Earnings Call Transcript - SLG Q3 2020

Operator, Operator

Thank you, everybody, for joining us, and welcome to the SL Green Realty Corp's Third Quarter 2020 Earnings Results Conference Call. This conference call is being recorded. At this time, the company would like to remind listeners that during the call, management may make forward-looking statements. Actual results may differ from any forward-looking statements that management may make today. Additional information regarding the risks, uncertainties and other factors that could cause such differences appear in the MD&A section of the company's latest Form 10-K and other subsequent reports filed by the company with the Securities and Exchange Commission. Also, during today's conference call, the Company may discuss non-GAAP financial measures as defined by Regulation G under the Securities Act. The GAAP financial measure most directly comparable to each non-GAAP financial measure discussed and the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found on both the Company's website at www.slgreen.com by selecting the press release regarding the Company's third quarter 2020 earnings and in our supplemental information filed with our current report on Form 8-K relating to our third quarter 2020 earnings. Before turning the call over to Marc Holliday, Chairman and Chief Executive Officer of SL Green Realty Corp., I ask that those of you participating in the Q&A portion of the call please limit your questions to two per person. Thank you. I will now turn the call over to Marc Holliday. Please go ahead, Marc.

Marc Holliday, Chairman and Chief Executive Officer

Thank you. Good afternoon, everyone. And thank you for being with us today. I'm joined here by Andrew Mathias, Matt DiLiberto, Ed Piccinich, Steve Durels, David Schonbraun, Andy Levine, and Maggie Hui as well as several others. And we're all together here socially distant and looking forward to a good earnings call today. So yesterday we released our earnings for the third quarter of 2020. And for the most part, the results and achievements met or exceeded our expectations and are aligned with our corporate goals, which were of course altered back in March and April at the outset of the pandemic, which you might recall from our Q1 call. Our earnings for the quarter were in line as we track towards the higher end of our revised guidance range. So we're pleased with that. And our office and overall collections remain relatively strong—surprisingly strong—at 97% and 92% respectively, something that we're quite proud of as it relates to the rigorous nature of our underwriting and our diligence and the superior quality of our tenant base this far into the pandemic. Our occupancy dipped, but finished the quarter above 94%. We are aggressively managing our operating expenses in order to maximize our bottom-line, generating savings in excess of $30 million of operating expenses year-to-date realized without sacrificing service to our tenants. We leased approximately 187,000 square feet of Manhattan office space—slightly less than we had hoped for. But the pipeline looks very good at 825,000 square feet of leases and term sheets pending and in negotiation. So that pipeline number has actually increased. While we do not expect to certainly close all of that activity by year end, we are on track to lease 1.2 million square feet for the full year, a lofty goal we reset for ourselves in April at a time of great uncertainty when there was not really good visibility as to what we could achieve. And as we sit here now, we feel that it's attainable and we are working hard to make those numbers for the year. Through additional focused reductions and savings, we also managed to reduce total G&A by $10 million to approximately $90 million projected for the full year. And we along with others are benefiting from significant interest savings due to the Fed's easy monetary policy. While generally pleased with these results, it doesn't nearly tell the entire story of what we've achieved as a company in the past seven months, how we achieved it, or what our current metrics are for measuring success in the pandemic economy. The city's economy is essentially on pause right now, as much focus is on the containment of COVID-19, and the traditional financial measures that we in our industry look to, we don't think really apply during these highly irregular times. The focus has changed. And at this moment in time, our focus has shifted and we are driven more than ever to help promote this great city, work with our hardest-hit tenants to sustain their businesses, create a safe and secure environment within our portfolio for building occupants and their employees, invest in the future of New York City and lead by example. And I'm happy to say that we feel there's no real estate company in our market that exceeds our efforts in these areas. We are batting a thousand in these areas. It all stems from SL Green's extraordinary employees who are 100% work-from-office, not work-from-home. We accomplished this safely, smartly and with enthusiasm for doing something positive for our families, our company, and our economy. We wish and encourage other companies to do the same for the sake of their employees many of whom feel disconnected and frustrated by the isolation of working from home, for the sake of local businesses who want to work and want to call their employees back to business and who rely on the 1.5 million office-using workforce in New York City for their sales. These businesses need everyone back in the city and back in their office spaces to make a go of it. And for the sake of the city, which has provided so much to so many. So lots of reasons beyond that go far beyond the productivity of working from office, but that really relate to the whole ecosystem of an economy which is why we have such a stout belief in work from office and school from classrooms and all the rest. So on June 15, SL Green employees returned to work at 420 Lexington Avenue and in our satellite offices, and we are working overtime with a sense of purpose and urgency that has expressed itself in many ways over these past months. First and foremost, we quickly established new operating procedures and protocols for our buildings combined with infrastructure upgrades, which make the buildings safe and secure for the employees that have returned to work and the employees that work in the buildings—the building employees themselves. And the feedback so far has been nothing short of excellent. Next, we worked to secure several construction sites so that construction could continue uninterrupted, on schedule and on budget. We then went to work with our most impacted retail tenants, and in many cases worked out arrangements to provide deferrals and concessions to help them through this difficult period. Turning now to our office tenants, we recognize this interim period is a moment of uncertainty, so we injected flexibility into the conversation with short-term lease extensions and increased free rent, both of which was met with real appreciation from those tenants that wanted to take advantage of those parameters, particularly those who had near-term lease expirations. So a lot of our activity recently, as Steve can expand upon, has been in the renewal area, much more so than prior years. Next, SL Green’s chef Daniel Boulud established Food1st, a nonprofit foundation created to provide free nutritious meals to frontline medical personnel, first responders, and the many food-insecure New Yorkers. On the same token, the organization has helped the hard-hit restaurant industry, reopened some of their kitchens and re-employed staff who had been laid off due to closures. To date, we are proud to have prepared and delivered 400,000 free meals to over 100 locations throughout the city—the logistics of which are managed entirely by SL Green. On the business front, SL Green continues to invest in New York in many ways that we believe create long-term value for the company. And there was no greater example of this than the completion of One Vanderbilt on September 14—three months ahead of schedule and $100 million below budget. Fifty invited guests, industry leaders, civic advocates, and elected officials attended the ribbon cutting that we held in the newly completed Vanderbilt Plaza as we celebrated this great and permanent achievement for New York, including $220 million of public realm and transportation improvements. Just two weeks later, we had a topping out at 185 Broadway for the on-time topping out of the project, which is the first new residential construction in downtown being built under the affordable New York housing program. And just blocks away from 185, SL Green commenced demolition of 126 Nassau Street for a $220 million fully committed development project for Pace University inclusive of dorms, classrooms, and other educational facilities. It’s a major project for Pace and for their expansion. And this project is completely capitalized with joint venture equity and construction financing that we closed during this quarter. Finally, there were a number of other sale and disposition transactions concluded during the quarter, the proceeds of which fortified our $1 billion liquidity plan that we set forth back in April, reduced corporate indebtedness and enabled us to continue our share repurchase program. So you see that we've been quite busy these past three months over the summer, and accomplished quite a lot with much more to come in Q4. Yes, it's true that economic activity in New York City slowed considerably in the third quarter, leasing activity was sharply reduced, vacancies rose and investment sales declined. However, this is entirely to be expected from a city on pause and a city whose number one priority right now is containment of COVID to such a degree that the city is one of the safest cities by most COVID measures in the country. Further digging into the data, there are encouraging signs. Wall Street profits for the first half of the year were spectacular—nearly $28 billion—which is much higher than an average full year of earnings for these banks. After a seismic 820,000 private sector jobs were shed in April, nearly one third of them have since been restored—a rate of recovery that is actually faster than we saw after the tech crash in early 2000 and the Great Financial Crisis in 2007–2008, albeit recovering from a lower starting point. The office-using job recovery is somewhat slower, but there has been sequential office-using job growth in July and August and September. And we hope to see that trend continue in October and throughout the year. Notwithstanding that the city projected a loss of $9 billion of tax revenues, its $90 billion budget is balanced for fiscal year ending 2021. And the city is now working on balancing the budget for fiscal year 2022 helped by reduced interest costs, higher than expected profits from the financial sector that I mentioned earlier, retail spending that is actually holding up fairly well and further aided by the prior stimulus benefits that many New York residents and businesses received and hopes for future stimulus in the near term. So while we read the analyst reports last night that were fairly neutral on our results and somewhat pessimistic on New York City fundamentals, we have an entirely different view on how we measure the quarter. We think it was an extraordinary quarter. We think we accomplished much for the company, for our employees, for our tenants, and the local businesses and the city's economy of which we are an inextricable part. And we take great pride in what we've done and what is yet to come. This city, we all know, has been written off many times before and has always rebounded stronger than ever. New York City is our home. We are fully committed here and we believe strongly in its future. The city's future in many ways is SL Green's future. And we have conviction in its underlying fundamentals, spirit, diversity, and everything great about the city. We will continue to set New York apart as the greatest city in the world. So before we open it up for questions, which we'll do momentarily, I want to talk about one further piece of good news, which is our investor conference slated for December 7th of this year. After much deliberation and input from the investor community, we have decided, true to form, that our 2020 investor conference will be live and in person at the now-iconic One Vanderbilt auditorium on our new amenity floor, which will be unveiled in December and open in January to tenants, and we will have all COVID precautions in place. At this event, we will obviously look forward to presenting our business plan for 2021 and our outlook for the future of New York City. With that, operator, I'd like to turn it over for questions.

Operator, Operator

Operator Instructions: Our first question comes from the line of John Kim of BMO Capital Markets. Your line is open.

John Kim, Analyst, BMO Capital Markets

Thank you. Good afternoon. Marc, I was wondering, if you can give the breakdown of your 825,000 square feet of leasing in the pipeline, as far as how much is renewal versus new or expansion space and how much of that is in your new developments?

Steve Durels, Head of Leasing

This is Steve Durels. So I'll respond to that. So in the pipeline we've got 825,000 square feet, 51% of that are new transactions, and 49% are renewal transactions, heavily weighted by legal, financial and publishing industries, and heavily centered around the Grand Central area where we see the most leasing activity right now, in particular a lot of activity at One Vanderbilt, and then our buildings at 485 Lexington, 750 Third/Graybar and 800 Third Avenue.

John Kim, Analyst, BMO Capital Markets

As a follow-up, I'd like to ask about dispositions and how much you're looking to sell. And in particular, the media reports on 410 Tenth Avenue just given it's your foothold in the Hudson Yards area, it leads to great tenants, why sell that asset at this time?

Marc Holliday, Chairman and Chief Executive Officer

Well, Andrew will talk about why and everything else going on, but we have—we've been selling fairly robustly our mature and non-core assets since 2015, 2020's no different. We've been able to accomplish much year-to-date. We have several assets in the market now. We can chat about them. But this is all part of a long-term plan. Volumes may be altered slightly by COVID, but really nothing new here—everything we talked about in December about recycling of capital, monetizing gains, and paying down debt and repurchasing of shares, which we're well along for this year, maybe not quite $500 million but closing in on it. So some of the specifics, Andrew, what we're doing.

Andrew Mathias, President & Chief Operating Officer

Well, I mean, particularly with 410, it's an asset that is drawing a lot of interest given where interest rates sit today. And the extraordinary job Steve and his team did leasing that asset up. So we don't have to sell it. We're evaluating bids. We actually closed a financing on the deal over the summer—$600 million financing—which funds all the capital improvements, which was part of our business plan for the year. But we did get approached with some interesting offers and decided to test the market. So, 410 is out there in the market along with several other assets. Haven't made a decision yet about whether to pull the trigger on a sale or not.

John Kim, Analyst, BMO Capital Markets

Is there an update as to how much in total you're looking to sell?

Andrew Mathias, President & Chief Operating Officer

I mean, I think, the guidance for the year is unchanged. And if we were opportunistic sellers, if we like prices for assets we have in the market, we'll transact. But otherwise, there's no pressure to sell.

John Kim, Analyst, BMO Capital Markets

Great. Thank you.

Operator, Operator

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

Jamie Feldman, Analyst, Bank of America

Great. Thank you. And I appreciate all the color on SL Green’s efforts to keep the city moving here. Can you just talk about—you had talked about your efforts to market the city and promote the city and bring people back. Can you talk about the feedback from tenants both large tenants and small tenants, just in terms of, are they changing their attitude at all on how soon they want to bring people back. And then as you think about the leasing among both small and large tenants, what are they saying lately about their space needs and maybe shrinking or expanding?

Marc Holliday, Chairman and Chief Executive Officer

Well, let's handle the first part of the question, which is what are these business leaders saying in terms of wanting to get their people back to work? I would say, out of the 900-plus tenants in the portfolio and the hundreds we've spoken with directly at the senior levels, almost to a person they all express a desire to have their employee base back in the city. They recognize the benefits. They recognize the need to do it. And I think they recognize an urgency to it. Surprisingly, what I read into it mostly is a concern over liability, which surprises us because there's actually very little in the way of employer or landlord liability if you do things right, and right means following all the DOL, DOH, OSHA guidelines for what you need to do in your space which we and many other landlords in New York City are doing. So the buildings themselves are among the safest places. We know many people in our company are using mass transit. Andrew and I, and others use mass transit. The mass transit is clean, efficient, much more so than it was previously because they're taking extra steps for sanitization overnight and throughout the day, and most people are wearing masks and adhering to mask guidance by and large. So it's hard to put a finger on it. It's always sort of right around the corner. We're hearing in August it'll be right after Labor Day and Labor Day it's October. So it feels imminent. And yet the numbers don't bear that out. We're still, as a portfolio, right around the city average of probably 15% to 20% back to work—back to office work. And that's out of a 1.5 million office workers. So that means 80% to 85% of the people that work in office buildings are still home and that's frustrating. And I think they will be back. Whether they're back next month, December, January, February, March, that doesn't in our estimation affect any of the long-term fundamentals of the things we look at. I mean, the sooner the better and I would expect by December to see those numbers be somewhere between 20% and 30%—up from 15% to 20% today. And then hopefully it just grows from there, but the important thing is that we're heading in the right direction. A lot of the stats I gave you earlier indicate we are heading in the right direction both from COVID containment and job recovery and more and more people coming in and MTA ridership. But the point is the narrative is people want to be back. Now how that's going to dovetail with some allowance—there's going to be allowance for larger spaces, everybody, as they're returning is kind of dedensifying. And how long that de-densification trend will last I don't know. But for now, that is the trend, and how that'll be mitigated by some work-from-home policy, I can't say. Steve, what do you think?

Steve Durels, Head of Leasing

Well, I don't think anybody out there has a clear picture as to exactly where the trend is going to head. When lockdown started, there was a lot of conversation and speculation about how work from home was going to sort of overtake all of our lives. And as time has gone by that conversation has done a 180-degree shift where almost every day there's a constant barrage of discussions with tenants who continually express frustration about being home, the isolation of being home, the inefficiency of working from home. So whether or not they're staying at home because of all the press with COVID and short-term fears, I think when they look past that, you're hard pressed to find a business manager out there that really has locked down a point of view as to how they're going to operate their space and manage their employees going forward, other than the fact that they all recognize they want to be back in the office. So in the short term, it'll mean changes to the furniture environment, some of the design elements of spaces. But I think looking past that, and if you talk a little bit more about the pipeline of deals that we're working on with tenants, they're looking past the immediate disruption of COVID and saying, okay, we recognize there's a lot of it in the tunnel, whether that's six or 12 months out, but they're starting to begin to plan for their offices and how they're going to run their space. But I don't think they have a firm point of view as to how much of that is work from home or how much of that is hoteling. It's just all over the board right now.

Jamie Feldman, Analyst, Bank of America

Okay. And then just to follow up, small versus large tenants, are you seeing a change there or a difference there just in terms of giving back more space or giving up leases, or how they're thinking about their space plans?

Steve Durels, Head of Leasing

What you're seeing is in the second and third quarters of the year there was a lot of renewal activity, a lot of short-term renewal activity, anything from a year to five years. And I don't think that was exclusive to larger or small tenants. You could argue that some of the very small tenants, and I'm talking very, very small—couple thousand square feet—found it easy to just simply say I'll work from home. But our average size tenant in the portfolio is 25,000 square feet. And things have started to decidedly shift: in the second quarter 77% of the transactions in our portfolio were renewals. In the third quarter it was 56%. As we sit here today, 51% of my pipeline are new transactions. So clearly the tides are shifting where tenants are beginning to look past it. And they're now saying let's talk about relocations and let's talk about longer-term planning as opposed to where the thinking was earlier in the year.

Jamie Feldman, Analyst, Bank of America

Okay, great. Thank you.

Operator, Operator

Thank you. Our next comes from the line of Michael Lewis of Truist Securities. Your line is open.

Michael Lewis, Analyst, Truist Securities

Great. Thank you. I want to ask for a little more color on 885 Third, which was a preferred equity investment. It looks like the common now. You don't ascribe any value to it, it looks like there's also a large expiration right around the corner. Maybe just your thoughts on keeping that building leased and the strategy there.

Marc Holliday, Chairman and Chief Executive Officer

Well, I'll start off then Steve can follow in. We—885 is a great building, 53rd and Third, otherwise known as the lipstick building. It's very iconic, beautiful building that right now is going through a transition because one of their larger tenants was rolling out, I think essentially now, or over the course of the next few months.

Steve Durels, Head of Leasing

Yes, next year.

Marc Holliday, Chairman and Chief Executive Officer

Next year is probably when they stop paying rent. So that building, from our standpoint, fits the category of one that we will—we have and will develop and will execute a full building repositioning and updating and cleaning and COVID-compliant improvements to position it as among the best buildings on Third Avenue. Our basis is quite low; our last-dollar preferred there is quite low. David, I want to say around $6.

Steve Durels, Head of Leasing

$6-something a foot.

Marc Holliday, Chairman and Chief Executive Officer

As we transition control to ourselves, we actually now have operating and managerial control of the property. We'll be executing a redevelopment plan, which is modest—the building is of recent vintage and it's in excellent shape. We'll go into it in more detail in December. But the goal is to invest an adequate amount of money to bring it up to the standards of one of the best on Third and then have a leasing program that we will execute over the next two-plus years. In fact there is a lease out on two floors already. So it's well-laid plans. We have a two-year lease-up plan, but there is activity at the building right now. We still are committed to going in this direction. And upon completion, I think you'll have something that's a world-class asset that would have both domestic and a lot of foreign interest because it's that kind of iconic building. David, anything you want to add?

David Schonbraun, Senior Vice President, Capital Markets

I mean, I think we're kind of taking over given capitalization issues of the sponsor, less the asset. The asset just needed money to reposition—a small redevelopment and re-lease—and the sponsor wasn't in a position to do that. So we're stepping in. But the asset is iconic. As Marc said, there's lots of people in the U.S. and internationally of interest. And in a couple of weeks, we've already had strong leasing demand without even reintroducing the building to the market. So we're excited about what's done there for the next year or so.

Michael Lewis, Analyst, Truist Securities

Great, thanks. And for my second question, maybe give us a sense of how sublease space available in your portfolio has changed? And even more broadly, with the increase in sublease space available in the city what does that mean—how much of a hurdle do you think that is?

Marc Holliday, Chairman and Chief Executive Officer

Well overall in the market, the availability rate for sublease is 2.9% of total availability. Between the third and second quarters, sublease inventory as far as availability rate increased by 25%. We did not see a similar increase of availability listings within our portfolio. In fact, since COVID—and I'm not talking just since the last quarter, I'm talking about since the work-from-home mandates—over the past six or seven months, we've seen less than 200,000 square feet of sublease listings added within our 28 million square foot portfolio. And on historical terms, we don't have any large blocks of space available for subleasing in our portfolio. It's a lot more kind of 5,000 to 30,000 square foot type spaces. So I don't really view it as competitive pressure. And remember, even though there'll be a lot of subleasing I think there is more sublease inventory to come in the broader market, it's always damaged goods. It's term-constrained. The sub-lessors typically are not funding work letters. They can't offer renewal and expansion options. The credit of the sub-landlords is always a question mark. So there are going to be tenants out there to take advantage of that marketplace, but there is always something more from a direct lease basis that we have to offer which is why we always seem to do well, irrespective of the sublease inventory.

Michael Lewis, Analyst, Truist Securities

Great. Thanks a lot.

Operator, Operator

Thank you. Our next question comes from the line of Rick Skidmore of Goldman Sachs. Your question please.

Rick Skidmore, Analyst, Goldman Sachs

Good afternoon, Marc and Matt. Can you just talk about how you're thinking about leverage in terms of debt-to-EBITDA? Debt-to-EBITDA has gone north of 10 times. If you annualize the third quarter, it's probably north of 12 times. Can you just talk about how you think about leverage and use of capital as you go forward between leverage and share repurchase? Thanks.

Matt DiLiberto, Chief Financial Officer

Yes, Rick, it's Matt. I'll hit the math first. I think if you're annualizing a quarter, you're going to come up with a bad number, and of course everybody does debt-to-EBITDA differently. Debt-to-EBITDA is of course the most unreliable and least relevant leverage metric you can use in real estate, particularly when you do a lot of construction. So we looked at our leverage as still holding steady. We look at it on an LTV basis in the mid to high 40s in a market that generally sees 70%. So 50%-plus equity cushion where we feel comfortable and we've been managing that very closely as we balance capital between debt repayment and share repurchases. With the construction that we have and use of EBITDA, you're basically saying One Vanderbilt, One Madison, 410 Tenth, 185 Broadway are all worth zero, and I don't think anybody on the call would actually say that. So we look at leverage differently and we feel we're comfortably protected.

Marc Holliday, Chairman and Chief Executive Officer

Yes, Rick, I would just urge you to consider what Matt said. I've been hearing we're over-leveraged for 21 years and we are a company that's always got a large pipeline of active projects that we're going through heavy redevelopment or ground-up development. And by its nature, we incur a lot of financing on those projects. In the case of One Vanderbilt something that's finished and yet we're recognizing little to no income, excuse those numbers. So if you take the leverage associated with properties not in service out, our operating portfolio is widely under-leveraged. And then on an overall LTV basis, even including all the leverage on assets that are among the most—the irony is the most valuable assets in the portfolio are the ones that have the leverage and aren't yet producing income. So right now, One Vanderbilt, soon to be One Madison, 410 Tenth which is fully leased but we're not recognizing income yet, 185 Broadway, which is going to be one of the best rental buildings downtown but obviously not yet leased up because we don't have our TCO. So you've got to dig—really dig into property-by-property loan-to-value, look at stabilized values, look at the quality of the earnings. But we, on an LTV basis, are probably 45% or less, tons of interest coverage, a lot of capacity, very little outstanding on our line of credit and we think we're in a—no near-term maturities which I actually think is more important than level of leverage is the balance of terming out your maturities. So I guess it's a matter of perspective, but we would disagree with the notion that the company is highly leveraged.

Rick Skidmore, Analyst, Goldman Sachs

Thank you.

Operator, Operator

Thank you. Our next question comes from Peter Abramowitz of Jefferies. Your line is open.

Peter Abramowitz, Analyst, Jefferies

Yes, thank you. I just want to ask about—it looks like you have a couple of upcoming lease expirations with News Corp at 1185 Sixth Avenue and then Fairchild Publications as well. So I just wanted to ask, with those coming up, how are those discussions going? Are they definitely renewing and kind of how are they considering changing their space needs based on the current environment?

Marc Holliday, Chairman and Chief Executive Officer

No, the leases at 750 Fairchild, which is the largest tenant over there, they moved out of the building years ago. A 100% of that space was subleased to a variety of different tenants, probably, and I'm going back in time maybe three or four years ago. So there was never a chance. They're part of Condé Nast, so their whole operation moved down to the Trade Center a long time ago. We are in active discussion with probably 25% to 30% of the subtenants that we think there is a good probability that we'll be able to convert them over to a direct tenant basis. And then, with News Corp at 1185, they made the election probably 18 months ago that they were going to consolidate into News Corp's headquarters. But that's a building where the space that we'll get back from them is on upper floors, and it's a building that we recently completed a significant capital program—redoing the lobby, the entrance, the elevator cabs, corridors, bathrooms. So that building is very well positioned to be able to retenant that space.

Peter Abramowitz, Analyst, Jefferies

Got it. That's helpful. And then from a high level, any other factors, either from move-outs or from incremental vacancy leasing to think about as we try to forecast your occupancy, say over the next six to 12 months?

Marc Holliday, Chairman and Chief Executive Officer

I don't think there is anything that's not already within our budget today. I mean, we've not been hit with any big surprises. As we've said in the past, one of the silver linings of this whole experience is that we probably have been able to have a fighting shot to keep some of the subtenants and keep some of the direct lease tenants that were otherwise anticipated to be vacating, just through the natural course of their business management. So I can think of at least six or seven tenants that we're probably going to end up keeping—tenants of decent size, whether they're long-term or medium-term type tenancies—but clearly it will preserve the cash flow in some of these buildings that we were otherwise budgeting interruptions.

Peter Abramowitz, Analyst, Jefferies

Got it. That's all from me. Thank you.

Operator, Operator

Thank you. Our next question comes from Alexander Goldfarb of Piper Sandler. Your question please.

Alexander Goldfarb, Analyst, Piper Sandler

Good afternoon down there. So just, the first question is on the DPE book. One, clearly, congrats for being able to transact in the current market. So I think it's a testament to the positions. But just to that point, you guys did take a little bit of a haircut on the DPEs that were sold in the quarter and then you had the write-off of your equity position in the ground position at lipstick as well. So I’m curious—there was no seasonal impact, you guys were clear that you didn’t have to take any marks there. How does it—just for us, because we’re new to CECIL, how does it work as far as taking an impact on the remaining positions? Do individual sales during the quarter not require you to reevaluate the other positions or just how does it work as we’re all sort of getting used to a CECIL world?

Matt DiLiberto, Chief Financial Officer

Yes, Alex, so I just want to correct one thing you said. I think you said we took a mark somewhere on 885 taking back the equity position, which isn't the case—we didn't do that this quarter. The marks we took this quarter were only on assets sold. We sold—netted to $122 million of proceeds, took a $9 million hit on those. Those had not been reserved previously; we took pricing marks on those to generate the liquidity to put back into debt repayment and share repurchase on an accretive basis. We took a mark on 885 a long time ago, probably 12 months ago. As to CECL, CECL is an ongoing analysis; we are required to look at the portfolio under CECL every quarter. We were very conservative; you're looking at a whole bunch of inputs, a whole bunch of potential outcomes and probabilities when you do that. You recall back in the first quarter, we took a significant amount of marks; we were very conservative, looking out through COVID and erring towards the side of conservatism. When we evaluated the entirety of the retained portfolio again at the end of the third quarter, there was no additional reserve required. It's not impacted by the sales we do because again, we're electing to sell things at a price that we feel is appropriate. So we can take those proceeds and go buy back stock or pay down debt. The retained portfolio is looked at on a hold basis based on potential outcomes, and no additional reserve was necessary. And we'll look at it again at the end of the year.

Alexander Goldfarb, Analyst, Piper Sandler

Okay, Matt, that's helpful. And then Marc, just going back to Jamie's questions on the city and COVID—there was that letter. I'm guessing that you were part of it from a bunch of the city leaders for the mayor's office about addressing concerns with the city safety, trash removal, etc. It seems like a lot of the issues—people aren't necessarily worried about the office per se so much as getting to and from the office. So in your dialogues, how do you think City Hall is understanding and responding to the concerns business leaders put forward about mass transit and cleanliness? How is the city addressing those commuter concerns to get people comfortable coming back?

Matt DiLiberto, Chief Financial Officer

Well just a couple of points on that. One, there were two letters delivered, I think—one from the real estate industry, another from the partnership. And we work very closely with the city and the state on all of these kinds of decisions mentioned. We were not signatory to the letter, but we have a very active voice in that as others expressed; we may have different views as how to achieve it. As it relates to mass transit in particular, the notion out there that I want to come to work, but I don't feel safe—I don't believe in that. From my purely personal perspective, I'm giving you now it's not even necessarily a company position—if it's okay for me and others and essential personnel who grind into the city day in and day out have been doing so since March 1, mass transit is a viable alternative. And I think there are people out there—I don't believe 85% of the people not coming to work are doing so because they have concerns over mass transit. I think at its core there are a lot of people who, if given the choice between staying home and getting paid and saving an hour commuting, some will opt for that. And it's just not something I subscribe to. So while the city can do a lot more to make mass transit safe, clean and hygienic—and I think the MTA is working on that—I believe it's up to the individuals to exit their homes, get into the city by whatever means possible, and get to work. People do it all day long. Our building employees, our construction workers, our employees at SL Green, our executive team—many of us use mass transit—and we've made it through, fortunately, and safely. We adhere to the protocols. COVID is very real, but I just give you another example: aside from mass transit, another refrain we hear is my kid's school is not in session, so we have to stay home with them and proctor them for online schooling, which is a real strain. So we implemented among our many incentives here at SL Green the latest incentive, which kicked off a few weeks ago, in which we converted some unused space and, with minor modifications, turned it into pods for tutoring and remote schooling. We hired tutors from IB Tutors who stay with small groups of kids who are the children of our employees, who otherwise might be getting a poor education at home. The participation rate is terrific. The kids come here, they are engaged, they're online, they get extra help, they do some things during downtime, and the feedback has been extraordinary from our employees. So businesses have to step up and give their employees some incentives—whether it's subsidized commuting, parking, boxed lunches for those that don't want to go out, subsidized childcare or proctoring for primary caregivers. We do that. This latest initiative—online school proctoring—has had excellent participation and results. So yes, government can do more, but I think businesses and individuals have to chip in, make some concessions, take some risks and get the economy going again.

Alexander Goldfarb, Analyst, Piper Sandler

Thank you.

Operator, Operator

Thank you. Our next comes from the line of Emmanuel Korchman of Citi. Your question, please.

Michael Bilerman, Analyst, Citi

Sure—it's Michael Bilerman here with Manny. Marc, I share your same enthusiasm about being back in the office—I'm here right now to go out for lunch with my colleagues—so it is very refreshing to be back in a live, in-person environment. We spend a lot of time obviously talking about New York because that's clearly where you're focused. But other cities—Boston, DC, San Francisco, London, Toronto—are seeing similar low office densities. Do you think there is a shift that comes with what types of jobs or industries end up in certain cities? How do you reposition or adjust for potentially those types of changes?

Marc Holliday, Chairman and Chief Executive Officer

First of all, Michael, glad to hear you are back in the office. We speak to a lot of folks who are prohibited from coming to the office because of company policy, and/or prohibited from taking one-on-one meetings with people like us, and that's frustrating. To address your question: New York is a roughly 400 million square foot office market and is probably five times larger than the next biggest city in terms of that density. It got to be that because of insatiable demand for office space. Work-from-home is not a new concept, it's been around for a long time. But there generally has been and continues to be a realization that in highly competitive markets—New York included—whether it's tech, healthcare, finance, advertising, creative work, or business services, teams are more bonded, client relationships are stronger and work is more structured and efficient when it's face-to-face in the office. I don't think this period of time is going to change that paradigm, which has been proven over decades. People will continue to demand highly functional offices, wired with state-of-the-art technology, with natural light, sustainability, and strong amenities. I still believe that's the best way to conduct business for almost all industries. Over time, some employers may adopt hybrid models—some days at home, some days in office—to varying degrees, but I don't think the office will be abandoned. We will have to adapt and the market will evolve, but the fundamentals of face-to-face collaboration, training, mentoring and client interaction remain compelling.

Michael Bilerman, Analyst, Citi

If we look specifically at your portfolio, can you talk a little bit about how much of your tenant space is actually open if people want to come in? How many of your tenants have reopened and are allowing employees in-office, and are there differences between larger tenants and smaller tenants?

Matt DiLiberto, Chief Financial Officer

I think Marc mentioned it earlier—15% to 20% are back in our portfolio, and we've been tracking that percentage each week since it dropped to very low levels. That percentage continues to grow and we expect it to continue to climb. Across the portfolio it varies. Some bigger companies don't have as many people back in the office as smaller companies and vice versa. The trend is generally upwards and our investments in building protocols and improvements have helped.

Marc Holliday, Chairman and Chief Executive Officer

The financial firms and lawyers coming back would be a major catalyst. Once those groups return in meaningful numbers, I think things will cascade. Each leader will make their own decisions about how much and when to mandate returns. But getting financial services and law firms back is key. Thanks, Michael.

Operator, Operator

Thank you. Our next question comes from the line of Craig Mailman of KeyBanc Capital Markets. Your line is open.

Craig Mailman, Analyst, KeyBanc Capital Markets

Hey guys, just curious—you're active in the sales market—what has the feedback been like? What do bidding pools look like and how are people getting comfortable underwriting cash flows today, given expectations around capex and the pandemic? How are people getting comfortable and what's pricing starting to look like?

Matt DiLiberto, Chief Financial Officer

I think there's more focus on weighted average lease term than there was previously. Assets with longer contractual lease streams sell with more liquidity, as you saw with our sale of 609 Fifth Avenue, the Puma retail condo. The bidding pools are very strong—even large assets like 410 Tenth got an enormous number of tours and interest. Foreign capital, if they can bid without a site visit, are also interested, though you do lose some foreign buyers who aren’t able to get to New York to do a site visit. But we see a fair amount of liquidity out there. Financing rates are so attractive that people who seek returns are able to achieve significant returns even at cap rates that people still find compelling to sell at.

Craig Mailman, Analyst, KeyBanc Capital Markets

Do you think people are significantly changing their required returns to be in office or in the gateway city?

Matt DiLiberto, Chief Financial Officer

No, because you have the dual impact of much lower rates which are being fixed out—ten-year interest rates at 3% or sub-3% in some cases—so buyers can achieve higher levered returns even at cap rates not far off earlier this year.

Craig Mailman, Analyst, KeyBanc Capital Markets

Great, thanks.

Operator, Operator

Thank you. Our next question comes from Vikram Malhotra of Morgan Stanley. Your line is open.

Vikram Malhotra, Analyst, Morgan Stanley

Thanks for taking the questions. You've outlined jobs are coming back, utilization is inching upwards, you're hoping things look different in three to six months. Can you give us your current view on where market rent growth or market rents are going to shake out versus pre-COVID? And similarly just values—what's your sense of marks on both those issues if we do see this recovery you are starting to outline?

Marc Holliday, Chairman and Chief Executive Officer

Vikram, I think December is the appropriate forum for that. We have not yet given our estimates or projections for rents and vacancies for 2021. We will dive into details in December when we present our business plan and outlook. It would be premature right now to give a definitive view—this city is in a pause and many other cities are in the same situation. If we're sitting here with 85% of people at home it feels one way; if by December we're up to 30%–40% it feels different. We'll have much more discovery between now and then. So let's table that until our December investor conference where we'll present our views.

Matt DiLiberto, Chief Financial Officer

Speaking to current rent dynamics, we've seen a larger shift in concessions than headline rents. Rents are probably down depending on the building anywhere from 5% to less than 10%. But concessions are up. So tenant improvement allowances and free rent have risen. If free rent was at 11% in months, it might be at 13% to 14% now. Landlords are funding more of the near-term cost of tenancy while tenants are willing to accept the rent over the life of the lease.

Vikram Malhotra, Analyst, Morgan Stanley

That's fair. Thanks for that color. As a follow-up, some corporates globally are clearly thinking about reducing office footprints. In your portfolio, has anyone approached you to talk about spaces where they may want to restructure or reduce footprint over the next six to 12 months as a post-COVID response?

Marc Holliday, Chairman and Chief Executive Officer

No, because so many tenants don't have a definitive point of view yet. Until employees are back in the office they don't know their headcount, the impact of work-from-home, or the impact of de-densification or hoteling. Conversations are fluid. Earlier in the year tenants were reacting to the uncertainty; now many are starting to plan for longer-term needs, but most haven't made final decisions. I don't think we'll have clarity until we're past COVID and people are back in the office.

Vikram Malhotra, Analyst, Morgan Stanley

Okay, great. Thanks so much. And congrats on the space allocated to tutoring for kids—great effort.

Operator, Operator

Thank you. Our next question comes from Steve Sakwa of Evercore ISI. Your line is open.

Steve Sakwa, Analyst, Evercore ISI

Thanks. Just two questions. Your largest DPE loan went nonaccrual this quarter—can you provide commentary around that, the care periods or how we should be thinking about that?

Andrew Mathias, President & Chief Operating Officer

Hey Steve. Yes, so that position is a loan on 625 Madison where we did a loan on the fee and where we control the leasehold separately. It was an opportunistic loan on a situation that's pretty fluid given the ground lease reval and we decided to take a conservative approach. Given that the loan is not paying currently we stopped recognizing income and it will remain on nonaccrual for the pendency of the revaluation, but the determination is expected next year.

Steve Sakwa, Analyst, Evercore ISI

Got it. So we should assume moving forward until the ground lease is resolved that that would be a noncash-paying loan?

Andrew Mathias, President & Chief Operating Officer

Correct.

Steve Sakwa, Analyst, Evercore ISI

Got it. Thank you. And then on the new leasing activity you mentioned, are the tenants you are talking to generally taking similar size spaces as before? Are they downsizing when they sign new deals or are they expanding? Is there any change in density on the most recent set of new deals?

Andrew Mathias, President & Chief Operating Officer

It's a mixed bag. We have one large tenant in the group that is actually moving into New York—a 100,000-square-foot tenant that plans to bring bodies from outside the city into the city. We have 79,000 square feet of leases out at One Vanderbilt and most of those tenants are coming from smaller spaces. We have a mix of renewals and smaller transactions. If your question is are size requirements being impacted by COVID, we haven't seen a material change yet based on the deals we're working on. The bigger conversation is how tenants will use their space and how they'll design and furnish it, not necessarily a dramatic change in square footage yet.

Steve Sakwa, Analyst, Evercore ISI

Got it. Thank you.

Operator, Operator

Thank you. Our final question comes from the line of Nick Yulico of Scotiabank. Your line is open.

Nick Yulico, Analyst, Scotiabank

Thanks. One of the themes of the call is that you feel very optimistic cities will come back, cities are on pause right now. But you did talk about giving some more free rent and doing some shorter-term renewals. There have been rents down. My question is how do you change your strategy if you're wrong? If the city is not just on pause but faces structural challenges for the next two years, how does that change your leasing decisions? Is this an issue where you can be more competitive on price? Does that make your portfolio more competitive? How should we think about scenarios where the city is on pause for a longer period or structurally problematic for a couple of years?

Marc Holliday, Chairman and Chief Executive Officer

A couple of points: acknowledging that things could take one to two years to recover, our assets are built for the long term. One Vanderbilt is built for a hundred years and One Madison will be delivered later—these are long-term assets. Whether it takes one or two years before a sharp recovery, our strategy is to stabilize and buy time. We proactively went to tenants with near-term expirations and offered flexibility—short-term extensions and free rent—in exchange for additional term. That was done to preserve occupancy and cash flow and to help tenants now. If the recovery is slower, that program lets us buy time. We're also selectively selling mature non-core assets where pricing is attractive to preserve liquidity. In other words, our playbook is to be proactive on renewals, flexible on terms to help tenants survive and preserve cash flow, manage operating expenses tightly, and opportunistically recycle capital when markets present attractive prices. Over the long run, we remain confident in New York City's fundamentals and SL Green's portfolio quality. If the pause is extended, we'd continue to adapt—more concessions, more flexibility, and continued focus on liquidity preservation and balance sheet management. But again, buying time and being proactive with tenants is the core of our approach.

Andrew Mathias, President & Chief Operating Officer

Nick, to add, as we said earlier, 50% of the 825,000-square-foot pipeline are new transactions. It was short-term renewals earlier in the year but the market is shifting. As we move into the fourth quarter clearly new deal activity is ramping back up. If we like prices for assets we have in the market, we'll transact. But otherwise there is no pressure to sell. We remain opportunistic.

Nick Yulico, Analyst, Scotiabank

That's helpful. And then as we think about next year, is there still a lot of renewal activity and will the new lease activity stay challenged? If so, does that tip the scale to more short-term renewals and free rent to keep tenants which makes sense as a strategy to hold occupancy?

Andrew Mathias, President & Chief Operating Officer

When you look at our pipeline and activity, it's clearly shifting. Earlier in the year we saw a lot of short-term renewals; now new deal activity is ramping. We'll give more color in December on how we project that to play out in 2021. But the pipeline suggests an improving environment for new deals.

Marc Holliday, Chairman and Chief Executive Officer

Okay, thank you everyone. I think we reached the end of the call list. So operator, there's no further questions—we're going to sign off.

Operator, Operator

Yes, sir. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.