Vornado Realty Trust Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2024

There are 16 speakers on the call.

Operator

Good morning, and welcome to the Vornado Realty Trust Second Quarter 2024 Earnings Call. My name is Rocco, and I will be your operator for today's call. This call is being recorded for replay purposes. All lines are in a listen only mode. Our speakers will address your questions at the end of the presentation during the question and answer session.

Operator

I will now turn the call over to Mr. Steve Bornstein, Executive Vice President and Corporate Counsel. Please go ahead.

Speaker 1

Welcome to Vornado Realty Trust Second Quarter Earnings Call. Yesterday afternoon, we issued our 2nd quarter 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 comments are Stephen Ross, 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 Ronch.

Speaker 2

Thank you, Steve, and good morning, everyone. Our business is on plan and continuing to improve month by month. Our primary focus is always on leasing and I can report that PENN2 is extremely active and further that in the overall portfolio more than 2 thirds of the recent vacancies have already been spoken for. Our focus continues to be on enhancing our liquidity, reducing leverage and of course taking advantage of opportunities created by the current market dislocation. New York City is as crowded as ever and that's a good thing.

Speaker 2

As I predicted over the past couple of years, working at the kitchen table wasn't an existential threat. We're now seeing building utilization percentages in the 70s and that's just about normal. Tenants are expanding and growing and actively searching for space. We actually compete in a market of over 200,000,000 square feet and in many of the prime submarkets, good spaces being eaten up and rents are rising. It may be that the most important dynamic in our market is that it is almost economically impossible to build new, thereby cutting off new supply.

Speaker 2

There hasn't been a new office building of size started in New York in the last 5 years. If history is the guide, when supply shuts down, it quickly leads to a landlord's market. As Michael will cover in a moment, we are off to a very strong start in our leasing this year. The Bloomberg renewal and extension of the 940 7,000 square feet at 731 Lexington Avenue, creating 16 years of term is the highlight. And we have good activity at all of our assets.

Speaker 2

As I said, at PENN2 with the lobbies, common spaces, amenities and plazas now complete, we're seeing a significant uptick in tour activity and our pipeline at Penn is strong. Prospective tenants are really appreciating our transformation. And that Penn is really an extension of the new Westside from Hudson Yards to Manhattan West to Penn. The public space surrounding PENN1 and PENN2 is transformational and I encourage all of you to go out and check it out. The district is really bustling with our new food and beverage offerings.

Speaker 2

We are we could not be more optimistic. I mentioned on the last call that we've been working on several large monetization transactions. We announced the first one yesterday, the sale of our portion of Uniqlo's 5th Avenue flagship to Uniqlo for $350,000,000 This asset is in our retail joint venture, 52% of which is owned by us. Uniqlo is also acquiring the upper two floors of their store from the office owner. This transaction continues the theme of Fifth Avenue users purchasing their space.

Speaker 2

Unical's lease was set to expire in April 2026, protecting and perpetuating their control of this high volume prominent Fifth Avenue store was paramount to the tenant. My bet is this won't be the last user purchase on Fifth Avenue. As you will recall, we recapitalized this asset at a 4.5% cap rate as part of our Street Retail joint venture in 2019. The sale to Uniglo is at a 4.2% cap rate on in place NOI and the cap rate on the mark to market rent is in the mid to high 3% range. The sale is expected to close in the Q1 2025.

Speaker 2

Importantly, all net proceeds will go towards repaying our preferred equity on this asset. There are a few other transactions in our liquidity. The second transaction I'll quickly comment on, which has been rumored in the market relates to 770 Broadway. We have reached a handshake deal with a user for a long term master lease of the entire 1,100,000 square foot office component. We will retain the 92,000 square foot Wegmans market.

Speaker 2

After a difficult 4 or so years, market dynamics are now reversing and growing constructive. There's no new supply on the horizon. Tenants are growing and expanding and searching for space. And New York continues to be the single best market in the nation. And importantly, our Penn District is finally showing brilliantly.

Speaker 2

Worried about the elephant in the room. The activity in the government bonds and stock markets over the last 3 days is confirmation that the Federal Reserve fight against inflation has succeeded and likely foretells a significant reversal of interest rates. All this will have significant positive impact on our numbers and our values. Now over to Michael to cover our financials and the market.

Speaker 3

Thank you, Steve, and good morning, everyone. Our overall Q2 FFO was $0.76 per share. This excludes $0.19 of non comparable items, mostly our share of the gain from the discounted debt extinguishment related to the refinancing at 280 Park Avenue and gains from additional 220 Central Park South unit sales. 2nd quarter comparable FFO as adjusted was $0.57 per share compared to $0.72 per share for last year's Q2. This decrease was attributable to the known items we previously discussed and consisted of $0.07 of lower NOI from known move outs, net of rent commencements, dollars 0.07 of termination income in 2023 from a former tenant at 345 Montgomery Street in San Francisco and $0.03 of higher net interest expense, partially offset by $0.02 of higher NOI from signage and the net impact of other items.

Speaker 3

We have provided a quarter over quarter bridge in our earnings release and in our financial supplement. On our last earnings call, we stated that we expect our 2024 comparable FFO to be down from 20.23 comparable FFO of $2.61 per share, primarily due to higher projected net interest expense of about $0.30 per share and the temporary impact of known vacancies at certain of our properties, primarily at 1290 Avenue of the Americas, 770 Broadway and 280 Park Avenue of roughly $0.25 to 0 point $0.30 per share. This is still a good assumption as these items are expected to have a larger impact during the second half of the year. We already have commitments for about 2 thirds of the aforementioned space, assuming the 770 Broadway transaction is finalized. But the GAAP earnings from these leases won't begin until the latter part of 2025.

Speaker 3

Thereafter, we expect earnings to increase as income in the lease up of Penn and other vacancies comes online and as rates trend down, partially offset by the reduction of capitalized interest. Now turning to the leasing markets. The overall tone of the New York office leasing market continues to be upbeat as we enter the second half of the year, particularly in Midtown. Private sector employment has reached a historic high, reinforcing that New York remains the leading magnet for talent in the U. S.

Speaker 3

Tenant demand for Class A properties is strong, outpacing 2023 and the mix of leasing is well balanced between financial services, legal and technology companies. Given the lack of available quality blocks of space in Midtown Manhattan, a dearth of new supply for the foreseeable future, slowing sublease additions and office conversions gaining momentum, many industry analysts are predicting a tightening of vacancy rates across the city and well capitalized Class A properties as we head into the second half of twenty twenty four and into 2025. A spike in rental rates much like what we have seen on Park Avenue and the new Westside should naturally follow. All this bodes well for Vornado's best in class collection of high quality repositioned assets within New York's most coveted submarkets on the New West Side, Park Avenue and Sixth Avenue. Our 2024 leasing activity reinforces the tenant demand for top of market properties near transit and which provide the type of space and amenities companies desire for employee retention, recruitment and flexibility remains strong.

Speaker 3

During the 1st two quarters, we leased a total of 1,600,000 square feet and market leading average rents of $130 per square foot. This includes our 2nd quarter lease renewal of Bloomberg for the global headquarters at 731 Lexington Avenue, where they will continue to occupy all 947,000 square feet of office space in the building. Excluding the Bloomberg Renewal, our transaction volume for the first half of twenty twenty four is 666,000 square feet at starting rents of $95 per square foot with a cash mark to market of 9.1%. During the second quarter, we completed many important leases throughout the portfolio in addition to Lindbergh, including 11 leases at PENN1 totaling 123,000 square feet at an average starting rent of $95 per square foot. The transformation of Penn 1 with its unmatched amenity program continues to attract tenants from all industry sectors who were previously occupying space in other city submarkets and at rent above our original underwriting.

Speaker 3

We continue to attract leading financial services companies to 280 Park, where this quarter we completed a long term transaction with Elliott Management for 149 1,000 square feet in the base of the building. The addition of Elliott to our tenant roster, where they joined PJT Partners, GIC, Antares and Investcorp cemented Trinity Park as one of Manhattan's premier financial services properties. Importantly, we have now leased 225,000 square feet of space at 280 during 2024 at an average starting rent of $124 per square foot. Looking forward, our pipeline is roughly 2,600,000 square feet, which consists of 1,600,000 feet of leases and negotiation and well more than 1,000,000 square feet in some stage of proposal negotiation. The pipeline consists of substantial activity at PENN2, where we have seen a significant pickup in tenant tour activity and proposals during the Q2, following the recent completion of the project, the opening of our new pedestrian park at Plaza 33 and completion of our expansive district wide new sidewalk program.

Speaker 3

Our total pipeline of deals is a fifty-fifty mix of new tenant deals vying for our current vacancies and important renewals as we continue to work hand in hand with our tenants expiring during the next few years. In San Francisco, at 555 California Street, we completed a 10 year lease renewal with Jones Day for 62,000 square feet and are currently finalizing a 46,000 square foot renewal expansion with 1 of our leading financial services tenants in the building. Additionally, we are in late stage letters of intent where several of our major tenants comprising a total of 250,000 square feet with upcoming lease expirations in 2025 2026. All these deals have positive mark to markets on the rents, reflecting 555's trophy nature. Finally, in Chicago at the Marq, we completed a long term expansion and renewal lease in July with 1 of our major tenants, which tripled in size to 160,000 square feet.

Speaker 3

While the Chicago market is challenging, we are benefiting significantly from the quality of our asset with our market leading work life amenity program and rock solid sponsorship and have a strong pipeline. Turning to the capital markets now. While the financing markets remain challenging for office and banks remain out of the market, we are beginning to see some early signs of improvement with the CMBS market open again for selective high quality assets and even ones that are less straightforward. Rates are beginning to moderate and the SOFR forward curve is projected to come down meaningfully over the next year, which should help borrowing rates. We continue to be very active on the capital markets front.

Speaker 3

In June, we refinanced the loan at 645th Avenue in our street retail JV, eliminating the $500,000,000 recourse obligation to the company. While the rate is higher than we'd like, this financing demonstrates that the markets are open again for high quality retail and office assets. At 731 Lexington Avenue with the Bloomberg renewal now complete, we're in the process of refinancing this loan as well. We will have then taken care of all of our significant 2024 maturities and are in the process of addressing our 2025 maturities. Our balance sheet remains in very good shape with strong liquidity of $2,700,000,000 including $1,100,000,000 of cash and restricted cash and $1,600,000,000 undrawn under our $2,170,000,000 revolving credit facilities.

Speaker 3

With that, I'll turn it over to the operator for Q and A.

Operator

Thank you. We will now begin the question and answer session. Today's first question comes from Steve Sakwa with Evercore ISI. Please go ahead.

Speaker 4

Yes, thanks. Good morning. Steve, you certainly piqued my interest with your 770 Broadway comments. I'm just not sure I fully understand, I guess, kind of the transaction in discussion because I know that building is about 80% occupied today with a couple of different tenants. So I'm just not exactly sure if this new tenant subleases the space from the old tenant or just kind of how that I guess I didn't really quite understand the whole transaction that's pending?

Speaker 2

Steve, I wish I could help you, but I've said all that I'm going to say on that topic. It's an important transaction. We're under a confidentiality agreement. And so that's all I'm going to say is that there's an important transaction in process. Sorry.

Speaker 4

Okay. Maybe switching gears to the 2 Penn and I guess, Michael, the pipeline you talked about sounds quite strong. Can you maybe just provide a little bit more color on the types of tenants that you're speaking to? And are these tenants that are, I guess, currently already in the marketplace and more at least expiration driven or these kind of new requirements in the market looking at 2

Speaker 5

Penn? Hi, Steve. It's Glenn. How are you? So it's a mix of both tenants expiring soon and some tenants expiring in the outer years.

Speaker 5

But I'll tell you at PENN2, we have tenants vying for the same space right now, both in the podium and in the tower. We have technology interest, fashion interest, financial interest, legal interest, academia interest, media. We have interest from all types of sectors on all the space. We're in different sorts of paper negotiation with all these tenants. So we're seeing very, very strong activity as we sit here.

Speaker 5

Similarly, at PENN1, we've leased about 155,000 feet at PENN1 this year. It went sort of well above where we thought we'd wound up there and the types of tenants keep coming in. We will lease out right now with a major pharmaceutical company for 2 floors and we have other activity coming into PENN1. And with that, we're also seeing great activity around the district at PENN11 and some of the other properties. So I would tell you, we're really on all cylinders now and when you walk the streets, it's really spectacular.

Speaker 5

Everything is looking great. The reception is better, better and better as each day passes. So we're super excited about what's to come.

Speaker 6

Okay, thanks.

Operator

Thank you. And our next question today comes from John Kim of BMO Capital Markets. Please go ahead.

Speaker 6

Thank you. On the Uniqlo sale, can you just talk about the earnings impact? I think you sold at the great price per square foot, but I think your preferred gets redeemed, so it might be slightly dilutive in the near term. And also you still own 5 assets on Fifth Avenue in that prime quarter between 51st and fifty fifth Street. Is $20,000 per square foot the right way to value the remaining retail?

Speaker 6

And do you plan to monetize any further assets there?

Speaker 3

Well, there's a lot in that, John. But so I'll try to refer to the and if I forget, remind me, but thank you. And I think you've been a steadfast believer in retail the whole time, which we appreciate. Look, it's obviously a transaction we're quite pleased about. We think it's an outstanding execution.

Speaker 3

And I think if you look at the valuation and Steve talked about the cap rates and the value, the income is actually up a little bit from 2019 transaction. That would effectively tell you that the retail value that we sold in 2019 is sort of back to those levels. So, if you take the preferred and the just the where the value of the equity was marked at the time, that's about $16 a share, which I don't think our stock price continues to reflect at all. So eventually people will appreciate the valuation of Fifth Avenue. But on the per square foot, dollars 20,000 is that's the entire space.

Speaker 3

I think the most important thing to focus on when you're looking at Fifth Avenue Retail is what's the amount of frontage, what's the amount of ground floor square footage. And when you take out a small allocation for the 2nd floor given the rents are obviously quite a bit less, It's about $50,000 a square foot per grade square foot. So I think that's a more representative metric for Fifth Avenue retail in terms of the grade screen. So you have to sort of look asset by asset. But with every user sale, and we've now seen 3 major sales, and I think we alluded over the last couple of calls, we expected there would be some obviously, we knew this was in the works, but I don't think you've seen the last, as Steve said.

Speaker 3

Each sale creates more scarcity in terms of what's remaining on 5th, which should drive both rental rates as well as valuations for those who want to keep buying. So we're pleased that we own a significant portion of the frontage still. We still own north of 20% of the prime upper Fifth Avenue frontage. And so that puts us in a good place. Let's talk about the earnings impact, which I think was I think that was your first question.

Speaker 3

So all the proceeds will go to repay our preferred, we're earning about 4.75% on that today. The entire amount, if you remember, we originally structured the transaction, the preferred was a proxy for 1st mortgage financing and it allowed us to defer any gain there. When we refinance the preferred, that gain continues to get deferred when it gets actually paid off that triggers the gain. So the entire $340,000,000 will be gain. It likely will close next year.

Speaker 3

And depending on what other transactions we have in terms of losses, and we already have some that have been monetized, we'll be able to keep some or all that cash. We think we'll be able to keep a significant portion of that cash, if not all of it. And so I would tell you at a minimum, it will be a push in terms of earnings. And hopefully, it will be accretive to the tune of a few $1,000,000 if you assume we redeploy that. If nothing else just to pay off debt, let's call it 6.5% in terms of where it is today.

Speaker 3

So I think I covered everything you asked, but if not, tell me.

Speaker 6

You covered it all. Thank you. And then my second question is on PENN2 and the timing of MSG moving into that space as well as the capitalized interest. If you could just remind us of your capitalized interest policy, when do you start expensing the interest on that project?

Speaker 7

Sure. John, it's Tom. MSG, we actually delivered some of the space, a portion of the space 6 months early. So in our Q2 results, you're seeing the impact of that. It gets fully delivered by the Q4.

Speaker 7

So our Q4 will be a full quarter of MSG rent at the new rent. And then obviously, 25,000,000 will be a full year of MSG on a GAAP basis. As it relates to capitalized interest, as we indicated in Michael's prepared remarks and on previous calls, capitalized interest will roll down in 2025, but most of that will be offset by additional GAAP revenue as it relates to some of the large leasing we did this past year with 1D and GAY, things involving and others.

Speaker 6

And you do that floor by floor as it's delivered or the entire building at once?

Speaker 7

It's going to be a portion of the building because as we have some open development going on, some of that interest will continue to capitalize in 2025.

Speaker 6

Thank you.

Operator

Thank you. And our next question today comes from florist van Dijkstra with Compass Point. Please go ahead.

Speaker 8

Hey, good morning guys. Thanks for taking my question. Obviously, very interesting and bullish news on Fifth Avenue. I also noticed that your rent spreads on your retail portfolio were positive by the tune of around 13%. Maybe if you could talk a little bit more about some of the upside potential.

Speaker 8

Is that what you're seeing in terms of leasing activity? And also, obviously, now that Uniglo owns its space, there's less space to lease in it, particularly in the Upper Fifth Avenue quarter. What are your expectations for market rental growth and lease spreads that in your portfolio over the next year or so?

Speaker 3

Good morning, Floris. On your first question, in terms of retail activity, I think we've talked about this on the last call, couple of calls in terms of just the general market dynamics where the retailers are more active and we're seeing continued recovery there, both in terms of the rents improving and vacancy rates declining and that certainly continues. I think if you look at our activity this quarter wasn't very meaningful, but it tends to be a little lumpy. But as I look forward at our pipeline, it's quite active. We probably have close to 160,000 feet in lease negotiations right now and probably another 150,000 feet of deals in various stages of letters of intent.

Speaker 3

So a lot of activity, I would say that's principally focused in Penn, as well as in Times Square, where we have space that obviously we've redeveloped in Penn that we've delivered or delivering. And then, backfilling some of the space, particularly 1540 Broadway. So that's where the activity is. And I would say the rents are at pretty healthy levels relative to historical, particularly in Times Square. 5th Avenue, we have one vacancy that comes up later this year.

Speaker 3

There is activity there. It's hard to extrapolate exactly just because there's not a tremendous amount of vacancy in every space is so particular in terms of where users want to be and how much space they want and whatnot. But rents are I think it recovered pretty significantly there. So again, we see continued momentum. I think in terms of near term, we don't have a lot of roll coming up on 5th near term.

Speaker 3

So I don't know that really the near term is to mark that either way is really relevant. There's duration on most of those leases other than that one small lease that's coming up at the end of

Speaker 6

the year.

Speaker 8

Thanks, Michael. And maybe my follow-up is, if you could talk a little bit about your plans for the $450,000,000 of unsecured debt that matures, I think, in January of '25. You said you're in the market looking at some of those things. Is the idea to refinance that? Or will you pay that off with cash?

Speaker 8

Or if you can talk a little bit about your thinking about that?

Speaker 3

Yes. Look, as we sit here today, plan is to pay it off. We've got significant cash on hand, obviously, given the announcements in the last 24 hours, we've got more cash coming in. So that's the plan. Like as you would expect, we are attuned to the markets and what's going on with rates trending down, with spreads tightening, we obviously look at the Barrick's financing markets to see where those are.

Speaker 3

That presents an alternative that's compelling, and we're pleased with the direction of that. But as we sit here today, plan is to pay it off.

Speaker 1

Thanks, Michael.

Operator

Yes. Thank you. And our next question today comes from Camille Baudel with Bank of America. Please go ahead.

Speaker 9

Good morning. Glenn, I wanted to follow-up on the leasing side given your comments around the improving outlook. Was the Handshake deal on 770 Broadway included in the pipeline from last quarter or did it more recently emerge? And just outside of the 7.7 Broadway discussions, curious to get your thoughts on what activity are you seeing specifically around the large office users?

Speaker 5

Hi. The 770 transaction was included within Michael's remarks in terms of the pipeline. In terms of overall activity, we're really seeing activity throughout the portfolio really everywhere right now. If I look at the list of the action, the leases out in the proposals in, we're really seeing it very well spread out for all the buildings. And the one thing I would note is the bread and butter tenants, the 10,000, 20000, 30000 foot types are really coming into the market more so now than they have in a while.

Speaker 5

And we're seeing that in a lot of the properties, particularly in Penn and in Midtown. So I'd tell you that the market is as well mixed as it's been in a long time, different size tenants, different genre of tenants. So we're really seeing a very good consistent mix, which is helping the market, helping the volume. And as you can see in a lot of the reports, New York is clearly leading that charge by spades throughout the country.

Speaker 9

And for my follow-up, I was wondering if we can get your latest thoughts on how taxable income is trending just following the pickup in dispositions this year. Are we likely to see more distributions paid out? Or is it still uncertain given the known move outs? Thank you.

Speaker 3

Still uncertain, Camille. As we get further on the year, depending on what ultimately ends up closing, not closing, etcetera, then we'll have a better sense. We have a decent sense and they can go a number of different directions still.

Operator

Thank you. And our next question today comes from Michael Griffin with Citi. Please go ahead.

Speaker 6

Great,

Speaker 10

thanks. Wondering if you can give us a sense of how concessions have been trending. Noticed it was I think notably lower this quarter, driven by the Bloomberg extension. But have you seen the concession environment improve at all? Or is it pretty steady relative to recent quarters?

Speaker 5

Hi, Michael, it's Glenn. So concessions have stabilized. They're stubbornly high, but they've stabilized. They have not gone up in some time. That's now being somewhat offset by higher rents in certain properties in certain sub districts in our portfolio.

Speaker 5

So that we're seeing positive signs in terms of net effective rents in some of our properties. So look, the hope is as the market tightens, we could bring the TIs and pre rents down. But certainly, they've stabilized now for a bunch of quarters as we've been stating on these calls.

Speaker 10

Thanks, Becca, and I appreciate that. And then Steve, just on your macro comments about the interest rate environment and the Fed's fighting its inflation? Obviously, I think lower interest rates are better for office overall. But just given the chatter that we've heard recently around recessionary fears, I guess, how do you balance the more favorable outlook for interest rates mixed with what could be a recessionary scenario that would probably negatively impact the office sector?

Speaker 2

The biggest driver and the biggest our biggest cost is the cost of capital. So the real estate industry has always thrived and increased in value as in the interest rate cycle as interest rates are trending down. The expectation of most market players is that we're in we're on the other side of the interest rate cycle and interest rates will be coming down. We are certainly not planning the business for interest rates to go down to the zero levels that they were. But hopefully, they will stabilize at a normalized level and we'll see how it works out.

Speaker 6

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

Speaker 2

Thank you. And our next

Operator

question today comes from Dylan Brzezinski with Green Street. Please go ahead.

Speaker 6

Hi, guys. Thanks for taking the question. Excuse me. I appreciate the comments on street retail activity picking up. But I guess as we look at the portfolio today, I think you ended the quarter, call it, high 70s occupancy, which is still well below where it was pre COVID.

Speaker 6

I guess as you guys think about that business moving forward, I mean, is there do you guys envision that eventually getting back to where it was pre COVID? Or do you sort of envision an environment where things are improving, but you still don't necessarily see a recovery back to this pre COVID level?

Speaker 3

Bill, good morning. Look, I think the number you referenced on the occupancy, I think we got to put a big asterisk next to that, which is it's really that lower number is driven by Manhattan Mall, right. So JCPenney went bankrupt, vacated that store and that caused about 10 points of occupancy decline there. Now we've been given everything else we're doing in Penn, evaluating what to do with that space, not necessarily wanting lock it up long term, certainly with a tenant that's not paying a rent that we think is appropriate and recognizing that everything we're doing, the district is going to accrue to that asset over time. So we've done a number of temp deals.

Speaker 3

In fact, we have one with Netflix that's opening right now. And that's probably the plan. We don't actually when we do that, we don't take that into occupancy. In fact, maybe we should have taken that service because by and large, it's really not a focus of ours to lease it long term unless we get a robust rent. So if you take Manhattan Mall out, that 77, if you will, goes to like 87.

Speaker 3

And we've got the other vacancy that we're working on. So the answer is, bottom line is yes, we think that number is going to get back up to levels we were at historically. But keep in mind, there's 10 points sort of frictional vacancy, right, and our structural vacancy that is due to Manhattan Mall.

Operator

Thank you. And our next question today comes from Connor Mitchell of Piper Sandler. Please go ahead.

Speaker 11

Hey, good morning. Thanks for taking my question. So there's been a lot of talk about the high street retail and how the whole environment is rebounding in terms of that area. We've seen it from rents coming back, retailers requiring spaces, they're leasing. But just thinking about one rent in particular, there's been articles in, I think it was June or July about Sephora recently negotiating their rents down by 2 thirds on Madison.

Speaker 11

So I guess I'm just wondering if you guys could help us think about the juxtaposition between some of the metrics we've seen recently, your comments and then some specific transactions such as the Sephora 1?

Speaker 5

Go ahead. On the Sephora deal, you mentioned the 5 20 Madison, I wouldn't call that a market transaction. It was a very short term deal. I believe it was only for 1 or 2 years at the most. So I wouldn't take into account as it relates to the market and what's going on in that corridor.

Speaker 3

I might add on to that, that I think when you define High Street, I don't know that I would characterize 520 Madison as High Street. Yes, it's Madison Avenue, but that's not the prime stretch of Madison Avenue. The prime stretch of Madison Avenue is 57th to probably 64th, which is where you see rents that are generally north of $1,000 a square foot. So retail that is non prime prime is it's coming off older rents. That has not seen the same level of recovery, it's recovering, but it's not seen the same level of recovery as PrimeFit, Prime Time Square and that prime stretch of Madison.

Speaker 3

So both the short term nature as well as and we've always talked about this, V Prime High Street is really scarce and you have to focus on what that means different than any other set of blocks in the city. And I think the beauty of our retail is, it is all prime high street.

Speaker 11

Very helpful. Appreciate the color. And then maybe just one more quick one. You said a lot of financing activity in the quarter, obviously. And then the 645 was refinanced at a fixed rate of 7.50.

Speaker 11

Just curious if that's a good rate that we should think about for some upcoming maturities such as 731 Lex or any others moving forward?

Speaker 3

That's probably as we sit here today, that's probably 50 basis points higher than it would be if we did it today, just given what's happened in the 10 year or in the future or in the 5 year. So obviously, the base rate matters, spreads matter, etcetera. But seventhirty one, I think you'll see gets done much tighter than that, reflected the long term lease that we executed last quarter. And I think it's asset dependent. But I think in general, the markets continue to heal.

Speaker 3

I think you'll see those rates trend to some extent just by the fact that base rates are down.

Speaker 11

Okay. Thank you.

Operator

And our next question today comes from Ronald Campbell with Morgan Stanley. Please go ahead. Hello, Mr. Campbell. Your line is open, perhaps you're muted.

Speaker 12

Yes. Can you hear me now?

Speaker 2

Yes.

Speaker 12

Okay, great. Just two quick ones from me. Going back to the 2,600,000 square feet pipeline, can you break out how much of that relates to PENN2? And the two floors that you mentioned on PENN1 that's out for lease, is that on vacant space?

Speaker 5

The PENN1 deal making is on vacant space. I really don't want to get into much more detail than I have already on PENN2, but a good amount of the pipeline is PENN2 with a plethora of deals brewing as we speak in different parts of negotiations. But rather not get into the very much detail of how many feet is what at this point.

Speaker 12

Sure thing. And if I could just sneak in a quick one, you sort of comment on any updated plans for the former Hotel Penn site given all the leasing activity you're seeing on Penn 1 and Penn 2?

Speaker 3

It's look, I think as we've talked about in the past, the cost of construction financing, lack of availability that makes it difficult to build right now. So like it's a prime site, arguably the best site left in the city, but it's day of not coming yet.

Speaker 12

Thanks so much. That's it for me.

Operator

Thank you. And our next question today comes from Caitlin Burrows at Goldman Sachs. Please go ahead.

Speaker 13

Hi, good morning. Earlier you mentioned how the leases you were doing at 555 California all had positive mark to market. So I could you just talk about that a little bit more? How long do you think those positive spreads at 555 can last for? And I guess given the occupancy there, how would you characterize market rents there?

Speaker 13

Like do you have the ability to push more? Or to what extent does vacancy in the market or submarket limit the pricing side?

Speaker 5

Look, I think what we're seeing in 5.5 is that it is the best building in San Francisco. Our tenants have all remained. Our rents have held very strong. So this building is really insulated from the overall market and what you're seeing statistically in the city. Without getting into much detail on the negotiations we have going on with our tenants, We're seeing a lot of strength.

Speaker 5

We're even seeing growth in the deals expansion with these tenants. So what's going to happen in the future in terms of these rents? I mean, look, the rents at our building have historically kept going up. We feel very good about the rental rates we're achieving right now. We're ahead of the market.

Speaker 5

We expect to continue to be ahead of the market as we move forward on.

Speaker 13

Okay, got it. And then back in the prepared remarks, you gave some color on the outlook to 25, I think suggesting that with the leasing that's been completed and PENN2 coming online that late 2025 could see maybe an improvement in earnings. I guess first, is that the right takeaway? But then, B, when you think about all of the moving parts, are there additional 2025 large lease expirations we should be aware of? And do you have any insight into those tenants thoughts at this point?

Speaker 5

We have a modest expiration schedule in 'twenty five. We're obviously speaking to all the tenants expiring during that period. But I think generally speaking, between $280,000,000 $770,000,000 $12,90,000,000 we've seen the real tide of exploration now. And as we go to $25,000,000 and forward, we're seeing a coming of those big expirations.

Speaker 13

Okay. Thanks.

Operator

Thank you. And our next question today comes from Tony Paolone with JPMorgan. Please go ahead.

Speaker 3

Yes, thanks. First, I think Steve mentioned the 666

Operator

Pardon the interruption here. Mr. Palone, your line is coming in very poorly. I'm going to disconnect your line and I'm going to move on from you. If you can dial back in, we can get you right back into the queue.

Operator

Our next question today comes from Nick Yulico with Scotiabank. Please go ahead.

Speaker 14

Thanks. Yes, I know you talked about some of the leasing underway already for this year. Can you give us a feel for how occupancy might trend for the back half of the year in the office portfolio?

Speaker 5

Yes.

Speaker 3

We're at about 89.3 today. We know that's going to trend down a bit next quarter. So just given that Meta is vacating 275,000 square feet at 770 Broadway. Obviously, if we complete the 770 deal that Steve alluded to, that's going to have a significant positive impact. But in terms of near term, certainly going to go on the next quarter, we have a bunch of things in the queue.

Speaker 3

I think we end up the year basically where we're at now, could it be 20 basis points, 30 basis points lower or higher? Sure. I mean, it all depends on timing, right? But I think it's just in terms of where we end this year, I think that's a decent number and there's some things in the work that could take that number up a couple of 100 basis points. But again, it's all fine.

Speaker 3

But I think just in terms of near term, next quarter or 2, hopefully that gives you what you wanted.

Speaker 14

Yes, that's helpful. Thanks. And then just going back to PENN2, can you give us a feel for maybe types of tenants looking at the space and from the standpoint of is it tenants that would be new to that submarket? Anything else you could just talk about whether these are lease expiration driven, where you're trying to sort of capture some market share there?

Speaker 5

Hi, it's Glenn. So as I said earlier, it's a very, very good mix of all different industry sector type tenants, technology, fashion, legal, media, academia, it's a very good mix. And yes, there are new entrants to the district. And really that's all due to the really great product that went out delivering and even more so the new streetscapes, all the new retail that we've embedded on the street. So it's all positive in terms of new entrants, new types of sectors, etcetera.

Speaker 5

That's really the mix of the action.

Speaker 1

All right. Thank you. I think

Speaker 3

one thing I would just add, Nick, I think, we talk about this, I think it's important, right? The access to transit, which we sit on top of, is just critical, right? And we are the most connected submarket. And when you look at some of the tenants and where they are attracting their employees from, that access is just critically important. Obviously, it's what Penn's been full historically, but now I don't know whether you've been over to the district and seen it done.

Speaker 3

I really encourage everybody to do so. But it's a wow. And when you combine that with the transit, I think it's now I think it's why you hear the excitement in Glen's voice and it's why the pipeline is built so significantly.

Speaker 6

Thanks.

Operator

Thank you. And our next question today is a follow-up from John Kim of BMO Capital Markets. Please go ahead.

Speaker 6

Thank you. I just wanted to get back to 770 Broadway. I understand you're under a confidentiality agreement. But just to help us understand the market dynamics and demand a little bit better, can you share what industry the tenant or users in, whether or not it's a tech user? And if this includes expansionary space in Manhattan?

Speaker 2

I'm very sorry, but we can't we can't say anything more than we've already said.

Speaker 6

Okay. But it is a lease, right, not a sale?

Speaker 3

I'd reiterate what Steve just said.

Speaker 2

I think I've said that's all we're going to say, and I'll say that again. Thank you. Sorry.

Speaker 3

That gives you a reason to tune in for the next couple of calls, John.

Operator

Thank you. And our next question today comes from Dylan Brzezinski with Green Street. Please go ahead.

Speaker 6

Steve, I think in your prepared remarks, you mentioned potential or potential transactions to repatriate more portions of the preferred equity in the Times Square joint venture. Are you able to share any details as to what this is? Is this potential sales, other recapitalizations?

Speaker 2

Both of those are in play. So the answer is, first of all, that we'll end up with about $1,500,000,000 of preferred after the Uniqlo sales completes. Our first of all, the instrument is dollar good, it's supported by very valuable collateral. Secondly, that it is a source of liquidity for us either through sales or refinancing, both of which we are in process of working on for portions of that $1,500,000,000

Speaker 11

And then I

Speaker 6

don't think you guys touched on this yet, but curious appetite for share repurchases given where the shares are today?

Speaker 2

I'm sorry, what was the question? Share repurchase appetite. I was very excited in the teens. There is incredible value still, but in the respect to our capital allocation, at the price of the shares today, that's not our primary objective. We have debt to handle, we have other capital allocation priorities.

Speaker 2

So as of right now, the program is dormant.

Operator

Thank you. And our next question today comes from Brendan Lynch with Barclays. Please go ahead.

Speaker 15

Great. Thank you for taking my question. If I recall correctly, a few quarters ago, you engaged an expanded group of brokers to pull in demand to the Penn District from other markets around the country. Can you discuss how that initiative is contributing to leasing year to date and how it's impacting the pipeline now?

Speaker 5

We brought in Cushman and Wakefield beginning this year. They've been a very good add to our team. It certainly has strengthened our outreach across the country, as you suggest, and in the city. So we've been very pleased with them and their additive performance to our crew.

Speaker 15

Great. Thank you. That was my only question.

Operator

Thank you. And our next question comes from Steve Sakwa with Evercore ISI. Please go ahead.

Speaker 4

Yes, thanks. Just one follow-up. I think last quarter you guys had talked about earnings probably bottoming in 'twenty four and then moving higher in 'twenty five. I know there's a lot of moving pieces and interest rates will play a factor. Is that still the case or is it possible that maybe with timing of leases at 2 Penn and capitalization burning offset that earnings could still be down next year with more of an inflection point late in 2025 into 2026?

Speaker 3

Steve, it's honestly, it's early to give you much visibility there. I mean, I think our comments still hold, but as you can tell from Uniqlo, 7.70, the other thing, there's a lot of moving pieces going on right now. And that's and those are the only things we've talked about. So I just think it's too preliminary to give you that view because based on some of those things, it may impact whatever I tell you now. So I think it's a good working assumption and we just have to wait as we get closer towards the end of the year.

Operator

Thank you. And this concludes our question and answer session. I'd like to turn the call back over to Stephen Roth for closing remarks.

Speaker 2

Thank you all for participating. I think you could tell from the call, the questions and the numbers that we published, there's a large emphasis on leasing. Leasing is very, very, very healthy in New York. And we feel that we're on the foothills of a very, very good market and we're very excited. The Penn project especially is number 1 on our hit parade.

Speaker 2

And if you all haven't been down there recently, you should go down, take a walk around, see what's going on, what we've done. And that will give you a reason for why Glenn's tenant activity is increasing geometrically. Thanks very much.

Operator

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

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Earnings Conference Call
Vornado Realty Trust Q2 2024
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