SL Green Realty Corp. (NYSE:SLG) Q4 2022 Earnings Call Transcript

SL Green Realty Corp. (NYSE:SLG) Q4 2022 Earnings Call Transcript January 26, 2023

Operator: Thank you, everybody, for joining us, and welcome to SL Green Realties Corporation Fourth Quarter 2022 Earnings Results Conference Call. This conference call is being recorded. At this time, the company would like to remind listeners that during the call, management may take forward-looking statements. You should not rely on forward-looking statements as predictions of future events as actual results and events may differ from any forward-looking statements that management may make today. All forward-looking statements made by management on this call are based on their assumptions and beliefs as of today. Additional information regarding the risks, uncertainties and other factors that could cause such differences to appear are set forth in the risk factors and MD&A sections of the company’s latest Form 10-K and other subsequent reports filed by the company with the Securities and Exchange Commission.

Also during today’s conference call, the company may discuss non-GAAP financial measures as defined by Regulation G under the Securities Act. The GAAP financial 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 fourth quarter 2022 earnings and in our supplemental information included in our current report on Form 8-K relating to our company’s fourth quarter 2022 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 to please limit your questions to 2 per person.

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

Marc Holliday: Okay. Thank you, and good afternoon, everyone. We appreciate you joining us today. Normally, our January earnings calls are brief, coming only 7 weeks after our annual investor conference, which we held back on December 5. We had a great conference on that day with attendance at capacity at One Vanderbilt, and we received a lot of positive feedback after the presentation. Not surprisingly during the conference, we set out for ourselves a characteristically robust best agenda for 2023, which included business plan, aspirational goals, I think there were 18 or 20, some of which included 1.7 million square feet of leasing, over $2 billion of asset sales and joint ventures, significant debt reduction and completion of several important development projects that we expect to deliver timely and on or under budget this year.

Notable among them is One Madison Avenue, which we actually topped out ahead of schedule in just 1 week after our investor conference. So it was a pretty amazing day. There were over 700 people gathered to witness the event of the laying of the last piece of steel on this truly great project in the Midtown South submarket, marking a turning point for the project where we now see completion in sight. And the timing of that topping out was truly perfect as it gave us the ability to stand on that 18,000 square foot penthouse floor with 18-foot lab sites and unobstructed views of Midtown and Downtown and standing there, you can truly understand why our new tenant that has just joined the roster of Tennis to the One Madison Avenue. Rent roll is 777 partners.

They were attracted to the opportunity and we were able to lease it up over 1 year ahead of our underwriting, just stressing the importance of not only hitting underwritten economics but also exceeding the timing has big positive effect on the project, and we hope there’s more to come. This lease, along with the others, we announced last night, underscores the early leasing achievements we had in January, which is typically a slow month but for us, turned out to be a pretty good month and a good start to the year. Hopefully, it pretends of increased activity to come in 2023 though a long holiday break followed by the MLK holiday weekend. We’ve seen a noticeable pickup in tour activity over the last 10 days, and we received around a fresh new proposal.

Photo by Heidi Fin on Unsplash

So we’re optimistic. We’re getting stuff done, and we’re on plan most importantly. So on the heels of signing over 370,000 square feet of office leases since our investor conference at the beginning of December, we managed to assemble a pipeline of leases totaling 700,000 square feet, where it stands today, 100,000 square feet of which we hope to sign over the next 60 days. We’ll be moving and hustling to try and get back up. We’re currently negotiating leases at 450 Park Avenue, 919 Third, 45 Lex, 1350 Avenue of the Americas and another lease at One Madison. In addition, we are just beginning to market our redevelopment project for 245 Park Avenue. We spent quite a bit of time showing off that amazing redevelopment plan that we have for 245 Park, and we are beginning to execute this year.

And the early read from the tenant broker community is that this exciting and, I think, a very elegant plan that we have for the asset is going to be very well received by the tenant market, and there seems to be much interest already that we’re generating as we’re beginning to take these meetings, and we’re also generating interest among foreign investors for JV investment. Recall that identifying one or more JV partners for 245 Park is one of the several capital markets goals we have for the year and for a little bit more color on that. I’m going to turn it over to Andrew Mathias.

Andrew Mathias: Thanks, Mark. There’s still a standoff between buyers and sellers in the market, but we definitely see as financing, hopefully returns and a 5- and 10-year fixed rate financing the CMBS market reopens, which we and all the rest of our market participants here are anxiously awaiting, we think we’ll see that standoff thaw a bit. We’ve been actively in discussions with investors from around the world. We were in the Middle East several months ago. We have a trip plan to Asia in March. The team was present at the Crafts conference in Miami earlier this month talking about the financing trends. And we think there’s still a lot of interest in prime New York City assets particularly Park Avenue, which is no secret that it’s the best submarket in New York City.

And we think we’ll have a lot of willing conversations this year from all different types of investors from around the world, talking about 245 and the other aggressive capital goals that we set out for us at the investor conference.

Marc Holliday: Great. So more to come on that throughout the first half of the year, we’ll keep you guys updated as we pursue our various goals for recapitalizations, refinancings, joint venture sales. We are full guns blazing right now here at Green and working very hard and diligently to set the seeds so that by the middle of the year. We can hopefully start to achieve and knock off some of these goals and continue on a path to what we think will be a pivot year for us in 2023, coming out of the markets we’ve experienced over the past couple of years and hope to see some more positive news seeping into the market throughout the year. I did want to leave, I’d say, the best for the end before opening up the call to questions.

Yesterday, as I trust you may have heard or read, it marks an incredible milestone moment for East Midtown, New York City and Long Island with the official opening of the long-awaited Grand Central Madison Station, right underneath Grand Central Terminal and One Vanderbilt, representing the culmination of the $11 billion Eastside access project. It is a watershed moment. I think it’s probably the most important and largest project the MT has completed in many, many decades. And with its grand opening, you now have direct service from Long Island to Grand Central. It’s finally become a reality after being, I think, in conception for 60 years in development for 20 and it opens up a direct seamless trip from Long Island, which has a 1.4 million person workforce that now can look to either of Grand Central or Pennsation as its primary destination and it choose its most efficient destination.

The MTA is estimating that 45% of nearly half of all Long Island Railroad commuters will — are expected and will eventually commute direct to Grand Central once full service is up and running this year instead of what is currently altePenn Station, and that translates into 160,000 people a day, and these commuters are essentially arriving literally right at our front door where the majority of our portfolio is located. I can’t stress enough the importance of the projected 40 minutes per day or nearly 3.5 hours per week of saved commutation time that the business community puts a short, easy, safe and pleasant commute as its top requirement now coming out of post-pandemic world and as a tool for encouraging employees to work from office. So yesterday, we celebrated with the Governor and the MTA Chair, Jane lever, the opening of this incredible terminal that spans over 700,000 square feet from, I’d say, approximately 42nd Street to 48th Street on what must be 1 to 3 different levels dedicated waiting areas, beautiful new retail stores that will be opening and restaurants and a host of other amenities and it’s all well done, well executed, well designed, well conceived, and I would urge anybody that hasn’t yet taken the time to swing by and check it out that they do so because it’s pretty inspiring to see what can be done after all the time and after all the money is spent, you look at the permanent goods that will come of it for the decades and perhaps centuries to come.

The terminal contains 8 tracks and 4 platforms, which will be in service and enable Long Island Railroad to increase its service from Long Island to Manhattan by nearly 50% of capacity. And One Vanderbilt and East Midtown rezoning was really a first step towards unlocking the pent-up demand for new and redeveloped office space in and around Grand Central. And now Grand Central Madison will further transform and revitalize what is undisputably New York City’s #1 business district. And we’re excited by it as shareholders or stakeholders or followers of the company. You should be excited by it, too, in my opinion. And it’s a great way to start the year. So with that, we’ll open it up for questions.

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Q&A Session

Operator: . Our first question or comment comes from the line of Alexander Goldfarb from Piper Sandler. Mr. Goldfarb, your line is now open.

Alexander Goldfarb: And obviously, it’s great to see ESATAccess finally open. So that’s awesome to see. But just clearly, that’s a positive for the Grand Central market in leasing. But bigger picture, especially since you guys put out your Investor Day, I think it was 1.7 million square feet target for this year. The tech layoffs have accelerated, granted, it’s a lot out west and not everything is New York, but it’s still pressure obviously all Street has had a tough year. we’re reading all the headlines. So the state of the leasing market, do you guys feel the same that you fell back in December? Is it slipping? Are there signs that tenants are taking even longer? Or Mark, your comments about people resuming activity post MLK Day, means that the leasing activity is sort of divorced from what we’re reading in the broker reports and the headlines.

Marc Holliday: Well, yes, so a lot to go on — back in that question. But let me start first with the reference to the tech layoffs. I think the notion of what you may have termed sizable or significant layoffs. I’m not sure I would characterize it that way in terms of the ultimate impact and effect it will have in New York City. These are firms that had been on an insatiable growth stage for many years. Tech was probably the biggest grower in New York City over the past 5 or 6 years and went from being a relatively small component of the markets being, I think, almost about 25% of the market. So it’s a click in the Alex.

Alexander Goldfarb: Sorry, I’ll stop…

Marc Holliday: I’m in the would you want to act was one of our guys

Alexander Goldfarb: No, you wanted us back in the office, and this is what you get type on the speaker.

Marc Holliday: There’s been massive growth. Steve, correct me, they may be as much as 30% or 35% of the total market. Certainly, they were 30% to 35% of the incremental demand. And now they’re pausing and becoming a little bit more efficient as companies do at the peak of the cycle. And New York City large employers are required to give Warn notices WARN. And even though there are these advertised or announced, I should say, announced layoffs from some of these firms, they represent a fairly modest amount of the overall Scopia companies. I think probably on average, close to about 5%. And many of the markets these companies are targeting for retention that I’ve heard, New York is always among that group of companies. I think there are other parts of the country that will feel it more.

The warn notices have not been that significant from the tech sector so far, which would have to reside and be received by the city. So it’s — there’s no indication yet of any mass layoff. When you look at the job numbers for 2022, and these are the most current numbers we have through December. So pretty current. There were 209,000 jobs added in New York City year-over-year. And recall, 2021 was also a big job growth year. I’ll see if I can get that number. That was 270,000 jobs. So 270,000 in 2021, 209,000 in 2022, office using jobs, 63,000 jobs added. That is the second most office using job count ever added with the first one being back in 2021, 83,000. But in a normal year, the city grows by about 20,000, 25,000 office using jobs and last year was triple that number.