Good morning, and welcome to the Vornado Realty Trust First Quarter 2023 Earnings Call. My name is Sarah and I will be your operator for today's call. This call is being recorded for replay purposes. I will now turn the call over to Mr. Steve Borenstein, Senior Vice President and Corporate Counsel. Please go ahead.

Welcome to Vornado Realty Trust's first quarter earnings call. Yesterday afternoon, we issued our first quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents, as well as our supplemental financial information 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, 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. 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 to everyone. Let me get a few things out of the way first. Our business is performing well in this environment. Our outlook hasn't changed since last quarter. We are full speed ahead on our current projects, totaling over 5 million square feet in the PENN District. Any comment in the newspapers or industry tabloids that we have stopped is incorrect and just plain silly. Just take a look at our three-block-long construction site when you next go through PENN Station or next go to a playoff game. Now, some commentary on last week's dividend press release and reaction there too. Simply stated, we are going on offense. Let me say that again. We are going on offense. A few facts for context. We know about dividends. In 2022, our dividend was $2.12 or $435 million in cash. Over the past 10 years, we have paid and happily paid $5.1 million in regular dividends and another $400 million in special dividends. Last week, an analyst characterized REIT dividends as sacred and I agree, well, I guess I sort of agree. For this year, we have already paid a $0.375 or $75 million cash first quarter dividend. We will pause paying dividends in the second and third quarters. And in the fourth quarter, based upon known facts actual taxable income including asset sales, et cetera, we will pay out as we must, taxable income, but we'll reassess whether it is wise or appropriate to pay in cash or in a combination of cash and scrip. Shareholders should be indifferent as to whether they receive cash or scrip, but that cash, if retained by the corporation, might be more wisely employed for debt management, stock buybacks, or whatever. As most of you know, I have resisted buybacks for years and years, resisting copycatting sister industry companies and resisting the pounding from analysts to 'close the NAV gap.' I believe our resistance was logical and fact-based. But since last quarter's dividend announcement to this quarter's dividend announcement, our stock price has declined 35% from a low level to an even lower level. Seeing value in the stock as an opportunity to create shareholder value, last Wednesday, included in our dividend press release, our Board authorized a $200 million share buyback program. We will proceed carefully and in a measured way, funding the buyback from asset sales or even cash retained from paying the dividend as scrip. Since our dividend is sized based on taxable income, not FFO earnings. Here is the math. 2021 taxable income was $2.03 versus a $2.12 dividend. 2022 taxable income was $2.08 versus a $2.12 dividend. 2023 taxable income is currently projected at $1.05 without any asset sales and surely, there will be asset sales. The difference between 2022 and 2023 taxable income is primarily increased interest rates. A couple of other comments. We think we have seen the peak in work from home. More and more CEOs are now requiring their employees back to the office. With each passing week, the office buildings feel more like 2019. And we believe it's just a matter of time before everyone is back for good. New York City seems to be leading the country in this regard. Lastly, with all CBD office stocks having been crushed, I'm greatly concerned about the future viability of office; it is important to review our financial position and our liquidity. We had $2.2 billion of liquidity, including $1.3 billion of cash and treasury bills. We have over $8 billion at today's markdown values of debt-free unencumbered assets. PENN1 and PENN2 are all unencumbered. The remaining capital program to complete PENN2 has been prefunded and will be paid for out of cash balances. These buildings have significant future embedded earnings growth and as PENN2 rents up, that incremental income will do wonders for our debt metrics. We rely primarily on project-level non-recourse debt, old-fashioned mortgages. Only 2.5% of our debt is recourse and that with well-laddered maturities. We are clear-eyed and realistic about the near-term financial market challenges. It is not pretty when 3% debt rolls over to 6%, 7%, or even an 8% market. We will certainly have a few workouts to deal with, but over the next couple of years. But that is the point of having non-recourse debt. We have no maturities this year, limited property-level maturities next year, and no corporate maturities in 2025 with sufficient capacity on our line that matures in December 2027, so that we don't have to reach asset finance at current prices in the current hostile market. Thank you. And now over to Michael to cover the financial side of the market.

Thank you, Steve and good morning everyone. During our last earnings call, we said that 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. Though the current economic environment makes forecasting more difficult than usual, this remains a decent assumption, absent the impact of any asset sales. As expected, first quarter comparable FFO as adjusted was $0.60 per share compared to $0.79 for last year's first quarter, a decrease of $0.19 or 24.1%. This decrease was driven primarily by higher net interest expense from increased rates. Our company-wide same-store cash NOI for the first quarter increased by 1.5% over the prior year's first quarter. We have provided a quarter-over-quarter bridge in our earnings release and in our financial supplement. Our core office and retail businesses remain resilient with long-term credit leases. Now turning to leasing markets. Amidst the backdrop of interest rate volatility and recessionary concerns, we remain encouraged by the level of activity year-to-date. Leasing activity has been led by strong demand from traditional industries, financial services and law firms, in particular, with many financial firms growing their footprint and accounting for 40% of the 7.4 million square feet leased in the first quarter. The availability rate of newly constructed properties has substantially declined with much of the new trophy space now largely absorbed at record-level rents. Tenants in the market are increasingly focused on the highest quality redeveloped Class A buildings that are well-amenitized, have strong sponsorship and are near transportation in Midtown and on the West side, which is resulting in rents moving up in these buildings. Our office portfolio is filled with these types of buildings. Companies are clearly willing to pay more for the right work environment that they believe will help them retain and attract talent as well as motivate their employees back to the office. 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 first quarter, we completed 22 leases totaling 777,000 square feet with healthy metrics, including starting rents at $101 per square foot and a positive mark-to-market of 1.7% cash and 8.5% cap. This included our full building 585,000 square foot deal with Citadel at 350 Park Avenue and 82,000 square feet at PENN1 at $92 starting rents. If we exclude the Citadel deal from our statistics, our team completed 21 leases totaling 192,000 square feet at $83 starting rents with a very strong cash mark-to-market of 13.1%. We are continuing to experience good momentum in the PENN District with a steady stream of new leases at PENN1 at ever-increasing rents, now in the high $90s and reaching $100 per square foot in the building's tower floors, reflecting tenant's attraction to the unique amenity offering we have in the most successful location in the city. Tour activity is picking up with PENN2 as well now. The project is nearing completion, and tenants can better appreciate the redeveloped product. Overall, we have very good activity across many of our assets, generally at higher rents than a year ago. Our leasing pipeline in New York remains healthy. We have more than 400,000 square feet of leases in negotiation plus an additional 1.4 million square feet in our lease line. Much of this activity is at buildings where we have significant move-outs this year and next. The financial sector in particular continues to be active. With that, I'll turn it over to the operator for Q&A.

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

Yes, thanks. Good morning. Steve, I appreciate the comments on the dividend and the additional color there. I just want to make sure when you talk about going on offense, does that really just mean buybacks? Or could that include potentially buying buildings as well? Or is buyback really the only thing on the table at this point?

Buybacks are the best value we see is in buying back our stock. So, we will focus on our stock at the expense of buying a building here and there. If we buy a building that used to be $1,000 a foot for $700 a foot, that potential pales in relation to the value that we see in our stock.

Great. And then as a follow-up, Michael, I was just wondering if you could maybe talk about the leasing dynamics sort of between PENN2 and PENN1. It sounds like with the renovation at PENN1, you're getting really good traction at the triple-digit rents you'd sort of talked about when you did the redevelopment. And I'm just curious, are you getting closer to getting some tenants secured at PENN2 as that project kind of nears completion by the end of this year? Or I guess, what's the holdup on getting leases signed for PENN2?

Yes. Hi Steve, it's Glenn. So, yes, PENN1 is on fire. Leasing activity is strengthening really week-to-week, with great tenants, financial technology, accounting, consulting, and rents are now piercing $100. So, we're really pleased with how PENN1 is coming along. And really, as PENN2 unfurls month-to-month, the project is looking better and better. It's just an amazing product we're delivering. And as the PENN1 activity continues to strengthen, that seamlessly flows into the PENN2 action. So, we now have tenants who are getting boxed out of PENN1 looking at PENN2. Our tour activity is higher than ever right now with PENN2, with some large activities, some single and double two-floor activity. The building will lease. It is the best product available in the market. It is in a perfect location. It is situated near transportation with amenities that no one else has. So, we're supremely confident in the product and we look forward to great success there.

Thank you.

Steve hang on for one moment. You should know that earlier, we had the opportunity to lease half of the Bussell floors to two different prospects, important companies, and we turned them down. So, we have a great deal of confidence in the product and the building, as Glenn says, and the building will lease. Next question, please.

Our next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

Good morning and thanks for taking my questions. So, two questions. First, Steve, in your third-quarter call, you outlined the potential to resize the dividend, which you did, and then a few months later, you decided to suspend it. Obviously, the rate environment has remained up and to the right, the office leasing, the capital needs of the company, everything else sort of stayed the same. So, what changed in your view, the Board's view, between deciding to resize the dividend from $0.53 quarterly to the $0.375 to then suspending it? I'm just trying to figure out what changed because the macro and the leasing fundamentals and the balance sheet all seem to be the same?

Alex, hi. Actually, you're correct. Nothing changed. The only thing that really changed was that our stock went down 35% from, as I said in my remarks, from a low level to an even lower level. We put our heads together and decided that after years and years of avoiding buying back stock for lots of logical financial reasons, we decided that the time was now. We consider buying back stock to be an offensive move, and we decided that we were going to buy back stock. So, that's the first point. We think the value is there. By the way, I'm not calling a bottom. What I am saying is that our company is going to devote financial resources to buying back stock. So, that's the first thing, and we announced it. By the way, it was a little awkward for us to announce a stock buyback in a dividend press release, but nonetheless, we thought that they matched together.

Yes, that segues into the next question. Obviously, you've seen your stock count here do a few billion. Hudson did a buyback. I mean there's not a lot of evidence that buybacks help, but when we look at your balance sheet, it looks like you have $2.4 billion of debt where the swaps expire later this year. So, my question is, wouldn't the $200 million be better spent paying down that debt? And Michael, in the $0.55 that you said this year would be down versus last year, that includes these swaps burning off? Or are these swaps burning off or incremental to that?

No, Alex, whatever we mentioned last quarter reflected our expectation of swaps, caps, et cetera, that roll off this year. So, that's in that number.

Alex, we have a high level of confidence in the strength of our balance sheet. We believe that our debt maturities are well-structured. Most of our debt, the vast majority, is non-recourse, which is a crucial aspect of the strength of our balance sheet. We will consider how to manage our debt compared to stock buybacks every time we face that decision. We are confident that we will make the right choice.

Okay. Thank you, Steve.

Yes, sir. By the way, one last point, okay? There's no other company that I'm aware of that is spending multiple billions of dollars.

Great. Thanks. Maybe just piggybacking on Goldfarb's question there about the stock buybacks. I mean, Steve, you just used the phrase, I'm not calling the bottom. I guess what gives you the confidence that the stock is trading so cheaply relative to your expectation, right? We've known that office NAVs relative to the stock price have been pretty materially depressed recently, but your share price relative to GFC times is down 30%-plus from the beginning of 2009. So, have you done some analysis? Is there really some kind of thought behind it? Or is there a worry that this could be an attempt to catching a falling knife, so to speak?

It's Michael, Griff, good morning. The answer is what I think what Steve said he's not calling the bottom. I think that commentary relates to the macro environment likely going to remain choppy near-term. The Fed appears to be coming to the end of their tightening cycle, but it's not definitive. We don't know whether rates will stay higher for a more extended period of time. But I think as we evaluate the company and we look at the price throughout the intrinsic asset value even on a stress case, we think it is heavily discounted, right? So, we think that the pricing has become irrational. Every day, there's negativity about office in the media. And some of that's warranted, but we think that's the whipping boy for today and so that's going to continue. And that obviously has an effect on sentiment. And so it's gotten a bit extreme. Right? And I think our action is a reflection of that. And as we stress the valuation, and we have, we think there is a significant margin still.

That's helpful. And then maybe just one on leasing for Glenn. I guess, ex-Citadel this quarter was about 200,000 square feet of leasing. Was there anything really driving that? And then do you have any big updates on, I guess, the move out at 770 Broadway and then I think there's potential expiration at 1290 AOA. I think it's with Ax Advisors, but if you could just update us on that, that would be great.

Yes, sure. So, the color on the 200,000 feet that we leased outside of Citadel was substantially PENN1 and then some strong financial service deals at our Plaza District buildings with rents that started at $83 a foot cash mark-to-market of 13%.

Pardon me. This is your conference operator. Please proceed. It seems we had a bit of interference. The main speaker line is connected. Please proceed with your response.

So, that was the first quarter known to Citadel activity. As it relates to 1290, 770, and other expirations this year and 2024, we're obviously in the market, and we're seeing very strong demand for those properties. If you think about the portfolio, we think it's the strongest in the city and those buildings particularly have undergone great redevelopments in the past. We're adding some of our work-life amenity programs to those assets currently on the board being drawn up. So, a lot of our pipeline is at the 1290, the 770s, the 280 parks, the PENN1, et cetera. So, we're out there. We're already in paper on a lot of space at some of those assets, and I feel good about those properties and those spaces coming back in terms of making matches with the tenants who are in demand in the market right now.

And Griff, I may just add to that, and I think I mentioned this in my opening remarks. If you look at what's happened in the market, right, the new trophy space that was delivered, which has seen record rents, significant demand, that's largely spoken for. And I think we talked last quarter about a broadening out of tenant activity. Not everybody wants to pay high $100, $200 a square foot rents; well-located redeveloped assets near the transit hubs are what is seeing that demand. So, the buildings where we have holes in them, the 280s, the 1290s, et cetera, we're seeing very good tenant activity there, and rents are starting to move up in those assets. And I think that's important, right? Concessions are high, but rents are starting to move up in these other assets because there's such a delta between the new buildings and these redeveloped assets that are well-located, proximity to transit is critical. Obviously, the state of the building is important. But that's a continuing trend we're seeing, and we're pleased with the activity at a number of our assets that are consistent with that theme.

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

Thank you.

Our next question comes from John Kim with BMO Capital. Please go ahead.

Thank you. Good morning. I wanted to follow up on the dividends and the circular aspect of suspending it at this time. Two questions on that. One, do you anticipate your share count will be reduced by the year-end? And two, when you decide whether or not to pay the dividend in scrip, are you committed to only issue it at a higher share price than where you're buying it back at?

John, we expect the share count to depend on how well we execute the buyback. We'll keep an eye on the market and make decisions on when and how to act. So, it's tough to answer your first question right now. The dividend won't be paid out until the end of the year, so it's likely that the share capital will decrease and then increase again, similar to our previous increase in the stock dividend.

Okay. It just seems like if you're buying it back at a, sorry, go ahead.

So, I'm remote and my equipment stinks. So, sorry, I cut out one back. The reason for the pause in the dividend is to give us time to evaluate all of those things that Michael just mentioned.

I was just going to say it makes sense to buy back at these levels, I suppose, at a 10% implied cap rate or so. However, if you issue it back at 10%, then it doesn't really make much of an impact. But my second question is.

Hold it, John. It does for an individual holding, right? If you hold the route, right, you own more of the company going forward.

Got it. Okay. My second question is on the leasing pipeline. I think, Michael, you mentioned 400,000 square feet of negotiations currently. I wanted to see how that compared versus the last quarter. I think you mentioned last time it was 1.2 million square feet, 275,000, being finalized. I know those terms are a little bit different. But apples-to-apples, where does your pipeline compare today versus a few months ago?

Hi, it's Glenn Weiss. I would say it's very consistent. When we refer to 400,000 square feet, that involves lease documents currently in negotiation, where the term sheets are finalized, and the lease documents are being negotiated. The additional 1.4 million square feet comprises deals we are discussing with brokers and tenants. We have proposals on the table, and we are engaging in regular back-and-forth regarding these deals. Generally, quarter-to-quarter activity remains steady, particularly driven by financial services and law firms within that pipeline. Overall, the pace of deal-making and tenant demand has been consistent for the last two to three quarters.

And can you break that out geographically?

I would say between PENN and Midtown for us pretty well averaged out between the two submarkets. And in Midtown, mainly the Plaza District buildings would attract the financial service tenants.

Very helpful. Thank you.

Our next question comes from Camille Bonnel with Bank of America. Please go ahead.

Good morning. Could we touch on the financing market? We've been hearing over recent weeks that the credit spreads have moved higher since the issues around regional banks, but notice you completed a refinancing on Rosalind and Plaza this month and the spread came in slightly lower. Was this a surprise or more of a reflection of other characteristics of the loan?

Michael?

Yes, Camille, each asset is unique. In this case, it's a smaller loan, and we have reduced our debt a bit. Our role is to identify the most suitable lenders for each circumstance. Overall, I concur with your initial observation; the markets are tough, and spreads have increased. However, it varies depending on the asset and the sponsor. There is capital available, although it's not plentiful, but it exists for suitable sponsors and quality assets. With favorable terms or appropriate loan-to-value ratios, the spreads, while wider than they were a couple of years ago, remain acceptable. The situation becomes more difficult with assets that carry higher leverage or face greater near-term income volatility. I believe Rosalind is a smaller asset, with a successful execution that reflects its prime location.

My take on this, Camille, is markets are extremely hostile. This is the time and the cycle where you're best to not have to refinance or finance. If you have to finance, you're at a huge disadvantage. And one of the things that I like about our strategy is we have very little that we have to finance. So, especially with our cash hoard, which is financing our PENN construction. So, the markets are really hostile and the best bid is to just stay out of them.

You were cutting out a bit, Steve, but I think I got parts of your message. So thank you. And then just switching, in the last quarter, Glenn talked about the opportunity of converting showroom space at the market to office. I was wondering how that specific business plan is progressing and how interest has been tracking so far into April?

So, the casual business departed for a makeover in the fourth quarter. We're now preparing that space for office leasing. And in general, we have a pretty good pipeline in Chicago. Our amenity program will be complete by June. We're going to be out there with NeoCon and another broker event this summer, which we're looking forward to, to really bring the program out to the market. So, the pipeline is good in Chicago. The market is tough. There's not a huge amount of tenant demand, particularly not large tenant demand at the present. Our showroom business continues to perform. We've leased about 60,000 feet this quarter at a $60 starting rent on the showroom business. The office business, we've leased over 0.5 million feet of office over the last three years. We have modest expirations in the next three years. We're running out the office. We're getting looks from all the majors. We're in very solid discussions now with a couple of tenants looking to move their headquarters to the market. So, it's starting to feel better, but certainly, tough conditions in Chicago as we sit here.

Our next question comes from Julian with Goldman Sachs. Please go ahead.

Hey, good morning. Thanks for taking the question. I wanted to go back maybe to the potential for asset sales. I know on the last call, I think the comment was that you didn't foresee being able to de-lever via asset sales for the next 24 months. But now, it sounds like you see a real potential for asset sales this year. Has your thinking changed at all? Is it really down to maybe the share price and now thinking that even at sort of distressed pricing, you can get some accretion from repurchasing shares? Just curious to sort of get your thoughts on that?

Michael?

Yes, Julian, I had seen you or I guess note. And I was a little surprised by the comment about no assets over the next 24 months. I don't think we said that on the last call. I think we've said it's a more difficult market to sell assets in. But I don't think we said we weren't going to try to sell assets. I think we've said, we're going to be targeted and recognize that you have to be realistic and thoughtful about what to sell. So, I don't know that our outlook has changed that significantly. It continues to be a difficult market to sell assets in. We think we have some that as we think about which assets we want to sell, it's a mix of leased office assets. We do think they're salable, and I think your comments sort of at the end that while the market may not be strong or as strong as it was and pricing has been impacted, our share price has been impacted more. So, I think that's exactly right, right? We may not love the price of some assets today relative to where they were a few years ago. But relative to our stock price, we do like that pricing. So, the answer is, we're not a forced seller. We don't have to sell anything. We're going to be targeted. We think we can execute some sales. We have some dialogues going on certain assets. We're going to pursue sales on a couple of other things that probably were not in our thinking a little bit earlier in the year. And our expectation is we're going to be able to execute on some of that. But given the uncertainty in the market, I'm not going to guarantee it and nor are we going to be forced to sell anything. So, we'll see how the rest of the year plays out, but it is our intent to try to execute on some of those sales.

Okay, great. Thank you.

The next question comes from Daniel Ismail with Green Street. Please go ahead.

Hi guys, Daniel on here. Just touching on the asset sales. I guess do you guys have anything in the market today? And if you could provide sort of further detail or color on sort of what sort of the profile of these assets are. Should we expect these to be some of the higher quality properties with long wall?

Daniel, I'm not going to get into specifics. The answer is we have discussions going on a few assets. This is not generally in a market that you blast things out. You got to focus on who has capital willing to deploy. I will say there are a number of investors who view this as an interesting time to enter New York. And in some cases, there's decent duration on the leases, in other cases, it's more traditional rollover in terms of building a certain percentage every year. And as I mentioned, it's a mix of both retail and office. So, I'm not going to get any more specific to that until we have something to announce. But as I said, we do think that they're executable if you're if you find the right investor and you're realistic on price.

That's helpful. I'm curious if you've noticed any changes in how tenants are designing their spaces, especially with office utilization still remaining low compared to 2019 levels, three years into the pandemic.

This is Glenn. Generally, I would say more collaborative collegial spaces, open workplaces like I always call it hangout spaces, but if you look across the portfolio generally, you're still seeing some private office mix with the traditional open areas. In terms of densification, some industry types are more than dense; some seeing density they were. It's really a mixed bag. I wouldn't say a consistent layout of any industry type as you relate one to the next. So, generally, I don't think there's much of a new theme than what we've seen previously other than the 'hangout collaborative collegial environment.' I mean, the one thing that we are focused on in terms of the workplace is what we've done in the buildings, particularly at PENN1, what we're doing at PENN2, what we've done at the Mark, what we're going to do shortly at 1290 where we believe tenants want to be in these buildings because of the way we have really improved the experience when you first enter the asset. So, the first experience that impact we think most important to our success is when people come in they're comfortable, they could eat, they could drink, they could hang out, they could go to the gym, whatever they're going to do. We look at it like they're coming into a concierge hotel environment. And that's how we've created these new workplaces in our portfolio which has been working extremely well as it relates to our program.

Great. Appreciate the color. Thank you.

Our next question comes from Derek Johnston with Deutsche Bank. Please go ahead.

Yes. Back in 2018, which feels like a different era, you invited Seinfeld to 555 California Street for investors. So, to clarify, Jerry's point was about his ability to be anywhere, which raises the question of why he was in San Francisco. Steve, we all know you have options, but you're here, which indicates that you believe there is a way to navigate out of this negative sentiment surrounding office REITs. My question is: how do you foresee Vornado overcoming this situation and coming out stronger?

I feel like I need Jerry Seinfeld to help me respond to this question. I believe things are changing now, and time works in our favor. It's evident that employers want their employees back in the office to facilitate collaboration and effective management. However, they have faced challenges due to a group of employees who are resistant to returning. Yet, if we look ahead five to seven years, I believe we will return to what was considered normal five years ago. The trend is moving quickly; people are eager to be in cities, as seen by the crowded apartments, restaurants, and streets. While certain demographics are still hesitant about returning to the office, that resistance is beginning to fade. Time is definitely on our side.

Thanks, Steve. That’s it for me, guys.

The next question comes from Vikram Malhotra with Mizuho. Please go ahead.

Thanks for taking the questions. So, just first I wanted to clarify, you said nothing's changed between when you adjusted the dividend down a couple of months ago and then now. But I'm just sort of looking at the dividend run rate you had then and now the taxable income you're projecting. Can you just help bridge what appeared to be sort of your projected taxable income run rate of, let's call it, $0.37, $0.38 and today, it's more like $0.25. I'm just wondering your debt is fixed now. I'm assuming you had outlined I think a $0.50 impact and that was due FFO, but you had outlined various impacts that you baked in. So, I'm just trying to bridge the two numbers. What has changed in driving that projection lower from here? And can you just comment if that projection now includes a change in the way expirations may be renewed?

As I said, nothing's changed. We have left room for some asset sales. By the way, if you read the Norton Properties' CFO's comment in their earnings call, you'll see basically exactly the same statement that I just made. So, what I'm saying is that we right-sized the dividend and we left room for asset sales.

Okay, that makes sense. Yes, go ahead.

I'm sorry, go ahead.

I wanted to mention that you spoke about asset sales without clarity on pricing or potential outcomes. From your perspective, we've observed various transactions in places like New York and California at prices we didn't anticipate a few years back, around $300 to $400 per square foot, with some buildings commanding even higher prices. I'm trying to understand how you determine which assets to sell and if there comes a point where you decide that a sale isn't worthwhile given the pricing. Essentially, I want to know your thoughts on how you see values evolving across different types of office properties.

We're aware of what you're talking about. We are not in a position where we have to sell due to distress, nor are we a seller under pressure. Instead, we are focusing on a carefully chosen group of assets, where we believe we can sell effectively since the proceeds, if we can execute properly, will be invested in a way that significantly benefits us. You can expect us to be very selective; we’re not in the business of bulk selling. Additionally, we know when to walk away and say no. If we do proceed with any sales, they will be highly beneficial for us.

Okay. Thank you.

Our next question comes from Anthony Paolone with JPMorgan. Please go ahead.

Yes, thank you. Regarding the PENN District, I apologize if I've lost track of the discussion with the press and your previous comments. As we look ahead to the next couple of years, can you clarify your plans or expenditures beyond the current projects in the suburbs? Specifically, what is committed, or what do you intend to pursue outside of that, if anything?

We haven't gotten into that. We haven't announced that. We haven't quite gotten that far. We have already in the PENN District done heroic accomplishments. We did the upgrade in a private-public partnership. We did the widening of the Long Island Railway Concourse. We have the retail on both sides of that concourse. We completed the 730-odd square foot deal in Farley. We have done a massive and very successful renovation of PENN1 where we have driven the rents from $55, $60 to the stunning side of $100 a foot and delivered value to our tenants, and we are in the middle of a $1 billion renovation of PENN2. Together with that, we are doing area-wide improvements infrastructure to the public realm and we're going to take a breath. The prospect of doing ground-up development, we will likely start with an apartment project. But we have not yet announced what we're doing; we're in the middle of planning that and we're actually very excited about it.

Thank you. I have a clarification question. Regarding your balance sheet, I noticed that the 14 million Class A units seem to have a redemption price of about $23.5 per share. Considering the current stock price, is there any possibility that those holders might exercise that option? Am I understanding that correctly?

Michael or Tom, you're going to have to help me with that one.

Yes, let us come back to you on that one.

Okay. Thank you.

Our next question comes from Nick Yulico with Scotiabank. Please go ahead.

Thanks. I wanted to see if you could provide any update on the retail joint venture. I know that the loans there have matured, and we're still in discussions with the lenders. How should we think about this? Are you considering walking away from the assets? Also, regarding the mortgage at 645th, which matures next year and is recourse to the company, what is the plan for that specifically?

Michael?

Yes. Good morning Nick. On the first asset St. Regis, which we talked a little bit last quarter, that continues to be in discussion with the lenders and we're heading towards a mutually acceptable resolution there. So, hopefully, that will be done in the next 90 days. And with respect to 640, which matures next May, that's something that we started to work on now, starting to gauge the financing markets, talk at an existing bank loans. So, obviously, existing lender is somebody that we'll continue to have discussions with as well. So, too early to tell exactly what's going to happen there, but obviously the intent is to refinance that asset and whether we do it at par or pay it down a little bit, but the expectation is that asset will get refinanced. I will say Nick I think one interesting dynamic. Two, three, four years ago, retailer is a four-letter word; nobody wanted to touch it. That's changing. It's changing. Unfortunately, office is now in that category for most people. But for retail, it's flipped. Retail, I think, people view the worst is behind us. The capital markets are more constructive both investors as well as lenders. And so yes, they have to sort of understand and think about how to deal with above-market rents in some cases. But I think in general, the capital markets are more constructive on retail today than they have been in a few years.

Okay. Yes, thanks, Michael. Just one other question is going back to the commentary on a potential buyback. I mean, the debt capital markets right now seem as bad as they've been for office since the great financial crisis, and there's a bearish argument that maybe the lending markets don't come back in a way that they existed in the past decade. So, it seems to me that if you're talking about asset sales to fund the potential stock buyback, there's implicitly a view that you think the lending markets improve. And I guess I'm wondering why make that call now instead of paying down debt? I mean, you have a balance on your line of credit; you have maturities you're dealing with over the next year or so. Why isn't that the better use of capital; sell assets, pay back debt, and perhaps that would reward your stock price more so than a buyback?

Michael, why don't you try that?

Yes, Nick, I want to clarify that we haven't stated that buybacks are the only option. Regarding asset sales, we haven't limited ourselves to just buybacks. The amount we've communicated for the buyback is relatively modest. As Steve mentioned earlier, it can mainly be funded from retained cash from dividends. Concerning asset sales, we haven't indicated that they are solely for buybacks. If we proceed with asset sales, we will evaluate the proceeds and determine the best use for them while being very mindful of our priorities. Our top priority is ensuring that our balance sheet remains strong. We can address various situations, such as reducing leverage or extending maturities by paying down debt, which will certainly be among our options. We agree that our focus should be on maintaining a strong balance sheet, and asset sales will be allocated for multiple purposes.

Appreciate it. Thank you.

Our next question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.

Hey, just a couple of quick ones. So, I was looking at the cash flow statement and looking at the $92 million of operating cash flow this quarter. Obviously, there's some working capital seasonality. But just one, can you talk about what happened to OpEx in the quarter? It looked elevated, and I suspect sort of flow through? And then two, I know you said nothing changed, but was this sort of cash flow in Q1 part of connecting the dots about postponing the dividend and thinking about doing a scrip dividend just to preserve cash flow?

On your second question, Ron, definitely not. I mean again nothing has changed. So, no. On the OpEx.

Maybe there's some seasonality. Ron, we could work offline and take a look at your model.

I don't think it's material.

Great. And then just the last one just on the refinancing. You already hit on the Fifth Avenue property, which I was going to ask about. But any comments on 280 Park as well which is coming next year? And just any general color when we're thinking about the model, what sort of rates, potential paydown, and how are you guys thinking about that? Thanks.

Yes. My general comment is that your current lender is often your best option for new lending. Most lenders recognize that refinancing large assets will be challenging for the foreseeable future. They will need to collaborate with borrowers and sponsors who they believe will manage the assets effectively, which we clearly do. Therefore, in many cases, you can expect to see loan extensions. There might be some pay downs in certain situations, while in others, there may not be. Discussions have initiated, and we will see how they unfold. However, in these larger near-term scenarios, lenders and borrowers are closely connected for the time being.

Thank you.

Our next question is a follow-up from Alexander Goldfarb with Piper Sandler. Please go ahead.

Hey, thank you for taking the follow-up. Maybe I missed it, but did you guys talk about 555? One, the debt restructuring, with the servicer, what you guys are thinking about that? And two, just given all the stories that we hear about just the state of San Francisco's office market, what's going on with leasing in the building, the Montgomery Street box, et cetera?

Yes, I'll touch on the first, and then I'll have Glenn touch on the second, Alex. It can be a bit frustrating when things are written, which are just not fact-based. This is a notion that 555 was in a workout or there was something. The answer is the building is performing extraordinarily well. There's no issue with the loan. We took out an outstanding loan two years ago, and it was structured as a two-year initial loan with a series of five-year, one-year as of right extensions, right? My as of right, if you want the additional term, all you have to do is send in a letter, and you get it. So, once a year, we're going to send a letter to the servicer. We're going to extend the loan and that will be that. So, there's no threat of default. There's never been a threat of default. There's never been an issue with this loan. It was a seven-year loan, structured that way. So, all the articles written on this thing, nobody did their homework. And by the way, there may be other situations like that. So, it bears understanding how the loans are structured and what the real story is, which everybody he wrote on that and just got it dead wrong. In terms of the building, I'll let Glenn talk about it. But again, it continues to be I think the best performing asset in San Francisco, with just the premier lineup of financial service.

Hi, Alex. It's Glen. The building has been perfectly insulated against everything you're reading about in that marketplace. We've lost zero tenants to anything Goldman Sachs, KKR, Microsoft, BofA, all renewed their leases during the last three-year period which speaks to the asset. I think that's like really need to know and none of them reduced in size. We're obviously in the market with the vacancy; that's the only vacancy at 77,000 feet. We finished the redevelopment obviously a couple of years ago. We continue to show it. But the campus, the three buildings has performed perfectly during this period, and it's clearly shown that it's the best asset in the city.

Okay, I appreciate those comments. So, thank you.

Okay. Pardon us if we get a little bit annoyed at the misinformation.

That's the beauty of these earnings calls.

Next question please.

This concludes the question-and-answer session. I would like to turn the call back over to Steven Roth for any closing remarks.

Thank you all for joining us. We are very excited to begin a buyback program. Additionally, we believe our approach to the dividend is very logical, and we appreciate your support. Thank you for being here, and we'll see you in three months.

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