SL Green Realty Corp Q4 2025 Earnings Call

Thank you for joining us this afternoon as we kick off the year. It's been just weeks since our investor conference, but we've already hit the ground running on our business plan for 2026. We are about a month into the Adams administration and know there's a lot of pressure and focus on the mayor coming out of the gate. But it's going to take some time for Mayor Adams to put an imprint on how he'll govern. He's still putting his team together and they're at the very early stages of getting their arms around the city. We did see an early test this week with a major snowstorm here in New York, about a foot of snow in Manhattan on Sunday, and the administration did a great job getting the city back to normal quickly with the mayor being very visible and communicating effectively. At the same time, there's a lot of political maneuvering going on as we enter budget season in Albany. This is the time of year when the city makes its case to get the biggest chunk of the state budget as possible for the coming fiscal year, reflecting the city's enormous contribution to the state economy. This is especially true with a new administration eager to invest in the initiatives and promises made on the campaign trail. I know there's been a lot of talk recently about potential city budget deficits, $2 billion this coming fiscal year and up to $10 billion the following. My own view is that the city starts off every budgetary period with a gap that needs to be plugged and this year is no different. It's not just about expenditures; on the revenue side there's a lot of good news with tax collections up 8.5% in 2025, a big portion of which came from growth in personal income. One thing that's certain is that the business economy in New York City had an incredible year in 2025. And I believe that when the new revenue forecasts come out in the next few weeks, we'll see that the city will be projecting significant additional revenue increases that will help defray the current deficit. Remember, the city's budget is required by law to be balanced at the beginning of every fiscal year, and we continue to remain confident in the city's fiscal stability and strength. Let's not forget that New York City's credit rating is double A and was reaffirmed by S&P as recently as October, which noted that the city has the budgetary reserves needed to navigate any near-term risks. At our investor conference in December, I made the case for what I believe was shaping up to be a stellar 2026. As we sit here on January 29th, I feel the same. In short, I think 2026 is setting up to be quite an amazing year for the commercial office sector in terms of occupancy gains, rental achievement, and business growth. Given the lens I look through today, the fundamentals are strong. Businesses are still leasing space and expanding, growing their businesses and making lots of money. The big five banks just reported increases to earnings year-over-year with profits in the fourth quarter up 6.7% and investment banking revenues up 12.6%. And we're expecting when Wall Street member firms finally report fourth quarter profits, they will come close to meeting or exceeding the current all-time high of $61 billion, as the number stood at $48 billion through the first nine months. Between Wall Street, the big five banks reporting, and what we see going on in our own portfolio, it all reaffirms our view at investor conference that New York City is differentiating itself from other US cities in significant ways and will continue to be the central focus of investors looking to deploy capital in debt and equity this year and beyond. Case in point, I led a contingency from SL Green that just finished a 10-day swing through Asia where we collectively held two dozen meetings with debt and equity capital sources, investors, buyers, sellers, asset managers, and sovereigns. I can tell you that the appetite to invest in New York was as strong as I have ever seen. As we continue our travels around the world, we expect to see a similar theme play out. I expect that transaction volume for 2026 will be even higher than last year, which was $23 billion, an amount that was roughly equivalent to that of 2019. And it'll only facilitate the company's execution on our $7 billion refinance plan and our $2.5 billion disposition plan. We set lofty goals for ourselves in December as we always do and know you all will be monitoring our progress every step of the way as you should. We like that pressure and we've never been more motivated to meet or exceed those goals than this year. What emboldens me is that the private markets completely get it. One point I highlighted at investor conference, Paramount trading at under $4 a share and then selling for nearly $7 was not lost on anyone. The private markets see economic growth in real terms, the coalescing of young and highly educated talent, and strong business demand right here in New York City. So, we're going back to work on what we can control and keep putting numbers on the board until we see it reflected in the stock price, which I know we will because the disconnect now is simply too big to ignore between the value of our premier assets in this company and our share price. And to be clear, one of those premier assets is our human capital, the people of SL Green, who will generate more than a hundred million dollars in fee revenue from institutional investors who look to us to develop, manage, and monetize investments on their behalf. I hope everyone out there appreciates our efforts and the enormity of the plan we have for 2026, and thank you for continuing to support our company. Now, I'd like to turn it over to our chief investment officer, Harry Satomer, who will add some color on how we're progressing on our business plan.

Well, I think the way I would characterize it is the way I've seen it in the past, but really only several years out of three decades where the money inflows into these institutions seems to be so great and real estate has to maintain its certain percentage of total AUM for these different investors. Many of these country investors have kind of maxed out their investment in their local economies and they really can't invest more. So they are almost forced to look outside their borders. When they do that, it was quite evident to me that there's really only a couple of areas that they feel comfortable investing in worldwide, and certainly in the US. The constant theme of New York City Midtown Manhattan real estate being sort of the real estate equivalent of US Treasuries really resonated in terms of risk-adjusted downside safety and a path towards real returns where you can still earn double-digit returns on good core real estate assets because interest rates in the US are still relatively high and cap rates are still relatively high, and that translates well for a lot of these investors. There was a lot of our counterparties telling us that they are looking to us to help them deploy capital in various different ways: debt and equity, development and core assets. Some is more opportunistic, and in some cases people have interest in the Summit platform and sponsoring growth in the Summit platform in various markets, etc. So it was great meetings. Our franchise in those markets is very well known and highly regarded. There seems to be a lot of capital to deploy in '26, and notwithstanding some of the geopolitical events with tariffs, both US tariffs on foreign goods and foreign tariffs on American goods, it seems that there's still a desire to convert money to dollars and put it to work in New York City, and in many cases with us. So it was a very good trip all around.

Yeah, it's premature to have a different conversation right now. We'll take it up at the board. I can tell you the board doesn't just look at the next quarter or two or three. The board takes a holistic look, and we're going to look at things in the coming years. I think '27 is going to be a really strong year. So we don't peg the policy quarter to quarter. It's intended to be the underpinning of a long-term plan of investment and harvesting, repatriation, creating free cash flow. And one of the biggest parts of that plan now, which is different than it used to be, is the creation of pure net fee income, unlocking the value in the platform over and above just our asset value. That money is kind of in place of what used to be DPE income. And I think you get a much higher multiple. It's much stickier. And it's core to who we are to build up this asset management business further. You heard Harry talk about the launching of a new fund which we will do in '26, and that's not even in those numbers. So I feel very good about the earnings trajectory of the company as all this development we did and all these leases start activating and coming into recurring FFO in '26, maybe back half, and certainly beyond '27 and beyond. Those are the kinds of things we'll look at in addition to taxable income and cash flow when setting a dividend policy. So I think what you're hearing is we're generally optimistic as it relates to the business plan. Where we peg the dividend at a moment in time is something the board will take up in March. There's not a lot more I can add to that. But you mentioned something about declining or falling earnings this year. This portfolio is without question the best portfolio of assets with the highest earning capacity this company has ever had. At the end of our $7 billion refinancing plan and our $2.5 billion disposition plan, the balance sheet is going to be exactly set to where we wanted to be at the end of this year. And we're poised for opportunity and growth, earnings growth and value growth. So the dividend we'll have to sort out in March. But this is not a company that feels like it's in a moment of decline. I think we're in a moment of expansion on all levels. And I think the private market gets that, and I hope the public market comes to realize the great successes we're having in this market and follows suit with support. But until then, it's a necessity that we have extraordinary support from global investors.

The second part of that question, you said with respect to the valuation push, what exactly did you ask?

Okay. So it's interesting when the dollar was strengthening and other currencies were weakening, you could have made an argument that maybe US assets would become less attractive. But we didn't experience that because at that moment in time, people wanted to get their foreign currency into US currency because they felt that the US had great real growth prospects. And once that money is here, it tends to stay here because the US is viewed as the safest place to park capital in the world. Now with a weaker dollar, it makes US assets cheaper for foreign buyers, which will only increase demand. So I think it's a positive for us regardless of the direction of the dollar. It provides us access to additional partners and capital, but it also could mean more competition for assets. However, given our long-standing relationships and track record, we're well positioned to continue to be a preferred partner for these global investors.

I think the intention with a lot of these investors is it stays here and gets reinvested. They're not just rifle-shotting certain asset investments opportunistically, but they're looking to set up investment platforms in domestic markets here in the US. At that moment in time, there was an intentional directive to diversify some money into what was then a strengthening dollar. I didn't see that hurt our ability to raise money at all, and a lot of these sophisticated investors have hedging strategies that mitigate some of that risk. Now, with the dollar depreciating, it obviously makes the assets less expensive, but also remember that means rates are rising in their home countries. That relative advantage we had—the US rate versus home country rate—is probably narrowing a bit, but still decidedly in favor of the US. I think the appetite picks up more with a depreciating dollar, which creates more demand and will push pricing, but nothing pushes pricing as much as interest rates. If you're looking for a push on pricing, maintaining or falling rates would have an explosive effect on values in the city. Right now, maintenance of rates gives us a fair market, and we out-compete in that market. It makes it more attractive for investors, and there was very little talk about the exchange ratio being a barrier; in some cases, it was a benefit. I think it's a good trend, but I wouldn't want to imply that if that reverses and the dollar strengthens again, I'd expect a dramatic tapering off, because I still think there's a global diversification play into markets where investors are underrepresented. That's the number one reason we're seeing these money flows in our direction. Harry, you have any thoughts on that?

It's Matt. I would say the occupancy objective is very nominally, if at all, affected by asset sales. There are some asset sales we have that are lower occupancy, and we could not consummate them and still meet our objective based on the leasing trajectory we're seeing. Will it have an effect? Potentially. Was it factored into our objective of 94.8%? Yes. We could do without the disposition plan and likely achieve our target. Blaine, I would point you to a slide we used at the investor conference, which I thought was pretty impactful. It listed a subset of all our material buildings in terms of current occupancy and where we expected to be at the end of the year. Those are same-store between 2025 and 2026. It showed in almost every case—the vast majority—occupancy gains being projected, which underlies the march forward from 93% to 94% plus in 2026. It shows two stories: we're operating at the highest levels in the market, getting to 95% and above on a major segment of our portfolio, but we still want to see those properties 100% leased. People say that's impossible due to friction, but we've got properties that are 99% and 100% leased. In a tight market, I think 97% plus is not unachievable—we've achieved it in the past. Every 100 basis points for this company has a dramatic impact on the bottom line. Referring back to that slide will give you a good visualization of where we see the occupancy gains coming from.

Despite all that big leasing in the fourth quarter, we've kept the pipeline full, over a million square feet of pipeline. What's most notable—and I think this is important for people to hear—of that over a million square feet, 800,000 square feet are leases that are out. These are not just hoped-for transactions that will convert; 800 of the million square feet are leases in negotiation, many close to execution form. Also within that pipeline, 900,000 square feet are new tenants as opposed to renewals. As far as the types of tenants, it's heavily weighted towards finance—half the pipeline is financial service businesses, with the balance being tech and legal tenants.

Sixth Avenue is the new Park Avenue. Park Avenue is the tightest market submarket in the country. Sixth Avenue posted some really big deals; you're seeing rents rise dramatically given the tightening of supply. What we've experienced is a really good case study of the strengthening market on Sixth Avenue. Many of you have inquired about the vacancy or rollover we had at 1185 Sixth Avenue over the past couple years. We had four big tenants that rolled out—over almost 700,000 square feet covering 25 floors. Since then, we've leased 434,000 square feet, have leases out on 135,000, deals pending on 131,000, leaving us only 24,000 square feet to deal with from that almost 700,000 square feet of rollover. That's an amazing case study of the strengthening submarket, to say nothing of the strength of our leasing team.

Summit has an impact, but it's not the main driver. The driver is clearly occupancy increases. As I said earlier, we've driven same-store occupancy up 400 basis points over three to seven quarters. That starts to flow through—that's why we show economic occupancy as a new metric ticking forward, with still growth thereafter that translates into same-store NOI growth of three and a half to four and a half percent this year and 10% plus in 2027. Summit had an effect, and it will be helpful in 2026 to have Ascent back up and running and Summit on great footing, but it's not the everything.

I look at cash flow, and cash flow for this company is comprised of operating cash flow and gains on sales because we are an active seller of real estate. We're not just a buy-and-hold company. If you evaluate us and our dividend only through the lens of buy-and-hold—a non-active way of managing real estate—then we'd have to look at different metrics as a board. But as a board, we look at buying things like unformed clay, breathing new life into older buildings, developing new buildings, entering into transactions to create high IRRs and often monetizing. We've sold much more real estate than we currently own; we own 30 million square feet, which says something. To only look at one metric for total return and dividend coverage—my opinion and the board's opinion is don't look at it that way. Look at it in its totality, for all the revenue we generate, because all that revenue—which is often taxable—is our metric and barometer for setting the dividend. We don't just occasionally harvest gains; this year it's a $2.5 billion plan, last year a couple billion, the year before $5 billion. This is what we do. You know Green buys, improves, develops, stabilizes, harvests, moves on, and does it again. I've been here 27 years, and it hasn't changed much; the assets have just gotten better, the numbers bigger. The culture and ethos are the same. This is how we look at it at the board level. We've been able to keep as good a dividend policy over those years as possible given the ups and downs of the markets, and we'll continue evaluating it through that lens of the different types of businesses we do and the cash flows, taxes, and dividend setting at the proper level.

We just debuted it last week. Hope everyone liked the design. We closed on it in September or October, and within a few months we conducted a wholesome design competition, going through a range of designs to settle on something we think is world-class. We're excited for this project—it's the right project at the right time. I know Steve, your phone's been ringing with pre-conversations. Where are we at?

It's worth noting that over the next four years, we have the lowest rollover I recall in the company's history—less than 900,000 square feet expiring each year, whereas typically it was 1.2 to 1.5 million or more. Over the past two years, we did 6 million square feet of leasing; 8 million in three years. Our projection for this year is around 1.5 to 1.6 million. We haven't been public with next year's projections, but suffice it to say, as we continue to fill buildings and get towards occupancy, the volume of leasing needed becomes less, and capital associated with it becomes less. The scarcity value allows us to trim renewal TI and free rent back to healthier levels. There are multiple reasons why we would see a big improvement in the FAD number in 2027, which I alluded to earlier. This is the reality of 6 million square feet of leasing in two years—you have to pay the capital. Now we have 1.5 million square feet to lease this year, and the projection for the year after and beyond is relatively modest due to less rollover and tightening packages. That's where it is. It's a good news reality that we're paying to install a lot of 10-, 15-, even 20-year tenancies, often at triple-digit rents. What was our average rent for the quarter?

Low 90s. We're in the 90s to hundreds now for average rents in this portfolio. That's where you start to make real margin to cover concessions and contribute to cash flow. It took a lot of work over the past few years to get here, and now we're here, enjoying it. I think we're six to 12 months ahead of the narrative, looking out to 2027 and beyond. We see a lot of great recovery in both FAD and earnings, which will be subject of discussions in the second half of this year.

That's it. That's the end game.

Nice catch.

That would have been my first question. Did I pass?

We got approval last year to convert Landmark Square to residential. We just received approval from the town and are now working on capitalizing that deal.

You have to amortize the TI over the term of the lease. Yes, it's a nominal one-time number upfront, but on a 15-year lease, make sure you're comparing the annual rent increase to the annual TI increase. It's not 60% annually—you have to spread it over the term. But to the more fundamental question...

Where it all comes home to roost is in price per square foot for premium assets. When you put everything through—rents, TI, free rent, downtime—asset values today for the top 20-25% of the market are solidly between $1,000 and $2,000 a square foot. Below that, $1,500 a foot for older but well-located renovated product, and probably $1,800 to $2,500 a foot, maybe even $3,000, for the best new product. To achieve those price-per-foot numbers, they have to be supported by net effective rent increases minus concessions. If you look back to 2018, asset values were not there. There's a part of the market still recovering, and the story is yet to be told on assets where average rents are below $100 a foot. The TI and free rent are relatively high relative to those leases. But for buildings with average rents well north of $100 a foot, the improvement is both nominal and net effective. I wouldn't paint the whole market with one brush—there are different categories of buildings. What we're referring to mostly is the upper echelon in East Midtown.

You've got to dream.

Got to have dreams.

All right. Thank you.

No closing remarks, Operator. We've been on for quite some time. Thank you to all who stayed with us. Thank you for the questions, and we'll speak to you all again in three months.