SL Green Realty Corp. (SLG) Q1 2019 Earnings Report, Transcript and Summary

Thank you, everybody, for joining us, and welcome to SL Green Realty Corp.'s First Quarter 2019 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 GAPP 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 2019 earnings. [Operator Instructions]. Thank you, and I will now turn the call over to Marc Holliday. Please go ahead, Marc.

Okay, thank you. Good afternoon, everyone, and thank you for joining us today. The first quarter of 2019 was another strong period of performance for SL Green, and for the New York City economy that continues to drive our success. Yet again, SL Green was far and away the most active player in our market, signing significantly leases, hitting major milestones in our development portfolio, moving swiftly to originate debt and preferred equity opportunities and contracting to dispose-off mature and non-core assets that fund our aggressive share buyback program, thereby capitalizing on the unprecedented discount in our stock. At our Investor Conference in December, we detailed 18 specific goals and objectives contained within 7 broad categories of performance. In the leasing category, Q1 is typically our slowest leasing quarter, however, we executed over 400,000 square feet in Manhattan office leases, more than doubling our internal expectations for the quarter. And to start April, we have already angled another 235,000 square feet of leases in the Manhattan portfolio and still have over 680,000 square feet of deals in pipeline. The three new bridges announced yesterday is further evidence of a market moving in the right direction as each of them represented organic growth in space leased. Clearly, the confluence of a strong New York City employment growth, along with the winnowing supply of suitable office inventory, is driving improvement in net effective rents and increase in rents. Notably, our mark-to-market for the quarter was 4.5%, above the high end of the range we provided to you in December. And there is 20 million square feet of active tenant searches that we are closing to tracking. In the area of investments, the market continues to demonstrate good support for the deals surprised at the market. There were several sizable deals consummated in the otherwise typical quiet for this quarter. 30 Hudson Yards sold for $2 billion. 237 Park completed a partial sale at $1.25 billion valuation, and 250 church sold for in excess of $860 per square foot, fairly attractive price for a Downtown asset. And of course, SL Green participated in this market by entering into a contract to sell 521 5th Avenue for $381 million, a price level that was above our own internal NAV for this asset. During the first quarter, there was $39 billion of private capital raised for global real estate investment, $8 billion more than the prior quarter, and it is now estimated to be at $338 billion of total dry powder for real estate, representing almost $1 trillion of potential buying power for real estate around the world. And certainly, New York City will continue to garner more than its fair share of that dry powder as it did in 2018 with over $50 billion of commercial transactions. Obviously, the public market concerned with New York City stands and stark contrast to views in actions of private market investors, who are targeting the exact type of product that we invest in no than anyone. These investors are looking to invest in assets with global appeal and strong quarter tenancy in a market with enormous depth and liquidity. We think private investors, which make up the vast majority of the real estate investment market, have the market analysis right and we trust that the public market will eventually recalibrate and return to a fair valuation for our highly sought-after assets. Throughout this incredible work, we remain true to our core mission of investing, managing and developing world-class properties in New York City. We continue to demonstrate our ability to undertake complex development projects with over $7 billion worth of asset, now or soon to be in development or redevelopment. One Vanderbilt construction process is just as vigorous as our leasing activity. As of April, the building superstructure reached the 60th floor, which is just above the height of the off deck and steel is projected to top out in October of this year months and of the original plan. So far this year, we signed expansion deals at One Vanderbilt with the Carlyle Group and McDermott Will & Emery along with a new lease to KPF Capital Partners, bringing the project to 57% leased with more leases spending so we are well underway to our outsize goal of 65% leased by the end of 2019. Building on the success of One Vanderbilt, we announced plans in December to reassemble the same design and development team, KPF, Heinz and Gensler, for a sweeping redevelopment of One Madison Avenue to Class A office server across the Madison Square Park. We are excited to break ground in this project in 2020 as we believe 1 Madison will transform Midtown South in the same dramatic with that One Vanderbilt has already done for East Midtown. We commenced our leasing program for the redevelopment of OME and are getting very strong response from tenants, confirming the excellence of the design of our development plan. When you put all these pieces together, you can see that we have a comprehensive plan in place to outperform our peers and stay at the top of our game. But that we know is not enough. Our entire executive team is deeply invested in our stock, and we share your laser focus on doing everything in our power to restore the connection between our share price and the underlying value of our assets. In 2019, we will continue to monetize assets and redeploy capital into share buybacks because every time we buy a share, we're buying more of a broad portfolio. And we know it's only a matter of time before the public market follows the private market in recognizing that New York real estate remains a stable, profitable and desirable investment. So with that, we'll open it up for questions.

[Operator Instructions]. And our first question comes from the line of Emmanuel Korchman with Citi.

Marc, or maybe it's appropriate for Andrew, we're looking at your DTE business, you had a few assets and we tell that you've repossessed over the last couple of quarters. Can you talk about how you invented the rest of the assets it within your book performing? And also just maybe an update on the retail environment overall?

Sure. I think we -- as of the end of Q1, we have 6 retail DPE positions remaining after 106 Spring came on board as part of the portfolio. We anticipate repayments in two of those over the next 60 days or so. So we'd be down to four assets remaining. So I think, in terms of retail assets coming back from the book, we're probably towards the end of that unless we find new distressed assets to acquire, which definitely wouldn't rule out than we did in the case of two well. Generally, the retail market, we think most of the majors submarkets have bottomed out. And we've seen -- if you take, for example, 106 spring, we're going to be reducing asking rents on their property from where our borrowers are asking to where we're going to ask as the new owner probably in excess of 30%. So you'll see, we think that will generate activity at that property and you will see activity in other properties where owners are able to meet the market on rents. There are tenants active in all the major retailers are markets in Manhattan. So I think most of the submarkets have bottomed up.

Great. And Marc, in your prepared remarks, I think you said there's 20 million square feet of active tenant demand in New York. Could you break that down for us into may be how much of that is may be more musical chairs? And how much of that is tenants either expanding or looking for new space in the market?

No, I can't, Emmanuel. But I can tell you that a good chunk of it is growth space for sure. I mean you are seeing, in our portfolio and elsewhere, enormous growth in the market, which is driven by employment growth. Last year was another big year for employment growth in the City. We're off to a good start, private sector job growth is over 20,000 jobs from Paris this year already. So as long as there is a new jobs and office using jobs, there is not a big growth in that segment. First Republic lease that we announced yesterday is a great example of the that, where most, if not all of that, I believe is growth. So I mean that's just enormous and enormously favorable. And that's why financial services have reemerged as a one of the leading sector for both tenant releasing, but also growing. And that's, I think, contrary to what certainly people we've spoken with in the past had thought would be the case a year or 2, 3 years ago. There is significant growth, obviously, in the technology industry and so that's -- there's a big -- I'd most of the technology demand within the 20 million is almost entirely growth because they're new to the sector. So when you see technology taking down in a given year, let's say 15% of 30 million in Q4 [ph], 3 million to 5 minutes square feet of free space. That's all growth because there -- mostly growth, because they're not rolling legacy leases. They're new to the market. So I can't give you an exact number of the 20 million, but I have to say at least 20% to 25% of that represents growth. But I just want to question them, giving you sort of an off the cuff answer based on just extrapolating from the experience in our own portfolio.

And our next question comes from the line of Alexander Goldfarb from Sandler O'Neill.

So two questions. First, on a modeling perspective, diesel came out some abducting that, that will get offset later this year by Puma coming on, but then the Ralph Lauren exploration at the end of this year, which would leave a $30 million NOI hole in next year. So maybe you could just provide some perspective on how we should think about the Diesel and PUMA interchange this year? And how we should be thinking about what you guys are doing to backfill their $31 million of Ralph Lauren NOI that's going away at the end of this year so the impact to next year?

I'll cover the first part on Diesel and PUMA. The Diesel outcome is not yet certain, so we have to see that play out over the last couple of months before we know the impact on the numbers expected to be nominal. The charge we took in the first quarter is really to write off a straight line. that's the noncash adjustment that we had to take because of the uncertainty of the future depending on what happens, I don't expect there to be a big impact for that deal, and of course, PUMA coming on is important not so much for '19 because it's probably the back half of the year, very late in the year, but more so for '20, so we'll highlight that in December. And I'll let market address the $625 million situation.

At 625, Ralph Lauren, I think, I have the number here are some there has about 385,000 square feet. Every year in the portfolio, we have anywhere between 1 million and 0.25 million feed that gross. Polo seems to get a lot of attention. I think if it goes into the paper, it gets a lot of attention, if it doesn't go into the paper it doesn't. We had a very large tenant at The News Building that rolled and then be backfilled with VNS, and we can go on and on. We had vacancy at 10 East 53rd, now it’s a lease building, we had vacancy [indiscernible] lease building and so we'll have vacancy at 625 Madison, we'll leasing it, we say how are we going to deal with it? I don't see dealing with that in a different fashion than we deal with all of the role in the portfolio. We have 30 million square feet that we own and manage. In any given year, as I said, about 1 million a quarter, 1.25 million square feet roll. So in 2019 -- at the end of '19, Paula will be a part of the. I don't think it's exceptional or notable in its size, nor how we'll deal with it. Our typical approach, for any building, and certainly for 625, which has been an earnings horse for 15 years, will be to go through some level of redevelopment of that building and then long-term lease that space to replace POLO. But again, I don't know -- I don't see a different and notable than what we've done over the decades in any building we have when we have a tenant rollout of what I'll call a space that needs to be upgraded because Polo was in that place for, I think, 15 years of. So they space in the building itself is probably in need of a revisit and that's kind of what we do, Alex. It's just is reposition, turning and related building, which is why we are at 96% leased and I don't think really ever been below 94% leased in the history of the company.

Right. I understand and thanks for the perspective. Our permanent long-term planning of rehab is on hold until you guys reset the ground lease. That's what I was asking if there is...

I wouldn't say necessarily. I mean, we feel very confident in our position in 625. I think I said that on the last call as well or maybe at the Citigroup. I said that, maybe it was at the city meeting that we had, but in one of those 2 venues, I mentioned that we are very experienced as both a leaseholder and a fee owner. I think, we've had probably in the aggregate more experience in those 2 as almost any other owner in the city. And we have an expectation of where rents will land on a revaluation, and we're going to be actively marketing the space in 2020. But you can't really market this kind of space, which -- so you can elaborate on until you have position, you wipe off and you have redevelopment plan. But I could say that about 20 other buildings. So we're not really going to treat this any different, and we think we have a manageable plan for the rent reset, which we fully anticipated when we originally bought the building and now the date is here, and we'll deal with it. By I don't know, Steve you want to add anything to that?

I don't know at this point of time, we're deep into design development for the repositioning of the space. Polo has the majority of the building. The building's moons are obviously great. It's one of the best locations of the city. It's pricing will be extremely competitive relative to other large blocks of space in that part of town. And we think we've got a very appealing capital program for the -- that we're designing for the lobby, elevator cabs and entrance for the building.

Okay. And then second question, just with the recent passage today of the energy act that the city Council did to upgrade all the buildings you have that the commercial rent control discussion, Marc, as you know is still in discussions. Have you seen any change in the way people are underwriting Commercial Real Estate Banking or NOI profiles or anything that would go into how you guys look at buildings given what's been passed by City Hall today and what potentially could be passed?

Not our buildings because we've been -- what's being passed or potentially being passed by city Council was being proposed in any case, is something along the lines of what we've been doing for 10 years. And a lot of the major owners are on this, being good corporate citizens and making their buildings as green as possible and lowest carbon emission with very smart building management systems today and materials that are extraordinary at preserving electricity and conservation and if everything that goes wrong with it. So we -- I think 63% of our portfolio is LEED certified. We have something like 24 energy store levels. We're another -- again, in 2018, EPA, energy star partner of the year. We rank very high on a number of the rating scales that were published and shareholders see. So like the Bloomberg index and over one, we were on top of performance in our sector. So this is -- if you own older buildings that you haven't been investing in and the bill passes as contemplated, there'll be certainly some onetime cost to renovate the benefit of as your operating costs are lowered. But for buildings like ours that I think are already at the leading edge, they'll be some additional compliance, but we would have done it anyway because that's the path we're won. You've heard me many times about wanting to be a lead partner in the administration's goal of reducing energy emissions 80% by 2050, and we have our own internal goals that are more accelerated than that. So look, there are elements of the bill that, I think, badly do need to be massaged and revisited because one -- they've taken, in some cases, a 1 shoe fits all approach, which is an appropriate. So there're details of the bill that would help them get changed in the final hour to reflect more fully the input that we've had with the Urban Green Council and other owners have had, and we hope City Council doesn't turn a blind eye to some of those recommendations. But in the general spirit of having a framework within, which to continue down the path and making our buildings more sustainable, I feel like we're already on that path.

[Operator Instructions]. Our next call comes from the line of Craig Mailman with KeyBanc Capital.

Just going back to the DPE book, you guys had a big origination quarter in 1Q, but another target for the year is to have to shrink it by $75 million. But could you maybe just give us how you guys see the trajectory for the balance -- for the rest of the year?

It's David. And I think there's any change in our guidance. We can't 100% control when we get past and when we find attractive originations. So I think you'll have probably, as you're seeing, higher front-end originations. And we expect to get more payouts starting in the next quarter and by the end of the year, will be at the level that we set.

And then just on the sales environment, you guys got 521 done. Just curious kind of what the depth of the buyer pool was there? And may be just update us on what you guys currently have in the market maybe what else market here in the near-term?

Sure. It's Andrew. We had great demand for that asset, both foreign and domestic. There were -- we went to contract on that asset without a due diligence period, so there were still hard offer, which is kind of unique to the New York market and felt very strong about the process there. Second part of the question?

We have to the market?

Out of the market. we're sort of , which we have discussed, we're evaluating next steps and watch as it will be more appropriate rollout next to meet the healthy demand.

That's helpful. What was the on 521?

4.6. 4-6.

And our next question comes from the line of [indiscernible].

UDP looking at 2020, I know you don't want to give guidance on that what you do have $1.3 billion of maturity next year and realizing there is a lot of expansion option in this portfolio, can you just discuss your ability or willingness to replenish this amount of capital?

Yes, look, I think we originate well over $1 billion a year, and we're very active working with existing borrowers on extending loans. So I think our average kind of life is usually somewhere between 2 and 3 years in general. So I don't -- maybe it's a little larger than it has been in some prior years. It's probably to provide some junk in your positions, but we're working with ours right now to do some extended deals and do given the historical pipeline we have, I think, we'll have no issue having the levels end up exactly where we want them to be.

Yes, just -- I would also just add to that. There is always this kind of push poll we hear from shareholders, balance too high, can you keep the balance high, is the best too high, can you keep the balance high? So it's always confused us over the years and so we sort of managed low for that 10% mark and it's been a great business, obviously, hugely profitable business in this year. It's yielded a number of very interesting and compelling investment opportunities for us, which isn't always the case, but over the years we can probably rattle off a dozen or more properties that the DPE program led to direct ownership. So the programs great. I think we have a very good management of it. But in this sort of unique moment in time, as yields on this paper hovered around 9%, and I think the FFO yield on buying back our own stock is probably close to 7% or 8%, that the conversion of structured finance investment balances that we don't reinvest for any reason into either further debt paydown, but also on a leverage neutral basis into equity into the buying our own shares, is almost a push earnings wise. So it's a very interesting time for us where you mentioned that $1.3 billion of money coming back now, we expect to be very active in the originations front next year as is this year, but again, next year is next year, and we'll have to gauge the market and things could change in which case may be we're not. But with the stock where it is, and the years almost at parity, we certainly have a very interesting alternative if we choose for whatever reason not to put out the same levels into DPE next year.

And, Marc, you referenced in your prepared remarks, the public market will eventually recalibrate apartment market valuation. Can you just -- what catalyst will be for that? Because a lot of us thought the cutlass would have been selling assets and buy back your shares and it hasn't happened yet?

Well, I think, then we just continue, right? Take into its extreme, we've got assets worth what they're worth. I mean again, 521, we put out -- we talk about NAV at levels much higher than, I guess, $87 a share, much, much higher. The NAV underlies that and 521 went for us north of NAV. So again -- and that's just the same as 3 Columbus, and that's same as 1745 Broadway so when we sold those assets last year. So we have a high degree of confidence in being able to properly evaluate, or I would almost say conservatively value, our portfolio. And as we just keep realizing, it's not a theory, when you sell it, you actually get the cash at or above the end of NAV and then you buy back the shares at the very discounted value so that, taken to its limit, is almost self-fulfilling. So whether or not that'll be a catalyst for people to come in and buy the shares, we hope so and we would expect so. But if not, we certainly can continue our program of doing that and fully expect to because this is, as I've said before, probably one of the greatest investment opportunities we've seen in our 21 years as a public company.

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

Matt, it looks like on some of your portfolio metrics, you're trending ahead of where your full year guidance would be like same-store NOI, leasing spreads. Can you talk about how those Audi expect this trend for the rest of the year? And looks like you maintain your guidance, just what your thoughts are around that?

Sure. Yes, if there are three months, actually across-the-board, we were ahead -- FFO, we were ahead of our expectations lives in volumes mark-to-market, same-store occupancy, same-store NOI growth, everything was ahead, but it's 3 months in, and so we're encouraged by that but not in a position to just at this point any of our guidance or goals that we set out back in December, but happy to see trending ahead, of course.

Okay. And then may be for Steve, can you talk more about just tenant discussions and what type of tenants you might think might be invested in 1 Madison and even for the last of One Vanderbilt?

Sure. I'll start with One Vanderbilt. We've got active discussions with several tenants at One Vanderbilt that were all financial services related or in the case of one good sized called business services [indiscernible], but I would think, as we finish off the podium of the building and focus our attention towards the upper third of the house, it will almost be exclusively financial services. The signing of KPIs years. We've got another lease very well done with a private equity fund. And we're doing tours over there of the site tours and board presentations almost on a -- if not daily, every other day basis. So the momentum is really feeding on itself at this point. With regards to 1 Madison, the obvious tenant base there is Tammy. But having said that, we've received RFPs from a large financial services business. So I wouldn't be surprised for sort of a Fintech type tenant to be a likely candidate for that building. But we've been in front of may be 12 or 15 tenants at this point. People are really enthusiastic about the development plans for the building because it's bringing brand-new, large-scale, state-of-the-art product to a submarket where that opportunities does not exist and we're sitting right on top of the subway line across the street from the park. So it checks all the boxes whether your financial services or whether your time and type tenant. But that building, I think, is going to be wild success from a leasing perspective.

And you think it's a full billing user based on discussions?

I think it will be large space users. So whether there's 4 billion or its 3,000, 4,000, 5,000 square-foot tenants and don't think it will be 1 of leading the way One Vanderbilt is going to finish off its leasing program.

And our next question comes from the line of Derek Johnston with Deutsche Bank.

Just on pricing power and trends, could you separate out concessions and leasing trends with your interest portfolio versus the development, redeveloped assets and give us any significant differences that are notable?

Steve?

Let's see, let's go sort of brought, that's a mouthful. That's a mouthful. Certainly on new construction and redeveloped buildings, which are good for the vast majority of our portfolio into the camp of the redeveloped buildings, there has been a slight to quality over the past year or two where there's been a lot of tenant demand for better quality buildings. Now we're the beneficiary of that because we have a portfolio, we've reinvested into the buildings and we're continuing on new acquisitions like 460 West 34th Street to make heavy capital investments in those buildings and as evidenced by the First Republic lease finding a strong tenant demand for it. As far as concessions go, there's this odd situation where new construction actually carries a slight TI savings. I don't think we've given a tenant at One Vanderbilt, but we example more than $95 a square foot with all the leasing we've done in that building. Yet you can go to other buildings and more commodity buildings where you sometimes have to spend more than $100 a foot in order to tenant paying a lot less and went. But I think that's a function of supply and demand where the best quality product is in high demand and TI doesn't have to be as [indiscernible] in that case.

Okay. Great. And just switching gears, any update on the Suburban markets and interest in the market portfolio that you have out there?

Sure. It's Andrew. Isaacs is not with us today. The capital markets are significantly more challenging in the suburbs. We continue to work through the portfolio and generate decent leasing activity, including our recent renewal with Skadden, Arps at 360 Hamilton in White Plains, which is a big deal for us. But we're trying to be patient because we don't want to accept kind of distressed prices for the assets if you will. So we expect, over the course of the year, to execute some different strategies and wind up the resolution of the portfolio.

And our next question comes from the line of Nicholas Yulico with Scotiabank.

Just turning back to the stock buyback, Marc. You talked about willingness to do more over time if that's what's needed to do to close the valuation gap. But can you just remind us where you're at in terms of whether it is a tax issue or [indiscernible] that would prevent you from doing a larger buyback once this current program ends?

No, there's nothing that prevents us that I'm aware of, and Andrew you're in here, correct me. Somewhere that's a question of source of funds and we have source of funds that's completed tax efficient, partially tax efficient, in some cases, tax inefficient. But at the moment, we have a $2.5 billion authorization. I think, we're well $1.8 billion or so into that authorization, may be $1.150 billion. So at least for future, we have sources of revenue that we feel more than comfortable that can finance those acquisitions in the dirt neutral way to get to the 2.5. And then when we get there, really evaluate going for the but somebody on the call earlier referenced, I guess, take into its extreme, $2.3 billion of cash that we have invested in the DPE portfolio, which just -- I was just making the point coincidentally has a yield that's not to differentiated from the FFO deal on the repurchase. So clearly that is another formidable source that could go well beyond the $2.5 billion. So I mean -- we don't -- haven't taken it much further than that nor do we need to sitting here in 2019 with a plant that we think is expendable for the balance of this year and probably a fairly obvious plan for next year. But beyond that, we have other strategies. We have developed have not yet deployed, which would enable us to go further. But I don't want to get ahead of yourself. I think is -- our goal is to see that price reach it's natural level, which would be equal to the value of the assets. And if that happens, then they'll be probably know by the program. Once that occurred and certainly, we over the next year or two, we see that kind of increase occurs, it should.

Okay. Second question, you mentioned 30 Hudson earlier, I'd like to hear more. What do you thought about the pricing of that asset? And we heard it was around a 5 cap rate 20-year lease long-term credit deal. I was just wondering, is that indicative of what long-term credit deal would trade in the market? Or is the call that within the building does that affect valuation the?

I think, certainly, the -- it's a very large transaction, so makes the universe of buyers smaller given $2 billion of aggregate size. And I think given that it's not multitenanted and you have sort of this bullet exploration, if you will, the how the entire space expiring, it takes a certain type of buyer. So I think in terms of cap rate on 1745, we achieved around the same or were we inside of that?

We were inside of it.

So I think between 4.5 and 5 cap, depending on the second stated, per foot where the rent stands versus market is a good estimate for sort of large single tenant, credit tenant leases in the city right now.

And our next question comes from the line of [indiscernible].

As we look out over the next 2 or 3 years, are there any other kind of early renewal similar to Viacom that we should be taken into account from a cash NOI perspective?

Well, we have several larger leases when you go out in time, but those are 3 to 5 years out. And most of them have significant market mark-to-market increase expectations. In the case, for instance, at 753rd Avenue, where we have advanced magazine and for general publication that's part of county national, all that space with subleased years ago to a variety of different subtenants. The prime lease in that case tenants was paying us of $50 a foot. So we're going to see a big uptick in rent on there, and we're already treating paper people on big of that fish. So I think there's going to be up a couple of big opportunities for us to have a very positive outcome.

Okay. And at One Vanderbilt, you guys had a goal for being 55% leased by the end of the year, you limit as it in Q3 of next year. I guess how long after delivering living should we expect the asset to be stabilized?

Well, we put numbers out there I think at the last 2 or 3 December conferences, which has the full lease of scheduled right through the end, I don't have that at my fingertips. I thought it was 21% or 22%, but I don't remember. We'll have to get back to you on that because, unless Matthew, do you have it?

I think it wraps up 21% you'd drop of the year starting at 23% on a full year basis.

23% full year, I think, is stabilized. I think that's what was on that schedule.

But for revenue recognition purposes, the standard is when the tenant space is ready for its intended use, you start to recognize revenue. But use our earliest we start earning space order tenants later this year. And the building opens in August of 2020 with space then three should be for its intend use. Summaries hundred 3 was sort of the base of the building revenue recognition as early as late 2020.

Yes, quarter of the building, we turned over for tenants to start their construction by the summer of this year. So a year in advance of completing construction of the building and having a TCO in hand. So all those tenants will construct their space and move in probably within 30 to 60 days of the TCO days, which means we'll recognizing the revenue at that point.

Our next question comes from the line of John Guinee with Stifel.

First, a quick one for Matthew DiLiberto. If you look at the right use of the asset, the operating lease is about $400 million of value. Do you think that's a good assessment of value to the ground lessor of that -- those ground leases?

No. The simple answer is no. That is the new lease accounting for our ground leases finally coming out of the balance sheet. The decade's long odyssey that all the accounts that have gone through to get to this point. That is not an indication of value. You put it on the balance sheet using a discounted cash flows at some as young right, and you put on the balance sheet it just grosses are blessed from my abilities and there's no indication of value and it's probably of no value to the readers of the financial statement either.

Thought so. Okay. Thanks And/or not sure who but if you look at 1 Madison, and if this is in your invested a Slide deck, just write me that way but watch their gross and net rents in place now? What your total net rentable square feet going to be when you redevelop this? And as you come -- of you created the development budget yet and figured out who is going to come in as the JV partner or how are you going to finance it?

The question is one, Madison, yes? So on 1 Madison, what's in place now, the 1.1 million square feet, we're going to 1.5 million square feet as we develop. The in-place escalated rents about $82 a foot.

Gross.

Gross. And the redevelopment budget is probably the, what, actual construction cost alone order of magnitude $600 million plus or minus. That redevelopment budget, obviously, would that to include -- we'll work it up and have probably by this December's meeting everything with TI, marketing, deficit of scary. When we give a budget, I don't think everyone gives it this way, we give a fully loaded [indiscernible] interest, land at cost with whatever market JV partner comes in at, all the TI commissions and everything. But the actual physical work for completely reimagining the podium and adding the tower for which we've spent extraordinary amount of time over the past 12 months designing and estimating, we think will be somewhere in the range of about $600 million of hard cost.

And do you have a sense for what sort of growth or rent you have 28 for this to value creating?

The answer is yes. We know up and down. I think we're going to sort of -- we're going to unveil it all in December as we did with One Vanderbilt because I think having pieces of it without the whole picture can lead people to confusion. So we want to give people a very good sense of those rents, which, obviously, are much higher than $82 gross if that's where the current escalator is. Even from the podium alone, little over the tower. The average rents for much higher price point than that, but still for a product that we expect to deliver in 2023, middle of '23, we're going to have a rent point there what we think will be among the most desirable buildings in all of Midtown South of the Downturn markets at rents that are being achieved daily today in 2019. So we're not pricing in inflation. Doesn't mean we don't expect there to be inflation, it just means we are modeling this building based on off of a rental business that's based rate not one we hope to exist in 2023, although we hope it's higher. So this deal underwrites extremely well, like One Vanderbilt did. In some ways it's a little bit of an easier exercise because the building exists and it's a large-scale redevelopment at its space, but it's new construction, a very attractive construction, and it's tower, but it's not a high-rise tower, it's a medium sized tower. So the cost unless the timing is more efficient. And I think when we unveil the financial metrics both in terms of cost, returns, rental points, et cetera, the deal will certainly hold its own with any deal we have in the portfolio operator, I think that's the last question, yes?

Correct, sir.

Okay. Well, listen, we've finished 10 minutes early today, so tremendous. So thank you for your questions. It was a great quarter. We look forward to more of the same in Q2 and most importantly, everybody have a very happy holiday upcoming holiday season this weekend. Happy Easter and see you and speak to you soon.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and may you, you may all disconnect. Everyone, have a wonderful day.