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


FORM 10-Q


o

 

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

 

 

 

 

 

For the quarterly period ended March 31, 2007

 

 

 

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

 

13-3956775

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

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 

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 59,414,026 as of April 30, 2007.

 




 

SL GREEN REALTY CORP.

INDEX

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

ITEM 1.

 

FINANCIAL STATEMENTS

 

 

 

 

PAGE

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2007 (unaudited) and December 31, 2006

3

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the three months ended March 31, 2007 and 2006 (unaudited)

4

 

 

 

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2007 (unaudited)

5

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006 (unaudited)

6

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

7

 

 

 

 

ITEM 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

32

 

 

 

 

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

46

 

 

 

 

ITEM 4.

 

CONTROLS AND PROCEDURES

46

 

 

 

 

PART II.

 

OTHER INFORMATION

47

 

 

 

 

ITEM 1.

 

LEGAL PROCEEDINGS

47

 

 

 

 

ITEM 1A.

 

RISK FACTORS

48

 

 

 

 

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

59

 

 

 

 

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

59

 

 

 

 

ITEM 4.

 

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

59

 

 

 

 

ITEM 5.

 

OTHER INFORMATION

59

 

 

 

 

ITEM 6.

 

EXHIBITS

59

 

 

 

 

SIGNATURES

 

 

61

 

2




PART I.

FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

Financial Statements

 

 

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

 

 

March 31
2007

 

December 31,
2006

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Commercial real estate properties, at cost:

 

 

 

 

 

Land and land interests

 

$

1,235,607

 

$

439,986

 

Building and improvements

 

4,930,419

 

2,111,970

 

Building leasehold and improvements

 

1,093,514

 

490,995

 

Property under capital lease

 

12,208

 

12,208

 

 

 

7,271,748

 

3,055,159

 

Less: accumulated depreciation

 

(297,365

)

(279,436

)

 

 

6,974,383

 

2,775,723

 

Assets held for sale

 

96,101

 

 

Cash and cash equivalents

 

499,728

 

117,178

 

Restricted cash

 

128,223

 

252,272

 

Tenant and other receivables, net of allowance of $12,114 and $11,079 in 2007 and 2006, respectively

 

53,040

 

34,483

 

Related party receivables

 

14,938

 

7,195

 

Deferred rents receivable, net of allowance of $12,756 and $10,925 in 2007 and 2006, respectively

 

103,267

 

96,624

 

Structured finance investments, net of discount of $14,542 and $14,804 in 2007 and 2006, respectively

 

688,303

 

445,026

 

Investments in unconsolidated joint ventures

 

743,978

 

686,069

 

Deferred costs, net

 

116,760

 

97,850

 

Other assets

 

207,064

 

119,807

 

Total assets

 

$

9,625,785

 

$

4,632,227

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Mortgage notes payable

 

$

2,156,575

 

$

1,190,379

 

Revolving credit facilities

 

 

 

Term loans and unsecured notes

 

2,692,730

 

525,000

 

Accrued interest payable and other liabilities

 

36,784

 

10,008

 

Accounts payable and accrued expenses

 

169,736

 

138,181

 

Deferred revenue/gain

 

44,082

 

43,721

 

Capitalized lease obligation

 

16,430

 

16,394

 

Deferred land leases payable

 

17,095

 

16,938

 

Dividend and distributions payable

 

47,427

 

40,917

 

Security deposits

 

39,103

 

27,913

 

Liabilities related to assets held for sale

 

74,636

 

 

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

 

100,000

 

100,000

 

Total liabilities

 

5,394,598

 

2,109,451

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

Minority interest in Operating Partnership

 

75,996

 

71,731

 

Minority interests in other partnerships

 

580,424

 

56,162

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

Series C preferred stock, $0.01 par value, $25.00 liquidation preference, 6,300 issued and outstanding at March 31, 2007 and December 31, 2006, respectively

 

151,981

 

151,981

 

Series D preferred stock, $0.01 par value, $25.00 liquidation preference, 4,000 issued and outstanding at March 31, 2007 and December 31, 2006, respectively

 

96,321

 

96,321

 

Common stock, $0.01 par value 100,000 shares authorized and 59,182 and 49,840 issued and outstanding at March 31, 2007 and December 31, 2006, respectively

 

592

 

498

 

Additional paid-in-capital

 

2,886,092

 

1,809,893

 

Accumulated other comprehensive income

 

11,568

 

13,971

 

Retained earnings

 

428,213

 

322,219

 

Total stockholders’ equity

 

3,574,767

 

2,394,883

 

Total liabilities and stockholders’ equity

 

$

9,625,785

 

$

4,632,227

 

 

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
March 31,

 

 

 

2007

 

2006

 

Revenues

 

 

 

 

 

Rental revenue, net

 

$

155,553

 

$

79,090

 

Escalation and reimbursement

 

28,612

 

13,927

 

Preferred equity and investment income

 

21,709

 

13,479

 

Other income

 

89,897

 

9,870

 

Total revenues

 

295,771

 

116,366

 

Expenses

 

 

 

 

 

Operating expenses including approximately $3,017 (2007) and $2,833 (2006) paid to affiliates

 

49,572

 

27,795

 

Real estate taxes

 

31,229

 

17,708

 

Ground rent

 

7,265

 

4,921

 

Interest

 

57,591

 

17,491

 

Amortization of deferred financing costs

 

3,301

 

714

 

Depreciation and amortization

 

37,991

 

15,636

 

Marketing, general and administrative

 

34,247

 

12,986

 

Total expenses

 

221,196

 

97,251

 

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

 

74,575

 

19,115

 

Equity in net income from unconsolidated joint ventures

 

9,354

 

9,968

 

Income from continuing operations before minority interest and discontinued operations

 

83,929

 

29,083

 

Equity in net gain on sale of interest in unconsolidated joint ventures/ real estate

 

31,509

 

 

Minority interest in other partnerships

 

(3,922

)

(851

)

Minority interest in Operating Partnership attributable to continuing operations

 

(6,875

)

(1,190

)

Income from continuing operations

 

104,641

 

27,042

 

Net income from discontinued operations, net of minority interest

 

526

 

1,659

 

Gain on sale of real estate

 

47,229

 

 

Net income

 

152,396

 

28,701

 

Preferred stock dividends

 

(4,969

)

(4,969

)

Net income available to common stockholders

 

$

147,427

 

$

23,732

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

Net income from continuing operations before discontinued operations

 

$

1.20

 

$

0.51

 

Net income from discontinued operations

 

0.01

 

0.04

 

Gain on sale of real estate

 

0.83

 

 

Gain on sale of unconsolidated joint ventures

 

0.56

 

 

Net income available to common stockholders

 

$

2.60

 

$

0.55

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

Net income from continuing operations before discontinued operations

 

$

1.23

 

$

0.50

 

Net income from discontinued operations

 

0.01

 

0.04

 

Gain on sale of real estate

 

0.77

 

 

Gain on sale of unconsolidated joint ventures

 

0.52

 

 

Net income available to common stockholders

 

$

2.53

 

$

0.54

 

 

 

 

 

 

 

Dividends per share

 

$

0.70

 

$

0.60

 

Basic weighted average common shares outstanding

 

56,649

 

42,858

 

Diluted weighted average common shares and common share equivalents outstanding

 

60,930

 

46,608

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Series C

 

Series D

 

Common Stock

 

Additional 

 

Other

 

 

 

 

 

 

 

 

 

Preferred

 

Preferred

 

 

 

Par

 

Paid-

 

Comprehensive

 

Retained

 

 

 

Comprehensive

 

 

 

Stock

 

Stock

 

Shares

 

Value

 

In-Capital

 

Income

 

Earnings

 

Total

 

Income

 

Balance at December 31, 2006

 

$

151,981

 

$

96,321

 

49,840

 

$

498

 

$

1,809,893

 

$

13,971

 

$

322,219

 

$

2,394,883

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

152,396

 

152,396

 

$

152,396

 

Net unrealized loss on derivative instruments

 

 

 

 

 

 

 

 

 

 

 

(2,403

)

 

 

(2,403

)

(2,403

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(270

 

Preferred dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,969

)

(4,969

)

 

 

Redemption of units and DRIP proceeds

 

 

 

 

 

94

 

1

 

4,253

 

 

 

 

 

4,254

 

 

 

Deferred compensation plan & stock award, net

 

 

 

 

 

18

 

1

 

476

 

 

 

 

 

477

 

 

 

Amortization of deferred compensation plan

 

 

 

 

 

 

 

 

 

11,821

 

 

 

 

 

11,821

 

 

 

Proceeds from stock options exercised

 

 

 

 

 

236

 

2

 

8,722

 

 

 

 

 

8,724

 

 

 

Common stock issued in connection with Reckson acquisition

 

 

 

 

 

8,994

 

90

 

1,048,588

 

 

 

 

 

1,048,678

 

 

 

Stock-based compensation—
fair value

 

 

 

 

 

 

 

 

 

2,339

 

 

 

 

 

2,339

 

 

 

Cash distribution declared ($0.70 per common share of which none represented a return of capital for federal income tax purposes)

 

 

 

 

 

 

 

 

 

 

 

 

 

(41,433

)

(41,433

)

 

 

Balance at March 31, 2007

 

$

151,981

 

$

96,321

 

59,182

 

$

592

 

$

2,886,092

 

$

11,568

 

$

428,213

 

$

3,574,767

 

$

149,723

 

 

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)

 

 

Three months

 

 

 

Ended March 31,

 

 

 

2007

 

2006

 

Operating Activities

 

 

 

 

 

Net income

 

$

152,396

 

$

28,701

 

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

 

 

 

 

 

Non-cash adjustments related to income from discontinued operations

 

653

 

1,237

 

Depreciation and amortization

 

37,991

 

15,636

 

Gain on sale of real estate

 

(47,229

)

—-

 

Equity in net income from unconsolidated joint ventures

 

(9,354

)

(9,968

)

Equity in net gain on sale of unconsolidated joint ventures

 

(31,509

)

—-

 

Distributions of cumulative earnings from unconsolidated joint ventures

 

9,995

 

11,396

 

Minority interest

 

10,797

 

2,041

 

Deferred rents receivable

 

(8,156

)

(4,353

)

Other non-cash adjustments

 

12,595

 

2,030

 

Changes in operating assets and liabilities:

 

 

 

 

 

Restricted cash — operations

 

(19,469

)

(1,409

)

Tenant and other receivables

 

(19,592

)

2,901

 

Related party receivables

 

(7,743

)

1,378

 

Deferred lease costs

 

(3,884

)

(7,907

)

Other assets

 

(12,237

)

2,392

 

Accounts payable, accrued expenses and other liabilities

 

69,475

 

(15,901

)

Deferred revenue and land lease payable

 

518

 

5,225

 

Net cash provided by operating activities

 

135,247

 

33,399

 

Investing Activities

 

 

 

 

 

Acquisitions of real estate property

 

(4,710,770

)

(242,456

)

Proceeds from Asset Sale

 

1,964,914

 

—-

 

Additions to land, buildings and improvements

 

(24,251

)

(13,537

)

Escrowed cash — capital improvements/acquisition deposits

 

143,518

 

2,670

 

Investments in unconsolidated joint ventures

 

(77,570

)

(17,413

)

Distributions in excess of cumulative earnings from unconsolidated joint ventures

 

43,150

 

33,986

 

Proceeds from disposition of real estate/ partial interest in property

 

58,421

 

8,847

 

Other investments

 

(71,265

)

(12,580

)

Structured finance and other investments net of repayments/participations

 

(243,015

)

(66,020

)

Net cash used in investing activities

 

(2,916,868

)

(306,503

)

Financing Activities

 

 

 

 

 

Proceeds from mortgage notes payable

 

788,870

 

148,894

 

Repayments of mortgage notes payable

 

(15,952

)

(1,025

)

Proceeds from revolving credit facilities, term loans and unsecured notes

 

1,619,006

 

241,645

 

Repayments of revolving credit facilities and term loans

 

(708,000

)

(117,000

)

Net proceeds from common stock issued for Reckson Merger

 

1,010,078

 

—-

 

Proceeds from stock options exercised

 

8,724

 

11,577

 

Other financing activities

 

522,798

 

14,765

 

Dividends and distributions paid

 

(39,676

)

(28,520

)

Deferred loan costs and capitalized lease obligation

 

(21,677

)

(801

)

Net cash provided by financing activities

 

3,164,171

 

269,535

 

Net increase (decrease) in cash and cash equivalents

 

382,550

 

(3,569

)

Cash and cash equivalents at beginning of period

 

117,178

 

24,104

 

Cash and cash equivalents at end of period

 

$

499,728

 

$

20,535

 

 

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

6




SL Green Realty Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2007

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 March 31, 2007, minority investors held, in the aggregate, a 4.2% limited partnership interest in the operating partnership.

On January 25, 2007, we completed the acquisition, or the Reckson Merger, of all of the outstanding shares of common stock of Reckson Associates Realty Corp., or Reckson, pursuant to the terms of the Agreement and Plan of Merger, dated as of August 3, 2006, as amended, the Merger Agreement, among SL Green, Wyoming Acquisition Corp., or Wyoming, Wyoming Acquisition GP LLC, Wyoming Acquisition Partnership LP, Reckson and Reckson Operating Partnership, L.P., or ROP. Pursuant to the terms of the Merger Agreement, each of the issued and outstanding shares of common stock of Reckson were converted into (i) $31.68 in cash, (ii) 0.10387 of a share of the common stock, par value $0.01 per share, of SL Green and (iii) a prorated dividend in an amount equal to approximately $0.0977 in cash. We also assumed an aggregate of approximately $226.3 million of Reckson mortgage debt, approximately $287.5 million of Reckson convertible public debt and approximately $967.8 million of Reckson public unsecured notes.  ROP is a subsidiary of our operating partnership.

On January 25, 2007, we completed the sale, or Asset Sale, of certain assets of ROP to an asset purchasing venture led by certain of Reckson’s former executive management, or the Buyer, for a total consideration of approximately $2.0 billion. SL Green caused ROP to transfer the following assets to the Buyer in the Asset Sale: (1) certain real property assets and/or entities owning such real property assets, in either case, of ROP and 100% of certain loans secured by real property, all of which are located in Long Island, New York; (2) certain real property assets and/or entities owning such real property assets, in either case, of ROP located in White Plains and Harrison, New York; (3) all of the real property assets and/or entities owning 100% of the interests in such real property assets, in either case, of ROP located in New Jersey; (4) the entity owning a 25% interest in Reckson Australia Operating Company LLC, Reckson’s Australian management company (including its Australian licensed responsible entity), and other related entities, and ROP and ROP subsidiaries’ rights to and interests in, all related contracts and assets, including, without limitation, property management and leasing, construction services and asset management contracts and services contracts; (5) the direct or indirect interest of Reckson in Reckson Asset Partners, LLC, an affiliate of RSVP and all of ROP’s rights in and to certain loans made by ROP to Frontline Capital Group, the bankrupt parent of RSVP, and other related entities, which will be purchased by a 50/50 joint venture with an affiliate of SL Green; (6) a 50% participation interest in certain loans made by a subsidiary of ROP that are secured by four real property assets located in Long Island, New York; and (7) 100% of certain loans secured by real property located in White Plains and New Rochelle, New York.

As of March 31, 2007, we owned the following interests in commercial office properties primarily in midtown Manhattan, a borough of New York City, or Manhattan, as well as Long Island City, Westchester County, Connecticut and New Jersey, which are collectively known as the Suburban assets:

Location

 

Ownership

 

Number of
Properties

 

Square Feet

 

Weighted Average
Occupancy 
(1)

 

Manhattan

 

Consolidated properties

 

26

 

14,145,000

 

98.2

%

 

 

Unconsolidated properties

 

8

 

7,966,900

 

95.9

%

 

 

 

 

 

 

 

 

 

 

Suburban

 

Consolidated properties

 

28

 

4,660,900

 

90.5

%

 

 

Unconsolidated properties

 

1

 

1,402,000

 

100.0

%

 

 

 

 

63

 

28,174,800

 

 

 


(1)             The weighted average occupancy represents the total leased square feet divided by total available square feet.

7




 

We also own an aggregate of 505,000 square feet of retail (nine) and development (one) 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, as well as 64.83 units of the Class B limited partner interest in Gramercy’s operating partnership.  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 2007 operating results for the period presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.  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, 2006.

The balance sheet at December 31, 2006 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 46, “Interpretation No. 46R, or FIN 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.  The interest that we do not own is included in “Minority Interest-Other Partnerships” on the balance sheet.  All significant intercompany balances and transactions have been eliminated.

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. Our adoption of EITF 04-5 did not have any effect on net income or stockholders’ equity.

We consolidate our investment in 919 Third Avenue as we own a 51% controlling interest.

Investment in Commercial Real Estate Properties

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

8




 

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.

We have not yet obtained all the information necessary to finalize our estimates to complete the purchase price allocations in accordance with SFAS No. 141 related to the Reckson Merger.  The purchase price allocations will be finalized once the information we identified has been received, which should not be longer than one year from the date of acquisition.

As a result of our evaluations, under SFAS No. 141, of acquisitions made, we recognized an increase of approximately $641,000 and $340,000 in rental revenue for the three months ended March 31, 2007 and 2006, 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 debt of approximately $1.1 million and $189,000 for the three months ended March 31, 2007 and 2006, respectively.

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

 

 

Intangible
Liabilities

 

2007

 

$

1,957

 

2008

 

2,605

 

2009

 

2,356

 

2010

 

1,857

 

2011

 

1,540

 

Thereafter

 

2,753

 

 

 

$

13,068

 

 

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.

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 $1.5 million and $1.1 million in estimated federal, state and local taxes during the three months ended March 31, 2007 and 2006.

Stock-Based Employee Compensation Plans

We have a stock-based employee compensation plan, described more fully in Note 13.  We account for this plan under SFAS No. 123 “Shared Based Payment,” revised, or SFAS No. 123-R.

9




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 during the three months ended March 31, 2007 and 2006.

 

 

2007

 

2006

 

Dividend yield

 

2.1

%

2.40

%

Expected life of option

 

5 years

 

5 years

 

Risk-free interest rate

 

4.61

%

4.80

%

Expected stock price volatility

 

21.48

%

16.61

%

 

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 months ended March 31, 2007 and 2006 (in thousands, except per share amounts):

 

 

Three months Ended

 

 

 

March 31,

 

 

 

2007

 

2006

 

Net income available to common stockholders

 

$

147,427

 

$

23,732

 

Deduct stock option expense-all awards

 

(1,662

)

(492

)

Add back stock option expense included in net income

 

1,484

 

231

 

Allocation of compensation expense to minority interest

 

74

 

25

 

Pro forma net income available to common stockholders

 

$

147,323

 

$

23,496

 

Basic earnings per common share-historical

 

$

2.60

 

$

0.55

 

Basic earnings per common share-pro forma

 

$

2.60

 

$

0.54

 

Diluted earnings per common share-historical

 

$

2.53

 

$

0.54

 

Diluted earnings per common share-pro forma

 

$

2.53

 

$

0.53

 

 

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.

10




 

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, we also have properties located in Westchester, Connecticut, New Jersey and Long Island.  The tenants located in our buildings operate in various industries.  Other than one tenant at 1515 Broadway who contributed approximately 6.4% of our annualized rent, no other tenant in the portfolio contributed more than 5.7% of our annualized rent, including our share of joint venture annualized rent, at March 31, 2007.  Approximately 7%, 6%, 6% and 6% of our annualized rent, including our share of joint venture annualized rent, was attributable to 1221 Avenue of the Americas, 1515 Broadway, 420 Lexington Avenue and 1185 Avenue of the Americas, respectively, for the quarter ended March 31, 2007.  One borrower accounted for more than 10.0% of the revenue earned on structured finance investments during the three months ended March 31, 2007.

Reclassification

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

New Accounting Pronouncements

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. The adoption of FIN 48, did not have a material impact on our consolidated financial statements.

3.  Property Acquisitions

In January 2007, we acquired Reckson for approximately $6.0 billion, inclusive of transaction costs.  Simultaneously, we sold approximately $2.0 billion of the Reckson assets to an asset purchasing venture led by certain of Reckson’s former executive management.  The transaction included the acquisition of 30 properties encompassing approximately 9.2 million square feet, of which five properties encompassing approximately 4.2 million square feet are located in Manhattan.

In January 2007, we acquired 300 Main Street in Stamford, Connecticut and 399 Knollwood Road in White Plains, New York for approximately $46.6 million, from affiliates of RPW Group.  These commercial office buildings encompass 275,000 square feet, inclusive of 50,000 square feet of garage parking at 300 Main Street.

In April 2007, we completed the acquisition of 331 Madison Avenue and 48 East 43rd Street for a total of $73.0 million. Both 331 Madison Avenue and 48 East 43rd Street are located adjacent to 317 Madison Avenue, a property that SL Green acquired in 2001. 331 Madison Avenue is an approximately 92,000-square foot, 14-story office building. The 22,850-square-foot 48 East 43rd Street property is a seven-story loft building that was later converted to office use.

In March 2007, we entered into an agreement to acquire an office property located at 500 West Putnam Avenue in Greenwich, Connecticut for $56.0 million. This property is a four-story, 121,500-square-foot office building. This transaction, which is subject to customary closing conditions, is expected to close during the second quarter of 2007. See Note 4 regarding the sale of 125 Broad Street in a related transaction.

11




 

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 three months ended March 31, 2007 and 2006 as though the acquisitions of 521 Fifth Avenue (March 2006), the investment in 609 Fifth Avenue, the July and November 2006 common stock offerings as well as the Reckson Merger were completed on January 1, 2006.  The supplemental pro forma operating data is not necessarily indicative of what the actual results of operations would have been assuming the transactions had been completed as set forth above, nor do they purport to represent our results of operations for future periods.  In addition, the following supplemental pro forma operating data does not present the sale of assets through March 31, 2007.  The Company accounted for the acquisition of assets utilizing the purchase method of accounting.

 

 

2007

 

2006

 

Pro forma revenues

 

$

330,220

 

$

228,653

 

Pro forma net income

 

$

146,670

 

$

12,571

 

Pro forma earnings per common share-basic

 

$

2.59

 

$

0.22

 

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

 

$

2.48

 

$

0.21

 

Pro forma common shares-basic

 

56,649

 

58,378

 

Pro forma common share and common share equivalents-diluted

 

60,930

 

62,127

 

 

4.  Property Dispositions and Assets Held for Sale

In February 2007, we sold the fee interests in 70 West 36th Street for approximately $61.5 million, excluding closing costs.  The property is approximately 151,000 square feet.  We recognized a gain on sale of approximately $47.2 million.

In March 2007, we entered into an agreement to sell our condominium interests in 125 Broad Street for approximately $273.0 million, excluding closing costs.  The property is approximately 525,000 square feet.  This transaction, which is subject to customary closing conditions, is expected to close in the second quarter of 2007.

At March 31, 2007, discontinued operations included the results of operations of real estate assets sold prior to that date.  This included 286 and 290 Madison Avenue, sold in July 2006, 1140 Avenue of the Americas, sold in August 2006, and 125 Broad Street which was considered as held for sale at March 31, 2007.

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 months ended March 31, 2007 and 2006 (in thousands).

 

 

 

Three months Ended

 

 

 

March 31,

 

 

 

2007

 

2006

 

Revenues

 

 

 

 

 

Rental revenue

 

$

3,840

 

$

7,096

 

Escalation and reimbursement revenues

 

1,081

 

1,710

 

Other income

 

29

 

48

 

Total revenues

 

4,950

 

8,854

 

Operating expense

 

1,838

 

3,096

 

Real estate taxes

 

607

 

1,416

 

Ground rent

 

 

87

 

Interest

 

1,326

 

1,359

 

Depreciation and amortization

 

628

 

1,148

 

Total expenses

 

4,399

 

7,106

 

Income from discontinued operations

 

551

 

1,748

 

Gain on disposition of discontinued operations

 

 

 

Minority interest in operating partnership

 

(25

)

(89

)

Income from discontinued operations, net of minority interest

 

$

526

 

$

1,659

 

 

12




 

5.  Structured Finance Investments

During the three months ended March 31, 2007 and 2006, we originated approximately $311.4 million and $66.1 million in structured finance and preferred equity investments (net of discount), respectively.  In addition, we assumed approximately $136.9 million of structured finance investments as part of the Reckson Merger.  There were approximately $205.0 million and none in repayments and participations during those periods, respectively.  At March 31, 2007 and December 31, 2006 all loans were performing in accordance with the terms of the loan agreements.

As of March 31, 2007 and December 31, 2006, we held the following structured finance investments, excluding preferred equity investments, with an aggregate weighted average current yield of approximately 10.6% (in thousands):

 

 

 

 

 

 

 

2007

 

2006

 

Initial

 

Loan

 

Gross

 

Senior

 

Principal

 

Principal

 

Maturity

 

Type

 

Investment

 

Financing

 

Outstanding

 

Outstanding

 

Date

 

Mezzanine Loan (1)

 

$

3,500

 

$

15,000

 

$

3,500

 

$

3,500

 

September 2021

 

Mezzanine Loan (1) (2)

 

85,000

 

225,000

 

89,954

 

31,226

 

December 2020

 

Mezzanine Loan (1)

 

28,500

 

 

28,500

 

28,500

 

August 2008

 

Mezzanine Loan (1)

 

60,000

 

205,000

 

58,053

 

58,013

 

February 2016

 

Mezzanine Loan (1)

 

25,000

 

200,000

 

25,000

 

25,000

 

May 2016

 

Mezzanine Loan (1)

 

35,000

 

165,000

 

33,610

 

33,082

 

October 2016

 

Mezzanine Loan (1) (3)

 

75,000

 

4,200,000

 

64,295

 

64,100

 

December 2016

 

Mezzanine Loan (1)

 

15,000

 

 

15,000

 

 

February 2010

 

Mezzanine Loan (3)

 

30,000

 

1,007,908

 

30,265

 

 

January 2008

 

Mezzanine Loan (1)

 

10,000

 

4,500

 

10,000

 

 

October 2007

 

Mezzanine Loan (1)

 

30,000

 

91,500

 

30,000

 

 

December 2007

 

Mezzanine Loan (1)(2)

 

25,000

 

314,830

 

26,723

 

 

November 2009

 

Mezzanine Loan (1)

 

1,000

 

 

1,000

 

 

January 2010

 

Mezzanine Loan (1)

 

500

 

 

500

 

 

December 2009

 

Mezzanine Loan (1)

 

14,189

 

15,661

 

9,938

 

 

April 2008

 

Mezzanine Loan (3) (5)

 

60,366

 

25,570,000

 

60,366

 

 

March 2009

 

Junior Participation (1)

 

37,500

 

477,500

 

37,500

 

37,500

 

January 2014

 

Junior Participation (1) (4)

 

4,000

 

44,000

 

3,905

 

3,911

 

August 2010

 

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

 

12,000

 

June 2007

 

 

 

$

583,555

 

$

32,776,899

 

$

572,109

 

$

328,832

 

 

 


(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)         Gramercy holds a pari passu interest in a mezzanine loan on this asset.

(4)         This is an amortizing loan.

(5)      This loan was repaid in May 2007.

 

Preferred Equity Investments

As of March 31, 2007 and December 31, 2006, we held the following preferred equity investments with an aggregate weighted average current yield of approximately 10.9% (in thousands):

 

 

 

 

 

 

 

2007

 

2006

 

Initial

 

 

 

Gross

 

Senior

 

Amount

 

Amount

 

Mandatory

 

Type

 

Investment

 

Financing

 

Outstanding

 

Outstanding

 

Redemption

 

Preferred equity (1)

 

$

75,000

 

$

69,724

 

$

3,694

 

$

3,694

 

July 2014

 

Preferred equity (1)

 

15,000

 

2,350,000

 

15,000

 

15,000

 

February 2015

 

Preferred equity (1) (2)

 

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

 

7,000

 

June 2009

 

Preferred equity (3)

 

32,500

 

385,000

 

32,500

 

32,500

 

July 2007

 

 

 

$

187,500

 

$

3,103,724

 

$

116,194

 

$

116,194

 

 

 


(1)             This is a fixed rate investment.

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

(3)             Gramercy holds a pari passu preferred equity investment in this asset.

13




 

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, SITQ Immobilier, a subsidiary of Caisse de depot et placement du Quebec, or SITQ, a fund managed by JP Morgan Investment Management, or JP Morgan, 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 March 31, 2007 (in thousands):

 

 

 

 

 

Ownership

 

Economic

 

Square

 

 

 

Acquisition

Property

 

Partner

 

Interest

 

Interest

 

Feet

 

Acquired

 

Price (1)

1221 Avenue of the Americas (2)

 

RGII

 

45.00%

 

45.00%

 

2,550

 

12/03

 

$

1,000,000

1250 Broadway (3)

 

SITQ

 

55.00%

 

66.18%

 

670

 

08/99

 

$

121,500

1515 Broadway (4)

 

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

Five Madison Avenue — Clock Tower (5)

 

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

800 Third Avenue

 

Private Investors

 

47.34%

 

47.34%

 

526

 

12/06

 

$

285,000

521 Fifth Avenue

 

CIF

 

50.10%

 

50.10%

 

460

 

12/06

 

$

240,000

One Court Square

 

JP Morgan

 

30.00%

 

30.00%

 

1,402

 

01/07

 

$

533,500


(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 14.8% of property’s annualized rent at March 31, 2007. We do not manage this joint venture.

 

 

(3)

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.

 

 

(4)

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 85.7% of this joint venture’s annualized rent at March 31, 2007.

 

 

(5)

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 performance thresholds are achieved.

 

 

(6)

We invested approximately $109.5 million in this asset through the origination of a loan secured by up to 47% of the interests in the property’s ownership, with an option to convert the loan to an equity interest. Certain existing members have the right to re-acquire approximately 4% of the property’s equity.

 

In March 2007, a joint venture between our company, SITQ and SEB Immobilier — Investment GmbH sold One Park Avenue for $550.0 million. We received approximately $108.7 million in proceeds from the sale, approximately $77.2 million of which represented an incentive distribution under our joint venture arrangement with SEB and the balance of approximately $31.5 million was recognized as gain on sale.

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 March 31, 2007 and December 31, 2006, respectively, are as follows (in thousands):

 

14




 

Property

 

Maturity 
Date

 

Interest 
Rate  (1)

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

1221 Avenue of the Americas (2)

 

12/2010

 

5.86

%

$

170,000

 

$

170,000

 

1250 Broadway (3)

 

08/2007

 

6.12

%

$

115,000

 

$

115,000

 

1515 Broadway (4)

 

11/2007

 

6.23

%

$

625,000

 

$

625,000

 

100 Park Avenue

 

11/2015

 

6.52

%

$

175,000

 

$

175,000

 

One Madison Avenue — South Building

 

05/2020

 

5.91

%

$

680,815

 

$

683,374

 

379 West Broadway

 

12/2007

 

7.57

%

$

13,029

 

$

12,872

 

One Madison Avenue — Clock Tower (5)

 

11/2007

 

7.11

%

$

131,090

 

$

127,323

 

Mack-Green joint venture (6)

 

08/2014

 

7.86

%

$

102,488

 

$

102,519

 

21 West 34th Street

 

12/2016

 

5.75

%

$

100,000

 

$

100,000

 

800 Third Avenue

 

08/2008

 

5.95

%

$

20,910

 

$

20,910

 

521 Fifth Avenue

 

04/2011

 

6.32

%

$

140,000

 

$

140,000

 

One Court Square

 

12/2010

 

4.91

%

$

315,000

 

—-

 


(1)

Interest rate represents the effective all-in weighted average interest rate for the quarter ended March 31, 2007.

(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)

The interest only loan carried an interest rate of 120 basis points over the 30-day LIBOR, but was reduced to 80 basis points over the 30-day LIBOR in December 2006. The loan is subject to two one-year as-of-right renewal extensions. The joint venture extended this loan for one year.

(4)

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.

(5)

The interest only loan carries an interest rate of 160 basis points over the 30-day LIBOR.

(6)

Comprised of $90.5 million variable rate debt that matures in May 2008 and $12.0 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, Mack-Green and 800 Third Avenue. We are entitled to receive fees for providing management, leasing, construction supervision and asset management services to our joint ventures. We earned approximately $3.0 million and $1.5 million from these services for the three months ended March 31, 2007, and 2006, respectively. In addition, we have the ability to earn incentive fees based on the ultimate financial performance of certain of the joint venture properties.

Gramercy Capital Corp.

In April 2004, we formed Gramercy as a 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.  It also established a real estate securities business that will focus on the acquisition, trading and financing of commercial mortgage backed securities and other real estate related securities.  Gramercy qualified as a REIT for federal income tax purposes and expects to qualify for its current fiscal year.  In August 2004, Gramercy sold 12.5 million shares of common stock in its initial public offering at a price of $15.00 per share, for a total offering of $187.5 million.  As part of the offering, which closed on August 2, 2004, we purchased 3,125,000 shares, or 25%, of Gramercy, for a total investment of approximately $46.9 million.  During the term of Gramercy’s origination agreement, we will have the right to purchase 25% of the shares in any future offering of Gramercy’s common stock in order to maintain our percentage ownership interest in Gramercy.  At March 31, 2007 we held 6,418,333 shares of Gramercy’s common stock representing a total investment of approximately $113.7 million.  The market value of our investment in Gramercy was approximately $196.9 million at March 31, 2007.

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.

In connection with Gramercy’s initial public offering, GKK Manager LLC, or the Manager, an affiliate of ours, entered into a management agreement with Gramercy, which provided for an initial term through December 2007, with automatic one-year extension options and certain termination rights.  In April 2006, Gramercy’s board of directors approved, among other things, an extension of the management

15




 

agreement through December 2009.  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 months ended March 31, 2007 and 2006, we received an aggregate of approximately $2.7 million and $2.2 million, respectively, in fees under the management agreement and $1.1 million and $0.5 million under the collateral management agreement.

To provide an incentive for the Manager to enhance the value of Gramercy’s common stock, we, along with the other holders of Class B limited partnership 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 $2.8 million and $1.2 million under this agreement for the three months ended March 31, 2007, and 2006, 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. of its investment in Gramercy.  We recorded compensation expense of approximately $0.7 million and $0.3 million for the three months ended March 31, 2007 and 2006, respectively, related to these awards.  After giving effect to these awards, we own 64.83 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 $1.33 million per year, increasing 3% annually over the prior year. For the three months ended March 31, 2007 and 2006, the Manager received an aggregate of approximately $1.1 million and $0.8 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.  Gramercy also has a joint venture investment along with us in 55 Corporate Drive, NJ.  See Note 5 for information of our structured finance investments in which Gramercy also holds an interest.

16




 

The condensed combined balance sheets for the unconsolidated joint ventures, including Gramercy, at March 31, 2007 and December 31, 2006, are as follows (in thousands):

 

 

March 31,
2007

 

December 31,
2006

 

Assets

 

 

 

 

 

Commercial real estate property, net

 

$

3,976,763

 

$

3,760,477

 

Structured finance investments

 

2,321,893

 

2,144,151

 

Other assets

 

654,489

 

783,754

 

Total assets

 

$

6,953,145

 

$

6,688,382

 

 

Liabilities and members’ equity

 

 

 

 

 

Mortgages payable

 

$

2,682,857

 

$

2,605,023

 

Other loans

 

2,200,528

 

2,156,662

 

Other liabilities

 

144,898

 

141,504

 

Members’ equity

 

1,924,862

 

1,785,193

 

Total liabilities and members’ equity

 

$

6,953,145

 

$

6,688,382

 

Company’s net investment in unconsolidated joint ventures

 

$

743,978

 

$

686,069

 

 

The condensed combined statements of operations for the unconsolidated joint ventures, including Gramercy from acquisition date through March 31, 2007 and 2006 are as follows (in thousands):

 

 

Three months Ended

 

 

 

March 31,

 

 

 

2007

 

2006

 

Total revenues

 

$

191,123

 

$

145,559

 

Operating expenses

 

42,161

 

32,383

 

Real estate taxes

 

20,197

 

17,417

 

Interest

 

76,359

 

49,615

 

Depreciation and amortization

 

22,825

 

18,108

 

Total expenses

 

161,542

 

117,523

 

Net income before gain on sale

 

$

29,581

 

$

28,036

 

Company’s equity in net income of unconsolidated joint ventures

 

$

9,354

 

$

9,968

 

 

7.  Investment in and Advances to Affiliates

Service Corporation

Income from management, leasing and construction contracts from third parties and joint venture properties is realized by the Service Corporation.  In order to maintain our qualification as a REIT, we, through our operating partnership, own 100% of the non-voting common stock (representing 95% of the total equity) of the Service Corporation our operating partnership receives substantially all of the cash flow from the Service Corporation’s operations through dividends on its equity interest.  All of the voting common stock of the Service Corporation (representing 5% of the total equity) is held by our affiliate.  This controlling interest gives the affiliate the power to elect all directors of the Service Corporation.  Effective July 1, 2003, we consolidated the operations of the Service Corporation because it is considered to be a variable interest entity under FIN 46 and we are the primary beneficiary.  For the three months ended March 31, 2007 and 2006, the Service Corporation earned approximately $3.5 million and $1.3 million of revenue and incurred approximately $2.6 million and $1.9 million in expenses, respectively.  Effective January 1, 2001, the Service Corporation elected to be treated 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.

eEmerge

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

17




 

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 44PthP 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 March 31, 2007 and December 31, 2006 was approximately $3.3 million and $3.6 million, respectively.

8.

Deferred Costs

 

 

 

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

 

 

2007

 

2006

 

Deferred financing

 

$

50,227

 

$

28,584

 

Deferred leasing

 

117,575

 

115,147

 

 

 

167,802

 

143,731

 

Less accumulated amortization

 

(51,042

)

(45,881

)

 

 

$

116,760

 

$

97,850

 

 

18




9.  Mortgage Notes Payable

The first mortgage notes payable collateralized by the respective properties and assignment of leases at March 31, 2007 and December 31, 2006, respectively, were as follows (in thousands):

Property

 

Maturity
Date

 

Interest
Rate(2)

 

2007

 

2006

 

711 Third Avenue(1)

 

6/2015

 

4.99

%

$

120,000

 

$

120,000

 

420 Lexington Avenue(1)

 

11/2010

 

8.44

%

114,546

 

115,182

 

673 First Avenue(1)

 

2/2013

 

5.67

%

33,640

 

33,816

 

125 Broad Street(3)

 

 

 

 

73,985

 

220 East 42nd Street(1)

 

12/2013

 

5.24

%

209,095

 

210,000

 

625 Madison Avenue(1)

 

11/2015

 

6.27

%

101,331

 

101,834

 

55 Corporate Drive

 

12/2015

 

5.75

%

95,000

 

95,000

 

609 Fifth Avenue(1)

 

10/2013

 

5.85

%

101,490

 

101,807

 

609 Partners, LLC

 

7/2014

 

5.00

%

63,891

 

63,891

 

485 Lexington Avenue

 

2/2017

 

5.61

%

450,000

 

 

1604-1610 Broadway

 

3/2012

 

5.66

%

27,000

 

 

120 West 45th Street

 

2/2017

 

6.12

%

170,000

 

 

919 Third Avenue(4)

 

7/2018

 

6.87

%

234,221

 

 

100 Summit Road(5)

 

4/2007

 

8.50

%

12,318

 

 

300 Main Street

 

2/2017

 

5.75

%

11,500

 

 

399 Knollwood Rd

 

3/2014

 

5.75

%

19,234

 

 

70 West 36th Street(6)

 

 

 

 

11,199

 

Total fixed rate debt

 

 

 

 

 

1,763,266

 

926,714

 

1551/1555 Broadway

 

8/2008

 

7.33

%

79,656

 

78,208

 

141 Fifth Avenue(7)

 

9/2007

 

7.57

%

10,653

 

10,457

 

717 Fifth Avenue(8)

 

9/2008

 

6.92

%

175,000

 

175,000

 

Landmark Square

 

2/2009

 

7.17

%

128,000

 

 

Total floating rate debt

 

 

 

 

 

393,309

 

263,665

 

Total mortgage notes payable

 

 

 

 

 

$

2,156,575

 

$

1,190,379

 


(1)     Held in bankruptcy remote special purpose entity.

(2)     Effective interest rate for the quarter ended March 31, 2007.

(3)     The balance on this mortgage at March 31, 2007 was included in liabilities related to assets held for sale.

(4)     We own a 51% interest in the joint venture that is the borrower on this loan.  This loan is non-recourse to us.

(5)     This loan will be repaid in May 2007.

(6)     We sold this property in March 2007.

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

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

 

At March 31, 2007 and December 31, 2006 the gross book value of the properties collateralizing the mortgage notes was approximately $3.2 billion and $1.6 billion, respectively.

For the three months ended March 31, 2007 and 2006, we incurred approximately $60.9 million and $18.2 million of interest expense, respectively, excluding interest which was capitalized of approximately $3.9 million and $2.5 million, respectively.

Mortgage Recording Tax - Hypothecated Loan

We had a credit loan totaling approximately $250.0 million from Wachovia Bank, National Association (“Wachovia”) at December 31, 2006.  This loan was collateralized by the mortgage encumbering our interest in 485 Lexington Avenue.  The loan was also collateralized by an equivalent amount of our cash, which was held by Wachovia and invested in US Treasury securities.  Interest earned on the cash collateral was applied by Wachovia to service the loan with interest rates commensurate with that of a portfolio of six-month US Treasury securities.  We, along with Wachovia, each had the right of offset and, therefore, the loan and the cash collateral were presented on a net basis in the consolidated balance sheet at December 31, 2006.  The purpose of this loan was to preserve mortgage recording tax credits for future potential refinancing for which these credits would be applicable.  At the same time, the underlying mortgage remains a bona-fide debt to Wachovia.  On January 22, 2007, we refinanced 485 Lexington Avenue at which time this mortgage was assigned to the new lender and we repaid an equivalent amount of the loan.

19




10.  Corporate Indebtedness

2005 Unsecured Revolving Credit Facility

We have a $800.0 million unsecured revolving credit facility.  We increased the capacity under the 2005 unsecured revolving credit facility from $500.0 million in January 2007.  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.  This facility matures in September 2008 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 balance and carried a spread over LIBOR of 110 basis points at March 31, 2007.  Availability under the 2005 unsecured revolving credit facility was further reduced by the issuance of approximately $15.3 million in letters of credit.  The effective all-in interest rate on the 2005 unsecured revolving credit facility was 6.42% for the three months ended March 31, 2007.  The 2005 unsecured revolving credit facility includes certain restrictions and covenants (see restrictive covenants below).

Term Loans

We had a $325.0 million unsecured term loan, which was scheduled to mature in August 2009.  This term loan bore interest at a spread ranging from 110 basis points to 140 basis points over LIBOR, based on our leverage ratio. This unsecured term loan was repaid and terminated in March 2007.  The effective all-in interest rate on the unsecured term loan was 5.63% for the three months ended March 31, 2007.

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 5.96% for the three months ended March 31, 2007.

In January 2007, we closed on a $500.0 million unsecured bridge loan, which matures in January 2010.  This term loan bears interest at a spread ranging from 85 basis points to 125 basis points over LIBOR, based on our leverage ratio. As of March 31, 2007, we had $500.0 million outstanding under the unsecured bridge loan at the rate of 110 basis points over LIBOR. This bridge loan is prepayable at any time without penalty. The effective all-in interest rate on the unsecured bridge loan was 6.42% for three months ended March 31, 2007. The unsecured bridge loan includes certain restrictions and covenants (see restrictive covenants below).

Unsecured Notes

In March 2007, we issued $750.0 million of 3.00% exchangeable senior notes which are due in 2027. The notes were offered in accordance with Rule 144A under the Securities Act of 1933, as amended. The notes will pay interest semi-annually at a rate of 3.00% per annum and mature on March 30, 2027. Interest on these notes is payable semi-annually on March 30 and September 30. The notes will have an initial exchange rate representing an exchange price that is at a 25.0% premium to the last reported sale price of our common stock on March 20, 2007, or $173.30. The initial exchange rate is subject to adjustment under certain circumstances. The notes will be senior unsecured obligations of our operating partnership and will be exchangeable upon the occurrence of specified events, and during the period beginning on the twenty-second scheduled trading day prior to the maturity date and ending on the second business day prior to the maturity date, into cash or a combination of cash and shares of our common stock, if any, at our option. The notes will be Redeemable, at our option on, and after April 15, 2012.  We may be required to repurchase the notes on March 30, 2012, 2017 and 2022, and upon the occurrence of certain designated events. The net proceeds from the offering were approximately $736.0 million, after deducting estimated fees and expenses.  The proceeds of the offering were used to repay certain of our existing indebtedness, make investments in additional properties, and make open market purchases of our common stock and for general corporate purposes.

As of March 31, 2007, we had outstanding approximately $2.0 billion (net of unamortized issuance discounts) of senior unsecured notes.

20




The following table sets forth our senior unsecured notes and other related disclosures by scheduled maturity date (in thousands):

Issuance

 

Face Amount

 

Coupon Rate

 

Term
(in Years)

 

Maturity

 

June 17, 2002(a)

 

$

50,000

 

6.00

%

5

 

June 15, 2007

 

August 27, 1997(a)

 

150,000

 

7.20

%

10

 

August 28, 2007

 

March 26, 1999

 

200,000

 

7.75

%

10

 

March 15, 2009

 

January 22, 2004

 

150,000

 

5.15

%

7

 

January 15, 2011

 

August 13, 2004

 

150,000

 

5.875

%

10

 

August 15, 2014

 

March 31, 2006

 

275,000

 

6.00

%

10

 

March 31, 2016

 

June 27, 2005(b)

 

287,500

 

4.00

%

20

 

June 15, 2025

 

March 26, 2007

 

750,000

 

3.00

%

20

 

March 30, 2027

 

 

 

$

2,012,500

 

 

 

 

 

 

 


(a)             These notes were redeemed on April 27, 2007.

(b)            Exchangeable senior debentures which are callable after June 17, 2010 at 100% of par.  In addition, the debentures can be put to us, at the option of the holder at par plus accrued and unpaid interest, on June 15, 2010, 2015 and 2020 and upon the occurrence of certain change of control transactions.  As a result of the Reckson Merger, the adjusted exchange rate for the debentures is 7.7461 shares of our common stock per $1,000 of principal amount of debentures and the adjusted reference dividend for the debentures is $1.3491.

Interest on the senior unsecured notes is payable semi-annually with principal and unpaid interest due on the scheduled maturity dates. In addition, certain of the senior unsecured notes were issued at discounts aggregating approximately $20.1 million.  Such discounts are being amortized to interest expense over the term of the senior unsecured notes to which they relate.  Through March 31, 2007, approximately $0.4 million of the aggregate discounts have been amortized.

Restrictive Covenants

The terms of the 2005 unsecured revolving credit facility and the unsecured bridge loan and unsecured bonds 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 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 March 31, 2007 and December 31, 2006, 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.

21




Principal Maturities

Combined aggregate principal maturities of mortgages and notes payable, 2005 unsecured revolving credit facility, term loan, bridge loan, trust preferred securities, unsecured notes and our share of joint venture debt as of March 31, 2007, excluding extension options, were as follows (in thousands):

 

 

Scheduled
Amortization

 

Principal
Repayments

 

Revolving
Credit
Facility

 

Term
Loans
and Trust
Preferred
Securities

 

Unsecured
Notes

 

Total

 

Joint
Venture
Debt

 

2007

 

$

10,207

 

$

22,971

 

$

 

$

 

$

200,000

 

$

233,178

 

$

456,616

 

2008

 

14,493

 

254,656

 

 

1,766

 

 

270,915

 

59,479

 

2009

 

15,596

 

128,000

 

 

327,648

 

200,000

 

671,244

 

6,573

 

2010

 

16,165

 

104,691

 

 

370,586

 

 

491,442

 

83,558

 

2011

 

13,470

 

216,656

 

 

 

150,000

 

380,126

 

78,810

 

Thereafter

 

24,371

 

1,335,300

 

 

100,000

 

1,442,730

 

2,902,401

 

579,022

 

 

 

$

94,302

 

$

2,062,274

 

$

 

$

800,000

 

$

1,992,730

 

$

4,949,306

 

$

1,264,058

 

 

11.  Rental Income

The operating partnership is the lessor and the sublessor to tenants under operating leases with expiration dates ranging from March 31, 2007 to 2037.  The minimum rental amounts due under the leases are generally either subject to scheduled fixed increases or adjustments.  The leases generally also require that the tenants reimburse us for increases in certain operating costs and real estate taxes above their base year costs.  Approximate future minimum rents to be received over the next five years and thereafter for non-cancelable operating leases in effect at March 31, 2007 for the consolidated properties, including consolidated joint venture properties, and our share of unconsolidated joint venture properties are as follows (in thousands):

 

 

Consolidated
Properties

 

Unconsolidated
Joint Venture
Properties

 

2007

 

$

513,530

 

$

148,132

 

2008

 

659,706

 

176,723

 

2009

 

627,705

 

172,405

 

2010

 

580,473

 

153,246

 

2011

 

523,666

 

137,036

 

Thereafter

 

2,919,373

 

870,540

 

 

 

$

5,824,453

 

$

1,658,082

 

 

12.  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.  First Quality leased 26,800 square feet of space at 70 West 36th Street pursuant to a lease that expires on December 31, 2015.  We sold this property in February 2007.  We paid Alliance approximately $3.0 million and $2.8 million for the three months ended March 31, 2007 and 2006 respectively, for these services (excluding services provided directly to tenants).

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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.  This consulting agreement was cancelled in July 2006.

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 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.  In 2007, our 1604-1610 Broadway joint venture paid approximately $146,500 to Sonnenblick in connection with obtaining a $27.0 million first mortgage and we paid $759,000 in connection with the refinancing of 485 Lexington Avenue.

In 2007, we paid a consulting fee of $525,000 to Stephen Wolff, the brother-in-law of Marc Holliday, in connection with our aggregate investment of $119.1 million in the joint venture that owns 800 Third Avenue.

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 $66,000 and $43,000 for the three months ended March 31, 2007 and 2006, respectively.

Other

 

Amounts due from (to) related parties at March 31, 2007 and December 31, 2006 consisted of the following (in thousands):

 

2007

 

2006

 

Due from joint ventures

 

$

9,570

 

$

3,479

 

Officers and employees

 

153

 

153

 

Other

 

5,215

 

3,563

 

Related party receivables

 

$

14,938

 

$

7,195

 

 

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 bore interest at the applicable federal rate per annum and was secured by a pledge of certain of Mr. Holliday’s shares of our common stock.  The principal of and interest on this loan was forgivable upon our attainment of specified financial performance goals prior to December 31, 2006, provided that Mr. Holliday remained employed by us until January 17, 2007.  Due to the attainment of the performance goals, this loan was forgiven in January 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 remained 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.

13.  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 March 31, 2007, 59,181,651 shares of common stock and no shares of excess stock were issued and outstanding.

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In January 2007, we issued approximately 9.0 million shares of our common stock in connection with the Reckson acquisition.  These shares had a value of approximately $1.1 billion on the date the merger agreement was executed.

In March 2007, Board of Directors approved a stock purchase plan under which we can buy up to $300.0 million of our common stock. This plan will expire on December 31, 2008. In April 2007, we purchased approximately 16,000 shares of our common stock at an average price of $132.48 per share.

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 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 three months ended March 31, 2007 and 2006, approximately 17,000 and 43,000 shares were issued and approximately $2.3 million and $3.4 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.

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2003 Long-Term Outperformance Compensation Program

 

Our board of directors adopted a long-term, seven-year compensation program for senior management.  The program, which measured our performance over a 48-month period (unless terminated earlier) commencing April 1, 2003, provided that holders of our common equity were to achieve a 40% total return during the measurement period over a base of $30.07 per share before any restricted stock awards were granted.  Plan participants would 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.  In April 2007, the Compensation Committee determined that under the terms of the 2003 Outperformance Plan, as of March 31, 2007, the performance hurdles had been met and the maximum performance pool of $22,825,000, taking into account forfeitures, was established.  In connection with this event, approximately 166,312 shares of restricted stock (as adjusted for forfeitures) were allocated under the 2005 Stock Option and Incentive Plan.  These awards are subject to vesting as noted above.  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.  Compensation expense of $101,500 and $162,500 was recorded during the three months ended March 31, 2007 and 2006, 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 was to 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 reached this dilution cap before November 30, 2008 and remained at that level or higher for 30 consecutive days, the performance period was to end early and the pool would be formed on the last day of such 30 day period. Each participant’s award under the 2005 Outperformance Plan would 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 would 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 would be granted prior to the determination of the performance pool; however, they were only to vest upon satisfaction of performance and other thresholds, and were not entitled to distributions until after the performance pool was established.  The 2005 Outperformance Plan provides that if the pool was established, each participant would 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 were to be paid in the form of additional LTIP Units.

After the performance pool was established, the earned LTIP Units are to 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 not earned upon the establishment of the performance pool were to be automatically forfeited, and the LTIP Units that are earned are 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 and are subject to time-based vesting.

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 $0.5 million and $0.4 million of compensation expense during the three months ended March 31, 2007 and 2006, respectively, in connection with the 2005 Outperformance Plan.

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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.

In the event of a change in control of our company prior to August 1, 2007, the performance period will be shortened to end on a date immediately prior to such event and the cumulative stockholder return benchmark will be adjusted on a pro rata basis.  In the event of a change in control of our company on or after August 1, 2007 but before July 31, 2009, the performance pool will be calculated assuming the performance period ended on July 31, 2009 and the total return continued at the same annualized rate from the date of the change in control to July 31, 2009 as was achieved from August 1, 2006 to the date of the change in control; provided that the performance pool may not exceed 200% of what it would have been if it was calculated using the total return from August 1, 2006 to the date of the change in control and a pro rated benchmark.  In either case, the performance pool will be formed as described above if the adjusted benchmark target is achieved and all earned awards will be fully vested upon the change in control.  If a change in control occurs after the performance period has ended, all unvested awards issued under our 2006 Outperformance Plan will become fully vested upon the change in control.

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 $0.6 million of compensation expense during the three months ended March 31, 2007 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.

During the three months ended March 31, 2007, 3,567 phantom stock units were earned.  As of March 31, 2007, there were approximately 14,127 phantom stock units outstanding.

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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 March 31, 2007, approximately 0.7 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