Welcome to the 8:35 A.M. Monday session at Citi's 2023 Global Property CEO Conference. I'm Michael Griffin with Citi Research. We are pleased to have with us SL Green and CEO Marc Holliday. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. For those in the room or on the webcast, you can sign on to liveqa.com and enter code Citi 2023 to submit any questions if you do not want to raise your hand. Marc, I'll turn it over to you to introduce SL Green and members of management, provide any opening remarks. Then we'll get into it.
Okay, great. Thank you. I'm gonna go quick 'cause I know time's short. A lot to cover and we'll have some questions. Good to be back. I think two year hiatus, if I'm not mistaken.
No, we were here last year.
Oh, we were here last year? Okay. I don't know. Time flies. Seems like we had at least a gap. Good to be back and thank you for joining us this morning. Wanted to give a quick update. This has been three months since our investor conference when we do a bit of an in-depth market review. You know, these markets move quick and lots happens. I wanted to go through what's happening today. I've got a deck in front of me. I think it's available online if anybody wants to pull it up, follow along, feel free.
You know, first, just starting out with New York City's economic recovery, which, you know, I think when you get past the leasing, the month-to-month leasing stats that affect our business in particular, being office rental, the city itself, I think is doing reasonably well in continuing its recovery and upward trajectory, you know, measured by, you know, private sector jobs which have recovered to about 90%-91% of pre-pandemic. Office using jobs are 115% of the level that they were at in 2019, which is something that, you know, doesn't, you know, deviates quite a bit from a 17% vacancy rate. That's the reality is there are a lot of jobs out there, and December and January, again, were growth months.
I don't have the February numbers. We'll see, but both December and January were plus and plus on office jobs increases. You know, tourism reined in at around 56 million domestic and foreign tourists last year. That's this year projected 61.5 million, so that's + 5 million new visitors to New York City, most of those to Manhattan. You know, both leisure and business, which puts it only about 7% down from peak in 2019. You know, it has a big stimulative effect on the New York economy.
I'd also say you saw yesterday or two days ago, articles came out for February in terms of more advancements in crime reduction in New York City, which I think is very positive, in terms of, I think there's seven major crime stats that they follow. They were down 6% year-over-year for February, which I think shows that the city is moving in the right direction, getting tougher on crime in the streets, you know, and subways feeling better. You know, one of the important new developments to follow is the opening of the $11 billion East Side Access Program, otherwise known as the New Long Island Rail Road station into Grand Central. It's called Grand Central Madison. It opened about a month ago, I wanna say.
It started with service just between Grand Central and Jamaica. Now has been expanded throughout most of Long Island. Right now about 30% or 35% of the LIRR's trains, which used to run 100% to Penn Station, 30%, 35% are now running to Grand Central Madison. I think they expect to stabilize that number at about 45% once people and commuters get accustomed to the new commute pattern, which saves people anywhere between 40 minutes and 50 minutes a day on their commute. It's a seismic, you know, moment for East Midtown and, you know, for SL Green's portfolio. There are some phenomenal images of the city, you know, that's been built beneath the ground, which you can see online or go see it in person.
you know, it affects so many of our buildings that are within a five-minute walk of where the new Grand Central Madison station is. We've diagrammed that in the online proposal, but it's about 12 buildings or, you know, almost half the portfolio, a five-minute walk from this new train station that will become one of the biggest and busiest commuter rails in the world from nothing. You know, not counting subway, obviously. We think that'll have a significant uplifting effect on office in a market where, you know, commutability is probably the number one on the checklist items for all business tenants. I'd also say office-to-resi conversion is a topic that's out there that people should keep their eye on. It's been talked about for years and years.
People always said, "Well, it's too political, it's too complicated," and not wrong. There is so much momentum behind this effort to take secondary and tertiary office, expand the universe of what's eligible to be converted right up through buildings built to 1990, adding over 100 million sq ft of potential convertible inventory, eliminating the 12 FAR cap that has constrained certain conversions. Also, putting in place tax incentives, meaningful tax incentives for conversion that the governor has included in one of her two bills related to this topic, as part of her executive budget in for the upcoming fiscal year that begins in April. It has nearly unanimous political support.
It's really just a question in my mind of what the changes to the zoning will be and what the tax incentives will look like in the end in order to make sure there's enough incentive there to offset the cost of conversion so that estimated between 20,000 and 40,000 new residential units can be developed, you know, what I'll call fairly easily, in our parlance, through the conversion of office to resi. I'll end now with, you know, just a quick snapshot on our leasing progress since over the last 90 days, that being, you know, what we felt was a recent time period.
We've done about 446,000 sq ft of leasing, deals that bigger deals that range anywhere between 20,000 sq ft-185,000 sq ft, and 28 other transactions making up 145,000 sq ft for a total of 446,000 sq ft. With that done, we're obviously off to a good start for the year in meeting our leasing objective of about 1.7 million sq ft for the year. We hope to end March, you know, at least somewhere around 0.5 million sq ft. One point two million sq ft, let's call it, for the remainder of the nine months, 400,000 sq ft a quarter.
Not a small task in this market. I don't wanna in any way make light of it because, you know, we'll have to really outperform and hustle and get leasing done. At least it, in my mind, keeps us on track to meeting our objective for the year, based on a pipeline that we have right now of about 700,000 sq ft of either leases out, leases in negotiation, or term sheets in substantial promise. With that, open up for questions.
Outstanding. Well, thank you, Marc. Appreciate that overview. We're starting off each one of these sessions with the same question. What are the top three reasons investors should buy SL Green?
Well, I mean, one, stock price. I think, you know, there's a lot of value I think that underlies the portfolio, and, you know, we've got a premier portfolio of assets. We've got great development pipeline. I think the price, as we've seen in the past, 25 years of SL Green's existence, tends to exaggerate on the high and exaggerate on the lows, and I think we're in one of those lows right now, where, you know, in terms of our free cash flow, our dividend, our relative stability of the portfolio at around 91% occupancy with a goal to increase that by year-end to 92%. You know, the East Side Access kind of unlocking value in half the portfolio.
Our ability to deliver hospitality and amenity, I think, is kind of a market leader in New York City, which like I said, you know, top tenant checklist items today are commutability. Our portfolio syncs up nicely with that. Amenity and service, I think we're doing an excellent job there. You know, buildings are well leased and in good shape and, you know, almost all redeveloped at this point. We've got, you know. So those are, let's call it two reasons. I don't know how you define that, but.
Lastly, I think, when the market settles, there'll be a very big opportunity set for doing what I think we do best, which is coming into complicated situations or recapitalizations and bringing our platform and our special servicing and our, you know, market relationships to bear in order to capitalize on, you know, what'll be for sure, you know, dislocation in the office market in 2023 and 2024.
I guess to expand on that a little bit, just given the headwinds the office sector is facing currently, you touched on it somewhat, but, you know, if you could expand a little bit, what differentiates Green's, you know, business in terms of your portfolio composition, tenant makeup, any growth opportunities kinda relative to your competitive set?
Well, I think that, you know, locationally, East Midtown is our territory, and I think East Midtown is where you're seeing the most traction right now in terms of, you know, in terms of what leasing there is out there. A lot of it is really centered in this area. A lot of financial firms, even some tech firms, are in the area. I think the whole Park Avenue spine from, you know, 100 Park on the south to, you know, I don't know, 450 Park on the north where we have all these great buildings, we're seeing pretty good leasing demand, you know, for those product. I think on a relative basis, we have more of that in the sweet spot than a lot of our competitors.
I think that's only gonna be aided by Grand Central Madison because you're taking, you know, I forget how many commuters a day, but it's over 200,000 commuters a day that exclusively were commuting into Penn Station, and now will have a choice between Penn Station and Grand Central. I think, you know, on that basis, we're differentiated. Also, I think we have a, you know, kind of a unique skill set that we've been able to express in terms of the debt markets through our debt and preferred equity program.
We're, I think, the only rated special servicer in that subset of peers that gets hired routinely today more than ever to perform special servicing functions on SASB assets, where, you know, we get a seat at the table to earn fees, work out recaps, and in some cases, bring investment opportunities to our shareholders and our partners. I think that differentiates us because we're so deeply embedded in that market.
You know, two, and I think our focus on hospitality and service, I mean, there's a lot of good owners out there that are focused in that area, but, you know, we are diversifying in ways that I think are not just, you know, areas that are trying to meet the tenant demand or meet public demand, but are really showing some thought leadership when it comes to great restaurants like Le Pavillon and Jōji, or great immersive destination experiences like SUMMIT, which we project will do over $100 million of revenue this year in only its second year of existence. Is frequently sold out, very successful. We've got plans there to expand SUMMIT, both, you know, within One Vanderbilt and then globally.
You know, I think that's a bit of a differentiating factor. You know, just our, you know, work ethic. I mean, everyone works hard, but, you know, we're five days a week in the office, still, you know, unchanged, doing, you know, working, you know, very, very hard to try and keep everything well leased, stabilized, finish out One Madison, big project, 1.4 million sq ft, which right now is six weeks ahead of schedule and $60 million below budget.
We've had a couple questions come in from our LiveQA feed, so thank you for sending those in. A reminder, if you wanna use the microphones to ask a question, you have to push the little button on it in front. Are office tenants taking more or less space when their leases expire? Do you think, where do you think long-term office utilization rates shake out at?
I think the trend right now and what we hope to, you know, try and see is to have tenants, you know, maintain their existing footprints. We have some expansion for sure that's occurred throughout the portfolio, but I would say it's offset more by tenant contraction. The way we're gonna maintain our occupancy and go forward is not necessarily by net absorption in the city, because I don't think, you know, we're necessarily gonna see net absorption in 2023. You know, February was obviously a tough month, but the first quarter is always a bit slow. I think the real telling signs will be, you know, April on into July, and then again from September to year-end. I mean, that's when we do the bulk of our leasing.
Our pipeline indicates it's pretty good. How we're going to sort of meet this market is by bringing other tenants into our portfolio through consolidations, which may be consolidations that are at equal space, or even if they're consolidations for less space, you know, what we care about is they end up in an SL Green building so that our properties stay above 90% occupied. At that level, we're in great shape regardless of the trend for some tenants towards downsizing space because of primarily remote work.
What percentage of your portfolio would you characterize as Class B, in which you would need to put more CapEx in order to stay competitive?
You know, I don't have a Class A, Class B designator, so it's, you know, whoever asked that question, it's a tough question to answer. I mean, we've got every year, you know, we're a big seller of assets. You know, every year, even through pandemic, we sold quite a bit of real estate, always somewhere between, I wanna say, $1 billion and $2 billion a year consistently. That goal for us is true again this year, whether it's outright sale or joint venture. You know, I would say that there are certain assets that we look to either sell entirely, which don't fit the business plan.
Doesn't mean they're Class B assets, just means, you know, we don't see, the risk reward for us in terms of investing more capital given the earnings growth potential, but that could be on Class A or Class B assets. Obviously, the portfolio size-wise, revenue-wise, is weighted now more than ever in our 25 years as a public company towards irreplaceable high-grade assets like One Vanderbilt, One Madison, 245 Park.
I've got a whole presentation in here about what we're gonna be undertaking, starting in December of this year for, basically a $200 million redevelopment of that asset to be what I think will be a world-class Park Avenue asset to line up with our other holdings like 450 Park and 280 Park and obviously One Vanderbilt and 100 Park and other assets in and around that area. You know, we've got great assets like 1515 Broadway and 461 Fifth. You know, I don't know percentage-wise, but I could say it's. Here's what I can say with confidence. The portfolio today with One Madison is, you know, monstrously better than it's ever been in the past.
Maybe just on the transaction activity and the capital allocation plan for 2023, I think you highlighted during your Investor Day targeting about 2.5 Billion of disposition proceeds. You know, is there any way you can take advantage of distressed deals, you know, you're seeing in the market, as it relates to your disposition program? Then can you comment on any expectations around buyer interest, you know, valuations, that sort of thing? Okay. Is it?
Yeah. I'm gonna turn it over to Matt DiLiberto, who I'm joined here today, for all of you in the room and not in the room, our CFO for another three years per the Form 8-K this morning. Matty's not going anywhere. We're not letting him out, just like we don't want tenants out.
I said I wasn't coming this morning until we did it. Get filed this morning.
We filed about a minute before this talk, and he can sort of go into detail on where we stand on the disposition plan for the year.
Yeah. As you noted, we put out an ambitious business plan back in December, $2 billion + of dispositions, $2.5 billion of debt reduction, and a $500 million mortgage maturity just to throw that in. You know, please report that's all, you know, going well, only, you know, two months and a week in. The $500 million mortgage financing, that's 919 Third Avenue. Everybody here knows well the financing markets are tougher today than they have been in a long time. The conventional financing for this asset would have been a 10-year fixed rate CMBS or Life Co execution. That's what's maturing. Those markets are very tough today.
It's bank financing, you know, banks are more likely to say no these days than to execute. It's all about sponsorship and property, and we are advantaged in both at 919, so feel good about getting that refinancing done at its existing proceeds, which is our target. Knock on wood, hopefully we can get that done even before maturity. The disposition program, the highlight of that was obviously a 50%-75% JV interest in 245 Park. That is part of the deleveraging strategy as well. We took on 245. Fantastic asset we've had our eye on for many, many years. It's right in that sweet spot that Marc talked about. Sits right on top of Grand Central Madison.
It's big and it's got a lot of leverage on it. We have, you know, gone around the world, looking at various partners, gotten good reception to the asset, particularly because of its size, quality and location, us as the operator. Feeling good about that execution, that was, you know, towards the mid to later part of the year. You know, still have a lot of wood to chop getting it done, feel good. 750 Third Avenue, another targeted sale. That's an asset that was in redevelopment, lower occupancy. Sets up well, actually for residential conversion. Those are the people we've been talking to, are likely residential converters of the tower, in particular. Wholly owned unencumbered assets. That's $300 million of proceeds.
That is going reasonably. The beauty of not having our CIO here is I can say whatever and he can't stop me. You know, tooting Harrison's horn, he is doing a good job and sourcing these transactions. We say the opportunity set, you know, that ambitious business plan, along with debt reduction, was a bolstering of liquidity. We do see, as Marc said earlier, some opportunities, likely later in 2023 into 2024, as owners that are not as well capitalized and structured as we are, may find themselves in some distress. You know, we are setting ourselves up to be more optimistic once we execute this 23 business plan.
Maybe to that end, Matt, I think you also targeted, I believe it was 7 Dey , the apartment building in Lower Manhattan for sale. Just given the probably more favorable fundamentals for residential real estate now compared to office, I mean, you've talked about conversion opportunities. I mean, this seems like a building you might wanna keep in the portfolio. You know, why does this make sense to sell now?
Well, I mean, we're asset, you know, rotators. It's, you know. I mean, we've In terms of, you know, what it makes sense, it's a function of what the price and the cap rate is and relative to how we can reinvest it and try and make, you know, yields. There's gonna be some opportunities for some pretty substantial yields, investment yields that I think we're gonna see in the back half of this year and into 2024. For the right situation, these are double-digit yields that might be + 500 bps from, 500 basis points from what they were, previously for high grade opportunities.
You know, with that said, you know, a fully rented residential building, you know, that we could, you know, try to attempt to sell at an attractive cap rate and attractive price, you know, would make sense for us to sort of clip that gain and reinvest. You know, that's how we generally look at these things. I mean, you can always make a case to keep the asset, but you know, we like to invest, add value, make marginally higher returns and move on. You know, that one is, has got some traction and, you know, we hope to be able to consummate a deal on it this year.
Oh, sorry, we got a question from the audience. Just a quick question. What kind of ROIC do you expect on new investment opportunities going forward?
You know, it depends where you are in the capital stack and how levered. I mean, we're gonna be very judicious in how we use our capital, so I would expect that you would see us taking relatively smaller positions in relatively bigger opportunities that, you know, may have, you know, a debt stack that's in the process of being worked out. It's a levered situation, but with not a lot of downside to whatever position we would be coming into to kind of help clean things up. You know, on that capital, it could be 15%-20% for sure. You know, is, you know, would sort of have to be. Again, that would be what I would call rescue capital at the bottom of the capital stack.
Just return on capital employed. Just curious, what specific number do you have in mind on today?
Does the 15%, 20% do it, or is it? I mean, that was the number I got. Is it, is that? That's unlevered, yes. You're talking about an unlevered? You know, I mean, what asset where and what kind of, you know, I mean, you know, some assets I think you're gonna sell if it's a multifamily asset that's relatively new and in good shape, you could be talking about, you know, 7%, you know, unlevered. You know, if you have trickier situations, it could be closer to like, you know, 10% or higher. I mean, you know, there's a range, but it's just too broad a universe of situations out there to pin it down any further than that, I would say.
I think we got another one down there.
The first one, you know, I've heard people say that those loans are not okay. There was a couple of ads down, have you run the numbers with the city to maybe build buildings that can handle those kind of work? Have you talked a little about the things in the world really end up creating this?
You know, look, the city says it needs 500,000 new housing units. If measured in that regard, this isn't, you know, the solution's gonna have to be new development. It's not gonna be conversion. You're not gonna be able to convert and get 0.5 Million units. To me, that's not a reason not to do it. You know, I mean, there's a double benefit of conversion you don't get with new construction, which is you're winnowing the office inventory while you're adding new units more rapidly than you can achieve with new construction and without the displacement and all of the NIMBYism that accompanies that.
You know, people are relatively relaxed about a change of use, and it's just a matter of, you know, getting possession of the space and converting the building. You know, in that regard, I think there's enormous merit because of that double benefit. Like I said earlier, I think that could produce 20,000 units- 40,000 units, you know, in Manhattan, which that's a lot of units, you know? I mean, we spent a lot of time building 7 Dey, which was just brought up, it's 250 units. If there's a path to convert, you know, to adding 20,000 units- 40,000 units, cities should pursue it. You know, it's not a question in my mind is, you know, well, you know, is that gonna solve the problem? That doesn't matter.
It's good business. It should be done, and it'll help the city's ratable, because it'll stabilize the office space by taking the marginal buildings out of play, and it'll help the residential 'cause it'll be fastest to be delivered. In terms of the economics, you know, when I look at it, I think there's a very good play for maintaining podiums and converting towers.
I think then, I don't know what you've underwritten, but I think that's kind of the sweet spot for a lot of these buildings is a mixed use in nature, which I think underwrites, you know, reasonably well because the tower is where you can get, you know, your better rents and the floor plates typically line up and set up better for conversion of the tower and you push your tenants into the podium if you can or relocate them out of the portfolio and, you know, it's, I think it's a win-win in that regard. You know, we think the numbers work and I think you will see more than just a couple of buildings downtown go that way with the tax incentive. Right now what you're looking at in underwriting I assume is without the tax incentive.
You know, the governor has a plan out there in her budget for a 50% real estate tax abatement over 19 years with 20% set aside for affordable housing at around a blended average of a 70 AMI or average median income, 70 percentile. You know, we gave testimony, Rob gave testimony at the city council hearing that was last week on this particular issue. You know, we stated that we think the incentives should be and need to be much more and that there's a big upside for the city in doing so and it's not this kind of perceived windfall to landlords just isn't there as you've shown.
You know, it makes the deals economic and, you know, and if it happens, as we hope it will and if the incentives are, broadened out a bit which I think there's an opportunity for then I think you'll see buildings convert.
Got it.
No, I think about a couple of different ways. One, I think that as buildings convert it just helps our, helps bolster the market generally, one. Two, there are certain buildings in the portfolio that we think can take advantage of this but it's, you know, it's not many. I mean that's not. Three, we think we can bring to bear the expertise. We've converted buildings, we've built new, we've got a very good, you know, sort of boutique residential operating division right now that, you know, I think we can help others do. Again, for not a lot of capital commitment on our part, that may not be the same that you're looking at. When you're underwriting those deals, you might have to be committing large amounts of capital, and you're not getting to your returns.
You know, we would be sort of rolling up the sleeves, the sweat in the deal and, you know, committing equity because we always put our money where our mouth is, but it doesn't have to be the preponderance in these situations that, you know, are caught up in limbo right now where resi conversion is the highest and best use.
Marc, to those unlevered IRRs that you stated just a little bit ago, I guess, power cap rates not moving up proportionally, just given the difficulty in assuming, you know, any NOI growth for the out years going forward.
I think there's a perception that rates are gonna be coming back in once they stabilize. I think that's why you've got a 3.90 treasury against a 4.76 two year. I think that when people are talking about cap rates, they're talking about long-term, almost in perpetuity cap rates. A 3.90 10-year, I think is a manageable interest rate in order to capitalize a deal around.
You know, if you think that rents are kind of at their lows right now because of, you know, all the hell we've been through in the past, you know, two and a half, three years, I think it's fair to think that as the rest of this country inflates, like on every measure, you know, that, you know, hard assets will catch up. When it does, it's great inflation protector, depending on the asset class. You know, the cap rates are just not gonna be, you know, in that range. You know, New York City is still considered the highest quality market to, you know, investor capital dollars in. are spending a ton of time right now with various forms of private equity investors in various parts of the country.
Andrew and I have kind of divided the world, and we're making those trips, and the reception is very, very strong. There's a lot of equity out there that wants to invest, you know, not just in the U.S., but you know, in New York City, in Manhattan. The returns are, I think, within the realm of, you know, the kinds of numbers we've discussed this morning and what I talked about in December. You know, I think there's a real belief that this is a great way to play an economic recovery where rates will hopefully be falling, you know, in the next several years and rents will be rising. That the combination of those two very powerful forces should keep cap rates relatively, you know, relatively in check.
It seems like you're in the Fed cutting rates camp at some point in 2023 versus the higher for longer.
You know, I think that, you know, I think this rate environment, specifically this 3.90% Treasury environment in and of itself is an environment we can do a lot of business in. You know, we've worked in 5% Treasury, 6%, 7% Treasuries and made money. To me it's, you know, I think that the data seems to say that the increases are having its effect. Economy's starting to cool off a bit. Should lessen the pace of the increases. The yield curve suggests, you know, that the rates will be coming down. I don't have any rate projections myself. I always look to the yield curve, and they had 50 basis points for cushion.
You know, based on that, I would say the market expects some tightening. Forget about what Marc Holliday expects. Therefore, I think investors are saying, I can put some money to work in 2023 and 2024, and then in 2025, 2026, 2027 have a better overall economic environment, you know, for that investment.
Real quick on the rapid fire to finish it up. Best real estate decision today, buy, sell, develop, redevelop or pause?
I gotta process that.
Say it again.
Buy-
Buy, sell, develop, redevelop or pause.
Recapitalize.
Same store growth for 2024 in office.
Oh, I'm sorry. Same store growth.
Well, the mic still work if you want it.
Same store growth. What did we just do? Figures?
3%-4%.
Is that it?
4%.
4%?
3%-4%
Between 3% and 4%.
More, fewer or the same office REITs a year from now.
In New York City, the same.
Great. Thank you.