Q3 2020 SL Green Realty Corp Earnings Call
Ladies and gentlemen, please many align your program, which began in approximately two minutes again, leaving many line. Your program will begin in approximately two minutes. Thank you so much rolling and please continue to standby.
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Thank you everybody for joining us and welcome to the SL Green Realty Corp.'s third quarter 2020 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 any forward looking statements that management may make today.
Additional information regarding the risks uncertainties and other factors that could cause such differences appear in the Mdna section of the company's latest form 10-K and other subsequent reports filed by the company with the Securities and Exchange Commission.
Also during todays conference call. The company May discuss non-GAAP financial measures as defined by regulation G. Under the Securities Act.
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 both the company's website at www Dot SL Green Dot com by selecting the press release.
Regarding the company's third quarter 2020 earnings and in our supplemental information filed with our current report on form 8-K relating to our third quarter 2020 earnings before turning the call over to Marc Holliday, Chairman and Chief Executive Officer of SL Green Realty Corp. I ask that.
Those of you participating in the Q and 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 mark.
Thank you good afternoon, everyone and thank you for being with US today I'm Joe.
I'm joined here by Andrew Mathias Makela, Bordeau, it picking which Steve Durels, David Schonbraun on India would be and Maggie Huey as well as several others and.
All together here socially distant and and I'm looking forward to a good earnings call. Today. So yesterday, we released our earnings for the third quarter of 2020 and for the most part the results and achievements met or exceeded our expectations and are aligned with our corporate goals, which were of course altered back in.
March and April at the outset of the pandemic, which you might recall from our Q1 call our earnings for the quarter were in line as we track towards the higher end of our revised guidance range. So we're pleased with that and our office in overall collections remain relatively strong.
Surprisingly strong at 97%, 92% respectively.
Something that you know, we're quite a quite proud of as it relates to the rigorous nature of our of our underwriting and our diligence and the.
Just the superior quality of our tenant base this far into the pandemic, our occupancy dip, but finished the quarter above 94%. We are aggressively managing our operating expenses in order to maximize our bottom line throughout.
Generating of savings in excess of $30 million of operating expenses year to date realized without sacrificing service to our tenants we leased approximately 187000 square feet of Manhattan office spaces.
Slightly less than we had hoped for but the pipeline looks very good at 825000 square feet of leases and term sheets pending or in negotiation. So that that pipeline number is actually increased while we do not expect to certainly close all of that activity by year end, we are on track.
Back to leased 1.2 million square feet for the full year, a lofty goal, we reset for ourselves in April at a time of great uncertainty.
When there was not really good visibility as to what we could achieve and as we.
As we sit here now we feel we feel that it's attainable and working hard to to make those numbers for the year through.
Through additional focussed reductions and savings. We also managed to reduce total gionee by $10 million to approximately $90 million projected.
For the full year.
And we along with others are benefiting from significant interest savings due to the feds easy monetary policy more.
More generally pleased with these results it doesn't nearly tell the entire story of what we've achieved as a company in the past seven months, how we achieved it or what our current metrics are for measuring success in a pandemic economy.
The city's economy is essentially on pause right now as much focus is on the containment of COVID-19, and the traditional financial measures.
That we.
We in our industry look too we don't think there really apply during these highly irregular times.
The focus has changed and at this moment in time, our focus has shifted and we are driven more than ever to help promote this great city.
Work with our hardest hit tends to sustain their businesses Cree.
Create a safe and secure environment within our portfolio for building occupancy and their employees and.
Invest in the future of New York City and lead by example.
And I'm happy to say.
That we feel there is no real estate company in our market that exceeds our efforts in these areas. We're batting a thousand in these areas. It all stems from SL Green's extraordinary employees, who are 100% work from office not from home.
We accomplished this safely smartly and with enthusiasm for doing something positive for our families our company and our economy.
We wish and encourage other companies to do the same for the sake of their employees, many of whom feel disconnected and frustrated by the isolation of working from home for this.
For the sake of local businesses, who want to work.
And want to call their employees back to business.
And who rely on the 1.5 million office using workforce in New York City for their sales these businesses need everyone back in the city and back in their office spaces to make a go of it and.
And for the sake of the city.
Which has provided so much to so many.
So lots of reasons.
You know beyond that that go far beyond.
The productivity of work from office, but that really relate to the whole ecosystem of an economy.
Which is why we have such a stout belief in.
In work from office and school from classrooms, and all the rest so.
So on June 15th SL Green employees return to work at 420 Lexington Avenue and.
And inner satellite office building offices, and we are working overtime with the sense of purpose and urgency that is expressed itself in many ways over these past months first and foremost we quickly established new operating procedures and protocols for our buildings combined with infrastructure upgrades, which may.
The building safe and secure for the employees that have returned to work.
And the employees that work in the buildings the building employees themselves and the.
And the feedback so far has been nothing short of excellent next.
Next we work to secure several construction sites so that construction could continue uninterrupted on schedule and on budget.
We then went to work with our most impacted retail tenants and in many cases worked out arrangements to provide deferrals in concessions to help them through this difficult period.
Turning now to our office tenants, we recognize this interim period as a moment of uncertainty. So we injected flexibility into the conversation with short term lease extensions and increased free rent both of which was met with a real appreciation for those tenants that want to take advantage of those.
Of those parameters.
Particularly those who had near term lease expiration. So a lot of our activity recently as Steve can sort of expound upon has been in the room.
In the renewal area much more so than in prior years now.
Next SL Green chef Daniel balloon established food first a non profit foundation created to provide free nutritious meals to frontline medical personnel first responders and the many food and secure new Yorkers.
The same token the organization has helped the hard hit restaurant industry reopen some of their kitchens and re employ staff who had been laid off due to closures to date. We are proud to have prepared and delivered 400000 free meals to over 100 locations throughout the city the logistics of.
Which are managed entirely by SL green.
On the business front SL Green continues to invest in New York in many ways.
That we believe create long term value for the company and there was no. Greater example of this and the completion of one Vanderbilt on September 14, three months ahead of schedule and $100 million below budget.
50 invited guests industry leaders civic advocates and elected officials attended the ribbon cutting that.
That we held in the newly completed Vanderbilt Plaza as we celebrated this great and permanent achievement for New York, including $220 million of public realm and transportation improvements.
Just two weeks later, we were a tough 185 Broadway for the Ontime topping out of the project, which is the first new residential construction downtown being built under the Affordable New York housing program.
And just blocks away from 185.
SL Green commenced demolition of 126 Nasser Street for.
For.
$220 million fully committed development project for pace University include.
Inclusive of dorms classrooms, and other school and educational facilities. Some major major project for pace and for their expansion and this project is completely capitalized with joint venture equity and construction financing that we closed during this quarter.
Finally, there were a number of other sale NDP disposition transactions concluded during the quarter the proceeds of which fortified our 1 billion dollar liquidity plan that we set forth back and in April reduced corporate indebtedness and enabled us to continue our share repurchase program.
So you see that weve been quite busy these past three months over the summer and accomplished quite a lot with much more to come in Q4.
Yes, it's true that economic activity in New York City slowed considerably in the third quarter leasing activity, we sharply reduced vacancies rose and investment sales declined.
However, this is entirely to be expected from a city on pause and the city, whose number one priority right.
Priority right now is containment of coded to.
To such a degree that the city is one of the safest cities by most cove it measures in any city in the country.
Further digging into the data there are encouraging signs wall Street profits for the first half of the year was spectacular nearly $28 billion, which is much higher than an average full year of earnings for these banks.
After a seismic 820000 private sector jobs were shut in April.
Nearly one third of them have since been restored a rate of recovery that is actually faster than we saw after the tech refresh in early 2000, and the great financial recession in a seven away, albeit recovering from a lower starting point.
The office using job recovery is somewhat slower, but there has been sequential office using job growth in July and August and September and we hope to see that trend continue in October and throughout the year.
Notwithstanding that the city projected a loss of $9 billion of tax revenues. It's $90 billion budget is balanced for fiscal year ending 2021 in the city is now working on balancing the budget for fiscal year 22 helped by reduced interest costs higher than expected profits from the financial sector that I meant.
And earlier retail spending that is actually holding up fairly well and further aided by the prior stimulus.
Benefit that many of newer residents and businesses received in hopes for future stimulus in the.
In the near term so while.
So while we read the analyst reports last night that were fairly neutral on our results and.
Somewhat pessimistic on New York City fundamentals.
We have an entirely different view on how we measure the quarter.
We think it was an extraordinary quarter.
We think we accomplished much for the company.
For our employees for our tenants and the local businesses and the city's economy of which we are extremely.
Inextricable part.
And we take great pride in what we've done.
And what is yet to come so this city. We all know has been written off many times before and is always rebounded strongly than ever.
New York City is our home we are fully committed here and we.
And we believe strongly in the future the city's future in many ways is SL Green's future and we have conviction that its underlying fundamentals spirit diversity and everything great about the city will.
We will continue to set New York apart as the greatest city in the world. So.
So.
Before we open it up for questions, which will do momentarily.
I want to talk about one further piece of good news, which is our Investor conference slated for December 7th.
Of this year after much deliberation and input from the Investor community. We have decided true to form that are 2020 Investor conference, we'll be live and in person at the now iconic one Vanderbilt Avenue auditorium on our new amenity floor, which will be.
Sort of yes unveiled in December and opened in January two tenants and we will have all co would precautions in place.
So at this event, we will obviously look forward to presenting our business plan for 2021, and our outlook for the future of New York City with that operator, I'd like to turn it over for questions.
Ladies and gentlemen to ask a question. Please press star one and your Touchtone telephone to remove yourself from the question queue. Please press the pound key again press star one and you touched on telephone please stand by while we compile the kewaunee roster.
Our first question comes from the line of John Kim of BMO capital markets. Your line is open.
Thank you good afternoon.
Mark I was wondering if you can give the breakdown of your 825000 square feet of.
Leasing in the pipeline as far as how much is renewal versus new or expansion space and how much of that is in your new developments.
Steve Durels will I'll respond to that so of in the pipeline.
We've got.
825000 square feet, 51% of our new transactions and 49% our renewal transactions.
Heavily weighted by legal financial and publishing industries.
And heavily centered around the Grand Central area.
Where we see the most leasing activity right now.
In particular, a lot activity at one Vanderbilt than our buildings at 45, Lexington, Some 50, Threerd Gray bar and 803rd Avenue.
As a follow up I'd like to ask about dispositions and how much you are looking to sell and in particular the media reports on form 10 10, 10th Avenue.
Just given its your foot hold in the Hudson yards area at least to great tenants why sell that asset at this time well.
Well, Andrew will talk about why and everything else going on but we have a.
We've been selling fairly robustly are mature and non noncore assets since 2015 two.
2020 is no different we have been able to accomplish much year to date, we have several assets in the in the market now where we can we can chat about.
But this is all part of a long term plan volley.
Volumes may be altered slightly by Cove, it, but really nothing new here everything we talked about in in December about recycling of capital monetizing of gains and.
Paying down of debt and repurchasing of shares which were well along for this year or maybe not quite 500 million, but closing in on it. So.
Some of the specifics Andrew what we don't.
Well I mean, particularly with 410, it's an asset that is drawing a lot of interest given where.
Where where interest rates set today.
And the extraordinary job, Steve and his team that leasing that asset up so.
Got it.
We don't have to sell it where we're evaluating bids we actually closed the financing on the deal.
Over the summer a $600 million financing, which funds all the capital improvements, which was part of our business plan for the year.
But we did get approached with some.
Interesting offers and decided to test the market so.
Retain is out there in the market along with several other assets have admitted his decision yet about whether to pull the trigger on a sale or not.
Is there an update as to how much in total you're looking to sell.
No I mean, I think I think the guidance for the year is unchanged and if we were opportunistic sellers. So if we if we like prices for assets, we have in the market.
What will transact, but otherwise there is no there is no pressure to sell.
Great. Thank you.
Thank you. Our next question comes from the line of Jamie Feldman of Bank of America. Your line is open.
Great. Thank you and I appreciate all the color.
Yeah.
Same here can you.
Can you just talk about you talked about your efforts to market the city from the city and bring people back can you talk about the feedback from tenants both large tenants at small tenants just in terms of changing their attitude at all.
And they want to bring people back and then as you think about the leasing among both small and large tenants what are they seeing lately about their space needs and maybe shrinking or expanding.
Well, let's let's handle the first part of the question is which is you know.
What are these business leaders what are they saying in terms of wanting to get their people back to work.
I would say.
Added to 900 tenants plus you know in the portfolio and hundreds weve spoken with directly at the senior levels.
Almost almost to a person.
They all expressed a desire to have their employee base back in the city.
They recognize the benefits they recognize the need to do it and I think they recognize an urgency to it.
Surprisingly.
What I read into it mostly is a concern over liability.
Which which.
Which surprises surprises us be costs.
There is actually.
Very.
Little in the way of employer landlord liability if you do things right and right means following all the Dol deal wage Osha guidelines for what you need to do in your space.
Which we and many other most other landlords in New York City are doing so the buildings themselves are among the safest places.
We know many many people in our company are using mass transit, Andrew and I and others use mass transit. The mass transit is you know is clean efficient much much more so than it was.
Previously because to taking extra set steps for standardization overnight and throughout the day everyone's wearing masks or most people are hearing to mass and.
By and large so there is it's hard to put a finger on it it's always.
Sort of right around the corner we are hearing.
In Iraq in August it will be right after labor day, and Labor day October so it feels imminent and yet the numbers don't.
Don't bear that out we're still as a portfolio right around the city average of probably 15% to 20%.
Back to work back to.
Back to office work at it and that's out of a one and a half million office workers. So that means 80, 85% of the people that work in office buildings are still home.
And that is frustrating and I think they will be back.
The reality, whether they're back next month December January March that doesn't.
Our estimation affect any of the long term fundamentals of the things we look at I mean, the sooner the better.
And I would expect by December to see those numbers be somewhere between 20 and 30%.
Up from 15 to 20 today.
And then hopefully it just grows from there, but the important things are that we're heading in the right direction and a lot of the stats I gave you earlier indicate we are heading in the right direction, both from a covert containment and.
John.
Recovery and more and more people coming in and empty ridership and I can go on and on which I will now maybe it will in December but the.
But the point is.
The narrative is.
People want to be back now, how that's going to dovetail with some.
Allowances is going to be allowance for larger spaces, everybody as they're returning is kind of densifying and how long that densification trend will last don't know, but for now that is and how that will be mitigated by some work from home policies see what do you think.
Well I don't think anybody.
Out there has a clear picture as to exactly where the trend is going to head when.
Locked down started there was a lot of conversation in speculation about how work from home is going to sort of overtake all of our lives.
And as time has gone by that conversation has.
On 180 degree shift where almost.
Every day, there is a constant barrage of discussions with tenants.
Who continually expressed frustration.
About being home the isolation of being at home.
The inefficiency of working from home.
So whether or not it's a.
No.
They are staying at home because of all the press with with Cove. It in the short term fears.
I think when we look past that.
You are hard pressed to find a business manager out there that really has locked out at point of view as to how they are going to operate their space and manage their employees going for forward other than the fact that we all recognize that won't be back in the office.
So in the short term it will mean changes to the fee.
Furniture environment some of the some of the design elements of spaces, but I think you know.
Looking past that and if you talk a little bit more about the pipeline of deals that we're working on with tenants, they're looking past the immediate disruption of coated.
And saying, Okay. We recognize there's no lot of the tunnel.
Whether that six to 12 months out, but they are starting to begin to plan for their offices and how they're going to run their space, but I don't think they have a firm.
When a view as to how much of that is work from home or how much of that is hoteling just it's all over the board right now.
Okay, and then just a follow up.
Small versus large tenants.
Seeing a change there difference there just in terms of giving back more space or giving up leases.
All right or how they're thinking about their space plants.
You know what you're seeing is it's.
In the second and third quarters of the year, there was a lot of renewal activity.
A lot of short term renewal activity any from thing from a year to five years.
And I don't think there was exclusive to larger small tenants I guess, the you could argue that some of the very small tenants.
In a very very small you know a couple of thousand square feet. It was easy for those types of tenants that just simply say Oh work from home, but our average size tenant in the portfolio is 25000 square feet.
And.
Things have started to decidedly shift you know in the second quarter, 77% of the transactions our portfolio were renewals in the third quarter was 56% as we sit here today, 51% of my pipeline, our new transactions. So clearly were.
The tides are shifting where tenants are beginning to look past it and they're now saying, let's let's talk about relocations, let's talk about longer term planning as opposed to where the thinking was earlier in the year.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Michael Lewis of Trust Securities. Your line is open.
Okay Thats fair.
I wanted to ask for a little more color on the types Eric.
One is occurred.
Equity investment it looks like the comment now.
Describe any value to it looks like there's also a large exploration right around the corner.
Maybe just your thoughts on keeping that building lease and the strategy there.
Well I'll start off then.
Sort of follow when we.
Yes, 85 is it was it.
Great building, 53rd and third.
Always known as Lipstick building, it's very.
It's very connick beautiful building that.
Right now is going no nothing to do with co, but it was going through a transition because one of their larger tenants was rolling out I think.
Essentially now we're over the course of next few months.
Your next year is probably when they know they start paying rent so that.
That building from our standpoint, you know fits the category of one that we will.
We have and will develop and we'll execute a a full building repositioning updating and cleaning.
Colby compliance of that building to position that has kind of you know the best or among the best Billings on third Avenue our basis is quite low our last dollar Pref. There is it was quite low.
David I want to say around six or something so I think something a foot.
As we enter are going up as we as we transition.
Control to our sales, we actually now have operating in managerial control.
Control of the property, we will be executing a developer.
Redevelopment plan, which is I mean, it's really modest cycle redevelopment plan, but the building is or.
Is a recent vintage and it's an excellent shape so.
We'll go into more detail in December.
But the goal is to invest.
You know an adequate amount of money to bring it up to the standards of as I said best on third and then have a leasing program that we will execute.
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Over the next two plus years in fact, there's a lease out.
On two floors already so it's better better laid plans, we have two year lease up plan, but.
There is activity at the building right now, but that we still are committed to going in this direction and upon completion I think you really got something that's kind of a world class asset that would have both domestic and.
A lot of foreign interest because it's just that if that kind of icon building do you want to add on.
I think.
We're kind of taking over given capitalization issues of the sponsor.
The asset the asset just needs money too.
Small redevelopment and release and.
Sponsorship wasn't in that position to do that so we're stepping in but.
The asset as iconic departure, there's lots of people in the us and internationally of interest.
And you know in a couple of weeks, we already had strong leasing demand without it.
Without even reintroducing the building to the market so.
We're excited about what's going on there for the next year or so.
Great Thanks and.
For my question.