Vornado Realty Trust Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 7, 2024

There are 14 speakers on the call.

Operator

Good morning, and welcome to the Vornado Realty Trust First Quarter 2024 Earnings Call. My name is MJ, 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 would now like to turn the call over to Stephen Borenstein, Executive Vice President and Corporation Counsel. Please go ahead.

Speaker 1

Welcome to Vornado Realty Trust First Quarter Earnings Call. Yesterday afternoon, we issued our Q1 earnings release and filed our quarterly report on Form 10 Q with the Securities and Exchange Commission. These documents as well as our supplemental 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 statement. 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 Ross.

Speaker 2

Thank you, Steve, and good morning, everyone. We've been busy. Let's start with Bloomberg. As a reminder, 731 Lexington Avenue, the mixed use tower whose 950,000 square foot office condo is Bloomberg's global headquarters is owned by Alexander's, a separately traded public REIT. Renevo owns 32.4 percent of Alexander's.

Speaker 2

The background facts are Bloomberg lease expires in February 2029, dollars 500,000,000 of debt on the office condo is due next month, June 2024. Yesterday, we announced that we renewed and extended the Bloomberg lease for an 11 year term to begin in February 2029 and take us through February 2040, so 16 years of term from now. As you can imagine, every developer in town tried to poach Broomberg and of course, they looked at every opportunity as they must. We are delighted that they chose to stay with 731 Lexington. By the way, the building is as much Mike's creation as mine.

Speaker 2

He had significant input into design of the original building. The design of the building and Bloomberg's internal fit out are on a par with what we would have built today, but of course now they don't need to. The terms of the lease are spelled out in yesterday's SEC filings. Tenant concessions in the form of TIs and free rent have been established and the net rent will be the subject of an appraisal in 2029 with the then rent adjusted up or down no more than 10% either way based on the then market conditions. We're in the process of refinancing this asset, but I must say I am not excited about paying today's market rate of 7% or even 8% for debt with all the trappings of leasing reserves, cash suites and such, which are admittedly protective of the lender, but don't do much for our equity value.

Speaker 2

As we speak, my personal favorite is to pay the debt down and maybe even pay the debt off. We shall see. Now let's focus on our credit lines. Traditionally, we've had 2 separate but similar credit lines with staggered maturities. One credit line for $1,250,000,000 has been renewed through 2027 and the renewal of the second credit line was finalized last Friday at a reduced amount of $915,000,000 with a term extended to April, 2029.

Speaker 2

As expected in these times, several banks dropped out. We use our credit lines very sparingly, generally for short term requirements with a known source of repayment and rarely have we exceeded 25% drawdowns. Now to 280 Park Avenue. We own 50% of 280 Park Avenue. Since our joint venture partner has already reported, I'm guessing you are all pretty much up to date on the details.

Speaker 2

What we did here was extend the maturity of the senior loan for 4 years, keeping the rate constant with no pay down, but posting significant cash reserves for future leasing. Several analysts have commented that the loan and the equity value pretty much cancel out. And that's fact allowed us to DPO the mezz loan at $0.50 on the dollar realizing a $31,300,000 gain at share, which we will recognize in the 2nd quarter. This is not yet a big win, but it does create a cheap warrant on a wonderful asset located in Prime Park Avenue, where there is already a very low 7% vacancy and a shortage of space. We think it's a first class bet.

Speaker 2

By the way, we are leasing very well here. We continue to protect our balance sheet with interest rate caps and swaps, but when a 3% loan matures into a 7% market, there really is no place to hide. We continue to prospect for good real estate in distress where our best in class operating platform can be helpful to the lender. We expect these opportunities to accelerate. The Goldrush on the part of the luxury brands to own control and dominate the very best locations is accelerating and the knock on effect on prime New York City retail space is palpable.

Speaker 2

It should be noted that in New York, we have much more prime retail space than anyone else by a wide margin. Some commentators have noted that the Fifth Avenue and Times Square values seem to have recovered to the price of our retail JV sale 5 years ago, it would seem so. I continue to strongly believe the contrarian bull case I made in my annual shareholders letter that basically with frozen supply I. E. No new developer office starts and none on the horizon, tenant requirements picking up and vacancies shrinking, I couldn't be more optimistic about the future.

Speaker 2

And also note that while the New York market has a huge 422,000,000 square feet, when you cancel out the non prime space, we really only compete in a much smaller 177,000,000 square foot market. Great things are happening in our Penn District. Come by and take a look. Our team here at Renato couldn't be more optimistic. Now over to Michael.

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. 1st quarter comparable FFO as adjusted was 0 point $6 partially offset by lower G and A expense. We have provided a quarter over quarter bridge in our earnings release in our financial supplement. Our overall New York business same store cash NOI was down 5.1% primarily due to the aforementioned expirations.

Speaker 3

As we indicated on our last earnings call, we expect our 2024 comparable FFO to be down from 2023 comparable FFO of $2.61 per share, primarily due to higher projected net interest expense of about $0.30 per share and the impact of known vacancies at certain of our properties, primarily at 1290 Avenue in the Americas, 770 Broadway and 280 Park Avenue. We anticipate the impact of these expirations in 2024 to be roughly $0.25 to $0.30 per share. We expect this impact to be temporary as we have already leased up a good chunk of the space. But the GAAP earnings from these leases won't begin until sometime in 2025. We then expect earnings to increase as income from the lease up of Penn and other vacancies comes online and as rates trend down.

Speaker 3

Now turning to leasing markets. The New York office market continues to show signs of strengthening. While first quarter office leasing in New York took a bit of a breather from the strong year end, there is a healthy backlog of activity with a number of large deals in the works. Overall tenant space requirements continue to trend upward, sublease space continues to fall, best in class renovated and amenitized product located in transit hubs continues to dominate leasing and the new supply pipeline is close to 0. These dynamics set the table for continued improvement in conditions in the upper tier of the market, which we are already experiencing in our best of class portfolio.

Speaker 3

Overall, asking rents are stable, even rising in the top tier properties, but concessions remain stubbornly high across all submarkets. The financial services and legal sectors are continuing to drive the leasing activity as both are in growth mode. We are also seeing the signs of life in the tech sector again after a couple of years of being on pause or downsizing. And our experience is when they grow, they tend to lease big chunks of space. The Midtown and New Westside markets are outperforming as leasing activity in Midtown is strong not only on Park Avenue, but also on Sixth Avenue and the Fifth Avenue, Madison Avenue corridor.

Speaker 3

On the West side, tenant demand continues apace. If you walk from 7th Avenue to the Hudson River, you will see why. Turning now to our leasing activity. After completing a slew of large leases in December 2023 and finishing last year with a market leading 2,100,000 square feet of deals. We expected a more muted first quarter of completed transactions given where our deal pipeline stood in the negotiation process.

Speaker 3

In the Q1, we leased 291,000 square feet at a healthy $89 per square foot, reflecting the overall quality and premium locations of our properties. The highlight of quarter was our 125,000 square foot headquarters lease with Major League Soccer at the New Penn 2. MLS

Speaker 4

had been

Speaker 3

in the market for some time looking mainly in the Midtown core until late in their process when they toured PENN2 and were wowed by what we've done with the building and the district. The project is now complete and really shows terrifically. Our new town hall event space is open. By the way, we hosted our first event just 2 weeks ago attended by 300 people. And the rooftop pavilion and park are truly spectacular.

Speaker 3

Tenants are responding positively to everything that we've done and what's still to come. We have a significant pipeline at PENN2 and are busy negotiating proposals with tenants across a variety of industry sectors. In addition to the significant Bloomberg lease renewal of almost 1,000,000 square feet we just completed, our leasing pipeline is strong with 370,000 feet of leases in negotiation and another 2,500,000 feet of proposals out on the street in different stages. Much of this activity is not only addressing current vacancy, but also forward looking expirations. As discussed on the Q4 call, we foreshadowed an occupancy decline due to the known Q1 move outs at properties such as 1296 Avenue and 280 Park.

Speaker 3

We are pleased to report that we have already taken care of half of the 2024 and 2025 expirations in these properties with more activity on the horizon at each. Turning to retail. Retail leasing market continues to recover. As we discussed in our last call, Prada's and Kering's blockbuster retail deals on Fifth Avenue that occurred December demonstrated their long term commitment to Manhattan and has further energized the market. And there are other potential sales rumored to be in the works.

Speaker 3

Vacancy rates are now below pre pandemic 2019 levels in most Manhattan submarkets and retailers are willing to pay top dollar for the best locations. Our retail leasing activity has picked up meaningfully in the last couple of quarters with almost all our assets seeing significant interest. As evidence of the rebound, this quarter in addition to signing many leases in the Penn District, we completed an important long term renewal at 1 of Times Square assets at the highest annual dollar rent we achieved in our portfolio since pre COVID, over $15,000,000 per year. Turning to the capital markets now. While the financing markets still remain challenging, we are starting to see some stability for high quality product.

Speaker 3

The CMBS market has begun to selectively reopen for office lending at conservative metrics on quality assets with long weighted average lease term. Unsecured bond spreads for office continue to tighten. The market is much more open for high quality retail. That being said, coupons are still high. Banks remain on the sidelines and generally in workout mode and there's more pain to come for all lenders given the volume of office maturities in the next few years.

Speaker 3

This will create opportunities for us. We have been and continue to be very active on the capital markets front. Addition to the recent extensions on 280 Park and 4 30 Fiveseven, we're also in the process of extending our other 20 24 maturities, which we expect to complete soon. Finally and importantly, as Steve mentioned, just a few days ago, we finalized the recast of our revolver that was scheduled to mature in 2026 for $915,000,000 Completing this refinancing solidified a key portion of our liquidity through 2029 and gives us significant runway to deal with any challenges over the next few years. It also highlights the continued support of our key banks in this challenging environment.

Speaker 3

We thank them for their support. Our balance sheet remains in very good shape with strong liquidity. Pro form a for the new revolver size, our current liquidity is a strong $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. With that, I'll turn it over to the operator for Q and A.

Operator

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

Speaker 5

Yes. Hi, good morning. Michael, I was wondering if you could just follow-up a little bit on the comments you made about the pipeline and just maybe help us think through how much of that 2,500,000 square feet is maybe earmarked for PENN2 and the development and how much is geared for, I guess, future rollovers and how much is geared to kind of current vacancy in the portfolio?

Speaker 3

Good morning, Steve. Glenn, do you want to take the lead on that?

Speaker 6

Sure. Hi, Steve. It's Glenn. How are you doing? So I would say it's a very, very balanced mix of what you just described.

Speaker 6

We're seeing a surge in proposals coming in on PENN, both PENN1 and PENN2 coming off the heels of our Major League Soccer lease. We're seeing, expirations, outbound expirations tenants coming to us to early renew just like we did with Bloomberg this week. And in addition, much of the pipeline is attacking expiration at the buildings where we have space available today. So I'd say it's a healthy mix across the portfolio, 10 and otherwise.

Speaker 5

Okay, thanks. And as a follow-up, Michael, just to I guess go back to some of the information you provided on kind of I guess the earnings drag from the lost occupancy this year. Just to be clear, if you took the $0.30 hit from the interest expense and now you're sort of quantifying this $0.25 to $0.30 hit from the known vacate, some of which I know has been released and will rebound maybe in 20 25 beyond. You kind of suggesting that there's sort of a $0.60 drag this year, as we think about 2024 and then are there other positive offsets that might sort of take that number a little bit up from say the $2 level?

Speaker 3

Yes. So look, in terms of your sort of detail there, I think that's accurate, right? We talked about interest last quarter and sort of reaffirmed the $0.30 this quarter. The $0.25 to $0.30 are sort of the known vacates. And as we've mentioned, we backfilled a lot of that already at $12.90 $2.80 $1,000,000 Like we have a lot that we're working on.

Speaker 3

There's some things that could certainly make that number more positive, but I think we're trying to give you the downside version today. And so I can't tell you where exactly it's going to come out, but I think if you say, look, let's take sort of worst case, the $0.30 plus the $0.25 to 0.30 dollars gets you down $0.55 to $0.60 I think that's a good baseline and our objective is to beat that, but there's still a lot moving around.

Speaker 5

Great. Thanks. That's it for me.

Speaker 2

Steve, let me just tack on that for a second. So, I mean the numbers that you mentioned and that Michael just mentioned are accurate for this year. Let's build from there and see what the company's future looks like on an almost certain basis. So if you start with re renting the vacancies and we get back from whatever we are now to our normal 96%, 97%, 98% occupancy. That adds a big number to our earnings.

Speaker 2

When 1 pen, 2 pens comes online, that's another $100,000,000 give or take of earnings that comes online that is brand new. If interest rates settle down into some kind of civilized number that also improves earnings enormously. So the company has the earnings potential of being, we think, pretty spectacular. And that's what we're shooting for. So we're looking at it not a 1 month to 1 quarter basis.

Speaker 2

We're looking at what the company's earning power would be, pick a number 2, 3 years out, And we are extremely excited about that.

Operator

Thank you. The next question is from John Kim with BMO Capital Markets. Please go ahead.

Speaker 7

Thank you. Michael, in your prepared remarks, you talked about tech sector coming back to the market in Manhattan and also referenced retailers potentially looking to purchase their flagship stores similar to the product. Is your commentary more of a market commentary? Or do you see Vornado involved in either one of those 2?

Speaker 3

I mean, look, I think it's both, John. I mean, we've got some of the best product in town in both categories. I think we've done more tech leasing than any other landlord in the city. We have all the big 4 in our portfolio. So we maintain an active dialogue with all those players.

Speaker 3

So I would expect that if the tech sector becomes active again, we're going to get more than our fair share. And in terms of the pipeline, I think the tech sector was pretty dormant for the last 18 months, 24 months either on pause or in some cases downsizing space. And we've seen in the last 90 days a real pickup there. Started small and now we're seeing some more significant requirements. So we do think some of those will convert to activity and we're quite optimistic about that sector turning on again.

Speaker 3

On the retail side, I think you know better than anybody given the discussions we've had in the past. We own the best retail in the city. So if you want to be on Fifth Avenue, particularly given the shrinking amount of availability, that's can be leased, we're the first, second, third call, Times Square. We on both sides of Bowtie. So activity level has picked up significantly in both those submarkets.

Speaker 3

The animal spirits are alive and well among retailers. They see that Manhattan is thriving again, their sales numbers reflected. And Prada and Kering's announcements, obviously, garner worldwide attention. And I think make every other retailer question, what are we doing, right, both from a leasing standpoint and buying standpoint. There's obviously been other transactions rumored, but I don't think you've seen the last of the retailer purchases.

Speaker 3

And obviously, given our portfolio, we are fertile ground. So we expect to be in the mix there.

Speaker 7

Okay. And my follow-up is on 350 Park Avenue. The leasing environment and interest rate environment or the outlook has changed a lot in the past year and a half since you struck the deal. What is the likelihood that either Citadel or you exercise your options at this point?

Speaker 2

There's always a likelihood, but right now we're on full steam ahead to build a world class headquarters for Citadel. We started the public approval process and it's a couple of year process to design the building, complete the drawings, get through the public approval process. And obviously, we will reappraise the financial markets at that time. Citadel is growing. They want the space.

Speaker 2

They're committed to the deal as are we.

Speaker 7

And can you confirm the starting rent for SEDAR that was reported at $35,000,000

Speaker 2

No, sir, we can't. It's a formulaic rent, which depends upon what the cost of financing is at the time that we at the time we go into the financing market.

Speaker 7

Got you. Okay. Thank you.

Operator

Thank you. The next question is from Michael Griffin with Citi. Please go ahead. Great.

Speaker 8

Thanks. Michael, I wanted to go back to your comments around concessions being stubbornly high. I imagine that's the case for the market overall. But if you look at maybe better off submarkets like Park Avenue or even some of your properties on the west side of the Penn District. How are you seeing concessions there given that the environment seems to have improved?

Speaker 9

Glenn, do

Speaker 3

you want

Speaker 6

to hit that? Yes, sure. Hi, it's Glenn. I would tell you no matter the submarket on new leases, key eyes are somewhere between $140,000,000 $150,000 a foot and free rent is somewhere in the 13 month, 15 month range. I think as it relates to submarket specific, it's really about the rent.

Speaker 6

So in some of the submarkets, we are seeing an uptick in rent where supply is tightening as you would expect.

Speaker 8

Got you. That's helpful. And then maybe just some color on lease expirations this year. It looks like there's a big one in the second quarter, about 3% of the overall rent. The space rent there right now seems pretty high.

Speaker 8

What's the likelihood of renewing or backfilling the space? Or is this one of those known move outs that you described earlier?

Speaker 6

It's the meta space that comes back to us in June that we spoke about on our last earnings call. That's the lease you're pertaining to.

Speaker 8

And in terms of potential of backfilling or renewing the space, what's demand looking like on it?

Speaker 6

We have action on this space. That's part of our pipeline that we've described. We feel very good about the asset and very good about backfilling that space. It's the most unique asset in Midtown South. We feel good about it.

Speaker 6

Great.

Speaker 9

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

Operator

Thank you. The next question is from florist Van Deekum with Compass Point. Please go ahead.

Speaker 10

Thanks for taking my question. Rather than get into the details on the leasing, which obviously is very important as well, but I wanted to ask a question on sort of the market and get Steve and Michael's view on the opportunity that's going to be representing itself, I think when the $200,000,000,000 of office loans mature over the next actually in 2024 as well as the other $100,000,000,000 next year. What do you see happening with some of those obviously are unlikely to be refinanced. And so where do you see Vornado in that situation? Do you have can you play a role in maybe buying some assets?

Speaker 10

And maybe does that help cause some of the bullishness in Steve's tone on the outlook for the next 2 years?

Speaker 3

Good morning, Floris. So like I think in terms of the debt rolling over, which is significant over the next few years as we all know, the capital markets are not there to support refinancing the vast majority of that. And so I think what happens there is going to take 1 of a few forms, It depends on the quality asset, the sponsor of the asset and what its future looks like. And we've seen some examples where the older obsolete buildings where debt rolls doesn't have a future as an office building or certainly with that sponsor and the lenders have taken it back or there's been a consensual sale of some of those assets, something like a 1740 Broadway would be a recent example. So I think we'll see a fair amount of that on some of those older buildings.

Speaker 3

Then there's a category where there's just overleveraged where there is a future. And again, I think the lender will assess whether the sponsor has the wherewithal and the capability to either re tenant or support the asset. And in some cases they will, in many cases they won't. We're talking to lenders about that. And I think they'll look for solutions, right?

Speaker 3

I think lenders in general know that taking back assets and operating them, certainly in the office space is not a winning strategy. Value deteriorates fairly quickly. Dentists don't want to go into those buildings. So we do think there's going to be opportunity to work with existing lenders, be a solutions provider. We have a leading operating platform.

Speaker 3

We expect to deploy capital there. And I think it could be in either one of those buckets. It could be buildings that are that with our capabilities can be lease back up, stabilize the value could be created or it could be assets that can be repurposed from office to residential potentially. So the answer is we are actively looking. We expect to play in that.

Speaker 3

And I think we're still at the beginning stages.

Speaker 10

And I know it's early in terms of what transactions would look like, but presumably for you to utilize part of your significant cash awards, which again sets you apart from some of your peers, you would have to have, I would imagine, returns that are in excess of the 7% plus financing rates that you would have to pay today if you were to theoretically get assets. Is that the right way to think about it? Your return for lease up 8% plus?

Speaker 3

Yes. I mean, look, I think our objective of deploying cash is not to invest in real estate is going to generate core returns, right? And this is an opportunity that is probably not for the faint of heart, right? I mean, you're taking risk and you want to get rewarded for that. So the returns need to be attractive.

Speaker 3

So yes, I think the stabilized yields, I think it depends a little bit on the nature of the asset and where you think ultimate cap rates settle out for particular assets. But no question that the required yield are in the neighborhood that you mentioned.

Speaker 10

Great. Maybe one follow-up in terms of your retail segment, again, particularly your Fifth Avenue, which is again as you highlight unique. Where do you think market rents are today? And I know you have 92% I think is your occupancy rate in your Times Square JV sorry, your Fifth Avenue and Times Square JV. But if you were to sign rent today on Fifth Avenue, where would you say market rents are for that space?

Speaker 3

I think it's there's been a couple of transactions that we signed probably, I guess, last year. And now it indicates that rents at the time were in the mid to high $2,000 per square foot, right? Now maybe there was a tick or a bottom in the 1,000, 1500 neighborhood. But I think realistically, it's back into that mid-2s, maybe even low it's it's hard to paint a broad brush. It's a very scarce asset class.

Speaker 3

And for the right situation, you can command rents that not too far off the peak. For the wrong asset with retailers don't think it configures well, you can't achieve that. So like I think rents have recovered quite a bit. They're continuing to recover. Obviously, the Times Square lease we signed recently, I think is evidence of that.

Speaker 3

And so we expect that to continue.

Operator

Thank you. The next question comes from Dylan Bircinski with Green Street. Please go ahead.

Speaker 2

Hi, guys. Thanks for

Speaker 9

taking the question. I guess just sort of going back to the acquisition point, is there any desire to given the lack of debt financing available out there to sort of go into it from a debt perspective and possibly from a loan to own or is this purely as you guys are looking at things more so looking at things on the equity side today?

Speaker 2

The easiest way to buy a building is through the debt. So that's obviously target number 1.

Speaker 9

Got it. And then as you guys think about opportunities, is this purely I guess purely focused on office? Or are there other retail opportunities that you guys think would also make sense?

Speaker 2

We're open to buy office obviously and retail obviously. So those are the two areas that we specialize in.

Speaker 9

And then I guess just a broader capital allocation question. I know in the past you guys have floated opportunistically selling asset. I guess, is that still on the table? Or are you guys now more focused on sort of going out and acquiring assets and growing the

Speaker 4

company on an external growth basis?

Speaker 2

We have, I think, basically 4 fairly significant sale transactions that are in various stages of conversation right now as we speak.

Operator

Thank you very much. The next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

Speaker 11

Hey, good morning and thank you. So a few two questions here. And first, Michael, good to hear about the rebound in street retail rents. That's really amazing, what a journey it's been. So the first question is, Steve, on the Bloomberg lease, so when we read the Q, the rents that are cited in there are basically a sliding scale that a negotiation in the future will address.

Speaker 11

So it's not as though we take that the one rent and then it slides up to the next. That's the range that the negotiation will be in?

Speaker 2

Alex, you published something that said there was a 25% discount in the rent. I don't know how you got that math and that's incorrect. So the way that the deal is structured is the basic rent on that building is basically net. There's a very small portion, maybe 50,000 feet out of the 9 100 and 50,000 feet that's growth. But 900,000 feet of it is net.

Speaker 2

So let's call it a net lease. The lease has a bump between now and 2029. And so when we get to the end of 2029, where we basically start, the net rent is $98 a foot, which grosses up to well into the $150 a foot. So that's the starting point. Now we established, first of all, you recognize that we are renewing and extending a lease 5 years before the mature before the lease expires.

Speaker 2

And so you have to take effect of the future unknown future and the contingency. So what we did there was we established what the tenant confessions, CIs and leasing commissions were. Those are frozen. The starting rent is frozen. And then from there, there is a market based appraisal as to what the proper market rate would be if we did the approval at the then expiry of the lease in 2029, taking into account the already established tenant concession.

Speaker 2

But the color is, is so that it can't be more than 10% more than the $98 a foot net or 10% less. So we have certainty on the bottom as to what the rent would be. And it will be established as the fair rent in the Zen market, which we think was a very clever by the way, both tenant landlord think was a fair deal and a clever way of handling the future. There's nothing in this deal whatsoever that contemplates any reduction in the rent. It will be a concentration on the market.

Speaker 11

Steve, thank you. And I apologize for getting that incorrect. That was my apologies. So your clarification is that the rent that cited it

Speaker 2

Wait a second. I accept your apology. Thank you. That's very generous of you.

Speaker 11

Well, I've made an so basically, the way the rent is characterized now is the $29,000,000 a quarter is characterized as gross, whereas the rents that are in the queue for the terms are now net. And it sounds like that's the confusion that I had on my end. Is that correct?

Speaker 2

I won't get into why you were confused. I'm just happy that you admit that you were confused.

Speaker 11

Okay. I just great. The next question is on the rents for this year to Steve Sakwa's question, Michael, you mentioned that originally it was down $0.25 to $0.30 Now it seems to be down $0.55 based on further lease move outs, what have you. Was there some stuff that fell out of bed that was unexpected or what or did I not hear correctly? I just want to understand like was there stuff that came up and surprised or what drove what's driving the additional earnings impact this year?

Speaker 3

Yes, yes. Maybe a little bit more confusion there, Alex.

Speaker 2

That's why

Speaker 6

I asked.

Speaker 3

So on the last call, we talked about it was early in the year. I gave clarity on the interest reduction because a lot of that was baked in with hedges that we're going to roll off. We knew those were going to roll off too. And we mentioned that there would be an impact from the known move outs, right, and cited what those were. But obviously, there's a lot moving out.

Speaker 3

So it was we didn't quantify what the impact of those numbers were. We're quantifying that for everybody's benefit on this call. So I don't think no surprises, right? Just trying to put a little more precision on it now that we're in May as opposed to where we were. And look, there's going to be more that moves around and that number could be less.

Speaker 3

But I think in terms of where we sit today, we have a known set between particularly $12,000,000 $7,000,000 $7,000,000 $2,000,000 $2,000,000 $2,000,000 $2,000,000 $2,000,000 $2,000,000,000 that drive the bulk of that. Obviously, we talked about releasing a lot of that and a lot of those deals have been announced. But just trying to get more precision to just the general statement we made last quarter.

Operator

Thank you. The next question is from Michael Lewis with Truist Securities. Please go ahead.

Speaker 4

Great. Thank you. I'm just going to follow-up on that question about the releasing activity on some of the known move outs. So I could probably triangulate an occupancy rate on that $0.25 drag. But could you share maybe just share how much square footage is related to known move out this year and how much of that square footage you've already addressed?

Speaker 3

Ben, you want to take that or I can take that?

Speaker 6

The bulk of the number is at 280 Park, 770 Broadway and 1290 Avenue in the Americas. At 1290280, we've taken care of, as Michael said in his remarks, 51% of the rolls, so call it 500,000 of a 1000000 feet. And as we said, it's 770 Broadway. We have meta rolling in June, along with the current vacant fee, we have pipeline activity on that space. So that's how we're approaching the big ones that are in that occupancy number.

Speaker 6

So as we take into account our pipeline of deal, as we take into account our expiration going through 2024, we may see more of a dip in occupancy. And as we complete transactions during the next 6 to 9 months, we expect that occupancy to then climb back as we get into 2025.

Speaker 4

Okay, great. Thanks. And then my second question is about the mark. So occupancy gets down to 77.6% in the most recent quarter. Pre pandemic, that was always 95 to 100.

Speaker 4

Could you maybe talk a little bit about kind of the roadmap there and what you think stabilized occupancy or given that there's obviously some volatility at that asset, what may be like a stabilized kind of revenue figure might look like for the Mara?

Speaker 3

So I'll start, Glenn, you jump in. Like the Chicago market is obviously challenging right now, probably one of the more challenging ones in the country. But we do have decent activity on the asset. I would say that, alluding to some of the prior questions, there's quite a bit of distress in Chicago office. Many landlords do not have the wherewithal to lease their assets given the debt situation there.

Speaker 3

They have an asset that has no debt on it. And so I think the sponsorship, the strength is well known by the brokers and the tenants, and I think that's helping us. We just finished what we call March 2.0, which is the 2nd stage of amenities that we have put in, fitness, conferencing, etcetera. And again, the reaction that's been positive. So the market is tough.

Speaker 3

Dismiss that. But I think we're seeing more than our fair share there. And I think that's going probably 3 years to get back to stabilized occupancy realistically. Maybe it's 2, but I think when the income fully comes online, it's probably in the neighborhood. And our objective is to get it back into the 90s percent occupied, get it 95 plus percent and get the income back up to that $90,000,000 to $100,000,000 cash NOI basis.

Speaker 3

So there's a fair amount of growth to come there. But the market is, as I said, challenging right now.

Operator

Thank you. The next question is from Caitlin Burrows with Goldman Sachs. Please go ahead.

Speaker 12

Hi, this is Julian on for Caitlin. Thanks for taking the question. One quick one, can you comment on whether the leasing spreads in the quarter benefited from the Penn District leasing and what that leasing spread might have been ex Penn leases?

Speaker 3

Yes. I think the answer is that the spreads, PENN2 is the major league soccer with the big lease in this quarter. That's a new lease, 1st generation. So it didn't affect the spread.

Speaker 12

Okay. Good to know. And then a second one on the debt covenant, it looked like interest coverage and fixed charge coverage tight the bid in the quarter. I know longer term the metric is going to benefit from the occupancy gain you talked about from Penn District NOI. And it also sounds like you have some sales underway.

Speaker 12

But can you give us a sense of maybe the trajectory over the coming quarters given the fact that I know there's that sort of big swap expiration at 5.55 Cal?

Speaker 3

Yes. No, you're accurate. I think the impact this quarter was predominantly the big item was the swap increase on 10, 11 we were coming up, I think, if I go from recollection, I think it was 17 basis points. So, too bad that couldn't go forever. But that was the material in this quarter, a couple of other things as well, but that was a big one.

Speaker 3

Next quarter, Q2, if you will, you're accurate 555, we put in place another swap that will kick in and increase. So as we look forward, we continue to have sufficient cushion in our covenants. Fixed charge will tighten up over the next couple of quarters, but we still have sufficient buffer there. And then as the income comes online from some of these leases, that number will grow again. But it will tighten up a little bit based on the 555 swap rate increase.

Operator

Thank you. The next question is from Nick Yulico with Scotiabank. Please go ahead.

Speaker 13

Thank you. I just wanted to go back to the $0.25 $0.30 impact this year from vacancy. So I guess that adds up to about $55,000,000 $60,000,000 of NOI versus your total NOI share last year of $1,140,000,000 So it's somewhat like a 5% NOI loss on that math, that's correct. So I guess I'm just wondering, how does that are there other moving parts here besides just some of the vacancy impact you talked about? Because if I look at your supplement in the Q4, you had 5% of your rent expiring in New York and you're obviously not all expiring.

Speaker 13

So the 5% NOI loss number seems a little bit high relative to what your expirations were this year?

Speaker 3

There may be a oneten that expire December 31 last year. But I think in a nutshell, that's it. I mean, it's pure and simple. The vast majority of it is 1296, 280 Park and 770. And you get to that sort of number.

Speaker 3

I mean, there's a little bit

Speaker 6

of positives, a little bit

Speaker 3

of negatives, but those are the 3 main drivers. So we just we came through a period where there was some known move outs and we're back on those as we discussed, but that's it. And it just occurred at various stages everywhere from December 31 through probably the last one is Meadow, which is in the middle of this year.

Speaker 13

Okay, thanks. And then I just want to be clear on the way to think about occupancy. And Michael, last quarter when you're talking about sort of a flattish occupancy this year, does that mean that by the time we get to the Q4 of this year, it's a sort of a flat year over year occupancy? I'm assuming it's not a sort of average occupancy for the year that would be flat year over year based on that.

Speaker 3

Yes. Yes. I would say by the end of the year. I mean, again, it depends on timing of certain things. And I don't know that I can play it with precision.

Speaker 3

This will happen by the Q4 as opposed to January or whatnot. But we think rough numbers will end up there. So we'll see. There's still we're still in the first half of the year and we just have to see how it plays out. But I think like occupancy, it's down now, it's going to trend down a little more given, for example, the Meta Move app in June,

Speaker 9

but we have some

Speaker 3

other things in the works that we can pick that up. So we'll see where it comes out in total. I think as we look at trend line, it will we think increase meaningfully over time. We are going to bring PENN2 into the numbers next year. Depending on where we are from the leasing standpoint there, that number could bring the average down, but obviously that's sort of an extraneous event being added to denominator.

Speaker 3

So we'll evaluate it as

Speaker 2

we get closer.

Operator

Thank you. The next question is a follow-up from Michael Lewis with Truist. Please go ahead.

Speaker 4

Yes, thanks. I just have one more. You sold 2 condo units at 220 Central Park South for about $32,000,000 Are the remaining 4 units similar in value, roughly $16,000,000 a unit? I don't know if you have maybe you have a penthouse left or you have smaller units. I was just wondering about that.

Speaker 2

No. The remaining 4 units are smaller, lower view impaired, so they're much less valuable.

Speaker 4

Okay. Thank you.

Speaker 2

Basically that job is basically sold out.

Speaker 4

Perfect. Thanks.

Operator

Thank you. The next question is a follow-up from Alexander Goldfarb with Piper Sandler. Please go ahead.

Speaker 11

Thank you. Steve, with the new office to conversion incentives, does this open a door for you to contemplate either assets from the existing portfolio or perhaps assets that are that you've always eyed as would be great for conversion and seem to maybe have a motivated owner who would be willing? Just seems like the incentive package that they passed is pretty lucrative for office landlords to convert.

Speaker 2

Alex, good morning again. Yes, the answer is yes, of course. So there's a couple of things. First of all, the building that you're going to be converting, the target building has the price somewhere in the neighborhood of sub $100 a foot or sub-two $100 a foot. So these are really distressed office buildings.

Speaker 2

They're not these they're distressed office buildings. Let me leave it at that. So the pricing and the economics really don't allow you to pay more, maybe even a pinch more, but probably not. So that's step number 1. Step number 2 is that obviously if those are the economics and those are the target building, These are the B and C buildings in the office market.

Speaker 2

So when those buildings are taken out of the conventional office market, they really don't help the Prime A market because the tenants that we deal with who are interested in A space don't really ever look at that. So the answer is that we will be able to as an industry convert a decent number of buildings. It will make a dent, not a big dent, but a dent in the residential market and the demand for residential space. But it will have a marginal effect on the conventional Class A Orbit market. But clearly, we're looking at that.

Speaker 2

It's an interesting activity and it's something that we will look at. I'm not 100% sure that the returns on capital are going to be what some people think they are. But anyway, we are looking at it pretty aggressively.

Operator

Thank you very much. There are no further questions at this time.

Speaker 2

Okay. Thank you all very much. We appreciate your joining us this morning and we will be anxious to we always learn from these calls and so thank you for that. We are excited about the next the quarter in the future And we'll see you at the next earnings call. Thank you.

Operator

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

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Earnings Conference Call
Vornado Realty Trust Q1 2024
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