Q4 2022 Vornado Realty Trust and Alexander's Inc Earnings Call
Speaker 1: I.
Speaker 1: Feel.
Speaker 2: 2022 earnings call.
Speaker 2: My name is Vina and I will be your operator for today's call. This call is being recorded for replay purposes.
Speaker 2: All lines are in a listen only mode.
Speaker 2: Our speakers will address your questions at the end of the presentation during the question and answer session. At that time, please press star then one on your touchtone phone.
Speaker 2: I will now turn the call over to Mr. Steve Borenstein, Senior Vice President, Incorporation Council. Go ahead.
Speaker 3: Welcome to Bernado Realty Trust's Fourth Quarter Earnings Call. Yesterday afternoon, we issued our fourth quarter earnings release and filed our annual report on Form 10-K with the Securities and Exchange Commission. These documents, as well as our supplemental financial information packages, are available on our website, www.vno.com, under the investigation.
Speaker 3: the import-looking statements and actual results that have been prematurely from these statements due to a variety of risks, uncertainties, and other factors. Please refer to our filing, which is the Security and Exchange Commission, including our annual report on 1-10K for the year ended, December 31, 2022, for more information regarding these risks and uncertainties.
Speaker 3: The call may include time-sensitive information that may be accurate only as of today's date. The company does not undertake a duty to update any forward-looking statements. On the call today from management, our opening comments are Stephen Roth, Chairman and Chief Executive Officer, and Michael Franco, President and Chief Financial Officer. The call may include time-sensitive information that may be accurate only as of today's date.
Speaker 3: Our senior team is also present and available for questions. I will now turn the call over to Stephen Roth.
Speaker 4: Thank you Stephen. Good morning everyone. It's Valentine's Day.
Speaker 4: As Michael will cover in a moment, 2022 was the spawning year with comparable FLO of 10%.
Speaker 4: Fourth quarter-fifle is down 11% due to higher interest rates.
Speaker 4: X rising interest rates are core businesses performing quite well.
Speaker 4: Not surprisingly, we expect 2023 will be a down year negatively impacted by a full year of higher rates.
Speaker 4: I'd like to share with you a few other thoughts.
Speaker 4: Now we're standing all the noise. New York continues to be the most important city in America.
Speaker 4: We continuously serve a dozens and dozens of our tenants, all of whom we affirm their commitment to stay and grow in New York.
Speaker 4: And that goes for our clients who are headquartered in other cities who are making New York there, so to speak, second home.
Speaker 4: And it's not by chance that the New York area is the tightest residential market in the country. We don't want to live here.
Speaker 4: Still concrete and current wall are important, but in our business capital is the essential water material
Speaker 4: We are now in the middle of a Federal Reserve tightening cycle, the result of which is interest rates are up and capital is scarce and that's an understatement.
Speaker 4: Notwithstanding Fed funds at 5%, most run of the middle real-state operators can't borrow with 10% or can't borrow a fiddle.
Speaker 4: So here's what we have done.
Speaker 4: Seven years ago when we began the Farley Facebook pen one and pen two projects in our all important pen district
Speaker 4: We loaded in over $2 billion in cash to pre-fund 100% of our development and construction
Speaker 4: We didn't know then how prescient this would be.
Speaker 4: So, Folly Facebook is now finished in Bade 4. Pen 1, almost sold, and Pen 2 will finish around year end. All three of these assets will be free and clear and unencumbered. And that's quite a feat.
Speaker 4: We handled all of our 2023 and 2024 maturities.
Speaker 4: We put on a series of swaps and caps.
Speaker 4: But while very helpful, they provide only partial protection.
Speaker 4: And I would observe that there really is no protection against loans that mature in a rising interest rate market.
Speaker 4: And a further observation is that the stock market prices at then current interest rates, giving no credit to a company which might have lower rate loans even if they're locked in for term.
Speaker 4: Beginning the first quarter of this year, we declared a right-sized dividend allowing us to retain $128 million of cash annually.
Speaker 4: And by the way, our stocked steel trades are still trades at a 2 high 6.5% yield.
Speaker 4: In January we completed an important deal with Citadel at our 350 Park Scavu building, which involved their mass-policing the entire 585,000 square foot building, essentially relieving us of 225,000 square feet of vacancy.
Speaker 4: This deal will almost certainly result in a tear down and a new build of a grand 1.7 million square foot tower on a larger assembly site.
Speaker 4: Please see our press release of December 9, 2022, explaining the transaction.
Speaker 4: We have lots of friends on Wall Street and I might mention that by any measure, return on equity or return for employee or whatever, Citadel is at the head of the class and tentally focused and aggressively growing.
Speaker 4: This deals validates the quality of our site, our development team, as the new author.
Speaker 4: Interestingly, Ken tells me that a significant differentiator for his firm is the simple fact that everybody comes to work every day, five days a week, I think they start at 730.
Speaker 4: There is a learning here. Call me crazy, but I think companies that embrace work from home will be left behind.
Speaker 4: And I think it's absurd to think that years from now tens of millions of Americans will be working from home alone at their kitchen table.
Speaker 4: And by the way, Zoom may be a disruptor, but its stock is down from 588 to a still high 75 today.
Speaker 4: We'll notice in our supplement that we updated our development projections for Farley Penn-1 and Cipatoo.
Speaker 4: raising our aggregate projected returns.
Speaker 4: This, based on the fact that in 2022, we released sort of 25,000 square feet at Penn 1, an average starting rate in the 90s.
Speaker 4: and based as well on the outstanding market reaction we are getting to pen 1 and pen 2.
Speaker 4: Our strategy here is to achieve very strong returns that went well below those required for new construction.
Speaker 4: The Penn One ground lease process is now kicking off. As required by GAAP accounting convention, in the first quarter of 2022, we estimated a ground lease of $26 billion and reflected that in our statements.
Speaker 4: Based on current market conditions, we now think that numbers should be quite a bit lower.
Speaker 4: We expect 2023 will be challenging as business and consumers continue to feel the effect of the feds aggressive rate increases and generally tight midbelts and active caution.
Speaker 4: This will likely be reflected in lower leasing volumes and frozen capital markets.
Speaker 4: We believe quality product wins today. Just look at our new bills, new lobbies, amenities at Penn 1, new skin at Penn 2, etc.
Speaker 4: Not long ago, new construction commanded a $20 premium. Now, it commands a $100 premium or more. Does anybody think that's too high and that the market will adjust? One more point, and this is an important one.
Speaker 4: In the history of the real estate, all great upward landlord markets follow the period of constrained supply. And here we are. Capital markets are now making it almost impossible to build new.
Speaker 5: which will...
Speaker 4: which will be the four tellers to the next bull market at Landlords's Market. Now over to Michael.
Speaker 6: Thank you, Steve, and good morning, everyone. As Steve mentioned, we had a strong year despite experiencing headwinds and rising interest rates.
Speaker 6: For the year, Comparable FFO has adjusted.
Speaker 6: With $3.15 per share of $0.29 or 10.1% from 2021.
Speaker 6: Fourth quarter comparable FFO as adjusted was 72 cents per share compared to 81 cents for last year's fourth quarter a decrease of 9 cents or 11.1%.
Speaker 6: While earnings for the quarter were down, driven primarily by higher net interest expense from increased rates, and the non-cash straight line impact of the estimated 2023 Penn-1 ground line expense.
Speaker 6: Our core business had strong performance from the rent commencement on new office and retail leases.
Speaker 6: We have provided a quarter over a quarter bridge in our earnings release in our financial supplement.
Speaker 6: We have several non-comfortable items in the quarter, primarily engaged in 220 Central Park South sales and other non-core asset disposition.
Speaker 6: which in total increased FFO by 19 cents per share.
Speaker 6: As previously announced, we recorded $595 million of non-cash impairment charges during the fourth quarter, of which approximately $483 million is for equity investment in the fifth avenue and time-square retail joint venture.
Speaker 6: It should be noted that an impairment charge is not included in the FFO.
Speaker 6: Company-wide same-store cash in a lie for the fourth quarter increased by 7.9% over the prior years fourth quarter.
Speaker 6: Our overall same-store office business was of 8% compared to the prior years forthcourt, while our New York same-store office business was of 5.4%. Primarily a new to cash rents at Farley coming online.
Speaker 6: Our retail same-store cash and OI was up a very strong 7.9%.
Speaker 6: primarily due to the rent commencement on several important leases.
Speaker 6: Now turning into 20-23, while the current economic environment makes forecasting more difficult than usual, we expect our 20-23 comparable FFO to be down from 2022, given the known impact of certain items.
Speaker 6: These include roughly 40 cents from additional interest expense as a result of a full year of higher rates on a variable rate debt, net of higher interest income and capitalized interest Public Library
Speaker 6: Assuming the current's overcurve.
Speaker 6: Ten cents from the prior period property tax accrual at the mart was recognized during the second half of 2022 and five cents of lower FFO from the sale of assets in 2022.
Speaker 6: These reductions could potentially be offset by a low result on the PEN1 ground rent reset that is currently running through our earnings, which Steve mentioned earlier.
Speaker 6: Now turn into the leasing markets.
Speaker 6: We see 2023 as a year of both challenges and opportunities.
Speaker 6: The pace of leasing has slowed in the past few months and the activity is lumpier, as businesses generally are feeling cost pressures and are exercising more caution.
Speaker 6: Companies are still grappling with hybrid work policies and the right level of flexibility.
Speaker 6: But overall sentiment is shifting more closely at pre-pandemic norms.
Speaker 6: We are seeing a real pickup in the return to office throughout our portfolio, particularly Tuesday through Thursday.
Speaker 6: The utilization rates are approaching 60%, and momentum is improving month by month.
Speaker 6: Both employers and employees clearly recognize the productivity, collaboration, creativity, and cultural benefits of working in the office together.
Speaker 6: Flight to quality continues to be the prevalent theme for tenants. However, releasing activity is broadening out. We are seeing a pickup and activity in the traditional multi-tenant class-a buildings as tenants are dealing with the aforementioned cost pressures and are not all willing to pay new construction rents.
Speaker 6: One thing we do think will begin to emerge this year is a heightened focus on the quality of the landlord. Many landlords, particularly private ones, are beginning to struggle with high leverage levels, which may limit their ability to invest capital in their buildings, or in some cases, even retain their assets.
Speaker 6: Tenants and their brokers are smart enough to figure out which buildings these issues are at and avoid them.
Speaker 6: Strong, well-capitalized landlords like Borneo will benefit.
Speaker 6: A perfect example of flight quality with strong sponsorship is the previously announced 350 Park Avenue transaction with Citadel.
Speaker 6: We began our relationship with Citadel 350 Park in the beginning of 2020 with an initial 120,000 square foot lease. In our proud relationship, we have built with our team which is culminated in this master lease in the future of potential partnership for a new 1.7 million square foot roll class building at the site.
Speaker 6: Our overall leasing pipeline in New York remains healthy, it almost 1.2 million square feet of leases.
Speaker 6: with 275,000 square feet of leases being finalized in another 900,000 square feet of activity in various stages of negotiation.
Speaker 6: The financial sector in particular continues to be active.
Speaker 6: Turning to retail, with the rebound in tourism and daily workers, we are continuing to see more retailers search Manhattan for new store locations.
Speaker 6: Retailer sales are generally back to pre-pandemic levels, which is spurring retailers to become more confident and active in taking new spaces.
Speaker 6: They are still concerned about inflation in the overall economy, but are starting to lock in deals given a answer of much more attractive levels.
Speaker 6: Starting to the capital markets now, the financing markets remain highly constrained, driven driven by the ballot till it from the fed's sharp rate increases.
Speaker 6: Thanks for dealing with increase in problem loans and remain cautious in lending in the CNBS market is still largely closed.
Speaker 6: Financing is available for the highest quality sponsors and properties.
Speaker 6: The markets will take some time to thaw, which likely won't happen until the Fed ends its Title Psych on.
Speaker 6: On the asset sale front, it continues to be active interest in investors in the YARC office and retail assets.
Speaker 6: But without a stable financing market, it remains difficult to transact large assets without that employees stay right now.
Speaker 6: And these volatile times remain focused on maintaining balance sheet strength.
Speaker 6: Our current liquidity is a strong $3.4 billion, including 1.5 billion of cash, restricting cash and investments in UST bills.
Speaker 6: And 1.9 billion undrawn under our $2.5 billion revolving craft facilities.
Speaker 6: In addition, as a result of our refinancing activities early last year.
Speaker 6: We have no significant casualties.
Speaker 6: through mid 2024.
Speaker 6: With that, I'll turn it over to the operator for Q&A.
Speaker 2: Thank you. We will now begin the question and answer session.
Speaker 2: If you have a question, please press star then one on your touchtone phone.
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Speaker 2: Once again, if you have a question, please press star then one on your touchtone phone.
Speaker 2: Each caller will be allowed to ask one question and a follow-up question before we move on to the next caller.
Speaker 2: Our first question comes from Steve Sakewa with Evercore ISI. Please go ahead.
Speaker 7: Thanks, good morning. I guess I wanted to start with the developments and the yield Steve that you talked about. I guess I can understand maybe the 10-1 return going up a bit since you've got kind of active leasing and maybe good market market and a little more visibility there.
Speaker 7: But I guess I was a little curious about Penn too. You did take the yield up there, but I don't think you've done any incremental leasing. But maybe that's part of the pipeline that Michael talked about. So could you maybe just sort of address those two?
Speaker 4: it's a very good film.
Speaker 4: We took the yield of 101 and 102. We took the yield down very marginally on Farley.
Speaker 4: We did that based upon, now we have, you know, a year, year and a half, even two years of experience with these assets. We know what the market's reaction is. We have side 220,000 flippy to leases in PEN1. We know what the bid and ask is for PEN1. We know what the bid and ask is.
Speaker 7: in 23, I kind of get the interest expensive, the five cents of sales, sounds like the ground lease may be a little bit better. I didn't quite understand the 10 cents from the property taxes. I was just hoping you could maybe clarify that because I thought in the first half of the year that might have been a bit of a tailwind but just wanted to make sure I understood that point properly.
Speaker 6: You know, we had a prior period of cruel and obviously benefited us at the end of 22. We didn't have it in the first half of
Speaker 6: in the first half of 22 and so that gets reversed at the beginning of this year and that's a thing. So at the timing difference of benefit last year get hurt at the beginning of this year. Net net, you know, there was reduction, but you know, it affects us in the beginning half of 2023.
Speaker 2: Great, thank you. The next question is from John Kim with BMO Capital Markets. Please go ahead.
Speaker 8: Hi, thank you. I wanted to ask about the write down, you took particularly 650 medicine. That's an asset where it was pretty well occupied. There's no loan upcoming. I was wondering why you decided to impair it now and what are your plans with the asset. Great Wow! What did you turn it? Thank you. Order.
Speaker 6: You know the accounting for joint venture assets is different from wholly on assets and you know result of that process You know and if you look at what's happened since we bought the asset, you know result in impairment this quarter
Speaker 6: So, you know, the retail renter obviously not with the war at the time we bought the asset and what we underrode. You know, we had a large ten and move out unexactedly in the hospital last year.
Speaker 6: And so you run it through the accounting model, and that's the conclusion. Now again, keep in mind, it's a non-cash item. It's still only asset. You know, the value could recover. We have bet with term on that asset at a very favorable rate. We'll continue to work the asset, and hopefully create value. But on a, you know, as we sit here today, based on the accounting methodology, you know, that's the bike product.
Speaker 4: John , you used the words in your question. Why we decided to take a department?
Speaker 4: The impairment process is rigorous and is to a long-term degree formulaic.
Speaker 4: and is to a large degree over a team by our independent accountants.
Speaker 4: So we try to keep as much subjective judgment as possible out of it and make it more of an academic formulae kind of an exercise.
Speaker 8: And the math shows that the write-down with the appropriate is there. Okay. My second question is on the mark.
Speaker 8: with the occupancy falling this quarter, really driven by the showroom and trade show. What's going on with such a big drop in occupancy of this quarter? And if you could also comment on variable businesses, which...
Speaker 8: In the past few quarters have been a driver of earnings growth and it's not really disclosed so much this quarter Wanted to know what's been going on with signage and trade show
Speaker 9: I'll start. It's Glen White's. So on the more the increase in vacancy was due to the casual business, leaving Chicago for Atlanta, we are converting that showroom business into all this space and that's the increase in the vacancy at the more.
Speaker 9: In other words, there are headwinds in Chicago, normally in New York in terms of leasing volume, pipeline, et cetera. Our 2.0 program is coming along great. Now we expect the complete June . Our tour volume has been very good of late. We have a couple leases in negotiation right now.
Speaker 9: But the increase in the vacancies, the casual business which moved out of town to a land there in the fall.
Speaker 6: You know John , on the variable businesses, I think the punchline if you will is that
Speaker 6: All the variable businesses except for the trade shows are back to pre-COVID levels. We had a very strong 2022. I think signage had our most successful year ever. That was with a little bit offline. That fourth quarter saw a little bit more of that.
Speaker 6: We've got a couple signs located at Penn 2 and Hotel Penn that are impacted by the development. And so fourth quarter was a little bit off from fourth quarter 2021. But you know, really everything, whether it's signage, garages, BMS, had a strong year generally up. And we, as a community, have found a way to keep Elizabeth and her family safe....................................................
Speaker 6: As I said, a separate signage quarter of a quarter, a year or a year I should say. And then the trade shows, you know, a little bit of tying difference from the prior year fourth quarter when we were cranking it back up. You know, some of the shows got moved to fourth quarter and this year back on their normal pace. So trade shows are not back to peak yet. We think they'll get there, you know, in the next couple of years.
Speaker 6: But the rest of the businesses are performing quite well and I think are, you know, in particular, the signage where, you know, we got the dominant signs in Times Square, where we're actually redoing the sign on 1540 right now, which will book end both sides of the potai.
Speaker 6: and hopefully allow us to drive additional revenue, given the fact we control two megabytes of science at the heart of the vote tie. That's a positive and then obviously what we're doing is pen over time, we think will perform, the potato performed well. Once the construction is completed, but that's in a nutshell, where we're at the aerobus.
Speaker 6: in Penn, you know, a lot of this is based on, you know, what comes in third party roadblocks. So you know, net net, we think it's probably comparable to 2022. It could be down a little bit just because of what's offline on the signage side and the fact that we're, as I said, rebuilding 1540, right, so we're taking some revenue offline.
Speaker 6: So I think overall, I'll put down a little bit just given the fact we've taken some stuff off line.
Speaker 8: Great, thanks and happy Valentine's Day.
Speaker 2: The next question is from Camille Bonnell with Bank of America. Please go ahead.
Speaker 10: Hello. I know the opportunity with Citadel is still a bit down the road, but are you able to speak to the financing strategy there in context?
Speaker 10: with your existing development pipeline around Penn District? Just generally, like, how are you thinking about the capital allocation and sourcing for these future projects?
Speaker 6: You know, Camille, I think the good is we don't have to do it today because it would be very, very difficult to line up construction financing and very expensive.
Speaker 6: But I suspect the 350 on that project is not ripe yet, right? It's
Speaker 6: It will be right in two or three years, but it's not right today and so hopefully the markets are more hospitable than we expect they will be. And I think the same goes with respect to pen. Again, I think Steve commented on last call, the market.
Speaker 6: really is not conducive for new development today. Construction financing is very expensive, if available, which generally is not as banks have pulled back. So I think of challenging. And again, today is not the day we have to line that up, but in the future.
Speaker 6: You know, the markets should settle down and you know, with respect to 350.
Speaker 6: We'll put on a traditional construction loan at 50 to 60% and the pardon was sold from the balance of equity. Most of our activities will come from our lane contribution.
Speaker 4: So we were pretty excited about 350-pork Avenue and maybe even more importantly, Ken is even more excited about it.
Speaker 4: Our strategy there is actually very simple.
Speaker 4: The land value, our land value, will constitute our equity contribution.
Speaker 4: So land value will represent the equity. We will not have to put in maybe another very high-end $10, $20, 30 million of cash to represent our share of the equity.
Speaker 4: The balance of it should be easily in a normalized market, borrowable in a construction financing or permanent financing.
Speaker 4: The deal comes along with a very substantially sized anchor lease.
Speaker 4: And so everything is in place. Our land will be our equity, and we have an anchor tenant. And so that all is very, very, I think, very well conceived.
Speaker 4: What's more, our development teams and construction teams that are hard at work.
Speaker 4: Down in PES will have completed PEN 1, PEN 2, and Farley, and will swing right into 350 Park.
Speaker 4: Part of our arrangement is that we are immediately starting the design of the building, actually we're probably halfway through it.
Speaker 4: And we are immediately starting the approval process so that in...
Speaker 4: It relatively short period of time, maybe not more than two years or now we would be ready to do the monitoring and spot construction.
Speaker 4: But the cash requirements.
Speaker 4: In any kind of a novel that's an editing market are basically almost zero at our part.
Speaker 11: Really?
Speaker 4: by the way, it's going to be a great one.
Speaker 10: Yes, really appreciate all the details on 350 parts. Just for my follow up, you've done a great job in terming out your maturities, but your leverage on a net debt basis is...
Speaker 10: above 10 times. So can you talk to how you're thinking about leverage today and where are your near to medium term targets?
Speaker 10: above 10 times. So can you talk to how you're thinking about leverage today and where are your near to medium-term targets? Michael.
Speaker 6: You know, our leverage is, you know, I think I get characterized by a little bit lower than we characterized.
Speaker 6: You know, our goal over time is to have less leverage. You know, I think importantly, we don't have any maturities this year. If any, if any, no, we have a couple of small, maturing processes.
Speaker 6: pushed out. But our preferences to have less leverage and over time we think that will be accomplished through growing earnings and likely some asset sales. So is that going to change in the next 24 months just given the environment? Probably not.
Speaker 4: Hang on, I want to go back for a second.
Speaker 4: I want to emphasize what Michael said. In terms of the leverage ratio that you referenced, Camille, we sort of have our hands tied behind our back.
Speaker 4: So number one, we have a decrease in earnings, which is going to...
Speaker 4: recover a variable businesses and what have you number two is we have zero income coming in basically from two pen which will be over a hundred million dollars of income when it gets online
Speaker 4: and we have listed underwritten optimal earnings from one pet.
Speaker 4: So, if you pro forma forward when we get all these different parts of our business stabilized, our leverage ratio will come down very significantly.
Speaker 4: I'm sorry, go ahead.
Speaker 12: Mr. President, please go ahead. Yep, thanks. Michael Griffin here with City. Just maybe getting back to Leasing. Michael, you mentioned your prepare remarks. You're leasing a slowed transaction. The lumpier, you pointed to about 1.2 million square feet in the pipeline. Just looking over the cadence of this year, with some.
Speaker 12: bigger upcoming maturities. I mean how confident are you in executing on that? Is there any update on maybe some of those more larger notable upcoming expirations? I think there's one at 770 Broadway coming up here maybe at the end of this quarter. So any update there would be great.
Speaker 6: Yeah, go ahead, go on.
Speaker 9: How Michael's Plum was. So we really had four bulky explorations that constant to our exploration since 23. One was 350 Park, which is now taken care of by Citadel. The other three is continuous explorations coming off lower ends from Penn 1.
Speaker 9: and then two blocks, one of which comes back this quarter, freewares from Verizon at 770. And then at the end of the year, we get the actual equitable block back at 1290. As you can imagine, we're all over it, we're attacking the market, presenting the buildings, marketing the product, tours weekly.
Speaker 9: We think both assets are very high quality assets. 770 is probably the most unique block of space in Midtown South.
Speaker 9: You know excellent building great bones in the market now with those three floors in 1290 by the end of the year We'll be you know ready for action. You know already showing the product Show casing some of my duty program. I mean, now we're going to take in 24 So that's the you know real outlying of what's coming this year in terms of expertise
Speaker 12: I guess to that point, you have this pitch around, you know, the building around the high-quality transportation hubs and asset like 770 Broadway maybe doesn't really fit into that strategy. So I guess, you know, how do you measure demand relative to that versus, you know, opportunities you might have within the Penn District?
Speaker 9: On 770 is a great spot. It's right at the subways that'll make it a grand central and pan very easily. It's right at NYU, right in the village, it's in this sweet spot in Midtown South. So geographically we think it's excellent.
Speaker 12: Okay, thanks. And then maybe one for Steve, I'm just curious, you focus on your paramedics about the importance of getting employees back to the office. In your conversations that you're having with business leaders, and how much more do you think they can really push their employees to get back in? And I think you talked about that 60 percent.
kind of occupancy number maybe on 2003. Do you see that potentially getting back to that pre-COVID call it the 70 to 80% range?
I think normal is more like 70% because there's always people who are traveling not in the Orchards and what have you.
So, to try to get to 90% is fictitious.
So, I mean, I think we're getting close to 60% now on two states, one states and third states. I think you can assume the Friday is dead forever. Friday is going to be a holiday forever. Monday is touch and go.
So I think that the world is coming back to normal.
Slowly but surely so multiple things are happening number one every boss wants his people back
Number two is now many of the people want to come back. They find that being alone, they find that they want to come back with their colleagues, they want to get back into the activity excitement and what have you of collaboration and being in the city.
So slowly over time I think this will all revert to normal.
Your question was, what powers do the voices have? Well, some of the voices have total power, and some of the voices have no power. And I can't comment on that either way. But the most important trends is people are wanting to come back themselves. And please actually do want to come back.
Great, well that's it for me, thanks for the time.
The next question is from Alexander Goldfarb with Piper Sandler. Please go ahead.
Hey, good morning, Steve. And first, a model tub on 350 Park. Awesome, awesome deal. So well done to you and Michael and everyone. So that's awesome.
Two questions. First, on the retail JV, the impairment that you guys took, what prompted that? And big picture, as we think about the rent that are in place versus the market, and it seems like the market has settled and hopefully is recovering.
Where would you peg the mark to mark it and then do you think that there will be future Impairments like is this an annual exercise? Just trying to get some more color on this
Well.
I can't predict the future of Noodle I want to.
I can't predict the future of the point that I want to. When will a rigorous process?
The
The math shows that there was an impairment and we do what the math shows
So there's that. What the market rents are is something that, you know, it's a very thin market. There are not a very few transactions on tips they have in your end-time square. So, but, you can make the assumption that this is still.
a sluggish impaired market. It hasn't recovered entirely. There is not the same lust for space that there was five years ago.
but that will come back to you for sure.
Okay, and then the second question is, you know, you guys appeared in the press recently that you're still in the hunt for Casino. It's been a while since you talked about movie studios, the Manhattan Mall, you know, seems to be a great spot for potential studios. So just sort of an update of what you can provide us, you know, do you have an operating partner?
for studios you have an operating partner for casino or are both of those you know two items you know things that more a back burner and less you know front of house if you will.
The answer is yes and yes in terms of operating partners and no they're not really backburning.
Anything more to elaborate or?
Not really. I mean, we have a wonderful Manhattan property that is going to be converted to
to studios. We have a great operating squad and we are in conversation with...
with multiple users and the demand is actually very, actually extraordinary.
with respect to the casinos, I don't have a lot to say. We're still mulling and studying and thinking and what have you about that. We have a great site, and whether we throw it into the game is, I'd be decided.
Okay, thank you Steve.
The next question is from Vikram Melhotra with Mizzouho. Please go ahead.
Good morning, thanks for being the question. So just first one going back to sort of your view of the dividend or the board's view. If you can just give us some more color, you know, what are you baking in in terms of occupancy for the corporate portfolio, just the business as it stands in terms of street retail.
I asked that because it sounded like the four key expressions you outlined. Am I correct in that they are all move outs? I just wanted to understand what is baked into the core portfolio relative to where the dividend is? Some big picture metrics or guide posts would be helpful.
So the dividend is based upon a minimum of taxable income.
Our taxable income allows us to reduce or I like to use the word might shot us outauft him.
I mean, our dividend was 9.5% on our stock price, which everybody knows is kind of like
this price and mistake. And we felt that...
that it was inappropriate to overpay the dividend substantially over-attacks of the late
And we felt the board felt also that it was appropriate to be retained the extra 130 million dollars of cash. So that's what happened with the dividend.
Okay, and then if I just follow up if I can dig into street retail, you know, two parts to it first, I think you have a couple of key explorations in Times Square in 23 and I'm wondering, you know, the latest on, you know, renewal there. And then second part of that is just...
I think they were there two big leaves with the sun not wrong swatch and Levi that have early termination rights in 23 and 24. They don't expire till 31, but I believe they have the option to terminate any updates or color you can give on those two as well would be great. Thank you.
We are friends. We are, as you would expect, we are in active negotiations with those clients, those tenants as well as all the other tenants. We are hopeful to retain all of the tenants, but the rents will be lower than the in place rents. The market is...
is lower than it was years ago when we made those. So you can assume
that we will...
that we will retain attendance but at lower rents.
Okay, I just thought because Swach and Liva, I thought they would have had to give you notice if they were going to terminate, but if it's just sort of like a rolling, like they can elect any time in the year to give you that notice.
So that may be just a feel to put a finer point on. So swatch had to exercise their notice in fall of 21.
And they did. And we have as Steve alluded to, we finalized a agreement for them to stay at a lower rent. So at the time, the exercise determination, we didn't know what they're going to do, but that agreement has recently been finalized.
So they will stay and as Steve said, lower rent. And with respect to Levi's, they as well have a termination option. I believe it comes up in 24, not this year. And so we'll see what they do. But again, Steve, you know.
alluded to likelihood is that just a swathe did you know that they may exercise that in our hope expectation that we'll keep them I'll be at it a lower rent the other leases that expire in 2023 you know some of those are
You know, those have been sort of, I'll call it short term leases, which we've continued to keep those tenants in place. I think we'll continue to do that. And beyond that, I think there's probably only one substantive expiration in 2023 and Times Square and that happens middle of the year and that's an active discussion right now.
Thank you so much.
The next question is from Dylan Burvinsky with Green Street. Please go ahead.
Hey guys, thanks for taking the question. I'm just curious, you know, on the overall strategy of the company, I think in the past you guys have mentioned about possibly doing a tracking stock. So just curious, you know, is that still on the table? And if so, could we see that happen in 2023?
Yes, it's still very much on the table. We are not ready to talk about the timing.
which will not be set until we actually make the decision and announce it.
Okay, and then just going back to the ground we reached out, I think you mentioned that 26 million might be less today. But I'm just curious, can you give us an update on how that process works? I think our initial thought was when we saw that the yield increased at the pen-dissing development that we thought that...
the ground right might reset higher. So just curious to see kind of an update on sort of the arbitration process and how that works.
Oh boy, but the each ground leaf is a little bit unique and a little bit different. This one.
Basically involves brokers negotiating if they can't agree.
Then a third party is appointed.
as a neutral, the interpretation is that
It's a determination by brokers with 20 years of experience, active brokers of what the value of the land making it unimproved would be. So I interpret that to me. What could you sell that piece of land for now?
which is somewhat different than what an appraisal process might be, which is a willing buyer and a willing seller.
etc.
We think it's a broker's process, so that's the way it's set. We think that the value of the land...
is lower today than it was a year and a half ago when we set the $26 billion. $9 billion!
actually maybe even quite a bit lower. And so that's the term an effector. The fact that, and most of these analysis are done by
what is the return to a new building and what the residual value would be for the land. So if we think we can get $5 or $10 a foot more on a $90 or $100 lease in one pen that has no bearing on what the value of the land might be.
Okay, that's helpful. We're going to try and get you some juice at it.
The next question is from Anthony Payalone with JP Morgan. Please go ahead. Great. Thank you. Michael, you went through a whole number of the parts of the business in terms of the impact on FFO and 23 versus 22. Can you maybe help?
bottom line just the core office and retail, N-O-I and whether that's higher or lower this year.
Tony, you're trying to box me the guidance here.
I'm telling you, you're trying to box me the guidance here. One, two, three.
We're in a fluid environment, it's hard to predict. Overall, we think the performance will be comparable to this year, I would say.
That's not trying to give you guidance. It's just, you know, we have some in and some outs. We can't print exactly what will come along. It depends on which tenants we renew, which may roll out. But, you know, in general, like we have some known pauses, we have some known moveouts as we just talked about, you know, overall.
You know, as we sit here today, it's probably neutral.
So here today it's probably unusual. Okay.
Thanks for that. And then the second question is on 350 park. I mean, you crystallized value there at a level that seems to be pretty well north of what. I think most people probably had in their numbers and where you're getting credit for it in the stock most likely. So just wondering how you thought about the ability to just come
Well, first of all, I would cripple with well-north-a-value.
The pricing of that deal we think would spare to both parties.
In terms of what our financial strategy will be, a year or two from now, what we have to make the decision as to whether to invest in the long-term building project and own 40% of a 1.7 million square foot brand new, super duper time squared tower.
Excuse me, the next question is from Nick Yuliko with Scotia Bank. Please go ahead.
Thanks. I just wanted to touch on the St. Regis retail where you had the default and the JV. Can you just tell us why the lend are not refinanced alone and can explain the earnings impact from this? I guess right now how it's working since it looks like there's some sort of cash flow sweep. And then, you know, if for some reason you can't get this resolved.
You know, as a joint venture just walks away from the property, how did that ultimately, get resolved and look at the earnings impact?
The long matured year end and the asset is not refinanceable today. Quite frankly, like many assets in this market, we signed two leases at the peak of the market. One of those, we just discussed.
terminated and we re-led it a lower rent. And so the asset was not re-financeable. One-line default. We were talking with calendars before that happened. We continue to talk to them today. And we're an active discussion to restructure the loan and then extend them a chart if we can't. We can't.
the asses will go back to the landers, just like everything we do, we're going to be disciplined and thoughtful about whether it's worth staying with the asset, investing capital, etc. We're sort of groping towards the deal that we think makes sense for the partnership, but that's the benefit of non-require state.
commentary and a couple of reports about, you know, 8.5% interest, you know, at the fault rate. The answer is that's the case. The deal, the answer is that rate's never going to get paid. Either they're going to toss the keys back, or we're going to restructure the deal, and the rate will get reset to what it's supposed to be, and that, you know, that interest is not going to get paid.
So, you know, that's the state of play. I don't think the earnings impact is really if it went away You know today, you know, I think based on frankly where it wasn't the fourth quarter. I don't know if there's
That much FFO that's flowing through, given the fact that it's a floating rate alone where You know, relative income, you know, there's some catch flow, but it's not it's not significant
Okay, I understand. Thanks, Michael. Appreciate that. And then going back to 650 Madison, I know you talked about this a little bit. I mean, it looks like that ASIC got refinanced in 2019. And I think there was a $1.2 billion appraisal on it.
There's 800 million of debt on the asset right now. So if you're saying the equity zero, basically, I guess the building's worth 800 million. So that would be about 35 percent asset value decline since 2019 when it was refinanced.
So please correct me from rolling those numbers, but I guess what I'm wondering is from that standpoint, you did talk about occupancy being down, rates are higher as well, but how would you frame out that level of an asset value decline for office and retail now versus 2019? Is that a indicative of...
A lot of the portfolio or only the pieces where you do have some more structural vacancy right now.
Yeah, I think, you know, first of all, you reference, you're two or three things. We did refinance in 2019. It was...
pretty outstanding execution by our team, frankly. We're pushing that loan out till 2029 at about 3.5%. So we have three time, right? As we talk about this in-parent today, I think the most important thing recognizes is that the non-cash charge, we can see on the asset, we can see in the work here we have time.
Secondly, the appraisal that was done was a lender of praisal, sort of a speech comments before. Was that where the asset would have traded when the loan was made? I can't comment. I can't think back to 2019 these act circumstances at that time. So.
It was an appraisal done at the time. There's some specific facts that have changed since then, probably most notably, we had a major tenant move out. And the reality is rents, I think, generally, office and retail have declined since then.
to varying degrees. So I think all that's reflected in there and this Steve, you talked about. The end-crabbit analysis, particularly for joint ventures, is a very much accounting driven methodology. And that's what the accounting produced today. And you know, nothing that says it over time that value can't go back up. But as we sit here, you know, at the end of 2022.
That's the never-result. Thank you.
The next question is from Ronald Camden with Morgan Stanley . Please go ahead.
Hey, good morning guys, this is Timmy Egon for Ronald Candon. You know, just, you guys laid out the, some of the FSO headwinds next year pretty clearly in the prepared remarks, just as we think about 10-1 and maybe some of the outside there and 23 versus 22. You know, furniture is time these $6 of foot today.
And that is where do you think that is year end 23. Thank you.
Alright, good boys. So you know we're coming off rent in the high 60s, low 70s. You know we have leases out right now that are piercing 100 in the tower of this building.
So that gives you a feel where we believe rents will go as we sign up leases for our in-play vacancy and for the expiration going forward.
Great. Thank you.
The next question is from a follow up from Steve Sockler with Evercore ISI. Please go ahead.
Yeah, thanks. Just one follow up, Michael, on some of the swaps and caps that are maybe burning off or coming to maturity here in 23 and 24. Should we assume that you're just going to let those kind of float? Are you going to put new caps in and you know, swaps in or just
How should we be thinking about that as the Fed kind of mirrors into the tightening cycle? Yeah, you know, some we wrestle with every day Steve. I mean, some of those are, you know, let's talk about 23 because 24, you know, again, we have a loan maturity. We have to determine what type of loan we're going to refinance that with, which is a more of a 24 issue than that.
and the 23 issue, right? So on the COVID-19 insurance 24, we roll into a fixed rate loan. Obviously, no need to swap there. So we'll see. I think the expectation for most of the loans that expire somewhere on caps is we'll roll those. And I'm looking at the downer list right now. So.
on the swaps, we'll continue to look for opportunities to turn some of those out to. You are getting to the point where the Fed is looking like they're close to being done and the curve is coming down. So I think we've benefited waiting a little bit and locking some of those in more recently. But we'll look at that as well in turning some of those out. But again, we've got...
And thanks to the follow-up, Michael, just on the 55 cents you outlined in terms of the headwinds. So that incorporate these the known office moveouts and the lowest three-three tail rent-cut ref Nina. Well, thank you like you reference.
I mean, the only data points I gave you were on interest, the margin, and I asked that sales. You know, the rest is, you know, we'll see how the business performs. You know, and they said, there's some pros, cons.
you know, by and large, we've been probably neutral, but you know, we can't predict, you know, it depends on what happens, you know, in terms of, you know, the pace of leasing.
Okay, and then just the other follow up, I know there are those moving pieces, so do we take that as based on your current view of taxable income for 23, you kind of right side the dividend, but if some of these moving pieces don't go your way.
you might have to revisit the dividend or have you incorporated some of the slack basically that you just outlined.
But dividend is a board decision and we're certainly not going to speculate on what might happen to the dividend and certainly not from a negative point of view. So that's a question that we can't answer and won't answer now.
The dividend is a board decision and we're certainly not going to speculate on what might happen to the dividend and certainly not from a negative point of view. So that's a question that we can't answer and won't answer now. Thank you.
There are no further questions at this time. I would like to turn the conference back over to Stephen Roth for any closing remarks.
Thank you everybody. You know, this is a...
At an interesting time, we're in the middle of a Federal Reserve tightening cycle.
I think Oat Thomas said in his opening remarks that his call a couple of days ago that commercial real estate is in a recession.
I wouldn't quibble with that either way, but markets are soft, which we think makes it a fairly exciting time. We will get through this easily. We will see what opportunities come up. And we think the world will be a lot better on the other side.
Happy Valentine's Day and we'll see you at the next corner.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.
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