Q3 2022 Vornado Realty Trust and Alexander's Inc Earnings Call
Welcome to the Vornado Realty Trust earnings and webcast for the third quarter of 2022. My name is Vanessa and I will be your operator for today.
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.
I will now turn the call over to Steve Bernstein, Senior Vice President and corporate Counsel, Steve you may begin.
Welcome to Vornado Realty Trust third quarter earnings call yesterday afternoon, we issued our third quarter earnings release and filed our quarterly report on Form 10-Q, with the Securities and Exchange Commission. These.
These documents as well as our supplemental financial information packages are available on our website www dot <unk> dot com under the Investor Relations section in these documents and during today's call. We will discuss certain non-GAAP financial measures reconciliations of these measures. The most directly comparable GAAP measures are included.
In our earnings release Form 10-Q and financial supplement.
Yes.
Payments 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 company does not undertake a duty to update any forward looking statements on the call today from management for our opening comments are Steven Roth, Chairman and Chief Executive Officer, and Michael Franco President and Chief Financial Officer, Our senior team is also present in.
Available for a question I will now turn the call over to Steven Roth.
Thank you, Steve and good morning, everyone.
As Michael will cover in a moment, we had another good quarter with comparable <unk> of 14% from last year's third quarter.
Despite headwinds from a slowing economy and rising interest rates.
We expect this year to be up a fair amount from last year.
We will feel the effect.
The full effect of higher interest rates on our numbers next year, given a full year of impact.
Overall this quarter, we leased 150000 square feet 229000 square feet in New York well below trend.
This is a little bit.
The slowing market and lots of result of timing.
Michael will explain.
Our New York pipeline is a robust $1 5 million square feet.
The fed is deadly serious in pursuing their fight against inflation.
<unk> is clearly slowing and capital markets are volatile as it is.
Top priority, we have taken the following actions.
Earlier this year, we extended our near term debt maturities. So we now have no debt coming due in 2023, and a very modest $233 million on three assets coming due in 2024.
Further we extended our unsecured revolving lines of credit totaling $2 5 billion with only $575 million outstanding through 2026, and 2027, providing significant liquidity for the next four to five years.
In addition, we protected our floating rate debt by.
Debt exposure by swapping for five years $2 billion of floating rate debt fixed at a weighted average LIBOR or so for that as the case may be of two 9%.
Further we have interest rate caps on an additional $2 billion.
Providing protection of about four 2% on a weighted average basis for a weighted average term of 10 months.
Please say please see page 33 of our financial supplement which describes all of this activity line by line.
Mark to market in the aggregate these swaps and caps now in the money $232 million.
So in effect, our only remaining floating rate debt exposure is $750 million, which is largely JV debt.
Be aware that nothing can really protect as loans mature into a higher rate environment.
The second area of our focus is of course, the Penn District dependent one lobby and amenities are now complete the pin to skin and bustle are now very far along as is the long Island Railroad concourse.
But all of you to come down and take a look will give us a call and we will be happy to talk you through.
Broker and tenant reactions have been truly outstanding.
The hotel Penn is coming down with demolition and scheduled to be completed in the fourth quarter of 2023.
Let's say that the headwinds in the current environment are not at all conducive to ground up development.
Lastly, I wanted to comment on our dividend policy is to pay out dividends equal to our taxable income. We now expect our taxable income to be lower in 2023, we will not have income from 220 Central Park South.
No asset sales and we are budgeting to the interest rate yield curve.
As such our board of Trustees plans to right size, our dividend in 2023 commensurate with our protection of taxable projections of taxable income.
This will allow us to.
Retain more cash.
Now over to you Michael.
Thank you, Steve and good morning, everyone.
As Steve mentioned, we had another good quarter, while we experienced some headwinds from rising interest rates, our core business performed well.
Third quarter comparable <unk> as adjusted was <unk> 81 per share compared to 71 for last year's third quarter, an increase of 10 or 14, 1%.
The increase was driven primarily by rent commencement on new office and retail leases the.
The continued recovery of our variable businesses and an adjustment for prior period real estate tax accruals at the margin, partially offset by higher net interest expense.
From increased rates on our variable rate debt.
We provided a quarter over quarter bridge in our earnings release on page three and in our financial supplement on page six.
Notwithstanding additional interest expense from rising rates on our variable rate debt will result in lower comparable <unk> per share growth for 2022, and we anticipate early in the year, we do still expect the comparable <unk> per share will be up year over year.
The additional interest expense from rising rates will have a greater impact next year as the higher rates impact our variable rate debt cost for a full year. We are partially mitigated the impact of this due to the significant amount of hedging we did this quarter as Steve just covered.
Companywide same store cash NOI for the third quarter increased by 13, 8% over the prior year's third quarter.
Excluding the accrual adjustments related to the Mark real estate taxes, the increase would have been a still solid three 4%.
Our retail same store cash NOI was up a very strong seven 7% primarily due to the rent commencement on several important leases.
Our overall office business was up 15% compared to the prior year's third quarter also benefited by the market adjustment, while our New York Office business was down one 3%.
Largely due to not renewing lower rent tenants at Penn one in order to bring in higher paying tenants post redevelopment.
Now turning to the leasing markets.
Amidst the backdrop of economic uncertainty in Europe class a office market remains resilient.
Emulated by the city's tight labor market, where office using job employment is now above pre pandemic levels at $1 5 million leasing activity in Manhattan continued its rebound through the third quarter with volumes, surpassing pre pandemic averages year to date market wide leasing activity stands at 24 million square feet.
50% above where we were at this time last year, including $9 3 million square feet this quarter.
Deal volume during the quarter was led by 16 headquarters leases signed in excess of 100000 square feet.
Reinforcing the large tenants are committed to new York and are signing long term commitments.
As we ended the fourth quarter, though caution is the word of the day there is increasing uncertainty in the world and tenants are acting accordingly.
As.
<unk> businesses continued to reassess their space requirements, the bifurcation between high quality and commodity product is growing.
Tenant preference remains strong for best in class newly developed or Redeveloped buildings, with modern amenities and collaboration and collaboration spaces and being on top of transportation is critical.
Most companies believe the highest quality work experience is key to both incentivizing employees to come back to the office and also for attracting new talent.
Our portfolio consists largely of these types of assets positioning us well to continue to capture tenant demand.
During the third quarter office leasing team completed 42 transactions, comprising 388000 square feet across New York, Chicago and San Francisco.
In New York, our average starting rents were very strong $89 per square foot, reflecting the breadth of our high quality portfolio.
Our overall leasing pipeline in New York remains strong with approximately one 5 million square feet of leases in advanced negotiation and proposal statements.
Now turning to Chicago.
At the Mart, we leased 67000 square feet and 19 transactions this quarter and a 50 50 mix of office and showroom activity while.
While the market in Chicago remains challenged.
We have seen a pickup in proposals during the quarter as.
As expected our trade show business has rebounded nicely in 2022, though not back to pre pandemic levels yet.
With NOI up $12 2 million through three quarters versus last year.
In San Francisco at $5, Five, California Street, where we're full except for the Q, we leased 154000 square feet during the quarter, including a large renewal with Morgan Stanley for its 132000 square feet and a 21000 square foot expansion and renewal Centerview partners.
Starting rents were very strong once again.
<unk> of 12% positive cash mark to market.
505, California continues to be the Premier real estate asset in San Francisco, particularly for financial tenants as evidenced by these leases.
Retail leasing results were fairly modest for the quarter.
With one renewal transactions significantly skewing reported GAAP and cash mark to market.
The bulk of the leasing activity incurred in the Redeveloped long Island Railroad concourse, where youre seeing very good activity was strong rents.
More broadly with the rebound in tourism and daily workers were continuing to see more retailers search for new store locations.
However, retailer concerns about inflation in the economy are resulting in them to be more cautious about committing to new leases now.
This will change as the economic environment stabilizes.
Finally, let me spend a minute on sustainability, but we continue to be a leader.
Tornado was once again selected as a global and regional sector leader or diversify the office and retail rates and global real estate sustainability benchmark or grasp survey survey.
Ranking number one in the USA and our group number three out of all 112 publicly listed real estate companies in the Americas that responded to grasp.
In addition, we once again earned <unk> five star rating received the Green Star distinction for the 10th time and scored an a for our ESG public reporting and for our score.
This area is increasingly important to our tenants and other stakeholders as well and is a differentiator for our portfolio in the market.
Turning to the capital markets now.
Overall, the heightened market volatility and aggressive rise in interest rates.
Difficult impact in the capital markets, and generally, causing most lenders and debt investors to pause.
The <unk> MBS market is effectively shut right now and balance sheet lenders are hesitant to lend other than to the best properties and sponsors.
We had anticipated the financing markets, becoming more challenging this year and focus early and dealt with our 2022 and 2023 maturities.
Importantly, given the $3 billion in refinancings, we completed this summer at attractive spreads.
We have dealt with all of our significant maturities through mid 2024 and are largely protected from near term refinancing risk.
On the asset sale front, while there continues to be active interest from investors in New York office and retail assets that are stable financing market. It is difficult to transact with Florida assets, we've got in place there right.
Notwithstanding the market challenges, we executed a contract to sell 40 fold.
<unk> 2 million and our negotiating sales of a handful of small assets.
Finally, our current liquidity is a strong $3 $3 billion, including $1 $4 billion of cash restricted cash and investments in U S Treasury bills.
And $1 9 billion Undrawn under our $2 5 billion.
<unk> all been credits.
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 press zero then one on your Touchtone phone if you wish to be removed from the queue. Please prestero then too.
If youre using a speakerphone please pick up the handset first before pressing the numbers. We ask that you. Please limit yourself to one question and one follow up question.
Once again, if you have a question. Please press star Zero and then one on your Touchtone phone.
We have our first question from Steve <unk> with Evercore ISI.
Thanks, Good morning.
Michael or Steve or maybe Glenn can you just maybe provide a little more color on the $1 5 million feet in the pipeline I'm just curious how much of that relates to kind of new requirements for you and how much of that is maybe early renewables looking into 2020 four.
Good morning, Steve It's Glenn so as we look at the pipeline in terms of the $1 5 million feet.
It cited more toward new tenants and expanding tenants versus the renewal.
Filling some of the empties we have today and then going forward locking in spaces. We know we have coming due with tenants who will be new to the portfolio.
So really good mix of law firm activity financial service activity.
On BD activity, but.
But I would say, it's more sided to new tenants coming in we're expanding tenants in the portfolio.
And Glenn maybe just any color just in terms of types of tenants I assume kind of big Tech is on hold but these private equity law firms.
Banks asset managers.
Certainly financial services heavy less on tech as you are saying private equity is very very strong very active.
Theres still some hedge fund activity also on our portfolio at our financial buildings, the Abd seven <unk>.
<unk> hundred 40, pips et cetera, So certainly financials busy and law firms are definitely getting busier in the portfolio, particularly buildings like the 12 and the six Avenue.
Great and then secondly, Steve in the past you've commented on your desire to sort of.
Pursue one of the casino licenses downstate.
Just curious if that's still something that you're interested in and how do you think that process unfolds over the next 12 to 18 months.
We continue to be interested very interested.
The government process.
The I think the.
They have already announced that theyre going to put out that first RFP I think EUR late December early January .
And then from there we'll see how it goes.
We expect it to be a very competitive process.
Great. Thank you that's it for me.
Thank you. Our next question is from.
We have our next question from Michael Griffin with Citi.
Great. Thanks, maybe just going back to the comments on the dividend wondering if you can frame, maybe how much youre expecting to right size the dividend sort of heading into 2023.
Any additional commentary on that would be helpful.
We really can't I mean, it's.
The board.
<unk>.
And the numbers are still moving around.
It would be totally inappropriate for us to guess as to what that dividend might be next year.
Got it.
And then maybe just back on the interest rate swaps what was the embedded cost in executing the swaps and then for the $800 million term loan it looks like about $250 million of those swaps are expected to still burn off in 2023 would the plan be to swap that going forward are to leave that is floating.
Good morning, Michael.
In terms of the cost of the swaps.
You laid out for you on page 33 of the supplement.
It gives you the all in swap rates.
Theres a credit charge.
Bedded in there it depends on the particular trade.
I would say four to five basis points as typical sometimes it's a little bit less but I think if you use that as a working assumption, it's not that but again thats embedded in the numbers.
We gave you and on the term loan that you cite these are all not all but I would say largely corporate level swaps and so we have the ability to move those around us different loans roll off.
Or if we sold an asset and we wanted to shift it around which we did for example on long Island City earlier. This year, we sold that asset we moved it to a different asset. So it gives us flexibility there are certain asset level swaps, but by and large the corporate and so the term loan.
We went ahead and forward swap 500 of that.
Beginning next year.
And then we have the ability to potentially move some around if not the answer is we will look at fixing that that balance.
Alright, great. That's it for me thanks for the time.
Thank you.
We have our next question from <unk> <unk> with Bank of America.
Hi, good morning busy quarter on the financing front just following up on the.
The interest rate swap can you help us understand the thinking behind how you decided on reducing your floating rate debt exposure to 27% versus a lower amount more in line with your peers.
Well I think 27% not the right number to use.
We've got caps in place on the bulk of the rest.
So our net exposure to floating rates about 7%.
And when you got when you look beyond that is what what's exposed its basically loans that are.
Coming due at the end of the year or we have JV partners, where there was no.
No sort of desire to collectively.
Do any sort of hedging there so.
Again, I think from a net exposure we've got about 7%. When also remind everybody. We've got significant cash in our balance sheet, that's earning higher rates summit.
It's been deployed in Treasury bills, some of that just werent higher rates with with our banking relationships.
And that exposure I think it's even less than seven.
I think there's a little bit more.
Accurate in terms of what the exposure is.
Okay, that's very helpful.
And just shifting to retail we saw quite a drop in leasing spreads. This quarter can you speak broadly to how you think about where pricing is going specifically for New York City retail.
Okay.
I think I think over the last call.
Couple of calls.
We've communicated we think retail has bottomed in the city and that is our view.
You're starting to see vacancy decline in many of the key Submarkets, which obviously is before runner to start to have some pricing rebuilding I think you're actually seeing rents move up a little bit in Soho already but the reality is vacancy is beginning to drop in many of the sub markets.
Rents are not falling anymore.
And that will take some time to.
To begin to recover but overall, we think the market's bottomed.
And leases that are getting done retailers are focused on the best locations.
They want to be in the highest footfall areas in the best Submarkets our portfolio is situated there.
And when the leases get done right now theyre going to be reflected the fact that rents are correct. It depends on the submarket could be third could be half from where they were at peak but.
And in most cases.
We don't have exposure on a lot of our big assets right now so.
It just depends on when the when the when the leases roll in where the market is at the time, but as I said I think from a trend line standpoint, theyre more retailers cruising around the city looking for spaces.
We're focused on the best locations in.
Being a little bit of caution right now given what's going on in the economy, but.
Net net New York is very much still top of the ranking of where they.
They want to be and where they want to expand it.
Thank you for taking my question mistakes with respect with respect to retail we are still in a retail recovering market.
So.
Volumes are not yet back to where they were pre pandemic.
If you look at the transportation numbers basically coming into the city.
On the railroads in the subways and buses is two thirds of what it was at.
<unk> pandemic.
And although.
Anecdotally traffic in the streets looks pretty wholesome.
So.
I think you need to do is to say we're in a recovering market.
<unk>.
Our prediction is that the market will be very much more healthy in.
A couple of years. This is not a quarter to quarter thing, it's a year to year thing.
Thank you. Our next question is from Alexander Goldfarb with Piper Sandler.
Hey, good morning, good morning, Steve and Michael.
Maybe just following up on the retail.
The 1 billion eight retail preferred that you guys have in the JV that you did a number of years ago, just sort of your thoughts on that the value of that is that still worth par.
Cash flow coverage I think the coupon is four in a quarter and as you guys. Steve think more about balance sheet focus you've addressed a number of the floating rate floating rate exposure. How do you view your ability to refinance this billion eight and get the cash out of that position.
Good morning, Alex Michael.
So let me try to hit all your questions.
In terms of the value of that preferred.
<unk>.
We believe it remains.
It's still worth par.
Just to the Chase I know you wrote it.
Do you think is worth less than par, we don't think so there's clearly equity value.
Retail JV I know our partners think there's significant value still left in that JV.
So we think the retail preferred is from a cash flow coverage standpoint, again just to remind you.
The cash flow from all of the assets, whether they have preferred or not goes to secure the payment of that preferred and the coverage of that is continues to be very strong and even though you assume rollover over time, some ups and downs and whatnot.
Coverage on that on our preferred dividend.
Today is four and a quarter will rise to four and three quarters.
In April of 2024.
That coverage is very strong today, and we expect to remain strong.
Now your last question the ability to refinance out if you go back to what I've said in my opening remarks, and I don't think this has any secret the financing markets are not good right now right.
Any product category so banks are.
Basically shutting it down for the rest of the year, unless you're a big client and great property and whatnot see MBS market and our bond investors really don't want to deploy capital. So it's a tough market to finance and if you have to absorption will be done.
But.
Retail remain.
Challenging the refinance in the near term.
And so this is not in our capital budget to get this.
Refinanced in the next year or so.
When the market opens up when we want to do remember this can be done piece by piece right.
<unk> five assets that have preferred on and if we want to avail ourselves on one or two or three that we will do that at the time, but to go we don't need the cash. So they had to go do it and pay exorbitant rates would not be prudent so hopefully I hit everything asked but.
Yes.
That's the current state Alex look at it.
Additionally, there's two elements to it one is the yield.
As I said this the collateral.
Michael said very clearly that we think the collateral is justified.
Coverage.
The dividend is give or take double what the what the carry on the preferreds.
So we think the collateral it was fine.
Dividend is.
Clearly in this very volatile chaotic.
Capital market is below what a market price for that preferred would be so on a short term basis, you might say that if we had.
If you're a trader and you sold it.
Get less in part because of the sub.
The submarket dividend.
That will change and so we still think that it's a sound instrument.
Okay, and then by the way.
Steve Second question as you mentioned dividend.
I appreciate the comments on the dividend for Vino for next year. Alexander's is in a similar boat should we read through that is similar that the board will make a similar determination resizing of the Alexander's dividend as well.
No.
Okay.
Okay.
Thank you. Our next question is from John Kim with BMO capital markets.
Thank you and good morning.
You talked about the cautious environment there wasn't a lot more of an optimistic piece from the post this week on New York Office and in particular <unk>.
Was wondering if you could provide an update on the project.
How much pre leasing you would need to move forward with the development.
And if theres any consideration to change the use of the of the project to have less office going forward.
John Thanks for the question I'm going to Duck the question.
A couple of things.
I'd say in my prepared remarks that the current environment makes ground up development.
Difficult.
So thats number one number two is in terms of changing uses and what have you.
It's something we're going to get into that.
Okay.
The taxable income next year I know you talked about rising rates and 220 Central Park South.
Being fully sold.
Are there any other pressures that you see on taxable income next year.
The 220 central downside protection, so wouldnt really be an issue but.
Any other thoughts on.
Yes.
The direction of your other businesses in 2023.
I mean, we've said that we think our budget show the taxable income is going to go down.
The primary reasons are higher interest rates, because we're not 100% protected.
We have no income from to play.
And we have a slot.
So if you take all those three things together, we're budgeting that.
Not budgeting any gains from asset sales.
So I mean.
I think thats it we are.
Let them to put a number on that at the current time.
But we will make a decision probably in the first quarter.
And your dividend is at a 100% of taxable income this year.
What is the exact number Tom who.
Through our dividend to 12, and we Havent finalized taxable income.
Our projections, it's around that yes.
So we think that the current dividend.
Within a hair of a 100% of our taxable income for the year 2022, which includes two four.
Great. Thank you.
Thank you. Our next question is from Daniel Ismail with Green Street.
Great. Thank you.
In a few times a difficult financing environment and I recognize this is a tough question to answer given the lack of transactions, but I'm just curious where do you think New York City office values and cap rates are at these days.
Okay.
The answer in annual is.
Yes, without a lot of transaction activity.
To give you a precise answer right I think there is.
First of all I would say that the.
Investor interest in New York City remains very high.
Well some.
C black clouds, others see opportunity and others have a fundamental belief.
In New York when you look at what's going on around the world right in terms of.
As a global Investor base, and as they evaluate where they want to invest their capital is.
As in Hong Kong anymore, I don't think so is it London announced doesn't seem as attractive given the issues that you come back to the U S looks very good and New York as I think without question the global financial capital. So you have a lot of interest in New York.
A lot of smart money Thats, frankly, scouring the market right now looking at New York, because they see that.
But in the absence of a financing market I think it is going to stem activity for a period of time I don't know if thats, one quarter two quarters, who knows.
First to sell in this market than your particularly on some larger than youre going to see.
The wider cap rate right, if somebody needs financing.
They don't it's an all cash buyer, then I think it'll be a little less compressed but is there a cap rate impact from this sure. There's a cap rate impact and I'll give you precision on that no is it 50 basis points, which is sort of maybe up 10% the value of their impact at 10% I think is that a reasonable assumption, probably but I don't think anybody can tell you with precision.
A couple of comments on that.
We've seen this before many times.
The economy is either entering a recession.
In recession.
The debt markets and the capital markets.
Our Wyoming they are highly liquid and they are.
Unbelievably expensive if you must.
Access the debt markets.
That's a very big.
Turning to asset sales.
Second thing is that in these kinds of markets all the people that have to sell transact.
And.
So.
The only weak sellers are transacting because they only buyers that are really controlling the market.
First buyers.
So you have to just lived through this.
It will end at <unk> sooner than you think but this is not the kind of a transactional market or capital market.
You can really make a judgment. This is abhorrent that happens one year out of a return and we are we are either in the one year or about to go into that one.
Got it.
But.
One last comment.
The stocks.
Office companies have corrected to the point where.
In my judgment, they have gone significantly below.
Given the distress mark to market of the portfolio.
Difficulty below that number.
Got it I appreciate the thoughts.
Last one for Glen I'm curious, where you think concessions are trending. These days are you seeing any.
Stabilization or abating and concessions on new leases you guys are negotiating.
I think concessions have stabilized they have been abated.
Theres still quote unquote too hypothetical stabilized.
Youre certainly seeing.
More.
In terms of getting tenants into the buildings.
In terms of helping them build out space more than historically, but I think that number has stabilized.
We're seeing a different.
Brian .
We're seeing sort of a strange market.
Rents have really not falling on the better buildings, if anything theyre going up.
But the Ti and inducements have gone up as well so the market is taking their pound of flesh in the inducements as opposed to in the breast reduction.
Okay got it thanks, everyone.
Thank you. Our next question is from Derek Johnson with Deutsche Bank.
Good morning, everyone. Thank you.
In your discussions with business leaders.
Is there a view that the likely recession will be a tipping point for greater office utilization and then and that's the balance of power favoring employers versus employees.
So I guess, Kansas slowdown drive greater and perhaps sustainable office utilization in your view.
Green Street wrote a piece that came out recently where basically.
The bump that idea.
Recession.
Get higher unemployment gets.
The power from the employee from the employee and therefore, the employee will scamper back into the office.
Just have no view on that.
I do believe however that the office is the.
The workspace.
As opposed to the kitchen table and I believe that over time, the cultural change where people will want to be back in the office the office will be more productive.
Yes.
Aspects of work.
Being with colleagues and trends et cetera.
Overpowered the temptation to say that.
At the kitchen table.
But I don't I don't think that it's the pain of a recession, that's going to change.
Thanks to the marketplace.
Got it appreciate it and thank you and just another big picture one I Hope you guys don't typically is unfair.
But Steve you know you've seen this movie before.
But as investors really have been sidelined by this hybrid work secular concern and now we have the likely recession, what is it going to take like I said, you've seen this before or what can you do ultimately to help flip investor sentiment more positive on an office rates longer term. Thank you.
No.
I've always believed that the rules of the game were to buy low and sell high.
So now what we have.
It's hard to buy assets are very liquid.
Rich you assets that are on the market certainly at distressed prices.
But the distress in the stock market.
So I don't know, but I mean.
From my personal family and the best thing, we like to buy and recessions.
And that's the time to buy so what's going on.
Going to take for you guys to start realizing that these stocks are stupid stupid cheap I don't know, but it will happen.
And my guess is that.
Just as the stock market always turns and galloped ahead way before the end of recessions.
I think that the I think that the.
<unk> business will do so as well.
I don't I can't tell you what the catalyst is.
Thank you Sir.
We have our next question from Anthony <unk> with J P. Morgan.
Yes. Thank you.
And just looking at your 2023 lease explorations. It seems like you have a disproportionate amount expiring in retail and office in the first quarter can you maybe help us peel that back a bit and give a sense as to whether or not there's any known big move outs or roll ups roll downs.
Okay, It's Glenn as it relates to the office in 'twenty, three it's really a mix of.
Four of our properties 770 Broadway 350 Park 12, 90 until <unk>.
And that's throughout the year not only in the first quarter.
Of course, the attacking all of those exploration we are very very good action on some and others were in the market trying to lease the space.
Tell you when you look at those assets.
Months, our highest quality of buildings and most unique characteristic buildings like the 770 like a $3 50.
So that's where the expirations that are coming out of in 'twenty three.
Okay, and how about retail in the first quarter anything to.
Call out there.
Tony It's Michael.
The answer is we've got.
Two or three.
Key tenants rolling in.
I can't tell you definitively whats going to happen there.
There's discussions were.
We're all could renew in this discussions we're monitoring it.
Too fluid.
I do think net net even if most of annuity income will be down some.
Just given the.
Where one may likely renew but but.
I just can't give you more precision given the discussions remain pretty fluid right now.
Okay got it and then just one follow up on the Mark It seems like the trade shows are back and I know in some years you have the tax item can you maybe just help us think about where you think the annual EBITDA run rate has gotten back to you on that on that asset.
Okay.
And I think today, it's probably in the.
Mid seventies.
But we're also we know that the casual business is going to be leaving so probably bottoms in the low to mid sixties.
It comes back.
So in that number probably in terms of a run rate at the end of the year low to mid 6% is probably a decent run rate portfolio rebuild that back.
Okay. Thank you.
Yes.
What's the potential building if it.
At the top end.
Ultimately, we think the building should get back north of $100 million.
So I mean, our job is to really is that we do think there is some.
Additional upside in the trade show.
That number in the next.
Call. It 36 months I think it gets back up with north of $100 million.
So based upon so.
But right now it's about 75, we expect it to go down into the <unk> before.
Before it turns and it goes back up to as much as 100, which will not happen next year, but what will happen in the future.
Alright scheduled for the asset.
It's a little bit more volatile than we would like but thats the story.
Okay I appreciate the help.
Yes, Sir.
Thank you. Our next question is from Nick <unk> with Scotiabank.
Thanks, I just wanted to see given the recent news from meta.
Just wanted to confirm that there is there is no impact youre seeing for your space with them at Farley or 770 Broadway.
Sure.
There is no impact.
No impact at 770 <unk>.
The recent announcements.
Okay.
The building's utilization is very strong.
And they happen to love both of the properties.
No.
It's almost embarrassing to say, but we got a little bit of time looking at their credit.
Because they are a big tenant that this is one spectacular company from a financial point of view. So when you think about it.
They have.
What's the number $25 billion of free cash flow year after.
Spending a similar amount or a greater amount on R&D, which is discretionary so their cash flow is.
Well above $50 million a year they have almost no debt I think they did their first highly debt issue recently.
They.
Cash balances in the <unk> or something like that there was a $1 opinions about little over $40 million.
Yeah.
That works so that from a financial point of view they are a great company. They have these huge platforms of.
Facebook.
Instagram and Whatsapp.
And so now they're off on a.
Now the rules are on a mission.
Yes.
The Guy because look what he has done in the past so.
The answer is they are they are.
Trying to develop a new universe.
I believe it will be extraordinarily successful even if it's not successful it certainly will not impair the sanctity of that unbelievable.
So where we're friends there.
Where vendors to them and we're we're happy and honored to be so.
Thanks, I appreciate that Steve just one other question is on the retail JV. So.
Look at the NOI in the supplement I mean, it feels like.
I think I'm looking at this correctly, but that the NOI is actually very similar to when you struck the deal in 2019 actually it might be up a bit I just wanted to confirm that and then also I know you did impair Deane.
The investment back in 2020, but when the original deal was struck or was that a four five cap rate.
Presumably cap rates are higher today based on everything going on in the world. So just trying to understand the dynamic of when you. When you had to do with the annual test on the value of the JV.
We should think that there is any.
Impairment possibility from that.
Nick.
So in terms of the income on the portfolio now versus.
When we struck the deal I don't have exact numbers in front of me my.
My recollection from just knowing the ins and outs.
It's down probably a little bit because of as you as you may recall.
Forever 21 went bankrupt and so they are still in this space, but that that number is down from when the original deal was struck.
And we had one.
Vacancy on fifth since then so like the signage is frankly is booming right now.
Higher than when we struck the deal, but I think net net it's probably down a touch but.
You correctly point out the income has been very durable.
And.
But.
Some of the leases roll there'll be there'll be some impact. So I think in terms of the impairment you are correct. In 2020, we did impaired again I'm going from memory I think we the fair value.
The original deal struck at five four and we imperative.
South of $5 billion I don't want to give you the number without without having in front of me, but the answer is look we look at it every quarter. There is an independent third party appraisal that is performed on behalf of the venture, which we frankly have.
We don't provide any assumption that they do their independent work and.
And we.
We take that and that's sort of what drives that so they will do their work at it.
End of the year, and so I can't predict whether it will or won't be.
I think the market is certainly.
Given your comments given <unk> comments on the market and how it's priced in our stock is certainly imperative significantly, but I can't tell you whether there'll be any further.
Impairments yet.
Okay. Thanks, Michael.
Yes.
We have our next question from Ronald Camden with Morgan Stanley .
Hey couple of quick ones from me just going back to the leasing activity you talked about.
Maybe the slowing economy and so for US. It just was hoping you could provide a little bit more color from the tenant side sort of is it the economy is it sort of hybrid.
And also by sub sectors would be helpful.
Okay.
I, certainly think Ceos are more hesitant due to the economy for sure.
Seeing that in our discussions I think.
By sector certainly the Big Tech has slowed I will tell you. There is some more small to medium sized tech activity. There were a couple of leases signed in the market this quarter by a couple of those.
But generally I would tell you more caution more hesitancy due to the economy.
Not so much by the hybrid specifically.
Great and then my second question was just going back.
The dividend.
And I know you sort of talked about.
It's the board decision Theyre discussing just trying to understand what the pieces that are going into that is it still sort of.
Is it $200 million plus or minus of Capex.
Operating cash flow.
Youre thinking about just how to solve for that to get to a sustainable basis I'm just I'm just trying to get a sense of what should we be looking at thinking about for the right place for the dividend to land banks.
I don't have anything more to say on the dividend other than what I've already said.
We will get to that at the first quarter Board meeting.
I think everybody can do their own math guest of it but I'm not.
The guesstimate in business.
I can tell you one little factoid and that as the stock trades between the nine and 10% dividend rate.
It indicates that something is something's wrong.
<unk>.
I think I'll standards, what I've already said.
Great. That's all my questions. Thank you.
Yes, Sir thank you.
Thank you. Our next question is from Vikram Malhotra with Mizuho.
Thanks, so much for taking the question I guess, just maybe bigger picture Steve.
I'm just I wanted to get your thoughts on what are you contemplating sort of macro wise rates wise and then more at a micro level with.
With fundamentals it just feels like.
Things seem to have been inflicting according to the last few calls.
Turning to work was improving leasing is improving.
But.
Now swapped a lot of debt for five years at a rate.
Your.
Buncombe bidding cutting the dividend.
I'm just trying to balance all of this like near term you said, it's a one year issue, but it sounds like in your action Thats more like a three to four year issue than a one year issue I'm. Just can you help US bridge, what are you forecasting macro wise and micro life too.
Effectuate this dividend and the five year swaps.
Boy Oh boy.
So let's see.
Obviously the economy has.
Ben.
Hi.
To that it's probably very disruptive so for whatever different reasons and this is I don't want to get into politics, but for different reasons, we have runaway inflation.
And.
As I said I think that the.
Deadly earnest about.
It's about doing that job and stopping it.
So they are number one tool of course as interest rates and interest rates have had an enormous effect already.
Yes.
And a very rapid manner.
As illustrated by the stock market, the whole market et cetera.
So the fed is going to win this battle in the ads, it's just a matter of how long it takes.
We.
Aggressively went to protect our floating rate exposure.
For multiple different reasons.
The most important one of which was to protect against a runaway interest rate.
Environment.
So we think we sort of had.
Sort of have that covered.
The most efficient execution for the swaps was five years and so we did we basically did that.
There is.
Do not read anything into our.
Our firm.
Our view on the future based upon this five year number.
I would tell you that I expect if you look at the graphs and look at the chart of past recessions in the past activity.
They generally go up at a pretty steep curve and then they come down fairly quickly.
Because.
<unk>.
They put the economy into recession, and then they are aggressive, but we have to build it out so.
So thats, what we expect is going to happen. This time, but we won't we don't bear a lifeline anything so we think we've protected our balance sheet.
Thank you overpay, our dividend is about <unk>.
Broker yet.
And so we think we've taken the proper financial.
Actions.
Protect the sanctity of the of the <unk>.
The physical science any of the company.
We believe that this is going to be.
<unk>.
One to two year three.
Three to five year event.
And then thank you and that does that.
One to two year is more.
Your comment on the fundamentals and office as opposed to the macro that you just totally I'm assuming.
Just following up on that I know the numbers are moving around.
Great.
Thank you.
Okay.
Two years.
It's a macro predictions.
Okay, and how do you square, where fundamentals will it be office fundamentals in that timeframe.
Well first of all we have new.
New York based we believe in New York, We believe.
The only we've had lots of conversations with lots of employers.
And.
From all over the world.
New York, It's still the capital of the United States.
And we believe companies want to be here for sure young people want to be here.
Just anecdotally I will tell you that a lot of my friends a book that the Florida.
But when you ask them.
The children are all but children.
And they want to be in the ASO thats extremely delek.
We think that this will be a fairly predictable cycle, where.
Different industries will grow at different rates, but there is they will continue to be.
Aggressive interest too.
Located in New York and growing in New York.
Okay, and then just two quick.
Okay.
We are absolutely.
Strongly.
It is about what we're doing in the pit.
We think that that is going to be.
Another separately.
Ordinary success.
Very very excited about that.
Okay I was going to ask you want some relief, but just before that.
I know the numbers are moving out so im not asking you where numbers or the dividend.
Going to be but is it fair to assume if we looked at that historical <unk> payout.
Payout ratio whatever the ASF will may be should we assume a payout in line with historical levels.
We think the model next year.
If you can model.
Taxable income and Thats, what the dividend is going to be approximately.
You can model that.
Better than we are.
Yes.
Yes.
We've got another full quarter to go.
And so we're in the budgeting process with nowhere near.
We will make that decision in the first quarter.
Thank you.
A follow up question from Steve Farquhar with Evercore ISI.
Thanks, Steve you mentioned about the valuation and I am sure.
A lot of numbers you trade at very low price per square foot very high implied cap rate.
Historically, we've seen private equity come in and close gaps in sectors, where there's big big discounts that persist but.
But I guess given the.
The financing markets are today that just doesn't seem likely so are there steps that you can take or are there steps youre contemplating.
To try and close that gap or is this just the time, where you've got to be patient and wait for the financing markets to improve.
I almost want to duck that question too, let me see if I can parse into it.
The.
The leverage buyout model.
Which.
Uh huh.
He has.
And that.
May or may not work in this environment.
The value of our company is there and it's extraordinary value.
How it all plays out as something that.
I can't.
I can't predict right now.
Well I guess, you've talked in the past about maybe the CEP.
Separation of the Penn district assets into a spin out which I know was on hold.
You said you would only do buybacks in a meaningful way, but you'd probably need to sell assets to be able to buy back stock, which seems difficult. So it seems like your hands are tight I'm. Just wondering are we missing anything here.
You could do to help close the gap.
The spin out is still on the table.
And the protection of our balance sheet is the number one priority.
Got it thanks, that's it.
Thanks, Steve.
Thank you Sir we have no further questions in queue.
Okay.
Well. Thank you all very much. We appreciate you joining us in the next call as well.
Ballantyne Tuesday February 14.
Paul the lovable Michael says is Valentine's day, So I guess, we will see you in red.
And Valentine's day.
Have a great rest of the thank you all very much and by the way do take by will take up by invitation that comes out of the pet.
Strawberry and those of you who havent toward through we've seen it yet.
<unk> take advantage of our invitation is sincere we'd like to get you all down there and show you what we'd do it.
Very much thanks for joining.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect.
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