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. 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 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. 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 everyone. There’s a very close parallel between what happens to malls and what is now happening to office spaces. Five years ago, there was universal certainty that malls and brick-and-mortar REITs were dead forever, the victims of growing e-commerce. Capital markets shut down, and no more malls were built. But here we are five years later, and malls are booming. Sound familiar? It seems that CBD office spaces in all our cities, New York included, have 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 that office work is a better bet. The capital markets are frozen for now with no new supply, and it will ultimately build strong demand for office space. Malls and offices in the center cities 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 provide further details in a moment. The principal difference in our numbers this year compared to last year is the rise in interest rates. Overall, the economy has been more resilient than we expected despite the Fed's historic interest rate hikes. Real estate capital markets remain challenged even for us. Highlights of our immediate business plan include conserving cash, protecting our balance sheet, and even raising cash by selectively selling assets, reducing debt, and buying 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 more to come. Over the last few months, we bought back approximately 25,000 shares for $29 million at an average price of $14.40. Sam Zell passed away on May 18. There was a memorial service in his honor in Chicago three weeks ago, attended by over 1,000 people. I delivered a eulogy; we can say that Sam was the father of the publicly traded deep market. He called it liquid real estate. I wish for us all to be as smart, 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 concerning 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. These items include $0.07 of termination income from a former tenant at 345 Montgomery Street in San Francisco, which was offset by $0.02 of additional interest expense related to the restructuring of the St. Regis retail loan 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. Despite the challenges posed by higher interest rates and the impact of nonrecurring items, our core office and retail businesses remain resilient, thanks to our long-term credit leases. Our New York cash same-store office business was up 3%, and our overall New York business was up 2.7%. Looking ahead to the remainder of 2023, we previously mentioned that we expect 2023 comparable FFO to be down from 2022, previously indicating the known impact of certain items totaling a $0.55 reduction, primarily owing to the effect of rising interest rates. Our outlook hasn't changed since the start of the year. However, with the additional recurring expense related to the new share-based awards granted in June, you can expect about 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 compared to our prior year run rate is estimated to be $0.02 to $0.03 overall. Naturally, this expectation for FFO does not factor in any potential asset sales. Now let's discuss the leasing markets. In the context of the Fed's sharp interest rate increases, we continue to be encouraged by the level of leasing activity year-to-date. Leasing activity has been driven by robust demand from traditional industries, particularly financial services and law firms, with many financial firms expanding their footprint and accounting for almost 40% of the 5.2 million square feet leased in the quarter. In general, tenants are focused on the highest quality, newly renovated Class A buildings that are well amenitized, have strong sponsorship, and are conveniently located near transportation in Midtown and the Westside, which is pushing rents upward in these buildings. Our office portfolio consists of these types of buildings. Midtown accounted for 70% of this quarter's leasing activity, with 75% of Midtown leasing happening in Class A properties, reinforcing the flight to quality trend. For companies, attracting and retaining tenants while creating a thriving culture is paramount, leading them to pay more for the ideal work environment that helps accomplish these goals. Rents in top-tier buildings are at peak levels, with the gap between Class A and Class B properties expanding. While there's solid activity in the market, larger deal flows are lagging, and concessions remain stubbornly high. Focusing on our portfolio, we completed 19 leases totaling 279,000 square feet this quarter, and our metrics include starting rents at $91.57 per square foot, a positive mark-to-market of 5.7% cash and 9.9% GAAP. Overall, we’ve signed one million square feet of leases in the first six months of the year at a market-leading rate of $99 per square foot. Our average starting rents continue to trend upwards, highlighting the quality of our portfolio and the ongoing flight to quality we've discussed. At PENN1, we’re executing a steady stream of leases with new top-tier tenants at attractive rents, showing tenant attraction to the unique amenity offering we have in the city's most successful location. Last quarter, we signed a lease with Samsung, and this quarter, we added a 72,000 square foot lease with Canaccord Genuity, a leading financial services firm. Tour activity for PENN2 is also picking up as the project nears completion, allowing tenants to better appreciate the redeveloped product. Both PENN1 and PENN2 now compete in the very top tier of the marketplace. It’s a testament to the market's reception of these two leading projects and growing confidence in the future of the PENN District as New York's new epicenter. Overall, activity in many of our assets remains strong, including solid transaction volume at 1296 Avenue and 280 Park, with higher rents than we previously forecasted. The headline is that industry insiders recognize there's a shortage of good space on Park Avenue and Sixth Avenue. Actual vacancy is below 10%, and rents are increasing nicely. We're observing certain competitive pockets in the market where a healthy tenant-landlord equilibrium allows 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, along with an additional 1.2 million square feet in our pipeline. This activity is well balanced across buildings with current vacancy and known vacancies returning to us over the next 18 months, featuring a healthy 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 from a mix of food and fitness activations, as we continue to curate the district like no other neighborhood in the city. We are thrilled about the best-in-class operators we are bringing into the district, where both our current and prospective office tenants are enjoying the developments we've recently announced. There’s much more in the works. Turning to capital markets, financing remains highly constrained, especially for office spaces, due to volatility from the Fed's sharp rate increases. There's more interest in retail as this asset class is perceived to be recovering. Banks are grappling with an increase in problem loans, regulatory scrutiny, and insufficient loan applications, which keeps them cautious and restrained in lending. The tone in the CMBS market has improved modestly over the past quarter, but it remains largely closed. High-quality sponsorship is more critical than ever. We are in good shape, however, with no material maturities until mid-2024. During the quarter, we completed the restructuring of the St. Regis retail loan, extending the term by five years and also extended several smaller loans with near-term maturities. We actively collaborate with our lenders to postpone the maturities on our loans that are set to mature in 2024 and beyond. Our consistent mantra is reviewing the portfolio. If an asset is overleveraged or not refinanceable, we'll support the asset only if we have sufficient time for the asset or market recovery. We can do this because the loans are secured by individual assets and are generally non-recourse. We've found banks to be cooperative in addressing these situations thus far. You will see in our financials that we continue to extend our interest rate hedges, giving us solid protection over the next few years against future increases. Lastly, we remain busy with asset sales and recently announced the sale of four small retail assets in Manhattan that yield minimal FFO, projected to close in the third quarter, along with the Armory Show that closed in July. We are diligently working on additional sales as well. In these volatile times, we are focused on bolstering our balance sheet. Our current liquidity stands at a robust $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 back to the operator for the Q&A session.

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 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. Also, on the New York leasing, the spreads were reasonably good. I'm just curious how much of the leasing in the quarter was at PENN1, where I know you're achieving a very strong uplift?

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

Hi, Steve, it’s Glen. So in terms of the quarter, about 40% of the activity was at PENN1, including the headline Canaccord deal. As for the pipeline, we have a very strong pipeline of almost 600,000 square feet of leases out and another 1.2 million in the works. I sketched out my calendar for the week; we have a final LOI for a 320,000 square-foot tenant, we’re getting a lease out for another 240,000 square-foot tenants, we responded to an LOI for 200,000 to 275,000 square feet, and we deepened term sheets with another firm for 175,000 square feet. So we’re busier than we’ve ever been and progressing as we predicted. We also see very good action at PENN2 now that the project is nearing completion, with plenty of tours taking place and proposals in the pipeline. We feel optimistic 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 what’s the updated thought on the dividend and the pace of buybacks?

Good morning, Steve. As we mentioned on the last call, we’ll be opportunistic about looking to sell assets. We’ve announced a few small ones last week and are working on others. There could potentially be a couple of larger ones, but I can't comment on tax impacts just yet. Regarding the ones we sold, there will be a tax loss which will help reduce taxable income. As we stated previously, our policy is to pay 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 to utilize for buybacks and pay down debt, but we’ll see how the year unfolds. Other transactions may get completed before year-end, but such transactions take time, and I can’t confirm anything large will get done definitively before the end of this year.

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-market opportunities quarter-to-quarter as this depends on our activity. However, as Michael mentioned, we’re pleased with the rent levels we’re observing at the buildings with major expirations, whether it’s 1297, 7280 or otherwise. Our starting rents have consistently remained strong over the last two years, in the 80s to even 90s. This year, of the one million feet we’ve leased, our starting rent is at $99 a foot. This reflects the quality of our buildings, and our leasing pace is accelerating. It’s hard to predict precisely the mark-to-market situation, but we feel confident about our rents overall.

I would just add that it's difficult to predict exactly where we'll land. It's August, and as we review the submarkets like Park Avenue and Sixth Avenue for Class A buildings, rents have increased by double digits over the past six to nine months. If you had asked us what the mark-to-market would be on some of those leases six to nine months ago, we wouldn't have anticipated the strength we see now. So, while we can't predict, we do see positive momentum.

That's very helpful. I assume those comments around market rents being up over the last six months were on a gross basis. Can you provide updates on how that has trended on the tenant improvement and rent-free side?

The concessions are still stubbornly high, too high. And so while rents have continued to inch up in our best buildings, concessions have remained steady.

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

Hey, guys. Good morning, and Steve, it's quite the honor for you to give the eulogy for Sam. I have two questions. First, regarding the new compensation plan that you rolled out: Are you terminating the old compensation plan? And what was the thought process behind issuing it ahead of the July 4 weekend, instead of as part of the annual proxy? Normally companies update comp plans at the beginning of the year, but you chose to announce it mid-year. I'm curious about the reasoning behind these decisions.

Alex, good morning. I want to address your comment regarding releasing it one Friday. The fact is that SEC regulations require us to file an 8-K within 48 hours when doing something like that. That turned out to be on that particular Friday. We had to adhere to that requirement. Furthermore, our teams managing this are accustomed to a 4:00 closing, so they put it out after the 4:00 closing without realizing the markets would close at 1:00 o'clock because it was pre-holiday. We’re not engaged in any sneaky business, we simply did what was needed. Regarding your second question on the old compensation plan, I will hand that over to Michael.

Good morning, Alex. To take your questions in parts: no, we are not terminating the old compensation plan. That plan is set to expire in 2025, and as it currently stands, it doesn’t look like it will earn out, but it’s still uncertain. The timing of the new compensation plan was essential; we are in a challenging period and have lost some valuable team members over the last few years. We felt it was important to send a message to our team by implementing a plan that incentivizes retention and rewards performance during this period and as we emerge from it. We believe this plan aligns well with shareholder interests, requiring sustained performance over a meaningful timeframe to realize value. If the stock price rises, the plan becomes more valuable. Parts of the plan don’t even vest until performance thresholds are met. The response from our team has been overwhelmingly positive. It has been allocated to a broad group of individuals, and we think it clearly communicates the importance of driving value over time and engaging the team in that effort.

It’s important to note that Michael and our team usually communicate with our largest shareholders when constructing this plan, and we received universal support from our shareholders which is a positive development. We’ve also gotten favorable feedback from peers within the industry about our approach.

Okay. And then for the second follow-up question, Steve, regarding the studio deal on Pier 94. Just looking for more details: is Hudson going to be the main operator? What are the economics, and what will your role be? I know you have a deep theatrical background; any insight you could share would be appreciated.

We're not completely finished with all the details on this deal, so we won’t provide specifics yet. However, it will be the only studios on the island of Manhattan, which excites us greatly. We own half the deal, came in with the land, while Hudson Pacific serves as the operator, with Blackstone being Hudson Pacific’s partner and now our partner as well. More details will be released as we finalize the arrangement.

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

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

Hi. It’s Glen. We've been fortunate in San Francisco. We've been very successful with 555 Cal, even given a quiet market. There’s a lack of new tenant demand in San Francisco, but we've been well insulated at 555. Chicago is a different story; there is less tenant demand, especially among larger firms. Our activity there tends to be limited to tenants seeking 100,000 square feet or less. Overall, I'd say both cities share a lack of demand and uncertainty regarding government impacts.

In San Francisco, we possess a premier financial services building, distinguishing us from the supply of technology buildings. Our tenant base comprises the most important financial services tenants and clients who have been with us for over 25 years. Therefore, our building is unique, being the highest quality in its category and the most significant financial services building. Conversely, in Chicago, while our building remains excellent, the market is softer, and we are navigating those dynamics.

That's very helpful. Thank you. Just 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 PENN1?

I don’t have that information on hand. I’ll need to get back to you on that, Julien.

We don’t have that at our fingertips. We will follow up.

The next question is from Anthony Paolone with JPMorgan. Please go ahead.

Thanks. Earlier you talked about potentially selling more assets this year. Looking out over the next two or three years, are there any parts of the portfolio that you're particularly keen to divest? Should we anticipate any part of the business to shrink, be it retail or certain submarkets?

We do not have a target on any specific type of asset. We are fairly focused in New York office properties, and our retail presence is exclusive. We don’t target any particular section of our business. Nonetheless, if we can sell assets at prices that create value for our stock and benefit shareholders, we are intensely focused on that.

Understood. As a follow-up, concerning NOI, looking at the second half of the year, the first couple of quarters were consistent, and there was significant leasing activity . What should we expect from retail in the second half? Also, regarding office, there appeared to be a difference in GAAP NOI from Q1 to Q2. Can you provide insights on how we should expect the second half to look?

Are we predicting the second half? I don’t think so. So we will not be providing guidance for the second half. That’s a premature question.

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

Thanks. I wanted to revisit the asset sales, specifically regarding the Farley building. Are you considering any plans to sell a joint venture stake in that asset? It seems like this type of asset would generate strong investor interest due to the long-term lease with a credit tenant and the success rate there.

We value the assets just as much as you do. We are not going to comment on future strategies regarding that.

Understood. Regarding Farley, I assume there’s no mortgage on it. I wonder if that's also an asset you're considering placing a mortgage on. Have you had any discussions with banks? It would serve as an intriguing test case for a strong office building's ability to finance. Any insights you can share?

We agree with you; it’s a valuable asset with a strong long-term lease. It has no financing on it, which makes it a great piece, and potentially, it may serve as a significant liquidity source.

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

Just two quick ones. Regarding the $0.72 of FFO this quarter, could you remind us of the one-time items that we need to adjust for what is recurring? For both, are there any lease terminations or anything else we should consider to get the right run rate?

Yes, Ronald. A lot goes into each quarter, and while it fluctuates, one significant one this quarter was the tenant termination at 345 Montgomery, which contributed $0.07. At the same time, we incurred a couple of cents related to the St. Regis loan restructuring. The net effect is a reduction of $0.05. Additionally, the stock comp will continue for the rest of the year but likely at a lower incremental amount for next year. So, to sum it up, let’s regard it as $0.05 this quarter as the non-recurring portion, while the stock comp will decline slightly as we move into next year.

Great, thanks for that. Regarding the leases, you've mentioned 580,000 in negotiation and an additional 1.2 million in the pipeline. How should we think about occupancy going forward? Will it remain stable, or what factors influence occupancy for the rest of the year and into next?

I'd say occupancy will hover around current levels for the remainder of the year. It depends on when these deals close and how everything progresses here. I expect we’ll maintain our position over the next couple of quarters, but I’m hoping for increased absorption as these deals finalize in the coming months.

I believe Glen and his team are doing great work on some upcoming expirations. Timing will play a role; for instance, there are known move-outs at 1290 and 280, and if we backfill those, occupancy won’t dip. However, if there’s a timing gap before backfilling, it might decrease slightly. I agree with Glen; we believe it will stabilize, although it could fall a bit early next year based on timing of backfilling. We’re confident that over time, occupancy will improve.

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, everyone, for attending. This is a record call; we’ve never gone for 35 or 40 minutes before. 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.