Vornado Realty Trust (VNO) Earnings Call Transcript & Summary

Good morning, and welcome to the Vornado Realty Trust Fourth Quarter 2024 Earnings Conference Call. My name is Betsy, and I will 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. Steve Borenstein, Executive Vice President and Corporate Counsel. Please go ahead.

Welcome to Vornado Realty Trust's Fourth Quarter Earnings Call. Yesterday afternoon, we issued our fourth quarter earnings release and filed our annual report on Form 10-K with the Securities and Exchange Commission. These documents as well as our supplemental financial information packages are available on our website, www.vno.com, under the Investor Relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-K and financial 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, 2024, 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. At Vornado, business is good, really good and getting better. New York is our home, and everyone agrees that the New York real estate markets are head and shoulders, strongest in the nation. As I have said before, while New York has over 400 million square feet of office, we really only compete in a narrower market of about 188 million square feet of the better space. Availability in the better-space market is 10.7% versus 20.1% in the not-better-space market. And that 10.7% availability is evaporating very quickly. Park Avenue is already under 7%. Add to that, that the cost of a new build tower in New York has just about doubled over the last 6 to 7 years. And with the cost of debt at, say, 6%, new supply is frozen. There hasn't been a major new building start in 5 years and once started, delivery takes 5 to 7 years. Taken together, this all creates a landlord's market, where we expect rents to rise aggressively, one might even say rents to spike. And in fact, rents have already started to rise. So all good, very good. Why New York? New York is America's world city, New York's human and physical capital is irreplaceable. We have the largest, most educated workforce, the best transit system for commuting from our vast suburbs. You may read this as a plug for the Penn District and I guess it is, the largest number of corporate headquarters, the best restaurants and museums and 8 professional sports teams even though the d*** Yankees can't seem to beat the Brooklyn Dodgers. I would like to focus on a few points and a handful of our recent accomplishments. Work from home was a scare. But as we predicted, it would not last and is -- not last. Most have left their kitchen tables and are back at the office. Our stock price increased 49% in 2024 after increasing 35% in 2023. In 2024, we leased 3.4 million square feet overall, of which 2.65 million square feet was New York office at market-leading $104 starting rents with mark-to-markets of 2.5% cash and 10.9% GAAP. For the second year in a row, we completed the most premium $100-plus deals in New York in 18 transactions for 1.36 million square feet. And we completed 3 of the top 10 largest office deals in New York. We completed 285,000 square feet of deals at PENN 1 at $98 starting rents exceeding our underwriting. We completed 25 retail leases totaling 187,000 square feet highlighted by Manhattan's first Primark in the Penn District. We completed the UNIQLO sale at 666 Fifth Avenue at a record price of $20,000 per square foot. Last month, we repaid at maturity our 3.5%, $450 million unsecured bonds out of cash on balance sheet and $108 million of our credit line. Our entire portfolio was 100% LEED certified, and we are first in the nation to achieve this milestone. We are on the 2-yard line with a handful of important deals. We finally complete -- we will finally complete the master lease to NYU at our 1.1 million square foot 770 Broadway by the end of the month. This deal will relieve our balance sheet of $700 million of debt on this asset and eliminate 500,000 square feet of vacancy. By the way, this large and impressive building on the edge of the NYU campus will be their Science Center. I have seen the plans. It will be a world-class education facility which will make NYU an even greater elite higher education institution. That's great for NYU, and that's great for New York. We will shortly refinance 1535 Broadway, which will allow us to redeem, for cash, over $400 million of our retail JV preferreds. And we have several asset sales in the works. Taken together, these transactions will shortly generate an incremental additional $1 billion of new cash. At PENN 2, we are only weeks away from signing a 300,000 square foot lease. PENN 2 is being very well received by tenants and brokers with commentary that it is the best redevelopment anyone has ever seen, and together with PENN 1 has by far the biggest and best amenity package anywhere. We are also engaged in multiple tenant proposals at PENN 2, including negotiating an LOI for a major headquarters lease. I'm predicting that PENN 2 will likely be 80% leased by year-end. We are achieving rents here above our underwriting. And accordingly, we have increased the incremental yield on Page 16 of our supplement to 10.2%. We will deliver Pier 94 on Manhattan's west side by year-end 2025, the first ever purpose-built film and television soundstages in Manhattan. Now for those interested in Alexander's, our 32.4% owned affiliate. In the second quarter of 2024, we early renewed the 947,000 square foot Bloomberg office lease at 731 Lexington Avenue, whose expiry is now pushed out to 2040. At Rego Park in Queens, we are moving Burlington and Marshalls, the last remaining tenants at Rego I to our adjacent Rego II shopping center, thereby filling up Rego II and creating a fully vacant blank canvas at Rego I for either sale or development. Obviously, we believe this unique 5-acre parcel of land wonderfully located at the intersection of Queens Boulevard and Junction Boulevard and bordering the Long Island Expressway is worth more as land than the 66-year-old building. I believe Alexander's stock substantially undervalues its assets, and we will have to do something about that. 350 Park Avenue development is on schedule. The new building is now fully designed, and it will stand out as being truly, truly best-in-class. We are in the formal approval process under the Midtown East zoning and Citadel, our major tenant and Ken Griffin, our partner. We'll shortly begin moving out of 350 Park into swing space, so the demolition can begin early next year. I end by noting how proud our Veneto teams all are of our accomplishments to date in the Penn District. Take a look at Meta at Farley, PEEN 1, PEEN 2, the Moynihan Train Hall, the Long Island Railroad concourse, the 33rd Street Plaza and even PENN 11 and how excited we all are about the future of our city within a city. Next up is the hotel Penn site, now down to the ground and ready to go. Our Penn District is clearly a site to be seen. If you haven't already said it, please call me to a range of tour. Now to Michael.

Thank you, Steve, and good morning, everyone. Comparable FFO was $2.26 per share for the year. As previously forecasted, this is down from 2023 and due to lower NOI from the known move-outs that we discussed throughout the year and higher net interest expense. But overall, our results were better than we had anticipated earlier in the year. This is primarily due to the acceleration of our leasing activity at 330 West 34th Street, where we recognize lease termination income in connection with executing a 304,000 square foot lease with WeWork on behalf of Amazon. Also, net interest expense ended up being lower versus our original projection due to short-term rates coming down. By the way, we already have almost 80% of the vacant space from the known move-out spoken for. Fourth quarter comparable FFO was $0.61 per share compared to $0.63 per share for fourth quarter 2023. This decrease was primarily attributable to higher net interest expense and lower NOI from the known move-outs. Partially offset by the lease termination income at 330 West 34th Street and lower G&A expense. We have provided a quarter-over-quarter bridge on Page 3 of our earnings release and on Page 6 of our financial supplement. Now turning to 2025. Though our practice is not to give earnings guidance, we can tell you that similar to current consensus, we expect 2025 to be slightly lower than 2024. This is partly due to the previously mentioned lease termination income at 330 West 34th Street that positively impacted 2024 comparable FFO. And as indicated during last quarter's call, the GAAP earnings impact and the backfilling of vacancies and the lease-up of PENN 1 and PENN 2 won't occur until towards the end of 2026, with full positive impact in 2027, resulting in significant earnings growth by 2027. A few words on occupancy. Our year-ended office occupancy was 88.8%, up from 87.5% last quarter. With the pending full building master lease at 770 Broadway, our office occupancy increases by 330 basis points to 92.1%. As we previously mentioned, our first quarter 2025 occupancy will decrease [ due to ] PENN 2 being placed into service. We anticipate that this decrease will be temporary as PENN 2 occupancy stabilizes over the next year and we get to the low 90s. Our New York leasing pipeline remains robust as we enter 2025. We have significant activity across our portfolio with 750,000 square feet in negotiation on top of the 1 million square foot master lease being finalized with NYU at 770 Broadway. Additionally, we have another 1.3 million square feet in various stages of proposals and negotiations. Turning to the capital markets. Both the financing and investment sales markets are showing encouraging signs over the past few months. The CMBS market is wide open for large, high-quality assets such as ours with appropriate metrics and loan structures. AAA and overall spreads for recent financings on the Spiral and 299 Park Avenue have shown significant tightening over the past 6 months to levels consistent with pre-COVID. While we expect banks will largely remain on the sidelines this year, some banks are beginning to look at financing smaller office deals. A hopeful first sign in the trend we expect to continue. The one negative is that short-term rates after coming down 100 basis points last year, look likely to remain around current levels for the foreseeable future, keeping borrowing costs high. The investment sales market continues to pick up also with several high-quality office assets trading recently, including interest in 320 Park Avenue by Munich Re, and 1345 Avenue in Americas (sic) [ 1345 Avenue of the Americas ] by Blackstone. With that, I'll turn it over to the operator for Q&A.

[Operator Instructions] Steve Sakwa from Evercore ISI is on the line with a question.

Steve, thanks for those great comments about the leasing activity. It sounds like you're close to punching a few things into the end zone here. But maybe you or Glenn could just provide a little bit more commentary around some of the timing for PENN 2, I guess, in particular. And just maybe the competitive dynamic that you're seeing for that space and the confidence level you had to raise the yield on PENN 2.

Steve, it's Glen. PENN 2 is more than off and running, every large head in the market has it in their top 3 list of what to see. There were only 5 buildings in Manhattan with blocks available of 500,000 feet or more. We have the best block. So as you heard in the remarks, we have a lease out with 1 tenant that's going to get done in short order for 330,000 feet. We have an LOI in very serious [ stages ] for another very large headquarter tenant. And behind all that, we have tenants battling for space from anywhere between 60,000 and 200,000 feet. So PENN 2 is now the bull's-eye for many people searches, and we're in complete fifth year on our leasing.

Okay. And just any comments on just kind of the rents, I guess, that you're sort of seeing, I guess that speaks to kind of the yields being pushed up at that by 70 basis points.

We've raised our rents across the entire building, from bottom to the top.

John Kim from BMO is on the line with a question.

I wanted to follow up on Steve's commentary on $1 billion of new cash proceeds you expect. You have $700 million debt pay down at 770 Broadway, $400 million freed up at 1535 Broadway as well. And then on top of that new dispositions, so I was wondering how much in new dispositions that you anticipate?

Well, the math of what you just said, the $700 million is going to pay off debt. There's a little more -- a couple of hundred million dollars more than that coming in on that building. It's $200-odd million coming in from refinancing 1535. And there will be enough in short-term dispositions to round it up to $1 billion.

And will those be focused on retail or noncore office? Or any color you could provide on what you're...

Not going to get into that -- I'm not going to get specific about that, John.

Jeff Spector with Bank of America is on the line with a question.

Congratulations on a great 2024. Can you tie Steve's comments on the slide...

I can't let that go by without saying thank you.

Okay. Absolutely. If you could please tie, Steve, your opening comments on the expectation for a rent spike to Michael's comment on growth in '27. I think we all understand '25. Can you tie in '26 at all to any of those comments, please?

Oh, God. I don't know. We've been through these kinds of cycles 4 or 5 times. What I said, which I thought I was pretty clear was that there's lots of space in New York, but we compete in a much smaller subset of the better space, which is somewhat below 200 million square feet. So that's the first point. The second point is that the current availability in that subset of space is 10% and going down very quickly because there's a shortage of space. We haven't had a recession, and all of our clients are expanding and aggressively expanding in New York. The businesses are good. The stock market is good. So business is healthy and robust, and demand for space in New York is actually pretty terrific. So with availability limited and shrinking and no new supply -- that's critical, no new supply coming on the market for lots of different reasons, construction costs are historically high, interest rates have not fallen -- have not fallen actually long term, they've not fallen at all. And so the ability to create new supply is very, very limited, and I use the word frozen. Take all that together, that's the landlord's market. We expect rents to go up significantly next year. And there I used the word spike. Now with respect to Michael's comments about 2026, you want to...

Yes. Jeff, what I would say is that as we look at our portfolio, right, we've got a number of drivers. We have filling up the empties. We have a -- and so we know that significant part of that is going to come from PENN 2 and to some extent, PENN 1. We have the leases roll over, we're now on the other side of that as we move into a landlord's market where we have positive mark-to-market. So it takes some time for that to flow through. '26 will be an improvement, but we think very significant improvement comes in 2027.

I'll give you something else to think about, okay? Now in PENN 1 and PENN 2 we are leasing now in the $100 range, maybe just a pinch higher. There's nothing that said -- but if you go to our neighbors, if you go to Manhattan West and you go to Hudson Yards, the market rents for those buildings, albeit they are newer buildings -- actually they're new buildings, is substantially monumentally higher than $100 a foot. As this market tightens and as the Penn District matures, it gets to be accepted as the single best location in the west side, there's nothing that says that market rents in PENN 1 and PENN 2 can't go from $100 a foot to $125 a foot and then maybe even substantially higher. That kind of appreciation in income will cause values to increase monumentally. So for example, help me on this, Tom, $25 a foot times 5 million feet is $125 million a year, okay? $125 million a year is worth $1.5 billion to $2 billion of value accretion without any capital expense. So we're unbelievably enthusiastic about the market, about the tightening of the market and about the inventory that we own.

Very helpful. And my follow-up question, is on the comment that you're working with a large anchor, not looking for specifics, of course, on who. But can you just talk about the demand for anchor space? Is it a particular industry? Technology, financials? Is it more broad-based? And I don't know if you could tie that to the hotel Penn site.

Jeff, it's Glen. Generally speaking, the big demand drivers are financial, legal and tech. That's what we're seeing, not just in PENN but across the entire portfolio.

Dylan Burzinski is on the line from Green Street with a question.

Steve, just wanted to go back to your comments on you guys not -- or in your guys' opinion, the public market not seeing the value in Alexander's, and your comments about doing some bit about it. Can you kind of talk about sort of what you mean by that, anything we could expect?

Well, thanks. If you take the assets of Alexander's, and you do a sum of the parts analysis, that number by any construct has to be very substantially higher than the trading price of the stock. So it's a very simple concept. And it's based upon NAV. And if you just -- if you calculate the value of the asset piece by piece, it greatly exceeds the stock price. Now think about it for a second. So Rego I, which I guess you might say is a failed shopping center, we had IKEA move out, so it's shrinking down. So we end up with a 66-year-old building. The capital cost of re-tenanting that building is huge. And obviously not economic. So what we did very simply is we took the two remaining -- actually, Burlington and Marshalls. Two great tenants. Marshall has been there for 30 years, 40 years. Very long period of time anyway. So we move them into -- or we're in the process, and we have signed documents, by the way, the process of moving them into Rego II, which will fill up Rego II, which is a relatively new shopping center, we built it the better part of 10 years ago. So that makes Rego II a success. And it empties out, Rego I, which is a grand 5-acre piece of land, which will be either sold or developed. So that creates value. Now it doesn't have income today. So somebody who's looking at Alexander's from the income-only approach is going to be substantially incorrect as to what the values are, but the piece of land is in the middle of Queens at the intersection of main, main, main and main, and we think is extraordinarily valuable. So we'll see.

Appreciate those comments. And then I guess just one more broader strategic question, I know several years ago, you guys floated the idea of doing a tracking stock and ultimately shelved it until things started to recover in the New York office market. Now that things are seemingly recovering quite significantly, I mean, is that something that's back on the table? Can you kind of talk us through where that sort of fits in the grand strategic set of things?

The easy answer to that is no. But I think about a tracking stock at least every day. I think it continues to be a very, very, very good idea. I can honestly tell you, I can't get any support for the idea from any of you guys and even from my guys inside. But I continue to think about it every day. You never know it may come up as being a useful tool sometime in the future. But the short-term answer is no, although I do think it's -- I do love the idea.

Floris Van Dijkum is on the line with a question.

I was just curious, your commentary on rents, obviously, at the Penn Plaza district being significantly higher than what you probably originally underwrote. I recall you talking about $150 million, or we -- I guess we've estimated about $150 million of NOI growth at your 3 Penn Plaza district assets, PENN 1, PENN 2 and Farley. As you think now on the progression of market rents, has your NOI growth expectation increased? And I mean fully stabilized, this thing could generate more than $300 million of NOI.

The answer to that is that, obviously, with the rents going up, that prediction will go up, but it will go up only marginally. And I'm told by my finance people who are smarter than I am, that you have to take into account that there will be capitalized interest that will roll off. So I mean, it's a complicated calculation that my guys can help you with off-line. But basically, what I'm looking for is as PENN 2 leases up, and as PENN 1 completes its fill up, and then there is some retail space in the Farley building, as all that happens, the income from that cluster of buildings will go up the better part of $150 million. And that's incrementally going up. That doesn't count -- so it will be more than that if you take it all together. So I mean, I read your piece that you put out, I think, last week, and I think it is absolutely directionally correct.

So Steve, maybe...

For us, [ by the bye, ] as we keep developing the neighborhood, and for example, as I said in the prepared remarks, the PENN 15 site, the old Hotel Pennsylvania site is next up. It's already raized and down to the ground as we build a world-class office building, which I've said the building is frozen, but we're going to attack that as if the land cost in -- at PENN 15 is sunk. So if we look at it as having 0 land cost for the moment, we simply can get the new building off the ground. So anyway, if we -- as you look at this as a neighborhood, as we build on PENN 15, a world-class office building, that will inure to increase the market value of the -- across the street, PENN 1 and PENN 2, by at least $25 or $50 a foot. So what we think as we continue to work on our neighborhood, the value creation will be quite substantial, and I might even say, enormous.

Yes, if you start adding those pieces. The follow-up question, I guess, is on the acquisitions front, I know that it's hard to acquire assets. Maybe if you could talk a little bit about the environment and the types of transactions you're looking at? And where you think you're going to source or where you're more likely to source transactions? And would you consider allocating capital to outside of Manhattan to maybe markets like San Francisco or Chicago that are further behind in the recovery phase?

That question is right up Michael's alley.

So I think in terms of acquisitions, you're accurate in the sense of it's been more challenging in New York, and as the cycle is turning here, sellers are getting a little more optimistic. That being said, there's still a lot of maturities to work through, and I think that's going to present opportunities in the next year or 2. So -- but our target is it has to be the right asset to fit into our portfolio, right, from a quality perspective. So I think there will be some, but it's going to be fewer rather than more. San Francisco, we are constructive on. We believe in the market -- I think we've been consistent on that. I think the signs are positive there, new leadership, city is certainly turning a corner. So the answer is yes. We are open minded regarding San Francisco. Chicago, I think we're content with what we have. I don't think you'll see us add anything there. The market has many more challenges, and it's going to take some time for that to recover. So we're not focused on adding there. And I don't think we'll look beyond that.

Michael Griffin with Citi is on the line with a question.

I appreciate all the color around the leasing pipeline and demand. I'm curious, maybe Steve or Glen, could you give us some insights into whether or not tenants are coming to you earlier to try to renew space just given that limited availability? And you've talked about landlord pricing power. Have you started to see concessions drop off at all as a result of this demand you've seen?

It's Glen. So in terms of the demand, we're seeing it from every angle, multiple expansions, multiple renewal discussions for deals that are years out from expiring and the demand -- the immediate demand for space from tenants who are either new to the market or want to move immediately is more robust than I've seen in many years. As it relates to concessions, I think they're neutralized. They've not come down generally yet, but rents have gone up. And that effectively, things are better. And as this market more and more become a landlord's market, the concessions will come down.

I would add on to what Glen said. I think there's a couple of dynamics there, right? First, Glen talked about these expansions. We were going through our pipeline the last few days. And there's a handful of tenants that we did leases with very recently that had already come back for more space. And I think that's reflective of a couple of dynamics that's occurred -- that occurred. One is I think there was a level of conservatism on behalf of tenants as they lease space coming out of COVID because they didn't know exactly how they'd use or how much they would need, right? And they're now all fully back and they recognize that they need more as a result of that. Two, as both Steve and Glen said, business is booming, right? Law firms are booming, financial services booming, tech is booming, et cetera. So all these businesses are growing. So when you take both of those dynamics, you have a very robust market overlaid onto a very tightening level of supply of where these tenants want to be. So I think that's why Steve said what he said in terms of the expectation for rental growth over the next several years.

I appreciate the additional commentary there. And then just maybe following back up on your comments in the prepared remarks around the financing markets and capital availability. Obviously, we've seen more transactions come to market as of recent, the CMBS market seems more open. For the mortgages that you guys have coming due this year, whether it's PENN 11, 888, those properties are very well leased. Do you have a sense or maybe give us some insight on where you'd expect the refinancing rate to be relative to the current interest rate? And any other commentary on sort of the debt capital markets would be helpful.

Look, I think if you think about where we are today versus where we were, let's say, a year ago, I think it's night and day. And we really opened up the market on the office side with the Bloomberg financing. And since then, certainly with respect to New York City, there's been a floodgate of high-quality office have been financed. So you think about the transactions that have gotten done, many of them in excess of $1 billion in a couple of cases, multibillion. So I think that is evidence of the -- just the demand from fixed income investors for high-quality New York City office, I think it's very encouraging. And so -- obviously, our portfolio plays in that. So as we look out in terms of the financings that are going to -- that roll this year, like we're coming off some low rates in a couple of cases, particularly on fixed -- on a couple of fixed rate deals, I think we'll see upticks in rates there. At the same time, something like a Union Square, the demand for high-quality retail is very strong and that may well be lower. So [ net debt, ] I think it's probably a little higher, but we're also delevering with some pay downs of the 770, et cetera. So I think from Vornado's perspective, I think we obviously took some hits the last couple of years with interest expense going up pretty significantly. I think by and large, we're done with that in total. Could it be a little bit higher this year? Maybe. Could it be a little bit lower? Maybe. I think we're sort of par year-over-year. And I think, generally, the worst is sort of over for us.

Vikram Malhotra with Mizuho is on the line with a question.

Steve, I guess, you've done a great job on the Penn District on various assets. You talked about sort of the -- I guess the next evolution or the next jump in loss stabilized NOI. I'm wondering from an actual development or an asset standpoint, what's next in PENN? How would you sequence sort of various other parcels or redevelopment opportunities you have?

Thanks for the question, Vik. We're studying that now. We believe that we should in the Penn District have 1 or 2 buildings under construction and rolling forward for the next 10 years, but we're not ready to announce anything yet. Obviously, the PENN 15 site is sitting there probably, I believe, the best site in Manhattan ex Park Avenue. So that obviously is the next site. We are considering all options for that site. There will clearly be an office building on the front of that site, but we're also considering apartments as well.

Got it. And then just maybe to follow up. You talked about the office pipeline. I'm wondering if you can give a little bit more color on sort of how street retail is evolving on Fifth and Madison. Any color on tenants in the market there? And what pricing may be doing and how that translates into your leasing costs?

Yes, Vikram. So on the retail pipeline, I'd say just on the market in general. The market continues to strengthen vacancy rates continued to decline and rents are certainly for the best spaces. I think returning to close to peak levels. So, we signed a significant lease in Times Square last year. There's activity in that submarket. Again, we own the two best blocks, and we have some active dialogue going at some very strong rents, not too far off the peak there. Fifth Avenue, same dynamic in terms of tenants looking for space, I think we've seen certainly, since COVID, the most activity of retailers cruising around looking for space. And so I think that pickup. And again, for the right spaces, I think tenants recognize they're going to have to pay rents that aren't too far off the peak there, if not the peak. So the bottom line is and what's driving all this is that the sales figures that the retailers are doing. And the recognition that New York remains the global city in the U.S., maybe #1 in the world, and they have to have locations here. So we're close to lease with some sort of new-to-market tenants as well as some tenants that are already here. We continue to have good activity throughout the Penn District, and we're working on some leases there as well. So we're pretty constructive on the retail market as well. We own great assets and those tend to be where the retailers are most focused.

I'll give you an anecdotal story. So we have an important asset on Fifth Avenue. Actually, we have a lot of them. But one particular important asset on Fifth Avenue, we had a major retailer come in knowing that the incumbent in that space had an expiry in 3 years and no renewal option. Trying to actually say, I would like to sign for that space now, and I'll wait for that tenant's lease to expire. So that's things that happen only for extraordinary properties in tight markets. So that was kind of fun. The other thing that I'll say is on Fifth Avenue tenants would prefer to buy rather than rent, and so the buy prices are higher than would be reflected by the market [ risk ]. So the arbitrage there is that it's more economic to sell some of these assets than to rent some of these assets. And we're open for business.

Michael Lewis with Truist Securities is on the line with a question.

So Steve, you often emphasized you run this as a cash business, a focus on cash, which we agree with. The FAD of $1.75 per share in 2024 was the lowest in at least the last 25 years, probably longer. And I realize leasing up a lot of space costs money, but maybe help us understand the health of the New York office business in the context of REITs like yourself making less cash money than ever before. And this 25-year trend of FAD kind of consistently going down? And are we at an inflection? Do you expect that to kind of rapidly increase? And do we get back to kind of pre-COVID cash flow levels?

A complicated question. I'm familiar with the trend, I'm familiar with the capital intensity of our business I'm familiar with the fact that we're in the multi-tenant -- we and all of our colleagues in the industry are in the multi-tenant business where the spaces turn over. I'm familiar with the cost of turning over those spaces all of which creates the trend that you mentioned. So clearly, and Glen alluded to this, the TI and the tenant inducements to turn over a floor in a building is very sticky, and we're struggling to try to get them to go down, they will only go down in a very tight market. So that's in our future, not in our past. On the other hand, if you look at the rents, rents have gone up already to sort of alleviate that problem. So I'm expecting that the cash -- the actual cash flow or AFFO or whatever you want to turn it, we are at the bottom of that cycle, and that's going to go up in a market which I think is going to get much tighter. Now, that is something that I'm predicting for New York. I believe New York is unique in the nation. Other cities as great as they might be around the country, I don't believe are going to benefit from that trend.

Okay. Great. And then my second question, I just wanted to ask about the New York office in-place rent versus market rent. So the in-place rent looks like it's right around $90 a square foot. Where do you think market rent for the operating portfolio are compared to that?

It's Glen. We say this often, quarter-to-quarter, it's going to ebb and flow, flat, positive, et cetera. We feel confident that our mark-to-markets will be positive. I'm not going to predict how much that means. But we like our spot in terms of our rolling expirations in the next few years. We like where we're now pegging rents. As we mentioned, we've increased rents generally across the whole portfolio. So we feel good about that metric over the next 2, 3 years.

I'm not [indiscernible] and I'll predict. So let's just go to PENN for a minute because that's easy. So I believe that we signed a wonderful lease for 730,000 square feet in the Farley building in the middle and the depths of COVID, I believe when that lease comes for renewal, albeit less than 7 years from now, the markets for that renewal will be very substantially higher than the in-place rent. I've already said that I believe PENN 1 and PENN 2, which we are very happy to get $100 or a pinch more today that in the short-term future, 3, 4, 5 years from now, the market rents for those buildings will be very, very substantially higher. So that's what I think. By the way, we're betting on that.

Alexander Goldfarb from Piper Sandler is on the line with a question.

Steve, and first, congrats, mazel tov on the improved yields at PENN and the positive reception you guys have had from the market. So that's quite a compliment from the market for you guys there. Two questions...

Alex, thank you, my friend.

No, it's true. I mean you spent time walking us through and it's evident at your ability to rethink in the campus environment. So it's good to see that the rents are moving the way you had hoped. My two questions are first on Alexander's, and I appreciate your comments, what would be -- what would -- I mean, right now, given how much of the original assets have been sold off, and I would think you could get a good price for the apartment tower in Rego II. Why not just blend in Alexander's into Vornado, you'd eliminate the G&A, instead of paying a dividend, that cash flow would accrue to Vornado. You have 731, which certainly fits in your portfolio. Why not just incorporate Alexander's into Vornado? What would prevent that?

Well, nothing if not tenacious. That idea has been floated for 20-odd years, and I have said we're not going to do that for 20-odd years. And actually, I probably will continue to say it now, the -- Alexander's, the pricing of it, the melding of -- it's not something that's on the front of my mind today.

Okay. I mean it just -- it has cash needs, and it's certainly as you wound it down, would seem to fit more and more, but I guess that's a conversation for off-line...

Hang on, Alex, let me give you a fantasy. Okay.

I love fantasies.

Okay. I'm trying to please you. If we merged Alexander's into Vornado, I have no idea how we would price it and how we could get both sides to be happy, very difficult to do, okay? Alternatively, if we left Alexander's as we are going to do, that's what I'm saying, as a freestanding independent public entity, and we narrowed it down to nothing but the Bloomberg office building, which shortly will have approximately $100 million of net income, and that was the only asset in that property, and it had very low debt or maybe no debt, what would that sell for as a -- what would that sell for in the stock market? And I submit to you that, that would sell for much, much higher than the current trading price of the stock. That's just a fantasy though.

Second question is, Michael, you walked through...

Actually, what I'm really saying is, from a value point of view, we think that we can make Alexander's value to be above what Vornado might be willing to pay for it and then Alexander's shareholders will -- on behalf of -- that's what we're pursuing.

Okay. Michael, you -- appreciate the comments on '25, some perspective. But you guys have outlined some asset sales, vacating at 350 Park and just the remnants of refinancing. In addition, you have the capitalized interest, I think, $51 million at PENN 2 that would burn off from that when -- as those leases take effect. So as we think about the next 2 years, how much FFO net is coming off of Vornado relative to FFO coming on from PENN?

Yes. I think that -- look, as we said, a couple of things. One is in terms of capitalized interest, right? We've talked about that being lower this year versus last year given PENN 2 is going to roll off this year. And I think that's why consensus is down appropriately, and that's reflected there. So 350, when that comes off, we don't think that has much of an impact relative to the master lease we're getting today. There'll be no debt on the asset at that point, we'll get capitalized interest on that. So that's not going to really have an impact on the numbers. So like we've talked for the last year about the success we've had backfilling 770, 1290, 280, now leasing up PENN. That's going to start flowing through a little bit this year, more materially next year and dramatically in 2027. And so -- sort of model that out as you want, based on that comment, but I think that's our trajectory.

Ronald Kamdem from Morgan Stanley is on the line with a question.

Just two quick ones for me. So one is on just on the same-store NOI for New York office ended at down 3.3%. Just as you're thinking about the next 2 to 3 years, just any high-level thoughts on what that same-store number could look like in this sort of strong environment?

Ronald, I don't have those numbers at my fingertips, and I don't want to give you numbers that are too much of a guesstimate and so on. So let us look at that and we'll try to get a little more visibility there.

Sure thing. Going back to the -- I had the same sort of question on CapEx, maybe asking it a different way. When I think about sort of the $250 million of CapEx spend this year, which includes $72 million on sort of first-generation space. Any sort of thoughts about what '25, '26 could look like? Are we coming down from those numbers? Are we staying in place? Just any sort of thinking on CapEx as we're thinking about the model.

I mean -- I think the CapEx, we raised it a little bit because -- and it's the best guess every year, right, in terms of timing of when you make those payments, and it doesn't necessarily line up to when you actually finalize the lease. But we know the leases that are in process. We have an expectation of what we're going to get done beyond that. And so I think it's reflective of the pretty strong leasing environment in addition to some base building capital. So, last year, I think we're dead on our prediction. Most years, we're, frankly, not because you're taking a high-level guess so I think directionally, we're still in the same bucket, $250 million, $275 million is frankly not that different, right? It's just a matter of what space you end up leasing in a particular year, how much capital you have to spend on the portfolio beyond that. So I think that's a pretty good number directionally for this year, just given some of these big leases that are in the works on PENN and beyond. And as we get into next year, we'll see what's left. But I think that number will start coming down as the portfolio fills back up.

Anthony Paolone with JPMorgan is on the line with a question.

Yes. Steve, you mentioned just viewing the cost basis around the Hotel Penn site as sunk at this point. Can you tell us just like what it costs to build something and go vertical right now then? And what kind of yield on that you would want?

What do you think a new building costs? My development -- my young development starts as $1,900 a foot ex land for a Class A building. I won't [indiscernible] test that.

And the yield?

Well, if you put land in, so we get to a number which is -- at the $2,000 and -- I don't know, pick a number, $2,500 a foot, some number like that, I don't know. And you put a yield on it, what would you build for now and with a debt market of 6%. Let's say, you need to get 7% or 8% or something like that because equity is more valuable than debt. So what, 7% times $2,500?

$175.

Now that's a number that's net of taxes and operating costs. So that -- so the answer is that to build a new building today, the rents that you would need to get are in the high $100s. You're shaking your head, why are you shaking your head?

I agree, which is why it's -- you talk about being frozen, the math doesn't work...

So -- but think about that for a second. So one of the reasons that I'm so enthusiastic about the rents at PENN 1 and PENN 2 and the rest of our portfolio rising from $100 a foot is because you have to figure that a new build is $200 a foot or something like that, maybe less, maybe a pinch more. So the in-place buildings and the better inventory in the great locations will become much more valuable. That's the whole punchline of -- that's the punchline for today.

Okay. I guess that's what I wanted to understand. I mean you mentioned your vantage point being that sort of cost thus far is sunk. And so I guess you're just looking at the incremental and what it could do for the whole area, not so much thinking about that $2,500 basis and a yield on that?

Yes. But the fact of the matter is, is that I own the land. I have -- I bought the land a long time ago. I have no debt on the land. And so given a choice between leaving the land empty or building on it, we'll make those choices. That's what we get paid to do.

Okay. I understand. And then just a quick follow-up. I think you bought a nonperforming B note on a Midtown deal last year. Can you give us any update on that or plans or what's happening there?

No, sir.

Nick Yulico with Scotiabank is on the line with a question.

Great. In terms of the PENN project, can you just talk a little bit about whether any the sublease space that's available in Hudson Yards is -- if you're actually finding that to be competitive when tenants are looking at your project?

Nick, it's Glen. So the answer is yes, which if you think about it, PENN 2 and PENN 1 are competing with new space. That's a great thing. And as Steve said, our pricing is not near their pricing, even the sublet pricing. So we feel good about the fact that tenant touring the west side whether it's the sublet availability in Hudson Yards or Manhattan West or PENN 1 or PENN 2, we are squarely in that mix every day. So we like that. We feel very competitive with it, very comfortable with it.

Okay. And then second question is just going back to the yield on PENN 2, can you just remind us, I think that the yield, when you quote the yield does not include TIs and leasing commissions being built into the cost there. So if we assume that -- I think at one point in the notes, I saw that it was around $140 was around like a TI leasing commission cost there per foot. I just want to see if that's still right. And if we build that in, is the yield on the project inclusive of that, closer to like 7.5%, 8%? Is that ballpark correct?

Yes, yes. I mean the answer is that we'll calculate it. I mean, I think the thesis is that we would have had to spend the TI dollars, leasing commissions anyway, right? And typically, given what's happened when you're spending those to generate rents that were not economic now given the quality of the old building. So we thought the incremental cost, it was cost that we would -- that we spent that we wouldn't have had to spend, right? That's how we got to the number that's in the supplemental. And what's the yield on that. So we can factor in the TIs, et cetera, to see, but we would have spent that money anyway.

Okay. So -- and then as the TI leasing commission per foot there, we should assume around $140, is that number?

It's about right, maybe a touch higher depending on the deal.

Brendan Lynch with Barclays is on the line with a question.

It looks like you've got about 14% of ABR expiring at 555 California in the third quarter and 18% for the year. Any details that you can give on renewal discussions. It sounds like you're optimistic on San Francisco in general. Just get -- some more color there, please.

It's Glen. We remain extremely bullish on our building in San Francisco, 555. It's the best of building the city, probably the state and certainly one of the best in the country. So when you look back from 2021 forward, we had a boatload, hundreds of thousands of feet expiring from '21 to '26. We have leased almost 700,000 feet thus far during that period. We have some more expirations coming in '25 and then some more in '26. We're attacking those now. Some of those tenants will stay but may not stay. But we feel great about what we've done -- our rents are clearly leading that market. It's not even close. And our tenant roster continues to be 5 star. So we feel great about 555 as we sit here.

Great. Maybe just one follow-up on that. Is the 14% in the third quarter, is that one tenant? Or is that split between multiple different tenants?

The third quarter of -- so in '25, there is multiple tenants expiring, call it, 5 or 6 tenants throughout the year in different quarters. None of them huge, but as you add it up, you get to that roll.

Steve Sakwa with Evercore is on the line with a question.

Just one quick follow-up. On 770, I realize that lease, Steve, isn't quite finished, but it sounds like it's going to get over the finish line soon. Are there any sort of unique accounting, I guess, adjustments that we need to be taking into consideration given the unique nature of this? Or is this just a typical normal long-term lease that would have straight-line rent, and we'll have to figure out what kind of the GAAP rent is and straight-line adjustments. I realize you get a lot of cash up front, but just trying to think if there are any nuances of this deal because it is a little bit different.

I'm not going to comment on that transaction. It will be final -- it will -- it is finalized actually. But it will be announced, I would hope by the end of this month. And so the announcements that we make we'll press release, and we'll have all the details that we need to give you guys so that you can understand it. But I mean, you'll get it. So I don't want to get into the detail now prematurely.

John Kim from BMO is on the line with a question.

Steve, you mentioned the lack of new office development in New York for several years, and how tough it is as far as getting the math to work on some of these sites. But how many projects do you think will get off the ground right around the same time as 350 Park? There's been a few out there in various stages.

None.

There's not enough demand?

No, there's plenty of demand. There's just not -- the cost of building -- I don't know what's going to happen with the cost of steel now, but who knows. The cost of building and the fact that interest rates remain stubbornly high and the lack of availability of aggressive capital will make the market frozen. Now 350 Park is an isolated different point of view because we already have a lease for a major tenant, and we already have a 60% capital partner. So 350 Park will get off the ground. My prediction is that almost no other building will get off the ground. And by the way, that could very well include for the for the short term, PENN 15.

Where would rents have to go to justify new development?

I've already answered that question. $200 a foot is an interesting bogey.

There are no further questions at this time.

Thank you all for participating. I think you can tell from the remarks of our management team. We are extremely enthusiastic about our business and extremely enthusiastic about New York and wildly enthusiastic about the Penn District. So thank you all very much for participating, and we'll see you next quarter.

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