Vornado Realty Trust (VNO) Q4 FY2025 Earnings Call Transcript & Summary

Good morning, and welcome to the Vornado Realty Trust Fourth Quarter 2025 Earnings Call. My name is Nick, 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 Corporation Counsel. Please go ahead, sir.

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, 2025, 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. Here at Vornado business is good and getting better. As you all know, Vornado is a [ premium ] Manhattan-centric office company. And I'm sure we can all agree that Manhattan is clearly far and away the best office and residential too, by the way, real estate market in the country. As predicted on our recent calls, New York is now on the foothills of the best landlords market in 20 years. We believe this landlords market in Manhattan will continue to tighten and lasts for a long time. Fundamentals are truly outstanding, the best ever. The long and short of it is, that tenant demand from finance, tech and most other industries is extremely robust in the face of declining availabilities and the better building subset. Take a look at our assets. We have the PENN District, our city within a city. The roster of our other assets in the better building category where in-place rents are well under market and market rents are rising. We have an irreplaceable portfolio of very scarce, think scarce as hen's teeth, high street retail assets on Fifth Avenue and in Times Square. We have the largest and most successful and growing large format signage business. We have in-house our wholly-owned vertically-integrated cleaning and security company. We have the best development program in town highlighted by 350 Park Avenue, PENN 15 and now 623 Fifth Avenue. And most importantly, we have the best management team, leasing, development, finance and operations in the business. In short, we are a very focused Manhattan-based office tower specialist. And we while not in Manhattan, let's not forget 555 California Street, the best building and rapidly recovering San Francisco, where occupancy is 95% and rents are north of $160 per square foot in the tower. At Vornado, we had an industry-leading quarter and an industry-leading year in almost every performance metric. And when I say industry-leading, I mean better than the other guys. Here's the scorecard. During 2025, Glen and his team leased 4.6 million square feet of office space overall, consisting of 3.7 million square feet in Manhattan; 446,000 square feet in San Francisco; and 394,000 square feet in Chicago. This was our highest Manhattan leasing volume in over a decade, our second highest year on record. Excluding the 1.1 million square foot master lease with NYU, our average starting rents in Manhattan were $98 per square foot with mark-to-markets of plus 10.4% GAAP and plus 7.8% cash and with an average lease term of over 11 years. For the second year in a row, Vornado was the clear leader in $100 per square foot leasing with 46 leases totaling 2.5 million square feet or 2/3 of our activity. PENN 1 and PENN 2 led here with a total of 23 deals comprising more than 1 million square feet between both properties. In the fourth quarter, we executed 25 New York office deals totaling 560,000 square feet at average starting rents of $95 per square foot. Mark-to-markets for the quarter were plus 8.1% GAAP, and plus 7.2% cash at an average lease term of 10 years. Half this activity was for leases with over $100 per square foot starting rents. 2025 results reflected the market's growing appreciation for our transformation of the PENN district. Tenants and brokers get it, high-quality office space, the best transportation, literally on top of PENN Station, the region's transportation hub and the plethora of amenities and hangout spaces are unmatched. In 2025 at PENN 2, we leased 908,000 square feet at average starting rents of $109 per square foot with an average term of over 17 years. This includes 231,000 square feet leased during the fourth quarter at average starting rents of $114 per foot with an average term of over 13 years, all well above our original underwriting. We have now leased over 1.4 million square feet of PENN 2 since project inception, putting us at 80% occupancy, getting the target which we guided to. We expect to finish the lease-up this year. Based on the leases we have executed and the activity in the remaining space, we have increased our projected incremental cash yield from 10.2% to 11.6%, as you will see on Page 22 of our supplement. At PENN 1, we leased 420,000 square feet during the year at average starting rents of $97 per foot, also well above our original underwriting. Since the start of physical redevelopment at PENN 1, we have leased over 1.7 million square feet at average starting rents of $94 per foot. At PENN 2, we have just 348,000 square feet of vacancy left to lease. At PENN 1, we have 177,000 square feet of vacancy left to lease, plus 0.5 million square feet of first-generation leases still to roll over. The good news is that this will all generate income very shortly. At PENN 11, we finalized 2 important leases during the fourth quarter as our major tenant there expanded by another 95,000 square feet, bringing their total footprint to 550,000 square feet and AMC Networks renewed for 178,000 square feet. In 2025, our office occupancy rose from 88.8% to 91.2%. Let's pause here for a minute and dig in. There are some -- there has been some recent chatter about physical occupancy, call it leased occupancy versus economic occupancy, call it, GAAP occupancy. Most look at the difference on a square foot basis, I prefer to look at it on a dollars and cents basis. The former, leased occupancy is based on signed leases, including those not yet recognized by GAAP. The latter, GAAP occupancy represents leases that are recognized as paying GAAP rents. At Vornado, the difference is over $200 million, which is revenue signed and committed that will be GAAP recognized over the next several years. That number represents gross rents but since the buildings are already paying full taxes at almost full operating expenses, that gross revenue number is very close to net. This income is pretty much of a short thing. A word of caution to those who are modeling, there are lots of ins and outs that go into our financials, and I suggest that you not use more than a $0.40 uptick in the 2027 year. Our New York office leasing pipeline remains robust with nearly 1 million square feet of leases in negotiation and at various stages of proposal. Michael and Glen will talk about this in a minute. Recognizing the shortage of large blocks in the better buildings, we can make available and are bringing to market prime space of up to 380,000 square feet at PENN 1, up to 350,000 square feet at PENN 2 and up to 400,000 square feet at 1290 Avenue of the Americas. We are making available to the marketplace what our clients need and want. Demand for our retail assets is robust and accelerated. Now turning to our development program. Construction will commence in April, 2 months from now on our 1.85 million square foot 350 Park Avenue new build with Citadel as our anchor tenant and Ken Griffin as our 60% partner. At our PENN 15 site, we have been busy responding to anchor tenant requests for proposals for substantial blocks of space. We recently acquired 2 very high potential development assets in unique locations, which I call in the middle of everything. 623 Fifth Avenue was a 383,000 square foot asset that was originally built to the highest standards by Swiss Bank Corporation as the U.S. headquarters. Our asset sits on the top of Saks Fifth Avenue flagship and starts at floor 11, up to floor 36. We acquired the property in September for $218 million or $569 per foot. Here's why I think this is the best deal ever. The location is the middle of everything with unique light and air and city views. You can reach out and touch Rockefeller Center, St. Patrick's Cathedral, JPMorgan Chase's new headquarters and even our 350 Park Avenue. Just for the fun of it, take a look at this location on Google Maps. The building is substantially vacant, which is a huge advantage to us as a redeveloper. Built in 1990, the building is modern. Our business plan is to create here the 220 Central Park of boutique office, i.e., the best of the best. We acquired this asset for $569 a foot, the finished product all-in soup to nuts, including tenant concessions is budgeted at $1,175 per foot. We will be creating here a new soup to nuts building, every bit equal to a ground-up new build for half the price in a premium platinum location. We will deliver to tenants by the end of 2027, half the time of a new build. Recognizing that Saks Fifth Avenue, now in bankruptcy has an uncertain future. I believe that any outcome to the Saks Fifth Avenue bankruptcy will be good for us. And the punchline is at a 10% return on cost with, say, a 5% exit or measure of value, we will achieve a double or with leverage a 4-bagger or an $0.11 incremental increase to earnings. In January, we closed for $141 million on the acquisition of 3 East 54th Street, a development site that is between Fifth Avenue and Madison Avenue on 54th Street, adjacent to the St. Regis Hotel and our prime Upper Fifth Avenue retail properties. We previously acquired the $85 million mortgage on this property which accreted to $107 million, and that was credited towards the purchase price. The business development site currently is owned for 232,500 square feet as of right. And the location is excellent for a hotel, office, and residential uses. We are considering several options for the site and have already received interesting income. Our 34th Street and eighth Avenue, we will develop 475-unit rental residential building and expect to break ground in fall of this year. My use of the word junky at last quarter's earnings call got a lot of attention. I don't know why. In any event, we will replace the junky retail on both sides of 7th Avenue along 34th Street, the gateway to our PENN District with more modern, appealing and exciting retail offerings. This will be another step forward and enhance what we have already accomplished at PENN. Our 50% owned Sunset Pier 94 with partners HPP and Blackstone, Manhattan's first purpose-built film studio facility, has just opened. And all 6 soundstages were immediately leased by Paramount and Netflix. These are short-term leases, but a great start. The Perch, a large glass pavilion on the rooftop of PENN 2 with indoor and outdoor food and drink, meeting and hanging space, has been so well received that we did it again on the 17-floor setback at 1290 Avenue of the Americas. This pavilion has just opened and together with a 10-store Five Iron Golf operation and new restaurants to come, makes 1290 the single best building on Sixth Avenue. And that's, in my opinion, and that's a mouthful. We invite all of you to come take a look at -- just call Glen. Our tenants love these spaces, and they represent our continuing leadership and innovation in the hospitality side of our business, all to the delights of our tenants, credit to Glen and Barry to design and execution here. Not so long ago $100 rents were rare. Now they are ubiquitous in the better buildings with some rents reaching $200 and even an occasional $300. Why? It might be, as I said, that there is a profound shortage of "better" space or it might be that the cost of the new build has doubled and now costs say, $2,500 per foot to build a new tower in Manhattan. You can all do the math, even at these higher rents, it's touch and go to make a new tower pencil. And by the way, these new builds are multibillion-dollar monsters, which are very difficult for most to finance. Here at Vornado we have always believed in maintaining a highly liquid cash heavy balance sheet. While liquidity is $2.39 billion comprised of cash balances of $978 million and our undrawn credit lines of $1.41 billion. Over the last several months, we extended maturities through 2031 on nearly $3.5 billion of debt, and we sold $500 million or 5.75% 7-year bonds to prefund the maturity of our $400 million 2.15% June '26 bond. Why we go to market 6 months early? We follow the golden rule that it's wise to take the money when the markets are wide open and welcoming and that certainly allows us to sleep at night. We are pretty good at math, and it's clear to us that there is a huge disconnect between our stock price and the value of our assets. Accordingly, we have gently put our toe in the stock buyback order. Over the last few months, we bought back 2,352,000 shares for $80 million at an average price of approximately $34. Since our board authorization in 2023, we bought back a total of 4,376,000 shares for $109 million at an average price of approximately $25 per share. Think about this. Vornado stock is a better buy today than it was at $15, 3 years ago. But as a believer in the predictive power of the stock market, I am certainly aware of the recent decline in our stock and in fact, the decline in all real estate sites. In our case, the decline was in the face of best fundamentals in Manhattan in the last 20 years. While this most likely represents a great buying opportunity, we will proceed with care, looking over our shoulder. There are a few investments we can find that are more attractive right now than our stocks. If this disconnect continues, we will become more aggressive. As you can see from my opening remarks, we have a lot going on. I can tell you that the activity level in the market and in our office is double what it was, all good stuff that it's fun. Now Michael, your turn.

Thank you, Steve, and good morning, everyone. Comparable FFO was $2.32 per share for the year. As previously forecasted, this was slightly higher compared to 2024 comparable FFO and better than we had anticipated at the beginning of the year. Fourth quarter comparable FFO was $0.55 per share compared to $0.61 per share for fourth quarter 2024. This decrease was primarily due to higher net interest expense and the lease termination income at 330 West 34th Street in the prior year's quarter partially offset by rent commencements net of lease expirations, higher FFO resulting from the NYU master lease at 770 Broadway and higher NOI from our signage business. We have provided a quarter-over-quarter bridge on Page 2 of our earnings release and on Page 8 of our financial supplement. Overall company same-store GAAP NOI was up 5% for the quarter, while same-store cash NOI was down 8.3%. As explained last quarter, GAAP is more relevant to earnings given the cash numbers impacted by free rent from the significant amount of leasing in recent quarters as well as the adjustment in cash rent related to the PENN 1 ground lease true-up. Now turning to 2026. As we previously mentioned, we still expect 2026 comparable FFO to be in line with 2025 due to the anticipation of some noncore asset sales being taking income offline in connection with our plans to redevelop 350 Park Avenue and the 34th and Seventh at PENN. First quarter will be more impacted due to GAAP rents ramping up throughout the year, higher interest expense from our recent bond issuance and some seasonality relating to our signage business. As we previously indicated, we expect there to be a significant earnings growth in 2027 as the positive impact from PENN 1 and PENN 2 lease-up takes effect. We had indicated on prior calls that we expected to achieve New York office occupancy in the low 90s in 2026. We got there early. New York office occupancy increased this quarter to 91.2% from 88.4% last quarter due to the significant volume of leasing we accomplished, principally in the PENN District. As we execute on our strong leasing pipeline, we anticipate that our occupancy will continue to increase over the next year or so. Turning to the capital markets. The financing markets also recognize that the New York office market is back and performing at a level of superior to any other market. The financing markets for these assets are very strong and liquid, with CMBS spreads reaching their tightest levels since 2021, and banks continue to expand lending for Class A assets with solid rent rolls. The unsecured bond market also remains strong and continues to be constructive for office credits in the right markets with new issue spreads remaining tight. We took advantage of both these markets recently. As Steve mentioned, this last quarter, we've been very active in refinancing our near-term maturities and bolstering liquidity with nearly $3.5 billion of financing. In addition to completing several mortgage refinancings, we also refinanced our unsecured term loan, upsizing the loan amount by $50 million to $850 million and extending the loan's maturity date from December 2027 to February 2031. We also refinanced one of our 2 revolving credit facilities and upsized the second facility. So now we have one $1.13 billion revolving credit facility that matures in February 2031 and another $1 billion revolving credit facility that matures in April 2029. We very much appreciate the strong show of commitment from our banks, including a few new entrants to our facilities. We also took advantage of the strong conditions in the unsecured market and completed a $500 million 7-year unsecured bond offering at 5.75%, which was significantly oversubscribed, a portion of net proceeds from these notes will be used to repay our $400 million senior unsecured notes that mature in June. In total, since mid-2025, we have refinanced or repaid almost half of our balance sheet, including almost all of our unsecured debt, terming out our maturities and putting our balance sheet on even stronger footing. Our net debt-to-EBITDA metric has improved to 7.7x from 8.6x at the start of the year and our fixed charge coverage ratio, as expected, continues to steadily rise. We expect these ratios will continue to improve over time as income from PENN 1 and PENN 2 comes online. In recognition of the significant improvement we've made in our balance sheet metrics over the past 18 months, S&P recently changed our credit outlook on our company from negative to stable and affirmed our BBB- unsecured rating. We are hopeful Fitch and Moody's will follow suit as our balance sheet continues to improve. With that, I'll turn it over to the operator for Q&A.

[Operator Instructions] And the first question will come from Dylan Burzinski with Green Street.

Maybe just touching on the 350 Park announcement in the release. Is there anything that's changed in the structure at all versus what was originally disclosed back in, I think, December 2022?

Dylan, thanks for joining. So in terms of the agreement, Ken Griffin wanted to accelerate the option exercise, which we were fine with. And in the course of that, there were some amendments related to the overall deal. Nothing, I would say, tremendously substantive in terms of the economics. But gave Vornado and Rudin the flexibility to effectively rather than just a fixed equity percentage, investing anywhere from, I think -- we put our percentage of 20% to 36%. So that's the main change. A couple of other minor things, but I think that was the most material thing. But it's a project we're very excited about, he's very excited about. Obviously, in the filing, the clock started, but we're excited about it. And I know there were questions about the put or so on. We intend to be part of this project.

Okay. That's helpful. And can you guys kind of just talk about sort of yield expectations, what that implies on sort of a required rent level? Just anything as it relates to sort of the economics? And I guess, is it still Citadel's plan to sort of take down, I think it was like 50%, initially?

So we'll publish that as we get a little bit closer to that date. There's a few things still moving around. But as we indicated, originally, there is a formula that determined Citadel's rent. It's effectively -- it's based on a premium to what permanent financing costs are, with a cap and collar. So that was unchanged. Citadel still finalizing their space planning. But I would tell you, in general, their appetite for space has grown from the original deal. So when we finish all that over the next few months, we will publish that, but I don't want to jump the gun just yet. Needless to say, we think it's going to be an extremely attractive project. Economically, we think it's going to be best building in the city. And we think the space we're going to have to lease is going to command the highest rents in the city.

The next question will come from Steve Sakwa with Evercore ISI.

Glen, could you maybe just provide a little color on just kind of your overall leasing pipeline? And the conversations that you're having with tenants about space in the market today?

Our pipeline continues to be really strong. I mean that's even after losing 3.7 million feet last year. As Steve said in his remarks, we're creating opportunities of big box space within the building, mainly of PENN 1 and 1290 to meet the market, have the inventory as we see tenants expanding and coming into New York rapidly with immediate needs. So those are all great signs. In the pipeline, more than half of the activity are tenants that will be new to our buildings and the other 50% of renewals and expansion. We're seeing financial services and the law firms expand a lot within the portfolio right now. Our first quarter lease activity will reflect that. The tech tenants are also growing a lot. As you saw PENN 11 last quarter, we're seeing action everywhere. New York is hitting on all cylinders. Our team is hitting on all cylinders and coming off a huge year like we had last year, we don't see any letup in that at all.

Okay. And then maybe as a follow-up, Steve, you mentioned the share buybacks and the disconnect with NAV and other property types, we are seeing some of the public REITs lean more heavily into dispositions and both paying down debt but using those excess proceeds to buy back stock. Is that something that you would entertain more aggressively, given where the stock is today?

Yes.

Any other comments beyond yes?

Double yes. So we have a few assets for sale which will generate capital. We think our stock is stupid cheap. I think in past years, I said, super, super, double stupid. So that's double yes. And the stock is probably the single best investment we can make now other than 623 Fifth which is obviously, I'm in love with.

The next question will come from Floris Van Dijkum with Ladenburg.

My question is regarding your -- the difference between your cash and GAAP same-store NOI. And I think Michael, you indicated that throughout the year, this is going to inflect. Can you give us a sense of when that inflection point will happen and when your cash NOI will turn positive?

I think I said on the last call, it remains the case that we would start to see that flip over in the second half of '26, and that remains the case. So I think you'll see it improve quarter-by-quarter, but it won't flip until the back half of the year when those tenants start -- many of those tenants start paying rent.

I mean the answer is, when they're very ugly and painful, free rent burns off. That's when the cash begins to become positive and plus it reflects similarity to the GAAP. So that's... .

And maybe...

That's coming kind of pretty soon.

That's encouraging. My follow-up question is regarding your retail, particularly your Upper Fifth Avenue retail. Maybe could you talk about what's happening to rents there relative to in-place. And maybe remind everyone what your in-place rents are for your Upper Fifth Avenue JV? And then potential monetizations for that. And I believe what's happening with the 657 Fifth Avenue, I think that's a new Meta, is that a permanent lease? Or is that still a pop-up lease?

Oh boy, the -- there's activity on the Meta lease, which will be -- which really -- it's inappropriate to talk about it now. So that's step one, which involves the Meta store going long term. With respect to the leases, generally, the retail market on Upper Fifth and Times Square is improving dramatically and rapidly whether it is still struggling to meet the top tick rents up 4 or 5 years ago. It's getting there, but it's struggling.

The next question will come from John Kim with BMO Capital Markets.

Steve, you gave some very interesting information on the difference between the GAAP occupancy and leased occupancy. I'm assuming that $200 million difference is annualized. But I was wondering how much of that you expect to get by the end of this year and by the end of '27?

It's actually, not annualized. It's an absolute number. And to be honest with you, and my finance guys are sitting here right across from me shooting daggers at me, the number is higher than $200 million. But in an abundance, of course, they wanted to keep it at $200 million. So $200 million is a slightly low number. It's a onetimer number and it feeds in as tenants go from -- go into GAAP, it feeds into GAAP. As tenants either take occupancy or they meet the standards for GAAP recognition of income. So that's what that number is. It happens over the next -- as the leases mature -- not -- mature is not the right word, that the leases -- right now.

The tenants build out their spaces, right? So when we get recognized GAAP revenue...

The GAAP recognition is the tenants have to either build out the spaces or take occupancy. And that happens quickly over the next year or 2. I don't have a plot as to exactly how much per month. But a lot of it comes in the first year, a lot of it comes in the second year. And I mean -- but the interesting thing about it is, that is income which is in the bag. The leases are signed, and it's just a matter of a small amount of time as to when they go in the GAAP recognition. Now the $0.40 that I put at the end of that paragraph is a kind of strange guidance for something that's 2 years out, which is something we never do. And so it's kind of like strange. I wouldn't rely upon it too much. It's not a guaranteed certified, I'll bet my life on a number. But it's sort of a number. But the $200 million, which is a little bit more than that, with 100% certainty comes in income over the next number of years. Now the interesting thing about it is which I tried to say is that -- the company -- it's a simple company, but the financials are sort of a little bit complicated. There are ins and outs. So there are some tenants that will move out, there are other things which will affect earnings positively and negatively. But that's -- I think the story. Anything to add there, Tom?

Yes. No, I think you said it.

Thank you.

For those of us who like to look at percentage terms, the 91.2% leased occupancy, what is that in terms of physical or economic occupancy?

Well, it's 92 -- it's 90, whatever, 91...

In New York City -- in New York, it is 91.2%.

Manhattan office is 91% and change versus 88% and change. And by the way, we expect that occupancy number to go up.

The next question will come from Jana Galan with Bank of America.

Maybe also following up on some of the strange guidance. If we could get some more details on 623 Fifth. And did I catch in your comments that it could add $0.11 to FFO?

I'm sorry, I didn't get the question.

623 Fifth.

What about it?

Comments on $0.11 to FFO?

Well, it's just math. So my guys are laughing at me, but I mean I'm in love with this asset. I think it's probably the best acquisition ever. So the building is basically empty. The prior owner was emptying the building out to convert it to residential. We think that, that's not the right program. We're going to make it. Glen's assignment to me is make this thing the 220 boutique office, meaning the best of the best of the best, which will generate the best income. So we believe that the finished product will cost $1,100 and change -- say, $1,200 a foot mounting. And we believe that the net income on the project will generate a [ scant ] over 10%, just I think we have on the supplement, 10.1%. So if you're saying that the project cost $1,200 a foot and it's going to have a 10% return. That's an interesting number. Now we think if we can -- if we sell that building, which I'm not saying, we will, or we won't. It probably would command -- if any building will command a 5% cap rate in the marketplace, it would be that building which starts on the 11th floor on top of Saks in a spectacular location. And by the way, I was being quite sincere when I said, take a look at the location on Google map, it's astonishing. So if you build into a 10 and you sell it at a 5, that is basically a doubling of your money or if you put 50% leverage on it, that's a quadrupling of your money. If, however, the value is in the income stream in the company. We think that, that will generate a little bit more than 11% -- $0.11 incremental return. How do I get that number? $50 million of income, less the cost of capital on the $1,200 a foot cost, yields 11% or slightly more than 11%. I hope that answers your question. What?

10%?

What did I say?

Percent.

11%, sorry.

That's very helpful. And then just in terms of the development costs? And I think there's debt on it now that you probably need to term out? What are kind of your expectations on that?

We're going to finance the building as we always do. It's not a great deal of money, a couple of hundred million dollars. We're going to complete the project. We're going to rent that out. One of the keys to it is, is that we will deliver for tenants probably the end of '27, which is less than half the time that it takes to build a new build at less than half the cost. So those are part of the financial metrics as to why I'm so excited about the project. When we get done with the project, we will keep it in our portfolio because we will expect that the rents will go up and up as time goes on. and we will finance it as we finance all of our projects.

The next question will come from Alexander Goldfarb with Piper Sandler.

Can you guys walk through on 350 Park, just -- I know, Steve, you mentioned that, it's part of the guidance for this year and that on a recurring FFO, it's flat. But can you just walk through sort of the mechanics of the income and how that is -- there's a master lease, but then you'll capitalize it. So just want to understand the net effect, especially as we think about our '27 and what the carryover is from 350 going because, you said you're going to stay in the project. So I just want to understand the full effect.

You're talking about the transition from the existing 350 Park Avenue building, which will be taken out of service and demolished starting next month into a capitalized interest model. Is that right?

Yes.

Yes, because I think there's a master lease right now, right?

There is. There is. So that's going to terminate -- it will be adjusted, I should say, when demolition starts, which will be April 1. So the answer is, there's going to be a little bit of a negative impact in '26 as we transition from demo to full capitalization. And next year, it will be capitalized and it will be basically on par with what it was last year, but a little bit down this year.

Okay. And then the second question is, Steve, on the dividend, you're one of the few companies that still is paying a reduced stub dividend, if you will. You talked about your liquidity. You talked about improving on the balance sheet, the rent that's coming online over the next few years and yet there's still a lot of capital projects that you have in terms of various development projects. So how do you see the dividend versus taxable income? And when do you see a full normal quarterly restoration of it?

Well, first of all, we may be one of the few companies, I'm not sure of that, but there is a hue and cry in the marketplace for people that are overpaying their dividend to reduce their dividend and conserve the cash. So we're sort of aware of that. But nonetheless, as a large shareholder, our management team and our Board has a high incentive to pay a normalized dividend. A normalized dividend is in relation to 2 things. The internal revenue code requires that we pay out our taxable income but also common sense says that we should pay to our shareholders, something which approximates the income stream of a normalized business. So it's not impossible that our regular income would be higher than our taxable income. So we have an incentive to get back to a normal dividend as soon as we can, which will not be this year, by the way. And as soon as we get back to normalcy, in terms of our income stream, getting all of the renting that we have done paid for with a free rent at the TI and get that all behind us, we will then revert to a normal dividend.

The next question will come from Anthony Paolone with JPMorgan.

Okay. I guess my first question, I was wondering if you could help a bit with sources and uses of funds over the next couple of years because as I'm listening to this, you've got a couple of redevelopments that you now have teed up. You talked about, I think, last quarter, maybe building an apartment project, buybacks are a priority. It sounds like you're going to be spending real money on 350 Park in the next couple of years as that gets underway. Just trying to add all this up and get a sense as to like sources and uses basically.

Tony, I can't give you a dollar figure by dollar figure. What I would say is, as you would expect, we're not willy-nilly frivolous, right? We have a capital plan. We know what's in front of us, and we have a business plan, right? And that business plan is a combination of financings generally at the asset level, some asset sales, et cetera. So -- and I would say in terms of the development projects, other than 623, which will be executed this year and next, the other projects are more back ended, particularly 350, where our capital to the extent we invest above the land contribution which we don't have to, although I think given the attractiveness of it...

We will assume we will.

We will, right? That capital, given that our partner has to true up with us first and the bank is going to fund some of that. There's no meaningful capital in 350 for several years. So the answer is, we have a plan. We can do all the things that we've laid out. And we've sold assets in the past. We had some things in the works, and we're confident that we can execute those. And we're going to be -- as Steve said in his opening remarks, we're going to be mindful on the buybacks once we have the appropriate capital and to deal with everything else.

So look, we have a lot of things that we want to do, which we think will create significant shareholder value. So one of them is buying back our stock, which is a separate thing, which is -- has to be done with care so that we don't screw up our balance sheet, which we will not do, ever. So one of the uses is buying back stock. So that's sort of like a subtraction. We do that with capital assets available. The next thing is 350 Park is a very important. We hope, extremely successful project, the principal amount that we will be contributing to that is our land, which is easy. And then there's $300 million to $400 million above that in cash that will represent our 40% interest or 36% interest. And so that's not a great deal of money in relation to a $6 billion project because we're only a 40% partner. So we have a $850,000 and growing anchor tenant that's signed, and we have a 60% partner. So the 350 Park project is a great project which from a financial point of view is not as challenging as you would think. The 623 Fifth Avenue project is seasonally financeable. What else -- the TIs -- the most important thing we have from a capital point of view is the TIs to put into occupancy and convert it to GAAP rent, the tenants that we've already signed. That money is already allocated.

And then the residential project is -- that's multifamily finance is very well. We already have the land unencumbered. That comprises a chunk of the equity and not much cash above that.

So now the next part of it is -- so that's a little bit about the uses. Now the sources are, I would remind you that we have basically income-producing part of the PENN District is free and clear with no debt on it. So -- and those buildings have now become more valuable as Glen and his team have leased them up. So we have the Meta building in Moynihan free and clear. We have 2 PENN free and clear. We have PENN 1 free and clear. We have the PENN 15 site free and clear and on and on. So we have significant financing available to us should we need it or choose. So that's -- without giving you a piece of paper, that's a verbal description of our capital plan.

Okay. And then just my only follow-up is 3 East 54th. I was wondering what's the cost to build a smaller building like that? I guess we're getting used to well over $2,000 a foot for the larger avenue type developments, it seems. Just wondering if there's any appreciable difference in a smaller mid-block asset like that.

A little bit less. A little bit less, but not appreciably less.

The next question will come from Vikram Malhotra with Mizuho.

So 2 ones. One, just a follow-up. I wanted to just be crystal clear on the $0.40 going to next year. Is that an NOI comment, incremental contribution? Is that sort of an FFO comment? Just how should we think about that? And maybe just other big picture, moving pieces as we think about this massive earnings ramp?

It's FFO, Vikram.

Okay. It's FFO. Okay. Helpful. Just on street retail, I think the team hired Newmark and the sort of a reenvisioning of PENN Station -- PENN District street retail. I'm just wondering as you've thought about like the street retail portfolio there, is there like a broad range or like after doing all of this, what's the NOI uplift over the long term?

We haven't split that out, and we're not really publishing projections on that. We will, sometime in the short-term future, but we haven't done that yet. But basically, the PENN District is a -- it's a district. It's office buildings, it's retail, it's events, it's a gathering place, it's the perch, it's the town halls. It's a system of interaction and hospitality and workplaces, which is important. Each plays off the other and increments the other and helps the other. So the retail is very important as a separate business, but it's extremely important as it affects our demand for the office space.

The next question will come from Nick Yulico with Scotiabank.

First, on PENN 2, I was hoping you could just remind us about for the leases that were done so far, when they're set to commence, I think MLS was assumed early this year. And then I guess the bulk is sort of 2027 and beyond. But I guess, in relation to like 80% lease number that you give for that asset, just how to think about when that will actually turn into GAAP NOI. I guess, how much of that 80% actually is fully in 2027 as you're talking about that ramp next year?

That's actually a question about detailed guidance, which as you know, we don't do.

The only thing I'd say, Nick, is that PENN 2 more of it will be online in '27 and '26.

Okay. And then I mean just in terms of the commencements this year then, what is it is, I think, MLS was assumed what early this year? Is there anything else that's listed there from the tenants in the sub where their leases haven't commenced that you expect commencement this year?

I would make a suggestion, call Tom offline and see if you can wrangle that answer out of him, which I doubt you will. I mean you can use your own judgment. I mean these are big leases, and they will come on in the next 6 months. If they don't come on in the next 6 months, they come out in the next 12 months. But from my point of view, as an investment really doesn't matter that much. So they're coming, whether they come 3 months sooner or 3 months later, that's interesting, but not this positive. But call Tom, see what you can get out of Tom. He's still laughing, by the way. He's waiting -- he's anxious for your call.

The next question will come from Ronald Kamdem with Morgan Stanley.

Going back a minute -- going back a minute. I was really not trying to be anything other than responsive to your question for a company that really doesn't do detail month-by-month guidance. So with respect call Tom. Next question.

This is Matt on for Ron. Just going to the New York office TIs and LCs as a percentage of initial rent, I noticed that ticked up in the quarter. I was kind of wondering what the drivers were and how we could think about the trend for the rest of 2026?

It's Glen. It's certainly not a trend. It was an outlier quarter. We made a couple of deals where we stretched TI with not as much term on the leases as we would have liked, but we wanted the tenants in these buildings for reasons. We love the tenants. We love their credit profile, and they were great users for the assets, but not a trend at all. I expect we'll go back to the -- we've been around 12%, 13% over the last few quarters. And I think concessions will tighten going forward here this year. Free rents already started to come down and the TIs are really starting to squeeze. So short answer, not a trend at all.

Got it. And then just as a follow-up, I noticed the projected cash yield on Sunset Pier 94 declined despite what looked like solid leasing activity on the property. Could you talk about like what the drivers of that were?

[ Realty ], which is our business, by the way. The streaming business is -- has some challenges, as you all know and read about in the papers. And I mean the fact that we leased 100% of the space at the opening, they're short-term leases, there not even a year long. So that's an interesting thing, but not indicative of the future. And it's just a matter of seeing realistic in our projection as to what the yield on the project will be. So the 10% went down to 9% as a result of [ realty ].

The next question will come from Brendan Lynch with Barclays.

This is Annabelle Ayer on for Brendan Lynch. How should we think about the expected retention rate on the remaining 2026 expirations, especially the 600,000 square feet in the fourth quarter? And are there any larger blocks of space that you would call out?

Great question. Glen?

It's Glen. We feel really good about the expirations this year. We're on top of all them as you would expect. On the larger block expirations, we expect 2 of them to renew. So we feel good about our expiration schedule. We've taken care of huge expirations over the past 3 years. So if you look forward '26, '27, and we're in great shape. So I think we'll be more than fine as it relates to attacking the future expiries.

As you can tell from all of our remarks today, we're extremely constructive about the office market in Manhattan. We believe that it is tightening. We believe that rents are going up. And by the way, rents are going up more rapidly than TIs or tenant inducements are going down. So our projection is -- and I don't -- Glen can give you his opinion, is that free rent can go down because that's a discretionary item. TIs will probably not go down because the cost of construction of the tenant spaces is not going down and in fact, going up. So we believe the easiest is for the rents to go up. The second is for the free rents to go down and TIs are going to be very, very sticky. Do you agree with that?

I agree with that. I will tell you on the TIs...

Careful now because you have to produce the results.

On the TIs, we're definitely squeezing them in terms of not being as flexible as we were. So I think the first signal is they're not going up for sure. We're squeezing them at these ranges that we've been seeing and hopeful they'll come down. Although I agree with Steve generally, free rents are coming down, and that's been more easy to manage with the deal making for sure.

The next question will come from Seth Bergey with Citi.

I kind of want to go back to 350 Park. I think in your opening comments, you mentioned that Citadel kind of had an appetite to take additional square footage. I think they are kind of set to occupy around $850,000. Just could you kind of quantify how much more they would be looking to take? Or are you in any other kind of conversations about pre-leasing space in that building?

Look, the Citadel relationship between Citadel and Vornado is important. These are conversations that are still taking place. The Citadel team is still making up their mind as to what exactly their requirements are. And so as soon as we know and they become firm and agreed to, you will know, but not now.

On the second part of your question, the energy and excitement around the spec office stays is excellent. So we're presenting the project to many tenants as small as even 50,000 feet. So if you think about it, tenants who are expiring in '31, '32, '33 are already asking us to present the project. That's how much excitement there is in the market. There will be nothing like this available in New York. And people realize that they recognize that between us and Citadel and Ken Griffin, this will be the best building built in the city by far.

And by the way, you can tell we're pretty damn proud of it. I'd like to try and end up today, it's close to 11 clock as we can. So it's 11:00 now. So how many more questions do we have?

This is it.

This is it. No more questions? Really. Well, anyway, thank you all very much for joining us. We're very excited about the business. We're very active. The activity level, as I said, is palpably doubled what it was, even as recently as a year ago. And thank you all very much for your support. We'll see you in the next quarter.

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