Q1 2022 Vornado Realty Trust and Alexander's Inc Earnings Call
[music].
Welcome to the Vornado Realty Trust earnings and webcast for first quarter of 'twenty to 'twenty two.
My name is Vanessa and I'll be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. During the question and answer session. If you have a question. Please press zero then one on your Touchtone phone I will now turn the call over to Mr. Steven.
Bornstein Senior Vice President and corporate Counsel, Steven you may begin.
Welcome to Vornado Realty Trust's first quarter earnings call yesterday afternoon, we issued our first quarter earnings release and filed our quarterly report on Form 10-Q, with the Securities and Exchange Commission. These documents as well as our supplemental financial information package are available on our website www dot dot com.
The Investor Relations section in these documents and during today's call, we will discuss certain non-GAAP financial measures reconciliations of these metrics 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 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 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 looking statement.
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. Today I will now turn the call over to Steven Roth.
Thank you, Steve and good morning, everyone.
Let me begin by saying I thought we had a very good quarter.
With <unk> up 22% from last year, reflecting the continued recovery in our business and we continue to see many positive trends across the business.
To my eye.
The streets of New York are back to pre Covid in terms of pedestrian counts and our beloved traffic congestion.
Barbara is a full and by full I mean literally full with long waiting lists restaurants are booming and office utilization is climbing we are now over 46% utilization as we speak.
There are a couple of things I'd like to highlight.
<unk>.
We have more floating rate debt than most and that strategy is correct nine out of every 10 years, but this is a healthier.
The economy is now in the hands of the federal reserve and their role as inflation fighter.
Appropriately. So if past is prologue, we expect rates declined quickly up a mountain.
Slowly economy, and inflation and then quickly pulled down the other side.
Second for.
For the first time this quarter, our GAAP financial statements reflect the balance sheet income statement effect of the <unk> June 2023, and one ground lease renewal.
We have estimated 26 million as the new ground rent and then the actual arbitration proceedings.
While these two numbers are substantial it was slower growth short term, we believe that as faulty Penn one Penn two come online growth will be very very substantial.
Now over to Michel.
Thank you, Steve and good morning, everyone as Steve mentioned, we had another strong quarter.
First quarter comparable <unk> as adjusted was <unk> 79 per share compared to <unk> 65 for last year's first quarter, an increase of 14% to 22%.
This increase was primarily from rent commencement on new office and retail leases and the continued recovery of our variable businesses.
We have provided a quarter over quarter bridge in our earnings release on page two in our financial supplement on page five.
As Steve mentioned this quarter for the first time, we are recognizing in our financials the impact from the pending Penn one ground lease renewal.
Under GAAP, we are required to record the present value of the estimated additional lease liability on our balance sheet and start recognizing the straight line impact in our earnings this reduced our earnings this quarter by approximately $4 million and we will reduce it by $21 million overall in 2022, and 23 billion a full year basis.
The reduction in earnings will not impact cash eppo cash <unk>, however, until we actually start paying an increased rent in June of 2023.
Looking ahead, we had initially expected to delivered double digit percentage of <unk> per share growth in 2022, driven primarily by previously signed leases in both office and retail, particularly metals platforms at Farley.
And the continued recovery of our variable businesses, but we now expect the impact of projected interest rate hikes by the fed on a variable rate debt to be a greater headwind to this year's growth than we originally anticipated.
We had assumed a LIBOR would move up this year. When we gave a preview of 2022 last quarter, but it now looks like it will move up more than we expected. This year keep in mind, we're also earning more of our cash balances as rates increase.
I expect our <unk> per share growth for the year to be in the mid to high single digits.
With respect to our variable businesses, we continued to see a strong recovery in the first quarter, our signage business led by our dominant signs in times square in the Penn District had its strongest first quarter ever in forward bookings continue to look healthy.
Our tradeshow business at the Mart is considering to rebound as we hosted four successful tradeshows during the quarter, whereas there were none during last year's first quarter due to the pandemic, our garages, which we expect to be fully back. This year continue to recover and finally, our BMS business continues to perform near pre pandemic levels, we expect to recover most of the income.
Our variable businesses this year with a full return in 2023.
Companywide same store cash NOI for the first quarter increased by five 8% over the prior year's first quarter.
Our overall office business was up two 2% compared to the prior year's first quarter, while our core New York Office business was up half a percent.
Our retail same store cash NOI was up a very strong 32% primarily due to the rent commencement on new leases at 595 Madison Avenue Four Union Square 770, Broadway and 60 89 fifth Avenue.
Our New York Office occupancy ended the quarter at 92, 1%, which is consistent with the fourth quarter of 2021 and up from the trough in the second quarter of 2021 by 100 basis points.
New York retail occupancy ended the quarter flat versus year end at 84% after adjusting for asset sales this quarter and up 380 basis points since bottoming in the first quarter of 2021, we expect both Occupancies continue to improve by the end of this year based on our deal pipeline and modest remaining 2022 office explorations schedule.
Now turning to the leasing markets.
During the first quarter of 2022 leasing conditions across Manhattan continue to remain strong deal activity is robust while asking rents the overall availability rate and tenant concessions have all stabilized the combination of office using job growth higher space utilization and continued expansion by tech.
And media companies has resulted in market resiliency.
Leasing activity is currently indicating continued trend towards recovery out of the pandemic with several large leases in the pipeline across all Submarkets Ceos are placing a high value on securing the long term workplaces in order to foster teamwork collaboration and morale amidst fierce competition for talent in an ever tightening labor market.
As such flight to quality remains the dominant theme in the leasing market. This is evidenced by 40% of the signed leases in the first quarter, consisting of relocations to new and Redeveloped assets. Accordingly rents have increased in the new construction or best in class Redeveloped assets, which provide amenity rich offerings of transit centric locations are best.
Class New York Office portfolio is well positioned to thrive in this environment.
Focusing now on our portfolio during the first quarter, we completed 30 leases totaling 271000 square feet with healthy key metrics, including starting rents of $81 per square foot and a positive mark to market of seven 2% cash and six 5% GAAP.
Leasing highlights during the quarter included a 53000 square foot expansion with NYU at one Park Avenue, bringing their total footprint in the building 685000 square feet.
We also completed eight transactions at Penn one totaling 68000 square feet with average starting rent of $90 per square foot. These early leases validate our plan to say grants at Penn one from the $60 per square foot to the nineties and we are now starting to push rents in this building into the triple digits as tenants love this totally unique workspace.
A transformation of Penn one as redefined work for all of our Penn District tenants.
Unrivaled work life campus ecosystem located on the buildings first three floors is running on all cylinders, including our food and beverage operation along with 142000 square foot amenity offering of health and fitness facilities Conference Center in Trophy Flex space operation.
While the first quarter leasing volume was lower than recent quarters, we anticipate a very strong boost in leasing activity during the forthcoming forthcoming quarters with.
With several large pending transactions in our pipeline.
Currently have $1 2 million square feet in lease negotiations driven by tenant expansions with an additional 500000 square feet in earlier stages of negotiation across our portfolio.
Retail leasing activity in the first quarter consists of six leases totaling 20000 square feet with average starting rents of $172 per square foot all of which were new leases. We have an active pipeline and strong interest in the Penn District in particular with the recent commencement of leasing in the long Island railroad kind of course.
Now turning to Chicago.
<unk> market continues to be challenged with direct vacancy at 19% and tenant concessions at historically high levels. However, as we said last quarter tenant demand continues to strengthen throughout the city as indicated by this quarter's positive net absorption.
At the March we signed 149000 square feet of new leases during the quarter, including a new 81000 square foot headquarters lease with <unk>, a fintech lending company as well as a 34000 square foot renewal of Steelcase showroom, which is an anchor tenant for our contract furniture business.
Recent tour activity has been strong and is reflected in our growing tenant pipeline, we have 70000 square feet of leases in negotiation.
Trading proposals with another 250000 feet of prospects.
We look forward to commencing construction of our Mark to point out building capital program in July when we will bring our New York work life campus ecosystem to Chicago, which will further differentiate the market the market is unique workplace.
And San Francisco leasing activity started slowly at the beginning of 2022 as companies monitored the omicron Varian, but activity picked up towards the end of the quarter and has continued as company's initiated their return to work plans led by a coordinated effort by the mayor and many large San Francisco employers.
The city's overall vacancy rate is elevated at 15%.
The seven building trophy set of which 550 <unk>, California is certainly one is at 3% and experiencing strong tenant demand and rental rates.
As such our market, leading 505, California complex is effectively fully leased with the exception of the 78000 square foot $3 45 Montgomery building during.
During the quarter, we completed an important 49000 square foot renewal with Microsoft and the base of 505, resulting in a significant 19, 8% cash mark to market as well as the new triple digit rent lease with a global private equity firm at a 7000 foot square foot suite and the buildings tower.
Finally, turning to the capital markets with the current market volatility and a move up in interest rates the financing markets have become choppy here with the typical increased focus from lenders on quality sponsorship and lease term.
Portfolio is well positioned in this regard and unfortunately, we have only modest debt maturities in 2022 and no material maturities in 2023 after capitalizing on the robust markets last year.
We are in the process of refinancing 770 Broadway now I won significant maturity in 2022 and expect to complete it later this quarter.
We also went under contract last week to sell our long Island City office building for $173 million.
After purchasing the asset in 2015, we extended the major leases over the past few years to create value and so our job here was done.
This sale together with the five small retail assets. We recently sold continues our efforts to monetize our noncore assets and we have another $750 million planned in the near future.
Finally, our current liquidity is a strong 396 2 billion, including $1 $787 billion of cash restricted cash and investments in U S Treasury bills.
<unk> to $1 75 billion Undrawn under our $2 75 billion revolving credit facilities with that I'll turn it over to the operator for Q&A.
Thank you we will now begin our question and answer session. If you have a question. Please dial zero then one on your Touchtone phone.
Wish to be removed from the queue. Please press star Zero, then too if youre using a speakerphone. Please pick up the handset first before pressing the numbers. Once again, if you have a question. Please press zero than one we have our first question from Manny Korchman with Citigroup.
Hey, it's Michael Bilerman speaking.
Michael leasing is definitely kept pace.
Start the year, you talked a little bit about pipeline I was wondering if you can sort of unpack some of those numbers in terms of where you're seeing the activity how much of it's on vacant space versus.
Existing stuff thats going to roll just to give a little bit more detail about the momentum in leasing that youre seeing.
Yes, because I want to take that one hi, Michael It's Glenn how are you.
Good.
The $1 2 million feet, Michael mentioned in his remark I mean, it's a very healthy mix I would call. It 50 50 of new expansion versus renewals.
A lot of the activity is in Penn.
And a lot more of the activities in the financial services building.
So in terms of looking forward.
As we said, we expect occupancy to continue to improve throughout the year.
<unk> continued to fill spaces, but we're seeing a real good mix across all types of tenant types in the portfolio as we sit here.
Great and then maybe just on Penn one Michael you talked a little bit about.
The ground lease in terms of recognizing the value that you've put in which is obviously now it sounds like subject to arbitration can you just sort of walk through sort of the math a little bit it would seem as though that 12 point.
2% targeted return would probably come down call. It about 500 basis points for the extra ground lease, but maybe just help us understand what the process is given the fact that you've gone through $3 30, with 34 Thats an arbitration.
Just trying to understand the timing of how all this will work through and ultimately its impact on financials.
So.
Like we do.
As we stated in the opening remarks right.
Put it on the balance sheet straight line in earnings I think in Steve's comments.
Stays at the number we put down as $26 million.
A lot of data out there in terms of what the <unk> is et cetera, I'm not going to get into that.
The process is going to commence.
Near term and so we're going to continue to not.
Get into details here publicly but it's.
It's our best guess based on where the sites on Penn One is.
Probably one of the largest sites to be valued at three times the size of 330.
Larger sites tend to be valued at lower prices than smaller site just given the nature. The size of what can be built in the risk and so forth construction costs et cetera.
The process is different on Penn one versus $3 30.
And.
It will start as I said later this year and be finalized by the middle of next year and so the new rent will take effect in June of 2023.
<unk> stated we have from the outset on Penn one put the return.
Gross of any renewal rent because we don't know exactly what that will be yet and said it could be material.
Now <unk>, our best guess as to what that may be and it will be.
Finalized over the course of the next year.
Is that the right math for Michael just thinking about that one Michael.
Michael hang on for Matt.
We chose to.
Disclose our returns on the investment we're making.
I had one on an incremental basis.
Had we not done.
The program is going.
<unk> yields, let's say, it's two and a half million square foot rentable building at rents again, they go up some with $35 $40 or something like that so let's say they go up $30 250000 square feet leases rollout over the next four or five years at $75 million.
Some of it drops down to the bottom line. Okay. So the ground rent would be we think it will be $25 $26 million.
And so we could easily handle that.
Can we get a return on the $400 million we're investing.
Furthermore, the building together with <unk>.
It's.
Our partner in the campus two pets creates the nexus of what we're doing in the Penn District.
Very important.
We have a totally unique largest intel amenity package, which is now complete and open to rave reviews from.
Our tenants the brokerage community and prospects. So we think it was.
Absolutely the right thing to do now the arbitration.
That is going to.
They see they are two different kinds of the three.
<unk> was a baseball arbitration and what that is is very simply one side puts in a number of the other side puts in a number.
The arbitrator.
Arbitrator decides.
Which number is.
More correct in other words the middle.
If you're a one dollar above the middle and the arbitrators mindset, you win et cetera.
One Penn arbitration is different it's tool arbitrations.
Or is this more of a negotiation.
So it's a totally different kind of platform.
We believe that the number that we have selected and chosen is correct for lots of different reasons.
Including pumps in the marketplace.
And.
That will all prove out over the next.
Muncie is I expect the arbitration is thought sometime before just before the end of the year.
So that's the way we look at it.
Just just to come back to your comment specifically on the math right. If you take the 12. So when you take the incremental rent that the $26 million implies we're paying $2 five today. So youre 12, two would go down to seven and your math is correct.
Alright, and then six point.
The reality is this is one massive complex where that ground lease supports a lot of other rent that's being generated and so it has to be looked at in hotel would you rather than individual basis.
Absolutely and one other thing okay.
We're in the process now of <unk>.
Budgeting, which we do all the time.
My belief and glenn's belief that if we.
Building.
Offered to the marketplace now is worth in the nineties I believe of $100 a foot.
If you go out and look at what's going on in the market to the west of Us at Manhattan, West and Hudson yards rents are higher at substantially higher.
And we believe.
Our Nexus with transportation creates a site, which is the best in the neighborhoods. So we believe that we will start in.
In the 90 to $100 a foot and 345 years from now those this asset will grow in value with rents that will go into the hundreds.
So the seven 5% to 5%.
Our 8% whenever that return is at the opening is just the beginning of a long healthy investment period for this asset.
Okay. Thanks, Steve.
Thank you Michael.
Our next question comes from Jamie Feldman with Bank of America.
Great. Thank you and good morning, Steve I wanted to go back to some of the comments you made in your Chairman's letter first you said Alaska.
The last Domino will be when employees and employers resolve hybrid work schedules and the office districts are teaming with activity, which will come sooner than you think.
You also said tenants tell us they want less formal creative office website model on behalf of New York 400 million square feet of office space fits that description.
So as you sit back and and.
And think about these comments and think about the future of office in New York City, what else can you tell us about how the vornado plans to invest or maybe how your current portfolio does or does it fit this description.
And then also just what do you think office usage it looks like a year from now in terms of days of the week and how people are going to use the space.
Im going to shift back.
Michael Glenn to start.
So it's a very extensive question I'm glad that you read my letter. Thank you.
Good morning, Jamie.
So in terms of predictions of what utilization will be from now.
Sure.
It's anybody's guess higher.
We continue to see a trend higher.
<unk>.
There is a fairly consistent pattern.
Monday through Thursday, higher Tuesday through Thursday, the highest in Friday, no one feels like commuting into the city. So.
Absent their bosses tell them to get them to see Friday will probably can seem to be the low mark but that number continues to trend up and I think it will.
It will continue to do so I don't I'm not going to sort of make a prediction of Glen will in terms of what the number is.
I think Steve's comments on the type of space people want companies one that.
That trend started pre pandemic, it's accelerated post pandemic I think what we're doing in Penn is exactly what companies want I think thats why were seeing the reception, we're seeing Penn one and that Penn two and.
Even $10 15, as they've seen the plans, although that's still a bit off.
So.
But it doesn't just go for west side right we are seeing.
Demand at the 770 is in the 85 tenths and that.
350 parts and so on so but that being said and we've talked about it at least in my comments of selling assets allowance Eddie.
And assets clearly doesn't fall in that category 40 Fulton.
Which we're going to brand new markets. Shortly it's a five building, but thats not an asset that we think is.
It's consistent where we want to own in five to 10 years. So we're going to we're going to prune the portfolio, we're going to continue to upgrade to make sure. We owned assets that we do believe we're going to reflect what tenants want and where we can push rents. Most importantly, we want to have assets, where we're going to see rental growth overtime and have assets. We believe we're not going to.
Fall into that category, and I think youll see us.
Actively prune those over time.
What would you add to that.
I think Michael covered it Jamie.
It's not a one size fits all answer.
It's very tenant specific degree industry sector specific in terms of the tenants and what their businesses, but I will tell you. We see positive momentum. So number one people are coming back more and more week to week leasing velocity is much higher this year than this time last year. There was a lot of large deals.
Out there a lot of large deals which have been signed another global banks on the new deal yesterday on the west side. So there continues to be momentum.
And I think more and more people are coming back into the office market.
Wanting new space, that's definitely a theme recreating their culture.
In terms of talent recruiting people.
Proving their brand et cetera, but.
But I think youre seeing now what we had predicted last year it will be in on winding back to the office.
People are now starting to come back getting more comfortable and I think month to month, it's continuing to improve out there in terms of the environment.
Jamie I think.
And your question was.
All right.
The culture of work and.
The design of space that the employers and the employees work.
This is something that our.
At our company and our teams have been focused on for a long while.
So.
We believe that the.
Hi.
On suspenders and striped suit.
A figure of the past in the.
The business community today with even the finance industry on Park Avenue or whether you're in the tech industry on the west side.
So what we have done we think very successfully and tried very hard that is to focus on the hospitality aspect of our buildings.
Our space.
If you go through.
The amenity package.
One pad, which is 160 odd thousand square feet. So we said north of us.
And one of the strategies that we have is that if you have a cluster of buildings.
Campus, you can afford that foot.
Ed.
Larger amenity offerings and then if you have a single building.
And so if you go through there we have.
We have food offerings, we have places to hang we have places to do that.
Jack we have gyms.
Jim's we have health facilities.
We have all matters of things we also have a.
Our conference center, so that a tenant can take 60000 square feet and that has not.
Not have to devote 1000 of those square feet.
The conference rooms, we have it we also have co working space in the building.
So we think that that's the future.
Part of it is that.
We want the staff and the ability to treat our tenants as if they would guess at a hotel.
No Theyre names welcome them greet them.
Treat them as they want to be greeted so theres, an entire cultural things away work will be done in the future and this is pretty universal by the way not only in New York.
But the better owners are.
Sort of doing what we think we're at the front of it but we're not we're not unique.
Alright, Thank you for everyone's thoughts on that.
So I guess just.
Following up on two Penn you talked more about just the leasing demand I know you signed the big MSG lease, but how do you think that stack worked out based on.
The discussions you're having or do you feel like it's still just kind of early to.
They have a view on that and then similarly, just there's just so much buzz around prime and safety and around the Penn District, how would you gauge it today versus maybe where it was a year ago.
Maybe some of the initiatives that could improve it further.
In terms of leasing at Penn to the building is at the very top of the list for any user coming into the market looking for either new construction or the very best of the redevelopment in the market.
So we are.
Continuous meetings with tenants brokers presenting the asset, but we are in no rush.
Bustled structure has just gone up.
As each month goes on this year, Jamie it's going to just get better better and better physically.
We'll then start bringing people into the project to get a feel just how unique and spectacular this space will be.
So we're seeing everybody, we're showing it to everybody the reception's been eight plus.
We're on every toward every important clients, who is walking around Europe for space.
As it relates to the district I think we are.
The Street.
Noticeably improved from this time last year.
Of course, working daily with all the jurisdictions.
NYPD the mayor's office the business improvement districts, our colleagues in the district other owners are major tenants et cetera.
We're really focused of course on safety in the neighborhood and I do think it has improved year over year, we still got work to do.
Of course on it everyday.
In terms of that mission, but the reception of Penn two has been excellent.
At Penn one as we've said in the remarks.
The action is enormous the rents continue to rise and we're seeing tenants.
Coming into the building for core they are coming from every submarket in the city.
Park Avenue sixth Avenue downtown meat happening all over the place honing in on the district and into this campus amenity program that we're offering.
Jay I would just say I mean, Glenn talked about year over year I think this quarter over quarter. The streets are better right as the streets.
The activity level in the streets as increase as more traffic through the station.
That is that is I think made the street's feel safer and it's made it feel better right pushed some of the <unk> to the side and maybe out to other areas. So I think when you are.
Don't know when the last time <unk> been through a district I know youre going to work in the area of soon but I think youll see a noticeable improvement still work to be done.
Thank you we have our next question from Steve <unk> with Evercore ISI.
Thanks, Good morning.
Steve I was wondering if you could just comment a little bit more about your appetite or desire to still be part of a casino project or licensing agreement.
New York City, we're able to get one I'm just curious if you're looking to be part of the operations are you looking to more b of a landlord and if it's on the landlord side, how big of an integrated resort do you ultimately think the winning bid needs to be does it need to be hotel rooms, and convention space or do you think it can just be a stand.
Alone casino kind of in the heart of Manhattan.
Well.
Some of the.
Some of the answers to your questions are at the current time unknowable.
This is going to be a political process.
And.
There are going to be government officials, who are going to make these decisions.
With respect to.
The.
The idea of a casino we are.
<unk> pursuing it.
As we should and as we must.
And I would say I've said in.
So last two vendors I have written that we believe that the.
We're going to be trimmed down state licenses, we believe that the best place for the third license.
One goes to the anchors one goes to equity or probably.
Although that might be congested as well, but we believe that the third license would be best served to go into Manhattan.
When you think about it Manhattan is the center of everything it's the center of the.
Hotel the hotel industry.
Entertainment industry, the restaurant industry the business industry.
The theater industry et cetera.
One of the anomalies as well as the economic engine of New York by far.
The voting population.
It is of interest to the political leadership of course is not necessarily in Manhattan.
So that's an interesting thing.
We are in the process of talking to multiple people.
Sure.
The casino industry operators are talking to multiple.
Multiple landowners.
We are in the process of debating whether we would be just a lay up.
We're just as it.
Statements being a landlord.
Or being part of the operation or being a hybrid which is a landlord with a kicker or whatever so.
We're in the throes of thinking about it talking about debating the financial arrangements.
With respect to.
Whether the winning bid so to speak would be a small isolated casino or in the entire Las Vegas style complex with hotel rooms entertainment food et cetera offerings, I don't know, which is the right one okay.
We believe that we can pursue both of them we have multiple sites that we intend to bid list.
And for example, if you just take the Penn District.
Whats in the middle of the Penn District, Madison Square Garden Madison Square Garden is the biggest and most important entertainment complex.
And certainly in the New York area and maybe.
Far and wide the interesting thing about Madison Square Garden as an addition to the teams that has 220 dates a year of concerts. So it's the center of the music industry as well.
And.
It sits on top of our land.
It's adjacent to Madison Square Garden that sits on top of the transportation network, which is interesting.
Theres been some talk about.
Times square, which is also interesting.
And.
We have sites. There. So this is early days and we are exploring we are working very hard exploring all of the different options and we expect to try it we will probably get a resolution as to what direction. We are going to go in some time.
Well before the end of the year.
<unk>.
I think I read one transcript somewhere that somebody thinks that this process is going to be opened in the first quarter of next year I don't think it's going to be anywhere near over that's going to take a lot longer than that as it should deliberative process and it's important.
So.
We believe that Manhattan.
When you get the third license.
We intend to compete aggressively for it and one last thing.
We think speed.
Speed to market with speed of opening.
Is going to be a very important determinant of the economics of.
Of the bidders so if you'll have to build a new complex that could take three to five years, whereas you're retrofitting a building that could take one to one and a handful of years. There are billions of dollars difference in that.
That calculation.
That's it from me on this topic.
Great. Thank you for that.
Second question, Michael could you, maybe just speak a little bit more to the financing markets. It sounds like 770 Broadway is in for refinancing can you just maybe give us a sense of kind of where the market is today for kind of mortgage debt.
And just give us an update on kind of size and pricing and how that market has changed.
Yes.
Anytime you get into periods of volatility, which were clearly in right now.
You get you get hesitancy on the part of.
I would say in particular bond buyers in and to some extent the banks, although I think it's a.
It's really much more so than the CBS market. So I think you started the year with a heavy supply of MBS volume and then you had rates gap out.
War economic uncertainty that caused the spreads gap out. So yes, you had a bit of a double whammy, both on spreads and rates.
See MBS markets open but if.
If you don't have the issue in that market in size, it's probably a market you'd prefer not to go into right now and we don't need to go into that so 770 will end up getting done in the bank market.
It's an asset.
High quality asset with a great tenant.
And so.
Well received in the bank market and we'll roll that over at.
At a spread I think it's pretty comparable to where we're at today.
On that building so.
Spreads on where they were.
612 months ago, but still attractive for high quality assets and.
As I said I think the bank market much more liquid than the <unk> market.
But but that can only handle so much so again our assets on a one off basis.
Good demand in both markets, but for 770 will go in the bank market, which I think has more stability right now fixed or floating.
So given the bank market, Steve I'm going to ask a few questions that fixed or floating given just the bank market will be a floater, but will likely as we've done in a number of other situations swap that out for a portion or all of the term.
And thank you.
Anything else in the financing market hopefully that answers your question I mean beyond but beyond 770.
We don't really have any other material finance I've got a couple of small things will get done but no other material financings for 2022 and 2023. So that's.
All of that Opportunistically last year, we obviously had a number of maturities last year.
So.
Even notwithstanding as markets, we really didn't anticipate being very active in 2022.
Got it okay. Thanks.
And thank you. Our next question is from John Kim with BMO capital markets.
I think you just answered my question, but Steve in your opening remarks, you did mentioned that having a high floating rate strategy works not in 10 years and rates will come back down again.
So I just wanted to confirm that you are comfortable maintaining a high floating rate strategy in the near term.
Yes, we think.
We spend a great deal of time on our balance sheet is very important liquidity.
And safety and the ability to be defensive but even more of the ability to be offensive is extremely important to us and in running this business.
So.
Every time did you look at a financing opportunity.
If you compare a floating rate.
Debt to a 10 year fixed rate debt.
Spread.
Is it all of US it goes to what was the two 5% both two five points 250 basis points most of the time.
So what happens if you elect to go 10 year fixed you are for certain.
Costing yourself doing 250 basis points more.
And during the life of.
Over the last 30 years I think one of the firms that we use as an adviser on financing set every single month for the last 30 years. The right decision was to go floating rather than fixed.
So the answer is is that you paid 250 basis points for the Yugo floating now theres other parts of it so if you're in a fixed rate loan.
You are locked in and if you decide you want to sell the building or refinanced the building or whatever before the end of the term you have to defease that which is normally a very very expensive proposition. So it takes away all of your flexibility if.
If you are going to sell or improve or whatever the asset.
And that's an extremely important thing now while we have floating rates on our books now.
And our interest rate our interest expense is increasing.
If we would have had all of that debt at fixed it would have been substantially more.
And interest expense that we are currently paying or we expect to be paid so we think that the fixed.
The fixed rate strategy.
It seems safer.
As for certain much more expensive.
But certain much less flexibility, which is why in the ate industry most.
Most folks seem to like the unsecured debt low.
Where you are not encumbering, the asset with a mortgage or what have you.
Get that flexibility, but we still believe I still believe in the floating rate floating rate strategy as being a superior strategy.
I'm, just wondering with inflation that 40 year highs.
There is a risk that rates could remain higher for longer.
And with 770 Broadway in particular.
Contemplate at all.
That is a fixed rate mortgage.
Perfect great. Thanks.
I couldn't understand your question down when you get them Tony.
Sure.
770, <unk> have you decided to.
Just I didn't even have that floating and hedge it near term or.
Yes.
Great.
Yes.
The baseline will be a floater, because it's going to be in the bank market, but our intent is to swap that.
At the corporate level for a period of time.
Okay.
And then one final question with the ground lease reset addressed in the retail guidance already provided.
Why not provide <unk> guidance going forward, just given the amount of uncertainty there in the market.
And with your company in particular.
The answer is.
Real estate, the long term business Theres, a lot of ins and outs were in a heavy development phase generally and it's difficult to do.
We gave you some preview at the beginning of the year end.
And now we're now we're walking that back a little bit given rate. So it's a difficult thing to deal. We've given you I think reasonable sense for 2020 to mid to high single digits.
So.
I think thats pretty good guidance for this year.
Our best guess and how things changed its a fluid business, but that's our best guess for this year.
And thank you.
Next question is from Alexander Goldfarb with Piper Sandler.
Hey, good morning, good morning, Steve.
So a few questions here.
The first is you guys had the $1 billion seven of cash you bought some some T bills, but why not use a portion of that cash to pay down some of the floating rate debt as opposed to just buying the T bills.
Alex Good morning.
Good morning, Michael to answer the.
The answer is we did deploy some of that cash and T bills in order to get some of the benefit of earning more than what's in the banks.
And a lot of that capital.
That's still left we intend to deploy into our development activities and Penn.
Since the quarter and by the way, we've put a little bit more into your bills.
And both of those are staggered maturities 369 12 months.
But a lot of capital is going to go into Penn too.
And to finish up.
What's left at Farley and Penn one so that's the rationale in terms of why wasn't all of the boiler is and I'll pay down debt and New York you have the additional issue on our mortgage debt mortgage recording tax, which cost a 3% of our incentives to have financing on those assets.
Over the longer term rate that would be a that would be wasted money that we've paid once before that we'd never have to pay again so.
We don't want to do that lightly.
Yes, Alex in this market.
With the financing markets are extremely choppy.
And hostile.
If we pay down.
If we pay down short term debt.
Replace again, if we need the capital later on is going to be more difficult.
The other strategy is you can hedge it and if we take the cash which we need and we have places for and it's all allocated in our in our capital plan and our budgets.
So if we take cash as hedges bye bye.
Treasuries.
Let's say, we get arbitrage and so the.
The interest expense on that particular slug of capital is.
100 basis points less than we would earn on that.
Treasuries, so a 100 basis points, let's say on a $1 billion is $10 million, that's a lot of money, but it doesn't move the needle so I'd rather have the liquidity rather than pay down the debt pay down the debt and not being able to replace that easily and quickly when we need it Steve.
Steve That's helped I think we're on.
Yes, that's helpful and as we look Michael as we look at at the I know that youre, not giving distinct guidance, but from the 81% run rate that you gave in the fourth quarter. You are now having an extra $750 million of dispose higher interest rates. There is the ground lease reset so just sort of ballpark.
Are we talking an extra five.
Lower from that number an extra 10% lower than that number it sounds like the number is lower given all these moving pieces, but you guys did bake in a fair amount into your.
Your guidance when you did say 81, despite Facebook coming online. So just trying to get a gauge for collectively how much off of that 81 run rate we're looking at.
Yes, I don't want to play that precise Alex just because again, we're in a fluid environment. I mean, we did assume originally at the beginning of the year. The LIBOR was going to go up.
The curve steeper today.
No.
It's up.
We don't know whaler end up but its certainly a steeper than what we originally projected.
The 750 of sales.
There is not tremendous earnings that are coming off a lot of that so I don't think thats going to have a huge impact.
There are a lot of the smaller assets that are not producing a lot of capital. So a lot of earnings so I don't think thats material.
But in terms of I.
I think we gave you a range mid to high single digits and you can sort of reduce the run rate depending on what you plug in for that coming off of the 286% last year.
Okay and then.
Alex I'm going to go out on a limit my financial guys are going to Whitney.
So they would never web you'll see the whipping the whipping goes the other way.
The whipping goes the other way.
No no no let's get serious.
Our internal budgets, which are highly detailed and revised frequently show that.
Interest rates rising even rising at a faster rate than we had.
As expected.
As recently as three or four or five political by the way I believe that.
Said in my remarks.
The economy is now in the hands of the Federal reserve as it should be the federal reserve means business. They always win and they will they will handle inflation and this will and this too will pass but anyway. So our internal budgets, which are extensive show that even with the one Penn ground.
<unk> lease reset and EBIT with a reasonable.
Reasonably predicted.
A rise in interest rates taken off.
Yield curve and by the way, 95% of the time the yield curve exaggerates the actual facts. So that's another statistic. We believe that we are earnings will grow through.
And we will have maybe one day a couple of years out.
But otherwise our earnings are going to grow right through it.
Now I'm going to give you something that I know they've got with me for our budget, Joe well in excess of $300 million a year.
NOI coming in from falling one at two Penn above, let's say above above our current numbers over the next period of time your job is to predict what the period of time, Okay. My job is to get those earnings.
That's come in.
Warner or even a year.
As we complete this program.
Without touching another piece of land in the Penn District.
Our earnings will increase.
Well over $300 million just from those three projects.
That's annually or aggregate.
Annually.
But $300 million, what I said that although I said that I've got a lot of people throwing knives that but yet here.
Yes.
Okay.
That's the math, okay, Okay, Stephen if I.
Okay.
Steve if I can end on a high note.
The studio business that you are contemplating with an operator would you be just a landlord or would you be active in the participation of those studios.
Well the answer is is that it's going to be a development deal in New York, That's what we do we do better than anybody. So we will be a full partner for a full decision maker.
The.
The skills and designing these things so that the customers and the tenants.
They work for the customers that have Dennis so we hooked up with a very talented and experienced operator.
He is going to do.
Going to do our part.
<unk>.
We think it will have a very very fine results, we believe that studios in Manhattan.
<unk> asset.
As opposed to studios.
And the boroughs or across the river announced or somewhere else.
And we have our next question from Daniel Ismail with Green Street.
Great. Thank you I'm, just curious given the discussion of interest rates and the plan to dispose of $750 million through the course of the year. How do you think that's impacting cap rates, both overall and on the assets Youre looking to dispose of.
Yes.
Daniel.
In terms of what's the impact.
I think it's too early to tell.
Look at financing rates are higher or is it going to impact cap rates certainly.
Yes.
But it depends on where rates settle out and so forth. So I think it's too early to tell but it will have some impact sure.
It will affect the 750 the answer is a lot of those are small assets. Some are value add in nature I don't think it's dependent on the last basis point is where somebody borrowers so.
Yes.
We have a pretty good sense as to where we can execute that we didn't necessarily say it was going to happen. All this year. So I'll just clarify that as you said it.
Certainly planned to go into the market this year, but when it will close TBD.
I think that we got we got a wave you said this is if you're financing literally in this market right. Now I think you are paying more than you probably will I mean, if you look at the financing market has historically as rates rise spreads do tend to compress somewhat.
So that.
The all in rate doesn't go up a basis point for basis point, we're in an environment right now given the uncertainty that's existing with what exactly is the fed going to do what's going to happen with the economy et cetera, where spreads have gapped out rates rate expectations have risen. So it's not a great market to be borrowing and I think that will change.
As we get as it settles down here.
And.
So what's the impact on cap rates will be TBD, but like a borrowing rates are up.
It will have some impact.
Daniel I would much rather have put these assets on the market two years ago when interest rates were lower.
But it is what it is the right strategy for our company to sell these assets.
We get 3% or higher price of 4% lower pricing at the margin. It just doesn't matter these assets for sale and we will and we will execute.
Got it that makes sense and thanks for the clarification on the timing Michael.
Just the last question for me on Penn District in Green zoning.
There's been a variety of news articles going back and forth about the potential additional density there in the states versus the city's plans I'm. Just curious can you give us an overall update as to.
What's going on with any potential rezoning and.
Any potential timeline on that as well.
Youre talking about the GPP and Penn District.
Yes.
Yes.
I think we will stand Pat on that.
These.
This is a.
Basically the.
Many of New York.
The state of New York Partners in government.
The strength of the MTA and the transit.
<unk> is basically a state asset the capital plan that will be expanded in Penn station is basically state capital.
So it makes lots of sense.
There's multiple multiple historic precedent fitness for the state to be in.
I'm going to use the word in charge, that's really not an accurate word of the zoning and the development process.
The city at the state and are cooperating on that there's been extensive public hearings on the plan and the proposal.
The political leadership in terms of the.
The governor and the mayor of both endorsed the plan.
I think thats about all that I have to say about it obviously, we support it.
Got it appreciate the color.
Thank you. Our next question is from Ron Camden with Morgan Stanley .
A couple of quick ones from me one is just on sort of the Capex I think you'd mentioned in the K that you were looking for about $275 million this year.
<unk> was sort of a $36 million range.
I know you talked about the leasing pipeline that potentially accelerating but just how you're thinking about capex for the rest of the year.
Kevin I don't know.
But I would say on the $2 35, and ill, let Greg comment on the Capex the rest of the year it depends on.
Whether its a new lease renewal lease.
The $2 35 is.
Our best estimate at the beginning of the year based on both what's in process and what we expect to come down the Pike right. It's obviously dependent on an actual transaction volume and so while this quarter was lower obviously, our leasing volume is lower as well and we talked.
<unk> talked about.
A significant number.
Well normalized I wouldn't vary from the $235 a day.
I think we've commented on the.
Tenant improvements generally having stabilized they stabilize higher than we like but they've stabilized and not going up any further.
What else would you add to that.
Okay leasing quarter to quarter, it's always very fluid.
We're always looking ahead blocking and tackling way ahead of our expirations.
Creating opportunities in the buildings on core value with all releases coming up whether its this year next year or two years or even further away.
It's really not a completely predictable quarter to quarter number but.
But certainly.
But we definitely believe have stabilized.
And Thats always due to the mix quarter to quarter of the new deals and expansion deals weighted against renewables.
Got it okay. All my questions have already been asked thank you.
Thanks, Ron.
We have our next question from Caitlin Burrows with Goldman Sachs.
Hi, There earlier, you mentioned lease at Penn One I was just wondering was that included in the reported once you leasing spreads and if so could you share what.
Office spreads would have been excluding it.
The answer was no.
Sorry, just on the <unk>.
You're talking on the stats for first quarter, yes.
Yes.
Yes.
Yes, if you exclude the Penn one deal because not all of the leasing activity in Penn One had a mark to market to at the high single digits would be low single digits. So it's still positive it was in that 3% to 4% range.
Okay got it and then.
All of the Penn one Gil.
Uh huh.
And then just regarding the ground lease at 330 west 34th and the increase there I was wondering if you could go through how much of a catch up.
<unk> payments does this represent versus the amount you had been accruing well it was in arbitration and whether this will impact financials going forward.
That's all that's all been recognized and true it up already.
Okay. Okay. Thank you.
That happened last quarter I think yes.
Thank you.
And thank you we have our next question from Vikram Malhotra with Mizuho.
Thanks, so much for taking the question just maybe first to clarify.
Can you confirm with was the Farley and Facebook specifically was that recognized GAAP revenue was that recognized in <unk> and if not when will GAAP and cash will be recognized.
Yes, Vikram that was recognized first quarter GAAP cash will be.
Some point in the second quarter.
Okay, Great and then just.
More broadly on street retail can you help us just understand where you think we are in this rent collect correction cycle now.
On fifth Avenue and Madison.
Terms of occupancy costs and what you're.
Hearing in terms of specific demand for some of your vacancies unsafe.
Vikram, we're just coming off the bottom.
And so.
I think I alluded to this in my in my recent letter.
B.
If you go back 18 months ago, there was no demand no tours no interest whatsoever.
Yes.
Prime Prime even in Prime Prime Prime.
Retail on fifth Avenue, that's changed there is now a fair amount of demand, but it is still at what I call characterize bottom efficient pricing.
We expect and this is the way markets generally were the vacancies will be.
Will be absorbed at low rents.
The markets will get tighter.
Business and this happens over some period of years business will improve demand will accelerate.
We will go up but we are right now at the point that at the beginning of that market cycle.
Coming off the bottom.
Okay, great. Thanks, So much and then just last question.
You're a bit of thoughts on co working and we work specifically in your tenant roster.
How are you thinking in this I would say not new but maybe evolving environment whats the room for co working in.
Portfolio.
I know your own or ballpark nodes.
Hi, it's Glenn So we certainly think there is a long term role for co working flex space.
And we're seeing great success early already at Penn one with the 80000 foot co working.
Operation, We've opened up there earlier this year, we expect to roll more of that in the portfolio.
We go building to building. So I think certainly there is a role there is certainly.
Need out there for more short term flexible space opportunity.
The thing we're seeing at Penn one specifically is that our existing tenants in the district are utilizing the facility to their benefit as it relates to folks coming in for a short term projects from out of town or if they are reconstructing their space and one of the buildings are coming into our cohort.
Facility.
It's parked themselves there to operate their business, while they're rebuilding we're even seeing cases for new leases. We're signing were tenants want a home now while they're waiting for their space to be built there coming into Penn one operating there with us as they wait for their space to be built so I certainly think there is a role.
And I certainly think what we create a Penn one is by far the best operation in Manhattan, and we expect to roll that out more and more in the portfolio as we see those opportunities arise.
Kudos to Barry and Glenn for creating our amenity package and one Penn.
Co working space.
We believe that co working is here.
Asset classes here to stay.
The interesting thing is the strategy of how you use co working.
So we put.
Was it 80000 feet of co working space into one Penn and you've got to remember that's in a $4 5 million square foot complex.
We believe that for our clients, whether they be an existing tenant in Penn.
One of our Penn two or a entrepreneur that is looking for space or in the neighborhood that the advantage of having that co working facility inside our complex.
Have a huge amenity package that they could use they have jim's. They have proved they have other offerings. They have confidence in is that everything that they could possibly want is an enormous advantage. So our strategy is in $404 5 million square foot complex to put the better part of in round numbers of 100000.
Lastly, the co working which is available to our tenants.
Neighborhood as well and they can make.
Use all of the facilities that are in this massive complex. So we think that that's a competitive advantage in going into a.
Co working space at seven blocks away and is 80000 square feet of couches and nothing else.
That's our thinking.
Yes.
And this concludes our question and answer session I will now turn the call over to Steven Roth for closing remarks.
Thank you all very much for participating we look forward to the next call and we will see you then thank you and have a great day.
Thank you ladies and gentlemen, this concludes our conference. We thank you for participating you may now disconnect.
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