SL Green Realty Corp (SLG) 2024 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Today's conference will begin momentarily about one minute.

Thank you for standing by.

Thank you, everybody, for joining us also to the SL Green Realty Corp.'s third-quarter 2024 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 miay differ from any forward-looking statements that management may make today.

All forward-looking statements made by management 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 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 any with the Securities and Exchange Commission.

Also during today's conference call, the company may discuss non-GAAP financial measures as we define -- as defined by Regulation G under the Securities Act.

The GAAP financial measures, most directly comparable to each non-GAAP financial measure discussed, and a 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 2024 earnings and our supplemental information included in our current report on Form 8-K relating to our third-quarter 2024 earnings.

(Operator Instructions)

Thank you.

I will now turn the call over to Marc Holliday.

Please go ahead, Marc.

Okay.

Good afternoon, and thank you for joining us today for the SL Green's third-quarter earnings call.

By now, you will have seen the exciting news that we put out last night, which was the culmination of another great quarter of activity since we last spoke.

We called the pivot in the market about one year ago.

And since then, we've seen four consecutive quarters of positive market momentum that reinforces our belief that New York City has turned the corner, and we are now meeting or exceeding many of our goals.

Since we were last together, and that was just three short months ago, a lot has happened.

Last month, IBM cut the ribbon and took occupancy of their incredible new space at One Madison Avenue, effectively christening the building that rightly takes its place alongside One Vanderbilt as a shining example of the new model for modern and innovative office buildings.

One Madison, now fully complete, has come alive as other tenants are moving in such as the Franklin Templeton companies; the opening of Chelsea Piers; the activation of the fabulous rooftop, which is already hold hosting many, many special events; and proof positive that the city is thriving for demand of space for this kind and punctuated by Daniel Boulud's new steak house with [Tête d'Or], designed by David Rockwell, completed the construction this month and will open to the public in November.

Be sure to get your reservations and be among the first to be there over the holidays; special place and a great new addition to the Flatiron area and just another great step in the right direction for New York City.

On Monday, we will celebrate the third anniversary of SUMMIT One Vanderbilt.

We are now closing in on, 6 million guests.

I guess, in November, we will host our 6 million-th guests through the turnstiles at Summit.

And I think that just really speaks volumes to what an enormous traction SUMMIT has turned out to be.

Many days sellouts.

Most days sellouts.

It has been named accolades as a special bucket list destination for New York City.

And everyone comes out of there with a smile.

We're very proud of it, and we're even more excited to begin the global expansion as we bring the unique SUMMIT experience to other cities around the world with Paris being first up in the queue.

Expect an announcement with further details on our Paris initiative sometime later this quarter.

Also, earlier this week, many of you may have seen the press yesterday and this morning, Mr. Giorgio Armani made a rare trip to New York to celebrate the opening of his new boutique and residences on Madison Avenue developed in conjunction with SL Green.

As you know, the residences are completely sold out and Armani's flagship store has anchored a complete revival of luxury retailing and elevated experiences on Madison Avenue as many of the world's prominent luxury retailers have relocated or recommitted to Madison Avenue after the announcement of the Armani project.

If you're in the area, please be sure to come by, check it out, pick out something special with the profits those of you have made on SL Green stock.

After nearly a four-year hiatus, we are now fully back in the DPE business, lending on and investing in mortgage and [mez] loans and debt securities.

This quarter, we invested nearly $110 million in various debt and debt-like investments, and that's on top of the other DPE investment activity we did earlier this year.

This marks the return to an extremely profitable business where we typically have achieved outsized market share and market returns.

The debt investments we've closed thus far, combined with our extensive pipeline that we've been building throughout the year, will serve to seed our debt fund that we anticipate having an initial closing on in the fourth quarter.

The fund will provide additional capital resources, enabling us to reestablish ourselves as the dominant provider of subordinate capital for New York City commercial assets.

And I guess, the highlight of highlights was something we announced after business closed yesterday, further evidence of what I would say, is really incredible leasing momentum, some of the best I can recall seeing in my 26 years here at the company.

We achieved a 925,000 square foot renewal and expansion of Bloomberg over at 919 Third.

This was not really within the expectations at the beginning of this year.

So it was a very pleasant surprise.

And I would say it was even more telling about the strength of this market, Bloomberg being one of the great worldwide media companies not only renewing upwards of 25,750,000 feet but they expanded by almost 25% within 919 for a total of 925,000 square foot footprint, which speaks volumes, I think, to the amazing partnership we have with Bloomberg who started out as a relatively small tenant in the building some years ago -- Steve, you recall?

200,000 foot.

200,000 foot tenant.

How long ago?

2015.

2015, less than 10 years later now, closing in on 1 million square feet.

So I think it's a great story about partnership, about complementary businesses, us being able to serve Bloomberg's growth needs and Bloomberg being there to help us fill the space in the building.

And it's, I think, further proof positive about the radiation of demand away from what we have traditionally referred to as the Park Avenue spine.

The story goes that the demand is limited to the trophy buildings on Park Avenue.

You've heard us say it's just not the case, particularly not this year, when we have consummated 2.8 million square feet of leasing year to date.

And this being example, as well as other examples in the portfolio of that demand not being so much geographically focused as it is generally within East Midtown in renovated Class A buildings with strong sponsorship.

And that's where we're having success such that we now expect to have leasing achievement this year, eclipsing 3 million feet and achieving a projected occupancy at yearend in same store in Manhattan of 92.5%.

So there are some pretty, pretty good stats.

We're proud of them.

Great job by the team.

Again, that's a good three months in my book.

I think it illustrates what we've been saying now for a while that business is back in New York.

The worst is, without a question, behind us.

This is now, in our eyes, a market for being affirmative and offensive.

And our portfolio is well-positioned to capitalize on that market as there is a scarcity of well-located and amenitized Class A assets in the East Midtown market, which is where we call home.

So with that, I'd like to open it up for some questions on the quarter.

(Operator Instructions) John Kim, BMO Capital Markets.

Thank you.

Congrats on the Bloomberg transaction.

I just wanted to confirm that it was not in your pipeline that you last described that 1.2 million square feet, just given the size of this lease.

And I think you described it; the pipeline is being pretty diversified.

And also if you could share with us any of the economics on the rent versus the in place of [66 bucks] and how much you offered in concessions?

So it was not in our reported pipeline.

The deal came together very quickly.

So it's not something that we were including in our pipeline because -- one, because it was so large; and two, it was so unanticipated; and three, it happened so rapidly.

With regards to the economics, we're under an NDA.

So we can't really share specific details other than to say that, obviously, the size of the lease.

It's a 15-year lease from today.

So it's a 10-year extension, 15-year term on the expansion.

There is substantial positive mark to market and the concessions are appropriate for renewal but significantly below what they would have been if we had to replace the tenant for vacant space.

And with regards to -- I think you asked about diversity on the pipeline.

Like in past quarters, it's heavily weighted towards financial services.

I think that's a reflection of where we have vacancy.

Not just because it's the only industry that's in the market right now.

We're seeing law firms, TAMI tenants, business services, and financial services, but specific to our current pipeline, a lot of it is weighted towards financial services.

Okay.

And my second question is on One Vanderbilt.

We didn't get an update on the joint venture sale.

So I wanted to ask if it's still on track.

And also if you really need to sell a stake in the asset at this point in time, just given the fundamentals and sentiment on New York has shifted positively over the last few months.

Your cost of capital has improved.

So there's other access to our sources of capital that you could tap.

So just wanted an update on that and whether or not you're contemplating or not to sell the stakes.

Yeah, it's going great at One Vanderbilt.

And we're confident that we'll be able to close the transaction in the fourth quarter.

The transaction really will be the culmination or conclusion of a process that affirms in our mind One Vanderbilt's position as not only the premier office tower in New York but also the global icon of modern development.

So two Michelin star restaurants, that continued success at SUMMIT, fully leased rental. and long-term fixed rate debt.

And the story here keeps getting better.

And we're looking forward to expanding the partnership at the building.

The second piece of your question, I'll leave to Marc.

Yeah, on the question of do we have to sell?

We don't have to do anything.

I mean, we're in great shape.

We have lots of tools at our disposal to generate capital organically, monetizing assets, third-party money, debt fund, et cetera.

And if -- I would not look at anything related to One Vanderbilt as it has to do.

We do it because it was part of our original business plan to sell down to somewhere between 50% and 60%, maybe 55 % and 60%.

That was the original business plan.

That's where we think the asset is optimized for the perspective of shareholders between return and enhanced fee generation of the asset.

It is a -- One Vanderbilt is transformational for this market.

It was -- it's now the building block of this company.

We expect to hold and own it for quite some time.

But we welcome the opportunity to bring in some of the great international partners from around the world.

And we expect, as Harry said to conclude that, in the fourth quarter, but that will just be one component of what we expect to close from this point forward through the remainder of the year by monetizing certain assets of the company that should yield to us in excess of $500 million of net proceeds which we will use in the interim to pay down the line to bring it into the levels that we had projected in December of last year.

So we're on track or, possibly, a little ahead on that.

And it will set us up, I think, quite well leading into 2025, which I think is going to be a big, big year for this company.

Steve Sakwa, Evercore ISI.

Yes, thanks.

Good afternoon.

Marc, I just wanted to see if you could comment a little bit more on the transaction market.

Obviously, you guys are back in the DPE business.

I'm just curious what you're seeing on the direct side of things and are the opportunities more pronounced in the DPE side than the direct purchase side?

Well, I think, Steve, it's kind of both.

And it's really a function, in my mind, of debt and equity liquidity coming back to this market.

And when it comes, it comes pretty fast and pretty strong.

And as a case in point, last year, there was -- I think there was $0 of New York, Manhattan, [SA SB] loan origination, zero, which is quite unusual.

This year, including the Rock Center deal which is pricing today and [299 Park] which is pending pricing next week, there's going to be $5.3 billion of SA SB deal illuminating spreads, levels, values, demand, et cetera.

And that's a quite a different picture.

Along with, we're seeing now lend balance sheet lenders quoting deals and the conduit market is firming up and spreads are coming in, irrespective of where underlying SOFR and treasuries are headed.

Spreads themselves are compressing.

And the equity follows the debt and we've seen some deals trade, some known 250 Park.

Was it a trade, Harry, couple of others off the top of your head?

980 Madison.

980 Madison, that was to a user Bloomberg philanthropies.

Obviously, been a lot of user trades, have been some investor trades.

And there's deals in the market that we're tracking.

Our focus isn't really on the direct equity side at the moment.

It's more development oriented and longer term, but there are a couple of deals that we are paying particular attention to.

But if you want to look at just dollars allocated, we do expect that most of our activity will be focused to DPE, which is very customary in routine coming out of a downturn like we had in '22, '23 to start there and then evolve into direct equity.

Great.

And then as a follow up, Matt, I did notice that things like real estate taxes and OpEx were at least much lower than what we had modeled.

I just didn't know if there was some timing issues there or if there were some maybe refunds that you got on the tax side?

Just anything -- was that sort of a normalized level or if there's some one timers that might have pulled those down and those might bounce back up in Q4?

Nothing.

Nothing unusual in there.

I think they moved, given the size of line item, not much.

They do bounce seasonally from time to time.

Certainly, operating expenses too.

I think the team's done a great job.

We worked very hard on our real estate taxes and the operations team does a fantastic job with our operating expenses keeping them contained.

They've done an even better job this year.

So we saw some savings.

They're working right now and how that looks going forward.

But nothing unusual within the quarter now.

Ronald Kamdem, Morgan Stanley.

Hey, just two quick ones.

Starting with the same-store, cash same-store NOI, accelerated to 2.9% in the quarter.

Just hoping you could talk through like what the expectations are for the back half for the rest of the year, maybe into 2025?

What major building or leases we should be thinking about as we're trying to think about 2025?

Thanks.

Yeah.

I appreciate you trying to ask about 2025.

We'll talk about that on December 9, at the investor conference when we give guidance.

But the results for 2024 through the first nine months reflect the portfolio that has been performing better than expectations.

It was part of the reason we raised guidance back in July with earnings, and we continue to trend ahead through the third quarter.

Fourth quarter is trending in a similar direction.

I do -- I'm not changing where our same-store full-year guidance ended up, but we have trended better than we expected through the first nine months, at least.

Great.

And then my second question was just going back to the alternative strategy portfolio, I think you talked about threats coming in, maybe the environment being a little bit better.

But qualitatively, does that help in terms of conversations, in terms of those negotiations, any sort of color you could provide on how that how that's progressing would be helpful.

Thanks.

Well, again, I just wanted to refresh for everybody.

ASP, the alternative strategy portfolio, is a category we created at the end of last year to address assets that shareholders perceived or we think the market perceived, more accurately, as having little value or a little current value even though in many of the cases -- and we believe there could be a long-term value, particularly when we work to recapitalize the underlying indebtedness on those assets, or in some cases, leaseholds in ways that are advantageous, win-win scenarios for the lender and for us as holder of those assets.

And I think you've seen that strategy bear fruit already, probably hadn't anticipated ourselves, the early returns, but year-to-date, I think we've had very good results, as I recall, 717 Fifth, 719 Seventh, Two Herald or Three, that's stick out of my mind.

There might be one other.

And there's others we're working on, where we've been able to get creative and do what we do and mine value out of the ASP assets.

And we'll continue to do so as the -- as we work that portfolio down.

I think the real takeaway or one of the reasons for the illumination of that portfolio was to dispel the notion that there was any recourse liability or guarantees or peril associated with those assets.

They're almost in every case, non-recourse.

With that said, out of respect and deference to our partners and lenders, we would do everything possible to try and optimize those assets and get as full a recovery as we can on those assets and we continue to do that and with respect to the three examples I gave very successfully.

So we're going to stay at it.

The market, to your point, the market coming back a bit certainly helps.

There's no question, we can reevaluate some of those assets, which we do quarterly and doesn't mean we pop them out of the portfolio.

It just means that we may have an accelerated timeline for the ultimate disposition of those assets.

But there are some ability -- there's some good assets in that portfolio.

We hope to work those assets as hard as we can and maintain as much value as we can.

Michael Griffin, Citi.

Great.

Thanks.

Maybe on the leasing front.

The demand you're seeing outside of Park Avenue, maybe on Third or Sixth, is this just a function of limited availability along park or tenants maybe out there looking for better deals?

And then can you kind of quantify maybe where concessions are in some of those submarkets relative to Park?

And then maybe broadly, is it fair to say we pass peak concessions in New York overall?

Well, when I started the last question first, we've said for, I think, the better part of the year that we've that concessions peaked last year.

We've seen no increase in free rent or TI on the average deal.

Obviously, you saw our deals for this particular quarter, they went up.

But they were influenced by a lot of high rent deals that were signed, a lot of new leases, filling vacancy that was signed as opposed to renewals.

And in one particular case, a very large deal, where we actually contributed, made $1 allowance for the tenant to perform base building work, which skewed the number as to what we reported for TI.

But at its core, the TI number has not changed throughout all of this year.

I think we're going to see rents rise more materially before we see concessions come down.

But concessions will start to tighten up.

And I think the first thing you'll see come off the table is some of the free rent, and then ultimately, the TI allowances will be the probably the last thing that changes.

With regards to the Park Avenue versus some of the other avenues, we've been saying consistently this year that we've seen a lot more activity in the value part of the marketplace.

There are those tenants that are paying $55 to $75 or $80 rents.

So those are not Park Avenue type tenants.

Whether they be on Third Lex or Sixth Avenue, in particular, where we've seen us do a lot of leasing at 810 Seventh, 1185 Sixth, and then obviously. this newest announcement on Third Avenue with Bloomberg.

Some of that is spill over from Park Avenue, but a lot of it, I think, is just an awakening of the market by those smaller to midsized tenants that are chasing the value part of the marketplace.

And I think we're going to continue to see that strengthening the market.

In fact, there was a Newmark report that just came out the other day that their statement was non-trophy leasing is on pace to reach its highest level this year versus all the way back to 2019.

So I think that really puts a pin in it for you.

Great, appreciate the color there, Steve.

And then just maybe on the financing markets, Marc, I know you talked a little bit about the CMBS market maybe being more open.

But have you gotten a sense maybe more traditional lenders have started to warm up to lending on commercial real estate and office broadly again?

And then, maybe you can give us some insights.

You obviously had a number of modifications and extensions this year.

You paid down a pretty small amount of principal.

But can you give us a sense why lenders are willing to cut those deals on refinances that would only require you to pay down a smaller amount when the mortgages come due?

Well, okay.

The question about portfolio lending, absolutely.

I think you're going to see 2025, I think the focus with a lot of the major lending institutions will start to revert back to increasing net interest income with less of a focus, if any, on establishment of reserves.

Because I think the view is that the banks are properly or reserved or -- and then some, based on what the expectations were going back over the past four years.

And you've seen in the announcements, the earnings trajectory and growth of the money center banks is extraordinary.

I mean, there's big profits there.

They're making money.

They're expanding.

It's broad-based, high net worth banking, trading operations, all contributing.

And, I think the view is going to be growth, new business, new lending, and commercial -- prime commercial assets in New York City in good locations.

I think it will be eligible for balance sheet lending.

And we're seeing that.

And I think you'll see more to come from us and others in the ensuing months on that exact topic.

So that's that.

As to some of the modifications we're doing, it's -- I mean, we have great relationships with our banks.

We have great assets.

The buildings typically are not in an over-leveraged state.

And we're able -- again, under the thesis that some of these banks want to maintain outstanding earning assets on great buildings with good sponsorship.

Sometimes, the balances have to be tweaked with a pay down or some additional posting of reserves.

But just remember, that we're projecting 92.5% leasing in the portfolio, which means we are swinging our way back to hopefully a fully leased state in the years to come.

The buildings are in great shape.

They're fully repositioned, and in most cases, amenitized, and well leased.

So those are not necessarily the assets you read and hear about that where there are problems.

And for those assets, I think, it's quite natural for lenders to work with us on extensions until the market is fully back.

And then when it is, they'll be more traditional refinancings for that portfolio.

But I think it's very consistent and makes sense.

(Operator Instructions) Alexander Goldfarb, Piper Sandler.

Hey, good afternoon.

And first, congrats on the strong leasing.

Really unreal what you guys have achieved there since last quarter.

Two questions are: first, on the mortgage servicing business, it looks like you guys currently have $5 billion and there's another $6.8 billion potential, depending on I guess if that goes the special service or not.

Matt, how do we think about the income that comes off of this?

I mean, it seems rather lucrative, as Marc just described, things are getting better.

So how much income are you currently getting?

And how should we think about that $6.8 billion?

How much of that that will -- you think could come on?

And how do you think -- where do you think this earnings could go?

Sure.

I'll try.

There's like eight questions.

But the business is obviously throwing off a substantial amount of fee income.

We had layered some of that fee income into our original projections back in December.

We're trending ahead of that.

We stay away from how because each deal is slightly unique on how much these fees, how they roll through, what they are.

I'll let Harrison expand on a little bit.

But generically, these are -- once they're in special servicing, you're earning a monthly, I'll call it, a stipend almost, a monthly modest fee.

And then on resolution, there's something more sizable.

Harrison, you want to expand on that a bit?

Yes.

I mean, this business has been remarkably fast growing.

Most people coming to us are looking for expertise and working out large loans, not just in New York, but across the country.

And just to give you a sense of scale, as you just noted, it's $5 billion of active assignments today.

We have another $6.8 billion of assignments where we are named special servicer but the assets are currently not in special servicing.

And then in addition to that, we have another $3 billion of pipeline and those are appointments that we're currently working on documentation to get named special servicer, some of which are in special, some which may get into special in the coming months or years.

So for us, this is a very scalable business.

We run it with our current team.

And the revenues, as I said on the last call there, almost entirely going to the bottom line.

So we're continuing to grow this and working our relationships to get on more assignments.

And I think one thing that's new in this past quarter is now our existing servicing clients when they're doing new HRR positions or CCR positions, they're pointing us upfront on these new SA SB loans.

A lot of the business we've done over the past year and growth is just organic reaching out.

But now we're getting new appointments on new originations.

And so we see this being a sticky business for us.

Okay.

And then the second question is -- great to see you back in the DPE.

It's been a good business for you guys, historically.

As you think about the JV debt fund, how do you bifurcate which goes in the DPE and which goes in the JV fund?

Yeah.

So just as an update on where we stand on the fund raise process.

It's been going great.

We've reached a deal with our anchor investor and we're now documenting their investment, which we expect to close in the next 45 days.

We also have significant follow-on investor demand that we expect will meet or exceed our $1 billion-dollar go through the final closing.

And the setup of the fund is, in terms of what goes into the fund and what doesn't, is that this will be our primary credit vehicle for new DPE investments until that $1 billion and whatever we end up closing on is deployed.

And so we look -- that's what the shareholder feedback last year was to get into this business.

This is how we'll be deploying dollars into the credit space until the dollars are deployed.

And we'll continue to mine these investors for potential follow-on funds, whether it be in debt or equity businesses.

Nick Yulico, Scotiabank.

Thanks.

First question is just in terms of the mark-to-market, year-to-date outperforming versus expectations.

I think some of that, I know, is housed by some lumpy leases like areas 245 Park but we had success.

But how do we think about -- like how much rent or may be surpassing expectation so far based on the leasing year to date?

Well, it's a -- you got -- I think you got to slice and dice the market a little bit.

If you look at Park Avenue, which is sort of the easiest example, it's the best submarket in the country right now.

Rents are clearly on the rise.

It's a landlord favored market.

We've raised rents 4 times in the past year on our assets on Park Avenue.

I think you're seeing the early days of a similar situation on Sixth Avenue.

But then I think as we look forward, I think you're going to see, broadly speaking in Midtown specific, rent increasing on a lot of parts of the market, on a lot of types of buildings next year.

A good barometer I always go to is the Graybar Building, right?

Pre-war building, big building, lots of different kinds of tenants, lots of different sizes, building that coming out of COVID had a historically high vacancy of like 18%.

We're now down approaching the 10% vacancy.

And I would fully expect that we'll see rents rise in that building next year.

So that's a very good indicator of the mid-price point product in the marketplace.

And if rents go up in that building, then you'll see rents go up broadly across most assets -- most quality assets in Midtown.

All right.

That's helpful.

Thanks, Steve.

I guess second question is just on -- going back to the acquisitions environment and how you're thinking about funding that?

I mean, how is the company right now thinking about using common equity stocks quite well, in terms of funding investments?

And how much of that could be on actually property investments versus debt investments?

Thanks.

I think that's, Nicholas, something we'll go into a fair amount of detail on in December.

We're not -- I mean, what you're really getting at is 2025 business plan.

Anything we're working on now, that we're closing 2.5 months.

We know what it is.

And we're in the process of closing, typically.

Not to say we can't knock down a late inning deal, maybe in November and December.

But most of the balance of this year's activity is allocated, modeled, thought through, et cetera.

And we are right now preparing our plans for '25 and beyond, and we'll be able to give some good color.

I don't really -- I know there's a lot of question between equity and debt.

To me, it's a spectrum.

It's real estate.

And we just want to find the best point on that spectrum to invest.

If we think we're getting a really good equity deal, we're going to do equity.

If we think we're getting a really good debt deal and that's where there's some, you know, advantageous or misprice, we'll do debt.

It's not always one or the other.

A lot of these opportunities we approach, which I think it's something that's, I don't know, about unique to us, but it definitely differentiates for us is that we can do any aspect of these deals from senior financing [mez] pref, common equity, servicing, combination thereof.

And we don't always know.

Because we got to evaluate where do we want to be in a particular deal.

And we don't know what deals are coming up in the next 12, 18 months.

So we like to consider ourselves fairly fluid and fairly opportunistic.

We're very comfortable investing along that spectrum that I mentioned to you.

And we've done some equity deals.

Obviously through pandemic, we did 450 Park.

We did 245 Park.

We did 625 Madison.

Those are the three big ones that come to mind.

We've done some debt deals recently, and I would expect you're going to see a mixture of opportunities we'll be pursuing, which will be both debt and equity in the months to come.

And I think we can give better planning and guidance on that in December but that's where that is.

And in terms of how we fund it, I mentioned to you, I mean, we have full tools available.

I sort of alluded to that earlier.

We have prolific group here that has great relationships throughout Asia, Middle East, domestically in Canada where we can turn to capitalized both debt and equity deals.

We're closing on a debt fund.

I mentioned in my opening remarks, in excess of $500 million of asset monetizations we expect to close this quarter and that will shorten funding a lot of activities and get our revolving balance down to where we wanted to be for year end.

And as in prior years, we'll evaluate stock along the way as a source of potential equity, if we feel the price is approaching something that is reasonable in light of the opportunities that exist.

So the more favorable and juicy the opportunity, the more -- and the larger the opportunity, we certainly wouldn't shy away from issuing equity for new opportunities or to rebalance the balance sheet.

But we're in a really good place right now.

We've shrunk our share count down considerably.

We retired a lot of debt along the way.

We were at levels that are very comfortable for us right now.

And I think we have a lot of access to capital in all those various ways, including potential stock issuances.

So it's a good position to be in.

We're going to use it wisely.

And we're going to hopefully use it very accretively.

Michael Lewis, Truist Securities.

Thank you.

First one, maybe for Matt.

The SUMMIT OpEx went up more than the revenue.

I think, it looks like the OpEx was definitely higher than the revenue in the quarter.

Is that just seasonality or is there something in that number?

They pay their percentage rent in the third quarter.

So that is a -- their calendar year -- their fiscal year runs from a -- not the calendar year.

The fiscal year runs from October through September.

They pay base rent and percentage rent.

They hit the percentage rent levels generally in the third quarter and pay it.

So you'll see that same type of trend every year.

Okay, got it.

And then my second question is bigger picture.

To your credit, Marc, and I guess, everybody as SL Green said New York would recover.

It always does.

And it is.

So to your credit and I understand all the enthusiasm, it's well earned.

When things are tough, I tend to think about how they might get better.

When there's a lot of enthusiasm., I tend to wonder where that might be -- people might get out over their skis.

So as I look at SL Green, right, you mentioned the alternative strategy portfolio. you know, Worldwide Plaza lost a large tenant as expected.

750 Third is not in that portfolio, but it's going to be a resi conversion.

185 Broadway, I think you'll sell.

I guess, is this a tide lifts all both kind of New York recovery or do you think you need to be almost more accretive here and it's still kind of a battle out there.

And is there anything in this recovery that concerns you?

Okay.

I just -- I want to make sure I've got -- I like the credit part.

Thank you very much for that.

I do have to extend credit to the entire team, as I always do, because I think one of the most differentiating factors of this is the tenure that people have here.

I don't know people recognize that we've got so many people at all various levels throughout the company that are in the 20- and 25-year club.

They've been here 20, 25 years.

This is a family.

We work well together.

And I think we get great results because of that, that history together, and the level of excellence because we have a certain culture here.

And if it fits and it works for you and you're committed to it, it's a great opportunity.

And if it's not, we've had people move on.

But the group we have today is the best I've ever worked with in terms of just a whole new group of young folks, in particular, coming up through the ranks, taking on mid-level and senior positions., and just carrying on the culture and theme of this company.

In terms of your question about is there anything in the recovery that concerns, I mean, in an odd way, the more rapid the market recovers, the thinner our opportunity set gets.

And it's kind of an interesting dynamic.

I think the real estate market generally is hoping for lower rates to help rightsize some of other people's investments and reinflate values a bit.

But you got to make sure the rates are falling for the right reason, meaning taming inflation and not because you have recession.

And clearly, the way the equity market are reacting right now and what we see in our tenant base, it seems to be a pretty robust and strong market.

So to see a good market and have rates [decrease], that's positive for values and positive for the economy.

But it also does change the landscape of opportunities.

So the other way to look at it is higher for longer, in terms of getting more money out the door because at the end of the day, we want to improve this portfolio, grow this portfolio, make smart investments in this period of time.

So that when we look back in five years, we've added a lot of seeds of growth, whether they're developing conversion projects like a 750 Third or doing more office redevelopment and development opportunities, which we hope to do because we have a good team to do it.

And we've got the prospect of hopefully helping to transform and boost Time Square with our casino -- with our casino proposal in conjunction with Caesars and Roc Nation, I think, could be one of the most important developments for New York City in terms of really having benefits that radiate out far, far beyond the building itself with Caesars Palace, Times Square casino.

So there's a lot of good stuff out there going on.

And I think whether rates stay where they are, they go a bit higher, they go a bit lower, we're prepared in all cases.

We're hedged in our floating rate exposure.

We want to be offensive with our capital, and we're also going to benefit by compressing spreads and a yield curve that says SOFR is declining.

So I don't have great concern at this moment like the concern we had back in '20 and '21.

Those were tough periods of time.

But this is, by all measures, a very good period of time.

Restaurants are full.

Mass transit is full.

Traffic is back.

Buildings are -- people are back in the office.

We don't get any questions now, hybrid work model, work from home.

It's not even -- in this office, it's not a talking point.

And we're excited and we're excited in December to unveil the new plan.

Anthony Paolone, JPMorgan.

Great, thank you.

First one is on Giorgio Armani.

Can you tell us when you expect to actually start closing the units there, what the proceeds back to you are and remind us if any gains there get booked in FFO?

Yeah.

I mean in our business plan, we expect it was a goal and objective to put everything under contract in the year which we've done.

And our expectation is we will close all those inside the calendar year as well.

That's part of the number of Marc has thrown around earlier, in terms of proceeds off of dispositions.

It's roughly USD160 million-or so.

There's not an FFO impact other than the use of proceeds to pay down debt, which is what those proceeds are earmarked for but that wouldn't show up until 2025.

Okay.

Got it.

And then just second one, you bought some CMBS in the quarter.

And so just wondering if you can give us some details on that.

You don't have it on the DPE page and just didn't know if that was because of securities or if the thrust of that investment is just different than your DPE investments?

Yeah, it's not in our DPE line because it is a different type of investment.

We've invested in securities from time to time in the past.

We did do more this quarter.

They have very unique accounting rules around security.

So we had to add a couple of new lines to the financial statements.

But at the end of the day, it's $109 million-ish investment in securities.

We are very careful to stay away from specifics on those as we do with DPE in terms of properties and yield and strategy and things like that.

But this is a furtherance of our previously announced strategy to source this type of opportunity in dislocated debt stacks in our backyard and we'll continue to do that.

Is it the sort of thing that just looking to get paid back and make a return on it?

Or is this something where there's something to do with the property?

I'm going to stay away from the strategy on those types of investments.

They're all different.

Ohad Bregman, Deutsche Bank.

Hi, good afternoon.

This is actually Tayo from Deutsche Bank.

In terms of DPE book, again, back in the days, that book was kind of a substantial size.

Just curious when you guys look at the outlook, how quickly you think DPE can continue to grow?

You guys sound really much more constructive on that business segment now.

Yeah, just understand we're doing the DPE business in a different format this year.

So it's not going to be the same as our prior 26-year track record, if you will, 22 of those 26 where we were investing heavily.

But we're going to be doing in a fund format.

So the capital commitment is going to be fund by fund typically, where we have a percentage of the fund which we'll be able to eliminate when we announce closing.

But clearly, other than putting together pipeline and seed opportunities, the intent is for, as Harry said earlier, everything to go into the fund and then we'll own our piece of the fund.

So it'll be, we think, highly profitable based on the returns that we expect.

And there were certain fees associated with fund that we didn't necessarily have previously, but we won't have -- we don't expect the same amount of balance sheet capital commitment to DPEs we've had in the past because of the new format.

That's helpful.

And then just a quick one on as we start thinking about fourth quarter '24 and first half of '25, any significant move out, so a rightsizing of office space that we should be aware of as we're tweaking our models?

There's nothing -- there's no new surprises.

I mean, anything that we've got budgeted or scheduled in our business plan, I'd say it's just the opposite.

We're doing more renewals than we had originally anticipated.

So nothing significant as far as any kind of move outs.

Jeff Spector, Bank of America.

Great.

Good afternoon.

Marc, when we saw you in May, you talked about the office to resi conversion as an opportunity.

I don't think you discussed that yet on this call.

Can you provide your latest views on that?

Well, I feel like we're on target with -- I'm going to stand by those comments.

There is an accelerated program down at the city that takes applications, if you will, to help accelerate projects that are not necessarily committed to going resi, but somewhere between committed to or thinking about or intending to.

And at last count, my understanding was that accelerated program was up around 75 applications.

I think the total square footage on identified by those applications is in excess of 25 million square feet.

That's not to say all 25 million square feet are going to happen.

And I don't think I could give you a projection in the near term of what's going to happen.

I do believe there will be over 25 million square feet in the next five to seven years, for sure.

And that was a number I floated out at that same time, 25 million to maybe as much as 40 million square feet, when you think about all of the secondary and tertiary office buildings.

The need and the demand for workforce housing and affordable housing -- I don't want to say it's endless but it's strong.

There's a lot of demand out there at those price points for that new studio, one- and two-bedroom house in Manhattan.

And between the projects we're working on, projects we know others are working on, buildings that we know have taken their space of the available office inventory list, I'd say there's at least solidly -- how you might have number 10 million square feet.

That's what I would say is, I think, pretty well dialed in and locked in.

May be in December, we can share some locations and more data on that.

I don't think we're prepared to on the phone right now, but deals that are, like I said, pretty well dialed in.

Most are rental.

Some are condo.

Some are other uses, life sciences, et cetera.

But most will be under the affordable program.

It's not easy but it's certainly not undoable for people who have experience with the product.

It's a big opportunity.

And I think that is a major contributor to what you'll see as net absorption in this market, what you saw in Q3 as of 9/30.

I think you'll see more in Q4.

It's also -- there was a question earlier been investment sales volume and there is -- there are deals that are being traded now with the intent to convert. 625 is one end of that spectrum, which we sold to related for condo conversion on Madison.

And then there's other deals that are being sold now for apart for affordable conversion.

And all of that just, you know, contributes to a win-win supply of office.

Now the only thing I think that could derail that is if the office sector gets tighten up.

And rents are rising and occupancies falling, then you may get back into that zone of difference where buildings may look equally as attractive as office and resi.

But for right now, I think that that that trend is bearing out on conversions and we're hopeful to see a lot happened over the coming years.

Thank you.

And if I could ask for as my second question a follow-up.

Steve, earlier in the call, you talked about concessions will tighten up and a free rent would be first.

I think it's an important comment.

Just there is so much focus on effective rents.

Can you clarify that a bit?

I don't know if you can talk about expectations on timing and I assume you're talking about the broader market for New York City.

Yeah, I think it was a three part, right?

First, I said that I thought you'd see a continuation of rents rising.

You're seeing that on Park Avenue and Sixth Avenue.

I think you'll see it more broadly next year.

So that will be first of the three components that's to change.

Then I think with specific concessions, free rent is most likely the titan.

I can't really put a timing on that.

I know that's anybody's guess, but it certainly feels like the trend line is there, the leasing velocity is there to support it.

The tenant demand is there.

And I think you'll start to see it specific to where the strongest submarkets are right now, Park and Sixth Avenue.

And the component will be TI.

I think that's probably much further off in time because as rents rise, construction costs haven't slowed down.

So tenants are still looking for the landlords to support them on these elevated TI contributions.

Peter Abramowitz, Jefferies.

Thank you.

Yeah, my first one for Steve.

You mentioned still financial services leading the market.

But just wondering if you could talk about any update on [tech], their presence in the market, any changes in their appetite for space?

Yeah.

They continue to be an increasing part of the marketplace.

There's over 6 million square feet of active check -- ongoing searches.

So if you compare that versus a year ago, it was a little over 3 million square feet of active searches.

And you've seen some of -- the combination of some of the household big names that are in the market -- I won't be too specific, but I think a lot of us heard some of the big news, whether the Amazon or Apple or who it may be but as to what their specific requirements are.

But you're also seeing smaller to midsize requirements driven by a couple of different things.

AI initiatives are creating new businesses and creating new initiatives and existing business businesses.

There's organic growth in some of these businesses that are driving it.

And clearly, a return to office mentality are bringing a lot more people back and forcing some of these existing tenants to come back into the market where they have laid off space because they thought that they're going to have a more robust hybrid work environment.

Now they're bringing the bodies back.

It's forcing them to take more space.

We're enjoying it right now.

We've got a very significant lease going out and as a result of exactly that -- of that function.

So it feels like that whole industry is coming back to life in a material way.

So time will tell us what it means for next year, but it certainly feels good right now.

That's helpful.

Thanks, Steve.

And my second question is just the sort of follow up on Jeff's question, some of Marc's comments around resident conversion.

Wondering if you could comment on 5 Times Square, any thoughts on the strategy there?

I know it's been in the press that is something new and your partner are considering to convert at least part of the building to residential.

Yeah, this is Harry.

This is an ASP asset.

We're working with our lenders and our partners, and we'll share more at the appropriate time.

Caitlin Burrows, Goldman Sachs.

Hi, everyone.

Maybe following up on Tayo's earlier question, you increased your leased occupancy rate for the end of the year.

Just wondering if you could provide any commentary on how you expect that to flow through to economic occupancy and recognizing rents?

Yes, it's Matt.

So when we're leasing up vacancy, that income recognition typically has a delay on it.

Because you're typically building out space.

So generally speaking, we would say at the very short end, six to nine months, typically more like 12 months after lease up, you start income recognition.

So we'll start to see the benefits of 300 plus basis points of occupancy pickup this year over the course of 2025 and beyond.

Got it.

Okay.

And then just wondering if you could give a quick update on 245 Park regarding the redevelopment and leasing and thinking on timing of JVs out there.

I realize it was

[305 Park].

Well, you got the leasing, the development, and the JV in there.

So the development -- I'll start.

The development is going right on schedule.

It's approximately $200 million-plus or minus redevelopment, which is really touching many, many areas of building from a podium facade to a great new plaza, fully landscape we lit, and new seeding, new signings, new everything.

It's going to be a really vastly improved plaza and front door, if you will, approach to the building, spectacular lobby.

I think it's a 20,000 foot amenity with fitness and other clubs, lounges, amenities, food and beverage offerings, and a fully serviceable rooftop garden in the spirit of what we did over at One Madison.

So it's exciting.

It's what all the leasing, you know, see if you talk about the leasing has been activated based off the excitement around these improvements which have begun.

They'll be done in about 18 months or thereabout.

We're already doing selective demolition and closing -- is Lexington closed?

Yeah, I think Lexington entrance is closed.

So work is underway and the tenant community reception has been spectacular.

Even on the leasing front.

We've posted a lot of big lease announcements this year.

I'm fully expecting to have another big announcement in the very near term that will take the building above a 90% occupancy, which puts us in a great spot given the fact that there is no near-term lease expirations.

That building is going to be stabilized before we ever get halfway through our reconstruction.

And with the redevelopments underway and Steve getting the building over 90% leased, the asset is going to be positioned as one of the Fortress office assets in New York City.

It's sitting right across from JPMorgan's new headquarters.

And we expect on the investor side, the opportunity is going to resonate well with investors.

We kicked off our discussions a little while ago.

We're meeting with potential LPs, and we're going on at a road show in the coming weeks to further discuss the interest along with some of the other capital markets execution we have for the end of this year and into early next.

Thank you.

That's all the time we have our question and answer session.

I would now like to turn it back over to Marc Holliday for closing remarks.

Okay.

Thank you for those still with us.

The investor conference date is December 9, this year due to the dates around Thanksgiving late in November, December 9, One Vanderbilt.

And we look forward to seeing everybody there for our annual and should hopefully have a lot of great things to talk about then and see you soon.

Thank you for your participation in today's conference.

This does conclude the program.

You may now disconnect.

Everyone, have a great day.