SL Green Realty Corp. (SLG) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the First Quarter 2013 SL Green Earnings Conference Call. My name is Phillip and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now turn the call over to your host for today, Ms. Heidi Gillette, Director of Investor Relations. Please proceed, ma'am.

Thank you, everybody, for joining us and welcome to SL Green Realty Corp.'s First Quarter 2013 Earnings Results Conference Call. This conference call is being recorded. At this time, the company would like to remind listeners that during the call, management may make forward-looking statements. Actual results may differ from the forward-looking statements 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 first quarter 2013 earnings call. 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 it over to Marc Holliday. Please go ahead, Marc.

Hello, and thanks for joining our call this afternoon. The positive economic conditions in New York City provided the backdrop for a very solid first quarter of 2013. First, and foremost, we leased nearly 600,000 square feet of space in Q1 with almost half of that amount represented by new leases. This momentum carried through to April where we have already leased an additional 164,000 square feet in just the first 3 weeks of the second quarter. Moreover, we have a strong pipeline of deals, evidenced by over 1 million square feet of leases that are either out for signature or under negotiation categories that, we believe, represent high probability categories of consummating sometime during the year 2013. About 0.5 million square feet is represented by new leases. So you can see that relative to last year, in particular, there's a lot of activity and a lot of success we're having at renewing tenants but also filling vacant space that we acquired in the growth portfolio. While mark-to-market on the office leases in the first quarter was just slightly positive, I do want to stress that I think you'll see more significant mark-to-market gains throughout the year as we have already experienced good mark-to-market in leases signed in quarter-to-date, in second quarter, and our pipeline looks very strong as well. So we are maintaining our full year office mark-to-market objective of 3% to 8%, which was something that we had highlighted back in December and notwithstanding 1 quarter down and 3 to go, we still think that, that will represent an accurate range of where we'll ultimately land. And that, I think, gives you some insight into the kind of leasing that's in front of us, not only in terms of volume, but in terms of economics. It was also notable that the concessions were down significantly in the first quarter, consistent with prior lows we've had in other quarters but certainly down from our average. And this is attributable, in some respect, to being very prudent on renewal leases and getting best deals possible. But even on new leases, you'll see that we're cutting more in the way of net effective deals. And so you don't always see that big pop in headline rent but we're also doing it very efficiently, trying to be smart about how we spend our capital to buy new deals. We're seeing very good demand in various sectors of the market, all but the largest financial firms, there's a lot of activity and we're seeing great activity in professional and business services, media, advertising, tech, health care and education. I would say all of those sectors, almost equally, are net contributors to absorption in this market. I know that many of the analysts are focused in on the potential space shutting that may occur in the future at some of the largest commercial and investment banks. But I think that would be a mistake to let that overshadow the very vibrant business and leasing environment in the midsize space market where we see much demand and competition for space. Examples of locations where we are experiencing a pickup or continuation in demand include the 125 Park, 3 Columbus Circle, Graybar, 810 Seventh, Tower 45, 919 Third and 304 Park Avenue South. And this morning, many of you have seen that we and Vornado announced 100,000 square feet of leasing at 280 Park Avenue, which represented renewal and expansion space for those 2 tenants and we have very good activity on the balance of the building, notwithstanding the full completion of the redevelopment is still a year away with completion of the lobby set for sometime around Thanksgiving. Our retail leasing also remains strong with deals announced this morning with CBS at 3 Columbus Circle and that lease with CBS is the anchor retail tenant that we had talked about landing as an important goal and objective for this company in 2013, so we're happy to have CBS join our roster of retail companies at 3 Columbus and having that objective completed so early the year, as well as retail leases that we did with Urban Outfitters and TD Bank at 180 Broadway bringing that building to full occupancy, 100% occupancy, for a tower that we developed from ground up. This leasing activity can be directly linked to the robust job creation in New York City. New York added 78,000 jobs in 2012 and that followed an increase of 90,000 jobs in 2011. The primary sources of growth, I mentioned before, but I'll sort of reiterate here: professional services, technology, health care and education, not in terms of square footage, as I mentioned earlier, but in terms of job creation. But those are the sectors where we see the biggest contributors. Overall, employment was up 13,000 jobs in the first 3 months of 2013 and this increase was achieved, notwithstanding the drag created by a reduction of 5,000 financial services jobs in March, which shows that these growing sectors can more than counter, counter by a wide margin, the job losses that we're seeing at the margins in the financial service sector are being far exceeded by job growth in these other industries. And we expect that trend to continue throughout the year and that -- our rule of thumb is typically anywhere between 40% to 50% for private-sector job growth, it translates into office-using job growth. So we think this bodes very well for stabilizing or even possibly, an increase in the overall occupancy rates in overall Manhattan market. So with that short introduction, I would like to open up for questions and answers.

[Operator Instructions] Your first question comes from the line, from Jamie Feldman of Bank of America.

Following up on what you're seeing in terms of demand, can you talk about any change in sentiment among tenants given that downtown is -- the developments are starting to kind of get near completion, the transit center getting close. And then the coach lease on the West side and then Time Warner's space, the Time Warner Center. Just kind of like what changed in the last quarter, given what seems to be we're getting closer to some new supply?

Well, I want to make sure we understand the question exactly. The sentiment we're seeing from tenants is, and I would say this is since December, and we stated this in December and in meetings we've had since that, we think there is a confidence factor and a profitability factor in most of the industries I mentioned earlier, even financial services is actually quite strong. It's not just at the -- not at the very top levels. And that sentiment, I think, has gotten stronger and there's a feeling now that before, there was a lot of consolidation. There might have been a little bit of contraction or there might have been sort of stable growth. Almost all the leases we're seeing now our factoring in future growth plans, again, as they typically do. So I don't -- that doesn't relate in any way, shape, or form to the new development that you were referring to in downtown and Hudson Yards. But that's just generally a shift in sentiment we've seen and a little bit more urgency in getting deals done in the first 3.5 months of the year, which are not typically very robust months, for at least as we've seen these cycles traditionally. As it relates to tenant sentiment, specifically being altered by downtown World Trade Center, completion at Hudson Yards. Steve, why don't you address that.

I don't think that those events are necessarily altering tenant's sentiment, per se. I think there is a general confidence that tenants have as a result of a lot of the hurdles that were passed. I think that we -- the second half of last year, you saw velocity pickup. And we said to everybody that in December and right in through January, as contrasted to the January of 2012, that we started 2013 carrying the momentum forward. And I think a lot of that was because tenants were -- had a growing level of confidence whether what was holding them back was the election or the uncertainty on the economy or the uncertainty of where the euro was headed or the uncertainty of regulatory change. There were a lot of reasons for people to delay and pause and make short-term decisions and I think we're past that. I think there is a growing level of confidence. We were saying it at the beginning of the years, there was a lot of broker feedback right in January that contrasted that, but I think most brokers would tell you that as we sit here in April, everybody uniformly is saying that there's increased velocity, increased confidence and more bullishness as far as where velocity is headed.

Great, that's very helpful on the demand side. I guess the second part of my question was, really, have you seen any change in the competitive environment or where tenants are willing to look? And how should we think about how your portfolio's positioned to compete with some of this new supply given that you are seeing a pickup in demand and a more positive outlook from tenants?

Yes, I would just -- I'll let Steve answer. I just want to sort of coming back to that question a bit. We signed -- how many leases in the first quarter? 55 leases. Most of those 55 tenants are not shopping downtown in Hudson Yards. I think, that there's too much in the press about tenants like Group M [ph] and Time Warner and other big tenants that are making potentially big, strategic moves from one location to the next for which those developments maybe applicable, and front and center. But for the 55 leases we signed in this quarter, I'm going to hazard to say somewhere between none or less than 10%, Steve, viewed the new developments as viable, competitive spaces relative to the deals they made with us. I just think it just gets distorted out there. We compete against the buildings in our submarkets almost exclusively for tenants. Typically, there'll be 2 or 3 buildings within Third Ave, Lex, Grand Central Plaza, Sixth Ave. It's not that every one of these tenants, which may be averaging in size, 50,000 feet plus or minus, are shopping a Midtown location to Hudson Yards, or downtown. It just doesn't -- I don't -- maybe other landlords experience that. But we don't experience that. So there is new inventory that will be coming online over the next 5 to 8 years, some of it nearer term, some of it not until '18 to '20 -- 2018 to 2020. And that space will certainly be looked at by some of the major users, I would say, 0.5 million square feet and up and that will be competition. And all of the factors will go into weighing that in terms of product, sponsorship, location and price. And I think Midtown will do very well in terms of retaining much of its tenant base. But there will be some that will venture into the new developments. But with that said, I just want -- the 580,000 feet we signed, the 1 million plus square feet in pipeline plus the April year-to-date, most of that we're competing at a very localized basis, not against new development. Steve, you want to...

Yes, and just to reiterate that, that the new construction for the deals that we're negotiating and that are in our pipeline is not applicable to those tenants. Notwithstanding that, having new construction as part of the overall Manhattan inventory is a good thing in order to keep our market healthy in the long run. But as far as being able, for us to compete and keep our portfolio full, it really doesn't enter into it. Second part of your question, maybe aside from the new construction, is that what are we seeing just generally downtown. And we are seeing some Midtown tenants and Midtown South tenants kick the tires downtown. But not necessarily new construction. We've seen guys come through 180 Maiden Lane who are Midtown and Midtown South type tenants. And they're there because it's still the value play, it's a lot of real estate for the dollar and in that building's particular case, we've got a lot of amenities to offer. So I think it all sort of feeds into that. The general theme of there's a lot of -- a lot more velocity, a lot more tenants, a lot more larger tenants and a lot of tenants doing long-term deals than there was a year ago.

Your next question comes from the line of David Toti of Cantor Fitzgerald. David Toti - Cantor Fitzgerald & Co., Research Division: We've been talking to some of our local brokers recently and they mentioned a phenomena is kind of resurfacing again and this is the potential for condo conversions, resi conversions of various towers around the city. Sort of a repeat of what we saw in the mid-2000s. Obviously, you're a little bit involved in that. Are -- do you think this is something that you're seeing interest in your portfolio in some of your assets? Are you seeing it being a rising phenomena potentially? And ultimately, do you think this could impact cap rates on assets that have been relatively stable recently?

Well, it's Andrew, I think it's definitely a phenomenon throughout the city where there's a lot of repurposing of office space into either a hotel or residential space. Probably, the foremost example of that is the Sony Building, which the current business plan is likely to go with a combination of retail, hotel and residential in that asset. So, but there are many others like the Sony Building where -- which are being marketed as conversion candidates. And from our perspective, that's a big positive in the office market as we see supply coming offline for projects that are slated for conversion. David Toti - Cantor Fitzgerald & Co., Research Division: One of the comments is that right now, it's only very high end in terms of the residential repurposing. Would you concur with that? Or maybe suggest that it could spread to sort of more middle price points?

I think downtown have a lot of potential candidates for the middle price point type conversion. There's 1 asset, a large asset downtown in particular, that's rumored to be trading that would be for a residential conversion. I think there's a couple of others that are possibilities. But in Midtown, you typically see people underwriting very high-end condominiums just because that's what the market is sort of demanding. David Toti - Cantor Fitzgerald & Co., Research Division: Okay. And then my last question, given that your increased involvement in residential in recent years, do you think there are any opportunities in your portfolio, anything you may have especially coupled with your increasing development interest as well?

Well, I think the most prominent is One Madison where we have 450,000 square feet of undeveloped air rights there and the lease with Credit Suisse that rolls in 2020. We did explore potential development there prior to 2008 and it's very feasible and very desirable. And that's certainly one that could get revisited in the future.

Your next question comes from the line of Rob Stevenson from Macquarie.

Can you talk a little bit about the strength of the structured finance pipeline today? And what of the sort of current $1.4 billion in change are you expecting to get repaid through year end?

Look, the pipeline is very robust right now. We continue to get much more than our fair share of transactions in the market and I think Sony was a great example of that. And we have several other transactions in various stages of application behind the Sony deal. So we're still finding it to be a market where our skill set and expertise in structuring and syndicating positions can earn us above-average returns and it's an area where we're focusing a lot of time and capital. So there's certainly a good amount of our book that is shorter term and floating rate. We're watching it carefully to see where we are likely to get repayments and trying to line up our originations so that we maintain a balance at or around its current levels.

And the new stuff that you're looking at is still in that sort of 10%-ish range? Or are you starting to see yields coming in?

What's our average?

Average [indiscernible] is just over 11%.

I would say in the 9% to 10% range, depending on how long term the paper is. But it's definitely a market that's adjusted down somewhat given where interest rates are.

Okay. And then are you guys seeing any improvement in the Suburban office portfolio demand and metrics out there?

Yes. I was a little surprised at some of the commentary I saw on the Suburban portfolio last night and this morning, and maybe that's just because we've got more of the realtime data than maybe comes across in the stats, which represents a little bit more of what was commenced. For instance, there was a lot of discussion about a falling occupancy rate which related to 3 tenants in particular that had -- we had done deals with last year, successfully renewed them but they all represented contractions. And I am looking at my notes here. Fuji was one, I know, and Heineken and Skadden. So those -- that should have caught anyone by surprise because those deals were done and announced last year, they just commenced into our occupancy, I guess, as of year end, right? So -- but I think the bigger picture or the bigger story there is that we've actually had, and ironically, given to this context, we had a very good first quarter. It was a very strong start to the year for Suburban leasing with 42 deals signed totaling 310,000 square feet, I think 230,000 square feet is probably through the first quarter in the supplement and then there's been, I guess, if I do the math, about 80,000 square feet or so that has signed since then. So that is actually a pickup from what we typically see in the suburbs and that emboldens us just a bit. I mean we need to see that for 3, 4, 5 quarters to really call it a trend. But you've got to start somewhere. And there's 11 leases out in Westchester and Stamford right now totaling 110,000 square feet and we have a pipeline of active proposals beyond that of about another 200,000 square feet. So you lay that over a backdrop that we only have 164,000 square feet expiring in 2013 and 200,000 square feet expiring in 2014 and it would cause us to go long right here and say that we expect occupancy to be up off of these levels by year end given those dynamics. So, again, a little too early to look at it as a trend or to get terribly excited about it because it is still a very fragile market. I mean we -- our occupancy is in the low 80s but that's still 4% to 5% ahead of the market. So we're outperforming the market, the market still has a lot of vacancy, but I think one of the bright spot relates to what was brought up earlier in the call, repurposing, where there is older office stock in the Suburbs that is being repurchased for biotech, educational and medical uses and there's approximately 750,000 square feet in Westchester County alone, most of which in White Plains and Elmsford, that is being transformed by Memorial Sloan-Kettering, Fordham and a variety of other biotech firms. So hopefully, that can also, in its own way, create a little bit of a mini stabilizing dynamic that's akin to the condominium conversions we had spoken of earlier in Manhattan.

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

It's Josh Attie with Michael. The average duration of the leases you executed in the quarter was about 5.5 years, which I think is lower than what you've done historically. And I know there were a couple of large deals with 3- and 5-year terms like Eisner and Viacom, but can you talk about the dynamics of some of these leases and also others that may have brought the average down?

Yes. It's just -- it's sort of an anomaly because it was driven by a couple of the large deals, Eisner in particular. We did a short-term extension. The trigger on that deal was in connection with a full floor of the expansion space they were taking. So in order to extend the term out on their existing space and marry it together, was the reason for the short term on that deal, and that was so much square footage that it moved the needle. Additionally you had WPP, which is the headquarters office for Y&R and their holding company of other advertising agencies. Because it's not an income-producing division, their home office mandates that the maximum term they can do for renewal is a 5-year deal. They've been in the building for 15 years. So there's no reason to think that they wouldn't have gone longer except for the home office restriction and that's not a new piece of news as to how they operate. So it's really a couple of deals that pushed it. If you contrast that against the deals that we're working on right now, where Marc mentioned that we have leases under negotiation, not term sheets, but actual lease agreements out in negotiation covering 1 million square feet. The top 9 deals covering 800,000 square feet of that 1 million square feet has an average term of over 13 years. So I don't think -- the fact that we saw that anomaly in the first quarter is really -- is indicative to a market trend or any tenant sentiment, it just happens to be unique to that bucket of deals and if we close the deals that we're working on right now then it'll be a radically different stat in the next quarter.

That's helpful. And if I could follow up with one other question. Can you tell us what the underlying average coupon is on the loan book investments? I know the 11% in the supplemental is being inflated by some other income on a variety of different loans that was specific to the first quarter.

Coupon average -- we can come back to you with that answer.

Josh, you're looking for a number excluding fees and things or are you looking for a straight -- like the rate on all of the positions?

Yes, exactly.

Yes, we'll have to come back to you on that one.

Yes, I mean, we can give you that but I wouldn't say that upfront fees and rate are often looked at interchangeably by floating rate lenders. So if you strip out the fees, you'll get to a coupon. But it'll be underrepresented by maybe upwards of 25 basis points for the fee income. It could even be 50 basis points below what the real rate of return is because of the fee. Sometimes, there's entry and exit fees. It could be one in one out, 2 in one out, it could be extension fees. So we'll get you that number. But I would certainly -- there's really no difference between fees and rate in floating rate limit.

And on that point, fees are recognized over the term of the loan so as we're looking at yield and recurring yield it's important to include the fees because regardless of whether we receive the fees upfront as an origination fee or at the end as an exit fee, we are amortizing those in over the life of the loan.

Right. No, I was just there -- there seems like there was a handful of loans with 16% and 17% yields that had very large one-time fees and I was just trying to, if you strip some of those larger items out, what the underlying rate is on the loan book?

Those are often times that we originate the whole loan and then sell pieces down and we retain a disproportionate share of the origination fees so that's why you get a large upfront fees. We'll take a look, I mean, I would think it's -- it largely is what it is. I mean, if the yield...

There's some bigger deals that have some larger yields on them for specific reasons, 5 Times than 550 being 2. But yet otherwise, they're going to be...

No, when you say -- I just want to -- when you say there are bigger deals with bigger yields for specific -- those are just called more profitable deals. I mean, there's no anomaly there that was -- those were just, those were sharp deals and we had very high yield on certainly on 550. 5 Times, I can't speak to because maybe that was one where we have taken a reserve where we capture a reserve, so that should be carved out. But I would say the book you're looking at which is yielding 11% but for maybe 5 Times is the true replicable ongoing annual rate of return. The only one I could think of which would had an "unusual or nonrecurring gain" would've be 5 Times. And so, to I've that out but it still going to be somewhere between 10 and 11, I would think.

That's right.

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

As you're kind of working through the 2013 leases, Steve, and you're starting to look out to next year, how do you think about some of the expirations like CS, HarperCollins, the AIG lease. Can you kind of give us any thoughts on redevelopment or how you're thinking about re-tenanting some of that space?

Well, the 2 big ones or 2 of the big ones that you just mention, AIG and HarperCollins, so obviously, we're not expecting to renew them. We bought the buildings with full knowledge that they would not to be staying in the property. So those buildings are undergoing or redevelopment in the various stages right now. 10 East 53rd Street, we're finalizing the development plans and are deep into the construction documents at this point. That's going to be a small space building because of the size of the floor plates. So that'll lease-up more towards the end of the construction project, which in the majority, that work won't happen until Harper is out and they're not out until July of next year. AIG, which vacates middle of next year as well, there we're already seeing some expressions of interest. We've got one proposal on the table, we're expecting another RFP in the next week or so. We've got our development concept pretty well nailed down. And work will get underway and get well advanced this year and try to get as much of it done before AIG leaves. And I think, that, as contrasted to 10 East 53rd Street, is more likely to have 1 or 2 anchor tenants in the 150,000 to 200,000 square foot range and in the balance of the space will get leased up in smaller blocks.

And then secondly, I guess, Marc, can you maybe just talk about monetization of some assets, you've obviously have not been afraid to kind of buy stuff, fix it up, sell it and I'm just curious as you think about 1515 Broadway and maybe some other assets in the portfolio and the liquid debt markets today and how you're thinking about asset sales?

Well, I think that we are putting a great degree of the focus in-house right now on trying to consummate one or more monetizations through year end. And I think we will achieve that, that is one of our stated goals for the year. I think it would may have been as much as $500 million or so of aggregate disposition. So it's selling well, selling at a very strong prize because you really -- we don't want to take just a sort of run-of-the-mill price, but I think we are looking really on these assets that are irreplaceable assets and irreplaceable locations. We really don't have any low hanging fruit anymore. Anything we sell is of an A Class institutional quality. We want to make sure that we're getting paid appropriately in this market and the demand seems to be there now, particularly after early December, I think, Andrew sort of identified the gridlock back in December and then right after that in the months that ensued, there's been about 3 or 4 sizable trades that have opened the door, we think, for us to accomplish our goals. So we will be delivering some product to the market. I don't think we're in a position, here on this call, to specifically identify which ones. I think that will become apparent over the next few months as deals get into the market. But it's definitely a focus of ours and we did something right at year end with 521 Fifth, which was a partial monetization. I think sold about 50% of that deal and that was very good execution for us. It was also a good execution for our partner because they bought into a very well-positioned Grand Central asset. So there'll be opportunities to recap, there'll be opportunities to do outright sale and what we're always looking about is case -- in situations like that, is not simply whether the building is leased or not leased, but what the internal growth metrics look like on kind of a compounded annual growth basis in NOI and how much capital these buildings require to get there. So we're looking at sub market, NOI growth and capital consumption, we'll target a few buildings and then hopefully, look to get couple of sales done this year.

And I guess would you be willing to go well above that $500 million if pricing kind of remains as strong or if not gets stronger?

Sure. Absolutely, yes.

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

Just on the other side of the disposition question, I guess, is the acquisition outlook for fee interest. And I think in your December presentation, I think you guys mentioned, maybe it was $700 million or $800 million of acquisitions that you were likely to do given that pricing's moved a bit early in the year, do you still kind of feel confident in that? Or would it be more likely to have more dispositions than acquisitions?

No, I think a lot of our long-lead-time type transactions, we still have a healthy pipeline of those deals and they take a lot of time to mature. But we're working actively on bunch of different situations and I still think we feel comfortable with that guidance.

Okay. I had 2, for Matt. Just the TI spend on Viacom. It looked like there's probably none of that in the quarter. Do you still expect that to happen during the year at $53 million?

Yes, I mean, when we went long the expected Viacom spend in December, we've said we -- it's kind of out of our control, so we have put a number of between $50 million or $55 million. At this point, there is still no plan from them as to how to spend that this year. So we're still holding out in a manner of speaking, that money for them to spend this year in our guidance. But with it being out of our control, it's kind of unclear.

Okay. And then just lastly, as we would think about expansion of net investments, if that were to happen during the year, should we assume that a portion of that would get funded via ATM issuance?

Yes, so you're asking hypothetically if we grow the investment book, are we going to fund some equity [indiscernible]?

Well, I think that's...

That's part of the asset sale program. We've been talking about, I think.

Right. Completely dependent on stock price.

Yes. Completely [indiscernible]. And another source of a capital.

I think we're going to -- we would fund new investments with asset sales or stock issuance whether it's the ATM or otherwise. And we're sort of indifferent between the 2 executions, it's just depending on where asset prices are relative to stock price and underlying NAV. I said earlier in the year, and I would reiterate, I don't think our price is currently reflective of underlying NAV and we're very in touch and in tune to it. And the asset pricing right now is as strong as it's been, certainly since the downturn. And there are things at play which may create more demand from foreign investors, which could have a uplifting effect, further uplifting effect on prices, cap rates, which we had been sort of conservatively estimating at 5% for the past year, 1.5 years, are in reality, probably well below that for the best assets and the ones that are trading, are in fact, trading. So I don't -- you guys do the math on a regular basis. So when you do, I don't think that is what we currently see in our stock price. So I think that when we get out in time, we'll see what things look like then, we'll see what kind of -- if we achieve the kind of cap rates we would hope to achieve for our dispositions and just properly fund growth with the cheapest cost of capital we have available at that time.

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

Coming back to the mezz portfolio, the opportunities, Andrew, I think you said were robust. Are the opportunities more of the origination's nature, similar to a 550 now?

Yes, I think it's a mix. We're not buying much in the secondary market, we're mostly originating our own paper these days. Some of that is -- were originating subordinate paper and then some of it were originating the whole capital stock as we did in Sony and syndicating off the big [ph] pieces.

So, it's just a mix, its not necessarily more...

No.

Okay. Could you walk us through sort of the economics on the junior mezz piece that you retained at 17.3%. I mean, I assume, there's a coupon rate on that and the rest of it, is the juice associated with having sold off the rest of the economic? What's the coupon rate on that piece?

Does that -- coupon rates are on the whole loan, right? There are no individual coupons or...

The yield that ran 17% is essentially the rate, the effective rate on our piece so that's not on the entire position. There is enhancement through various fees as a result of our position having higher stack. But that will be taken over time. In fact, that 17% isn't even reflective of the full fee stream that we are entitled to. We will be recognizing a little bit more beginning the second quarter.

Okay. But there's not a like a coupon rate or a strip rate on the piece -- on that piece of paper that you've retained and the rest is the fees? Or the [indiscernible] ?

Yes, I mean, we essentially originated the whole capital stock at LIBOR plus 5.60% and then sold a senior -- a mortgage position, we sold a senior mezzanine position, and we sold up a pari-passu junior mezzanine position and what was left after we sold all those pieces at varying rates was the 17% that you see, plus our share of origination fees.

Okay. Just lastly, clarification maybe for Matt, just on the -- on Page 18, your joint venture statement balance sheet. There's a debt investment in there. I'm just curious of the nature of that and how that ends up on the joint venture side?

Occasionally, I think this is maybe the only the second time we've done it. We will do a debt investment in the form of a joint venture. So literally set up as any other JV would be for a real estate property and for accounting purposes, that can't be included in our debt and preferred equity portfolio, it rolls down to the unconsolidated JV line item and then goes into the JV balance sheet.

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

Can you talk a little bit about your acquisition efforts overall in terms of characterizing it such that are you spending a majority of your time looking at structured finance deals, as well as retail apartments versus sort of pure fee simple 5 cap office deals?

Well, I would say almost exclusively the time is spent looking at acquisitions. What happens is, of the acquisitions we don't pursue, we then turn them into -- attempt to turn them into structured finance opportunities. And that's why for us, this duality works so well. But it's everything, not everything, but generally, the business starts as evaluating acquisition opportunity, Sony, no different in that regard, nor some of these other deals we talked about today. And we pursue what we want to pursue and hopefully we prevail. And when we don't, and we like the business plan sponsorship or there's an opportunity, then we'll switch gears. And our debt folks will attempt to originate products. So I would say the orientation is always an equity orientation at the outset that can transform into or lending platform except for refinancing. So occasionally, we'll just get people on refinancings that will look to recap and the only opportunity is a debt opportunity so obviously, those would fall outside of what I just described. But that would be the minority of the situations.

Okay. And can you characterize how your underwriting on the structured finance deals exist today versus sort of where it was, let's say, back at the end of the last cycle. How different is your underwriting with respect to where you look at coverages and loan-to-values? And the returns you're getting in respect to that?

I think the senior loan underwriting is still enormously conservative versus where it was at the end of the last cycle. So that -- and then each of the tranche is subordinate to the senior loan, therefore, is significantly less levered. Whereas senior loans used to be at 80%, 85%, even 90% loan to cost, now you're seeing, still seeing senior loan top out in the -- between 50% and call it, 65% loan to cost depending on the building and the cash flow profile. So you still have -- the mezzanine positions are still significantly less levered today than they were at the end of the last cycle.

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

Marc or Steve, just curious can you comment on the 96% year end occupancy goal? I think last call, you labeled it, maybe, a little bit of a stretch and it sounds like there's a lot of new leasing that's coming but just curious, how you feel about that and since the occupancy was flat sequentially?

I think we're still optimistic that we're going to hit our number. We're ahead of budget in the first quarter based upon the leases that we've signed to date. I think we've got better velocity than we were anticipating at this moment in time when we originally set our budget. So I think the only question will be how the year unfolds and the deals that we signed, is it occupancy, or is it really based upon the amount of square footage that's been leased. But for whatever reason the tenant demand that comes in, their start date trails into the following year. So -- but I think the effect of our ability to close enough leases to lock down the buildings are going to get us to the number that we want to be at.

Okay. So whether it's 9 months from now or whether it's maybe 12 months from now, you still feel pretty good about gaining almost 200 basis points in occupancy.

Exactly, you nailed it.

And then, can you talk about the price point orientation in terms of leasing. It sounds like maybe there's been a little bit of a shift where it's not just the value-oriented tenants that are signing deals? Is the recovery you're seeing a little more broad-based than going higher up the food chain, if you will, to the higher end building as well?

I guess that's true only because we've been the beneficiary of a couple of deals. Certainly, 280 Park Avenue, those deals that we just -- 2 deals that we just signed for 99,000 square feet, those were high price point deals that the 10-year average rent on that square footage was over $98 a square foot. And that's in the base of the building. We've seen a little bit better activity at 600 Lexington Avenue where we recently went to lease on 2 floors and we got the green light to do an early renewal on the floor and we're expecting another tenant to give us a green light for a new deal for another full floor in the next week or so. So that's picked up a little bit. But I'm a little hesitant to say that that's anything other than I don't know if that's a broad statement that I'd say about the confidence as the high price point guides back in the market. I still think the lion's share of the deals are on the value side of the demand.

Your next question comes from line of John Guinee from Stiefel. John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: John Guinee here. Just to sort of come to closure on this whole -- half the calls have been on the structured finance book. Perhaps, it would be a good idea if you considered, instead of just giving 1 line item, $52.7 million, bifurcated that out into cash, accruals, fees and gains, and I think you you'd solve about 90% of the problems in understanding what's going on there. That's not a question, obviously, just a thought. My question is, refresh our memories as to what's going on at 885 Third Avenue, selling the ground lease position and also, what's the status on the West Coast office portfolio?

On the 885 Third Avenue, that is a position we've been testing the market on and we've seen very good interest from people in the market and we continue to have discussions with various groups. I think the interest has confirmed our suspicion that the value of the position is sort of well in excess of where the street is carrying its NAV. And just not -- we're not sure yet whether the interest is going to reach a level where we're sellers or not -- we have to sort of complete the process to see. But the response from the market has been very strong. Wait, on the... John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: [indiscernible] office, when -- can you guys get out of that anytime soon? Is that earning any income for your 27% interest right now?

This is the West Coast deal?

Yes.

Well, we'll going to let David Schonbraun, who is here with us, who specifically sort of oversees that portfolio with Blackstone, address that.

Sure. I think we transitioned management a couple of months ago to Blackstone and we had very good leasing philosophy. So I think we're comfortable with the progress and kind of with new management, we're expecting kind of the occupancy upticks in the portfolio and I think were going to try to monetize assets over the period, some on the next year then just depending on where that market is and depending on just cap rates, work with Blackstone to kind of monetize as efficiently as possible. But we're definitely going to sell some assets in the next 6 to 12 months. John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: But is that -- David, is that generating any income to you at all? Should we look at it as part of the NOI or should we just look at it as being close to book value in order to value it appropriately?

I think our share of NOI rent is up $4 million or so.

[indiscernible] .

But it's primarily a residual. Right, would you say? I mean, this is -- this portfolio, I think, is at 70%, 80% leased.

It's a little less than 80% occupied. So I think -- right now, it's a residual but obviously as they lease it up and there's significant amount of vacancy, we expect that to increase significantly.

But the early read is the price talk on the few assets that have been exposed to some market participants is our underwriting is on or ahead of schedule.

Correct.

So, we'll -- I think we'll have to more to report on that in -- by year end. That was -- that had 3-year business plan, we just closed it a few months ago. So hopefully, by year-end, we will have more to talk about on that. But it is -- it's certainly not intended to be a hold investment. So, in answer to your question, John, I think, yes, we're looking to liquefy. But -- and optimize because the portfolio is actually doing reasonably well. John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: Let me just ask that a little -- great feedback, thank you. Just to clarify, is it generating any earnings that show off on your income statement or not? Or should we -- or should it be looked at on a book value basis because it's not generating any income?

John, it's Matt. So, it generated just over $4 million our share of NOI in the quarter, net of interest. It had free cash flow of $2 million. So to answer your question of whether it hit the income statement, it was $2 million of contribution to our earnings in the quarter.

Your next question comes from the line of Andrew Schaffer from Sandler O'Neill.

One question. It's in regards to 2 buildings that you just bought in Williamsburg. I was wondering if you're considering to do some counter deals to sell them off or just solely to rent them?

There is a townhouse component of that project, which we intend to sell off as condos because they don't set it very well for family rentals. The balance of the project will be rented out as multifamily. So sales office is open, we're getting great response and the first residents are moving to the building shortly.

And your final question is a follow-up from the line of Michael Bilerman from Citi group.

I completely second John's motion on the disclosure. But I do have a question. Matt, just in terms of the guidance, the $4.90 to $5, given the loan book, I think in those numbers is $1.50 of FFO with $1.3 billion investment at a 10% yield, you're at a north of a $1.4 billion at 11% yield, of $1.70 of earnings. I guess how should we think about guidance for the year?

At this point, we did have a lot of discussion about guidance [indiscernible]. At this point, we are keeping guidance unchanged at $4.90 to $5. Based on the performance in the first quarter, you would see a trend towards higher end of that but we do have some other things kicking around, not the least of which is the sale of 885. So we are leaving it unchanged for right now.

Yes. I'll add to that, Matt. Part of our guidance assumes additional investment. I think that's -- I want to make sure that comes across that we don't we run a static book. We don't assume that whatever we start the year with, we end the year with and we just increased with the market. There are -- that's not our profile, there are other companies that serve that niche. But in our guidance, we look at our liquidity and capacity at the beginning of the year. We set certain goals for ourselves and investments and in structured book, and they are somewhat interchangeable. So we may end up with a slightly higher structured book, maybe a smaller amount of equity investment. So again, there's a lot of interchangeability. But a portion of that $4.90 to $5 was on a presumed return on a fairly sizable amount of new investments because that's what we are accustomed to accept in the times of the market cycle where we say we're on the sidelines, which wasn't this December. So the fact that we're executing on that plan and we may be a little over allocated momentarily in one versus another instance, I wouldn't -- we don't revise guidance quarterly. We revise it when we see need a need to revise it. At the moment, we're comfortable with $4.90 to $5, if we see a need to revise it, we will. But we've been, I think pretty good in the past about our guidance projections and good about adjusting when we see need to. But at the moment, we haven't adjusted it. Okay. Well, I just want to thank everyone for calling in today. I hope everybody likes this somewhat different format with abbreviated formal remarks and leaving more time for Q&A because the calls were running 1.5 hour, 1 hour and 45 minutes, and we think that was too long for some. And we know you have a full plate with other companies. So we thank you for your hour of attention, and we look forward to speaking to you next quarter.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation, and you may now disconnect. Have a good day.