SLG - NYSE

Thank you, everybody, for joining us. Welcome to the SL Green Realty Corp's Third Quarter 2024 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 or 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 measures most directly comparable to each non-GAAP financial measure discussed and a 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 2024 earnings and in our supplemental information included in our current report on Form 8-K, relating to our third quarter 2024 earnings. Before trying to 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.

Okay, good afternoon and thank you for joining us at SL Green's third quarter earnings call. By now, you will have seen the exciting news that we put out last night, which was the culmination of another great quarter of activity since we last spoke. We called the pivot in the market about one year ago, and since then we've seen four consecutive quarters of positive market momentum that reinforces our belief that New York City has turned the corner and we are now meeting or exceeding many of our goals. Since we were last together, and that was just three short months ago, a lot has happened. Last month, IBM cut the ribbon and took occupancy of their incredible new space at 1 Madison Avenue, effectively christening the building that rightly takes its place alongside One Vanderbilt as a shining example of the new model for modern and innovative office buildings. One Madison, now fully complete, has come alive as other tenants are moving in, such as the Franklin Templeton companies, the opening of Chelsea Piers, the activation of the fabulous rooftop which is already hosting many, many special events and proof positive that the city is thriving for demand of space for this kind and punctuated by Daniel Boulud's new steakhouse La Tête d'Or designed by David Rockwell completed construction this month and will open to the public in November. Be sure to get your reservations and be among the first to be there over the holidays. Special place and a great new addition to the Flatiron area and just another great step in the right direction for New York City. On Monday, we will celebrate the third anniversary of SUMMIT One Vanderbilt. We are now closing in on 6 million guests. I think in November we will host our 6 millionth guest through the turnstiles at Summit. And I think that just really speaks volume to what an enormous attraction Summit has turned out to be. Many day sellouts, most day sellouts. It has been named, you know, [Accolades] (ph) as a special bucket list destination for New York City and everyone comes out of there with a smile. We're very proud of it and we're even more excited to begin the global expansion as we bring the unique Summit experience to other cities around the world with Paris being first up in the queue. Expect an announcement with further details on our Paris initiative sometime later this quarter. Also, earlier this week, many of you may have seen the press yesterday and this morning, Mr. Giorgio Armani made a rare trip to New York to celebrate the opening of his new boutique and residences on Madison Avenue developed in conjunction with SL Green. As you know, the residences are completely sold out, and Armani's flagship store has anchored a complete revival of luxury retailing and elevated experiences on Madison Avenue, as many of the world's prominent luxury retailers have relocated or recommitted to Madison Avenue after the announcement of the Armani project. If you're in the area, please be sure to come by, check it out, pick out something special with the profits those of you who have made on SL Green stock. After nearly a Four-year hiatus, we are now fully back in the DPE business, lending on and investing in mortgage and ME

Thank you. And this time we will conduct a question-answer session. [Operator Instructions] Our first question will come from the line of John Kim from BMO Capital Markets. Your line is open.

Thank you. Congrats on the Bloomberg transaction. I just wanted to confirm that it was not in your pipeline that you last described that 1.2 million square feet just given the size of this lease. And I think, you described the pipeline as being pretty diversified. And also if you could share with us any of the economics on the rent versus the in place of $66 and how much your offering in concessions?

So it was not in our reported pipeline. The deal came together very quickly. So it is not something that we were including in our pipeline because one -- because it was so large and two it was so unanticipated in three, it happens so rapidly. With regards to the economics, we are under an NDA, so we can't really share specific details other than to say that obviously, the size of the lease, it's a 15-year lease from today. So it is a 10-year extension, 15-year term on the expansion. There is substantial positive mark-to-market and the concessions are appropriate for renewal but significantly below what they would have been, if we had to replace the tenant for vacant space. And with regards to I think you asked about diversity on the pipeline. Like in past quarters, it is heavily weighted towards financial services. I think that's a reflection of where we have vacancy, not just because it is the only industry that's in the market right now. We are seeing law firms, family tenants business services and financial services, but specific to our current pipeline, a lot of it is weighted towards financial services.

Okay. And my second question is on One Vanderbilt. We didn't get an update on the joint venture sale. But I wanted to ask if it is still on track. And also, if you really need to sell a stake in the asset at this point in time, just given the fundamentals and sentiment in New York has shifted positively over the last few months. Your cost of capital has improved, so there is other access to our sources of capital that you could tap. So just wanted an update on that and whether or not you're contemplating that [stake] (ph).

Yes. It's going great at One Vanderbilt. And we are confident that we'll be able to close the transaction in the fourth quarter. The transaction really will be the culmination or conclusion of a process that affirms in our mind, One Vanderbilt's position as not only the premier office tower in New York, but also a global icon of modern development. So two [indiscernible] restaurants, the continued success at Summit, fully leased rent roll and long-term fixed rate debt and the story here keeps getting better, and we are looking forward to expanding the partnership at the building. The second piece of your question, I'll leave to Marc.

On the question of do we have to sell, we don't have to do anything. I mean, we are in great shape. We have lots of tools at our disposal to generate capital organically, monetizing assets. Third-party money, debt fund, et cetera. And if I would not look at anything related to One Vanderbilt as it has to do. We do it because it was part of our original business plan to sell down to somewhere between 50% and 60%, maybe 55% and 60%. That was the original business plan. That's where we think the asset is optimized for the perspective of shareholders between return and enhanced fee generation off the asset. It is a -- One Vanderbilt is transformational for this market. It was – it is now the building block of this company. We expect to hold and own it for quite some time, but we welcome the opportunity to bring in some of the great international partners from around the world. And we expect, as Harry said to conclude that in the fourth quarter, but that will just be one component of what we expect to close from this point forward through the remainder of the year by monetizing certain assets of the company that should yield to us in excess of $500 million of net proceeds which we will use in the interim to pay down the line to bring it into the levels that we had projected in December of last year. So we are on track or possibly a little ahead on that and it will set us up, I think quite well leading into 2025, which I think is going to be a big, big year for this company.

Great. Thank you.

One moment for our next question. Our next question comes from line of Steve Sakwa from Evercore ISI. Your line is open.

Yes. Thanks good afternoon. Marc, I just wanted to see if you could comment a little bit more on the transaction market. Obviously, you guys are back in the DPE business. I'm just curious what you're seeing on the direct side of things. And are the opportunities more pronounced in the DPE side than the direct purchase side?

Well, I think, Steve, it is kind of both. And it is really a function, in my mind of debt and equity liquidity coming back to this market. And when it comes, it comes pretty fast and pretty strong. And as a case in point last year, there was -- I think there was $0 of New York, Manhattan SASB loan origination, 0 which is quite unusual. This year, including the Rock Center deal, which is pricing today and 299 Park, which is pending pricing next week, there is going to be $5.3 billion of SASB deal, illuminating spreads, levels, values, demand, et cetera. And that is quite a different picture along with we are seeing now end balance sheet lenders quoting deals. And the conduit market is firming up and spreads are coming in, irrespective of where underlying SOFR and treasuries are headed, spreads themselves are compressing. And the equity follows the debt, and we've seen some deals trade, some known 250 Park? Was it trade Harry, a couple of others off the top of your head?

980 Madison.

980 Madison that was to -- that was to a user Bloomberg philanthropies. Obviously, there've been a lot of user trades, there have been some investor trades. And there's deals in the market that we're tracking. Our focus isn't really on the direct equity side at the moment. It's more development oriented and longer-term, but there are a couple of deals that we are paying particular attention to. But if you want to look at just dollars allocated, we do expect that most of our activity will be focused to DPE, which is very customary and routine coming out of a downturn like we had in '22, '23 to start there and then sort of evolve into direct equity.

Great. And then as a follow-up Matt, I did notice that things like real estate taxes and OpEx were at least much lower than what we had modeled. I just didn't know if there was some timing issues there, if there were some maybe refunds that you got on the tax side. Just anything -- was that sort of a normalized level? Or is there some one-timers that might have pulled those down and those might bounce back up in Q4?

Nothing unusual in there. I think they moved given the size of the line item, not much. They do bounce seasonally from time-to-time certainly, operating expenses do. No, I think the team has done a great job. We work very hard on our real estate taxes and the operations team does a fantastic job with our operating expenses, keeping them contained. They've done an even better job this year. So we saw some savings. They are working right now on how that looks going forward, but nothing unusual within the quarter, no.

Great. Thanks.

Thank you. One Moment for our next question. Our next question will come from the line of Ronald Kamdem from Morgan Stanley. Your line is open.

Hi. Just two quick ones. Starting with the same-store cash same-store NOI accelerated to 2.9% in the quarter. Just hopefully, you could sort of talk through what the expectations are for the back half for the rest of the year and maybe into 2025, what major sort of buildings or leases we should be thinking about as we are trying to think about 2025. Thanks.

Yes. I appreciate you trying to ask about 2025. We'll talk about that on December 9 at the investor conference when we give guidance. But the results for 2024 through the first nine months reflect the portfolio that has been performing better than expectations as part of the reason, we raised guidance back in July with earnings, and we continue to trend ahead through the third quarter. Fourth quarter is trending in a similar direction. I do -- but I'm not changing where our same-store full year guidance ended up, but we have trended better than we expected through the first nine months at least.

Great. And then look my second question was just going back to the alternative strategy portfolio. I think you talked about sort of strength coming in, maybe the environment being a little bit better. But qualitatively, does that help in terms of conversations in terms of those negotiations? Any sort of color you can provide on how that's progressing would be helpful. Thanks.

Well, again, I just want to refresh for everybody. ASP, the Alternative Strategy Portfolio is a category we created at the end of last year to address assets that shareholders perceived or we think the market perceived more accurately, as having little value or a little current value, even though in many of the cases, and we believe there could be long-term value, particularly when we work to recapitalize the underlying indebtedness on those assets or in some cases, leaseholds, in ways that are advantageous win-win scenarios for the lender and for us as a holder of those assets. And I think you've seen that strategy bear fruit already, probably hadn't anticipated ourselves the early returns. But year-to-date, I think we have had very good results, as I recall, 717 Fifth, 719 Seventh, 2 Herald or 3 that stick out in my mind, there might be one other. And there's others we're working on, where we've been able to get creative and do what we do and mine value out of the ASP assets. And we will continue to do so as the -- as we work that portfolio down. I think the real takeaway or one of the reasons for the illumination of that portfolio was to dispel the notion that there was any recourse liability or guarantees or apparel associated with those assets, they are almost in every case, non-recourse. With that said, out of respect and deference to our partners and lenders, we would do everything possible to try and optimize those assets and get as full a recovery as we can on those assets and we continue to do that. And with respect to the three examples I gave very successfully. So we're going to stay at it. The market to your point, the market coming back a bit certainly helps. There is no question, we can re-evaluate some of those assets, which we do quarterly, and it doesn't mean we pop them out of the portfolio. It just means that we may have an accelerated timeline for the ultimate disposition of those assets. But there are some ability – there is some good assets in that portfolio. We hope to work those assets as hard as we can and maintain as much value as we can.

Helpful color. Thank you.

Thank you. One moment for our next question. Our next question come from the line of Michael Griffin from Citi. Your line is open.

Great. Thanks. Maybe on the leasing front, for demand you are seeing outside of Park Avenue, maybe on Third or Sixth. Is this just a function of limited availability along park or a tenants maybe out there looking for better deals. And then can you kind of quantify maybe where concessions are in some of those submarkets relative to Park? And then maybe broadly, is it fair to say, we passed peak concessions in New York overall.

Well, why don't I start with the last question first. We've said for I think, the better part of the year that we've -- that concessions peaked last year. We've seen no increase in free rent or TI on the average deal. Obviously, you saw for our deals for this particular quarter, they went up, but they were influenced by a lot of high rent deals that were signed, a lot of new leases filling vacancy that was signed as opposed to renewals. And in one particular case, a very large deal where we actually contributed made a dollar allowance for the tenant to perform base building work, which skewed the number as to what we reported for TI. But at its core, the TI number has not changed throughout all of this year. I think we are going to see rents rise more materially before we see concessions come down. But concessions will start to tighten up. And I think the first thing you'll see come off the table is some of the free rent. And then ultimately, the TI announces will be probably the last thing that changes. With regards to the Park Avenue versus some of the other avenues, we've been saying consistently this year that we've seen a lot more activity in the value part of the marketplace. Those tenants that are paying $55 to $75 or $80 rents. So those are not Park Avenue type tenants whether they be on Third [Lex] (ph) or Sixth Avenue in particular, where we've seen us do a lot of leasing at 8, 10, 7 and 11, [ 856 ] (ph) and then obviously, the newest announcement on Third Avenue with Bloomberg. Some of that is spillover from Park Avenue. But a lot of it, I think is just an awakening of the market by the -- those smaller to mid-sized tenants that are chasing sort of the value part of the marketplace. And I think we're going to continue to see that strengthening the market. In fact, there was a new market report that just came out the other day that their statement was non-trophy leasing is on pace to reach its highest level this year versus all the way back to 2019. So I think that really puts a pin in it for you.

Great. Appreciate the color there, Steve. And then just maybe on the financing markets. Marc, I know you talked a little bit about the CMBS market maybe being more open, but have you gotten a sense maybe more traditional lenders have started to warm up to lending on commercial real estate and office broadly again? And then maybe you can give us some insights. You've obviously had a number of modifications and extensions this year where you paid down a pretty small amount of principal. But can you give us a sense why lenders are willing to kind of cut those deals on refinances that would only require you to pay down a smaller amount in the mortgages come due?

Well, okay. The question about portfolio lending, absolutely. I think you are going to see 2025, I think the focus with a lot of the major lending institutions will kind of start to revert back to increasing net interest income with less of a focus, if any on establishment of reserves because I think the view is that the banks are properly or reserved and then some based on what the expectations were going back over the past four years. And you've seen in the announcements, the earnings trajectory and growth of these -- of the money center banks is extraordinary. I mean there is big profits there. They're making money, they're expanding. It's broad-based, high net worth banking, trading, operations all contributing. And I think the view is going to be growth, new business, new lending and commercial -- prime commercial assets in New York City in good locations. I think, will be eligible for balance sheet lending, and we are seeing that. And I think you will see more to come from us and others in the ensuing months on that exact topic, so that's that. As to some of the modifications we are doing, it's -- I mean we have great relationships with our banks. We have great assets. The buildings typically are not in an over-levered state. And we're able -- again, under the thesis that some of these banks want to maintain outstanding earning assets, on great buildings with good sponsorship, sometimes the balances have to be tweaked with a paydown of some additional posting of reserves. But just remember, we are projecting 92.5% leasing in the portfolio, which means we are swinging our way back to, hopefully, a fully leased state in the years to come. The buildings are in great shape. They are fully repositioned and in most cases, amenitized and well-leased. So those are not necessarily the assets you read in, hear about that where there are problems. And for those assets, I think it is quite natural for lenders to work with us on extensions until the market is fully back. And then when it is, there will be more traditional refinancings for that portfolio. But I think it is very consistent and makes sense.

Great. That’s it for me. Thanks for the time.

Thank you. [Operator Instructions] One moment for our next question. Our next question will come from the line of Alexander Goldfarb from Piper Sandler. Your line is open.

Hi, good afternoon. And first, congrats on the strong leasing, really unreal what you guys have achieved there since last quarter. Two questions are; first, on the mortgage servicing business, it looks like you guys currently have $5 billion and there is another $6.8 billion potential depending on, I guess if that goes to special service or not. Matt, how do we think about the income that comes off of this I mean, it seems rather lucrative, as Marc just described things are getting better. So how much income are you currently getting? And how should we think about that $6.8 billion? How much of that will you think could come on? And where do you think this earnings could go?

Sure, I'll try. Those are like eight questions. But the business is obviously throwing off a substantial amount of fee income. We had layered some of that fee income into our original projections back in December. We are trending ahead of that. We stay away from how -- because each deal is slightly unique on how much these fees how they roll through what they are. I will let Harrison expand on a little bit. But generically, these are -- once they are in special servicing, you are earning a monthly, I'll call it a stipend almost monthly modest fee. And then on resolution, there is something more sizable. Harrison you want to expand on that a bit?

Yes. I mean this business has been remarkably fast growing. Most of the people coming to us are looking for expertise in working out large loans, not just in New York, but across the country. And just to give you a sense of scale as you just noted, it is $5 billion of active assignments today. We have another $6.8 billion of assignments where we are named special servicer, but the assets are currently not in special servicing. And then in addition to that, we have another $3 billion of pipeline and those are appointments that we are currently working on documentation to get named special servicer some of which are in special, some which may get into special in the coming months or years. So for us, this is a very scalable business. We run it with our current team. And the revenues, as I said on the last call, they are almost entirely going to the bottom-line. So we are continuing to grow this and working our relationships to get on more assignments. And I think one thing that's new in this past quarter is now our existing servicing clients when they are doing new HRR positions or CCR positions, they are pointing us upfront on these new SASB loans. A lot of the business we've done over the past year in growth is just organic reaching out, but now we are getting new appointments on new originations. So we see this being a sticky business for us.

Okay. And then the second question is -- great to see you are back in the DPE. It's been a good business for you guys historically. As you think about the JV debt fund, how do you bifurcate which goes in the DPE and which goes in the JV fund?

Yes. So just as an update on where we stand on the fund raise process. It is been going great. We've reached a deal with our anchor investor and we are now documenting their investment, which we expect to close in the next 45 days. We also have significant follow-on investor demand that we expect will meet or exceed our $1 billion goal through the final closing. And the setup of the fund is in terms of what goes into the fund and what doesn't, is that this will be our primary credit vehicle for new DPE investments until that $1 billion or whatever we end up closing on is deployed. And so we look -- that's what the shareholder feedback last year was again into this business. This is how we will be deploying dollars into the credit space until the dollars are deployed and we'll continue to mine these investors for potential follow-on funds whether it be in debt or equity businesses.

Thank you.

Thank you. One moment for our next question. Next question comes from the line of Nick Yulico from Scotiabank. Your line is open.

Yes. Thanks. First question is just in terms of the mark-to-market year-to-date, outperforming versus expectations. I think some of that, I know was helped by some lumpy leases like areas 245 Park, but where you had success. But how do we think about like how much rents are maybe out surpassing expectations so far based on the leasing year-to-date?

Well, it is a -- you got -- I think you got to slice and dice the market a little bit. If you look at Park Avenue, which is sort of the easiest example, it is the best submarket in the country right now. Rents are clearly on the rise. It is a landlord favorite market. We've raised rents 4 times in the past year on our assets on Park Avenue. I think you are seeing the early days of a similar situation on Sixth Avenue. But then I think as we look forward, I think you are going to see broadly speaking, in Midtown specific rent increasing on a lot of parts of the market and a lot of types of buildings next year. A good barometer I always go to is the gray bar building, right pre-war building, big building, lots of different kinds of tenants, lots of different sizes, building that coming out of COVID, had a historically high vacancy of like 18%. We are now down approaching the 10% vacancy. And I would fully expect that we'll see rents rise in that building next year. So that is a very good indicator of the kind of the mid-price point product in the marketplace that the rents go up in that building, then you'll see rents go up broadly across most assets -- most quality assets in Midtown.

All right. That's helpful, thanks Steve. I guess second question is just on going back to the acquisition environment and how you are thinking about funding that? I mean how is the company right now thinking about using common equity stocks on quite well in terms of funding investments and how much of that could be on actually property, investments versus debt investments? Thanks.

I think that's -- Nick, it is something we'll go into a fair amount of detail on in December. We are not I mean what you're really getting at is kind of a 2025 business plan, anything we're working on now that we're closing in the next 2.5 months, we know what it is, and we are in the process of closing typically. Not to say we can't knock down a late inning deal, maybe in November or December, but most of the balance of this year's activity is allocated, modeled thought through, et cetera. And we’re right now preparing our plans for '25 and beyond. And we'll be able to give some good color. I don't really I know there is a lot of question between equity and debt, equity and debt. To me, it's a spectrum. It is real estate. And we just want to find the best point on that spectrum to invest. If we think we are getting a really good equity deal, we're going to do equity. If we think we're getting a really good debt deal, and that's where there is some advantageous or mispriced, we'll do debt, it's not always one or the other. A lot of these opportunities we approach, which I think is something that's I don't know about unique to us, but it definitely differentiates for us is that we can do any aspect of these deals from senior financing, mezz pref, common equity, servicing, combination thereof. And we don't always know because we got to evaluate where do we want to be in a particular deal. And we don't know what deals are coming up in the next 12, 18 months. So we like to consider ourselves fairly fluid and fairly opportunistic. We are very comfortable investing along that spectrum that I mentioned to you. And we've done some equity deals, obviously through pandemic, we did 450 Park, we did 245 Park, we did 625 Madison. Those are the three big ones that come to mind. We've done some debt deals recently. And I’d expect you're going to see a mixture of opportunities we will be pursuing, which will be both debt and equity in the months to come. And I think we can give better planning and guidance on that in December. But the that's where that is. And in terms of how we fund it, I mentioned to you I mean, we have all tools available. And I sort of alluded to that earlier. We have a prolific group here that has great relationships throughout Asia, Middle East, domestically in Canada, where we can turn to capitalize both debt and equity deals. We're closing on a debt fund. I mentioned in my opening remarks, in excess of $500 million of asset monetizations, we expect to close this quarter, and that will certainly fund a lot of activities and get our revolving balance down to where we want it to be for year-end. And as in prior years, will evaluate stock along the way as a -- as a source of potential equity. If we feel the price is approaching something that is reasonable in light of the opportunities that exist. So the more favorable and juicy the opportunity, the more -- and the larger the opportunity, we certainly wouldn't shy away from issuing equity for new opportunities or to rebalance the balance sheet, but we are in a really good place right now. We've shrunk our share count down considerably. We've retired a lot of debt along the way. We are at levels that are very comfortable for us right now. And I think we have a lot of access to capital in all those various ways, including potential stock issuances. So it is a good position to be in. We're going to use it wisely and we are going to hope to use it very accretively.

All right. Thanks Marc.

One moment for our next question. Our next question will come from the line of Michael Lewis from Truist Securities. Your line is open.

Thank you. First one, maybe for Matt. The Summit OpEx went up more than the revenue. I think it looks like the OpEx was actually higher than the revenue in the quarter. Is that just seasonality? Or is there something in that number?

They pay their percentage rent in the third quarter. So that is a -- if you -- their calendar year, their fiscal year runs from another calendar year, the fiscal year runs October through September. They paid base rent and percentage rent -- they hit the percentage rent levels generally in the third quarter and pay it. So you will see that same type of trend every year.

Okay. Got it. And then my second question is bigger picture. To your credit Marc, and I guess everybody SL Green said New York would recover, it always does and it is. So to your credit, and I understand all the enthusiasm is well earned. When things are tough, I tend to think about how they might get better when there is a lot of enthusiasm, I tend to wonder where that might be -- people might get out over their skis. So as I look at SL Green, right, you mentioned the alternative strategy portfolio. Worldwide Plaza lost a large tenant as expected, 753rd is not in that portfolio, but it is going to be a resi conversion, 185 Broadway, I think you'll sell. I guess, is this a tide lifts all boats kind of New York recovery? Or do you think you need to be almost more creative here and it is still kind of a battle out there. And is there anything in this recovery that concerned view?

Okay. I just -- I want to make sure I've got I like the credit part. Thank you very much for that. But I do have to extend credit to the entire team, as I always do because I think one of the most differentiating factors of this is the tenure that people have here. I don't know if people recognize that we've got so many people at all various levels throughout the company that are in the 20- and 25-year club. I've been here 20, 25 years. This is a family, we work well together. And I think we get great results because of that history together and the level of excellence because we have a certain culture here and if it fits and it works for you, and you're committed to it. It's a great opportunity. And if it is not, we've had people move on. But the group we have today is the best I've ever worked with. In terms of just a whole new group of young folks in particular coming up through the ranks, taking on mid-level and senior positions and just carrying on the culture and theme of this company. In terms of your question about, is there anything in the recovery that concerns I mean -- I mean, in an odd way, the more rapid the market recovers the thinner our opportunity set gets. And it is kind of an interesting dynamic. I think the real estate market generally is hoping for lower rates to help right-size some of other people's investments and reinflate values a bit but you got to make sure that rates are falling for the right reason, meaning taming inflation and not because you have recession. And clearly, the way the equity markets are reacting right now and what we see in our tenant base, there does -- it seems to be a pretty robust and strong market. So to see a good market and have rates decrease, that is positive for values and positive for the economy. But it also does change the landscape of opportunities. So the other way to look at it is higher for longer, in terms of getting more money out the door because at the end of the day, we want to improve this portfolio, grow this portfolio, make smart investments at this period of time. So that when we look back in five years, we've added a lot of seeds of growth, whether they are development conversion projects like the 753rd or doing more office redevelopment and development opportunities, which we hope to do because we have a good team to do it. And we've got the prospect of hopefully helping to transform and boost Times Square with our casino. With our casino proposal in conjunction with Caesars and Rock Nation, I think could be one of the most important developments for New York City in terms of really having benefits that radiate out far -- far beyond the building itself with Caesars Palace Times Square Casino. So there is a lot of good stuff out there going on. And I think whether rates stay where they are, they go a bit higher, they go a bit lower. We are prepared in all cases. We're hedged in our floating rate closure. We want to be offensive with our capital, and we are also going to benefit by compressing spreads and a yield curve that says SOFR is declining. So I don't have great concern at this moment, like the kind of concern we had back in '20 and '21. Those were tough periods of time. But this is by all measures, a very good period of time. Restaurants are fold, mass transit as well. Traffic is back, buildings are -- people are back in the office. I don't -- we don't get any questions now hybrid work, model work from home. It's not even -- in this office, it's not a talking point. And we are excited, and we are excited in December to unveil the new plan.

Great. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Anthony Paolone from JPMorgan. Your line is open.

Great. Thank you. First one is on Giorgio Armani. Can you tell us when you expect to actually start closing the units there? What the proceeds back to you are? And remind us if any gains there get booked in FFO?

Yes. I mean in our business plan, we expect it as a goal and objective to put everything under contract in the year, which we've done. And our expectation is we will close all those inside the calendar year as well. That's part of the number Marc was turning around earlier in terms of proceeds off of dispositions. It is roughly $160 million or so. There's not an FFO impact other than the use of proceeds to pay down debt, which is what those proceeds are earmarked for, but that wouldn't show up until 2025.

Okay. Got it. And then just second one, you bought some CMBS in the quarter. And so I was wondering if you can give us some details on that. You don't have it on the DPE page and I just didn't know if that was because of securities or if the thrust of that investment is just different than your sort of DPE investments?

Yes. It is not in our DPE line because it is a different type of investment. We've invested in securities from time-to-time in the past. We did do more this quarter. They have very unique accounting rules around security. So we had to -- has a couple of new lines to the financial statements. But at the end of the day, it's $109-ish million investment in securities. We are very careful to stay away from specifics on those, as we do with DPE in terms of properties and yields and strategies and things like that. But this is a furtherance of our previously announced strategy to source this type of opportunity in dislocated debt stacks in our backyard, and we will continue to do that.

But is it the sort of thing that you are just looking to get paid back and make a return on it? Or is this something where there is something to do with the property?

That's -- I'm going to stay away from the strategy on those types of investments. They're all different.

Okay. Thank you.

Thank you. One moment for our next question. Our next question will come from the line of Ohad Bregman from Deutsche Bank. Your line is open.

Hi, guys. Good afternoon. This is actually Tayo from Deutsche Bank. In terms of the DPE book, again back in the days, that book was kind of a substantial size. Just curious when you guys have got the outlook, how quickly you think DPE can continue to kind of grow, you guys sound really much more constructive on that business segment now?

Yes. Just understand we are doing the DPE business in a different format this year. So it's not going to be the same as our prior 26-year track record, if you will, 22 of those 26 where we were investing heavily. But we are going to be doing it in a fun format. So the capital commitment is going to be fund by fund typically where we have a percentage of the fund, which we'll be able to illuminate when we announce a closing. But clearly, it -- other than putting together pipeline and seed opportunities, the intent is for as Harry said earlier, everything to go into the fund and then we'll own our piece of the funds. So it will be -- we think, highly profitable based on the returns that we expect, and there were certain fees associated with the fund that we didn't necessarily have previously, but we won't have, we don't expect the same amount of balance sheet capital commitment to DPE as we've had in the past because of the new format.

Got you. That's helpful. And then just a quick one on -- as we kind of start thinking about fourth quarter '24 and first half of '25, any significant move-outs or right-sizing of office space that we should be aware of as it weaken our models?

There is nothing that -- there's no new surprises. I mean, anything that we've got budgeted or scheduled in our business plan. It's -- I'd say, it is just the opposite. We are doing more renewals than we had originally anticipated. So nothing significant as far as any kind of move outs.

Perfect. Congrats on the solid leasing.

One moment for our next question. Our next question will come from the line of Jeff Spector from Bank of America. Your line is open.

Great. Good afternoon. Marc, when we saw you in May, you talked about the office to resi conversion as an opportunity. I don't think you discussed that yet on this call. Can you provide your latest views on that?

Well, I feel like we are on target with I'm going to stand by those comments. There is an accelerated program down at the city that takes applications, if you will to help accelerate projects that are not necessarily committed to going resi, but think somewhere between committed to or thinking about or tend to. And at last count, my understanding was that accelerated program was up around 75 applications. I think the total square footage identified by those applications is in excess of 25 million square feet. That's not to say all 25 million square feet are going to happen. And I don't think I could give you a projection in the near term of what's going to happen. I do believe there will be over 25 million square feet in the next five years to seven years for sure. And that was a number I floated out at that same time, 25 to maybe as much as 40 million square feet when you think about all of the secondary and tertiary office buildings the need and the demand for workforce housing and affordable housing, I don't want to say it is endless, but it's strong. There is a lot of demand out there at that -- at those price points for that kind of studio, 1 and 2 bedroom housing in Manhattan. And we've -- between the projects we are working on, projects we know others are working on, buildings that we know have taken their space off the available office inventory list. I would say there is at least solidly Harry, you might have number 10 million square feet. That is kind of what I would say is, I think, pretty well dialed-in and locked-in. Maybe in December, we can share some locations and more data on that. I don't think we are prepared to on the phone right now, but deals that are like I said, pretty well dialed in. Most are rental, summer condo, some are other uses, life sciences, et cetera, but most will be under the affordable program. It is not easy, but it's certainly not undoable for people who have experience with the product. It's a big opportunity. And I think that is a major contributor to what you'll see as net absorption in this market, which you saw in Q3 as of 9/30, I think you'll see more in Q4. It's also -- there was a question earlier about investment sale volume. And there is -- there are deals that are being traded now with the intent to convert, 625 end of that spectrum, which we sold to related for condo conversion on Madison. And then there is other deals that are being sold now for affordable conversion. And all of that just contributes to a winnowing supply of office. Now the only thing I think that could derail that is if the office sector gets tight enough and rents are rising and occupancies are falling, then you may get back into that zone of indifference where buildings may look equally as attractive as office and resi. But for right now, I think that, that trend is bearing out on conversions. And we're hopeful to see a lot happen over the coming years.

Thank you. And if I could ask as my second question, a follow-up. Steve earlier in the call, you talked about concessions will tighten up, and free rent would be first. I think it is an important comment just there is so much focus on effective rents. Can you clarify that a bit? I don't know if you can talk about expectations on timing? And I assume you are talking about the broader market for New York City.

Yes. I think -- well, it was a three-part right up. First, I said that I thought you would see a continuation of rents rising, and you are seeing that on Park Avenue in Sixth avenue. I think you'll see it more broadly next year. So that will be the first of the three components that could change. Then I think with specific concessions, free rent is most likely to tighten. I can't really put a timing on that. That's anybody's guess, but it certainly feels like the trend line is there, the leasing velocity is there to support it. The tenant demand is there. And I think you will start to see a specific to where the strongest submarkets are right now, Park and Sixth Avenue. And the last component will be TI. And I think that is probably much further off in time because as rents rise, construction costs haven't slowed down. So tenants are still looking for the landlord to support them on -- with these elevated TI contributions.

Thank you.

Thank you. One moment for our next question. Our next question will come from the line of Peter Abramowitz from Jefferies. Your is open.

Thank you. Yes. My first one for Steve. You mentioned still financial services kind of leading the market, but just wondering if you could talk about any updates on tech their presence in the market? Any changes in their appetite for space?

Yes. They continue to be an increasing part of the marketplace. There is over 6 million square feet of active tech ongoing searches. So if you compare that versus a year ago, it was a little over 3 million square feet of active searches. And you've seen some of the combination of some of the household big names that are in the market. I won't be too specific, but I think a lot of us heard some of the big names, whether it be Amazon or Apple or who may be, but as to what their specific requirements are. But you're also seeing sort of a smallish to mid-sized requirements driven by a couple of different things. AI initiatives are creating new businesses and creating new initiatives in existing businesses. There's organic growth in some of these businesses that are driving it. And clearly a return to office mentality are bringing a lot more people back and forcing some of these existing tenants to come back into the market where they had laid off space because they thought they were going to have a more robust hybrid work environment and now they're bringing the bodies back, is forcing them to take more space. I mean we are enjoying it right now. We've got a very significant lease going out. And as a result of exactly of that function. And it feels like that whole industry is coming back to life in a material way. So time will tell us what it means for next year, but it certainly feels good right now.

That's helpful, thanks Steven. And my second question, just to sort of follow up on Jeff's question, some of Marc's comments around residential conversion. Wondering if you can comment on 5 Times Square. Any thoughts on the strategy there? I know it's been in the press that it's something you and your partner considering to convert at least part of the building to residential?

Yes. This is Harry. This is an ASP asset. We are working with our lenders and our partners and we'll share more at the appropriate time.

All right. That’s all from me thanks.

One moment for our next question. Our next question will come from the line of Caitlin Burrows from Goldman Sachs. Your line is open.

Hi, everyone. Maybe following up on Tayo's earlier question, you increased your lease occupancy rate for the end of the year. Just wondering if you could provide any commentary on how you expect that to flow through the economic occupancy and recognizing rents?

Yes, it is Matt. So when we are leasing up vacancy that income recognition typically has a delay on it because you're typically building out space. So generally speaking, we would say at the very short end, six to nine months, typically more like 12 months after lease up, you start income recognition. So we'll start to see the benefits of 300-plus basis points of occupancy pickup this year over the course of 2025 and beyond.

Got it. Okay. And then just wondering if you could give a quick update on 245 Park regarding the redevelopment, leasing and thinking on timing of a JV sale there. I realize we’re at 305, so what's the latest on 245 Park?

Well, you got the leasing, the development and the JV in there. So the development, I will start. The development is going right on schedule. It is approximately a $200 million plus or minus redevelopment, which is really touching many, many areas of the building from podium facade to a great new plaza fully landscape, we lit and new seating, new signage, new everything. It's going to be a really vastly improved plaza and front door, if you will, approach to the building, spectacular lobby. I think it's a 20,000-foot amenity with fitness and other clubs, lounges, amenities, food and beverage offerings and a fully serviceable rooftop garden in the spirit of what we did over at One Madison. So it's exciting. It is what all the leasing -- see if you talk about the leasing has been sort of activated based off the excitement around these improvements which have begun, they will be done in about 18 months or thereabout. We are already doing selective demolition and closing push. Is Lexington closed, I think Lexington entrance is closed, so work's underway and the tenant community reception has been spectacular.

And on the leasing front, we've posted a lot of big lease announcements this year. I'm fully expecting to have another big announcement in the very near-term that we'll take the building above a 90% occupancy, which puts us in a great spot given the fact that there is no near-term lease expirations that building is going to be stabilized before we ever get halfway through our reconstruction.

And with the redevelopment underway and Steve getting the building over 90% leased, the asset is going to be positioned as one of the fortress office assets in New York City. It is sitting right across from JPMorgan's new headquarters. And we expect on the investor side, the opportunity is going to resonate well with investors. We kicked off our discussions a little while ago. We're meeting with potential and we're going on a roadshow in the coming weeks to further discuss the interest along with some of the other capital markets executions we have for the end of this year and into early next.

Got it. Thanks.

Got it. That is all the time we have for our question-and-answer session. I will now like to turn it back over to Marc Holliday for closing remarks.

Okay. Thank you for those still with us. The Investor Conference date is December 9 this year due to the dates around Thanksgiving in late November, December 9, One Vanderbilt. And we look forward to seeing everybody there for our annual and should hopefully have a lot of great things to talk about then and see you soon.