Vornado Realty Trust

Good morning and welcome to the Vernado Realty Trust first quarter 2020 earnings call. My name is Sydney and I'll be your operator for today's call. This call is being recorded for replay purposes. All lines are in a listen only mode. Our speakers will address their questions at the end of the presentation during the question and answer session. At this time, please press star then one in your touch tone phone. I will now turn the call over to Miss Kathy Cresswell, Director of Investor Relations. Please go ahead.

Thank you. Welcome to Vernado Realty Trust's first quarter earnings call. Yesterday afternoon, we issued our first quarter earnings release and filed our quarterly report on form 10-2 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 release, Form 10-Q, and financial supplement. Please be aware the 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, 2019, and our quarterly report on Form 10-Q for the quarter ended March 31, 2020, 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 to update any forward-looking statements. On the call today for management for our opening comments are Steven Roth, Chairman and Chief Executive Officer, and Michael Franco, President. And our senior team is on the call and available for questions. I will now turn the call over to Steven Roth.

Thank you, Kathy, and good morning, everyone. Before we begin, I ask for a moment of silence in honor of the lives that have been lost during this COVID-19 pandemic. including Haim's beloved father and my dear friend Stanley Chera. Thank you. We now find ourselves in almost total shutdown, a never before situation. Life as we know it is upside down, people are hurting, businesses are hurting, and the future is uncertain. At Renato, as our first priority, we are following strict protocols and taking all measures to protect our employees, our tenants, and our communities. We pray for the health and safety of all and we commend and admire the talent and courage of our healthcare providers. In their honor, the crown of 731 Lexington Avenue, our Bloomberg Tower is now flying scrubs blue as is our block long time square sign and also the light projection on the mark. Our entire organization is working remotely and doing a remarkable job keeping the trains running and on time. They have our thanks. Our office buildings remain open, safe, and sanitized with a right-sized operating staff. Building census is currently less than 5%. All but essential retail is closed, dealing a lethal blow to some in an already challenged industry. We have taken the following operating steps to reduce expenses and preserve cash. We have placed 1,800 employees on temporary furlough. including 1,300 employees of BMS, our wholly owned subsidiary which provides cleaning, security, and engineering services to our properties, 400 employees at the Hotel Pennsylvania, and 100 of our corporate staff. We have deferred certain capital projects to the tune of $125 million. We have closed the Hotel Pennsylvania temporarily. Effective April 1, For the remainder of the year, our executive officers waive portions of their annual base salary, beginning with my 50% reduction and scaling down from there, and each member of our Board of Trustees will forego their annual cash retainers. Now let's talk a little about the mass of this COVID-19 situation as it affects our business. I see it in three parts. We expect a $9 million average monthly income reduction from, one, the Hotel Pennsylvania being closed, two, the March canceled trade shows, three, reduced revenue from BMS cleaning services, four, reduced income from our garages, and five, reduced third-party spot signage rentals. All of these businesses are variable depending upon economic activity as opposed to fixed price leases. They represent only 6% of our overall revenue and all of these businesses will rebound to prior levels when life returns to normal. Second, our rental revenue stream is supported by over 1,000 office leases with an average lease term of eight years and over 300 retail leases with an average lease term of six and a half years. This year, total annual rent due from all tenants is over $1.7 billion or $142 million per month. As is normal, we have collected virtually all rent due from January through March. For April, we collected 90% of office rents and 53% of retail rents, or a combined 83%. Interestingly, of the unpaid office rents and coincidentally of the unpaid retail rents, almost two-thirds is due from credit-worthy tenants. So in April, we have uncollected rents of almost $24 million, and that's calculated as 17% times $142 million, which will become a receivable on our balance sheet, in effect, a loan to our tenants. We have $302 million of tenant security deposits protecting bad debts, of which $51 million is from tenants who have not yet paid April's rent. As you would imagine, we are in discussion with almost every one of our tenants. We are confident that we will ultimately collect most of this receivable. By way of further information, for the first four days of May, we have collected 53% of office and retail rents, which is very slightly ahead of the first four days of April. Here's the punchline of my first two points as they affect valuation. If April's run rate were to continue for, say, an entire 12-month year, and we surely hope it will be shorter than that. The cost or earnings ding from the variable businesses I mentioned plus from our educated guesses to what bad debts might be is a one-time cost of around a dollar per share and that would be for a total 12 months. This does not give any credit for security deposits. And my third point is the larger issue affecting valuations. What will our world be like when COVID-19 passes? We can each estimate or guesstimate what will be tenant demand, rents and building values, how many tenants will not survive, and how many retail tenants will seek bankruptcy. The stock market has voted by taking the price of our stock down $25 or $5 billion. I think this is a gross exaggeration. Our current liquidity is $3.4 billion including $1.7 billion of cash and restricted cash and almost $1.7 billion undrawn under our $2.75 billion revolving credit facilities. In addition, we are scheduled to receive $750 million from two 20 Central Park South closings from May through the balance of this year. So you might say our liquidity is really over $4 billion. Interestingly, Since the heat of the crisis in mid-March and through April, we closed, as scheduled, five units for net proceeds of $210 million. We remain committed to our redevelopment and capital plans for the Penn District, Farley, Penn 1, and Penn 2. These projects are the center point of our Penn District vision, the new epicenter of New York, where we will be delivering for tenants cutting-edge, next-generation amenities and services unmatched anywhere. Each project is progressing, albeit at a somewhat slower pace due to government-mandated construction restrictions. As we have said before, these three large Penn District projects are debt-free and are being funded off our balance sheet and from the aforementioned proceeds from 220 Central Park South closings. No debt, no joint ventures, and Renato shareholders keep 100% of the upside. We have built Renato to weather the storm and, importantly, to flourish as it passes. We have a cycle-tested management team. We are always laser-focused on our balance sheet and liquidity, and in recent years have been aggressively selling and spending assets, aggregating over $19 billion, pushing away from top-tech acquisitions and pushing away from stock buybacks. As cycles go, all of a sudden, it is now surely a better time to buy than to sell. The next few years should be great vintages for investors, so you might say I am ringing the bell. Here is a thought for you. We invest not for quarterly returns, but for two, three, and even five years, and we hope you do too. Buying right and the passage of time and patience begets outsized rewards. I'll now turn it over to Michael Franco for our first quarter financial results.