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SL Green Realty Corp
Earnings Call Analysis
Q2-2024 Analysis
SL Green Realty Corp
SL Green Realty Corp. delivered a robust performance this quarter, significantly exceeding the guidance provided. The company’s revenue grew by 16% year-over-year, driven largely by increased tenant occupancy and substantial leasing activity, particularly on Park Avenue where vacancy rates are less than 9%. Higher occupancy is contributing to this strong performance, with key leases, such as those with PJT Partners and Ares Management, doubling in size .
SL Green’s leasing pipeline remains strong at 1.2 million square feet, with 62% of it concerning current vacancies. The financial services sector is a major driver, contributing to 50% of the pipeline. Notable leases include significant expansions from PJT Partners and Ares Management at key Park Avenue properties. This leasing success suggests continuous positive momentum without slowing down for the rest of the year .
Other revenue stood at $33 million this quarter compared to $13 million in the first quarter. Fee income significantly contributed to the improved guidance, including an increase by $0.10 per share, with $0.05 from fee income and another $0.05 from other sources like the SUMMIT experience. The company reassured investors of its expectations for similar revenue levels moving into the next year, attributing variations to special servicing assignments .
SL Green remains committed to enhancing its portfolio, particularly along the Park Avenue corridor. Their strategy involves selling off less fitting assets and reinvesting in core properties. This approach has visibly paid off, with strong performance metrics and positive market outlook, even as the broader commercial real estate market faces uncertainty .
Despite ambitious targets, SL Green is trending well within its original guidance. The company originally projected same-store NOI to be down 1-2% but now sees potential to meet a goal of up 1-2%. This optimism is contingent on a strong second half of the year, indicating that while challenging, hitting the year-end targets is within the realm of possibility .
The company announced its first international SUMMIT location in Paris, demonstrating a commitment to expanding its successful experiences globally. Additionally, considerable progress is being made in the conversion of office spaces to residential units, with the 750 Third Avenue project expected to yield high returns by early 2025. This conversion aligns with the current market trend favoring residential developments .
SL Green has seen solid interest from both local and international investors. This is attributed to their strong fundamentals, competitive assets, and strategic repositioning efforts. One Vanderbilt, a flagship property, continues to garner global recognition for its architectural excellence and strong leasing performance, attracting top-tier tenants such as Blackstone and Bloomberg .
High-margin businesses, including special servicing and asset management, are becoming increasingly important to SL Green's income streams. With a pipeline of over $2 billion in special servicing opportunities and more than $3 billion currently managed, these services represent a growing part of the company’s profitability and are expected to contribute significantly to the bottom line moving forward .
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Thank you, everybody, for joining us, and welcome to SL Green Realty Corp.'s Second Quarter 2020 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 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 measures most directly comparable to each non-GAAP financial measure discussed and the reconciliation of the fee each non-GAAP financial measures and the comparable GAAP financial measures can be found on both the company's website at www.slgreen.com by selecting the press release regarding the company's second quarter 2021 earnings and our supplemental information included in our current report on Form 8-K relating to our second quarter 2024 earnings.
Before turning the call over to Marc Holliday, Chairman and Chief Executive Officer of SL Green Realty Corp., [Operator Instructions]. Thank you.
I'll now turn the call over to Marc Holliday. Please go ahead, Marc.
Thank you. Good afternoon, and I appreciate everybody joining in today. I think this was, by all measures, a great quarter for SL Green even by our own lofty standards. I want to lead off by expressing my sincere appreciation for the SL Green team who have massively contributed to our company's impressive results for this quarter and throughout the most challenging times of recent.
The extremely talented men and women of SL Green work 7 days a week, believe in New York City, care deeply about what we are doing and are simply the best in the business. We cannot print these results against the tide of negativity and defeatism without the dedication and loyalty of the 300-plus SL Green corporate employees and another 1,000-plus who work in the buildings day, night, weekends and holidays. We are extremely lucky to have such a diverse and talented team of professionals, and it's the biggest reason for outperformance in the office sector over the past 1, 3 and 5 years.
And it should be the deciding factor in making an investment in SL Green, the knowledge that we can outperform in good markets and bad and that we will always put the shareholders first in making strategic decisions. This year-to-date achievement illustrates something far greater than simply a market in recovery because we are vastly outperforming a still unsettled commercial real estate market.
It is the result of a deliberate plan we laid out years ago to improve the quality of our portfolio by physically improving and amenitizing our properties, focusing our efforts along the Park Avenue spine in East Midtown, selling assets that didn't fit that profile and then monetizing our best assets to fund our new development activity.
What you are now seeing is the positive consequence of the execution of that plan and I believe we are now on a path to seeing sequential quarterly improvement in our operating and financial metrics into the foreseeable future. When others gave up on New York, we believed. People said that the financial sector was picking up and moving to Florida. But what we've seen is significant sector growth right here in our hometown fueled in part by the $12 billion of Wall Street profits in just the first quarter of 2024, and that's as compared to $26 billion for all of last year.
Growth in South Florida and elsewhere doesn't mean contraction here in New York. In fact, it's been the opposite companies like Blackstone, Citadel, Wells Fargo and Bloomberg are all expanding their footprint here, and it appears that JPMorgan is buying the neighboring building at 250 Park Avenue as they continue to report extremely strong profits.
But the demand for space goes far beyond Park Avenue and I think the best illustration of that is looking at our current pipeline of office leasing of -- which is 1.2 million square feet. This is after all the activity we announced yesterday totaling 1.4 million square feet of leases signed to date. There's another 1.2 million square feet of identifiable leases pending, term sheets, out for signature, that we have in our sites after that activity.
And interestingly, more than 80% of that activity is not on Park Avenue. But rather, it's on radiating outwards through East Midtown, everywhere from Sixth Avenue on over to Third Avenue, fairly evenly dispersed, lots of mid-market deals, lots of strength in the middle, not just the big deals. And I think it's one of the more exciting elements of what we have to look forward to for the balance of this year.
Everyone wrote off retail in New York City, but you saw our release yesterday, and it very clearly is back. Retail is back. Yesterday, we announced that One Madison, retail is now 100% leased, curated in a way that brings real value to our tenants at the building and to the residents of the Flatiron neighborhood. And naysayers were off New York as a global destination, but tourism is beating expectations again, well over 60 million tourists expected this year in New York, hotel average daily rates up 3% year-over-year.
Occupancy is approaching 90% in Manhattan. And the result of this is because of limits on Airbnb's and conversion of some hotel properties to support of housing. If this trend continues, Midtown is likely going to be under hoteled again soon. There is no better evidence of this surge of tourists and then right upstairs from us at SUMMIT where attendance numbers are up again this year over the outperformance attendance we had last year.
And it's just proving again and again that this has become one of New York City's most compelling destination experiences and was a contributor to our quarterly results and more to come on that. But I want to end on an even higher note. Today, I'm excited to announce that we have secured our first new SUMMIT global location, and we are expanding to Paris.
More details to come on that in the fall today. But today, I can say to everyone listening in Paris, [Foreign Language] and see you soon, and thank you all for listening, and we'll take questions.
[Operator Instructions] Our first question comes from the line of John Kim of BMO Capital Markets.
To curve ball with this with the Paris announcement, so I have to ask about that. Can you just talk anything more about the location of SUMMIT in Paris, the timing of it? And anything else you could describe on it?
Yes. No, we're going to leave that, stay tuned, more formal rollout in the coming months. Lots to talk about, very exciting. But just wanted everyone to know we're coming.
Maybe if I could focus then on SUMMIT, New York. You had a 16% growth in revenue this quarter year-over-year. How much of that was visitor count versus average ticket price? And can you also remind us on the mechanics of how the rent is paid to the JV? How much of the OpEx is that rent figure?
I got the first part of the question. The -- it's mostly attendance. I think the attendance, which we had up for the year was up another 100,000 for the first half of the year above our budgeted numbers. The ticket prices are fixed. I just want to -- my goal is -- and the goal of SUMMIT is to really keep SUMMIT as an affordable price point as possible, so people can come and enjoy it both within the city and around the world.
We have programs for New York residents where they get discounts. We have discounted programs that I think are best in class for active duty personnel and veterans and the prices are fixed. We don't surge price. We set those prices at the beginning of the year. We hold them fixed and evaluate at the end of every year. So almost all of what you see is attendance. What was that second part that you asked, if I can ask you, John, again?
The intercompany rent or the rent that you paid at the JV, is that -- how much of that is in the operating expense? And also on the revenue or visitor counts, when do you start opening up on Mondays or expanding the hours?
Well, Why don't you answer the rent part.
Yes, rent schedules in the supplemental, John, the base rent. We don't get into how much percentage rent, the SUMMIT pays to the building.
Okay. And...
And then hours.
Hours of operation?
Yes, hours of operation. Those are -- I think right now, we're typically opening from around 9 in the morning, last ticket sale 10:30 -- and night facility closes at midnight. We could go longer. The night experience at SUMMIT is every bit as good as daytime and Sunset, something better because of the city lights and the air at night feature we have with -- that we've curated in the evening.
So it's possible that in the second half of the year, maybe after the summer will we'll go later on the closing hours. We're open 7 days a week now. Portions of the first half of the year we were closed on Tuesdays, I believe, down days. But right now, the facility is in excellent condition. The demand is strong. We're going 7 days, and I imagine we'll be going 7 days almost right up until the end of the season, ramping to the end of year.
Our next question comes from the line of Connor Mitchell of Piper Sandler.
Marc, you touched on it in your opening remarks, but just as Park Avenue leases up at higher rents with the recent quarter in activity, as an example. Could you just expand on how you guys are seeing the dynamic of the neighboring submarkets changing in terms of pricing concessions, story activity? Any other color you might be able to give?
Yes. The -- I don't have the average starting rent for the pipeline. But just to give you a sense for the leases done in the second quarter, the average rent which was about $93 in the first quarter was up over 10% to over $100 in the second quarter. So a lot of that is influenced by Park, but not all of it. It's really -- it's as much Park Avenue as it is tops of buildings because I think Steve will sort of run you through the dynamic in the dearth, if you will, of big block availability, particularly in tops of buildings, whether it's old or new and regardless of its on Park or off of Park, and it's definitely driving rents. And as it relates to concessions, Steve, your thoughts?
Well, a couple of points. Mark is spot on with regards to the migration to better quality space and don't confuse that to mean just new construction or heavily renovated buildings. What we're seeing is that even in the mid-price point buildings, we've got a tremendous amount of activity in our portfolio. The -- but a lot of that is skewed towards the upper half of the floors.
So the tower floors in particular. If you look overall in the market beyond just our portfolio, there's a stat out there that would tell you that 57% of the current direct availability in the marketplace is located in base building -- are in the base floors of buildings. So you're seeing price appreciation on Park Avenue. You're seeing price appreciation in the heavily renovated buildings irrespective of location, and you're seeing price appreciation and heavy and strong leasing velocity in the tower floors of both the high-quality buildings and the mid-price point buildings.
Concessions, I think, as we've said for a while now, remain pretty static. I haven't seen any change in concessions irrespective of the building you're in. And we're seeing the prices get pushed on the better portions of buildings and better quality buildings. And I think we had commented earlier in the year when asked that same question. That's exactly how we expected things to unfold as the market continues to improve.
Okay. Appreciate that. And then maybe just a quick question on the JV debt fund as well. Just wondering if there's any update on if the focus is still primarily on Manhattan or maybe any opportunities outside of the company's primary focus submarkets, may surprise you -- you're kind of taking a look at any opportunities for the debt fund outside of Manhattan?
Manhattan, the focus is Manhattan. I will add to that. As you'll start to see us -- or continue to see us grow the special servicing and asset management business, which is not a principal investment business. You'll continue to see us pick up assignments outside of Manhattan, but that's purely a fee business for us.
Our next question comes from the line of Michael Lewis of Tourist Securities.
My first question is about the leasing in Manhattan so far year-to-date. Your full year guidance, as you know, for Manhattan office time leases 2 million square feet for the year. I don't know if you expected that to be first half weighted or not. So I guess the question is, is your volume year-to-date? Are you running ahead of what you expected in your guidance? And if you are, is there a reason? Or is it just broad strength that you're seeing in the market?
Well, I mean, we're definitely running ahead of guidance. The year has been -- first half of the year was really strong for us and occupancy heading in the right direction and not just volume for volume's sake, but really good leases on terms where we're satisfied with. And I think you saw -- you're seeing that in our guidance as well as in other ways. So yes, we'll -- we should exceed our goal for the year, and that's good by how much we'll see.
I'd like to see this team blow it away and end up with some really sort of fantastic results. But look, it's -- there's a lot of work to do on that 1.2 million pipeline. I guess, Steve, you could sort of give some parameters around what's driving that pipeline and where that strength is coming from?
Yes. So as we mentioned earlier, the pipe is -- currently, it stands at about 1,200,000 square feet. In that number, we have leases out in negotiation as opposed to just term sheets being negotiated, covering over 760,000 square feet and of that number of the overall pipeline of 1.2 million, 62% of the square footage that's in the pipeline is for deals or pending deals for current vacancy in the building. So you're seeing a lot of new tenants come into the portfolio, filling current vacancy, we're seeing the financial service sector, which makes up 50% of our pipeline continue to add bodies and add square footage and see dramatic expansions.
Some of the bigger deals that you've seen us announce recently this year with both PJT at 280 Park Avenue and areas of 245 Park Avenue. Those were very large transactions and each of them were for tenants that were doubling in size. So I think those were the -- those were some big drivers of our success to date, and we're seeing that in our pipeline. So no expectation that's slowing down for the rest of the year.
Great. We'll look for that green thumbs up on that slide in the deck in December. My second question is about fee income, and I talked to Matt a little bit about this. The other revenue line item was $33 million this quarter. It was $13 million in the first quarter. If I look at the guidance, it appears to me it's somewhere in the mid-teens quarterly run rate in the next couple of quarters. Can you maybe talk about the recurring fees?
And I don't want to call the rest of the nonrecurring because I realize they're just lumpy and more transaction driven. But it might help kind of frame not only modeling but what multiples to put on revenue streams to talk about the servicing fees versus some of the lumpier transaction fees in that line item?
Yes, it's Matt. So I think this quarter finally illuminates the people, the fee-generating machines this platform convey, which we've telegraphed to people over the last few years, and it's really showing its strength now. These fees come in, in various forms and they can be lumpy. So last quarter was a fairly muted quarter in ancillary fee income. This was big. And those fees can come in many forms. We talked about the special servicing business.
That business is basic modest fees on a monthly basis until you resolve the situation, then you get a resolution success fee. Those are unpredictable, but they're sizable when they come in. We often get fees from partners, buyers of assets or restructuring debt. Those can be lumpy, those can be time, a function of the timing of the closing of those deals. That's part of what flowed through in the quarter. So when you say what's recurring? Well, all of those as categories are recurring.
The timing of those things is what is most challenging. By the way, even for us, it's the blessing of not putting out quarterly guidance. I don't have to guess when these fees come in every 3 months, we can do it over the course of 12 months. But even that can move from quarter-to-quarter. But as categories, you will see special servicing fees, ancillary fees, asset management fees continue to be a bigger and bigger part of our recurring income, and that's a very high-margin business, much higher margin than the real estate and therefore, requires a much higher multiple.
Well, I have to continue to do quarter-to-quarter, so I'll do my best.
Our next question comes from the line of Nick Yulico of Scotia Bank.
First question is for the Ares renewal and expansion, I think that was done in July. Is it possible to get a feel for the mark-to-market on that?
It's a sizable number. I don't want to get into specific mark-to-market on leases, but it's -- the leases in 245 Park as a general statement, are being marked up significantly from a prior vintage.
Yes. I mean you got to understand the asset was owned by HNA for a period of time. And it was probably not receiving the amount of capital commitment it deserved in order to be responsive to a building that's in an unbelievable location and should be a market leader really in terms of Park Avenue address. So we're obviously addressing that through a significant capital program we've launched. It's already underway.
We hope to be done by end of '25, first quarter '26. And we're marketing the building off of the commitment to do that very robust repositioning of the property, everything from plaza to lobby amenities, new rooftop, et cetera. I mean it's going to be a phenomenal building when it's done.
So when you look at mark-to-market, it's kind of -- it's a bit unfair to compare apples and oranges because this building is completely different than its current state or predecessor building. The rents are reflective of that and all the rents in the building from bottom to top or decidedly triple digits, maxing out at as much as $150 a foot or thereabouts.
And we're probably raising rents as we go forward because there's a diminishing supply of what's left. We had forecasted a longer lease-up period. But given both the demand for renewal space and expansion space and new leases we've signed, you've seen a bunch of them over the past few quarters. I expect we'll be able to achieve even higher mark-to-market as we go forward to full lease-up of the building.
Okay. I guess, Mark, just a follow-up then is that I know you've gotten a lot of leasing done in the building, as you mentioned, and it sounds like rents have gone higher. Can you then just give us a feel for how you're thinking about then? What the asset valuation could be like versus the interest sale that was done last year?
I realize you're still, I think, focused on that. Just any feel for whether it's an NOI number or something else, how that may have changed based on the underwriting a year ago versus what you're trying to achieve now.
Well, I don't have those numbers in front of me. But I mean, just looking at intuitively where like over a year forward, I think in terms of time elapsed, we've leased up a lot of space. We've done it on budget. So time value alone would warrant some type of premium. On the one hand, you could say, well, that's great progress. On the other hand, we budgeted this progress.
That's the progress our partner brought into when they did the deal. When was it Harry?
13 months ago.
13 months ago. And one of the things our partners rely on is we put numbers on a piece of paper, they're not shy. They're not unobtainable, obviously, but they're not shy we test ourselves just like we do with you guys every December with our scorecard, we do it the same with our partners and put down what we think we can achieve, both timing and rents and concession packages, we've been achieving that.
So the good news is we're executing the plan. The cost for the development are coming in right on the nose of where we expected them to come in. In fact, we increased scope a bit to include a more dramatic we improved rooftop like we did at One Madison.
And by the way, the rooftop at One Madison is spectacular, and I think it's going to be one of the real icons down in that area for venue space going forward. And so on the one hand, you pick up the time value. On the other hand, we're dead on our numbers. So that's the good news. And I would expect there'll be some premium to where we transacted.
Our next question comes from the line of Steve Sakwa of Evercore ISI.
You guys have had a lot of success leasing up 280 Park, 245 Park, obviously, One Vanderbilt is filled One Madison on the office side maybe hasn't made as much traction, Mark. I know you kind of leased up all the retail there. But maybe you or Steve, just kind of speak to the demand within that 1.2 million square foot pipeline that you're seeing for One Madison? And maybe what's been holding the leasing back at that asset?
Steve, I just want to...
No, no, don't stop.
Steve, I got it. First of all, somebody restrained this guy. Second of all, Steve Sakwa, that's quite a statement given that we're 65% leased, over 70% economically leased right on our original budget, which was a pre-COVID budget, right on our numbers -- and the building doesn't even really open until, I think, like November or something. So to say the building is behind schedule or whatever words you use or not leasing or anything, no chance my friend. I mean we leased that building that retail is 100% leased. The tower is 100% leased, and we are, I think, [ 3/8 ] leased in the podium or something like that, it is dead on the numbers. So we could talk about the leasing status. That's fine, but no notion of any challenger any underperformance on that asset in no way. Now Steve Durels, he's calmed down a bit so he can go.
Steve is good when your boss says you back that way.
I'm glad he's passionate about the project.
Well, I think Mark, you have all the highlights. It's -- the building is 65% leased. The tower portion of the building is fully leased. We just signed the top floor with an expansion to FanDuel. So they now have 2 floors in the building that rents that exceeded our underwrite for that last floor.
What we have remaining in the building are 5 floors in the podium of the building. Those are 92,000 square foot floor plates. Without a doubt, it is the best building in the Midtown South submarket, and everybody we tour through there loves the project. The challenge are what we have available right now are those 5 large floor plates.
And as no doubt, you've read some of the market reports in the brokerage houses, there's been a dearth of large tenants in the Midtown South market as opposed to large tenants actively transacting in Midtown where we've done more than our fair share of very large deals in the Midtown market. It's just -- it's a matter of time before the large tenants sort of come back into the Midtown South market. And when they do the building is well positioned, and we'll have great success.
Okay. And then is there any update on the potential stake in One Vanderbilt? I know that was something that was actively marketed and part of your plan for 2024. I'm just curious if there's any update you can share?
Yes, sure. One Vanderbilt continues to set the standard for the market, and it continues to receive recognition nationally and globally, no matter what meeting we are in throughout the world, the first thing investors want to talk about is One Vanderbilt. It's fully leased.
The debt is locked in through 2031, sub-3%. SUMMIT continues to outperform as a globally recognized tourist destination. We just added our second Michelin Star restaurant. Architecturally, Jamie von Klemperer and the KPF team just received, I think it was like last month, the prestigious AIA National Architecture Award for their work at the building. And by my estimation, we have in excess of $30 a foot of average embedded rent growth, really, which I look at as demonstrating the scarcity and really no comparable supply on the horizon due to a bunch of factors.
Sourcing right location, long lead time, lack of affordable construction financing, some of the big anchors needed for any comparable project to this recently signed up commitments. I think you have Blackstone, Bloomberg and Citadel. And I think all of these factors that really create a moat for One Vanderbilt.
And so for all these reasons, of course, we have very strong investor appetite and multiple offers from investors. And I know everyone on this call wants speed, but I think most important is the right investor on the right terms and not really looking at it quarter-by-quarter. With that said, we are working on transaction documents, and I do expect news to share later this quarter.
Our next question comes from the line of Camille Bonnel of Bank of America.
It seems like the financing and transaction market is starting to open up this year. So more broadly, can you talk to how investors are underwriting lease-up time lines and returns for office in New York City?
So just repeat -- do you mind repeating the question?
Just wondering if you could provide more color on the underwriting that investors are looking for when looking at office buildings?
Yes. Look..
The time line yields?
Yes, I would say on the fundamental side for the right assets, I think, as we've always said, you can't generalize the market. But for the types of deals we own for the types of deals we're investing in looking at whether it be through the fund or through our balance sheet. The fundamentals of the real estate investors are very easily wrapping their head around today.
There isn't a lot of question about rents, downtime, or even concessions at this point. Investors, again, whether it be the fund or on specific deals, they have a lot of confidence in our ability to underwrite assets. We talked about 245 Park. As Mark said, we're dead on the underwrite that we presented to our partner a year ago, and that is over 500,000 square feet of leasing just in 13 months.
So there's a lot of -- there's a lot of ability for investors as we said them to wrap their head around those fundamentals. With respect to the overall transaction market, the reason we're not seeing significant number of investor transactions, is really just the lack of debt liquidity today. And a lot of that is what is driving us to want to launch the fund and the efforts that we're putting in there is to be that source of liquidity.
But right now, the reason we're not seeing significant investor activity is really because investors are still trying to wrap their head around where the liquidity will come from in the debt capital markets.
Okay. And for the benefit for those who have only started to follow your company more recently, curious to understand the kind of involvement your teams engage in when you have asset assignments on the special servicing side? How much capacity do they have to take on more?
Yes. Look, special servicing and asset management for us is really an exponentially growing opportunity. We have a subsidiary entity Green Loan Services run by Andrew Falk. And capital providers continue to come to us for real estate services whether that would be on the special servicing side or asset management side. Right now, we have about $3 billion -- over $3 billion of active special servicing and asset management and another $6 billion were named special servicer, which I just look at as future opportunities for the special servicing business.
In addition to that, I expect that to grow pretty exponentially over the coming quarters. We have a pipeline right now of over $2 billion of additional opportunities, not all in New York. And I would expect very shortly to land most, if not all of those. Those figures are going to continue to grow. And as I think Matt alluded to earlier, that almost entirely goes right to the bottom line. So that's a big focus of ours.
In terms of staff, which I think was the second part of your question, Andrew and his team continue to have the ability to take on new opportunities and use the resources within the firm. But we're constantly monitoring if we need to staff additional people on it. But again, I would expect most, if not all, the revenues to go right to bottom line.
And so to clarify, is the timing of that $6 billion that you're designated as factored into the updated guidance you provided last night?
The $6 billion is not all factored into the guidance we got last night.
Our next question comes from the line of Blaine Heck of Wells Fargo.
Rent spreads on signed leases increased really nicely for you guys this quarter. Can you just try to characterize kind of how much of that you think might have been more of a mix issue and lower rents on expirations this quarter versus how much of that is kind of a reflection of market rent growth that you guys have seen recently, really just trying to get at whether the mid-teens level seen this quarter is kind of a blip or a level that could be more sustainable?
Yes. I mean, the mark-to-market when we put out our guidance and then reported first quarter people question how do you correlate down in the first quarter to a positive 2.5% to 5% for the full year. The mix and the quarterly activity is going to bounce all over the place.
So to date, yes, we had a good quarter. We expected the quarter, second, third quarter to be relatively strong just based on the mix of leases that we expected to do in those periods. I think we're still on a trajectory on a full year basis to hit our targets. That will be a function of the mix that happens for the back half of the year. But I wouldn't read too much market movement or anything like that into what we've achieved thus far. Volume, yes, you can do that, but mark-to-market now.
Great. That's helpful. And then just second question. Any update on the casino bid that you can provide?
No, I don't think anything -- I mean, if you're asking about casino timing, then no, I think everything is out there in terms of the decision that's in front of the governor right now as to whether to expedite the process by calling for the submissions forming the CAC and getting past the first stage of the process, which is the hyper local stage.
We, of course, are strong advocates of expediting. We think there's a number of reasons not to want to see the process drag out indefinitely, really because of the jobs that will be produced in the aggregate by 3 casino licenses will be extraordinary and impactful on the construction trades in the industry in order to get what will undoubtedly be tens of billions of dollars of construction underway.
And in addition, there's what -- after they're built, there's significant number of operating jobs, good paying, excellent newly formed jobs that New York City hopefully, will be the beneficiary of not just 1, but hopefully 2 licenses. And I think there's a lot of reasons also on the taxation front because there's certainly upfront moneys that the state stands to benefit from for the upfront license fees.
And then obviously, the significant ongoing taxes that will be projected to be earned by the gaming operations. So a lot of good reasons to expedite. We're certainly ready. We have our building. The building is built. There's really no displacement issues or interruption issues.
We have a great bid that will uplift all of Times Square and also the city as a whole because of the way in which we're working with Caesars Rewards to solicit hundreds of coalition supporters into the bid who will all benefit from the fact that the Times Square Caesars Palace casino will be really outward facing when it comes to things like retail, restaurants, hotels and entertainment.
It's like one of the most compelling community development, economic development projects I can think of in New York City. So we're hopeful to prevail, and we'd like to see the process get going. With that said, I think that there's still a decision pending up in Albany as to when exactly the bids will be called for and when they will be ready.
Our next question comes from the line of Anthony Paolone of JPMorgan.
I'd like to go back to the transaction market and understand the lack of debt out there. But as you mentioned, you are the balance sheet partners and have been able to get that. So I mean, what would levered and unlevered IRRs have to be for you all to put capital out there to do something on assets that you find attractive?
Attractive unlevered in order to -- well, for what kind of business for which type of -- I mean everything has got -- there's -- Obviously, we're doing a lot of -- we intend to be doing a lot of debt and preferred. I think you talked about the growing pipeline, most of which is intended -- or all of which is intended for the fund.
And those returns, I think we've talked about in the past in terms of -- well, I think the market for that product can range anywhere from low teens to high teens on average depending on type of -- the type of asset, the location, the credit, it's very hard to extrapolate from that because every deal is so different as its own nuances.
But I think for subordinate lending, I feel safe in saying low teens to high teens is a good spread. And in other activity, obviously, all the fee-based activity that Harry spoke of, that's it's very capital light. So the returns there are extremely strong. And we'll be committing some dollars in that towards building out the platform with additional resources, and in some cases, taking some capital positions, but that's a very high-margin business.
The expansion of SUMMIT is a very relatively high-margin business, which is return for having spent years and years building a brand. And so therefore, it's a higher return activity. And in terms of new property acquisitions, we're really development focused right now because we see that as being a strength in the market.
And we are looking at doing residential conversion, conversion of office to residential, 750 Third being the first of that program that we're intending to roll out. We're already in design development. We've retained our professionals and our team. We're making headway on the design and programming of that building. We intend to be in physical construction sometime in early 2025.
I think it's going to be sort of -- it's going to set the standard, if you will, in terms of conversions of that vintage of office building in Midtown to something that I think will be a real destination. And the levered returns on a project like that will be mid- to high-teens levered.
And that's, I think, for residential, which is very in vogue and attractive these days, I think it's a very compelling return. And that's because we're going the affordable route in order to be able to do something really good for the city and produce what could be 100 units or more of affordable housing than just one project.
And at the same time, being able to generate returns that we think we'll be able to attract debt and equity capital that we can go forward with. We'll be working on that capitalization throughout the balance of this year. So probably in December, at investor meeting, we could shed more light to exactly what those returns look like, and I would think those will be prototypical returns.
Okay. And then just my second question, maybe just a detailed one for Matt. Matt, if my notes are right, I think at Investor Day, the guidance for other income for the year was, I think, $84.5 million, and I think it included $17.5 million for SUMMIT, if I got this right. And so just wondering what that new number might be because it sounds like part of the guidance bump was changed there?
No. Well, a little part of the guidance bump was other income. We increased guidance by $0.10, I'd say half of that is fee income. The rest is SUMMIT in NOI. So that's $0.05 is roughly $3.5 million or so. That's the incremental fee income. So we're not running that far ahead of our anticipated other income levels overall.
But there's the potential to do better than that, depending on how special servicing assignments play out over the balance of the year. But I think we're trending exactly where we expected to be, maybe slightly ahead. And we'll expect to see similar levels as we head into next year.
Okay. So just to make sure I got that right, about $0.05 from the other income running a little ahead, $0.02, $0.03 from SUMMIT and the rest from the core?
Correct.
Our next question comes from the line of Michael Griffin of Citi.
I wanted to go back and touch on leasing for a minute. Steve, I think you mentioned earlier in the call that. Some of the vacancy you're seeing in the market is those bottom level, not the tower floors, but if we're led to believe that particularly Park Avenue is as strong as it's been wouldn't you expect kind of greater leasing demand to come from those lower place floors? And then you mentioned concessions as well. I'm curious if you've seen any change in net effective rents, given it seems like face rents have been increasing, particularly a lot of properties in that submarket?
Well, when I referred to the vacancy in the -- being heavily weighted towards the bottom of the buildings, I was speaking to the overall market. So that was not limited to Park Avenue have ended up as all buildings in the Class A sector. Park Avenue overall, that's what you're really asking.
I mean that has a current vacancy of less than 9%. So that is a landlord favorable submarket, which is why you've seen us raise rents in our Park Avenue buildings at 280 Park, the 245 Park, at 450 Park. And I don't see any let up as far as tenant demand for those quality buildings on Park Avenue irrespective of whether those spaces are located at the top or bottom of the building.
Concession wise, as I spoke to earlier, I haven't seen any change. I just -- I'm a believer of that right now. There's an ability to push rents as opposed to tightened concessions. With the passage of time, you'll see concessions get reeled in a little bit. But first thing will come off the table will be some of the free rent. But I think build-out cost for tenants is still very expensive. That's why the tenants are being heavily on the landlords and expect to get the TI allowances while they sort of cover it in the form of.
Great. That makes sense. And then maybe one, Matt, for you, just on the capital plan, given I think where the equity is currently trading, could you look at maybe issuing equity as kind of an arrow in your quiver? Or is the plan to kind of maintain the outlook for your capital needs laid out at Investor Day?
I like the analogy to an arrow in the quiver part of the beauty of being a public company is that it's available to us. We don't see as we play out over the course of '24. The -- on our base case plan, the need for any equity because we're -- our balance sheet is in good place. Our liquidity is in good place, where the plan that we laid out in December is playing out as expected. I think where we might see an opportunity to top up liquidities if we saw additional investment opportunities.
So we'll keep -- we always keep eyes out for stuff like that. But that's what it would take for us to really look at the equity as a source because it is still relatively expensive.
Our next question comes from the line of Ronald Kamdem of Morgan Stanley.
Great. Just one quick one for me just on the same-store NOI. Just thinking about the guidance at the Investor Day and comparing to where you're trending sort of year-to-date, that suggests there's sort of a big acceleration in the second half of the year. Just am I thinking about that right that the same store sort of could be 2%, 3% in the second half? And any sort of puts and takes as we're thinking about the second half and going into 2025?
Yes. Let's clarify that, and I'm sitting next to him, so he can reach me if he needs to. So our guidance for same-store NOI was down 1% to 2%. A certain CEO next to me, said for goals and objectives kind of tongue in cheek that we would be up 1% to 2%. Now we are trending ahead first half of the year. So that's good. I think to reach the goal would be -- I'd love to see it to be outstanding. But as we sit today, we're trending a little bit closer to our original guidance as opposed to the objective.
Yes. Look, those are stretch goals. We never hit all of them nor should we, although we'd like to. But the goal is to hit as many as we can. And I believe in having a target that is an ambitious target on all levels. When I look at those goals and objectives for the year, midway through the year, we're tracking really well on many of them, most of them, certainly, not all.
There was a scenario where we could have been in that 1% to 2% range. There still is a scenario where we can be in that 1% to 2% range with a big second half of the year. But it's going to be pretty tough. And we may or may not hit that particular goal. But I'm confident we're going to hit the vast majority of those goals. And the important thing on this end is to try and shoot lights out on all these leases that we do, we do dozens and dozens, here probably over 100 a year, actually.
And let's see how the second half of the market -- second half of the year shapes up, and we're going to try and push the bottom line as much as we can and squeeze down our expenses as much as we can in the second half of the year without sacrificing any quality in order to try and make the goal. But it's too early to say one way or the other, but I said it -- we said it in December. This one was going to be a push.
Great. And then my second one was just there is you guys have a lot of properties where you've been looking to do JVs redevelopment right from One Vanderbilt 245 Park, 2 Herald Square. Maybe could you just talk about what the sort of level of demand interest from local U.S. buyers, international buyers and sort of your conviction in getting a lot of those deals through the finish line? Are you or your building conviction? Just any comments there would be helpful.
Yes. Look, the demand from foreign buyers today is very strong. It hits on what I said earlier. There's -- the assets we own today, investors believe heavily in the fundamentals of those assets. And the good news for us is, in many cases, as you know, we're working through our plan to extend our debt across all the assets and that makes assets more attractive for investors to invest. So there's a lot of belief from the foreign market in the fundamentals of our real estate, and we'll continue to see new joint ventures over the next few years.
This concludes the question-and-answer session. I would now like to turn it back to Marc Holliday for closing remarks.
Okay. Well, for those still on, thank you for participating and listening in. We appreciate it. We like the questions. We love the constructive feedback. We'll take it to heart. Everyone, have a great summer, and we'll speak again in Q3. Thank you.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.