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

 

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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.

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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.

 

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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.

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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.

 

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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

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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):

 

 

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.

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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.  

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

 

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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.

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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.

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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.

 

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.

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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.

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