Q2 2022 Vornado Realty Trust Earnings Call
[music].
Yeah.
Good morning, and welcome to the Vornado Realty Trust second quarter 2022 earnings call. My name is Daryl and I will be the operator for today's call.
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 present zero then one on your Touchtone phone.
I'll turn the call over to Steve <unk> Senior Vice President and Corporation Counsel. Please go ahead.
Welcome to Vornado Realty Trust second quarter earnings call yesterday afternoon, we issued our second quarter earnings release and filed our quarterly report on Form 10-Q from the Securities and Exchange Commission. These documents as well as our supplemental financial information packages are available on our website www Dot VNS.
Dot 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-Q 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.
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 maybe accurate only as of today's date. The company does not undertake a duty to update any forward look.
These statements 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.
Thank you, Steve and good morning, everyone.
As Michael will cover in a moment, we had another very good quarter with comparable <unk> of 20% from last year's second quarter.
While the first half of the year was right on our expectations and our business continues to perform well we are now projecting the second half to be below what we had forecasted given interest rates and the incremental noncash accounting charge from the Penn One ground lease overall this year is still expected to be up year over year.
By the way.
Reaffirm resales guidance of cash NOI of not less than $175 million for the year.
While headline inflation numbers remain very high it seems like defense efforts are beginning to have their desired effect.
There are signs of a slowdown at all around rapidly slowing housing market falling consumer confidence and.
And companies announcing hiring pauses or even layoffs.
Very good yield curves signal as market participants expect a recession in.
And the forward yield curve predicts that rates will come back down within a couple of years.
While we are protected by long term leases with about 500 tenants, we do expect that all prepared for choppy conditions.
Pennsylvania station is by far the most important piece of transportation infrastructure in our region.
In a manner of speaking I might say that every transportation project in the last 100 years I described to the pen ended at Penn or has gone through at.
All of this of course makes the surrounding Penn district critically important and we have a large and unique holdings here.
Last week.
As many of you may have seen the Empire State Development Corporation approve the General project plan for the Penn District.
This is an important piece and govern a holdco and mayor items planned to finally fix that station.
GPP is essentially a zoning overlays for transit oriented development to create a modern mixed use district that maximizes public benefits, including new station entrance is robust subway improvements and addresses overcrowding and accessibility public.
Public realm improvements in affordable housing out of the 10 sites involved in the GPP, we own for a part of the fifth.
We have long invested in our properties around Penn station.
Including $2 billion.
Harley and one two.
We've also met and multiple successful public private partnerships that have delivered meaningful transit and public realm improvements for new Yorkers, including the Moynihan train Hall, which was another ESD led general project plan to new station entrance at 33, and 34th Street, and a new long Island Railroad concourse.
Which will deliver at the beginning of 2023.
And the MTA is now advancing the design work for the reconstruction of the remainder of Penn station.
In addition to finalizing the GPP. This has been one of a year of significant accomplishments for us in the Penn District.
At Penn one we substantially completed the renovation, including the largest and best in class amenity package the overwhelming enthusiasm.
Total renovation and re imagining of our two block wide pad two is more than half complete it's exciting for us and the real estate market generally to see the steel structure for the transformative bustle taking shape.
Penn one and Penn two will be the centerpiece of our current Penn District development as Michael will tell you. We are spot on our leasing underwriting this $4 4 million square foot interconnected campus will be completed.
And income producing in the short term and by that I mean as much as an additional incremental $300 million of NOI.
Jason.
Kudos to Michael in Jan and their team for completing $3 $2 billion of Refinancings, which Michael will tell you about shortly.
I N.
With a plug for our new <unk> restaurant of 280 <unk> gave you on 49th Street, we appointed to set up from from Brazil, and they certainly are living up to their notices as being one of the best new restaurants, it's al.
Call Me, if you can't get a reservation now to Mike.
Thank you, Steve and good morning, everyone.
As Steve mentioned, we had another strong quarter second quarter comparable <unk> as adjusted was <unk> 83 per share compared to 69 for last year's second quarter, an increase of 14 or 20%.
This increase was driven primarily by rent commencement on new office and retail leases and the continued recovery of our variable businesses, partially offset by the straight line impact of the estimated 2023 pen one ground rent expense.
We have provided a quarter over quarter bridge in our earnings release on page three in our financial supplement on page six.
On our last earnings call, we said that we expected our comparable <unk> per share growth for 2022 to be in the mid to high single digits.
It bears repeating that this expected growth, which is driven by strength in our core operating business, primarily from previously signed leases in both office and retail, including meta platforms at Farley and the continued recovery of our variable businesses factored in the impact of rising rates riverwoods rate debts, however, the pace and magnitude of.
Fed hikes have been greater than we anticipated.
The faster than expected rise in rates will affect 2022 earnings.
And result in lower <unk> growth than we were anticipating.
Further 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.
With respect to our variable businesses, we continued to see a strong recovery in the second quarter and the EBITDA. In total is currently around 90% of pre COVID-19 levels now excluding the closed four development hotel Penn site or.
Our signage business, which is the largest in the city with dominant science and the best location in times square in the Penn District had another very strong quarter and forward bookings remain strong.
Our tradeshow business at the Mark just continuing to rebound nicely, including our hosting of the commercial furniture design industries, Neocon, which is typically our largest trade show.
The chart shows took place during last years second quarter due to the pandemic.
Our BMS business continues to perform near pre pandemic levels and finally, our garages are continuing to be on track to fully recover. This year, we still expect recover most of the income from our variable businesses. This year with the full return in 2023.
Companywide same store cash NOI for the second quarter increased by a healthy eight 4% over the prior year second quarter.
Our overall office business was up five 4% compared to the prior year second quarter, while our New York Office business was up three 9%.
Our retail same store cash NOI was up a very strong 24, 8% primarily due to the rent commencement on important new leases, including spending Christoph <unk> at 595 Madison Avenue Sephora at four Union Square Wegmans at 770 Broadway, Canada Goose at 609 fifth Avenue.
Several analysts have reported that our new York occupancy is 98%. So that's not really the story, that's a blend of office and retail.
Dark office occupancy ended the quarter at 92, 1%, which is flat against the first quarter of 2022.
Still up 100 basis points from the trough in the second quarter of 2021, and the highest of our industry peers in New York.
Our New York retail occupancy decreased to 76, 3% since last quarter due entirely to the retail space at Farley that was previously under development being placed into service during the second quarter.
Now turning to leasing markets in New York total employment has reached its highest level since March 2020, and office using jobs are near $1 5 million, which is only 6500 jobs below its February 2020.
Tech sector leasing has slowed but the financial sector has picked up the slack now accounting for almost half of market wide activity with some large expansion transactions in the works.
Leasing velocity and higher quality buildings continues to dominate the landscape with many large scale tenants relocating to the most differentiated well located office buildings in both ground up new builds and best in class Redevelopments across the city.
Overall tenant demand in rental pricing and the top end of the market remains strong while older commodity product is experiencing higher vacancy rates and less tenant demand and sublease space availability continues to increase.
Our office leasing results since the onset of the pandemic reflect the resiliency of our best in class portfolio and how it's benefiting from these trends our teams strong dealmaking skills have resulted in more than 5 million feet of office leases signed since the first quarter of 2020 at average rents of $84 per square foot and an average lease term of $12 40.
Years.
During the second quarter, we completed 21 transactions comprising a total of 301000 square feet leased we continue to outperform the market are consistently healthy quarter to quarter leasing metrics reflect the high quality of our portfolio and the immediate impact of our redevelopment program at Penn One.
This foreshadows the success, we're going to have it tend to also.
Our portfolio wide average starting rent this quarter was strong at $85 per square foot, including $97 per square foot for 75000 square feet of deals that are highly monetized pen, one which exceeds our underwriting and further validates our program to significantly increase rents in our Redeveloped 10 assets.
Other transaction highlights. This quarter include a 45000 square foot headquarters expansion relocation lease with a private equity fund the 650 Madison.
New 60000 square foot transaction with a nonprofit at 825 seventh Avenue and 61000 square feet of various deals at $1 50, East 50 <unk> Street.
Importantly, the average lease term of this quarters activity was 11 five years, while our mark to market on these deals was positive five 1% GAAP and one 7% cash.
Overall, our pipeline remains active with more than 700000 square feet of deals and lease negotiation and an additional 700000 square feet in lease proposal stages.
Now turning to Chicago, where the market is lagging behind New York's recovery.
At the March while our office leasing pipeline is active with more than 800000 square feet in discussion conversions are taking longer and concessions remain elevated.
We recently commenced our capital program to add World class fitness conferencing, and other amenities, which will be completed by summer 2023, and is already having a positive impact on our leasing efforts during the quarter. We leased 59000 square feet. The majority of which were leasing renewals and expansions within our showroom industries and an average starting rent.
<unk> $56 per square foot.
In San Francisco.
While the market overall is experiencing record level of vacancy rates and lower turnover numbers are 505, California Street campus remains full other than our vacant 78000 square foot building at $3 45 Montgomery Street.
We're currently on renewal.
Spansion dialogue with more than 200000 square feet of existing tenants within the trophy by by five.
Tower, and we continue to see market, leading triple digit rents of $5 five with very healthy mark to markets.
Retail leasing results were fairly modest for the quarter.
With the highlight being a new long term deal with chase for 7500 square feet at Penn to at a significant positive mark to market.
This deal set a new high watermark for retail rents in the Penn District, along seventh Avenue.
Retail leasing activity in the city continues to be concentrated in the highest footfall locations. This is proving true for our newly renovated retail spaces and the long Island Railroad concourse typically Penn station busiest thoroughfare, we have leases out for signature for almost half of the 30 spaces fronting the concourse and at rents exceeding the previous.
High watermark for retail rents in Penn station is.
These commitments demonstrate retailers' belief in public transportation and specifically in Penn station.
More broadly the city is bustling with New York City tourism projected to reach 56 million visitors in 2022, and a return to pre pandemic levels in 2023. However.
However, this positive momentum is being offset by retailer concerns about inflation and recession and many retailers are becoming more conscious about making commitments.
Turning to the capital markets now.
Overall, the increased market volatility and spike in interest rates is impact in the capital markets with the volume of both asset sales and debt financings down significantly from last year.
<unk> balance sheet markets are being much more selective which accrues to the benefit of stronger sponsors and high quality properties as.
As such spreads generally widened out with lower leverage available.
As previously announced in June we completed $3 $2 billion in refinancings, which consistent of extending one of our 212 5 billion unsecured.
Revolving credit facilities, and our $800 million unsecured loan to December 2027, as well as refinancing 770 Broadway and 100 West 30 <unk> Street.
We're quite pleased with these executions as they were completed at attractive spreads reflection of lenders heightened focus on sponsorship and quality properties. We.
We had anticipated the financing markets, becoming more challenging and with all but 770, we refinance these loans early.
And while the forward curve has historically over predicted rates, we fix 770 Broadway.
Moving our fixed to floating ratio to 60, 40, which is more in line with our historical operations.
Importantly, with these refinancings, we have dealt with all of our significant maturities through mid 2024.
We also announced the completion of the sale of our <unk>. So the office building for $173 million during the quarter, continuing our efforts to monetize noncore assets. Despite the challenging market. We are hard at work on our other noncore asset sales as well.
Finally, our current liquidity is a strong $3 5 billion, including $1 6 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.
That alternatives over to the operator for Q&A.
Thank you we will now begin the question and answer session. If you have a question. Please press Star Zero then one on your Touchtone phone if you wish to be removed from the queue. Please press zero then two if you are using a speakerphone you may need to pick up the handset first before pressing the numbers. Once again, if you have a question. Please press zero then.
One on your Touchtone phone each caller will be allowed to ask a question and a follow up question before we move onto the next caller.
And I am standing by for questions.
And our first question.
Comes from Jamie Feldman go ahead Jamie.
Alright, Thank you and good morning.
Maybe just starting with you.
You're changing your outlook for earnings for this year next year can you just talk more about the magnitude of the drag from.
From higher rates.
Both in 'twenty, two and 'twenty, three and just as we're thinking about how to model it, but maybe where your assumption was and where it is now.
Yeah, Good morning, Jamie It's Michael.
Look yes.
If you look at where we said last time, we were mid to high single digits early in the year double digits and now still projected to be up.
So if you just take what we've done in the first two quarters in.
You model out the rest of the year.
Youre looking at roughly 100 basis points impact on LIBOR from where we thought it would be and with floating rate debt of around for quarter $1 billion.
Uh huh.
Youre looking at about <unk> 20, a share impact from.
Where we thought it could be.
Obviously.
<unk> change every day, we've already seen the forward curve come down, but what I've told you on 2023.
Would've been higher two weeks ago, and I would tell you today so.
We cant predict obviously that reflects really two quarters of impact on.
On our variable rate debt versus where we expect that next year, we will have a full year impact on that.
So.
Could it be another 100 basis points overall potentially again I don't want to sit here today and give you a number it's driven by what the curve will be but relative to your original expectations, it's probably in the ballpark.
Jamie.
Bit more on.
This floating.
First of all we think very well fix a little bit more of it to reduce the $2 billion.
We may pay some of it down.
Over the last 10 or 12 years, we have benefited enormously.
From the low interest rates and floating rate debt.
<unk>.
Every time, we fixed or.
Took a fixed rate loan.
During that 12 year period.
Wrong wrong wrong.
So that's all very interesting, but it doesn't matter going forward.
Next thing is that.
Many of our assets are in transition.
Some of our assets are on the for sale list.
Floating rate debt of course facilitates that because.
Getting out of fixed rate debt when you have a transitional exit.
Just your real asset involves the seasons, which in many cases can be extremely expensive.
Some of the floating rate debt and fixing.
Activities, we got perfectly right for example, a $5 five California.
We executed it was about a year and a half ago, Michael yes, about a year and a half ago.
A very attractive loan.
At a very attractive spreads.
On a floating rate basis, and we fixed our share of it so that was very good.
A very good outcome.
Real assets when we did the 12.
Refinancing.
Which was a similar team.
I guess I'll take the blame for it we didn't fix it.
In retrospect it was a mistake.
The next thing about floating rate debt to think about it is that there is really no protection.
Again.
Interest rate increases and by that I mean when rates go up.
You get.
Fairly small benefit of the protection of our fixed rate debt.
Fixed rate piece.
Piece of that for as long as it lasts.
Expiry, which is 345 years or whatever it is you have to go to whatever the market rate is.
Cap rates of course.
It reflects the current.
The current interest rate environment.
So.
Yeah, you have it we will give some of it back.
This year and next year, we expect rates to.
Come down perhaps quite substantially depending upon what the depth of the business slowed down his.
And but there you have it.
Yes.
And our next question comes from Michael Pilar Man go ahead Michael.
Thank you.
In your opening comments.
Mr Bilerman welcome.
Welcome. Thank you.
So Steve you talked a little bit about sort of choppy conditions, given everything that's going on in the marketplace.
And how does that sort of forward outlook.
Change your sort of strategic direction, obviously, you still have the tracker that you've been thinking about ASP.
Asset sales there is so many things going on.
Affecting sort of the path forward for Vornado and.
I recognize youre, not happy with where the stock prices today and if it was stupid stupid cheap it's now stupid stupid.
Stupid you want to put but how are you going to go about.
Getting.
Other side of this.
Oh.
Good morning first of all.
We've been through this I don't know five or six times, five or six business cycles over the last 40 years or so.
So there is always an end.
And our job is to.
Rigorously focused on the important things for example.
Protecting our balance sheet.
Preserving our liquidity.
Preserving the safety of sanctity of our balance sheet.
Number two we have certain missions that we have to do.
Which is for example.
The building is leased to the extent that the.
Market services to do that.
Specifically with respect to our fairly Grand plans in the Penn District repetitive one too.
So.
We will have a spectacular outcome based upon the increased value of those buildings and the surrounding districts.
And those basically are where new York centric centric.
To have an open to buy in terms of acquisitions, if something comes around that we face.
Hence our skill set.
It hits our price aspirations.
<unk> basically.
It's business as usual with a with a more rigorous focus on the important things and the balance sheet.
We have.
Given COVID-19, we cut our G&A and began to get.
Very very tough on unexpected Juris.
We have reduced nonessential capital expenditures et cetera. So those are the kinds of things that one has to be going into.
Yes.
Business slowdown I've said, a couple of things I think it looks to me like we are on the foothills of a recession.
<unk>.
We are.
We are in a don't bet against the fed mode.
Which I think probably everybody is.
As I said, we're in the foothills of business correction.
And we are hopeful that the fed will be disciplined there.
<unk>.
Yes.
Foot to the pedal.
We will accomplish their objectives as quickly as possible.
So does that alter at all sort of the progression of whether its asset sales or thinking differently about.
Doing a tracking stock.
The Penn District, like where is your mindset.
Today, knowing of where we're headed.
And trying to.
Alexander's activist, obviously, there is that's out there but.
I don't get the sense that you are happy with.
With where the stock market is valuing vornado.
I'm, just trying to better understand and you've spent the last decade, simplifying and doing so many value creating activities.
And even continued this year I'm, just trying to understand what potentially could change into the future.
Given the environment that we're in.
Let me, let me unpack that a couple of places first of all I still continue to believe that separating the Penn District is doing separately tradable security, whether it be a tracker or some other technique is absolutely the right.
The right strategy for our shareholders.
We expect to pay this should be a grower and we think that our shareholders should have the ability.
And that as an isolated pure play investment.
So thats, what the timing of that is still up in the air.
Totally.
We're on both sides of that deal so to speak we have no counterparty, we can time it whenever we want to and we will.
Subject to.
Lots of different things that could occur in between.
I continue to believe in that.
And that strategy.
Secondly.
We have a whole group of noncore assets that we are in the process of selling.
Where we think we can get pricing, which is not as good as it would've been a year or two ago, but good enough to execute.
And Thats.
Somewhere between $505 billion to 750, something like that.
We already executed on one on the long Island city asset.
There are other buildings in our portfolio that we.
Would be very happy to sell.
Although we are more price sensitive to those buildings because once you get out of the noncore.
Basket the buildings are more important than better quality.
Nonetheless, if we can.
We get incoming all the time and if we can execute at a price that we think is reasonable.
Which will create value for our shareholders and improve our balance sheet, we will do so.
I think the last part of your statement was with respect to the activist investor at.
Alexander's.
Which I was going to hold that question I was going to hold my answer that that's out Alex.
I think I'll continue to hold for Alex.
And our next question comes from Steve Go ahead, Steve.
Thanks, Good morning.
Steve I was wondering if you could just spend a little more time on.
The new Penn station proposal to 10 sites. The four that are owned by you and maybe just give us a little flavor for sort of how you see those evolving over time and how much of that would be office versus residential.
I've said.
Multiple times over the over recent years.
Since the Penn District was.
Our.
Thanks.
Our big Kahuna was ground.
Was the bullseye et cetera.
Have been accumulating property independent districts for 20 years now.
We believe that Penn station is the most important piece of transportation infrastructure in the region.
We believe that.
Yes.
The entire district.
It has been limited by the Adjacencies of Hudson yards in Manhattan, West where they were.
Successful are very large.
Projects with really actually sort of put us on the map. So we're very.
We're very appreciative of the efforts.
Our neighbors.
There is.
The normal amount of demand for the district, I mean, we get incoming all the time.
And so basically the GPP.
Is a zoning matter.
It's an overlay of the existing cities already where the state has basically become the dominant party.
And there are multiple things involved in it one is that.
We will have the option to.
Increase the square footage that is allocable for each site.
Bye bye.
At fair market value. So we can build.
You might say, we can build larger buildings. Okay. So I think in round numbers. There is 5 million <unk> 5 million square feet of additional <unk> that can be allocated in the district.
Which we obviously intend to avail ourselves over but remember, we're paying fair market value for those <unk>.
The second thing is is that the state.
And the EDC at this stage because the.
Basically our oversea or at a regulator with respect this et cetera.
Third is that.
The revenues that come off the new builds is allocated first to the city to what the taxes that were.
Payable to the Sydney has been historically.
And then basically into a path that is basically subject to an agreement between the city and the state where most of that will be allocated towards the reconstruction.
The actual the actual Penn station Okay.
Some of it a relatively small amount.
On the scale of what Hudson yards taxes, that's it was will be allocated to the developer.
Two.
Incentivize and allow the construction to go forward on an economic basis.
And one of them actually got very anything about 600 units to the FERC.
The zoning zoning.
Requires about 600.
Units of apartment.
The intention has been.
For a long time that this will be principally office development okay.
How the mix of.
We will might or might not change.
We will determine over time.
Now remember this is a long term project.
Bob.
Huge is irreplaceable piece of.
Location.
But the first part of it is the existing buildings, whether they are <unk> 10, two at Farley, which we are.
Ankle deep in.
We're up to our eyeballs and Redeveloped.
And as I have said before we write on our underwriting we expect this to be relatively short term.
Between now and 345 years from now the stabilization and we expect those buildings to generate an incremental $300 million.
<unk>.
Additional NOI.
Great well that leads into my follow up because on that 300 million Steve I.
I know you've laid out return hurdles and the dollar spend in the supplemental.
Yes.
And I think others are maybe struggling or trying to understand is how much of that income say in a pen one is already flowing into the income statement as you're marking to market. Some of these leases and so we wanted to give you a credit, but we want to make sure we're not double counting or overstating. So is there a way you can sort of help us think about what's contributing from <unk>.
Harley from 110 today, and then when would <unk> start to actually contribute.
I'm going to let my finance team take care of that offline.
Because whatever I say theyre going equivalent with a flat fee.
Nonetheless.
The numbers are approximately like this maybe $70 million for quality, which has just begun to come online and will come online over the next year or so.
10, one.
Pat.
90% occupied something like that I don't know the exact number.
But at an average rent in the fifties.
Hi, <unk>, we expect the market rents at that building to be <unk>.
Hundred dollars a foot.
And as Michael said, we signed 70 171.
75000, <unk> the slapping the already 75000 square feet of leases.
Four or five a handful.
<unk> was this quarter at $97 per foot average, which we think justifies and validates our underwriting we expect the same for two so what I'm, saying is over time as leases turnover 10, one will go from say pick a number $60 a foot to 100.
Dollars a foot.
$40, a foot times $2 5 million feet, that's $100 million, Okay, that's new fresh coming in as the leases turnover will you pick the period of time and turn to the building basically has one tests.
For 400 odd thousand square feet, which means it has a $1 4 million feet.
On income producing today and that will be will come over time.
And the building will be completed less than two years, so with lease up and stabilization and what have you. So the two years it will turn out to be four maybe even five years, that's okay with me.
$101 4 million feet of vacant space.
We will produce.
We think $100 a foot.
So there's your math you can you can I hope that will help you to model it but thats the way I do the math and as I said.
My finance team, which is.
Very very very.
Expert at conversion with this will give you more detail.
If you like.
And our next question comes from Alexander <unk>.
I wanted to go back to Steve <unk> for a minute, okay, I don't know heavier.
Don't know any other company public.
Public company that has a development of this magnitude.
And this.
Unique prospects.
Out there, okay, and so obviously I think the stock doesn't reflect.
I think the stock is selling for way less than what we have now it doesn't begin to reflect the opportunities we have here.
I'm sorry go ahead.
Okay. Our next question comes from Alexander Goldfarb go ahead Alexander.
Oh good morning, good morning, Steve.
Thank you for holding off on the Alexander's question.
I think we get to questions is that correct.
Yes.
Great Okay.
Alright.
I'm here to serve you.
Okay.
And.
I'm just I'm just here to serve my wife and kids. So we all serve someone don't Mike.
So.
It goes back to business Okay.
Okay. So the two questions are first going off from Steves.
Question on.
Penn District, so one it sounds like you guys will only have a few of the buildings like four or five not all 10 that are outlined.
But second and I guess more importantly, you guys entered New York with men <expletive> you've been talking about pen for 25 years hard to believe that in the next five or even 10 years that youll get.
Four of five buildings up online not because of you, but just how long it takes to build office to stabilize and lease.
So as far as the question of earnings because you guys are earnings Youre paying dividends you spoke of more asset sales. There is rising rates, we're still waiting for the existing stuff that you've already.
Under construction to deliver.
How is this.
I understand in a private vehicle, where timelines are much longer but in a public vehicle, where investors expect earnings growth and that's something that a lot of us have been waiting for from you guys. How are we to think about this investment.
Versus other things that are more near term tangible because all of this stuff seems to be out multiple years nothing in the near term.
I do real estate I don't do stock market.
You'll do stock market.
I can only tell you that.
My model.
And the prospects of the business in the future Bad news that we are creating and by the way I have to work for my kids.
I believe that the inherent values.
<unk> even out over a period of time are extraordinary and unique okay.
No.
Yes.
Investors want to be short minded.
Each investor can make their own decisions.
I would remind you and you know full well that the stock market is at all knowing being.
And the stock market chooses to give.
Companies with no sales or no earnings multiple billions and billions and billions of value because the stock market is saying that.
I used to be created in future will be.
Will justify the investment I can only tell you that youre focused on time.
And youre in patients.
Focused on time.
Im focused on what the IRR is youll be over time as we deliver these buildings it takes almost no imagination.
To begin to model <unk>.
Penn two Penn fall it can be worse.
And put a risk adjusted adjustment on that which is very high certainty and once you do that.
No.
I think that speaks for itself.
Okay and then the second question just goes to Alexander's.
An alexander's one your thoughts around the dividend given its uncovered and it doesn't look to be covered for the next.
As far as we forecast the next few years into <unk>.
Michael said, you do have an activist, although it seems pretty tough given that two thirds of the company is basically either interstate or vornado. So maybe just some thoughts around is vino alexanders tie up something in the offing and your thoughts around the Alexander's dividends.
Okay.
Let's spend a minute on the activist.
So the Actavis as a small company that has a I think that's it.
They have launched very significant shareholders.
The way, we see that they have about 10000 shares which I wouldn't call very significant there are some other names on the shareholder list that could be affiliated with them or what have you but.
But your point is that it's pretty.
Either co agents or whatever.
To target a company that has too.
That has two entities that are closely allied that control the own two thirds of the business.
So take that for what you will.
Got.
Incoming.
Okay.
Very simply and very quickly we treated it with the highest of respect notwithstanding the shareholdings.
<unk>.
Some of it came from shareholders that once yeah, we would still acting the same way.
We invited the.
The focus in two ways.
I think they notified us we got a letter from them in April .
Sure.
I think we invited them into presented the full board of Alexander's at the next meeting which was it.
May.
They presented we exchanged views.
Then the Alexander Forbes.
Very carefully and very seriously deliberated about the pros and cons of suggestions.
We sent them a response later.
We did not stiff arm them, we listen to them very carefully and we treated them with the highest of the spec.
We sent them a letter basically.
Saying that the Alexandra.
Preferred the status quo, what they had suggested was that.
Internalized management.
Externally managed by by Vornado, which would cost which would raise the expenses of Alexander's by a huge about very significant amount.
Which we had which we've debated over the years.
They suggested that we.
Take the cash I would say as it sits on about $540 billion Gary.
Alexander's has $540 million, which is a big number for a small company, which is 5 million shares.
Suggested that we leverage the company up more paying special dividends out.
Basically.
Traditional actavis techniques to recap the company.
Two.
With an objective.
Juicing the stock.
Basically the cost of.
Sure.
Certain times because of projects there that are having a potential because of lease expiries that are uncertain.
Many different reasons the Alexander's board.
<unk> chose to be more conservative as to.
Not pursue that idea.
There was one other thing and I think that was that Alexander's go into the PR.
PR IR business.
I believe in the stock market I think the stock market everything thats going on without having to have a pitch man tell us what's going on.
And if they were.
Hang on let me just finish apparently they are unsatisfied and they made their they made their point of view public.
Which is fine.
So basically.
I'm going to say that this.
Last minute or two or three.
Remarks will be my formal response to their going public.
I speak now.
Sort of.
Half and half.
Yes.
This is of our NATO call.
I speak on behalf of Grenada, Alexander's for NATO owns a third of Alexander's.
Bob.
And.
Yes.
Externally manages alexander's.
The management teams are overlapping.
And so the investment is a very significant investment for <unk>.
Let me just give you a little bit of math, because I was curious so I looked it up recently.
<unk> total investment in Alexander is $73 million, which was made about 20 years ago, which is $44 a share.
Over time.
So $73 million was the investment.
Over time.
<unk> has received $520 million of dividends from Alexander's.
<unk>.
Is receiving on an annual basis $18, a share which constitutes a 41% return on the.
Tom.
The purchase price of the Alexanders shares.
No.
Thank you.
I think it's my friend Bruce Flatt, it talks about compounds.
This is the very definition of compounds.
Now you talk about the dividend so.
I don't know where you get your math, but.
Alexander's.
Has the option of doing multiple things, which would cover the dividend, but what have you so the dividend.
Is.
I guess, what Youre, saying is the dividend.
And not be coverage I don't know whats your math is but let's just give it a shot there are some retail vacancies, which is part of the.
Yes.
As a result of market conditions, which of course Alexander's income to decline now that's not a permanent thing.
Tenants common tenants goes cycles common cycles go.
I don't think Thats the Alexander's board.
Very interested in.
Raising lowering raising lowering the dividend as tenants come and go out.
You got some kind of regularity and smoothness to it and the second thing is alexanders has.
I think.
Six $700 million of floating rate debt, which is obviously a little bit more.
So if you think about it.
We sort of arbitrage on that.
Floating rate debt, because we have $540 million of cash.
We put that $540 million of cash to work, earning interest.
I think you will find that the dividend is covered.
And that's I think all that I have to say about this I just want to reiterate.
To my friends at.
Yes.
Lionbridge that these remarks constitute my formal response to their most recent letter.
Thanks, Thank you Steve Thank you Steve.
And our next question comes from John Kim Go ahead John .
Good morning.
Michael you talked about the impact of interest rates on your outlook for the rest of the year, but I was wondering if your second quarter NOI.
$289 million GAAP 285 cash.
Is it good run rates for the remainder of 2022.
Okay.
Of the NOI John .
Okay.
The answer is.
Generally, yes, I don't want to give you specificity around like the first half was very strong with some things that stays in second half.
Do you see a strong growth in the second half, but I think the answer is generally yes.
Okay, Yes, I just wanted to clarify there was nothing onetime in nature on your variable rate.
You do have a fair amount of explorations at the March but the rest of your portfolio, it's pretty minimal.
Yes.
If you think about costs offset some of the negatives that are known so I'd, probably say generally yes.
I think I think the I think that as we said in the prepared remarks on our core business is performing well.
NII growth was very good we expect that there continue to be growth.
But when you slowed down the <unk> with the impact of rising rates, that's where you see the.
That growth being the moderating.
Okay and my second question is on your 2023 explorations.
You have a fair amount in office, 11% retail was nine.
Can you provide any commentary or color on what percentage today are known to vacate versus <unk>.
Lisa.
You have a high confidence in renewing or backfill immediately.
I think I'll share as it relates to office Jon This is Glenn.
23.
At $1 3 million feet expiring.
That is 300000 feet of pen, one, which as Steve alluded to whether that rolls, we look forward to that at least a program to get to the new rents as it relates to the remaining million feet. We're all over it we're in paper on a lot of it.
Probably expect the 50 50 split of people staying versus leaving.
But we are in paper for much of it now in terms of people, who are going to stay or at least the space.
As expiring.
I was in retail.
Our 2024 explorations, we are laser focused on and we believe that the ryzen tourism to New York City, which is growing rapidly and could reach pre pandemic levels by next year.
<unk> very well for our exploration and we know that our tenants have a desire to say it'll be a matter of what the rents are.
John in 2023, Im looking down the retail list.
I think we feel pretty good about most of those but obviously, we announcements I think.
I don't know three calls ago that swatch exercise the termination option.
St Regis, we own about half of that building, so thats, a known move out in 2003.
We've got a meaningful termination payments along the way when they exercise that but.
From a 2003 expiry.
That's a notable on the others, we're in active discussion and we'll see what happens.
And what would be the mark to market on that as much space.
Yes.
Too early to tell you.
Okay. Thank you very much.
And our next question comes from Ronald Camden Go ahead Ronald.
Hey, just following up on some of the bread crumbs for 2023, I think we touched on the interest expense already but maybe going back to the pad district.
Asking the question a different way.
Given that such a big part of the modeling into next year any sense, how we should think about the year over year change in contribution potentially in 2023 versus <unk> versus 'twenty two.
Clearly the $300 million makes sense long term, but just trying to think about the 23 versus 22 difference if that makes sense.
Okay.
So I'll ask this again.
So for the Penn District, the contribution and the Delta between 2023 versus 2022.
Contribution to NOI that makes sense.
Yes.
I don't have the numbers at my fingertips, we can get that to you offline in 2023, though when you think about it.
<unk> two is not going to be contributing yet.
Penn one as we rollover those leases.
You'll see contribution there although again.
That's going to take time to phase in so.
Kind of a one.
Every year, we're going to roll that space or are we still on average of five years.
And Glenn and his team are just going to knock that out quarter by quarter, and so you'll see that flow and pen so youre not going to see flow into a period of time, and then Farley youre going to start to see that.
Flow and more substantially.
As the retail comes online. So we'll give you we'll give you some quantification offline in a buy online, but Steve asked as well, but yes, theres going to be an improvement in 2023 again not significant because of pen two really is not going to start contributing until 2024, probably.
<unk>.
But realistically, even a year or two beyond that and the other.
Year by year.
As leases roll.
Remember in pen.
Have the pen one ground lease.
Repricing praise.
Phrasal process.
And so.
Victor.
Yes.
The accounting number.
As accordance with the accounting Convention I think it was last quarter of 'twenty.
$6 million for the new new.
Right.
I get asked about that all the time the process has not begun.
Although it will begin probably in the fall.
I think we are in the process of preparing.
I think the other side is really the same.
There's going to be multiple experts involved.
Yes.
<unk>.
It's a fairly significant kind of process.
Interestingly.
A little bit about it interestingly.
These are old fashioned ground leases with old fashion.
Most of the old ground leases call for an appraisal process.
Sure.
Which is based upon the highest and best use for the land is it baked into it ought to improve.
With a willing buyer and a willing seller.
In a normalized market no distress no.
No economic issues.
This particular lease we believe is oriented towards a real estate broker.
A.
A situation.
Which would require that the renewal price we based upon what the.
Lance could actually be sold though.
All of that at a particular point in time, which we believe is significantly different than the smoothed out.
Traditional appraisal process.
What's more.
This is a date certain.
Bob.
<unk>.
We are now in a.
The situation in the macro economy, where rates are rising.
Lee.
<unk> markets are in turmoil.
One of the interesting things is most cap.
Capital markets real estate capital markets.
Players admit.
The debt markets are not conducive to buying and selling assets because they're just not there.
And if they are there they are at much lower amounts at a much higher interest rates.
In addition, construction costs are going up aggressively.
In addition tenant demand is slowing and in addition, this is an extremely large asset where very few buyers could.
They have the financial wherewithal to do it.
So we think that all sort of.
Plays too.
A constructive kind of a process.
The outcome will be.
We will be something that we can certainly live with this is a very large very important asset everybody knows we have spent.
400 odd billion dollars in capital improvements to improve this asset.
We're very happy with it.
Whenever the outcome might be.
This ground lease reappraisal, we will still have enormous equity value in our at least going forward.
Can I ask Mike if I could ask a second question just on just on the retail.
Last quarter, you took the guidance up reiterated this quarter.
Clearly, it's been coming in better than expected any other sort of large leases or anything we should think about as we're rolling into next year, just on that retail contribution at $175 million.
Is it.
No I don't think so.
There's a number of leases we've talked about that are now contributing.
Theres other signed leases that will contribute next year, but nothing of the magnitude of this.
Worth mentioning.
The series of leases.
Our next question comes from Nick You look Oh go ahead Nick.
Thanks, I was hoping you were just a little bit more about.
For the first quarter of this year to the second quarter. You did have an increase in property revenue on a GAAP basis. I think you said Chinese lease commencements were some of the <unk>.
Benefits I just wanted to see if lease termination fees were also.
Any impact and I guess, just how we should think about the incremental benefit still from the rest of the year from signage upside commencement.
Anything from a GAAP revenue standpoint, as you think about the back half of the year versus what you've done in the first half of the year.
On the like I'd say overall first half was quite good.
Where the contribution broad based.
Got.
Contribution coming from leases coming online both office and retail.
But.
Yeah.
We've got.
Lower expenses that we've been managing.
Our variable businesses doing quite well.
And then there is a small piece of.
Maybe a little piece of lease termination, but also this quarter. We we got about $3 $5 million from bankruptcy recovery is related to New York and company from 330, west 34th so, but I wouldn't characterize that as very significant.
So overall the bulk of the contribution is from traditional.
Recurring items.
And our expectation is that will continue.
Trajectory of that growth, we've seen the first couple of quarters going to level off in.
In the second half just as.
Some of the things that that's starting to flow and last year's second half will be and again. This year. So you won't get as much of an uplift year over year, but on a quarter to quarter basis continue again, probably not as significantly growth rate as we've been.
The last couple of quarters.
Okay. Thanks.
I guess the second question is just in terms of guidance I know you are now giving some pieces.
On a cash basis for retail NOI et cetera.
But I guess I'm wondering if your philosophy, if youre willing to revisit your philosophy of not providing <unk> guidance and the reason why I ask is that.
If you look at estimates for your company for this year on <unk> for next year I know there is some of the wide widest that we see.
Which really doesn't make that much sense for an office company, but there is a lot of I think theres a lot of impact that we're all trying to figure out right projects coming online offline commencement difficult to really understand from a GAAP NOI standpoint, as well you have some of the highest floating rate debt.
<unk>.
Which is going to be an issue over the next year. So just trying to.
Understand if you guys at all or revisit this approach on guidance, particularly as it feels like over the next year. The estimates are really all over the place for SSL.
At this time, we don't have any plans to revisit I think we've given you more guidance than we've historically given over the last 18 months.
But as Youre seeing this quarter last quarter.
Particularly in an environment like this it's hard to do it right. It is hard to do it given the <unk>.
Significant redevelopments, we have underway and the impact of when things come online.
The impact from LIBOR going up.
It was causing an impact in the back half of this year versus the original expectations. So there's a lot of ins and outs, we don't manage the business quarter to quarter, we do manage it.
You have to drive growth, but if we feel like it is.
It makes sense.
Wait to lease space, a little bit longer because we can extract better terms, we will do that so.
It's sort of an artificial view on our mine quarter to quarter and as I said I think I think we gave.
Reasonable guidance at the outset of this year, obviously have proved too optimistic given the environment is changing and given the lack of clarity in the current environment across the board, whether it's rates leasing et cetera, I don't think its something were going to start right now.
Yes, I would say I mean look every week.
Sorry go ahead.
I guess I'm the heavy in this.
And the board as well.
So we have on our board.
Group of Berry.
Season.
People are very familiar with public companies.
And so my my feeling my personal feeling is that.
We are not in a quarter to quarter business. We are not in that day to day business. We are in a business, which cycles over five to 10 years. So our objective is to create value over a five year cycles.
And we think we've done a.
Awfully good job of that over long periods of time.
The emphasis on.
Short term modeling of getting down to a penny a share.
<unk>.
<unk>.
Beat a penny raise a penny.
That kind of stuff is not for me.
So to the extent that.
To the extent that.
Guidance focuses in my mind.
Some members of our boards minds on short term ism.
That's not what we're about.
However over time, we have had several different occasions, where we have things happen.
We're.
Issues for example.
I don't know 15 years ago, we had the PTO the patent and trade office move out.
Multiple millions of feet in Crystal City complex at the time, when we continued to own what is now the JBT Smiths business, we chose at that time.
And a fairly detailed way with multiple pages of.
Documentation to model out exactly how much space was empty and how.
Our processing.
Leasing that space.
Similarly.
Recently, when the retail business fell off a cliff we thought it was prudent to.
Give our investors and the analysts our opinions as to what the retail income would be at least from a downside point of view and I think there was one or two others that I cant recollect right now so that's my thinking about.
About.
Guidance and basically it's a very strong.
Disagreement with the with short term ism in our business.
Right no I understand all those points I would just say that.
Interest rates are volatile we can all model that we can decide what we think the interest rate curve is but.
GAAP NOI is something that would just be really useful to understand for this year. What is the GAAP NOI number how should we think about GAAP NOI next year. It would just help and its not a quarter to quarter number. It's an annual number we're talking about something.
Because your stock doesn't just trade on NAV, which is cash NOI and other factors right. Those train on an earnings multiple and I think you are.
Your earnings estimates are very wide the range versus where.
It could be if you actually just gave some level of guidance. So thanks.
Thank you.
And our next question comes from Vikram Malhotra go ahead Vikram.
Thanks for taking the question. So I just have two one just maybe given the news around.
Mecca.
Any thoughts or updates on 770 Broadway kind of ins and outs and how we should think about that.
So the lease with Verizon and expires in the first quarter of 'twenty three they renewed for one of the four floors. So theres three floors remaining which is about 240000 feet.
Spaces unique terrific in a great location, we are in the market police. It now we feel good about the prospects.
What's the status of that block.
Okay great.
And then just maybe a bigger picture question.
Yes, Steve you many years ago called out the shift in office.
In Manhattan office.
Going to the west side, and South I'm, just wondering given sort of all the change.
Changes were seen both cyclically and potentially some structural changes in your mind sort of you said you want to create value over the next five years what is the biggest.
Opportunity in terms of value creation as it hard asset is it in debt investments, perhaps you're on your own stock in terms of buybacks I'm, just taking a longer term view.
What would you do if you were to start looking at external growth.
Wow, that's a metaphysical question of the highest order.
Vic.
So look.
We have done debt investments over 20.
<unk> 25 year period.
Have not.
Recently.
<unk>.
So I don't think that were going to get into the business.
For lots of different reasons.
And.
Good.
With that.
A couple of things number one the best wishes and hope for is that a.
Publicly traded debt.
Business trades for.
10% of its book value, So basically it's not.
It's not a capitalization of earnings it's basically a book that you've kind of a thing.
So.
We don't believe that that gives equity returns.
One, although we have done it.
In the past and we May do it in the future.
But not likely.
With respect.
Stock, we agree that our stock is uniquely.
I think all equity as the Vista development Stupidly.
Super cheap.
And without saying anything.
<unk> stayed away from investing in our stock or buying back our stock for many many quarters now.
But we are starting to get.
Kind of tempted about it we think it's.
We think it's.
A little Crazy.
But we have to balance that.
The returns that we could get by buying back our stock.
With the returns that we can get.
The Penn District, and other investments.
We don't have a hankering for.
Small potatoes.
We are going to buyback our stock we would want to do it in a fairly significant way.
The rest of it is we are kind of baked in.
Our assets, we may sell some we certainly would buy assets in our skill set to the extent that they had we had the opportunity to make the entrepreneurial returns that we think.
We have traditionally base.
I'm not sure I can handle all of the alternatives.
That you mentioned, but.
I've tried to handle some of them.
Our next question is a follow up from Michael Bilerman go ahead Michael.
Alright, great. Thank you just see if I just a few follow ups.
Just on 770, I know you have 18 months to achieve perhaps greater loan proceeds.
Some of the conditions and how much additional capital can you draw out of that asset per the terms of your agreement.
The agreement provides for an additional $300 million draw it as conditions apart.
It's conditioned upon.
Leasing the Verizon space.
Awesome.
And one other condition.
We are planning as if we will not.
Make that draw.
Okay.
And then just going back to Alexander and I. Appreciate all the comments you gave to Alexander.
I go back.
Maybe 16 17 years ago, an Alexander's was trading at a discount and you proactively put in the annual letter that.
Youre going to take a deep look at variety of options.
A year later the stock market corrected itself in the stock had gone up and there was nothing to do.
How does the current situation compared to back then in relation to Alexander's, but also stepping back as it relates to Vornado, where you have been very active can you just sort of compare and contrast, the environment back then versus the environment now and trying to do something with Alexander's.
Michael.
Stocks fluctuate.
Alexander This is no different Alexander's has traded as high as 400, some odd dollars a share as low as 100.
Hi, one hundreds of dollars of shale Alexanders now sells for.
I guess basically at 8% dividend or at least there was a couple of days ago.
So.
Our business with the credit of Alexander's assets, the quality of the assets of Alexander's the balance sheet, which basically has 500, it's somewhat of a billion dollars of cash on it should not trade for an 8% dividend. So that's totally displaced.
It would not be stupid for Alexandra has to trade at a 4% dividend based upon the money market Comparables et cetera, which would made that Alexander is based upon the dividend.
Uhm alone.
Would be fairly priced stock with double.
Some of the stock market is going to do what the stock market does from our point of view.
We are going to preserve the $500 million of cash, but lots of different reasons that may change, but it's not going to change in the short term.
We're going to continue to pay out the dividend the board determines to be appropriate.
And.
We are as I've said multiple times.
It's almost impossible for NATO Alexander's to combine it's impossible.
Figure out what the price would be that would basically tornado shareholders happy.
And all the Alexander's shareholders happy at the same time, so for the moment Alexandria sort of sits where it sits.
And its shareholders should enjoy the dividend.
Future prospects.
Okay.
And then just the last one Steve.
Response to my question at the opening on the tracker, you talked about being committed to the tracker or other techniques and I don't know I don't want to pick up too much on that word but in your mind is there other avenues in the separation of dependent district that youre evaluating other than just the tracking stock which.
And I know you and I disagree, but that's fine.
We can.
But is there other ways that you're thinking about structurally.
Separating the company that way.
Oh sure.
But we're not going to talk about them today.
Yeah.
Next question comes from Jamie Feldman go ahead Jamie.
Great. Thanks, and just a quick follow up Glenn I think you had said.
Yeah.
We're in discussions for 50% of the 23 explorations and you think 50% may move out Hey, I want to make sure Thats correct Andy.
And B, how does that compare to this time in prior years and can you talk about some of the larger known move outs.
Yes.
The 50 50 production in today's target that move as you know weekly quarterly et cetera. So we'll keep you up to speed, but as always we're way ahead of it have been ahead of it over the past quarters tackling all of those explorations.
I don't want to get into specific tenants or specific buildings, Jamie but you can be assured we're on top of every one of them, particularly the larger a larger variety of exploration.
Is that about where you are typically this time of year or do you think next year is going to be a tougher year.
Every year is different but I mean year to year 50, 50, 60, 40, I mean, it's always in that range I would say, it's not far off the standard fare.
No.
We usually.
Predicting all of this is yourself difficult things change every day with our tenants in our buildings always putting the puzzle together the best we can.
To create value so it's hard to say.
Yes, exactly that are exactly this so that's where we are today.
Okay alright, thank you.
And we have no more questions at this time.
Yes.
So let me say, we appreciate everybody joining us. This morning, we look forward to seeing you all again soon our third quarter.
Earnings call will be on Tuesday November one.
At 10 o'clock in the morning, and we look forward to your participation again.
Take good care.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect.
Okay.
Yes.
Okay.
Sure.
[music].
Yes.
[music].