Vornado Realty Trust Price & Performance (VNO)

Yesterday afternoon, we issued our fourth quarter earnings release and filed our annual report on Form 10 ks with the Securities and Exchange Commission. These documents as well as our supplemental financial information package .bno.com under the 10 ks and financial supplement. 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 ks, for the year ended 12/31/2024, 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 statement. On the call today from management for our opening comments are Stephen 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 Stephen Ross, Thank you, Steve, and good morning, everyone. Our 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 a head and shoulders strongest in the nation.

As I have said before, while New York has over 400,000,000 square feet of office, we really only compete in a narrower market of about 188,000,000 square of the better space. Availability in the better space market is 10.7% versus 20.1% in the not bitter 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 six seven years and with the cost of debt at say 6% new supply is frozen. Hasn't been a major new building start in five years, and once started delivery takes five to seven years. Taken together, this all creates a landlord's market We expect rents to rise aggressively One might even say [indiscernible] Sunk 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 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 for the Penn District and I guess it is. The largest number of corporate headquarters the best restaurants and museums and eight professional sports teams even though the damn 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 as we predicted, it would not last and is not the Most have left their kitchen tables and are back at at the office. Our stock price increased 49% in 2024 after increasing 35% in 2023. In 2024, we leased 3,340,000 square feet overall, of which 2,650,000 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 and eight and eighteen transactions were 1,360,000 square feet. And we completed three of the top 10 largest office deals in New York. We completed 285,000 square feet of deals at ten-one at $90.98 dollars starting rents. Exceeding our underwriting. We completed 25 retail leases totaling up 187,000 square feet highlighted by Manhattan's first Primark In The Penn District. We completed the Uniqlo sale at 660 Sixth Avenue at a record price of $20,000 per square foot. Last month, we repaid at maturity out 3.5 percent $450,000,000 unsecured bonds out of cash on balance sheet and $108,000,000 off our credit line.

Our entire portfolio was 100% lead certified in we are the first in relation to achieve this milestone. We are on the two yard line with a handful of important deals. We will finally complete the master lease to NYU at our 1,100,000 square foot 770 Broadway by the end of the month. This deal will relieve our balance sheet of $700,000,000 of debt on this and eliminate 500,000 square feet of vacant 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 as 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 $400,000,000 of our retail JV preferreds. And we have several asset sales in the works. Taken together, these transactions will shortly generate an incremental additional $1,000,000,000 of new cash. At Penn2, we are only weeks away from signing a 300,000 square foot lease, Fintu 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 One has by far the biggest and best amenity package anyway. [indiscernible] are also engaged in multiple tenant for a major headquarters lease.

I'm predicting that Penn two 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 we will deliver Pier 94 on Manhattan's Westside by year end 2025 the first ever purpose built film and television South Asia in that. Now for those interested in Alexander, our 32.4% owned affiliate. In the second quarter of twenty twenty four, we early renewed the 947,000 square foot Bloomberg office lease at 07:31 Lexington afternoon. Whose expiry is now pushed out to 02/1940. At Regal Park in Queens, we are moving Burlington and Marshall with the last remaining tenants at Regal 1 to our adjacent Rego II shopping center, thereby filling up Rego II and creating a fully vacant blank canvas at Rigo I for either sale [indiscernible] Obviously, we believe this unique five 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 Stockton 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. Are in the formal approval process under the Midtown East zoning and Citadel, our major tenant and Ken Griffin, our partner.

Will 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 Renato teams all are of our accomplishments to date in the Penn District. Take a look at Meta at Farley, Pen one, the Moynihan Train Hall. Long Island Railroad Concourse, the 30 Third Street Plaza and even Petal 11, Next up is the Hotel Fed site, now down to the ground and ready to go. Our Penn District is clearly a sight to be seen If you haven't already seen it, please call me to arrange a 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 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 30 Fourth Street where we recognized 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 outs Fourth quarter comparable FFO was $0.61 per share. Compared to $0.63 per share for fourth quarter twenty twenty three. This decrease was primarily attributable to higher net interest expense and lower NOI partially offset by the lease termination income at 330 West 30 Fourth Street and lower G and A expense. We have provided a quarter over quarter bridge on Page three of our earnings release and on Page six 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 West 30 Fourth 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 Pen one and Pen two won't occur until towards the end of twenty twenty six with full positive impact in 2027. Resulting in significant earnings growth by 2027. A few words on occupancy. 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 three thirty basis points to 92.1%. As we previously mentioned, our first quarter twenty twenty five occupancy will be We anticipate that this decrease will be temporary as Penn II occupancy stabilizes over the next year. And we get to the loan [indiscernible] 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 1,000,000 square foot master lease being finalized with NYU at 7 Broadway.

Additionally, we have another 1,300,000 square feet in various stages of proposals and negotiation. 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 six months the 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 and a trend we expect to continue. 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 Investment sales market continues to pick up also. With some high quality office assets trading recently, including interest in 320 Park Avenue, [indiscernible] and thirteen forty five Houring Americas by Blackstone. With that, I'll turn it over to the operator for Q and A. Thank you. We will now begin the question and answer session. Before we move on to the next caller. Steve, from Evercore ISI is on the line with a question. Please proceed. Yes, thanks. Good morning. 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 PEN2, I guess, in particular and just maybe the competitive dynamic that you're seeing for that space and confidence level you had to to raise the yield on Penn two?

Hi, Steve. It's Glenn. How are you doing?

So Pen two is more than off and running. Every large pet in the market has it in their top three list of what to see.

There were only five 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 one tenant that's going to get done in short order for 330,000 feet. We have an LOI in very serious ages for another very large headquarter tenant. And behind all that, we have tenants [indiscernible] for space from anywhere between 60,002 feet. So, PEN2 is now the bull's eye for many people searches. And we're complete fifth year on our lease, I 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. Please proceed. I wanted to follow-up on Steve's commentary on a $1,000,000,000 of new cash proceeds you expect You have $700,000,000 debt paid out at 770 Broadway, dollars 400,000,000 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 $700,000,000 is going to pay off debt. There's a little more, a couple of hundred million dollars more than that coming in on on that building. It's $4.00 $5,000,000 coming in from refinancing 1535. And there'll be enough short term disposition to round it up to $1,000,000,000 And will those be focused [indiscernible] retail or non core office or any color you can provide? On what you're looking to sell? I'm not going to get specific about that, John.

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

Great. Thank you and congratulations on a great 2024 Can you tie Steve's comments on the spike I can't let that go by without saying thank you.

Okay. Absolutely.

If you could please tie Steve your opening comments [indiscernible] the expectation for a rent spike to Michael's comment on growth in 'twenty seven, 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 four or five 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 somewhat below 200,000,000 square feet.

So that's the first point. The second point is that the current availability in that subset of spaces 10% and going down at very quickly. Because there's a shortage of space. We haven't had a recession. And all of our clients are expanding at a and aggressively expanding in New York. Their businesses are good. The stock market is good. So business is healthy and robust and demand for space in New York is is actually pretty terrific. So With availabilities 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 hysterically high, Interest rates have not fallen have not fallen actually, long term rates have not fallen at all. And so the ability that create new supply is very, very limited and I use the word flow, so We expect rents to go up significantly next year and dare I use the word spike. Now with respect to Michael's comments about 2026, you want to jump in, please? 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, And so we know that significant part of that is going to come from Pen2 and to some extent Pen1.

We have the leases rollover, we're now on the other side of that as we move into a landlord market where we have positive mark to market. So So it takes some time for that to flow through. '26 will be an improvement, but we think very significant improvement comes in 2027.

Okay. Thank you. I'll give you something else to think about. [indiscernible] in PEN1 and PEN2, we are leasing now in the $100 range, maybe just a pinch higher. There's nothing that's said, but by the 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 and gets to be accepted as the single best location in the Westside 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 sub substantially higher That kind of appreciation in Income will cause bad news to increase monumentally. So for example, help me on this, Tom, dollars 25 of short times times 5,000,000 feet is $125,000,000 a year. $25,000,000 a year is worth $1,500,000,000 to $2,000,000,000 of value creation 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.

Thank you. 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?

I don't know if you could tie that to the Hotel Penn site. Hi, Jeff. It's Glenn. 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 Brzenski is on the line. From Green Street with a question. Please proceed. Hi, guys. 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 in your comments about doing something about it? Can you kind of talk about sort of what you mean by that? Anything we can expect Well, thanks. If you take the assets out of there, this and you do some of the parts analysis, That number by any construct has to be very substantially higher than the trading price of the stock. It's a very simple concept and it's based upon NAV. And if you just if you calculate the value of the assets, [indiscernible] it greatly exceeds the stock price. Now Think about it for a second. So [indiscernible] 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 tenant in that building is huge. And obviously not economic. So what we did very simply is we took the two remaining actually Burlington and Marshall, two great tenants Marshall's been there for thirty years, forty years or so.

Very long period of time. Anyway, we moved them into we're in the process of we have signed documents by the way, we now are in the process of moving them into Rego two. Which will fill up Wigo too, which is a relatively new shopping center we built at the better part of ten years ago. So that makes Regal too a success.

And it empties out Regal one grand five 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 Alexanders 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 [indiscernible] and we think is extraordinarily valuable. So we'll see. [indiscernible] And then I guess just one more broader strategic question. Know several years ago you guys floated the idea of doing a tracking stock in ultimately shelved it until things started to recover in the New York office market. Now that things are seemingly recovering quite significantly, is that something that's back on the table? Can you kind of talk us through that sort of sits in the grand strategic side of things?

The easy answer to that is no. [indiscernible] I think about attracting stock at least [indiscernible] I think it continues to be a very, very, very good idea. [indiscernible] I can honestly tell you, I can't get any support from the idea from any of you guys and even from my guys inside. But I continue to think about it every day. If 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 a I do love the idea.

Great.

Floriss VanDijkum is on the line with a question. Please proceed.

Hey, thanks.

Just curious, your commentary on rents obviously at at the Penn Plaza District being significantly higher than what you originally underwrote. I recall you talking about $150,000,000 or I guess we've estimated about $150,000,000 of NOI growth At your three pen 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 $300,000,000 of NOI, Well, 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 capitalized interest That will roll off. So I mean, it's a complicated calculation, which my guys can help you with. Offline. But basically, what I'm looking for is as Penn two leases up, And as Pen1 completes its fill up, and then there is some retail space in the Farley build As all that happens, the income from that cluster of buildings will go up the better $550,000,000 and that's incrementally going up.

That doesn't count. So it will be more than that and pick it all together. So I mean, I read your piece that you put out, I think, last week and and I think it is absolutely directionally correct.

So Steve, maybe Floris, by the way. As we keep developing the neighborhood, And for example, as I said in the prepared remarks, the Penn-fifteen site, the old Hotel Pennsylvania site is next up.

It's already raised and down to the ground.

As we build a world class office building, I've said the building is frozen. But we're going to attack that as just the land cost in at PED fifteen is So if we look at it as having zero land costs for the moment, we can get the new building off the ground.

So anyway, if we as you look at this as a neighborhood, as we build on 1015, a world class office building that will annort to the 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 to work on our neighborhood, the value creation will be Right.

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 environments and the types of transactions you're looking at and 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.

Good morning, Floris. 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 two. So but our target is it has to be the right asset to fit into our portfolio, right, from a quality perspective. 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. Citi is certainly turning a corner.

So the answer is yes, we are are open minded regarding San Francisco, Chicago. I think we're content with what we have. 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.

We're not focused on that. I don't think we'll look beyond that.

Thanks, Michael.

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

Great, thanks. Appreciate all the color around the leasing pipeline and demand. I'm curious maybe Steve or Glenn, 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 [indiscernible] at all as a result of this demand you've seen?

Hi, it's Glenn. 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 have not come down generally yet, but rents have gone up. And that effectively things are better And as this market more and more becomes a landlords market, the concessions will come down. I would add on to what Glenn said, I think there's a couple dynamics there, right? But first, Glenn talked about these expansions. We're going through our pipeline the last few days. And there's a handful of tenants that did leases with very recently that have already come back for more space. And I guess, a flight of a couple 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 it or how much they would beat, right?

And they're now all fully backed and they recognize that they need more digital debt. Two, as both Steve and Glenn said, business is booming. Right? Law firms are booming, financial services booming, tech is booming, etcetera. So all these businesses are growing. So when you take both those dynamics, you have a very robust market overlaid onto a very tightening level supply of where these tenants want to be. So I think that's that's why Steve said what he said in terms of the expectation for rental growth over the next several years.

Thanks, Michael. Appreciate the additional commentary there. And then just maybe following back up on your comments and 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 $10.11, $8.88, 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.

So, look, I think if you think about where we are today versus [indiscernible] 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 offices and finance. So You think about the [indiscernible] transactions have gotten done many of them in excess of $1,000,000,000 and in a couple of cases, multi billion dollars 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, But we're coming off some low rates a couple of cases. Particularly on a 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 will be lower. So net I think it's probably a little higher but we're also delevering with some pay downs of the $7.70, etcetera. So I think from Vornado's perspective, think that 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 be a little bit lower? Maybe. I think we're par year over year And I think, Johnny, the worst is sort of over for us.

Great.

That's it for me. Thanks for the time.

Vikram Mahal, with Mizuho is on the line with a question.

Good morning. Thanks for taking the questions. Steve, I guess you've done a great job on the PENDS rig on various assets. You talked about sort of I guess, the next evolution or the next jump in stabilized NOI. I'm wondering from an actual development or an asset standpoint, what's next in Penn? How would you sequence sort of the various parcels or redevelopment opportunities you have? Thanks for the question, Vic. We're studying that now. We believe that we should have one or two buildings under construction and rolling forward for the next ten years. But we're not ready to announce anything yet. Obviously, the Penn-fifteen site is sitting there probably I believe the best site Manhattan X 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 free retail is evolving on Fifth And Madison. Any color on tenants in the market there and [indiscernible] pricing may be doing and how that translates into your leasing cost Thanks. Yes. Good morning, Vikram.

So on the REIT pipeline, I'd say just on the market in general, market continues to strengthen vacancy rates continue to decline and rents are certainly for the best spaces. I think returning to to close to peak levels. So 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 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 pick up. And again, for the right spaces, I think tenants recognize they're going to have to rents that aren't too far off the peak there, if not the peak. So 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 number one in the world. And they have to have locations here. So So we're close to leads with some sort of new to mark 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 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 on a one particular important asset on Fifth Avenue, we had a a major retailer come in knowing that the The incumbent head in that space had an ex rate in three years and no renewal option. Trying to actually say, I would like to sign for that space now I'll wait for that tenant's lease to expire. So that's things that happen only for extraordinary profit 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 economic to sell some of these assets than to rent some of these assets. And and we're open for business. Thank you.

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

Thank you. So Steve, you often emphasize 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 and at least the last twenty five 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 twenty five 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 level?

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 [indiscernible] I'm familiar with the cost of turning over new spaces all of which creates the trend that you mentioned. So clearly, and Glenn alluded to this, PI and the tenant inducements turn over a floor in a building It's 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 some rents, rents have gone up [indiscernible] to sort of alleviate that problem. So I'm expecting that the cash, the actual cash flow or AFFO or whatever you want to term 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 we're 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 rents for the operating portfolio are compared to that?

Hi, it's Glenn. We say this often quarter to quarter, it's going to ebb and flow flat, positive, etcetera. We feel confident that our mark to mortgage will be positive I'm not going to predict how much that means, but we like our spot in terms of our rolling exploration for 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 two or three years.

I'm not bashful and I'll predict. [indiscernible] let's just go to Penn for a minute because that's easy.

So I believe that the Albeit about seven 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 PEN1 and PEN2 which we are very happy to get $100 or a pinch more today, that in the short term future three, four, five years from now, the market rents for those buildings will be very, very substantially higher. So that's what I think. We're betting on that.

Alexander Goldfarb from Piper Sandler is on the line with a question. Please proceed. Good morning, Steve. And first, congrats, Mavicov, on the improved yields at Penn and the 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. First, 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 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 Rigo two, Why not just blend in, Alexander's, into into Vornado, you'd eliminate the G and A, instead of paying a dividend, that cash flow would accrue to Vornado Vornado. You have $7.31 which certainly fits in your portfolio. Why not just incorporate Alexander's into into Vornado? What would what would prevent that Well, nothing is not tenacious. That idea has been floated for twenty odd years and I have said we're not going to do that for twenty odd years. And actually, I probably will continue to say it now. [indiscernible] the pricing of it the melding of it's just not something that's on the front of my mind today.

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

So, hang on, Alex. Let me give you a fantasy. Okay?

I love fantasy.

Okay. I'm trying to please you. If [indiscernible] into Berenado, I have no idea how we would price it and how we could get both sides to be happy, very difficult to do. [indiscernible] Alternatively, if we left Alexander's as we are going to do, that's what I'm saying. As a freestanding independent public entity [indiscernible] narrowed it down to nothing but the Bloomberg Office Building. Which shortly will have approximately $100,000,000 of net income and that was the only asset And that that property. And it had very low debt or maybe no debt what would that sell for as 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 That's just a fantasy though.

Okay. Second question is Michael, you walked through the question. 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 were NATO might be willing to pay for it and that Alexander shareholders will that's what we're pursuing.

Okay. Michael, you appreciate the comments on 25 some perspective. But you guys have outlined some asset sales the vacating at 350 Park and just the remnants of refinancing. In addition, you have the capitalized interest, I think $51,000,000 at Penn too. That would burn off when those leases take effect. So as we think about the next two years, how much FFO net is coming off of Vornado relative to FFO coming on from Penn Yes.

I think that [indiscernible] couple of things. One is in terms of capitalized interest, right, we've talked about that being lower this year versus last year given Penn2 is going to roll off this year. And I think that's why consensus is down three fifty 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 had capitalized interest on that. So that's not going to really have an impact numbers. So like we've talked the last year about the success we've had back [indiscernible] $7.70, $12.90, $2.80, 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 your trajectory.

Ronald Camden from Morgan Stanley is on the line with a question. Please proceed.

Hey, just two quick ones from me. So one is on just on the same store NOI for New York office ended it down 3.3%. Just you're thinking about the next two to three 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 in my finger. Tips and I don't want to give you numbers that are 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 was had the same sort question on CapEx, maybe asking in a different way. When I think about sort of the $250,000,000 of CapEx spent this year, which includes $72,000,000 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 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. [indiscernible] Last year, I think we're dead on our prediction. Most years were frankly not, because you've taken a high level guess. So I think directionally, we're still in the same bucket, 02/5275 is frankly not that different, right? It's just a matter of what space you end up leasing it [indiscernible] And 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.

Helpful. Thanks so much. [indiscernible] JPMorgan is on the line with a question. Please proceed.

Yes, thanks.

Steve, you mentioned just viewing the cost of basis around the Hotel Penn side of 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 are you thinking of the building costs?

My development [indiscernible] X land for Class A building.

In the yield?

Well, if you put land in, so we get to a number which is 22,000 and don't know, pick a number, 2,000 and two thousand five hundred to put some number like that. I don't know. And you put a yield on it of what would you build for now with a debt market of 6%, let's say you you need to get 7% or 8% or something like that because equity is more valuable than than debt. So what 7% times 2,501 hundred and 75. Now that's a number that's net of taxes and operating costs, so that the [indiscernible] the answer is that to build a new building today, the rents that you would need to get are in the high 100. You're shaking your head while you're shaking your head.

I agree, which is why it's you talk about being frozen and that doesn't work. [indiscernible] but think about that for a second. So one of the reasons that I'm so enthusiastic about the rents at Penn one and Penn two and the rest of our portfolio rising from $100 to is because you have to Yes. You asked us to give that a new build is $200 or something like that, maybe you could suggest maybe So the in place buildings And the better inventory in the great locations will become much more valuable. That's the whole punch line to to today.

Okay. I guess that's what I wanted to understand. So I mean you mentioned vantage point being that sort of cost thus far sunk. And so I guess you're just looking at the incremental and what it could do for the 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 that I own the land, I have I bought the land a long time ago. I had no debt on the land. And so given a choice between leaving the land empty or building on it, we'll make those choices. What we get paid to do.

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

No, sir.

It's okay.

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

Great. Thanks. In terms of the Penn project, can you just talk a little bit about whether any of 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?

Hi, Nick. It's Glenn. So the answer is yes.

Which if you think about it, Pen 2 and Pen 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 So we feel good about the fact that any tenant touring the Westside 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 and very comfortable with it.

Okay, thanks. And then second question is just going back to the yield on ten-two, 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 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 is the yield on the project inclusive of that closer to like 7.58% is that ballpark correct? [indiscernible] It. I mean I think thesis is that we would have had to spend the TI dollars leasing commissions anyway, right? And typically, given what's happened, we'll be spending those to generate rents that were not economic now. Given the quality of the old buildings. So So, we thought the incremental cost, there was cost that we would hit that [indiscernible] that we wouldn't have had to spend, right? That's how we got to the number in the supplemental and what's what's the yield on that?

So Andrew, we can factor in the TIs, etcetera to see. But would have spent that money anyway. [indiscernible] TI leasing commission per foot there, which is assume around it around $140 is that the number?

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

All right. Thanks. Appreciate Brendan Lynch with Barclays. On the line with a question. Please proceed.

Great. Thanks for taking my 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. [indiscernible] get some more context, please. Hi, it's Glenn.

We remain extremely bullish on our building in San Francisco five five, it's the best building in the city, probably the states, and certainly one of the best in the country. So when you look back from 2021 forward, we had a boatload of hundreds of thousands of feet expiring from 2021 to We have leased almost 700,000 feet thus far during that We have some more exploration coming in 2025 and then some more in 2026. We're attacking those now. Some of those tenants will stay, some 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 five star So we feel great about five fifty five 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's multiple tenants expiring call it, five or six tenants throughout the year in different quarters. None of them is huge but as you add it up, you get you get to that Okay, very good. Thank you.

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

Yes. Thanks. Just one quick follow-up. On [indiscernible] quite finished, but sounds like it's going to get over the finish line soon. 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 untypical 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 upfront, 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 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 will press release and they will have all the details that we need to give you guys so that you can understand it. But I mean you get it. So I don't want to get into the details prematurely.

Okay. Thank you.

Yes, sir.

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

Thank you for taking the follow-up. Steve, you mentioned the lack of new office development in New York for several years.

And how tough it is as far as hitting the math to work on some of these sites But how many projects do you think get off the ground right around the same time as 350 Park been a few out there in various stages. None. There's not enough demand?

No, there's plenty of demand. It'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 that and the lack of availability of aggressive capital will will make the market frozen. Now three fifty Park is a isolated [indiscernible] point of view because we already have a lease for a major tenant and we already have a 60% capital partner. So 350% part 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-fifteen.

Where would rents have to go to justify new development outside of I've already answered that question.

I've already answered that question. Dollars 200 a foot is an interesting boat. Got it.

Great. Thank you.

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.