More than 72 million sq. ft.

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1 SPRING 2012 RESEARCH PUBLICATION Major NYC Activity & Holdings A Comparative Analysis of the Notable -owned Manhattan Office Properties & Portfolios A research report prepared for the Steven L. Newman Real Estate Institute, Baruch College, CUNY by Benjamin Polen, MBA, Senior Research Associate at the Institute Introduction More than 72 million sq. ft. or approximately 18% of Manhattan s office space is controlled by four public real estate investment trusts (s) that perform well in both the local office market and the capital markets. They are Boston Properties, Brookfield Office Properties, SL Green Realty Corporation, Inc., and Vornado Realty Trust. Combined, the total Manhattan holdings of these four s collateralize almost $18 billion in mortgage debt. Their portfolios include iconic skyscrapers, as well as a variety of other commercial office space buildings, retail space, and mixed-use structures. While these s also control significant Manhattan retail and suburban New York properties, as well as non-new York properties, the focus of this paper is on the Manhattan commercial office holdings of these s. As institutional corporate owners and public companies, the four s have superb access to capital markets that provide the companies with corporatelevel debt and equity, in addition to mortgages. This gives the s a significant cost of capital advantage compared to all but the largest private owners and operators when it comes to competing for deals and providing incentives to tenants. With capital funding obtained through low interest rate bond and public equity issuances, they have access to additional layers of capital, unavailable to non-institutional owners. The capital markets offer both unsecured corporate debt and equity as a Figure 1: One Penn Plaza Photograph courtesy of Vornado source of funds to finance properties in need of capital expenditure, thereby giving the s a significant financial advantage over less well-capitalized owners. The financing can be used for tenant improvements (TIs), leasing commissions, capital expenditures, and competitive property maintenance. Fueled in part by the competitive advantages of their capital structure, the s have exceeded the Manhattan office market averages in occupancy and achieve premium rents. They are active and aggressive buyers in the current low cap rate acquisitions market. The sources used for this whitepaper include annual reports prepared by the s, which highlight portfolio and property-level updates of New York office holdings. Leasing, rents, and transaction information are reported by the S and presented for discussion in this report. The goal of this whitepaper is to provide a view inside leading real estate investors, as afforded by timely operating information on leasing, rents, and transactions. A Shift from Families to s The office sector within Manhattan s real estate sector was historically controlled by family ownership. Throughout the 1990s, families such as the Dursts, Rudins, Helmsleys, and Speyers, along with many lesser known ones, owned large portfolios of Class A and B office building stock. While these families remain major players, a shift has been underway over the past two decades. Since 2006, 15 million sq. ft. of New York office space has changed hands to the control of public s, from both families and other owners. There has also been increased investment in Manhattan office real estate by foreign investors (notably, sovereign wealth funds) and private, non-traded s. This shift away from family owners is attributable to a number of factors, most significantly the availability of capital for s. The access to ready capital allows S to have liquidity and cash out families and partnerships. When a new generation inherits family real estate, estate taxes may necessitate the sale of real estate, or the new generation may not share the same affinity for owning property. s have served as ready buyers, with a combination of market knowledge and the ability to finance quick closings through multiple capital sources.

2 Table 1: Manhattan Office Market - RBT Overview Manhattan Occupancy Owned & Managed (sq. ft.) Proportional Ownership (sq. ft.) Property Debt Proportional Debt Total Debt / sq. ft. Proportional Debt / sq. ft. Brookfield Office (BPO) 93.2% 18,301,000 15,724,000 $4,193,000,000 $3,440,000,000 $229 $219 Boston Properties (BXP) 97.8% 8,310,065 7,237,535 $3,852,381,000 $2,631,428,800 $464 $364 S.L. Green (SLG) 92.5% 24,621,618 20,847,097 $5,158,566,000 $3,682,671,162 $210 $177 Vornado (VNO) 95.3% 21,134,000 17,156,756 $4,792,877,000 $2,700,159,700 $227 $157 Total/Average 94.1% 72,366,683 60,965,388 $17,996,824,000 $12,454,259,662 $249 $224 Manhattan Office s ownership, debt & occupancy (2011) 1 The development process in New York, especially for complicated large-scale projects, requires a dedication of resources and capital that only the best capitalized families and s possess. This staying power can provide an advantage in both execution and perception. Public s, unlike their private counterparts who usually have three to seven year investment fund life cycles, are typically associated with a longer term investment horizon. They also may have more flexibility with complicated, long term development projects and can adjust rents to meet softer markets without partner approval or in violation of debt covenants. Real Estate Market Performance A fundamental comparison of the s current performance compared to the height of the boom in 2006 reveals interesting differences. Occupancy was higher, and vacancy lower, at the end of At that time, the s had an average occupancy of 98.1%, compared to 94.1% in 2011, a sign of a stronger office tenancy market in Since 2006, in-place rents for s have grown to $54.16 per sq. ft., compared to average portfolio rents of $46.84 at the end of The lower numbers from 2006 likely reflect older leases at significantly below-market rents, while the current figures may reflect above-market leases signed in a stronger market. These figures illustrate the muted effects of headline-grabbing numbers when spread across giant portfolios. By analyzing the s office property data, it is possible to bring together real estate and capital markets, with the access to public data shedding light on the mostly private world of real estate holdings. This analysis takes into account U.S. Securities & Exchange Commission (SEC) filings, public website information, and industry press reports. The vast holdings and associated debt of New York City s largest owners of office space are quantified in Table 1, with some of the most notable buildings listed in Table 2. Even when joint venture (JV) partnerships are subtracted, the proportional ownership to shareholders is nearly 61 million sq. ft. The mortgage debt used to support this ownership is significant, almost $18 billion total, while the relative use of mortgage debt is in line with capital market underwriting standards, averaging $249 per sq. ft. Applying a required loan-to-value ratio of 65%, this mortgage debt would require an average appraised value of at least $383 per sq. ft., a more than reasonable assumption given both in-place income and comparable recent transaction prices. Occupancy & Rents The four s analyzed all had average occupancy levels of 94.1% on December 31, 2011, outperforming the overall Manhattan office market occupancy rate of 90.9% (Table 3). The differential between occupancy levels and market occupancy is measureable, with average occupancy levels 380 basis points higher than the market (Table 4). Boston Properties occupancy levels are 690 basis points greater than the overall Manhattan market and represent the best occupancy performance of the group. SLG s out performance of 160 basis points is likely attributable to its high stock of Class B assets, mainly older buildings with smaller floor plates and more interior columns that can be less desirable to tenants. The portfolio rents of the s average $54.16/sq. ft. across their Manhattan office holdings (Table 5). While this is slightly less than average market asking rents of $57.23/ sq. ft., the portfolio rents reflect historical below market leases. One positive aspect of this is the opportunity to release space at greater rents upon lease expiration. The differentials among the portfolio rents reflect the nature of their holdings. Brookfield s lower rents reflect its older, below-market leases and its large Downtown holdings, a submarket with lower rents than the overall Manhattan office market. Boston Properties higher rents show the horsepower of the General Motors Building, which obtains some of the highest rents in Manhattan. Vornado and SL Green s rents 1 BXP s total debt includes partner loans of $450 million made to GM Building, not counted in proportional debt. The office space totals only include Manhattan office space. Vornado s office space total does not include a 132,000 sq. ft. building in Paramus, NJ that is 100% owned. SL Green s totals do not include its Downtown Brooklyn properties. 2

3 hover around the current average asking rents. Though these two s are below the average Class A rents, this provides the opportunity to obtain higher rents upon issuing new leases. Indeed, the s are capitalizing on today s leasing market and capturing higher rents. In 2011, these s leased a total of 7.4 million sq. ft. of office space (Table 6). These leases represent 25% of the total 30 million sq. ft. leased in Manhattan s office market in Given the rent and occupancy performance of the four s, near-term lease expirations and the ability to compete with TIs allow s to capture higher rents. The s are doing exactly that. When leasing or renewing leases, s have an advantage in offering TIs and other concessions. This is due to their lower cost of capital, as discussed earlier. In 2011, Vornado leased 3,211,000 sq. ft. of New York office space, the most of the four s, representing 15% of its portfolio. The leases generated new rents of $55.37 per sq. ft., and rents in released space were 18% higher than previous in-place rents. The new leases averaged 9.2 years and included tenant improvement and leasing commissions of $5.25 per sq. ft. per year. In 2012, VNO has 999,000 sq. ft. of space expiring at average rents of $61.59 per sq. ft. In 2011, Brookfield leased a total of 2,052,000 sq. ft ,000 sq. ft. in Midtown at average rents of $55.89 per sq. ft. and 1,717,000 sq. ft. in Downtown at average rents of $32.84 per sq. ft. The Midtown rents were nearly double - 96% higher - than the expiring rents, while the downtown rents were just 2.3% higher. During 2011, Brookfield scored a big win when Bank of America/Merrill Lynch renewed 767,000 sq. ft. at the World Financial Center, made up of 524,000 sq. ft. at Four World Financial Center and 243,000 sq. ft. at One World Financial Center. Brookfield also inked a 10- year lease expansion for 72,000 sq. ft. with Societe Generale at 245 Park Avenue. Other Table 2: s - Selection of Manhattan Office Buildings Table 1: Table 3: Manhattan Office Market Market Occupancy Asking Rent Inventory (sq. ft.) Midtown 90.4% $ ,245,327 Midtown South 93.6% $ ,248,004 Downtown 90.5% $ ,372,509 Total 90.9% $ ,865,840 Source: Cushman & Wakefield, Q Building Size (sq. ft.) Ownership BPO One World Financial Center 1,603, % BPO Two World Financial Center 2,671, % BPO Three World Financial Center 1,254,000 99% BPO Four World Financial Center 1,861,000 51% BPO 300 Madison Avenue 1,089, % BXP 399 Park Avenue 1,707, % BXP Times Square Tower 1,244, % BXP 601 Lexington Avenue 1,630, % BXP 125 West 55th Street 570,000 60% BXP General Motors Building 1,803,465 60% SLG 919 Third Avenue 1,454, % SLG Graybar Building (420 Lexington) 1,188, % SLG 1185 Avenue of the Americas 1,062, % SLG 388 & 390 Greenwich Street 2,635,000 51% SLG 600 Lexington Avenue 303,515 55% VNO One Penn Plaza 2,461, % VNO Two Penn Plaza 1,588, % VNO Eleven Penn Plaza 1,068, % VNO 909 Third Avenue 1,327, % VNO 1290 Avenue of the Americas 2,061,000 70% Some of the buildings (but not all) owned by the subject s (2011) leasing highlights included an 11-year expansion with Royal Bank of Canada for 112,000 square feet at Three World Financial Center and a 12-year lease with law firm Kilpatrick Townsend & Stockton for 45,000 square feet at the Grace Building. In 2012, Brookfield will have 79,000 sq. ft. of space expiring in Midtown and 220,000 sq. ft. in Lower Manhattan, at average rents of $19.00 and $18.00 per sq. ft., respectively. These below market, relatively small spaces should be easy for the company to re-lease. However, Brookfield will lose a large tenant in 2013, since Nomura Holdings indicated it will be vacating its 800,000 sq. ft. space at the World Financial Center when its lease expires. Nomura signed a 900,000 sq. ft. lease in Midtown at Worldwide Plaza (owned by George Comfort & Sons, a private firm). Re-tenanting that space is a major priority for Brookfield. 2 Based on 30,096,753 sq. ft. of leasing activity as reported by Cushman & Wakefield, Q Manhattan Office Snapshot. 3

4 Figure 3: The General Motors Building Photograph courtesy of Boston Properties Table 4: vs Market Performance Table 5: Portfolio Rent Performance Table 6: Manhattan Office Market Leasing Activity Leased (sq. ft.) BPO 2,052,000 BXP 160,665 SLG 2,020,146 VNO 3,211,000 Total 7,443,811 Leasing Activity Average Rents / sq. ft. BPO $32.05 BXP $88.01 SLG $54.42 VNO $59.68 Total $54.16 Portfolio Rents Occupancy vs Market (basis points) BPO 230 BXP 690 SLG 160 VNO 440 Average 380 Performance Compared to Market SL Green reported leasing 2,020,146 sq. ft. of space in 2011, nearly 10% of its Manhattan portfolio, at average rents of $ If SLG is able to continue obtaining rents at this level, it could provide a boost to the 725,000 sq. ft., representing 4.1% of its older stock of consolidated Manhattan holdings, expiring in 2012 at average rents of $54.05 per sq. ft. In SLG s newer stock of consolidated holdings, it will have 396,873 sq. ft., or 7.0%, of its leases expire in 2012, at average rents of $71.13 per sq. ft. While this may present a challenge, premier properties, such as 280 Park Avenue and 600 Lexington Avenue (which command above market rents of $83 and $70 per sq. ft. respectively), should be able to contribute to rent growth for SLG s portfolio. Boston Properties scored a significant leasing win in May 2011 when 180,000 sq. ft., representing 19%, of its 989,000 sq. ft. development at 250 West 55th Street was leased to law firm Morrison & Foerster. This lease enabled BXP to restart the project. The building will be 40 stories, for a height of 550 feet. Of course, this lease will not take effect until the project is completed. For its existing portfolio, BXP appears to have leased 160,665 sq. ft. of its Manhattan office space in Since BXP does not provide this figure directly, it can be derived through other figures provided by the company. BXP began 2011 with 189,317 sq. ft. of scheduled lease expirations in Manhattan and 156,180 sq. ft. of vacant space. It ended 2011 with 184,820 sq. ft. of vacant space. 3 By subtracting that change in vacant space from 2011 scheduled lease expirations, the 160,665 leased sq. ft. figure is derived. However, BXP did not report the new rents it received for the space. In 2012, Boston Properties has Manhattan leases expirations of 332,757 sq. ft. in 2012, at an average rent of $91.73 per sq. ft. With its portfolio of trophy buildings and its demonstrated ability to command premium rents, BXP may be able to meet this leasing goal. Manhattan Office Transactions The s were very active buyers in 2011, acquiring commercial office (along with retail and residential) real estate in Manhattan and restarting large office development projects. With their sizable corporate equity and debt cushions, the s were among the most aggressive buyers in 2011, helping to drive cap rates on some transactions to below 5%. 4 During the second quarter, Brookfield acquired a 75% interest in 450 West 33rd Street through a joint venture with Broadway Partners, valued at approximately $520 million. The 1.8-million-squarefoot office building is directly adjacent to BPO s 5.4-million sq. ft. Manhattan West development site on Ninth Avenue. Brookfield also acquired the remaining 49% interest in Four World Financial Center for $264 million after the end of the third quarter. In January 2011, SL Green bought out a JV partner in 521 Fifth Avenue, a transaction that valued the building at $492 million, or $502 per sq. ft. During the second quarter, SLG bought out its JV partner and tenant, media company Viacom, at 1515 Broadway in a deal that valued the building at $691 per sq. ft., or $1.21 billion, a price in line with the Times Square sub-market, given the building s retail base. Based on 2010 reported financials, the building generated $56.2 million in NOI. 5 Applying that NOI, the transaction would have a cap rate of 4.6%. In November, SLG formed a joint venture with the Moinian Group to recapitalize 180 Maiden Lane. The share in the 1.1 million sq. ft. property was acquired for $72.7 million, paid through a mix of stock and cash. Also in November, SL Green purchased 51 East 3 Not including Two Grand Central Tower, which was sold in Capitalization, or cap rate, is a property s net operating income divided by sales price at the closing. It is reflected as a percentage. 5 Based on $20.2mm net income, $21.4mm interest expense and $14.6mm depreciation. 4

5 42nd Street, a 142,000 sq. ft. building that is across the street from Grand Central, for $80 million, or $563 per sq. ft. This acquisition is part of a larger assemblage plan SL Green has for that block. It is adjacent to 317 Madison Avenue, which is next door to 331 Madison Avenue, also owned by SLG. With regard to sales, in May 2011 SLG sold a 359,000 sq. ft. building at 28 West 44th Street for $161 million, or $448 per sq. ft. an impressive number for a Class B building without avenue frontage. In addition, in October 2011, SLG entered into an agreement to sell its leased fee interest (the land underneath) 292 Madison Ave for $85 million, and the sale is pending lender s approval. In March 2011, Vornado acquired a 95% interest in One Park Avenue, a 922,000 sq. ft. building between 32nd and 33rd Streets, for $374 million, a valuation of $422 per sq. ft. Also in March, Vornado and SL Green entered into a 50/50 JV to acquire 280 Park Avenue, a 1960s era, 1.2 million sq. ft. office building between 48th and 49th Streets. The JV involved VNO s contribution of $73.75 million in mezzanine debt and a $ million cash payment. In December, VNO formed a joint venture with the Kushner Companies to recapitalize the office portion of 666 Fifth Avenue, a 1.4 million sq. ft. Class A building between 52nd and 53rd Streets. VNO acquired 49.5% of the building, in connection with a modification of the first mortgage into A and B Notes. The new JV plans to spend $150 million re-tenanting, and repositioning the property, which was only 81.1% occupied at year end. In May 2011, BXP resumed development of 250 West 55th Street, an approximately 989,000 sq. ft. Class A office building in midtown Manhattan. The restart of this development was catalyzed by a lease with law firm Morrison & Foerster for 19% of the building s space, or 184,000 sq. ft. A portion of BXP s 510 Madison Avenue office development came online during the second quarter when, in May, 16% of the 347,000 sq. ft. building Class A building was placed into service. Value of Manhattan Office Holdings Applying market information from comparative sales to an income capitalization analysis is a powerful way to estimate the value of the s Manhattan office holdings. Comparative sales report information about recent market transactions can be used to determine the value of other properties. Typically private information, such as a capitalization rate (cap rate) or the current yield on a property, is occasionally divulged in market sales. Since property sales are often reported (or easy to compute) on a per sq. ft. basis, that price mark represents a property condition, location, income, risk, and upside. The comparative sales approach, when combined with income capitalization can provide an accurate depiction of property and portfolio value. Cap rates are the current yield on a property, determined by dividing net operating income (NOI) by the market price or value. Backing into a market value, the income capitalization method divides NOI by an appropriate cap rate to determine a property price. Cap rates differ among property types and markets, but as of mid-year 2011, cap rates for Class A Manhattan office space were in the 4.0% to 5.0% range, while Class B space were in the 5.0% to 7.0% range. Just as a junk bond carries a high yield, higher cap rates can signify higher risk, while lower cap rates are typically associated with core, stabilized properties. 6 New York, as usual, offers an exception, as office investors may be willing to accept a lower cap rate due to high vacancy or other factors in the short term if they think they can quickly lease the property or increase rents on near-term lease expirations. When reviewing comparative sales, differences between the properties can significantly affect the value. For example, 1450 Broadway sold in June for $204 million, at a 5.5% cap rate and for $510 per sq. ft., according to reports. The 400,000 sq. ft. building was approximately 15% vacant, and the buyer saw an upside in leasing the vacant space. Depending on market conditions, vacant space can present an opportunity, as in this example, or a risk if it s perceived as difficult to lease. While more property-specific, the income capitalization approach faces several hurdles. For the most part, the s do not provide property-level income numbers. Even when companies provide their aggregated New York office funds from operation (FFO) figures, these numbers include non- Manhattan properties. 7 Vornado provides financial information for its New York office portfolio that makes it possible to determine the NOI of those holdings (Table 7). It is also possible to compare VNO s 2011 New York office performance to the top of the real estate market performance in 2006 (Table 8). This comparison shows a 61% growth in portfolio NOI. Applied to financials Vornado provides for its New York office holdings, 8 a 5.0% cap rate results in a valuation of $12.3 billion or $714/sq. ft. (Table 9). A more aggressive 4.0% cap rate results in a portfolio value of $15.3 billion, or $893/sq. ft. 9 With recent investment sales in the $700+ per sq. ft. range, this may be a fair assessment, even with the low cap rate. 6 Of course, as an asset class, real estate differs from bonds significantly, since real estate can provide long-term capital appreciation, as opposed to a return of par value. 7 FFO = Net Income + Amortization & Depreciation Gains from Sale of Real Estate. 8 VNO s NYC income data includes a 132,000 sq. ft. Paramus, NJ office building with gross rents of $2.3 million (based on annualized rents of $20.28 per sq. 87.1% occupancy) in its calculations. 9 Based on proportionate owned sq. ft., as Vornado s 10-K, Note 2, p 173: Interest and debt expense, depreciation and amortization and income tax expense in the reconciliation of net income to EBITDA includes our share of these items from partially owned entities. 5

6 Table 7: Vornado s New York Office 2011 NOI 10 While Boston Properties does not provide the same level of detailed information as Vornado, BXP does break out NOI for its Manhattan office portfolio (Table 10). With this information, different cap rates can be applied to obtain portfolio valuations (Table 11). For example, a 5.0% cap rate applied to BXP generates a value of $6.1 billion, or $846/sq. ft. That is $132/sq. ft. more than the same cap rate on Vornado s portfolio, reflecting BXP s higher rents. New York Office 2011 Revenue $1,117,317,000 Operating Expenses $504,546,000 NOI $612,771,000 Table 8: Vornado s New York Office Reported Financials Description 2011 Annual 2006 Annual Net Income $264,190,000 $187,880,000 + Depreciation & Amortization $201,122,000 $101,976,000 - Gain from sale $ - $ - Funds From Operations (FFO) $465,312,000 $289,856,000 + Rent Increases $25,720,000 $4,431,000 - Capital Expenditures $13,733,000 $ - - Maintenance $21,503,000 $12,446,000 Adjusted FFO $455,796,000 $281,841, Vornado s New York Office 2011 and 2006 Financial Performance Table 1: Table 9: Vornado s New York Valuation per sq. ft. (2011) 13 Cap Rate 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% Value ($B) $15.3 $13.6 $12.3 $11.1 $10.2 $9.4 $8.8 NOI Multiple FFO Multiple AFFO Multiple Value/sq.ft. $893 $794 $714 $649 $595 $549 $510 Vornado s New York Valuation per sq. ft. (2011) 13 BXP separately reports FFO and NOI for its JVs (Table 12). Using the NOI information, valuations can also be obtained and are presented in this paper based on a 5.0% cap rate. With that 5.0% cap rate applied to the annualized NOI across three very different properties, a range of values appear on a sq. ft. basis. This analysis shows values ranging from $1,176 per sq. ft. for 125 West 55th Street, and $2,913 per sq. ft. for the GM Building. By way of comparison to the peak of the boom in 2006, BXP collected average rents of $77.88 per sq. ft., compared to $88.01 in A valuation based on a 5.0% cap rate would value the GM Building at $5.268 billion, compared to when BXP acquired the property in a $3.95 billion transaction in The s can also be compared side-byside by applying a per sq. ft. valuation based on the total size of their office holdings (Table 13). By applying per sq. ft. values, varying total portfolio values can be extrapolated. This approach would be useful for applying a sales comparison approach to valuation. In the case of VNO and BXP, the corresponding per sq. ft. values can be linked to the income method approach values provided in Tables 9 and 11. It is also possible to measure the impact of mortgage debt on portfolio values. By taking the portfolio values from Table 13 and subtracting mortgage debt (Table 1) provides a net asset value (NAV) for the Manhattan office holdings of the s (Table 14). This net asset value is the equity that a portfolio level investor would have in the aggregated properties. 14 The effect of mortgage debt is also measured in loan-to-value ratio. The values in Table 15 show the implied leverage of the s Manhattan portfolios, based on an estimated value per sq. ft. Using the valuation in the top left cell as an example, if BPO s Manhattan office portfolio is valued at $400 per sq. ft., it would have a total value of $6.3 billion (Table 13), a Net Asset Value (i.e., equity) of $2.8 billion (Table 14), and a loanto-value ratio (leverage) of 55% (Table 15). Interestingly, despite all the negative press and industry sentiment on financial 10 NOI based on reported New York Office Revenues minus New York Office Operating Expenses minus General and Administrative expenses. Does not include depreciation and amortization or interest and debt expense. 11 Net Income = NOI (Depreciation & Amortization) (Interest and Debt Expense). 12 In this analysis, Vornado s income from owned office space in New Jersey is included in their New York office financial reporting, since information to separate this out is not available. 13 Based on proportionate owned sq. ft., as Vornado s Note 2, p 173: Interest and debt expense, depreciation and amortization and income tax expense in the reconciliation of net income to EBITDA includes our share of these items from partially owned entities. 14 Excluding any unsecured, corporate level debt. 6

7 Table 10: BXP s Manhattan Office Net Operating Income (2011) Manhattan Office 2011 Revenue $458,791,000 Expenses $152,649,000 NOI $306,142,000 Table 11: BXP s Manhattan Office Valuation (2011) Cap Rate 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% Value ($B) $7.7 $6.8 $6.1 $5.6 $5.1 $4.7 $4.4 NOI Multiple Value/sq.ft. $1,057 $949 $846 $769 $705 $651 $604 Table 12: BXP s JV Performance (2011) Description GM Building 125 West 55th St. 540 Madison Ave Property Financials Revenue $345,483,000 $47,789,000 $32,252,000 NOI $263,416,000 $34,303,000 $20,839,000 Interest $105,227,000 $12,562,000 $7,683,000 Interest: Partner Loans $63,131,000 $ - $ - Depreciation & Amortization $117,583,000 $16,866,000 $9,728,000 Mortgage Principal $ - $1,562,000 $240,000 Total Debt Payments $168,358,000 $14,124,000 $7,923,000 FFO $158,188,333 $22,288,333 $13,948,333 BXP s Share Ownership% 60% 60% 60% NOI $158,050,000 $20,910,000 $12,978,000 FFO $94,913,000 $13,373,000 $8,369,000 Valuation Metrics 5.0% Cap Rate (NOI) $5,268,320,000 $686,060,000 $416,780,000 Implied Value per sq ft $2,913 $1,176 $1,441 Implied FFO multiple Implied Loan to Value Ratio 39% 30% 28% Debt Service Coverage Ratio Table 13: NYC Portfolio Value Using per sq. ft. Comparable $400 $500 $600 $700 $800 $900 $1,000 $1,100 BPO $6.3 $7.9 $9.4 $11.0 $12.6 $14.2 $15.7 $17.3 BXP $2.9 $3.6 $4.3 $5.1 $5.8 $6.5 $7.2 $8.0 SLG $8.3 $10.4 $12.5 $14.6 $16.7 $18.8 $20.8 $22.9 VNO $6.9 $8.6 $10.3 $12.0 $13.7 $15.4 $17.2 $18.9 Total $24.4 $30.5 $36.6 $42.7 $48.8 $54.9 $61.0 $67.1 leveraging and aggressive use of debt usage, on average, the s portfolios appear to be more highly leveraged in 2011 than they were in 2006 (Tables 15 and 16). This may be attributed to New York City s resurgence from the recession and the strong performance of New York s market, which has attracted buyers and lenders alike. Future Growth The West Side, Park Avenue, and Penn Station are all favored development areas, as indicated by investment activity by the four s. Boston Properties restart of its 1 million sq. ft. development at 250 West 55th Street is a strong vote of confidence in the Midtown West/Columbus Circle market. BXP is also putting the finishing touches on a 347,000 sq. ft. tower at 310 Madison Avenue. Vornado has publicly argued for the upzoning of Park Avenue to allow for bigger buildings. Additionally, both Vornado and Brookfield have substantial development plans for the Penn Station area. Brookfield owns a parcel suitable for 5.4 million sq. ft. between West 31st and 33rd Streets and across from the Farley Post Office (Penn Station s planned relocation). However, at this time, Brookfield appears to be concentrating on a renovation of the retail space at the World Financial Center, and re-leasing the soon to be vacant Nomura space there, rather than building new development. Vornado has considered replacing the Hotel Pennsylvania with a 2.8 million sq. ft. office tower. This plan has had a long history of opposition from the owners of the Empire State Building and local activists. In December 2011, however, Vornado reported that the hotel will be renovated, not demolished. SL Green has partnered with Joe Moinian in his redevelopment of Three Columbus Circle (1775 Broadway) by recapitalizing that venture. SL Green has also been a 7

8 Table 14: Manhattan Office Portfolio Net Asset Value $400 $500 $600 $700 $800 $900 $1,000 $1,100 BPO $2.8 $4.4 $6.0 $7.6 $9.1 $10.7 $12.3 $13.9 BXP $0.3 $1.0 $1.7 $2.4 $3.2 $3.9 $4.6 $5.3 SLG $4.7 $6.7 $8.8 $10.9 $13.0 $15.1 $17.2 $19.2 VNO $4.2 $5.9 $7.6 $9.3 $11.0 $12.7 $14.5 $16.2 Total $11.9 $18.0 $24.1 $30.2 $36.3 $42.4 $48.5 $54.6 Table 15: Implied 2011 Portfolio Leverage (Loan to Value) Based on per sq. ft. value $400 $500 $600 $700 $800 $900 $1,000 $1,100 BPO 55% 44% 36% 31% 27% 24% 22% 20% BXP 91% 73% 61% 52% 45% 40% 36% 33% SLG 44% 35% 29% 25% 22% 20% 18% 16% VNO 39% 31% 26% 22% 20% 17% 16% 14% Total 57% 46% 38% 33% 29% 25% 23% 21% Table 16: Implied 2006 Portfolio Leverage (Loan to Value) Implied Leverage $400 $500 $600 $700 $800 $900 $1,000 $1,100 BPO 57% 45% 38% 32% 28% 25% 23% 21% BXP 45% 36% 30% 26% 23% 20% 18% 16% SLG 35% 28% 24% 20% 18% 16% 14% 13% VNO 35% 28% 23% 20% 18% 16% 14% 13% Total 43% 34% 29% 25% 21% 19% 17% 16% Bibliography Boston Properties, Form 10-K for the Period Ending 12/31/11. Boston Properties, Supplemental Operating and Financial Data for the Quarter Ended December 31, Brookfield Office Properties, Form 40-F for the Period Ending 12/31/11. Brookfield Office Properties, Supplemental Information for the quarter ended December 31, CoStar Research, Fosterlane Returns to Buy 750 Seventh Ave. for $485 Million, May 4, Crain s New York Business, SL Green buys out partner at 1515 B way, April 28, Crain s New York Business, More Towers get three-digit rents, May 22, Cushman & Wakefiled, Marketbeat Office Snapshot Manhatan Q National Association of Real Estate Investment Trusts, White Paper on Funds from Operations, April Real Estate Weekly Online, The Zar Group finishes $204 million buy of 1450 Broadway, June 1, Real Estate Weekly, Nomura signs 900K s/f deal at Worldwide Plaza, June 28, SL Green Realty Corp, Form 10-K, for the Period Ending December 31, SL Green Realty Corp, Fourth Quarter Supplemental Data, December 31, Vornado Realty Trust, Form 10-K, for the period ending December 31, Vornado Realty Trust, Supplemental Operating and Financial Data for the Quarter and Year Ended December 31, very active buyer of retail properties, so it is seeking growth outside of the office sector. SL Green purchased 3 Columbus Circle, with 20.1% occupancy in January 2011 and had brought occupancy to 61%, as of January Conclusion Even in the face of economic uncertainty, the demand for New York office property by major s and other real estate investors remains strong. s are aggressively acquiring prime Manhattan office space through both outright purchases and by taking advantage of creative capital uses, as shown by Vornado s use of mezzanine debt to partner with SL Green at 280 Park Avenue. Existing space is being re-leased at higher rates, and tenants are signing leases on development projects, both positive indicators. More than 11 million sq. ft. of office space is under development or redevelopment by the s, demonstrating their confidence in the long term strength of New York s office market. This research report is published by the Steven L. Newman Real Estate Institute, Baruch College, CUNY. The Newman Real Estate Institute gratefully acknowledges the support of the sponsors who make possible our efforts to promote critical thinking on topical issues for the real estate industry. The views expressed in the research report are those of the authors and not necessarily those of Baruch College, City University of New York, or any of its affiliated organizations, foundations, and sponsors. Please address inquiries to Jack S. Nyman, Director, at: Baruch College, CUNY 137 East 22nd Street Box C-0120 New York, NY Tel: Fax: Mitchel B. Wallerstein, President, Baruch College William Newman, Founding Chair Richard Pergolis, Co-Chair Jack S. Nyman, Director Emily Grace, Associate Director of Research 8