Q4 2021 Vornado Realty Trust and Alexander's Inc Earnings Call
Yeah.
Okay.
Yeah.
Good morning, and welcome to the Vornado Realty Trust fourth quarter 2021 earnings call. My name is Richard 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 or.
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. Seaborne Stein Senior Vice President and Corporation Counsel. Please go ahead.
Welcome to Vornado Realty Trust fourth quarter earnings call yesterday afternoon, we issued our fourth quarter earnings release and filed our annual required on Form 10-K , with the Securities and Exchange Commission. These documents as well as our supplemental financial information package are available on our website www dot.
Dot com under the Investor Relations section in these documents and during today's call. We will discuss certain non-GAAP financial measure reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release Form 10-K and financial supplement.
Please be aware that statements made during this call maybe 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.
Guarding 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 statement on.
On the call today from management for our opening comments are Steven 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 Steven Roth.
Thanks, Steve and good morning, everyone.
By any measure Vornado just reported about.
Standing industry, leading quarter at the head of the class of our industry peers.
Comparable <unk> for the quarter for the fourth quarter increased 19, 1% from last year's fourth quarter.
Companywide same store cash NOI for the fourth quarter increased 10, 1% from last year's fourth quarter <unk>.
Same store cash NOI from our New York business for the fourth quarter increased 11, 3% from last year's fourth quarter.
Companywide, we leased two 9 million square feet for the year of which $2 5 million square feet was in New York, where our leasing teams landed the second and third largest office leases and the second largest retail lease.
For the quarter, we leased 1 million or 36000 square feet companywide of which 1 billion 8000 square feet was in New York, you will hear more about our leasing activity and Michael Franco's comments shortly.
New York Office cash starting rents were $83 for the year and $88 for the quarter.
New York Office cash Mark to markets were positive <unk>, 8% for the year and a positive 29, 1% for the quarter.
Importantly, our triple digit Madison Square garden anchor lease too.
Our current leasing successes at Penn one validate our Penn District program.
Here's a short update on the Penn District.
The acclaimed Moynihan train Hall is open to the public or leasing retail leasing and the train Hall is nearly complete with 36 with I'm sorry.
With 26 leases executed.
The doubling in width and doubling at high end of the long Island Railroad concourse is scheduled to be completed by year end.
We own the retail on both sides of the IRR conquest, all of with space was vacated to accommodate the construction.
We are now finalizing with over 30 retailers for that space many of them food oriented at terms that are better than.
Pre COVID-19 levels.
And finally, we have turned over all of Facebook at 730000 square feet to Ben for tenant fit out.
At 10 one.
Brand, new lobby and multi floor amenity offerings are largely completed and opened.
Our amenities here, our extensive we believe them to be the largest amenity package in the city by <unk> and.
And unique.
And the demographic of our workforce and is receiving rave reviews from tenants and brokers.
The role we are in the hospitality business and that means pleasing our tenants and pleasing their employees.
On the seventh floor pad, one our experience at leasing centers opened at this.
This 14000 square foot facility complete with multiple scale models and floor to ceiling wall-to-wall videos visit.
<unk> illustrates at brings to life, our vision and plans for the buildings restaurants retail amenities lifestyle at work style that the Penn District will become.
At <unk>, we are give or take 25% into construction.
Our construction operations in the Penn District span three full blocks 31, 3% to 34th Street, along the west side of seventh Avenue and.
In a few short months everything at our Penn District will be will come to life as shiny modern curtain wall continues to be erected on the peds supersonic.
As steel has directed giving shaped to the massive two block long bustle in architectural statement and scale in substance that we'll announce the entrants to Pennsylvania station Madison Square Garden, and our office building.
And Thats the hotel Penn across the street begins to come down Daylighting that unique site.
My excitement and conviction about our Penn district rose quarter by quarter.
I still believe that a winning strategy is to allow investors to choose between the high growth development oriented Penn district, or our other pretty terrific in their own right class a traditional core assets or books.
Unless we have decided to pause the execution of a separation by tracker.
This is a purely internal transaction with no counterparty or deadline and I believe a delay until Covid has resolved at Newark is return on mass to the office is appropriate and warranted.
Worried about our retail business the Manhattan retail market has definitely bottom and activity is accelerating.
2021 our retail cash NOI was $168 million lowering away our guidance of 135 billion.
Further we are increasing our 2022 retail cash NOI guidance by $50 million from 160 million to $175 million.
While we own a very large and very important trophy quality asset in Egypt, San Francisco, and Chicago, where neither was primarily in Manhattan centric company.
As we interact with our tenants other occupiers and market participants our conviction about Manhattan its future performance.
And EBIT dominance is stronger than ever.
Case in point.
That has become the second hub for all of the Tech Giants, specifically, the new west side and they continue to grow here.
With inflation the topic does your I should point out that replacement cost for New York Office buildings is rising pretty aggressively.
I submit that replacement cost has always been a leading indicator leading indicator foretelling that our existing stock of office building will be increasing in value.
In the same vein the Manhattan residential market is I believe also a leading indicator, but it went from 100% occupancy pre COVID-19 down to 70% at the speed of Covid and it's now back to 100% at higher than pre COVID-19 rents by the way as new Yorkers have returned.
Franz of full and standing room only so.
The city is full but office buildings not so much that last domino will be with employers and employees resolve hybrid work schedules and the office districts are again teaming with activity.
And I submit that will come sooner than you think.
That concludes my remarks now to Michael.
Thank you, Steve and good morning, everyone.
As Steve mentioned, we had an outstanding quarter and a strong year.
Fourth quarter comparable <unk> as adjusted was <unk> 81 per share compared to 68 for last year's fourth quarter, an increase of 13 or 19% and for the year comparable <unk> was $2 86 per share of <unk> 24, or 9% from 2020, we have provided a quarter or.
Per quarter bridge in our earnings release on page four and in our financial supplement on page eight.
We had several non comparable items in the quarter, primarily 12 90 Avenue of the America defeasance costs, and a Trs noncash deferred tax liability, partially offset by 220 Central Park, South gains, which in total reduced <unk> by <unk> <unk> per share.
As we look ahead, we are expecting another strong year in 2022.
With double digit percentage <unk> per share growth driven primarily by previously signed leases in both office and retail, particularly Facebook at Farley and the continued recovery of our variable businesses.
With respect to our variable businesses, we continued to see a recovery in the fourth quarter, our dominant signs in times square in the Penn District continue to attract disproportionate demand and have healthy signage bookings BMS.
<unk> continued to perform near pre pandemic levels.
Number of Tradeshows have successfully taken place, albeit with lower attendance, primarily due to travel restrictions and finally, we still expect our garage is to be fully back in 2022.
Other than hotel pens income, we still expect to recover most of the income from our variable businesses in 2022 with the full return in 2023.
Companywide same store cash NOI for the fourth quarter increased by a strong 10, 1% over the prior year's fourth quarter.
Our core New York Office business was up eight 5% and our retail same store cash NOI was up 32, 3%.
<unk> due to the rent commencement on new leases at 595 Madison Avenue, Four Union Square, South 770, Broadway and 689 fifth Avenue.
Our New York Occupancies also continue to recover nicely.
Our office occupancy ended the quarter at 92, 2% up 60 basis points from the third quarter and 110 basis points from the trough in the second quarter.
Retail occupancy ended the quarter at 87% up 350 basis points from the third quarter.
We expect further improvement in both Occupancies by year end 2022 based on our deal pipeline and modest 2022 office explorations schedule.
Now turning to the leasing markets. The New York Office leasing market continues to strengthen and show resilience in this period of change supported by strong economic and private sector job growth.
<unk> over quarter sustained leasing momentum led to total volume in 2021 of 25 million square feet.
By far the highest level since the start of the pandemic.
Tenant demand continues to surge, especially from technology and financial services users and importantly, these companies are committing to long term leases as they map out their futures.
Tour activity has returned to pre pandemic levels with lots of deals in the works.
Most industry experts are forecasting market rent occupancy improvement in 2022 with pent up demand building as more employers get off the sidelines and into the market.
The office markets recent performance is completely centered on flight to quality as the highest quality properties are clearly win.
Tenants are strongly attracted the transit oriented properties with state of the art systems amenity rich programming outdoor space and health and wellness features along with food and beverage offerings and importantly, they are happy to pay for quality and value as it is more important than ever to Ceos that there'd be an appealing and engaging workspaces to.
Track and retain their employees.
Gol reports that in 2021, an all time high 164 leases comprised of $3 4 million square feet were signed at $100 plus starting rents.
Our leasing team led the market here with 831000 square feet or 25% of these deals including the largest deal in this class for the second year in a row.
Or at least with MSG it tends to fall in the footsteps of 2020 as largest trophy transaction with Facebook at Farley.
We expect this trend to continue which bodes well for rental growth of our high quality assets.
Overall, we continue to outperform the market as is evident from our statistics and things that is worth underscoring our leasing accomplishments during the pandemic over the past 24 months.
For four 8 million square feet leased starting rents of $85 per square foot Mark to markets of $8 six cash and GAAP of 14, 1% and average lease term of nearly 13 years.
We executed on a number of large important leases during this timeframe Facebook 730000 feet NYU 633000 feet Interpublic 513000 feet.
Medicine Square Garden for 128000 feet, Apple 336000 feet clear secured a 119000 feet.
The 2021, our office leasing performance was comprised of 98 transactions for more than $2 2 million square feet total with initial starting rents of $83 per square foot and an average lease term of 11 years.
Moreover, cash and GAAP Mark to markets were strong at 10, 8% and 15, 9% respectively.
38% of this activity with trophy transactions at Triple digit rents.
During the fourth quarter, we completed 23 leases totaling 954000 square feet. Our average starting rent during the quarter was $88 per square foot cash mark to market was 29%.
GAAP Mark to market was 39% and average lease term was 14 years, all very very strong figures.
The Madison Square Garden lease is another major milestone for us in the Penn District, and validates our program to take rents from the $60.
Richard.
Yes.
On mute the backup line.
Sure.
For the year, we executed 36 leases for 229000 square feet of positive GAAP and cash mark to markets of 37% and 13% respectively.
We have an active pipeline with over with over 170000 square feet in the works interest in the Penn District in particular is strong and we expect it to grow with the commencement of leasing and the long Island Railroad concourse.
Turning amount of Chicago and San Francisco.
While the Chicago market continues to be challenged by high vacancy negative absorption elevated tank concessions. There are signs would suggest a growing confidence by tenants entering the market as leasing activity continues to increase quarter over quarter.
We have recently embarked on bringing our New York work life amenity ecosystem from Penn one to the Mark and plan to spend approximately $40 million to create a new tenant.
<unk> focused on the first and second floors.
The program will further differentiate the Mart and include first class fitness and conferencing facilities and new outdoor Plaza and main entrance fronting River, North neighborhood, and new outdoor spaces and landscaping on the South drive alone Chicago River building on what we first accomplish in 2016 with our grants their restaurant and new.
Food Hall.
We anticipate starting construction in the second half of this year with the completion during 2023.
We have begun to introduce the project to the marketplace and are experiencing a real uptick in tour volume proposals, we have a lease out for 80000 square feet with a Fintech company and are in advanced dialogue with 50000 square feet of potential new tenants.
And San Francisco the city's office.
Leasing market is beginning to thaw and recovery seems to be underway.
Leasing volume averaged $2 1 million square feet over the last two quarters, we renewed 446000 square feet in total here during 2020 in 2021, putting the campus and great long term shape, we have zero lease explorations in 2022, and a modest 203000 square feet expiring in 2023 and 20%.
Four.
When we finalize the renewal with one tenant for 50000 square feet just last week at a significant positive mark to market and are in discussions with the remaining tenants to also renew youll.
You will see that our occupancy in the campus decline from 98% to 94% this quarter, which is solely a function of bringing back the 78000 square foot cube, which is vacant back into service the balance of the campus. This fall.
Lastly, turning to the capital markets.
The investment sales market is continuing to pick up with the return of large office deals at strong pricing. So just for such as 441 90 per $1 billion $4 52 fifth Avenue for $855 million and one Manhattan West for $2 85 billion.
Investor interest in New York is clearly rebounding as they see that the city has bottomed and find the relative value compelling.
On the debt side, despite the move up in rates spreads remain tight and all in coupons attractive.
We refinanced over $4 billion of debt in 2021, taking advantage of the very favorable financing markets to lock in low rates, including our early refinancing in November of the $950 million auto loan at 12 90 Avenue. The Americas, we have modest debt maturities in 2022, the largest of which we are currently in the process of refinancing.
And essentially no maturities in 2023.
Finally, our current liquidity is a strong four 105 billion, including $1 $93 billion of cash and restricted cash and to $1 75 billion Undrawn under our $2 75 billion revolving credit facilities.
With that I'll turn it over the operator for Q&A.
Yes.
Thank you we will now begin the question and answer session. If you have a question. Please press Star then one on your Touchtone phone if.
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Our first question on line.
It comes from Mr. Emmanuel Korchman from Citi. Please go ahead your line is open.
Hey, good morning, it's Michael Bilerman here with Manny.
Steve I wanted to go to your comments around the tracker and putting it on pause.
You can just walk us through your and the Board's decision.
To put that on pause obviously you made the announcement last April when we were in the throes of Covid.
It had been multiple multiple years.
<unk> been thinking along those lines.
Q why put it on pause now and there is a lot of vibrant.
Coming into the city a lot of excitement obviously, the often stocks have rebounded.
Actually it would be a good time to put something out so maybe just walk us through the decision of putting on pause and whether you would look at other transaction alternatives to attract or is it still 100%.
On that path.
Good morning, Michael how are you.
Fantastic I'm, calling you from the office.
So he had a little Dustup yesterday, yes, I did here.
So look I mean, I think that my remarks speak for themselves. We think COVID-19 has not resolved yet.
The.
Sure.
Our tenants' customers.
And the Ceos.
That we talk with that are in our portfolio add in the city.
We have.
Not resolved yet the comeback in coming back to work getting their employees back into the office or the schedules et cetera. So we're still in an uncertain period.
Our thinking is is that we want to have put our best foot forward. There is still uncertainty we are still at the.
At the foothills of a recovery.
We just don't think the timing is right and so.
That's our judgment and what.
Therefore it.
With respect to your.
Got it.
I still have conviction about the concept of having our investors be able to invest at either the Penn district, or our pretty terrific other assets.
And whether there is other transactions there is no no other transactions that are that are being contemplated at the moment, although we do have a responsibility.
To cover all the basis.
I'm, just really trying to understand what really changed in your thinking because the financial driven transaction right you Didnt have a counterparty, which you've talked about this was Michael Michael.
Michael I couldnt be clear Okay. This we're still not done with Covid buildings are still.
30% occupied this is not the right time to launch something like like we contemplated for success, Okay, I couldnt be clearer.
No I know you are clear, but this is not something you announcements during COVID-19 right and you've been progressing along this path for a number of years. So it's.
It's just surprising to now put it on pause when we've had all this information and you've been doing this during COVID-19 .
That's helpful.
I'm not happy that Youre surprised I have nothing further to say.
Okay. Thank.
Thank you.
Yes.
Thank you.
Our next question on line comes from Mr. Steve software from Evercore ISI.
Yes. Thanks, good morning, Michael Unfortunately, the line cut out for maybe a minute or two I think we lost a little bit of information or at least I did.
And I don't know if you had talked a little bit about the pipeline, but maybe you could just talk a little bit about the leasing pipeline and perhaps how the MSG lease.
Directly impacted the leasing stats in the fourth quarter I realize there was a very big mark to market on that lease and so it probably helped to get you up towards that 29% figure. So I was just wondering if you could unpack maybe MSC from everything else in the quarter and then talk about the pipeline in general.
Steve I did I did make a comment on the MSG take MSG yet on the Mark to markets I guess, that's where I cut out.
But mfg was a tremendous deal.
Being said the balance of the quarter was similarly outstanding if you take out the MSG leaves the mark to markets.
For the quarter were nine 2% cash and 12, 9% GAAP.
So.
Outstanding starting rents.
And Mark to market is really across the board, which I think is reflective of our of our portfolio.
Steve Let me give you a little color the way I look at it.
There were three components and the leasing this quarter okay.
One was the MSG lease.
Second was 136000 square foot lease.
In a building we own in long Island city. It obviously.
The market there is in the mid thirties of risks.
So that that was lumped into the averaging and then theres the balance of the portfolio.
The number that I think is the most relevant is the starting rents because I think that speaks to the quality of the assets.
The Red and long Island City Long Island city component of the quarter's leasing and by the way Glen and his team did a bang up job.
The quarter this year as last year and they always do.
And we couldnt be proud of.
Glen and his team.
Long Island City lease was 136000 square feet in the thirties, the Madison Square Garden lease we know about.
By subtraction, the remainder of our portfolio that is ex long Island city and ex Madison Square Garden, the starting rents were $94 a foot okay, not 65, not 70 $94 a foot.
So I think that if you focus on that that is a measure of course this is idiosyncratic.
<unk> quarter by quarter by the mix of buildings and the mix of.
So what I'm, saying is the fact that the balance of our portfolio X Long Island City and ex Madison Square Garden commanded $94 starting rents to me is extremely telling to the quality of our assets and the reception that our assets get into the marketplace.
I'm talking about pipeline, Hey, Steve it's Glenn on the pipeline and Michael's remarks.
We said two things one we have leases out final negotiations with more than 400000 feet, notably about 80% of those deals or with new and expanding tenants. Furthermore, we're in.
Very good negotiation on another call it more than a million feet, which is a real balance of new expansion and renewals across the portfolio and all of the buildings with tenants for most of the industry sector is very strong activity throughout the portfolio.
We sit here today and stayed out of that 440 again, maybe I cut out here of 160000 square feet at Penn one at over $90 per square foot starting rents.
So just to continue down the line on this question.
It's an important question and the statistics are important fee. So thanks for the question.
Basically.
What's happening in the Penn District, and when we basically announced our plans in the Penn District, We said that we were going to.
Take the two existing buildings, which are the better part of 5 million square feet. Combined. So these are big assets. They are important assets.
And we were going to spend X and we were going to take the rents from $55 a foot average up to into the 90 <unk> into the triple digits, we believe that our performance as announced this quarter.
Validates that program.
The MSG lease is not a one timer, it's not an anomaly we have lots of leasing to do in the Penn district, and the existing buildings.
Even getting into the new buildings that we will be doing and so we will be announcing I don't know the better part of 100000 square feet a quarter or whatever the number is going to be at $90 rents may be triple triple digit rents.
Almost as far as the eye can see so.
These numbers are going to be our foretelling, what the future will be and what the growth will be and what the earnings accretion will be coming from the Penn District.
But the number that <unk> that.
Number that I'm the happiest about is the balance of our portfolio commanded $94. This quarter I think that's an extraordinary number and we're very proud and happy about that number in that also.
As the result of years and years of improving those assets Redeveloped those assets.
Nurturing those assets so that they perform at the level that they that we were able to daylight this quarter.
And I'll give a shout out to David Greenbaum, and Glenn because they did most of the work of repositioning those assets over the last few years.
Great. Thanks for thanks for that commentary I guess, Steve just as a maybe follow up with new government officials in both the governor and EMEA are specifically.
Alright.
As a follow up that's a whole new topic.
Okay.
Briefly can you maybe just talk about.
The mayor and some other priorities and how they fit into kind of Penn station and whether it's a homelessness issue in New York and the crime. Just how are you sort of thinking about that and what do you think are the key focal point here for the next six to 12 months.
Well.
Obviously.
Densely populated.
Urban.
In cities, which go across the northern belt of the country that goes from Washington D. C at New York across to <unk>.
Chicago, and then across to San Francisco are all pretty much.
Similar similar.
Similar politics.
The demographics. So crime has increased in all of those cities at about the same rate homelessness and what have you. So it's it's.
It's.
It's a.
Situation, which has.
As distressing.
Perfect.
And we believe that the political climate in New York is getting better if you read the headlines about what the.
The.
Mayor in Chicago has said what the mayor in San Francisco has said what the mayor of New York I said, they are all sort of similar and that is is that the situation has to improve and their job is to improve it. So we are extremely optimistic about the political climate in New York at the governor level at the <unk>.
At our level.
And we are very supportive and we're very optimistic.
Thank you. Our next question online comes from Mr. John Kim from BMO capital markets.
Yes.
Thank you.
I had a couple of questions on guidance, you mentioned, increasing your 'twenty two retail guidance.
<unk> 75.
Can you talk about some of the puts and takes on that because I know you sold some assets since the original guidance was put out and how does this impact your 2023 guidance, which initially was at 175 level.
We don't give guidance.
And.
But we did give guidance on retail because of the precipitous change in market dynamics.
And so we did do that to help you all in terms of your modeling in in terms of you are valuing our retail assets.
I don't think that it would be productive for us.
For me to start getting into 93.
2023, although we are optimistic about it we think towards 2023 will be better than 2021. So we're on a progression of recovery.
And I think.
Michael or Tom do you want to pursue that anymore.
I would just say John first of all I think if you think about where we were a year or two years ago and we first laid this out.
I know you've been on this there were some skepticism whatnot.
<unk> to say, we own the best retail assets in the city.
Dan.
There was a there was a period, where obviously at the outset of Covid with no tourism no workers in the city or at least they went on hiatus.
Now picked up we still need to see continued consistent return there but.
The tourism started to come back pretty significantly in the fall.
And so retailers are now active again and I think what you're seeing.
2021.
Was the fact that we got.
Wanted to pools.
We got.
We got the benefit of our assets again, when you're on the Folgers when you own a lot of the great assets that we own.
Union square et cetera.
Leasing there so we're seeing a continuation of that and I think a lot of what's going to come through in terms of raising the guidance. In 2022 is the fact that we did sign leases at quite a few of our assets and Thats more in line. So we feel good about the number we put out there and as Steve said hopefully continues to go up from there.
The bottom that we had called.
Earlier in 2021, I think youre seeing come through and we just need to see a consistent return of tourism and workers and so forth to rents and start building back.
Significantly.
Just from a technical point of view.
Did guide and predict what 2021 would be.
We exceeded that.
Bye.
But the $25 million.
So.
The number is now known we thought the.
Possible for us to now update what we expect for 2022, and we did that in my remarks.
And so.
We're trying to tell you what we think as we think.
I just wanted to clarify that the moynihan retail is that being pulled forward to 2022 or is that still expected to be 23 delivery.
The latter.
Okay.
My follow up question is on <unk>.
So the 2022 number.
It does not include the Moynihan retail.
Got it so okay. So you can just you can just look back and just think.
And retail is pretty substantial how that will improve the 23 number at our growth profile going forward.
Okay. My follow up question is on variable income so your indication not really quite guidance, but your indication is that will be fully returned in 2023.
However, if I look at your fourth quarter gain on the variable income of 12 5 million versus the loss that you had in the prior year fourth quarter 'twenty.
Which was $24 million loss less the hotel Penn.
Top line was about $14 million it looks like you've already gained back all of that variable income that you lost in the fourth quarter 'twenty. So I'm just wondering if components of variable income have changed.
Now I'd like to advertise.
You want to handle that detail on this call. If you want to handle that supplemental lead off the call either.
Either way, it's going to be primarily garage and trade shows that are going to come back BMS and the signage is pretty much back to where they were pre pandemic.
Hello, I would say the signage is like we had an outstanding fourth quarter on the sign side, having the dominant sign as I as I mentioned in my comments.
Paid significant dividends and Thats, what having taken a couple of science offline. So.
While we are back to pre pandemic levels on the signs is thats not same store.
When we bring those signs back we think that number goes up further.
The BMS business in our signage business are growing businesses by the way so in normal times. What we're doing now is we're all we're doing now is recovering from the hit of Covid in normal times, and then going forward, we would expect those businesses to grow.
Growth.
How else can we help you Jonathan.
Okay.
Next question please.
Thank you. Our next question on line comes from Jamie Feldman from Bank of America.
Please go ahead.
Great. Thank you and good morning, I wanted to get your thoughts on exposure to floating rate debt.
If you look at the balance sheet, you do have a decent amount clearly we're in a rising rate environment, maybe if you could just kind of step back and tell us your philosophy.
What we should expect going forward in terms of either.
Earnings risk from floating rate debt or just how you expect to run the balance sheet in terms of percentage floating versus fixed.
Jamie good morning.
Few comments.
So the answer is no.
We do run our balance sheet with the mix.
Anybody can.
Predict exactly where rates are going in any environment and the reality is if you had borrowed fixed for the last several years you would have been.
Donnelley wrong in terms of where rates are going and even floating.
When we have looked at swapping those obviously were going to pay more for several years, but I would say from a baseline standpoint.
Our balance sheet is.
50, 50 fixed floating okay. Now when you net out, let's just say, a 1 billion and a half of cash which is sort of a natural hedge against floating rate debt.
So as rates go up we're going to earn more on net income were probably about two thirds fixed one third floating which is not.
Not that radically different from most others would probably one company that's entirely fixed so and why do we why don't we borrow floating to that proportion because we have a number of assets that the business plan warrants that right, we're going to be executing redevelopments.
Maybe theres, a recapitalization opportunity for whatever reason having.
Having that that be fixed or sale right, having that that would be fixed. We think is costly right. So I would think almost 100% of the time, if youre selling an asset recapitalizing and I said, if you borrow fixed the buyer doesn't want would you put on it right <unk> guess leverage levels wrong higher LOE and it ends up costing you more than would've cost along the way so that's.
Some general philosophy on a floating rate basis, even if they go up there is still cheaper than our view than where we would have borrowed fixed for several years. It may be entirely analog rates may go up now Jamie but the fed is going to clearly put short term rates up here to tamp down inflation.
Hopefully that puts us in a recession, but that's a risk.
And we think ultimately rates stabilized at levels that are still fairly low. So that's general commentary I'll, let Steve tack on if he's got anything but.
I think important also to understand that natural hedge that sits in our in our cash portion.
So macro philosophy.
The.
The thinking on the path of.
Analysts and what have you that fixed rate debt is safe and floating rate debt is not safe.
Is totally incorrect.
In my opinion.
So if you were a fixed rate borrower over the last 50 as you were wrong wrong dead wrong to the tune up huge amounts of money.
So.
So the first thing is that if you look at it from a risk point of view, if you are a fixed rate borrower.
We have locked in our cost for 710 years whatever it is.
And if you.
If your income if you want to refinance that loan or sell the asset or redevelop or whatever it might be then.
Then you'll have to pay the fees and switch, which historically has been very very high.
So there is risk in fixed rate debt that.
Many folks don't really recognize okay.
Now.
And you have been wrong historically, so generally speaking there is a premium.
<unk>.
Floating rate term fixed rate and generally speaking it's anywhere from two to three percentage basis, two to 300 basis points. So if you borrow fixed you are giving up two to 300 basis points may be more.
With certainty in the beginning now.
Rates fluctuate.
And it appears as if we are in a period now where the fed is that a tightening cycle.
Michael said to tamp down inflation.
And so whatever but for example, we did we did a floating rate loan of big floating rate loan on the.
555, California last year.
And we.
We basically the loan was unbelievably attractive and we and we bought a we swapped it.
Four.
Yes. It was for three years at an unbelievably attractive low fixed rate for that so we hedged our bets with that.
We did have a big floating rate loan recently on the 12 90 Avenue the Americas.
<unk> did not yet swap it.
And our feeling was that the difference between.
The current bid on floating rate debt versus the fixed rate debt was so high that the risk of that our tolerance for increases in floating rate debt way outweigh the cost of fixing fixing the debt. So that's basically a philosophical answer.
For philosophically looking backwards fixed rate debt has been very very has been wrong.
So going forward and of course now our balance sheet is as yet.
Pretty simple, we stay very liquid with a couple of billion dollars of debt.
Gross of.
Of cash on our balance sheet, most times and as Michael said that as a hedge.
We you do do swaps.
And so when we do use floating rate debt, we do it with care caution and we think a great deal of thought.
Alright, Thank you I appreciate.
A detailed and thoughtful response.
You guys gave good color on kind of where the thought processes for office tenants right now in terms of getting back to the office and the kind of space. They use how would you characterize the thought process of retail tenants right now in terms of where they want to be the types of spaces, they're looking for any read through we should we should be.
Thinking about at this point in the cycle.
Jaime you on the call.
I am Steve Yes.
So the first signs of resiliency in New York City, where the neighborhoods and the basic needs retail the Union square.
<unk> hundred 70 Broadway Workman those have come back robustly.
The high Street, and our major high streets of fifth Avenue and times square.
Take a little longer we need our international tourists back we need our workers back in the office to fill the street and that.
It's just a little behind the curve.
And I predict those will be back robustly as well.
Okay.
It's interesting.
There is there was probably still has a very negative feeling about brick and mortar retail in the in the.
In the ether.
<unk>.
And there has been a startling recovery in brick and mortar retail around the country.
The open air shopping centers are doing well the freestanding brick and mortar retailers are doing well I mean look for example at target stock it's just shocking.
How well they are performing.
We are basically a combination of brick and mortar and e-commerce .
And there is others like them, but luxury brands are booming.
Mainly almost entirely brick and mortar so around the country retail is recovering.
Surprisingly well.
And aggressively and that includes open air shopping centers and malls what have you.
Our cities the Big cities in America are lagging at New York is a lagger there is lots of reasons why.
And we understood we.
And those reasons, we believe over time and not a long period of time by the way that that New York will catch up with the rest of the country.
And high Street retail in New York will begin to recover aggressively.
The marketplace in New York as highly as high ups. I think said is the retailers that are doing well that are well capitalized that are well managed and our aggressive are starting to nibble at <unk>.
New locations I mean, we have done.
Multiple deals.
With those kinds of folks.
We expect that.
Overtime.
Retail will recover we do around and expect it will recover to the unbelievable highs highs of the upticks in rents for three or four or five years ago, but it will recover from today's.
Today's levels very aggressively.
Is there anything youre seeing in the market that changes your appetite for certain types of assets.
You want to be positioned within retail.
We are well, let's see how do I answer that question, we have offloaded several assets.
We are not very high on Madison Avenue for lots of different reasons that I went into extensively on the last call.
Loaded some small non.
Less important assets downtown.
And the rest of our assets.
We're pretty happy with or.
Very happy with I mean, do you think about it we own the two.
The two best Mega blocks on times square, they're irreplaceable assets.
The assets that we have on fifth Avenue and by the way. It's just avenue is struggling but traffic on fifth Avenue is not what it was but it will recover.
<unk>.
Reaffirm we realize the hand that we have.
Periodically frequently and so as of right now we're not unhappy with the with what.
With our portfolio.
Thank you.
Next question on line comes from Alex Goldfarb from Piper Sandler. Please go ahead.
Hey.
Good morning, Good morning, Steve.
And hopefully your bankers and lawyers have paused the billable on the tracking stock as well.
Yes.
So question for you.
When you look at the.
Ti's that are in the in the quarter for presumably that's a lot of Madison square, but also other tenants as well.
And then speaking to brokers to hearing about how tenants are cutting lease terms tenants to do 15, what have you how have the economics changed as far as when you're leasing to kind of how has the ti package and the and the length of the lease changed as you're as you're engaging in the rents and is it purely a function that.
The way to get the higher rents you have to escalating ti given inflation or do you think that some of this may subside just trying to get the economics, because if you look in San Francisco.
California.
The <unk> as a percent of the lease are much much lower than they are in New York.
Hi, it's Glenn.
I will tell you.
Certainly neutralize they of course did escalate post COVID-19 , but we've seen a stabilization in those numbers.
Or even strengthening in many of our buildings.
This quarter was certainly weighted to the MSG deal, which was a market ti.
So the numbers.
Peak for themselves I would tell you San Francisco a lot of the dealmaking that we've done the last two years have been renewals.
And the terms have been call it five six years.
But I think the bigger the bigger answer to your question is tenants are committing to long term leases if.
If you listen to our remarks.
In terms of term.
13, 14 year average terms I think is a huge signal that Ceos are committing to space in a big way all over our portfolio and the rest of the city.
So I think that's a big thing in terms of the signals of everyone starting to think about the future, bringing their employees back and making huge commitments to space. So I think the term is the biggest.
And sort of focus on in terms of what you're asking.
Alex Let me give you my take on this.
Yes.
Inducement packages Ti.
Our elevated we are.
I'm not happy with that by the way.
But it's the market and we have to meet.
So there.
Market in New York is basically sort of.
Rule of thumb, a formulaic rule of thumb that four.
Based upon the term of the lease that's how large the ti packages at the free rent packages. Okay. So it is fairly formulaic and the <unk>.
Market has gone gone too.
It's not.
It's not a jump ball, where every every lease is a new negotiation, there's kind of a formula.
It's kind of like one month free for every ear of terms. So that's the way to sort of work.
There are some wise guys in the market.
And we are certainly not one of them who will.
Elevate that.
Die package and buy up the rent okay. That's not the game that we play.
Okay. No. That's helpful. Steve and then just going going back to your comments about uncertainty in the market and certainly yes, I saw yesterday, there's a headline that I guess mayor Adams isn't going to pursue bell reform with Albany. It sounds like that May have died yesterday, which is unfortunate because certainly we need that but.
You mentioned, Alex Alex, Alex, making political predictions like that year over year hedge side okay.
Just because the newspaper said something because whatever it is don't don't take that to the bank.
Okay I won't go to the ATM, but my question is you made a comment about uncertainty around COVID-19 and it seems like a lot of companies, especially the wall Street banks and everyone are sort of moving on and accepting that Covid is here, we got to get back to the office, even governor hopeless said that so when you make the comments about the uncertainty in the market is there a <unk>.
Concern that until maybe labor pressure subsides that the companies may feel like they have to still be sort of gingerly with the employees or is there a true concern from the from the leasing managers that if theres. Another COVID-19 wave. They may go back to the return.
At home because it seems like everyone's sort of done with Covid and wants to get back to normal lives. So I was just curious your comment about it still being a risk out there.
I don't think I didn't think I said it was a risk I said it was not resolved yet.
The point of it is is this every CEO .
Glenn talks to Michael talks to our I talk to they want their people back in the office okay.
Business is run from the office and not from the kitchen table.
And they all feel.
It's a universal feeling that the office is the place where creativity is.
Gatherings are and Thats, the place where businesses.
Yes.
Ron and where businesses growth I mean, I think that's a universal feeling.
Now obviously there is different.
Health issues and other issues, which had.
Affected that feeling and obviously it is getting a little silly.
People announce they're going to call back their workers on X date, and then that gets postponed and postponed and postponed again.
From my point of view and that of my my partners here.
Speculating on when all of this is going to be over at the <unk>.
<unk> raised in the offices will go back from the 30% than it is now up to the 75% that's normal.
I think it's silly, it's going to happen whether it happens three months from now or nine months from now we don't know.
The one thing that we do know is all of our clients our tenants and the Ceos, They basically want to be office centric operations.
Okay. Thank you Steve.
Thank you Alex.
Okay.
Our final question comes from Ronald Camden from Morgan Stanley . Please go ahead.
Hey, two quick ones from me just going back on the variable income maybe asking it a different way is there a way to think about how much is left relative to sort of pre COVID-19 there.
On that has not been recovered just putting it altogether.
I don't want to I don't want to give you a number off the cuff here Rommel we can we can follow up offline.
So.
We're going to go component by component.
<unk> does not do it off the cuff.
Sure.
My last small one was just so in 2021 sort of did one acquisition and bought bought our partner out. Just curious are you is there sort of more opportunities like that in in 'twenty, two and 'twenty three.
As youre thinking about the portfolio and some of the joint ventures.
Look that was always the question we bought our partner out in 2021 are there more opportunities like that in 2022.
The answer is our partner there as well.
They initiated that and we responded and we're happy about the purchase but.
Yes.
All of our other partners seem fairly content.
Got it. Thank you Nance it continues to be we'll see.
We have no further questions at this time.
Well. Thank you very much we appreciate you all participating.
Yes, Lee from as you can tell from the.
The results that we published last evening.
Our remarks in our dialogue this afternoon.
Very proud of the quarter, we think we had a bang up quarter I'm extremely proud of our teams delivering on these results.
We're excited.
We think once again, yes.
The quality of our portfolio, we reaffirm that we are bouncing off the bottom aggressively at retail and we're doubling and tripling the excited about the Penn District. So we appreciate your.
Youre participating in the call and we will see it we'll see at the next call.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect.
Yes.
Okay Richard.
Okay.