Earnings Call Transcript - SLG Q1 2020

Operator, Operator

Thank you, everybody, for joining us, and welcome to SL Green Realty Corp's First Quarter 2020 Earnings Results Conference Call. This conference call is being recorded. At this time, the company would like to remind listeners that during the call, management may make forward-looking statements. Actual results may differ from the forward-looking statements that management may make today. Additional information regarding the factors that could cause such differences appears in the MD&A section of the company's Form 10-K and other 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 SEC Regulation G. 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 the company's website at www.slgreen.com by selecting the press release regarding the company's first quarter 2020 earnings. Before turning the call over to Marc Holliday, Chairman and Chief Executive Officer of SL Green Realty Corp., I ask those of you participating in the Q&A portion of the call to please limit your questions to one per person. Thank you. I’ll now turn the call over to Marc Holliday. Please go ahead, Marc.

Marc Holliday, Chairman & Chief Executive Officer

Okay, well, what a difference a couple of months make. If we had this call at the beginning of March, I would have told you all about the great things happening in New York City and at SL Green, recapping another very strong year of accomplishments and a stock price performance relative to our New York City peers that was very strong. I would have told you about a record low unemployment and a record high leasing pipeline, near zero vacancy across our portfolio, incredible progress on the construction and leasing of One Vanderbilt, and a sense of growing stability in the retail sector. And I would have highlighted our plans to continue executing on our very defined corporate strategy of asset dispositions and stock buybacks. But that was eight weeks ago and for all intents and purposes, a lifetime ago. Suddenly, we are living in unprecedented times, experiencing a disruption to our lives and businesses the extent of which most of us have never seen. The COVID-19 pandemic and the subsequent dramatic reduction of global economic activity have rendered the best-laid plans and projections uncertain and injected volatility into the marketplace. We don't yet know how long it will take to bring the pandemic under control nor whether New York's economy will rebound quickly as it often has in the past, or face a more protracted decline. What we do know, however, is that SL Green is built to withstand these times. It's in moments of crisis and market disruption that our team shines the brightest. Every member of our leadership team has been with the company for at least a dozen years, and many of us have been together since the very beginning. Our strategic position as New York's commercial real estate specialists means that we are better prepared to not only weather difficult times but thrive in the aftermath as things recover. Our response to this new threat was swift and comprehensive. We are at the forefront of instituting new policies to keep all of our buildings safe and secure, and our tenants and their employees well informed. New York City office buildings house many essential businesses, organizations, and agencies that work in our portfolio that are critical to keeping this city running. Medical offices, health care companies, visiting nurses, major media outlets and broadcast studios, and governmental agencies all have offices in our buildings. These tenants simply don't have the option of working from home; they are the people on the frontline who need assurances that they can operate in buildings that are open, operating, secure, serviced, and free from COVID-19. So we have viewed our role these past few weeks as doing everything we possibly can to support the heroes who are tackling the crisis and ensure that our facilities are ready when they need them. We are tremendously grateful to our own frontline employees from property managers and building engineers to security guards and cleaning staff, who continue to make our buildings best-in-class even in this environment. With our buildings and construction sites secured, we have turned our attention to the business of welcoming attendance back into the portfolio as soon as workforce limitations are eased. While no one yet is certain how and when the restrictions will be lifted, we are planning for partial returns to offices sometime in the second half of May with ramping up occurring over June and July. What we are hearing from our tenants is that employees definitely will want to return once the restrictions are lifted. Work from home is proven serviceable at best. However, businesses are currently operating far below total capacity and capability and there is simply no substitute for working in purpose-built environments, free of home-life distractions, in a collaborative setting which nurtures creativity, camaraderie, and collaboration. Count me out as someone who believes the future of work will be at home in a bedroom with a laptop and spotty Wi-Fi, connecting with family members doing video bumps. But undoubtedly COVID-19 has changed the perception of what businesses want in a work environment. As businesses reopen and rebegin the process of getting back to work, we will set new standards in the workplace to satisfy office workers. With more on that, let me turn it over to none other than our very own Ed Piccinich, SL Green's Chief Operating Officer.

Ed Piccinich, Chief Operating Officer

Thank you, Marc, and I echo your sentiments. We couldn't perform at the level we are performing in this emergency if it wasn't for Marc's and Andrew's leadership as well as the full support of the board. Here we are, seven weeks and it feels like seven years. Many of you have been through your share of crises and emergencies. Throughout my career everything from the 1993 World Trade Center bombing, 9/11, the Northeast blackout in 2003, the steam explosion in 2007, H1N1 in 2009, and superstorm Sandy in 2012. When COVID-19 first hit, it was about initial risk containment and we immediately formed a steering committee to understand and address the evolving situation. We were early in implementing expanded cleaning systems and protocols, identifying how to quickly isolate and sanitize areas exposed to COVID-19. We made sure that we were managing and disseminating information in real time and that our tenants were fully informed, but also our employees, while keeping the building fully operational. We took our in-house technology group—John Mathews, Jeff Kurkjian, A.J., and the rest of the team with Brian Allicock—to make sure that we were connected, Zoomed in like a sniper's crosshair. Governor Cuomo's directive to restrict nonessential workers from reporting to the office was reflected in our building occupancy. As a result, we needed to make some very difficult decisions, but we held out for as long as we could because of the loyalty of the workers that Marc referenced and we scaled back accordingly. Our frontline people kept the buildings running safe, sanitized, and clean. We're not only looking forward to ramping up operations as soon as this mandate is lifted, but we already, and I can assure you that the team has been manning, training, equipping, and as soon as this mandate is lifted, we will be ready. The team has been working hard, running like human calculators. Greg McManus and Head of HR Lynne-Courtney Hodges are running necessary algorithms that track our expenses and frontline headcounts as though we had a mounted GPS tracker on everyone. A few weeks ago, we shifted our focus from risk containment to risk mitigation mode and formed what we're calling our SLG Forward task force to establish the foundations of ideas and recommendations that will guide us through with a detailed roadmap of our entire portfolio reopening. Meghann Gill and Laura Vulaj are literally our in-house cartographers navigating us through uncharted waters. This virus may be new, but we have always been preparing. Once a year we close shop for a couple of days and run tabletop exercises to understand exactly how our buildings work inside and out, which currently puts our buildings to sleep like a board-certified anesthesiologist who is behind the controls to get them ready for their wake-up call. Never have I been more proud of our property management team and their laser focus. As you know, we oversee a behemoth of a portfolio with some 24 BMS systems, hundreds of fans, almost 20,000 square feet of coils, nearly 60,000 tons of refrigeration machines, and 200,000 tons of cooling capacity. I say all that because when you're behind the controls and you can bring that throttle down and be ready to ramp it up, that's where everyone that's key has to step in. On the construction side of things, we have Bob Dewitt. He's perfected the ability to execute virtually and has filed more exception applications than probably 20 owners combined. He has consistently maintained a construction workforce, albeit fluctuating at times, but kept construction crews with hammers in hand. There's been much work completed since we jumped on this in January and of course we're still not out of the woods yet. We've grouped our efforts into half a dozen or so categories which comprise some 100 different line items that we considered. We evaluated each and every one of them to exhaustion. Nonetheless, knowing that communication and safety would be the most critical aspects of our program and providing everything with confidence that our best-in-class staff and facility were up to the challenge. So as industry leaders, we set the standards for managing this crisis in the days and weeks following the first cases reported in New York City. The topics that I'm referencing—we looked at everything from how we're going to communicate with our tenants on captive screens through building systems, ensuring that our communication order from managing elevator occupancy, reducing conference room capacities, restricting outside visits, promoting teleconferencing— all the things you can think of. This tall order is being tracked by the project lead who brought ingenuity and leadership across the project and forms of communication, delivering flawless execution on each and every one of them. When it comes to the actual lobbies, we’re ready. Our signage will be ramped up for corridors, turnstiles, freestanding dispensers, and handouts to our tenants so they understand exactly what we're trying to achieve. And everything from hand sanitizers to floor Q markers in the elevators as well as commanding traffic control, everyone is going to be on call, understanding how these floor decals will indicate where you go and how you get to your destination. We've been running algorithms on our elevators and there will be staggered shifts as needed, but for the most part we've changed and ensured that our wait times will be manageable while maintaining social distancing and we'll get people exited in and out through the elevators. We're listening to anything and everything that has to be done in order to make it happen. We've also looked at consumables and we're making sure that all these consumables—everything from surgical masks to latex gloves—are available. Rachel Boniello is tracking that with her unrelenting encouragement, proving to us that during this time there's more than 24 hours in a day. We have evaluated passenger elevator proctors that are going to be pushing elevator buttons, directing tenants into cabs, and reducing density as necessary. These are passive and noninvasive ways of dealing with the situation at hand. We've looked at overhead thermal scanners as well as handheld thermal scanners. And although there's something to be said about the interpretation of how you use these, we're currently using them successfully at our construction sites to detect anyone with high body temperatures and the accuracy will be managed carefully. Look, no one is perfect, but I've been talking to my contemporaries at the Real Estate Board of New York, real estate advisory organizations, building owners management associations, and our tenants, and they understand how critical their behavior is. I'm sure they'll be implementing that in the weeks to come. Additionally, we've looked at some long-term items, everything ranging from nano vapor and hydronic technology to blue light to tracking frontline employees and hands-free turnstile enhancements. We've already started ordering retrofitting of our turnstiles. Even though we have a card recognition system, we want to create a Bluetooth system that can detect your approach to the turnstile and allow you access once you're within feet from the turnstile. Shout out to Tony Iaquinto, Dana Ranney, and Sam Yuri who are led by Ari Mahairas, work our portfolio every day, seven days a week, and are really redefining what real estate and security is all about. They tell me it's a context for it. And no doubt, it's proven to be such in these last seven weeks. As far as occupancy protocols, we're working with our own in-house specialists to determine what antibody tests or vaccination stations we might consider. But we will be surrounding our lobbies with the necessary support to understand exactly how everything should flow through. Getting back to some of the other things that we're doing to make sure that we understand how our protocol throughout the buildings is aligned: we're also going to be looking at our tenants' return to work and making sure that when we greet them at the entrance, it's not going to be any different than it was pre-COVID. Some of you may think, well, how are you going to do that with a mask on your face? What we're going to do is make sure that we obviously don't embrace them, but they'll see the wrinkles around our eyes when we give them the smile. There is not a single thing that we haven't looked at. So we're very confident that whether it's the greeting of our tenants at the lobby or any air quality enhancement from carbon filtration to electrostatic filtration to real-time monitoring, UV emitters, or bipolar ionization, we've looked at it all. And we expect to be able to cover each and every aspect. It's like anything else—we were always good at risk containment and risk management, but we are better today. It's like anything else in life. We've proven that we respect the shelter-in-place and the well-being of all. And I'm confident that when the tenants return to our buildings and we get full occupancy, there will be a continued improvement in the way we do things. I can't help but think of Vince from our mail room. Every time I've seen him over the past two decades, I pass him and run into him and he always turns to me. Hopefully, he's trademarked this little phrase. He tells me, 'maintaining, not complaining.' And through it all, he has not wavered. He's been here every day. So on that note, Marc, life doesn't take a day off. No matter how you slice it, people want to do the right thing. We thrive during these challenging situations. I assure you Andrew, Marc, me, and my team remain committed and we've got this.

Marc Holliday, Chairman & Chief Executive Officer

Thank you, Ed. There's no question about your passionate commitment to the task at hand and you've got a great team on it and we thank you for it. The tenants are going to be better off for it. And now, it's time for us to look ahead. As you can imagine, we are completely reassessing our business plan for 2020 to recognize and adapt to the current situation and to be prepared to move decisively as conditions continue to evolve through late spring and beyond. Fortunately, the moves we made over the past four years now look prescient and put us in a position to come out of this crisis stronger than ever. By monetizing nearly $10 billion of real estate since 2016, de-leveraging our balance sheet with proceeds, and buying back stock on an accretive basis, we've created a more streamlined company that's narrowly focused on our very best Manhattan office assets. We couldn't have predicted the current moment, but we're comfortable with where we sit today: substantial cash and liquidity, generally long-dated assets and liabilities, and a stable base of credit tenants. On the tenancy and leasing front, we are very fortunate to have largely creditworthy office tenants and long-term rent rolls. Accordingly, we did not experience significant delinquency or fallout on office collections in April. Having collected over 90% of our office rents, over 60% of our retail rents, we will exceed 86% of collections overall. Those are stats we are enormously proud of not only because of the tenant base that we built, knowing that they were built like we are to withstand times like this, but also we've had conversations with every single tenant in the portfolio and everyone who can pay, for all intents and purposes, has. April is not over yet. We think we're going to end up April office collections around 92%, retail rents based on the commitments we have in place today will approach 64%, and we will actually end up at around 87% overall come April 30th. So we've got still a week left. We're working with these tenants and we understand the challenges that some of them are facing, particularly our retailers. They'll be extraordinarily challenged during these times and we're attempting to work with those smaller tenants that had been most impacted during this time. We certainly have asked that our larger tenants and credit tenants pay their share as it was evidenced they did, so that it gives us the latitude and flexibility to work with the most impaired, generally smaller tenants generally in the retail community, who right now have been shut out of business. And we've been doing that. We've been doing that well. We work for the shareholders, but tenants and their employees are our customers and we will try to be there for them throughout. One great example of this is the Food1st initiative. We launched this week in partnership with Daniel Boulud to help alleviate the ongoing food shortage in New York City that has now been further amplified. Our mission is to help feed emergency service workers and our neighbors who have limited access to food by partnering with SL Green's foodservice tenants across our entire portfolio in a way that we believe will also help to revitalize our food and beverage tenants at a time when the industry needs it most. We kicked off phase one of this initiative this morning by firing up Daniel's Lower East Side prep kitchen with the objective of initially cooking 1,000 meals a day for nurses and first responders in New York City. SL Green has contributed $1 million as a down payment to the Food1st initiative, an investment that we expect will enable the preparation and delivery of over 150,000 meals to frontline heroes and those New Yorkers in need. Of our more than 30 foodservice tenants in our portfolio, we expect nearly half of them to join us in this initiative and open their doors during Phase II of this program next week to help feed local communities and bring workers back into the kitchen for the purposes of beginning the process of reemergence from this pandemic and serving the people of the city that we love. Pre-COVID, we had an extremely robust leasing pipeline and while much of that is temporarily on hold, we had a strong first quarter of leasing nonetheless and we know we will rebuild that pipeline once this crisis passes. In fact, our current pipeline, exclusive of all the COVID-delayed tenants, still stands at an impressive 815,000 square feet and that's on top of the 426,000 square feet of leasing we've already concluded year-to-date with over 100,000 square feet of that leasing occurring in April alone. So in fact we know that in situations like this, companies will want to work with trusted partners and will move toward the quality, service capabilities and experience that SL Green best exemplifies. In a moment of uncertainty you can count on us. We will ride out the storm together. I want to now just take a moment to focus in on the debt and preferred equity. Andrew is going to give you sort of an overview of the accounting charges that took place during the first quarter. I saw a lot of commentary on that. I thought for a program that has delivered to us $1.8 billion of revenues over the past 10 years, not including 2020, $1.8 billion from 2010 to 2019, we took total losses in that period of time of $32 million, I believe, about $3 million a year against $1.8 billion of revenues. I think it's an extraordinary track record. I'm very proud of that. I think when you look around at what's taking place among some of the levered finance companies out there today, we really appreciate the quality, the creditworthiness of our assets, our borrowers, our program and our underwriting that has created such an extraordinarily profitable program for us over that period of time. In the first quarter, as a result of CECL and some trading activity, we took some further reserves. And I'll let Andrew come in and shed some light on that please.

Andrew Mathias, Head of Debt & Preferred Equity / Chief Investment Officer

Thanks, Marc. On the debt and preferred equity book, we received 98% of our scheduled interest payments in the first quarter with two positions representing approximately $25 million of book balance having not paid. Both assets are retail assets where the tenants didn't pay rent. One of those interest payments is additionally backed by a debt service guarantee. We took some marks at the end of the fourth quarter and over the first quarter, partly attributed to CECL where we ran multiple different scenarios and, based on the percentage likelihood of each scenario, adjusted book balances. Those reserves may or may not come to pass, but it's important to note that we did take reserves through CECL against the two positions that did not pay in the first quarter that I just mentioned. There is obviously a lot of uncertainty surrounding rental payments over the next few months, and if that choppiness continues, it's possible that the rate of collections may temporarily fall below the level we achieved for the first quarter. As in all downturns, some assets may end up in foreclosure. That's part of this business and an outcome that we are comfortable with—that's the way we underwrite every position, to the worst outcome. Given that roughly 70% of our portfolio is comprised of loans secured by office properties and another 23% by residential properties, we wouldn't expect the level of non-payment to rise dramatically, and any rise in non-payment will most likely be short-lived. Additionally, we took reserves against assets that we anticipate selling in the second quarter based on management's best estimates of where the loans would price in today's market. Based on where we sit today, we hope to have $100 million to $150 million or so of loan sales closed in the next four weeks and pricing may well exceed the levels we marked them to. We don't see any debt assets trading below their marks. There's been a lot of chatter in the market with respect to loan sales. People are obviously free to believe what they want of press reports but shareholders shouldn't confuse SL Green evaluating bids on multiple loans in our portfolio with a mortgage REIT's must-trade bid list in a forced sale due to repo debt margin calls. Across the entire DPE portfolio, we have $140 million of total debt against only first lien debt positions. And as we sit here today, we expect that balance to be down to $50 million or so within the next couple of weeks based upon a repayment we expect to come in that's already been committed by take-out lenders. If we're not in the market at least evaluating opportunities to optimize our portfolio or raising liquidity, our view is we're not doing our jobs. With that, Matt, I'll turn it over to you to take us through earnings.

Matt DiLiberto, Chief Financial Officer

Thank you, Andrew. Before I get to guidance, I just want to touch on liquidity, where an underpinning of our corporate credit profile has always been maintaining a sufficient amount of liquidity, both as a protective measure and when market conditions dictate that it's prudent to be opportunistic. In the current environment, cash is king and we have taken our desire for liquidity one step further by looking to increase our cash balances from the $580 million we had at quarter-end to at least $1 billion over the next 45 to 60 days. The most cash we have ever had by executing a solid plan that we have a high degree of confidence in. We actually call this the Billion Dollar Plan. As the first step, we drew an additional $150 million off our credit facility in early April, bringing us to within $50 million of total capacity and putting our cash balance at $730 million. Drawing down the credit facility seems to be the norm these days, but that's actually a playbook out of the SL Green playbook I used back in the financial crisis and just protects us from any dislocation that may happen in the broader financial markets. That said, we always strive to keep our line balances as close to zero as possible and we expect to pay down the facility with other cash sources in the near term, including the pending financing of 220 East 42nd Street, which will generate proceeds of about $0.5 billion. Also, on the financing front, we are moving ahead with our refinancing of 410 10th Avenue, given the incredible leasing success we have had there. That closing will not only repatriate about $25 million of cash to us, but it will also cover any future spend that would have come out of our pockets. In the debt and preferred equity portfolio, Andrew highlighted our active marketing of between $100 million and $150 million of sales, most if not all of which we expect to close in the second quarter. In addition, repayments of existing positions will total another $100 million, allowing the DPE portfolio to bring in $200 million to $250 million of cash in just a matter of weeks. Rounding out the plan, we expect completion of two joint ventures, one for Madison Avenue, which is in a very advanced stage, and another for 126 Nassau. These transactions in total we expect to generate about $40 million of cash proceeds just at closing. These activities put us comfortably at our $1 billion target. If we elect to sell more DPE positions, we'll be well above. With our share buyback program paused, no material debt maturities until 2021, development projects requiring very little equity funding because financing is in place, and our operations generating free cash flow, having $1 billion of cash provides us an enormous amount of protection for many years to come. Turning to guidance: given the incredible level of uncertainty in this environment, many may have expected us—and some even encouraged us—to pull our 2020 FFO guidance entirely and revisit it when there is greater clarity. Obviously many companies and REITs have done it and many more are likely intending to. However, we believe that our shareholders and the broader investment community deserve and expect us to provide them with a confident view of the Company's position and trajectory on a go-forward basis. So we undertook a full rebudgeting process in just four weeks. It's an incredibly daunting task and the real credit goes to the entire company from our office and retail leasing teams to operations, to our investments group and to the incredible finance team who have all been focused on the situation at hand and have worked 24/7 since mid-March to formulate this plan across all aspects of our business. Our new FFO guidance range of $6.60 to $7.10 reduces our midpoint 6% from $7.30 down to $6.85 and is wider than our customary $0.10 range to account for the high degree of uncertainty. Obviously, there are many assumptions incorporated into our revised guidance. I'll summarize them as concisely as possible, using the same broad categories I use when providing our initial guidance in December. First, I'll address our diluted share count on which all of our per-share numbers are based. As I read some of the research out there, I believe there was confusion about the impacts of certain parts of our business because consideration was not given to the fact that our share repurchase program has been curtailed. Through early March, we executed $238 million of share buybacks in 2020, along with OP unit redemptions anticipating the closing of 220 East 42nd Street and The Olivia. While The Olivia did close without the proceeds from 220 East 42nd Street, we announced we will be curtailing our share buyback program until other sources of liquidity could be established. In our revised guidance, we have assumed no further real estate sales and therefore no further share repurchases. This leaves us more than $300 million short of the buybacks we included in our initial guidance and increases our diluted share count for earnings purposes by 2.1 million shares to 81.4 million versus the 79.3 million we utilized in December. This has a material dilutive effect which has been incorporated into each of the line items in the guidance rolled forward in last night's press release. Now, let's get into the components of the business starting in the real estate portfolio, where the assumption of no more property sales for the rest of the year is the driver of a positive contribution to FFO of between $0.03 and $0.16 a share. The largest contributor to this is obviously 220 East 42nd Street, where the buyer's failed purchase allows us to retain over $45 million of GAAP NOI and ultimately the $35 million deposit as well, but we've not included a deposit in our guidance as it is a long process to access the deposit. Within the now larger retained portfolio, Steve Durels and Brett Herschenfeld with their leasing teams have gone back and revisited every single leasing assumption on every single space for 2020 to reflect a slower pace of leasing, albeit not stopped, and a moderation in their view of rents. We then layered in a conservative view of early tenant vacates predominantly in smaller tenant spaces and considered the rent relief requests we have already received as well as a factor for additional rent relief requests that might come. The factor of early tenant vacates hits earnings, but rent relief that comes in the form of a short-term deferral has little to no effect on GAAP NOI because that rent will be paid; it simply sits on the books as a receivable. The conservatism we have built into our real estate revenues is partially offset by operating expense savings that Ed Piccinich and his team have implemented over the last few weeks while the portfolio is at low occupancy and savings that can be implemented on a more permanent basis while also factoring in any additional costs we will need to incur at our properties to operate at a Class A standard in a post-COVID world. All told, on a dollar basis at the midpoint of our new guidance range, GAAP NOI increases by $28 million. In the debt and preferred equity portfolio, we see a portfolio size that will be trending lower from the $1.8 billion at the end of the first quarter, as we have assumed no new originations for the balance of the year, just the funding of future funding obligations, along with $222 million of repayments and the aforementioned $100 million to $150 million of sales. This results in a projected year-end balance of between $1.5 billion and $1.55 billion and an average balance during the year of $1.65 billion versus an average we showed back in December of $1.85 billion. Lower balances coupled with lower rates reduces investment income to the tune of about $23 million at our guidance midpoint. With regard to reserves, we've taken an even closer look at every single investment in the DPE portfolio as well as any other loans we have to partners as part of the implementation of the new current expected credit loss or CECL accounting rules that Marc and Andrew both referenced. Recall that CECL rules are being implemented across the industry and this is something we've been working on for a long time. As a result of these reviews, in the first quarter, we recorded $43.5 million of total reserves related to CECL, the bulk of which is recorded through equity and only $4.3 million of which was recorded through earnings, reflecting any changes in the views from 12/31 to 3/31. In addition to reserves for CECL, we also recorded $6.9 million of reserves related to positions that we have a high degree of confidence we will sell. Could we sell more? Definitely, and that's what we have left room for in our guidance on reserves. Rounding out the revenue side, in other income, we model a reduction of $4 million at our guidance midpoint as we did not recognize any lease termination income during the first quarter versus our expectation of about $2 million per quarter. So we have reduced our generic full-year projection down to $6 million from $8 million. We've also reduced our assumption of leasing commissions at joint ventures where we earn them due to a slower pace of leasing and reduced other fees from transactions that we don't expect to move forward. Moving to the liability side, after refinancing 10 East 53rd for a fresh five years and repaying $250 million of unsecured bonds during the first quarter, we have no meaningful debt maturities until 2021. That further maximizes retention of liquidity. While in interest expense, rates have clearly taken a huge plunge; falling LIBOR benefits us as we have a meaningful level of floating-rate debt. On average over 2020, LIBOR is about 100 basis points lower than it was in our initial guidance. Modeling the forward LIBOR curve plus our customary 50 basis point cushion on top of that curve saves us a meaningful amount of interest expense. While we feel that our level of floating-rate debt and where it's used is appropriate, you may see us take advantage of low fixed rates as well. We did recently when we executed $350 million of fixed-rate swaps against an issuance of corporate bonds that mature next year. We're certainly considering doing more of that. Offsetting the benefit of low rates, we're carrying more debt than we typically do than what we originally anticipated because we elected to keep $1 billion of cash in the bank versus having it as available liquidity on our credit facility. So as I stated earlier, we expect to bring that line balance back down in the coming weeks by roughly $500 million with the financing of 220 East 42nd Street. That also extends the term of our debt and we could reduce our line balance even further with additional asset sales. In total, the combination of lower rates, higher debt balances, and the cost of new financings increases interest expense by $12 million at the guidance midpoint. And finally, we expect to reduce G&A by at least another $5 million on top of the nearly $2 million reduction we originally projected versus last year. This reduction reflects the underperformance of our stock as well as deterioration in our operating performance, both of which will have a direct effect on cash and stock-based compensation expense, as the vast majority of executive compensation is performance-based. This reduction also takes into consideration the $1 million seed funding of Food1st which Marc discussed earlier, as well as additional COVID-related charitable contributions we expect to make this year. Concluding with revised FAD guidance or AFFO depending on what you want to call it, we did not highlight that in our earnings release, but at our Investor Conference in December, we projected FAD of just over $380 million, a very healthy number. After taking into consideration all of the FFO impacts that I've outlined thus far, which totals $28 million of decline at our guidance midpoint, we are actually increasing our FAD guidance by $20 million to $400 million, reflecting a substantial reduction in second-generation capital both leasing related and elective base building and recurring capital at our properties, even after considering additional investments we will make at the properties to enhance the safety and security of our tenants—a testament to our ability to manage costs and cash flow. Marc?

Marc Holliday, Chairman & Chief Executive Officer

Okay. Well, this was a little longer than usual. We had a lot to say, not only Matt's detail on the revised guidance but also sort of the state of the market as we see it, steps we've taken to reopen the portfolio to welcome back tenants, which I think is the most exciting thing we have to look forward to in May right now: getting people back into the city. I think the Governor and Mayor are hopefully committed to doing that if the trends keep going in the right direction for the next two to four weeks. So we want to open it up for questions. We're going to take two questions per person, operator. We'll try, but let's try and cut through it quickly. It seems there are a lot of people on the line, a lot of questions. It's already quarter to three. So let's start out with two questions each, we'll see if we can cut through it. I'll turn it over for questions.

Operator, Operator

Our first question comes from the line of Michael Lewis from SunTrust. Your question please.

Michael Lewis, Analyst

Great, thank you. My first question: I wanted to ask a little more about the DPE bookings. The decision to sell some loans here presumably below par when you have some investments maturing anyway, and you have some cash built up. So maybe just talk about the decision to do that and kind of the direct use of proceeds beyond growing the cash balances?

Andrew Mathias, Head of Debt & Preferred Equity / Chief Investment Officer

Well, I think they break down into a couple of different categories. Some of the sales that we're doing are of senior positions where we're optimizing our retained yield. Some of the sales we're doing are opportunistic where there are assets that we feel we want to trade out of and we have better use of the cash, and then some of them are strictly for liquidity purposes. So it cuts across those different categories. We have discussed with the Board a plan, as Matt said, to have $1 billion-plus of cash liquidity available to us and our unencumbered DPE positions are the best source of shorter-term liquidity. So we have turned to that book and the market is going to mandate less than par just based on required yields on some of the assets. Some of the assets we expect to clear very close to par.

Matt DiLiberto, Chief Financial Officer

Yes, that $1 billion of liquidity Andrew references is a measured number but it's also an arbitrary threshold. It's the number we think if we have that kind of liquidity in the bank with our liability structure and our asset structure, it makes us as close to impenetrable as we can get. And that's where we want to be. Could it be $900 million? Sure, it could be $800 million. We're cash-flow positive. So you can argue it will be a lot less than that. But with that, we feel like anything beyond $1 billion which we will raise would be our sensitive capital. We will be in this market in the future with offensive capital after we have what we consider the impenetrable hard deck. Just recognize that we were obviously there with the closing of 220 East 42nd. We were there and more. So all we're doing really is substituting different forms of capital for a sale that didn't go as planned, but we still have the asset and it's a great asset and it's long-term leased to credit tenants. I think it's a testament to the program that even in this tough market, we do have extraordinary liquidity in that debt book, which not everybody can say. So I think it's a testament to how we underwrite. It's not to say there won't be some charges; there have been. And that's part of the business, but it's dwarfed as a measure of the revenues we generate and the other benefits we get in the program.

Michael Lewis, Analyst

Thanks. For my second question, I wanted to ask about One Vanderbilt. How does this unprecedented situation impact the timeline and how construction is progressing? I see you still expect certificate of occupancy in 3Q 2020. Is there anything to say on what the timeline looks like and maybe with the initial yields and whatever else you could say about how this impacts that project specifically?

Marc Holliday, Chairman & Chief Executive Officer

Yes, on construction, we were three months ahead of schedule that you probably know. And so this will eat into that time somewhat. We haven't fully given up on an August 4th target. We have a fairly robust crew on site right now because there is a lot of transit work and public improvements and other site and safety work that is being undertaken. We probably have 200 people plus on site today and that will grow as the construction sites reopen in May. So we've lost some time. Some of that we can make up by going to multiple shifts starting in May and June, and hopefully the City of New York will consider in the right locations waiving some of the after-hours work rules. That's one of the things that we and many others in the industry will be pushing for. I think a lot of the workers will waive premium time or substantially reduce premium time so as to get people back working. By working in shifts you can keep distancing because you can allow them space; you don't have to be 100% for one shift; you can be 50% for two or three shifts. So there are changes that are going to take place. There are opportunities to make up time. We still expect to finish ahead of schedule, whether it's August 4th or not is a tough task. We're hopeful for August, hopefully not later than the beginning of September. So we're certainly not projecting more than a month or so of delay to account for what we've gotten into. But we don't know until we're back to a full complement and we see how the city operates through the summer. We're going into that time at the right period because with the summer hours, we can really make up a lot of time. In terms of yield, we leased and had a very substantial pipeline of leases going into COVID. We were on track to meet or exceed the guidance we had originally given back in December. We nonetheless got some leases signed actually last week, increasing occupancy to 67%. There is one more tenant pending that we hope can be rounded out in the near term that might bring us closer to 70%. Then the goal for the year Matt had was 82%. We'll have to see—there is a pipeline beyond that and many tenants tell us they have every intention of going ahead with the leases we have been pre-negotiating, but people want to take a month or two pause while we work through this situation. Steve, can you add anything?

Steve Durels, Head of Leasing

Yes, I'll add to the fact that pre-COVID we had another seven deals that were in ongoing term sheet negotiations covering about 150,000 square feet. We've kept in touch with those tenants; the larger ones of that group still are signaling that they want to reengage once they have clarity when everybody is back in the office. So we closed these past two deals out in pretty quick order over the past 10 days, and the one other lease we have pending for about 27,000 square feet we've had an ongoing series of meetings with them and that continues to move forward.

Operator, Operator

Our next question comes from the line of Derek Johnston from Deutsche Bank. Your question please.

Derek Johnston, Analyst

Hi everybody, good afternoon. I appreciate the strong liquidity position. However, what levers can you pull to raise further cash to reignite the buyback program, especially at this valuation, and I do mean besides the DPE book? And I guess it's really part of the same question, but what are your thoughts on the capital recycling environment going forward?

Marc Holliday, Chairman & Chief Executive Officer

We will look to joint ventures most likely and potentially asset sales. We're reaching out in a measured way with different scenarios to gauge the market right now. Obviously, a lot of the capital in the market currently is opportunistic or looking for distressed situations. We think, as in past cycles, that will quickly turn to core buyers recognizing they have a good opportunity to get into the market. This is the type of market where we bought in the last cycle assets like 600 Lexington and 125 Park—really strong assets at good pricing. We've seen the market turn quickly from a distressed buyer environment to a more core, stable buyer environment and as those core stable buyers re-enter the market, they'll be interested in the types of assets we'll be offering.

Derek Johnston, Analyst

Okay, great. And just a quick one for Matt. On the accounting and assumptions in place for the $11.2 million reserve set aside for DPE, does this only relate to the loans you're looking to sell and what's the time period this reserve covers?

Matt DiLiberto, Chief Financial Officer

There are two components to that number. About $4 million of it is related to CECL. CECL implementation is recorded initially and any changes in that view are recorded through earnings each quarter. We took an incremental $4 million through earnings in the first quarter. The other $6 million-plus is for the positions we expect to sell—the $100 million-plus that we talked about. We expect those to sell in the next couple of weeks.

Marc Holliday, Chairman & Chief Executive Officer

Those sales positions are credit-wise money good. These are assets we are trading based on market pricing, but none of the assets we're trading have credit issues. We largely pruned the portfolio prior to COVID and these CECL charges are intended to reflect current market scenarios and potential short-term impacts. The portfolio remains fundamentally strong.

Operator, Operator

Our next question comes from the line of Alexander Goldfarb from Piper Sandler. Your question please.

Alexander Goldfarb, Analyst

Yes, hi, good afternoon. Can you talk a bit about the JV you mentioned for 1 Madison and the other property, what percent of the property you're planning on joint venturing, specifically at 1 Madison? And as we think about value creation, would it be better to sell down more of One Vanderbilt later rather than selling 49.5% of 1 Madison now?

Marc Holliday, Chairman & Chief Executive Officer

For 1 Madison we anticipate selling 49.5%. On One Vanderbilt, we have no intention this year to sell any additional percentage of that asset. We'll complete the lease-up and construction and that would be something we explore in future years. The rationale is that the JV for 1 Madison is structured to raise upfront equity without requiring significant incremental equity from us; it's consistent with our approach of monetizing select assets to redeploy capital, historically into share buybacks. We still view buybacks as a high-return use of capital when we have proceeds to deploy, but given the current pause on repurchases, monetizations can provide other forms of strategic liquidity.

Alexander Goldfarb, Analyst

Thanks. Second question: you gave rent collection numbers for April. Do you think May will be the same, worse, or better, perhaps nuanced around office versus street retail?

Marc Holliday, Chairman & Chief Executive Officer

We hope May will be at least similar or better, particularly if we see progress toward reopening. If retailers and restaurants can get back into their locations, collections should improve. We can't predict exact numbers yet, but we are roughly modeling that April collections will end around the ranges we've discussed—office around 92% and retail around 63% to 64%—and we're continuing to work with tenants who have indicated they will pay in whole or in part before month-end.

Operator, Operator

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

Emmanuel Korchman, Analyst

Hey, thanks. Maybe to follow up on Alex's question, the NOI projections and the deferral projections you guys have given—do all those follow the guideline Marc presented with a partial reopening in May and fuller reopening in June and July? Is that the right way to think about it?

Marc Holliday, Chairman & Chief Executive Officer

That's accurate.

Emmanuel Korchman, Analyst

And then, Andrew, are you and your team still underwriting new DPE deals where you might have an opportunity to lend or own assets others aren't looking at in this environment, or is the DPE program in contraction/no new investment mode?

Andrew Mathias, Head of Debt & Preferred Equity / Chief Investment Officer

We haven't modeled new investments for the balance of the year given our plan to conserve capital. That said, we manage a lot of third-party capital and that will keep us active in the market. Our team remains underwriting and looking at opportunities, and we see potential advantages in certain bridge and specialty finance scenarios where our local knowledge and ability to act quickly provide an edge. We'll evaluate opportunities selectively.

David Schonbraun, Head of Investments

Yes, our team is always working and underwriting to see everything out there. At the end of the day, it comes down to cost of capital and where the best opportunities are. Right now some bridge deals have a real gap because mortgage pricing hasn't normalized and some local players who know the buildings have an advantage because tours and travel are restricted. We have an advantage in that scenario and will see if we take advantage of it.

Operator, Operator

Our next question comes from the line of Jamie Feldman from Bank of America. Your question please.

James (Jamie) Feldman, Analyst

Great, thank you. I appreciate all the detail on the call. You switched to a monthly distribution rather than quarterly and you're talking about AFFO actually rising. Can you talk more about that decision and your visibility on the distribution going forward?

Marc Holliday, Chairman & Chief Executive Officer

The dividend frequency and any changes are a Board-level decision. We went monthly because we felt that for this period we wanted very real-time visibility into collections as well as any revised guidance. April came out reasonably well and the monthly cadence allows us to monitor and update the Board more frequently than usual. We'll continue to evaluate and communicate as appropriate.

James (Jamie) Feldman, Analyst

Okay. Have discussions with some of your largest pending expirations changed in terms of likelihood of renewals? Or across the market, in a downturn people tend to stay in place. Have any tenants who thought they might be moving are now talking renewals? I'm thinking specifically about News America later this year and Advance in early 2021.

Steve Durels, Head of Leasing

At 750 Third, where Condé Nast and Advance-related space was previously sublet, we have engaged many of those subtenants who previously planned to vacate and are now discussing the potential of them staying for significant pieces of space. We'll likely see some of that across the portfolio as tenants reconsider consolidations or relocations. We're hearing that tenants may prefer shorter-term deals, two to five years, to preserve capital and see how the market shakes out. Retaining tenants in the portfolio is a key focus given our high occupancy levels.

Operator, Operator

Our next question comes from the line of Nick Yulico from Scotiabank. Your question please.

Nick Yulico, Analyst

Thanks. I was hoping to get a feel for how your cash same-store NOI guidance might be changing?

Matt DiLiberto, Chief Financial Officer

Generically, lower. As currently modeled, adjusting for the two items we typically adjust for—lease termination income and the free rent at 1515 Broadway—we expect cash same-store NOI to be down between 1% and 2%.

Nick Yulico, Analyst

That's helpful. As a follow-up, what drivers should we think about for occupancy at year-end, expected loss this year, and mark-to-market assumptions on rents?

Marc Holliday, Chairman & Chief Executive Officer

We have not yet updated our long-form goals and objectives; we'll revisit them. We were aggressive on occupancy targets earlier in the year; we'll reassess and expect to provide updated goals in July when we have better visibility. We remain optimistic we can achieve many of our objectives, but we will update guidance and goals when we can do so with more confidence. Historically our occupancy is resilient, and given the market fundamentals pre-COVID—strong job growth and constrained new supply—we're hopeful occupancy won't decline dramatically, but we'll provide more detail in the next few months.

Operator, Operator

Our next question comes from the line of John Kim from BMO Capital Markets. Your question please.

John Kim, Analyst

Thank you. Just summarizing CECL accounting: you assessed the entire DPE portfolio to fair market value at least once a quarter, and you can only write it down but you can't write it up in following periods—did I summarize that correctly?

Matt DiLiberto, Chief Financial Officer

Generically yes. CECL requires a much more robust process. We assessed and took the majority of the implementation hit through equity in the first quarter and recorded an incremental $4 million charge in earnings for the change from 12/31 to 3/31. You reassess every quarter and market conditions can cause reserves to be adjusted either way. If we sell a position at a better price than marked, we will reverse reserves accordingly.

John Kim, Analyst

Does CECL change your views on the size of the DPE book? And are you considering reporting a core FFO figure going forward?

Matt DiLiberto, Chief Financial Officer

CECL didn't change our view on the size of the DPE book; the market, size of company, opportunities, and liquidity position dictate that. Regarding core FFO, we adhere to NAREIT's rules and provide information in our releases so investors can derive adjusted figures if they wish. We aim to be consistent and transparent rather than creating a new proprietary metric.

Operator, Operator

Our next question comes from the line of John Guinee from Stifel. Your question please.

John Guinee, Analyst

First, well done, particularly Ed. Two quick questions: what are you thinking about the observatory at One Vanderbilt, and when can we expect more color? Second, Andrew, you said 98% collection in DPE. How much of that is from cash from the property versus reserve accounts set up to pay interest?

Marc Holliday, Chairman & Chief Executive Officer

On the observatory: I think it will be spectacular. What we're designing and will unveil this December is the entire experience front to back. It will find its place among destination attractions in the city. It's conducive to distancing because it is a large facility spread over three floors, column-free, with tall ceilings and a lot of outdoor experience. The model underwrites a modest attendance—about two million people a year in our projection—so it's not intended as a tightly packed, high-volume experience. We plan to launch the observatory end of 2021 and expect stabilization to kick in later in our five-year plan. We remain optimistic the observatory will perform well as a destination attraction and provide an escape-type experience for visitors after the pandemic. On the second question regarding DPE collections and reserve-funded interest: we do have some loans where borrowers have set up funded reserves to cover interest, which we view as prudent. Those reserves can be drawn to pay interest and are accounted for appropriately. If you want a precise breakdown of cash servicing versus reserve-funded interest for the DPE portfolio, we can follow up with more granular detail after the call.

Operator, Operator

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

Peter Abramowitz, Analyst

Yes, my questions were answered, thank you.

Operator, Operator

Our next question comes from the line of Craig Mailman from KeyBanc Capital Markets. Your question please.

Craig Mailman, Analyst

Thanks. Could you give a little more color on the NASA deal in terms of dollars out the door? I think you said you might have a JV partner and maybe just timing?

Marc Holliday, Chairman & Chief Executive Officer

We're planning on starting construction on that project in the fall and we plan to put a construction loan and a JV partner in place before we start building. We've made significant progress on both fronts and expect to be successful in announcing both a construction loan and a JV partner in the next three to five months. It's a build-to-suit for a large institution downtown and we don't expect to have a significant equity investment; it will primarily be built on behalf of third-party capital.

Craig Mailman, Analyst

Thanks. Assuming you have opportunistic dollars, where would you underwrite market rents versus in-place rents if you were pursuing opportunistic acquisitions? Maybe break it out for office versus retail?

Marc Holliday, Chairman & Chief Executive Officer

We need to let the market play out a bit. We're hopeful rents hold because we expect a period of stalemate rather than immediate deep declines. We'll likely see tenants try to negotiate concessions—free rent or TI—rather than dramatic cuts to face rents. Our leasing pipeline remains strong: as we sit here today, we have 275,000 square feet either out for execution or in active document negotiation and another 540,000 square feet of term sheets that have a reasonably high probability of converting. In addition, we have roughly 600,000 square feet of previously delayed deals that we think many tenants will reengage on, though the timing may shift. The immediate expectation from tenants is a push for concessions, not a large step-down in face rents.

Steve Durels, Head of Leasing

To add granularity, pre-COVID we had 275,000 square feet of leases out for execution or in active document negotiation, 540,000 square feet in term sheets, 267,000 square feet of leases that were in negotiation that were delayed, and another 340,000 square feet of term sheets that were delayed. So there's a lot of potential activity that we expect can reengage as conditions normalize. The immediate tenant feedback indicates a desire for short-term concessions rather than large permanent reductions in face rents.

Operator, Operator

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

Steve Sakwa, Analyst

Thanks. Clarification on the collections numbers Marc provided: are those pure cash numbers or do they include any drawdowns from security deposits or reserve accounts?

Matt DiLiberto, Chief Financial Officer

That is pure cash.

Steve Sakwa, Analyst

Thank you. And then Steve, just as it relates to tenants and how they're thinking about returning, how are they thinking about space—will they want more space, less, or the same? On the rent side, your mark-to-market assumptions did come down from the fourth quarter; can you comment on those declines?

Marc Holliday, Chairman & Chief Executive Officer

Pre-COVID, the phenomenon of densification had already begun to reverse in many cases. We're hearing consistently from tenants that they will redesign spaces and allocate more square footage per employee to allow distancing. That could mean tenants end up taking more space in some cases. On the other hand, some tenants may split operations or delay expansions. So it's still being written. The market was already moving away from densification and COVID likely accelerates that trend. Regarding the mark-to-market assumptions, we took a conservative view in the near term given uncertainty—we reduced mark-to-market assumptions as a conservative measure while we see how behavior evolves. We think face rents will be under pressure for concessions but not necessarily permanent steep declines, and we'll update assumptions as clarity emerges.

Operator, Operator

Our next question comes from the line of Vikram Mahotra from Morgan Stanley. Your question please.

Vikram Mahotra, Analyst

Thanks for taking the questions. On street retail: can you give specific color around your views on street retail rents and any sense of payback for deferrals—length and expectations?

Ed Piccinich, Chief Operating Officer

Directionally, rents are secondary for now. We're most focused on getting businesses back open and customers back in stores. There's no retail pipeline right now. It's a business in transformation and many of our retail tenants are strong and we're encouraging reopening. Collections in retail were all over the spectrum: many big credit tenants paid as required, some did not, and we have deferral deals with several. Smaller tenants similarly varied—some paid and some did not—and we're working with those most negatively impacted. Our priority is to support reopening and help retailers recover customers.

Marc Holliday, Chairman & Chief Executive Officer

Retail was tenuous even before COVID, and this environment is not going to be helpful. Most of our retail is long-term credit leases. We saw good collections in April overall and many tenants who haven't paid will ultimately have to step forward. It's important larger credit tenants pay their share to enable us to support smaller, more impaired retailers who need relief the most. We're focused on targeting assistance where it matters most.

Operator, Operator

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

Blaine Heck, Analyst

Thanks. It sounds like you aren't too broken up about not getting the 220 deal done and you're expecting to close new financing in the near term. How should we think about that asset longer term—earmarked to be put back on the market or any change in strategy?

Andrew Mathias, Head of Debt & Preferred Equity / Chief Investment Officer

Because of the long-term nature of the leases at 220 East 42nd, it's a great JV asset coming out of this tumult. We intend to put the financing in place; preference would have been to close the contracted sale, but the buyer didn't perform. We adapted by lining up financing and ultimately we'll probably look to joint venture the asset. The fundamental strategy for that asset hasn't materially changed.

Blaine Heck, Analyst

Got it. And on WeWork, you have two leases with them. Are they current on rent and do you expect them to continue to pay for the remainder of the year?

Andrew Mathias, Head of Debt & Preferred Equity / Chief Investment Officer

We are current on one of the leases and not current on the other; discussions are ongoing. I can't comment beyond that right now.

Operator, Operator

Our final question for today is a follow-up from the line of Emmanuel Korchman from Citi. Your question please.

Michael Bilerman, Analyst

Thank you. It's Michael Bilerman. Marc, a strategic question: the COVID-19 pandemic forced a trial of work-from-home for every office tenant. Many CEOs and boards might say let's try more remote work and use less office space. What gives you the confidence there won't be a bigger shift to less office demand over the long term?

Marc Holliday, Chairman & Chief Executive Officer

Part of it is what we're hearing from tenants and part of it is our own view. Many tenants are telling us this doesn't work long-term for their businesses. Work-from-home can be serviceable, but the business of generating new business, collaboration, creativity, and team culture is materially better in person. Video conferencing existed pre-COVID and many tried it before and didn't prefer it. We are hearing that while some employees may work remotely occasionally, the majority will want to return to office environments—purpose-built spaces with natural light, amenities, and collaboration areas. The phenomenon of densification from the last decade was already reversing and COVID likely accelerates that trend: tenants are planning to allocate more square footage per employee. There will be some tenants who adopt more remote work, but we expect that to be balanced or more than offset by de-densification and the need for better-quality spaces.

Steve Durels, Head of Leasing

To add, the practice of hoteling—having fewer seats than employees—was common. We expect that to decline as employees demand their own space, given heightened cleanliness concerns and desire for distancing. That will add to space allocation per employee and offset a portion of remote work adoption.

Marc Holliday, Chairman & Chief Executive Officer

Thank you everybody. This was a little longer than usual, but warranted. I hope stakeholders come away with a sense that we're doing our best under difficult circumstances. No one is having an easy time of it. The best path forward is getting back to work when appropriate and beginning normalization. If that takes three, six, nine, twelve, or eighteen months, with a $1 billion hard deck, we are ready for it and hopefully beyond that we'll return to our usual position of being able to invest and take advantage of opportunities on behalf of shareholders. Thank you.

Operator, Operator

Thank you, ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.