Q3 2022 SL Green Realty Corp Earnings Call
The conference.
Vince will begin shortly to raise your hand during Q&A you can dial star one one.
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The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Okay.
Thank you everyone for joining us and welcome to SL Green Realty Corp's third quarter 2022 earnings results Conference call.
This conference is being recorded at this time the company would like to remind listeners that during the call management may make forward looking statements you should not rely on these four it looks like the predictions of future events 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 their assumptions and beliefs as of today additional information regarding the risks uncertainties and other factors that could cause such differences to appear are 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.
During today's conference call. The company May discuss non-GAAP financial measures as defined by regulation G. Under the Securities Act.
The GAAP financial measures 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 Companys website at www Dot SL Green Dot com by selecting the press release regarding the company's third quarter 2022 earnings.
There is supplemental information included in our current report on form.
Relating to our third quarter 2022 earnings before turning the call over to Marc Holliday, Chairman and Chief Executive Officer of SL Green Realty Corp, I would ask that those of you participating in the Q&A portion of the call. Please limit yourself to two questions per person. Thank you I will now turn the call over to Marc Holliday. Please go ahead Marc.
Thank you and good afternoon, everyone. We appreciate you dialing in today and we look forward to giving you an overview of our quarter's results taking your questions. So I want to remind everyone that since 2019, we faced many new challenges.
Which in turn caused us to raise our bar, even higher and respond in ways had been beneficial for our tenants our shareholders and our community.
In less than three years we.
We signed over 5 million square feet of office leases, we completed two dozen individuals sale transactions at a gross price at share a $5 billion, we developed and acquired new World class assets oversaw an executed two in a quarter billion of physical construction projects for <unk>.
Time deliveries reduced our G. P E balance to 663 million at quarter end, we created a new iconic global inserting them in destination summit.
We managed our portfolio in a safe secure and efficient manner.
On a portfolio wide hospitality and amenity program and we did all of this throughout by working five days a week from office the only possible way, we could realize these extraordinary accomplishments I want to once again.
Express my extreme gratitude to the amazing and talented workforce here at SL Green.
Who came together all of us on the floor of the New York stock exchange to ring, the closing Bell and celebrate 25 years of excellence and improving the way, which new Yorkers live work and play.
And this momentum carried through into the most recent quarter.
I am extremely extremely pleased with the leasing performance in Q3 highlighted by the Franklin Templeton deal at one Madison Avenue and Memorial Sloan Kettering deal at 885 third Avenue, which took.
A total of over 750000 square feet of vacancy out of the SL Green portfolio.
Economic terms that were consistent with our expectations as pleased as I am with the leasing performance in Q3, I'm just as happy that we were able to retire 800 million of maturing public bonds through a series of pay downs and financings that were done on attractive terms.
Furthermore, we're highly focused on implementing strategies to mitigate our exposure to rising interest rates by executing on a series of swaps caps and debt repayment.
Understandably a lot of the focus from the market is on the leasing performance and tenant demand and on that front, we feel quite good about where we are given the portfolio is highly improved and our overall asset quality has never been better we continue to monetize our best assets to attract top tenants and as a result of port.
Folio is still well occupied today at 92% and we have marketing and capital plans in place that we believe will enable us to operate during this market cycle at or above 90% or better until things begin to turn around.
Rising interest rates on the other hand are more of a concern given the impact it has on our earnings making interest rate hedging and debt reduction our number one priority for the foreseeable future.
Matt and his team have done an excellent job with this is evidenced by the one point to $5 billion of corporate swaps entered into during the third quarter to hedge future floating rate exposure. In addition, during the most recent quarter, we entered into cap contracts in another $270 million or <unk>.
<unk> rate property debt and just yesterday, we swapped another $200 million on a floating rate mortgage not.
Notwithstanding the current interest rate environment, the underlying New York City economy is still chugging along based on employment data showing that NYSE added 24000 private sector jobs in August and is now a 100000 jobs ahead of New York City O N B's original two O two to forecast.
To the point 22500 office using jobs have been created in just the last three months reported now, bringing the total office using jobs recovery to 104% of pre pandemic high watermark and contrary to what you may see in the media I expect septembers numbers.
Due out momentarily to show positive as well.
The numbers confirm what we feel that New York City is finally back to normal the roads sidewalks and commuter trains are packed in the subways are coming back tourism and hospitality are near pre pandemic levels residential rental market remains tight and the enablement of conversion of office to Rajiv to.
Help solve this problem is gaining momentum at the state and city levels mean.
Meetings conferences parties, they fill the calendars and the rhythm of New York's social life has returned.
Before opening up the line for questions I want to acknowledge a few other milestone moments for the company.
First summit, one Vanderbilt is celebrating its one year anniversary tomorrow, we will all be there to recognize the successful launch of this world class attraction that has quickly become one of new York's hottest experiences, having welcomed 1.4 million guests to summit during the first year of operation with far more expected next.
Year.
During the third quarter, we prevailed in consolidating ownership and control of $2 45 Park Avenue, a trophy asset in the SL Green corridor of owned properties. After a contentious bankruptcy litigation, we have plans to improve to 45 park over the next 24 months to make it one of the most desirable buildings on Park Avenue.
Last week, we received the excellent news that <unk> received a Michelin star less than 18 months after opening during the pandemic.
And finally this morning, we announced a partnership with Caesars Entertainment to pursue a downstate casino license for World Class Gaming Hotel and entertainment venue in the heart of times square in connection with this effort. We have formed a coalition for a better time square it seeks to make significant investment in security.
Traffic mitigation mass transit improvements and accelerate economic recovery for surrounding businesses and create good paying jobs for local new Yorkers.
With that.
Summary, we'd like to open up the line for questions on the quarter and.
Whatever else is on People's minds.
Ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your Touchtone telephone, we will pause for a moment, while we compile the Q&A roster.
Our first question comes from Alexander Gulf Goldfarb with Piper Sandler Your line is open.
Good afternoon.
So two questions.
First just taking a look at bringing on converting the D. P positions for five times square and $2 45 Park just wanted to understand one the earnings impacts I think you were getting close to 11% on the DP positioned previous plan I'm not sure how that equates to a cap rate on the buildings.
Two I think.
I think you have some large vacancies coming in $2 45 Park. So maybe Matt if you could just talk about how we should think about the economics and impact to earnings from converting those two positions.
Sure I'll, let Steve address the 245 park.
Thank you for the question you had as earnings obviously, we'll be giving guidance for.
For 2023 on December 5th at our Investor Conference. So you'll get more detail then.
You you alluded to the D. P balances rolling off that's about $367 million of debt and preferred equity investments combined between $2 45 to five times that were rolling off at just short of 11% you're right. The properties do not generate that equivalent return on.
Their phase five times is in redevelopment and lease up we only owned 30% 32% roughly of that.
And 245, we owned 100% of.
There will be finalization of GAAP adjustments and those types of things done over the coming weeks, leading into our guidance for 2023.
The roll off is substantial.
Substantial at $367 million at 11%.
And then with regards to <unk>.
Vacancy or pending vacancy at the building, we really don't have as much as I think you you may.
Suspect.
The J P. Morgan space, which is 17 floors in the building 15 of those floors.
Were either previously leased to suction.
While we were doing the leasing for HMA, we had pre let five of the floors Houlihan lokey. So that only leaves us two floors to really deal with when we get that space back late next year other than that there's about 120000 square feet of current vacancy there is another block in the building that we get back.
Late next.
Late this year.
I'm sorry late next year Major League baseball, which had.
Roughly five floors, we had pre leased most of that space on short term leases.
Either Rockefeller group of Houlihan Lokey, So we'll now get it back mid to end of next year other than that is it.
Battery of Florida throughout the building.
And that sort of roll over the next couple of years is what's justifying the capital program that were designed for the building right now, which we're really excited about it.
Just to remind everybody. This product is exactly what the world is looking for today, it's side core design.
It has a floor plate design that has actually six corners on it the way it's configured.
It's directly catty corner to JP Morgan's New headquarters has direct access to Grand Central terminal, our development plan, which is going to be a spectacular transformation of the building from the plaza to the lobby to amenities being added.
Is I think very forward thinking.
And.
We're already trading paper with prospective tenants. So I have I have the greatest.
It is the confidence that this building will outperform.
Okay and then the second question is Matt on the swaps lot of news and press reports about the rising cost of swaps, but you guys have been quite active can you just give some perspective.
How much pricing has changed and should we think about swaps being prohibitive or based on the fact that you guys are still executing them earlier. This week that prices may have gone up but in the scheme of things given that cost.
Still plenty of availability and cost effectiveness on the swaps for your debt.
Yes, certainly the latter not the former and I think mark alluded to the fact that we're going to continue to target.
Reducing future for floating rate debt exposure through caps in <unk>.
Swaps you talked about cost.
<unk> cost for our swap is built in through a credit charge, which is just measured in basis points on top of the rate that you swap.
On the 1 billion $2 50, it was roughly five basis points on average.
So not much caps have an upfront cost.
Those costs are based on the term and the benchmarks out.
There has been impressive out increasing cost cutting cost of everything is has gone up.
But certainly the savings we're realizing by executing on these trades far exceeds whatever incremental cost may be embedded in them just to put that in perspective on the $1 billion $2 50 that we did and was included in the press release that was done more than 100 basis points tighter than where you would do those today on a 1 billion to 50.
You can do the simple math 100 basis points of 1 billion to 50 over the course of several years, that's a lot of money well worth a couple basis points.
Thank you.
Yes.
One moment for our next question.
Okay.
Our next question comes from Steve <unk> with Evercore ISI. Your line is open.
Thanks, Good afternoon.
I guess, Steve I was just wondering if you could comment a little bit more on kind of where the pipeline sits today given that big Tech has sort of gone on hold I'm. Just curious you know what parts of the market are you seeing the most demand in whether it be size of tenants or.
What part of of you know.
New York is it Midtown South Midtown.
Color on leasing would be great.
Sure.
We've got a pipeline that's about 700000 square feet, obviously, it's that number is down.
As a result of the two big leases that we recently signed.
But I think the good news in that pipeline.
As we're seeing a lot more activity from the small to medium sized tenants, which you know.
Or has it changed from where the market was for the past six to nine months.
There's a lot of the leasing activity, although the year is doing broadly speaking the market that market is doing well compared to the prior two years of velocity is still down compared to sort of the 10 year average.
But the the success in the market. This year has been driven largely by the bigger tenants.
And I think the new new sites have said is that they were starting to see these small to medium sized tenants coming back into the market as the bigger tenants the higher price point tenants.
Assigning leases.
We're the first ones in the market the small to medium sized guys are sitting on the sidelines and as the big guys are bringing their employees back to the office you are now seeing the smaller guys follow them into the office and Thats driving a lot more leasing activity. So some of our third Avenue Lexington Avenue product.
We have more tours trading paper and signing leases today than we have been in the past.
Year or so so.
That's that's.
Positive.
Midtown is still without a doubt the driver of the overcall overall leasing velocity in the marketplace financial services is some 41, 42% of total leasing that was signed in the third quarter.
Tech is still out there, but obviously at a much smaller diminished way theyre kind of 8% to 10% of total leasing but.
Financial services, which.
In the past couple of years was sort of in that 30% range Theyre now 40, plus I think there.
There doesn't seem to be any slowdown.
That segment's demand Youre also seeing law firms.
A lot more active today than they were a year ago.
No.
And I think that same.
Demographic is what we're seeing within our portfolio of the pipeline of about 17% is financial services, 12% is tacking the balances everything from government to health care to our services.
And if I could just ask a quick follow up on that.
Most of these requirements are they.
Kind of downsizing are they kind of including growth stays or they just.
Kind of musical chairs moving out of 150000 foot into another or just what can you say about size well.
Well there is an unusual there is an unusual amount of relocations taking place in the city as tenants.
<unk> their workplaces.
Typically about 30% of leases that get signed are relocations third quarter. It was over 40% of the leases that were signed were relocations and I think thats a function of tenants that are continuing to densify.
Pre COVID-19 phenomenon thats ever stopped.
And they are reinventing how they wanted to use their workplace so more amenities.
More space per employee and a more hospitality vibe in their design and without a doubt people are.
Most businesses are still very unsettled.
What their ultimate footprint is going to be they don't they just don't know so they're building in a lot of flexibility an ability to grow and ability to downsize as time goes by because the world is still figuring itself out.
Got it and then Mark I know, it's early and you just put out the press release well with seat.
With Caesars on.
The gaming.
Gaming license I.
I guess I'm, just trying to sort of think through that buildings, obviously encumbered with a with a large tenant.
And I'm, just trying to think through sort of the concept of a vertical casino in New York versus one that's more horizontal mean can you just kind of share any thoughts with us about that.
Steve there'll be lots coming out over the course of.
The next several months, we expect the RFP out sometime in <unk>.
December but that's not that's.
Not official our formula or announced from the state that's just our expectation could be before it could be after.
Suffice it to say we have.
Well, we in Caesars think are is an excellent plan.
For bringing.
<unk> and entertainment.
And hotel right to the heart of times square.
I think we wouldn't do anything less than a <unk>.
World Class facility laid out in a way that we think will be.
Streaming successful and desirable and and.
And additive to times square, which I think really could use a boost right now so I would say stay tuned for those details will be more to come.
And stuff that.
And the team are really excited about.
Thanks for the question.
Thank you.
One moment for our next question.
Again, ladies and gentlemen, we ask that you limit yourself to two questions.
Our next question comes from.
Michael Griffin with Citi. Your line is open.
Okay. Thanks, maybe you could go back to the refinancing for a moment.
Debt maturities coming up is there any ability to get longer term refinancing and kind of lead the expectation more of a shorter term floating rate debt.
Similar to the bottom line.
Yes.
At the moment.
The MBS market for single assets is not as compelling as the shorter term market. So you apprise CSU is the shorter term market.
At the moment as soon as that single asset see MBS window, reopens, which no dealers vanilla tell us exactly when it'll happen, but hopefully it will be.
By the first of the year.
Then we will start to avail ourselves of longer term fixed rate financing.
And just with regard to the $400 million corporate facility remember, we're trying to accomplish there.
We are ultimately going to we had to pay off maturing bonds 500 million, which we've done.
And we're doing that in a way that can be repaid one year from now when we get money from our partners at one Madison just short of $600 million.
The bank financing market for that kind of term.
Is well inside of what any bond execution look like probably 200 basis points inside so that's why we went that route.
Gotcha.
Definitely helpful.
We talked in detail.
With me around local law 97 in New York.
I understand maybe some preliminary data.
Your portfolio.
Can you highlight any such that they can make.
Make sure your political is going to be in compliance.
Yeah.
This is local low 97, yes, no I mean this is.
The.
The rules were formally adopted a recently, but this is something we've been preparing for for years that it's been out there.
The first measurement date.
We think the bulk of the portfolio.
Not all of the portfolio will pass.
In compliance without penalty.
And then on the 2030 date, we're going to be working obviously over the next.
Seven eight years on.
Making additional investments and.
Exploring ways to use renewable energies and credits and everything that will be available to try and <unk>.
<unk> or eliminate entirely whatever penalties they will be in 2030 will probably go into more detail on this in December at the Investor Conference to give people a better sense of.
You know where the issues lie arrange a quantification but.
We don't have that here now and I would say that until.
2030 at the earliest.
We expect it to be if know of no financial consequence, not not because.
The rules are not rigorous.
But simply because we've invested so much in the portfolio and we have so many of our buildings are.
LEED designated well designated energy Star <unk>.
Our recipients et cetera that.
We we score very well on the on the current metrics it is evolving.
Yes, those rules will evolve over time and.
And we'll see what the state of play is seven or eight years, but we're preparing as though.
It's been promulgated as what we'll have to live with.
Okay. That's it from me. Thanks for your time. Thank you one number for next question.
Our next question comes from Anthony <unk> with J P. Morgan Your line is open.
Yes. Thank you.
I guess first question for Mark can you talk about where you think the balance sheet leverage should be over time, you mentioned the priority of debt Paydown and so just wondering how you're thinking about it and especially in the context of <unk>.
The asset right strategy, you guys have articulated.
Yes, just on the issue of debt Paydown, it's not so much a.
A leverage ratio question in my mind I think we are.
Very fairly.
Leveraged.
And you know.
Many of you asked under leverage relative to what I think a loan to a proper loan to value would be in this market.
Debt reduction really is.
Pointedly towards.
Preserving and.
Protecting our earnings.
From increasing rates and variable rate debt. So it's at a leverage point, we feel and have always felt very comfortable where we sit today.
With our leverage relative to.
An asset base that we think has a value.
Far far in excess of where the stock trades today, and even given where the stock trades today. However.
We have.
About Matt I want to say, maybe $2 billion or so unhedged at this point so we're over 80% hedged at the moment and so therefore, what we're talking about is managing.
The risk if you will on that.
Whatever that is you know 17, 18% unhedged position, which I would like to reduce further again not from a credit or balance sheet stable, but purely from an earnings standpoint.
To protect ourselves from volatile increases in interest rates.
Okay got it and then just follow up on the DP book a lot of it.
Is set to mature next chairman should we think about this as being a.
And and also.
Do you anticipate just getting paid back in August I guess outside of 625, perhaps or do you think other properties might have to come onto the books.
It's definitely not be missed.
<unk> has been very important program for US it's returned US terrific IRR is.
Over the course of the program.
We tend to invest in at the bottom of the cycle. So.
That investments are most effective when we can make them in distress type situations and if we do see those type of situations.
We will definitely be taking advantage of them in that book.
Yes in terms of the maturities.
Ill.
Time will tell.
The refinancing markets look like what the property markets look like sitting here today, we can't predict sort of what's going to happen in the future at existing loan maturities, but.
We were happy with the outcomes, obviously on $2 45 Park.
Five times square.
I definitely wouldn't wouldn't call to book.
Performed by any by any stretch.
Okay. Thank you.
One moment for our next question.
Our next question comes from John Kim with BMO. Your line is open.
Thank you.
You guys talked about the improvements you can make it to 45 park over the next couple of years and the former owner was capital constrained.
I was wondering if you can comment on how much capex will be needed to upgrade the building and also if you can comment on the timing of finding a joint venture partner.
Hi.
I would say needed is.
There's a lot you can.
Work into what's needed at the property to property.
Leases in its current state and we've done actually a lot of leasing how much Steve probably 200, plus thousand square feet. Yes, we've done about 200000 square feet plus they build very good building, but.
And I don't think needs for much however.
What.
To bring it up to where we want it to be to its full potential.
And be consistent with.
Some of the great properties within the portfolio that have extensive.
Amenities et cetera.
We're going to go in sort of Electively and voluntarily.
I would expect any program of size to be under $100 a foot. So I don't I don't mean that to sound de Minimis, It's a big building thats to up to $1 8 million square foot build.
Building and that's the beauty of the situation here is we can amortize.
Substantial some substantial improvement dollars over a very large asset.
For relatively.
I'll call it modest incremental investment per square foot, we can take our already low basis for our park Avenue asset of I think about $1100 a foot if I'm not mistaken maybe even slightly under that.
And like I said make a very large dollar amount, but a small relative per square foot improvement amount.
For improvements purification.
Efficiencies, new lobby plaza amenities and still have a basis very low by Park Avenue standards and I think have.
One of the best buildings with one of the best views.
Sitting right on top of access to Grand Central station.
Central station.
Okay.
And the timing of a JV partner.
Oh.
Well I mean.
I mean, we're we're looking I mean, where we'll begin those conversations.
Excuse me in this quarter.
And that will that's one of our priorities for will be one of our price for 2023 will be identification closing of a JV partner.
But we.
We already have.
Begun fielding inbound and will be sort of proactively marketing outbound this quarter.
Okay.
My second question. It doesn't mean, it's kind of like this quarter. It just means we're going to start the process. This quarter these processes, yet and really could take anywhere from.
Four to six months.
I would say on balance.
Got it.
Obviously, the joint venture can you provide any more color on the structure of the JV is it just going to be you and Allianz on good real estate and key this is the operator.
Completely separate or will it be corners.
And if you could answer.
Confirm if this is an exclusive.
Two bulk even Caesars for New York Casino license.
Yes in terms of.
Maybe I'll sort of do a blanket statement for the many questions that may follow any details.
The project bid the structure all of that.
Is going to be something that we're going to address.
Other bidders will address over time and in response to an RFP that hasnt been issued yet so I want to put an emphasis on <unk>. There is no RFP from the state right now for our Downstate Casino license award that is.
The anticipated to occur so.
The answer to your <unk>.
Third question was yes, we are.
Exclusive with Caesars on this casino site, and we're going to be putting.
Both of our mutual best efforts behind it to make it happen because we think it's <unk>.
Not just a big opportunity for the state and city, but it's almost a it's a rallying point for times square to have a catalyst of something very positive to help.
Redirect.
Some of the degradation, we've seen in that area and we know times square as best Theres nothing better in the World. The Best Entertainment District in the World Bar, none, but there are moments in time, particularly coming on the heels of this pandemic.
They're an area like times square, it's not the only area in New York City, but an area of lifetime square.
Need need help.
<unk> needs to reboot itself and I think we can rally around a casino and make that the.
The.
The engine and economic engine around which.
We could really have a time square Renaissance.
Much in the way that you've seen a grand central Renaissance.
Over the past few years.
Great. Thank you.
For next question.
Our next question comes from Tom Catherwood of <unk>. Your line is open.
Thanks, so much.
Steve Let me turn it over to one Madison.
Obviously, you too to kind of anchor tenants in there at this point in time now that you've reached this kind of 55% plus level of pre leasing how does your marketing program shift at all do you become more selective with tenants are you able to start pushing rents at this point in time is there.
Anything that changes once you reached this level.
Yes, we've already raised rents.
As a result of the leases that we've signed.
But.
Okay.
First and foremost is to remind the brokers.
Community that we still have space I think a lot of people out of the depression that were fully leased in the building.
So we're out there reminding people that we still got space to offer.
We're actively trading paper with a couple of tenants now.
In the tower of the building.
And.
We're still seeing.
Pretty strong.
Tour activity.
I think it's going to pick up even further.
Towards the end of this year once we start to have the steel in place for the new tower and we can do site tours up into this point all of our marketing has really been done out of our boardroom off of renderings and off.
The presentation deck, and really not with site visits and what we saw at one Madison One Vanderbilt Avenue is that once we can do site tours.
The places its really exploded because people get so excited about the quality of the development with the views are light with the volume of space really feels like and it takes on a whole different character than in pace.
<unk> leasing program. So we talked about steel in November of this year.
I think we'll be doing site tours.
Towards the end of the year or early next year.
So that's really where the thrust of our focus will be.
Got it I appreciate that and then maybe Marc or Andrew when Youre thinking of sources and uses going forward, obviously, you're one of the big priorities has been repaying the unsecured bonds you got that resolved.
The new projects, obviously add more capital requirements, whether it's 450 park or 245 park or five times square, how do you think about allocating capital to those while at the same point in time kind of reducing your floating rate debt.
It gets prioritized or kind of where do you hit a challenged and that capital allocation if at all.
So I think the primary source of capital will be asset sales.
And.
In terms of specifics five times square will be zero incremental capital that that deal is sort of fully funded at capitalization with new.
Cash equity.
Come from our side of the Ledger came from the other partners in the deal.
So theres zero incremental capital needs there and then as we said $2 45 Park.
We have this active search for a joint venture partner ongoing and we would expect the proceeds of that joint venture sale to cover most if not all of the capital required by that building.
Greetings.
Thanks, everyone.
Well remember for our next question.
Our next question comes from Michael Lewis with <unk>. Your line is open.
Great. Thank you.
I have a question about the term loan and the swaps and I'm wondering if there was any change in the DN now or the composition of the banks that that kind of came to the table to help you get that done because we've heard that some large lenders have pulled back on commercial real estate lending. So I'm wondering not just about the pricing of that but kind of the <unk>.
<unk> ability of capital market.
Yes, Mike its Matt No question, it's tough out there.
A lot of banks are are pulling back in various areas. So to hit the mark with a facility like this is not without its challenges.
But we went to very close relationship institutions, who who stepped into it.
They are all participants in our existing credit facility. Some are participants in the one Madison financing and given that this facility is pursuant to funds coming from one Madison.
They have a great deal of certainty around the success of that project and therefore, the funds coming in.
But yes, there are plenty of plenty of nos in this environment.
Because capital allocation or restrictions.
We are keeping a lot of banks and costs.
Okay. Thanks.
Second question kind of piecing together I guess some of the other questions that were already asked.
As you look at JV partners, and maybe selling some assets.
What's kind of the depth of that market right. So so with interest rates up leveraged buyers under pressure.
Is there capital out there to get those deals done in the pricing taken a significant hit.
Feel pretty good about.
What youll be able to do that.
Well I mean, I think we feel good relative to the kind of product, we're bringing to the JV market. It's still sort of irreplaceable class a office Trophy trophy like assets and for that I'd say, there's almost always demand in every market.
That demand often shifts from.
Uh huh.
Investor to investor or from country of origin to country of origin, but.
I think that for the balance of 'twenty, two youre not going to see a lot of people are going to have more limited capacity, but in 'twenty. Three there. We believe we'll be certainly new investment mandates.
To put money to work.
But only in best markets Best properties, both sponsorship I mean, it's like it's like almost anything in that in a dislocated market or a challenged market.
Because of what Matt just talked about on the debt front.
Only only the best deals are going to get done in great markets with with very competent sponsorship so in that regard.
We go into it very confidently that we've got the right product the right returns for this market the right valuation levels.
Proof will be in the execution in the case of $2 45 to write in place financing, yes, well that said you know it's a great point Andrew makes it it's a fully finance deal so.
That certainly helps but with or without it in most new deals has taken off the table and 245 products.
Okay.
That makes sense. Thank you.
One of them.
Our next question comes from.
Daniel <unk> with Scotia Bank your line is open.
Oh, Hi, Nicky will go here. So just a question on 245 Park.
How are you guys you talked about some of the capital plan, but how should we think about.
Yeah, how you underwrote a stabilized yield on that building post renovation.
Well stabilize what kind of cash on cost Unlevered IRR Levered IRR.
Yeah.
Yes.
Great. Thanks, Sean cost stabilized cash on cost would have to.
Yes.
I think we've got.
Let me sort of go back to front we've got.
Levered returns on our basis that I think would exceed 50% based on where we can execute for a great a trophy.
Office property.
Right across from JP Morgans, New World headquarters, how does that transfer sell green, it's low sixes cash on cost.
Okay, great. Thanks, and I guess, just going back to the.
In that case, you do have the in place debt on the building, which is attractive low 4% yes.
If you were to think about that building or another building in New York trading right now you have to put new acquisition debt on it.
The all in rate on that even if you can get it is going to be somewhat over 6%, let's say how do we get in your mind effecting values in the market.
Starting in cap rates for New York and that type of situations you have to finance at over 6%.
Starting cap rates have to be closer to 7% or higher.
No change so I mean, there's no different than you have inverted interest rates youre going to have cap rates below.
Financing rates, because new York.
Class a trove multifamily is not going to be a office is not going to be a seven cap.
Youre looking at a cap rate is a perpetual in place expected rate of return over over a spread to treasuries minus growth rate.
Based on long term treasury.
That has no.
Youre talking about discount rate has no bearing to our capital New York City cap rates today.
I still think are solidly for the best assets in the fours.
Maybe for a more mid market product in the fives I haven't heard anything about <unk>. I mean is that do you have a transaction in mind that traded in Midtown at north of seven.
So I think part of the problem is that there arent that many transactions, but everything we're hearing is that negative leverages a problem, particularly for office you underwrite.
Our leverage is a fact of New York City, that's been doing this for 30 something years, whose businesses.
Negative leverage.
As is often the case in New York city's called often if you people building with vacancy there is going to be negative level or even.
People will generally be making long term $10 50 year investments.
I mean, you'd love to be in a positive strong positive leverage going I'm, not arguing that but it is not unusual in new York by negative leverage and work your way up on cash on cost to get to.
Even a positive leverage to create.
It depends on the market, but high single digit IRR. So.
No I wouldn't say it's not.
Not for trophy.
It is $400 million fortune 10 million square feet of assets in New York.
Not all the same I'm just talking as you said a building like a $2 45, so I'm responding to that are seven plus cap rate would be I think.
Yes.
Empty set.
Okay, even if even if someone could put debt on that building today would have to replace that.
Well over 6%, even if you can get.
Can see I don't know where that that would be that's your that's your debt I don't know where the spreads and spreads in the market I hear you, but I think we just closed a corporate facility was.
140 over now.
Now in your mind, maybe it's like seven plus but.
No no I understand.
Im saying in the Mark to get property, Nick Nick Nick. Please you asked me a question I'm going to give you my opinion. If you don't agree I just wanted to I just want to make sure I understand. So you said you still think cap rates in new Yorker for stabilized assets not turnaround assets somewhere noteworthy very specific but then I'm going to move on to the next question I think Steve.
Stabilized cap rates when I say.
Cap rates for assets like $2 45.
Has improved with us at the helm.
In this market across from J P. Morgan is $5 billion to $6 billion investment few blocks up the road from one Vanderbilt down the street from 425 Park.
Carries a sub five cap rate.
Does not carry a seven five cap rate that's it no other words on that.
My feeling on it and if you disagree disagree which is.
What makes a market I have no problem with I'm, just saying that's my opinion.
Okay. Thank you.
Number four our next question.
Yes.
Our next question comes from Blaine Heck with Wells Fargo. Your line is open.
Thanks, Good afternoon.
Mark you talked a little bit about this in your prepared remarks, but now that we've moved past labor day I'm curious what you guys are seeing in terms of tenant space usage or utilization.
Days in the office per week, and maybe even times of day that are most active at the office.
Yes.
I'd say that like many others are experiencing right now.
Theres two work vis vis the Tuesday, Wednesday, Thursday, workweek, where I'd say, we're almost back to close to pre pandemic levels. We've had is how it feels like the numbers are in excess of 60%.
Pre pandemic, our full occupancy might have been 70% or 70, some odd percent, we don't have exact numbers on <unk>.
Certain buildings are higher than that.
Where the tenant base.
It's more back to work then we have certain tenants that may be more remote so it fluctuates a bit but I'm, giving you the averages and then Mondays and Fridays, particularly Fridays.
You might see physical occupancy at 30%.
Now all those numbers are increasing and.
And we see that in the numbers we're getting.
But.
This friday's, where often late in New York City. So we're not measuring against the 100% on Fridays in New York City, I mean people are out PTO travelling doing business et cetera.
So it has the feel for $3 three to almost four days a week like a pre pandemic marketing I come off the train the other day I mean that train is full of that platform is for you can't.
Time, it took to get out the doors.
The main theater Grand Central was the <unk>.
Measured in minutes, many minutes not seconds, because that platform was packed and.
It has a very good feel right now in my opinion.
I don't know anybody.
I mean just statistically.
Metro North ridership.
As.
If I remember correctly is like 9% greater than it was.
Pre pandemic.
Car traffic is five five or 6% greater than it was pre pandemic, we're still less than.
Covid numbers as well on a railroad is still.
At a lower number but to Mark's earlier point the trend line is such that.
Ridership and people coming back into the city and people occupying the offices is on the upward slope and we're seeing that consistently improve week over week.
Great. Thanks, guys. That's helpful. Second question, it seems as though the highest quality and highest price points, where certainly the most active during the pandemic and I assume that can't last forever. So I'm wondering how the pace of leasing activity has trended in some of your lower rent buildings are you guys seeing much of a pickup in <unk>.
Activity, there relative to kind of what you saw during the pandemic.
We're seeing as I said earlier, we're seeing more.
Tours and proposals and lease signings in our in our sort of mid price point buildings, which I think.
Are largely dominated by the smaller to midsized tenants.
That's not yet translated into enough signed leases to really move the needle, but just off of a tour activity and expressions of interest it's improved its still a struggle.
Because those small to medium size guys are late to the game.
Great. Thanks, Steve.
One moment for our next question.
Our next question comes from Tayo Okusanya with credit Suisse. Your line is open.
Hi, yes.
Good afternoon, two quick ones for me.
First of all in regards to the swaps.
Earlier comments about again, just having more hedging going forward could you just talk to how much you kind of ultimately expect to be hedged by given you.
We have about $3 billion.
I'll kind of variable deck between consolidated and unconsolidated JV.
Yes, so let's talk the numbers first yeah, we had.
About $2 4 billion.
Unhedged floating on 12, just short of $12 billion of debt our target floating rate ratio is kind of 15% to 20%. So we're already at or below that number, but we're going to target all of our existing floating rate debt.
Much of it as we possibly can because we don't unilaterally control some of it to hedge.
So we just beyond the end of the quarter, we did another $200 million swap of floating to fixed yesterday.
Zoned in on another almost $400 million of property level of floating rate debt and then there will be debt paydown.
You want to look at the credit facility and our revolving credit facility.
And our goal is to always have that near zero, so with proceeds from asset sales or other activity, we'll try and get that down to zero. That's also floating rate debt. So it's a combination of caps swaps and debt repayment as Mark said in his opening comments and we are even though we are at or below our target we're going for more because we want to.
Protect earnings and cash flow.
Got you. Okay. That's helpful. And then 717 fifth Avenue and 655th Avenue with the.
The debt maturities, there and the ongoing kind of conversations with the lenders I mean, what's kind of the ultimate kind of goal there with those two assets.
We're not managing.
Partner at 717, we have very small passive interest there. So I think the hope is to get an extension from the existing lender group.
And I would say $15 52 is much the same.
<unk> square retail has obviously been heavily impacted by the pandemic and we expect.
The lender to be appreciative of those impacts and you mentioned 650, 655th we did a short term extension.
Right. After the six month extension that expires in April of next year right.
I think longer term the idea.
Part of the exercise part of the exercise with extensions is evaluating the financing market at the time. So we felt with the lender the best thing to do at this point was extended six months ended six months, we'll consider it again and maybe there are another six months another 12 months.
Until we get to more capital conditions are right and if the markets are cooperative, we'll do something longer term.
Gotcha. Thank you.
For our next question.
Our next question comes from Anthony Powell with Barclays. Your line is open.
Hi, good afternoon.
Mark I think you mentioned that the profit that office to residential conversion.
Have you talked to any contracts with people like the mayor and the Governor are there plans in place to maybe just systematically reduced 70 optics I guess availability out there up stock in New York. These conversions because that may be announced in the next few quarters I'm curious because I think this issue of maybe obsolescent this time.
Comes up a lot.
So.
Plans are underway to kind of get that started that would be super helpful. So what's your view on that prospect for next for the next few quarters.
Okay.
So just so I understand the question. The question is what do I think is the real timeline at our prospect of getting something accomplished that state and city level set yes.
Just a broad office.
Residential or office conversion.
Program.
Okay.
I think the best this is one of the topics that we're going to be featuring in about six weeks at the Investor Conference stepping through.
What it takes.
Get a building from.
From office to <unk> from a physical standpoint from a zoning standpoint.
From building code standpoint.
<unk>.
It's very doable, we've done it many have done it.
There are ways to make it.
Easier better more efficient too.
Churn right now, which are very small pipeline of.
Office to resi.
To a much larger pipeline of office towards the obviously one of those big elements.
Would be a tax break along the lines of what.
For 'twenty one G was downtown went downtown.
<unk> substantial.
<unk> after 911 and that in and of itself is being looked at but its being looked at in coordination with the kind of changes that I mentioned, some of which will take time to implement so I think that.
Our program.
Can come about in 2023.
In terms of directional but in terms of actually seeing buildings converted I would guess, that's 24 and beyond but I do think that.
You could see.
Upwards of 10 million square feet.
Of <unk>.
Office.
Sort of taken out of the equation.
For conversion pursuant to a new program, if the economics and the zoning are there to make it happen so.
It's a much longer discussion to detailed discussion.
Anthony if you don't mind I wanted to defer until our Investor conference when we're going to be speaking to that directly.
Alright, great. Thank you.
One moment for our next question.
Our next question comes from Ronald <unk> with Morgan Stanley . Your line is open.
Hey, Great two quick ones from me just when Youre thinking about the 23.
Lease role at this point any commentary on how much is rolled how much is left to do.
What that shaking out.
Well, we're as you can imagine we've we've been.
For the better part of this year working on the 23 explorations already so.
We have very good clarity every single tenant as to who is likely to stay or not we're actually going through our budgets building our budgets for next year. So we have a granular tenant by tenant assumption for.
Everybody, that's rolling and each piece of vacancy that we have today.
And I don't think Theres any surprises.
As we sit here today.
As to where we thought.
Which tenants, we're going to stay or go.
<unk>.
Compared to where we saw those kind of how we saw those tenants probably 12 months ago.
And any chance it any way to quantify that is it 20%, 10% any sort of high level numbers are.
I don't have it at my fingertips, so it'd be pure speculation and that's something that I think we will have.
When we're done with our budgets over the next week or two we will have a very good ability to two.
To communicate that perhaps that's something we'll talk about at Investor Conference as well sure. Okay. Thanks.
So my second question was just on asset sales.
Thank you talked about.
Historically about sort of potentially JV, one vanderbilt, but maybe if you could talk about how that's going and are there other assets beyond that that that you're contemplating is wow.
And the portfolio.
Well.
We are marketing.
Some assets for sale, we have other assets, we're evaluating for sale and the one Matt one Vanderbilt JV process is still sort of in.
In discussions so.
We're active on the disposition front.
Going to use those proceeds to retire debt and to fund.
Some of the capital needs of some.
Some of the projects.
And yes, there is still an active market out there as we showed with memorial Sloan Kettering and Theres a bunch of other trades that have happened in the market.
I think on balance we feel pretty good in our ability to execute which is why we are basing our plan on redeployment of those proceeds if if we feel good about those executions then we have a different plan but.
Yes.
Can harden trying to convert.
We got a lot done this year I referenced <unk>.
<unk> 24 sale transactions either entire partial interest sale.
Several of which were this year and more of which will be.
In the next few quarters.
Thank you.
And I'm not showing any further questions at this time I'd like to turn the call back to management for any closing remarks.
No. That's it thanks rivers left on the phone I appreciate you hanging in there for the duration and.
We will see I hope, many or most or all of you on December 7th fifth Im sorry about that.
On December 5th Monday see then.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
Okay.
The conference will begin shortly to raise Johan during Q&A, you can dial star one one.
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Okay.
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