Q4 2019 Earnings Call
Thank you everybody for joining us and welcome to SL Green Realty Corp. fourth quarter 2019 earnings results Conference call.
This conference call is being recorded.
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 on the M. DNA section of the company's Form 10-K , and other reports filed by the.
But even with the Securities and Exchange Commission.
Also during today's conference call. The company May discuss non-GAAP financial measures as defined by S. You see regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure disgusting, a 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 Dot SL Green Dot com, let's selecting the press release regarding the company's fourth quarter 2019 earnings before turning the call over to Marc Holliday, Chairman and Chief Executive Officer, SL Green Realty Corp. I asked that those of you participating in the queue in a portion of the call. Please limit yourselves to two questions for.
Person. Thank you I will now turn the call were to Marc Holliday. Please go ahead mark.
Thank you very much a good afternoon, everyone. We appreciate you joining us.
And you know we'd love to.
Speak with you today about our earnings release yesterday, which brought to a closed 2019, which turned out to be an exceptionally good year for the company.
We're certainly proud of the results we've achieved throughout the year on your behalf, including high it's such as the generation of $7 per share a better AFFO, representing a year over year increase of nearly 6%.
The leasing of two and a half million square feet of space in our Manhattan office portfolio, which activity carried a 38% mark to market on replacement leases and brought the same store portfolio to 96.2% occupancy.
We also achieved the near complete liquidation of the suburban portfolio.
Hi level of performance in the debt and preferred equity portfolio and the total return to shareholders in excess of 20%, reflecting the success of our innovative and strategic business plan centered around disposing of assets at compelling prices and redeploying those proceeds into share repurchases.
Just last month, we held our annual Investor Conference, which was well attended and we thank all of you for that.
We took a new approach and our conference presentation and focused almost exclusively on the work we've been doing these past few years to position the company to benefit from a spectacular set of new developments.
Eight projects that we detailed will contribute an enormous amount of earnings growth SL green estimated to be nearly $300 million of incremental in a wide creation when combined with expected increases in the retain portfolio.
The success of these development projects and the positive impact they will have on our city will submit SL Green's position not only is the leading owner operator of commercial properties, but also as one of the premiered developers in New York.
The SL Green team is completely energized to take on the challenges of the new year and is already hard at work to fulfill the mission we laid out.
Our mandate for 2020 is quite clear meaningfully progress our construction and leasing efforts at our development projects maintain virtual full occupancy in the retain portfolio.
Actively selling mature noncore properties aggressively invest in ourselves by repurchasing stock at a significant discount the underlying value and continue investing in our properties.
To support SL green sector, leading sustainability initiatives.
We feel confident in our ability to execute on that program in part because we believe we have the exact right team to do it.
And in part because we believe the New York market will stay strong throughout the year benefiting from low interest rates record job growth.
Positive economic sentiment and white Hot capital markets.
As an example last year.
Private equity fund raising in the us hit record territory with firms raising north of $300 billion.
As Levered that 750 billion of total PE buying power with more to be raised in 2020.
And real estate will certainly be a beneficiary of a significant portion of those investment monies.
So in recognition of our recent presentation at our Investor Conference.
Where we went through in detail our business plan and New York City market dynamics, we're going to go right to questions on the call as we've done in.
In past earnings calls that follow immediately our Investor conference So with that operator, we'd like to open it up for questions.
As a reminder to ask a question you wanted to press star one on your telephone to withdraw your question press. The pound key please limit your questions to two per person. Please standby well, we compile Q and a roster.
And our first questions from Manny Korchman from Citi. Your line is now fan.
Good afternoon.
Mark just given the recent rising share price does it change your.
Perspective of the pace on the buyback he presented at Investor Day.
Okay just.
Does it change buyback plan from investment is that I didn't hear the final yep.
Yeah.
No I mean, we say doesn't change it got slightly more expensive so thats.
Thats a reality the prices fluctuated throughout the program we bought it.
At.
Prices in the Ninetys on down to in the eighties, maybe even.
Hi, seventies, I'm not sure, but I think our average price at the moment somewhere around 95 in change.
We think anything within that range, where we've been buying.
We continue to be a buyer is as much we're more today as a year or two ago folks we believe there's more value.
In the platform today than a year or two ago in part because rates have continued to lower we see cap rates.
Stabilizing or maybe even compressing a bid for high quality assets.
And we get closer to the realization date of these development projects that I mentioned earlier.
All of which.
Brings more value to that portfolio. So.
It does cost us a little more some of that is incorporated into our projections that we put out four and guidance that we put out for 2020.
But it doesn't.
The pricing levels, where we're at now we're still in affirmative buyer and I think you've seen that in what was disclosed as buying activity in the recent.
Press release at least through the date.
Got it was.
Of the quarter.
And then if we think about acquisitions that you're potentially looking at in the market those can be concentrate on the west side similar to the last couple of you've done.
Oh, I think we're going to be opportunistic in terms of acquisitions and I think we'll go where we see the best risk adjusted returns so I mean.
It's.
Going to purely depend on deal flow and I think anywhere in the five boroughs as game.
We can if we can find the right returns.
Thanks, Andrew.
Thank you. Our next question comes from the line of Michael Lewis from Suntrust. Your line is now fan.
Great. Thank you.
It looks like several of the fourth quarter lease expirations.
Turns into month to month or holdover tenants about 423000 square feet $35 million of annual cash rent.
Is that expected or or.
Maybe you could provide some color on and 5 million.
Hi, Mike Yes.
Matt part of that is polo actually leaves in January thing so.
Thats, the bulk of that and beyond that every quarter, there's a little bit a carryover month to month.
Thanks, guys, you that thing sorted out but that big number was polo in January their natural expiration was end of December .
Okay that makes sense. Thanks, and then I just wanted to ask about the rent spread during the quarter. You know I think it was 50% even better than the 38% for the for the year overall.
Was there anything there that stood out.
In that high high rent spreads.
There's two deals that drive a lot of that the Amazon deal in the West side is a 222% mark to market on 280000 square feet of.
They are deal and the BMW early renewal is 91% over at 555 was 57.
Perfect. Thank you.
Thank you. Our next question comes from the line of Jamie Feldman from Bank of America. Your line is now fan.
Great. Thank you maybe a question for it.
Steve just on the leasing Fred can you talk about just kind of the city's leasing pipeline today, maybe compared to this time last year.
We've seen a lot of be leases getting done.
Over the last six months or so, but I don't think stand today as it relates to interest in like one Madison.
Some of your.
Pending move outs that we know about over the next couple of years.
All right well I can speak to our pipeline I'm not sort of like speak to cities by Glenn.
[noise], we've got a pipeline of three quarters 1 million square feet.
I think is pretty full pipeline given the amount of deals that were closed million a quarter. The in the fourth quarter of last year.
Notwithstanding all of that.
Great leasing velocity and sign deals are still a pretty full pipeline across the board in our portfolio with a wide range of sizes.
You know the largest of wishing that pipe is probably about a 115000 square feet.
One Vanderbilt continues to see extremely strong activity, we have a couple of leases of that so we're working on.
We have a number of proposals.
That were also extends you back and forth, we're starting to get through a point, where we're certain tenants are getting bump from deals because they're competing for the same floors.
And.
So we feel very good about our our pace at that building.
One Madison little early to the game, we're still three enough years out from delivery. We are responding through three or four different RFP is that have been submitted to us we expect some others to come through the door.
You know I wouldn't read too much into that I think it's early days there like what we saw one Vanderbilt if you recall when we started the lease up there there was a long period of just educating the market place about what the product is all about and then when we got into that kind of two two and a half year a away from delivery. That's one thing ceded.
Because of industrial timeline for tends to make their decisions.
Okay.
Great. Thanks, and then.
Just thinking about some of the known move outs over the next couple of years.
Yes, NHL any early read on.
Maybe just talk through how you're approaching those spaces and what we should expect to see.
Well, we're actively in the market with both of them Crevasse is still way out there. That's 2025, so it's it's.
You know there's no tenant that that is really.
I think at this moment in time, making about four had decision for four product is currently occupied Devon was a little closer to US, we'll probably doing a modest capital program in the building two today some of the public areas.
Yes.
To.
Robert remind you got on both of those buildings, it's the top of the house. It's the best part of the building. So we've got very they're both very strong buildings. So I think we're we're well positioned to be able to bring those product to market.
And particularly with third Avenue I expect it will will be leasing that at higher rents that are in place today.
All right. Thank you.
Thank you. Our next question comes from the line of Alexander Goldfarb from Piper Sandler. Your line is now open.
Hey.
Good after good afternoon over there.
So two questions first.
Just big picture recently.
Theres the politicians, who are proposing extending the mortgage recording tax to mezz and other forms of subordinated finance.
For real estate, maybe if you could just give your view on this I'm, assuming it would be borne by the borrower, but still at just adds cost in the friction to the 50 to maybe you can just give your view on what do you think happens in what you may be hearing from your from your folks that you may speak to in Albany.
Yes, Alex its mark and.
The what you're referring to I believe is the.
No as a bill that was just recently introduced.
In the Senate in the Assembly bye.
Two of the.
More junior centers Assembly people, it's it's been introduced its not a part of any budget.
At this time, it's not on any committee agenda. So.
You know, it's far far from something that I think.
Has any traction we've looked at the bill as drafted.
Frankly, we think its flawed in a number of ways.
So on the one hand, we think its Florida. Another hand, we think is written a ways to be so broad as it would apply not only to real estate, but.
Maybe to commercial loans much beyond which.
I can't imagine, there's going to be support for that type of.
Okay.
Disruption of the lending markets in New York City, right now, which is really you know.
Helping to drive this economy and while it might have been narrowly construed we don't we don't read it that way so.
The one hand I think it's early on other hand, we don't things can get traction on third hand, it's not even clear how it would be enforced because it it would appear to be not really a enforceable is are you see see you owned or enforce was mortgage loan it sort of creates a third category of I don't even know what so.
Yes, I think we'll monitor it I'm sure there'll there'll be no significant.
Opposition to from the business community, we'll just see where it goes.
Okay and then.
Steve as you talk to some of the bigger, especially on the tech side.
Are you seeing that when they look at at Manhattan for space are they trying to sort of create like a campus where if they have to be in multiple location. They want to have buildings that are within a few blocks of each other or is your sense that as these bigger tech users come to the city there just happy take space wherever they can get itself.
It mean blending it between downtown in Midtown or different Submarkets, there five or is it like I mean, I'm, just thinking about Facebook, where it seems like the aggregated pretty tight to what another up on the west side.
Well I think it's interesting you know if you if you roll that say about couple of years ago. The tech tenants that were in the city by and large.
Migrated to older buildings buildings, a lot of character smaller floor plates. There were there were.
Were hampered with lots of column small when those low salute feelings that kind of thing, but it was it was in the Midtown south market, where they want it sort of the quality of life.
In that industry has gotten bigger in the city in the size of the tenants have expanded in the sophistication of those tenants.
Has grown their need for quality real estate.
Has led them to better quality buildings that can support the occupancy which means.
Bigger ceilings bigger will.
Windows less columns, better infrastructure, where they can support greater density of occupancy so.
That's driving them to new construction.
Puts us in the coverage seat with the redevelopment of one Madison because it's large floor plates in the part of town that they want to be.
And I think that's the real change that you've seen that in that sector of the of the marketplace, where it was not just about which part of town that they want to be and now they're finding themselves meeting to be in certain types of buildings.
Okay. Thank you.
Thank you. Our next question comes from the line of Derrick Johnson from Deutsche Bank. Your line is now fan.
Good afternoon everybody.
PE balances dropped to 1.61 be this quarter is this the new base to grow from and have DP balances bottomed out or could we see a bit more shrinkage here.
No. It's Andrew I think you'll you'll see those balances rebound.
Quite a bit by the end of the first quarter or mid second quarter, we've already added about $100 million of assets.
So far in first quarter and.
That billions sex should be a low point I think our guidance was to end the year.
But higher than that.
Okay, great and given the dispositions this quarter.
How do you plan to use the proceeds and what will the split.
Well by dispositions, we told we actually it's Matt we didn't lose yeah, we didn't disposal out in the fourth quarter in the first quarter, we expect to close to 20.
And that will fund the combination of share buybacks and debt repayment, so that we maintain leveraging tragedy.
Excellent thanks, guys.
Thanks.
Thank you. Our next question comes from the line of Nick Yulico from Scotiabank. Your line is now open.
Thanks, I was hoping you could just talk a little bit more about.
How the conversations going at 625 Madison, we're sharing eventually you have a ground lease reset.
Dealing with any any updates there.
Well no updates and in on past calls Weve.
We've gotten that question and it's as it's going to be increasingly tricky because it it's there'll be a fair market value reset I think it's in 21 or.
Second half a 21, so it still ways off.
With a 20 well 22 is the.
Thank you Dave determination will be in 21, so so we get to work in 21. The effective date is 22, and it's still a ways off but you know to the extent it becomes a subjective any kind of.
Dispute or procedure anything we're going to we're not say a whole lot about this other than.
From our standpoint, it's a pretty straight down the middle FNB reset, we've we've dealt with them before and myriad of other lease the space leases and ground leases and we think we have a fairly good handle on where it should come out.
And on that basis, we feel.
Confident that will be in a position to have the rent reset execute a modest.
Building.
Repositioning program and we let the Polish space at the right time.
In the interim we are actively pursuing.
Interim.
Leases on a short term basis and getting some traction there to create some ancillary revenue that actually wasn't really included in our 2020 guidance, but notwithstanding that we're hopeful that that will be some upside on 2020.
Okay. That's helpful. And then maybe a question for Andrew or anyone in terms of.
All the tech leasing that has has happened last year as more and the pipeline.
Has that yet translated into.
Any change in fire sentiment in the market or in terms of more assets larger assets come into market in New York City because of some of this confidence in the tech leasing in the market.
I think the short answer is yes, some I think theres, a doesn't understand and there's going to be enormous amount of hiring to fill a lot of this space that's being committed.
For 2023.
To call. It 2020 to 20 to 23 2024 delivery.
And that obviously has a multiplier effect so.
Generally investors other than public shareholders are extremely positive on New York City on its prospects and we.
We we showed that analytically at the Investor Conference and we continue to hear it.
More and more in our travels as people are very bullish on New York and then they love the the occupancy statistics.
They love sort of the makeup of the the growth in the market.
Thank you.
Thank you. Our next question comes from the line of Aaron Wolf from Stifel. Your line is now open.
Great I think this is John Guinee here.
You have another.
Lease ground lease coming up it's not for 20 odd years Avenue of the Americas, but you've got some big tenants.
In that building million square feet. When do you start having discussions with the ground less or and when do you start being reluctant to put money into the building knowing that you've got this down the road.
Hey, John It's David Sean, but I think.
Any lease like that were.
So far out I think it's a little too premature I think as you get a lot closer to the expiration and you have to make leasing decisions.
Where are you don't have enough time to maybe get a lease and kind of give extension options. That's when those conversations more right than right now, it's just too early and there's too much term on it so it really doesn't make sense to do it at this time, we did we just completed a pretty significant repositioning and capital campaign at that building in advance of the vacancy that you're seeing now so.
We did a lobby renovation.
Some systems work and sort of improve the curb appeal of the building quite a bit so we invested that capital and contemplation of getting long term leases little sort of lead up to that that revaluation.
But beyond that we'll we'll see we're trading paper with some of that near the nearest term.
Lease expiration, we're already trading paper was perspective.
Great. Thank you.
Thank you. Our next question comes from the line of Craig Mailman from Keybanc capital markets. Your line is now fan.
Hey, guys.
Just curious Greenberg signed another lease at 420 does that affect at all I know the lease one vandy in the space needs could they transfer that are.
Yes.
No no no that was always part of their game plan from day one.
Was to have a split operation were part of their.
There are people would be over at the Graybar building.
The amount of space. They took a gray bar was a larger amount of space than they originally contemplated so it was good news.
And number of the tons one Vanderbilt have elected to split their operation putting some of their support people in surrounding buildings and we've been a beneficiary of that as well.
That's helpful. Then.
Just to go back to the slide you guys had at the Investor day on the bridge and the Capex.
Associated then why coming online just two questions to follow up questions to that one kind of whats the threshold on.
Probability for a tenant staying versus going for some of the bigger.
Kind of tenants you guys have your Theyve explorations. The next couple of years.
And then how much capital if any isn't therefore.
Complying with the first phase of the carbon emissions in 2024.
It's Matt So they are your first question was what's our probability of retaining tenants I mean generally our historical averages, 60% to 70% retention rate and for the leases that we know our the tenants that we know our leaving or known vacancies we put in assumptions. There I mean, there's can't get into specifics as to how we do.
But obviously take those into consideration.
Carbon emissions, we've said in shown we are compliant through the known compliance period. So there is any incremental capital that is needed there.
And we feel our portfolio is well ahead as evidenced by our scores of.
The New York City requirements and the other portfolios in the city.
We always have things in there.
Head of regulatory requirements and safe to assume there is some in there.
In that capital plan as well, but as for what happens beyond 24, those rules are not out yet and so we don't have.
A large number or any specific number in there for that for what we know through 2030. The cost is de Minimis, yes. So I mean for the next 10 years, we based on what we do know we know it to be de Minimis, if you're asking 2030 and beyond.
Those those standards will be set and then we'll have a better sense of things but.
When I say set there will be.
Revise and modified from what came out.
And there's a committees and task force has been set up.
To do that so.
So it is being actively attended to even though it's very early but.
The 24 hurdles I think way.
We did a whole segment on that in December showing that.
We were almost entirely compliant today for 24.
Okay. Thank you.
Thank you. Our next question comes from the line of Jason Green from Evercore. Your line is now open.
Just a question on the suburban sale are you able to provide a cap rate on that sale and also generally how deep the buyer pool was.
A cap rate, we're not in a position to give the the buyer pool I would say, it's it's a it's a light buyer pool in the suburbs much lighter than in the city. That's part of the time that it's taken us to divest of that portfolio, we still.
The two assets remaining as you know in Stamford, Connecticut.
And.
We were very pleased to be able to come to a resolution on those assets in white plains.
And I guess, just a follow up just what the activity level lives and the remaining suburban assets.
For lease or sale.
For sale.
Oh, I think one of them was going through a rent reevaluation process on a ground lease which is now complete that resulted in no increase in ground rent and that asset is now in our in our view ready for sale given.
The rent to set another uncertainty has taken away and the other asset as landmark square in Stamford, where we continue to.
Manage and lease and collect significant income.
But I'd say for this at this moment, we're sort of taking a pause on the marketing process there completing some.
Leasing and other activity at the building and then.
Ultimately a look to reintroduce that building for sale and Jason just to be clear. We did not include the sale of landmark square in our business plan for 2020.
Got it thank you very much.
Thank you. Our next question comes from the line of Vikram Malhotra from Morgan Stanley . Your line is now fan. Thanks for taking the question just with the news that we.
We book, so to slow down and potentially maybe giving back some space can you just sort of update as broadly on your thoughts on sort of how this naval or.
From a demand perspective, but more specifically on six or nine fish.
We work did sign leaves at where are we in that process or they are they already cash being or is that the to commence.
Well on six or nine specifically I think.
We were commences rent payments I want to say, yes, yes. So.
They are close to but not quite at their rent commencement period.
They just gave us an updated construction schedule so they seem to be going.
Full bore ahead at this moment to.
Complete their base building work and installation.
How long that will take them not quite sure but based on the scope of work I say at least.
Till the end of this year.
But in all respects, there's nothing notable to note on six or nine where the we work with their other than.
They are in the process of doing the work.
As it relates to the market generally.
The co working companies have definitely.
The down their demand in New York in the fourth quarter.
Pretty sizably.
But that's certainly didn't seem to have an effect that we saw with one another giving back space I haven't seen why haven't I mean, I'm not referring getting back no question. The question was he referred to giving back to notice I mean, they have contractual obligations, we haven't heard of them.
Walking away from any contractual obligation so I'm not I'm not sure.
So just just to add to that we've had a number of discussions with them.
And.
What they have consistently said to us is that the focus of their business plan is on their core cities, New York City, London, New York, London and the like.
Being there is hyper focused on and then realized.
You know there outer borough cities that that's where you you may hear about them.
Pulling back from but New York City, they expect to continue to be.
Expanding as the years to calm and certainly not.
Retracting on any of the current commitments, yes, I know a lot of the focus is on a.
We work, but no tell is that they're also as someone who.
Is going through a lot of the same things that we hear about and see and have had experienced where they seem to be pulling back.
From deals not giving up space. If that was the question, but certainly you know downsizing their demand greatly and laying off.
You know employees, so I think you're going to see it.
Within that sector.
You know and but the market both in terms of what we achieved in the fourth quarter in the pipeline we have in front of us doesn't seem to be meaningfully affected by.
By that pull back because the tenants that might otherwise have gone into those facilities just seem to be.
Back to come into landlords direct.
So maybe that's even.
Either way, whether its derivatively through a co worker or direct the leasing space. What we said is a good thing for us and we support.
We support any company that leasing space, where there's directly or as a as you know is as part of a co working community aggregator. If you will but the important thing is the job growth is there the underlying demand is there so space will get leased directly or through one of the co working companies.
Okay. That's that's helpful.
Just last just to clarify on the.
The income I know I from cash NOI from from the retail properties any.
Anything from any of the leases recently signed with this boom or anything in terms of like a bump up in the cash NOI and can you give us an update on on the Mcdonald's space.
As it relates to pull money. They started we started income recognition late last year when they open they opened August September timeframe.
Okay, and Vince so you'll have a.
Full year effect this year versus just a partial year last year, but thats, the most material and the retail side, the Mcdonald spaces, Demoed and prep to looks looks beautiful and has formally on the market as of about 30 days ago. So.
We'll look forward to activity. This year again that space leased up at Mcdonalds is still paying rent on that space for several more years as you know.
Okay, great. Thank you.
Thank you at this time I'm showing no further questions I would like to turn the call back over to Mark holiday for closing remarks.
Okay, well thank you all for.
Somewhat abbreviated coal but.
We appreciate the questions and look forward to.
Very.
Ambitious and productive year in 2020, and look forward to speaking to get in three months.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.