Vornado Realty Trust

Good morning and welcome to the Borenality Realty Trust third quarter 2019 earnings call. My name is Michelle and I will be your operator for today's conference. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. And during the question and answer session, if you have a question, please press star then 1 on your touchtone phone. Please note that this conference is being recorded. I will now turn the call over to Ms. Kathy Creswell. Ma'am, you may begin. Thank you.

Welcome to Bernado Realty Trust's 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 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 relief, 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 is Michael Franco, President. In addition, Steven Roth and our senior team are present and available for questions. I will now turn the call over to Michael Franco.

Thank you Kathy and good morning everyone. Overall our business is in great shape. Our buildings are full and we continue to hone in on the significant opportunity that we have with the redevelopment of the Penn District. Let me review our third quarter financial results before giving some thoughts on the markets and our portfolio and in particular the Penn District. Third quarter FFO as adjusted was 89 cents per share. 7 cents lower than last year's third quarter. As I discussed on last quarter's call, these results were impacted primarily by reduced income related to the over $3.1 billion of asset sales we've completed year-to-date and the lost income from the Top Shop and Forever 21 bankruptcies. Last quarter, I also discussed the impact of Top Shop's closing at 608 Fifth Avenue and 478 Broadway. In August, we delivered the required nine-month notice to the groundless sort at 608 Fifth Avenue that we will terminate the lease in May 2020. This permanently reduces FFO by approximately $10 million annually and nix our NAB by roughly $1 per share. This grand lease had only 14 years left on it and was not economic for us to hold on to. Now to Forever 21, which we mentioned last quarter was a restructuring candidate. As you know, they filed for Chapter 11 bankruptcy protection at the end of September. They are a tenant at 1540 Broadway and 435 7th Avenue. They have a third lease with us at 4 Union Square, which expires next month, and we chose not to renew them. We have already re-leased a portion of that space to Whole Foods as part of their expansion and have a lease out with another important tenant for an additional portion, both at higher rents than what Forever 21 was paying us here. Forever 21's annual rent on 1540 Broadway and 435 7th Avenue totals approximately $20 million a share. While the bankruptcy process is fluid and is still in its early stages, we have reached a tenant agreement with Forever 21 to shorten their leases and retain them in those two locations for a little less than half of their current rent, with us having the right to recapture the spaces at any time after the first year, enabling us to secure long-term tenants for the spaces. Both of these assets are in prime locations, and we are confident of their long-term potential. So to summarize, even with these items, we remain on track to meet the approximate $3.40 per share in comparable FFO for 2019 that we referenced in last quarter's call. Our non-comparable items this quarter included a couple of large gains. One, the $178.8 million of net gains on sale of real estate, primarily related to the July sale of our 25% interest in 330 Madison, where we made eight times our investment. and two, the $109 million after-tax net gain on unit closings at 220 Central Park South. To date, we have closed on 48 units for net proceeds of $1.25 billion, including 14 units for $349 million this quarter. And we continue to sign new contracts for the few remaining units as well. Remember that we paid off the remainder of the $950 million loan on this asset in July. So as closings continue through 2020, We retain all net proceeds, which importantly, will be redeployed into the Penn District redevelopments, turning this capital into highly accretive earnings and propelling our future growth. Company-wide, our third quarter cash basis, same store in OI, increased by 1%, broken down as follows. New York office and street retail were both up 1%, the mart was down 1%, and 555 California Street was up 17.7%. For the first nine months, Cash Same Store NOI across the business was up 2.7%. Let me now turn to the New York market. The New York office market, which continues to be fueled by positive job growth and delivery of premium office product, performed strongly during the third quarter of 2019. Leasing activity across the city remains vibrant, driven mainly by technology and financial tenants, with asking rents at record highs for the market overall. More than 25 million square feet of new leases have been signed in New York during the first three quarters of 2019, with many large deals in process expected to close in the fourth quarter. Talent wants to be in New York, and therefore companies are migrating to and expanding in the city, creating tremendous competition for top talent. Nowhere is this more evident than with the dramatic demand from the big tech companies. Executives view their real estate as one of the key drivers to recruiting the best and brightest talent to their teams. Private sector jobs increased 53,000 in the first nine months on pace with 2018, with nine-month office sector jobs increasing about 18,000 as compared to 20,000 for all of 2018, and certainly at a pace strong enough to continue absorbing the new supply coming online. There are currently 65 tenants actively looking for 100,000 square feet or more, totaling 16 million square feet of potential activities. This demand is coming from all industry sectors, from companies already in the city as well as those seeking their first home here. Our development in the Penn District is seeing the benefits of this demand, as we are in full gear on our 5.2 million square feet of combined redevelopments at Farley, Penn 1, and Penn 2. We are experiencing robust interest in all three projects as prospective tenants begin to appreciate the magnitude of our district transformation. Tenants are responding very favorably to the unique nature of our amenities, space offerings, and design elements at each property that will serve today's workforce. At the most accessible location, directly on top of the most important transportation hub in the region. Farley is one of a kind, and we have great activity on the space. At Penn Zoo, we are negotiating a lease with a 400,000 square foot headquarters tenant. And there is more in the works beyond this. All at rents, at or above or under. All our activities will benefit from the significant public sector projects being built in our district, including the new Grand Moynihan Train Hall, which will be delivered in 2020, the expanded LIR concourse, running from 7th to 8th Avenues by the end of 2021, and a soaring new station entrance at 33rd Street and Plaza 33. Against the backdrop of this district transformation, we are placemaking the entire district, and are hard at work negotiating deals to curate the district with new food and beverage outlets by leading operators, coffee spots, fitness offerings and other retailers to service our tenants. These additions will dramatically enhance our offering and drive greater demand and rental rates within our 10 billion square foot district portfolio. Our goal simply is to make the Penn District and our holding specifically the go-to location for tenants in the city. More broadly, our New York office portfolio is in great shape and continues to perform well. We are substantially full, with occupancy ending the quarter at 96.8%. Our remaining 2019 expirations are only 85,000 square feet, while our 2020 expirations are a modest total of 1,055,000 square feet, with 760,000 square feet of this amount expiring at PIN 1 and PIN 2. Please remember, this includes 565,000 square feet at Pen 2, which will be taken out of service in 2020 as this development kicks into high gear. This will bring the total out of service at Pen 2 at the end of next year to approximately 1 million square feet. Basically, we're repositioning the buildings from mid-60s per square foot rents to the 90s and need to move the old tenants out in order to accommodate the new ones. During the third quarter, our leasing team completed 25 leases, totaling 197,000 square feet in New York, at over $80 per square foot starting rents, with very strong second-generation positive market markets of 22.7% cash and 28.5% cap. We have now completed 814,000 square feet of leases during the first three quarters of 2019, at a healthy average starting rent of only $79 per square foot. In the quarter, we signed our first lease at our new build at 512 West 22nd Street on the High Line with Warner Media for 20,000 square feet at a triple-digit rent. We also have an additional lease out here for 43,000 square feet at triple digits, which we expect to sign in the fourth quarter. Additionally, during the quarter, we finalized a relocation expansion deal with an existing tenant in our portfolio, which will be moving from Midtown to 28,000 square feet at 330 West 34th Street in the Penn District. The starting rent per square foot here is in the high 80s, a record for this building, which is clearly benefiting as tenants recognize what's coming with the Penn District transformation. Overall, tenant dialogue across our entire portfolio is very strong, We are as busy as ever with 3 million square foot of deals in different stages of negotiations, including our strong momentum at Farley and Pentil. Moving to Chicago now. At the mark during the quarter, we executed 45,000 square feet of leases at an average starting rent of over $48 per square foot, with positive mark-to-markets of 6.7% cash and 14.9% gap. This included an expansion lease with Allstate, for 17,500 square feet, raising the total footprint to 120,000 square feet. Occupancy here is at 95%. In San Francisco, the market continues to be hitting on all cylinders. With our campus here at 100% occupancy, we are taking advantage of the extreme tightness in the market and are now discussing with renewals with several important tenants totaling 180,000 square feet well in advance of their expiration. During the quarter, we leased 50,000 square feet, including a 42,000 square foot renewal expansion with an existing tenant in 315 Montgomery Street at a starting rent of $97 per square foot. Please note our positive mark to markets on second generation space here, which were a spectacular 39.3% cash and 64.5% gap. Before turning to our retail business, let me comment on WeWork. There's been some speculation in the press that we and several other landlords have meaningful exposure to WeWork, when quite the opposite is true in our case. We have WeWork as a tenant in only one location, 606 Broadway, a mere 15,000 square feet of share. While we appreciate some of the creativity that WeWork brought to the office business, we chose to lease our space to end users with better credit over the past few years. Notwithstanding this, we do think that co-working provides an important service in the real estate ecosystem, and we will be providing flex space as part of our overall offering for tenants at Pen 1 and Pen 2. This space will provide our tenants swing space, co-working space, meeting and social spaces, food, and more. We will brand this space under the Bornado name and, importantly, retain the bulk of the upside. Turning now to our New York Street retail business. Overall, the retail market continues to be challenged. with leasing velocities slow and assets prone to negative surprises, a la Top Shop and Forever 21. Retail occupancy was 95.9% at quarter end. In the third quarter, in spite of the challenging leasing environment, we executed nine leases for 26,000 square feet of retail space, achieving positive mark-to-markets of 6.2 cash and 15.6% gap of second-generation space. During the first week of October, We finalized their replacement lease for the short-lived former Four Seasons Restaurant at 280 Park Avenue with the famous best-in-class Fasano Hotel and Restaurant Group. Fasano has been a symbol of quality fine dining and excellence in Sao Paulo and Rio since 1949. This will be their first New York restaurant and will focus on classic Italian cuisine similar to those they operate in Brazil. Fasano will deliver the best in fine dining to Midtown Manhattan, while creating an atmosphere of style, sophistication, and energy. We think this will further enhance the quality of our tenant experience at 280 Park and are excited for their openings in the first half of 2020. We continue to maintain a fortress balance sheet with reasonable leverage and an abundance of liquidity today and growing over the next few years. Our current liquidity is $3.36 billion, comprised of $1.28 billion in cash, restricted cash and securities, and $2.08 billion undrawn on our revolving credit facilities. Lastly, I want to remind you that based on taxable gains from our asset sales year to date, we are currently anticipating paying out a special dividend of approximately $1.90 per share this year. With that, I'll turn it over to the operator for Q&A.