SL Green Realty Corp (SLG) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter-one 2014 SL Green Realty Corp. earnings conference call. My name is Sheena, and I will be your operator today. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

And now I'd 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 first-quarter 2014 earnings results conference call. This conference is being recorded.

At this time the Company would like to remind all 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 a 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 first-quarter 2014 earnings call.

Before turning the call over to Marc Holliday, Chief Executive Officer of SL Green Realty Corp., I'd 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.

Okay, thank you, Heidi. And good afternoon and thank you to all of -- everyone dialing in to join us today. It pretty much goes without saying how happy we are with our first-quarter achievements and the subsequent transactions that we announced yesterday. Our results and achievements had something for everyone and certainly sets a strong early foundation for what we expect to be a very good 2014.

First and foremost, our Manhattan leasing results exceeded our expectations, both in terms of leases signed and mark-to-market. The substantial leasing volume is reflective of accelerating demand as private sector job growth continues in New York City at a historically rapid pace. Over 20,000 private sector jobs were created in the first quarter of 2014 alone, continuing last year's torrid pace of job growth, which neared 100,000 private sector jobs last year.

Most of this growth in the first quarter took place among professional business services companies, which accounted for a quarter, probably slightly more than a quarter, of the total growth. So clearly, from my perspective, job growth being the metric that has the greatest impact on tenant demand is clearly continuing at a strong pace -- at a historically significant pace.

And at this point it seems relatively unabated in its job creation ability in these various sectors; notwithstanding financial services in the first quarter was down marginally. So, again, these achievements are being done by all the other sectors that we have spoken about at length on these calls and in December.

Complementing our leasing activities was a typically busy quarter on the investment front, as well. Year to date we entered into agreements to acquire over $1 billion of real estate in four separate transactions, highlighted by our agreement to buy out our partner in 388-390 Greenwich Street.

I consider the lease extension of Citigroup in December combined with the sizable buyout of our partner to be among the most important and impactful events in this Company's history. These transactions serve to derisk a significant future lease role and also created substantial earnings momentum, which we will be able to realize this year, and value creation, which we will be enjoying over the coming years.

But while our investment volume for the year was front-ended, we were very conscious of making sure that we sold into this market -- this market being exceedingly strong right now, given high levels of investor demand, plentiful levels of debt and equity capital. And as a result, we were able to achieve $586 million of sales in, also, four transactions.

So that is over $1.6 billion of investment activity. Eight different transactions. The fourth month of the year is not even behind us, and that is not including another $160 million-plus of debt and preferred equity originations that we also were able to accomplish in the first quarter.

So that is not to say we are by any means done for the year. We've got a substantial pipeline on leasing of about 1.4 million square feet. So we expect second quarter to be pretty much on par with first quarter on leasing, in the range of 500,000 to 600,000 square feet, which would make for another outsized quarter, putting us on target or in excess of our target for the year.

And we do have further pipeline on the investments and sales front. So, clearly, we've got a lot of work cut out for us for the remainder of the year. But I don't think I could have asked for better start or a better market at this point to be conducting it in.

The sales in particular produced a significant amount of net cash proceeds and capital gains -- gains being, on those four transactions alone, greater than $225 million of capital gains on those four deals. And those are non-core value-add kind of deals, which I think just continues our tradition and reinforces our pedigree of being able to create these double-digit returns in a highly competitive market.

So for more color on that, let me turn it over to Andrew Mathias.

Thanks, Marc. The quarter's investment activity was highlighted by 388 Greenwich, which Marc touched on. In addition, we announced several other acquisitions and dispositions, continuing on our theme of accretively recycling capital.

In somewhat of a pair trade, we sold our leasehold position and what is probably the last remaining IPO asset at a 4.7% cap rate: 673 First Avenue. And we will reinvest the proceeds of that sale into a fee position at 635 Madison Avenue.

Although the going cap rate is a bit below the cap rate we're selling 673 for, we're getting an enormous upgrade in terms of location, upside, and long-term value in the fee position at 635 Madison. Our returns on 673 are truly incredible: a 13.6% unlevered IRR over the 16 or so year periods since our IPO. They speak for themselves.

We also announced several deals on the retail program centered around SoHo, the city's hottest submarket. Those deals were off-market and featured in-place rents that are 50% or more below market and more opportunities to develop the space within those actual buildings.

Combined with our strategic investment into 530 Broadway, which closed during the first quarter, 115 Spring and 121 Greene Street give us some of the scale that we are targeting to achieve in the SoHo market.

Again, continuing with the recycling theme, we also closed this quarter on our sale of our interest in 21-29 West 34th Street, booking a 55% levered IRR on investment. And we expect to close on the sale of our interests in 747 Madison Avenue shortly, as well, as we continue to take profits on interest -- in retail assets we own across the portfolio.

With that, I will pass the microphone on to Jim to dive into the numbers.

Thanks, Andrew. I'm going to touch on the financing activities and our liquidity position, and then turn it over to Matt to go over some of the numbers.

We closed $1.4 billion in three financings this quarter, including mortgage financings on our office property at 100 Park Avenue and at the retail property at 724 Fifth Avenue. And notably, we took advantage of the demand from bank lenders for funded loans to expand our bank term loan facility by $383 million to a total of $783 million, extending the maturity date and lowering the pricing of the facility by 25 basis points. This was an excellent execution that achieved a LIBOR spread that we believe is at least 10 basis points lower than any REIT at the BBB- credit rating.

As we look forward, we will be refinancing 388-390 Greenwich and expect that there will be sufficient proceeds to fully fund the entirety of the acquisition of our partner's interest. So that, in combination with the other investments and dispositions we have discussed, leaves us in excess of our targeted $1 billion in liquidity, and so without any need to tap the equity markets for funding any of these activities.

Thanks. Let me turn the call over to Matt now, please.

Thanks, Jim. Obviously, we're very pleased with our first-quarter results and the outlook for the remainder of the year. We came out of the gates in 2014 with a flurry of activity that Marc, Andrew, and Jim just spent some time walking through, which puts us in a position of raising our 2014 FFO guidance by $0.26 a share at the midpoint to $5.90 to $5.96 a share only four months into the year, equating to FFO growth of nearly 15% over last year.

In the first quarter we saw operating performance as measured by occupancy and NOI in both the existing Manhattan and suburban portfolios that was in line and certainly ahead of our expectations. We knew vacancies of nearly 100,000 square feet at 711 Third Avenue and 88,000 square feet at 810 Seventh Avenue would put pressure on our first-quarter occupancy and NOI, but the strength of recent leasing helped alleviate that pressure and actually resulted in our first-quarter same-store Manhattan occupancy exceeding our budget, putting us well on track to achieve an increase in our same-store Manhattan occupancy by 150 basis points by the end of the year.

And our same-store NOI growth of 1% on a cash basis and 2% on a GAAP basis was right in line with what we expected, giving us confidence that we will be able to meet our stated goal of achieving 3% to 4% cash same-store NOI growth for 2014 as comparable NOI builds in the back half of the year.

The real catalyst to our upward guidance revision is the volume and timing of our real estate and debt and preferred equity investment activity. From an earnings perspective, the most impactful real estate transaction is clearly the acquisition of our partner's interest in 388-390 Greenwich Street, which we anticipate closing in mid-May with financing in place.

Net of a one-time charge of about $4 million that we will need to take at closing for unamortized costs related to the previous financing, an acquisition of this size at this yield is an early highlight of the year and contributes roughly $0.14 of net FFO accretion in 2014 and even more in 2015.

In the debt and preferred equity portfolio, following a robust 2013, the first four months of 2014 have continued to provide a significant pipeline of opportunities to make new investments earlier in the year and at better yields than we originally projected. While the portfolio size may fluctuate during the year, based on the current flow of activity, we projected the portfolio ended the year between $1.4 billion and $1.45 billion, roughly where we anticipated. But the front-loaded investment timing at better yields than the 8.5% we projected will be impactful and should result in $0.08 to $0.10 of accretion to full-year FFO.

We expect to fund our incremental investment activity in part with further property sales, tapping into embedded equity at the asset level. Included in our initial guidance were the sales of 21-25 West 34th Street, which closed in the first quarter; and 747 Madison, which is expected to close during the second quarter. However, other opportunities to prune the portfolio at attractive pricing have arisen on the heels of the unbudgeted sale of the Arden portfolio in the first quarter and the sale of 673 First Avenue, which we expect to close in the next 30 days.

We have several other assets currently out in the market for sale and anticipate being able to close at least two or three more dispositions before the end of the year. These sales will offset the FFO accretion for our investment activity by $0.03 to $0.05 a share.

Finally, during the first quarter we recognized previously unaccrued interest income on a mezzanine investment that was roughly $7 million or $0.07 a share greater than what we provided for in our initial guidance. This income was required to be accelerated based on the expected sale of the underlying property at a price well north of our last dollar exposure.

With that brief summary, I will turn it back over to Marc.

Okay. So we wanted to give everyone a brief overview today of our assessment of the quarter and the activities within, but we wanted to leave ample time to get into questions. I think, just to put a spotlight on it, the ability for us only 4 months, I guess 4 1/2 months after December investor, to be able to come out with a guidance revision and a guidance revision of this magnitude, I think is very telling about our feelings and belief about the momentum in the leasing market, primarily in the mark-to-market; the accretion that we are realizing from our acquisitions and on basically primarily, if not exclusively, on a self-funded basis; the debt and preferred equity program, which continues to perform on a market-leading basis in this New York City market. I think we are far and away the leader in subordinate debt provision, both in terms of volume and in terms of return to net business.

When you bring that all back, we felt that we had enough confidence in this market and in the direction that the portfolio is going to come out with this earnings revision this early in the year. And as I said earlier, we have $1 billion-plus of liquidity that Jim highlighted that will hopefully enable us to continue this momentum throughout the year.

So with that, let's turn it over to questions and answers.

(Operator Instructions) Jamie Feldman, Bank of America.

I was hoping you guys could provide some more color on the leasing market -- just some more granularity in terms of what size of tenants you are seeing the most activity from: whether they are small, they are big; they are startups, they are established; they are looking for high rents or low rents? Especially with supply coming online downtown and on the west side, how should we be thinking about what is really the sweet spot in the market right now?

Jamie, it is Steve Durels. You know, the good news is I don't think there is a single theme to the demand that is out there right now, meaning that is not limited to one part of town or one size of tenant, the way it was a year or two ago. We are seeing tenants of size -- large tenants that are out in the market; some driven by growth; some driven by expirations; some driven by consolidations.

We are seeing higher price point tenants. And within our portfolio, good examples of that are some of the pre-built spaces that we have done at 3 Columbus that have been leasing well; some of the space at 600 Lexington Avenue, which is one of our higher price point buildings, where we have had very good leasing activity this year -- I think probably the best demand we have had since we have owned the building.

And then continued activity on the lower price points, as reflected down at the number of tours that we are getting at 180 Maiden Lane, where we're seeing a lot of midtown tenants shopping lower price points downtown. And then the midtown sales market continues to be on fire. You saw the release today, where we had a corporate goal of leasing the penthouse at 635 Avenue of the Americas. And we succeeded with that by leasing the top floor at $101 a square foot on a starting rent. In other than new construction, that is the highest price point ever achieved for a Midtown South building.

So it is a little bit of everything all over town. And I think it is driven by tenants who are hiring, tenants who feel good about their businesses. And it is not limited to one industry.

Okay. And then Marc had mentioned the leasing pipeline. How does that shape up in terms of the same question?

Yes, we have got demand right now from probably five or six sectors, I would say. We've got leases out with tenants in the finance world, marketing, legal, engineering, fashion, transportation. Those are probably the biggest demand we have got.

I would say the tenants that we are not in active negotiation with but who we're seeing a lot of foot traffic from, in particular, are law firms right now -- probably more so than we saw last year. So those seem to be, at least within our portfolio, the big tenant demand.

Okay, great. Thank you.

George Auerbach, ISI Group.

Andrew, you talked about the capital recycling so far in 2014. Do you get the sense that the level of activity you will see and the market will see will be better this year than last? And if so, why do you think that is the case?

Are you dividing better by total volume, or by price per foot, or --?

I would say volume and opportunity set. It seems like the first quarter and even in the fourth quarter, there was just more for you to do in both acquisitions and depositions.

Yes. I think it is extremely competitive out there. And the pricing, certainly in terms of price per foot, I think, this year will hurdle last year in terms of a better market. Volume -- yet to be seen, because we have got to see what is going to come to market in the second half of the year.

But we had the sale of the mobile building, which went to contract a couple of weeks ago to an individual, entrepreneurial-type investor, at really a record-breaking price for a leasehold, and a very large-scale deal. The contract price there is rumored to be around $900 million.

So I think year to date we have seen $7.5 billion close, $9 billion under contract, and about $5 billion more or so on the market. So it's very active out there. We are winning our fair share of deals. Most of our deals are off-market, like 388 Greenwich, like the retail deals I spoke about. But it's a very healthy environment for us right now to have a lot of success in.

Thanks. And also, any color on the competitive landscape in the origination market? It didn't really impact yields in the first quarter, but do you expect to see yield compression over the next six months?

Let me ask David to answer that.

I think we had a good run this quarter. And I think based on our pipeline, the next quarter or two may be as robust or more robust, at yields looking in line or even above where we are.

So I think just through our existing relationships, and being aggressive with capital stacks and taking the whole thing down, we've had the same success we've had in other years. So I think we are comfortable that even though there are more entrants into the marketplace, we're still able to keep that competitive advantage and put out money at these returns.

Thank you.

John Guinee, Stifel.

Steve, at the lower price point of the market, 180 Maiden Lane and a few other assets you might have, are you getting any competition from Jersey City? Is anybody considering actually going over to the other side of the Hudson?

As best I can tell, most of the larger tenants that have been looking at Jersey City mostly have used it as a stocking horse. We have seen a couple of big tenants, meaning 150,000, 200,000-square-foot guys, come through our door at 180 Maiden, and been told that it was a discussion between the east side of downtown, the west side of downtown, and Jersey.

And I think in every one of those cases where we have seen those tenants, they ultimately turned their focus to stay in lower Manhattan. So I have not heard or sensed that there has been much flight to the New Jersey side.

Okay. And then second question, also for you, Steve: we got to page 42 of the supplemental, and it looks like a lot of roles in both your consolidated and your JV portfolio -- a little bit of a potential rent roll-down, based on asking rents in the consolidated portfolio, but a sizable rent roll-up in the second quarter -- 972,000 square feet in the consolidated, 254,000 square feet in the joint venture. Can you just give us a little more color on what is happening with these sizable tenants?

Well --.

And if it is proprietary because you are in negotiation, just say so.

Our biggest expirations where we think that we are likely to lose the tenants or there will be any material change in the rents -- we have sort of already been through those.

It was Crain's at 711 Third Avenue; it was Draft at 919 Third Avenue; and it was PLI at 810 Seventh Avenue. There are no other really big guys out there that I can recall -- who? -- other than AIG and HarperCollins, which, I guess, in my mind I have already -- that was sort of a last-year event, where we knew they were leaving. And that is one of the reasons we bought those two buildings.

But the rest of the portfolio -- at this point it is really about filling the vacancy that we already have. I don't think there's anybody expiring between now and the end of the year of any size who we don't expect to keep and see a rent increase on.

Great. Thank you.

Vincent Chao, Deutsche Bank.

Just wanted to go back to the rent spread this quarter, which was quite strong. Just curious: just given your commentary, I think I know the answer. But just curious how broad-based those increases are. Was there anything deal-specific that drove that number? And how are you feeling about the 5% to 8% for the year?

I think in our guidance we increased that yesterday to 7% to 10%.

Correct.

So we are feeling, having come out of the gate, a little stronger than expected. I wouldn't read too much into it, because I don't think we are expecting midteens in the second quarter. But we didn't expect it in the first quarter, either. So it's a little bit of a crystal ball.

But I think if you look out over the second quarter, you will see the mark-to-market that is probably more in line with our revised guidance. And too early to tell third and fourth quarter.

But again, if we had good visibility through the first half of the year, and that average for the first half of the year is up around 10%, that caused us to raise the guidance up to 7% to 10%, which is a pretty significant movement. Because 5% to 8%, which it was previously, was already aggressive for -- I think by any measure -- for commercial companies in this market.

So we would be happy to end the year and be able to report that we are within that strike zone. And I think that based on the 1.4 million of pipeline we have in place, where we can at least better estimate where those numbers are going to be; and for all the deals that are really not yet known that we will be doing in the third and fourth quarter of this year, the market feels like that is about the rate level where we will be.

I don't -- there is no outlier deal or two that contributed to that 15%. We just -- every quarter that number is going to bounce around based on what is expiring. So it's not -- I wouldn't read too much into it, other than -- I would read more into our guidance of 7% to 10% than I would read into the 15%.

Okay, thanks for that. And then, just going on to the pipeline of investments that you mentioned, just curious if you can give some color on the composition of that pipeline. What are you looking at? It seems like retail was pretty active on the retail side here, but just curious what the pipeline looks like.

Yes. Our focus continues to be on retail; that is where we're seeing the best rent spreads and finding the most fertile ground for off-market deals. So I think you will see some more retail deals executed. And looking at some office and residential deals, too, but those areas are very competitive.

Okay, thank you.

David Toti, Cantor Fitzgerald.

Marc, I kind of want to take a step back and talk about your structured finance portfolio a little bit, now that it is approaching about $1.5 billion. Can you just remind us of the guiding criteria, if there is any, relative to return hurdles? Are you seeking to ladder in any specific way? Or is it really just asset- and relationship-driven?

So the last part of that question, David -- I didn't follow the last part.

Sorry. I guess I'm just trying to understand if there is a structural map as you build the portfolio out? Or is it more really opportunistic relative to the asset, the relationship, and the return?

We are in the 16th year of this program, and I would say that it is reasonably well defined from our perspective, in terms of the kinds of assets we target; the kinds of return hurdles we are looking for, which in today's market -- I think we had forecasted spreads or yields on subordinate paper of about 8.5%, which we have been exceeding to date. So exceeding is a good thing.

But I would always go with our guidance rather than the actuals. I think our guidance is our gut and feel as to where the market either is or will get to throughout the year, although we have been finding the ability to outperform that.

The volumes are pretty much on target, if you will, with what we had projected. I think it was somewhere around $1.45 billion or $1.5 billion. In the past we have talked about limiting the amount of investment in this particular business line to about 10%, which would be up close around $2 billion, so we are well within that.

It always had been. I think we generally fluctuate somewhere around 5%, 6%, maybe 7% or 8% at the high. And that really hasn't -- except for some extreme moments in time, that has been largely consistent over the 15-year period.

And we originate a couple of hundred million dollars a quarter, but we get repayments. So I think the return hurdles we establish based off our funding sources. So the funding sources for this are slightly more expensive than for the equity component. But they are pretty efficient today in terms of the amount of equity and debt capital out there looking for yield product. Yield product is very much in vogue today.

This is yield product in some of the best collateral out there, in terms of how you can generate these returns nationally. I think our experience in Manhattan has been just heads and shoulders above most other markets. And therefore, we are fortunate to be doing this in this market.

We love the collateral pool we have. We have, I would guess, the best relationships of any subordinate lender in town by far, which is why -- which is what keeps that business going at such a strong pace. Our market share as an office owner is high. Our market share as a lender is even higher. So one business complements the other.

And I think that the collateral we target is pretty well specified. Our relationships are strong. Our track record is excellent. And the returns are a couple of hundred basis points above the returns we look for in straight real estate, because it is -- a subordinated loan is a levered product. But I would say in terms of actual achievement, the returns in this business have been solidly well over 10%. And I would say that represents excess return.

Okay, that is helpful. And then just as a follow-up on that, given the growth of that platform -- and here again, I apologize; I am probably pulling questions out of my 2004 question list. But would you ever consider applying some of this business to more of a broker concept, where you are participating in, maybe, a securitization machine of some sort? If you have the relationships, and they have to move volume, would that be --.

You know, that's our -- we do syndicate. And securitization is just another form of syndication, as far as I'm concerned. So we are active, active syndicates.

I think last year -- I don't have the numbers in front of me. I think we originated something like $1.7 billion originated. And we sold $1.3 billion and held, I guess, $400 million.

So we love to syndicate. We prefer that, but we're not a securitization shop. We don't want to be a securitization shop.

But having the ability to source and syndicate has an extraordinary amount of indirect and direct benefits. Direct benefit is -- it's profitability and higher yields on what we retain. But the indirect benefits are: by delivering product to our relationships, we get product in return. It gives us broader access to the market, which helps the business grow and gives us a more prominent name. So securitization, I would say no. But to syndication efforts, definitely yes.

Okay, that is helpful. Thanks for the detail today.

Emmanuel Korchman, Citi.

It is actually Michael Bilerman. Marc, you talked about the exceedingly strong transaction market, clearly being able to sell into this market, and glad; being able to liquidate assets. And you talked about two to three more assets.

And I'm just curious -- wholly owned or joint venture? And size? Because a Manhattan asset, especially in your portfolio, could be quite small or could be quite large. And I'm just trying to get a sense of the total volume of proceeds and, potentially, how much more aggressive you could get beyond two to three assets.

I think it is -- Michael, it is pretty consistent with the guidance from the investor conference. We've got a couple of other deals we're looking at which are generally wholly owned, non-core, but of a smaller size. I mean, small is relative. There is nothing in the portfolio that is small. But certainly, on a relative basis, of a smaller size.

And whether we transact or not on one or both this year, we will see. Obviously, you know we test the market. We try and get optimum pricing, because these assets are hard to come by; so when you sell, you want to make sure you're -- you want to feel as if you are getting the right price and feel good about selling knowing that. The next buyer is obviously buying with the expectation of making money.

So we're very careful with it. We feel no pressure with it. We will probably hang two properties out there. If we get our price, we will transact. If we don't, we don't.

We have already done, I guess, close to 600 for the year. That is probably somewhat in line with our guidance, Matt, yes? That was --.

Net-net.

Yes, net-net. So I don't think you are going to see anything -- there's no statement coming down the road with large-scale, billion-dollar-plus kind of assets. But there is a continued focus on trying to prune and improve the portfolio, and take money out of lower-growth assets, and then redeploy into higher-growth assets.

And then maybe just going back to Durels, just sort of on leasing, as you think about lifting occupancy by the end of the year, I'm just curious: does that exclude AIG and HarperCollins from what the current baseline -- but even so, where is the growth coming from?

And you think about the asset you are sitting in today -- that occupancy has declined 660 basis points. Big asset. I'm not sure if there is leasing going on there. I don't know how much of it is 3 Columbus Circle. I don't know how much of it is retenanting 711 Third or 810 Seventh. Where is the uplift coming that you are expecting to drive through year end?

It does exclude 180 and 10 East. But the rest of the portfolio is rapidly filling its vacancy. The biggest chunks that we have are -- of vacant space, where we feel good about if not filling all of it, filling a big chunk of it -- is 919 Third Avenue, where we have 150,000 square feet, and we have active term sheet negotiations covering all of that space; 3 Columbus, where we have 150,000 square feet, and we have either leases out or term sheets covering half of that space.

Contrary to what the numbers may reflect, Graybar has actually been our most active building. It just doesn't reflect it in the lease commenced category yet because of the deal we did with Metro-North for 260,000 square feet. And we have another 30,000 square feet of expansion space pending with them, and those leases just haven't commenced yet.

Of that 260,000 square feet, half of it was expansion space. And my availability at Graybar today is down less than 2%. Hard as that may be to believe, Graybar was probably one of our weaker buildings two years ago and is now our strongest building. We have raised the rents in Graybar three times over the past six months and are doing deals today in the mid-$50s a square foot, whereas a year and half ago we were doing rents in the high $30s, low $40s a square foot. So that's a little bit of granular response.

And then on the bigger side, we're seeing demand in the entire portfolio for vacant space. So I think that's where the lift is coming from.

That's helpful.

Jordan Sadler, KeyBanc Capital Markets.

Curious to hearken back a little bit to a discussion at the Investor Day regarding tenants in the market. I am hearing your comments, Steve, on the demand you are seeing.

Things sounded and seem to feel pretty good. Large tenants in the market -- the guys that you had identified in one of your slides -- there's a number of them from financial, legal, and the TAMI sectors. And I know of or have heard of Macy's, and Google, some others, being added to the market.

How is this dynamic affecting the market right now? I know there are some availabilities and some potential developments, et cetera. But are we setting up for a potential spike in rents or a broader spike in rents?

We're not underwriting a spike; I would say most of our competitors are. They are underwriting spikes that we see on the loan submissions that are between 25% and 35% over the next three to five years. So very aggressive mental spikes.

Our whole way in which we have oriented this portfolio is about repositioning and leasing up vacant space, and creating hundreds of millions of dollars of kind of identifiable earnings without regard to any kind of rent spike; rent spike would just be coming on top of that. So the earnings increase today is without regards to any rent spike or any rent increase from where we are today.

We don't see a rent spike at the moment. However, the market would tell you that the next two to three years, given there is dwindling amount of space, our portfolio being, I think, typical of that, should push rents certainly higher than 3% to 5%, which is what it has been since the trough. And I guess you could create a scenario for a couple of years of outsize increases between 5% and 10%. Rental increases in certain product type, it is happening today.

So the lease at 635 Sixth, which no one has mentioned yet on the phone. Maybe Steve did. Yes, triple -- yes, $80 a foot for the regular floors. Over $100 a foot for the penthouse space.

That is clearly rent spike kind of material. And I would say other of our Midtown South properties are increasing, not at 3% to 5%, but at probably -- you can measure it at 10% to 20%.

So it does depend on which properties, which building. But we are looking at 27 million square feet overall. And in that regard, we are modeling that out at returns that we think -- at increases that will probably be at or exceed 5% for the next couple of years. So we have been talking about another 25% on top of the 25% we have already realized since the trough to get back to, and ahead in certain cases, of peak-level rents. We are there in certain properties, and I think we will be there in most all of our properties in the next year or two.

So it's a good market. And it's a good market notwithstanding the overhang from the west side, which has taken a couple of big tenants. But we sign, probably, 250 leases a year. So in the past two years, let's say -- last year, actual; this year, projected: 500 leases.

I can count on one hand the number of conversations where Hudson Yards was a main competitor for those tenants, because the meat of our market, which is maybe anywhere between 10,000 and 50,000 feet as, quote, the average. It's just not looking at multi-floor tenancy in a new building, Hudson Yards, as their option.

So we still feel it is a very competitive market. It's a good landlord market. And we're still projecting 96% overall occupancy for the same-store portfolio, which started the year at, I think, at 94%, Matt?

94.5%.

So that is 200 basis points of positive increase in the same-store portfolio that we are projecting, which is a lot of leasing.

I appreciate that color. I had one other. Other than the Spectrum on 635 Madison, what is the play there? It's a little bit of a head-scratcher for me. I think the last time you guys were buying encumbered fees was 2007, maybe. I'm just kind of -- what is the play on that deal?

Well, it's across the street from an asset we own at 625 Madison. And the leaseholder on 635 happens to be the fee owner on our asset at 625. So there's some potential synergy there.

It's a very good receiver for our significant gains from 673 First Avenue. And it is a prime corner. So there is a significant revaluation. The rent on the existing position is significantly under market, so there's a revaluation opportunity in the medium-term. But it's our job to go out and create value in that position in the shorter-term.

Is the GAAP cap rate below the 4.7% that you referenced on the sale, or is that the cash cap rate?

The GAAP cap -- both are below -- GAAP and cash are right on top of one another, because the rent is flat until the next revaluation under the fee position.

Okay, thank you.

Vance Edelson, Morgan Stanley.

Just going back to the rent spreads and the higher mark-to-market expectations in Manhattan, could you touch on pricing strength by submarket? I know you mentioned it's hard to pinpoint any specific drivers in terms of overall demand, but does anything stand out when it comes to pricing when we think about Midtown, versus Midtown South, versus downtown? Or is that also just strong across the board?

Broadly, I would say it's strong across the board. I think downtown, you have seen rents rise. I think to a lot of people's surprise, rents have been rising kind of disproportionately as a lot of the big blocks have gotten soaked up, and as World Financial Center is starting to lease up, and as a lot of the big blocks on the east side of downtown have found tenants or starting to find tenants from Midtown tenants -- Nature America, Revlon being examples of that who have gone downtown looking for price-relief-type space. But as that inventory gets soaked up and supply diminishes, then the rents are starting to escalate up.

Midtown South: the demand is insatiable. So if you have got the product, and you're putting the capital into the building, then there is a ready supply of tenants that are willing to pay for it. And it is not just the TAMI market, the technology guys, but it is really traditional Midtown tenants who want to be cool Midtown South tenants and are willing to pay the price. The problem there is just a lack of supply of space, or a lack of buildings with large enough footprints or enough inventory that rationalize the investment to take advantage of the opportunity.

And then lastly, I think Grand Central is starting to get a lot more traction as far as tenant demand. And rents are increasing in Grand Central, slowly. The best barometer of that being the Graybar building, as I mentioned earlier. But Grand Central was probably a laggard over the past -- in 2013.

And I will add to that Sixth Avenue. Sixth Avenue today is -- tremendous amount of activity on Sixth Avenue. If we had inventory at 1185 Avenue of the Americas, I could rent it for $10 a foot more today than we were doing deals last year. I just -- the building is pretty well locked up. We're talking to a few tenants about trying to recapture space in order to take advantage of the tenant demand.

So it is a bit of a shotgun approach, but broad strokes, there is good demand everywhere. And pricing is increasing in certain submarkets more than others, but I think most landlords have a view -- and most brokers share it -- that rents are on the rise.

Okay, that is very helpful. And then, shifting gears, could you just touch on the suburbs and the improvement you are seeing there? Occupancy is starting to move up; months of free rent was down a bit. Maybe just bring us up to date on how you feel about the suburbs in general right now.

This is Isaac Zion. There's continued improvement across the board. In Westchester, in particular, we're seeing more demand from health and health tech sector and biotech. In Stanford, it is financial services, general corporates.

The activity levels in the 5,000 to 10,000-square-foot range are clearly improving. And we anticipate into the next quarter to have probably about 150,000 to 200,000 square feet of leasing as well, and mark-to-market to be about the same, flat to up a little bit. So things are generally positive. It's just the pace is a little bit slower than the city, obviously.

Okay, great. Thanks a lot.

Brendan Maiorana, Wells Fargo.

In guidance, original guidance -- or in your current guidance, I think, Matt, you laid out that $0.14 is higher from the 388-390 deal, offset by $0.03 to $0.05, or call it $0.04, the midpoint of dispositions. That sounds like maybe later in the year.

And so if I think about that, it is $0.10 up in terms of net property acquisitions. And some of that is driven by timing with the 388-390 deal early in the year; some of it is probably cap rate arbitrage, where you have got a higher cap rate on the 388-390 deal versus what you sell.

But it seems like there's probably an expansion in the asset base, also. So I guess the question is: are you comfortable funding that expansion in the asset base with incremental debt? Or do you think at some point ATM issuance or an equity would be needed as you think about the investments for the year?

I think right now we are focused on liquidity as a benchmark of whether we're adequately funded. And from a liquidity standpoint, after -- and remember, the sales of the assets that we are talking about also release large capital -- or large gains, as Marc had pointed out.

So I think from an overall liquidity standpoint, with the financing of 388 effectively paying for the acquisition, and with the other things that we are doing, we have ample liquidity through the year. That doesn't -- so we're not -- we don't need to go to the equity markets to raise any money for liquidity purposes.

But we will look at the market and look at what our need is going forward as we go through the year, and that will determine our stance on new equity. But I think the important takeaway here is that we really don't need equity to fund the plan that we have in place.

Okay, great. And then just a question, probably for Andrew: but the retail deals -- it seemed like the details in the press release yesterday were a little light. Just wondering if you can provide any color on size of those acquisitions and maybe current yield or longer-term yield expectations.

We are unfortunately limited by contractual obligations until we close up those deals, which are expected to be this year, one of them in the fall and one of them later in the summer. So we will be able to release further details at the time we close those deals.

Okay, fair enough. Thanks.

Michael Knott, Green Street Advisors.

Curious if there is anything to read into the slightly shorter lease terms this quarter. And then also, Steve, just curious if you can comment on that trends in lease concessions.

No, you shouldn't read anything into it. It was -- we had a number of tenants that -- it was a hodgepodge of reasons. In one case we intentionally were lining up expirations on a floor; so, therefore, we held the term the back. On another it was some tenants that wanted to do short term because they had some growth expectations.

But there is no broad trend that you should take away. Just the opposite, quite frankly, is that we are more pushing to reject short-term deals of late in favor of holding out for longer-term deals. Because we think the market and the leverage is on our side to demand that.

And concessions-wise, we are trying to tighten it up. I think there's greater willingness of tenants to pay higher rents in exchange for not taking a reduction on the concessions. I think the free rent is slowly getting tightened up a little bit.

I think there are fewer build-to-suits, where the capital sort of exceeds the typical allowance for raw space of $60, $65 a foot. So you see more deals where we are capping the capital. But that is still a tough fight right now. I think there is greater ability to push rents as opposed to rein in concessions.

Okay, thanks. That is interesting. That's somewhat backwards from what the normal course is, correct?

Yes. Yes. And I think, you know, that may just be the world we're coming out of, where tenants are capital sensitive after the recession. It is certainly contrary to prior cycles, but coming out of the recession, where businesses were capital sensitive, there's a little bit of a hangover of that mentality.

And then Andrew or Marc, just curious: the pricing on 673 First seemed pretty attractive. Seems like cap rates have been trending down further. Just curious if the fact that it is a partial user sale contributed to the pricing there? Or should we read into it that cap rates in Manhattan have continued to trend lower, even just over the last couple of months?

I think both. There is an incentivized buyer here, but I think that was roughly a market transaction for them. I don't view that it would have been materially different result one way or the other, had we taken it to market.

There is a grab out there for good, solid, well-leased assets. This is one of those. It is non-core for us, just given its size and location; but for a lot of buyers who are structurally priced out of the large-scale Midtown Manhattan office market, this would be a highly attractive asset with great-credit tenants. And the ability to finance that project accretively well below the 4.7% cap rate would probably support a price right around that.

If you look at the pricing on the Mobil Building, in fact, that as well is a long-term leasehold. And that is supportive of these kind of levels, or even a little tighter.

And obviously, Mobil was not a user. So you have two great, fresh data points, all within the past week or two, to go by. I think that would conclude that there's great investor demand, and there is also big institutional user demand from the -- which we have been saying -- from the hospitals and from the schools.

That sounds right. Thank you.

Ross Nussbaum, UBS.

Marc, on the retail deal that you just announced and the ones that you might have in the hopper: are you going to be partnering with Jeff Sutton on those, or are you going to be flying solo on them?

I think on one of those --?

Yes, on the Greene Street deal, we will partner with Jeff. And the Spring Street deal, likely not, although we haven't decided the full capitalization of those deals quite yet.

Yes, and as we have said in the past, it is really case dependent. Generally, most of the retail we own, we are partners with Jeff. We continue to partner with him on deals like 655th -- and which of the two here, Andrew? -- the Greene Street deal, we are going to be partners with Jeff.

So that is still -- that joint venture continues to produce great results and a great relationship. But not every single asset fits the matrix for us or for Jeff. So occasionally, as in the case of Spring Street, we'll -- you know, that one we are purchasing ourselves. Whether we JV it down the road or not is an issue for a later date.

Okay. And on the leasing front, we have been hearing that Bank of New York and Time are potentially close to taking 1 million square feet down at the World Financial Center. And I'm wondering if that is what you are hearing.

And then if that is true, it would seem to open up your prospects for 180 Maiden, taking off the far west side of downtown. If that is getting leased up, it makes your life a lot easier.

I would agree with everything you just said. (laughter)

Thank you.

And add to it that as they are finding -- if they make those two deals, I think that basically we well lock up all of their big blocks of space at World Financial Center. And the word is that they are raising their rents in the Center, which can only help things further as far as east side having even that much more of a competitive advantage from a pricing perspective.

Thanks.

Alexander Goldfarb, Sandler O'Neill.

Two quick ones. First, Matt, you addressed the extra investment income from the acceleration on the mark on that sale. The other property income that was $14.5 million was up considerably from the historic run rate. Was there anything -- what was in there? Was there one time-ish stuff, or is that a new run rate for this year?

We had a promote of about $7 million recognized in the first quarter. Coming into the year, we provide in our guidance for expected promotes or lease termination income as best as we can project them. So that is what is in the first quarter.

Okay. So you guys got a double positive there in the first quarter on that side.

We had a positive, yes.

You got the promote and you got the acceleration on the preferred position, so that was good.

On One Vanderbilt, how comfortable are you guys emptying out that assemblage and starting demolition ahead of getting approvals?

We have made no such -- we are in the process of getting the approvals, and we're certainly in dialog with the administration, trying to get that. We have set the building up, and there are selected areas we have begun termination proceedings.

But I would say it has been very slow, very measured. And we will just have to see how that plays out through the balance of this year in terms of the entitlements. That building will be developed or redeveloped. There is no question that we will do that.

I think the question is -- what will be built there and when is a question we are still grappling with. And that will weigh in heavily on the timing of the actual vacating of the tenants.

Okay. So the point is that you wouldn't look to emptying it out and demo the site before approvals. You are going to keep some income there until you get approvals.

You know what? For reasons I can't get into on the -- I can't get into that exactly here.

I got you. I got you.

But what our strategy is going to be, what our timing is going to be -- we have a definite decision to move ahead and develop or redevelop this property. That is happening. And the timing is going to be largely predicated on the receipt of the entitlements.

But with that said, we have every expectation of building this building at One Vanderbilt. We are optimistic we are going to get the zoning as part of East Midtown or through some other mechanism. And we are very much focused in on it.

And it would be a great thing for Grand Central. It would be a great thing for the city, for the MTA to see this building built. And everybody that we presented it to at the administration, the civics, the neighborhood community -- I think everybody seems to be very much in favor of having a new building built, not just on the west side, not just in the World Trade Center, but one right smack in the middle of Grand Central, where you have one of the two busiest commuter hubs in New York City. And it is only getting bigger with east side access.

The thing we have to face is building that without subsidy, whereas a lot of the other developments are with subsidy. Makes it, certainly, more economic and easier. But we are prepared to move forward on a full-market, rate-based development on a site that is perfect for the building we have designed, with a lots of benefits for the city and the MTA. And it is a very special occasion.

So we are doing it. But the granularity of the when, and how, and what kind of income will be in place this year, next year -- we can't really get into that.

Okay, I got it. Listen, thank you.

Thank you. Ladies and gentlemen, I would now like to turn the call over to Marc Holliday for closing remarks.

Thank you, everyone who is remaining. And we look forward to speaking in the next three months.

Thank you. This concludes the presentation. You may now disconnect. Have a very good day.