Earnings Call Transcript - SLG Q2 2023

Operator, Operator

Thank you, everybody, for joining us, and welcome to the SL Green Realty Corp. Second Quarter 2023 Earnings Results Conference Call. This conference call is being recorded. At this time, the Company would like to remind listeners that during the call, management may make forward-looking statements. You should not rely on forward-looking statements as predictions of future events as actual results and events may differ from any forward-looking statements that management may make today. All forward-looking statements made by management on this call are based on their assumptions and beliefs as of today. Additional information regarding the risks, uncertainties, and other factors that could cause such differences 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 second quarter 2023 earnings and in our supplemental information included in our current report on Form 8-K relating to our second quarter 2023 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 like to turn the call over to Marc Holliday. Please go ahead, Marc.

Marc Holliday, CEO

Thank you, and good afternoon everyone. Welcome to SL Green's earnings call. I want to thank all of you for joining us today as we review the second quarter's results and discuss our progress on our 2023 business plan. I want to begin by commending the entire SL Green team on a very strong first half of the year, particularly as we were confronted by the dual challenges of a partially remote workforce and increasing interest rates. But headwinds notwithstanding, our team added to the year's accomplishments in meaningful ways during the second quarter. No one in the business works harder for shareholders than the men and women of SL Green, who lead by example and show what can be achieved by a 300-person corporate workforce that is present, productive, and positive every single day of the week. By the numbers, it was a solid quarter as our FFO was above expectations, we leased another 410,000 square feet of office space, our same-store NOI increased by 3.6%, and our same-store office occupancy at quarter’s end was slightly ahead of our original projections back in December. These performance stats are in stark contrast with the negative drumbeat of media coverage proclaiming the demise of office space. We continue to see demand building as businesses who hit the pause button during the prior three years are more and more frequently acting on plans for future growth, particularly in the finance sector, which accounted for about 38% of market leasing during the second quarter, as well as business services, healthcare, and education sectors, all of which continue to be active and all of which help to mitigate the pause in the tech sector. While overall leasing in the market in the first half of the year was below historical average, SL Green has garnered more than its fair share and has now entered into year-to-date leases totaling 950,000 square feet of space leased. And we are trading paper with a lot more tenants evidenced by our 1.1 million square foot leasing pipeline, more than two-thirds of which represents new leasing activity. Midtown continues to outperform with the lowest availability rate and the highest leasing volume among all Manhattan submarkets. This affirms our core property strategy and should enable us to gain occupancy during the second half of the year from what we believe to be our current low point. However, the financial stats only tell part of the story, as significant progress was also made on the property front. Of course, the highlight for the quarter was the completion of our joint venture partnership with Mori Trust. The transaction culminates years of relationship building, affirms the global allure of investing in trophy assets in prime corridors, and now fully resets ownership and capital stack in what is a case study of opportunistic investment, enforcement, and recapitalization of an important asset on Park Avenue. We continue to evaluate and refine different redevelopment scenarios and hope to commence physical work towards the end of this year. I want to acknowledge the extraordinary efforts of our Chief Investment Officer, Harrison Sitomer, who was backed up by Young Hahn, our SVP of Investments. They literally worked day and night for months on end to ensure the successful completion of an important component of our business plan. This is our first partnership with Mori Trust, and they have already proven themselves to be excellent partners. We are making great progress on other fronts as well. At One Madison, we now believe we can obtain a TCO for the project in September of this year, a full three months ahead of schedule and open our doors to tenants in the second quarter of 2024. The ability for us once again to deliver ahead of schedule and under budget is a testament to the efforts of Robert Schiffer, Robert DeWitt, our amazing Head of Construction, and John Krush, our Project Executive, along with our partners at Hines. Additionally, it accelerates the receipt of $577 million from our partners on the project, which is triggered upon the TCO of the project, later this next quarter. I'm also pleased to report that during the second quarter we topped out 760 Madison and began marketing that project. The project is absolutely spectacular. I'm excited to show it to shareholders who have not yet seen it. Please walk by and check it out. It's already impacted the skyline in the historical district of Upper East Side Madison Avenue in a very positive way. It's been extremely well received by the market. And we are proud to have initiated this project and fostered along with our partners at Giorgio Armani. We already have several units under contract with significant interest on the balance of the units at prices which will be market-leading for Upper East Side condos, a testament to the power of the SL Green and Giorgio Armani brands and vision. We expect to turn over the retail to Armani by the end of September and rent would start right away. The first closings on residential units will commence in June of next year, with all net proceeds of sale available for use by us, as there is no indebtedness against the project. We will have more commentary on the sales effort and pricing metrics on our next earnings call which I guess is in October. Finally, we received our TCO for 15 Beekman this month and plan to turn over the project fully to Pace University in August. The props here go to the SL Green team of Peter Flynt, John Hefferon, and Jason Pastuzyn. And if that weren't enough, a reminder that in April, just after our last earnings call, we closed the refinancing of 919 Third Avenue, proof that the credit markets are still available for the highest quality office assets and reputable sponsors. So the first half of the year is now in the books, but no rest for the team. We are going to continue to forge ahead through the rest of the summer to set the table for a successful second half of the year. Management is completely aligned with our shareholders. And we will work hard to create value, generate earnings, and protect the dividend. Thank you. Operator, we can take some questions.

Operator, Operator

Certainly. Our first question will come from Michael Lewis of Truist Securities. Your line is open.

Michael Lewis, Analyst

Great. Thank you. My first question is for Matt. I want to ask about your debt coverage ratio, particularly the fixed charge coverage ratio relative to your covenants, because it keeps coming up in conversation. Your fixed charge coverage fell to 1.7 times this quarter, the covenants 1.4 times. Can you just maybe discuss the mechanics and how close do you expect that ratio to get to the covenant over the next two quarters?

Matt DiLiberto, CFO

Yes, sure. I've read some of the commentary about it. I'm somewhat surprised that it gets that much attention. It's a pretty simple calculation. It's consolidated only calculation. This is just the covenant. And it's been impacted, one, by rates; rates are up, but also been impacted by 245 Park, being a wholly owned consolidated asset for about three quarters now. Now that that is a JV, it rolls out of that calculation, and that in and of itself improves the calculation. And we obviously watch all of our covenants and our metrics very, very closely and are not as fussed about that one as people seem to be out in the market.

Michael Lewis, Analyst

Great. So, notwithstanding a big move in rates, I guess, I mean, should we expect this coverage ratio to improve from here, is it trusting, or do you think it gets a little tighter before it goes back up?

Matt DiLiberto, CFO

It'll get tighter before it gets better because the effect of 245 has to work its way through. It's a trailing 12 calculation. So, it goes lower before it gets better. But just by having 245 in the JV as a JV, that alone improves it, because that was a sub 1 coverage asset.

Michael Lewis, Analyst

Thank you. My second question is about portfolio occupancy. You mentioned during your Investor Day in December that you would hit around 90% in the second quarter and rebound to about 92% in the latter half of the year. Currently, your lease percentage is reported at 89.8%, which aligns closely with your prediction. So, my question is whether you still anticipate reaching that 92% this year, or if that expectation has changed. Additionally, I know the leasing pipeline was building in the earlier part of the year; what are your thoughts on converting that into actual leases?

Marc Holliday, CEO

Yes, I want to ensure I understand the question correctly. Our occupancy was approximately 89.8% for the quarter, which we anticipate to be the lowest point. I mentioned this in my commentary, and we expect to see occupancy increase from here, regardless of market trends, based on our pipeline and visibility. We have established 21 ambitious goals for the year. While we may not achieve all of them, we generally meet most or at least over half, and we will make every effort to reach these targets. I believe the occupancy goal for the year is 92.4%, and we aim to end the year as close to that figure as possible. Our pipeline is substantial, and if everything aligns, we could achieve this. If not, we will still be close. This is why we label our goals as ambitious—they are not meant to be easy. Achieving over 90% in an 18% vacant market is a significant achievement, and it reflects the hard work of Steve Durels and his team.

Operator, Operator

Our next question will come from Steve Sakwa of Evercore.

Steve Sakwa, Analyst

Marc, maybe you could just touch on the dispositions and what your expectations are for either further sales at One Vanderbilt, what your plans are potentially for additional sales at 245 and maybe other assets that you've got on the market today?

Marc Holliday, CEO

Our main focus right now is on One Vanderbilt, which has received very positive feedback. I believe One Vanderbilt is one of the top office buildings in the city, featuring an impressive rent roll and favorable low-rate financing. It is truly an exceptional asset, and interest in it from the investment community has been strong. This will keep us engaged with One Vanderbilt through the end of the year. Regarding 245 Park, the redevelopment program we are developing is promising, and leasing is progressing better than we anticipated at this stage.

Steve Durels, CRO

75,000 square feet and then we expanded by 10,000 square feet…

Marc Holliday, CEO

Angelo Gordon. Yes. Okay. And we have others pending with trading papers.

Steve Durels, CRO

Six proposals out.

Marc Holliday, CEO

So, not unlike One Vanderbilt, where we initially went out to sell, I think it was down by up to 40%, we wound up selling 30%. Now we're going out for an additional 10%. We may do the other 25% towards the end of this year. We may hold back and get some more leasing done. We'll see.

Steve Sakwa, Analyst

And I'm just wondering if you can provide any color on the 625 Madison situation. I know there's been a lot of back and forth with different defaults and the ground leases and the land position. Is there anything you can sort of provide us on that front today?

Marc Holliday, CEO

Well, it's always uncertain until there's some ongoing litigation surrounding this asset. You know that there was a rent reset, I think we discussed it on the last call, or was that...

Matt DiLiberto, CFO

It happened after the last call, but we disclosed in our Q.

Marc Holliday, CEO

In the Q. okay. So, there was a rent reset. It was somewhat higher than we had anticipated, although far, far below, I think, what the fee owner had been putting into the market at that point, which was actually very deleterious to our position because there were discussions of rent levels of double or more, which were really never to be the case. And we took a write-down on the leasehold portion of the asset in this quarter. And on the other side, you know from previous commentary that we have a mezzanine position on the fee, which has come due, and we'll see how things shake out there. There is a foreclosure date scheduled for August 8th on that asset. So, we'll know quite soon how things will shake out there.

Operator, Operator

And our next question will be coming from Alexander Goldfarb of Piper Sandler.

Alexander Goldfarb, Analyst

Marc, at the beginning of your comments, you mentioned that you are making efforts to protect the dividend, and I would like to delve into that a bit further. Matt, you often state that the dividend is evaluated at the end of the year, and I expect you might reiterate that now. However, based on your current plan for this year, with the successful execution of the 245 sale and the ongoing positive performance of 245 leasing, alongside One Vanderbilt being next for disposition, everything seems to be on track. Should we interpret your statement, Marc, regarding the dividend as an indication that the current level might be sustained into next year, or was it more of a general comment suggesting that you are focused on managing shareholders' capital responsibly and doing your utmost to preserve the dividend, with the understanding that circumstances could shift? I'm trying to clarify how to interpret your comment.

Marc Holliday, CEO

There are many ways to interpret this, but my intention is clear. We believe in the dividend as a critical aspect of our approach. It's similar to what you just mentioned, Alex. When individuals invest in SL Green and purchase our stock, they seek a combined return. They want immediate returns and proof of our capacity to generate cash flow, whether through standard operations or asset gains, while rewarding shareholders with dividends throughout the year. This is in addition to our redevelopment efforts and growth strategies that enhance share value. Generally, this is reflected in our performance. In challenging years, like this one with negative market sentiment, we navigate through it. I want to emphasize that we view dividends as a vital part of the investment rationale for anyone considering our stock. Our management team is invested as well, and for many of us, this stock represents the majority, if not all, of our net worth. We aim to create value, generate cash flow, and see dividends distributed. We feel confident in the current dividend levels based on our earnings and gains from crucial sales. We will outline next year's business strategy during our meetings in November and December, addressing our objectives and earnings. Overall, we take all these factors seriously, and our aim is to maintain the dividend levels as much as possible.

Alexander Goldfarb, Analyst

The next question is about compensation. Every year, it seems to become a major topic ahead of the shareholder meeting. This year, you provided some intriguing data revealing that Marc's compensation was 40% lower than the reported figure, while the rest of the team was 30% lower. The issue is that shareholders are at a disadvantage because you expense 100%, yet realize 30% or 40% less than what you're expensing, meaning people ultimately get paid under a system that feels unfair. Is there a way for consultants or others to implement a better method that ties compensation more closely to performance, ensuring it's directly linked to both results achieved and the profit and loss statement? Currently, it seems the funds from operations are being negatively impacted because they're not aligning with compensation. It appears the existing system isn't ideal, and I wondered if you had any thoughts on this topic.

Marc Holliday, CEO

Got it. Let me have Matt address the accounting issues related to that. I want to emphasize that at the highest levels of the company, including our EVPs and down to the SVP ranks, we strongly believe in aligning interests by offering a significant portion of total compensation in stock. In some instances, this can be as much as 75%, 80%, or even 85% of total compensation, while in other cases it may be around 50%, but it is substantial in every instance. This approach makes sense to me. As a shareholder, I believe it is the most effective method to create the alignment I mentioned earlier. I don't see us shifting away from providing proportionately more stock compensation as individuals advance in the company ranks. However, the specifics of how these plans are structured, including the timing of charges—whether they are fixed or variable—are matters I will leave for Matt to discuss.

Matt DiLiberto, CFO

Yes. You make a good point, Alex. I mean, the challenge with the accounting for these plans is once the charges or the cost of the plans from an accounting perspective are established, day one, they do not change. The plans are valued. We were talking stock plans or outperformance plans, which have multiyear measurement periods, investing periods, the accounting rules say you value that plan day one. And if it's worth full value to the recipient at the end, the accounting charge is what it is. If it's worth zero or close to zero to the recipients, the charge is still the same. And of late, these plans have not been paying anywhere near what they're expected to, so they're not a retention tool, but the charge is still flowing through G&A. And more than 50% of our G&A is noncash, primarily related to stock-based compensation because we do believe it's an important part of the program. The challenge is finding the right form of stock-based compensation so that the expense to the company is mitigated and actually more closely mirrors the benefit to the recipient because these plans, I'll say it again, largely hit expense in a disproportionate manner in this environment than they benefit the recipient.

Operator, Operator

And our next question will come from Tom Catherwood of BTIG.

Tom Catherwood, Analyst

Maybe Steve can begin. There’s been a nice increase in leasing, with a certain percentage of your buildings leased. One notable example for us is Graybar. This likely reflects the rise in demand from small tenants that you’ve mentioned over the past few quarters. However, how is the market currently for large block demand? Are there particular submarkets or buildings in your portfolio that are attracting more of that large block demand?

Steve Durels, CRO

Yes, that's a great question. In the first half of the year, we've observed that the overall pace of leasing in the marketplace has been quite modest, despite the success we've achieved in our portfolio. Many of the leases signed this year have been on the smaller side. We began the year with very few large requirements in the market. However, in the last 30 to 45 days, we've noticed a significant increase in both tenant tours and proposals from larger tenants. To elaborate, we currently have 16 active proposals in negotiation, ranging from 45,000 to 300,000 square feet, with 8 of those proposals coming in just the past two weeks. Only 3 of these proposals for sizable tenant requirements are part of our 1.1 million square-foot pipeline, indicating a rising interest from larger tenants reentering the market. We hope this trend will lead to improved leasing success for the overall market and specifically within our portfolio as we move into the second half of the year.

Tom Catherwood, Analyst

I understand, thank you, Steve. Now for my second question, Marc, regarding One Madison, you mentioned the early completion and how that allows you to access your joint venture partner's contribution sooner. I have two questions about that. First, what is the new expected TCO date? Second, in the press release, you talked about restructuring the loan to invest more in amenities and utilize some of the savings; what specific amenities are being planned, and what additional investments does the building require?

Marc Holliday, CEO

The initial completion date for TCO was December 2023. We advanced it to November 2023 when we began our GMP a few years ago, and then we thought we might achieve October. Now, the team is working hard to aim for mid to late September. We expect to complete it as soon as possible, targeting mid to late September, and while I hope we can meet that timeline, weather and other factors could affect this. Nevertheless, the project is running smoothly; we are very close to completion and the property looks fantastic, significantly ahead of schedule, thanks to the outstanding efforts of our team and many others who have worked diligently. Our main goal is to finish the job correctly, with the secondary goal of doing it quickly so we can prepare for tenant move-ins and open the building, enhancing the neighborhood. Regarding amenities, we have saved about $60 million in construction costs, which is now our projected total relative to the original GMP, including safety contingencies and other elements. Some of these savings will offset higher interest costs, but we are investing a substantial portion into creating a stunning rooftop venue that will compete with the best rooftops in the city, serving as an attractive amenity for tenants and an exclusive event space for evenings and weekends. The total investment in One Madison's amenities, including what was originally planned and additional features, exceeds that of One Vanderbilt, which is known for its exceptional amenities. Upon completion, with the market, the Daniel Boulud steakhouse, an exclusive tenant commons, a four-level fitness center from Chelsea Piers, and the rooftop amenity designed by the David Rockwell group, One Madison will truly become an extraordinary destination and experience.

Tom Catherwood, Analyst

Got it. Can’t wait to see it. Thanks, all.

Marc Holliday, CEO

Next summer.

Operator, Operator

And our next question will come from John Kim of BMO Capital Markets.

John Kim, Analyst

I suppose you had your mic drop moment with the 245 Park sale. But now that that's done, and you're expecting proceeds on One Madison, potentially JV sale at One Vanderbilt, in your view, is that enough to avoid a credit rating downgrade from Moody's?

Matt DiLiberto, CFO

It's a question I can't answer definitively because they have moved somewhat as a result of the market, not just as a result of us. I'll say this as it relates to the ratings. I mean, we're focused on a business plan that puts us in a financial position that we feel is prudent and we want to be in. It is not a stated objective to satisfy Moody's or any one of the other rating agencies. Our ratings are important, but the fixed income market has not been a reliable source of funding for us. And the ratings will come back as a byproduct of an execution of the business plan, but is not the goal of the business plan. If Moody's makes a move, that's fine. If they don't, that's fine as well. We think we're executing on a prudent business plan for our business and for the shareholder base.

Marc Holliday, CEO

I would add to the mic drop moments, not just capital transactions, but leasing of space. I mean, we're at these levels with increased interest costs and a vacancy rate, as I said before, was our low point. We now think we're going to be able to turn the tide and start building occupancy again. And as we do, that has as much or more effect, if you will, on an improving ratio as any of the other things you mentioned. So, I would say, stay tuned. We've got a big pipeline, and we think the market is starting to come around and we're believers in this market, and that will be as big a help as anything.

John Kim, Analyst

Another asset that you've had some leasing success with, I think, with GIC was at 280 Park, but there are still some tenant departures scheduled and the debt maturity next year. How confident are you that you'll be able to refinance that asset on economically viable terms?

Marc Holliday, CEO

Andrew, would you like to discuss your involvement with 280 and the refinancing?

Andrew Mathias, SVP

Fortunately, 280 is located in the most sought-after area of the Park Avenue corridor in Manhattan. We have significant interest in the available space, and we are continuously communicating with our current lenders as well as exploring options with other lenders globally, similar to what we did for 919 Third Avenue. We believe we have a strong business strategy with Vornado for this property. Steve and Glen Weiss are diligently working on it, and I anticipate some very positive developments are likely due to the building’s prime location and the renovations we completed. The asset is attracting considerable attention, and we are confident about its future prospects.

Operator, Operator

And our next question will come from Blaine Heck of Wells Fargo.

Blaine Heck, Analyst

Can you talk in general about asset pricing in the market? What sort of cap rates and IRRs are potential investors targeting? And how large is the bifurcation between well-positioned assets, like 245 Park versus more commodity type buildings?

Marc Holliday, CEO

Andrew?

Andrew Mathias, SVP

I believe we've never experienced such a significant gap between well-located, amenitized buildings and lower-tier Class B and C buildings, which we've fortunately moved away from in the SL Green portfolio. There are still submarkets struggling, particularly in the financial district, and Third Avenue has a lot of inventory. However, investors are very aware of these trends. This was evident with the 245 Park transaction and will likely be seen in upcoming deals, where investors are willing to pay a premium for stable, improved assets. In contrast, properties that are off the beaten path or lacking investment and amenities have very few comparable sales, primarily involving lenders rather than property owners. This highlights the substantial gap, but we believe there remains strong investor interest in well-located, amenitized, and improved properties in New York City.

Blaine Heck, Analyst

Okay, great. And then for my second question, kind of related to that, it seems like we're still seeing the flight to quality trend play out with most net absorption and leasing activity taking place at higher rent buildings. But just curious if you're seeing any better activity at the lower rent buildings within your portfolio, or is it still relatively soft in that segment?

Steve Durels, CRO

No. As we've mentioned in previous calls and over the last several months, we've observed increased activity in more price-sensitive buildings. Graybar serves as a good indicator of that segment, with our current vacancy at around 12%, down from a peak of approximately 15% to 16%. We've experienced good leasing momentum in that building. Additionally, we're beginning to see more deal flow in other similar buildings. A notable example is 1185 6, which was slow to lease but gained traction last year as the market focused on higher-quality buildings. Currently, 1185 has around 5 to 7 active proposals in negotiation. This building is both rent-sensitive and price-sensitive, but it is situated in one of Manhattan's prime submarkets, specifically along Park Avenue and the 6th Avenue Rock Center corridor, which are among the best. It's also important to note that 62% of the leasing activity year-to-date in Manhattan has occurred in what is classified as commodity-type buildings. This indicates a noticeable revival in that market segment. While there is still a way to go before it reaches a healthier state, the positive news is that progress is beginning to take place.

Operator, Operator

And our next question will come from Anthony Paolone of JPMorgan.

Anthony Paolone, Analyst

My first question is related to your guidance from the Investor Day, where you indicated a disposition guidance of $2 billion. I want to clarify whether you consider the 245 as $1 billion or the 174. Additionally, I would like to know if the 570 from your OMA partners and any cash from the DPE book that may come in over the latter half of the year will count towards that $2 billion. I am trying to understand what to expect in the second half of the year.

Matt DiLiberto, CFO

The $2 billion, just use 245 as an example, it would be $1 billion. So, 50% of $2 billion. That's what would feed the goal. The $577 million of proceeds on One Madison from our partners is not part of that. DPE is not part of that. It is pro rata share of sold assets that feed the calculation. And getting to that goal will be a function of the assets we have in the market currently as well as where we end up with One Vanderbilt, which we said is an opportunistic sale that we've had out there for the last couple of years. We're marketing an interest and would hope to get one done, but we want to be opportunistic about it. And with regard to another interest sale in 245 Park, there's likely upside to where we sold the first interest. So, we may play that out a bit and watch the redevelopment and lease-up. Leasing has been strong, as we mentioned earlier. Watch the redevelopment and lease-up take place before we bring another interest to market.

Marc Holliday, CEO

Well, with that in mind, Matt, if the goal was $2 billion, and that's what I'm hearing from Anthony, if we were to postpone the second 25%.

Matt DiLiberto, CFO

It would not be $2 billion.

Marc Holliday, CEO

That would be $500 million. That doesn't mean we won't identify other assets to address that. However, as I mentioned, we're approaching this from a position of strength. I have a lot of confidence in 245, our capitation there, and our partner. While we completed the major part this year, there's still a smaller portion left. This is about generating profits for our shareholders. If we believe we can perform significantly better next year after gaining more leasing momentum, we might consider deferring it. However, this doesn't imply that reaching that goal isn't possible if we choose to proceed. It simply means we need to take the optimal steps to maximize returns.

Anthony Paolone, Analyst

Okay. Understand. Then even with that being said, that sounds like between the OMA partner capital and maybe some amount of sales, you'll have cash coming in over the second half of the year that's pretty meaningful. And so, my second question is just maybe remind us of the priorities of where you see that cash going, whether it's line of credit, buyback, other asset, acquisitions, like whatever.

Matt DiLiberto, CFO

Priority is debt repayment. We've earmarked the entire $577 million coming in from our partners towards debt repayment. All of the proceeds from 245 went to debt repayment. We have still paused share buybacks since the middle of last year. That was largely a function of the rate environment and where leverage levels were. We have a goal to be more on offense as we get into later '23, particularly '24. That was the purpose of our business plan in '23, execute sales, increase liquidity, reduce leverage, and go back on offense. We are still on that program. But for the time being, we need to get through the remainder of the '23 business plan.

Operator, Operator

And our next question will come from Ronald Kamdem of Morgan Stanley.

Ronald Kamdem, Analyst

Great. A couple of quick ones. Going back to the DPE book, you mentioned $289 million in investments that are nonaccrual. I understand that $225 million of that pertains to 625 Madison and that you indicated there will be a resolution on August 8th. Should we expect you to take over that asset, or what other scenarios might we see? Additionally, could you provide some insights on the remaining approximately $65 million or $55 million in nonaccrual? What is the situation there and what are the plans?

Matt DiLiberto, CFO

So, on 625, we will adhere to our previous statements. We need to be mindful of the situation with the asset. However, I must mention that there is a foreclosure proceeding on August 8th. If the outcome is unfavorable, it will have an impact on that and the other assets. I believe your question was regarding what will happen to those.

Ronald Kamdem, Analyst

Yes, exactly. What's the plan on those that are nonaccrual, are you taking over? Just curious.

Marc Holliday, CEO

No, I don't think we can generalize, Ronald. Every asset could potentially be extended, restructured, modified, or converted into equity. I don't want to generalize, and we won't review each asset individually. However, it's important to note that the remaining portfolio is relatively small in terms of the number of assets. While it may not be small in terms of dollars, over a third of it is represented by 625. For that, we will all have to wait and see the outcome after August 8th, as we have previously mentioned. Most of the other assets are performing, but how much of this 625 is nonperforming?

Steve Durels, CRO

$50 million, $60 million.

Marc Holliday, CEO

So I mean for $50 million to $60 million, we'll see how it goes. I mean, we're going to do whatever we can to optimize, either restructure, extend or possibly foreclose.

Operator, Operator

And our next question will come from Michael Griffin of Citi.

Michael Griffin, Analyst

Maybe just going to the leasing pipeline, the comments in Marc’s prepared remarks about the 1.1 million square feet, and about two-thirds of those are new leases. Can you give us some more color on these? Are these expansions? Is it tenants looking to keep the same size? And then, Durels, I think you mentioned in a previous question that you have a lot of large tenants that are in the pipeline. How likely are some of these to close? And any color on that would be appreciated.

Steve Durels, CRO

Starting with the last part, any deals in the pipeline are ones we believe have a strong chance of closing or, if they're proposals being negotiated, turning into lease negotiations. Beyond the 1.1 million square feet, there are many proposals currently being negotiated with potential tenants, but it's still early in those discussions, making it too soon for us to include them in the pipeline. The pipeline is mostly made up of financial service tenants, with the remainder consisting of law firms and professional services, along with a small amount of educational and medical interests. Overall, financial services are leading the current trends. Among our largest proposals, specifically the 16 that we are actively discussing, 7 are from the finance sector and 4 are from legal. Regarding whether these are expansions, it's a mix. Many financial services firms are expanding, while a lot of law firms are either consolidating or facing lease expirations. The rest of the tenants have varied situations, with some downsizing, some upsizing, and others simply replacing their current spaces without any clear trend.

Operator, Operator

And our next question will come from Caitlin Burrows of Goldman Sachs.

Caitlin Burrows, Analyst

Maybe just back to the fixed charge coverage ratio and the expected trend going forward. Matt, you mentioned that it would go down before up. Given that you now expect the One Madison JV partner proceeds during 3Q, I guess, what makes it get worse before better?

Matt DiLiberto, CFO

Well, I'm still being conservative. We get the TCO in late September. Those proceeds wouldn't come in until the fourth quarter. So, obviously, those proceeds help it. It's a function of whether we get it in the third quarter or early fourth. And that could be a matter of days.

Caitlin Burrows, Analyst

Got it. Okay. So once it's in, that should make the trough and then it improves?

Matt DiLiberto, CFO

Exactly.

Caitlin Burrows, Analyst

Okay. And then just on dispositions. You mentioned earlier how your goals are generally a stretch, and it sounds like further sales at 245 Park and One Vanderbilt could be somewhat opportunistic. So, I guess, as we think about the $2 billion goal, how important is it to you that you reach or get pretty close to that target?

Marc Holliday, CEO

I just want to make a correction because if I don't, I don't want to get into the narrative. I did not say One Vanderbilt was an opportunistic sale. I was asked the question earlier, and my commentary was that there is a lot of interest in One Vanderbilt. It's got the primary amount of our focus right now, and we're going to do everything to get that deal done this year. So, that's where we are.

Caitlin Burrows, Analyst

Yes. I guess, I was just thinking with the $2 billion goal, kind of what is the focus? And obviously, if One Vanderbilt gets done, that could be a decent piece of it. And whether that gets done or not, how does that kind of impact your focus on potential smaller assets?

Marc Holliday, CEO

Still not getting it. A lot of this was previously mentioned. 245 represents $1 billion of it. We may choose to defer the $500 million on One Madison. As for One Vanderbilt, we are moving ahead and there is significant interest. So, that's where we stand.

Caitlin Burrows, Analyst

And then, there were a couple of other properties that you guys had pointed out, 750 Third or…

Marc Holliday, CEO

We are currently working on several deals, which are substantial, but my main focus remains on key projects like One Madison, 245, the $577 million expected to come in, the condo proceeds we anticipate receiving next year, and the rent from Armani that will begin upon turnover on September 30. These are the major priorities. Additionally, we are also engaged in a retail deal at the moment.

Unidentified Company Representative, Representative

There's been significant interest in some of the retail assets we own at Madison Avenue, and there's one transaction that's in the works currently.

Marc Holliday, CEO

But Caitlin, we do that every quarter. I'm trying to just highlight the big things on this call.

Operator, Operator

And our last question will come from Nick Yulico of Scotiabank.

Nick Yulico, Analyst

Just a clarification question on Page 19 of the supp where you give the NOI breakdown of the portfolio. It went down sequentially. Was that all due to the onetime L Brands payment in the first quarter?

Marc Holliday, CEO

Correct. Is that it, operator?

Operator, Operator

I'm showing no further questions. I would now like to hand the call back to management for closing remarks.

Marc Holliday, CEO

Okay. 2:59. So, we did our job well. And we appreciate all the questions. And we thank you for listening in. We thank you for being shareholders. And for those of you that aren't, we hope you'll become so. And we'll look forward to speaking again in three months' time.

Operator, Operator

And ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.