Earnings Call Transcript - SLG Q3 2022

Operator, Operator

Thank you, everyone, for joining us, and welcome to SL Green Realty Corp's Third Quarter 2022 Earnings Results Conference Call. This conference is being recorded. At this time, the company would like to remind listeners that during the call, management may make forward-looking statements. You should not rely on these forward-looking statements predictions of future events as actual results and events may differ from any forward-looking statements that management may make today. All forward-looking statements made by management on this call are based on their assumptions and beliefs as of today. Additional information regarding the risks, uncertainties and other factors that could cause such differences to appear are set forth in the risk factors and MD&A sections of the company's latest Form 10-K and other subsequent reports filed by the company with the Securities and Exchange Commission. Also during today's conference call, the company may discuss non-GAAP financial measures as defined by Regulation G under the Securities Act. The GAAP financial measures most directly comparable to each non-GAAP financial measure discussed in 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 2022 earnings and in their supplemental information included in our current report on Form 8-K relating to our third quarter 2022 earnings. Before turning the call over to Marc Holliday, Chairman and Chief Executive Officer of SL Green Realty Corp, I would ask that those of you participating in the Q&A portion of the call, please limit yourself to two questions per person. Thank you. I will now turn the call over to Marc Holliday. Please go ahead, Marc.

Marc Holliday, Chairman and CEO

Thank you. Good afternoon, everyone. We appreciate you dialing in today, and we look forward to giving you an overview of our quarter's results and taking your questions. So I want to remind everyone that since 2019, we faced many new challenges, which in turn caused us to raise our bar even higher and respond in ways that have been beneficial for our tenants, our shareholders, and our community. In less than three years, we signed over 5 million square feet of office leases; we completed two dozen individual sales transactions at a gross price per share of $5 billion. We developed and acquired new world-class assets, oversaw and executed $2.25 billion of physical construction projects for on-time deliveries, and reduced our DPE balance to $663 million at quarter end. We created a new iconic global entertainment destination, Summit. We managed our portfolio in a safe, secure, and efficient manner, launched a portfolio-wide hospitality and amenity program, and we did all of this while working five days a week from the office, the only possible way we could have realized these extraordinary accomplishments. I want to once again express my extreme gratitude to the amazing and talented workforce here at SL Green, who came together, all of us on the floor of the New York Stock Exchange, to ring the closing bell and celebrate 25 years of excellence and improving the way New Yorkers live, work, and play. This momentum carried through into the most recent quarter. I'm extremely pleased with the leasing performance in Q3, highlighted by the Franklin Templeton deal at One Madison Avenue and the Memorial Sloan Kettering deal at 885 Third Avenue, which took a total of over 750,000 square feet of vacancy out of the SL Green portfolio on economic terms that were consistent with our expectations. As pleased as I am with the leasing performance in Q3, I'm just as happy that we were able to retire $800 million of maturing public bonds through a series of paydowns and financings that were done on attractive terms. Furthermore, we're highly focused on implementing strategies to mitigate our exposure to rising interest rates by executing on a series of swaps, caps, and debt repayment. Understandably, a lot of the focus from the market is on the leasing performance and tenant demand. And on that front, we feel quite good about where we are, given the portfolio is greatly improved and our overall asset quality has never been better. We continue to enhance our best assets to attract top tenants, and as a result, the portfolio is still well occupied today at 92%. We have marketing and capital plans in place that we believe will enable us to operate during this market cycle at or above 90% until things begin to turn around. Rising interest rates, on the other hand, are more of a concern given the impact it has on our earnings, making interest rate hedging and debt reduction our number one priority for the foreseeable future. I think Matt and his team have done an excellent job with this, as evidenced by the $1.25 billion of corporate swaps entered into during the third quarter to hedge future floating rate exposure. In addition, during the most recent quarter, we entered into cap contracts and another $270 million of variable rate property debt, and just yesterday we swapped another $200 million on a floating rate mortgage. Notwithstanding the current interest rate environment, the underlying New York City economy is still strong, based on employment data showing that NYC added 24,000 private sector jobs in August and is now 100,000 jobs ahead of New York City OMB's original 2022 forecast. More to the point, 22,500 office-using jobs have been created in just the last three months, bringing the total office-using jobs recovery to 104% of the pre-pandemic high watermark. Contrary to what you may see in the media, I expect September's numbers, due out momentarily, to show positive as well. The numbers confirm what we feel: that New York City is finally back to normal. The roads, sidewalks, and commuter trains are packed, and the subways are coming back. Tourism and hospitality are near pre-pandemic levels. The residential rental market remains tight, and the enablement of conversion of office to residential to help solve this problem is gaining momentum at the state and city levels. Meetings, conferences, parties are filling the calendars, and the rhythm of New York's social life has returned. Before opening the line for questions, I want to acknowledge a few other milestone moments for the company. First, Summit One Vanderbilt is celebrating its one-year anniversary tomorrow. We will all be there to recognize the successful launch of this world-class attraction, which has quickly become one of New York's hottest experiences, having welcomed 1.4 million guests to the summit during its first year of operation, with far more expected next year. During the third quarter, we prevailed in consolidating ownership and control of 245 Park Avenue, a trophy asset in the SL Green corridor of owned properties, after a contentious bankruptcy litigation. We have plans to improve 245 Park over the next 24 months to make it one of the most desirable buildings on Park Avenue. Last week, we received the excellent news that Le Pavillon received a Michelin star less than 18 months after opening during the pandemic. Finally, this morning, we announced a partnership with Caesars Entertainment to pursue a downstate casino license for a world-class gaming hotel and entertainment venue in the heart of Times Square. In connection with this effort, we have formed a coalition for a better Times Square that seeks to invest significantly in security, traffic mitigation, mass transit improvements, accelerate economic recovery for surrounding businesses, and create good-paying jobs for local New Yorkers. With that summary, we'd like to open up the line for questions on the quarter and whatever else is on people's minds.

Operator, Operator

Our first question comes from Alexander Goldfarb with Piper Sandler. Your line is open.

Alexander Goldfarb, Analyst

Good afternoon. So two questions. First, just taking a look at bringing on converting the DPE positions for 5 Times Square and 245 Park, just want to understand one, the earnings impact. Because I think you were getting close to 11% on the DPE positions previously, and I'm not sure how that equates to a cap rate on the buildings. Two, I think you have some large vacancies coming in 245 Park. So maybe, Matt, if you could just talk about how we should think about the economics and impact to earnings from converting those two positions?

Matt DiLiberto, CFO

Sure. I'll let Steve address the 245 Park vacancy question you had. As for earnings, obviously we'll be giving guidance for 2023 on December 5 at our investor conference, so you'll get more detail then. You alluded to the DPE balances rolling off—that's about $367 million of debt and preferred equity investments combined between 245 and 5 Times that we're rolling off at just short of 11%. You're right, the properties do not generate that equivalent return on their phase five times is in redevelopment and lease-up. We only own 30% to 32% roughly of that, and 245 we own 100%. There will be finalization of GAAP adjustments and those types of things done over the coming weeks leading into our guidance for 2023. But the roll-off is substantial at $367 million a year, 11%.

Steve Durels, Chief Operating Officer

And then regarding the vacancy or pending vacancy at the building, we really don't have as much as, I think, you may suspect. The JPMorgan space, which is 17 floors in the building, 15 of those floors were either previously leased to SocGen or while we were doing the leasing for HNA, we had pre-leased five of the floors to Houlihan Lokey. So that only leaves us two floors to really deal with when we get that space back late next year. Other than that, there is about 120,000 square feet of current vacancy. There is another block in the building that we get back late next year, Major League Baseball, which had roughly five floors. We had pre-leased most of that space on short-term leases to either Rockefeller Group or Houlihan Lokey. So we'll now get it back mid to end of next year. Other than that, there is a smattering of floors throughout the building. And that sort of roll-over the next couple of years is what's justifying the capital program that we're in design for the building right now, which we're really excited about. Just to remind everybody, this product is exactly what the world is looking for today. Its side core design has a floor plate design that has actually six corners on it. The way it's configured sits directly catty-cornered to JPMorgan's new headquarters, has direct access to Grand Central Terminal. Our development plan, which is going to be a spectacular transformation of the building from the plaza to the lobby, to amenities being added is, I think, very forward-thinking. And we're already trading paper with prospective tenants. So, I have the utmost confidence that this building will outperform.

Alexander Goldfarb, Analyst

Okay. And then the second question is Matt, on the swaps. A lot of news in press reports about the rise in the cost of swaps, but you guys have been quite active. Can you just give some perspective on how much pricing has changed? And should we think about swaps being prohibitive or, based on the fact that you guys are still executing them, earlier this week, that prices may have gone up, but in the scheme of things, given debt costs still plenty of availability and cost-effectiveness on the swaps for your debt?

Matt DiLiberto, CFO

Yes, certainly the latter, not the former. I think Marc alluded to the fact that we're going to continue to target reducing future floating rate exposure through caps and swaps. You talk about cost, technically the way it works, the cost for a swap is built in through a credit charge, which is just measured in basis points on top of the rate that you swap. On the $1.250 billion, it was roughly five basis points on average. So not much. Caps have an upfront cost, and those costs are based on the term and the benchmark. So yes, there has been some press about increasing costs. I think the cost of everything has gone up. But certainly, the savings we're realizing by executing on these trades far exceeds whatever incremental costs may be embedded in them. Just to put that in perspective, on the $1.250 billion that we did, which was included in the press release, that was done more than 100 basis points tighter than where you would do those today. On $1.250 billion, you can do the simple math: 100 basis points of $1.250 billion over the course of several years is a lot of money, well worth a couple of basis points.

Operator, Operator

Our next question comes from Steve Sakwa with Evercore ISI. Your line is open.

Steve Sakwa, Analyst

Thanks. Good afternoon. I guess, Steve, I was just wondering if you could comment a little bit more on kind of where the pipeline sits today, given that big tech has sort of gone on hold. I'm just curious what parts of the market are you seeing the most demand in, whether it be size attendance or what part of New York? Is it Midtown South, Midtown? Any color on leasing would be great.

Steve Durels, Chief Operating Officer

Sure. Well, we've got a pipeline that's about 700,000 square feet. Obviously, that number is down as a result of the two big leases that we recently signed. But I think the good news in that pipeline is we're seeing a lot more activity from small to medium-sized tenants, which is a change from where the market was for the past six or nine months because a lot of the leasing activity, although broadly speaking, the market is doing well compared to the prior two years, velocity is still down compared to the sort of the 10-year average. But the success in the market this year has been driven largely by the bigger tenants. The new news, as I said, is that we're starting to see these small to medium-sized tenants coming back into the market as the bigger tenants, the higher price point tenants that are signing leases. We're the first ones into the market; the small to medium-sized guys are sitting on the sidelines, and as the big guys are bringing their employees back to the office, you're now seeing those smaller guys follow them into the office, and that's driving a lot more leasing activity. So some of our Third Avenue, Lexington Avenue product has more tours, trading paper, and signing leases today than we have been in the past year or so. I think that's positive. I think Midtown is still, without a doubt, the driver of the overall leasing velocity in the marketplace. Financial Services is some 41% to 42% of total leasing that was signed in the third quarter. Tech is still out there, but obviously in a much smaller diminished way, around 8% to 10% of total leasing. Financial Services, which in the past couple of years was sort of in that 30% range, is now at 40-plus, and there doesn't seem to be any slowdown in that segment's demand. You're also seeing law firms a lot more active today than they were a year ago. I think that same demographic is what we're seeing within our portfolio. Of our pipeline, about 17% is financial services, 12% is tech, and the balance is everything from government to healthcare to services.

Steve Sakwa, Analyst

And if I could just ask a quick follow-up on that. Do most of these requirements, are they kind of downsizing? Are they kind of including growth space? Are they just kind of musical chairs moving out of 150,000-foot spaces into another? Just what can you say about size?

Steve Durels, Chief Operating Officer

Well, there's an unusual amount of relocations taking place in the city as tenants reinvent their workplaces. Typically, about 30% of leases that get signed are relocations. The third quarter was over 40% of the leases that were signed were relocations. I think that's a function of tenants that are continuing to densify; that was a pre-COVID phenomenon that never stopped and they're reinventing how they want to use their workplace. So more amenities, more space per employee, and a more hospitable design are prevalent. Most businesses are still very unsettled about what their ultimate footprint is going to be. They just don't know. So they're building a lot of flexibility for the ability to grow and ability to downsize as time goes by because the world is still figuring itself out.

Marc Holliday, Chairman and CEO

Steve, there will be lots coming out over the course of the next several months. We expect the RFP out sometime in December, but that's not official or formal or announced from the state; that's just our expectation, could be before or it could be after. Suffice it to say, we have what we and Caesars think is an excellent plan for bringing gaming and entertainment and a hotel right to the heart of Times Square. I think we wouldn't do anything less than a world-class facility laid out in a way that we think will be extremely successful and desirable and additive to Times Square, which I think really could use a boost right now. I would say, stay tuned for those details; there will be more to come and stuff that I and the team are really excited about. Thanks for the question.

Operator, Operator

Our next question comes from Michael Griffin with Citi. Your line is open.

Michael Griffin, Analyst

Great. Thanks. Maybe we go back to refinancing for a moment. Actually, debt maturities coming up, is there any ability to get longer-term refinancing on some of these? Are the expectations more the shorter-term floating rate debt, kind of similar to the $400 million term loan?

Andrew Mathias, President

I would – I mean, at the moment, the CMBS market for single assets is not as compelling as the shorter-term market. So you'll probably see us use the shorter-term market at the moment. As soon as that single-asset CMBS window reopens, which no dealers have been able to tell us exactly when it will happen, but hopefully it will be by the first of the year, then we'll start to avail ourselves of longer-term fixed-rate financing.

Matt DiLiberto, CFO

And just with regard to the $400 million corporate facility, remember what we're trying to accomplish there. We had to pay off maturing bonds—$500 million, which we've done. We're doing that in a way that can be repaid one year from now when we get money from our partners at One Madison, just short of $600 million. The bank financing market for that kind of term is well inside of what any bond execution would look like—probably 200 basis points inside. So that’s why we went to everyone.

Michael Griffin, Analyst

Got you. That's definitely helpful. And then we saw some details released recently around Local Law 97 in New York. I mean, other things—I understand this is preliminary. Can you give a sense of how that could impact your portfolio? And can you highlight any special considerations to make sure your portfolio is going to be in compliance?

Marc Holliday, Chairman and CEO

This is Local Law 97? Yes. No, I mean this is—the rules were formally adopted recently, but this is something we’ve been preparing for years that has been out there. The first measurement date, we think the bulk of the portfolio, if not all, will pass compliance without penalty. In the 2030 date, we're going to be working, obviously, over the next seven, eight years on making additional investments and exploring ways to use renewable energies and credits available to eliminate entirely whatever penalties they will impose in 2030. We’ll probably go into more detail on this in December at the investor conference to give people a better sense of where the issues lie and range of quantifications, but we don’t have that here now. Until 2030, at the earliest, we expect it to be of no financial consequence, not because the rules are not rigorous, but simply because we’ve invested so much in the portfolio. Many of our buildings are LEED designated, Energy Star recipients, etc., so we score very well on the current metrics, which is evolving. Yes, those rules will evolve over time, and we’ll see what the state of play is in seven or eight years, but we’re preparing as though what’s promulgated is what we’ll have to comply with.

Michael Griffin, Analyst

Okay. That’s it from me. Thanks for the time.

Marc Holliday, Chairman and CEO

Thank you.

Operator, Operator

Our next question comes from Anthony Paolone with JPMorgan. Your line is open.

Anthony Paolone, Analyst

Yes. Thank you. I guess first question is for Marc. Can you talk about where you think the balance sheet leverage should be over time? You mentioned the priority of debt pay down. I'm just wondering how you’re thinking about it, especially in the context of the asset-light strategy you guys have articulated.

Marc Holliday, Chairman and CEO

Yes. Just on the issue of debt pay down, it’s not so much a leverage ratio question in my mind. We are very fairly leveraged, and many of the assets are under-leveraged relative to what I think a proper loan-to-value would be in this market. The debt reduction really is pointedly towards preserving and protecting our earnings from increasing rates and variable rate debt. So, it's—it’s a leverage point; we feel and have always felt very comfortable where we sit today with our leverage relative to an asset base that we think has a value far, far in excess of where the stock trades today and even given where the stock trades today. However, we have about, Matt, I want to say maybe $2 billion or so unhedged at this point. So we’re over 80% hedged at the moment, right? What we’re talking about is managing the risk on that unhedged position, which I would like to reduce further—not from a credit or balance sheet standpoint, but purely from an earnings standpoint to protect ourselves from volatile increases in interest rates.

Anthony Paolone, Analyst

Okay. Got it. And then just a follow-up. On the DPE book, a lot of it is set to mature next year. I mean, should we think about this as being the end? Also, do you anticipate just getting paid back on all this, I guess, outside of 625 perhaps? Or do you think other properties might have to come on to the books?

Andrew Mathias, President

Well, it’s definitely not the end. This has been a very important program for us. It’s returned us terrific IRRs over the course of the program. We tend to invest at the bottom of the cycle. The debt investments are most effective when we can make them in distress-type situations. If we do see those types of situations, we will definitely be taking advantage of them in the debt book. In terms of the maturities, time will tell what the refinancing markets look like, what the property markets look like sitting here today; we can’t predict sort of what’s going to happen in the future at existing loan maturities. But we were happy with the outcomes, obviously, on 245 Park and 5 Times Square. I definitely wouldn’t call the book defunct by any stretch.

Operator, Operator

Our next question comes from John Kim with BMO. Your line is open.

John Kim, Analyst

Thank you. You guys talked about the improvement you could make at 245 Park over the next couple of years, and the former owner was capital constrained. So I was wondering if you can comment on how much CapEx will be needed to upgrade the building? And if you can also comment on the timing of finding a joint venture partner.

Marc Holliday, Chairman and CEO

I would say, needed is—there’s a lot you can work into what’s needed at the property. I mean, the property leases in its current state, and we’ve done actually a lot of leases, how much, Steve?

Steve Durels, Chief Operating Officer

Probably 200,000-plus square feet.

Marc Holliday, Chairman and CEO

Yes. We’ve done about 200,000 square feet-plus. The building is a very good building. I don’t think it needs much. However, to bring it up to where we want it to be, consistent with some of the great properties within the portfolio that have extensive amenities, et cetera, we’re going to go in sort of electively and voluntarily; I would expect any program of size to be under $100 a foot. So I don’t mean that to sound de minimis; it’s a big building. That’s up to 1.8 million square feet. The beauty of the situation here is we can amortize some substantial improvement dollars over a very large asset, and for relatively, I’ll call it, modest incremental investment per square foot, we can take our already low basis for our Park Avenue asset of about $1,100 a foot, if I’m not mistaken, maybe even slightly under that, and, like I said, make a very large dollar amount, but a small relative per square foot improvement amount for improvements, beautification, efficiencies, new lobby, plaza, amenities, and still have a basis very low by Park Avenue standards and I think have one of the best buildings with one of the best views sitting right on top of access to Grand Central Station. Thanks.

John Kim, Analyst

And the timing of a JV partner?

Marc Holliday, Chairman and CEO

Well, we’re looking. I mean, we’ll begin those conversations in this quarter. That will be one of our priorities for 2023, which will be the identification and closing of a JV partner. But I guess we’ve already begun fielding inbound and will be sort of proactively marketing outbound this quarter. It doesn’t mean it’s going to close this quarter. It just means we’re going to start the process this quarter. These processes can take anywhere from four to six months, I would say, on balance. On the Caesars joint venture, can you provide any more color on the structure of the JV? Is it just going to be you and Allianz on the real estate and Caesars is the operator, and that’s going to be separate? Or will there be ownership? Also confirm that this is exclusive to both you and Caesars for a New York casino license. Yes. In terms of—maybe I’ll sort of do a blanket statement for the many questions I may follow. Any details of the project, the bid, the structure—all that is going to be something that we’re going to address—as other bidders will address over time and in response to an RFP that hasn’t been issued yet. So I want to put an emphasis on that. There is no RFP from the state right now for a downstate casino license award that is anticipated to occur. So the answer to your second or third question was yes, we are exclusive with Caesars on this casino site, and we’re going to be putting both of our mutual best efforts behind it to make it happen. Because we think it’s not just a big opportunity for the state and city, but it’s almost a rallying point for Times Square to have a catalyst of something very positive to help redirect some of the degradation we’ve seen in that area. We know Times Square best; there’s nothing better in the world. It’s the best entertainment district in the world, bar none. But there are moments in time, particularly coming on the heels of this pandemic, where an area like Times Square needs help and needs to reboot itself. I think we can rally around a casino and make that the economic engine around which we could really have a Times Square renaissance much in the way that you’ve seen a Grand Central renaissance over the past few years.

John Kim, Analyst

Great. Thank you.

Operator, Operator

One moment for our next question. Our next question comes from Tom Catherwood, BTIG. Your line is open.

Tom Catherwood, Analyst

Thanks so much. Steve, maybe turn over to One Madison. Obviously, two kind of anchor tenants in there at this point in time. Now that you’ve reached this kind of 55% plus level of pre-leasing, how does your marketing program shift at all? Do you become more selective with tenants? Are you able to start pushing rents at this point in time? Is there anything that changes once you reach this level?

Steve Durels, Chief Operating Officer

Yes. We’ve already raised rents as a result of the leases that we’ve signed. But first and foremost, we remind the broker's community that we still have space. I think a lot of people are under the impression that we are fully leased in the building. So we’re out there reminding people that we’ve still got space to offer. We’re actively trading paper with a couple of tenants now in the tower of the building. We’re still seeing pretty strong tour activity, and I think it’s going to pick up even further towards the end of this year once we start to have the steel in place for the new tower and we can do site tours. Up until this point, all of our marketing has really been done out of our boardroom, off of renderings and off of a presentation deck and really not with site visits. What we saw at One Madison—at One Vanderbilt Avenue is that once we could do site tours, the place just exploded because people got so excited about the quality of the development, what the views are like, what the volume of space really feels like. It takes on a completely different character and pace to a leasing program. So we top out steel in November of this year, and I think we’ll be doing site tours towards the end of the year or early next year. So that’s really where the thrust of our focus will be.

Tom Catherwood, Analyst

Got it. Appreciate that. And then maybe Marc or Andrew, when you’re thinking of sources and uses going forward, obviously one of the priorities has been repaying the unsecured bonds; you got that resolved. But the new projects obviously add more capital requirements, whether it’s 450 Park or 245 Park or 5 Times Square. How do you think about allocating capital to those while at the same point in time, reducing your floating rate debt? What gets prioritized or where do you hit a challenge in that capital allocation, if at all?

Andrew Mathias, President

Well, I think the primary source of capital will be asset sales. As for specifics, 5 Times Square will be zero incremental capital; that deal was sort of fully funded at capitalization with new cash equity that did not come from our side of the ledger, it came from the other partners in the deal. So there’s zero incremental capital needs there. As we said, 245 Park, where we have a search for a joint venture partner going on, and we’d expect the proceeds of that joint venture sale to cover most, if not all, of the capital required for that building.

Tom Catherwood, Analyst

Got it. Thanks, everyone.

Operator, Operator

One moment for our next question. Our next question comes from Michael Lewis with Truist. Your line is open.

Michael Lewis, Analyst

Great. Thank you. I have a question about the term loan and the swaps. I’m wondering if there was any change in the amount or the composition of the banks that kind of came to the table to help you get that done? Because we’ve heard that some large lenders have pulled back on commercial real estate lending. So I’m wondering not just about the pricing of that but kind of the availability of capital in the market.

Matt DiLiberto, CFO

Yes, Mike, it’s Matt. No question, it’s tough out there. A lot of banks are pulling back in various areas. So to hit the market with a facility like this is not without its challenges. But we went to very close relationship institutions who stepped into it. They are all participants in our existing credit facility. Some are participants in the One Madison financing, and given that this facility is pursuant to funds coming from One Madison, they have a great deal of certainty around the success of that project and therefore the funds coming in. But yes, there’s plenty of headwinds in this environment just because capital allocation or restrictions are keeping a lot of banks handcuffed.

Michael Lewis, Analyst

Okay, thanks. And my second question, kind of piecing together, I guess, some of the other questions that were already asked. As you look at JV partners and maybe selling some assets, what’s kind of the depth of that market, right? So with interest rates up, leverage buyers under pressure, is there capital out there to get those deals done? And does the pricing take a significant hit? Or do you feel pretty good about what you’ll be able to do those deals at?

Marc Holliday, Chairman and CEO

Well, I mean, I think we feel good relative to the kind of product we’re bringing to the JV market. It’s still sort of irreplaceable Class A often trophy-like assets. For that, I’d say there’s always demand in every market. That demand often shifts from investor to investor or from country of origin to country of origin. But I think that for the balance of 2022, you’re not going to see—many people are going to have more limited capacity. But in 2023, we believe there will certainly be new investment mandates to put money to work, but only in the best markets, best properties, and best sponsorship. It’s almost anything in a dislocated market or a challenged market because of what Matt just talked about on the debt front. Only the best deals you’re going to get done in grade A markets with very competent sponsorship. In that regard, we go into it very confidently, thinking we’ve got the right product, the right returns for this market, and the right valuation levels. The proof will be in the execution.

Andrew Mathias, President

In the case of 245, the right in-place financing.

Marc Holliday, Chairman and CEO

Yes. Well, that said, it’s a great point Andrew makes—a fully financed deal, so that certainly helps. But with or without it.

Michael Lewis, Analyst

That makes sense. Thank you.

Operator, Operator

Our next question comes from Daniel Tuche with Scotiabank.

Nick Yulico, Analyst

Hi, Nick Yulico here. So just a question on 245 Park. How are you guys—you talked about some of the capital plans, but how should we think about—you underwrote a stabilized yield on that building post-renovation?

Marc Holliday, Chairman and CEO

Well, stabilize, what kind of yield—cash on cost, unlevered IRR, levered IRR, just...

Nick Yulico, Analyst

Yes. Cash on cost would be great.

Marc Holliday, Chairman and CEO

Cash on cost, stabilized cash on cost would have to—I think we’ve got—let me sort of go back to front. We’ve got levered returns on our basis that, I think, would exceed 50% based on where we can execute for a great trophy office property right across from JPMorgan’s new world headquarters. How does that translate?

Andrew Mathias, President

Also green, it’s low 6%.

Nick Yulico, Analyst

Okay. Great. And I guess just going back to the—in that case, you do have the input debt on the building, which is attractive low 4%. If you were to think about that building or another building in New York trading right now, you have to put new acquisition debt on it. Your rate on that, if you can get, it’s going to be somewhere over 6%, let’s say. How is that in your mind affecting values in the market? Does that mean that starting cap rates for New York, in that type of situation, if you have to finance it over 6%, starting cap rates have to be closer to 7% or higher?

Marc Holliday, Chairman and CEO

Nick, please. You asked me a question. I’m going to give you my opinion; if you don’t...

Nick Yulico, Analyst

Okay. I just want to make sure I understand. So you still think cap rates in New York are for stabilized assets, not turnaround assets or somewhere...

Marc Holliday, Chairman and CEO

It would be very specific, but then I’m going to move on to the next question. I think stabilized cap rates—with the assets we have—245 has improved with us at the helm in this market, across from JPMorgan’s $5 billion to $6 billion investment, a few blocks up the road from One Vanderbilt, down the street in 425 Park, carries a sub-five cap rate. It does not carry a seven-and-a-half cap rate. That’s it. No other words on that. That’s my feeling on it. If you disagree, disagree, which is what makes a market. I have no problem with that. I’m just saying, that’s my opinion.

Nick Yulico, Analyst

Okay. Even if someone were to put debt on that building today, they would have to replace it at well over 6%, even if you can get...

Marc Holliday, Chairman and CEO

I don’t know where that debt would be. That’s your debt. I don’t know where that...

Nick Yulico, Analyst

It’s just spreads. I mean, it spreads in the market.

Marc Holliday, Chairman and CEO

I hear you, but something, we just closed a corporate facility at 140 over. Now, in your mind, maybe it’s like seven plus, but...

Nick Yulico, Analyst

No, no, I understand the term; I’m saying in the market to get property debts.

Marc Holliday, Chairman and CEO

Nick, please. You ask me a question. I’m going to give you my opinion; if you don’t... This is all about what’s going on in the market today. I mean, we’re at 400 million, and 410 million square feet of assets in New York. Not all the same. I’m just talking, you said a building, like a 245, so I’m responding to that. A seven-plus cap rate would be, I think, empty set. Okay. It’s fine with me if nobody believes it; this is what makes a market.

Nick Yulico, Analyst

Thank you.

Operator, Operator

One moment for our next question. Our next question comes from Blaine Heck with Wells Fargo. Your line is open.

Blaine Heck, Analyst

Thanks. Good afternoon. Marc, you talked a little bit about this in your prepared remarks, but now that we’ve moved past Labor Day. I’m curious what you guys are seeing in terms of tenant space usage or utilization, days in the office per week, and maybe even times of day that are most active at the office?

Marc Holliday, Chairman and CEO

Yes, I’d say that like many others are experiencing right now; there’s two work weeks—Tuesday, Wednesday, Thursday work week—where I’d say we’re almost back to close to pre-pandemic levels, at least that’s how it feels like. The numbers are in excess of 60%; pre-pandemic, our full occupancy might have been 70% or somewhat above that. We don’t have exact numbers on pre-pandemic. Certain buildings are higher than that, where the tenant base is more back to work; then we have certain tenants that may be more remote, so it fluctuates a bit, but I’m giving you the averages. On Mondays and Fridays, particularly Fridays, you might see physical occupancy at 30%. Now all those numbers are increasing, and we see that in the numbers we’re getting. But this Friday, we’re often late in New York City. So we’re not measuring against a 100% on Fridays in New York City. I mean, people are out, PTO, traveling, doing business, etc., so it has the feel for three to almost four days a week like a pre-pandemic market. I came off the train the other day. I mean, that train is full. That platform is full. You can’t—the time it took to get out the doors into the main theater of Grand Central was measured in minutes, many minutes, not seconds because that platform was packed. It has a very good feel right now, in my opinion.

Steve Durels, Chief Operating Officer

I’ll add to it. I mean, just statistically, Metro North ridership is, if I remember this stuff correctly, is like 9% greater than it was pre-pandemic. Car traffic is 5.5% or 6% greater than it was pre-pandemic. While it’s still lower than pre-COVID numbers, the long railroad is still at a lower number. To Marc’s earlier point, the trend line is such that ridership and people coming back into the city and occupying the offices is on an upward slope, and we’re seeing that consistently improve week over week.

Blaine Heck, Analyst

Great. Thanks, guys. That's helpful. Second question; it seems as though the highest quality and highest price points were certainly the most active during the pandemic, and I assume that can't last forever. So I'm wondering how the pace of leasing activity has trended in some of your lower-rent buildings? Are you guys seeing much of the pickup in activity there relative to kind of what you saw during the pandemic?

Steve Durels, Chief Operating Officer

We're seeing—well, as I said earlier, we're seeing more tours and proposals and lease signings in our mid-price point buildings, which I think are largely dominated by the smaller to medium-sized tenants. That's not yet translated into enough signed leases to really move the needle, but just off of tour activity and expressions of interest, it's improved. It's still a struggle because those smaller to medium-sized guys are late to the game.

Operator, Operator

Our next question comes from Tayo Okusanya with Credit Suisse. Your line is open.

Tayo Okusanya, Analyst

Yes. Good afternoon. Two quick ones from me; first of all in regards to the swaps and earlier comment about, again just having more hedging going forward; could you just talk to just how much you kind of ultimately expect to be hedged by given you have about $3 billion of kind of variable debt between the consolidator and unconsolidated JVs?

Steve Durels, Chief Operating Officer

Yes. So let’s talk the numbers first. We had about $2.4 billion unhedged floating on just short of $12 billion of debt. Our target floating rate ratio is kind of 15% to 20%. So we're already at or below that number, but we're going to target all of our existing floating rate debt as much of it as we possibly can because we don't unilaterally control some of it to hedge. Beyond the end of the quarter, we did another $200 million swap of floating to fixed. Yesterday, we're zeroed in on another almost $400 million of property-level floating-rate debt. There will be debt pay down. We want to look at the credit facility—our revolving credit facility, and our goal is to always have that near zero. So with proceeds from asset sales or other activity, we'll try and get that down to zero; that's also floating rate debt. It’s a combination of caps, swaps, and debt repayment, as Marc said in his opening comments. Even though we are at or below our target, we're going for more because we want to protect earnings and cash flow.

Tayo Okusanya, Analyst

Got it. That's helpful. And then 717 Fifth Avenue and 650 Fifth Avenue, with the debt maturities there and the ongoing conversations with the lenders. I mean, what's kind of the ultimate goal there with those two assets?

Marc Holliday, Chairman and CEO

Well, we're not the managing partner at 717; we have a very small passive interest there. The hope is to get an extension from the existing lender group, and I would say 1552 is much the same. Times Square retail has obviously been heavily impacted by the pandemic, and we expect the lender to be appreciative of those impacts.

Steve Durels, Chief Operating Officer

And you mentioned 650—650 Fifth we did a short-term extension.

Tayo Okusanya, Analyst

Right. But after the six-month extension that expires in April or so next year, right? So, I think longer term is the idea?

Steve Durels, Chief Operating Officer

Part of the exercise with extensions is evaluating the financing market at the time. We felt with the lender the best thing to do at this point was to extend six months. At six months, we'll consider it again, maybe we'll do another six months or another 12 months until we get to a more comfortable position.

Tayo Okusanya, Analyst

So longer term is the answer?

Steve Durels, Chief Operating Officer

Right, and if the market is cooperative, we'll do something longer term.

Operator, Operator

Our next question comes from Anthony Powell of Barclays. Your line is open.

Anthony Powell, Analyst

Hi, good afternoon. Marc, I think you mentioned the prospect of office to residential conversions. Have you talked in any conversations with people like the Mayor and Governor? Are there plans in place to maybe systematically reduce some of the office, I guess, availability out there stock in New York through these conversions? Is something being announced in the next few quarters? I'm curious because I think this issue of maybe obsolescent is becoming more prominent in the conversation.

Marc Holliday, Chairman and CEO

So just, so I understand the question. The question is what do I think is the real timeline that or the prospect of getting something accomplished at the state and city level? I think the best; this is one of the topics that we're going to be featuring in about six weeks at the Investor Conference, stepping through what it takes to get a building from office to residential from a physical standpoint, from a zoning standpoint, from building code standpoint. It's very doable; we've done it; many have done it. There are ways to make it easier, better, more efficient to turn right now with a very small pipeline of office to residential into a much larger pipeline of office and residential. Obviously, one of those big elements would be a tax break along the line of what (for 21G) was downtown. When downtown had substantial problems after 9/11, that in and of itself is being looked at; but it's being looked at in coordination with the changes that I mentioned; some of which will take time to implement. I think that a program can come about in 2023 in terms of directional, but in terms of actually seeing buildings converted, I would guess that’s 2024 and beyond. A program can see upwards of 10 million square feet of office sort of taken out of the equation for conversion, pursuant to a new program, if the economics and the zoning are there to make it happen. A much longer discussion to detailed discussion that, Anthony, if you don’t mind, I want to defer until our investor conference when we're going to be speaking to that directly.

Anthony Powell, Analyst

Great. Thank you.

Operator, Operator

Our next question comes from Ronald Kamdem with Morgan Stanley. Your line is open.

Ronald Kamdem, Analyst

Hey, great. Two quick ones from me. Just when you're thinking about those 2023 lease rolls at this point, any commentary on how much is rolled, how much is left to do, and what that's shaking out?

Steve Durels, Chief Operating Officer

Well, as you can imagine, we’ve been, for the better part of this year, working on the 2023 expirations already. So we have very good clarity on every single tenant as to who’s likely to stay or not. We’re going through our budgets—building our budgets for next year. We have a granular tenant-by-tenant assumption for everybody that's rolling and each piece of vacancy that we have today. I don’t think there are any surprises as we sit here today as to which tenants are going to stay or go compared to what we saw those tenants twelve months ago.

Ronald Kamdem, Analyst

And any chance—or any way to quantify that? Is it 20%, 10% any sort of high-level numbers?

Steve Durels, Chief Operating Officer

I don't have it at my fingertips, so I'd be pure speculation. It'll be something that I think we will have—a very good ability to communicate once we finish our budgets over the next week or two. Maybe perhaps that’s something we’ll talk about at investor conferences as well.

Ronald Kamdem, Analyst

Sure. Thanks. So my second question was just on asset sales. I think you talked about historically about sort of potentially JV-ing on Vanderbilt. Maybe can you talk about how that's going? Are there other assets beyond that that you're contemplating as well in the portfolio?

Andrew Mathias, President

We are marketing some assets for sale. We have other assets we're evaluating for sale, and the One Vanderbilt JV process is still in discussions. We're active on the disposition front. We're going to use those proceeds to retire debt and to fund some of the capital needs of some of the projects. There’s still an active market out there, as we showed with Memorial Sloan Kettering, and there have been a bunch of other trades that have happened in the market.

Marc Holliday, Chairman and CEO

I think, on balance, we feel pretty good in our ability to execute, which is why we're basing our plan on redeployment of those proceeds. If we feel good about those executions, then we have a different plan. But we're working hard and trying to convert. We got a lot done this year. I referenced 24 sales transactions, either entire or partial interests, several of which were this year and more of which will be in the next few quarters.

Ronald Kamdem, Analyst

Thank you.

Operator, Operator

And I'm not showing any further questions at this time. I'd like to turn the call back to management for any closing remarks.

Marc Holliday, Chairman and CEO

No. That's it. Thanks for whoever's left on the phone; appreciate you hanging in there for the duration. We will see, I hope many or most or all of you on December 7th—5th. Good. I'm sorry about that on December 5, Monday. See you then.

Operator, Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.