Thank you everyone for joining us and Welcome to SL Green Realty Corp's Third Quarter 2022 Earnings R esults Conference Call. This conference is being recorded. At this time, the company would like to remind listeners that during the call, management may make forward-looking statements. You should not rely on these forward-looking statements or 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 measure is most directly comparable to each non-GAAP financial measure discussed. The reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found on both the company's website at www.slgreen.com by selecting the press release regarding the company's third quarter 2022 earnings and in their supplemental information included in our current report on Form 8-K relating to our third quarter 2022 earnings. Before turning the call over to Marc Holliday, Chairman and Chief Executive Officer of SL Green Realty Corp., I would ask that those of you participating in the Q&A portion of the call, please limit yourself to two questions per person. Thank you. I will now turn the call over to Marc Holliday.
Please go ahead, Marc.
Thank you. Good afternoon, everyone. We appreciate you dialing in today, and we look forward to giving you an overview of our quarter's results, taking your questions. Just want to remind everyone that since 2019, we faced many new challenges, which in turn caused us to raise our bar even higher and respond in ways that have been beneficial for our tenants, our shareholders, and our community. In less than three years, we signed over 5 million sq ft of office leases. We completed 24 individual sales transactions at a gross price of $5 billion. We developed and acquired new world-class assets, oversaw and executed $2.25 billion of physical construction projects for on-time deliveries, reduced our DPE balance to $663 million at quarter end. We created a new iconic global entertainment destination, SUMMIT.
We managed our portfolio in a safe, secure and efficient manner, launched a portfolio-wide hospitality and amenity program, and we did all of this throughout by working five days a week from office, the only possible way we could have realized these extraordinary accomplishments. I want to once again express my extreme gratitude to the amazing and talented workforce here at SL Green, who came together, all of us on the floor of the New York Stock Exchange, to ring the closing bell and celebrate 25 years of excellence in improving the way which New Yorkers live, work and play. This momentum carried through into the most recent quarter.
I'm extremely pleased with the leasing performance in Q3, highlighted by the Franklin Templeton deal at One Madison Avenue and the Memorial Sloan Kettering deal at 885 Third Avenue, which took a total of over 750,000 sq ft of vacancy out of the SL Green portfolio on economic terms that were consistent with our expectations. As pleased as I am with the leasing performance in Q3, I'm just as happy that we were able to retire $800 million of maturing public bonds through a series of pay downs and financings that were done on attractive terms. Furthermore, we're highly focused on implementing strategies to mitigate our exposure to rising interest rates by executing on a series of swaps, caps and debt repayment. Understandably, a lot of the focus from the market is on the leasing performance and tenant demand.
On that front, we feel quite good about where we are given the portfolio is highly improved and our overall asset quality has never been better. We continue to amenitize our best assets to attract top tenants, and as a result, the portfolio is still well occupied today at 92%, and we have marketing and capital plans in place that we believe will enable us to operate during this market cycle at or above 90% or better until things begin to turn around. Rising interest rates, on the other hand, are more of a concern given the impact it has on our earnings, making interest rate hedging and debt reduction our number one priority for the foreseeable future.
I think Matt and his team have done an excellent job with this, as evidenced by the $1.25 billion of corporate swaps entered into during the third quarter to hedge future floating rate exposure. In addition, during the most recent quarter, we entered into cap contracts and another $270 million of variable rate property debt. Just yesterday, we swapped another $200 million on a floating rate mortgage. Notwithstanding the current interest rate environment, the underlying New York City economy is still chugging along based on employment data showing that NYC added 24,000 private sector jobs in August and is now 100,000 jobs ahead of New York City OMB's original 2022 forecast.
More to the point, 22,500 office using jobs have been created in just the last three months reported, now bringing the total office using jobs recovery to 104% of pre-pandemic high watermark. Contrary to what you may see in the media, I expect September's numbers, due out momentarily, to show positive as well. The numbers confirm what we feel that New York City is finally back to normal. The roads, sidewalks, and commuter trains are packed, and the subways are coming back. Tourism and hospitality are near pre-pandemic levels. Residential rental market remains tight, and the enablement of conversion of office to resi to help solve this problem is gaining momentum at the state and city levels. Meetings, conferences, parties, they fill the calendars, and the rhythm of New York social life has returned.
Before opening up the line for questions, I want to acknowledge a few other milestone moments for the company. First, SUMMIT One Vanderbilt is celebrating its one-year anniversary tomorrow. We will all be there to recognize the successful launch of this world-class attraction that has quickly become one of New York's hottest experiences, having welcomed 1.4 million guests to SUMMIT during the first year of operation, with far more expected next year. During the third quarter, we prevailed in consolidating ownership and control of 245 Park Avenue, a trophy asset in the SL Green corridor of owned properties, after a contentious bankruptcy litigation. We have plans to improve 245 Park over the next 24 months to make it one of the most desirable buildings on Park Avenue.
Last week, we received the excellent news that Le Pavillon received a Michelin star, less than eighteen months after opening during the pandemic. Finally, this morning, we announced a partnership with Caesars Entertainment to pursue a downstate casino license for a world-class gaming hotel and entertainment venue in the heart of Times Square. In connection with this effort, we have formed a coalition for a better Times Square that seeks to make significant investment in security, traffic mitigation, mass transit improvements, and accelerate economic recovery for surrounding businesses and create good-paying jobs for local New Yorkers. With that, summary, we'd like to open up the line for questions on the quarter and, whatever else is on people's minds.
Ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your touchtone telephone. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Alexander Goldfarb of Piper Sandler. Your line is open.
Good afternoon. Two questions. You know, first, just taking a look at bringing on converting the DPE positions for Five Times Square and 245 Park, just wanna understand, one, the earnings impact, because I think you were, you know, getting close to 11% on the DPE positions previously, and I'm not sure how that equates to a cap rate on the buildings. Two, I think you have some large vacancies coming in 245 Park. Maybe, Matt, if you could just talk about how we should think about the economics and impact to earnings from converting those two positions.
Sure. I'll let Steve address the 245 Park vacancy question you had. As to earnings, obviously, we'll be giving guidance for December 5th 2023 at our investor conference, so you'll get more detail then. You alluded to the DPE balances rolling off. That's about $367 million of debt and preferred equity investments combined between 245 Park and 5 x that we're rolling off at just short of 11%. You're right, the properties do not generate that equivalent return on their face. 5 x is in redevelopment and lease up. We only own 30%, 32% roughly of that. 245, we own 100% of.
There will be finalization of GAAP adjustments and those types of things done over the coming, you know, weeks leading into our guidance for 2023. The roll-off is, you know, substantial at $367 million at near 11%.
With regards to vacancy, or pending vacancy at the building, we really don't have as much as I think you may suspect. The JPMorgan space, which is 17 floors in the building, 15 of those floors were either previously leased to Saks, or while we were doing the leasing for HNA, we had pre-let 5 of the floors to Houlihan Lokey. That only leaves us 2 floors to really deal with when we get that space back late next year. Other than that, there's about 120,000 sq ft of current vacancy. There's another block in the building that we get back late next year, Major League Baseball, which had roughly 5 floors.
We had pre-leased most of that space on short-term leases to either Rockefeller Group or Houlihan Lokey, so we'll now get it back mid to end of next year. Other than that, there's a smattering of floors throughout the building. That sort of roll over the next couple years is what's justifying the capital program that we're in design for the building right now, which we're really excited about. You know, just to remind everybody, this product is exactly what the world is looking for today. Its side core design has a four-plate design that has actually six corners on it, the way it's configured. Sits directly catty-corner to JP Morgan's new headquarters. Has direct access to Grand Central Terminal.
Our development plan, which is going to be a spectacular transformation of the building from the plaza to the lobby to amenities being added, is I think very forward-thinking and we're already trading paper with prospective tenants. I have the greatest confidence that this building will outperform.
Okay. The second question is, Matt, on the swaps, lot of news, you know, and press reports about the rise in cost of swaps, but you guys have been quite active. Can you just give some perspective, you know, how much pricing has changed? Should we think about swaps being prohibitive or based on the fact that you guys are still executing them, you know, earlier this week, that prices may have gone up, but in the scheme of things, given debt costs, you know, still plenty of availability and cost-effectiveness on the swaps for your debt?
Yeah, certainly the latter, not the former. I think Marc alluded to the fact that we're gonna continue to, you know, target reducing future floating rate debt exposure through, you know, caps and swaps. You know, you talk about cost. Technically, the way it works, you know, cost for a swap is built in through a credit charge, which is just measured in basis points on top of the rate that you swap. You know, on the $1.25 billion, it was roughly five basis points on average. Not much. You know, caps have an upfront cost and, you know, those costs are based on, you know, the term and the benchmark. Yeah, there has been some press about increasing cost. I think cost of everything has gone up.
Certainly the savings we're realizing by executing on these trades far exceeds whatever incremental costs may be embedded in them. Just to put you know that in perspective, on the $1.25 billion that we did and was included in the press release, that was done more than 100 basis points tighter than where you would do those today. On a $1.25 billion, you know, you can do the simple math, 100 basis points, a $1.25 billion, over the course of several years. That's a lot of money, well worth a couple of basis points.
Thank you.
One moment for our next question. Our next question comes from Steve Sakwa with Evercore ISI. Your line is open.
Thanks. Good afternoon. I guess, Steve, I was just wondering if you could comment a little bit more on kinda where the pipeline sits today, given that big tech has sorta gone on hold. I'm just curious, you know, what parts of the market are you seeing the most demand in, whether it be size of tenants or, you know, what part of New York? Is it Midtown South, Midtown? Any color on leasing would be great.
Sure. Well, we've got a pipeline that's about 700,000 sq ft. Obviously, that number is down as a result of the two big leases that we recently signed. I think the good news in that pipeline is we're seeing a lot more activity from the small to medium-sized tenants, which, you know, is a change from where the market was for the past six or nine months, 'cause a lot of the leasing activity. Broadly speaking, the market is doing well compared to the prior two years. Velocity is still down compared to, you know, sort of the 10-year average. The success in the market this year has been driven largely by the bigger tenants.
I think the new news, as I said, is that they were starting to see these small to medium-sized tenants coming back into the market as the bigger tenants, the higher price point tenants, that have been signing leases, were the first ones into the market. The small to medium-sized guys were sitting on the sidelines. As the big guys are bringing their employees back to the office, you're now seeing those smaller guys follow them into the office, and that's driving a lot more leasing activity. Some of our Third Avenue, Lexington Avenue product, we have more tours, trading paper, and signing leases today than we have been in the past year or so. I think that's positive.
I think Midtown is still, without a doubt, the driver of the overall leasing velocity in the marketplace. Financial services is 41%-42% of total leasing that was signed in the third quarter. Tech is still out there, but obviously in a much smaller, diminished way. They're kinda 8%-10% of total leasing. Financial services, which in the past couple of years was sort of in that 30% range, they're now 40%+, and I think they're, you know, there doesn't seem to be any slowdown in that segment's demand. You're also seeing law firms a lot more active today than they were a year ago. You know, and I think that same demographic is what we're seeing within our portfolio.
Our pipeline, about 17% is financial services, 12% is tech, and the balance is everything from government to healthcare to service.
If I could just ask a quick follow-up on that. Do most of these requirements, are they kinda downsizing? Are they kind of including growth space? Are they just, you know, kinda musical chairs moving out of 150,000-foot into another? Just, you know, what can you say about size?
Well, there's an unusual amount of relocations taking place in the city as tenants reinvent their workplaces. You know, typically about 30% of leases that get signed are relocations. Third quarter, it was over 40% of the leases that were signed were relocations.
I think that's a function of tenants that are continuing to de-densify. You know, that was a pre-COVID phenomenon that never stopped. They're reinventing how they want to use their workplace. More amenities, more space per employee in a more hospitality in their design. Without a doubt, people are, you know, most businesses are still very unsettled about what their ultimate footprint is going to be. They just don't know. They're building in a lot of flexibility on ability to grow and ability to downsize as time goes by because the world is still figuring itself out.
Got it. Marc, I know it's early, and you just put out the press release with Caesars on, you know, the gaming license. I guess I'm just trying to sort of think through that building's obviously encumbered with a large tenant. I'm just trying to think through sort of the concept of a vertical casino in New York versus one that's more horizontal. I mean, can you just kinda share any thoughts with us about that?
Steve, there'll be lots coming out over the course of the next several months. We expect the RFP out sometime in December, but that's not, you know, that's not official or formal or announced from the state. That's just our expectation. Could be before, could be after. Suffice it to say, we have what we and Caesars think is an excellent plan for bringing, you know, gaming and entertainment and hotel right to the heart of Times Square. I think we wouldn't do anything less than a world-class facility laid out in a way that we think will be, you know, extremely successful and desirable and additive to Times Square, which I think really could use a boost right now. I would say stay tuned for those details.
Will be more to come and stuff that I and the team are really excited about. Thanks for the question.
Great. Thank you.
One moment for our next question. Again, ladies and gentlemen, we ask that you limit yourself to two questions. Our next question comes from Michael Griffin with Citi. Your line is open.
Great. Thanks. Maybe we go back to the refinancing for a moment. Just with these debt maturities coming up, is there any ability to get longer term refinancing on some of these? Or are the expectations more of the shorter term floating rate debt instruments, kind of similar for the $400 million term loan?
I mean, at the moment, the CMBS market for single assets is not as compelling as the shorter term market. You'll probably see us use the shorter term market at the moment. As soon as that single asset CMBS window reopens, which no dealer's been able to tell us exactly when it'll happen, but hopefully it'll be by the first of the year, then we'll start to avail ourselves of longer term fixed rate financing.
Just with regard to the $400 million corporate facility, remember what we're trying to accomplish there, you know, we had to pay off maturing bonds, $500 million, which we've done. We were doing that in a way that can be repaid one year from now, when we get money from our partners at One Madison, just short of $600 million. The bank financing market for that kind of term is well inside of what any bond execution looked like, probably 200 basis points inside. So that's why we went that route.
Gotcha. That's definitely helpful. We saw some details recently released around Local Law 97 in New York. You know, I had to think, since I understand things are still preliminary, but do you have a sense of how this could impact your portfolio and maybe highlight any steps you're taking to make sure your portfolio is gonna be in compliance?
This is Local Law 97?
Yeah.
Yeah, no, I mean, this is, you know, the rules were formally adopted recently, but this is something we've been preparing for years, that it's been out there. The first measurement date, we think, you know, the bulk of the portfolio, if not all the portfolio, will pass in compliance without penalty. You know, in the 2030 date, we're gonna be working obviously over the next 7, 8 years on making additional investments and exploring ways to use renewable energies and credits and everything that'll be available to try and limit or eliminate entirely whatever penalties there will be in 2030.
We'll probably go into more detail on this in December at the investor conference to give people a better sense of, you know, where the issues lie, a range of quantifications. You know, we don't have that here now, and I would say that until, you know, 2030 at the earliest, we expect it to be of no financial consequence, not because the rules are not rigorous, but simply because we've invested so much in the portfolio, and we have so many of our buildings are LEED designated, WELL designated, Energy Star recipients, et cetera, that, you know, we score very well on the current metrics.
Should these evolve.
You know, those rules will evolve over time and we'll see what the state of play is, you know, in seven or eight years, but we're preparing as though what's been promulgated is what we'll have to live with.
Okay. That's it for me. Thanks for the time.
Thank you.
One moment before our next question. Our next question comes from Anthony Paolone with JPMorgan. Your line is open.
Yeah, thank you. I guess first question's for Marc. Can you talk about where you think the balance sheet leverage should be over time? You mentioned the priority of debt pay down, and so just wondering how you're thinking about it and especially in the context of the asset-light strategy you guys have articulated.
Yeah, just, you know, on the issue of debt pay down, it's not so much a leverage ratio question in my mind. I think we are very fairly leveraged and, you know, on many of the assets, under-leveraged relative to what I think a proper loan to value would be in this market. The debt reduction really is pointedly towards preserving and protecting our earnings from increasing rates and variable rate debt. It's
At a leverage point we feel, and have always felt very comfortable where we sit today, with our leverage relative to, you know, an asset base that we think has a value, you know, far, far in excess of where the stock trades today and even given where the stock trades today. However, you know, we have about, you know, Matt, I wanna say maybe $2 billion or so unhedged at this point. You know, we're over 80% hedged at the moment, right?
Mm-hmm.
you know, what we're talking about is managing the risk, if you will, on that, whatever that is, you know, 17%-18% unhedged position, which I would like to reduce further. Again, not from a you know, credit or balance sheet standpoint, but purely from an earnings standpoint, to protect ourselves from volatile increases in interest rates.
Okay, got it. Then just a follow-up on the DP book. A lot of it is set to mature next year. I mean, should we think about this as being the end? Also, you know, do you anticipate just getting paid back on all this, I guess, outside of 625 perhaps, or do you think other properties might have to come onto the books?
It's definitely not the end. I mean, this has been a very important program for us. It's returned us terrific IRRs over the course of the program, and you know, we tend to invest in at the bottom of the cycle. You know, the debt investments are most effective when we can make them in distressed type situations. If we do see those type of situations, we will definitely be taking advantage of them in the debt book. You know, in terms of the maturities that they'll you know. Time will tell what the refinancing markets look like, what the property markets look like. Sitting here today, we can't predict sort of what's gonna happen in the future at existing loan maturities, but we were happy with the outcomes, obviously, on 245 Park and Five Times Square.
You know, I definitely wouldn't call the book defunct by any stretch.
Okay. Thank you.
One moment for our next question. Our next question comes from John Kim with BMO. Your line is open.
Thank you. You guys talked about the improvements you could make at 245 Park over the next couple years, and the former owner was capital constrained. I was wondering if you can comment on how much CapEx will be needed to upgrade the building, and also if you can comment on the timing of finding a joint venture partner.
I would say, you know, there's a lot you can work into, you know, what's needed at the property. I mean, the property, you know, leases in its current state, and we've done actually a lot of leasing. How much, Steve?
Probably 200,000+ sq ft.
We've done about 200,000+ sq ft . The building is a very good building, but you know, I don't think needs for much. However, you know, to bring it up to where we want it to be to its full potential, and be consistent with some of the great properties within the portfolio that have extensive amenities, et cetera, you know, we're gonna go in sort of electively and voluntarily. You know, I would expect any program of size to be under $100 a foot. I don't mean that to sound de minimis. It's a big building. It's up to 1.8 million sq ft building. That's.
The beauty of the situation here is we can amortize substantial improvement dollars over a very large asset. For relatively, you know, I'll call it modest incremental investment per sq ft, we can take our already low basis for a Park Avenue asset of, I think about $1,100 a foot, if I'm not mistaken, maybe even slightly under that. Like I said, make a very large dollar amount but a small relative per sq ft improvement amount for improvements, beautification, efficiencies, new lobby, plaza, amenities. Still have a basis very low by Park Avenue standards, and I think have, you know, one of the best buildings with one of the best views, sitting right on top of access to Grand Central Station. Thanks.
The timing of a JV partner?
Well, I mean, you know, I mean, we're looking. I mean, we're, you know, we'll begin those conversations, excuse me, in this quarter. You know, that'll be one of our priorities for 2023, identification and closing of a JV partner. But we, you know, I guess, already have begun fielding inbound and will be sort of proactively marketing outbound this quarter.
Okay. My second question is.
That doesn't mean it's gonna close this quarter. It just means we're gonna start the process this quarter. You know, these processes, you know, really could take anywhere from, you know, four-six months, you know, I would say, on balance.
Got it. On the Caesars joint venture, can you provide any more color on the structure of the JV? Is it just gonna be you and Allianz own the real estate and Caesars is the operator that's completely separate, or will there be co-ownership of both?
What is this?
If you could also confirm if this is an exclusive to both you and Caesars for a New York casino license?
Yeah, in terms of, you know, maybe I'll sort of do a blanket statement for the many questions that may follow. Any details of the project, the bid, the structure, all of that, you know, is gonna be something that we're going to address, as other bidders will address over time and in response to an RFP that hasn't been issued yet. You know, I wanna put an emphasis on that there. There is no RFP from the state right now for a downstate casino license award that is, you know, anticipated to occur.
you know, the answer to your second or third question was yes, we are exclusive with Caesars on this casino site, and we're gonna be putting you know, both of our mutual best efforts behind it to make it happen, because we think it's not just a big opportunity for the state and city, but it's almost a rallying point for Times Square to have a catalyst of something very positive to help you know, redirect some of the degradation we've seen in that area. We know Times Square at its best, there's nothing better in the world. It's the best entertainment district in the world, bar none.
You know, there are moments in time, particularly coming on the heels of this pandemic, where, you know, an area like Times Square, it's not the only area in New York City, but an area like Times Square needs help and needs to reboot itself. I think we can rally around a casino and make that the, you know, the engine and economic engine around which, you know, we could really have a Times Square renaissance, you know, much in the way that you've seen a Grand Central renaissance, you know, over the past few years.
Great. Thank you.
One moment for our next question. Our next question comes from Tom Catherwood with BTIG. Your line is open.
Thank you so much. Steve, let me turn it over to One Madison. Obviously two kind of anchor tenants in there at this point in time. Now that you've reached this kind of, you know, 55%+ level of pre-leasing, how does your marketing program shift at all? Do you become more selective with tenants? Are you able to start pushing rents at this point in time? Is there anything that changes once you reach this level?
Yeah, we've already raised rents as a result of the leases that we've signed. You know, first and foremost is to remind the brokers community that we still have space. I think a lot of people are under the impression that we're fully leased in the building. So we're out there reminding people that we still got space to offer. We're actively trading paper with a couple of tenants now in the tower of the building. We're still seeing, you know, pretty strong tour activity. You know, I think it's gonna pick up even further towards the end of this year once we start to have the steel in place for the new tower and we can do site tours.
Up until this point, all of our marketing has really been done out of our boardroom, off of renderings and off of a presentation deck, and really not with site visits. What we saw at One Vanderbilt Avenue is that once we could do site tours, the place just really exploded because people got so excited about the quality of the development, what the views are like, what the volume of space really feels like. It takes on a whole different character and pace to the leasing program. You know, we top out steel in November of this year, and I think we'll be doing site tours towards the end of the year or early next year. That's really where the thrust of our focus will be.
Got it. Appreciate that. Maybe Marc or Andrew, when you're thinking of sources and uses going forward, obviously one of the big priorities has been repaying the unsecured bonds. You got that resolved. You know, the new projects obviously add more capital requirements, whether it's 450 Park or 245 Park or Five Times Square. How do you think about allocating capital to those while at the same point in time kind of reducing your floating rate debt? What gets prioritized or kind of where do you hit a challenge in that capital allocation, if at all?
Well, I think the primary source of capital will be asset sales. You know, in terms of specifics, Five Times Square will be 0 incremental capital. That deal was sort of fully funded at capitalization with new cash equity that did not come from our side of the ledger, it came from the other partners in the deal. There's 0 incremental capital needs there. As we said, 245 Park, we have this active search for a joint venture partner ongoing, and we'd expect the proceeds of that joint venture sale to cover most, if not all, the capital required by that building.
Yeah. Thanks everyone.
One moment before our next question. Our next question comes from Michael Lewis from Truist. Your line is open.
Great. Thank you. I have a question about the term loan and the swaps, and I'm wondering if there was any change in the amount or the composition of the banks that kind of came to the table to help you get that done because, you know, we've heard that some large lenders have pulled back on commercial real estate lending. I'm wondering not just about the pricing of that, but, you know, kind of the availability of capital in the market.
Yeah. Mike, it's Matt. No question. It's tough out there. You know, a lot of banks are pulling back in various areas. To hit the mark with a facility like this is not without its challenges. We went to very close relationship institutions who stepped into it. They are all participants in our existing credit facility. Some are participants in One Madison financing, and given that this facility is pursuant to funds coming from One Madison, they have a great deal of certainty around the success of that project, and therefore the funds coming in. Yeah, there's plenty of no's in this environment, just 'cause you know, capital allocation or restrictions are keeping a lot of banks handcuffed.
Okay, thanks. My second question, kind of piecing together, I guess some of the other questions that were already asked. You know, as you look at, you know, JV partners and, you know, maybe selling some assets, you know, what's kind of the depth of that market, right? So with interest rates up, you know, leverage buyers under pressure, you know, is there capital out there to get those deals done and does the pricing take a significant hit, or do you feel pretty good about what you'll be able to do those deals at?
Well, I mean, I think we feel good relative to the kind of product we're bringing to the JV market. It's still, you know, sort of irreplaceable Class A often, you know, trophy-like assets. For that, I'd say, you know, there's almost always demand in every market. That demand often shifts from, you know, investor to investor or from country of origin to country of origin. I think that, you know, for the balance of 2022, you're not gonna see, you know, a lot of people are gonna have more limited capacity. In 2023, there we believe will be certainly new investment mandates to put money to work, but only in best markets, best properties, best sponsorship.
I mean, it's like almost anything in a dislocated market or a challenged market, because of what Matt just talked about on the debt front. You know, only the best deals are gonna get done in, you know, the grade A markets with very competent sponsorship. In that regard, we go into it very confidently that we've got the right product, the right returns for this market, the right valuation levels. The proof will be in the execution.
In the case of 245, the right in place financing.
Yeah. Well, that's, you know, it's a great point, Andrew makes. It's a fully financed deal, so.
Right
that certainly helps. You know, with or without it.
The challenge in most new deals is taken off the table in 245 Park, so.
That makes sense. Thank you.
One moment for our next question. Our next question comes from Daniel Ismail with Scotiabank. Your line is open.
Nick Yulico here. Just a question on 245 Park. How are you guys. You talked about some of the capital plans, but how should we think about, you know, how you underwrote a, you know, stabilized yield on that building post renovation?
Well, stabilize what kind of yield? Cash on cost, unlevered IRR, levered IRR? You know, just-
Yeah, cash on cost would be great.
Cash on cost. Stabilized cash on cost? Boy, I'd have to. You know, look, let me sort of go back to front. We've got levered returns on our basis that I think would exceed 50%, you know, based on where we can execute for a grade A trophy multi office property right across from JPMorgan's new world headquarters. How does that translate-
SL Green, it's low sixes cash on cost.
Yeah.
Okay, great. Thanks. I guess just going back to the, you know, in that case, you do have the in-place debt on the building, which is, you know, attractive, low 4%. You know, if you were to think about that building or another building in New York trading right now, you have to put new acquisition debt on it. You know, your own rate on that, even if you can get it's gonna be somewhere over 6%, let's say. How is that, in your mind, affecting values in the market? Does that mean that, you know, starting cap rates for New York and that type of situation, if you have to finance it over 6%, you know, starting cap rates have to be closer to 7% or higher?
No, no chance. I mean, this is no different than you have inverted interest rates. You're gonna have cap rates below, you know, financing rates because New York Class A trophy office is not gonna be a seven cap. You know, a cap rate is a perpetual in place expected rate of return over a spread to treasuries minus growth rate, based on long-term treasuries. You're talking about discount rate. It has no bearing on a cap rate. New York City cap rates today, I still think are solidly in the 4s for the best assets. You know, maybe for a more, you know, mid-market product in the 5s. I haven't heard anything about 7s. I mean, is that?
Do you have a transaction in mind that traded in Midtown at north of 7?
Well, no. That's why I think part of the problem is that there aren't that many transactions, but everything we're hearing is that, you know, negative leverage is a problem, particularly for office if you're underwriting.
No. Negative leverage is a fact of New York City. That's been doing this for 30-something years. Who's this? This is-
Nick.
Negative leverage is often the case in New York City. It's called, you know, often in people.
If you buy a key building with vacancy, there's gonna be negative leverage.
Yeah. Even, you know, people will generally be making long-term 10-, 15-year investments. You know, ideally, I mean, you'd love to be in a positive, strong positive leverage going out. I'm not arguing that. It is not unusual in New York to buy negative leverage and work your way up on cash on cost to get to, you know, even or positive leverage to create, depends on the market, but, high single-digit, you know, IRRs. No, I wouldn't say it's. You know, not for trophy. I mean, it's 400 million, 410 million sq ft of assets in New York. Not all the same. I'm just talking. You said a building, you know, like a 245. I'm responding to that.
A 7+ cap rate would be, I think, you know, empty set.
Okay. Even if someone could put debt on that building today would have to replace it at, you know, well over 6%, even if you can get that.
I don't know where that debt would be. That's your debt. I don't know where that debt would be.
It's just spreads. I mean, it's spreads in the market or, you know.
I hear you, but you know something? We just closed a corporate facility. Matt, how much was it? $140 over. Now, in your mind, maybe it's like $7+, but, you know.
No. I understand you use the term while I'm saying in the market to get property debt.
Nick, please. You asked me a question. I'm gonna give you my opinion. If you don't agree.
Okay. I just wanna make sure I understand. You're still think cap rates in New York are for stabilized assets, not turnaround assets?
No.
are somewhere around 4% or 5%.
I'm gonna be very specific, but then I'm gonna move on to the next question.
Okay.
I think stabilized cap rates. What did I say? Cap rates for assets like 245 have improved with us at the helm in this market across from JPMorgan's $5 billion-$6 billion investment, few blocks up the road from One Vanderbilt, down the street from 425 Park, carries a sub-5% cap rate. Does not carry a 7.5% cap rate. That's it. No other words on that. That's my feeling on it, and if you disagree, you disagree, which is what makes a market. I have no problem with that. I'm just saying that's my opinion.
Okay. Thank you.
One moment before our next question. Our next question comes from Blaine Heck with Wells Fargo. Your line is open.
Thanks. Good afternoon. Marc, you talked a little bit about this in your prepared remarks, but now that we've moved past Labor Day, I'm curious what you guys are seeing in terms of tenant space usage or utilization, you know, days in the office per week and maybe even times of day that are most active at the office.
You know, I'd say that like many others are experiencing right now, there's two work weeks. There's the Tuesday, Wednesday, Thursday work week, where I'd say we're almost back to close to pre-pandemic levels. You know, at least that's how it feels like, and the numbers are, you know, in excess of 60%. You know, pre-pandemic, our full occupancy might have been 70% or 70-something %. We don't have exact numbers on pre-pandemic.
Certain buildings are even higher.
You know, certain buildings are higher than that, where the tenant base is more back to work. You know, then we have certain tenants that may be more remote, so it fluctuates a bit, but, you know, I'm giving you the averages. Then Mondays and Fridays, particularly Fridays, you might see physical occupancy, you know, at 30%. Now all those numbers are increasing, and we see that in the numbers we're getting. But you know, Fridays, we're often late in New York City, so we're not measuring against 100% on Fridays in New York City. I mean, people are out, PTO, traveling, doing business, et cetera. So it has the feel for three to almost four days a week, like a pre-pandemic market.
You know, I come off the train the other day. I mean, that train is full, that platform is full. You can't. You know, the time it took to get out the doors into the main concourse at Grand Central was you know, measured in minutes, many minutes, not seconds, because that platform was packed. You know, it has a very good feel right now in my opinion. I don't know if anybody.
Well, I'll add to it. I mean, just statistically, Metro-North ridership is, if I remember the stat correctly, like 9% greater than it was pre-pandemic. Car traffic is 5.5 or 6% greater than it was pre-pandemic. Where it's still, you know, less than pre-COVID numbers. Long Island Rail Road is still at a lower number. To Marc's earlier point, the trend line is such that ridership and people coming back in the city and people occupying the offices is on the upward slope, and we're seeing that consistently improve week-over-week.
Great. Thanks, guys. That's helpful. Second question. You know, it seems as though the highest quality and highest re-price points were certainly the most active during the pandemic, and I assume that can't last forever. I'm wondering how the pace of leasing activity has trended in some of your lower rent buildings. Are you guys seeing much of a pickup in activity there relative to kind of what you saw during the pandemic?
We're seeing. Well, as I said earlier, we're seeing more tours and proposals and lease signings in our sort of mid-price point buildings, which I think, you know, are largely dominated by the smaller to mid-size tenants. That's not yet translated into enough signed leases to really move the needle, but just off of a tour activity and expressions of interest, it's improved. It's still a struggle, because those small to medium-sized guys are late to the game.
Great. Thanks, Steve.
One moment for our next question. Our next question comes from Tayo Okusanya with Credit Suisse. Your line is open.
Yes, good afternoon. Two quick ones from me. First of all, in regards to the swaps, and an earlier comment about, again, just having more hedging going forward. I mean, could you just talk to just how much you kind of ultimately expect to be hedged by, given you have about $3 billion of kind of variable debt between the consolidated, unconsolidated JVs?
Yeah. You know, let's talk the numbers first. You know, we had about $2.4 billion unhedged floating on 12, you know, just short of $12 billion of debt. Our target floating rate ratio is kinda 15%-20%. We're already at or below that number, but we're gonna target all of our existing floating rate debt, as much of it as we possibly can because we don't, you know, unilaterally control some of it to hedge. You know, beyond the end of the quarter, we did another $200 million swap of floating to fixed. Yesterday, we're zoned in on another almost $400 million of property level floating rate debt. Then there will be debt paydown.
You know, we wanna look at the credit facility, you know, our revolving credit facility, and our goal is to always have that near zero. With proceeds from asset sales or other activity, we'll try and get that down to zero. That's also floating rate debt. It's a combination of, you know, caps, swaps, and debt repayment, as Marc said in his opening comments. Even though we are, you know, at or below our target, we're going for more, because we wanna protect earnings and cash flow.
Gotcha. Okay, that's helpful. 717 Fifth Avenue and 650 Fifth Avenue with the debt maturities there and the ongoing kind of conversations with the lenders. I mean, what's kind of the ultimate kind of goal there with those two assets?
Well, we're not the managing partner at 717. We have a very small passive interest there. I think the hope is to get an extension from the existing lender group. I would say 1552 is much the same. The Times Square retail's obviously been heavily impacted by the pandemic, and we expect you know, the lender to be appreciative of those impacts.
You mentioned 650. 650 Fifth, we did a short-term extension.
Right. After like the six-month extension that expires like in April of next year, right? I think longer term is-
Yeah.
is the idea. You wanna get longer term
You know, part of the exercise with extensions is, you know, evaluating the financing market at the time. We felt with the lender, the best thing to do at this point was extend it six months. In six months, we'll consider it again, and maybe we'll do another six months, another 12 months, until we, you know, get to a more comfortable position.
Longer term if the rates are.
Right. If the markets are cooperative, we'll do something longer term.
Gotcha. Thank you.
One moment for our next question. Our next question comes from Anthony Paolone of Barclays. Your line is open.
Hi, good afternoon. Marc, I think you mentioned the prospect of office to residential conversions. Have you talked in any conversations with people like the mayor and governor? Are there plans in place to maybe systematically reduce some of the office, I guess, availability out there of stock in New York through these conversions that could suddenly be announced in the next few quarters? I'm curious because I think this issue of maybe obsolescence is kind of coming. I mean, it comes up a lot in our conversations, so if the plans are in a way to kind of get that started, that would be super helpful. What's your view on that prospect for the next few quarters?
Just so I understand the question, the question is, what do I think is the real timeline or prospect of getting something accomplished at state and city level? Is that-
Yeah. In terms of just a broad office to you know residential or office conversion program.
Okay. I think you know, this is one of the topics that we're gonna be featuring in about six weeks at the investor conference, stepping through what it takes to get a building, you know, from office to resi from a physical standpoint, from a zoning standpoint, from, you know, building code standpoint. It's very doable. You know, we've done it, many have done it. There are ways to make it easier, better, more efficient to, you know, turn right now what's a very small pipeline of office to resi into a much larger pipeline of office to resi. Obviously, one of those big elements, you know, would be a tax break along the line of what 421-g was downtown when downtown had, you know, substantial problems after 9/11.
You know, that in and of itself is being looked at, but it's being looked at in coordination with the kind of changes that I mentioned, some of which will take time to implement. I think that a program, you know, can come about in 2023, in terms of, you know, directional. But in terms of actually seeing buildings converted, I would guess that's 2024 and beyond. I do think that you could see, you know, upwards of 10 million sq ft of office, you know, sort of taken out of the equation for conversion pursuant to a new program if the economics and the zoning are there to make it happen. It's a much longer discussion.
It's a detailed discussion that, you know, Anthony, if you don't mind, I wanna defer until our investor conference when we're gonna be speaking to that directly.
All right. Great. Thank you.
One moment for our next question. Our next question comes from Ronald Kamdem with Morgan Stanley. Your line is open.
Hey, great. two quick ones from me. Just, when you're thinking about sort of the 2023 lease roll at this point, any commentary on how much is rolled, how much is left to do, what's that shaking out?
Well, as you can imagine, we've been, you know, for the better part of this year, working on the 23 expirations already. We have very good clarity on every single tenant as to who's likely to stay or not. We're actually going through our budgets, building our budgets for next year, so we have a granular tenant-by-tenant assumption for everybody that's rolling and each piece of vacancy that we have today. I don't think there's any surprises as we sit here today as to where we thought which tenants were gonna stay or go compared to where we saw those tenants, you know, how we saw those tenants probably 12 months ago.
Any chance, any way to quantify that? Is it 20%, 10%? Any sort of high level numbers or?
I don't have it at my fingertips, so it'd be pure speculation. It's something that I think we'll have. You know, when we're done with our budgets over the next week or two, we'll have a very good ability to communicate that. Perhaps that's something we'll talk about at investor conference as well. Sure.
Sure thing. My second question was just on asset sales. I think you talked about, historically about sort of potentially JV-ing One Vanderbilt. Maybe can you talk about how that's going, and are there other assets beyond that that you're contemplating as well, in the portfolio?
Well, we are marketing some assets for sale. We have other assets we're evaluating for sale, and the One Vanderbilt JV process is still sort of in discussions. We're active on the disposition front. We're gonna use those proceeds to retire debt and to fund you know some of the capital needs of some of the projects. You know, there's still an active market out there, as we showed with Memorial Sloan Kettering and, you know, there's a bunch of other trades that have happened in the market. I think on balance, we feel pretty good in our ability to execute, which is why we're basing our plan on redeployment of those proceeds. If we didn't feel good about those executions, then, you know, we'd have a different plan.
You know, working hard and trying to convert and, you know, we got a lot done this year. I referenced, you know, 24 sale transactions, either entire or partial interest, you know, several of which were this year, and more of which will be in the next few quarters.
Thank you.
I'm not showing any further questions at this time. Let's turn the call back to management for any closing remarks.
Nope. That's it. Thanks for whoever's left on the phone. Appreciate you hanging in there for the duration and, we will see, I hope many or most or all of you on December 17th.
5th.
5th. I'm sorry about that. On December 5th, Monday. See you then.
Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.