SL Green Realty Corp (SLG) 2021 Q2 法說會逐字稿

Thank you, everybody, for joining us, and welcome to SL Green Realty Corp. Second 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 their assumptions and beliefs as of today. Additional information regarding the risks, uncertainties and other factors that could cause such differences appear in the risk factors and MD&A 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 second quarter 2021 earnings and in our supplemental information filed with our current report on Form 8-K relating to our second quarter 2021 earnings. (Operator Instructions)

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

Thank you, and good afternoon, everyone. We appreciate you joining the call today and giving us an opportunity to review the second quarter earnings with you. I have some items that I'll open up with. And obviously, we'll then turn it over for some questions and answers to whatever is on everyone's minds today.

But starting with the quarter, we accomplished quite a bit in these 3 months. Since our last call with you, we successfully completed several asset sales; a significant joint venture that we closed this morning; an important fee acquisition; over 0.5 million square feet of office leasing; over 2 million shares of stock buybacks; and maybe, most notably, a record-setting $3 billion SASB financing of One Vanderbilt. Our first half accomplishments have exceeded much of our earlier goals and objectives, and we are now very well situated to benefit from what we believe will be an even better market environment in the second half of this year.

At the beginning of and throughout the year, I shared my optimism with you for a sharply rebounding New York. And when I survey where we are midyear, I think that optimism was well founded. With the year-to-date total return exceeding 30% through yesterday's close, our stock has performed very well as the market is resetting its views of the New York economy after COVID-related restrictions were lifted on May 19.

Average physical occupancy in SLG's portfolio is approaching 25% as tenants are reopening their doors and more and more workers return to the office. Business leaders are now more than ever voicing their strong support, preference and adherence to continued work-from-home model -- I'm sorry, continued work-from-office model -- I see a lot of raised eyebrows here -- continued work-from-office model in collaborative, communicative and physically present matter.

The majority of our tenants are planning for their workers to return after Labor Day and, more importantly, we do not see any material trends in hot desking or shrinking footprints. To the contrary, we see a trend of businesses availing themselves at this moment in time in the market to lock in space and make investments in improved work environments, technology and amenities as a way of competing for talent and making a compelling case to their employees for work from office.

The space plans we are reviewing today that are submitted by tenants as they begin their build-outs have decidedly more common space, amenities, food and beverage offerings, collaborative meeting spaces, specialty areas, de-densified workstations, breakout rooms for privacy and, generally, more thoughtful and efficient and healthy use of space. Within our portfolio, this has led to almost 1 million square feet of new and renewal office leasing at rents that are generally flat with expiring escalated rents and TI packages that are marginally higher than pre-COVID levels.

We are currently tracking about 0.5 percentage point higher in occupancy than originally projected at the beginning of the year. And with over 600,000 square feet of additional leasing and pipeline, we hope to maintain outperformance through year-end. Foot traffic at our properties has increased considerably in response to a strong underlying New York City business economy, calls for return to office and a slow but steady jobs recovery. There are about 6,000 to 7,000 new office jobs being created monthly, which trend is expected to continue and result in reattaining pre-COVID office employment levels by mid-2022.

Interestingly, the job creators to date are being led by information and technology and professional business services, while the greatest amount of leasing demand seems to be coming from the finance sector. Wall Street profits, which ended 2020 with a near-record $51 billion in profits, has already posted $18 billion in profits in just the first quarter. And the Big Five banks reported a 150% increase in second quarter earnings year-over-year, and last year was a good year for the banks.

There is now essentially a war for talent among large companies and high-growth businesses, a competition that New York City will win given its diverse, educated and highly skilled workforce and deep talent pool. It should come as no surprise that New York City personal and corporate income tax collections are at all-time record levels of $15 billion and $5 billion, respectively. It is in this economic backdrop with record low interest rates and substantial investment capital for deployment that we believe New York City is situated to outperform other major markets on a near- and long-term basis.

Looking forward into the coming quarter, we've got many milestones and achievements that we are busy to be able to report positive movement on, on the next time we speak, such as making ready for workers returning to the office after Labor Day, completion of demo and all the column reinforcement for the commencement of vertical construction next month at One Madison, the commencement of marketing, all of the residential units at 185 Broadway will begin next week. The commencement of full demolition of 760 Madison Avenue now that we just received our DOB permit to make way for the new Giorgio Armani retail boutique and condominiums.

We have planned additional asset sales that we expect to achieve in the third and fourth quarters of the year, with much of the proceeds going towards additional stock buybacks consistent with the original plan. And certainly, and maybe most excitingly, the grand opening of Summit One Vanderbilt on October 21. It's something that we've been working on for 3 years, and we fully expect and hope it will become one of the top-performing and most visited experiential attractions in New York City once it opens. And that now is well within our sights and looking forward to the opening of Summit.

So with that, I would say, the second quarter financial results were all in line with our expectations, and we're happy to open it up now to take questions on any of the specifics.

(Operator Instructions) Our first question comes from the line of Caitlin Burrows from Goldman Sachs.

You commented on the first quarter call that lease concessions had stabilized, and it appears from the fine leasing data you provided that this was indeed the case in the second quarter. So just wondering if you could go through what you're seeing on the concession side, have they stabilized. And are they perhaps even improving yet?

Yes. I certainly don't think they've improved, but they've stabilized. We saw a stabilization starting in the fourth quarter of last year, and that's carried forward through today. And it's very important that when you look at the numbers quarter-over-quarter, you really need to dig into it and understand the complexion of the deals that are signed in any one particular quarter, whether heavily weighted towards raw space or space that's been retrofitted renewal deals versus new deals. But on balance, what we see, there's TIs for raw space, long-term deals, generally in that [110 to 130] range. That's been consistent for the past 6 to 9 months and free rent's anywhere from 12 to 14 months, typically for new deals, inclusive of construction time. And then, obviously, depending on whether it's a renewal deal or shorter-term duration, then those concessions can be dramatically less than raw space.

Yes. Caitlin, I just want to add to that. I see a lot of commentary about TIs and what the brokers are saying about TIs. I would caution it a couple of ways. One, brokers talking up the book for their client tenants saying TIs are going up and up, I think you have to be very discerning when you look at that data versus what we disclose on a quarterly basis. Matt can take you through the actual TI disclosures for the quarter. But on an over 0.5 million square feet of leasing, our TIs were, I think, relatively efficient and, as I said in my commentary, at or marginally above pre-COVID levels for both new and renewal deals.

And we don't buy up rents. So you have to -- TIs have to be talked about in connection with the rents. Our rents, which I also said in the commentary, are marginally flat with previous escalated rents. Those rents could be higher if we bought the rents up with more TI. And that's a strategy that some of our competition will do. It's not good or bad. It's just not what we do. We meet the market on rents and we try and keep the TIs as efficient as possible. And you have to look at the 2 in tandem. So for the commentary out there to be on these vastly escalating TIs, I think you have to compare it to what we actually have done for the quarter and the year.

Matt, can you sort of review again what those numbers are?

Yes. So we reported last night that for the second quarter, this is all excluding the One Vanderbilt leasing since the numbers are dramatically different at One Vanderbilt, on the rest of the portfolio, TIs were $17 a foot, and that compared to a significantly higher number last quarter. But to Steve's point, never look at quarter-to-quarter because it depends on the buildings and the spaces and also the blend between new and renewal. We had a significant portion of our leasing this quarter, renewal leasing, and the TI there was almost 0. On one lease, it was 0, 100,000-foot lease. On the new leases, it's $59 a foot. So it's a blend every quarter. For the year, our TIs on the comparable space is $40 a foot. And that is pretty close to the historical average, maybe marginally higher, and all dependent on the blend between new and renewal and what buildings were leasing it.

Got it. Okay. And then maybe just a question on One Vanderbilt. You guys have clearly made a lot of progress there on leasing up. So just wondering if you could give some comments on the rents there and how the rents and concessions are trending relative to your underwriting and versus recent quarters.

Well, the trending is, basically, we're almost stabilized. We're at about 90% leased. We have a couple of leases in pipeline that we hope to get done in the next 1 to 3 weeks or so to bring us over 90%. And at that point, obviously, we're going to work hard to get to full occupancy. But we'll be very selective about how we finish off essentially the top of the building, those 2 or 3 or 4 floors at the top, which are higher-rent floors and very special floors. And we're so far ahead in terms of velocity. That may be a '22 event, we'll see. I mean hopefully sooner but, certainly, we haven't planned for sooner. And the NOI and the rental levels are right on top of underwriting, maybe certainly slightly ahead on velocity, probably right on top on economics. We've gone through every December what those underlying assumptions are, what those NOI goalposts are. We're trending towards the high end of those goalposts with an expected NOI at stabilization, I think, of close to $250 million, I think, is the -- or is that $220 million?

Yes. Between $200 million and $250 million.

Between $200 million and $250 million, just depending on which year you pick, but that's in the next 2 years or so. So the valuation of that stream of flows supported a $5 billion-plus appraisal and a $3 billion financing execution. And it closes out the chapter pretty much on what was just a transformational project for the company.

Our next question comes from the line of Alex Goldfarb from Piper Sandler.

So 2 questions. Steve, maybe I'll start with you. With everything that's gone on, we're reading articles about Delta variant, companies like Apple delaying returning to office. You guys obviously are pretty active on the leasing front, but the gap of the lease rate versus occupancy has widened. In your view, in totality, when do you think the market will stop the negative absorption? Do you think that's at the end of this year? Do you think that's '22? Or do you think it's going to take longer than that?

Boy, I mean that's so speculative, Alex, I don't think I'm going to venture a guess as to, like, exactly when we turn. I will say this. I think the trend line -- I think the general consensus from our position and supported by the brokerage community is that the first quarter of this year, the market hit its bottom. And the trend line is that with increasing velocity and a strong economy and an expectation of tenants and employees reoccupying the spaces after Labor Day, that it's sort of all green lights at this point as far as the market repairing itself. How long that process takes, I'm not -- that's a crystal ball I don't have. But from our position, as we sit with a portfolio that's well leased and well positioned in the marketplace, I think that we'll outperform the market in total. And certainly, our experience in One Vanderbilt and what we're seeing with the rest of the portfolio would support that expectation.

Okay. And then on the asset sale front, can you guys just give an update on the Kenneth Cole site? I think you guys had potentially looked at that maybe for a life science conversion, whether you guys will do better to sell it. We had heard from just conversations that perhaps the site would be -- could be conceived as a last-mile warehouse site. So can you give just sort of your sense on that? Because it seems like that could be a potential source of some meaningful dollars.

Well, it is in the life sciences corridor for the city, and we're in the process of applying for a ULURP on the site, which would be a significant increase to the potential square footage of that asset. And at the same time, we had a sale process that was ongoing and continues, and we're evaluating offers for the asset through that sale process. So it's a small asset for us but one that is getting a lot of focus just because it's in an area of the city that's very hot right now. And we're working on a couple of different options to try to maximize value there.

And then, Andrew, do you think that's a second half resolution or that spills into next year?

Well, the ULURP would be an 18-month process. So I'm not sure if it will be a resolution in the second half, a sale or joint venture or if we decide to hold it and take it down the ULURP path and be a longer-term redevelopment asset.

Our next question comes from the line of Michael Lewis from Truist Securities.

My first question, I guess following up on something that Alex asked about, as I talked to investors today, I heard a lot about Apple pushing back their return to office and a lot about the Delta variant. Maybe help us set the goalposts. I heard this concern that post Labor Day, maybe it becomes a bus that everybody starts pushing back. I mean maybe help us -- what's the expectation for physical occupancy post Labor Day where you would say things are trending in the right direction versus what that number might be that could cause some concern, kind of an expectation post Labor Day, what the office physical occupancy would look like?

Look, I don't think we're in a position -- and I think that's what Steve said to Alex as well -- we survey our tenants. We've also seen larger surveys. Like, there was a Goldman research survey that surveyed a much broader swath of tenants. And I think we can only speak to what the current expectations are. But I don't know that we can modify those expectations, say whether Delta variant may or may not pretend in the fall. The consensus in the reports, which is echoed by our tenant base, is very decisive where 80% of workers expect to be essentially back to a full workweek by no later than early '22, starting in earnest after Labor Day. And that's kind of what we've been saying for 6 months now.

The workweek was never 5 days a week. The workweek was kind of 4, 4.25 days a week, 4.5 maybe, and that may shrink to an in-office workweek to like 4-0 or 4-1. There's no narrative within our portfolio where we speak to people going to 5, 4, 3 days a week at home. It really -- and this is what we said on the last call -- is more in the nature of might there be floating work-from-home days and flexibility built into a schedule, but it doesn't reduce desks and it doesn't, more importantly, reduce the recognition by the business leaders you see, notwithstanding Apple may want to push back their return by a month, but if they push it back by month, they push it back by a month.

The commentary you're hearing from us is commentary you should think about over a period of years to come, not September versus October, because that really has no bearing on our performance or portfolio. We'll be prepared for a return for workers more robust than we have today right after Labor Day because that's what our tenants are telling us. Whether the Delta variant is going to cause that to be delayed by a month or so, I don't know. But even if we did know, it really wouldn't change anything we're doing here in our business. And I don't think it would change anything that tenants are doing for their 5- and 10-year long-term planning because that really is evidenced by the ink on the leases, which was 1 million square foot of leases done in the first half, 600,000 pending.

Everybody is fully familiar with the Delta variant. I mean I don't think it's a secret. Everyone knows it's out there, and we're going to take precautions against it. The incidence of COVID in our portfolio as workers have returned is almost, I would say, none to negligible. So I continue to maintain the safest place to be is in healthy offices, which have policies and protocols in place. And where the spread may be taking place, it's not within the SL Green portfolio, that I can tell you. And I don't think it's going to cause people not to return to offices.

New York City is about 60% vaccinated. Hopefully, that number goes up. I think the office population is more highly vaccinated. If you take our office as a barometer of that, it's much higher than 60%. It's higher than 80%. So we're just not in a position to comment on Delta variant, but we are in a position to say that everything we see in here leads us to believe that businesses are awaiting the opportunity to get everybody in and that the plans are to commence in September.

Michael, I would just add, we're signing leases, many leases with companies that are not back in the office yet. So are the people you're talking to saying those people are signing leases and never coming back to the office?

No, I don't think that's the case.

Okay. We're looking at lease velocity.

Yes. So look, the tenants -- I think business leaders have spoken. There's no illusion that Fortune 500 companies are going 5 days a week work-from-home. And for those that do, I think they'll competitively suffer. But that's my thinking.

That all makes sense and actually answers a couple of my questions. Maybe I'll ask -- I think we're about 1 year out from the reset on the ground lease on 625 Madison. I know you've been asked about this from time to time. I don't know if there's any update or indication of what that rent increase would be but also maybe the timing of when we'll know what that will be.

No update and status there. The rent reset is the middle of next year and the rent will be known before then, but there's no update on status there.

I would say we're actively engaged with our team on the process surrounding the rent revaluation. So the process is underway. The team is hard at work on it, and it is about a 1-year process. That's just the way it works.

Our next question comes from the line of Blaine Heck from Wells Fargo.

Properly for Marc or Steve. I wanted to follow up on some of the nuances in the return to office, if possible. Are you guys seeing any major difference in the pace of the increase in utilization or physical occupancy between newer, higher-quality buildings that have better overall office environments versus more commodity buildings that maybe weren't really updated much during the pandemic and may have less of an energetic feel, for lack of a better way of phrasing it.

Yes. I mean there's no doubt that tenants and their employees are gravitating towards better-quality buildings with better, healthier work environments, which is why you've seen in our portfolio, certainly at One Vanderbilt where we're starting to see the tenants onboard as they finish the construction but throughout the rest of the portfolio where we've put so much effort into upgrading air filtration with MERV 14, 15 and 16 level of filtration such that it produces the healthiest work environment possible and enhanced cleaning and other protocols that we've implemented. As the months have gone by, essentially, we've seen almost a 1% increase in physical occupancy as each week goes by. Last week, we were at 22% occupied throughout the portfolio. And 2, 3 months ago, we were as low as 11%. So there's a wave of tenants that are coming back and their employees are coming back. But clearly, they favor the healthier buildings, and their employees want to see it and feel it.

Great. That's helpful, Steve. And maybe one more quick one for you. I know it's still somewhat early in your process, but can you give us any color on the interest from prospective tenants at One Madison?

I think it's specifically for you.

I thought I heard Steve. I would say that for where we stand in the deal, in the development, which is 3-plus years ahead of completion, relative to that same point in time on One Vanderbilt, the early interest level is far higher.

Large tenants.

Large tenants are the ones that are moving fairly decisively within just a small selective band, I think, of competitive properties that can meet their needs for end of 2023, beginning of 2024 move-in. Obviously, we have 1.4 million square feet to offer. But the beauty of One Madison is we've got sort of a building within a building. We've got 93,000 square foot podium floors that are relatively more affordably priced. And then we've got state-of-the-art, even more efficient, tower floors at 35,000 feet that appeal towards a different segment of the market. So we're seeing activity on both right now. We're seeing activity, I would say, and a volume ahead of what we would have expected from large tenants over 3 years out from completion. I would say that some of the interest is fairly serious interest in terms of people taking hard looks and even some paper being passed back and forth.

So with that said, we have no anticipation of signing a lease in '21. It was not in our guidance. We really -- I think on the numbers we had put out there in December -- had talked about second half of '22. So I would say that where we sit today, I still feel very good about that guidance. We'll obviously try and exceed it. And most importantly, based on the early feedback, I think we have the right product. It's the right product in the right area with the right amenity mix that I believe strongly is going to be leased and is going to be leased consistent with our projections. So the early feedback is good. And I'd say we're marginally ahead of where we expect to be. But I wouldn't think that's going to translate into anything announceable in '21, nor do we expect it to.

Our next question comes from the line of Manny Korchman from Citi.

I don't know if this one's for maybe Marc. But on the sale of 220 East 42nd, did anything change in the market that made you want to JV that rather than sell it outright as you have planned to a few months ago?

Andrew, why don't you -- I mean that was entirely -- I was resolved to own it long term. So Andrew, why don't you, sort of the evolution of how we got to where we got to, which was, again, an above expected execution.

I think we were able to achieve a price that was equivalent to the pre-COVID price if you adjust for the deposit that we retain on the sale. And we're pretty optimistic about the prospects for the building because it has a great base of very long-term lease space and some low rent rolling space that I would say our view for that, the prospects for that space, has gotten more positive over the last couple of years. So it was a price we were willing to sell. We're quite happy to hold 50% of the building. We got great financing done last April, May on the asset. And we just decided there was upside in the rent roll that we wanted to continue mining.

I think it's another great data point about the global appetite for well-positioned Midtown real estate. It's a sizable deal. I think it's reflective of this disconnect between private market that really is looking for yield, looking for high credit yield, which obviously the news building affords. It's, as Andrew said, very well financed. And in this market, there seems to be no shortage of capital that wants to deploy into deals like that. So good data point for the market, good data point for our portfolio. And I wouldn't take it in isolation. I would combine that with the success we achieved, the $1,200 a foot on 635, 641 6th, and the deal we did at the end of last year at 410 Tenth, which was nearly $1 billion for a newly completed asset and a plethora of other deals that we've started and finished in a post-COVID world.

Thanks for the additional color, Marc. Just to dig into your point on capital out there for a second. Do you think that there's as big an appetite for taking it out whether it be a larger single asset or a larger portfolio of assets? Or do you really think that the capital sources today are focused on sort of more salable single-asset deals that don't take a larger commitment of capital?

Well, just to put some meat on the bones, larger, smaller, I think the largest investments for single assets, maybe small portfolios, is in that check range of $500 million, I think, is the sweet spot for large deals. I think if it approaches $1 billion, you start to thin out very rapidly as to who can write that check. And it's not commentary, I don't think, on the attractiveness of the opportunity or maybe even the desire, it's just that $1 billion-plus checks are rarer to come by. And anything between $500 million and $1 billion will normally take care of even the largest of New York City assets on an outright purchase or JV. And to aggregate up buildings to make a portfolio deal, you can do it. And for people who can write that check, I think it's enormous opportunity. There's just less people and less groups that can handle it at those levels.

Our next question comes from the line of Frank Lee from BMO.

First question is for Steve. Can you provide any additional color on the 600,000 leasing pipeline? What's the breakdown between new versus renewal, what type of tenants are in the pipeline and if you are able to provide the average lease term?

So we have 355,000 square feet of either leases in execution or in negotiation and another 264,000 square feet of term sheets, which we think have a high degree of probability of conversion over to a lease. And of the leases that are out, there's roughly 300,000 square feet of new tenants and about 35,000 square feet of renewal tenants. And then on the term sheets, it's roughly 200,000 square feet of new and 68,000 square feet of renewal tenants.

And then as far as the complexion of the tenants with the leases that are either out or out for signature, 39% of the square footage is our legal tenants, law firms; 29% are financial service tenants; and 17% are tech tenants which, by and large, mirrors what we've seen in leasing velocity year-to-date. A little flip-flop on legal versus financial services whereas financial services has clearly led the market to date. But in our pipeline, we've got 1 larger law firm deal that skews that data a little bit. But just to broaden the answer a little bit, I'd say where we're seeing most activity in the marketplace is financial services throughout the portfolio. We have a disproportionate number of leases, maybe not total square footage, but disproportionate number of leases that are out with financial services tenants.

Okay. So it sounds like the majority of the leasing pipeline is coming from new leases. Do you have a sense of what's driving this? Are these tenants looking to upgrade space or just simply looking to relocate?

Yes. I think across the market, you've seen a pivot by tenants that have sort of moved away from the short-term renewals, not to say that there aren't short-term renewals, but there's a lot more activity with tenants that are making long-term new lease commitments as they get back to business as usual, looking to create new work environments, restack, change the densification of how they operate their companies. And tenants are going more on the offensive where they're not just hibernating in place scared of the world but now that they're getting past COVID, they're getting back to business as usual. And that philosophy is picking up, and that's why we're seeing more relocations.

Our next question comes from the line of Steve Sakwa from Evercore ISI.

Marc, I was just wondering if you could comment, I know leasing spreads bounce around quarter-to-quarter and same-store NOI is choppy and can have some unusual comparisons. But your leasing spreads year-to-date are only down maybe 1% or 2%. I know your expectation was down 5% to 10% at the Investor Day. Same-store NOI growth is a little weaker than you had projected. So do you just have any comments about the back half on either of those trends and anything that may be playing out as expected or better than you thought?

Well, I mean, again, we don't -- I look at everything over the course of the year. I mean we budget based on the course of the year. We do our reforecast, which we just finished up, based on the balance of the year. And on that basis, we feel like most of our goals and objectives, we are either on track or maybe hope to exceed. I mean there's 18 of them. In general, there are obviously going to be ones that we stretch, we may or may not hit or we miss by a little. But I'd say, by and large, we're on track or ahead. Whether we're a couple of points above or below in July, we have our numbers run out through the end of the year. I think mark-to-market, we are pretty much on track with that or maybe slightly ahead of our projections as with velocity. Matt can address the same-store.

Yes. Same-store, like other metrics, we are, on a full year basis, on our expectations to maybe slightly ahead. You got to remember, the first half of this year is comping to mostly a pre-COVID comp, the first 6 months of last year, whereas the last 6 months will comp to post COVID, the last 6 months of last year. So the comps will be better. And that will trend thus, what looks to be, off from our expectations in the first half of the year. That will put us back on our expectations for the back half of the year.

The other thing I would say and I alluded to earlier, you can't really just look at the rent because you got to take that capital into play. I think we're probably ahead on net effective relative to budget because our capital in Q2 was down. So as we sit here talking about, "Well, is TI up 30%, 20%, 10%," our TIs were down in the second quarter. Now they may be up again in the third and fourth. And we feel like, for the full year, we're on or ahead of schedule relative to what our TI capital budget was, meaning within our TI capital budget. A little hard to do quarter-to-quarter, but we certainly are not experiencing the trauma on concessions that I read about in all the tenant broker reports. And I just think you have to take a little bit of a grain of salt.

Okay. Second question, you alluded to bringing more assets to market in the second half of the year. Can you just maybe help frame out sort of the potential size or bucket of asset sales? And then the corollary to that is, obviously, share buybacks, I think, were much stronger in Q2 than, certainly, we thought. And we thought it'd be a little more back-end loaded. But how do we think about asset sales back half of the year and share buybacks back half of the year?

Well, I mean I would say we're reviewing our business plan based on the success that we've had with the assets we've rolled out to date and the fact that the appetite out there is voracious for New York City assets on a relatively quick closing basis. We're reexamining the art of the possible for the second half, and we definitely will be back active in the capital markets. Just can't mention exactly how large at this time. Share buybacks, Matt can speak to.

Yes. And consistent with what you've seen us do in the first half of the year, the bias is to use proceeds from asset sales for share repurchases. We only do share buybacks with the proceeds from asset sales, but we have taken the opportunity to pay down debt to keep the leverage levels in line with some of the asset sales, too. So to Andrew's point on dimensioning it, depending on what the dimension is and what that does to the balance sheet, again, our bias is to buy back stock with the proceeds unless we need to pay down debt to manage that leverage level.

Our next question comes from the line of Jamie Feldman for Bank of America.

Steve, I was hoping to get a little bit more granular on the leasing pipeline or at least kind of the segments of demand. I mean I think everything we've seen is that the most active tenants in the market -- and certainly, you guys have had success at One Vanderbilt -- have been that kind of higher-end, boutique-type financial services and law firms. As people are thinking about getting back to the office, how should we think about that next group, kind of maybe larger tenants but not quite as high end? What are they looking for? Is it still a focus around Grand Central? Do you think that they're going to look at other parts of the market? I'm just curious, like, kind of what stage 2 is going to look like in terms of New York leasing picking up after the pandemic?

Well, I think maybe a couple of other sound bites to round off the color commentary on leasing other than the very specific percentages I gave on my last answer, I think we're seeing certainly more focus on transit-centric located buildings, certainly more focused on buildings that are amenitized and a focus on buildings that have a healthier workplace environment. The good news in all of that is, by comparison to the first half of the year, we're starting to see more tours proposals and leases and negotiations on the kind of smaller tenants in the market. What we saw in the first half of the year were a lot of activity on the premier buildings, the Class A product. But now we're starting to see life for the smaller guys and the more commodity buildings.

So in our portfolio, if you use Graybar as a good example of that, we've got a lot more leasing activity in that building than we have in the first half of the year, which I think one that's in prior market disruptions, it was always the small guys that stayed busy. The big guys pulled out of the market. This is the first time in my career where I remember that the big guys were the ones driving the market and the smaller guys were on the sidelines. But I think as we're getting past COVID, those smaller commodity guys are now starting to awaken and come back into the market. And we're certainly seeing it in our Grand Central portfolio and in some of the more commodity-type product, like Graybar or 711 Third Avenue.

Okay. And then I mean now that we know who won the primary for mayor, any thoughts on what Eric Adams would mean for New York real estate, some of the concerns around crime, maybe operating costs for landlords? Any early read?

Well, there's still a general election to go in November. So Eric looks very well positioned to become next mayor. But I think when you speak to him, he still has work to do before that's mission accomplished. And I think that in a more broad context, looking at increased voter turnout, there was like an extra 150,000 voters than usual in a city that doesn't have high voter turnout to begin with, I think, demonstrated the positive results of activism within the resident and business community to get people to get out to vote, to make sure that all voices were heard and not just a segment of the voice is heard. And the top 2 leading candidates were both considered moderate candidates, candidates who believed in safety and affordable housing and working with businesses to create an environment that will be favorable for the next 4 years. And I think that was a major and positive step forward. And I think Eric is going to do great job if and when he becomes mayor.

We've seen him in the past work through difficult land use issues and other issues in his borough in Brooklyn, and we have respect for what he brings to the table in a total package of being able to work with the policing and security community, the business community, the minority community, the homeless and people who are in the affordable rent segment of the market. And we're looking forward to continuing to have good relations with city hall and do our part. More than anything else, we want to do our part to help improve transportation, infrastructure, the built environment, contribute towards affordable housing like we did with Sky and 185 Broadway, and we'll do everything possible to support him and his administration just like we have with Mayor de Blasio and his administration.

Our next question comes from the line of Craig Mailman from KeyBanc Capital Markets.

I know lease terms have been kind of elongating from the contraction you saw earlier in the pandemic. But are any tenants looking for more flexibility in terms of early outs in some of the longer leases they're taking? Is that something that's taking hold or not a conversation?

Whenever you've got a market where the tenants feel that they've got more leverage than they had previously, then one of the things they go for as part of their overall negotiations is greater flexibility. I don't think that's driven by COVID, post-COVID state of the economy, a different perspective on the real estate market, it's just that tenants come to the table asking for a lot of different components on their transactions. So yes, we're seeing requests for more flexibility, whether it's to shed space midterm or cancel early. But having said that, the number of times that we actually acquiesce to it and give that kind of flexibility is still very, very rare. It's not a foregone conclusion that just because you asked for it, you're going to get it.

Okay. That's helpful. And then just on the One Vanderbilt financing, after you guys repaid the $1.750 billion that you had out, can you just talk about the excess proceeds, how much of that needs to be kind of retained within the JV for anything laid out in the CMBS docks and how much, if any, is kind of being returned to partners as excess proceeds or return of capital?

Sure. It's Matt. So at closing, we had about $1.55 billion out on the construction financing. We repaid that. And then after reserves -- first, costs, and then predominantly reserves for executed leasing TIs, free rent, that type of thing, $650 million was repatriated back to SL Green which then went to all pay down debt.

Our next question comes from the line of Anthony Paolone from JPMorgan.

So I guess for maybe Marc or Andrew, with the valuation you got on OVA, where do you think that puts land values? And what does that do for your appetite to pursue other potential large-scale projects or even teardowns for that matter?

Well, there are some other sites trading around Grand Central or in the market at least. And I would say that's indicating strong land values in the Grand Central area. Just specific to Grand Central, we're seeing -- I think the biggest impact to us is really One Madison where we're very confident with the decision we made with that asset and think we have a chance to replicate or exceed the success we've had on One Vanderbilt with One Madison. So that's where it sort of impacts us the most, I think, more so than taking on another large-scale development in this immediate area because we sort of have one ongoing at One Madison.

Okay. And then just my second one is maybe for Matt. Can you give us any guideposts or any additional color as we think about FFO from 2Q to 3Q with, I think, the Latham & Watkins? I don't know if they're moving out or not or if they're holding over and just how to think about that as we roll the numbers.

Sure. Yes. Latham & Watkins left in June. End of June was the expiration of their lease. So they're out. That asset will move into a redevelopment phase now for the balance of the year. FFO is somewhat a function not just of NOI but of the other things that we have in the business plan. So depending on the timing of things, the third quarter could be equal to or slightly below the second quarter, and then fourth quarter pops up, or the inverse of that. We have some things in the pipe that are timing dependent. And whether or not they happen in third or fourth, we're indifferent to because, as we said earlier, we're giving annual guidance. We don't look at stuff on a quarterly basis. It's always within our annual guidance, and we are squarely within our range as we sit now.

Just to add to that, Latham & Watkins, when we took control of the building, we knew that they had already signed the lease to move out of the building. So it was no surprise to us. So when we bought the building, we bought it with the intention to do a redevelopment plan. And that plan has now been fully designed and is in the early stages of beginning to execute.

Our next question comes from the line of Vikram Malhotra from Morgan Stanley.

Matt, maybe just sticking with you not necessarily the FFO but from One Vanderbilt. Can you just clarify or give us the sort of GAAP contribution you've baked in for each quarter, the third and fourth quarter? And then what's your expectation for the Summit in the fourth quarter?

So in sticking with the commentary so far, I won't give quarterly guidance, but I will stick with my annual number of low-30s GAAP NOI contribution from One Vanderbilt for 2021. Our Summit numbers, we're open on October 21. We have modeled in very conservative ramp. So the contribution for the back half of the year is very light.

Okay. That's helpful. And then just in the street retail portfolio, can you just clarify or give us more color on 85 Fifth Avenue? I think it showed 100% occupied the prior quarter but not this quarter. Can you just clarify what went on there?

Did you say 100% occupied or 100% vacant?

No, it was vacant this quarter. So last quarter, it was pretty occupied.

We signed a lease yesterday for the space, all of it, a long-term lease. So next quarter, it will reflect occupied again. Anthropologie's lease expired, and they left and we signed the lease.

Vikram, you've taken wind out of the sails for third quarter, forcing us to go. We just signed a full building lease on that deal yesterday. You got to leave something on the bones for Q3, my friend.

So the street retail is fully leased back up.

With leased, again, no worries.

Okay. Any comments or any color on the economics relative to where it was prior?

You're using your third question of 2, we'll talk about it more when we reveal the deal.

Okay. Sounds good. So I'd get that color off-line. Just one color clarification. You talked a lot about capital, obviously, buybacks in terms of capital deployment, all the developments that you're doing. But just in tying with your commentary about New York coming back near term, long term, one of your peers formed a big JV to focus on their markets but also look at more value-add type development or type acquisitions. I'm just wondering your appetite from here on, on focusing on something like that, value-add buildings in terms of acquisitions, but also just given the debt markets growing the DPE book from here.

Well, we are very actively pursuing desires of not just value add, full-on ground-up development opportunities. We have value-add opportunities we've acted on recently like 885 Third, which is, I think, a great example of that and now well underway. 750 Third is a redevelop within the portfolio. We have other deals like that in pipeline. We closed a DPE deal in Q2. We have other pipeline for Q3 we expect to close and be able to discuss on the next call. So I mean we're very much in business. We've got like 7 active development deals and redevelopment deals going on right now. We have a fairly active pipeline of opportunity. But disproportionately, just given the extreme divergence of value and stock price, we've decided to locate most free cash flow towards the stock buyback, and we'll continue to do so.

Our next question comes from the line of Nick Yulico from Scotiabank.

Page 38 on the lease expirations, I just had a question there. If you look last quarter, it was talking about there being 450,000 square feet of expirations in the second quarter. You still listed over 400,000 in this quarter. And so I'm just trying to understand what -- it looks like you have now additional month-to-month tenants in the portfolio, and maybe you could provide some clarity on that and how much of this is office to retail.

Wow, you're in the weeds on that one, Nick. So I will say there's holdover tenants from quarter-to-quarter, so that will probably contribute to it. As to the complexion of it, I don't know that one off the top of my head, so I can research it further and get back to you off-line.

Okay. I appreciate that. I guess my other question is just, as we think about the leasing activity that's in the pipeline that Steve was talking about earlier, and then we relate that back to Page 29 in the sup where you do give the occupied number for same-store versus the leased number, that spread is converged closer, meaning that you tend to have a higher lease number than an occupied number. You still do, but it's not as big of a spread. I mean I'm just trying to think about that leasing that's in the pipeline, what that means in terms of your lease number in the same-store portfolio. Is that going to be additive to that?

I think we addressed that earlier in saying we are still comfortable with the goals and objectives we put out there, including occupancy and would hope to exceed our goal, which was 93% by the end of the year.

Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Marc Holliday for closing remarks.

Okay. Well, I appreciate the opportunity for those to on to discuss all that we accomplished in Q2. It's a great 3 months. We'll be working hard in these next 3 and look forward to speaking to you again.

This concludes today's conference call. Thanks for participating. You may now disconnect.