Vornado Realty Trust [VNO] Conference call transcript for 2022 q3
2022-11-01 16:42:07
Fiscal: 2022 q3
Operator: Welcome to the Vornado Realty Trust Earnings and Webcast for the Third Quarter of 2022. My name is Vanessa, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I will now turn the call over to Steve Borenstein, Senior Vice President and Corporate Counsel Steve, you may begin.
Steven Borenstein: Welcome to Vornado Realty Trust third quarter earnings call. Yesterday afternoon, we issued our third quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents, as well as our supplemental financial information packages are available on our website, www.vno.com, under the Investor Relations section. In these documents and during todayâs call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q and financial supplements. Please be aware that statements made during this call may be deemed forward-looking statements and actual results may differ materially from these statements due to a variety of risks, uncertainties and other factors. Please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2021, for more information regarding these risks and uncertainties. The call may include time-sensitive information that may be accurate only as of todayâs date. The company does not undertake a duty to update any forward-looking statements. On the call today from management for our opening comments are Steven Roth, Chairman and Chief Executive Officer; and Michael Franco, President and Chief Financial Officer. Our senior team is also present and available for questions. I will now turn the call over to Steven Roth.
Steven Roth: Thank you, Steve, and good morning, everyone. As Michael will cover in a moment, we had another good quarter with comparable FFO of 14% from last yearâs third quarter. Despite headwinds from a slowing economy and rising interest rates, we still expect this year to be up a fair amount from last year. We will feel the effect â the full effect of higher interest rates on our numbers next year, given a full year of impact. Overall, this quarter we leased 450,000 square feet, 229,000 square feet in New York well below trend. This is a little bit growth of the slowing market, and a lot the result of timing. As Michael will explain, our New York pipeline is a robust 1.5 million square feet. The Fed is deadly serious in pursuing their fight against inflation. The economy is clearly slowing, and capital markets are volatile. As a top priority, we have taken the following actions. Earlier this year, we extended our near-term debt maturity, so we now have no debt coming due in 2023 and a very modest $233 million on 3 assets coming due in 2024. Further, we extended our unsecured revolving lines of credit totaling $2.5 billion, with only $575 million outstanding through 2026 and 2027, providing significant liquidity for the next 4 to 5 years. In addition, we protected our floating rate debt exposure by swapping for 5 years, $2 billion of floating rate debt fixed, and a weighted average of LIBOR or SOFR as the case may be of 2.9%. Further, we have interest rate caps on an additional $2 billion providing protection above 4.2% on a weighted average basis for a weighted average term of 10 months. Please see Page 33 of our financial supplement, which describes all this activity line by line. Mark-to-market in the aggregate the swaps and caps now in the money $232 million. So in effect, our only remaining floating rate debt exposure is $750 million, which is largely JV debt. Be aware that nothing can really protect as loans mature into a higher rate environment. The second area of our focus is, of course, the PENN District. The PENN 1 lobby and amenities are now complete. The PENN 2 skin and bustle are now very far along as is the Long Island Railroad Concourse. We invite all of you to come down and take a look or give us a call and we will be happy to tell you through. Broker and tenant reactions have been truly outstanding. Hotel PENN is coming down with demolition scheduled to be completed in the fourth quarter of 2023. I must say that the headwinds in the current environment are not at all conducive to ground-up development. Lastly, I want to comment on our dividend. Our policy is to payout dividends equal to our taxable income. We now expect our taxable income to be lower in 2023. We will not have income from 220 Central Park South. We assume no asset sales and we are budgeting to the interest rate yield curve. As such, our Board of Trustees plans the right size our dividend in 2023 commensurate with our protection of taxable â projection of taxable income. This will allow us to retain more cash. Now, over to you, Michael.
Michael Franco: Thank you, Steve, and good morning, everyone. As Steve mentioned, we had another good quarter. While we experienced some headwinds from rising interest rates, our core business performed well. Third quarter comparable FFO as adjusted was $0.81 per share, compared to $0.71 for last yearâs third quarter, an increase of $0.10 or 14.1%. The increase was driven primarily about rent commencement on new office and retail leases, the continued recovery of our variable businesses, and an adjustment for prior period real estate tax accruals at theMART, partially offset by higher net interest expense from increased rates on our variable rate debt. We provided a quarter-over-quarter bridge in our earnings release on Page 3 and in our financial supplement on Page 6. Notwithstanding additional interest expense from rising rates and a variable rate debt will result in lower comparable FFO per share growth for 2022, and we anticipate early in the year, we do still expect that comparable FFO per share will be up year-over-year. The additional interest expense and rising rates will have a greater impact next year, as the higher rates impact our variable rate debt costs for a full year. Weâve partially mitigated the impact of this due to significant amount of hedging we did this quarter, as Steve just covered. Company-wide same store cash NOI for the third quarter increased by 13.8% over the prior yearâs third quarter. Excluding the accrual adjustments rate to theMART real estate taxes, the increase would have been still solid 3.4%. Our retail same-store cash NOI was up a very strong 7.7%, primarily due to the rent commencement of several important leases. Our overall office business was up 15% compared to the prior yearâs third quarter also benefited by theMART adjustment. While our New York office business was down 1.3% largely due to not renewing lower rent tenants at PENN 1 in order to bring in higher paying tenants post-redevelopment. Now turning to the leasing market. Amidst the backdrop of economic uncertainty, the New York Class A office market remains resilient, stimulated by the cityâs tight labor market for office use, job employment is now above pre-pandemic levels of $1.5 million. Leasing activity in Manhattan continued its rebound through the third quarter with volumes surpassing pre-pandemic averages. Year-to-date, market-wide leasing activity stands at 24 million square feet, 50% above where we were at this time last year, including 9.3 million square feet this quarter. Deal volume during the quarter was led by 16 headquarters leases signed in excess of 100,000 square feet, reinforcing the large tenants are committed in New York and are signing long-term commitments. As we enter the fourth quarter, though, caution is the word of the day. Thereâs increasing uncertainty in the world and tenants are acting accordingly. As businesses continue to reassess their space requirements, the bifurcation between high quality and commodity product is growing. Tenant preference remains strong for best-in-class newly developed or redeveloped buildings with modern amenities in collaboration spaces, and being on top of transportation is critical. Most companies believe the highest quality work experience is key to both incentivizing employees to come back to the office and also for attracting new talent. Our portfolio consists largely of these types of assets, positioning us well to continue to capture tenant demand. During the third quarter, our office leasing team completed 42 transactions comprising 388,000 square feet across New York, Chicago and San Francisco. In New York, our average starting rents were very strong $89 per square foot, reflecting the breadth of our high quality portfolio. Our overall leasing pipeline in New York remains strong with approximately 1.5 million square feet of leases and advanced negotiation and proposal stages. Now, turning to Chicago. At theMART really 67,000 square feet in 19 transactions this quarter in a 50/50 mix of office and showroom activity. While the market in Chicago remains challenged, we have seen a pickup in proposal during the quarter. As expected, our tradeshow business has rebounded nicely in 2022 still not back to pre-pandemic levels yet, with NOI up $12.2 million through three quarters versus last year. In San Francisco at 555 California street, where weâre full except for the queue, we leased 154,000 square feet during the quarter, including a large renewal with Morgan Stanley for its 132,000 square feet, and a 21,000 square foot expansion renewal with Centerview Partners. Our starting rents were very strong once again, generating a 12% positive cash mark-to-market. 555 California continues to be the premier real estate asset in San Francisco, particularly for financial tenants as evidenced by these leases. Retail leasing results were fairly modest for the quarter with one renewal transaction significantly skewing reported GAAP and cash mark-to-market. The bulk of the leasing activity incurred in the redevelop Long Island Railroad Concourse, where youâre seeing very good activity with strong rents. More broadly with the rebound in tourism and daily workers were continuing to see more retailers search for new store locations. However, retailer concerns about inflation in the economy, our results and them to be more cautious about committing the new leases now. This will change the economic environment stabilizes. Finally, let me spend a minute on sustainability, where we continue to be a leader. Vornado was once again selected as a global and regional sector leader for diversify the office and retail REITs and Global Real Estate Sustainability Benchmark or GRESB survey, ranking number one in the USA in our group, and number 3 out of all 112 publicly listed real estate companies in the Americas that responded to GRESB. In addition, we once again in GRESBâs Five Star rating, received the Green Star distinction for the 10th time and scored in A for our ESG public reporting and for our score. This area is increasingly important to our tenants and other stakeholders as well and as a differentiator for our portfolio in the market. Turning to the capital markets now. Overall, the heightened market volatility and aggressive rise in interest rates is significantly impacting the capital markets and generally causing most lenders and debt investors to pause. The CMBS market is effectively shut right now and balance sheet lenders are hesitant to lend other than to the best properties and sponsors. We had anticipated the financial markets becoming more challenging this year, and focus early and dealt with our 2022 and 2023 maturities. Importantly, given the $3 billion in refinancing as we completed this summer at attractive spreads, we have dealt with all of our significant maturities through mid-2024 and are largely protected from near-term refinancing risk. On the asset sale front while there continues to be active interest from investors in New York office and retail assets. Without a stable financing market, it is difficult to transact with large assets without in place that right now. Notwithstanding the market challenges, they executed a contract to sell 40 Fulton of $102 million and our negotiating sales of a handful of small assets. Finally, our current liquidity is a strong $3.3 billion, including $1.4 billion of cash, restricted cash and investments in U.S. Treasury bills, and $1.9 billion undrawn under our $2.5 billion revolving credit facilities. With that, Iâll turn it over to the operator for Q&A.
Operator: Thank you. We will now begin our question-and-answer session. We have our first question from Steve Sakwa with Evercore ISI.
Steve Sakwa: Thanks. Good morning. Michael or Steve, or maybe Glenn, can you just maybe provide a little more color on the 1.5 million feet in the pipeline? Iâm just curious how much of that relates to kind of new requirements for you and how much of that is maybe early renewals are looking into 2023 and 2024.
Glen Weiss: Good morning, Steve. Itâs Glen. Yeah, as we look at the pipeline in terms of the 1.5 million feet, itâs cited more towards new tenants and expanding tenants versus renewals. Filling some of the empties we have today and then going forward locking in spaces we know we have coming do; we tend to will be new to the portfolio. Itâs a really good mix a lot from activity, financial service activity, some BD activity. But, I would say, itâs more sided to new tenants coming in or expanding tenants in the portfolio.
Steve Sakwa: And Glen, maybe just any color just in terms of types of tenants, I assume, kind of big tech is on hold, but these private equity law firms, investment banks, asset managers?
Glen Weiss: Yeah, certainly financial service is heavy, less on tech, as youâre saying. Private equity is very, very strong, very active. Thereâs still some hedge fund activity also in our portfolio, at our financial buildings, 888 Seventh, 640 Fifth, et cetera. So certainly financial is busy, and law firms are definitely getting busier in the portfolio, particularly buildings like 1290 Sixth Avenue.
Steve Sakwa: Great. And then secondly, Steve, in the past, youâve commented on your desire to sort of pursue one of the casino licenses downstate. Iâm just curious if thatâs still something that youâre interested in and how do you think that process unfolds over the next 12 to 18 months.
Steven Roth: We continue to be interested, very interested. Itâs a government process. I think, they have already announced that theyâre going to put out their first ROIC , I think, late December, early in January. And then, from there, weâll see how it goes. We expect it to be a very competitive process.
Steve Sakwa: Great. Thank you. Thatâs it for me.
Operator: Thank you. Our next question is from â we have our next question from Michael Griffin with Citi.
Michael Griffin: Great. Thanks. Maybe just going back to the comments on the dividend, wondering if you can frame maybe how much youâre expecting the right size of dividend sort of heading into 2023. And any additional commentary on that would be helpful.
Steven Roth: We really canât, I mean, itâs a board prerogative. And the numbers are still moving around. It would be totally inappropriate for us to guess as to what that dividend might be next year.
Michael Griffin: Got it. And then maybe just back on the interest rate swaps. What was the embedded cost in executing those swaps? And then, for the $800 million term loan, it looks like about $250 million of those swaps are expected to still burn off in 2023. Would the plan be to swap that going forward or to leave that as floating?
Michael Franco: Good morning, Michael. In terms of the cost of the swaps, what we laid out for you on Page 33 of the supplement, gives you the all-in swap rates so that â thereâs a credit charge thatâs embedded in there, depends on that particular trade. I would say, 4 to 5 basis points is typical, sometimes itâs a little bit less. But, I think, if you use that as a working assumption, thatâs not bad. But again, thatâs embedded in the numbers that we gave you. And on the term loan that you cite, these are all â well, not all, but I would say largely corporate level swaps. So we have the ability to move those around as different loans, we pull up, where if we sold an asset, and we wanted to shift it around, which we did, for example, on Long Island City, earlier this year. We sold that asset, we moved it to a different asset. So it gives us flexibility. There are certain asset level swaps, but by and large, the corporate. And so, the term loan, we went ahead and forward swap 500 of that weâre getting next year, and then we have the ability to potentially move some around. If not, the answer is weâll look at â fixing that balance.
Michael Griffin: All right. Great. Thatâs it for me. Thanks for the time.
Michael Franco: Yeah, thank you.
Operator: We have our next questions from Camille Bonnel with Bank of America.
Camille Bonnel: Hi, good morning. Busy quarter on the financing front. Just following up on the interest rate swaps. Can you help us understand the thinking behind how you decided on reducing your floating rate debt exposure to 27% versus a lower amount more in line with your period?
Michael Franco: Well, I think 27% not the right number to use. Weâve got caps in place on the bulk of the rest. So our net exposure to floating rates about 7%. And â when you look beyond that is whatâs expose, itâs basically loans that are coming due at the end of the year or we have JV partners where â there was no sort of desire to collectively â do any sort of hedging there. So, again, I think from a net exposure, weâve got about 7%. I want to also remind everybody, weâve got significant cash on our balance sheet thatâs earning higher rates, some thatâs been deployed in Treasury bills, some of that is just learning higher rates with our banking relationships. So on net exposure, I think itâs even less than 7%. But, I think, itâs a little bit more accurate in terms of what the exposure is.
Camille Bonnel: Okay. Thatâs very helpful. And just shifting to retail, we saw quite a drop in leasing spreads this quarter. Can you speak broadly to how you think about where pricing is going specifically for New York City retail?
Michael Franco: I think over the last couple of calls, weâve communicated, we think retail has bottomed in the city, and that is our view. Youâre starting to see vacancy decline in many of the key sub-markets, which obviously is the forerunner to start to have some pricing rebuilding, I think youâre actually seeing rents move up a little bit slow already, but vacancy is beginning to drop in many of the sub-markets. Rents are not falling anymore â and thatâll take some time to begin to recover. But, overall, I think the markets bottomed, and leases that are getting done, retailers are focused on the best locations. They want to be in the highest footfall areas and the best sub-markets, our portfolio is situated there. And, when leases get done right now, theyâre going to be reflected the fact that rents have corrected, depends on the sub-market could be one-third could be a half from where they were in peak. But, in most cases, we donât have exposure on â of our big assets right now. So, it just depends on when the leases roll and where the market is the time. But, as I said, I think from a trendline standpoint, theyâre more retailers cruising around the city looking for spaces. Theyâre focused on the best locations, and being a little bit of caution right now, given whatâs going on the economy. But net-net, New York is very much still top of the ranking of where they want to be and where they want to expand it.
Camille Bonnel: Thank you for taking my question.
Steven Roth: With respect to retail, we are still in a retail recovering market. So volumes are not yet back to where they were pre-pandemic. If you look at the transportation numbers basically coming into the city, on the railroads, in the subways and the buses is two-thirds of what it was at debrief pandemic, and, although, anecdotally traffic in the streets looks pretty wholesome. So what I think you need to do is to say weâre in a recovery market. And our prediction is, is that the market will be very much more healthy in a couple of years. This is not a quarter-to-quarter thing; itâs a year-to-year thing.
Operator: Thank you. Our next question is from Alexander Goldfarb with Piper Sandler.
Alexander Goldfarb: Hey, good morning, Steve and Michael. Maybe just following up on the retail, the $1.8 billion retail preferred that you guys have in the JV that you did a number of years ago. Just sort of your thoughts on that, the value of that, does that still worth par? The cash flow coverage, I think, the coupon is 4.25%. And as you guys, Steve, think more about balance sheet focus, youâve addressed a number of the floating rate exposure. How do you view your ability to refinance this $1.8 billion and get the cash out of that position?
Michael Franco: Good morning, Alex. Itâs Michael. So, let me try to get all your questions. In terms of the value that referred â we believe it remains fine, still worth par. , we donât think so. Thereâs clearly equity value. We build JV and our partners think, the values still left and that gave to be. So, I think, the retail preferred is front. From a cash flow coverage standpoint, again, just to remind you, the cash flow from all the assets, whether they have preferred or not, it goes to secure the payment of that preferred. And the coverage of that is continues to be very strong. And even though you assume rollover over time and some ups and downs and whatnot the coverage on that on our preferred dividends, which today is 4.25% will rise to 4.75%. In April of 2024 that coverage is very strong today. And we expect to remain strong. Now, your last question, the ability to refinance out, if you go back to what I said in my opening remarks, I donât think this is any secret. The financing markets are not good right now, right, and any product category. So, banks are basically shutting it down for the rest of the year, unless youâre a big client and great property and whatnot. CMBS market and bond investors really donât want to deploy capital. So the tough market that financing if you have to, fortunately donât. But, retail rates remain challenging to refinance in the near-term. And so, this is not in our capital budget to get this refinance in the next year or so. And, when the market opens up, and we want to do, remember, this can be done piece by piece, right? Thereâs five assets that have preferred on and, if we want to avail ourselves on 1 or 2 or 3, then weâll do that at the time. But, we donât need the cash today to go do it and pay exorbitant rates would not be prudent. So hopefully, I had everything asked, but thatâs the current state.
Steven Roth: Alex, look at it this way. Thereâs two elements do it. One is the yield and the second is the collateral. I think, Michael said very clearly that we think the collateral is just fine. The coverage of the dividend is give or take double what the carry on the preferred units. So we think the collateral is fine. Dividend is clearly in this very volatile, chaotic capital pocket is below what a market price and then preferred would be. So on a short-term basis, you might say that if you were a trader, and you sold it, you will get less than 5 because of the sub-market dividend, but thatâll change and so we still think that is a sound instrument.
Alexander Goldfarb: Okay. And then, Steve, second question, as you mentioned, dividend. You appreciate the comments on the dividend for VNO for next year; Alexander is in a similar boat. Should we read through that a similar, that the board will make a similar determination resizing of the Alexanderâs dividend as well?
Steven Roth: No.
Alexander Goldfarb: Okay. Thank you.
Operator: Thank you. Our next question is from John Kim with BMO Capital Markets.
John Kim: Thank you. Good morning. You talked about the cautious environment, there was a lot more of an optimistic piece in the posts this week on New York office, and in particular, PENN 15. I was wondering if you could provide an update on the project, how much pre-leasing you would need to move forward with the development? And if thereâs any consideration to change the use of the project to have less office going forward?
Steven Roth: John, thanks for the question. Iâm going to duck the question. A couple of things, I did say in my prepared remarks that the current environment makes round-up development very difficult, and I meant it. So thatâs number one. Number two is in terms of changing uses and what have you â thatâs not something weâre going to get into now.
John Kim: Okay. Regarding the taxable income next year, I know, youâve talked about rising rates in 220 Central Park South being fully sold. Are there any other pressures that you see on taxable income next year? I thought that 220 Central Park South is a tax protection, so it wouldnât really be an issue, but any other thoughts on the direction of your other businesses in 2023?
Steven Roth: I mean, we said that we think that our budgets show that taxable income is going to go down. The primary reasons are higher interest rates, because weâre not 100% protected. We have no income from 220, and we have a self economy. So, if you take all those three things together, weâre budgeting that â and weâre not budgeting any gains from asset sales. So, I mean, I think that we are reluctant to put a number on that at the current time. But we will make a decision probably in the first quarter.
John Kim: And your dividend is at 100% of taxable income this year?
Steven Roth: What is the exact number, Tom?
Thomas Sanelli: For a dividend 2.12, and we havenât finalized taxable income.
Steven Roth: Whatâs our projection?
Thomas Sanelli: Itâs around that.
Steven Roth: Yeah. So, we think that the current dividend is within there of 100% of our taxable income for the year 2022â¦
Michael Franco: ...which includes, 2.12.
John Kim: Great. Thank you.
Operator: Thank you. Our next question is from Daniel Ismail with Green Street.
Daniel Ismail: Great. Thank you. You mentioned a few times the difficult financing environment. And I recognize this is a tough question to answer given the lack of transactions. But Iâm just curious, where do you think New York City office values and cap rates are these days?
Michael Franco: The answer, Daniel is, there a lot of transaction activity. I think itâs difficult to give a precise answer, right? I think, there is â first of all, I would say that the investor interest in New York City remains very high. While some see black clouds, others see opportunity, and others have a fundamental belief in New York, when you look at whatâs going on around the world, right, in terms of the global investor base, and as they evaluate where they want to invest their capital, is it Hong Kong anymore? I donât think so. Is it London? Doesnât seem as attractive, given the issues they have. And then come back to U.S., looks very good. And New York is, I think, the question to global financial capital. So you have a lot of interest in New York, a lot of smart money thatâs frankly scouring the market right now, looking at New York, because they see value. But, in the absence of a financing market, I think, itâs going to stem activity for a period of time. I donât know if thatâs one quarter, two quarters, who knows. And if youâre forced to sell in this market, then youâre picking on something larger than youâre going to sell it a wider cap rate, right, if somebody needs financing. If they donât, itâs in all cash buyer, then I think itâll be a little less compressed. But is there a cap rate impact from this? Sure, thereâs a cap rate impact. I give you precision on that, no. Is it 50 basis points, with the sort of maybe up 10%. So values are impacted 10%. I think is that a reasonable assumption, probably. But I donât think anybody can say with precision.
Steven Roth: A couple of comments on that. Weâve seen this before many times, the economy is either entering recession or in recession. The debt markets and the capital markets are rioting. They are highly illiquid. And they are unbelievably expensive if you must access the debt markets. So thatâs a very big deterrent to asset sales. The second thing is, is that in these kinds of markets, only people that have to sell transact. And so, the only weak sellers are transacting, because the only buyers that are really trolling the market are distressed buyers. So you have to just live through this and itâll end sooner than you think. But this is not the kind of a transactional market or a capital market, where you can really make a judgment. This is aberrant that happens one year out of a return. And we are either in the 1 year or weâre about to go into the 1 year.
Daniel Ismail: Got it.
Steven Roth: One more comment. The stocks of the office companies have corrected to the point, where in my judgment, they have gone significantly below even the distress mark-to-market of the portfolio significantly below that number.
Daniel Ismail: Got it. I appreciate the thoughts. Just last one for Glen, Iâm curious where you think concessions are trending these days. Are you seeing any stabilization or abating and concessions on the new leases you guys are negotiating?
Glen Weiss: I think concessions have stabilized. They havenât abated, Iâm saying, are still quote unquote too high, but theyâve stabilized. Youâre certainly seeing more of the T eyes in terms of getting tenants into the buildings, in terms of helping them build out space more than historically, but I think that number has stabilized.
Steven Roth: Weâre seeing sort of a strange market. Rents had really not fallen on the better buildings, if anything, theyâre going up. But the T eyes and the inducements have gone up as well. So the market is taking their pound of flesh in the inducements as opposed in the rent reductions.
Daniel Ismail: Got it. Thanks a lot.
Operator: Thank you. Our next question is from Derek Johnston with Deutsche Bank.
Derek Johnston: Good morning, everyone. Thank you. In your discussions with business leaders, is there a view that the likely recession will be a tipping point for greater office utilization, and the balance of power favoring employers versus employees? So, I guess, can the slowdown drive greater and, perhaps, sustainable office utilization in your view?
Steven Roth: Recently wrote a piece that came out recently, where basically debunked that idea, that recession, he gets higher unemployment, he gets changes the power from to the employer from the employee, and therefore the employee will scamper back into the office. I just have no view on that. I do believe, however, that the office is the workspace, as opposed to the kitchen table. And I believe that over time, the culture will change, where people will want to be back in the office, the office will be more productive. The collegial aspect of work, and being with colleagues and friends, et cetera, will overpower the temptation to sit at the kitchen table. But, I donât think that itâs the pain of a recession, thatâs going to change the marketplace.
Derek Johnston: Got it. Appreciate it and thank you. Just another big picture one, I hope you guys donât think this is unfair. But, Steve, youâve seen this movie before, but as investors really have been sidelined by this hybrid work secular concern and now we have the likely recession. What is it going to take? Like I said, youâve seen this before. Or what can you do, ultimately, to help flip investor sentiment more positive on Office REITs longer-term? Thank you.
Steven Roth: Iâve always believed that the rules of the game were to buy low and sell high. So now what we have is that itâs hard to buy assets. Theyâre very illiquid. And there are very few assets that are on the market, certainly at distressed prices, but the distress is in the stock market. And so, I donât know, but I mean, from my personal family and investing, weâd like to buy in recessions and thatâs the time to buy. So whatâs going to take for you guys to start realizing that these stocks are stupid, stupid, cheap. I donât know, but it will happen. And my guess is, is that â just as the stock market always turns, and gallops ahead, way before the end of recessions. I think that the office business will do as well. I canât tell you what the catalyst is.
Derek Johnston: Thank you, sir. We have our next question from Anthony Paolone with JPMorgan.
Anthony Paolone: Yeah, thank you. And just looking at your 2023 lease expirations, it seems like you have a disproportionate amount expiring in retail and office in the first quarter. Can you maybe help us peel that back a bit and give sense as to whether or not thereâs any known big move outs or roll ups, roll downs?
Glen Weiss: Itâs Glen. As it relates to the office in 2023, itâs really a mix of 4 of our properties, 770 Broadway, 350 Park, 1290 and 280, and thatâs throughout the year, not only in the first quarter. Weâre, of course, attacking all of those expirations, we have very, very good action on some and others were in the market, and trying to lease the space. I will tell you, when you look at those assets amongst our highest quality of buildings, and most unique characteristic buildings like a 770 like 350. So thatâs where the expirations are coming out in 2023.
Anthony Paolone: Okay. And how about retail in the first quarter anything to call out there?
Michael Franco: Tony, itâs Michael. The answer is, weâve got 2 or 3 key tenants rolling, and I canât tell you definitely, whatâs going to happen there. Thereâs discussion where â all could renew and the discussions, weâre not doing it, I said, still do fluid. I do think, net-net, even if most renewed income will be down some just given, where one may likely renew, but I just keep getting more precision, given the discussions remain pretty fluid right now,
Anthony Paolone: Okay, got it. And then just one follow-up on the March, it seems like the tradeshows are back, and I know in some years, you have the tax item. Can maybe just help us think about, where you think the annual EBITDA run rate has gotten back to on that asset?
Michael Franco: I think today is probably in the mid-70s. But, weâre also â we know that the casual business is going to be leaving, and so, probably bottoms in the low- to mid-60s, before it comes back. So that numbers probably in terms of a run rate at the end of the year, that low- to mid-60s is probably a decent run rate, before we rebuild that back.
Anthony Paolone: Okay. Thank you. Whatâs the potential building, if itâs at the top end?
Michael Franco: Ultimately, I think the building should get back north of $100 million, right? So our job is to re-lease it. We do think thereâs some additional upside in the tradeshow. So that number in the next, itâs called, 36 months within it gets back hopefully to north of $100 million.
Steven Roth: So based upon â so right now itâs about 75, we expect it to go down into the 60s, before it turns and goes back up to as much as 100, which will not happen next year, but it will happen in the future, potential for the assets. The little bit more volatile than we would like, but thatâs the story.
Anthony Paolone: Okay. I appreciate that.
Steven Roth: Yes, sir.
Operator: Thank you. Our next question is from Nick Yulico with Scotiabank.
Nicholas Yulico: Thanks. I just wanted to see given the recent news from Meta, just want to confirm that thereâs no impact youâre seeing for your space with them at Farley or 770 Broadway?
Steven Roth: Thereâs no impact on Farley, no impact on 770 relates to the recent announcements. The buildings utilization is very strong. They happen to love both of the properties. Itâs almost embarrassing to say, but we met a little bit of time looking at their credit, because they are a big tenant. And this is one spectacular company from a financial point of view. So when you think about it, they have â whatâs the number $25 million of free cash flow a year after spending a similar amount or a greater amount on R&D, which is discretionary. So their cash flow is well above $50 million a year. They have almost no debt. I think they did their first tiny debt issue recently. They have cash balances in the 50s or something like that millions of dollars, billions of dollars.
Michael Franco: A little over $40 billion.
Steven Roth: Okay. That works. And so, from a financial point of view, they are a great company. They have these huge platforms of Facebook, Instagram and WhatsApp. And so now theyâre off on a mission. Yeah, have to back that guy because look what heâs done in the past. So the answer is they are trying to develop a new universe. I believe it will be extraordinarily successful. Even if itâs not successful, it certainly will not impair the sanctity of that, unbelievable for this. So weâre friends, weâre vendors to them, and weâre happy and honored to be so.
Nicholas Yulico: Thanks. Appreciate that, Steve. Just one other question is on the retail JV. So, I look at the NOI in the supplement and it feels like, I mean, I think Iâm looking at this property. But that the NOI is actually very similar to when you struck the deal in 2019, actually it might be up a bit? I just want to confirm that. And then also see, I know, you did impair the investment back in 2020. But, when the original deal was struck, it was at a 4.5 cap rate, presumably, cap rates are higher today, based on everything going on in the world. So just trying to understand the dynamic of when you have to do with the annual test on the value of the JV, if we should think that there is any impairment possibility from that?
Michael Franco: Hey, Nick. So, in terms of the income on the portfolio now versus when we struck the deal, I donât have the exact numbers in front of me. My recollection from just knowing the ins and outs is downplayed a little bit. Because of, as you may recall, forever 2021 went bankrupt, and so theyâre still in the space, but that number is down from when the original deal was struck. And, we had one vacancy on Fifth since then. So, like the signage is frankly booming right now, higher than when we struck the deal, but I think net-net is played down and touch. But, you correctly point out, the income has been very durable. Some of the leases roll, but thereâll be some impact. So I think in terms of the impairment, youâre correct, in 2020, we did impaired. Again, Iâm going from memory, Nick, I think we â the fair value original deal was struck at 5, 4, and we impaired it south of $5 billion. I donât want to give you the number without having it, fine. But the answer is what we look at it every quarter, thereâs an independent third party appraisal that is performed on behalf of the venture, which we frankly have â we donât provide the assumption that they do their independent work. And we take that, and thatâs sort of what drives that. So, theyâll do their work at the end of the year, and weâll evaluate. So I canât predict whether it will or wonât be. I think the market is certainly â given your comments on the market, and how itâs priced in our stock is certainly imperative significantly, but I canât say whether thereâll be any further upcoming impairments yet.
Nicholas Yulico: Okay. Thanks, Michael.
Michael Franco: Yeah.
Operator: We have our next question from Ronald Kamdem with Morgan Stanley.
Ronald Kamdem: Hey, a couple of quick ones for me. Just going back to the leasing activity, you talked about, maybe this slowing economy and so forth, I was just hoping you could provide a little bit more color from the tenant side, sort of, is it the economy? Is it sort of hybrid? And also by sub-sectors, would be helpful?
Steven Roth: I certainly think, CEOs are more hesitant due to the economy, for sure. Weâre seeing that in our discussions. And I think, by sector, certainly the big tech is slowed. Iâll tell you, there is some more small to medium size tech activity, or a couple of leases signed in the market this quarter by a couple of those. But, generally, Iâll tell you, more caution, more hesitancy due to the economy, not so much by the hybrid specifically.
Ronald Kamdem: Great. And then my second question was just going back to the dividend. I know, you sort of talked about, itâs the board decision, theyâre discussing â just trying to understand what the pieces that are going into that, is it still sort of â is it $200 million plus or minus of CapEx, operating cash flow? And then youâre thinking about just how to solve for that to get to a sustainable basis? Iâm just trying to get a sense of what should we be looking at thinking about for the right place for the dividend to land banks?
Steven Roth: I donât have anything more to say on the dividend other than what Iâve already said. We will get to that at the first quarter board meeting. I think everybody can do their own math and guesstimate, but Iâm not do guesstimating business. I can tell you one little factoid and that is the stock trades between the 9% and 10% dividend run rate. So that indicates that somethingâs wrong. But I think Iâll stand with what Iâve already said.
Ronald Kamdem: Great. Thatâs all my questions. Thank you.
Steven Roth: Yes, sir. Thank you.
Operator: Thank you. Our next question is from Vikram Malhotra with Mizuho.
Vikram Malhotra: Thanks so much for taking the question. I guess, just maybe bigger picture for Steve. Iâm just â I want to get your thoughts on what are you contemplating sort of macro wise, rates wise, and then more at a micro level with fundamentals. It just feels like things seem to have been inflecting according to last few calls, return to work was improving, leasing is improving. But youâve now swapped a lot of debt for 5 years at a rate your â contemplating cutting the dividend. And so Iâm just trying to balance all of this like near-term, you said, itâs a 1-year issue. But it sounds like in your action, itâs more like a 3-to 4-year issue than a 1-year issue. I guess, can you help us bridge? What are you forecasting macro wise and micro wise to effectuate this dividend in the 5-year swap?
Steven Roth: So letâs see, obviously, the economy has been hyped to the tune that itâs probably very destructive. So for whatever different reasons, and this is â why donât want to get into politics, but for whatever different reasons, we have runaway inflation. And, as I said, I think the Fed is deadly earnest about doing their job and stopping it. So their number one tool, of course, is interest rates, the interest rates have had an enormous effect already. In a very rapid manner, I mean, as illustrated by the stock market, the whole market, et cetera. So, the Fed is going to win this battle. In the end, itâs just a matter of how long it takes. We aggressively went to protect our floating rate exposure for multiple different reasons, the most important one of which was to protect against a runaway interest rate environment. So we think, we sort of had that covered. The most efficient execution for the swaps was 5 years, and so we basically did that. There is â do not read anything into our firm view on the future, based upon this 5-year number. I would tell you that I expect if you look at the graphs and look at the charts of past discussions and past activity. They generally go up at a pretty steep curve, and then they come down fairly quickly. They put the economy into recession, and then they aggressively have to fail it out. So thatâs what we expect is going to happen this time, but we donât bet our life on anything. So we think we protected our balance sheet, we think to overpay our dividend is about appropriate. And so, we think weâve taken the proper financial actions to protect the fiscal sanctity of the company. We believe that this is going to be a 1- to 2-year event, not a 3- to 5-year event.
Vikram Malhotra: Thank you. So that 1- to 2-year is more, your comment on the fundamentals in office as opposed to the macro that you just out laid down, Iâm assuming. Just following up on that, I know the numbers are moving aroundâ¦
Steven Roth: The 1 to 2 years is a macro prediction.
Vikram Malhotra: Okay. And how do you square where fundamentals will be office fundamentals in that timeframe?
Steven Roth: Well, first of all, we are New York based. We believe in New York. We believe, and anecdotally weâve had lots of conversations with lots of employers, and from all over the world. New York is still New York. Itâs still the capital of the United States. And we believe companies want to be here, for sure young people want to be here. Just anecdotally, Iâll tell you that a lot of my friends have moved back to Florida. But when you ask them, where their children are, all the children are in New York, and they want to be in New York, so thatâs extremely talent. So we think that this will be a fairly predictable cycle, where different industries will grow with different rates. But there will continue to be an aggressive interest to locating in New York and growing in New York.
Vikram Malhotra: Okay. And then just 2 quick...
Steven Roth: We are absolutely strongly convicted about what weâre doing in the PENN District. We think that PENN is going to be another center of New York and an extraordinary success. So weâre very, very, very excited about that.
Vikram Malhotra: Okay. I was going to ask you once and relate to that. But just before that, I know the numbers are moving out. So Iâm not asking you where numbers are the dividend cut is going to be, but is it fair to assume if we look at like a historical as a full payout ratio, whatever the AFFO may be, should we assume a payout in line with historical levels, as we think to model next year?
Steven Roth: If you can model taxable income, thatâs what the dividend is going to be approximately. And if you can model that to the penny, youâre better man than we are. So weâve got it another full quarter to go. And so, weâre in the budgeting process, we know when we over it, and we will make that decision in the first quarter.
Operator: Thank you. We have a follow up question from Steve Sakwa with Evercore ISI.
Steve Sakwa: Thanks. Steve, you mentioned about the valuation, and Iâm sure, on a lot of numbers, you traded very low price per square foot, very high implied cap rate. Historically, weâve seen private equity come in and close gaps in sectors where thereâs big, big discounts that persist. But, I guess, given â where the financing markets are today, that just doesnât seem likely. So are there steps that you can take? Or are there steps youâre contemplating to try and close that gap? Or is this just a time where youâve got to be patient and kind of wait for the financing markets to improve?
Steven Roth: I almost want to duck that question too. Let me see if I can parse into it. The leveraged buyout model, which has equity and debt, may or may not work in this environment. The value of our company is there, and its extraordinary value. How it all plays out is something that I canât predict right now.
Steve Sakwa: Well, I guess youâve talked in the past about maybe the separation of the PENN District assets into a spin out, which I know was on hold. You said you would only do buybacks in a meaningful way. But you probably need to sell assets to be able to buy back stock, which seems difficult. So just seems like your hands are tied. Iâm just wondering, are we missing anything here that you could do to help close the gap.
Steven Roth: The spinout is still on the table. And the protection of our balance sheet is the number one priority.
Steve Sakwa: Got it. Thanks. Thatâs it.
Steven Roth: Thanks, Steve.
Operator: Thank you, sir. We have no further questions in queue.
Steven Roth: Well, thank you all very much. We appreciate you joining us â and the next call is when?
Michael Franco: Valentineâs Day, Tuesday, February 14.
Steven Roth: The next call, the lovable Michael says is Valentineâs Day. So, I guess, weâll see you in red on Valentineâs Day. Have a great rest of the year and thank you all very much. And by the way, you take up my invitations to come down to PENN. Itâs extraordinary and those of you who havenât toured through or seen it yet. Please take advantage of our invitation, itâs sincere . Weâd like to get you all down there and show you what weâre doing. Thanks very much. Thanks for joining.
Operator: Ladies and gentlemen, this concludes todayâs conference. Thank you for your participation. You may now disconnect.