SL Green Realty Corp (SLG) 2014 Q4 法說會逐字稿

Thank you, everybody, for joining us, and welcome the SL Green Realty Corp. fourth-quarter and full-year 2014 earning results conference call. This conference call is being recorded.

At this time, the Company would like to remind listeners that during the call, management may make forward-looking statements. Actual results may differ from 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 the SEC Regulation G. The GAAP financial measures most directly comparable to each non-GAAP financial measure discussed and the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found on the Company's website at www.slgreen.com by selecting the press release regarding the Company's fourth-quarter and full-year 2014 earnings.

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

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

Okay. Thank you, and good afternoon, everyone. I think you'll all be fairly pleased with our abbreviated format for today's call, which follows our extremely fulsome investor presentation last month.

I think that December's presentation was by far the strongest and most comprehensive one yet, and I think that was affirmed by the extremely positive feedback we got from shareholders and analysts since that day, and as reflected not insubstantially in the stock price since that time as well.

So, we are still very much on track with a lot of the goals and objectives we put out there about six or seven weeks ago. I think the market is forming up in a way which will still enable us to be right on track with our fairly aggressive goals that we set for ourselves. And so I'll just take this opportunity now to highlight a few items occurring since that time for opening it up for Q&A.

Last night and pretty notably, we achieved a significant milestone in the One Vanderbilt entitlement process. After lengthy negotiations and numerous meetings with Manhattan Borough President Gail Brewer and her staff, the Borough President has recommended approval of the project inclusive of certain improvements we have agreed to make.

There continued to be strong community support from groups like the coalition for a Better Grand Central and the straphangers Campaign, both of which greatly helped us achieve this important milestone, along with many other groups for which we are thankful for their support.

At the investor conference in December, Rob Schiffer explained in some detail that the EULA process contains four key steps, the first being the local community board followed by the Manhattan Borough President recommendation yesterday. And then on to city planning commission and finally city council.

Next week, we'll be presenting the project to the city planning commission, the third stop, at a hearing where we hope to receive significant support from all of the key stakeholders, unions, coalitions and civic groups.

The Borough President's approval gives us great momentum as we enter into the final stages of this process, and we remain confident that we'll achieve our goal of the special permit for One Vanderbilt this coming May, which is consistent with the timeline we set out for everybody in December.

So turning now towards leasing, we obviously went through a fairly exhaustive amount of information on the portfolio in the market in December. That supported, I think, our contention that rents would be taking a fairly sizable step forward this year and into next year, over the next 12 to 18 months. And I would say right now the market environment is such that it's forming up in a way that's either meeting or exceeding our expectations.

Just since December 8, we've signed about 230,000 square feet of leases in 18 different transactions. That's in the Manhattan portfolio. And as you saw for the quarter, fourth quarter, we were up about 13% or slightly more than that mark to market and nearly 15% mark to market for the entire year 2014.

So I would say that that's still the primary engine on the operating side, the core earnings side, of what we are looking to. And as I go through the pipeline with Steve Durels, I see that we've got on top of that another $1.1 million in the pipeline as we sit here today. That's as of the 28th, which is about 70,000 some-odd square feet out for signature, 0.5 million square of leasing in negotiation and then another 0.5 million square feet that are pipeline deals in term sheet negotiation.

Again, any time that pipeline exceeds or approaches a million square feet, I would call that fairly robust for the kinds of targets we had for the year which, Matt, if my memory serves me right were about 1.8 million square feet for the year. That's something that I think we still feel very good about given the demand that we see out there and the winnowing supply as the absorption in this market continues to accelerate.

We had a pleasant surprise at the end of the year which I don't think has been fully -- has not been really communicated in a formal way to the market yet as it relates to the suburban leasing activity. Since December 8, the investor meeting, there was 185,000 square feet of leasing. Since then 122,000 square feet of that representing new leases, a total of 19 transactions.

And, true to form, the suburban group signed 8 of those deals on December 31 right into New Year's Eve. Eight different transactions, 60,000 feet which are encompassed in 185,000 feet, which made for quite a -- it put quite in an exclamation point on the end of the year for an improving suburban market outlook as we see it.

And I think you saw some of the metrics relating to mark to market and occupancy also trended up in the fourth quarter, so that was good news.

I think the leasing is also punctuated by two of the recent announcements this morning. The Swarovski deal at 10 East 53rd, I think, is an affirmation of the excellent job the construction and design team and leasing team have done in positioning and redeveloping that asset in a way to capture these type of high-quality profile tenants.

Swarovski is our first new office tenant lease post redevelopment, and that's on top of the Equinox deal we announced previously for a major business center in that building. So we still are very, very bullish on the prospects with 10 East 53rd this year.

And on top of that, you heard -- many of you heard Brett Herschenfeld talk about significant mark to market in the retail portfolio back in December. And I think one great example of how we've now monetized just a small piece but a significant piece of that mark to market was with their announced Diesel deal at 625 Madison, with many more deals in the pipeline to come from the retail leasing side. So that was very strong.

On the debt and preferred equity front, our balances remain roughly the same through year end. I think that people saw a slight dip in the average yield reported on fourth-quarter activity, about 8.3%. That's actually fairly consistent with our guidance of around 8.5%, and it still leaves a portfolio that's averaging 10.5% on $1.4 billion.

So I wouldn't get too overly focused on the quarterly ups and downs. We have had some quarters that exceeded 10%, this quarter was 8.3%. I would look to the average on the $1.4 billion at 10.5%. I think that's the best depiction of the earnings power of that portfolio for 2015.

And by way of example, just already into this year we've originated about $111 million of new debt and preferred equity investments which had a yield of just slightly under 10% in the high 9%s. So again, that pipeline is still, we think, extremely strong.

We have fairly lofty origination goals of adding an incremental $250 million to our net balances by the end of 2015, and that's an increment that's on top of whatever the expected payoffs and redemptions are this year. So that could approximate activity certainly in excess of $600 million of gross originations.

And looking at a pipeline in front of me now, which have about a dozen deals or so, that would make a significant dent in that total, and it's only January. So I think that's reflective of a market that's got a very high amount of transaction activity. And as a result of that transaction activity, it drives financing opportunities and debt and preferred equity investments for people like us.

Lastly, Andrew Mathias talked about unlocking opportunity and the liability side of the balance sheet and talked about all the opportunities we saw to take higher rate debt, and either unsecured certain assets or term it out using lower, more efficient and cheaper forms of secured and/or corporate bond financing that's available in today's market.

And I think one example of where we have now monetized or eliminated that since the investor meeting is on 3 Columbus, where we have signed a commitment with a lender for $350 million financing at an interest rate of about 3.6% which is locked for 10 years, which is a very, we think, a very good piece of financing in terms of both repatriation of our substantial equity investment into that deal for a long-term lock-in of rates at a very advantageous level. And there's more of that to come. As you remember, when you extrapolate that to the whole portfolio, we showed you the kinds of interest savings number that could be achieved on a full mark to market at today's rates. And today's rates are lower than what we projected back in December 8 due to the rise in -- the recent rise in treasury prices.

So all in all, I think good news to report. It was a very good quarter. And as important, the prospects for 2015 look to be very much in line with how we hope to execute.

And with that, I would turn it over for questions and answers.

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

I guess just starting out for Steve Durels or anyone in general, you know, at the investor day you had commented you'd see a premium in 2015 for big blocks of space. Can you give your latest thoughts on what's happening in the big-block market today in terms of the lease-to-demand pipeline? And then also your thoughts on competitive big blocks that will be in the market this year?

Sure. There's a great step which I think supports that, which is the fact that the number of -- the scarcity of big-block availabilities in Midtown. There's only five spaces available in Midtown that are 250,000 square feet or greater compared to 10 units from a year ago.

So from a supply side, certainly it's drying up fast. The number of large leases that were signed last year -- sort of give you the trend line -- was dramatically larger. There were 58 leases signed last year for 100,000 square feet or more compared to 43 leases from the prior year. But more telling was the fact that there were 33 relocations rather than just renewal deals compared to only 17 large leases the prior year. And those large-block deals were 7.5 million square feet compared to 3.4 million square feet.

So clearly from the demand side and offset by the lack of supply makes us very bullish as to why there is going to be a premium on the big blocks.

Okay. And then secondly on the suburban market, can you just talk more about who is signing leases out there and what kind of assets they're looking for? Are they rail? Are they transit served or not? Just a little more color on why there was a pickup in the fourth quarter.

Sure, this is Isaac. You are clearly seeing more activity in the transit-oriented buildings in White Plains and Stamford. And in terms of tenant types, it's really across the board. You've got legal, financial services, tech, healthcare.

We signed probably three or four leases north of 50,000 square feet, so there are also larger tenants coming back into the market as well, and that's driving both occupancy and mark to market, both of which have been really, really positive. (multiple speakers)

So for example, we signed up Legal Aid for close to 30,000 square feet. Cummings & Lockwood, which is a law firm, for 55,000 feet. Sony for 53,000 feet. So it's really across the board. And this is the first time in the last two to three years that we've seen positive direction from different tenant types. Not just healthcare, not just education -- so it's across the entire gamut.

And are these tenants coming out of the city, or they are local tenants that are expanding?

The vast, vast majority are local tenants. They are either moving, they're expanding, but the positive thing here is we have seen them actually getting bigger. So it was a 20,000-square-foot tenant moving from building X to one of ours, they're now taking 22,000 or 23,000. So that's actually a really, really positive sign.

Just as a note on our portfolio performance versus the market, our performance is trending towards around 84%, which is better than the market. We are -- I think the group -- you know, the Reckson Group in White Plains and Stamford are doing an excellent job of outperforming the market.

So I think what Isaac is telling are the types of tenants we are attracting and we are winning, and we are doing it on economic terms that are accretive, which I think is not necessarily illustrative of the market as a whole, which is improving but I don't think improving as rapidly as our portfolio.

Got it. All right. Thank you.

Ross Nussbaum, UBS.

We saw some market reports that you guys might have made some leasing progress at 280 Park Ave. Can you talk a little bit about where that project stands currently?

Sure. As we sit right now, the only reason we didn't put a press release out covering there is a large deal that we signed in early January with Fiduciary Trust for 126,000 square feet was generally reported in the local papers. So that was a deal that we've been working on for quite a while. It was for 3.5 base floors of the building at rents that were well within our underwrite numbers.

It leaves us with 302,000 square feet of remaining office space left in the building, which is about 24% of the office space. We have leases out on another 110,000 square feet of that availability. And then we have another close to 80,000 square feet of term sheets that we are very hopeful will get converted into leases within the next couple of weeks.

So we have basically completed, I'd say, 95% of the capital program. And as soon as we unveil the lobby and if you've been to the building and seen the second half of the lobby that recently opened, it really opened up the floodgates as far as tenant demand.

We were very optimistic and bullish on the project early last year. Now it's sort of the high five because everybody's coming through one right after another. And we are going to -- if we close everything that we are working on, we will be down to only one base floor left in the building. And beyond that, a smattering of partial spaces up in the tower.

So we will be -- we should have the building stabilized this year without too much fear. And rents are on the rise. And as we saw all last year, it's all financial services, nothing but financial services.

Great. Appreciate that. Second question either Andrew or Marc, General Growth did announce the Crown building deal on Fifth and 57th. So I guess it's a two-part question. One is are you guys looking at -- have an opportunity of putting some mezz on that deal?

And then number two, I'm guessing you took a hard look at it, if General Growth can hit their 6% percent stabilized yield target in three years, I'm curious. That doesn't seem like an unreasonable number relative to where our cap rates are in Manhattan. What was it about that deal that you guys didn't see?

I'll let Andrew take that one.

We are -- I'm going to not comment on the acquisition. I'll just say we obviously underwrote the deal carefully. We knew the sellers, and we didn't see that type of earning potential on our plan for the asset.

And, you know, the mezzanine -- we're -- I honestly don't know what GGP is doing terms of debt capital stack there. So it's not an opportunity that's crossed our desk; we would certainly look at it if it did. But he has generally -- the deals he has bought thus far in Manhattan has generally used lower leverage and used some master leases and other structures to get his debt cost very low. So I don't know if he'll do the same on Crowne or not.

Thank you. Appreciate it.

John Guinee, Stifel Nicolas.

I'm just curious because you've never brought this up before, but One Vanderbilt, I guess you've got about 700,000 or 800,000 square feet in place, up-zoned to about 1.6 million square feet.

Can you provide, I guess just on a square foot basis, what you think your land basis is going to be including your building costs, all of your fees, infrastructure cost, demo cost so people can get a sense for whether your land basis is $200 a foot or $2,000 a buildable foot? And then what you think your total development cost is going to be on One Vanderbilt?

Yes, no -- you know, John, I think what we said in December -- we went through the building program fairly extensively in the design and the entitlement process. We are completely focused on those elements right now and getting through what's been a long road of assemblage, acquisition, possession and now entitlements over time.

At the conclusion of that effort, when it's done and we know we have and we know the total cost in and total envelope of the building and the exact program, I think we'll go into that in much greater detail. But that's kind of a -- that's a later-in-the-year kind of event for us.

I know we've been saying that for some time now, but still is the case because there's a lot of different moving pieces. You saw even yesterday we had to make some modifications to the property that we think were good improvements and certainly good for public benefit and public realm improvements. But until everything sort of -- until we have everything isolated and identified, it would be premature to start going through numbers. But you can certainly look back and see what our acquisition costs are for the assemblage.

And you know, that's the bulk of the cost. But then obviously there's all the public realm improvements we've been pretty specific on. It's $210 million of costs associated with public realm improvements and then obviously a lot of pre-development possession costs on top of that, which, like I said, when it's all settled we'll be able to give a better picture of.

Just intellectual curiosity, when you are taking down 800,000 square feet brick by brick, have you got any preliminary demo costs on that yet?

Yes.

Okay.

In line with -- we do a lot of demolition in the city. This isn't the first time. And I would say it is certainly not the most material of items on the budget and consistent with the kind of demolition costs we experienced throughout the city. Because we do annually enormous volumes of demolition of space and occasionally structures.

Great. Thank you.

Michael Bilerman, Citi.

Manny [Cordesman] here with Michael. Just wondering if you can comment on any changes you're seeing to the investment landscape in Manhattan and maybe if you could focus on any changing trends you're seeing from foreign buyers.

Well, I think we went through specifically at investor day that the trends emerging in terms of a lot of Chinese capital coming into the market. Canadian Capital continuing to play a dominant role.

I would say since investor day we've seen Japanese capital with Mitsui Fudosan making a large investment into Hudson Yards with related. So there's a lot of Japanese capital circulating around.

You know, there's just continued demand from all different points on the globe and in all different property types that are driving the market. I think you're seeing that at the trophy level and you are also seeing it a very deep level of demand for properties like 315 Park Avenue South, which traded within the last quarter, and other sort of side-street and less high-profile glass-and-steel buildings which are trading at record levels throughout the city.

Have you seen any impacts from just the drop in crude prices more recently, or has that really not trickled down to the buyer pool yet?

It hasn't trickled down to the buyer pool quite yet. I read about it as having more direct impact on condo buyers, individuals, but not in the commercial land at all.

Thanks so much.

Brendan Maiorana, Wells Fargo.

Retail disclosure that you guys provided is helpful. I think you talked about that at the investor day, and you gave the outlook on the significant amount of rent growth. I think it was around $165 million of rent growth over the next several years.

If we look at stabilized retail assets, either kind of retail at the base of an office building or stand-alone retail, how do you think the valuation of those on a cap rate basis stabilized retail would compare to stabilized office in the city?

Yes, I think it is similar. I think stabilized retail is getting slightly more aggressive bids than stabilized office. So stabilized office is sort of 4 cap, stabilized retail would be 3.5 and 3.75 cap in prime areas. But it's hard to generalize because every property has its own below-market issue or opportunities that play a role in cap rates.

Okay, understood. That's helpful. And then just maybe second one for Steve Durels. So you gave very helpful color on 280 Park. You did the Swarovski deal at 10 East 53rd, and I think you are targeting stabilization or leasing of that asset more in 2016 than 2015. But can you give us a sense of how the pipeline shapes up at 10 East 53rd?

Yes, remember we signed the Swarovski deal for two floors. That was right on the tail of signing the two-floor lease with Equinox. We have another lease out right now that we just went to documents with yesterday. The capital program is pretty well advanced. If you went over there today you'd see probably 80% of the lobby work is complete. Still a construction zone, but when you walk in there you clearly get a sense of the scale of what's happening at the ground floor and how impactful that's going to be to reposition this building. The windows have all been replaced. The facade has been recolored. A lot of the infrastructure work has been done.

And we've got very strong tour activity from a mix of type of tenants. I'd say for two thirds of the space on the floors that are the 9,000-footers, it's primarily financial services and international companies. And then downstairs on a few floors that are a little bit larger, 16,000-foot floors, those are more general service businesses.

In the -- we've got four or five proposals out that we are trading with tenants. Most of them for the top third of the building. And rents in that part of the building are anywhere from $95 to $115 a foot as far as the term sheet numbers that we are going back and forth with ahead of time. So we're feeling like we're right on plan for that.

Okay. Great. And just Steve, quickly, at the base of the building, the rent differential between that sort of 100 to 110 at the top?

Yes, so it's a tale of two cities in that building. The bottom nine floors -- two of which have already been leased now, so there's only seven floors left of space to worry about -- are 16,000 feet there. They don't have the big open views of Central Park we have upstairs. But that's still sort of low 70s rents, which are right in line with underwriting and put it in a very good place as far as being competitive in the market.

Great. Thanks for the time.

Alex Goldfarb, Sandler O'Neill.

Two questions here. One, Marc, on the One Vanderbilt approvals from last night, I think you said the Manhattan Borough President, she approved it. What about Dan -- I'm going to boggle his name, but Dan the local district councilmember, is he also signed off on it now?

Yes, the city -- the project comes before city council as I guess what we would call the last stop or the fourth prong of what I described earlier. So Dan Garodnick is the local councilman who has been sort of intimately involved and knowledgeable with the project. The entire city council will act on this. So Dan and the rest of the council are extremely important in terms of obtaining final approval, but that comes later on in April or May.

Okay. So the Borough President, she signed off on it. Now the next political hurdle is going to the Council as a whole. But presumably Dan is on board if the borough --

I don't want to -- the Borough President gave her recommendation yesterday, last night. And it goes now before the city planning commission because there's a lot of -- it's a very -- there's a lot of technical features to this project that have to go first before the city administration planning. And then with -- hopefully with their support and affirmative vote, it then goes to the city council for final vote.

Okay, cool. Second question -- and Matt, again, thank you for the enhanced retail disclosure. Just curious, the vacancy when you look in the columns, obviously you show the current in-place rent versus what you think the mark to market would be. And then there's the vacancy where obviously there's nothing in place, but there's the market rent of that vacant space. And all of that vacant space is materially higher than what you had in place as far as what the mark to market is on the in-place.

So is this stuff that you -- is this vacancy that you've acquired, or this is stuff that you're holding vacant off market waiting to obviously hit those numbers?

No, this is more vacancy that we've acquired recently. If you think particularly about what we've acquired in 2014, we acquired a lot of things that were either vacant or were anticipated to be vacant so we could re-tenant them. So those are more recent vintage than the occupied space.

Okay. And just for a sense of markup, can you give sort of what the old rents that used to be in those spaces were?

It would vary by property. But it's measured not in percentages, it's measured in multiples.

Okay, that's cool. Thank you.

Jed Reagan, Greenstreet Advisors.

It looked like on the concession side, tenant improvement dollars came in a little bit last quarter but free rent still on the higher side. Just wondering if you can talk broadly about trends you're seeing with concessions and when you expect those might start to improve in a meaningful way.

The numbers in any one quarters are so widely driven by whether or not we're doing large deals or small deals and how many of the deals we're doing are renewals as opposed to new transactions on space that's completely raw and needs a full concession package. So I don't know that you can glean a lot from the number from one quarter to the next. I'll tell you that, broadly speaking, there seems to be greater willingness on tenants to absorb rent increases as opposed to reduction of concessions.

Concessions are slowly coming down a little bit. Certainly by comparison to two years ago, they're down materially. But I think construction costs for tenants are going up not only because commodity prices are up and labor is up but also because how much tenants have to spend as they densify their offices. Their build-out, their needs are greater; more infrastructure, more furniture, more telecom. Everything that just goes into putting a lot of people in a same piece of space. And therefore, that explains why the tenants are willing to pay more rent but are resistant to really knocking down the concession. So I think it's going to be a slower reduction in concessions over the year where we'll see, alternatively, a bigger pop in rents as the year goes forward.

Okay, that's helpful. And then with the US dollar strengthening recently, just curious if you're seeing any evidence of impact in your retail portfolio just in terms of the fall-off in tourist traffic or weaker sales. And does that strong dollar change your growth strategy for Manhattan street or New York street retail at all?

No, to the contrary, we are busy on the leasing front and the retail portfolio as evidenced by the Diesel lease. And haven't seen any reported changes or certainly haven't felt it throughout the portfolio.

Okay, that's helpful. And actually any color you can offer on the Diesel lease in terms of economics?

I mean, it was an 83% increase from the prior rent, which was the Baccarat space. Very strong deal, and there's a lot of demand on Madison.

Okay. Thank you.

Ian Wiseman, Credit Suisse.

Just a quick follow-up on the Diesel deal. What was the motivating factor behind their move? I think they've only been in that location for five years.

You are referring to their Fifth Avenue location?

Yes, yes. Assuming they are leaving there.

Somebody paid them a fortune to leave. (laughter)

Let me ask you this question. What would be the rent differential between space in that -- for space on the Fifth Avenue location today versus what you're getting?

Probably 50%.

50% higher.

No, double. The rent on Fifth Avenue is more than twice the rent on Madison.

I got you. And when was their lease up? It wasn't -- how much term did they have left?

I think -- that was a sublease. I think they had through 2018, but I'm not positive.

Okay. All right, thank you.

Brad Burke, Goldman Sachs.

I had a follow-up to Manny's question on investment trends. I wanted to know as you've been talking to sources of capital over the past month, do you have a sense of how their allocations are trending this year versus what they were allocating last year?

Allocations to --?

Allocations to new investments in New York office specifically.

In Manhattan. So allocation specifically in the Manhattan office.

Right.

I don't know if we have that data. That's hard to tell what the relative allocation is. I would say that anyone who is investing domestically and in the commercial sector is -- you hear one. Manhattan is generally the top of the list in terms of desire to allocate. It's hard to say what percentage either of the whole portfolio or vis-a-vis other markets. But I think the -- I can't say the desire has increased. I think it's always there as their primary goal. We get calls daily, and that's not a exaggeration or embellishment. I mean, every day multiple, multiple calls from foreign, domestic, institutional, non-institutional people who either want to buy or joint venture. So it's hard to put that into a percentage allocation. It's just a very, very deep demand.

I think for every asset we have, it's really a matter of price. I mean, the demand is almost always there. It's a question of terms and price, which is, I think -- you see what's driving this market and driving these values to, in many cases, new peak levels over the prior peak in 2006 and 2007.

But, Isaac, I don't know if you have any sense specifically of percentage allocated.

No, I don't. But I think what you're saying is maybe it's still very strong, if not maybe a little bit higher, because you're seeing some foreign investors looking at different product types. Not just the trophy, glass and steel; they're looking at more of your B building, side-street product type like.

JoHo, which is a Japanese group, buying 4 49th and 24 and 28 West 25th and 40 West 25th. I think historically you wouldn't have seen that. So clearly the appetite is strongest. Those are the assets that are available.

Okay, that's helpful. And then maybe moving out of the city to the suburbs. Obviously you've had some leasing momentum there, and I know you wanted to sell more in the suburbs. Can you give us a sense of what you're seeing in cap rate momentum? And do you also have a sense whether there are buyers that are getting sticker shock in the city and are looking to allocate more to suburban property?

Right, there still haven't been enough trades to see exactly where cap rates are actually going. And every building, they're so unique in terms of triple net leases. Other buildings are 50% leased. But we have seen some transactions in Connecticut and in northern Jersey that have basically been people who have owned land or buildings in Brooklyn, Queens, the city, and they are 1031ing out of those assets into deals in Connecticut and Westchester. So we are seeing that as a little bit of a trend.

Yes, I think the sequence is generally the market first, and I think we are seeing market improvement. Then the financing; the financibility of these assets. And we are seeing decent bids out there from lenders and securitized and non-securitized lenders willing to lend at attractive rates up in some of these metro markets outside of New York City proper. And I think the last piece of that is then the investor demand driving cap rates to compress which -- I would think that's probably will be happening this year, just based on the first two prongs being in place.

I can't say that we can give you evidence or specifics to that effect. But you don't always want to be looking in the rearview mirror, so if you want to go out on the skis a little bit and make a bit of a forecast, I would say you will start to see those cap rates compress this year.

Okay, that's interesting. Thank you.

Jordan Sadler, KeyBanc Capital.

I wanted to follow up a little bit I think tangentially to the last question. And I appreciate the update since the investor day in early December. I can't help but notice that interest rates are down a full 50 basis points as you pointed out. So it increases the opportunity on the liability side of the balance sheet as you talked about. But what are you guys thinking on the asset side of the balance sheet given this pretty material shift?

I think that on the asset side, there's really two things. It enhances our strategy of selectively disposing of assets. We did a substantial amount of dispositions in 2014 that was kind of punctuated by the almost $0.5 billion sale of 180 Maiden Lane, which just closed I think this month. So that's a fairly significant deal right on the heels of 2 Herald, which I think also closed in the fourth quarter of December.

So we will continue to sell into that market. I don't think the 50 basis points means we'll sell more or less. We had a plan, we are on plan. Maybe it means on the margins we're going to get some higher pricing. I don't think the 50 basis points of treasury is necessarily basis point for basis point equal to a reduction in financing rates. Because when you get below 3.5% for 10-year money, I think it starts to get a bit sticky in terms of what the absolute rate will be for 10-year I owe money.

But clearly the financing rates have come in, and we'll take advantage of that on the liability side, as Andrew talked about. It should add incrementally to the sales. And obviously on our acquisitions, we are underwriting lower rates right now. So either higher-levered returns or it could drive pricing a bit further. But we are -- we tend to model on our underwriting everything is towards stabilized markets.

So we are never just taking the spot market cap rate and the spot market financing rate on acquisitions. We are always modeling the curve. We often -- on LIBOR, we'll model the curve plus a 50-basis-point cushion which I think many of you know. Some of you may not. We hold our exit cap rates pretty stable at levels far in excess of where the spot market cap rate are today. And I think that hurts us a bit on cap rate but it certainly protects us in the future against any kind of cap rate increase. And we keep our absolute level of returns pretty consistent, looking to stabilize at 6% or more current cash returns and 8% to 10% levered returns. And that probably translates into 6.5% to 8% unlevered returns.

So that, I think, is not varying greatly because of the interest rate decline. But on the margins it certainly is healthy.

Thanks for the color. And a follow-up for Steve, the demand for space from financial services specifically. I'm kind of curious, you guys had mentioned that in December, and it sounds like it's materializing. What's the nature of it and how deep is it?

I would say it's the largest user group in our portfolio as far as prospects right now. Total number of transactions in the pipeline, total square footage, part of that is reflective of the inventory that we currently have available. So I don't know that that's a barometer or gives us insight as to the overall market color. But based upon the kinds of buildings, the kinds of floors, the price points that were where we currently have availability: 10 East 53rd Street, Tower 46, 280 Park Avenue being the best examples, 600 Lex, are all geared towards financial service industry tenants.

Behind that, we've got some pretty good pipeline with the TAMI industry, information services in particular, where we've got high hopes that we are going to convert some of that over to some significant transactions.

Okay that's helpful. Thank you.

Vance Edelson, Morgan Stanley.

Terrific, thanks. I'll just start with another suburban question. Would you describe your sentiment around the suburbs as flexible at all, not just on cap rates and financing rates? But the given all the leasings signed at the end of December and that you're winning in the market with these assets, what's your appetite for curtailing dispositions? Or is it less a cyclical decision and more a secular feel for where you want to focus long term?

Well, you know, our suburban portfolio has -- I think serves an important function in terms of its fairly consistent cash flow. I mean, it's fairly low -- it's a low consumer on the capital end of things as compared to the Manhattan portfolio. So that's a certainly a great attraction to the portfolio and why I think it's always played a key role for us is that it's a relatively unencumbered portfolio. It's maintained occupancy in the low 80%s I think since we've acquired it sort of at a very tough period of time in 2007, 2008. The capital budget for that portfolio is very manageable and the market is picking up, so it's a contributor to the bottom line.

So we like that portfolio. It was pruned down from a much larger portfolio at the time we originally closed on the Reckson transaction. And we kept what we felt were the best properties in the best markets, and I think that proved to be true during the downturn.

And, you know, we had a team of about 30 people up there that run this portfolio in White Plains and Stamford that are I think best in class. And so everything we do, there's no wholesale decision to hold. There's no wholesale decision to sell. I think everything is -- we look at is fairly opportunistic. And if we can bring properties to stabilizations and a very strong bid comes back in the market and we have redeployment opportunities, then I think you'll see us execute on that program as we have in the past. But I don't see current conditions driving that significantly in one direction or the other. I think we're just going to continue with the plan.

Okay that's helpful. Then back on the tenant strength by vertical, so it's pretty widespread in the suburbs, and you also mentioned 280 Park being all financial services so to speak. And financial services representing the biggest user group now. If you had to compare the traditional verticals to TAMI though, can you just give us a feel -- do the traditionals still pale in comparison to tech and so forth when it comes to growth and your feel for future growth, or is it really becoming a more balanced market?

Well, I think we've been saying for the past couple of years quite frankly that the good news is that Manhattan is not as dependent upon financial services as what everybody felt years ago because of, one, the emergence of TAMI as being a big driver in the marketplace. So now it's TAMI, legal and financial services, and then followed by general business services. So you've got really four big groups providing diversification as far as tenant demand goes.

On the financial service side, I think it's mostly the same as what we've seen for the past year or year and a half, which is the profile of that group has been asset management, hedge funds, private equity, commercial banking. You haven't yet seen the really big banks and the investment banks active in the market. Although, I think there's a couple of requirements kicking around today that weren't there a year or a year and a half ago. And part of that's driven on the big investment banking requirements either by consolidations or lease expirations that are coming up.

And a lot of the brokers that I speak to are now I think generally have a shared view which is that the banks of are hopefully past understanding the regulations. Their new world environment. They are short on space. And nobody is sitting on a lot of excess inventory. And they are sort of primed to start to come back into the market as they figure out how they are going to grow their businesses. So we think that's going to be a big contributor in the period to come.

Okay, that's good color. Thank you.

Thank you. I'm not showing any further questions in queue. I'd like to turn the call back over to management for any further remarks.

Nothing further. We brought it in under an hour, so we thank all of you for listening in and look forward to next time.

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