Vornado Realty Trust

Good morning and welcome to the Barnetto Realty Trust first quarter 2024 earnings call. My name is MJ and I will be your office.

Debt on the office condo is due next month, June 2024. Yesterday we announced that we renewed and extended the Bloomberg lease for an 11-year term to begin in February 2029 and take us through February 2040. So 16 years of term from now. As you can imagine, every developer in town tried to poach Bloomberg, and of course, they looked at every opportunity as they must. We are delighted that they chose to stay with 731 Lexington. By the way, the building is as much Mike's creation as mine. He had significant input into the design of the original building. The design of the building and Bloomberg's internal fit-out are on a par with what we would have built today. but of course now they don't need to. The terms of the lease are spelled out in yesterday's SEC filings. Tenant concessions in the form of TIs and free rent have been established, and the net rent will be the subject of an appraisal in 2029 with the then rent adjusted up or down no more than 10% either way based on the then market conditions. We're in the process of refinancing this asset, but I must say I am not excited about paying today's market rate of 7% or even 8% for debt, with all the trappings of leasing reserves, cash suites, and such, which are admittedly protective of the lender but don't do much for our equity value. As we speak, my personal favorite is to pay the debt down and maybe even pay the debt off. We shall see. Now let's focus on our credit lines. Traditionally, we've had two separate but similar credit lines with staggered maturities. One credit line for $1.25 billion, has been renewed through 2027, and the renewal of the second credit line was finalized last Friday at a reduced amount of $915 million, with a term extended to April 2029. As expected in these times, several banks dropped out. We use our credit lines very sparingly, generally for short-term requirements with a known source of repayment, and rarely have we exceeded 25% drawdowns. Now to 280 Park Avenue. We own 50% of 280 Park Avenue. Since our joint venture partner has already reported, I'm guessing you are all pretty much up to date on the details. What we did here was extend the maturity of the senior loan for four years, keeping the rate constant with no pay down, but posting significant cash reserves for future leasing. Several analysts have commented that the loan and the equity value pretty much cancel out, And that fact allowed us to DPO the MES loan at 50 cents on the dollar, realizing a $31.3 million gain at share, which we will recognize in the second quarter. This is not yet a big win, but it does create a cheap warrant on a wonderful asset located in Prime Park Avenue, where there is already a very low 7% vacancy and a shortage of space. We think it's a first-class bet. By the way, we are leasing very well here. We continue to protect our balance sheet with interest rate caps and swaps, but when a 3% loan matures into a 7% market, there really is no place to hide. We continue to prospect for good real estate in distress where our best-in-class operating platform can be helpful to the lender. We expect these opportunities to accelerate. The gold rush on the part of the luxury brands to own, control, and dominate the very best locations is accelerating, and the knock-on effect on prime New York City retail space is palpable. It should be noted that in New York, we have much more prime retail space than anyone else by a wide margin. Some commentators have noted that the Fifth Avenue and Times Square values seem to have recovered to the pricing of our retail JV sale five years ago. It would seem so. I continue to strongly believe the contrarian bull case I made in my annual shareholders letter that basically with frozen supply, i.e., no new developer office starts and none on the horizon, tenant requirements picking up and vacancies shrinking, I couldn't be more optimistic about the future. And also note that while the New York market has a huge 422 million square feet, when you cancel out the non-prime We really only compete in a much smaller 177 million square foot market. Great things are happening in our Penn District. Come by and take a look. Our team here at Renato couldn't be more optimistic. Now over to Michael.

Thank you, Steve, and good morning, everyone. As expected, the financial results for the quarter were down from last year due to items that we previously forecasted. First quarter comparable FFO as adjusted. was $0.55 per share compared to $0.60 per share for last year's first quarter, a decrease of $0.05. This decrease is primarily driven by lower NOI from higher net interest expense and no move-outs, partially offset by lower G&A expense. We have provided a quarter-over-quarter bridge in our earnings release in our financial supplement. Overall, New York business same-store cash NOI was down 5.1 percent, primarily due to the aforementioned expirations. As we indicated on our last earnings call, we expect our 2024 comparable FFO to be down from 2023 comparable FFO of $2.61 per share, primarily due to higher projected net interest expense of about 30 cents per share in the impact of known vacancies at certain of our properties, primarily at 1290 Avenue of the Americas, 770 Broadway, and 280 Park Avenue. We anticipate the impact of these expirations in 2024 to be roughly 25 to 30 cents per share. We expect this impact to be temporary as we have already leased up a good chunk of this space. But the gap earnings from these leases won't begin until sometime in 2025. We then expect earnings to increase as income from the lease up of Penn and other vacancies comes online and as rates trend down. Now turning to leasing markets. The New York office market continues to show signs of strengthening. While first quarter office leasing in New York took a bit of a breather from the strong year end, there is a healthy backlog of activity with a number of large deals in the works. Overall, tenant space requirements continue to trend upward, sublease space continues to Best-in-class renovated and amenitized product located in transit hubs continues to dominate leasing, and the new supply pipeline is close to zero. These dynamics set the table for continued improvement in conditions in the upper tier of the market, which we are already experiencing in our best-of-class portfolio. Overall, asking rents are stable, even rising in the top-tier properties, but concessions remain stubbornly high across all submarkets. The financial services and legal sectors are continuing to drive the leasing activity as both are in growth mode. We are also seeing the first signs of life from the tech sector again after a couple years of being on pause or downsizing. And our experience is when they grow, they tend to lease big chunks of space. The Midtown and new Westside markets are outperforming as leasing activity in Midtown is strong, not only on Park Avenue, but also on 6th Avenue and the 5th Avenue-Madison Avenue corridor. On the west side, tenant demand continues apace. If you walk from 7th Avenue to the Hudson River, you will see why. Turning now to our leasing activity, after completing a slew of large leases in December 2023 and finishing last year with a market-leading 2.1 million square feet of deals, we expected a more muted first quarter of completed transactions, given where our deal pipeline stood in the negotiation process. In the first quarter, we leased 291,000 square feet at a healthy $89 per square foot, reflecting the overall quality and premium locations of our properties. The highlight of the quarter was our 125,000 square foot headquarters lease with Major League Soccer at the new Penn II. MLS had been in the market for some time, looking mainly in the Midtown core, until late in their process when they toured Penn II and were wowed by what we've done with the building and the district. The project is now complete and really shows terrifically. Our new town hall event space is open. By the way, we hosted our first event just two weeks ago, attended by 300 people. And the rooftop pavilion and park are truly spectacular. Tenants are responding positively to everything that we've done and what's still to come. We have a significant pipeline at PEM2 and are busy negotiating proposals with tenants across a variety of industry sectors. In addition to the significant Bloomberg lease renewal of almost 1 million square feet we just completed, our leasing pipeline is strong, with 370,000 feet of leases in negotiation and another 2.5 million feet of proposals out on the street in different stages. Much of this activity is not only addressing current vacancy, but also forward-looking expirations. As discussed on the fourth quarter call, we foreshadowed an occupancy decline due to the known Q1 move-outs at properties such as 1296th Avenue and 280th Park. We are pleased to report that we have already taken care of half of the 2024 and 2025 expirations in these properties, with more activity on the horizon at each. Turning to retail, the retail leasing market continues to recover. As we discussed in our last call, Prada's and Caring's blockbuster retail deals on Fifth Avenue that occurred in December demonstrated their long-term commitment to Manhattan and has further energized the market. And there are other potential sales rumored to be in the works. Vacancy rates are now below pre-pandemic 2019 levels in most Manhattan submarkets, and retailers are willing to pay top dollar for the best locations. Our retail leasing activity has picked up meaningfully in the last couple of quarters, with almost all our assets seeing significant interest. As evidence of the rebound, This quarter, in addition to signing many leases in the Penn District, we completed an important long-term renewal at one of our Times Square assets at the highest annual dollar rent we've achieved in our portfolio since pre-COVID, over $15 million per year. Turning to the capital markets now. While the financing markets still remain challenging, we are starting to see some stability for high-quality product. The CMBS market has begun to selectively reopen for office, lending at conservative metrics on quality assets with long weighted average lease term. Unsecured bond spreads for office continue to tighten. The market is much more open for high quality retail. That being said, coupons are still high. Banks remain on the sidelines and generally in workout mode, and there's more pain to come for all lenders given the volume of office maturities in the next few years. This will create opportunities for us. We have been and continue to be very active on the capital markets front. In addition to the recent extensions on 280 Park and 435 Seventh, we're also in the process of extending our other 2024 maturities, which we expect to complete soon. Finally and importantly, as Steve mentioned, just a few days ago, we finalized the recast of our revolver that was scheduled to mature in 2026 for $915 million. Completing this refinancing solidified a key portion of our liquidity through 2029 and gives us significant runway to deal with any challenges over the next few years. It also highlights the continued support of our key banks in this challenging environment. We thank them for their support. Our balance sheet remains in very good shape with strong liquidity. Pro forma for the new revolver size, our current liquidity is a strong $2.7 billion, including $1.1 billion of cash and restricted cash. and $1.6 billion undrawn under our $2.17 billion revolving credit facilities. With that, I'll turn it over to the operator for Q&A.