SL GREEN REALTY CORP(SLG)Q2 2026 法說會逐字稿

Ladies and gentlemen, please standby for your conference. Thank you everybody for joining us, and welcome to SL Green Realty Corp. second quarter 2026 Earnings Results Conference Call. We will begin shortly. 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 occur are set forth in the risk factors and MD&A sections of the company's latest Form 10-Ks and other subsequent reports filed by the company with the Securities and Exchange Commission. Also during today's conference call, the company may discuss non-GAAP financial measures as defined by Regulation G under the Securities Act. The GAAP financial measure most directly comparable to each non-GAAP financial measure discussed and the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found on the company's website at www.slgreen.com by selecting the press release regarding the company's second quarter 2026 earnings and in our supplemental information, including in our current report on Form 8-K relating to our second quarter 2026 earnings. Before turning the call over to Marc Holliday, Chairman and Chief Executive Officer of SL Green Realty Corp., I ask that those of you participating in the Q&A portion of the call please limit your questions to two per person. Thank you. I will now turn the call over to Marc Holliday. Please go ahead, Marc.

Thank you very much. Good afternoon, and thank you all for joining us. It may be the dead of summer, but our team is, of course, hard at work. This is truly when we shine the brightest—completely dialed in on our business plan and outworking the market. That hustle really showed up this quarter. Much of what we predicted at our investor conference in December is now playing out in ways that directly drive earnings and improve cash flow. We forecasted that the leasing progress we have made over the past 2.5 extraordinary years would become apparent in our economics, and it certainly did this quarter: up a remarkable 300 basis points as concessions continue to burn off and overall vacancy dwindles. At the same time, we are putting the significant leasing costs associated with the lease-up behind us and leverage and coverage ratios are improving, which we also saw in the second quarter. On the leasing front, the story remains the same. A growing scarcity of premier space in desirable Midtown districts has turned the tables in our favor. We now know that we will exceed our leasing goals again this year. It is just a question of whether it will be by a wide margin or a really wide margin. We do not have that visibility yet, so it is too soon to reforecast. But the trend continues to move in the right direction. We are also seeing very positive momentum at Summit, both here at 1 Vanderbilt and on our projects around the world. Even with reduced overall tourism in the city this year, we enjoyed the highest attendance among all of our competitors and introduced a number of new ticketed experiences that we expect will continue to drive revenue. We are on track to open Paris next summer in 2027 and Tokyo in 2030 as we continue to see enormous growth potential for this business. Most importantly, the backdrop to our performance this quarter and moving forward is the extraordinary and prolonged surge in business activity in New York City. Our economy is in a league of its own compared to any other CBD in the country or even the world, driven by a financial services sector performing as well as I have ever seen. Wall Street profits hit $21 billion in the first quarter alone—the second-highest first quarter that has ever been recorded in approximately 40-plus years of tracking this metric. The big five money center banks just reported second quarter profits that are up a whopping 50% year-over-year, and that is coming off a very strong year. Office-using jobs are up by 12 thousand year-to-date according to the city's OMB, a strong showing for only six months of the year with further growth projected for the balance of the year. We have also seen tech growth driven by AI, and we are obviously getting more than our fair share of those leases, including the lease we announced last night for 100 thousand square feet at 11 Madison. It is not just financial services and tech; it is truly a broad-based growth and demand momentum that we see here in the city. The healthcare sector continues to grow and added 20 thousand jobs year-to-date, many of which do land in office space like MSK at 885 Third and the Hospital for Special Surgery at 15 West 21st. NYU also has a significant footprint at 1 Park. New York City-based companies raised $10.8 billion in venture capital funding in Q2 alone, bringing it to $21.1 billion year-to-date. Both of those metrics are double the same respective amounts in the measurement periods in 2025. The city is, I think, experiencing one of the largest resurgences I have seen. The tax receipts are very good. The city just passed its budget in June; it is another balanced budget with rainy day reserves. I feel we are in very good standing. And this all adds up to about 50 million square feet of office space leased in the past four quarters. That has to be a record. It was a very strong quarter. I am incredibly proud of our team, and I remain very optimistic about the direction of the city and the economic activity that supports our performance. Finally, before we open up for questions, I want to address our big guidance revision for this quarter. The revision is great news and certainly represents the culmination of efforts not just over the past three months, but over the many years leading up to this. We have executed a deliberate strategy to invest what was needed to move our occupancy back toward 95% and we are now reaching a positive inflection point. This should not be a big surprise since we forecasted this positive momentum back in December. Maybe the magnitude is even more than we expected, but it is obviously a pleasant result. Matthew, if you would, please elaborate on the underpinnings of this significant guidance revision.

Thanks, Marc. It is clear we have had a fantastic first six months of 2026, exceeding our expectations on several fronts, including our second quarter reported results. We are excited to be able to translate these successes into a significant upward FFO guidance revision of $1.20 a share, more than 26%, the vast majority of which is recurring. In the Manhattan office portfolio, revenues benefit from strong leasing—particularly early renewals—and the lease of a prebuilt space, both of which have immediate earnings benefit, along with a conscious effort to accelerate GAAP revenue recognition by delivering space to tenants more rapidly. This is coupled with phenomenal expense containment, as always, by our operations team, to drive $0.20 a share of incremental FFO in 2026 from the real estate portfolio, 50% of which we recognized in the second quarter—$0.10 recognized in Q2. Visibility into the execution of the remainder of our 2026 business plan over the next six months also provides us the opportunity to generate additional fee and other income which we expect to contribute an additional $0.20 a share of FFO. If we had simply increased FFO guidance by $0.40 a share for these operational successes, we would have been thrilled. That equates to about a 9% increase at the midpoint. But because we built one of the most successful—and more importantly, profitable—buildings in the country here at 1 Vanderbilt, we were able to add another $0.80 of recurring, not one-time, FFO to our guidance revision. This property has generated so much cash flow that we repatriated all of our invested equity long ago. That cash flow in excess of our share of GAAP net income at the property caused the carrying value of our investment to go negative. GAAP allows you to carry a negative basis but only up to the value of any known or potential future tenant obligation. At the end of the first quarter, our negative basis reached the maximum allowed under GAAP. So starting in the second quarter, 1 Vanderbilt's incremental FFO contribution is calculated based on the sum of two things. First, amortization of the negative carrying value over the term of the related tenant obligations. This amortization component alone is approximately $21 million a year through the early part of 2031. Second, the difference between cash distributions we receive from 1 Vanderbilt and our share of GAAP net income. Going forward, every dollar of cash distribution out of 1 Vanderbilt that is in excess of GAAP net income is incremental FFO to us. The total of these two components contributes an additional $0.80 a share of FFO in 2026, $0.35 of which we recorded in the second quarter, and based on current projections, is expected to contribute as much or more to FFO next year. The way I look at it, this is essentially flowing deferred cash profits from the project through earnings, and further evidence of the incredible success of 1 Vanderbilt. More importantly, it is a testament to the hard work of the best employees in New York real estate that work here. With that, operator, we can open it up for questions.

Certainly. As a reminder, to ask a question, please press 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press 1-1 again. Our first question will be coming from the line of Nicholas Yulico of Scotiabank. Your line is open, Nicholas.

Thanks. Hi, everyone. Maybe we could start on the leasing side. The mark-to-market again this quarter was strong, above guidance. Can you just talk about what specific buildings are driving that activity, submarkets, or is it actually just a broad-based improvement?

Well, let's start with it is a broad-based improvement, but within the portfolio there are some particularly notable transactions and buildings that are really seeing rent appreciation. Anything on Park Avenue, we have raised rents dramatically. On Sixth Avenue, for instance, rents are up dramatically. Across the portfolio, we have been consistently raising asking rents throughout the year. At 245 Park Avenue, where we have done a lot of leasing this year, we have deals pending to replace some tenants and rents are going to be up dramatically. So I think what we saw this quarter, we are going to see it again next quarter.

Okay. Thanks. And then second question is just going back to 1 Vanderbilt. It is 100% leased. As we think about it, I know you have said before there is a significant mark-to-market embedded in that asset. Is there any opportunity to perhaps move an existing tenant to 346 Madison, your new development project, and unlock some of that mark-to-market in 1 Vanderbilt through that process? It is a little early to talk about 346 Madison since it is five years away. But there are opportunities that we are pursuing for tenants that have either outgrown their space and we are recapturing some of those spaces and accommodating tenants that need expansion space. In the building we have several pending transactions, and you will see those leases, I expect, sign this quarter. The rents will be up in a way that I think will really illuminate the fact that the building's in-place rents are well below current market. Okay. Thanks, guys.

Hello. Our next question will be coming from the line of Alexander David Goldfarb of Piper Sandler. Your line is open.

Two questions. Marc or Steven, the pace of this office recovery is incredible. Is it solely just the lack of supply, or what do you think is causing companies to clamor for so much space so quickly and even be willing to commit? We have not seen this in decades. I'm trying to understand if it is lack of supply or something else. And then on office-to-residential conversions, do you see most of that pipeline continuing, or will some planned conversions come back to office and become competition?

Four things. One, the economy in New York City is doing extremely well and profits drive growth; growth drives demand for space. It is broad-based as I mentioned earlier and there is no sign of abatement right now because things are firing on all cylinders across almost all sectors. Second, there are almost no additions in space to speak of in a roughly 400 million square foot market looking out over the next five years. Many projects were delayed, shelved, or changed from 2020 to 2024 and you cannot flip a switch to produce that space; it takes time, effort, money, and foresight. This scarcity is the second major factor. Third, companies that were sitting on the sidelines are now moving forward with ambitious, affirmative plans. The issue we face is not just delivering space, it is giving tenants confidence that once they lease space, we will have more growth options for them either within those buildings or surrounding buildings to satisfy their future needs. That feeds on itself and turns into smart businesses wanting to lock in long-term space plans. Fourth, conversions. I identified this trend back in 2024 as significant for diminishing office supply. Secondary and tertiary office space is being converted into attractive residential rental apartments, which reduces inventory. That has brought up the middle and bottom of the market into rates that make conversion economic. Taken together, these factors explain the rapid recovery; as long as the economy stays robust, I do not see this abating anytime soon. On conversions, for projects that are permitted or about to be permitted, I think you'll see them go through as conversions. Economics have tilted toward residential, and residential still benefits from a financing edge and stronger cap rate environments for selling or joint venturing. The gap is narrowing but still tilts in favor of conversion for many buildings. That could change in a year or two and you may hit an equilibrium.

Our next question will be coming from the line of Steve Sakwa of Evercore ISI. Your line is open.

Yes. You had an ambitious debt refinancing and capital markets transaction program for 2026. Could you give us an update on where you are on refinancing and asset sales for the year? Also, on 1515 Broadway, I know you were disappointed with the casino outcome. Have you given more thought to long-term plans for that building and timing?

Sure. On the capital markets more broadly, the shifting macro landscape and resulting benchmark rate widening tried to interfere with the natural trajectory of the market, but these are moments where New York City shines. New York City is the triple-A investment of our sector. Despite not having the wind at our back, we continue to see unending domestic and international demand for quality Midtown Manhattan product. Manhattan's investment sales market jumped 50% annually in the first half of the year, marking the strongest first half since 2022 when interest rates were just starting to rise. This past quarter, the development sector closed our partnership with Mori Building at 346 Madison. This is our third transaction with Mori Building, a remarkable partner and developer. We are proud to launch this project with them, and their commitment shortly after our acquisition speaks volumes to the quality of what we are building. In the core office sector, we entered into contract to sell 10 East 53rd Street at approximately a 5.7% cap rate. That sale will complete a successful transaction for SL Green, notably about a 3.5x multiple on the acquisition of our partner's interest in 2024. There was also a competitive purchase of Park Avenue Plaza and transactions like 623 Fifth. Regarding portfolio deals, you may have seen press rumors about a potential transaction for the Hudson Square portfolio. Much of this quarter's demand was driven by domestic long-term investors who had been on the sidelines. Between the availability of debt capital, strengthening fundamentals, and a diverse investor base, this is one of the best investment sales backdrops in quite some time. Specifically to our disposition program, we have completed or are in contract on four of the eleven deals in the plan. I expect we will announce two additional deals soon and then launch on the remaining five. Our disposition plan was weighted to the second half and the team is gearing up. The next up in the queue is 245 Park Avenue; that one is in advanced stages and I expect more to announce in the coming months.

Thanks. On 1515 Broadway, we shook off the disappointment last September. It is a shame because I think we would have been close to open. Since then we've had an opportunity to assess many plans and I have come to appreciate that we are in a very good spot with 1515. With Paramount being acquired by Skydance and now having an agreement to merge with Warner Bros. to create one of the largest media companies in the world, 1515 is squarely back in the mix for longer-term use by that combined entity. I do not know that their plans are fully sorted yet given the merger is not closed, but the combined entity could employ more than 4,000 people and many of those jobs could stay in New York City. We would expect to be a net beneficiary. Also, the debt on that property amortizes rapidly, so at the expiration of the Paramount lease we will have very low debt outstanding on that mortgage, which gives us flexibility to consider conversions or entertainment uses to maximize value. Signage opportunities and mixed-use entertainment, live theater, live music, media office—these are very attractive options for Times Square and that asset. Timing wise, I think we will be more active next year once things are clearer with our primary tenant in the building. I am very positive on that property.

Our next question will be coming from the line of Tom Catherwood of BTIG. Your line is open, Tom.

Thank you. Good afternoon. Marc, I want to go back to something you said in your prepared remarks about the step function in economic occupancy in Q2. We think of vacancy and leasing eventually driving economic occupancy, but a good portion of your portfolio are leases signed 2020 to 2023 when tenants focused on shorter-term renewals. Do you have a sense of what the embedded mark-to-market is on that portion of COVID-vintage leases? Maybe it is not reflected in economic occupancy now, but over the next one to three years when those roll, how much is embedded?

I do not have that exact number in front of me. Steven and Matthew do not have a specific consolidated figure on hand either, so I will give you more of a gut feel. Broadly, I would give a range between 10% and 20% based on our increases in asking and taking rents over the last two to two-and-a-half years. Typically the range of increase is minimally 10%, probably as much as 15% or 20%. Buildings like 1 Vanderbilt are more than that, but as a safe estimate I would say around 15% when those COVID-year leases come up for renewal. That is more touch and feel than a precise calculation.

A couple of points: many of the deals we did during COVID were very short-term—three, four, five years—and we are now five to six years past COVID. Net effective rents may have dropped more than face rents during that period. Face rents were probably down about 10% from early 2020, and since that time face rents have dramatically increased across the portfolio. The complexion of our portfolio has changed with bigger rent appreciation in Park and Sixth Avenue buildings. With stabilization of concessions over the past year and a half, net effective rents are also going up. I think we're past the moment where those short deals are kicking the can; we've already addressed many of them as part of our leasing over the last couple of years.

Particularly, if you look at our rollover schedule over the next couple of years, we do not have any large chunky expirations that are not already being attended to. Our largest lease next year is about 150 thousand square feet and that is one lease. We will be mining opportunities that are noncontractual—early renewals, blend-and-extend deals, trying to get rental upticks while deferring some capital costs. We are out there five to six years forward hitting every tenant to do blend-and-extends and early renewals. You will see good traction in the second half of the year. We are focused not just on the next year or two but on the next five or six years, with an intense eye on saving capital dollars and trying to maximize face rents.

Maybe to touch on the debt fund— we've done approximately $600 million of deployment. We have a handful of opportunities in the pipeline that we are working through. These are moments where our team shines, originating capital stacks and working with senior lenders to get the tightest senior financing, then syndicating senior and subordinate bits to reach our yield requirements. We have deals where we originated the entire stack and syndicated it out. For us, success is in financial engineering and relationships to build capital stacks that meet our yield targets.

Our next question will be coming from the line of John Kim of BMO Capital Markets. Your line is open.

Thank you. I wanted to follow up on what drove the $0.20 of operational uplift this year and what surprised you. You did not raise same-store occupancy guidance, so I am assuming a lot of this is timing and economic occupancy moving up. Is it purely better renewal rates in terms of tenant retention and leasing of prebuilt space? Why such a big uplift relative to expectations?

Sure. Renewals and early renewals are instant gratification for GAAP revenue recognition. We are doing more of those. We have also made a conscious effort to accelerate GAAP revenue recognition by turning over space even faster so we can turn that earnings spigot on. From an expense perspective we budget conservatively and are ahead on expenses. The combination of renewals, faster turnover of space, leasing of a prebuilt space, and expense containment drove the $0.20 operational uplift. Half of that was already recognized in Q2 ($0.10) and the remaining $0.10 is for the balance of the year tied to these items.

Our next question will be coming from the line of Blaine Matthew Heck of Wells Fargo. Your line is open.

Thanks. On the leasing pipeline, I think it stood at 900 thousand square feet last quarter. Can you give us an update there? The mix between new and renewal? And how much of the renewal activity is pull-forward renewals? My second question: on 346 Madison, did you consider selling a smaller stake or waiting for some leasing activity to potentially push valuation higher? Why the structure and timing?

There is a roughly 900 thousand square foot pipeline, about 50% new and 50% renewal. Of that 900 thousand, 400 thousand square feet are in active negotiation and are very far advanced. The balance are term sheets we expect to convert to leases. Most of the renewals are near-term renewals, not early renewals for the majority of that square footage.

On 346 Madison, we did this for business reasons. We like fully capitalized development deals and you never want to take a moment in the market for granted. We have special relationships with co-investors and partners like Mori Building. We secured standard JV enhancements for sourcing and executing the deal and Mori is a very strong codeveloper with an excellent track record. We reserved enough equity that we plan in the future to probably syndicate equity further down the line—perhaps when we sign first leases, when the project is completed, or at recapitalization. This provides de-risking through capitalization at day one, the economics we targeted, and a solidified relationship with a trusted partner. We are a volume shop—there are many opportunities in this market and we want to be well-capitalized to pursue them.

Our next question will be coming from the line of Peter Dylan Abramowitz of Deutsche Bank. Your line is open, Peter.

Thank you. First, related to the guidance raise and NOI and fee income coming in faster than expected, how does that impact when you think you will start to see an inflection in FAD? Previously you indicated end of 2027 or early 2028—any updated thoughts? Second, on Summit: you mentioned tourism being weaker this year. Was there any noticeable impact from World Cup travelers in Q2 and into Q3, and how are you thinking about that impact for the full year?

The trajectory is slightly ahead, but the path we outlined before remains similar. With FAD steadily improving from 2026 into 2027, the expectation that you reach breakeven against coverage of your dividend by 2028 is still the path we are on.

Regarding Summit, the FIFA games provided a bump to hospitality and there was a positive effect. Summit typically does very well in June through August. Since May, daily ticket sales have been strong—some days exceeding $400,000. Year-over-year attendance is down a few points overall driven by the more challenging early part of the year, but since May numbers have returned to levels we had previously. We expect a strong second half of the year, and the team is excited about bringing Summit to additional cities like Paris and Tokyo.

Our next question will be coming from the line of Anthony Paolone of JPMorgan. Your line is open, Anthony.

Maybe give us a sense of cap rates and what to expect on your dispositions over the balance of the year. Perhaps bucket them depending on whether it is a 245 Park stake, residential, or other assets. Also, on 750 and 346 Madison—there was an incident with a nearby conversion and press about 346 Madison being delayed by a neighboring property. Any update on progress and whether anything gets interrupted on either deal?

For competitive reasons we won't quote specific cap rates on pending transactions. Recent data points: 10 East 53rd Street, a core office side-street building, transacted at a 5.7% cap rate. 7D, a core residential and retail asset, transacted around a 5.0% cap. You should expect assets to trade in those types of ranges. We will not tie specific figures to individual pending assets at this time.

On 750 and development progress: the incident you referenced at a nearby property was human error and has zero extrapolation to our project. There is no interruption to the project, debt, or equity capital for 750. We expect to close debt and equity in the third quarter and feel great about the project—it's on track and should be the top rental project in its Midtown submarket. On 346 Madison, the litigation you referenced involves access across an adjoining building, which is fairly routine in New York development. We expect that will be sorted out in August ahead of demolition and anticipate no adverse outcome or impact on the timeline.

We have numerous layers of oversight, review, inspection, and approvals before any structural demolition or overbuild is authorized. We have a world-class design team, an independent major New York City construction manager, third-party special inspectors, and our own dedicated staff overseeing day-to-day execution. We have extensive procedures to track structural reinforcement of columns and beams at all levels. Each location is tracked with detailed photographs and logged electronically in our online tracking software by the construction manager and design team. Once reinforcement is confirmed complete by the subcontractor and construction managers, an independent third-party special inspector performs an inspection and confirms the work is complete per plans and specifications before any further work continues. No structural additions, demolition, or overbuild activities commence until all required structural reinforcement is completed, inspections are approved, tracking documentation is in place and verified, and structural stability requirements are confirmed in a pre-transfer and pre-overbuild conference that includes all members of the design and development teams. This process is standard across our projects that involve structural work.

Thank you. Our controls and oversight are rigorous and standard across the portfolio for any project involving structural work.

Our next question will be coming from the line of Seth Berge of Citi. Your line is open, Seth.

Hi. You had $14 million of buyback activity in the quarter and dispositions are back-half weighted. Thinking about use of proceeds, how do additional buybacks compare to your goals of debt paydown on a relative basis? Also, given the $0.80 of FFO related to basis accounting and some fair value adjustments on derivatives, have you considered disclosing a core or real estate FFO metric to give investors a better sense of underlying earnings performance?

Our goal is to make the most with what we have and that takes different forms: development, opportunistic investment, buybacks, debt paydown. When we felt we had incremental liquidity—deals done, deals pending, deals in contract—we used some of that liquidity for buybacks. We acted when we felt price was not reflective of the underlying value of the platform. We believe our assets are becoming more valuable with each leasing activity and improvement. We consider the buyback an investment in ourselves and believe it is the best way to deploy capital at that moment. We may or may not do more buybacks depending on future circumstances; we have many levers to optimize returns for shareholders. On disclosing an alternate FFO metric: we do not believe in creating custom FFO measures that deviate from NAREIT FFO. We report as NAREIT defines and encourage comparability across companies.

Our next question will be coming from the line of Vikram Malhotra of Mizuho. Your line is open, Vikram.

Afternoon. Congrats on a strong print. Two clarifications: you referenced FAD and breakeven—what do you mean by breakeven and Matthew, could you give a sense of how CapEx should trend in the back half relative to the first half for 2026? Also, given interest in capital markets, how should we think about ranges of cap rates for newer-built core assets versus older assets that need CapEx or lease-up opportunities?

CapEx tends to be a little back-ended because budgets are approved and then spending kicks in, so historically capital spend is higher in the back half than the first half. Regarding breakeven on FAD, the commentary remains that with steady improvement through 2026 into 2027, 2028 is the year you reach breakeven versus coverage of the dividend.

On cap rates: cap rates are driven by embedded expected growth in an asset and a view on rates. You can get a low cap rate on an older building if embedded growth is expected. Right now, with nominal rents and net effective rents increasing, cap rates may compress even in a higher interest rate environment because investors are paying for growth. For our portfolio I would say most assets sit between 5% and 6%, with certain premier assets sub-5% and very few north of 6% in our view. If occupancy and net effective rents continue to improve and we get interest rate relief, cap rates could compress further.

One last question, Matthew: you have a fair amount of debt coming due next year and a bunch of swaps expiring. Can you give any preview on the plan for 2027 refinancings and hedges?

We will plan to provide an update later in the year—expect more detail in December when we provide further guidance and a preview of 2027 plans.

Our next question will be coming from the line of Ronald Kamdem of Morgan Stanley. Your line is open, Ronald.

Two quick ones. First, you talked about the lease occupancy target of 95% and potentially exceeding that. Any color on where commenced occupancy ends the year? At Investor Day you highlighted same-store NOI for 2027 potentially over 10%—is that still realistic? Second, updates on the alternative strategy portfolio: 2 Herald Square, 650 Fifth, 440 Worldwide Plaza—any traction or movements?

We are trending ahead of our same-store NOI projections for 2026, which raises the benchmark for 2027, but our trajectory into 2027 still supports being in excess of 10% same-store cash NOI growth in 2027. On occupancy, economic occupancy is the more relevant metric for earnings. We expect to close at least half the gap to leased occupancy by the end of 2026 compared to the end of 2025 and we are on that trajectory.

On the alternative strategy portfolio—two Herald Square, 650 Fifth, Worldwide Plaza—these are good assets that need recapitalization. Worldwide Plaza saw the move-out of a main tenant; 2 Herald had Amazon/WeWork lease expirations; 650 Fifth needs to be recapped. These are capitalization challenges rather than fundamental real estate problems. We have proven our ability to work with stakeholders to get to solutions and we are committed to doing so. Each needs a restructuring and we are working through those options. They contribute little to current earnings; we have no recourse that materially impacts the company's core balance sheet. We will continue to work on optimal solutions for each asset.

Our next question will be coming from the line of Brendan Lynch of Barclays. Please limit yourself to two questions.

On the concession environment: one of your peers has argued it's hard to get free rent below one month per year of lease term, which you guys were able to do this quarter. The argument is tenants need time to build out space and resist double cash rent during build-out. So how low do you anticipate you can get free rent going forward?

You need to differentiate between new tenants and renewal leases. Concessions tighten on renewals. For a typical five-year renewal, free rent might be two to three months in a strong market; today the average on a five-year renewal is around three months. For new transactions—if it's a 10-year lease—you could see free rent in the range of approximately 10 months for a 10-year transaction. Renewals compress concessions much more quickly than new tenant deals.

Our next question will be coming from the line of Caitlin Burrows of Goldman Sachs. Your line is open, Caitlin.

Quick one on the 1 Vanderbilt $0.80 of additional FFO. It seems like you would have had some visibility into this earlier—why wait until now to talk about the boost to FFO? And what will cause fluctuations quarter-to-quarter going forward? For instance, Q2 contribution was $0.35—why wouldn't total Q3-Q4 contributions be over $1? Also, on Summit and Ascent: were Q2 2026 results in line with expectations and any changes to full-year expectations?

If we had visibility and confirmation of the accounting treatment earlier, we would have included it. We did not have full vetting through auditors and all governance until after Q1, so it became effective in Q2. Going forward, the contribution is composed of a fixed amortization component of the negative carrying value and a variable component tied to cash distributions. The variable piece depends on the cash distributions that exceed our GAAP equity pickup; distributions can fluctuate quarter-to-quarter based on cash needs or decisions to hold or distribute cash, which will affect FFO recognition.

On Summit and Ascent: trends turned late May into June and the latter part of Q2 showed improved performance. Ascent was brought back online for maintenance and is now running; it will contribute to Q3. Overall, since May numbers have been right back to prior levels, and we've managed variable operating expenses well. We expect a very good second half of the year, and we are optimistic for Summit's future.

Our next question will be coming from the line of Michael Lewis of Truist Securities. Your line is open, Michael.

AI leasing is obviously very strong. Some AI tenants are large, some are smaller. Similar to the early internet era, some firms will succeed and some will fail. From a landlord's perspective, what are you seeing in terms of credit quality of AI tenants? Are there AI tenants you'd avoid, or are there ones where growth prospects make you more willing to take a chance? Also, when looking at the 18% cash rent spread you referenced, what would net effective rent growth look like? You mentioned net effective rents are spiking—how should we observe that in the numbers?

Broadly, technology is back in a big way leasing space in Manhattan. There are 9.5 million square feet of active tech searches right now; 1.5 million of that is AI tenants. Important to differentiate: not all tech is AI. Compared to the dot-com era, today's AI tenants tend to be much better capitalized and many have significant revenue. During the dot-com era we were careful to limit exposure and the tenants often had little or no revenue. Today, most meaningful tenants have real revenue, so credit quality is generally stronger. We have consciously limited our exposure to the AI industry to roughly 1% to 2% of the portfolio. Most AI tenant activity is in Midtown South. We focus on credit and capitalization—there will be winners and losers, but the meaningful tenants we are dealing with are well capitalized.

On net effective rents versus face rents: if concessions have been stabilizing over the last year and a half and face rents are up materially, net effective rents will also increase materially. Net effective rent calculations can be complicated—how you amortize tenant improvements, salvage values, and the quality of tenant installations all affect the calculation. We do not publish a single 'net effective' figure because assumptions vary by transaction. Our focus is on driving higher renewal probabilities, keeping concessions low for renewals, and investing in buildings to drive face rents. When you combine higher face rents, lower concessions, and reduced TIs on renewals, net effective rents increase meaningfully. We are managing to drive FFO and AFFO growth and you will see that reflected in our reported numbers as we progress through 2026 and into 2027.

Thank you for joining. Have a great rest of your summers. This concludes today's conference call. Thank you for participating. You may now disconnect.