SL Green Realty [SLG] Conference call transcript for 2023 q1
2023-04-20 17:09:09
Fiscal: 2023 q1
Operator: Thank you, everybody, for joining us, and welcome to SL Green Realties Corp's First 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 first quarter 2023 earnings and in our supplemental information included in our current report on Form 8-K relating to our first quarter 2023 earnings. Before turning the call over to Marc Holliday, Chairman and Chief Executive Officer of SL Green Realty, 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. Good afternoon, everyone, and welcome to SL Green's earnings call. Thank you for joining us today as we review the first quarter's results and discuss improving trends. We see New York City as the office sector continues its recovery from the unprecedented three years of a pandemic economy. The commercial real estate sector seems to dominate much of the headlines these days, amplifying messages of doom and gloom and creating what I believe to be an over anxiety in the market that is most acutely felt in New York City, where many of the market opinion makers reside. Overly negative voices are overshadowing some of the positive signs that portend to a slow but steady recovery for a market that offers what employers want most: a highly educated, diverse, youthful and talented workforce. Midtown Manhattan also offers the most highly commutable office inventory with many buildings that are highly improved and amenitized, and are at the forefront of innovation. It is clear that we are now in another moment of significant change as businesses rethink their office needs and cities around the world adapt to how pandemic has changed central business districts, in a way no one could have predicted. However, one thing we know is that New York is resilient. The city has reinvented its economy time and time again, whether it's responding to crisis like 9/11, or identifying trends to attract and accelerate the growth of new industries and sectors like technology and venture capital. We always find a way to remain a global capital, attracting the talent that leading and growing companies need in times of change, there's no better place to be than here in New York City. The future of this great city relies on rethinking the arc of the work day and how we experience our CBDs, transforming them into vibrant 24/7 destinations. Our lives can no longer be neatly separated into work and leisure and entertainment, and there's an expectation that people coming into the office will have access to compelling experiences that make the trip worthwhile before, during and after the work day. There are a number of positive indicators and developing trends that give reason for pragmatic optimism, though clearly to a challenging environment. A rapid run-up in interest rates sent a chill through the real estate debt markets as lenders became concerned with decreasing interest coverage and refinance-ability maturing loans. One month SOFR today stands at 501, up from just 25% a year ago. But as the core inflation numbers begin to normalize and the labor market begins to cool, expectations as evidenced by the forward curve show one-month term SOFR receding to just 3.11% by the end of 2024. And similarly, the 10-year SOFR swap rate, which peaked at 3.97% just six months ago has already come in 73 basis points, and the forward curve implies now a 10-year silver swap rate of 3.3% by the end of 2024. So clearly moderating interest rates will have a positive impact on the real estate debt and equity capital markets. In the meantime, SL Green has hedged most of its interest rate exposure through strategic debt repayment and the use of derivative instruments like interest rate swaps, caps and collars. New York City employment is another area that I think is showing signs of significant improvement. The labor market in New York City has shown resiliency as businesses that employ office workers have raised all COVID year losses. There is recent evidence of higher office utilization within our portfolio as physical occupancy regularly exceeds 60% on many workdays, and the MTA announced that Metro North Railroad reached pandemic-era ridership record two days ago with 195,000 riders or 74% of the pre-pandemic average. So it's the highest single day ridership since the beginning of pandemic. And during the seven days between April 9 and April 15, Long Island Railroad carried an average of 170,000 daily commuters, the best seven-day average in over three years. So there is an increasing drumbeat of optimism about return to work, and we hear it from more and more companies that are doing business here in the city, but national and global companies that are mandating people come back anywhere between three to five days a week, all within the past three months or so: JPMorgan, Disney, Twitter, Google, Goldman Sachs, Salesforce, Apple, many others, have come out with very definitive statements about a recognition that these businesses can be only at their most efficient and best when people are together in purpose-built, collaborative office space and not home or remotely. And I think that's why there has been this experiment over the past three years. Clearly, the major companies that span all different office sectors have concluded that the experiment is not working and thus requiring their people to come back, as I said, anywhere between three to five days a week. And that trend is something that we see on the streets, in the buildings, on mass transportation, and we think it's only going to get more and more momentum as this year weighs on because it makes sense. And it makes sense for business, it makes sense for competitiveness. It makes sense for the re-imagination of our CBDs. And it's what people have done and it's how people are at their best. So, we're very optimistic in that regard. It took longer than we expected, but we now feel like things are coming around in the right direction. In terms of safety, New York City is becoming safer with crime stats heading in the right direction, including declines in overall crime and violent crime in the first few months of '23. We're also anticipating that there'll be some level of additional bail reform to be included in the state budget which will give judges clearer discretion over the imposition of bail. So while other cities are having difficulty getting a handle of crime or some other major cities are having difficulty getting a handle on crime, New York City clearly has a plan that is working. And for '23, New York City is on track to welcome 63 million visitors, including more than 10 million international travelers. That puts projected tourism within 5% of the prior peak in 2019, which represents a remarkable recovery. Summit's high attendance and first quarter results, which eclipsed our projections for the first quarter, certainly demonstrates that domestic and foreign tourism is back in a big way with the prime travel months still ahead of us. Perhaps one of the most important developments of the year is the completion of East Side Access, now known as Grand Central Madison. Long Island commuters now have access on a direct basis into Grand Central. The new terminal spans 43rd to 48th Street along Park and Madison Avenue corridors where much of the SL Green portfolio is situated. So with all that, I'm pleased with the start to the year we are having. Our results for the quarter were ahead of our expectations in several key areas. Mark-to-market rents and same-store NOI were both in excess of 5%. Our same-store office occupancy was slightly ahead of what we internally forecasted at just over 90%, and leasing volume of 504,000 square feet also outperformed our expectations. But the real highlight is forward-looking as we are building leasing pipeline at a steady pace. The pipeline of leases now stands at 1.2 million square feet, which is up 70% from our earnings call just three months ago, I think it was end of January. And to give you a flavor for the pipeline and preempt what I know undoubtedly will be someone's question later on, the pipeline is 80% financial services, includes 18 individual deals that we are working on at Graybar and includes 1 million square feet of space in same-store properties, which would absorb over 300,000 square feet of space of vacancy in those same properties. While overall vacancy sublet and availability is not yet declining in Manhattan overall, our leasing results and current pipeline is indicative of the fact that the Park Avenue East Midtown corridor is highest performing in Manhattan, and tenants are responding to our well-located, repositioned and highly amenitized buildings in a very positive way. We are also benefiting from brokers and tenants who are scrutinizing much more carefully the financial wherewithal of landlords and the stability of the capital stacks in individual buildings that tenants want to locate in, these are areas where SL Green shines the most. In the investment marketplace, there are signs that demand is forming for high-quality commercial assets in Midtown, and we expect to see transactions announced over the next two quarters. Initially, these transactions will be for the well-located assets, some with financing in place and some with financing that will be arranged and generally involve buildings that are already fully repositioned and amenitized or are in the process of doing so. There is also more activity than usual in the user buyer market as evidenced by the recent sales totaling over $725 million to users like Hyundai, Dyson and Memorial Sloan Kettering, and we are aware of several other pending transactions for purchase or long-term capital leases by users. Taken together, these developing trends bode well for our 2023 business plan, and we are working hard to execute on a series of sales, joint ventures and financings. With that, I'd like to open it up for questions.
Operator: [Operator Instructions] And our first question comes from John Kim from BMO. Your line is now open.
Operator: And thank you. And one moment for our next question. And our next question comes from Steve Sakwa from Evercore ISI. Your line is now open.
Operator: And thank you. And one moment for our next question. And our next question comes from Alexander Goldfarb from Piper Sandler. Your line is now open.
Operator: And thank you. And one moment for our next question. And our next question comes from Anthony Paolone from JPMorgan. Your line is now open.
Operator: And thank you. And one moment for our next question. And our next question comes from Tom Catherwood from BTIG. Your line is now open.
Operator: And thank you. And one moment for our next question. And our next question comes from Camille Bonnel from Bank of America. Your line is now open.
Operator: And thank you. And one moment for our next question. And our next question comes from Blaine Heck from Wells Fargo. Your line is now open.
Operator: And thank you. And one moment for our next question. And our next question comes from Derek Johnston from Deutsche Bank.
Operator: And thank you. And one moment for our next question. And our next question comes from Tayo Okusanya from Credit Suisse. Your line is now open.
Operator: And thank you. And one moment for our next question. And our next question comes from Peter Abramowitz from Jefferies. Your line is now open.
Operator: And thank you. And one moment for our next question. And our next question comes from Ronald Kamdem from Morgan Stanley. Your line is now open.
Operator: Well, I'm actually showing no further questions. So I would now like to go ahead and turn the call back over to Marc Holliday for closing remarks.
Marc Holliday: Okay. Well, I want to thank all of you who made it to the end here of the call, and looking forward more than most you on the call the next three months from now. And hopefully, a lot of what you're hearing now will be able to speak about it in more detail then, and appreciate the continued support of our shareholders. Thanks.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
