SL Green Realty Corp (SLG) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 and full-year SL Green Realty Corp. earnings call. My name is Erin, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I will now turn the presentation over to your host for today's conference, Ms. Heidi Gillette from SL Green. Please proceed, ma'am.

Thank you, everybody, for joining us, and welcome to SL Green's fourth-quarter and full-year 2012 earnings results conference call. 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 factors that could cause such differences appear in the MD&A section of the Company's Form 10-K and other reports filed by the Company with the Securities and Exchange Commission.

Also during today's conference call, the Company may discuss non-GAAP financial measures as defined by SEC Regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure discussed 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 and full-year 2012 earnings.

Before turning to call over to Marc Holliday, Chief Executive Officer of SL Green Realty Corp., I ask that those of you participating in the Q&A portion of the call 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, and welcome, everyone. I think as was previously stated to all, this call that we do for the fourth-quarter and year-end wrap is somewhat abbreviated. We go right to Q&A, given that this is less than two months on the heels of our in-depth investor presentation, which could be found, I assume, still on the web, and provides a very deep look into all of our forecasts and projections for 2013, as well as our goals and objectives, and has a lot of information on specific sectors within the Company for -- as to structured finance, investments, retail leasing, et cetera.

So we keep this relatively short. I would just to kick it off by -- before we go to Q&A -- by saying just how happy I am with the results of the quarter, which I think were very good, but I think exceptional in light of the fact that it was all done within the overhang of Sandy, the Sandy Storm, which had a very, very severe and intense impact on this economy for a period of time. Although clearly, we are getting back to normal on the heels of that storm.

Also the uncertain election outcome had people's attention and caused a bit of paralysis, I think, in the fourth quarter. As well as the fiscal cliff deadlock, which at least temporarily has been surpassed.

So in light of that, the fact that we were able to increase our occupancy in the same-store Manhattan portfolio by 50 basis points, 40 basis points of which occurred since December investor meeting, so just right at the end of December. We had sector-leading increases in same-store cash NOI of 4.6% for the quarter and 4.8% for the year, which is a very healthy margin, to say the least. We had increase in structured finance balance by about $286 million net, and that was on about $453 million of origination activity.

And that activity enabled us to actually increase our average yield on that portfolio by 40 basis points to over 9.9%.

We had a positive mark-to-market on signed leases of 4.2%, and that was on signed leases of over 320,000 square feet of office leases in Manhattan alone, wrapping up what I think was about a 4 million-square-foot leased year for 2012, a record for the Company.

We increased our dividend by 32% to $1.32 per share, and that was done right around the beginning -- end of November, beginning of December. In addition, there was a lot of transactional activity, some of which occurred after December investor meeting, notably, $122 million new retail acquisition at 131-137 Spring Street, which actually met one of our goals and objectives for the year that was not met at December investor meeting, but obviously has since hurdled our expressly stated goal of one new material retail transaction during the year.

There were other portfolio-enhancing transactions throughout the quarter, such as extending the ground lease at 673 First Ave for 50 additional years of term; the acquisitions of 1080 Amsterdam at 315 W. 36th Street in two separate JV formats; the sale of the 50% interest in the mezzanine loan that had been originated several years, or maybe four or five years back, resulting in about $13 million of additional income to the Company in the quarter. And I think that, too, was consummated -- that was actually a first-quarter consummation, but something that we had pretty much brought to fruition by the end of fourth quarter. And then the sale of a half interest in 521 Fifth, such that we feel that we positioned ourselves to optimize our returns in that portfolio.

So again, I think it was an excellent, excellent quarter, as a stand-alone and particularly in light of the headwinds that I mentioned earlier. And we are off to a strong start in 2013, with signed leases during January alone of in excess of 150,000 square feet in the month; that's usually a quiet month for us. The transactional activity in the market is impressive, with an exclamation point on 550 Madison, which went to contract during January for a price that exceeded expectations by $100 million to $200 million, depending on how you look at the asset.

Confidence among our tenant base seems to be much higher now than it had been in the second half of 2012. And we believe that confidence and the continued low interest rates and some stability in the market will lead towards some growth and expansion in this market for the coming year, which will enable us to hit our fairly lofty goals and objectives we laid out in 2013, back at our December investor meeting.

So with that, I would like to open it up for Q&A.

(Operator Instructions) John Guinee, Stifel Nicolas.

Great. A couple questions. Clearly, Marc, the market value of your shares is a discount to the private market valuation. Plus, you're at $7 billion, $7.5 billion market cap or denominator, so it is hard to push the earnings-per-share with that kind of basis. Having said that, are you in the market to buy back your shares at this kind of price?

I don't know that if we were or weren't I could answer that question. Looking at my counsel, he's shaking his head no. But with that said, I would concur with the basic premise of what you say, John, which is that there are moments in time where I feel like we are trading somewhat on top of private market valuation, often it is a discount, and there are moments where it is a very sizable discount. I would say entering this year, it would move into the realm of sizable.

The private market appetite for core product in Manhattan, particularly residential, retail, but office as well, is just strong and robust, and people are once again willing to take very low entering yields that are then predicated on executing business plans to create upside, whether it is through market rental rate increases that they believe will evidence themselves over the next year or two, or whether it is conversion opportunity, or whether it is just taking advantage of very low interest rates today. Whatever it is, we are seeing enormous strength in pricing across all product types.

And I think that when you look at our portfolio today as what it was a year or year and a half ago, it is just dramatically enlarged, improved and higher -- and more value creation within; yet the stock price has not risen in tandem with those efforts.

So there is a fairly sizable divergence, I would say, and I don't think that those divergences last. At least our experience as a public company for 15 years is those moments in time don't last. So we will look at how best to run the Company in light of that situation.

Okay. And then the second question is a two-parter. 635 Sixth Ave, which you just bought I think in the third quarter, looks like the book (inaudible) you are carrying it went from $83 million down to $62 million, if you can discuss that. And also discuss the $218 million first mortgage you made, which is on the books showing the 11 yield, which seems a little bit high.

635 Sixth, I think, is a pretty straightforward explanation. Matt.

So when we acquired that property late in the third quarter, final purchase price allocations as between 635 and 641 weren't complete. When that gets completed, which usually takes place three to four months after the acquisition -- it was done in the fourth quarter -- the basis is allocated differently between 635 and 641. So the all-in basis in both combined is the same. The allocation between the two changes based on the final analysis as completed by third parties.

As to the second part --

John, it's Andrew. We acquired a nonperforming mortgage loan secured by 315 Park Ave South; that is a first mortgage. And as you note, that rate is the full default rate that is accruing on the loan given its passed its maturity.

And are you able to book that as current income?

Until any assessment is made that we cannot, we can. The cash component to that is what we are evaluating on a go-forward basis. That rate is below 10%. It is closer to 6%, 7%. When we took the position in late November or early December, at that point we made the set assessment to book the default interest for at least that first month.

In other words, the rent from the property is servicing currently, as Matt said, 6% to 7%. The balance is accrual of the loan amount.

But you are booking 6% or 7% or 11%?

In the fourth quarter, for the one month we held it, it was booked at 11%. Going forward, it will be the 6% to 7%.

Okay, thanks.

Josh Attie, Citi.

Thank you. At the investor day, you provided targeted returns for some of the transitional assets in the portfolio, like 180 Maiden Lane, 280 Park and 10 E. 53rd Street, and others, too, where there is either vacancy today or a pending moveout. Given the slowdown in the market, which of these do you feel best about, and which are you kind of concerned might take longer or generate lower returns than you initially underwrote?

Well, I mean, I just want to make sure we've got the time periods right. Relative to what we showed you in December, we are right on track with what we showed you in December. I don't think we have any modification to that, be it accelerated or decelerated, for all of those assets, and there were a lot. I'm flipping through the book now. I think I just found it, actually.

There is probably 15 or more properties on here which we showed how much NOI we had created since acquisition. And then we showed how much more we expected to create in 2013, and then I guess 2014 and beyond. So for all of those assets, I would say we are still very much on track with what was in that presentation in December for all of those assets.

Can you talk specifically about 180 Maiden Lane and what are your thoughts on re-leasing the AIG space and kind of what is the competitive dynamic downtown? You also have vacancy at World Trade Center and World Financial Center.

This is Steve Durels. Our business plan when we bought the building was to -- much like when we took over 100 Church Street -- was essentially a value play, bringing the space to the market cheaper than the competitive alternative. And the way we look at downtown right now, we look at the Trade Center, which we think is priced -- taking deal, it is going to be in the mid-sixes to low sevens a square foot. World Financial Center will be in the low 50s to high 50s a square foot. And we see 180 as being low 40s to high 40s a square foot, depending on how much space and where it is in the building.

We think that the capital program and the amenities that the building enjoys give it an added leasing advantage, where we have an opportunity to create a big branding statement for a tenant. We've got amenities like a fitness center, an auditorium, a cafeteria, that will all be open to the general tenant population. And the views in the building are -- and the floor plates are top drawer.

So we feel good about its prospects. It's early in the game because we are only now starting the capital plan for the building, and AIG doesn't vacate until the middle of 2014.

And I'm not sure where you are in the marketing process, but can you talk anecdotally about what the level of interest has been and what the activity has been? And are you talking to the same type of tenants that could go to World Trade or could go to World Financial Center? Are they directly competitive or because of the price difference, are you talking to different tenants?

For the profile of tenants, they are going to shop, I think, all three of those submarkets, whether it is a Trade Center, World Fi or us. So I think you are going to see everything from the typical downtown tenant of financial services and insurance to service businesses and general office services.

But I also think -- and we are designing our capital program to appeal to the Midtown South and sort of the traditional Midtown tenants, particularly some of the more creative media and tech-type tenants. We've got to find the right balance between an aesthetic for the building that appeals to both populations. Because particularly the tech guys and the creative guys who are going to get pushed out of Midtown South because there is no availability, the natural place for them is to come downtown, and we think we've got a product that should appeal to them.

Thank you.

Rob Stevenson, Macquarie.

Just to follow up on that last question, Steve, are you starting to see any spillover in tenant demand for downtown, Midtown South from tech tenants in Brooklyn unable to find additional space in that market?

Very, very little. We've seen one or two tenants come from downtown. I haven't seen anybody come from Midtown to Brooklyn, as far as our building goes at 16 Court. There have been others in that neighborhood that have come across. But mostly, it has been the tech guys that come, small companies that are coming out of essentially their garage, their apartment. They are in their infancy, and they are taking their first offices and they're coming into a more traditional office building. But certainly that type of tenant is in Brooklyn.

Okay. And then Marc or Andrew, could you talk about what type of opportunities you are seeing on the residential side beyond the Amsterdam asset, and how you are viewing the risks and return on residential in the city today versus those on the office side?

It's definitely extremely competitive out there to accumulate quality residential assets. We did go to contract on a property in Williamsburg that was attached -- I think we talked about it at investor day -- that was attached to the retail asset that we own there already. That will be an exciting lease-up play for us on a bunch of apartments in Williamsburg.

And we are looking at deals actively in Manhattan. It is just extremely difficult to manufacture what we would call acceptable yields for that type of product. Most of the market seems to be at 3.5% to 4% type cap rates for stabilized or pretty much stabilized assets, and that is just not an area we are interested in playing in right now.

All right. And are you still doing deals or looking at deals with Stonehenge, or are you primarily looking at deals on your own at this point?

I think it is a lot of both. The Williamsburg deal is with another sponsor, another operator. And we are looking at some deals with Stonehenge, as well.

Okay. Thanks, guys.

David Toti, Cantor Fitzgerald.

Good afternoon. Sorry if I hopped on a bit late, but did you guys talk about the ground lease renegotiation at 673, how it sort of came about and what the term options were, if there were any?

I'm sorry -- and the last part was what the term options are?

Yes, a ground lease is sort of an interesting instrument, right? So there is probably a number of different ways to structure it, and I'm just wondering if there were multiple options considered and kind of how that negotiation went.

Well, 673 is an asset that was actually -- it could be the only asset in the portfolio that was contributed in as part of the initial IPO. It was contributed as a leasehold, and so now we are 15 years later. We were coming up upon a revaluation date, and I think that revaluation date is probably in 2013 or 2014, as I recall -- 2013. So that kind of event tends to get the parties into discussion. There is not a whole lot of discussion in the interim on a ground lease because there is a leasehold that you just run and operate the building and, but for some ministerial stuff, it is fairly, it is fairly routine.

But when you get to a revaluation date, obviously then it gets interesting, because rent based on the formula in that particular ground lease would go up commensurate with the increase in market values for that land over -- from whatever that lease was originally transacted, which was at least 15 years ago, maybe even 20 or 25 years ago.

So as part of that, we took it as an opportunity to do kind of a wholesale modification of the lease. And as part of increasing the rent to reflect that revaluation, that we did a little early -- maybe six or 12 months before the rent would have otherwise kicked in, which was obviously a benefit to the fee owner -- we got a whole host of additional features added to the ground lease, which we think really created a lot of value for us, not the least of which was a 50-year additional term extension that I think brings the total term now maybe to 70 -- 74 years or thereabouts. So that is a very long-term ground lease in the world of commercial ground leases.

Second, it is set to rent for the next period of time for about 25 years. So there won't be another revaluation date. We have a known rent with known increases over that 25-year period of time.

And then there were some other features. We cleaned up the language around the revaluation formula, and actually [outened] time for the extension period, made it somewhat less onerous than it would otherwise be by reducing the rental factor, which is common to those kinds of revaluation exercises.

Then we also got a right of first offer on any future sales of the real estate, which as a leaseholder is an incredibly important feature. So all in all, I think a terrific execution for the Company.

It's interesting. My other question -- thanks for the detail -- my other question is just around some of the leases that you signed on the suburban assets in the quarter. And I'm wondering if you could just give us a couple of examples of sort of the general tone of the discussions you had on some of those leases. The rolldowns still kind of suggest some weakness there. I'm wondering what is the sense of the tenants -- or I guess what is the tenant mindset of those markets relative to the takedown of space? Are they more cautious than some of your sort of core CBD tenants? Are they shopping around more? What is the behavior pattern you are seeing there?

The term weakness, I think, is a relative term. I thought it was a pretty good quarter given the suburban markets. We held occupancy close to flat. I think we might have been down from 81.5% to 81.3% for the quarter, and that was on leases that were commenced and reported in the supplemental of 142,000 square feet of leasing in 31 deals. That is for the fourth quarter. So that is robust. I think we're doing about as good a job as anybody in the suburbs holding the line.

I think the sentiment is the same as it has been. Certainly it is not worse. I'd query whether it is starting to get a touch better, but I think it's premature. But I wouldn't say it was any worse than it was either throughout the early part of the year in 2011, where we've taken care of a lot of our near-term roll by doing a lot of -- we did a lot of advanced leasing in 2011, 2012. I was very surprised when I sat down to do the budgets for 2013 that the leases expiring contractually in 2013 is on the order of a couple hundred thousand square feet. It is 250,000, 300,000 square feet, is the number that sticks out in my mind -- quite, quite low. And we are obviously going to work hard to retain as much of that as we can.

We are working on some new deals. We have actually two tenants competing on one space out on some property in the Tarrytown area, which that is always nice. And we have other deals we are working on at the Ritz Condo and elsewhere. So I think it is -- the market is pretty much the same as it has been. But a lot of the triage we were doing in 2008, 2009, 2010, 2011 seems, in my mind, to have subsided a bit.

Okay. That's very helpful. Thank you.

James Feldman, Bank of America Merrill Lynch.

Thank you. Marc, your comments on confidence among your tenant base is higher than in the second half of 2012, can you just talk a little bit more about the kind of leasing you are seeing and what changed after the first of the year -- in terms of the types of the tenants and the sizes?

I think the best way -- rather than do it anecdotally, let's just talk about the most recent signed deals, the kinds of tenants that signed, renewal, renewal expansion or new deal, and talk a little bit about the pipeline. Actually, I am going to turn that over to Steve Durels.

But before we do, thought I'd maybe preempt another question here. On the last call, we talked about having leases out for signature and leases in negotiation totaling 435,000 square feet. If you check back to the transcript for Q3, that was about 120,000 out for signature and about 315,000 that were in negotiation, meaning leases had been drawn and being negotiated. 435,000 feet in total.

That number now has increased to 727,000 square feet, comprised of 80,000 leases out for signature. So a lot of the ones that were out, we obviously signed and got done in the fourth quarter.

But then our pipeline of deals in negotiation is 650,000 square feet, which is quite high. And that means we've agreed upon a term sheet and we've gone to lease. Steve, if you could just talk about maybe the most recent signed deal, the 150,000 feet we spoke of as being signed in January and then sort of the composition by sector or type of the 730,000 square feet that is in pipeline.

Sure. It is -- much as what we saw the second half of last year, where it has been a very broad, diverse group of tenants that are out there. We've done a combination of renewals, one of the larger being with WPP, which is the parent company for Young & Rubicam, for 47,000 square feet at 100 Park Avenue. That is one of the leases we signed in early January.

But I don't think there is any one tenant type that is really driving the leasing demand right now, other than the fact that it is no surprise to hear that financial services for the big investment banks are still fairly quiet. Commercial banks are still out in the marketplace, hedge funds and private equity guys are still floating around.

But I think, also like what we saw second half of last year, and you heard us repeatedly say, it is still a market where tenants are searching for value. They are not searching for the penthouse type space. They are looking for space much like what we have in our portfolio of quality space where buildings have been renovated, they are well-located. And they are looking to trade in particular in the rents that are in the -- anywhere from mid-40s to low 60s a square foot, seems to be where the biggest demands. And value is relative. Even the deals that you've seen announced in new construction, those tenants are going there for value. They are not going for high profile. They are going for efficiency of space and they are going to be able to re-stack their use and put a lot of tenants into as little square footage as possible.

There is a pretty good pipeline of activity. We've certainly seen it coming off of the fourth quarter, coming into the first month of the year, where, as Marc said, we signed 150,000 square feet. What he didn't mention is that we've got another 600,000 square feet of term sheets that are also in negotiation, on top of the 700,000 square feet of deals that are -- where we are actually in the lease negotiation.

So I think the year is set up for a pretty strong leasing year. And the question that is on everybody's mind is when we will see rent depreciation, and I think we are a little more bullish about that in the second half of the year.

If I could just ask a follow-up on that. Do you have a sense of just financial services shadow space -- like how much more is there to come, or do you feel like we are nearing the bottom?

I ask the question of -- anytime I am with a broker, and I can't really get somebody that can give us a clean answer as to where is the list of financial service where the big banks are going to put space in the market. We've seen a little come on the market that was unexpected. AXA put some space on at 1290 Avenue of the Americas. But they also put it on at a very low rate. From what I understand, it's already got offers in on a good portion of the space.

So I can't give you a good answer as to whether there is a lot of shadow space that is going to convert into supply coming on the market, because I just haven't seen it.

Okay. And then for my second question, if we could talk about the debt book. You grew it by $286 million in the quarter. What is your -- how big are you comfortable taking that? And then what are the opportunities you are seeing to grow it by that much in the quarter?

I'm not sure I understand the second part of the question. How big are we comfortable, I think the levels we are at, we are very comfortable with. I think there is some room for growth throughout the year. I think we may have projected, as part of December, some increase in structured finance balances over the year, which will be mitigated in part by some sales and syndications that we plan to do on assets, like possibly 315 Park Avenue South and otherwise.

So I don't think you will see a significant increase throughout the year, but certainly that could translate into maybe another $200 million to $300 million in total net, which would still be right within our sort of unofficial guide of around 10% of market cap. So there is no real change in thought or strategy there.

Okay.

What was the second part of the question?

Just in terms of what would the transaction -- or the deals you signed in the quarter, what kind were they?

Well, they were all -- it is our typical mix of bridge loans, mezzanine loans, preferred equity.

All Manhattan?

All Manhattan. I detailed the large nonperforming loan we repurchased on Park Avenue South and -- all Manhattan office retail.

All right. Thank you.

Ross Nussbaum, UBS.

Good afternoon. The asset you purchased at the end of the year, the retail asset down on Spring Street, can you maybe shed some color on why is that an asset that SL Green is going to fully own as opposed to in a joint venture with Jeff Sutton? And what kind of deals I guess on the retail front going forward get done with as opposed to without Jeff?

The deal we did at year-end came together very quickly at year-end. I want to say that. That transpired over a period of a few days at the end of the quarter, which is why we pride ourselves in always being here and on the ready, even over the holidays in December, because that is usually fertile grounds for us for last-minute deals. And here it was, we popped one.

So I wouldn't necessarily make any speculation about who will or won't be in that deal ultimately as to Jeff or otherwise. We just -- I think we just closed it a few weeks ago, and we certainly could wind up venturing that asset with Jeff, possibly, or not. But sometimes things just come up so quickly, it doesn't -- it is not so rigid a program where we have to do it all one way or the other. The deal just came up, we loved it, we did it. You were able to get in there where others were vying very hard for that same asset, and it took a lot of execution and performance by the team here to have accomplished that, both on the transaction and legal side, to get it done. It was only $122 million, but it doesn't mean it wasn't as complicated as some of the bigger transactions we work on. They are always complicated. And we will just sort of take stock of the asset and decide what to do.

What is the initial ROI on that asset, and what made you so excited about it?

It is two extremely valuable retail stores in a very prime area of SoHo which is benefiting from the significant rental appreciation on Broadway and a lot of development of high-end stores in the Spring and Wooster Street corridor.

So the attraction was to get to these very high-quality stores that have relatively short terms remaining on the leases there. And going in, it is a very low yield, as is typical of retail assets today. However, we think in the short term, we'll be able to work the leases or the property and get the returns up to our typical 6% to 7% cash on cost range for the retail investments there.

I would just add to that -- because you had asked something about go -- someone brought to my attention you asked about go-forward arrangements with Jeff. Jeff is our retail partner. We have a very strong alliance with him. We do most deals together.

There is always the one oddity that Jeff does on his own for -- whether it is legacy reasons or partner reasons or strategic reasons, and that may fall on our side of the ledger as well. But the value we've created as a team, I think since 2005 or 2006, has been extraordinary in the sector. And we certainly expect to do a lot of business with Jeff this year.

Okay. Second question. Marc, on the dividend -- and I appreciate the dividend increase that the Board put through. But I just was looking back. The last time you were at the current earnings level you are at now on a run rate basis, the Company was paying out a quarterly dividend that was in the $0.60, $0.70 a quarter range. And I'm wondering, in the Board discussions around the dividend, were there any voices that spoke out and said, look, SL Green still, after all these dividend increases the last two years, still has basically the lowest dividend yield of any real REIT, and shouldn't we --

That certainly gets discussed at the Board. It is usually somewhat of a -- it is a little bit more of a badge of honor than something we are not -- than something that is viewed as a negative. Because our shareholder base is almost exclusively institutional, and we meet with the shareholders. Jim and Matt meet with them regularly to discuss the dividend. And I would say almost across the board, maybe eight out of 10, if not nine out of 10, generally conclude that they are owning SL Green for growth -- and income, but with a much higher emphasis on growth.

And if you look at the ROEs we are creating on our investments, as measured by the ones that we buy, reposition and sell, or as measured by the structured finance assets that we originate and get yield and then get repaid, those returns are generally the highest levels of our sector. And retaining as much cash as permissible to reinvest into those activities is generally viewed positively.

I guess there is always -- there will always be someone who will say, well, it would be nice to have all that growth and high income, but the two are somewhat not positioned to each other. And we find that we get better net asset value expansion by paying out a reasonable dividend. But clearly, it has always been from day one at the lowest levels of the sector. And while it may be lower on a relative basis to FFO than it was -- I guess your point was relative to FFO --

Last time we were at these FFO levels, our dividend was (multiple speakers)

Yes, but has not changed from what our stated objective has been and always been, which is that the dividend is right on top of net income -- taxable. I'm sorry, taxable net income, correction, on top of taxable net income. And that is probably no different than it has been if you check back in time. So the dividend is more tightly tracking taxable and net income, whereas not FFO.

I appreciate the answer. I am obviously -- it sounds like I am in the minority amongst your shareholders you speak to in terms of the view on the dividend, but we will continue the debate. Appreciate it.

Alex Goldfarb, Sandler O'Neill.

Thank you. Good afternoon. Just wondering if you guys can comment, you know, [Cranes] had the article that you guys are in the lead to provide all the financing. And at your investor day, you guys had outlined the sort of buying wholesale, selling retail concept as far as originating entire financing, selling off the senior and the B piece and keeping the mezz.

But sort of curious -- given where that building traded on a per square foot value, how far up are you willing to underwrite mezz? Would you go up to like 1000 a foot on mezz or higher than that? Just trying to get some color.

Sony is obviously a deal in the market, so I don't think we're going to comment on it specifically. There is a great need for financing there, and I would say typically we are comfortable holding debt up to a level that is a reasonable cushion below what we would pay for the property. So we did bid for that asset, and I would say we are comfortable holding the last dollar of debt that is -- call it 5% to 10% lower than what we bid for the asset.

And it is an extraordinary building. We thought it would have made an extraordinary office building. It wound up trading on a basis of use that is likely going to be more oriented to hotel and residential than office. However, there were office players that did significantly more than (inaudible) thought at a more fulsome view of rents there. So it is an extraordinary asset and one we would certainly like to be involved in.

It is not -- certainly not the first office asset to trade in the $1100, $1200 a foot range. And there is a lot of demand for these types of assets out there. We thought this was a great validation of the market and our story, to see this asset trade for this kind of price.

Okay. The next question just if you can comment on the HarperCollins news report earlier in the Post this week that they are going to move out. Just sort of curious what your thoughts are on CapEx as far as downtime and where you think the red marks will be.

Harper signed their lease downtown at 195 Broadway. We knew they were moving out of the building when we bought the property. We underwrote it in our business plan. It would have been nice if they had stayed, but that would have been a Hail Mary, and nobody really had much expectation that we had a chance of keeping them.

The plan has been and currently is to reposition the building with a pretty material capital improvement program to a boutique office building. The property hasn't been touched in, I'm going to guess, 25 years by the prior ownership, and it sort of needs everything. But it has got the perfect bones. It is a great location, it's small to medium size floor plates, with very few columns and great windows, and the top 10 or 12 floors have stunning views of Central Park.

We think we underwrote rents that are going to be attractive in the market. Our next-door neighbor is 510 Madison, and they are doing deals in the $115 to $120 a foot range. And our rents that we're expecting to get are going to be considerably less than that. And a capital program that is going to be everything from a new lobby that closes off some of the public space passthrough right now to enlarge the presence of the property, redoing the plaza, replacing the windows, the elevators, the infrastructure. And we are going to have one of the best products in the market.

They don't -- Harper doesn't vacate until the middle of 2014, and we are deep into the design right now. We think we will probably be in construction sometime in the second -- late in the second quarter. And we will get a lot of the work done before Harper ever packs their bags.

Excuse me. I would just add to that, in December, we did a little [module incentive], which noted almost two months ago that Harper was leaving and we were launching a redevelopment. So I understand the newsworthy item is that they've signed elsewhere, but as far as Harper leaving the building, this has probably been on our drawing board for -- we've had a couple meetings with them after acquisition, one or two, but I would say the better part of almost a year.

Okay, it may just be impression. At the investor day, it seemed like there was a chance that they may stay, given everything that was going on. So excuse the question, but it just seemed from the investor day that there may be a chance that they were staying. So thank you.

Brendan Maiorana, Wells Fargo.

Thanks. Good afternoon. So Marc, it sounded like you felt that asset values were moving up somewhat significantly for building acquisitions. At the same time, as you guys detailed in your December event, you are making very good spreads on your structured finance book, and you moved it up in the quarter. Is there any chance that you relax the self-imposed 10% threshold of your asset base, given that it seems like returns there are attractive and maybe it is hard to find these simple investments?

No -- I mean 10% is a target. It is generally, I think on average, been probably 6% to 8%. When market cap dropped for a period of time back in 2008, we [blipped] over for maybe a year or so. I don't quite remember exactly how long.

So I wouldn't get too zoned in on 10% being an exact metric. That is -- the target is to be at or below. If we had an extraordinary year this year and ended up the year at let's say 12%, then I think what you would see is we would work extra hard to syndicate some assets, some structured finance assets, to optimize the yield and bring the structured balance back below.

So if the question is could we have some big originations throughout the year that would temporarily put us above 10%, I guess the answer is yes. Does that mean our target is therefore moving up from 10%, the answer would be no. And that would mean we would just be followed going with some syndication exercises, which, as you've seen, we've been very deft, I think, at executing. We're as good originator as we are a seller, and that is why you are seeing the average yield move up in part. It is not necessarily that we are underwriting at higher and higher spreads. It is that we are doing what somebody mentioned earlier on the call, and what we detailed in December, where wholesaling the capital stack and then retailing it out and bringing our spreads up that way through origination and syndication.

So that could become slightly lumpy, I guess, although it really hasn't to date. And I think that is the best way I would answer it.

That's helpful. And just as an outsider sometimes, it is sort of difficult to ascertain value of that book. But if you had to handicap it, if you had to monetize that book, do you think it is sort of 10% above where your book value is, 20% above? Can you sort of give us some goalposts?

I don't know. That's very difficult. It is very telling -- it's only one asset, but look at what we did on (inaudible) times, through selling half that investment and creating a sizable gain there on what I believe is a fixed rate investment -- correct? That is fixed rate?

So obviously, with the fixed rate instrument, there is more opportunity for that kind of execution than the floating rate asset, so you would really have to bifurcate the portfolio into fixed and floating. I don't know -- in the supplemental, we have the bifurcation?

We do, yes.

So the floating-rate assets, there is generally what you are trying to do is make the fees and maybe you make an IO and you can create some real value that way. The bigger gains, if you will, if you do it properly, are in the fixed rate book.

Okay, great. Thank you.

Michael Knott, Green Street Advisors.

Just curious how you are thinking about office acquisitions. It sounds like it is still not as attractive as the debt investments. And then also what about dispositions for 2013?

Well, office acquisitions -- I don't know if I would measure it against the structured finance book there. It is not one or the other. I think the structured finance originations are probably at the same levels now in 2012 as they were in earlier years, when we were buying office assets more aggressively. So I'm not sure I would draw the parallel between the two.

If you are just asking generally about our appetite for new office investments, I would say that, consistent with what we've said in December, we view that the pricing has gotten to levels where we are being much more selective. Case in point, in 2012, I think we did three deals primarily.

Really 10 East 53rd was the only major Midtown office asset we bought, and then we bought the two Midtown South assets. But I think we are so comfortable with our guidance from early December of $750 million or so of new acquisitions and dispositions of $400 million or so.

And then just a housekeeping question. I think at the investor event, you talked about a 96% occupancy goal for Manhattan. Can you help us relate that to the number in the South, the 93.8% for same-store?

At the first of every year, we reset the same-store [pool rate] to take into consideration the assets that were acquired really two years prior. That is the basis for our 96% occupancy goal we set for 2013. So it is the 2013 same-store pool. That pool at the end of 2012 was 94.3% occupied.

So it is 94.3% on a new same-store portfolio as of 1-1-13, and we are projecting 170 basis points of increase then, which I'm going to assume is close to sector-leading in terms of projected occupancy gains for the year. And just based on how we see things as we sit here 45 or 50 days after having set that goal, we still feel confident, but it is clearly -- that is a stretch, though. That is not a tap-in, but I do think we will hit it this year.

As it turned out last year, we were only 30 basis points off of our projection at year-end. It was unfortunate, because at the December meeting we had some deals not yet signed. And had they been signed, we would have been just 30 bps points shy, representing a significant increase over 2011. So that was timing. Hopefully, Steve will do the right thing here and get those signed by December investor this year and not by (inaudible) 31. But in any case, we are still comfortable with 96%.

Okay, that's helpful color. If I can just ask a follow-up to that, where would that 170 bps come from? Obviously, there are some specific assets where you have a lot of vacancy, like Tower 45, et cetera. Is there sort of a generic way to describe where that 170 bps might come from or how or what types of tenants?

I would look at the growth portfolio slide, and I guess we would have to pick -- it is mostly coming from there. We would have to pick out.

There are some properties, Michael, like 100 Church, that has leases signed but they haven't taken occupancy yet. So that thing is in the mid-90%s leased, but not mid-90%s occupied. There is a big pickup there. We anticipate some pickups in properties like 810, 521, 420, some properties that have seen -- they've done fairly well over the last couple years, but have seen a little bit of a tail-off; like in the case of 810, we see some pickup in 2013.

I think (inaudible) 521 Fifth.

And 420 (multiple speakers).

420 Lex.

Right. Thank you.

Michael Bilerman, Citi.

Just two quick ones. Marc, just thinking about your comment at the beginning of the Q&A about sizable discount to asset value in terms of where the stock is trading. Is there any reason why -- just like you have an ATM to take advantage of issuing equity -- you wouldn't just have a standing stock buyback program in place, just to have it, so that if there is a market dislocation -- and we can count the number of ways that could happen over the next 12 months -- that you fully have the opportunity to take advantage and capitalize on that and buy what you know best, which is your portfolio?

Clearly, there is no reason not to have a standing buyback that I can think of.

We really don't need one, though.

I was going to say -- you also -- it wouldn't hold us up. So those are -- that is a fairly immediate item. But you're right; on the margins, no reason not to. I'm not sure that it is a benefit -- 100% benefit to do it. But it is a good -- it is something we will take under consideration, because certainly no reason not to.

And just on 131-137 Spring, is there anything different -- the asset traded back in 2006 for $46 million. The square footage, it looks like it is 10,000 square feet more. I don't know if there was some addition or if your purchase is different from what it was then. But maybe, Andrew, just talk about what has changed in the marketplace from 2006 in terms of rents in the market, and then just sort of initial cap rates from what was probably getting to be peakish market back in mid-2006.

We actually underwrote and bid on the property in 2006, and lost the bid. Hindsight is 20/20, as they say. But the retail market rents have moved significantly. The in-place rents today are $178 a foot in one case and $263 a foot in the other case. And we are looking at market rents today in the $600 per foot range. We expect that to grow as rents on Broadway are getting pushed to the $1200 to $1500 a foot range. And that is sort of -- like Fifth Avenue and upper Madison, that is pushing users that can't afford Broadway rents onto the side streets of SoHo. So it is really just a change in retail market rents, which have changed the return profile of the asset.

And there is no difference in square foot -- was there a difference in square footage or everything is exactly the same?

I'm not sure about the discrepancy.

(inaudible - microphone inaccessible)

-- square footage. There may have been some change of use in the upper floors, where they bought out some live/work tenants and changed the use to office, but obviously they didn't modify the envelope of the building. They probably picked up some square footage because of loss factor on office space versus usable square footage on retail -- on residential space.

Okay. Thank you.

I would now like to turn the call over to Mr. Holliday for closing remarks.

Okay, thank you very much for dialing in today. We look forward to working hard through the year to meet our lofty, but we believe attainable, objectives for the year. And we will 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. Have a good day.