Thank you everybody for joining us, and welcome to SL Green Realty Corp's Q2 2022 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 risk, 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.
Also, 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 measures and the comparable GAAP financial measures can be found on both the company's website at www.slgreen.com by selecting the press release regarding the company's Q2 2022 earnings, and in our supplemental information filed with our current report on Form 8-K relating to our Q2 2022 earnings. Before turning the call over to Marc Holliday, Chairman and Chief Executive Officer of SL Green Realty Corp., I ask that those of you participating in the Q&A portion of the call to please limit your questions to two per person. Thank you. I will now turn the call over to Marc Holliday.
Please go ahead, Marc.
Thank you and good afternoon, everyone. Appreciate you joining us today. I hope you're somewhere cool this afternoon, but mostly I hope you are in your office with your colleagues listening in for this today as we are all here at SL Green each and every day, five days a week, doing what we do and what helped us achieve or what we got done in this quarter. I wanna say how pleased I truly am with the company's achievements during this recent quarter and throughout this year. Everybody has been working really, really hard to get done as much as we possibly can towards our long-term goals and objectives for the year.
It's been a volatile and challenging environment to navigate as we emerge from this most unusual two-year period, which required us really to write a new playbook to address the unprecedented restrictions and the unprecedented nature of this market. I feel that we did so thoughtfully, skillfully, and we hope that those results of the first half will continue throughout the second half as we continue to outperform within our market. The same store portfolio now sits at 92% leased after 1.1 million sq ft of office leases that we signed year to date. We have a current and active pipeline of another 1.1 million sq ft of leases and transactions, which we will be working tirelessly to convert to close deals between now and year-end.
While SL Green's Q2 closed leasing transactions was below average, this is not to be unexpected due to the front-loaded activity we had in the first quarter, which followed a lot of activity we had in Q4 2021, and a precursor to what we hope will be, you know, back to our average levels for Q3 and Q4. You know, there is a level of cyclicality to how and when we can time these leases, but, you know, we feel as we sit here today, we are on track. While Midtown Manhattan leasing velocity in Q2 was down, it was just down 4% below Q1 levels. However, it also represented a 33% year-over-year increase, and 81% of Midtown leasing took place in Class A buildings.
Tenant demand is shifting as some of the big technology tenants which expanded rapidly have pulled back as they adapt to new workforce patterns, but financial firms continue to be very active in this market. In fact, the finance sector, which represented only about a third of the overall leasing activity in the prior two years during the pandemic, this finance sector accounted for half of all leases signed in Q2, and it also accounts for a disproportionate amount of our pipeline that I mentioned earlier. We're, you know, happy to see that sector is taking up a little bit of slack for the technology sectors the space they've taken over the, you know, over the many recent years.
We're also seeing a marked increase in tours and proposals from small to medium-sized tenants in buildings such as Graybar and 110 Greene Street. Most notably, we believe that when tenants are faced with a market that gives them choices, there's going to be a flight to quality, mainly within that 5-10 minute walk of major transportation and commutation hubs. That plays into the strength of this well-located and highly improved SL Green portfolio. When you look past the headlines and take a closer look at the data, it points to some very positive trends within New York City that if current trajectory continues will serve to restore equilibrium in this market.
First and foremost, the jobs recovery in New York City continues at a robust pace, much more so than average and much more than we've seen in prior years, as 51,000 jobs were added in April and May, of which 21,000 jobs were categorized as office using. Hot off the presses today, maybe an hour ago or so, it appears that New York City added another 22,000 jobs in June as we inch closer to restoring 100% of pre-pandemic employment levels. In fact, through May, office using jobs were 92% recovered from early 2020, and overall employment was about 77% recovered through May, and both of those numbers will now improve as a result of the data that just came out today. That's good news.
Also, space utilization in our portfolio, which we began tracking throughout pandemic, as looking at physical occupancy as a percentage of pre-pandemic physical occupancy. July, this month, represents our best month of physical occupancy in over two years, with weekly portfolio averages reaching close to 45%, and that's adjusted to 55% when looking at the peak days of Tuesday, Wednesday, and Thursday, and it's July, and it's hot. You know, we do expect those numbers to improve markedly in September and, you know, thereon out through the end of the year. You know, there's again, looking at data in terms of the performance of our all-important financial sector, Wall Street member firms on the NYSE reported in the first quarter $7.7 billion of profits.
While that was down measurably from Q1 2021, that's coming off of a record quarterly profit in 2021. The $7.7 billion, to put it into more of what I'll call a normal context, is far better than the five-year pre-pandemic average of $5.6 billion. While you know a lot of comparisons will be made to 2021 in financial performance, including big bank big five banks net income results for the quarter, it's all measured to pretty much record years in 2020 and 2021.
When you look at normalized years for New York City, the financial sector is still generating profits off of the trading volatility that is serving to somewhat mitigate these lower banking and advisory fees, and we do still see a lot of leasing activity and expansion activity coming out of the finance sector. That's that I think is very good news, and you know, we can talk more about that in the Q&A. Tourism is another bright spot. Visitors to New York City, which had peaked at over 60 million pre-pandemic, were as low as 30 million during pandemic, are now 85% recovered. That's with fairly relatively low participation from international visitors, which are expected to rebound in 2023, at which point full recovery is expected next year.
That's consistent with what we basically had discussed in our December investor meeting in terms of expectations, because that drives so much in terms of retail expenditures and hotel nights and, you know, boosts this economy in many ways. I think SUMMIT is fully reflective of this pent-up demand and energy that we see in New York City right now, as we welcomed yesterday, this was a Wednesday in July, 6,400 customers to SUMMIT One Vanderbilt, and we will celebrate our one millionth customer next week, well ahead of original expectations and achieved on a fairly limited operating schedule that we've maintained since October 21, 2021. We're only 9 months into it, and we're going to have a nice celebration next week when the one millionth customer walks through our turnstiles.
It's for all these reasons and many more that we continue to have the confidence and conviction of our business plan in New York City. You know, that's not to say it's without challenges. The capital markets are more difficult now than they've been in a long time, primarily driven by a dearth of debt capital. This is a market where reputation, relationship, and record come into play. You know, there's a diversion of people who can get things done and people who are going to have a harder time getting things done.
you know, I think 450 Park Avenue, which just closed, I think, in the past few weeks or past month, is as good a proxy as any for what our capabilities are in this market to acquire, I think, one of the most exceptionally located, commercial assets in all of New York City on 57th and Park, further expanding our Park Avenue presence at a basis we found very attractive, and then demonstrated our ability to capitalize that deal with 75% brand-new fresh equity in this market environment and close an acquisition loan, with one of our relationship and corporate lenders, on terms that were, really pretty much dead on underwriting.
You know, that is, I think, just a demonstration of what this platform can do, what we expect we will continue to do throughout this market as more opportunities arise. 100 Church refinancing on a different level tells the same story, and that also closed in the Q2. You know, more on that from Matt. All in all, it's a challenging market, but we rise to the challenge. It's a market that I think has a lot of headline overhang right now, but I do think there is a lot of good news out there in the market directionally that we can build upon throughout the rest of this year into next year. That will, you know, help New York recover, because this recovery was never expected to be immediate.
We expected this to be, you know, a multi-year recovery into 2023, maybe even to 2024. The point is, we're heading in the right direction and portfolio is in great shape, and we're gonna keep our full attention on the task at hand and try and deliver for our shareholders. Now we wanna turn it over to Matt DiLiberto, who's got a little bit more commentary on the financial results.
Thank you, Mark. We are certainly very pleased with the results we posted for both the Q2 and the H1 of 2022 as the portfolio and the platform overall performed well, and FFO for the first six months exceeded our internal projections. This performance keeps us on track to meet our 2022 normalized FFO guidance range, which we issued last December of $6.70-$7 a share, while trending towards the lower end of that range, as we see the impact of rising interest rates on floating rate debt and the effect of our recent shift in capital allocation, which prioritizes capital to the repayment of debt and enhancing liquidity while also funding the relatively small equity needs of our development and redevelopment projects.
In the Q2 , our reported FFO of $1.87 a share included a mark-to-market charge of about $0.09 related to a marketable securities investment. As a reminder, these kinds of marks, up or down, are not included in our normalized FFO guidance. Excluding the effect of that charge, FFO of $1.96 beat consensus estimates pretty handily, due primarily to the timing of certain items that were included in our initial guidance. We don't guide by quarter, so we understand The Street can't accurately project when these items will hit. We also recognized $4.7 million or $0.7 a share, of unbudgeted fees related to the acquisition of 450 Park Avenue and $5 million, also $0.7 a share, of unbudgeted fees related to the resolution of our Crowne Plaza investment.
These are in addition to other fee income streams that our platform regularly generates by managing properties and projects and capital activities on behalf of our partners or third-party assignments like special servicing troubled loan situations. We hear and we read that these fees are lower quality earnings, which has always kind of baffled us. This is real money being made, oftentimes without any incremental capital investment. It's in cash, and therefore it is real earnings. These income streams also verify and enhance the value of our platform as others pay us for our expertise. There clearly isn't any platform value in our share price. Finally, it provides additional scale to what is already a huge platform as we get additional insights into what is happening in the market, as well as an exponential expansion of our business relationships.
As such, we will continue to look for opportunities to generate more, not less, of this ancillary income, particularly through the expansion of our asset management strategy. Another positive in the quarter, G&A expense was lower than our original budget, which is a trend that we expect will continue for the balance of the year as we expect to reduce G&A by $3 million-$4 million below our initial guidance. On a full year basis, these positives help to offset the dilutive impact of several things we've been highlighting for the last few months. Most notably, the effect of interest rates, which we all know are expected to continue to move higher over the balance of the year and into 2023, particularly for us, the effect of rising LIBOR and SOFR.
It's true, historically, the forward curves are not very accurate, but we need to be prudent and make decisions as if they are. When we provided our initial FFO guidance, LIBOR is expected to average just 38 basis points during the year and end the year at 75 basis points, while SOFR is expected to average 27 and end the year at 66. Stress those expectations by another 50 basis points to project interest expense that's consistent with our past practice. That cushion, clearly not at a loss, as LIBOR is now projected to end the year at 3.78% and SOFR at 3.51. It's a 300 basis point increase by the end of the year on over $2 billion of floating rate debt.
To mitigate the effect of those rising interest rates on earnings and especially cash flow, while further enhancing the balance sheet, we have pivoted our capital allocation strategy to prioritize debt repayment, particularly corporate unsecured debt. The easiest way to generate immediate liquidity for this initiative is to reduce share repurchases and DPE originations. This was evident in the Q2 , where for the first time in recent memory, we did not originate any new debt and preferred equity investments, nor did we repurchase any shares. Instead, we used this retained liquidity to pay down our corporate credit facility. We're also looking out further in the year for efficient debt repayment.
Our current plan, which is a shift from our original guidance, is to repay a $300 million bond maturity at its open date in September, ideally use the proceeds from asset sales. Then refinance a separate $500 million bond maturity with a short duration bank or bond financing that allows us to repay the principal when we receive almost $600 million in November of 2023 from our partners at One Madison at TCO of the project. This strategy shift is not an indication that we don't still view share repurchases, debt and preferred equity, and other potential investment opportunities in the market as attractive. As you saw with 450 Park, we will still invest capital into growing the business accretively, especially in the asset management model. Obviously, the share price is extremely cheap.
I hear the term stupid cheap, but that probably doesn't even scratch the surface as we now trade at the equivalent value of just a handful of our assets and a shocking +50% discount to the street's NAV, not ours, which we know is a conservative view of value. In the current environment, we feel this capital allocation pivot is the most prudent path for right now. All told, as I said at the opening, FFO remains on track to be within our 2022 Q2 normalized FFO guidance range of $6.70-$7 a share while continuing to trend towards the lower end of the range, which I indicated in our Q1 call.
In the real estate portfolio, just looking at a few of the other goals we set out for ourselves, our same-store cash NOI growth of 7.8% for the H1 of the year was generally in line with our projections, and we always anticipated the trend to be lower over the balance of the year, ending somewhere between 4% and 5%. Having just completed a full rebudgeting of the portfolio that projects a slightly slower pace of leasing in the same-store portfolio, as well as some incremental pressure on operating expenses, particularly utilities, we remain optimistic that we can still achieve same-store cash NOI growth of 4% this year. The slower pace of leasing also had an effect on our reported same-store leased occupancy, which at 92% as of the end of the Q2 , was about 1% below our projections.
While we have a substantial pipeline, as Marc alluded to earlier, and of course, incredible faith in the talents of Steven Durels and his team, being that far behind at this point in the year makes our goal of 94.3% a very challenging goal, to say the least. That said, on an overall basis, with 1 million sq ft leased through June and that significant pipeline, our goal of 2 million sq ft of total Manhattan leasing remains intact and appears achievable.
Okay, thanks. With that, we'll open up the line for questions.
Thank you, sir. As a reminder, to ask a question, you will need to press star one on your telephone. If you're queuing up using a cell phone, please press star, pause for two seconds, then press the one key. We also ask that you please limit yourselves to one question and one follow-up. Please stand by while we compile the Q&A roster. I show our first question comes from the line of Alexander Goldfarb from Piper Sandler. Please go ahead.
Hey, good morning. Or I should say good afternoon. Two questions. Actually, Marc, let me start with a big picture one, and then I'll hit Matthew with guidance. Marc, just, today, there was that news item that Governor Hochul had finalized or approved initially the, Penn Station redevelopment, with one of your, fellow REITs. Just thinking about, you know, big office development subsidized with tax, financing coming to New York in the next several years, potentially, is this a replay of, you know, what happened with the Far West Side, where there was a lot of tax-incented financing that weighed on the market?
Also, do you think that Grand Central is gonna be recipient of any similar tax-incentivized financing to sort of replace some of the older buildings and upgrade the office stock around Grand Central?
Okay. Well, Alex, it's, you know, it's a good question. I think it's a question we'll dive into further throughout the year and at the end of the year, as more of the details emerge from the plan. You know, I think there's some parallels, and I think there are some differences. You know, it's good for New York City to have a dramatically improved Penn Station. You know, that is a true public asset in a way that I think is differentiated from some of the other subsidized developments throughout the years and throughout the city that this is something that is badly needed for the millions and millions of commuters that come through Penn Station and Amtrak and NJ Transit.
You know, there has to be and should be an improved experience, and this is something that's been on the drawing board for, you know, like, decades. The fact that something will happen there, I think is, you know, net net a positive for the city. How that's gonna get financed is still something, like as I said, where I think details need to emerge and, you know, whether that's gonna be funded predominantly from state funds or, you know, what the contribution will be from some of the buildings in and around the area that are being upzoned to allow for tax payments to be directed into certain funds that would be for public realm improvement and others.
In spirit, it makes sense, but we never, you know, are big fans of, you know, subsidized development, no particular pointedness to Penn Station. I just think that, it's, you know, when you pick and choose areas. You know, there are winners and losers, and you have to compete against that. And since our portfolio is our office portfolio is 100% unsubsidized, and the development we did at One Vanderbilt, One Madison is also unsubsidized. You know, it makes us have to, you know, work that much harder and, you know, have the buildings compete that much better in order to, compete against the subsidies.
I think it's a challenge, but I also think that there may be a fair amount of residential and non-commercial uses that may come out of that, which could be interesting, especially if it has big affordability components, which I think could make a lot of sense. I think it's a much better use of subsidy when it's pointed towards affordability uses, and that, you know, may or hopefully will be some portion of what's coming out of this Penn Station redevelopment. You know, it's gonna take. This is something that'll be, I presume, over a very long period of time. I can't imagine full build-out of these 10 or so sites would occur, you know, inside of a decade.
you know, having measured growth over time to allow for a city that is net-net growing, I think is a good thing. you know, we need to have new product. We need to have new product for tenants that are growing and wanna have new state-of-the-art space. I think the market has proven there is a deep demand for that, and it's a very expensive city to build within. you know, let's see how the details fall out. Let's hope they fall out in a way that is measured so that, you know, whatever the addition to inventory is, it's a responsible amount delivered every year over, as I say, I would think 10 years or more, but that's just me projecting.
Let's hope there is some mixed uses in there to make for a pretty lively 24/7, improved Penn Station sub-district that if done the right way, and I believe Vornado, you know, certainly and the others there can do it and have demonstrated they can do it the right way and will do it the right way, could be a real net-net, addition and advantage for New York.
Matt, a question on the guidance. The state of the mortgage market, where it's tough to get, you know, mortgages on anything but like sort of the top tier, how does that impact your guys' ability to sell assets as far as buyers to get funding? Also, you know, on the DPE book for those holders of your DPE to get financing to pay you off, how does that impact your debt paydown thoughts for the balance of the year?
Sure. I'll lead off, and I'll probably ask Andrew to add a little market color. You know, the financing market is clearly being very selective. You know, Marc alluded to that, in speaking about the financings that we got done, you know, the 450 Park financing and an upsized financing on 100 Church Street that was almost, you know, twice the size of the mortgage that was maturing. Those are, you know, really, you know, landmark kinda financings in this environment. CMBS market is pretty much seized up. You have to turn to banks, and banks are being selective about the sponsorship and the buildings on which they'll lend. You know, we feel good about that. It sets us up well.
We also don't have a lot of maturities upcoming, so it's nice to be able to get those things done and now just target corporate maturities that we have. You know, I spoke about our pivot when it comes to corporate financings. The corporate bond market is similar to CMBS market. It's very choppy, and we wanna take some of those bonds out. I think that we have a good path to get an asset sale or two done to pay off the $300 million of bonds. If we can't find another, you know, $500 million, then we'll refinance those bonds' short duration and pay them off when we get proceeds in next year from One Madison. Andrew, you wanna add anything in the market?
Alexander , I think it's just really figuring out when the CMBS market is gonna return to liquidity. There's really very little new issue right now. It sounds like bond buyers are on the sidelines, you know, watching interest rates, watching the dollar, and watching all these various financial factors that have nothing to do with sort of the underlying credit of the real estate. Balance sheet lenders are ruling the day, and I think they're taking advantage of it and getting, you know, historically, relatively, good pricing, which is bringing capital to that market, and that's fueling some of the transactions we've seen to date. To have a fully functioning market, we do need that CMBS market back, so we're anxious to see where it settles at.
Thank you.
Thank you. I show our next question comes from the line of Jamie Feldman from Bank of America. Please go ahead.
Great. Thank you, and good afternoon. I wanna go back to your leasing comments. I guess first is the 1.1 million sq ft leasing pipeline. Can you talk about, you know, how that breaks out, large tenant versus small tenant? I guess to tie into that, you know, your comments on small to medium size picking up, I'd love to hear more color on what you're seeing there.
Sure. You know, like what we've seen in the overall market, approximately 46% of our pending leases are with financial service tenants. I guess no surprise with that. The good news with that is that our product that we have in the marketplace is the right product for the tenants that are out there searching for space.
Of the 1.1 million sq ft, 948,000 sq ft, and this is particularly the good news relative to what Marc and Matt were saying earlier about meeting our targets, are leases that are out, either out for signature or leases that are in active negotiation as opposed to simply, term sheets being negotiated. We've got another over 200,000 sq ft of term sheets, which we think have a good chance of converting over to a lease. What's not in those numbers are a wide array of other early-stage proposals that we're entertaining but are not yet advanced enough that we felt confident enough to say that it would qualify to meet our pipeline standard. A wide range of size of tenants, from very large to small.
with, you know, no not skewed for one size of tenant in any way, shape, or form. The good news, I think that we're seeing today and that sort of developed over the past maybe 45, 60 days, is we're finally starting to see those small to mid-size commodity building tenants come back into the market. You know, I've always used Graybar Building as a good barometer of that because of the diversity of types of tenants and size of tenants, and we're more active at Graybar today than we have been any time in the past 12 months. I think the, you know, the reason for that as the big guys start to return to the city to work from their office, the smaller tenants are following in their trail.
They require less time to make the real estate decisions, so it's natural to expect that as the big guys start to reenter their office space, the smaller ones are going to follow suit, and that's leading to real estate decisions and why we're seeing those smaller to mid-size co,modity type transactions come to the forefront. I view that as very encouraging news and hope that we'll see more traction as the year progresses.
Very helpful. Thanks. I guess just-
Jamie, are you there?
Must have been his second question.
It's one of you guys. Do we have another question Operator?
Yes. Sure. Our next question comes from the line of Michael Griffin from Citi. Please go ahead.
Hi, it's Michael Silverman here with Griff. Mark, you know, on this acceleration of an expansion of the asset management strategy, and I recognize it's a challenging and volatile environment, but just taking your comments about the stock, or I think DiLiberto talked about stupid cheap and where the stock is. Is there any opportunity to dramatically accelerate the shift of the company by, you know, looking at your existing assets and just bringing a substantial number of your partners in and effectively solving all of this at once, right? Solving the balance sheet, solving where the stock is, and accelerating the asset management strategy effectively, you know, taking the company private, but keeping it public and being an asset management company. Is that at all the thought process today?
I mean, if I understand the question, I think the expansion and growth of a true asset management platform within the public company that we sit for the benefit of, you know, shareholders and management is the direction we're headed. I don't know how expedited it is because, you know, these are big, high-profile assets, and even in volatile markets, it's hard to really get the right assets in the right locations at the right price. You know, it's like, gotta all come together. You know, there are other new asset targets we have that we think are perfect for this program, but, you know, I'd measure them in 1-2, not 5-10, as we sit here today.
I think this is a program that will grow over time as we get traction, you know, and you know, expand our universe and of joint venture partners, which we are doing.
I was thinking about it.
Yes.
Yeah. I was thinking about it, you know, from the perspective of like you think about 450, and I recognize the value you invested and the opportunity that it provides the company. There was new equity put out, which obviously could have been used for debt repayment, share repurchase, or DPE investments. I was thinking more so rather than going out and pushing new equity out, which would require a sale, why not just leverage as you have over your long duration? If this is really the new strategy, you know, take as many of your assets, and we've already done well, Madison and OVA, take more of them, raise the capital, buy back your shares that you've been doing. You've bought back 35% of your share base-
Yeah
... more so than REITs, and just completely accelerate it because your stock is so. Like, it's you're in this really difficult spot with a really low cost of capital or high cost of capital, right? Low stock price, high cost of debt. You have too much debt that you wanna repay. How do you sort of dig your way out of this, basically?
I mean, we don't feel, you know, what you're describing, internally, we feel like we've got a lot of liquidity.
The balance sheet doesn't need to be solved.
Yeah, I mean, we don't feel under balance sheet pressure. We've got over $1 billion of liquidity. We don't have much in the way of near-term maturities. Matt's got the game plan he articulated for how we're gonna handle some of the unsecured.
Bonds that come up, I think this year primarily. I think that the only difference in what we're doing and maybe what you're saying is that there's no freneticism or urgency we feel that we have to take. I'm not sure it would be in our interest to act with that kind of speed. We lean into markets, and we average into markets, so we're gonna average as the stock is down and as the stock recovers. We're by no means signaling that we're not going to continue with the stock buyback program.
I think what Matt said, both in his prepared remarks and on the call last time, was that we are simply taking a moment in time to sort of, you know, reallocate and over-allocate to some near-term debt reduction, which I think is primarily unsecured bonds, as we then continue with our program of stock buybacks and into development and redevelopment opportunities and money into highly accretive, asset management. I don't think you're gonna see us on a hyper-accelerated basis. You've asked the question, I understand.
Yeah.
Why that may sound enticing, and I'm not rejecting that. I'm just saying that's not the plan we're on right now. The plan we're on is to take a very measured approach here, and you know, just accomplish the goals on the timelines we've set out, which we think is the right way to do it.
Yeah. I'm just thinking about where the stock is today and trying to take advantage of that opportunity to dual-
You know, I hear you, Mike.
Accelerate the asset management business.
You know, we you know, the stock price, you know, we're driven by the business plan. The stock price is gonna be where it's gonna be, you know, today, 6 months from now, 12 months from now, and we have to execute into that. We're opportunistic, as you know, but I just don't think you're gonna see us change that business plan, which we think is the right plan for the assets and our long-term, you know, program that we have to develop an asset management company, to take advantage of this moment in time, which we expect to benefit from in due course. That's all I'm saying.
Okay. All right. I appreciate the color, Marc.
Thank you. Our next question comes from the line of Steve Sakwa from Evercore ISI. Please go ahead.
Yeah. Thanks. Good afternoon. I guess I just wanted a little bit more color or thoughts around kind of the tech leasing. I know, Marc, you sort of talked about the slowdown. You know, we've seen a lot of announcements out of a lot of the big tech firms on kind of hiring freezes, real slowdown in hiring. We've even heard some of those large companies really stopping their tenant build out on leases that they've taken. I'm just curious if you have any concerns about any of that space maybe returning to the sublease market, you know, over the next 6-12 months.
Well, look, you know, right now, sublet market in Midtown is around 3.5%-4% of the overall availability. You know, higher than average, but not by, you know, I think by an unsustainable amount. You know, tenants today who have a preference for new product, class A product, well-amenitized product, they want direct leases, they want term. You know, the sublet market is not the best avenue for those tenants. You know, that's. There's always that shadow availability space, but the 1.1 million sq ft Steve talked about negotiating with, I don't think any of that has got an alternate deal teed up for sublet space. You know, it's just not the right. It's a different kind of profile.
On the one hand, we'd love to see the tech industry, which has been such a big contributory grower, keep growing. On the other hand, you know, the data from the Department of Labor, I mean, the numbers are what the numbers are. If it's showing sustained job growth, that would be, I think, over 70,000 jobs in New York City in three months, 51,000 April, May, and then, you know, numbers that are not. We have to delve into, but the gross number looks like 22,000 to New York, you know, out of the state, conjectural, if you will, for New York City in June. I mean, these are very, you know, very healthy numbers. I mean, compare those statistically to past two years, past five years, past 10 years. These are big numbers.
If the growth is there, regardless of what sector it's coming out of, New York benefits because New York is a diversified economy. Thank God. I mean, it's finance, it's healthcare, it's professional business and service, by the way, is fully recovered to pre-pandemic levels, you know, fully recovered, 96% or something. You know, tech may be a slower contributor, but we have other sectors we hope will take up the slack. As long as there's overall growth in the market, then I think we're in, you know, relatively good shape. Sure, we'd love to see tech, you know, pick things back up after they take a pause.
I'll just add to that, you know, to put a couple of data points in front of you or commentary to share is that, sublease space availability today is still 500,000 sq ft of availability less than it was at the depths of the pandemic. You know, we went through three or four quarters where sublease space was coming off the market at a pretty rapid pace.
Secondly is that from what we were told, accurate or not, but what we're told is that the announcement of the stoppage of the work for the big tech firm that you referred to was not unique to New York City, but was in five or six locations around the country and really driven by them feeling a need to redesign exactly what they were planning to build as a result of addressing, you know, the right workplace strategy in order to accommodate and respond to bringing employees back to the office. So whatever they had in the can to design, they felt maybe it wasn't the right mix of design elements.
They hit the pause button, they want to go through a redesign, and they expect to then go back into the construction and build out that space as opposed to putting it on the sublease market. Third is that, although the big tech guys have announced some slowdown, there are still some tech requirements that are floating around in the market, so it's not as if it went to a zero overnight.
Great. Appreciate those comments. Maybe one for Matt, just a little more housekeeping. Yeah, and you talked about kind of the other income, and it was obviously a big surprise here in the quarter. Can you just help frame out what your expectations are for other income in the back half of the year, just so we're all kind of on the same page?
Sure. Yeah. You know, that's a lumpy line item because it's where we capture, you know, all these ancillary, you know, income streams, fee streams. It was larger in the quarter relative to other quarters and relative to our expectations, because of those two, you know, items I mentioned. As I look out over the course of the third and fourth quarter, I see a drop-off in the third and a pick back up in the fourth. You know, those are based on when, if there are special servicing deals, we get success fees. That's based on, you know, the successful resolution. If there are other deal-related fees, it's, you know, based on when the deals close. You know, I would expect to see a drop-off in third, pick-up in fourth, but that timing could shift around.
Thank you. As a reminder to ask a question, please press star and one on your telephone. I show our next question comes from the line of Tom Catherwood from BTIG. Please go ahead.
Excellent. Thank you. Good afternoon, everyone. Maybe for Matt or Andrew. Thinking of your floating rate debt, how much of higher interest rate expenses due to rising rates would be offset by higher rates on your DPE book? Is there a lag between the recognition of those higher rates, for your DPE positions?
You're right. I mean, we do have floating rate debt and preferred equity positions. That balance has been shrinking, though. I'm just grabbing the number. I think it's around $300 million or so of our DPE positions-
Offset.
Offset the $2 billion in floating rate liabilities.
Got it. Thanks for that, Matt. One other just cleanup one, specifically thinking of 7 Dey Street. Occupancy continues to scale there, obviously above 76% as of the quarter end. We kind of pencil out something north of $3 million quarterly in NOI off of that. At stabilization, looks like you're running about a little bit less than half that. I know there's a lag, and especially apartments, between NOI rolling on and occupancy, but what are your current thoughts on when you start to get the bump from that increased occupancy, or do you really need to lease up the commercial space as well to get there?
We have 7 Dey and 185 Broadway broken out separately. 7 Dey is the residential. 185 Broadway is the commercial. If you're looking at 7 Dey's occupancy, that is exclusively the residential. Remember there we have two components. We have market component and an affordable component. The market component is 100% leased. The affordable component is not. That's a very long process to get that component leased.
It will be by year-end.
We will be by year-end. If you're looking at when is a, you know, stable cash flowing year for the residential component, you should look to 2023.
Excellent. Thanks, guys.
Thank you. I show our next question comes from the line of John Kim from BMO Capital Markets. Please go ahead.
Thank you. Good afternoon. Marc, you talked about the dearth of debt capital in the market today, and of course, we have a rising interest rate environment. Can you talk about what the impact would be on cap rates for office? Because in the past cycle, owners could just refinance rather than sell assets.
Well, I mean, what typically happens in a market like this is you just have very limited trades. You know, there's no. You know, a cap rate's got to be set by willing buyer, willing seller, you know?
You know, when you have a market where you've got well-capitalized long-term ownership that appreciates the long-term value of the real estate it holds, you know, if there's not enough acquisition capital or transactional capital that's out there that's priced at a level that you know can meet those expectations of the owners, then you know there's a view that well cap rates rise, and I would just say that you have a bit of
You know, of a frozen market where, you know, just not many trades get done, other than, you know, in situations that might be pressured, but those are not the normative, I would say for, you know, the bulk of the assets. You know, half the inventory in New York City, commercial office inventory is owned by 10-12 very well-capitalized long-term owners that, you know, typically we've seen through the 1990s, early 2000s, Great Recession, et cetera, you know, ride these periods out, continue to improve the product and, you know, wait for the temporary nature of the debt markets to loosen up again, which they invariably do. I don't, you know. There have been some trades. I know resi trades in the 4%
Resi where there's still a liquid financing market, you see a lot more trades.
At what kind of cap rate?
19 Dutch Street downtown, which was at a 4% cap rate.
Right.
You know, resi, you still see trading at the 4 cap rate range. Commercial's been few and far between. There've been some trades. 609 Fifth was a vacant, you know, office to condo trade. The Santander building is sort of a full redevelopment. There's not really a full sort of market formed on the commercial side.
Okay, that's helpful. Matt, on the other income, it doesn't look like there's been much of a contribution this quarter from SUMMIT despite the strong traffic numbers that you reported. Are you still on track to deliver $20 million-$25 million of NOI this year? If so, can you discuss some of the expenses that offset the NOI contribution?
You know, Marc talked about SUMMIT performance. We are right on our numbers for the year. You know, remember there's two components to that. There's the operator that flows through other income that I said in December and said again in the first quarter call that is a nominal contribution. A lot of the contribution from SUMMIT comes through NOI, and it is coming through on our numbers.
Okay. Thank you.
Thank you.
Thank you. I show our next question comes from the line of Jamie Feldman from Bank of America. Please go ahead.
Thanks. I guess just a follow-up to the last question. I mean, are there assets out there that we should be watching that could trade soon? Or do you think it's gonna be quiet for a while just based on the conversation you're seeing or having?
Well, I mean, there's always assets in the market, and there's gonna be trades, you know, even assets coming out of our structured finance portfolio into our own portfolio. I mean, one notable deal in particular. There will be a market and there will be trades, yes.
Okay. In terms of like higher profile transactions we should keep our eye on for price discovery, there's nothing you'd point to right now?
Well, 245 Park Avenue has a bid date of today.
Today.
I'd call that pretty high profile, big, and current, because I think it's a 5:00 P.M. deadline. If you wanna
You gotta hang up, Jamie, and put your bid in.
Okay. All right. Thank you.
Thank you. Our next question comes from the line of Vikram Malhotra from Mizuho Group. Please go ahead.
Thanks so much, and good afternoon. I just want to go back to the occupancy comment. You talked about the year-end target at risk, but can you just maybe remind us what are the sort of known move-outs that would influence occupancy in the next, you know, this year and maybe the next six months? Maybe give us a sense of where do you actually think occupancy will end up at year-end?
You know, I think I said in my comments we're about 100 basis points behind through the first 6 months. If that carried through the end of the year, we end up at 93 instead of 94. You know, not a lot of big known move-outs coming in the portfolio. What we're really seeing is just a slower pace in that same store portfolio. Again, I wanna differentiate, we set a 2 million sq ft leasing target for the year. That's in the entirety of the portfolio. We're on track for that. We're a little behind in the same store portfolio, which is just pace of leasing.
Any tenant that has a lease expiration between now and the end of next year, we have a very high degree of confidence that we have very good clarity as to what their intentions are. To the extent that they may be vacating our portfolio, it's already built into our numbers.
Just on that point, if you could clarify, since you have a high degree of visibility, like next 12 months, including first half of next year, what % of the expirations are sort of high visibility locked at this point in your mind?
Well, the high visibility move-outs. You know, some of them we've known for quite a while and, you know, there's, I mean, so you have 919, there's
Debevoise.
Debevoise. But that, you know, that-
Debevoise's, of which we've leased 50% of that space already.
Yeah, MLB, well, you know, we you know, within the DPE portfolio, 245 Park has what? Baseball, right?
Yeah. Major League Baseball at 245 Park.
Major League Baseball. You know, that's. There's, you know, those are. I mean, that stuff's been known, I'd say, for over a year. At Worldwide Plaza, Cravath. We've identified all those spaces and are busy at work, either re-tenanting the space to the extent we have possession, or if not, you know, some of these move-outs don't occur for two or three years. Cravath, I think, is a 2024 move-out. You know, it gives us a lot of time to program in redevelopment, which we're doing right now, three buildings on Third Avenue, 885, 919, and 750 Third. Then, you know, in the future, probably next year in 2024, you know, with our partner RXR, we'll take a look at Worldwide Plaza, 825 Eighth.
I don't know that there's anything out there of note that we haven't previously discussed. I guess that's really the question, Steve. Is there anything-
Okay.
No, I think, I don't think there's any big surprises between now and the next 18 months.
Okay. Just maybe a broader question. You know, we talked a little bit about in your opening remarks that tech has slowed down because they're adjusting, I guess, to changing work patterns. Financials are now a big part of the leasing. I just, you know, why wouldn't sort of, you know, what technology firms are doing and how employees are working, why wouldn't that, why wouldn't other segments also start to say, "Hey, you know, we also need to adapt or change, or we lose people." Why wouldn't this become more broader? How do you react in terms of maybe what you need to do with the product, in terms of more CapEx or redevelopment?
Does it change your mind on where you want to own geographically and not just within the city, but maybe other markets? What would that make you as you think about, like, the evolution of SL Green from here, leaving aside asset light, why wouldn't this just be a broader issue?
Well, I think the number one response we've had to the question of hybrid work model is the extraordinary efforts we've undertaken and continue to undertake to amenitize the portfolio in ways that we think really resonate with tenants and their employees. You know, that's not verifiable feedback, if you will, as to the connection between what we're doing in terms of, you know, health and wellness and fitness and very elevated food and beverage program and conferencing and everything else, commutability, public realm improvements, as connected to what tenants want in order to maximally incentivize their workforce back to the office and create environments where they feel they're getting the most efficiency in production. I mean, that. You know, that's all.
Like, you know, we spent, you know, I would say close to an hour on just that topic alone in December, talking about our plans that we've executed both in our new construction and throughout a good chunk of our portfolio and the positive response we've received to it. I think when you say, you know, do we worry, you know, about it or, you know, however you phrased it, I personally think, and no surprise here, because I've, you know, made statements to this effect in the past, I think in the long run it's a failed work model. I think that whatever people
You know, whatever firms are, you know, experimenting with now, you go from one goalpost of five days a week to another goalpost of three days a week, and wherever that medium turns out in between, I don't know. I don't. I'm not one of those who subscribe to the notion that companies are at their best when they're all in disparate locations, connected only by, you know, by video conferencing. You know, people may differ on that, they do, but we have a strong belief in that, at least I do, and I think a lot of other business leaders do too. I think that pendulum swings one way, pendulum swings back the other. I think over the long term, having.
I think there's a heightened need to have a sense of community and centrality and a place companies can call home that are being developed today in ways that are, I think, far more extraordinary and far more inviting than they used to be pre-pandemic, which I think is ultimately a good thing. I think it'll prove to be the winning strategy for most sectors. I can't say all sectors. You know, that'll have to. That's not something that's gonna be decided in a month or two or a quarter or two. That's gonna be something that I think companies will each decide what their sweet spot is.
Most of the folks I talk with of our 800 tenants in our portfolio would agree that more togetherness, collaboration, mentoring, relationship building, business getting, et cetera, is better done face-to-face and in person than remotely. You know, that's just my feeling.
Fair enough. Sorry, just last clarification, Matt. You talked about using funds now, proceeds to pay down or deleverage. What is the goal? Like, what is appropriate now in this environment over the next few years? Where do you want leverage to be?
We have not set a leverage target, but we are prioritizing dollars towards unsecured debt repayment. I mean, we were comfortable with our leverage point before we got into a rising rate environment. This is much more, you know, an effort to retain cash flow, protect against rising rates, not a function of view that we had high leverage, prior to rising rates.
Okay, thank you.
Thank you. I show our next question comes from the line of Michael Lewis from Truist Securities. Please go ahead.
Great. Thank you. My first question is about 625 Madison. I see that that ground rent reset date passed a few weeks ago. Could you just tell us kind of what the process is, you know, now that that date is behind us, and of course, what we really wanna know is, you know, what the rent might be, if you're able to give an idea of that or maybe what's assumed in guidance for that.
I think we, you know, we've commented before, it's the subject of an ongoing arbitration slash litigation, so can't really get into any details. The rent has not been set as of yet. As a leaseholder, we're still paying the historical rent. There's been no reset, and we would expect that to get clarity over the next, hopefully six to nine months. You know, it hasn't. From our perspective, it hasn't been us holding up the process. It's been a little longer than we would have expected, but you know, as a leaseholder, we're continuing to pay the historic or old rent.
Yeah. We also.
Just recall if you would that we also have a DPE position on the fee interest, which has a maturity of next year as well, and that's all you know been previously disclosed. There's really you know there are two different yet related transactions there.
For guidance purposes for the back half of the year, there's no significant bump in the monthly rent included in guidance.
The good news is I don't have to tell you because it's mostly a capitalized property, so it doesn't affect FFO guidance.
Okay, fair. And then for my second or my last question, this is sort of similar to a question you just answered. You know, along the lines of this flight to quality theme, you know, you obviously own some great trophy assets like One Vanderbilt and One Madison and some others. But when you're the biggest office landlord in New York, you also have some buildings that are more, I guess, up on average, for lack of a better word. You know, how do you think about the portfolio in that context? You know, do you think the bottom half of that portfolio, does it mean that, you know, in this environment, you know, much higher capital investment needs or maybe you sell things that otherwise you wanted or?
You know, Steve talked a little bit about the Graybar Building as kind of a barometer for this. I'm kinda curious if, you know, what we've learned through the pandemic and hybrid and all this stuff changes, you know, the way you think the portfolio should be put together. I think your average rent is kind of in the mid-sixties. You know, do you think you need to change that going forward or not?
Well, I mean, we've been pursuing a very aggressive asset disposition strategy over the last seven years, really since 2015. The focus of that strategy has been the assets you describe as sort of the bottom half of the portfolio. I think what we tried to show you in December is we have a portfolio now that is centrally located, prime locations, and for the most part, amenitized, so ready to compete in today's leasing environment. I think we've been fairly ahead of this trend. You know, sure, there's assets we own that we've stabilized or that you know, the income profile doesn't show the kinda growth that other assets we own do. Generally, those are sort of our next sale candidates, if you will.
There's always assets we look at reducing or reducing our ownership interest in, because there's capital out there that wants poor returns and capital like ours that wants more higher opportunistic returns. We're very happy with the way the portfolio sits today, and I don't think any of the trends in the market, you know, cause us to do like a wholesale, you know, re-scrub of the portfolio that's sort of been in process, since we really haven't issued equity for seven years or so.
Great. Thank you.
All right, we're gonna try and pick it up just a bit here because I, you know, we usually allocate about an hour. I know we still have many more questions, so just gonna see if we can try and, for the benefit of those that have been on, and I'm sure have to get on to other, calls and things, try and pick up the pace just a bit if we can.
Thank you, sir. I show our next question comes from the line of Omotayo Okusanya from Credit Suisse. Please go ahead.
Yes. Good afternoon. One very quick one off the bat. Matt, other income for the quarter, apart from the aforementioned items you discussed, the fee income and things like that, it still seems a little bit high relative to 1Q. Curious if there were any other items in that other income line this quarter.
Again, we generate, you know, a growing stream of ancillary fee income, servicing, management, construction management. So, you know, what was a historical recurring number each quarter has grown to something closer to, you know, $8 million-$10 million a quarter. On top of that, we have things that come in upon successful resolution or completion. In this quarter, on top of the two things that I highlighted in the press release, we had the final recognition of a construction management fee at a project that we sold a year or two ago. That was projected in our guidance. It was unclear when we would get it. We completed the project in the Q2 , and so we were able to recognize it. That was about $4 million.
Great. That's helpful. Then, you know, everyone's always kind of talked about, you know, people will eventually start coming back to the office. That's when a lot of the powers that be will start to make decisions about their real estate. It sounds like this tech company is doing some redesign based on that thesis. I'm just kind of curious that, are you starting to hear more from your tenants now about, you know, how they're kind of thinking about real estate longer term, just kind of given where they are with, you know, with their employees coming back to the office or what have you?
Well, sure. I mean, the answer to that is the tenants' response is all over the board. I don't think anybody's found the perfect solution as to how they're going to manage a hybrid work environment or whether they're gonna be 100% back in the office. What we consistently hear is tenants want their employees back to the office. They need to create a work environment that gives their employees a reason to want to be in the office, as opposed to simply giving their employees a mandate to be in the office. You hear more commentary about things like it's, you know, it's touch points in an office.
What that really means is, employees may not have necessarily an assigned seat all the time, or not all the employees, but those employees that are more mobile, you know, it counts just as much whether they're working in the cafe or in the conference room or in the communal space, as opposed to in an office or a cubicle, that that's how architects are designing space to be more fluid, and more, you know, group-oriented, as opposed to very structured assigned type seating. You see a lot more discussion about a hospitality work environment. You know, the tenants obviously are leveraging the improvements that landlords like us are making into the common areas of our building in order to make the whole building part of the work environment.
Not only monetizing their space, but taking advantage of the amenities that we may be programming into the space.
Gotcha. Thank you.
Thank you. I show our next question comes from the line of Anthony Powell from Barclays. Please go ahead.
Hi, good afternoon. There's a view that some have that like a downturn or recession in the economy could be positive for office space occupancy as people get back to work because they wanna keep their jobs. Is that something that you see as likely, or do you think, you know, the impact of people hiring less is gonna be a larger force there?
Certainly makes sense to us. I do think we've heard the feedback from our tenants that, you know, they're getting the resistance they're getting to people returning to the office is hard to combat because of the job market. I think if you see the job market start to weaken a bit, some of that leverage may shift back to employers. It's speculation.
Got it. Thanks. Have you disclosed a lease mark-to-market in your portfolio? I mean, I know other sectors talk about that quite a lot, but, you know, with spreads down in the past few quarters, I just wanna see if you have a view of what the lease mark-to-market is in your, let's say, your non-One Vanderbilt type of a portfolio.
I'm a little unclear as to what you're asking, but if you're looking for, you know, something that looks at in-place rents versus what we think, you know, you could mark the entire portfolio to today.
Yes.
We have that in the lease expiration schedule, somewhere probably three-quarters of the way back in the supplemental.
Got it. Thanks. I'll check that out. Appreciate it.
Yep.
Thank you. Our next question comes from the line of Ronald Kamdem from Morgan Stanley. Please go ahead.
Hey, just two quick ones from me. On the leasing pipeline, the 1.1 million sq ft, maybe any color on the mark-to-market on those, and just recent trends would be helpful.
Yeah. It's, you know, if every one of those deals make, then it's essentially a flat mark-to-market.
Great. Concessions are?
Concessions, I think, you know, we haven't seen a material change in concessions probably in the past 12+ months. I think, TIs in free rent leveled out 12-18 months ago. You know, time will tell as the economy gets stronger and the market strengthens as to whether those concessions come in and when that starts. For the foreseeable future, we're not expecting any material change.
I think similar to the last question, if you do see a slowdown and a little less activity out there, that could help construction pricing, which continues to be elevated, and you could see those concessions come down as the price to complete space comes down, we would hope.
Helpful. My second one was just on working with clearly elevated vacancies. Does that create an opportunity for? I know you guys have a co-working business, but how does this environment play into that? Thanks.
Can you say the first part of that question again? You broke up right in the middle.
Sorry about that. Just the elevated vacancy, does this create more opportunities for the co-working business?
Oh, co-working.
Yeah.
Emerged business. No, I mean
To expand?
Yeah. From our perspective, no. We're not seeing, in the broader market, more co-working leases being signed. Certainly from our perspective, co-working is not a focus of what we're trying to attract that use in our portfolio.
Thank you.
Thank you. I show our last question comes from the line of Nicholas Yulico from Scotiabank. Please go ahead.
Thanks. I just wanted to go back to the DP book. I think you were saying, Matt, about potentially use some redemptions there to help fund debt payoff. I guess I'm just wondering, you know, at this point, should we assume that, you know, the $440 million maturities by the end of the year, you know, are earmarked for other use, and so we think about a DP book next year that starts at a level that's down by $400 million-$500 million?
You should definitely assume that we still, you know, end the year at a lower level. You know, whether we get repaid on all the maturities or, you know, extend them or work out some other situation, we have yet to see.
It's 2:45 P.M., we're either getting repaid.
Right
... or we're trans-trans-
245 is already in there, right. There's something that's gonna happen there that's immediately gonna take that out of the maturities for this year. What I was referring to in my commentary is actually repayments and originations for the first half of the year that we already put towards debt repayment because we probably would have otherwise originated something in the Q2 , and we didn't. Yeah, I would expect by the end of the year, our balance will be significantly lower.
Okay. Just from, like, an earnings standpoint, if we think about it, I mean, using, you know, using that book to pay off debt maturities, I mean, there's some earnings dilution from that. I think even when you said about pushing out the $500 million on a short-term basis, even if you refinance that today, that's at a much higher rate than what you're paying. I just wanna make sure that we're understanding from a standpoint going into next year, you have some of these, you know, dilutive issues to deal with on the balance sheet we should be thinking about from a modeling standpoint.
That's exactly right. The things I highlighted in my commentary as affecting 2022 will certainly affect 2023. Rising rates, less DP origination, being the largest.
Contrasted against a lot of the development pipeline that starts to roll onto the books into earnings.
Right. More fee income.
You gotta look at both ends of that spectrum, you know. Because we have delivery of, you know, stabilized incomes from One Vanderbilt, from 7 Dey, completion of One Madison and the 760 Madison retail project with which is a substantial retail lease we have with Armani. I mean, you gotta look at the whole picture, but, you know, yes, I think as it relates to DPE, the balance is expected to be down year-over-year.
Thank you.
Thank you. This concludes our Q&A session. At this time, I'd like to turn the call back over to Marc Holliday, Chairman and CEO, for closing remarks.
Am I on? Yeah. No, no. You know, for anyone that's still on, which I imagine is the hearty few. Thank you for listening in all the way through. Enjoy the rest of the summer, and we look forward to another catch-up call in three months, hopefully with you know, with good news and you know, more in the direction for New York City's recovery. Thank you.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.