Alexanders Inc Q1 FY2022 Earnings Call

Welcome to the Vornado Realty Trust Earnings and Webcast for the 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'll conduct a question-and-answer session. I will now turn the call over to Mr. Steven Borenstein, Senior Vice President and Corporation Counsel. Steven, you may begin.

Welcome to Vornado Realty Trust first quarter earnings call. Yesterday afternoon, we issued our first 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 package 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 statements. On the call today from management for our opening comments are Steven Roth, Chairman and Chief Executive Officer; and Michael Franco, President and Chief Financial Officer. Our senior team is also present and available for questions. I will now turn the call over to Steven Roth.

Thank you, Steve, and good morning, everyone. 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. Partners are full, and by full, I mean literally full with long waiting lists. Restaurants are booming, and office utilization is climbing. 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 nine 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 the past is prolonged, we expect rates to climb quickly up a mountain, slow the economy and inflation, and then quickly fall down the other side. Second, for the first time this quarter, our GAAP financial statements reflect the balance sheet and income statement effect of the pending June 2023 Penn 1 ground lease renewal. We have estimated $26 million as the new ground rent pending the arbitration proceeding. While these two numbers are substantial and will slow our growth short term, we believe that as Farley, Penn 1, and Penn 2 come online, those will be very, very substantial. Now over to Michael.

Thank you, Steve, and good morning, everyone. As Steve mentioned, we had another strong quarter. First quarter comparable FFO as adjusted was $0.79 per share compared to $0.65 for last year's first quarter, 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 in our financial supplement on Page 5. As Steve mentioned, this quarter for the first time we are recognizing in our financials the impact and the pending Penn 1 draft 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 impact in our earnings. This reduced our earnings this quarter by approximately $4 million and will reduce it by $21 million overall in 2022 and $23 million on a full-year basis. The reduction in earnings will not impact cash FFO, however, until we actually start paying an increased rent in June of 2023. Looking ahead, we had initially expected to deliver double-digit percentage FFO per share growth in 2022, driven primarily by previously signed leases in both office and retail, particularly platforms at Farley and the continued recovery of our variable businesses. But we now expect the impact of projected interest rate hikes by the Fed on our variable-rate debt to be a greater headwind to this year's growth than we originally anticipated. 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 this year. 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 digits. With respect to our variable businesses, we continued to see a strong recovery in the first quarter. Our signage business, led by our dominant signs in Times Square and the Penn district, had its strongest first quarter ever, and forward bookings continue to look healthy. Our trade show business at the Mart is continuing to rebound as we hosted four successful trade shows during the quarter, whereas there were none during last year's first quarter due to the pandemic. Our garages, which we expect to be fully back this year, 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 this year, with the full return in 2023. Company-wide same-store cash NOI for the first quarter increased by 5.8% over the prior year's first quarter. Our overall office business was up 2.2% compared to the prior year's first quarter, while our core New York office business was up 0.5%. 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, Four Union Square, 770 Broadway, and 689 Fifth Avenue. Our New York office documents at the end of the quarter at 92.1%, which is consistent with the fourth quarter of 2021 and up from the trough from the second quarter 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 quarter and up 380 basis points since bottoming in the first quarter of 2021. We expect both documents to 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 first quarter of 2022, leasing conditions across Manhattan continue to remain strong. Deal activity is robust while asking rents, 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 trend towards recovery out of the pandemic, with several large leases in the pipeline across all submarkets. CEOs are placing a high value on securing their long-term 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 signed leases in the first quarter consisting of relocations to new or redeveloped assets. Accordingly, rents have increased in new construction or best-in-class redeveloped assets, which provide amenity-rich offerings at transit-centric locations. Our best-in-class New York office portfolio is well positioned to thrive in this environment. Focusing now on our portfolio, during the first quarter, we completed 30 leases totaling 271,000 square feet 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% 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 eight transactions at Penn 1 totaling 68,000 square feet with an average starting rent in the nineties per square foot. These early leases validate our plan to take rent at Penn 1 from the sixties per square foot to the nineties. We are now starting to push rents in this building into the triple digits, as tenants love this totally unique workspace. The transformation of Penn 1 has redefined work for all of our Penn district tenants. The unrivaled work-life campus ecosystem located on the building's first three floors is running on all cylinders, including our food and beverage operation, along with a 142,000 square foot amenity offering of health and fitness facilities, conference center, and trophy flex space operation. While the first quarter leasing volume was lower than recent quarters, we anticipate a very strong boost in leasing activity during the forthcoming quarters with several large pending transactions in our pipeline. We currently have 1.2 million 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 activity in the first quarter consisted of six leases totaling 20,000 square feet with average starting rents of $172 per square foot, all of which were new leases. We have an active pipeline and strong interest in the Penn district, particularly with the recent commencement of leasing in the Long Island Rail Road Concourse. Now turning to Chicago; the office market continues to be challenged with direct vacancy at 19% and tenant concessions at historically high levels. However, as we said last quarter, tenant demand continues to strengthen throughout the city, as indicated by this quarter's positive net absorption. At the Mart, 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 is an anchor tenant for our contract furniture business. Recent tour activity has been strong and is reflected in our growing tenant pipeline. We have 70,000 square feet of leases in negotiation, and our trading proposals include another 250,000 square feet of prospects. We look forward to commencing construction of our Mark 2.0 building capital program in July. We will bring our New York work-life campus ecosystem to Chicago, which will further differentiate the Mart as a unique workplace. In San Francisco, leasing activities started slowly at the beginning of 2022 as companies monitored the Omicron variant, but 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 vacancy rate is elevated at 15%, the seven-building trophy set of which 555 California is certainly one, is at 3% and experiencing strong tenant demand and rental rates. As such, our market-leading 555 California Complex is effectively fully leased, with the exception of the 78,000 square foot 345 Montgomery building. During the quarter, we completed an important 49,000 square foot renewal with Microsoft in the base of 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 a 7,000 square foot suite in the building's tower. Finally, turning to the capital markets; with the current market volatility and a move up in interest rates, the financing markets have become choppier, with a typical increased focus from lenders on quality, sponsorship, and lease term. Our portfolio is well positioned in this regard, and fortunately, we have only modest debt maturities in 2022 and no material maturities in 2023, after capitalizing on the robust markets last year. We are in the process of refinancing 770 Broadway now. I want to highlight that we have significant maturities in 2022 and expect completion later this quarter. We also went under contract last week to sell our Long Island City office building for $173 million. After purchasing the asset in 2015, we extended the major leases over the past few years to create value, and so our job here was done. This sale, together with the five small retail assets we recently sold, continues our efforts to monetize our non-core assets, and we have another $750 million planned in the near future. Finally, our current liquidity is a strong $3.962 billion, including $1.787 billion of cash, restricted cash, and investments in U.S. treasury bills, and $2.175 billion undrawn under our $2.75 billion revolving credit facilities. With that, I'll turn over the operator for Q&A.

We have our first question from Manny Korchman with Citigroup.

Hey, it's Michael Bilerman speaking. Michael, leasing has definitely kept pace. To start the year, you talked a little bit about the 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.

Yeah. Glen, why don’t you take that one?

Hi Michael, it's Glenn, how are you? So, the 1.2 million feet Michael mentioned in his remarks it's a very healthy mix. I'll call it 50-50 of new expansion versus renewals. A lot of the activity is in Penn and a lot more of the activities in the financial service building. So in terms of looking forward, as we said, we expect occupancy to continue improve throughout the year, continue to fill spaces. But we're seeing a really good mix across all types of tenant types in the portfolio as we sit here.

Great. And then maybe just on Penn 1, 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% targeted 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.

Look, as we stated in the opening remarks, right, we put it on the balance sheet straight line in earnings. I think in Steve's comments, he stated that the number we've put down is $26 million. There's a lot of data out there in terms of what the FAR is, etc. I'm not going to get into that or 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 Penn 1 is, probably one of the largest sites to be valued. It's three times the size of 330. 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, etc. The process is different on Penn 1 versus 330, and it'll 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've stated, we have from the outset on Penn 1, put the return gross of any renewal rent because we don't know exactly what that'll be yet. It could be material. We've now daylighted our best guess as to what that may be, and it'll be finalized over the course of the next year.

Is that the right math though, Michael, just thinking about that 20…

We decided to share our returns on the investment in Penn 1 gradually. The program is projected to yield a 2.5 million square foot rentable building, with rents expected to increase by approximately $30 on 250,000 square feet as the leases renew over the next four to five years. This could result in about $75 million that would contribute to our bottom line. We anticipate the ground rent to be around $25 million to $26 million, which we can easily manage while earning a return on our $400 million investment. Additionally, this building, along with its partner in the campus at Penn, is central to our efforts in the Penn district. We have developed a unique, extensive amenity package that has received positive feedback from tenants, brokers, and prospects, reinforcing that this was a smart decision. Regarding the arbitration, there are two types involved: the 330 arbitration follows a baseball arbitration model where each side presents their numbers, and the neutral arbitrator selects the more accurate figure, while the 1 Penn arbitration combines two arbitrators with a third focusing on negotiation. We are confident in the number we've chosen for various reasons, including market comparisons, and we believe this will be validated in the upcoming months and years. I expect the arbitration to commence before the end of the year.

Michael, just to come back to your comment specifically on the math. Right? If you take the 12.2 and you take the incremental rent that the $26 million implies, which we're paying $2.5 million today. So your 12.2 would go down to seven; your math is correct.

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

We are currently engaged in our budgeting process, which is a routine part of our operations. Both Glen and I believe that the property we are offering to the market is valued at around $90 to $100 per square foot. Analyzing the market trends to the west of us, particularly at Manhattan West and Hudson Yards, we see that rents are significantly higher. Our strong connection to transportation enhances the site's attractiveness, making it one of the best in the area. Therefore, we anticipate starting at the $90 to $100 per square foot range, and we project that in three to five years, the value of this asset will increase, pushing rental rates into the hundreds. Hence, a return of 5%, 7.5%, or 8% at the outset is only the beginning of what we foresee as a long and prosperous investment period.

Okay. Thanks, Steve.

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

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 less domino will be when employees and employers resolve hybrid work schedules in the office districts or teaming with activity, which will come sooner than you think. You also said tenants tell us they want less formal creative office, West Side model, only half of New York's 400 million 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? And then also just what do you think office usage looks like a year from now in terms of days of the week and how people are going to use the space?

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

Good morning, Jamie. As for predicting future utilization, it's uncertain, but we are observing an upward trend. Consistently, we see higher usage from Monday through Thursday, with Tuesday through Thursday being the peak days, while Friday tends to have lower activity as fewer people feel inclined to commute into the city. Unless there are company mandates encouraging people to come in, it seems Friday will remain the least busy day, although overall numbers are on the rise. I won't speculate on how high that will go. I believe Steve highlighted the type of spaces companies are seeking, a trend that began before the pandemic and has gained momentum since. What we're developing at Penn aligns with these needs, which explains the positive reception for Penn 1, Penn 2, and even the plans for Penn 15, though that's still in the future. This demand isn't limited to the West Side either; we are also seeing interest in the 770s, 850s, 350 parks, and other locations. However, as I mentioned, we have discussed divesting certain assets. Long Island City clearly does not fit our strategy, and although 40 Fulton is a solid building, it doesn't align with the assets we want to hold for the long term. We will refine our portfolio, continue upgrading, and ensure we retain properties that meet tenant demands and where we can expect rental growth. If certain assets don’t meet these criteria, you can expect us to actively divest from them over time. What would you like to add to that?

I think Michael covered it, Jamie, and it's not all one size fits all answer. It's very tenant specific. It's very industry sector specific in terms of the tenant and what their business is, but I will tell you, we see positive momentum. So number one, people are coming back more and more week to week. Leasing velocity is much higher this year than this time last year. There's a lot of large deals out there, a lot of large deals that have been signed, and other global banks on the new deal yesterday on the West Side that continues to build momentum. 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, etc. But I think you're seeing now what we have had over the last year, it will be an unwinding back to the office. People are now starting to come back, getting more comfortable, and I think month-to-month, it's continuing to improve out there in terms of the environment.

Jamie, I think in your question, there was implied the culture of work and the design of space that employers and employees want. This is something that our company and our teams have been focused on for a long while. So, we believe that the tie and suspenders and strip 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 West Side. So what we have done, we think very successfully and 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 1 Penn, which is 160,000 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 have much larger amenity offerings than if you have a single building. If you go through there, we have food offerings, we have places to hang, we have places to chat, we have gyms, we have health facilities, we have all manners of things. 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 conference rooms 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 is that we want the staff in the building to treat our tenants as if they were guests at a hotel. Know their names, welcome them, greet them, and treat them as they want to be greeted. So there's an entire culture of how work will be done in the future. 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.

All right. Thank you for everyone's thoughts on that. So I guess just following up on 2 Penn, 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 just kind of early to have a view on that and then similarly, there's just so much buzz around crime and safety 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?

In terms of leasing at Penn 2, 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 redevelopment in the market. So we're in continuous meetings with tenant brokers presenting the asset, but we are in no rush. The bustled structure has just gone up, and 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. So we're seeing everybody we're showing it to, and everybody, the reception's been A Plus. We're on every tour of every important client who's walking around New York for space. As it relates to the district, I think the streets are noticeably improved from this time last year. We're of course working daily with all the jurisdictions between NYPD, the Mayor's Office, the business improvement districts, our colleagues in the district, other owners, our major tenants, etc. and really focused of course on safety in the neighborhood, and I do believe 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 at Penn 2 has been excellent. And at Penn 1, as we've said in the remarks, the action is enormous. The rents continue to rise, and we're seeing tenants coming into the building for tours. They're coming from every submarket in the city from Park Avenue, Sixth Avenue, downtown, I mean all over the place, honing in on the district and into this campus amenity program that we're offering.

Jamie, I would just like to mention that compared to the previous quarter, the streets are showing improvement. The level of activity has risen, resulting in more foot traffic at the station, which contributes to a greater sense of safety and overall positivity in the area. Some issues have been addressed, possibly by relocating them, so if you've had a chance to visit the district recently, you should notice a significant enhancement. However, there is still work to be done.

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

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 a landlord, and if it's on the landlord side, how big of an integrated resort do you ultimately think the winning bid needs to be? Does it need to be hotel rooms and convention space, or do you think it can just be a standalone casino kind of in the heart of Manhattan?

Some of the answers to your questions are currently unknown. This will be a political process, and government officials will make the decisions. Regarding the casino concept, we are actively pursuing it as necessary. I have mentioned in my recent letters that we believe there will be three downstate licenses. We think the best location for the third license, after one going to Yonkers and another likely to Aqua, is in Manhattan. Manhattan is at the heart of various industries such as hotels, entertainment, restaurants, business, and theater. Interestingly, while Manhattan serves as New York's economic engine, the voting population that interests political leaders is not primarily based there. We are engaging in discussions with various parties as well as with other casino operators and landowners. We are currently considering whether to be just a landlord, part of the operation, or a hybrid model. We are evaluating different financial arrangements. As for whether the winning bid will be a small casino or a large Las Vegas-style complex with hotels and entertainment, we believe we can pursue both options. We have several sites we plan to bid on. For instance, Madison Square Garden, located in the Penn district, is a significant entertainment venue with 220 concert dates yearly, making it a focal point for the music industry. Our land is adjacent to it and well connected to the transportation network. We are also looking into locations in Times Square. This is still early in the process, and we are diligently exploring all options, expecting to have clarity on our direction well before the end of the year. Some believe this process will conclude in the first quarter of next year, but I think it will take much longer, as it is a thoughtful and important process. We believe Manhattan is the ideal location for the third license, and we intend to compete strongly for it. Additionally, we think that the speed of opening will significantly impact the economics for bidders. Building a new complex could take three to five years, while retrofitting an existing building could take one to one and a half years, resulting in significant financial differences.

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

When there are periods of volatility, which we are currently experiencing, there's hesitation particularly among bond buyers and to some extent the banks, especially in the CMBS market. The year started with a significant supply of CMBS volume, but with rising rates, war, and economic uncertainty, the spreads widened. We faced challenges with both spreads and rates. CMBS markets are still operational, but if you can avoid issuing large amounts in that market right now, it's preferable. Therefore, 770 will likely be financed through the bank market. It's a high-quality asset with a strong tenant, and we plan to refinance at a spread similar to where we are today for that building. While spreads are not as favorable as they were six or twelve months ago, they remain attractive for high-quality assets. The bank market is considerably more liquid than the CMBS market, but it has its limits. For our assets individually, there's solid demand in both markets, but for 770, we prefer the bank market, which currently offers more stability.

Fixed or floating?

Well, given us the bank market, it'll be a floating rate, but we'll likely as we've done in a number of other situations, swap that out for a portion of all the terms. Anything else on the financing market? Hopefully, that answers your question. But beyond 770, we don't really have any other material finance. We got a couple of small things we get done, but no other material financings for 2022 and 2023. So that's, we did a lot of that opportunity last year. We obviously had a number of maturities last year, so even now withstanding those markets, we really didn't anticipate being very active in 2022.

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

I think you just answered my question, but Steve, in your opening remarks, you did mention that having a high floating rate strategy works nine out of 10 years and rates will come back down again. So I just wanted to confirm that you are comfortable maintaining a high floating rate strategy in the near term.

We spend considerable time managing our balance sheet, as it's crucial for liquidity, safety, and our ability to be both defensive and proactive in our business operations. When evaluating financing options, the difference between floating rate debt and 10-year fixed rate debt is significant, typically around 250 basis points. Choosing a 10-year fixed rate means incurring that additional cost. Over the last 30 years, our financing advisors have indicated that floating rates have consistently been the better choice every month. Opting for a fixed rate loan locks you in; if you want to sell or refinance before the term ends, it often requires paying costly penalties, which limits your flexibility in managing the asset. Currently, we have floating rates on our books, and while our interest expenses are rising, fixing that debt would have resulted in a significantly higher interest cost. We believe the fixed rate approach, while seemingly safer, is ultimately more expensive and offers less flexibility. This is why many in the industry prefer unsecured debt, which allows for greater adaptability. I maintain that a floating rate strategy is the better approach.

I'm just wondering with inflation at 40-year highs if there's a risk that rates could remain higher for longer, and with 770 Broadway in particular, is it contemplated at all to have that as a fixed rate mortgage or fixed rate tax?

Yeah, 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.

Okay. and then one on a question with the ground lease reset addressed and the retail guidance already provided, why not provide FFO guidance going forward, just given the amount of uncertainty there is in the market and with your company in particular?

You know, the answer is look, real estate, the long-term business; there are a lot of ins and outs. We're in a heavy development phase generally, and it's difficult to do. We gave you some preview at the beginning of the year, and now we're walking that back a little bit given rates. So it's a difficult thing to do. We've given you, I think, reasonable sense for 2022, mid to high single digits. So that's, I think that's pretty good guidance for this year, and that's our best guess things change. It's a fluid business, but that's our best guess for this year.

And thank you. Our next question is from Alexander Goldfarb with Piper Sandler.

Hey good morning. Good morning, Steve. So, a few questions here. The first is, you guys had the billion, some amount of cash. You bought some T-bills, but why not use a portion of that cash to pay down some of the floating rate debt as opposed to just buying the T-bills?

Alex, good morning. The answer is we did deploy some of that cash in T-bills in order to get some of the benefit of earning more than what's in the banks. 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 put a little bit more in T-bills, and by the way, those are stack maturity, 3, 6, 9, 12 months. But a lot of that capital is going to go into Penn 2 and finish up what's left at Farley and Penn 1. So, that's the rationale in terms of why wasn't all the deploy; isn't all paid on debt. In New York, you had the additional issue of on the mortgage debt, you do have mortgage recording tax, which costs you 3%. Our intent is to have financing on those assets over the longer term right? That would be a wasted money that we've paid once before that we would never have to pay again. So, we don't want to do that lightly.

Alex, in this market, where the financing markets are extremely choppy and volatile; if we pay down short-term debt replacing it; if we leave the capital later on, it's 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. If we take cash and hedge it by buying treasuries, let's say we can arbitrage it. The interest expense on that particular slug of capital is a hundred basis points, less than we would earn on the treasuries. So a hundred basis points let's say on a billion dollars is $10 million. 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, Steve, that's helpful. Yeah, that's, 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 fourth quarter, you're now having an extra $750 million of disposal, 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. So just trying to get a gauge for collectively, how much off of that $0.81 run rate we're looking at?

Yeah. I don't want to put that precise as just because again we're in a fluid environment. I mean, we did assume originally the LIBOR was going to go up, the curve is steeper today. So, it's up; look, we don't know where it'll end up, but it's certainly steeper than what we originally projected. The $750 of sales, there's not tremendous earnings that are coming off a lot of that. So I don't think that's going to have a huge impact; a lot of the 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 look, I think we gave you a range mid to high single digits. And you can sort of deduce the run rate depending on what you plug in for that coming to 286, the last year.

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

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

No, no, no, let's get serious. Our internal budgets, which are highly detailed and devised frequently show that even with interest rates rising, even rising at a faster rate than we had expected, as recently as three or four or five months ago, by the way, I believe that. And 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 the inflation, and this too will pass. Anyway, so our internal budgets, which are extensive, show that even with the 1 Penn ground lease reset and a reasonably predicted rise, interest rates taken off the yield curve. By the way, 95% of the time, the yield curve exaggerates the actual facts. So that's another statistic. We believe that our earnings will grow through and we may have one ding a couple of years out, but otherwise our earnings are going to grow right through it. Now I'm going to give you something that I know my financial team is going to throw knives at me for. Our budgets show well in excess of $300 million a year of NOI coming in from Farley, 1 Penn, and 2 Penn above our current numbers over the next period of time. Your job is to predict what the period of time is. My job is to get those earnings. It will not come in a quarter or even a year, but during the, as we complete this program, without touching another piece of land in the Penn district, our earnings will increase by well over $300 million, just from those three projects.

That's annually or aggregate?

Annually, by the way.

I thought it's...

I said that, now that I said that, I've got a lot of people throwing knives at me in here.

I thought it's...

Anyway.

Okay. Okay. Steven, 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?

Well, the answer is, is that it's going to 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. There’s the skill to designing these things so that the customers and the tenants they work for the customers and tenants. We hooked up with a very talented and experienced operator, and he's going to do his part. We're going to do our part, and we think it'll 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 somewhere else.

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

Great. Thank you. I'm just curious, given the discussion of interest rates and the plan to dispose of $750 million 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?

Daniel, it's in terms of what the impact, I think it's too early to tell like if financing rates or higher are going to impact cap rates. Certainly, but it depends on where rates settle out and, and so forth. So I think it's too early to tell, but it will have some impact sure. Will affect the $750 million? The answer is a lot of those are small assets, some are value-add nature. I don't think it's dependent 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 necessarily say it was going to happen all this year. So let me just clarify that, as you said, it certainly has been planned to go into the market this year, but when it'll close TBD. So I think, Daniel, we got to, we got to wait and see 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 is 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 exists with what exactly is the Fed going to do? What's going to happen with the economy, etc., where spreads the gap down, rates, rate expectations have risen. So it's not a great market to be borrowing in. I think that'll change as get it settles down here. And so what the impact on cap rates will be TBD but like if borrowing rates are up it'll have some impact.

Daniel, I would much rather have put these assets on the market two 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 a 3% or 4% higher price or 4% lower prices at the margin, it just doesn't matter. These assets are for sale, and we will execute.

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

You're talking about the GPP and Penn district. I think we'll stand pat on that. I mean, this is basically the city of New York and the state of New York are partners in government. The MTA and transit is basically a state asset. The capital plan that will be expended in Penn station is basically state capital. So it makes a lot of sense. There's multiple, multiple historic precedents for this, for the state to be in — I'm going to use the word in charge, that's really not an accurate word of the zoning and the development process. The city and the state are cooperating on that. There's been extensive public hearings on the plan and the proposal, and the political leadership in terms of the governor and the mayor have both endorsed the plan. I think that's about all that I have to say about it. Obviously, we support it.

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

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

I would say on the $235, I like gun kind on the CapEx the rest of the year. It depends on whether it's a new lease, new lease, the $235 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 pike, right? It's obviously dependent on actual transaction volume. And so while this quarter was lower, obviously our leasing volumes are lower as well. And we talked about being significant. So that number will normalize. I wouldn't vary from the $235 today. I think we've commented on tenant improvements generally having stabilized; they stabilize higher than we like, but they've stabilized and not going up any further. What else would you add to that?

The leasing quarter, it's always very fluid. We're always looking ahead, blocking and tackling way ahead of our explorations. Creating opportunities in the buildings time core value with all real leases is coming up, whether it's this year, next year, two years, or even further away. It's really not a completely predictable quarter to quarter number. But certainly the TIs, we definitely believe have stabilized. And that's always due to the mix quarter to quarter of the new deals and expansion deals weighted against renewals.

Got it. Okay. All my questions about where you be now. Thank you.

Thanks, Ron.

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

Heather earlier you mentioned leases at Penn 1. I was just wondering, was that included in the reported one Q leasing spreads? And if so, could you share what New York office spreads would have been excluding it?

The answer is I'm sorry, Kevin, you're saying on the, on the, you're talking about the stats for the first quarter?

Yeah.

Yeah. If you exclude the Penn 1 deal, because not all the leasing activity in Penn 1 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 three to four percent lease.

Okay, got it. Then just regarding the ground lease at 330, West 34th and the increase there, I was wondering if you could go through how much of a catch-up of retroactive payments does this represent versus the amount you had been accruing while it was in arbitration and whether this will impact financials going forward?

That's all, that's all been recognized and accrued already.

Okay. Thank you.

And thank you. We have our next question from DRA ATRA with Misso.

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

Yeah, that was recognized in the first quarter. GAAP cash will be some point second quarter.

Okay, great. And then just more broadly on street retail, can you us just understand where you think we are in this rent collection correction cycle now specifically on Fifth Avenue and Madison in terms of occupancy costs and what you're hearing in terms of specific demand for some of your vacancies?

Background, we're just coming off the bottom. And so what, 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 whatsoever in prime retail on Fifth Avenue, that's changed. There is now a fair amount of demand, but it is still at what I call characterizing the bottom fishing pricing. What we expect is, and this is the way markets generally work. The vacancies will be absorbed at low rents. The markets will get tighter business. This happens over some period of years, business will improve. The demand will accelerate, and the rents will go up. We are right now at the point in the beginning of that market cycle where we are just coming off the model.

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

High school, and so we certainly think there's a long-term role for co-working flex space in our portfolio. We're seeing great success early, already at Penn 1 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 go building to building. So I think certainly there's a role; there's certainly a need out there for more short-term, flexible space opportunities. One thing we're seeing at Penn 1 specifically is that our existing tenants in the district are utilizing the facility to their benefit as it relates to folks coming in for short-term projects from out of town or if they're reconstructing their space in one of the buildings are coming into our co-working facility to park themselves there to operate their business while they're rebuilding. We're even seeing cases where new leases were designed, 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. So I certainly think there's a role. And I certainly think the offering we create at Penn 1 is, by far, the best operation in Manhattan. And we expect to roll that out more and more into the portfolio, as we see those opportunities arise. Kudos to Barry and Glen for creating our amenity package in One Penn and the co-working space. We believe that co-working is here as an asset class here to stay. The interesting thing is the strategy of how you use co-working. So we put what is it, 80,000 feet of co-working space into One Penn, and you've got to remember that's in a four and a half million square foot complex. We believe that for our clients, whether they be an existing tenant in Penn 1, or Penn 2, or a 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. They have gyms, they have food, they have other offerings, they have conference centers, they have everything that they could possibly want is an enormous advantage. So our strategy is in a 404 and a half million square foot complex to put the better part of round numbers, a hundred thousand 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 massive complex. So we think that that's a competitive advantage then going into a co-working space, that's seven blocks and has 80,000 square feet of couches and nothing else. That's our thinking.

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

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

And thank you, ladies and gentlemen, this concludes our conference. We thank you for participating. You may now disconnect.