SL Green Realty Corporation (SLG)

Q2 2010 Earnings Call Transcript

July 27, 2010 2:00 pm ET

Executives

Heidi Gillette – Director of IR

Marc Holliday – CEO

Greg Hughes – CFO and COO

Andrew Mathias – President and Chief Investment Officer

Steve Durels – EVP, Director of Leasing and Real Property

Analysts

Jamie Feldman – Bank of America/Merrill Lynch

Steve Sakwa – ISI Group

Jay Habermann – Goldman Sachs

Vincent Chow – Deutsche Bank

Jordan Sadler – KeyBanc

Brendan Maiorana – Wells Fargo Securities

Josh Attie – Citi

Mitch Germain – JMP Securities

Sri Nagarajan – FBR Capital Markets

Michael Knott – Green Street Advisors

Ross Nussbaum – UBS

Jim Sullivan – Cowen & Company

Suzanne Kim – Credit Suisse

John Guinee – Stifel Nicolaus

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2010 SL Green Realty earnings conference call. My name is Novelia and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be conducting a question-and-answer session at the end of the conference and would like to remind everyone to please limit your questions to two per person. As a reminder this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today’s call, Ms. Heidi Gillette, Director of Investor Relations. Please proceed.

Heidi Gillette

Thank you everybody for joining us and welcome to SL Green Realty Corp’s second quarter 2010 earnings results conference call. This conference call is being recorded.

At this time, the company would like to remind the listeners that during the call, management may make forward-looking statements. Actual results may differ from predictions that management may make today. Additional information regarding the factors that could cause such differences appear in the MD&A section of the company’s Form 10-K and the other reports filed with the SEC.

Also, during today’s conference call the company may discuss non-GAAP financial measures as defined by SEC Regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure discussed in the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found at the company’s Website at, www.slgreen.com, by selecting the Press Release regarding the company’s second quarter earnings. Thank you, everyone.

Go ahead, Mr. Holliday.

Marc Holliday

Okay. Thank you and good afternoon everyone. As reported yesterday, the company’s financial performance in the second quarter and year-to-date for the first half met or exceeded our estimates and guidance in almost all categories.

Earnings right now are tracking at the high end of our 2010 guidance, notwithstanding the significant and dilutive steps we have taken to further reposition the balance sheet in 2010, which included the sale of one of SL Green’s largest single investments, that being our interest in 1221 Avenue of the Americas, and also a sizable amount of debt reduction and retirement that we began in 2009 and continued to pace in 2010.

Portfolio occupancy, same-store NOI, average replacement rents and operating margins are all very consistent with the specific estimates we rolled out in December and are reflective of a market that bottomed in 2009 and is now improving, which improvement will become more evident in future periods.

After two years of decline, New York City has added about 37,000 private sector jobs in 2010, with roughly a quarter or such amount being office using employment. While this growth may seem modest in Merritt, contrast these amounts with the New York City budget projection over that same period of time for 25,000 job loses, resulting in a swing of about 60,000 jobs positive swing over and above what was budgeted to occur in the first half of this year.

These numbers should be increasing more sharply as financial services firms who have restrained their hiring for much of the year, we believe will become greater drivers of job growth in this market in the second half of the year as the regulatory and tax landscapes become clearer and the firms are able to sort through their hiring needs and business lines for 2011.

Wall Street’s profits were a sizable $10 billion in the first quarter of the year and look to be tracking at about $16 billion year-to-date, on track to exceed the budget estimates of $20 billion for the entire year and the expectation that these record profits will translate into a meaningful amount of new jobs.

These positive job trends are filtering their way through the commercial leasing market in Manhattan, both in terms of job creation and as a stimulus for tenants to lock in their long-term space needs ahead of oncoming rental increases. Notably, overall Manhattan vacancy fell to 10.8% in June from 11.3% in May as a result of over 2.2 million square feet of leasing.

Important to note here that vacancy peaked in this cycle far lower than many people were forecasting. So we are entering our recovery with the lowest peak vacancy rate in over 20 years.

As the peaks in the past two downturns were 18.5% in 1992 and 12.5% in 2003, contrast that against this cycle where we peaked at about 11.6% and have quickly reduced that level to the 10.8% I mentioned earlier, on its way toward equilibrium, which is around 9%.

In Midtown, the leasing market is improving even more rapidly as vacancy fell to 12.5% in June from 13.2% in May directly related to 1.5 million square feet of leasing that was completed in June.

If you recall, in December we highlighted the significant pickup in monthly leasing, which occurred starting in around November, and has been proceeding at healthy levels since that time and we communicated that 1.5 million square feet per month is what’s typically necessary to get meaningful absorption in Midtown and I think we’re starting to see those results slowly but steadily and on track with how we are viewing this recovery market.

All of these positive and improving trends are apparent in the portfolio of performance in SL Green for the first half of the year. SL Green has already leased 1.1 million square feet out of our stated goal of 1.5 million square feet for the entire year with approximately 500,000 square feet of leases currently under negotiation.

Read the rest of this transcript for free on seekingalpha.com