SL Green Realty Corp. (NYSE:SLG) Q3 2023 Earnings Call Transcript

SL Green Realty Corp. (NYSE:SLG) Q3 2023 Earnings Call Transcript October 19, 2023

Operator: Thank you, everybody, for joining us, and welcome to the SL Green Realty Corps’ Third 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. 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 third quarter 2023 earnings and in our supplemental information included in our current report on Form 8-K relating to our third quarter 2023 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 two per person.

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

Marc Holliday: Okay, thank you. Good afternoon, everyone. We’re obviously holding this call at a moment of great global stress, but we will do our best today to focus in on the Company’s third quarter performance and what we’re seeing in the market. While the current market remains challenging, we did have a number of very positive developments and milestones that I’ll summarize for you right now because they were a hard fought and we’re proud of them. First, we celebrated completion of One Madison Avenue with the receipt of our temporary certificate of occupancy, marking the completion of the building construction, three months ahead of schedule and well under budget. Importantly, this milestone triggered the final $577 million equity payment from our joint venture partners, which we already received and used to repay an equivalent amount of unsecured debt.

Earlier this month, we launched sales at 760 Madison Avenue, the beautifully designed and executed Giorgio Armani Residences, with half of the 10 units already spoken for and negotiations pending on additional units. We have also substantially completed the Armani retail store and restaurant and are in the process of turning the space over to Armani to commence the lease. Building off our positive experience and sales momentum at 760 Madison, I’m now happy to report that we have successfully acquired the fee interest in 625 Madison Avenue through a UCC foreclosure of our mezzanine loan and we are now in control of the fee. All litigation with the previous fee owner has been resolved and we are finalizing our business plan, which we intend to unveil in December.

With JV Partners, we closed on two extremely well executed loan extensions at 719 Seventh Avenue and 115 Spring Street, bringing our total refinancing extensions and modifications to $3.2 billion for the year, reducing our combined debt by $1 billion and additional extensions and pay downs are planned for the near future. And yesterday, we announced the sale of our interest alongside our partners in 21 East 66th Street for a gross total value of $40 million, demonstrating the resiliency of demand for Upper Madison Avenue boutique and retail properties. Perhaps and most significantly for the first time in the last 16 quarters, you got to go all the way back to December of 2019, I can report that same-store occupancy trended up in this past quarter with projections of a slow but steady climb that should continue into the next quarter and on into 2024.

This is an important moment that signifies the stabilizing of the operating portfolio assets. The trend is in our favor as companies continue calling people back to work with news this past week of another 500,000 workers being called back and expected back this January. It’s important to note we are sitting in a good position at 1.1 million square feet of pipeline leasing activity with nearly half of that amount represented by 20 leases that are either in negotiation or out for signature, indicating a high probability of closure of those particular transactions. Those leases are split about evenly by square footage between new and renewal leases. Decision timelines for tenants are lengthier than average, which has delayed some of the occupancy gains we had hoped to achieve this year, but directionally, it appears that predictions of an existential crisis from New York City office buildings is way, way overblown.

And in fact, more and more of New York City’s leading businesses are championing physical presence in the workplace as the best and most meaningful way of building community, promoting teamwork, establishment relationships and maximizing productivity. We will continue to enhance and amenitize our core properties to provide maximum convenience and benefits to a workforce today that is looking for elevated workplace experiences. We along with the rest of the real estate industry are impacted by the sharp and rapid rate increase experienced over just the past 18 months, but we are implementing our strategic plan to complete our development projects, lease up the portfolio, sell in JV certain assets, pay down indebtedness, refinance and extend debt maturities and hedge our exposure to future increasing interest rates.

And we are going to succeed. We will talk at greater length about our 2024 strategic plan at our upcoming investor conference, but rest assured that we are ready for this moment of great opportunity and we intend to take advantage of market repricing and the liquid borrower dislocation through growth in our asset management business. So as we look into 2024, we see reasons for real optimism. We have a plan to execute and a new generation of leaders to help execute it. That last part is bittersweet for me and for the Company as we prepare to say farewell to Andrew Mathias. After 26 years of and over on my estimation 100 earnings calls, today will be his last earnings call for the Company. While this was an extraordinarily hard decision, it’s the right time for the Company and probably the right time for Andrew as well.

He can speak to that. But one thing that’s for certain is that he’s made an invaluable contribution from the time we first embarked on a new trajectory to become the biggest and best real estate Company in New York City and the rest is history. Andrew is a partner and a friend and I’m happy that he will continue as well as a Director of the Company and as an adviser to me. Andrew will undoubtedly have the opportunity to move on to other things, and we will have the opportunity to bring up some of the younger talent we’ve been mentoring to assume positions of leadership as we’re ready for incredible opportunities that will be before us in the new year. I want to take this opportunity to thank Andrew on behalf of the entire Company, Andrew’s dedication and loyalty have been essential in accomplishing things for this Company that were unimaginable 25 years ago.

On a personal note, Andrew and I have been side-by-side for nearly 30 years in work and in friendship. What incredible ride it’s been. Now I’d like to hand it off to Andrew to say a few words.

Andrew Mathias: Thank you, Marc. It has truly been a long and amazing run for the kid from Buffalo, who never expected anything like this kind of experience in his life. I appreciate all the relationships with shareholders and analysts, that have formed over the years seen many come, many go, many stay and kept in touch with them in their new positions. And it’s quite an industry, quite a business, and we’ve written a lot of ups and downs together. I would just say we have a great and deep bench of talent at this Company, some known, some not so young anymore. But I’m confident that SL Green will be the best positioned Company by far for a recovery when it comes, and it will inevitably come. And I look forward to continued involvement in the Company’s success as a Board member as long as they’ll have me and as an adviser to Marc and all the words and kind reach out, I’ve gotten over the last couple of weeks is greatly appreciated. So, thank you.

Marc Holliday: That’s great. Thank you, Andrew. And I guess we’ll end on that note and open it up for questions, operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of John Kim from BMO Capital Markets.

John Kim: Thank you. Congratulations and best wishes to Andrew. Can you talk more or elaborate more on the decision at this time for him to lead the Company. Who’s going to take over the day-to-day responsibilities if he’s got a non-compete and what the G&A savings will be going forward?

Marc Holliday: Okay. So, I think, John, if I think it was a little muffled, but if I heard you correctly, first question was about timing of why now. And it’s a very hard decision. And I guess you never really know, none of us know when it’s time when’s the right time, but I think there’s a recognition that we are starting a new chapter here at SL Green, starting in 2024 with extraordinary new opportunity, and we have this unbelievable talent younger professionals that in and of themselves have been 10, 15, in some cases, 20 years. And we just felt that this was the right time and the best time for this restructuring, if you will, to allow for that talent to step up at a moment in time where we can maximize their relationships with kind of a new generation of lenders and partners and co-investors out there that we think is just in the interest of the Company and knowing that Andrew is still on the board and still an adviser to me, serves a critical role for me that I don’t feel this is a loss, but I feel it’s additive overall to something that I think is a good move for the Company.

And probably a good move for Andrew because I’m sure he’s going to have a limitless amount of great opportunities in front of them. In terms of I think you mentioned the vision of responsibility or something to that effect. As we always do, we don’t like to be reactive. I like to be measured. The Board and I are going to take the next several months, we’ll meet, we’ll talk about, how we want to work on that division and successorship role going forward. And I would imagine some time in ’24, we’ll have some additional announcements to make. But for the time being, we’re just going to — Andrew is still here through year-end, there’s a lot to do. As you know, in SL Green style, we’ll be doing it right to the last day of December 31 of the year and then we’ll take stock and make sure that we’re extremely well positioned.

No — nothing will be unattended and no stone will be entering when we get to ’24, we’ll be off and running. The last piece, I think, that dealt with some of the numerical issues, which Matt, you want to address?

Matthew DiLiberto: Yes. G&A savings on a run rate basis between $10 million and $11 million.

John Kim: Okay. I wanted to ask about condo sales at 760 Madison, you report near your FFO, not a core number. So, is it fair to assume that condo sale gains will be included and earnings next year?

Matthew DiLiberto: Condo sales, well, proceeds from condo sales, to the extent they close in ’24, would have an earnings benefit, the gains on those sales themselves are not FFO.

John Kim: But, this is new development, correct?

Matthew DiLiberto: It’s — this is 760 Madison was a retail condo at least long-term lease to Armani at the base that’s been turned over to our Armani, condos, 10 units up top, half of which are spoken for. I said the proceeds we would hope, come in, in late ’24. Those will be utilized and then — but the gains from those are not FFO, which I think was the genesis of your question.