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Vornado Realty Trust (VNO -0.51%)
Q4 2021 Earnings Call
Feb 15, 2022, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and welcome to the Vornado Realty Trust fourth quarter 2021 earnings call. My name is Richard, and I'll be your operator for today's call. This call is being recorded for replay purposes. [Operator instructions] I will now turn the call over to Mr.

Steven Borenstein, senior vice president and corporation counsel. Please go ahead.

Steven Borenstein -- Senior Vice President and Corporation 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 package 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 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.

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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

Thanks, Steve, and good morning, everyone. By any measure, Vornado just reported an outstanding industry-leading quarter at the head of the class of our industry peers. Comparable FFO for the quarter -- for the fourth quarter increased 19.1% from last year's fourth quarter. Companywide same-store cash NOI for the fourth quarter increased 10.1% from last year's fourth quarter.

Same-store cash NOI from our New York business for the fourth quarter increased 11.3% from last year's fourth quarter. Companywide, we leased 2.9 million square feet for the year, of which 2.5 million square feet was in New York, where our leasing teams landed the second and third largest office leases and the second largest retail lease. For the quarter, we leased 1,036,000 square feet company wide, of which 1,008,000 square feet was in New York. You will hear more about our leasing activity in Michael Franco's comments shortly.

New York office cash starting rents were $83 for the year and $88 for the quarter. New York office cash mark-to-markets were a positive 10.8% for the year and a positive 29.1% for the quarter. Importantly, our triple-digit Madison Square Garden anchor lease at PENN2 and our current leasing successes at PENN 1 validate our Penn District program. Here's a short update on the Penn District.

The acclaimed Moynihan Train Hall is open to the public. Our leasing -- our retail leasing in the train hall is nearly complete with 36, I'm sorry, pardon me, with 26 leases executed. The doubling in width and doubling in height of the Long Island Railroad concourse is scheduled to be completed by year-end. We own the retail on both sides of the LIRR Concourse, all of which base was vacated to accommodate the construction.

We are now finalizing with over 30 retailers for that space, many of them food-oriented at terms that are better than pre-COVID levels. And formally, we have turned over all of Facebook's 730,000 square feet to them for tenant fit-out. At PENN 1, our grand new lobby and multi-floor amenity offerings are largely completed and open. Our amenities here are extensive.

We believe them to be the largest amenity package in the city by far, and unique, tailored to the demographic of our workforce and is receiving rave reviews from tenants and brokers. After all, we are in the hospitality business, and that means pleasing our tenants and pleasing their employees. On the seventh floor of PENN 1, our experience at leasing center is open and busy. This 14,000 square foot facility complete with multiple scale models and flow sealing wall-to-wall videos vividly illustrates and brings to life our vision and plans for the buildings, restaurants, retail, amenities, lifestyle, and work style that the Penn District will become.

At PENN2, we are, give or take, 25% into construction. Our construction operations in the Penn District span three full blocks, 31st Street to 34th Street along the west side of Seventh Avenue. In a few short months, everything in our Penn District will be -- will come to life, as shiny modern curtain wall continues to be erected on the PENN2 facades as steel is erected giving shape to the massive two-block long bustle, an architectural statement and scale and substance that will announce the entrance to Pennsylvania Station, Madison Square Garden and our office building. And as the Hotel Penn across the street begins to come down, daylighting that unique site.

My excitement and conviction about our Penn District grows quarter-by-quarter. I still believe that a winning strategy is to allow investors to choose between the high-growth development-oriented Penn District or our other pretty terrific in their own right, Class 8 traditional core assets or both. Nonetheless, we have decided to pause the execution of a separation by tracker. This is a purely internal transaction with no counter-party or deadline, and I believe a delay until COVID is resolved and New York has returned unmasked to the office is appropriate and warranted.

A word about our retail business. The Manhattan retail market has definitely bottomed, and activity is accelerated. For 2021, our retail cash NOI was $160.8 million, blowing away our guidance of $135 million. Further, we are increasing our 2022 retail cash NOI guidance by $15 million from $160 million to $175 million.

While we own a very large and very important trophy quality asset in each of San Francisco and Chicago, Vornado is primarily a Manhattan-centric company. As we interact with our tenants, other occupiers and market participants our conviction about Manhattan's future performance, importance and even dominance is stronger than ever. Case in point, Manhattan has become the second home of all of the tech giants, specifically the New West side, and they continue to grow here. With inflation on the top of de jure, I should point out that replacement costs for New York office buildings is rising pretty aggressively.

I submit that replacement cost has always been a leading indicator for telling that our existing stock of office building will be increasing in value. In the same vein, the Manhattan residential market is, I believe, also a leading indicator. It went from 100% occupancy pre-COVID down to 70% at the height of COVID and is now back to 100% at higher than pre-COVID rents, by the way, as New Yorkers have returned, restaurants are full and standing remotely. So the city is full, but office buildings not so much.

That last domino will be when employers and employees resolve hybrid work schedules, and the office districts are again teaming with activity, and I submit that will come sooner than you think. That concludes my remarks. Now to Michael.

Michael Franco -- President and Chief Financial Officer

Thank you, Steve, and good morning, everyone. As Steve mentioned, we had an outstanding quarter and a strong year. Fourth quarter comparable FFO as adjusted was $0.81 per share compared to $0.68 for last year's fourth quarter, an increase of $0.13 or 19%. And for the year, comparable FFO was $2.86 per share, up $0.24 or 9% from 2020.

We have provided a quarter-over-quarter bridge in our earnings release on Page 4 and in our financial supplement on Page 8. We have several noncomparable items in the quarter, primarily 1290 Avenue of the Americas, defeasance costs and a TRS noncash deferred tax liability partially offset by 220 Central Park South gains, which in total reduced FFO by $0.08 per share. As we look ahead, we are expecting another strong year in 2022, with double-digit percentage FFO per share growth driven primarily by previously signed leases in both office and retail, particularly Facebook at Farley, and the continued recovery of our variable businesses. With respect to our variable businesses, we continued to see a recovery in the fourth quarter.

Our dominant signs in Times Square in the Penn District continue to attract disproportionate demand and have healthy signage bookings. BMS continue to perform near prepandemic levels. A number of trade shows have successfully taken place, albeit with lower attendance, primarily due to travel restrictions. And finally, we still expect our garages to be fully back in 2022.

Other than Hotel Penn's income, we still expect to recover most of the income from our variable businesses in 2022 with the full return in 2023. Companywide, same-store cash NOI for the fourth quarter increased by a strong 10.1% over the prior year's fourth quarter. Our core New York Office business was up 8.5% and our retail same-store cash NOI was up 32.3%, primarily due to the rent commencement on new leases at 595 Madison Avenue, 4 Union Square South, 770 Broadway and 689 Fifth Avenue. Our New York occupancies also continue to recover nicely.

Our office occupancy ended the quarter at 92.2%, up 60 basis points from the third quarter and 110 basis points from the trough in the second quarter. Retail occupancy ended the quarter at 80.7%, up 350 basis points from the third quarter. We expect further improvement in both occupancies by year-end 2022 based on our deal pipeline and modest 2022 office exploration schedule. Now turning to leasing markets.

The New York office leasing market continues to strengthen and show resilience in this period of change, supported by strong economic and private sector job growth. Quarter-over-quarter sustained leasing momentum led to total volume in 2021 of 25 million square feet by far the highest level since the start of the pandemic. Tenant demand continues to surge, especially from technology and financial services users. And importantly, these companies are committing to long-term leases as they map out their futures.

Tour activity has returned to prepandemic levels with lots of deals in the works. Most industry experts are forecasting market rent occupancy improvement in 2022 with pent-up demand building as more employers get off the sidelines and into the market. The office market's recent performance is completely centered on flight to quality as the highest quality properties are clearly winning. Tenants are strongly attracted to transit-oriented properties with state-of-the-art systems, amenity-rich programming, outdoor space, and health and wellness features along with food and beverage offerings.

And importantly, they are happy to pay for quality and value as it's more important than ever to CEOs that they be an appealing and engaging workspaces to attract and retain their employees. JLL reports that in 2021, an all-time high 164 leases comprised of 3.4 million square feet were signed at $100-plus starting rents. Our leasing team led the market here with 831,000 square feet or 25% of these deals, including the largest deal in this class for the second year in a row. Our lease with MSG at PENN2 follows in the footsteps of 2020's largest trophy transaction with Facebook at Farley.

We expect this trend to continue, which bodes well for rental growth for our high-quality assets. Overall, we continue to outperform the market as is evident from our statistics, and think it is worth underscoring our leasing accomplishments during the pandemic over the past 24 months. 4.48 million square feet leased, starting rent of $85 per square foot, mark-to-markets of 8.6% cash and GAAP of 14.1%, and average lease term of nearly 13 years. We executed on a number of large important leases during this time frame: Facebook, 730,000 feet; NYU, 633,000 feet; Interpublic, 513,000 feet; Madison Square Garden, 428,000 feet; Apple, 336,000 feet; and Clear Secure, 119,000 feet.

In 2021, our office leasing performance was comprised of 98 transactions for more than 2.2 million square feet total, with initial starting rents of $83 per square foot and an average lease term of 11 years. Moreover, cash and GAAP mark-to-markets were strong at 10.8% and 15.9%, respectively. 38% of this activity were trophy transactions at triple-digit rents. During the fourth quarter, we completed 23 leases totaling 954,000 square feet.

Our average starting rent during the quarter was $88 per square foot. Cash mark-to-market was 29%, GAAP mark-to-market was 39% and average lease term was 14 years, all very, very strong figures. The Madison Square Garden lease is another major milestone for us in the Penn District and validates our program to take rents from the...

Steven Borenstein -- Senior Vice President and Corporation Counsel

Richard?

Questions & Answers:


Operator

Yes. If you could unmute the backup line.

Michael Franco -- President and Chief Financial Officer

For the year, we executed 36 leases for 229,000 square feet at positive GAAP and cash mark-to-markets of 37% and 13%, respectively. We have an active pipeline with over 170,000 square feet in the works. Interest in the Penn District, in particular, is strong, and we expect it to grow with the commencement of leasing in the Long Island Railroad Concourse. Turning now to Chicago and San Francisco.

While the Chicago market continues to be challenged by high vacancy, negative absorption, elevated tank concessions, there are signs which suggest a growing confidence by tenants entering the market as leasing activity continues to increase quarter over quarter. We have recently embarked on bringing our New York WorkLife amenity ecosystem from PENN 1 to theMART, and plan to spend approximately $40 million to create a new tenant program focused on the first and second floors. The program will further differentiate theMART and includes first-class fitness and conferencing facilities, a new outdoor plaza and main entrance fronting at River North neighborhood and new outdoor spaces and landscaping on the South drive along the Chicago River, building on what we first accomplished in 2016 with our Grand Stair restaurant and new food hall. We anticipate starting construction in the second half of this year with the completion during 2023.

We have begun to introduce the project to the marketplace and are experiencing a real uptick into our volume and proposals. We have a lease out for 80,000 square feet with a fintech company and are in advanced dialogue with 50,000 square feet of potential new tenants. In San Francisco, the city's office leasing market is beginning to thaw, and recovery seems to be underway. Office leasing volume averaged 2.1 million square feet over the last two quarters.

We renewed 446,000 square feet in total here during 2020 and 2021, putting the campus in great long-term shape. We have zero lease expirations in 2022 and a modest 203,000 square feet expiring in 2023 and 2024, where we finalized renewal with one tenant for 50,000 square feet just last week at a significant positive mark-to-market and are in discussions with the remaining tenants to also renew. You will see that our occupancy in the campus declined from 98% to 94% this quarter, which is solely a function of bringing back the 78,000 square foot Cube, which is vacant back into service. The balance of the campus is full.

Lastly, turning to the capital markets. The investment sales markets continuing to pick up with the return of large office deals at strong pricing such as 441 Ninth for $1 billion, 452 Fifth Avenue for $855 million, and 1 Manhattan West for $2.85 billion. Investor interest in New York is clearly rebounding as they see that the city has bottomed and find the relative value compelling. On the debt side, despite the move up in rates, spreads remain tight, and all-in coupons attractive.

We refinanced over $4 billion of debt in 2021, taking advantage of the very favorable financing markets to lock in low rates, including our early refinancing in November of the $950 million loan on 1290 Avenue of the Americas. We have modest debt maturities in 2022, the largest of which we are currently in the process of refinancing, and essentially no maturities in 2023. Finally, our current liquidity is a strong $4.105 billion including $1.93 billion of cash and restricted cash and $2.175 billion undrawn under our $2.75 billion revolving credit facilities. With that, I'll turn it over to the operator for Q&A.

Operator

[Operator instructions] Our first question on line comes from Mr. Emmanuel Korchman from Citi. Please go ahead. Your line is open.

Michael Bilerman -- Citi -- Analyst

It's Michael Bilerman here with Manny. Steve, I want to go to your comments around the tracker and putting it on pause. And maybe you can just walk us through your and the Board's decision to put that on pause. Obviously, you made the announcement last April when we were in the throes of COVID.

It had been multiple, multiple years that you've been thinking along those lines. And so why put it on pause now when there is a lot of vibrance coming in the city, a lot of excitement, obviously, the office stocks have rebounded? It would seem actually would be a good time to put something out. So maybe just walk us through the decision of putting on pause, and whether you would look at other transaction alternatives to a tracker. Or is it still 100% on that path?

Steven Roth -- Chairman and Chief Executive Officer

Michael, how are you?

Michael Bilerman -- Citi -- Analyst

Fantastic. I'm calling you from the office. How about that?

Steven Roth -- Chairman and Chief Executive Officer

So had a little dust up yesterday. Yes, I did here. So look, I mean, I think that my remarks speak for themselves. We think COVID is not resolved yet.

The -- our tenants' customers and the CEOs that we talked -- that are in our portfolio and in the city, note that we have not -- they have not resolved yet, they're coming back to work, getting their employees back into the office or the schedules, etc. So we're still in an uncertain period. And our thinking is that we want to have -- put our best foot forward. There is still uncertainty.

We are still at the foothills of recovery. And we just don't think the timing is right. And so that's our judgment. And what -- and I stand for it.

With respect to your -- I still have conviction about the concept of having our investors be able to invest in either the Penn District or our pretty terrific other assets, and whether there's other transactions -- there's no other transactions that are being contemplated at the moment, although we do have a responsibility to cover all the bases.

Michael Bilerman -- Citi -- Analyst

I'm just really trying to understand what really changed in your thinking because this wasn't a financial-driven transaction, right? You didn't have a counter-party, which you talked about. This was really just an awkward...

Steven Roth -- Chairman and Chief Executive Officer

Michael, I couldn't be clearer, OK? This -- we're still not done with COVID. Buildings are still 30% occupied. This is not the right time to launch something like we contemplated for success, OK? I couldn't be clearer.

Michael Bilerman -- Citi -- Analyst

No. I know you're clear, but this is not something -- you announced this during COVID, right, and you've been progressing along this path for a number of years. So that's -- it's just surprising to now put it on pause when we've had all this information, and you've been doing this during COVID. That's the thing.

Steven Roth -- Chairman and Chief Executive Officer

I'm happy that you are surprised. I have nothing further to say.

Operator

Our next question on line comes from Mr. Steve Sakwa from Evercore ISI.

Steve Sakwa -- Evercore ISI -- Analyst

Michael, unfortunately, the line cut out for maybe a minute or two. I think we lost a little bit of information, or at least I did. And I don't know if you had talked a little bit about the pipeline. But maybe you could just talk a little bit about the leasing pipeline, and perhaps how the MSG lease directly impacted the leasing stats in the fourth quarter.

I realized there was a very big mark-to-market on that lease. And so it probably helped to get you up toward that 29% figure. So I was just wondering if you could unpack maybe MSG from everything else in the quarter, and then talk about the pipeline in general. 

Michael Franco -- President and Chief Financial Officer

Steve, I did make a comment on the MSG. If you take MSG out on the mark-to-markets, I guess that's where I cut out. But MSG was a tremendous deal. That being said, the balance of the quarter was similarly outstanding.

And if you take out the MSG lease, the mark-to-markets for the quarter were 9.2% cash and 12.9% GAAP. So outstanding starting rents and mark-to-markets really across the board, which I think is reflective of our portfolio.

Steven Roth -- Chairman and Chief Executive Officer

Steve, let me give you a little color on the way I look at it. There were three components in the leasing this quarter, OK? One was the MSG lease. The second was 136,000 square foot lease in a building we own in Long Island City. And obviously -- and that -- the market there is in the mid-30s of rents so that, that was lumped into the averaging.

And then there's the balance of the portfolio. The number that I think is the most relevant is the starting rents because I think that, that speaks to the quality of the assets. So the rent in Long Island City -- Long Island City component of the quarter's leasing -- and by the way, Glen and his team did a bang-up job in the quarter this year and last year, and they always do. And we couldn't be prouder of Glen and his teams.

The Long Island City lease was 136,000 square feet in the 30s. The Madison Square Garden lease we know about, OK? By subtraction, the remainder of our portfolio that is ex Long Island City and ex Madison Square Garden, the starting rents were $94 a foot, OK? Not $65, not $70, $94 a foot. So I think that if you focus on that, that is a measure -- now of course, this is idiosyncratic. It depends quarter-by-quarter by the mix of buildings and the mix of tenants.

So -- but what I'm saying is the fact that the balance of our portfolio, ex Long Island City and ex Madison Square Garden commanded $94 starting rents. To me, it's extremely telling to the quality of our assets and the perception that our assets get into the marketplace.

Michael Franco -- President and Chief Financial Officer

You want to talk about the pipeline?

Glen Weiss -- Executive Vice President, Co-Head of Real Estate

Yes. Steve, it's Glen. On the pipeline on Michael's remarks, we've said two things. One, we have leases out final negotiations of more than 400,000 feet.

Notably, about 80% of those deals are with new and expanding tenants. Furthermore, we're in very good negotiation on another, call it, more than one million feet, which is a real balance of new expansion and renewals across the portfolio in all the buildings with tenants from most of the industry sectors, very strong activity throughout the portfolio as we sit here today.

Michael Franco -- President and Chief Financial Officer

And Steve, out of that 440,000, again, maybe I cut out here, 160,000 of that square feet is at PENN 1 at over $90 per square foot starting rents.

Steven Roth -- Chairman and Chief Executive Officer

So just to continue down the line on this question, and it's an important question, and the statistics are important, Steve. So thanks for the question. Basically, what's happening in the Penn District. And when we basically announced our plans in the Penn District, we said that we were going to take the two existing buildings, which are the better part of five million square feet combined.

So these are big assets. They're important assets. And we were going to spend x and we were going to take the rents from $55 a foot average up to into the 90s and into the triple digits. We believe that our performance, as announced this quarter validates that program.

So the MSG lease is not a one-timer, it's not an anomaly. We have lots of leasing to do in the Penn District. Not -- in the existing buildings, not even getting into the new buildings that we will be doing. And so we will be announcing, I don't know, the better part of 100,000 square feet a quarter or whatever the number is going to be at $90 rents, maybe triple-digit rents, almost as far as the eye can see.

So these numbers are going to be -- are foretelling what the future will be and what the growth will be and what the earnings accretion will be coming from the Penn District. But the number that I'm the happiest about is that the balance of our portfolio commanded $94 this quarter. I think that's an extraordinary number, and we're very proud and happy about that number. And that also is the result of years and years of improving those assets, redeveloping those assets and nurturing those assets so that they perform at the level that they -- that we were able to daylight this quarter.

And I'll give a shout out to David Greenbaum and Glen because they did most of the work of repositioning those assets over the last years.

Steve Sakwa -- Evercore ISI -- Analyst

Great. Thanks for thanks for that commentary. I guess, Steve, just as a maybe follow-up with new government officials in, both the Governor and Mayor, specifically. I'm just curious...

Steven Roth -- Chairman and Chief Executive Officer

That's not a follow-up. That's a whole new topic. Go ahead.

Steve Sakwa -- Evercore ISI -- Analyst

Just briefly, can you maybe just talk about the mayor and some of the priorities and how they fit into kind of PENN Station and whether it's a homelessness issue in New York and the crime. Just how are you sort of thinking about that? And what do you think are the key focal points here for the next six to 12 months?

Steven Roth -- Chairman and Chief Executive Officer

Well, obviously, the densely populated urban northern cities, which go across the northern belt of the country that goes from Washington, D.C. and New York across to Chicago and then across to San Francisco are all pretty much similar. Similar politics, similar demographics. So crime has increased in all of those cities at about the same rate, homelessness and what have you.

So it's a situation which is distressing, it's disturbing. And we believe that the political climate in New York is getting better. If you read the headlines about what the Mayor in Chicago has said, what the Mayor in San Francisco has said, what the Mayor in New York has said, they are all sort of similar, and that is that the situation has to improve, and their job is to improve it. So we are extremely optimistic about the political climate in New York at the governor level and at the mayor level.

And we're very supportive, and we're very optimistic.

Operator

Our next question on line comes from Mr. John Kim from BMO Capital Markets.

John Kim -- BMO Capital Markets -- Analyst

Thank you. I have a couple of questions on guidance. You mentioned increasing your '22 retail guidance to $175 million. Can you talk about some of the puts and takes on that? Because I know you sold some assets since the original guidance was put out.

And how does this impact your 2023 guidance, which initially was at that $175 million level?

Steven Roth -- Chairman and Chief Executive Officer

We don't give guidance. And -- but we did give guidance on retail because of the precipitous change in market dynamics. And so we did do that to help you all in terms of your modeling and in terms of your valuing our retail assets. I don't think that it would be productive for me to start getting into '93 -- to 2023.

Although we are optimistic about it, we think 2023 will be better than 2021. So we're on a progression of recovery. And I think Michael or Tom, do you want to pursue that anymore?

Michael Franco -- President and Chief Financial Officer

Yes. I would just say, John, look, first of all, I think if you think about where we were a year or two years ago, and we first laid this out, I know you've been on this, there was some skepticism and whatnot. I think we've continued to say, we own the best retail assets in the city. And there was a period where, obviously, at the outset of COVID with no tourism, no workers in the city, right, leasing went on hiatus.

It's now picked up. We still need to see consistent return there. But the tourism started to come back pretty significantly in the fall. And so retailers are now active again.

And I think what you're seeing in 2021, it was the fact that we got...

Steven Roth -- Chairman and Chief Executive Officer

We won the pool.

Michael Franco -- President and Chief Financial Officer

We got the benefit of our assets. Again, when you own the Fullers, when you own a lot of the great assets that we own, Union Square, etc., we saw leasing there. So we're seeing a continuation of that. And I think a lot of what's going to come through in terms of raising the guidance in 2022 is the fact that we did sign leases at quite a few of our assets, and that's going to go online.

So we feel good about the number we put out there. And as Steve said, hopefully, it continues to go up from there. But the bottom that we had called earlier in 2021, I think you're seeing come through. And we just need to see a consistent return of tourism and workers and so forth, for rents to start building back significantly.

Steven Roth -- Chairman and Chief Executive Officer

Just from a technical point of view, we did guide and predict what 2021 would be. We exceeded that by $25 million. So the number is now known. We thought the responsible act for us to now update what we expect for 2022, and we did that in my remarks.

And so we're trying to tell you what we think as we think it.

John Kim -- BMO Capital Markets -- Analyst

I just want to clarify, the Moynihan retail, is that being pulled forward to 2022? Or is that still expected to be a '23 delivery?

Steven Roth -- Chairman and Chief Executive Officer

The latter.

John Kim -- BMO Capital Markets -- Analyst

OK. My follow-up question is on...

Steven Roth -- Chairman and Chief Executive Officer

Hang on. So the 2022 number does not include the Moynihan retail. So you can just look back and just think the Moynihan retail is pretty substantial, how that will improve the '23 number and our growth profile going forward.

John Kim -- BMO Capital Markets -- Analyst

OK. My follow-up question is on variable income. So your indication -- it's not really quite guidance, but your indication is that will be fully returned in 2023. However, if I look at your fourth quarter gain on the variable income of $12.5 million versus the loss that you had in the prior year, fourth quarter '20, which was $24 million loss, less the Hotel Penn, Hotel Penn was about $14 million.

It looks like you've already gained back all that variable income that you lost in the fourth quarter '20. So I'm just wondering if components of this variable income have changed.

Steven Roth -- Chairman and Chief Executive Officer

No. You fellows want to handle that detail on this call or do you want to handle it supplementally off the call?

Glen Weiss -- Executive Vice President, Co-Head of Real Estate

Either way. I mean it's going to be primarily garages and trade shows that are going to come back. BMS and the signage is pretty much back to where they were pre pandemic.

Michael Franco -- President and Chief Financial Officer

I would say the signage is like we had an outstanding fourth quarter on the signage side and having the dominant signs, as I mentioned in my comments, has paid significant dividends, and that's with having taken a couple of signs off-line, right? So while we're back to prepandemic levels on the signage, that's not same store, when we bring those signs back, we think that number goes up further.

Steven Roth -- Chairman and Chief Executive Officer

And the BMS business and our signage business are growing businesses, by the way. So in normal times, what we're doing now is we're -- what we're doing now is recovering from the hit of COVID. In normal times and going forward, we'd expect those businesses to be -- to grow. How else can we help you, John?

Steven Borenstein -- Senior Vice President and Corporation Counsel

Next question, please.

Operator

Thank you. Our next question on line comes from Jamie Feldman from Bank of America. Please go ahead. 

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Great. Thank you. Good morning. I wanted to get your thoughts on exposure to floating rate debt.

As you look at the balance sheet, you do have a decent amount. Clearly, we're in a rising rate environment. Maybe if you could just kind of step back and tell us your philosophy, and what we should expect going forward in terms of either earnings risk from floating rate debt or just how you expect to run the balance sheet in terms of percentage floating versus fixed.

Michael Franco -- President and Chief Financial Officer

Jamie, good morning. A few comments. So the answer is we do run our balance sheet with the mix. I don't think anybody can predict exactly where rates are going in any environment.

And the reality is if you borrow fixed for the last several years, you would have been generally wrong in terms of where rates are going. And even floating, when we have looked at swapping those, obviously, we're going to pay more for several years. But I would say, from a baseline standpoint, our balance sheet is 50-50 fixed floating, OK? Now when you net out, let's just say, $1.5 billion of cash, which is sort of a natural hedge against floating rate debt, so as rates go up, we're going to earn more on that income. We're probably about two-thirds fixed, one-third floating, which is not that radically different from most others.

There's probably one company that's entirely fixed. So -- and why do we borrow floating to that proportion? Because we have a number of assets that the business plan warrants that, right? We're going to be executing redevelopments. Maybe there's a recapitalization opportunity. For whatever reason, having that debt be fixed...

Steven Roth -- Chairman and Chief Executive Officer

Or sale.

Michael Franco -- President and Chief Financial Officer

Or sale, right? Having that debt be fixed, we think is costly, right? So I would think almost 100% of the time, if you're selling an asset, recapitalizing asset, if you borrow fixed, the buyer doesn't want what you put on it, right? You guess leverage levels wrong, high or low and it ends up costing you more than it would have cost along the way. So that's some general philosophy. And on a floating rate basis, even if they go up, they're still cheaper in our view than where we would have borrowed fixed for several years and maybe entirely. And look, rates may go up now, Jamie, right? But the Fed is going to clearly push short-term rates up here to tamp down inflation.

Hopefully, not push us in recession, but that's a risk. And we think ultimately, rates stabilize at levels that are still fairly low. So that's general commentary. I'll let Steve tack on if he's got anything.

But I think important also to understand that natural hedge that sits in our cash portion.

Steven Roth -- Chairman and Chief Executive Officer

So macro philosophy, the thinking on the part of analysts and what have you, that fixed rate debt is safe and floating rate debt is not safe, is totally incorrect and debunked in my opinion. So if you were a fixed rate borrower over the last 15 years, you were wrong, wrong and dead wrong to the tune of huge amounts of money. So the first thing is that if you look at it from a risk point of view, if you are a fixed rate borrower, you have locked in a cost for seven, 10 years, whatever it is. And if you -- if your income -- if you want to refinance that loan or sell the asset or redevelop or whatever it might be, then you have to pay defeasance, which historically has been very, very high.

So there is risk in fixed rate debt that many folks don't really recognize, OK? Now -- and you have been wrong, historically. So generally speaking, there is a premium to floating rate, to fixed rate. And generally speaking, it's anywhere from two to three percent -- basis -- 200 to 300 basis points. So if you borrow fixed, you are giving up 200 to 300 basis points, maybe more with certainty in the beginning.

Now rates fluctuate, and we -- and it appears as if we are in a period now where the Fed is in a tightening cycle, as Michael said, to tamp down inflation. And -- so whatever. But for example, we did a floating rate loan, a big floating rate loan on the 555 California last year. And we basically -- the loan was unbelievably attractive, and we bought a -- and we swapped it for -- I guess it was for three years at an unbelievably attractive low fixed rate for that.

So we hedged our bets with that. We did a big floating rate loan recently on the 1290 Avenue of the Americas, and we did not yet swap it. And our feeling was that the difference between the current bid on floating rate debt versus the fixed rate debt was so high that the risk of -- that our tolerance for increases in floating rate debt way outweighed the cost of fixing the debt. So I mean that's basically a philosophical answer.

For -- philosophically looking backwards, fixed rate debt has been very, very -- has been wrong. So going forward, of course, now our balance sheet is pretty simple. We stay very liquid with a couple of billion dollars of debt, most -- of cash on our balance sheet most times. And as Michael said, that is a hedge.

We do do swaps. And so when we do use floating rate debt, we do it with care, caution, and we think a great deal of thought.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

I appreciate the detailed and thoughtful response. You guys gave good color on kind of where the thought process is for office tenants right now in terms of getting back to the office and the kind of space they use. How would you characterize the thought process of retail tenants right now in terms of where they want to be, the types of spaces they're looking for? Any read-through we should be thinking about at this point in the cycle?

Steven Roth -- Chairman and Chief Executive Officer

Haim, you on the call?

Haim Chera -- Executive Vice President, Head of Retail

I am, Steve. Yes. So the first sign of resiliency in New York City were the neighborhoods and the basic needs retail, the Union Squares, the 770 Broadway Wegmans. Those have come back robustly.

The high streets and our major high streets are Fifth Avenue and Times Square. Those are going to take a little longer. We need our international tourists back. We need our workers back in the office to fill the street, and that's just a little behind the curve, and I predict those will be back robustly as well.

Steven Roth -- Chairman and Chief Executive Officer

It's interesting. There was, and probably still is, a very negative feeling about brick-and-mortar retail in the ether. And there has been a startling recovery in brick-and-mortar retail around the country. The open-air shopping centers are doing well, the freestanding brick-and-mortar retailers are doing well.

I mean, look, for example, the Target's stock. It's just shocking how well they are performing. And they are basically a combination of brick-and-mortar and e-commerce. And there's others like them.

The luxury brands are booming, and that's mainly almost entirely brick-and-mortar. So around the country, retail is recovering surprisingly well, and aggressively. And that includes open-air shopping centers and the malls, what have you. The cities, the big cities in America are lagging, and New York is a lagger.

There's lots of reasons why, and we understand those reasons. We believe over time, and not a long period of time, by the way, that, that will -- New York will catch up with the rest of the country. And high street retail in New York will begin to recover aggressively. The marketplace in New York, as Haim I think said, is the retailers that are doing well, that are well capitalized, that are well managed and are aggressive are starting to nibble and take new locations.

I mean we have done multiple deals with those kinds of folks. We expect that over time, the fleet retail will recover. We do not expect it will recover to the unbelievable highs of the top ticks in rents four -- three -- four or five years ago, but it will recover from today's levels very aggressively. 

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Is there anything you're seeing in the market that changes your appetite for certain types of assets? Or how you want to be positioned within retail?

Steven Roth -- Chairman and Chief Executive Officer

We are -- well, let's see, how do I answer the question. We have offloaded several assets. We're not very high on Madison Avenue for lots of different reasons that I went into extensively on the last call. We have noticed some small non -- less-important assets downtown.

And the rest of our assets, we're pretty happy with or very happy with. I mean you think about it, we own the two best mega blocks on Times Square. They're irreplaceable assets. And the assets that we have on Fifth Avenue -- and by the way, Fifth Avenue is struggling.

The traffic on Fifth Avenue is not what it was, but it will recover. So we reanalyze the hand that we have periodically frequently. And so as of right now, we're not unhappy with our portfolio.

Operator

Thank you. Our next question on line comes from Alex Goldfarb from Piper Sandler. Please go ahead. 

Steven Roth -- Chairman and Chief Executive Officer

Hey. Good morning. 

Alex Goldfarb -- Piper Sandler -- Analyst

Morning, Steve. Hopefully, your bankers and lawyers have paused the billables on the tracking stock as well. So a question for you. When you look at the TIs that are in the quarter for -- presumably that's a lot of Madison Square, but also other tenants as well.

And then speaking to brokers hearing about how tenants are cutting lease terms, tenants that do 15, what have you. How have the economics changed as far as when you're leasing the tenants? How has the TI package and the length of the lease changed as you're engaging in the rents? And is it purely a function that the way to get the higher rents, you have to -- escalating TIs given inflation? Or do you think that some of this may subside? Just trying to get the economics. Because if you look in San Francisco, 555 in California, the TIs as a percent of the lease are much, much lower than they are in New York.

Glen Weiss -- Executive Vice President, Co-Head of Real Estate

It's Glen, Alex. I will tell you, TIs have certainly neutralized. They, of course, did escalate post COVID, but we've seen a stabilization in those numbers. Rents are even strengthening in many of our buildings.

This quarter was certainly weighted to the MSG deal, which was a market TI. So the numbers speak for themselves. I would tell you, San Francisco, a lot of the deal-making that we've done the last two years have been renewals. And the terms have been, call it, five, six years.

But I think the bigger answer to your question is tenants are committing to long-term leases. If you listen to our remarks, in terms of term, 13, 14-year average terms, I think, is a huge signal that CEOs are committing to the space in a big way, all over our portfolio and throughout the city alone. So I think that's a big thing in terms of the signals of everyone starting to think about the future, bringing their employees back and making huge commitments to space. So I think the term is the biggest answer to focus on in terms of what you're asking.

Steven Roth -- Chairman and Chief Executive Officer

Alex, let me give you my take on this. The inducement packages, TIs, are elevated. We are not happy with that, by the way. But it's the market, and we have to meet the market.

So the market in New York is basically a sort of a -- there's a rule of thumb -- a formulaic rule of thumb that for -- based upon the term of the lease, that's how large the TI package is and the free rent package is, OK? It's fairly formulaic and the market has gone to -- it's not a jump forward. Every lease is a new negotiation. There's kind of a formula. So it's kind of like one month free for every year of term.

So that's the way it sort of works. There are some wise guys in the market, and we are certainly not one of them who will elevate the TI package and buy up the rent, OK? That's not the game that we play.

Alex Goldfarb -- Piper Sandler -- Analyst

OK. No. That's helpful, Steve. And then just going back to your comments about uncertainty in the market.

And certainly, I saw yesterday, there's a headline that I guess, Mayor Adams isn't going to pursue bail reform with Albany. It sounds like that may have died yesterday, which is unfortunate because certainly, we need that. But you mentioned...

Steven Roth -- Chairman and Chief Executive Officer

Alex, Alex, Alex, making political predictions like that, you're over your head, son, OK? Just because the newspaper says something and because -- whatever it is, don't take that to the bank.

Alex Goldfarb -- Piper Sandler -- Analyst

OK. I won't go to the ATM. But my question is, you made a comment about uncertainty around COVID. And it seems like a lot of companies, especially the Wall Street banks and everyone are sort of moving on and accepting that COVID is here.

We got to get back to the office, even Governor Hochul has said that. So when you make the comments about the uncertainty in the market, is there a concern that until maybe labor pressure subsides that the companies may feel like they have to still be sort of gingerly with the employees? Or is there a true concern from the leasing managers that if there's another COVID wave, they may go back to the return at home? It just seems like everyone is sort of done with COVID and wants to get back to normal life. So I was just curious your comment about it still being a risk out there.

Steven Roth -- Chairman and Chief Executive Officer

I don't think -- I didn't think I said it was a risk. I said it was not resolved, yet. The point of it is, is this, every CEO that Glen talks to or Michael talks to or I talk to, they want their people back in the office, OK? The business is run from the office, not from the kitchen table. And they all feel it's a universal feeling that the office is the place where creativity is, gatherings are, and that's the place where businesses are run and where businesses grow.

I mean I think that's a universal feeling. Now obviously, there's different health issues and other issues, which have affected that feeling. And obviously, it's getting a little silly where people announce they're going to call back their workers on x date, and then that gets postponed and postponed and postponed again. From my point of view, and that of my partners here, speculating on when all this is going to be over and when the occupancy rate in the offices will go back from the 30% that it is now up to the 75%, that's normal, I think it's silly.

It's going to happen, whether it happens three months from now or nine months from now, we don't know. But the one thing that we do know is all of our clients, our tenants and the CEOs, they basically want to be office-centric operations.

Alex Goldfarb -- Piper Sandler -- Analyst

OK. Thank you, Steve. 

Steven Roth -- Chairman and Chief Executive Officer

Thank you, Alex.

Operator

And our final question comes from Ronald Kamdem from Morgan Stanley. Please go ahead. 

Ronald Kamdem -- Morgan Stanley -- Analyst

Hey. Two quick ones for me. Just going back on the variable income. Maybe asking it a different way. Is there a way to think about how much is left relative to sort of pre-COVID? Is there on -- that's not been recovered, just putting it all together?

Michael Franco -- President and Chief Financial Officer

I don't want to give you a number off the cuff here, Ronald. We can follow up offline. So we're going to go component-by-component. So let's not do it off the cuff.

Ronald Kamdem -- Morgan Stanley -- Analyst

Sure. And then my last small one was just -- so in 2021, sort of did one acquisition and bought a partner out. Just curious, are you -- is there sort of more opportunities like that in '22 and '23 as you're thinking about the portfolio and some of the joint ventures?

Michael Franco -- President and Chief Financial Officer

Look, that was...

Steven Roth -- Chairman and Chief Executive Officer

What was the question?

Michael Franco -- President and Chief Financial Officer

We bought a partner out in 2021. Are there more opportunities like that in 2022? The answer is our partner...

Steven Roth -- Chairman and Chief Executive Officer

The answer is, we'll see. We'll see.

Michael Franco -- President and Chief Financial Officer

They initiated that, and we responded, and we're happy about the purchase, but all our other partners seem fairly content.

Steven Roth -- Chairman and Chief Executive Officer

The answer continues to be, we'll see.

Ronald Kamdem -- Morgan Stanley -- Analyst

Got it. Thank you. 

Operator

We have no further questions at this time.

Steven Roth -- Chairman and Chief Executive Officer

Well, thank you very much. We appreciate you all participating. I mean, obviously, from -- as you can tell from the results that we published last evening, and our remarks and our dialogue this afternoon, we are very proud of the quarter. We think we had a bang-up quarter.

I'm extremely proud of our teams delivering on these results, and we're excited. We think -- once again, we reaffirm the quality of our portfolio. We reaffirm that we are bouncing off the bottom aggressively in retail, and we're doubly and triply excited about the Penn District. So we appreciate your participating in the call, and we'll see you at the next call.

Operator

[Operator signoff]

Duration: 60 minutes

Call participants:

Steven Borenstein -- Senior Vice President and Corporation Counsel

Steven Roth -- Chairman and Chief Executive Officer

Michael Franco -- President and Chief Financial Officer

Michael Bilerman -- Citi -- Analyst

Steve Sakwa -- Evercore ISI -- Analyst

Glen Weiss -- Executive Vice President, Co-Head of Real Estate

John Kim -- BMO Capital Markets -- Analyst

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Haim Chera -- Executive Vice President, Head of Retail

Alex Goldfarb -- Piper Sandler -- Analyst

Ronald Kamdem -- Morgan Stanley -- Analyst

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