Welcome to the Vornado Realty Trust Earnings and Webcast for the Third Quarter of 2022. My name is Vanessa, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I will now turn the call over to Steve Borenstein, Senior Vice President and Corporate Counsel. Steve, you may begin.

Welcome to Vornado Realty Trust's 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, 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 supplements. 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 of 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 growth 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 serious about pursuing their fight against inflation. The economy is clearly slowing, and capital markets are volatile. As a top priority, we have taken the following actions. Earlier this year, we extended our near-term debt maturity, so we now have no debt coming due in 2023 and a very modest $233 million on three assets coming due in 2024. Further, we extended our unsecured revolving lines of credit totaling $2.5 billion, with only $575 million outstanding through 2026 and 2027, providing significant liquidity for the next four to five years. In addition, we protected our floating rate debt exposure by swapping for five years, $2 billion of floating rate debt to fixed, at a weighted average of LIBOR or SOFR, as the case may be, of 2.9%. Further, we have interest rate caps on an additional $2 billion, providing protection above 4.2% on a weighted average basis for a weighted average term of ten months. Mark-to-market in the aggregate, the swaps and caps are now in the money $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 loans mature in a higher rate environment. The second area of our focus is, of course, the PENN District. The PENN 1 lobby and amenities are now complete. The PENN 2 skin and bustle are now very far along, as is the Long Island Railroad Concourse. We invite all of you to come down and take a look, or give us a call, and we will be happy to take you through. Broker and tenant reactions have been truly outstanding. 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 payout dividends equal to our taxable income. We now expect our taxable income to be lower in 2023. We will not have income from 220 Central Park South. We assume no asset sales and we are budgeting to the interest rate yield curve. As such, our Board of Trustees plans to right-size our dividend in 2023 commensurate with our projection of taxable income. 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 theMART, 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, we do still expect that comparable FFO per share will be up year-over-year. Company-wide same-store cash NOI for the third quarter increased by 13.8% over the prior year’s third quarter. Excluding the accrual adjustments related to theMART real estate taxes, the increase would have still been a solid 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 and also benefited from theMART adjustment. While our New York office business was down 1.3%, largely due to not renewing lower rent tenants at PENN 1 in order to bring in higher-paying tenants post-redevelopment. Amidst the backdrop of economic uncertainty, the New York Class A office market remains resilient, stimulated by the city’s tight labor market for 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 volumes 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 in New York and are signing long-term commitments. As we enter the fourth quarter, though, caution is the word of the day. There’s 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 products is growing. Tenant preference remains strong for best-in-class newly developed or redeveloped buildings with modern amenities and collaboration spaces, and being on top of transportation is critical. Most companies believe the highest quality work experience is key to both incentivizing employees to come back to the office and also for attracting new talent. Our portfolio consists largely of these types of assets, positioning us well to continue to capture tenant demand. During the third quarter, our office leasing team completed 42 transactions comprising 388,000 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 theMART, we really had 67,000 square feet in 19 transactions this quarter in a 50/50 mix of office and showroom activity. While the market in Chicago remains challenged, we have seen a pickup in proposals during the quarter. As expected, our tradeshow business has rebounded nicely in 2022 but is still not back to pre-pandemic levels yet, with NOI up $12.2 million through three quarters versus last year. In San Francisco at 555 California Street, where we’re full except for the queue, we leased 154,000 square feet during the quarter, including a large renewal with Morgan Stanley for its 132,000 square feet, and a 21,000 square foot expansion renewal with Centerview Partners. Our starting rents were very strong once again, generating a 12% positive cash mark-to-market. Retail leasing results were fairly modest for the quarter, with one renewal transaction significantly skewing reported GAAP and cash mark-to-market. The bulk of the leasing activity occurred in the redeveloped 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 continue to see more retailers searching for new store locations. However, retailer concerns about inflation in the economy are leading them to be more cautious about committing to new leases now. This will change when the economic environment stabilizes. Finally, let me spend a minute on sustainability, where we continue to be a leader. Vornado was once again selected as a global and regional sector leader for diversified office and retail REITs in the Global Real Estate Sustainability Benchmark (GRESB) survey, ranking number one in the USA in our group, and number three out of all 112 publicly listed real estate companies in the Americas that responded to GRESB. In addition, we once again received GRESB’s Five Star rating and the Green Star distinction for the tenth time, scoring an A for our ESG public reporting. This area is increasingly important to our tenants and other stakeholders as well and is a differentiator for our portfolio in the market. Turning to the capital markets now. Overall, the heightened market volatility and aggressive rise in interest rates are 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 financial markets becoming more challenging this year, and focused early and dealt with our 2022 and 2023 maturities. Importantly, given the $3 billion in refinancing we completed this summer at attractive spreads, we have dealt with all 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 right now. Notwithstanding the market challenges, we executed a contract to sell 40 Fulton for $102 million, and are negotiating sales of a handful of small assets. Finally, our current liquidity is a strong $3.3 billion, including $1.4 billion of cash, restricted cash, and investments in U.S. Treasury bills, and $1.9 billion undrawn under our $2.5 billion revolving credit facilities. With that, I’ll turn it over to the operator for Q&A.

Thank you. We will now begin our question-and-answer session. We have our first question from Steve Sakwa with Evercore ISI.

Thanks. Good morning. Michael or Steve, or maybe Glen, 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 new requirements for you and how much of that is maybe early renewals looking into 2023 and 2024.

Good morning, Steve. As we look at the pipeline in terms of the 1.5 million feet, it’s cited more towards new tenants and expanding tenants versus renewals. Filling some of the vacancies we have today and then, going forward, locking in spaces we know we have coming due; we tend to have that be new to the portfolio. It’s a really good mix, a lot from activity in financial services, some in business development. But, I would say, it’s more weighted towards 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?

Yeah, certainly financial services are heavy, less on tech, as you’re saying. Private equity is very, very strong, very active. There’s still some hedge fund activity also in our portfolio, at our financial buildings, 888 Seventh, 640 Fifth, etc. So certainly, financial services are busy, and law firms are definitely getting busier in the portfolio, particularly in buildings like 1290 Sixth Avenue.

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 ROIC in late December, early January. And then, from there, we’ll see how it goes. We expect it to be a very competitive process.

Great. Thank you. That’s it for me.

Thank you. Our next question is from Michael Griffin with Citi.

Great. Thanks. Maybe just going back to the comments on the dividend, wondering if you can frame how much you’re expecting the right-size of dividend heading into 2023. And any additional commentary on that would be helpful.

We really can’t, I mean, it’s a board prerogative. And the numbers are still moving around. 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?

Good morning, 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 rates so that there’s a credit charge that’s embedded in there, depends on that particular trade. I would say, 4 to 5 basis points is typical, sometimes it’s a little bit less. But, I think, if you use that as a working assumption, that’s not bad. Again, that’s embedded in the numbers that we gave you. And on the term loan that you cite, these are all largely corporate level swaps. So we have the ability to move those around as different loans we pull up, where 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 are corporate. So, we went ahead and forward swapped 500 of that we’re getting next year, and then we have the ability to potentially move some around. If not, the answer is we’ll look at fixing that balance.

All right. Great. That’s it for me. Thanks for the time.

Yeah, thank you.

We have our next questions from Camille Bonnel with Bank of America.

Hi, good morning. Busy quarter on the financing front. Just following up on the interest rate swaps. Can you help us understand the thinking behind how you decided on reducing your floating rate debt exposure to 27% versus a lower amount more in line with your peers?

Well, I think 27% is not the right number to use. We’ve got caps in place on the bulk of the rest. So our net exposure to floating rates is about 7%. And when you look beyond that, 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, we’ve got significant cash on our balance sheet that’s earning higher rates, some that’s been deployed in Treasury bills, and some of that is just earning higher rates with our banking relationships. So, on net exposure, I think it’s even less than 7%. But, it’s 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 sub-markets, which is the forerunner to start to have some pricing rebuilding. I think you’re actually seeing rents move up a little bit slowly already, but vacancy is beginning to drop in many of the sub-markets. Rents are not falling anymore – and that’ll take some time to begin to recover. But, overall, I think the market has bottomed, and leases that are getting done, retailers are focused on the best locations. They want to be in the highest footfall areas and the best sub-markets; our portfolio is situated there. When leases get done right now, they’ll reflect the fact that rents have corrected, which, depending on the sub-market, could be one-third to half from where they were at peak. But, in most cases, we don’t have exposure on our big assets right now. It just depends on when the leases roll and where the market is at the time. As I said, I think from a trendline standpoint, there are more retailers cruising around the city looking for spaces. They’re focused on the best locations, though being a little bit cautious right now, given what’s going on in the economy. But net-net, New York is very much still top of the ranking of where they want to be and where they want to expand.

Thank you for taking my question.

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 basically coming into the city, on the railroads, in the subways and the buses are two-thirds of what it was at pre-pandemic. Although anecdotally, traffic in the streets looks pretty wholesome. So what I think you need to consider is that we’re in a recovery market. Our prediction is that the market will be very much more healthy in a couple of years. This is not a quarter-to-quarter thing; it’s a year-to-year thing.

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

Hey, good morning, Steve and Michael. Maybe just following up on the retail, the $1.8 billion retail preferred that you guys have in the JV that you did a number of years ago. Just sort of your thoughts on that, the value of that, does 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 focus, 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?

Good morning, Alex. In terms of the value that preferred, we believe it remains fine and is still worth par. We don’t think so. There’s clearly equity value. We built JV and our partners think the value is still left and that gave to be. So, I think, the retail preferred is front. 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 continues to be very strong. And even though you assume rollover over time and some ups and downs and whatnot, the coverage on that our preferred dividends, which today is 4.25%, will rise to 4.75% in April of 2024, and the coverage is very strong today. And we expect it to remain strong. Now, your last question, 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, in any product category. So, banks are basically shutting it down for the rest of the year, unless you’re a big client and a great property and whatnot. The CMBS market and bond investors really don’t want to deploy capital. This tough market has made financing if you have to, fortunately not required. But, retail rates remain challenging to refinance in the near term. And so, this is not in our capital budget to refinance in the next year or so. When the market opens up, we want to do remember, this can be done piece by piece. There are five assets that have preferred and, if we want to avail ourselves on one or 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; that would not be prudent. So hopefully, I had everything asked, but that’s the current state.

Alex, look at it this way. There are 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 units. So we think the collateral is fine. Dividend is clearly in this very volatile, chaotic capital pocket is below what a market price and then preferred would be. So on a short-term basis, you might say that if you were a trader and you sold it, you’d get less than five because of the sub-market dividend, but that’ll change and so we still think that is a sound instrument.

Okay. And then, Steve, second question, as you mentioned, dividend. You appreciate the comments on the dividend for VNO for next year; Alexander is in a similar boat. Should we read through that a similar, that the board will make a similar determination resizing of the Alexander’s dividend as well?

No.

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

Thank you. Good morning. You talked about the cautious environment; there was a lot more of an optimistic piece in the posts 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 pre-leasing you would need to move forward with the development? And if there’s any consideration to change the use of the project to have less office going forward?

John, thanks for the question. I’m going to dodge 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 two 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’ve talked about rising rates in 220 Central Park South being fully sold. Are there any other pressures that you see on taxable income next year? I thought that 220 Central Park South is a tax protection, so it wouldn’t really be an issue, but any other thoughts on the direction of your other businesses in 2023?

We think that our budgets show that taxable income is going to go down. The primary reasons are higher interest rates since we’re not 100% protected. We have no income from 220, and we have a soft economy. If you take all those three things together, we’re budgeting that – and we’re not budgeting any gains from asset sales. So, I think that we are reluctant to put a number on that at the current time. But we will make a decision probably in the first quarter.

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

The exact number is $2.12, and we haven’t finalized taxable income.

For a dividend, $2.12, and we haven’t finalized taxable income.

What’s our projection?

It’s around that.

So, we think that the current dividend is within that of 100% of our taxable income for the year 2022.

...which includes $2.12.

Great. Thank you.

Thank you. Our next question is from Daniel Ismail with Green Street.

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

The answer, Daniel, is there are a lot of transaction activities. I think it’s difficult to give a precise answer. First of all, I would say that the investor interest in New York City remains very high. While some see black clouds, others see opportunity, and others have a fundamental belief in New York, when you look at what’s going on around the world, in terms of the global investor base, and as they evaluate where they want to invest their capital, is it Hong Kong anymore? I don’t think so. Is it London? It doesn’t seem as attractive given the issues they have. And then come back to U.S.; it looks very good. And New York is the question to global financial capital. So you have a lot of interest in New York, a lot of smart money that’s frankly scouring the market right now, looking at New York because they see value. But, in the absence of a financing market, I think it’s going to stem activity for a period of time. I don’t know if that’s one quarter, two quarters, who knows. If you’re forced to sell in this market, then you’re picking on something larger than you’re going to sell it at a wider cap rate if somebody needs financing. If they don’t, it’s an all-cash buyer, then I think it’ll be a little less compressed. But is there a cap rate impact from this? Sure, there’s a cap rate impact. I give you precision on that, no. Is it 50 basis points likely up 10%? So values are impacted around 10%. I think that’s a reasonable assumption, probably. But I don’t think anybody can say with precision.

A couple of comments on that. We’ve seen this before many times; the economy is either entering a recession or in one. The debt markets and the capital markets are rioting. 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. The second thing is that in these kinds of markets, only people that have to sell transact. So, the only weak sellers are transacting because the only buyers that are really trolling the market are distressed buyers. You have to just live through this, and it’ll end sooner than you think. This is not the kind of transactional market or a capital market, where you can really make a judgment. This is aberrant and happens one year out of a return. We are either in the one year or we’re about to go into the one year.

Got it.

One more comment. The stocks of the office companies have corrected to the point where, in my judgment, they have gone significantly below even the distress mark-to-market of the portfolio significantly below that number.

Got it. I appreciate the thoughts. Just last one for Glen, I’m curious where you think concessions are trending these days. Are you seeing any stabilization or abating in concessions on the new leases you guys are negotiating?

I think concessions have stabilized. They haven’t abated; TIs are still quote unquote 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 a sort of 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.

Thank you. Our next question is from Derek Johnston with Deutsche Bank.

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

Recently wrote a piece that came out, debunking the idea that a recession, where you get higher unemployment, changes the power from the employee back to the employer, and therefore the employee will scamper back into the office. I just have no view on that. I do believe, however, that the office is the workspace, as opposed to the kitchen table. I believe that over time, the culture will change, where people will want to be back in the office; the office will be more productive. The collegial aspect of work, and being with colleagues and friends, etc., 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. Thank you. 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 have really 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. What can you do, ultimately, to help flip investor sentiment more positively on Office REITs longer-term? Thank you.

I’ve always believed that the rules of the game were to buy low and sell high. Now, what we have is that it’s hard to buy assets. They’re very illiquid, and there are very few assets that are on the market, certainly at distressed prices. But the distress is in the stock market. What’s going to take for you guys to start realizing that these stocks are stupid cheap? I don’t know, but it will happen. My guess is, just as the stock market always turns and gallops ahead, way before the end of recessions, I think that the office business will do as well. I can’t tell you what the catalyst is.

Thank you, sir. We have our next question from Anthony Paolone with JPMorgan.

Yeah, thank you. Just looking at your 2023 lease expirations, it seems like you have a disproportionate amount expiring in retail and office in the first quarter. Can you maybe help us peel that back a bit and give sense as to whether or not there are any known big move-outs or roll-ups, roll-downs?

It’s Glen. As it relates to the office in 2023, it’s really a mix of four of our properties, 770 Broadway, 350 Park, 1290, and 280, and that’s throughout the year, not only in the first quarter. We’re, of course, attacking all of those expirations. We have very good actions on some, and others we’re in the market trying to lease the space. I will tell you, when you look at those assets amongst our highest quality buildings and most unique characteristic buildings like 770 like 350. So that’s where the expirations are coming out in 2023.

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 definitely what’s going to happen there. There are discussions where all could renew, but the discussions are still fluid. I do think net-net, even if most renew, income will be down some just given where one may likely renew, but I just keep getting more precision given the discussions remain pretty fluid right now.

Okay, got it. And then just one follow-up on the tradeshows. We saw that 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 today it’s probably in the mid-70s. But we’re also – we know that the casual business is going to be leaving, and so, probably bottoms in the low- to mid-60s before it comes back. So that number in terms of a run rate at the end of the year, that low- to mid-60s is probably a decent run rate before we rebuild that back.

Okay. Thank you. What’s the potential building, if it’s at the top end?

Ultimately, I think the building should get back north of $100 million. Our job is to re-lease it. We do think there’s some additional upside in the tradeshow. So that number in the next, it’s called, 36 months within it gets back hopefully to north of $100 million.

Based upon – so right now it’s about 75, we expect it to go down into the 60s before it turns and goes back up to as much as 100, which will not happen next year, but it will happen in the future; potential for the assets. It's a little bit more volatile than we would like, but that’s the story.

Okay. I appreciate that.

Yes, sir.

Thank you. Our next question is from Nick Yulico with Scotiabank.

Thanks. I just wanted to see given the recent news from Meta, 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 on 770 related to the recent announcements. The building's utilization is very strong. They happen to love both properties. It’s almost embarrassing to say, but we spent a little time looking at their credit, because they are a big tenant. This is one spectacular company from a financial point of view. So when you think about it, they have – what’s the number $25 million of free cash flow a year after spending a similar amount or a greater amount on R&D, which is discretionary. 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 of dollars, billions of dollars.

A little over $40 billion.

That works. From a financial point of view, they are a great company. They have these huge platforms of Facebook, Instagram and WhatsApp. They are on a mission, and we have to back that guy because look what he’s done in the past. I believe it will be extraordinarily successful. Even if it’s not successful, it certainly will not impair the sanctity of that unbelievable space. We’re friends; we’re vendors to them, and we’re happy and honored to be so.

Thanks. Appreciate that, Steve. Just one other question is on the retail JV. So, I look at the NOI in the supplement and it feels like, I think I’m looking at this property. But that the NOI is actually very similar to when you struck the deal in 2019; actually, it might be up a bit? I just want to confirm that. And then also see, I know you did impair the investment back in 2020. But when the original deal was struck, it was at a 4.5 cap rate, presumably cap rates are higher today, based on everything going on in the world. Just trying to understand the dynamic of when you have to do with the annual test on the value of the JV, if we should think that there is any impairment possibility from that?

Hey, Nick. So, in terms of the value that preferred, I don’t have the exact numbers in front of me. My recollection from just knowing the ins and outs is downplayed a little bit because, as you may recall, Forever 21 went bankrupt and they’re still in the space. That number is down from when the original deal was struck. We had one vacancy on Fifth since then. The signage is frankly booming right now, higher than when we struck the deal, but I think net-net it's played down just a touch. You correctly point out, the income has been very durable. Some of the leases will roll, but there’ll be some impact. I think in terms of the impairment you’re correct. In 2020, we did impair. Again, I’m going from memory, Nick, I think the fair value at the original deal was struck at 5, 4, and we impaired it south of $5 billion. I don’t want to give you the number without having it. But the answer is we evaluate that every quarter. There’s an independent third-party appraisal that is performed on behalf of the venture, which we frankly have – we don’t provide the assumption that they do their independent work. We take that, and that’s what drives that. I can’t predict whether there will be any impairments or not. I think the market is certainly, given your comments on the market and how it’s priced in our stock, is certainly imperative significantly, but I can’t say whether there’ll be any further upcoming impairments yet.

Okay. Thanks, Michael.

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

Hey, a couple of quick ones for me. Just going back to the leasing activity, you talked about, maybe this slowing economy and so forth, I was just 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 sub-sectors would be helpful?

I certainly think CEOs are more hesitant due to the economy, for sure. We’re seeing that in our discussions. By sector, certainly big tech is slowed. I’ll tell you, there is some more small to medium size tech activity, a couple of leases signed in the market this quarter by a couple of those. Generally, I’ll tell you, more caution, more hesitancy is due to the economy, not so much by the hybrid specifically.

Great. And then my second question was just going back to the dividend. I know, you talked about how it’s a board decision they’re discussing – just trying to understand what the pieces that are going into that. Is it still sort of is it $200 million plus or minus of CapEx, operating cash flow? I’m just trying to get a sense of what should we be looking at thinking about for the right place for the dividend to land bands?

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 into guesstimating business. I can tell you one little factoid and that is the stock trades between the 9% and 10% dividend run rate. So that indicates that something’s wrong, but I think I’ll stand with what I’ve already said.

Great. That’s all my questions. Thank you.

Yes, sir. Thank you.

Thank you. Our next question is from Vikram Malhotra with Mizuho.

Thanks so much for taking the question. I guess, just maybe bigger picture for Steve. I’m just – I want to get your thoughts on what are you contemplating sort of macro wise, rates wise, and then more at a micro level with fundamentals. It just feels like things seem to have been inflecting according to the last few calls, return to work was improving, leasing is improving. But you’ve now swapped a lot of debt for five years at a rate you’re contemplating cutting the dividend. So I’m just trying to balance all of this, like near term you said, it’s a one-year issue. But it sounds like in your action, it’s more like a three-to four-year issue than a one-year issue. I guess, can you help us bridge? What are you forecasting macro wise and micro wise to effectuate this dividend in the five-year swap?

Let’s see, obviously, the economy has been hyped to the tune that it’s probably very destructive. So for whatever different reasons, and this is – don’t want to get into politics, but we have runaway inflation. As I said, I think the Fed is serious about doing their job and stopping it. Their number one tool, of course, is interest rates. The interest rates have had an enormous effect already in a very rapid manner, evidenced by the stock market and the whole market, etc. The Fed is going to win this battle. It’s just a matter of how long it takes. We aggressively went to protect our floating rate exposure for multiple different reasons, the most important one of which was to guard against a runaway interest rate environment. We think we protected that. The most efficient execution for the swaps was five years, and we basically did that. There is – do not read anything into our firm view on the future based upon this five-year number. I would tell you that I expect if you look at the graphs and look at the charts of past discussions and past activity, they generally go up at a pretty steep curve, and then they come down fairly quickly. They put the economy into recession, and then they aggressively have to bail it out. That’s what we expect that is going to happen this time. But we don’t bet our life on anything. We think we protected our balance sheet, and we think overpaying our dividend is about appropriate. So we think we’ve taken the proper financial actions to protect the fiscal sanctity of the company. We believe that this is going to be a one- to two-year event, not a three- to five-year event.

Thank you. So that one- to two-year is more your comment on the fundamentals in office as opposed to the macro you just outlined, I’m assuming. Just following up on that, I know the numbers are moving around.

The one to two years is a macro prediction.

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

First of all, we are New York-based. We believe in New York. We believe, and anecdotally we’ve had lots of conversations with lots of employers from all over the world. New York is still New York. It’s still the capital of the United States. 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 back 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, so that’s extremely talent. We think that this will be a fairly predictable cycle, where different industries will grow at different rates. There will continue to be aggressive interest in locating in New York and growing here.

Okay. And then just two quick...

We are absolutely strongly convicted about what we’re doing in the PENN District. We think that PENN is going to be another center of New York and an extraordinary success. So we’re very, very, very excited about that.

Okay. I was going to ask you once and relate to that. But just before that, I know the numbers are moving around. So I’m not asking you where numbers are, the dividend cut is going to be, but is it fair to assume if we look at it like a historical payout ratio, whatever the AFFO may be, should we assume a payout in line with historical levels as we think to model next year?

If you can model taxable income, that’s what the dividend is going to be approximately. If you can model that to the penny, you’re better man than we are. So we’ve got another full quarter to go. We’re in the budgeting process, and we know when we over it, and we will make that decision in the first quarter.

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

Thanks. Steve, you mentioned about the valuation, and I’m sure, on a lot of numbers, you traded 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 are big discounts that persist. Given where the financing markets are today, that just doesn’t seem likely. So 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?

I almost want to dodge that question too. Let me see if I can parse it. The leveraged buyout model, which has equity and debt may or may not work in this environment. The value of our company is there, and its extraordinary value. How it all plays out is something that I can’t predict right now.

Well, I guess you’ve talked in the past about maybe the separation of the PENN District assets into a spin out, which I know was on hold. You said you would only do buybacks in a meaningful way. But you probably need to sell assets to be able to buy back stock, which seems difficult. So just seems like your hands are tied. I’m just wondering, are we missing anything here that you could do to help close the gap?

The spinout is still on the table. The protection of our balance sheet is the number one priority.

Got it. Thanks. That’s it.

Thanks, Steve.

Thank you all very much. We appreciate you joining us – and the next call is when?

Valentine’s Day, Tuesday, February 14.

The next call, the lovable Michael says is Valentine’s Day. So, I guess, we’ll see you in red on Valentine’s Day. Have a great rest of the year and thank you all very much. Please take up my invitations to come down to PENN. It’s extraordinary and those of you who haven’t toured through or seen it yet. Please take advantage of our invitation; it’s sincere. We’d like to get you all down there and show you what we’re doing. Thanks very much. Thanks for joining.

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