Welcome to the Vornado Realty Trust earnings and webcast for the third quarter of 2022. My name is Vanessa, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press zero then one on your touchtone phone. I will now turn the call over to Steven Borenstein, Senior Vice President and Corporate Counsel. Steve, you may begin.
Welcome to Vornado Realty Trust third quarter earnings call. Yesterday afternoon, we issued our third quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These 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, 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 statement. 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. As Michael will cover in a moment, we had another good quarter with comparable FFO up 14% from last year's third quarter. Despite headwinds from a slowing economy and rising interest rates, we still expect this year to be up a fair amount from last year. We will feel the full effect of higher interest rates on our numbers next year, given a full year of impact. Overall, this quarter, we leased 450,000 sq ft, 229,000 sq ft in New York, well below trend. This is a little bit the result of the slowing market and a lot the result of timing. As Michael will explain, our New York pipeline is a robust 1.5 million sq ft. The Fed is deadly serious in pursuing their fight against inflation.
The economy is clearly slowing, and capital markets are volatile. As a top priority, we have taken the following actions. Earlier this year, we extended our near-term debt maturity, so we now have no debt coming due in 2023 and a very modest $233 million on three assets coming due in 2024. Further, we extended our unsecured revolving lines of credit totaling $2.5 billion, with only $575 million outstanding through 2026 and 2027, providing significant liquidity for the next 4- 5 years. In addition, we protected our floating rate debt by swapping for five years, $2 billion of floating rate debt to fix at a weighted average of LIBOR or SOFR, as the case may be, of 2.9%.
Further, we have interest rate caps on an additional $2 billion, providing protection above 4.2% on a weighted average basis for a weighted average term of 10 months. Please see page 33 of our financial supplement, which describes all this activity line by line. Mark-to-market in the aggregate, these swaps and caps are now in the money $232 million. In effect, our only remaining floating rate debt exposure is $750 million, which is largely JV debt. Be aware that nothing can really protect as loans mature into a higher rate environment. The second area of our focus is, of course, the PENN DISTRICT. The PENN 1 Lobby and amenities are now complete. The PENN 2 Skin and bustle are now very far along, as is the Long Island Railroad Concourse.
We invite all of you to come down and take a look or give us a call, and we will be happy to tour you through. Broker and tenant reactions have been truly outstanding. The Hotel PENN is coming down, with demolition scheduled to be completed in the fourth quarter of 2023. I must say that the headwinds in the current environment are not at all conducive to ground-up development. Lastly, I want to comment on our dividend. Our policy is to pay out dividends equal to our taxable income. We now expect our taxable income to be lower in 2023. We will not have income from 220 Central Park South. We assume no asset sales, and we are budgeting to the interest rate yield curve.
As such, our board of trustees plans to right size our dividend in 2023, commensurate with our projection of taxable income. Of course, this will allow us to retain more cash. Now over to you, Michael.
Thank you, Steve, and good morning, everyone. As Steve mentioned, we had another good quarter. While we experienced some headwinds from rising interest rates, our core business performed well. Third quarter comparable FFO, as adjusted, was $0.81 per share compared to $0.71 for last year's third quarter, an increase of $0.10 or 14.1%.
The increase was driven primarily by rent commencement on new office and retail leases, the continued recovery of our variable businesses, and an adjustment for prior period real estate tax accruals at the Mart, partially offset by higher net interest expense from increased rates on our variable rate debt. We provided a quarter-over-quarter bridge in our earnings release on page three and in our financial supplement on page six. Notwithstanding additional interest expense from rising rates on our variable rate debt will result in lower comparable FFO per share growth for 2022 than we anticipate early in the year. We do still expect that comparable FFO per share will be up year-over-year. The additional interest expense from rising rates will have a greater impact next year as the higher rates impact our variable rate debt costs for a full year.
We have partially mitigated the impact of this due to the significant amount of hedging we did this quarter, as Steve just covered. Company-wide same-store cash NOI for the third quarter increased by 13.8% over the prior year's third quarter. Excluding the accrual adjustments related to theMART real estate taxes, the increase would have been a still solid 3.4%. Our retail same-store cash NOI was up a very strong 7.7%, primarily due to the rent commencement on several important leases. Our overall office business was up 15% compared to the prior year's third quarter, also benefited by theMART adjustment, while our New York office business was down 1.3%, largely due to not renewing lower rent tenants at PENN One in order to bring in higher paying tenants post redevelopment.
Now turning to leasing markets. Amidst the backdrop of economic uncertainty, the New York Class A office market remains resilient. Stimulated by the city's tight labor market, where office user job employment is now above pre-pandemic levels at 1.5 million. Leasing activity in Manhattan continued its rebound through the third quarter, with volumes surpassing pre-pandemic averages. Year-to-date, market-wide leasing activity stands at 24 million sq ft, 50% above where we were at this time last year, including 9.3 million sq ft this quarter. Deal volume during the quarter was led by 16 headquarters leases signed in excess of 100,000 sq ft, reinforcing that large tenants are committed to New York and are signing long-term commitments. As we enter the fourth quarter though, caution is the word of the day. There is increasing uncertainty in the world, and tenants are acting accordingly.
As businesses continue to reassess their space requirements, the bifurcation between high quality and commodity product is growing. Tenant preference remains strong for best-in-class newly developed or redeveloped buildings with modern amenities and collaboration spaces, and being on top of transportation is critical. Most companies believe the highest quality work experience is key to both incentivizing employees to come back to the office and also for attracting new talent. Our portfolio consists largely of these types of assets, positioning us well to continue to capture tenant demand. During the third quarter, our office leasing team completed 42 transactions comprising 388,000 sq ft across New York, Chicago, and San Francisco. In New York, our average starting rents were a very strong $89 per sq ft, reflecting the breadth of our high-quality portfolio.
Our overall leasing pipeline in New York remains strong, with approximately 1.5 million sq ft of leases in advanced negotiation and proposal stages. Now turning to Chicago. At the Mart, we leased 67,000 sq ft in 19 transactions this quarter in a 50-50 mix of office and showroom activity. While the market in Chicago remains challenged, we have seen a pickup in proposals during the quarter. As expected, our trade show business has rebounded nicely in 2022, though not back to pre-pandemic levels yet, with NOI up $12.2 million through three quarters versus last year.
In San Francisco, at 555 California Street, where we're full except for the Cube, we leased 154,000 sq ft during the quarter, including a large renewal of Morgan Stanley for its 132,000 sq ft and a 21,000 sq ft expansion renewal with Centerview Partners. Our starting rents were very strong once again, generating a 12% positive cash mark-to-market. 555 California continues to be the premier real estate asset in San Francisco, particularly for financial tenants as evidenced by these leases. Retail leasing results were fairly modest for the quarter, with one renewal transaction significantly skewing reported GAAP and cash mark-to-market. The bulk of the leasing activity occurred in the redeveloped Union Railroad Concourse, where you're seeing very good activity with strong rents.
More broadly, with the rebound in tourism and daily workers, we're continuing to see more retailers search for new store locations. However, retailer concerns about inflation and the economy are resulting in them too being more cautious about committing to new leases now. This will change as the economic environment stabilizes. Finally, let me spend a minute on sustainability, where we continue to be a leader. Vornado was once again selected as a global and regional sector leader for diversified office and retail REITs in Global Real Estate Sustainability Benchmark, or GRESB survey, ranking number 1 in the USA in our group and number three out of all 112 publicly listed real estate companies in the Americas that responded to GRESB.
In addition, we once again earned GRESB's five-star rating, received the Green Star distinction for the tenth time, and scored an A for our ESG public reporting and for our score. This area is increasingly important to our tenants and other stakeholders as well, and is a differentiator for our portfolio in the market. Turning to the capital markets now. Overall, the heightened market volatility and aggressive rise in interest rates is significantly impacting the capital markets and generally causing most lenders and debt investors to pause. The CMBS market is effectively shut right now, and balance sheet lenders are hesitant to lend other than to the best properties and sponsors. We had anticipated the financing markets becoming more challenging this year and focused early and dealt with our 2022 and 2023 maturities.
Importantly, given the $3 billion in refinancings we completed this summer at attractive spreads, we have dealt with all of our significant maturities through mid-2024 and are largely protected from near-term refinancing risk. On the asset sale front, while there continues to be active interest from investors in New York office and retail assets, without a stable financing market, it is difficult to transact with large assets without in-place debt right now. Notwithstanding the market challenges, we executed a contract to sell 40 Fulton for $102 million and are negotiating sales of a handful of small assets. Finally, our current liquidity is a strong $3.3 billion, including $1.4 billion of cash, restricted cash, and investments in U.S. Treasury bills, and $1.9 billion undrawn under our $2.5 billion revolving credit facilities.
With that, I'll turn it over to the operator for Q&A.
Thank you. We will now begin our question-and-answer session. If you have a question, please press zero then one on your touch-tone phone. If you wish to be removed from the queue, please press zero then two. If you're using a speakerphone, please pick up the handset first before pressing the numbers. We ask that you please limit yourself to one question and one follow-up question. Once again, if you have a question, please press zero, then one on your touch-tone phone. We have our first question from Steve Sakwa with Evercore ISI.
Thanks. Good morning. Michael or Steve or maybe Glenn, can you just maybe provide a little more color on the 1.5 million sq ft in the pipeline? I'm just curious how much of that relates to kinda new requirements for you, and how much of that is maybe early renewals looking into 2023 and 2024.
Good morning, Steve. It's Glenn. You know, as we look at the pipeline, you know, in terms of the 1.5 million sq ft, it's sided more towards new tenants and expanding tenants versus renewals. You know, filling some of the empties we have today, and then going forward, locking in spaces we know we have coming due with tenants who will be new to the portfolio. You know, it's a really good mix of law firm activity, financial service activity, some media activity. I would say it's more sided to new tenants coming in or expanding tenants in the portfolio.
Glenn, maybe just any color just in terms of types of tenants. I assume kind of big tech is on hold, but you know, these private equity law firms, investment banks, asset managers.
Yeah. Certainly, financial services heavy, less on tech, as you're saying. Private equity is very, very strong, very active. There's still some hedge fund activity also in our portfolio, you know, at our financial buildings, you know, with 888 Seventh Avenue, 645 Madison Avenue, et cetera. Certainly financial is busy, and law firms are definitely getting busier in the portfolio, particularly buildings like at 1290 Avenue of the Americas, Sixth Avenue.
Great. Secondly, Steve, in the past, you've commented on your desire to sort of pursue one of the casino licenses downstate. I'm just curious if that's still something that you're interested in, and how do you think that process unfolds over the next 12-18 months?
We continue to be interested, very interested. It's a government process. I think they have already announced that they're gonna put out their first RFP, I think, either late in December or early in January. Then from there, we'll see how it goes. We expect it to be a very competitive process.
Great. Thank you. That's it for me.
Thank you. Our next question is from-
Thank you.
We have our next question from Michael Griffin with Citi.
Great. Thanks. Maybe just going back to the comments on the dividend. Wondering if you can frame maybe how much you're expecting to right-size the dividend sort of heading into 2023, and any additional commentary on that would be helpful.
You know, we really can't. I mean, it's a board prerogative, and the numbers are still moving around, and, you know, it would be totally inappropriate for us to guess as to what that dividend might be next year.
Got it. Maybe just back on the interest rate swaps. What was the embedded cost in executing those swaps? For the $800 million term loan, it looks like about $250 million of those swaps are expected to still burn off in 2023. Would the plan be to swap that going forward or to leave that as floating?
Good morning, Michael. In terms of the cost of the swaps, you know, what we laid out for you on page 33 of the supplement, you know, gives you the all-in swap rate so that, you know, there's a credit charge that's embedded in there. It depends on the particular trade. I would say, you know, 4-5 basis points is typical. Sometimes it's a little bit less, but I think if you use that as a working assumption, it's not bad. But again, that's embedded in the numbers that we gave you. On the term loan that you cite, you know, these are all, well, not all, but I would say largely corporate-level swaps.
We have the ability to move those around as different loans, you know, roll off. You know, or if we sold an asset and we wanted to shift it around, which we did, for example, on Long Island City earlier this year, you know, we sold that asset, we moved it to a different asset. You know, it gives us flexibility. There are certain asset-level swaps, but by and large, they're corporate. The term loan, you know, we went ahead and forward swap $500 of that, you know, beginning next year. We have the ability to potentially move some around. If not, the answer is we'll look at, you know, fixing that balance.
All right, great. That's it for me. Thanks for the time.
Yep. Thank you.
We have our next question from Caitlin Burrows with Bank of America.
Hi. Good morning. Busy quarter on the financing front. Just following up on the interest rate swaps. Can you help us understand the thinking behind how you decided on reducing your floating rate debt exposure to 27% versus a lower amount more in line with your peers?
Well, I think 27% is not the right number to use. You know, we've got caps in place on the bulk of the rest. So our net exposure to floating rate is about 7%. You know, when you look beyond that is what's exposed, it's basically loans that are coming due at the end of the year, or we have JV partners where, you know, there was no sort of desire to collectively, you know, do any sort of hedging there. So, again, I think from a net exposure, you know, we've got about 7%. I wanna also remind everybody, we've got, you know, significant cash in our balance sheet that's earning higher rates.
You know, some of that's been deployed in Treasury bills, some of that's just, we're earning higher rates with our banking relationships. You know, on net exposure, I think it's even less than seven. That, I think, is a little bit more accurate in terms of what the exposure is.
Okay, that's very helpful. Just shifting to retail. We saw quite a drop in leasing spreads this quarter. Can you speak broadly to how you think about where pricing is going, specifically for New York City retail?
You know, I think over the last couple calls, you know, we've communicated, we think retail has bottomed in the city, and that is our view. You know, you're starting to see vacancy decline in many of the key sub-markets, which obviously is the forerunner to start to have some pricing rebuilding. I think you're actually seeing rents move up a little bit in SoHo already. You know, the reality is vacancy is beginning to drop in many of the sub-markets. You know, rents are not falling anymore, and that'll take some time to begin to recover. You know, overall, we think the market's bottomed. You know, leases that are getting done, retailers are focused on the best locations.
You know, they wanna be in the highest footfall areas in the best sub-markets. Our portfolio is situated there. You know, when leases get done right now, they're gonna be reflective of the fact that rents have corrected. You know, it depends on the sub-market. Could be, you know, a third, could be a half from where they were at peak. You know, in most cases, you know, we don't have exposure on a lot of our big assets right now. You know, it just depends on when the leases roll and where the market is at the time. You know, as I said, I think from a trend line standpoint, there are more retailers cruising around the city looking for spaces.
They're focused on the best locations and, you know, being a little bit cautious right now given what's going on in the economy. Net-net, you know, New York is very much, you know, still top of the ranking of where they wanna be and where they want to expand in.
Thank you for taking my question.
Make no mistake. With respect to retail, we are still in a retail recovering market. Volumes are not yet back to where they were pre-pandemic. If you look at the transportation numbers, basically, coming into the city, on the railroads and the subways and the buses is two-thirds of what it was pre-pandemic. Although anecdotally, traffic in the streets looks pretty whole. What I think you need to do is to say we're in a recovering market, and our prediction is that the market will be very much more healthy in a couple of years. This is not a quarter-to-quarter thing, it's a year-to-year thing.
Thank you. Our next question is from Alexander Goldfarb with Piper Sandler.
Good morning. Morning, Steve and Michael. Maybe just following up on the retail. The $1.8 billion retail preferred that you guys have in the JV that you did a number of years ago, just sort of your thoughts on that, the value of that. Is that still worth par? The cash flow coverage, I think the coupon is 4.25%. As you guys, Steve, think more about balance sheet focus, you've addressed a number of the floating rate, you know, floating rate exposure. How do you view your ability to refinance this $1.8 billion and get the cash out of that position?
Good morning, Alex. Michael. Let me try to get all your questions. In terms of the value of that preferred, you know, we believe it remains, you know, fine. Still worth the par. Just to cut to the chase. I know you wrote a sentence you think it's worth less than par. We don't think so. There's clearly equity value in the retail JV. I know our partners think there's significant value still left in that JV. We think the retail preferred is fine. From a cash flow coverage standpoint, you know, again, just to remind you, the cash flow from all the assets, whether they have preferred or not, you know, goes to secure the payment of that preferred, and the coverage of that, you know, continues to be very strong.
You know, even though you assume, you know, rollover over time and some ups and downs and whatnot, the coverage on our preferred dividend, which today is 4.25, will rise to 4.75 in April of 2024. You know, that coverage is very strong today, and we expect to remain strong. Now your last question, the ability to refinance out. I mean, if you go back to what I said in my opening remarks, and I don't think this is any secret, you know, the financing markets are not good right now, right? In any product category. You know, banks are, you know, basically shutting it down for the rest of the year unless, you know, you're a big client and great property and whatnot.
CMBS market, you know, bond investors really don't want to deploy capital. It's a tough market to finance in if you have to. Fortunately, we don't. You know, retail, I think it's gonna remain challenging to refinance in the near term. You know, this is not in our capital budget to get this refinanced in the next, you know, year or so. You know, when the market opens up, when we want to do. Remember, this can be done piece by piece, right? There's five assets that have preferred on. You know, if we want to avail ourselves of one or two or three, you know, then we'll do that, you know, at the time. To go.
You know, we don't need the cash today to go do it and pay exorbitant rates would not be prudent. Hopefully, I hit everything you asked, but you know, that's the current state.
Alex, look at it this way. There's two elements to it. One is the yield, and the second is the collateral. I think Michael said very clearly that we think the collateral is just fine. The coverage of the dividend is, you know, give or take, double what the carry on the preferred is. We think the collateral is fine. The dividend is, you know, clearly in this very volatile, chaotic capital market, is below what a market price of that preferred would be. On a short-term basis, you might say that if you were a trader, and you sold it, you would get less than par because of the sub-market dividend. That'll change.
We still think that it's a sound instrument.
Okay.
By the way.
Steve, second question, as you mentioned, dividend. You know, we appreciate the comments on the dividend for Vornado for next year. Alexander's is in a similar boat. Should we read through that the board will make a similar determination resizing of the Alexander's dividend as well?
No.
Okay. Thank you.
Thank you. Our next question is from John Kim with BMO Capital Markets.
Thank you. Good morning. You talked about the cautious environments. There was a lot more of an optimistic piece in the post this week on New York Office and in particular 1015. I was wondering if you could provide an update on the project, how much pre-leasing you would need to move forward with the development, and if there's any consideration to change the use of the project to have less office going forward.
John, thanks for the question. I'm gonna duck the question. A couple of things. I did say in my prepared remarks that the current environment makes ground-up de-development very difficult. I meant it. That's number one. Number two is in terms of changing uses and what have you know, that's not something we're gonna get into now.
Okay. Regarding the taxable income next year, I know you talked about rising rates and 220 Central Park South being fully sold. Are there any other pressures that you see on taxable income next year? I thought that 220 Central Park South had tax protection, so it wouldn't really be an issue. Any other thoughts on direction of your other businesses in 2023?
I mean, we've said that we think that our budgets show that taxable income is going to go down. The primary reasons are higher interest rates because we're not 100% protected. We have no income from 220, and we have a soft economy. If you take all those three things together, we are budgeting that. We're not budgeting any gains from asset sales. I mean, I think that's it. We are reluctant to put a number on that at the current time. We will make a decision probably in the first quarter.
Your dividend is at 100% of taxable income this year?
What is the exact number, Tom?
Well, our dividend is $2.12, and we haven't finalized taxable income.
What's our projection?
It's around that.
Yeah. We think that the current dividend is within a hair of 100% of our taxable income for the year 2022.
Which includes 220.
Great. Thank you.
Thank you. Our next question is from Daniel Ismail with Green Street.
Great. Thank you. You mentioned a few times the difficult financing environment, and I recognize this is a tough question to answer given the lack of transactions. I'm just curious, where you think New York City office values and cap rates are these days?
The answer, Daniel, is you know, without a lot of transaction activity, you know, I think it's difficult to give you a precise answer, right? I think there is. First of all, I would tell you that the investor interest in New York City remains very high. You know, while some, you know, see black clouds, others see opportunity, and others have a fundamental belief in New York. You know, when you look at what's going on around the world, right? In terms of, you know, you have a global investor base, and as they evaluate where they want to invest their capital, is it Hong Kong anymore? I don't think so. Is it London? You know, it doesn't seem as attractive given, you know, the issues they have.
You know, you come back to the U.S. looks very good. You know, New York is, I think, without question, the global financial capital. You know, a lot of interest in New York. A lot of smart money that's frankly scouring the market right now, looking at New York, you know, 'cause they see value. You know, in the absence of a financing market, I think it's going to stem activity for a period of time. I don't know if that's one quarter, two quarters, who knows? If you're forced to sell in this market, you know, then you're, you know, particularly on something larger, then you're gonna sell at a wider cap rate, right? If somebody needs financing. If they don't, you know, it's an all-cash buyer, then I think it'll be a little less compressed.
You know, is there a cap rate impact from this? Sure, there's a cap rate impact. Can I give you precision on that? No. Is it 50 basis points, you know, which is sort of maybe up 10%, so values are impacted 10%. I think, is that a reasonable assumption? Probably. I don't think anybody can tell you with precision, Daniel.
A couple of comments on that. We've seen this before many times, as the economy is either entering recession or in recession. The debt markets and the capital markets are tightening, they are highly illiquid, and they are unbelievably expensive if you must access the debt markets. That's a very big deterrent to asset sales. The second thing is that in these kinds of markets, only people that have to sell transact. You know, only weak sellers are transacting because the only buyers that are really trolling the market are distressed buyers. You have to just live through this and, you know, it'll end. It'll end sooner than you think.
This is not the kind of a transactional market or a capital market where you can really make adjustment. This is an aberrant that happens one year out of every ten, and we are, you know, either in the one year or about to go into the one year.
Got it.
I have a-
Just last one for-
I want Daniel, one last comment. The stocks of the office companies have corrected to the point where, in my judgment, they have gone significantly below even the distressed mark-to-market of the portfolio. Significantly below that number.
Got it. I appreciate the thoughts. Just a last one for Glenn. I'm curious where you think concessions are trending these days. Are you seeing any stabilization or abating in concessions on the new leases you guys are negotiating?
I think concessions have stabilized. They haven't abated. You know, TIs are still quote-unquote too high, but they've stabilized. You know, you're certainly seeing, you know, more, you know, of the TIs in terms of getting tenants into the buildings, you know, in terms of helping them build out space more than historically, but I think that number has stabilized.
We're seeing sort of.
Great. Thanks, everyone.
We're seeing sort of a strange market. Rents have really not fallen on the better buildings. If anything, they're going up. But the TIs and the inducements have gone up as well. The market is taking their pound of flesh in the inducements as opposed to in the rent reductions.
Got it. Thanks, everyone.
Thank you. Our next question is from Derek Johnson with Deutsche Bank.
Good morning, everyone. Thank you. In your discussions with business leaders, you know, is there a view that the likely recession will be a tipping point for greater office utilization and, you know, thus, you know, the balance of power favoring employers versus employees? I guess, you know, can the slowdown drive greater and perhaps sustainable office utilization in your view?
Green Street wrote a piece that came out recently that basically debunked that idea that a recession begets higher unemployment, begets changes of power from the employee to the employer, and therefore, the employee will scamper back into the office. I just have no view on that. I do believe, however, that the office is the workspace as opposed to the kitchen table. I believe that over time, the culture will change, where people will want to be back in the office. The office will be more productive. The collegial aspect of work and being with colleagues in person will overpower the temptation to sit at the kitchen table. I don't think that it's the pain of a recession that's going to change the marketplace.
Got it. Appreciate it, and thank you. You know, just another big picture one, and I hope you guys don't think this is unfair. Steve, you know, you've seen this movie before. You know, as investors, you know, really have been sidelined by this hybrid work, secular concern. You know, now we have the likely recession. You know, what is it going to take? Like I said, you've seen this before. Or what can you do ultimately to help flip investor sentiment to more positive on office REITs, you know, longer term? Thank you.
You know, I've always believed that the rules of the game were to buy low and sell high. Now what we have is that it's hard to buy assets. They're very illiquid, and there are very few assets that are on the market, certainly at distressed prices. The distress is in the stock market. I don't know, but I mean, from my personal family and investing, we like to buy in recessions, and that's the time to buy. What's it going to take for you guys to start realizing that these stocks are, you know, stupid, super cheap? I don't know, but it will happen.
My guess is that, you know, just as the stock market always turns and gallops ahead way before the end of recessions, I think that the office business will do so as well. I can't tell you what the catalyst is.
Thank you, sir.
We have our next question from Anthony Paolone with JP Morgan.
Yeah, thank you. In just looking at your 2023 lease expirations, it seems like you have a disproportionate amount expiring in retail and office in the first quarter. Can you maybe help us peel that back a bit and give sense as to whether or not there's any known big move-outs or roll-ups, roll-downs?
As it relates to the office in 2023, it's really a mix of four of our properties, 777 Broadway, 350 Park Avenue, 1290 Avenue of the Americas, and 280 Park Avenue. And that's throughout the year, not only in the first quarter. We're, of course, attacking all of those expirations. We have very, very good action on some and others who are in the market, you know, trying to lease the space. I will tell you that, you know, when you look at those assets, they're, you know, among our highest quality of buildings and most unique characteristic buildings like a 777, like a 350. So that's where the expirations are coming out of in 2023.
Okay. How about retail in the first quarter? Anything to call out there?
You know, Anthony, it's Michael. The answer is, we've got two or three, you know, key tenants rolling, and I can't tell you definitively what's gonna happen there, you know. There's discussions where, you know, all could renew, and there's, you know, discussions where none could renew. It's still too fluid. I do think net-net, you know, even if most renew, the income will be down some, just given the, you know, where one may likely renew. I just can't give any more precision given the discussions remain pretty fluid right now.
Okay. Got it. Just one follow-up on The Mart. It seems like the trade shows are back, and I know in some years you have the tax item. Can you maybe just help us think about where you think the annual EBITDA run rate has gotten back to on that asset?
You know, I think today it's probably in the mid-70s%. But you know, we also know that the Casual Market is gonna be leaving. You know, it probably bottoms in the low-to-mid 60s% before it comes back. You know, that number probably in terms of run rate, you know, at the beginning of the year, the low-to-mid 60s% is probably a decent run rate before we rebuild that back.
Okay. Thank you.
What's the potential of the building if it's at the top end?
Yeah. Like, ultimately, I think the building should get back north of $100 million, right? I mean, our job is to re-lease it. You know, we do think there's some additional upside in trade show. So that, you know, that number in the next, you know, let's call it 36 months, we think it gets back hopefully north of $100 million.
It's right now at about 75. We expect it to go down into the 60s.
Yep.
Before it turns and goes back up to as much as 100, which will not happen next year, but will happen in the future.
Okay.
That's the potential for the asset. It's a little bit more volatile than we would like, but that's the story.
Okay. Appreciate the help.
Yes, sir.
Thank you. Our next question is from Nicholas Yulico with Scotiabank.
Thanks. I just wanted to see, you know, given the recent news from Meta, just wanna confirm that there's, you know, no impact you're seeing for your space with them at Farley or 770 Broadway.
There's no impact on Farley, no impact at Seven Seventy, as it relates to the recent announcements.
Okay.
They're in the buildings. You know, the buildings' utilization is very strong. You know, they happen to love both of the properties.
You know, it's almost embarrassing to say, but we spent a little bit of time looking at their credit, because they are a big tenant, and this is one spectacular company from a financial point of view. So when you think about it, they have, what's the number? $25 million of free cash flow a year after spending a similar amount or a greater amount on R&D, which is discretionary. So their cash flow is, you know, well above $50 million a year. They have almost no debt. I think they did their first tiny debt issue recently. They have cash balances in the, was it in the fifties or something like that? Millions of dollars. Billions of dollars.
Yeah. A little over $40 billion.
Okay. That works. From a financial point of view, they are a great company. They have these huge platforms of Facebook, Instagram, and WhatsApp. Now they're off on a mission. You have to back the guy because look what he's done in the past. The answer is they are trying to develop a new universe. I believe it will be extraordinary successful. Even if it's not successful, it certainly will not impair the sanctity of that unbelievable business. We're friends, we're vendors to them, and we're happy and honored to be so.
Thanks. Appreciate that, Steve. Just one other question is on the retail JV. When I look at the NOI in the supplement, I mean, it feels like. I mean, I think I'm looking at this correctly, but that the NOI is actually very similar to when you struck the deal in 2019. Actually, it might be up a bit. I just wanted to confirm that. I know you did impair the investment back in 2020, but you know, when the original deal was struck, it was at a 4.5 cap rate. Presumably cap rates are higher today based on everything going on in the world.
Just trying to understand, you know, the dynamic of when you had to do it, the annual test on the value of the JV, you know, if we should think that there is any, you know, impairment possibility from that.
Yeah, Nick. In terms of the income on the portfolio now versus when we struck the deal, I don't have the exact numbers in front of me. My recollection from just knowing the ins and outs is it's down probably a little bit because of, as you may recall, you know, Forever 21 went bankrupt. They're still in the space, but that, you know, that number is down from when the original deal was struck. You know, we had one vacancy on Fifth Avenue, you know, since then. Look, the signage is frankly booming right now, higher than when we struck the deal, but I think net-net is probably down a touch. You know, you correctly point out the income has been very durable.
You know, some of the leases rolled, there'll be some impact. I think in terms of the impairment, you're correct. In 2020, we did impair it. Again, I'm going from memory, Nick. I think we... You know, the fair value, you know, the original deal was struck at $5.4 billion, and we impaired it, you know, south of $5 billion. I don't wanna give you the number without having it in front of me. The answer is, look, we look at it every quarter. There's an independent third party appraisal that is performed on behalf of the venture, which we frankly have, you know. We don't provide any assumption. They do their independent work, and we, you know, we take that, and that's sort of what drives that.
You know, they'll do their work at the end of the year, and we'll evaluate. I can't predict whether it will or won't be. I think the market is certainly, you know, given your comments, given how it's going as far as comments, you know, the market and how it's priced in our stock has certainly impaired it significantly. I can't tell you whether there'll be any further accounting impairments yet.
Okay. Thanks, Michael.
Yep.
We have our next question from Ronald Kamdem with Morgan Stanley.
Hey, couple quick ones from me. Just going back to the leasing activity. You talked about, you know, maybe the slowing economy and so forth. Just was hoping you could provide a little bit more color from the tenant side, sort of is it the economy? Is it sort of hybrid? And also by subsectors would be helpful.
You know, I certainly think, you know, CEOs are more hesitant due to the economy, for sure. You know, we're seeing that in our discussions. You know, I think, you know, by sector, you know, certainly the big tech lull. I will tell you there is some more small to medium-sized tech activity. There were a couple leases signed in the market this quarter by a couple of those, but generally, I'd tell you know, more caution, more hesitancy due to the economy, not so much, you know, by the hybrid specifically.
Great. Then my second question was just going back to the dividend. I know you sort of talked about, you know, it's the board decision they're discussing. Just trying to understand what the pieces that are going into that. Is it still sort of a, you know, is it $200 million ± of CapEx, operating cash flow? You're thinking about just how to solve for that to get to a sustainable basis. I'm just trying to get a sense of what should we be looking at, thinking about for the right place for the dividend to land. Thanks.
You know, I don't have anything more to say on the dividend other than what I've already said. You know, we will get to that at the first quarter board meeting. I think everybody can, you know, do their own math and guesstimate, but I'm not in the guesstimating business. I can tell you one little factoid, and that is, if the stock trades, you know, between 9% and 10% dividend rate, so that indicates that something's wrong. I think I'll stand with what I've already said.
Great. That's all my questions. Thank you.
Yes, sir. Thank you.
Thank you. Our next question is from Vikram Malhotra with Mizuho.
Thanks so much for taking the question. I guess just maybe bigger picture first, Steve. I wanna get your thoughts on what are you contemplating sort of macro-wise, rates-wise, and then more at a micro level with fundamentals. It just feels like, you know, things seem to have been inflecting according to the last few calls. Return to work was improving, leasing is improving. You know, you've now swapped a lot of debt for five years at a rate. You're contemplating cutting the dividend. I'm just trying to balance all of this, like, near term, you said it's a one-year issue, but it sounds like in your actions, it's more like a three to four-year issue than a one-year issue. I'm just
Can you help us bridge what are you forecasting macro-wise and micro-wise to effectuate this dividend and the five-year swaps?
Boy, oh, boy. So let's see. You know, obviously, the economy has been hyped to the point that it's probably very destructive. For whatever different reasons, and this is, you know, I don't wanna get into politics, but for whatever different reasons, we have runaway inflation. As I said, I think the Fed is deadly earnest about doing their job and stopping it. Their number one tool, of course, is interest rates. The interest rates have had an enormous effect already in a very rapid manner, I mean, you know, as illustrated by the stock market, the housing market, et cetera. The Fed is going to win this battle in the end. It's just a matter of how long it takes.
We aggressively went to protect our floating rate exposure for multiple different reasons. The most important one of which was to protect against a runaway interest rate environment. We think we sort of have that covered. The most efficient execution for the swaps was five years, and so we basically did that. Do not read anything into our firm view on the future based upon this five-year number. I would tell you that I expect, if you look at the graphs and look at the charts of past recessions and past Fed activity, you know, they generally go up at a pretty steep curve, and then they come down fairly quickly, because, you know, they have to.
They put the economy into recession, and then they aggressively have to bail it out. That's what we expect is going to happen this time, but we won't, you know, we don't bet our life on anything. We think we protected our balance sheet. We think to overpay our dividend is not appropriate. We think we've taken the proper financial actions to protect the sanctity of the financial sanctity of the company. We believe that this is gonna be a, you know, a 1-2-year event, not a 3-5-year event.
Thank you. That one- to two-year is more your comment on the fundamentals in office as opposed to the macro that you just outlined, I'm assuming. Just following up on that, I know the numbers are moving around.
No, no.
I'm not asking where.
No, no. Hang on, Vikram. The two to
Okay.
The 1-2 years is a macro prediction.
Okay. How do you square where fundamentals will be office fundamentals in that timeframe?
Well, first of all, you know, we are New York-based. We believe in New York. We believe, and anecdotally, we've had lots of conversations with lots of employers, from all over the world. New York is still New York. It's still the capital of the United States. We believe companies wanna be here. For sure, young people wanna be here. Just anecdotally, I'll tell you that a lot of my friends have moved back to Florida. When you ask them where their children are, all the children are in New York, and they wanna be in New York, so that's extremely telling. You know, we think that this will be a fairly predictable cycle where different industries will grow at different rates, but there is...
There will continue to be an aggressive interest in locating in New York and growing in New York.
Okay. Just two quick-
By the way.
Sorry, go ahead.
One other point, Vikram. You know, we are absolutely strongly convicted about what we're doing in the PENN District. We think that that is going to be another center of New York and an extraordinary success. We're very, very, very excited about that.
Okay. Just before that, I know the numbers are moving out, so I'm not asking you what the numbers or the dividend cut is going to be. Is it fair to assume, if we look at, like, a historical AFFO payout ratio, whatever the AFFO may be, should we assume a payout in line with historical levels as we think to model next year?
You know, if you can model taxable income, that's what the dividend is gonna be, approximately. We're in the budgeting process. We're nowhere near over it, and we will make that decision in the first quarter.
Thank you. We have a follow-up question from Steve Sakwa with Evercore ISI.
Thanks. Steve, you know, you mentioned about the valuation, and I'm sure you know, on a lot of numbers, you trade at very low price per square foot, very high implied cap rate. Historically, you know, we've seen private equity come in and close gaps, in sectors where there's big discounts that persist. I guess given, you know, the where the financing markets are today, that just doesn't seem likely. Are there steps that you can take, are there steps you're contemplating to try and close that gap? Is this just a time where you've gotta be patient and kinda wait for the financing markets to improve?
You know, I almost wanna duck that question, too. Let me see if I can parse into it. The leveraged buyout model, which you know has equity and debt, you know, may or may not work in this environment. The value of our company is there, and that's its extraordinary value. How it all plays out is something that you know that I can't predict right now.
Well, I guess you've talked in the past about maybe the you know, separation of the PENN District assets into a spin out, which I know was on hold. You know, you said you would only do buybacks in a meaningful way, but you'd probably need to sell assets to be able to buy back stock, which seems difficult. Just seems like your hands are tied. I'm just wondering, are we missing anything here that you could do to help close the gap?
The spin out is still on the table, and the protection of our balance sheet is the number one priority.
Got it. Thanks. That's it.
Thanks, Steve.
Thank you, sir. We have no further questions in queue.
Well, thank you all very much. We appreciate you joining us. The next call is when?
Valentine's Day.
February fourteenth.
Tuesday, February fourteenth.
The next call, the lovable Michael says is Valentine's Day, so I guess we'll see you in red on Valentine's Day. Have a great rest of the year, and thank you all very much. By the way, do take up my invitation to come down to PENN. It's extraordinary. Those of you who haven't toured through or seen it yet, you know, please take advantage of our invitation. It's sincere. We'd like to get you all down there and show you what we're doing. Thanks very much. Thanks for joining.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.