Vornado Realty Trust

Good morning and welcome to the Vornado Realty Trust first quarter 2019 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. Our speakers will address your questions at the end of the presentation during the question and answer session. At that time, please press star then one on your touchtone phone. I will now turn the call over to Ms. Cathy Cresswell, Director of InVector Relations. Please go ahead, ma'am.

Cathy Cresswell Thank you. Welcome to Vornado Realty Trust's first quarter earnings call. We issued our first quarter earnings release yesterday and filed our quarterly report on Form 10Q with the Securities and Exchange Commission. These documents, as well as our supplemental financial information package, are available on our website, www.bno.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-Q, 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 Michael Franco, President. I will now turn the call over to Steven Roth.

Thank you, Kathy. Good morning, everyone. Our earnings were released yesterday morning in error instead of our normal practice of aftermarket close. Our web hosting service provider pushed the wrong button during the test. While they were only live for a minute, New York Stock Exchange protocol in such a case is to stop trading pending the issuer's full release, which we accomplished mid-morning. This is annoying, but I guess you could say no harm, no foul. So now to business. My annual letter to shareholders was released on April 5th and amended on April 18th, 13 days later, to update for our retail deal and that Haim Chera was joining. In my letter, we announced important leadership changes. Michael Franco was appointed president of Renato. Michael has been an important part of our management since 2011, most recently serving as chief investment officer, where he has been lead for acquisitions, dispositions, and financing. and has been involved in all important decisions and strategies. David Greenbaum, who has been my partner as president of the New York Division since joining us in 1997 as part of the Mendick acquisition, has decided to cut back, spend half his time in Arizona and half in New York while continuing his leadership as vice chairman. David will join the board this year when we add an additional independent trustee. We have promoted David's two most important lieutenants, Glen Weiss, our head of office leasing, and Barry Langer, our head of development to the position of co-heads of real estate. Glen has been with us since the 1997 Mendick acquisition, and Barry has been with us since 2003. We are delighted to promote Michael and to promote Glen and Barry. These are promotions from within our organization. Each of these talented leaders is proven is the best in the business and is ready to step up. They have been with us for a combined 46 years. We know them well. One might say that the big deal of the quarter was our blockbuster retail deal. To me, as big a deal was our recruiting Haim Chera to head our retail business. In my mind, Haim is hands down the best retail executive there is. In addition to running our existing portfolio, The disruption in retail will present enormous opportunities for those with talent and capital. We have both in full measure. We are excited about the opportunities that lie ahead. My personal observations about David, Michael, Glen, Barry, and Haim are in my letter. Biographical information is available on our website at www.vno.com. I might say it's truly amazing how deep and talented our management team is. It's a joy for me to work with them every day. In the quarter, we did some house cleaning. We sold our shares of Lexington Realty Trust and Urban Edge Properties for $276 million, resulting in a financial statement gain of $78 million. We used the proceeds from these sales together with existing cash to retire our $400 million principal amount of 5% unsecured notes, which were scheduled to mature in January 2022. Now to our retail deal. As you already know, we created a joint venture and transferred a 45.4% common equity interest in seven assets on Upper Fifth Avenue and Times Square to a group of international investors at a valuation of $5.556 billion. Taken together, our press release, 8K filings, and the disclosure in my amended shareholder letter represent, in my mind, some of the most comprehensive disclosure I have seen about a deal. Reading your notes and talking to investors, we are very pleased that almost everyone got it. The 4.5% cap rate is spot on with our published NAV. A few were surprised that we got such a robust bid for these retail assets. They shouldn't have been surprised. As we have been saying time and time again, the very best quality assets such as these are always in high demand by institutional and foreign capital. The deal value at share was $5.327 billion as against our economic basis of $2.873 billion and a tax basis of $1.561 billion. Everyone can do the math. Two questions were most frequently asked. Explain the $1.828 billion of preferred equity, and second, what's the appropriate cap rate for the remaining retail assets that are not part of the joint venture? Our partners' desire of 50% leverage, and that suited us just fine. The deal we structured, which perfectly accomplished all of our goals, involved leaving a $450 million mortgage loan in place, putting on a new $500 million mortgage loan, which we will guarantee... and 1.828 billion in new preferred equity on five unencumbered properties which we will hold on balance sheet. Now many may think of real estate preferred equity as deeply subordinated junk at the bottom of a too complicated capital structure. This preferred is completely the opposite. It has the first claim to the cash flow and the value of each of five great unencumbered assets. It represents approximately 50% of the value of each of these assets. It has a due date of never, a fixed coupon of 4.25% for the first five years, increasing to 4.75% for the next five years, and formulaic thereafter. It can be borrowed against, sold, or redeemed to create liquidity. The coupon is, say, 50 basis points rich to equivalent debt, which is a good thing, and by the way, such debt was readily available, and 200 basis points rich to what we would have earned on cash and that's a very good thing. Our remaining retail assets are each in their best sub markets. Many have below market rents a la four Union Square and the Kmarts and many are in transition and some have a sprinkling of vacancy. My guess is when we publish our year end NAV, the cap rate on these assets may be even lower than 4.5%. We will see. As I said, the deal is spot on with our published NAV and about $7 per share accretive to our stock price. Think of it this way. We started with $5.3 billion of assets, subject to $860 million of debt, or $4.5 billion of equity at NAV, which was valued in the marketplace at, you pick the number, say a 30% discount or a $1.35 billion ding. We ended up with $1.2 billion of cash and $1.828 billion of preferred equity, or $3 billion of financial assets, plus 51% of the common equity and the continuing upside in the properties. All in all, we are much, much better off. We will recognize a $2.6 billion financial statement gain in the second quarter. The tax gain is estimated to be $735 million. The math in my letter indicates that there will likely be a capital gain distribution at year end. Michael Franco quarterbacked our execution team on this deal. He and his team did a superb job. To sum it up, and even if I'm being a little repetitive, we think the execution of this deal was outstanding, done in a very tax efficient manner, and validates the enormous value we have created in our retail assets. We are delighted with this transaction and we look forward to working with our new partners who are sophisticated, long-term investors who appreciate the true value of our assets more than the public markets do. Lastly, in response to a few incoming questions, I want to comment on the Green New Deal bill that was recently passed in New York City. And by the way, we expect similar legislation in all major U.S. cities. While the exact specifics still need to be written, We are supportive of policies that mitigate climate change and benefit the environment. We believe in sustainable policies, as do our investors and our tenants require it. We have a long-held strategy of continuously improving, reducing our own carbon footprint, and encouraging our tenants to do the same. We are a six-time Energy Star Partner of the Year. We have over 26 million square feet of LEED-certified buildings and have been named Leader in the Light by NARI for nine years in a row. With respect to the bill's penalties, and by the way, they are penalties, not attacks, we are well ahead of the curve and think the impact on our portfolio will be de minimis in 2024 when the first carbon emission cap goes into effect. Through proactive energy efficiency measures, we have already reduced our consumption by 20% since 2005. Now let's go to Michael Franco, my colleague of the last eight years, and now Vernado's newly minted president. Congratulations, Michael.