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Good morning, and welcome to the Vornado Realty Trust Second Quarter 2023 Earnings Call. My name is Gary 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 Instructions] I will now turn the call over to Mr. Steve Borenstein, Senior Vice President and Corporate Counsel. Please go ahead.

Welcome to Vornado Realty Trust's second quarter earnings call. Yesterday afternoon, we issued our second quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents, as well as our supplemental financial information packages are available on our website, www.vno.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-Q, 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. Please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2022, 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 Steven Roth, Chairman and Chief Executive Officer; and Michael Franco, President and Chief Financial Officer. Our senior team is also present and available for questions. I will now turn the call over to Steven Roth.

Thank you, Steve, and good morning everyone. It seems to me there's a very close parallel between what happens to malls and what is now happening to office. Five years or so ago, there was universal certainty that mall and brick-and-mortar REIT were dead forever, the victim of ubiquitous and explosively growing e-commerce. Capital markets shut down, no more malls were built. But the whole today five years later, malls are booming. Sound familiar? It seems to be that CBD office in all our cities New York included has fallen victim to the same emotional and shortsighted view in the investment community. Work from home is to office what the Internet was to retail. We believe in office work is the better bet a little time frozen capital markets and no new supply build strong and glory to office. Malls in office and the center cities of America are not going away. Our business is continuing to perform well and on plan in this environment. Michael will cover the math and give color in a moment. The principal difference in our numbers this year to last year is the rise in interest rates. Overall, the economy has been more resilient than we expected in the face of the Fed's historic interest rate hikes. Real estate capital markets remain challenged even for us. Highlights of our immediate business plan are to conserve cash and protect our balance sheet and even to raise cash by accretively selling select assets, to reduce debt and buy back stock and for us, the Penn District continues to be the main event. At Farley Penn one and Penn two come online, they will create significant growth and shareholder value with much more to come. Over the last few months, we bought back 20,25,000 [ph] shares for $29 million at an average price of 14.4 [ph]. Sam

Thank you, Steve and good morning, everyone. Though down from last year we had a solid quarter as it relates to our core business. Second quarter comparable FFO as adjusted was $0.72 per share compared to $0.83 for last year's second quarter, a decrease of $0.11 or 13.3%, driven primarily by expected higher net interest expense from increased rates. In addition, there were several nonrecurring items in the quarter that essentially offset each other. Those items include $0.07 of termination income from a former tenant at 345 Montgomery Street in San Francisco, offset by $0.02 of additional interest expense related to the restructuring of the St. Regis retail loan, which is forgiven by the lenders but is required to be recognized by GAAP and $0.04 of additional stock compensation expense related to the new compensation plan we implemented in June. We have provided a quarter-over-quarter bridge in our earnings release and in our financial supplement. Notwithstanding the headwinds from higher interest rates and the impact from nonrecurring items, our core office and retail businesses remain resilient with long-term credit leases. Our New York cash same-store office business was up 3% and our New York business overall was up 2.7%. With respect to the remainder of 2023, you'll recall that we previously said that we expect 2023 comparable FFO to be down from 2022 and provided the known impact of certain items, totaling a $0.55 reduction, primarily from the effect of rising interest rates. Our outlook hasn't changed since the beginning of the year. Though with the additional recurring expense related to the new share-based awards granted in June, you can expect an additional G&A expense of approximately $0.05 in total for the rest of the year. For 2024, the incremental impact of the plan versus our prior year run rate is $0.02 to $0.03 overall. Of course, our expectation of FFO is absent the impact of any potential additional asset sales. Now turning to the leasing markets. Against the backdrop of the Fed sharp interest rate increases, we continue to be encouraged by the level of activity year-to-date. Leasing activity has been led by strong demand from traditional industries, financial services and law firms in particular, with many financial firms growing their footprint and accounting for almost 40% of the 5.2 million square feet leased in the quarter. Overall, tenants in the market continue to be focused on the highest quality, new or redeveloped Class A buildings that are well amenitized, have strong sponsorship and our near transportation in Midtown, in the Westside, which is resulting in rents moving up in these buildings. Our office portfolio is filled with these types of buildings. Midtown accounted for 70% of this quarter's leasing activity with 75% of Midtown leasing occurring in Class A properties, reinforcing the flight to quality theme. For companies, it's all about tenant attraction and retention and creating culture and they are willing to pay more for the right work environment that will help accomplish these objectives. Taking rents in top-tier buildings are at peak levels, and the delta between Class A and Class B properties, continues to widen. While there is solid activity in the market, large requirement deal flow is lagging, concessions remain stubbornly high. Focusing on our portfolio. During the second quarter, we completed 19 leases totaling 279,000 square feet, with very healthy metrics including starting rents at $91.57 per square foot, a positive mark-to-market of 5.7% cash and 9.9% GAAP. Overall, for the first six months of the year, we have signed one million square feet of leases, at a market-leading $99 per square foot. Our average starting rents continue to trend up, evidencing the quality of our portfolio and the continued flight to quality we've discussed. At PENN 1, we continue to execute a steady stream of leases, with new top-tier tenants at attractive rents, reflecting tenants attraction to the unique amenity offering we have in the most successful location in the city. Last quarter, we signed a lease with Samsung at the building. This quarter, we signed a 72,000 square foot lease with Canaccord Genuity, a leading financial services firm. Tour activity is picking up at PENN 2 as well now that the project is nearing completion and tenants can better appreciate the redeveloped product. PENN 1 and PENN 2, now compete in the very top tier of the marketplace. In most cases, versus new construction to the west of us at Manhattan West and Hudson Yards. This is a testament to the marketplace's reception, to these two market-leading projects as well as confidence in the future of PENN District as the new epicenter of New York. Overall, we have very good activity in many of our assets including strong deal volume at 1296 Avenue and 280 Park and at higher rents than we previously forecast. Here's the headline. Industry insiders understand there's a shortage of good space on Park Avenue and Sixth Avenue. Actual vacancy is below 10%, and rents are moving up nicely. There are certain competitive pockets in the market such as these, where there is a healthy tenant landlord equilibrium, allowing us to push rental rates higher in our best-in-class buildings. Our leasing pipeline in New York is strong, and not reflective of the media's negative office narrative. We have 580,000 square feet of leases in negotiation, plus an additional 1.2 million square feet in our pipeline. This activity is well balanced in buildings where we have current vacancy, and known vacancy where space is coming back to us over the next 18 months and is a good mix of new deals renewals and expansions. The financial sector in particular continues to be the most active. Much of our retail leasing this quarter, occurred in the PENN District, primarily a mix of food and fitness activations, as we continue to curate the district like no other neighborhood in the city. We are excited about the best-in-class operators, we are bringing to the district. And more importantly, both our current and prospective office tenants are really enjoying everything we have done, we have recently announced. We have much more in the works here. Turning to the capital markets now. The financing markets remain highly constrained particularly for office, driven by volatility from the Fed sharp rate increases. There's more appetite for retail as this asset class is perceived to have bought. Banks are dealing with an increase in problem loans, regulator scrutiny and lack of loan attrition, and thus they remain cautious and constrained in lending. The tone of the CMBS market has improved modestly in the past quarter, but is still largely closed. High-quality sponsorship is more important than ever. We are in good shape though. We have no material maturities until mid-2024. During the quarter, we completed the restructuring of the St. Regis retail loan, adding five years of term and also extended a couple of smaller loans that had near-term maturities. We are actively working with our lenders to push out the maturities on our loans that mature in 2024 and beyond. Our mantra remains consistent as we continue to review the portfolio. If an asset is overleveraged or not refinanceable, we will support the asset only if we have sufficient term for the asset or markets to recover. We were able to do this because the loans are secured by individual assets and are generally non-recourse. We have found the banks to be cooperative in working through these situations thus far, servicers TBD. You will see in our financials that we continue to push out our interest rate hedges, giving us good protection over the next few years from future increases. Finally, we continue to be active in selling assets and recently announced the sale of four small retail assets in Manhattan, which don't produce much FFO, closing in the third quarter and the Armory Show, which closed in July. We are hard at work on others as well. In these volatile times, we remain focused on maintaining balance sheet strength. Our current liquidity is a strong $3.2 billion including $1.3 billion of cash and restricted cash and $1.9 billion undrawn under our $2.5 billion revolving credit facilities. With that, I'll turn it over to the operator for Q&A.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Steve Sakwa with Evercore ISI. Please go ahead.

Thanks. Good morning. Michael, I was wondering if you could maybe just comment or elaborate a little bit more on the leasing pipeline that you talked about. And how much of that relates to the lease-up of PENN2? And then also just on the New York leasing, the spreads were reasonably good. I'm just wondering how much of the leasing in the quarter was at PENN1 where I know you're achieving very strong uplift?

Good morning, Steve, I'm going to turn over to Glen to tackle that I'll follow-up this.

Hi, Steve it's Glenn. How are you? So in terms of the quarter about 40% of the activity was at PENN1 including the headline Canaccord deal. As it relates to the pipeline, a very strong pipeline almost 600,000 feet of leases out another $1.2 million in the works. I sketched out this morning my calendar for the week. We've got a final LOI, the final innings for a 320,000-foot tenant. We're getting a lease out for another 240,000 foot tenants. We responded to an LOI for 200,000 to 75,000 feet and we deepen term sheets with another firm for 175,000 feet. So we're busier than we've been doing much better as we go, which we predicted. We do have very good action also at PENN2 at this point lots of tours. We have some proposals in the house, project is showing very well, and we feel great about PENN2 coming out of the sheet later this year.

Okay. And maybe a question for Steve or Michael. Just as you think about the dividend, I know you put the dividend at least on the back burner as you sort of contemplated asset sales and you've got a few that you talked about some of these retail assets in the Armory. I guess are there other larger assets that you're contemplating bringing to market between now and the end of the year? And I guess just sort of what's the updated thought on the dividend and then the pace of buybacks? Thank you.

Good morning, Steve. So, the answer is, I think we talked on the last call we're going to be opportunistic about looking to sell assets. We obviously announced a few small ones last week. We're working on some others. There could be a couple of larger ones. I can't play the tax impact. But I think in total by the way on the ones we just sold, there'll be a tax loss on those. So that will reduce taxable income. And as we've said historically, our policy is to pay taxable income. We'll evaluate where we end up at the end of the year in terms of cash versus stock mix. Our objective, I think has been to retain cash utilize it for buyback utilize it to pay down debt. But we'll see where we end of the year. And while other things get done before the end of the year possibly, but it's all these things have a pace of when they can get done. And so, I can't tell you anything else large is going to get done definitively by year-end but we're working on some things.

The next question is from Camille Bonnel with Bank of America. Please go ahead.

Michael, you provided commentary around the mark-to-market opportunity for 1290 Avenue of Americas. Are you able to quantify this for the rest of your expiries through 2024? Are the market opportunities there positive, or are there any meaningful unique leases that are above market rents?

Hi Camille. It's Glen Weiss. As usual, it's hard to predict the mark-to-markets quarter-to-quarter because that will depend on our activity. As Michael said, we're really right now really pleased with the rent levels we're seeing at the buildings where we have major expiries coming whether it's 1297, 7280 or otherwise, but it's hard to predict where they're going to lay out but we feel good about the rents. And our starting rents have been extremely strong and consistent for the last, I think two years in the 80s, even 90s this year of the one million feet we've leased or starting rent to $99 a foot. So, it shows just the quality of our buildings, the pace of our leasing is picking up. So on the mark-to-market, I can't really predict exactly what's going to happen here, but we feel our rents are top-tier throughout and we're making matches everywhere right now.

I would just add that, I think it's hard to predict. And even as we sit here, it's August, right? And so as we look at the activity, we talk about the submarkets like Park Avenue, Sixth Avenue for the Class A buildings. Rents are up double-digits from six, nine months ago, right? And so if you asked us six, nine months ago with the mark-to-market be on some of those leases, they wouldn't have been as strong as the turning out to be or what's in the pipeline. So, to sit here and tell you what they may be in 2024, we can't predict. But I think what you're hearing from us is that, I think it's a really important point, right? One of this we spend a lot of time with counterparties talking about is sort of separating fact from fiction, right, negative narrative that it's on the front pages every day versus what's actually going on in the field. And in these key submarkets in the better buildings, you're at an equilibrium level, right? You're sub 10% vacancy. And so it's allowing us to really put rents in those buildings, in those submarkets. And that is where a lot of our expiries are occurring this year next year. And so we feel good about it. So, where it will end up. I can't tell you, but I think there's positive momentum there.

That's very helpful. And I assume those comments around market rents being up over the last six months on a gross basis. So any update on how that's trended on the TI and rep free side?

The concessions are still stubbornly high, too high. And so the rents have continued to inch up on the best of our buildings concessions have remained where they've been.

The next question is from Alexander Goldfarb with Piper Sandler. Please go ahead.

Hey, guys. Good morning, and Steve quite the honor for you to give the eulogy for Sam. So I have two questions. The first question is the new comp plan that you guys rolled out one, are you terminating the old comp plan? And two, just the thought process you put it out like 4:30 ahead of July 4 weekend. And just curious why it wasn't done as part of the annual proxy? Normally companies will update comp plans at the start of the year. You guys did it mid-year. So just want to get some thinking about how you're looking at that the decision that went into making it in the mid-year and then are you terminating the old plan?

I want to -- Alex, good morning. I want to handle your comment about snuck it out one day on a Friday. The fact of the matter is that the SEC regulations say, when you do something like that, you have to file an 8-K within 48 hours. So that turned out to be on that particular Friday. So we had to get out. The second thing is our teams that handle this are used to a 4:00 closing. So they put it out after what they told me the 4:00 closing without really realizing that, because it was pre-holiday, the markets would close at 1:00 o'clock. So we're not in a sneaky business and we did what we had to do. The rest of your question Michael can handle.

Good morning, Alex. So let me take them in pieces. Return in the old comp plan, the answer is no, that plan will expire. I think in 2025 as we sit here today, it doesn't look like it will earn, but we'll see. And it's not a big number either way. In terms of the comp plan now, why do it now, look, I think our view was we felt it was -- we're in a challenging period. And we lost a few key people over the last few years or a few people I should say. And we felt it was an important message to send to our team to put in place a plan that both incentivizes retention as well as rewards for performance during this period and coming out of this period. And so we put a plan in place. We think it's a great plan for shareholders by the way. It requires sustained performance over a meaningful period of time. And so if the stock price goes up, obviously, the plan is more valuable and pieces of it don't even invest in until performance is achieved much higher than the price at which it was awarded. So it's very high performance, we think it's great for shareholders and we think it's great for the team. So the reactions and the team have been extraordinary. It was allocated to a broad group of people. We think we've ensured stability of the team for the next several years, which is important, important for shareholders. And frankly, our shareholders have been, I think, very helpful both in constructing the plan on the front end and follow-up after. So until -- January. We want to put in place now makes a very strong message to our team about the importance of if we drive value over time what is there for everybody to receive and to get people excited and that's been the significant reaction and I'm confident that we have a broad group of people that are even more laser-focused on how we're going to drive the stock.

It's important to note that Michael and others on our team communicated normally with our largest shareholders in constructing this plan and got universal support from our shareholders and so that's a very, very good thing. We have gotten also universal positive commentary from our peers in the industry about what we did, why we did it and gee -- what a good idea that was.

Okay. And then the second the follow-up question Steve, the studio deal on Pier 94. Just curious more details is Hudson going to be the main operator? What are the economics what is your role? I mean, obviously, you have a deep theatrical background in your family. So just more details on the economics and how the operations will run between you guys Victor and Blackstone?

We're not 100% finished with all the details on this deal. So we're not going to get into that. So what it is basically it will be the only studios in -- on the island of Manhattan. So we're extremely enthusiastic about it. Where we have half the deal, we came in with the land and Hudson Pacific is the operator and Blackstone is Hudson Pacific's partner and now our partner. So there'll be more about that as we consummate this.

The next question is from Julien Blouin with Goldman Sachs. Please go ahead.

Yes. Hi. Thank you for taking my question. I guess just at a high level I was wondering if you could give us any insight into leasing activity in San Francisco and Chicago. Maybe how you would compare those two markets which of them is in better shape right now.

Hi. It's Glenn. San Francisco we've been fortunate enough we've been very successful with 555 Cal even given the markets, which are quiet. There's very little new tenant demand in San Francisco, but we've been very insulated in a very successful way 555. Chicago I would say is a different story that there is a lack of tenant demand particularly big heads. The action we have at the more is 100,000 feet and less tenant variety. The market there I'd say it's more quiet. But I think both cities generally there is a lack of demand. There is uncertainty as it relates to the cities and the government. So I would say the kind of equal as it relates to the action. For us specifically, Vornado we're in great shape in San Francisco. Chicago, we got a lot of space to lease. We had expirations that we're grappling with right now. We're feeling better. We just completed work-life program. We just had a huge broker of that last Wednesday night which was a huge success. So we're now our way but we got a lot of wood to chop.

I would add a couple of comments. In San Francisco we see -- we own the premier financial services building. So we are sort of different than all of the supply of technology building and so all of the important financial services tenants and clients are in our building, and have been there for 25 years and more. So the building is sort of unique, it's the highest quality and it's by far the most important financial services building. So it's a great piece of real estate. In Chicago, similarly, the building it's a great piece of real estate. The market is a little bit soft we're navigating that now.

That's very helpful. Thank you. And maybe as a quick follow-up. I may have missed it in the answer to Steve Sakwa's question but what were the New York office leasing spreads in the quarter excluding Penn 1?

Yes. I don't know that we have that off hand. Well, we'll have to come back to you on that Julien.

We don't have that at our fingertips. We'll get back.

Next question is from Anthony Paolone with JPMorgan. Please go ahead.

Thanks. You talked earlier about maybe selling some more stuff over the rest of the year. But if we look out the next two or three years, is there a part of the portfolio that you'd really like to get rid of if you can or should we think about just any part of the business shrinking whether it's retail or certain submarket?

There is no target on a particular type of our assets. I mean, we're fairly concentrated in New York in office and our retail is extremely unique. So we don't have a target on any particular division of our business. We don't have very many divisions. We're the office company in pointed in New York. We have a great building in San Francisco another great building in Chicago, and a retail presence on the most important streets in New York City. So we don't have a target. On the other hand, if we can sell assets for prices which are accretive to our stock and create shareholder value that's something that we are looking at very intensely.

Okay. And then second one just on NOI as we think about the second half of the year. In retail, the first couple of quarters were very consistent and you did a lot of leasing. So just what should we expect in the second half there? And then in Office, it seemed like there was a big balance in the GAAP NOI 1Q to 2Q. And same question just kind of how to think about second half?

Are we predicting the second half? I don't think so. So we're not forecasting or guiding for the second half. So that's a premature question. Sorry.

The next question is from Nick Yulico with Scotiabank. Please go ahead.

Thanks. I just wanted to go back to the asset sales. And I want to ask specifically about the Farley building and whether you're contemplating any plan there to sell a joint venture stake in the asset. Just it seems like the type of asset would gather good investor demand, long-term lease with a strong credit tenant to a lot of success there. So any thoughts on that you can provide?

We like the assets just as much as you know. And we're not going to comment on the future.

Okay. I guess secondly on Farley, as well as I don't know if there's no mortgage there. So I don't know if that's also an asset that you're considering putting a mortgage on if you've had any conversation with banks be sort of an interesting test case for a strong office building and the ability to finance it. Any thoughts you could share there?

I mean we agree with you. It's a very strong asset with a very strong long-term lease on it. It's arguably one of the best buildings of its type in kind in the city. It has no mortgage. It has some basis. It has no financing on it. So obviously, it's a great asset and could be an important source of liquidity.

The next question is from Ronald Kamdem with Morgan Stanley. Please go ahead.

Hey, just two quick ones. So on the $0.72 of FFO in the quarter, can you just remind us what is a one-timer that we need to adjust for what is recurring? So both is there any sort of lease termination or anything like that so we can get the right sort of run rate?

Yeah. Ronald, I think there's a lot that goes in every quarter, right? But it's one time it's up down, it's small. I think this quarter probably a little more significant onetimer from the tenant termination at 345 Montgomery which was $0.07. At the same time, we had a couple of cents that was related to St. Regis loan restructuring where the interest that was accrued during that default period was forgiven and we were required to recognize that by GAAP, right? So that nets down to $0.05. And then on the stock comp that will continue as we said for the rest of the year, but be probably a lesser incremental amount for next year. So net-net, let's call it $0.05 this quarter that's true non-recurring and the stock comp will decline a little bit as we get into next year.

Great. Okay. So, got it. So 72% down to five 67%, so just on the last one just on the leasing, you talked about I think 580, in negotiation one, two in the pipeline. Can we put that all in the blender? So how should we think about occupancy going from here, right? Is it flat? What are sort of the puts and takes you're thinking about the occupancy for the rest of the year and into next? Thanks.

Yeah. I'd say occupancy for the rest of the year we'll hover around the range now it depends when these deals happen when they close and how everything goes here. So I think we will pretty much at these levels over the next couple of quarters. But I'm hoping to see more absorption as we go based on getting these deals done over the next three, six months or whatever it will be.

Look, I think, Glen and his team are doing a great job on some of the expiries that are coming up. Some of this will be timing when those deals are -- I mean, we have some known move-outs for example at 1,290 to 280 and the extent we backfill those then occupancy won't dip to the extent that there's a timing gap in terms of whether it's backfilled will tip. So I agree with Glen's comments around here where it will stabilize. But could it go down a little bit at the beginning of next year depending on timing of whether we have the space spec-build it could. So I wouldn't hold your breast saying, it's going to stay exactly 91% change from here on out. It may go down a little bit, but we're confident that with time that space will get backfilled and the occupancy will get rebuilt.

There are no further questions at this time. So this concludes our question-and-answer session. I would like to turn the conference back over to Steven Roth, for any closing remarks.

Thanks everybody for attending. This is a record. I mean, we've never done a call that was 35 or 40 minutes before. So in any event that's it's a record that is kind of surprising. We'll see you in three months on the next call. Have a great day.