Vornado Realty Trust

Good morning and welcome to the Vornado Realty Trust fourth quarter 2018 earnings call. My name is Michelle and I will be your operator for today's conference. This call is being recorded for replay purposes. All lines are in a listen only mode and our speakers will address your questions at the end of the presentation during the question and answer session. At that time, please press star and then one on your touch phone. I will now turn the call over to Ms. Kathy Cresswell, Director of Investor Relations. Please go ahead, ma'am.

Thank you. Welcome to Gornado Realty Trust's fourth quarter earnings call. Yesterday afternoon, we issued our fourth quarter earnings release and filed our annual report on Form 10-K with the Securities and Exchange Commission. These documents, as well as our supplemental financial information package, are available on our website, www.dno.com, under the Investor Relations section. In these documents and during today's 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-K, and financial supplement. 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 Form 10-K, for more information regarding these risks and uncertainties. The call may include time-sensitive information that may be accurate only as of today's 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 of the Board and Chief Executive Officer, and David Greenbaum, President of the New York Division. Also in the room are Michael Franco, Executive Vice President and Chief Investment Officer, Joseph Macnow, Executive Vice President, Chief Financial Officer, and Chief Administrative Officer, Mark Hudspeth, Executive Vice President and Head of Capital Markets, Matt Iocco, Executive Vice President and Chief Accounting Officer, and Tom Sanelli, Executive Vice President and Chief Financial Officer, New York Division. I will now turn the call over to Steven Roth.

Thank you, Kathy. Good morning, everyone. 2018 was a good year. Here are some highlights. Our leasing activity for the year across the entire business, including New York, The Mart, 555 California Street, and retail, totaled over 2.6 million square feet and 230 leases, with industry-leading mark-to-markets of 25.6% gap and 18.4% cash. At year-end, office occupancy across the board was 97%. and retail occupancy was 97.3%. These numbers in the very high 90s are typical of our performance year in and year out over the past 20 years. Thanks to Glen and our best in the business leasing team. We have begun closings at our 220 Central Park South super tall condominium project. In the fourth quarter, we closed 11 units aggregating $222 million with a 67.3 million after tax gain. and we have already closed in just the first five weeks of this year another 290 million. Closings will continue throughout 2019 as we climb up the building. And the last of the 27 large full floor apartments in the tower is now committed and under contract. I'm guessing that this is the most successful apartment project ever anywhere. We increased our ownership in the Moynihan Train Hall Farley project from 50% to 95%. We are in full-blown construction here and in 2020 we will deliver the best creative space in Manhattan. We love this asset. It is the link between our Penn Plaza neighborhood and Hudson Yards. It is a double wide block with 150,000 square foot floor plates and high ceilings. It is a horizontal campus in an iconic landmark building much like the horizontal campuses favored by our Fang tenants in the West. It is a truly unique asset. In the Penn District, we are underway to transform Penn One and Penn Two to create a two building, 4.4 million square foot campus right on top of Penn Station. It will include a three block grand plaza along Seventh Avenue covered by a giant new bustle across the entire 400 feet frontage of Penn Two. This bustle will extend 70 feet out from the building and will be 50 feet above the street. It will serve a dual purpose. It will be striking, creating a huge covered plaza in front of our 1.8 million square foot Penn II and the main entrance to Penn Station. It will bring the neighborhood into the modern age. And at the same time, we will create 140,000 square feet of very valuable new best-in-class creative space. The scale of our campus here will allow us to provide our tenants with the biggest and best unparalleled amenity package, even a giant step forward from what many of you have seen that we have done at the Mart. Considering our redevelopment plans and everything that's happening around us, we expect an incremental $30 uplift in rents here. This financial reward is the main event. So, putting 220 Central Park South and the Penn District together. Big picture, our financial plan is to redeploy the proceeds of 220 Central Park South sales into the capex of Farley, Penn 1, and Penn 2. Give or take, we expect to finance all this capex internally, probably with no or very little new debt. Given that the only cost of the capital coming out of 220 Central Park South is the accounting item, capitalized interest, which in round numbers is about $25 million. This will be enormously accretive. As is our custom, we published management's estimate of NAV in the fourth quarter supplement. Please see page 22 of the supplement. Our SPOT NAV is $97 per share versus $96 per share a year ago. The math here reflects an increase in office NOI partially offset by an increase in the cap rate on street retail to 4.5% from 4.25%, which we believe more accurately reflects current market conditions. Last month we increased our quarterly dividend to $0.66 per share at an annual rate of $2.64, a 4.8% increase, this after a 7.7% increase the year before. Based on yesterday's closing price, the dividend yield is 3.8%. It is very encouraging that Amazon chose New York for half of HQ2 and that Google, Disney, Facebook, and many others continue to expand and expand again and again, making New York their second home. By the way, the other half of HQ2 is going to Crystal City, Virginia, on land we contributed to our JBG Smith spinoff, validating investments we made years ago. This is a really big deal. Kudos to Matt Kelly and the JBG Smith team. Here's an interesting tidbit that bodes really well for the future of New York. As David will tell you in a minute, a research piece just came out with the fact that New York has grown to be the leading tech city in this year's index, overtaking San Francisco. The point here is that New York has been steadily growing in creative class workforce, in creative employers, and in creative infrastructure. Now I'd like to cover the financial math. Financial results for the full year are as follows. Net income was $2.01 per share compared to $0.85 for 2017. Total FFO was $3.82 compared to $3.75 for 2017. FFO as adjusted was $3.76 compared to $3.73 for 2017, consistent with our comments at the beginning of the year that 2018 would be flat. 2018 cash basis FFO is adjusted was 373 compared to 348 for 2017 up a strong 7.2%. Company-wide cash basis NOI for 2018 was 1.338 billion compared to 1.315 billion for 2017. 2018 cash basis same-store NOI increased 3.9% as follows. New York office was up 7.5%. Retail was essentially flat down two-tenths of a percent. The total New York segment was up 4.3%. Retail produced $324.2 million of cash NOI in 2018, well ahead of the $304 million minimum we guided in the beginning of the year, which we increased to $315 minimum in the third quarter. The market was down a funky 6.5% as a result of a fourth quarter $12.1 million additional real estate tax accrual. This is essentially a timing mismatch between the gap required expense accrual in 2018 and the actual payment, which we will make in 2019, which is when we will bill our tenants and collect approximately 80% in reimbursement income. Excluding this mismatch, Lamar's same store would have been positive 8.8%. At 555 California Street, the same store was up 18.1%. For the fourth quarter, results are as follows. Net income was 53 cents compared to 14 cents in the prior year's fourth quarter. Total FFO was $1.10 compared to 80 cents for the prior year's fourth quarter. FFO as adjusted which includes non-recurring items was 90 cents compared to 98 cents in the prior year's fourth quarter. FFO as adjusted for this quarter was negatively impacted by the following items. $12.1 million or six cents from the already mentioned additional real estate tax accrual at the mark. 10.5 million or five cents from expected retail vacancies and lower income from a few short-term deals. and 6.2 million or 3 cents from expected vacancy at 90 Park Avenue and the Mart, space out of service at Pen 2 and 825 7th Avenue and lower office termination fees. Of course, there were many positives which partially offset these items. This is all the normal ebb and flow of our business. We run the business for cash. Here are the cash numbers for the quarter. Cash basis FFO is adjusted with 91 cents and Robert Larson. This flattish number masks a very healthy business. Here are the details. New York office was up a sound 5.8%. Retail was down an anticipated 4.1% based on scheduled lease expiries and reduced rents on short-term renewals. The total New York segment was up 1.9%. The Martin same-store number is so heavily skewed by the real estate tax mismatch that the number is not meaningful. Excluding this mismatch, The March same store would have been positive 2.7%. And 555 California Street was up a very healthy 15.8%. Our office business continues to perform very well. We continue to experience robust demand from all manner of industries in all of our submarkets. As I have said before, our tenants are optimistic, aggressive, growing, and upbeat about New York. Retail continues to be soft, albeit we are finding sales volumes are leveling and there is increased retailer activity and tours. The two strongest retail submarkets in town are Times Square and Penn Station, where we are the largest owner with the best assets. And here I want to make a plug for the 120,000 square feet of retail we are developing in the Moynihan Train Hall at Penn Station. In addition to the teeming streets and the existing traffic and the nation's busiest train stations, All the pedestrian traffic to and from Hudson Yards and Manhattan West will funnel through us. As you would expect, we have tremendous retailer interest in this unique space. David will give you more facts and details in a minute. Turning now to investment sales. After a slow start to 2018, the investment sales market strengthened over the course of the year, ending strongly. Investor appetite for New York City office continues to be healthy, though disciplined, with a good mix of domestic and foreign capital sources easily replacing declining activity from China. Demand for assets in the west and south of Manhattan and for smaller assets continue to be strongest, but investor interest is also active in midtown. Pricing has stayed fairly constant with cap rates in the mid-fours. The market has suffered from a shortage of available quality product on offer, and with a fair amount coming out in 2019 should get off to a strong start. The debt markets continue to be constructive, very strong in the first three quarters of 2018, but signaling caution and volatility in the fourth quarter. All in borrowing rates remain low by historical standards. It's interesting to note that for us, secured non-recourse financing, which is our mainstay, is now cheaper than unsecured public market full recourse financing by 25 basis points for sure, and maybe even more. We have a highly liquid fortress balance sheet with $3.3 million in immediate liquidity, measured leverage, and well-staggered debt maturities. and this doesn't count a couple of billion dollars to come from 220 closings and non-core asset sales. Thank you, now to David.