Vornado CEO Roth: Investors Have 'Short-Sighted And Emotional' View Of Office
Vornado continued to sell properties and restructure its debt in the second quarter of the year as it reviews its portfolio amid toughening economic conditions.
“If an asset is overleveraged or not refinanceable, we will support the asset only if we have sufficient terms for the asset or markets to recover,” Vornado President and Chief Financial Officer Michael Franco said on the firm’s earnings call Tuesday morning.
Vornado is working with lenders to push out maturities for anything coming due next year and beyond, Franco added.
“We're able to do this because the loans are secured by individual assets that are generally nonrecourse," he said. "We have found the banks to be cooperative and working through these situations thus far. [Loan] servicers, TBD.”
He pointed to the St. Regis Hotel on Fifth Avenue in New York — where Vornado and its partner Crown Acquisitions defaulted in February on the $450M loan on the retail space — saying the debt was restructured there to add five years onto the term.
A couple of smaller loans that had near-term maturity were also extended during the quarter. The REIT had to pay down some principal on those loans to land extensions, but it still has more than $10.3B in debt on its books, $2.1B of which is variable-rate debt.
“It’s volatile times, we remain focused on maintaining balance sheet strength," Franco said.
During the quarter, Vornado reached agreements to sell five properties for $124.4M. The sale of 510 Fifth Ave., along with 148-150 Spring St., 443 Broadway and 692 Broadway, are expected to close in the third quarter. The company also sold the Armory Show in New York, an international art fair.
Vornado’s current liquidity sits at $3.2B, including $1.3B of cash, Franco said. The firm is working on other sales, though he did not specify what else could be sold. An analyst asked if a sale of a joint venture stake at the Farley Building, which is leased to Facebook parent company Meta, could be possible.
“We like the asset just as much as you do, and we're not going to comment on its future,” Vornado CEO Steven Roth responded.
In Q2 Vornado reported funds from operations of $140.7M, or 72 cents per share. It had $46.4M in net income and $472M in revenue. Earlier this year, Vornado suspended payments of dividends on its common shares until the end of 2023.
In February, Vornado announced a $600M impairment charge on its portfolio, $480M of which stemmed from its ownership stake in a large portfolio of Times Square and Fifth Avenue retail properties. In its quarterly earnings statement released Monday, it disclosed that the carrying amount of its investment in the portfolio was $853.8M less than its share of equity in the joint venture.
In the last few months, Vornado has spent $29M buying back more than 2 million of its own shares after announcing a $200M stock buyback earlier this year. Roth, who previously said he had resisted buybacks "for years and years," said Tuesday that the current view on office is similar to that of malls five years ago.
“It seems to be that CBD office, in all our cities, New York included, has fallen victim to the same emotional and short-sighted view from the investment community," Roth said. “Real estate capital markets remain a challenge, even for us.”
He described the REIT's immediate business plan as continuing to be to conserve cash and raise funds by “creatively selling” assets.
On the leasing front, Vornado leased just over 1M SF of New York office space in the first six months of the year, at an initial rent of $98.89 per SF and a weighted average lease term of 9.8 years. Some 230K SF of New York retail was leased up in the company’s portfolio in the first half of the year, at an initial rent of $85.76 per SF and a weighted average lease term of 5.3 years.
Occupancy across the company's office and retail space was essentially flat over the past six months. The company has 580K SF of leases in negotiations and 1M SF in the pipeline, which Franco said is “not reflective of the media's negative office” narrative.
“Industry insiders understand there's a shortage of good space on Park Avenue and Sixth Avenue,” Franco said. “Actual vacancy is below 10% and rents are moving up nicely.”
Samsung, for example, is taking 36K SF at Penn1, and Canaccord Genuity is taking 72K SF in the building.
“A little time, frozen capital markets and no new supply will restore value and glory for office,” Roth said. “We believe in-office work is the better bet.”