Earnings Call Transcript
Sl Green Realty Corp (SLG)
Earnings Call Transcript - SLG Q2 2022
Operator, Operator
Thank you, everybody, for joining us, and welcome to SL Green Realty Corp.'s Second 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 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 measures most directly comparable to each non-GAAP financial measure discussed and the reconciliation of the differences between each non-GAAP financial measures and the comparable GAAP financial measures can be found on both the company's website at www.slgreen.com by selecting the press release regarding the company's second quarter 2022 earnings and in our supplemental information filed with our current report on Form 8-K relating to our second quarter 2022 earnings. Thank you. I will now turn the call over to Marc Holliday. Please go ahead, Marc.
Marc Holliday, CEO
Thank you, and good afternoon, everyone. I appreciate you joining us today. I hope you're somewhere cool this afternoon, but mostly, I hope you are in your office with your colleagues listening in for this today as we are all here at SL Green each and every day, 5 days a week, doing what we do and what helped us achieve what we got done in this quarter. And I want to say how pleased I truly am with the company's achievements during this recent quarter and throughout this year, everybody has been working really hard to get done as much as we possibly can towards our long-term goals and objectives for the year. It's been a volatile and challenging environment to navigate as we emerge from this most unusual 2-year period, which required us really to write a new playbook to address the unprecedented restrictions and the unprecedented nature of this market, and I feel that we did so thoughtfully, skillfully, and we hope that those results of the first half will continue throughout the second half as we continue to outperform within our market. The same-store portfolio now sits at 92% leased after 1.1 million square feet of office leases that we signed year-to-date, and we have a current and active pipeline of another 1.1 million square feet of leases and transactions, which we will be working tirelessly to convert to close deals between now and year-end. While SL Green's second quarter closed leasing transactions was below average, this is not to be unexpected due to the front-loaded activity we had in the first quarter, which followed a lot of activity we had in Q4 2021 and a precursor to what we hope will be back to our average levels for Q3 and Q4. So there is a level of cyclicality to how and when we can time these leases. But we feel, as we sit here today, we are on track. And while Midtown Manhattan leasing velocity in Q2 was down. It was just down 4% below first quarter levels, however, it also represented a 33% year-over-year increase and 81% of Midtown leasing took place in Class A buildings. Tenant demand is shifting as some of the big technology tenants, which expanded rapidly, have pulled back as they adapt to new workforce patterns, but financial firms continue to be very active in this market. In fact, the finance sector, which represented only about 1/3 of the overall leasing activity in the prior 2 years during the pandemic, this finance sector accounted for half of all leases signed in Q2, and it also accounts for a disproportionate amount of our pipeline that I mentioned earlier. So we're happy to see that that sector is taking up a little bit of slack for the technology sector that has digested the space taken over the many recent years. We're also seeing a marked increase in tours and proposals from small to medium-sized tenants in buildings such as Gray Bar and 110 Green Street. And most notably, we believe that when tenants are faced with a market that gives them choices, there's going to be a flight to quality, mainly within that 5 to 10-minute walk of major transportation and commutation hubs and that plays into the strength of this well-located and highly improved SL Green portfolio. When you look past the headlines and take a closer look at the data, it points to some very positive trends within New York City that if current trajectory continues, we'll serve to restore equilibrium in this market. First and foremost, the jobs recovery in New York City continues at a robust pace much more so than average and much more than we've seen in prior years, as 51,000 jobs were added in April and May, of which 21,000 jobs were categorized as office using. And hot off the press is today, maybe an hour ago or so, it appears that New York City added another 22,000 jobs in June as we inch closer to restoring 100% of pre-pandemic employment levels. In fact, through May, office-using jobs were 92% recovered from early 2020 and overall employment was about 77% recovered through May, and both of those numbers will now improve as a result of the data that just came out today. So that's good news. Also, space utilization in our portfolio, which we began tracking throughout the pandemic as looking at physical occupancy as a percentage of pre-pandemic physical occupancy. July this month represents our best month of physical occupancy in over 2 years with weekly portfolio averages reaching close to 45%, and that's adjusted to 55% when looking at the peak days of Tuesday, Wednesday and Thursday, and it's July and it's hot. So we do expect those numbers to improve markedly in September and thereafter through the end of the year. There's — again, looking at data in terms of the performance of our all-important financial sector, Wall Street member firms on the NYSE reported in the first quarter, $7.7 billion of profits. And while that was down measurably from Q1 2021, that's coming off of a record quarterly profit in 2021. But the $7.7 billion to put it into more, what I'll call normal context, is far better than the 5-year pre-pandemic average of $5.6 billion. And so while a lot of comparisons will be made to '21 on financial performance, including big bank net income results for the quarter, it's all measured to pretty much record years in '20 and '21. But when you look at normalized years for New York City, the financial sector is still generating profits off of the trading volatility that is serving to somewhat mitigate these lower banking and advisory fees, and we do still see a lot of leasing activity and expansion activity coming out of the finance sector. So that's good news, and we can talk more about that in the Q&A. Tourism is another bright spot. Visitors to New York City which had peaked at over 60 million pre-pandemic, were as low as 30 million during the pandemic, are now 85% recovered, and that's with relatively low participation from international visitors, which are expected to rebound in 2023, at which point full recovery is expected next year. And that's consistent with what we basically had discussed in our December investor meeting in terms of expectations because that drives so much in terms of retail expenditures and hotel nights and boosts this economy in many ways. And I think Summit is fully reflective of this pent-up demand and energy that we see in New York City right now as we welcomed yesterday, this was a Wednesday in July, 6,400 customers to Summit One Vanderbilt, and we will celebrate our 1 millionth customer next week, well ahead of original expectations and achieved on a fairly limited operating schedule that we've maintained since October 21, 2021. So we're only 9 months into it — and we're going to have a nice celebration next week when the 1 million customer walks through our turnstiles. It's for all these reasons and many more that we continue to have the confidence and conviction of our business plan in New York City. That's not to say it's without challenges. The capital markets are more difficult now than they've been in a long time primarily driven by a dearth of debt capital, but this is a market where reputation, relationships, and record come into play. And there's a division of people who can get things done and people who are going to have a harder time getting things done. And I think 450 Park, which just closed, I think, in the past few weeks or past month is as good a proxy as any for what our capabilities are in this market to acquire, I think, 1 was exceptionally located commercial assets in all of New York City on 57th and Park, further expanding our Park Avenue presence at a basis, we found very attractive and then demonstrated our ability to capitalize that deal with 75% brand-new fresh equity in this market environment and closing acquisition loan with one of our relationship and corporate lenders on terms that were really pretty much dead on underwriting. So that is, I think, just a demonstration of what this platform can do, what we expect we will continue to do throughout this market as more opportunities arise. 100 Church refinancing on a different level tells the same story, and that also closed in the second quarter. So more on that for Matt. But all in all, it's a challenging market, but we rise to the challenge. It's a market that I think has a lot of headline overhang right now, but I do think there is a lot of good news out there in the market directionally that we can build upon throughout the rest of this year into next year, and that will help New York recover because this recovery was never expected to be immediate. We expected this to be a multiyear recovery into '23, maybe into '24. But the point is we're heading in the right direction and portfolio is in great shape. And we're going to keep our full attention on the task at hand and try and deliver for our shareholders. So now I want to turn it over to Matt DiLiberto, who has got a little bit more commentary on the financial results.
Matt DiLiberto, CFO
Thank you, Marc. We are certainly very pleased with the results we posted for both the second quarter and the first half of 2022 as the portfolio and the platform overall performed well, and FFO for the first 6 months exceeded our internal projections. This performance keeps us on track to meet our 2022 normalized FFO guidance range, which we issued last December of $6.70 to $7 a share, while trending towards the lower end of that range as we see the impact of rising interest rates on floating rate debt and the effect of our recent shift in capital allocation, which prioritizes capital toward the repayment of debt and enhancing liquidity, while also funding the relatively small equity needs of our development and redevelopment projects. In the second quarter, our reported FFO of $1.87 a share included a mark-to-market charge of about $0.09 related to a marketable securities investment. As a reminder, these kinds of marks up or down are not included in our normalized FFO guidance. Excluding the effect of the debt charge, FFO of $1.96 beat consensus estimates pretty handily due primarily to the timing of certain items that were included in our initial guidance. We don't guide by quarter, so we understand the Street can't accurately project when these items will hit. We also recognized $4.7 million or $0.07 a share of unbudgeted fees related to the acquisition of 450 Park Avenue and $5 million, also $0.07 a share of unbudgeted fees related to the resolution of our Crown Plaza investment. These are in addition to other fee income streams that our platform regularly generates by managing properties and projects and capital activities on behalf of our partners for third-party assignments like special servicing troubled loan situations. We hear and we read that these fees are lower quality earnings, which is always kind of baffling. This is real money being made oftentimes without any incremental capital investment. It's in cash and therefore, it is real earnings. These income streams also verify and enhance the value of our platform as others pay us for our expertise. There clearly isn't any platform value in our share price. And finally, it provides additional scale to what is already a huge platform as we get additional insights into what is happening in the market as well as an exponential expansion of our business relationships. As such, we will continue to look for opportunities to generate more, not less of this ancillary income particularly through the expansion of our asset management strategy. Another positive in the quarter, G&A expense was lower than our original budget, which is a trend that we expect will continue for the balance of the year as we expect to reduce G&A by $3 million to $4 million below our initial guidance. On a full-year basis, these positives helped to offset the dilutive impact of several things we've been highlighting for the last few months. Most notably, the effect of interest rates, which we all know are expected to continue to move higher over the balance of the year and into 2023, particularly for us, the effect of rising LIBOR and SOFR. It's true historically, the forward curves are not very accurate, but we need to be prudent and make decisions as if they are. When we provided our initial FFO guidance, LIBOR was expected to average just 38 basis points during the year and end the year at 75 basis points, while SOFR was expected to average 27 and then the year at 66 and stress those expectations by another 50 basis points to project interest expense that's consistent with our past practice. In that cushion, clearly not a lot, as LIBOR is now projected to end the year at 3.78% and SOFR at 3.51%, a 300 basis point increase by the end of the year on over $2 billion of floating rate debt. So to mitigate the effect of those rising interest rates on earnings and especially cash flow, while further enhancing the balance sheet, we have pivoted our capital allocation strategy to prioritize debt repayment, particularly corporate unsecured debt. The easiest way to generate immediate liquidity for this initiative is to reduce share repurchases and DPE originations. This was evident in the second quarter, where for the first time in recent memory, we did not originate any new debt preferred equity investments, nor did we repurchase any shares. Instead, we used this retained liquidity to pay down our corporate credit facility. We're also looking out further in the year for efficient debt repayment. Our current plan, which is a shift from our original guidance, is to repay a $300 million bond maturity at its open date in September, ideally use the proceeds from asset sales. And then refinance a separate $500 million bond maturity with a short duration bank or bond financing that allows us to repay the principal when we receive almost $600 million in November of 2023 from our partners at One Madison at TCO of the project. This strategy shift is not an indication that we don't still view share repurchases, debt preferred equity and other potential investment opportunities in the market as attractive. As you saw with 450 Park, we will still invest capital into growing the business accretively, especially in the asset management model. And obviously, the share price is extremely cheap. I hear the term stupid cheap, but that probably doesn't even scratch the surface as we now trade at the equivalent value of just a handful of our assets and a shocking 50-plus percent discount to the Street's NAV, not ours, which we know is a conservative view of value. But in the current environment, we feel this capital allocation pivot is the most prudent path for right now. All told, as I said at the opening, FFO remains on track to be within our '22 normalized FFO guidance range of $6.70 to $7 a share, while continuing to trend towards the lower end of the range, which I indicated on our first quarter call. In the real estate portfolio, just looking at a few of the other goals we set out for ourselves. Our same-store cash NOI growth of 7.8% for the first half of the year was generally in line with our projections, and we always anticipated the trend to be lower over the balance of the year, ending somewhere between 4% and 5%. Having just completed a full rebudgeting of the portfolio that projects a slightly slower pace of leasing in the same-store portfolio as well as some incremental pressure on operating expenses, particularly utilities, we remain optimistic that we can still achieve same-store cash NOI growth of 4% this year. The slower pace of leasing also had an effect on our reported same-store leased occupancy, which at 92% as of the end of the second quarter, was about 1% below our projections. And while we have a substantial pipeline, as Marc alluded to earlier, and of course, incredible faith in the talent of Steve Durels and his team, being that far behind at this point in the year makes our goal of 94.3% a very challenging goal to say the least. That said, on an overall basis with a 1 million square foot lease through June and that significant pipeline, our goal of 2 million square feet of total Manhattan leasing remains intact and appears achievable.
Marc Holliday, CEO
So with that, we'll open up the line for questions.
Operator, Operator
I show our first question comes from Alexander Goldfarb from Piper Sandler.
Alexander Goldfarb, Analyst
I have two questions. First, Marc, let me start with a broad question before I direct a guidance question to Matt. Today, there was news that Governor Hochul has approved the Penn Station redevelopment project alongside one of your fellow REITs. Considering the upcoming large office developments supported by tax financing expected in New York in the next few years, do you see this as similar to what happened on the Far West side, where tax incentives had a significant impact on the market? Additionally, do you believe that Grand Central will receive any comparable tax incentive financing to help modernize some of the older buildings and improve the office offerings in that area?
Marc Holliday, CEO
That's a great question, Alex. I believe we will explore this further as the year progresses and more details about the plan emerge. There are similarities and differences to consider. It's beneficial for New York City to have a significantly enhanced Penn Station, which serves as a vital public asset, unlike some other subsidized developments in the city. This improvement is crucial for the millions of commuters using Penn Station, Amtrak, and Jersey Transit. It's overdue, as this initiative has been in planning for decades, and I see it as a positive step for the city. However, how the financing will be handled remains unclear, particularly regarding the mix of state funds and contributions from nearby buildings that are being upzoned to support tax payments for public improvements. While the concept makes sense, we generally oppose subsidized development. This isn't specifically about Penn Station; it's about how we select areas for development, creating both winners and losers in the competition. Since our office portfolio is entirely unsubsidized, and our development at One Vanderbilt and One Madison is also unsubsidized, we must ensure our buildings are competitive against subsidized projects. This presents challenges, but it also opens possibilities for residential and non-commercial developments, especially if they focus on affordability. Investing subsidies in affordable housing seems like a sensible approach, and I hope that is part of the Penn Station redevelopment plan. It's likely this project will unfold over a long period; I can't envision all ten sites being completed within a decade. A gradual growth strategy will help ensure the city keeps expanding positively. We need new projects to accommodate tenants seeking modern spaces, and the market shows strong demand for such developments. Construction in this city is costly, so we’ll have to see how the details develop. Ideally, the inventory increases at a measured pace, responsibly adding new spaces over a decade or more. I'm optimistic there will be mixed uses resulting in a vibrant, 24/7 Penn Station subdistrict. If done well, this could provide significant benefits to New York, and I trust that Vornado and others involved will execute it effectively.
Alexander Goldfarb, Analyst
And Matt, a question on the guidance. The state of the mortgage market where it's tough to get mortgages on anything but like sort of the top tier. How does that impact your guys' ability to sell assets as far as buyers to get funding and also on the DPE book for those holders of your DPE to get financing to pay you off? How does that impact your debt paydown thoughts for the balance of the year?
Matt DiLiberto, CFO
Sure. I’ll start off, and I’ll also ask Andrew to provide some insights on the market. The financing market is clearly very selective, as Marc mentioned. Regarding the financings we completed, the 450 Park financing and the increased financing on 100 Church were significant given the current environment. The CMBS market is largely inactive, forcing us to rely on banks, which are discerning about the sponsors and properties they fund. We are confident about our position. We don’t have many upcoming maturities, so it’s advantageous to have completed these financings and now focus on our corporate maturities. I previously discussed our shift in corporate financings. The corporate bond market mirrors the CMBS market in its volatility, and we aim to reduce some of our bond holdings. I believe we have a solid strategy to execute one or two asset sales to cover the $300 million in bonds. If we can't secure another $500 million, we will consider refinancing those bonds for the short term and pay them off once we receive proceeds next year from One Madison. Andrew, would you like to add anything about the market?
Andrew Mathias, Chief Investment Officer
Well, Alex, I think it's just really figuring out when the CMBS market is going to return to liquidity. There's really very little new issue right now and it sounds like bond buyers are on the sidelines, watching interest rates, watching the dollar, and watching all these various financial factors that have nothing to do with sort of the underlying credit of the real estate. So balance sheet lenders are ruling the day. And I think they're taking advantage of it and getting historically relatively good pricing, which is bringing capital to that market, and that's fueling some of the transactions we've seen to date. But to have a fully functioning market, we do need that CMBS market back. So we're anxious to see where it settles out.
Operator, Operator
And I show our next question comes from the line of Jamie Feldman from Bank of America.
Jamie Feldman, Analyst
I want to go back to your leasing comments. I guess, first is the 1.1 million square foot leasing pipeline. Can you talk about how that breaks out, large tenant versus small tenant? And I guess to tie into that, your comments on small to medium-size picking up, I'd love to hear more color on what you're seeing there?
Steve Durels, Head of Leasing
Sure. So like what we've seen in the overall market, approximately 46% of our pending leases are with financial service tenants. So I guess no surprise with that. The good news with that is that our product that we have in the marketplace is the right product for the tenants that are out there searching for space. Of the 1.1 million square feet, 948,000 square feet, and this is particularly the good news relative to what Marc and Matt were saying earlier about meeting our targets are leases that are out, either out for signature or leases that are in active negotiation as opposed to simply term sheets being negotiated. And then we've got another over 200,000 square feet of term sheets, which we think have a good chance of converting over to a lease. And then what's not in those numbers are a wide array of other early-stage proposals that we're entertaining, but are not yet advanced enough that we felt confident enough to say that it would qualify to meet our pipeline standard. A wide range of size of tenants from very large to small and so with no — not skewed for one size of tenant in any way, shape or form. The good news, I think, that we're seeing today or the sort of developed over the past maybe 45, 60 days is we're finally starting to see those small to midsized commodity building tenants come back into the market. I've always used Graybar Building as a good barometer of that because of the diversity of types of tenants and size of tenants, and we're more active at rebar today than we have been any time in the past 12 months. So I think the reason for that is the big guys start to return to the city for work from their office; the smaller tenants are following in their trail. They require less time to make their real estate decisions. So it's natural to expect that the big guys start to reenter their office space, and the smaller ones are going to follow suit, and that's leading to real estate decisions and why we're seeing those smaller to midsized commodity type transactions come to the forefront. So I view that as very encouraging news and hope that we'll see more traction as the year progresses.
Jamie Feldman, Analyst
I guess the —
Steve Durels, Head of Leasing
Must have been a second question? What you guys. Do we have another question operator?
Operator, Operator
Yes, our next question comes from the line of Michael Griffin from Citi.
Michael Griffin, Analyst
It's Michael Bilerman here with Griff. Marc, on this acceleration of an expansion of the asset management strategy, and I recognize it's a challenging and volatile environment. But just taking your comments about the stock, I think Gilberto talked about stupid cheap and where the stock is, is there any opportunity to dramatically accelerate the shift of the company by looking at your existing assets and just bringing a substantial number of your partners in and effectively solving all of this at once, right, solving the balance sheet, solving where the stock is, and accelerating the asset management strategy, effectively taking the company private but sticking it public and being an asset management company. Is that at all the thought process today?
Marc Holliday, CEO
Well, I mean, if I understand the question, I think the expansion and growth of a true asset management platform within the public company that we sit for the benefit of shareholders and management is the direction we're headed. I don't know how expedited it is because these are big, high-profile assets and even in volatile markets, it's hard to really get the right assets in the right locations at the right price. It's got to all come together. So there are other new asset targets we have that we think are perfect for this program. But I'd measure them in 1 to 2, not 5 to 10 as we sit here today. So I think this is a program that will grow over time as we get traction and expand our universe of joint venture partners, which we are doing.
Michael Griffin, Analyst
Yes. I was thinking about it from the perspective of like you think about 450, and I recognize the value you invested and the opportunity that it provides a company, but there was new equity put out which obviously could have been used for debt repayment, share repurchase, or DPE investment. So I was thinking more so rather than going out and pushing new equity out, which would require a sale, why not just leverage as you have over your long duration? And if this is really the new strategy, take as many of your assets and we've already done One Madison and OVA, take more of them, raise the capital, buy back your shares that you've been doing, you've bought back 35% in your share base more so than REITs and just completely accelerate it because your stock is so — like if you're in this really difficult spot with a really low cost of capital or high cost of capital, right, low stock price, high cost of debt, you have too much debt that you want to repay, how do you sort of dig your way out of this basically?
Marc Holliday, CEO
Yes. I don't — I mean we don't feel the — what you're describing internally. We feel like we've got a lot of liquidity balance. Yes. I mean I don't — we don't feel under balance sheet pressure. We've got over $1 billion of liquidity. We don't have much in the maturities. Matt's got the gateway articulated for how we're going to handle some of the unsecured bonds that come up, I think, this year primarily. We've got — so I think that the only difference in what we're doing and maybe what you're saying is that there's no urgency, we feel that we have to take, and I'm not sure it would be in our interest to act with that kind of speed. I mean we lean into markets and we average into market. So we're going to average as the stock is down and as the stock recovers. We're by no means signaling that we're not going to continue with the stock buyback program. I think what Matt said both in his prepared remarks and on the call last time, was that we are simply taking a moment in time to sort of reallocate and overallocate to some near-term debt reduction, which I think is primarily on our bonds. As we then continue with our program of stock buybacks and development and redevelopment opportunities and money into highly accretive asset management. So I don't think you're going to see us on a hyper-accelerated basis. You've asked the question. I understand why that may sound enticing and I'm not rejecting that. I'm just saying that's not the plan we're on right now. The plan we're on is to take a very measured approach here and just accomplish the goals on the timelines we've set out, which we think is the right way to do it.
Operator, Operator
And I show our next question comes from the line of Steve Sakwa from Evercore ISI.
Steve Sakwa, Analyst
Yes. I guess I just wanted a little bit more color or thoughts around the tech leasing. I know, Marc, you sort of talked about the slowdown. We've seen a lot of announcements out of a lot of the big tech firms on kind of hiring freezes and a real slowdown in hiring. And we've even heard some of those large companies really stopping their tenant build-out on leases that they've taken — and I'm just curious if you have any concerns about any of that space maybe returning to the sublease market over the next 6 to 12 months?
Marc Holliday, CEO
Well, look, right now, the sublet market Midtown is around 3.5%, 4% of the overall availability. So higher than average but not by — I think, by an unsustainable amount. And tenants today who have a preference for new product, Class A product, well-amenitized product, they want direct leases. They want term. And the sublet market is not the best avenue for those tenants. So that's — there's always that shadow availability space, but the 1.1 million square feet Steve talked about negotiating with, I don't think any of that is kind of an alternate deal teed up for sublet. It's just not the right — it's a different kind of profile. So on the one hand, we'd love to see the tech industry, which has been such a big contributor grow, keep growing. But on the other hand, the data from Department of Labor, I mean, the numbers are what the numbers are. And if it's showing sustained job growth, that would be, I think, over 70,000 jobs in New York City in 3 months, 51,000 in April, May, and then numbers that are not — we have to delve into, but the gross number looks like 22,000, out of the state conjunculator, if you will, for New York City in June. I mean these are very healthy numbers. I mean, compare those statistically to past 2 years, past 5 years, past 10 years, these are big numbers. So if the growth is there, regardless of what sector it's coming out of, New York benefits because New York is a diversified economy, thank God. I mean it's finance, in health care, and professional business and services, by the way, is fully recovered to pre-pandemic levels, fully recovered about 96% or something. So Tech may be a slower contributor, but we have other sectors we hope will take up the slack. And as long as there's overall growth in the market, then I think we're in relatively good shape. But sure, we'd love to see tech pick things back up after they take a pause.
Steve Durels, Head of Leasing
I'll just add to that, that it's put a couple of data points in front of you or commentary to share is that sublease space availability today is still 0.5 million square feet of availability less than it was at the depths of the pandemic. So we went through 3 or 4 quarters where sublease was coming off the market at a pretty rapid pace. Secondly is that from what we were told — accurate or not, but what we're told is that the announcement of the stoppage of the work for the big tech firm that you referred to, was not unique to New York City, but was in 5 or 6 locations around the country and really driven by them feeling a need to redesign exactly what they were planning to build as a result of addressing the right workplace strategy in order to accommodate and respond to bringing employees back to the office. So whatever they had in the can to design, they felt maybe it wasn't the right mix of design elements to hit the pause button; they want to go through a redesign, and they expect to then go back into the construction and build out that space as opposed to putting on the sublease market. Third is that although the big tech guys, the big tech guys have announced some slowdown, there are still some tech requirements that are floating around in the market. So it's not as if it went to overnight.
Jamie Feldman, Analyst
Great. Appreciate those comments. Maybe 1 for Matt, just a little more housekeeping, but — and you talked about kind of the other income, and it was obviously a big surprise here in the quarter. Can you just help frame out what your expectations are for other income in the back half of the year just so we're all kind of on the same page?
Matt DiLiberto, CFO
Sure. Yes, that's a lumpy line item because it's where we capture all these ancillary income streams, fee streams. So it was larger in the quarter relative to other quarters and relative to our expectations because of those 2 items I mentioned. As I look out over the course of the third and fourth quarter, I see a drop-off in the third and I picked back up in the fourth. But those are based on when — if there are special servicing deals, we get success fees. That's based on the successful resolution if there are other deal-related fees that's based on when the deal is closed. So I would expect to see a drop off in third and pick up in fourth, but that timing could shift around.
Operator, Operator
Our next question comes from Tom Catherwood from BTIG.
Tom Catherwood, Analyst
Excellent. Maybe for Matt or Andrew, thinking of your floating rate debt, how much of higher interest rate expenses due to rising rates would be offset by higher rates on your DPE book? And is there a lag between the recognition of those higher rates for your DPE positions?
Matt DiLiberto, CFO
You're right. I mean we do have floating rate debt and preferred equity positions that balance has been shrinking though. I'm describing the number. I think it's around $300 million or so of our DPE positions that offset the $2 billion rate liabilities.
Tom Catherwood, Analyst
Got it. And then 1 other just clean up 1 specifically thinking of 7 day occupancy continues to scale there obviously above 76% as of the quarter end. We kind of pencil out something north of $3 million quarterly in NOI off of that at stabilization. It looks like you're running about little bit less than half of that. I know there's a lag in, especially apartments, between NOI rolling on and occupancy. But what are your current thoughts on when you start to get the bump from that increased occupancy, or do you really need to lease up the commercial space as well to get there?
Matt DiLiberto, CFO
So we have 7 day and 185 Broadway broken out separately. 7-day the residential, 185 Broadway is the commercial. So if you look at a 7-day occupancy, that is exclusively the residential. Remember there, we have 2 components. We have market component and an affordable component. The market component is 100% leased; the affordable component is not. That's a very long process to get that component. But we will be by year-end. So if you're looking at when is a stable cash flowing year for the residential component, you should look at '23.
Operator, Operator
And I show our next question comes from the line of John Kim from BMO Capital Markets.
John Kim, Analyst
Marc, you talked about the dearth of debt capital in the market today and, of course, we have rising interest rate environment. Can you talk about what the impact would be on cap rates for office because in the past cycle, owners could just refinance rather than sell assets?
Marc Holliday, CEO
Well, I mean, what typically happens in a market like this is you just have very limited trades. There's no — cap rates got to be set by a willing buyer, willing seller. And when you have a market where you've got well-capitalized long-term ownership that appreciates the long-term value of the real estate holds, if there's not enough acquisition capital, transactional capital that's out there that's priced at a level that can meet those expectations of the owners then there's a view that will cap rates rise. And I would just say that you have a bit of a frozen market where just not many trades get done other than in situations that might be pressured, but those are not the normative, I would say, for the bulk of the assets. Half the inventory in New York City, commercial office inventory is owned by 10 to 12 very well-capitalized long-term owners that typically, we've seen through the '90s, early 2000s recessions, et cetera, ride these periods out, continue to improve the product, and wait for the temporary nature of the debt markets to loosen up again, which they invariably do. So I don't — there have been some trades, I know resi trades in the —
Andrew Mathias, Chief Investment Officer
Resi, where there's still a liquid financing market, you see a lot more trades.
Marc Holliday, CEO
And what kind of situation is being referred to?
John Kim, Analyst
Okay. That's helpful. And Matt, on the other income, it doesn't look like there's been much of a contribution this quarter from Summit despite the strong traffic numbers that you reported. Are you still on track to deliver $20 million to $25 million of NOI this year? And if so, can you discuss some of the expenses that offset the NOI contribution?
Matt DiLiberto, CFO
So Marc talked about Summit performance. We are right on our numbers for the year. Remember, there's 2 components to that. There's the operator that flows through other income that I said in December and said again on the first quarter call, that is a nominal contribution to a lot of the contribution from Summit comes through NOI, and it is coming through on our numbers.
Operator, Operator
I show our next question comes from the line of Jamie Feldman from Bank of America.
Jamie Feldman, Analyst
Following up on the last question, are there any assets we should be monitoring that might trade soon, or do you think it will be quiet for a while based on your current discussions?
Andrew Mathias, Chief Investment Officer
Well, I mean, there's always assets in the market, and there's going to be trades even assets coming out of our structured finance portfolio into our own portfolio. So one notable deal in particular. So I mean there will be a market and there will be trades.
Jamie Feldman, Analyst
Okay. But in terms of like higher profile transactions, we should keep our eye on for price discovery, there's nothing you'd point to right now?
Andrew Mathias, Chief Investment Officer
Well, 245 Park has a bid date of today — so I'd call that pretty high profile, big and current because I think it's a 5 p.m. deadline. If you want to —
Marc Holliday, CEO
You're going to hand it to Jamie and put your bid in.
Operator, Operator
And I show our next question comes from the line of Vikram Malhotra from Mizuho Group.
Vikram Malhotra, Analyst
I just want to go back to the occupancy comment. You talked about the year-end target at risk. But can you just maybe remind us what are the sort of known move-outs that would influence occupancy in the next — this year and maybe the next 6 months? And maybe give us a sense of where you actually think occupancy will end up at year-end?
Matt DiLiberto, CFO
I think I said in my comments, we're about 100 basis points behind through the first 6 months; that carried through the end of the year, we end up at 93 instead of 94. Not a lot of big known move-outs coming in the portfolio. So what we're really seeing is just a slower pace in that same-store portfolio. So I want to differentiate, we set a 2 million square foot leasing target for the year, that's in the entirety of the portfolio. We're on track for that. We're a little behind in the same-store portfolio, which is just the pace of leasing.
Steve Durels, Head of Leasing
Any tenant that has a lease expiration between now and the end of next year. We have a very high degree of confidence that we have very good clarity as to what their intentions are. So to the extent that they may be vacating our portfolio, it's already built into our numbers.
Vikram Malhotra, Analyst
So just on that point, if you could clarify, since you have a high degree of visibility, like next 12 months, including the first half of next year, what percent of the expirations are sort of high visibility locked at this point in your mind?
Marc Holliday, CEO
Well, regarding the high visibility move-outs, we’ve been aware of some of them for quite some time, and I see 919 there, but that’s...
Steve Durels, Head of Leasing
Which we've leased 50% of that space already.
Marc Holliday, CEO
Yes, ML, well, within the DPE portfolio, 245 Park, as what baseball, right?
Steve Durels, Head of Leasing
That's correct.
Marc Holliday, CEO
That information has been known for over a year globally. We have identified those areas and are actively working on retenanting spaces where we have possession. Some of the move-outs, like Corbat, won’t happen for 2 to 3 years, which gives us ample time to plan for redevelopment. We are currently focusing on three buildings on Third Avenue: 885, 919, and 753. Next year, in 2024, we plan to collaborate with our partner, RXR, to examine the worldwide market. I don’t believe there’s anything significant we haven’t already talked about. Is there anything, Steve?
Steve Durels, Head of Leasing
No, I don't think there's any big surprises between now and the next 18 months.
Vikram Malhotra, Analyst
Okay, okay. And then just maybe a broader question. We talked — you talked a little bit about in your opening remarks that tech has slowed down because they're adjusting, I guess, to changing growth patterns, financials are now a big part of the leasing. I just — why wouldn't sort of — what technology firms are doing and how employees are working? Why wouldn't this become more broader? And then how do you react in terms of maybe what you need to do to the product in terms of more CapEx or developing? Does it change your mind on where you want to own geographically and not just with the city, but maybe other markets? What would that make you — if you think about like the evolution of SL Green from here, leaving aside asset-light. Why wouldn't this be a broader issue?
Marc Holliday, CEO
Well, I think the #1 response we've had to the question of hybrid work model is the extraordinary efforts we've undertaken and continue to undertake to amenitize the portfolio in ways that we think really resonate with tenants and their employees. And that's not — that's not anecdotal. That's verifiable feedback, if you will, as to the connection between what we're doing in terms of health and wellness and fitness and very elevated food and beverage program and conferencing and everything else, commutability, and public realm improvements as connected to what tenants want in order to maximally incentivize their workforce back to the office and create volume environments where they feel they're getting the most efficiency in production. So I mean that — but that's all — like we spent, I would say, close to an hour on just that topic alone in December talking about our plans that we've executed both in our new construction and throughout a good chunk of our portfolio and the positive response we've received to it. I think when you say do we worry about it or however you phrased it. I personally think and no surprise here, because I've made statements to this effect in the past, I think in the long run, it's a failed work model. And I think that — whatever people — whatever firms are experimenting with now, you go from 1 goalpost of 5-day a week to another goalpost of 3 days a week and wherever that medium turns out in between, I don't know, but I don't — I'm not one of those who subscribe to the notion that companies are at their best when they're all in disparate locations connected only by video conferencing. And people may differ on that they do but we have a strong belief in that, at least I do. And I think a lot of other business leaders do too. And I think that pendulum swings one way, and pendulum swings back the other. And I think over the long term, having — I think there's a heightened need to have a sense of community and centrality and a place companies can call home that are being developed today in ways that are, I think, far more extraordinary and far more inviting than they used to be pre-pandemic, which I think is ultimately a good thing. And I think it will prove to be the winning strategy for most sectors, I can't say all sectors. But that will have to — that's not something that's going to be decided in a month or two or a quarter or two; that's going to be something that I think companies will each decide what their sweet spot is. But most of the folks I talk with, of our 800 tenants in our portfolio, would agree that more togetherness, collaboration, mentoring, relationship building, business getting, et cetera, is better done face-to-face and in person than remotely. So — but that's just my feeling.
Vikram Malhotra, Analyst
Fair enough. And sorry, just last clarification, Matt. You talked about using funds now proceeds to pay down or deleverage. What is the goal? Like what is appropriate now in this environment over the next few years, where do you want leverage to be?
Matt DiLiberto, CFO
We have not set a leverage target, but we are prioritizing dollars towards unsecured debt repayment. I mean, we're comfortable with our leverage point before we got into a rising rate environment. So this is much more an effort to retain cash flow, protect against rising rates, not a function of a view that we had high leverage prior to rising rates.
Operator, Operator
And I show our next question comes from the line of Michael Lewis from Truist Securities.
Michael Lewis, Analyst
My first question is about 625 Madison. So I see that, that ground rent reset date passed a few weeks ago. Could you just tell us kind of what the process is now that, that date is behind us? And of course, what we really want to know is what the ramp might be if you're able to give an idea of that or maybe what's assumed in guidance for that?
Andrew Mathias, Chief Investment Officer
I think we've commented before, it's a subject of ongoing arbitration/litigation so I can't really get into any details. The rent has not been set as of yet. So as a leaseholder, we're still paying the historical rent — there's been no reset, and we would expect that to get clarity over the next, hopefully, 6 to 9 months. It hasn't — from our perspective, it hasn't been us holding up the process. It's been a little longer than we would have expected. But as a leaseholder we're continuing to pay the historic or old rent.
Marc Holliday, CEO
Yes. Just recall, if you would, that we also have a DPE position on the fee interest, which has a maturity of next year as well, and that's all been previously disclosed. So there's really — there are two different yet related transactions there.
Michael Lewis, Analyst
So for guidance purposes for the back half of the year, there's no significant bump in the monthly rent included in guidance?
Matt DiLiberto, CFO
The good news is I don't have to tell you because it's mostly a capitalized property, so it doesn't affect FFO guidance.
Michael Lewis, Analyst
Okay. And then for my second or my last question. This is sort of similar to a question you just answered. But along the lines of the flight to quality theme, you obviously own some great trophy assets like One Vanderbilt and One Madison and some others. But when you're the biggest office landlord in New York, you also have some buildings that are more, I guess, I'll call them average for lack of a better word. How do you think about the portfolio in that context? Do you think the bottom half of that portfolio, does it mean that in this environment, much higher capital investment needs, or maybe you sell things that otherwise you wanted or Steve talked a little bit about the Graybar building? It's kind of a barometer for this, but I'm kind of curious of what we've learned through the pandemic and hybrid and all this stuff. Changes the way you think the portfolio should be put together. I think your average rent is kind of in the mid-60s. Do you think you need to change that going forward or not?
Andrew Mathias, Chief Investment Officer
Well, I mean, we've been pursuing a very aggressive asset disposition strategy over the last 7 years really so 2015 — and the focus of that strategy has been the — I guess, the assets you described as sort of the bottom half of the portfolio. So I think what we tried to show you in December is we have a portfolio now that is centrally located prime locations and, for the most part, amenitized, so ready to compete in today's leasing environment. I think we've been fairly ahead of this trend. Sure, there's assets we own that we've stabilized or that the income profile doesn't show the kind of growth that other assets we own do; and generally, those are sort of our next sale candidates, if you will. So there's always assets we look at reducing or reducing our ownership interest in because there's capital out there among core returns and capital like ours that want more higher opportunistic returns. But we're very happy with the way the portfolio sits today. And I don't think any of the trends in the market caused us to do like a wholesale rescrub of the portfolio that's sort of been in process since we really haven't issued equity for 7 years or so.
Marc Holliday, CEO
We're going to try and pick it up just a bit here because we're usually allocated about an hour. I know we still have many more questions. So I'm just going to see if we can try and for the benefit of those that have been on and I'm sure have to get on to other calls and things. Trying to pick up the pace just a bit, if we can.
Operator, Operator
I show our next question comes from the line of Omotayo Okasa from Credit Suisse.
Unidentified Analyst, Analyst
Yes. One very quick one off the bat. Matt, other income for the quarter, apart from the aforementioned items you discussed, the fee income and things like that. It seems — still seems a little bit high relative to 1Q. So curious if there were any other items in that other income line this quarter?
Matt DiLiberto, CFO
Again, we generate a growing stream of ancillary fee income, servicing, management, construction management. So what was a historical recurring number each quarter has grown to something closer to $8 million to $10 million a quarter. On top of that, we have things that come in upon successful resolution or completion. And in this quarter, on top of the 2 things that I highlighted in the press release, we had the final recognition of a construction management fee at a project that we sold a year or 2 ago. That was projected in our guidance. It was unclear when we would get it, we completed the project in the second quarter, and so we were able to recognize that that was about $4 million.
Unidentified Analyst, Analyst
Great. That's helpful. And then everyone has always kind of talked about people eventually coming back to the office. That's when a lot of the power that people start to make decisions about their real estate. It sounds like the tech company is doing some redesign based on that thesis. But I'm just kind of curious are you starting to hear more from your tenants now about how they're kind of thinking about real estate longer term just kind of given where they are with the employees coming back to the office or what have you?
Steve Durels, Head of Leasing
Well, sure. I mean, the answer to that is the tenant's response is all over the board. I don't think anybody has found the perfect solution as to how they're going to manage a hybrid work environment or whether they're going to be 100% back in the office. What we consistently hear is tenants want their employees back to the office, they need to create a work environment that gives their employees a reason to want to be in the office as opposed to simply giving their employees a mandate to be in the office. You hear more commentary about things like it's a touchpoints in an office. And what that really means is employees may not have necessarily an assigned seat all the time, or not all the employees — those employees that are more mobile count just as much as whether they're working in the cafe or in the conference room or in the communal space as opposed to in an office or a cubicle; that's how architects are designing space to be more fluid and more group-oriented as opposed to very structured science-type seating. But you see a lot more discussion about a hospitality work environment, and tenants obviously are leveraging off the improvements that landlords like us are making into the common areas of our building in order to make the whole building part of the work environment. So not only amenitizing their space, taking advantage of the amenities that we may be programming in the space.
Operator, Operator
And I show our next question comes from the line of Anthony Powell from Barclays.
Anthony Powell, Analyst
There's a view that some have that a downturn or recession in the economy could be positive for office space occupancy as people get that to work because they want to keep their job. Is that something that you see as likely or do you think the impact of people hiring less is going to be a larger force there?
Marc Holliday, CEO
Certainly, makes sense to us. I do think we've heard the feedback that from our tenants that they're getting — the resistance they're getting to people returning to the office is hard to combat because of the job market. So I think if you see that job market start to weaken a bit, some of that leverage may shift back to employers, but it's speculation.
Matt DiLiberto, CFO
Got it. And have you disclosed the lease mark-to-market in your portfolio? And I know other sectors talk about that quite a lot, but with spreads down in the past few quarters. I just want to see if you have a view of what the lease mark market is in your say, your non-One Vanderbilt type of portfolio? I'm a little unclear as to what you're asking, but if you're looking for something that looks at in-place rents versus what we think you could mark the entire portfolio to today. We have that lease expiration schedule, somewhere probably 3 quarters away back in the supplemental.
Operator, Operator
And I show our next question comes from the line of Ronald Kamdem from Morgan Stanley.
Ronald Kamdem, Analyst
Just 2 quick ones for me. On the leasing pipeline, the 1.1 million square feet, maybe any color on the mark-to-market on those and just less trends would be helpful?
Steve Durels, Head of Leasing
Yes. If every one of those deals makes, then it's essentially a flat mark-to-market.
Ronald Kamdem, Analyst
Great. And concessions are?
Steve Durels, Head of Leasing
Concessions, I think we haven't seen a material change in concessions probably in the past 12-plus months. I think TIs in free rent leveled out 12 to 18 months ago. Time will tell as the economy gets stronger and the market strengthens as to whether those concessions come in and when that starts. But for the foreseeable future, we're not expecting any material change.
Andrew Mathias, Chief Investment Officer
I think similar to the last question, if you see — if you do see a slowdown or a little less activity out there, that could help construction pricing, which is — continues to be elevated, and you could see those concessions come down as the price to complete space comes down, we would hope.
Ronald Kamdem, Analyst
Helpful. And just — and my second one was just on again clearly elevated vacancies. Does that create an opportunity for — I know you guys have a co-working business, but how does that — how does this environment play into that?
Matt DiLiberto, CFO
Can you say the first part of that question, and you broke up right in the middle?
Ronald Kamdem, Analyst
Sorry about that. Just the element you can see, does this create more opportunities for the co-working business?
Steve Durels, Head of Leasing
Merged business. No, we — I mean, yes, from our perspective, no, we're not seeing in the broader market, more coworking leases being signed. And certainly, from our perspective, co-working is not a focus of what we're trying to attract that use in our portfolio.
Operator, Operator
And I show our last question comes from the line of Nick Yulico from Scotiabank.
Nick Yulico, Analyst
I just want to go back to DPE book. I think you're saying, Matt, about potentially use some redemptions there to help fund debt payoff. And so I guess I'm just wondering at this point, should we assume that the $440 million of maturities by the end of the year or earmarked for other uses? And so we think about a DPE book next year that starts at a level that's down by $400 million, $500 million?
Matt DiLiberto, CFO
You should definitely assume that we end the year at a lower level. Whether we get repaid on all the maturities or extend them or work out some other situation, we have yet to see the —
Andrew Mathias, Chief Investment Officer
It’s 245, we're either getting —
Matt DiLiberto, CFO
245 is already in there, right? So there's something that's going to happen there that's immediately going to take that out of the maturities for this year. What I was referring to in my commentary is actually originations, repayments, originations for the first half of the year that we already put towards debt repayment because we probably would have otherwise originated something in the second quarter and we didn't. But yes, I would expect by the end of the year, our balance will be significantly lower.
Nick Yulico, Analyst
Okay. But just from like an earnings standpoint, if we think about it, I mean using that book to pay off debt maturities. I mean there’s some earnings dilution from that. And I think even when you said about pushing out the $500 million on a short-term basis, even if you refinance that today that’s at a much higher rate than what you’re paying. So I’m — I just want to make sure that we’re understanding from a starting into next year, you have some of these dilutive issues to deal with on the balance sheet we should be thinking about from a modeling standpoint?
Matt DiLiberto, CFO
That’s exactly right. The things I highlighted in my commentary is affecting ‘22 will certainly affect ‘23 rising rates, less DPE origination being the largest.
Marc Holliday, CEO
As contrasted against a lot of the development pipeline that starts to roll onto the books into earnings.
Matt DiLiberto, CFO
And more fee income.
Marc Holliday, CEO
You've got to look at the whole picture. But yes, I think as it relates to DPE, the balance is expected to be down year-over-year.
Operator, Operator
This concludes our Q&A session. At this time, I'd like to turn the call back over to Marc Holliday, Chairman and CEO, for closing remarks.
Marc Holliday, CEO
Yes. No. For anyone that's still on, which I imagine is the hardly few thank you for listening in all the way through. And enjoy the rest of the summer, and we look forward to another catch-up call in 3 months, hopefully, with good news and more in the direction for New York City's recovery. Thank you.
Operator, Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.