SL Green Realty Corp (SLG) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the first-quarter 2013 SL Green earnings conference call. My name is Philip and I will be your operator for today.

At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

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

Thank you, everybody, for joining us and welcome to SL Green Realty Corp.'s first-quarter 2013 earnings results conference call. This 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 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, www.SLGreen.com, by selecting the press release regarding the Company's first-quarter 2013 earnings call.

Before turning the 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 it over to Marc Holliday. Please go ahead, Marc.

Hello and thanks for joining our call this afternoon. The positive economic conditions in New York City provided the backdrop for a very solid first quarter of 2013.

First and foremost, we leased nearly 600,000 square feet of space in Q1 with almost half of that amount represented by new leases. This momentum carried through to April, where we have already leased an additional 164,000 square feet in just the first three weeks of the second quarter. Moreover, we have a strong pipeline of deals evidenced by over 1 million square feet of leases that are either out for signature or under negotiation. Categories that we believe represent high probability categories of consummating sometime during the year 2013.

About half of this million square feet is represented by new leases, so you can see that relative to last year in particular there is a lot of activity and a lot of success we're having at renewing tenants, but also filling vacant space that we acquired in the growth portfolio. While mark-to-market on the office leases in the first quarter was just slightly positive, I do want to stress that I think you will see more significant mark-to-market gains throughout the year as we have already experienced good mark-to-market in leases signed in quarter-to-date in second quarter. And our pipeline looks very strong as well.

So we are maintaining our full-year office mark-to-market objective of 3% to 8%, which was something that we had highlighted back in December. Notwithstanding one quarter down and three to go, we still think that that will represent an accurate range of where we will ultimately land. And that, I think, gives you some in cut into the kind of leasing that is in front of us, not only in terms of volume but in terms of economics. It was also notable that the concessions were down significantly in the first quarter, consistent with prior lows we have had in other quarters, but certainly down from our average.

This is attributable in some respect to being very prudent on renewal leases and getting best deals possible, but even on new leases you will see that we are cutting more in the way of net effective deals. And so you don't always see that big pop in headline rental, but we are also doing it very efficiently, trying to be smart about how we spend our capital to buy new deals.

We are seeing very good demand in various sectors of the market. All but the largest financial firms there's a lot of activity, and we are seeing great activity in professional and business services, media, advertising, tech, healthcare, and education. I would say all of those sectors, almost equally, are net contributors to absorption in this market.

I know that many of the analysts are focused in on the potential space shutting that may occur in the future at some of the largest commercial and investment banks, but I think that would be a mistake to let that overshadow the very vibrant business and leasing environment in the midsized space market where we see much demand and competition for space. Examples of locations where we are experiencing a pickup or continuation in demand include 125 Park, 3 Columbus Circle, Graybar, 810 Seventh, Tower 45, 919 Third, and 304 Park Ave. S.

This morning many of you have seen that we and Vornado announced 100,000 square feet of leasing at 280 Park Ave., which represented renewal and expansion space for those two tenants. And we have very good activity on the balance of the building, notwithstanding the full completion of the redevelopment. It's still a year away with completion of the lobby set for sometime around Thanksgiving.

Our retail leasing also remains strong with deals announced this morning with CVS at 3 Columbus Circle. That lease with CVS is the anchor retail tenant that we had talked about landing as an important goal and objective for this company in 2013, so we are happy to have CVS join our roster of retail companies at 3 Columbus and having that objective completed so early in the year. As well as retail leases that we did with Urban Outfitters and TD Bank at 180 Broadway, bringing that building to full occupancy, 100% occupancy, for a tower that we developed from ground up.

This leasing activity can be directly linked to the robust job creation in New York City. New York added 78,000 jobs in 2012 and that followed an increase of 90,000 jobs in 2011. The primary sources of growth, I mentioned before but I will sort of reiterate here, are professional services, technology, healthcare, and education. Not in terms of square footage, as I mentioned earlier, but in terms of job creation. But those are the sectors where we see the biggest contributors.

Overall, employment was up 13,000 jobs in the first three months of 2013. And this increase was achieved notwithstanding the drag created by a reduction of 5,000 financial services jobs in March, which shows that these growing sectors can more than counter --- can counter by a wide margin -- the job losses that were seen at the margins in the financial service sector being far exceeded by job growth in these other industries.

We expect that trend to continue throughout the year. Our rule of thumb is typically anywhere between 40% to 50% of private sector job growth translates into office using job growth, so we think this bodes very well for stabilizing or even possibly an increase in the overall occupancy rates in overall Manhattan market.

So with that short introduction, I would like to open up for questions and answers. Operator, if we have questions that we can address.

(Operator Instructions) Jamie Feldman, Bank of America.

Following up on what you are seeing in terms of demand, can you talk about any change in sentiment among tenants, given that downtown is starting --- the downtown developments are starting to kind of get near completion and transit center is getting close? Then the Coach lease on the west side and then Time Warner's space at Time Warner Center. Just kind of what has changed in the last quarter, given what seems to be --- we are getting closer to some new supply?

I want to make sure we understand the question exactly. The sentiment we are seeing from tenants is -- and I would say this is since December, and we stated this in December and the meetings we've had since that, we think there is a confidence factor and a profitability factor in most of the industries I mentioned earlier. Even financial services is actually quite strong. It's just not at the very top levels.

And that sentiment I think has gotten stronger, and there's a feeling now that before there was a lot of consolidation, there might have been a little bit of contraction or there might have been sort of stable growth. Almost all the leases we are seeing now are factoring in future growth plans again, as they typically do.

So that doesn't relate in any way, shape or form to the new development that you were referring to in downtown and Hudson Yards, but that is just generally a shift in sentiment you have seen and a little bit more urgency in getting deals done in the first 3 1/2 months of the year which are not typically very robust months, for at least as we have seen these cycles traditionally.

As it relates to tenant sentiment specifically being altered by downtown World Trade Center, completion of Hudson Yards, Steve, why don't you address that?

I don't think that those events are necessarily altering tenant sentiment per se. I think there's a general confidence that tenants have as a result of a lot of the hurdles that were passed. I think that the second half of last year you saw velocity pick up. We said to everybody that in December and right in through January, as contrasted to the January of 2012, that we started 2013 carrying the momentum forward.

And I think a lot of that was because tenants had a growing level of confidence, whether what was holding them back was the election, or the uncertainty on the economy, or the uncertainty of where the euro was headed, or the uncertainty of regulatory change, there were a lot of reasons for people to delay and pause and make short-term decisions. And I think we are past that. I think there is a growing level of confidence.

We were saying it at the beginning of the year. There was a lot of broker feedback right in January that contrasted that, but I think most brokers would tell you that as we sit here in April everybody uniformly is saying that there is increased velocity, increased confidence, and more bullishness as far as where velocity is headed.

Great, that's very helpful on the demand side. I guess the second part of my question was really have you seen any change in the competitive environment or where tenants are willing to look? And how should we think about how your portfolio is positioned to compete with some of this new supply, given that you are seeing a pickup in demand and a more positive outlook from tenants?

Yes, I would just -- I will let Steve answer. I just want to --- sort of coming back to that question a bit, we signed -- how many leases in the first quarter? 55 leases. Most of those 55 tenants are not shopping downtown at Hudson Yards.

I think there's too much in the press about tenants like Group M and Time Warner and other big tenants that are making potentially big, strategic moves from one location to the next for which those developments may be applicable front and center. But for the 55 leases we have signed in this quarter, I am going to hazard to say somewhere between none or less than 10% viewed the new developments as viable competitive spaces relative to the deals they made with us. I just think it just gets distorted out there.

We compete against the buildings in our submarkets almost exclusively for tenants. Typically, there will be two or three buildings within 3rd Ave., Lex, Grand Central, Plaza, Sixth Ave. It's not that every one of these tenants, which may be averaging in size 50,000 feet, plus or minus, are shopping a Midtown location to Hudson Yards or downtown. It just doesn't --- may be other landlords experience that, but we don't experience that.

So there is new inventory that will be coming online over the next five to eight years. Some of it nearer term, some of it not until 2018 to 2020, and that space will certainly be looked at by some of the major users, I would say 0.5 million square feet and up. And that will be competition and all the factors will go into weighing that in terms of product, sponsorship, location, and price.

I think Midtown will do very well in terms of retaining much of its tenant base, but there will be some that will venture into the new developments. But with that said, I just want --- the 580,000 feet we signed, the 1 million-plus square in the pipeline, plus the April year-to-date, most of that we are competing on a very localized basis, not against new development. Steve?

Yes, just to reiterate that, the new construction for the deals that we are negotiating that are in our pipeline is not applicable to those tenants. Notwithstanding that, having new construction as part of the overall Manhattan inventory is a good thing in order to keep our market healthy in the long run. But as far as being able for us to compete and keep our portfolio full, it really doesn't enter into it.

A second part of your question may be, aside from the new construction, is what are we seeing just generally downtown. And we are seeing some Midtown tenants and Midtown South tenants kick the tires downtown, but not necessarily in new construction. We've seen guys come through 180 Maiden Lane who are Midtown and Midtown South type tenants, and they are there because it's still the value play. It's a lot of real estate for the dollar, and in that building's particular case, we have got a lot of amenities to offer.

So I think it all sort of feeds into that, the general theme of there is a lot more velocity, a lot more tenants, a lot more larger tenants, and a lot of tenants doing long-term deals than there was a year ago.

Okay, thank you.

David Toti, Cantor Fitzgerald.

Thanks for taking the question. We've been talking to some of our local brokers recently and they mentioned a phenomenon is kind of resurfacing again; this is the potential for a condo conversions, resi conversions of various towers around the city. Sort of a repeat of what we saw in the mid-2000s. Obviously you were a little bit involved in that.

Do you think that this is something that you are seeing interest in your portfolio and some of your assets? Are you seeing it being a rising phenomenon potentially? And, ultimately, do you think this could impact cap rates on assets that have been relatively stable recently?

It's Andrew. I think it's definitely a phenomenon throughout the city, where there's a lot of repurposing of office space into either hotel or residential space. Probably the foremost example of that is the Sony Building, which the current business plan is likely to go with a combination of retail, hotel, and residential in that asset.

But there are many others like the Sony Building which are being marketed as conversion candidates. And from our perspective, that's a big positive in the office market as we see supply coming offline for projects that are slated for conversion.

One of the comments is that right now it's only very high end in terms of the residential repurposing. Would you concur with that, or maybe you suggest that it could spread to sort of more middle price points?

I think downtown you have a lot of potential candidates for a middle price point type conversion. There's one asset, large asset downtown in particular that's rumored to be trading that would be for a residential conversion. I think there's a couple of others that are possibilities.

But in Midtown you typically see people underwriting very high-end condominiums, because that's what the market is sort of demanding.

Okay. And then my last question, given your increased involvement in residential in recent years, do you think there are any opportunities in your portfolio, anything you may have, especially coupled with your increasing development interest as well?

I think the most prominent is 1 Madison, where we have 450,000 square feet of undeveloped air rights there and a lease with Credit Suisse that rolls into 2020. We did explore potential development there prior to 2008, and it's very feasible and very desirable. That is certainly one that could get revisited in the future.

Okay, great. Thanks for the detail.

Rob Stevenson, Macquarie.

Good afternoon, guys. Can you talk a little bit about the strength of the structured finance pipeline today, and what of the sort of current $1.4 billion and change are you expecting to get repaid through year-end?

The pipeline is very robust right now. We continue to get much more than our fair share of transactions in the market and I think Sony was a great example of that. We have several other transactions in various stages of application behind the Sony deal. So we are still finding it to be a market where our skill set and expertise in structuring and syndicating positions can earn us above-average returns, and it's an area where we are focusing a lot of time and capital.

So there is certainly a good amount of our book that is shorter term and floating rate. We are watching it carefully to see where we are likely to get repayments and trying to line up our originations so that we maintain a balance at or around its current levels.

And the new stuff that you are looking at is still in that sort of 10%-ish range or are you starting to see yields coming in?

I would say in the 9% to 10% range depending on how long term the paper is. But it's definitely a market that has adjusted down somewhat given where interest rates are.

Okay. And then you guys seeing any improvement in the suburban office portfolio demand and metrics out there?

You know, I was a little surprised at some of the commentary I saw on the suburban portfolio last night and this morning. And maybe that's just because we've got more of the real-time data that maybe comes across in the stats, which represent a little bit more of what was commenced.

For instance, there was a lot of discussion about a falling occupancy rate which related to three tenants in particular that had --- we had done deals with last year. Successfully renewed them, but they all represented contractions. And I'm looking at my notes here; Fuji was one I know and Heineken and Skadden. So those --- that shouldn't have caught anyone by surprise because those deals were done and announced last year. They just commenced into our occupancy I guess as of year-end.

But I think the bigger picture, the bigger story there is that we have actually had, and ironically given today's [context], we had a very good first quarter. It was very strong start to the year for suburban leasing with 42 deals signed totaling 310,000 square feet. I think 230,000 square feet is probably through the first quarter in the supplement, and then there has been, I guess if I do the math, about 80,000 square feet or so that has signed since then.

So that is actually a pickup from what we typically see in the suburbs and that emboldens us just a bit. We need to see that for three, four, five quarters to really call it a trend, but you got to start somewhere. There is 11 leases out in Westchester and Stanford right now totaling 110,000 square feet, and we have a pipeline of active proposals beyond that of about another 200,000 square feet.

So you lay that over a backdrop that we only have 164,000 square feet expiring in 2013 and 200,000 square feet expiring in 2014, and it would cause us to go long right here and say that we expect occupancy to be up off of these levels by year-end given those dynamics. So, again, a little too early to look at it as a trend or to get terribly excited about it because it is still a very fragile market.

Our occupancy is in the low 80%s, but it's still 4% or 5% ahead of the market. So we are outperforming the market; the market still has a lot of vacancy. But I'd say one of the bright spots relates to what was brought up earlier on this call, repurposing, where there is older office stock in the suburbs that is being repurchased for biotech, educational, and medical uses.

And there's approximately 750,000 square feet in Westchester County alone, most of which in White Plains and Elmsford, that is being transformed by Memorial Sloan-Kettering, Fordham, and a variety of other biotech firms. So, hopefully, that can also, in its own way, create a little bit of a mini stabilizing dynamic that is akin to the condominium conversions we had spoken of earlier in Manhattan.

Okay. Thanks, guys.

Michael Bilerman, Citi.

Thanks, good afternoon. It's Josh Attie with Michael. The average duration of the leases you executed in the quarter was about 5.5 years, which I think is lower than what you've done historically. And I know there were a couple of large deals with three- and five-year terms like Eisner and Viacom, but can you talk about the dynamics of some of these leases and also others that may have brought the average down?

Yes, it's sort of an anomaly because it was driven by a couple of the large deals, Eisner in particular. We did a short-term extension. The trigger on that deal was in connection with a full floor of expansion space they were taking. So in order to extend the term out on their existing space and marry it together was the reason for the short term on that deal, and that was so much square footage that it moved the needle.

Additionally, you had WPP, which is the headquarters office for Y&R and their holding company of other advertising agencies. Because it's not an income-producing division, their home office mandates that the maximum term they can do for renewal is a five-year deal. They have been in the building for 15 years, so there's no reason to think that they would not have gone longer except for the home office restriction. And that's not a new piece of news as to how they operate.

So it's really a couple of deals that push it. If you contrast that against the deals that we are working on right now where Marc mentioned that we have leases under negotiation -- not term sheets, but actual lease agreements out in negotiation covering 1 million square feet -- the top nine deals covering 800,000 square feet of that 1 million square feet has an average term of over 13 years.

So I don't think the fact that we saw that anomaly in the first quarter is really indicative to a market trend or any tenant sentiment. It just happens to be unique to that bucket of deals, and if we close the deals that we are working on right now then it will be a radically different stat in the next quarter.

Thanks, that's helpful. If I could follow up with one other question, can you tell us what the underlying average coupon is on the loan book investments? I know the 11% in the supplemental is being inflated by some other income on a variety of different loans that was specific to the first quarter.

Coupon average.

We can come back to you with that answer.

Josh, are you looking for a number excluding fees and things like that? You are looking for a straight -- like the rate on all of the positions?

Yes, exactly.

Yes, we will have to come back to you on that one.

I would say that upfront fees and rate are often looked at interchangeably by floating-rate lenders, so if you strip out the fees you will get to a coupon, but it will be underrepresented by maybe upwards of 25 basis points for the fee income. It could even be 50 basis points below what the real rate of return is because of the fee element. Sometimes there is entry and exit fees. It could be one in one out, two in one out. It could be extension fees.

So we will get you that number, but I would certainly -- there is really no difference between fees and rate in floating rate lenders.

And on that point, fees are recognized over the term of the loan, so as we are looking at yield and recurring yield it's important to include the fees. Because regardless of whether we receive the fees upfront as in an origination fee or at the end in an exit fee, we amortize those in over the life of the loan.

Right, no, I was just -- it seems like there was a handful of loans with 16% and 17% yields that had very large one-time fees and I was just trying to -- if you strip some of those larger items out what the underlying rate is on the loan book.

Those are oftentimes when we originate the whole loan and then sell pieces down and we retain a disproportionate share of the origination fee. So that is why you get the large upfront fees.

Okay.

We will take a look. I would think it's -- it largely is what it is. I mean the yield is --

There is some bigger deals that have some larger yields on them for specific reasons, [5 times and 550] being two, but otherwise they are going to be pretty --

When you say there are bigger deals with bigger yields for specific -- those are just called more profitable deals. There is no anomaly there, those were just sharp deals and we had very high yields on -- certainly on [550]. 5 times I can't speak to because maybe that was one where we had taken a reserve and we had captured a reserve so that should be carved out.

But I would say the book you are looking at which is yielding 11%, but for maybe 5 times, is the true replicable, ongoing annual rate of return. The only one I can think of which would have had a quote in an unusual or non-recurring gain would have been 5 times. So strip that out, but it's still going to be somewhere between 10% and 11% I would think.

Okay, thank you.

Steve Sakwa, ISI Group.

Thanks, good afternoon. As you are kind of working through the 2013 leases, Steve, and you are starting to look out to next year, how do you think about some of the expirations like CS, Harper Collins, the AIG lease? Can you give us any thoughts on redevelopment or how you are thinking about retenanting some of that space?

Well, two of the big ones that you just mentioned, AIG and Harper Collins, obviously we are not expecting to renew them. We bought the buildings with the full knowledge that they would not be staying in the properties, so those buildings are undergoing redevelopment in the various stages right now.

10 East 53rd St. we are finalizing the development plan and are deep into the construction documents at this point. That is going to be a small space building because of the size of the floorplates. So that will lease up more towards the end of the construction project, which the majority of that work won't happen until Harper is out, and they are not out until July of next year.

AIG, which vacates middle of next year as well, there we are already seeing some expressions of interest. We have got one proposal on the table. We are expecting another RFP in the next week or so. We have got our development concept pretty well nailed down and work will get underway and get well advanced this year. Trying to get as much of it done before AIG leaves.

And I think that, as contrasted to 10 E. 53rd St., is more likely to have one or two anchor tenants in the 150,000 to 200,000 square foot range. Then the balance of the space will get leased up in smaller blocks.

Okay, thanks. Then, secondly, I guess Marc can you maybe just talk about monetization of some assets? You have obviously not been afraid to buy stuff, fix it up, sell it. And I'm just curios, as you think about 1515 Broadway and maybe some other assets in the portfolio and the kind of liquid debt markets today, how are you thinking about asset sales?

Well, I think that we are putting a great degree of focus in house right now on trying to consummate one or more monetizations through year-end. And I think we will achieve that. That is one of our stated goals for the year. I think it may have been as much as $500 million or so of aggregate disposition.

So it's selling well, selling at a very strong price because you really -- we don't want to take just a run-of-the-mill price. I think we are looking really on these assets that are irreplaceable assets and irreplaceable locations. We really don't have any low-hanging fruit anymore. Anything we sell is of an A class institutional quality.

We want to make sure that we're getting paid in this market and the demand seems to be there now, particularly after early December. I think Andrew sort of identified the gridlock back in December. Then right after that in the months that ensued there's been about three or four sizable trades that have opened the door, we think, for us to accomplish our goals.

So we will be delivering some product to the market; I don't think we are in a position here on this call to specifically identify which ones. I think that will become apparent over the next few months as deals get into the market, but it's definitely a focus of ours.

We did something right at year-end with 521 Fifth, which was a partial monetization. I think we sold about 50% of that deal, and that was a very good execution for us. It was also a good execution for our partner because they bought into a very well-positioned Grand Central asset.

So there will be opportunities to recap. There will be opportunities to do outright sale. And what we are always looking about in case --- in situations like that is not simply whether the building is leased or not leased, but what the internal growth metrics look like on kind of a compounded annual growth basis in NOI and how much capital these buildings require to get there.

So we are looking at submarket, NOI growth, and capital consumption. We will target a few buildings and then hopefully look to get a couple of sales done this year.

I guess would you be willing to go well above that $500 million if pricing kind of remains as strong or if not get stronger?

Sure, absolutely.

Okay, thanks.

Brendan Maiorana, Wells Fargo.

Thanks, good afternoon. Just on the other side of the disposition question I guess is the acquisition outlook for fee interests. I think in your December presentation I think you guys mentioned maybe it was $700 million or $800 million of acquisitions that you were likely to do. Given that pricing has moved a bit early in the year, do you still kind of feel confident in that or would it be more likely to have more dispositions than acquisitions?

No, I think a lot of our long lead time type transactions, we still have a healthy pipeline of those deals and they take a lot of time to mature. But we are working actively on a bunch of different situations and I still think we feel comfortable with that guidance.

Okay. I had two for Matt. Just the TI spend on Viacom, it looked like there was probably none of that in the quarter. Do you still expect that to happen during the year at $53 million?

Yes, when we went long the expected Viacom spend in December we had said it's kind of out of our control, so we had put a number in of between $50 million and $55 million. At this point there is still no plan from them as to how to spend that this year, so we are still holding out, in a manner of speaking, that money for them to spend this year in our guidance. But with it being out of our control it's kind of unclear.

Okay. Then just lastly as we would think about expansion of net investments, if that were to happen during the year, should we assume that a portion of that would get funded via ATM issuance?

Yes, so you are asking hypothetically if we grow the investment book are we going to fund some acquisitions? I think that is part of the asset sale program that we've been talking about I think.

Completely dependent on [the stock price].

I think we would fund new investments with asset sales or stock issuance, whether it's the ATM or otherwise. We are sort of indifferent between the two executions just depending on where asset prices are relative to stock price and underlying NAV. I said earlier in the year, and I would reiterate, I don't think our pricing is currently reflective of underlying NAV. We are very in touch and in tune to it.

The asset pricing right now is as strong as it has been certainly since the downturn. There are things in play which may create more demand from foreign investors, which could have an uplifting effect, further uplifting effect on prices. Cap rates, which we had been sort of conservatively estimating at 5% for the past year, year-and-a-half, are in reality probably well below that for the best assets and the ones that are trading, are in fact trading.

So I don't --- you guys do the math on a regular basis and when you do I don't think that is what we currently see in our stock price. So I think that when we get out in time we will see what things look like then. We will see what kind of --- if we achieve the kind of cap rates we would hope to achieve for our dispositions and just fund growth with the cheapest cost of capital we have available at that time.

Sure, thank you.

Jordan Sadler, KeyBanc Capital Markets.

Thank you for taking the question. Coming back to the mezz portfolio, the opportunities, Andrew, I think you said were robust. Are the opportunities more of the origination nature similar to a 550 now?

I think it's a mix. We're not buying much in the secondary market; we are mostly originating our own paper these days. Some of that is we are originating subordinate paper and then some of it we are originating the whole capital stack, as we did in Sony, and syndicating off the pieces.

So it's just a mix, there's not necessarily more ---?

No.

Okay. Could you walk us through sort of the economics on the junior mezz piece that you retained, that 17.3%? I assume there's a coupon rate on that and the rest of it is the juice associated with having sold off the rest of the economic. What's the coupon rate on that piece?

That coupon rate is on the whole, right? There are no individual coupons?

The yield at around 17% is essentially the rate, the effective rate on our piece, so that's not on the entire position. There is enhancement through various fees as a result of our position and having higher stack. But that will be taken over time.

In fact, that 17% isn't even reflective of the full fee stream that we are entitled to. We will be recognizing a little bit more beginning of the second quarter.

Okay. But there's not a coupon rate or a strip rate on that piece of paper that you have retained and the rest is the fees?

We essentially originated the whole capital stack at LIBOR plus 5.60% and then sold a senior --- a mortgage position, we sold a senior mezzanine position, and we sold a pari passu junior mezzanine position. What was left after we sold all those pieces at varying rates was the 17% that you see, plus our share of origination fees.

Okay. Just lastly, a clarification, maybe for Matt. Just on the page 18, your joint venture statement balance sheet, there's a debt investment in there. I'm just curious of the nature of that and how that ends up on the joint venture side.

Occasionally --- I think this is maybe only the second time we've done it -- we will do a debt investment in the form of a joint venture, so literally set up as any other JV would be for a real estate property. And for accounting purposes, that cannot be included in our debt and preferred equity portfolio. It rolls down to the unconsolidated JV line item and then goes into the JV balance sheet.

Okay, thank you.

Ross Nussbaum, UBS.

Good afternoon, guys. Can you talk a little bit about your acquisition efforts overall in terms of characterizing it such that are you spending the majority of your time looking at structured finance deals as well as retail and apartments versus sort of pure, fee-simple five cap office deals?

Well, I would say almost exclusively the time is spent looking at acquisitions. What happens is of the acquisitions we don't pursue, we then turn them into, or attempt to turn them into, structured finance opportunities. And that's why for us this duality works so well.

But it's everything --- not everything, but generally the business starts as evaluating acquisition opportunities. Sony no different in that regard, nor some of these other deals we have talked about today. We pursue what we want to pursue and hopefully we prevail. When we don't and we like the business plan sponsorship or there's an opportunity, then we will switch gears and our debt folks will attempt to originate products.

So I would say the orientation is always an equity orientation at the outset that can transform into our lending platform, except for refinancing. So occasionally we will just get people on refinancings that will look to recap and the only opportunity is a debt opportunity, so obviously those would flow outside of what I just described. But that will be the minority of the situations.

Can you characterize how your underwriting on the structured finance deals exists today versus where it was, let's say, back at the end of the last cycle? How different is your underwriting with respect to where you look at coverages and loan-to-values and returns you are getting with respect to that?

I think the senior loan underwriting is still enormously conservative versus where it was at the end of the last cycle, so that -- and then each of the tranches subordinate to the senior loan, therefore, is significantly less levered. Whereas senior loans used to be at 80%, 85%, even 90% loan to cost, now you're still seeing senior loans top out in the between 50% and call it 65% loan to cost, depending on the building and the cash flow profile. So you still have -- the mezzanine positions are still significantly less levered today than they were at the end of the last cycle.

Thanks.

Michael Knott, Green Street Advisors.

Marc or Steve, just curious can you comment on the 96% year-end occupancy goal? I think last call you labeled it maybe a little bit of a stretch. It sounds like there's a lot of new leasing that's coming, but just curious how you feel about that since the occupancy was flat sequentially.

I think we're still optimistic that we are going to hit our number. We are ahead of budget in the first quarter based upon the leases that we have signed to date. I think we've got better velocity than we were anticipating at this moment in time when we originally set our budget, so I think the only question will be how the year unfolds and the deals that we sign.

Is it occupancy, or is it really based upon the amount of square footage that has been leased but for whatever reason the tenant demand that comes in, their start date trails into the following year? But I think the effect of our ability to close enough leases to lock down the buildings are going to get us the number that we want to be at.

Okay. So whether it's nine months from now or maybe whether it's maybe 12 months from now you still feel pretty good about gaining almost 200 basis points in occupancy?

Exactly, you nailed it.

Then can you talk about the price point orientation in terms of leasing? It sounds like maybe there has been a little bit of a shift where it's not just the value-oriented tenants that are signing deals. Is that the recovery you are seeing a little more broad-based and going higher up the food chain, if you will, to the higher-end buildings as well?

I guess that's true. Only because we have been the beneficiary of a couple of deals. Certainly 280 Park Ave.; those deals that we just --- two deals that we just signed for 99,000 square feet. Those were high price point deals that the 10-year average rent on that square footage was over $98 a square foot. And that is in the base of the building.

We have seen a little bit better activity at 600 Lexington Ave., where we recently went to lease on two floors and we got the green light to do an early renewal on a floor. We are expecting another tenant to give us a green light for a new deal for another full floor in the next week or so. So that has picked up a little bit.

But I am a little hesitant to say that that's anything other than -- I don't know if that's a broad statement that I'd say about the confidence as the high price point guys back in the market. I still think that the lion's share of the deals are on the value side of the demand.

Okay, thanks.

John Guinee, Stifel.

Great, John Guinee here. Thanks. Just to sort of come to closure on this whole half the calls have been on the structured finance book, perhaps it would be a good idea if you considered instead of just giving one line item $52.7 million, bifurcated that out into cash, accruals, fees, and gains, and I think you would solve about 90% of the problems in understanding what's going on there. That's not a question, obviously, just a thought.

My question is refresh our memories as to what's going on at 885 Third Ave. selling the ground lease position. And also what's the status on the West Coast office portfolio?

On 885 Third Ave. that is a position we've been testing the market on. We have seen very good interest from people in the market and we continue to have discussions with various groups. I think the interest has confirmed our suspicion that the value of the position is sort of well in excess of where the Street is carrying its NAV. And just not sure --- we are not sure yet whether the interest is going to reach a level where we are sellers or not. We have to sort of complete the process to see, but the response from the market has been very strong.

Then on (multiple speakers) office, when can you guys get out of that anytime soon? Is that earning any income for your 27% interest right now?

This is the West Coast deal? Well, I am let David Schonbraun, who is here with us, who specifically sort of oversees that portfolio with Blackstone, address that.

Sure. I think we transitioned management a couple months ago to Blackstone and we have very good leasing velocity, so I think we are comfortable with the progress and kind of new management. We are expecting the occupancy upticks in the portfolio and I think we're going to try to monetize assets over the period. Some in the next year and then, just depending on where that market is and depending on just cap rates, work with Blackstone to kind of monetize it as efficiently as possible. But we are definitely going to sell some assets in the next six to 12 months.

David, is that generating any income to you at all? Should we look at it as a part of the NOI or should we just look at it as being close to book value in order to evaluate appropriately?

I think our share of NOI rent is up $4 million or so.

It's primarily a residual, would you say? This portfolio, I think, is about 79%, 80% leased.

It is a little less than 80% occupied, so I think -- right now it's a residual, but obviously as they lease it up and there is a significant amount of vacancy (inaudible) significantly.

But the early read is the price talk on the few assets that had been exposed to some market participants as our underwriting is on or ahead of schedule. So I think we will have more to report on that in --- by year-end. That was --- that had a three-year business plan. We just closed it a few months ago, so hopefully by year-end we will have more to talk about on that.

But it is certainly not intended to be a hold investment, so in answer to your question, John, I think, yes, we are looking to liquefy but -- and optimize, because the portfolio is actually doing reasonably well.

Let me just ask that a little --- great feedback, thank you. Just to clarify, is it generating any earnings that show up on your income statement or not, or should it be looked at on a book value basis because it's not generating any income?

John, it's Matt. So it generated just over $4 million our share of NOI in the quarter net of interest. It had free cash flow of $2 million. So to answer your question on whether it hit the income statement, it was $2 million of contribution to our earnings in the quarter.

Great, that's what I wanted. Thanks.

[Andrew Schaffer], Sandler O'Neill.

Thank you. One question is in regards to two buildings that you just bought in Williamsburg. I was wondering if you are considering to do some condo deals to sell them off or just solely to rent them.

There is a townhouse component to that project which we intend to sell off as condos, because they don't set up very well for family rentals. The balance of the project will be rented out as multifamily. The sales office is open. We're getting great response and the first residents are moving into the building shortly.

All right, thanks. That's it for me.

Michael Bilerman, Citigroup.

Great, thank you. I completely second John's motion on the disclosure, but I do have a question. Matt, just in terms of the guidance, the $4.90 to $5, given the loan book I think in those numbers was $1.50 of FFO with $1.3 billion investment at a 10% yield. You are north of $1.4 billion and 11% yield as $1.70 of earnings. How should we think about guidance for the year?

At this point we did have a lot of discussion about guidance. At this point we are keeping guidance unchanged at $4.90 to $5. Based on the performance in the first quarter you would see a trend towards a higher end of that, but we do a some other things kicking around, not the least of which is the sale of 885. So we are leaving it unchanged for right now.

I would add to that, Matt, part of our guidance assumes additional investment. I want to make sure that comes across that we don't want a static book. We don't assume that whatever we start the year with, we end the year with, and we just increase with the market. That's not our profile; there are other companies that serve that niche.

But in our guidance we look at our liquidity and capacity at the beginning of the year. We set certain goals for ourselves for investments and in structured book, and they are somewhat changeable, so we may end up with a slightly higher structured book, maybe smaller amount of equity investment. Again, there's a lot of interchangeability, but a portion of that $4.90 to $5 was at a presumed return on a fairly sizable amount of new investments because that's what we are accustomed to. Except in times of the market cycle where we say where we are on the sidelines, which wasn't this December.

So the fact that we are executing on that plan and we may be a little over allocated momentarily, (inaudible) is another instance, I would not -- we don't revise guidance quarterly. We revise it when we see a need to revise it. At the moment we are comfortable with $4.90 to $5. If we see a need to revise it we will, but we've been, I think, pretty good in the past about our guidance projections and good about adjusting when we see need to. But at the moment we haven't adjusted it.

Okay, I just want to thank everyone for calling in today. I hope everybody likes this somewhat different format with abbreviated formal remarks and leaving more time for Q&A, because the calls were running an hour and a half, hour and 45 minutes and we think that was too long for some. We know you have a full plate with other companies, so we thank you for your hour of attention and we look forward to speaking to you next quarter.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation and you may now disconnect. Have a good day.