Earnings Call Transcript - VNO Q4 2022

Operator, Operator

Good morning and welcome to the Vornado Realty Trust Fourth Quarter 2022 Earnings Call. My name is Benny, and I will be your operator for today. 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.

Steven Borenstein, Senior Vice President and Corporate Counsel

Welcome to Vornado Realty Trust fourth quarter earnings call. Yesterday afternoon, we issued our fourth quarter earnings release and filed our annual report on Form 10-K 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-K 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.

Steven Roth, Chairman and Chief Executive Officer

Thank you, Steve, and good morning, everyone. It's Valentine's Day. As Michael will cover in a moment, 2022 was a strong year with comparable FFO up 10%. Fourth quarter FFO was down 11% due to higher interest rates. Excluding rising interest rates, our core business is performing quite well. Not surprisingly, we expect 2023 will be a down year, negatively impacted by a full year of higher rates. I'd like to share with you a few other thoughts. Notwithstanding all the noise, New York continues to be the most important city in America. We continuously survey dozens and dozens of our tenants, all of whom reaffirm their commitment to stay and grow in New York. And that goes for our clients who are headquartered in other cities who are making New York their, so to speak, second home. And it's not by chance that the New York area is the tightest residential market in the country. People want to live here. Steel, concrete, and curtain wall are important, but in our business, capital is the essential raw material. We are now in the middle of the Federal Reserve's tightening cycle, the result of which is interest rates are up and capital is scarce. And that's an understatement. Notwithstanding Fed funds at 5%, most run-of-the-mill real estate operators can't borrow at 10% or can't borrow at all. So here's what we have done. Several years ago, when we began the Farley Facebook PENN 1 and PENN 2 projects and our all-important PENN district, we loaded in over $2 billion in cash to pre-fund 100% of our development and construction costs. We didn't know then how precious this would be. So Farley Facebook is now finished and paid for. And PENN 1 is almost complete, and PENN 2 will finish around year-end. All three of these assets will be free and clear and unencumbered. And that's quite a feat. We handled all of our 2023 and 2024 maturities. We put on a series of swaps in caps, which we found very helpful. They provide only partial protection. I would observe that there really is no protection against loans that mature in a rising interest rate market. And a further observation is that the stock market prices at then-current interest rates, giving no credit to a company which might have lower rate loans, even if they're locked in for a term. Beginning in the first quarter of this year, we declared a right-sized dividend allowing us to retain $128 million of cash annually. And by the way, our stock still trades at a too high 6.5% yield. In January, we completed an important deal with Citadel at our 350 Park Avenue building, which involved them master leasing the entire 585,000 square foot building, essentially relieving us of 225,000 square feet of vacancy. This deal will almost certainly result in a teardown and a new build of a grand 1.7 million square foot tower on a larger assembled site. Please see our press release of December 9, 2022 explaining the transaction. We have lots of friends on Wall Street, and I might venture that by any measure, return on equity or return per employee or whatever, Citadel is at the head of the class, intensely focused and aggressively growing. This deal validates the quality of our site and our development team as new. Interestingly, Ken tells me that a significant differentiator for his firm is the simple fact that everybody comes to work every day, five days a week. I think they start at 7:30. There is a learning here; call me crazy, but I think companies that embrace work from home will be left behind. And I think it's absurd to think that years from now, tens of millions of Americans will be working from home alone at their kitchen table. And by the way, Zoom may be a disruptor, but its stock is down from 588 to a still high 75 today. You will notice in our supplement that we updated our development projections for Farley PENN 1 and PENN 2, raising our aggregate projected returns. This is based on the fact that in 2022, we had signed 25,000 square feet of PENN 2 at average fighting rates in the 90s. This is based as well on the outstanding market reaction we are getting to PENN 1 and PENN 2. Our strategy here is to achieve very strong returns at rents well below those required for new construction. The PENN 1 ground lease process is now kicking off as required by GAAP accounting convention. In the first quarter of 2022, we estimated a ground lease of $26 billion and reflected that in our statements. Based on current market conditions, we now think that number should be quite a bit lower. We expect 2023 will be challenging as businesses and consumers continue to feel the effect of the Fed's aggressive rate increases and generally tighten their belts and act with caution. This will likely be reflected in lower leasing volumes at frozen capital markets. We believe quality product wins today. Just look at our new buildings, new lobbies, amenities at PENN 1, new scale at PENN 2, etc. Not long ago, new construction commanded a $20 premium. Now it commands a $100 premium or more. Does anybody think that's too high and that the market will adjust? One more point, and this is an important one. In the history of real estate, all great upward landlord markets followed a period of constrained supply, and here we are. Capital markets are now making it almost impossible to build new, which will be the fourth pillar to the next bull market and landlord’s market. Now over to Michael.

Michael Franco, President and Chief Financial Officer

Thank you, Steve. And good morning, everyone. As Steve mentioned, we had a strong year despite experiencing headwinds from rising interest rates. For the year, comparable FFO as adjusted was $3.15 per share, up $0.29 or 10.1% from 2021. Fourth quarter comparable FFO as adjusted was $0.72 per share, compared to $0.81 for last year's fourth quarter, a decrease of $0.09 or 11.1%. While earnings for the quarter were down, driven primarily by higher net interest expense from increased rates and the non-cash straight-line impact of the estimated 2023 PENN 1 ground and expense, our core business had strong performance from the rent commencement and new office and retail leases. We have provided a quarter-over-quarter bridge in earnings released in our financial supplement. We have several non-comparable items in the quarter from early gains from 220 Central Park South sales and other non-core asset dispositions, which in total increased FFO by $0.18 per share. As previously announced, we recorded $595 million of non-cash impairment charges during the fourth quarter, of which approximately $483 million was related to our equity investment in the Fifth Avenue and Times Square retail joint venture. It should be noted that impairment charges are not included in FFO. Company-wide same-store cash NOI for the fourth quarter increased by 7.9% over the prior year's fourth quarter. Our overall same-store office business was up 8% compared to the prior year's fourth quarter. Our New York same-store office business was up 5.4%, primarily due to cash rents at Farley coming online. Our retail same-store cash NOI was up a very strong 7.9%, primarily due to the rent commencement on several important leases. Now turning to 2023. While the current economic environment makes forecasting more difficult than usual, we expect our 2023 comparable FFO to be down from 2022, given the known impact of certain items. These include roughly $0.40 from additional interest expense as a result of a full year of higher rates on variable-rate debt, net of higher interest income and capitalized interest, assuming the current curve. $0.10 from the prior period property tax accrual that was recognized during the second half of 2022, and $0.50 of lower FFO from the sale of assets in 2022. These reductions could potentially be offset by a lower result on the PENN 1 ground rent reset that's currently running through earnings, which Steve mentioned earlier. Now turning to the leasing markets. We see 2023 as a year with both challenges and opportunities. The pace of leasing has slowed in the past few months, and activity is lumpier as businesses generally feel cost pressures and are exercising more caution. Companies are still grappling with hybrid work policies and the right level of flexibility. But overall sentiment is shifting more closely to pre-pandemic norms. We are seeing a real pickup in the return to office throughout our portfolio, particularly Tuesday through Thursday. Utilization rates are approaching 60% and momentum is improving month by month. Both employers and employees clearly recognize the productivity, collaboration, creativity, and cultural benefits of working in the office together. Flight to quality continues to be the prevalent theme for tenants. However, leasing activity is broadening out. We are seeing a pickup in activity in the traditional multi-tenant Class A buildings as tenants are dealing with the aforementioned cost pressures and are not all willing to pay new construction rents. One thing we do think will begin to emerge this year is heightened focus on the quality of the landlord. Many landlords, particularly private ones, are beginning to struggle with high leverage levels, which may limit their ability to invest capital in their buildings and, in some cases, even retain their assets. Tenants and their brokers are smart enough to figure out which buildings have these issues and avoid them. Strong, well-capitalized landlords like Vornado will benefit. A perfect example of flight to quality with strong sponsorship is the previously announced 350 Park Avenue transaction with Citadel. We began our relationship with Citadel at 350 Park in the beginning of 2020 with an initial 120,000 square foot lease and are proud of the relationship we have built with their team, which has culminated in this master lease and the future potential partnership for a new 1.7 million square foot world-class building at the site. Our overall leasing pipeline in New York remains healthy at almost 1.2 million square feet of leases, with 275,000 square feet of leases being finalized and another 900,000 square feet of activity in various stages of negotiation. The financial sector, in particular, continues to be active. Turning to retail. With the rebound in tourism and daily workers, we're continuing to see more retailers searching Manhattan for new store locations. Retailer sales are generally back to pre-pandemic levels, which is spurring retailers to become more confident and active in taking new spaces. They are still concerned about inflation and the overall economy but are starting to lock in deals given rents at much more attractive levels. Turning to the capital markets now. The financing markets remain highly constrained, driven by the volatility from the Fed's sharp rate increases, resulting in an increase in problem loans and remaining cautious in lending, and the CMBS market is still largely closed. But financing is available for the highest quality sponsors and properties. The markets will take some time to thaw, which likely won't happen until the Fed ends its tightening cycle. On the asset sale front, interest investors in New York office and retail assets remain active, but without a stable financing market, it remains difficult to transact large assets without in place debt right now. In these volatile times, we remain focused on maintaining balance sheet strength. Our current liquidity is a strong $3.4 billion, including $1.5 billion of cash, restricted cash, and investments in U.S. T-Bills, and $1.9 billion undrawn under our $2.5 billion revolving credit facilities. In addition, as a result of our refinancing activities early last year, we have no significant maturities through mid-2024. With that, I'll turn it over to the operator for Q&A.

Operator, Operator

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

Steve Sakwa, Analyst

Thanks. Good morning. I guess I wanted to start with the developments and the yield, Steve, that you talked about. I guess I can understand maybe the PENN 1 return going up a bit since you've got kind of active leasing and maybe good mark to market and a little more visibility there. But I guess I was a little curious about PENN 2. You didn't take the yield up there. But I don't think you've done any incremental leasing. But maybe that's part of the pipeline that Michael talked about. So could you maybe just sort of address those two?

Steven Roth, Chairman and Chief Executive Officer

We took the yield of PENN 1 and PENN 2. We took the yield down very marginally on Farley. We did that based upon now we have a year, year and a half even two years of experience with these assets. We know what the market's reaction is. We have signed 220,000 square feet of leases in PENN 1. We know what the bid/ask is for PENN 1. We know what the bid/ask is for PENN 2, and it exceeds our initial underwriting, and that's why we made, we adjusted the returns.

Steve Sakwa, Analyst

Okay, and then maybe as a follow up, Michael. I just when you talked about some of the headwinds to growth in '23 I kind of get the interest expense in the $0.50 from sales. Sounds like the ground lease maybe a little bit better. I didn't quite understand that $0.10 from the property taxes. I was just hoping you could maybe clarify that because I thought in the first half of the year, that might have been a bit of a tailwind but just wanted to make sure I understood that point properly.

Michael Franco, President and Chief Financial Officer

We had a prior period accrual and obviously it benefited us at the end of '22. We didn't have it in the first half of '22. And so that gets reversed at the beginning of this year, and that's a ding. It's a timing difference of benefit last year gets hurt the beginning of this year net-net there was a reduction. But it affects us in the beginning half of 2023.

Operator, Operator

The next question is from John Kim with BMO Capital Markets. Please go ahead.

John Kim, Analyst

Hi, thank you. I wanted to ask about the write down details, particularly at 650 Madison, that's an asset where it was pretty well occupied, there's no loan upcoming. I was wondering why you decided to impair it now? And what are your plans for the asset?

Steven Roth, Chairman and Chief Executive Officer

Good morning, John. The accounting for joint venture assets is different from wholly owned assets. As a result of that process, and if you look at what's happened since we bought the asset, resulted in an impairment this quarter. Retail rents are obviously not what they were at the time we bought the asset and what we underwrote. We had a large tenant move out unexpectedly last year, and so you run it through the accounting model, and that's the conclusion. Again, keep in mind it's a non-cash item; we still own the asset, the value could recover. We have debt with term on that asset at a very favorable rate, and we'll continue to work the asset and hopefully create value, but as we sit here today, based on the accounting methodology, that's the byproduct.

Michael Franco, President and Chief Financial Officer

John, you used the words in your question, why we decided to take impairment. The impairment process is rigorous and is, to a large degree, formulaic, and is to a large degree overseen by our independent accountants. So we tried to keep as much subjective judgment as possible out of it and make it more of an academic, formulaic kind of an exercise. And they may have showed that the right that was appropriate there.

John Kim, Analyst

Okay, my second question is on the market. With the occupancy falling this quarter, really driven by the showroom and trade show. What's going on with such a big drop in occupancy this quarter? And if you could also comment on variable businesses, which, in the past few quarters, have been a driver of earnings growth, and it's not really disclosed so much this quarter. I wanted to know, what's been going on with signage and tradeshow?

Glen Weiss, Executive

Hi, it's Glen Weiss. So the increase in vacancy was due to the casual business leaving Chicago for Atlanta. We are converting those showroom visits into office space. And that's the increase in the vacancy at the mart. In other words, there are headwinds in Chicago, known, like New York, in terms of leasing volume, pipeline, etc. Our 2.0 programs are coming along great, and we expect to be complete in June. Our tour volume has been very good of late. We have a couple of leases in negotiation right now. But the increase in the vacancy is the casual business, which moved out of town to Atlanta in the fall.

Steven Roth, Chairman and Chief Executive Officer

Yes, John, on the variable businesses, I think the punchline, if you will, is that all the variable businesses, except for the trade shows, are back to pre-COVID levels. We had a very strong 2022. I think signage had our most successful year ever and that was with a bit offline in the fourth quarter. So a little bit more that we've got a couple signs located at PENN 2 and Hotel PENN that are impacted by the development. And so the fourth quarter was a little bit off year-over-year, I should say. And then trade shows had a little bit of timing difference in the prior year fourth quarter when we were cranking it back up. Some of the shows got moved to the fourth quarter, and this year, they are back on their normal pace. So trade shows are not back to peak yet. We think they'll get there in the next couple of years, but the rest of the businesses are performing quite well. In particular, the signage where we got the dominant signs in Times Square, we're actually redoing the sign on 1540 right now, which we'll book and both sides of the bow tie and hopefully allow us to drive additional revenue given the fact we control two mega signs as part of the bow tie. That's a positive, and then obviously what we're doing in PENN over time, we think will continue to perform well once the construction is completed, but that's in a nutshell, where we're at with our businesses.

John Kim, Analyst

So net is variable going up or down this year?

Steven Roth, Chairman and Chief Executive Officer

In 2023, we're going to have, I mean, the answer is, it's hard to predict. I would say because we've taken a couple signs offline in PENN. A lot of this is based on what comes in from third-party roadblocks. So net-net, we think it's probably comfortable that 2022 could be down a little bit, just because of what's offline on the signage side. And the fact that we're, as I said, rebuilding 1514. So we're taking some revenue offline. So I think overall, probably down a little bit, just given the fact we're taking some stuff offline.

Operator, Operator

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

Camille Bonnel, Analyst

I know the opportunity with Citadel is still a bit down the road. But are you able to speak to the financing strategy there in context with your existing development pipeline around the PENN districts? Just generally, like how are you thinking about the capital allocation and sourcing for these future projects?

Michael Franco, President and Chief Financial Officer

Camille, I think the good news is we don't have to do it today because it would be very difficult to line up construction financing and very expensive. So with respect to 350, that project is not right yet. It'll be right in two or three years, but it's not right today. And so hopefully, the markets are more hospitable than we expect they will be. And I think the same goes with respect to PENN. Again, we're not, I think, Steve commented in the last call, the market really is not conducive for new film today. Construction financing is very expensive, if available, which genuinely is not, as banks have pulled back. So I think it's challenging, and again, today it's not the day we have to line that up. But in the future, the markets should settle down. And with respect to 350, we'll put on a traditional construction loan at 50% to 60%, and the partners will fund the balance with equity. Most of our equity will come from our land contribution.

Steven Roth, Chairman and Chief Executive Officer

So, we were pretty excited about 350 Park Avenue. Maybe even more importantly, Ken is even more excited about it. Our strategy there is actually very simple. The land value will constitute our equity contribution. So our land value will represent the equity. We will not have to put in maybe another very tiny $10 million, $20 million, $30 million of cash to represent our share of the equity. The balance of it should be easily, in a normalized market, borrow under a construction financing or permanent financing. The deal comes along with a very substantially sized anchor lease. So everything is in place. Our land will be our equity, and we have an anchor tenant. And so that will be very, very, I think, well conceived. What's more, our development teams and construction teams that are hard at work down in PENN will have completed PENN 1, PENN 2, Farley, and we'll swing right into 350 Park. Part of our arrangement is that we are immediately starting the design of the building; actually, we're probably halfway through it. And we are immediately starting the approval process so that in a relatively short period of time, maybe not more than two years from now, we would be ready to do construction. But the cash requirements in any kind of a normal financing market are basically almost zero on our part. By the way, it's going to be a great one.

Camille Bonnel, Analyst

Yes, really appreciate all the details. 350 Park. Just for my follow-up, you've done a great job in terming out your maturities, but your leverage on a net debt basis is about 10 times. So can you talk to how you're thinking about leverage today? And where are your near to medium term targets?

Michael Franco, President and Chief Financial Officer

Our leverage is, I think, is characterized by a little bit lower than we characterized. Our goal over time is to have less leverage. I think, unfortunately, we don't have any maturities this year; we have a couple of small ones that are in the process of being pushed out. But our preference is to have less leverage. Over time we think that'll be accomplished through growing earnings and, unlikely, some asset sales. So is that going to change in the next 24 months just given the environment? Probably not. But over time we foresee that happen.

Operator, Operator

Thank you. The next question is from Michael Griffin with Citi. Please go ahead.

Steven Roth, Chairman and Chief Executive Officer

Hang on. I want to go back for a second. I want to emphasize what Michael said. In terms of the leverage ratio that you referenced, Camille, we sort of have our hands tied behind our backs. Number one, we've had a decrease in earnings, which is going to recover variable businesses, and what have you. Number two is we have zero income coming in recently from PENN 2, which will be over $100 million of income when it gets online. We have less than underwritten optimal earnings from PENN 1. So if you pro forma forward, when we get all these different parts of our business stabilized, our leverage ratio will come down very significantly. I'm sorry, go ahead.

Operator, Operator

Mr. Griffin, please go ahead.

Michael Griffin, Analyst

Yes. Hey, thanks, Michael Griffin from Citi. Just maybe getting back to leasing. Michael, you mentioned in your prepared remarks that your leasing has slowed transactions are lumpier. You pointed to about 1.2 million square feet in the pipeline. Just looking over the cadence of this year with some bigger upcoming maturities, I mean, how confident are you in executing on that? And is there any update on maybe some of those more large notable upcoming expirations? I think there's one at 770 Broadway coming up here maybe at the end of this quarter. So any update there would be great.

Glen Weiss, Executive

Hi, Michael, it's Glen Weiss. So we really had bulky expirations that constitute our explorations in '23. One was 350 Park, which is now taken care of by Citadel. The other three are continuous expirations coming off the low rents from PENN 1 and then two blocks, one of which comes back this quarter, three floors from Verizon, and 770. By the end of the year, we'll be ready for action, already showing the product, showcasing some programming that we're going to undertake in '24. So that's the real outline of what's coming this year in terms of expirations.

Michael Griffin, Analyst

I guess, to that point, you have this pitch around the building around the high-quality transportation hubs and an asset like 770 Broadway maybe doesn't really fit into that strategy. So I guess how do you measure demand relative to that versus opportunities you might have within the PENN district?

Glen Weiss, Executive

770 is a great spot; it's right at the subways. That'll take you to Grand Central and PENN very easily. It's right at NYU, right in the village. It’s in the sweet spot of midtown South. So geographically, we think it's excellent.

Michael Griffin, Analyst

Okay, thanks. And then maybe one for Steve, I'm just curious, you've focused on your prepared remarks about the importance of getting employees back to the office. In your conversations that you're having with business leaders, how much more do you think they can really push their employees to get back in? And I think you talked about that 60% kind of occupancy, maybe on Tuesdays and Thursdays. Do you see that potentially getting back to that pre-COVID call it the 70% to 80% range?

Steven Roth, Chairman and Chief Executive Officer

I think normal is more like 70%. Because there's always people that were traveling not in the office and what have you. So to try to get to 90% is fictitious. I mean, I think we're getting close to 60% now on Tuesdays, Wednesdays, and Thursdays. I think you can assume that Friday is dead forever; Friday is going to be a holiday forever. Monday is touch and go. So I think the world is coming back to normal slowly but surely. So multiple things are happening. Number one, every boss wants his people back. Number two is now many of the people want to come back; they find that being alone, they find that they want to come back with their colleagues, they want to get back into the activity, excitement, and what have you of collaboration and being in the city. So slowly over time, I think that that will revert to normal. Your question was, what powers the bosses have? Well, some of the bosses have total power, and some of the bosses have no power. And I can't comment on that either way. But the most important trend is people are wanting to come back themselves; employees actually do want to come back.

Operator, Operator

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

Alexander Goldfarb, Analyst

Hey, good morning. Morning, Steve. And first, on 350 Park. Awesome deal. So well done to you, Michael, and everyone. So that's awesome. I have two questions. First, on the retail joint venture impairment that you guys took. What prompted that? And big picture, as we think about the rents that are in place versus the market, it seems like the market is settling and hopefully recovering. Where would you peg the mark to market? And then do you think that there will be future impairments? Is this an annual exercise? Just trying to get some more color on this.

Steven Roth, Chairman and Chief Executive Officer

Well, I can't predict the future knowing that I want to. It’s a rigorous process. The math shows that there was an impairment, and we do what the math shows. What the market rents are is something that it's a very thin market. There are very few transactions on Fifth Avenue and Times Square. So you can make the assumption that this is still a sluggish impaired market. It hasn't recovered entirely. There is not the same lust for space that there was five years ago. But that will come back for sure.

Alexander Goldfarb, Analyst

Okay, and then the second question is, you guys appeared in the press recently that you're still in the hunt for a casino. It's been a while since you talked about movie studios. The Manhattan mall seems to be a great spot for potential studios. So just sort of an update on what you can provide us. Do you have an operating partner for studios? Do you have an operating partner for the casino? Or are both of those two items things that more are back burner and less front of house, if you will?

Steven Roth, Chairman and Chief Executive Officer

The answer is yes and yes, in terms of operating partners, and no, they're not really back burner.

Alexander Goldfarb, Analyst

Anything more to elaborate on?

Steven Roth, Chairman and Chief Executive Officer

Not really. I mean, we have a wonderful Manhattan property that is going to be converted to studios. We have a great operating quad that we are in conversation with multiple users, and the demand is actually extraordinary. With respect to the casinos, I don't have a lot to say. We're still modeling and studying and thinking about that. We have a great site, and whether we throw it into the game is to be decided.

Operator, Operator

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

Vikram Malhotra, Analyst

Good morning. Thanks for taking the question. So just first one, going back to sort of your view of the dividend or the board's view. If you can just give us some more color on what you're baking in terms of occupancy for the core portfolio, just the business as it stands in terms of street retail? I ask that because it sounded like the four key explorations you outlined, am I correct in that they're all move out? I just want to understand, like, what is baked into the core portfolio relative to where the dividend is? Just some big picture metrics or guideposts would be helpful.

Steven Roth, Chairman and Chief Executive Officer

Well, the dividend is based upon a minimum of taxable income. Our taxable income allows us to reduce, or I like to use the word right-size our dividend. I mean, our dividend was 9.5% on our stock price, which everybody knows is kind of like, mispriced and a mistake. We felt that it was inappropriate to overpay the dividends substantially over taxable income. The board felt also that it was appropriate to retain the extra $130 million of cash. So that's what happened with the dividends.

Vikram Malhotra, Analyst

Okay, and then if my just follow up, if I can dig into street retail. Two parts to it. First, I think you have a couple of key expirations in Times Square in '23. And I'm wondering the latest on renewal there. And then the second part of that is just, I think there were two big leases, if I'm not wrong, Swatch and Levi's that have early termination rights in '23, and '24. They don't expire to '31, but I believe they have the option to terminate. Any updates of color you can give on those two as well would be great. Thank you.

Steven Roth, Chairman and Chief Executive Officer

We are, as you would expect, in active negotiations with those clients, those tenants, as well as all the other tenants. We are hopeful to retain all of the tenants, but the rents will be lower than the in-place rents. The market is lower than it was years ago when we made those links. So you can assume that we will retain the tenants, but at lower rents.

Michael Franco, President and Chief Financial Officer

So just to put a finer point on Swatch, had to exercise their notice in the fall of '21, and they did. And we have, as Steve alluded to, finalized a grant for them to stay at a lower rent. So at the time they exercised their determination, we didn't know what they were going to do, but that agreement has recently been finalized. So they will stay. And Steve said lower rent. With respect to Levi's, they as well have a termination option. I believe that comes up in '24, not this year. So we'll see what they do. But again, Steve alluded the likelihood that just as Swatch did, they may exercise that, and our hopes and expectations is we'll keep them albeit at a lower rent. The other leases that expire in 2023, some of those have been, I will call shorter-term leases, which we've continued to keep those tenants in place. I think we'll continue to do that. Beyond that, I think there's probably only one substantive expiration in 2023 in Times Square, and that happens in the middle of the year. And that's an active discussion right now.

Operator, Operator

The next question is from Dylan Burzinski with Green Street. Please go ahead.

Dylan Burzinski, Analyst

Hey, guys, thanks for taking the question. I'm just curious about the overall strategy of the company. I think in the past, you have mentioned about possibly doing a tracking stock. So just curious, that's on the table. And if so, can we see that happen in 2023?

Steven Roth, Chairman and Chief Executive Officer

Yes, it's still very much on the table. We are not ready to talk about the timing, which will not be set until we actually make a decision and announce it.

Dylan Burzinski, Analyst

Okay, and then just going back to the ground lease reset, I think I'd mentioned that $26 million might be less today. We're just curious, can you kind of give us an update on how that process works? I think our initial thought was when we saw the yields increase at the PENN district of the developments that we thought that the climate might reset higher. So just curious to see kind of an update on the arbitration process and how that works.

Steven Roth, Chairman and Chief Executive Officer

Well, each ground lease is a little bit unique and a little bit different. This one basically involves brokers negotiating. If they can agree, then a third party is appointed as a neutral. The interpretation is that it's a determination by brokers with 20 years of experience, active brokers of what the value of the land, vacant and unimproved, would be. So I interpret that to mean what could you sell that piece of land for now, which is somewhat different than what an appraisal process might be, which is a willing buyer and a willing seller, etc. So we think it's a brokerage process. So that's the way it's set. We think that the value of the land is lower today than it was a year and a half ago when we set the $26 billion. Actually, maybe even quite a bit lower. And so that's the determining factor. The fact that most of these analyses are done by determining what the return to a new building is and what the residual value would be for the land. So if we, I think we can get $5 or $10 a foot more on a $90 or $100 lease in 1 PENN, that has no bearing on what the value of the land might be.

Operator, Operator

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

Anthony Paolone, Analyst

Great, thank you. Michael, you went through a whole number of the parts of the business in terms of the impact on FFO in '23 vs '22. But can you maybe help bottom line, just the core office and retail, NOI and whether that's higher or lower this year?

Michael Franco, President and Chief Financial Officer

Tony, you're trying to box me in the guidance here. We're in a fluid environment. It's hard to predict. Overall, we think the performance will be comparable to this year, I would say. And that's not trying to give you guidance; it's just we have some ins and outs. We can't predict exactly what will come along. It depends on which tenants we renew, which may roll out. But in general, as we sit here today, it's probably neutral.

Anthony Paolone, Analyst

Okay, thanks for that. And then the second question is on 350 Park. You crystallized value there to a level that seems to be pretty well north of what I think most people probably had and their numbers and where you're getting credit for it in the stock most likely. So just wondering how you thought about the ability to just completely exit, I think next year versus staying and what could be another, I guess, seven plus years or so, like how you think about that being worth it versus just saying you did well with the deal and use that capital otherwise?

Michael Franco, President and Chief Financial Officer

First of all, I would quibble with, well north of value; is the pricing of that deal, we think was fair to both parties. In terms of what our financial strategy will be a year or two from now, when we have to make the decision as to whether to invest in the long term, building project and own 40% of a 1.7 million square foot brand new super-duper Times Square tower, or take the money and run, that's a decision we'll make at the time. But it is an interesting fact that we have the option to do either.

Operator, Operator

Excuse me, the next question is from Nicholas Yulico with Scotiabank. Please go ahead.

Nicholas Yulico, Analyst

Thanks. I just want to touch on this St. Regis retail, where you had to default and the JV. Can you just tell us why the lender did not refinance the loan and can you explain the earnings impact from this? I guess, right now how it's working, since it looks like there's some sort of cash flow sweep. And then if for some reason you can't get this resolved, as a joint venture, does it just walk away from the property? How does that ultimately get resolved? And what could be earnings impacting?

Michael Franco, President and Chief Financial Officer

The loan matured at year-end, and the asset is not refinancing today. Quite frankly, like many assets in this market, we've signed two leases at the peak of the market. One of those, we just discussed, terminated, and we relented to a lower rent. The asset was not refinancable. The loan went into default. We were talking to lenders before that happened; we continue to talk to them today. We are in active discussions to restructure the loan and extend the maturity. If we can't, we can't, and we'll ask them to go back to the lenders just like everything we do. We're going to be disciplined and thoughtful about whether it's worth staying with the asset, investing capital, etc. We're sort of groping towards a deal that we think makes sense for the partnership. That’s the benefit of non-recourse debt. If you can reach an agreement, we have the option to walk away, and I think that'll happen. Probably not. I think we'll end up with a deal because it's in the lender's best interest too, but that's the state of play. To date, I know there was some commentary and a couple of reports about an 8.5% interest default rate. That's the case. But if we do get the answers, that rate's never going to get paid; they're going to toss the keys back, or we're going to restructure the deal and the rate will get reset to what it's supposed to be, and that interest is not going to get paid. So that's the state of play. I don't think the earnings impact is really significant; it went away today. I think, based on, frankly, where it was in the fourth quarter, I don't know if there's that much FFO that's flowing through, given the fact that it's a floating rate loan where relative income is some cash flow, but it's not significant.

Nicholas Yulico, Analyst

Okay, understand, thanks. Thanks, Michael. Appreciate that. And then going back to 650 Madison. I know you talked about this a little bit. I mean, it looks like that asset got refinanced in 2019. I think there was a $1.2 billion appraisal on it. There's $800 million of debt on the asset right now. And if you’re saying the equity is zero, basically, I guess the building's worth $800 million. So that would be about a 35% asset value decline since 2019 when it was refinanced. So please correct me if I'm wrong on those numbers, but I guess I'm wondering if from that standpoint, if you talk about occupancy being down, I know rates are higher as well. But how would you kind of frame out that level of an asset value decline for office and retail now versus 2019? Is that indicative of a lot of the portfolio or only the pieces where you do have some more structural vacancy right now?

Steven Roth, Chairman and Chief Executive Officer

Yes. Like I think first of all, you referenced two or three things. We did refinance in 2019. It was pretty outstanding execution by our team, frankly, in pushing that loan out till 2029 at about 3.5%. So we have time, as we talked about this impairment today. I think the most important thing to recognize is that it's a non-cash charge; we continue to see the asset, we continue to work, and we have time. Secondly, the appraisal that was done was a lender appraisal. Some of the specifics have changed since then, probably most notably we had a major tenant move out. The reality is rents, I think, generally in office and retail have declined since then to varying degrees. So I think all that's reflected in there. And Steve talked about the impairment analysis, particularly for joint ventures as a very much accounting-driven methodology. And that's what the accounting produced today. And nothing says that over time, that value can't go back up. But as we sit here at the end of 2022, that's the net result.

Operator, Operator

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

Unidentified Analyst, Analyst

Hey, good morning, guys; this is Steve on for Ronald Kamdem. Just you guys laid out some of the FFO headwinds next year pretty clearly in the prepared remarks, just as we think about PENN 1 and maybe some of the upside there in '23 versus '22, $76 a foot today. What do you think that is year-end '23?

Glen Weiss, Executive

Hi, Glen Weiss. So we're coming up on rents in the high 60s, low 70s. We have leases out right now that are piercing $100 in the Tower of this building. So that gives you a feel of where we believe rents will go as we sign up leases for increased vacancy and for the explorations going forward.

Operator, Operator

The next question is a follow-up from Steve Sakwa with Evercore ISI. Please go ahead.

Steve Sakwa, Analyst

Yes, thanks. Just one follow-up, Michael, on some of the swaps and caps that are maybe burning off or coming to maturity here in '23 and '24. Should we assume that you're just going to let those kind of float? Are you going to put new caps in and swaps in? Or how should we be thinking about that as the Fed kind of nears the end of the tightening cycle?

Michael Franco, President and Chief Financial Officer

Yes, somebody wrestled with everyday, Steve. I mean, some of those are talking about '23 because '24, again, we have a loan maturity; we have to determine what type of loan we're going to refinance that with, which is more of a '24 issue than a '23 issue. So on the mature in '24, if we roll into a fixed-rate loan, obviously no need to swap there. We'll see. I think the expectation for most of the loans that expire somewhere in caps is we'll roll those. Looking down our list right now, we've got two or three that expire in the middle or latter part of the year. I would expect that we would roll those in the next few months. Those tend to be on an annual basis, although you can go out a couple of years. And then on the swaps, we'll continue to look for opportunities to turn some of those out too. You are getting to the point where the Fed is looking like they're close to being done, and the curve is coming down. I think we've benefited waiting a little bit and locking some of those in we are recently, but we'll look at that as well and terming some of those out. But again, we got a couple that expire this year with maturities next year. We have to make a decision on what type of financing we're going to do on the asset before we finalize that decision.

Operator, Operator

And the next question is a follow-up from Vikram Malhotra with Mizuho. Please go ahead.

Vikram Malhotra, Analyst

And thanks for the follow-up, Michael. Just on the $0.55 you outlined in terms of the headwinds. Does that incorporate these known office move-outs and the lower street retail rent that you referenced?

Michael Franco, President and Chief Financial Officer

Vikram, the only data points I gave you were on interest and asset sales. The rest is we'll see how the business performs. There are some pros and cons; by and large, we've been probably neutral, but we can't predict. It depends on what happens in terms of base leasing.

Vikram Malhotra, Analyst

Okay, and then just the other follow-up, just I know there are those moving pieces. So do we take that as the based on your current view of taxable income for '23 you kind of right size the dividend, but if some of these moving pieces don't go your way, you might have to revisit the dividend, or have you incorporated some of the slack basically, that you just outlined?

Michael Franco, President and Chief Financial Officer

The dividend is a board decision. We're not going to speculate on what might happen to the dividend and certainly not from a negative point of view. So that's a question that we can't answer and won't answer now.

Operator, Operator

There are no further questions at this time. I would like to turn the conference back over to Steven Roth for any closing remarks.

Steven Roth, Chairman and Chief Executive Officer

Thank you, everybody. This is an exciting time. We're in the middle of a Federal Reserve tightening cycle. I think Owen Thomas said in his opening remarks of his call a couple of days ago that commercial real estate is in a recession. I don't want to, I wouldn't quibble with that either way. But markets are soft, which we think makes it a fairly exciting time. We will get through this easily. We will see what opportunities come up. We think the world will be a lot better on the other side. Happy Valentine's Day, and we'll see you next quarter.

Operator, Operator

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