Good morning, and welcome to the Vornado Realty Trust Second Quarter 2023 Earnings Call. My name is Gary and I will be your operator for today's call. This call is being recorded for replay purposes. All lines are in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question-and-answer session. Please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2022, for more information regarding these risks and uncertainties. The call may include time-sensitive information that may be accurate only as of today's date. The company does not undertake a duty to update any forward-looking statements. On the call today from management for our opening comments are Steven Roth, Chairman and Chief Executive Officer; and Michael Franco, President and Chief Financial Officer.

Welcome to Vornado Realty Trust's second quarter earnings call. Yesterday afternoon, we issued our second quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents, as well as our supplemental financial information packages, are available on our website, www.vno.com, under the Investor Relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q, and financial supplement.

Thank you, Steve, and good morning, everyone. It seems to me there's a very close parallel between what happens to malls and what is now happening to office. Five years ago, there was universal certainty that malls and brick-and-mortar REITs were dead forever, the victim of ubiquitous and explosively growing e-commerce. Capital markets shut down, and no more malls were built. But today, five years later, malls are booming. Sound familiar? It seems to me that CBD office in all our cities, New York included, has fallen victim to the same emotional and shortsighted view in the investment community. Work from home is to office what the Internet was to retail. We believe in office work is a better bet. A little time frozen capital markets and no new supply build strong and glory to office. Malls and offices in the city centers of America are not going away. Our business is continuing to perform well and on plan in this environment. Michael will cover the math and give color in a moment. The principal difference in our numbers this year to last year is the rise in interest rates. Overall, the economy has been more resilient than we expected in the face of the Fed's historic interest rate hikes. Real estate capital markets remain challenged even for us. Highlights of our immediate business plan are to conserve cash, protect our balance sheet, and even to raise cash by accretively selling select assets, to reduce debt and buy back stock. For us, the Penn District continues to be the main event. As Farley Penn one and Penn two come online, they will create significant growth and shareholder value with much more to come. Over the last few months, we bought back 225,000 shares for $29 million at an average price of $14.4. Sam Zell passed away on May 18. There was a memorial service in his honor in Chicago three weeks ago. Over 1,000 people attended. I gave a eulogy; we could say that Sam is the father of the publicly traded deep market. He called it liquid real estate. I wish us all to be as smart and as accomplished and live life as large as Sam did. I apologize in advance, but Glenn and I must leave at 11:15 for a tenant meeting. Now over to Michael to cover our financials and the market.

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

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

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

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

Hi, Steve, it's Glen. How are you? So in terms of the quarter, about 40% of the activity was at PENN1, including the headline Canaccord deal. As it relates to the pipeline, we have a very strong pipeline with almost 600,000 square feet of leases out and another 1.2 million in the works. I sketched out my calendar for the week, and we've got a final LOI, the final innings for a 320,000 square foot tenant. We're getting a lease out for another 240,000 foot tenant. We responded to an LOI for 200,000 to 275,000 feet and we are deep in term sheets with another firm for 175,000 feet. So we're busier than we've been doing much better as we go, which we predicted. We do have very good action also at PENN2 at this point, with lots of tours. We have some proposals in the house, and the project is showing very well, and we feel great about PENN2 coming out of the sheet later this year.

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

Good morning, Steve. The answer is, I think we talked on the last call. We are going to be opportunistic about looking to sell assets. We obviously announced a few small ones last week. We're working on some others. There could be a couple of larger ones. I can't predict the tax impact. But I think in total on the ones we just sold, there will be a tax loss on those. So that will reduce taxable income. As we've said historically, our policy is to pay out taxable income. We'll evaluate where we end up at the end of the year in terms of cash versus stock mix. Our objective has been to retain cash, utilize it for buyback, and utilize it to pay down debt. But we'll see where we end at the end of the year. While other things may get done before the end of the year possibly, the timing of when they can get done will determine what we can achieve.

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

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

Hi Camille. It's Glen Weiss. As usual, it's hard to predict the mark-to-markets quarter-to-quarter because that will depend on our activity. As Michael said, we're really right now very pleased with the rent levels we're seeing at the buildings where we have major expirations coming, whether it's 1297, 7280, or otherwise. But it's hard to predict where they're going to land out. But we feel good about the rents. Our starting rents have been extremely strong and consistent for the last two years, even reaching into the 90s with this year showing an average starting rent of $99 per foot. This demonstrates the quality of our buildings, and the pace of our leasing is picking up.

I would just add that it’s hard to predict. Even as we sit here in August, as we look at the activity, we talk about the submarkets like Park Avenue, Sixth Avenue for the Class A buildings. Rents are up double-digits from six to nine months ago. So, if you asked us six to nine months ago, what the mark-to-market would be on some of those leases, they wouldn't have been as strong as they're turning out to be or what’s in the pipeline. So, I can’t sit here and tell you what they may be in 2024, but I think there's strong positive momentum.

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

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

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

Hey, guys. Good morning, and Steve, quite the honor for you to give the eulogy for Sam. So I have two questions. The first question is the new comp plan that you guys rolled out. One, are you terminating the old comp plan? And two, just the thought process behind rolling it out at 4:30 ahead of the July 4 weekend. I'm curious why it wasn't included as part of the annual proxy. Normally, companies will update comp plans at the start of the year. You guys did it mid-year, so just want to get some insight into the decision behind that and whether you're terminating the old plan.

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

Good morning, Alex. Let me take your questions in pieces. Regarding the termination of the old comp plan, the answer is no; that plan will expire in 2025. As we sit here today, it doesn't look like it will earn, but we'll see. In terms of the new comp plan, we felt it was important to send a clear message to our team to put in place a plan that incentivizes retention as well as rewards for performance during this challenging period and coming out of it. The reactions from the team have been extraordinary. It was allocated to a broad group of people, and we believe we've ensured stability of the team for the next several years, which is crucial.

It's important to note that Michael and our team communicated normally with our largest shareholders in constructing this plan and received universal support from them. We've also received universal positive feedback from our peers in the industry regarding what we did and why we did it.

Okay. And then the second follow-up question, Steve, regarding the studio deal on Pier 94. Just curious for more details: is Hudson going to be the main operator? What are the economics, and what is your role? Obviously, you have a deep theatrical background in your family.

We're not 100% finished with all the details on this deal, so we're not going to get into that. Essentially, it will be the only studio on the island of Manhattan. We're extremely enthusiastic about it. We have half the deal, having come in with the land, and Hudson Pacific is the operator, with Blackstone as Hudson Pacific's partner and our partner. More information will come as we solidify the deal.

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

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

Hi. It's Glen. In San Francisco, we've been fortunate to be very successful with 555 Cal, even given the quiet markets. There's very little new tenant demand in San Francisco, but we've been insulated in a very successful way at 555. Chicago tells a different story, as there is a lack of tenant demand, particularly for larger deals. Our action there is mostly with tenants of 100,000 feet and less. The market there, I'd say, is more quiet. However, both cities generally face a lack of demand and uncertainty related to the cities and government. So I'd say they're kind of equal regarding activity. For us specifically, in San Francisco, we are in great shape. In Chicago, we have a lot of space to lease, and with expirations we're dealing with now, it's a work in progress.

I would add a couple of comments. In San Francisco, we own the premier financial services building. So we are sort of different from all of the supply of technology buildings. All the significant financial services tenants and clients are in our building and have been there for over 25 years. Therefore, the building is unique; it's the highest quality and the most important financial services building in the area – a great piece of real estate. In Chicago, understandably, the market is soft, and we are navigating that.

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

I don't know that we have that offhand. We'll have to come back to you on that, Julien.

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

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

Thanks. Earlier, you talked about potentially selling more assets over the rest of the year. If we look out at the next two or three years, is there a part of the portfolio that you'd really like to get rid of if you can, or should we think about any part of the business shrinking, whether it's retail or certain submarkets?

There is no target on a particular type of asset within our holdings. We are fairly concentrated in New York in office, and our retail is very unique. We don't have a target on any particular segment of our business. We don't have many divisions; we are primarily an office company focused in New York. We have a great building in San Francisco, another great building in Chicago, and a retail presence on the most important streets in New York City. However, if we can sell assets for prices that are accretive to our stock and create shareholder value, that is something we are looking at intensely.

Okay. And then second, on NOI as we think about the second half of the year. In retail, the first couple of quarters were very consistent, and you did a lot of leasing. What should we expect in the second half there? In office, it seemed like there was a significant balance in the GAAP NOI from Q1 to Q2. Same question; how should we think about the second half?

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

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

Thanks. I wanted to revisit the asset sales and specifically ask about the Farley building and whether you're contemplating any plan there to sell a joint venture stake in the asset. It seems like the type of asset that would attract good investor demand, given its long-term lease with a strong credit tenant, and there has been a lot of success there. So any thoughts you can share?

We like the asset just as much as you do. However, we’re not going to comment on the future of any plans.

Okay. Secondly regarding Farley, I don't know if that's a mortgage-free asset; it could be an interesting test case for financing it. Any thoughts you could share on that?

I mean, we agree with you; it's a very strong asset with a very strong long-term lease on it. It has no mortgage, a good basis, and no financing on it. It is a great asset and could be a significant source of liquidity.

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

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

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

Great. Okay, got it. So $0.72 down to about $0.67. On the last point regarding leasing, you talked about having 580,000 square feet in negotiation and 1.2 million square feet in the pipeline. Can we consider these numbers in the context of occupancy? What are the puts and takes you're thinking about for occupancy going forward?

I'd say occupancy for the rest of the year will hover around the current range. It depends on when these deals happen, when they close, and how everything plays out. I think we will remain at these levels over the next couple of quarters. However, I’m optimistic about seeing more absorption as we finalize these deals over the next three to six months.

Glen and his team are doing a great job on some of the expiries that are coming up. Some of this will depend on the timing of those deals. For instance, we have known move-outs at 1290 and 280. If we can backfill those spaces, occupancy won't dip to the extent that there’s a timing gap between move-out and move-in. So I agree with Glen's comments; it will stabilize. But could it go down slightly at the beginning of next year, depending on the timing of backfills? Yes, it's possible.

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

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

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.