SL Green Realty Corp. (NYSE:SLG) Q1 2024 Earnings Call Transcript

SL Green Realty Corp. (NYSE:SLG) Q1 2024 Earnings Call Transcript April 18, 2024

SL Green Realty Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you everybody for joining us and welcome to the SL Green Realty Corp.’s First Quarter 2024 Earnings Results Conference Call. This call is being recorded. At this time, the company would like to remind listeners that during the call, management may make forward-looking statements. You should not rely on forward-looking statements as predictions of future events, as actual results and events may differ from any forward-looking statements that management may make today. All forward-looking statements made by management on this call are based on their assumptions and beliefs as of today. Additional information regarding risks, uncertainties, and other factors that could cause such differences to appear are set forth in the risk factors and MD&A sections of the company’s latest form 10-K and other subsequent reports filed by the company with the Securities and Exchange Commission.

Also during today’s conference call, the company may discuss non-GAAP financial measures as defined by Regulation G under the Securities Act. The GAAP financial measure most directly comparable to each non-GAAP financial measure discussed and the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found on both the company’s website at www.slgreen.com by selecting the press release regarding the company’s first quarter 2024 earnings and in our supplemental information included in our current report on Form 8-K, relating to our first quarter 2024 earnings. Before turning the call over to Marc Holliday, Chairman and Chief Executive Officer of SL Green Realty Corp, I ask that those of you participating in the Q&A portion of the call please limit yourself to two questions per person.

Thank you. I will now turn the call over to Marc Holliday. Please go ahead, Marc.

Marc Holliday : Okay, good afternoon and thank you all for joining us today. We appreciate the opportunity to discuss with you our results for the first quarter and review with you our recent announcements. It’s been years since I’ve felt this optimistic about the trajectory of our business. After a challenging few years where we navigated unprecedented change by keeping focused and working harder than ever, we’ve emerged with a stronger portfolio, a more exciting and diversified business, and an even sharper strategy moving forward. Certainly nobody did more than us when it came to leasing within our portfolio, developing extraordinary projects, capitalizing on market dislocation, and recapitalizing deals when others didn’t.

Our reputation and extraordinary relationships within the lending community allowed us to create plans to extend our debt maturities, capitalize and move forward. We’re in the early innings of what we believe will be a period of market improvement, fueled by the strength of New York City’s resurgent financial sector, signs of a re-emergence of the tech sector, and a new generation of workers who recognize that career advancement and relationship building doesn’t happen at home. Now as we enter what we expect to be a period of significant growth and opportunity, we are encouraged by the market fundamentals which we believe are shifting to become tailwinds. Even in this higher interest rate environment, there’s a solid foundation of positive economic momentum among our strong and stable tenant base.

The diversity of New York City’s economy is reflected in our portfolio and is one of the core strengths of this market compared to other cities, a market where a record 192 leases were signed last year at triple digit rents. And contrary to the media hype, the vast majority of these premium leases were not signed in new construction projects, but rather in well-located, easily commutable, and highly-amenitized existing buildings. This aligns extremely well with SL Green’s portfolio and the elevated office experience in which our hospitality group specializes. And the leasing results for the first quarter certainly support the case. We leased over 630,000 square feet of space at an average starting rate of $93 per square foot, one-third of which were renewals and two-thirds of which were new leases.

On the investment front, we launched a $1 billion opportunistic debt fund in February, the only one of this scale that is entirely New York City-centric. This fund will allow us to capitalize on current capital market dislocation through the discounted acquisition of existing debt investments and the origination of new high-yielding debt instruments. Fundamentally, we are looking to replicate our approach for the last 26 years of investing in the best properties in New York City via strategic debt investments. The feedback is that no one is better positioned to take advantage of the moment in this market as we are, and our initial closings are targeted for sometime this summer. Just this past week, the Governor and the Legislature have reached agreement on a comprehensive office to residential conversion bill, which should be printed tomorrow and voted upon and signed this weekend.

The conversion program is particularly targeted to existing Midtown Office buildings south of 96th Street and Lower Manhattan Office buildings as well. SL Green has played an instrumental role in helping to get this legislation passed as part of the state’s new fiscal budget. And we applaud Governor Hochul, the Senate and the Assembly on the doorstep of passing this landmark office to residential conversion bill which I believe will have a transformative effect on this office market much in the same way that we called very early on the transformative effect that Eastside Access would have on the Park Avenue corridor. I see this as being even more impactful than that event and certainly more comprehensive in a midtown and downtown encapsulated way.

By incentivizing the conversion of underutilized obsolete office space to housing, this vital legislation will uniquely address three of New York’s most pressing challenges. Amidst record high Manhattan office vacancy, the bill will create stability in the commercial office market, produce the affordable and market rate housing we need to overcome the city’s housing crisis, and generate foot traffic to support local retailers and restaurants in New York Central business districts. While many of these conversions under the new program will be taking place over the next three years to five years, the impact will be felt immediately as owners remove their buildings from office space inventory and relocate out existing tenants into other buildings.

Ultimately, we believe that somewhere between 25 million to 40 million square feet of rentable space will convert under this program. If this bears out as we think, the result would be a significant reduction in available space, far accelerated from whatever would otherwise have occurred simply through natural absorption of space via demand. Thanks to the leadership of the Governor and our elected officials in Albany as well as to Mayor Adams for his City of Yes zoning initiatives, the private sector is now positioned to again invest in New York City’s housing future. As part of a new conversion incentive bill, we are planning to be among the first out of the blocks with the conversion of 750 Third Avenue from office to residential use. The conversion of 750 Third Avenue will spur on this important new development for the city and there’ll be more to come on this throughout the year.

Lastly, we made enormous progress over the past year with our partners, Caesars Entertainment and Roc Nation on our vision for Caesars Palace Times Square. We had the opportunity to meet with hundreds of stakeholders, grower coalition, and gain significant support. We now know that this will be a long process with bids likely not due until 2025, and we will use this time to continue strengthening our bid because the project is worth the extra effort and Times Square stands to gain so much. One thing we know for sure, ours is the only proposal that is a true New York approach to gaming, providing benefits far beyond its walls. Thank you, and we’d like to take your questions on the quarter’s results please. Operator questions? Operator, are you there?

Operator: [Operator Instructions] Our first question comes from Alexander Goldfarb with Piper Sandler. Your line is open.

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Q&A Session

Alexander Goldfarb : Hey, good afternoon. Marc, let me first go to the Office-to-Resi conversion. You know, I guess a two part question and hopefully Matt doesn’t say that’s all my questions. But, you know, if we look at what Douglas Emmett did out in Hawaii, they’ve been able to convert building, you know, a building floor by floor so they didn’t have to take it out of service. Obviously for you guys, you’ve done 750, I think it’s pretty fully vacant. But one, does this accelerate your plans and thoughts on how you would convert buildings? And then two, the buildings that are coming out, that 25 million to 40 million square feet, are those really competitive with you guys? Meaning, if those buildings go out of service, does that really force more office demand into your portfolio, or what do you think the carry-on impact of that 25 million to 40 million going offline is?

Marc Holliday: Yeah, well, you know, some of these buildings, they’re all competitive to a certain extent because they form the bottom of the market or the bottom-middle of the market. These are not bad buildings. They’re just what I would call secondary buildings. Secondary buildings do not mean bad buildings. Some of them, when I use the term obsolete, it just means that they don’t really warrant the full-scale capital redevelopment and amenitization redevelopment relative to the types of rents that can be achieved in light of the concessions that would have to be given. So they’re not bad buildings. The buildings in Midtown definitely, you know, by eliminating such a vast quantity of space and taking the tenants out of those buildings and relocating them into existing space like we did it, you know, 750 Third is a perfect example.

It’s a good office building. It just in our eyes had a better higher and better use. And we’ve relocated many of those tenants out into our portfolio and other surrounding buildings. So, don’t get the impression that these midtown buildings are bad buildings simply because I use the term, you know, secondary or obsolete. They’re just buildings that have a — can be optimized as residential and should be optimized as residential and don’t necessarily warrant the same level of investment as buildings that we have where we’re achieving $90 square foot and above. That’s where that investment should go. And these buildings that might otherwise be $60 a foot or thereabouts on office rentable might be $100 a foot on Resi square footage equivalent.

So it becomes very clear. And your comment about what Douglas Emmett is doing in Honolulu, I think it’s spot on. I mean, obviously, it’s a different market, different size of market, but the point is the same. There was an example of one building having a fairly significant impact on an office market, imagine dozens of buildings converting, being taken offline, tenants being relocated out. The way this bill is structured, to get the maximum tax benefits, you have to file for your permits by sometime in 2026. That means you got to get going right now. This isn’t one of those wait and see and I’ll get to it in 2027, 2028, 2029. This is intended smartly to coerce not just ultimate transition to building, but expedited transition to building because we want to see this affordable housing and market and workforce housing problem addressed right now, not five years, 10 years down the road.

So the tax benefits, I think, to me, look intentionally coercive in a way that’s very positive for city and positive for affordable renters who need solutions sooner than later.

Alexander Goldfarb : Okay, second question is, the $2 billion of debt that you guys did clearly I think exceeded what anyone would have expected, especially with only $40 million of debt pay down. But as you guys look to future asset sales and really the stake sales out of 1 Vanderbilt and others of your top tier assets. Does the calculus change because everything is interconnected, right? You do refinancing, you do better than you expect, it means less pressure to sell a stake here or do other things. How does the $2 billion that you have achieved so far, does that change anything that you’ve laid out at your Investor Day? You know, either accelerating things or taking the pressure off the need off to do other things?

Marc Holliday: Well, I mean, look, you know, it doesn’t — it’s not changing our business plan. We don’t feel pressured. We’re enjoying this. This is what we do and this is what we’ve done and what I’ve done for 33 years. We’re in this because we love it, we enjoy it, and we view this as progress, and we view this as putting points on the board for our shareholders. And we enjoy watching the impact on the stock and turning the tide and seeing New York come back. So we don’t feel any more or less pressure to do anything. Our business plan remains the same, which is we do intend to sell or JV certain buildings which we’ve identified in the beginning of the year. Plus, along the year, we may, you know, add or eliminate from that mix, but the aggregate amount of activity is still our goal and objective for the year, both with regards to debt modification extensives and restructurings.

As much as we just announced, we still have four or five big important deals that we’re working on to go. And then two, on the disposition front, we think that the appetite, both domestic and internationally, for the best well-located premium assets remains very strong. And we remain committed to working through the monetization events of these assets like we’ve done you know for decades now, as we harvest our gains and reinvest.

Alexander Goldfarb : Thank you.

Operator: Thank you. One moment for our next question. And our next question comes from John Kim with BMO Capital Markets. Your line is now open.

John Kim: Thank you. I had a question on earnings, excluding all the debt extinguishments and other one-time items, that was $0.98 for the quarter, which on a run rate basis is kind of modest. I was wondering if this is a good run rate and what’s your visibility on additional one-time items, whether it’s debt extinguishment or sourcing any fees from your debt fund?