Vornado Realty Trust Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 15, 2022

There are 11 speakers on the call.

Operator

Good morning, and welcome to the Vornado Realty Trust 4th Quarter 2021 Earnings Call. My name is Richard, and I'll 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 I will now turn the call over to Mr.

Operator

Steve Borenstein, Senior Vice President and Corporation Counsel. Please go ahead.

Speaker 1

Welcome to Vornado Realty Trust 4th quarter earnings call. Yesterday afternoon, we issued our 4th quarter earnings And filed our annual report on Form 10 ks with the Securities and Exchange Commission. These documents as well as our supplemental financial information package 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 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 report on Form 10 ks for the year ended December 31, 2021, For more information regarding these risks and uncertainties, the call may include time sensitive information that may be accurate only as of today's date. The company does not undertake a duty to update any forward looking statements. On the call today from management for our opening comments are Stephen Ross, Chairman and Chief Executive Officer and Michael Franco, President and Chief Financial Officer. Our senior team is also present and available for questions. I will now turn the call over to Steven Roth.

Speaker 2

Thanks, Steve, and good morning, everyone. By any measure, Vornado just reported an outstanding industry leading quarter at the head of the class of our industry peers. Comparable FFO for the quarter for the 4th quarter increased 19.1% from last year's 4th quarter. Company wide, same store cash NOI for the Q4 increased 10.1% from last year's Q4. Same store cash NOI from our New York business for the 4th quarter increased 11.3% from last year's 4th quarter.

Speaker 2

Company wide, we leased 2,900,000 square feet for the year, of which 2,500,000 square feet was in New York, where our leasing teams landed the 2nd and third largest office leases and the 2nd largest retail lease. For the quarter, we leased 1,036,000 Square Feet Company Wide, of which 1,008,000 Square Feet was in New York. You will hear more about our leasing activity in Michael Franco's comments shortly. New York office cash starting rents were $83 for the year $88 for the quarter. New York office cash mark to markets were a positive 10.8% for the year And a positive 29.1 percent for the quarter.

Speaker 2

Importantly, our triple digit Madison Square Garden anchor lease at And our current leasing successes at PENN1 validate our Penn District program. Here's a short update on the Penn District. The acclaimed Moynihan Train Hall is open to the public. Our retail Leasing in the tray hole is nearly complete with 36 I'm sorry, pardon me, with 26 leases executed. The doubling in width and doubling in height of the Long Island Railroad Concourse is scheduled to be completed by year end.

Speaker 2

We own the retail on both sides of the LIRR concourse, all of which space was vacated to accommodate the construction. We are now finalizing with over 30 retailers for that space, many of them food oriented at terms that are better At Farley, we have turned over all of Facebook's 730,000 square feet to them foot and it sit out. At PENN1, our grand new lobby and multi floor amenity offerings are largely completed and open. Our amenities here are extensive. We believe them to be the largest amenity package in the city by far and unique, Tailored to the demographic of our workforce and is receiving rave reviews from tenants and brokers.

Speaker 2

After all, We are in the hospitality business and that means pleasing our tenants and pleasing their employees. On the 7th floor of PENN1, our experience Leasing center is open and busy. This 14,000 square foot facility complete with multiple scale models And floor to ceiling wall to wall videos vividly illustrates and brings to life our vision and plans For the buildings, restaurants, retail, amenities, lifestyle and work style that the Penn District will become. At PENN2, we are give or take 25% into construction. Our construction operations in the Penn District span 3 full blocks 31st Street to 34th Street along the West Side of 7th Avenue.

Speaker 2

In a few short months, everything in our Penn District will come to life As shiny modern curtain wall continues to be erected on the PENN2 facades, as steel is erected giving shape to the massive Two block long bustle and architectural statement in scale and substance that will announce the entrance to Pennsylvania Station, Madison Square Garden and our office building. And as the hotel pen across the street begins to come down, daylighting that unique site. My excitement and conviction about our Penn District grows quarter by quarter. I still believe that a winning strategy is to allow investors Choose between the high growth development oriented Penn District or our other pretty terrific in their own right Class A traditional core assets Or both. Nonetheless, we have decided to pause the execution of a separation by tracker.

Speaker 2

This is a purely internal transaction with no counterparty or deadline, and I believe a delay until COVID is resolved and New York is returned en masse A word about our retail business. The Manhattan retail market has definitely bottomed Activity is accelerating. For 2021, our retail cash NOI was $160,800,000 blowing away our guidance of $135,000,000 Further, we are increasing our 2022 retail cash NOI guidance by 15,000,000 From $160,000,000 to $175,000,000 While we own a very large and very important trophy quality In Egypt, San Francisco and Chicago, Renato is primarily a Manhattan centric company. As we interact with our tenants, Other occupiers and market participants are conviction about Manhattan's future performance, importance and even dominance is stronger than ever. Case in point, Manhattan has become the 2nd home to all of the tech giants, specifically the New Westside and they continue to grow here.

Speaker 2

With inflation at the top of the jure, I should point out that replacement cost for New York office buildings is rising pretty aggressively. I submit that replacement cost has always been a leading indicator foretelling That our existing stock of office building will be increasing in value. In the same vein, the Manhattan residential market is, I believe, Also a leading indicator. It went from 100% occupancy pre COVID down to 70% at the height of COVID and is now back to 100% At higher than pre COVID rents by the way, as New Yorkers have returned. Restaurants are full and standing room only.

Speaker 2

So The city is full, but office buildings not so much. That last domino will be when employers and employees resolve hybrid work schedules The office districts are again teaming with activity and I submit that will come sooner than you think. That concludes my remarks. Now to Michael.

Speaker 3

Thank you, Steve, and good morning, everyone. As Steve mentioned, we had an outstanding quarter and a strong year. 4th quarter comparable FFO as adjusted was $0.81 per share compared to $0.68 for last year's 4th quarter, An increase of $0.13 or 19%. And for the year, comparable FFO was $2.86 per share, Up $0.24 or 9% in 2020. We have provided a quarter over quarter bridge in our earnings release on Page 4 and in our financial supplement on Page 8.

Speaker 3

We had several non comparable items in the quarter, primarily 1290 Avenue of the Americas, defeasance Costs And a TRS non cash deferred tax liability, partially offset by 2.20 Central Park South gains, which in total reduced FFO by $0.08 per share. As we look ahead, we are expecting another strong year in 2022 with double digit percentage FFO per share growth, Driven primarily by previously signed leases in both office and retail, particularly Facebook and Farley and the continued recovery of our variable businesses. With respect to our variable businesses, we continue to see a recovery in the 4th quarter. Our dominant signs in Times Square and the Penn District Continue to attract disproportionate demand and have healthy signage bookings. BMS continued to perform near pre pandemic levels.

Speaker 3

A number of trade shows have successfully taken place, albeit with lower attendance, primarily due to travel restrictions. And finally, we still expect our garages to be fully back in 2022. Other than Hotel Penn's income, we still Company wide same store cash NOI for the Q4 increased by a strong 10.1% over the prior year's Q4. Our core New York office business was up 8.5% and our retail same store cash NOI was up 32.3%, Primarily due to the rent commencement on new leases at 595 Madison Avenue, 4 Union Square South, 770 Broadway and 689 5th Avenue. Our New York occupancies also continue to recover nicely.

Speaker 3

Our office occupancy ended the quarter at 92.2%, Up 60 basis points from the 3rd quarter and 110 basis points from the trough in the 2nd quarter. Retail occupancy ended the quarter at 80.7%, Up three fifty basis points from the Q3. We expect further improvement in both occupancies by year end 2022 based on our deal pipeline and modest 2022 office expiration schedule. Now turning to the leasing markets. The New York office leasing market continues to strengthen and show resilience in this period of change, supported by strong economic and private sector job growth.

Speaker 3

Quarter over quarter sustained leasing momentum led to total volume in 2021 of 25,000,000 Square Feet, By far the highest level since the start of the pandemic. Tenant demand continues to surge, especially from technology and financial services users. And importantly, these companies are committing to long term leases as they map out their futures. Tour activity has returned to pre pandemic levels With lots of deals in the works. Most industry experts are forecasting market rent occupancy improvement in 2022 With pent up demand building as more employers get off the sidelines and into the market.

Speaker 3

The office market's recent performance is completely centered on flight to quality, As the highest quality properties are clearly winning. Tenants are strongly attracted to transit oriented properties with state of the art systems, amenity rich programming, Outdoor space and health and wellness features, along with food and beverage offerings. And importantly, they are happy to pay for quality and value, As it's more important than ever to CEOs that they be in appealing and engaging workspaces to attract and retain their employees. JLL reports that in 2021 an all time high 164 leases comprised of 3,400,000 square feet We're signed at $100 plus starting rents. Our leasing team led the market here with 831,000 square feet We're 25% of these deals, including the largest deal in this class for the 2nd year in a row.

Speaker 3

Our lease with MSG at PENN2 follows in the footsteps of We expect this trend to continue, which bodes well for rental growth for our high quality assets. Overall, we continue to outperform the market as is evident from our statistics and think it is worth underscoring our leasing accomplishments during the pandemic over the past 4,480,000 Square Feet Leased, Starting Rent of $85 per Square Foot, Mark to markets of 8.6% cash and GAAP of 14.1%, an average lease term of nearly 13 years. We executed on a number of large important leases during this timeframe. Facebook, 730,000 feet NYU, 633,000 feet Interpublic, 513,000 feet Madison Square Garden, 428,000 feet Apple, 336 For more than 2,200,000 square feet total, with initial starting rents of $83 per square foot and an average lease term of 11 years. Moreover, cash and GAAP mark to markets were strong at 10.8% and 15.9%, respectively.

Speaker 3

38% of this activity were trophy transactions at triple digit rents. During the Q4, we completed 23 leases totaling 954 Our average starting rent during the quarter was $88 per square foot. Cash mark to market was 29%, GAAP mark to market was 39% and average lease term was 14 years, all very, very strong figures. The Madison Square Garden lease is another major milestone for us in the Penn District and validates our program to take rents from the 60 Richard?

Operator

Yes, if you could unmute the backup line.

Speaker 3

For the year, we executed 36 leases for 229,000 Square Feet at positive GAAP and cash We have an active pipeline with over 170,000 square feet in the works. Interest in the Penn District in particular is strong and we expect it to grow with the commencement of leasing in the Long Island Railroad Concourse. Turning now to Chicago and San Francisco. While the Chicago market continues to be challenged by high vacancy, Negative absorption elevated tank concessions. There are signs which suggest a growing confidence by tenants entering the market as leasing activity continues to increase quarter over quarter.

Speaker 3

We have recently embarked on bringing our New York Work Life amenity ecosystem from Penn 1 to the mark And plan to spend approximately $40,000,000 to create a new tenant program focused on the 1st and second floors. The program will further differentiate The Mart and include 1st class fitness and conferencing facilities, a new outdoor plaza and main entrance fronting our River North neighborhood And new outdoor spaces and landscaping on the South Drive along the Chicago River, building on what we first accomplished in 2016 with our Grand Stair Restaurant and new food hall. We anticipate starting construction in the second half of this year with the completion during 2023. We have begun to introduce the project to the marketplace and are experiencing a real uptick in tour volume proposals. We have a lease out for 80,000 square feet with a fintech company and are in advanced dialogue with 50,000 square feet of potential new tenants.

Speaker 3

In San Francisco, the city's office leasing market is beginning to thaw and recovery seems to be underway. Office leasing volume averaged 2,100,000 square feet over the last two quarters. We renewed 446,000 square feet in total here during 2020 and 21, putting the campus in great long term shape. We have 0 lease expirations in 2022 and a modest 200 3,000 square feet expiring in 2023 2024. Where we finalized renewal with 1 tenant for 50,000 square feet just last week at Again, positive mark to market and are in discussions with the remaining tenants to also renew.

Speaker 3

You will see that our occupancy in the campus declined from 98% to 90 4% this quarter, which is solely a function of bringing back the 78,000 square foot cube, which is vacant back into service. The balance of the campus is full. Lastly, turning to the capital markets. The investment sales market is continuing to pick up with return of large office deals at strong pricing such as $441,000,000,000 452 Fifth Avenue for $855,000,000 and 1 Manhattan West for $2,850,000,000 Investor interest in New York is clearly rebounding As I see that the city has bottomed and find the relative value compelling. On the debt side, despite the move up in rates, Spreads remain tight and all in coupons attractive.

Speaker 3

We refinanced over $4,000,000,000 of debt in 2021, taking advantage The very favorable financing markets to lock in low rates, including our early refinancing in November of the $950,000,000 loan on 12 The Avenue of the Americas. We have modest debt maturities in 2022, the largest of which we are currently in the process of refinancing and Essentially no maturities in 2023. Finally, our current liquidity is a strong $4,105,000,000 Including $1,930,000,000 of cash and restricted cash and $2,175,000,000 undrawn under our $2,750,000,000 With that, I'll turn it over to the operator for Q and A.

Operator

Thank you. We will now begin the question and answer session. May need to pick up the handset first before pressing the numbers. Each caller will be allowed to ask a question and a follow-up question before we move on to the next caller. And we're standing by for questions.

Operator

Our first question online comes from Mr. Manuel Corfman from Citi. Please go ahead. Your line is open.

Speaker 4

Hey, good morning. It's Michael Bilerman here with Manny. Steve, I want to go to your comments around the tracker and putting it on pause. Maybe you can just walk us through your and the Board's decision, to put that on pause. Obviously, you made the announcement last April when we were in the throes of COVID.

Speaker 4

It had been multiple, multiple years that you've been thinking along those lines. And so why put it on pause now when There is a lot of vibrance coming in the city, a lot of excitement. Obviously, the office stocks have rebounded. It would seem Actually, it would be a good time to put something out. So maybe just walk us through the decision of putting on pause and whether You would look at other transaction alternatives to a tracker or is it still 100% on that path.

Speaker 2

Good morning, Michael. How are you?

Speaker 4

Fantastic. I'm calling you from the office.

Speaker 2

How about that? So I hear you had a little dust up yesterday. Yes, I did hear. So look, I mean, I think that my remarks speak for themselves. We think COVID is not resolved yet.

Speaker 2

Our tenants, customers Yes, they come back in coming back to work, getting their employees back into the office or the schedules, etcetera. So we're still in an uncertain period. And our thinking is that we want to put our best foot forward. There is still uncertainty. We are still at the foothills of recovery.

Speaker 2

And we just don't think the timing is right. And so that's our judgment and I stand for it. With respect to your I still have conviction about the concept of having our investors be able to invest in either the Penn District or our pretty Other assets, and whether there's other transactions, there's no other transactions that are contemplated at the moment, although we do have a responsibility to cover all the bases.

Speaker 4

I'm just really trying to understand what really changed in your thinking, because this wasn't a financial driven transaction, You didn't have a counterparty, which you talked about. This is

Speaker 2

really not Michael, I couldn't be clearer, okay? This we're still not done We contemplated for success, okay? I couldn't be clearer.

Speaker 4

No, I know you're clear, but this is You announced this during COVID, right? And you've been progressing along this path for a number of years. So that's it's just Surprising to now put it on pause when we've had all this information and you've been doing this during COVID.

Speaker 2

I'm happy that you're surprised. I have nothing further to say.

Operator

Okay. Thank you. Thank you. Our next question on line comes from Mr. Steve Sakwa from Evercore ISI.

Speaker 5

Yes, thanks. Good morning. Michael, unfortunately, the line cut out for maybe a minute or 2. I think we lost a little bit of information, or at least I did. And I don't know if you would talk a little bit about the pipeline, but maybe you could just talk a little bit about the leasing pipeline and perhaps how the MSG lease It directly impacted the leasing stats in the Q4.

Speaker 5

I realized there was a very big mark to market on that lease, and so it probably Help to get you up towards that 29% figure. So I was just wondering if you could unpack maybe MSG from everything else in the quarter and then Talk about the pipeline in general.

Speaker 3

Steve, I did make a comment on the MSG. If you take MSG out on the mark to Mark, I guess that's where I cut out. But MFG was a tremendous deal. That being said, The balance of the quarter was similarly outstanding. And if you take out the MSG lease, the mark to markets For the quarter, we're 9.2% cash and 12.9% GAAP.

Speaker 3

So Outstanding starting rents and mark to markets really across the board, which I think is reflective of our portfolio.

Speaker 2

Steve, let me give you a little color the way I look at it. There were 3 components in the leasing this quarter, okay? One was the MSG lease. The second was 136,000 Square Foot Lease In a building we own in Long Island City, and obviously, and that the market there is in the mid-30s of rents. So that, that was lumped into the averaging and then there's the balance of the portfolio.

Speaker 2

The number that I think is the most relevant is the starting Rents, because I think that, that speaks to the quality of the assets. So the rent in Long Island City, Long Island City component of the quarter's leasing. And by the way, Glenn and his team did a bang up job in the quarter, This year and last year, and they always do. And we couldn't be prouder of Glenn and his teams. Long Island City lease was 136,000 square feet in the 30s.

Speaker 2

The Madison Square Garden lease we know about, okay? By subtraction, the remainder of our portfolio that is ex Long Island City and ex Madison Square Garden, the starting rents were $94 a foot, okay? Not $65 not $70 $94 a foot. So I think that if you focus on that, that is a measure now of course this is idiosyncratic. It depends quarter by quarter by the mix of buildings and the mix of tenants.

Speaker 2

So but what I'm saying is the fact that the balance of our Ex Long Island City and Ex Madison Square Garden commanded $94 starting rents to me is extremely telling The quality of our assets and the reception that our assets get into the marketplace.

Speaker 6

I'll talk about pipeline.

Speaker 7

Hey, Steve, it's Glenn. On the pipeline of Michael's remarks, we said 2 things. 1, we have leases out, final negotiations of more than 400,000 feet. Notably, about 80% of those deals are with new and expanding tenants. Furthermore, we're in a very good negotiation on another, Call it more than a 1000000 feet, which is a real balance of new expansion and renewals across the portfolio in all the buildings With tenants from most of the industry sectors, very strong activity throughout the portfolio as we sit here today.

Speaker 3

And Steve, out of that 4 Again, maybe I cut out here. 160,000 of that square feet is at Penn 1 at over $90 per square foot starting rents.

Speaker 2

So just to continue down the line on this question and it's an important question and the statistics are important Steve, so thanks for the question. Basically, what's happening in the Penn District and when we basically announced our plans in the Penn District, we We were going to take the 2 existing buildings, which are the better part of 5,000,000 square feet combined. So these are big They're important assets. And we were going to spend X and we were going to take the rents from $55 a foot average up to Into the 90s and into the triple digits. We believe that our performance as announced this quarter validates that program.

Speaker 2

So the MSG lease is not a one timer, it's not an anomaly. We have lots of leasing to do in the Penn District, Not in the existing buildings, not even getting into the new buildings that we will be doing. And so we will be Announcing, I don't know, the better part of 100,000 square feet a quarter or whatever the number is going to be at $90 rents, maybe tripled digit Rents, almost as far as the eye can see. So these numbers are going to be are foretelling What the future will be and what the growth will be and what the earnings accretion will be coming from the Penn District. But the number that I'm the happiest about is that the balance of our portfolio Commanded $94 this quarter.

Speaker 2

I think that's an extraordinary number and we're very proud and happy about that number. And that also Those assets so that they perform at the level that they are that we were able to daylight this quarter. And I'll give a shout out to David And Glenn, because they did most of the work of repositioning those assets over the last years.

Speaker 5

Great. Thanks for that commentary. I guess, Steve, just as a maybe follow-up, with new government officials in both the Governor and Mayor specifically, I'm just curious

Speaker 2

That's not a follow-up. That's a whole new topic.

Speaker 5

Just Briefly, can you maybe just talk about the mayor and some of the priorities and how they fit into kind of Penn Station and Whether it's a homelessness issue in New York and the crime, just how are you sort of thinking about that? And what do you think are the Key focal points here for the next 6 to 12 months.

Speaker 2

Well, obviously, the densely populated Urban Northern Cities, which go across the northern belt of the country that goes from Washington, D. C. And New York across to Chicago and then across to San Francisco are all pretty much similar, similar politics, Similar demographics. So crime has increased in all of those cities at about the same rate, Homelessness and what have you. So it's a Situation which has is distressing, it's disturbing.

Speaker 2

And we believe The political climate in New York is getting better. If you read the headlines about what the Mayor in Chicago has said, what the Mayor in San Francisco has said, what the Mayor in New York has said, they are all sort of similar and that is that the Situation has to improve and their job is to improve it. So we are extremely optimistic about the political climate in New York at the governor I will add at the mayor level. And we're very supportive and we're very optimistic.

Operator

Thank you. Our next question online comes from Mr. John Kim from BMO Capital Markets.

Speaker 8

Thank you. I had a couple of questions on guidance. You mentioned increasing your 2022 retail guidance to 175. Can you talk about some of the puts and takes on that? Because I know you sold some Since the original guidance was put out, and how does this impact your 2023 guidance, which initially was at that $175,000,000 level?

Speaker 2

We don't give guidance and but we did give guidance on retail Because of the precipitous change in market dynamics. And so we did do that to help you all in terms of your modeling and in terms of your And in terms of your valuing our retail assets, I don't think that it would be productive for me to start getting 93, into 2023. Although we are optimistic about it, we think 2023 will be better than 2021. So on a progression of recovery. And I think, Michael or Tom, do you want to pursue that anymore?

Speaker 3

Yes. I would just say, John, look, first of all, I think if you think about where we were a year or 2 years ago and we first laid This out, I know you've been on this. There were some skepticism and whatnot. I think we've continued to say we own the best retail assets in the city. And there was a period where obviously at the outset of COVID with no tourism, no workers in the city, Leasing went on hiatus.

Speaker 3

It's now picked up. We still need to see consistent return there, but The tourism started to come back pretty significantly in the fall, and so retailers are Now active again and I think what you're seeing in 2021 was the fact that we got You won the pool. We got the benefit of our assets. Again, when you own the Fuller's, when you own a lot of the great assets that we Union Square, etcetera, we saw leasing there. So we're seeing continuation of that and I think a lot of what's going to come through in terms of raising the guidance In 2022 is the fact that we did sign leases at quite a few of our assets and that's going to come online.

Speaker 3

We feel good about the number we put out there. And as Steve said, hopefully, continues to go up from there. But the bottom that We had called earlier in 2021. I think you're seeing come through, and we just need to see a consistent return of Tourism and workers and so forth, the rents have started building back significantly.

Speaker 2

Just from a technical point of view, we did Guide and predict what 2021 would be. We exceeded that by $25,000,000

Speaker 7

So

Speaker 2

the number is now known. We thought it the responsible act for us to Now update what we expect for 2022, and we did that in my remarks. And We're trying to tell you what we think as we think it.

Speaker 6

I

Speaker 8

just want to clarify that the Moynihan retail, is that being pulled forward 2022 or is that still expected to be a 2023 delivery?

Speaker 2

The latter.

Speaker 8

Okay. My follow-up question is on

Speaker 2

Hang on. So the 2022 number does not include the Moynihan retail. So you can just look back and just think the Moynihan retail is pretty substantial,

Speaker 8

My follow-up question is on variable income. So your indication, it's not really quite guidance, but your indication is that will Fully returned in 2023.

Operator

However, if I

Speaker 8

look at your 4th quarter gain on the variable income of 12,500,000 Versus the loss that you had in the prior year, Q4 2020, which was $24,000,000 loss less the Hotel Pen. Hotel Pen was about $14,000,000 It looks like you've already gained back all that variable income that you lost in the Q4 2020. So I'm just wondering if Components of this variable income have changed.

Speaker 2

No. Look, do you fellows want to handle that detail on this call? Paul, do you want to handle it supplementally off the call?

Speaker 8

Either way, I mean it's going to be primarily garages and trade shows that are going to come back. BMS and the sign It's pretty much back

Speaker 6

to where they were pre pandemic.

Speaker 3

Well, I would say the signage is like we had an outstanding Q4 on the signage side and having the dominant sign, As I mentioned in my comments, has paid significant dividends, and that's without having taken a couple of signs offline, right? While we're back to pre pandemic levels on the signage, that's not same store. When we bring those We think that number goes up further.

Speaker 2

And the BMS business and our signage business are growing businesses by the way. So in normal So what we're doing now is recovering from the hit of COVID. In normal times and going forward, we expect those businesses to How else can we help you, John? Next question please.

Operator

Thank you. Our next question online comes from Jamie Feldman from Bank of America. Please go ahead.

Speaker 6

Great. Thank you and good morning. I wanted to get your

Speaker 3

thoughts on exposure to floating

Speaker 6

As you look at the balance sheet, you do have a decent amount. Clearly, we're in a rising rate environment. Maybe if you could just kind of step back and tell us your And what we should expect going forward in terms of either earnings risk from floating rate debt or just How you expect to run the balance sheet in terms of percentage floating versus fixed?

Speaker 3

Jamie, good morning. A few comments. So the answer is, we do run our balance sheet with a mix. I don't think anybody can Predict exactly where rates are going in any environment. And the reality is if you'd borrowed fixed for the last several years, you would have Generally wrong in terms of where rates are going.

Speaker 3

And even floating, when we have looked at swapping those, obviously, we're going to pay more But I would say from a baseline standpoint, our balance sheet is fifty-fifty fixed floating. Okay. Now when you net out, let's just say $1,500,000,000 of cash, which is sort of a natural hedge against floating rate debt. So as rates go up, we're going to earn more on that income. We're probably about 2 thirds fixed, 1 third floating, which is not that radically different from Most others, there's probably one company that's entirely fixed.

Speaker 3

So and why do we borrow floating to that proportion because we have a number of assets that the business plan Warren said, right. We're going to be executing redevelopments. Maybe there's a recapitalization opportunity. For whatever reason, Having that debt be fixed, for sale, right? Having that debt be fixed, we think is costly, right?

Speaker 3

So I would think almost 100% of the time, If you're selling an asset, recapitalizing asset, if you borrow fixed, the buyer doesn't want what you put on it, right? You've guessed leverage levels wrong, High or low and ends up costing you more than it would have cost along the way. So that's some general philosophy. And on a floating rate basis, even if they go up, they're still cheaper in our view, then where we would have borrowed fixed for several years and maybe entirely and look, rates may go up now, Jamie, right? But the Fed is going to clearly Push short term rates up here to tamp down inflation, hopefully not push us in recession, but that's a risk.

Speaker 3

And we think ultimately rates stabilize at levels that are still fairly low. So that's general commentary. I'll let Steve tack If he's got anything, but I think important also to understand that natural hedge that sits in our cash portion.

Speaker 2

So macro philosophy, The thinking on the part of Analysts and what have you that fixed rate debt is safe and floating rate debt is not safe It's totally incorrect and debunked in my opinion. So if you were a fixed rate borrower over the last You were wrong, wrong and dead wrong to the tune of huge amounts of money. So the first thing is that if you look at it from a risk point of view, if you are a fixed rate borrower, You have locked in a cost for 7, 10 years, whatever it is. And If your income if you want to refinance that loan or sell the asset or redevelop or whatever it might be, Then you have to pay a defeasance, which historically has been very, very high. So there is risk in fixed rate debt That many folks don't really recognize, okay?

Speaker 2

Now And you have been wrong historically. So generally speaking, there is a premium So floating rate to fixed rate, and generally speaking, it's anywhere from 2 to 3 percent basis 200 to 300 basis points. So if you borrow fixed, you are giving up 200 to 300 basis points, maybe more with certainty in the beginning. Now rates fluctuate, and we and it appears as if we are in a period now where the Fed is in a tightening cycle, As Michael said, to tamp down inflation. And so whatever.

Speaker 2

But for example, we did a floating A big floating rate loan on the 555 California last year. And we basically the loan was unbelievably attractive, and we bought a we swapped it For, I guess it was for 3 years at an unbelievably attractive low fixed rate for that. So we hedged our bets with that. We did a big floating rate loan recently on 1290 Avenue, the Americas, and we did not yet swap it. And our feeling was that the difference between the current bid on floating rate debt For increases in floating rate debt way outweigh the cost of fixing the debt.

Speaker 2

So I mean that's basically Philosophical answer. For philosophically, looking backwards, fixed rate debt has been very, very has been wrong. So going forward, of course, now our balance sheet is pretty simple. We stay very liquid with a couple of $1,000,000,000 of debt Most of cash on our balance sheet most times. And as Michael said, that is a hedge.

Speaker 2

We do And so when we do use floating rate debt, we do it with care, caution and we think a great deal of thought.

Speaker 6

Hi, thank you. I appreciate the detailed and thoughtful response. You guys gave good color on kind of where the thought process is for office tenants right now in terms of getting back How would you characterize the thought process of retail tenants right now in terms of where they want to be, the types of spaces they're looking for? Any read through we should be thinking about at this point in the cycle?

Speaker 2

Jaime, you on the call?

Speaker 9

I am, Steve. Yes. So the first sign of resiliency in New York City were the neighborhoods and the basic needs retail, the Union Square, The 770 Broadway Wegmans, those have come back robustly. The high streets and our major high streets are Fifth Avenue and Times Square. Those are going to take a little longer.

Speaker 9

We need our international tourists back. We need our workers back in the office to fill the street. And that's just a little behind the curve, and I predict those will be back robustly as well.

Speaker 2

It's interesting, there was and probably still is a Negative feeling about brick and mortar retail in

Speaker 8

the ether.

Speaker 2

And there has been a startling recovery in brick and mortar retail Around the country, the Open Air shopping centers are doing well. The freestanding brick and mortar retailers are doing Well, I mean, look, for example, at Target stock, it's just shocking how well they are performing. And they Basically a combination of brick and mortar and e commerce. And there's others like them, but luxury brands Our booming and that's mainly almost entirely brick and mortar. So around the country, retail is recovering Surprisingly well and aggressively, and that includes open air shopping centers and the malls, what have you.

Speaker 2

The cities, the big cities in America are lagging, and New York is a lagger. There's lots of reasons why, And we understand those reasons. We believe over time and not a long period of time, by the way, That will New York will catch up with the rest of the country and the high street retail in New York will The marketplace in New York, as Jaime, I think, said is The retailers that are doing well, that are well capitalized, that are well managed, that are aggressive are starting to nibble And take new locations. I mean, we have done multiple deals with those kinds We expect that over time, the Sleep Retail will recover. We do not expect it will recover to the unbelievable highs of the top ticks in rents 4 or 5 years ago, but it will recover from today's levels very aggressively.

Speaker 6

Is there anything you're seeing in the market that changes your appetite for certain types of assets or how you want to be positioned within retail?

Speaker 2

We are well, let's see, how do I answer that question? We have offloaded several assets. We're not very high on Madison Avenue for lots of different reasons that I went into extensively on the last call. We have noticed some small non less important assets downtown. And the rest of our We're pretty happy with or Victor very happy with.

Speaker 2

I mean, you think about it, we own the 2 best mega blocks Times Square, they're irreplaceable assets. And the assets that we have on Fifth Avenue and by the way, Fifth Avenue is struggling. The traffic on Fifth Avenue is not what it was, But it will recover. So we reanalyze the hand that we have periodically, frequently. And so as of right now, we're not unhappy with our portfolio.

Operator

Thank you. Our next question online comes from Alex Goldfarb from Piper Sandler. Please go ahead.

Speaker 10

Hey, good morning. Good morning, Steve. Hopefully, your bankers and lawyers have paused the billables on the tracking stock as well. So a question for you. When you look at the TIs That are in the quarter, for presumably that's a lot of Madison Square, but also other tenants as well.

Speaker 10

And then speaking to brokers, hearing about how tenants are cutting lease terms, tenants that do 15, what have you, How have the economics changed as far as when you're leasing to tenants, how has the TI package And the length of the lease changed as you're engaging in the rents? And is it purely a function that the way to get the higher rents, you have Escalating TIs given inflation or do you think that some of this may subside? Just trying to get the economics because if you look in San Cisco 555 California, it's the TIs as a percent of the lease are much, much lower than they are in New York.

Speaker 7

Hi, it's Glenn Altz. I will tell you TIs have certainly neutralized. They of course did escalate post Post COVID, but we've seen a stabilization in those numbers. Rents are even strengthening in many of our buildings. This quarter was certainly weighted to the MSG deal, which was

Speaker 9

a market

Speaker 7

TI. So the numbers I would tell you, San Francisco, a lot of the deal making that we've done the last 2 years have been renewals, And the terms have been, call it, 5, 6 years. But I think the bigger answer to your question is tenants are committing To long term leases, if you listen to our remarks in terms of term, 13, 14 year Rich terms, I think, is a huge signal that CEOs are committing to space in a big way, all over our portfolio and throughout the city So I think that's a big thing in terms of the signals of everyone starting to think about the future, bringing their employees back And making huge commitments to space. So I think the term is the biggest answer to focus on in terms of what you're

Speaker 2

Alex, let me give you my take on this. The Inducement packages, TIs, are elevated. We are not happy with that, by the way. But it's the market, and we have to meet the market. So the market in New York is It's basically sort of a there's a rule of thumb, a formulaic rule of thumb that for based upon the term of the lease, That's how large the TI package is and the free rent package is, okay?

Speaker 2

So it's fairly formulaic, and the market has I've gone to a it's not a jump forward. Every lease is a new negotiation. There's There's kind of a formula. So it's kind of like 1 month free for every year of term. So that's the way it sort of works.

Speaker 2

There are some wise guys in the market, and we are certainly not one of them who will Elevate the TI package and buy up the rent, okay? That's not the game that we play.

Speaker 10

Okay. No, that's helpful, Steve. And then, just going back Your comments about uncertainty in the market and certainly, I saw yesterday there's a headline that I guess Mayor Adams isn't going to pursue bail reform with Albany. It Sounds like that may have died yesterday, which is unfortunate, because certainly we need that. But you mentioned uncertain

Speaker 2

Alex, Alex, Alex, Making political predictions like that, you're over your head, son, okay? Just because the newspaper says something and because whatever it is, Don't take that to the bank.

Speaker 10

Okay. I won't go to the ATM. But my question is, you made a comment about uncertainty around COVID And it seems like a lot of companies, especially the Wall Street Banks and everyone are sort of moving on and accepting that COVID is here. We got to get back to the office. Even Governor Hochul has said that.

Speaker 10

So when you make the comments about the uncertainty in the market, is there a concern that until Maybe labor pressure subsides that the companies may feel like they have to still be sort of gingerly with the employees? Or is there a true concern From the leasing managers that if there's another COVID wave, they may go back to the return at home. It just seems like everyone's sort of with COVID and wants to get back to normal lives. So I was just curious your comment about it still being a risk out there.

Speaker 2

I don't think I didn't think I said it was a risk. I said it was not resolved yet. The point of it is this, every CEO Glenn talks to or Michael talks to or I talk to, they want their people back in the office, okay? The business is run from the office, not from the kitchen table. And they all feel it's a universal feeling That the office is the place where creativity is, gatherings are, And that's the place where businesses are run and where businesses grow.

Speaker 2

I mean, I think that's a universal feeling. Now obviously, there's different health issues and other issues which have Affected that feeling. And obviously, it's getting a little silly where people announced they're going to Call back their workers on x date, and then that gets postponed and postponed and postponed again. From my point of view and that of My partner is here, speculating on when all this is going to be over and when The occupancy rate in the offices will go back from the 30% that it is now up to the 75%, that's normal. I think it's silly.

Speaker 2

It's going to happen. Whether it happens 3 months from now or 9 months from now, we don't know. But the one thing that we Do know is all of our clients, our tenants and the CEOs, they basically want to be office centric operations.

Operator

Okay. Thank you, Steve.

Speaker 2

Thank you, Alex.

Operator

And our final question comes from Ronald Candon from Morgan Stanley. Please go ahead.

Speaker 6

Hey, two quick ones for me. Just going back on the variable income, maybe ask me in a different way. Is there a way to think about how much is left relative to sort of pre COVID, that's not been recovered, just putting it all together?

Speaker 3

I don't want to give you a number off the cuff here Ronald. We can follow-up So we got to go component by component. So let's not do it off the cuff.

Speaker 6

Sure. And then my last small one was just, so in 2021, sort of did one acquisition and bought a partner out. Just curious, are you is there sort of more opportunities like that in 2022 and 2023, as you're thinking about the portfolio and some of the joint ventures?

Speaker 3

What was the question? We bought a partner out in 2021 and there are more opportunities like that in 2022. The answer is our partner The

Speaker 2

answer is we'll see. We'll see.

Speaker 3

We'll see. They initiated that and we responded, and we're happy about the purchase. But All our other partners seem fairly content.

Speaker 2

Got it. Thank you. The answer continues to be we'll see.

Operator

We have no further questions at this time.

Speaker 2

Well, thank you very much. We appreciate you all participating. I mean, obviously, from as you can tell from The results that we published last evening and our remarks and our dialogue this afternoon, we're We think once again, we reaffirm the quality of our portfolio. We reaffirm that we are We're doubling off the bottom aggressively in retail, and we're doubly and triply excited about the Penn District. So we appreciate You're participating in the call, and we'll see you at the next call.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Vornado Realty Trust Q4 2021
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