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spk00: The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1. The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1.
spk02: Thank you everyone for joining us and welcome to SL Green Realty Corp's third quarter 2022 earnings results conference call. This conference is being recorded. At this time, the company would like to remind listeners that during the call, management may make forward-looking statements. You should not rely on these forward-looking predictions of future events as actual results and events may differ from any forward-looking statements that management may make today. All forward-looking statements made by management on this call are based on their assumptions and beliefs as of today. Additional information regarding the risk, uncertainties, and other factors that could cause such differences to appear are set forth in the risk factors and MD&A sections of the company's latest Form 10-K and other subsequent reports filed by the company with the Securities and Exchange Commission. Also during today's conference call, the company may discuss non-GAAP financial measures as defined by Regulation G under the Securities Act. The GAAP financial measure is most directly comparable to each non-GAAP financial measure discussed in the Reconciliation Of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found on both the company's website at www.slgreen.com by selecting the press release regarding the company's third quarter 2022 earnings and in their supplemental information included in our current report on 48 relating to our third quarter 2022 earnings. Before turning the call over to Mark Holliday, Chairman and Chief Executive Officer of SL Green Realty Corp. I would ask that those of you participating in the Q&A portion of the call, please limit yourself to two questions per person. Thank you. I will now turn the call over to Mark Holliday. Please go ahead, Mark.
spk15: Thank you. Good afternoon, everyone. We appreciate you dialing in today, and we look forward to giving you an overview of our quarter's results, taking your questions. I just want to remind everyone that since 2019, we've faced many new challenges, which in turn caused us to raise our bar even higher and respond in ways that have been beneficial for our tenants, our shareholders, and our community. In less than three years, we signed over 5 million square feet of office leases. We completed two dozen individual sales transactions at a gross price at share of $5 billion. We developed and acquired new world-class assets, oversaw and executed $2.25 billion of physical construction projects for on-time deliveries, reduced our DPE balance to $663 million at quarter end. We created a new iconic global entertainment destination, Summit. We managed our portfolio in a safe, secure, and efficient manner, launched a portfolio-wide hospitality and amenity program, and we did all of this throughout by working five days a week from office, the only possible way we could have realized these extraordinary accomplishments. I want to once again express my extreme gratitude to the amazing and talented workforce here at SL Green, who came together, all of us on the floor of the New York Stock Exchange, to ring the closing bell and celebrate 25 years of excellence in improving the way which New Yorkers live, work, and play. And this momentum carried through into the most recent quarter. I'm extremely, extremely pleased with the leasing performance in Q3, highlighted by the Franklin Templeton deal at 1 Madison Avenue and the Memorial Sloan Kettering deal at 885 3rd Avenue, which took a total of over 750,000 square feet of vacancy out of the SL Green portfolio in economic terms that were consistent with our expectations. As pleased as I am with the leasing performance in Q3, I'm just as happy that we were able to retire $800 million of maturing public bonds through a series of paydowns and financings that were done on attractive terms. Furthermore, we're highly focused on implementing strategies to mitigate our exposure to rising interest rates by executing on a series of swaps, caps, and debt repayment. Understandably, a lot of the focus from the market is on the leasing performance and tenant demand. And on that front, we feel quite good about where we are given the portfolio is highly improved and our overall asset quality has never been better. We continue to amenitize our best assets to attract top tenants. And as a result, the portfolio is still well occupied today at 92%. And we have marketing and capital plans in place that we believe will enable us to operate during this market cycle at or above 90% or better until things begin to turn around. Rising interest rates, on the other hand, are more of a concern given the impact it has on our earnings, making interest rate hedging and debt reduction our number one priority for the foreseeable future. I think Matt and his team have done an excellent job with this, as evidenced by the $1.25 billion of corporate swaps entered into during the third quarter to hedge interest future floating rate exposure. In addition, during the most recent quarter, we entered into cap contracts in another $270 million of variable rate property debt. And just yesterday, we swapped another $200 million on a floating rate mortgage. Notwithstanding the current interest rate environment, the underlying New York City economy is still chugging along, based on employment data showing that NYC added 24,000 private sector jobs in August and is now 100,000 jobs ahead of New York City OMB's original 2022 forecast. More to the point, 22,500 office-using jobs have been created in just the last three months reported, now bringing the total office-using jobs recovery to 104% of pre-pandemic high-water mark. And contrary to what you may see in the media, I expect September's numbers due out momentarily to show positive as well. The numbers confirm what we feel that New York City is finally back to normal. The roads, sidewalks, and commuter trains are packed and the subways are coming back. Tourism and hospitality are near pre-pandemic levels. Residential rental market remains tight and the enablement of conversion of office to resi to help solve this problem is gaining momentum at the state and city levels. Meetings, conferences, parties, they fill the calendars and the rhythm of New York social life has returned. Before opening up the line for questions, I want to acknowledge a few other milestone moments for the company. First, Summit One Vanderbilt is celebrating its one-year anniversary tomorrow. We will all be there to recognize the successful launch of this world-class attraction that has quickly become one of New York's hottest experiences, having welcomed 1.4 million guests to Summit during the first year of operation, with far more expected next year. During the third quarter, we prevailed in consolidating ownership and control of 245 Park Avenue, a trophy asset in the SL Green corridor of owned properties, after a contentious bankruptcy litigation. We have plans to improve 245 Park over the next 24 months to make it one of the most desirable buildings on Park Avenue. Last week, we received the excellent news that Le Pavillon received a Michelin star less than 18 months after opening during the pandemic. And finally, this morning, we announced a partnership with Caesars Entertainment to pursue a downstate casino license for a world-class gaming hotel and entertainment venue in the heart of Times Square. In connection with this effort, we have formed a coalition for a better Times Square that seeks to make significant investment in security, traffic mitigation, mass transit improvements, and accelerate economic recovery for surrounding businesses and create good paying jobs for local New Yorkers. With that summary, we'd like to open up the line for questions on the quarter and whatever else is on people's minds.
spk02: Ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your touchtone telephone. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Alexander Goldfarb of Piper Sailor. Your line is open.
spk04: Oh, good afternoon. So two questions. You know, first, just taking a look at bringing on converting the DP positions for five times square and 245 Park. Just want to understand, one, the earnings impact, because I think you were getting close to 11% on the DP positions previously, and I'm not sure how that equates to a cap rate on the buildings. Two, I think you have some large vacancies coming in 245 Park. So maybe, Matt, if you could just talk about how we should think about the economics and impact to earnings from converting those two positions?
spk16: Sure. I'll let Steve address the 245 part vacancy question you had. As earnings, obviously, we'll be giving guidance for 2023 on December 5th at our investor conference, so you'll get more detail then. You alluded to the DPE balances rolling off. That's about $367 million in of debt and preferred equity investments combined between 245 and five times that we're rolling off at just short of 11%. You're right, the properties do not generate that equivalent return on their face. Five times is in redevelopment and lease up. We only own 32% roughly of that. And 245, we own 100% of. There will be finalization of gap adjustments and those types of things done over the coming weeks leading into our guidance for 2023. But the roll-off is substantial at $367 million at near 11%.
spk13: And then with regards to vacancy or pending vacancy at the building, we really don't have as much as I think you may suspect. the J.P. Morgan space, which is 17 floors in the building. Fifteen of those floors were either previously leased to SocGen, or while we were doing the leasing for H&A, we had pre-let five of the floors to Houlihan Loki. So that only leaves us two floors to really deal with when we get that space back late next year. Other than that, there's about 120,000 square feet of current vacancy. There's another block in the building that we get back late next year, Major League Baseball, which had roughly five floors. We had pre-leased most of that space on short-term leases to either Rockefeller Group or Houlihan Loki. So we'll now get it back mid to end of next year. Other than that, there's a smattering of floors throughout the building. And that sort of role over the next couple years is what's justifying the capital program that we're in design for the building right now, which we're really excited about. You know, just to remind everybody, this product is exactly what the world is looking for today. It's side core design, has a floor plate design that has actually six corners on it, the way it's configured, sits directly Catty Corner to Jake Morgan's new headquarters has direct access to Grand Central Terminal. Our development plan, which is going to be a spectacular transformation of the building from the plaza to the lobby to amenities being added, is, I think, very forward-thinking. And we're already trading paper with prospective tenants. So I have the greatest confidence that this building will outperform.
spk04: Okay. And then the second question is, Matt, on the swaps, a lot of news, you know, in press reports about the rise in cost of swaps, but you guys have been quite active. Can you just give some perspective, you know, how much pricing has changed? And should we think about swaps being prohibitive or based on the fact that you guys are still executing them, you know, earlier this week, that prices may have gone up, but in the scheme of things, given debt costs, you know, still plenty of availability and cost effectiveness on the swaps for your debt?
spk16: Yeah, certainly the latter, not the former. And I think Mark alluded to the fact that we're going to continue to, you know, target reducing future floating rate debt exposure through, you know, caps and swaps. You know, you talk about cost. Technically, the way it works, you know, cost for a swap is built in through a credit charge, which is just measured in basis points. on top of the rate that you swap. In the billion 250, it was roughly five basis points on average, so not much. Caps have an upfront cost, and those costs are based on the term and the benchmark. There has been some press about increasing cost. I think cost of everything has gone up, but certainly the savings we're realizing by executing on these trades far exceeds whatever incremental cost may be embedded in them, just to put that in perspective. On the $1,250,000 that we did and was included in the press release, that was done more than 100 basis points tighter than where you would do those today. On $1,250,000, you can do the simple math, 100 basis points, $1,250,000 over the course of several years. That's a lot of money, well worth a couple basis points.
spk18: Thank you.
spk10: One moment for our next question. My next question comes from Steve Sockwell with Evercore ISI.
spk02: Your line is open.
spk12: Thanks. Good afternoon. I guess, Steve, I was just wondering if you could comment a little bit more on kind of where the pipeline sits today. Given that big tech has sort of gone on hold, I'm just curious, you know, what parts of the market are you seeing the most demand in, whether it be size attendance or, you know, what part of, you know, New York? Is it Midtown South, Midtown West? any color on leasing would be great.
spk13: Sure. Well, we've got a pipeline that's about 700,000 square feet. Obviously, that number is down as a result of the two big leases that we recently signed. But I think the good news in that pipeline is we're seeing a lot more activity from the small to medium-sized tenants, which Is it changed from where the market was for the past six or nine months? Because a lot of the leasing activity, although the year is doing, broadly speaking, the market is doing well compared to the prior two years, velocity is still down compared to the 10-year average. But the success in the market this year has been driven largely by the bigger tenants and I think the new news, as I said, is that they were starting to see these small to medium-sized tenants coming back into the market. As the bigger tenants, the higher price point tenants that are assigning leases were the first ones into the market, the small to medium-sized guys were sitting on the sidelines, and as the big guys are bringing their employees back to the office, you're now seeing those smaller guys follow them into the office, and that's driving a lot more leasing activity. So some of our 3rd Avenue, Lexington Avenue product We have more towards trading paper and signing leases today than we have been in the past year or so. So I think that's positive. I think Midtown is still, without a doubt, the driver of the overall leasing velocity in the marketplace. Financial services is some 41, 42% of total leasing that was signed in the third quarter. Tech is still out there, but obviously in a much smaller, diminished way. They're kind of 8% to 10% of total leasing. But financial services, which in the past couple years was sort of in that 30% range, they're now 40-plus. And I think there doesn't seem to be any slowdown in that segment's demand. You're also seeing law firms a lot more active today than they were a year ago. And, you know... I think that same demographic is what we're seeing within our portfolio. Of our pipeline, about 17% is financial services, 12% is tech, and the balance is everything from government to healthcare to services.
spk12: And if I could just ask a quick follow-up on that. Do most of these requirements, are they kind of downsizing? Are they kind of including growth space? Are they just, you know, kind of musical chairs moving out of one 50,000 foot into another. Just, you know, what can you say about size?
spk13: Well, there's an unusual, there's an unusual amount of relocations taking place in the city as tenants reinvent their workplaces. You know, typically about 30% of leases that get signed are relocations. Third quarter, it was over 40% of the leases that were signed were relocations. And I think that's a function of tenants that are continuing to densify. You know, that was a pre-COVID phenomenon that never stopped. And they're reinventing how they want to use their workplace. So more amenities, more space per employee, and a more hospitality vibe in their design. And without a doubt, people are, you know, most businesses are still very unsettled. about what their ultimate footprint is going to be. They just don't know. So they're building in a lot of flexibility on ability to grow and ability to downsize as time goes by because the world is still figuring itself out.
spk12: Got it. And then, Mark, I know it's early and you just put out the press release with Caesars on the gaming license. I guess I'm just trying to sort of think through that building's obviously encumbered with a large tenant. And I'm just trying to think through sort of the concept of a vertical casino in New York versus one that's more horizontal. I mean, can you just kind of share any thoughts with us about that?
spk15: Steve, there'll be lots coming out over the course of the next several months. We expect the RFP out sometime in December, but that's not official or formal or announced from the state. That's just our expectation. Could be before, could be after. Suffice it to say, we have what we and Caesars think is an excellent plan for bringing gaming and entertainment and hotel right to the heart of Times Square. I think we wouldn't do anything less than a world-class facility laid out in a way that we think will be extremely successful. and desirable and additive to Times Square, which I think really could use a boost right now. So I would say stay tuned for those details. There will be more to come and stuff that I and the team are really excited about. Thanks for the question. Great. Thank you.
spk02: One moment for our next question.
spk10: Again, ladies and gentlemen, we ask that you limit yourself to two questions. Our next question comes from Michael Griffin with Citi.
spk02: Your line is open.
spk07: Great. Thanks. Maybe we go back to the refinancing for a moment. Don't you think debt maturity is coming up? Is there any ability to get longer-term refinancing on some of these? Or is the expectation more the short-term floating rate debt action that's kind of similar to the $400 million turn line?
spk14: I mean, at the moment, the CMBS market for single assets is not as compelling as the shorter-term market. So you'll probably see us use the shorter-term market at the moment. As soon as that single asset CMBS window reopens, which no dealer's been able to tell us exactly when it'll happen, but hopefully it'll be by the first of the year, then we'll start to avail ourselves of longer-term fixed-rate financing.
spk16: And just with regard to the $400 million corporate facility, remember what we're trying to accomplish there, we are ultimately going to, we had to pay off maturing bonds, $500 million, which we've done, and we were doing that in a way that can be repaid one year from now when we get money from our partners at One Madison, just short of $600 million. The bank financing market for that kind of term is well inside of what any bond execution looks like, probably 200 basis points inside. So that's why we went that route.
spk07: Gotcha. That's definitely helpful. And then we saw some details released recently around Local Law 97 in New York. I understand things are so preliminary, but do you have a sense of how this could impact your portfolio and maybe highlight any steps that they can make sure your portfolio is going to be in compliance?
spk15: This is Local Law 97? Yeah, no, I mean, this is, you know, the rules were formally adopted recently, but this is something we've been preparing for for years, that it's been out there. The first measurement date, we think, you know, the bulk of the portfolio, if not all the portfolio, will pass in compliance without penalty. And then, you know, in the 2030 date, we're going to be working, obviously, over the next, seven, eight years on making additional investments and exploring ways to use renewable energies and credits and everything that will be available to try and limit or eliminate entirely whatever penalties there will be in 2030. We'll probably go into more detail on this in December at the investor conference to give people a better sense of where the issues lie, a range of quantifications. you know, we don't have that here now. And I would say that until, you know, 2030, at the earliest, we expect it to be of no financial consequence, not because the rules are not rigorous, but simply because we've invested so much in the portfolio. And we have so many of our buildings are lead-designated, well-designated, Energy Star recipients, et cetera, that we score very well on the current metrics. Those rules will evolve over time, and we'll see what the state of play is in seven or eight years, but we're preparing as though what's been promulgated is what we'll have to live with.
spk07: Okay. That's good for me. Thanks for your time.
spk10: Thank you. One moment for our next question. Our next question comes from Anthony Pallone with J.P.
spk02: Morgan. Your line is open.
spk09: Yeah, thank you. I guess first question is for Mark. Can you talk about where you think the balance sheet leverage should be over time? You mentioned the priority of debt pay down, and so just wondering how you're thinking about it, and especially in the context of the asset-wide strategy you guys have articulated?
spk15: Yeah, just, you know, on the issue of debt pay down, it's not so much a leverage ratio question in my mind. I think we are very fairly leveraged and, you know, many of the assets under leveraged relative to what I think a proper loan-to-value would be in this market. The debt reduction really is pointedly towards preserving and protecting our earnings from increasing rates and variable rate debt. So at a leverage point, we feel and have always felt very comfortable where we sit today with our leverage relative to an asset base that we think has a value far, far in excess of where the stock trades today. even given where the stock trade is today. However, you know, we have about, you know, Matt, I want to say maybe $2 billion or so unhedged at this point. So, you know, we're over 80% hedged at the moment, right? And so, therefore, you know, what we're talking about is managing the risk, if you will, on that whatever that is, you know, 17%, 18%, percent unhedged position, which I would like to reduce further, again, not from a credit or balance sheet, but purely from an earnings standpoint, to protect ourselves from volatile increases in interest rates.
spk09: Okay, got it. And then just follow up on the DP book, a lot of it is set to mature next year. I mean, should we think about this as being
spk14: uh... the end and also you know did you anticipate just getting paid back on all this i guess outside of six twenty five perhaps or you think other properties might have to come onto the books it's definitely not the end this has been a very important program for us it's returned us terrific IRRs uh... over the course of the program and you know we tend to invest in at the bottom of the cycle so Debt investments are most effective when we can make them in distress-type situations, and if we do see those type of situations, we will definitely be taking advantage of them in the debt book. You know, in terms of the maturities, they'll, you know, time will tell what the refinancing markets look like, what the property markets look like sitting here today. We can't predict sort of what's going to happen in the future at existing loan maturities. But we were happy with the outcomes, obviously, on 245 Park and Five Times Square. And, you know, I definitely wouldn't call the book defunct by any stretch.
spk09: Okay.
spk10: Thank you. One moment for our next question. Our next question comes from John Kim with BMO. Your line is open.
spk06: Thank you. You guys talked about the improvements you could make at 245 Park over the next couple years, and the former owner was capital constrained. So I was wondering if you can comment on how much CapEx will be needed to upgrade the building, and also if you can comment on the timing of finding a joint venture partner.
spk15: You know, I would say You know, needed is, you know, there's a lot you can work into, you know, what's needed at the property. I mean, the property, you know, leases in its current state, and we've done actually a lot of leasing. How much, Steve?
spk13: Probably 200,000 plus square feet.
spk15: Yeah, we've done about 200,000 square feet plus. The building is a very good building, but, you know, and I don't think needs were much. However, what... you know, to bring it up to where we want it to be to its full potential and be consistent with some of the great properties within the portfolio that have extensive amenities, et cetera, you know, we're going to go in sort of electively and voluntarily. You know, I would expect any program of size to be under $100 a foot, so I don't mean that to sound de minimis. It's a big building. to 1.8 million square foot building. And that's the beauty of the situation here is we can amortize some substantial improvement dollars over a very large asset. And for relatively, you know, I'll call it modest incremental investment per square foot, we can take our already low basis for a Park Avenue asset of I think about $1,100 a foot, if I'm not mistaken, maybe even slightly under that. And like I said, make a very large dollar amount, but a small relative per square foot improvement amount for improvements, beautification, efficiencies, new lobby, plaza, amenities, and still have a basis very low by Park Avenue standards. And I think have one of the best buildings with one of the best views sitting right on top of access to Grand Central Station. Grand Central Station. Thanks.
spk06: And the timing of a JV partner?
spk15: Oh, well, I mean, you know, I mean, we're looking. I mean, we'll begin those conversations in this quarter. And, uh, you know, that'll, you know, that's one of our priorities for will be one of our price for 2023 will be identification and closing of a JV partner. Uh, but we're, we, you know, I guess already have, you know, begun fielding inbound and will be sort of proactively marketing outbound this quarter. Okay. Um, my second question is this quarter, it just means we're going to start the process this quarter. You know, these processes generally could take anywhere from, you know, four to six months, you know, I would say on balance.
spk06: Got it. On the Caesar's joint venture, can you provide any more color on the structure of the JV? Is it just going to be you and Allianz owns the real estate and Caesar's the operator and that's completely separate? Or will there be co-ownership of both? And if you could also confirm if this is an exclusive project to both you and Caesars for a New York casino license.
spk15: Yeah, in terms of, you know, maybe I'll sort of do a blanket statement for the many questions I may follow. Any details of the project, the bid, the structure, all that, you know, is going to be something that we're going to address, as other bidders will address, over time and in response to an RFP that hasn't been issued yet. So I want to put an emphasis on that. There is no RFP from the state right now for a downstate casino license award. That is anticipated to occur. So the answer to your second or third question was, yes, we are exclusive with Caesars on this casino site, and we're going to be putting both of our mutual best efforts behind it to make it happen. We think it's not just a big opportunity for the state and city, but it's almost a rallying point for Times Square to have a catalyst of something very positive to help redirect some of the degradation we've seen in that area. And we know Times Square has best. There's nothing better in the world. It's the best entertainment district in the world, bar none. coming on the heels of this pandemic where an area like Times Square, it's not the only area in New York City, but an area like Times Square needs help and needs to reboot itself. And I think we can rally around a casino and make that the engine and economic engine around which we could really have a Times Square renaissance much in the way that you've seen a Grand Central renaissance. you know, over the past few years.
spk02: Great.
spk10: Thank you. One moment for our next question. Our next question comes from Tom Catherwood with BTIG. Your line is open.
spk01: Thanks so much. Steve, let me turn it over to one Madison. Obviously, two kind of anchor tenants in there at this point in time. Now that you've reached this kind of 55% plus level of pre-leasing, how does your marketing program shift at all? Do you become more selective with tenants? Are you able to start pushing rents at this point in time? Is there anything that changes once you reach this level?
spk13: Yeah, we've already raised rents as a result of the leases that we've signed. But, you know, first and foremost is to remind the brokerage community that we still have space. I think a lot of people are under the impression that we are fully leased in the building. So we're out there reminding people that we've still got space to offer. We're actively trading paper with a couple of tenants now in the tower of the building. And we're still seeing, you know, pretty strong tour activity. I think it's going to pick up even further towards the end of this year once we start to have the steel in place for the new tower and we can do site tours. Up until this point, all of our marketing has really been done out of our boardroom off of renderings and off of a presentation deck and really not with site visits. What we saw at 1 Vanderbilt Avenue is that once we could do site tours, the place just really exploded because people got so excited about the quality of the development, what the views are like, what the volume of space really feels like, and it takes on a whole different character and pace to the leasing program. So, you know, we top out steel in November of this year, and I think we'll be doing site tours towards the end of the year or early next year. So that's really where the thrust of our focus will be.
spk01: Got it. Appreciate that. And then maybe Mark or Andrew, when you're thinking of sources and uses going forward, obviously one of the big priorities has been repaying the unsecured bonds. You got that resolved, but the new projects obviously add more capital requirements, whether it's 450 park or 245 park or five times square. How do you think about allocating capital to those while at the same point in time kind of reducing your floating rate debt What gets prioritized or kind of where do you hit a challenge in that capital allocation, if at all?
spk14: Well, I think the primary source of capital will be asset sales. And, you know, in terms of specifics, five times square will be zero incremental capital. That deal was sort of fully funded at capitalization with new cash equity that did not come from our Our side of the ledger came from the other partners in the deal. So there's zero incremental capital needs there. And then as we said, 245 Park, we have this active search for a joint venture partner ongoing, and we'd expect the proceeds of that joint venture sale to cover most, if not all, of the capital required by that building.
spk02: Thanks, everyone.
spk10: One moment before our next question. Our next question comes from Michael Lewis from the Troister line is open.
spk18: Great. Thank you. I have a question about the term loan and the swaps. And I'm wondering if there was any change in the amount or the composition of the banks that kind of came to the table to help you get that done. Because, you know, we've heard that some large lenders have pulled back on commercial real estate lending. So I'm wondering not just about the pricing of that, but, you know, kind of the availability of capital in the market.
spk16: Yeah, Mike, it's Matt. No question. It's tough out there. You know, a lot of banks are pulling back in various areas. So to hit the market with a facility like this is not without its challenges. But we went to, you know, very close relationship institutions who stepped into it. They are all participants in our existing credit facility. Some are participants in the, you know, One Madison financing and given that this facility is pursuant to funds coming from One Madison, they have a great deal of certainty around the success of that project and therefore the funds coming in. But yeah, there's plenty of no's in this environment just because, you know, capital allocation or restrictions are keeping a lot of banks handcuffed.
spk18: Okay, thanks. My second question, kind of piecing together, I guess, some of the other questions that were already asked, you know, as you look at, you know, JV partners and, you know, maybe selling some assets, you know, what's kind of the depth of that market, right? So with interest rates up, you know, leverage buyers under pressure, you know, is there capital out there to get those deals done? And does the pricing take a significant hit? Or do you feel pretty good about what you'll be able to do those deals at?
spk15: Well, I mean, I think we feel good relative to the kind of product we're bringing to the JV market. It's still, you know, sort of irreplaceable, class A, often, you know, trophy-like assets. And for that, I'd say, you know, there's almost always demand in every market. That demand often shifts from, you know, investor to investor or from country of origin to country of origin. But, you know, I think that, you know, for the balance of 22% you're not going to see a lot of people are going to have more limited capacity. But in 23, there, we believe, will be certainly new investment mandates to put money to work, but only in best markets, best properties, best sponsorship. I mean, it's like almost anything in a dislocated market or a challenged market because of what Matt just talked about on the debt front. You know, only the best deals are going to get done in the grade A markets with very confident sponsorship. So in that regard, we go into it very confidently that we've got the right product, the right returns for this market, the right valuation levels. The proof will be in the execution.
spk14: In the case of 245, the right in-place financing.
spk15: Yeah, well, that's a great point Andrew makes. It's a fully financed deal, so that certainly helps. But with or without it.
spk14: is taken off the table in 245 parks. That makes sense.
spk10: Thank you. One moment for our next question. Our next question comes from Daniel Touche here with Sculpture Bank. Your line is open.
spk08: Oh, hi. Nick Ulico here. So just a question on 245 Park. How do you guys, you talked about some of the capital plans, but how should we think about, you know, how you underwrote a, you know, stabilized yield on that building post-renovation?
spk15: Well, stabilize what kind of yield? Cash on cost, unlevered IRR, levered IRR, you know, just... Yeah, cash on cost would be great. Cash on cost, stabilize cash on cost. We'd have to... You know, look, I think we've got, you know, let me sort of go back to front. We've got levered returns on our basis that I think would exceed 50%, you know, based on where we can execute for a grade A trophy office property right across from J.P. Morgan's New World headquarters. How does that translate?
spk14: If I sell green, it's low sixes. Yeah.
spk08: Okay, great. Thanks. And I guess just going back to the – In that case, you do have the in-place debt on the building, which is attractive low 4%. If you were to think about that building or another building in New York trading right now, you have to put new acquisition debt on it. Your own rate on that, even if you can get it, is going to be somewhere over 6%, let's say. How is that in your mind affecting values in the market? Does that mean that starting cap rates for New York in that type of situation, if you have to finance it over 6%, starting cap rates have to be closer to 7% or higher?
spk15: No, no chance. I mean, no different than you have inverted interest rates. You're going to have cap rates below financing rates because New York – Class A office is not going to be a seven cap. You're looking, a cap rate is a perpetual in place expected rate of return over a spread to treasuries minus growth rate based on long term treasuries. That has no, you're talking about discount rate, it has no bearing to a cap rate. New York City cap rates today I still think are solidly for the best assets in the fours. you know, maybe for a more, you know, mid-market product in the fives, I haven't heard anything about sevens. I mean, is that, do you have a transaction in mind that traded in midtown at north of seven?
spk08: Well, no, that's what I think part of the problem is that there aren't that many transactions, but everything we're hearing is that, you know, negative leverage is a problem, particularly for office, for your underwriting.
spk15: Negative leverage is a fact of New York City. That's been doing this for 30-something years.
spk14: Who's this? This is Nick.
spk15: Negative leverage is often the case in New York City. It's called, you know, often in people... If you buy a building with vacancy, there's going to be negative leverage. Yeah, or even, you know, people will generally be making long-term 10, 15-year investments. You know, ideally, I mean, you'd love to be in a positive, strong positive leverage going out. I'm not arguing that. But it is not unusual in New York to buy negative leverage and work your way up on cash on cost to get to... you know, even or positive leverage to create, depends on the market, but high single digit, you know, IRRs. So, no, I wouldn't say it's, you know, not for trophy. I mean, it's 400 million, 410 million square feet of assets in New York, not all the same. I'm just talking, you said a building, you know, like a 245. So I'm responding to that. A seven plus cap rate would be, I think, you know, empty set.
spk08: Okay, even if someone could put debt on that building today would have to replace it at, you know, well over 6%, even if you can get that.
spk15: I don't know where that debt would be. That's your debt. I don't know where that debt would be.
spk08: Well, it just spreads. I mean, it spreads in the market.
spk15: I hear you, but you know something? We just closed a corporate facility, not how much, 140 over. Now, in your mind, maybe it's like 7 plus, but, you know. No, no, no.
spk08: I understand you need a term law. I'm saying in the market to get property debt.
spk15: Nick, Nick, Nick, please. You asked me a question. I'm going to give you my opinion.
spk08: Okay, I just want to make sure I understand. So you still think cap rates in New York are for stabilized assets, not turnaround assets? No, no, no.
spk15: I'm going to be very specific, but then I'm going to move on to the next question. Okay. I think stabilized cap rates, well, in this market across from J.P. Morgan's $5 to $6 billion investment, a few blocks off the road from One Vanderbilt, down the street from 425 Park, carries a sub-5 cap rate. And it does not carry a 7.5 cap rate. That's it. No other words on that. That's my feeling on it. And if you disagree, you disagree, which is what makes a market. I have no problem with that. I'm just saying that's my opinion.
spk02: Okay. Thank you. One moment for our next question.
spk10: Our next question comes from Blaine Heck with Wells Fargo. Your line is open.
spk17: Thanks. Good afternoon. Mark, you talked a little bit about this in your prepared remarks, but now that we've moved past Labor Day, I'm curious what you guys are seeing in terms of tenant space usage or utilization, you know, days in the office per week and maybe even times of day that are most active at the office.
spk15: Yeah, you know, I'd say that like many others are experiencing right now, the There's two work weeks. There's the Tuesday, Wednesday, Thursday work week, where I'd say we're almost back to close to pre-pandemic levels. At least that's how it feels like, and the numbers are in excess of 60%. Pre-pandemic, our full occupancy might have been 70% or 70-some-odd percent. We don't have exact numbers on pre-pandemic. Certain buildings are higher than that, where the tenant base is more back to work. Then we have certain tenants that may be more remote, so it fluctuates a bit, but, you know, I'm giving you the averages. And then Mondays and Fridays, particularly Fridays, you might see physical occupancy, you know, at 30 percent. Now, all those numbers are increasing, and we see that in the numbers we're getting. But, you know, this, you know, Fridays, we're often late in New York City, so we're not measuring against 100 percent on Fridays in New York City. I mean, people are out, PTO, traveling, doing business, et cetera. So it has the feel for three to almost four days a week, like a pre-pandemic market. I come off the train the other day. I mean, that train is full. That platform is full. You can't, you know, the time it took to get out the doors into the main theater at Grand Central was, you know, measured in minutes, many minutes, not seconds, because That platform is packed. And, you know, it has a very good feel right now, in my opinion. I don't know. Anybody?
spk13: I'll add to it. I mean, just statistically, Metro North ridership is, if I remember the stock correctly, is like 9% greater than it was pre-pandemic. Car traffic is 5.5% or 6% greater than it was pre-pandemic. where it's still less than COVID numbers as long on a railroad is still at a lower number. But to Mark's earlier point, the trend line is such that ridership and people coming back in the city and people occupying the offices is on the upward slope. And we're seeing that consistently improve week over week.
spk17: Great. Thanks, guys. That's helpful. Second question, you know, it seems as though the highest quality and highest rent price points were certainly the most active during the pandemic, and I assume that can't last forever. So I'm wondering how the pace of leasing activity has trended in some of your lower rent buildings. Are you guys seeing much of the pickup and activity there relative to kind of what you saw during the pandemic?
spk13: We're seeing, well, as I said earlier, we're seeing more tours and proposals and lease signings in our mid-price point buildings, which I think are largely dominated by the smaller to mid-size tenants. That's not yet translated into enough sign leases to really move the needle, but just off of a tour activity and expressions of interest, it's improved. It's still a struggle. because those small-to-medium-sized guys are late to the game.
spk17: Great. Thanks, Dave.
spk10: One moment for our next question. Our next question comes from Teo Kusanya with Credit Suisse. Your line is open.
spk05: Yes. Good afternoon. Two quick ones from me. First of all, in regards to the swaps, An earlier comment about, again, just having more hedging going forward. Could you just talk to just how much you kind of ultimately expect to be hedged by, given you have about $3 billion of kind of variable debt between the consolidated and unconsolidated JVs?
spk16: Yeah. So, you know, let's talk the numbers first. We had about $2.4 billion of unhedged floating on 12, you know, just short of $12 billion of debt. Our target floating rate ratio is kind of 15 to 20%, so we're already at or below that number, but we're going to target all of our existing floating rate debt as much of it as we possibly can because we don't, you know, unilaterally control some of it to hedge. So we just, you know, beyond the end of the quarter, we did another $200 million swap of floating to fixed yesterday. We're zoned in on another almost $400 million of property level floating rate debt. And then there will be debt pay down. You know, we want to look at the credit facility, you know, our revolving credit facility. And our goal is to always have that near zero. So with proceeds from asset sales or other activity, we'll try and get that down to zero. That's also floating rate debt. So it's a combination of, you know, caps, swaps, and debt repayment, as Mark said in his opening comments. And we are, even though we are, you know, at or below our target, we're going for more because we want to protect earnings and cash flow.
spk05: Gotcha. Okay, that's helpful. And then 717 Fifth Avenue and 655th Avenue with the debt maturities there and the ongoing kind of conversations with the lenders. I mean, what's kind of the ultimate kind of goal there with those two assets?
spk14: Well, we're not the managing... partner at 717 we have very small passive interest there so i think the hope is to get an extension from the existing lender group and i would say uh 1552 is much the same the times square retail has obviously been heavily impacted by the pandemic and we expect uh you know the lender to be appreciative of those impacts and you mentioned 650 655th we did a short-term extension
spk05: Right, but after the six-month extension that expires in April or so next year, right? So I think longer term is the idea.
spk16: Part of the exercise with extensions is evaluating the financing market at the time. So we felt with the lender, the best thing to do at this point was extend it six months, and in six months we'll consider it again, and maybe we'll do another six months, another 12 months, until we get to a more comfortable position. Right, and if the market's a cooperative, we'll do something longer term.
spk05: Gotcha. Thank you.
spk10: One moment for our next question.
spk02: Our next question comes from Anthony Powell with Barclays. Your line is open.
spk03: Hi, good afternoon. Mark, I think you mentioned the prospect of office to residential conversions. Have you talked in any context with people like the mayor and the governor? Are there plans in place to maybe systematically reduce some of the office, I guess, availability out there off stock in New York through these conversions. Could something be announced in the next few quarters? I'm curious because I think this issue of maybe obsolescence, I mean, it comes up a lot in our conversation. So if the plan's in a way to kind of get that started, that would be super helpful. So what's your view on that prospect for the next few quarters?
spk15: Just so I understand the question, the question is, what do I think is the real timeline or prospect of getting something accomplish at state and city level?
spk03: Yeah, in terms of just a broad office to residential or office conversion program.
spk15: Okay. I think the best, you know, this is one of the topics that we're going to be featuring in about six weeks at the investor conference, stepping through what it takes to get a building, you know, from office to resi, from a physical standpoint, from a zoning standpoint, from, you know, building code standpoint. It's very doable. You know, we've done it. Many have done it. There are ways to make it easier, better, more efficient to, you know, turn right now what's a very small pipeline of office to resi into a much larger pipeline of office to resi. Obviously, one of those big elements, you know, would be a tax break along the line of what 421G was downtown when downtown had, you know, substantial problems after 9-11. And, you know, that in and of itself is being looked at, but it's being looked at in coordination with the kind of changes that I mentioned, some of which will take time to implement. So I think that a program that you know, can come about in 2023 in terms of, you know, directional, but in terms of actually seeing buildings converted, I would guess that's 24 and beyond. But I do think that you could see, you know, upwards of 10 million square feet of office, you know, sort of taken out of the equation for conversion pursuant to a new program if the economics and the zoning are there to make it happen. So it's a much longer discussion to detail discussion that, you know, Anthony, if you don't mind, I want to defer until our investor conference when we're going to be speaking to that directly. Great. Thank you.
spk10: One moment for our next question.
spk02: Our next question comes from Ronald Kim with Morgan Stanley. Your line is open.
spk19: Hey, great. Two quick ones from me. Just when you're thinking about those of the 23 lease role at this point, any commentary on how much is rolled, how much is left to do, what's that shaking out?
spk13: Well, as you can imagine, we've been, you know, for the better part of this year working on the 23 expirations already. So, We have very good clarity on every single tenant as to who's likely to stay or not. We're actually going through our budgets, building our budgets for next year. So we have a granular tenant by tenant assumption for everybody that's rolling and each piece of vacancy that we have today. And I don't think there's any surprises as we sit here today. as to where we thought which tenants were going to stay or go compared to how we saw those tenants probably 12 months ago.
spk19: And any way to quantify that? Is it 20%, 10%, any sort of high-level numbers?
spk13: I don't have it at my fingertips, so it would be pure speculation. It's something that I think we'll have. you know, when we're done with our budgets over the next week or two, we'll have a very good ability to, uh, to, to communicate that. And maybe perhaps that's something we'll talk about at investor conference as well.
spk19: Sure. Sure. Thanks. Uh, so my second question was just on asset sales. Um, I think you talked about, um, historically about sort of potentially JV when Vanderbilt, maybe he talked about how that's going and are there other assets beyond that, that, that you're contemplating as well, um, in the portfolio?
spk14: Well, we are marketing some assets for sale. We have other assets we're evaluating for sale. And the One Vanderbilt JV process is still sort of in discussions. So we're active on the disposition front. We're going to use those proceeds to retire debt and to fund some of the capital needs of some of the projects. There's still an active market out there, as we showed with Memorial Sloan Kettering, and there's a bunch of other trades that have happened in the market.
spk15: I think on balance, we feel pretty good in our ability to execute, which is why we're basing our plan on redeployment of those proceeds. If we feel good about those executions, then we have a different plan. But working hard and trying to convert and you know, uh, we, we got a lot done this year. I referenced, you know, 24 sale transactions, either entire or partial interest, you know, several of which were this year and, uh, more of which will be, uh, in the next few quarters. Thank you.
spk02: And I'm not showing any further questions at this time. Let's turn the call back to management for any closing remarks.
spk15: Nope. That's it. Uh, thanks for whoever's left on the phone. Appreciate you hanging in there for the duration. And, uh, We will see, I hope, many or most or all of you on December 5th. I'm sorry about that. On December 5th, Monday.
spk02: See you then. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
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