third Avenue.  In 2005, our 1515 Broadway joint venture paid approximately $400,000 to Sonnenblick in connection with refinancing the property and increasing the first mortgage to $625.0 million.  In 2006, our 485 Lexington Avenue joint venture paid approximately $757,000 to Sonnenblick in connection with refinancing the property and increasing the first mortgage to $390.0 million.  Also in 2006, an entity in which we hold a preferred equity investment paid approximately $438,000 to Sonnenblick in connection with refinancing the property held by that entity and increasing the first mortgage to $90.0 million.

Management Fees

S.L. Green Management Corp. receives property management fees from an entity in which Stephen L. Green owns an interest.  The aggregate amount of fees paid to S.L. Green Management Corp. from such entity was approximately $54,000, $143,000, $55,000 and $164,000 for the three and nine months ended September 30, 2006 and 2005, respectively.

21




 

Amounts due from (to) related parties at September 30, 2006 and December 31, 2005 consisted of the following (in thousands):

 

2006

 

2005

 

17 Battery Condominium Association

 

$

94

 

$

93

 

Due from joint ventures

 

4,934

 

3,500

 

Officers and employees

 

1,436

 

1,527

 

Other

 

3,099

 

2,587

 

Related party receivables

 

$

9,563

 

$

7,707

 

 

Management Indebtedness

In January 2001, Mr. Marc Holliday, then our president, received a non-recourse loan from us in the principal amount of $1.0 million pursuant to his amended and restated employment and non-competition agreement he executed at the time.  This loan bears interest at the applicable federal rate per annum and is secured by a pledge of certain of Mr. Holliday’s shares of our common stock.  The principal of and interest on this loan is forgivable upon our attainment of specified financial performance goals prior to December 31, 2006, provided that Mr. Holliday remains employed by us until January 17, 2007.  In April 2000, Mr. Holliday received a loan from us in the principal amount of $300,000 with a maturity date of July 2003.  This loan bore interest at a rate of 6.60% per annum and was secured by a pledge of certain of Mr. Holliday’s shares of our common stock.  In May 2002, Mr. Holliday entered into a loan modification agreement with us in order to modify the repayment terms of the $300,000 loan.  Pursuant to the agreement, $100,000 (plus accrued interest thereon) was forgivable on each of January 1, 2004, January 1, 2005 and January 1, 2006, provided that Mr. Holliday remains employed by us through each of such date.  This $300,000 loan was completely forgiven on January 1, 2006.

Gramercy Capital Corp.

See Note 6. Investment in Unconsolidated Joint Ventures — Gramercy Capital Corp. for disclosure on related party transactions between Gramercy and us.

12.  Stockholders’ Equity

Common Stock

Our authorized capital stock consists of 200,000,000 shares, $.01 par value, of which we have authorized the issuance of up to 100,000,000 shares of common stock, $.01 par value per share, 75,000,000 shares of excess stock, at $.01 par value per share, and 25,000,000 shares of preferred stock, par value $.01 per share.  As of September 30, 2006, 45,773,779 shares of common stock and no shares of excess stock were issued and outstanding.

In July 2006, we sold 2.5 million shares of our common stock for net proceeds, after deducting underwriting discounts, commissions and transaction expenses, of approximately $268.5 million.  Lehman Brothers acted as sole underwriter for this offering, and was also granted a 30-day option to purchase up to an additional 250,000 shares solely to cover over-allotments.  This option was not exercised. The proceeds from our offering were used to repay a portion of the amount outstanding under our 2005 unsecured revolving credit facility.  The balance of the proceeds will be used to fund acquisitions and for other working capital purposes.

We filed a $500.0 million shelf registration statement, which was declared effective by the Securities and Exchange Commission, or SEC, in March 2004.  This registration statement provides us with the ability to issue common and preferred stock, depository shares and warrants.  We currently have $65.1 million available under the shelf.

Perpetual Preferred Stock

In December 2003, we sold 6,300,000 shares of our 7.625% Series C preferred stock, (including the underwriters’ over-allotment option of 700,000 shares) with a mandatory liquidation preference of $25.00 per share.  Net proceeds from this offering (approximately $152.0 million) were used principally to repay amounts outstanding under our secured and unsecured revolving credit facilities.  The Series C preferred stockholders receive annual dividends of $1.90625 per share paid on a quarterly basis and dividends are cumulative, subject to certain provisions.  On or after December 12, 2008, we may redeem the Series C preferred stock at par for cash at our option.  The Series C preferred stock was recorded net of underwriters discount and issuance costs.

In 2004, we sold 4,000,000 shares of our 7.875% Series D cumulative redeemable preferred stock, or the Series D preferred stock, with a mandatory liquidation preference of $25.00 per share.  Net proceeds from these offerings (approximately $96.3 million) were used principally to repay amounts outstanding under our secured and unsecured revolving credit facilities.  The Series D preferred stockholders receive annual dividends of $1.96875 per share paid on a quarterly basis and dividends are cumulative, subject to certain provisions.  On or after May 27, 2009, we may redeem the Series D preferred stock at par for cash at our option.  The Series D

22




 

preferred stock was recorded net of underwriters discount and issuance costs.

Rights Plan

In February 2000, our board of directors authorized a distribution of one preferred share purchase right, or Right, for each outstanding share of common stock under a shareholder rights plan. This distribution was made to all holders of record of the common stock on March 31, 2000.  Each Right entitles the registered holder to purchase from us one one-hundredth of a share of Series B junior participating preferred stock, par value $0.01 per share, or Preferred Shares, at a price of $60.00 per one one-hundredth of a Preferred Share, or Purchase Price, subject to adjustment as provided in the rights agreement.  The Rights expire on March 5, 2010, unless we extend the expiration date or the Right is redeemed or exchanged earlier.  The Rights are attached to each share of common stock.  The Rights are generally exercisable only if a person or group becomes the beneficial owner of 17% or more of the outstanding common stock or announces a tender offer for 17% or more of the outstanding common stock, or Acquiring Person.  In the event that a person or group becomes an Acquiring Person, each holder of a Right, excluding the Acquiring Person, will have the right to receive, upon exercise, common stock having a market value equal to two times the Purchase Price of the Preferred Shares.

Dividend Reinvestment and Stock Purchase Plan

We filed a registration statement with the SEC for our dividend reinvestment and stock purchase plan, or DRIP, which was declared effective on September 10, 2001, and commenced on September 24, 2001.  We registered 3,000,000 shares of our common stock under the DRIP.

During the nine months ended September 30, 2006 and 2005, approximately 98,000 and 232,000 shares were issued and approximately $9.2 million and $13.7 million of proceeds were received, respectively, from dividend reinvestments and/or stock purchases under the DRIP.  DRIP shares may be issued at a discount to the market price.

2003 Long-Term Outperformance Compensation Program

Our board of directors adopted a long-term, seven-year compensation program for senior management.  The program, which measures our performance over a 48-month period (unless terminated earlier) commencing April 1, 2003, provides that holders of our common equity are to achieve a 40% total return during the measurement period over a base of $30.07 per share before any restricted stock awards are granted.  Plan participants will receive an award of restricted stock in an amount between 8% and 10% of the excess return over the baseline return.  At the end of the four-year measurement period, 40% of the award will vest on the measurement date and 60% of the award will vest ratably over the subsequent three years based on continued employment.  Any restricted stock to be issued under the program will be allocated from our 2005 Stock Option and Incentive Plan (as defined below), which was previously approved through a stockholder vote in May 2002.  We record the expense of the restricted stock award in accordance with SFAS 123-R.  The fair value of the award on the date of grant was determined to be $3.2 million.  Forty percent of the value of the award will be amortized over four years and the balance will be amortized at 20% per year over five, six and seven years, respectively, such that 20% of year five, 16.67% of year six, and 14.29% of year seven will be recorded in year one.  The total value of the award (capped at $25.5 million) will determine the number of shares assumed to be issued for purposes of calculating diluted earnings per share.  Compensation expense of $162,500 and $487,500 was recorded during each of the three and nine months ended September 30, 2006 and 2005, respectively.

2005 Long-Term Outperformance Compensation Program

In December 2005, the compensation committee of our board of directors approved a long-term incentive compensation program, the 2005 Outperformance Plan.  Participants in the 2005 Outperformance Plan will share in a “performance pool” if our total return to stockholders for the period from December 1, 2005 through November 30, 2008 exceeds a cumulative total return to stockholders of 30% during the measurement period over a base share price of $68.51 per share. The size of the pool will be 10% of the outperformance amount in excess of the 30% benchmark, subject to a maximum dilution cap equal to the lesser of 3% of our outstanding shares and units of limited partnership interest as of December 1, 2005 or $50.0 million. In the event the potential performance pool reaches this dilution cap before November 30, 2008 and remains at that level or higher for 30 consecutive days, the performance period will end early and the pool will be formed on the last day of such 30 day period. Each participant’s award under the 2005 Outperformance Plan will be designated as a specified percentage of the aggregate performance pool to be allocated to him or her assuming the 30% benchmark is achieved. Individual awards will be made in the form of partnership units, or LTIP Units, that may ultimately become exchangeable for shares of our common stock or cash, at our election. LTIP Units will be granted prior to the determination of the performance pool; however, they will only vest upon satisfaction of performance and other thresholds, and will not be entitled to distributions until after the performance pool is established.  The 2005 Outperformance Plan provides that if the pool is established, each participant will also be entitled to the distributions that would have been paid on the number of LTIP Units earned, had they been issued at the beginning of the performance period. Those distributions will be paid in the form of additional LTIP Units.

 

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After the performance pool is established, the earned LTIP Units will receive regular quarterly distributions on a per unit basis equal to the dividends per share paid on our common stock, whether or not they are vested.  Any LTIP Units that are not earned upon the establishment of the performance pool will be automatically forfeited, and the LTIP Units that are earned will be subject to time-based vesting, with one-third of the LTIP Units earned vesting on November 30, 2008 and each of the first two anniversaries thereafter based on continued employment.  On June 14, 2006, the Compensation Committee determined that under the terms of the 2005 Outperformance Plan, as of June 8, 2006, the performance period had accelerated and the maximum performance pool of $49,250,000, taking into account forfeitures, was established.  Individual awards under the 2005 Outperformance Plan are in the form of partnership units, or LTIP Units, in SL Green Operating Partnership, L.P., that, subject to certain conditions, are convertible into shares of the Company’s common stock or cash, at the Company’s election.  The total number of LTIP Units earned by all participants as a result of the establishment of the performance pool was 490,475.

The cost of the 2005 Outperformance Plan (approximately $8.0 million, subject to adjustment for forfeitures) will continue to be amortized into earnings through the final vesting period in accordance with SFAS 123-R.  We recorded approximately $0.4 million, $1.2 million, none and none of compensation expense during the three and nine months ended September 30, 2006 and 2005, respectively, in connection with the 2005 Outperformance Plan.

2006 Long-Term Outperformance Compensation Program

On August 14, 2006, the compensation committee of our board of directors approved a long-term incentive compensation program, the 2006 Outperformance Plan.  Participants in the 2006 Outperformance Plan will share in a “performance pool” if our total return to stockholders for the period from August 1, 2006 through July 31, 2009 exceeds a cumulative total return to stockholders of 30% during the measurement period over a base share price of $106.39 per share. The size of the pool will be 10% of the outperformance amount in excess of the 30% benchmark, subject to a maximum award of $60 million. The maximum award will be reduced by the amount of any unallocated or forfeited awards. In the event the potential performance pool reaches the maximum award before July 31, 2009 and remains at that level or higher for 30 consecutive days, the performance period will end early and the pool will be formed on the last day of such 30 day period. Each participant’s award under the 2006 Outperformance Plan will be designated as a specified percentage of the aggregate performance pool.  Assuming the 30% benchmark is achieved, the pool will be allocated among the participants in accordance with the percentage specified in each participant’s participation agreement.  Individual awards will be made in the form of partnership units, or LTIP Units, that, subject to vesting and the satisfaction of other conditions, are exchangeable for a per unit value equal to the then trading price of one share of our common stock.  This value is payable in cash or, at our election, in shares of common stock.  LTIP Units will be granted prior to the determination of the performance pool; however, they will only vest upon satisfaction of performance and time vesting thresholds under the 2006 Outperformance Plan, and will not be entitled to distributions until after the performance pool is established.  Distributions on LTIP Units will equal the dividends paid on our common stock on a per unit basis.  The 2006 Outperformance Plan provides that if the pool is established, each participant will also be entitled to the distributions that would have been paid had the number of earned LTIP Units been issued at the beginning of the performance period.  Those distributions will be paid in the form of additional LTIP Units.  Thereafter, distributions will be paid currently with respect to all earned LTIP Units that are a part of the performance pool, whether vested or unvested.  Although the amount of earned awards under the 2006 Outperformance Plan (i.e. the number of LTIP Units earned) will be determined when the performance pool is established, not all of the awards will vest at that time.  Instead, one-third of the awards will vest on July 31, 2009 and each of the first two anniversaries thereafter based on continued employment.

The cost of the 2006 Outperformance Plan will be amortized into earnings through the final vesting period in accordance with SFAS 123-R.  We recorded approximately $0.4 million of compensation expense during the three and nine months ended September 30, 2006 in connection with the 2006 Outperformance Plan.

Deferred Stock Compensation Plan for Directors

Under our Independent Director’s Deferral Program, which commenced July 2004, our non-employee directors may elect to defer up to 100% of their annual retainer fee, chairman fees and meeting fees.  Unless otherwise elected by a participant, fees deferred under the program shall be credited in the form of phantom stock units.  The phantom stock units are convertible into an equal number of shares of common stock upon such directors’ termination of service from the Board of Directors or a change in control by us, as defined by the program.  Phantom stock units are credited to each non-employee director quarterly using the closing price of our common stock on the applicable dividend record date for the respective quarter.  Each participating non-employee director’s account is also credited for an equivalent amount of phantom stock units based on the dividend rate for each quarter.

24




During the nine months ended September 30, 2006, 4,575 phantom stock units were earned.  As of September 30, 2006, there were approximately 9,940 phantom stock units outstanding.

Stock Option Plan

During August 1997, we instituted the 1997 Stock Option and Incentive Plan, or the 1997 Plan.  The 1997 Plan was amended in December 1997, March 1998, March 1999 and May 2002.  The 1997 Plan, as amended, authorizes (i) the grant of stock options that qualify as incentive stock options under Section 422 of the Code, or ISOs, (ii) the grant of stock options that do not qualify, or NQSOs, (iii) the grant of stock options in lieu of cash Directors’ fees and (iv) grants of shares of restricted and unrestricted common stock.  The exercise price of stock options are determined by our compensation committee, but may not be less than 100% of the fair market value of the shares of our common stock on the date of grant.  At September 30, 2006, approximately 0.9 million shares of our common stock were reserved for issuance under the 1997 Plan.

2005 Stock Option and Incentive Plan

Subject to adjustments upon certain corporate transactions or events, up to a maximum of 3,500,000 shares, or the Fungible Pool Limit, may be granted as Options, Restricted Stock, Phantom Shares, dividend equivalent rights and other equity-based awards under the 2005 Plan; provided that, as described below, the manner in which the Fungible Pool Limit is finally determined can ultimately result in the issuance under the 2005 Plan of up to 4,375,000 shares (subject to adjustments upon certain corporate transactions or events).  Each share issued or to be issued in connection with ‘‘Full-Value Awards’’ (as defined below) that vest or are granted based on the achievement of certain performance goals that are based on (A) FFO growth, (B) total return to stockholders (either in absolute terms or compared with other companies in the market) or (C) a combination of the foregoing (as set forth in the 2005 Plan), shall be counted against the Fungible Pool Limit as 2.6 units.  “Full-Value Awards” are awards other than Options, Stock Appreciation Rights or other awards that do not deliver the full value at grant thereof of the underlying shares (e.g., Restricted Stock). Each share issued or to be issued in connection with any other Full-Value Awards shall be counted against the Fungible Pool Limit as 3.9 units.  Options, Stock Appreciation Rights and other awards that do not deliver the value at grant thereof of the underlying shares and that expire 10 years from the date of grant shall be counted against the Fungible Pool Limit as one unit.  Options, Stock Appreciation Rights and other awards that do not deliver the value at grant thereof of the underlying shares and that expire five years from the date of grant shall be counted against the Fungible Pool Limit as 0.8 of a unit, or five-year option.  Thus, under the foregoing rules, depending on the type of grants made, as many as 4,375,000 shares can be the subject of grants under the 2005 Plan. At the end of the third calendar year following the effective date of the 2005 Plan, (i) the three-year average of (A) the number of shares subject to awards granted in a single year, divided by (B) the number of shares of our outstanding common stock at the end of such year shall not exceed the (ii) greater of (A) 2% or (B) the mean of the applicable peer group.  For purposes of calculating the number of shares granted in a year in connection with the limitation set forth in the foregoing sentence, shares underlying Full-Value Awards will be taken into account as (i) 1.5 shares if our annual common stock price volatility is 53% or higher, (ii) two shares if our annual common stock price volatility is between 25% and 52%, and (iii) four shares if our annual common stock price volatility is less than 25%.  No award may be granted to any person who, assuming exercise of all options and payment of all awards held by such person, would own or be deemed to own more than 9.8% of the outstanding shares of the Company’s common stock.  In addition, subject to adjustment upon certain corporate transactions or events, a participant may not receive awards (with shares subject to awards being counted, depending on the type of award, in the proportions ranging from 0.8 to 3.9, as described above) in any one year covering more than 700,000 shares; thus, under this provision, depending on the type of grant involved, as many as 875,000 shares can be the subject of option grants to any one person in any year, and as many as 269,230 shares may be granted as restricted stock (or be the subject of other Full-Value Grants) to any one person in any year.  If an option or other award granted under the 2005 Plan expires or terminates, the common stock subject to any portion of the award that expires or terminates without having been exercised or paid, as the case may be, will again become available for the issuance of additional awards.  Shares of our common stock distributed under the 2005 Plan may be treasury shares or authorized but unissued shares.  Unless the 2005 Plan is previously terminated by the Board, no new Award may be granted under the 2005 Plan after the tenth anniversary of the date that such 2005 Plan was initially approved by the Board. At September 30, 2006, approximately 1.2 million shares of our common stock, calculated on a weighted basis, were available for issuance under the 2005 Plan, or 1.5 million if all shares available under the 2005 Plan were issued as five-year options.

Options granted under the plans are exercisable at the fair market value on the date of grant and, subject to termination of employment, generally expire ten years from the date of grant, are not transferable other than on death, and are generally exercisable in three to five annual installments commencing one year from the date of grant.

25




A summary of the status of our stock options as of September 30, 2006 and December 31, 2005 and changes during the periods then ended are presented below:

 

 

2006

 

2005

 

 

 

Options
Outstanding

 

Weighted
Average
Exercise
Price

 

Options
Outstanding

 

Weighted
Average
Exercise
Price

 

Balance at beginning of year

 

1,731,258

 

$

41.25

 

2,169,762

 

$

29.39

 

Granted

 

300,500

 

$

93.60

 

466,203

 

$

65.22

 

Exercised

 

(415,116

)

$

32.31

 

(888,374

)

$

27.34

 

Lapsed or cancelled

 

(44,666

)

$

40.58

 

(16,333