SL Green Realty Corp. (SLG) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 and full year SL Green Realty Corp Earnings Call. My name is Erin and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today's conference, Miss Heidi Gillette from SL Green. Please proceed, ma'am.

Thank you, everybody, for joining us, and welcome to SL Green's Fourth Quarter and Full Year 2012 Earnings Results Conference Call. At this time, the company would like to remind listeners that during the call, management may make forward-looking statements. Actual results may differ from the forward-looking statements that management may make today. Additional information regarding the factors that could cause such differences appear in the MD&A section of the company's Form 10-K and other reports filed by the company with the 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 the press release regarding the company's fourth quarter and full year 2012 earnings. Before turning the call over to Marc Holliday, Chief Executive Officer of SL Green Realty Corp., I ask that those of you participating in the Q&A portion of the call, please limit your questions to 2 per person. Thank you. I will now turn the call over to Marc Holliday. Please go ahead, Marc.

Okay, thank you, Heidi, and welcome, everyone. I think as was previously stated to all, this call that we do for the fourth quarter and year-end wrap up is somewhat abbreviated. We go right to Q&A given that this is less than 2 months on the heels of our in-depth investor presentation, which can be found, I assume, still on the web. And provides a very deep look into all of our forecast and projections for 2013, as well as our goals and objectives and has a lot of information on specific sectors within the company for construction, finance, investments, retail, leasing, et cetera. So we keep this relatively short. I would just kick it off by, before we go to Q&A, by saying just how happy I am with the results of the quarter, which I think were very good, but I think exceptional in light of the fact that it was all done within the overhang of Sandy, the Sandy storm, which had very, very severe and intense impact on this economy for a period of time. Although clearly, we're getting back to normal on the heels of that storm. Also, the uncertain election outcome had people's attention and caused a bit of paralysis, I think, in the fourth quarter, as well as the fiscal cliff deadlock, which, at least temporarily, has been surpassed. So in light of that, the fact that we were able to increase our occupancy in the same-store Manhattan portfolio by 50 basis points, 40 basis points of which occurred since December Investor Meeting. So just right at the end of December. We had sector-leading increases in same-store cash NOI of 4.6% for the quarter and 4.8% for the year, which is a very healthy margin, to say the least. We had increased in structured finance balance by about $286 million net and that was on about $453 million of origination activity. And that activity was -- enabled us to actually increase our average yield on that portfolio by 40 basis points to over 9.9%. We had a positive mark-to-market on signed leases of 4.2% and that was on signed leases of over 320,000 square feet of office leases in Manhattan alone. Wrapping up what, I think, was about a 4 million square foot leased year for 2012, a record for the company. We increased our dividend by 32% to $1.32 per share and that was done right around the beginning -- end of November, beginning of December. In addition, there was a lot of transactional activity, some of which occurred after December Investor Meeting. Notably, $122 million new retail acquisition at 131-137 Spring Street, which actually met one of our goals and objectives for the year that was not met at the December Investor Meeting. But obviously, since hurdled our expressly stated goal of one new material retail transaction during the year. There were other portfolio-enhancing transactions throughout the quarter, such as extending the ground lease at 673 First Avenue for 50 additional years of term. The acquisitions of 1080 Amsterdam and 315 West 36th Street in 2 separate JV formats, the sale of a 50% interest in a mezzanine loan that has been originated several years or maybe 4 or 5 years back, resulting in about $13 million of additional income for the company in the quarter and I think that too was consummated. That was actually a first quarter consummation, but something that we had pretty much brought to fruition by the end of the fourth quarter. And then the sale of a half interest in 521 Fifth such that we feel that we position ourselves to optimize our return to net portfolio. So again, I think it was an excellent, excellent quarter as a standalone, and particularly in light of the headwinds that I mentioned earlier. And we're off to a strong start in 2013 with signed leases during January alone of -- in excess of 150,000 square feet in the month that's usually a quiet month for us. The transactional activity in the market is impressive with an exclamation point on 550 Madison, which went to contract during January for a price that exceeded expectations by $100 million to $200 million depending on how you look at the asset. The confidence among our '10 phase seems to be much higher now than had been in the second half of '12, and we believe that, that confidence and the continued low interest rates and some stability in the market will lead towards some growth and expansion in this market for the coming year, which will enable us to hit our fairly lofty goals and objectives we laid out in 2013 back at our December Investor Meeting. So with that, I'd like to open it up for Q&A.

[Operator Instructions] And your first question comes from the line of John Guinee from Stifel, Nicolaus. John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: A couple of questions. Clearly, Marc, the market value, your shares is a discount to private market valuation, plus you're at a $7 billion, $7.5 billion market cap or denominator, so it's hard to push the earnings per share with that kind of basis. So having said that, are you in the market to buy back your shares at this kind of price?

Well, I don't know that if we were or weren't, I could answer that question. I have to -- by looking at my counsel, shaking his head, no. But with that said, I would concur with the basic premise of what you say, John, which is that there are moments in time where I feel like we're trading somewhat on top of the private market valuation. Often it's a discount and there are moments where it's very sizable discount. I would say, entering this year, it would move into the realm of sizable. The private market appetite for core product in Manhattan, particularly residential, retail but office as well, is just strong and robust. And people are once again willing to take a very low entering yields that are then predicated on executing business plans to create upside, whether it's through market rental rate increases that they believe will evidence themselves over the next year or 2, or whether it's a conversion opportunity or whether it's just taking advantage of very low interest rates today. Whatever it is, we're seeing enormous strength in pricing against -- across all product types. And I think that when you look at our portfolio today as what it was 1 year, 1.5 years ago, it's just dramatically enlarged, improved and higher and more value creation within yet, the stock price has not risen in tandem with those efforts. So there is a fairly sizable divergence, I would say, and I don't think that those divergences last. At least our experience as a public company for 15 years is those moments in time don't last. So we'll look at how best to run the company in light of that situation. John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then the second question is a two-parter. 635 Sixth Avenue, which you just bought I think in the third quarter, looks like the book you're carrying it went from $83 million down to $62 million, if you can discuss that? And also discuss the $218 million first mortgage you made, which is on the book showing the '11 yield, which seems a little bit higher?

635 Sixth, I think, was a pretty straightforward estimation, Matt.

Yes, exactly, Matt. When we acquired that property late in the third quarter, final purchase price allocations added between 635 and 641 weren't complete. When that gets completed, which usually takes place 3 to 4 months after the acquisition, it was done in the fourth quarter, the base is allocated differently between 635 and 641. So the all-in basis in both combined is the same allocation between the 2 changes based on the final analysis that's completed by third parties.

John, it's Andrew. We acquired a nonperforming mortgage loan secured by 315 Park Avenue South. That is a first mortgage. And as you note, that rate is the full default rate that's accruing on the loan given it's past its maturity. John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: And are you able to book that as current income?

Until any assessment is made that we cannot, we can. The cash component of that is what we are evaluating on a go-forward basis. That rate is below 10%, it's closer to 6%, 7%. When we took the position in late November, early December, at that point, we made the assessment to book the default interest for at least that first month.

In other words, the rent from the property is servicing currently, as Matt said, 6% to 7%. The balance is accrual of the loan amount. John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: But you're booking 6% or 7% or 11%?

In the fourth quarter for the one month we held it, it was booked at 11%. Going forward, it will be the 6% to 7%.

And your next question comes from the line of Josh Attie from Citi.

At the Investor Day, you provided targeted returns for some of the transitional assets in the portfolio like 180 Maiden Lane, 280 Park and 10 East 53rd Street and others too, whether it's either vacancy today or a pending move out. Given the slowdown in the market, which of these do you feel best about and which are you kind of concerned might take longer or generate lower returns than you initially underwrote?

I just want to make sure we get the time periods right. Relative to what we showed you in December, we are right on track with what we showed you in December. I don't think we have any modifications that-- be it accelerated or decelerated for all of those assets, and they were a lot. I think -- I'm flipping through the book now, I think I just found it, actually. There's probably 15 or more properties on here, which we showed how much NOI we had created since acquisition, and then we showed how much more we expected to create in 2013, and then, I guess '14 and beyond. So for all of those assets, I'd say we're still very much on track with what was in that presentation in December for all of those assets.

Can you talk specifically about 180 Maiden Lane and what are your thoughts on re-leasing AIG space and what's the competitive dynamic downtown and also vacancy at World Trade Center and World Financial Center?

This is Steve Durels. The -- our business plan when we bought the building was to, much like when we took over 100 Church Street, was essentially a value play, bringing the space to the market, cheaper than the competitive alternatives. And the way we look at downtown right now, we look at the Trade Center, which we think is priced. Taking deals is going to be in the mid-6s to low 7s a square-foot. World Financial Center will be in the low 50s to high 50s a square foot and we see 180 as being low 40s to high 40s a square-foot, depending on how much space and where it is in the building. We think that the capital program and the amenities that the building enjoys, give it an added leasing advantage, where we have an opportunity to create a big brand statement for our tenants, we've got amenities like a fitness center, an auditorium, a cafeteria that are all be open to the general kind of, population and the views in the building are, in the full place[ph] , are a top drawer. So we feel good about its prospects this early in the game because we're only now starting the capital plan for the building and AIG doesn't vacate until the middle of '14.

And I'm not sure where you are in the marketing process. But just can you talk anecdotally about what the level of interest has been and what the activity has been? And are you talking to the same type of tenants that could go to World Trade or could go to World Financial Center? Are they directly competitive or because of the price difference, are you talking to different tenants?

The profile of tenants, they're going to shop, I think, all 3 of those submarkets whether it's Trade Center, World Fi. or us. So I think you're going to see everything from typical downtown tenant of financial services and insurance to service businesses and office -- and general office services. But I also think, and we're designing our capital program to appeal to the Midtown South and sort of the traditional Midtown tenants, particularly some of the more creative media and tech-type tenants. And you've got to find the right balance between an aesthetic for the building that appeals to both populations because particularly the tech guys who work -- and the creative guys are going to get pushed out of Midtown South because there's no availability. The natural place for them is to come downtown, and we think we have a product that should appeal to them.

And your next question comes from the line of Rob Stevenson from Macquarie.

Just a follow-up on that last question, Steve. Are you starting to see any spillover in tenant demand for downtown, Midtown South from tech tenants in Brooklyn unable to find additional space in that market?

Very, very little. We've see 1 or 2 tenants come from downtown. I haven't seen anybody come from Midtown to Brooklyn. As far as our building goes, it's 16 Court, there's been others that's in that neighborhood that have come across. But mostly, it's been the tech guys that come, small companies that are coming out of essentially the garage, their apartment, they're in their infancy and they're taking their first offices and they're coming into a more traditional office building. But certainly, that type of tenant is in Brooklyn.

Okay. And then, Marc or Andrew, can you talk about what types of opportunities you're seeing on the residential side beyond the Amsterdam asset and how you're viewing the risk and return on residential in the city today versus those on the office side?

Definitely extremely competitive out there to accumulate quality residential assets. We did go to contract on a property in Williamsburg that was attached, I think we talked about it in Investor Day, that was attached to our -- the retail asset that we own there already. That will be an exciting lease up play for us on a bunch of apartments in Williamsburg, and we're looking at deals, actively in Manhattan. It's just extremely difficult to manufacture what we would call acceptable yields for that type of product. Most of the market seems to be at 3.5% to 4% type cap rates for stabilized or pretty much stabilized assets and that's just not an area we're interested in playing in right now.

All right. And are you still doing deals or looking at deals with Stonehenge or are you primarily looking at deals on your own at this point?

Yes, I think it's a lot of both. I mean, the Williamsburg deal is with another sponsor, another operator. And we are looking at some deals with Stonehenge as well.

And your next question comes from the line of David Toti from Cantor Fitzgerald. David Toti - Cantor Fitzgerald & Co., Research Division: Sorry if I ask a bit late. But did you guys talk about the ground lease renegotiation at 673? How sort of that came about and what the term options were, if there were any?

I'm sorry. And the last part was, what the term options are? David Toti - Cantor Fitzgerald & Co., Research Division: Yes, a ground lease is sort of an interesting instrument, right? So there's probably a number different ways to structure them. I'm just wondering if there were multiple options considered and kind of, how that negotiation went?

Well, 673 is an asset that was actually -- it could be the only asset in the portfolio that was contributed in as part of the initial IPO. It was contributed as a leasehold and so now we are 15 years later and we see it as a leasehold, do you just run and operate the building? And except for some ministerial stuff, it's fairly routine. But when we get to the revaluation date, obviously then it gets interesting because of rent based on the formula in that particular ground lease would go up commensurate with the increase in market values for that land over from whenever that lease was originally transacted, which is at least 15 years ago, maybe even 20 or 25 years ago. So as part of that, we took it as an opportunity to do kind of a wholesale modification of the lease. And as part of increasing the rent to reflect that revaluation, and we did it a little early, maybe 6 or 12 months before, the rent would have otherwise kicked in, which was obviously a benefit to the fee owner. We got a whole host of additional features added to the ground lease, which we think really created a lot of value for us not the least of which was a 50-year additional term extension that I think brings the total term now maybe to 70, 74 years or thereabout. So that's a very long-term ground lease in the world of commercial ground leases. Second it set the rent for the next period of time for about 25 years. So there won't be another revaluation date. We have a known rent with a known increases over that 25-year period of time. And then there was some other features, we cleaned up the language around the revaluation formula and actually out in time for the extension period, made it somewhat less owner-risk than it would otherwise be by reducing the rental factor, which is common to those kinds of revaluation exercises. Again, we also got a right of first offer on any future sales of the real estate, which as a leaseholder is an incredibly important feature. So all in all, I think a terrific execution for the company. David Toti - Cantor Fitzgerald & Co., Research Division: It's interesting. My other question, thanks for the detail. My other question is just around some of the leases that you signed on the Suburban assets in the quarter, and I'm wondering if you could just give us a couple of examples of sort of the general tone of the discussions you've had on some of those leases that the roll down still kind of suggest some weakness there. I'm wondering, what's the sense of the tenants or, I guess, what's the tenant mindset of those markets relative to the takedown of space. Are they more cautious than some of your sort of core CBD tenants, are they shopping around more, what's the behavior pattern you're seeing here?

Well, the term weakness, I think, is a relative term. I don't -- I thought it was a pretty good quarter. Given the Suburban markets, we held occupancy close to flat. I think we might have been down from 81.5% to 81.3% for the quarter and that was on leases that were commenced and reported in the supplement of 142,000 square feet of leasing in 31 deals, that's for the fourth quarter. So that's robust. I think we're doing a better -- as good a job as anybody in the Suburbs holding the line. I think the sentiment is the same as it has been. I -- certainly it's not worse. I query whether it's starting to be a touch better, but I think it's premature. But I wouldn't say it was any worse than it was, either throughout the early part of the year in 2011 where we've taken care of a lot of our near-term roll by doing a lot of -- we did a lot of advanced leasing in 2011, 2012. I was very surprised when I sat down to do the budgets for 2013 that the leases expiring contractual in '13 is on the order of a couple of hundred thousand square feet. It's 250,000 to 300,000 square feet is a number that sticks out of my mind. You know quite, quite low and we're obviously going to work hard to retain as much of those as we can. We are working on some new deals. We have actually 2 tenants competing from one space out on some property in the Tarrytown area, which that's always nice and we have other deals we're working on at the Ritz condo and elsewhere. So I think it's -- the market is pretty much the same as it's been. But a lot of the triage we are doing in '08, '09, '10, '11, seems in my mind, to have subsided a bit.

And your next question comes from the line of James Feldman from Bank of America Merrill Lynch.

So, Marc, your comments on confidence among your tenant base is higher than in the second half of '12. Can you talk a little bit more about the kind of leasing you're seeing and what changed after the first of the year? In terms of the types of tenants and the sizes?

I think the best way rather than do it anecdotally, let's just talk about the most recent signed deals, the kinds of tenants that signed renewal, renewal expansion or new deal and talk a little bit about the pipeline. Actually, I'm going to turn that over to Steve Durels. But before we do, maybe preempt another question here. On the last call, we talked about having leases out for signature and leases in negotiation totaling 435,000 square feet. And if you check that in the transcript for Q3, that was about 120,000 out for signature and about 315,000 that were in negotiation, meaning, leases have been drawn and being negotiated, 435,000 feet in total. That number now has increased to 727,000 square feet, comprised of 80,000 leases out for signature. So a lot of the ones that were out, we obviously signed and got done the third -- in the fourth quarter. But then our pipeline of deals and negotiation is 650,000 square feet, which is quite high. And that means we've agreed upon a term sheet, and we're -- you've gone to lease. So Steven, if you could just talk about maybe the most recent signed deals of 150,000 feet we spoke of as being signed in January. And then sort of the composition by sector or type of the 730,000 square feet that's in pipeline.

Sure. It's much as what we saw in the second half of this year where it's been a very broad diverse group of tenants that are out there, we've done a combination of renewals. One of the larger being with WPP, which is the parent company for Young & Rubicam for 47,000 square feet at 100 Park Avenue, that's one of the leases we signed in early January. But I don't think there's any one tenant that type that's really driving the leasing demand right now other than the fact that it's no surprise to hear that financial services for the big investment banks is still fairly quiet. Commercial banks are still out in the marketplace, hedge funds and private equity guys are still floating around. But I think also like what we saw second half of last year, you heard us repeatedly say, it is still a market where tenants are searching for value. They're not searching for the penthouse-type space. They're looking for space, much like what we have in our portfolio of quality spaces where buildings have been renovated, they're well located and they're looking to trade in particular in the rents that are in the anywhere from mid-40s to low 60s a square foot seems to be where the biggest demand. And value's relative even the deals that you've seen announced in new construction. Those tenants are going there for, for value. It's -- they're not going for high-profile, they're going for efficiency of space, they're going to be able to lease[ph] Their use and put a lot of tenants into as little square footage as possible. There's a pretty good pipeline of activity. We've certainly seen it coming off of the fourth quarter, coming into the first month of the year where, as Marc said, we signed 150,000 square feet. What he didn't mention is that we've got another 600,000 square feet of term sheets that are also in negotiation on top of the 700,000 square feet of deals that are -- where we are actually in lease negotiation. I think the year is set up for a pretty strong leasing year and the question that is on everybody's mind is when we'll see your rent appreciation and I think we're a little more bullish about that in the second half of the year.

If I could just have the follow-up on that. Do you have a sense of just financial services shadow space, like how much more is there to come or do you feel like we're nearing the bottom?

You know, I ask the question of any time I'm with a broker and I can't really get somebody that can give us a clean answer as to where is the list of financial service, where the big banks are going to put space on the market. We've seen a little comer on the market that was unexpected, right? Axa , put some space on at 1290 Avenue of the Americas, but they also put it on in a very low rate and from what I understand, it's already got offers and I think good portion of the space. So I can't give you a good answer as to whether there's a lot of shadow space that's going to convert into supply coming on the market because I haven't seen it.

Okay. And then for my second question, if we could just talk about the debt book, you grew it by $286 million in the quarter. What's your -- how big are you comfortable taking that? And then what are the opportunities you're seeing to grow by that much in the quarter?

I'm not sure I understood the second part of the question. The -- how big are we comfortable, I think, at the levels we're at, we're very comfortable with. I think there's some room for growth throughout the year. I think we may have projected as part of December some increase in structured finance balances over the year, which will be mitigated in part by some sales and syndications that we plan to do on assets like, possibly 315 Park Avenue South and otherwise. So I don't think you'll see a significant increase throughout the year. But certainly, that could translate into maybe another $200 million to $300 million in total net, which would still be right within our sort of unofficial guide of around 10% of market cap. So there's no real change in the quarter or strategy there. What was the second part of the question?

Just in terms of the -- the transaction or the deal that you found in the quarter, what type were they?

Well, they were all, it's our typical mix of bridge loans, mezzanine loans, preferred equity.

All Manhattan?

All Manhattan, I detailed the large non-performing loan we purchased on Park Avenue South and all Manhattan office retail.--

And your next question comes from the line of Ross Nussbaum from UBS.

The asset you've purchased at the end of the year, the retail asset down on Spring Street, can you maybe shed some color on why is that an asset that SL Green has not wholly owned as opposed to in a joint venture with Jeff Sutton and what kind of deal, I guess, in the retail part going forward get done with and without Jeff.

Well, the deal we did at year-end, came together very quickly at year end, I want to say that. That transpired over a period of few days at the end of the quarter, which is why we pride ourselves in always being here and on the ready, even though over the holidays in December because that's usually fertile grounds for us for last-minute deals and here it was, the top one. So I wouldn't necessarily make any speculation about who will or won't be in that the deal ultimately. Jeff or otherwise, we just -- I think we just closed it a few weeks ago and we certainly could wind up venturing that asset with Jeff, possibly, or not. But sometimes things come up so quickly, it doesn't -- not a -- it's not so rigid a program where we have to do it all one way or the other. The deal just came up, we loved it, we did it. We were able to get in there where others were vying very hard for that same asset and it took a lot of execution and performance by the team here to have accomplished that, both on the transactional and legal side to get it done. It was only $122 million, but it doesn't mean it was -- it's as complicated some of the bigger transactions we work on, they're always complicated. And we'll just sort of take stock of the asset and decide what to do.

What's the initial ROI on that asset and what made you so excited about it?

Well, it's 2 extremely valuable resale stores in a very prime area of SoHo, which is benefiting from the significant rental appreciation on Broadway and a lot of development of high-end stores in the Spring and Wooster Street corridors. So the attraction was to get to these very high quality stores that have relatively short terms remaining on the leases there. And going in, it's a very low yield as is typical of retail assets today. However, we think in the short term, we'll be able to work the leases of the property and get the returns up to our typical 6% to 7% cash on cost range for the retail investments.

I would just add to that because you had something about -- go-forward arrangements with Jeff. I mean, Jeff is our retail partner. We have a very strong alliance with him. We do most deals together. There's always the one oddity that Jeff does on his own for whether it's legacy reasons or partner reasons or strategic reasons, and that may fall on our side of the ledger as well. But the value we created as a team, I think since 2005 or 2006, has been extraordinary in this sector and we certainly expect to do a lot of business with Jeff this year.

Okay. Second question, Marc, on the dividend, and I appreciate the dividend increase that the board put through. But I just was looking back. The last time you were at the current earnings level you're at now on a run-rate basis, the company was paying out a quarterly dividend that's in the $0.60, $0.70 quarter range. And I'm wondering in the board discussions around the dividend, were there any voices that spoke out and said, look SL Green is still, after all these dips and increases the last 2 years, still has basically the lowest dividend yield of any real REIT and shouldn't...

Well, I mean that certainly gets discussed at the board. It's usually somewhat of a -- it's a little bit more of a badge of honor than something we're not -- something that is viewed as negative because our shareholder base is almost exclusively institutional and we meet with the shareholders, Jim and Matt meet them regularly to discuss the dividend. And I would say, almost across the board, maybe 8 out of 10, if not 9 out of 10, generally conclude that they're owning SL Green for growth and income but with a much higher emphasis on growth. And if you look at the ROEs we are creating on our investments as measured by the ones that we buy, reposition and sell or as measured by the structured finance asset that we originate and get yield and then get paid, those returns are generally at the highest levels of our sector. And retaining as much cash as permissible to reinvest into those activities is generally viewed positively. I guess, there's always -- there will always be someone who will say, well, it would be nice to have all that growth and high income but the 2 are somewhat in opposition to each other. And we find that we get better net asset value expansion by paying out a reasonable dividend. But clearly, it's always been from day one, lowest levels of the sector. And while it may be lower on a relative basis the FFO than it was, I guess your point was relative to FFO -- relative FFO in the...

[indiscernible]

Yes, but it's not changed from what our stated objective has been and always been, which is at the dividends ride on top of net income -- I'm sorry, taxable net income, correction. On top of taxable net income. And that is probably no different than it has been if you check back in time. So the dividend is more tightly tracking taxable net income, whereas -- and not FFO.

Okay. No, I appreciate the answer. I'm obviously -- it sounds like I'm in the minority amongst your shareholders you speak to in terms of the view on the dividend.

And your 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 wondering if you guys can comment Kranes[ph] had the article that you guys are in the lead to provide all the financing and -- at your Investor Day, you guys have outlined the sort of buying wholesale, selling retail concept as far as originating entire financing, showing off the senior and the VP has been keeping the mezz. But sort of curious given where that building traded on the per square foot value, how far off are you willing to underwrite mezz? Would you go up to like 1,000-foot on mezz or higher than that? Just trying to get some color.

Sony is obviously a deal in the market. So I don't think we're going to comment on it specifically. There's a great need for financing there, and I would say typically, we're comfortable holding debt up to a level that's a reasonable cushion below what we would pay for the property. So we did bid for that asset and I would say we're comfortable holding the last dollar of debt that's, call it, 5% to 10% lower than what we bid for the asset and it's an extraordinary building. We thought it would've made an extra office building, wound up trading on the basis, a use that is likely going to be more oriented to hotel and residential than office, although there were office players that bid significantly more than awesome thought at a more Folsom [ph] view of rents there. So it's an extraordinary asset and one we would certainly like to be involved in. It's not -- certainly not the first office asset to trade in the $1,100, $1,200 a foot range. And there's a lot of demand for these types of assets out there. We thought this was a great validation of the market and our story to see this asset trade for this kind of price. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay. The next question is just if you can comment on the HarperCollins news report early in the Post this week that they're going to move out. Just sort of curious what your thoughts are on CapEx as far as downtime and where you think the red marks will be?

Sure. Harper signed their lease downtown at 195 Broadway. We knew they were moving out of the building when we bought the property. We underwrote it in our business plan. Would have been nice if they had stayed, but that would have been a Hail Mary. Nobody really had much expectation that we had a chance of keeping them. The plan has been and currently is to reposition the building with a pretty material capital improvement program to a boutique office building. The property hasn't been touched in, I'm going to guess, 25 years by the prior ownership. And it sort of needs everything. But it's got the perfect bones, it's a great location, it's small to medium-size of 4 plates with very few columns and great windows. And the top 10 or 12 floors have stunning views of Central Park. We think we underwrote rents that are going to be attractive in the markets. Our nextdoor neighbor is 510 Madison and they're doing deals in the 120 -- 115 to 120 a foot range, and our rents that we're expecting to get are going to be considerably less than that and the capital program that's going to be everything from a new lobby that closes off some of the public space, the passthrough right now to enlarge the presence of the property, redoing a plaza, replacing the windows, the elevators, the infrastructure and we're going to have one of the best products in the market. They don't -- Harper doesn't vacate until the middle of '14, and we're deep into the design right now. We think we're probably in construction sometime in the second, late in the second quarter and we'll get a lot of the work done before Harper ever packs their bags.

I'll just add to that. In December, we did a little module on [indiscernible] which noted almost 2 months ago that Harper was leaving, we were launching a redevelopment. So I understand the newsworthy item is that they signed elsewhere. But as far as Harper leaving the building, this is probably been on our board a couple of meetings with the [indiscernible] acquisition 1 or 2 but I would say the better part of almost a year. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay, may just be the impression of the Investor Day, it seemed like there was chance that they may stay given everything that was going on. So excuse the question but it just seem [indiscernible] that may be a chance that they were staying. So thank you.

Okay.

And your next question comes from the line of Brendan Maiorana from Wells Fargo.

So Marc, it sounded like you felt that asset values were moving up somewhat significantly for building acquisitions. At the same time, as you guys detailed in your December events, you're making very good spreads on your structured finance book and you moved it up in the quarter. Is there any chance that you relaxed the self-imposed 10% threshold of your asset base given that, it seems like returns there are attractive and maybe it's hard to find the simple investment?

No. I mean, 10% is a target. It can -- it's generally, I think on average, been probably 6% to 8%. When market cap dropped for a period of time back in '08, we blitzed[ph] over for maybe a year or so. I don't quite remember exactly how long. So I wouldn't get too zoned in on 10% being an exact metric, that's the target is to be at or below. If we had an extraordinary year this year and ended up the year at, let's say, 12%, then I think what you would see is we would work extra hard to syndicate some assets, some structured finance assets to optimize the yield and bring the structured balance back below. So if the question is, could we have some big origination throughout the year that would temporarily put us above 10%, I guess the answer is, yes. Does that mean our target is there for moving up from 10%, the answer would be no. And that would mean we would be just following on with some syndication exercises, which, as you've seen, we've been very, very blessed, I think, in executing -- we're as good about originating as we are a seller and that's why you're seeing the average yield move up in part. It's not necessarily that we're underwriting at higher and higher spreads. It's that we're doing what somebody mentioned earlier on the call what we detailed in December where wholesaling the capital stack and then retailing it out and bringing your spreads that way through originations indication. So that could become slightly lumpier, I guess, although it really hasn't to date. And I think that's the best way I would answer it.

Yes, that's helpful. And just as an outsider, sometimes it's sort of difficult to ascertain value of that book. But if you have the handicap, but if you had to monetize that book, do you think it's -- sort of, 10% above or your book value is 20% above? Can you sort of give us some goalpost?

I don't know. That's very difficult. I mean, it's very telling, it's only one asset but look at what we did on 5x through selling half that investment. And creating a sizable gain there on what I believe is a fixed rate investment grade that is fixed rate. So obviously, with the fixed rate instrument, there's more opportunity for that kind of execution than the floating rate asset so you'd really have to bifurcate the portfolio into a fixed and floating. And in the supplemental, we have that bifurcation.

We do, yes.

So the floating rate assets, there is generally what you're trying to do is make the fees and maybe make an IO when you can create some real value that way. The bigger gains, if you will, if you do it properly are in the fixed rate book.

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

Just curious how you're thinking about office acquisitions. It sounds like it's still not as attractive as the debt investments and then also, what about dispositions for 2013?

Well, office acquisitions, I don't know if I would measure it against the structured finance book there. It's not one or the other. I think the structured finance originations are probably at the same levels now in 2012 as they were in earlier years when we were buying office assets more aggressively. So I'm not sure I'd draw the parallel between the two. If you're just asking generally about our appetite for new office investments, I would say that consistent with what we said in December, we view that the pricing has gotten to levels where we're being much more selective. Case in point in 2012, I think, we did 3 deals primarily.

10 East 53rd was the only major Midtown office asset we bought and then we bought the 2 Midtown South assets.

Right.

But I think we're still comfortable with guidance from early December of $750 million or so of new acquisitions and dispositions of $400 million or so.

Okay. And then just a housekeeping question. I think at the Investor Day, you talked about a 96% occupancy goal for Manhattan. Can you help us relate that to the number in the [indiscernible] the 93.8 for the same store.

Michael, it's Matt. At the first of every year, we reset the same-store [indiscernible] take into consideration the assets we acquired really 2 years prior. That is the basis for our 96% occupancy goal that we set for 2013. So for 2013 same-store pool. That pool at the end of 2012 was 94.3% occupied.

So it's 94.3% on a new same-store portfolio as of 1,113 that we're projecting 170 basis points of increase in which I'm going to assume it's close to sector leading in terms of occupancy, projected occupancy gains for the year. And just based on how we think -- see things as we sit here 45 or 50 days after having set that goal, we still feel confident, but it's clearly -- that's a stretched goal. I mean, that's not a tap in, but I do think we'll hit it this year. As it turned out last year, we were only 30 basis points off of our projection at year end. It was unfortunate because at the December meeting, we had some deals not yet signed. And had they been signed, we would've been just 30 bps shy, representing a significant increase over 2011. So that was timing. Hopefully, we'll do the right thing and get those signed by December Investor Day and not by D31. But in any case, we're still comfortable with 96%.

Okay, that's helpful color. As a follow-up to that, where would that 170 bps come from? Obviously there is some specific assets where you have. A lot of vacancy like Tower 45, et cetera. Is there sort of a generic way to describe where that 170 might come from or how or what types of tenants?

I would look at the gross portfolio slide and I guess we have to take, I mean, it's mostly coming from there. We'd have to pick it out...

There are some properties, Mike, like 100 Church, right, that has leases signed but they haven't taken occupancy yet so. That thing is in the mid-90% leased about not mid-90% occupied. There's a big pickup there. We anticipate some pickups in some properties like 810, 521, 420, some properties that have seen -- they've done fairly well over the last couple of years but have seen a little bit of a tail off like in the case of 810 that we see some pickup in 2013.

That's 810 Seventh, 521 Fifth and...

And 420 Lex.

And your next question comes from the line of Michael Bilerman from Citi.

Just 2 quick ones. Marc, just thinking about your comment beginning of Q&A about sizable discount to asset values, sort of where the stock is trading. Is there any reason why, just like you have an ATM to take advantage of issuing equity. You wouldn't just have a standing stock buyback program in place just to have it so that if there is a market dislocation, and we can count the number of ways that, that could happen over the next 12 months that you fully have the opportunity to take advantage and capitalize on that and buy what you know best, which is your portfolio?

Yes. Clearly, there's no reason not to have a standing buyback that I can think of.

We really don't need one, though.

[indiscernible] It would hold us up. So those are -- that's a fairly immediate item but you're right, on the margins, no reason not to. I'm not sure that it's a benefit, 100% benefit to do it, but it's a good -- something we'll take under consideration. Certainly, no reason not to.

And then just on 131-137 Spring, is there any -- difference --the asset traded back in '06 for $46 million. The square footage looks it is 10,000 square-feet more. I don't know if there was some addition or if your purchase was different from what it was then. But maybe -- talk about what changed in the marketplace from '06 in terms of rents in the market and then just sort of initial cap rates from, it was probably getting to be peakish market back in mid-'06?

We actually underwrote and bid on the property in '06 and lost the bid. Hindsight is 20-20 as they say but the retail market rents have moved significantly. The in-place rents today are $178 a foot in one case and $263 a foot in the other case, and we're looking at market rents today in the $600 per foot range. We expect that to grow as rents on Broadway are getting pushed to the $1,200 to $1,500 a foot range and that's sort of like Fifth Avenue and Upper Madison, that's pushing users that are -- that can't afford Broadway rents onto the side street of SoHo. So it's really just a change in retail market rents, which have changed the return profile of the asset.

And there's no difference in the square foot or was there difference in square footage or everything is exactly take same?

I'm not sure about the discrepancy in square footage. I mean, there may have been some change of use in the upper floors where they bought out some live/work tenants and changed the use to office, but obviously, they didn't modify their envelope of the building, they probably picked up some square footage because of lost factor on office space versus usable square footage on retail and on residential space.

I would now like to turn the call over to Mr. Holliday for closing remarks.

Okay. Thank you very much for dialing in today. We look forward to working hard through the year to meet our lofty but we believe attainable objectives for the year, and we'll 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. Have a good day.