Vornado Realty Trust

Good morning, and welcome to the Vornado Realty Trust fourth quarter 2022 earnings call. My name is Gary, 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 address your questions at the end of the presentation during the question and answer session. At that time, please press star then one on your touchtone phone. I will now turn the call over to Mr. Steve Borenstein, Senior Vice President and Corporation Counsel. Please go ahead.

Welcome to Vernado Realty Trust's fourth quarter earnings call. Yesterday afternoon, we issued our fourth quarter earnings release and filed our annual report on Form 10-K with the Securities and Exchange Commission. These documents, as well as our supplemental financial information packages, 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 release, form 10-K, 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 filing with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2022, 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, our opening comments are Stephen Roth, 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, Stephen. Good morning, everyone. It's Valentine's Day. As Michael will cover in a moment, 2022 was a strong year with comparable FFO up 10%. Fourth quarter FFO was down 11% due to higher interest rates. X rising interest rates, our core business is performing quite well. Not surprisingly, we expect 2023 will be a down year, negatively impacted by a full year of higher rates. I'd like to share with you a few other thoughts. Notwithstanding all the noise, New York continues to be the most important city in America. We continuously survey dozens and dozens of our tenants, all of whom reaffirm their commitment to stay and grow in New York. And that goes for our clients who are headquartered in other cities who are making New York their, so to speak, second home. And it's not by chance that the New York area is the tightest residential market in the country. People want to live here. Steel, concrete, and curtain wall are important, but in our business, capital is the essential raw material. We are now in the middle of a Federal Reserve tightening cycle, the result of which is interest rates are up and capital is scarce, and that's an understatement. Notwithstanding Fed funds at 5%, most run-of-the-mill real estate operators can't borrow at 10% or can't borrow at all. So here's what we have done. Several years ago, when we began the Farley-Facebook PEN1 and PEN2 projects in our all-important Penn District, we loaded in over $2 billion in cash to pre-fund 100% of our development and construction costs. We didn't know then how prescient this would be. So Farley Facebook is now finished and paid for, PEN1 almost so, and PEN2 will finish around year end. All three of these assets will be free and clear and unencumbered, and that's quite a feat. We handled all of our 2023 and 2024 maturities. We put on a series of swaps and caps, but while very helpful, they provide only partial protection. And I would observe that there really is no protection against loans that mature in a rising interest rate market. And a further observation is that the stock market prices at then current interest rates, giving no credit to a company which might have lower rate loans, even if they're locked in for term. Beginning first quarter of this year, we declared a right size dividend allowing us to retain 128 million of cash annually. And by the way, our stock still trades at a too high 6.5% yield. In January, we completed an important deal with Citadel at our 350 Park Avenue building, which involved their mass releasing the entire 585,000 square foot building, essentially relieving us of 225,000 square feet of vacancy. This deal will almost certainly result in a teardown and a new build of a grand 1.7 million square foot tower on a larger assembled site. Please see our press release of December 9th, 2022, explaining the transaction. We have lots of friends on Wall Street, and I might venture that by any measure, return on equity or return per employee or whatever, Citadel is at the head of the class, intensely focused and aggressively growing. This deal validates the quality of our site, our development team, and New York. Interestingly, Ken tells me that a significant differentiator for his firm is the simple fact that everybody comes to work every day, five days a week. I think they start at 7.30. There is a learning here. Call me crazy, but I think companies that embrace work from home will be left behind. And I think it's absurd to think that years from now, tens of millions of Americans will be working from home alone at their kitchen tables. And by the way, Zoom may be a disruptor, but its stock is down from 588 to a still high 75 today. You will notice in our supplement that we updated our development projections for Farley, Penn 1, and Penn 2, raising our aggregate projected returns. This, based on the fact that in 2022, we leased 225,000 square feet at Penn 1, at average starting rates in the 90s, and based as well on the outstanding market reaction we are getting to PEN1 and PEN2. Our strategy here is to achieve very strong returns at rents well below those required for new construction. The PEN1 ground lease process is now kicking off. As required by GAAP Accounting Convention, in the first quarter of 2022, we estimated a ground lease of $26 million and reflected that in our statement. Based on current market conditions, we now think that number should be quite a bit lower. We expect 2023 will be challenging as business and consumers continue to feel the effect of the Fed's aggressive rate increases and generally tighten their belts and act with caution. This will likely be reflected in lower leasing volumes and frozen capital markets. We believe quality product wins today. Just look at our new bills, new lobbies, amenities at PennOne, new skin at Pentoo, et cetera. Not long ago, new construction commanded a $20 premium. Now it commands a $100 premium or more. Does anybody think that's too high and that the market will adjust? One more point, and this is an important one. In the history of New York real estate, all great upward landlord markets followed a period of constrained supply, and here we are. Capital markets are now making it almost impossible to build new, which will be the foretellers to the next bull market and landlord's market. Now over to Michael.