Vornado Realty Trust Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 13, 2024

There are 15 speakers on the call.

Operator

Good morning, and welcome to the Vornado Realty Trust 4th Quarter 2023 Earnings Call. My name is Andrea, and I will be your operator for today's call. This call is being recorded for replay purposes. All lines are in a listen only mode. Our speakers will address your questions at the end of the presentation during the question and answer session.

Operator

I will now turn the call over to Mr. Steve Borenstein, Senior Vice President and Corporate Counsel. Please go ahead.

Speaker 1

Welcome to Vornado Realty Trust's 4th quarter earnings call. Yesterday afternoon, we issued our 4th quarter earnings release and filed our annual report on

Speaker 2

Form 10

Speaker 1

ks with the Securities and Exchange Commission. These documents as well as our supplemental financial information packages are available on our website, www.bno.com under the Investor Relations section. In these documents and during today's call, we will discuss certain non GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10 ks and financial supplement. Please be aware that statements made during this call may be deemed forward looking statements and actual results may differ materially from these statements due to a variety of risks, uncertainties and other factors.

Speaker 1

Please refer to our filings with the Securities and Exchange Commission, including our annual The call may include time sensitive information that may be accurate only as of today's date. The company does not undertake On the call today from management for our opening comments are Stephen Ross, Chairman and Chief Executive and Michael Franco, President and Chief Financial Officer. Our senior team is also present and available for questions. I will now turn the call over

Speaker 2

Stephen Roth. Thank you, Steve, and good morning, everyone. We ended the year on a high note with a good 4th quarter. The quarter and the year were right on target. Although as expected, our results were negatively affected by the dramatic increase in interest rates.

Speaker 2

This will carry through next year, but I expect will reverse as interest rates recede. It's important to note that our business has continued to perform well. Will review the quarter and the year with you in a moment. This year, our New York City office leasing team won the gold medal. In the Q4, we leased 840,000 Square Feet.

Speaker 2

For the full year, we leased 2,100,000 Square Feet. Average starting rents for the quarter and the year were record breaking at $100.99 per square foot respectively. In more gold metal stuff, for the year, we leased 1,200,000 square feet at over $100 square foot rents. The office leasing market is on the foothills of recovery, but the capital markets still remain challenged and are even tightening and even tightening slightly as we speak. The foreclosures and givebacks are still in front of us and therefore so is the opportunity.

Speaker 2

As Michael and I have said on the last few calls, retail in New York City has bottomed and is recovering rapidly. While rents have a way to go to reach peak pricing of 5 years ago, we feel very good about the activity level and strength of the retail recovery. And there's more big retail news. In 2 blockbuster deals announced in December, major global luxury retailers Prada at Kering, bought prime Upper Fifth Avenue Properties for their own use as stores. One deal was $835,000,000 and the other was $63,000,000 So in round numbers call it about $900,000,000 for a half block front on Upper 5th Avenue.

Speaker 2

So we now have the most important retailers in the world investing aggressively in real estate for their own use on the most important retail street in our country. This is only happening in the most important world cities, New York, London, Paris. Now we take this mark very personally because we own in our retail joint venture, so 52% our share, A 26% market share of available 5th Upper Fifth Avenue and 4 half blocks of similar AAA quality. I'm sure you can all do the math here. We also own in that same joint venture the 2 best full blocks, so that would be 4 half blocks in Times Square and we have the largest sign business in town.

Speaker 2

It's been a long ride We have now just about completed construction of our renovation of the double block wide PENN2 and we are about 90% complete with the surrounding plazas. The huge plaza in front of PENN2 combined with the 33rd Street Promenade and the 33rd Street setback at PENN1 have created an enormous open public space, which I might say will be quite majestic. Directly across 7th Avenue, the Hotel Pen is now down to ground creating our Pen15 site. All this Taken together is for sure a game changer. If you are a shareholder of Vornado or are interested in Vornado, This is an immediate must go see.

Speaker 2

The world turns in funny ways and creates opportunity. The retail apocalypse is now passing, having handily survived the e commerce attack. But now we have a CBD office apocalypse involving the work from home threat and the total blacklisting of office in the capital markets. In the end, the major cities of America will to grow and thrive with New York, our hometown, leading the pack. Office workers will gather in offices with their colleagues rather than be alone at home at kitchen table.

Speaker 2

And in the end, the supply demand equation will come into balance and bring on a landlord's market by a total cutoff of new supply, you can't build anything in these frozen capital markets. And in New York, the evaporation or irrelevance of say 100,000,000 square feet of old, obsolete, unrentable space. This cycle is not over yet. There remain challenges, but for forward looking investors, the time is now. My colleagues and I at Vredeo are optimistic and excited.

Speaker 2

Now over to Michael.

Speaker 3

Thank you, Steve, and good morning, everyone. Though 2023 was a challenging year, Our core office and retail businesses proved to be resilient. Our overall New York business same store cash NOI was up a healthy 2.8% for the year and was up 2% in the 4th quarter compared to last year. Comparable FFO as adjusted was 2 point $1 per share for the year, down $0.54 from 2022 largely due to increased interest expense, which is in line with the expectations that we previously communicated. 4th quarter comparable FFO as adjusted was $0.63 per share compared to $0.72 per share for last year's Q4, a decrease of $0.09 Overall, the core business was flat And the entire decrease in the quarter was driven by increased G and A and lower FFO from sold properties.

Speaker 3

We have provided a quarter over quarter bridge in our earnings release and in our financial supplement. We recorded $73,000,000 of non cash impairment charges during the 4th quarter, primarily related to joint venture assets that we intend to exit in the next few years. It should be noted that in accordance with near REIT's FFO definition, This impairment charge is not included in FFO. Now turning to 20 remains challenging in the current economic environment. We expect our 2024 comparable FFO to continue to be impacted by higher interest rates and be down from 2023, which already seems to be in the market.

Speaker 3

We project a roughly $0.30 impact from higher net interest expense due to extending hedges at higher rates on our variable debt. Additionally, there will be a ding to earnings as we turn over certain spaces, primarily at 1290 Avenue of the Americas, 770 Broadway and 280 Park Avenue. This is temporary as we have already leased up a good chunk of this space, But the GAAP earnings from these leases won't begin in 2024. We expect 2024 will represent the trough in our earnings for earnings to increase meaningfully from there as rates trend down and as income from the lease up of Penn and other vacancies comes online. Now turning to the leasing markets.

Speaker 3

New York is clearly leading the leasing charge nationally as the city continues to experience strong employment growth. 2023 leasing in Manhattan ended on a strong note. And as we entered 2024, market conditions are more in any year since the pandemic ensued in March 2020 providing support for the continued recovery in the Class A office market. The economy is healthy. Most employers are back in the office at least 3 to 4 days per week.

Speaker 3

Competitive sublease space is thinning and the market for higher end space is tightening fueled by a decline in the new development pipeline. Now that companies have greater clarity on their space needs, Tenant demand is growing, which is translating into more leasing transactions. With new supply of operating, tenants are increasingly focused on highest quality redeveloped Class A buildings near Penn Station and Grand Central Station as they seek to attract and retain talent. Activity in the best buildings has been strong with vacancy at less than 10% and rents rising. Our best in class portfolio has a major beneficiary of this trend and the stats bear out this that we consistently outperform the marketplace as Steve mentioned earlier.

Speaker 3

In 2023, we leased 2,100,000 square feet at average starting rents of the industry leading $99 per square foot with 1,200,000 feet at triple digit starting rents. Importantly, we made significant strides in addressing our upcoming vacancy and tenant role at some of our most important assets leases with the following important customers: Citadel at 350 Park Avenue, PJT Partners and GIC at 280 Park Avenue, King and Spalding, Solemby and Gaye and Cushman and Wakefield at 1290 Avenue in the Americas and Shopify at 85 10th Avenue. Additionally, at PENN1, we maintained strong momentum with another 300,000 square feet of deals highlighted by new leases with Samsung and Canaccord Genuity. Just as a reminder, since we started our redevelopment efforts in the Penn District, we have leased over 2,500,000 square feet of office at average starting rents of $94 per square foot, a significant increase in what these buildings achieved previously. Our 4th quarter activity led the overall market's leasing volume upturn as we completed 17 leases comprising 840,000 feet at starting rents of $100 per square foot.

Speaker 3

Even with our very strong close to 2023, Our leasing pipeline heading into 2024 is robust. We currently have almost 300,000 feet of leases in negotiation with another 2,000,000 feet in our pipeline at different stages of negotiation including a balanced mix of new and renewal deals. Turning to the capital markets now. While the financing markets for office remain very challenging as banks continue to deal with problem loans, are starting to see some stability with the Fed potentially cutting rates in 2024. Fixed income investors are constructive again on high quality office And unsecured bond spreads for office have tightened significantly over the past couple of quarters.

Speaker 3

That being said, we are still a ways away from the healthy mortgage financing market in office and most office loans will have to be restructured or extended as they aren't refinancable at their current levels. More broadly, lenders have no appetite for construction financing across most property types, which should keep a lid on new supply. Conversely, the financing market for retail is now wide open now that the sector has bottomed. As always, we continue to remain focused on maintaining balance strength. Even in this challenging financing environment, our balance sheet remains in very good shape with strong liquidity.

Speaker 3

We are actively working with our lenders and making good progress out the maturities on our loans, which mature this year. Our current liquidity is a strong 3 point $1,300,000,000 of cash and restricted cash and $1,900,000,000 undrawn under a $2,500,000,000 revolving credit facilities. With that, I'll turn it over to the operator for Q and A.

Operator

And our first question comes from Steve Sakwa of Evercore ISI. Please go ahead.

Speaker 4

Thanks. I guess first question for Michael or maybe Glenn. Just kind of on that, I guess pipeline, the 2,000,000 square that you talked about, could you maybe tell us a little bit how much of that's for kind of the existing portfolio? How much of that is for the development such PENN2. And in that discussion, can you just talk about the upcoming expirations in 2024?

Speaker 4

Are there any large known move outs this year that you might know about that you could share with us?

Speaker 5

Hey, Steve, it's Glenn. So over the pipeline that we mentioned in the opening remarks, there is a good spread in there, including PENN1 and PENN2. So activity continues to strengthen at both properties. The reception at PENN2 has been better than excellent. Tour volume is off the charts.

Speaker 5

Everyone thinks this thing is a wow, nothing they've ever seen. So the pipeline does include activity at both PENN2 and PENN1. As it relates to the bulge in 2024, the expirations that we were facing, we've attacked it, I think, very well thus far. At twelve ninety, we've already leased more than 50% of the space that was expiring in 2024 between Venable and Equitable. At 280 Park, we released over 200,000 feet of the 275,000 feet expiring between 24 and 25 and put away PJT, which was expiring in 2026.

Speaker 5

770 Broadway, we continue to be in Martha with that building of course is more of a big tech, big media building, but we expect that building to perform as we move along here given its great location and great boats.

Speaker 4

Sorry, just a quick follow-up, are you saying 770, does that have a meta

Speaker 5

It does. It is a meta expiration of 275,000 feet in June of this year.

Speaker 2

What's left?

Speaker 5

So Meta after that exploration, Steve, we'll have another 500,000 feet long term in the building.

Speaker 4

Okay, great. Thanks. And then just on the second question, I noticed that you pushed out the stabilization of 10.2 by a year, which Certainly makes sense just given the challenging market today, but you guys also kept the I guess you kept the yield unchanged. So just Can you kind of help us think through that? And I guess from an accounting perspective, if leasing doesn't occur This year somewhat soon, does that begin to create a potential earnings drag in 25% just from the lack of ability to

Speaker 3

Good morning, Steve. It's Michael. The answer respect to stabilization is we did push it out to 26. It's taking a little longer to get going on take up there. But as Glenn just referenced, the reaction as it's gotten to delivery here has been outstanding.

Speaker 3

So we expect that to pick up. But that being said, we're trying to be realistic as well, and so we pushed it out. The yield is based on the $750,000,000 cost, does not include carry. So that's based NOI over the original cost. So that's a simple math for you.

Speaker 3

We'll trade drag beyond 25. If it's not done, I guess, potentially, but we feel good about the pipeline and what we have baked in right now.

Speaker 4

Great. Thanks. That's it.

Operator

The next question comes from Michael Griffin of Citi. Please go ahead.

Speaker 6

Great, thanks. Steve, I know in your opening remarks, you talked about Stressed opportunities you're seeing out there in the market. Can you maybe quantify kind of what those opportunities could be? And when you look at kind of capital priorities, would it make sense to take advantage of those maybe relative to buying back your stock or starting new developments?

Speaker 2

There are 3 opportunities. Buying back our stock is the first one or uses of capital allocation. The second is paying off debt and deleveraging a little bit. And the third is offensively acquiring new assets. We are only interested in acquiring new assets at distressed prices.

Speaker 2

And I think as I've said, the foreclosures and the givebacks have not really happened at an accelerated pace. So the opportunities are still in front of us. I don't have any comment as to what we might do. But I think our first our number one priority is The debt that we need to the debt expiries and then after that we go on the offense. The stock we will react opportunistically to the stock over time.

Speaker 6

Great, thanks. And then I was wondering if you could comment on the recent news about A rent reduction from a tenant at 650 Madison. I know you only own 20% of this building, but is there a worry that we should extrapolate this in terms of Kind of future rent roll and maybe a sign of things to come from a leasing and rent perspective?

Speaker 2

The interesting thing is, in some of the industry papers. They always get it right, but this case they got it dead wrong. The facts are that the $60 number was net number. So if you gross it up, it's about $100 a foot. Glenn is telling me it's a little less than $100 a foot, but so it's in the low 90s, I

Operator

The next question comes from Camille Bonnell of Bank of America. Please go ahead.

Speaker 7

Good morning. Can you talk a bit more to the retention levels of the overall portfolio in 2023? How did it track versus your expectations? And with the lack of new on the horizon, do you think this will pick up in 2024?

Speaker 5

Hi, it's Glenn. Our retention rate was strong. As I mentioned, the leasing that we've gotten done, the renewals, I think we're better than we originally thought with the beginning of 2023. And in our pipeline that we referenced, We have very good activity on forward lease expirations. We're definitely finding that CEOs, the decision makers of these tenants who are expiring forward are now coming to us earlier than they had been over the past few years, because there's less and less quality blocks and space available to them.

Speaker 5

So I would say definitively the renewal program is stronger than it had been. We're in very good talks with many of our tenants going forward. And I think it's showing in our leasing activity numbers, especially with the volume we had during 2023 and what we're now seeing in 2024 already.

Speaker 2

You make a good point. I think you said with the lack of supply. So the dynamics which are going to cause the office market to get very, very healthy pretty soon are You can't build anything in this capital market. So there will be no new supply coming on stream. The supply of Buildings that were built in the last cycle over the last number of years, that space is all being eaten up.

Speaker 2

And the next trend is that tenants seem to want high quality buildings, which are either brand new or buildings which have been completely retrofitted, which is and so the older buildings and I think I said the stock of those are somewhere around 1 100,000,000 to 150,000,000 square feet. Those are just obsolete and irrelevant and will evaporate. So what we're dealing with is not a 400,000,000 square foot marketplace. We're dealing with something which is somewhere in the high 200s, which is a totally different supplydemand equation.

Speaker 7

Appreciate the color there. And given retail seems to be a bit of a bright spot in your portfolio, can you also talk about how your leasing pipeline is looking for that side of the business?

Speaker 2

Sure.

Speaker 3

I appreciate you recognizing the retail is a bright spot. I think It feels like investors wrote it off and with everything that's happened in the marketplace, forgotten that we still own The most and highest quality retail in New York City, as Steve alluded to in his opening remarks. So these are scarce trophy assets, I think the value is being recognized. We've talked about the last couple of quarters and that continues in our leasing pipeline. We've got activity across the board, really on all those spaces, where there's vacancy or rollover occurring.

Speaker 3

We have tenant activity, in some cases, multiple tenants for those spaces and rents are clearly rebounding. So I would just sort of So stay tuned. We're optimistic in terms of what's coming down the pike based on what we're working on right now.

Speaker 2

There is definitely a finite supply of the highest quality retail space, which is what the marketplace wants. And then I hope you noticed I have a new financial metric for retail, which is called the half block price. And we got a lot of half blocks in the best place.

Speaker 7

Appreciate that. And just finally, on the G and A side, you've managed to control those costs quite well since the pandemic, but it did pick up last year due to some additional stock expense. Is this a reoccurring event going And are there any key considerations for 2024 that will keep your G and A at the current or higher levels? Just For instance, less capitalized interest from your development program now that PENN1 is out of the pool?

Speaker 3

Capitalized interest will be comparable. G and A, some of that will roll off given that was a one time event. But I think what you're referencing generally is the compensation plans put in place, which we felt important to retain our talent in a difficult environment. And so we implemented those 1 in June heavily tied to entirely tied to stock performance over the next 3, 4 years. And the shareholders do quite well and the employees will do quite well.

Speaker 3

So that expense was elevated in 2023, and That will start to, I think, normalize as we get into this year. Tom,

Speaker 2

how many years are we writing off the expense for the comp plan? So it's 4 years, you are accelerating. So, say that again, you are accelerated. So the expense we're writing off the equity comp plan that we issued in June is over a 4 year period. So The G and A will benefit enormously shortly as that rolls off.

Speaker 2

And I think I said in my remarks, You climb the mountain and then you go to the other side of the mountain. So the rise in interest rates have penalized our earnings Pretty substantially. That is going to reverse somewhere as the government begins to reduce rates, which they will. And then similarly, Well, I guess that's the big those are the 2 that's the big thing. Now similarly, Michael said that our earnings were going to be hit Dinged, I think was his word, by turnover in the tenants from the bulge and expiry lease expiry.

Speaker 2

Once again, those spaces will fill up, income will come on board. So these are temporary reductions in our earnings, which will absolutely reverse.

Operator

The next question comes from John Kim of BMO. Please go ahead.

Speaker 8

Thank you. Given all your commentary on street retail and how it's recovered, the pricing has been very strong. Are you going to be looking to sell into this strength? Or do you think market rents are going to improve? Or is this really just telling us to update our N and D estimates?

Speaker 2

Hi, John. How are you? Well, the first thing is we're enjoying The bounce back from the retail, I mean, retail had a target on its back Threatened by e commerce, etcetera. And that has all evaporated and now Retail has become the vogue. We believe that the asset prices of the assets that we own has increased dramatically from the bottom.

Speaker 2

And we may take advantage of those prices by selling assets from year to year Every once in a while, we've already sold a chunk of assets that we really thought were not part of our core. So we've sold some. We may well sell some more. And we're absolutely convinced that rents are going to rise. Will they rise to the peak pricing that they were 5 years ago?

Speaker 2

Probably not, but they're certainly going to rise from here.

Speaker 8

Okay. Do you think you'll get the same pricing you got originally when you established a joint venture? In other words, have pricing and assets reached peak levels from

Speaker 2

We're delighted with the pricing that we were able to achieve In a large joint venture, we're not going to speculate on what the pricing will be.

Speaker 9

John,

Speaker 3

That's speculation. I think if you look at the pricing that Prada and Kering paid, And Steve talked about the half blocks. And you analyze what our portfolio could be worth, then It's not a stretch to say that we're back at those levels or get back to those levels right now. And who knows over time. But I think what you're seeing is, I think the most important thing is you have 2 of the most important retailers in the world who are saying Fifth Avenue is critically important to us.

Speaker 3

We want to be there forever. We are prepared to pay a meaningful price to be there. And I think that the history of these things is the animal spirits get going. You don't think that other retailers are behind them saying, maybe we need to make sure we have a place on 5th and secure our position. So I don't think it's a stretch to think that these aren't the last two transactions that occur on 5th.

Speaker 8

And Michael, you mentioned an impairment that you've taken this quarter related to joint venture assets you're looking to exit. Is it this retail joint venture that you're discussing? Or are there other assets? No. And if so, which ones are they?

Speaker 3

Not the retail. Retail, the worst is past as we've said. Now these were just a handful of Smaller, really all office assets that are in joint venture. The accounting treatment as You guys should know well by now given the Street Retail Venture, the accounting treatment, the impairment methodology is much different from joint ventures than for wholly owned assets. And this is a handful of assets that we intend to exit over the next 2, 3 years and that results in a different accounting approach and thus the impairment.

Speaker 3

It's an accounting convention, what the ultimate proceeds will be realized, TBD, but again, it relates to a handful of smaller assets.

Speaker 2

But there is no doubt that in this cycle, values have fallen. So when interest rates go from 3.5% to 8%, that has an enormous effect on value. And so therefore, I'm very pleased that the impairments were as small as they were actually.

Speaker 8

And just to confirm, this does not include 1290 or 555 CAL?

Speaker 2

No. That's correct.

Speaker 8

Great. Thank you.

Speaker 2

Thank you.

Operator

The next question comes from Dylan Brzezinski of Green Street. Please go ahead.

Speaker 10

Hi, guys. Thanks for taking the question. Just two quick ones on occupancy for both the office and retail side of things. So it sounds like for New York office that occupancy should bottom throughout 2024. And as you guys have already leased up some of the move outs that it We should see a pretty swift recovery as we look out to 2025 and beyond.

Speaker 10

Is that sort of a fair characterization?

Speaker 5

Hi, it's Glenn. I think that's fair. I think you'll see a dip over the coming quarters based on what we talked about earlier. And based on the pipeline, we'll come right back up. I think it's What you're characterizing, yes.

Speaker 5

Probably flattish for 24 overall.

Speaker 2

Hang on, just a word about occupancy. So the market occupancy is in the high teens. So our occupancy is, give or take, around 90 a half or half south of 90. If you look back over our history, our normal occupancy is a hair over 95, 96, 96, they call it 96. The difference between 96 and 100 is kind of like structural vacancy.

Speaker 2

You never get to 100% on a large over 20,000,000 square foot portfolio. So our occupancy is really the difference between our vacancy is really the difference between 96% 90%, let's say 6%, which we think is we can do better, we will do better, but we think that's pretty good performance in a soft market. Now the next thing is that when we rent up the space and as the markets revert to normal From $90,000,000 to $96,000,000 that's a very significant increase in our earnings. So we have that in front of us for sure.

Speaker 10

Great. And I think that kind of sort of leads into my next question is on the retail side of things. As we look at the portfolio today, I In your disclosure, you guys say occupancy is high 70s, pre COVID you were mid 90s. I guess just how do we think about the there given some of the comments that you guys laid out regarding the leasing pipeline?

Speaker 2

Well, the retail occupancy is really sort of an anomaly. It includes the Manhattan Mall JCPenney bake, which vacated a couple of years ago. And that's 11 points of occupancy, is that right? And what's the next what's the second one, Tom? Yes, Farley, the retailer.

Speaker 2

And then Farley, We have slow going on the ninth Avenue side. So between those 2, we're somewhere in the probably mid-80s.

Speaker 4

That's helpful. Thanks guys.

Operator

The next question comes from Vikram Malhotra of Mizuho. Please go ahead.

Speaker 9

Morning. Thanks for taking the question. Just I want to just go back to your comment about FFO troughing in 2024. So just Two clarifications to what you've said first. One is the Facebook lease 770, is it was it clear the 200 or so 1,000 square foot expiring there a move out, but then the rest is there long term, number 1?

Speaker 9

And number 2, could you just Roughly quantify the move outs you mentioned, what is the FFO impact this year to that?

Speaker 5

On the first question, the remaining met of 500,000 feet is long term. That's correct.

Speaker 3

Right. So the 270,000 piece is just that one component this year. And the remainder Vikram, We don't give guidance, right? There's a number of ins and outs. Yes, you can just quantify the specific three situations we mentioned, but there's other things that are going on as well.

Speaker 3

So I don't want to isolate and say, on these 3, this is the impact because that doesn't give the full picture. Net net, we expect it to be negative. How big? We have to see what transpires across the whole portfolio.

Speaker 9

And so I guess just second question is to clarify. You're basically saying with the move outs, with the interest rate impact, etcetera, the ins and outs, you think FFO will go occupancy will dip. You're assuming the lease rate will eventually come back is what I'm assuming you were referring to. And then the impact of all that leasing will help 25 recover FFO wise. Is that fair?

Speaker 9

Is there any other big moving piece to that equation?

Speaker 3

No, I think that's fair. Obviously, look, as we lease up Penn, which is and some of the other vacancy that Steve mentioned, It's not just natural turnover, that's going to power that as well. But I think your general comment is accurate. So

Speaker 2

I agree it's accurate. So to summarize, interest rates have gone up have been painful. They will go down. They're not going to go down all the way to 0, but they will go down. And so that's going to increase our earnings from here.

Speaker 2

Our occupancy is going to climb from, say, 90 to whatever. And so that's going to increase our earnings. And then the big thing is over the next 2 years, To Penn will rent the income from that will come online. Now that's probably over $100,000,000 So these are fairly numbers. But overall, you're 100% correct.

Speaker 2

Thank you.

Speaker 9

Okay, great. And then Steve, just last You mentioned external growth opportunities at some point, obviously, paying a delevering. I'm assuming FFO growth important, but so that when you look to maybe as the Board and yourself, you look to avoid executive LTIPs going forward. What are maybe 1 or 2 of the top metrics that could be different the next 5 years versus the last 5 years in terms of gauging those LTIP awards?

Speaker 2

I don't know how to answer that question. We don't give guidance for next quarter. And it's very difficult to predict what's going to happen over the next 5 years. But a couple of to talk around that very We are a New York centric company. I don't imagine that we will open up a new beachhead where we don't have the same kind of depth of experience, knowledge and franchise So basically, we're a New York company.

Speaker 2

My guess is that unless something that I'm not contemplating comes up, we will stay a New York company. Now we opened up a beachhead in Washington some years ago, spun that off into a separate company, which I think is a terrific opportunity. And then we had a large, northeastern shopping center company, which we also spun off. So we have experience with different geographies, but my guess is the main company will continue to be New York centric. The likelihood is we will to be a large aggressive office company.

Speaker 2

But I think I've said this before, we will not make acquisitions of conventional office At full pricing, we will only be a buyer at I don't want to call it distressed. What's the right word, Michael? Okay. At distressed prices for office buildings. And we will only buy the finest office buildings.

Speaker 2

We have some residential and we might do a little more of that. And then what we will develop in the Penn District is an extraordinarily important of our company and maybe arguably the most important development in the country as we go forward. You can't build anything in the Penn District today because of the frozen capital markets. You cannot do it. The math doesn't work.

Speaker 2

But as that begins to thaw, We will consider residential building and developing residential in that marketplace. And we might even sell a piece of land to a residential developer. So we can't predict what's going to happen. But in 5 years, we will be New York centric. We will be minority in office company and the Penn District will be really important 5 years from now.

Operator

The next question comes from Alexander Goldfarb of Piper Sandler.

Speaker 11

Steve, just Talking about the comp plan that you guys put in place around 350 Park at the year end, obviously, in the middle of last year, the stocks were on their back and you guys Revised your comp plan understandably just given how the stock was depressed and I think we all understood that. At the end of the year, the $350,000,000 comp plan definitely surprised and especially that shareholders have to wait till the end of this year to figure out their dividend for 2024, the stub the $0.30 stub aside. So can you just walk through how we should think about That comp plan for development project that doesn't deliver for another decade while you're talking about earnings still going down this year and shareholders Having to wait another year for the dividend, just want to understand that, especially in light of the mid year update that you guys did for the senior executives and upper generation last summer?

Speaker 2

Sure. How are you, Alex? Let me go backwards first. Your comment about the dividend. We have had an enormous number of incomings from shareholders, analysts, etcetera, and industry peers saying what we did with the dividend was correct.

Speaker 2

And to continue to pay by the way, we will right size the dividend, but to continue to pay overpay a dividend, etcetera. And this capital market is just not the most efficient use of capital. So you seem to be on the other side of that. I can tell you that most of your friends and peers are think that what we did was the correct thing. Pardon me.

Speaker 2

Now, I need some hot water, Barry. So now let's go to the I can't get you to clarify

Speaker 3

if I was there.

Speaker 2

Well, I'm not going to get into that. Now let's talk about the development fee comp So this is something that we've been thinking about a long time. So the first thing is its objective is retention, Reward to increase motivation and to incent our Most important employees retention, reward, motivation and incent. So the first thing is that anything that is paid out on that comp plan comes from joint venture development projects. We don't do a lot of those.

Speaker 2

350 Park is probably in my memory the first one. We did 220%, 100%. So we don't do a lot and we own the Penn District 100%. So this doesn't come into being until there is a joint venture partner that pays a development fee. Now I talked about incentives and motivation.

Speaker 2

We think that it's shoulder to shoulder with our shareholders that we do this kind of investing. And we think it's also shoulder to shoulder with our shareholders that we bring in outside third party capital, the funds, which has become most of our peers in the industry are using outside capital. We haven't done that in the past. So we want to do that in the future. So that's the beginning of it.

Speaker 2

By the way, it's a very small plan. We don't expect it to be substantial in any way. And as we look at it and as we review our senior management compensation and even down the line, We find that our compensation is lower than almost all of our peers. So this is a way to have performance based comp, a small amount by the way. And this is other than stock based comp because we can't control the stock price, but we can control our performance in joint ventures.

Speaker 2

It's only payable out of 3rd party Not development fees that Verneta would be paying. And we think it's highly appropriate. We probably made a mistake. We did a good job of socializing the June comp plan. We sort of didn't do it with this development plan because we thought it was very small.

Speaker 2

We thought shareholders would get it. And frankly, I made a mistake. We should have told Our shareholder base is what we are going to do. I myself have hang on. I myself am We're really unhappy to get any negative comments about that.

Speaker 2

And but there it is. We think it's right. We think it's a good way of comping our people. We've done I think our people are underpaid certainly at the highest level and at the highest level. And by the way, doing a 2,000,000 square foot building In New York City, it's backbreaking work.

Speaker 2

It's night since weekends, it's backbreaking work. And we think that the team deserves it.

Speaker 11

So Steve, but to that point, if it's a small amount, it would seem like something that's just part of the annual comp committee like, hey, you guys did a great job As part of your bonus for your 2023 or 2024, we're rewarding. So if it's a small number, it doesn't seem like that much of an incremental incentive. And 2, it just seems like ordinary course that management is expected to do to drive value for shareholders and would be part of their regular course compensation. It's not clear why it would be a standalone.

Speaker 2

Obviously, I don't agree with you.

Speaker 6

Okay.

Speaker 2

But this is I would like to agree with you. I would like you to agree with me. I'd like you to agree with me rather than me agree with you. But anyway, No comment in this plan is paid unless it goes through the comp committee of the Board as they take all circumstances into account. So there you have it.

Speaker 11

Okay. Let me switch. Glenn, on PENN2, I believe you guys switched brokers from your original one to a new one.

Speaker 6

Just curious, the progress that

Speaker 11

you guys had on PENN1 seemed Pretty good. You toured us last year of the project. It certainly seemed impressive what you guys have done with PENN1. It seemed like leasing was going well. What happened with PENN2 that you found it necessary to switch brokers.

Speaker 11

And is that sort of a repositioning of the asset, different tenants? Or was there something else that you learned through the process that caused you to switch brokers on PENN2?

Speaker 5

We did not switch brokers. The Cushman and Wakefield team is additive to my team, something we do not do often as you know, but here we decided to do it To cover the entire market, both regionally, locally and nationally, we brought in a great team. The team had just done all leasing over in Manhattan West. So it's additive, not a switch. At PENN1, it remains the Vornado team.

Speaker 5

And that was the reasoning for doing the PENN2 add of Cushman and Wakefield, but no switch, no change, normal course of business.

Speaker 2

Alex, I'm confident that the gold medal team of Glenn and the rest of his team in house have The strength, the ability, the franchise to do the job. But we're in the no stone unturned business. And so we thought that adding Cushman to have that extra Look into the marketplace was a good piece of insurance and it's working out.

Operator

The next question comes from Caitlin Burrows of Goldman Sachs. Please go ahead.

Speaker 12

Hi, thank you. This is Julian Blouin on for Caitlin. Thank you for taking the question. Steve, regarding the dividend and adding to Alex's question, last quarter you provided a really helpful breakdown of your 2023 expected tax I was wondering if you could provide the same for 2024. And should we assume that the 4th quarter dividend will be again set at sort of minimum required taxable income level?

Speaker 2

The answer to that is that we have A broad idea of what the 2024 taxable income will be as you would expect. But it is not a number that we are comfortable enough with disclosing publicly. So That's the first point. The second point is, in this time, it's a financial policy of our Board to pay out the minimum dividend Because from a capital allocation point of view, that's the right decision. We have had, As I said before, numerous investors, shareholders, analysts, peers tell us that's the right decision.

Speaker 2

The dividend, the most interesting part of the dividend, however, will likely be gains on asset sales because all of our assets have very low basis. So if we choose to sell an asset of 2 or 3 or 4 in 2024, That will determine more than anything what the dividend would be.

Speaker 12

That's really helpful. Thank you. And then maybe switching gears to bet 10.1, the ground lease renewal. I think you mentioned at the beginning of last year that you thought the final number could come in lower than the original $26,000,000 estimate just based on evolving sort of market conditions. Is that still your expectation?

Speaker 12

And I guess what is the latest update on that process?

Speaker 2

Well, that's absolutely my But there's somebody on the other side that disagrees with that. So we're in the middle of the process, The arbitration process to determine what the number will be. And that's something we can't speculate on.

Speaker 12

Okay, great. Thank you.

Speaker 2

Yes, sir.

Operator

The next question comes from Nick Yulico of Scotiabank. Please go ahead.

Speaker 13

Thanks. Just first a question on PENN1, based on the incremental yield you gave last quarter in the sup, I know it's now in the, I guess, more stabilized pool. But it looks like there was eventually $59,000,000 of future NOI assumed now on a cash basis. Can you just let us know like how if any of that's already been captured yet and just how to think about the impact of any of that if any of that benefit assumed for this year?

Speaker 3

Nick, it's Michael. I can't give you the exact numbers off hand. The answer is some of that is back in 2024, but this is a rolling program and so it will continue to come in next year as well. Obviously, there's vacancy there that gets leased up, that will come online as well. So the answer is, some of that's there.

Speaker 3

I can tell you is And it's not in the development yields anymore just because the project is done. But our the last one we had published, We're confident in terms of hitting that and hopefully exceeding it. But we can sort of circle up and get a little more specifics. But some of that's in 2024, but it'll roll in over the next year or 2 as well.

Speaker 13

Okay. Thanks.

Speaker 2

I'd like to make a couple of comments. The first is that All of us focus on what the initial yield is on an asset. I think it's a very interesting exercise to say what can that asset produce in terms of revenue 3, 5, 7 years out. So we believe, for example, in the Penn District, we believe in the Westside of Manhattan. We believe that when you combine Penn District with Manhattan West and Hudson Yards, I mean, that's a hell of a neighborhood, highly sought after and whatever.

Speaker 2

So we believe that these assets will return a very satisfactory return at the get go and we'll grow from there as we continue to own them over the next period of time. So there's that. We also believe that I mean, there's some question about Which is more important, Penn or Grand Central? Well, the answer is obviously Grand Central is at the foot of Park Avenue, so that's very important. I think everybody considers Park Avenue to be the principal business boulevard in the country, maybe even in the world.

Speaker 2

We have a representation of multiple assets on Park Avenue too. But it's interesting to note that New Jersey transit comes into only Penn Station. And New Jersey is the fastest growing suburb of New York. So we are very, very happy with our position.

Speaker 13

Okay. Thanks for that. Just second question is on PENN1 and PENN2. You guys give only the occupancy numbers in the sub. And I'm just wondering if there's any way that you can give us a feel for the like a leased rate For those assets or even think about how much of the leasing you've achieved so far of what your ultimate plan is On getting to these stabilized cash yields you talked about for the projects?

Speaker 3

So how much you're going to go through? How much PENN1 release? How much they go?

Speaker 5

I mean, as Michael said, PENN1 is a multiyear program. When we set out on the project, there were over 200 tenants in the property, which we're rolling over the next call it 5, 6, 7 years. We've leased a considerable amount of space in PENN1 to date and we continue to cycle through if these tenants expire year to year. So it's been very successful. We've leased over 200,000 feet this year.

Speaker 5

It rents north of 90,000 and we have a lot

Speaker 2

of action in the pipeline now.

Speaker 5

Similarly at PENN2, we talked about the pipeline. We have deals coming to 4 at PENN2 as we speak. And you could stay tuned on that activity as we roll into the 1st, Q2 of 2024.

Speaker 13

Okay. Yes. No, I appreciate all the commentary on the re leasing. It's just honestly a little bit hard to understand where you guys are at in terms of the re leasing of those projects and at what point you're getting the NOI benefit because there's no like Bridge provided any more about the rolling out and the rolling in of NOI. So it's honestly very difficult to quantify what the benefits of the is going to be over the next couple

Speaker 3

of years? I would say, Nick, Let's go through it, right? PENN2, we've got $1,400,000 to lease up, okay? PENN1, we've probably taken care of, I'm going to Rough guess, we're going to have a square footage today, right? So there's probably another $1,200,000 to go in terms of rolling that up and marking that to market, right?

Speaker 3

Between those two assets, In a short period of time, and let's call it let's just let's use the outside, 3 years, right? There's going to be an incremental $200,000,000 that comes from an NOI that comes from those assets, maybe a little less from Farley too terms of remaining retail. But the bulk of that is PENN1, PENN2. That's probably in net uncapitalized interest, another $150,000,000 right? So That's as crisp as I can give it to you, whether I'm a little bit early, a little bit late on the timing, that's the magnitude and it's going to happen.

Speaker 13

Great. Thanks. I appreciate that extra commentary, Michael.

Speaker 3

Okay. Yes.

Operator

The next question comes from Anthony Paolone of JPMorgan. Please go ahead.

Speaker 8

Thanks. I just have one. Michael, if I got your comment right earlier, I think you mentioned, debt markets are pretty open right now for retail. And so I was wondering if that creates any opportunities for you all to get paid back on your prep interest in the JV in the near term at all?

Speaker 3

Tony, good morning. We're pleased that the markets are opening. And the answer is, we're starting to look at it, but we've We got some leasing to do on a couple of those assets as well. If you think about a 689 or 5th or the old space at $15.40 So there's a little bit of leasing that's to get accomplished, stabilize 2 or 3 of the assets. But as opposed to something that was sort of not on the table as a possibility, I think it's emerging as a possibility.

Speaker 3

And as the markets continue to improve, the answer is we are absolutely focused on it. And we're So they're gathering data and looking at it. But it's one of those things where we got to do leasing. There's also a size limitation in terms of how much you can put through system. But our goal is to repatriate that capital over time and opportunities emerge.

Speaker 2

I look at it differently. The markets are open, which really means that lenders prepared to give you money at 8%. That's not open to me because the cost of that capital is just too high. And it will this is not the time to be aggressively borrowing unless you absolutely need it. So the answer is, as we look at it from an academic point of view, but it would be very surprising to see our company aggressively refinance the preferred or anything else in this market at these interest rates.

Speaker 2

Now just a minute about our liquidity. We have $1,000,000,000 a month in cash. We consider at some point in time that the preferred is a source of liquidity, not an 8% but lower. But if we had to, it's a source of liquidity and $1,800,000,000 And the next is remember that Penn Plaza has no debt on it. So we've got Penn 1 debt free, Pen2 debt free Farley debt free and the Hotel Penn site debt free.

Speaker 2

So we have an enormous source of liquidity, which we think is pretty interesting.

Speaker 8

Okay. Thank

Speaker 2

you. Thank you.

Operator

The next question comes from Ronald Kamdem of Morgan Stanley. Please go ahead.

Speaker 14

Great. Just one for me as well. I was just looking at the 10 ks in a footnote. You put some really helpful details about Where you expect to release some of the maturities on the office portfolio, I think it looks like flat or in some of the retail at sort of over 30 which I thought was helpful. But trying to connect the dots between those releasing spreads, I think we talked earlier on the call about occupancy potentially dipping in the 1st part of the year before picking up.

Speaker 14

Can you put that all together for us and into a same store NOI number? I know you don't give guidance, but Is there some broad strokes that we should be thinking about same store NOI? Is it flat? Is it slightly down? How should we think about those pieces?

Speaker 14

Thanks.

Speaker 3

It's probably a little bit down in the aggregate. But again, it depends a little bit on what spaces and when happens. So Hard to give you any more guidance than that. But I think your overall characterization in the office on an average basis flat is probably accurate. But as Glenn and his team had a history of doing, we pull forward a number of leases they're going to roll and deal with those.

Speaker 3

So it's sort of hard to give you that number.

Speaker 14

Got it. Thanks so much.

Operator

The next question is a follow-up from Steve Sakwa of Evercore ISI. Please go ahead.

Speaker 4

Yes, thanks. Just two quick follow ups. Michael, I think on the G and A, you and Steve had provided some color, but I just wanted to See, are you saying that in 2024 you think the G and A will be flattish with 2023 or it actually comes down in 2024 versus 2023?

Speaker 3

Well, it's going to come down. The development fee bonds are not going to be there, right? I mean, that was a last dry and that's not going to reoccuritize. That's going down. So the answer is yes, we think it will be down.

Speaker 4

Okay. But just basically stripping that out, That's really the only kind of one timer that would sort of come off the 23% number?

Speaker 5

Yes. There's a little bit more in terms

Speaker 3

of things that were accelerated that aren't going to Just based on historical vesting for certain people. But So the answer is net net between development fee that, I don't know, Tom, we're talking $10,000,000 total at neighborhood, probably somewhere in the neighborhood that comes off the books in 24.

Speaker 4

Okay, great. Thanks. And then just second follow-up, I think you've got a big refinancing that you're working on with your partner at 280 Park Avenue. Just any kind of color, I think that might have gone into special servicing. I assume that that was maybe part of the mechanics of getting that loan refinanced, but just any color or commentary you could provide on that refinancing would be great.

Speaker 4

Thanks.

Speaker 3

Sure. I'm not going too much given we're still in the middle of the process, but it is a CMBS loan. Going into special servicing is part of the process of working that out. And we and our partner are making good progress on that and we expect to get to a successful resolution with terms that we think are attractive. So more to come shortly there, But we've been hard at work for the last 6, 9 months.

Speaker 3

The CMBS loans are Painful, complicated, given the way they're set up, but You have the right sponsorship and I think they recognize that. So we're getting closer to the finish line.

Speaker 4

Great. That's it for me. Thanks.

Speaker 2

Thank you.

Operator

That concludes today's question and answer session. I would like to turn the conference back over to Stephen Roth for any closing remarks.

Speaker 2

Thank you, everybody. We appreciate your interest in our company. We learn from you every call. This was an interesting call, and we it's snowing in New York, and we'll

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.

Powered by Quartr

Key Takeaways

  • Office leasing strength: In Q4 Vornado leased 840,000 sf in NYC and 2.1 M sf for full-year 2023 at record starting rents of ~$101 psf, including 1.2 M sf above $100 psf, signalling an office market foothills of recovery.
  • Solid retail rebound: Retail in NYC has materially bottomed and is rapidly recovering, underscored by $900 M+ Upper Fifth Avenue luxury deals (Prada, Kering), with Vornado’s JV owning 26% of prime Fifth Avenue blocks and a robust leasing pipeline.
  • Penn District transformation: The PENN2 renovation is ~90% complete and, combined with newly finished PENN1 plazas, creates a landmark public space “game changer,” while 300 k sf of leases are in negotiation and 2 M sf+ pipeline supports upcoming NOI growth.
  • 2023 financial resilience: Same-store cash NOI in NYC rose 2.8% in 2023 (Q4 +2%), and full-year comparable FFO as adjusted was $2.11 per share (down from $2.65) due to higher interest costs; 2024 FFO is expected to trough with a ~$0.30 headwind from hedges, then rebound as rates ease and new leasing income comes online.
  • Robust balance sheet: Despite a still-challenged office capital market, Vornado holds $1.3 B cash, $1.9 B undrawn revolver and debt-free core assets (PENN1, PENN2, Farley, Hotel Penn site), while retail financing is “wide open.”
AI Generated. May Contain Errors.
Earnings Conference Call
Vornado Realty Trust Q4 2023
00:00 / 00:00