Earnings Call: Q3 2021

Oct 21, 2021

Thank you everybody for joining us and welcome to SL Green Realty Corp. 3rd Quarter 2021 Earnings Results Conference Call. This conference call 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 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 their assumptions and beliefs as of today. Additional information regarding the risks, uncertainties and other factors that could cause such differences Appear in the Risk Factors and MD and A section of the company's latest Form 10 ks and other subsequent reports filed by the company with the Securities and Exchange Commission. Also during today's call, the company may discuss non GAAP financial measures as defined by Regulation G under the Securities Act. The GAAP financial measure most directly comparable to each non GAAP financial measure discussed and the reconciliation of the differences between each non GAAP financial measure The comparable GAAP financial measure can be found on both the company's website at www.slgreen.com By selecting the press release regarding the company's Q3 2021 earnings and in our supplemental information filed with our current report on Form 8 ks relating to our Q3 2021 earnings. Before turning the call over to Mark Holliday, Chairman and Chief Executive Officer of SL Green Realty Corp, I ask that those of you participating in the Q and A portion of the call to please limit your questions to 2 per person. Thank you. I will now turn the call over to Mark Holliday. Please go ahead, Mark. Okay. Thank you and good afternoon. Thank you all for joining us today. We have just come from the historic opening of what I consider New York's most thrilling and unique destination, Summit 1 Vanderbilt opened to the public earlier today. At 11 am, we cut the ribbon in the Transcendence Room High above 1 Vanderbilt with the most incredible and amplified views of New York City. The room is aptly named Because everything we've done with this building has been about transcending limits and pushing boundaries. We're doing it again today, but this time We're taking it to a much higher level literally. At the ribbon cutting ceremony, I spoke about how One Vanderbilt is representative of what True 21st Century office tower can be. It redefines what it means to integrate excellence in design, efficiency, sustainability, Amenity, health, wellness and commutability. By putting it all together, we've established a new category of building, A new icon on the skyline and a new model for the workplace. As a result, we are now more than 90% leased despite COVID And despite every dire prediction of the city's demise. Several months after we opened this building, we introduced Danielle Balut's La Pavillon to the midtown restaurant scene And that too was an important milestone for New York, marking the reopening of indoor dining. Every available table has been booked Every single night since it opens in May and there were a lot of questions when we opened that restaurant about whether the New York had enough of a population here in Midtown to support this restaurant and the restaurant has 100 and 100 on waiting list every evening. So now today at 1 pm, we welcomed our 1st paid visitors to see and experience This new and exciting cultural destination we call Summit. This time we've done more than push the boundary. We've completely shattered it. We spent years in design taking the best elements of observation decks, cultural institutions, experiential art and immersive technology And combined it all into Summit. The result is an experience that has the potential to not only become one of the most sought after destinations in New York City, But a true global phenomenon. The energy in New York has been palpable this past month and now with international borders reopening, Hotels preparing to welcome back millions of guests, live audiences returning to sporting venues and Broadway reopening, New York is back. On certain days of the week, we are reaching nearly 40% physical occupancy in our portfolio, a substantial increase that's been building up over the past few weeks. As a sense of normalcy returns to the city, ambitious projects like 1 Vanderbilt and Shore that New York remains a top global destination. People from around the world come here to shop, to be entertained, to enjoy great food, to see great architecture and visit world class museums. Summit now becomes an important addition to that lineup. The primary drivers of this market, finance, Technology, business services, media and healthcare are all doing unbelievably well and beginning to make space commitments that Evidence net demand in our market that will stabilize the occupancy rate and hopefully turn into Meaningful positive absorption towards the end of this year in 2022. With over 450,000 square feet leased in the 3rd Quarter in our portfolio and nearly 1,400,000 square feet leased in SL Green Portfolio to date, We are tracking well ahead of our leasing goals for the year and we're doing that at rental levels that are ahead of expectations and almost flat expiring escalated rents, we carried this momentum into the 4th quarter with the announcement of the Seismic Chelsea Piers lease, it's a 56,000 square foot lease To one of the best operators of fitness, wellness and health in New York City, It's only their 2nd Manhattan location. We've been negotiating with Chelsea for quite a while and they've Selected One Madison to be their Eastside home, where they'll be making a substantial investment To make a fitness destination that I think is going to be second to none. It's going to be awesome. And that really bodes well for One Madison, which otherwise Is already about 6 to 7 weeks ahead of schedule on construction and significantly under budget Even beyond the numbers that we discussed back in December of last year, The buyouts, which now stand at close to 92% of the total project have resulted in over $12,000,000 of additional contingency savings And that's above and beyond the savings we had already factored into that deal Through smart bidding, smart project management and just given the overall state of The construction market right now, we're experiencing savings while the city and I think the nation at large is experiencing Cost increase as a result of supply chain issues that are driving a price. So We're managing that to the best we can, staying well within our budget and One Madison with That new lease now done and more conversations underway. We feel very, very good about that development. During the quarter, we also completed a couple of dispositions previously announced, but we closed them not most significantly The consummation of the sale of about a 50% interest to an institutional Overseas institutional investor in the news building and we have more transactions teed up that we think we'll be able to complete in the Q4. So we continue to have great success in monetizing our assets, our gains and we see that continuing into Q4. That of course enabled us to repurchase about an additional $80,000,000 of stock in the 4th quarter, Which brings us close, but not completely rounded out I'm sorry, in the Q3, my mistake, dollars 80,000,000 of stock in the 3rd quarter and that Brings us close, but not completely rounded out to our repurchase objectives for the year. So as we sit here End of October with a rigorous 2 month spread to the finish line to get done all we need to do To close out this year and then embark on what we feel is going to be a solid 2022 for this company. And more importantly, this city, we're excited. I think it's great to have the call on this day, that is really a historic event for the company To open this wonderful experience and I hope everybody on this call will see it and see it often, It's truly, it's fun, it's exhilarating, it's thrilling and it's everything we set out for it to be. With that, I think we'll open up to questions. Thank you. Our first question comes from the line of Caitlin Burrows with Goldman Sachs. Your line is now open. Hi, good afternoon, everyone. I was wondering if you could just maybe talk about leasing volumes. It looked like they were pretty strong In the Q3, could you give more detail on what types of your properties saw the most interest and ultimately signings versus which has less and I guess Also, have you seen this activity continue into 4Q? Well, we signed over 455,000 square feet, which As we said earlier, we've now exceeded what was our full year projection Our pipeline has grown to over 856,000 square feet, the largest that it's been At any point during 2021. And as I think we've seen earlier in the year, A lot of the leasing is being driven by either Financial Service Businesses, in particular, And who leased 40% of it was 40% of our current pipeline and TAMI, which is about 28% of our current pipeline. A lot of the activity seems to be focused on the better quality buildings. Thankfully in our portfolio, The majority of our buildings have enjoyed significant capital investment over the years as we continue to Develop them as healthy workplace environments and that's paying off for us And helping us increase our leasing velocity. We've got a couple of projects that are in development where amenities And infrastructure upgrades are part of that menu and we're seeing a lot of good tour activity, strong proposals And feel very good about the overall velocity as we wrap up this year. Great. And then maybe just following up on that kind of investment side. I know you guys are already very active from a Redevelopment perspective, but how do you think about continuing that reinvestment or desire to refresh Older vintage buildings, that haven't been touched recently. So maybe like 1185 Avenue of the Americas, 1350 Avenue America's 110 Green Street properties like those. Well, I think 1185, we did recently Complete a renovation there, but we have big amenity programs going in at 85 Third Avenue, 753rd Avenue And obviously, One Madison Development. So where we see that we can be accretive in terms of net effective rents, We'll make the investment in the amenities to attract that type of tenant. But there's also a lot of demand for Affordable product, which is still a good portion of our portfolio and we don't we like having space available to address that part of the market as well. Okay, thanks. Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Hey, good afternoon. Good afternoon down there. Congrats on the opening So of the Summit, two questions here. First, just big picture, I think you guys took back the garage at 15:15, But away from there, do you see parking as an area of focus for investment? Or As you look at the landscape wherever parking does become available, it's already priced accordingly such that there's not as much value as there would have been Maybe 6 or 7 plus months ago. Yes, Alex, it's Matt. So we did actually take back Several garages during COVID, several operators, 1 in particular, did not Maintain the rent payments not only in our portfolio, but across the city and more broadly. We elected to take It's really a total of like 8 or 9 garages back, and we've started operating them really over the last 3 to 6 months or so, they'll be ramping up. So this year, not a huge impact, will be more material when we start getting Into 2022, as to additional investment, I don't know that it's hit our radar as a Deep investment pool of opportunity, but within our portfolio, we have found that given the current environment, We can make good money off of Garage. If the opportunity presents itself within our existing portfolio to take another one back, I'm sure we'd be happy to. Okay. And then, Matt, while you're on the phone, I'll hit you for another I don't want anywhere else. That's fine. No, I know. I know. So, 2 questions the 2 parter is on WeWork and the planned One Vanderbilt Steak sale. So On WeWork, is that have the lease term that you booked, is that the full amount or is there any more that you're going to get from them? And then as far as the stake sale, You guys have talked about doing this. I don't know if now this gets pushed into next year. I know you have the December Investor Day, you'll give The guidance, but as we start to fine tune our numbers ahead of the Investor Day for 2022, just trying to think what Sort of one time items like a lease term or like a stake sale, we should be thinking about that may move from this year to next year? Sure. So specific to the WeWork lease termination we announced, that was incremental to our plan. We did not have that baked in. That was A deal that played out over several months, a huge win for us. That Is the bulk of the termination payment we received, but not all. There is a portion that will come in, it's supposed to come in early 2022. And the total of those 2 would be $100 on the dollar of the, guarantee and letter of credit that we work head on the space. So Again, a great accomplishment to get that out of that entity. I think in the face of that, I got several questions as to why guidance wasn't Increased by more. If you recall back to December last year when we gave our full year guidance, we had layered in Potential JV interest sales, further JV interest sales in One Vanderbilt and One Madison. We are working both of those. But with regard to One Vanderbilt because it's done so well and now we have the Summit open and the Summit just opening today ahead of it has Exceeding our expectations, we may elect to defer that interest sale to 2022 or not do it at all. And that sale had with it recognition of incremental income at closing of $9,000,000 to $10,000,000 So that was baked in our original guidance. If we don't do that, which it seems unlikely we will do this year, that offsets The incremental income from the WeWork termination that we recognized in the Q3 and gets you right back to where we increased our guidance range By $0.05 at the midpoint. Okay, great. Thank you. Our next question comes from the line of Michael Lewis with Truist Securities. Your line is now open. Thank you. So that was good color On the change in guidance, I had a guidance related question as well. When I look at what the full year range implies for 4Q, looks like about $1.35 to $1.55 And my question is really what with 2 months left this year, What's kind of driving that range? Is it kind of just giving you some flexibility on either side? Or is there a swing factor in there that could go one way or the other on us? So important when we reset the range, we upped the bottom end of the range by $0.15 So clearly, there's not a lot of downside in our numbers, And there is room to the upside. As you look at run rate Q3 into Q4, a couple of things. One, we have the full Quarter effect of some sales that we executed in Q3, not the least of which is half of 220s 42nd Street, which is a material contributor. We also have a significantly Lower other income amount in Q4. We had the WeWork termination in Q3. We also had some other fee income. Now we seem to find Fee income every quarter, but we don't project a lot of it. So that goes down. We I talked about the Taking out the sale of an interest in 1 Vanderbilt, potentially pushing that to 2022 if we do it at all. And then we've layered into Some conservatism as we always do. That's why we keep a range. So could we end up higher than our 655 midpoint? Sure. But that's not what we guide towards. We guide towards our expected levels in Q4 and that's what we set the range to. Okay, got it. And then my second question and I've asked this one before, but as we get closer to that 6 25 Madison Ground lease reset. Is there any color you could provide on that? Or is that something you think, when you lay out the 2022 guidance in December that you'll Kind of address some expectations for what that could be? So there's nothing at this point to report that's new on 6/25. There is a very prescribed process or part of an appraisal process. The appraiser We'll set the rent, but the appraiser hasn't even been determined yet. That is not going to happen until December at the earliest and there is no timeline as to when The rent will actually be reset. So until such time as the process moves along, we don't really have anything new to add to the process. Sure. That's good to understand anyway. Thank you. Our next question comes from the line of Manny Korchman with Citi. Your line is open. Hey, it's Michael Bilerman with Nanny. How are you? Mark, my kids are really excited to go up to the summit. Looks really awesome. I was wondering if you can just sort of step back just on the office market broadly. You have a lot of companies that have had fits and starts trying to bring their employees back. I think that there's A lot of examples of where it's worked and a lot of examples where it hasn't. It definitely feels as though the employees May not be as excited as the CEOs or the companies may want them to be. You've already seen some companies back off From in office work, how do you sort of see this sort of playing out over the next sort of 24 months because It doesn't feel like a switch is just automatically going to go on and everyone's going to rush back. And it would seem that when companies do put those Proclamation is in, you could see employees just leave their companies and go to companies where they can get a more flexible work environment. How do you sort of and this is not akin to New York, right? We're seeing this globally. This really was a trend that No one could have anticipated that we'd all go remote for now with the better part of almost 2 years. So how do you And by the way, while we may not have been as productive, things still got done. So how do you sort of put all this together and where do you sort of see Things landing overall for the office market. We talked about on the last call, Slowly, steadily, the numbers are building and people are coming back to the office. I think, like I said, we're averaging in excess of 30% and Peak days are mid I think the average is close to 35, peak days are 40. Some companies may experiment with a day or 2 a week of Flex, but we don't see that impacting their footprint. I mean, I can't project It's going to do in terms of, are they going to be 5 days a week or build some flex into the system. What we have pretty good visibility into is that these same companies, Regardless of whatever sort of flexible work model they're going to are still, utilizing and mapping and consuming roughly the same amount of In some cases more and we don't see that many downsizing. So, if somebody works 4 days a week and they're out of the office one day a week, that Person still needs a desk or an office or a workstation. It's not like those 4 days they just stand there. And we don't see a lot of Sharing, hotelling, hot desking, if anything, I think COVID has given rise to a little bit more Personal space and larger space and partitioning and I'd say the era of Sort of hot desking is we don't see that quite as much and we see a lot more Non office space being built into these tenant floor plans that we're building. So we will lease this year well in excess of 1,500,000 square feet. These are tenants that are making 10 year plus commitments With the knowledge of whatever flexible work program they're going to, with an expectation they're going to need and utilize that space or else these are Sophisticated tenants, they're not going to make these commitments if they don't think they're going to utilize the space. So our role is not to sort of Troy, get into the details of how they're going to work their flexible office. We put the space out there and these tenants The management leadership of these tenants, I would almost say to a person says we got to get back in the office. That's the good news is there's a recognition, Which that the companies are more efficient, competitive And better, if their people are together. I could there are few and far between The heads of our tenants who don't immediately come out and say that, they're just going to evaluate whether there's a model that works for them Competitively that allows them to build in some flexibility, but I don't see that in any way materially altering space demand or shrinkage in footprint. I just if we see it, we're going to relay that to you guys. I mean, it's the numbers sort of speak for themselves. We're still well occupied. Amenitized buildings are attracting tenants. And so we're beefing up our amenity program, as Andrew said. And we're leasing a lot of space in the pipeline. I don't know if I mentioned the pipeline. So 830,000 square feet of pipeline. So these are this is pipeline for tenants that Have studied and studied where they're going to be with their space plans in the future and that's where that demand is coming from. So there was flexible Workspace before COVID, there's going to be flexible workspace after COVID. The business activity in this city right now Is as hot as we've ever seen. Financial firm and financial profits continue to break Record after record. The first half of the year Wall Street profits was over $30,000,000,000 and we're on track for over $50,000,000,000 again this year, Kind of matching last year and last year was the 2nd best year ever recorded. Technology firms are growing. The startups are growing. Business services are growing. So I think that's the tension, right? The economy is growing. Everything is doing well. But then you get headlines PWC going all remote, Amazon saying, you know what, PWC are not based on headlines. PWC is not the one. Yes. And one more, It's not the headlines that result. What ends up in the results column are signed leases. And in that regard, we're sitting at $1,400,000 now with an 800,000 square foot pipeline. So I'm not going to go tell all those tenants, tell you're not supposed to lease that space. These tenants are coming to us And they want to lease that space and we're going to lease it to them. Chelsea, everybody said to your point, everybody said, oh, fitness centers Are going to have a really hard time. People are going to want to now sit at home in their basements, look at a wall, project an image, work out by themselves. Guess what? Chelsea just committed to a 55,000 square foot lease for a 20 year term And we worked with them to come up with a design plan where they're going to be making a big investment in that space. So whatever the headlines say, Chelsea peers thinks they're going to put people in 55,000 feet. And you know what, I think they're right. Yes. No, I like listen, I love New York. I live in New York and I love every aspect of the interactions I get when in all the culture activities And when I'm in the office with my team. So that's my personal view, right, and what I feel. The Question though is the office market in general and obviously, I feel great and can do a lot of things for their own company, but the office market at large Just feels that the employees, every survey that you read, the employees themselves have a lot of hesitations, not from safety, They feel that they can do their job effectively. And I just don't know how all that will play out ultimately to you. And my view is not that if that was the case before COVID, If you polled employees before COVID, you don't think there were employees who would have said, I think I could be effective at home? I mean, come on. I know, I know. But now we went through this test case guide, like just put the off everyone around the world remote like it was an experiment and things continued. Now I agree with your point that maybe the Firms who do it are going to suffer. Firms who do it, I believe, will competitively suffer and it'll work itself out and businesses are going to operate in the way that Produce is the best bottom line. That's our opinion. If people don't believe a difference of opinion from you, Michael. Yes. It's just difference of opinion. Yes. No, it's not my opinion. It was more so I'm asking the question just As we look at all of this and everything that's happening, I'm just trying to get your sense of things. I'm not trying to say it's my opinion. I enjoy being in the arts, okay? The dynamic in the city right now, I feel is very strong because businesses are doing well, People are hiring. It's hard to hire. There's a like a land grab for Human resources and an educated workforce, we have a pipeline of 826,000 feet. We're filling our buildings. I can't speak to others. And we can operate well in this environment. And I the business leaders themselves say, we want to bring our people back. I believe at the end of the day that will be the last word on the topic. Yes. I appreciate the color Mark and look forward to you at Investor Day. Thank you. Our next question comes from the line of John Kim with BMO Capital Markets. Your line is open. Thank you. I was wondering if your views or expectations at the summit has changed at all, either visitors or revenue Or now more recently the valuation of the Summit due to what's happening at the Edge? Well, I mean Summit is doing it just opened, so I'll have to see what our results are from the first hour. But I can tell you that in terms of advanced ticket sales, we are at or ahead of our projections. The people online today, it was Like pandemonium down there. People were excited. They were the first ones in the place. I've got pictures with hundreds of people on every floor having a fantastic Well, the feedback from our pre soft open over the past couple of weeks, really month has been tremendous. Social media has been great. I have big, big expectations that Summit is going to be a hit and I don't think that's driven by the Edge or Any other individual particular venue, I think it's just driven by what we've created, which really is differentiated from I think Anything in the city, anything in the world for that matter. And I think as a company, this For shareholders and this company is going to benefit tremendously from I think an ambitious project Where I think we hit the mark. But what are your views on the valuation that KKR put on the Edge and I don't have any views on the valuation. We just opened it today. Ask me any I mean, generally, I would evaluate it After I see the revenue results, I have my projections I think we're going to vastly exceed those projections. So I wouldn't value it based on my projections, which are what we went through with you guys in December. We haven't revised those projections. They're still basically the same. With that said, I think we're going to blow them away. And after a year of operating history and this is a brand new I don't look at valuation as kind of the day the door is open. I think it's value we're going to build over the next 2 to 3 years as we stabilize this asset. And when we do, we'll look at What stabilized value looks like, but whatever valuation or projections I had 9 months ago, I think we're going to do far better. Okay. And then, my second question is On the UiPath lease at 1 Vanderbilt, I guess based on public disclosure, it came in at a high initial rent, But the rent bumps are pretty modest afterwards, I think an average a little bit over 1%. Is that No comment in signing leases today? $220,000,000 When you say is it common, it's not Common to sign leases in excess of 200 a foot. The comp set would be 0. So I don't know how common it would be to If you went out and said what is the bump average on a how big was the UiPath lease rent? I mean, how big are the rents? I don't know if you want to go to UiPath. Yes, we should. I wouldn't talk about UiPath. They may have originally. But UiPath was on our underwriting. It's a tremendous lease. It's a great validation of Midtown as a destination for technology tenants, Yes, which the narrative is technology tenants don't locate here and it's false. And we're very pleased with the lease. Yes, anyone who gave you the impression That the UiPath or any of the leases we're doing here are kind of underwhelming economics has got their kind of screwless. Okay. Thank you. Our next question comes from the line of Anthony Powell with Barclays. Your line is open. Hi, good afternoon. Just a Question on the leasing activity that's been pretty strong this year. When you look at the tenants that have been signing leases, have you noticed any tenants that have a permanent Flexible work arrangement signing the same amount of floor space or do you see those tenants, I guess redesigning or maybe Lowering the amount that they would use on a per employee basis? Well, I'm not me just clarify your question. Are you asking us whether or not we see tenants leasing space that includes some component of Flex office, where they go to a WeWork type tenant or you're simply saying from a design perspective, are they using their space differently to be more flexible? I'm just trying to ask if tenants who you know to be kind of going to a 3 or 4 day in the office kind of arrangement. And are they Go ahead. I will say broadly speaking, Let me set it up this way. We have the greatest number of large Deals, large term sheets being exchanged, leases out that I've ever seen at one point in time, being large, being 100,000 square foot or larger type transactions In our pipeline that I've ever seen in my entire career. Having said that, none of these tenants Really know where their requirement is going to be a year or 5 years from now, not necessarily driven simply by A work from home component, they don't know their headcounts. They have confidence that their businesses are going to remain strong, but they're changing how they use the space. They may or may not have some work from home component. And even having said that, we've seen tenants that thought they were going to have a significant work from home component That have reversed that decision have come back to us in fact and said, hey, where I was going to give up some space, I no longer want to give up that space Jorge, I actually need to lease more space. So, there's a lot of I think there's a lot of uncertainty from on the tenant side as to where Their space requirements are going to go and not to suggest it's just on the downside. Tenants are baking into their leases as much Future growth as they are protecting the sellers about having flexibility on the downside. Got it. Thanks for that. And just one more on the transaction activity. Can you give more detail on 48th and Broadway, the deal there, The 3rd party contesting the rights of the fee, just more details on the strategy and the overall transaction? I mean, it's the subject of a pending litigation. So I think what we've released thus far is really all we're in a position to release. Okay. Thanks. Our next question comes from the line of Steve Sakwa with Evercore ISI. Your line is open. Thanks. Good afternoon. Mark, I was just wondering if you could talk a little bit more about program, you didn't sell a lot other than what you had put under contract earlier, but you talked about a pretty big pipeline, but Potentially delaying some JVs and then how does that sort of tie in with the buyback program moving into Q4? Well, we see delays in JVs. I think there was one in particular. Just one Vanderbilt. No, just one Vanderbilt. Taking issue with the world. So I think what Matt talked about was 1 Vanderbilt. We're not delaying it. Did you give the rationale for that? We're not delaying it per se. Again, I think there may be a misunderstanding By some, as to the what's going on here at this building and in Summit, the results are extraordinary And it's not a delay as much as what we're assessing like we've done in the past is for the benefit of the shareholders rather than sort of go forward now Without leasing up the last 9% of the building and waiting for the full year results from Summit or let's call it 1 to 1.5 years, It would just be possibly advised to go forward at this time because the results of the building are outstripping where we thought we'd be in December of last year. So it's we're just sort of electively saying, if we're going to sell an additional interest in the building, let's make sure we're doing at the optimal time. That's as it relates to OVA. I don't think there are any other JVs that we're delaying. That's right. And other than that in terms of New pipeline of sales, we have several assets that are in the market where we're negotiating contracts. And hopefully those contracts will be in the form to be executed and Announcable between now December, Investor, I can't make any guarantees on that. But we still see a pretty healthy market and we still see A couple of deals in our business plan that we hope to knock down by end of year. And Steve, as it relates to use of proceeds, I think I was asked this question 1st or second quarter, what we would do with the proceeds of incremental sales. And we said we're going to balance out Debt repayment and share repurchase. So we did share repurchase $80,000,000 worth in the 3rd quarter and we used some proceeds to manage the leverage point, which is something that People push on all the time is our leverage level. So we are balancing that out. If we are able to close the transaction at 2% before the end of the year, we'll do the same thing, look at whether it's Appropriate to buy stock with that, with those proceeds or take down leverage. We've been trying to maintain that leverage neutrality. And When we're at the leverage neutral level, we can buy with the incremental proceeds. We'll continue to do that. I think that's a way of saying as we put more assets on the contract, there's a Good chance you'll see some more buybacks. Got it. Thanks. And then I don't know if Mark, you or Andrew, maybe just comment on the DPE That you're saying, I know it wasn't there weren't a lot of paybacks and there weren't a lot of originations in the quarter, but just what does that business look like today and what are your expectations Moving forward. Well, I think there's a very, very aggressive, 1st mortgage market, Which we'll talk about in more depth at Investor Day for sure. And that does crowd out when you have Higher advance rate first mortgages is less demand for mezz dollars. So it's a competitive market out there to find New origination opportunities. And I also think you have less transaction activity than in a normal year. A lot of times originations come as a result of those transactions. So those two things combined, I think it's a slower Sort of market out there for mezz paper, but we're also taking a very conservative approach after Raising the liquidity we raised in 2,000, the intention is not just to turn around and fire it back out, And we're being very selective in terms of originations. Great, thanks. Our next question comes from the line of Jamie Feldman with Bank of America. Your line is open. Great. Thank you. I guess just sticking with the transaction market, can you just characterize where you think we stand today in terms of Risk taking on value add, I mean, it does sound like you're kind of more optimistic about where things are heading in New York City. Is there more capital looking now? How would you explain? Well, I think there's a lot of capital raised and I think The most notable trade that just closed probably was BlackRock CBS's headquarters at 31 East 52nd. That's an older, dated Sixth Avenue product that has not had any capital invested, hasn't been amenitized And has a very aggressive lease rollover schedule and that building traded for a very healthy per foot. So, traded for $8.71 a foot. I think there is a lot of capital out there. There's a lot of owners that are refinancing rather than selling because debt is so cheap and You can go out long term at very compelling rates. And I do think that there's a lot of activity sort of pending out there As capital comes off the sidelines and gets more comfortable putting money out in New York. Okay. And then thinking about inflationary pressures and your ability to offset them, can you talk about Where you think where from an operating perspective, where you are seeing the most inflationary pressures and how you can pass that through? And then I guess at the same time thinking about Your ability to raise rents or at least improve economic some leases, like where do you think you have the most leverage now to improve terms? Well, I think rents were not there yet on the commercial space. Residential market is basically fully recovered. And I think 185 Broadway, which we started leasing in August, September, will wind up Renting ahead of pro form a. Residential rents have fully sort of corrected back. Commercial rents, We don't have pricing power anywhere other than our best buildings. I think every landlord is holding the line. I don't think there Erosion in rents by any stretch, but in Class A space, the demand is there to push rents a little bit. On the expense side, Matt, you have any view on that? We're 93% leased, and the best defense Against inflation is to have a well leased portfolio where increases in operating expenses are passed through to our tenants. At 93%, we're in a good spot. I don't think we've seen ramp in No. We're going through our projections For next year, we to this point haven't seen a dramatic increase on the expense side. We'll be looking at it again before we give guidance in December. Electric rates are definitely higher. Right. It's all passed through. But the other side of that is, for the first time in a long time, we're seeing a little bit A surprise benefit on the real estate tax side, which came in, we got our bills in July and they came in below our expectation. Right. So that has certainly offset any increase on the Our next question comes from the line of Blaine Heck with Wells Fargo. Your line is open. Great, thanks. Mark, to follow-up on some of the Flex Space questions in the context of getting WeWork out of 6095, I guess, how are you thinking about FlexBase in your portfolio going forward? It seems like there's a place in the market for this type of space, but There have certainly been difficulties with the operator. So how are you thinking SL Green will offer flexible office solutions in the future, if at all? I mean, if the question is, what do we think about co working as a viable sector That has could have tenancy within the building in our portfolio. If that's the question, then I would say, We like the co working sector. We have co working tenants. We don't have a lot of exposure to that industry. Yes. Without the WeWork lease, it's got to be below 3%, maybe. Well below, yes. So 1% to 2%. 1% to 2%. So I mean it's In the scheme of the portfolio, it's kind of it has no significant Representation, but with that being said, we have some very good, co working businesses, some of whom have been around for like Long as I can remember, 10, 20 years, right? I mean, Steve or longer. So, I think the business Model is fine. There are examples of where people run that business model well. We have Emerge. And EMERGE has been alive and kicking for 20 years and we have 2 or 3 facilities any one point in time. They stay relatively leased like they are now. And they serve a role in this market. So we it's not a role we focus on, but I do believe there is an important And legitimate role that co working plays, as long as it's based on A sound fundamental model where those tenants are renting it rents more than they can sustain or They don't over improve the space, they improve it to a level that is sustainable and that's what I've seen the better ones do and that's what Emerge does. But I like the space. It's just it's not a very it's not a driver, if you will, Within the Citi at this time, it was maybe, I don't know, 5 years ago or so, 3 or 5 years ago, there was A lot more talk about that space, but I think right now it's kind of settling back to the mean. Great. That's helpful. And then congrats on the lease at One Madison. It seems like a great tenant to have in place to drive further interest in leasing there. Is there anything you guys can say about the rent Chelsea is paying and the concessions involved with that lease versus maybe what you were expecting in your pro form a? And then if you could give any update on any leasing process or progress at the office space at One Madison, that would be great. So Chelsea lease was it's right on pro form a, probably a little bit more capital, but we had not anticipated What is being built far outstrips or exceeds what we had intended for the space. So it's not a fair comparison. We were looking for a little bit more of a not only we're looking for, but we had modeled more of a traditional build out, if you will. We probably didn't have the 60 foot climbing wall and we probably didn't have We didn't have a full floor retail. Full floor retail presence That Chelsea appears wants because they want that retail presence. So the configuration is different And the product exceeds our expectation. The capital is probably a little bit higher. But in the context of that deal Where we have massive savings, The excess is at a contingency. There's 0 issue to the budget. As I mentioned earlier, the budget is still far under. And the use It is as good as we could have asked for. Number one amenity. Yes. And now it's like it's our number one amenity for us to market Off of and Chelsea appears knows that and wants us to because they want to drive business to their place and we want to use that as an example of the best of the best tenants that will be attracted to One Madison and want to make it their home or campus. This is a step in that direction. We have other negotiations going with other tenants that I think are equally consistent with that theme. And then on the office side, we have very robust tenant interest. We've got active term sheets being exchanged. We're not in a position to say whether we'll make any of those deals yet. But as we sit here today, by comparison to where we were in the life cycle of the development of One Vanderbilt, The level of large scale tenant interest at One Madison is much earlier to the game than it was at One Vanderbilt. I think that speaks a lot about what we are building, the quality of the location and the desire of these large tenants To want to be in an interesting, healthy, amenitized work environment that is hard to find on the east side of Manhattan. So we are pretty pumped about that, but we don't want to count on anything. It's a little too early to the game, but Lots and lots of very good positive term sheets being exchanged. Great, thanks. Our next question comes from the line of Ronald Kamdem with Morgan Stanley. Your line is open. Great. Two quick ones for me. Going back to, I think, the leasing question, year to date sort of leasing activity is above 2019, which is pretty impressive. I think you provided color in terms of some of the subsectors, whether it's financials or TAMI. Just curious, can we slice it a different way in terms of size, large versus medium and small? Is there any sort of notable Trends or differences between sort of now and sort of pre COVID levels? Yes. As I said earlier, I've never experienced It's a large number of large prospects in our pipeline at any one time. As we sit here today, we have a significant number of large tenants being defined as tenants above 100,000 square feet. And I think compared to prior market disruptions, it always seemed in the past, it was a small tenant sort of we are the first ones to come back into the market where there was new businesses being formed or there were layoffs and people went off on their own. In this case, it seems that the leasing recovery is being led by the large tenants who are looking past COVID And are wanting to make long term commitments and spend the capital to reinvent their workplaces To give their employees a reason to want to be in the office. And I think that's it's a unique differentiator, But the good news is there's big boys out there and they're serious about making commitments. Great. And then the second question was just thinking about One Madison, Just curious, was there any sort of lessons learned after executing One Vanderbilt, whether it's design, construction or the leasing plan And sort of getting all those moving pieces together, is there any sort of lesson learned or best practices that are applicable to One Madison as you're Sort of embarking on that project. Thanks. Yes. Well, the lessons learned definitely trends Related from one project to the next because the team is almost identical in most respects. So that's a big bonus for us. So if nothing else, just The communication and workflow between the myriad of companies And consultants, etcetera, is as good now as ever and there's no learning curve. So that's great. In terms of the development plan, they're pretty different kinds of development. I think some of what we learned here is that Tenants greatly appreciate, I think amenity finish Design thoughtfulness in a way that I think is underappreciated in the market generally. Having these sort of best of class Hospitality like spaces where you don't really cut corners, but the tenants kind of feel it and see it, And they know when you've gotten the 100% distance to deliver a great product and include great food and beverage experience As part of that and an outdoor experience and space that they can utilize for events And their own uses either during business hours or after. Sometimes developers will build these spaces And they can advertise they have it, but it's not spaces that tenants really want to bring their guests of 100 to And or there's not a food and beverage or hospitality program to support it. So putting together the human resource element, which is a great hospitality Division and personnel with really well executed food and beverage with really well designed Space and functional thoughtful. That package together is pretty powerful in trying to differentiate product. And so We're just trying to do more of that and do it better at One Madison. Healthy. Healthy workplace, I think, is something that Is born out of One Vanderbilt, but also born out of COVID. So, we're putting extra energy and effort into One Madison To try and make it at the very top of what it can be from a health, wellness and sustainability aspect, The DOAS system that I think Steve has spoken about previously, if not today, is sort of a hallmark of that project. Steve, you want to just Which will be one of the largest spec buildings to deploy DOAS for those who don't know what it is. It has an ability to 100% circulate outside air as opposed to recirculating interior air. So it makes the workplace a healthier work environment. And it's something that we had designed into the project pre COVID, but it was an emphasis on using cutting edge technology To create and emphasize healthy workplace that we saw firsthand at 1 Vanderbilt that the tenants put a lot of value into that. So I think to Mark's point, great architecture, heavily amenitized, weighted towards food and beverage and outdoor spaces a healthy workplace environment, those were all key factors that has made One Vanderbilt so successful and why I think We're seeing such strong interest in One Madison at this point in time. Great. Thanks. That's the last question, Matt. Our last question comes from the line of Nick Yulico with Scotiabank. Your line is open. Thanks. Just a couple of quick ones here. In terms of One Vanderbilt, could you just Remind us just on a rough number, what percentage or rather what is the GAAP NOI that was actually achieved in the quarter as we're thinking about The ramp that still has to happen. And then also on capitalized interest, if you could just remind us how it's going to work with that project, When it gets removed from construction in progress and just how to think about capitalized interest over the next year? Sure. I'll get into capitalized interest more in December when I give guidance. But generically speaking, the building opened about a year ago. So 1 year is your timeframe after which you can't capitalize on vacant space, but can still capitalize while space that's leased is being built out. So we'll ramp down, as space is coming online over the course of 2022. GAAP NOI for the quarter for One Vanderbilt was 9,500,000 Our share. Okay, great. Thanks. Just last question is on, I guess, the fact that Leasing volume you're talking about is higher than expected this year. The pipeline is strong as well. You did hit your You are going to hit your guidance on occupancy for the year, but you're still down versus pre COVID. So I guess Any high level thoughts on the ability to get back from 93%, where you're at today versus 95% even 96 percent, I think you were at some point in 2019. It's still a very unsettled market, Nick. So We're pleased with the velocity that we've seen and we've got good tenant demand, but it's hard to predict. There's a lot of wood to chop still going forward And we'll have to take it one day at a time. Yes. I just want to make sure and I don't know if people are still left on the line, Nick, I don't have many people. But We're comparing this environment to what it was 12, 18 months ago, 6, 12, 18 months ago, And it feels really good. We are still at a level in this market right now that's starting from like a 17% or 18% vacancy rate, Which is very, very high and it's going to take a lot to absorb that space and it will be absorbed. But I would guess most of 2022 will be spent absorbing that space. The good news is going to be directionally, we're going to be heading in the right direction and The deals are going to firm up and we expect our occupancy to rise. But it's not flip a switch kind of thing. The deals just don't roll out that way. We can only do so much leasing in a year and the market can only do so much leasing in a year. So, I think we're very optimistic, but I think we're also very realistic that we're going to have to be on our best game with our best product To get back to the levels we want to be back to, I think I heard the words 95 or something, we want to get back to like 97. That's when the portfolio is really cooking in and that's when you have a market environment that's a sub 9% vacancy market. We're not there anywhere close to there now. So we'll have to do our best within that framework and Hope we can deliver the results in 2022. And honestly, Nick, in this market where rents are not Truly reflective of the value of the space because of the vacancy in the market that Mark was talking about. We may actually elect to just hold some space off And not lease it aggressively. So that'll just we do want to get back to that 97%, but we're going to do it appropriately from an economic All right. Appreciate it. Thanks, Matt, Mark, everyone. Thanks, Nick. All right. Operator, is that last question? There are no further questions. Okay. We're all going back to the summit. So, see everybody there. See everybody there. And we'll see you in December at the event. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.