SL Green Realty Corp (SLG) 2010 Q4 法說會逐字稿

Good afternoon, and thank you for joining us.Welcome to the SL Green Realty Corp's fourth-quarter and year-end 2010 earnings results conference call. This conference call is being recorded.

I will now turn it over to Heidi Gillette of SL Green.

Good afternoon, all. 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 other reports filed with the SEC.

Also during today's call, the Company may discuss non-GAAP financial measures, as defined by SEC Regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure discussed, and the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found in the Company's current report on Form 8-K filed with the SEC today, and the press release and supplemental materials regarding the Company's fourth-quarter and year-end earnings included therein; all of which are available in the investor section of our website, www.SLGreen.com.

In December, executive management provided substantial commentary at its Investor Conference, addressing both past performance as well as detailing the estimates for 2011. Therefore, for today's call, we will be utilizing an abbreviated format from that of other quarters past.Initial commentary will come only from Chief Executive Officer Marc Holliday. Then we will turn the call over immediately to Q&A. As a reminder, for the Q&A section, please limit your questions to two per person. Thank you.

I will now turn the call over to Marc Holliday. Please go ahead, Marc.

Thank you, Heidi. Good afternoon, and thank you all for joining us today. We were pleased to close out the year with a solid fourth quarter, in which occupancy was up sequentially, same-store NOI was up year-over-year, and earnings came in slightly higher than we had forecasted. SLG Portfolio leasing volume in Manhattan topped out at over 800,000 square feet for the quarter, which is reflective of the continued strengthening of the Manhattan leasing market. In December and January alone, we signed major new and renewal leases with AECOM at 100 Park Avenue; Greater New York at 555 West 57th; New York State at 100 Church Street; Wells Fargo at 100 Park, and CUNY, the City University of New York, also at 555 West 57th Street.That's all essentially within under 60 days.

Looking at the broader Midtown market, there was 5.5 million square feet of net absorption in 2010, driving the vacancy rate below 11% in Midtown to right around 10.5% as we stand today. Of that amount, less than 3% is sublet space, and a smaller proportion of that is what we would term competitive. As detailed in our December Investor Conference, there are only about a half a dozen contiguous blocks in Midtown in excess of 250,000 square feet. And the large block requirements in the market right now far exceed that inventory.

Tenants known or rumored to be looking at space 200,000 square feet and above, include such firms as Nomura, UBS, Bank of America, Morgan Stanley, Hovis Advertising, J Crew, Credit Agricole, Oppenheimer and Company, Coach, Wells Fargo, WilmerHale, Morrison Foerster, in addition to many, many others. Anecdotally, I would say this activity is at the highest level I've seen in the market in any January, a traditionally slow month, exceeding anything I've seen and recall since 2006. The reason driving this activity in large part can be attributed to the private sector job growth in Manhattan, which amounted for about 50,000 private sector jobs added in New York City in 2010. Of that, about half, or 25,000, where office sector using jobs. The prediction for 2011 by city forecast was for less than that amount.

And if you recall, in December, I had given a range of 10,000 to 20,000 office-using job growth for the year, which exceeded the city's estimates. I fully expect the city is going to come out and revise its estimates sometime in February, to reflect the effects of the extension of the Bush era tax cuts, the lowering of FICA, payroll deductions by 2 percentage points, and the positive effects of QE2, which I think will be most positively felt and affected here in New York City. All of which, I believe, will result in about another 50,000 private sector jobs being added to the payrolls in '11, about 25,000 of which will be or should be office-using jobs.Which means that with another 5 million square feet of absorption in 2011, I think we may inch our way closer to that equilibrium number of around 9%, which is the point at which I think that pricing power will be at least neutral or at least going back to an economically rational market for net effective rents, and start to put the market favorable nature back in the hands of the landlords.

In addition to an improving leasing market, external growth drove earnings in 2010. Much of this activity was reviewed last month at the investor conference, but since that date there has been additional activity including the buyout of Citi investment funds' interest in 521 Fifth Avenue; the closing of the purchase of three fee interests in Midtown Manhattan office buildings in the GKK transaction; and additional investments in debt and preferred equity securities, bringing total structured finance investments for the year to almost $500 million.

As Heidi mentioned earlier, we're going to curtail the prepared remarks and we're going to jump right into Q&A. I would urge all of you who haven't either reviewed the transcript or done the play-back for our investor conference just a month and a half ago. I think if you do that, you'll find an extraordinary amount of information. I think it was about 2.5 hours plus of strategic insight for 2011, our views on the market, inventory, how current trends related to historic trends, and a lot of data and strategic rationale for the structured finance portfolio; much more than we can cover, and should cover on an earnings call, but all of which was gone into in great detail in December.

We set out goals and objectives and guidance in December. We maintain all of that today. It was an ambitious set of goals and objectives, but it's one we feel we're off to a very good start in 2011, and should be well on track to meeting our objectives.

The market momentum, generally, I would characterize as one of declining vacancy, obviously declining sublet availabilities, tenants with real requirements for big blocks, as I mentioned earlier, little to no new inventory being added, and very low interest rate environment and private sector and office-using job growth. That's a great confluence of factors that I think will put us well on track to meeting or exceeding our estimates, which were given very early on, that over a year ago when we talked about 25% rental growth, from trough rents back in 2009; I think you've seen at least 5% to 10% growth in our portfolio and in the market already. You've seen shrinking concessions. And I know that over that three-year period, we should be well in hand to achieve that 25% target or more.

I wouldn't over-analyze or be confused by the fact that the mark to market today doesn't reflect those numbers, because those numbers are comparing not to trough rents, and therefore not reflective of growth. They're comparing to rents that are expiring. And rents that are expiring today, by and large, were rents done in 2000 and 2001, which was almost on par with the '06, '07 peak rents.

In fact, those '00 and '01 rents have been escalating for 10 years. And also had base rent increases compounding that. So when you take near-peak rents 10 years ago, factor in base rent increases and escalation increases, you're going to get to some very high rents that are rolling off in the years '10 and '11, which is why our guidance for those years was minus 5% to plus 5% for last year and for 2011.

For last year, we were right on target. This year we feel confident as well we'll be right within the guidance. And then the rents that start rolling off in '12 and beyond are more reflective of the '02, '03 and '04 rents, which was a much worse leasing environment; where I think we'll achieve much higher mark to markets. But most importantly, today rents to trough rents are much more favorable, and we are seeing, not just predicting but seeing tangible evidence of those increases.So, that is why we set that bar high for ourselves in December. That is why we reaffirmed guidance today, and with that, I would like to open it up for Q&A.

Just to confirm for people, who is here today, we're joined by a slightly different cast. As usual, Andrew Mathias, Steve Green, Steve Durels, Andy Levine, and Matt DiLiberto are with me for the Q&A portion.Jim Mead is here for his inaugural run at an investor earnings call, and we welcome, Jim. And also welcome David Schonbraun and Isaac Zion, who were both promoted to co-CIO, taking the mantel from Andrew Mathias, are here today, and will also give some input on some of your questions regarding the investment front.

So with that, Heidi, let's start the Q&A.

(Operator Instructions)

And, as a reminder, please limit your questions to no more than two questions. Our first question will come from the line of John Guinee with Stifel Nicolaus. Please proceed with your question.

Hello. Thank you very much. This is regarding 885 Third, 2 Herald Square and 292 Madison. It appears to me, and Mark, again, correct me if I'm wrong, that you went from a JV ground lessor investment to a wholly owned ground lessor investment. For example, on the balance sheet, it looks like your other assets went up by $525 million. Your land and land interests went up by $290 million. Total consolidated debt went up by 663 while, at the same time, investments in unconsolidated JVs went down by 146 and portion of the JV debt went down by 215. Can you walk through sort of the accounting overall, the balance sheet changes, how these three investments used to run through the income statement, how they run through the income statement now, the risk profile on the investments, the leverage philosophy on the investments, and then the cash and GAAP income returns and the per square foot investment basis?

We're going to give you all of it, and we're only going to penalize you for the two questions. Let us start with the accounting and income side of it. Jim and Matt, why don't you take that and then we'll flip it on over to --

Let me do the simple one. The asset treatment on the balance sheet, we bought the fee interests, and if we had bought the buildings, we would have allocated the buildings between land and building. In this case, because the buildings are under lease, we can't put that part of it in our balance sheet as a building. We put it into other assets.

So basically take the purchase price, allocate it between land and building, but in this case, we're calling the building the other assets, and that's why you see the other assets going up by so much. And, yes, effectively we're converting an investment in joint venture into a wholly owned investment and we're booking 100% of the asset, 100% of the debt. And, I think that ,generally speaking, you've got the right accounting there. I'll let Matt touch on the income side.

Yes, income statement is actually even simpler to understand. What was recognized in the income from unconsolidated joint ventures, just for 885 and 2 Herald, we're speaking about, will now be consolidated through our rental revenues and consolidated expense line items as we move forward. 292 is obviously a new acquisition, so that will also be included in consolidated revenues, consolidated income.

All right. On the access side, Andrew, do you want to kickoff? David, you can certainly chime in on the -- I think, John, your question's related to what's the risk profile of the investment and the leverage strategy.

Right. Yes, I think these were intended to be in our extraordinarily low risk investments. They represented between 40% and 50% or so of purchase price of the asset. When these assets traded at the peak, and the -- I would say the leverage strategy sort of mirrors that, in that you have a very secure investment that has a long time period to run. And you --therefore, we put long-term fixed rate leverage on the assets at a time when we could get very efficient financing that mature between 2016 and 2017.

I think a good example of that is on the Lipstick Building, where you just saw the lease hold of the building essentially go through a restructuring, go through a prepackaged bankruptcy, and ownership of the lease hold mortgage change hands with some debt forgiveness given by Royal Bank of Canada, but you still have somebody investing new capital into that deal at a basis of over $110 million in the lease hold. So, therefore, we take a lot of comfort at the fee position that whoever is investing, you know, new cash into that situation, is intending to make their rental payments under the fee, and ultimately extend or purchase the fee based on their -- based on the options that are embedded in those leases.

And your leases run through how long? You have a master lease with the-- ?

Yes. There are approximately 90 nine-year leases with additional terms of around 15 to 20 years, with the resets every 10 to 20 years thereafter, depending on the lease.

And they have the right to purchase the fee at points in time?

Correct. They were designed so, you know, usually within 20 years of the initial date, they would have a purchase option and each reset they have a purchase option at a higher price that ratchets up. They were kind of designed to give them an incentive to hit them. Otherwise the payments get exceedingly higher.

Difference between GAAP and cash on this?

It's around 4% cash as we sit today, and the GAAP yield is north of 10%.

Got you, thank you.

Our next question comes from the line of Steve Sakwa with ISI group. Please proceed with your question.

Hi, good afternoon. Just a couple questions. First, for Steve Durels, can you just go back through some of the larger blocks of space that Marc had mentioned, and just give us an idea of whether those tenants are just looking at spaces of similar size that they currently occupy, are these expansions, downsizing, and just kind of what is the landscape for these tenants, today, and I guess I would start with that?

You know -- Boy, it's a combination of everything. Maybe rather than be specific to the list of those benefits that he spoke to, because I think the intention was to really demonstrate how much activity there is in the marketplace right now; let me make a couple of points. One is,you noticed of that list there was a good number of financial service tenants. There were a good number of big center banks, and there were a good number of very, very large transactions. Many of those tenants are either doing consolidations from multiple locations, or they are doing just pure relocations because they are moving out of space that's where it would be too expensive to really rebuild the space around them.

But to go through a couple of them specifically, you know, Numora started in the market for a search for 400,000 square feet maybe a year and a half ago. I'm going to go off basically sort of general market rumor anyways. It was a 400,000-foot search. While the search was going on, they leased 200,000 square feet through a variety of different transactions. It was originally going to be a downtown location. They have now moved to midtown and the requirement has grown to 800,000 square feet. I think that a pretty big statement, as to where the markets come from a year, if I had been answering the same question in January of 2010.

UBS, unclear as to what their requirement is for 800,000 square feet. They just renewed for 700,000 square feet in New Jersey. They are now believed to be searching the market for a front office requirement of somewhere in the neighborhood of 800,000 square feet. B of A, you know, rumor is they will leave downtown and come to midtown. May still keep a small footprint, or relatively small footprint downtown.

Morgan Stanley is in the market for a couple of requirements of 5 to 700,000 square feet a piece. One of probably is a midtown requirement, one probably a downtown requirement, at the end of the day, but they haven't made any decisions yet. It's been a search that's been ongoing for the past year.

Coach is out there for 500,000 square feet. The headlines in the papers have been that (inaudible) talking to them about new development on the west side rail yards. Havas has been searching the market for 400,000 feet. Interestingly enough, this is a service, advertising services business that is finding it very challenging to put all of their requirements under one roof, at the price point that they seek, which does two things. One, if you're looking for, you know, sort of that value office rental rate, that supply is tightening up very quickly, and they may find themselves having to split the operation.

Wells Fargo rumored to be negotiating a lease right now on a block of space that's been vacant for -- being marketed for the past year and a half. And then there's a couple of law firms out there in the market for a couple hundred thousand square feet a pop.

So, you know, couple of conclusions. One, there's diversity in the tenant base. Two, there's a lot of demand from financial services that we didn't see a year, year and a half ago. Three, not everybody's going to land the kind of space that they would have thought they could have landed a year and a half ago; and four, the result of all of this is concessions, concessions are tiny and the net effect is slowly creeping up.

Okay, thanks. That's helpful. Then secondly, Marc, could you or Isaac or somebody else talk a little bit about the investment opportunities that you're seeing in the marketplace today?

Well, you know, I would say that having just come off of a big year which carried through to -- one of the refrains in December, I think it was December 7, our investor meeting, was, hey, that's great, but isn't it going to be challenging in the future? And then we went out and we did 521, closed up Gramercy fee consolidations, where the three Columbus deals relatively new, and we've made new structured investments in debt and equity securities I think will yield, what could yield some future pipeline in 2011.

So, I just have always found, for over a decade now, good markets, bad markets, tight, not tight. Our platform and our approach to the business seems to -- seems to attract deal flow. We have a lot -- we have a very big pipeline of deals right now that we're evaluating for both debt and equity investment. We gave a goal at the -- at the December meeting of greater than $400 million of new investments, and I think with GKK and 521, we're probably at or maybe in excess of that already.

So, that doesn't mean we don't intend to do anything for the balance of the year, but I think you'll see our future investments balanced with some divestitures. And we're probably going to increase the pace of some of those divestitures to prune profits, which we love to do. I think we're one of the few REITs that sequentially and serially roll out mature properties, take gains, reinvest into new buildings. We've done it throughout. I think we're close to, or in excess of $4 billion of that kind of activity, and you'll see more of that clearly this year with the first being a deal that should hit the market, you know, within the next--

Basically within the next couple of days, bringing 28 plus 44th to the marketplace. As Mark said this, is a mature asset that's 93% leased. We created a lot of value in the asset by operating the lobby and doing certain things in tenant spaces, but we feel now is the time to bring that asset to market and we feel it'll get a lot of traction in the market place.

So, Steve, I would say full pipeline, pretty confident in our ability to execute and we'll probably necessitate an increase in divestitures.

Our next question will come from the line of Rob Stevenson with Macquarie. Please proceed with your question.

Thank you, guys. Maybe a question for Matt or Jim, can you guys talk about what drove the increase in reserves on the structure finance side and whether or not what your expectations are as we move throughout 2011?

Sure. So, about half of the reserves we took in the fourth quarter were on the structure finance book. It's actually taking down to a zero position we had outside of New York, that we had previously taken a reserve on in the prior quarter. The other component that's in there is -- we looked closely and the accounting rules are a little intricate for off balance sheet joint ventures, but there was a very small venture out in New Jersey, that when we did the analysis we took right around a $3 million market on that position.

It's an equity in real estate, not in the construction finance portfolio. But we discussed -- pretty significant depth in December about where we sat with reserves and how we felt about the existing portfolio, and, you know, I think we've taken a lot of marks that we feel pretty good where we stand now. We haven't layered in expected additional reserves into 2011, and think we have adequately marked the book as to where it stands today.

Okay, and then as a follow-up, tell me a little bit about G&A. Just the normal fourth quarter bonus in there, or is it -- is there change -- is there any material charge for the CFO change in there? Is there anything else that would not be in a regular run rate going as we move throughout the rest of the year?

Well, let me -- I'm going to let Jim and Matt handle this. One piece, which I think is the majority of this piece when you get down to granular detail on the difference. We finished up towards the end of the year either signing or negotiating management contracts with approximately 8 to 10 or so of the senior level employees department heads, in that sense, whose contracts either had or were expiring throughout '10. So at this point, estimates were done throughout the year. I think the good news-bad news, depending, I look at it as mostly good news, the stock price having ticked up towards the end of the year drove the cost of the stock component of some of those new contracts up, I think only about $1 million or so beyond what we had forecasted at lower stock price, but I know at least a million of the $1 million and change of increase is attributable to that. You guys can--

I guess I would point out that there's always a seasonality in G&A. And year-over-year, I think that the 2010 number in aggregate, grew only 2.6% from the prior year. So, so I think it's well within sort of an inflationary kind of gap, or increase.

Okay. Was there any CFO stuff in there that's not going to be recurring?

Well, certainly not nearly enough. But, I don't think that that was really a big issue with regard to the year end number.

Well, let's -- looking at '11, we must have given the forecast.

Yeah.

In December, so why don't we just use that.

Yeah, Rob, it's Matt. The guidance that we provided for in December for 2011 is unaffected by any charges that we took in 2010. You saw a little bit of seasonality, but the execution of executive contracts in December, and awards that go along with those at higher stock price ticked up the fourth quarter G&A, but does not change how we look ahead to 2011.

Yeah, this is showing from our December investor meeting $0.95.

Right, which is about $76 million.

of G&A, which is $76 million, which is sort of right on top of this year.

That's right.

Okay, thank you, guys.

Our next question comes from the line of Tony Paolone with JPMorgan. Please proceed with your question.

Thank you. I know you guys signed some longer leases in the quarter and that helped drive up some of the concession packages, but this seems fairly high nonetheless. So I was wondering if you could talk about TIs, leasing commissions, free rent going forward, if the environment tightens further as you talked about?

Yeah, there's a couple, you know, looking back first of all, there were a couple of deals that hit in the quarter that, one, were negotiated -- in the case of one deal, was as much as a year and a half ago, where the terms were negotiated, the deal was paid for and it was a forward commitment. Sort of the bottom of a dark day, and it just happened that it was -- it came online in the fourth quarter. A couple of the other deals that really drove the concession package numbers, you know, the 170,000-foot deal downtown, and obviously there's a different concession package that one receives when negotiating downtown and in that case, it was for health first versus the midtown deals. That was 172,000 square feet. So it influenced the overall average.

Going forward in the deals that we're negotiating today, it's worth noting, we've got a couple of hundred thousand square feet of leases that have already been signed since the investor conference with a significantly improved mark to market over the -- over what we saw in the fourth quarter. Concessions have started to tighten, and as a rule of thumb, I would say, where typically you would have seen 12 to 14 months of free rent on space that was raw and where the tenant was building out the space, now it's more typical that concessions are 10 to maybe 12, but I would say 10 months is more on target.

The AECOM deal that we just signed at 100 Park Avenue for 190,000 square feet, that was a 10-month deal. And that's probably the most recent deal inked that was for vacant space that was done really in the last two weeks of December. TI's, where you would have said last year almost every deal irrespective of size, we would have had to either build the space or given up cash to fully fund the construction of the space for a tenant, which meant TIs were on many spaces going to the $75, $80 range. Even though, and remember, these don't get averaged out, because the combination of renewal deals and some deals will be retrofit space, but for raw space, you saw a lot of deals that influenced our averages, that went into that kind of TI package.

Now they are more into the $60, $65 range than the deals being negotiated today. So, concessions have tightened and we're seeing, we're seeing the finish rents push up as well. And I think that's pretty consistent with what we were feeling at the end of last year and we are seeing it roll right into first part of '11.

Okay, and that 10 to 12 months of free rent, that's something for a 10-year deal?

That's a 10-year deal on raw space where the tenant is building the space themselves, as compared to a 10 or 15-year deal where the landlord may be building the space, in which case the construction time falls on our clock.

Okay, got it. My second question, just on 521 Fifth and just what is the -- what do the economics look like really -- just from an earnings point of view with that debt coming due I guess in a few months and bringing in that interest, and then I guess you also had retail tenant in the bottom there, just how does it shake out in terms of the economics of buying the rest of that in?

Well, Andrew, do you want to just go through some of the baseline economics of the deal and how we're viewing the debt, and I think Matt and Jim can -- the earnings impact.

Sure. Our going-in tap rate is right around 5%, and that's with about 15% vacancy in the building. We historically have run that building closer to 97%, 98% and definitely anticipate as the market tightens up, that we'll be able to lease up the balance of that vacancy. So, our stabilized cash on costs in the very near term, we expect to be in excess of 6%, with some below market rents in place to continue -- to continue rolling over the coming five, six years.

In terms of the financing, it does roll in April. We are talking to our existing lenders and sort of deciding corporately how we want to handle our financing strategy there, whether we want to un-lever the asset as one possibility, or continue with the existing financing, or go out and get new financing. The financing's at a level that's extremely comfortable in the market today, and we've already had quite a number of unsolicited reverse inquiries from lenders looking to finance our purchase.

I think from a -- just commenting on what we had put out in the investor conference in terms of our guidance, this acquisition is sort of right on top of the economics that we baked into our guidance for the year, so there would be no change to our guidance this year as a result of this deal.

Okay, thank you.

Our next question comes from the line of Jay Habermann with Goldman Sachs. You may proceed with your question.

Good afternoon. You know, just following on that last question, as you look at your 2011 debt roles, do you have a preference toward fixed rate at this point in this cycle, or will you continue with floating rates? And as interest rates are at very low levels today, are you looking forward and expecting an NOI to tick up before you put more permanent financing with fixed rate in place?

You know, I've said in the past, Jay, we tend not to like to prognosticate on interest rates. It's not -- that's over the years proven to be a bit, I think, treacherous. And we just try and match the form of financing to the investments.

So, you know, long-term, net lease deals like the ones we own and the ones we just acquired from Gramercy those either have fixed rate, or if those debts were coming up, we would fix them. Then we have transitional assets like 521 Fifth, where Andrew said we have some significant lease up there. Clearly, 3 Columbia Circle, when that litigation sort of resolves itself, there will be a building there to lead to repositioning and lease-up, which would warrant we think, floating rate debt.

And we pretty much like to group things into buckets of transitional assets, have a floating rate that longer term, mature, fixed assets have a fixed rate debt, and then a whole basket of properties that carry no debt, to support the line in our unsecured financing. So, I don't think -- we don't have a corporate view at the moment that rates are going to stay where they are or are going to go up significantly, so we've got to rush out and fix rates. We will swap on occasion when we think there's an asset level reason to do so.

If we're carrying floating rate debt on a JV that we think we should be fixed, but our partner doesn't want to fix, we'll float and then swap. That's not, that's not a directional view. That's an asset level view. Occasionally in the past, we have made some bets. Some were for us. Some were against us. We tend not to do that. So, I don't know if that fully answers your question, but I would say we're a little bit view neutral on the issue of rates. We carry a slightly higher proportion of floating to fixed in other REITs, because we carry a slightly higher proportion of transitional assets to mature assets and we think that's appropriate.

That's helpful. And I guess just given your progress so far at 100 Church, can you talk about the competition from downtown at this point in the cycle, given the rent differential, and does that potentially change your rent growth outlook for midtown, just given the growing vacancy in lower Manhattan?

Well, you know, listen, the growing vacancy in he lower Manhattan is also relative. At the beginning of last year, everybody expected the downtown to be a whole lot worse than where it seems to be going. And although the vacancy has slowly been inching up, it's really -- you could argue that it's actually been rather successful about it not being as bad as what was projected.

You know, we're left now at 100 Church Street with two blocks of roughly a little over 100,000 square feet each. When we started the project, we were half million square feet needing to be leased, and our major competitors, which to date have been 125 Broad and 77 Water, both of those buildings have had some leasing success as well. So, for the primary things that we're negotiating against, the supply has been tightening.

Now that we're going into smaller blocks of space rather than the unique 500,000 square foot space that we had to offer, it sort of opens up a feel a little bit, as far as a broader audience of competitive buildings, so that will change things. And, I don't think it really invites the opportunity to raise rents materially, although we had anticipated that we would continue to see some modest increase versus the first deal that we did. And, by comparison, the deal that we signed with the state for 90,000 square feet, was just inked a couple weeks ago --That's a 10-year deal, $65 in TI, at six months of free rent after the construction, which is a big improvement over the first anchored tenant that we signed with -- that we signed with Health First. So, you know, I think we're going to continue to see good success. The building continues to get better every single day because of all the activity down at the World Trade Center, particularly with Conde Nast coming into the neighborhood a half a block away.

Great, thank you.

Our next questions comes from the line of Michael Bilerman with Citi. Please proceed with your question.

Thank you. It's Josh Addie with Michael. Can you talk about some of the large loan-book investments, like 280 Park, London, and maybe the new investment that was made in the quarter? If you're in active discussions or considering taking equity positions in any of those buildings?

Well, Josh, that's -- you know, we've given a lot more disclosure in December on that book -- really as much as we think we can give and we think anything greater would unnecessarily put us in the position of not being aligned with the interest of the borrower, which is paramount here as a lender. It's really not appropriate to talk about live investments, which are strictly debt investments, in talking about what the long-term expectations or strategies are.

I mean, these are all, for the most part, we could talk about some exceptions, but for the most part, these are all well-covered, performing debt investments that, every one of which we expect will be paid off if the borrower so chooses. The borrower doesn't always choose to pay off, so I wouldn't limit that commentary to the investments you've made. If anything on that book, you saw in December where we detailed the assets. These are for the most part high quality assets, predominantly located in Manhattan, predominantly or almost exclusively office and retail. And, in all cases where I think the borrower could and should support the investments, and where booking for the most part yielded maturity kinds of returns on these investments.

With that said, there may be, time to time, where we'll have the opportunity for pipeline, typically consensually, very rarely non-consensually, as evidenced by the fact that over 14 years of this business, we've only had one foreclosure through this program. The other buildings that we've acquired out of this program have been done consensually. So, I would say it's likely of the 10 million square feet plus or minus that we have loan interest in, in and around Manhattan, that some of those could result in portfolio assets in the future. Again, I would reiterate, if they do, more likely than not consensually. And to give any specific color on any specific asset, we can't unfortunately do on this call.

Okay, and separately, can you give us an update on 600 Lex? It looks like the occupancy has declined a little bit sequentially and I know it's early, but how is that property performing, versus your underwriting in terms of being able to roll up the rents?

It's, it's pretty much on target. We, you know, we've -- when we bought the building, we put it under a modest, but a capital improvement program that's wrapping up now. We should be completing our lobby work, hallway work, a model office in the next 10 days to two weeks. Remember, that this is a small space building, so very rarely do these type of tenants make forward commitments with a great deal of time. So generally it's the kind of tenant that, you know, comes in, says what's available and I want it tomorrow, because the floors are 12,000 feet at the largest and more typically, 67,000 square feet. Unlike other buildings where you havevery large tenants, they make lease commitments 10 months to two years in advance. So it's not surprising that, until we have the capital program completed, that there would be some slow lease-up. We knew the majority of tenants who had leases that were rolling were not planning to stay in the building, irrespective of anything we did or the pricing or the market.

Many of the spaces had already been sublets, some of the tenants had already moved out. So we had very good color going into it, as to where the vacancy would grow to. And, quite frankly, we intentionally priced the building a little ahead of where the market was at the time of acquisition. And it's been -- as anticipated, it's been an effort on our part to educate the brokerage community as to what we're doing with the building, educate them as to why we think there's logic in our pricing, and I think we're getting support on that. I believe this year, we'll see a decent amount of leases signed into the building at numbers that were materially higher than where that building was transacting before we bought it. You know, but the proof will be in the pudding when I post the leases.

Could you remind us what level of face rents you underwrote on the building for the new leases?

Well, our asking rent today is anywhere between $65 to $80 a foot in the base, and normally there's always a little bit of room off those -- off the asking rates.

Okay, thank you.

You're welcome.

Our next question comes from the line of Vincent Chao with Deutsche Bank. Please proceed with your question.

Good afternoon, everybody. Just wondering if you had any update on the dividend. Probably too soon after the analyst day, but just wondering if you had any color there?

Yes. No, I would say we discussed that at length all the reasons why we thought where we are now is appropriate. Long-term desire to see that increase, but it's really tied mostly to the taxable earnings of the company for this year, with expectations certainly for next year, towards increasing. And this year, I think we'll just have to wait and see how things shape up from a taxable earnings perspective.

But I think that most of the shareholders we speak to seem to support the use of the retained cash, not only from not paying dividends higher than what they currently are, but also other strides we've made on reducing our capital to increase our cash flow and using all that for either -- to fund new investments, debt reduction. We think it's the right time for that in this market where we're re-acquiring assets that we look at as kind of seeds of growth for the future. So we'll reevaluate that probably more towards the end of the year, but it's a little too early now.

Okay, and just the second question, just going back to 100 Church, I think it's about 60% occupied at the end of the quarter. Sounds like you got another 90,000 square foot lease that's coming in. And I think last quarter you talked about maybe 80 to 85% some time, sounded like first half '11. Does that still seem like a reasonable target for you guys?

Yes, we're now at a 70% occupancy with signing of the lease that we just completed with the state for 90,000 square feet.

Right.

We've got 275,000 square feet of vacancy. I think the building stabilizes in that 80 to 85% range. Which means we've got a little bit of road still to go to it, but we've got good activity, good tenant demand. We've got a lot of good showings that are ongoing. So I think we'll -- I think we'll hit our target for this year.

Okay, thank you.

Our next question comes from the line of Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your question.

Thank you. I was hoping you could talk about some of your largest expirations this year, kind of where are you in the process, and also, what your thoughts are on TIs and concessions for those deals?

Well, the biggest ones, the reality is we don't have that many real large expirations this year. We knocked off a bunch of them last year with the early renewals, but the more significant ones would be the Meredith role at 125 Park Avenue. To remind you, when we bought that building, we knew Meredith would not be staying. They occupied about 150,000 square feet that expires on 12-31.

We're already in the market with that space, and it's a continuous block. It's sort of the upper half of the building, so it's -- I'm not really too worried about it. I believe actually that the rents will be north of where we underwrote the building ultimately. But would not expect it to land a tenant until, at the very best, till the end of this year.

Beyond that, we have some role -- not a lot, at Tower 45 we have DD Shaw is going to down size by about 30 or 40,000 square feet. We've got more role next year in that building, which is why we put the building under a renovation program. Where we're doing a new lobby, elevator caps, turnstiles, and renovating the atrium in the property. Those are small floors that are 13,000 square feet a pop.

DD Shaw essentially outgrew the building. They started as a small tenant, ended up taking a whole lot of floors. Now we'll have to go back out and re-tenant on a floor by floor basis, so that will be a little bit of work. And other than that, my biggest role is at 800 Third. I've got a lease that expires at the end of the year that's another 20,000 -- I'm sorry, another 50,000 square feet. And, that's it. I don't have any huge blocks of space. I have -- we have vacancy in the portfolio that we're working on. We've got 600 Lexington and 100 Church and 3 Columbus, once that building comes in-house. That will be the majority of our attention this year, will be filling those spaces.

Okay, and then given the ramp-up in TIs in the fourth quarter, is there any -- what's your latest guidance for AFFO for '11?

Let me jump in -- remember, before Matt answers that, the ramp-up in TI was a result of deals, many of which were negotiated anywhere between the first quarter of 2010, going all the way back into early 2009. So it would be, you know, I think, wrong for us to conclude that that increase in TI is a reflection of where the market is, or where we would expect TIs to be on deals we're going to start to negotiate today.

Yes, Jamie, it's Matt. As far as how that flows through AFFO, or CAD, as we refer to it, we provided guidance in December that took, you know, our midrange of FFO at 413 down to $2.02 a share of CAD, which factors in capital that you saw flow through here in the fourth quarter.

Okay. So that unchanged the AFFO or the CAD estimate?

Correct, yes.

Okay, and then just finally, given signing market conditions and your success at 180 Broadway, are you guys changing your stance at all on the appetite for developing in midtown?

No. No. Our view is make much, much better risk adjusted returns with the strategy re-employ of buying existing product; that's often, but not always, under-managed, under-positioned, and then repositioning, re-marketing, rebranding and ultimately leasing up, and obviously to get into that, you got to buy at the right basis. That approach yields returns we believe that are traditionally much more attractive for much less time, much less risk, much less effort. And, you've heard me say before, it's as much about you got to look not only IRR, but return on effort.

We do a lot of volume here and a project that would take senior level capacity, often taking your eye of the ball for three to five years to develop a major project, or longer, generally doesn't fit in with our designs, except for the exceptional property or an exceptional location. So there's no -- there's always exceptions to the rule. But as a rule, our approach is the approach we think is best suited for us and for the public markets. With that said, there's always going to be outlier kind of situations, like American Eagle, Case, our site at 317 Madison, where the basis is good enough and the economics are compelling enough that we make a decision to move forward, but that will be the exception, not the rule.

Okay, thank you.

Our next question comes from the line of Michael Knott with Green Street Advisors. Please proceed with your question.

Hello, guys. Just wanted to touch back on CapEx real quick or leasing costs. Steve, which deal did you refer to that was done a year and a half ago? Because there were a couple of eye popping packages in the lease detail, had a couple of midtown avenue properties?

Well, the one that jumped off the page with me, and I actually had to go remind myself of the deal, was the DeLoitte deal at 919 Third avenue. (inaudible) I'm sorry, at 919 Third Avenue. They had made a forward commitment to expand into a piece of space where Jenna Block was going to be vacating, cut the deal back in '09. And, in fact, part of the TI there was a reduction in commissions paid that got shifted over to an increased debt TI package. So, That's why that number jumped up.

The other ones that were big, or the other one that was biggest, which was Health First downtown, you know, again, it's important to differentiate the downtown market where we have a pretty small footprint, versus the midtown market, where the vast majority of our real estate and vast majority of our current vacancy is currently located. So, downtown trades are bigger concession packages. That one had an $80 TI, plus a $7.50 redecorating allowance the tenant gets10 years from now, but still, we had to post the $87.50 as the TI allowance. And then we gave them 15 months of free rent, which included their construction time. That was, I will tell you, a lower concession package than the building that we were competing against what they were offering them. Still I believe from our perspective, and inconsistent with the concession packages that we experienced in midtown.

And then, my second question is about small tenant demand. Sounds like big block demand is coming back, especially from finance, but looked like some of your smaller tenant properties, namely Gray Bar, look like it continues to lose a meaningful amount of occupancy. Do you feel like the small tenant demand picture is not yet firmed up, and not part of the midtown recovery story?

Oh, Michael, Gray Bar is one that we're treating a little bit uniquely internally. We think that, when you look at the peak to trough rents in Gray Bar, it was a higher than average drop, that is just starting to make its way back, and we think will firm substantially in 2011, and this is one of the few areas we've chosen to warehouse some space.

We did it at 100 Park, when we weren't prepared to sort of lease at the trough, and you see the results there. That worked out extremely well. We're doing it here at Gray Bar and we think that will work to our advantage, because we see those small to medium size tenants showing up in size, and we think that we can make up enough rent by waiting six, not 12 months. Relative to the capital that you have to put into pre-build or build for these smaller tenants, we think we should be waiting for rents that are back in the 50s, Steve?

Yes.

And, you know, in the 40s, it's not attractive enough a metric. So, while the building itself has hired an historical vacancy, you know, recall our portfolio is almost 95% leased. So at 95% leased, you start to be able to get to pick your shots at where you want to spend your capital. Right now we're looking to spend that capital in the spaces that we think we can get the highest nominal and net effective rents.

And right now, that's not Gray Bar. That was 100 Park, 461 Fifth, Tower 45, and 600 Lex, soon to be 3 CC. The capital dollars are close to the same. The only difference is the rents. We're targeting that capital to the higher rent buildings, and that's not to say we're not actively leasing Gray Bar, but there's a couple of blocks of space we've said we'll deal with at the end of the year. And, we've modeled it as such in our 2011 budget.

Okay, thank you.

Our next question comes from the line of Ross Nussbaum with UBS. Please proceed with your question.

Hi, everyone. Good afternoon. Folks, a couple balance sheet questions. What did you do with the unsecured note that matured in January? And then, I know you addressed some of the specific assets that are up for refinancing this year, but in particular, what's the game plan for 919 Third, 717 Fifth, and then1551 Broadway?

Let's do 919 first. What were the other two you mentioned?

First of all, we repaid the note that was due in January, just out of cash.

Okay. And then the other two assets in addition to 919 were some of your JVs -- 717 Fifth and 1551 Broadway?

Andrew, let's--

I mean, 919, we have a book in the market now soliciting proposals for refinancing. That's something we expect to close late first quarter, or early second quarter of '11. I think as you know, Ross, we have a very significant cash NOI there, versus the financing that's in place. And we're anticipating having the option to up-size that financing if we choose to do so. In the market today, that would be a long-term fixed rate financing. 717 Fifth, we have an extension option on, which will likely avail ourselves of -- that financing in place is pretty efficient. And 1551 is in the process of being refinanced now. We have -- we're down to a very small interest on that property, 10% or so, but it's in the process of being refinanced now.

Okay. And then, I guess the other question I have is, you guys started off the call talking about all the big blocks of space and the demand that's clearly out there. As time goes on here, how much more of a factor is all the available space downtown? I mean, obviously those requirements aren't getting filled overnight. Are a quarter, half, a third of those folks just going to say, you know what, let's wait a couple years and let's take brand-new fresh space downtown, especially if it's not necessarily for our front line people?

Well, it hasn't traditionally been our experience. The -- almost exclusive motivating factor is rental spread. And, when we see those spreads get upward of $35, $40 a foot, that's where we see the spill over into what you described as the new freshly built space downtown. But, I don't think midtown has diminished in any way from its attractive -- attractiveness and allure to people who live, you know, whether they live sort of downtown, midtown, uptown, New Jersey, Long Island, Greenwich, this is still the area of convenience, the area closest to where the heads of these businesses tend to locate and is usually first choice until the bottom line impact makes it compelling enough. But, when we see that occur, that's usually in a midtown vacancy level, well below 9%, which clearly we're not at now. We're at around 10.5%, so I wouldn't characterize that a 2011 phenomenon. But, eventually, certainly, and, you know, that's healthy for New York to have a more moderately priced alternative for companies and tenants to avail themselves of who can't pay, don't want to pay the midtown rents when they get back to kind of that point of neutrality or higher, in the 60s to well over $100 a foot. Downtown offers an outlet for that rental price point in the 30s, 40s and 50s, but I would say, at the moment, that is not a factor, but eventually and certainly it will become spillover into downtown.

Thanks, appreciate it.

Our next question will come from the line of Jordan Sadler with KeyBanc Capital Markets. Please proceed with your question.

I would just like to follow up on the last question on sort of the big blocks you were discussing earlier and, Steve, your comments regarding where you think we'll be occupancy wise. I'm curious about, and Marc, you talked about being able to achieve the 25% rent growth and maybe even better, that you had outlined quite a while ago at this point. I'm just curious, you laid out I think at the investor day, a plus or minus 5% mark to market on the New York City leases. Is it feasible that, at this point, given sort of demand you're seeing, that you're already running ahead on that, and that could be better for 2011?

No, again, I want to make -- I think there's a slight confusion here between the 25% or better comment relates purely to trough rents, doesn't relate in any way to the in-place escalator rents of the company. That's rents that had peaked in '07 and had kind of hit bottom in '09, early '10, in sort of middle of '10, or maybe it was third quarter of '10, there was -- there was a belief that rents would come at least 25% off the bottom. And that, we've seen building momentum in '10 and we believe will continue in '11. But, that is unrelated in a certain respect to where those rents are relative to what's coming off our book. What's coming off our book now are rents that were largely put in place in 2000 and 2001 when rent levels were very high. We typically bake about 10% increases into those leases off of those peak rents, and then you have 10 years of operating tax escalations on top of that, compounding the situation.

And, that's clear. I wasn't--

So then what--

It sounded just at the margin, in January, you said this is the best January you've seen since 2006, and maybe incrementally, since 45 days ago when you last talked, you're seeing greater demand. So I would--

Yes, I think I hear what you're -- that may push it more towards the higher half of the range and the lower half. Itcertainly -- it takes a lot to move our mark to market on over a million square feet of rollover. And, if we were minus 5, plus 5, I would say, if anything, you may think more towards the positive territory than negative territory, but I wouldn't revise the guidance at this point. Because we could just have an anomaly where one or two or three very big high rent leases are rolling off the books in '11 and we're just going to get tagged with a 10% or 12% or 15% down tick. The modal of leases, we may have by number of leases, many more up than down, but if you get tagged with two or three big roll downs, it's very hard to overcome that. And, I think what you'll see is there are nothing of a monumental side, but there's enough done in that '00-01 era that's going to be below -- in the negative category that even with a good, tight improving market is going to make it tough to exceed our estimate.

But I would say to you, if we could -- there's a big range between minus 5 and plus 5, and if we're in the top half of that guidance, our same-store will be at least that or more. That will make for a very good year. And, set us up well going forward. Those are good, those will be very good metrics. So I think it's, I think the guidance is consistent with an expectation of some absorption and big job growth, which I did set out in December for office-using jobs -- close to 20,000 office-using job additions, which is where I think things will -- where the projections will ultimately get to in another month or two.

My follow-up is just on your comment regarding maybe increasing sales activity, a bit, to sort of coincide with the increased investment activity. I think in the past, when we've talked about increased sales, it sounded like you were happy with sort of the collection of assets that you had whittled the portfolio down to over time. So, I'm just curious, what would sort of be potentially on the block, or have a higher likelihood of being put on the block, for you guys. What type of volume that could potentially be and at what point -- what's sort of the assessment in terms of relative growth? What you're selling versus what you're buying, where you're opting to sell some of these assets, as opposed to maybe issuing the equity?

I'm going to turn this over to Isaac who had put up a slide, actually -- I got Page 47 in my hand here from December, which is potential JV dispositions -- list there about six assets as a pool, which whether or not we're going to sell them, this is no indication we're going to sell them, because they're also potential JVs, but they do have a characteristic, and a common theme that I think Isaac can describe.

Right. Just on Page 47, that list of assets, just so you know, was 28 West 44th, which is currently in the market. 100 Church, 220 East 42nd Street. 711 Third avenue, 379 West Broadway, and 520 White Plains Road up in Westchester.

And, I think I indicated, at that point in time, that we were looking at these assets and it's clear that we're not going to sell all of them. Obviously, we have one on the market. I might pick one or two others. But the point that we made, with respect to each of these assets, is actually a slide I had on Page 43, which basically said that we actually bought we feel we bought these assets right. And, as the capital expenditures in these assets continues to rise and the current NOI growth isn't quite there, it's clearly time to prune those assets and deploy that capital into more accretive investments.

Okay, that's helpful, thank you.

Okay.

Our next question comes from the line of Brendan Maiorana with Wells Fargo. Please proceed with your question.

Thanks. Good afternoon. Just wanted to follow up on Jordan's question a little bit there. And, Marc, just going back to some comments you made earlier on the call, is it fair to say it sounds like from where we sit today, that new investment activity is probably likely to be offset by net sales activity, given there could be some increasing disposition, and given how active you've been early in the year on the investment side?

I think that since we've done as much as we've done in the past 60 days, which wasn't all -- certainly, not certain when we set our goals for the year. I think that's generally a fair statement. The way we go about looking to try and arbitrage the market, to find the assets where we can get the best bid, realize the highest amount of gain, relative to what we perceive as future NOI growth, and then put that money back into accretive activities -- I think even if the dollars are the same, that's an accretive activity unto itself, because we do believe we are subscribing to the theory of buying low, sell high, and unto itself, over the long-term, you'll end up with a growth portfolio by doing that, even if the dollars deployed are the same. If that makes sense. Because that is an accretive activity.

So I wouldn't -- I would say the dollars might be the same, but the earnings potential of that activity is still quite high. I mean, that's what we do. We create significant, significant value and we grow this portfolio predominantly through embedded gains and not by repeated equity risks.

That's helpful. I'm just trying to understand the investment side of it, with the balance sheet side as well. And then, just a quick follow-up for Steve Durels. I think you guys mentioned on a couple of past calls that you started moving asking rents up. Has any of that been reflected in the Q4 leasing activity that you guys have given us? And maybe, can you give us any kind of early commentary into how successful you've been capturing some of the increased asking rents, ultimately materializing at a higher signed deals?

We'll start with the asking rent. On the asking rents, we have raised asking rents across the entire portfolio that right at the end of 2010. It depended on the building. Even at 100 Church Street, I actually raised the rent by increasing the loss factor. So effectively raising the rent by raising the measurement, -- which I think probably caught some people off guard, but I think the market is there to support it.

You know, in other buildings, we raised it as much as $10 a foot. In some spaces, it was just a couple bucks a foot. And then, I think also, we've already seen in the second half of 2010, face rents have increased by comparison to where our expectation was for many of those transactions, at the beginning of the year. And ,you can almost pick any single building.

Deals that we're doing today in Gray Bar, I think are a couple bucks higher than where they were six or eight months ago. 100 Park Avenue is usually a couple bucks higher than where we were expecting on the base floors. I just did a deal for one of the mid rise floors over there where we actually recaptured space. First time we've seen that in a couple of years, where we took space back, subleased it back from a tenant with seven years left on a lease at $39 a foot and we rented the space at $52 a foot. So the face rents are definitely growing and the asking rents have popped. The first part of the question, which was -- you'll have to remind me, was related to -- what?

I was just wondering, has any of that been reflected in the Q4 activity that you guys have disclosed, or -- maybe see that kind of going forward?

No. Because, remember, so many of the deals that we're inking today, almost none of them, quite frankly, of any meaningful size, have a lease commencement of immediately. So a lease that I signed in the fourth quarter of 2010, at best probably doesn't start till the first quarter of '11 and more typically, would be anywhere from six to 12 months forward, by the time -- if we're building the space, that we can't -- we don't book the deal until we've actually completed the work and turned the space over to the tenant, and even where the tenant is building the space, we actually don't recognize that lease until they have completed their work. So there is naturally a significant lead time, even if the space is turned over to the tenant for their construction. So--

What Steve is saying is don't necessarily expect to see this in the first quarter. This is something that takes time to ripple through the financials, but that's why we're on the phone trying to give you, you know, a six to 12-month lead time into the dynamics of the market; that may not be outwardly evident in the way things get reported or commenced in the market. It's just a natural lag time, but what I said in my remarks earlier is don't -- I wouldn't get confused by Q4 mark down to market and come away with assumption that the metrics are not as robust as we see them. We could be wrong. That's a separate issue, but at least that's how we see them and what we're trying to do is convey that to you guys early on, no different than the 25% comment back in '09 and no different than in 2007 when we said rates were going to fall dramatically, and about 12 months later, they did. And that was, that was controversial to the other side at that time.

So just -- it would be a little patient year in waiting to see these results come through, but I think what we're -- you're hearing from us is the, sort of the realtime experiences we're seeing in tenant negotiations in the market that is certainly nowhere near what it was in '06 and '07, but it's something that's returning to an equilibrium market -- and a healthy market, and a market where our net effective rents will improve measurably.

That's great. Thanks for the color.

Our next question comes from the line of Steve Bennett with Jefferies. Please proceed with your question.

Hi, guys. Thanks very much. I was just curious if you guys could provide some further color on the 3.6 million of higher lease buyout income in the quarter and how much additional buyout income is currently embedded in the 2011 numbers?

Well, let me start. I noticed a couple of commentaries, it's Jim Mead, by the way -- that the lease termination income was excluded from some of the numbers, from some of you folks on the analyst side. It's a number that is in all of our years that -- I'm just looking back at lease termination income from this year, or 2010 was 8 million, 2009 was 8 million, 20 -- sorry, 2008 was 6 million, 2007 was 11 million. So, it's a number that is consistently in the results of the company and the reason is that it's just a normal course of business for the number of tenants that a company like this has.

You're going to have some that want to leave early for a variety of reasons and so there's going to be that number in every year. So it is a recurring number. We have some baked into our guidance on that view, and I think that a few million dollars baked into guidance.

Yeah, probably half of what has been the average over the last five years is baked into 2011 guidance. But, because it's been so recurring, we took the step of at least layering in a nominal amount.

Okay, and then just one more conceptual one. In the scenario, where the 10-year goes closer to, you know, the 5%, say, by the end of the year, what do you think that does to New York City office cap rates, in terms of the risk premium that property buyers are going to require? And also how would that, you know, essentially change your approach to investment or balance sheet management?

Well, the question of where treasuries go to has to be coupled with a view as to what's happening in the rental market. When cap rates have been very low in the city, and I define that as under 5%, or 5% and under, I've seen that in low rate and higher rate treasury environments, because it's -- remember, the cap rate's a function of cost of funds, but it's also a function of expected growth.

And if there's a, you know, if treasuries go from 3.5 to 5, but people's expectations for rental growth rates go from, you know, 3% a year to 25%, over the next three years, the cap rate could be unchanged or down. Because the expected growth could dwarf the 150 basis point pickup in cap rates. So traditionally, cap rates will trade at a spread to treasuries, if the 10-year goes to 5, it would be reasonable to think that cap rates could be 6 or 6 plus, but cap rates could be 5 and cap rates have traded through treasuries. So, it was only three or four years ago, maybe five years ago, where cap rates were around 3.5 to 4% and they were traded through treasuries. So they can trade through treasuries; they can trade on top of treasuries, and historically they will trade a premium to treasuries for Class A of maybe 100, 150 basis points plus.

But, again, if we're of the mindset that there's going to be sort of above average rental growth in the next three years, that may overwhelm what's happening in treasury. That's not to say treasury explodes, that it's not going to have a funding impact, but I would say to you right now, it's not a leveraged market. People aren't pricing these assets to the last dollar borrowed.

If you look at the profile of people buying today, it's largely equity oriented investors who are looking for good, safe, risk adjusted and tax sheltered yields for the most part, and for that, I think New York office and New York real estate, in general, is a mecca for that kind of investment, and, you know, it could have an impact, or it may not. And like I said, I think you have to just couple that with the view of rental growth.

Okay, and just in terms of your balance sheet and investment outlook in that higher rate environment?

Investment outlook and higher rate environment?

Where we deploy capital.

Well, I think -- I mean, if we were active, active buyers of real estate in a treasury environment that was 5 to 7.5. So this -- it's all just a pricing exercise for us at the end of the day. Will -- if the treasury goes to 5 and borrowing costs go to 6.5, let's say, that isn't going to curtail our appetite for investment,. It might curtail the price we're willing to pay, or if we think the rental increases will mitigate that. It might not have an extraordinary effect. That, that is basically what comes out of the analysis we do, but I would say, in a 5% treasury environment, we have been, traditionally, and I would still expect to be an avid buyer of real estate, where we see vacancy rates declining from 10.5% today to, you know, single digits.

If you asked me if we were at 10.5% today, and somebody projected vacancy rates increasing to 13%, that would have a chilling effect and a measurable effect on our investment appetite. But, as long as the vacancy rate and all the market dynamics are trending in the right direction, the treasury cost is just -- the borrowing cost is another factor that we would put to the model. And we'll price it as such, but I don't think it would dampen our enthusiasm in this current market to be a net acquirer. If that rate increase somehow put a damper on job growth, private sector growth and office using growth, that would certainly have to get factored in, but I don't see -- we've lived through multiple 5% treasury rate environments, and I think you could have a good, healthy business environment there as you do with 6.5% and 3.5%.

I think we showed a slide in December as well, where, you know, the spread of cap rates, 10-year treasuries, pretty historic high right now for the cycle, and a lot of times you'll see rising rates, but cap rates stay the same or actually tighten a bit, because typically rising rates will come in a rising rent environment.

Great. Thank you very much.

Is that it, Operator? We'll take -- What? Two? -- Okay, last two questions, Operator. We're well beyond the time we traditionally allow for the call, but we'll take two last ones.

Okay, not a problem. Our next question will come from the line of Tom Truxillo with Bank of America Merrill Lynch. Please proceed with your question.

Yes, hello, guys. This is Tom Truxillo. Speaking of that borrowing cost that's another part of input in the model, Jim you had said, during the analyst call, that you need a little bit more time to kind of look at the balance sheet and see what you needed to do to get investment grade ratings, or whether or not that's still the goal of the company. Now that you've had a little bit more time in the seat, can you give any thoughts on whether or not that's still a goal and if it is, what you think you need to do to get there?

Well, let's step back. I think the goal is to continue the improvement in the credit metrics of the companies --

Right.

-- made progress on. I think that the company just got an increase in its rating from Moody' s from, to double -- to BA 1 from BA 2. So my sense is that we've moved in the right direction and the rating agencies like what they have seen. Our creditors like what they have seen.

I don't think that I'm yet in a position to really quantify what has, or articulate specifically what has to be done. But, look, we're going to keep moving in this direction, and I don't think we're very far from investment grade, other than through time and relationship with the, the rating agencies, which I think, you know, is obviously something that can't be predicted. So we're a large REIT. We've got great momentum in our credit metrics. We've got great availability, and I think we've made some very thoughtful investments. So I think there's a, there's really good traction on progress on those things.

Okay, but no formal plans for balance sheet kind of management items. It's more of de-leveraging through EBITDA growth, improved operations, kind of continuing the track you've been on for the last, call it year, year and a half.

I think we touched on a lot of the items. I think we touched on a view of fixed and floating rate, for example. I think that's a pretty good approach there. I think that we've talked about recycling, the relative value of recycling versus going out to markets raising equity. I think all these things get tweaked over time and we continue to look at them based on our investments appetite, based on where we see rents going and the leasing going. So, again, I think we're making good progress. I think we're still on the same track we were before.

Okay, thank you for letting me in the queue, guys.

No problem. Thank you for your question.

Our final question comes from the line of Suzanne Kim with Credit Suisse. You may proceed with your question.

Hello, I want to ask you a couple questions about your structured finance book. First of all, what is driving the loans in the non accrual status? Is it a function of the larger book, or is there -- or is this a forward indicator of loan reserves, and is there a history of those loans going back and forth from non accruals to accruals, sort of buckets?

Suzanne, it's Matt. You know, we have to evaluate accrual-non accrual status every quarter. Actually we touched on this two investor conferences ago, that non accrual status is not necessarily indicative of those positions that have reserves or require reserves or could add reserves in the future. It's a separate analysis of income stream. Historically, those don't go back and forth; Can they? Yes. Historically, once they're on non accrual, they stay on non accrual. And then in the current book, we have one position that's the vast majority of the positions that are on non accrual right now. That is a performing loan, but it was an independent evaluation and termination made by us to turn off the income stream. And in all the cases, if we recognize income, or if it does perform, even though we have it on non accrual status, we will recognize the income. So it's an independent evaluation done every quarter and not necessarily something we should read into on a go forward.

Sure. And the second question is, on your largest investment, I think it's $202 million for [messes] debt in New York City, the yield sort of ticked up from 737 to now I think it's recorded at 984. Could you provide some color behind that and sort of what we should expect on that yield?

Yeah, it's actually, it's pretty simple. We have OID, discount, amortization that was started in Q4. That ticked up the yield, and that is how it will be recorded on a go-forward basis.

Okay, and is this Columbus circle?

It is not.

Okay. And finally, what sort of level of earnings coming from the structured finance rates are you comfortable at going forward?

We would like these positions to be as high as possible relative to the capital we devote there, but we only devote about, you know, no more than 10% of assets to the sector. Right now, we're probably at about 7% or so. We would love those yields to be as high as possible, so, you know, they traditionally have been around 10%. I guess right now, Matt, that yield on that book is how much?

It's around 8%.

I guess what -- let me just comment. You know, it's about, also it's about -- I don't have the exact number, but around the 8% of EBITDA comes from that portfolio, but I think that that activity itself has value added that reaches way beyond just the investments in the portfolio into our ability to create value across the whole company. So we've shown that I think historically, this business has been a good business for the company. So I think if what you're asking is, you know, how much, how much -- how important this business -- it's going to continue to be important, but I think that we are also rational in measuring the exposure to risk and taking into consideration credit metrics and other things, but we're going to continue a big focus on this business.

Okay, great. Thank you so much.

Okay, thank you for whoever is still with us at the end. We appreciate your questions and interest and patience in getting through, you know, a long list of, you know, what were very good questions. And we look forward to speaking to you in three months time. Thank you.