Welcome to the Vornado Realty Trust earnings and webcast for the third quarter of 2022. My name is Vanessa, and I will be your operator for today. [Operator Instructions] I will now turn the call over to Steven Borenstein, Senior Vice President and Corporate Counsel. Steve, you may begin.

Welcome to Vornado Realty Trust third quarter earnings call. Yesterday afternoon, we issued our third 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, 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.

Thank you, Steve, and good morning, everyone. As Michael will cover in a moment, we had another good quarter with comparable FFO up 14% from last year's third quarter. Despite headwinds from a slowing economy and rising interest rates, we still expect this year to be up a fair amount from last year. We will feel the effect -- the full effect of higher interest rates on our numbers next year given a full year of impact. Overall, this quarter, we leased 450,000 square feet, 229,000 square feet in New York, well below trend. This is a little bit the result of the slowing market, and a lot the result of timing. As Michael will explain, our New York pipeline is a robust 1.5 million square feet. The Fed is deadly serious in pursuing their fight against inflation. The economy is clearly slowing, and capital markets are volatile. As a top priority, we have taken the following actions. Earlier this year, we extended our near-term debt maturity, so we now have no debt coming due in 2023, and a very modest $233 million on 3 assets coming due in 2024. Further, we extended our unsecured revolving lines of credit totaling $2.5 billion with only $575 million outstanding through 2026 and 2027, providing significant liquidity for the next 4 to 5 years. In addition, we protected our floating rate debt by -- debt exposure by swapping for 5 years, $2 billion of floating rate debt to fixed at a weighted average of LIBOR or SOFR as the case may be of 2.9%. Further, we have interest rate caps on an additional $2 billion providing protection above 4.2% on a weighted average basis for a weighted average term of 10 months. Please see Page 33 of our financial supplement, which describes all…

Thank you, Steve, and good morning, everyone. As Steve mentioned, we had another good quarter. While we experienced some headwinds from rising interest rates, our core business performed well. Third quarter comparable FFO as adjusted was $0.81 per share compared to $0.71 for last year's third quarter, an increase of $0.10 or 14.1%. The increase was driven primarily by rent commencement on new office and retail leases, the continued recovery of our variable businesses and an adjustment for prior period real estate tax accruals at the mark, partially offset by higher net interest expense from increased rates on our variable rate debt. We provided a quarter-over-quarter bridge in our earnings release on Page 3 and in our financial supplement on Page 6. Notwithstanding additional interest expense from rising rates on our variable debt will result in lower comparable FFO per share growth for 2022 than we anticipate earlier in the year, we do still expect the comparable FFO per share will be up year-over-year. The additional interest expense from rising rates will have a greater impact next year as the higher rates impact our variable rate debt cost for a full year. We have partially mitigated the impact of this due to the significant amount of hedging we did this quarter, as Steve just covered. Company-wide, same-store cash NOI for the third quarter increased by 13.8% over the prior year's third quarter. Excluding the accrual adjustments related to the market real estate taxes, the increase would have been still solid 3.4%. Our retail same-store cash NOI was up a very strong 7.7%, primarily due to the rent commencement of several important leases. Our overall office business was up 15% compared to the prior year's third quarter, also benefited by the Mart adjustment, while our New York Office business was down…

[Operator Instructions] We have our first question from Steve Sakwa with Evercore ISI.

Michael or Steve or maybe Glenn, can you just maybe provide a little more color on the 1.5 million feet in the pipeline. I'm just curious how much of that relates to kind of new requirements for you? And how much of that is maybe early renewals looking into '23 and '24?

Steve, it's Glenn. So as we look at the pipeline in terms of the 1.5 million feet, it's cited more toward new tenants and expanding tenants versus renewals filling some of the empties we have today and then going forward locking in spaces, we know we have coming due with tenants who will be new to the portfolio. It's a really good mix, law from activity, financial service activity some BD activity. But I would say it's more sided to new tenants coming in or expanding tenants in the portfolio.

And Glenn, maybe just any color just in terms of types of tenants, I assume kind of big tech is on hold, but these private equity law firms, investment banks, asset managers.

Yes. Certainly, financial service is heavy, less on tech, as you're saying. Private equity is very, very strong, very active. And there's still some hedge fund activity also in our portfolio at our financial buildings with [ 87, 640 ] bps, et cetera. So certainly, financial is busy and law firms are definitely getting busier in the portfolio particularly buildings like 126th Avenue.

Great. And then secondly, Steve, in the past, you've commented on your desire to sort of pursue one of the casino licenses downstate. I'm just curious if that's still something that you're interested in? And how do you think that process unfolds over the next 12 to 18 months?

We continue to be interested, very interested. The -- it's a government process. The -- I think they have already announced that they're going to put out their first RFP, I think, late in December, early in January. And then from there, we'll see how it goes. We expect it to be a very competitive process.

Our next question is from -- we have our next question from Michael Griffin with Citi.

Maybe just going back to the comments on the dividend. Wondering if you can frame maybe how much you're expecting to rightsize the dividend sort of heading into 2023. And any additional commentary on that would be helpful.

We really can't. I mean, it's a board prerogative. And the numbers are still moving around, and it would be totally inappropriate for us to guess as to what that dividend might be next year.

Got it. And then maybe just back on the interest rate swaps. What was the embedded cost in executing those swaps? And then for the $800 million term loan, it looks like about $250 million of those swaps are expected to still burn off in 2023. Would the plan be to swap that going forward or to leave that as floating?

Michael, in terms of the cost of the swaps, what we laid out for you on Page 33 of the supplement, gives you the all-in swap rate so that there's a credit charge that's embedded in there. It depends on the particular trade, I would say, 4 to 5 basis points is typical. Sometimes it's a little bit less, but I think if you use that as a working assumption, that's not bad. But again, that's embedded in the numbers that we gave you. And on the term loan that you cite, these are all -- well, not all, but I would say largely corporate level swaps. And so we have the ability to move those around as different loans roll off or if we sold an asset and we wanted to shift it around, which we did, for example, on Long Island City earlier this year. We sold that asset. We moved it to a different asset. So gives us flexibility. There are certain asset level swaps. But by and large, they're corporate. And so the term loan, we went ahead and Ford swap, 500 of that beginning next year. And then we have the ability to potentially move some around. If not, the answer is we'll look at fixing that balance.

We have our next question from Camil [indiscernible] with Bank of America.

Busy quarter on the financing front. Just following up on the interest rate swaps. Can you help us understand the thinking behind how you decided on reducing your floating rate debt exposure to 27% versus a lower amount more in line with your peers?

Well, I think 27% is not the right number to use. We've got caps in place on the bulk of the rest. So our net exposure to floating rate is about 7%. And when you look beyond that, what's exposed, it's basically loans that are coming due at the end of the year, or we have JV partners where there was no sort of desire to collectively do any sort of hedging there. So again, I think from a net exposure, we've got about 7%. I want to also remind everybody we've got significant cash on our balance sheet that's earning higher rates. Some of that's been deployed in treasury bills. Some of that's just earning higher rates with our banking relationships. So in that exposure, I think it's even less than 7%. But that, I think, is a little bit more accurate in terms of what the exposure is.

Okay. That's very helpful. And just shifting to retail. We saw quite a drop in leasing spreads this quarter. Can you speak broadly to how you think about where pricing is going specifically for New York City retail?

I think over the last couple of calls, we've communicated -- we think retail has bottomed in the city, and that is our view. You're starting to see vacancy decline in many of the key submarkets, which obviously is the forerunner to start to have some pricing rebuilding. I think you're actually seeing rents move up a little bit in SOHO already. But this vacancy is beginning to drop in many of the submarkets. Rents are not falling anymore, and that will take some time to begin to recover. But overall, we think the market's bottomed. And leases that are getting done, retailers are focused on the best locations. They want to be in the highest footfall areas in the best submarkets, and our portfolio is situated there. And when leases get done right now, they're going to be reflective of the fact that rents have corrected. It depends on the submarket, could be 1/3 could be half from where they were at peak. But in most cases, we don't have exposure on a lot of our big assets right now. So it just depends on when the leases roll and where the market is at the time. But as I said, I think from a trend line standpoint, there are more retailers cruising around the city looking for spaces. They're focused on the best locations and being a little bit of caution right now given what's going on in the economy. But net-net, New York is very much still top of the ranking of where they want to be and where they want to expand it.

Make no mistake. With respect to retail, we are still in a retail recovering market. So volumes are not yet back to where they were pre-pandemic. If you look at the transportation numbers basically coming into the city on the railroads and the subways and the buses is 2/3 of what it was at pre-pandemic. And although anecdotally, traffic industries looks pretty wholesome. So what I think you need to do is to say we're in a recovering market. And our prediction is that the market will be very much more healthy in a couple of years. This is not a quarter-to-quarter thing. It's a year-to-year thing.

Our next question is from Alexander Goldfarb with Piper Sandler.

Maybe just following up on the retail. The $1.8 billion retail preferred that you guys have in the JV that you did a number of years ago, just sort of your thoughts on that, the value of that. Is that still worth par? The cash flow coverage, I think the coupon is 4.25%. And as you guys, Steve, think more about balance sheet focused, you've addressed a number of the floating rate exposure. How do you view your ability to refinance this $1.8 billion and get the cash out of that position?

Alex, it's Michael. So let me try to get all your questions. In terms of the value of that preferred, we believe it remains fine. It's still worth par. -- just to the chase. I know you wrote [indiscernible] You think it's worth less than par, we don't think so. It's clearly equity value retail JV and our partners think they're significant value still left in that JV. So we think the retail preferred is fun. From a cash flow coverage standpoint, again, just to remind you, the cash flow from all the assets, whether they have preferred or not goes to secure the payment of that preferred and the coverage of that is -- continues to be very strong. And even as you assume rollover over time and some ups and downs and whatnot, the coverage on that -- on our preferred dividend, which today is 4.25%, will rise to 4.75% in April of 2024. That coverage is very strong today, and we expect to remain strong. Now your last question, the ability to refinance out. I mean, if you go back to what I said in my opening remarks, and I don't think this is any secret. The financing markets are not good right now, right, in any product category. So banks are basically shutting it down for the rest of the year unless you're a big client and a great property and whatnot. CMBS marketing bond investors really don't want to deploy capital. So -- and its' a tough market to financing, if you have to. Unfortunately, we don't. But recall I think it's going to remain challenging to refinance in the near term. And so this is not in our capital budget to get this refinanced in the next year or so. And when the market opens up, what we want to do -- remember, this can be done piece-by-piece, right? There's [indiscernible] asset that have preferred on. And if we want to avail ourselves on 1 or 2 or 3, then we'll do that at the time. But to go -- we don't need the cash today to go do it and pay exorbitant rates would not be prudent. So hopefully, I hit everything to ask, but that's the current state.

Alex, look at it this way. I mean there's 2 elements to it. One is the yield and the second is the collateral. I think Michael said very clearly that we think the collateral is just fine. The coverage of the dividend is, give or take, double what the carry on the preferred is. So we think the collateral is fine. Dividend is, clearly, in this very volatile [indiscernible] capital market is below what a market price to that preferred would be. So on a short-term basis, you might say that if you were a trader and you sold it, you would get less than par because of the submarket dividend, but that will change. And so we still think that it's a sound instrument. [indiscernible] by the way.

Steve, second question. As you mentioned, dividend, I appreciate the comments on the dividend for VNO for next year. Alexander's is in a similar boat. Should we read through that is similar -- that the Board will make a similar determination resizing of the Alexander's dividend as well? .

No.

Our next question is from John Kim with BMO Capital Markets.

You talked about the cautious environment. There was a lot more of an optimistic case in the post this week on New York office, and in particular, PENN15. I was wondering if you could provide an update on the project, how much preleasing you would need to move forward with the development? And if there's any consideration to change the use of the project to have less office going forward?

John, thanks for the question. I'm going to duck the question. A couple of things. I did say in my prepared remarks that the current environment makes grounds up the development very difficult. And I meant it. So that's number one. Number 2 is in terms of changing uses and what have you, that's not something we're going to get into now.

Okay. Regarding the taxable income next year, I know you talked about rising rates and 220 Central Park South being fully sold. Are there any other pressures that you see on taxable income next year? I thought the 220 Central Park South tax protection, so will it really be an issue. But any other thoughts on the direction of your other businesses in 2023?

I mean we've said that we think that our budget shows that taxable lentis going to go down. The primary reasons are higher interest rates because we're not 100% protected. We have no income from 220, and we have a soft economy. So if you take all those 3 things, again, we are budgeting that -- and we're not budgeting any gains from asset sales. So I mean, I think that's it. We are reluctant to put a number on that at the current time. But we will make a decision probably in the first quarter.

And your dividend, is that 100% of taxable income this year?

What is the exact number, Tom? .

Our dividend is $2.12, and we haven't finalized taxable income.

That's our projection.

It's around that.

Yes. So we think that the current dividend is within a hair of 100% of our taxable income for the year 2022.

Which includes [indiscernible]

Our next question is from Daniel Ismail with Green Street.

You mentioned a few times the difficult financing environment and I recognize this is a tough question to answer, given the lack of transactions. But I'm just curious where you think New York City office values and cap rates are at these days?

The answer Daniel is a lot of transaction activity. I think it's difficult to give you a precise answer, right? I think there is -- first of all, I would tell you that the investor interest in New York City remains very high. While some see black clouds, others see opportunity and others have a fundamental belief in New York. When you look at what's going on around the world, right, in terms of -- you got a global investor base, and as they evaluate where they want to invest their capital. Is it HongKong anymore? I don't think so. Is it London? It doesn't seem as attractive given the issues they have. And when you come back, the U.S. looks very good. And New York is, I think, without question, the global financial capital. So you had a lot of interest in New York, a lot of smart money that's frankly scouring the market right now, looking at New York because they see value. But in the absence of a financing market, I think it's going to stem activity for a period of time. I don't know if that's 1 quarter, 2 quarters, who knows? And if you're forced to sell in this market, then you're picking on something larger than you can sell at a wider cap rate, right? If somebody needs financing. If they don't, it's an all-cash buyer, then I think it will be a little less compressed. But is there a cap rate impact from this? Sure. There's a cap rate impact. Can I give you precision on that? No. Is it 50 basis points with the sort of maybe up 10%? So values are impacted 10%. I think it's got a reasonable assumption, probably. But I don't think anybody can say with precision, Dan.

A couple of comments on that. We seen this before many times that the economy is either entering recession or in recession. The debt markets and the capital markets are aligning. They are highly illiquid, and they are unbelievably expensive if you must access the debt markets. So that's a very big deterrent to asset sales. The second thing is that in these kinds of markets only people that have to sell, transact. And so the only weak sellers are transacting because the only buyers that are really controlling the market are distressed buyers. So you have to just live through this, and it will end. It will end sooner than you think. But this is not the kind of a transactional market or a capital market where you can really make adjustment. This is aberrant that happens 1 year out of every 10, and we are either in the 1 year or about to go into the 1 year. But one last comment. The stocks of the office companies have corrected to the point where, in my judgment, they have gone significantly below given the distressed mark-to-market of the portfolio, significantly below that number.

Got it. I appreciate the thoughts. Just a last one for Glenn. I'm curious where you think concessions are trending these days? Are you seeing any stabilization or abating in concessions on the new leases you guys are negotiating?

I think concessions have stabilized. They have abated. So TIs are still "too high", but they've stabilized you're certainly seeing more of the TIs in terms of getting tenants into the buildings in terms of helping them build out space more than historically, but I think that number has stabilized.

We're seeing sort of a strange market. Rents have really not fallen on the better building. If anything, they're going up. But the TIs and the inducements have gone up as well. So the market is taking their pound of flesh in the inducements as opposed to in the rent reductions.

Our next question is from Derek Johnston with Deutsche Bank.

In your discussions with business leaders, is there a view that the likely recession will be a tipping point for greater office utilization. And thus, the balance of power favoring employers versus employees. So I guess, can the slowdown drive greater and perhaps sustainable office utilization in your view?

Green Street wrote a piece that came out recently, where basically debunked that idea that recession we get higher unemployment, we get -- changes the power from -- to the employer, from the employee and therefore, the employee will [indiscernible] back into the office. I just have no view on that. I do believe, however, that the office is the workspace as opposed to kitchen table. And I believe that over time, the culture will change where people will want to be back in the office. The office will be more productive, the [indiscernible] aspect of work and being with colleagues in transit that will overpower the temptation to sit at the cafe -- at the kitchen table. But I don't think that it's the pain of a recession that's going to change the marketplace.

Got it. Appreciate it. And just another big picture one. I hope you guys don't think this is unfair. But Steve, you've seen this movie before. But as investors really have been sidelined by this hybrid work secular concern. And now we have the likely recession. What is it going to take? Like I said, you've seen this before. Or what can you do ultimately to help flip investor sentiment to more positive on office REITs, longer term.

I always believe that the rules of the game were to buy low and sell high. So now what we have is that it's hard to buy assets. They're very illiquid and there are virtue assets that are on the market, certainly at distressed prices. But the distress is in the stock market. And so I don't know. But I mean, from my personal family and investing. We like to buy in recessions, and that's the time to buy. So what's going to -- what's it going to take for you guys to start realizing that these stocks are stupid, stupid cheap. I don't know, but it will happen. And my guess is that just as the stock market always turns and gallops ahead way before the end of recessions. I think that the office business will do so as well. I don't -- I can't tell you what the catalyst do.

We have our next question from Anthony Pelon with JPMorgan.

And just looking at your 2023 lease expirations, it seems like you have a disproportionate amount expiring in retail and office in the first quarter. Can you maybe help us peel that back a bit and give us a sense as to whether or not there's any known big move-outs or roll-ups, roll downs?

It's Glenn. As it relates to the office in '23, it's really a mix of 4 of our properties, 770 Broadway, [indiscernible] Car, 1290 and 280. And that's for out the year, not only in the first quarter, we're, of course, attacking all of those expirations. We have very, very good action on some and others were in the market trying to lease the space. I will tell you when you look at those assets, they're amongst our highest quality of buildings and most unique characteristic buildings like a 770 like a 350. So that's where the expirations are coming out in '23.

Okay. And how about retail in the first quarter? Anything to call out there?

Tony, it's Michael. The answer is we've got 2 or 3 key tenants rolling and I can't tell you definitely what's going to happen there. There's discussions where all could renew and there's a schedule we're not to renew. So it's still too fluid I do think net-net, even if most renew, the income will be down some, just given the -- where one may likely renew. But I just can't give you more precision given the discussions remain pretty fluid right now.

Okay. Got it. And then just one follow-up on the Mart. It seems like the trade shows are back. And I know in some years, you have the tax item. Can you maybe just help us think about where you think the annual EBITDA run rate has gotten back to on that asset?

I think today, it's probably in the mid-70s. But we're also -- we know that the casual business is going to be leaving. And so probably bottoms in the low to mid-60s before it comes back. So -- and that number probably in terms of a run rate -- at the beginning of the year, the low to mid-60s is probably a decent run rate before we rebuild that back.

What's the potential for the building is at the top end?

Yes. Like, ultimately, we think the building should get back north of $100 million, right? So I mean our job is to release it. We do think there's some additional upside in the trade show. So that number in the next -- let's call it, 36 months, we think it gets back, hopefully the north of $100 million.

So based upon -- so -- right now, it's about $75 million. We expect it to go down into the $60s million before it turns and goes back up to as much as $100 million, which will not happen next year, but will happen in the future, potential for the asset. It's a little bit more volatile than we would like, but that's the story.

Our next question is from Nick Yulico with Scotiabank.

I just wanted to see, given the recent news from Meta, I just want to confirm that there's no impact you're seeing for your space with them at Farley or 770 Broadway.

There's no impact on Farley, no impact of 770 as it relates to the recent announcements. There are buildings out of the buildings utilization is very strong, and they happen to love both of the properties.

It's almost embarrassing to say, but we meant a little bit of time looking at their credit because they are a big tenant. And this is 1 spectacular company from a financial point of view. So when you think about it, they have -- what's a number? $25 million of free cash flow a year after spending a similar amount or a greater amount on R&D, which is discretionary. So their cash flow is well above $50 million a year. They have almost no debt. I think they did their first tiny debt issue recently. They have cash balances in the $50s-or-something like that millions -- $50s-or-something billions.

Yes. A little over $40 billion.

Okay. That works. And so from a financial point of view, they are a great company. They have the huge platforms of Facebook, Instagram and WhatsApp. And so now they're off on a mission. You have to back the guy because look what he's done in the past. So the answer is they are trying to develop a new universe. I believe it will be extraordinarily successful. Even if it's not successful, it certainly will not impair the sanctity of that unbelievable for this. So we're friends where vendors to then and we're happy and honored to be so.

Appreciate that, Steve. Just one other question is on the retail JV. So when I look at the NOI in the supplement, it feels like -- I mean, I think I'm looking at this correctly, but that the NOI is actually very similar to when you struck the deal in 2019, actually, it might be up a bit. I just want to confirm that. And then also see, I know you did impair the investment back in 2020. But when the original deal was struck, it was at a 4.5% cap rate, presumably cap rates are higher today based on everything going on in the world. So just trying to understand the dynamic of when you had to do the annual test on the value of the JV, if we should think that there is any impairment possibility from that?

Nick, so in terms of the income on the portfolio now versus when we struck the deal, I don't have the exact numbers in front of me. My recollection from just knowing the ins and outs is it down probably a little bit because of -- as you may recall, Forever 21 went bankrupt, and so they're still in the space, but that number is down from when the original deal was struck. And we had 1 vacancy on [ Fifth ] since then. So like the signage is frankly booming right now higher than we struck the deal. But I think net-net, it's probably down a touch. But you correctly point out, the income has been very durable. And -- but some of the leases roll, there'll be some impact. So -- and I think in terms of the impairment, you're correct. In 2020, we did impair it. Again, I'm going from memory, Nick. I think we -- the fair value, the original deals struck at $5.4 million, and we impaired it south of $5 billion. I don't want to give you the number without having it in front of me. But the answer is, look, we look at it every quarter. There's an independent third-party appraisal that has performed on behalf of the venture, which we frankly have -- we don't provide the assumption. They do their independent work, and we take that. And that's sort of what drives that. So they'll do their work at the end of the year, and we'll act. So I can't predict whether it will or won't be. I think the market is certainly -- given your comments, given it's [indiscernible] comments on the market and how it's priced in our stock is certainly impaired significantly. But I can't tell you whether there will be any further accounting impairments, yet.

We have our next question from Ronald Kamdem with Morgan Stanley.

A couple of quick ones for me. Just going back to the leasing activity, you talked about maybe the slowing economy and so forth. Just was hoping you could provide a little bit more color from the tenant side sort of is it the economy? Is it sort of hybrid and also by subsectors would be helpful.

I certainly think CEOs are more hesitant due to the economy for sure. We're seeing that in our discussions. And I think by sector, certainly, the big techs [indiscernible] load. I will tell you there is some more small to medium-sized tech activity. There were a couple of leases signed in the market this quarter by a couple of those. But generally, I would tell you, more caution, more hesitancy due to the economy, not so much by the hybrid, specifically.

Great. And then my second question was just going back to the dividend. And I know you sort of talked about it's the Board decision they're discussing. Just trying to understand what the pieces that are going into that. Is it still sort of -- is it $200 million plus or minus of CapEx, operating cash flow and then you're thinking about just how to solve for that to get to a sustainable basis? I'm just trying to get a sense of what should we be looking at thinking about for the right place for the dividend to land?

I don't have anything more to say on the dividend other than what I've already said. We will get to that at the first quarter Board meeting. I think everybody can do their own math and guesstimate, but I'm not the guesstimating business. I can tell you one little factor and that is the spot trades between the 9% and 10% dividend rate. So that indicates that this something is wrong. But I think I'll stand with what I've already said.

Our next question is from Vikram Malhotra with Mizuho.

I guess just maybe a bigger picture first, Steve. I'm just -- I want to get your thoughts on what are you contemplating sort of macro-wise, rates-wise, and then more at a micro level, with fundamentals. It just feels like things seem to have been inflecting according to the last few calls, return to work was improving, leasing is improving. But you've now swapped a lot of debt for 5 years at a rate you're contemplating cutting the dividend. And so I'm just trying to balance all of this like near term, you said it's a 1-year issue, but it sounds like in your actions, it's more like a 3- to 4-year issue than a 1-year issue. And this can you help us bridge what are you forecasting macro-wise and micro wise to effectuate this dividend in the 5-year swaps?

Boy oh boy, so let's see. -- obviously, the economy has been hyped to that it's probably very destructive. So for whatever different reasons, and this is -- I don't want to get into politics, but for other different reasons, we have runaway inflation. And as I said, I think that is deadly earnest about doing their job and stopping it. So their #1 tool, of course, is interest rates. The interest rates have had an enormous effect already in a very rapid manner. I mean, as illustrated by the stock market, the whole market, et cetera. So the fed is going to win this battle. In the end, it's just a matter of how long it takes. We aggressively went to protect our floating rate exposure for multiple different reasons, the most important one of which was protect against a runaway interest rate environment. So we think we sort of had that covered. The most efficient execution for the swaps was 5 years. And so we did -- we basically did that. There is -- do not read anything into our firm view on the future based upon this 5-year number. I would tell you that I expect -- if you look at the graph and look at the chart of past recessions and past activity, they generally go up at a pretty steep curve and then they come down fairly quickly because they have -- they put the economy into recession, and then they aggressively have to bail it out. So that's what we expect is going to happen this time, but we won't -- we don't bet our life on anything. So we think we've protected our balance sheet. We think to overpay our dividend is not appropriate. And so we think we've taken the proper financial actions to protect the fact that the fiscal sanctity of the company. We believe that this is going to be a 1- to 2-year up a bit, not a 3- to 5-year event.

And so that 1 to 2 year is more your comment on the fundamentals in office as opposed to the macro that you just outlaid, I'm assuming. Just following up on that. I know the numbers are moving around so I'm not asking that...

No. No, no. Hang on, Vikram. The 1 to 2 years is a macro prediction.

Okay. And how do you square where fundamentals will be office fundamentals in that time frame?

Well, first of all, we are New York-based. We believe in New York, we believe -- and anecdotally, we've had lots of conversations with lots of employers and -- from all over the world. New York is still New York. It's still the capital of the United States. And we believe companies want to be here, for sure, young people want to be here. Just anecdotally, I'll tell you that a lot of my friends have moved out to Florida. But when you ask them, where their children are, all the children are in New York, and they want to be in New York because that's extremely [indiscernible]. So we think that this will be a fairly predictable cycle where different industries will grow at different rates, but there is -- there will continue to be an aggressive interest to locating in New York and growing in New York.

Okay. And then just 2 quick...

We are absolutely strongly convicted about what we're doing in the PENN District. We think that, that is going to be another center of New York, and an extraordinary success. So we're very, very, very excited about that.

Okay. That -- I was going to ask you one thing related to that. But just before that, I know the numbers are moving out. So I'm not asking where numbers or the dividend cut is going to be. But -- is it fair to assume if we look at like a historical AFFO payout ratio, whatever the AFFO may be, should we assume a payout in line with historical levels as we think to model next year?

If you can model taxable income, that's what the dividend is going to be approximately. And if you could model that to the penny, you're a better man than we are. So we've got another full quarter to go. And so we're in the budgeting process. We're nowhere there over. And we will make that decision in the first quarter.

We have a follow-up question from Steve Sakwa with Evercore ISI.

Steve, you mentioned about the valuation, and I'm sure on a lot of numbers, you trade at very low price per square foot, very high implied cap rate. Historically, we've seen private equity come in and close gaps in sectors where there's big, big discounts that persist. But I guess, given where the financing markets are today, that doesn't seem likely. So are there steps that you can take? Or are there steps you're contemplating to try and close that gap? Or is this just a time where you've got to be patient and kind of wait for the financing markets to improve?

I almost want to duck that question, too. Let me see if I can parse into it. The leverage buyout model, which has equity and debt may or may not work in this environment. The value of our company is there, and that's its extraordinary value. How it all plays out is something that the -- I can't predict right now.

Well, I guess you've talked in the past about maybe the separation of the PENN District assets into a spinout, which I know was on hold. You said you would only do buybacks in a meaningful way, but you probably need to sell assets to be able to buy back stock, which seems difficult. So it just seems like your hands are tied. I'm just wondering, are we missing anything here that you could do to help close the gap.

The spinout is still on the table, and the protection of our balance sheet is the #1 priority.

We have no further questions in queue.

Well, thank you all very much. We appreciate you joining us, and the next call is when?

Valentine's Day. Tuesday, February 14.

Your next call, the lovable Michael says is Valentine's Day. So I guess we'll see you in red on Valentine's day. Have a great rest of the year, and thank you all very much. And by the way, do take up my invitation to come down the PENN. It's extraordinary. And those of you who haven't toured through or seen it yet, please take advantage of our invitation is since here. We'd like to get you all down there and show you what we're doing. Thanks very much. Thanks for joining.

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