SL Green Realty Corp. (SLG) Q3 2011 Earnings Report, Transcript and Summary

Steven M. Durels - Executive Vice President and Director of Leasing Matt DiLiberto - Andrew W. Mathias - President Stephen L. Green - Founder, Chairman and Chairman of Executive Committee Heidi Gillette - Director of Investor Relations James Mead - Chief Financial Officer Marc Holliday - Chief Executive Officer, Director and Member of Executive Committee

Jonathan Habermann - Goldman Sachs Group Inc., Research Division Ross T. Nussbaum - UBS Investment Bank, Research Division Blaine Heck - Wells Fargo Securities, LLC, Research Division James C. Feldman - BofA Merrill Lynch, Research Division Jordan Sadler - KeyBanc Capital Markets Inc., Research Division Joshua Attie - Citigroup Inc, Research Division Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division Anthony Paolone - JP Morgan Chase & Co, Research Division Sheila McGrath - Keefe, Bruyette, & Woods, Inc., Research Division Steven Benyik - Jefferies & Company, Inc., Research Division Michael Knott - Green Street Advisors, Inc., Research Division John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division Robert Stevenson - Macquarie Research

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 SL Green Realty Earnings Conference Call. My name is Katie, and I'll be your coordinator for today. [Operator Instructions] I would now like to now hand the call over to Heidi Gillette. Please proceed.

Thank you everybody for joining us, and welcome to SL Green Realty Corp's Third Quarter 2011 Earnings Results Conference Call. This conference call is being recorded. At this time, the company would also like to remind listeners that during the call, management may make forward-looking statements. Actual results may differ from the forward-looking statements that management may make today. Additional information regarding the factors that could cause such differences appear in the MD&A section of the company's Form 10-K and other reports filed by the company with the Securities and Exchange Commission. Also during today's conference call, the company may discuss non-GAAP financial measures as defined by SEC Regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure discussed and the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found on the company's website at www.slgreen.com by selecting Press Release regarding the company's third quarter earnings. Before turning the call over to Marc Holliday, Chief Executive Officer of SL Green Realty Corp., I would like to ask that you please mark your calendars for Monday, December 5, for SL Green's Annual Investor Conference. If you would like to be added to the e-mailing list, please e-mail your full contact information to slg.2011@slgreen.com. For those of you participating in the Q&A portion of the call, again, please limit your questions to 2 per person. Thank you. I will now turn the call over to Marc Holliday. Please go ahead, Marc.

Thank you, Heidi, and good afternoon, everyone. Thank you for joining us in what I know is a busy day of calls for many of you. I'm obviously very pleased with our results for the third quarter reported last evening and has reinforced this morning by several additional announcements we made for activities largely occurring after the quarter's results. We take great satisfaction in knowing these results were distributed throughout all major areas of the firm, including leasing, operations, investments, finance. With respect to leasing, the stats underscore what was an enormously productive, busy summer with over 625,000 square feet of leases signed in 60 different transactions in Manhattan alone. Accordingly, we have already met our leasing goals for the New York portfolio only 9 months into the year, and I still expect that we will eclipse to 2 million square foot mark for the full year, consistent with my guidance back in July. Industry is represented by this leasing activity, ran the gamut from healthcare, media, to fashion and apparel, insurance and finance. However, again, notably absent from our portfolio this quarter was any significant activity among the banking and security sector, a theme we've been conveying to you throughout the year. And that theme is the fact that the other 60% -- 60%, 65% of the industries in Manhattan are picking up the bulk of the activity in new and renewal leasing while the commercial banks and investment banks tend to be in somewhat of a neutral mode at this point. As I mentioned earlier, we have a fairly good remaining pipeline of activity for the fourth quarter. At the moment, we certainly don't see tenants backing off of their desire to lock in today's rates with some growth and expansion included in most instances. Operationally, we had good core performance as evidenced by positive mark-to-markets, same-store NOI growth, occupancy gains and continuing expense control. As you may recall, we set very ambitious operating performance measures for ourselves at the beginning of the year and with a little over 2 months to go, it certainly seems we will meet or exceed all of these targets. That's obviously, for us, a very fortunate position to be in given the most recent headwinds of the current market and also in light of the extraordinary amount of investment activity that we undertook throughout the year, requiring us to access sufficient debt and equity capital to fund those activities at all point throughout this year. A high level of investment activity demonstrated over the past 4 months is typical of the way in which we actively manage our portfolio for growth, monetization of significant gains and simply don't adopt a hold-and-wait strategy. On the intake, we concluded 3 significant transactions, predominantly all off market and all extremely high quality and in excellent locations in Midtown Manhattan. Within our very profitable retail business line, the DFR transaction 1552 Broadway and 747 Madison Avenue fits squarely within such program and will provide for near and long-term upside to this company. The DFR opportunity came about through the mining of our extensive relationships, both with the seller and with Stonehenge, a prominent and successful New York City owner and operator of multi-family properties throughout Manhattan. Likewise, the deal at 1552 and 1560 Broadway came about as a result of our relationship with ownership at 1560 Broadway and our proprietary strategy of creating almost 50,000 square feet of retail and signage opportunity in a prime location in Times Square. And that transaction, in conjunction with our partner, Jeff Sutton, we will able to reposition this property and realize on its upside potential in the near term. It's interesting to note that while much of our activity over the past 2 years has been centered around opportunistic office investments, most recently, we have backed away from such deals as cap rates have contracted to under 5%, and our focus is then turned to an expansion of the retail portfolio and increased activity, structured finance, consistent with remarks made earlier this year about our appetite for putting out more structured capital in Manhattan centric opportunities. As to the financing of these activities, Jim and Matt will go into further detail about our recent activities. However, I would just like to note that as we've continued to expand the asset side of the balance sheet, we've kept our leverage ratios fairly constant through a combination of internally generated cash flow -- internally generated retained cash flow due to our below-market dividend rate, equity raises through the ATM and asset sales where we continue to demonstrate our desire and willingness to bring value-add opportunities round-trip and realize significant cash gains for shareholders. At our investor meeting in December, which Heidi just spoke of, we will go into further detail regarding our balance sheet strategy for 2012. While the market still seems to be in a net growth mode, the trajectory of the recovery slowed in September. After 2 very good years of economic activity in New York City, in 2010 and '11, it now looks like the market is set to take a breather while economic conditions in Europe play out and the debt markets re-establishes at better levels. While the translation of headline risks to leasing activity seemed to weigh heavily on REIT investor's minds, it doesn't take away from the strong showing 2011 the second consecutive year that the market experienced significant growth and improvement in many important areas. Wall Street profits, while projected to be down sharply in Q3, are still on track to register $20 billion of profits in 2011. Average private sector job growth for the year will likely come in around 51,000 jobs, of which almost half of these are office using jobs, which is a very healthy growth rate in each of those categories by historic levels. While these levels may moderate in 2012 and are projected to moderate in 2012, they're still expected to be positive on both levels in 2012, not negative. This, in turn, has lead to continued absorption, driving the overall Manhattan office vacancy rate down from 10.9% last year to 9.3% currently, which reflects absorption of almost 4 million square feet. And near-record tourism has helped push hotel ADRs and occupancies up, with occupancies at almost 90% currently, not withstanding the significant additional units that were added to the hotel inventory in the past 2 years. All of this points to a very favorable setting for SL Green in which we will continue to execute a very deliberate plan of repositioning and leasing up opportunistic purchases, continuing to mind the portfolio for realized capital gains, financing our activities through asset sales, head issuances, the ATM and retain cash flow and conserving our abundant liquidity, new opportunities that may emerge in a transitional market. Given our fairly low embedded in-place rents and only 1 million square feet of space scheduled to expire and roll in 2012 and the lack of any material near-term debt maturities, we are in great shape defensively. I think we're in great shape offensively. I think were just generally in very good shape overall. So rest assured, we are ready for which ever direction this market breaks in 2012. And with that, let me turn it over to Andrew Mathias.

Good afternoon, everybody. The third quarter marked one of our most active on the investment front with the full power of our platform on display in the office, retail and structured finance businesses. We continue to see and hear of auction processes, and instead focused our time and capital on off-market and tax-sensitive situations where our structuring expertise can gain us a leg up. The broader Manhattan market continued to chug along, and the 2 billion or so deals we signaled last call were about to go to contract have all, in fact, materialized. Buyers continue to show faith in the resiliency of Manhattan rents and continued low rates, hitting up large and small deals in every submarket of the city. On SL Green's plate, in addition to the DFR portfolio, which Marc discussed, we found some great retail opportunities in 1552, 1560 Broadway and 747 Madison. 1552 and 1560 represents the highest profile availability in Times Square, a retail submarket with no vacancy. What we couldn't say on the last call is that we created a way to dramatically increase the envelope of the site via our 7-year lease at 1560 Broadway and convert side street retail to Broadway frontage. The complexity of this deal was unmatched and a real credit to our investment, legal and management and construction teams who were able to synthesize every aspect of this deal. Now the execution phase begins, and I'm pleased to report that we have had some very encouraging conversations with retailers about the site thus far as we think the end product here has limitless potential in terms of visibility and signage. In the quarter, we also closed on our purchase of 747 Madison Avenue in a joint venture with Jeff and Harel, essentially reconstituting our partnership from our Pace project downtown at 180 Broadway. This is the venture's first foray into the Upper Madison submarket and with Valentino vacating its store, we got a prime corner vacancy to market in an area that's currently hot and experiencing a lot of demand from very high-end retailers. Today, we announced 2 sales as well, exiting the remaining condo interests at 141 Fifth Avenue and liquidating our fee interests in 292 Madison. Fee interest became somewhat nonstrategic when the mortgage debt encumbering the leasehold traded earlier in the year. The opportunity to exit this position at a profit to our basis and deleverage as a result, was too compelling to pass up on an asset we consider nonstrategic. Similar story on 141 Fifth Avenue where we had originally purchased the building in 2005 and proceeded to sell the upper floors to a condo converter immediately, sell the second floor to an office user several years later and re-tenant the retail stores with HSBC and Cole Haan. The sale we announced today at a sub-5% cash cap rate completes the investment, which hopefully makes someway -- someday be a business goal case on maximizing the highest invest use of components of buildings. Our equity IRR on the deal is north of 60% over our 6-year hold period. As I indicated on the last call, we had a very active quarter on the structured finance front as well, including several large high-profile preferred equity investments at compelling yields. Illiquidity in the CMBS markets hasn't slowed demand for buildings. It has created some inefficiencies in capital stocks that we're happy to price and fill. Each of the acquisition financings this quarter feature significant new cash equity invested by the sponsors of these deals, a state-of-the-art structural protections for SL Green. Subsequent to quarter end, we marked up and sold a $50 million interest in our largest preferred equity investment originated during the quarter and sold another $28.5 million participation in a bridge loan we had restructured, demonstrating liquidity and the value in our origination platform. As we look to the fourth quarter, we would expect the transaction volume to moderate. While the property markets haven't yet experienced any backup, we expect to see some investor pause while they seek greater clarity on rent growth and value added situations. However, for each sideline investor, there's been typically several others waiting to take their places at the contract table. And we don't see that trend changing. Now I'd like to turn it over to Jim to take you through the numbers.

Thanks, Andrew. Again, I'd like to reemphasize the point that based on all of our metrics, mark-to-market volume of leasing, same-store NOI growth, accretive capital deployment and successful funding activities, we had a great quarter. I'm going to start now on the capital and funding side and then let Matt go over some of the quarter's operating results in more detail. We continue to be active investors, as you just heard. In total, we invested and committed $812 million this quarter. Included in that number was $348 million of new investments in the debt and preferred equity side that will provide a weighted average yield to us of 9.3%. That brings our total portfolio to almost $900 million or 6.4% of today's total enterprise value, just about where we started the year at. Real estate investments and commitments during the quarter totaled $464 million and include deals we've already discussed today, 1552 Broadway, 747 Madison Avenue and the contracted DFR commitment. We're using a combination of tools to support our financial capacity and maintain liquidity. Early in the quarter, we completed our second ATM program raising $80 million at an average $82 per share, share price, bringing our total new common equity this year to $525 million. We also put a new $250 million program in place, which hasn't been used yet. We continue our program of recycling capital in addition to having closed the sale of 28 West 44th Street last May and sales that Andrew mentioned just a moment ago, 141 Fifth Avenue and 292 Madison Avenue. That brings our total sales so far this year to about $300 million. We're considering additional sales to continue to recycle capital into higher growth opportunities and, importantly, to manage our credit ratios through this period in which we've had deployed a large amount of capital. From a liquidity standpoint, we've been careful to match our sources and uses, and we continue to carry liquidity at the end of the quarter that exceeded $1 billion. We've previously spoken about our desire to extend debt maturities and lock-in today's low fixed interest rates. Getting our first investment grade rating during the second quarter improved the company's access to the unsecured markets. Fortunately, the public debt markets have been, in essence, close to REITs now for several months. In August, we saw a brief opening of the window, and despite conflicting advice from our advisers, we decided to test the market with a small deal. The result was a 7-year, $250 million, 5-year bond issuance that was well executed in the face of what turned out to be an incredibly challenging day. This was the last unsecured bond offering done by a REIT. We're looking forward to a return of the debt markets to raise some additional capital, this time, we hope in a more meaningful amount. Finally, we spoke in our last conference call about replacing our existing $1.5 billion revolving credit facility, which matures in June of next year. It became clear during the summer that the European debt crisis, combined with a growing backlog of REIT revolving credit deals, would increase the challenges to arranging a new facility if we were to wait. So Matt and I accelerated our process to arrange a new facility. Today, I can say with confidence that we anticipate a closing of a new replacement revolving credit facility this quarter. We have the sponsorship and strong demand from the leading U.S. and international banks and expect an oversubscribed new facility with state-of-the-art investment grade structure and pricing. So more on this to come when we close. Now I'll turn it over to Matt.

Thanks, Jim. In past quarters when we discussed our results and provided our guidance for the remainder of 2011, we spent a significant amount time normalizing our results, discussing items like gains on debt investments, non-recurring fee streams or other items that generated significant profits for the company that created what the street likes to call noise in our results. However, for the third quarter, this normalization is essentially unnecessary because the $1.01 per share of FFO we reported is comparably quiet and driven by a strong core operating performance in our real estate and debt and preferred equity portfolios. With respect to the real estate portfolio, NOI overall met our expectations for the quarter. Our same-store NOI continued on a positive trajectory with growth of 3.6% for the first 9 months of the 2011. This performance has not only been driven by our leasing efforts, which were further evidenced during our announcement this morning, but also as a result of the efforts of our operations teams, both in Manhattan and in the Suburbs, who remain vigilant in managing our variable property operating expenses to offset increases in real estate taxes and labor. To that end, we have supplemented more basic strategies, such as fixed priced utility contracts with alternative expense management initiatives, including retrofitting lighting fixture and garages, stairwells and lobbies with LED fixtures, which reduces energy consumption by 50%, installing real time energy monitoring equipment in the New York City portfolio that optimizes building performance for moment-to-moment energy management. And we now have 13 energy star buildings in the suburbs. So our leasing teams keep the buildings full and work to increase rents. Our operations teams are doing an equivalent amount of heavy lifting to ensure that our expenses remain in check. Along with strong NOI during the quarter, we also saw an increase in all of our Manhattan occupancy statistics, achieving over 95% occupancy in our stabilized Manhattan office portfolio. Our Manhattan leasing metrics are trending well for 2011. We are on pace to lease over 2 million square feet of office space and have recognized a mark-to-market in Manhattan on signed office leases of over 6% through the first 9 months of the year. In the suburban portfolio, occupancy dropped 50 basis points sequentially to around 86%. That is still well ahead of market occupancy levels. In addition, we were able to achieve a mark-to-market on our third quarter office leasing in a suburban portfolio almost 2%. In markets that are undoubtedly challenging, this is a significant accomplishment. With regard to capital, the accelerated volume of leasing we have achieved in 2011, coupled with the 3 million square feet of leasing completed in 2010, has resulted in the company incurring higher aggregate leasing-related capital costs. This is not an indication that we are seeing a widening concession packages, its simply a function of the tremendous volume of leases signed over the past 2 years. In general, concession packages have stabilized over the past several quarters. Moreover, it is a function of volume and timing. Also, it is important to note that the capital allocated to each lease is given very careful consideration based on location, type of tenant, new versus renewal and the term of the lease. And we feel the capital we spend on leasing is prudent in order to keep the portfolio full and grow our top line. As Jim noted on the debt and preferred equity side of the business, we still see opportunities to invest capital into our portfolio at attractive yields during the quarter, deployed just short of $350 million at a weighted average yield of 9.3%, all of which was in New York City. This contributed to the $3.3 million increase in investment income during the quarter. We brought the portfolio size back to more historical levels after seeing it significantly reduced early in the year following repayments, sales and conversions to equity at 280 Park Avenue. Looking ahead to the remainder of the year, we are reiterating our FFO guidance for 2011, $4.75 to $4.80 per share. In reiterating our guidance, we have taken into consideration the sales announced this morning and interest expense that will be higher on a sequential quarter basis and higher than what was included in our original guidance as a result of the full quarter effect of the $250 million, 7-year, 5% unsecured bond offering we completed in August and the expected early recasting of our line of credit, both of which Jim touched on a moment ago. Clearly, from a corporate finance and capital markets perspective, these events are significantly positive, very efficient executions for the company and a testament to our reputation in the fixed income and bank markets. We're also anticipating the closing of the new mortgage financing at the Landmark Square in Stamford that we've discussed previously. Turning to our guidance for 2012, which I know many people are anticipating, all I can say is that consistent with prior years, we'll have to wait until December for our Investor Conference. With that I'll turn the call back over to Marc for some closing comments.

Okay. Thank you, Matt. We try to anticipate as many questions and topics as we could in our prepared remarks. But something tells me we may have a some questions nonetheless. So with that, why don't we open it up for Q&A.

[Operator Instructions] Your first question will come from the line of Rob Stevenson from Macquarie.

Can you talk a little bit about the plans for the retail portion of the Stonehenge JV as to what the sort of end game is there?

Sure. And I think there's a prime asset on Fifth Avenue, 724 Fifth, which has a medium-term lease to Prada. And we own an interest in a building next door at 720 Fifth Avenue. So we'll clearly be exploring whether there's any synergies to be gained there. And then there's a site on Madison which is leased longer term to Armani. And that's more of a stable cash flowing asset for the time being.

Okay. And then I guess a follow-up question is, the apartments that you guys acquired in that joint venture, is it -- is that sort of coupled with some of the development that you're doing now? Are you guys actively looking for incremental apartment investments given your commentary about office cap rates moving so low, or is it just happenstance that those came along in a pool together?

Well, I mean, that was clearly a transaction that was connected to a portfolio sale from a generational family owner. And in those situations, we thought the portfolio was pretty well custom tailored to our sweet spot. But, obviously, the retail -- the residential component is something that we have experienced with in the structured finance side, not as much in direct ownership. So it gave us an opportunity to partner with one of the premier multi-family firms in the city, Stonehenge, who we've done transactions with -- certain commercial transactions with in the past. And this is the first time that we've been able to kind of join forces on a multi-portfolio, which is in their sweet spot. So I would say that we don't have an active pipeline of residential, and I can't say that, that is or isn't going to be a focus going forward. I think we'll see how these assets perform. It was a minority portion of the overall portfolio, if you will. And we think they're good stable assets, so it will give us, I think, a pretty good barometer of the profitability of these kinds of investments as they stack up to our commercial and retail platform. But at the moment, no concentrated effort to expand that.

Your next question comes from the line of James Feldman from Bank of America.

I guess, Marc, following up on your comment earlier that the financial services really wasn't that active this quarter. What is that -- what are you seeing in terms of the types of buildings or maybe the types of submarkets that are different with that out of the market?

What am I seeing in terms of?

In terms of demand, I mean, are you seeing any shift from -- into older buildings, into smaller floor plates. Just how should we be thinking about what -- how the market's acting today without financial services?

Right. A couple of different ways to answer that. I would say it's not really just limited to today, but probably more so consistent with how it's been over the past year or 2. This has been a market driven from non-financials. And I would give you as one example, information in media companies accounted year-to-date for about 28% of all leasing, whereas, historically, they've been close to around 15%, 16%. So clearly, they are overrepresented. I don't want to make it sound if there's no financial leasing, they're probably accounting for about 30%, where typically, they would account for 40% and some of those are the secondary banks, hedge funds and private equity firms and other foreign banks like Nomura, which did a deal for about 800,000 square feet a little earlier this year. So it's not -- I don't want to create a picture of where the market is devoid. This market is too big to be devoid of financial tenants. It's a matter of over and under representation. And I think that our portfolio has had a lot of media, information technologies, publishing, some healthcare-related companies, advertising, accounts and lawyers and the financial firms have been underrepresented by no means absence from the market just somewhat absent from our results in the third quarter.

Okay. But I guess given -- I mean, our sense is that the media tenants, the tech tenants are looking more at Midtown South. How do -- what does that mean for Midtown? I mean, are there certain parts of Midtown that were...

I mean, we -- was drilling on submarkets. I wouldn't -- Midtown South or Downtown or -- is an area, but Midtown is still probably the most prevalent area for publishing and media. So I wouldn't say Downtown is, by any means, exclusive or near exclusive to those tenants. Steve, why don't you comment specifically on the submarkets?

Well, I think there's a couple of things to point out. One is, from Marc's point, which is that all of financial services are still in the market that's been -- of late, it's been driven by new media and other businesses, accounting, law firms, other industries. And where we see a lot of activity today, and have seen it for the past quarter. So it's really more in the value type price points, sort of the $45 to $65 square foot price point as compared to the $85 square foot and above. There are plenty of comps out there for high price point, but the volume of deals are being done in the more -- by tenants who are more price sensitive and value oriented. I think that speaks well for our portfolio. They're looking for a lot of value, good quality of ownership, well-positioned assets that have been -- that are improved. And that's why you're seeing tremendous amount of activity acknowledge last year but rolling right into this year and strong velocity as we move into the fourth quarter.

The next question comes from the line of Alex Goldfarb from Sandler O'Neill. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Just wanted take the leasing comments just one more step. If you speak to the brokers, it sounds like the tenants today in the market aren't feeling the pressure to do deals today. People are fine waiting. We're just not doing anything. Whereas earlier in the year, there was a rush to get deals signed ASAP. With the sense of perhaps concessions starting to increase or free rent starting to increase, what do you think it takes for the market to sort of get reinvigorated? I mean, Wall Street is still going through its issues and if the other part of Manhattan has been carrying its weight, what's the incremental event that's going to cause the market to tighten back up where the landlords start to get the leverage again?

Yes. I just want to say, I wouldn't say the leverage is gone, nor would I say it's exceptionally present. I think it's consistent with what we've said. This market has improved off the bottom to date around 15% from the trough in '09. We expect over the next 2 years that, that will increase at least another 10% over the next 2 years and be right on target with where our 25% prediction from earlier, possibly in excess of that. It's -- for the market to be taking a momentary pause while there is some mixed economic news, to say the least, so people -- corporations will naturally be somewhat more hesitant making long-term commitments until things become more transparent for them. I would say we're at a 9.3% vacancy rate. That's pretty low vacancy rate. And that's -- it would not take a lot to quickly tip that into a landlords market. It's not like it was back in '09 where we had to chop away 300-plus basis points of vacancy and tons and tons of well-built sublet space. Right now, the sublet space offering in this market, Steve, is 1.7%, so under 2% desirable sublet space in any market is pretty tight market. And that's generally what we compete with, and that's generally what would cause rents to go in the other direction. So I think that if you take my comments from earlier, we had 24,000 jobs created, office using jobs in 2011. That's where -- I think that's where it's expected to land at year end. If that pace were to continue into '12 or even half that amount, that's real absorption. If we can get 4 million square feet of absorption a year, that's not a lot of job growth. I call that, generally ordinary growth where tenants were renewing or taking maybe 15% or 20% expansion space when they're signing new tenant 15-year leases because they want to be prudent. They don't want to undershoot their needs over that period of time. I think we'll see rental terms stay stable or increase further in '12. It's just not necessarily going to be at the aggressive levels that I think some of our competitors were underwriting earlier in the year. And we talked about that in July, we said we felt good about the growth prospects, but we thought the market had gotten ahead of us where they used to be behind us. So what would it take? I think it would just take a modest amount of job creation in the financial services industry and a continuation of job creation in the non-financial sectors. By the way, in September, there were 1,600 jobs added in the securities industry. I mean, as non-appearing as that may seem, it was actually job growth. Now we're not expecting that to necessarily be the case in October, November and December, and we could see that reverse itself. But if you get 15,000, 20,000, 25,000 jobs next year of -- office jobs, you could see a decent market. But as we said earlier, we're prepared for the reverse just in case this job loss, or more importantly, sublet space delivered onto the market, that's what I would keep my eye on to see if rents go to the other way. Steve, I don't know if anything you want to add to that?

Well, I guess just a little bit of more micro color to it which is, as we sit here today and having asked the question dozens of times already in the past couple of months, with regards to subleased space, there's -- were hard for us to see any on the horizon. So I don't think we ever want to say that they won't come. But as we sit here today, it doesn't seem to be imminent. And on the velocity side, we haven't seen a slowdown in our portfolio. I think that speaks largely to the price points of our -- of the average rents of our available space. We're busier today than we were at the beginning summer. We had One of our busiest summers. Fourth quarter is already well ahead of schedule, and the pipeline is still very strong. I think a lot of the uncertainty in people's minds and the uncertainty in tenants' minds is really as they look sort of beyond the next quarter. It's more where does 2012 and beyond go. And I think a lot of people are just sitting there saying, "Hey, I don't have a firm opinion as to whether the world is in a better or worse place." I just don't know. And therefore, that's a little bit of the broker uncertainty that you hear people comment on. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay, and then just quickly, the dividend, it's like 0.5% yield right now. You guys have about a 4% AFFO yield. As we think about 2011 taxable income or where the dividend may end up, how should we be thinking about that?

Well, we'll give you a full breakdown in December. But I think we've been consistently saying that the taxable -- the income for the company will rise. So certainly directionally, dividend is going to go up. But we'll talk about it in a lot of detail in December.

Your next question comes from the line of Ross Nussbaum from UBS.

Wanted to talk about a little bit about the sale of the leased fee interest at 292 Madison because the pricing there intrigued me. Because at $440 a foot and what looks like to be 3.7% yield, does that encourage you to go out and test the market to go sell the land that you own at 2 Harold Square and 885 Third?

Well, I think it demonstrates the value in these positions which there was quite a bit of confusion or inquiry when we purchased the package of 3 interests from Gramercy. This is representative of the value of long-term net leased fees in Manhattan. And I think while whereas 292 Madison we view as a non-strategic asset, not one where we particularly have a long-term view on, I would say the other 2 fees we own, 2 Herald and 885 Third, are definitely long-term assets that are of great interest to us depending on the -- ultimately how the leaseholders performed there. So we're not in a rush to sell those assets. But I think it is instructive to see the value of leased fee interests.

Okay. And then the second question I have is just to clarify, I think there's some confusion around what your involvement or lack thereof is surrounding 180 Maiden Lane. Can you clarify for everybody what exactly do you have anything invested there in equity or mezz, and do you plan to?

We have -- I mean, we have a small debt interest in the property now that we've owned for some time. And there was a Wall Street Journal article regarding a deal that either closed or was pending, and we haven't announced anything to date. So we have a small debt investment and mortgage there that we've owned for some time.

How we should we all think about the exposure there given AIG's lease expiring in 2014 and how that factors in?

Yes, I think we're -- I would have to take a look at what our per foot last dollar is. But we're fairly senior within that mortgage. So I think we're insensitive to the tenant role there. I mean, it's a very high-quality asset in a good submarket. And I think people's -- the ability to retenant assets Downtown, we've demonstrated 100 Church, and there's been decent activity Downtown. So that's certainly not one of that's keeping us up at night.

There was some confusion on some of the write-ups this morning. Just to clarify, our position in that building is less than $20 million. So it's a very small position for us.

Yes, I would just add to Andrew, I mean, it's a terrific building Downtown, has improved dramatically. We're looking at more opportunities Downtown on the heels of our success at 100 Church and on the heels of some other structured finance deals we've done Downtown. So I -- we've been asked the question multiple times over the past 6 months, whether we would consider doing more Downtown than we've traditionally done in the past, and we've answered in the affirmative. And its just that -- like old Manhattan. Its just not that easy to come across good deals at reasonable cap rates with high-quality tenants, high-quality building. So the answer is, we're constantly trolling that market as we do to Midtown market and whether it's 180 or some other asset, I think we're looking a little more exposure Downtown on the heels of our success at 100 church.

Your next question comes from the line of John Guinee from Stifel, Nicolaus. John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: Mark, you guys are clearly more and more everyday running an opportunity fund with probably a little more or less leverage that I would have expected. I guess, Jim, is beating on you every day. I think you're making a multitude of different investments in New York City in every angle. At the same time, when it comes right down to it, you still are valued as a proxy to the Manhattan office market. Any chance of Matt and his team could provide a little more clarity on these multitude of other apartment retail, et cetera, investments going forward?

Well, clarity in what respect, John, just so I'm clear with... John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: Just what your real basis is in these deals? How much leverage there really is? What sort of yield you're looking at going in? What kind of stabilized yields you're looking at? Just a little more explanation on some very complicated deals?

Well, let's think how to tackle that. Let's talk a bit about DFR, I guess, as one -- I think one component of what you're referring to. That transaction is one that broke down into predominantly retail and obviously, there are the 2 multi-family assets on our 57th, 58th Street. And I think the way we looked at that deal is similar to how we look at most of these retail deals. There's maybe 4 submarkets in general that we look at 4 or 5 submarkets. Times Square proper, upper Fifth, upper Madison, Flatiron and 34th Street and Soho. So let's call those the primary trade routes, if you will, of where we're trying to amass more and more of this retail product. And when we're successful in doing that, typically, we're going at a fairly low cap rates, 4%, 4.5%. But the rents are generally pretty significantly below market, much more so than we find in office deals whereas office rents today, we buy deals are typically kind of at market, maybe 5% or 10% below market. These retail deals can sometimes be 20% or more below market. Conversely, you have to wait longer with these retail deals than typical office assets. So in some cases, we may have to wait 10 years or longer. This was an opportunity where there were -- there was near-term role in this portfolio that we felt we could access. There was synergy between other assets we owned in those markets with the DFR assets. And when we look at what we think the total returns will be unlevered, we get to something in the high-single digits, 8-ish percent unlevered yields. For good retail locations in those areas, we look at that as very, very good. I think we priced the multi-family there under that. We look a little bit more price per foot of around $350, $360 per square foot. Those multi-family assets that we --that have about a 50-50 split roughly between regulated and non-regulated tenancies. But we think that Stonehenge has an extraordinary track record of being able to develop those units, move the rent roll, convert units, just manage a very good property such that we'll be having -- we're expecting to have stabilized cash on cost yields, or I should say, unlevered cash on cost yields in the 4.5% range and IRRs that are probably closer to 6.5%, 7% range. So under the retail expectation, but still pretty healthy especially given cost of funds today to finance these multi-family properties. So I think we look at the retail and the residential. But predominantly, the resi is just 2 buildings, as a way to act as a counterbalance, if you will, to the office portfolio, which tends to be more volatile and consume more capital to maintain those NOIs than our experience on the retail and the multi-family, which once stabilized, tends to be more of a net business. But I think with the intense focus that you all have on our FO, not just FFO, we thought it was important to branch out into these other areas as a way of increasing, not only our returns, which I think are already above average turns, but increasing our cash flow so that we can invest in more and pay high dividends. So I think, a little bit of a diversity within our market, a little bit of a counterweight to the volatility, if you will, and just a pure profitability of these largely defensive assets and offensive in good markets drew us and draw us to the retail opportunities specifically. And we'll look at the residential performance and assess that as well.

Your next question comes from the line of Michael Knott from Green Street Advisors.

Marc, just curious your perspective on the market and how long it can continue to trend sort of in the right direction from the other 2/3 of the marketplace if finance and banking continues to remain stagnant or even if you start to see a little more sublet space put on the market by some of those guys with all the job cuts they've had? Just curious if you feel like you -- the market has done much better than you would have thought given sort of the negative headlines?

I wouldn't say it's done better than we thought. I think, I would say, it's consistent with where we thought. I think it's -- I think the market had gotten to a point where we've got ahead of these results. I think we were more in lockstep with the results we've achieved. In answer to your question, there's countervailing points. On the one hand, if the market takes a breather, then it will be harder, obviously, to keep the velocity at the levels we've experienced for the couple of years, 2 million square feet-plus. That's a lot of velocity. And rental growth, which we've enjoyed over the past 2 years of about 15% and some shrinking concessions. Flipside is, there's no new availability. The market is getting more and more leased. You're down under 10%. You're almost at 9%. And without more significant economic activity, a lot of the subsidized development projects around the city that were maybe at the tipping point of starting, this may push them back. Maybe not, we'll have to see. But to the extent it does, that puts a limit and a cap on any new availability. And I think go back to what I said earlier, I think it just really depends on the sublet space. I think that without major new blocks of sublet, and I don't mean a couple hundred thousand feet, I'm talking millions of square feet of well-built prime sublet space, this is going to be, I think, still a pretty tight market, a pretty fair market, I should say, where we're going to get decent rents. I think we'll get some rental growth. But maybe 5%, 10% more over the next year or 2. And maybe leveling or possibly even some further shrinking concessions. Now that's assuming job growth next year is slightly positive to along the lines of what I said earlier. If there were significant, significant reductions and significant sublet space, then we have to reevaluate. But that's not what we're seeing now. This is what we saw in '08. So it's a different market. And I think that with low rates and if the rightsizing that domestic banks went through in '08 and '09, the European banks go through that kind of rightsizing in '11 and '12, everybody's right sized. I think you could get significant growth again when this market picks up whenever that is. Second half of '12, '13. I think our bias would be more towards that than the reverse. But we're going to have to wait and see. The reason we're somewhat sanguine about is because we're very defensive in our posture right now. So even if rents were down 10% next year, or couple of million square feet of sublet space hit the market, I don't think it's going to have a material effect on our portfolio.

Okay, thanks. And then my last question is just any color, are you guys happy with the progress on leasing at 3 Columbus Circle today? Then also on the sale side, I know you have 711 Third out on the market and also 1 Court Square, I believe?

We're seeing very good interest in the assets that we're selling. And we are encouraged there, obviously, 141 and 292 are 2 small deals that got done at very, very efficient levels. And we're working on the bigger deals for sure. Steve, you want to comment on 3 CC?

Well, it's been in the paper that there's a big deal rolling at 3 Columbus. And we've had very good response from the brokerage community and prospective tenants. We have active negotiations covering roughly 2/3 of our availability. And we're working hard to get it leased up. So nothing to truly report right now. But I think we're ahead of schedule of expectation.

Your next question comes from the line of Jay Habermann from Goldman Sachs.

Marc, you gave some thoughts in terms of your expectations for office rent growth. But as you think about retail, can you give us some sense of where you think we are in the cycle and specifically the Fifth Avenue, Times Square markets because rent growth has been pretty robust in those areas in recent years. And I'm just curious where you think rents can go from here?

Andrew is right on top of where the rental opportunities lie on some of these assets. What you think we have and what kind of...

In the submarkets that Mark and I identified, we still see the potential for strong rental growth. Times Square is very unique and that retailers essentially get 2 full days for every day that they're open because they can open early and stay open late until 2 in the morning in some cases, and get essentially 2 full shifts out of 1 day. So that the rent that they can pay and the sales that retailers are achieving have allowed rents to drift up significantly in addition to -- you have a lack of supply working there as well. But I think you have similar types of dynamics on Fifth Avenue without necessarily the late hours but certainly with very high sales being achieved and more and more critical mass being achieved on Fifth where you've just had Uniqlo, Hollister, you'll have Zara opening. You'll have Dolce & Gabbana when they open at 717. You have a continual new blood of retailers and just a great critical mass there that draws a lot of traffic. So that's allowed landlords to continue pushing up rents and filling the spaces. And we don't see that dynamic really changing in those areas so long as tourism in the city stay strong. And obviously, a weak dollar always helps. Dollar has been fluctuating around, but the dynamics are setup very well in those of submarkets.

Okay. And just a second question, can you comment, maybe perhaps for Jim, just the dollar amount of asset sales that you're looking at, I guess, just given the concerns that you highlighted with the unsecured market today?

Yes. I mean, I hate to give you a firm number, but it's fair to say that we're looking at something around $0.5 billion in aggregate sales as we move forward into the fourth and then into next year.

Would this be an alternative to doing a bond issuance, or is this in addition to it?

I think it's different categories, right? Bond issuance would be effectively to term out existing debt. Asset sales would be to find a more efficient supplement to the equity offerings. And also, to, as we've done over the years, to look for opportunities to recycle into higher growth, higher-quality assets.

Your next question comes from the line of Mike Bilerman of Citi.

Its Josh Attie with Michael. Last quarter, you mentioned there was a lot of opportunity to put money to work in the structured finance market, and you did that and you brought the loan book up to $900 million. What does the environment look like today? And are you still seeing opportunities to put capital to work there?

In the structured book, you're saying?

Yes.

Yes. I think the dynamics haven't really changed. You have insurance companies and commercial banks being the primary providers of acquisition financing because the CMBS market is somewhere between closed and not really competitive to those capital sources for Manhattan-type acquisitions. And the commercial banks and insurance companies generally leave a large chunk of capital between, call it, 40% and 50% loan to acquisition and 60% -- 60%, 65%, 70% loan to acquisition. That's a gap that we've been able to step in and fill in a lot of these cases at attractive returns. That dynamic has not really shifted. And that is why I would say we did generate some liquidity from within the book, selling down $50 million of one preferred equity investment and $30 million or so of another bridge loan to allow us to generate some positive returns. And also to continue reinvesting in new structured deals.

And the 2 large investments that you made in the third quarter, can you talk about them generally, maybe where you stand in the capital stack and how you expect those investments to play out over time?

I think it's very consistent with what I just described, where 50%-ish or so first dollar and 65% to 70% or so last dollar. The term is generally 3 to 5 years, generally fixed rates or LIBOR -- floating over LIBOR with floors and their varying levels of current pay, but 5%, 6%, 7% current pay and 9% to 10% accrual rates on those pieces of paper.

Your next question comes from the line of Sheila McGrath from KBW. Sheila McGrath - Keefe, Bruyette, & Woods, Inc., Research Division: Recently, we've seen public companies make boost to sell their suburban office assets. And I'm just wondering what your view on your suburban portfolio is? Are you currently planning to hold onto it, or would you consider a sale?

Sheila, so far, we're -- it's Jim. We're getting -- it feels as though we're either flattening or turning the corner in the suburbs. We've done very well. We got positive mark-to-market for the first time in quite a while in the suburbs. So I think we're pretty content that we've got the highest-quality assets in our submarkets in the -- and that the -- we continue to do much better than the Australian markets. Sheila McGrath - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And quickly on the 100 Church. It seems like you've made a lot of strides on occupancy. Could you give us some perspective of how the rental rates, lease-up pays, some returns, look versus your original pro forma?

Well on the lease-up, we are -- we just signed a lease that was announced today. It was actually a fourth quarter transaction where Healthfirst expanded by almost another 60,000 square feet. We have only 2 floors remaining in the building other than some very small pockets beyond that. But eventually, 2 full floors left in the building at which we have leases out that are actively being negotiated. So we're, I think, way ahead of pro forma on the building. The most recent deals that we did in the third quarter and this last transaction were $3 to $5 square foot higher than the additional leases that were signed in the building. And the concessions were actually reduced as well, both on TI and free rent. On the return side of it, maybe Andrew or Jim can speak to that.

I mean the building has blown away our expectations in terms of return, in large part due to occupancy that's going to well exceed our initial pro forma, but also rents and retail and mezzanine space, some medical space, we've just been able to get the building to a much higher level of occupancy than there ever was historically. And that's going to contribute to unbelievable returns on the investment.

Your next question comes from the line of Jordan Sadler from KeyBanc Capital Markets.

I just want to come back to the tempo in the market. There's obviously been some sort of shift in your last call, or at least early in the summer. One of your peers sort of identified the change that they've seen as the shift to a smaller tenancy in their pre-building out suites, which tends to be your bread and butter. Is that something that you guys have seen? Is there a shift? I mean, there are larger tenants out of the market and more -- the smaller tenants just continue to be the more dynamic ones?

Well, I think there's a couple of things understand. There is generally, as I said earlier, uncertainty in both broker and tenant minds as to where the world is headed. Notwithstanding that, there's still very good leasing velocity, particularly in the more value priced point of the market. And there's lots and lots of deals being done. As a matter of fact, the deals that we've just announced, those were all closed within the past 30 days. One was 130,000 square feet, one was 114,000 square feet and the other is an expansion for 60,000 square feet. We're working on several very, very large transactions right now. The difference again is emphasized that they're all in that sort of middle-of-the-market price point. So the big investment banks, the very top of the price point where rents are at $85 and above clearly, I think, that has taken a pause. But I don't see a slowdown on the rest of the markets.

Okay. And then just a follow-up, I know it's early, but you have taken these down now on the 1550 and 1560. Are you envisioning a single-tenant type situation there, or is that going to be a multi-tenant or?

We think it will likely be single user. That's what we're targeting.

And the time frame and incremental dollars invested, you think?

Our capital budget there is around $20 million. And time frame, we have the existing tenant in there on a one-year leaseback. That was one of the conditions of sale. So we'll be getting our approvals and doing all of our preparations over the next 12 months. And we expect to deliver a completed box within 6 months or so after that.

Your next question is from the line of Anthony Paolone of J.P. Morgan. Anthony Paolone - JP Morgan Chase & Co, Research Division: I just had a question about your discussion on your tenants taking a more value bent and seeing some of the financial services guys a bit rash in the market. So how does that factor into just repositioning of 600 Lex and also your plans for 280 Park where both those buildings seem to be either a little bit more towards financial services or more boutique, much price-sensitive tendency?

Well, I think you got to take each one separately. 280 Park is an irreplaceable location, and that building in almost all markets, I think, is going to outperform and be very attractive for tenants that don't have to be the very large financial service-oriented tenants. Steve can talk about a couple of deals that we and our partners just did there at very good rates above underwriting and certainly near-term than we had envisioned. And there's a capital program that we and Vornado are not really prepared to take investors through now, but at a point in time, we'll be. This is a project that will -- isn't going to be done in the next 6 months. It's probably something that's going to take a year or 2 to fully reposition. And when it is repositioned, we both expect it to be among the best offerings on Park Avenue. So I wouldn't -- I look at that in a very special class, particularly given what our plans are for that building. And I think we're going to wind up with a very good investment there. And today's market, to me, is not quite as relevant as the market we expect to be leasing into in a year or 2. So that's one. On 600, Steve, I don't know if you want to...

Well, remember, 600, the floor sizes there are the largest, about 12,000 square feet. The majority of the spaces are 10,000 square feet for a full floor. And the price points is at its most expensive than daily dollar space. So it's still acts as a price relief type of building to the higher price points Park Avenue and Madison Avenue. So although it's expensive, it's still relatively center space. It's cheap space for the profile of tenant that we're going after. And that's where we catch them. Recently seeing the building and we've got still a lot of good traffic. But we're pounding the pavement to take care of the role that we've got. Just to add the Mark's point on 280 Park, don't take our comments the wrong way with regards to a pause in activity. That’s a statement of today. And I don't think 280 Park is a long-term play. We've still got tenants in place and the development program has really just started. So it's going to be one of the 3 best buildings on the avenue, and it think it's going to be a -- there is always going to be a strong market for it. So we're wildly excited about the opportunity there. Anthony Paolone - JP Morgan Chase & Co, Research Division: Okay. And my follow-up question is just on -- in your packet, there was some additional secured fixed-rate debt that you guys took on at 8% for $50 million. It seems like that's related to a preferred investment. I just wonder if you could flush out just how that all works?

That's a participation interest we sold in an asset. I mean, we essentially financed a position of ours. So it shows up as a secured financing. It's essentially a senior participation.

Your next question comes from line of Steve Benyik from Jefferies & Company. Steven Benyik - Jefferies & Company, Inc., Research Division: Great. I was hoping you guys could comment a little bit further on just the state of the unsecured -- or the secured financing markets you mentioned, the life insurance companies and the commercial banks sort not fulfilling all the demand there from a loan-to-value perspective. Just sort of whether you're seeing any changes there from their underwriting, and what your expectations are for secured debt over the next 12 months and what impacts that may have on cap rates?

Sure. I think you characterized it accurately, which is that there's enough of their capital to finance sort of every deal that needs financing. Thus far, they're just -- they don't finance at a proceed level that to a more levered buyer find sufficient. So that's creating a structured finance opportunity for us. I mean, if you look at the financings that we did on the deals we purchased this quarter, we got very efficient secured financing on 1552, 1560 Broadway, very efficient financing on 747 Madison. Both were from commercial banks, and those are non-securitized type execution, balance sheet type executions. But there is a bit of a GAAP out there where mezzanine guys are filling at what we think to be attractive rates. But thus far, most of the deals we've gotten done in the last quarter or so have been insurance companies and commercial banks for balance sheets. Steven Benyik - Jefferies & Company, Inc., Research Division: Okay. And then also for Andrew, I guess, when you mentioned earlier about some investors stepping to the sidelines and not participating in some of the recent auctions that are out there, can you talk a little bit about who has done that and where does sort of the sovereign wealth funds stand today if the REITs today are the most likely buyer of some of these assets? Is that sort of a negative for the cap rate outlook?

I don't think so. I mean, I think it's a little more -- the interest rates are so compelling today that you've seen, as I said, 2 guys step in for every guy that steps aside, has led to a dynamic where there's not necessarily one dominant like we've seen. We were a dominant buyer in 2010. And I guess the closest thing you could say is, RXR has had a very busy year with the Canadian Pension Fund PSP. They announced they bought 626 Avenue. That's on the heels of buying this steadily high building. So they're probably the closest thing to a dominant buyer. But you've seen a lot of different groups step in and fill the voids. And it's tough to sort of paint them with one brush. It's been a lot of pension capital, a lot of core funds and saw entrepreneurial deals. It's been sort of all over the map.

Your next question comes from the line of Blaine Heck, Wells Fargo.

I just wanted to see if you guys could comment on the FAD guidance for both Q4 and 2011 full year? I think on your last conference call, you mentioned the full year number was expected to come in around 260 to 265, which would imply $0.55 a $0.60 a share in Q4. Just wanted to see if that was still what you're looking at and kind of how you get there? The guidance for FFO in Q4 is going to be lower than Q3 run rate?

It's Matt. I addresses the capital a little bit in my commentary. Clearly, in the third quarter, we spent quite a bit of leasing capital. And probably, we'll do so again in the fourth quarter, driven by the sheer volume of leasing we're doing. The term of these deals are longer, so we're putting more capital into them. And they're getting done in such a time frame that we will likely spend more capital than we anticipated. That all being said, it is, to a certain extent, out of our control. If it's a landlord contribution because it depends on when the tenant does his work and when we get the paperwork submitted for reimbursement as to when it shows up in our numbers. So it is a gap to fill for the fourth quarter that is going to be tight. But it's somewhat dependent on the pace of the capital spend related all the leasing we've done that happens in the fourth quarter.

Okay, but you're still comfortable with the 260 to 266 at this point?

265, we haven't moved off it, but it's going to require some capital management in the fourth quarter.

At this time, I'm showing we have no further questions. I'd like to hand the call back over to management for closing remarks.

Okay. Well, thank you for your questions today. We'll be speaking with many of you in December at our investor meeting that Heidi mentioned. So just I would recognize that in terms of upcoming events for us, that's probably the onetime a year where we get to really talk about forward-looking projections, strategies, business plans, much more so than we're set to cover on these kinds of earnings call. So we look forward to speaking with as many of you possible in December. And accordingly, I would expect our next call in 3 months to be abbreviated as they've been in years passed because it comes right on the heels of that investor meeting. So I would encourage you, if you're choosing one of the other to choose the investor day. Thank you, and look forward to speaking with you guys again.

Ladies and gentlemen, thank you very much for your participation in today's conference call. You may now disconnect. Have a wonderful day.