Q2 2022 SL Green Realty Corp Earnings Call

July 21, 2022

The conference will begin shortly to raise your hand during Q&A you can dial star one.

[music].

Yeah.

The conference will begin shortly to raise your hand during Q&A you can dial star one.

[music].

Okay.

Thank you everybody for joining us and welcome to SL Green Realty Corp, second quarter 2022 earnings results Conference call.

This conference call is being recorded at.

At this time the company would like to remind listeners that during the call management may make forward looking statements.

Should not rely on forward looking statements as predictions of future events as actual results and events may differ from any forward looking statements that management may make today.

All forward looking statements made by management on this call are based on your assumptions and beliefs as of today.

Additional information regarding the risks uncertainties and other factors that could cause such differences to appear.

Set forth in the risk factors and MD&A sections of the company's latest Form 10-K, and other subsequent 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 regulation G. Under the Securities Act.

GAAP financial measures most directly comparable to each non-GAAP financial measure discussed and the reconciliation of the differences between each non-GAAP financial measures and the comparable GAAP financial measures can be found on both the Companys website at Www Dot SL Green Dot com by selecting the press release regarding the company.

Second quarter 2020 to earnings and in our supplemental information filed with our current report on form 8-K relating to our second quarter 2022 earnings.

Before turning the call over to Marc Holliday, Chairman and Chief Executive Officer of SL Green Realty Corp.

Ask that those of you participating in the Q&A portion of the call to please limit your questions to two per person.

I will now turn the call over to Marc Holliday. Please go ahead Marc.

Thank you and good afternoon, everyone. Appreciate you joining us today I hope you somewhere cool this afternoon, but mostly I hope you are in your office with your colleagues listening in.

For this today is as we are all here at SL Green each and every day five days a week.

Doing what we do and what helped us achieve our what we got done in this quarter.

Wanted to say.

How pleased I truly am with the company's achievements during this recent quarter.

And throughout this year, everybody has been working really really hard to.

Get done.

As much as we possibly can towards our.

Long term goals and objectives for the year, it's been a volatile and challenging environment to navigate as we emerge from this most unusual two year period, which required us really to write a new playbook to address the unprecedented restrictions and the unprecedented nature of this market and I feel that we.

We did so thoughtfully skillfully and we hope that those results of the first half will continue throughout the second half as we continue to outperform within within our market.

The same store portfolio now sits at 92% leased after one 1 million square feet of office leases that we signed year to date.

And we have a current inactive pipeline of another $1 1 million square feet of leases in transactions, which we will be working tirelessly to convert to close deals between now and year end, while SL Green's second quarter closed leasing transactions was below average this is not to.

Unexpected due to the front loaded activity, we had in the first quarter, which followed a lot of activity. We had in Q4 2021, and a precursor to what we hope will be.

Back to our average levels for Q3 and four so there is a level of.

Of cyclicality to how and when we can time these leases, but we feel as we sit here today.

We are on track and while.

Midtown Manhattan leasing velocity in Q2 was down it was just down 4% below first quarter levels. However, it also represented a 33% year over year increase in 81% of Midtown leasing took place in class a buildings.

Tenant demand is shifting as some of the big technology tenants, which expanded rapidly have pulled back as they adapt to new workforce patterns, but financial firms continue to be very active in this market in fact, the finance sector, which represented only about a third of the overall leasing activity in the prior.

Two years.

During the pandemic this finance sector accounted for half of all leases signed in Q2 and it also accounts for a disproportionate amount of our pipeline that I mentioned earlier, so where we're happy to see that that sector.

Is taking up a little bit of slack for the technology sector is to digest. This space they have taken over the.

Over the many recent years.

We're also seeing a marked increase in tours and proposals from small to medium sized tenants and buildings, such as Gray bar and 110 Greene Street.

And most notably we believe that when tenants are faced with a market that gives them choices. There is going to be a flight to quality, mainly within that five to 10 minute walk a major transportation and commutation hubs and that plays into the strength of this well located and highly improved SL green portfolio.

<unk>.

When you look past the headlines and take a closer look at the data it points to some very positive trends within New York City that if current trajectory continues will serve to restore equilibrium in this market first.

First and foremost the jobs recovery in New York City continues at a robust pace.

Much more so than average and much more than we've seen in prior years as 51000 jobs were added in April and May of which 21000 jobs were categorized as office using and hot off the presses today, maybe an hour ago or so it appears that New York City added another 22.

Jobs in June as we inch closer to restoring 100% of pre pandemic employment levels. In fact through May office, using jobs, where 92% recovered from early 2020, and overall employment was about 77% recovered through may.

And both of those numbers will now improve as a result of the data that just came out today. So.

So thats good news.

So space utilization in our portfolio, which we began tracking throughout pandemic.

As looking at physical occupancy as a percentage of pre pandemic physical occupancy.

July this month represents our best months of physical occupancy in over two years with weekly portfolio averages, reaching close to 45%.

And that's adjusted to 55% when looking at the peak days of Tuesday, Wednesday, and Thursday, and it's July and it's hot.

So we do expect those numbers.

To improve markedly.

In September and thereon out through the end of the year.

There is again looking at data in terms of the performance of our all important financial sector.

Wall Street member firms on the NYSE reported in the first quarter $7 7 billion of profits.

And while that was down measurably.

From Q1, 2021, that's coming off of a record.

Quarterly profit in 2021.

But the $7 7 billion to put it into <unk>.

More of what I'll call normal context is far better than the five year pre pandemic average of $5 6 billion.

And so while a lot of comparisons will be made to 'twenty, one and financial performance, including.

Big Bank Big five banks.

Net income results for the quarter, it's all measured to pretty much record years in 2020, one, but when you look at normalized years for New York City, the financial sector is still <unk>.

<unk> generated profits.

Also of the trading volatility that is serving to somewhat mitigate these lower banking and advisory fees and we do still see a lot of activity coming leasing activity and expansion activity coming out of the finance sector. So that's.

That I think is very good news and we can talk more about that on the <unk>.

Q&A.

Tourism is another bright spot visitors to New York City, which had peaked at over $60 million pre pandemic were as low as $30 million. During pandemic are now 85% recovered.

And thats with fairly.

Relatively low participation from international visitors, which are expected to rebound in 2023 at which point full recovery is expected next year and that's consistent with what we basically had discussed in our December investor meeting in terms of expectations.

Does that drive so much in terms of retail expenditures and hotel nights.

<unk>.

Boost this economy in many ways and I think summit is.

Fully reflective of this pent up demand and energy that we see in New York City right now as we welcomed yesterday.

This was a Wednesday in July 6400 customers to summit, one Vanderbilt and we will celebrate our one millionth customer next week well ahead of original expectations.

<unk> achieved on a fairly limited operating schedule that we have maintained since October 21, 2021, So we're only nine months into it.

We're going to have a nice celebration next week when the one millionth customer walks through our turnstiles.

It's for all these reasons and many more that we continue to have the confidence and conviction of our business plan in New York City.

That's not to say, it's without challenges to capital markets.

Are more difficult now than they've been in a long time, primarily driven.

By a dearth of debt capital, but.

This is a market where reputation relationship and record come.

Come into play.

And.

There is a diversion.

Of people, who can get things done and people who are going to have a harder time getting things done and I think $4 50 Park, which just closed I think in the past few weeks or months.

Is as good a proxy as any for what our capabilities are in this market.

To acquire I think one was exceptionally located commercial.

Commercial assets in all of New York City on 57th and Park.

Further expanding our park Avenue presence at a.

Basis, we found very attractive and then demonstrated our ability to capitalize that deal with 75% brand new fresh equity in this market environment and.

Closing the acquisition loan.

With one of our.

And in corporate lenders.

On terms that were really pretty much dead on underwriting so.

That is I think just a demonstration of.

What this platform can do what we expect we will continue to do throughout this market has more opportunities arise.

100 church refinancing on a different level tells the same story and that also closed in the second quarter, so more on that from Matt but.

All in all.

It's a challenging market, but we rise to the challenge.

It's a market that I think has a lot of.

Headline.

Overhang right now, but I do think.

There is a lot of.

Good news out there in the market Directionally that we can build upon throughout the rest of this year into next year and that will.

Health, New York recover because this recovery was never expected to be immediate we expected this to be.

Our multi year recovery into 'twenty, three may be even to 'twenty four.

But the point is we're headed in the right direction.

<unk> portfolio is in great shape.

And we're going to keep our.

Full attention on the task at hand, and try and deliver for our shareholders. So now I want to turn it over to Matt.

Alberto has got a little bit more commentary on the financial results. Thank you Mark we're certainly very pleased with the results we posted for both the second quarter and the first half of 2022 as the portfolio and the platform overall performed well and <unk> for the first six months exceeded our internal projections. This perk.

<unk> keeps us on track to meet our 2022 normalized <unk> guidance range, which we issued last December of $6 70 to $7 a share while trending towards the lower end of that range as we see the impact of rising interest rates on floating rate debt and the effect of our recent shift in capital allocation, which prioritizes capital.

The repayment of debt and enhancing liquidity, while also funding the relatively small equity needs of our development and redevelopment projects.

In the second quarter, our reported <unk> of $1 87, a share included a mark to market charge of about <unk> <unk> related to our marketable securities investment as a reminder, these kinds of marks up or down are not included in our normalized <unk> guidance.

Excluding the effect of that charge <unk> of 196 beat consensus estimates pretty handily due primarily to the timing of certain items that were included in our initial guidance. We don't guide by quarter. So we understand the street can't accurately project when these items will hit.

We also recognized $4 $7 million <unk>, a share of unbudgeable fees related to the acquisition of 450 Park Avenue and $5 million also seven cents a share of <unk> fees related to the resolution of our Crowne Plaza investment.

These are in addition to other fee income streams that are platform regularly generates by managing properties and projects and capital activities on behalf of our partners or third party assignments like special servicing troubled loan situations.

We hear me read that these fees are lower quality earnings, which is always kind of baffled us.

This is real money being made oftentimes without any incremental capital investment. It is in cash and therefore it is real earnings. These income streams also verify and enhance the value of our platform as others pay us for our expertise there clearly isn't any platform value in our share price and.

And finally it provides additional scale to what is already a huge platform as we get additional insights into what is happening in the market as well as an exponential expansion of our business relationships.

As such we will continue to look for opportunities to generate more not less of this ancillary income, particularly through the expansion of our asset management strategy.

Another positive in the quarter G&A expense was lower than our original budget, which is a trend that we expect will continue for the balance of the year as we expect to reduce G&A by $3 million to $4 million below our initial guidance.

On a full year basis. These positives helped to offset the dilutive impact of several things we've been highlighting for the last few months.

Most notably the effect of interest rates, which we all know are expected to continue to move higher over the balance of the year and into 2023, particularly for us the effect of rising LIBOR and sulfur. It's true historically the forward curves are not very accurate, but we need to be prudent and make decisions as if they are.

When we provided our initial <unk> guidance LIBOR is expected to average just 38 basis points during the year and end the year at 75 basis points. While software is expected to average 27 and end the year at 66.

Ben stress those expectations by another 50 basis points to project interest expense thats consistent with our past practice and that cushion clearly not at a loss as LIBOR is now projected to end the year at 378% and sulfur at 351.

A 300 basis point increase by the end of the year on over $2 billion of floating rate debt.

So to mitigate the effect of those rising interest rates on earnings and especially cash flow while further enhancing the balance sheet, we have pivoted, our capital allocation strategy to prioritize debt repayment, particularly corporate unsecured debt.

The easiest way to generate immediate liquidity for this initiative is to reduce share repurchases and DP originations. This was evident in the second quarter, where for the first time in recent memory, we did not originate any new debt and preferred equity investments nor did we repurchase any shares.

Instead, we use this retained liquidity to pay down our corporate credit facility.

We're also looking at further in the year for efficient debt repayment. Our current plan, which is a shift from original guidance is to repay $300 million bond maturity and its open date in September ideal and used the proceeds from asset sales and then refinance a separate $500 million bond maturity with a short duration bank or bond financing that allows us to repay the principal.

When we receive almost $600 million in November of 2023 from our partners at one Madison at Tcl project.

This strategy shift is not an indication that we don't still view share repurchases debt preferred equity and other potential investment opportunities in the market as attractive.

As you saw with 450 Park, we will still invest capital into growing the business accretively, especially in the asset management model and obviously the share price is extremely cheap I hear the term stupid cheap, but that probably doesn't even scratched the surface as we now trade at the equivalent value of just a handful of our assets and a shocking 50 plus percent discount to <unk>.

The Street's NAV.

Not ours, which we know is a conservative view of value but.

But in the current environment, we feel this capital allocation pivot is the most prudent path for right now.

All told as I said at the opening <unk> remains on track to be within our 2022 normalized <unk> guidance range of $6 $77 a share while continuing to trend towards the lower end of the range, which I indicated in our first quarter call.

And the real estate portfolio, just looking at a few of the other goals, we set out for ourselves our same store cash NOI growth of seven 8% for the first half of the year was generally in line with our projections and we always anticipated the trend to be lower over the balance of the year ending somewhere between four and 5%.

Having just completed a full re budgeting of the portfolio that projects a slightly slower pace of leasing in our same store portfolio as well as some incremental pressure on operating expenses, particularly utilities. We remain optimistic that we can still achieve same store cash NOI growth of 4% this year.

The slower pace of leasing also had an effect on our reported same store leased occupancy, which at 92% as of the end of the second quarter was about 1% below our projections and while we have a substantial pipeline as mark alluded to earlier and of course incredible faith in the town of Steve <unk> and his team being that far behind at this point in the year makes our goal.

94, 3%, a very challenging gold say the least.

That said on an overall basis with 1 million square feet leased through June and that significant pipeline. Our goal of 2 million square feet of total Manhattan leasing remains intact and appears achievable.

Okay. Thanks.

With that.

We'll open up the line for questions.

Yeah.

Thank you Sir.

As a reminder to ask a question you will need to press star one on your telephone.

If you are queuing up using a cell phone. Please press star pause pause for two seconds, then press the one key.

We also ask that you please limit yourself to one question and one follow up.

Please stand by while we compile the Q&A roster.

I show our first question comes from the line of Alexander Goldfarb.

From Piper Sandler. Please go ahead.

Hey, good morning, or I should say good afternoon two questions.

Actually Mark let me start with a big picture, one and then I'll have Matt with guidance.

Mark just today, there was a news item that governor <unk> finalized or approved initially the Penn station redevelopment with one of your fellow Reits and just thinking about Big office development subsidized with tax.

And also do you think that Grand central is going to be recipient of any similar tax incentive financing to sort of replace some of the older buildings and upgrade the office stock around Grand Central.

Okay, well Alex it's.

Good question I think it's a question we will dive into further throughout the year at the end of the year is more of the details emerge.

From the plan, but.

I think there is some parallels and I think there are some differences.

It's good for New York City to have a dramatically improved.

Penn station.

And that is a true public asset.

In a way that I think is differentiated from some of the other subsidized developments.

Throughout the years and throughout the city that this is.

Something that is badly needed for the millions of millions of commuters that come through.

Penn station.

Amtrak and Jersey transit.

Has to be and should be an improved experience.

And this is something thats been on the drawing board for decades. So.

Fact that.

Something will happen there I think is.

It was net net a positive for the city.

How thats going to get financed.

Is still something as I said, where I think details need to emerge.

And.

Whether that's going to be funded predominantly from state funds or what the contribution will be from some of the buildings in and around the area that are being up zones.

To allow for tax payments to be directed into certain funds that would be for public realm improvement in others.

In spirit, it makes sense, but we never.

Our big fans of.

Subsidized development.

No particular.

Appointed Mrs to Penn station I, just think that.

It's when you pick and choose areas.

There are winners and losers and you have to compete against that.

And since our portfolio.

As our office portfolio is 100% on subsidized and the development. We did at one Vanderbilt one Madison is also on subsidize it makes us have to.

Work that much harder.

The buildings compete that much better in order to.

Compete against the subsidies.

So I think it's a challenge, but I also think that.

There may be a fair amount of residential and non commercial uses that may come out of that which could be interesting, especially if it if it has big affordability components, which I think could be make a lot of sense I think it's a much better use of subsidy. When it is pointed towards affordability uses.

And that.

They are hopefully will be some portion of what's coming out of this Penn station redevelopment and.

It's going to take this is something that will be.

Presume over a very long period of time.

Imagine full build out of these 10 or so sites would occur.

Inside of a decade so.

Having measured growth.

Over time to allow for a city that is net net growing I think is a good thing.

And.

We need to have new product, we need to have new product for tenants that are growing and want to have new state of the art.

Space I think the market has proven there is deep demand for that and it's a very expensive.

City to build within so.

Let's see how the details fallout, let's hope they fall out in a way that is measured so that whatever the addition to inventory as it is.

It's a responsible amount delivered every year over as I said, I would think 10 years or more.

But thats just me projecting.

Let's hope there is some mixed uses in there to make for a pretty lively 24 seven.

Improved Penn station subdistrict.

If done the right way in.

I believe we're NATO certainly than the others. There can do it and have demonstrated they can do it the right way and we will do it the right way it could be a real net net addition, and advantage for New York.

Matt a question on the on the guidance.

The state of the mortgage market, where it's tough to get mortgages on anything, but like sort of the top tier how does that impact your guys' ability to sell assets as far as buyers to get funding and also.

On the <unk> book for for those holders of your DP to get financing to pay you off how does that impact your debt paydown thoughts for the balance of the year sure. So I'll lead off and I'll, probably ask Andrew to add a little market color.

The market the financing market is clearly being very selective mark alluded to that.

And speaking about the financings that we got done.

450, part financing and an upside as financing on 100 Church I was almost twice the size of the the mortgage that was maturing those are really.

Landmark kind of financings in this environment.

See MBS market is pretty much seized up.

You have to turn to banks and banks are being selective about the sponsorship in the buildings on which they'll lend.

We feel good about that it sets us up well.

We also don't have a lot of maturities upcoming so.

It's nice to be able to get those things done and now just target corporate maturities that we have in.

Sure.

Spoke about our pivot when it comes to corporate financings.

The corporate bond market is similar to the MBS market, it's very choppy.

And we want to take some of those bonds out so I think that we have.

A good path.

You get an asset sale or two done to pay off the 300 million of bonds and if we can't find another $500 million then we'll refinance those bonds short duration and pay them off when we get proceeds in.

Next year from one Madison.

Andrew are you on that.

Anything in the market.

I think it's just really figuring out when the <unk> MBS market is going to return to liquidity, there's really very little new issue right now.

Sounds like bond buyers are on the sidelines watching interest rates watching the dollar and watching all of these various financial factors that have nothing to do with sort of the underlying credit of the real estate. So bal.

Balance sheet lenders are ruling the day.

I think theyre, taking advantage of it and getting.

Historically relatively good pricing, which is bringing capital to that market and thats fueling some of the transactions we've seen to date, but to have a fully functioning market. We do need that see MBS market back. So we're anxious to see where it settles out.

Thank you.

And.

I show. Our next question comes from the line of Jamie Feldman from Bank of America. Please go ahead.

Great. Thank you and good afternoon.

I go back to your leasing comments.

I guess first is the one 1 million square foot leasing pipeline can you talk about.

How that breaks out large tenant very small tenant and I guess to tie into that your comments on small to medium size picking up.

Love to hear more color on what Youre seeing there.

Sure.

So like what we've seen in the overall market.

Approximately 46%.

Our pending leases are with financial service tenants.

So I guess no surprise with that the good news with that is that our product that we have in the marketplace is the right product for the tenants that are out there searching for space.

Of the $1 1 million square feet 948000 square feet and this is a particularly good news relative to a market that we're saying earlier about meeting our targets are leases that are out either out for signature or leases that are in active negotiation as opposed to simply term sheets being negotiated.

And then we've got another.

Over 200000 square feet of term sheets, which we think have a good sense a good chance of converting over to a lease and then whats not in those numbers are.

A wide array of other.

Early stage proposals that were entertaining but are not yet advanced enough that we felt confident enough to say that would qualify to meet our pipeline standard.

A wide range of size of tenants from very large to small.

And.

So no no not skewed for one size of tenant.

Any way shape or form.

The good news I think that we're seeing today and then sort of developed over the past maybe 45 60 days is we're finally starting to see those small to mid sized commodity building tenants come back into the into the market.

I've always used Graybar building is a good barometer of that because of the diversity of types of tenants or size of tenants and we're more active at graybar today than we have been anytime in the past 12 months. So I think.

The reason for that is the big guys start to return to the city to work from their office. The smaller tenants are following in their trial they require less time to make the real estate decisions. So it's natural to expect.

The big guys start to reenter the their office space. The smaller ones are going to follow suit and thus leading to real estate decisions and why we're seeing those smaller to mid sized commodity type transactions come to the forefront so I view that as.

The forefront so I view that as very encouraging news.

Hope that we will see more traction as.

The year progresses.

Okay helpful. Thanks, I guess just.

Jamie there.

Most of it is second question.

What are you guys.

Sure.

Do we have another question, yes, Sir our next question comes from the line of Michael Griffin from Citi. Please go ahead.

Hey, it's Michael Bilerman here with Chris.

Mark on the acceleration and expansion of the asset management strategy and I recognize it's challenging and volatile environment, but just taking your comments about the stock or I think philberta talked about Cupid cheap.

Where the stock is is there any opportunity to dramatically accelerate.

The shift of the company by looking at your existing assets and just bringing a substantial number of your partners in the <unk>.

Actively solving all of this at once right solving the balance sheet solving where the stock is and accelerating in the asset management strategy effectively.

Taking the company private sticking at public Indian asset management company.

Is that at all the thought process today, well I mean, if I understand the question I think.

The expansion and growth.

A true asset management platform within the public company that we sit.

For the benefit of.

Shareholders and management is.

Is the direction we're headed.

I don't know how expedited it is because these are these are big high profile.

Assets and even in volatile markets.

Hard to.

Really get the right assets in the right locations at the right price.

Got it all come together so.

There are.

Other new asset.

<unk> targets, we have that we think are.

Perfect for this program, but I would measure them in one to two not 5 million yen as we sit here today. So I think this is a <unk>.

Program that will grow over time as we get traction.

Yes.

And <unk>.

Expand our universe of.

Joint venture partners, which which we are doing so.

Yes.

Yeah, I was thinking about it from the perspective of what do you think about $4 50, and I recognize the value we invested in the opportunity that it provides the company, but there was new equity put out which obviously could have been used for debt repayment share repurchase or DP investments so all of us.

Thinking more so rather than going out and pushing new equity out which would require a sale.

Why not just leverage as you have over your long duration and if this is really the new strategy take as many of your assets, what we've already done one Madison and Olivier take more of them raise the capital buyback. Your shares that you have been doing you've bought back 35% of your share base more so than REIT and just completely accelerated because you saw.

And so like you are in this really difficult spot with a really low cost of capital or high cost of capital right low stock price high cost of debt you have too much debt you want to repay how do you sort of get your way out of Mexico.

Yes, I don't I mean, we don't feel.

What youre describing.

We feel like we've got a lot of liquidity our balance.

I wish it doesn't matter.

Yes.

We don't feel under balance sheet pressure, we've got.

Over 1 billion of liquidity, we don't have much in the winter term.

Charities, Matt Scott the Gameplan you articulated.

How we're going to handle some of the unsecured.

Ponds that come up I think this year primarily.

We've got some.

So I think that the only difference in what we're doing and maybe what you're saying is the.

There's no.

The urgency.

Feel that we have to take and I'm not sure it would be in our interest to act with that kind of speed.

Lean into markets and we average into market. So we're going to average.

As the stock is down and as the stock recovers.

Whereby no means signaling that we're not going to continue with the.

With the stock buyback program I think what Matt said in his prepared remarks on the call last time.

Was that we are simply taking a moment in time to.

Sort of reallocating over allocate to some near term debt reduction.

Which I think is primarily unsecured bonds.

As we then continue with our program of stock buybacks and.

And.

Development and redevelopment opportunities and money into highly accretive asset management. So I don't think youre going to see us on a hyper accelerated basis. You can ask the question I understand why that May sound enticing and I'm not that rejecting that I'm, just saying that's not the plan. We're on right now the plan we're on.

Just to take a very measured approach here.

And just accomplished the goals on the timelines we've set out.

Which we think is the right way to do it.

Yes.

Just thinking about where the stock is today and trying to take advantage of that opportunity to dual.

Alright.

The stock price, where it <unk>.

Driven by the business plan the stock price is going to be where it's going to be today six months from now 12 months from now and we have to execute into that and where we are opportunistic as you know.

But I, just don't think you're going to see us.

Change that business plan, which we think is the right plan for the assets.

And our long term program.

Program that we have to develop an asset management company.

To take advantage of this moment in time.

We expect to benefit from in due course, that's all I'm, saying.

Okay, all right I appreciate the color Mark.

Thank you.

And I show our next.

Question comes from the line of Steve <unk> from Evercore ISI. Please go ahead.

Yes, thanks, good afternoon.

I guess I, just wanted a little bit more color or thoughts around kind of the tech leasing I know mark.

Can you sort of talked about the slowdown we've seen a lot of announcements out of a lot of the big tech firms on kind of hiring freezes real slowdown in hiring and we've even heard some of those large companies really stopped their tenant build out on leases that they've taken and I'm. Just curious if you have any concerns about any of that space.

Maybe returning to the sublease market.

Over the next six to 12 months.

Well look.

Right now.

Sublet Morgan mid tests around 354% of the overall availability so.

Yes.

Higher than average, but not by.

Think by an unsustainable amount.

And tenants today, who have a preference for new product class, a product well and monetize product they want direct leases they want term.

And the sublet market is not the best Avenue for those tenants so.

Theres always that shadow availability space, but.

The $1 1 million square feet, Steve talked about negotiating with I don't think any of that has got an alternate deal teed up for sublet space. It's just not the right. It's a different kind of profile.

So on the one hand.

We'd love to see the tech industry, which has been such a big contributory grower keep growing but.

But on the other hand.

The data from department of Labor I mean.

The numbers are what the numbers are and if it's showing.

Sustained job growth.

That would be I think over 70000 jobs in New York City and three months 51000 April May and then.

Numbers that are we have to delve into but the gross number it looks like 22000.

Out of the state.

Conjuncture later, if you will for New York City in June .

These are very <unk>.

Very healthy numbers, I mean compare those statistically to pass.

Past two years past five years 10 years. These are big numbers. So if the growth is there.

Regardless of what sector it is coming out of.

New York benefits, because New York is a diversified economy. Thank God I mean, its finance health care professional professional business and serviced by the way is fully recovered to pre pandemic levels fully.

Fully recovered, but 96% or something.

So.

Me.

<unk> be a slower contributor, but we have other sectors. We hope will take up the slack and as long as there is overall growth in the market.

I think we're in relatively good shape mature, we'd love to see tech.

Pick things back up after the take a pause.

Just to add to that.

A couple of data points in front of me or commentary.

To share is that.

Sublease space availability today is still half a million square feet of availability less than it was at the depths of the pandemic. So.

We went through three or four quarters, where sublease space was coming off the market at a pretty rapid pace. Secondly is that from what we were told accurate or not but what we're told is the announcement of the stoppage of the work for the Big Tech firm that you referred to.

Was not unique to New York City, but it was five or six locations around the country.

And really driven by there.

I am feeling a need to redesign exactly what they were planning to build as a result of addressing.

The right workplace strategy in order to accommodate and respond to.

Bringing employees back to the office, so whatever their head into cancer design. They felt maybe it wasn't right right mixed with design elements to hit the pause button. So I wanted to go through a redesign.

Spec then.

Go back into the construction and.

And build out that space as opposed to putting on the sublease market third is that although the big Tech guys. The big Tech guys.

As announced some slowdown there are still some tech requirements that are floating around in the market. So it's not as if it went to zero overnight.

Great. Appreciate those comments, maybe one for Matt just a little more housekeeping, but and you talked about kind of the other income and it was obviously.

A big surprise here in the quarter can you just help frame out what your expectations are for other income in the back half of the year. Just so we're all kind of on the same page sure yes.

As a lumpy line item because its where we capture all these ancillary income streams fee streams.

So it was larger in the quarter relative to other quarters and relative to our expectations.

Because of those two items I mentioned.

As a as I look out over the course of the third and fourth quarter.

I see a drop off in the third and I pick back up in the fourth but those are based on win.

Our special servicing deals we get success fees Thats based on the successful resolution if there other deal related fees.

Based on when the deals close so.

I would expect to see a drop off in sort of pickup in fourth but that timing could shift around.

Thank you.

As a reminder to ask a question please press star and one on your telephone.

I show. Our next question comes from the line of Tom Catherwood from <unk>. Please go ahead.

Excellent. Thank you and good afternoon, everyone, maybe for Matt or Andrew thinking of your floating rate debt, how much of higher interest rate expenses due to rising rates would be offset by higher rates on your DP book and is there a lag between the recognition of those higher rates.

For your DP positions.

<unk>.

You are right I mean, we do have floating rate debt and preferred equity positions that balance has been shrinking now I'm, describing the number I think it's around $300 million or so.

Our DP positions offset the $2 billion of floating rate liabilities.

Got it thanks for that Matt and then one other just cleanup one specifically thinking of.

Seven day.

Occupancy continues to scale, there, obviously above 76% as of quarter end.

We kind of pencil out something north of $3 million quarterly and NOI off of that at stabilization. It looks like youre running about little bit less than half of that.

No theres, a lag, especially apartments between NOI rolling on in occupancy, but what are your current thoughts on when you start to get the bump from that increased occupancy or do you really need to lease up the commercial space as well to get there.

So we have seven day and 185 Broadway broken out separately seven day is the residential.

185 Broadway is the commercial.

So if you're looking at seven days occupancy that is exclusive of the residential remember there we have two components, we have market component.

Then an affordable component the market component is 100% leased the affordable component is not that's a very long process to get that component.

But we will be by year end.

Youre looking at when is a stable cash flowing year for the residential component.

You should look to 'twenty three.

Excellent thanks, guys.

Thank you.

And I show. Our next question comes from the line of John Kim from BMO Capital markets. Please go ahead.

Thank you and good afternoon.

Mark you talked about the dearth of debt capital in the market today and of course, we have rising interest rate environment.

Can you talk about what the impact would be on cap rate for office because in the past cycle.

One is to just refinance rather than sell assets.

Well I mean, what typically happens in market. Like this is you just have very limited trades Theres no.

<unk> got to be set by willing buyer willing seller.

<unk>.

When you have a market where you have got.

Well capitalized long term ownership.

Appreciate the long term value of the real estate holds.

If there is there is not enough acquisition capital of transactional capital that's out there.

Priced at.

At a level that can can meet those expectations of the owners then.

Yes.

There is a view that will cap rates rise and I would just say that you have a bit of.

Of our frozen market, we're just not many trades get done.

Other than.

In situations that might be.

Pressured but those are those are not the normative I would say for the bulk of the assets you.

Half the inventory.

In New York City commercial office inventory is owned by 10 to 12, very well capitalized long term owners that.

Typically we've seen through the 90 is early two thousands.

Great recession et cetera.

Ride these periods out continue to improve the product and.

Wait for the temporary nature of the debt markets to loosen up again, which they invariably do so.

I don't.

There have been some trades I know resi trades in the relative percent rosy, where theres still liquid financing market you see a lot more trades at what kind of camera team Dutch Street downtown.

Which was at a.

4% cap rate so Brian .

<unk> is still see trading.

Four cap rate range commercial has been fewer and far between there've been some trade 609 fifth was a vacant office condo trade. The Santander building is sort of a full redevelopment.

But there is not really.

Full sort of market formed on the commercials.

Okay. That's helpful.

And Matt on.

On the other income it doesn't look like there's been much of a contribution this quarter from summit. Despite the strong traffic numbers that you reported.

Are you still on track to deliver $20 to $25 million of NOI This year and.

If so can you discuss some of the expenses that offset the.

NOI contribution.

So mark talked about summit performance, we are right on our numbers for the year.

Remember, there's two components that theres, the operator that flows through other income.

That I said in December and said again in the first quarter call.

That is a nominal contribution a lot of the countries from summit comes through NOI.

And it is coming through on our numbers.

Okay.

Okay. Thank you.

Thank you.

I show. Our next question comes from the line of Jamie Feldman from Bank of America. Please go ahead.

Thanks, I guess, just a follow up to the last question. I mean is there a are there assets out there that we should be watching that could trade soon or do you think it's going to be quiet for a while just based on.

The conversation Youre seeing.

<unk>.

Well I mean.

There's always assets in the market and there's going to be trades.

Even even.

Assets coming out of our structure finance portfolio into into our own portfolio. So.

One one notable deal in particular so.

I mean, there will be a market and there will be trades, yes.

Okay, and then in terms of like higher profile transactions, we should keep our eye on for price discovery.

Anything you'd point to right now.

So up to $2 45 Park has a bid date of today.

I'd call that pretty high profile big and current because I think it's a five PM deadline do you want to.

Hey, guys hanging with Jamie and put your bid.

Okay.

Okay alright, thank you.

Thank you.

Yes.

And I show. Our next question comes from the line of Vikram Malhotra from Mizuho Group. Please go ahead.

Thanks, so much.

Good afternoon, I just wanted to go back to the occupancy comment.

You talked about the year end target that risk, but can you just maybe remind us what are the sort of known move outs that would influence occupancy in the next this year and maybe the next six months and maybe give us a sense of where do you actually think occupancy will end up at year end.

Okay.

I think I said in my comments were about 100 basis points behind through the first six months that carried through the end of the year. We ended up at 93 instead of 94.

Not a lot of big known move outs coming in.

In the portfolio. So what we're what we're really seeing is just a slower pace in that same store portfolio. So you don't want to differentiate we set a 2 million square foot leasing target for the year. That's the entirety of the portfolio are on track for that we're a little behind in the same store portfolio, which is just pace of leasing.

Tenants that is the lease exploration between now.

And then next year.

We have a very high degree of confidence that we have very good clarity as to what their intentions are so to the extent that.

There may be shaping our portfolio, it's already built into our numbers.

So just on that on that point, if you could clarify since you have a high degree of visibility next 12 months.

And during the first half of next year what percent of the explorations are sort of high visibility lock locked at this point in your mind.

Well the high visibility move outs I think we've.

Some of them, we've known for quite a while.

Let me see.

19, there is a long ways that boys, but that that is a win.

We have leased 50% of.

Space already ml well.

Within the DP portfolio $2 45 Park.

As what baseball right.

Baseball season was very strong.

Those are I mean that stuff's been known I would say for over a year.

At.

Worldwide.

<unk>.

So, but yes, so we've we've.

<unk> all of those spaces and are busy at work either re tenant in the space to the extent, we have possession or if not some of these move outs don't occur for two or three years corvette.

<unk> I think it's a 24 movement. So it gives us a lot of time to program and redevelopment, which we're doing right now three buildings on third Avenue $85 19.

Sure.

750, <unk> and then in the future.

Probably next year in 'twenty four.

Our partner RSR, we'll take a look at our worldwide.

A 25.

Okay.

So I don't know that there is any.

Anything out there of note that we haven't.

Previously discussed I guess, that's really the question Steve is there anything okay.

I think.

I don't think there's any big surprises between now and the next.

Me too.

Okay. Okay, and then just maybe a broader question.

You talked a little bit about in your opening remarks that.

<unk> has slowed down because they are adjusting I guess to changing work patterns financials are now big part of the leasing.

Why wouldn't sort of what technology firms are doing and how employees are working why wouldn't that why wouldnt. Other segments also start to say hey, we also need to adapt 13, youll we lose people.

Why wouldn't this become more broader and then how do you how do you react in terms of maybe what you need to use the product in terms of more capex or redevelopment.

Does it change your mind on where you want to own geographically and not just within the city, but maybe other markets.

Would that make you think about like the evolution of SL green from here given the slight asset light.

Why wouldn't this be a broader issue.

Well I think the number one response we've had.

To the question of hybrid work model is the extraordinary efforts we've undertaken a continued undertake to monetize the portfolio in ways that we think really resonate with tenants and their employees.

That's not that's not anecdotal.

That's.

Verifiable feedback if you will.

As to the connection between.

What we're doing in terms of health and wellness and.

Fitness and <unk>.

Very elevated food and beverage program in conferencing and.

And everything else commute ability.

Public realm improvements as connected to.

What tenants.

In order to maximally.

Incentive is their workforce back to the office and creating volume environments, where they feel they are getting.

The most efficiency in production so.

But thats all we spent.

I would say close to an hour.

Just that topic alone in December talking about our plans.

<unk>.

Executing both in our new construction and.

Throughout a good chunk of our portfolio and the positive response, we received to it I think when you say do we worry about it or however, you phrased it.

I personally think and no surprise here because.

Sure.

Made statements this effect in the past I think in the long run. It's a failed work model and I think that.

Whatever.

People whatever firms are.

Spare minting with now.

You go from one goalpost of five day, a week to another goalposts of three day weekend wherever that medium terms out in between I don't know, but I.

I don't.

I am not one of those who subscribe to the notion that companies are at their best when they are all in disparate locations connected only by.

Bye.

Video conferencing.

And people may.

Defer on that they do.

But we have a strong belief in that at least I do.

And I think a lot of other business leaders do too.

And I think that.

Pendulum swings one way pendulum swings back the other.

And I think over the long term.

Having.

I think there is a heightened need to have a sense of community and centrality and a place companies can call home that are being developed today in ways that are I think far more extraordinary and far more inviting than they use.

To be pre pandemic, which I think is ultimately a good thing.

And I think it will prove to be the winning strategy for most sectors I can't say all sectors, but that'll have to that's not that's not something that's going to be decided in a month or two a quarter or two that's going to be something that I think companies will each decide.

What their sweet spot is.

But most of the folks I.

Talk with our 800 tenants in our portfolio.

I would agree that more.

Togetherness collaboration mentoring relationship building business getting et cetera is better done.

<unk> face to face and in person then remotely so but.

That's just that's just marshfield.

Fair enough and then sorry, just last clarification, Matt you talked about using funds now proceeds to pay down our Delever. Just what is the go like what is appropriate now in this environment over the next few years, where do you want leverage to be.

We have not set a leverage target.

But we are prioritizing dollars towards.

Unsecured debt repayment and we were comfortable with our leverage point before we got into a rising rate environment. So this is much more.

An effort to retain cash flow protect against rising rates.

Not a function of our view that we had high leverage.

Prior to rising rates.

Okay. Thank you.

Thank you.

And I show our next question.

It comes from the line of <unk>.

Michael Lewis from <unk> Securities. Please go ahead.

Okay, great. Thank you Mike.

My first question is about $6 25, magic and so I see that that ground rent reset date past a few weeks ago could you just tell us kind of what the process is.

Now that that is behind us and of course, what we really want to know is what the ramp might be if you are you able to give an idea of that or maybe what's what's assumed in guidance for that.

I think.

We've commented before it's a subject of an ongoing arbitration slash litigation, so can't really get into any details of the rent has not been set as of yet so there's a leaseholder we're still paying.

The historical rents.

There's been no reset and we would expect that.

Get clarity over the next hopefully six to nine months.

No it hasnt.

From our perspective, it hasnt been us holding up the process its been a little longer than we would've expected but.

As a leaseholder, where we're continuing to pay the the historic or overall.

Yes, we are.

Rick just regard.

Recall, if you were there we also have.

A DP position.

On the fee interest, which has a maturity of next year as well and Thats all been previously.

Disclose so theres really.

There are two different yet related transactions there.

Okay. So for guidance purposes for the back half of the year. There is no significant bump.

And the monthly rent included in <unk>.

<unk>.

Good news is that don't have to tell you because it's mostly a capitalized property so it doesn't affect <unk>.

Okay.

And then for my second or my last question.

This is sort of similar to a question you just answered but along the lines of this flight to quality theme.

You, obviously on some great trophy assets like one Vanderbilt and why not a senate and some others.

But when you are the biggest office landlord in New York you also have some buildings that are more.

I guess I'll call them average for lack of a better word.

How do you think about the portfolio in that context.

Do you think the bottom half of that portfolio does it does it mean that in this environment.

Much higher capital investment needs are or maybe you sell things that otherwise you wanted or.

Steve talked a little bit about the Graybar building as kind of a barometer for this but I'm kind of curious to.

What we've learned through the pandemic and hybrid and all this stuff.

It changes the way you think of the portfolio should be put together I think your average rent is kind of in the mid sixties.

Do you think you need to change that going forward or not.

Well I mean, we've been pursuing a very aggressive asset disposition strategy over the last seven years.

This really since 2015.

And the focus of that strategy has been.

I guess the asset you would describe as sort of the bottom half of the portfolio. So I think what we tried to show you in December as we have a portfolio now.

That is centrally located prime locations and for the most part are monetized so ready to compete in today's leasing environment. I think we've been fairly ahead of this trend.

Sure.

We own that we've stabilized or that the income profile doesn't show the kind of growth that other assets, we own and generally those are sort of our next sale candidates. If you will so there's always assets, we look at reducing or reducing our ownership interest in <unk>.

Because there is capital out there around store returns and capital.

Or is that once more higher opportunistic returns.

But we're very happy with the way the portfolio sits today.

Any of the trends in the market.

Cause us to do like a wholesale.

Sure.

Re scrub of the portfolio, that's sort of been in process.

Since we really haven't issued equity for seven years or so.

Alright.

Okay. Thank you.

We're going to try and pick it up just a bit here.

We usually allocate about an hour as I know we have so many more questions. So.

I'm just going to see if we can try and.

For the benefit of those that had been on and.

I'm sure it has to get onto other calls and things try and pick up the pace just a bit.

Thank you Sir.

I show. Our next question comes from the line of amortize a concern I hear from credit Suisse. Please go ahead.

Hi, yes.

Good afternoon, one very quick one off the bat.

Other income for the quarter.

From the aforementioned items, we discussed the fee income and things like that it seems to seemed a little bit high relative to <unk>.

Other items.

That other income line this quarter again, we generate.

A growing stream of.

It's Larry fee income servicing management construction management.

So what was the historical.

Recurring number each quarter has grown at something closer to.

$8 million to $10 million a quarter.

On top of that we have things that come in upon successful resolution of our completion and in this quarter on top of the two things that I highlighted in the press release.

We had a.

The final recognition of a construction management fee at a project that we sold a year or two ago.

That was projected in our guidance it was.

Unclear when we would get it we completed the project in the second quarter and so we were able to recognize it that was about $4 million.

Great that's helpful and then.

Everyone is always kind of talked about.

People, who have entered about coming back to the office. That's when a lot of the powers that be will start to make decisions about their real estate. It sounds like this tech companies doing some redesign based on that thesis, but I'm just kind of curious.

Are you starting to hear more funding of tenants now about.

How that kind of thinking about real estate long term.

Just kind of given where they are with with their employees coming back to the office or what have you.

Well sure.

<unk>.

The answer to that is.

Tenants.

Tenants response is all over the board I don't think anybody's from the perfect solution is too.

How they're going to manage.

Our hybrid work environment, or whether theyre going to 100% back in the office, where we can.

But we consistently hear is tenants want their employees back to the office.

They need to create a work environment that gives their employees a reason to want to be in the office as opposed to simply giving their employees a mandate to be in the office you hear more commentary about things like.

It's.

It's a touch points in an office what that really means is.

Employees may not have enough.

Necessarily an assigned seat all the time or not all of the employees.

Those employees that are more mobile.

Accounts, just as much whether they are working in the cafe or in the conference room or in the communal space as opposed to in an office or cubicle.

Yes.

So architects are designing supposed to be more fluid.

And more group oriented as opposed to very structured assigns types type setting.

But you'll see a lot more discussion about hospitality work environments and.

Tenants, obviously are levering off the improvements that landlords like us are making into the common areas of our building in order to make the whole building.

Part of the work environment, so not only in monetizing their space taking advantage of the medicines that we may be programming space.

Okay. Thank you.

Thank you.

And I show. Our next question comes from the line of Anthony Powell.

From Barclays. Please go ahead.

Hi, good afternoon.

The view that some have that downturn or a recession in the economy could be positive for office space occupancy as people get back to work because they want to keep your job is that something that you see us likely or do you think have impact of people hiring Alaska is going to be a larger.

Of course, there certainly makes sense to us.

I do think we've heard the feedback from our tenants that.

They are getting the resistance theyre getting to people returning to the office is hard to combat because of the job market. So I think if you see.

That job market start to <unk>.

Weaken a bit.

Some of that leverage may shift back to employers, but that's speculation.

Got it thanks and have you disclosed the lease mark to market in your portfolio and I know other sectors talk about that quite a lot but.

<unk> down the past few quarters I just want to see if you have a view of what the lease mark to market is in your let's say your non one Vanderbilt type of a portfolio.

I'm, a little unclear as to what Youre, asking but if youre looking for something that looks at in place rents versus what we think you could mark the entire portfolio to today, we have that we have that in the lease expiration schedule.

Somewhere probably three quarters of the way back in the supplemental okay. Thanks ill take that I appreciate it.

Thank you.

And I show. Our next question comes from the line of.

Ronald Camden from Morgan Stanley . Please go ahead.

Hey, just two quick ones from me.

Our leasing pipeline, the $1 1 million square feet, maybe any color on the mark to market on those and just some trends would be helpful.

Yes.

Sure.

Every one of those deals make.

Then, it's essentially a flat mark to market.

Alright.

Alright and concessions there.

Concessions I think we haven't seen a material change in concessions probably in the past 12 plus months I think.

And in free rent leveled out 12 to 18 months ago.

Time will tell as the economy gets stronger in the market market strengthens as to whether those concessions come in or when it starts but for the foreseeable future, we're not expecting any material change.

I think similar to the last question. If you see if you do see a slowdown a little less activity out there that could help construction pricing, which is continues to be elevated.

Could see those concessions come down as the price to complete space.

It comes down we would hope.

Helpful and just my second one was just on <unk> clearly elevated vacancies.

Does that create an opportunity for I know you guys have a co working business.

How does that how does this environment play into that.

Can you say the first part of that question and you broke up right in the middle set.

Sorry about that just the all of it you can see does this create more opportunities for the co working.

Okay.

Which business.

<unk>.

Now to expenses.

From our perspective.

No we're not we're not.

<unk>.

The broader market more co working leases being signed and certainly from our perspective.

Co working is not a focus of what what.

We're trying to attract that using our portfolio.

Thank you.

Okay.

Thank you.

And I sure. Our last question comes from the line of Nick <unk> from Scotiabank. Please go ahead.

Thanks, I just wanted to go back to the DP book, I think youre, saying, Matt about potentially use some redemptions there to help fund that pay off.

And so I guess I'm just wondering at this point should we assume that the $440 million maturities by the end of the year.

Our earmarked for other use and so we think about a DP book next year that starts at a level that's down by 400 $500 million.

You should definitely assume that we end the year at a at a lower level.

Whether we get repaid on all the maturities or extend them or work out some other situation, we have yet to see that.

First it's $2 45 are either getting rewrite or were <unk>.

245 is already in there right. So there's something that's going to happen that is immediately going to take.

That out of the maturities for this year.

What I was referring to my commentary is actually our originations repayments originations for the first half of the year.

That we already put towards debt repayment, because we probably would've otherwise.

Origination something in the second quarter and we didn't.

But yes, I would expect by the end of the year, our balance will be significantly lower.

Okay, but just from like an earnings standpoint, if we think about it I mean, using using that book to pay off debt maturities I mean, theres some earnings dilution from that and I think even when you said about pushing out the 500 million on a short term basis evening, you refinance that today.

Today, that's at a much higher rate than what you are paying so I'm just trying to I just want to make sure that we're understanding from a starting into next year you have some of these.

Dilutive issues to deal with on the balance sheet, we should be thinking about from a modeling standpoint that's.

That's exactly right.

Things I highlighted in my commentary is affecting 22.

Certainly affect 'twenty, three rising rates less DP origination.

Being the largest.

As contrasted against a lot of the development pipeline that starts to roll onto the books into earnings right and more and more fee income you got to look at both ends of that spectrum.

Because we have <unk>.

Delivery.

Of stabilized.

Stabilized incomes from one Vanderbilt from seven day.

Completion of.

One Madison and.

760, Madison retail project with which is a substantial.

Retail leased we have with Armani. So I mean, you got to look at the whole picture, but yes.

Yes, I think as it relates to DP the balance is expected to be down year over year.

Thank you.

This concludes our Q&A session at this time I would like to turn the call back over to Marc Holliday, Chairman and CEO for closing remarks.

Demand yes.

For anyone still on which I imagine.

Is the Hardy few thank you for listening in all the way through.

Enjoy the rest of the summer and we look forward to another catch up call in three months hopefully with.

With which was good news.

Q2 2022 SL Green Realty Corp Earnings Call

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