Monster Beverage Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2022

There are 12 speakers on the call.

Operator

Welcome to the Vornado Realty Trust Earnings and Webcast for First Quarter of 2022. My name is Vanessa, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press 0 then 1 on your touch tone phone.

Operator

I will now turn the call over to Mr. Stephen Bornstein, Senior Vice President and Corporate Counsel. Stephen, you may begin.

Speaker 1

Welcome to Vornado Realty Trust's 1st quarter earnings call. Yesterday afternoon, we issued our Q1 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 package are available on our website, www.bno under the Investor Relations section. In these documents and during today's call, we will discuss certain non GAAP financial Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10 Q and financial 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 ks for the year ended December 31, 2021, for more information regarding these risks and uncertainties.

Speaker 1

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 statement. On the call today from management for our opening comments 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 this call over to Steven Roth.

Speaker 2

Thank you, Steve, and good morning, everyone. Let me begin by saying I thought we had a very good quarter With FFO up 22% from last year, reflecting the continued recovery in our business. And we continue to see many positive trends across the business. To my eye, the streets of New York are back to pre COVID in terms of pedestrian counts and our beloved Traffic congestion. Apartments are full and by full I mean literally full with long waiting lists, restaurants are booming And office utilization is climbing.

Speaker 2

We are now over 46% utilization as we speak. There are a couple of things I'd like to highlight. First, We have more floating rate debt than most and that strategy is correct 9 out of every 10 years, but this is the 10th year. The economy is now in the hands of the Federal Reserve in their role as inflation fighter and appropriately so. If past this prologue, we 2nd, for the first time this quarter, our GAAP financial statements reflect the balance sheet and income statement effect of the pending June 2023 N1 ground lease renewal.

Speaker 2

We have estimated $26,000,000 as the new ground rent pending the actual While these two numbers are substantial and will slow our growth short term, we believe that as Farley, PENN1 and PENN2 come online, Those will be very, very substantial. Now over to Michael.

Speaker 3

Thank you, Steve, and good morning, everyone. As Steve mentioned, we had another strong quarter. 1st quarter comparable FFO as adjusted was $0.79 per share compared to $0.65 for last year's 1st an increase of $0.14 or 22%. This increase was primarily from rent commencement on new office and retail leases And the continued recovery of our variable businesses. We have provided a quarter over quarter bridge in our earnings release on Page 2 and our financial supplement on Page 5.

Speaker 3

As Steve mentioned, this quarter for the first time, we are recognizing in our financials the impact from the pending PenOne ground lease renewal. Under GAAP, we are required to record the present value of the estimated additional lease liability on our balance sheet and start recognizing the straight line impact in our This reduced our earnings this quarter by approximately $4,000,000 and will reduce it by $21,000,000 overall in 20 an increased rent in June of 2023. Looking ahead, we had initially expected to deliver double digit percentage FFO per share growth in 20 driven primarily by previously signed leases in both office and retail, particularly meta platforms at Farley and the continued recovery of our variable But we now expect the impact of projected interest rate hikes by the Fed and our variable rate debt to be a greater headwind to this We had assumed the LIBOR would move up this year when we gave a preview of 2022 last quarter, but it now looks like it will move up more than we expected Keep in mind, we're also earning more on our cash balances as rates increase. We now expect our FFO per share growth for the year to be in the mid to high single With respect to our variable businesses, we continued to see a strong recovery in the Q1.

Speaker 3

Our signage business led by our dominant signs in Times Square in the Penn District had its strongest Q1 ever and forward bookings continue to look healthy. Our trade show business at the mart is As we hosted 4 successful trade shows during the quarter, whereas there were none during last year's Q1 due to the pandemic. Our garages, which we expect to We fully back this year and continue to recover. And finally, our BMS business continues to perform near pre pandemic levels. We expect to recover most of the income from our variable businesses Companywide, same store cash NOI for the Q1 increased by 5.8% over Our overall office business was up 2.2% compared to the prior year's Q1, while our core New York office business was up 0.5%.

Speaker 3

Our retail same store cash NOI was up a very strong 32%, primarily due to the rent commencement on new leases at 595 Madison Avenue, 4 Our New York office occupancy ended the quarter at 92.1%, Which is consistent with the Q4 of 2021 and up from the trough in the Q2 of 2021 by 100 basis points. Our New York retail occupancy ended the quarter flat versus year end at 80.4% after adjusting for asset sales this And up 3 80 basis points since bottoming in the Q1 of 2021. We expect both occupancies continue to improve by the end of this year based on our deal pipeline And modest remaining 2022 office expiration schedule. Now turning to leasing markets. During the Q1 of 2022, leasing conditions across Manhattan continue to remain strong.

Speaker 3

Deal activity is robust, while asking rents, the Overall availability rate and tenant concessions have all stabilized. The combination of office using job growth, higher space utilization And continued expansion by tech, financial and media companies has resulted in market resiliency. Leasing activity is currently indicating a continued workplaces in order to foster teamwork, collaboration and morale amidst fierce competition for talent in an ever tightening labor market. As Such flight to quality remains the dominant theme in the leasing market. This is evidenced by 40% of the site leases in the Q1 consisting of relocations to new or redeveloped Accordingly, rents have increased in the new construction or best in class redeveloped assets, which provide amenity rich offerings at transit centric locations.

Speaker 3

Our Best in class New York office portfolio is well positioned to thrive in this environment. Focusing now on our portfolio, during the Q1, we completed 30 leases With healthy key metrics, including starting rents at $81 per square foot and a positive mark to market of 7.2% Cash and 6.5 percent GAAP. Leasing highlights during the quarter included a 53,000 square foot expansion with NYU at 1 Park Avenue, bringing their total footprint in the building to 685,000 square feet. We also completed 8 transactions at Penn totaling 68,000 square feet with average starting rent in the 90s per square foot. These early leases validate our plan to take rent to from the 60s per square foot to the 90s and we are now starting to push rents in this building into the triple digits as tenants love Our transformation of PenOne has redefined work for all of our Penn District tenants.

Speaker 3

The unrivaled work With 140,000 square foot amenity offering of health and fitness facilities, conference center and trophy flex space operation. While the Q1 leasing volume was lower than recent quarters, we anticipate a very strong boost in leasing activity during the forthcoming With several large pending transactions in our pipeline, we currently have 1,200,000 square feet in lease negotiation Driven by tenant expansions with an additional 500,000 square feet in earlier stages of negotiation across our portfolio. Retail leasing The Q1 consists of 6 leases totaling 20,000 square feet with average starting rents of $172 per square foot, all of which were new leases. We We have an active pipeline and strong interest in the Penn District in particular with the recent commencement of leasing in the Long Island Railroad Concourse. Now turning to The office market continues to be challenged with direct vacancy at 19% and tenant concessions at However, as we said last quarter, tenant demand continues to strengthen throughout the city as indicated by this quarter's At the March, we signed 149,000 square feet of new leases during the quarter, Including a new 81,000 square foot headquarters lease with Avant, a FinTech Lending Company, as well as a 34,000 square foot renewal of Steelcase's showroom, which Which is an anchor tenant for our Contract Furniture business.

Speaker 3

Recent tour activity has been strong and is reflected in our growing We have 70,000 square feet of leases in negotiation and are trading proposals another 250,000 feet We look forward to commencing construction of our MARQ 2.0 Building Capital Program in July. We will Our New York Work Life campus ecosystem to Chicago, which will further differentiate the market's unique workplace. In San Francisco, leasing activity started slowly at the beginning of 2022 as companies monitored the The activity picked up towards the end of the quarter and has continued as companies initiated their return to work plans, led by a coordinated effort by the Mayor and many large San Francisco employers. While the city's overall occupancy rate is elevated at 15 The 7 building trophy set of which 555 California is certainly 1 is at 3% and experiencing strong tenant demand and rental rates. As such, our market leading 5 by 5 California Complex is effectively fully leased with the exception of the 78 During the quarter, we completed an important 49,000 square foot renewal with Microsoft in the base 555 resulting in a significant 19.8% cash mark to market as well as a new triple digit rent lease with a global private equity firm in 1,000 square foot suite in the building's tower.

Speaker 3

Finally, turning to the capital markets. With the current market volatility In a move up in interest rates, the financing markets have become choppier with the typical increased focus from lenders on quality, sponsorship Our portfolio is well positioned in this regard and fortunately we have only modest debt maturities in 2022 and no material maturities in 20 After capitalizing on the robust markets last year.

Speaker 4

We are

Speaker 3

in the process of refinancing 770 I want significant maturity in 2022 and expect to complete it later this quarter. We also went under contract last week to sell our Long Island City office Building for $173,000,000 After purchasing the asset in 2015, we extended the major leases over the past few years to Our efforts to monetize our non core assets and we have another $750,000,000 planned in the near future. Finally, our current With that, I'll turn it over to the operator for Q and A.

Operator

Thank you. We will now begin our question and answer We have our first question from Manny Korchman with Citigroup.

Speaker 4

Hey, it's Michael Bilerman speaking. Michael, leasing has definitely kept pace to start the year. You talked a little bit about pipeline. I was wondering if you can sort of unpack some of those numbers in terms of where you're seeing the activity, how much of it's on vacant space versus Existing stuff that's going to roll, just to give a little bit more detail about the momentum in leasing that you're seeing?

Speaker 3

Glenn, why don't you take that one?

Speaker 5

Hi, Michael. It's Glenn. How are you?

Speaker 2

Good.

Speaker 5

So, the 1,200,000 feet Michael mentioned in his remarks, I It's a very healthy mix. I would call it fifty-fifty of new expansion versus renewals. A lot of the activity is in Penn and a lot more of the So in terms of looking forward, as we said, We expect occupancy to continue to improve throughout the year, continue to fill spaces, but we're seeing A real good mix across all types of 10 types in the portfolio as we sit here.

Speaker 4

Great. And then maybe just on PENN1, Michael, you Talked a little bit about the ground lease in terms of recognizing the value that you've put in, which is obviously now it sounds like subject to arbitration. Can you just sort of walk through sort of the math a little bit? It would seem as though that 12.2% The return would probably come down, call it, about 500 basis points for the extra ground lease. But maybe just Help us understand what the process is given the fact that you've gone through 330 West 34th that's in arbitration and Just trying to understand the timing of how all this will work through and ultimately its impact on financials.

Speaker 3

So, look, we as we stated in the opening remarks, right, we put it on the balance Straight line in earnings, I think in Steve's comments, he stated that the number we put down is 26 There's a lot of data out there in terms of what the FAR is, etcetera.

Speaker 1

I'm not going to get into that.

Speaker 3

The process is going to commence Near term and so we're going to continue to not get into details here publicly. But it's Our best guess based on where the site on PenOne is probably one of the largest sites to be valued, and it's 3 times the size of 30 larger sites tend to be valued at lower prices than smaller sites just Given the nature, the size and what can be built and the risk and so forth, construction costs, etcetera. The process is different on PENN1 And it will start, as I said, later this year and be finalized By the middle of next year, and so the new rent will take effect in June of 2023. As you stated, We have from the outset on PENN1 put the return gross of any renewal rent Because we don't know exactly what that will be yet and so it could be material. We've now daylighted our best guess as to what that may be and it will be You know, finalized over the course of the next year.

Speaker 2

Is that the

Speaker 4

right math though, Michael, just thinking about that 20? Yes.

Speaker 2

Michael, hang on for a minute. We chose to Disclose our returns on the investment we're making in PENN1 on an incremental basis. Why? Had we not done because if we the program is going to yield, let's say, it's a 2,500,000 square And the rents are going to go up somewhere $35 $20 or something like that. So let's say they go up $30 on 250 As the leases roll out over the next 4, 5 years, that's $75,000,000 that approximately drops down to the bottom line, okay?

Speaker 2

So the ground rent would be we think it will be $25,000,000 $26,000,000 and so we could easily handle that And easily get a return on the $400,000,000 we're investing. Furthermore, we the building together with It's a partner in the campus to Penn creates the nexus of what we're doing in the Penn District. So it's very important. We have a totally unique, largest in town amenity package, which is now We've been open to rave reviews from our tenants, the brokerage community and prospects. So we think it was Absolutely the right thing to do.

Speaker 2

Now the arbitration that is going to There are 2 different kinds of the 330 arbitration was a baseball arbitration. And what that is, is Simply one side puts in a number, the other side puts in a number and the arbitrator and the neutral arbitrator decides Which number is more correct? In other words, the middle, if you're $1 above the middle in the arbitrator's mind, Then you win, etcetera. The 1 pen arbitration is different. It's 2 arbitrators and then a third is more We believe The number that we have selected and chosen is correct for lots of different reasons, including comps in the marketplace, And that will all prove out over the next months and years.

Speaker 2

I expect the arbitration to start sometime before the just before the end So that's the way we look at it.

Speaker 3

Michael, just to come back to your comments specifically on the math, right? If you take 12.2 and you take the incremental rent that the $26,000,000 implies, we're paying 2.5 today. So you're 12.2 would go down to 7. Your math is correct.

Speaker 4

Right. And then Steve's point is that the reality is this is one massive complex where that ground lease supports a lot of other rent that's being generated. And so it has to be looked at in totality rather than an individual basis.

Speaker 2

Absolutely. And one other thing, okay. We're in the process Now of doing budgeting, which we do all the time, it's my belief and Glenn's belief that if we The building as offered to the marketplace now is worth in the 90s, I believe $100 a foot. If you go out and look at what's going on In the market to the west of us at Manhattan West and Hudson Yards, rents are higher and substantially higher. And we believe our nexus with transportation creates a site which is the best in the neighborhood.

Speaker 2

So We believe that we will start at in the 90s at $100 a foot and 3, 4, 5 years from now Those this asset will grow in value with rents that will go into the 100s. So the 7.5% or 5% or 8%, whatever the return is at the opening is

Operator

Our next question comes from Jamie Feldman with Bank of America.

Speaker 6

Great. Thank you and good morning. Steve, I want to go back to some of the comments you made in your Chairman's letter. First, you said, the last domino will be when employees and You also said tenants tell us they want less Formal creative office Westside model, only half of New York's 400,000,000 square feet of office space fits that description. So as you sit back and think about these comments and think about the future of office in New York City, what else can you tell us about How Vornado plans to invest or maybe how your current portfolio does or doesn't fit this description?

Speaker 6

And then also just what do you think Office usage, it looks like a year from now in terms of days of the week and how people are going to use the space.

Speaker 2

I'm going to shift back that off to Michael and Glenn to start. So it's a very extensive question. I'm glad that you read my letter. Thank you.

Speaker 3

Good morning, Jamie. So in terms of predictions of what utilization will be from now, It's anybody's guess higher. We continue to see a trend higher and there's a fairly consistent pattern Monday through Thursday, higher Tuesday through Thursday the highest and Friday no one feels like commuting in the city. So absent their boss is telling to get in Probably it will probably continue to be the low mark, but that number continues to trend up and I think it will continue to do so. I don't I'm not going to sort of make a prediction and the plan will in terms of what the number I think Steve's comments on the type of space people want, companies want, that trend started pre pandemic, It's accelerated post pandemic.

Speaker 3

I think what we're doing in PENN is exactly what companies want. I think that's why we're Seeing the recession we're seeing with PENN1 and now PENN2 and even PENN15 as they've seen the plans, although that's still a bit off. So, but it doesn't just go for Westside, right? We're seeing demand at the 770s and 8510s and The 350 Parks and so on. So, but that being said, and we talked about, at least in my comments, selling assets, Long Island City, Yes, that was an asset that clearly doesn't fall in that category.

Speaker 3

A 40 Fulton, which we're going to bring to market shortly, it's a fine building, but that's not an asset that we think It's consistent where we want to own in 5, 10 years. So we're going to prune the portfolio. We're going to continue to upgrade, make sure We own assets that we do believe are going to reflect what tenants want or we can push rents most importantly, right? We want to have assets where we're going to see rental growth over time And if assets we believe are not going to fall into that category, then I think you'll see us You know, actively prune those over time. Would you add to those?

Speaker 5

I think Michael covered it Jamie. And it's not a one size fits all answer. It's very tenant specific. It's very industry sector specific in terms more week to week. Leasing velocity is much higher this year than this time last year.

Speaker 5

There's a lot of large deals out there, a lot of large which have been signed and other global banks on the new deal yesterday on the Westside. So there continues to be momentum. And I I think more and more people are coming back into the office market, wanting new space, that's definitely a theme, recreating their culture In terms of talent, recruiting people, improving their brand, etcetera. But I think you're seeing now what we had Last year, it will be an unwinding back to the office. People are now starting to come back, getting more comfortable.

Speaker 5

I think month to month is continuing to improve out there in terms of the environment.

Speaker 2

Jamie, I think In your question, there was implied the culture of work and what the design This is something that our company and our teams have been focused For a long while, so we believe that the tie And suspenders and striped suit are a thing of the past in the business community today, Whether you're in the finance industry on Park Avenue or whether you're in the tech industry on the Westside. So what we have done, we think very successfully and I tried very hard at is to focus on the hospitality aspect of our buildings and our space. So if you go through The amenity package in one pen, which is 160 odd 1,000 square feet, so it's enormous. And one of the strategies that we have is that if you have a cluster of buildings in a campus, you can afford to put just to have Much larger amenity offering than if you have a single building. And so if you go through there, We have food offerings.

Speaker 2

We have places to hang. We have places to chat. We have gyms. We have health facilities. We have all manners of things.

Speaker 2

We also have a conference center So that a tenant can take 60,000 square feet and not have to devote 4,000 of those square feet to the We have it. We also have co working space in the building. So we think that that's the future. The other part of it We want the staff in the building to treat our tenants as if they were guests at a hotel, So know their names, welcome them, greet them and treat them as they want to be greeted. So there's an entire cultural thing the way Work will be done in the future.

Speaker 2

And this is pretty universal by the way, not only in New York, but the better owners are Sort of doing what we're doing. We think we're in the front of it, but we're not unique.

Speaker 6

All right. Thank you for everyone's thoughts on that. So I guess just following up on 2PENN. Can you talk more about Just the leasing demand, I know you signed the big MSG lease, but how do you think that stack works out based on the discussions you're having? Or do you feel like it's still Kind of early to have a view on that.

Speaker 6

And then similarly, just there's just so much buzz around crime and safety and around the Penn District. How would you gauge it today versus maybe where it was a year ago and maybe some of the initiatives that could improve it further?

Speaker 5

In terms of leasing at PENN2, the building is at the very top of the list for any user coming into The market looking for either new construction or the very best of the redevelopments in the market. So we're in continuous meetings Tenants brokers presenting the asset, but we are in no rush. The bustle structure has just gone up. As each month goes on this year, Jamie, it's going to just get better, better and better physically. We'll then start bringing people Into the project to get a feel of just how unique and spectacular this space will be.

Speaker 5

So we're seeing everybody. We're showing it to everybody. The reception has been We are on every tour of every important client who is walking around New York for space. As it relates to the district, I think we are The streets are noticeably improved from this time last year. We're of course working daily with all the Restrictions between the NYPD, the Mayor's office, the business improvement districts, our colleagues in the district, other owners, our major tenants, Etcetera.

Speaker 5

I am really focused of course on safety in the neighborhood and I do think it has improved year over year. We still got work to do and we're of course on it every day in terms of that mission. But the reception PENN2 has been excellent. And at PENN1, I mean, as we said in the remarks, The action is enormous. The rents continue to rise and we're seeing tenants coming into the building for tours.

Speaker 5

They're coming from

Speaker 3

Jay, I would just say, I mean, Glenn talked about year over year. I think this quarter over quarter the streets are Right. As the street the activity level in the streets has increased more traffic through the station, that is I think it made the streets feel safer and it's made it feel better, right? Pushed some of the elements to the side, maybe out to other areas. So I think I don't know when the last time you've been through the district.

Speaker 3

I know you're going to walk in the area soon, but I think you'll see a noticeable improvement. Still work to be

Operator

done. Thank you. We have our next question from Steve Sakwa with Evercore ISI.

Speaker 7

Thanks. Good morning. Steve, I was wondering if you could just comment a little bit more about your appetite and desire to Still be part of a casino project or licensing agreement if New York City were able to get one. I'm just curious if you're Looking to be part of the operations or you're looking to more be of a landlord. And if it's on the landlord side, how big of an integrated resort do you ultimately think

Speaker 2

Well, Some of the answers to your questions are at the current time unknowable. This is going to be a political And there are going to be government officials who are going to make these decisions. With respect to the idea of a casino, we are aggressively pursuing As we should and as we must. And I've said in the last Two letters I've written that we believe that the there are going to be 3 downstate licenses. We believe that the best place for the 3rd license, one goes to Yonkers, one goes to One goes to Yonkers, one goes to Aquavut probably, although that might be contested We believe that the 3rd license would be best served to go into Manhattan.

Speaker 2

When you think about it, Manhattan is the It's the center of the hotel industry, the entertainment industry, the restaurant industry, the business industry, The theater industry, etcetera. And one of the anomalies is, while it's the economic engine of New York So that's an interesting thing. We are in the process of talking to multiple people as our And the casino industry operators are talking to multiple land owners. We are in the process of debating whether we would be just a landlord and that word just is An understatement being a landlord or being part of the operation or being a hybrid, which is a landlord with ticker or whatever. So we're in the throes of thinking about and talking about and debating the financial arrangements.

Speaker 2

With respect to Whether the winning bid, so to speak, would be a small isolated casino Well, in the entire Las Vegas style complex with hotel rooms, entertainment, food, etcetera offerings, I don't know which is the right one, Okay. We believe that we can pursue both of them. We have multiple sites that we intend to bid with. And for example, if you just take the Penn District, what's in the middle of the Penn District, Madison Square Garden. Madison Square Garden is the biggest and most important entertainment And certainly in the New York area and maybe far and wide, the interesting Thing about Madison Square Garden is in addition to the teams, it has 220 dates a year of concerts.

Speaker 2

So it's the center of the music industry as well. And it sits on top of so our land sits on is adjacent to Madison Square Garden and sits on top of the transportation network, There's been some talk about Times Square, which is also And we have sites there. So this is early days and we are exploring we're working very hard All of the different options and we expect to try to we will probably get a resolution as to what direction we are going to go in sometime We are way well before the end of the year. We I think I read one transcript somewhere that somebody thinks that this process is going to be over in the first Next year, I don't think it's going to be anywhere near over that's going to take a lot longer than that, as it should. It's a deliberate process and it's important.

Speaker 2

So We believe that Manhattan is the right venue to get the 3rd license. We intend to compete aggressively for And one last thing. We think speed to market or speed of opening is going to be a very important determinant The economics of the bidders. So if you have to build a new complex and that could take 3, 5 years Well, as you're retrofitting a building that could take 1 to 1.5 years, there are 1,000,000,000 of dollars difference

Speaker 7

I guess second question, Michael, could you maybe just speak a little bit more to the financing markets? It sounds like 770 Broadway is in for refinancing.

Speaker 2

Can you just maybe give us a sense of kind of

Speaker 7

where the market is Can you just maybe give us a sense of kind of where the market is today for kind of mortgage debt and Just give us an update on kind of size and pricing and how that market's changed?

Speaker 3

Yes, look, It's anytime you get into periods of volatility, which we're clearly in right now, you get hesitancy on the part of, I would say in particular bond buyers and to some extent the banks. Although I think it's Really much more so in the CMBS market. So I think you started the year with a heavy supply of CMBS volume and then you had rates gap About war economic uncertainty that caused the spread to gap out. So you had a bit of a double whammy both on spreads CMBS market is open, but if you don't have the issue in that market in size, It's probably a market you prefer not to go into right now and we don't need to go into that. So 770 will end up getting done in the bank It's an asset that's it's a high quality asset with a great tenant and So, well received in the bank market and we'll roll that over at a spread, I think, pretty comparable to where we're at today on So spreads aren't what they were 6, 12 months ago, but still attractive for high quality assets.

Speaker 3

And as I said, I think the bank market much more liquid than the CMBS market, but that can only handle so much. So Again, our assets on a one off basis, there's good demand in both markets, but for 770, it will go in the bank market, which I think has more stability Fixed or floating? So, given the bank market is

Speaker 2

Hey, Steve, I'm going to ask a few questions now. Fixed or floating?

Speaker 3

Well, given it's the bank market, it will be a floater, but we'll likely, as we've done in a number of other situations, swap that out for I don't know anything else in the financing market. Hopefully that answers your question. I mean beyond 7 70, we don't really have any other We had a couple of small things we'll get done, but no other material financings for 20222023. So that's we did a lot of that opportunity Last year, we obviously had a number of maturities last year. So, even now with steady markets, we really didn't anticipate being very active

Speaker 7

Got it. Okay, thanks.

Operator

And thank you. Our next question is from John Kim with BMO Capital Markets.

Speaker 8

I think you just answered my question. But Steve, in your opening remarks, You did mention that having a high floating rate strategy works 9 to 10 years and rates will come back down again. So I just wanted to confirm that you're comfortable maintaining a high floating rate strategy in the near term?

Speaker 2

Yes. We think we spend a great deal of time on our balance sheet. It's very important. Liquidity And safety and the ability to be defensive, but even more The offensive is extremely important to us and in running this business. So Every time that you look at a financing opportunity, if you compare a floating rate Debt to a 10 year fixed rate debt, the spread is It goes to what was the 2.5%, 2.5 points, 2 50 basis points most of So what happens if you elect to go 10 year fixed, you are for certain costing yourself 2.50 basis And during the life of over the last 30 years, I think one of the The terms that we use as an advisor on financing said every single month for the last 30 years, the right decision was to go floating So the answer is, is that do you pay 2 50 basis points forward, do you Now there's other parts of it too.

Speaker 2

If you're in a fixed rate loan, you are locked in and if you decide you want to sell the building or refinance the building Whatever before the end of the term, you have to defease that, which is normally a very, very expensive proposition. So it takes away All of your flexibility, if you are going to sell or improve or whatever the asset. So and that's Extremely important thing. Now while we have floating rate on our books now and Our interest expense is increasing. If we would have had all of that debt as fixed, it would have substantially more in interest expense than we are currently paying or we expect to be paying.

Speaker 2

So we think That the fixed rate strategy, while it seems safer, it's for certain much more And for certain much less flexibility, which is why in the REIT industry, Most folks seem to like the unsecured debt route, where you are not encumbering the asset with a mortgage or what have And you can get that flexibility. But we still believe I still believe in the floating rate strategy as being a superior

Speaker 8

I'm just wondering if inflation at 4 year highs, if there's a risk that rates And with 770 Broadway in particular, is that contemplated at all to have that as

Speaker 3

I couldn't understand your question.

Speaker 8

With 770, have you decided to definitively have that floating and hedge it near term or is

Speaker 3

Yes. I think that's great. The baseline will be a floater because it's going to be in the bank market, but our intent is to swap that At the corporate level for a period of time.

Speaker 8

Okay. And then one final question, with the ground lease Reset addressed in the retail guidance already provided. Why not provide FFO guidance going forward just given the amount of Certainly there is in the markets and with your company in particular.

Speaker 3

The answer is like real estate is a long term business. There's a lot of ins and outs. We're in a heavy development phase generally It's difficult to do. We gave you some preview at the beginning of the year and now we're walking that back a So it's a difficult thing to do. We've given you I think reasonable sense for 2022 mid to high single digits.

Speaker 3

So that's I think that's pretty good guidance for this year. That's our best guess. Things change, it's a fluid business, but that's

Operator

Our next question is from Alexander Goldfarb with Piper Sandler.

Speaker 9

Hey, good morning. Good morning, Steve. So a few questions here. The first is you guys had the $1,700,000,000 of cash, you bought some T bills, but why not use a portion of that cash to pay down

Speaker 3

Alex, good morning.

Speaker 9

Good morning, Michael.

Speaker 3

The answer is we did deploy some of that cash and T bills in order to get some of the benefit of earning more than what's in the And a lot of that capital that's still left, we intend to deploy into our development activities in Penn. Since the quarter end, by the way, we've put a little bit more in T Bills. And by the way, those are staggered maturities, 3, 6, 9, 12 But a lot of that capital is going to go into PENN2 and the finish up what was left at Farley and PENN1. So that's the rationale in terms of why wasn't all the flow isn't all paid on debt. In New York, you have the additional issue of on the mortgage debt, you do have mortgage recording tax, which 3% of our intent is to have financing on those assets over the longer term, right, that would be wasted money that we've paid once before that we would So, we don't want to do that lightly.

Speaker 2

Alex, in this market, where the financing markets are extremely choppy and are extremely choppy and hostile. If we pay down short term debt, Replacing it if we need the capital later on is going to be more difficult. The other strategy is you can hedge it. And if we take the cash, which we need and we have places for and it's all allocated in our capital plan and our budgets. And so if we Take cash and hedges by buying treasuries.

Speaker 2

So let's say we can arbitrage it so the interest expense on that The slug of capital is 100 basis points less than we would earn on the treasuries. So 100 basis Let's say on $1,000,000,000 is $10,000,000 That's a lot of money, but it doesn't move the needle. So I'd rather have the liquidity rather than Pay down the debt and not be able to replace it easily and quickly when we need it. So

Speaker 9

Yes, that's helpful. And as we look Michael, as we look at the I know that you're not giving distinct guidance, but From the $0.81 run rate that you gave in Q4, you're now having an extra $750,000,000 of dispose, higher interest rates. There's the ground lease reset. So just sort of ballpark, are we talking an extra $0.05 lower from that number, an extra $0.10 lower than that number? It sounds like the number is lower given all these moving pieces, but you guys did bake in a fair amount into Your guidance when you did say $0.81 despite Facebook coming online.

Speaker 9

So just trying to get a gauge for collectively how much off of that $0.81 run rate we're looking at?

Speaker 3

Yes, I don't want to be that precise Alex just because again we're in a fluid environment. I mean we did assume At the beginning of the year, the LIBOR was going to go up. The curve is steeper today. So it's Look, we don't know where it will end up, but it's certainly steeper than what we originally projected. The $750,000,000 of sales, There's not tremendous earnings that are coming off a lot of that.

Speaker 3

So I don't think that's going to have a huge impact. There are a lot of smaller assets that are not producing a lot of capital, so there's a lot of earnings. So I don't think that's material. But in terms of like, I think we gave you a range mid to high single digits and you can sort of reduce the run Right, depending on what you plug in for that coming off of the $286,000,000 for last year.

Speaker 9

Alex, I'm going to go out

Speaker 2

on a limb Alex, I'm going to go out on a limb and my financial guys are going to whip me.

Speaker 9

So They would never whip you, Steve. The whipping goes the other way. The whipping goes the other way, Steve.

Speaker 2

No, no, no. Let's get serious. Our internal budgets, which are highly detailed and The revised frequently show that with interest rates rising, even rising at a faster rate than we had As expected, as recently as 3 or 4 or 5 months ago, by the way, I believe that As I said in my remarks that the economy is now in the hands of the Federal Reserve as it should be. The Federal Reserve means business. They always win, and they will handle inflation, and this too will pass.

Speaker 2

But anyway, So our internal budgets, which are expensive, show that even with the One Penn ground lease reset and even with A reasonably predicted rise in interest rates Taken off the yield curve, and by the way, 95% of the time, the yield curve exaggerates the actual So that's another statistic. We believe that we our earnings will grow through and we will have Maybe one thing a couple of years out as but otherwise our earnings are going to blow right through it. Now I'm going to give you something that I know they're going to whip me for. Our budget show well in excess of $300,000,000 a year of NOI coming in from Farley, 1p and 2p above our current numbers over the next period of time. Your job is to predict what My job is to get those earnings.

Speaker 2

It will not come in a quarter or even a year. But As we complete this program without touching another piece of land in the Penn District, Our earnings will increase by well over $300,000,000 just from those three projects.

Speaker 9

That's annually or aggregate?

Speaker 2

Annually. By the way $300,000,000 Now that I said that, I've got a lot of people throwing knives at me in Okay. That's the math, okay?

Speaker 9

Okay. Stephen, if I No, that works, Steve. If I can end on a high note, the studio business that you're contemplating with an operator, Would you be just a landlord or would you be active in the participation of those studios?

Speaker 2

Well, the answer is, is that it's It will be a development deal in New York. That's what we do. We do better than anybody. So we will be we're a full partner. We're a full decision maker.

Speaker 2

There's a skill to designing these things so that the customers and the tenants, They work for the customers doing business. So we hooked up with a very talented experienced operator and He's going to do his part. We're going to do our part. And we think it will have a very fine result. We believe that studios in Manhattan are a unique asset as opposed to studios in the boroughs or across the river or down or

Operator

And we have our next question Daniel Ismail with Green Street.

Speaker 8

Great. Thank you. I'm just curious given the discussion Interest rates and the plan to dispose of $750,000,000 through the course of the year, how do you think that's impacting cap rates, both overall and on the assets you're looking to dispose of.

Speaker 3

Yes, Daniel, it's in terms of what's the impact, I think it's too early to tell. Look, if financing rates are higher, is it going to impact cap rates? Certainly. But it depends on where rates settle out and so forth. So I think it's too early to tell, but it will have some impact, sure, Will it affect the $750,000,000 The answer is a lot of those are small assets.

Speaker 3

Some are value add in nature. I don't think it's And then on the last basis point is where somebody borrows. So I think we have a pretty good sense as to where we can execute that, but we didn't It was going to happen all this year. So I want to just clarify that as you said it. It's certainly planned to go into the market this year, but when it will close So, I think Daniel, we got to wait and say.

Speaker 3

This is, if you're financing literally in this market right now, I think you're paying more than you probably will. I mean, if you look at the financing markets historically, as rates rise, spreads do tend to compress somewhat, So that the all in rate doesn't go up basis point for basis point. We're in an environment right now given the uncertainty that's With what exactly is the Fed going to do? What's going to happen with the economy, etcetera, where spreads have gapped out, rates, Great expectations have risen. So it's not a great market to be borrowing in.

Speaker 3

I think that will change as we get as it settles down here. And so what the impact on cap rates will be TBD, but like if borrowing rates are up, It will have signed back. Daniel, I

Speaker 2

would much rather have put these assets On the market 2 years ago when interest rates were lower, but it is what it is. It's the right strategy for our company to sell these assets. If we get 3% Higher price or 4% lower price at the margin, it just doesn't matter. These assets are for sale and we will And we will execute.

Speaker 8

Got it. That makes sense. And thanks for the clarification of the timing, Michael, just a last question for me on Penvistrofen rezoning. There's been a variety of news articles going back and forth about the potential Additional density there in the state versus the city's plans. I'm just curious, can you give us an overall update as to what's going With any potential rezoning and any potential timeline on that as well.

Speaker 2

You're talking about The GPP in Penn District?

Speaker 8

I am, yes.

Speaker 2

Yes. I think we'll stand pat on that. I mean, this is

Speaker 5

a basically

Speaker 2

The City of New York and the State of New York are partners in government. The MTA and the transit is basically a state asset. The capital plan that will be Expanded in Penn Station is basically state capital. So it makes lots of sense and there's multiple, multiple historic For the state to be in, I'm going to use the word in charge, that's really not an accurate order The zoning and the development process. The city and the state are cooperating on that.

Speaker 2

There's been extensive Public hearings on the plan and the proposal, the political leadership in terms of the

Speaker 8

Got it. Appreciate the color.

Operator

Thank you. Our next question is from Ron Kamden with Morgan Stanley.

Speaker 8

A couple of quick ones for me. One is just on sort of the CapEx. I think you'd mentioned in the K that you were looking for about $235,000,000 this year. 1Q was sort of in 36,000,000 Just, I know you talked about the leasing pipeline and that potentially accelerating, but just how are you thinking about CapEx

Speaker 3

I would say on the $235,000,000 I'll let Glen comment The CapEx for the rest of the year, it depends on whether it's a new lease, renewal lease. The $235,000,000 is That's our best estimate at the beginning of the year based on both what's in process and what we expect to come down the pipe, right? It's obviously dependent on actual transaction volume. And so while this quarter was lower, obviously our leasing volume is lower as well and we talked about being significant. So that number We'll normalize.

Speaker 3

I wouldn't vary from the 235 today. I think we've commented on the tenant improvements generally Having stabilized, they stabilized higher than we like, but they've stabilized and not going up any further. What else would you add to that?

Speaker 5

Okay. The Leasing quarter to quarter, it's always very fluid. We're always looking ahead, blocking and tackling way ahead of our expirations, Creating opportunities in the buildings on core value with all releases coming up whether it's this year, next year, 2 years or even further away. So it's We have stabilized and that's always due to the mix quarter to quarter of the new deals and expansion deals weighted against renewals.

Speaker 8

Got it. Okay. All my questions have already been asked. Thank you.

Speaker 3

Thanks, Raj.

Operator

We have our next question from Caitlin Burrows with Goldman Sachs.

Speaker 10

Hi there. Earlier you mentioned a lease at PENN1. I was just wondering was that included in the reported 1Q leasing spreads? And if so, could you share What New York office spreads would have been excluding it?

Speaker 3

The answer was I'm sorry, Kelly, just on the you're talking about the stats for Q1?

Speaker 7

Yes. Yes. If you exclude the PENN1 deal, because not all the leasing activity in PENN1 had a mark to market to it, The high single digits would be low single digits. So it's still positive. It was in that 3% to 4% rate.

Speaker 10

Okay, got it. We'll move all

Speaker 8

the Penn 1 deal.

Speaker 10

And then just regarding the ground lease At 330 West 34 and the increase there, I was wondering if you could go through how much of a catch up Your active payments does this represent versus the amount you had been accruing while it was in arbitration and whether this will impact financials going forward?

Speaker 2

That's all been recognized and trued up already. Okay. Thank you. That happened last quarter, I think. Thank you.

Operator

And thank you. We have our next question from Vikram Malhotra with Mizuho.

Speaker 11

Thanks so much for taking the question. Just maybe first To clarify, can you confirm was the Farley and Facebook specifically, was that recognized GAAP revenue was that recognized in 1Q and if not when will GAAP and cash be recognized?

Speaker 3

Yes, Vikram that was recognized 1st quarter GAAP cash will be some point in the second quarter.

Speaker 11

Okay, great. And then just More broadly on street retail, can you help us just understand where you think we are in this rent collect correction cycle now, Specifically on Fifth Avenue in Madison, in terms of occupancy costs and what you're hearing in terms of Specific demand for some of your vacancies on Zest.

Speaker 2

Vikram, we're just coming off the bottom. And so And I think I alluded to this in my recent letter. If you go back 18 months ago, there was no demand, no tours, no interest The way markets generally work. The vacancies will be absorbed at low rents. The markets will get Hi there.

Speaker 2

Business and this happens over some period of years. Business will improve, demand will accelerate And the rent flow go up. We are right now at the point in the beginning of that market cycle where we're just coming off the mark.

Speaker 11

Okay, great. Thanks so much. And then just last question, your updated thoughts on co working and we work Specifically in your tenant roster, how are you thinking in this, I would say, not new, but maybe evolving What's the room for co working in your portfolio, either your own or partners?

Speaker 5

Hi, it's Glenn. So we certainly think there is a long term role for co working flex space in our portfolio and we're seeing great success early already at PENN1 with the 80,000 foot co working Operation, we've opened up there earlier this year. We expect to roll more of that in the portfolio, as we So I think certainly there is a role. There is certainly a need out there for more short term One thing we're seeing at Penn 1 specifically is that our existing tenants in term projects from out of town or if they're reconstructing their space in one of the buildings or coming into our coworking facility to park themselves there Operator business while they're rebuilding. We're even seeing cases where new leases we're signing where tenants want a home now while they're waiting for their space To be built, they're coming into Penn 1, operating there with us as they wait for their space to be built.

Speaker 5

So I certainly think there's a role, and I certainly think what we created at PENN1 is by far the best operation in Manhattan, and we

Speaker 2

Glenn for creating our amenity package in One Penn and the co working space. We believe that Coworking is as an asset class is here to stay. The interesting thing is the strategy So we put of co working space into One Penn. And you got to remember that's in a 4,500,000 square foot complex. We believe that for our clients, whether they be an existing tenant in PENN1 or PENN2 For an entrepreneur that is looking for space or in the neighborhood, that the advantage of having that co working facility inside our complex where they have a huge amenity package that they could use.

Speaker 2

They have gyms, they have food, they Other offerings, they have conference centers, they have everything that they could possibly want is an enormous advantage. So our strategy is in 4,500,000 square foot complex to put the better part of the round numbers, 100,000 square feet of co working, which is available to our tenants And to the neighborhood as well, and they can use all of the facilities that are in this mass So we think that that's a competitive advantage than going into a co working space That's 7 blocks away and has 80,000 square feet of couches and nothing else. That's our

Operator

And this concludes our question and answer session. I will now turn the call over to Steven Roth for closing remarks.

Speaker 2

Thank you all very much for participating. We look forward to the next call, and we will see you then. Thank you, and

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Monster Beverage Q1 2022
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