Thank you everybody for joining us. Welcome to SL Green Realty Corp's second 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 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 2018 earnings. Before turning the call over to Marc Holliday, Chief Executive Officer of SL Green Realty Corp, I ask that those of you participating in the Q&A portion of the call, please limit your questions to two per person. Thank you. I will now turn the call over to Marc Holliday. Please go ahead, Marc.
Okay. Thank you everyone for joining us for SL Green's second quarter 2018 earnings call. As I believe was evident from our reported results last night, we are off to another very good start to the first half of this year. It was an excellent second quarter. This was similar in many respects to our first quarter, where our results were pretty much in line with expectations and guidance. Once again, in line, that term in line, I think materially understates the extraordinary effort and execution that went into producing these results and going into the kinds of results we produce quarter-over-quarter, year-over-year. A lot goes into it.
It gets summarized into eight to 10 bullet points. We're happy today as part of the Q&A section to talk about each of these individual items that make up what I think were a quarter that was very much in line with our prior guidance and talk about the kinds of activities we see in the third quarter that'll continue to help us achieve our goals. Notably, in this quarter, we had 71 leases signed in New York City and the suburbs, covering more than 570,000 rentable sq ft of office space. We closed or contracted for seven discrete property dispositions, representing a gross aggregate asset value of over a billion and a half dollars. We acquired the leasehold interest in Two Herald Square, following foreclosure of the asset, a foreclosure that was consummated in under a year's time from start to finish.
We originated or acquired $541 million of new debt and preferred equity investments, deals that were originated during the quarter at a retained yield of about 9.5% on average between mortgage and mezz. There was also substantial construction and leasing progress at One Vanderbilt. We'll talk a little bit about that later. Notably, and obviously, a continuation of our share repurchase program, totaling an additional 3.5 million shares acquired, in the second quarter alone. All in all, I think a very respectable three months for the company, and it should be obvious that most here have not yet begun to take their summer holidays, so maybe after the call. At its core, our business strategy remains unchanged. Property dispositions and joint ventures to fund targeted acquisitions and the largest stock buyback program in the commercial REIT sector.
We do this in a way that is predominantly leverage neutral, and we do it in a way that maintains our liquidity in the range of $1.5 billion-$2 billion, so that while we're pursuing this strategy of growth and accretion, and optimization, we're also doing so in a way that is very protective of the balance sheet. The capital market environment for this strategy remains favorable as private sector values remain well above the implied net asset value of the company, and we have been able to execute this program in a tax-efficient manner, thus far avoiding the need for any special dividends.
You should expect to see a continuation of this program in the third quarter, as we have already identified additional assets for disposition in the suburban and Manhattan portfolios, and we still believe that the repurchasing of our shares at current prices to be the best large-scale investment opportunity that we are presented with. Also of note, leasing velocity accelerated in the second quarter, both in the market and in our own portfolio, and this was consistent with our expectations and puts us on track to meet or exceed our leasing goal for the year. Notably, the current pipeline stands at 1.3 million sq ft, and this is pipeline that is roughly consistent with the pipeline as it stood in the last quarter, notwithstanding 540,000 sq ft of space leased in just Manhattan in the second quarter.
The business narrative in New York City right now, the narrative amongst businesses and amongst our tenants, is fairly positive, and we see a lot of activity and expansion taking place in the market. This activity has not yet resulted in any observable spike in rents, but concessions do seem to be leveling, and we are making substantial gains in leasing up our previously vacant space, as is evident by the 40 basis point improvement in our occupancy. I'll save any further market commentary for the Q&A portion of the call as it relates to the leasing market or the property investment market. Before opening up the lines for those questions, I do want to state how absolutely pleased I am with the progress at One Vanderbilt.
Construction continues at pace, and as I've alluded to in the past, the prior gains we've made in scheduling now has been solidified as the completion date under our GMP contract for the project has been moved up by 5 weeks from September 30th, 2020 to August 25th, 2020, a date where the building will be open just a little over 2 years from today. Very exciting and credit goes to our entire construction team and staff that has carefully coordinated every facet of the job, and the 500-plus hardworking men and women that are on the site day after day, moving this project along at a pace that even exceeded our ambitious timeline at the outset. If you haven't already seen the progress, I would encourage you to stop by next week and view the first installation of what will be over 8,140 panels of terracotta curtain wall.
Leasing, as you know from prior announcements, now stands at about 31% pre-leased with this quarter's announcement of the McDermott Will lease, and we expect to have additional announcements between now and December as we continue to actively market and negotiate with tenants for additional space at the building. With that, I'd like to go right into Q&A.
Certainly. Ladies and gentlemen, if you have a question at this time, please press star then one on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, if you have a question, that's star then one. Please limit your questions to only two per person. If time permits, we will take your follow-up questions after that. Our first question comes from the line of Craig Mailman with KeyBanc Capital. Your line is now open.
Good afternoon, guys. Just curious, there's been some news reports about interest in 245 Park. Just curious if you could comment all about your interest level, either from an equity position or debt position.
Unfortunately, we can't comment too much on that particular project. We have talked about 245 Park, I think, on prior calls in response to questions in terms of the quality of the asset, location of the asset, and what we perceive as an upside in that asset, both being one that could benefit pretty substantially from moderate redevelopment, sort of playing off the heels of the success we've enjoyed at 280 Park and in line with the other construction and redevelopment improvement that's taking place on Park at buildings like 425 Park, the announced-to-be new world headquarters for JP Morgan, and obviously just a few blocks north of One Vanderbilt. The building itself is a very substantial building. I believe it's about 1,000,007 or 1,000,008 rentable sq ft located in an extraordinary location, right at the base of Park Avenue, near Grand Central.
That asset is something that we've followed very closely, underwritten carefully, and in the second quarter, made a phase one investment that basically is a structured finance investment. It's in the DPE portfolio. It gives rise, I guess, to what you might see as a tick up in the DPE portfolio in the quarter that just finished. That's really where we stand at this point. We already had an existing mezzanine investment in that project, and we've stated that earlier. Really, this was in addition to that previous investment. Where we go from here as part of a phase two and something that may be more equity-like, I think, is yet to be seen and something that we may be able to comment on future calls.
Great. Thanks for the color. Just curious as a second question, you had mentioned you guys have been pretty tax efficient so far funding the buybacks with sales. Just curious with what you guys have kind of in the till here, what kind of cushion you have left to continue to sell assets on the buyback without any tax implications?
Hey, Craig, it's Matt. Yeah, we've been as part of the kind of five primary criteria to fund buybacks thus far have been very tax efficient, not requiring any special dividends, using a lot of tax protections and strategies to create that, and plan to do so for the next 500 as well. As to how much is left, there's a whole host of things that goes into that. There's not a number that I'm going to quantify for you to say how much tax efficiency we have left, except to say that we certainly have planned for the next 500 to be tax efficient, and there is certainly room for much more. How we go about doing that is part of a multifaceted exercise in evaluating the assets to fund it, the returns, the liquidity, the leverage, the earnings, and tax efficiency.
Great. Thanks, guys.
Thank you. Our next question comes from the line of Manny Korchman with Citi. Your line is now open.
Hey, guys. It's Michael Bilerman, here with Manny. I just had a question on the debt and preferred equity originations you did in the quarter. I don't know who wants to talk about it, but can you just give a little bit more color on sort of the number of transactions, the type of the transactions. Were they refis or sales, the type of borrowers, and just sort of give a little bit more detail about because it was a pretty big origination quarter, so just trying to get a little bit more color around it.
Sure. I think Marc highlighted, obviously, that an additional investment in 245 Park was part of the activity in the quarter. Then we additionally had a large structured deal we did, where we originated a mortgage and mezzanine position, and then we'll probably ultimately sell a piece of that mortgage. For now, we still have it on our balance sheet. They're across sectors, office, and really multifamily. We haven't really changed any of our underwriting criteria. It's kind of standard for our structured finance book.
Andrew, how do you think that's going to go through your end in terms of repayments that you're expecting versus what's in the pipeline now from an origination standpoint? Where does this DP book sit at the end of the year?
Michael, it's Matt. This is the high watermark for the year. As we provided guidance back in December, we said overall the balance would be down, average and absolute. This will come down over the balance of the year. Just looking at over the next quarter, I'm looking at north of $400 million of repayments, with very little incremental origination to offset that. Definitely the high watermark of the year, consistent with how we planned for the year to go, because the originations ebb and flow, and repayments are a little less predictable. That balance will come down over the balance of the year.
Right. $400 million repayments and selling down positions that you originated this quarter. We could be in the billion and a half range by the end of the year.
That's really low. I wouldn't go that low, down year-over-year is our expectation, and we're maintaining that.
I thought we have guidance-
Yeah
specific guidance on this.
Down 100.
Down 100. We're not changing guidance-
Right
at this moment. I would say the best proxy, if you're trying to look at how we think about it through the end of the year, would be last year's balance minus 100. It's a living, breathing portfolio, it's a lot of activity, you can't be that specific. That's a very good estimate. Yeah.
Okay, thanks.
Next question. Operator?
Yeah. Our next question comes from the line of John Kim with BMO Capital Markets. Your line is now open.
Good afternoon. Your leverage today is above 9 times net debt to EBITDA, if you include proportionate debt. Presumably, this will be going higher with One Vanderbilt, your buyback, possibly 245 Park Avenue. Can you remind us what leverage levels you're comfortable with and how this compares to the target of 7 times, which is defined by Fitch, may be calculated differently?
John, it's Matt. We are at 6.8 as against our 7.0 goal on Fitch's math. That is the balance sheet leverage, including off balance sheet, we are at 8.8, 2 times higher factoring the sales we just closed. On an LTV basis, we are exactly neutral in the low 40s, Our expectation is over the balance of the year, ex One Vanderbilt, that stays flat to even down based on growth in EBITDA. Sure, leverage is affected by a large-scale project going on, where you have no EBITDA, but the underpinning of our share buyback program of being leverage neutral, certainly on an LTV basis, is maintained.
The main difference with Fitch is they exclude development CapEx as well as they only look at balance sheet debt versus-
Most of the rating agencies use balance sheet, not off balance sheet. They all calculate it differently. One of the greatest or one of the 100 flaws with debt to EBITDA is everybody calculates it differently. We use one of the three agencies as the standard, but they have a calculation that includes certain things, excludes certain things that maybe other rating agencies or other equity investors don't. We had to create some standard so as not to create just our own math.
Okay. Then with the sale of 724 Fifth Avenue, is this a one-off transaction or do you expect to sell more of your retail assets in New York?
Well, we've sold some retail, I don't know about one-off. I think we showed a slide in December that showed over $2 billion of sales in the retail portfolio. This is a continuation where we buy opportunistically, we stabilize, then depending on sort of the growth profile of the asset, we'll look to exit.
Thank you. Our next question comes from the line of Alexander Goldfarb with Sandler O'Neill. Your line is now open.
Okay. Thank you. Morning, or I should say, afternoon. Two questions. First, just going on your JV side at Worldwide Plaza, your partner in New York REIT, the CEO, Wendy, just left. Curious if that changes anything as far as the partnership goes or strategy for the building, or if this means that New York REIT may accelerate their sale, if you guys have any view of whether you'd increase your ownership or you'd stay as is?
Well, I think the only thing we can comment on, the only thing we know is that Wendy has moved on. We had been dealing with this investment both with Wendy and at a board level. I think there is some continuity there, and there were colleagues of Wendy who were with us every step of the way of underwriting and making the deal, who are still with the company, and I guess will continue to be our counterparts at NYRT for the assets. We and RXR, we operate, we lease, we handle all the day-to-day management and activities of the building. In that regard, there's no change at a building level.
We have a mid-term plan, about a three-year plan of making certain improvements of the building, capitalizing on some near-term leasing opportunities, which include some recapture of space, which actually has been going on this year on a smaller scale. The bigger opportunity out there is to focus in with Cravath on their lease roll. That's not until 2024. There's also some opportunity to upgrade retail, which we're working on with RXR along 9th Avenue. Is that right? Along the
Yeah. That's correct.
Yeah. Along the 9th Avenue frontage. All of that is sort of in the works. We look at that as kind of a three-ish year business plan, at which point we'll re-evaluate the building at that point. I don't think anything's changed there. As far as what NYRT, what their intentions are with the interest they own, that's not something we can shed any light on.
Okay. Then the second question is for Matt. Matt, just curious if you have a sort of framework for what you think the change in FASB accounting for internal leasing costs is going to have on you guys for next year, or maybe the way you guys do it already, you already expensed it's not an impact.
Yeah. I hate to announce it on the call, we're going to eliminate Steve and his entire group, we don't take any other charge for that. I'm kidding, obviously. We are going through the process right now of evaluating the impacts and alternatives. I don't view the impact to be meaningful. There will be an impact, of course, because you can't avoid it entirely. There are strategies to mitigate it and working through those right now.
Thank you. Our next question comes from the line of Jamie Feldman with Bank of America Merrill Lynch. Your line is now open.
Great. Thank you. Marc, I want to go back to your comments on rents and concessions, just hoping you can provide a little bit more color, or maybe Steve provide more color on where are rents rising in any types of assets right now, any sub-markets or declining, then same thing with concessions. Is there a way to dig a little bit deeper into the types of assets or sub-markets that might be different than the overall market trends?
It's very hard to go through, whether it's sub-market by sub-market, building by building, a rent that's coming up for renewal, whether there'll be a large mark-to-market or not, because it depends what vintage year the lease was signed. I think that in general, and we can talk about some specific sub-markets, and Steve can do that, but in general, we take our pulse from the vibe we get from our tenant base. Remember, we house almost 1,000 tenants in New York City, maybe more. It covers the entire gamut of industries and sectors. Since this is our only market, I would say we cover this tenant base as good or better than any REIT covers their tenant base, because we are in front of them 365 days a year, management-wise, leasing-wise, marketing-wise, early renewal-wise.
Andrew and I meet with them, and we get a sense of the level of business optimism that's out there in terms of expectations of growth in revenues, expansion, M&A activity, et cetera. I would say, and what I said in my comments was that sentiment right now is really fairly positive. We're dealing a lot right now in a portfolio that doesn't have that much vacancy, trying to create space in buildings to accommodate the needs of tenants that want to consolidate or want to grow. We're only in Midtown, Jamie. So that commentary is really condensed into sub-markets that would include Third Avenue, for sure, Grand Central, Park, certainly Fifth and Sixth Avenue, we have a big presence. I can't really differentiate sub-market to sub-market. I'd say it's fairly consistent. It's evidenced by a couple of things.
One, I'm looking at a CBRE report in front of me right now where the headline is Highest mid-year leasing activity since 2015. So that's a fairly positive commentary for Midtown Manhattan. Strongest quarter of leasing activity since 2015, exceeding 5 million square feet, and it's almost 10 million square feet for the half-year, which if you extrapolate, would be 20 million square feet for the full year, which would almost be a record year. So clearly the velocity is there. The rents, which is one of the two prongs you asked about, the rents we see a firming of rents, but we don't see what I'll call a spike. So we're moving rents where we can, but I think we're moving them responsibly.
We're maintaining a mark-to-market, which right now, I think for the first half of the year, has averaged about 7% or in that range, which is within the range that we wanted. We'd like to see it higher, but it's solid, and it's right where we would've expected it to be, and it's a result of a fairly significant amount of demand, not only that's taken place in the first year, but also is in the pipeline. We have pretty good visibility into the leasing for the next six months, both in our portfolio and the market. It should be, this'll end up being quite a good year in the leasing market, with concessions that have generally leveled off, and Steve can give a little more insight as to where are they dropping and where might they still be rising, and rents that are firm and rising a touch.
What I had said previously is in the second half of the year, hopefully we can start to push those rents and see the market respond to a tightening. All of this is notwithstanding the additional inventory in Manhattan West and Hudson Yards. We've always said that there's enough employment growth in this market, and we only have the numbers through May. June numbers are actually coming out for New York City today, ironically. Through May, the employment growth was very good, very much on track, and that's driving this demand and I think this level of optimism, notwithstanding what we hear out there in terms of reasons to be nervous. You want to be nervous in a macro sense, but in our micro New York City economy, everything is pretty much operating at full tilt. Steve, I would see if you want to add to that.
Well, I'll just add a couple more data points just to reinforce what Marc's saying, which is, Midtown is really the big part of the leasing story this year. We said it on the last earnings call, where within Midtown last year was about the leasing that was taking place in the far West Side with Hudson Yards and Manhattan West. This year it's all really focused back to Midtown Core, and within that, Grand Central Terminal, Park Avenue, and Sixth Avenue have been the dominant beneficiaries of that. Grand Central in particular, which has been 52% of the leasing activity year to date. Contrast that to last year, and we've seen over 2 million square feet of positive absorption this year in Midtown. The fundamentals of the market are very strong. We're seeing to the extent that we see rent appreciation.
I think it's been more on the lower end of the price point spectrum. There's continued strong demand for high-quality product, but it doesn't feel like that rental rate has been increasing. It feels like to the extent there's been rental rate appreciation, it's been at the lower end of the spectrum.
Okay, thank you. That's very helpful. Then I guess on the concession side, you said leveling. Do you think they can come in at all? Is it more on the free rent or construction cost side or TI side?
I think they're less willing to sacrifice concessions as opposed to pay a little more in rent. There's still a few landlords that are out there that are with outsized concessions that are buying deals. It skews people's perspective of the market.
Thank you. Our next question comes from the line of John Guinee with Stifel. Your line is now open.
Great. Hey, Matt, can you give us the other 99 flaws to net debt to EBITDA?
Yeah, I'll write them all down. I'll distribute them in a mass email.
Thank you.
No problem.
Ed, talk a little bit about what it costs to build new product these days in the core of Manhattan around One Vandy and the Plaza District versus what you think it might cost at Hudson Yards. Any sense for that?
Well, are you excluding land or?
All in. To the extent you guys have that kind of number at your fingertips. If you don't, it's not a big deal.
I think exclusive of land, is probably $1,200 a foot or so, wherever you're building it to get to finished space. Obviously land is far more valuable in Midtown East than it is in the West Side of Manhattan, so you have to adjust. There's no difference appreciably in construction cost between East and West and South.
The $1,200 a foot, everybody defines it differently. We like to be very comprehensive when we give a number. That's everything. That's hard, soft, tenant improvements, marketing, deficit operations-
Leasing commissions
leasing commissions, everything. We think the right way to look at it, the actual hard cost of physical core and shell construction might be in the $600, $700, $800 a foot range, but that's not a meaningful answer, at least we don't think. To deliver soup to nuts, that's probably the number Andrew gave you. Land costs could be anywhere from $300 to, I don't know, $800 a foot on top of that. You're looking at sort of all-in $1,500, $2,000 a foot, in that range. One Vandy falls right within that range. That's probably as good a proxy as any, and the only real variable, if you will, from location to location, will be the land component. Great. Second question, third question after net debt EBITDA. Have you formulated any plans for 1 Madison Avenue, the big Credit Suisse space? Yes.
We have fairly exciting plans that have been formulated, with much of that having crystallized in our minds, and in our plans over the past three to five months. We are looking forward to unveiling glimpses of what that'll look like and what our strategy is in December. Even though we probably won't elaborate in much detail until then, we have a fairly comprehensive and set plan as we sit here today.
Thank you. Our next question comes from the line of Michael Lewis with SunTrust. Your line is now open.
Great. Thank you. I wanted to ask about street retail, both in terms of fundamentals, what you're seeing, also kind of more strategically. I know you answered a question about obviously some sales you've done and maybe some opportunistic buys you're always looking for. Is there any thought to kind of changing your exposure to street retail, or would that be kind of a knee-jerk reaction?
Well, we had a very active leasing quarter on the retail side. We signed Coty at 719 7th, which was the kind of credit tenant we were looking for that asset. We signed Puma at 609 5th Avenue in the largest deal to be done on 5th Avenue in some time. We're getting, we feel, more than our fair share of tenancy. In terms of the % of retail as a % of our gross or our net, I think we're fairly comfortable with that number. We've been continuing to maintain or reduce that % over time, as I answered to the earlier question. As we sit today, we're having some exciting retail conversations on 2 Herald. We have a lot of activity in other retail areas of our portfolio.
We still view it as a business we're active in and want to continue to be a first mover in, for sure. We also see some opportunity coming out of that sector. As the question was asked before about the sale of 724 Fifth and the redemption of 720. Andrew referenced $2 billion of other sales over the past few years. While that's taking place, you have things like 2 Herald, and we would expect imminently to announce another small deal on the Upper East Side, retail, residential, just sort of things that will be an outgrowth of a market in which is going through change, going through some dislocation and repricing. Whenever you have that, you sort of have a period of paralysis, if you will, and then an inertia, and then once you get past that, the next phase of that usually represents opportunity.
I would hope and think we'll be best positioned selectively, I don't think in any kind of large scale, and certainly nothing that'll materially alter the % of retail we own in the portfolio. For us, it's not about % of retail, it's about the profitability of what we own, trying to move out of mature investments and move into value-add investments where we can continue to push earnings, value creation, and the like.
Thanks. My second question may be for Matt. I realize guidance was left unchanged. I wanted to ask a little about the components of guidance maybe more dispositions, obviously, maybe more buybacks than you planned at the beginning of the year. I was just curious if there's any other components that are kind of moving. It looks like G&A is running pretty well versus your original guidance. Is there anything else kind of worth talking about?
You hit on the things that are. If there are any real variances, or variables, I should say, that's them. The sales, we've talked about a buyback program that is earnings-friendly. The next leg of the buyback program, the $500, is engineered to be that way as well. It is more than we expected to do when we came out with our initial guidance, but it keeps us within the range based on how much we expect to do and how we expect to fund that. G&A, yes, running ahead of our expectations. That's a good thing. The other ins and outs, whether it be the debt portfolio, interest expense, basically wash themselves out, so keeping us right in our range.
Okay, great. Thank you.
Our next question comes from the line of Blaine Heck with Wells Fargo. Your line is now open.
Thanks. Hey, guys. Steve, just on One Vanderbilt, you guys got a nice lease there this quarter, and I know you've talked about the bulk of leasing coming in late 2018 and 2019, but can you just give us an update on the pipeline there, maybe the number of prospects and the aggregate square footage of deals you guys are kind of actively working on?
We have four active proposals that we're discussing with prospective tenants. We've got at least two more that we think are prospective tenants who are diligencing the building. We think they're likely to submit RFPs to us. Whether we land any of those tenants is too early to really tell, but based upon the amount of tours, the amount of presentations, the enthusiasm from the brokers community, the reception that we're getting from prospective tenants, we're very confident that we're on plan, if not ahead of plan.
Great. That's helpful. Matt, just following up on the guidance question. I think your original guidance for other income was around $24 million. You guys have done $28 million thus far this year. Can you just give a little color on what's being included in that number and driving it higher than expectations and maybe your outlook for the rest of the year?
Sure. It's actually not ahead of our expectations. It has to do with classification of items on the face of the income statement. We present our guidance for other income, net of the expense for our service corp, which actually runs through operating expenses on the face of the income statement. All in all, as I look out excuse me, the balance of the year, I expect within a few million dollars of our original guidance. It's really just a classification issue. As for the quarter, the biggest item in the other income line item on the face of the income statement are about six million dollars of tax refunds we got up in the suburbs. Those were in large part in our guidance. It's just a matter of timing. We didn't have them all baked into the second quarter, but that's when they rolled through.
All in all, largely on track with our full year other income guidance.
Great. Thanks.
Sure.
Thank you. Our next question comes from the line of Steve Sakwa with Evercore. Your line is now open.
Thanks. Good afternoon. Marc, I guess you quickly touched on kind of the One Madison, and I guess my question really related to kind of the Credit Suisse lease in 2020 and the Ralph Lauren lease in 2019. Are there any kind of comments you can make about those two large expirations?
Well, excuse me, Credit Suisse lease is up in 2020, and we have a very robust redevelopment and development plan for that building that, as I mentioned earlier, we're going to go into a deep dive on probably in December when we get some real time to meet with everyone and present some visuals. In terms of status of lease, what exactly do you mean by status of lease? They're in through 2020. Do you mean, are we going to be taking back the lease early?
I just didn't know if they were renewing for a piece of it, if they were going to give you back all of that, if that was going to completely vacate. I was just looking for a sense for some portion of how much they may stay, how much they may vacate.
The plan, again, I want to make sure it's looked at the right way. This building is a 100% redevelopment and development candidate, that a renewal of the lease or portion was never expected nor is expected, nor do I think it's really physically possible. The commencement of that work will begin in 2021. If your question was earlier and by making some kind of deal with CS, that's to be seen, but that's not a now moment. This building, in our opinion, is sort of the next great, not good, but very great opportunity within this portfolio to create extraordinary value in a part of the market that today has the lowest vacancy rates and is achieving the highest rents.
We want to deliver a product that both appeals to the tenant base that wants to be what really, I would say is the best sub-market in the USA right now, this Midtown South sub-market, certainly in New York City, by far. Make sure we have the right tenant who can create the kind of excitement and pay the kind of rents that are consistent with that level of development. The CS lease is not really a part of that exercise per se. I can't say whether they'll be the tenant or not. I guess that's possible. Before you get to that juncture, there'll be a couple of years of physical work to do with that building. We've talked about that, and that's still the path we're on. There's no change in path there.
Okay. Just to be clear, we should assume that that building basically goes dark, the rent goes away, and you commence some sort of large- scale redevelopment project that takes several years to unfold.
For sure.
Yeah. The lease is up December 2020.
Yeah.
Thanks.
Starting 2021 for sure. Remember, and I don't want to sort of preempt, but the major value
Paradigm here is there's somewhere between 250,000 and 450,000 square feet of unused. A bulk of that is as of right air rights that can be used on a building which was built as a podium. I think the best we could say is let's table that conversation for a few months, and we'll have more to come on that. This will be a very exciting redevelopment, not only for the company, but I think for New York City.
I would say it is too early to comment on any conversations ongoing there.
Thank you. Ladies and gentlemen, at the moment, we have time for any follow-up questions you may have. Please press star then one if you have a question. We have a follow-up question from the line of Jamie Feldman with Bank of America Merrill Lynch. Your line is now open.
Great. Thank you. Can you just provide more color on Two Herald Square and the JV that you guys announced there? Just kind of leasing challenges or leasing plans there?
Well, it is Matt. Andrew alluded to leasing progress over there on all fronts, particularly the retail side. As to the JV, we expect a JV and financing later in the year. We will provide more details at that time. It would be a little bit premature to go out with that at this point. A JV and financing are our expectations in the second half of the year.
Thank you. That concludes our question and answer session for today. With that said, I'd like to turn the call back over to CEO, Mr. Marc Holliday, for closing remarks.
Okay. Thank you, everyone. We're back to work, everybody.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program.