Vornado Realty Trust

Good morning and welcome to the Vornado Realty Trust fourth quarter 2019 earnings call. My name is Brandon and I'll be your operator for today. 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 1 on your touchtone phone. I will now turn the call over to Ms. Kathy Creswell, Director of Investor Relations. Please go ahead.

Thank you. welcome to tornado Realty Trust fourth quarter earnings call yesterday afternoon we issued our fourth quarter earnings release and filed our annual report on form 10k with the Securities and Exchange Commission these documents as well as our supplemental financial information package are available on our website www.vno.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-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 for management for our opening comments is Michael Franco, President. In addition, Steven Roth and our senior team are present and available for your questions. I will now turn the call over to Michael Franco.

Thank you, Kathy, and good morning, everyone. Overall, we look back at 2019 as an important and successful year, setting the stage for the next phase of the company's growth. In addition to keeping our buildings full at very healthy rents, we are at 96.5% occupancy. We recapitalized our 5th Avenue and Times Square retail assets on a very attractive basis in a $5.5 billion transaction. We paid $1.95 per share of special dividend last month for Layman. Most importantly, we advanced the redevelopment of the Penn District, positioning the company to capitalize on the enormous opportunity we have on the west side of Manhattan. More on this in a moment. Before giving some thoughts on the markets in our portfolio, and in particular the Penn District, let me review our fourth quarter and full year financial results. Fourth quarter FFO as adjusted was 89 cents per share, flat to last year's fourth quarter. Full year 2019 FFO as adjusted was $3.49 per share compared to $3.73 per share for 2018. These results are 9 cents ahead of the guidance we've given in the third quarter. As we've previously indicated, our financial results for 2019 were lower than 2018. Explained as follows. Of the 24 cent reduction, 25 cents is due to over 3.2 billion of asset sales. 9 cents is due to a one-time non-cash stock-based compensation and four cents is due to lost income from retail and bankruptcies, all of which aggregate to a 38 cent reduction, which was partially offset by growth in our core business and interest savings. Overall, our core business continues to be strong. For the year, across New York, Chicago and San Francisco, our office and retail leasing teams completed 215 leases comprising 1.7 million square feet at starting rents of $90.45 per square foot at positive mark-to-markets of 14% GAAP and 8.8% cash. Please see page 18 of the supplement for further detail. Cash basis same-store NOI company-wide was up 3.6%. Company-wide, our fourth quarter cash basis same-store NOI increased by 6.6%, broken down as follows. New York office was up 3.4%, street retail was down 2.2%, The MART was up 100%, benefiting from a one-time $12 million accrual of real estate tax expense last year due to the triennial reassessment of the property. And 555 California Street was up 4.1%. Our non-comparable items in the fourth quarter included the $173.7 million after-tax net gain on unit closings at 220 Central Park South. To date, we have closed on 65 units for net proceeds of $1.82 billion, including 17 units for $565.9 million in the fourth quarter. We are now 91% sold in the face of a very soft luxury condo market, a testament to the building being the best ever built in New York City. And our sales continue strong. Since the beginning of 2019, we have executed contracts for $490 million. We expect to receive over $1 billion from closings in 2020, and as we've said previously, all the net proceeds will be redeveloped into the Penn District, redevelopments underway, turning this capital into highly accretive earnings and driving strong future growth. Now turning to 2020, which will be an inflection point for us as we invest heavily in the Penn District to create enormous future value. Given the full year effect of our substantial asset sales, and our development activity as we continue to invest in the Penn District, we thought it appropriate to provide some greater visibility into our projection for 2020. We currently estimate the 2020 FFO as adjusted will be lower than 2019 by between $0.23 and $0.33 per share. Of this $0.28 reduction to the midpoint, $0.16 is due to the full year impact of asset sales. $0.09 is due to taking additional assets out of service for redevelopment, primarily in the Penn District, at Penn II, the retail at the LIR Concourse, and the Kmart space at Penn I. And $0.08 is due to lost income from the full-year effect of 2019 retailer bankruptcies, all of which aggregate to a $0.33 reduction, which is partially offset by growth in the core business. Let me now turn to the New York market. The Manhattan office market continues to fire on all cylinders, fueled by strong job growth and unabated tenant demand for office space, particularly for landlords with new or redeveloped products. The city added 19,000 office-using jobs during the year, bringing office-using employment to an all-time high of 1,470,000 jobs. And the recently announced large future office commitments from major companies in the city point to continued strong jobs. Leasing volume citywide in 2019 totaled 43 million square feet, the highest activity in 20 years. Tammy tenants continued their strong demand, accounting for one-third of all activity during the year, with the tech sector alone leasing 7.5 million square feet. This sector has become a dominant powerhouse in New York, as tech companies are attracted by the city's dynamic economy, deep and diverse talent base, and leading universities. While the big tech companies like Facebook, Google, and Amazon continue to expand their sizable presence, the city's growth is also being driven by long-established traditional industries hiring more and more technology workers to support their businesses. Importantly, in 2018, venture capital investment in New York companies surpassed $17 billion, increasing New York City's share of total VC investment in the U.S. to an all-time high of 20%. up from 11% in 2018. These investments paved the way for continued growth from the tech sector in the future. The flight to quality trends and tenants for new construction and redeveloped space accelerated during 2019. According to JLL's annual trophy building report, more than 20%, or 8.8 million square feet, of the citywide leasing activity was signed to triple-digit starting rents, a record number. Interestingly, 60% of this triple-digit activity was with Tammy Tennis, mainly concentrated on the west side. According to a Cushman & Wakefield year-end report, asking rents for Class A product in the Penn District sub-market, which includes Hudson Yards and Manhattan West, reached a historic $109 per square foot, a very good sign for our 5.2 million square feet currently in redevelopment. As a company, we are heavily focused on the transformational repositioning of our Penn District holdings as a new epicenter of New York. Our redevelopments are now in full construction mode. 2020 will mark an important step in the district's transformation as the majestic Moynihan Train Hall in Farley and our 850,000 square feet of office and retail space in Farley will be substantially completed at year end. As you walk around the district today, you see the incredible amount of activity underway. The redevelopments of Farley, Penn 1 and Penn 2, the grand new entrance to Penn Station on Plaza 33 where work has begun, and the scaffolding in the LIRR concourse where redevelopment will shortly commence. In total, there is over $5 billion currently being invested in the district and its infrastructure, between Guarnero's $2.2 billion and the government's $3 billion. During the fourth quarter, we bought out Kmart's 141,000 square foot lease at Penn which had another 16 years to run for a $34 million payment of which $10 million is expected to be reimbursed. Steve and Eddie have been wrangling about this for years and years and we think we timed the buyout at exactly the right time and got it at a fair price. Despite the nominal short-term FFO loss from Kmart's rent, this was a big win for us and allows us to immediately integrate this space into our overall redevelopment plan for PEN1, the adjacent plaza, and the LIR concourse. and to populate this space with high-quality retailers much sooner. Overall, a big uptick for the neighborhood. During January, we executed a relocation transaction with Information Builders, which will move them from the tower of Pen 2 into two separate spaces at Pen 11 and Pen 1, totaling 78,000 square feet. This deal was the last piece of space we needed to get back to execute the redevelopment plan at Pen 2. Moreover, the starting ramp with information builders at Penn One is in the mid-90s per square foot, reflecting the market's confidence in the district's transformation and in this extraordinary development as it begins to take shape. In addition, as I'm sure most of you saw, the governor made a major announcement in January, expressing the state's intention to further modernize and expand track capacity at Penn Station through the creation of the Empire Station complex, with an expanded terminal on the block south of Penn II, increasing train capacity by approximately 40%. This announcement represents another validation of Penn Station slash Empire Station as the key transportation hub in the region and a further commitment from the government to invest in the area. The government expects ridership at Penn Station to double in the next 10 to 15 years. The state intends to fund this expansion through the creation of a new district which encompasses our Penn District holdings and by capturing future increases in tax revenues for new developments in this designated district. We look forward to working with the state, city, and other important stakeholders to help realize the governor's very important vision. With the explosion of tech demand in New York City, particularly on the west side, our Penn District assets are very well positioned to be at the center of this activity. It's in the hottest sub-market in the city. We're going to be delivering Farley, Pen 1 and Pen 2, totaling 5.2 million square feet near term, with an ability for tenants to grow with us over time on our massive campus located right on top of transportation. We're confident, as our plans become reality, that office tenants will truly appreciate the unique and differentiated product we're delivering. In this regard, we remain on track with the two large leases we mentioned on last quarter's call, and there's good activity from a variety of important tenants behind us. On the retail side, the interest in Farley has been outstanding as retailers come to understand the significant foot traffic that will course through Farley in the district every day. We are in lease negotiations on over 50% of the Farley concourse and are in active negotiations with the majority of the space on the main level. More broadly, we are working on a variety of deals to curate the district with all sorts of offers. Food and beverage, coffee, fitness, co-working, conferencing, retail, and so forth. The service, our 10th base. While earnings are, of course, negatively impacted in the short term, earnings will significantly increase as we turn the 60s per square foot office rents currently in place into mid-90s and higher as we deliver and lease the redeveloped space. Overall, our New York office portfolio is in great shape. 97% occupancy with a very manageable 525,000 square feet expiring during 2020 after taking the previously announced McGraw Hill space comprising 566,000 square feet at 10-2 out of service. Our office leasing activity is extremely strong with more than 1.6 million square feet of leases in final documentation and an additional 1.8 million square feet in the pipeline. During 2019, we completed 102 office transactions for 987,000 square feet at starting rents of $82.17 per square foot, with positive market markets of 4.6 cash and a 5.5% gap. Approximately 20% of our total leasing activity in 2019 was at triple digits at average starting rents of $120 per square foot. In terms of the fourth quarter, we leased 173,000 square feet at an average starting rent of $101 per square foot. While we had negative 5.2 cash and 3.5% gap mark the markets for the quarter, it is worth noting this was based on only 54,000 square feet of second generation space and driven by the rent reduction of one short-term renewal at $350 per gap. This is the single best development site on Park Avenue in Lakely Midtown, and we will be keeping renewals short-term here in order to line up this site for a possible new development. Leasing highlights during the fourth quarter included a headquarters lease at our new 512 West 22nd Street with NextGen Media for 41,000 square feet. At The Mart in Chicago during 2019, we completed 62 leases comprising 286,000 square feet at average starting rents of $49.43 per square foot. During the fourth quarter, we completed 50,000 square feet of showroom deals at starting rents of $51 per square foot. I can see stood at 94.6% a year end. We have very good activity on our available office space here and our numerous discussions with those new and existing tenants throughout the building. In San Francisco, the market remains on fire and it is hard for tenants to find quality available space At our 1.8 million square foot 555 California Street campus, we remain full and are enjoying the benefits. During the fourth quarter, we finalized a lease renewal with one of our full-floor law firm tenants in the bottom third of the tower at a starting rent of $94 per square foot, a 72.5% positive cash mark to market. We are also in renewal negotiations with two of our major tenants in the tower of the building, with each transaction that ramps well into the triple-dig. Turning now to our New York Street retail business. Overall, while rents are down, activity is up from a year ago, and there continues to be a flight to quality for retailers, a trend that benefits our portfolio. The best high street retail is not bad, but rents do need to be economic for retailers to commit. In a very difficult retail environment, we completed 39 retail leases with 238,000 square feet during with gap and cash positive mark to markets of 12.9% and 9.8% respectively. In the fourth quarter, we completed 16 leases comprising 94,000 square feet highlighted by very important 10-year leases with two LVMH brands, 595 Madison Avenue, better known as the Fuller Building. Fendi and Berluti leased a total of 16,850 square feet a year. reflecting the building's bullseye location at the corner of 57th Street and Madison Avenue. A portion of this space was formerly occupied by Coach and a portion was vacant. Kudos to Haim for sourcing the LDMH deal. Our retail occupancy remains high at 94.5% as we continue to source tenants for this best-in-class portfolio. Rents this quarter rolled up on a cash-mark-to-market basis by 11.3% and were flat on a gap. In addition, we are pleased to report that last week we signed an 8,000 square foot lease with Sephora at 4 Union Square South, which fills most of the space vacated by Forever 21 last year. Between the recent Whole Foods expansion and new Sephora deal, we have now surpassed the total rent Forever 21 was paying on the entire space, and we still have an additional 9,700 square foot leasing opportunity. Taken as a whole once fully released, we project an approximate 40% mark-to-market increase and a much better credit profile. As a testament to the uniqueness of our Union Square asset, we released the space 96 days after Forever 21's lease expired. We don't yet know what will happen with the other two Forever 21 leases we have, but if we get them back, these assets are in premier locations, and while it might take longer, we are confident we'll release them successfully, just as we did Union Square. Finally, a comment on sustainability. We have always prioritized reduction of our carbon footprint and mitigation of our contribution to climate change. And we are in lockstep with our investors, tenants, employees, and communities. We have reduced by 25% our same store energy consumption in the last 10 years and are committed to furthering our progress through continued energy retrofits, smart building technology, and meaningful engagement with our tenants. We will also include renewable energy as an important step in our process towards carbon neutrality. We are well positioned to comply with recent climate laws, as evidenced by our being Energy Star Partner of the Year for the seventh time, a Navy leader in the Life Award recipient for the tenth year in a row, and a top performer among all global real estate sustainability benchmark respondents. In addition to the many awards for sustainability we win each year, I am specifically proud of our team for being cited as the industry model with our innovative approach to furnishing our audited ESG report to the Security Exchange Commission. We continue to maintain a fortress balance sheet with measured leverage and an abundance of liquidity today in Toronto. After the $400 million special dividend was paid last month, our liquidity is $3.8 billion, comprised of $1.2 billion in cash and restricted cash, and $2.175 billion undrawn or revolving credit facility. To conclude, we feel very good about our overall business. We own great assets in great locations in great cities and know how to keep these properties full with best in class tents and market leading us. Moreover, we have outstanding and unique development skills that allow us to create significant value. We will continue to take full advantage of New York's strong economy and climate for businesses to grow and succeed while they find the best talent in the country. With that, I'll turn it over to the operator for Q&A.