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Edited Transcript of SLG earnings conference call or presentation 18-Oct-18 6:00pm GMT

Q3 2018 SL Green Realty Corp Earnings Call

New York Oct 22, 2018 (Thomson StreetEvents) -- Edited Transcript of SL Green Realty Corp earnings conference call or presentation Thursday, October 18, 2018 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew W. Mathias

SL Green Realty Corp. - President & Director

* Marc Holliday

SL Green Realty Corp. - CEO & Director

* Matthew J. DiLiberto

SL Green Realty Corp. - CFO

* Steven M. Durels

SL Green Realty Corp. - Executive VP & Director of Leasing & Real Property

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Conference Call Participants

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* Alexander David Goldfarb

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst

* Craig Allen Mailman

KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst

* Derek Charles Johnston

Deutsche Bank AG, Research Division - Research Analyst

* Emmanuel Korchman

Citigroup Inc, Research Division - VP and Senior Analyst

* James Colin Feldman

BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst

* John P. Kim

BMO Capital Markets Equity Research - Senior Real Estate Analyst

* John William Guinee

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Jordan Sadler

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

* Nicholas Philip Yulico

Scotiabank Global Banking and Markets, Research Division - Analyst

* Stephen Thomas Sakwa

Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst

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Presentation

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Operator [1]

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Thank you, everybody, for joining us, and welcome to SL Green Realty Corporation's Third Quarter 2018 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 to -- appear in the MDA 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 third quarter 2018 earnings.

(Operator Instructions)

I will now turn the call over to Marc Holliday. Please go ahead, Marc.

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Marc Holliday, SL Green Realty Corp. - CEO & Director [2]

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Thank you, everyone, for joining us on our third quarter earnings call. We will discuss some of the highlights and accomplishments of the quarter, as well as take as many questions as we can afterwards.

But first, I want to put the quarter's results into the context of the big picture.

The engine behind our current strategic plan is the extraordinary value creation we've been able to generate in this current cycle, which really began after the '08-'09 recession. As many of you know, we have been hard at work since 2016 finding ways to optimize and harvest the extraordinary gains in our portfolio, as evidenced by over $8 billion of total gross transaction values, dispositions and recapitalizations, which resulted in well over $2 billion of cash inflows to the company since 2016. We've been very thoughtful and deliberate in redeploying these proceeds in ways we believe best benefit the company and our shareholders. Notably, we brought our aggregate and relative debt levels down considerably in this current cycle, and we're also projecting to have record net cash balances on hand by year-end.

In addition, and as you know, we've been moving along a path of being among the most aggressive REITs in the country in terms of share buybacks, having bought back over 8 million shares and OP units year-to-date with the expectation and intent that we will round out our $2 billion share buyback program in the coming months. This continues to be an area of investment that we identify by far as the most attractive opportunity in our investment horizon right now, and that opportunity has only increased with the recent sector performance resulting in FFO multiples for the company that I can only describe now as shockingly low. As we have reduced our leverage, shed noncore investments, improved our asset quality and leased our portfolio, we have, notwithstanding, seen our FFO multiple decrease to as low as 13x, implying well in excess of a 6% capitalization rate on our prime New York City office portfolio. And, given the extraordinary quality of that portfolio and substantial discount to net asset value, we conclude that there is a dislocation that continues and warrants a continuation of our share buyback program.

We have also kept our eye on the ball and made sure to take advantage of a number of limited strategic new investments in 2018 as and when we saw them arise. Most notably, 2 Herald Park (sic) [2 Herald Square] and 245 Park are just 2 of the examples where we were able to put new money to work in ways that we feel will be highly accretive to the company, and we do have a pipeline of additional opportunities that we hope to be able to expand on further at our December Investor Conference.

As it relates to the positioning of the company for the future, we have ongoing and future development projects that we will be devoting our time and resources to in order to continue to maintain our standing as one of the leading real estate growth companies in terms of same-store NOI and FFO per share growth, metrics which we again lead the office sector in 2018 and areas where we will continue to try to demonstrate leadership in going forward.

The development pipeline -- which we will present in December in much more detail -- will provide the new seeds of growth in 2020 and beyond, as these projects begin to come to fruition, irrespective of same-store rental levels between now and then, because this is -- these are all inventory right now out of any same-store metric that we follow, all of which will just be aggregate incremental NOI growth as these projects complete. Fortunately, market conditions in New York City continue to be fairly strong, such that we've been able to execute our program consistent with guidance we gave back in the beginning of the year.

Taking a look first at leasing activity, our volume for the quarter was obviously quite strong, and as we sit here today, we are 3,000 square feet shy of our 1.6 million square feet leasing goal for 2018. So maybe, Durels wants to get out ahead of this and sign up a small lease before this call is over. What do you think, Steve?

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Steven M. Durels, SL Green Realty Corp. - Executive VP & Director of Leasing & Real Property [3]

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That's very possible.

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Marc Holliday, SL Green Realty Corp. - CEO & Director [4]

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Okay, I think it's in the bank. So make it happen.

So, of course, everything we do in the fourth quarter is a bonus. And more good news is that we expect to have a fairly strong fourth quarter of leasing, which should bring us to or above 2 million square feet of leasing for the year.

We want to remind everyone that when looking at statistics like mark-to-market with same-store mark-to-market NOI and the like, they are highly dependent on the leases rolling in any given quarter, and right now, we're rolling off a lot of leases that were signed in and around the 2007 peak. They've escalated pretty substantially over that 10-year period, so the fact that we have positive growth off of that, I think, is quite extraordinary. Notwithstanding, we may feel a little shy -- may fall a little shy of our ambitious goal at the beginning of the year of 6% to 9% same-store NOI growth -- I'm sorry, same-store mark-to-market on leasing, and we will track that closely. It'll be dependent on a few leases that we either make, hopefully, by December, or it may trip into January. But there's certainly a possibility that we'll be at the low end or just under the 6% to 9% range of the original guidance.

You might recall that we had hoped to see stabilizing of concessions and a firming of rents in the second half of the year, and I think we got it pretty much right. There's been, clearly, stabilization in TIs and concessions that we see in the portfolio now. We think that the rental market is very stable and demand is quite good.

So all in all, I would call it a healthy leasing market, which is, I think, reflective of a very good New York economy, and I'll have more to say about that momentarily.

And good news, furthermore, is that we have a -- these results have been occurring while new product from the West Side and Downtown has been coming online. So we've shown an ability to absorb this new inventory, keep the vacancy rate roughly in check and maintain stability in these key leasing metrics, which we do think will only get better as the available inventory is winnowed.

Another big part of our big story is the success we are having with our development at One Vanderbilt. Construction continues on a pace ahead of schedule and under budget as steel has now reached our 39th floor of construction -- well ahead of our original goal for the year -- reflecting, really, a lot of hard work by 1,000-or-so construction workers that are on that site day in, day out. We had a Worker Appreciation Day last week attended by all, and you could see the passion in their eyes and how proud they were, not only to be working on a project of this magnitude and this importance but also how proud they were that it's been -- the job has been going like a well-oiled machine. Just really a great job by the team. And if you haven't been to the site recently, I would encourage you to do so, as the beautiful terracotta curtain wall and 10-foot glass panels are now installed up to around the eighth floor and is really truly a spectacular addition to the cityscape of East Midtown.

Tenant demand for the project continues to accelerate on the heels of signing our lease with Carlyle for approximately 100,000 feet in the middle part of the building, and the fourth quarter pipeline of deals I mentioned earlier certainly has some more activity included within it that will hopefully bring us well ahead of our goals for One Vanderbilt come year-end.

The project continues to reinforce the basic themes which drove our decision to pursue it initially, which included: a dramatic addition to the Grand Central submarket; leading the way for other new development projects like JPMorgan's announcement of the their 2.5 million-square-foot new headquarter project; providing over $200 million of funding for critically important public realm and transportation improvements; and the delivery of state-of-the-art new construction right in the heart of Midtown to provide tenants with a best-of-class choice near New York's greatest transportation hub, which will soon see 100,000 additional riders a day from the completion of Long Island Railroad East Side Access.

We will continue to monitor the New York City economic indicators and reveal directionally our thoughts for the market environment in the coming -- for the coming year at our December investor meeting.

The job numbers right now are a bit scattered and hard to get a precise read on. The non-seasonally adjusted numbers are quite strong and almost on par with last year's non-seasonally adjusted. However, the seasonally adjusted numbers diverge from that fairly significantly, albeit all still positive numbers, bringing into question whether there will be a significant revision sometime after the year that brings those 2 closer together.

In either case, Wall Street profits were nearly $14 billion for the first half of the year and are on track to eclipse the city's projection of $20.5 billion for the full year. And, furthermore, the Big 5 banks that have already reported their third quarter earnings showed a 6% year-over-year increase through September '18, proving that the banks are benefiting more than, I think, expected from the overall absolute rate increase in the lending environment and keeping those earnings still on an upward trajectory.

Tax withholdings are showing indications that 2018 will be another strong year of compensation levels in the city, and retail sales, which are tracked by the state, show that retail sales tax is up around 7% for the year. That includes bricks-and-mortar and online sales for which the state collects taxes.

So we have this extraordinary New York City economy that's operating right now at a 4.1% record low unemployment rate, and it keeps moving along while population growth year-over-year has been somewhat muted. But you have people rejoining the workforce that had been on the sideline, and that's what's contributing right now to that job growth. And it's like with our leasing portfolio: as you get towards full occupancy, there are not as many jobs that can be created and filled. And as you get towards a -- I'm sorry, you get toward full occupancy, there's not as many tenants that you're available to sign, because you don't have as many spaces. I think you see a little bit of the same thing in the jobs picture. You have a sequentially lower job growth, but it's still indicative, I think, of a very strong economy which is almost at full employment.

So with that, I would like to stop there and open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Craig Mailman with KeyBanc.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [2]

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Just curious, Marc, you kind of mentioned that you have a pipeline of opportunities here that you're going to explore at the Investor Day, but just ahead of that, you guys have been active on the buyback, you sold a lot of assets. Just curious, from here on out, how you're kind of weighing those buybacks, the potential kind of pipeline of assets to sell, and thinking about other financing options, such as JVs on some of your larger assets, to kind of unlock the -- these sources for some of the usage you're going to be talking about at the Investor Day.

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Marc Holliday, SL Green Realty Corp. - CEO & Director [3]

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Well, okay, I mean -- I guess, instinctually I want to say let's wait till Investor Day because we're going to go through it in detail. But I'll give you a sort of a framework within how we think about it. Assets we can sell, recap or otherwise monetize, tax efficiently, lends itself towards the buyback program because we get to retain all the proceeds, or most of the proceeds, and that's ripe for reinvesting in our stock, which we think is the best single investment opportunity. Then there are transactions we have slated that may be somewhat less tax efficient, and in those instances, we would typically reinvest those proceeds in other new opportunities, whether they be acquisitions or new development, and by doing that, we're able to shelter the gain. We've been doing that for 20 years, so that's not a program or a strategy that should sound new to anybody on this call, because that really, prior to the buybacks, had been our -- stock and trade was buying, adding value, monetizing, reinvesting the gains into higher-growth opportunities and moving on. So those 2 investment opportunities, I think, are somewhat parametered by whether we're generating tax-free or taxable gain on execution. That's one element of it. Then there are other elements that will guide ourselves towards looking at strategic investments that may have return attributes that are as strong, on a risk-adjusted basis, as the stock itself, and where we do that, you'll see us be active, as we always have been. We try to maintain -- never an on or off approach. In every market, we're selling, we're buying, we're investing in our stock at this moment. And that -- we're not looking to cull the market. What we're looking to do is simply buy low and sell high and reap the benefits of our arbitrage of that in a tax-efficient way, be it in our stock or in new investments.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [4]

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Hey, it's Jordan Sadler with a follow-up. Just on, kind of, demand in the wake of the new tax regime, for Marc or Steve. This year, we saw pretty big headlines from AllianceBernstein's plans to move to Nashville, seemingly a one-off. But maybe, can you speak to trends you're seeing, if any, in terms of tenant migration plans, either into or out of Manhattan, as a result of sort of the tax burden on employees?

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Steven M. Durels, SL Green Realty Corp. - Executive VP & Director of Leasing & Real Property [5]

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No, I think there's been the rare occasion where you see that that's been maybe an influence. But it's hard to draw any kind of conclusion that taxes are having a negative impact on the leasing environment given the fact that Midtown leasing is 6% ahead of last year and is going to have its best leasing year in the last 12 years. So in the face of that, velocity is extremely strong. We're seeing it within our portfolio, and where we have the majority of our portfolio surrounding Grand Central Terminal, it's one of the best submarkets from a leasing velocity perspective. So I think it's all -- all cylinders are firing straight ahead.

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Operator [6]

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Our next question comes from Manny Korchman with Citi.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [7]

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Can you give us your updated views on the coworking space, especially following the recent announcement of the large lease that you signed with WeWork?

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Marc Holliday, SL Green Realty Corp. - CEO & Director [8]

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Sure, Manny. I think the view is still consistent, which is it's a thriving part of the market. We generally view it as a positive. WeWork is an enormous consumer of space in the market, and that's certainly helped to keep things tight in the market. And it's going to be a portion of our portfolio, we anticipate, as it has been for the last 20 years, whether it's with an HQ, a Regus, New York office suites or other tenants, an Emerge212, which is our own coworking business, or one of the more recent guys, like a WeWork or a Knotel.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [9]

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And Steve, any updates on the lease with Polo?

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Steven M. Durels, SL Green Realty Corp. - Executive VP & Director of Leasing & Real Property [10]

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No, nothing to report at this point in time.

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Operator [11]

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Our next question comes from John Kim with BMO Capital Markets.

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John P. Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [12]

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A question on your DPE. One of your objectives of the year was to keep your DPE balance flat. But I was wondering if there was an update on this, just given your balance sheet had shrunk considerably over last year and looks like it may continue to do so.

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Matthew J. DiLiberto, SL Green Realty Corp. - CFO [13]

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John, it's Matt. Our guidance was actually to have the balance be lower by about $100 million year-over-year, and we're on a trajectory for that while meeting our target of $200 million of income from that portfolio. So from quarter -- from second quarter to third quarter, it went down as we anticipated. I expect there to be a modest amount of more diminution over the course of the fourth quarter.

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John P. Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [14]

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And can you just discuss your appetite to take this down further and potentially get some more earnings dilution because of that?

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Marc Holliday, SL Green Realty Corp. - CEO & Director [15]

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Well, I don't know -- I don't think we look at it as appetite for earnings dilution. So I have to think about how to answer that question. If the question is, in our 2019 plan, where do we see us pegging that and might it be lower, I think you have to wait till December for that. And we're going to lay that into the context of all the other planned activity we have for 2019, not really in isolation. And we'll have guidance for you then. But clearly, we -- our -- I don't want to say our target or constraint, but our self-imposed cap, if you will, was something to the effect of 10% of total asset value of the company. We're certainly below that. So within the range of -- whether we're at 6%, 7% or 8%, I don't think there's a magic number there. The answer is, we have a -- our portfolio stands today at about $1.9 billion or so?

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Matthew J. DiLiberto, SL Green Realty Corp. - CFO [16]

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A little over $2 billion, yes.

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Marc Holliday, SL Green Realty Corp. - CEO & Director [17]

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So about $2 billion.

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Matthew J. DiLiberto, SL Green Realty Corp. - CFO [18]

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Completely scalable.

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Marc Holliday, SL Green Realty Corp. - CEO & Director [19]

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We have, we believe, a net asset value that certainly -- which would put that at well under 10% even on an enterprise value. So it's really going to be something we'll look at and look at the opportunity set and decide whether to size down further or maintain.

Hey, Matt, you...

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Matthew J. DiLiberto, SL Green Realty Corp. - CFO [20]

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No, that's it for this...

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Operator [21]

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Our next question comes from Alexander Goldfarb of Sandler O'Neill.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [22]

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Just 2 questions. First, in one of your recent investor decks, you guys commented on doing another $300 million of capital for One Vanderbilt to reduce your equity. Would this be bringing in an additional joint venture partner, expanding the current JV partner? Just what are your sort of thoughts as you're looking at that project, especially as it leases up? Presumably, you're getting more inbound calls of interests?

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Matthew J. DiLiberto, SL Green Realty Corp. - CFO [23]

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Yes. Specifically, we talked about a refinancing, which we're undertaking as we speak, for the in-place construction financing. We've -- obviously, the project has gone very well, exceeded a lot of our expectations along the way. And so we are looking for up to $300 million. That could come in the form of financing, it could come in the form of additional equity. But the refinancing we're undertaking right now would result in additional proceeds, longer term, lower rate and less recourse, as we anticipate it.

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Marc Holliday, SL Green Realty Corp. - CEO & Director [24]

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Yes, I would add to that. That refinancing was unintended and is a good news aspect of just how well this project is going, and evidence of the project's success that we are in front of the -- a group of banks for the refinancing, interim refinancing, unplanned. And it will be highly accretive to the deal and the joint venture and really just is an affirmation, I would say, if we can get that done.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [25]

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Okay. And then the second question is just in some of the local press, Marc, there's been talk about city council bringing up commercial rent control. I know that it's come up in the past, just sort of curious in today's environment what your view is, if you think this is real and – over the past. Especially if you think about Midtown rezoning, where the city has tried to encourage redevelopment, this would seem to be the opposite.

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Marc Holliday, SL Green Realty Corp. - CEO & Director [26]

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Yes. Well, look, this is something -- there's many bills that come to council, and some get passed and many don't. We'll see where this shakes out. There's been some form of this hanging around out here, I think, for decades, and I honestly think that it's the -- they're on the wrong issue. Retailers today, as you know, are having problems unless they're very well capitalized and very well situated. But a lot of these smaller, less-credit-worthy, what will be called small business or mom-and-pop businesses are having a hard time, but it's not the rent. And I think that'll be the debate on the floor. It's all the other things that don't seem to be in that bill, which a lot of these small businesses are coming out and talking about now, such as the increasing minimum wage, which is a great goal for the city, but it has with it the intended (sic) [unintended] impacts of raising operating costs. It's real estate taxes. I mean, the real estate -- rents are down almost in all submarkets of retail, anywhere between 10% on the low end and 35% on the high end, but all the while, real estate taxes keep increasing and keep increasing annually at very, very high compounded annual rates, and the regulation -- the things these retailers have to do to open up businesses and maintain their businesses and stay compliant. When you put that all together, it doesn't seem to be the rent to us. We have adjusted our rents in ways that have met the market and have been almost immediately reactive to the system -- now in real estate, nothing is immediate. It's not a nanosecond, it's not a day, but over the course of the past 12 to 18 months, we as long as other landlords, retail landlords, have repriced their portfolios generally to meet the market, and it's been sizably down and quick as demand has dropped. And yet, even with that, a lot of vacancy remains; projections between 20% and 25% in some submarkets. Now rent is only a piece of it, and the rent is corrected quickly. It's probably the only parameter I mentioned that went down and went down significantly. Everything else -- more regulation, higher wages and higher real estate taxes -- they're going to have to figure out a way to solve that issue, I think, in order to make meaningful progress on this point, and I think the rent, for economically motivated people, will take care of itself. I'd like to see possibly inserted into the bill some kind of incentives for landlords to give breaks to tenants. We do it with affordable housing. Why not do it with small business retailers?

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Operator [27]

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Our next question comes from Jamie Feldman with Bank of America Merrill Lynch.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [28]

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I wanted to talk about rents for a minute. So it sounds like you think you're trending below your original target of 6% to 9% growth. Can you just talk about what's different than maybe at the beginning of the year that you're on this trajectory?

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Steven M. Durels, SL Green Realty Corp. - Executive VP & Director of Leasing & Real Property [29]

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It's not that the rents have moved lower than expectations. It's just really that when we focus only on mark-to-market and compare the rents that we're signing against the rents that are burning off from those select leases where the space is being filled in with 12 months or less of downtime, it gives a distorted view of the rental landscape. If you looked at our mark-to-market, which we posted at 1% -- if you spun out the 2 leases -- of all the leases that we signed, there were only 2 leases that really had a negative mark-to-market that watered down the overall performance. If you pulled those out, we would have posted a 6% positive mark-to-market. So I see rents that are still going up modestly, as we've said all along, and we projected at the beginning of the year, but we are seeing rental appreciation. But when we focus on the mark-to-market, it's just a, I think it gives a distorted view of rents.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [30]

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Okay, that's helpful. And then, I guess, for Andrew, just some thoughts on the investment sales market, cap rates and asset values. And then it looks like you took a $0.01 impairment on a debt investment that was repaid. Can you talk about what happened there?

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Andrew W. Mathias, SL Green Realty Corp. - President & Director [31]

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Sure. Investment sales, there's going to be a lot of price discovery because there are a lot of assets on the market now. So I think fourth quarter, we should see quite a few assets clear and get a much better sense. But our -- we still see a lot of demand from foreign and domestic investors. Obviously, we're getting a -- we announced the sale of a development site on 72nd Street and an asset that came back to us through the debt portfolio, on Third Avenue. Being able to quickly sell those assets and redeploy that capital is an indicator that not just core income-producing real estate but also development-oriented real estate, there's still quite a liquid market for. So -- and I'll let Matt comment on the impairment.

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Matthew J. DiLiberto, SL Green Realty Corp. - CFO [32]

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Yes, and that's more of an allocation than anything else, that we have a multifaceted transaction, the Upper East Side Assemblage sale, 1231, and -- that has multiple aspects to it. It's a matter of basis allocation, and we've taken an impairment on the partner loan inside of that deal.

Just one other point, operator, I want to make to Jamie in answering the first question that he asked of Steve. Steve referenced a couple deals that were done in the quarter that brought our mark-to-market for the quarter down to 1%. I think Jamie was asking about our guidance of 6% to 9% for the year. Another factor is we had in our initial expectations a rather large early renewal, couple hundred thousand-plus square feet that may or may not make and may not -- may or may not be this year. We expected that to be this year, in which case we'd be squarely within our guidance range. If that does not make this year, I would expect us to be below our -- the low end of the guidance range of 6% to 9%, and that deal could make next year.

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Operator [33]

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Our next question comes from John Guinee with Stifel.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [34]

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As you know, cost of capital is everything in this business, and there's a lot of very inexpensive JV equity out there, which is obviously available to you guys. Big picture, what do you think is the spread now between cost of JV equity on an asset-by-asset basis and issuing stock? Or, said another way, where would your share price need to be that you would find common equity of more attractive cost of capital than JV equity? And then the second question is, any update on 245 Park? And if you talked about it earlier in the call, I apologize. I was late to the party.

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Marc Holliday, SL Green Realty Corp. - CEO & Director [35]

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Okay, we didn't in any detail, so we'll come back to 245. But John, let's me just -- let's just hit that first question again. The question is at what stock price would issuing common be better than a joint venture? Is that something -- yes?

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [36]

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Yes.

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Marc Holliday, SL Green Realty Corp. - CEO & Director [37]

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Yes. Well, one, I'd say we're so far away from that. We probably aren't tracking that number very closely right now, because it would have to be -- my view is generally at or near NAV. I mean, that's sort of the -- let's call it -- that's the mathematical answer, would be you generally don't want to issue discounted securities below value. It's like selling $1 for $0.98 or $0.9765. Now, selling $1 for like $0.7075 is even more objectionable. But really, when we have issued in the past, used the ATM quite aggressively, as you might recall, leading up to mid-2015 or so, generally, we like to think we're right at or around NAV. It could be off a $1 or $2 or 1% or 2%, but issuing at 10%, 15%, 20% discounts, not very attractive. On the flip side, joint ventures, you're typically doing those right at the market. People who come in and invest in a $1 billion building expect to pay $1 billion, not $900,000,000 not $800,000,000, not $700,000,000. They expect to pay the market. And you could almost say it's a premium offering, because in addition to bringing a JV partner in at the value, you then get fees and promotes, which we've talked about and broken down and analyzed in the past, that could increase the yield on our retained interests between 300% to 500% depending on that fee and promote package. So that's -- I think that's how we analyze it. But again, since we're so far away from that, we haven't been running those numbers recently.

Oh, I'm sorry, 245. 245, we made initial, what we call, phase 1 investment. We're working towards a Phase 2 that contemplates more direct equity investment with control that is still uncompleted at this time, and we'll just have to wait and see what the further update is as of December Investor (sic) [Investor Conference]. But for the moment, we have our investment, money's working, we're having a -- we're deeply embedded within the asset with our partner on that deal and, I guess, more to come in the next 30, 45 days.

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Operator [38]

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Our next question comes from Derek Johnston with Deutsche Bank.

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [39]

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Any further commentary regarding how leasing or the leasing pipeline is trending versus plan at One Vanderbilt? And secondly, are there any issues tied to the Carlyle lease in light of today's news?

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Steven M. Durels, SL Green Realty Corp. - Executive VP & Director of Leasing & Real Property [40]

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I'll address the first one, which is that we've got a good pipeline of deal flow at One Vanderbilt. We're trading paper with 4 or 5 tenants. We're in advanced discussions with 2 in particular, and we expect to have something positive to report before the end of the year.

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Marc Holliday, SL Green Realty Corp. - CEO & Director [41]

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Okay. So I guess you had asked a question about Carlyle and their efforts to assign the lease to SLG Funding, which is our $2 billion finance subsidiary. I think, as the papers state, the landlord in that case has rejected the assignment, Carlyle believes improperly, so it's brought a lawsuit. SL Green is not a party to that lawsuit, and that lawsuit in no way affects the One Vanderbilt lease, which stands apart and alone. So I can't really comment any further on that, other than to say it's unfortunate.

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Operator [42]

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Our next question comes from Steve Sakwa with Evercore ISI.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [43]

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Marc, I guess I wanted to come back to your comment about the tax-efficient asset sales, that allow you to do buybacks, and the less efficient ones, which sort of maybe force you to do kind of 1031 deals. Can you just give us a sense for what within the portfolio would be characterized as tax-efficient asset sales on kind of just gross dollar terms? And, I guess, to complete the remaining buyback authorization, how much more do you need to sell to do that on a leverage-neutral basis?

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Marc Holliday, SL Green Realty Corp. - CEO & Director [44]

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Well, Steve, we've gone through this in, I think, some fair amount of detail. We have assets where -- I'll give you -- structured finance. I mean, that's tax efficient. We've got $2 billion of assets that are marked at par. And as we reduce balances there, there's no gain, typically, unless we have some kind of exit fee or something like that. And we -- that's a potential source. We have other asset sales that either don't have as much tax gain or we're able to structure around it through creative JVs or whatever it is. So we have assets, and you've -- I mean, you've seen us do almost $2 billion of it. So we clearly have been able to generate a significant amount of tax-free proceeds for use in stock buybacks. We have more we can do going forward, so the question will simply be, when we meet again in December and then discuss it as a board, whether and to what extent we want to keep going, based on market conditions, price and capital availability, versus the opportunity set, which is still meaningful out there. I mean, we do have a pipeline of deals that are very high yielding. You see the kinds of returns we print on these deals, both levered and unlevered. They're very high, double-digit yields, and we hope to be able to continue to balance our core investment strategy, as we've done in more limited amounts of late, with share buyback program.

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Matthew J. DiLiberto, SL Green Realty Corp. - CFO [45]

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Steve, what was the second part of your question?

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [46]

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Well, it was just, I guess, in terms of you talk about trying to be leverage neutral. You sold -- you put out the press release recently on the asset sales, which was several -- $300 million to $400 million. You have about $350 million to $400 million left. I know you didn't do a lot of buybacks in the third quarter, waiting for more sales to unfold, which you just announced, so I guess, how much more do you feel like you need to do just to complete the current buyback program, I guess, was sort of the question.

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Matthew J. DiLiberto, SL Green Realty Corp. - CFO [47]

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Yes, I mean, we're almost fully funded on the full $500 million. We have a couple more sales that are in the process, primarily in the Suburban portfolio -- which we've said we are slowly winnowing down -- that would round out the program and do it on the leverage-neutral basis that we've executed the first $1.7 billion on, $1.650 billion.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [48]

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Okay. And I guess just second question maybe for Steve. You've historically talked about kind of the size of the leasing pipeline. I'm curious where it is today. And did you get the 3,000-square-foot lease signed in the last 25 minutes?

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Steven M. Durels, SL Green Realty Corp. - Executive VP & Director of Leasing & Real Property [49]

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It's funny you say that. I just got an email that said we signed a 20,000-square-foot deal that's -- is waiting for me to countersign when I get downstairs.

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Marc Holliday, SL Green Realty Corp. - CEO & Director [50]

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All right.

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Steven M. Durels, SL Green Realty Corp. - Executive VP & Director of Leasing & Real Property [51]

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I'll tell them to bring it up. Otherwise, it doesn't count. If it's not signed, so...

So it was 945,000 square feet of pipeline. So now we're actually 925,000 square feet, and it's down from last quarter because we did a lot of leasing this quarter. But we've got very good deal flow, and we've got a lot of leases that are in very advanced stages of negotiation out of that pipeline.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [52]

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And can you characterize just kind of types of tenants, new tenants? Is this kind of pulling forward renewals? Or how would you characterize it?

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Steven M. Durels, SL Green Realty Corp. - Executive VP & Director of Leasing & Real Property [53]

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Yes, sure. In the pipeline, it's finance, real estate, legal, nonprofit, education is the large part of it. Of the leases that we signed, it was dominated by finance and legal. Between the 2 of those industries, that was 60% of it. But it's good, broad-based group of tenants.

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Marc Holliday, SL Green Realty Corp. - CEO & Director [54]

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Thanks, Steve. I think we have time for one more, is it? Is there one more question?

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Operator [55]

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We do have a question from Nick Yulico with Scotiabank. (Operator Instructions)

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [56]

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I just wanted to make sure that the 2 Herald JV sale, is that still set to close in the fourth quarter? And do you have a number for just overall sales proceeds you expect in the fourth quarter?

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Matthew J. DiLiberto, SL Green Realty Corp. - CFO [57]

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The answer is yes, we expect it to close in the fourth quarter, and that's going to be coupled with a financing. The -- I mean, I have a roundabout number from 3 Columbus and from 2 Herald. You're talking several hundred million dollars of proceeds.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [58]

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Okay. And then just lastly, going back to 245 Park, I mean, it sounds like there are some redevelopment plans that have started to float around the leasing market for that building. I mean, is that what is first need to be sorted out before you have -- you consider making an additional investment?

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Marc Holliday, SL Green Realty Corp. - CEO & Director [59]

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Well, I don't really -- I think it's not -- until we have a conclusion to where we stand on the phase, I wouldn't want to start talking about redevelopment plans or strategies for the building, I think it'd be inappropriate. So, I mean, I would just say at this point -- and not even at this point, I mean, you've heard from the day HNA first bought the asset way back, we think it's a spectacular asset. Great location, great building, now directly across the street from JPMorgan new world headquarters, catty-corner to 280 Park, which has been a very successful redevelopment, and only getting better through developments like One Vanderbilt, 425 Park and others to come as a result of East Midtown rezoning. So it's a good piece of real estate. We like it very much. We've been -- we're in the -- we're early -- we were part of the original acquisition financing. We made an additional substantial investment about 3, 3.5 months ago. And we're in dialogue with the -- with HNA to recast that investment into something that'll have longer-term, more permanence. That's really all I can say on it for now.

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Operator [60]

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That concludes our question-and-answer session, so I'd like to turn it back for closing remarks to...

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Marc Holliday, SL Green Realty Corp. - CEO & Director [61]

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Okay, thank you.

See you, the investor conference is December 3?

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Matthew J. DiLiberto, SL Green Realty Corp. - CFO [62]

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Yes, Just to remind, December 3, doors open at 8:30. It's at Jazz at Lincoln Center, same venue we've been at for the last couple of years. Program will begin at 9, so please get there ahead of that. We expect it to be roughly a 3-hour presentation, then there will be an optional property tour. For details on how to register, please look at our press release or go onto our website.

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Marc Holliday, SL Green Realty Corp. - CEO & Director [63]

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Thank you.

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Operator [64]

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Thank you. Ladies and gentlemen, that does conclude today's conference, thank you for your participation. You may all disconnect. Have a wonderful day.