SL Green Realty Corp (SLG) 2017 Q3 法說會逐字稿

Thank you, everybody for joining us, and welcome to the SL Green Realty Corp's Third Quarter 2017 Earnings 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 the forward-looking statements 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 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 financial measure -- sorry, 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 2017 earnings.

Thank you.

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

Okay. Good afternoon, everyone, and thank you for joining us today.

The results for the third quarter were very consistent with our prior guidance and commentary throughout the year. The results are reflective of a healthy market, one in which new supply has been met with increasing demand associated with private sector job growth that has already exceeded last year's totals. The level of uninterrupted job growth is record setting in New York City and is a major contributor to the tick-up in the third quarter leasing activity that is keeping overall vacancy between 9% and 10%.

Leasing market conditions strengthened in the third quarter as Midtown experienced its highest amount of quarterly leasing activity in the past 2 years. The October leasing reports, which are just coming out, show that the quarterly net absorption registered about 1.5 million square feet of net absorption on total leasing activity of approximately 5 million square feet in Midtown. That's reflective of a 19% increase in the trailing 5-year quarterly averages. Primarily, this activity was driven by financial services leasing activity, and we see that within our own portfolio.

Total city-wide year-to-date leasing activity has topped 21 million square feet, and the pipeline for a big lease transaction in the fourth quarter looks sizable. So taking that down a level to within our own portfolio, we've been able to sign, year-to-date, nearly 1.2 million square feet of commercial office leases in the Manhattan office portfolio, 489,000 square feet of which was done in Q3 alone. And our same-store net operating income increase of 1.9% trended up from the prior 2 quarters of the year, and we expect that trend to continue.

Our leasing pipeline remained strong at 840,000 square feet, of which leases out for signature and in negotiation account for over 350,000 such square feet, and we have about 500,000 square feet of deals in term sheet -- credible term sheet beyond that, that would more or less be deals for Q1 of 2018.

This pipeline, the 840,000 square feet, is larger than it was in early September, I think, when we last spoke about our pipeline results, and this is continuing to build. The mark-to-market on the deals we hope to close in the fourth quarter is approximately 11%, which would be within the range of our guidance for the year and consistent volumetrically with the goal of 1.6 million square feet of total leases signed. And this notwithstanding that the 1.6 million square foot stretch goal, that volume would double the amount of square footage that we had expiring in all of 2017.

While mark-to-market compressed in the second half of the year, we hope to see this trend reverse itself as leasing volumes increase consistent with the demand that I spoke of that was evident in Q3 and availabilities in new construction on the West Side is reduced as that space leases up.

I also want to mention that yesterday, we closed on our acquisition of a joint venture interest in Worldwide Plaza. It's a trophy asset with attractive going-in returns and an excellent tenant roster.

The relatively low price per square foot and significant future upside due to average in-place rents that are well below market made this opportunity highly appealing to us. It was also obviously highly financeable given the sub-4% interest rate for a 10-year fixed-rate financing that was closed simultaneously with the acquisition.

So we are very pleased to be partnering on this asset with our long-time friends and business partners at RXR and with NYRT with whom we've been in dialogue for quite some time now. And I think the Worldwide Plaza venture that you saw us close yesterday is definitely an outgrowth of that continuous dialogue we had with management and with the board of NYRT over that period of time.

The asset provides us with a greater presence in an area of town we have done quite well with, as in other investments such as 3 Columbus and 1745 Broadway, and we look forward to having Worldwide Plaza be a part of our portfolio.

Additionally on the investments front, we continued to use our investment capital to buy back shares of stock in the company, something we consider to be an extremely attractive investment proposition that will yield benefits to shareholders in the near and long term. We've taken a disciplined approach to these stock repurchases by funding this activity with proceeds of asset sales and internal cash flow and not through debt. I believe we saw the markets' appreciation of that approach last week when we issued $500 million of corporate bonds at a 3.25% interest rate for a 5-year term. Our return to the unsecured bond market is the culmination of many years of deliberate efforts to position ourselves within the bondholder community for ready access to the bond market at attractive and competitive rates.

Before opening this up to Q&A, I want to turn it over to Matt, who will spend a few minutes discussing our quarterly earnings results, results that were highly consistent with the guidance we've given throughout the year and at the beginning of the year, but guidance that I think was characterized, in some cases, as below what expectations were. And I think Matt will go through in detail exactly where our earnings were, why we're on track and why some of the consensus numbers out there were probably just wrong.

Thanks, Marc. And we do want to get to your questions, so rather than click through all of incomes statement line items, I'm going to hit the high points.

Last night, we reported FFO per share of $1.49, which, as Marc said, was below The Street estimates but is actually ahead of our internal estimates for the quarter by about $0.02 a share. Obviously, we don't provide quarterly guidance, and we don't have any plans to, so one would think there must have been something off from The Street numbers.

Important to note that these results are net of a $0.04 write-off of unamortized deferred financing costs related to the refinancing of 280 Park as a nonrecurring item.

In NOI, from a GAAP perspective, our properties continue to perform on plan for the first 9 months of the year.

Looking specifically at the third quarter, we saw a reduction in rental revenues of about $5 million relative to the second quarter primarily from $1.9 million of percentage rent at 1515 Broadway, which is recognized only in the second quarter of the year when it is received as per the lease.

We also recognized about $2 million of FAS 141 income at 187 Broadway in the second quarter upon the commencement of our redevelopment. We also sold Stamford Towers, which closed in the third quarter. That reduced rental revenues by about $2 million versus last quarter.

This telegraphed reduction in rental revenue quarter-over-quarter was coupled with the normal increase in operating expenses that we see in the third quarter of every year as real estate taxes reset on July 1 and there is the customary seasonality of utility expenses, which tend to be the highest in the third quarter and increased by $5 million over the second quarter this year.

From a cash NOI perspective, our same-store cash NOI performance improved, as expected, during the quarter, bringing us to a 1.3% increase for the first 9 months or 1.9% excluding lease termination income.

For 20 years, lease termination income has been a very reliable source of revenue. And as a result, we've always provided same-store cash NOI guidance, including that revenue stream. This year, unfortunately, has been different. Against the projection of $8 million of lease termination income for the year, that's our historical average, we've recorded only $2.5 million so far, and we don't see much, if any, termination income coming in the fourth quarter. This potential $5.5 million shortfall is a good news, bad news story. And the good news is that the tenants are still in place and occupancy is maintained. The bad news is that the shortfall weighs on earnings and same-store results such that we do not expect to hit our 2% to 3% same-store cash NOI guidance. However, excluding the effect of lease termination income, the customary way companies look at same-store performance, we expect to be within that range. So we're taking a serious look at whether we should provide guidance going forward excluding lease termination income since this previously reliable revenue stream can obviously be unpredictable, and we do not want it to mask the underlying performance of the portfolio.

In the debt and preferred equity portfolio, the $51.5 million of investment income we recorded in the third quarter, inclusive of the investment income that runs through the JV income statement, puts us well on track to achieve our $200 million target as the portfolio performs in line with our expectations. Relative to the second quarter, investment income dropped as a result of the $9 million of previously unrecognized interest income we recorded in the second quarter on our preferred equity investment at 885 Third. There was also $4 million less income recorded on our investments in 2 Herald Square in the third quarter as they were put on nonaccrual status in early August.

All in all, the debt business remains healthy and completely scalable as we continue to find opportunities to invest at attractive returns in New York City.

With regard to guidance, back on September 21, we issued an 8-K where we again reiterated our full year FFO guidance of $6.40 to $6.50 per share as well as highlighting the charge we were going to take on the 280 Park refinancing and the placement of 2 Herald on nonaccrual status. Still not sure that everyone saw that filing or adjusted their numbers as a result as I look at the FirstCall numbers. Nothing in our third quarter results or our view of the fourth quarter necessitates us adjusting our guidance range at this time.

Certainly, we would like to wrap up the year at the upper end of the range, and I guess everybody would. But with the shortfall in termination income of over $5 million and $5 million that we projected to receive upon the repayment of a debt investment after the sponsors sold the property, which is now on hold, while we are maintaining our guidance range, we would now expect to be closer to the midpoint of the range versus the upper end.

With that, we can open it up to Q&A.

(Operator Instructions) Our first question comes from Craig Mailman with KeyBanc.

Just curious if you could give us an update maybe on the status of the 1515 Broadway sale or any other deals you may have out in the market?

Sure. It's Andrew. 1515 continues to be in negotiation. As we indicated on last call, sale of JV interests are a lot more complex than sale of real estate. So I think you saw us close 16 Court Street and several Suburban sales in the quarter. 1515, still on track but taking its time. Based on the complexity of the transaction, we're doing there.

That's helpful. And then, Marc, of the 350,000 square feet out for signature, I mean, is that what you guys are kind of anticipating could close by quarter-end at this point?

Well, I mean, in addition to that, there's about 500,000 square feet in term sheet, and some of that term sheet will migrate to closed deals also. So our goal is typically to always hope to close just about all that's -- negotiating lease documents that are out for signature, plus some portion of that term sheet. So that'll put us right around the 1.6 million. We could be 50,000 high, 50,000 low but at least, as it sits, provided everything in that -- in the lease out category makes. And traditionally, that's got a pretty high percentage attached to it. It would be 350,000 plus some portion of the 500,000 in term sheet deals also signed third quarter.

And could you comment if any of that includes One Vanderbilt?

No, I can't really go into any detail on the composition of deals that we're kind of negotiating and chasing, whether it's One Vanderbilt or any other building. I mean, that's -- this is a competitive market. We sign 250 leases a year. I think we like to keep sort of illumination around any of those deals with regards to any of the buildings under wraps until -- when and until leases are finalized.

(Operator Instructions) And our next question comes from John Kim with the BMO Capital Markets.

I wondering on the 4% cash re-leasing spread achieved this quarter. It's below what you indicated as far as mark-to-market for the rest of the year. But I was curious what the vintage was of the leases that were expiring this quarter that led to the relatively low re-lease spreads this quarter.

I think we have to look at that -- I'm not sure. If you're talking about vintage like when were the leases signed relative to now that we're being replaced, I mean, our average lease term is 10 years, but that's not sufficient to say, well, they're probably 10-year deals. We have to, I guess, take a look. We don't necessarily look at it in that context, but we certainly can. But I'd say in general, they're probably 10-year-plus deals, but -- that are rolling off. In some cases, maybe 5 to 7; in other cases, maybe longer. But we'd have to pull that together. Matt, do we have anything close to that?

Not in my fingertips. But I just want to make clear, too, I mean, the one quarter that's -- it's all based on the leasing activity in any one quarter. So we had said earlier in the year we were well exceeding our expectations, but that the pipeline had mark-to-market that was lower. And we had maintained for the full year our 11% to 14% mark-to-market objective, and we said at 11% through 9 months, and Marc highlighted that the fourth quarter deals that we expect to sign are in the 11s as well. So we're sticking to that 11% to 14% for the full year. Wouldn't focus too much on a 4% quarter.

And let me just add to it to give you a little bit of color on it. It was -- if you looked at all the deals that we signed across the portfolio, the majority of the buildings had a mark-to-market that was in line or better than what our guidance was, and the weighted average was really skewed by just 2 buildings. So if you look whole portfolio, the mark-to-market was well above 4%, well in line of where our 11%-plus guidance was if not for those 2 buildings where we had a couple of high-rent deals that had burned off.

Okay, that's helpful. And then also on One Vanderbilt. Can you just discuss the leasing achieved this quarter with the German banks and whether or not that fell into your underwriting range of $130 to $150 per square foot?

You, Steve, or I can.

It was safely within our underwrite assumptions.

I think it exceeded it.

I just pointed that.

It did exceed it.

Exceeded -- it slightly exceeded underwriting. It was certainly within all the parameters. It was early. So, I mean, in that respect, we didn't expect to sign anything in '17, but the opportunity arose. And they are terrific institution and banking organization with whom we're happy to welcome to One Vanderbilt. And we welcomed them ahead of our schedule, and slowly we have underwrite.

When you say exceeded, I mean, above that range or just exceeded relative to where the floors were -- floors that was leased at?

So obviously, we have underwrite rents for different portions of the building, and we have a weighted average for the entire building. And for the floor that was leased, that lease exceeded the underwriting.

Our next question comes from Alexander Goldfarb with Sandler O'Neill.

The first question is, on Worldwide Plaza, can you guys just sort of walk us through how you think about that investment from a return or yield perspective, if Cravath renews and if they don't, if they -- meaning that you have to go out and relet that space?

Well, I'll start. David's here, and he can sort of chime in. I mean, I think the going-in cap rate in the deal was upwards of 4.7% or 4.75%. Obviously, got some very efficient financing that we've put in place, so those yields are increased. It's leased now. The -- overall, because Nomura is way, way below market, the average rent overall for the building is well below market but long-dated. We think Cravath is a terrific tenant, and they occupy some of the prime areas of that building. And there'll be opportunities down the road with those tenants and others to, we think, be able to tap into the embedded rent opportunity to create, a, value, which will be evidenced with some kind of value creation, maybe re-capital event 3 to 5 years down the road. Levered returns should be -- certainly, in the position we're in because we only took 25% in the deal and our returns are fee enhanced -- double-digit returns. I don't know, David. Do you want to add anything to that or...

Well, I think it's a high cash-on-cash going-in yield. I think Cravath has 7 years of term left. Nomura has more. As Marc said, it's a below-market transaction, so I think there's a lot of upside and we have a lot of time to kind of work with the tenants and optimize the deal.

But, I mean, David, if you have to go and if they don't -- if they choose to go elsewhere, presumably they're going to give you a few years ahead in advance. So just curious what your yields would be if you have to go backfill that space. Just curious, the impact from your underwriting on the transaction.

I think we're comfortable with the rents that are in place and the market. It's highly consistent.

Okay. Okay. And then next question is for Matt. Matt, on the -- sorry to bug you on guidance, but it sort of imply sort of like a $1.61 on the fourth quarter. Are there any particular areas where we're going to see whether it's an increase in either seasonal income or maybe any sort of onetime items or operating expense or something that's going to drive this sort of $0.12 increase from where we are at -- in the third quarter?

Sure. Two big things. First, there was a $0.04 charge in the third quarter. So you just add that right back. And then seasonality is another probably $5 million to $6 million just at the property level. And then you have another couple million dollars or so of leases kicking in at various properties. So it's primarily property driven and then the $0.04 charge, nonrecurring, that we took in the quarter -- third quarter.

Our next question comes from Manny Korchman with Citi.

It's Michael Bilerman here with Manny. Marc, I'm curious how you think about the cadence you'll have going forward either on the acquisition front of either buildings or of your stock relative to disposition volumes and bringing those in line. And I recognize you're still negotiating 1515 and 600 Lexington is on the market, I'm sure some other things that you have teed up. But how should investors think about when those decisions would be now to the market to when you have the confidence to go out and put additional capital to work before those are done?

Well, Michael, we've been doing this for a long time, so I don't think there's any shift here in cadence or otherwise in terms of how we approach the business, which is typically harvesting gains and reinvesting in high-quality opportunities. I think that's what we've done. I think that's what we'll continue to do. We sold 16 Court, closed on that deal, regenerated those proceeds into Worldwide Plaza. We think it's an uptick in returns and in asset quality even though 16 Court is a very good building. And hopefully, the guys will do well with the building. But it's always for us about trying to lift same-store NOI CAGR, trying to lift portfolio value, trying to lift total returns. And the way we do -- have done it historically, I think we'll continue to do that, is through a very measured, balanced approach of selling assets and using those proceeds generally tax efficiently to make new acquisitions and, of late, also looking at our stock as one additional but attractive opportunity, which also would get a lot of attention for use of investment proceeds. So I think you'll see, as I said on the last call when the question was asked, we'll be doing stock buybacks and asset acquisitions when we think the opportunities sort of check all the boxes from our standpoint with compelling returns being a big component of that.

Should we expect sales in the fourth quarter at this point in terms of proceeds generated?

Well, I think Andrew just answered that question 1 or 2 questions ago about somebody might -- I mean, if you're calling a sale a partial interest sale, I thought Andrew said we're on track to try and complete 1515 by year-end. So if that's the case, then I'll have to say yes that we would expect to close more in this quarter.

And then just a comment. I would agree providing same-store NOI without and with lease term fees or just break out lease term fees would be something that I think would be very good. And then I know you won't provide quarterly guidance, but I do think providing any onetime items, clearly the entire analytical community was significantly higher than what you reported. So calling out any onetimers that may impact the quarter, I think, will help not get some of the negative reactions when the numbers come out.

Yes. I'm not sure I would agree with the characterization of lease term fees as one-timers, as we probably have 20 years of history where the lease termination fees were fairly well projectable and recurring to the extent that I think to refer to them as onetimers is -- could be misleading as...

I wasn't referring to...

I don't want to debate it. It's under review. We'll take a look at it. Whether we put it in, take it out, instead of $8 million, it's $4 million, we'll talk about that in December. But I think when you look at our track record year after year after year of projecting guidance and meeting that guidance, it's as good as -- well, I'm going to say it's better than almost anybody on The Street in terms of meeting our goals. And in many years, we are able to move up; in many years, we're within. Very few, if any, years that we're down. So I think we do a very good job there. But thank you.

Our next question comes from Michael Lewis with SunTrust.

I just wanted to come back to Worldwide Plaza for a minute. There's a pretty sizable capital reserve there. And New York REIT apparently thinks that, that building could be much more valuable in, call it, 2 years when they intend to sell the other half of it. Given that it's well leased on long-term leases, I mean, do you see the same kind of opportunity? And what kind of is that capital spend going to be? Or what are you going to spend it on?

You know what, I don't want to -- it's really -- NYRT's approach to the asset, I think, if -- you really have to ask them about it. We believe it's a great asset with a great return profile, with embedded rents that are below market, great tenant roster. And we think we'll be able to create value because that's what we do. Us and along with Scott, I think we both have a track record of figuring out ways -- even when the asset's been sort of well cared for in prior hands, it's our job to step into the situation, improve the asset maybe physically, maybe in other ways, maybe through some strategic leasing objectives that we're going to develop together and roll out over the years. I can't -- I wouldn't want to sit here right now and sort of get into their business plan, their hold period, whether it's achievable or not. I mean, we just spent $108 million to close the transaction yesterday that we think will have significant upside. And I think generally, we've proven that to be true. So generally or always, I'm going to say, in terms of assets that we've come full circle on and those that we hold in portfolio. So we're very excited to be working with Scott and with NYRT. We will certainly move heaven and earth to try and -- in the near term, they view it as 2. I referenced earlier 3 to 5. I think that's semantics. The point is in near term, let's create some value and then let's try and capitalize on the value.

Okay, great. My second question is about the debt and preferred equity book. It was a little less active this quarter, and I was wondering if that was just a function of the opportunities you just had in the quarter, which is a small time period, or it looks like also maybe the size of that book has gotten up maybe towards your upper limit as you'd like to see it as a percentage of assets. So just curious there if the activity is due to either of those 2 things.

It's Dave. Now look, as we've said, it's a scalable business. I think we've said we're going to keep it to certain levels, and we're at those levels right now. We actually have a large pipeline and others -- and assets we sold in the last quarter. But it's not for lack of a pipeline; we have a large pipeline for the fourth quarter. But obviously, without growing the book significantly, either we have to syndicate a lot of it or either sell other positions or have payoffs. Or you're going to see lower origination volumes or at least growth in asset.

Our next question comes from Nick Yulico with UBS.

I think there's been 2 focal points of negativity on the New York City office market of late. First, talk -- the net effective rents are down by some amount over the past year because of higher concessions. And secondly, the investment sales market is down meaningfully year-over-year. So somehow, I think the question is, does this mean that the New York City office market is just not as attractive as it was in recent years? I'd love to hear your thoughts on that.

Well, let's say -- there's 2 questions there. One has to deal with leasing concessions, one investment sales. Why don't we his investment sales first. Andrew?

I should go first. I think the volumes, obviously, are down year-over-year. I think a lot of that is reflective of the attractiveness of financing markets. And I also think you've seen a lot of velocity in the very recent past with our trade of 16 Court; the trade of 685 Third on Third Avenue, which was a very positive trade for the market, with a Japanese buyer; and the trades which were announced of the NYRT assets, the Twitter and Red Bull buildings and the 36th and 38th Street buildings, the West Side collection, all of which were done at very strong pricing. So I think the pricing has not been impacted. The velocity has been impacted because of the attractiveness of that financing market. And obviously, the volumes do reflect it, but there's a healthy amount of transaction activity in the market. So I think you're missing some of the very large [Stitham]-like or other bellwether trades of some of the last couple years, but there's still a healthy amount of velocity out there.

And just to add on, I think last year was the second-largest year in terms of volume in the last decade. And in the last month or so, about $3 billion to $4 billion worth of assets have actually hit the marketplace. This is Isaac, by the way.

And then, Steve, on net effective?

So on net effectives, Steve, or really concessions.

So we measure net effectives, obviously, relative to our budget, so specific to our portfolio, and how net effectives are trending to the rest of the market, I don't think, is as important commentary. But I can tell you that net effectives on the 1.15 million square feet signed year-to-date are actually up overbudget. Yes, concessions are higher than originally budgeted but offset by higher rents. So -- and I think that's further evidence to what we keep trying to reemphasize to people, that the market is better than some people's sentiment.

Yes. And I would just -- you shouldn't look at TIs much differently than other forms of expenses or even revenues. They will rise over time generally just due to the natural results of cost of construction. I mean, that's ultimately what you're getting at, is what does it cost to build out space to a level that's acceptable for a level of rent. Over the years, those construction costs are rising, hence the TIs rise, hence we budget for that. We're probably right on budget in terms of our TIs. You guys see the numbers. They were pretty much in line with the prior quarter and really the entire year. So if the answer -- if the question is, are they higher? Yes. Materially? No. Are they -- is it in line with our budget? Yes or maybe we'll do a little better. And is it offset by higher rents, which we're also achieving? Yes, in net effectives, I guess, on portfolio-wide they're up for us. So it's -- in very hot markets, you can drive those concessions down. And in bad markets, you may have to see them spike. But in general, markets like we have now, which are relatively balanced, it's typically an amount required to deliver a certain level of finish that is acceptable and customary for the kinds of tenants that are renting at these levels.

Okay, it's helpful. Just one other question. You talked about the mark-to-market on lease signings. If I look at the mark-to-market on commenced leases of 2% in the quarter, the number seemed low since you've been over double digit in the past year. So I'm just wondering if there was some -- a single lease that drove that commenced number low.

It's all -- it's Matt. It's all a matter of timing. So yes, there's probably something in there that drove it lower, and then there'll be something in a future quarter that drives it back to a normalized level. But it's all timing.

It's all the same pool of leases.

Yes.

It's just the difference between (inaudible) 4...

No matter when they were (inaudible).

Is just leasing commenced. But...

(inaudible)

That'll help. The commenced leases were previously in unsigned leases, and today's signed leases will be showing up as commenced next year. So I don't know that there's any -- shouldn't be any real difference. I mean, it's the same pool of leases.

It'll pull through eventually.

Our next question comes from James Feldman with Bank of America.

I know you talked about earlier a good pipeline of large financial leasing activity scheduled for the fourth quarter. I guess, Steve, can you just give more color on kind of just the tone and sentiment in the leasing market coming out of the summer? And now that we're squarely into fall and looking ahead to fourth quarter and into next year, what seems like it might be changing? Or is it more of the same?

Well, I think if you look at many of the brokerage reports who are just hitting The Street now, what you're seeing is third quarter was a very strong year. We're on track, for market-wise, to have a very strong year. Through third quarter of '17, there's been 24.5 million square feet of leases signed. By comparison to 2016, where there was just under 30 million signed for the entire year, you could sort of extrapolate that and say, okay, we're going to have a very good year by historical terms. A lot of our leasing that we've seen in the portfolio in the third quarter were dominated by financial services, legal and TAMI. And in the deals that we're negotiating now, it's primarily financial and legal, less TAMI. And that's not a function of less TAMI demand, it's more a function of the product that we have available right now. So we've got a wide diversity of tenant demand across the portfolio, and I don't think there's been any real change from what we said about the overall depth of the market either in price point or product cost. It's more of the same from what we've been saying all year other than where we think we're -- that we're in a safe place to meet our targets.

Okay. And then can you guys talk about just foreign capital? Any shifts there? Who -- which countries seem to be stepping up? Who's pulling back and what that means for the transactions that might be on the market?

Yes, I think European and Japanese stepping up. China clearly pausing, pending some of the outcomes of the meetings they're having now. And still a lot of interest on the debt side from Korean capital. They're fueling a lot of the deals out there. And steady interest from Canadians.

And any change in underwriting assumptions?

No. No, I think people are still -- the -- both the debt submissions we're getting and the indications we're getting from the brokers or the people are pretty static in terms their underwriting assumptions. Still underwriting, similar growth, et cetera.

Our next question comes from Nicholas Stelzner with Morgan Stanley.

So on same-store NOI growth, you said that you expect to hit the 2% to 3% range. If you exclude termination income, you're up 1.9% today. So just curious what the big-ticket items are that will get you there through the end of the year?

Well, I mean, to get to the 2%, you kind of just need to maintain the 1.9% we achieved for the quarter, although we do expect to be slightly better in the fourth due in part to some of the things I highlighted earlier in the property portfolio, seasonality that happens in the third quarter. So fourth quarter is definitely better, and you will have some leases kick in, in the fourth quarter. And then we expect that trajectory to continue beyond the fourth quarter.

Okay, great. And then just one other one on One Vanderbilt. How do you characterize the tenant activity there also? I know it's early and you discussed the lease has been signed already. But in your conversation with tenants at One Vanderbilt, how do the rents and lease terms compare to what you originally expected?

We're seeing -- we're doing a lot of tenant presentations, and we're seeing a good, strong enthusiasm from both the brokerage and the tenants that we're presenting to. So that's why we think we're right on plan as far as expectations and the dialogue that we're having with prospective tenants.

Our next question comes from Steve Sakwa with Evercore ISI.

I know you guys are going to be hosting an Investor Day in a month or so, so I don't want to jump too far ahead to '18. But when I look at Page 46 and I look at the lease expiration schedule, it looks like -- I'm assuming that your current sort of average asking rent per foot is an updated kind of thought process on where the market is today. And you've got almost a 20% uplift on the consolidated and a slightly larger roll-down on the unconsolidated or JV asset. Can you just maybe talk about what's going on in both of those buckets?

Yes, Steve, it's Matt. So important to think about that schedule and includes retail. So it's not just office there. I think on the consolidated side, the 20% up is probably influenced by retail. On the JV side, I think we have a couple of leases similar to what we saw in the third quarter here, where you have some maybe older-vintage leases with escalations that have pumped up the in-place rents. But nothing -- we'll obviously give you much more guidance when we come out on December 4 with a view of '18, but -- and we'll do a lot more leasing beyond what you see expiring in that schedule. But that's the gist of what's going on in those numbers at this point.

Okay. And then I guess, Marc, just going back to kind of capital deployment. I mean, I can appreciate you trying to sort of play in all 3 buckets: Acquisitions, the DPE business and share buybacks. Just when you think about kind of the returns, how do they sort of stack up to one another? And, I mean, is there a spread or a difference that you want in sort of an acquisition versus the share buyback versus the DPE? I'm just sort of thinking about how you guys sort of look at it mechanically.

Well, the answer is there is, but their risk-adjusted returns, obviously, is not just line up the returns.

There's also tax considerations.

And tax considerations as well.

Yes.

And there's also platform considerations. A purchase of a building might incrementally, at a moment in time, be, let's call it, a lower IRR than a stock buyback. But the ability to scale up the platform, control more tenants, have more options to do the creative deals we do, which are sometimes multi-tenant deals, in order to unlock embedded rent growth or other ways we use our presence and scale in the city and relationship with these tenants to our overall portfolio advantage, it's not just -- you'll get that with a stock buyback. That stock buyback is literally more of a financial exercise, if you will. If something is trading cheap enough and you own it, you want to own more of it. And that's pretty compelling. It's also pretty -- not risky because you already own the asset. There's a lot of economic and strategic reasons why we will look to increase our asset portfolio, particularly in parts of the market where we may be underrepresented and want to be -- have a great representation. And on the DPE, it's kind of a funny situation. Some people look at that as a risky form of business. We look at it as the only form of the -- the only one of those 3 buckets that had significant equity subordination. So with DPE, you're not left without a risk. We typically have approximately a 30% equity cushion on average because we're 70% less dollar, and yet we're still making 9%, 9.5%, in that range, sometimes 10%. So on a risk-adjusted basis, you could argue that's one of the champions for the 3 buckets because of that equity subordination. However, it also doesn't necessarily provide the scale and presence in an equity sense unless you're able to consensually use that DPE bucket to create pipeline, which, obviously, we've done successfully in the past. So there are qualitative reasons. There are quantitative reasons. All of them are kind of double-digit exercises. So, I mean, that goes without saying. But among the 3 buckets, we usually pick opportunities as they relate to themselves. Which are the best debt yields? Which are the best equity deals? And when do we feel is the best time to buy stock? And I think right now, we're deploying into those 3 buckets on a very rational basis.

(Operator Instructions) Our next question comes from Jed Reagan with Green Street Advisors.

I think you guys had put an acquisition target of $650 million or more for the year. I'm just curious if you expect to reach that number. And then I was just interested on the comment you made about other parts of the market where you feel like you might be underrepresented. So just curious if you can talk a little bit about what those areas might be and why you like them.

Well, on the $650 million, that's always a gross target. That's not net equity, never has been. So my instinct is we're somewhere between very close or in excess, as we said.

Worldwide.

I guess 25% Worldwide. So that would...

Sure.

Of course. Yes.

What's up? So that doesn't mean we don't have more in pipeline. So we are working on some active pipeline right now. And whether those deals are fourth quarter deals or beginning of 2018, that seems a little too early to tell right now. But we're pretty much where we want to be on the acquisition front and on the disposition front. As it relates to other parts of the market, we're obviously very invested in and have a major presence in the East Midtown market in particular. And one other areas, as an example, that we think has great supply and demand metrics, low availability, almost nonexistent big lots in Midtown South. So I'd say that's one of our real preferred areas of acquisition. Our last big acquisition prior to Worldwide was the One Madison in that area. We own One Madison. We own 304 Park Avenue South and 2 buildings on Sixth Ave. And we're constantly scouring for more in that area because we think the demand profile there, the types of tenants and the types of opportunities, which are somewhat limited given the inventory down there, are particularly appealing. So we'll try and do deals like that, even extrapolating that a little further downtown to 110 Greene, which we did about 1.5 years ago. Those kinds of deals, which that has a significant office component at 110 Greene Street, is our attempt to gain exposure in high-quality buildings in those submarkets where we think there's relatively good demand.

Okay, appreciate that. And then just curious what you guys are seeing on the ground in terms of the street retail environment, fundamentals-wise and cap rate trends. Any changes there? And do you kind of -- given that, do you feel comfortable with your current positioning in that space?

I think we feel comfortable with our current position because we're generally very well leased across our portfolio. There's definitely submarkets where there's quite a bit of vacancy right now given sort of a lack of tenant demand -- some combination of lack of tenant demand and slowness to adjust to asking price on rents. So there are definitely some markets with vacancy that are sort of shaking out. We've seen that type of shakeout before in various markets, Upper Madison specifically. Other submarkets come to mind. We're somewhat insulated from that, again, because we're generally pretty well leased on the retail side and we have good remaining term on our leases. And I think we're comfortable with our positioning in the submarkets we're in.

And do you have an view on where -- kind of where cap rates are today for sort of stabilized street retail product?

It's tough to tell because it's so asset specific. You have in-place rents below market, at market, above market. Remaining lease term short, long, medium. So there haven't been a lot of retail trades this year that give a lot of visibility into where cap rates are. So I'd hesitate to -- I think there's an asset on the market now in SoHo that is now an LMNH lease, which is fairly long in term. Be curious to see where that trade prints. 522 Fifth was on the market. That asset hasn't cleared, but that would be another sort of an indicative trade. So it's sort of tough to peg exactly where cap rates are right now on the retail side.

And I'm not showing any further question at this time. I'd like to turn the call back over to our host.

Okay, great. Thank you for the questions today. We look forward to seeing everyone about 1.5 months on December 4 for the investor meeting, which is going to be starting at 9 a.m. as we did last year. We promise it will be informative, as it always is, but also lively, spirited. And hopefully, we'll have a lot of good things to talk about for the upcoming year and beyond. So we look forward to seeing everybody. Thanks.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect, and have a wonderful day.