SL Green Realty Corp. (SLG) Q4 2011 Earnings Report, Transcript and Summary

Heidi Gillette - Director of Investor Relations Marc Holliday - Chief Executive Officer, Director and Member of Executive Committee Matt DiLiberto - Steven M. Durels - Executive Vice President and Director of Leasing James E. Mead - Chief Financial Officer

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division Anthony Paolone - JP Morgan Chase & Co, Research Division Nicholas Yulico - Macquarie Research James C. Feldman - BofA Merrill Lynch, Research Division Steve Sakwa - ISI Group Inc., Research Division Sheila McGrath - Keefe, Bruyette, & Woods, Inc., Research Division Michael Knott - Green Street Advisors, Inc., Research Division Brendan Maiorana - Wells Fargo Securities, LLC, Research Division Joshua Attie - Citigroup Inc, Research Division Michael Bilerman - Citigroup Inc, Research Division Louise Pitt - Goldman Sachs Group Inc., Research Division Jordan Sadler - KeyBanc Capital Markets Inc., Research Division Jonathan Habermann - Goldman Sachs Group Inc., Research Division

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Year-End 2011 SL Green Realty Earnings Conference Call. My name is Keisha, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Ms. Heidi Gillette. Please proceed.

Good morning, everybody, and thank you for joining us. 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 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 SEC. 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 the Press Release regarding the company's fourth quarter year-end earnings. In December, executive management provided substantial commentary at its investor conference addressing both past performance as well as detailing the essence for 2011 -- 2012, sorry. Therefore, for today's call we will be utilizing an abbreviated format from that a quarter's past and initial commentary will come from -- only from Chief Executive Officer, Marc Holliday, then we will turn the call over immediately to Q&A. As a reminder, the Q&A Section, please limit your question to 2 per person. Thank you. I will now turn the call over to Mark. Please go ahead.

Good morning, and welcome, everyone. We were very pleased with our quarterly results announced last night, to cap-off, very, very good year for the company. While those who had significant concerns at the New York Wall Street [ph] market, while those may have been surprised by these results. We certainly were not as the company's performance was well in line with the guidance we gave last month at our investor conference. Because of the, I guess, 3-hour presentation that was done in December and webcast and was available online, we're going to limit today's remarks coming only 7 or 8 weeks after that extensive dive, if you will, into the New York market in our portfolio and focus mostly on Q&A for the quarter. But I did want to just give you a few thoughts before we turn it over to Q&A. First thing I think you'll note in the release is that we are seeing improved earnings velocity coming from 2 different avenues, improvement in same-store and contributions from recently acquired value added properties. Earnings and cash flow velocity will accelerate in 2012 as we lease up the acquired vacancy and the New York market continues to improve. Such improvements being fairly measurable in '10 and '11 but still nowhere close to peak performance years of 2006 and 2007. Recall in December, we highlighted about a dozen properties that are projected to contribute nearly $90 million of incremental EBITDA for the most part occurring over the next 3 years. Also we ended 2011 with peak leasing volume for the quarter of 662,000 square feet. While that is a very sizable number in and of itself, I would just want you to note that, that total would have been almost 900,000 square feet if we included in this total the condo unit that was sold instead of leased to Y&R 3 Columbus Circle. While that market activity in citywide maybe slowing somewhat as reported by several of the New York brokers, our portfolio activity remains quite high with over 115,000 square feet of space leased in our portfolio this month alone, first 30 days, first 31 days and another 1.2 million square feet on top of that, which is being actively negotiated. An example of this recent performance occurring after year-end would be the lease signed last evening by Steve Durels and his leasing team at Jazz at Lincoln Center, is now also an occupant at 3 Columbus, leasing about 30,000 square feet, and bringing the total office left to lease at 3 Columbus to about 170,000 square feet. That building -- the building activity is accelerating on the heels of the Y&R announcement and I feel safe to say that we'll have less than 100,000 square feet to lease by year’s end that property, well ahead of schedule. So we welcome Jazz as well as all the other tenants that were signed up as part of that 115,000 square feet at 3 Columbus. The leasing market remains in equilibrium at an overall 9.1% vacancy rate, with Midtown being about 0.5 higher than that and we are expecting that number to improve modestly in 2012 with 24,000 private sector jobs estimated to be created in New York City in the coming year. Also the fact that sublease phase today is around 5 million square feet and that represents, if not a low, very near a low since the year 2000. So the sublease space and I think, that being something that people focus on, and rightfully focus on with the concerned with it if there was material glut of improved space on the market. That is right now at its lows and I think that emboldens us to a major projection we made back in December in the face of what people thought a softening market when we projected an approximately 5% improvement in that effective rent in 2012 and we still are standing by that assessment. We also increased our structured finance balances by 10% in the fourth quarter through 4 new originations that are typical of our New York century investment profile. This program continues to be an enormous source of earnings and opportunity. On the investment front -- on the asset investment front, values continue to appreciate, cap rates continue to fall as over $25 billion of sales were executed in 2011 with over half of that represented by office sales. And those are very significant volumes, not peak volumes, but quite sizable. We took advantage of that hot market as a buyer and a seller. As a seller, we announced 3 asset sales at the end of last year, and we intend to accelerate our sales in JV efforts to capitalize on significant value creation and also our desire to continue to demonstrate the vast under assessment of private market valuations by public market investors. On the acquisition front, in 2011, as we had demonstrated in December, there were about 10 different transactions where we acquired property or substantial interest in properties totaling a transaction value of close to $4.5 billion in 2011. So you can see that on both sides of the Table, we were active, we continue to be so in 2012, notably 10 East 53rd Street, which was not discussed in December, is our latest acquisition. It fits right in with our core business line of acquiring, repositioning and redeveloping prime New York midtown Manhattan assets in prime location. And in that case, we subsequently brought in a foreign and institutional equity joint venture partner to both leverage our equity, enhance our returns and increase our opportunity set. So that deal was fairly profiled. Also adding to our future growth is the DFR portfolio acquisition that is expected to close later today, which includes 402 residential units -- residential rental units in 2 Midtown East apartment buildings and extraordinary retail properties at 724 Fifth and 752 Madison Avenue. So we'd like to congratulate the entire team here at SL Green for what was really a fabulous year in 2011. My hat is off to everyone including the operations and management group led by Ed, leasing led by Steve and investments led by David Schonbraun and Isaac Zion. Andrew will address you later on some of the specifics for these transactions but the legal team, Andy Neil and Jim and Matt, Heidi and everyone else, was a part of this enormous effort in 2011. Just want to say thank you. And with that let's open it up for Q&A.

[Operator Instructions] Your first question comes from the line of Alex Goldfarb with Sandler O'Neill. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Just a quick comment on the GAAP same-store NOI. The -- in the press release, you had the 2.9, which I'm guessing is a slightly different definition than what's in the supplemental. So on an apples-to-apples basis, what would fourth-quarter same-store NOI have been using the 2.9 definition that was in the press release?

It's Matt. If you use that same definition of what [ph] that includes 15, 15 and 521 in the calculation because we bought out partners during the course of the year that technically doesn't fit the same-store definition but the mathematics would, obviously, hold that. We don't know properties to control those properties, so that should be in there that tell you the 2.9. For the quarter that would be north of 3%, if done under same measure. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay. So over 3% for the quarter.

Exactly. And that's how you get to 3% for the year as well. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: And then, just -- you guys sound like you're ramping-up the disposition program. As you think about new investments, certainly Midtown South, especially when you speak to the brokers, they're very excited by that submarket. Just wanted to get your take especially on the Chelsea flatiron, if you think that market truly has lags and now be -- now maybe much more acceptable for institutional investors to go down there especially if that's where sort of the next generation of new tenants and business is coming from.

While, I think, it certainly has lags from a leasing perspective. The challenge for investors is there's not lag institutional quality of inventory down there. So you're talking about the biggest buildings down there One Madison, which we own 626th and [indiscernible], which just traded this year. There are relatively few other buildings that are Park Avenue South buildings, which are primarily over-term and factory buildings, not a lot of institutional quality or institutional size product, it's lot of very small type properties. So while the leasing market does have lags, I'm not sure yet in terms of the institutional demand for smaller size 3 properties that make a lot of the inventory though. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: If a big institutional size asset were to come up, you guys, I'm assuming would be seriously interested, correct? Or not so much?

Sure, absolutely. We own One Madison. We had a great experience with them and we would absolutely look at others as we looked at the 620 and [indiscernible] last year.

Your next question comes from the line of Tony Paolone with JPMorgan. Anthony Paolone - JP Morgan Chase & Co, Research Division: If financial services demand remains muted over the course of the year, do you think the other parts of the New York economy can make up the slack you can get to the rent growth projections you guys talked about?

Well, I think it has been. I think it's a little less projection, it's more just a synopsis of what taken us from down by about 300 basis points or so of vacancy. This quarter alone, it was tenants, like HF Global Healthcare and Bloomingdale's for office space, Y&R obviously a big deal, leading hotels, Viking Global Hedge Fund, Aéropostale, which was a tenant that we started with as a retail relationship in Times Square and was able to work with our suburban group and John Barnes at Broomnet tenant out for a sizable occupancy at Chubbway [ph] in New Jersey, and then you have some new media tenants like Amazon, who continues to grow at 1350 Sixth Avenue, I think, Steve, there's another lease last night to Amazon?

Yes. It expanded by another 11,000 square feet.

So that was sound last night. And they continue to expand the footprint 1350, so I mean that's a sample and maybe Steve you can put in more?

Well, I think to put it in perspective. Financial Services primarily is defined by the big investment banks and commercial banks. Actually has helped reduce the footprint that we had last year by couple of percentage points. Yet, last year was one of the biggest leasing years in the decade. It was driven primarily by new media and technology who leased 26%, 27% of all the inventory for last year. And we see those industries continue this year, to build during the pipeline are not necessarily financial related except we could always still see the hedge fund private equities, smaller type deals kicking about, but there's plenty of deals out there for advertising, technology, engineering, law firms and general service businesses. So, and I think that's the good news, that there's a big diversity of industries that are in the market and we saw last year, the leases last year was currently have a good leasing without financial services, we did and I think, we're going to see more of that this year. Anthony Paolone - JP Morgan Chase & Co, Research Division: Okay, thanks and my second question is as relates to 600 Lexington and 125 Park both had occupancies within the quarter, just curious if you could refresh us on the plans there, how they're coming along and whether those were expected and when those occupancies might turn the corner.

600 Lexington, actually both this buildings as you recall, we bought them. We then go into the investments that the good percentage of the tenants would be vacating the buildings. 125 Park it was Meredith Publishing Firm who had about 150,000 square feet. We knew there was no chance of them staying in the building. They had outgrown their space and there was nothing available to retain their occupancy, would've wanted to consolidate to a bigger footprint at an equal price. And at 600 Lexington, we did color on those tenants as well, we none of the tenants expiring between '11, '12 in early '13 would renew, the producers have a couple of them. 600 Lexington, we've seen the leasing there, kind of go up and down. We had a burst of activity early last year, went kind of quiet during the year and we're busy there today than anywhere else in the portfolio, 4, 5, full floor deals that are pending at rents that are significantly above the underwriting. We're seeing a lot of tenants that are -- who have been looking at Park Avenue upper Madison Avenue coming our way and price points that are kind of 65 on the base of $80 a square foot in the tower and at 1425 Park Avenue the space just went vacant on January 1. We've pre-let one of the full floors of 25,000 square feet and we're out hunting for full floor tenants over there. So that will take the balance of this year, I think, on getting any traction on that building, but that's in line with the business part.

Your next question comes from the line of Nicholas Yulico with Macquarie.

For the New York City leases that were signed, I mean, now have in fourth quarter very strong renewals spreads, you had them in the third quarter as well. I'm wondering how much of that is a function of you guys pushing rents harder as opposed to now getting the benefit from some easier comps on renewals?

I don't -- I would say it's more a function of the market than anything. We've experienced relatively good growth in market rents beginning back in 2010 and continuing into '11 and received moderating a bit but positive in 2012, probably bringing us close to at least 20% over that 3-year period if not higher, if you include the tightening of the concessions that we've seen in free rents and TI. So, I think, what you're seeing primarily is sublets being taken off the market, vacancy rate that has declined by almost over 300 basis points, in equilibrium market of around 9% where we generally have competition for space that's not in same competition like it would be at 5% or 6%. But it's usually more than 1 tenant on a space that we can get. Those premium rents are very focused to try to get the rents are placed at least equal to or greater than in most cases where they will expire. It'll change from quarter-to-quarter as you may just have in normally a tenant in any given quarter may have a very high head rent and if it was signed at a peak time and it rolls onto market today. So we still have a number of tenants that are rolling down from market, are rolling down from the previous escalated to market but on average when we're leasing about a 0.5 million square feet or more per quarter, the preponderance of those are neutral to up and on average you saw they were up substantially in the fourth quarter and we'd given guidance in December at where we saw that mark-to-market for the full year 2012 and I think that guidance as I'm looking at is greater than 5% on average for the coming year. That's actually, it's very good consistent with our view but there's a lot of work to do. [Audio Gap] program to bring it solidly into the -- to compete with comparable Class A buildings and our rental assumptions there at the top of the building where we've unimpeded Central Park views are at premium to 600 Lexington, for sure. So, I think, locationally it's a premium and view-wise, it's a premium. It does have that same highly desirable boutique floor plate for a tenant can get a floor full identity which tenants will certainly pay premium for comparable 600 Lexington, but you have a location advantage and a big view advantage. So after the renovation we really feel this building compare with other boutique office buildings like it in the plaza district.

Just to be clear, the 40 million does that include tenant improvements or is that separate?

Separate.

Your next question comes from the line of Jamie Feldman with Bank of America-Merrill Lynch.

Can you talk a little bit about the loan loss reserves and the [Audio Gap] So as you think about what's to come for the rest of the year, what is the environment look like for more equity infusions [Audio Gap] transactions that you guys were seeing from more recently like the Des Moines deal?

Sure. On the structure finance side, it was all New York-based deals, 3 of them were acquisition financing and one of them was a -- we acquired a senior position in a capital sect that we already hold a junior position in 5 Times Square. We continue to bring the investing environment for structured finance is very good, the yields are [Audio Gap] historically a high level [Audio Gap] gaps that are in our pipeline and certainly for those who don't want to expose more than property for marketing, they have tax issues or they want to stay in and continue to enjoy upside in their buildings, the recap route is a preferred route and I think, we're the first to launch those types of deals in New York, we've had so much success with them and we work successfully with so many other owners and operators as partners in New York.

And then just one final follow-up, is the yield on the structured finance, is that sustainable? You think putting money the rest of that for the rest of the year?

Right now, the market conditions are holding, there are some new entrants to the space, we always have the risk that people start competing on yield, but for now the most recent deals that we've done are still consistent with the yields that we're making for the year, which is in the 10% or so range.

Your next question comes from the line of Steve Sakwa with ISI Group.

I guess really 2 questions. One, Marc, can you talk a little bit more about this apartment deal and Stonehenge relationship and I know that your partner has relatively lofty goals in terms of expanding the size of his portfolio and I'm just wondering how you sort of think about apartments, what percentage of that business you'd like it to represent? Or what kind of opportunities you see relative to structured finance and recaps from the office side?

Well, I think, some of it, Steve, to be determined because these initial acquisitions, I think, by the market assessment of these deals I think we've got 2 solid deals and I think our partners Stonehenge, it's a group run by Ofer Yardeni and Joel Seiden, 2 very talented professionals who have a large multifamily portfolio here in Manhattan and have successfully grown it from 0 over the years to where they are [Audio Gap] that can be $300 million, $400 million, $500 million buildings or complexes. So I can't really give you any guidance as to investment targets, but I think, it's a fairly nice complement so far to our business where we achieved great inroads, maybe and understatement on the office front, and on the high-end retail front structured finance, I think, we're generally recognized as a market leader in this city and subordinate financing and I think, multifamily provides another avenue where we can capitalize on our relationships, on our tax advantage currency, and on our ability to take projects that don't have a lot of current return, but work on ways ourselves or with our partners to enhance NOI and improve and move rents up. So we like that business, it'll be dictated purely by profitability as we see great profitability that you'll see us do more. If the yields are below our thresholds, and we talked about our yield thresholds in the past, then I think, we'll do some but probably not a lot because we don't -- we're not looking to do low margin business, we're only looking to do business that fits into the spectrum of what we're making on our office retail and structure.

And then, I guess, second question as you think about sort of just the shifting landscape maybe away from financial services, you mentioned media and tech is taking almost 25% of the space in 2011 and perhaps those kind of tenants continuing to grow. Do you need to change kind of where the portfolio is located or types of buildings, that you own presumably a lot of these tenants don't want to be in the 50 story high-rise building on Park Avenue or Fifth Avenue or Sixth Avenue so how do you sort of think about that changing landscape given who's growing and shrinking in the city?

Let me just, the largest growing segment -- I want to dispel certain notions that I see, and while we're very excited about new media. The sizes tend to be small, it's made up of a lot of small companies that get moderately bigger, that's only -- not every one of these tendencies like Google and Amazon. They're a very important user, I think, for Downtown and Midtown South where there's space that's more in line with their targets in 40s, 50s and 60s and not 80s, 90s, and 100s. But the largest growing segment in New York City by far is professional business services, period. That's where 16,000 jobs were added in 2011 and that's where we see most of the growth coming. So for most media firms, Midtown is still considered not just acceptable but desired. And I think Y&R is a great example of that and the tenant that we had competing for that space, which was a multi-hundred thousand square foot tenant that was ultimately -- we didn't consummate with because we couldn't accommodate both [indiscernible] and the Y&R ideal. And Midtown is still -- sees highest rents that is most desired and we don't see many tenants in our portfolio migrating downtown. So I think, we've got kind of a developing and very healthy complementary markets for users that are looking for different types of space, at different price points throughout the city with Midtown being -- what's most in demand and achieves the highest price. We do a fair amount of lending in Midtown South. As Andrew said, we own One Madison, it's one of the premier institutional assets in Midtown South. As we said on prior conference calls we were actively looking at 1107 Broadway, which we bid for, but it went condo, so what I can tell you, one was residential but we were leading better for 1107 Broadway. We owned other assets in that market like 470 Park Avenue South, One Park Avenue, which we bought and sold, Clock tower. So it's a market we know well, I don't think it's a market that's got the highest asset appreciation potential changes we spoke to earlier, we still believe that to be the best Midtown assets with the highest rent appreciation, potential but with that said, we love that market, we're active in that market. I think that market is going to stay very tight because a lot of the inventory is being leased to tenants looking for affordable rents, but a lot of it is also being converted to residential. And you see that certainly supports to a large extent why you see such a low vacancy rate in that market. And downtown we spent probably, I don't know, a half-hour at our investor conference in December highlighting downtown our investments there in when we announced 180 Maiden. So I would sort of leave it at that but I just want to make sure that it's pretty clear when we're talking about the engine of growth in the city, it vacillates between financial services and professional business services and those are the 2 realism [ph] in the market that you will that drive the big block usage for the most part.

Your next question comes from the line of Sheila McGrath with KBW. Sheila McGrath - Keefe, Bruyette, & Woods, Inc., Research Division: Given that demand that you're seeing in the market today from larger users, do you think some of the shadow development pipeline on the west side or over by Penn Station may be pushed out further into the future than previously expected?

While you saw Silverstein's announcement that he was going to cap off, one of its World Trade Center buildings due to lack of demand so that there is some evidence of that in the market for sure and Hudson Yards, we continue to watch carefully they signed Coach for the first building but they still need commitments for around 1.2 million square feet there in order to get that building underway. And so we're watching carefully but certainly there is demand for space that's available now and in the short term and much harder to sign up tenants for longer-term development projects. Sheila McGrath - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And the second question, you did outline the target goal of same-store NOI of greater than 4% in 2012. Fourth quarter was slightly negative. I was just wondering if you could discuss, if you think greater than 4% is still achievable and what would be the main drivers of that, is that occupancy pickup, rent spreads or new buildings in the mix?

It's Matt. So we targeted 3% or 4% on the cash NOI basis. Some of it had to do with what you mentioned, concessions we've seen kind of stabilizing and not so far as they were seen before, and you'll also see the burn off of the larger concessions on a lot of leasing that we did over the last couple of years as well as straight-line of the new rents coming on board.

We have 3 million square feet of leasing 2 years ago, 2.4 or so last year and we targeted in the investor conference 1.7 this year. So as the portfolio continues to stabilize, portfolio continues to run along from the bottom of the market, we're going to have a growth in cash NOI that's going to exceed the cap NOI.

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

Question for you, Marc, I know the answer to your question, but I've to ask you anyway, I happened to agree with your comments about the power market having undervalued your real estate especially during the fall when your stock got hit pretty hard, just curious again why didn't you make a move to buy back your stock during that time period because your conviction never waiver that values haven't really declined. Like the public market here and just curious why in '12 from disposition proceeds to that initiative as opposed buying private market assets at say, presumably fair market pricing?

Well, I think it's the last piece of what you just said, is probably the barometer. We're making fortunes on the assets that we purchased predominantly in the trough to middle innings of this recovery from 2009, end of 2009 both. I mean very, very sizable levered and unlevered gains well into the double digits. You can argue around the margins whether better or not, I bought in the stock but the opportunity set as I said in December, is about as good as we sought. We see 2012 clearly as the market is heated up the buying opportunities may moderate and maybe the late inning ones weren't quite the same as the early ones. But we had an extraordinary 2-, 2.5-year run where we made investments that I think, are going to prove to be the seeds of earnings in cash flow growth or net asset value appreciation over the coming 3 years that is going to be sizable, that are going to define this period of time for the company. So it's a marginal analysis, certainly not the same as if we didn't have very attractive uses for the proceeds along the way, including the structured finance business which you see is also a double-digit business with moderate risk associated with it. So I think, that has driven our actions to a large extent. And also part of the proceeds went to paying down leverage, which we de-leveraged fairly sizably from 2008, let's say, from where we stand today as measured by debt to EBITDA or debt to assets. So those 2 metrics we felt that it was prudent to bring that -- those metrics closer to in line with the re-community because of our goal of establishing an investment grade rating with S&P and hopefully with Moody's. And while buying back the stock may have been more opportunistic at the time than deleveraging, we think the deleveraging will have a long term structural benefit to us as we are able to access the unsecured markets as alternative to secured markets at very cheap rates. So I would ask Jim if he would like to answer that in a philosophy.

The reality is the accounting for share repurchase gives you less than half of the capacity that you would have to go out and make acquisitions off the balance sheet. So the theory is good but so long as we've alternative uses of capital there, really highly accretive and it doesn't make sense for us to look at our stock.

And then second question, I guess, more for Steve or Marc or whoever would like to comment, but I would just be curious if you can update us on your thoughts on high-end versus maybe mid-tier versus low-end of the market. I think, you commented before that the middle of the market was faring better than the very best part of the market and maybe just weave any comments that you feel appropriate in terms of submarkets Park Avenue or Fifth or Madison versus some of the more value oriented submarkets in midtown. That would be helpful.

I think, that's still true today that the biggest activity that's out there is kind of the mid-price points type space and you can define that in a couple of different ways. There's the kind of 30-year-old buildings that are $45 to $65, maybe even $70 price points auction of in the middle of the market and I think, that's where a lot of the activities that could be a lot of the products we've around Grand Central, Third Avenue, but even if there were newer buildings that were downtown, the better quality new buildings downtown are mid- price points and are seeing a lot of activity. When you compare them against the same kind of product, whatever it went for in Midtown. So I think, a lot of the decision-makers out there are taking a very prudent perspective with regards to the real estate. They're looking to lock in long-term leases and they're shying away from that $120 price point. But that comes in waves, I would not be surprise if the economy continues to improve the people become more bullish to see that the high price point product pick up steam later this year.

Your next question comes from the line of Brendan Maiorana from Wells Fargo Securities.

Just had a question about 711 Third Avenue and maybe the marketing of that project and what you guys are going to learn due the marketing process and how that compares to what you're looking to sell in 2012 where I think expectations are around $500 million or more of dispositions for this year?

I think there were issues specific to that marketing process maybe the bankruptcy of a 40,000 square foot tenant during the process, and also the fact that we signed up 3 other deals at prices well ahead of our expectations and sort of very fast timing that allowed us to take a step back really work on re-tenanting that bankruptcy with a tenant liquidated, and then reevaluate the building. So the market response to the building rates, the whole activity was great and frankly the indications of value we got were compelling, but we think we can do better bringing it back under our control and getting the vacant space leased up and then bring in a more civilized building to the market eventually what we when we decide to re-market.

And do you still feel like the buyers out there in terms of looking at projects with some longer-term upside are still underwriting at fairly optimistic scenarios in terms of value where it is today in relative to where they can get so couple of years?

Definitely. You saw the trade-off 575 Lex most recently where that building has a lot of vacancies so people are still aggressively chasing vacancy and taking optimistic use of rental growth and asset appreciation, which has continued to push values in the market.

And then for Matt or Jim, I think, Marc mentioned the $85 million to $90 million of incremental EBITDA from the value add portfolio or the value add properties you guys have within the portfolio. How much of that do you think gets realized in your contemplated in 2012 guidance, how much of $85 million to $90 million incremental guidance that, how much is 2013 and beyond when you realize it?

Actually there's a pretty good reference point for the Brendan's math. You can go to the investor conference are we actually laid out an incremental, call it, $90 million of EBITDA, was coming from notice from the stabilized years a lot of that is beyond 2012, some properties will contribute during 2012 but I think, incremental [Audio Gap] been in full way until 2013 and beyond.

Your next question comes from the line of Michael Bilerman with Citi.

It's Josh Attie with Michael. Just a follow-up on Steve's question on residential, would you now consider doing pure residential investments and is that a shift from the prior strategy, where it seemed to be more of a way to get the retail that you wanted? And would you also consider buying into the Stonehenge's portfolio?

Well, I can't speak to the latter, not our portfolio and I'm not going to speak about somebody else's portfolio, but as it relates to our interest, which is pure residential, which I think you mean standalone residential, I would say absolutely. We would not have purchased the 2 apartment buildings in connection with the retail properties if we didn't think that on the merits they wanted investment that was while it was a smaller portion of the overall. It was still a recollection close to a $100 million, well over $150 million of total value that was ascribed to those property so this was not an incidental investment, if you will.

It was 40% of the investment.

So I mean, it wasn't the primary objective. The primary objective was Seventh, 24th, Fifth and Morrison Avenue and 752 and 760. But nor would I characterize those apartments as I said earlier incidental I would say that we thought each component of that transaction was very attractive and if we had the opportunity to do that on a stand-alone basis I think, we would give it a very serious look. But the only thing I said earlier, I think, it was in response was simply that you now, people tend to be generational owners of rental and so they don't perceive this type of quality buildings don't trade often, but when they do, I think, we're well positioned because we have a currency that can be utilized in a way that would be very attractive to sellers and tax efficient to sellers and flexible to sellers to treat different people differently as we've done time-to-time again. I think, we've done somewhere between 8 and 10 unit deals at least over time. So it's clearly a valuable tool in our arsenal and I would say that we're certainly -- we're evaluating or will evaluate those types of opportunities going forward.

It's Michael Bilerman speaking. How you think about your competitive advantage relative to a lot of multifamily REITs same sort of currency benefit that you do in terms of offering units but also have significant operating platform with multifamily and a lot of them have been very active in New York. How do you sort of compete with that especially when the multifamily REITs, probably, lower cost of capital and have lower return thresholds than you do?

Let me say 2 things, Michael, I don't -- I would disagree with you anyone has got our kind of that currency that appeals to New York owners. When you say there's a lot of other multifamily REITs that have currency that would be as attractive, I don't know of any frankly that have what is viewed as a almost completely New York centric portfolio and operating portfolio like we have at SL Green. I've said it before, I always think that it's very difficult to get people to trade their New York bricks for out of New York paper, that's just my opinion. You could differ with that, others in different with it, it's been my opinion in experience that traditionally people are hesitant and very thoughtful about when and how they're going to trade hard assets that they control for securities that they don't control, the partnership interests that they don't control. And the way in which we've gotten people over than is through track record, management team and portfolio. When you line our portfolio up compared to others, there's a mindset where typically what I've seen is now your people want a New York portfolio. I think it's less an issue of property type per se because I think people view their buying into diversified portfolio. But I know people who just aren't going to trade a midtown rental property for a group of properties located in secondary markets in the U.S.

So it's critical factor in the Franco portfolio as well.

So I mean that's my opinion but that's opinion developed through my experiences and with that in particular and when you talk about New York operating platforms, I look at our operating platform and would stack it up to many other out of town REITs operating platforms and the ability to manage and local vendors and invest capital and relationships. I view that as a competitive advantage, not disadvantage. The cost of capital I can't respond to, we have excellent cost of capital certainly through the private markets and then the public markets at times when we see that market opportunity. It's there at times, not at others, that I think goes to my statement earlier about what I perceived to be a vast under assessment of private market valuation of private market investors, but again all 3 of these things are just my opinion.

What are your thoughts on the size, Times Square and the incremental investment that you made?

In fairness, we have a queue of others, I think, what we should do is we could pick this up off-line. As a residential, I said earlier in response to Steve I had no size parameters for targets and so I don't have any thoughts along those lines because we are driven by opportunity within this market. And I would say that the size of that opportunity will be dependent on a whole number of factors and we'll just see how it goes but we can certainly talk off-line and go through residential more but I would also just want to caution, if you went out there that in the pipeline you're looking at, it's a very small component of our pipeline and I wouldn't look to that to be a major driver of 2012 investment or results.

Your next question comes from the line of Louise Pitt from Goldman Sachs.

Just a quick question on unsecured financing opportunity, the wonder if you comment, given the existing low rates and the fact that you already simplified the corporate structure with the recent bank facility. I know that rating agencies have looked for you to unencumber some additional assets, so I'm just wondering if this would be a good opportunity.

Look, I think that as we move through the year we're going to be doing a number of cap raising activities as we talked about, Louise, including selling potentially some additional assets, more joint venture positions. So as we, for my vernacular as he reload our balance sheet I think we'll look at all sorts of opportunities including the potential for unencumbered additional assets to creating a different kind of capacity not just the mortgage side of the financing that we've done in part over the last couple of years. So that's still the direction that we are consistently on.

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

Just wanted to follow-up on 5 Times Square. Curious, was the legacy investment performing or is it performing and maybe the strategy surrounding the incremental investment there?

There were a couple of new factors there. The property was marketed and ownership decided not to sell but the property was marketed, we've -- we got some data in terms of where the market and where the bits work for the assets when it was marketed. And a piece Senior to us in the capital structure, as I said before, did become available at a price that was attractive to us so we did pick it up. That piece is -- on accrual and a prior piece, which is a pay in kind piece, has been on nonaccrual. We're currently evaluating whether it should stay on not accrual or return to accruing status based on the outcome of that marketing although the building didn't trade.

It's helpful. What else is ahead of you besides the CMBS and the stack?

Just the CMBS?

Just the CMBS.

I mean, the piece that we bought the senior piece was current pay, it's not a pay in kind position.

And then separately, just more of a housekeeping item, on Pages 42 and 43 you used to have your asking rent disclosure which we found helpful over the years. Can you maybe just with that an oversight excluded or did you purposefully sort of eliminate it?

That was -- we couldn't put it back it was in -- it's not in. I found that there was some people who looked at it and sometimes confuse asking rent, taking rent with market rent and with other kinds. And we've got jumbled questions from time-to-time and they would point to the asking rents in a way that was inappropriately applied. It's easy for us to put in, we can put it back in, the problem is in asking rents, it's not equivalent in all cases to a taking rent. Sometimes it is, but more often is a natural negotiations that was on this market. And bear markets, the deviances could be more substantial in good markets it's relatively tied but we didn't know that -- we thought that was being misapplied in some cases and we also didn't know who would anyone really needed it trapped it, if there's a preponderance of people want to back in we can drop it back in easily in '12.

From one man's perspective, we liked it directionally to see what you guys thought of market rents given your perspective.

I would agree with that. Directionally is the most useful application of that. I think, you can get directionally also from average escalated rent unsigned leases in the quarter but with that said, it's a little tough because we have different asset classes so if people.

We'll look at it -- we'll look at it later. We heard this from a couple different sources now, and we'll look at it. But again, it did cause in the last couple of quarters I'm really confused analysis from the investment communities. Now...

There some people who looked at it and several there's another 15%, 20%, 25% embedded market growth based on the asset rents. Now that's not really accurate and even though we like keeping that we want to be accurate and we didn't feel that was right. When I heard that comment that led me to say if that's what people are looking at this, pull it out. We can put it back in.

The cynical view, right, not that I would be cynical, would be that somebody that you guys were pulling it out if that number were rolling over in terms of where the market rent no longer going up with the rent at it does i.e. second derivative.

That's not what happened. That's how Steve [ph] operates the asking rents.

Gradually [indiscernible]

We actually did updated but it was up. The peak cynical...

Do you have the number by chance?

Jordan, it's a matter I'll call you later with that.

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

If you think about ramping up the dispositions in the near term, should be think of that is as a growing appetite to actually see some acquisitions in the back half of the year, I guess, maybe Marc back to the comments you made earlier what sort of opportunities may be size of opportunities are you seeing. Are you seeing more of willingness of sellers to sell and Banks to move properties that create those opportunities?

Well, 10 East is a fresh brick. I think, that's within the past few weeks. That is a foreign pension fund owner, so owned the properties for a long period of time, wants to take some gain for whatever reason most, speculates has no reason if they want some liquidity at this point in time. And review there is upside potential in converting a building that hasn't had a lot of capital investment over the years into what Andrew stated earlier would be building competitive Class A buildings and that location. It’s a great location. So that business for us is something we've been executing for 15 years prior to that for over 2 decades. That's not -- I don't want to -- there's nothing trend setting about it. It's another value-added opportunity that fits our profile. I hope we'll have more like that this year, no reason to expect we won't but as it relates to -- and the answer is yes, I think, we will see those from, you mentioned banks, I don't think we're going to see those from banks, because banks don't own those kind of properties. We're talking about bank-owned facilities that we're looking to shed in order to free up some capital. You may see some of that, but a lot of banks don't necessarily own this phase, there higher rents products, you may see data centers or back office properties being sold by banks to raise cash. But that I don't view as -- that's not the heart of our opportunities, the heart of our opportunities set our owners that have owned buildings for 10, 20, 30 years that are deep in the money, that want to monetize gains and don't want to invest a lot of capital, where we see upside.

At the Investor Day you didn't touch on your development side in Midtown, should we expect any sort of updates throughout the year uses an opportunities, I mean, maybe you're talking more about residential, when would you expect some sort of an update on that site?

Hard for me to speculate, not in the near-term so I can't tell you whether that's 2, 3 or 4 but it's not near-term. So certainly some time throughout the year, I guess, in the second half of the year we should have some kind of update, hopefully meaningful update for investors. I can't pinpoint it more specifically than second half of the year.

There are no further questions in queue at this time. I would now like to hand the conference back over to Marc Holliday for any closing remarks.

That's it. Want to thank everybody and look forward to speaking again in 3 months time.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect your lines. Good day.