SL Green Realty Corp (SLG) 2011 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the fourth quarter and year end 2011 SL Green Realty earnings conference call. My name is Keisha and I'll be your operator for today. At this time all participants are in listen-only mode. We will conduct a question and answer session toward the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for recorded for replay purposes. I would now like to turn the conference over to Miss Heidi Gillette. Please proceed.

Good morning everybody, and thank you for joining us. The conference call is being recorded. At this time the company would like to remind listeners that during the call management may make Forward-looking statements. Actual results may differ from the Forward-looking statements 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 10K and other reports filed by the company 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 correctly 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 on the company's website at www.slgreen.com by selecting the Press Release regarding the company's fourth quarter, year end earnings. In December, executive management provided substantial commentary at the investor conference addressing both past performance as well as detailing the estimates for 2012. Therefore, for today's call will be utilizing an abbreviated format from that of quarters past. Initial commentary will come only from Chief Executive Officer Marc Holliday, then we'll turn the call over immediately to Q&A. As a reminder, for the Q&A section please limit your question to two per person. Thank you. I would not turn the call over to Marc.

Good morning, and welcome everyone. We were very pleased with our quarterly results announced last night to cap off a very, very good year for the company. While those who had significant concerns with the New York office market, while those may have been surprised by these results, we certainly were not, as the company's performance was well in line with the guidance we gave last month at our Investor conference. Because of the, I guess, three-hour presentation that was done in December, and webcast, and was available online, we're going to limit today's remarks coming only seven or eight weeks after that extensive dive, if you will, into the New York market and our portfolio and focus mostly on Q&A for the quarter, but I did want to just give you a few thoughts before we turn it over to Q&A.

First thing I think you'll note in the release is that we are seeing improved earnings velocity coming from two different avenues, improvement in same-store and contributions from recently acquired value add properties. Earnings and cash flow velocity will accelerate in 2012, as we lease up the acquired vacancy and the New York market continues to improve, such improvements being fairly measurable in '10 and '11, but still nowhere close to peak performance years of 2006 and 2007. Recall in December, we highlighted about a dozen properties that are projected to contribute nearly $90 million of incremental EBITDA, for the most part occurring over the next three years. Also, we ended 2011 with peak leasing volume for the quarter of 662,000 square feet. While that is a very sizable number in and of itself, I would just want you to note that, that total would have been almost 900,000 square feet if we included in this total the condo unit that was sold instead of leased to YR 3 Columbus Circle.

While that market activity in citywide may be slowing somewhat, as reported by several of the New York brokers, our portfolio activity remains quite high with over 115,000 square feet of space leased in our portfolio this month alone, first 30 days, first 31 days, and another 1.2 million square feet on top of that, which is being actively negotiated. An example of this recent performance occurring after year end would be the lease signed last evening by Steve Durels and his leasing team at Jazz at Lincoln Center, is now also an occupant at 3 Columbus, leasing about 30,000 square feet and bringing the total office left to lease at 3 Columbus to about 170,000 square feet. The building activity is accelerating on the heels of the YR announcement, and I feel it's safe to say that we'll have less than 100,000 square feet to lease by year's end at that property, well ahead of schedule. So we welcome Jazz, as well as all the other tenants that were signed up as part of that 115,000 square feet at 3 Columbus.

The leasing market remains in equilibrium at an overall 9.1% vacancy rate, with Midtown being about a 0.5 higher than that, and we're expecting that number to improve modestly in 2012 with 24,000 private sector jobs estimated to be created in New York City in the coming year. Also, the fact that subleased space today is around 5,000,000 square feet and that represents, if not a low, very near a low since the year 2000. So the subleased space, and I think that being something that people focus on, and rightfully focus on, and we would be concerned with if there was material glut of improved space on the market, that is right now at its lows, and I think that emboldens us to have made the projection we made back in December in the face of what people thought was a softening market when we projected an approximately 5% improvement in that effective rents 2012, and we still are standing by that assessment.

We also increased our structured finance balances by 10% in the fourth quarter, through four new originations that are typical of our New York centric investment profile. This program continues to be an enormous source of earnings and opportunity. On the investment front, I should say on the asset investment front, values continue to appreciate, and cap rates continue to fall, as over $25 billion of sales were executed in 2011 with over half of that represented by office sales, and those are very significant volumes, not peak volumes but quite sizable. We took advantage of that hot market as a buyer and a seller. As a seller, we announced three asset sales at the end of last year, and we intend to accelerate our sales and JV efforts to capitalize on significant value creation, and also our desire to continue to demonstrate the vast under assessment of private market valuations by public market investors.

On the acquisition front, in 2011, as we had demonstrated in December, there were about 10 different transactions where we acquired property or substantial interest in properties, totaling a transaction value of close to $4.5 billion in 2011. So you can see that on both sides of the table we were active. We continue to be so in 2012, notably 10 East 53rd Street, which was not discussed in December, is our latest acquisition. It fits right in with our core business line of acquiring, repositioning, and redeveloping prime New York Midtown Manhattan assets in prime location, and in that case, we subsequently brought in a foreign and institutional equity joint venture partner to both leverage our equity, enhance our returns, and increase our opportunity set. So that deal was fairly profile.

Also adding to our future growth is the DFR portfolio acquisition that is expected to close later today, which includes 402 residential units, residential rental units, in two Midtown East apartment buildings and extraordinary retail properties at 724 Fifth and 752 Madison Avenue. So we'd like to congratulate the entire team here at SL Green for what was really a fabulously year in 2011. My hat's off to everyone, including the operations management group, led by Ed, leasing led by Steve, and investments led by David Schonbraun and Isaac Zion. Andrew will address you later on some of the specifics for these transactions, but the legal team, Andy, Neil, and Jim and Matt, Heidi, and everyone else who was a part of this enormous effort in 2011, just want to say thank you, and with that, let's open it up for Q&A.

(Operator Instructions)Your first question comes from the line of Alex Goldfarb with Sandler O'Neill. Please proceed.

Good morning. Just a quick comment on the GAAP same-store NOI. In the Press Release, you had the 2.9%, which I'm guessing is a slightly different definition than what's in the supplemental. So on an apples to apples basis, what would fourth quarter same-store NOI have been, using the 2.9% definition that was in the press release?

Alex, it's Matt. If use that same definition, and what that does is that includes 1515, and 521 in the calculation, because we bought out partners during the course of the year that technically doesn't fit the same-store definition, but the mathematics would obviously hold that we own those properties, we control those properties so they should be in there, that's how you get to 2.9%. For the quarter, that would be north of 3%, if done on the same metric.

Okay. So over 3% for the quarter?

Exactly, and that's how you get to 3% for the year as well.

Okay, and then just, you guys sound like you are ramping up the disposition program. As you think about new investments, certainly Midtown South, especially when you speak to the brokers, they're very excited by that sub market. Just want to get your take, especially on the Chelsea Flatiron, if you think that market truly has legs, and now may be much more acceptable for institutional investors to go down there, especially if that's where the next generation of new tenants and business is coming from.

Well, I think it certainly has legs from a leasing perspective. The challenge for investors is there's not a lot of institutional quality inventory down there. So you're talking about the biggest buildings down there are 1 Madison, which we own, 626 Starrett-Lehigh which was traded this year. There are relatively few other buildings. There are Park Avenue South buildings, which are primarily old garment factories buildings, not a lot of institutional quality or institutional size product. It's a lot a very small, small side street type properties. So while the leasing market does have legs, I'm not sure yet in terms of the institutional demand for the smaller side street properties that make up a lot of the inventory, though.

But if a big institutional size asset were to come up, you guys would, I'm assuming, would be seriously interested, correct, or not so much?

Sure, absolutely. We own 1 Madison, we've had a great experience with it, and we would absolutely look at others as we look at 620 and Starrett-Lehigh at last year.

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

If financial services demand remains muted over the course of the year, do you think the other parts of the New York economy can make up the slack and you can get to the rent growth projections you guys talked about?

Well, I think it has been. I think it's a little less projection. It's more just a synopsis of what's taking us from down by about 300 basis points or so of vacancy. This quarter alone it was tenants like HF Global Healthcare and Bloomingdale's for office space, YNR obviously a big deal, Leading Hotels, Viking Global Hedge Fund, Aeropostale, which was a tenant that we started with as a retail relationship in Times Square and was able to work with our suburban group, and John Barnes that [groomed] that tenant out for a sizable occupancy at Chubb Way in New Jersey, and then you had some new media tenants like Amazon, who continues to grow at 1350 6th Avenue, I think, Steve, there was another lease last night to Amazon?

Yes, expanded by another 11,000 square feet.

So that was signed last night and they continue to expand their footprint at 1350. That's a sampling. Steve, maybe you know more?

Yes. Well, I think to put in perspective, financial services primarily is defined by the big investment banks and commercial banks, actually have reduced their footprint in Manhattan last year by couple of percentage points. Yet last year was one of the biggest leasing years in a decade, and it was driven primarily by new media and technology who leased 26%, 27% of all the inventory for last year, and we're seeing those industries continue this year. The deals that are in the pipeline are not necessarily financial related, except we still see the hedge fund, private equity, smaller type deals kicking about, but there's plenty of deals out there for advertising, technology, engineering, law firms, and general service businesses. So I think that's the good news, is that there's a big diversity of industries that are in the markets, and we saw it last year. The thesis last year was, can we have a good leasing year without financial services? We did, and I think we're going see more of that the this year.

Thanks. My second question is as it relates to 600 Lex and 125 Park. Both had occupancy slippage in the quarter. I'm just curious if you can refresh us on the plans there, how they're coming along and whether those were expected, and when those occupancies might turn the corner?

Sure. 600 Lex, actually both these buildings, if you recall when we bought them, we knew going into the investments that a good percentage of the tenants would be vacating the buildings. At 125 Park it was Meredith Publishing Firm, who occupied about 150,000 square feet. We knew there was no chance of them staying in the building. They had outgrown their space and there was nothing available to retain their occupancy, where they wanted to consolidate into a bigger footprint at a cheaper price. At 600 Lexington, we didn't count on those tenants as well. We actually underwrote the building that none of the tenants expiring between '11, '12, and early '13 would renew. The good news is we actually have renewed a couple of them. 600 Lex, we've seen the leasing there kind of go up and down. We had a burst of activity early last year, went kind of quiet midyear, and we're busier there today than we are anywhere else in the portfolio.

We have four or five full floor deals that are pending at rents that are significantly above the underwriting. We're seeing a lot of tenants who have been looking at on Park Avenue or Upper Madison Avenue, coming our way at price points that are kind of $65 in the base up to $80 a square foot in the tower. 125 Park Avenue, the space just want vacant on January 1. We have pre-let one of the full floors of 25,000 square feet, and we're out hunting for full floor tenants over there. So that will take the balance of this year, I think to get any traction on that going, but that's in line with the business model.

Your next question comes from the line of Nicholas Yulico with Macquarie. Please proceed.

For the New York City leases that were signed, you now have in fourth quarter very strong renewal spreads, you had them in the third quarter as well. I'm wondering how much of that is a function of you guys pushing rents harder as opposed to now getting the benefit from some easier comps on renewals?

I would say it's more a function of the market than anything. We experienced relatively good growth in market rents beginning back in 2010 and continuing into '11, and we see moderating a bit but positive in 2012, probably bringing us close to at least 20% over the three-year period, higher if you include the tightening of the concessions that we've seen in free rent and TI's. So I think what you're seeing primarily is sublet space being taken off the market, vacancy rate has declined by over 300 basis points, and equilibrium market of around 9%, where we generally have competition for space. It's not insane competition like you would be at 5% or 6%, but there's usually more than one tenant on a space so we can get those premium rents, and we're very focused at trying to get the rents replaced at least equal to or greater than in most cases where they were expired.

That will change from quarter to quarter, because you may just have an anomaly where a tenant, in any given quarter may have a very high head rent, if it was signed in the peak time, and it rolled down to market today. So we still have a number of tenants that are rolling down for market, or rolling down from their previous escalated to market, but on average, when we are leasing about 0.5 million square feet or more per quarter, the preponderance of those are neutral to up, and on average you saw they were up substantially in the fourth quarter, and we had given guidance in December at where we saw that mark-to-market for the full year 2012. And I think that guidance, as I'm looking at it, is greater than 5% on average for the coming year. That's actually very good, and consistent with our view, but it's a lot of work to do this year to achieve that.

Okay, and then just turning to the investment side, on 10 East 53rd Street, obviously a very good location with Class B building. Can you just talk a little bit about the plans for redevelopment there, and the dollar range of the money going in there, and whether rents you're targeting there, sort of in that range of 600 Lex, or perhaps even a bit higher, where you're talking about maybe average rents targeting of say $80 to $85 in the building?

Sure. The capital program is going to be close to $40 million. So it's going to be a transformational capital program to bring it solidly to compete with comparable Class A buildings, and our rental assumptions there at the top of the building where you have unimpeded Central Park views are at a premium to 600 Lex, for sure. So I think locationally it is a premium, and view-wise, it's a premium. It does have that same highly desirable boutique floor play where a tenant can give a full floor identity, which tenants will certainly pay a premium for, comparable to 600 Lex, but you have a location advantage and a big view advantage. So after the renovation, we really feel this building will compare with other boutique office buildings like it in the Plaza District.

Just to be clear, the $40 million, does that include tenant improvements, or is that separate?

Separate.

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

Can you talk a little bit about the loan loss reserve and the gain on marketable securities, and then anything else that is kind of one-time in the quarter that we should be thinking about?

Hey, Jamie, it's Matt. I'll hit the gain on marketable securities first. That's simply disposition of additional shares that we still held in Gramercy Capital. So for tax reasons, we disposed of a couple million shares in the fourth quarter, and that's what the marketable securities gain is.

And then, Jamie, the loan loss reserve was related to our position in Southern California in what's known as the Arden Portfolio. It's a position we continue to evaluate carefully, and watch the Southern California market. We don't run those assets. [Heinz] runs those assets, but based on our year-end marks, we did take that position down by the charge that you saw.

Okay, and then I guess as we're thinking about future investments. Well, I guess can you first talk about the structured finance money you put to work in the quarter? I think you had said it was New York-based. A little bit more color on those investments, and then also, as you think about what's to come for the rest of the year, what does the environment look like for more equity infusions, or the kind of transactions with you guys do recently like the Moinian deal?

Sure. On the structured finance side, it was all New York-based deals. Three of them were acquisition financing and one of them was we acquired a senior position in a capital stack where we already hold a junior position at 5 Times Square, and we continue to think the investing environment for structured finance is very good. The yields are historically at a high level, even notwithstanding the interest-rate environment, and the attachment points of the last dollar risk is at historically low levels. So for us that led us to allocate a lot of dollars to the program over the last 12 months or so, and we think we've been able to pick up some great relative value positions within some different capital structures, all the way from first mortgages to B notes and mezzanine loans. Second part of your question was whether there still recaps out there?

Correct, and just the appetite for equity infusions, and whether you think we'll see more of that this year like we did last year?

I think it's very possible. We've been working on several recaps that are in our pipeline, and certainly, for those who don't want to expose their market property to a full marketing, they have tax issues or they want to stay in and continue to enjoy upside in their buildings, the recap route is a preferred route, and I think we're the first call generally for those type of deals in New York because we've had so much success with them, and we were successfully with so many other owners and operators as partners in New York.

And then just one final follow-up. Is the yield on the structured finance, is that sustainable? You think you will be putting money to work like that for the rest of the year?

Right now the market conditions are holding. There are some new entrants to the space. You always have the risk that people start competing on yield, but for now, the most recent deals we've done, still consistent with the yields we've been making for the year, which is in the 10% or so range.

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

I guess really two questions. One, Marc, can you talk a little bit more about this apartment deal and the Stonehenge relationship? I know that your partner has relatively lofty goals in terms of expanding the size of his portfolio, and I'm just wondering how you think about apartments, what percentage of that business you'd like it to represent or what kind of opportunities do you see there relative to structured finance and recaps on the office side?

Well, I think some of it, Steve, is to be determined, because these initial acquisitions, I think by the market assessment of these deals, I think we've got two solid deals, and I think our partners, Stonehenge, it's a group run by Ofer Yardeni and Joel Sieden, two very talented professionals who have a large multifamily portfolio here in Manhattan, and have successfully grown it from zero over the years to where they are today. I think they have extraordinary growth opportunity, and at this time we're working closely with them on evaluating new opportunities, as and when we see them, but it's like anything in Manhattan, they're tough to come by. They're tough to come by that particular meet our collective objectives of having a decent amount of in place started cash flow, but more importantly, a lot of growth over the near-term through redevelopment and repositioning. So I think those deals are out there. I think you'll see us do more of those in 2012. I can't say that, there is no investment target or guideline I can give you. It is going to be more dependent on the opportunities as they arise.

Most of the opportunities tend to be on the smaller side relative to what we're usually presented with on the office side, but there are sizable deals as well that can be $300 million, $400 million, $500 million buildings or complexes. So I cannot really give you any guidance as to investment targets, but I think it's a very nice compliment so far to our business where we've achieved great inroads would be an understatement on the office front, and on the high end retail front, structured finance I think we're generally recognized as a market leader in this city in subordinate financing, and I think multifamily provides another avenue where we can capitalize on our relationships, on our tax advantage currency, and on our ability to take projects that don't have a lot of current return but work on ways, ourselves or with our partners, to enhance NOI, and improve, and move rents up. So we like that business. It'll be dictated purely by profitability, and if we see great profitability, then you'll see us do more. If the yields are below our thresholds, and we've talked about our yield specials in the past, then I think we'll do some but probably not a lot because we're not looking to do low margin business. We're only looking to do business that fits into the spectrum of what we're making on our office, retail, and structured.

Okay. Thanks, and then I guess second question, as you think about just the shifting landscape, maybe away from financial services, you mentioned media and tech as taking almost 25% of the space in 2011, and perhaps those kind of tenants continuing to grow. Do you need to change kind of where the portfolio is located or the types of buildings that you own? Presumably a lot of these tenants don't want to be in 50 story high-rise buildings on Park Avenue, or Fifth Avenue, or Sixth Avenue. So how do you think about that changing landscape, given who's growing and shrinking in the city?

The largest growing segment, I want to dispel certain notions that I see, and while we're very excited about new media, the sizes tend to be small. It's made up of a lot of small companies that get moderately bigger, not every one of these tenants is like Google and Amazon. They're a very important user, I think, for Downtown and Midtown South, where there is space. That's more in line with their targets, in the $40s, $50s, and $60s per square foot and not $80s, $90s, and 100 per square foot. The largest growing segment in New York City, by far, is professional business services, period. That's where 16,000 jobs were added in 2011, and that's where we see most of the growth coming. So for most media firms,

Midtown is still considered not just acceptable, but desired, and I think YNR is a great example of that, and the tenant that we had competing for that space, which was a multi-100,000 square feet tenant, that we ultimately didn't consummate with because we couldn't accommodate both of that deal and the YNR deal. Midtown still sees the highest rents and is most desired, and we don't see many tenants in our portfolio migrating downtown. So I think we've got a developing and very healthy complementary markets for users that are looking for different types of space at different price points throughout the city, with Midtown being what's most in demand and achieves the highest price. We do a fair amount of lending in Midtown South. As Andrew said, we own 1 Madison. It's one of the premier institutional assets in Midtown South. As we said on prior conference calls, we're actively looking at 1107 Broadway, which we bid for but it went condo. What can I tell you? One was residential, but we were a leading bidder, if you will, for 1107 Broadway.

We've owned other assets in that market, like 470 Park Avenue South, 1 Park Avenue, which we bought and sold, Clock-tower, so it's a market we know well. I don't think it's a market that's got the highest asset appreciation potential, which Andrew spoke to earlier. We still believe that to be the best Midtown assets with the highest rent appreciation potential, but with that said, we love that market, we're active in that market. I think that market is going to stay very tight, because a lot of the inventory is being leased to tenants looking for affordable rents, but a lot of it is also been converted to residential, and that certainly supports, to a large extent, why you see such a low vacancy rate in that market, and downtown, we spent probably, I don't know, a half hour at our investor conference in December highlighting downtown, our investments therein, when we announced 180 Maiden. So I would sort of leave it at that, but I just want to make sure that it's pretty clear, when you are talking about the engine of growth in the city, it vacillates between financial services and professional business services, and those are the two gorillas in the market, if you will, that drive the big block usage, for the most part.

Your next question comes from the line of Sheila McGrath with KBW. Please proceed.

Given the demand that you're seeing in the market today from larger users, do you think that some of the shadow development pipeline on the West Side, or over by Penn Station, may be pushed out further into the future than previously expected?

Well, you saw Silverstein's announcement that he was going to cap off one of his World Trade Center buildings due to lack of demand. So there is some evidence of that in the market, for sure. Hudson Yards, we continue to watch carefully, they signed Coach for their first building, but they still need commitments for another 1.2 million square feet there in order to get that building underway. So we're watching it carefully, but certainly there is demand for space that's available now and in the short-term, and much harder to sign up tenants for longer term development projects.

Okay, and a second question. You did outline a target goal of same-store NOI of greater than 4% in 2012. Fourth quarter was slightly negative. I was just wondering if you could discuss if you think greater than 4% is still achievable, and what would be the main drivers of that? Is that occupancy pick up, rent spreads, or new buildings in the mix?

It's Matt. We had targeted 3% to 4% on a cash NOI basis, something that has to do with what you mentioned, concessions we've seen kind of stabilizing, so not as large as they were before. You will see the burn off of the larger concessions on a lot of leasing that we did over the last couple of years, as well as straight line of the new rents coming onboard.

If you think about it, Sheila, we had 3 million square feet of leasing two years ago, 2.4 million or so last year, and we targeted in the investor conference, 1.7 million this year. So as the stabilized portfolio continues to run along from the bottom of the market, we're going to have growth in cash NOI that's going to exceed the GAAP NOI.

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

Excellent quarter, that was very good. Question for you. Marc, I know the answer to this question but I have to ask it anyway. I happen to agree with your comments about the public market having undervalued your real estate, especially during the fall when your stock got hit pretty hard. So just curious again why you didn't make a move to buy back your stock during that time period, because your conviction never wavered that values hadn't really declined like the public market feared. Just curious why you didn't plow some disposition proceeds, say, to that initiative as opposed to buying private market assets at, say, presumably fair market pricing?

Well, I think the last piece of what you just said that is probably the barometer. We are making fortunes on the assets that we purchased predominately in the trough to middle innings of this recovery, from end of 2009 forward. I mean very, very sizable levered and unlevered gains, well into the double digits. You can argue around the margins whether better or not to have bought in our stock, but the opportunity set, as I said in December, was about as good as we saw it. We'll see 2012, clearly as the market has heated up, the buying opportunities may moderate, and maybe the late inning ones weren't quite the same as the early inning ones, but we had an extraordinary two, two and a half year run where we made investments that I think are going to prove to be the seeds of earnings and cash flow growth, or our net asset value appreciation, over the coming three years that is going to be sizable. It's going to define this period of time for the company. So it's a marginal analysis.

It's certainly not the same as if we didn't have very attractive uses for the proceeds along the way, including the structured finance business, which you see is also a double-digit business with more moderate risk associated with it. So I think that has driven our actions, to a large extent. Also part of the proceeds went to paying down leverage, which we deleveraged fairly sizable you from 2008, let's say, to where we stand today as measured by debt to EBITDA, or debt to assets. So in those two metrics, we felt that it was prudent to bring those metrics closer to in-line with the REIT community because of our goal of establishing an investment grade rating with S&P, and hopefully with Moody's. While buying back the stock may have been more opportunistic at the time then deleveraging, we think the deleveraging will have a long-term structural benefit to us as we are able to access the unsecured markets as alternative to secured markets at very cheap rates. So I would ask Jim if he wants to add to that, but that I can tell you, is sort of our guiding philosophy.

Michael, the reality is that the accounting for a share repurchase gives you less than half of the capacity that you have to go out and make acquisitions off the balance sheet. So the theory is good, but so long as we have alternative uses of capital that are really highly accretive, then it doesn't make sense for us to look at our stock.

Second question is, I guess, more for Steve or Marc or whoever would like to comment, but just be curious if you can kind of update us on your thoughts on high end, versus maybe mid-tier, versus low end of the market? I think you had commented before that the middle of the market was faring better than the very best part of the market, and maybe just weave in any comments that you feel are appropriate in terms of sub markets, say Park Avenue or Fifth or Madison, versus, say, some of the more value-oriented sub markets in Midtown? That would be helpful. Thanks.

Well, I think that's still true today, that the biggest activity that's out there is kind of that mid-price point type space, and you can define that in a couple different ways. There's the kind of 30 year old buildings that are $45 to $65, maybe $75 price points, kind of the middle of the market, and I think that's where a lot of the activity is that could be a lot of the product would have around Grand Central. Third Avenue for instance, where we've see activity, but even on the newer buildings that were downtown, the better quality, newer buildings downtown, are mid-price points, and are seeing a lot of activity when you compare them against the same kind of product with whatever rent for in Midtown. So I think a lot of the decision makers out there are taking a very prudent perspective with regards to their real estate. They're looking to lock in long-term leases, and they're shying away from that $120 price points, but that comes in waves. I would not be surprised, if the economy continues to improve and people become more bullish, to see that the high price point product pick up steam later this year.

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

Just had a question about 711 3rd Avenue, and maybe the marketing of that project and what you guys learned through the marketing process, and how that compares to what you're looking to sell in 2012 where I think expectations are around $500 million or more of dispositions for this year?

I think there were issues specific to that marketing process, mainly the bankruptcy of a 40,000 square foot tenant during the process, and also the fact that we signed up three other deals at prices well ahead of our expectations, and sort of very fast timing that allowed us to take a step back, really work on re-tenanting that bankruptcy where the tenant liquidated, and then reevaluating the building. The market response to the building was great. The tour activity was great, and frankly the indications of value we got were compelling, but we think we can do better bringing it back under our control, getting the vacant space leased up, and then bringing out a more stabilized building for the market eventually when we do decide to re-market.

Andrew, you still feel like the buyers out there, in terms of looking at either value-add projects or projects with some longer-term upside, are still underwriting fairly optimistic scenarios in terms of value where it is today, and relative to where they can get to in a couple of years?

Definitely. You saw the trade at 575 Lex most recently, where that building has a lot of vacancies. People are still aggressively chasing vacancy and taking optimistic views of rental growth and asset appreciation, which has continued to push values in the market.

Great, and then for Matt or Jim, I think Marc mentioned the $85 million to $90 million of incremental EBITDA from the value-add properties that you guys have within the portfolio. How much of that do you think gets realized, at least as it is contemplated in 2012 guidance, how much of the $85 million to $90 million of incremental is in guidance, and how much of that is 2013 and beyond when you realize it?

Actually, there's a pretty good reference point for that, Brendan. It's Matt. You can go to the investor conference where we actually laid out where that incremental, call it $90 million of EBITDA, was coming from. Notice from the stabilized years, a lot of that is beyond 2012. There are some properties who will actually contribute during 2012, but that incremental doesn't really kick in any meaningful way until 2013 and beyond.

Your next question comes from the line of Michael Bilerman with Citi. Please proceed.

It's Josh Attie with Michael. Just to follow up on Steve's question on residential, would you now consider doing pure residential investments, and is that a shift from the prior strategy where it seemed to be more of a way to get at the retail that you wanted? Would you also consider buying into Stonehenge's portfolio?

Well, I can't speak to the latter, it's not our portfolio and I'm not going to speak about somebody else's portfolio. As it relates to our interest in what you're calling pure residential, which I think you mean stand-alone residential, I would say absolutely. We would not have purchased the two apartment buildings in connection with the retail properties if we didn't think that on the merits they weren't an investment. While it was a smaller portion of the overall, it was still, our recollection is close to well over $150 million of total value that was ascribed to those properties. So this was not an incidental investment, if you will.

No, it's 40% of the investment.

Yes. It wasn't the primary objective. The primary objective was 724 Fifth and the Madison Avenue (inaudible) with 752 and 760, but nor would I characterize those apartments, as I said earlier, incidental. I would say that we thought each component of that transaction was very attractive, and if we had the opportunity to do that on a stand-alone basis, I think we give a very serious look. The only thing I said earlier, I think it was in response to Steve Sakwa's question, was simply that people tend to be generational owners of rental, and so those type of quality buildings don't trade often, but when they do, I think we're well-positioned because we have a currency that can be utilized in a way that will be very attractive to sellers, and tax efficient to sellers, and flexible to sellers to treat different people differently as we've done time and time again. I think we've done somewhere between 8 and 10 unit deals at least, over time. So it's clearly a valuable tool in our arsenal, and I would say that we are evaluating and will evaluate those kind of opportunities going forward.

Marc, it's Mike Bilerman speaking. You think about your competitive advantage relative to a lot of the multifamily REITs, which have the same sort of currency benefit that you do in terms of offering units, but also have a significant operating platform within multifamily, and a lot of them have been very active in New York. How do you sort of compete with that, especially when the multifamily REITs have access to probably even lower cost of capital and have lower return thresholds then you do, as well?

I would say two things Michael. I would disagree with you. I don't think anyone's got our kind of currency that appeals to New York owners. When you say there's a lot of other multifamily REITs that have currency that would be as attractive, I don't know of any, frankly, that have what is viewed as a almost completely New York centric portfolio and operating portfolio, like we have at SL Green. I've said it before, I always think that it's very difficult to get people to trade their New York bricks for out-of-New York paper. That's just my opinion. You can differ with that, others can differ with it.

It's been my opinion and experience that traditionally people are hesitant and very thoughtful about when and how they're going to trade hard assets that they control for securities that they don't control, for partnership interests that they don't control. The way in which we've gotten people over that is through track record, management team, and portfolio. When you line our portfolio up compared to others, there's a mindset where typically what I've seen is New York people want a New York portfolio. I think it's less an issue of property type, per se, because I think people view their buying into a diversified portfolio, but I know people who just aren't going to trade a midtown rental property for a group of properties located in secondary markets throughout the US, just not going to do it.

It was a critical factor in the Franklin portfolio as well.

Yes. So that's my opinion, but that's opinion developed through my experiences with that in particular. When you talk about New York operating platforms, I look at our operating platform and would stack up to many other out-of-town REITs' operating platforms in the ability to manage staff and.

Invest capital.

Local vendors and invest capital and relationships. I view that as a competitive advantage, not disadvantage. The cost of capital, I cannot respond to. We have excellent cost of capital certainly through the private markets, and then the public markets at times when we see that market opportunity. It's there at times, it's not others. That, I think, goes to my statement earlier about what I perceive to be a vast under-assessment of private market valuation by public market investors. Again all three of these things are just my opinion.

What are your thoughts on size, Times Square, and the incremental investment that you made?

Michael, in fairness, we have a queue of others. I think what we should do is we could pick this up offline as a residential. I said earlier, in response to Steve Sakwa, I had no size parameters for targets. So I don't have any thoughts along those lines. We are driven by opportunity within this market, and I would say that the size of that opportunity will be dependent on a whole number of factors, and we'll just see how it goes. We can certainly talk offline and go through residential more, but I would also want to caution everyone out there that in the pipeline we're looking at, it's a very small component of our pipeline. I wouldn't look to that to be a major driver of 2012 investment or results.

Your next question comes from the line of Louise Pitt with Goldman Sachs. Please proceed.

Thanks for holding the call, and congratulations on earnings, guys. Just a quick question on unsecured financing opportunities. I wonder if you can comment, given the existing low rates and the fact that you already simplified the corporate structure with the recent bank facility. I know that the rating agencies have looked for you to unencumbered some additional assets. So just wondering if this would be a good opportunity?

Look, I think that as we move through the year, we're going to be doing a number of capital raising activities, as we've talked about, Louise, including selling potentially some additional assets or joint venture positions. From my vernacular, as we reload our balance sheet, I think that we will look at all sorts of opportunities, including the potential for unencumbered some additional assets to create, again, a different kind of capacity, not just the mortgage side of the financing that we've done in part over the last couple of years. So that's still the direction that we are consistently on.

Your next question comes from the line of Jordan Sadler with KeyBanc Capital Markets. Please proceed.

I just wanted to follow-up on 5 Times Square. Curious, was the legacy investment performing, or is it performing, and maybe the strategy surrounding the incremental investment there?

Well, there was a couple of new factors there. The property was marketed and ownership decided not to sell, but the property was marketed and we got some data in terms of where the marketing, where the bids were for the asset when it was marketed. A piece senior to us in the capital structure, as I said before, did become available at a price that was attractive to us. So we did pick it up. That piece is on accrual, and our prior piece, which is a pay-in-kind piece has been on nonaccrual. We're currently evaluating whether it should stay on nonaccrual or return to accruing status based on the outcome of that marketing, although the building didn't trade.

Okay. That's helpful, and what else is ahead of you, besides the CMBS in the stack?

Just the CMBS.

Just the CMBS.

The piece that we bought, the senior piece, was current pay. It's not a pay-in-kind position.

Okay, and then separately, just more of a housekeeping item, on pages 42 and 43, you used to have your asking rent disclosure, which we found helpful over the years. Was that an oversight to exclude it, or did you purposely eliminate it?

We can put it back. It was in, it's not in. I found that there were some people who looked at it, and sometimes confuse asking rent with taking rent, with market rent, with other kinds. We got jumbled questions from time to time, and they would point to the asking rents in a way that was inappropriately implied. It's easy for us to put in, I mean we can put it back in. The problem is, in asking rents is not equivalent, in all cases, to a taking rent. Sometimes it is, but more often than not there is a natural negotiation that goes on in this market. In bad markets, the deviances can be more substantial, in good markets it is relatively tight. We thought it was being misapplied in some cases, and we also didn't know who, if anyone, really needed or tracked it. If there's a preponderance of people who want it back in, we can drop it back in easily in '12. Just out of curiosity, is it.

Yes, from one man's perspective, we liked it directionally to see what you guys thought of market rents, given your perspective.

I would agree with that, directionally is the most useful application of that. I think you can get directionally also from average escalated rent on signed leases in the quarter, but with that said, it's a little tougher because we have different asset classes. So you guys decide. If people want it back in, we'll put it back in.

We'll look at it later today. We've heard this from a couple of sources now, and we'll look at it. Again, it did cause, in the last couple of quarters, really confused analysis from the investment community. I'll give you an example.

There were some people who looked at it and said, I don't know what it is, 15%, 20%, 25%, embedded market growth based on the ask amounts. Now, that's not really accurate. Even though we like hearing that, we want to be accurate and we didn't feel that was right. I think when I heard that comment, that led me to say, Jesus, if that's how people are looking at this, pull it out. We can put it back in.

Yes. The cynical view, right, and not that I would be cynical, would be that you guys were pulling it out if that number were rolling over in terms of, with the market rent no longer going up at the rate that it was, i.e. second derivative.

No, that's not what happened. Could just have Steve operate the asking rents.

I'm glad you had the opportunity to clarify.

We actually did update it, and it was up at the top, so it's just the cynical a.

Do you have the number, by chance?

Jody, it's Matt. I'll call you later with it. I just don't have it at my fingertips.

Okay. No problem.

We did it.

No problem, thank you.

Your next question comes from the line of J. Habermann with Goldman Sachs. Please proceed.

If you think about ramping up the dispositions in the near term, should we think of that as a growing appetite to actually see some acquisitions in the back half of the year? I guess maybe Mark, back to the comments you made earlier. What sort of opportunities, and maybe size of opportunities, are you seeing? Are you seeing more of a willingness of sellers to sell and banks to move properties that could create those opportunities?

Well, I mean 10 East is a fresh print. I think that's within the past few weeks. That is a foreign pension fund owner, so in the property for a long period of time. Wants to take some gain for whatever reason, we won't spec of it as to the reason. It may want some liquidity at this point in time, and we view there is upside potential in converting a building that hasn't had a lot of capital investment over the years into what Andrew stated earlier, would be a building competitive with Class A buildings in that location. It's a great location. So that business for us is something we've been executing for 15 years, and Steve Green, prior to that for over two decades. There's nothing trend-setting about it. It's another value-add opportunity that fits our profile.

I hope we'll have more like that this year. I have no reason to expect we won't. The answer is yes. I think we will see those from -- you mentioned banks. I don't think we're going see those from banks because banks don't really own those kind of properties. If you are talking about bank-owned facilities that are looking to shed in order to free up some capital, you may see some of that, but a lot of banks don't necessarily own these days, their higher-end products. You may see data centers or back office properties being sold by banks to raise cash. a bit that, that's not the heart of our opportunities. The heart of opportunities that are owners that have owned buildings for 10, 20, 30 years that our deep in the money that want to monetize gains and don't want to invest a lot of new capital where we see upside.

Okay, and I know at the investor day you did touch on your development site in Midtown. Should we expect any sort of update throughout the year? I know you look at maybe mixed use as an opportunity. Clearly you're talking more about residential. When would you expect some sort of an update on that site?

Well, hard for me to speculate. Not in the near term. So I can't tell you whether that's Q2, Q3, or Q4, but it's not near term. Certainly sometime throughout the year, and if I had to guess, in the second half of the year we should have some kind of update, hopefully a meaningful update for investors. I cannot pinpoint it more specifically then second half of the year.

There are no further questions in queue at this time. I would now like to hand the conference back over to Marc Holliday for any closing remarks.

That's it. Want to thank everybody and look forward to speaking again in three months time.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect your lines. Good day.