SL Green Realty Corp. (NYSE:SLG) Q4 2023 Earnings Call Transcript

SL Green Realty Corp. (NYSE:SLG) Q4 2023 Earnings Call Transcript January 25, 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 SL Green Realty Corp.’s Fourth Quarter 2023 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 [Technical Difficulty] cannot rely on forward-looking statements as predictions of the 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 uncertainties and other factors that could cause such differences to appear are set forth in the Risk Factors and in D&A section of the company’s latest Form 10-K and other subsequent reports filed by the company with the Securities and Exchange Commission.

Also during today’s conference call, the company may discuss non-GAAP financial measures as defined by Regulation G under the Securities Act. The GAAP financial measures most directly comparable to each non-GAAP financial measure discussed and the reconciliation of the differences between each non-GAAP financial measures and the comparable GAAP financial measures can be found on both the company’s website at www.slgreen.com by selecting the press release regarding the company’s first quarter 2023 earnings and in our supplemental information included in our current report on Form 8-K relating to our fourth quarter 2023 earnings. Before turning the call over to Marc Holliday, Chairman and Chief Executive Officer of SL Green Realty Corp, I would like to ask those of you participating in the question-and-answer session.

of the call, please limit your questions to 2 per person. Thank you. I would like to turn the call over to Marc Holliday. Please go ahead, Marc.

Marc Holliday: Okay. Thank you. Good afternoon and glad everybody could join us today. I’m extremely happy, and I’m extremely proud with how we ended 2023, navigating what was a challenging year and showing that we have turned the corner going into 2024. We’re just a few weeks into the year and only 7 weeks on from our investor conference, but we already have so much new activity that we want to talk about and share with you today. Normally, I don’t like to repeat the earnings press release. Most of you have it. You’ve read it and I don’t like to do that on these calls. But I think today is different. I think it deserves a moment to reflect on what we have achieved in the fourth quarter and at the outset of the year during these first few weeks.

At 2 Herald, we increased our ownership in a well-located asset and fully resolved a $182.5 million leasehold mortgage, all of which was accomplished for very little out of pocket. There’s more work to be done for sure, but we are on our way to stabilizing this asset. There was seismic news in New York City retail this month with Jeff Sutton our long-term partner and friend and among the best retail deal makers in the city, wait, Jeff, if you’re listening in, I know what you’re thinking, the best retail deal maker in the city, pulled off not 1, but 2 amazing deals. 717 Fifth Avenue sold for $963 million generating full repayment of the capital stack plus distributions to Sutton and ourselves equating to approximately $8,000 per square foot of sale price.

And to prove this as an outlier right across the street, add another legacy Green Warton asset, Prada bought 720 and 724 Fifth Half for $835 million a deal that was also just recently closed. And these deals developed quickly and confidently and I think it’s very, very exciting for the city. We had a third great example of user acquisitions in the retail space in the past 30 days with the Swiss retailer Acre buying the entire retail condo that we owned at 21 East sixth Street for over $40 million and exceeding $7,000 per square foot thereby putting an exclamation point on the trend of retailers making permanent commitments to New York City through the purchase of desirable retail assets. This is Acre’s second purchase from SL Green over the past year.

We expect this trend to continue as we are already aware of another transaction in the works in that part of town. Obviously, 717 wasn’t an anomaly in confidence in Fifth Avenue and high street retail in New York City is once again on the rise. But let me remind you some of the headlines from the past few years, relatively recent headlines. When FT declared the death of High Street retail, Cranes talked about a retail apocalypse on fifth and New York Times concluded that retail has abandoned Manhattan. My point here is simply that people often underestimate how quickly things can change from these sort of historical media headlines to record-setting transactions just a few years later. I urge you all to keep this in mind when you read similar headlines about the office sector.

Speaking of office, we ended the year strong with over 500,000 square feet of New York office leasing in the fourth quarter, which enabled us to report an uptick in occupancy for the second consecutive quarter after having stated publicly last summer that we believe the market has essentially hit bottom. And JLL recently reported that SL Green signed the greatest number of triple-digit leases in all of New York City last year. There’s good news on the debt front as well. We gave you a business plan in early December with ambitious plans to extend, modify upwards of $5 billion in debt. which certainly gives new meeting to the definition of stretch goal. Happy to report that even before the year ended, we put the first 1 on the Board with 7 day, which we successfully extended for 3 years at terms that are favorable for the asset and should help us get our JV done on that asset.

Another aspirational goal we set of $1 billion of debt reduction this year on the heels of $1 billion of debt reduction last year. And we’ve accomplished already over $200 million of that reduction sitting here in sort of mid-Jan. So not to be overshadowed by all this great news, our premier development on 760 Madison which has really set, I think, a new standard for Upper East Side, bespoke New York luxury, and we just signed a contract this morning for the ninth floor, bringing us to 6 out of 10 units spoken for with a contract out on a seventh. So we’re off to a great start, certainly confident in our business plan and optimistic about the city’s continued recovery where we have some positive indicators to report. The city’s OMB forecast for 2024 is hot off the press and looks really good with over 90,000 private sector jobs forecasted for this year and another 97,000 jobs forecasted for 2025, certainly continuing to bring New York’s employment base to record highs.

As or more importantly, after a year where we saw slippage in the office using employment, the city is forecasting a robust reversal that is — will more than make up for those losses with 42,000 office-using jobs projected for this year, and that would also set office using record in 2024. So kudos to the Adams and Hochul administrations and all involved for helping them bring back tourism, improve security and implement pro-business policies. As a result of all that, we are launching our fundraising efforts to amass a minimum of a $1 billion capital allocation to become active participants in this city’s ongoing recovery and resiliency. In fact, after we get off the phone, we’re heading to the airport, and we’re on a plane to Asia to formally kick off those efforts.

We’re excited about the prospects of this. We got a lot of excellent response and inbound inquiries on these efforts. Most importantly, what we’re doing, along with other announced deals, shows that new capital is forming in this market. The second indicator that we passed the bottom, of course, the first indicated being our statements to you in July of last year. With that, happy to open it up for questions. Thanks.

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Q&A Session

Operator: [Operator Instructions]. Our first question is going to come from the line of Steve Sakwa with Evercore ISI.

Stephen Sakwa: Marc, I was just wondering if you could provide a little bit more color on the 2 Herald transaction. I think just what the bank did and effectively letting you basically pay off that mortgage for close to 0. It’s a great deal for you. I think everyone here is just trying to understand kind of the hows and the whys and how that deal ultimately kind of unfolds and how you’re thinking about the economics of that deal?

Marc Holliday: Well, I take that as kudos for getting a great job done on that deal. I think that everybody in this market is trying to come together to make sure that these assets have a safe landing. This is a great asset. I love the location. I think it’s — well, I know it’s Ulta’s #1 location in sales per foot in its entire 400 store portfolio throughout the country.

Unidentified Participant: 1,500.

Marc Holliday: 1500. Sorry, 1,500 throughout the country. Number one, I mean, that says something, but it also says that it’s an asset that we’re going to have to really start to think about what’s the best use of beauty is there’s a lot of different options and alternatives that we can look at here. It’s great for office. It’s an unbelievable retail location, right, across Macy’s. It’s in a part of town that’s seeing a lot of capital investment and upgrade. It has the ability to flex as residential, both dormitory, which we’ve actually seen because Mercy College is there. and potentially for some conversion to other residential use. A lot of options. And that’s what we like. We like deals that give us optionality. We’ve got to roll up our sleeves here and writing the capital stack is just part 1, but executing the business plan over time will be part 2.

And hopefully, all of us, including our partners and others will come out of this with something good to talk about in the future.

Stephen Sakwa: Okay. And my second question, I think at the Investor Day, you talked about mark-to-market being in the 2% to 5% range for 2024. However, when I look at the disclosure that you have towards the back of the supplemental, where you provide your lease expiration schedule and your expectations of asking rents today. It looks like the ’24 leases in both wholly owned and unconsolidated show roll downs. And I realize these are just asking rents, and they’re different from maybe what gets signed. But is there just any way to kind of tie those two together? Or what are we missing kind of on the schedule on Page 40 and what you provided at the Investor Day?

Steven Durels: Steve, it’s Steve Durels. So as we look at our pipeline right now and the mark-to-market associated with the pending transactions or the prospective deals that we think are likely to convert the deals, it’s the mark-to-market on any particular deal is kind of all over the board. I’d say half of them are positive half of are down to varying degrees. But they’re within our current 1.4 million square foot pipeline, we are — there are enough large deals with very significant mark-to-markets that are positive that will drive the overall average up.

Operator: Our next question is going to come from the line of Alexander Goldfarb with Piper Sandler.

Alexander Goldfarb: Marc, before you get on that plane to Asia, I just want to understand better how investors, the international or domestic institutional investors are thinking about investing in your debt fund versus investing in real estate directly. I mean you’re out with potentially a One Vanderbilt state, but you’re also out with a debt fund. And just trying to understand how private capital is thinking about those two options?

Marc Holliday: Yes. It’s a good question. I mean it’s different flavors for different investors. Some investors have different pockets for both. It’s not exclusive. I didn’t mean to imply that just FYI. We’re going — the debt fund is one element of what we’re having meetings about I think we’ve got over 20-some-odd meetings lined up over a 5-day period and there’s a lot to talk about. On the debt fund is certainly exciting. As are some of our JV and equity opportunities that we’ll be talking about in addition to some of the other things that we’re involved with in the entertainment and hospitality world. So we’ve got a full agenda certain of these investors are credit-oriented, and that’s the way they want to play it. Others are sort of high end, long-term equity-oriented investors and the ones the best are both.

And trust me, we’ll be putting lots of opportunities out there. The key is to make sure that this — all these meetings, not just — this is just one leg of many legs that we’ll be doing over the next couple of months, trips, both domestically and internationally, not just to talk about the fund, but to talk about what’s going on in New York City on the office front, on the retail front, on the credit opportunities, tourism, hotels or ADRs and occupancy going up significantly, job growth. I think there were 24,000 new businesses since pandemic created in New York that’s more than most cities even have. So it’s like an amazing story that I think needs to be told because on the comments I made earlier, if you rely only on the headlines, you get sort of a different impression of what’s taking place on the ground.

Alexander Goldfarb: Okay. And the second question is Matt, just thinking about 2 Herald as a template for other deals, potentially for those 10 stand-alone strategic assets. Can you give us a sense of how many of your loans are held directly versus in CMBS? Just trying to understand your ability to negotiate, can you negotiate as well with the CMBS special servicer as you can, if it’s being held directly by a financial institution?

Matthew DiLiberto: Yes, it’s Matt. I’m going to kick this one over to Harrison.

Harrison Sitomer: To answer the first question off the top of my head, I think it’s about 4 or 5 loans that sit in the CMBS as opposed to balance sheet and we’ve had great good negotiations with both CMBS lenders and the special servicers as well as balance sheet. So I wouldn’t say that either option is restrictive to us. There are obviously some more complexities when working with CMBS lenders, but we’re working through that on a few loans now as part of the $5 billion plan, and we’re well underway in those negotiations.

Operator: And our next question is going to come from the line of Tom Catherwood with BTIG.

William Catherwood: Steve, maybe going back to your answer to a previous question. mentioned kind of several large leases that should bump up the mark-to-market average for the year. a bulk of your activity in ’23, at least earlier in ’23, was more small and mid-sized leases, what are you seeing as far as tenant sizes in the pipeline? Has that — is it starting to skew you’re starting to see kind of larger tenants coming back in the market? Or is it still mainly dominated by those smaller requirements?