Q2 2023 SL Green Realty Corp Earnings Call
Participants
Andrew W. Mathias; President & Director; SL Green Realty Corp.
Harrison Sitomer; CIO; SL Green Realty Corp.
Marc Holliday; Chairman & CEO; SL Green Realty Corp.
Matthew J. DiLiberto; CFO; SL Green Realty Corp.
Steven M. Durels; Executive VP & Director of Leasing & Real Property; SL Green Realty Corp.
Unidentified Company Representative
Alexander David Goldfarb; MD & Senior Research Analyst; Piper Sandler & Co., Research Division
Anthony Franklin Powell; Research Analyst; Barclays Bank PLC, Research Division
Anthony Paolone; Senior Analyst; JPMorgan Chase & Co, Research Division
Blaine Matthew Heck; Senior Equity Analyst; Wells Fargo Securities, LLC, Research Division
Caitlin Burrows; Research Analyst; Goldman Sachs Group, Inc., Research Division
John P. Kim; MD & Senior U.S. Real Estate Analyst; BMO Capital Markets Equity Research
Michael Anderson Griffin; Senior Associate; Citigroup Inc. Exchange Research
Michael Robert Lewis; Director & Co-Lead REIT Analyst; Truist Securities, Inc., Research Division
Nicholas Philip Yulico; Analyst; Scotiabank Global Banking and Markets, Research Division
Ronald Kamdem; Equity Analyst; Morgan Stanley, Research Division
Stephen Thomas Sakwa; Senior MD & Senior Equity Research Analyst; Evercore ISI Institutional Equities, Research Division
William Thomas Catherwood; MD & REIT Analyst; BTIG, LLC, Research Division
Presentation
Operator
Thank you, everybody, for joining us, and welcome to the SL Green Realty Corp. Second Quarter 2023 Earnings Results Conference Call. This conference call is being recorded. At this time, the company would like to remind listeners that during the call, management may make forward-looking statements. You should not rely on forward-looking statements as predictions of future events as actual results and events may differ from any forward-looking statements that management may make today.
All forward-looking statements made by management on this call are based on their assumptions and beliefs as of today. Additional information regarding the risks, uncertainties and other factors that could cause such differences to appear are set forth in the Risk Factors and MD&A sections of the company's latest Form 10-K and other subsequent reports filed by the company with the Securities and Exchange Commission.
Also, during today's conference call, the company may discuss non-GAAP financial measures as defined by Regulation G under the Securities Act. The GAAP financial measure most directly comparable to each non-GAAP financial measure discussed and the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found on both the company's website at www.slgreen.com by selecting the press release regarding the company's second quarter 2023 earnings and in our supplemental information included in our current report on Form 8-K relating to our second quarter 2023 earnings. (Operator Instructions) I would now like to turn the call over to Marc Holliday. Please go ahead, Marc.
Marc Holliday
Thank you, and good afternoon, everyone. Welcome to SL Green's earnings call. I want to thank all of you for joining us today as we review the second quarter's results and discuss our progress on our 2023 business plan.
I want to begin by commending the entire SL Green team on a very strong half of year, this first half, particularly as we were confronted by the dual challenges of a partially remote workforce and increasing interest rates, but headwinds notwithstanding, our team added to the year's accomplishments in meaningful ways during the second quarter. No one in the business works harder for shareholders than the men and women of SL Green, who lead by example and show what can be achieved by a 300-person corporate workforce that is present, productive and positive every single day of the week.
By the numbers, it was a solid quarter as our FFO was above expectations. We leased another 410,000 square feet of office space. Our same-store NOI increased by 3.6% and our same-store office occupancy at quarter's end was slightly ahead of our original projections back in December. These performance stats are in stark contrast with the negative drumbeat of media coverage proclaiming the demise of office space. We continue to see demand building as businesses who hit the pause button during the prior 3 years, are more and more frequently acting on plans for future growth particularly in the finance sector, which accounted for about 38% of market leasing during the second quarter as well as business services, healthcare and education sectors, all of which continue to be active and all of which helped to mitigate the pause in the tech sector.
While overall leasing in the market in the first half of the year was below historical average, SL Green has garnered more than its fair share and has now entered into year-to-date leases totaling 950,000 square feet of space leased. And we are trading paper with a lot more tenants, evidenced by our 1.1 million square foot leasing pipeline more than 2/3 of which represents new leasing activity. Midtown continues to outperform with the lowest availability rate and the highest leasing volume among all Manhattan submarkets. This affirms our core property strategy and should enable us to gain occupancy during the second half of the year from what we believe to be our current low point. However, the financial stats only tell part of the story as significant progress was also made on the property front.
Of course, the highlight for the quarter was the completion of our joint venture partnership with Mori Trust. The transaction culminates years of relationship building, affirms the global law of investing in trophy assets in prime corridors and now fully resets ownership and capital stack in what is a case study of opportunistic investment, enforcement and recapitalization of an important asset on Park Avenue. We continue to evaluate and refine different redevelopment scenarios and hope to commence physical work towards the end of this year.
I want to acknowledge the extraordinary efforts of our Chief Investment Officer, Harrison Sitomer, who was backed up by Young Hahn, our SVP of Investments. They literally work day and night for months on end to ensure the successful completion of an important component of our business plan. This is our first partnership with Mori Trust, and they have already proven themselves to be excellent parts.
We are making great progress on other fronts as well. At One Madison, I now believe we can obtain a TCO for the project in September of this year, a full 3 months ahead of schedule and opened our doors to tenants in the second quarter of 2024. The ability for us once again to deliver ahead of schedule and under budget is a testament to the efforts of Robert Schiffer, Robert DeWitt, our amazing Head of Construction and John Krush, our project executive, along with our partners at Hines.
Additionally, it accelerates the receipt of $577 million from our partners on the project, which is triggered upon the TCO of the project later this next quarter. I'm also pleased to report that during the second quarter, we topped out 760 Madison and began marketing that project. The project is absolutely spectacular, excited to show it to shareholders who have not yet seen it, please walk by, check it out. It's already impacted the Skyline in the historical District of Upper East Side Madison Avenue in a very positive way. It's been extremely well received by the market. And we're proud to have initiated this project and fostered along with our partners at Giorgio Armani.
We already have several units under contract with significant interest on the balance of the units at prices which will be market-leading for Upper Eastside condos, a testament to the power of the SL Green and Giorgio Armani brands and vision. We expect to turn over the retail to Armani by end of September and rent would start right away. First, closings on residential units will commence in June of next year, with all net proceeds of sale available for use by us as there is no indebtedness against the project.
We'll have more commentary on the sales effort and pricing metrics on our earnings -- on our next earnings call which I guess is in October. Finally, we received our TCO for 15 Beekman this month and plan to turn over the project fully to Pace University in August. The props here go to the SL Green team of Peter Flynt, John Hefferon and Jason Pastuzyn. And if that weren't enough, a reminder that in April, just after our last earnings call, we closed the refinancing of 919 Third Avenue, proof that the credit markets are still available for the highest quality office assets and reputable sponsors.
So the first half of the year is now in the books, but no rest for the team. We're going to continue to forge ahead through the rest of the summer to set the table for a successful second half of the year. Management is completely aligned with our shareholders, and we will work hard to create value, generate earnings and protect the dividend.
Thank you. Operator, we can take some questions.
Question and Answer Session
Operator
(Operator Instructions) And our first question will come from Michael Lewis of Truist Securities.
Michael Robert Lewis
My first question is for Matt. I want to ask about your debt coverage ratios, particularly the fixed charge coverage ratio relative to your covenants because it keeps coming up in conversations. Your fixed charge coverage fell to 1.7x this quarter, the covenant is 1.4x. Can you just maybe discuss the mechanics and how close do you expect that ratio to get to the covenant over the next 2 quarters?
Matthew J. DiLiberto
Yes, sure. I've read some of the commentary about it. I'm somewhat surprised that it gets that much attention. It's a pretty simple calc, it's consolidated only calc is just the covenant. And it's been impacted, one, by rates. Rates are up, but also been impacted by 245 Park being a wholly owned consolidated asset for about 3 quarters now. Now that, that is an JV, it rolls out of that calculation, and that in and of itself improves the calc. And we obviously watch all of our covenants and our metrics very, very closely and are not as fussed about that one as people seem to be out in the market.
Michael Robert Lewis
Great. So notwithstanding a big move in rates, I guess, I mean, should we expect the coverage ratio to improve from here? Is it troughing or do you think it gets a little tighter before it goes back up?
Matthew J. DiLiberto
It will get tighter before it gets better because the effect of 245 has to work its way through to a trailing 12 calc. So it goes lower before it gets better. But just by having 245 in the -- as a JV that alone improves it because that was a sub-1 coverage asset.
Michael Robert Lewis
Okay. Got it. My second question about portfolio occupancy. So you could correct me if I'm wrong. I think you said at your Investor Day in December, you troughed around 90% in 2Q and rebound to about 92% in the second half of the year. I think what we're talking about is your lease percentage, which was 89.8%, so just about exactly what you predicted. So my question is, do you still expect to reach that 92% this year? Or has that expectation changed? And maybe you could tie in kind of how -- I know the leasing pipeline had been building in the early part of the year, what are you seeing on kind of conversion in turning that into leases?
Marc Holliday
Yes. I just want to make sure I understand the question. I mean I think we were 89.8% something for the quarter. We expect that to be a low point. I think I said in my commentary. And we expect to gain occupancy from here, regardless of which direction the market goes, just based on our pipeline and visibility. I mean our -- all the -- we set out 21 goals a year they're all stretch goals. We never make all, but we generally make most or certainly more than half. And we're going to do everything possible, like forget the exact metric on the occupancy stat for the year was...
Matthew J. DiLiberto
92.4%.
Marc Holliday
92.4%. So we're going to try and end the year certainly there as closely as possible. We've got a big pipeline, if everything falls into place, then I think we have a chance of doing it. And if it doesn't, we'll be damn close. So I mean that's why we call it stretch goals, we don't make them easy. To be anywhere above 90% in a market that's 18% vacant, I think, is enormous testament to Steve Durels and his team.
Operator
And our next question will come from Steve Sakwa of Evercore ISI.
Stephen Thomas Sakwa
Marc, maybe you could just touch on the dispositions and what your expectations are for either further sales at One Vanderbilt? What your plans are potentially for additional sales of 245 and maybe other assets that you've got on the market today?
Marc Holliday
Well, I think our big focus now is on One Vanderbilt. And the reception there is very good, as you would expect. I consider One Vanderbilt just objectively, although it's hard not to be biased, One of the best office buildings of its ilk in the city, and it's got an amazing blue-chip rent roll. It's got great embedded financing, low rate financing in place. it's just a wonderful asset. And as you would expect, the reception in the investment community has been a high level of interest. And I'd say that, that's going to get a lot of our attention now through the end of the year. So that's that.
On the One Madison front -- I'm sorry, on the 245 Park front, which I think is the other asset you mentioned, I don't know. I think there, the redevelopment program that we are designing and working through is so good. And I think now with the leading being probably ahead of where we expect to be at this point, both in terms of Steve, the leases we signed with -- give me the leases -- EQT...
Steven M. Durels
245. And then we expanded by 10,000 square feet...
Marc Holliday
(inaudible) Okay. And we have others pending, we're trading papers.
Steven M. Durels
6 Proposals out.
Marc Holliday
6 proposals out. So not unlike One Vanderbilt, where we initially went out to sell, I think it was down by up to 40%. We round up selling 30%, now we're going out for additional 10%. We may do the other 25% towards the end of this year, we may hold back and get some more leasing done. We'll see.
Stephen Thomas Sakwa
Okay. And I'm just wondering if you can provide any color on the 625 Madison situation. I know there's been a lot of back and forth with different defaults and the ground leases and the land position. Is there anything you can sort of provide us on that front today?
Marc Holliday
Well, it's always -- until there's some ongoing litigation surrounding this asset. You know that there was a rent reset, I think we talked about on the last call or no, was that...
Matthew J. DiLiberto
It happened after the last call, but we disclosed in our Q (inaudible).
Marc Holliday
In the Q. okay. So there was a rent reset. It was somewhat higher than we had anticipated, although far far below, I think, what the fee owner had been putting into the market at that point, which was actually very deleterious to our position because there were discussions of rent levels of double or more, which were really never to be the case. And we took a write-down on the leasehold portion of the asset in this quarter. And on the other side, you know from previous commentary that we have a mezzanine position on the fee, which has come due, and we'll see how things shake out there. There is a foreclosure date scheduled for August 8 on that asset. So we'll know quite soon how things will shake out there.
Operator
And our next question will be coming from Alexander Goldfarb of Piper Sandler.
Alexander David Goldfarb
Great. Marc, in your end of your commentary -- at the start, you said that you guys are working hard and to protect the dividend is -- so I just want to explore that a bit more. I know, Matt, you always say, hey, dividend gets reassessed at the end of the year, and you'll probably tell me the same thing right now. But you guys seem to be on the plan for this year, you've done the 245 sale, seems like 245 leasing is going well. One Vandy is next step for disposition. It doesn't seem like anything is out of whack. Should we take your comment, Marc, about the dividend that we should think about the current level being maintained into next year? Or was the comment more just a holistic point that, hey, you guys are in charge of shareholders' capital. You husband it to the best that you can. You do everything to preserve the dividend. But obviously, things could change. I'm just trying to understand which way to read the comment.
Marc Holliday
Okay. Well, that's -- there's a lot of ways I guess, you can read it. The way I meant it to be because it's the way we approach it and believe in the dividend is, I guess, akin to what you just said, Alex, which is that we think when people invest in SL Green buyer stock, it's a blended play. People want current return, and they want evidence of our ability to be able to generate cash flow either through ordinary operations or gain on assets and be able to reward shareholders throughout the year with the dividend in addition to doing our redevelopments and developments and creating growth and driving share value. And in most years, that's reflected in some years, like we have today, where the market sentiment is very negative, we just work our way through that. But I think what I wanted to state is that we believe that a dividend is an important component of the overall investment thesis for anybody to invest in the stock.
We all own the stock at the managerial level. For most of us, it is the largest, if not almost the exclusive source of our net worth is the stock that we own. And we want to create value, and we want to create cash flow and see distributions in the form of dividends. So we are very comfortable with where the dividend is today, given the earnings that we're generating and the gains that we're generating on some of these very important sales, we'll do next year's business plan next year. We'll have a sit down in November, December, and we'll roll that entire plan out with our objectives and our earnings levels, et cetera. But suffice it to say, which is what I said earlier is, we take all of those points very seriously. And our goal is as best as possible to maintain the levels as much as we can.
Alexander David Goldfarb
Okay. The next question is on compensation. Every year, for whatever reason, it seems to always be a big topic ahead of the shareholder meeting. This year, you guys put out some really interesting data just showing the fact that like Marc your comp was 40% lower than the stated value, the rest of the team, 30% lower. But here's the rub is that shareholders are sort of disserviced because you guys expense 100%, you realize 30% or 40% less than your expensing, people obviously don't get paid at sort of disrewarding. So is there something better that like the consultants or people can put in place that better ties you guys to performance, but something that actually is more directly correlates not only to you guys being paid for results delivered, but also to the P&L because right now, FFO is being penalized because the -- it's not paying. It just seems like the current system doesn't seem to be an ideal one. So just -- I don't know if you guys have thoughts around that, but I thought I'd ask.
Marc Holliday
Got it. Let me -- I'm going to let Matt address the accounting issues with respect to that. I'll just give you the -- the philosophy is at the top levels of the company, our EVPs and even down into the SVP ranks for sure. We're big believers in creating the alignment and having a large portion of total compensation in the form of stock. In some cases, it's a very, very high percentage. I don't have them on my fingertips, but in some of our cases, it might be 75%, 80%, 85% of our total compensation and in other cases, maybe half, but in all cases, material.
And I think that makes sense. I mean if I were -- I am a shareholder and as a shareholder and as -- in all my different hats, I wear, I think that it is the best at creating the alignment I referred to earlier. And I don't see us moving away from what I would call proportionately more stock compensation as you move up the ranks as a component of total compensation. Now how those plans are structured and the charges that are taken upfront versus charges that could be taken later, ,fixed charges, variable charges, I'd leave to Matt.
Matthew J. DiLiberto
Yes, you make a good point, Alex. I mean the challenge with the accounting for these plans is once the charges or the cost of the plans from an accounting perspective are established, day 1, they do not change. The plans are valued. We were talking stock plans or outperformance plans, which have multiyear measurement periods, investing periods, the accounting rules say you value that plan day 1. And if it's worth full value to the recipient at the end, the accounting charge is what it is. If it's worth 0 or close to 0 to the recipients, the charge is still the same.
And of late, these plans have not been paying anywhere near what they're expected to, so they're not a retention tool, but the charge is still flowing through G&A. And more than 50% of our G&A is noncash, primarily related to stock-based compensation because we do believe it's an important part of the program. The challenge is finding the right form of stock-based compensation so that the expense to the company is mitigated and actually more closely mirrors the benefit to the recipient because these plans, I'll say, again, largely hit expense in a disproportionate way in this environment than they benefit the recipient.
Operator
And our next question will come from Tom Catherwood of BTIG.
William Thomas Catherwood
Excellent. Maybe one for Steve to start out. Nice uptick in leasing -- percent leased to a number of your buildings. One that jumped out to us was Graybar. And this probably reflects the pickup in small tenant demand that you've referenced over the last few quarters. But on the other side of that, what's the market like for large block demand right now? And are there specific submarkets or buildings in your portfolio that are garnering more of that large block demand?
Steven M. Durels
Yes, it's a great question because what we saw in the first half of the year, and particularly, if you read a lot of the market reports and some of the brokerage houses that are out there, is that leasing overall velocity in the marketplace has been very modest year-to-date despite the success that we've had within our portfolio. And a lot of the leasing -- leases that have been signed this year have really been on the smaller side of the market. There was -- we started off the year with very few larger-sized requirements active in the market. But having said that, in the past 30, 45 days we've seen a lot of increase both in tenant tours and in proposals that we've received for larger-sized tenants. So that's the good news.
Just to put a little meat on the bone. We've got 16 active proposals that we're trading paper with right now that range between 45,000 and 300,000 square feet. 8 of those proposals came across our door only within the past 2 weeks. And only 3 of those 16 proposals of good-sized tenant requirements, are in our 1.1 million square foot pipeline. So it shows you there's a growing wave of larger tenants that have reentered the market. And hopefully, that's going to pay off for better leasing success for the overall marketplace and certainly within our portfolio as we go into the second half of the year.
William Thomas Catherwood
Got it. Appreciate that, Steve. Then kind of second one for me, maybe Marc, over on One Madison, you mentioned the early completion and how that gets you access to your JV partners' contribution sooner rather than later. Kind of 2-parter there. First, when is the new expected TCO date? And second, when -- in the press release, you mentioned restructuring the loan so that you could invest more in amenities and invest some of the savings, what's envisioned amenity wise and kind of what more does that building need from an investment standpoint?
Marc Holliday
Okay. So first question, I think the original completion date was December of 2023. That was for TCO. We moved that forward in a later -- when we kicked off and got our GMP under our belt a few years ago to November of 2023 and then we internally kind of felt like we can maybe hit October. And now the team is pushing hard for September, middle-ish to end of September. So when do we expect it? We expect it as soon as possible. I don't know we're aiming for middle to end of September. I hope we get there. We should get there, but you got weather and all sorts of other issues. But we should get there.
But regardless, the bigger point is we ran a great project, we're at the final whatever, 2, 3, 4-yard line, almost done, property looks great, we're way, way ahead of schedule, thanks to the good work of the people I mentioned and hundreds or thousands of others who work very hard to get the building to this point. And the primary mission is get the job done right, but the secondary mission is get it done expediently so we can button it up and get tenants moved in and open the building and have it be a great addition to the neighborhood.
In terms of the amenities, I think we had something on the order of $60 million of construction cost savings. That was the ultimate cost of the project that we are now projecting relative to the original GMP, a lot of safe contingency and other components which is great. Some of that, obviously, is being retained. Some will go to defray higher interest expense, but we took a very significant amount of that and we are constructing an amazing rooftop, indoor-outdoor rooftop venue that I think will rival some of the great rooftops in and around the city that will be there as both a tenant amenity and also as some very attractive and exclusive event space that can be activated evenings and weekends as well as, I mentioned earlier, being, I think, a world-class amenity for the building.
The amount of investment we're making in One Madison amenities overall, that which was planned and that which we added exceeds that of what we did at One Vanderbilt. And I think One Vanderbilt is recognized as having an amazing amenity program. So this -- at its completion with the market and the Daniel Boulud stake, place and an exclusive tenant commons and the Chelsea peers, 4-level fitness center and upstairs this kind of pièce de résistance, this Rockwell, David Rockwell Group-designed rooftop amenity in the aggregate is going to make One Madison just an amazing destination and experience.
William Thomas Catherwood
Got it. Can wait to see it.
Marc Holliday
Next summer.
Operator
And our next question will come from John Kim of BMO Capital Markets.
John P. Kim
I suppose you had your mic drop moment with the 245 Park sale. But now that that's done, and you're expecting proceeds on One Madison, potentially JV sales at One Vanderbilt. In your view, is that enough to avoid a credit rating downgrade from Moody's?
Matthew J. DiLiberto
It's a question I can't answer definitively because they have moved somewhat as a result of the market, not just as a result of us. I'll say this as it relates to the ratings. I mean, we're focused on a business plan that puts us in a financial position that we feel is prudent and we want to be in. It is not a stated objective to satisfy Moody's or any one of the other rating agencies. Our ratings are important, but the fixed income market has not been a reliable source of funding for us. And the ratings will come back as a byproduct of an execution of the business plan, but not the goal of the business plan. If Moody's makes a move, that's fine. If they don't, that's fine as well. We think we're actually on a prudent business plan for our business and for the shareholder base.
Marc Holliday
I would add to the mic drop moments, not just capital transaction, but leasing of space. I mean, we're at these levels with increased interest costs and a vacancy rate as I said before, was our low point. We now think we're going to be able to turn the tide and start building occupancy again. And as we do, that has as much more effect, if you will, on an improving ratio as any of the other things you mentioned. So I would say, stay tuned. We've got a big pipeline, and we think the market is starting to come around and we're believers in this market and that will be as big a help as anything.
John P. Kim
Another asset that you've had some leasing success with, I think, with GIC was at 280 Park, but there are still some tenant departures scheduled and the debt maturity next year. How confident are you that you'll be able to refinance that asset on economically viable term fee?
Marc Holliday
Andrew, do you want to address -- I know you've been involved with 280 in the refinancing.
Andrew W. Mathias
Fortunately, 280 sits in the hottest submarket in Manhattan Park Avenue corridor. We have strong interest in the space that's coming available, and we are constantly in discussions with the existing lenders on the property, the -- obviously, other lenders around the world, like we accessed for 919 Third Avenue. And we're -- we think we have a great business plan with Vornado on that asset. Steve and [Glenn Weiser] working on it day in and day out. And I think there is some very positive developments that are possible given the buildings location and it's -- the renovation we did there. And it's getting a lot of attention because of the profile of the asset. And I think we're confident that there's a good future for us at that asset.
Operator
And our next question will come from Blaine Heck of Wells Fargo.
Blaine Matthew Heck
Can you talk in general about asset pricing in the market? What sort of cap rates and IRRs are potential investors targeting? And how large is the bifurcation between well-positioned assets like 245 Park versus more commodity type buildings?
Marc Holliday
Andrew?
Andrew W. Mathias
Well, I think we've probably never seen a gap as high as currently in terms of well-located and amenitized buildings versus more, call it, Class B and C buildings which, fortunately, we really have rotated the SL Green portfolio out of. So we still have submarkets that are struggling in the financial district for sure. Third Avenue, just a lot of inventory, but investors are very attuned to that.
And I think you saw that with the 245 Park transaction. You'll see it in further transactions where they're willing to pay up for the stability of improved monetized assets and if you have an off-the-beaten path asset or an asset that not been invested in and amenitized, it's honestly -- there's not a lot of comps out there. Most of the comps are lenders -- lender and loan related rather than owners selling. So it's a huge gap in answer to your question, but we do feel investor demand for the former, for well-located, amenitized and improved continues to be there in New York City.
Blaine Matthew Heck
Okay. Great. And then for my second question, kind of related to that, it seems like we're still seeing the flight to quality trend play out with most net absorption and leasing activity taking place at higher rent buildings. But just curious if you're seeing any better activity at the lower rent buildings within your portfolio? Or is it still relatively soft in that segment?
Steven M. Durels
No. It's -- we've -- I think as we've commented in maybe the last call and certainly over the last several months, we've seen an increase in activity in the more price-sensitive buildings, Graybar being a good barometer of that part of the marketplace where our vacancy in that building right now is around 12%, and that's from a high of we were up around 15%, 16%. So we've had good velocity in that building. We're starting to see more deal flow in the other -- in similar type buildings. A very good example of that is 1185 Sixth, which was very slow to lease -- getting leasing traction last year as a lot of the market attention was on the best-in-class buildings.
And right now, 1185 has got plus 6, 7 active proposals that are in negotiation for the building. And that's a price-sensitive, rent-sensitive type of building, but it also sits in one of the best submarkets in Manhattan right now, Park Avenue and the (inaudible) being the 2 best. Another stat worth knowing is that 62% of the leasing year-to-date in Manhattan has been done in what is termed as commodity type buildings. So clearly, you've seen kind of a reawakening of that part of the market has got a long way to go before where it's in a healthy place, but the good news is it's starting to happen.
Operator
And our next question will come from Anthony Paolone of JPMorgan.
Anthony Paolone
First question is just, I think your guidance or at the Investor Day, I think your disposition guidance was $2 billion. And so I just wanted to understand like make sure 245, are you treating that as $1 billion or the 174. And then also things like the 570 and change you'll get from your M&A partners and then any cash from the DPE book maybe over the rest of the year as some of those mature, like does that all roll into the $2 billion? I just want to try to clarify like what's coming in the second half?
Matthew J. DiLiberto
The $2 billion -- just use 245 as an example, it would be $1 billion. So 50% of $2 billion. That's what would feed the goal. The 577 in proceeds on One Madison from our partners is not part of that. DPE is not part of that. It is pro rata share of sold assets that feed the calc. And getting to that goal, will be a function of the assets we have in the market currently as well as where we end up with One Vanderbilt, which we said is an opportunistic sale that we've had out there for the last couple of years. We're marketing an interest and would hope to get one done, but we want to be opportunistic about it. And with regard to another interest sale in 245 Park, there's likely upside to where we sold the first interest. So we may play that out a bit and watch the redevelopment and lease-up -- leasing has been strong, as you mentioned that earlier, watch the redevelopment and lease-up take place before we bring another interest to market.
Marc Holliday
Well, so with that being said, Matt, the goal was $2 billion, and that's just what I'm hearing from Anthony. If we were to defer the second -- the 25%.
Matthew J. DiLiberto
We would not be able...
Marc Holliday
That would be $500 million? So there is -- I mean, -- that doesn't mean we won't identify other assets to solve for that. But that one -- like I said, we're doing it out of a position of strength. I feel very good about 245 our capitation there, our partner. And while it was -- we got the big part done this year, there's a smaller part to go this isn't about -- this is about making money for shareholders. So if we -- we're going to do a lot better next year after we get a lot more leasing traction then we may defer. But that doesn't necessarily mean we couldn't get there if we decided to go forward with it now. It just means we have to do what we think is best to optimize returns.
Anthony Paolone
Okay. Understand. Then even with that being said, that sounds like between the OMA partner capital and maybe some amount of sales, you'll have cash coming in over the second half of the year that's pretty meaningful. And so my second question just maybe remind us of the priorities of where you see that cash going, whether it's line of credit, buyback, other asset, acquisitions like whatever.
Matthew J. DiLiberto
Priority is debt repayment. We've earmarked the entire 577 coming in from our partners towards debt repayment. All of the proceeds from 245 went to debt repayment. We have still paused share buybacks since the middle of last year. That was largely a function of the rate environment and where leverage levels were, where we have a goal to be more on offense as we get into later '23, particularly '24. That was the purpose of our business plan in '23, execute sales, increase liquidity, reduce leverage and go back on offense we are still on that program. But for the time being, we need to get through the remainder of the '23 business plan.
Operator
And our next question will come from Ronald Kamdem of Morgan Stanley.
Ronald Kamdem
Great. A couple of quick ones. So just go back to the DPE book. I think you talked about $289 million of investments on nonaccrual. I appreciate $225 million of that is 625 Madison. I think you said on August 8, there will be a resolution. So is -- should we be expecting you to take over that asset? Or what are some of the other scenarios there? And then the follow-up to that is the remaining sort of $65 million or $55 million, plus or minus on nonaccrual. Can you just comment on what the situation there and what the plan is?
Matthew J. DiLiberto
So on 625, we'll stick to what we said earlier. We have to be sensitive to what's going on with the asset. But I need to say, there is a foreclosure proceeding on August 8, and if that went in a certain direction, then that effect -- and then the remainder of the assets, I think your question was what happens with those?
Ronald Kamdem
Yes, exactly. What's the plan on those that are nonaccrual, are you taking over? Just curious.
Marc Holliday
No, I don't think we can generalize, Ronald. Every asset is -- could be extended, could be restructured, modified, could be turned into equity. I don't want to generalize and we're not going to go through asset by asset. It's not what we do. But suffice it to say that the remaining book is quite small at this point in terms of number of assets. It's not small in terms of dollars. But I think like more than 1/3 of it is represented by 625. And for that, you'll just have to like all of us wait and see what the outcome is after August 8. We've already said that. For the balance, most of it is performing, but for how much is nonperforming this 625.
Unidentified Company Representative
$50 million, $60 million.
Marc Holliday
So I mean for $50 million to $60 million, we'll see how it goes. I mean we're going to do whatever we can to optimize either restructure, extend or possibly foreclose.
Ronald Kamdem
Helpful. If I could just sneak one in for my follow-up. Just going back to the 545 guide at midpoint, you had some other income come in this quarter. The forward curve has moved. Just -- can you talk through how are you thinking about sort of that -- the guidance for the year and some of the puts and takes and where it's trending?
Matthew J. DiLiberto
Trending within the range. If we were outside the range, we would have moved it. But given rates and the balance of business plan to execute for the back half of the year, we feel good with the range where it is.
Operator
And our next question will come from Anthony Powell of Barclays.
Anthony Franklin Powell
Just a question on the dividend going back to the prior question. I noticed that the payout ratio of FAD went above 90%. So maybe if you can go over, I guess, what your medium-term dividend policy is? And is that a comfortable ratio for you?
Matthew J. DiLiberto
So if you recall, we set a dividend level that's as every year, dividend level is based on taxable income. So the popular measure other than taxable income is FAD. We said our dividend at what was at the time, 100% of FAD, FAD is slightly better than we projected. So maybe we're slightly under 100%. But it all comes back to taxable income. And as I think we alluded to earlier, our program is in line with what we expected it to be, and therefore, the dividend is exactly where we expected it to be.
Anthony Franklin Powell
So maybe 1 more if you can comment. I guess there were some reports about an asset in Chicago that may be turned over to an office building. If that's the case, would that be a potential sale? Or is that -- can't comment on that at all?
Marc Holliday
So Harry Sitomer has been handling the part of the 245 claim that doesn't really relate to the asset, but it relates to the guarantees and the judgments we've received against the prior owner HNA. If you recall, I think we discussed in prior calls and certainly, it's been publicized that we received a $185 million judgment, which has grown far higher since with interest in passage of time, et cetera, additional claims. And as a component of that claim, we've exercised against some assets and Harry can shed some light on it.
Harrison Sitomer
Sure. So there's 2 assets that we currently have a line of sight to right now as we continue to pursue additional assets under that $185 million judgment, the one that you referenced in Chicago, that asset is currently working through a bankruptcy process, and we're trying to monetize the position that we have there. The second asset is an asset in Orangetown, New York. That asset has no debt against it, and we're working with stakeholders in the town to monetize that position as well. And just to be clear, we have no basis in either in those positions and no liabilities that we've taken on at the corporate level.
Operator
Our next question is going to come from Michael Griffin of Citi.
Michael Anderson Griffin
Maybe just going to the leasing pipeline, the comments and prepared remarks about the 1.1 million square feet, about 2/3 of those are new leases. Can you give us some more color on these? Are these expansions? Is it tenants looking to keep the same size? And then Durels, I think you mentioned in a previous question, you have a lot of large tenants that are in the pipeline. How likely are some of these to close? And any color on that would be appreciated.
Steven M. Durels
Well, start with the last part. Anything that's in the pipeline is a deal which we think has a high probability of either closing or if it's a proposal that's being negotiated, being converted over to a lease negotiation. So beyond the 1.1 million square feet, there is a significant number of proposals that are being negotiated with prospective tenants, but it's early days in discussion with those tenants, and they are premature for us to then make it part of the pipeline. What composes the pipeline 2/3 of it is financial service tenants, the balance being law firms and professional services, a little bit of education, a little bit of medical beyond that. But by and large financial services is driving the train right now. And then of our biggest proposals, when I referred to earlier, the 16 largest proposals that were actively trading paper back and forth with 7 of those tenants are from the fire sector and 4 from legal.
So as far as whether the expansions or not, it's a little bit everything. I'd say a lot of the financial service guys are driven by expansion. A lot of the law firms are driven by either consolidations or lease expirations. And the balance of the tenancy is -- it's a mixed bag. Some are downsizing, some are upsizing, some are just being replacing (inaudible) with no discernible trend one way or the other.
Michael Anderson Griffin
That's helpful. And then maybe just a question on the balance sheet for Matt. I know you've got about $300 million of notional swaps burning off this month. Is the plan to leave that as floating? I know you've done a good job of managing our floating rate exposure, call over the past year, but would you plan to swap that back for (inaudible). And if you are, what kind of rate do you think you'd get on that?
Matthew J. DiLiberto
There's actually a schedule of our derivatives now in the supplemental, we added it last quarter. You'll see there that maturing swaps are replaced already with forward starting swaps we put those in place a while ago. So we have no near-term swap maturities at all.
Operator
And our next question will come from Caitlin Burrows of Goldman Sachs.
Caitlin Burrows
Maybe just back to the fixed charge coverage ratio and the expected trend going forward. Matt, you mentioned that it would go down before up, given that you now expect the One Madison JV partner proceeds during 3Q, I guess what makes it get worse before or better?
Matthew J. DiLiberto
Well, I'm still being conservative. We get the TCO in late September. Those proceeds wouldn't come in until fourth quarter. So obviously, those proceeds help it. It's a function of whether we get it in the third quarter or early fourth. And that could be a matter of days.
Caitlin Burrows
Got it. Okay. So once it's in, that should make the trough and then it improves.
Matthew J. DiLiberto
Exactly. .
Caitlin Burrows
Okay. And then just on dispositions. You mentioned earlier how your goals are generally a stretch, and it sounds like further sales at 245 Park and One Vanderbilt could be somewhat opportunistic. So I guess as we think about the $2 billion goal, how important is it to you that you reach or get pretty close to that target and...
Marc Holliday
I just want to make a correction because if I don't, I don't want to get into the narrative. I did not say One Vanderbilt was an opportunistic sale. I was asked the question earlier, and my commentary was that there is a lot of interest in One Vanderbilt. It's got primary amount of our focus right now, and we're going to do everything to get that deal done this year. So I'm not -- I think that's inconsistent with what I just heard is I want to make that clarification. So if you could reask me the question.
Caitlin Burrows
Yes. I guess I was just thinking with the $2 billion goal, kind of what is the focus? And obviously, if One Vanderbilt gets done, that could be a decent piece of it. And whether that gets done or not, how does that kind of impact your focus on potential smaller assets?
Marc Holliday
Still not getting. Let me just -- what we pushed -- a lot of this was previously said, 245 is $1 billion of it. The $500 million on One Mad, we may choose to defer -- 245, we may choose to defer. And One Vanderbilt, we're moving ahead on, and there's a lot of interest. So that's where we are.
Caitlin Burrows
And then there were a couple of other properties that you guys had pointed out 750 Third for 7 days.
Marc Holliday
Well, there's other deals we're working on, but those are -- I don't want to say they're not -- I mean, they're material, but they're not mean I keep my eye on 245, One Vanderbilt, the $577 million that's triggered to come in, the condo proceeds we're going to be getting next year. The rent on Armani that's going to be triggered on turnover on September 30. I mean these are the big things. And then there's other -- we're always in the -- I mean there's a retail deal we're working on right now. I don't .
Unidentified Company Representative
I don't know what you want to say anything in script that we've been.
There's been significant interest on some of the retail assets we own at Madison Avenue and there's 1 transaction that's in the works (inaudible)
Marc Holliday
But Caitlin, I mean we do that every quarter. That's not a -- I'm trying to just highlight the big things on this call.
Operator
And our last question will come from Nick Yulico of Scotiabank.
Nicholas Philip Yulico
Just a clarification question on Page 19 of the supp, where you give the NOI breakdown of the portfolio. It went down sequentially. Was that all due to the onetime [L Brands] payment in the first quarter?
Marc Holliday
Correct.
Is that it, operator?
Operator
I'm showing no further questions. I would now like to hand the call back to management for closing remarks.
Marc Holliday
Okay. 2:59. So we did our job well, and we appreciate all the questions. And we thank you for listening in. We thank you for being shareholders. And for those of you that aren't, we hope you'll become so. And we'll look forward to speaking again in 3 months' time.
Operator
And ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.
