SL Green Realty Corp

Thank you everybody for joining us and welcome to SL Green Realty Corp's second quarter 2025 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. Forward-looking statements made by management on this call are based on their assumptions and beliefs as of today. Additional information regarding the risks, uncertainties, and other factors that could cause such differences to appear are set forth in the risk factors and MD&A sections of the company's latest TORM 10-K and other subsequent reports filed by the company with the Securities and Exchange Commission. Also during today's 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 a 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 2025 earnings and in our supplemental information included in our current report on Form 8K relating to our second quarter 2025 earnings. Before I turn the call over to Mark Holliday, Chairman and Chief Executive Officer of SL Green Realty Corp., I ask that those of you participating in the Q&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.

Okay, thank you, good afternoon, and I appreciate all of you joining us. I'm very proud of what we at Usagreen accomplished this past quarter, and I'm pleased to be able to share some of the highlights with you today and some thoughts on the market, as well as field your questions coming out of these results. The achievements for the quarter were particularly impressive in my view when you put it up against a volatile economic backdrop and a higher than optimal short-term rate environment. For some firms, the confluence of these events and the current market environment presents challenges, but SL Green is adept at dealing with the volatility, and it's in these types of situations that I believe our platform truly shines the brightest. We are well adapted to threading the needle, finding the best investment opportunities when others are less certain as to where to find that value. Ultimately, it's the diversity of our platform, business lines, and skill set that keeps us well-balanced offensively and defensively and enables us to outperform expectations quarter after quarter. In this second quarter alone, we concluded over 540,000 square feet of leasing, bringing our year-to-date total to 1.3 million square feet of space leased, inclusive of last night's announcement, and we have refilled the pipeline to over 1 million square feet for near-term execution. What's notable about the deals done to date and the deals in the pipeline is that they're not really chunky in size. Rather, they are a broad cross-section of mid-size leases that are renewing, expanding, and relocating within our portfolio at a rate which is bringing down vacancy levels in Class A midtown buildings. A good stat I have on that is that the pipeline of a million square feet I referenced, 80% of those leases are 25,000 square foot and under. Half of that pipeline is financial services, but the other half is a broad range of legal, professional services, government and nonprofit, TAMI, and real estate, all of which is about equally dispersed within that remaining 50%. So very diverse, very numerous, and I think evidence of a very healthy environment, not only for our top buildings, but throughout the portfolio. In fact, half the pipeline by square footage represents non-Park Avenue properties. So this is definitely an indication that the demand has radiated out kind of from east to west within our portfolio, from Third Avenue all the way to Seventh. And we're going to start to see in the second half of this year significant occupancy gains as we get towards our projected 93.2% by the end of the year. As you also know, our ability to source and execute is really a validation of our pipeline. The investment we made in the 522 mortgage position last year is perhaps one of the best trades of this cycle, where we realized nearly $90 million of profit on a $130 million investment in well under a year's time. We also consummated a transaction with a new domestic partner by selling a 50% participation interest In the preferred equity position, we hold in 625 Madison Avenue, which carries a pick preferred rate of about 6.65%. When combined with the proceeds of the 522 transaction, the 625 interest sale yielded over $300 million of fresh cash proceeds into the company that we now intend to deploy into new and accretive opportunities. And lastly, we announced the closing of over $500 million of fund commitments, bringing the total close to date to over $1 billion, a significant milestone for the company. That's an announcement we just made. It's probably crossing your screens right now. That gives us corporate liquidity and fund availability combined of over $2 billion to fund our new opportunistic investment pipeline and solidify our position as a market maker in midtown Manhattan. But perhaps one of the most momentous events of the quarter was something that wasn't even included in the earnings release. And that is the filing of our response to the state's RFP in the casino license bid project. It represents almost four years of work, effort, planning, partnering, and listening to the community and other constituencies all of which came together in a 13,000-page document that was filed in the second quarter at the state's offices near Albany. And, you know, it was a privilege to present to the state Caesar's Palace Times Square. It's located in one of the world's most iconic destinations that will provide far and away more tax revenue for the people of the state than most other, and if not all other, proposed facilities. while bringing a new attraction to Times Square that befits its location at the center of the entertainment universe. Caesar's Palace will achieve this lofty ambition without displacing residents or utilizing land that could otherwise be developed for much needed housing. The project has been intentionally and uniquely designed and programmed to uplift surrounding businesses and residents, not displace them. And that makes this project truly unique among all the proposed projects. Caesars Palace Times Square is set precisely where a global entertainment facility should be. Times Square, the world's greatest tourist and entertainment destination at the crossroads of the world. All of, you know, wish us luck in that endeavor. It's the start of a 90-day process that with the community advisory committee that was formed, and we hope to be through that and you know, be able to make it to the next step of the bid process in Albany after, you know, we are able to get the consensus that we need at the CAC and majority vote to move on. We're very confident because we have a fantastic proposal on all merits and more to come on that on the next call. This all combined to enable us to raise our earnings guidance at the midpoint by 40 cents a share. There's a lot of ins and outs that go into that, but mostly it's reflective of substantial increased profit at the company above our earnings guidance. More on that from Matt Diliberto.

Thanks, Mark. Clearly been an extremely busy six months for this team. Because we're a very active company across multiple business lines, There are dozens of items that can affect our results each quarter, as well as the trajectory of earnings over the course of a year. And yes, some of those income streams are unpredictable, or as a lot of people use the word, lumpy. This is why we set guidance on an annual, not a quarterly basis, and use a relatively wide guidance range. When we give guidance, we are confident in it. Needless to say, we are very pleased that our successes so far this year allow us to not only increase our FFO guidance range only six months into the year, but by a meaningful 40 cents or 7.4% at the midpoint. The drivers of this upward revision are most easily summarized into two basic categories. First, in our debt and preferred equity portfolio, the repayment of our mortgage investment at 522 fifth for $200 million, which was substantially more than what we purchased the position for, generated about 69 cents a share of incremental FFO. I say incremental because our original guidance included various forms of income, from holding this investment over the course of 2025, as well as income from other debt and preferred equity investments. This incremental income is offset by 19 cents a share of reserves that we booked in the second quarter on our preferred equity investment in 625 Madison Avenue. This is pursuant to the sale that Mark alluded to of 50% of that investment, which closed earlier this week to generate incremental liquidity. While this transaction closed in the third quarter, because the deal was largely known at June 30th, Accounting rules require us to not only take a reserve on the portion that we sold, but an equivalent reserve on the piece that we retained. All told, that's 50 cents a share of uplift just from the debt and preferred equity book. Offsetting this incremental income, interest expense is trending a bit above original expectations by about 10 cents a share. This is not necessarily the result of higher rates because our debt is 95% hedged and the current SOFR curve is not that far off from the curve we used for initial guidance. It's primarily related to decisions we have made around potential asset sales that change the size or timing of them. As a result, we carry the debt on these assets for longer if they have debt and don't realize the benefit of the proceeds from the sales to pay down corporate debt. Across the rest of the business, we are largely performing in line with original expectations, with NOI trending slightly better, as you can see in our second quarter results. Offset by summit, where second quarter results were slightly below our expectations due primarily to taking the ascent experience offline during the quarter. which is a premium ticket that generates incremental revenue. We expect to bring that back online before the end of summer. From an attendance perspective, overall attendance at Summit was actually higher than our projections in the second quarter, and we are right on top of our projections for the first six months of the year. As it relates to discounted debt extinguishment gains, we have maintained our original assumption of $20 million or 26 cents a share of discounted debt gains in our updated guidance range, but we see a potential path to more than that. As noted in the earnings release, an affiliate of the company and a partner have purchased the debt at 1552-1560 Broadway for just $63 million, as against a total debt claim of $219.5 million, $193 million of which is principal. However, the debt is still outstanding for very specific reasons. Accounting rules don't allow us to record a debt gain until the debt is extinguished. When that debt is extinguished, which could potentially be this year, we would recognize a debt gain substantially larger than the $20 million we currently have in guidance. Aside from 50-52 Broadway, we're also evaluating other opportunities to take out existing debt at less than par. In closing, I read and hear a lot about the complexity of modeling the company. We sympathize with all of you on that because we have to model it too. I also see a lot of analysts or investors that want to discount the unique ways that we generate real cash gains that generate real FFO that pay a real cash dividend. And I'll admit, I'm a bit perplexed by that. I'm sure there are plenty of other REITs out there that you can model in your sleep and run right every quarter in perpetuity with laser precision. But those are not the companies with a team like ours that will work like animals to evaluate every opportunity presented to them with an eye towards generating profits and creating shareholder value. Being unique and creative in the ways we make money for our shareholders is in our DNA and that won't change. And if the price of that profitability is more complexity, We can't be apologetic for that. Now I'd like to open it up to questions.