SL Green Realty Corp (SLG) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2013 SL Green Realty Corp. earnings conference call. My name is Mark and I will be your operator for today. At this time, all participants are in a 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 call over to Heidi Gillette. Please proceed.

Thank you, everybody, for joining us and welcome to SL Green Realty Corp's third-quarter 2013 earnings results conference call. At this time, the Company would like to remind you that listeners -- during the call, management -- sorry -- 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 at www.SLGreen.com by selecting the press release regarding the Company's third-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 from last evening, we did once again announce 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, please email SLG2013 at SLGreen.com.

Lastly, I ask 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.

Okay, thank you, Heidi and thanks to all of you joining us this afternoon. We would like to provide you with some color on certain factors influencing our market and on the third quarter's financial results, followed by your questions.

Overall, we are still seeing very good market fundamentals, which enables us to execute our business strategies that we've enumerated throughout the year, including new purchases, like the retail, residential and commercial project known as The Olivia; the redevelopment of growth assets out of that value-add portfolio, like 280 Park Avenue, 3 Columbus, 635 6th Avenue, to name a few; sales and harvesting of hard-fought gains, like the recently-closed 333 West 34th Street; major leasing signed and commenced, like the new leases with Bloomingdale's and the law firm of Meister Seelig, which were signed in the third quarter; and structured finance originations, which exceeded $180 million in total and still provides a very attractive risk-adjusted return after we sell and syndicate out senior pieces of that capital stack.

Underpinning these favorable market conditions is the continued strength, diversity and vibrancy of the New York City economy, which added another 88,000 private-sector jobs this year through August -- only through August -- of 2013. This is well ahead of the city's initial forecast for year to date, which was about 54,000 jobs, and I think you are likely to see a revision upward in November, ending the year somewhere right around that 88,000 total job creation number.

While only 10,000 of these jobs are classified as office-using, that still represents over 2 million square feet of new demand and counters the refrain I sometimes hear about the shrinkage of the labor force in New York. This simply isn't the case and hasn't been since the recovery began in 2009.

Of particular note, the closely-watched fire sector is essentially flat for the year through August, and Wall Street profits for the first half of the year was $10 billion, which was roughly on track with last year. While I think expectations are that the second half of the year will be less robust, it will still be very profitable year on Wall Street, at least as things look at this moment.

Switching focus to the leasing front, I read with interest last night some commentary from analysts that looked at 440,000 square feet of leasing as a deceleration and possibly a signaling of a slowing market. I don't think anything could be further from the truth, and I also think it's probably somewhat flawed to measure the leasing market in terms of signed leases in three-month increments.

I think it's better to look at the picture over year to date of 1.8 million square feet. Actually 450,000 feet signed or 440,000 feet signed is on track with 1.8 million per year, not through three months. And looking out over our pipeline over the next three months, we see very encouraging signs, not the least of which is almost 100,000 square feet of leases already signed in October, and then another 1.2 million square feet of leases that are either out for signature or in negotiation and pending. That's about as high as we've had our leasing pipeline at any point in the past year. And in speaking with the Group just prior to the call, it's our estimate at the moment that approximately 750,000 feet in total of those leases will likely sign in the fourth quarter, which would put it on track with last quarter's roughly 750,000 feet, which represents near all-time highs for the Company in any quarter, and would end the year at about 2.5 million square feet leased, without any exceptional bias towards any one tenant.

So I guess you will read into it what you want to read into the third quarter's leasing results, but from our vantage point -- and I presume that's why everyone's dialing in, is to hear our thoughts and commentary on the matter -- we look at the pipeline as robust. We think the market is very balanced and we think demand is reasonably good.

And as this demand continues to clip along, there's going to be a need to look at how we are going to be able to house this new tenant demand into the future. And we get to the discussion about East Midtown rezoning. This is a very important rezoning proposal that's been put forth by the city to be voted on by the city council sometime in the middle to end of November of next month.

They will be voting on a plan which would result in a limited number of sites receiving bulk and density increases beyond current zoning, including our site located right across the street from Grand Central Station at what is known as 1 Vanderbilt.

We believe the passage of this new zoning is essential for incentivizing the development of new buildings in one of Manhattan's most desirable commercial districts. The city's proposal is putting density right where density belongs, surrounding one of the busiest rail transportation hubs in the country with over 1 million commuters and visitors daily.

This establishment of a district improvement fund from which developers can purchase air rights at a cost of $250 per square foot, subject to future increases, is being established to fund necessary transportation and other important public realm improvements which were unveiled by the city within the past few weeks.

We have come this far and we certainly hope the council will approve this rezoning proposal to encourage the selective renewal of East Midtown's commercial inventory.

Another note on leasing, as we've commented on in the past, we continue to be engaged with Citigroup on an extension of their lease beyond 2021 at 388/390 Greenwich Street. We believe that we presented Citi with the most compelling offer, containing substantial economic benefits, flexibility, certainty of execution, iconic architecture and the most desirable neighborhood today to live, work, play and eat, Tribeca.

We are focused -- very focused on making this happen, but at this point we can't comment further on the status of any details associated with this particular transaction.

So the combination of, I guess, all the factors I touched upon, including primarily leasing up the growth portfolio, same-store mark-to-market increases in rents, expense control, all have enabled us to guide towards a midpoint in earnings that is 13% higher than just last year. This earnings momentum, which we foresee continuing into 2014 and 2015, in conjunction with improving FAD and cash flow numbers, enabled us to reward investors with a sizable dividend increase, which Jim will speak to the rationale of the underlying -- the amount of that increase a little later on.

But for more color on the capital -- the investment market, sales market, and some of how we are fine-tuning our strategy in light of very enthusiastic market conditions, Andrew is going to take you through the next few minutes.

Thanks, Marc. Third quarter saw a continuation of the themes we've been seeing all year, all leading to a very strong sales market. Interest rates continue to be well under control, with the ten-year treasury again reaching 2.5%, leading to a liquid debt market. Spreads continue to be very stable. Some spreads, including on floating-rate debt, seem to be compressing again.

That liquid debt market, combined with enormous inflows of foreign capital, is creating an environment where assets are trading for untested, unseen numbers in all different parts of Manhattan. The latest example of this was 1 Chase Manhattan Plaza, where a large Chinese conglomerate bought the deal on an all-cash basis, signed the hard contract, beating out a litany of residential developers and other traditional sort of New York bidders. They all were topped by a Chinese conglomerate, which is a theme we have seen throughout the year.

Chinese capital, Norwegian capital, other sovereign wealth funds, all targeting New York as their primary entry point to the US, and all targeting the US as an attractive investment market where they want to increase their investment allocations.

Additionally, alternative uses continued to drive a lot of these transactions, as the residential market, both rental and for sale in New York, continues to appreciate and continues to drive significant transaction volume.

We participated in this frothy market with our sale of 333 West 34th Street, which Marc referred to. And further, we've put 1350 6th Avenue on the market to test pricing levels for a prime 6th Avenue asset.

In addition to 1350, we are exploring other recapitalization strategies with respect to other assets in our portfolio, trying to find the exact right mix of deals to best improve our asset allocations.

These transactions all serve to demonstrate a widening gap between our actual at-the-market NAV and market views of our NAVs, which in a lot of cases, including on 333 West 34th Street, badly trail the market prices we are able to achieve.

We also continue to contract and sell properties in the Arden portfolio in Southern California, and sold a property in Stamford, Connecticut this quarter as well.

On the structured finance front, we have continued very strong originations in our portfolio. We have an active pipeline for fourth quarter, and we continue to be the market leader in originating primary positions and syndicating both senior and pari passu positions with great success and at great profitability to the Company.

For example, in August, we closed $160 million acquisition loan on a B class asset on Madison Avenue, and in early September, syndicated a $110 million senior mortgage, leaving ourselves a prime, high-yielding $50 million junior position on that asset. We have more transactions like this in the pipeline and feel very confident of our abilities to keep our balances roughly where they are and keep our rates of return consistent with our current rates of return.

We are also adding some fixed rate positions with longer duration to help balance out prepayments over the next two to three years.

We do view these yields as sustainable, given our 15-year track record of originating high-yield paper in the structured finance program and look forward to continued originations and profitability.

And with that, I'd like to turn the call over to Matt to talk about earnings.

Thanks, Andrew. The first nine months of 2013 have obviously been very profitable for the firm and with only three months left to go we see a clear path to finishing 2013 with earnings well above the expectations we set out last December, even after taking several nonrecurring charges throughout the course of the year including a non-cash charge of around $7 million this quarter relating to accounting balances of a tenant who vacated their space early.

Based on the performance of the first nine months and our view of the next three, we took the opportunity last night to increase both our FFO and FAD guidance significantly. Our FFO guidance range was increased from $4.90 to $5 a share to $5.12 to $5.16 a share. This increase is due to the performance of our real estate portfolio which in a strong and strengthening market is performing in line to slightly ahead of our expectations. Certainly leasing as well outpaced our initial guidance.

And due to the performance of our debt and preferred equity portfolio, or as Andrew alluded to, our ability to source new deals has provided a relatively stable outstanding principal balance throughout the year, with still more pipeline left to close in the fourth quarter, while maintaining a robust average yield that currently stands at 11.2%.

In addition, our earnings this year have benefited from some other income events, which are generally not provided for in our initial guidance due to their uncertainty.

With regard to FAD, which adjusts FFO for GAAP-related items and second-generation capital expenses, our increasing guidance from $3.10 to $3.20 a share to $3.51 to $3.55 a share not only reflects the increase in our FFO expectations, but also takes into consideration the continued slow pace of spending by Viacom, who through the third quarter had get to spend any of the capital they were provided under their 2012 1.6 million square foot lease renewal. We have layered in about $15 million of expected spend for Viacom in the fourth quarter of 2013.

With that, I will turn it over to Jim to touch on the dividend.

Thanks, Matt. We announced that dividends would be increasing by 52% to the annual rate of $2 a share, or a quarterly rate of $0.50, beginning with the dividend that will be declared later this year for payment in January 2014.

As many of you know, it's not really in our nature to pay out more than we have to, and we continue to have plenty of places to invest our capital. So the reality is that the increase is because our taxable income is increasing, and as Andrew said, we have got some asset sales planned that would also have gains that need to be sheltered.

So while we are managing our taxes to have as low a dividend as possible, the $2 for 2014 is our best guess at the moment, and if anything, may be light if we close on more property sales. In that case, we will have to revisit our dividend level, unless we adopt other strategies to shelter or defer gains.

What's clear though is that at $2 a share, we still have room to grow, and we will likely need to grow over time. Our payout ratio will be modest in comparison to other office REITs, and as we move forward into 2015 and beyond, we expect to see sizable growth in our income stream from the lease-up and stabilization of the portfolio of growth asset we purchased since 2010.

Now, changing topics for a moment, I also want to say a few words about an important achievement this quarter. We received an upgrade to our outlook from Fitch, which is the step that precedes receiving their full investment grade rating. The analysts at Fitch really understand us well. And in fact, they made their target ratios more accommodative earlier this year as they became more comfortable with the security of our operating cash flow and our focus on reducing balance sheet risk.

So this is a great accomplishment for our team led by Matt and puts us right on track to get our second investment grade rating, having already achieved investment grade from S&P a couple of years ago.

So Heidi already went through some of the details for the upcoming investor meeting, right, so hopefully that will be the next opportunity we will get to make a fulsome presentation on these topics and a host of many, many other topics that we will be preparing throughout November for a day that we consider one of the most important days for us in terms of our communications with you folks.

So we look forward to that. And I guess at this point, we will open up the line for questions and answers.

(Operator Instructions). Vincent Chow, Deutsche Bank.

Curious, just on the rent spread for the quarter, obviously there was a big -- one lease that skewed it quite significantly. But just given the size of that lease, I'm, just wondering if you could provide some more color on what was going on there. I guess it was a bankruptcy replacement. But just curious what caused you to mark the rent down so much on that one rollover.

Yes, that one lease was at 810 7th Avenue, where we had a hedge fund that had a little over 17,000 square feet. And they had signed at the top of the market a few years ago, in the last cycle, and the rent was in excess of $100 a square foot.

So we leased it at a healthy rent, but on a mark-to-market basis, it watered down the averages for the quarter.

You would replace it at market rent, though, you think?

Yes, we replaced it at a full market rent. And I think it's arguably probably a below-market concession package. Because we inherited a very nice installation, so we really just gave them some modest money to redecorate.

That deal, as I recall, Steve, was zero TI. So obviously for a new tenant, that's dramatically below --

The $40 average.

$40 to $50 average for a new tenant. And I think it was only three months' free rent, which --. So there's no adjustment for -- on a net effective basis, it's actually much higher. So we stripped it out. So you could look at it both ways, with and without. Take your pick.

But if you look at it with that lease, understand that that was a brand-new lease done with almost nothing in the way of new concessions.

Okay, thanks. I know you said the lease pipeline is very strong and very broad-based. I was just curious if you could maybe provide a little bit more color on what you are seeing between the different submarkets in Manhattan, in terms of demand activity, that kind of thing.

The good news is, like we said last quarter, is that we are continuing to see really no one pocket geographically drive the demand, nor one industry. Really all across our portfolio, we are seeing good demand at all price points.

So the value-play type tenant, that $45 to $60 kind of tenant, is active in the market. The very high price point type tenant, north of $100 for top floor space, that seems to be back in the market much more so this year than last year.

And then on the types of tenants that we are seeing, we have active either leases out or term sheets being negotiated with tenants in technology and media businesses, transportation, financial services, legal, publishing, and a good size lease out with a consulting firm. So no one user group is driving the demand, and I think that's one of the healthiest things.

The last point I think worth making on that is a couple of the buildings that were laggards last year -- for instance 711 3rd Avenue and 810 7th Avenue -- where we had very slow leasing last year in those properties have good momentum this year with active leases out. 810 7th is on track to be at least -- until we get some more space back from future roll -- up to a 95% occupancy. In 711 3rd Avenue, half of my vacancy there has leases out.

So that drives a lot of why we are encouraged about what we are seeing in the marketplace.

Okay, thanks. And just the last one. Just in regards to the commentary about the 10-year, obviously, we had a spike there and it has pulled back again more recently. It sounded like you are exploring some other potential sales.

How much of that is driven by what's going on in the treasury markets today? Are there more buyers that have -- does it help you from that sense? And how are you thinking about taking advantage of this pullback here?

I don't think it -- when it spiked up to 3, it didn't really have a material impact. And in fact, we printed 333 West 34th Street at just about the high of the 10-year treasury market probably this year.

The buyers, as we've said, are just not that sensitive to relatively small moves in rates. I define it as 25 to 50 basis points. I just don't think it makes a material impact. People have a view that the markets continue to tighten, rents are going up, and because of where spreads, are the cost of debt is still, from a longer-term, historical perspective, whether the 10-year is at 3% or the 10-year is at 2.5% or 2%, the all-in cost of debt is still very attractive. And that's driving these buyers more than month-to-month moves in the treasury.

Okay, thanks, guys.

John Guinee, Stifle.

Great. Well done, guys. Kind of a big picture question for you. It looks like your next mayor is going to be Mr. de Blasio, and depending on who you listen to, he is anywhere from a Clinton centralist to a very far left.

Talk about what that's going to do to your business and also to operating expenses, and how your operating expense increases may be mitigated by your lease structures.

I'm sorry, John, the question was -- ?

The question is it looks like de Blasio is going to be your (multiple speakers). Expenses -- just how property tax is going up, any other aspects of your business going up, and how you might mitigate those increases vis-a-vis your lease structures.

I wouldn't equate the potential win by de Blasio in November as in any way connected to real estate tax increase. I think everyone always has a fear with incumbents and with new administrations that real estate taxes become a source of potential revenues if other sources cannot be identified.

But I think that the tax burden on the commercial sector is very full, and relative to other sectors, like particularly some of the residential sectors, arguably overtaxed. And because the real strength in the market right now is much more oriented towards residential rents and sale prices versus the commercial rents, which are increasing, but not to the same degree, I wouldn't necessarily conclude that real estate taxes on, for instance, our portfolio will come in to attack any more or less so than increases have been experienced over the past -- in this current administration, where taxes have gone up.

Now, a lot of that tax increase does get passed through to tenants until the date of reset when that tenant expires or vacates. So there is certainly a lot of interim protection on any kind of tax increases.

But we do model very routinely and conservatively these tax increases going forward. And I think we've got a very good handle on that, and whatever increases occur get phased in over generally a five-year transitional period, and a lot of that gets passed through to tenants.

So I can't speak to the very, very long-term of where things might be headed, but certainly I would say in the near-term -- near-term as defined as the next 3 to 5 years -- I don't see that as a particular area of risk to us, particularly relative to other areas that may be more at risk.

Okay. And then a second and last question. If you look at your structured finance book, your originations run about $200 million a quarter and your redemptions run about $100 million a quarter. And during the last five quarters, your weighted average yield has increased 180 basis points.

What are you doing differently to cause that yield to go up so much in a pretty competitive environment with a lot of people in the space?

I think the average yield is skewed up by certain extremely profitable transactions that we've had -- outlier profitable transactions, like the Sony Building, which I think we gave a case study on. And our average origination, I would say, has skewed up slightly to be more profitable. That's solely because the senior debt markets have gotten more liquid.

So when we are originating that $160 million loan that I spoke about, there are simply more competitors for the $110 million senior mortgage that we syndicated, and that drives down price. So whereas we used to be syndicating that senior mortgage at 400 over LIBOR, today, we are syndicating at 300 over LIBOR. It is literally that kind of spread compression.

And we are seeing increasing amounts, particularly of German banks and US commercial banks, coming into the floating-rate transitional loan sector, which is further driving down spreads, which is a terrific dynamic for us.

Great, thank you very much.

Rob Stevenson.

Good afternoon, guys. You sold a couple of assets in the Arden portfolio this quarter. How much are you seeing value recovery there? And is there more harvesting that can occur near-term, or were these select assets and much of the value harvesting out of that portfolio is still going to be further off into the future?

This is David. I think we have seen significant value recovery over the past couple months. Part of it is the market in general, part of it is now that we have the right-sized capital stack, we are leasing up the properties and doing the right thing in creating value. So it's a combination of the market and us together with Blackstone creating value.

So I think we have sold well in excess of what we thought values were a year ago. We are going to continue to harvest the portfolio, I think. Both of us intend to sell assets as they become ripe, and we intend to cycle out of it over the next couple years.

Okay. And then Marc or Andrew, given the commentary on Chase Plaza and the competition for assets out there, if you guys continue to harvest out of your own portfolio and sell deals, where does the capital go? Do you guys expand the structured finance portfolio, given the higher yields there? Are there still deals at the margin that may be require some redevelopment that you guys still could be competitive on from a capital standpoint? Can you just talk about from a capital deployment how you see the next six months shaping out?

I think -- how you have seen the year unfold is probably a good indicator of where we would see things over the next 6 to 12 months. And that's with money going into kind of varied sources. A lot of it is headed towards redevelopment, because right now that is an enormously profitable place to be in a rising rent environment, is improving your own building stock, which typically is not quite as costly as bidding for new product.

And for $100 a foot or less, in many instances, we can move rental points $10 a foot or thereabouts, or $7 to $10 a foot. So we have an enormous pipeline of redevelopment for next year, which is very capital-intensive, including 10 E. 53rd Street, which as the market gets better, I think our scope of program there continues to be upgraded towards the top-end rents. And that's an investment that we think is going to turn out really well if the market continues on its current trajectory.

Then we have got 180 Maiden, which is going to take some level of repositioning and redevelopment after the AIG expiration in 2014. And we have a really exciting new plan developed by all the different group heads here oriented towards kind of the technology and creative tenant base that we see spilling out of Midtown South for which 180 Maiden is going to be a perfect candidate for. And the redevelopment -- which wasn't envisioned that way initially; it was envisioned towards financial tenants -- is now being redesigned and upgraded into something that's going to be pretty spectacular.

And there are other examples of that. The Olivia, which we just purchased, we are going to be more aggressively renovating those residential units than I think prior ownership had done, with just a different philosophy -- investment philosophy. And we are going to be trying to really upgrade our rents in that multi-use, mixed-use project over on 33rd and 34th Street.

280 Park will be completed next year. That still has a ways to go. You heard Matt talk about the capital that's still needed for the repositioning of 1515, and 635 6th, another extremely exciting and successful development where we've increased our underwritten rents and projected NOI, but we've also underwritten some additional capital to go along with that.

So redevelopment is kind of right in the middle of the mix, along with some incremental increase in structured finance and new retail projects, both ones we've closed this year and ones that we have in pipeline, along with a continued interest in the commercial product type.

But on that end, you heard Andrew's comments earlier where we are kind of in a neutral zone there to a net seller zone on commercial, until we see either greater rent increases, which would put it on par with these other avenues of investment, which are just more attractive at the moment.

Okay, thanks, guys.

Steve Sakwa, ISI Group.

Thanks. I guess, Marc, I wanted to tackle a little bit about rent growth. And obviously you are looking at a lot of transactions, but not winning and haven't really bought a traditional office building in a while.

I guess I'm just curious as you look at where the bidders are winning and where you guys have bid, is it a function of those investors getting much more aggressive on rent growth or just accepting a much lower IRR, in your opinion?

I would say that if you see us, as you call it, not winning a particular deal or not pursuing a particular deal, it's because we see greater opportunity elsewhere in the areas I just covered. So it's not to say any of these deals unto themselves are bad deals or unsupportable deals. We have a limited capital base and we are looking to optimize returns. And if we see higher returns on a risk-adjusted basis at any point along the spectrum, then that's going to necessarily make our pursuit of some of those bigger office deals just a little less frothy.

But with that said, I think people who are winning those deals tend to be syndicating out that equity to people who have extraordinarily high visions of what rent growth is going to be like in Manhattan. And even though we are pretty bullish on where rents are headed, there's always a group of people out there who are more bullish. And those people now have capital, and we can't say they are wrong. It's one of those things where if job growth continues at 75,000 to 100,000 private-sector jobs a year and office-using jobs are in the 15,000 to 20,000 to 25,000 jobs a year, then there's going to continue to be significant demand, which is going to drive up rents, particularly as some of the new product that has been a bit of an overhang for the past few years gets leased up in Hudson Yards, on the Far Westside and down in the Trade Center zone.

So we see that getting better; every new lease is getting tighter and tighter. There is no real new supply to speak of that's going to be delivered over the next few years. The jobs are there, so we do see rents going up.

It's just a question of -- we already control 28 million, 29 million square feet of office, and I think right now we are looking to optimize and not necessarily look into bringing that next incremental building, unless it is strategic or we have a particularly good tax-advantage situation or we need a 1031, in which case the tax efficiency might drive us to do something a bit more aggressive to shelter corporate taxes for shareholders.

So just, I guess, on the rent point, I think you had said this last year -- you thought there'd be cumulative 25% rent growth over a three-year period. And I assume we are kind of one year into the three years. So of that 25%, how much do you think has actually transpired?

Let's go back in time. Around 2009 or 2010 -- I don't recall -- I think it was at the 2009 December meeting, we said 25% over three years. That was -- you think it was 2010? 2011, 2012, 2013. I mean, way in excess of that. So if that's the question, we are well beyond that.

In terms of additional increases, I had said earlier in the year what are we projecting versus what the market is projecting, I said the market was kind of, in our estimation, projecting increases as high as 40% -- 40% to 50% over maybe the next -- I would call it more like 3 to 5 years.

Steve, I don't know if I -- I don't remember the three-year [comps], but I would say easily 40% to 50% over the next 3 to 5 years, and we were more like 25%. But again, both are really aggressive and both drive cap rates that are going to be right on top of borrowing costs, 4%, 4.5% cap rate kind of talk. And that is where the market is.

You know, it's interesting. We traded around 5% or 5% plus, and the cap rates are below that, and there's going to be record sales volume. I think Andrew mentioned earlier, like $30 billion -- when I say record, record but for the peak in 2007. So but for 2007, a $30 billion sales yield.

So any notion I think that there's any kind of pullback in the market over interest rates or slack tenant demand or a feeling like rental growth isn't going to be very aggressive, it's just -- our version of aggressive or someone else's version of aggressive. It's really just -- we don't see that right now. We see a very, very good market and we are just trying to make the best allocation of capital.

Okay, thanks.

Brendan Maiorana, Wells Fargo.

Thanks. Good afternoon. I appreciate all the leasing color on the pipeline. It sounds like it is progressing pretty well. Just was interested in an update on the year-end occupancy target, which I think still implies a pretty good ramp in the fourth quarter in terms of the occupancy number.

And then secondly, I've got a similar question with respect to same-store. It looks like maybe there's lower other income and higher operating expenses which are keeping the trend little bit below that 4% target which you guys had laid out for 2013.

When you say below the 4%, we are currently at --.

We are roughly 3%. We set out a goal in our guidance of 3% to 4%. I think we set a stretch goal of North of 4%. We will certainly be within our 3% to 4% range by the end of (multiple speakers) the way we are looking at it.

I don't believe we are below our range on same-store NOI. I think we are squarely in the range of 3% to 4%. We are going to try to finish at 4% and we will do our best, but I think seasonally third quarter is high.

So you may be looking at third-quarter OpEx numbers that are traditionally high, or maybe you're making a relative comment which I will leave to Matt and Jim to address. But I think we will certainly meet our target on same-store NOI.

And your other comment about occupancy, my recollection is the goal was about 96%, which was a significant same-store increase year-over-year, and I think we are at 95.8%.

Yes, we're at 95.8%. So Brendan, I will go back -- it's Matt -- to the operating expense point first. The third quarter is traditionally the highest expense quarter of the year. It was right on top of our expectations for this quarter. And when you look at operating expenses, you got to look up to the revenue -- the recovery of that expense load as well, which came through in large part this quarter. But the deal as it relates to taxes does lag a little bit, so you will see a little bit more of that in fourth quarter.

And as it relates to occupancy, based on the leases we have signed, we are at 95.8%. In the commenced -- based on leases that have commenced, we are at around 94.4%, 94.5%, but we would expect to meet our goal of 96% based on signed.

Okay, that's great. That's helpful. And then, Marc, I know you want to give guidance in December. But I think I heard in your prepared remarks that you said you felt like the earnings momentum that you guys have shown this year, you think that momentum keeps up in next year as well.

I'm just wondering if you could kind of frame that up a little bit in terms of where the components (multiple speakers).

I can't really quantify that, because then nobody would show up in December. We are going to try to leave just something left on the bone here.

But certainly we have been flashing up on the screens at presentations and investor meetings the enormous profitability in that growth portfolio, which was acquired since 2010, which I think totaled about 18 properties, which we're now in various stages of repositioning, redevelopments and stabilizing.

And that portfolio of real property, along with the structured finance portfolio and the enormous success we are having in the retail portfolio, are all converging to translate into the kinds of sizable earnings increases that we have been projecting.

So I think it's nothing more than we have been saying, but it feels like until people see it, it doesn't necessarily get fully credited for. And I do think when we do get to 2014, on top of this latest earnings revision, we are going to be talking about certainly another healthy year next year, which is consistent with the kinds of numbers we laid out there in December of last year.

Great, thank you.

Jordan Sadler, Keybanc Capital Markets.

Thank you. I wanted to touch on this -- Andrew's comment about the right mix to improve the asset allocation across the portfolio. And Marc, you spoke to it as well -- a little bit better opportunities in retail and resi, it sounds like. What do you view -- how should we think about the rent growth profile for resi versus maybe office?

I think the reason that we like the resi assets that we purchased is that we are underwriting very modest growth there. But with capital investment into the apartments, we are able to achieve significant mark to today's market. We don't need big market rent growth to make attractive returns in the residential buildings we've purchased thus far. So that's what has attracted us to that asset class.

I think Olivia is very much on that theme. I think the DFR assets that we purchased last year are very much proving that theme, where we're beating our acquisition budgets pretty significantly with modest capital spends. And it's a better underwriting feeling we get from being able to sort of take today's rents, grow them at call it 3% annually, and still make compelling returns just by virtue of bringing rents to market, as opposed to relying on market rent growth.

Okay. So more of a redevelopment play opportunity it seems in the resi space.

Well, I would call it unit upgrades. These are -- there's no --.

In the case of St. Luke's, it's redevelopment. That's a full redevelopment. But most of their assets we bought are just unit upgrades, as Marc said.

Okay. And then maybe for Steve, on the office side, it sounds like you're confident in seeing good activity and feel good about the office side generally, although it's not necessarily translating into rents, which I think I understand why.

But can you maybe give us a little bit of color in terms of what you are seeing from financial service tenants? I know they are not the whole market, but I'm curious at the margin if you are seeing any differences there. And then just talk about the small tenants and if they are still driving the market somewhat.

Sure. On the financial tenants, they are out in the market -- not the big investment banks, but certainly the commercial banks are out in the market. There was a big deal that was just signed on Park Avenue a week or two ago for 0.25 million square feet with Cap One. So there's a couple of big commercial bank requirements floating around.

There seems to be still good demand from the small to medium sort of hedge fund, private equity type tenant, and that's the kind of tenant that we are seeing over at 600 Lexington Avenue, and a little bit at [8010] 7th. It's certainly the profile tenant that we expect to be the dominant tenant when we bring 10 East 53rd to the market.

And what, you know, what you didn't note is as compared to last year, sort of the big tenant is back in the market. There's a lot of requirements floating out there in the 100,000 to 250,000, 300,000 square foot type user group that wasn't as prevalent last year as there is today.

The last thing worth noting is we have in fact been raising our asking rents, maybe not portfolio-wide, but certainly in a good chunk of the portfolio. And maybe the best case in point and a very good barometer of the market is the leasing activity at the Graybar Building, whereas a year, 1.5 years ago, we would have been doing deals in the $39 to $44 price point; and today, we are doing deals starting rents really in the $47, $48 on the low side to, many of them, in the $52, $53 price point.

So to Marc's earlier statement, as we've realized that increase in asking rents already, and we think there's more gas in the tank.

Thanks for the color.

Michael Bilerman, Citi.

Thanks. It is Josh Attie with Michael. Can you talk about the composition of the 1.2 million square-foot leasing pipeline? Given that the lease rates are already pretty high at almost 96%, maybe how much of it is a renewal of future expirations versus new leasing on some of your growth assets?

Sure. Of the 1.2 million, it's roughly -- well, the vast majority is new, so --. Leases out for signature, about 340,000 square feet, and that is sort of evenly distributed between new and renewal.

But then on the leases in negotiation, I would say it's -- I would just say significantly skewed towards new.

And in that new component is a big chunk of tenants expanding.

Okay.

So when I say -- new in that context is renewal and expansion, as opposed to a straight renewal. So we don't have it exactly as (inaudible) new. But I would say to you at least 50% represents true net new leasing and probably more.

Okay. And separately, when you think about residential, how large of a portion of the portfolio do you feel comfortable allocating to it, if opportunities like The Olivia continue to present themselves?

I'm sorry -- how much of the portfolio do we see (multiple speakers)?

How much of the portfolio do you feel comfortable having allocated to residential?

To residential? Well, it's I don't see it -- we've been asked this question, and I think it has played out the way I've said over the past two years. We see this as an opportunistic investment vehicle, where we, through relationships or use of OP units, can get into a residential investment that in many cases has a retail or commercial element with it, like the Frankel deal, like The Olivia deal, those being the two biggest.

Or the build-to-suits down at -- for Pace, where we -- through our network and relationships, we were able to lock up sites and do two net lease build-to-suits.

So yes, I'd like to say we would allocate a fair amount to those deals because those are extremely profitable deals, either now or in the future, after we are done doing our repositioning programs. But I think the reality is it's opportunistic, and therefore the reality is I don't think it's going to get all that large, other than maybe a dealer or two a year, as it has been over the past couple of years.

Marc, just a follow-up to Josh's question. If you are at 95.8% including the leases that have not yet commenced, and you talk very strongly about this pipeline, especially with a big amount being new and expansions, where does occupancy get to by year-end or early next year? Could we be pushing the past peak occupancies that you had?

So the question is on the 95.8%, which is where our same-store occupancy is on signed leases. And then we said there's another, let's say, 1.2 million in the pipe, where we might convert about three quarters or so -- I mean 750,000 -- where will that take occupancy for next year? Is that the question?

Well, that amount of square footage brings your portfolio pretty fully leased. And so I'm just trying to picture in my head, if we get to --.

I got it. Two things. One, the leasing in that million in the quarter isn't all in same-store assets. So it doesn't therefore affect -- all of it doesn't affect 95.8% -- a lot of the leasing definitionally, or at least in some cases non-same-store assets, where there's a lot of development and/or existing vacancy. So that is one.

Two, you have to buffer the leasing pipeline with the expiration pipeline. We have leases expiring as much as we are leasing. It's not all one way. And my recollection is for 2014, I think there's about 2 million square feet that is expiring. So we will have to be tapping into that. And obviously, there will be some attrition out of that portfolio offsetting these numbers. So those two factors.

2 million square feet of lease expiration next year, I think there is about 350,000 square feet more of lease expiration this year, plus whatever portion of the 750,000 feet is new as opposed to renewal. And making a differentiation between same-store and non-same-store.

So the answer is we think it will be up. Wait until December and we'll figure out how much. But I would not add 1.2 million to 95.8%. That will give you a wrong number and too high a number.

Correct. That is why we were just trying to figure out -- because your commentary points to a very healthy and the largest pipeline that you had. And we're just trying to parcel that out between how much is roll, how much is new, how much is --.

We are going through our budgets right now, and if you can hang in there six more weeks, we will have it all for you.

Awesome, thank you.

Alexander Goldfarb, Sandler O'Neill.

Good afternoon. First, Bloomies is getting some good space at 919.

Matt, a question for you first on the ratings. Sort of curious -- do you need to be long-term unsecured -- I mean investment grade? Or if you have two of the three being at the unsecured level having that investment grade, then that gets you to the cost savings and all the good stuff that you want?

Well certainly, I mean our focus right now is on the two rating agencies, S&P and Fitch. We have spent a lot of time with them. One has a full investment-grade rating on us; the other has now set a clear path to investment-grade in the 12- to 18- month range.

We would ideally like to get all three, but clearly our struggle with Moody's continues here.

Getting two of the three is important. There is pricing benefit in it, because with two of three, you get into an index that's important for pricing. So I would say our long-term goal is to ultimately have all three, and we are still optimistic we could get somewhere with Moody's.

But in the near-term, Fitch was a great outcome and a testament to a lot of hard work on the balance sheet that the whole team here has done, and continue our relationship with S&P.

But what about, Matt, the -- there's the senior unsecured rating, where you're investment-grade, and then there's the long-term rating, where you are still BB-plus across the three. Do you need the long-term rating to be up at investment-grade as well?

I think you are referring to -- there are two ratings or several ratings. One is a senior secured rating and one is senior unsecured rating. And what we are focused on is the senior unsecured rating.

Okay, perfect. And then the second question is on the mezz portfolio, as you guys look at new opportunities, are you seeing -- with all the condo construction coming, are you seeing better pricing on some of the condo activity where you are looking at paper, or does the pricing really determine, whether it's condo or office, it's really more LTV-driven, where the rate is really more LTV-driven rather than whether it's a resi or an office product?

I don't think we have done any condo loans. We have no condo loans on our book right now. So all the returns you are seeing are on commercial, multifamily and retail.

Okay, thank you.

Your next question comes from the line of --

I think we will take one or two more questions, operator, and then unfortunately we'll have to follow-up with others off-line.

Okay, so you want another question?

Yes.

Ross Nussbaum, UBS.

Good afternoon. I was hoping you could help me out with some hopefully simple math. I'm just looking at your earnings guidance for the year, and you had earned $3.77 in FFO in the first nine months. So at the midpoint, it suggests the number for Q4 of $1.37. So I'm trying to understand that relative to the clean $1.41 number you earned in the third quarter ex the charge. And just what are the items that are causing it to slip from Q3 to Q4?

We had a tough time hearing you. It's Matt. I think your question was if you look at the midpoint of our guidance for the fourth quarter, you'd say that it is a tick down from the third. Is that the question?

Yes, basically. Your guidance suggests that the FFO is going to slip in Q4 from Q3, excluding that charge.

Yes, I think the primary difference -- we don't view it as a tick down necessarily, but I think the one item -- or one line item that we consciously don't project forward, because it's got a lot of uncertainty, is other income. And so if you look at our traditional run rate in other income, it's roughly $5 million a quarter; this quarter, it was around $9 million. That would be about the $0.04 I think you enumerated.

Okay, perfect. The other question that I had was on 180 Maiden Lane. Is there a sense of the capital investment that you think you are going to need to put into that asset to reposition it? And then just talk to us a little bit about the marketing plan for the asset and why will that building potentially lease up before Brookfield Place or World Trade Center or the Rail Yards, given that that's sort of the supply that's out there now?

The second piece, Steve will elaborate on. The first piece, I would say was just about finishing with our budget. So I think it would be a bit premature, other than to say a base building program is likely to be about $50 million, plus or minus.

What I don't have for you offhand is whether some of that is reimbursable or not out of insurance proceeds, because we took on some damage in the storm last year. And I don't -- so some of what we are doing as part of the redevelopment is also restoration, insured and covered restoration as part of Sandy. So I just don't have that number.

But just to give you a sense of magnitude, I think as a base building number, that number is a decent starting point. And then obviously, leasing capital on top of that. Steve?

And then on the marketing side, remember that this is one of the better buildings downtown. It was an institutional quality building built for Continental Insurance. It's one of only four true glass and steel buildings downtown. The floor plates are very efficient, the views are unobstructed from the sixth floor and above.

And we are inheriting an amenities package from AIG that we are capitalizing on as part of the leasing program which includes a health club, a cafeteria, an auditorium space. So the package of -- and all of those are being renovated as part of our marketing program.

So the package of amenities that tenants are receiving, I think, with the quality of the building and the infrastructure that Goldman Sachs had previously updated in the building, leaves us with a very, very strong product.

And on a pricing point, if you sort of think of the Trade Center as kind of a $70 plus kind of a product, and Brookfield in the very high fives to low sixes kind of price points, and we are in the sort of mid-fours to $50 price point. And so I think we've got the right product and a price-competitive product.

Thanks very much.

I think we are going to take one last question and wind up the call. So operator, we will take one more.

Jamie Feldman, Bank of America-Merrill Lynch.

Can you guys talk a little bit about what you are seeing in the suburbs?

The activity in the suburbs so far has been pretty solid, actually. Year to date, we've leased close to 750,000 square feet. For the entire year last year, we leased 650,000 square feet.

The activity in Westchester is slightly better than Stamford. Historically, these are small tenant markets, but we've seen some activity. We signed a 67,000-square-foot lease, a 30,000-square-foot lease and a 25,000-square-foot lease all in the last month or so.

And we have got a pretty good pipeline throughout the end of the year. I anticipate we will probably be at about 850,000 square feet by the end of the year. And our occupancy started the year at around 80%. I think it will be closer to 81.5% to 82% by the end of the year.

So while it's not the city, it's not close, things are definitely positive on a relative basis.

And then just any thoughts on harvesting some of those assets or just how long you plan to hold?

We sold one, Jamie. We sold a building in Stamford last quarter. It's still not much of a capital market out there, so there's not a lot of transactions changing hands. And I would say if we see a bid we like, we are definitely -- we are happy to sell assets out there.

But as of now, Isaac and his team out there are doing a great job blocking and tackling and keeping the occupancy as high as possible. So we are going to keep managing, keep running them and keep clipping cash flow until the investment sales markets improve out there.

All right. Thank you.

Thank you, everyone, and we look forward to speaking with you all in December.

Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.