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SL Green Realty Corporation (NYSE:SLG)

Q2 2014 Earnings Conference Call

July 24, 2014 2:00 PM ET

Executives

Heidi Gillette – Director, IR

Marc Holliday – CEO

Andrew Mathias – President

Steven Durels – EVP and Director of Leasing

Matthew Diliberto – Chief Accounting Officer & Treasurer

James Mead – CFO

Analysts

James Feldman – BofA Merrill Lynch

John Guinee – Stifel, Nicolaus & Company

Vincent Chao – Deutsche Bank

Ross Nussbaum – UBS

Jordan Saddler – Keybanc Markets

Michael Bilerman – Citigroup

Steve Sakwa – ISI Group

Michael Knott – Green Street Advisors

Tayo Okusanya – Jeffries & Company

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2014 SL Green Realty Corp. Earnings Conference Call. My name is Whitley, and I will be your operator for today. At least this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder this call is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Heidi Gillette of SL Green Corp. Please proceed.

Heidi Gillette

Thank you, Whitley. Thank you all for joining us today.

At this time the company would like to remind all 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 second quarter 2014 earnings call.

Two items before turning the call over to Marc Holliday, Chief Executive Officer of SL Green Realty Corp. First off the company yesterday in its earnings release announced that it will host its annual institutional Investor Conference on Monday December 8th, 2014 in New York City. To be added to the conferences email distribution list or to pre-register please email slg2014@slgreen.com. Secondly I ask that those of those of you participating in the Q&A portion of the call please limit your questions to two per person.

Thank you. I’ll now turn the call over to Marc Holliday. Please go ahead Marc.

Marc Holliday

Okay. Thank you, Heidi, and good afternoon, and thank you dialing in today. Continuing on the heels of our strong first quarter showing we have now completed an excellent second quarter which is reflective of the vibrant New York City economy, strengthening commercial office market and successful execution of our strategic plan. The foundation of our success begins with the strong New York City economy and expanding jobs market.

The New York City seems like it may be on track to add approximately 100,000 private sector jobs for the year with 50,000 jobs already created through the second quarter. Office using employment one of the key statistics for our industry also showed significant gains with almost 10,000 jobs added primarily in finance and professional business services. So clearly a bit of turnaround and departure from last couple of years. If this trend continuous we would be on track for an approximate 100 basis points reduction in the vacancy rate for calendar year 2014 and I estimate that based upon approximately 20,000 jobs a 200 square feet per job of net absorption.

Further evidence of this employment activity can be seen in our pipeline of lease transactions. Our current leasing pipeline has grown to 1.6 million square feet with approximately half of those deals out for signatures or pending and another 800,000 square feet in the term sheet stage. This 1.6 million square feet being negotiated, represented about a 200,000 square foot increase to the statistics I gave you on the last quarter we call and that’s also net of the approximately 275,000 square feet we leased during the quarter and another 50,000 some odd square feet that was leased in the first three weeks of this current quarter.

To-date we have signed up approximately 900,000 square feet of Manhattan office leases with an expectation that we will convert out of 1.6 million square feet another 1.1 million square feet of that pipeline into signed deals over the remaining quarters to hit our ambitious target for the year of 2 million square feet of leasing over the next, I would say five months.

We have been – we have experience an uptick in our Suburban portfolio as well. Those leasing stats show occupancy climbing to almost 83% portfolio wide and positive leasing spread of about 3.2% mark-to-market on replacement leases. So this continues a trend that we have highlighted over the past four or five quarters and we hope that that’s trend that will continue and our projections at the moment for the remainder of the year are showing such.

One of the hallmarks of this company and something that was very evident in the press release you read last night or this morning is our willingness to sell mature properties and non-core assets in order to take advantage of favorable market conditions like we have at this moment and we demonstrate the success of our value add approach to investing. So far this year we have executed on five separate sales transactions involving a total of $1 billion of gross consideration with even more under consideration for the balance of the year.

Excluding 673 First Avenue which was an original IPO asset these transactions had holding periods ranging from two years to seven years with a weighted average of approximately 4.7 years. So you can see that the game plan that we execute on these value add assets generally buy, improve reposition and lease and then try and convert within the three to five year window those sales into capital gains clearly held true with four of those five assets and the returns exceeded about 25% on those four assets on a $1 billion of gross sales and total profits approaching $300 million.

So this is very much in line with our previous results on prior assets sales with the bulk of those asset sales recurring at the better part of the last cycle of five or six or seven. I think at this point we probably sold more assets then most of our nearest competitors own. So it is a demonstration of our – even at 28 million-29 million square feet owned we have you know we have shown over luck to grow for market share sake but rather continue to award our shareholders with the kind of profits that can be achieved when capital rates go to a 4% to 5% level where they are now and there is an incredible demand for vacancy. So you should expect that to continue.

Many analyst that we’ve spoken in the past 24 or maybe 18 hours have expressed to us that these sale prices have far exceeded what was been carried in their respective NAV models. So hopefully these sales have the added benefit of illuminating the substantial embedded value in our portfolio and the voracious demand for well-located and well positioned commercial Manhattan assets.

We have sort of put an exclamation mark behind the fact that we have these two business buy, improve and hold and buy, improve and sell and in the non-core sale portfolio we do generate these capital gains, they are fairly recurring to greater or lesser degrees over time. And in the reports we see that there is this distinction made between underlying recurring earnings and capital gains which has taken on the nomenclature of noise. The reality is capital gains is nothing more than the monetization of those future earnings. And it’s pretty easy to get your hands around whenever we sell an asset what the earnings diminution is from the sale of the asset relative to the price we achieved. And whenever the cap rate is below the earnings contribution rate that’s an accretive sale and that’s something that’s hugely beneficial to our shareholders.

So I think if you look at most if not all of the sale we achieved, they’ve generally been local sales that are accretive to NAV it’s not just the monetization for monetization sake but it’s where we feel that we are getting a price that exceeds the earnings contribution of that asset going forward. And I think that rather than trying to dial out cap gains to get to core earnings we would encourage people to look at both of those as highly rewarding and almost the capital gains in some sense are more important because it is – it takes the mystery out of what something is worth when you have the market trade and these sales were all done at levels that I think are very supportive of asset pricing for our portfolio and assets in the city market wide at levels that probably exceed where many people have those levels pegged.

So we are happy to have gotten those done. There is certainly more to come. Andrew is going to expand a little bit further on those sales with some details but also talk about our active acquisition campaign that’s been going on as well, because as we’ve been selling we’ve also been buying. And not only identifying very good 1031 receivers but identifying basically the new product that we will be looking in some cases to monetize in three to five years from now and hopefully generate these similar kinds of gains.

So with that said let turn it over to Andrew.

Andrew Mathias

Thanks Marc. As I sales we announced yesterday that Marc mentioned the investment sales market continues to take material steps forward. The Third Avenue site was purchased in December of 2012 and following a frantic 18 months of deal making, via air rights purchases, lot mergers and proceed sharing agreements lo and behold the company was able to turn a $32 million profit in those 18 months. Major credit to Managing Director, [Brad Herschenfeld] who led the charge on this investment.

The 2 Herald sale bring us to conclusion a highly successful investment originated in 2007. One can’t use highly successful when describing too many 2007 investments in the real estate industry, but this structure which stood the test of time in the real estate cycle and returned a cash IRR to SL Green of over 17% on what is a senior fixed income position which would normally earn 6% to 7% as levered. Our returns on this investment almost tripled those normalized returns.

At 180 Broadway another deal purchased in 2007 where we created an enormous value vacating several buildings and constructing a state of the art dormitory for Pace University and investment grade retail box at the base. We sold the building for 4.3% cap rate and it’s easy to see in these kind of numbers how demand for high quality fixed income real estate is accelerating in the Manhattan market. Across this backdrop of our individual transactions I would expect to see significant market transaction volume continue in to the second half.

In the face of all this activity we continue to pick our spots on the acquisition front. We announced three new retail deals at NAREIT, before NAREIT in June as demand for retail properties continues to hit new heights we continue to scour the market for off market deals where we can get better than market returns and take advantage of growing retail rents. And with an interesting pipeline on the office front and the residential front for the balance of the year we would expect acquisition to top $1 billion this year making it one of our most active years in terms of acquisition in the last couple of years. We are actively evaluating the next potential asset sale candidates as well as we continue to view this market as an excellent time to monetize as well as to make new investments.

The structure finance program was on track with our guidance and expectations with several scheduled pay offs occurring in the quarter and new originations slightly more than offsetting those pay-offs. Yields in that portfolio are holding steady and we have a very high quality pipeline in that portfolio as well and would expect to announce some exciting new deals in August. Structured finance continues to be an important part of our overall strategy.

We look forward to a very active second half of the year and with that I guess we’d like to open it for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Jamie Feldman with Bank of America. Please proceed.

James Feldman – BofA Merrill Lynch

Great. Thank you. And good afternoon. I was hoping you guys could talk a little bit more about your outlook for Midtown. We know of leases that are going to be moving out either go Downtown or the west side. I think if you talk to brokers they’ll say they are not expecting really much in terms of rent growth and even minimal net absorption. I am curious what you guys are seeing from your perspective in thinking about your business over the next 12 to 18 months?

Marc Holliday

Well, we are not seeing that Jamie. So I don’t know exactly which brokers that’s coming from. I think the activity and statistics prove otherwise. We’ve got, we are projecting still as we sit here over the next five months occupancy gain mark to market gain, we have tremendous activity. Steve Durels can kind of walk you through properties where in Midtown where we have vacancies like I don’t know 280 Parks, 600 West, [inaudible] 3, 8 and 7, 3 Columbus all of which have lot of activity. So I’d say anyone that’s describing the market as stagnant is wrong, or off. I don’t think that’s opinion, I think that’s factually incorrect.

If they’re talking about what they are projecting for the future I can’t speak to that. But if they’re talking about what is taking place now, I’d say we have 900,000 square feet leased to date, a 1.6 million in pipe. And we are projecting a 100 basis point pick up in occupancy between now and end of year. Our rents I think are up 13% or 14% mark-to-market over the first six months. So I put that in one of the better markets we’ve operated in since our IPO in ‘97. There has been better markets but there has been many that have been worse. So I’d put this in the top third of those markets. And we think it’s getting stronger for the reasons I tried to set forth at the outset with respect to the job growth we are seeing and increased demand in Midtown.

Steve, you can – why don’t you add to that your thoughts.

Steven Durels

Sure. Just to add a little more color to it. Of the 800,000 square feet of leases that we have out 740,000 square feet of that are Midtown deals which certainly speaks to velocity that we are seeing within our portfolio. And I would point you to the end of last year where we got lot of questions and there was lot of reporting about Midtown Grand Central Terminal, 6th Avenue in particular about how everybody was leaving and there was trouble on the horizon. And in reality what we’ve seen since the fourth quarter last year through all of this year, is that there have been a number of very large deals done in Midtown particularly on 6th Avenue, White and Case, [Neuberger Burban] being very good examples of that, where it is a cyclical market and each of these submarkets are going through changes right now. And as much as Downtown is the beneficiary of those tenants who are price sensitive, whose businesses are low margin businesses, than that brings us to the Downtown market. But they are only going Downtown because rents are stable to rising in Midtown. And while there is a big rent difference between Midtown and Downtown that creates market relief. And we are seeing good velocity throughout the portfolio. So I think we all remain very bullish on the Midtown market.

James Feldman – BofA Merrill Lynch

And I guess Steve, while we have you on, what are your thoughts as we do start to see some of these larger vacancies in the market? How do you think that plays out?

Steven Durels

Well, I mean give me a specific concern.

James Feldman – BofA Merrill Lynch

Right on…

Steven Durels

Yeah. So [Condinas] has got obviously time left while there are out shopping in that space, they have got a very heavy rent that they are looking for on this space, a rent that’s substantially above what Condinass is vacating, for the simple reason that the big blocks in Manhattan and in Midtown in particular are in fairly short supply. But I think if you ask the – who own that building, they are seeing a lot of velocity in their portfolio, they have time on their side and quite frankly they are kind of marketing off the backs of the port who is paying the rent on the Condinas space after Condi moves Downtown.

So they are confident that there is going to be strong demand and it’s going to likely come from probably one of two industries. It will be either law firms or it will be financial services because those have been the big drivers for the Midtown leasing. The other one that people throw around is the Time Warner and again that’s so far off in the future, it’s years off in the future as to not be competitive against anything that – certainly for our portfolio that we’re competing against.

James Feldman – BofA Merrill Lynch

Okay. And then secondly can you talk a little bit more about 7-19-7 what do you guys envision there in cost?

Marc Holliday

7-19-7.

Andrew Mathias

All right. The intention is to vacate the building take it down and build a retail box similar to what we’ve done on several other corners in Time Square. So I mean, it’s a very small site, it will be a single tenant occupant that we’re looking for and I would expect cost there to be in the neighborhood of $30 million or so of construction.

James Feldman – BofA Merrill Lynch

Okay. All right. Thank you.

Operator

Your next question comes from the line of John W. Guinee with Stifel. Please proceed.

John Guinee – Stifel, Nicolaus & Company

Great. All right thank you very much. Marc or Andrew how should we look at the valuation on the City building 388-390 Greenwich, how you are guys thinking that plays out?

Marc Holliday

Well, I mean in terms of yeah, we don’t do valuations per se let me start with that. So we don’t put valuations on the properties and hang them out there. With that said we would look at this as I think the rental contribution as it currently sits, I think is about a $150 million net rent. So and yeah we’ve got probably remaining maybe $250 million or so of capital between now and 2017 or 2018 that we’re going to put into the building and then there is either an option that city may or may not exercise after that I think sometime between ‘17 and ‘20 or ‘21 which if exercised the value will be capped at $2 billion which I don’t have the number – we did this on a protocol John but it produced double-digit kind of returns from inception back in 2007, which again Andrew sort of highlighted as making big profits and double-digit returns on 2007 deals are few and far between.

We obviously did it on 2 Herald and 180 Broadway and we would do it on 388 if they hit the option. If they don’t hit the option then you can apply whatever cap you want to apply to that rent and get to whatever value that would bring to you which would likely be at least $2 billion, possibly more. But that sort of depends on A, what is the rent then because it is subject to a CPI adjustment annually. So we can’t sit here today and tell you what that rent would be in ‘17 or ‘18 it’s dependent on CPI.

And two, it depends on what cap rate is at that point in time. But certainly in today’s world I think that’s every bit of a five cap today not less.

John Guinee – Stifel, Nicolaus & Company

And then a second Herald Square is to me just sort of a fascinating deal. Looks to me like you sold your fee or your land position for a shade over a $1,000 or right about a $1,000 per net rentable square foot for the building. A couple of questions what’s the buyers plan for that building or what’s their plan for the fee position or the land position. And then two what kind of gain would you – what kind of tax gain you would have on that and how would you – are you able to roll that sort of gain into another asset on a 1031 basis?

Marc Holliday

I’ll answer the first part and I’ll leave Matt to answer the second part, John. Buyer is a life insurance company and the tenant under the lease does have an option to buy that fee position in 2027 which we sort of highly expect that they will exercise that option as does the buyer. So the buyer is basically looking at it for the fixed income stream it will produce between now and 2027 and you are right on the square footage there, the building is around 365,000 rentable square feet. So Matt?

Matthew Diliberto

And John to the tax side of the things yes we do the gain will be significant but we certainly have the ability to roll that into a 1031.

John Guinee – Stifel, Nicolaus & Company

Thank you very expect.

Marc Holliday

Yeah we expect to fully have that deck shelved is our current planning.

John Guinee – Stifel, Nicolaus & Company

All right thank you.

Marc Holliday

Thank you John.

Operator

Your next question comes from the line of Vincent Chao with Deutsche Bank. Please proceed.

Vincent Chao – Deutsche Bank

Hi good afternoon everyone. Just curious if you can maybe elaborate a little bit more on the additional assets sales which you are contemplating, maybe just order of magnitude what kind of size are we talking about and given your comments about suburban markets picking up here over last couple of quarters if there’s any potential that, that would be included?

Marc Holliday

The sales we were referring to at the outset are sales of additional Manhattan assets. They would likely be assets that we consider non-core which I think if you look at the five we sold this year and I think last year we did one court and a couple of others that there is a consistent theme there which if you look at remains in the portfolio, you can kind of pick through things where we stabilize non-core assets, we make good trading candidates versus other kinds of core [fortress] type buildings that we think there’s a whole another round of profit opportunity as we will lease it there in hopefully double-digit mark-to-market environment that’s highly compelling.

So order of magnitude don’t really have a number on it. Let’s say over the next 12 months another few hundred million dollars worth of sales growth at least. So whether any or all of that concludes in the balance of this year, who knows because there is nothing that we’re actively underway on and these sales typically take four to six months. So more likely than not they are deals that would be very end of this year or first quarter of next year.

But that was – that’s a rough description of the kind of things we’ll be looking at. I don’t think we’re looking at another billion dollars per se but 300 million plus is certainly on the table.

Vincent Chao – Deutsche Bank

Okay and on the suburban side, is that perhaps conditions improving to the point where that might more be part of the – this story?

Marc Holliday

I mean the answer is yes, it’s in that direction. But I think those assets are most ripe when you get the occupancy levels that are probably closer to 88%, 90%. I think that’s where we can probably get our best execution. And right now we’re around 83% and I think we’ll end the year hopefully at 84%. So it’s strengthening in the right direction. There may be individual assets that fall into that category ones we would consider no different than having an asset for sale. But I think as I said on the last call getting closer to a market where we can look to certain of those assets as contributors to equity and liquidity for new deals but maybe not just yet.

Vincent Chao – Deutsche Bank

Okay thank you.

Operator

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

Ross Nussbaum – UBS

Hi good afternoon guys. Marc are you surprised positively to the strength of what’s been going on in the New York Street retail scene particularly in the revenue in the quarter?

Marc Holliday

I think the rents, no, the rents have been consistent, I think the number of participants who are willing to pay kind of extraordinary prices and price per square foot for grade level retail has surprised me. It was over the years the domain of a new and now there is a number of other new entrants to the market that is creating more pricing pressure which is flattering our existing portfolio, makes it harder to add to that. With that said I think we’ve done about five or six deals since December so we are still very active but there is – the relationship between net rent to price is really no different than we see in the office markets. These deals are traditionally deals that are bought at whatever cap rate it could be 1%, 2%, 3%, 4%, cap rates going in but we deploy then to stabilize call it 6% to 7% or 6% to 7.5% range which is not too dissimilar you know from where we are.

I just find that people are making greater leaps of faith in the ability to that market happen quickly and significant buy out monies involved, it is a little more risk in executing our plan but the rewards as you have seen are pound for pound far greater than we are experiencing with office right now. Office rents we are talking about 10% mark to market. These retail assets you are talking about 200% to 300% market to market. So there it’s night and day in terms of opportunity profile and people are paying extraordinary process for that we are taking response hopefully wisely and so far it’s proven to be a major contributor for the firm. We are going to stay active there and we do have a pipeline of retail properties for the balance of this year already identified.

So right now it’s one of the great pieces of our overall program is that retail real estate platform.

Ross Nussbaum – UBS

Okay. I appreciate that. Second question is on your structured finance book. There was a footnote there that was trying to figure out which is you reclassified just under $100 million of a then preferred to equity investment you guys did in the first quarter into unconsolidated joint venture. So I am just curious for some color around what prompted that what’s was that?

Matthew Diliberto

So it’s Matt that’s accounting and only accounting. There is an equity kicker feature in that deal which we do often get in preferred equity positions, that is structured in such a way that it falls in to a virtual no man’s land of accounting rules and for that simple reason it’s put into a JV category versus the consolidated and preferred equity book. It doesn’t affect the income stream, it doesn’t affect the income it will get on a go forward basis for the term or anything else, it’s simply an accounting treatment.

Marc Holliday

But it is what we would otherwise characterize as a piece of structure equity that’s right. Structured finance like mezzanine preferred equity with terms and you know remedies and all the rest it just happened to be in the equity books we got.

Ross Nussbaum – UBS

Okay. Got it. Thank you.

Operator

Your next question comes from the line of [Brenon Maron with Wells Fargo]. Please proceed.

Unidentified Analyst Thanks, good afternoon. Hey Matt another really strong quarter in terms of bottom line FFO. Did you guys contemplate revisiting the guidance given how strong it’s been in the first half of the year, I know you raised after last quarter and if not what should we sort of think about is some of the things that would bring the run rate down pretty significantly in the back half of the year to kind of get where your current guidance midpoint stands?

Matthew Diliberto

So we certainly look at where we think we are going to close out the year all the time so we did have to close the quarter as well but I think we are comfortable where we sit now, we are trending within the guidance range and then certainly could see ways to get above that. But that said we are always evaluating things we never sit still. There could be asset sales which Marc just touched on a little while ago there may be other opportunities to source capital. The refinancing market is strong and we always evaluate opportunities to accretively refinance in place mortgages or other corporate financing sometimes those involve taking charges.

So that’s potentially on the table for the rest of the year and the sales that we consummated which weren’t necessarily a factor in updating our guidance into the first quarter now play in. So deals like 2 Heralds where we will have effect on earnings as well. So I think as we’ve said today while there could be in and outs the rest of the year we feel comfortable leaving our guidance as is at 590 to 596.

Marc Holliday

Yeah with that said I think we have a feeling where we sit now that the guidance would be at the higher end of the range possibly even little in excess but…

Matthew Diliberto

Somebody else was before for about like volumetric sales. So sales by one way, earnings momentum price the other and we are finding the right balance of the two but for the moment we are just going to leave where it is.

Unidentified Analyst

I understood. Makes sense. As you guys highlighted really great execution on three sales that you announced last night, just when I was kind of doing the back of the envelope map net proceeds of $240 million that seemed I was getting a number that seemed it will be a little bit higher than that based on the gross sales proceeds and that and your interest. Was there any promote fees that were due to any of your partners or anything like that that would cause the net proceeds to be down relative to what I would have thought.

Matthew Diliberto

It’s Matt there is one component that maybe throwing numbers. We don’t have any promotes due to anybody else we don’t have those in any JV so I’ll make that point. There is in place debt that will need to be decreased and that will be our cost and so that comes off the top as well.

Unidentified Analyst Okay, so what was your – what were magnitude of differential?

Matthew Diliberto

I think it was around 25 million or something like I think I estimated…

Marc Holliday

That’s exactly the amount.

Unidentified Analyst

That’s great. That makes sense. Thanks.

Operator

Your next question comes from the line of [Alexander Gofarb] with Sandler O’Neil.

Unidentified Analyst

Good afternoon. Just some quick questions here. As you guys look at the investment market for doing more stuff. Can you just talk a little if you are seeing anything on the residential side that maybe of interest or maybe that market has just gotten too pricy and second the weather Brooklyn is looking more attractive or if there are some structural things, developmental things that need to go on downtown before you get a lot more activity in that market.

Marc Holliday

Well on residential we are looking a lot of opportunities now. We see a lot of good opportunities and we I would say almost certainly will convert on some between now and year end. So yeah it is a competitive market but it’s been a profitable one for us so far and we expect to kind of proceed at the pace the we’ve been proceeding, and we’ve been guiding people too and I think towards from now to year end that we will have maybe one or two deals to announce there. As to Brooklyn, Matt…

Matthew Diliberto

We had a lot of success at the Williamsburg property where we just signed up a term sheet to make loan on other property in Brooklyn and we are evaluating other opportunities as we learn the different markets. There is explosive growth a lot of rental growth and value growth going out there. So we are certainly actively looking and trying to identify other opportunities out there.

Unidentified Analyst

Okay. And then the second question for Steve. Down at 180 Maiden, you just give us a sense for where you thought rents would be when you guys originally underwrote the building when you required it and where rents are today where you think you actually signed deals just given the strength in rebound downtown, just curious how much it’s moved on your underwriting?

Steven Durels

Well we underwrote the building in the $44 depending on where you are in the property top to bottom and a lot of the activity – there has been two sides of the market down there. There has been a lot of big deals going on the west side, there has been a lot of good sized deals in small traffic on the east side but the east side has generally been at the lower price point. The best news of all is the low price product has largely been taken off the market at this point and I think the market is on our side so that’s, we are going to, we will see the lift in our pricing compared to underwrites but I think it’s got – we got to get some momentum going first. We got one deal up right now that right on our underwrite numbers, we are getting a lot of tour activity in the building.

I would say two-third maybe more of the tenants are midtown, midtown south tenants and the profile of the type of tenants which are creative, marketing, information technology type of tenants which is exactly who we you know anticipated to the building as a result of our redevelopment plan and is exactly what we were shooting for when we underwrote the acquisition. That’s we are seeing confidence that as we are further along with the construction we are going to start to see some good velocity down there.

Unidentified Analyst

Okay. Thank you.

Operator

Your next question comes from the line of Jordan Saddler with Keybanc Markets. Please proceed.

Jordan Saddler – Keybanc Markets

Hi. Good morning. Good afternoon, rather sorry. I’m curious thinking back to the retail question a little bit that Ross was asking about. It seems to some extent the number of players have come in to the space and the valuations it’s kind of have changed your thinking somewhat on the underwriting of the space and I am just curious as you think about it, does it change the potential hold period of these assets or are they still – is there still tremendous value or there is really no change just curious?

Matthew Diliberto

We just I mean we just announced the sale of lot of retail assets. So we sold assets on 34 Street, we sold 747 Madison, we sold Third Avenue which was a retail and we sold 747 Madison. So that should give a pretty clear indication of the fact that we are going to take advantage of what we see is a very aggressive bid for retail out there for sure.

Marc Holliday

Otherwise said we have sold more retail than probably anybody this year. So we are, we like this market to sell into but there are – we are looking to buy value add in retail and in office and particularly with retail which is less core than office sell for capital gain which these kind of cap rates we think it’s great.

So I mean if your question is does competition change our underwriting, the answer was no. It doesn’t change All that changes the underwriting really is, is cost of capital that may indirectly be linked to what you are talking about and/or demand for space which is reflect in west. You know so whether there is three people we were just ambitious on these three or four – less participants as today the only thing with more market participants just makes it harder to find those assets. If they go outside of our underwriting we pass the deal. So it doesn’t change our underwriting. We don’t stretch to make the deal. A good example of that I think was 625 Madison which was largely a fee driven, I am sorry retail-driven exercise if you will which went beyond or well beyond our parameters this year so we passed. I mean that’s the way it is

There are other deals as probably six deals that we bought this year where they felt right within the parameters and we bought them but I’d say that underwriting if you will a way we are modeling the deals sort of without regard to what other people pay other than if that drives the cap rate down low enough we’re going to sell which we have.

Jordan Saddler – Keybanc Markets

Yeah I mean I was thinking are you maybe a little bit better for sale today than you would have thought at the beginning of the year your investor day outlook where you thought you were maybe a little bit better for buy as a result of just valuations going on roughly?

Marc Holliday

No, I wouldn’t come off the call thinking there are all great opportunities in the retail sector, I think there are – those five deals we bought I look at each of them as a great opportunity. So my guess is I don’t have the numbers in front of me probably exceeded our December goal already here we are in July, right I mean those are – what was our math, or do you have that Andy. We set out some retail acquisition target I believe and my guess is we’ve exceeded that, $500 million between resi and retail so yes I think we have exceeded that entry I guess, likely yes and there’s more pipeline. So it’s when you have an abundance of low price capital in certain sub-markets, extremely strong rents that’s a great market. That’s a great opportunity set so we’re having participants but if it folds outside the balance of targeted returns then we pass.

But we still found ways to make our spots. A lot of those deals SL OP unit, components, and again that’s a differentiating factor which I’m not sure everybody, I hope everybody on the call gets credit to which is the SL Green OP Unit currency has been utilized to a very high degree as something that’s very attractive and you unique for sellers of retail and office product and residential product.

Jordan Saddler – Keybanc Markets

And then lastly, any color you can offer on 5th Avenue retail assemblies?

Marc Holliday

No change in status there yet.

Jordan Saddler – Keybanc Markets

Okay do we know when that’s or how long that will, the redevelopment will take place over or is it just open ended at this point?

Marc Holliday

It’s open end I mean it’s in process.

Jordan Saddler – Keybanc Markets

Okay alright thank you.

Operator

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

Michael Bilerman – Citigroup

Yeah good afternoon. Just thinking about now the development and the redevelopment pool, page 35 of 3.8 million square feet now that you’ve rolled 180 and [inaudible] 53rd in there, almost 3 billion gross of real estate, how should we think about I guess additional funding that would come as you redevelop those projects, number one. Number two, the NOI effectively perhaps dipping before it gets any better. It’s obviously much bigger part of the company, these assets at this point, so maybe talk about certain goals that you have or the benchmark that we’ve to think about for it?

Matthew Diliberto

Well let me answer the first part with respect to capital some of these projects that have been moved in may have significant value comprising the three point whatever billion of assets that you identified or identified on the page, but with respect to the capital going into those deals there they are not that significant by our standards.

The redevelopment at 280 Park is largely finished. Although that probably is still in redevelopment place we’ll come out at some point in not too distant future. 180 Maiden is underway but the redevelopment there is order of magnitude maybe $60 million plus or minus of which we’re 50%. So it’s we have enough liquidity in flow for that kind of project. That’s not a significant kind of capital planning project and the same is sort of true of [inaudible] 53rd.

So I think when you talking about development properties where we have – you have to have significant and well thought out funding plans it’s 1 Vanderbill. I mean I mean that’s it. The rest are I would I would almost manage out of cash flow you know I am saying for the bulk of other projects but 1 Vanderbill is the kind of project that we think long and hard about and as we get closer to construction date and that would after we get full approvals because we currently embarking on the new build process so you got first things first we get approvals in 2015 and then embark by then we will have a capital plan. We will be able to kind of walk you through that but at this point there is no capital, no significant capital for 2014 on that project.

So that’s not a current issue. No, it is something we are we are putting a lot of effort behind and next year we will be putting a lot of effort behind.

Michael Bilerman – Citigroup

Alright. And then just

Marc Holliday

Michael just to clarify the $3 billion you are looking at I think that’s a gross value we own 50% of the major development there. So for our balance sheet it’s not $3 million it’s significantly less than that.

Michael Bilerman – Citigroup

Yeah. And just thinking about the 3.5% cash combined same store NOI in the quarter. What is the associated occupancy, same store occupancy that ties to that 3.5 and you know what would it be without sort of 3 Columbus, 100 Church and 180 Broadway which obviously boosted the overall pool? I’m just trying to distinguish between the two.

Marc Holliday

The occupancy that ties to that pool Michael is 949 which is the same store occupancy we reported inclusive of the signed, as yet to be commenced leases. The pool is consistent what we guided to in December at the Investor Conference and the projection of 3% to 4% cash NOI growth is based on that pool. Clearly 3 Columbus as it’s getting further leased up is contributing significantly to that. It started last year. It’s building this year. What it is without those three properties I just don’t have the numbers that precisely.

So, you know the other properties not just other three properties are obviously contributing we got occupancy pick-ups in the Manhattan portfolio last year, we’re growing that occupancy again by an expectation of 150 basis points. So that alone will drive organic growth. I just don’t have at in my fingertips would it be without three specific properties that you mentioned here.

Michael Bilerman – Citigroup

The 94 is just a consolidated not the total so, well can follow-up offline, fine.

Marc Holliday

949 is inclusive of JVs.

Matthew Diliberto

So 949 is combined.

Marc Holliday

Is combined, right.

Matthew Diliberto

Want to make that clear before we hop off this. If that’s not consolidated that is combined.

Marc Holliday

That is absolutely, right.

Matthew Diliberto

Combined same store?

Marc Holliday

Correct.

Matthew Diliberto

Not consolidated.

Marc Holliday

Correct.

Matthew Diliberto

So, I think that’s the most accurate number that we have but we can –

Marc Holliday

Yeah. And that’s what we guide towards.

Matthew Diliberto

Certainly we can take it offline. Next question please.

Operator

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

Steve Sakwa – ISI Group

Thanks. Just as it relates to street retail, are you guys looking outside of Manhattan I mean to the Bronx, Brooklyn, Queen’s make any sense just wanted your thoughts on that.

Marc Holliday

Yeah, we did our Williamsburg residential project started out we just bought the retail counter there and a had lot of success, leased up to HSBC and Walgreen so, we down a couple of other sites in the Burrows and are looking at additional sites in high traffic areas for sure.

Steve Sakwa – ISI Group

Just curious how kind of returns and pricing maybe compare in competition?

Marc Holliday

Competition is certainly less, returns are higher although as you get to the very high traffic areas there is increase in competition as people get sort of chased on Manhattan.

Steve Sakwa – ISI Group

Okay, thanks.

Operator

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

Michael Knott – Green Street Advisors

Hey, guys I agree with you optimistic take on Midtown but just curious if you comment on the signed leasing volume and seemed a little low I am just curious did that surprise you in any way or was there something that maybe fell out or just curious your thoughts on that. And if there is any impact to any of your full year goals?

Marc Holliday

No, I mentioned earlier that we are still on $2 million feet, it didn’t surprise us but for maybe one or two deals that will get done early Q3 and late Q2.

Michael Knott – Green Street Advisors

Okay. And then congrats on selling 2 Herald I would presume that possible the Lipstick land side is also possibly in the to-sell bucket?

Marc Holliday

So it’s under consideration based on the execution on 2 Herald.

Michael Knott – Green Street Advisors

Okay, thanks.

Operator

Your next question comes from Tayo Okusanya, Jeffries. Please proceed.

Tayo Okusanya – Jeffries & Company

Hi Jeff. Good afternoon. Just two quick ones. First of all, I may have missed this earlier on but apart from street retail just curious about the appetite for more multi-family assets going forward?

James Mead

Yeah, I mean we’re actively looking at a couple of different multi-family situations. Our existing portfolio is doing great. We opened leasing at 1080 Amsterdam which is a big redevelopment. We did up in Harlan and it’s been highly, highly successful so we’re looking combing the market for more off-market assets there.

Tayo Okusanya – Jeffries & Company

Okay, great. That’s helpful. And then second thing, just the swap rate on the $504 million of mortgages

Marc Holliday

What’s the question Tayo?

Tayo Okusanya – Jeffries & Company

The swap rate…

James Mead

3.8%.

Tayo Okusanya – Jeffries & Company

3.8%. Great, thank you.

Marc Holliday

That’s the swap we had on the previous financing that carries over to the new financing.

Tayo Okusanya – Jeffries & Company

Okay, perfect. Thank you.

Marc Holliday

Sure.

Thank you for whoever has remained. I look forward to speaking with you in three months time. Thank you.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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Source: SL Green Realty's CEO Marc Holliday on Q2 2014 Results - Earnings Call Transcript

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