Sl Green Realty Corp Q2 FY2020 Earnings Call

Thank you, everybody, for joining us, and welcome to SL Green Realty Corp's Second Quarter 2020 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. Actual results may differ from the forward-looking statements that management may make today. Additional information regarding the risk, uncertainty and other factors that could cause such differences appear in the MD&A section 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 by selecting the press release regarding the company's second quarter 2020 earnings and in our supplemental information filed with our current report on Form 8-K relating to our second quarter 2020 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 two per person. Thank you. I will now turn the call over to Marc Holliday. Please go ahead, Marc.

Thank you. And thank you to everyone for joining us today. I hope you are all healthy and safe in these unprecedented times. Here in New York City, I'm pleased to report that we have come a long way since the start of the pause in New York and are now leading the nation in terms of getting COVID-19 under control from a health perspective. New York City has started to wake up. Residents are engaging in outdoor dining. New Yorkers have begun going back to places of work. Construction has resumed. And retail stores have reopened. There are a number of positive developments happening city-wide right now, including the open restaurants initiative, outdoor dining and the planned reopening of public schools come this fall. With that said, office space utilization is still quite low during these summer months, and most of our tenants are telling us that they are planning for a 50% plus or minus return to the office after Labor Day. While we still have a long way to go with this pandemic, the trends here are very positive. It has been that way for weeks now with various parts of life starting to return to normal. That said, we now know that the economic impacts of COVID will not disappear overnight or as quickly as initially hoped. Very few industries have been able to avoid the impact of this pandemic, not just in New York, but nationally. It has affected all of us from a personal, health, and family perspective and certainly from an economic and jobs perspective. This is something bigger than any industry or any company and we're certainly not in a position to make predictions on how long it will take for economic activity to begin returning to pre-pandemic levels. Whatever it is, with the incredible level of resources devoted to finding a solution to this virus, we're hopeful this downturn will be relatively short in duration. What we do know is that this nation's leading urban center and avatar of an urban lifestyle that remains incredibly popular and appealing, New York will rise up and make these unprecedented circumstances show resiliency as it had in the past. As a global financial capital and as an incredibly diversified center for the tech industry, healthcare and higher education, we will rise back to the top when this pandemic has been arrested. For SL Green, our 24/7 focus since March has been excelling at the things we can control or influence in this time of uncertainty. We are working tirelessly and completely to ensure that this company is in the best position possible to deal with the immediate and near-term impacts that COVID presents. And looking forward, ensuring that this company is in a position to excel and outperform once the Manhattan workforce is firmly back in the office and economic recovery begins in earnest. Our job is to make sure that the company gets from here to there in a way that maintains SL Green's leadership position as the largest, best and most prolific operator of Manhattan Commercial Office. In a moment, where everyone will be inevitably impacted, we are confident of our position and our actions relative to our competitors. Fortunately, we built this company to withstand moments of great uncertainty. You could say that we spent the past 21 years planning for the unexpected. From the global financial crisis in 1990 to the aftermath of 9/11, from the housing-led meltdown in 2007, 2008 to the current pandemic, we never know where or when the challenge will come. So we fortified the company to guard against all of it. Let me describe how we fortified the company to withstand this particular moment. It starts with our rent roll, which is an intentionally diversified group of approximately 800 predominantly credit tenants on largely long-term leases. It is no coincidence that through this pandemic to date, our office tenants have paid rent to the tune of 96% of gross billings—an incredible statistic given what's happening. The months ahead will not be easy, but when you compare that to other sectors like multifamily and hotels where the daily, monthly and annual turnover of contracts exposed those segments to much more downturn, our average nine-year lease term provides significant long-term protection in contrast. Our focus needs to be on getting through the next six to 18 months because we know that we will come out of this in a position of relative strength once we reach the other side. We are all very well situated for this coming period, however long it lasts. We had cash liquidity of over a billion dollars at quarter end. We have a manageable debt maturity schedule with less than 8% debt maturity in the next 18 months. We have modest lease expirations of under 10% for the balance of this year and throughout all of 2021. Our asset base of premier properties have all been substantially improved under our ownership such that the mandatory capital needs over the next 18 months are really quite modest. As I mentioned, our rent collection is at the top of the industry. That's an enviable position to be in on a relative basis for those things that we can engineer and control leading up to this moment. But it’s not all fortification. We are also incredibly active in the market, doing more than our peers, and I think you've seen that throughout the second quarter. Investment sales, JVs, financings, new lease signings, and development projects all moving ahead during this pandemic. I want to share with you just some examples of this activity from this past quarter: 280,000 square feet of leases signed during the quarter; that's Manhattan office leases. 510 million of secured financing—non-recourse financing of the news building. One of the largest real estate JVs in the world closed with NPS and Hines at One Madison Avenue. Sale of 609 Fifth and an agreement to sell 400 East 58th Street at prices that still demonstrate strong demand still exists for high quality and relatively high yielding real estate in New York City as index rates approached zero. Our consummation of five individual investment loan sales near pre-pandemic levels. Continuing initiatives throughout the pandemic to lead in the area of sustainability with a recent upgrade just received from MSCI from BB to BBB. Partnering with chef Daniel Boulud to launch Food First, one of our company's proudest moments, actually, in the past three months. A new nonprofit organization that by the end of this week will have delivered 250,000 meals to first responders and families in need. We now have 15 restaurant partners, and we've reactivated kitchens feeding New Yorkers and continuing to give back to this community basically, our sole community that we do business in. Sorry for all those examples, but we've been busy. And we did it all while re-engineering our buildings to meet the highest and best safety practices for virus protection in order to give our tenants confidence to return to the office, whether that's already happened or will happen in the future. A key to getting it all done is that on any given day, we have close to 100% of our company workforce right here on site at our 420 Lexington Avenue Corporate Headquarters and in our satellite building offices. We are leading by example, to show that work from office can be done safely and without major risk when the right precautions are taken. And that there continues to be no more productive way to work than in a collaborative, creative and efficient office setting. I don't underestimate the challenges that lay before us. Trust me. The next few quarters will be difficult and there will be hurdles to clear. But we are built for these moments. We believe in New York. And we expect to be stronger and better positioned compared to our competitors when this crisis too shall pass. I'd like to turn it over to Matt, who can dive into some more of the details from the second quarter.

Thanks, Marc. On the last call, I highlighted our $1 billion plan strategy to accumulate a billion dollars of cash by the end of the second quarter as a measure of uncertainty ahead. In early June, we announced that we had completed that plan more than 30 days ahead of schedule, and exceeded the $1 billion target by almost $200 million at that time, which allowed us to commence the share buyback program again. Since then, over the balance of the second quarter, we continued to focus on cash, overall liquidity, leverage and share buybacks, which resulted in us ending the quarter with a cash balance of just over $1 billion; it’s a $1.15 billion if you include our share of cash at our joint ventures, while executing over $143 million of share buybacks and op unit redemptions, and paying down debt. We reduced our line of credit balance by $500 million from its peak balance of $1.45 billion and completely repaid our $147 million debt and preferred equity repurchase facility. The activities that generated this cash run the gamut and evidence that depth of capital still exists in the New York market. Real estate sales generated nearly $200 million, including the sale of 609 Fifth Avenue, which wasn't even a part of the plan we laid out in April and the sale of a JV interest in One Madison Avenue. We expect to receive another $20 million in the third quarter from the pending sale of 400 East 58 Street. In the debt and preferred equity portfolio, we generated almost $500 million of cash through the strategic sales of five positions, totaling $259 million and repayments totaling $229 million. Coupled with the conversion of one debt and preferred equity position at JV equity in the quarter, our portfolio balance stood at just $1.25 billion as of June 30th. More on that portfolio to come. And on the financing front, we closed on an enormously important $510 million mortgage financing for the company and for the broader market at 220 East 42nd Street. That was provided by a syndicate of world-class financial institutions. On top of that, we have the refinancing of our project at 410 10th Avenue still in process, which is expected to repatriate equity we have funded into the project, as well as cover future equity needs. As to the share repurchases, we remain committed to a disciplined execution of our program, and after tailing it back in March pending execution of the billion-dollar plan, we commenced buybacks again in late May, taking advantage of extraordinarily low share prices as our liquidity plan was executed in an expedited manner. Since then, we've completed $163 million of buybacks including $20 million in early July, bringing total executions to $401 million year to date, and now over $2.6 billion through our $3 billion authorization. At today's share price, which is a 7.3 times multiple, 13.8% FFO yield and over 7% dividend yield, virtually all sources of incremental liquidity are accretive into buybacks. So with a careful eye on the balance sheet, meaning we're not using leverage to buy the stock, and a focus on maintaining a substantial amount of protective liquidity, we will continue to evaluate further opportunities to sell assets and generate incremental liquidity to continue share repurchases in the second half of this year, and beyond. Turning to earnings guidance. In April, we took what many considered a very bold step in this environment, and provided revised FFO and FAD guidance. Most other office REITs pulled their guidance and most of them are likely to withhold guidance again this quarter. But we feel we owe it to all of our constituents to share our views. We have a view; let's not keep it a secret. Three unique months later, after a ton of activity and more projection models than I care to count and reviews of those models no less than two to three times a week. There's been some movement in the line items, but we remain comfortable with the guidance we provided and are maintaining our FFO guidance range of 660 to 710 a share and FAD of at least $400 million. Highlighting a few items in the real estate portfolio, as Marc highlighted, collections remain solid for the entire second quarter and now into July. With second quarter office collections approaching 96%, retail at 70%, which is now a very small component of our business, and overall collections at 91%. Tenants are definitely paying at a slower pace, but the vast majority are paying and the pace of collections has actually improved every month from April through July. One point of clarification I just want you to remember that our figures are gross collections based on contractual billings, not reflective of any rent relief deals that may have been cut, or the very rare use of security deposits. If we were to report on that basis, as I see many others doing, the numbers would be substantially higher. While collections have been solid, we have historically taken a very conservative view of our receivables. And in this environment, we're being even more conservative. In the second quarter alone, we recorded a total of $14.9 million of bad debt reserves on a combined basis, comprised of $7.6 million of reserve against actual billed receivables, and $7.3 million against straight-line balances, which are essentially future rents. These are the highest such reserves we've ever booked in a single quarter. For comparison purposes in the first quarter, we've recorded total reserves of about $1 million, and in the second quarter of last year, it was only $1.4 million. Our bad debt reserve now covers 45% of tenant unpaid balances. Could this prove to be too conservative, based on historical trends? Possibly. But always better to err on the side of caution at times like this. On a positive side, we've seen a dramatic drop in our projected full-year operating expenses by over $14 million just since we revised guidance back in April. Obviously, reduced occupancy levels over the last several months have contributed to the savings. But Ed Piccinich and his team have also implemented longer-term cost-saving plans, which we will benefit from even after the buildings gain occupants, all while taking into consideration the nominal incremental costs of operating our fully redeveloped portfolio at a Class A standard and a post-COVID world. Collectively, the savings also have the effect of improving our same-store cash NOI expectations for the year versus what I outlined in April. On the debt and preferred equity portfolio, our portfolio is now almost $1 billion smaller than it was just one year ago, and we continue to assume no new originations for the balance of the year. With regard to reserve, during the quarter, we booked an incremental $3.4 million of reserves against one retail loan position, but otherwise felt the conservative view we took in December in March as part of the CECL process continues to be adequate, and on a percentage basis far in excess of our historical loss history. We also recorded $3.4 million of realized losses against DPE positions that were sold in the quarter. Needless to say, the sales have gone very well. Credit to David Schonbraun and his team. And that leads us to considering more of them over the course of the year. In our initial guidance in December, we included more than $160 million of income from the debt preferred equity portfolio. Now with a dramatically reduced size, our income projection is down by over $40 million, including the $5 million fee we recorded in the second quarter and excluding the effective reserves. Just a couple years ago, the $120 million we expect for this year was over $200 million from that portfolio. Yet our FFO per share remains high, even while the contribution from our DPE business has shrunk. This is contrary to what many have long predicted would be the case, thus proving there is incredible value to the debt and preferred equity business in the SL Green platform. We expect to do this business for many years to come, but as a component of the earnings power of this platform, not the driver of it. A couple seconds on other income. In the revised guidance we provided in April, recall that we reduced our generic full-year projection of lease termination income down to $6 million from $8 million for the balance of the year. That assumption didn't last long as we recognized $12.4 million of termination income in the second quarter, following negotiations with two retail tenants to vacate their space early. Given its unpredictability, we have not assumed any further lease termination income in 2020. And finally, on the expense side, we continue to manage G&A very closely, taking further action to reduce G&A during the second quarter, even after reducing it coming into the year, and again in the first quarter, and now see total expenses down by about $10 million or 10% from our 2019 levels. So as I said earlier, some movements in the income and expense line items, and a lower share count than our April guidance as the share repurchase program is active again. But all in all, we're sitting comfortably within our previously provided guidance range. With that operator, we can open it up for questions.

Thank you. [Operator Instructions] And our first question comes from Michael Lewis with SunTrust. Your line is open.

Great. Thank you. I want to ask kind of a broad question about the risk of work from home strategies that's kind of overhanging the stock. There was another article this morning stating that 25 large companies already discussed significant reductions in their office space needs on our 2Q calls. I was just wondering, have you had tenants tell you that they intend to permanently work from home and decrease their space? Or have you seen other signals in your portfolio that maybe there's a tidal wave of this coming?

Well, I'll sort of take that. Steve, you can sort of chime in. But tenants have worked from home before a pandemic. And we expect tenants will work from home and in some cases, hotel, share desks, everything post-pandemic, maybe in increasing amounts. But I think that it's premature to get any real read on to what level that will be until people are firmly back in the office which we're hoping for great strides in that direction between Labor Day and year-end, is when we expect to see the bulk of our tenant base return. The leasing activity that we have in front of us right now that we consummated during the pandemic quarter and have in front of us right now indicates that there's still good demand out there for New York, albeit at lower levels, obviously, than in 2019. At the start of this year, we had projected $1.6 million of lease volume in our office portfolio. At the beginning of this year, I think we're going to revise that down more like to about 20%, to $1,280 million. That would still imply more leases we expect to sign during the second half of the year than we signed during the first half of the year. We expect to do another 600,000, 700,000 square feet or so between July and the end of December of this year. So, we still think that most of the tenants we talked to and what we're hearing is that most are very much looking forward to getting back to work. I think it's very hard to manage from afar. We absolutely have seen productivity and efficiency declines. We hear that from the tenants. But to say with a broad stroke will some of the bigger companies incorporate some amount of work from home going forward, I guess that's to be seen. We have 900 tenants, 800 to 900 tenants in the portfolio. We have hundreds more conversations going on. So sure, in some of those cases, I think people are going to experiment with work from home. But I would put it at a small fraction of the overall demand in this 400 million square foot marketplace. So, Steve, I don't know?

From what we hear. From what I hear is tenants are more about work flexibility, as opposed to -- it's not a choice of either or. It's a choice of giving their employees flexibility to say, okay, you can work from home part of the time, but you're still going to be in the office most of the time. And I think that's more of the flavor of what we're hearing. We're yet to hear any one of our tenants of size say that work from home is the predominant way that they're going to migrate the operation of their business. The number of phone calls that were on as Marc was indicating, whether it's the brokerage community or a tenant community, where there was a novelty to working from home for the first couple of months. And after that, I think there's a lot of frustration where people are like, enough of this already. Let's get back to the office and get back to my desk and so much more effective. I think, as time goes by, that'll be proven out to be even more so.

Great. Thanks. And then, I actually want to ask about the residential portfolio. I realize it's a relatively small piece. But it looks like kind of across the board, you saw some material occupancy decreases. We know people are kind of moving out of the city at least temporarily in a lot of cases. Any thoughts on the residential market? And kind of where you see your portfolio?

I don't think we're a good barometer to answer that question. I would pass on that rather than -- the last thing I want to do is opine on this sector and give information that really isn't targeted. I mean, we have, I think one or two buildings remaining in the portfolio that met -- one building I think is under 100 units and the other is a rent-stabilized building on 57th Street, it was a good building. That's not -- that's all we have in this portfolio right now. And that's not nearly enough to give any kind of public guidance on the questions you asked. I just -- I don't think we're in a position to do it.

Fair enough. Thanks.

Thank you. We have a question from Rick Skidmore with Goldman Sachs. Your line is open.

Yes, sorry about that. I was on mute. Just Marc, you mentioned some of the OpEx declines. And Matt, you mentioned that on the call as well. Can you just talk to what you're seeing on the operating expense side? What are the things that you're doing that are allowing you to bring down the OpEx?

Yes. I mean, Ed is not here with us. But he and his team really took back in April and then again, over the last three months, went through every line item in our operating expenses and cut them back dramatically. Now part of that is driven by occupancy, obviously. The portfolio occupancy got very low at the bottom, and it's coming back. But that allows you -- it shows the scalability, the expenses that allows you to cut security, cleaning, maintenance costs dramatically, R&M. The buildings quite simply just weren't getting used. But in doing so, and looking out over the balance of the year, the pause has been longer, and the ramp back up has been slower. So that allows us to save those types of expenses. But there's also some expenses that -- culinary expenses that we can save on through the balance of the year. And that allows us to see pretty dramatic reductions even beyond what we just said three months ago throughout the balance of the year. And also remember, we are covered in large part on our expense load by the tenant base.

Yes. But building staff and utilities, probably the top two items, I would think that comprise a lot of that savings. And not just operating savings, Richard, but we went back and showed that, because these buildings have been so improved to a high level, we were able to scale back a lot of discretionary capital that would be a little bit more proactive and preemptive, which we will do in the next year or two, but we took it out of 2020, largely, and we saved an incredible amount of money not only on operating expenses, but on discretionary elective capital, which will pay for a later date. And the combination of that was -- you've seen in our earnings results, which were very solid for the quarter, and also in our cash liquidity position, which quickly ramped up to over a billion dollars, about three months ahead of schedule from where we expected it to be -- probably 60 days ahead of schedule from where we expected it to be.

And you mentioned in the prepared comments that some of those savings would be potentially longer-term. Certainly understand how things may have been impacted in the second quarter with people not in the office. But what are some of the things that you think might be longer-term savings that you realized?

About utility— I mean, look, think of all this interest rate savings for us is enormous. Utility rates now have dropped. And we get more and more efficient as we invest more in our sustainability programs. So we're using less energy and reducing the carbon footprint. The capital, as I mentioned, we're getting more efficient with it, and we're seeing the bids come back more competitive. So that—there has been a lot of construction cost escalation since 2015. That was almost unbridled that all of a sudden, in just three months it creeps up whatever it is, 3%, 5%, 7% a year, and then in the span of three months, it might drop 10%, 15%, 20%. So, all these things are offsets to what otherwise are the impacts of a down market. There's substantial savings for a business of our scale. And I think we are scouring every nook and cranny to take advantage of it.

Thank you.

Thank you. And we have a question from Alexander Goldfarb with Piper Sandler. Your line is open.

Hey, good afternoon. Thanks. So just two questions. First, on the DPE book you guys took—would seem to be actually rather modest marks. And I'm just sort of curious. Your positions are performing the cash flow, and there's really buyers for your positions that you're selling. And it sounds like you guys are going to sell even more. So what really drove the marks? Was it just sort of an interest rate like mark-to-market on where the yields are versus where buyers would get yield today? Or I'm just sort of curious what drove the mark, because it doesn't seem from a performance basis that they were taking any dings on cash flows?

Alex, it’s Andrew. I think one was on a position that we sold. And then as Matt said, the other was on a retail position. We're winding down the retail portion of the DPE book as much as possible. But retail is definitely an asset class that's struggling, and we just felt that it was prudent to take some additional reserves there.

Okay. But Andrew, what you're saying, though, is overall in your DPE book. You're not seeing a degradation of any cash flows. They're all current and paying and all that?

Aside from a couple of retail loans, yes.

Yes, I would -- we worked very hard since 2015. We go back and look at all the commentary since then to pair down our own real estate portfolio. And then, I'd say, in the past 18 months our DPE real estate portfolio that was secured by retail. And— but whatever is left as little as it is, I mean, retail, as an asset class is pretty highly impaired. And fortunately for us, I think it's less than 5% of revenues on the own basis. And that which we own is generally well long-term credit. So we feel very good about our retail portfolio. We have very little retail left in the DPE portfolio. I'm going to say it's like a couple of assets, David.

Just three or four assets. Yes. So it's very little. It's a couple percent of the overall.

Which we've marked in one case anyway. So, we feel like we really managed that retail exposure well and come through that well. But to answer your question, I think, Alex, which is why do we take those marks? The marks on retail were credit-driven marks. And that's just the way it is. But the good news is, we don't expect, hopefully no more of those marks, because we don't have much left. And with respect to everything else, which is mostly secured by office. Yes, no, those are—we feel very good about those positions that were made.

Okay. And then Marc, perfect for the second question is, Albany, yesterday, the assembly at any rate passed what seems to be sort of a very pro-tenant unilateral right to exit leases, and leaves the landlords holding the dime, if you will. What is your sense for the potential that the Senate may pass this? And what's your sense that this could really come to fruition which would seem to really upend the commercial rent construct or a lease construct?

Yes. No. I think I know what you're referring to, Alex. And I wouldn't overstate it. I mean, I think it's bad law, and I do not think it'll get passed in the way that it's currently drafted. However, when you look at the impact of what it is. Just to be clear, under current New York law, a landlord has no duty to mitigate damages, but we almost always do. So, what this law says is, hey, landlords, you have a duty to mitigate damages. That's different. We don't—legally we think that's misguided. But also want to point out in almost every case where a tenant leaves and we have a claim against that tenant. The measure of damages is mitigated against whatever we get in terms of replacement rent, and we're always replacing that rent. So that nuance as to whether we have a duty to mitigate or not. We oppose it. But I don't think there'll be any practical effect, because we and maybe others don't, but we always mitigate. The other question which is significant is the burden of proof, and that's just really legal dollars. The burden of proof should absolutely be on a tenant to prove up whether or not we've carried out—whether we've attempted to mitigate. We always do. For a landlord like us, it's irrelevant. I mean, we have records. And as soon as the space comes back, we're leasing it within like sometimes the same day, sometimes even before. So, I think it would be unprovable at least in our case, to show that we didn't try to mitigate. But if there's a duty to mitigate, it should be on the tenant, it should be on the—proof of that should be on the tenant, not the landlord. Those are the two flaws I see in that bill. I think cooler heads will prevail in the Senate and hopefully with our governor to reject or greatly modify that bill, we'll see. But I would say to you that we are in a position that I don't feel will be affected by it. Okay.

Thank you, Marc.

Thanks.

Thank you. Our next question comes from Emmanuel Korchman with Citi. Your line is open.

Hey, guys. Matt or maybe Marc, you keep talking about the billion-dollar sort of cash balance plan and have gotten there more quickly. But what is so special about that billion dollar number that you wouldn't use some of that for buybacks? Or that you only want to use incremental cash to that to do buybacks? What's the actual billion earmarked for?

Well, it's a nice round number, Michael. I mean, it's—we talked about on the last call. We said, point blank, the billion was somewhat arbitrary. It relates to the way we look at it as to a multiple of our dividends that we have to pay in a pinch. If like cash flow was zero, which is a draconian method, so it's probably more of a cushion than we need to maintain. But in a market like this where you feel like you can never have enough, a billion dollars is a very formidable war chest. It's probably, as I said, an overabundance of liquidity for what we need. Because all of our capital needs going forward largely are capitalized, either with equity commitments from third parties or from coming out of loan proceeds which are committed or covered by cash flow from our property. Arguably, I would agree with you, it's a bit arbitrary, and we probably really need less and would be fine with less. But it's just a goal that we and the board developed as something that was an abundance of caution, significant number, and something that was many multiples of our fixed obligations that we felt we wanted to cover for situations that could stretch out years into the future. And that's how we got it.

And I want to go back to your comments on retail. Certainly, it's structurally impaired right now and been an issue in the city. But given the fact that there's so much retail at the base of your buildings and of neighboring buildings and how much culture or flavor, personality is given to New York City. How do you envision that retail being replaced? That New York City remains sort of a special place that people don't just go in and go into the office space, but want to be in the streets, and visitors want to be in the streets and tourists want to be in the streets and bring back that vibrancy to New York City?

This is Steve. I'd like to sense, and I'm sure Marc or Andrew will weigh in. But what's the base of our buildings by and large is service retail. And even with the changing landscape of retail over the past year or three, we've never had a problem leasing up that kind of product. So those are the restaurant spaces, the takeaway food spaces, the drugstores, the banks, that kind of stuff. And I think going forward, you'll see some shift in that where landlords do for at least for a point of time on the food guys, we'll do a little more partnering with them on percentage rent deals. Because you're right, it is an amenity to the building. We view it as an amenity building. We've always approached it as carefully curating the types of uses that are in those spaces. But I think you got to separate that from when Andrew or Marc speak about retail, the high street portfolio which is entirely different.

Yes. I think the assets we're talking about on the DPE book and in the own real estate book are really the high street retail portfolio standalone. And there, we do have some great long-term credit leases to fall back on like Nick and others. And sort of commodity retail at the base of our building, our commentary on retail really is not related to that type of retail. That's not where we got high rents in the past. We didn't see the kind of rent growth in that space as we saw in the high street retail. So we don't expect as much sort of fall-off in that retail as in the high street portfolio.

Thanks guys.

Thank you. Our next question comes from Jamie Feldman with Bank of America. Your line is open.

Great. Thank you. I'd like to get your thoughts on lease terms and where you think we are in terms of net effective rents. Have face rents moved, their concessions moved, their free rent periods moved, how should we think about what's been happening in the last few months?

We've seen more movement. It depends on what you're talking about retail renewal deals or new deals. But let's just start on the renewal deals. By and large, the renewal deals that we've been working on, I would say, for the past two or three months, many of those deals have been kind of net effective type transactions, where concessions were just netted out of the face rent. We've done a lot of those deals, maybe the majority of those deals without the participation of brokers. So there's been a lot of capital savings on those deals. On the new deals, I think we've seen—I think the markets still very unsettled exactly where rents are and where they're headed. But by and large, I think that tenants are looking for more movement on concessions as opposed to face rent. And that's not so surprising. We've said it in prior calls that we've had with people that whenever there's a major market disruption, tenants go on the defensive. And that means they try to shorten their lease terms on renewals, they try to husband their capital, and they're willing to pay the rent, but they want to—the concessions to be beefed up. And that comes on the landlord's pocket. I think that's, we'll see that again in the cycle.

So if you were to boil it all down in terms of how much net effective rents have changed, what would that answer be?

I don't think anybody knows right now, because there's not enough deals out there to really get a good barometer on it. There's some broker reports that say that it's been like, 2%, 2.5% net effective change, but I don't—I wouldn't count on that, because it's too early in the game.

It was all part of our guidance. So remember, back to December, we projected the JV. So the timing of the JV, the manner in which we did hit the size, all consistent with the guidance we had in December. It's actually one of the few elements of our model. I don't think that has changed since last year. It will reduce our capitalized interest over time, because it's based on funded dollars. But that's all consistent with what we had projected back in December.

So what—can you remind me the dollar amount?

I'll happy back to later, I mean, I have a bunch of numbers around me. That's probably one I don't have.

Thank you. Our next question comes from John Kim with BMO Capital Markets. Your line is open.

Thank you. Your rent collection rate has been very high. But as tenants delay the return to work, do you see the collection rate deteriorating? And what leverage can you pull to keep that from happening?

Well, we don't see it deteriorating. I mean, we certainly hope it doesn't. I think the buildings are open and available for occupancy. So there's a lot less discussion even around deferrals or any type of rental accommodations. I think that the levers we've pulled is to be a market leader in terms of opening the buildings and having them be ready for safe occupancy. So, you come into our buildings and there's way finding, your temperature's taken. There's no signage that clearly illustrates the seriousness with which we're taking safety. There's air filtration. There's a lot of measures, we've taken the tenants see, a lot of measures we take in the tenants don't see, but that their facilities people understand from our facilities people. I think we've gotten great feedback from tenants about the steps that we've taken.

On the leasing activity you've done in One Vanderbilt. Can you discuss how rents have changed for that versus comparable space? And is your preference today to hold the rate as much as you can versus occupancy for the remaining space?

Yes. One Vanderbilt, I didn't mention that in the opening remarks. But, I mean, how great is it that next month we expect to be 100% complete with that building? I think we want to take a moment here. After something that started 20 years ago to the date, we'll cut the ribbon which we're planning for in September. Although the TCO should be in hand by August 25. Through everything that's happened over that period of time, the excitement level here even with everything that's going on, it's like palpable to come to work every day and we have the benefit of looking up at this spectacular building design, achievement, contribution to the skyline, everything. It's just been a monumental achievement. And it's something even now which is years after we broke ground this project. Every day, we hear from people, friends, strangers, whomever passersby, what a fantastic job it is. Noteworthy that there's $220 million of improvements to the public realm that are also going to be unveiled in September, if not earlier, which right now it's kind of behind wooden walls, temporary walls. So, you can see, there is such an extraordinary expansion, in addition to Grand Central Station that is weeks away from being conveyed to New York City commuters, straphangers, tourists, everybody, that it really is just something that when the day comes, it'll be quite a moment for the company. The tenant community out there, I don't think any of this is lost on. Because I'd say of all the buildings in the portfolio, the one building that seems to have, I would call it, good to excellent foot traffic at the moment is where we signed I think two or three leases during a pandemic. And we have two, we're negotiating right now. A proposal in for a third and many others that went on pause just before the pandemic, where we're told, after Labor Day, we want to reengage. It really is a testament not just to new construction, because I don't know if all new constructions are experiencing the same thing. It's really a testament to every element of what One Vanderbilt represents—forward-thinking and best-of-class design, sustainability, location, computability and something that we planned for in general terms, but not specific to a pandemic. The building is probably as hygienic, healthy and forward building as exists in New York City with MERV 16 filtration. It’s the only building our portfolio has MERV 16. It might be one of the very few buildings in the city that has MERV 16, frictionless pass through of turnstiles, destination dispatch, you don't have to do elevator call buttons, light and air that reaches like 90% of every floor. It's just every, the amenities which could have been modified to adapt to social distancing. It checks every box, and it's no coincidence that the tenant community still has a great affection for this building. And while the leasing will sort of avoidably be delayed a few months for the month loss to the pandemic. We were so far ahead on leasing that I think we're still ahead on our underwriting projections, but behind probably on the 2020 goals and objectives. I think we would hope to end at 82% for the year was the original projection. I think now we're looking at closer to 72%. Still, as I said, honor ahead of original underwriting, but delayed as it relates to 2020 for I think, as I said, unavoidable and obvious reasons. As it relates to some of the terms, Steve, I don't know if you have commentary on that.

The deals that we closed, it's much like I was saying before. We topped up the concession a little bit with some free rent and work. But there wasn't any material trade on the face rents. And the deals that we've got on the table, similar story, a little bit of a little bit erosion on the face rent, more focus on the concession side than anything else. And I'll just add one other thing to Marc's list of the highlights of the building. I think in the new world, the buildings location being next to public transportation isn't even a greater enhancement, because there's a lot of discussion out in the broker and tech community about being able to be on a one-stop public transit location. So you don't have to take two modes of public transportation to get to your office. So that speaks well for One Vanderbilt and it speaks well for the rest of our portfolio, which is Grand Central Centric.

I'm looking forward to the property tour. But—so you're saying that stabilization period has been extended? Are you saying also it's going to come in at the low end of your yield expectation?

I'm sorry, what was it?

The other way you heard that. We're ahead of underwriting.

I don't even say we're at the midpoint—we're above the midpoint. For sure, we have been and continue to be. I had only talked about timing of the leases, which for a period of about three months, everything sort of went on hold.

Okay. Thank you.

Thank you. Our next question comes from Blaine Heck with Wells Fargo. Your line is open.

Great. Thanks. Can you guys just talk about the demand for office space in Manhattan from some of the large tech tenants that have been taking down big blocks of space or even rumored to be looking in the market. How their requirements changed if at all in the last few months in terms of number one, desire to be in New York. Number two, the aggregate size of space requirements. And three, their rental rate sensitivity?

We haven't seen any pullback by the tech industry as far as any of the deals that we're working on. I can tell you probably the best barometer for us is the tenant interest for One Madison Avenue. And we've had a number of and we did a number of virtual presentations during the work from home period. We continue to market that building today. I don't think there's been any slowdown on tenant interest in that project, given its uniqueness, and its size, and its spectacular location. Some of the tenants that we were talking to, the feedback was they were previously looking for space where they were incorporating a hotelling concept. So if they had a 1000 seats, that were going to be space for 700 or 800 people with a balance of the people start circulating through on hotelling. And we've had a couple of those tenants come back and say, they're not doing hotelling. So now they're looking at seats for 1000 people. So I don't know if that's indicative across the board, but it's been our experience over the past couple months of the feedback that we've had.

Great. Thanks Steve. And then, one for you, Marc, probably, at your investor conference, you've laid out an impressive NOI ramp into 2024 from development projects. I'm sure you don't want to get into or can't get into any specifics, but just generally, can you comment on how this crisis impacts that development outlook, whether it be from a delayed development timelines or declines in asking rent that might call the economics on any of those projects into question?

We'll likely, but we haven't really thought about it fully yet. It's a little premature, try not to think about it until after the summer. But we'll probably do a full update on each of those projects in December. I would say that at this point all the projects are on or ahead of schedule. One Vanderbilt obviously completing on schedule. Leasing achievement, we expect to be fairly in line with every all the guidance previously given to get the stabilization. One Madison as Steve just said, tenant response during this difficult period I think has been very good and uplifting. Obviously, you got to see what you convert to leases. But you got to start with RFPs and the conversations in the walkthroughs. And that's been ongoing for the past few months. And we're encouraged by it. I also think we're going to get a significant break on construction costs from One Madison, that's an aside. So we got to look at everything. Interest rates, in terms of the LIBOR curve. I mean, when we were projecting LIBOR in December, it's a little bit of a different curve right now to our benefit construction costs. I think to our benefit in terms of breaking ground there, we're still on track to break ground. October 1st, we had possession agreements in place with every single remaining tenant in the building. We didn't have that in December. We do now. We actually got to jump on some of the demolition because we got early possession agreements. So we'll probably a little ahead of schedule in construction there. 185 Broadway continues to be topping out in September, that was per the original goal. So that goal we're not revising. We hope to—we expect to meet on its original terms. And we still feel like the rents we underwrote there were conservative relative to market. So we're hoping that the leasing achievement there which really won't begin in earnest till sometime in 2021, with the bulk of that occurring I guess in 2022, or second half of 2021, beginning of 2022. We have every reason to say that that new amenitized product will out compete its competitors, and we'll perform at the high end of whatever the range of rents are for the buildings that surround 185 Broadway. That deal that Andrew took you through last year 15. Did we go through 15 as well?

No. For 410.

The good news is a deal we didn't—a development deal we didn't even have as part of last year. We not only have it now, but it's fully leased as I think everybody knows, net lease, and that deal is moving ahead. What else?

410 is leased.

So that's, we didn't lose any time on development 410. So obviously, since its leased, there's no income diminution, there's no time to diminution. So look, we'll update everything. But I would—I guess as I sit here four months ahead of that exercise, I'm not actually expecting any material changes to what we're presented.

Alright. Great. Thanks.

Thank you. And we have a question from Nick Yulico with Scotiabank. Your line is open.

Thanks. I just want to go back to the rent question. Your mark-to-market did weaken in the second quarter and down versus your original guidance for the year, down versus the first quarter number. So looks like your rents are down about 5%, 10%. I mean, is that a good ballpark number? And how should we think about the mark-to-market on the portfolio for the rest of the year?

I really think that's a little misleading. You got to get deeper into these numbers, because the strategy is shifted from doing new full concession deals on new leases to very capital efficient renewal deals, where the concessions are far lower, but the head rents are lower. Net effective, I think Steve already took you through and said the net effectives were about the same.

Yes. The net effectives I think were not the same or probably above where we otherwise budgeted for the year. Because we did so much of the leasing was oriented towards renewals. As I said earlier, a lot of those deals were done without the capital cost of broker commissions. The TI was very modest. We gave some free rent. But we also, in many cases, in some cases, drop the face rent only because we were dealing with tenants that had escalated way above current market. But on balance, forget the mark to market number. It's all about the net effective on these transactions.

And to use your words two quarters. But my confidence is New York City. I've done business in this city for, let me get my numbers right, 31 years. This has been done 31 years in the city, in almost every aspect of it from structured finance, mezzanine lending, workouts, new business, development, adaptive redevelopment, et cetera. And through that period of time many, many cycles, each of which, the trough that was, New York will never be the same. I guess after four or five of those you become a little hardened to that and you look past the rhetoric of New York will never be the same to New York will come out of this. People will come back to work. All the things that made New York one of the most desirable markets in the country will be here again once the pandemic is arrested. I think I referred everything to that moment where whether that's remedy or cure or vaccine or herd immunity. I mean, this isn't a medical conversation, but you pick which of those things that will when you get past it, and then you get past I think a lot and then you start working on the healing of the disruption to this economy, which I think will occur. Immediately after one of those three or four things happen, maybe slow and steady, it's not to say we'll be back to 2020 levels and to use your words two quarters. But at that moment, remember the market is always forward-looking. It's not a question of when will we be back to 2020 It's when will this be behind us with the prospect of resurgence. And I do think that can absolutely be in 2021. And that's what we're looking forward to. And that's based on all the advice and guidance that we and everybody else gets out there in terms of where we hope to be in terms of attacking this virus. So, even without that, I think we’re a shining example of a company that's operating at nearly 100% capacity, safe, effective, much more productive. I got to tell you, if we were all sitting at home, literally just sitting at homes in our bedrooms. There's no way I could have rattled off that list that I rattled off to you in those prepared comments. There's no chance that would have. I don't know if we would have done half of it. So the only reason we did what we did and maybe you've got some other calls today and you'll have similar lists from other companies, or later in the week or next week, I don't know. But I don't see too much of it out there in that volume. I attribute that to a confidence level in the city we operate in and the experience with the city through all sorts of calamities, and chaos and crisis. But knowing that fundamentally, this is still where the best educated workplaces. This is where the most international community of residents and employees are. It's young, its vibrant, its going to come back. It has to get past COVID-19 and it will. But to take a position that it's never coming back. New York's done. Remind me of that. We make money coming out of downturns on thinking like that. That's where we usually make the most of our money. I'd say most of our money has been made within one to three years of coming out of downturns, because we take advantage of sort of apocalyptic thinking that I don't think will apply to the situation.

Okay. Great. Thanks so much.

Thank you. Our next question comes from Anthony Paolone with JPMorgan. Your line is open.

Thanks. On One Madison, is there going to be cash back to SL Green either from your partners, equity investment here or maybe a construction loan at some point. Just trying to understand the cash in and out there for you all?

Yes, we got cash from them in the second quarter when we signed up the deal. And then the construction financing that we have in process will fund essentially the construction of the project. And then on the other side of that, we get the remaining equity contribution from our partners.

Yes, it's a good point actually, because the substantial equity repatriation at the end of this project is not really a part of our liquidity.

Correct.

Got it. As I wanted to understand. Thanks. And then the second one is on the collection side, you're going to give the cash collections. But it looks like you didn't—you recognize 100% though from like a GAAP and earnings recognition point of view, is that right? Or did I miss something?

If the balances are deemed collectible, yes, they are in earnings and in the revenue line. But I also highlighted, we took a significant amount of reserves. We normally book half a million to a million dollars in reserves against receivables and we booked $7.5 million this quarter, that's looking at unpaid balances and saying, we have some skepticism around collections, and we'll take 50% or even 100% reserve against those receivable amounts.

I just want to check, from Matt's world of reserves, $7.5 million reserves like seismic. With a company with I think it's $1.6 billion of revenues last I checked. I would call it a microscopic. I mean, we're in the business of taking risks. And I think that when you measure our revenues and income relative to these were very minor, modest, almost tiny reserves as a proportion of those revenues. I think it's a real testament to the collections effort and the balance sheet. So yes, they are substantial reserves because we usually take almost no reserves. But in the context of $1.7 billion of revenues and in the context of a component of that which was $200 million a year of DPE revenues was supposed to be $160 million a year. This year the reserves are taking at a very tough point in time against that revenue stream. I think speaks to the scrupulousness of the underwriting process and credit process here that the reserves as a presenter are fairly small.

Okay. But is there a way to think about that dollar amount though in terms of either like a quarterly or annual number so like, for instance, if COVID didn't happen and now it is. How much quarterly revenue has become uncollectible, I guess, up to $7.5 million a quarter. Is that $7.5 million covering some other period of time in the straight-line write-off or some other number?

No, there is no way to extrapolate it.

Can you give us the number or just get a sense as like how much?

It was $7.5 million for the quarter, which is higher than we've ever recorded. I mean, I don't know how to take that out beyond that.

No. We're going to do the best we can on collections going forward.

There's no estimate for future quarters. Is that's what you're asking for. I mean, there's no—we don't estimate future losses. I mean, the idea is hopefully we don't have future losses. But I mean, if there are or some visible to us then that are now than we'll have to take further reserves. But at this moment, the $7.5 million is the seven substance of our reserves booked this quarter, the total is much larger. That was just what we booked this quarter.

Thank you.