SL Green Realty Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 20, 2023

There are 16 speakers on the call.

Operator

You everybody for joining us and welcome to the SL Green Realty Corp. 2nd 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 It calls such differences to appear or set forth in the Risk Factors and MD and A sections of the company's latest Form 10 ks and other subsequent reports followed 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 atslgreen.com by selecting the press release regarding the company's Q2 2023 earnings and in our supplemental information included in our current report on Form 8 ks relating to our Q2 2023 earnings. Before turning the call over to Mark Holliday, Chairman and Chief Executive Officer of SL Green Realty Corp, I ask that Thank you.

Operator

I would now like to I'll turn the call over to Mark Holliday. Please go ahead, Mark.

Speaker 1

Thank you, and good afternoon, everyone. Welcome to SL Green's earnings call. I want to thank all of you for joining us today as we review the 2nd quarter's results and discuss our progress on our 2023 business plan. I want to begin by commending the entire SL Green team on a very strong half Of year, this first half, particularly as we were confronted by the dual challenges of a partially remote workforce and increasing interest rates. But headwinds notwithstanding, our team added to the year's accomplishments in meaningful ways during the Q2.

Speaker 1

No one in the business works harder for shareholders than the men and women of SL Green who lead by example and show what can be achieved by a 300 person corporate workforce that is present, productive and positive every single day of the week. By the numbers, it was a solid quarter as our FFO was above expectations, we leased another 410,000 square feet of office space, Our same store NOI increased by 3.6% and our same store office occupancy at quarter's end We're slightly ahead of our original projections back in December. These performance stats are in stark contrast with the negative drumbeat of media coverage Proclaiming the demise of office space. We continue to see demand building as businesses who hit the pause button during the prior 3 years Are more and more frequently acting on plans for future growth, particularly in the finance sector, which accounted For about 38% of market leasing during the Q2 as well as business services, healthcare and education sectors, all of which continue to be active and all of which helped to mitigate the pause in the tech sector. While overall leasing in the market in the first half The year was below historical average.

Speaker 1

SL Green has garnered more than its fair share and has now entered into year to date leases totaling 950,000 square feet of space leased and we are trading paper with a lot more tenants Evidenced by our 1,100,000 square foot leasing pipeline, more than 2 thirds of which represents new leasing activity. Midtown continues to outperform with the lowest availability rate and the highest leasing volume among all Manhattan submarkets. This affirms our core property strategy and should enable us to gain occupancy during the second half of the year from what we believe to be our current low point. However, the financial stats only tell part of the story, as significant progress was also made on the property front. Of course, the highlight for the quarter was the completion of our joint venture partnership with Maury Trust.

Speaker 1

The transaction Culminates years of relationship building, affirms the global allure of investing in trophy assets in prime corridors And now fully resets ownership and capital stack in what is a case study of opportunistic investment, enforcement and recapitalization of an important asset on Park Avenue. We continue to evaluate and refine different redevelopment scenarios and hope to commence physical work towards the end of this year. I want to acknowledge the extraordinary efforts of our Chief Investment Officer, Harrison Sotomer, who was backed up by Young Han, our SVP of Investments, they literally work day and night for months on end to ensure the successful completion of an important component of our business plan. This is our first partnership with Mori Trust and they have already proven themselves to be excellent partners. We are making great progress on other fronts as well.

Speaker 1

At One Madison, we now believe we can obtain a TCO for the project in September of this year, a full 3 months ahead of schedule and open our doors to tenants in the Q2 of 2024. The ability for us once again to deliver ahead of schedule and under budget It's a testament to the efforts of Robert Schiffer, Robert DeWitt, our amazing Head of Construction and John Krush, our Project Executive, along with our partners at Hines. Additionally, it accelerates the receipt of $577,000,000 from our partners on the project, which is triggered upon the TCO of the project later this next quarter. I'm also pleased to report that during the Q2, we topped out 760 Madison and began marketing that project. The project is Absolutely spectacular, excited to show it to shareholders who have not yet seen it.

Speaker 1

Please Walk by, check it out. It's already impacted the skyline in the historical district of Upper East Side Madison Avenue in a very positive Wei, it's been extremely well received by the market and we're proud to have initiated this project And fostered along with our partners at Giorgio Armani. We already have several units under contract with Significant interest on the balance of the units at prices which will be market leading for Upper East Side condos, a testament to the power of the SL Green and Giorgio Armani brands and vision. We expect to turn over the retail to Armani by end of September and rent would start right away. First, closings on residential units will commence in June of next year with all net proceeds of sale available for use by us as there is no indebtedness against the project.

Speaker 1

We'll have more commentary on the sales effort and pricing metrics On our earnings on our next earnings call, which I guess is in October. Finally, We received our TCO for 15 Beekman this month and plan to turn over the project fully to Pace University in August. The props here go to the SL Green team of Peter Flint, John Heffern and Jason Pestusen. And if that weren't enough, A reminder that in April, just after our last earnings call, we closed the refinancing of 919 Third Avenue, proof that the credit markets are still available for the highest quality office assets and reputable sponsors. So the first half of the year is now in the books, But no rest for the team.

Speaker 1

We're going to continue to forge ahead through the rest of the summer to set the table for a successful second half of year. Management is completely aligned with our shareholders and we will work hard to create value, generate earnings and protect the dividend. Thank you. Operator, we can take some questions.

Operator

And our first question will come from Michael Lewis of Truist Securities. Your line is open.

Speaker 2

Great. Thank you. My first question is for Matt. I want to ask about your debt coverage ratios, particularly the fixed charge coverage ratio Relative to your covenants, because it keeps coming up in conversation, your fixed charge coverage fell to 1.7 times this quarter, the covenants 1.4 times. Can you just maybe discuss the mechanics and how close do you expect that ratio to get to the covenant over the next two quarters?

Speaker 3

Yes, sure. I've read some of the commentary about it. I'm somewhat Surprised that it gets that much attention. It's a pretty simple calc. It's consolidated only calc.

Speaker 3

This is just the covenant. And It's been impacted, 1, by rates. Rates are up, but also been impacted by 245 Park, being a wholly owned consolidated asset for About 3 quarters now. Now that that is a JV, it rolls out of that calculation and that in and of itself improves the calc. And we obviously watch all of our covenants and our metrics very, very closely and are not as fussed about that one as people seem to be out in the market.

Speaker 2

Great. So notwithstanding a big move in rates, I guess, I mean, should we expect this coverage ratio to improve from here? Is it troughing or do you It gets a little tighter before it goes back up?

Speaker 3

It will get tighter before it gets better because the effect of 245 has to work its way through to trailing 12 calc. So It goes lower before it gets better, but just by having $245,000,000 in the JV, as a JV, that alone improves it, It says that, that was a sub one coverage asset.

Speaker 2

Okay. Got it. Thank you. My second question about portfolio occupancy. So You could correct me if I'm wrong.

Speaker 2

I think you said at your Investor Day in December, you trough around 90% in 2Q and rebound to about 92% in the second half of the year. I think what we're talking about is your lease percentage, which was 89.8%. So just about exactly what you predicted. So my question is, do you still expect to reach that 92% this year or has that expectation changed? And maybe you could tie Kind of how I know the leasing pipeline has been building in the early part of the year.

Speaker 2

What are you seeing on kind of conversion in turning that into leases?

Speaker 1

Yes. Just want to make sure I understand the question. I mean, I think we were 89.8% or something for the quarter. We expect that to be a low point. I think I said that in my commentary.

Speaker 1

And we expect to gain occupancy from here regardless of which direction the market goes Just based on our pipeline and visibility. I mean, our all that we set out 21 goals a year, they're all stretch goals. We never make all, but we generally make most or certainly more than half. And We're going to do everything possible, like forget the exact metric on the occupancy staff for the year was 924. 924.

Speaker 1

So we're going to try and end the year certainly They're as close to there as possible. We've got a big pipeline. If everything falls into place, then I think we have a chance of doing it. And If it doesn't, we'll be damn close. So I mean that's why we call it stretch goals.

Speaker 1

We don't make them easy. To be anywhere above 90 in a market that's 18% vacant, I think is enormous testament to Steve Durels and his team.

Speaker 2

Thank you.

Operator

And one moment for our next question. And our next question will come from Steve Sakwa of Evercore ISI. Your line is open, Steve.

Speaker 4

Great. Thanks. Good afternoon. Mark, maybe you could just touch on the dispositions and what your expectations are for either further sales at 1 Vanderbilt, What your plans are potentially for additional sales at $245,000,000 and maybe other assets that you've got on the market today?

Speaker 1

Well, I think our big focus now is on One Vanderbilt. And the reception there is very good, as you would expect. I consider One Vanderbilt just objectively, although it's hard not to be biased. One of the best office buildings of its ilk in the city and It's got an amazing blue chip rent roll. It's got great embedded financing, low rate financing in place.

Speaker 1

It's just a wonderful asset. And as you would expect, the reception in the investment community Has been high level of interest and I'd say that that's going to get a lot of our attention Now through the end of the year. So that's that. On the 1 Madison front, I'm sorry, on the 245 Park front, which I think is the other asset you mentioned. I don't know.

Speaker 1

I think there the redevelopment program That we are designing and working through is so good. And I think now with the leasing Being probably ahead of where we expected to be at this point, both in terms of Steve, the leases we signed with give me the leases, 245. EQT. And

Speaker 5

then we expanded by 10,000 square feet. Energy Group. Energy Group.

Speaker 1

Yes. Okay. And we have others pending. We're trading papers. Six proposals out.

Speaker 1

Six proposals out. Not unlike 1 Vanderbilt, where we initially went out to sell, I think it was down by up to 40%. We wound up selling 30, now we're going out for additional 10. We may do the other 25% towards the end of this year. We may hold back and get some more leasing done.

Speaker 1

We'll see.

Speaker 4

Okay. And I'm just wondering if you can provide any color on the 625 Madison situation. I know There's been a lot of back and forth with different defaults and the ground leases and the land position. Is there anything you can sort of provide us on that front today?

Speaker 1

Well, it's always until there's some ongoing litigation surrounding this asset. You know that there was a Rent reset, I think we talked about on the last call or no, was that?

Speaker 3

It happened after the last call, but we disclosed in our Q.

Speaker 1

In the Q. Okay. So There was a rent reset. It was somewhat higher than we had anticipated, although Far, far below, I think what the fee owner had been putting into the market at that point, which was actually very Deleterious to our position because there were discussions of rent levels of double or more, which were really never to be the case. And we took a write down on the leasehold portion of the asset in this quarter.

Speaker 1

And on the other side, from previous commentary that we have a mezzanine position On the fee, which has come due and we'll see how things shake out there. There is a foreclosure date scheduled for August 8 On that asset. So we'll know quite soon how things will shake out there.

Operator

One moment for our next question. And our next question will be coming from Alexander Goldfarb of Piper Sandler. Your line is open, Alexander.

Speaker 6

Great. Hey, good afternoon. Thank you. Mark, in your end of your commentary, At the start, you said that you guys are working hard and to protect the dividend. So just want to explore that a bit more.

Speaker 6

I know Matt, you always say, hey, dividend gets reassessed at the end of the year and you'll probably tell me the same thing right now. But if you guys seem to be on the plan for this year, you've done the $245,000,000 sale seems like $245,000,000 leasing is going well. One Vandy is next up for disposition. It doesn't seem like anything's out of whack. Should we take your comment, Mark, about the dividend that we should think about the current level being maintained into next year?

Speaker 6

Or was the comment more just a holistic point that, hey, you guys were in charge of shareholders' capital, you husband it to the best that you can, You do everything to preserve the dividend, but obviously things could change. I'm just trying to understand which way to read the comment.

Speaker 1

Okay. Well, that's there's a lot of ways I guess you can read it. The way I meant it to be because it's The way we approach it and believe in the dividend is, I guess, akin to what you just said, Alex, which is that, we think when people invest In SL Green and Buyer stock, it's a blended play. People want current return and they want evidence of our ability Be able to generate cash flow either through ordinary operations or gain on assets and be able to reward shareholders throughout the year With the dividend in addition to doing our redevelopments, end developments and creating growth and driving Share value. And in most years that's reflected in some years like we have today Where the market sentiment is very negative, we just work our way through that.

Speaker 1

But I think what I wanted State is that we believe that a dividend is an important component of the overall Investment thesis for anybody who invests in stock. We all own the stock at the managerial level. For most of us, it is the Largest, if not almost the exclusive source of our net worth is the stock that we own. And We want to create value and we want to create cash flow and see distributions in the form of dividends. So we are Very comfortable with where the dividend is today given the earnings that we're generating and the gains That we're generating on some of these very important sales.

Speaker 1

We'll do next year's business plan next year. We'll have a sit down in November, December And we'll roll that entire plan out with our objectives and our earnings levels, etcetera. But suffice it to say, which is What I said earlier is, we take all of those points very seriously and our goal is as best as possible To maintain the levels as much as we can.

Speaker 6

Okay. The next question is on compensation. Every year Yes, for whatever reason, it seems to always be a big topic ahead of the shareholder meeting. This year, you guys put out some really interesting data Just showing the fact that like Mark, your comp was 40% lower than the stated value, the rest of the team 30% lower. But here's the rub is that shareholders are sort of disserviced because you guys expense 100%, you realize 30% or 40% less than you're expensing.

Speaker 6

People obviously don't get paid, it's sort of disrewarding. So is there something better that like the consultants So people can put in place that better ties you guys to performance, but something that actually is more directly correlates not only To you guys being paid for results delivered, but also to the P and L because right now FFO is being penalized Because the stop paying it just seems like the current system doesn't seem to be an ideal one. So just I didn't know if you guys have thoughts around that, But I thought I'd ask.

Speaker 1

Got it. Let me I'm going to let Matt address the accounting issues with respect to that. I'll just give you The philosophy is at the top levels of the company, our EVPs. And even down to the SVP ranks for sure, We're big believers in creating the alignment and having a large portion of total compensation in the form of stock. In some cases, it's a very, very high percentage.

Speaker 1

I don't have them at fingertips, but in some of our cases, it might be 75%, 80%, 85% of our total compensation and in other cases maybe half, but in all cases material. And I think that makes sense. I mean, if I were I am a shareholder and as a shareholder and As in all my different hats I wear, I think that it is the best at creating the alignment I referred to earlier. And I don't see us moving away from what I would call proportionately more stock compensation as you move Up the ranks as a component of total compensation. Now how those plans are structured And the charges that are taken upfront versus charges that could be taken later, fixed charges, variable charges, I'll leave it to Matt.

Speaker 3

Yes. You make a good point, Alex. The challenge with the accounting for these plans is once the charges or the cost of the plans from an accounting perspective are established, Day 1, they do not change. The plans are valued. We're talking stock plans or outperformance plans, which have multi year measurement periods, investing periods.

Speaker 3

The accounting rules say you value that plan day 1 and if it's worth full value to the recipient at the end, the accounting charge is what it is. If it's worth 0 Or close to 0 to the recipients, the charge is still the same. And of late, these plans have not been paying anywhere near what they're expected to. So they're not a retention tool, but the charge is still flowing through G and A. And more than 50% of our G and A is non cash, primarily related to Stock based compensation because we do believe it's an important part of the program.

Speaker 3

The challenge is finding the right form of stock based compensation So that the expense to the company is mitigated and actually more closely mirrors The benefit to the recipient because these plans, I'll say it again, largely hit expense in a disproportionate way in this environment, Then they benefit the recipient.

Speaker 7

Thank you.

Operator

And our next question will come from Tom Catherwood of BTIG. Tom, your line is open.

Speaker 8

Excellent. Thanks so much. Maybe one for Steve to start out. Nice uptick in leasing, percent leased to number of your buildings. One that jumped out to us was Graybar.

Speaker 8

And this probably reflects the pickup in small tenant demand that you've referenced over the last few quarters. But on the other side of that, what's the market like for large block demand right now? And are there specific submarkets or buildings in your

Speaker 5

Yes, it's a great question, because What we saw in the first half of the year, particularly if you read a lot of the market reports in some of the brokerage houses that are out there, is that leasing overall velocity in the marketplace has been very modest year to date Despite the success that we've had within our portfolio and a lot of the leasing Leases that have been signed this year have really been on the smaller side of the market. There was we started off the year with very few Larger size requirements active in the market. But having said that, in the past 30, 45 days, we've seen a lot of increase both in tenant tours And in proposals that we've received for larger size tenants. So that's the good news. Just to put a little meat on the bone, we've got 16 active proposals that we're trading paper with right now that range between 45,000 and 300,000 square feet.

Speaker 5

8 of those proposals Came across our door only within the past 2 weeks, and only 3 of those 16 proposals Good sized tenant requirements are in our 1,100,000 square foot pipeline. So it shows you there There's a growing wave of larger tenants that have reentered the market and hopefully that's going to pay off for Better leasing success for the overall marketplace and certainly within our portfolio as we go into the second half of the year.

Speaker 8

Got it. Appreciate that, Steve. Then kind of second one for me, maybe Mark. Over on One Madison, you mentioned the early completion and how that gets you access to your JV partners contribution Sooner rather than later. Kind of 2 parter there.

Speaker 8

First, when is the new expected TCO date? And second, When in the press release you mentioned restructuring the loan so that you could invest more in amenities and invest some of the savings. What's envisioned amenity wise and kind of what more does that building need from an investment standpoint?

Speaker 1

Okay. So First question, I think the original, original completion date was December of 2023. That was for TCO. We moved that forward and later when we kicked off and got our GMP under our belt a few years ago to November of 2023. And then we internally kind of felt like we can maybe hit October.

Speaker 1

And now The team is pushing hard for September, middle ish to end of September. So When do we expect it? We expect it as soon as possible. I don't know. We're aiming for middle to end of September.

Speaker 1

I hope we get there. We should get there, but you got weather and all sorts of other issues, but we should get there. But regardless, The bigger point is we ran a great project. We're at the final whatever 2, 3, 4 yard line, almost done. Property looks great.

Speaker 1

We're way, way ahead of schedule. Thanks to the good work of the people I mentioned and 100 or 1000 of others who worked very hard to get to building to this point. And the primary mission is get the job done right, but the secondary mission is get it done expediently So we can button it up and get tenants moved in and open the building and have it be a great addition to the neighborhood. In terms of the amenities, I think we had something on the order of $60,000,000 of construction cost savings. That was the ultimate cost of the project that we are now projecting relative to the original GMP.

Speaker 1

A lot of saved contingency and other components, which is great. Some of that obviously is being retained, some will go to defray higher interest expense, but we took A very significant amount of that and we are constructing an amazing Rooftop indooroutdoor rooftop venue, that I think will rival some of the great rooftops in and around the city That will be there as both a tenant amenity and also as some very attractive and exclusive event space That can be activated evenings and weekends, as well as I mentioned earlier being, I think, a world class amenity For the building, the amount of investment we're making in One Madison amenities overall that which was planned and that which we added Exceeds that of what we did at One Vanderbilt and I think One Vanderbilt is recognized as having an amazing amenity program. So This at its completion with the market and the Daniel Ballude stake place and an exclusive tenant commons And the Chelsea peers, 4 Little Fitness Center and upstairs this kind of piece de resistance, this Rockwell, David Rockwell Group designed rooftop amenity in the aggregate is going to make One Madison just an amazing Destination and Experience.

Speaker 8

Got it. Can't wait to see it. Thanks all.

Speaker 1

Next summer.

Operator

One moment for our next question. And our next question will come from John Kim of BMO Capital Markets. John, your line is open.

Speaker 7

Thank you. I suppose you had your mic drop moment with the 240 Park sale. But now that that's done and you're expecting proceeds of One Madison, potentially JV sale at One Vanderbilt, In your view, is that enough to avoid a credit rating downgrade from Moody's?

Speaker 3

It's a question I can't answer definitively because they have moved Somewhat as a result of the market, not just as a result of us. I'll say this as it relates to the ratings. I mean, we're focused on a business plan that puts us in And a financial position that we feel is prudent and we want to be in. It is not a stated objective to Satisfye Moody's or any one of the other rating agencies, our ratings are important, but the fixed income market has not been a reliable source Funding for us, and the ratings will come back as a byproduct of an execution of the business plan, but it's not the goal of the business plan. If Moody's makes a move, that's fine.

Speaker 3

If they don't, that's fine as well. We think we're executing on a prudent business plan for our business and for the shareholder base.

Speaker 1

Yes. I would add to the mic drop moments, not just capital transaction, but leasing of space. I mean, We're at these levels with increased interest costs and a vacancy rate that as I said before is our low point. We now think we're going to be able to turn the tide and start building occupancy again. And as we do, that has as much or more effect, if you will, on an improving ratio as any of the other things you mentioned.

Speaker 1

I would say stay tuned. We've got a big pipeline and we think the market is starting to come around and We're believers in this market and that will be as big a help as anything.

Speaker 7

Another asset that you've had some leasing success with, I think with GIC, was at Kuwaiti Park. But there are Still some tenant departures scheduled and the debt maturity next year. How confident are you that you'll be able to refinance that asset On economically liable terms for you.

Speaker 1

Andrew, you want to address, I know you've been involved with 280 and the refinancing?

Speaker 9

Fortunately 280 sits in the hottest submarket in Manhattan, Park Avenue Corridor. We have strong interest in the space that's coming available and We're constantly in discussions with the existing lenders on the property and obviously other lenders around the world like we accessed for 919 Third Avenue. And we're We think we have a great business plan with Vornado on that asset. Steve and Glenn Weiss are working on it day in, day out. And Yes, I think there's some very positive developments that are possible given the building's location and the renovation we did there.

Speaker 9

And it's getting a lot of attention because of the profile of the asset. And I think we're confident that There's a good future for us at that asset.

Speaker 7

Appreciate it. Thank you.

Operator

One moment for our next question. And our next question will come from Blaine Heck of Wells Fargo. Blaine, your line is open.

Speaker 3

Great, thanks. Can you talk in general about asset Pricing in the market, what sort of cap rates and IRRs are potential investors targeting? And how large is the bifurcation between Well positioned assets like 245 Park versus more commodity type buildings.

Speaker 1

Andrew?

Operator

Well, I

Speaker 9

think we've probably never seen a gap as high as currently in terms of Well located in the manitized buildings versus more called Class B and C buildings, Which fortunately we really have rotated the ESSAG REIT portfolio out of. So we still have Submarkets that are struggling, the financial district for sure, 3rd Avenue, just a lot of inventory, But investors are very attuned to that. And I think you saw that with the 245 Park transaction. You'll see it in further transactions where they're willing To pay up for the stability of improved amenitized assets and If you have an off the beaten path asset or an asset that's not been invested in and amenitized, It's honestly there's not a lot of comps out there. Most of the comps are Lenders lender and loan related rather than owners selling.

Speaker 9

So It's a huge gap in answer to your question, but we do feel investor demand For the former for well located, amenitized and improved, continues to be there in New York City.

Speaker 2

Okay, great.

Speaker 3

And then for my second question, kind of related to that, it seems like we're still seeing the flight Quality trends play out with most net absorption and leasing activity taking place at higher rent buildings. But just curious if you're seeing Any better activity at the lower rent buildings within your portfolio? Or is it still relatively soft in that segment?

Speaker 5

No, I think as we've commented in maybe the last call and certainly over the last several months, We've seen an increase in activity in the more price sensitive buildings, Graybar being a good barometer of that part of the marketplace where our vacancy in that building right now is around 12%, And that's from a high of we were up around 15%, 16%. So we've had good velocity in that building. We're starting to see more deal flow In the other in similar type buildings, a very good example of that is 11.856, which was very slow to lease Getting leasing traction last year as a lot of the market attention was on the best in class buildings. And right now, 1185 has got, I don't know, 5, 6, 7 active proposals that are in negotiation for the building. And that's a Price sensitive, rent sensitive type of building, but it also sits in 1 of the 2 best submarkets In Manhattan right now, Park Avenue and the Sixth Avenue, Roxette Aquart being the 2 best.

Speaker 5

Another stat worth knowing is that 62% of the leasing year to date in Manhattan has been done in what is termed as commodity type buildings. So Clearly, you've seen kind of a reawakening of that part of the market. It's got a long way to go before where it's in a healthy place, but the good news is it's starting to happen.

Speaker 3

Great. Thanks guys.

Operator

One moment for our next question. And our next question will come from Anthony Paolone of JPMorgan. Your line is open, Anthony.

Speaker 10

Great. Thank you. First question is just I think your guidance or at the Investor Day, I think your disposition guidance $2,000,000,000 And so I just wanted to understand like make sure $245,000,000 you're treating that as $1,000,000,000 or the $174,000,000 And then also things like the $570,000,000 and change you'll get from your OMA partners and then any cash from the DP book maybe over The rest of the year as some of those mature like does that all roll into the $2,000,000,000 just want to try to clarify like what's coming in the second half?

Speaker 3

The $2,000,000,000 just use $245,000,000 as an example, it would be $1,000,000,000 So 50 percent of $2,000,000,000 That's what would feed the goal. $577,000,000 of proceeds on One Madison from our partners is not part of that. DPE is not part of that. It is pro rata share of sold assets that feed the calc. And getting to that goal will be a function of assets we have in the market currently as well as where we end up with 1 Vanderbilt, which we said is an opportunistic sale that we've had out there for the last couple of years.

Speaker 3

We're marketing an interest and Would hope to get one done, but want to be opportunistic about it. And with regard to another interest sale in 245 Park, There's likely upside to where we sold the first interest. So we may play that out a bit And watch the redevelopment and lease up, leasing has been strong, so we mentioned that earlier, watch the redevelopment and lease up take place before we bring another interest to

Speaker 1

Well, so with that being said, Matt, if the goal was $2,000,000,000 and that's just what I'm hearing from Anthony. If we were to defer The 2nd the 25 percent on the 25,000,000,000

Speaker 3

We would not be $500,000,000

Speaker 1

That would be $500,000,000 Yes, volume year. So there is I mean That doesn't mean we won't identify other assets to solve for that. But that one, Like I said, we're doing it out of a position of strength. I feel very good about 245,000,000, our capitalization there, our partner. And while it was we got the big part done this year, there's a smaller part to This isn't about this is about making money for shareholders.

Speaker 1

So if we think we're going to do a lot better Next year, after we get a lot more leasing traction, then we may defer it. But that Doesn't necessarily mean we couldn't get there if we decided to go forward with it now. It just means we have to do what we think is Best optimize returns.

Speaker 10

Okay. Understand. Then even with that being said, that sounds like Between the OMA, partner capital and maybe some amount of sales, you'll have cash coming in over the second half of the year. That's pretty meaningful. And so my second question, just You may remind us of the priorities of where you see that cash going, whether it's line of credit, buyback, other asset acquisitions like whatever?

Speaker 3

Priority is debt repayment. We've earmarked the entire $577,000,000 coming in from our partners towards debt repayment. All of the proceeds from $245,000,000 went to debt repayment. We have still paused share buybacks since the middle of last year. That was largely a function of the rate environment and where Leverage levels were, where we have a goal to be more on offense as we get into later 'twenty three, particularly 'twenty four.

Speaker 3

That was the purpose of our business plan in 2023, execute sales, increase liquidity, reduce leverage and go back on offense. We are still on that program, but for the time being, we need to get through the remainder of the 2023 business plan.

Speaker 7

Okay. Thank you.

Operator

One moment for our next question. And our next question will come from Ronald Kamdem of Morgan Stanley. Ronald, your line is open.

Speaker 11

Great. Couple of quick ones. So just go back to the DPE book. I think you talked about $289,000,000 of investments on non accrual. My appreciate $225,000,000 of that is $625,000,000 Madison.

Speaker 11

I think you said on August 8, there will be a resolution. So should we be expecting you to take over that asset? Or what are some of the other scenarios there? And then the follow-up to that is the remaining sort of $65,000,000 or $55,000,000 plus or minus on non accrual. Can you just comment on what the situation there and what the plan is?

Speaker 3

So on 625, we'll stick to what was said earlier. We have to be sensitive to what's going on with the asset. But Need to say, there is a foreclosure proceeding on August 8. And if That went a certain direction, then that affects the Q2.

Speaker 1

We said all we did in 6/20. And then

Speaker 3

the remainder of the assets, I think your question was What happens with those?

Speaker 11

Yes, exactly. What's the plan on those that are non accrual? Are you taking over?

Speaker 12

I don't think we can

Speaker 1

generalize, Ronald. Every asset It could be extended, could be restructured, modified, could be Turning to equity, I don't want to generalize and we're not going to go through asset by assets, it's not what we do. But Suffice it to say that the remaining book is quite small at this point in terms of number of assets. It's not small in terms of dollars, But I think like more than a third of it is represented by 625. And for that, you'll just have to like all of us wait and See what the outcome is after August 8, right there.

Speaker 1

We've already said that. For the balance, most of it is performing, but For how much is non performing if this $625,000,000 $50,000,000 $60,000,000 So I mean for $50,000,000 or $60,000,000 we'll see how it goes. I mean We're going to do whatever we can to optimize either restructure, extend or possibly foreclose.

Speaker 11

Helpful. If I could just sneak one in for my follow-up. Just going back to the $545,000,000 guided midpoint, You had some other income come in this quarter. The forward curve has moved. Just can you talk through how are you thinking about sort of that the guidance for the year and some of the puts and takes and where it's trending?

Speaker 11

Thanks.

Speaker 3

It's trending within the range. If we were outside the range, we would have moved it. But given rates and the balance of the business plan to execute for the back half of the year, We feel good with the range where it is.

Speaker 7

Thank you.

Operator

One moment for our next question. And our next question will come from Anthony Powell of Barclays. Anthony, your line is open.

Speaker 13

Hi, good afternoon. Just a question on the dividend going back to the prior question. I noticed that the payout ratio of FAB went above 90%. So maybe if you can go over, I guess, what your medium term dividend policy is and is that a comparable ratio for you?

Speaker 3

So if you recall, we set a dividend level that's as every year dividend level is based on taxable income. So the popular measure Other than taxable income is FAD. We said our dividend is at what was at the time 100% of FAD. Our FAD is slightly better than we projected. So Maybe we're slightly under 100%, but it all comes back to taxable income.

Speaker 3

And as I think we alluded to earlier, our program is in line with what we expected it to be and therefore the dividend is exactly where we expected it to be.

Speaker 13

Thanks. And maybe one more if you can comment. I guess there were some reports about an accident in Chicago that may be turned over to you, an office building. If that's the case, would that be a potential sale Or is that can't comment on that at all?

Speaker 1

So Harry, Satomar has been handling the part of the 245 Claim that doesn't really relate to the asset, but relates to The guarantees and the judgments we've received against the prior owner HNA, if you recall, I think we discussed in prior calls and certainly It's been publicized that we received $185,000,000 judgment, which has grown far higher since With interest in passage of time, etcetera, additional claims. And as a component of that claim, We've exercised against some assets and Harry can shed some light on that.

Speaker 12

Sure. So there's 2 assets that we currently have a line of sight to right now As we continue to pursue additional assets under that $185,000,000 judgment, the one that you referenced in Chicago, That asset is currently working through a bankruptcy process and we're trying to monetize the position that we have there. The second asset is Asset in Orangetown, New York. That asset has no debt against it, and we're working with stakeholders in the town to monetize that position as well. And just to be clear, we have no basis in either of those positions

Speaker 3

and no liabilities that we've taken on at the corporate level.

Speaker 13

Okay. Thank you.

Operator

One moment for our next question. Our next question is going to come from Michael Griffin of Citi. Michael, your line is open.

Speaker 14

Great, thanks. Maybe just going to the leasing pipeline, the comments and Mark's prepared remarks about the 1,100,000 square feet, about 2 thirds of those

Speaker 6

are new leases. Can you give

Speaker 9

us some more color

Speaker 14

on these? Are these expansions? Is it tenants looking to keep the same size? And then Dorels, I think you mentioned in a previous question That you have a lot of large tenants that are in the pipeline. How likely are some of these to close?

Speaker 14

And any color on that would be appreciated.

Speaker 5

Well, Start with the last part. Anything that's in the pipeline is a deal which we think has a High probability of either closing or if it's a proposal that's being negotiated, being converted over to a lease negotiation. So beyond the 1,400,000 square feet, there's a significant number of proposals that are being Negotiated with prospective tenants, but it's early days in discussion with those tenants and they were premature for us to then make it part of the pipeline. What composes the pipeline, 2 thirds of it is financial service tenants, the balance being Law Firms and Professional Services, a little bit of education, a little bit of medical beyond that. But By and large, Financial Services is driving the train right now.

Speaker 5

And one of our biggest proposals, one I referred to earlier, the 16 largest proposals that we're actively trading paper back and forth With 7 of those tenants are from the fire sector and 4 from legal. So as far as Whether expansions or not, it's a little bit of everything. I'd say a lot of the financial service guys are driven by expansion. A lot of the law firms are driven by other consolidations Or lease expirations and the balance of the tenancy is it's a mixed bag. Some are downsizing, some are upsizing, some are just being replacing like in kind with no discernible trend one way or the other.

Speaker 14

That's helpful. And then maybe just a question on the balance sheet for Matt. I know you've got about $300,000,000 of notional swaps burning off This month, is the plan to leave that as floating? I know you've done a good job of managing your floating rate exposure, call it, over the past year, but would you plan to swap that back for fixed? And if you are, what kind of rate do you think you'd get on that?

Speaker 14

Thank you.

Speaker 3

There's actually a schedule of our derivatives now in the supplemental we added it last quarter. You'll see there that maturing swaps are replaced Already with forward starting swaps, we put those in place a while ago. So we have no near term swap maturities at all.

Speaker 11

Great. Thank you. Yep.

Operator

One moment for our next question. And our next question will come from Caitlin Burrows of Goldman Sachs. Your line is open, Caitlin.

Speaker 15

Hi, good afternoon. Maybe just back to the fixed charge coverage ratio and the expected trend going forward. Matt, you mentioned that it would go down before up, Given that you now expect the One Madison JV partner proceeds during 3Q, I guess what makes it get worse before or better?

Speaker 3

Well, I'm still being conservative. We get the TCO in late September, those proceeds wouldn't come in until Q4. So obviously those proceeds help it. It's a function of whether we get it in the Q3 or early 4th and that could be a matter of days.

Speaker 15

Got it. Okay. So once it's in, that should make the trough and then it improves?

Speaker 3

Exactly.

Speaker 15

Okay. And then just On dispositions, you mentioned earlier how your goals are generally a stretch, and it sounds like further sales at 245 Park and 1 Vanderbilt Could be somewhat opportunistic. So I guess as we think about the $2,000,000,000 goal, how important is it to you that you reach or get pretty close to that target? Yes. I just want to make a

Speaker 1

correction Because if I don't, I don't want to get into the narrative. I did not say One Vanderbilt was an opportunistic sale. I was asked the question earlier and my commentary was that there was a lot of interest in One Vanderbilt. It's got primary amount of our focus right now and we're going to do everything to get that deal done this year. So I'm not I think that's inconsistent with what I just heard.

Speaker 1

I just want to make that clarification. So if you could re ask me the question.

Speaker 15

Yes, I guess I was just thinking with the $2,000,000,000 goal, kind of what is the focus and obviously if One Vanderbilt gets done that Could be a decent piece of it and whether that gets done or not, how does that kind of impact your focus on potential smaller assets? No, I'm

Speaker 1

still not getting. Let me just Well, we pushed a lot of this was previously said. Dollars 245 is $1,000,000,000 of it. The $500,000,000 on 1 Mad, We may choose to defer. 245.

Speaker 1

Let's see, 245, we may choose to defer. And 1 Vanderbilt, we're moving A head on and there's a lot of interest. So that's where we are.

Speaker 15

And then there were a couple of other properties that you guys had pointed out 753rd or 7 Day?

Speaker 1

Well, there's other deals we're working on, but those are I don't want to say they're not I mean, they're material, but they're not I mean, I keep my eye on $245,000,000 1 Vanderbilt, the $577,000,000 that's triggered to come The condo proceeds we're going to be getting next year, the rent on Armani that's going to be triggered on turnover on September 30. I mean these are the big things. And then there's other we're always in the market. I mean there's a retail deal we're working on right now. I don't want you want to say anything, I mean, descriptively, Ben?

Speaker 12

There's been significant interest on some of the retail assets we own on Madison Avenue and there's one transaction that's in the works, Karl.

Speaker 1

Yes. But Caitlin, that I mean, we do that every quarter. That's not a I'm trying to just highlight the big things on this call.

Speaker 15

Got it. Okay. Thanks for clearing those up.

Speaker 7

Thank you.

Operator

One moment for our next question. And our last question will come from Nick Yulico of Scotiabank. Your line is open Nick.

Speaker 11

Hi. Just

Speaker 14

a clarification question on Page 19 of the sup where you give the NOI breakdown Of the portfolio, it went down sequentially. Was that all due to the one time L Brands payment in the Q1? Correct. Okay, great. Thank you.

Speaker 1

Okay. Is that it, operator?

Operator

I'm showing no further questions. I would now like to hand the call back to management for closing remarks.

Speaker 1

Okay. 259. So we did our job well. And We appreciate all the questions and we thank you for listening in. We thank you for being shareholders.

Speaker 1

And For those of you that aren't, we hope you'll become so. And we'll look forward to speaking again in 3 months' time.

Operator

And ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
SL Green Realty Q2 2023
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