SL Green Realty Corp (SLG) 2014 Q3 法說會逐字稿

Thank you, everybody, for joining us and welcome to SL Green Realty Corp. third-quarter 2014 earnings results conference call. This call is being recorded. At this time, the Company would like to remind listeners that during the call management may make forward-looking statements. Actual results may differ from the forward-looking statements that management may make today.

Additional information regarding the factors that could cause such differences appear in the MD&A section of the Company's Form 10-K and other reports filed by the Company with the (technical difficulty).

Also during today's conference call, the Company may discuss non-GAAP financial measures, as defined by the 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 2014 earnings.

Before turning the call over to Marc Holliday, Chief Executive Officer of SL Green Realty Corp., I ask that those of you participating in the Q&A portion of the call, please limit your questions to two per person. Thank you.

I will now turn the call over to Marc Holliday. Please go ahead, Marc.

Thank you, and welcome to all of you that have dialed in today. It certainly goes without saying that the easiest and most enjoyable investor conference calls follow earnings releases of the type we posted yesterday. On many levels, the quarterly and year-to-date results illuminate the underlying strength in the New York City economy, and the way in which our active management of the portfolio and value-add investment strategy is continuing to pay off for our shareholders.

We are generally on or ahead of plan with respect to our core operating metrics, and at the moment market fundamentals appear to be improving on an accelerating basis. Demand for commercial space and resulting office leasing activity in our portfolio, and the market at large, should really not come as a surprise to those of you who have been dialing into our calls throughout the year.

We have been emphasizing three major factors contributing to a positive outlook that we have maintained on prior calls. First and foremost is the continuation of a robust job creation environment. Employment data shows that New York City is on track for the fourth straight year of plus-2% job creation, with 85,000 private sector jobs added just year-to-date. Notably, over 25% of such new employment is in office-using job sectors like professional and business services, finance, and the TAMI sector. This equates to nearly 4 million square feet of incremental demand, and the year is obviously not over.

A second major leading indicator foreshadowing our substantial leasing results was the extensive pipeline of deals that we discussed throughout the year on prior calls. Even as our buildings are trending towards full occupancy, we still have 1.1 million square feet of leases in current pipeline, of which over 700,000 square feet are either signed already in Q4, out for signature, or pending in negotiation.

The third significant factor driving space absorption is the relatively limited amount of near-term new supply that will be delivered to the market over the next two years. While larger tenants of 500,000 square feet or more are planning for their space needs many years in advance, the bulk of the market is made up of tenants below 150,000 square feet, and focusing mainly in the affordable commercial rent part of the rental spectrum; and, generally, making leasing decisions within a much shorter timeframe, which bodes quite well for falling vacancy rates through 2016.

Above-average job creation and limited near-term supply should sustain double-digit mark-to-market rental uptick on expiring rents; and, combined with the depth of SL Green's leasing pipeline, will drive growth in net operating income now, and we think throughout 2015, and on from there.

These are just some of the topics we will delve into in much more depth at our investor conference in December, but I wanted to highlight these items in particular here today. I believe that our announced results are not an indication of a change in direction of Manhattan fundamentals, but rather a continuation of a steady and protracted recovery that began approximately 4 years ago.

With that, we want to get right into the Q&A, but we -- as you noted in our press release last night, we did raise guidance. So, before turning it over for Q&A, we want to have Matt go through some of the major items and components underlying that guidance change.

And before turning it over to Matt, I also want to note that this past Monday the planning department certified that the application for 1 Vanderbilt is complete, and ready for public review through the ULURP process.

This is a seven-month statutory review process that should conclude in May 2015, and we all intents and hopes of concluding that ULURP process with the issuance of a special permit to go forward with the 1 Vanderbilt development. So that was quite an exciting moment for us, after over two years of work in design and pre-development and environmental impact, to get to the point of certification.

So, with that said, let me turn it over to Matt.

Thanks, Marc. As Marc said, we announced last night we have increased our FFO guidance for 2014 to $6.06 to $6.09 from our previous guidance range of $5.90 to $5.96. Before giving (technical difficulty) related to the $300 million refinancing of 420 Lexington Avenue. This equates to a new NAREIT defined FFO guidance range of $5.82 to $5.85.

The increase in our guidance range is a result of continued strong performance in both the real estate and debt and preferred equity portfolios through the first nine months of the year and our outlook for the remaining few months.

In Manhattan, in our leasing volume is on track to meet the 2 million square foot objective we set out for the year, while the mark-to-market that Steve and his team have been able to achieve is well in excess of our original expectations. From an earnings perspective, the 280,000 square foot lease renewal with Schulte at 919 Third provides a meaningful benefit to 2014, given its significant increase in rent, which will be straight-lined into earnings starting now; and a leasing commission that we recognized in the third quarter.

The additional revenue from our Manhattan leasing activity is coupled with the operating expense savings we have realized as a result of more moderate temperatures and particularly in the third quarter, which is traditionally a high expense quarter, and the continued cost-containment measures employed by our operations team.

In the debt and preferred equity portfolio, we saw the balance shrink in the third quarter as we received the repayments we projected. However, our new investment activity has been brisk, resulting in an average balance that has trended above our initial expectations throughout the course of the year. And more significantly, the yields we are achieving on new investments remain in excess of the 8.5% that we originally estimated.

Looking to the balance of 2014, we have a pipeline of debt and preferred equity activity that we expect to close in the fourth quarter. But we will also be keeping our eye on repayments, in particular one large investment which could potentially repay this year.

On the corporate side, with our second investment grade rating, which we obtained from Fitch a couple of weeks ago, and an attractive Treasury yield, we will closely evaluate the opportunity to raise more efficient corporate capital to replace higher-cost legacy debt. As you have seen in the first three quarters, sometimes these refinancings result in one-time charges.

With that brief summary of our guidance revision, I want to remind people that our investor conference is being held on Monday, December 8, in New York City. To be added to our email distribution, you can email us at SLG2014@slgreen.com. We expect to get invitations out over the next 24 to 48 hours.

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

Okay. Thanks, Matt. And operator, we're ready to open up the lines for questions.

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

Just hoping to get some more general color on the leasing market. What did you see this quarter that picked up so much? And what are you seeing going forward?

Hey, Jamie, it's Steve. You know what? We really saw a continuation of much of what we've seen from the beginning of the year. Just to remind everybody, we ended very strong last year. The market overall last year was a very good year, almost close to a record-setting as far as velocity goes. And that momentum carried through the holiday, and certainly didn't slow down over the weekend.

I think the differentiator between what we're seeing today versus a year ago is it's not just a story about the lower end of the market, as far as the price point goes, but it's a story about big block deals, being 100,000 square foot leases or larger. It's a story about the high end of the market coming back, with a greater number of $100 rents being achieved today than were signed last year. And we continue to see good demand across the board from a wide range of businesses, whether it's financial services, law firms, accounting firms, business services, and TAMI -- you know, the whole advertising, media, information services sector -- is not slowing down by any sense of the imagination.

So, it feels like we've got very strong momentum that is going to carry us through the balance of the year, going into next year very strong.

Okay. And then I guess a follow-up. How much are you guys impacted by the change in oil prices in terms of operating costs, especially in some of your older buildings? Will you see a benefit from that?

It's Matt. On the margins, we may see a benefit. We do pass through a lot of our expenses, so whatever benefit we would see is shared with the tenants, as well.

Clearly, the common area charges. It's really a question of, where do we see the utility rates headed as a result of the oil drop? And I don't know if you have enough data as yet to make a statement on that.

We're in the process of locking in electricity rates for next year. And it's a very good time to do it. So I think in the summer we didn't lock in as much as we usually did, with the hope that prices would retreat a little bit, on advice from our consultants; which turned out to be fortuitous because oil has gone down, and the price of electricity is, we feel, close to bottomed out, so we're locking in a lot of those contracts.

Okay, great. Thank you.

John Guinee, Stifel.

A couple questions. First, when you guys are looking at your mark-to-market, if it's, say, 10% on a gross basis, what is it on a net rent basis? And then second, what sort of threat to your NOI do you see from the inevitable property tax increases, given a variety of things that are happening in Manhattan?

Well, let me answer the second question, and then we'll come back to net, to the extent we have that number at our fingertips. The (technical difficulty) over the past probably five or six years, I'm going to say, have been quite substantial. The mill rate has not increased all that much, but our assessments have grown significantly. And those increases are phased in, I think, typically over five years or so. So, the property tax increases we're going to see over the next couple of years are really baked in from years prior, as the transitional amounts come into play.

But in terms of going forward, I think that whatever property tax increases might come into play in future years, that they may not be as targeted on the commercial sector as they have been in the past, because I think commercial has borne well more than their fair share over the years.

And we're hopeful, and we're obviously supportive of efforts to try and have a more equitable allocation of those real estate taxes among all property classes, not just commercial, so that if there are increases going forward that they would not be any more than they've been in the past. And our hope is actually that they will be quite -- the increases will be at a much lower rate than in the recent past. So we don't see that, at the moment, as an area of risk or unanticipated increase for the Company, but we'll keep our eye on it.

And we actively are involved in trying to make sure that the taxes for our buildings are fairly assessed, and reflective of the capital that we have to put into it, and the vacancies that do occur from time to time. So I think we're okay on property taxes for now, but we'll see what 2015 brings, the next fiscal year.

As to the net, recall that when you're comparing the gross rent on a newly signed lease, we're comparing it to the escalated rent on the previous lease. So those escalated rents do reflect all the expense increase over, let's say, a period of a 10-year lease. That reflects 10 years of expense increases. So I think it is a proper comparative to look at new gross rents to old escalated, expiring rents and look at that delta as reflective of the true -- real, not nominal, but real -- growth in rents, lease over lease, for that particular lease.

You can't necessarily extrapolate to the rest of the portfolio, because you're just dealing with a sample of leases expiring in any one given quarter. But for those leases, I think the 17% increase that we posted for this quarter is accurate, in terms of where the older leases, as escalated for expenses, had risen to.

Right.

Does that -- okay. Thank you, John.

Perfect. I'll get back in the queue. Thanks.

Nick Yulico, UBS.

It's Ross Nussbaum here with Nick. Two questions. First is what prompted the decision to sell 180 Maiden Lane versus going through the lease-up process and monetizing it after that?

It's Andrew, Ross. The short answer is, the offer that we received was, in our evaluation, too attractive to hold onto the property and go through the redevelopment. Because when we ran our financial analysis on the building, the capital that we were going to invest and the rents that we projected receiving when we valued the building, somebody just frankly offered us more than that value. So we saw an opportunity to take that capital, redeploy it into a higher-yielding deal on our evaluation in the Tower 46 on 46th Street, and decided to pull the trigger on the sale.

Yes, we've gotten that question the last couple of times, and I think our shareholders want us to think like that. That's our -- our view is we redevelop a lot of property, and it's easier to just go with the plan, if you will, and spend the money and hope you hit the market right. But we are in the business of optimization. That's why we sell at all; forget about why 180, and why sell it all. It's to basically optimize profits, reinvest in higher-yielding deals that we see out there, and do it again and again and again.

So we're not really married to any particular deal. 180 Maiden, we thought was an excellent property. I think it will lease well, and I think the redevelopment plan we came up with is a smart one that will appeal to this market. With that said, we saw less chance of rental uptick on the upside coming out of 180, which had, we thought, a $45 to $50 price point, versus -- Jim -- Tower 46, which we think has a price point that is --.

$90 to $100.

$90 to $100. And so, higher margins, we think higher opportunity for lift in a rising market. But 180 is a good building; it's a good redevelopment plan; and we think the buyers will execute and do well. It's just doing well, unfortunately, in this market for us, is not enough. It's doing (technical difficulty). I think that was the -- as Andrew said, that was the beauty to the trade, if you will.

Okay. I'm sure you saw that NYRT is evaluating options. Do you guys have any thoughts on that one?

Nothing in particular that we would speak about. Just a couple of the properties we know well in that portfolio; and I would say we get our interest like any other situation would, but nothing more notable than that to discuss.

Okay. I think Nick had a quick one.

Yes, I just wanted to go back to the 2 million leasing goal you had for the year. I think there was a couple hundred thousand budgeted for 180 Maiden. So if you're saying that you are still going to feel good about hitting the 2 million leasing goal, and in reality are you surpassing your goal for the year now?

Well, is that question to Steve Durels or the rest of us? (laughter).

Let me answer it. Let's not get ahead of ourselves.

Let's take a vote. Who says we don't move the bar on the 2 million feet? The show of hands around here, Nick, is unanimous. So we keep the bar at 2 million feet, notwithstanding the reduction of the couple hundred thousand feet of 180 Maiden.

I'd just like to affirm that I'm a supporter of that. (laughter)

Okay. And then, Steve, do you mind just providing a little update on 280 Park and HarperCollins? Thanks.

Sure. So, 280 Park, we just closed a couple small to medium-size deals over at the building. One of them was a 30,000 square foot lease for part of the 14th floor, with a starting rent of $120 a foot. The capital project is, at this point, I would say 90%-plus complete. We're about ready to open up the mid-portion of the lobby, which is -- if you haven't been over to the building recently -- is really dramatic space. I think it's coming out better than any of the renderings that we've shared with people. And we have a large lease that is in negotiation for about 125,000 square feet. So I think we're going to end the year very strong on that building, at rents that are at or above underwriting.

At 10 East 53rd Street, the redevelopment work is flying. It's really going fast. All the windows have been replaced. The building's facade is being recolored. The lobby is on track to be complete close to the end of the year, maybe early next year. The tour activity has been very strong. We've got leases out on four floors, which puts us four floors ahead of expectation. I really didn't think we'd do any leasing until early next year because of the size of the tenants. And the rents are on top of our budgeted numbers. So we're feeling like we're in a really good spot with that building, and we're getting tremendous feedback from the brokerage community.

All right, in deference to those waiting patiently in the queue, we're going to have to go for a ruling on whether two people from the same firm aggregate to four questions or not. No. We'll come back with our ruling shortly. But thank you, and next question, operator.

Vincent Chao, Deutsche Bank.

Just wondering if there's any additional color you can share about the announcement from this morning about the Brooklyn site.

Sure. We purchased, in partnership with the Kushner organization, and an Entrepreneurial Brooklyn operator called LIVWRK -- which, incidentally, there was some confusion is not the same as [WeWork]. This is a business that buys and renovates buildings in Brooklyn, and is not a fractional office provider. So there's no fractional office plan at the site, as of now. Just to clarify any confusion.

It's a prime site in Gowanus, which is an area we've heard, from a lot of retailers we speak to, is a very target market for them. So we have an enormous amount of bulk. It's a very large site. And the existing zoning -- we have a very interesting as-of-right plan, and then a potential upside plan if we do decide to take the site through ULURP and get it rezoned. So we're going through those discussions internally now, and deciding what ultimately how much bulk we want to put on the site.

But the development there will be retail-oriented, primarily. And then there are interesting commercial and residential opportunities, combined with community uses for the building, depending on how much bulk we put on the site.

Got you. And just on the as-of-right side of things, do you have a general sense of sizes [development] in terms of dollar value?

It's 280,000 square feet, as-of-right. So you'd be looking at a $150 million to $200 million development, as-of-right.

Okay, thanks. And just one question on the ULURP process. You mentioned the seven-month process at 1 Vanderbilt. Is there just radio silence from now until then? Or is there other benchmarks we should be looking out for between now and May?

Well, the seven-month is the beginning of a public process. So this project will be reviewed by the community board's department of planning commission, and ultimately the city Council, as well as other stakeholders like the Borough (technical difficulty). I think you'll see a lot of discussion. And the discussion has been extremely positive to date from all different constituencies -- transit, straphangers, the labor unions, the community, and the city administration. So I think you will see a lot of discussion, but it will be basically presenting, more formally, that which has already been presented.

(Operator Instructions). Steve Sakwa, ISI Group.

It's just one person, and I'll just ask my two questions.

Thanks (laughter).

I guess for Steve Durels, could you maybe just comment a little bit about submarket performance? Where are you are seeing the greatest demand in terms of the portfolio? Where are you seeing the best pricing power? Is it the Midtown South? Is it Grand Central? Is it the Sixth Avenue corridor? As you look around the portfolio, where are you seeing the best trends?

Well, a couple things. The Midtown South Corridor is still on fire; lots of demand, but still too small to really satisfy the overall market demand. I think that the rents stay high there because more older stock of buildings are going through repositionings. But I'm not certain that there's, as time goes by, that that market is going to continue to escalate with rental growth beyond where the market has topped out right now. It will go up a little bit. But I don't think it's -- we're not going to go from repositioned buildings being at $80 a foot to the average being $100 rents.

I think there's a lot of Midtown rent growth that's going on right now. We've seen good demand in the Grand Central submarkets. And there was a lot of commentary at the end of last year that Grand Central was particularly slow, and there was a lot of inventory that hit the market last year on Sixth Avenue. And we said, at the investor conference a year ago, that our feeling was that both those submarkets would come back strong this year; and, in fact, they have. Sixth Avenue has returned to its historical norm as far as availability, and there have been a lot of deals in the Grand Central area.

The renewal that we did just a couple weeks ago, to extend the Schulte lease for 300,000 square feet, I think is a very good testimonial to the fact that tenants still want to be on the East Side; they still want to be in Midtown; and they are willing to pay rents that are commensurate with some of the best buildings that are out there.

So, I think as an opportunity and an expectation as to where there will be more proportionate increase in rents, I think it's going to be the Midtown, and then East Side of Midtown in particular, over the next 12 to 24 months.

Okay. And then, Marc, just in terms of looking for opportunities, I know the market is highly competitive. As you look out over the next year, do you think the best opportunities will be in residential, retail, or office? Are you focusing on any particular area, or feel there are more opportunities in one versus the other?

Well, I would say two things. First, I would think, going forward, we'll have the look and feel very much of what we've done this year, which was quite voluminous; we think, in many cases, quite opportunistic; but also quite varied -- high-ticket retail, down-the-middle retail, three big office deals, and a little bit of resi, but some resi in pipeline as well. So I don't know that you're going to see any heavy emphasis on the one versus the other.

I'd have to say generally our experience has been, and probably continues to be, that pound for pound, if you can buy the right retail projects at -- not a reasonable cost, because there's nothing reasonable -- but at a cost where you can make your returns with the potential to make outsized returns by working the tendency more aggressively than your pro forma, that's where the largest mark-to-markets are.

So, while office is great -- office rents have been up for us about 15% mark-to-market over expiring leases -- retail rents, you can generally measure as 100% or more mark-to-market when they expire, for the kinds of deals with low embedded rents that we're finding.

So those are probably, on average, the highest-return deals that we are buying today. But that doesn't mean the other sectors that we're focusing on aren't also high-returns unto themselves, with debt and preferred equity being a good example of that. The portfolio originations for the quarter were in excess of 10% return on core product in New York City. And that is something that we continue to have fairly high volumes of origination, such that the balances at the end of December will likely be going up above where our current balances were at the end of the third quarter.

Brendan Maiorana, Wells Fargo.

(technical difficulty) there has certainly been a very -- even the bids for assets in the city, particularly office, have accelerated this year. Lots of foreign capital, and even seems like maybe JV deals are priced as aggressively; or even maybe more so, in some cases, than fee-simple outright sales, which seems like it fits right in the wheelhouse of what SL Green does well.

How do you guys think about maybe monetizing some additional assets? Do you feel like maybe you'd look to do more, given the strong bids for prices?

In terms of fee versus leasehold?

No, just overall, Andrew. Just in terms of thinking about how prices have accelerated this year, do you think about monetizing more to harvest some of the gains that you have within the portfolio, and maybe realize some of the embedded growth in the stock price relative to NAV?

Look, we've had a very active year on the sales front, and I think you'll see that continue in the fourth quarter. It is definitely our intention to monetize some of the value we've created in some of our longer-term holds and a couple of our shorter-term holds. You've seen us print some very large gains thus far this year on our sales. We still have the sale of 2 Herald closing in the fourth quarter. And we intend to keep selling; we're just limited in terms of taxable gains, and our goal, which has been to retain as much capital as possible.

There are different philosophies out there about what you should be selling into this kind of market. Our stated philosophy -- and it has been this way for many, many years -- has been in this kind of market, the cap rates for non-core and core compress to where they are almost on top of each other. So our view is that's a bit of an arbitrage. In bad markets, they gap out, and core is maybe 100 basis points or more inside of non-core. But in a tight market, they are on top of each other.

So we like to buy core in bad markets, and sell non-core in good markets. And I think that, for us, we prefer to retain those core holdings, in some cases do joint ventures, to optimize or maximize equity. But where we see core holdings that have still a significant amount of NOI upside, whether it's mark-to-market or redevelopment potential, we want to keep as much of that for the REIT as possible, and we'll continue to hold those assets which we think have the highest ongoing earnings velocity.

But non-core property is generally bought, redeveloped, leased, and sold, to act as our currency for future growth. And that's nothing new that I'm stating there. That has been our MO. I don't think you'll see any different in this market. So we will accelerate sales, but the sales will typically be of non-core assets; maybe some joint venturing of some of the higher-quality core assets, but we'll have to see how that plays out, because we're looking for cap rate differentiation to justify those moves.

And right now, there's not a lot of -- there's not as much quality differentiation we see (technical difficulty).

Okay, that's great and helpful. And then just can you guys give some color on the Gem Tower in terms of timing of when you think you can stabilize the asset, and then return outlook or yield outlook?

Well, I think we're pretty emboldened right now by the fact that we haven't even closed on the building, and we already have two offers in on the space. We're expecting a third offer. The types of tenants that we're showing the building to are exactly in line with what we expected, which are financial services and law firm tenants. So I think we're expecting to do more leasing sooner than what we underwrote. We had a pretty sizable amount of downtime in our underwrite, given the fact that the building needs to be repositioned and really reintroduced to the market, because it's a bit of an unknown product to the brokerage community. But I think we'll probably have more on that, hopefully by investor day, to give an update as to progress made.

Hey, this is Isaac. Once that leasing is done, I think the anticipated stabilized yields are in the low 6% range. And on a total return basis, we're targeting IRRs on this deal probably in the 12% to 15% range. So those are the expectations on this particular asset.

Great, thank you.

Michael Bilerman, Citi.

Steve, a question for you just on the Schulte lease. With the tenant having expiration in 2021, I got to assume that they were out in the marketplace. And I'm just curious if you can share a little bit how aggressive West Side and downtown developers are in terms of targeting tenants, in terms of what sort of incentives they're offering, tenant improvement packages?

And then, conversely, in keeping the tenant and signing the extension starting in 2021, can you share a little bit about how the $73.50 will compared to what the fully escalated rent is in 2021? Because I think that the $73.50 starts then, and the $60 that's in the [SOP] is the current cash rent. So just trying to understand how you thought about economics and de-risking out into the future.

(technical difficulty) their rent won't escalate a great deal between now and what would be -- the expiration would have otherwise been, because they are a pure pass-through on buildings operating expenses and real estate taxes. So maybe it escalates another $5 or $6 above the escalated rent today.

As how the deal unfolded, it's pretty interesting. It started with a conversation of, hey, one of our clients happens to be one of the partners on Hudson Yards, and they really want us to move over there. And we were like, great, let's sit down and talk about renewal.

And they went back and forth. They looked at the market. They kicked the tires. They understood exactly the kind of deal they could make on the far West Side. And the partnership overwhelmingly voted to stay on the East Side. And ultimately what drove their decision in the economics were basically looking at where we saw the value of a big block of space, which has a slightly different value versus smaller spaces in the overall market, because the big blocks are tightening up. And for a 300,000 square foot tenant, first saw that as high $50s, maybe $60 rents today, and then put on a growth factor over the next several years.

We netted out some of the concessions, and ended at a starting rent of $73.50 a foot, with $50 in TI and no free rent. And we think that's a very fair number. Obviously the tenant endorsed that. But I think is if you stack that rent up against the deals that are being signed around town, particularly some of them on the far West Side or downtown and some of the newer product for delivery in 2020 or 2021, that -- 919 is a very good building, and the rents reflect that value.

That's helpful. And then I don't know if Andrew for Marc can talk a little bit about 605 West 42nd, in terms of the total construction cost and the capital structure. I think there's about a $540 million senior construction loan; you have $50 million in mezz. I wasn't sure if there was other sources of capital outside of just pure equity, and how much equity is being contributed into the project.

Sure. This is David. This was a project that The Moinian Group has owned for a long time, so when we invested they already had couple hundred million of equity in the deal. The construction loan is $539 million. About $100 million of it took out an existing land loan. There's about $430 million of hard and soft costs that are needed to complete the project. We invested an additional $50 million in the deal, really to cover any overruns, even though there is a GMP on the deal. So, likely, our money won't even be needed for the project. It was for more security.

I think we got into the project well past foundation, when they were already a couple stories vertical, so they're probably going to top it off in the next maybe 12 or so months. So, it was well through the construction project when we started, and all of the equity was already invested.

And your 20% option costs you what, in terms of further capital, if you exercise it?

Well, we can't give you a specific number at this point, other than to say we've negotiated for a present-day number that escalates pursuant to a formula based on additional contributed capital and cost to a number where, in the future, we'll have a look at the final capitalization of the deal, and the market at that time, and the leasing progress at that time, and decide whether or not to exercise that option. Sitting here today, I would assume that option gets exercised, because we think it's a great deal. Joe has been a very good partner for us. It's a very good project. And it's an ability for us to get a bigger footprint in Midtown multifamily.

With that said, we really won't cross that bridge for some time. So there's really no decisions to make at the moment.

Thank you.

Jed Reagan, Green Street Advisors.

So you've got the good pricing on 180 Maiden; and, in fact, were able to shift your redevelopment focus there to another project. Just wondering if that good execution makes you reconsider the game plan for a project like 10 East 53rd? And does that put a quick flip on the table for that asset?

No. I think it's a bit of an apples-and-oranges comparison. The profile tenant that was going to 180, the rents that the market would support, the amount of capital that had to be invested, are two different animals. 10 East is a very high-profile, quintessential boutique building going to high-priced tenants who are in a submarket where there is limited supply. So it's a different repositioning exercise with an entirely different kind of redevelopment plan. And if we could find three more 10 East 53rd Streets, I think we'd be all over it. It's a great, great opportunity.

It's Andrew, Jed. I would just add (technical difficulty) flip offers for 10 East 53rd, which we have rejected. Again, we see the returns on that project significantly exceeding the offers we received.

Okay, that makes sense. And also you guys and some of your competitors seem to be getting more interested in the outer boroughs. And I'm just wondering if you could see a Brooklyn or a Queens becoming a material portion of your portfolio over time. Or do you think it's going to continue to be just smaller one-offs at this point?

Well, I think with 28 million feet in Manhattan, I don't know that there's much of anything we could do that will become a material portion of the portfolio over time. But I guess the question of whether we're going to expand our footprint in other markets, outer boroughs, Brooklyn in particular, Andrew could address that.

Yes, look, we've had terrific success with our residential project in Williamsburg and our office building at 16 Court. So based on those successes, we're definitely actively looking in those markets for additional opportunities. The scale of the deal size is obviously significantly smaller than Manhattan, both by dollar volume and by square footage, as Marc points out. I don't think we're -- we're never going to get a critical mass versus, say, the structured finance program in Manhattan. But we're definitely actively in those markets looking for additional opportunities.

Okay. Thanks, guys.

We have one, two, three, four more -- five more. So we'll take five more questions, it looks like. And try to end it around 3 o'clock or so, because I know a lot of people on the call have a lot of other calls they've got to jump onto. So we'll try and finish up in the next 10, 15 minutes with these next 5 callers.

Alexander Goldfarb, Sandler O'Neill.

Thank you. Two questions. The first question is, on 1 Vanderbilt, can you just comment on the $210 million of infrastructure that's being discussed that you guys would fund -- can you discuss how this impacts the yield? Just because obviously you guys don't get the tax incentives that the far West Side gets, so just curious how this affects the yield.

That's something we haven't discussed yet, and probably want to be getting to that level of detail until after we know we have the approvals at the end of this ULURP process, because it would be premature. Without the approvals, we don't go forward with the deal. So, I think step one is obtaining the approvals. Step two is we'll talk about capitalization of the project. And then step three will be far enough along where we'll have greater visibility into the rents and the projected rents that we'll be able to pass along some return data.

But I can tell you that the scope of the MTA project is something we've been working on for quite some time, and the costs have been included in the overall budget. So it's not something that's adding to or taking away from our development returns. It's part of the project. It's known, and it is -- there's a lot of complexity to the project, a lot of cost. And as you know, there's no subsidy, so we have to do this completely right.

But I would say, to date, we feel like we have a great project designed. It's the right kind of transit-oriented development, sitting right next to Grand Central Station, right at its doorstep, essentially. So we're very happy with the project, but we're going to take it incrementally, in terms of the kinds of questions you are asking.

Okay. And then the second question is, on the Gowanus deal, between the three partners, you guys obviously bring a lot of experience and financial. Kushner has a lot of real estate experience, obviously. The LIVWRK guys, they've done the Domino Sugar site and the Mercedes, so they understand that challenges of it.

Can you just help us understand how the three of you guys are going to work together? Is there one driving partner, or is it all three working together, or each entity has a specific focus and capital contribution?

I think it's going to be collaborative between the three. We're the dominant equity player, given relative scale. But in terms of day to day, Rob Schiffer spearheads it from the SL Green side. And he is working closely with Jared and Asher on the development plan. And we're going to approach it collaboratively.

Okay, thank you.

Tayo Okusanya, Jefferies.

Just some news hitting the rags recently about JPMorgan considering moving to Manhattan West in the next few years. Just wondering if you can give us any color on that, and what that could potentially mean for classic Central Midtown if that happens.

Well, I don't think we have any color that we could share with you on JPMorgan's intention or --.

They are not a tenant of ours.

-- or what, ultimately, happens there. Tayo, every significant tenant of size over the past three or four years has kicked the tires on Midtown, Manhattan West, Downtown. We went through that with Viacom and Citigroup, as you may recall. And time and time again, I think that it's been shown that if you have the right building in the right location at the (technical difficulty) retain tenants.

We've done that very successfully. So I don't know what JPMorgan's intentions are going to be or not going to be. But what we've heard is that if they were to pull out and relocate, that's something where the vacancy impact of that would not be felt until early to middle of 2020, possibly as late as 2025, for the full impact of their vacancy. So you are talking very long-term.

I'm really focused on 4 million square feet or more of net absorption over the next 2 to 3 years. So maybe we'll have 8 million to 12 million square feet of demand over the next two or three years that hopefully is going to be focused right in our wheelhouse. And we'll always be watching tenant decisions and preferences about where they want to be.

But you have to assume, by necessity, if New York City is creating 100,000 private-sector jobs a year, the city's inventory will have to grow. We don't want to lose tenants. So the question is going to be, over the next 5 or 10 years, where can that growth occur? And clearly East Midtown, which is being considered to come back on the board to allow for more development in and around Grand Central, as well as having options on the West Side, makes a lot of sense. And we'll see how that plays out.

But I think you should assume any big tenant of a couple of million square feet or more are going to be looking at every option in the city, and sometimes outside of the city.

That's helpful color. Thank you.

Jordan Sadler, KeyBanc Capital Markets.

I just wanted to bring it back to office fundamentals in Manhattan, real quick. Marc, you characterized this is a recovery that's been taking place over the last four years, and I can relate to that. But the 15%-plus mark-to-market year-to-date feels significantly better than what we were led to believe might happen last December. So it feels like it's surprise to the upside. And I'm curious on your thoughts in terms of how things are shaping up as we look forward. Are things just continuing to get better, and are rents headed significantly higher?

Well, I think our contention has been, since the end of last year -- yes, there was -- we saw one cycle of growth from 2010 to 2012, and then we saw the second cycle. And that was almost just getting back to even, let's say, or getting close to even. And then there's the second cycle of growth, which I think you saw began at the beginning of this year, and we think will take rents to new heights next year. And I don't think this is an anomaly, given that this growth has been steady for the last four years, but you've seen the mark-to-market now.

Because for the first several years, you were recouping losses and filling vacancy. Remember, office vacancy got as high as 13%, 14%. Now it's down around 10%. So part of that growth was filling space. And you couldn't really drive rents. But when you start to get to around 10%, and clearly at 9% or below, then you'll see that reflected in rents, which are appropriate. There's been expense increase; there's been cost of construction increase; there's been valuation increase.

So the fact that rents are finally catching up, if you will, in my mind is really nothing more than that, a catch-up, to get back to normalized. And I think you will see that this year and next. And because we have some low embedded rents in our portfolio, that is going to equate to mark-to-market.

But on the demand side, I don't think we've seen a large year-to-year variation. You're just seeing the effect of inventory getting to a point where the net effect of rents can start to be rightsized.

And as we look forward into next year, you think we cross the threshold back to where -- more of a landlord-dominant market, sub-9% vacancy? (multiple speakers)

Well, I don't know that's sub-9%, but that would be a big move, but I would say sub-10%. And that will be a healthy -- we're not looking for extraordinary rental movements. People are underwriting that. Because remember, we lend to a lot of these folks, and we see there's a lot of people who have some pretty lofty growth projections in their numbers. We try to be a little bit more restrained than that. I think it's best overall for the city to have steady growth, as opposed to spiking growth. And that's what we have experienced to date.

Hopefully, that steady growth continues into 2015. That is what we see, for the reasons, some of which I communicated earlier, and we're on track for that. But if that changes, I think we have the leading indicators to see when that change occurs, and if so, communicate that to shareholders. But at the moment, 2015 is shaping up to be what we think is one of the better years.

As a quick follow-up, is the structured finance book, is that exclusively focused on New York still these days? Or would you look to the outer boroughs or otherwise to maintain the origination at these yields?

Well, we do consider the outer boroughs as part of New York (laughter) for the record. (technical difficulty)

(technical difficulty) in New York.

We are sympathetic to all boroughs. But I would say if the portfolio is (multiple speakers). Well, no. I think we own a very small retail piece of property in Queens. That may be worth a couple million bucks. So, I would say of the $1.4 billion outstanding, the vast majority is Manhattan. But we probably have some positions -- yes, a couple of positions in Brooklyn.

Okay, thank you.

Brad Burke, Goldman Sachs.

Just one question, a follow-up on structured finance. The investments that you made are yielding over 10%, which, as you noted, is better than 8.5% you guided us to. And this is an environment where we've seen the interest rates compress; we've seen credit spreads compress. So I'm just hoping you can give us some color on how you are still able to get these really strong yields, and whether we should expect it to stay near these levels on the new originations you are making going forward.

Well, yes, I think the quarter was skewed a little bit because of the 605 West 42nd Street investment is an extraordinary yield, and a yield that was really reflective of us assembling that entire capital stack for the borrower. We continue to take advantage of tightening debt markets on the senior side to lever up our yields on the subordinate paper. And that's how we've been able to beat our estimates and our expectations a bit. But, overall, the market has tightened, and continues to tighten. And we still think an average of 8.5% going forward is a reasonable and the right expectation.

I appreciate it. Thank you.

Okay, we have time for one last question, operator.

Vance Edelson, Morgan Stanley.

In under the wire. Could you just -- just following up on the earlier question on strength by submarket, could you give us some feel for the variability around the pricing on the 46 office leases signed in Manhattan, the 17% overall mark-to-market on replacement? Were there notably lower markups in some submarkets, maybe south of 10%, being offset by even greater strength, maybe north of 20% or 25% in others? Or is it generally a tighter range than that throughout Manhattan?

You know what? It's because the mark-to-market is really compared against the rents of the prior lease's escalated rent. I don't think we can really comment as to whether it's driven by submarket, per se. It just happens to be what you are dealing with for the last guy's lease coming off. So it's not particularly good as an indicator of the strength of any of the overall submarkets. I can tell you that my sense is where we've seen the greatest rent appreciation, and no surprise, is where the rents have been beaten down the farthest.

So, Grand Central, we've seen rents -- and a really good indicator of that is the Graybar building. The Graybar building has now got an availability of 1% for this building. This is a building that has got 300 tenants, with tenants that are everything from 300 square feet to 300,000 square feet. And the rents that we're signing today, the deals that are in the pipeline, I would say almost typically are $58, $59, starting rents as compared to a year and a half, two years ago, where they would've been $38 to $40.

So as a percentage increase, Grand Central had been beaten down, Graybar being a good barometer, and there's some hard stats as to where we've experienced rent appreciation.

Okay, that's very helpful. And then just one last one on the structured finance. Could you comment on the level of new debt and preferred equity investments brought on board, just a little bit lower this quarter than the past two. Anything driving that, or is it just naturally lumpy? And do you think it could pick up going forward?

I think it's naturally lumpy, and I think we're probably ahead of where we projected to be at the end of last year. It's just the nature of other people closing their deals sometimes makes it a little lumpy. But we have a robust pipeline, and we're comfortable.

Great, thanks.

That's all the time we have.

Thank you, everyone. And I guess we look forward to seeing, hopefully, all of you in a little over a month's time at the investor conference. Thank you.

This concludes today's conference. You can disconnect, and have a great day.