SL Green Realty Corp

Thank you everybody for joining us and welcome to the SL Green Realty Corp's second quarter 2020 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. Actual results may differ from any forward-looking statements that management may make today. Additional information regarding the risk uncertainty and other factors that could cause such differences appear in the MD&A section of the company's latest Form 10-K and other subsequent reports filed by the company with the Securities and Exchange Commission. Also during today's conference call, the company may discuss non-GAAP financial measures as defined by Regulation G under the Securities Act. The GAAP financials 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 second quarter 2020 earnings and in our supplemental information filed with our current report on Form 8K, relating to our second quarter 2020 earnings. Before turning the call over to Marc Holliday, Chairman and Chief Executive Officer of SL Green Realty Corp, I ask that those of you participating in the Q&A portion of the call to please limit your questions to two per person. Thank you. I will now turn the call over to Marc Holliday. Please go ahead, Marc.

Thank you and thank you to everyone for joining us today. I hope you are all healthy and safe in these unprecedented times. Here in New York City, I'm pleased to report that we have come a long way since the start of Pause New York and are now leading the nation in terms of getting COVID-19 under control from a health perspective. New York City has started to wake up. Residents are engaging in outdoor dining. New Yorkers have begun going back to places of work. Construction has resumed. and retail stores have reopened. There are a number of positive developments happening citywide right now, including the open restaurants initiative, outdoor dining and the planned reopening of public schools come this fall. With that said, office space utilization is still quite low during these summer months and most of our tenants are telling us that they are planning for a 50% plus or minus return to the office after Labor Day. Thank you for joining us. and certainly from an economic and jobs perspective. This is something bigger than any industry or any company and we are certainly not in a position to make predictions on how long it will take for economic activity to begin returning to pre-pandemic levels. Whatever it is, with the incredible level of resources devoted to finding a solution to this virus, we're hopeful this downturn will be relatively short in duration. What we do know, is that this nation's leading urban center and the avatar of an urban lifestyle that remains incredibly popular and appealing, New York will rise up and meet these unprecedented circumstances to show resiliency as it has in the past. As a global financial capital and as an incredibly diversified center for the tech industry, healthcare, and higher education, we will rise back to the top when this pandemic has been arrested. For SL Green, then, our 24-7 focus since March has been on excelling at the things we can control or influence in this time of uncertainty. We are working tirelessly and completely to ensure that this company is in the best position possible to deal with the immediate and near-term impacts that COVID presents. And looking forward, ensuring that this company is in a position to excel and outperform the Once the Manhattan workforce is firmly back in the office, an economic recovery begins in earnest. Our job is to make sure the company gets from here to there in a way that maintains SL Green's leadership position as the largest, best, and most prolific operator of Manhattan commercial office. In a moment where everyone will be unavoidably impacted, we are confident of our position and our actions relative to our competitors. Fortunately, we built this company to withstand moments of great uncertainty. You could even say that we've spent the past 21 years planning for the unexpected. From the global financial crisis in 1998 to the aftermath of 9-11, from the housing-led meltdown in 2007-8 to the current pandemic, we never know where or when the challenge will come, so we have always had the company to guard against all of it. So let me describe how we fortified the company to withstand this particular moment. It starts with our rent roll, which is an intentionally diversified group of approximately 800 predominantly credit tenants on largely long-term leases. It is no coincidence that through this pandemic to date, our office tenants have paid rent to the tune of 96% of gross billings, an incredible statistic given what's happening. The months ahead will not be easy, but when you compare that to other sectors like multifamily and hotels, where the daily, monthly, and annual turnover of contract exposes those segments and segments like that to much more downturn, our average nine-year lease term provides a significant long-term protection in contrast. So our focus needs to be on getting through the next six to 18 months because we know that we will come out of this in a position of relative strength once we reach the other side. and we are all very well situated for this coming period, however long it lasts. We had cash liquidity of over a billion dollars a quarter end. We have a manageable debt maturity schedule with less than 8% debt maturity in the next 18 months. We have modest lease expirations of under 10% for the balance of this year and throughout all of 2021. Our asset base of premier properties have all been substantially improved under our ownership such that the mandatory capital needs over the next 18 months are really quite modest. And as I mentioned, our rent collection is at the top of the industry. That's an enviable position to be in on a relative basis for those things that we can engineer and control leading up to this moment. But it's not all about fortification. We are also incredibly active in the market, doing more than our peers, and I think you've seen that throughout the second quarter. Investment sales, JVs, financings, new lease signings, and development projects, all moving ahead during this pandemic. I want to share with you just some of the examples of this activity just from this past quarter. 280,000 square feet of leases signed during the quarter. That's Manhattan office leases. $510 million of secured financing, non-recourse financing of the News Building. One of the largest real estate JVs in the world closed with NPS and Heinz at 1 Madison Avenue. Sale of 609 Fifth and an agreement to sell 400 East 58th Street at prices that still demonstrate strong demand still exist for high quality and relatively high yielding Real Estate in New York City as index rates approach zero. Our consummation of five individual investment loan sales near pre-pandemic levels. Continuing initiatives throughout the pandemic to lead in the area of sustainability with a recent upgrade just received from MSCI from BBB to BBB. Partnering with Chef Danielle Ballou to launch Food First. One of our company's proudest moments, actually, in the past three months. A new nonprofit organization that by end of this week will have delivered 250,000 meals to first responders and families in need. We now have 15 restaurant partners, and we've reactivated kitchens, feeding New Yorkers and continuing to give back to this community, basically our sole community that we do business in. So sorry for all those examples, but we've been a bit busy. And we did it all while reengineering our buildings to meet the highest and best safety practices for virus protection in order to give our tenants confidence to return to the office, whether that's already happened or will happen in the future. A key to getting it all done is that on any given day, we have close to 100% of our company workforce right here on site at our 420 Lexington Avenue corporate headquarters and inner satellite building offices. We are leading by example to show that work from office can be done safely and without major risk when the right precautions are taken and that there continues to be no more productive way to work than in a collaborative, creative, and efficient office setting. I don't underestimate the challenges that lay before us, trust me. The next few quarters will be difficult, and there will be hurdles to clear. But we are built for these moments. We believe in New York and we expect to be stronger and better positioned compared to our competitors when this crisis too shall pass. I'd like to turn it over to Matt who can dive into some more of the details from the second quarter.

Thanks, Marc. On the last call, I highlighted our billion-dollar plan, a strategy to accumulate a billion dollars of cash by the end of the second quarter as a measure of Thank you for joining us today. while executing over $143 million of share buybacks and OP unit redemptions and paying down debt. We reduced our line of credit balance by $500 million from its peak balance of $1.45 billion and completely repaid our $147 million debt and preferred equity repurchase facility. The activities that generated this cash run the gamut and evidence the depth of capital that still exists in the New York market. Real estate sales generated nearly $200 million including the sale of 609 Fifth Avenue, which wasn't even a part of the plan we laid out in April, and the sale of a JV interest in 1 Madison Avenue. And we expect to receive another $20 million in the third quarter from the pending sale of 458th Street. In the debt and preferred equity portfolio, we generated almost $500 million of cash through the strategic sales of five positions, totaling $259 million, and repayments totaling $229 million. coupled with the conversion of one debt and preferred equity position to JV Equity in the quarter, our portfolio balance stood at just $1.25 billion as of June 30th. More on that portfolio to come. And on the financing front, we closed on an enormously important $510 million mortgage financing for the company and for the broader market at 220 East 42nd Street that was provided by a syndicate of world-class financial institutions. On top of that, we have the refinancing of our project at 410 10th Avenue still in process, which is expected to repatriate equity we've funded into the project, as well as cover future equity needs. As the share repurchases, we remain committed to a disciplined execution of our program. And after curtailing it back in March, pending execution of the billion dollar plan, we commenced buybacks again in late May, taking advantage of extraordinarily low share prices as our liquidity plan was executed in an expedited manner. Since then, we've completed $163 million of buybacks, including $20 million in early July, bringing total executions to $401 million year-to-date, and now over $2.6 billion through our $3 billion authorization. At today's share price, which is a 7.3 times multiple 13.8% FFO yield and over 7% dividend yield, virtually all sources of incremental liquidity are accretive into buybacks. So with a careful eye on the balance sheet, meaning we're not using leverage to buy the stock, and a focus on maintaining a substantial amount of protective liquidity, we will continue to evaluate further opportunities to sell assets and generate incremental liquidity to continue share repurchases in the second half of this year and beyond. Turning to earnings guidance, in April we took what many considered a very bold step in this environment and provided revised FFO and FAD guidance. Most other office reads pulled their guidance, and most of them are likely to withhold guidance again this quarter. But we feel we owe it to all of our constituents to share our views. If we have a view, let's not keep it a secret. And three unique months later, after a ton of activity, more projection models than I care to count, and reviews of those models no less than two to three times a week, there's been some movement in the line items, but we remain comfortable with the guidance we provided and are maintaining our FFO guidance range of 660 to 710 of share. and FAD of at least $400 million. Highlighting a few items in the real estate portfolio, as Marc highlighted, collections remain solid for the entire second quarter and now into July, with second quarter office collections approaching 96%, retail at 70%, which is now a very small component of our business, and overall collections at 91%. Tenants are definitely paying at a slower pace, but the vast majority are paying, and the pace of collections has actually improved every month from April through July. One point of clarification, I just want you to remember that our figures are gross collections based on contractual billings, not reflective of any rent relief deals that may have been cut or the very rare use of security deposits. If we were to report on that basis, as I see many others doing, the numbers would be substantially higher. While collections have been solid, we have historically taken a very conservative view of our receivables, and in this environment, we're being even more conservative. In the second quarter alone, we recorded a total of $14.9 million of bad debt reserves on a combined basis, comprised of $7.6 million of reserve against actual billed receivables and $7.3 million against straight-line balances, which are essentially future rents. These are the highest such reserves we've ever booked in a single quarter. For comparison purposes, in the first quarter, we recorded total reserves of about $1 million and in the second quarter of last year, it was only $1.4 million. And our bad debt reserve now covers 45% of tenant unpaid balances. Could this prove to be too conservative based on the historical trend? Possibly, but always better to err on the side of caution at times like this. On a positive side, we've seen a dramatic drop in our projected full year operating expenses by over $14 million just since we revised guidance back in April. obviously reduced occupancy levels over the last several months, have contributed to the savings, but Ed Piccinich and his team have also implemented longer-term cost-saving plans, which we will benefit from even after the buildings gain occupants, all while taking into consideration the nominal incremental costs of operating our fully redeveloped portfolio at a Class A standard in a post-COVID world. Collectively, these savings also have the effect of improving our same-store cash NOI expectations for the year versus what I outlined in April. In the debt and preferred equity portfolio, our portfolio is now almost $1 billion smaller than it was just one year ago, and we continue to assume no new originations for the balance of the year. With regard to reserves, during the quarter we booked an incremental $3.4 million of reserves against one retail loan position, but otherwise felt the conservative view we took in December and March as part of the CECL process continues to be adequate, and on a percentage basis, far in excess of our historical losses. We also recorded $3.4 million of realized losses against DPE positions that were sold in the quarter. Needless to say, the sales have gone very well, credit to David Schaumbraun and his team, and that leads us to considering more of them over the course of the year. In our initial guidance in December, we included more than $160 million of income from the debt and preferred equity portfolio. Now, with a dramatically reduced size, our income projection is down by over $40 million including the $5 million fee we recorded in the second quarter and excluding the effective reserves. Just a couple years ago, the $120 million we expect for this year was over $200 million from that portfolio. Yet our FFO per share remains high, even while the contribution from our DPE business has shrunk. This is contrary to what many have long predicted would be the case, thus proving there is incredible value to the debt and preferred equity business in the SL Green platform and we expect to do this business for many years to come, but as a component of the earnings power of this platform, not the driver of it. A couple seconds on other income. In the revised guidance we provided in April, recall that we reduced our generic full year projection of lease termination income down to $6 million from eight for the balance of the year. That assumption didn't last long as we recognized $12.4 million of termination income in the second quarter following negotiation with two retail tenants to vacate their space early. Given its unpredictability, we have not assumed any further lease termination income in 2020. And finally, on the expense side, we continue to manage G&A very closely, taking further action to reduce G&A during the second quarter, even after reducing it coming into the year, and again in the first quarter, and now see total expense down by about $10 million, or 10%, from our 2019 levels. So I said earlier, some movements in the income and expense line items. and a lower share count than our April guidance as the share repurchase program was active again, but all in all, sitting comfortably within our previously provided guidance range. With that, operator, we can open it up for questions.