Sl Green Realty Corp Q4 FY2022 Earnings Call

Thank you, everybody, for joining us, and welcome to SL Green Realties Corporation Fourth Quarter 2022 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 take 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 to appear are set forth in the risk factors and MD&A sections of the company's latest Form 10-K and other subsequent reports filed by the company with the Securities and Exchange Commission. Also during today's conference call, the company may discuss non-GAAP financial measures as defined by Regulation G under the Securities Act. The GAAP financial measure most directly comparable to each non-GAAP financial measure discussed and the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found on both the company's website at www.slgreen.com by selecting the press release regarding the company's fourth quarter 2022 earnings and in our supplemental information included in our current report on Form 8-K relating to our company's fourth quarter 2022 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.

Okay. Thank you, and good afternoon, everyone. We appreciate you joining us today. Normally, our January earnings calls are brief, coming only seven weeks after our annual investor conference, which we held back on December 5. We had a great conference on that day with attendance at capacity at One Vanderbilt, and we received a lot of positive feedback after the presentation. Not surprisingly during the conference, we set out for ourselves a characteristically robust best agenda for 2023, which included business plan, aspirational goals, I think there were 18 or 20, some of which included 1.7 million square feet of leasing, over $2 billion of asset sales and joint ventures, significant debt reduction and completion of several important development projects that we expect to deliver timely and on or under budget this year. Notable among them is One Madison Avenue, which we actually topped out ahead of schedule in just one week after our investor conference. So it was a pretty amazing day. There were over 700 people gathered to witness the event of the laying of the last piece of steel on this truly great project in the Midtown South submarket, marking a turning point for the project where we now see completion in sight. And the timing of that topping out was truly perfect as it gave us the ability to stand on that 18,000 square foot penthouse floor with 18-foot lab sites and unobstructed views of Midtown and Downtown and standing there, you can truly understand why our new tenant that has just joined the roster of Tennis to the One Madison Avenue. Rent roll is 777 partners. They were attracted to the opportunity and we were able to lease it up over one year ahead of our underwriting, just stressing the importance of not only hitting underwritten economics but also exceeding the timing has big positive effect on the project, and we hope there's more to come. This lease, along with the others we announced last night, underscores the early leasing achievements we had in January, which is typically a slow month but for us, turned out to be a pretty good month and a good start to the year. Hopefully, it pretends of increased activity to come in 2023 though a long holiday break followed by the MLK holiday weekend. We've seen a noticeable pickup in tour activity over the last 10 days, and we received around a fresh new proposal. So we're optimistic. We're getting stuff done, and we're on plan most importantly. So on the heels of signing over 370,000 square feet of office leases since our investor conference at the beginning of December, we managed to assemble a pipeline of leases totaling 700,000 square feet, where it stands today, 100,000 square feet of which we hope to sign over the next 60 days. We'll be moving and hustling to try and get back up. We're currently negotiating leases at 450 Park Avenue, 919 Third, 45 Lex, 1350 Avenue of the Americas and another lease at One Madison. In addition, we are just beginning to market our redevelopment project for 245 Park Avenue. We spent quite a bit of time showing off that amazing redevelopment plan that we have for 245 Park, and we are beginning to execute this year. And the early read from the tenant broker community is that this exciting and, I think, a very elegant plan that we have for the asset is going to be very well received by the tenant market, and there seems to be much interest already that we're generating as we're beginning to take these meetings, and we're also generating interest among foreign investors for JV investment. Recall that identifying one or more JV partners for 245 Park is one of the several capital markets goals we have for the year and for a little bit more color on that. I'm going to turn it over to Andrew Mathias.

Thanks, Mark. There's still a standoff between buyers and sellers in the market, but we definitely see as financing, hopefully returns and a 5- and 10-year fixed rate financing the CMBS market reopens, which we and all the rest of our market participants here are anxiously awaiting, we think we'll see that standoff thaw a bit. We've been actively in discussions with investors from around the world. We were in the Middle East several months ago. We have a trip planned to Asia in March. The team was present at the Crafts conference in Miami earlier this month talking about the financing trends. And we think there's still a lot of interest in prime New York City assets particularly Park Avenue, which is no secret that it's the best submarket in New York City. And we think we'll have a lot of willing conversations this year from all different types of investors from around the world, talking about 245 and the other aggressive capital goals that we set out for us at the investor conference.

Great. So more to come on that throughout the first half of the year, we'll keep you guys updated as we pursue our various goals for recapitalizations, refinancings, joint venture sales. We are full guns blazing right now here at Green and working very hard and diligently to set the seeds so that by the middle of the year, we can hopefully start to achieve and knock off some of these goals and continue on a path to what we think will be a pivot year for us in 2023, coming out of the markets we've experienced over the past couple of years and hope to see some more positive news seeping into the market throughout the year. I did want to leave, I'd say, the best for the end before opening up the call to questions. Yesterday, as I trust you may have heard or read, it marks an incredible milestone moment for East Midtown, New York City and Long Island with the official opening of the long-awaited Grand Central Madison Station right underneath Grand Central Terminal and One Vanderbilt, representing the culmination of the $11 billion Eastside access project. It is a watershed moment. I think it's probably the most important and largest project the MTA has completed in many, many decades. And with its grand opening, you now have direct service from Long Island to Grand Central. It's finally become a reality after being, I think, in conception for 60 years in development for 20 and it opens up a direct seamless trip from Long Island, which has a 1.4 million person workforce that now can look to either Grand Central or Penn Station as its primary destination and it chooses its most efficient destination. The MTA is estimating that 45% of nearly half of all Long Island Railroad commuters are expected to eventually commute direct to Grand Central once full service is up and running this year instead of what is currently Penn Station, and that translates into 160,000 people a day, and these commuters are essentially arriving literally right at our front door where the majority of our portfolio is located. I can't stress enough the importance of the projected 40 minutes per day or nearly 3.5 hours per week of saved commutation time that the business community puts a short, easy, safe, and pleasant commute as its top requirement now coming out of the post-pandemic world and as a tool for encouraging employees to work from the office. So yesterday, we celebrated with the Governor and the MTA Chair, Jane Lever, the opening of this incredible terminal that spans over 700,000 square feet from approximately 42nd Street to 48th Street on what must be one to three different levels dedicated waiting areas, beautiful new retail stores that will be opening, restaurants, and a host of other amenities and it's all well done, well executed, well designed, well conceived, and I would urge anybody that hasn't yet taken the time to swing by and check it out that they do so because it's pretty inspiring to see what can be done after all the time and after all the money is spent, you look at the permanent goods that will come of it for the decades and perhaps centuries to come. The terminal contains eight tracks and four platforms, which will be in service and enable Long Island Railroad to increase its service from Long Island to Manhattan by nearly 50% of capacity. And One Vanderbilt and East Midtown rezoning was really a first step towards unlocking the pent-up demand for new and redeveloped office space in and around Grand Central. And now Grand Central Madison will further transform and revitalize what is undisputedly New York City's #1 business district. And we're excited by it as shareholders or stakeholders or followers of the company. You should be excited by it, too, in my opinion. And it's a great way to start the year. So with that, we'll open it up for questions.

Our first question or comment comes from the line of Alexander Goldfarb from Piper Sandler. Mr. Goldfarb, your line is now open.

And obviously, it's great to see East Side Access finally open. So that's awesome to see. But just clearly, that's a positive for the Grand Central market in leasing. But bigger picture, especially since you guys put out your Investor Day, I think it was a 1.7 million square feet target for this year. The tech layoffs have accelerated, granted, it's a lot out west and not everything is New York, but it's still pressure obviously all Street has had a tough year. We're reading all the headlines. So the state of the leasing market, do you guys feel the same that you fell back in December? Is it slipping? Are there signs that tenants are taking even longer? Or Mark, your comments about people resuming activity post MLK Day, means that the leasing activity is sort of divorced from what we're reading in the broker reports and the headlines.

There is a lot to unpack regarding your question. First, I want to address the point about tech layoffs. While you may refer to them as sizable or significant, I don’t necessarily see it that way in terms of the overall impact they will have on New York City. These companies were experiencing relentless growth for many years. The tech sector was arguably the fastest growing in New York City over the past five to six years, going from a relatively small part of the market to about 25% of it.

Sorry, I'll stop...

I'm in the would you want to act was one of our guys.

No, you wanted us back in the office, and this is what you get. Type on the speaker.

There has been significant growth. Steve, please correct me if I'm wrong, but they may account for as much as 30% or 35% of the total market, and they were definitely 30% to 35% of the incremental demand. Now, they are taking a pause and becoming more efficient, which is typical for companies at the peak of the cycle. In New York City, large employers must provide WARN notices. Although there have been announced layoffs from some firms, they make up a relatively small portion of the overall number of companies, likely around 5%. Many of the markets these companies are focusing on for retention include New York. Other regions may experience a greater impact. WARN notices from the tech sector have not been significant thus far, as they must be sent to the city. Therefore, there is no indication of mass layoffs yet. Looking at the job numbers for 2022, which are the most recent through December, there were 209,000 jobs added in New York City year-over-year. It's worth noting that 2021 was also a strong year for job growth, with 270,000 jobs added. So, in 2021, we had 270,000 jobs, in 2022, we had 209,000 jobs, and there were 63,000 office-using jobs added. This is the second highest count of office-using jobs ever added, with the highest being 83,000 in 2021. Typically, in a normal year, the city adds about 20,000 to 25,000 office-using jobs, but last year it was three times that number. Growth is now slowing as office-using jobs have surpassed pre-pandemic levels. I previously mentioned that the office-using job count is approximately 106% of pre-pandemic levels, while total jobs are about 90% of pre-pandemic levels. The city's forecast for the year, which we have found to be generally accurate, predicts only modest job losses in the first half of the year, estimated at about 10,000 to 15,000, with approximately 5,000 of those jobs recovered in the second half of the year. Our expectations indicate that while some sectors are tightening their belts, others continue to grow. All businesses are still determining how to navigate work, balancing between office and remote work, and aiming to return utilization rates from below 50%-60% back up to 70%-80%, which we consider full utilization. However, the market does not appear to indicate any significant pullback in jobs or economic activity based on our observations. Steve, could you address some of Alex's points?

Yes, I would like to make a few points. First, regarding technology, it's important to note that today's tech companies are not like those from past decades that failed during the dot-com bubble. The companies announcing layoffs today are mature businesses with secure lease obligations. While they may not be hiring more staff or boosting leasing activity, they still play a vital role in New York City's diverse economy, which is more varied than that of the West Coast. Secondly, looking at leasing activity, you may have noticed from the brokers' reports that October and November were slow during the fourth quarter. However, December saw a significant uptick in leasing, indicating a recovery, despite the overall quarter showing a decline. Our recent announcements reflect several significant transactions closing in the first weeks of January. As Mark mentioned, we've already achieved over 340,000 square feet in leasing within the first couple of weeks, alongside a strong pipeline of about 700,000 square feet, which includes various technology firms and, as we experienced last year, a significant focus on the fire sector. Finally, I'm pleased to report that smaller market segments are also showing signs of life. We currently have nine leases out at the Grad Bar building, which has consistently served as a reliable indicator of the small space market. This is a crucial aspect of our leasing success for the year.

That was the complete market recap. Questions, Alex. We need to move on, but thank you for your question. I hope that addresses some of the issues you raised.

Our next question or comment comes from the line of Tom Catherwood from BTIG.

Maybe just sticking with leasing for a bit. Steve, you mentioned the broker reports and pickup in December. But the broker reports also noted what seemed to be a reacceleration in tenant concessions. But I know that can be swayed by a handful of leases, especially when overall volume is down. So what are you seeing on the ground as far as concession trends? And how are those trends impacting your portfolio specifically?

I don't really see it. I think it's been fairly stable throughout last year. It depends on where the leases are being signed; there's no doubt about that since two-thirds of the leasing activity is in the Class A market. This segment has the highest rents, and you would expect it also has the greatest amount of concessions to support those high rents. This skews the statistics because when you have many triple-digit rents, you expect a larger concession package compared to deals in the $60 range. If you look at the 340,000 square feet we signed in the first few weeks of January, the weighted average was $43 per foot in tenant improvements and five months of free rent. Some of those are renewals for five-year deals, along with a mix of ten or 15-year deals. I believe that number aligns with the kind of concessions we reported throughout last year. Therefore, I don't sense any significant negative movement.

I appreciate that information. Steve or Mark, I remember one of you mentioning last quarter that at 245 Park, over 1 million square feet of leases expired in the fourth quarter. However, as you noted in the third quarter, most of those had sublet tenants already in place. It seems the actual reduction was just over 130,000 square feet for the quarter. For the tenants that remained, are they all now direct with you? If so, what is the expected change in rent and expenses moving forward?

Well, I don't know, there are a couple of different moving parts here. What we probably referred to is that we had a pretty large lease with Major League Baseball, which they vacated several years ago when they relocated to Sixth Avenue. We backfilled most of that square footage with various short-term deals, some of which are long-term, but most are short-term direct deals. Those leases will end in the next year or so. As for the rent reset, I'm not sure, maybe you can wait, Matt, I don't...

No. I mean Steve made the point on the rents. The rents that we took on the shorter duration deals, they're not really market rents. So we'll be resetting those rents to market as we retenant the space. So kind of temporary tenants, so to speak.

But I will use this as an opportunity just to sort of reinforce what Mark said earlier. We're out there in a big way now with a very well-established development plan and a very strong marketing presentation for the building. And that is already paying dividends as we are already receiving proposals that we think have a very credible chance of converting over to leases of significant size.

You discuss the amount of space that will be marketed and the corresponding rental range.

We have approximately 800,000 square feet in the building set to roll over the next 30 to 36 months. Most of that space is located in the mid to upper sections of the building, with rents estimated at around $110 to $140 per square foot. The proposals we've received and the discussions we're having with tenants align with our projected rent expectations.

Our next question or comment comes from the line of John Kim from BMO Capital Markets. Mr. Kim, your line is now open.

On the CBS renewal, it looks like they downsized by about 40% from the space that they had. And if that's the case, it's quite different from the Fox and News Corp renewals, which I think was all the space that they had at 1211 Americas. Is your anticipation that CBS is taking space elsewhere in New York? Or are they just truly downsizing their space requirements?

No, it was just downsized. The majority of the people there are part of an independent group of operating units, distinct from the groups at 1515 Broadway, where they occupy the entire building. Our conversations with them have not indicated that they are actively planning to downsize at this time. However, many large firms are trying to determine their long-term strategies due to hybrid work environments and other factors. Despite this, they are strong proponents of having everyone return to the office.

Okay. And then on Page 39 of your staff, there was a notable change in your mark-to-market or the implied mark-to-market of the leases expiring in 2023 versus the asking rents and has turned positive on your wholly owned assets last quarter, it was negative. It looks like it's the same amount of square feet or pretty similar. I'm wondering what that change was to get to that positive mark-to-market?

That's actually related to the leases we were just discussing at 245 Park, where the large tenants' leases have expired. For example, when MLB's rent expired, it transitioned from market rent to what the previous subtenant or current short-term direct tenant is paying. The new smaller direct tenants' rents will be reflected in the subsequent years as those leases end, and the mark-to-market will be based on these lower rents compared to the earlier market rents. None of these changes reflect our perspective on market rent fluctuations; they are merely a result of adjustments in the starting rent used as a basis.

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

Mark, in your conversations with business leaders, I'm just curious, you talk about getting that utilization rates back to that 70% to 80%. But I think the worry is are we stuck in this kind of impaired level of, call it, the low to mid-50s. I guess as we look forward to the balance of this year, I mean, how confident are you that these firms can get their people back in? And is it possible to get back to that previous high watermark?

There is a strong belief that a three to four-day work week is becoming more common. The main question is whether Friday is increasingly seen as a remote workday for some but not all companies. This shift does not significantly affect space decisions; rather, it reflects a business philosophy. Companies are unlikely to change their office space based on their Friday arrangements. Fridays are viewed as productive as other weekdays, with many companies sharing this perspective. However, I have some reservations about this trend. Throughout the week, energy levels seem to rise, evident in busier lobbies, crowded trains, and streets. Retailers are reporting better results, suggesting that as the job market stabilizes from its previous tightness, conditions will improve. While wage inflation remains higher than desired, I expect it to moderate this year, leading to incremental gains. Whether we return to pre-pandemic occupancy levels is uncertain, but individual businesses will determine their office space needs based on competitive strategies and hybrid work models. Meetings are mostly held in person now, with minimal reliance on Zoom compared to the past. From discussions with leaders across various companies, there appears to be a consensus that they aim for a three to four-day in-office work week, leaving Fridays to be decided on a case-by-case basis.

Great. And then Matt, on the debt maturities, I noticed that some on the unconsolidated joint ventures were past their due date. I think you did a good job at the Investor Day kind of laying out the that some of this might be outside of Green's control. But do you have any sense on a potential resolution or how these things ultimately get worked out?

Yes. So you're talking about 1552 Broadway and 34th Street. Yes, you're right. I mean we don't unilaterally control those things we get ahead of our maturities, the wholly owned ones and the ones that we control well ahead of maturity. We are in active discussions with the borrowers on likely some form of extension. We did short-term extensions to get pushed. The maturity dates pushed out 30, 60, 90 days just as a path to getting to something longer duration done, and that's in process.

I think lenders are going to have to work with borrowers at this time. So it's somewhat in our partners' hands and it's somewhat in the lenders' hands.

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

So I saw an interest in LIRR yesterday when I was on my weighted Metro North train. I was actually kind of shocked. So you beat me to it because I was going to ask about that. I guess I never thought it would open either. So congratulations on that. My first question, I wanted to ask about an update on the properties or let missed this here. So Andrew mentioned a standoff in the market and he gave some color. But maybe you could just add to that. Is there a question of waiting on financing markets? Are there very different opinions of price? And then also, have you given any guidance in terms of expected transaction timing, particularly for the interest in 245 Park and in One Vanderbilt?

There is no change in guidance on timing from December. Currently, short rates are at 4.5% while long rates are at 3.5%. This situation leads buyers to prefer long-term borrowing, but providers of long-term debt are being very cautious about the deals they consider. Bond buyers are gradually returning to the CMBS market. As the long market becomes more established and liquid in terms of debt, buyers will likely return for assets. The issue is less about a significant price gap, as sellers are not considering offers until they are confident they can achieve realistic prices and prefer not to sell during a time of limited financing options. Therefore, we will need to see long-term financing return before we can gauge where the market will stabilize.

Okay. Great. And then I have a question about financial leverage and your perspective on it. You've fixed a lot of your debt now, and I'm curious if that changes the priority of deleveraging for you. Additionally, does it affect how you evaluate potential uses for disposition proceeds in relation to stock buybacks or other investments?

For 2023, the answer is simply no. We carefully planned the fixing of our debt during the middle to later part of last year, and the timing of this fixed debt aligns with our anticipated schedule for asset sales and other funding sources that will allow us to repay that debt. In December, we outlined a strategy to reduce debt by $2.4 billion to $2.5 billion through asset disposals exceeding $2 billion and other capital sources, such as funding from our partners at One Madison. For any floating debt we are repaying, we have implemented swaps to fixed rates that match our expected repayment timeline. Thus, the fixing of the debt and the repayment schedule align with what we communicated in December.

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

Can you hear me?

Yes, I can.

So first question, I guess for Mark or Andrew, on the third-party capital side, can you give us a sense as to what type of return you're pitching prospective investors on 245 Park and just a general sense as to maybe what kind of return that market requires right now for New York City office project?

Sure, Tony. That's a unique asset because we have fixed-rate financing there that is very favorable and attractive. We expect returns in the low teens for levered IRRs, which I believe is a strong return for an asset of that quality with existing financing. This is one reason we feel confident about our acquisition of the resolution. We acquired it at a good price and are optimistic about finding partners to invest alongside us.

Got it. Okay. And then just one quick one, I guess, for Matt. On One Vanderbilt, can you give us the fourth quarter cash and GAAP NOI contributions to try to think about where that was relative to the kind of stabilized level you're getting to?

Sure. Just give me a moment. When you have detailed questions, Tony, I need to look for information quickly. Our GAAP share is about $27 million in cash and $16 million. That's our share for the fourth quarter.

Our next question comment comes from the line of Ronald Kamdem from Morgan Stanley.

Just going back to the transaction market, number one, just on One Vandy. Just any update there on the 10% JV prospects as well as sort of the $2 billion plus planned for this year, just what's being marketed, what's the interest like? Any color there would be helpful.

One Vanderbilt, no update from December. It's still a goal of this year to get that interest sold. And we're hopeful to make it happen. The second part of the question, I did not hear here. Can you repeat the second question?

Yes. Just of dispositions for this year. I think some had already been marketed or in the process of being marketed. Just where are we in that process? What kind of interest are you seeing there?

The biggest component of that is $245 million, which I think we've covered at length so far...

Seven days in the market.

Seven days in the market, 121 Green went to contract. We announced that in the release last night. That's a component of it, and we have a couple more assets that are out to market or will be shortly. So I think as Andrew said in his commentary earlier, we're trying to make a lot of headway on that plan in the first half of the year, and we're doing an admirable job on plan with that strategy.

Yes. There was some comment about it. It has been in the market, and these are all relatively new initiatives, some of which we haven't started yet. We presented a plan in December that spans a 12.5 month period, and there are specific plans that we will be introducing in the spring and by summer. As Andrew mentioned, we are currently working on some of these initiatives, all of which are new, and we have reiterated our guidance a couple of times during this call. The market is challenging; it's never easy, as it's often simpler to buy than to sell, but we consider ourselves effective sellers. Over our 25 years as a public company, we have shown the ability to monetize more assets than anyone else in our New York market. We currently have an ownership interest in approximately square feet. We have monetized and repatriated significantly more than we hold today. Our business plan includes about five assets for sale or joint ventures, and we feel optimistic about this. While the market may not be as strong as it once was, we wouldn't describe it as a bad market either. There are investment opportunities available, and we're marketing very strong positions. We believe we will achieve favorable pricing, and that's where we are now. More updates will come, as I mentioned earlier, around midyear.

Great. Earlier this month, the New York Gaming Board released a request for applications without any artificial deadlines. The first round of questions is due on February 3. I was wondering if you plan on asking questions regarding that release. Was there anything surprising or not surprising? Can you provide an update on the casino plan?

We have a strong and growing team focused on this casino project, including our investor team, strategic team, grassroots supporters, and coalition members. This initiative is a top priority for us, and we are dedicated to making it happen as we believe it benefits Times Square, New York City, and our company. The concept of integrating gaming with entertainment, hospitality, live shows, sports betting, dining, and outdoor spaces fits perfectly with the surroundings of Times Square. In New York state, I can’t think of a better location for this venture. The district is designed for large-format entertainment, with a focus on exciting signage and technology. It brilliantly unites commercial activity within Times Square, which uniquely supports tourism. Coupled with excellent public transportation access, including 11 subway lines and proximity to major transit hubs, this site will attract millions of visitors while minimally impacting the area due to the ability to maximize public transit usage. The appeal of a New York Times Square Casino draws both domestic and international tourists, positioning it as a leading contender. While there are other potential sites, the ultimate decision will hinge on economics, job creation, and tourism generation, without displacing important community resources like housing or parks. Our existing building at 1515 Broadway provides an excellent site for this casino licensing opportunity. The competition for the gaming licenses will be intense in New York City, with three licenses available. I hope that SL Green, Caesars, and Rock Nation will secure one of those licenses.

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

I have one quick question about the ground lease at 625 Madison. I know the reset date has passed, and I'm wondering if you could provide an update on the timing or how those conversations are progressing.

We're currently in an arbitration process to determine that rent as leaseholder. And with respect to the rest, unfortunately, as we've said on prior calls, there's a lot of controversy and litigation surrounding that asset, and we're not really able to comment further.

I can appreciate you can't give a lot of detail, but I guess, would it be your expectation that, that gets resolved sometime in '23? Or is it too difficult to handicap that kind of timing?

We would expect the rent on the leasehold to be resolved in 2023, yes.

Our next question comment comes from the line of Camil Bonnel from Bank of America.

Is a follow-up on the capital structure and strategy behind it. Do you see any difference in the longer-term leverage levels between your consolidated and JV portfolios?

Our perspective on leverage focuses first on loan-to-value ratios rather than debt to EBITDA, as this is the standard for measuring leverage in real estate. We assess it at a corporate level on a combined basis and feel comfortable with our current position. Although we're slightly above the typical level due to some recent asset acquisitions, this justifies our goal to reduce debt over the year. We are confident in our projections, both prior to these acquisitions and for the end of the year based on our current strategy. In transitioning to an asset management model, we are increasing our use of unconsolidated joint ventures compared to the past, and we expect this trend to continue. Each leverage case will be evaluated individually based on the asset involved in the JV and ultimately consolidated within the company to ensure we maintain a responsible level of leverage overall. Therefore, our focus is less on current levels and more on maintaining a healthy leverage profile.

Okay. And just taking another angle on the transaction market. More of our conversations with brokers seem to indicate that we won't see pricing discovery over the next 12 months. Can you update us on how you think about this in the context of opportunistic investments? And how much of your pipeline is based on distressed opportunities?

We aim to achieve price discovery on five of our assets within the next 12 months. While this doesn't dictate the market, it's certainly sufficient for us. We take pride in understanding current pricing well. This market is not one where pricing is hidden. We expect trades to occur this year, and we plan to engage in those trades. It is essential to bring a realistic perspective on current values. We continually refresh our internal net asset values throughout the year, adjusting by asset and lease for factors like growth, cap rates, and required returns. I believe there will be two distinct markets. One will be for stronger sponsors and quality assets like ours, which have largely retained their values and will have a market. The other will involve properties with weaker sponsorship or overly leveraged capital stacks, lacking the liquidity and capacity to redevelop or lease their buildings effectively. These properties will fall into an opportunistic category, and we might start seeing opportunities in the second half of this year. As I mentioned in December, we have our own capital as well as access to third-party capital, which could allow us to make opportunistic acquisitions. Despite expectations for distress in the market, it typically doesn't manifest in New York City, particularly in Manhattan, where a small group of owners control a significant portion of inventory and are well-positioned to navigate this market. We're already observing a moderation in rate rises, with long-term financing rates decreasing significantly. As Andrew pointed out, once the long-term financing market recovers, liquidity will return, and we will move forward. We view this situation as a minor correction rather than something more severe, though we will see how the year unfolds. For now, we remain committed to our plan and believe we can execute it effectively.

Our next question or comment comes from the line of Derek Johnston from Deutsche Bank.

As the DPE balance decreases and loans mature or are repaid, I believe this quarter represented $57 million. How do you plan to utilize that capital? Can you clarify if there are any restrictions on how those repayments or capital can be deployed? Additionally, could you provide an update on the DPE strategy? I understand we have the strategy for 2023 in the near term, but what are the plans for the midterm?

So as it relates to use of capital upon repayment, we have no restrictions.

$7 million was a loan.

Right. That was the $57 million was repaid. We anticipated the repayment to come three, it came in late in '22, and we simply paid down debt with it, which is what we've been doing along with here purchases with a lot of the repayments and sales proceeds that we've gotten off the DPE book for the last couple of years, but we don't have any specific restrictions as to how we use those proceeds.

We do not view the DPE book as a closed system where funds must only be reinvested into DPE. These funds are flexible and can be used for debt repayment, investing in existing assets, or acquiring new assets. We assess all investment opportunities across our various business lines to determine where we can achieve the best risk-reward balance, and we will direct funds accordingly.

What gives you confidence that the casino license for your Times Square project is superior and what makes it stand out compared to others, including the potential Penn District application being submitted?

I’m only talking about Times Square here. I can't think of a better location in the U.S. for a high-end gaming entertainment venue, a five-star hotel with live entertainment, sports betting, restaurants, and outdoor space that can seamlessly integrate into the vibrant atmosphere of Times Square. Certainly, in New York state and New York City, I can't imagine a better spot. This area was designed for large-format entertainment with a theater focus, emphasizing engaging signage, technology, and entertainment. Those elements are uniquely celebrated in Times Square. When you consider this commercial district along with unparalleled access to public transportation, thanks to 11 subway lines servicing Times Square and close proximity to the Port Authority—which is about to be redeveloped—it's nearly equidistant from Grand Central and the new Grand Central Madison. A facility here could draw millions of visitors while minimizing impact, leveraging public transit more effectively than almost any other potential site. Putting together the appeal of this district with its ability to attract both domestic and international tourists eager to visit a casino in Times Square places it at a top position. That said, there are other viable sites. In the end, the decision will hinge on economic analysis, job creation, and potential tourism growth without disrupting the surrounding area. Importantly, 1515 Broadway is an existing building that does not need development and will not replace housing, parks, or schools. It’s a current commercial structure. I’m excited that we have a viable site there for the casino license. It's going to be competitive with many proposals expected. There will be significant competition, which is typical for New York City, and with three licenses available, I hope SL Green, Caesars, and Rock Nation will secure one of them.

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

Times here in the Q&A, you've commented about how businesses are still navigating how they're going to deal with in-office versus remote work. Are you seeing any signs that tenants are looking at hoteling as a way to more efficiently use their office space? And I guess, do you think the filing strategy could be more widespread in a more hybrid environment?

Hotelings has been a concept for a long time. Shared hot desking has been around for decades. There was a trend toward it before the pandemic, but immediately after, there was a move away from it as people were cautious. Not long ago, there were Plexiglass barriers between cubicles, and floors were depopulated. Now that those measures have passed, we are beginning to trend back to how people previously viewed hoteling. It has always had a role in New York offices, but whether it’s more or less prevalent now is hard to say. It seems to be more common than it was immediately after the pandemic, but I'm not sure if it's more than in the years leading up to it.

It's also only applicable to very large tenants. If you really think about the average tenant in New York City, that's less than 25,000 square feet, hoteling is not a viable way of them operating their business. If you're talking about a tenant with hundreds of thousands of square feet, then it's a conversation. And typically, where we see it, it's very specific to certain types of industries. So sales businesses, consulting media businesses. But when you go into the big financial firms and things like that, we see it far less frequently.

All right. That's very helpful. And then just to follow up on a couple of earlier questions. I was hoping you could just comment a little bit more in general on debt availability for office assets and landlords today? And how you expect that availability and even pricing on debt to trend throughout 2023?

Beyond the commentary we gave, yes, we touched on it a bit earlier, we think duration is slightly available.

It's widely available. And I think I just said earlier, sponsorship and building quality location will matter more so than ever. So we're out with good product. We're obviously a good sponsor and the feedback has been good.

I think we expect that in the second half of the year, there will be a slight return of the longer fixed rate market. These rates seem low, and before you know it, we will be on our second or third quarter conference call. By then, we hope to discuss increased capacity in the market. Fortunately, we don't have any projects planned this year that would require such execution. So yes, we're in good shape. Next question, operator?

Our next question comes from the line of Peter Abramowitz from Jefferies.

Just one more on the financing market because I think you talked about 919 Third Avenue and then you also have 2nd. I guess, Third Avenue or Lexington, depending on who you ask, has kind of been cited as the cutoff for how assets are performing differently by submarket with a little bit less activity, both leasing and then utilization east of that cutoff. Do you sound to me like kind of different than the conversations when it comes to that just in terms of 919 versus would it be easier to refi at a similar asset closer to Park Avenue?

No, you didn't hear that from us. Not at all. If you look at our tenant base at 919, it's as institutional as you can get. We sold 885 Third Avenue to a hospital at a great price at the end of last year, in case anyone missed that. And that absolutely makes no difference in the financing model.

And 220 2nd Street matures in 2025. So we're not discussing that right now.

Operator?

I'm not showing any additional questions in the queue at this time, sir.

Okay. Well, for anyone who's still on the phone, I would encourage you to check out highlights from today's 2023 state of the city address that Mayor Adams gave this morning. And it announced amongst a host of other things, several exciting investments that were born out of the New York plan that a lot of stakeholders worked on, including us here at Green in order to create an action plan to really bring New York forward. And it was great to see how quickly the recommendations were developed, how executable they were in their communication and now to see Mayor Adams including much of that in the state of the city, which includes hundreds of millions of dollars of investment in new public spaces and permanent open streets, which we think is great for the city to make CBDs 24/7 cities in Manhattan and all five boroughs he reaffirmed his commitment to building more housing and more affordable housing through what he calls the city of yes, by making the necessary modifications to zoning and working with counsel to make that happen and making the incentives in place there for conversion of office to residential as well as new development and other investments in quality of life initiatives in and around the commercial corridors throughout the city, which I think are very much needed and appreciated. The city and state are working together towards common goals, making the city safer, cleaner, better and it's a good thing to see. And more on that to come. So thank you for joining us today.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.