Alexanders Inc Q3 FY2022 Earnings Call

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. 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 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. 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 square feet, 229,000 square feet 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 square feet. The Fed is seriously 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 3 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 to 5 years. In addition, we protected our floating rate debt exposure by swapping for 5 years, $2 billion of floating rate debt to fixed at a weighted average of LIBOR or SOFR at 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 range of $232 million. So in effect, our only remaining floating rate debt exposure is $750 million which is largely JV debt. Be aware that nothing can really protect us as long as we 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 other amenities are now very far along, as is the Long Island Railroad concourse. We invite all of you to come down and take a look. Call us, 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 rightsize 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 mark, 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 3 and in our financial supplement on Page 6. Notwithstanding additional interest expense from rising rates on our variable debt, we still expect the 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 cost 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 the market real estate taxes, the increase would have still been solid at 3.4%. Our retail same-store cash NOI was up a very strong 7.7%, primarily due to the rent commencement of several important leases. Our overall office business was up 15% compared to the prior year's third quarter, also benefited by the Mart adjustment, while our New York Office business was down 1.3%, largely due to nonrenewing lower rent tenants at PENN 1 in order to bring higher-paying tenants post redevelopment. Now turning to the 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, our office use job employment is now above pre-pandemic levels at 1.5 million. Leasing activity in Manhattan continued its rebound through the third quarter, with volume surpassing pre-pandemic averages. Year-to-date, market-wide leasing activity stands at 24 million square feet, 50% above where we were at this time last year, including 9.3 million square feet this quarter. Deal volume during the quarter was led by 16 headquarters leases signed in excess of 100,000 square feet, 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 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 square feet across New York, Chicago, and San Francisco. In New York, our average starting rents were very strong at $89 per square foot, reflecting the breadth of our high-quality portfolio. Our overall leasing pipeline in New York remains strong with approximately 1.5 million square feet of leases in advanced negotiation and proposal stages. Now turning to Chicago. At the MART, we leased 67,000 square feet in 19 transactions this quarter and 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 3 quarters versus last year. In San Francisco, at 555 California Street, where we're full except for the remaining units, we leased 154,000 square feet during the quarter, including a large renewal of Morgan Stanley for its 132,000 square feet and a 21,000 square-foot expansion and 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 1 renewal transaction significantly skewing reported GAAP and cash mark-to-market. The bulk of the leasing activity incurred in the redeveloped Long Island Railroad Concourse, where we'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 searching for new store locations. However, retailer concerns about inflation in the economy are resulting in them being more cautious about committing to new leases. 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 among diversified office and retail REITs in the Global Real Estate Sustainability Benchmark, or GRESB survey, ranking #1 in the USA in our group and #3 out of all 112 publicly listed real estate companies in the Americas that responded to GRESB. In addition, we once again earned GRESB's 5-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 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 on addressing 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 not in place with debt right now. Notwithstanding the market challenges, we contracted 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.

We have our first question from Steve Sakwa with Evercore ISI.

Michael or Steve or maybe Glenn, can you just provide a little more color on the 1.5 million feet in the pipeline? I'm just curious how much of that relates to kind of new requirements for you? And how much of that is maybe early renewals looking into '23 and '24?

Steve, it's Glen. As we look at the pipeline in terms of the 1.5 million feet, it's cited more toward new tenants and expanding tenants versus renewals filling some of the empties we have today and then going forward locking in spaces with tenants who will be new to the portfolio. It's a really good mix, a lot of activity, primarily in financial services. But I would say it's more skewed toward new tenants coming in or expanding tenants in the portfolio.

And Glen, maybe just any color just in terms of types of tenants, I assume kind of big tech is on hold, but these private equity law firms, investment banks, asset managers.

Yes. Certainly, financial services are heavy, less on tech, as you're saying. Private equity is very, very strong and very active. And there's still some hedge fund activity also in our portfolio at our financial buildings.

Great. And then 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 to 18 months?

We continue to be very interested. It's a government process. I think they have already announced that they're going to put out their first RFP, I think, late in December, early in January. And then from there, we'll see how it goes. We expect it to be a very competitive process.

Our next question is from Michael Griffin with Citi.

Maybe just going back to the comments on the dividend. Wondering if you can frame maybe how much you're expecting to rightsize the dividend sort of heading into 2023. And any additional commentary on that would be helpful.

We really can't. I mean, it's a board prerogative. The numbers are still moving around, and it would be totally inappropriate for us to guess as to what that dividend might be next year.

Got it. And then maybe just back on the interest rate swaps. What was the embedded cost in executing those swaps? And then 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?

Michael, in terms of the cost of the swaps, what we laid out for you on Page 33 of the supplement, gives you the all-in swap rate so that there's a credit charge embedded in there. It depends on the particular trade. I would say 4 to 5 basis points is typical. Sometimes it's a little bit less, but that is a working assumption. But again, that's embedded in the numbers that we provided. And on the term loan that you cite, these are largely corporate level swaps. And so we have the ability to move those around as different loans roll off 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. We sold that asset. We moved it to a different asset. So it gives us flexibility. There are certain asset level swaps. But by and large, they're corporate. And so for the term loan, we went ahead and swapped 500 of that beginning next year. Then we have the ability to potentially move some around. If not, the answer is we'll look at fixing that balance.

We have our next question from Camil with Bank of America.

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. We've got caps in place on the bulk of the rest. So our net exposure to floating rate is about 7%. When you look beyond that, what’s exposed, it's basically loans that are coming due at the end of the year, or we have JV partners where there was no desire to collectively do any sort of hedging there. So again, I think from a net exposure, we've got about 7%. I want to also remind everybody that we've got significant cash on our balance sheet that's earning higher rates. Some of that has been deployed in treasury bills. So in that exposure, I think it's even less than 7%, but that is a little bit more accurate in terms of what the exposure is.

Okay. That's very helpful. And 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?

I think over the last couple of calls, we've communicated we think retail has bottomed in the city, and that is our view. You’re starting to see vacancy decline in many of the key submarkets, which is obviously the forerunner to start to have some pricing rebuilding. You're actually seeing rents move up a little bit in SOHO already. But this vacancy is beginning to drop in many of the submarkets. Rents are not falling anymore, and that will take some time to begin to recover. But overall, we think the market's bottomed. Leases that are getting done, retailers are focused on the best locations. They want to be in the highest footfall areas in the best submarkets, and our portfolio is situated there. And when leases get done right now, they're going to be reflective of the fact that rents have corrected. It depends on the submarket, could be one-third or half from where they were at peak. But in most cases, we don't have exposure on a lot of our big assets right now. It just depends on when the leases roll and where the market is at the time. But 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 but being a little cautious right now given what's going on in the economy. But net-net, New York is very much still at the top of the ranking of where they want to be and expand.

Make no mistake. With respect to retail, we are still in a retail recovering market. So volumes are not yet back to where they were pre-pandemic. If you look at the transportation numbers coming into the city on the railroads and the subways and the buses, it's two-thirds of what it was pre-pandemic. Although anecdotally, traffic in the city looks pretty wholesome. So what I think you need to say is that we're in a recovering market. Our prediction is that the market will be much more healthy in a couple of years. This is not a quarter-to-quarter thing; it's a year-to-year thing.

Our next question is from Alexander Goldfarb with Piper Sandler.

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 your thoughts on that, the value of that. Is that still worth par? The cash flow coverage, I think the coupon is 4.25%. And as you guys, Steve, think more about balance sheet focused, you've addressed a number of the floating rate exposure. How do you view your ability to refinance this $1.8 billion and get the cash out of that position?

Alex, it's Michael. So let me try to answer your questions. In terms of the value of that preferred, we believe it remains fine. It's still worth par. Just to get to the chase, I know you wrote that you think it's worth less than par, but we don't think so. It's clearly equity value retail JV, and our partners think there's significant value still left in that JV. From a cash flow coverage standpoint, again, just to remind you, the cash flow from all the assets, whether they have preferred or not, goes to secure the payment of that preferred and the coverage of that is continuing to be very strong. And even as you assume rollover over time and some ups and downs, the coverage of our preferred dividend, which today is 4.25%, will rise to 4.75% in April of 2024. That coverage is very strong today, and we expect it to remain strong. Now your last question regarding the ability to refinance out. If you go back to what I said in my opening remarks, I don't think this is any secret. The financing markets are not good right now, right, in any product category. So banks are basically shutting it down for the rest of the year unless you're a big client with a great property. The CMBS marketing bond investors really don't want to deploy capital. It's a tough market to finance if you have to. Unfortunately, we don't, but recall I think it's going to remain challenging to refinance in the near term. This is not in our capital budget to get this refinanced in the next year or so. When the market opens up, we can do this piece-by-piece, right? There are certain assets that have preferred on. If we want to avail ourselves on one, two or three, then we'll do that at the time. But we don't need the cash today to go do it and pay exorbitant rates would not be prudent.

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, give or take, double what the carry on the preferred is. So we think the collateral is fine. The dividend is clearly in this very volatile capital market below what a market price to that preferred would be. So on a short-term basis, you might say that if you were a trader and sold it, you would get less than par because of the submarket dividend, but that will change. We still think it's a sound instrument.

Steve, regarding your second question about dividends, I appreciate your comments on VNO's dividend plans for next year. Alexander's is in a similar situation. Should we assume that the Board will make a comparable decision regarding the dividend for Alexander's as well?

No.

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

You talked about the cautious environment. There was a lot more of an optimistic case in the press this week on New York office, and in particular, PENN 15. I was wondering if you could provide an update on the project, how much preleasing 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 going to duck the question. A couple of things. I did say in my prepared remarks that the current environment makes ground-up development very difficult. And I meant it. So that's number one. Number 2 is in terms of changing uses and what have you, that's not something we're going to 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 the 220 Central Park South tax protection wouldn't really be an issue. But any other thoughts on the direction of your other businesses in 2023?

We've indicated that we believe our budget suggests taxable income will decrease. The main factors for this are elevated interest rates since we’re not fully shielded, the absence of income from 220, and a weak economy. Considering these three factors, we are planning without anticipating any gains from asset sales. Therefore, we are hesitant to specify a number at this time, but we expect to reach a decision likely in the first quarter.

And your dividend, is that 100% of taxable income this year?

What is the exact number, Tom?

Our dividend is $2.12, and we haven't finalized taxable income.

That's our projection.

It's around that.

Our next question is from Daniel Ismail with Green Street.

You mentioned a few times the difficult financing environment and I recognize this is a tough question to answer, given the lack of transactions. But I'm just curious where you think New York City office values and cap rates are at these days?

The answer, Daniel, is that there is a lot of transaction activity. It's challenging to provide a precise answer. First, I want to highlight that investor interest in New York City remains very high. While some may see challenges, others view opportunities and have a strong belief in New York. When considering the global landscape, the U.S. appears quite attractive compared to other locations. New York, in particular, is undoubtedly the global financial capital. There is substantial interest and many investors actively exploring opportunities in New York because they perceive value. However, the lack of a financing market will likely hinder activity for some time. It's hard to predict if this will last one quarter, two quarters, or longer. If someone is forced to sell in this environment, they might have to accept less favorable terms. For all-cash buyers, the impact may be less severe. There is definitely a cap rate impact, though I can't provide exact figures. It could be around 50 basis points with values potentially affected by about 10%. That seems like a reasonable assumption, but no one can give precise numbers.

A couple of comments on that. We've seen this before many times that the economy is either entering recession or in recession. The debt markets and the capital markets are aligning. They are highly illiquid, and they are unbelievably expensive if you must access the debt markets. So that's a very big deterrent to asset sales. In these kinds of markets only people that have to sell transact. The only weak sellers are transacting because the only buyers that are really controlling the market are distressed buyers. So you have to just live through this, and it will end. It will end sooner than you think. But this is not the kind of a transactional market or a capital market where you can really make adjustments. This is aberrant that happens one year out of every ten, and we are either in the one year or about to go into the one year. But one last comment. The stocks of the office companies have corrected to the point where, in my judgment, they have gone significantly below given 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 have abated. So TIs are still too high, but they've stabilized. You're certainly seeing more of the TIs in terms of getting tenants into the buildings in terms of helping them build out space more than historically, but I think that number has stabilized.

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. So the market is taking their pound of flesh in the inducements as opposed to in the rent reductions.

Our next question is from Derek Johnston with Deutsche Bank.

In your discussions with business leaders, is there a view that the likely recession will be a tipping point for greater office utilization and thus, the balance of power favoring employers versus employees? So I guess, can the slowdown drive greater and perhaps sustainable office utilization in your view?

Green Street wrote a piece that came out recently, where they basically debunked that idea that recession will lead to higher unemployment, which could change the power dynamics from the employee to the employer and therefore, the employee will return to the office. I don't have a view on that. However, I do believe that the office is the workspace as opposed to a 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 collaborative aspect of work and being with colleagues in transit will overpower the temptation to sit at the kitchen table. But I don't think that it's the pain of a recession that's going to change the marketplace.

Got it. Appreciate it. And just another big picture one. I hope you guys don't think this is unfair. But Steve, you've seen this movie before. But as investors really have been sidelined by this hybrid work secular concern, and now we have the likely recession, 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, longer term?

I always believe that the rules of the game were to buy low and sell high. So now what we have is that it's hard to buy assets. They're very illiquid, and there are distressed assets on the market, certainly at distressed prices. But the distress is in the stock market. So I don't know. From my personal standpoint and family investing, we like to buy during recessions, and that's the time to buy. So what's it going to take for you guys to start realizing that these stocks are significantly undervalued? I don't know, but it will happen. My guess is that 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.

We have our next question from Anthony Paolone with JPMorgan.

And 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 us a sense as to whether or not there's any known big move-outs or roll-ups, roll downs?

It's Glen. As it relates to the office in '23, it's really a mix of 4 of our properties, 770 Broadway, and others for out the year, not only in the first quarter. We're, of course, attacking all of those expirations. We have very good action on some, and others we're in the market trying to lease the space. I will tell you when you look at those assets, they're amongst our highest quality buildings.

Okay. And how about retail in the first quarter? Anything to call out there?

Tony, it's Michael. The answer is we've got 2 or 3 key tenants rolling, and I can't tell you definitively what's going to happen there. There are discussions, and all could renew, or there’s a schedule we're not to renew. So it's still too fluid. I do think net-net, even if most renew, the income will be down some just given where one may likely renew. But I just can't give you more precision given the discussions remain pretty fluid right now.

Okay. Got it. And then 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?

I think it's currently in the mid-70s. However, we anticipate that the casual business will be departing, which means it will likely drop to the low to mid-60s before we see a recovery. Therefore, at the beginning of the year, a run rate in the low to mid-60s seems like a reasonable expectation before we start rebuilding.

What's the potential for the building is at the top end?

Yes. Ultimately, we believe the building should exceed $100 million. Our goal is to ensure that happens. We see some potential for growth in the trade show segment, so we expect that in the next 36 months, it will hopefully return to above $100 million.

Currently, the figure is about $75 million. We anticipate it will decrease into the $60 million range before eventually rising back up to as much as $100 million. This increase will not occur next year, but it is expected in the future, reflecting the asset's potential. It's somewhat more volatile than we would prefer, but that's the situation.

Our next question is from Nick Yulico with Scotiabank.

I just wanted to see, given the recent news from Meta, I just want to confirm that there's no impact you're seeing for your space with them at Farley or 770 Broadway.

There's no impact on Farley, no impact at 770 as it relates to the recent announcements. Their utilization is very strong, and they happen to love both of the properties.

It's almost embarrassing to say, but we meant a little bit of time looking at their credit because they are a big tenant. This is one spectacular company from a financial point of view. They have significant free cash flow after spending a similar amount or a greater amount on R&D, which is discretionary. Their cash flow is 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 $50s or something like that millions.

Yes, a little over $40 billion.

Okay. That works. So from a financial point of view, they are a great company. They have the huge platforms of Facebook, Instagram and WhatsApp. They’re off on a mission. You have to back the guy because look what he's done in the past. So the answer is they are trying to develop a new universe. I believe it will be extraordinarily successful. Even if it's not successful, it certainly will not impair the value of that property.

I appreciate that, Steve. I have one more question regarding the retail joint venture. When I review the net operating income in the supplement, it appears quite similar to what it was when you finalized the deal in 2019, and it might even be slightly higher. I would like to confirm that. Additionally, I know there was an impairment of the investment in 2020, but when the original agreement was made, it was at a 4.5% cap rate. Given the current market conditions, it's likely that cap rates are higher now. I'm trying to understand the implications of the annual evaluation of the joint venture's value and if there could be any potential for further impairment.

In terms of the income on the portfolio now compared to when we made the deal, I don't have the exact figures at hand. From what I remember, it may have decreased slightly because Forever 21 went bankrupt. They are still in the business, but the income is lower than it was when we first made the deal. Since then, we’ve had one vacancy. The signage is currently thriving, higher than it was when the original deal was made. Overall, I believe the income is probably down a small amount. However, you've pointed out that the income has remained quite steady. As some leases expire, there may be some impact. Regarding the impairment, you're right. In 2020, we did recognize an impairment. I believe the fair value was around $5.4 million, and we recorded it at less than $5 billion. I wouldn’t want to give you a specific number without having it in front of me. We review this every quarter, and there’s an independent third-party appraisal done for the venture, which we don’t disclose the assumptions for. They handle their analysis, and we rely on that. They will complete their evaluation by the end of the year, and we’ll respond accordingly. I can’t predict whether there will be any further accounting impairments at this point. The market has certainly shown significant impairment based on your comments about pricing and our stock, but I cannot confirm whether there will be additional impairments.

We have our next question from Ronald Kamdem with Morgan Stanley.

A couple of quick ones for me. Just going back to the leasing activity, you talked about 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.

I certainly think CEOs are more hesitant due to the economy for sure. We're seeing that in our discussions. I think by sector, certainly, the big tech loads. I would tell you there is some more small to medium-sized tech activity. There were a couple of leases signed in the market this quarter by a couple of those. But generally, I would tell you, more caution and more hesitancy due to the economy, not so much by the hybrid specifically.

Great. My second question is about the dividend. I understand this is a decision being discussed by the Board. I'm curious about the factors involved in that decision. Is it still approximately $200 million for CapEx and operating cash flow that you're considering in terms of finding a sustainable balance? I'm trying to get an idea of what we should expect for where the dividend might be positioned.

I don't have anything more to say on the dividend other than what I've already said. We will get to that at the first quarter Board meeting. I think everybody can do their own math and guesstimate, but I'm not the guessing business. I can tell you one little factor and that is the spot trades between the 9% and 10% dividend rate. So that indicates that something is wrong. But I will stand by what I've already said.

Our next question is from Vikram Malhotra with Mizuho.

I guess just maybe a bigger picture first, Steve. I want to get your thoughts on what you're contemplating sort of macro-wise, rates-wise, and then more at a micro level, with fundamentals. It just feels like things have been inflecting according to the last few calls; return to work was improving, leasing was improving. But you've now swapped a lot of debt for 5 years at a rate you're contemplating cutting the dividend. So I'm just trying to balance all of this; near term, you said it's a 1-year issue, but it sounds like in your actions, it's more like a 3- to 4-year issue than a 1-year issue. Can you help us bridge what you forecast macro-wise and micro-wise to effectuate this dividend in the 5-year swaps?

The economy has been portrayed as very challenging for various reasons, and there's significant inflation. I believe the Federal Reserve is determined to address this, with interest rates being their primary tool. Interest rates have already made a considerable impact quickly, as reflected in the stock market and other areas. I am confident the Fed will prevail in this situation; it just depends on the timeline. We took steps to safeguard our floating rate exposure for several reasons, the main one being to guard against rising interest rates. We believe we have addressed that concern. We executed the swaps for a 5-year term, but that should not be taken as a definitive prediction for the future. Historically, recessions tend to rise steeply before falling quickly, as the economy enters a downturn and then requires aggressive measures to recover. We anticipate a similar scenario this time, but we are not wagering everything on it. We believe we have secured our balance sheet and do not find it appropriate to overpay our dividend. We are confident we have taken the right financial measures to uphold the company’s fiscal integrity. We foresee this being a 1- to 2-year challenge rather than a long-term issue lasting 3 to 5 years.

And so that 1 to 2 year is more your comment on the fundamentals in the 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 so I'm not asking that...

No. No, no. Hang on, Vikram. The 1 to 2 years is a macro prediction.

Okay. And how do you square where fundamentals will be office fundamentals in that time frame?

Well, first of all, we are New York-based. We believe in New York, 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 want to be here, for sure; young people want to be here. Just anecdotally, I'll tell you that a lot of my friends have moved out to Florida. But when you ask them where their children are, all the children are in New York, and they want to be in New York because that's extremely attractive. We think this will be a fairly predictable cycle where different industries will grow at different rates, but there will continue to be an aggressive interest in locating in New York and growing in New York.

Okay. And then just 2 quick...

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. So we're very, very, very excited about that.

I was going to ask you something related to that. But just before that, I know the numbers are changing, so I'm not asking where the numbers or the dividend cut will end up. Is it reasonable to assume that if we look at a historical AFFO payout ratio, whatever the AFFO might be, we should expect a payout consistent with historical levels as we model for next year?

If you can model taxable income, that's approximately what the dividend is going to be. If you could model that to the penny, you're a better man than we are. We've got another full quarter to go. We're in the budgeting process; we're nowhere near done. We will make that decision in the first quarter.

We have a follow-up question from Steve Sakwa with Evercore ISI.

Steve, you mentioned about the valuation, and I'm sure on a lot of numbers, you trade at very low price per square foot, very high implied cap rate. Historically, we've seen private equity come in and close gaps in sectors where there's big discounts that persist. But given where the financing markets are today, that doesn't seem likely. Are there steps that you can take? Or are there steps you're contemplating to try and close that gap? Or is this just a time where you've got to be patient and kind of wait for the financing markets to improve?

The spinout is still on the table, and the protection of our balance sheet is the #1 priority.

We have no further questions in queue.

Well, thank you all very much. We appreciate you joining us, and the next call is when?

Valentine's Day. Tuesday, February 14.

Your 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. And by the way, do take up my invitation to come down to the PENN. It's extraordinary. Those of you who haven't toured or seen it yet, please take advantage of our invitation, as it is 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.