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spk00: Welcome to the Vornado Realty Trust Earnings and webcast for the third quarter of 2022. My name is Vanessa and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press 0 then 1 on your touch-tone phone. I will now turn the call over to Steve Borenstein, Senior Vice President and Corporate Counsel. Steve, you may begin.
spk13: Welcome to Vernado 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 packages, are available on our website, www.vernadorealty.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 10Q 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 annual report on Form 10-K for the year ended December 31, 2021, 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.
spk06: Thank you, Stephen. Good morning, everyone. As Michael will cover in a moment, we had another good quarter, with comparable FFO up 14% from last year's third quarter. Despite headwinds from a slowing economy and rising interest rates, we still expect this year to be up a fair amount from last year. We will feel the full effect of higher interest rates on our numbers next year, given a full year of impact. Overall this quarter, we leased 450,000 square feet, 229,000 square feet in New York, well below trend. This is a little bit the result of the slowing market and a lot the result of timing. As Michael will explain, our New York pipeline is a robust 1.5 million square feet. The Fed is deadly serious in pursuing their fight against inflation. The economy is clearly slowing, and capital markets are volatile. As a top priority, we have taken the following actions. Earlier this year, we extended our near-term debt maturity, so we now have no debt coming due in 2023, and a very modest $233 million on three assets coming due in 2024. We extended our unsecured revolving lines of credit totaling $2.5 billion with only $575 million outstanding through 2026 and 2027, providing significant liquidity for the next four to five years. In addition, we protected our floating rate debt exposure by swapping for five years $2 billion of floating rate debt to fix at a weighted average of LIBOR or SOFR, as the case may be, of 2.9%. Further, we have interest rate caps on an additional $2 billion, providing protection above 4.2% on a weighted average basis for a weighted average term of 10 months. Please see page 33 of our financial supplement, which describes all this activity line by line. Mark-to-market, in the aggregate, these swaps and caps are now in the money $232 million. Our only remaining floating rate debt exposure is $750 million, which is largely JV debt. Be aware that nothing can really protect as loans mature into a higher rate environment. The second area of our focus is, of course, the Penn District. The Penn 1 Lobby and amenities are now complete. The Penn 2 Skin and Bustle are now very far along, as is the Long Island Railroad Concourse. We invite all of you to come down and take a look or give us a call, and we will be happy to tour you through. Broker and tenant reactions have been truly outstanding. The Hotel Penn is coming down with demolition scheduled to be completed in the fourth quarter of 2023. I must say that the headwinds in the current environment are not at all conducive to ground-up development. Lastly, I want to comment on our dividends. Our policy is to pay out dividends equal to our taxable income. We now expect our taxable income to be lower in 2023. We will not have income from 220 Central Park South. We assume no asset sales, and we are budgeting to the interest rate yield curve. As such, our Board of Trustees plans to right-size our dividend in 2023, commensurate with our projection of taxable income. Of course, this will allow us to afford to retain more cash. Now over to you, Michael.
spk07: Thank you, Steve, and good morning, everyone. As Steve mentioned, we had another good quarter. While we experienced some headwinds from rising interest rates, our core business performed well. Third quarter comparable FFO, as adjusted, was $0.81 per share compared to $0.71 for last year's third quarter, an increase of $0.10 or 14.1%. The increase was driven primarily by rent commencement on new office and retail leases, the continued recovery of our variable businesses, and an adjustment for prior period real estate tax accruals at the mark, partially offset by higher net interest expense from increased rates on our variable rate debt. We provided a quarter-over-quarter bridge in our earnings release on page three and in our financial supplement on page six. Notwithstanding additional interest expense from rising rates on our variable rate debt will result in lower comparable FFO per share growth for 2022 than we anticipated earlier in the year, we do still expect that comparable FFO per share will be up year over year. The additional interest expense from rising rates will have a greater impact next year as the higher rates impact our variable rate debt costs for a full year. We have partially mitigated the impact of this due to the significant amount of hedging we did this quarter, as Steve just covered. Company-wide, same-store cash NOI for the third quarter increased by 13.8% over the prior year's third quarter. Excluding the accrual adjustments related to the marked real estate taxes, the increase would have been a still solid 3.4%. Our retail same-store cash NOI was up a very strong 7.7%, primarily due to the rent commencement on several important leases. Our overall office business was up 15% compared to the prior year's third quarter, also benefited by the MART adjustment, while our New York office business was down 1.3%, largely due to not renewing lower-rent tenants at PEN1 in order to bring in higher-paying tenants post-redevelopment. Now turning to leasing markets. Amidst a backdrop of economic uncertainty, the New York Class A office market remains resilient. Stimulated by the city's tight labor market, where office-using job employment is now above pre-pandemic levels at 1.5 million. Leasing activity in Manhattan continued its rebound through the third quarter, with volumes surpassing pre-pandemic averages. Year-to-date market-wide leasing activity stands at 24 million square feet, 50% above where we were at this time last year, including 9.3 million square feet this quarter. Deal volume during the quarter was led by 16 headquarters leases signed in excess of 100,000 square feet, reinforcing that large tenants are committed to New York and are signing long-term commitments. As we enter the fourth quarter, though, caution is the word of the day. There is increasing uncertainty in the world, and tenants are acting accordingly. As businesses continue to reassess their space requirements, The bifurcation between high quality and commodity product is growing. Tenant preference remains strong for best-in-class newly developed or redeveloped buildings with modern amenities and collaboration spaces, and being on top of transportation is critical. Most companies believe the highest quality work experience is key to both incentivizing employees to come back to the office and also for attracting new talent. Our portfolio consists largely of these types of assets, positioning as well to continue to capture tenant demand. During the third quarter, our office leasing team completed 42 transactions comprising 388,000 square feet across New York, Chicago, and San Francisco. In New York, our average scouting rents were a very strong $89 per square foot, reflecting the breadth of our high-quality portfolio. Our overall leasing pipeline in New York remains strong, with approximately 1.5 million square feet of leases in advanced negotiation and proposal stages. Now turning to Chicago. At DeMart, we leased 67,000 square feet in 19 transactions this quarter, and a 50-50 mix of office and showroom activity. While the market in Chicago remains challenged, we have seen a pickup in proposals during the quarter. As expected, our trade show business has rebounded nicely in 2022, though not back to pre-pandemic levels yet, with NOI up $12.2 million through three quarters versus last year. In San Francisco, at 555 California Street, where we're full except for the cube, we leased 154,000 square feet during the quarter, including a large renewal with Morgan Stanley for its 132,000 square feet and a 21,000 square foot expansion and renewal with Centerview Partners. Our starting rents were very strong once again, generating a 12% positive cash mark-to-market. 555 California continues to be the premier real estate asset in San Francisco, particularly for financial tenants, as evidenced by these leases. Retail leasing results were fairly modest for the quarter, with one renewal transaction significantly skewing reported gap in cash mark-to-market. The bulk of the leasing activity incurred in the redeveloped Long Island Railroad concourse, where you're seeing very good activity with strong rents. More broadly, with the rebound in tourism and daily workers, we're continuing to see more retailers search for new store locations. However, retailer concerns about inflation and the economy are resulting in them too being more cautious about committing to new leases now. This will change as the economic environment stabilizes. Finally, let me spend a minute on sustainability, where we continue to be a leader. where NATO was once again selected as a global and regional sector leader for diversified office and retail REITs and Global Real Estate Sustainability Benchmark, or Gresby survey, ranking number one in the USA in our group and number three out of all 112 publicly listed real estate companies in the Americas that responded to Gresby. In addition, we once again earned Gresby's five-star rating, received the Green Star distinction for the 10th time, and scored an A for our ESG public reporting and for our score. This area is increasingly important to our tenants and other stakeholders as well and is a differentiator for our portfolio in the market. Turning to the capital markets now, overall the heightened market volatility and aggressive rise in interest rates is significantly impacting the capital markets and generally causing most lenders and debt investors to pause. The CMBS market is effectively shut right now, and balance sheet lenders are hesitant to lend other than to the best properties and sponsors. We had anticipated the financing markets becoming more challenging this year and focused early and dealt with our 2022 and 2023 maturities. Importantly, given the $3 billion in refinancing as we completed this summer at attractive spreads, we have dealt with all of our significant maturities through mid-2024 and are largely protected from near-term refinancing risk. On the asset sale front, while there continues to be active interest from investors in New York office and retail assets, without a stable financing market, it is difficult to transact with large assets without in-place debt right now. Notwithstanding the market challenges, we executed a contract to sell 40 Fulton for $102 million and are negotiating sales of a handful of small assets. Finally, our current liquidity is a strong $3.3 billion, including $1.4 billion of cash, restricted cash, and investments in U.S. Treasury bills, and $1.9 billion undrawn under our $2.5 billion revolving credit facilities. With that, I'll turn it over to the operator for Q&A.
spk00: Thank you. We will now begin our question and answer session. If you have a question, please press zero, then one, on your touchtone phone. If you wish to be removed from the queue, please press 0, then 2. If you're using a speakerphone, please pick up the handset first before pressing the numbers. We ask that you please limit yourself to one question and one follow-up question. Once again, if you have a question, please press 0, then 1 on your touchtone phone. We have our first question from Steve Sacqua with Evercore ISI.
spk01: Thanks. Good morning. Michael or Steve or maybe Glenn, can you just maybe provide a little more color on the 1.5 million feet in the pipeline? I'm just curious how much of that relates to kind of new requirements for you and how much of that is maybe early renewals looking into 23 and 24.
spk10: Good morning, Steve. It's Glenn. As we look at the pipeline in terms of the 1.5 million feet, It's sided more towards new tenants and expanding tenants versus renewals, filling some of the empties we have today and then going forward locking in spaces we know we have coming due with tenants who will be new to the portfolio. It's a really good mix, law firm activity, financial service activity, some media activity, but I would say it's more sided to new tenants coming in or expanding tenants in the portfolio.
spk01: Glenn, maybe just any color just in terms of types of tenants. I assume kind of big tech is on hold, but, you know, these private equity law firms, investment banks, asset managers.
spk10: Yes, certainly financial service is heavy, less on tech, as you're saying. Private equity is very, very strong, very active. There's still some hedge fund activity also in our portfolio, you know, at our financial buildings, you know, with 88877. 645th, et cetera. So certainly financial is busy, and law firms are definitely getting busier in the portfolio, particularly buildings like at 12 Indy 6th Avenue.
spk01: Great. And then secondly, Steve, in the past you've commented on your desire to sort of pursue one of the casino licenses downstate. I'm just curious if that's still something that you're interested in, and how do you think that process unfolds over the next 12 to 18 months?
spk06: We continue to be interested, very interested. It's a government process. I think they have already announced that they're going to put out their first RFP, I think, either late in December or early in January. And then from there, we'll see how it goes. We expect it to be a very competitive process.
spk01: Great. Thank you. That's it for me.
spk00: Thank you. Our next question is from, we have our next question from Michael Griffin with Citi.
spk02: Great, thanks. Maybe just going back to the comments on the dividend, wondering if you can frame maybe how much you're expecting to right-size the dividend sort of heading into 2023 and any additional commentary on that would be helpful.
spk06: You know, we really can't. I mean, it's a board prerogative. And the numbers are still moving around. And it would be totally inappropriate for us to guess as to what that dividend might be next year.
spk02: Got it. And then maybe just back on the interest rate swaps. What was the embedded cost in executing those swaps? And then for the $800 million term loan, it looks like about $250 million of those swaps are expected to still burn off in 2023. Would the plan be to swap that going forward or to leave that as floating?
spk07: Good morning, Michael. In terms of the cost of the swaps, you know, what we laid out for you on page 33 of the supplement, you know, gives you the all-in swap rate so that, you know, there's a credit charge that's embedded in there. It depends on the particular trade. I would say, you know, four to five basis points is typical. Sometimes it's a little bit less, but I think if you use that as a working assumption, it's not bad. But again, that's embedded in the numbers that we gave you. And on the term loan that you cite, you know, these are all, well, not all, but I would say largely corporate level swaps. And so we have the ability to move those around as different loans, you know, roll off. You know, or if we sold an asset and we wanted to shift it around, which we did, for example, on Long Island City earlier this year. You know, we sold that asset. We moved it to a different asset. So, you know, it gives us flexibility. There are certain asset level swaps, but by and large, they're corporate. And so the term loan, you know, we went ahead and forward swapped 500 of that, you know, beginning next year. And then we have the ability to potentially move some around. If not, the answer is we'll look at, you know, fixing that balance.
spk02: All right, great. That's it for me. Thanks for the time.
spk07: Yeah, thank you.
spk00: We have our next question from Camille Bunnell with Bank of America.
spk08: Hi, good morning. Busy quarter on the financing front. Just following up on the interest rate swaps, can you help us understand the thinking behind how you decided on reducing your floating rate debt exposure to 27% versus a lower amount more in line with your peers?
spk07: Well, I think 27% is not the right number to use. You know, we've got caps in place on the bulk of the rest. So our net exposure to floating rates is about 7%. And, you know, when you look beyond that is what's exposed, it's basically loans that are coming due at the end of the year or we have JV partners where, you know, there was no sort of desire to collectively do any sort of hedging there. Again, I think from a net exposure, we've got about 7%. I want to also remind everybody we've got significant cash in our balance sheet that's earning higher rates. Some of that's been deployed in treasury bills. Some of that's just learning higher rates with our banking relationships. On a net exposure, I think it's even less than 7%. That, I think, is a little bit more accurate in terms of what the exposure is.
spk08: Okay, that's very helpful. And just shifting to retail, we saw quite a drop in leasing spreads this quarter. Can you speak broadly to how you think about where pricing is going specifically for New York City retail?
spk07: You know, I think over the last couple calls, you know, we've communicated we think retail has bottomed in the city, and that is our view. You know, you're starting to see vacancy decline in many of the key submarkets, which obviously is the forerunner to start to have some pricing rebuilding. I think you're actually seeing rents move up a little bit in SoHo already. But, you know, the reality is vacancy is beginning to drop in many of the submarkets. You know, rents are not falling anymore, you know, and that'll take some time to begin to recover. But, you know, overall, we think the market's bottomed. And, you know, leases that are getting done, you know, retailers are focused on the best locations. You know, they want to be in the highest footfall areas and the best submarkets. Our portfolio is situated there. And when leases get done right now, they're going to be reflected in the fact that rents have corrected. It depends on the sub-market. A third could be a half from where they were at peak. But in most cases, we don't have exposure on a lot of our big assets right now. So it just depends on when the leases roll and where the market is at the time. But as I said, I think From a trend line standpoint, there are more retailers cruising around the city looking for spaces. They're focused on the best locations and being a little bit of caution right now given what's going on in the economy. But net-net, New York is very much still top of the ranking of where they want to be and where they want to expand it.
spk08: Thank you for taking my question.
spk06: Make no mistake, with respect to retail, We are still in a retail recovering market. So volumes are not yet back to where they were pre-pandemic. If you look at the transportation numbers, basically coming into the city on the railroads and the subways and the buses is two-thirds of what it was at pre-pandemic. And although anecdotally, traffic in the streets looks pretty wholesome. So what I think you need to do is to say we're in a recovering market, and our prediction is that the market will be very much more healthy in a couple of years. This is not a quarter-to-quarter thing. It's a year-to-year thing.
spk00: Thank you. Our next question is from Alexander Goldfarb with Piper Sandler.
spk09: Hey, good morning. Good morning, Steve and Michael. Maybe just following up on the retail, the BillionAid retail preferred that you guys have in the JV that you did a number of years ago, just sort of your thoughts on that, the value of that. Is that still worth par? The cash flow coverage, I think the coupon is four and a quarter. And as you guys, Steve, think more about balance sheet focus, you've addressed a number of the floating rate, you know, How do you view your ability to refinance this BillionAid and get the cash out of that position?
spk07: Good morning, Alex, Michael. So let me try to get all your questions. In terms of the value of that preferred, you know, we believe it remains, you know, fine. It's still worth the part. Just to go to the chase. I know you wrote it. a sentence, you think it's worth less than par? We don't think so. There's clearly equity value in retail JV. I know our partners think there's significant value still left in that JV. We think the retail preferred is fine. From a cash flow coverage standpoint, again, just to remind you, the cash flow from all the assets, whether they have preferred or not, goes to secure the payment of that preferred and the coverage of that is you know continues to be very strong and and you know even as you assume you know roll over over time and some ups and downs and whatnot uh the coverage on that on our preferred dividend which uh today is four and a quarter will rise to four and three quarters in april of 2024 uh you know that coverage is very strong today and and we expect to remain strong Now, your last question, the ability to refinance out. I mean, if you go back to what I said in my opening remarks, and I don't think this is any secret, you know, the financing markets are not good right now, right, in any product category. So, you know, banks are, you know, basically shutting it down for the rest of the year unless, you know, you're a big client and great property and whatnot. CMBS market, you know, bond investors really don't want to deploy capital. So it's a tough market to finance in if you have to. Fortunately, we don't. But retail, I think it's going to remain challenging to refinance in the near term. And so this is not in our capital budget to get this refinanced in the next year or so. And when the market opens up, what we want to do, remember, this can be done piece by piece. There's five assets that have preferred on. And if we want to avail ourselves on one or two or three, then we'll do that at the time. to go, we don't need the cash today to go do it and pay exorbitant rates would not be prudent. So hopefully I hit everything you asked, but that's the current state.
spk06: Alex, look at it this way. There's two elements to it. One is the yield, and the second is the collateral. I think Michael said very clearly that we think the collateral is just fine. The coverage of the dividend is, you know, give or take double what the carry on the preferred is. So we think the collateral is fine. Dividend is, you know, clearly in this very volatile, chaotic capital market is below what a market price event preferred would be. So on a short-term basis, you might say that if you were a trader and you sold it, you would get less than par because of the sub market dividend. But that'll change. And so we still think that it's a sound instrument.
spk09: Okay. And then, Steve, second question, as you mentioned, dividend. You appreciate the comments on the dividend for Vino for next year. Alexander's is in a similar boat. Should we read through that the board will make a similar determination resizing of the Alexander's dividend as well?
spk06: No.
spk09: Okay. Thank you.
spk00: Thank you. Our next question is from John Kim with BMO Capital Markets.
spk04: Thank you. Good morning. You talked about the cautious environment. There was a lot more of an optimistic piece in the post this week on New York office, and in particular, PEN15. I was wondering if you could provide an update on the project, how much pre-leasing you would need to move forward with the development, and if there's any consideration to change the use of the project to have less office going forward.
spk06: John, thanks for the question. I'm going to duck the question. A couple of things. I did say in my prepared remarks that the current environment makes ground-up development very difficult, and I meant it. So that's number one. Number two is in terms of changing uses and what have you, that's not something we're going to get into now.
spk04: Regarding the taxable income next year, I know you talked about rising rates and 220 Central Park South being fully sold. Are there any other pressures that you see on taxable income next year? I thought that 220 Central Park South had tax protection, so it wouldn't really be an issue. But any other thoughts on the direction of your other businesses in 2023?
spk06: I mean, we've said that we think that our budget shows that taxable income is going to go down. The primary reasons are higher interest rates, because we're not 100% protected. We have no income from 220, and we have a soft economy. So if you take all those three things together, we're budgeting that, and we're not budgeting any gains from asset sales. So, I mean, I think that's it. We are reluctant to put a number on that at the current time. But we will make a decision probably in the first quarter.
spk04: And your dividend is at 100% of taxable income this year?
spk05: What is the exact number, Tom? Our dividend is 212, and we haven't finalized taxable income. What's our projection? It's around that.
spk06: So we think that the current dividend is within a hair of 100% of our taxable income for the year 2022, which includes 212. Great. Thank you.
spk00: Thank you. Our next question is from Daniel Ismail with Green Street.
spk03: Great. Thank you. You mentioned a few times the difficult financing environment, and I recognize this is a tough question to answer given the lack of transactions. But I'm just curious, where do you think New York City office values and cap rates are these days?
spk07: The answer to Daniel is, without a lot of transaction activity, I think it's difficult to give you a precise answer. First of all, I would tell you that the investor interest in New York City remains very high. While some see black clouds, others see opportunity, others have a fundamental belief in New York. When you look at what's going on around the world, in terms of a global investor base as they evaluate where they want to invest their capital. Is it Hong Kong anymore? I don't think so. Is it London? It doesn't seem as attractive given the issues they have. You come back, the U.S. looks very good, and New York is, I think, without question, the global financial capital. So you have a lot of interest in New York, a lot of smart money that's frankly scouring the market right now looking at New York because they see value. But in the absence of a financing market, I think it's going to stem activity for a period of time. I don't know if that's one quarter, two quarters. Who knows? And if you're forced to sell in this market, then you're, particularly on something larger, then you're going to sell at a wider cap rate if somebody needs financing. If they don't, it's an all-cash buyer, then I think it'll be a little less compressed. But is there a cap rate impact from this? Sure, there's a cap rate impact. Can I give you precision on that? Is it 50 basis points, you know, which is sort of maybe up 10%, so values are impacted 10%? I think, is that a reasonable assumption? Probably, but I don't think anybody can say it with precision, Daniel.
spk06: A couple of comments on that. We've seen this before many times, that the economy is either entering recession or in recession. The debt markets and the capital markets are rioting, they are highly illiquid, and they are unbelievably expensive if you must access the debt markets. So that's a very big deterrent to asset sales. The second thing is that in these kinds of markets, only people that have to sell transact. Only weak sellers are transacting because the only buyers that are really trolling the market are distressed buyers. So you have to just live through this and it'll end sooner than you think. But this is not the kind of a transactional market or a capital market where you can really make adjustments. This is aberrant. It happens one year out of every ten. and we are either in the one year or about to go into the one year. Got it. One last comment. The stocks of the office companies have corrected to the point where, in my judgment, they have gone significantly below even the distressed mark-to-market of the portfolio, significantly below that number.
spk03: Got it. I appreciate the thoughts. Just a last one for Glenn. I'm curious where you think concessions are trending these days. Are you seeing any stabilization or abating in concessions on the new leases you guys are negotiating?
spk10: I think concessions have stabilized. They haven't abated. So, you know, TIs are still quote unquote too high, but they've stabilized. You know, you're certainly seeing, you know, more of the TIs in terms of getting tenants into the buildings in terms of helping them build out space more than historically, but I think that number has stabilized.
spk06: We're seeing sort of a strange market. Rents have really not fallen on the better buildings. If anything, they're going up. But the TIs and the inducements have gone up as well. So the market is taking their pounds of flesh in the inducements as opposed to in the rent reductions.
spk00: Thank you. Our next question is from Derek Johnson with Deutsche Bank.
spk14: Good morning, everyone. Thank you. In your discussions with business leaders, You know, is there a view that the likely recession will be a tipping point for greater office utilization and, you know, thus, you know, the balance of power favoring employers versus employees? So I guess, you know, can the slowdown drive greater and perhaps sustainable office utilization in your view?
spk06: Green Street wrote a piece that came out recently where basically debunked that idea that recession begets higher unemployment, changes the power to the employer from the employee, and therefore the employee will scamper back into the office. I just have no view on that. I do believe, however, that the office is the workspace as opposed to the kitchen table. And I believe that over time, the culture will change where people will want to be back in the office. The office will be more productive. The collegial aspect of work and being with colleagues in transit center will overpower the temptation to sit at the kitchen table. I don't think that it's the pain of a recession that's going to change the marketplace.
spk14: Got it. Appreciate it, and thank you. Just another big picture one, and I hope you guys don't think this is unfair, but Steve, you've seen this movie before, but as investors, really have been sidelined by this hybrid work, secular concern, and now we have the likely recession. You know, what is it going to take? Like I said, you've seen this before. Or what can you do ultimately to help flip investor sentiment to more positive on office REITs longer term? Thank you.
spk06: You know, I've always believed that the rules of the game were to buy low and sell high. So now what we have is that it's hard to buy assets. They're very illiquid. And there are very few assets that are on the market, certainly at distressed prices. But the distress is in the stock market. And so I don't know, but I mean, from my personal family and investing, we like to buy in recessions, and that's the time to buy. So what's it going to take for you guys to start realizing that these stocks are stupid, stupid cheap? I don't know, but it will happen. And my guess is that just as the stock market always turns and gallops ahead way before the end of recessions, I think that the office business will do so as well. I can't tell you what the catalyst is.
spk14: Thank you, sir.
spk00: We have our next question from Anthony Pallone with J.P. Morgan.
spk16: Yeah, thank you. And just looking at your 2023 lease expirations, it seems like you have a disproportionate amount expiring in retail and office in the first quarter. Can you maybe help us peel that back a bit and give sense as to whether or not there's any known big move-outs or roll-ups, roll-downs?
spk10: As it relates to the office in 2023, it's really a mix of four of our properties, 770 Broadway, 350 Park, 1290 and 280. And that's not only in the first quarter. We're of course attacking all of those expirations. We have very, very good action on some and others were in the market, you know, trying to lease the space. I will tell you, you know, when you look at those assets, they're, you know, amongst our highest quality of buildings and most unique characteristic buildings like a 770, like a 350. So that's where the expirations are coming out of in 23. Okay.
spk16: And how about retail in the first quarter? Anything to call out there?
spk07: You know, Tony, it's Michael. The answer is we've got two or three key tenants rolling and I can't tell you definitively what's going to happen there. There's discussions where all could renew, and there's discussions where none could renew. So it's still too fluid. I do think net-net, even if most renew, the income will be down some, just given where one may likely renew. But I just can't give you more precision, given the discussions remain pretty fluid right now.
spk16: Okay, got it. And then just one follow-up on the MART. It seems like the trade shows are back, and I know in some years you have the tax item. Can you maybe just help us think about, you know, where you think the annual EBITDA run rate has gotten back to on that asset?
spk07: You know, I think today is probably in the mid-70s. But, you know, we're also – we know that the casual business is going to be leaving. And so, you know, it probably bottoms in the low to mid-60s before it comes back. You know, so – and that number probably, in terms of a run rate, you know, at the beginning of the year, the low to mid-60s is probably a decent run rate before we rebuild that back.
spk16: Okay. Thank you.
spk06: What's the potential for the building if it – at the top end?
spk07: Yeah, like ultimately we think the building should get back north to $100 million. So our job is to release it. We do think there's some additional upside in the trade show. So that number in the next, you know, it's called 36 months, we think it gets back hopefully north to $100 million.
spk06: So based upon, so right now it's about 75. We expect it to go down into the 60s. before it turns and goes back up to as much as 100, which will not happen next year, but will happen in the future. That's the potential for the asset. It's a little bit more volatile than we would like, but that's the story.
spk16: Okay. Appreciate the help.
spk06: Yes, sir.
spk00: Thank you. Our next question is from Nick Ulico with Scotiabank.
spk15: Thanks. I just wanted to see, you know, given the recent news from Meta, just want to confirm that there's no impact you're seeing for your space with them at Farley or 770 Broadway?
spk10: There's no impact on Farley, no impact at 770 as it relates to the recent announcements. They're in the buildings. Out of the buildings, utilization is very strong. And, you know, they happen to love both of the properties.
spk06: You know, it's almost embarrassing to say, but we spent a little bit of time looking at their credit because they are a big tenant. And this is one spectacular company from a financial point of view. So when you think about it, they have, what's the number, $25 million of free cash flow a year after spending a similar amount or a greater amount on R&D, which is discretionary. So their cash flow is well above $50 million a year. They have almost no debt. I think they did their first tiny debt issue recently. They have cash balances in the 50s or something like that, millions of dollars, billions of dollars.
spk07: A little over $40 billion.
spk06: Okay, that works. And so from a financial point of view, they are a great company. They have these huge platforms. of Facebook, Instagram, and WhatsApp. And so now they're off on a mission. You have to back the guy because look what he's done in the past. So the answer is they are trying to develop a new universe. I believe it will be extraordinary successful. Even if it's not successful, it certainly will not impair the sanctity of that unbelievable business. So we're friends, we're vendors to them, and we're happy and honored to be so.
spk15: Thanks. Appreciate that, Steve. Just one other question is on the retail JV. So when I look at the NOI and the supplement, I mean, it feels like, I mean, I think I'm looking at this correctly, but that the NOI is actually very similar to when you struck the deal in 2019. Actually, it might be up a bit. I just want to confirm that and then also see, I know you did impair the investment back in 2020, but, you know, when the original deal was struck, it was at a 4.5 cap rate. Presumably cap rates are higher today based on everything going on in the world. So just trying to understand the dynamic of when you had to do the annual test on the value of the JV, if we should think that there is any impairment possibility from that.
spk07: Yeah, Nick. So in terms of the income on the portfolio now versus when we struck the deal, I don't have the exact numbers in front of me. My recollection from just knowing the ins and outs is it's down probably a little bit because of, as you may recall, Forever 21 went bankrupt. They're still in the space, but that number is down from when the original deal was struck. We had one vacancy on fifth since then. The signage is, frankly, booming right now, higher than when we struck the deal, but I think net-net is probably down a touch. You correctly point out the income has been very durable, but some of the leases rolled, there'll be some impact. I think in terms of the impairment, you're correct, in 2020 we did impair it. Again, I'm going from memory, Nick. I think we, you know, the fair value, you know, the original deal was struck at 5.4, and we impaired it, you know, south of 5 billion. I don't want to give you the number without having it in front of me. But the answer is, look, we look at it every quarter. There's an independent third-party appraisal that is performed on behalf of the venture, which we frankly have, you know, we don't provide any assumption. They do their independent work, and... And we take that, and that's sort of what drives that. So they'll do their work at the end of the year, and we'll evaluate it. So I can't predict whether it will or won't be. I think the market is certainly, given your comments, given Alex Goldfarb's comments, the market and how it's priced in our stock is certainly impaired significantly. But I can't tell you whether there will be any further accounting impairments yet.
spk16: Okay, thanks, Michael.
spk00: We have our next question from Ronald Camden with Morgan Stanley.
spk12: Hey, a couple quick ones for me. Just going back to the leasing activity, you talked about maybe the slowing economy and so forth. Just was hoping you could provide a little bit more color from the tenant side. Is it the economy? Is it sort of hybrid? And also by subsectors would be helpful.
spk10: You know, I certainly think, you know, CEOs are more hesitant due to the economy, for sure. You know, we're seeing that in our discussions. You know, I think, you know, by sector, you know, certainly the big tech is low. I will tell you there is some more small to medium-sized tech activity. There were a couple of these assigned in the market this quarter by a couple of those. But generally, I'll tell you, you know, more caution, more hesitancy due to the economy, not so much, you know, by the hybrid specifically.
spk12: Great. And then my second question was just going back to the dividend. And I know you sort of talked about, you know, it's the board decision they're discussing. Just trying to understand what the pieces that are going into that. Is it still sort of a, you know, is it 200 million plus or minus of CapEx operating cash flow? and then you're thinking about just how to solve for that to get to a sustainable basis. I'm just trying to get a sense of what should we be looking at, thinking about for the right place for the dividend to land. Thanks.
spk06: You know, I don't have anything more to say on the dividend other than what I've already said. You know, we will get to that at the first quarter board meeting. I think everybody can, you know, do their own math and guesstimate, but I'm not in the guesstimating business. I can tell you one little factoid, and that is the stock trades between a 9% and 10% dividend rate. So that indicates that something's wrong. But I think I'll stand with what I've already said.
spk12: Great. That's all my questions. Thank you. Yes, sir. Thank you.
spk00: Thank you. Our next question is from Vikram Mahatra with Mizuho.
spk11: Thanks so much for taking the question. I guess just maybe bigger picture first, Steve. I want to get your thoughts on what are you contemplating sort of macro-wise, rates-wise, and then more at a micro level with fundamentals. It just feels like things seem to have been inflecting according to the last few calls. Return to work was improving. Leasing is improving. But you've now swapped a lot of debt for five years at a rate, you're contemplating cutting the dividend. And so I'm just trying to balance all of this like near term, you said it's a one year issue, but it sounds like in your actions, it's more like a three to four year issue than a one year issue. Can you help us bridge, what are you forecasting macro wise and micro wise to effectuate this dividend and the five year swaps?
spk06: Boy oh boy. So let's see. Obviously the economy has been hyped to the tune that it's probably very destructive. So for whatever different reasons, and I don't want to get into politics, but for whatever different reasons we have runaway inflation. And as I said, I think the Fed is deadly earnest about doing their job and stopping it. So their number one tool, of course, is interest rates. The interest rates have had an enormous effect already in a very rapid manner, as illustrated by the stock market, the home market, et cetera. So the Fed is going to win this battle. In the end, it's just a matter of how long it takes. We aggressively went to protect our floating rate exposure for multiple different reasons, the most important one of which was to protect against a runaway interest rate environment. So we think we sort of had that covered. The most efficient execution for the swaps was five years, and so we basically did that. Do not read anything into our firm view on the future based upon this five-year number. I would tell you that I expect, if you look at the graphs and look at the charts of past recessions and past Fed activity, they generally go up at a pretty steep curve and then they come down fairly quickly. because they put the economy into recession and then they aggressively have to bail it out. So that's what we expect is going to happen this time, but we don't bet our life on anything. So we think we've protected our balance sheet. We think to overpay our dividend is not appropriate. And so we think we've taken the proper financial actions to protect the fiscal sanctity of the company. We believe that this is going to be a one to two year event, not a three to five year event.
spk11: Thank you. So that one to two year is more your comment on the fundamentals in office as opposed to the macro that you just outlined, I'm assuming. Just following up on that, I know the numbers are moving around.
spk06: No, no, no. The one to two years is a macro prediction.
spk11: Okay. And how do you square where fundamentals will be office fundamentals in that timeframe?
spk06: Well, first of all, you know, we are New York based. We believe in New York. We believe, and anecdotally, we've had lots of conversations with lots of employers from all over the world. New York is still New York. It's still the capital of the United States. And we believe companies want to be here. For sure, young people want to be here. Just anecdotally, I'll tell you that a lot of my friends have moved out to Florida, but when you ask them, where their children are. All the children are in New York and they want to be in New York, so that's extremely telling. So, you know, we think that this will be a fairly predictable cycle where different industries will grow at different rates, but there is, there will continue to be an aggressive interest to locating in New York and growing in New York. Okay, and then just two quick... Go ahead. you know, we are absolutely strongly convicted about what we're doing in the Penn District. We think that that is going to be another center of New York and an extraordinary success. So we're very, very, very excited about that.
spk11: Okay, I was going to ask you once in relation to that, but just before that, I know the numbers are moving out, so I'm not asking where numbers or the dividend cut is going to be, but is it fair to assume if we look at like a historical ASFO payout ratio, whatever the ASFO may be, should we assume a payout in line with historical levels as we think to model next year?
spk06: You know, if you can model taxable income, that's what the dividend is going to be approximately. And if you can model that to the penny, you're a better man than we are. So we've got another full quarter to go. And so, you know, we're in the budgeting process. We're nowhere near over it. We will make that decision in the first quarter.
spk00: Thank you. We have a follow-up question from Steve Sakwa with Evercore ISI.
spk01: Thanks. Steve, you mentioned about the valuation, and I'm sure on a lot of numbers, you traded very low price per square foot, very high implied cap rate. Historically, we've seen private equity come in and close gaps in sectors where there's big, big discounts that persist. But I guess given where the financing markets are today, that just doesn't seem likely. So are there steps that you can take? Are there steps you're contemplating to try and close that gap, or is this just a time where you've got to be patient and kind of wait for the financing markets to improve?
spk06: You know, I almost want to duck that question, too. Let me see if I can parse into it. The leveraged buyout model, which requires which has equity and debt, may or may not work in this environment. The value of our company is there, and it's extraordinary value. How it all plays out is something that I can't predict right now.
spk01: Well, I guess you've talked in the past about maybe the separation of the Penn District assets into a spin-out, which I know was on hold. You said you would only do buybacks in a meaningful way, but you'd probably need to sell assets to be able to buy back stock, which seems difficult. So it just seems like your hands are tied. I'm just wondering, are we missing anything here that you could do to help close the gap?
spk06: The spin-out is still on the table. And the protection of our balance sheet is the number one priority.
spk01: Got it. Thanks. That's it. Thanks, Steve.
spk00: Thank you, sir. We have no further questions in queue.
spk06: Well, thank you all very much. We appreciate you joining us. And the next call is when?
spk07: Valentine's Day. Tuesday, February 14th.
spk06: The next call, the lovable Michael says it's Valentine's Day, so I guess we'll see you in red on Valentine's Day. Have a great rest of the year, and thank you all very much. And by the way, do take up my invitation to come down to Penn. It's extraordinary, and those of you who haven't toured through or seen it yet, you know, please take advantage of our invitation. It's sincere. We'd like to get you all down there and show you what we're doing. Thanks very much. Thanks for joining.
spk00: Ladies and gentlemen, this concludes today's conference. Thank you for your participation.
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