SL Green Realty Corp (SLG) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2013 SL Green Realty Corp.'s earnings conference call. My name is Lacy and I will be your coordinator for today.

At this time, all participants are in listen-only mode. We will facilitate a question-and-answer session towards the end of the presentation. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Heidi Gillette. Please proceed.

Thank you everybody for joining us. 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 call the Company may discuss non-GAAP financial measures as defined by SEC Regulation G. The GAAP financial measures most directly comparable to each non-GAAP financial measure discussed and the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found in the Company's website at www.SLGreen.com by selecting the press release regarding the Company's second-quarter 2013 earnings.

Before turning the call over to Marc Holliday, Chief Executive Officer of SL Green Realty Corp., I would like to highlight that in our earnings release we did announce that the Company will host its annual institutional investor conference on Monday, December 9, in New York City. To be added to the conference's email distribution list or to preregister, please email SLG2013@SLGreen.com.

Lastly, 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.

Heidi, thank you very much and thank you, everyone, for joining us this afternoon. We are going to try to keep these initial remarks somewhat abbreviated so we can get to the many questions we generally have on this call.

Obviously, if it wasn't apparent from the release itself, we were very pleased with the results that we announced late yesterday afternoon. We are running generally ahead of our December guidance in many of the areas we had outlined for investors about six or seven months ago. And while we are running ahead, we are running ahead in a manner that I think is very much consistent with our expectations that have been communicated throughout the first half of this year, on our last conference call, and also at NAREIT.

It is important to note that we have achieved this success in a wide array of areas. No one single area such as leasing, where you see the leasing activity and mark-to-market was very robust in the second quarter; investment sales, where we are executing on our strategy of monetizing gains and harvesting selectively where we are finding best pricing; financing activity such as the refinancing and upsize of 1552, 1560 Broadway which we did in this quarter; and certain operational efficiencies that Matt and Jim can expand on which point towards the benefits of scale and the benefits of an improving market.

Redevelopment efforts are well underway at projects at 280 Park Ave. and also our project at 635 6th Ave., and in the pipeline for next year we are finishing our design work on projects like 180 Maiden, 10 E. 53rd St. which will be commencing on those projects sometime towards the end of this year. But with those being some of the prominent areas, let me focus on a few key areas and identify the factors that I think are driving our success in those areas.

Notably, on the leasing front we had a second-quarter achievement of about 770,000 square feet of leases signed and that represented about 12% mark-to-market. There were really two factors, I think, that drove that mark-to-market.

The first is good underlying core competition for space and increased asking rents by us and other landlords in the market. The second contributing factor was a higher-than-average proportion of renewal deals where we can better drive mark-to-market on renewal deals than we can on new deals. So unclear whether we will see that continue for the balance of the year, but generally we are still feeling very good about our original guidance in this area. And we are feeling very good about the direction of rents and net effective rents and velocity as this market continues to improve.

Pipeline where, notwithstanding 1.4 million square feet signed year-to-date, we still have over 1 million square feet in pipeline with most of that amount, the vast majority, being either leases in negotiation or leases out for signature. So I think it is fair to say at this point that based on what we have achieved and what we can forecast for the remaining five or so months of the year that we could well eclipse 2 million square feet of total leasing and may settle out somewhere around 2.3 million square feet, plus or minus, based on current activity.

The other point to make here is that the activity is very broad based, both in terms of types of tenants, price points, individual buildings, and submarkets. We are really experiencing that strength almost across the board. It is good to see that these results are not being driven only by certain segments of the market or only in certain buildings that have based on vintage price point or degree of redevelopment, but it really is a very broad-based recovery that we see.

Looking at the market as a whole, the experience we have in our portfolio I think you can extrapolate to the market at large where leasing activity was exceptionally strong in the first half of the year with 12.5 million square feet leased, representing an 11% increase over and above the same time period in 2012. And over half of that amount being new leases as opposed to renewal leases, so all very positive.

Midtown, which I think has -- there has been questions about Midtown's velocity and viability in light of activity in Midtown South and Downtown, but Midtown held its own and leasing activity was up 18% year over year. It has led the three major markets in Midtown, Midtown South, and Downtown. So that was very positive by our estimation as well.

Things that are driving that Midtown recovery is -- not the least of which is sublease space, which is back down under 2% again, which is indicative of a very tight market. 450,000 square feet of space that was available at 1290 Sixth Ave. through AXA has now been leased to tenants such as Morgan Stanley, Sirius satellite, and Remington [Turow]. And there is other examples of that throughout Midtown where we are seeing a winnowing of direct and available space through subs.

It can also be seen in Midtown South, but it's already -- the metrics down there are much better to begin with. So it is a very tight market and there is not a lot of availability, direct or sublet in that market, so we see the spillover largely headed Downtown. We will probably get into that a little bit later on Q&A, but I think one of the more exciting prospects for Downtown is largely spillover tenants from Midtown South that Steve Durels can expand on more as kind of an emerging trend that we think we will see over the next year or two.

The leasing activity obviously has to be driven by something very tangible and it is the job growth that we continue to experience in New York. Private-sector job growth is still trending positive at a rate which eclipses most estimates, and certainly our and the city's estimates. Net private-sector job growth is running one-third higher than the same period in 2012 with 67,000 jobs having been created in only the first half of the year. Office-using jobs accounting for approximately 8,000 jobs of that amount.

Contrary to prevailing views, half of the office-using job growth came right from the finance, insurance, and real estate sectors within which securities alone added 2,000 jobs net. The big five banks reported first-quarter results showing strong profits with a 40% increase in investment banking revenues year over year and compensation set aside with these same institutions were up 16.5%.

So these statistics continue to conflict with the refrain that I sometimes here when I visit the shareholders regarding a perception and a very sharp reduction in the financial sector job growth, which, by everything we see and by the statistics, just doesn't bear out.

Looking at the investment market, the investment yields through the first half of the year we see are largely unchanged. Whatever modest uptick there has been to the rates -- I know there has been a lot of scrutiny and focus on the rising 10-year and clearly rates have risen more on the long end than on the short end where movement has been relatively small to nil.

These rate increases have been largely offset by investors' expectations of rising rents leaving cap rates essentially unchanged. We have taken advantage of this market by selling into it in a way that Andrew will expand upon shortly.

But the notion that the recent backup in the 10-year has had any kind of material effect on investor appetite for good, solid Manhattan commercial product at fairly aggressive cap rates I think is not substantiated at this moment. And notwithstanding the deals we have announced as either being sold or in contract, we have other deals in the market so I think we have got a pretty good look at real-time investor appetite and demands and targeted yields for product. We still feel like that is all very, very strong and will continue to be as this market improves.

Given these solid operating and investment results, we have been asked about revisions to our FFO and FAD guidance. Current run rate FFO seemed to indicate an upward revision is in store, but we are going through and finalizing our re-forecast now. Think it will be done, literally, within the next two to three weeks and I think we will likely address any upward guidance in FFO sometime in the near future.

However, as it relates to FAD guidance, we have some identified capital savings, particularly in second-generation capital where the spend is running behind what we had originally projected so we are ahead in terms of where we expect it to be. We are going to be upping our FAD guidance by $0.20 for the full-year 2013. Matt and Jim can expand on that in the Q&A portion of this.

But with that said, hopefully that is a good overview of where we see the market, our portfolio, some of the drivers of demand. And with that I will turn it over to Andrew for a little more color on some of the dynamics he is seeing on the asset side of the equation.

Thanks, Marc. Our big announcement of the quarter was our contract to sell 333 W. 34th St., which we announced several weeks ago. This asset was acquired in 2007 strategic to our overall relationship with Citi, our largest tenant, in a year when a lot of people would look and say it is a tough year to be buying assets. Back at the top of the last cycle.

We stabilized the asset and re-tenanted it with a minimal capital program and were able to sell the asset for nearly a $20 million gain. So really successful execution by our leasing team and our construction and operations teams. This fully stabilized asset sold for $630 a foot, 4.4% going in cap rate, so it was an execution we were very pleased with.

The quarter otherwise in the investment market was really characterized by huge deals which were going down in the city. Just going through the list -- 1211 Sixth Ave., Worldwide Plaza; 237 Park Ave.; 75 Rockefeller Center; 605 Third and 1345 Sixth Ave.; 650 Madison; 125 W. 55th St. just to name a few of the gigantic deals that were announced this quarter.

So we are looking at a serious spike up in terms of velocity and sales volume. These are all deals we have underwritten, taken a close look at. They all traded on the basis of a very strong expectation of rental growth. We will be involved in the financing side on some of these deals, but more to come on that in the future.

On the structured finance side, we have a very solid pipeline in the business with $211 million of net originations year-to-date and more than $100 million of deals in application. The rising rates seem to be creating some opportunity for us to at least maintain, if not moderately increase, our yields on our ultimate hold positions there.

We continue to be very active talking to all the buyers that I mentioned of those properties and more of the smaller properties that don't make sort of the big building list. There is still an active demand for mezzanine preferred equity and bridge loans.

The continuing trend also in the city is residential values rising. A lot of office buildings being looked at for conversion to residential, a lot of land trades. The Park Lane Hotel went under contract reportedly last week. Really record-breaking prices for any assets that have a reuse as residential, hotel, or some combination of both.

And that is a trend we expect to see continue as the strength in residential sales across really all neighborhoods of the city and very strong residential rents are buttressing a lot of conversion plans and new construction plans on the residential side of the business, which is taking some office inventory offline. So helping to eat away at the vacancy rate Marc mentioned in Midtown and Downtown.

With that I would like to turn it over to --.

I think Matt is just going to -- just a quick statement on the Fed. Matt, give a little more meat on the bone there as to what is behind the $0.20.

Sure. As many of you noticed, our capital trends through the first six months of the year are trending ahead of what we expect. We are spending less, as Marc stated.

This is primarily attributable to the Viacom capital that we focused on at the end of the year and again in the first quarter. Recall that we had projected for the year around a $53 million spend. We don't control any of that spend. It is all at the discretion of Viacom. Through June they had spent none of it, so we revised that number significantly lower.

Also, to Steve's credit, the leasing that has been done through the first six months of the year has been -- has had less capital attributable to it than what we had originally forecast. So those two in combination account for the $0.20 adjustment to FAD.

I am obligated to say FAD is funds available for distribution. The difference between FAD and FFO are non-cash accounting adjustments and second-generation capital.

Thank you for that clarification, Matt.

The SEC obligates me.

So with that we would like to turn it over to the operator to begin the Q&A portion.

(Operator Instructions) Jamie Feldman, Bank of America Merrill Lynch.

Thank you. I guess, Marc, just following up on your comment about landlords raising rents, can you give us your thoughts on where you think rents are today on a net effective basis versus the bottom? And then I guess year over year and then how fast you think they can grow?

Well, I don't have an answer for you, Jamie, on net effective. I can tell you nominal rents, nominal taking rents are up from the very bottom, I would say, on average about 25% off the bottom. Net effectives would be up greater than that.

I don't know; it is a very hard number because it is all over the place in terms of free rent and concessions and the degree in which people are paying out broker commissions. So that is tougher. And you have to amortize over the term of leases, whether it is a 10-, 15-, 20-year deal.

So I can only tell you that nominal -- taking rents are probably up 25% off the bottom and concessions are up would put that number up significantly more because you could see where our concessions were at the trough, if you will, in 2008 versus where they stand today in 2013. We have made significant improval, particularly on renewal rents. Renewals we are pushing, in some cases, for bigger renewals, almost like new concession deals, at the bottom. Now I would say the renewal market is much more in line with what we traditionally see in terms of limited free rent, TI, and better achievement on mark-to-market.

And then just your outlook on rents as well?

The outlook on mark-to-market, I haven't really changed our view from the beginning of the year, which was 3% to 8% in mark-to-market. I think I said on the last call, and I would reiterate on this call, that we are probably trending towards the higher end of that. I think year-to-date we are probably combined 7% first and second quarter average.

It is very hard to predict what we are going to achieve over the next two quarters because it really depends on which leases in particular are expiring in any given quarter. Sometimes you may have a tenant coming off of a very high effective rent, sometimes very low, but on average I think the high end of that range is still where we would target things.

And I think looking out to next year it would not at all surprise me if the guidance cracks into the double digits, 10% or more. I think we are into that part of the market where you start to get above average increases after a few years of kind of low single-digit increases.

Okay. Then my second question. Talking to brokers it sounds like there is the most concern over the Sixth Ave. corridor, especially if Time Warner moves. Can you talk about your outlook for that submarket if Time Warner does move and how you think your portfolio will perform?

Remember, we have got two buildings on Sixth Ave., one is 1350 and one is 1185 Avenue of the Americas. We have leases out at 1185 that will take the building to 100% with no near- to medium-term rollover in the building. 1350 is equally pretty well locked down. We have got a little bit of space and we have some deals pending. So I think both those buildings are in a very healthy place.

Overall, on Sixth Ave. you saw a lot of sublease space come on the market. The best example of that is the AXA sublease, but that got pulled off the market very, very quickly. I think everybody was shocked by how quickly Morgan Stanley and Sirius stepped up. At the end of the day 450,000 square feet was pulled away.

I think you have seen mother moves along Sixth Ave. where there has been reasonably good velocity, both on direct deals and on sublease deals. So from our perspective we are not -- we don't think there is anything endemic about Sixth Ave.

It is sort of the way Third Ave. was a couple years ago where it happened to be a confluence of events where there was a lot of inventory that came on and it has repaired itself over the last couple of years. And Sixth Ave. is going through that process as well. The nice thing about it is Sixth Ave. is seeing a good diversely of types of tenants that are doing deals over there.

Great, thank you.

David Toti, Cantor.

Given some of your early commentary on relatively stable cash, better absorption rates, and the residential bids heating up, are you guys looking at more opportunities within your own portfolio for an acceleration of redevelopment or development? I would think that given a market that is looking a little bit more frothy some of those opportunities might surface a little sooner than expected.

You are talking about conversion to residential or --?

No, just general site redevelopment, some conversions. Because I mean the opportunities should begin to expand, theoretically, right, in a frothy market?

We got a lot of redevelopment going on now. With 10 E. 53rd, 180 Maiden, 635 and 641 Sixth, 280 Park we are in sort of full redevelopment mode here. So I think we are looking, certainly, for properties that have alternative uses that may be good sale candidates.

But in terms of every developing what we have that is the pathway have been on. We haven't bought a large office building since last March, because we are completely focused on our existing portfolio, getting our buildings redeveloped and leased up.

There is -- David, I just want to be clear. We have more opportunity in the portfolio to mine. I think there is a prudent and physical limitation as to what we can and should be executing at any one time. I would say right now, from my vantage point, we are full tilt.

You are just starting to see the benefits of that effort starting to flow through into our earnings, which I do believe will accelerate into the coming years. We have tried to be very specific in guiding people as to the 15 or so properties you are going to largely see that coming from. And we generally honor ahead of schedule with respect to all of those properties.

We are very focused on what you are saying. We will execute to the fullest we can, but at a certain level you always have to run a bit of a hedge book I think. Just in case the unforeseen in a year or two or whatever, you don't want to get caught too far out over your skis. So we are right where I think we need to be in a balance between kind of redeveloping and mining the internal opportunities.

Okay, that is helpful. My second question is a bit left field. Have you guys considered the Empire State Building at all? Speaking of froth, I understand that has been an acceleration of bidding and potential outcomes there.

I am sorry; have we considered the Empire State Building? You know, look, we look at everything. I wouldn't -- there is a fairly substantial portfolio of assets all comprising a part of what is potentially going to be a new [REIT]. Empire State being the most notable or notorious of the bunch.

But there is I think 18 total properties within ESRB and about, I would say, 10 or 12 of those from my recollection in Manhattan. The rest in the suburban markets that we deal in. I think it is all very interesting and we have been sort of watching it play out.

Tony Malkin seems to be navigating the waters on his way towards trying to get something done and it seems that they are on that path. But, like anything, when -- no different than us or anybody else, when you expose your asset to the market you are going to get a lot of interest from the private market as well.

And I think there is generally a perception that the private market valuation for that portfolio probably exceeds what would likely be the public market valuation. That is my opinion only, but that is a -- I would say it is an educated opinion from having looked at it. I would say the private market valuation probably somewhere between exceeds or well exceeds public market valuation, but we will have to just kind of wait and see how that deal moves along and where the ultimate IPO valuations come out and what kind of disparities exist.

But you can be sure that in a market this efficient there is somebody out there that is going to be looking at public versus private. If there is a feeling that there is a disparity there, then there will be activity and you have seen that activity. People have sailed in what I assume are unsolicited offers and you will probably see more of that.

Okay. Great, I appreciate the detail today.

Josh Attie, Citi.

Thanks. What are your thoughts on the new supply that may come online, both on the West Side and World Trade Center? It is greater now as a result of the pre-leasing that was recently completed. Has that changed your view of fundamentals over the next few years at all? And also what submarkets do you think will be most impacted?

Steve Durels will sort of answer that. I just want to lead into it by saying I don't think the leasing or pre-leasing adds to it. I think it really subtracts from it, from my vantage point. Because even though the pre-leasing hadn't occurred, the inventory was out there on the market -- World Trade, Hudson Yards, and wherever else that you referenced. So that space is starting to become leased in whatever building.

It is not limited to those. Boston Properties building over on Eighth or 11 Times or Downtown or Hudson Yards -- any leasing of any of those projects that are being heavily marketed to tenants I think is, my opinion, a net positive because it takes space off the market. Obviously, with taking space off the market it might add to the market elsewhere but net-net most of these deals that you are seeing signed up tend to be new deals plus expansion. I would say they are rarely contractions, although sometimes.

You have other space being taken off the market in terms of conversion to residential, like 1107 Broadway, like the Sony building on Madison, and like a whole host of other buildings. So you have got some new supply that I think has been known. You have got other supply being taken off and net-net you have got some pre-leasing, which I think overall for the market is good.

But as it relates to the specificity, addressing the question, Steve?

Just to build on Marc's point, there was a drag on the market for the past couple years because there is not a big tenant that was out there shopping the market that wasn't using either the Trade Center or Hudson Yards as sort of a leverage in a negotiation on pricing and forcing landlords to stretch to make deals. So much like 11 Times Square for a considerable period of time and some other big blocks over the past couple of years were drags on the market.

As that product gets leased up it is a great thing for the health of the overall market. Combine that with the fact that in a 400 million square foot market it is not a lot of inventory over a 10-year period. These tenants are going to move these buildings; we will lease up. That is a good thing.

The overall market needs a certain supply of new construction and the types of businesses that are going there are the few types of businesses that absolutely want new construction. Doesn't mean it is right for all tenants out there. And I think it is, overall, a positive thing for us. And it is not going to force a lot of new supply coming on in the near future because the delivery of these buildings are still years away.

So I think net-net it is great news. I think it is great long-term on a 30,000-foot level looking at what makes a healthy market and keeps us a world-class city. And I think from a supply/demand side it is great because it gets the competitive product off the market and starts to shift some of the leverage back to the landlords as the big blocks get whittled away.

Thanks for that. You also mentioned I think spillover from Midtown South to Downtown. Could you elaborate on that and also update us on the activity at 180 Maiden?

So you can sort of answer that -- the answer to both those questions comes at the same time. We are seeing more and more Midtown and Midtown South tenants both kick the tires and starting to negotiate deals Downtown. Case in point being World Financial Center and World Trade Center seem to be in legitimate, active lease negotiations for some big blocks of space with GroupM over at the Trade Center for about 0.5 million square feet. Jones Day and Scotia Bank for a combination of another 0.5 million square feet over at World Financial Center.

It is something that we have said all along we thought was going to happen as far as Downtown goes. We are early to the game at 180 Maiden Lane, but I can tell you we have got four or five real proposals on our desk for blocks of space in that building ranging between 70,000 and 150,000 square feet. I would not signal that we have a chance of landing any one of those deals, but I think the fact that building is on the short list of some of these tenants, some of which are coming from Midtown, is indicative of where we think the building is -- where the demand is for that product.

And we are seeing it from a couple different types of industries. We are seeing it from nonprofits. We are seeing it from publishing, insurance, technology, and education. So we have got a good, diverse group of tenants looking at the building at the price points that we have been targeting for that product.

Thanks very much. That is helpful.

Alex Goldfarb, Sandler O'Neill.

Good afternoon, thank you. As you guys look at both adding to your finance book and then you guys are obviously always in the market looking at buying physical property, where in some of the spillover markets, whether it is outside of Midtown South so maybe Garment District or Penn Station area or the in-between, not quite Downtown but heading down towards that way, do you guys see better opportunity on the financing side or on the direct side?

There hasn't been a lot of availability, a lot of sales south of -- on the way to Financial District as you put it. So I think most of our activity has been financing, but we sort of take them as they come. There have been some very good leasing deals made, particularly more towards the Financial District.

101 Sixth has been very active and the SoHo area has been very active in terms of leasing, so that is where we price either better direct opportunities. Penn Station -- we sold 333 W. 34th St. in Penn Station so it has not been an area we have invested much capital.

Okay. The second question is just going to 10 East 53rd and 180 Maiden, just curious if you guys can provide some dollars that may go into these buildings. Don't know if it is normal TIs or maybe there is some bigger redevelopment, maybe not the grand scale of 280, but just some of your thoughts as the capital needed for both those buildings.

And then on 10 East 53rd, just because of the floor plate size and some of the park views, if you think there is any optionality of some of the upper floors to do something other than office?

I think that as it relates to any specificity on dollars on 180 and/or 10 East, that is probably going to be sort of front and center in December. Because it would just be too speculative at this point, given that we haven't nailed the designs down. And then once we get the designs, we have to send it out, do the CDs and price it.

So, I mean, you can look at the amount of square feet that is available in both and just multiply that by a TI and commission package. That is fairly easy to get your hands around kind of a leasing cost aspect.

But as to the redevelopment, we have got several different scenarios from modest to less modest to very aggressive, and we just haven't decided. As the market is improving, it kind of encourages us to invest more, because we think we can invest more and then get more top-end rents, especially at 10 East 53rd.

I would say that is one where we have a wide range of decisions to make and opportunities. We will sort of finalize that, if you will, over the next, I would say, three months is probably the right time frame. Then sometime around November, December I think we will be able to really not only give you some numbers, but get into what we are doing and who we are targeting and the kinds of rents we expect to achieve.

But again those are -- we are probably just a quarter too early on those to give you guidance on the redeveloped portion. But, again, the leasing cost portion is sort of just math, to a certain extent.

Okay. What about any optionality at the upper end up 10 E. 53rd? Is that one of the potentials?

When you say optionality meaning --?

Just taking advantage -- smaller floor plates part views that may be --

Oh, by the way, the way we are looking at 10 East right now is it is perfectly positioned and it is going to be an excellent redevelopment for us, financially. That is going to be -- I don't want to use the euphemism home run, but that is going to be a very strong product for us.

We are going to be marketing that product very aggressively as a lower-cost provider to some of the top-end rents that are being positioned in and around that area. And I think the question is who are we targeting and to what degree are we going to spend and orient the redevelopment to achieve those rents. And that is really what Steve and Ed Piccinich are spending a lot of their time on and we are close to that conclusion.

But, yes, Steve, at the top end of the building, let's say, what is your expectation of rents today given the middle of the road redevelopment?

If the building were fully redeveloped today, I think the market for those top seven to 10 floors is in the $110 to $115 a square foot range.

So well in excess of our underwriting, which is probably should be apparent, just because of where the market is headed. And we are going to execute on that shortly.

Thank you.

Rob Stevenson, Macquarie.

Good afternoon, guys. Steve, can you talk a little bit about where the leasing stands at a couple of the major vacancies in the same-store portfolio -- 100 Church, 125 Park, and 120 W. 45th?

I am sorry, repeat those 100 Church --

125 Park and 120 W. 45th, which I believe are probably the three big vacancies in the same-store?

Remember, 100 Church has been fully leased at this point. You may not see it in the stats where the leases have commenced, but at this point we are at 99% leased as far as signed documents and we have leases out on the last 1%. So that is pretty good news on that one.

125 Park we announced a deal today where we just signed a deal with -- two-floor deal with Pandora Music for a little over 50,000 square feet. We have leases out on another 50,000 square feet and we think we are on track to get that building pretty much stabilized hopefully by the end of the year, assuming that we close the deals that we are working on.

And Tower 45, which is a different kind of product, it is a small space building where we have had rollover that kind of started -- expirations that started last year and will carry through pretty good rollover this year and next year as a result of D.E. Shaw who was migrating out of the building to Sixth Avenue. That is basically coming back to us and we have been doing a lot of deals.

I think we have signed half a dozen leases in the past eight months. We have got four or five leases out right now. And because it is small space you don't get a lot of ramp up time for it. It is the kind of stuff that leases once it goes vacant and once we start to spend some dollars on improving the floor it's on.

And we are getting good rents over there. That building all ways shocks us as to how high the rents are. On the upper floors there we have been landing deals in the $62, $65 price point and I think that is great for a size three building.

And then, Marc or Andrew, can you talk about what the demand is for the suburban assets these days given the price point and where yields are for the CBD stuff? You sold one or are in the process of selling one. Is there potential to sell additional assets at decent prices that are well leased at this point?

I think it is probably a little early for the suburbs. The financing markets are still not terribly liquid and the sale markets there is not a lot of transaction activity. So we are still in a hunker down mode out there, trying to block and tackle and do as much leasing as we can in some very challenging markets.

Okay. Thanks, guys.

Brendan Maiorana, Wells Fargo.

Thanks. Good afternoon. Steve, your response to Rob's question about some of the lease up at a couple of the buildings, can I read between the lines to suggest that you still feel pretty confident in the year-end occupancy number which I think was in the high 95%s?

Yes, yes. I think we are on track to hit the number that we provided guidance to.

I think the number tends to be well ahead. It is just convincing Matt to actually show it in the statistics. He has got a fairly disciplined rubric between commenced, signed, leased, occupied, whatever.

But I would say the actual activity as and when it properly shows up at year-end is probably to the positive of what you might see looking at the portfolio as a whole at a point in time now just based on passage of time in order to get those reflected in the stats.

So I think what we are saying is that the leasing velocity is there. We are going to close enough deals. And if there is any kind of slippage it is simply a function of timing because the deal signs today but starts 30 days later and it falls outside the quarter. But the velocity is clearly there to support the guidance.

Okay, yes, that is helpful color on the disconnect between the leasing activity and the occupancy change in the quarter.

Then just also -- this is probably for Steve too. But I think on the value-add portfolio my recollection was that you guys expected to get some decent leasing done at 280 Park this year and 3 Columbus, and I know you signed some leases in both of those buildings during the quarter. But could you maybe give us an update on the prospect lists for the balance of the space that you have in both those properties?

Yes, 280 Park Ave. we signed two 50,000 square foot deals in the quarter. They were -- both deals were in the bottom half of the building in the base. Both of them were rents that were in the $92 to $96 starting rent, which were certainly on the high end of where we had underwritten that part of the building.

One of the tenants was financial services and we have seen pretty good prospect towards coming through the building. The development side of it is well underway. We are on track to open up the Park Avenue lobby right about Thanksgiving time so that when we do the investor conference in December we should expect to have an opportunity to walk people through and really start to unveil what this building is going to be all about.

I can tell you that when we do tours over there it is -- now that people can sort of touch and feel it the brokerage community and perspective tenants they get why we think this is going to be one of the two or three best buildings on Park Avenue.

3 Columbus we have got -- we are down to sort of a handful of spaces over there. We have got part of the second floor. We did the big retail deal with CBS for the ground floor and a third of the second floor. So we have got part of the second floor, a little bit of the 16th and 17th floors, and we have got three tower floors, so we are kind of down to 150,000 square feet of office spread about the building.

We think the top portion of the building will go to a small space program with financial services. We just chopped up a floor and signed our first prebuild lease over there last week at a rent in the low $70s. I think the middle of the building will continue to sort of attract the Y&R-type tenant, the Young & Rubicam type tenant, who is our anchor tenant, going more to the creative type industry. And that is where we are focusing our marketing.

That is helpful. So just for clarification, 280 Park, would your expectation be that -- or should we assume that you get another anchor signed by year-end? Or is that more likely to be a 2014 event?

No, I think that is next year event. I think there a -- that building seems like it's -- because of its price point is likely to trade sort of on the one to two floor type trade. It would be nice to say that we are going to get a big, meaty anchor, but I think ultimately we are going to knock it off in one- and two-floor type deals.

Great, thank you.

Ross Nussbaum, UBS.

Good afternoon. Can you talk a little bit about 388, 390 Greenwich and talk about when would you expect to know when they make a decision as to whether they stay or they go?

I don't know that we are in a position to answer that. I mean they have seven years plus on their lease, and like a lot of tenants, they are kicking tires, looking, talking with us, talking with others. But I don't know if it is imminent, next year, five years. I mean it is just as and when they are ready to make a decision, but I don't think -- this early in the process it would be pure conjecture on our part.

Okay. Can you talk a little bit about the potential development at 42nd and Vanderbilt and where that stands from a timeline perspective in your view on where rents may be trending in the city?

I think we are -- the timeline we put out there in December is exactly where we are at. The pacing item before there is any real initiation there is the Midtown East rezoning proposal that has to be -- has to go fully through the (inaudible) process and then be voted upon at the end of the year. So that is step one and then step two would be project specific, which would start towards the end of this year. And approvals carrying over into next year.

I think that is consistent with what we had sent out for people and I think we are still very much on that track. Recall that there is a sunrise provision in the current iteration of the proposal, which doesn't really allow for the bulk of the construction to occur prior to the middle of 2017. So that hasn't changed, although maybe it will. We think it should, but that is yet to be seen.

So we are on track but it is going through its necessary channels in order to first get the zoning in place.

Do you have a view on which of the mayoral candidates would be the most positive for SL Green?

No, not at this point. We are familiar, have dealt with many of them and there are several candidates that I think would be favorably inclined towards continuing the positive aspects of what has helped this city to be at the point it is in terms of business activity and quality of life and security, etc. So I think we are just going to continue to monitor and stay close, and we will see how it plays out.

Jordan Sadler, KeyBanc Capital Markets.

Thank you. Good afternoon. Curious about the condition of the market. I don't know if this is for Steve maybe. At what point -- and we are sort of dancing around it a little bit, but at what point do you see the market becoming a landlords' market again? If you are sort of to handicap it.

Traditionally we have seen, when the market has been in the state that it has been in, large tenant A followed by large tenant B requirements in the market act and then all of a sudden we start to see a tightening. But I am kind of curious are those tenants around and/or what would it take for us to see one of those tenants for these conditions to change in your favor?

I think you would have to see availability down around 9%, but the fundamentals are certainly there. You are seeing these big chunks of subsidized, low rent type spaces getting pulled off the market, so that is -- fundamentally that is a very strong thing as far as the supply side goes.

You are seeing tenants out in the market, big tenants out in the market, shopping and making long-term commitments. You are seeing a greater number of smaller-type deals at $100 a square foot being done than at any time in the past. You are seeing an improving national economy and a very strong local economy.

So I think the fundamentals are there. It is a point in time that job growth continues to get us to a point of supporting the demand that we will enjoy that spike in rents. We saw it a couple of years where rents certainly spiked 15% in one year because of the way the market was trending. And tenants in the brokerage community certainly were counseling their clients that rents were poised to continue to spike for the long-term.

It is coming, but it may not be in the short term. But it is around.

Along the same lines, what are you guys underwriting in terms of market rent growth? And your submarkets, as you see some of these assets crossing, even as you look to sell some of these assets next two, three years?

Well, depends on the building, depends on the submarket so it's hard to generalize, but I think we are generally looking at somewhere between 15%-plus, which is very conservative. So it is not really -- it is a tough question because the better question I think is what is the market underwriting? What I have said on the previous call is that the market seems to be underwriting rental growth over the next three to five years of as much as 30% to 50%.

The fact that our bias tends to be a little conservative at the top and more aggressive at the bottom that is just the way we execute the business. So if our estimates are 15%, 20%, 25% depending on building, depending on market with greater growth in some submarkets and less in others, and the market at large is 30%-plus, I mean you will take from that what you want to take from that as to who is right and who is wrong.

The deals being bought today have very heavy rental growth assumptions and they are being capitalized and there is equity that wants to stand behind very heavy growth assumptions. We are a little more conservative. We could be wrong, could be right.

But I think more importantly, whether it is us or the market, there is a view that over the next three-plus years there is going to be significant growth just based on the job growth in the city, which is what I spoke about earlier and Steve just confirmed. If you have 100,000 jobs, private sector jobs added annually and a good proportion of those are office using, you are going to drive down vacancy and you are going to drive up rents. So at the moment it seems to be that the job growth fundamentals in the city are very good and, therefore, people are very optimistic about where rents are headed.

Operator, we have still have about half a dozen questions remaining, so if there is -- we have spent a lot of time on the leasing and the market, and we can do more. But to the extent we are going to be starting to cover some ground we have already covered, if there are any other questions dealing with any other topic. If not, we will just stick with the leasing. So next question.

Steve Sakwa, ISI Group.

These should be very quick. Matt, on that $20 million of savings from the Viacom deal, is that just a deferral or is that an actual savings on your part, meaning they are never going to spend it?

So the full $20 million, Steve, isn't Viacom. I would say Viacom is probably three-quarters of that. It is a deferral in that they still are entitled to the money, but again, since we don't control it, I can't say when that is deferred until.

Okay. So it is more just a timing issue as opposed to an actual real savings?

Accurate.

Then just for Steve. On that 1 million square feet that you have in the pipeline, I am just curious how much of that is early renewals, tenants coming to you like the teacher situation, and how much of that is actually for the 5% vacant space that you have?

It is sort of two-thirds of new deals and one-third of our renewals on a rough count.

John Guinee, Stifel.

Thank you. Can you talk about the leasing market? That was a joke, Marc. Sorry.

I was waiting for somebody to get to this, so thank you for bringing it up.

Maybe this is something that you need to think about and get back to us on, and maybe Ed knows this off the top of his head. But one thing that is incredibly interesting about the conversion from office to residential or hotel is that when you go from gross buildable square foot to New York Board of Realtors net rentable you are actually leasing 110%, 120% of the building. But when you get down to a net salable square footage it is much, maybe 60%, 70%, 80% of the gross square footage. So there is a huge gap between New York City net rentable office measurement versus salable.

Then you have also got different issues in terms of what floor plate size works and what doesn't work for conversions. And then you also have a situation where you have got just incredibly different valuations for land to the extent it is available on the island. Is it possible for Ed or someone to give a very, very quick tutorial on that, or is that something you maybe talk about offline?

Well, Ed is dialed in remotely because he is on a job site right now but, Andrew, you want to -- you have done a lot of the underwriting on the potential conversion. What John is saying is accurate; there is an extraordinary loss of salable real estate in the conversion from commercial to resi and that does act as a hindrance in some, but not all cases, in doing that. So you want to just quickly touch --?

In a lot of cases, office loss factor is 26%, 27% generally so the conversion back down to gross and then to sellable, a lot of times you are looking at between 30% and 40% shrinkage from rentable office to sellable residential. And I think that is pretty consistent across the deals that we have underwritten. It doesn't get much more efficient than that.

Then what square footage is sort of the maximum floor plate for which residential or hotel might work?

It sort of depends on where the core is and how much span there is from the windows to the core. The core depth the city maxes out around 30 feet, the city code, so beyond 30 feet the space is technically not habitable. So you will end up with storage units or it used to be home offices, but they really discourage heavily home offices without windows that a lot of people treat as bedrooms.

So you want core to glass depths of less than 30 feet and generally side core buildings set up better for residential because you can put a hallway up the middle and sort of branch the apartments off of it. But it totally depends on the building. We have seen floor plates as large as 50,000 feet probably and obviously smaller floor plates work great generally.

Tayo Okusanya.

Good afternoon. Just had a question about the structured finance portfolio and how we should think about yields from that portfolio and how large it could get, especially in light of a rising interest rate environment?

I think we have said consistently we try to keep the book somewhere around 10% of assets, which is about where we are now. I think there is always some fluctuation. I think it went from [1.4] to [1.2] with a payoff, but we have some originations in the pipeline.

I don't think you can always time things perfectly, but I think within that range somewhere we are going to stay. And I think we have been able to keep yields, either through creativity, taking down stacks and breaking up pieces, or you said when yields rise we obviously tend to get a higher yield.

So I think we have been able to keep our yields relatively consistently and we think we will stay in that range. And in terms of outstandings we will kind of remain in the range that we have been for the past couple months.

Okay, that is helpful. Then also in regards to the Midtown rezoning it seems like there had been some news recently that that may involve a bit more residential. Just wondering if that had any impact on 1 Vanderbilt and how you think about that development project.

I think that it is great to have the optionality worked in for us to evaluate, and there are clearly certain sites within the rezoning district that will benefit more from residential than others. We happen to have what we consider to be an extraordinary retail and commercial site and location. Now we will assess separately the residential viability and compare it to what we have already underwritten if you will.

So I don't think we have any conclusions there. Like I said, it makes sense, we think, for that flexibility to have been worked into the proposal because most of the successful submarkets we see today are 24-hour submarkets where you have live, work, recreate and not just one or the other. Even by working it in it is not that Grand Central is or probably could become a prevalent residential market just given the extraordinary inventory of commercial space, but like I said, I think that having that option makes sense.

Obviously, enough people did so that the city went back and revised its proposal. And we will evaluate whether it has any applicability to our site.

Helpful. Thank you.

Vincent Chao, Deutsche Bank.

At the risk of asking another market-related question. Just curious if there is something you think we should be asking about that we haven't so far.

That is a good question. Well, why don't we turn it over -- Jim and Matt have been a little bit sidelined in this Q&A today, which is not customary. So I'm going to turn it to you guys.

And if there is a particular thing, Jim, that you want to get through on what I think is as important as everything else we are discussing but hasn't gotten a lot of play today -- balance sheet, liquidity, metrics, Moody's, things like that -- why don't we just cover that?

Sure. I think that if we were talking about the balance sheet, the balance sheet has come along in the same way that the rest of the Company has come along. We have taken a number of opportunities over the last six months, year to really work on our maturity schedule to maintain our liquidity.

We accessed the market for equity through the sale of 333 West 34th St., which was enormously efficient for the Company. At the same time, we have been deploying capital carefully into high returning investments. Not just debt and preferred equity, but also investing in our redevelopment program.

So I think that as we look at where we are today we have never been stronger from the standpoint of our balance sheet. As we talk to our lenders and we talk to the rating agencies we have gotten across to them that the wind is behind us in terms of the market performance. That overall we have no maturities, material maturities coming up in the near-term. We have very few maturities in the next couple of years.

We have maintained an incredible amount of availability at our credit facility. I think we only have $40 million or something outstanding on it today. It is a $1.2 billion credit facility.

We have done a number of things to extend our average maturity of our debt portfolio of our loans that we have. So, overall, I would say consistently with the evolution of our market and the improvement in our leasing and everything else we have also as well put to bed any kind of things you would think of as being important to address in our balance sheet while maintaining the liquidity and the ability to invest going forward. So I think that is substantially what we would get across, what Matt and I would get across in terms of our activities for the last three months and also the last year.

Excellent, thank you. Any final questions?

Michael Knott, Green Street Advisors.

I hear your comment on cap rates for buildings are unchanged, but I am wondering if the rise in rates has adversely affected the probability that you might sell the land fees at 885 Third and [2 Herald].

No, I don't think so. Often what you see in cases like this is the underlying rate rises and the risk spread or credit spread shrinks such that the overall rates of return people are looking for are not terribly unchanged. So I think that we have a number -- not a number but we have several deals that are out there in a somewhat formal or less formal way, as we always do. We are a buyer and a seller.

We are always looking for those points where we think we can kind of get the best execution on the margin relative to our goal. So we, I think, sell as much as any REIT, certainly any of our peers out there. We are active buyers, but we are active sellers. I think the fees today are still extremely attractive, notwithstanding a little run up in the Treasury, because as I said it is --

Some of the buyers were looking at diffusing the in-place debt, so those (inaudible) costs actually have gone down as rates have gone up.

That is a good point. A lot of people like to draw sort of a linear distinction between the 10-year U.S. Treasury and real estate values. I think that is dangerous. I think it doesn't correlate all that well and I think it is much more about -- in some cases that kind of asset overall rate of return and kind of a point of view as to where cap rates and values and rents are headed in the near-term.

We will be rooting for a good price on those. Then last question is just curious if you guys are feeling bearish about your acquisition volume guidance, just given how competitive the marketplace is out there.

(multiple speakers) Well, I think we have broken it down to a few different areas -- office, resi, and retail. I think of the three, probably office will trail behind the original guidance. I think resi/retail -- I don't have the guidance here in front of me, but just knowing the pipeline and where I think roughly we had guided in December would probably -- we wouldn't modify anything there.

But on the office front I would say we have been a bit more careful and judicious in terms of how we are going to deploy capital in that asset class. And even though we are bullish on rents, a lot of that, as I mentioned earlier, is reflected in the cap rates and the rates of return.

I think the market is balanced for office. I don't think it is heated, I think it is balanced, but we tend to look for value-add redevelopment off-market opportunities. At this point in the cycle there are fewer of those than there were three, four, or five years ago.

So our plate is very full right now in terms of mining internally the opportunities from acquiring those properties over the past three or four years, and I think that is where the focus will be unless we see some compelling opportunities hit the radar screen.

Thank you. We have made it through the Q. We appreciate the attention, for those of you still listening, and we look forward to speaking again after the summer.

Thank you for your participation in today's conference. This concludes your presentation. You may all disconnect. Good day, everyone.