Vornado Realty Trust (VNO) Earnings Call Transcript & Summary

[Audio Gap] CEO Conference. I'm Michael Bilerman. I'm here with Manny Korchman. We're extraordinarily pleased with -- to have with us Vornado Realty, Chairman and CEO, Steven Roth; President, Michael Franco; Chief Financial Officer, Joe Macnow; Cathy Creswell; and Matt Iocco. For those in the room, on the webcast, you can sign in at liveqa.com and enter code Citi 2020 to submit any questions or just raise your hand. Turning it over to Steven or Michael, first. So I'm going to turn it over, and I'd say Vornado, to introduce the company and management team and provide the audience with 3 reasons why investors should buy Vornado's stock today, and then we're going to begin Q&A.

So 3 reasons. I guess, cheap, cheap, cheap is the first reason. The second is, is that we have the best development opportunity, building a city within a city in the Penn Plaza District of Manhattan. So those are 2 of the 3 reasons. Well actually, cheap, cheap, cheap is 3 and Penn Plaza is the fourth reason. Our company is actually very simple and very understandable. We are 80% office and 80% New York-centric. I'll describe our office business for you very simply. We own 555 California, arguably the best single building in San Francisco, which is a building where we are now enjoying rents that are doubling. So the mark-to-markets in that building are doubling. We own the 4.2 million square foot gross, 3.6 million square foot rentable Mart building in Chicago, arguably the best financial performer in Chicago. We started out some years ago with a $40 million income that, pick a number, in 8 cap, so it was valued somewhere $400 million, $500 million. We now have over $100 million of income and rising, and I'd say a 5 cap, so it's worth the better part of $2 billion. So $400 million, $500 million goes to $2 billion, that's a decent business. Then we have our New York office portfolio, where we have some great product, high-quality, well-performing, all of which -- all of the buildings of which had been renovated, updated, modernized and are very well accepted by our tenants. Then we have the Penn District, which is -- I've called it the promised land and we think it is, now and it's become very timely now because we are under construction for delivery of the Farley Building, the end of the year. And we have One Penn, Two Penn under construction right now. And then we have our Retail business where we have the best quality assets in Times Square, Fifth Avenue, et cetera. Retail is challenged now. We understand that we -- and that's something that we are working through. One last thing about the Penn District, and that is we also own and are finishing up now 220 Central Park South, which is probably -- well, not -- for sure, the best apartment house that's ever been built in the United States, which has made a very significant profit, which will have, we will have a $1 billion cash flow coming out of that building this year from signed contracts with 25% nonrefundable deposits. And all of that capital goes into finance, the Penn District, so the Penn District, as you -- sort of self-finances. Cheap, cheap, cheap, and you have to believe in the Penn District.

Great. Thank you for those opening comments. Steve, one of the things you've really been focused on, in addition to the simplification over the last number of years, is making the balance sheet as liquid, as low-leveraged, and as cash-rich as possible, both to invest in the Penn District, but being prepared to be able to go on offense if opportunities arise. So can you talk a little bit about the mindset today with a little bit more uncertainty in the economy, more uncertainty in the stock market. Is your desire to put more capital work outside of what you have in the company? Or is the focus today all on the internal projects that you have?

Michael, stand up.

I'm up.

Michael, you can never be tall -- too tall, and you can never be too rich, okay? So in terms of our balance sheet, we have a...

I'd like to be a little rich. Little rich is good.

Michael, I can't believe you fell for that. So look, we have a great balance sheet. We would always like more liquidity, we would almost like more dry powder. Up until about 1 month or 2 ago, there was, for sure, a feeling in the land that it's not when there would be the next recession or the next business decline, if there was, if there would be. So people were thinking, this is a perpetual goldilocks. So things come out of the blue. Who knows what has happened? My feeling is that it is -- actually, it's a very risky world out there, very uncertain world out there. We have a -- in addition to the coronavirus and other miscellaneous things, we've got all kinds of things in the international arena, and then we have this election, with an uncertain result and the -- I'm not going to get into politics, unless you...

I was going to ask you what your...

Unless you insist. So basically, I can only tell you that we are prepared to act and act aggressively when the right opportunities come. They are not here yet.

Okay. The uncertainty regarding the election, how do you sort of see that playing out and its impact on the economy? So obviously, that's going to...

My dream is that it would be Mr. Bloomberg against Mr. Trump. So I have now a tenant. We own the Bloomberg headquarters building, and Mr. Trump, we're his major partner. So that's in -- so either way, I get to go to the state dinners in the White House. And that's where I am. There are some pretty scary candidates out there, and I'll let you make your own judgments on that.

As you think about Penn Plaza, which is clearly the biggest opportunity that the company has for...

I think it may be the biggest opportunity there is in the entire REIT universe in the entire nation.

The big kahuna. You called it the promised land, the big kahuna. There's been a number of acronyms.

Wait until what -- see what I call it in the next letter.

Very excited. Where do things stand? I think this quarter's earnings got dominated by sort of what's happening with earnings, GAAP earnings, rather than value creation. We can get to some of that noise. And so what didn't get talked about is where things currently stand. Last quarter, you talked about a bit of headquarters lease at Two Penn. You talked about having some discussions on Farley. Where is that leasing activity today? And when should the market expect some of that to occur?

We don't preannounce big important leases. Nothing's changed since the last time we talked about it publicly. And by the way, and that's a good thing.

Not talking about it or that nothing's changed?

Nothing's changed.

And so what should the market expect from, I guess, a timing perspective?

The market should expect that we will make an announcement when we execute the leases.

How is the tenant demand and tours? I mean there obviously is a lot of space that you're going to have around the Penn Plaza District. Can you give us a sense of the tone of those conversations and how that's all going? I know obviously, you signed the big lease at the top of -- was it One Penn or Two Penn?

One.

One -- PENN1. Sorry, going to get slapped if I keep on referring it to -- but you had that, which validated the rents.

Now that's both the most massive rebranding in the history of American commerce. One Penn becomes PENN1, massive.

We did that internally.

Still have to pay $25 million to the guy who came up with that. Franco, you were going to say something?

No, it was just -- Michael, look, I think the -- and you asked about the tenor, the interest. I think the reaction, reception on the brokerage community who is sort of the front lines for the tenants has been outstanding, and as the tenants have seen what we're doing, renderings. Obviously, Farley stands on its own in terms of that massive redevelopment, and I think being a totally unique floor plate and roof deck and so on. But what we're doing in terms of the campus, PENN1, PENN2, is absolutely resonating with tenants. We've signed a couple of leases at PENN1 in the $90s, which validate everything we've been saying to you in terms of taking rents from the mid-$60s into the $90s and higher. And that's just initially, right? Over time, we expect that to grow. And given it's on transit, it should be on par with everything to the west of us. And over time, in terms of the large users, that's going to create opportunities on the development side. So I think what's going on in PENN1, PENN2 -- everything is on track, both in terms of development, in terms of some the tenant discussions we've talked about. I think most important thing is, when does it hit? We've published in the last few supplements, right, stabilization dates, right, which is notwithstanding whether we sign it 2 months from now or 6 months, right? When we expect it to hit, that's still the best estimate of when that's going to come online from an income standpoint, which I know you and others care about. And so that's on track.

There was some disclosure that you had...

Let me just add to what Michael said. Your question was, what's the activity level? What are the tours? What's the acceptance in the marketplace of these 3 buildings, Farley, PENN1, PENN2. There are -- we're not -- nobody gets to look at Farley anymore. We have no reason to show that, so we've done with that. In terms of PENN1 and PENN2, the point of first contact is with the brokerage community. And so we have a very robust marketing operation and very robust leasing team, and we spend lots of time with the brokers, each of them. And the response on the part of the brokers to this product offering has been nothing short of spectacular. So the answer is, is that we are unbelievably confident in what we're doing. And what we're basically doing is something that's very simple. We are transforming $60 rents into -- pick a number, $95 or $100 rents. So if you think about the math, the value creation is, I don't know, 3-some-odd-billion-dollars, and the cost of getting that is 1-some-odd-billion-dollars. So it's a very, very exciting, profitable thing. Even more important than that is what will the value of those buildings go to 5 years or 7 years from now? So think about it, there's 4.2 million square feet in the PENN1, PENN2 cluster. And if you add on Farley, it's the better part of 5 million square feet. Every $10 a foot that the market rents go up, and they will go up, because this is a unique place in the bull's eye location of Manhattan on top of the transportation network, so that's 5 million square feet at $5 a foot, you can do the math.

Manny, you got the Farley is -- done?

Yes.

You got the Farley's done?

I'm not showing it lately.

Not showing? Close to being?

Office only.

By the way, you can't write that. If you write that, I'll break your ass.

My ass is very good, though. I can...

No, no, no.

A really good ass. My wife's in the room. Now she's very embarrassed that I...

That's nothing new.

No, that's nothing new. I want to sort of go back to, I think, the earnings call and what effectively was a non-guidance, guidance discussion...

If this is going to be a nasty question, I'm going to turn it over to Joe.

Right. Well, no, no -- it's just more so, I guess, how do you think about -- and I think it was helpful to have the bridge that you provided it in the presentation this morning that walked through all the items that were different. But I guess, just from a company policy perspective, are you rethinking at all sort of -- or maybe where your thinking is. Is it purely an NAV story or does earnings and guidance and those things matter, and it's just that interplay where, clearly, the stock market has spoken a little bit about how they react from an earnings perspective. So I just don't know how you're thinking about it from a corporate perspective.

What's the question?

The question effectively is, you've -- from a guidance, you've never given guidance, right?

That's right.

There's never been -- you've never given guidance, right? Guidance has never been a part of it. But there's been areas where the market's focused on earnings and dribbled out different negative impacts where the value creation side, I would concur with your view is, nothing's really changed from a value perspective. But we're caught in this scenario where the market is more earnings-focused than NAV-focused. And NAV, unfortunately, is not an investable metric, and so are you rethinking maybe providing more disclosure, more guidance, more bridges as you sort of go forward?

And I'll add maybe just...

Joe, you want to give that a shot?

Updates to what you gave us this morning.

So we -- Michael appraised us for putting in Page 27 of the deck. Page 27 of the deck did 2 things: one, it took Michael Franco's remarks concerning '19 versus '18's adjusted FFO and '20 versus '19's adjusted FFO, put them together in writing, because we do understand it's hard on a script and a phone call to get all the numbers, so now we've printed them for you. So we did that. And I think when you look at it, clearly, the first $80 million of $100 million diminution, dealing with asset sales, monetizing assets, including the April 2019 monetization of 50% of our Upper Fifth Avenue and Times Square street retail assets at a 4.5% cap rate, which everyone in this room that Michael and I spoke to, raved about, should have increased the stock price anywhere between $4 and $7, did nothing for the stock price, plus the asset sales listed beneath it and above it. The stocks, the remnant stocks, et cetera, et cetera, very positive, very [ co-offensive ]. Clearly, taking PENN1 and PENN2 out of service, principally PENN1 in 2020 -- PENN2 in 2020, as Steve said before, is the means to the end to take $60 rents, and move them into the high $90s or triple digits, also very offensive. The bankruptcies of Topshop and Forever 21 were clearly not offensive. However, as Michael Franco said in an earlier conference call, the only portion of that, that has a finite answer and can't be recouped is the giving back of 608 Fifth Avenue, which we will get back the lease later this year, and then have a $70-plus million noncash, non-adjusted FFO income item, reversing the capital lease we put on the books when we had to adopt the new FASB, but that did cost us $1 in NAV. We did pay out $2 in NAV through the special dividend, that $1.95 special dividend in January. Notwithstanding that, when we published our NAV this year, it was $96. Last year, it was $97. We also took care of, in large part, management succession, which is publicly known. There were some G&A costs associated with that. That's been reflected. Our interest goes down at every corner without what's been going on recently. Hanging off the $450 million notes at the beginning of the year, saved us $20 million in interest. Lower interest rates, lower LIBOR interest rates, less debt and capitalizing interest on Farley, all made for a very large interest reduction. And then notwithstanding the negative views, there were pluses in the business, we're at $26 million over the 2-year period. What's new is what's at the bottom of the page and tries to deal with where the street thought we would be at $3.40 in 2020, and we ended up being at $3.21. These are things -- it was not possible for us to know about when we talked about flattish 2020. But now it's here in writing, we'll deal with any questions now, its public information. Matt or I or any of the rest of our team and not monopolize the rest of this session, but we'll deal with you on any questions you have about specifics. We don't give guidance. We have, on occasion, given guidance. If you remember when in Washington...

BRAC, yes.

We've done it on occasion, but we've never gone all the way. We don't intend to go all the way. We're not going to give guidance. However, earnings and NAV do have to come together at some point in time. Our NAV is capped NOI. NOI has to produce earnings. So look, there's a big disconnect today. At some point, either the NAV goes down or the earnings go up. And we're thinking about ways to help demonstrate that, but no commitment yet.

And so...

So bottom line, to answer your question, our business is very tightly controlled, especially with respect to the numbers. And the Page 27 that we put out over the weekend, we think, very crisply, very succinctly and very accurately shows a recap of what happened with our numbers over the last period of time, okay? We think that answers or it's intended to answer every question, number one. Number two, it's no secret that I basically am a value creation real estate guy with dirt under my fingernails.

Those must get cleaned pretty often, though?

If you look at the math, we have compounded NAV over whatever period of time you choose to at the top quartile or top decibel, or whatever it is, of all of the public competitors. You're making yourself a note to check -- to fact-check me, and I'm going to -- okay, I'm going to get the President on this.

I'm an American citizen now, by the way. I have my letter from Mr. Trump.

That's of no moment. Congratulations. So as I said, we have compounded NAV at an extremely acceptable and competitive rate. With respect to guidance, it's also pretty well-known that I'm not a big fan of guidance for lots of different reasons. And I mean, for example, we did some things over the last half, which if we were into micromanaging, trying to guess every penny -- squeeze every penny out of earnings, we wouldn't have done. So we sold some stock that had a 12% or 13% dividend. We bought back a K-Mart lease. So we took that -- sacrificed lots of different things. So we run the business to create shareholder value on the real estate level. We're old-fashioned real estate guys, like it or not.

So how do you eventually get to NAV, right? Because it -- there's an element of, you can continue to sell assets and bring in the cash and invest it or buy back the stock. You can sell the company and if someone's willing to pay NAV or something close to it, or you can wait for the market to reflect the value that you see as value creation.

The Street came out with a report a couple of days ago where they debunked NAV, okay? NAV is a theoretical computation, which you could -- each of you can judge its value. Everybody in the room has their own NAV calculation, so it's a subjective kind of a thing. It is, from my point of view, it's a tool. It's a guide. It's directionally correct. It's not intended to be, nor can it be exact, okay? So much for NAV.

But I guess, what is the -- Joe, you mentioned trying to do some things that may illuminate it more. I don't know if that's reflective of doing an office joint venture like you did on the retail side. I don't know if that's full building sales.

I was talking about disclosure, not a business.

Every time we do a transaction, okay, in my recent memory, it has justified the -- our NAV and most other people's NAV, the most recent one, the sale of -- multibillion-dollar sale of some of our retail at a 4.5% cap rate, which is only 9 months old. I don't -- it's been my experience that if you "illustrate NAV to the marketplace", that doesn't mean the stock is going to change or move, okay? So everybody knows that we could sell 1 or 2 or 3 buildings at the stated NAV or your stated NAV, that's a totally different thing. I can't tell you why the stock moves the way it does.

Right. So is the stock...

And I wish you would tell me.

Well, I -- listen, I'm in the same boat as you.

Next question.

Well, because, look, I think all the things that you've done, you sold the malls before malls became a really bad 4-letter word, you spun off Urban Edge, you merged the Washington D.C. portfolio with JBG and ultimately...

And won the HQ2 deal.

Correct, and then...

On the land that we contributed. We're 75% of it. That we contributed to...

Right. $1 billion profit on...

A little plug for JBG Smith, okay? So the team down there, which has all of our assets, has done a great job in landing Amazon HQ2, and we'll continue to do a great...

Right. So then $1 billion profit on 220, doing the retail joint venture on NOI that no one believes got a 4.5% cap rate, right? So at some point, the stock market...

I like the direction he's going.

Well, but I -- well, now I'm going to go in for the jugular, right? Because at some point, like it -- like what -- like what's going to -- like if the stock market's not willing to take hold of the value, you can't go back and say that those weren't value creating, and if you hadn't done them, I shudder to think where your stock would be. But I guess, how do you narrow that valuation gap? What else -- I mean a lot of people always talk about the sale of the company, right? It's no secret that you are older and want to see this get the value, right? I don't, like...

Michael, let's not forget, $5 a share of done deal at 220.

Right. No, I said the $1 billion. That's why -- and so I think, it's like, is the stock market wrong? And is it better to be private, right? And I just don't know at some point, like how do you balance those things?

Well, I believe -- everything that you said up until that last phrase was 100% correct, and I endorse it, right? We think that what we've been done -- what we've been doing has been extraordinary and correct, and we're sort of proud of our record. With respect to the metaphysical speculation on why the stock price hasn't reacted and what's going to happen in the future, I pass.

You added Bill Helman to the Board, I guess, just last year. I guess, what -- the comment in your letter last year was you brought him on to break glass. So what has transpired over the year of having Bill in the boardroom? And can you share with us a little bit...

I would love to share with you all of the confidential interest in the...

There's nobody in the room.

The pace we had in our boardroom, but I think I won't.

Well, the expectation, though, you brought him on for a reason, right? And the mandate that you set out was, I want to bring this guy in to break glass. And I -- so I'm just -- how has anything changed in the boardroom? Has it provided you the insight that you wanted in bringing him on? No? Any other Board changes anticipated?

Sure. Sure.

One of the questions that we've been opening up with, which I passed over, was talking about ESG, which obviously is a very important and increasing factor for all of your...

Let's go back to the Board, okay? So we have -- it's no secret, we have a Board which is long tenured, and slightly long in tooth. I think that I would put the quality of the gray matter, the quality of passion, quality of investment in our company that sits in our boardroom on a par with any other Board in the country, whether in the real estate industry or any other industry. Notwithstanding that, we do refresh our Board slowly, periodically, with the best talent that we can attract. We think Bill Helman, and I don't know that we want to start picking on poor Bill Helman, who's only 6'4", but -- and he's not that poor, as an extraordinarily gifted, curmudgeonly challenging investor. So -- and there will be more refreshment of our Board coming up.

Right. And I would say, in addition to the gray matter, the ownership in the boardroom is significant, right? So one would argue there actually should be a better alignment of interests, given the Board's ownership of the stock.

We think we have perfect alignment. We have lots of stock in the room. We think we have perfect alignment with our Board. We have no 0 OP units in the boardroom. Everybody has stock, just like everybody else does.

There's a question that came through LiveQA which was, how concerned are you about the degradation of the New York City business environment? Anti-business climate, the Amazon snafu, increased crime rates, rent control potentially cutting off affordable housing supply, tax issues with property tax, et cetera.

I think it's a terrible thing. But the thing I like to tell my granddaughter, a story about she sucks. Look, it's a relative world. We own arguably the best building in San Francisco. Whatever you can say about New York City in terms of its left-leaning politics, et cetera, it's worse, much worse in San Francisco. So the legislation that's on the books, et cetera, et cetera, it's worse. This is a -- the political environment in New York City is not dissimilar to that of every other major population center in the world. Go to Europe. Go to California. Go -- anywhere you go, okay? I guess Texas probably escapes that. Good for Texas.

Not Austin.

Not Austin, okay. So anyway, if you go to Seattle, the home of Amazon, it's worse. So what I'm saying is, this is a fact that the business community has to live with. And it ebbs and it flows, and it ebbs and it flows, okay? Notwithstanding all of that, New York has become an extremely tech-friendly center, and New York has become the second most important tech center in the country versus the Pacific Northwest. So the talent is there, the environment is there and the tech companies, which are really the most important companies and the best growers in the country, are pouring into New York. So there you have it. So while I -- obviously, I'm concerned about it, but it's a relative world, and New York is no worse off than any place else.

Right. I remember when...

And we have personal experience in some of these other cities, okay? Washington, San Francisco, Chicago, et cetera.

I remember when the de Blasio became Mayor, and I think I asked you what your views were, and you said, he's a tall man. That was the answer. So...

I'm beyond flattered that you could remember that. Thank you.

So if AOC, which there's rumors that she's going to run for Mayor, what would be the view...

That's a rumor that I started, and I want to stop it. I mean that rumor basically spent -- my thinking was, she's down there in Congress where she's one of 400, and she's part of a caucus and they have a muzzle on her. She doesn't like that. So she comes to New York. Anyway, what can I tell you?

Is there questions in the audience? Steve will not ask you to stand up, if that's -- go ahead, Chris.

Maybe just an update on the Street retail [indiscernible].

I would be thrilled with rent growth. I would be thrilled with flat, okay?

[indiscernible]

Say that again.

Is that reasonable and what's your actual outlook?

Rents are declining.

Yes, we have 2 examples in the past 6 months where that's not the case. We replaced Forever 21 at Union Square at greater rents than Forever 21 was paying. We replaced Coach at The Fuller Building on 57th and Madison with 2 LVMH brands, or really 1, because 1 was for vacancy, at rents higher than Coach was paying. So there are some pluses and minuses.

And the other thing, Chris, is when Steve talked about rents declining that's -- principally on the areas that they rose the fastest, Fifth and Madison, Times Square, to some extent. On those latter 2, Fifth Avenue and Times Square, right, other than the 1 vacancy we have, we don't have any expiries for another 40 years.

Notwithstanding my 2 partners who are on the optimist side, okay. On the average, what I'm expecting is for the entire portfolio to have modest [ business declines ], okay?

[indiscernible].

So do you think there's going to be more or less office companies a year from now in the public world?

No idea.

All right. 10-year treasury? You're always good at this one.

The 10-year treasury breaks one.

U.S. goes into a recession?

By the way, you want a great idea? The U.S. goes negative interest rates, and we refinance the national debt.

That's a good one.

The U.S. doesn't make at least [indiscernible].