SL Green Realty Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 19, 2023

There are 15 speakers on the call.

Operator

Thank you everybody for joining us and welcome to SL Green Realty Corp. 3rd Quarter 2023 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.

Operator

All forward looking Statements made by management on this call are based on their assumptions and beliefs as of today. Additional information regarding the risks, Uncertainties and other factors that could cause such differences to appear are set forth in the Risk Factors and MDA sections of the company's latest Form 10 ks and other subsequent reports filed by the company with the Securities and Exchange Commission. Also during today's conference call, the company may discuss non GAAP financial measures as defined by Regulation G under the Securities Act. The GAAP financial measure most directly comparable to each non GAAP financial measure discussed and the reconciliation of the differences Between each non GAAP financial measure 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 Q3 2023 earnings and in our supplemental information included in our current report on Form 8 ks relating to our Q3 2023 earnings. Before turning the call over to Mark Holliday, Chairman and Chief Executive Officer of SL Green Realty Corp, I ask that those of you participating in the Q and A portion of the call to please limit your questions to 2 per person.

Operator

Thank you. I will now turn the call over to Mark Holliday. Please go ahead, Mark.

Speaker 1

Okay. Thank you. Good afternoon, everyone. We're obviously holding this call at a moment of great global stress, but we will do our best today to focus in on the company's Q3 performance and what we're seeing in the market. While the current market remains challenging, We did have a number of very positive developments and milestones that I'll summarize for you right now, because they were hard fought and we're proud of them.

Speaker 1

First, we celebrated completion of 1 Madison Avenue with the receipt of our temporary certificate of occupancy, marking the completion of the building construction 3 months ahead of schedule and well under budget. Importantly, this milestone triggered the final 5.77 $1,000,000 equity payment from our joint venture partners, which we already received and used to repay an equivalent amount of unsecured debt. Earlier this month, we launched sales at 760 Madison Avenue, the beautifully designed and executed Giorgio Armani Residences With half of the 10 units already spoken for and negotiations pending on additional units. We have also substantially completed the Armani retail store and restaurant And are in the process of turning the space over to Armani to commence the lease. Building off our positive experience and sales momentum at 760 Madison, I'm now happy to report that we've successfully acquired the fee interest in 625 Madison Avenue through a UCC foreclosure of our mezzanine loan And we are now in control of the fee.

Speaker 1

All litigation with the previous fee owner has been resolved and we are finalizing our business plan, which we intend to unveil in December. With JV Partners, we closed on 2 Extremely well executed loan extensions at 719 7th Avenue and 115 Spring Street, bringing our total refinancing extensions and modifications to $3,200,000,000 for the year, reducing our combined debt by $1,000,000,000 and additional extensions and pay downs Our plan for the near future. And yesterday, we announced the sale of our interests alongside our partners in 21 East 66th Street For a gross total value of $40,000,000 demonstrating the resiliency of demand for Upper Madison Avenue Boutique And Retail Properties. Perhaps and most significantly for the first time in the last 16 quarters, You got to go all the way back to December of 2019. I can report that same store occupancy trended up in this past quarter With projections of a slow but steady climb that should continue into the next quarter and on into 2024.

Speaker 1

This is an important moment that signifies the stabilizing of the operating portfolio assets. The trend is in our favor As companies continue calling people back to work with news this past week of another 500,000 workers Being called back and expected back this January. It's important to note we are sitting in a good position at 1,100,000 square feet of Pipeline leasing activity with nearly half of that amount represented by 20 leases that are either in negotiation or out for signature indicating a high probability of closure of those particular transactions. Those leases are split about evenly by square footage between new and renewal leases. Decision timelines for tenants are lengthier than average, which has delayed some of the occupancy gains we had hoped to achieve this year.

Speaker 1

But directionally, it appears that predictions of an existential crisis from New York City office buildings is way, way overblown. And in fact, more and more of New York City's leading businesses are championing physical presence in the workplace as the best and most meaningful way Building community, promoting teamwork, establishing relationships and maximizing productivity. We will continue to enhance and amenitize our core properties to provide maximum convenience and benefits To a workforce today that is looking for elevated workplace experiences. We along with the rest of the real estate industry by the sharp and rapid rate increase experienced over just the past 18 months, but we are implementing our strategic plan To complete our development projects, lease up the portfolio, sell and JV certain assets, Pay down indebtedness, refinance and extend debt maturities and hedge our exposure to future increasing interest rates. And we are going to succeed.

Speaker 1

We will talk at greater length about our 2024 strategic plan at our upcoming investor conference, But rest assured that we are ready for this moment of great opportunity and we intend to take advantage of market repricing and the liquid borrower dislocation through growth in our Asset Management business. So as we look into 2024, we see reasons for real optimism. We have a plan to execute and a new generation of leaders to help execute it. That last part is bittersweet for me And for the company as we prepare to say farewell to Andrew Mathias. After 26 years And over on my estimation, 100 earnings calls, today will be its last earnings call for the company.

Speaker 1

While this was an extraordinarily hard decision, it's the right time for the company and probably the right time for Andrew as well. He can speak to that, but one thing that's for certain is that he's made an invaluable contribution from the time We first embarked on a new trajectory to become the biggest and best real estate company in New York City and the rest is history. Andrew is a partner and a friend, and I'm happy that he will continue in his role as a Director of the company and as an advisor to me. Andrew will undoubtedly have the opportunity to move on to other things and we will have the opportunity to bring up some of the younger talent we've been mentoring to assume positions of leadership as we're ready for incredible opportunities that will be before us in the New Year. I want to take this opportunity to thank Andrew on behalf of the entire company.

Speaker 1

Andrew's dedication and loyalty have been essential in accomplishing things for this company That were unimaginable 25 years ago. On a personal note, Andrew and I have been side by side for nearly 30 years in work and in friendship. What an incredible ride it's been. Now I'd like to hand it off to Andrew to say a few words.

Speaker 2

Thank you, Mark. It has truly been a long and amazing run for a kid from Buffalo who never expected anything like this kind of experience in his life. I appreciate all the relationships with shareholders and analysts I've formed over the years. I've seen Many come, many go, many stay and kept in touch with them in their new positions. And it's quite an industry, quite a business, And we've written a lot of ups and downs together.

Speaker 2

I would just say we have a great and deep bench of talent at this company, Some young, some not so young anymore, but I'm confident that SL Green will be the best positioned Company by far for a recovery when it comes and it will inevitably come. And I look forward to continued involvement in The company's success as a Board member as long as they'll have me and as an advisor to Mark, and all the words and Kindly reach out I've gotten over the last couple of weeks is greatly appreciated. So thank you.

Speaker 1

It's great. Thank you, Andrew. And I guess we'll end on that note and open it up for questions, operator.

Operator

And wait for your name to be announced. Please standby while we compile the Q and A roster. Our first question comes from the line of John Kim from BMO Capital Markets.

Speaker 3

Thank you. Congratulations and best wishes to Andrew. Can you talk more elaborate more on the decision at this time for him to leave the company? Who's going to take over his day to day responsibilities, if he's got a non compete and what the G and A savings will be going forward?

Speaker 1

Okay. So I think, John, if I think it was a little muffled, but if I heard you correctly, first question was About timing or why now. And it's a very hard decision and I guess you never really None of us know when it's time and when it's the right time. But I think there's a recognition that we are starting a new chapter here At SL Green, starting in 2024 with extraordinary new opportunity and we have this unbelievable Talent of younger professionals that in and of themselves have been here 10, 15, in some cases 20 years. And We just felt that this was the right time and the best time for this restructuring, if you will, to Allow for that talent to step up at a moment in time where we can maximize their relationships With kind of a new generation of lenders and partners and co investors out there that we think is just In the interest of the company and knowing that Andrew is still on the Board and still an advisor to me It serves a critical role for me that I don't feel this is a loss, but I feel it's additive overall to something That I think is a good move for the company and probably a good move for Andrew because I'm sure he's going to have A limitless amount of great opportunities in front of him.

Speaker 1

In terms of, I think you mentioned Division of responsibility is something to that effect. As we always do, we don't like to be reactive. I like to be measured. The Board and I We're going to take the next several months. We'll meet, we'll talk about how we want to work on that division And successorship role going forward and I would imagine sometime in 'twenty four, We'll have some additional announcements to make, but for the time being, we're just going to Andrew is still here through year end.

Speaker 1

There's a lot to do. As you know, in SUG REIT We'll be doing it right to the last day of December 31st of the year and then we'll take stock and Make sure that we're extremely well positioned. Nothing will be unattended and no stone will be unturned. When we get to 2024, we'll be off and running. The last piece I think dealt with some of the numerical issues which Matt you want to address?

Speaker 4

Yes. G and A savings on a run rate basis Between $10,000,000 $11,000,000

Speaker 3

Okay. Wanted to ask about Condo sales at 760 Madison, you report NAREIT FFO, not a core number. So is it fair to assume that condo sale Gains will be included in earnings next year?

Speaker 4

Condo sales well proceeds From condo sales to the extent they close in 2024 would have an earnings benefit. The gains on those sales themselves are not FFO.

Speaker 3

This is a new developed, correct?

Speaker 4

This is 760 Madison was a retail condo leased to long term lease to Armani at the base that's been turned over to Armani. Condos, 10 units up top, half of which are spoken for. They said the proceeds we would hope come in late 2024. Those will be utilized and then but the gains from those are not FFO, which I think was the genesis of your question.

Speaker 3

Okay. Thank you very much.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Steve Sakwa from Evercore ISI.

Speaker 5

Thanks. Good afternoon and congrats to Andrew. Best wishes. I guess maybe on the leasing front, Mark or Steve, could you maybe just break down the pipeline a little bit and just Maybe talk about the types of buildings that you see the most demand for and the types of tenants, whether they be financial services, law firms, any big tech That's kind of peering its head out of its kind of hibernation.

Speaker 6

Sure. So as Mark said, we've got 1,100,000 square feet in the current pipeline. There's a big long list of other prospects behind that, that Our prematurity included our pipeline number. Of the pipeline that we've got out right now, 67% of those leases are from the fire Terence, the balance is a mixed bag between healthcare, government, Nonprofits, business services, things like that. So financial services clearly, as you might expect, is driving the boat right now.

Speaker 6

A lot of the big deals, a lot of the larger leases that we have out are in the better quality buildings. Park Avenue in particular is very busy, 280 Park, 245 Park, 100 Park are all We are very active with leases or deals pending. The good news behind that is, as we said in the last earnings call is, We continue to see increased foot traffic and proposals at the in the rest of the portfolio in the buildings that are More price sensitive type of product, and I think that's a positive note. The next step is That needs now to convert over to leases. And I think we're going to continue to see traction on that as we come to the end of the year and going into early next year.

Speaker 5

Okay, thanks. And then second question, I don't know, maybe Mark or Andrew, you guys had talked about Doing some additional asset sales and dispositions, 1 Vanderbilt possibly, Maybe even selling down a little bit more of $245,000,000 Can you maybe just talk about the disposition market and what you're seeing just in light of where The economic uncertainty, how are you thinking about that and the impact to maybe leverage moving forward over the next year?

Speaker 2

Sure, Steve. It's Andrew. We're still actively out there. As you saw Mark I mentioned the sale of the retail condo on Madison. We're talking to groups really from around the world Regarding some of the other interests, either further interest in 245, which we haven't really made a decision on yet, And certainly the interest in One Vanderbilt.

Speaker 2

And it's just trying to balance the right timing and matching up with The requirements that a lot of these firms have. So I'd like to turn it over to Harry to have him speak a little further. He just got back from Asia About what you're seeing from investor demand out there?

Speaker 7

Sure. Thanks, Andrew. So as Andrew mentioned, we just returned from our Quarterly roadshow in Asia, we're continuing to hear from foreign investors that they're interested in making select new office investments, And they really do believe in the fundamentals for Quality Office. More specific to us, they believe in our ability to underwrite Business plans, execute in this market and get stuff done. So, the one variable that foreign investors are still very focused on are U.

Speaker 7

S. Interest rates, And in some cases, the impact that has on ForEx rates, specifically as it relates to the U. S. Dollar to certain Asian currencies. We're helping push back against that with the fact in some of these countries, they have very low borrowing rates.

Speaker 7

You saw us successfully navigate through that Last quarter at 2:45 Park. We're very focused on OVA. It's a high priority of ours. We're going to be putting a lot of pressure to get that done, and I would expect to see good momentum for that over the next few months.

Speaker 5

Great. Thank you.

Speaker 7

I've been very

Speaker 1

happy with the response we're getting. Obviously, that we got on 245 Park Premier as a Premier location and that we're getting on 1 Vanderbilt multiple Party, counter parties, highly interested, different parts of not only Asia, but around the world and Working hard to try and get something done by year end and we'll see how that comes up.

Speaker 5

Great. Thank

Operator

you. Thank you. One moment for our next question.

Speaker 1

I'm sorry, next question?

Operator

Our next question comes from the line of Alexander Goldfarb from Piper Sandler.

Speaker 8

Hey, good afternoon. And Andrew, congrats mazel tov, I guess this is it for you having to do the earnings call. So Congrats and look forward to where the New York gossip columns have your next real estate deals. Two questions here. The first question, Matt, capitalized interest always sort of the bane of modeling.

Speaker 8

You guys, you did the 1 Madison delivery, you got the $577,000,000 You also closed on 625 Madison, so maybe you could just put some framework about how we should think about interest expense next year, The impact of capitalized interest, just given those moving pieces.

Speaker 4

Yes. Capitalized interest is It's a tough thing to model even here. It's a complicated exercise, particularly when you have joint venture interest And multiple development redevelopment projects. But specific to your question, something like the proceeds at One Madison, which is a Fully capitalized property because it's in full development. When you get $577,000,000 in that reduces our investment in the Asset by $577,000,000 and therefore you can't capitalize interest on that $577,000,000 Use whatever Interest rate you want, it's based on our consolidated weighted average interest rate, so call that 4.5%.

Speaker 4

4.5% times 5.77 It's a big number that's lower capitalized interest. Other assets like 625 or anything else for that matter that Gets leased up as leasing comes on, capitalized interest goes down. So there's an offset to NOI coming on from interest capitalization. So yes, there will be some significant changes as you roll through 2024 and into Maybe even 2025 as One Madison comes online, NOI benefit, capitalized interest reduction. And so I'm optimistic that people will start to flow those through their models.

Speaker 4

I haven't seen it flow through just yet, but I'm sure as people tune up their forward looking models that will appear.

Speaker 8

But it sounds like the big ones obviously the one Madison that's helpful. And then 625, just for clarity, because you just brought that on, that would reduce interest because now you're That building is on your books and you're capitalizing it or were you sort of already running it through? I just want to make sure that we by bringing 625 on that we account for that correctly.

Speaker 4

We had a leasehold investment previously,

Speaker 9

right? We wrote

Speaker 4

it off back in the Q2 prior to it being written off, There would have been capitalized interest against that investment. Now there will be a capitalized interest against the new investment. So there will be capitalized interest, but on a different investment amount.

Speaker 8

Okay. And then second question is, With Andrew's departure, Mark, you mentioned bringing up the younger the bench and having other people step forward. On the mezz and And preferred business that you guys have that you've long held, Andrew was big into that, but should we take the comments as Other people will step into that and you will regrow this mezz business once interest rate and transaction markets start to normalize? Or is this sort of a wind down? Does this Andrew's departure signal a wind down of the mezz business?

Speaker 1

Yes. It's a good question, Alex. Andrew sort of presided over the whole company, which included an investments bench, probably 20 investment professionals Led by Harry Satoma, Raheushenfeld, Rob Schiffer, all of whom have worked on, I don't know, countless 1,000,000,000 and 1,000,000,000 of Debt and Equity Investments under Andrew's and my tutelage over the years. Remember, we've been doing this business for Well, since 1998 or 99, I forget. So it's always been core to us, I would say, on average, anywhere between $1,000,000,000 to $3,000,000,000 a year of gross originations and backing up that team, we have Andrew Falk, who's Head of Special Servicing and runs that business and has a team under him, Helping him, there are other young guys behind that with that Harry can elaborate on.

Speaker 1

But the bench is deep. The bench is very experienced. We are very much going to stay in that business, like no illusion whatsoever that We're not going to be in that business in what I hope will be a very, very big way in 2024, 'five and 'six. I think there's going to be 3 years of very solid opportunities. A year ago, I said 12 months, 6 months ago, I said 6 months.

Speaker 1

What you're going to hear in December, I think, is the opportunities now. And we're you should expect That as we have settled out the other aspects of our business plan with respect to paying down debt, hedging, monetizing assets, Then full focus is going to pivot to new investments and assume that we are in deep conversations with many capital partners about putting the capital together both in a discretionary and in a managed account situation For various ways of taking advantage of this market opportunity that I think It's going to be nothing like what we've seen in probably 30 years. I'd have to dial back to my first experiences in late 80s to early 90s to sort of get a comparable, bench point. So, yes, I mean, active or continuing with the program, I'd say, is an understatement.

Speaker 3

Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Camille Bonnell from Bank of America.

Speaker 10

Hello. Can you talk about the drivers behind the update to full year guidance, which Your midpoint has changed excluding one time items. And with only one more quarter to go, can you talk to the big

Speaker 4

Yes, Camille, it's Matt. You're a little muffled. So I think the first question was just talking about the details, but a little bit more of the details behind our guidance revision. We have to take a $0.25 I'm sorry, dollars 0.27 total non recurring charge related to Andrew. That's $0.10 of severance and $0.17 that's accelerated stock based comp that would have been recognized over The coming years that in part contributes to the $10,000,000 to $11,000,000 of G and A savings on a run rate basis.

Speaker 4

Offsetting that though performance And the rest of the company has been modestly better than expected. So were it not for the charges, we would We'll be taking up the rest of the range by a few pennies. And we still leave a fairly wide range because even with 3 months left to go, we do have A significant amount of execution left, and in part, depending on where the 1 Vanderbilt JB interest sale falls, Whether it be in 'twenty three or 'twenty four that has an impact on FFO. So we had to leave the range at the same $0.30 Level it was previously while adjusting primarily for Andrew's charges.

Speaker 10

Got it. And thinking about your operating model and Continued transition to Asset Light strategy. Are there any further cost saving programs you're considering to implement from an operating RG and A standpoint?

Speaker 1

I'm sorry, repeat the question.

Speaker 4

Are there any cost saving or G and A

Speaker 1

Well, let me I mean, generally, we as a team Our meeting, I would say, almost like daily, where the operational and construction members of the team are meeting daily, Scrubbing through property level operational expense budgets for next year Where appropriate, looking for areas of savings, trying to keep our expenses as close to like net zero increase in an otherwise inflationary environment, But making sure that we're still delivering best of class service, so we're never going to do anything to jeopardize the reputation And excellence that we are delivering through that program now, but we're hyper focused on that. And looking at our capital programs, we benefited by investing so much in the buildings over the years That we can go a little capital light in 2024, maybe 2024 and 2025, Not to the detriment of any building simply because most of the buildings have been completely repositioned, amenitized, new lobbies, security system, local law 11 work and roof And it's not to say there's 30,000,000 feet is always something more to do, but I feel like we'll be able to really enter the market in 2024 with a strong hand in terms of operating expense control and And capital cost control.

Speaker 1

As it relates to G and A, if that was a specific question or item, I'd say we are one of the leaders in our peer group, if you will, In terms of not only controlling G and A or maintaining it, but reducing it. We had G and A, I wouldn't say at its peak of $100,000,000 or so. No, it's $110,000,000 $110,000,000 So and This year, it will ring in at around $90,000,000 and I would expect next year through all sorts of Smart planning austerity measures, etcetera, to come in below that. We haven't done we'll know in December, But I'd say it's safe to say below 90. So that's a trend that I think is unusual or unequal than our industry and sector.

Speaker 1

And yet, We're able to do more with less and the building performance and I think level of service is as high as it's ever been. So I don't know if that answers the question, but That's what we're working on between now December and maybe December can elaborate further on that. But yes, operating expense, Conservation, capital cost, efficiency and reduction in G and A are all things we're going to be focused on Going into next year.

Speaker 10

That's helpful. And final question for Matt on the balance sheet. I know you've managed to swap your exposure to your swap expiries To its respective debt maturities, but how are you thinking about cap maturities? For instance, 10 East 53rd Street and 220 East 42nd Street have final debt maturities in 2025, but the caps are maturing next year.

Speaker 4

Sure. Happy to answer it and I'll save the operator the trouble of reminding people two questions only please. But Camille, I'll give you a free one. We do hedge when we swap as far out The debt to which those swaps are associated goes. As it relates to caps, caps are often a requirement of the underlying financing.

Speaker 4

And specific to the two instances you referenced, we have JV partners. So we are not able to make a unilateral decision to put a cap in place Without the sign off of our partner, we agree with our partners on the terms. With regard to those 2, we agreed to time to a 1 year cap And those caps need to be put back, as is required by the financing.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Blaine Heck from Wells Fargo.

Speaker 11

Great, thanks. Can you just talk about the lending environment and maybe touch on where interest rates stand for high Looking for with respect to loan to value and debt service coverage ratio?

Speaker 7

Sure. This is Harry. So look, we're continuing to navigate through the current debt capital markets environment, Given the prominence of who we are and what we mean to this market, we're working with our depth of relationships, Modifying existing modifying, extending existing secured debt. We're seeing a capitulation in the market from the lenders. And we think we're really well positioned right now to work with these lenders on terms that make sense given their confidence in us To be the right steward of this portfolio.

Speaker 7

We're getting very well ahead of our existing debt maturities. In most cases, we're looking 3 years out at this point. As Mark mentioned earlier, we already executed 2 deals in this quarter, and I would expect to see us do Some larger ones over the course of the next few months leading to the end of the year. In each refinancing that we're looking at, we're assessing prudently Putting in new capital and trying to very conservatively underwrite any money that's going in as we think about these refinancings.

Speaker 11

All right. That's helpful. For my second question, Matt, you talked about the fixed charge coverage ratio on the last call and your expectation for it to Titan relative to your covenant before expanding. Can you just comment on the movement quarter over quarter and whether that magnitude was in line with your expectation, Whether we should see the Q3 as likely to be the bottom for the metric? And I guess any stress testing you've done Relative to kind of where rates would have to go to trip that covenant?

Speaker 4

Yes. You're right. On the last call, I did say, I would expect to trend down into Q3. I'll remind people how this calc works. It's a consolidated only calculation.

Speaker 4

There's only a handful of properties that flow through it. Layered on top of that is our debt and preferred equity income offset by G and A, and then essentially corporate debt and any consolidated Debt, the other side of the equation. So that metric and it's done on a trailing 12 month basis. So that metric Has been and will continue to be for several more quarters weighed down by $245,000,000 and a higher corporate debt load. So we got $577,000,000 of proceeds from our partners at One Madison.

Speaker 4

We got that towards the tail end of the quarter. That had no effect On the quarter, but will obviously benefit the forward quarters as that flows through over the next 12 months. Same effect as 245 Park, which was a consolidated property For the better part of a year before we sold the JV interest, it comes out of the consolidated calc, but does so over a 12 month period. So it has to roll through over time. The trajectory we're on was 3rd quarters, we would trend lower into Q3 and then bounce off of that.

Speaker 4

Obviously, the timing of things could affect that. If we I referenced 1 Vanderbilt that has an effect, because that is an income generated for the Q4. If you did that in the 4th versus the 1st, that might have an effect, but the trajectory of this is to be Naturally higher through EBITDA growth and also through lower interest expense as a result of consolidated interest expense As a result of reduced corporate debt and reduced consolidated property debt.

Speaker 11

Great. Thanks. And Andrew, thanks for the help over the years and best of luck with everything.

Speaker 2

Thanks very much.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Peter Abramowitz from Jefferies.

Speaker 12

Thank you. Yes, I just first wanted to ask within that leasing pipeline, kind of What's the interest in the remaining space at One Madison? What sort of coverage do you have on that? And how are kind of the rents there trending relative to your expectations?

Speaker 6

We're in active term sheet negotiation with 4 different tenants right now covering, Let's see, about 200,000 square feet of space. It's a Mix between tech, fintech type tenants, I would say, is sort of the dominant theme there. All of the rents that are being discussed are at or above underwrites. And I'm not going to Get too far out of them, but other than to say that I feel really positive about our prospects on at least 2 or 3 of those tenants. And Hopefully, we'll have more to report, if not by the end of the year, then very shortly thereafter.

Speaker 12

Got it. Thanks, Steve. And then one other, just as we kind of look forward in our model thinking about 'twenty four, just a reminder In terms of the moving parts, any large expirations to think about in the portfolio or no move outs?

Speaker 6

Well, two things. I would say that we have, I think, absolute transparency On all of the expirations in 'twenty four and probably even into 'twenty five quite frankly as to whether or not tenants are staying or going, Certainly, the tenants of size, all of those are built into our current projections and the budgets that we're building Currently building for next year, the only one of that may be new news to people is CBS downsized, they renewed and then downsized A little bit of 555, but it's not really moving the needle anywhere.

Speaker 12

All right. That's helpful. Thank you.

Operator

Our next question comes from the line of Ronald Kamden from Morgan Stanley.

Speaker 13

Hey, congrats, Matt, on a great job. Just really quickly, my two Quick ones is, so 7 Day and 185 Broadway, I think were previous planned sales. I know the loans maturing this quarter. What's the update there? Are you most likely to extend the loan on that on those two assets?

Speaker 1

With respect to the debt,

Speaker 7

we are very close to finalizing a multiyear extension there on very favorable terms. So We'll be wrapping that up hopefully shortly. And then with respect to the joint venture partnership, We're in active negotiations and discussions with groups that they're very interested in resi product. There's a lot of interest we're seeing throughout the globe on that, and we'll be looking to get something done there soon after we wrap up the debt.

Speaker 13

Great. And then just coming back to the I think last quarter you talked a lot about A potential JV at One Vanderbilt. Just was wondering if we've had obviously a pretty big rate move. Maybe can you provide just a little bit more sort of color on your thinking there? Is it still the same size?

Speaker 13

New investors come in, investors dropped out. Just what sort of happened in the past sort of month or 2 with the rate move and how that's impacting The conversations and your thinking there on 1 Vanderbilt. Thanks.

Speaker 1

I think for foreign investors who have an appetite for core product, It almost makes the asset stand out as 1 of 1, if you will, in terms of 2 or 3 attributes That are almost unequal anywhere in the country. It's got size. It's got very long weighted average lease term. It has incredibly favorable locked in and low rate debt for I think another 8 or 8.5 years.

Speaker 2

It's obviously,

Speaker 1

it's a great building. And I think As the rates are moving up, it's differentiated as, I'm going to say, one of I won't say the only, but certainly one of the best core investments That people with core money can put to work either remainder of this year or early 'twenty four, whenever we get that deal done, We're working hard on it and we have not seen any diminution in interest. As rates rise, Obviously, the embedded debt becomes more valuable on a mark to market basis and the lease stream is unaffected And I don't think you can make any extrapolations as to interest rates or cap rates 10 or 15 years out. I guess you could, but it would be conjecture. So in that way, the building is as well insulated as any and we've had great reception and we're

Operator

Thank you. One moment for our next question. Our next question comes from the line of Caitlin Burrows from Goldman Sachs.

Speaker 14

Hi, good afternoon, everyone. Maybe just on the occupancy front, you mentioned Earlier in response to the guidance question, the various parts of the business are going better than expected. It does seem like to meet the occupancy target For the same store Manhattan portfolio, you need a significant pickup in the Q4. So just wondering based on where we are today and the visibility that you have kind of the outlook for occupancy increasing materially in the near term?

Speaker 4

Yes. So we had a very Heady goal, north of 92%. We will not make that goal. Mark alluded to in his comments that we have a good pipeline. We've already done 1,300,000 square feet of leasing.

Speaker 4

We have 1,100,000 square feet of pipeline, but deals are taking longer to Get done and therefore the occupancy is picking up but at a slower trajectory than we had anticipated. So we do expect it to pick up into 2023 And into 2024 as we close on the pipeline, but we will be short of the 92% that we had laid out at the beginning of Yes.

Speaker 1

And I just want to be clear on that, that in fact, I know it's maybe it's too nuanced, but what we have internally projected Versus what our goal is that we set for ourselves and what I call stretch goals. The 92 point whatever was the was a Ambitious goal to get to 7.5% occupancy in a market that's 18% vacant. Sorry, 7.5% vacant, the market is 18% vacant. I mean, obviously, in doing that, We're trying to be realistic, but we're trying to push ourselves. I said anywhere from, I don't know, 18 to 20 to 21 goals a year.

Speaker 1

And if they were all projected or tap ins, we'd meet them all every year. And in fact, we generally meet anywhere from about 60% to 75% of those goals. That's by design. So the fact that I think as we sit here this year, our Occupancy is trending up and will be in the 90s. We'll have to see where we cross the finish line at a point in time on December 31, It's an amazing achievement in a market that otherwise has been relatively flat on They can see at around 18% throughout the year.

Speaker 1

I do think the pipeline is more telling than Where we are exactly at December 31, because what it's saying is we're going to have a big December, January February because we have a 1,100,000 square foot pipeline. And typically those deals take 3 to 5 months to close from the time they're in that pipeline. So it sets up really well for next year. I know how it works and the headlines are going to be, well, SL Green Goal 92 and they come in at 90.7% or 91%, who knows. But the reality is, it's all about the trend, it's about the pipeline and it's about our confidence That we bottomed out in vacancy in the Q2, Q3 turned the tide, Q4 I think we're going to do the same On into 2024 and kind of march our way back hopefully to 92 above Next year, we don't have those numbers until December Investor, and we'll see.

Speaker 1

But that's where it is. No more or less relevant than saying we set a stretch goal of 1,700,000 square feet of lease signed. Today, we said it almost $1,300,000 signed. Actually, how much if you add in the post quarter?

Speaker 2

It would be around $1,300,000

Speaker 1

About $1,300,000 So there's a good chance we'll be over when our lease is signed, which also sets up well for 2024. But We're dancing on the heads of tens of basis points. And I'm not throwing intel yet. Let's try mid-ninety two percent and let's Keep at it, the pipeline is there. We just got to close those deals quick.

Speaker 14

Got it. And yes, I appreciate that you guys have mentioned that those goals can be Stretch goals. Maybe then separately on the dividend, I know last call you mentioned you want to keep the dividend as close to the current levels as possible. So just wanted to see if you thought the G and A savings you're pursuing could help you maintain the dividend next year or any updated thoughts to share?

Speaker 1

Yes. My comments, I think, on the last call as it related to dividend, where there were some companies that were in the process of cutting or eliminating dividends, It was along the lines of we think the dividend is an important and Almost fundamental reason that people invest in REIT stocks. I still believe that to be the case And we're going to work hard to maintain that dividend as best we can, Always in light of where our FFO and FAD is for the year. So that's the one thing. I just we don't have next year's numbers Publisher, so we couldn't on this call begin to give you a sense of where that is.

Speaker 1

It's about FFO, it's about Feds, it's about taxable income. But our goal and everything we do, when I mentioned earlier about Cutting our capital to only that we need to spend next year, cutting our expenses is all for The basic reason of meeting our obligations and paying a dividend, and we'll do everything possible. But you got to wait till December or maybe it's just Before December when we announce, we meet as a Board, we'll set the level for next year, it will be based off of taxable income And we recognize the importance. We're all aligned with shareholders. We will try to maintain as best we can.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Michael Griffin from Citi.

Speaker 9

Great, thanks. Maybe getting back to the potential asset sales, I'm curious if you can give some Color around return hurdles or IRR that potential investment partners are looking for in order to get interested?

Speaker 1

Well, that's Michael, it's broad because the market coming up There's going to be so many ways to play it and therefore the return hurdles will be a lot different. I mean there'll be people Trying to take position in 1st lien positions that will be more debt and credit life in there. There'll be mezzanine position, there'll be equity positions. I think it's fair to say whatever the return hurdles were sort of Before the rate increases, if you will, that the return hurdles sort of generally across the Order probably up 250 to 300 over for various positions in that range. So maybe what was low teens might be mid teens, mid teens high teens, whatever, what might have been a 7.5 unlevered discount might be a 10.

Speaker 1

I mean, in that range It's kind of the level of movement, but it just it depends What's the asset class? Where is it? Where are you investing in that asset class? And is it from an ownership perspective or from a mezzanine Origination perspective, etcetera. But I think $250,000,000 to $300,000,000 up in Return requirements is probably a good number.

Speaker 1

I don't know, Andrew, you think I

Speaker 2

would agree.

Speaker 1

Yes. What you're seeing in Harry? Yes. I think that's all a good number.

Speaker 9

Great. Thanks. And then Mark, I know you mentioned in your prepared remarks The time that it's been taking to sign leases have increased. Should we take this as maybe the new normal for signing leases going forward? Or was there something specific about these leases this year Getting signed in terms of being elongated that kind of put was a drag on occupancy.

Speaker 1

Yes, I don't know. It's a good question. And for that, you got to kind of have an economic forecast for what next year will be like. I think the decision, the timeline It's less about uncertainty and more at the moment about having more choice. So people are Just more so than in past, they're exploring all their choices because they have more choices.

Speaker 1

And there's no sense in my mind that the people who are out there that are serious, that are in the inventory of tenants that we would say Our real tenants that will be signing leases, whether it's this year or next year, will cross the finish line and sign leases at Plus or minus the amounts they're looking at, I think they just have more opportunities and they're taking more time to vet those opportunities Before they narrow in on the one they want. And so what might have been a It might have been a 6 month exercise, might be 8 or 9 months now, something like that. But I don't think I think As the better space becomes more fully leased and it will, because we're seeing that already, And a lot of the vacant overhang pre pandemic in terms of planned development is leased, Then I think the options become fewer and then the time line comes in again.

Operator

Thank you. I would now like to turn the conference back over to Mark Holliday for closing remarks.

Speaker 1

Okay. Only closing remark I have for today is special day for us coming up in December. I think it's December December 4, 9 am.

Speaker 4

9 am here at 1 Vanderbilt, in person with invitation only, but the entire presentation It will be webcast and available via our website.

Speaker 1

And safe to say, we are busy at work preparing a lot of Good information and strategic visioning for that session to make it meaningful for people. So hope everyone has a chance To call in or accept invites and come and we look forward to it every year. And

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
SL Green Realty Q3 2023
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