Vornado Realty Trust

Good morning and welcome to the Vernado Realty Trust second quarter 2021 earnings call. My name is Hilda and I will 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 adjust 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 touchstone phone. I will now turn the call over to Ms. Kathy Creswell, Director of Investor Relations. Please go ahead.

Thank you. Welcome to Bernardo Realty Trust's second quarter earnings call. Yesterday afternoon, we issued our second quarter earnings release 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.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 Relief, Form 10-Q, and Financial Supplements. 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 annual report on Form 10-K for the year ended December 31st, 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 a duty to update any forward-looking statements. On the call today from management for our opening comments are Stephen Ross, Chairman and Chief Executive Officer, and Michael Franco, President and Chief Financial Officer. Our senior team is also present and available for questions. I will now turn the call over to Stephen Roth.

Thank you, Kathy, and good morning, everyone. I hope everyone is healthy, continues to be vigilant, and gets vaccinated. Let me say it again. Everybody, please get vaccinated. I'll start by sharing a few things that are happening on the ground, which I hope you all find interesting. The U.S. economy is resilient, is growing, I might even say is booming, and so is New York. Financial, tech, and almost all industries are achieving record results. In New York, apartment occupancy, which had dropped to as low as 70% during COVID, is now rapidly climbing back with record numbers of new leases being signed each week at higher and higher rents. Condo sales, which had stalled during COVID, are now active, albeit at discounted pricing, except I'm proud to say at our 220 Central Park South, where resales are at a premium. This apartment and condo demand is coming from folks who live and work in New York, and that's a very good sign. At 220 Central Park South, where we are basically sold out, resale pricing is up, and that's an understatement. A recent spectacular example, which is now public, is a two-floor, 12,000-square-foot resale that traded at a record-breaking $13,000 per square foot Think about that. Our New York office division is now experiencing record incoming RFPs and requests for tours, including from many large and important occupiers who had been on the sidelines during COVID. Glenn and his team are very busy. By the way, Big Tech is now very active, looking for more space in New York to take advantage of New York's large, highly educated, and diverse workforce. Here's an interesting fact. A Fortune 100 occupier, household name, who dropped out of the market during COVID has come back to market. They were originally looking for 300,000 square feet to house 2,800 employees. Post-COVID, after extensive study and space planning, they now need and are seeking 400,000 square feet, a 30% increase, to house the same 2,800 employees. In both instances, their projected in-office occupancy is the same 60%. The fact that this occupier needs 30% more space post-COVID is contrary to all analysts' expectations. But that is the fact, and we are hearing the same from many, although not all, but many of our tenants, that they will need more space, not less, post-COVID. One of our analysts and a friend recently wrote that our company suffers from pen fatigue. True. It took us over a decade to assemble our vast pen district holdings, But as the saying goes, this is our time. Here's where we stand. At Farley, we have delivered to Facebook all of their 730,000 square feet. Their tenant work is going full bore. The west side of Seventh Avenue along the three blocks stretching from 31st Street to 34th Street is now a massive construction site where we are transforming the 4.4 million square foot Pen 1 and Pen 2 into the nucleus of our cutting-edge connected campus. The 34th Street Penwood Lobby just opened, and our unrivaled three-level amenity offering will be completed at year-end. Our full-building Pen-2 transformation, including the bustle and re-skinning, is 98% bought out, on budget, and off to a fast start. We couldn't be more excited. Our 14,000 square foot sales center on the seventh floor of Pen 1 is now open to rave reviews from brokers and occupiers. It's busy. The sales office is designed as a deal-making conference and presentation center with multiple building models and videos that tell our story in a clear, persuasive, and unique way. After working with Glenn and Josh in the sales center, the market is understanding our ambitious plans to make the Penn District the crown jewel of the west side of the new New York. By the way, every quarter and every year, the west side is punching way above its weight, measured by high and growing market share of lease assigns. In a sign of our confidence and the market's enthusiasm, even at this early date, we are raising our Penn asking rents. We will shortly begin demolition of the Hotel Pennsylvania to create the best development site in town. We expect demolition and shutdown costs to be about $150 million, which you should look at as land costs. Our book basis in this property today is $203 million. And we are midstream in the process to make the unique high-growth Penn District a separate investable public security. Our best in the business team leaders in the Penn District are Glenn Weiss Leasing, Barry Langer Development, and David Bellman Construction. Michael will cover our operating results in a moment, but I can say that overall leasing and occupancy statistics in New York tell a misleading story. While overall availability is 18%, assets newly built or repositioned since 2000 have a much lower direct vacancy rate of 11%. Last quarter, 88% of new leasing activity in Midtown was in Class A product. It's clear that the market is voting for new and repositioned assets. As you would expect, Class A assets command higher pricing than Class B, in fact, one-third higher. Obviously, this is the place to be, and you should know that substantially all of our assets are repositioned and in this competitive set. New York is coming back to life. Residential neighborhoods are bustling, less so the commercial canyons where office utilization is now approximately 23%. Remember, it's August, the vacation month. The largest employers in Manhattan have mandated a return to work by Labor Day or shortly thereafter, some with full staff in office and others with a flexible program allowing some work from home. As I have said before, I do not believe that the office will be threatened by the kitchen table, And I do not believe that even one or two work-from-home days per week by some number of a tenant's employees will be a negative to us. I, for one, am unable to predict whether it will take a month or a quarter for office buildings to be back to full up and the canyons to be teeming again. There is no magic date. All that matters is that it will happen soon enough. Last week, we announced that Wegmans, the premier grocer in the Northeast region, is opening its first store in Manhattan at our 770 Broadway, replacing Kmart. And you can bet that we will do several more Manhattan deals with Wegmans. The fact that Wegmans is coming is creating excitement with it. At last count, 43 print and broadcast press articles celebrating the announcement. Here is an interesting factoid. Wegmans expects that as much as 50% of its volume will be from in-home delivery, will be from two-home delivery. We will be investing $13 million in TIs, leasing commissions, and free rent in this long-term lease with a 65% gap mark-to-market increase over Kmart's rent. This quarter, we announced that we exercised a ROFO to acquire our partner's 45% interest in One Park Avenue in a transaction that values the building at $870 million. Based on the in-place floating rate loan, we project $18 million, $0.09 per share, first-year accretion. Last summer, we brought 555 California Street to market for sale and unable to achieve fair value, we withdrew, understandable at the height of COVID with travel restrictions and so forth. At that time, we said we would refinance, and this past quarter we did to the tune of $1.2 billion, netting us approximately $467 million at share. The interest carry on the new floating rate loan is almost exactly the same as the old, much smaller fixed rate loan, so one might say the $460 million is free money. Ironically, I believe continuing to own this outstanding asset with this superb accretive financing is actually a better outcome. In New York, replacement cost is rising quickly. Over the past many decades, replacement cost, with a dip here and there, has risen relentlessly. And if past is prologue, replacement cost will undoubtedly continue to rise as far as the eye can see. Replacement cost has always been a key predictor of future value, a rising umbrella lifting all similar real estate values. and New York is the poster child of this phenomenon. Here is updated guidance for our retail business. For 2021, we guided cash NOI of 135 million, and now halfway through the year, we expect to do a little better. For 2022, we guided cash NOI of 160 million, which we affirm. For 2023, we announced new cash NOI guidance of not less than $175 million. You should know that, as expected, Swatch exercised its termination option for a portion of their space at St. Regis, which is effective March 2023, with a $9 million termination fee. The Swatch-owned Harry Winston store will remain under lease through its June 2031 expiry. The guidance above takes account of the Swatch termination. If I were a betting man, and I guess in some ways I am, I would bet that we have already put in the bottom in New York, that the worst of the best stuff is behind us, and that New York will get better and better. And so will New York real estate in spades. In our case, occupancy rate, TIs, and pricing have bottomed. Finally, we have a great, talented leasing, development, and operations team, all thanks to them. Thank you. Now to Michael.