SL Green Realty Corp (SLG) 2021 Q4 法說會逐字稿

Thank you, everybody, for joining us, and welcome to SL Green Realty Corp. Fourth Quarter 2021 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.

All forward-looking statements made by management on this call are based on the assumptions and beliefs as of today. Additional information regarding the risks, uncertainties and other factors that could cause such differences to appear as set forth and 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 most directly comparable to each non-GAAP financial measure discussed and the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found on both the company's website at www.slgreen.com by selecting the press release regarding the company's fourth quarter 2021 earnings and in our supplemental information filed with our current report on Form 8-K relating to our fourth quarter 2021 earnings.

Before turning the call over to Marc Holliday, Chairman and Chief Executive Officer of SL Green Realty Corp., I ask that those of you participating in the Q&A portion of the call to please limit your questions to 2 per person. Thank you.

I will now turn the call over to Marc Holliday. Please go ahead, Marc.

Okay. Thank you, and good afternoon, everyone. Before we begin, I want to express our sincere condolences and deep sympathies to the families of officers, Rivera and Mora, who gave their lives in the line of duty.

At SL Green, we work hand-in-hand with the NYPD, FDNY and other first responders, and we support their efforts in every way we can day after day. There's an outpouring of support at St. Patrick's Cathedral right now, and there will be more in the coming days and weeks as new administration works with the state to make public safety the #1 priority in the city. Everyone has a role to play, and I'm confident we can and will move forward from this.

Now we appreciate the opportunity to discuss with you our company performance and financial results for the fourth quarter and full year 2021.

After a solid December in the office market, we had a bit of a reset in January, which is not atypical after the holidays, but most businesses in our portfolio expressed their intentions to return to the office in February. And by March, we expect to be back at the same levels we saw in December, if not beyond that.

The Omicron virus seems to be dissipating as fast as it arrived, and we are hopeful that February, we will begin to return to normal. Those questioning the ability of New York City to rebound need look no further than the resurgence in 2021 of the residential markets, which saw record high-end condo sales and 1% vacancy in rental apartments as young people return to the city.

Our newly completed rental project at 7 Dey Street supports this thesis as we have now signed leases for over 100 units at average rents just shy of $100 per square foot.

On the employment front, New York City added another 8,000 office-using jobs in December bring the total December-to-December job gain to 61,000 new jobs. We have now regained just over half of all office-using jobs lost during the early days of the pandemic, and there are approximately 50,000 additional jobs forecasted to be created in 2022, which should help to begin to reduce office vacancy rates in Manhattan. And in some of the submarkets, we've already started to see those contraction.

We remain optimistic about hitting our ambitious leasing goals for 2022 on the heels of signing 250,000 square feet of office leases after our December investor conference and notwithstanding having grown our pipeline to almost 1.3 million square feet today from just about 1,050 -- 1,050,000 square feet in the beginning of December.

The positive takeaway is that companies continue to see the office as the central and necessary hub of business activity and are making long-term commitments and expansions within the portfolio that vastly outnumber contractions. It will take some more time to work through the system and get past the disruption of the pandemic, but with the new mayor, the new governor and the business community all coming together and playing significant roles in the recovery of the city, we have every expectation of a rapid recovery and another demonstration of New York's extraordinary resiliency.

Seven weeks ago, we hosted our December investor conference at One Vanderbilt. And we did a deep dive into our goals, objectives and expectations for '22, which we reaffirm as we sit here today. As usual, we covered a lot of our 2021 accomplishments, which I think we're sector-leading in New York in many different respects of leasing transactions, operational performance and contribution to the city in the form of openings of the Summit, Le Pavillon and other things that turned out to be extraordinary successes and I think demonstrated the leadership we have and commitment we have to this market.

And accordingly, as is our custom for the January call, we're going to go right into the Q&A and get questions as everything we talked about in December is still relatively fresh and happy to address anything we covered then or anything new as a result of the release we put out last night.

So with that, we'll turn it over for some Q&A.

(Operator Instructions) Our first question coming from the line of Michael Lewis with Truist Securities.

My first question, I wanted to ask about flights to quality. And so yesterday on Boston Properties' call, they used San Francisco as an example with market vacancy well over 20%. But when you look at the top 25% of buildings, it's more like 5%. Another example, I was in Atlanta recently, where the office vacancy is above 20%, but the REITs there are below 10%. So I wanted to ask it about New York and about SL Green, your competitive set, how you think about maybe your investable universe used to be the top half of buildings in New York and now it's the top quarter, something like that. Do you think differently about any of the assets you own or about how you want to concentrate the portfolio now?

I would start off by reminding you that when people talk about the flight to quality, that's not unique to just new construction or the very, very top 1% of the marketplace. What we're seeing is throughout our portfolio and given the fact that our portfolio is highly improved throughout all of the buildings, with the exception of a couple of buildings that we have in redevelopment, we're seeing a migration of tenants coming into the building.

Of that 1.3 million square feet that Marc spoke of, of pipeline, probably 85% to 90% of that are new tenant deals. So I think sometimes people get confused that we've had such great success at One Vanderbilt, and therefore, that's the whole show.

But in truth, we're already seeing the benefit of our redevelopment plan at the Lipstick Building, where we have 2 full floor leases out, and we haven't even picked up a hammer yet to start the work, but off of the plan that we've got tenants are coming to the building. We're seeing increased activity throughout our other very high-end buildings like 100 Park Avenue, 461 Fifth, 1350 Avenue of the Americas.

So you can go down the list of the portfolio and the better quality buildings, particularly Midtown transportation-centric located buildings are seeing a lot of the activity in the marketplace.

And the last point I'll drive home is to say, we said at our investor conference we had more gas in the tank between then and the end of the year to get to our target of 93% occupancy. And in fact, we signed those leases to hit that bogey.

Yes. And on that point, I think the statistic you mentioned in San Francisco, 20% vacancy, 5% for the top, the same statistic is right in front of us here at SL Green. This market, Manhattan market has a vacancy rate of 16% to 18%, depending on what source you use, and our portfolio is only 7% vacant and shrinking. So that same story is there. But that 7% vacancy isn't just our top buildings. That's every building combined on average.

Okay. Great. And then my second question, I wanted to ask about the risk-reward in the DPE book. The rising interest rates have been a theme to start the year. How do you -- what do you think about -- are you seeing investment yields start to creep up and maybe there's some opportunity there? And then on the flip side of that, how do you think about the value of your current holdings and the value of what you own?

Well, our portfolio is mostly floating rate. So I think the value of the portfolio is very much intact. There's not much diminution as the 10-year rises, if at all. And we are seeing more structured finance opportunities, but that's mostly based on just increased transaction volume in Manhattan, more so than sort of as a result of rates rising.

Our next question coming from the line of Alexander Goldfarb with Piper Sandler.

Marc, I just want to go back to your opening comments on the new governor, new mayor and obviously, Albany. New mayor is awesome. There definitely seems to be some tension with Albany as far as bail reform. But one of the items that came out late last year was a proposal to do a billionaire's tax and tax billionaire capital gains at normal income, which I'm guessing would lead to other taxes that perhaps Albany would like to pass. So in your discussions in the business community in New York crime and street safety is one element, but there's also the regulatory and tax element as well. What's your sense of what Albany may do? And are they listening to the business community and what really drives the city as far as the companies that take residents versus migrating to Florida or elsewhere?

Yes. I mean I do think so. This year, uniquely among years, the state is flush with cash. I mean, that's the good news. It came out with a budget in excess of $200 billion. So the highest budget it's ever proposed, and we'll see as it gets negotiated and finalized. But it's -- it was able to be proposed in a way with very little in the way of any new revenue enhancements because the combination of surging business profits in New York State and also personal income taxes in New York State as a result of rising compensation bonuses is leaving state and city coffers relatively flush going into '22, and I think that will carry into '23. And that's something I talked about in December about the...

The stimulus in the Federal...

And the stimulus and ongoing. So there was the stimulus plan that Chuck Schumer was able to bring, the $100 billion stimulus. And now the infrastructure on top of that, which I think will be multiples. And again, that -- all of that, which we sort of reviewed in December, I think the tax -- the business activity, the tax collections, the stimulus dollars is all pointing to a moment where there's not a lot of discussion on the table or need more importantly, for any kind of regressive revenue enhancements. And so I don't think we'll see that. I think the state of the state that Governor Hochul gave 2 weeks ago hit on many of the right issues in terms of wanting to work with the city and this new administration on the topics that we talk so much about, making investment in infrastructure. I think there's a lot of common ground there no matter where you stand on what side of any political or social leanings. Affordable housing mandate to come up with new and creative ways to modify 421-a in a way that will create more and better affordable housing, while also creating an economic framework that developers can help -- the private sector can help deliver that.

In public safety, I think, again, I put it right there as priority one, working with the mayor in a very concerted way to put higher presence of boots on the street, in the subways, in mass transit to -- just to reinforce and get right back to where New York was not long ago and where we will be again very soon. Because we know how to get it done, and now I think there's a will to get it done. So I'm pretty optimistic, Alex, that the soundings coming out of both City Hall and Albany are in line with the kinds of things we want to see in here. On the...

From your lips to Albany's ears. Andrew, on the mez book on the DPE, you guys had a $0.04 write-down. Were these -- from my understanding, these were prior positions, I think? Or maybe not, but what was the composition of these write-downs? And then in general, the DPE book has been hugely successful over time. And at the Investor Day, you spoke about first mortgage hunger that was sort of cashing out a lot of positions. So workouts or write-downs weren't required. So maybe just a little bit more color on what's driving these write-downs and if these are new write-downs or previously -- positions previously written down?

Well, I mean, they're on previous positions. The book had an enormously profitable year, and we take a conservative approach when we think there's any type of potential for a future write-down. We like to make sure that it's covered and reflected and the income is -- that you're looking at for the year is sort of net of any potential offset.

But the book had a very good year. We had some very large payoffs. We had a large payoff after the investor conference on a development position we had on 72nd Street. And as I said on the call previously, we're seeing very good new opportunities, and we expect to be able to hit our target we laid out to you in December or exceed it for originations for the year.

Your next question coming from the line of Caitlin Burrows with Goldman Sachs.

Maybe just a question first on the return-to-office. I know you mentioned companies that were planning to return in February where March could be back to December levels or possibly higher. I guess what's your outlook for further improvement of physical utilization and sort of recent conversations with tenants who maybe weren't yet back in December been like? And then more importantly, how important do you think that kind of near- to medium-term return is to SL Green's business, long-term?

Well, it's hard to get a barometer on the pre-pandemic levels because I think people have in their mind this notion of 100% benchmark, which is far, far from the reality of what space utilization is. And as best I can tell anecdotally speaking with all of our tenants, which isn't a bad sample because we have 900 plus/minus tenants, is that between PTO and holiday, sick days, traveling, people travel for their work and did and still will. And there was an element of remote work even before the pandemic -- it's not a completely new science -- that an average day would be somewhere in the 70% occupancy range.

We can't -- I don't have hard statistics on that, but I can tell you that I'd say everything I hear is either right at that level or in the 70% to 75% level at max. Some companies are different and they have higher capacities and some are less. But I think that's a good average. So when we talk about approaching 50% occupancy, physical occupancy in the near term, that's a good ways back. And what it will take and how long will take to get from that 50% to that last 75% I think that's just -- as I said earlier, it's just going to be a matter of working through the disruptions of the system and a recognition that many firms will, at least for the time being, work some increased element of flexible remote work into their program.

But we're still hearing almost across the board that the majority of days will be in the office. So whether a company is going to go to a 3-day work week in office, 4-day work week and also 5 day, averaging maybe 4 days or so, everybody has a desk. Everyone's got a landing station. And these same companies that are talking about some element of a hybrid work model are the same ones who are signing 10-, 15-, 20-year leases and generally expanding.

I think our expansions outnumber our contractions by like 5 to 1. That's in terms of square footage and maybe 4 to 1 in terms of number of deals. So the larger deals, it's even more pronounced that the expansions are outnumbering contractions in our portfolio 4 to 1 or 5 to 1. And we looked at over 200 transactions. We did 200 and some-odd leases in 2021. That's just office leases. And so that's a -- it's a very good sample set. And I think that this year, the confidence factor is going to be even higher.

And we have a rising occupancy. So it will -- I don't know if it's going to have an impact on our portfolio. It is going to have an impact on the way companies work. And I think it's an impact for the better. It's part of this whole shift in what we deliver to tenants being not just a deliverer of commodity space -- we never approach it like that. But now more than ever, we are going to make every effort possible to demonstrate leadership in this industry by giving workers every reason to want to be in the office -- maximum efficiency, health, safety, wellness, food and beverage amenities, lounges, town halls, some fun recreational items, work out, spa, wellness.

It's all part of this new package of delivery we're working into every one of the buildings we own and the feedback from tenants and tenant employees is that they love it. It's -- the vibe is great. People have more incentive, they feel better. And I think we will, over time, get back roughly to pre-pandemic levels. But for whatever kind of shifts there are that might insert more remote flexibility, but I don't think there's any question in my mind about the office as the central hub of everything that takes place in the workplace.

And the sense of community, mentorship, training and business generation, I don't see that being degraded. But time will tell, and we'll see the results. But the early indicator for me is the leasing and the leasing right now, both in terms of the 1.9 million square feet we signed last year and the 2 million square feet we're projecting for this year, we think, says it all.

Got it. And maybe then a follow-up question on a different topic, other income. It looks like that came in materially higher than expected in 4Q. So just wondering what that might have been driven by -- and as you look out to 2022, it seems like you're expecting that to be significantly less than '21 and 2020. So just wondering why you think that may change?

It's Matt. So the other income line, I think, was roughly $7 million better than we expected in the fourth quarter. Most of -- meaning most of the other $19 million was expected, significant contribution from the fees and income we got from the JV at 1 Madison. And the increment was -- some incremental leasing commissions and fees we received and also better performance at the Summit than we had expected, which flows through in large part, other income.

And so when you think about 2022, is it that part of that, I guess, it was just onetime and it could be lower, perhaps there's upside opportunity?

No, comfortable with the guidance we put out for '22 in other income.

Our next question coming from the line of Manny Korchman with Citi.

Marc, if -- we want to spend a couple more minutes on this utilization or census question. A couple of questions there. One, have you seen a difference in utilization actually people coming in from the companies that have signed new leases more recently? Are they signing new leases and then trying to bring people in, especially on the ones that have expansions? Or are you still in those lower building census numbers there?

And then secondly, as you sign new leases, and this might be one for Durels. Are they thinking about that same 70% on average? Or are they trying to boost that number? And so you might have the same number of people, you might have the same number of -- same square footage allotted to people, but you're actually taking less space because you're just trying to get utilization up.

Well, trying to answer the first part of that question, I would just say that the space plans that we've been presenting with and what's being built, new is very -- it's well-amenitized space. It's highly efficient space. And it's a space that I think they intend will be fully utilized. I don't -- I mean, I don't think these companies are building with the intent that they're building with the expectation that all of that space and all of those desks won't be utilized. In fact, I just -- I want to caution that everything is an average.

We have many tenants in front of us right now, part of that 1.3 million square feet of pipeline, who are at their limits in terms of whether who's back in the office -- a company like us, we're 100% back. There are others that are predominantly back and there are some that have such enormous expansion needs that even when they're underutilized, they're still in the market. We've got deals over at -- I'll just say, in the Grand Central Park Avenue area, Steve, where we were talking the other day, 2 tenants, both expanding, competing for the same space. Both of those...

Yes. 30% to 50% expansion.

I was going to say those were -- I thought they were both 50%, but Andrew notes 30% to 50% expansions per tenant, and we can only accommodate 1 of those 2, just given the nature of the building where that's coming from and it's not One Vanderbilt. So I do go back to what I said, which is when -- these tenants are very sophisticated, with sophisticated real estate groups, and they do a lot of planning.

And when they sign these 10-, 15-, 20-year commitments and they lay out their full floor plans with desks they expect to be occupied and they come and they say they've got these significant expansion goals, yes, I think they have every intention of bringing people back and populating those work areas because they would not be acting that way otherwise.

And in terms of who we see doing it, we absolutely saw that this -- the vibe in the city in December was great. Like I said, we had a reset in January, a confluence of events. But we'll get past that quick I believe, in Feb, March, April, we will be there. So on the next call, give me the same question again.

Marc, it's Michael Bilerman here with Manny. I was hoping to ask a question just about the sort of transaction market and investors. Last year, when we talked about the subject, you talked about maybe a limit of maybe a $500 million check from an individual investor to go into office transactions. We've certainly seen the upper end of the market, just like on the leasing front, that the investors are more looking at higher-quality buildings, newer buildings, environmentally friendly buildings and those deals are getting done. Where do you think we are in terms of investors maybe enlarging the scope of office assets that they're looking at and maybe even looking at portfolio-type transactions, and just comparing it to some of the other property sectors, like whether it's single-family or multifamily or industrial and data centers or in infrastructure where we're seeing multibillion-dollar commitments almost on a weekly basis. It just doesn't feel like the office market has turned to that same scope. And so I want to sort of get a little bit of the color that you're seeing from the institutional world.

Okay. So I mean, let's switch to a discussion about what we're seeing on the things we've recently transacted on, the money-raising efforts that we're undertaking right now, both for pipeline activity and just general future activity. Andrew, why don't you sort of cover as much ground as you can.

I think we have an active market for non-trophy properties as well as evidenced by 110 East 42nd Street, which we closed in December and 1080 Amsterdam and many of the other sales that we closed last year. You saw the Columbia Property Trust portfolio, which many of those buildings are certainly not -- they are masonry-type buildings, they're not all glass and steel buildings.

And I think there's a thriving market right now for large assets and small assets. And across the property types we have here in New York City, obviously, it doesn't speak to data centers and single-family homes. But there's a lot of liquidity out there for transactions large and small.

You saw 8 Spruce, a large multifamily asset, traded at Blackstone. You see 1 Manhattan West, which is going to get recapitalized, there's -- 452 Fifth Avenue, the HSBC Headquarters. So there's a tremendous amount of capital markets activity out there on development deals, on cash-flowing deals, on partially vacant deals. So we see a very active investment sales market.

In terms of the multi-multibillion-dollar portfolio deals, I guess, Columbia Property Trust would be the closest thing we've had to that. I don't -- there just hasn't been that type of offering out.

Right. I mean that's -- I mean you'd want to point to more than one. And that was sort of the framing of my question of whether that's starting to open up and whether you're starting to have more serious discussions on finding that investors want to get more appetite. But I'll turn it over to the other questions, and I'll see you down in Florida.

Next question coming from the line of Steve Sakwa with Evercore ISI.

A lot of questions on leasing have been answered -- asked and answered. But Marc, maybe just on the Summit, I didn't know exactly what you were planning to do from a disclosure standpoint going forward. I don't know what you can share with us about the activity levels in the fourth quarter. And what is your expectation, if any, or what's embedded in guidance for '22 for the contribution from the Summit?

Sure. Well, what I can share on the Summit is it's unbelievable. It's fantastic. We opened in October 21. It exceeded every lofty expectation I communicated to you in the prior years, not just in terms of the financial performance -- this is as successful as it will be financially, it's an important addition to New York and the destination entertainment sector because of its uniqueness. It's very out of the box. It was a little bit risky. But now obviously, we look back and we think we hit it exactly right in terms of the customer experience and the journey and the uniqueness of what we've created, and everybody experiences it a different way, and that's kind of the beauty of it.

Some people come as individuals, they come in groups. There's people lying on the floor and they'll video themselves and everything going on for hours, the dwell time for some people might exceed 2 hours depending on how they want to experience Summit, which is everything about the view outside but being brought inside and the way that is all curated and amplified with the artistic input and creation of Kenzo with the various mirrored transcendence rooms and the air at night light show and the soundtrack curation. It's just -- it's -- it really is wonderful and it's something people are coming back to again and again, which is very atypical for this market to have people coming back 2, 3, 4 times in a very limited period.

We only opened this October 21. Our average capacity sellout was about 95% on average from October 21 through the end of December. Most of December was even higher. It was probably like 97%, 98%.

And this industry typically is a very significant drop-off in the first quarter after the holidays. And yet we are still experiencing great numbers for January. We sit here today already beyond our January projections, which were already increased when we sat with you guys for the December investor conference. So that's just a little bit about Summit and more to come. But you should also note that, that capacity I mentioned is kind of self-limited because we are only open right now about 5 days a week, and we've curtailed the hours on a couple of days. We have demand, we could -- we can and will extend ours and add a day probably at the end of the first quarter, I would expect sometime in April for us to do that. I think it's the right time for that.

And we want to lean into this very gradually. This is not -- Summit is going to be here for a long, long time, and it's going to get better and better over time. And we want to make sure that experience is as good as it can be.

In terms of numbers, Matt, I don't know what you want to -- I mean the '22 guidance, most of the numbers are embedded in the lease payment. That's the way this deal is structured. The operating company makes -- has some contribution to FFO, but probably just a few cents a share on the OpCo. And the lease itself and the projections we've shown you guys previously and over the years, Summit bottom line FFO contribution was always about in the range of 20% to maybe 24% of the bottom line for OVA. And so it should meet -- we over -- we exceeded on our rental assumptions, and we're exceeding on our Summit assumptions. And hence, that 20% to 22%, 23%, 24% contribution to bottom line should be holding up. But Matt I'll...

Yes, that's spot-on. In our '22 number, we had expected around $100 million of GAAP NOI off One Vanderbilt, our share, and 20%, 25% comes from Summit. And the operator has a modest contribution of $0.02, $0.03 in our FY '22 guidance.

Right. And Matt, that will be increased in '23 and beyond as we add hours, add days and dial this in even further.

Great. My follow-up, I guess, is just on the transaction market. And I don't think in the press release -- you detailed a lot of deals that had previously been announced that either closed or were going to close. Just curious sort of what you're looking at in terms of bringing to the market or thoughts are in the first half of the year? And just what should we be looking for on the transaction side and mirror that up obviously with the buyback?

Well, we have active discussions on quite a few assets. We're putting 609 Fifth on the market. That will be as an alternative to lease, but we've received some unsolicited inquiries to purchase that asset. And we're remarketing 110 Greene Street as well. So those 2 are sort of active in the market right now, and we're entertaining discussions on other assets that are not in the market. So I'd look for a very active transaction sort of book for ourselves in the first half of '22.

I would also just add to that, that the activity and expressions of interest we're receiving on assets mentioned and assets that we're working on that weren't mentioned in almost every case exceed our own internal NAV. And accordingly, really give us confidence as we execute our business plan throughout this year to continue to acquire our own stock with proceeds of some of these capital transactions as well as investment in new development and debt repayment in order to capitalize on what we see still as an attractive and wide arbitrage.

Next question coming from the line of Jamie Feldman with Bank of America.

Marc, in an answer to a prior question, you talked a lot about the types of amenities and just what your tenants are going to want in their spaces to bring people back to the office and make it a great experience. How should we think about the CapEx for the company? I mean do you think there's going to be a good number of major CapEx projects across the portfolio going forward? Or is this more capital that's going to look a lot more like traditional TI capital over the next several years?

No. It's -- I mean, for this year, I think we highlighted in December, I don't exactly remember, but we talked about 885 Third, 750 Third. Well, and there's one other -- 919 to a certain extent, right? So 3 buildings on Third where we think the investment is not -- don't think of it as redevelopment capital the way we've redeveloped every building in this portfolio, which get down to systems and windows and big heavy infrastructure, mechanicals. This is usually very targeted, surgical programmatic upgrades -- usually a space that's underutilized. So a lot of times, it's sub-grade space. or in some grade space that wasn't fully built out.

All the capital for those projects are in our 2022 capital plan. They're not disabling in any way and the return on those dollars in terms of the lease velocity and rental uptick, we think, more than pays for itself. I think we spent about $3.5 million at 100 Park for a 10,000 square foot -- what - the name of the facility is...

Park Club.

Park Club. And tenants love it. I mean it's a lot of bang for the buck. Now we're doing a larger project at 885, but we're leasing about 600,000 feet space. So this to me is not -- I wouldn't look at it -- to me, it's not like TI capital. This is real permanent building improvement and permanent value-add. This is taking a building from one level up.

TI is commissioned. That's a cost of leasing for us because the improvements of the tenant space is not the building space. But this is improvement to fundamental building. Everything we spend here at One Vanderbilt, I mean, is part of this $5 billion appraised valuation. And everything we're doing at One Vanderbilt will be part of what we hope will be another sign -- I'm sorry, One Madison will be a part of a significant valuation and the same for 885 and 750.

So I look at them differently. They're more manageable. We've planned it throughout the portfolio. We're internally financing it with the sale proceeds of assets, and we're getting lease velocity and rental uptick as the reward for that delivery of excellence.

Okay. That's helpful. I guess just a follow-up just thinking longer term, I mean, it sounds like the opportunity to do this is when you have vacancy. As you just think about your expiration schedule or just the portfolio overall, I mean, how long do you think this goes on in terms of years that you'll be putting kind of excess capital into building? Or is there a way to quantify how much...

You got to go building -- look, for us, it's a very granular process. You got to go building by building. I mean, Graybar is done. We have our conference center there that actually was the former SL Green Conference Center that we put like $1 million into and have now turned it into, I think, one of the -- I mean, a dominant, within that world of buildings, small tenant building, it's probably the best amenity of any building. And we just opened it -- wasn't dramatic cost. And that's done. And One Vanderbilt is done. And [1515] is fully tenanted. And -- so in some of these smaller buildings, either they don't require the same investment or we've sold some of the building. And we just sold 110 East 42nd Street.

So no, it's not this sort of endless pipeline of improvement. It's very targeted and very manageable. So I hear what you're saying, but it's -- we don't -- it doesn't feel like that to us. By the way, there's also a little silver lining in a deal like at 810 Seventh. We just as part of, I guess, last year or 2 years ago, I'm not even sure, but as part of the pandemic, we took back a fully improved conference center that was a third-party conference center with full back of house and kitchen and furniture, I mean, with a little bit of investment ready to go. And we're lining up operators and/or leases for that facility, which will serve as an amazing amenity for 810 Seventh. So it's underway and the portfolio occupancy level, I think, reflects the great state of our product.

Our next question coming from the line of John Kim with BMO Capital Markets.

I just wanted to follow up on your commentary on the Summit. It sounds like you're expecting $20 million to $25 million of NOI this year to be contributed. And I'm comparing that versus the $2.1 million of intercompany rents that you provided. So I was just wondering what that mismatch was? And then, Marc, you mentioned 95% capacity. What does that mean as far as visitors because I think you last provided guidance of 2 million visitors per year.

John, I'll take the first one. I don't know what the $2.1 million of intercompany rent is, but the...

The rent [that's variable.]

Yes. We have leases between SL Green and One Vanderbilt that's separate aside from Summit. So I think that's what you might be looking at. And then there's also remember, cash payment base rent on our leasing schedule that is separate and aside from the percentage rent, right? The bulk of the lease here with Summit -- between Summit and One Vanderbilt is a percentage of sales. That's obviously not in the leasing schedule, the ground lease schedule that you're looking at, I think. So the 20% to 25% of NOI is based on a projection of attendance and sales and a lease that has rents based on that. What was your second question?

It was a question about attendance. We had previously talked about stabilized -- underwritten stabilized projections of about 2 million or 2.1 million. I think for this year, 2022, we're expecting to be about 70% to 75% of that number. I'd say our underwritten numbers probably have us at about 70% of that total capacity. So that's our expectation for the year. Obviously, we hope to exceed it. But remember, it's kind of hard to go by that now because we're only open 5 days a week and 2 of those days fairly limited hours -- like half days.

So I guess what I'm trying to say we had a very long ramp. That's the part I think you're -- that's left out of that question, which is we had not expected to ramp into 2 million, 2.1 million until I think it was like 2024, is my recollection. And we had everything -- numbers we gave you guys in December bleeding in, it was roughly 25%, 50%, 75% and 100% over a 4-year period. I think that was actually our 2020 guidance. We upped that because, obviously, as we sit here in '22, we're not talking about 50% capacity, which would have been the original guidance. We're talking closer to 70% capacity, so far in excess of underwriting and still well within the expected ramp to stabilize this facility, which would have been like a '24 metric. Does that make sense?

Yes. I mean is it fair to say that ramp has shortened, so it's going to be more like a '23 stabilization?

Yes. I think that's reasonably fair to say -- maybe like I said, I would rather go to the number like between 70% and 75%. But whatever it is, it's so vastly in excess of '22 projection, we're in good shape.

Okay. And then on your same-store occupancy, it looks like it dipped to 92.1%, which is versus the 92.8% that you provided in December as far as the update. So it's come down a little bit. And I was wondering how that impacts your guidance. I know you didn't change it. But you had occupancy guidance of 94.3%. So just a further ramp-up to get there.

Yes, I'll start with -- you're picking up the wrong number. We ended at 93% as against 92.8% that we guided to in December. So we actually beat our year-end same-store occupancy projection, which includes leases signed. So it's a signed occupancy number. So exceeded the expectation and feel -- and puts us on a great ramp to our number for 90 -- I'm sorry, of 94.3% for '22. So beat our expectation.

Then 94.3% is occupancy, including signed leases?

That's the only way we quote it. And the only way we've ever quoted it and the only way we will continue to quote it.

Our next question coming from the line of Anthony Powell with Barclays.

Question on, I guess, expirations and renewals. It seems like a lot of the leasing is with new tenants, which is positive at good rates, but that means that there's a lot of churn. So in terms of who's leaving the portfolio, why are they leaving? Are they working fewer days in the office? Are they relocating to either new cities or new buildings? And what's kind of driving some of that churn on that side of the business?

We did a lot of early renewals. If you'll recall during the depth of the pandemic, we were extremely proactive about going and making outreach to tenants in order to, quite frankly, to lock down our rent roll. So we -- that pays off -- paid dividends to us because it helps us stabilize the occupancy level. And so it's not so much that we're losing a lot of tenants. I would say there's very few tenants who are departing who we haven't -- we didn't already identify as likely to leave probably 12- to 18-months ago. And the majority of those are typically because they want to rebuild their space. They've outgrown their space and they want to make an investment to create a different work environment for themselves.

And the reality is it's tough to do around yourself unless we can provide swing space and when we're so well occupied, we don't have a lot of excess space in order to make that happen. We accommodate it where we can. But I would say, if I was going to broad stroke it, the majority of the tenants that if we're losing them now is because they've outgrown their space and they want to create an entirely different work environment, which -- or by the way, I think, is a good thing throughout the broader marketplace because a lot of those tenants that are coming into our portfolio are doing the exact same thing.

Right. So you're not seeing tenants leave because you know that they're going to downsize and don't need the space. It's more of a reconfiguration. So you're not only seeing a broader just retreat from office spaces, it is more of kind of just reconfiguring and switching out where they want to take.

Yes. I think it's -- they're using their space differently. They're not necessarily downsizing. And if I answer it a different way by saying some of the tenants that we see coming into our portfolio, there's a good -- a good percentage of the square footage that are being driven by new tenants coming in that are doing consolidations, which is a pretty interesting phenomenon where we're seeing these companies that want to consolidate where they used to split their operations and go to a campus type of an environment. Now they want to put everybody into one roof. And it's all driven by what Marc was saying earlier, which is a desire by the tenants to really create a work environment that gives their employees a reason to want to be in the office and as a recruitment tool because it's become -- and it has remained for quite some time, highly competitive in order to recruit new talent.

Anthony, it's me, it's Matt. I just want to add one thing again because we keep hearing the contraction, contraction. We said it earlier and I think it's worth saying again. Our -- in the 1.9 million square feet of leasing we did in '21, expansions were 5x larger than the contractions. Almost 400,000 feet of leases were expansions. Less than 70,000 feet were contractions.

Yes. Understood. Yes. I think on Investor Day, I think you mentioned that you hired or starting a hospitality, I guess, [own] hospitality, I guess, segment. Maybe go into more detail about that, what do you expect to kind of drive there? And what's the opportunity for you there?

Yes. Well, we introduced in December the team, the hospitality team headed up by Laura Vulaj, Gerald Feurer and Marijana Herceg and now Jelena has also been promoted within that group. So it's a growing and very solid group that is taking responsibility, operational and marketing responsibility for all these locations, not just at One Vanderbilt, but One Vanderbilt soon to be One Madison, 100 Park that Steve mentioned earlier, the Graybar conference center, the one over at 810.

And this has proven to be really not only a great source of satisfaction with tenants but there's an ability for us to drive some revenues that are not unmeaningful in terms of after hours, rentals and events that tenants like to throw. Because we're doing this F&B at a very high level and generally with Dynex, Daniel Boulud's company, that is delivering extraordinary culinary experiences into these spaces. And we have an arrangement with Dynex. There's a lot of symmetry there.

There's a lot of compatibility. It's a win-win situation where the tenants are getting access to great spaces and great service and great food and beverage. Dynex is about as good as it comes in the city at providing that. And for us, it's a great way to get a return on all this amenity space that's really amenity during business hours and then doubles down as a function space after business hours and on weekends. So we're going to keep growing that business and growing the team. And it's -- eventually, it should become a line item on the budget. I mean, in terms of its relevance.

I could see it growing substantially. Le Pavillon alone, just that -- our one restaurant is going to be meaningful -- is expected to be meaningfully profitable in 2022, which in less than a year of open is quite a statement.

Our next question is coming from the line of Derek Johnston with Deutsche Bank.

Derek? All right. We're going to try and pick up the pace here because it's half past 3, and I think we still have 1 or 2 more questions. Operator?

Operator, you can go to the next, and Derek, you can jump back in if you...

Call Matt.

Yes. Or call me, Derek.

Our next question coming from the line of Ronald Kamdem with Morgan Stanley.

Two quick ones for me. Just an update on One Madison and sort of the leasing activity, trying to get an anchor there? And any update there would be great.

Well, as we said at an investor conference, we've had a lot of very, very strong interest from prospective tenants. We're in advanced dialogue with a couple, and we'll see how it unfolds. But we're -- I would say -- I think Marc would agree that the pace of our discussions with tenants at this point in time of that development far exceeds the level of activity that we were experiencing at One Vanderbilt at a similar moment in time. So we're emboldened by that and optimistic and there's nothing really specific that we're ready to report yet, but I hope to have more to talk about later this year.

Great. And then sort of the second question is just relating to co-working space, just given the experience we've had over the past 2 years and talking to clients, talking to tenants, has the company's views changed on that business -- business model? And is this something that you would consider?

Well, we have a division called Emerge212 that's been operating for about 20 years in the co-working environment. So we introduced the Altus Suites at One Vanderbilt. That's been a huge success. That's fully furnished. Shorter-term occupancy suites upstairs. We've leased...

Two and we have leased out on the third...

Two and leased out on the third, and there'll be one remaining shortly. So Altus has been a huge success. I think we're fans of co-working, where we build it, we operate it, we manage it, which we do a lot of. And third-party co-working was never a big priority for us. And I would say that sentiment exists and continues.

Our next question is coming from the line of Nick Yulico with Scotiabank.

So I was just hoping to get some more info on Page 29 of the Sup, where you give the occupancy versus the leased occupancy. Is it possible to get the leased occupancy number for the consolidated same-store portfolio where you are showing up here that you have more vacancy than the rest of the portfolio?

It probably is, but I haven't done that math. So, no.

Okay. I mean I guess I'm just trying to figure out here, I mean, if the bulk of your vacancy is in the consolidated portfolio and certain assets that look underoccupied versus history? I mean 810 Seventh, Graybar, Avenue of the Americas, right? Where your overall vacancy showing up here is very similar to the overall market. Just kind of how you're thinking about those buildings competing and how much occupancy uplift for those lower occupancy buildings is built into your guidance for the year?

I'll say with specificity to those buildings, I can't tell you, but they're obviously part of the 100-plus basis point occupancy pick up. I think it's 130 basis point occupancy pickup, we're expecting for '22. Those are traditionally buildings that operate at a much higher occupancy level, and they are headed that direction. So we...

I guess what I'm asking is -- you're saying -- if you're saying they're heading in that direction, they're not -- it's not showing up on the occupancy page. So that's why I was asking for the lease number, if you had that. If there was any [embedded] occupancy lift up in those buildings, that we can't see because it's not on that page.

Right.

Nick, it's hard to generalize amongst -- every building has its own DNA. Graybar you mentioned as a high occupancy building. Well, guess what? We moved out of Graybar. You know that.

We were one of the largest tenants.

We were 100,000 feet.

We were 100,000-foot tenant in a building that's made up of 2,500 square foot tenants. So yes, we moved out this year. We -- I think we left the space -- or in 2021, we left in March, I think, if I recall. So we left a gaping hole in Graybar.

But that -- don't extrapolate. Graybar is a wonderful building with a lot of activity, and we're backfilling our space and other space. And it will be back into the 90s, I assume, I don't have, like Matt said, I don't have a number in front. I got to believe that building is back in the 90s this year, great building.

It's a little bit more specific to things happening in the property at that point in time. I certainly couldn't generalize, "Well, consolidated properties have high vacancy, JV properties have low vacancy." It ebbs and flows. We've had JV properties -- last year -- One Vanderbilt was a JV property that was bone empty as is One Madison. And those will go to fully leased, one now, one in the future. What were some of the other ones you mentioned besides Graybar?

810 Seventh.

Well, 810 Seventh, we had that -- I mentioned we had a conference center that we had a full floor conference center that blew out during pandemic because the pandemic was very tough on conference centers because there was nobody to convene in the conference center. So we took it back. And now we're in the process of doing some very modest upgrades to that and then turning around and either reletting it or putting it into our management contract, and it will become profitable.

So there's not -- this portfolio, the properties we own are all excellent buildings, leasable buildings that we're making better through -- in some cases, through targeted amenity improvement. And we're going to increase our occupancy overall to, we think, what was the projection?

94.3%.

94.3%. 130 basis points. So that would certainly be a lot better than the market. The market is nowhere near 5% to 6%. If the market was 5% to 6% vacancy, I mean, wow, we'd be in an unbelievable position.

So this portfolio will be, that's our goal for our investors this year. We wouldn't put it out there if we didn't think we'd get there, and we'll get there. But I wouldn't draw broad-brush conclusions based on any moment in time vacancy in any particular asset.

I guess my point was just that if you had activity in those buildings, it would be helpful to know kind of what the lease number is in those buildings because if you look at this page, you just see a lot of occupancy loss in those buildings in the last year.

When you say the lease number, what do you mean by the lease like...

Your leases under [One Madison] is the only number you like talking about, which is the leased occupancy number rather than you show a commenced occupancy number for these buildings. And my point was that if you -- is there any way to give a leased number for these buildings, it would be interesting, we'd understand sort of how much leasing activity there's been that's embedded already, right, in those buildings, that's not showing up in this page.

I don't think it would matter much, which is why we don't put it out there. So never heard before...

I hear what you're saying. Let us -- I didn't say what you're saying, if it's the lag time between leasing commencement, let us look at it. But when we give that lease number, know that they will all commence. So we are 93% leased as we sit here today, period. Your point is, well, I don't know which buildings those leases are in, I guess, they haven't commenced...

And then so let us digest that. I hear them.

Okay. Any more questions, operator? Terrific. We will get right back to work and look forward to speaking to everybody in 3-months. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.