Vornado Realty Trust Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 5, 2024

There are 14 speakers on the call.

Operator

Good day, and welcome to the Vornado Realty Trust Third Quarter 20 24 Earnings Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Stephen Borenstein, Senior Vice President and Corporate Counsel. Please go ahead.

Speaker 1

Welcome to Vornado Realty Trust Third Quarter Earnings Call. Yesterday afternoon, we issued our Q3 earnings release and filed our quarterly report on Form 10 Q with the Securities and Exchange Commission. These documents as well as our supplemental financial information packages are available on our website, www.vno.com under the Investor Relations section. In these documents and during today's call, we will discuss certain non GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10 Q and financial supplement.

Speaker 1

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 ks for the year ended December 31, 2023, 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 remarks are Stephen Robb, Chairman and Chief Executive Officer and Michael Franco, President and Chief Financial Officer.

Speaker 1

Our senior team is also present and available for questions. I will now turn the call over to Steven Roth.

Speaker 2

Thank you, Steve, and good morning, everyone. Today is Election Day in America, an extra important since this is a once in 4 year presidential election. Election Day is arguably the single most important day in the calendar of our democracy. Early voting participation seems to indicate that this year's turnout will be a record and that's great. Enough said, now to business.

Speaker 2

I've been saying for the past few quarters that the office leasing market in Manhattan is at the foothills of recovery and I think that's becoming more and more apparent. While Manhattan has over 400,000,000 square feet of office space, we compete in a much smaller, say 180,000,000 square foot market of the Class A better buildings, where demand is strong and vacancies are rapidly evaporating. Look at Park Avenue at 6th Avenue now with 7% and 9% Class A vacancy, which is the very definition of a landlord's market. And the item on the cake is that there is no sign of additional order supply on the horizon. It hasn't been a major new office start in 5 years, the cost of building and the cost of capital make it totally uneconomic to build.

Speaker 2

History is a guide, no new supply always forgets the landlords market. As Michael and Glenn will comment in a moment, our rents are going up. I am extremely optimistic and the stock market seems to agree. Year to date, we have leased 2,500,000 square feet of 2,500,000 square feet company wide, including 2,100,000 square feet in Manhattan. As Michael and Glenn will cover, activity is robust and I am confident that we will sign between 3,500,000 and 3,800,000 square feet of Manhattan leases year, which would rank number 2 in our history.

Speaker 2

On the last call, we made mention of the deal of the works at 770 Broadway. I'm pleased to report we have agreed to a transaction with NYU percent 70 Broadway. NYU will master lease the entire 1,100,000 square foot office component, which excludes the Wegmans with an option to purchase in the 30th year and the 70th year. Mass lease will provide for an upfront payment of prepaid rent sufficient to pay off our $700,000,000 loan on the property as well as an annual net rent over the lease term. Both parties have signed a detailed letter of intent and expect to execute final binding papers shortly.

Speaker 2

I expect the closing and rent commencement would occur in January. We are delighted to expand our relationship with NYU. Our liquidity is a strong $2,600,000,000 with $1,000,000,000 of cash on balance sheet. Our cash will shortly be augmented by over $1,000,000,000 from the Uniqlo sale, NYU prepaid rent and the redemption for cash of over $500,000,000 of our street retail preferred for proceeds of an in process 1535 Broadway financing. Note that between Uniqlo and 1535, we will have redeemed about half of the preferreds.

Speaker 2

We will pay off our $450,000,000 January 'twenty five bonds in January. We have well more than enough cash on balance sheet to complete our leasing program for PENN1 and PENN2. And remember, we have no debt on Farley, PENN1 and PENN2. Regarding our 350 Park Avenue site, arguably the very best site on Park Avenue, we are well along with the Norman Foster architectural firm in completing the design of the 1,800,000 square foot tower that we will build with Citadel, who will be our major tenant and with Ken Griffin as our 60% partner. At PENN15, the former Hotel PENN site at 33rd Street and 7th Avenue directly across the PENN2 is now down to grade and ready for development.

Speaker 2

I believe this site in the heart of our Penn district and directly connected to Penn Station It's a single best site available in booming Westside of Manhattan. We own one asset in San Francisco, the trophy 1,500,000 Square Foot 555 California Street. In a city of tech buildings, which are struggling with citywide vacancy of 36% and declining rents, this dominant financial services building, its performance is quite remarkable. This year we will lease 443,000 square feet at average starting rents of $110 Occupancy in the tower is 98.7% and we haven't lost a single large tenant in all of the years of our ownership. We have a history of owning the very best street sale sites, Reed's Fifth Avenue and Times Square and bringing exciting retailers to town Reed H and M.

Speaker 2

We announced this quarter an important deal to bring Primark to the Penn District on 34th Street. This will be their flagship store in America. At softer, the Federal Reserve will seem to have beaten down inflation and engineered a soft landing. Having said that, but now borrowing rates remain stubbornly high and not accretive to real estate value. And capital to refinance maturing loans on over levered assets is simply not available other than from the incumbent lender.

Speaker 2

But true at all, the economy is growing and our occupiers are expanding and that's a very good thing. 731 Lexington Avenue, the Bloomberg headquarters tower is owned by Alexander's Inc, of which Renato is external manager and 1 third owner. In the Q1, we extended the Bloomberg lease to 2,040. In the Q3, we financed the maturing loan on the Bloomberg H2 building. Alexander has paid the loan down by $100,000,000 to $400,000,000 from cash on its balance sheet.

Speaker 2

The low LTV $400,000,000 loan was rated all AAAs enabling us to achieve a 5% interest rate by far the lowest we have heard of in this cycle. The AAA rating together with the quality of the credit and the quality of the building led to the offering being 8 times oversubscribed. This refinancing will save Alexander's $17,000,000 a year. We are open to buying the acquisitions market, but very selective on the hunt for good assets at distressed prices. No business as usual here.

Speaker 2

In this cycle, lenders seem to be working out their troubled over leverage problems with their existing borrowers with few high quality distressed assets coming to market. Having said that, this Q2 we did acquire a $50,000,000 loan in default on a very interesting Midtown site. We will keep hunting. While our business is financially better and improving, we continue to be rigorous with cash management. We will likely pay approximately the same dividend as last year, dollars 0.68 and a single dividend paid in December.

Speaker 2

We expect to carry over to next year the same dividend policy with single dividend payable at year end. This strategy has been understood and endorsed by our major shareholders. I expect as conditions normalize, so will our dividend. Lastly, if you are a Venator investor, you must tour our Penn District and I do mean must and I do mean tour not just drive by. If you last visited 6 months ago, you must visit again.

Speaker 2

It's changed that much that quickly. The building architecture of Penn 1 and Penn 2, the size, extent and quality of the amenities and the closets and public spaces have all received universal acclaim from commentators, brokers and occupiers alike. This was a team effort led by our senior leaders, Glenn Weiss and Barry Langer who deserved the Gold Star Award. We are on budget here and achieving higher rents than projected and so we will expect the returns shown on our financial statements to improve. Now over to Michael to cover our financials and the market.

Speaker 3

Thank you, Steve, and good morning, everyone. As expected, the financial results for the quarter were down from last year due to items that we previously forecasted. 3rd quarter comparable FFO as adjusted was $0.52 per share compared to $0.66 per share for last year's Q3. This decrease was primarily attributable to lower NOI from known move outs, largely at 770 Broadway, 1290 Avenue of the Americas and 280 Park Avenue and higher net interest expense, both of which we have previously discussed. We have provided a quarter over quarter bridge in our earnings release and in our financial supplement.

Speaker 3

Our outlook for comparable FFO for 2024 hasn't changed in the past couple of quarters. That being said, with the pending lease at 770 Broadway, we already have approximately 75% of the aforementioned vacant space from the move outs spoken for. Now turning to leasing markets. The tide has clearly shifted in the New York Class A office market. Leasing activity is strong and gaining momentum and availabilities are declining, particularly for large blocks of space.

Speaker 3

Manhattan's leasing volume during the 1st 3 quarters of 2024 totaled 23,100,000 square feet and it looks like full year activity will surpass 30,000,000 square feet for the first time in 5 years. Strong demand for Class A space near transit coupled with limited quality blocks of space is resulting in rents rising and concessions beginning to tick down. 4 Midtown vacancy for the better buildings as defined by CBRE is down to around 10% with Park Avenue around 7% and 6th Avenue at 9%. The headquarter deals are also back with more mega transactions greater than 700,000 square feet signed this year than any year since 2019. During the Q3, 10 leases of 100,000 square feet or greater were signed.

Speaker 3

With little availability in the new Trophy product, tenants have been keenly focused on what remains available in recently redeveloped buildings, which have undergone extensive transformations. PENN2 is perfectly positioned to capture this large tenant demand. Turning now to our portfolio. In the Q3, we leased approximately 740,000 square feet of office space across our three markets. In our New York business, we have now leased more than 2,000,000 square feet in 68 transactions during the 1st 9 months of 2024 at an average starting rent of $112 per square foot.

Speaker 3

And during the Q3 in our New York office portfolio, we completed 454,000 square feet of leasing across 18 transactions at starting rents of $92 per square foot. We closed on a 297,000 square foot renewal with Google at 85 Tenth Avenue, solidifying this property as one of Midtown South's best and an important piece of Google's meat packing district campus and reaffirming the long term commitment to New York. We have a unique window into tech sector activity given our leading position as landlord to the big 4 technology companies in New York as well as many others. And as we indicated on our last call, our sector demand is coming back strong in New York and we have more in the works in our portfolio, particularly in Penn. At Penn 1, we leased 70,000 square feet at an average starting rent of $119 per square foot, led by our 55,000 square foot new headquarters lease with Voyvant Sciences.

Speaker 3

These are historic rents for this building and the Penn District and validate our original redevelopment thesis. Since we commenced the transformation of PENN1, we have now completed more than 1,000,000 feet of leasing at $92 per square foot with a significant mark to market increase. We are well on our way to achieving our original aspirations as the Penn District Campus continues to attract new tenants from across the city at ever increasing rents. Our market leading amenity rich offerings coupled with our complete transformation of the entire neighborhood has put our properties in the leasing bullseye for tenants seeking high quality space. Our reported New York office cash mark to market for the quarter was a negative 7%, but that's not the real story.

Speaker 3

This is because several of the leases signed at PenOne during the quarter for space that has been vacant for more than 9 months and therefore is not considered 2nd generation re let space used to calculate our reported mark to market statistics. Additionally, the quarter included a 297,000 square foot lease 148,000 feet of share, where we exchanged a tenant improvement allowance for a reduction in rent. As indicated on Page 17 of our financial supplement, if you were to include these leasing transactions in our cash mark to market statistics, the negative 7% would be a positive 17.9%. Including the lease at 770 Broadway, which Steve mentioned, our New York pipeline is robust and consists of 2,800,000 square feet of leases in various stages of negotiation. This includes multiple tenant headquarter deals at our transformed Pinto.

Speaker 3

We currently project to finish 2024 with almost 3,800,000 square feet leased across our portfolio, which would be our highest volume since 2014 and then our highest average starting rents ever. Our current office occupancy is 87.5 percent, down from 89.3% last quarter, primarily due to the previously announced meta expiration at 770 Broadway. The easiest money we can make is filling up our empties. As occupancy rises, our earnings will go up. With a pending full building master lease at 770, our office occupancy increases by 330 basis points to 90.8%.

Speaker 3

Depending on the timing of future lease transactions, our office occupancy will likely decrease in Q1 2025 as the vacant space at PENN2 is placed into service. We anticipate that this decrease will be temporary and as PENN2 stabilizes, we get to

Speaker 2

the

Speaker 3

93s. Turning to San Francisco at 555 California, we closed the 46,000 square foot renewal and expansion deal with Wells Fargo during the quarter and currently have renewals out for another 283,000 square feet. Our leasing program at 555 is by far outpacing the entire market at leading financial services companies continue to be attracted to the property's premier quality into our new 555 work life amenity program similar to what we've done in New York. While tenant concessions are up here too, every one of our renewal rental has been positive mark to market or flat in an otherwise weak San Francisco office market, demonstrating the unique cache of this trophy property. At the Mart in Chicago, we closed on 15 leases during the quarter, totaling 239,000 square feet, headlined by an important expansion and renewal of Medline, a worldwide leader in the healthcare industry for 161,000 square feet.

Speaker 3

Medline's enormous growth in Chicago is particularly noteworthy and the transaction is a major bright spot for both us and the overall market. The market continues to outperform the market and attract top tier tenants, driven by our strong debt free sponsorship and recent amenity additions, which reaffirmed its leading position in the marketplace. Turning to the capital markets now. While the financing markets remain challenging for office, we are beginning to see some encouraging signs. While banks remain out of the market, the CMBS market has reopened for Class A in New York City office buildings, as evidenced by our recent $400,000,000 financing on 731 Lex office at 5.04%, the lowest rate achieved for CMBS office financing post COVID, and the $3,500,000,000 financing for Rock Center and $750,000,000 financing for 277 Park Avenue.

Speaker 3

And there are several $1,000,000,000 more in the pipeline. These financing show investors are once again constructive on office and assets can get financed in size, albeit on conservative metrics and loan structures. With short term rates finally coming down and the SOFR forward curve projected to come down significantly over the next year, both the financing markets and borrowing rates should continue to improve and value follow. The investment sales market is also beginning to perk up. There have been a number of older obsolete buildings sold to residential converters, which will take supply out of the market and the 1st Class A building sold this cycle, 799 Broadway, was recently put under contract at a 5% cap rate for $255,000,000 or $1400 per square foot, which is strong pricing.

Speaker 3

Our balance sheet is in excellent condition with strong liquidity of $2,600,000,000 including $1,000,000,000 of cash and restricted cash and $1,600,000,000 undrawn under $2,170,000,000 revolving credit facilities. We have taken care of all of our significant 2024 maturities and are making good progress on our 2025 maturities. Despite the success we've had recently in extending our loans with existing lenders or refinancing our loans in the midst of this more challenging environment. We do still have a handful of assets that are over levered. Most of these assets do not contribute to our FFO right now and have little to no equity value.

Speaker 3

We will maintain our discipline and unless these loans are restructured on terms that allow us to put the assets on sound footing, similar to what we previously negotiated at 280 Park in San Regis Retail, we will not invest any more capital in these status. The non recourse nature of these loans provides us with this option. With that, I'll turn it over to the operator for Q and A.

Operator

We will now begin the question and answer session. Our first question comes from John Kim with BMO Capital Markets. Please go ahead.

Speaker 4

Good morning. Steve, you mentioned the leasing activity

Speaker 5

that you've done year to date,

Speaker 4

2.59 Square Feet, and what you anticipate for the remainder of the year, which sort of implies another $1,000,000 to $1,300,000 Does that include the NYU lease or is that separate?

Speaker 2

Yes, it does. Okay.

Speaker 4

Can you provide any more details on that when the lease or occupancy starts at 770 Broadway? And I know it's a structured deal with the upfront payments and the purchase option, but how does the overall rents compare to the $115 that's in place today?

Speaker 2

Well, the upfront prepaid rent is significant. And therefore, there's a small tail of value that a rent will cover. So it's substantially lower, not $100 a foot. But when you take into account the prepaid rent and capitalize that as a value, the rent is approximately the number you have in your mind.

Speaker 4

And when does occupancy start?

Speaker 2

Say that again?

Speaker 4

The occupancy of the building, when does that contribute to FFO?

Speaker 2

The closing will is expected to be in January. The rent will commence in January. The funds will transfer in January. So that's the action will be completed. The papers will be signed imminently.

Speaker 2

The closing will be in January.

Speaker 4

Great. Thanks. And my second question, I know I asked multiple questions in the first time. But second question is on the March. You had increased leasing and the occupancy went up.

Speaker 4

The rents have come down compared to where it was last quarter. Is that your strategy going forward is to kind of build up occupancy with reduced rents?

Speaker 2

The key to the Bard is, first of all, it's an extraordinary building. 2nd of all, the Chicago market is soft to very soft. The most important strategic point in the mart is the mart is now unencumbered and free and clear. So it's one of the very, very few buildings in Chicago that is well capitalized. It's the strongest financial building in the Chicago area.

Speaker 2

And that gives us an enormous amount of strategic flexibility. So we will rent the building opportunistically as deals that we think are attractive come along. We're performing better than any other building in the market. As the Chicago market improves as it will, we will ramp up the leasing.

Operator

And the next question comes from Steve Sakwa with Evercore ISI. Please go ahead.

Speaker 6

Yes, thanks. Good morning. Maybe just following up on John's question on just leasing. If we strip out the NYU lease, that sounds like there's a couple of 100,000 to maybe 400,000 feet of other leasing. Can you maybe just speak to the pipeline and the activity that you're seeing at PENN2 today?

Speaker 6

Has that pipeline changed at all? And what's your confidence level of getting some leases signed at PENN2 before the end of the year? Thanks.

Speaker 7

Hi, Steve, it's Glenn. So there's actually a lot more leases out over and above the NYU deal, 600,000, 700,000 feet of paper, we have leases in negotiation, all of which I expect to close during the Q4, number 1. Number 2, as it relates to the PENN2 pipeline, it is robust with very many, many important transactions. We expect to go to lease 2 or 3 of those during 4Q. We are in full swing.

Speaker 7

As less and less blocks are available in the market, particularly of this type of quality at this location with the amenity program we put together, we're now in 5th year and more to come.

Speaker 3

I just want to add a couple of both John's comments, Steve and your comments implied there's not that much more to leasing when you add in what we've done year to date adding NYU. I think the math you guys are doing is inaccurate, right? I think both Steve and I commented we expect to do as much as $3,800,000 We've signed and that's in New York, right? We've signed about 2 to 1 year to date through 3 quarters. So if you take out NYU, as Glenn said, there's another 600,000 plus in papers in the pipelines deeper beyond that.

Speaker 3

So I think you're hearing a level of enthusiasm and confidence from us that is sort of as high as it's been a long time given the activity we have.

Speaker 6

Great. Thanks for that clarification, Michael. Maybe second question, Steve. I think last quarter after the Uniqlo sale, you mentioned you may explore some other street retail sales. Just kind of where are you on that front?

Speaker 6

And has your thinking changed at all? And has the appetite from some of the luxury retailers changed at all?

Speaker 2

The appetite continues to be strong. We have no news to report in that regard. But I think the interesting thing is that and I said it in the script that by the end of this year or into January, we will have monetized half of the $1,800,000,000 retail preferred at par. So if you remember back a year or so ago, analysts were predicting that the preferred was were substantially flat at par. So the big story this quarter is the balance sheet.

Speaker 2

So we're monetizing the balance sheet. We will increase our cash balances by more than $1,000,000,000 very shortly. We will pay off $450,000,000 of our bonds and we will end up, for example the NYU deal reduces our debt by $700,000,000 So when you put it all together, Michael, what's the math?

Speaker 3

I think we'll end up paying off a little over $1,100,000,000 of debt and increased cash on our balance sheet north of $600,000,000

Speaker 2

So that's very substantial. So we're definitely in fighting mode. With respect to selling more of the retail, which was I think your main question, there is activity. The retail values have been validated multiple times and we will react opportunistically to opportunities as they come along.

Operator

And the next question comes from Floris Van Dijk with Compass Point. Please go ahead.

Speaker 5

Hey, good morning guys. Following up on Steve's question on retail, there was I don't think there was a lease that was executed in the Q3 on the on your retail portion. Can you talk a little bit about the demand for retail? I know you talked about Primark coming to the Penn District. Also what are the plans on your big Macy's store?

Speaker 5

Is that a long term project? Or is there anything more near term coming for that space?

Speaker 3

Boris, good morning. I would tell you and I think you've heard this from us the last few quarters, right? The demand from retailers is up pretty significantly from the Lowe's. We continue to see good demand across the portfolio. We're hard at work, obviously, leasing Penn, I think bringing Primark to the district is a big win.

Speaker 3

They're excited. We're excited. We're in discussions on other retailers to bring into the district, which will continue to enhance the district. So we're very pleased about that. Times Square has seen a big pickup in activity.

Speaker 3

We have a lot of discussions going there with respect to our 1540 asset. And as we look at the pipeline, there's pretty good activity across the board. We have some vacancies, the rollover, I should say, coming up on Fifth Avenue in the next couple of years and there's dialogue there too, but that's not as imminent. But I would say again, interest is up, activity up, importantly rents have firmed and retailers are doing the sales that give them confidence to transact. So these deals take a while.

Speaker 3

These are big commitments, particularly on the 2 main blocks or submarkets, I should say, at 5th and Times Square, but the interest level continues to be there.

Speaker 2

I would add that the Primark deal is it's a big deal coming into the Penn District. It's a fable store. It will do great business. It's a flagship. It's a big deal.

Speaker 2

The occupancy numbers that we publish for retail are actually the story behind that is I think we published that our occupancy is what, Tom? It's 77%, 78%. Okay. But that includes the but not more vacancies. And if you take those out, then you get to very close to 90%.

Speaker 2

So actually, we're pretty well leased in comparison above the market occupancies. And the way I look at it, we're really 90% leased in the retail, not 78%. So that's the way I look at the retail. There is, as Michael said, there is strong demand in retail. Retail is certainly in much better shape than it was a couple of years ago.

Speaker 3

Well, with respect to your, I believe let me clarify. You mentioned Macy's. We don't have a Macy's.

Speaker 5

Yes, I meant the Manhattan Mall, of course. I apologize.

Speaker 2

Yes, we figured that out. Thanks, Flor.

Speaker 3

So, I think Steve alluded to that in terms of the occupancy. We have continued to put temp tenants in that space. Right now, we actually have Netflix doing a squid Games pop up, which I hear is quite popular and we'll continue to do that. On that space, which is big, a bit more complex, The math doesn't work to do anything permanent today. So I think that's probably going to be the case for some time.

Speaker 3

So I wouldn't wait up sleepless nights assuming that's going to get done in the next few months. That's going to be we're thinking through some broader plans there and that's a little bit more atypical space.

Speaker 5

Great. Maybe a follow-up question. Your stock is trading at an implied cap rate of around 6%. How do you think about raising equity? And what needs to happen for you to be willing to do that at this point, particularly as you think about your potential investment opportunities out there as well?

Speaker 2

That's a fascinating question. First of all, we are very well capitalized. I think I said 3 or 4 minutes ago that we're bringing $1,000,000,000 of new cash in, we're paying down our debt. Our balance sheet is extremely strong and we have all of the firepower that we think we need for the foreseeable future. Our capital requirements to complete our lease up in PED 1 and PED 2 and across the board are already in cash on our balance sheet without doing any more financing.

Speaker 2

We have the lion's share of our assets in PENN1, PENN2 and Farley where we have Meta are all unfinanced. So we're extremely liquid and low capitalized. The cap rate that you mentioned is interesting, but when I do the math, I look at what the business looks like when we complete leasing and we get back to the 96%, 97% occupancy that we have traditionally had. We will get there for sure. They take a year, they take a 2 years.

Speaker 2

So I look at the business with all of that income coming in and if you look at that, we really don't need any equity. So for the moment, we have no plans of issuing equity. Also, we are being pounded by bankers who want to write a ticket and sell stock for us, but it's really not something that we think is strategically important for the moment. If opportunities present themselves, which are super accretive and not dilutive to our current shareholders, we will consider that. But we're not in the business of diluting our shareholders.

Operator

And the next question comes from Dylan Bircinski with Green Street Capital. Please go ahead.

Speaker 5

Hi, guys. Thanks for taking the question. And appreciate your comments on after the 1535 transaction closes on monetizing half of the preferred equity in the Street Retail JV. But I guess, are there any other transactions or should we expect for you guys to monetize the remaining half of that preferred equity position over the near term? Or do you guys feel like most of the sort of the low hanging fruit there is it's come to pass after this most recent announcement?

Speaker 2

Well, we're actually very pleased with the first half of monetizing that's referred at par. We will we have no current plans to attack the second half. That's opportunistically and we'll see how things go. As I said pretty extensively a moment ago, we are in a very strong capital position. And we feel that we have spin equity, although we have the opportunity to raise more equity if we wanted it or need it, but we don't think at the moment we want it nor do we think we need it.

Speaker 2

So the preferred is the other half of the preferred is something that we're very happy holding with as the markets turn, the income coming in on that preferred now exceeds the rate of interest that we could earn on short term debt. So we're pretty okay with it.

Speaker 5

Thanks for the detail, Steve. And then just maybe one

Speaker 8

more if I can.

Speaker 5

On the B note acquisition, the $50,000,000 I mean curious, can you kind of talk about your guys' plans there? And I know the note is currently in default along with the A note at the property. I mean, is there plans to sort of go after this? And if so, can you kind of just talk about it a little bit more?

Speaker 2

I wish I could, but it's really not appropriate. So first of all, it's a very small investment. 2nd of all, it is interesting and you'll all learn more about that over the next quarters. It has multiple different alternative ways that this thing could go. It will possibly result, maybe even likely result in litigation.

Speaker 2

And it's just it's a very interesting thing, very interesting site and it's really not appropriate to talk about it at this call.

Speaker 4

Okay, makes sense. Thanks again.

Operator

And the next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

Speaker 9

Good morning. And Steve, as one of those analysts who was questioning on the preferred, good to hear that you've made progress paying it off at par. So, kudos to you and the team. Two questions. First, just following up on the preferred sorry, on the B note purchase.

Speaker 9

Given it's potentially litigation, it was in default, can you provide any perspective on buying it at par versus discount? It would seem based on what you've described that it should be a position that would trade at a discount, but clearly there's a rationale. So maybe you could just help us understand to what you can discuss?

Speaker 2

Well, thank you for the compliment, Alex. That's very nice. Thank you. We appreciate it. With respect to the B note, I'm really not going to say any more than we have.

Speaker 2

Obviously, I'm a famously difficult buyer and we paid par because we thought it was we were getting value and we were getting a position in the asset. So other than that, I don't have anything to add. Okay.

Speaker 9

The second question is, Steve, based on how you described 555 California and you and others have described Park Avenue, it seems like the traditional office submarkets have been the leaders coming out of the pandemic and remain very strong. Just curious, years ago, you talked about Manhattan tilting to the south and to the west, and yet right now, everyone's walking back to assets like 555 or Park Avenue. Can you just discuss if you think that perhaps going forward future Vino investment is going to focus more on the traditional submarkets and less on the new frontiers? Or you think that this is just a moment in time and as the cycle recovers, those new frontier markets will once again have their place?

Speaker 2

Alex, I wouldn't call the west side of Manhattan when you take Hudson Yards and Manhattan West and the Penn District as a new frontier. That's now become a very established neighborhood. The demand from blue chip double blue chip, triple blue chip tenants is established and validated. And so I think the way I look at Manhattan, there's the traditional midtown market and then there's the newer, dare I say, better Westside market, which is actually booming. So I think we don't really own a lot of stuff in the middle, but I think I have no problem with the Westside.

Speaker 2

I think the Westside is great, if you're calling that new frontier. I don't think it's new frontier. I think it's very established by now.

Speaker 9

Right. Thinking more like meat packing Chelsea that area?

Speaker 3

Alex, I think one of the dynamics that has happened in the last 3, 4 months actually is that the market's broadened back out again. So like Park Avenue is Park Avenue achieving historically higher rents, which is fantastic. We benefit from that, and we're excited about what's to come there with 350 Park. But if you look at our pipeline, it's broadened out I think it's broadened out actually quite meaningfully. There's been a real uptick there.

Speaker 3

And I think that's what you're seeing, broad based strength in the market. So I I think that's an encouraging sign for the marketplace. We have activity across all of our assets. And so meatpacking, Chelsea, all those assets, not just our top grade assets are seeing activity. So Google just renewed an E510.

Speaker 3

So I don't think I would call those submarkets dead by any stretch of the imagination. I think they're stronger than they've been in

Speaker 2

a while. Those markets really are smaller buildings, smaller tenant markets. But for example, we own buildings we own a couple of buildings in the Chelsea market. The rents are $150 a foot. The rents are higher there than they are at Park Avenue.

Speaker 2

So New York is, as Michael said, broadening out. Tenants want to go into various submarkets and they're all pretty good.

Speaker 9

Good color. Thank you.

Operator

And the next question comes from Jeff Spector with Bank of America. Please go ahead.

Speaker 10

Great. Thank you and congratulations on the quarter. Just listening to the call, you've discussed

Speaker 2

Thanks, Jeff. Thanks, Jeff.

Speaker 10

You've laid out a lot of drivers of growth and I'm just thinking about 2025. I know you have a deep team. I mean, where are the priorities for 2025? And where do you see best time spent for opportunities?

Speaker 2

Michael, do you want to take a shot at that? Sure.

Speaker 3

Good morning, Jeff, and good to have you back on the front lines with us. So in terms of priorities, I think the number one priority continues to be like we've invested significant capital in Penn. I don't know if you've been there recently, but it is transformed. It looks phenomenal. And now it's a leasing game.

Speaker 3

And you heard in the opening remarks, you heard Glenn talk about the activity being significant there. We just have to execute, right? We have to lease up PENN2. We have to continue to turn over PENN1. And if we do that, I'm confident we will, you're going to see significant growth coming out of PENN.

Speaker 3

And I think you're going to see us continue to push rents up there. So that is the easiest earnings growth we can generate. We're going to. 2nd, it's filling our vacancies elsewhere, which we're in the process of doing piece by piece. We have good activity across Manhattan.

Speaker 3

The mart, as Glenn talked about, is a little more challenging market wise, but the team is working hard there. And I think what we've done in 555 with Glenn's in process on is really, I think breathtaking honestly, if you focus on the stats. So it's Penn, it's filling the balance of the vacancies. It's continuing to manage our balance sheet effectively. I think we've done a very good job of working through our maturity over the last 2, 3 years, including some of our challenging situations.

Speaker 3

We need to continue doing that. And then we've got a whole host of opportunities that are internal that we've got the seeds plant, we have to take the next step on, whether it's 350 Park, whether that's other opportunities in Penn. We have a few assets internally, but beyond that, that are potentially repurposed or redevelopment assets that we are working on right now in terms of economics and when may be the right time there. And then lastly is, we're trolling the market for external opportunities. And I think one of the disappointing things has been that there have been low quality office opportunities and most of those are getting repurposed to other uses, but there really have been very little in the way of high quality distressed office assets.

Speaker 3

So we continue to troll. There will be some, but I don't think it's going to be floodgates. And so we would like to be active at doing things on that front. But we have a lot internally that we can execute on that will grow the value of this company significantly over the next several years. Some are going to take longer to realize given their development opportunities, but we think they're pretty unique.

Speaker 2

I think you can say and I'm happy to say that our single focus is in creating value, being financially disciplined and getting our stock price up to where we think the value is and where it should be. In order to do that, we need to keep leasing, we need to keep improving our balance sheet and we need to focus on calling out assets that we don't want and turning them into cash and continue to work on the assets, the very significant and great asset pool that we have in creating more value out of that existing asset pool. Hopefully, we'll find external opportunities, but we have enough internal so that we can be very busy and create very significant increased values. But actually, I'm all about the stock price.

Speaker 10

Thanks. Very helpful. And my second question, can you expand on your initial comments, Steve, you've mentioned it's a landlord's market. I understand that technically you're right between demand supply in your market, it's a fair comment. I guess from a New York City office market standpoint, when we talk to brokers or others, right, we think about tenant allowances and free rent and more equilibrium there or more equilibrium in the market where, let's say, for the landlord, you'd be contributing less tenant allowances, free rent.

Speaker 10

I mean, how do you think about that? And can you maybe just expand on that comment a little bit? Thank you.

Speaker 2

Thank you. A good model is the retail industry over the last 5 or 6 or 7 years. So if you go back 5 or 6 years ago, retail was toxic. All retail was toxic, whether it was malls or Fifth Avenue or the streets of any city, the feeling in the marketplace was that the Internet shopping was going to demolish all physical brick and mortar shopping and the stocks got crushed, the values got crushed and the attitude of about retail was, I mean, just toxic. The office industry has gone through very much the same thing over the last 2 or 3 or 4 years, COVID, work from home, nobody's going to ever get out of their kitchen get off their kitchen table to come to the office.

Speaker 2

Well, all of that turns out to it's all passing and passing very aggressively. So there's 2 things or 3 things going on. Number 1, it's been established now, people are coming back to work and people want to come back to work and people want to be in the big cities. The second thing is that the environment has basically shut down new supply. It's totally uneconomic.

Speaker 2

The cost of building has risen significantly and the cost of capital has risen significantly and it's sort of like it's not money is not free anymore. Money is expensive. So building a new construction and new supply has shut down. Those are 2 very, very constructive things for our market. You can see if you look at Park Avenue, you look at Sixth Avenue and you look even at the West Side of Manhattan that the supply and the other thing is the market is bifurcated.

Speaker 2

There's 200,000,000 square feet of B and C and D space in New York and there's 200,000,000 or 180,000,000 square feet of better space and A space in New York. The customers that we deal with only want to be in the better space. That space is limited and the supply of that space, the vacancy in that space is evaporating very quickly. So for example, Park Avenue rents went from $80 a foot to $130 a foot almost overnight as the supply shrinks. So that's the definition of a landlords market.

Speaker 2

No supply, vacancies evaporating and significant demand. The other thing is and I made mention in this in my paragraph about the Fed, there was speculation we were going to have a recession. There has been no recession. There has been a soft landing and our customers are enthusiastic and expanding and that's a good thing. So most of our customers are enthusiastic about their space and they want more space and they want better space.

Speaker 2

That's for the ambulance market.

Operator

And the next question comes from Michael Griffin with Citi. Please go ahead.

Speaker 11

Great, thanks. Maybe going back to the PENN2 leasing pipeline, I know historically that submarket's been more focused on tech and media tenants. But just given maybe the limited availability that we see in a more traditional financial services markets like Park and 6, is it fair to say that there's an increasing share of that leasing pipeline that's driven by financial services or some of those more traditional office space takers?

Speaker 7

Absolutely correct. So all types of industry sector tenants are coming to PENN, both PENN1 and PENN2. They're flooding in. Law firms, financial, entertainment, tech, consulting, private equity, hedge funds, we're seeing a plethora of activity from everybody. And it's a game changer.

Speaker 7

I think partly that's due to the lack of quality space available in the market generally, but more importantly to what we've done with these buildings and what this neighborhood now feels like. It's powerful. They're all coming in and astounded by what we've done. And they feel like 10 is part of this Westside, part of Manhattan West, part of Hudson Yards. We're now part of the New Westside.

Speaker 7

And not only that, we're at the doorstep right on top of transportation, which gives us a leg up on everybody else. So it's all in full gear and you're on point with what you said about tenant type for sure.

Speaker 11

Thanks, Glenn. Appreciate the color there. And then Steve, I just want to go back to your comments on trying to pivot to acquisitions and external growth and going on offense in 2025. It seems like you have the balance sheet primed to do that. But as you look at your opportunity set, is it more kind of on the distressed debt side?

Speaker 11

Would you prefer to purchase assets outright? And then can you give us a sense of what you might be underwriting to in terms of return hurdles or from an IRR perspective? That would be great.

Speaker 3

Griff, it's Michael. We are an equal opportunist, whether it comes through the debt or outright asset purchase. We're open to both. It's obviously easier to buy the assets outright than having to work through the debt. But in some cases, the opportunity is to the debt.

Speaker 3

And I think a lot will be debt driven, whether it's lenders that collectively get together and want to short sell an asset or they want to sell a position. So we're looking at a number of opportunities like that. Look, I think that as we think about deploying capital, this is not a growth for growth sake, right? As Steve said, we're trying to do things that are going to increase the value of the enterprise over time. And so our capital is precious and we want to deploy that capital in a very attractive way.

Speaker 3

So I'm not going to give you a specific return target, but these are not core buys that we're trying to focus on. We're trying to generate very attractive returns that can generate very attractive multiples over time. And so, I would think that sort of value added opportunistic sort of dynamic is at play here. And that's probably as specific as I can get. Each deal has its own dynamics, but we're not looking to put out money just to put out money.

Speaker 3

We want to make some serious profit if we deploy the capital.

Operator

And the next question comes from Ronald Kamden with Morgan Stanley. Please go ahead.

Speaker 12

Hey, just two quick ones. So just one on the I think you made some comments about occupancy dipping in 1Q 2025, but potentially ending at sort of 93% at the end of next year, if I heard that correctly. Just curious what we should think about in terms of just the impact of same store NOI, any sort of comments on that would be helpful.

Speaker 3

Ronald, good morning. I think difficult to give you that prediction right now. We're going through our budgets now. A lot of this stuff is timing driven and I don't know that give you sort of this quarter versus that quarter etcetera. I think you know sort of the end goal based on what we talked about in terms of at least the near term and just hard to give you that visibility today.

Speaker 12

Okay, great. I guess my second question, just going back to the cash flow statement, looks like a good cash from operating quarter and so forth. Just how are you guys thinking about cash conversion as sort of the business recover? Is there anything that we should be mindful of whether it's CapEx spending or anything else like that as you're thinking about maximizing free cash flow as the business recovers? Thanks.

Speaker 3

I mean, look, our objective, our general approach is to be fairly rigorous with how we invest our capital, right? And that includes on our existing asset base. So we are deploying the capital where we see appropriate return. If we don't see that opportunity, and I referenced that in my remarks, if we don't see an opportunity on an asset that has too much debt or until that debt is reworked, we're not going to do that. And I think we've demonstrated that in the past.

Speaker 3

So we're going to continue to be rigorous. Capital is precious, notwithstanding the strength of the balance sheet. And we hope that as we transition into the landlord's market, we will start to see concessions trend down some. I don't think it's going to drop to where it was years ago, because with inflation, the cost to build out space is higher. But we do think in the best submarkets that there will be an opportunity to start tightening that a bit.

Operator

And the next question comes from And the next question

Speaker 2

comes from Caitlin Burrows with Goldman Sachs. Please go ahead.

Speaker 13

Hi, good morning, everyone. Thanks for the comments earlier on the expected 2024 dividend and the policy for 2025. I guess I know the dividend is a Board decision, but could you give some discussion maybe on what it would take bring back the quarterly dividend?

Speaker 2

What we did was totally based upon conserving cash and protecting our balance sheet. That's the that was the genesis of the dividend policy that we adopted. Lower dividend, conserve the cash, pay it once at the end of the year. We canvassed a very significant number of our shareholders about that strategy and universally they endorsed it, protecting the balance sheet being the principal thing to do. As the business cycle changes and the availability of capital and we get back into more normal times, we will then likely convert to a normal dividend policy, a lot of what we had in the past.

Speaker 2

So this is not necessarily a permanent strategy. It's an interim strategy that protects the balance sheet, which was very well received by our constituents.

Speaker 13

Got it. Okay. And then maybe just on PENN2, given the leasing you've already done and knowing it takes time for users to move in and contribute to rent in FFO, could you give any detail on your expectation for PENN2 buildup in 2025, like maybe the path to recognizing that 9.5% yield?

Speaker 3

I don't think you're going to see much in 2025 just because the leases Glenn is working on now, those really won't start by the time the build out occurs, that income really won't start kicking in until 'twenty six. So, I think you'll see a lot of activity over the course of the remainder of this year, next year. But I don't think in terms of it actually hitting earnings, I think it's going to be, really as we start getting into 'twenty six.

Operator

And the next question comes from Nick Yulico with Scotiabank. Please go ahead.

Speaker 8

Thanks. Just wanted to go back to PENN1 and I guess two questions there is on the leasing that was done, the 70,000 square feet, which was at higher rent than prior leases. I think some of that was benefit from higher floor space. But can you just talk about like the rent there versus how we should think about the additional rents still to come?

Speaker 7

Hi, it's Glenn Weisnick. How are you? So we continue to increase rents at 10.1. If you think about our starting rents quarter to quarter since we unleashed on the redevelopment, they continue to rise in a pretty strong way. So yes, one of the deals we made this past quarter was in the upper stack of the building at a huge rent.

Speaker 7

And that's now allowed us to drag along the rest of the building where we've increased rents throughout. Similarly at PENN2, we've been very focused on our rental quotes. We've been increasing our quotes there as well. So as we had predicted when we set forth on this whole PENN district transformation a few years ago, we had said rents will rise as the district gets better, better and better as the new tenants move in, as the action strengthens and it's exactly what's happening. So we expect that trend to continue as we go into 2025.

Speaker 7

Much of our activity we talked about in the pipeline that PENN1 and PENN2 and other Penn District Holdings additionally. So we think the best is yet to come and we're really excited about it.

Speaker 8

Okay. Thanks, Glenn.

Speaker 3

David, as we said, we have leased 1,000,000 feet post redevelopment. And therefore, we still have another $1,300,000 $1,400,000 to go, right? So I think that gives you a sense of the magnitude of the opportunity. Now that's unlike PENN2, which is a lease up execution, right? This is going to occur over the next several years, not all at once.

Speaker 3

And so we think there's a continued meaningful mark to market opportunity there and that's without rents continuing to rise, which if we start factoring in the rents that Glenn just did on PENN1, Glenn just did on PENN1, this past quarter, that's even more significant. So this is an asset that we

Speaker 4

think is

Speaker 3

going to continue to deliver for us over time given what we've done in the district.

Speaker 8

Okay. Thanks. Thanks, Michael. Second question is just in terms of I know there's been a lot of talk on the call about occupancy improving and then Michael you're also talking about some of the impact for the Penn 2 leasing is more of 2026 impact. But as we're thinking about 2025, I know you've said in the past to capitalize interest burn off issue you have to deal with.

Speaker 8

How should we think about earnings growth next year? And at some point, if there's a feel for when you're getting to sort of the bottom in terms of FFO and you'd start see some FFO growth based on the occupancy growth? Thanks.

Speaker 3

Yes. Look, I think we said in the last quarter or so that a lot of the activity that we're executing on now, we're really going to get the benefit of starting in 'twenty six. I think that continues to be the case, right? So this pipeline that we're working on, there's some things that will hit a little bit more immediately and we're sort of running that through the system right now to see the impact. But a lot of this activity will really kick in 'twenty six and you'll start seeing material growth in that year and thereafter.

Speaker 3

So 25% look, we'll try to give you a little bit more color as we get closer next year as we refine the budget to what we're doing. But I think we've sort of said next year was going to continue to be somewhat flat to this year. These the move outs and the backfilling, the timing doesn't sync up in terms of when that comes online. So there's things that are moving around on the positive side like we were effectively hedged, rates are starting to come down certainly in the short term, but I don't think we'll start to see material impact on that as well until 2026 because we are fairly hedged still. So I can't give you a precision because we're still working through it.

Speaker 3

And as you know, we don't give guidance. But I think this is a general matter. In the comments we've said in the last 3, 4 months about being not too dissimilar from this year, I think still hold with respect to 25.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Mr. Steven Roth for any closing remarks.

Speaker 2

Thanks everybody. Election Day and so tonight is going to be very exciting, I think. Those of you who have not seen the Penn District recently and I mean very recently, please call we're very proud of what we've accomplished there and we're dying to take you through and expose you to these assets which we think are performing very well and will perform better. So if you want a tour, give us a call and we'll see you at the next quarter. Thanks very much.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Vornado Realty Trust Q3 2024
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