Q3 2024 Vornado Realty Trust Earnings Call
Good day and welcome to the Vornado Realty Trust 3rd Quarter 2020 for earnings call. All participants will be in listen only mode, should you need assistance of a signally conference specialist by pressing the star key followed by zero.
[inaudible]
To ask a question, you may press star, then 1 on a touch-tone phone.
To withdraw your question, please press star and then 2.
Speaker Change: Please note this event is being recorded. I would now like to turn the conference over to Steven Borenstein, Senior Vice President and Corporate Counsel. Please go ahead. Welcome to Bornado Realty Trust third quarter earnings call. Yesterday afternoon we issued our third quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission.
Speaker Change: These documents, as well as our supplemental financial information packages, are available on our website, www.dno.com, under the Investor Relations section.
Speaker Change: 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 Change: Please be aware that statements made during this call may be deemed forward-looking statements and actual results may differ materially from these statements due to a variety of risks, uncertainties, and other factors.
Please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2023, for more information regarding these risks and uncertainties.
Speaker Change: 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.
Speaker Change: On the call today from management for our opening comments are Steven Roth, Chairman and Chief Executive Officer, and Michael Franco, President and Chief Financial Officer.
Speaker Change: Our senior team is also present and available for questions. I will now turn the call over to Steven Roth Thank you, Steven. Good morning, everyone
Steven Roth: Today is election day in America and extra important since this is a once in four year presidential election. Election Day is arguably the single most important day in the calendar of our democracy.
Steven Roth: early voting participation seems to indicate that this year's turnout will be a record and that's great
Enough said, now to business.
Steven Roth: I've been saying for the past few quarters that the office leasing market in Manhattan is at the foothills of recovery, and I think that's becoming more and more apparent.
Steven Roth: While Manhattan has over 400 million square feet of office space, we compete in a much smaller, say 180 million square foot market of the class A better buildings, where demand is strong and vacancies are rapidly evaporating.
Steven Roth: Look at Park Avenue and 6th Avenue now with 7% and 9% Class A vacancy, which is the very definition of a landlord's market.
Steven Roth: And the item on the cake is that there is no sign of additional office supply on the horizon. There hasn't been a major new office start in five years. The cost of the building and the cost of capital make it totally uneconomic to build.
Steven Roth: Mystery is a guide. No new supply. Always forget the landlord's market.
Steven Roth: Michael and Glenn will comment in a moment. Our rents are going up.
Steven Roth: I am extremely optimistic and the stock market seems to agree.
Steven Roth: Here today we have leased 2.5 million square feet company-wide, including 2.1 million square feet in Manhattan.
Steven Roth: As Michael and Glenn will cover, activity is robust and I am confident that we will sign between 3.5 and 3.8 million square feet of Manhattan leases this year, which would rank number two in our history.
Steven Roth: with an option to purchase in the 30th year and the 70th year.
Mass Beliefs will provide for an upfront payment of prepaid rent sufficient to pay off our $700 million loan on the property, as well as an annual net rent over the lease term.
Steven Roth: Both parties have signed the detailed letter of intent and expect to execute final binding papers shortly.
Steven Roth: Our liquidity is a strong $2.6 billion, with $1 billion of cash on balance sheet.
Steven Roth: Our cash will shortly be augmented by over a billion dollars from the UNIQLO sale, NYU prepaid rent, and the redemption for cash of over 500 million dollars of our street retail preferred for proceeds of an in-process 1535 Broadway financing.
Steven Roth: Note that between UNIQLO and 1535 we will have redeemed about half of the prefers.
Steven Roth: We will pay off our $450 million January 25 bonds in January.
Steven Roth: We have well more than enough cash on our balance sheet to complete our leasing program for PEN1 and PEN2. And remember, we have no debt on Farley, PEN1 and PEN2.
Steven Roth: Regarding our 350 Park Avenue site, arguably the very best site on Park Avenue, we are well along with the Norman Foster architectural firm in completing the design of the 1.8 million square foot tower that we will build with Citadel, who will be our major tenant, and with Ken Griffin as our 60% partner.
Steven Roth: At Penn 15, the former hotel Penn site, at 33rd Street and 7th Avenue, directly across from Penn 2.
Steven Roth: is now down the grade and ready for development.
Steven Roth: I believe this site, in the heart of our Penn District, and directly connected to Festation, is the single best site available in booming west side of Manhattan.
Steven Roth: We own one asset in San Francisco, the trophy of 1.5 million square foot 555 California Street.
Steven Roth: in a city of tech buildings which are struggling with city-wide vacancy of 36 percent and declining rents. This dominant financial services building
Steven Roth: Its performance is quite remarkable. This year we will lease 443,000 square feet at average starting rent of $110.
Steven Roth: Occupancy in the tower is 98.7% and we haven't lost a single large tenant in all of the years of our ownership.
Steven Roth: We have a history of owning the very best retail sites. Read Fifth Avenue and Times Square. And bringing exciting retailers to town, read H&M.
Steven Roth: We announce this quarter an important deal to bring Primark to the Penn District on 34th Street. This will be their flagship store in America.
Steven Roth: hats off to the Federal Reserve who seem to have beaten down inflation and engineered a soft landing
Steven Roth: Having said that, the now borrowing rates remain stubbornly high and not accretive to real estate values.
Steven Roth: And capital to refinance maturing loans on overleveraged assets is simply not available other than from the incumbent lender.
Steven Roth: But through it all, the economy is growing and our occupiers are expanding, and that's a very good thing.
Steven Roth: 731 Lexington Avenue, the Bloomberg headquarters tower, is owned by Alexander's Inc., of which Renato is external manager and one-third owner.
Steven Roth: In the first quarter, we extended the Bloomberg lease to 2040.
Steven Roth: In the third quarter, we financed a maturing loan on the Bloomberg H2 building.
Steven Roth: Alexander's paid the loan down by 100 million dollars to 400 million dollars from cash on his balance sheet.
Steven Roth: The low LTV $400 million loan was great at all AAA's, enabling us to achieve a 5% interest rate, by far the lowest we have heard of in this cycle.
Steven Roth: The AAA rating, together with the quality of the credit and the quality of the building, led to the offering being eight times over-subscribed. District refinancing will save Alexander $17 million a year.
Steven Roth: We are open to buy in the acquisitions market, but very selective on the hunt for good assets at distressed prices. No business as usual here. In this cycle, lenders seem to be working out their troubled over-leveraged problems with their existing borrowers.
Steven Roth: with few high-quality distressed assets coming to market. Having said that, this quarter we did acquire a $50 million loan in default on a very interesting midtown site.
Steven Roth: We will keep on thinking.
Steven Roth: Well our business is substantially better and improving. We continue to be rigorous with cash management.
Steven Roth: We will likely pay approximately the same dividend as last year, 68 cents.
Steven Roth: in a single dividend paid in December. We expect to carry over to next year the same dividend policy of a single dividend payable at year end.
Steven Roth: This strategy has been understood and endorsed by our major shareholders.
Steven Roth: I expect as conditions normalize, so will our dividends.
Steven Roth: Lastly, if you are a Veneto investor, you must tour our Penn District, and I do mean must.
Steven Roth: And I do mean tour, not just drive-by.
Steven Roth: If you last visited six months ago, you must visit again. It's changed that much, that quickly. The building architecture of Penn One and Penn Two, the size, extent, and quality of the amenities, and the plazas and public spaces have all received universal acclaim from commentators, brokers, and occupiers alike.
Steven Roth: This was a team effort led by our senior leaders, Led Weiss and Barry Lager, who deserve the Gold Star Award.
Steven Roth: We are on budget here and achieving higher rates than projected, and so we will expect the returns shown on our financial statement to improve.
Speaker Change: Now over to Michael to cover our financials and the market.
Michael Franco: 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 forecast.
Michael Franco: Third quarter comparable FFO as adjusted was 52 cents per share compared to 66 cents per share for last year's third quarter.
Michael Franco: This decrease was primarily attributable to lower NOI from known move-outs, largely at 770 Broadway, 1290 Avenue of the Americas, and 280 Park Avenue.
Steven Roth: and Higher Net Interest Expense, both of which we have previously discussed. We have provided a quarter-over-quarter bridge in our earnings release and in our financial supplement.
Steven Roth: Our outlook for comparable FFO for 2024 hasn't changed in the past couple of quarters.
Steven Roth: That being said, with the pending lease at 770 Broadway, we already have approximately 75% of the aforementioned vacant space from the move-out spoken for.
Steven Roth: Now turning to leasing markets.
Steven Roth: The tide has clearly shifted in the New York Class A office market.
Steven Roth: Leasing activity is strong and gaining momentum and availabilities are declining, particularly for large blocks of space.
Steven Roth: Manhattan's leasing volume during the first three quarters of 2024 totaled 23.1 million square feet and it looks like full-year activity will surpass 30 million square feet for the first time in five years.
Steven Roth: Strong demand for class A space near transit, coupled with limited quality blocks of space, is resulting in rents rising and concessions beginning to tick down.
Steven Roth: For Midtown vacancy for the better buildings as defined by CBRE is down to around 10% with Park Avenue around 7% and 6th Avenue at 9%.
Steven Roth: The headquarter deals are also back with more mega transactions greater than 700,000 square feet signed this year than any year since 2019.
Steven Roth: During the third quarter, 10 leases of 100,000 square feet or greater were signed.
Steven Roth: With little availability in the new Trophy product, tenants have been keenly focused on what remains available in recently redeveloped buildings which have undergone extensive transformations.
Steven Roth: PEN2 is perfectly positioned to capture this large pen demand.
Steven Roth: Turning now to our portfolio.
Steven Roth: In the third quarter, we leased approximately 740,000 square feet of office space across our three markets.
Steven Roth: In our New York business, we have now leased more than 2 million square feet and 68 transactions during the first nine months of 2024 and an average starting rent of $112 per square foot.
Steven Roth: And during the third quarter in our New York office portfolio, we completed 454,000 square feet of leasing across 18 transactions at starting rents of $92 per square foot.
Steven Roth: We closed on a 297,000 square foot renewal with Google at 85 10th Avenue, solidifying this property as one of Midtown South's best and an important piece of Google's meatpacking district campus, and reaffirming their long-term commitment to New York.
Steven Roth: We have a unique window into tech sector activity given our leading position as landlord the big four technology companies in New York as well as many others. And as we indicated in our last call, tech sector demand is coming back strong in New York and we have more in the works in our portfolio particularly in Penn.
Steven Roth: At Penn One, we lease 70,000 square feet and an average starting rent of $119 per square foot, led by our 55,000 square foot new headquarters lease with Voivint Sciences.
Steven Roth: These are historic rents for this building and the Penn District and validate our original redevelopment thesis.
Steven Roth: Since we commenced the transformation of Penn One, we have now completed more than 1 million feet of leasing at $92 per square foot, with a significant mark-to-market increase.
Steven Roth: We are well on our way to achieving our original aspirations as the Penn District Campus continues to attract new tenants from across the city at ever-increasing rents.
Steven Roth: Our market-leading, amenity-rich offerings, coupled with our complete transformation of the entire neighborhood, has put our properties in the leasing bullseye for tenants seeking high-quality space.
Steven Roth: A reported New York office cash mark to market for the quarter was a negative 7%.
Steven Roth: But that's not the real story.
Steven Roth: This is because several of the leases signed at PEN1 during the quarter are for space that has been vacant for more than nine months and therefore is not considered, quote, second-generation relapsed space, quote.
Steven Roth: used to calculate our reported mark-to-market statistics.
Steven Roth: Additionally, the quarter included a 297,000 square foot lease, 148,000 feet of share, where we exchanged a tenant improvement allowance for a reduction in rent.
Steven Roth: As indicated on page 17 of our financial supplement, if you were to include these leasing transactions in our cash mark-to-market statistics, the negative 7% would be a positive 17.9%.
Speaker Change: including the lease at 770 Broadway which Steve mentioned.
Steven Roth: A New York pipeline is robust and consists of 2.8 million square feet of leases in various stages of negotiation.
Steven Roth: This includes multiple tenant headquarter deals in our transformed PIN 2.
Steven Roth: We currently project to finish 2024 with almost 3.8 million square feet leased across our portfolio Which would be our highest volumes of 2014 and then our highest average starting rent ever
Steven Roth: The easiest money we can make is filling up our empties.
Steven Roth: As occupancy rises, our earnings will go up.
Steven Roth: With a pending full building master lease at $770, our office occupancy increases by 330 basis points to 90.8%.
Steven Roth: Depending on the timing of future lease transactions, our office occupancy will likely decrease in first quarter 2025 as the vacant space at PEM II is placed into service.
Steven Roth: We anticipate that this decrease will be temporary, and as PEN2 stabilizes, we get to the 93s.
Steven Roth: Turning to San Francisco at 555 California, we closed a 46,000 square foot renewal and expansion deal with Wells Fargo during the quarter and currently have renewals out for another 283,000 square feet.
Steven Roth: A leasing program at 555 is by far outpacing the entire market as leading financial services companies continue to be attracted to the property's premier quality and to our new 555 Work Life Amenity program, similar to what we have done in New York.
Steven Roth: Well, tenant concessions are up here, too. Every one of our renewal rentals has been positive mark-to-market or flat in an otherwise weak San Francisco office market.
Steven Roth: At the MART in Chicago, we closed on 15 leases during the quarter, totaling 239,000 square feet, headlined by an important expansion and renewal of Medline, a worldwide leader in the healthcare industry for 161,000 square feet.
Steven Roth: Medline's enormous growth in Chicago is particularly noteworthy and the transaction is a major bright spot for both us and the overall market.
Steven Roth: The Mark continues to outperform the market and attract top-tier tenants driven by our strong debt-free sponsorship and recent amenity additions, which have reaffirmed its leading position in the marketplace.
Steven Roth: Turning to the capital markets now.
Steven Roth: While the financing markets remain challenging for office, we are beginning to see some encouraging signs. While banks remain out of the market, the CMBS market has reopened for Class A New York City office buildings.
Steven Roth: as evidenced by our recent 400 million dollar financing on 731 Lex office at 5.04 percent, the lowest rate achieved for CNBS office financing post-COVID.
Steven Roth: and the $3.5 billion financing for Roth Center and $750 million financing for 277 Park Avenue.
Steven Roth: and there are several billion dollars more in the pipeline. These financings show investors are once again constructive on office and assets can get financed in size, albeit on conservative metrics and loan structures.
Steven Roth: With short-term rates finally coming down, and the SOFR forward curve projected to come down significantly over the next year, both the financing markets and borrowing rates should continue to improve, and values should follow.
Steven Roth: The investment sales market is also beginning to perk up. There have been a number of older obsolete buildings sold to residential converters, which will take supply out of the market.
Steven Roth: And the first class A building sold this cycle, 799 Broadway, was recently put under contract at a 5% cap rate for $255 million, or $1,400 per square foot, which is strong pricing.
Steven Roth: Our balance sheet is in excellent condition, with strong liquidity of $2.6 billion, including $1 billion of cash and restricted cash, and $1.6 billion undrawn under $2.17 billion revolving credit facilities.
Steven Roth: We have taken care of all of our significant 2024 maturities and are making good progress on our 2025 maturities.
Steven Roth: Despite the success we've had recently in extending our loans with existing lenders or refinancing our loans in the midst of this more challenging environment, we do still have a handful of assets that are over levered. Most of these assets do not contribute to our FFO right now and have little to no equity value.
Steven Roth: We will maintain our discipline and unless these loans are restructured on terms that allow us to put the assets on sound footing Similarly similar to what we previously negotiated at 280 Park and St. Regis retail. We will not invest any more capital in these status
Steven Roth: The non-recourse nature of these loans provides us with this option.
Steven Roth: With that, I'll turn it over to the operator for Q&A.
Speaker Change: We will now begin the question-and-answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. At this time, your question has been addressed and you would like to withdraw your question. Please press star and then 2.
Speaker Change: Our first question comes from John Kim with BMO Capital Markets. Please go ahead.
John Kim: Good morning. Steve, you mentioned the leasing activity that you've done year-to-date, two and a half million square feet. And what do you anticipate for the remainder of the year, which sort of implies another
John Kim: 1 to 1.3 million. Does that include the NYU lease or is that separate?
Speaker Change: Yes, it does.
Steven Roth: OK.
Speaker Change: Can you provide any more details on that when the lease or occupancy starts at 770 Broadway? And I know it's a structured deal with the upfront payments and the purchase option, but how does the overall rent compare to the $115 that's in place today?
Speaker Change: Well, the upfront prepaid rent is significant.
Speaker Change: and therefore there's a small tale of value.
Steven Roth: that rent will cover. So it's substantially lower. It's not $100 a foot.
Steven Roth: But when you take into account the prepaid rent, and capitalize that as a value, the rent is approximately the number you have in your mind.
Steven Roth: And when does the optimacy start?
Speaker Change: Say that again?
Speaker Change: The occupancy of the building, when does that contribute to FFL? The closing is expected to be in January. The rent will commence in January. The funds will transfer in January. So the action will be completed. The papers will be signed immediately.
Speaker Change: The closing will be in January.
Speaker Change: Great, thanks. And my second question, I know I asked multiple questions in the first time, but second question is on the March. You had increased leasing and occupancy went up. The rents have come down compared to where it was last quarter. Is that your strategy going forward is to kind of build up occupancy, you know, with reduced rents?
Speaker Change: The key to the Mart is, first of all, it's an extraordinary building. Second of all, the Chicago market is soft, very soft.
Speaker Change: The most important strategic point in the Mart is that the Mart is now unencumbered and free and clear.
Speaker Change: So it's one of the very very few buildings in Chicago that is well capitalized It's the strongest financial building in the Chicago area and that gives us an enormous amount of strategic flexibility
Speaker Change: So, we will rent the building opportunistically as deals that we think are attractive come along.
Speaker Change: Thank you.
Speaker Change: And the next question comes from Steve Sacwa with Evercore ISI. Please go ahead.
Steve Sacwa: Can you maybe just speak to the pipeline and the activity that you're seeing at at PEN2 today? Has that pipeline changed at all and, you know, what's your confidence level of getting some leases signed at PEN2 before the end of the year? Thanks.
Steve Sacwa: Hi Steve, it's Glenn. So there's actually a lot more leases out over and above the NYU deal.
Speaker Change: six, seven hundred thousand feet of paper. We have leases and negotiations.
Speaker Change: all of which I expect to close during the fourth quarter number one.
Speaker Change: Number two is released to the PEN2 pipeline. It is robust with very, you know, many, many important transactions. We expect to go to at least two or three of those during 4Q. We are in full swing.
Speaker Change: you know as you know less and less blocks are available in the market particularly of this type of quality at this location with the amenity program we've put together we're now in fifth year and more to come.
Speaker Change: I just want to add both John's comments and your comments implied you know there's not that much more policing when you add in what we've done year-to-date adding NYU I think I think the math you guys are doing is
Speaker Change: is inaccurate, right? I think both Steve and I commented, we...
Speaker Change: I think you're hearing a level of enthusiasm and confidence from us that you know is sort of as high as it's been a long time given the activity we have.
Speaker Change: Great, thanks for that clarification, Michael. Maybe second question, Steve, I think last quarter after the Uniqlo sale you mentioned you may explore...
Speaker Change: and some other street retail sales, just kind of where are you on that front and has your thinking changed at all and has the appetite from some of the luxury retailers changed at all?
Steven Roth: The appetite continues to be strong. We have no news to report in that regard. But I think the interesting thing is is that, and I said it in the script, that
Steven Roth: By the end of this year or into January, we will have monetized half of the 1.8 billion dollar retail preferred at par.
Steven Roth: So if you remember back a year or so ago, analysts were predicting that the preferred was worth substantially less than par. So the big story this quarter is the balance sheet. So we're monetizing the balance sheet.
Steven Roth: We will increase our cash balances by more than a billion dollars very shortly. We will pay off $450 million of our bonds, and we will end up, for example, the NYU deal reduces our debt by $700 million.
Steven Roth: So when you put it all together, Michael, what's the math?
Michael Franco: You know, I think we'll end up paying off a little over a billion won of debt and increased cash on our balance sheet north of $600 million.
Michael Franco: So that's very substantial. So we're definitely in fighting mode with respect to selling more of the retail, which was I think your main question.
Steven Roth: There is activity. The retail values have been validated, validated multiple times and we will react opportunistically to opportunities as they come along.
Speaker Change: And the next question comes from Floris Van Dyck with Compass Point. Please go ahead.
Speaker Change: Hey, good morning guys.
Speaker Change: Following up on Steve's question on retail, I don't think there was a lease that was executed in the third quarter on your retail portion. Can you talk a little bit about the demand for retail? I know you talked about Primark.
Speaker Change: coming to the Penn District. Also, what are the plans on your big Macy's store? Is that a long-term project or is there anything more near-term coming for that space?
Speaker Change: Lars, good morning. You know, I would tell you, I think you've heard this from us the last few quarters, right? The demand from retailers, you know, is up pretty significantly from the lows.
Speaker Change: We continue to see good demand across the portfolio. We're hard at work, obviously, leasing Penn. I think bringing Primark to the district is a big win. They're excited. We're excited. We're in discussions on other retailers to bring into the district, which will continue to enhance the district.
Speaker Change: So we're very pleased about that. Times Square has seen a big pickup in activity. We have a lot of discussions going there with respect.
Speaker Change: to our 1540 asset, and, you know, as we look at the pipeline, there's pretty good activity across the board. You know, we have some vacancies, a rollover, I should say, coming up, you know, on Fifth Avenue in the next couple of years, and there's dialogue there, too, but that's not as imminent.
Speaker Change: But I would say, again, interest is up, activity up, and importantly, you know, rents affirmed, and retailers are doing the sales that give them confidence to...
Speaker Change: to transact. So, you know, these deals take a while. These are big commitments, particularly on the two main blocks or submarkets, I should say, a fifth in Times Square. But the interest level continues to be there.
Speaker Change: I would add that the Primark deal is it's a big deal coming into the Penn District it's a it's a fabled store it will do great business it's a flagship it's a big deal
Speaker Change: in the
Speaker Change: The occupancy numbers that we publish for retail are actually
Speaker Change: The story behind that is I think we published that our activity is what Tom?
Speaker Change: It's 77, 78%. OK, but that includes the Manhattan Mall vacancies. And if you take those out.
Speaker Change: then you get the very close to 90 percent. So actually we're pretty well leased in Comparison above the market occupancies and the way I look at it. We're really 90 percent leased in the retail not 78 percent
Speaker Change: So, you know, that's the way I look at the retail. There is, as Michael said, there is strong demand. The retail retail is certainly in much better shape than it was a couple of years ago.
Speaker Change: With all due respect to the year, I believe
Speaker Change: Let me clarify, you mentioned Macy's, we don't have a Macy's in Alabama. Yeah, I meant the Manhattan Mall, of course. I apologize. Yeah, we figured that out. Thanks, Warren.
Speaker Change: So, you know, Nick Steve alluded to that in terms of the occupancy. You know, we have continued to put temp tenants in that space. Right now, we actually have Netflix doing a squid.
Speaker Change: James Pop-up, which I hear is quite popular And we'll continue to do that, you know on that space which is big a bit more complex
Speaker Change: You know, the math doesn't work to do anything permanent today, so...
Speaker Change: And I think that's that's probably going to be the case for some time So I wouldn't I wouldn't you know, wait up sleepless night assuming that's going to get done in the next, you know few months that that's going to be we you know, we're thinking through some broader plans there and That's a little bit more atypical space
Speaker Change: Great. Maybe a follow-up question.
Speaker Change: You know, your stock is trading an implied cap rate of around 6%. How do you think about raising equity and what needs to happen for you to be willing to do that at this point?
Speaker Change: particularly as you think about your potential investment opportunities out there as well.
Speaker Change: That's a fascinating question. First of all, we are very well capitalized. I think I said three or four minutes ago that we're bringing a billion dollars of new cash in. We're paying down our debt.
Speaker Change: Our balance sheet is extremely strong and we have all of the firepower that we think we need for the foreseeable future.
Speaker Change: Our capital requirements to complete our lease up in PEN1 and PEN2 and across the board are already in cash on our balance sheet without doing any more financing.
Speaker Change: We have the lion's share of our assets in PEN, PEN1, PEN2, and Farley, where we have Meta, are all unfinanced, so we're extremely liquid and no capitalized.
Speaker Change: The cap rate that you mentioned is interesting, but
Speaker Change: When I do the math, I look at what the business looks like when we complete leasing and we get back to the 96, 97 percent.
Speaker Change: occupancy that we have traditionally had. We will get there for sure. They take a year, they take two years. So I look at the business with all of that income coming in and if you look at that we really don't need any
Speaker Change: We really don't need any equity. So for the moment.
Speaker Change: We are being pounded by bankers who want to write a ticket and sell stock for us, but it's really not something that we think is strategically important for the moment.
Speaker Change: If opportunities present themselves which are super accretive and not dilutive to our current shareholders, we will consider that. But we're not in the business of diluting our shareholders.
Speaker Change: Thank you.
Speaker Change: And the next question comes from Dylan Brzezinski with Green Street Capital. Please go ahead.
Dylan Brzezinski: Hi, guys. Thanks for taking the question and I appreciate your comments on after the 1535 transaction closes on monetizing half of the preferred equity in the street retail, JD, but I guess...
Speaker Change: Are there any other transactions or should we expect for you guys to monetize the remaining half of that preferred equity position over the near term or do you guys feel like most of the sort of the low-hanging fruit there is it's come to pass after this most recent announcement?
Speaker Change: Well we're actually very pleased with the first half of monetizing that's referred at par.
Speaker Change: We have no current plans to attack the second half.
Speaker Change: That's opportunistically and we'll see how things go.
Speaker Change: As I said pretty extensively a moment ago, we are in a very strong capital position.
Speaker Change: And we feel that we have suspended equity, although we have the opportunity to raise more equity, is if we wanted it or need it.
Speaker Change: But we don't think at the moment we want it, nor do we think we need it.
Speaker Change: So the preferred is, the other half of the preferred is something that we're very happy holding.
Speaker Change: As the markets turn, the income coming in on that deferred now exceeds the rate of interest that we could earn on short-term debt, so we're pretty okay with it.
Speaker Change: Thanks for the detail, Steve. And then just maybe one more if I can. On the BNode acquisition, the $50 million, I mean,
Speaker Change: Curious, can you kind of talk about your guys' plans there, and I know the node is currently in default, along with the A node at the property. I mean, is there plans to sort of go after this, and if so, can you kind of just talk about it a little bit more?
Speaker Change: You know, I wish I could, but it's really not appropriate. So, first of all, it's a very small investment. Second of all, it is interesting, and you'll all learn more about that over the next quarters.
Speaker Change: It has multiple different alternative ways that this thing could go.
Speaker Change: possibly result maybe even likely result in litigation and it's just it's a very interesting thing a very interesting site and it's really not appropriate to talk about it at this call
Speaker Change: Okay, makes sense. Thanks again.
Speaker Change: And the next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.
Alexander Goldfarb: Morning, and Steve, as one of those analysts who was questioning on the preferred, good to hear that you've made progress paying it off at par.
Alexander Goldfarb: kudos to you and the team.
Alexander Goldfarb: can you provide any perspective on buying it at par versus discount? It would seem, based on what you've described, that it should be a position that would trade at a discount, but clearly there's a rationale. So maybe you could just help us understand to what you can discuss.
Speaker Change: I'm famous I'm a famously difficult buyer and we paid par because we thought it was we were getting value and we were getting a position in the in the asset so other than that I don't have anything to add
Speaker Change: Okay, the second question is, Steve, based on how you described 555 California and you and others have described Park Avenue, it seems like the traditional office sub markets
Speaker Change: you know, have been the leaders, you know, coming out of the pandemic and remain very strong. Just curious, you know, years ago, you talked about Manhattan tilting to the south and to the west.
Speaker Change: and yet right now everyone's flocking back to assets like 555 or Park Avenue.
Speaker Change: Can you just discuss if you think that perhaps going forward, you know, future vino investment is going to focus more on the traditional sub-markets and less on the new frontiers, or you think that this is just a moment in time and as the cycle recovers those new frontier markets will once again have their place?
Speaker Change: um
Speaker Change: Alex, I wouldn't call the west side of Manhattan when you take Hudson Yards and Manhattan West and the Penn District as a new frontier.
Alexander Goldfarb: That's now become a very established neighborhood, the demand from
Alexander Goldfarb: blue-chip, double blue-chip, triple blue-chip pennant is established and validated. And so I think the way I look at Manhattan, there's the traditional midtown market and then there's the newer, dare I say better,
Alexander Goldfarb: West Side Market, which is actually booming.
Alexander Goldfarb: So I think, you know, we don't really own a lot of stuff in the middle.
Alexander Goldfarb: But I think I have no problem with the west side. I think the west side is great if you're calling that
Alexander Goldfarb: if you're calling that new frontier. I don't think it's new frontier, I think it's very established by now.
Alexander Goldfarb: I was thinking more like meatpacking Chelsea, that area
Alexander Goldfarb: Alex, I think one of the dynamics that has happened in the last three or four months actually is that the market's broadened back out again.
Alexander Goldfarb: So like Park Avenue is Park Avenue achieving historically higher rents, which is fantastic. We benefit from that.
Alexander Goldfarb: And we're excited about what's to come there with 350 Park
Alexander Goldfarb: But if you look at our pipeline You know that it's broadened out. I think it's broadened out actually quite meaningfully There's been a real uptick there, and I think yes, we're seeing broad-based strength in the market So I think that's an encouraging sign for the marketplace. We have activity across all of our assets
Alexander Goldfarb: And so, you know, Meatpacking, Chelsea, all those assets, you know, not just ours.
Alexander Goldfarb: top trade assets are seeing activity. So, you know, Google just renewed at 85 cents. I don't think I would call those submarkets dead by any stretch of the imagination. I think they're stronger than they've been in a while. Those those markets really are smaller building smaller tenant markets. But for example, you know,
Alexander Goldfarb: We own a couple of buildings in the Chelsea market. The rents are $150 a foot. The rents are higher there than they are at Park Avenue.
Alexander Goldfarb: So New York is, as Michael said, broadening out, tenants want to go into various sub-markets and they're all pretty good.
Speaker Change: Good color. Thank you.
Alexander Goldfarb: Bye!
Speaker Change: And the next question comes from Jeff Spector with Bank of America. Please go ahead.
Jeff Spector: Great. Thank you and congratulations on the quarter. Now just listening to the call, you know, you've discussed...
Jeff Spector: You've laid out a lot of, you know, drivers of growth, and I'm just thinking about, you know, 2025. I know you have a deep team. I mean, where are the priorities?
Jeff Spector: for 2025, and where do you see best time spent for opportunities?
Speaker Change: Michael, you want to take a shot at that? Sure.
Michael Franco: Good morning, Jeff, and good to have you back on the front lines with us.
Michael Franco: So, in terms of priorities,
Michael Franco: You know, I think that the number one priority continues to be like we've invested significant capital in Penn
Jeff Spector: I don't know if you've been there recently, but it has transformed. It looks phenomenal and now it's a leasing game and
Michael Franco: You heard in the opening remarks, you heard Glenn talk about the activity being significant there.
Jeff Spector: you know, we just have to execute, right? We have to lease up Penn 2, we have to continue to turn over Penn 1, and if we do that, I'm confident we will.
Jeff Spector: which we're in the process of doing.
Jeff Spector: you know, piece by piece. We have good activity across Manhattan. You know, the market Glenn talked about is a little more challenging market-wise.
Jeff Spector: is really, I think, breathtaking, honestly, if you focus on the stats. So it's Penn, he's filling the balance of the vacancies.
Jeff Spector: It's continued to manage our balance sheet effectively. I think we've done a very good job of working through our maturity over the last, you know, two, three years, including some of our challenging situations. We need to continue doing that.
Jeff Spector: And then, you know, we've got a whole host of opportunities that are internal that we've got the seats plan and we have to, you know, take the next step on whether it's 350 Park, whether that's other opportunities in Penn.
Jeff Spector: We have a few assets internally, but beyond that, that are potentially repurposed or redevelopment assets that we are working on right now in terms of
Jeff Spector: economics and when may be the right time there, and then lastly is, you know, we're trolling the market for external opportunities and I think one of the disappointing things has been that there have been low-quality office opportunities and most of those are getting repurposed to other uses, but there really have been
Jeff Spector: you know, very little in the way of high-quality distressed office assets. So we continue to trawl. There will be some, but I don't think it's going to be floodgates.
Jeff Spector: And so, you know, we would like to be active at doing things on that front. But, you know, we have a lot internally that we can execute on that will grow the value of this company significantly over the next several years.
Jeff Spector: Some are going to take longer to realize given their development opportunities, but we think they're pretty unique.
Jeff Spector: I think you can say
Jeff Spector: And I'm happy to say that our single focus is in
Jeff Spector: creating value, being financially disciplined, and getting our stock price up to where we think the value is and where it should be.
Jeff Spector: In order to do that, we need to keep leasing.
Jeff Spector: culling out assets that we don't want and turning them into cash and continue to work on the assets, the very significant and great asset pool that we have and creating more value out of that existing asset pool.
Jeff Spector: Hopefully we'll find external opportunities but we have enough internal so that we can be very busy and create very significant increased values.
Jeff Spector: But actually, I'm all about the stock price.
Speaker Change: Thanks, very helpful. And my second question, can you expand on your initial comment, Steve? You mentioned it's a landlord's market.
Jeff Spector: You know, I understand.
Speaker Change: that technically you're right between demand supply in your market it's a fair comment. I guess you know from a New York City office market standpoint when we
Jeff Spector: you know, talk to brokers or others, right? We think about tenant allowances and free rent and...
Jeff Spector: More equilibrium there or more equilibrium in the market where let's say for the landlord you'd be contributing less Tenant allowances free rent. I mean, it's how do you think about that and can maybe just expand on that comment a little bit? Thank you
Speaker Change: Thank you. You know, a good model is the retail industry over the last five or six or seven years. So if you go back five or six years ago,
Jeff Spector: Retail was toxic.
Jeff Spector: The feeling in the marketplace was that
Jeff Spector: The internet shopping was going to demolish all physical brick-and-mortar shopping, and the stocks got crushed, the values got crushed, and the attitude about retail was just toxic.
Jeff Spector: The office industry has gone through very much the same thing over the last two or three or four years. COVID, work from home, nobody's going to ever get out of their kitchen, get off their kitchen table to come to the office. Well, all of that turns out to have, it's all passing and passing very aggressively.
Jeff Spector: So...
Jeff Spector: There's two things or three things going on. Number one, it's been established now people are coming back to work and people want to come back to work and people want to be in the big cities. The second thing is is that the
Jeff Spector: The environment has basically shut down new supply. It's totally uneconomic. The cost of building has risen significantly, and the cost of capital has risen significantly, and it's sort of like... It's not...
Jeff Spector: Money is not free anymore, money is expensive.
Jeff Spector: So building a new construction and new supply has shut down. Those are two very very constructive things for our market
Jeff Spector: You can see if you look at Park Avenue, you look at 6th Avenue, and you look even at the west side of Manhattan
Jeff Spector: B and C at D space in New York and there's 200 million or 180 million square feet of better space at A space in New York.
Jeff Spector: The customers that we deal with only want to be in the better space, that space is limited and the supply of that space, the vacancy in that space is evaporating very quickly.
Jeff Spector: So for example Park Avenue rents went from $80 a foot to $130 a foot almost overnight as the supply shrinks So that's the definition of a landlord's market. No supply
Jeff Spector: There was speculation we were going to have a recession, there has been no recession, there has been a soft landing.
Jeff Spector: and our customers are...
Jeff Spector: enthusiastic and expanding and that's a good thing. So most of our customers are enthusiastic about their space and they want more space and they want better space. That's a landlord's market.
Speaker Change: And the next question comes from Michael Griffin with Citi. Please go ahead.
Michael Griffin: Maybe going back to the Penn 2 leasing pipeline,
Michael Griffin: Submarkets been more focused on tech and media tenants, but just given maybe the limited availability that we've seen a more traditional financial services markets like Park and six. Is it fair to say that there's an increasing share of that leasing pipeline that's driven by financial services or some of those more traditional office space takers?
Speaker Change: You're absolutely correct.
Speaker Change: So, all types of industry sector tenants are coming to Penn, both Penn 1 and Penn 2. They're flooding in.
Speaker Change: consulting, you know, private equity hedge funds. We're seeing a plethora of activity from everybody and it's a game-changer. I think partly that's due to the lack of quality space available in the market generally, but more importantly to what we've done with these buildings and what this neighborhood now feels like.
Jeff Spector: It's powerful. They're all coming in and astounded by what we've done. And they feel like can is...
Jeff Spector: part of this West Side. Part of Manhattan West, part of Hudson Yards, we're now part of the new West Side. And not only that, we're at the doorstep right on top of transportation, which gives us a leg up on everybody else. So it's all in full gear, and you're on point with what you said about tenant-type for sure.
Speaker Change: Thank you. Bye.
Speaker Change: Thanks Glenn, appreciate the color there. And then Steve, I just want to go back to your comments on trying to pivot to acquisitions and external growth and going on offense in 2025.
Speaker Change: It seems like you have the balance sheet primed to do that, but as you look at your opportunity set, is it more kind of on the distressed debt side? Would you prefer to purchase assets outright? And then can you give us a sense of...
Speaker Change: what you might be underwriting to in terms of return hurdles or from an IRR perspective. That would be great.
Speaker Change: Griff, it's Michael. You know, we are, we're an equal opportunist, whether it comes through the debt or outright asset purchase, you know, we're open to both. It's obviously easier to buy the assets outright than having to work through the debt.
Speaker Change: But, you know, in some cases...
Speaker Change: that the opportunity is to the debt. And I think a lot, you know, will be debt driven, whether it's lenders that collectively get together and want to short sell an asset or they, you know, want to sell a position. So we're looking at a number of opportunities like that.
Speaker Change: Look, I think that as we think about deploying capital, you know, this is not a growth for growth's sake, right, where, as Steve said, we're trying to do things that are going to increase the value of the enterprise.
Jeff Spector: over time and so our capital is precious and we want to deploy that capital in a very attractive way. So, I'm not going to give you a specific return target but, you know, these are not core buys that we're trying to focus on. We're trying to generate, you know,
Jeff Spector: very attractive returns that can generate very attractive multiples over time and so
Jeff Spector: You know, I would think that sort of value-added, opportunistic sort of dynamic is at play here. And that's probably as specific as I can get. Each deal has its own dynamics. But we're not looking to put out money just to put out money. We want to make some serious profit if we deploy the capital.
Speaker Change: And the next question comes from Ronald Camden with Morgan Stanley. Please go ahead.
Ronald Camden: Hey, just two quick ones, so just one on the, I think you made some comments about occupancy dipping and 1Q25 potentially ending.
Ronald Camden: at sort of 93% at the end of next year, if I heard that correctly. Just curious what we should think about in terms of just the impact of Same Store and why. Any sort of comments on that would be helpful.
Speaker Change: Good morning. I think
Speaker Change: I think it's difficult to give you that prediction right now, you know, we're going through our budgets now, a lot of this stuff is timing driven, and, you know, I don't know that I can give you sort of this quarter versus that quarter, etc. I think you know sort of the end goal based on what we talked about in terms of at least the near term, and, you know, just hard to give you that visibility today.
Jeff Spector: Thank you. Bye-bye.
Speaker Change: Okay, great. I guess my second question, just going back to the cash flow statement, looks like a good cash from operating quarter and so forth, just how are you guys thinking about cash conversion as sort of the business recover? Is there anything that we should be mindful of, whether it's
Jeff Spector: you know, CapEx spending or anything else like that as you're thinking about maximizing free cash flow as the business recovers. Thanks.
Speaker Change: I mean like our
Speaker Change: objective, you know, our general approach is to be fairly rigorous with how we invest our capital, right, and that includes on
Speaker Change: are our existing asset base. So, you know, we are deploying the capital where, you know, we see
Speaker Change: appropriate return if we don't see that opportunity you know and I referenced that in my remarks you know if we don't see an opportunity on an asset that is has too much debt or until that debt is reworked
Speaker Change: You know, we're not going to do that, and I think we've demonstrated that in the past. So we're going to continue to be rigorous.
Speaker Change: Capital is precious notwithstanding the strength of the balance sheet.
Speaker Change: We do think in the best sub-markets.
Speaker Change: Thank you for the opportunity to start tightening that a bit.
Speaker Change: And the next question comes from Caitlin Burrows with Goldman Sachs, please go ahead
Caitlin Burrows: Hi, good morning everyone. Thanks for the comments earlier on the expected 24 dividend and the policy for 25. I guess I know the dividends a board decision but could you give some discussion maybe on what it would take to bring back the quarterly dividend?
Speaker Change: What we did was totally based upon conserving cash.
Speaker Change: and protecting our balance sheet. That was the genesis of the dividend policy that we adopted.
Speaker Change: lower dividend, conserve the cash, pay it once at the end of the year.
Speaker Change: We canvassed a very significant number of our shareholders'
Jeff Spector: about that strategy and universally they endorsed it, protecting the balance sheet being the principal thing to do. As the business cycle changes
Jeff Spector: and the availability of capital and we get back into more normal times, we will then likely convert to a normal dividend policy, a la what we had in the past.
Jeff Spector: So this is not necessarily a permanent strategy, it's an interim strategy to protect the balance sheet which was very well received by our constituents.
Speaker Change: Got it. Okay and then maybe just on PEN2, given the leasing you've already done and knowing it takes time for users to move in and contribute to rent and FFO, could you give any detail on your expectation for PEN2 buildup in 2025, like maybe the path to recognizing that nine and a half percent yield?
Speaker Change: I don't think you're going to see much in 25 just because you know the leases Glenn's working on now
Speaker Change: Those really won't start by the time the build-out occurs, that income really won't start kicking in until 26.
Speaker Change: I think you'll see a lot of activity over the course of the remainder of this year and next year, but I don't think in terms of it actually hitting earnings, I think it's going to be really as we start getting into 26.
Speaker Change: And the next question comes from Nick Ulico with Scotiabank. Please go ahead.
Speaker Change: Thanks, just wanted to go back to you know, Penn, Penn One and
Nick Ulico: I guess two questions there is on the leasing that was done the 70,000 square feet which was at you know higher rent than prior leases I think some of that was benefit from you know higher floor space but you know can you just talk about like the the rent there versus how we should think about you know the additional rents still to come
Speaker Change: Hi, it's Glen Weissnake, how are you? So we continue to increase rent at 10-1.
Speaker Change: If you think about our starting rents quarter to quarter since we unleashed on the redevelopment they continue to rise
Speaker Change: in a pretty strong way. So yes, one of the deals we made this past quarter was in the upper stack of the building at a huge rent, and that's now allowed us to drag along the rest of the building where we've increased rents throughout.
Speaker Change: Similarly at Penn too, we've been very focused on our rental quotes. We've been increasing our quotes there as well.
Speaker Change: So, as we had predicted when we set forth on this whole Penn District transformation a few years ago, we had said winds will rise as the district gets better, better, and better as the new tenants move in, as the action strengthens, and it's exactly what's happening.
Speaker Change: So we expect that trend to continue as we go into 25
Speaker Change: Much of our activity we talked about in the pipeline, the Penn One and Penn Two, and other Penn District holdings additionally. So we think the best is yet to come and we're really excited about it.
Speaker Change: Okay, thanks, Clarence. You know, we said we have leased a million feet post-redevelopment and therefore, you know, we still have another, you know, million three, million four to go, right? So I think that gives you a sense of the magnitude of the opportunity there. Now, that's unlike PEN2, which is a lease up
Speaker Change: execution, right? This is going to occur over the next several years, not all at once.
Speaker Change: And so we think there's a continued meaningful mark-to-market opportunity there, and that's without rent continuing to rise, which...
Speaker Change: This past quarter, you know, that's even more significant. So, you know, this is a, you know, this is an asset that we think is going to continue to deliver for us over time, given what we've done in the district.
Speaker Change: OK, thanks. Thanks, Michael. Second question is just in terms of, you know, I know there's been a lot of talk on the call about, you know, occupancy improving. And then, you know, Michael, you're also talking about some of the impact for the Penn 2 leasing is more of, you know, 2026 impact. But as we're thinking about 2025, I know you've said in the past, the capitalized interest burn off issue you have to deal with.
Speaker Change: How should we think about, you know, earnings growth next year? And at some point, you know, if there's a feel for when you're getting to sort of the bottom in terms of, you know, FFO and you start to see some FFO growth based on the occupancy growth. Thanks.
Speaker Change: Yeah, like I think, you know, we've said in the last quarter or so that
Speaker Change: that a lot of the activity that we're executing on now, you know, we're really going to get the benefit of starting in 26. I think that continues to be the case, right? So, this pipeline that we're working on...
Speaker Change: There's some things that will hit.
Speaker Change: you know, a little bit more immediately. And we're sort of running that through the
Speaker Change: the system right now to see the impact, but
Speaker Change: a lot of this activity will really kick in in 2026 and you'll start seeing material growth in that year and thereafter. So 2025, we'll try to give you a little bit more color as we get...
Speaker Change: Closer next year as we refine the budget to what we're doing, but you know I think we've sort of said You know next year was going to continue to be Somewhat you know flat to this year You know these these
Speaker Change: the move-outs and the backfilling, you know, the timing doesn't sync up, you know, in terms of when that comes online. So, you know, there's things that are moving around, you know, on the positive side, like we're effectively hedged, rates are starting to come down certainly on the short term, but, you know, I don't think we'll start to see...
Speaker Change: material impact on that as well until 26, because, you know, we are fairly hedged though, so.
Speaker Change: You know, I can't give you a precision because we're still working through it. And as you know, we don't give guidance, but I think this is a general matter. I think the comments we've said in the last, you know, three, four months about being, you know, not too dissimilar from this year, I think still hold with respect to 25.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Mr. Steven Roth for any closing remarks.
Steven Roth: Thanks everybody. It's election day and so tonight's going to be very exciting I think. Those of you who have not seen the Penn District
Steven Roth: recently, and I mean very recently, please call. We're very proud of what we've accomplished there and we're dying to take you through and expose you to these assets which we think are performing very well and will perform better.
Steven Roth: So, if you want a tour, give us a call and we'll see you at the next quarter. Thanks very much.