Good morning and welcome to the Vornado Realty Trust Fourth Quarter 2023 Earnings Call. My name is Andrea and I will be your operator for today's call. This call is being recorded for replay purposes. I will now turn the call over to Mr. Steve Borenstein, Senior President and Corporate Counsel. Please go ahead.

Welcome to Vornado Realty Trust Fourth Quarter Earnings Call. Yesterday afternoon, we issued our fourth quarter earnings release and filed our annual report on Form 10-K with the Securities and Exchange Commission. These documents, as well as our supplemental financial information packages are available on our website, www.vno.com, under the Investor Relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-K and financial supplement. 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. The call may include time-sensitive information that may be accurate only as of today's date. The company does not undertake a duty to update any forward-looking statements. On the call today from management for our opening comments are Steven Roth, Chairman and Chief Executive Officer; and Michael Franco, President and Chief Financial Officer. Our senior team is also present and available for questions. I will now turn the call over to Steven Roth.

Thank you, Steve, and good morning, everyone. We concluded the year strongly with a solid fourth quarter. Both the quarter and the year met our expectations. However, as anticipated, our results were impacted by the significant rise in interest rates, which will continue into next year, although I believe we will see a turnaround as interest rates decline. It's worth mentioning that our business performance has remained robust. Michael will recap the quarter and the year shortly. This year, our New York City office leasing team received the Gold Medal. In the fourth quarter, we leased 840,000 square feet, totaling 2.1 million square feet for the year. Average starting rents for the quarter and the year reached new highs of $100 and $99 per square foot, respectively. Additionally, for the year, we leased 1.2 million square feet at rents exceeding $100 per square foot. The office leasing market is showing signs of recovery, although the capital markets remain difficult and are tightening slightly. There are still foreclosures and givebacks on the horizon, presenting opportunities. As Michael and I have mentioned in recent calls, retail in New York City has reached its lowest point and is recovering quickly. While rents still have some distance to cover to reach the peak levels of five years ago, we are optimistic about the activity levels and the strength of the retail comeback. There is also exciting retail news. In two major deals announced in December, luxury retailers Prada and Kering purchased prime properties on Upper Fifth Avenue for their own stores. One deal was for $835 million and the other for $963 million, totaling around $900 million for a half block on Upper Fifth Avenue. Now, we have the world’s leading retailers investing heavily in real estate for their own use on the most significant retail street in our country. This trend is limited to the world's major cities: New York, London, and Paris. We take this seriously because our retail joint venture holds a 52% share, with a 26% market share of available Upper Fifth Avenue in four half blocks of similar high-quality properties. We also own the two best full blocks in that same venture, which includes four half blocks in Times Square and the largest sign business in town. We are nearing the completion of the renovation of our double block-wide PENN 2 and are about 90% done with the surrounding plazas. The large plazas in front of PENN 2, along with the 33rd Street promenade and the setback at PENN 1, have created a significant open public space that will be quite impressive. Directly across Seventh Avenue, the Hotel Penn has been demolished, paving the way for our PENN 15 site. All these developments combined will undoubtedly change the game. For anyone interested in Vornado, this is a must-see opportunity. The landscape is shifting and providing chances for growth. The retail apocalypse is behind us now, having successfully navigated the challenges posed by e-commerce. However, we are now facing a CBD office crisis due to the work-from-home trend and the capital markets' reluctance towards office spaces. Ultimately, America's major cities will continue to prosper, with New York, our hometown, leading the way. Office workers will choose to collaborate in offices rather than work alone at home. Consequently, the supply-demand dynamic will stabilize, resulting in a landlords' market due to a complete halt in new supply. It's difficult to develop new properties in the current capital market conditions, and in New York, we are seeing the decline or irrelevance of around 100 million square feet of old, unwanted office space. This cycle isn't over yet. There are still hurdles to overcome, but for those looking to invest for the future, the time is now. My colleagues and I at Vornado are feeling optimistic and excited. Now, I will hand it over to Michael.

Thank you, Steve and good morning, everyone. Though 2023 was a challenging year, our core office and retail businesses proved to be resilient. Our overall New York business same-store cash NOI was up a healthy 2.8% for the year and was up 2% in the fourth quarter compared to last year. Comparable FFO as adjusted was $2.61 per share for the year, down $0.54 from 2022, largely due to increased interest expense, which is in line with the expectations that we previously communicated. Fourth quarter comparable FFO as adjusted was $0.63 per share compared to $0.72 per share for last year's fourth quarter, a decrease of $0.09. Overall, the core business was flat and the entire decrease in the quarter was driven by increased G&A and lower FFO from sold properties. We have provided a quarter-over-quarter bridge in our earnings release and in our financial supplement. We recorded $73 million of noncash impairment charges during the fourth quarter, primarily related to joint venture assets that we intend to exit in the next few years. It should be noted that in accordance with NAREIT's FFO definition, this impairment charge is not included in FFO. Now turning to 2024. While forecasting remains challenging in the current economic environment, we expect our 2024 comparable FFO to continue to be impacted by higher interest rates and be down from 2023, which already seems to be in the market. We project a roughly $0.30 impact from higher net interest expense due to extending hedges at higher rates on our variable debt. Additionally, there will be a ding to earnings as we turn over certain spaces, primarily at 1290 Avenue of the Americas, 770 Broadway and 280 Park Avenue. This is temporary as we have already leased up a good chunk of this space but the GAAP earnings in these leases won't begin in 2024. We expect 2024 will represent the trough in our earnings and for earnings to increase meaningfully from there as rates trend down and as income from the lease up of PENN and other vacancies come online. Now turning to the leasing markets. New York is clearly leading the leasing charge nationally as the city continues to experience strong employment growth. 2023 leasing in Manhattan ended on a strong note. And as we enter 2024, market conditions are more favorable than any year since the pandemic ensued in March 2020, providing support for the continued recovery in Class A office market. The economy is healthy, most employers are back in the office, at least 3 to 4 days per week. Competitive sublease space is thinning and the market for higher-end space is tightening, fueled by a decline in the new development pipeline. Now that companies have greater clarity on their space needs, tenant demand is growing, which is translating into more leasing transactions. With new supply evaporating, tenants are increasingly focused on the highest quality redeveloped Class A buildings near Penn Station and Grand Central Station, as they seek to attract and retain talent. Activity in the best buildings has been strong with vacancy at less than 10% and rents rising. Our best-in-class portfolio has been a major beneficiary of this trend, the stats bear out this, that we consistently outperform the marketplace, as Steve mentioned earlier. In 2023, we leased 2.1 million square feet and average starting rents of industry-leading $99 per square foot with 1.2 million feet at triple-digit starting rents. Importantly, we made significant strides in addressing our upcoming vacancy in tenant roll at some of our most important assets with leases with the following important customers. Citadel at 350 Park Avenue, PJT Partners and GIC at 280 Park Avenue, King & Spalding, Selendy Gay and Cushman & Wakefield at 1290 Avenue of the Americas and Shopify at 85 Tenth Avenue. Additionally, at PENN 1, we maintained strong momentum with another 300,000 square feet of deals, highlighted by new leases with Samsung and Canaccord Genuity. Just as a reminder, since we started our redevelopment efforts in the PENN District, we have leased over 2.5 million square feet of office at average starting rents of $94 per square foot, a significant increase on what these buildings achieved previously. Our fourth quarter activity led the overall market's leasing volume upturn as we completed 17 leases comprising 840,000 feet at starting rents of $100 per square foot. Even with our very strong close to 2023, our leasing pipeline heading into 2024 is robust. We currently have almost 300,000 feet of leases in negotiation with another 2 million feet in our pipeline at different stages of negotiation, including a balanced mix of new and renewal deals. Turning to the capital markets now. While the financing markets for office remain very challenging as banks continue to deal with problem loans, we are starting to see some stability with the Fed potentially cutting rates in 2024. Fixed income investors are constructive again on high-quality office and unsecured bond spreads for office have tightened significantly over the past couple of quarters. That being said, we are still away from a healthy mortgage financing market in office. And most office loans will have to be restructured or extended as they aren't refinanceable at their current levels. More broadly, lenders have no appetite for construction financing across most property types which should keep a lid on new supply. Conversely, the financing market for retail is now wide open, now that the sector has bottomed. As always, we continue to remain focused on maintaining balance sheet strength. Even in this challenging financing environment, our balance sheet remains in very good shape with strong liquidity. We are actively working with our lenders and making good progress pushing out the maturities on our loans, which mature this year. Our current liquidity is a strong $3.2 billion, including $1.3 billion of cash and restricted cash and $1.9 billion undrawn under a $2.5 billion revolving credit facilities. With that, I'll turn it over to the operator for Q&A.

And our first question comes from Steve Sakwa of Evercore ISI.

I guess first question for Michael or maybe Glen, just kind of on that, I guess, pipeline, the 2 million square feet that you talked about, could you maybe tell us a little bit how much of that is for kind of the existing portfolio, how much of that is for the development such as PENN 2? And in that discussion, can you just talk about the upcoming expirations in '24? Are there any large known move-outs this year that you might know about that you could share with us?

Steve, it's Glen. In the pipeline mentioned earlier, there's a good distribution, including PENN 1 and PENN 2. Activity is continuing to strengthen at both locations, with PENN 2 receiving exceptional reception and record tour volumes. People are amazed by it. The pipeline reflects ongoing activity at both PENN 2 and PENN 1. Regarding the expirations in '24, we've handled that situation effectively so far. At 1290, we've leased over 50% of the space set to expire in '24, thanks to major tenants like Equitable. At 280 Park, we have re-leased more than 200,000 square feet of the 275,000 square feet expiring in '24 and '25, while also securing PJT, which was set to expire in '26. At 770 Broadway, we are still active in the market. This building is more aligned with larger tech and media firms, and we anticipate it will perform well due to its excellent location and solid structure.

Just a quick follow-up. Are you saying 770, does that have a Meta expiration that...?

It does. It is a Meta expiration of 275,000 feet in June of this year.

Of what's left, the rest is Meta.

Yes. So, Meta, after the expiration, Steve, we'll have another 500,000 feet long term in the building.

Okay. Great. Regarding the second question, I noticed that you delayed the stabilization of PENN 2 by a year, which certainly makes sense given the current challenging market conditions. However, you also maintained the yield. Can you help us understand that? Additionally, from an accounting perspective, if leasing does not occur soon this year, could that lead to a potential earnings drag in '25 due to the inability to continue to capitalize costs on that project?

Steve, it's Michael. Regarding stabilization, we have extended it to 2026. It's taken a bit longer to gain traction, but as Glen mentioned, the response to the delivery has been excellent. We anticipate the situation will improve. However, we want to remain realistic, which is why we extended the timeline. The yield is calculated based on approximately $759 million in costs and does not account for carry. This is the net operating income over the initial cost, which is straightforward. We believe there could be delays beyond 2025 if the project isn't completed, but we are confident in our current pipeline and projections.

The next question comes from Michael Griffin of Citi.

Steve, I know in your opening remarks, you talked about the stressed opportunities you're seeing out there in the market. Can you maybe quantify kind of what those opportunities could be? And when you look at kind of capital allocation priorities, would it make sense to take advantage of those, maybe relative to buying back your stock or starting new developments?

There are three opportunities: the first is buying back our stock or reallocating capital. The second involves paying off debt and reducing leverage a bit. The third is strategically acquiring new assets, but we are only interested in doing so at distressed prices. As I mentioned, foreclosures and property givebacks are happening at an increasing rate, so there are still opportunities available to us. I don’t have any specifics on our potential actions, but our top priority is addressing the debt maturities. After that, we'll focus on acquiring assets. We will also respond opportunistically to fluctuations in our stock price over time.

Great. And then I was wondering if you could comment on the recent news about a rent reduction from a tenant at 650 Madison. I know you only own 20% of this building but is there a worry that we should extrapolate this in terms of kind of future rent roll and maybe a sign of things to come from a leasing and rent perspective?

The interesting thing is that some industry papers often get it right, but in this case, they got it completely wrong. The facts are that the $60 number was a net figure. If you gross it up, it's around $100 a foot. Glen is telling me it's slightly less than $100 a foot, so it's probably in the low $90s.

The next question comes from Camille Bonnel of Bank of America.

Can you talk a bit more to the retention levels of the overall portfolio in 2023? How did it track versus your expectations? And with the lack of new supply on the horizon, do you think this will pick up in '24?

It's Glen. Our retention rate was strong. As I mentioned, the leasing that we've gotten done, the renewals, that thing went better than we originally had thought at the beginning of '23. And in our pipeline that we referenced, we have very good activity on forward lease expirations. We're definitely finding that CEOs, the decision makers of these tenants who are expiring forward, are now coming to us earlier than they have been over the past few years because there's less and less quality blocks of space available to them. So I would say definitively, the renewal program is stronger than it had been. We're in very good talks with many of our tenants going forward and I think it's showing in our leasing activity numbers, especially with the volume we had during '23 and what we're now seeing in '24 already.

You make a good point about the lack of supply. The dynamics driving the office market are likely to improve quickly, especially since new construction is constrained in the current capital market. There will be no new supply coming onto the market. The buildings constructed in the previous cycle are being quickly absorbed, and the trend is leaning towards tenants preferring high-quality spaces, whether they are brand new or fully renovated. The older buildings, which number between 100 million to 150 million square feet, are becoming obsolete and irrelevant, leading to their decline. Consequently, the marketplace isn't as large as 400 million square feet; instead, we're looking at a market of around 200 million square feet, resulting in a significantly different supply-demand dynamic.

Appreciate the color there. And given retail seems to be a bit of a bright spot in your portfolio, can you also talk about how your leasing pipeline is looking for that side of the business?

Sure. I appreciate you recognizing that retail is a bright spot. I think it feels like investors wrote it off and with everything that's happened in the marketplace, forgotten that we still own the most and the highest quality retail in New York City, as Steve alluded to in his opening remarks. So these are scarce property assets. I think the value is being recognized. We've talked about the last couple of quarters and it continues in our leasing pipeline. We got activity across the board, really on all the spaces. Where there's vacancy or rollover occurring, we have tenant activity, in some cases, multiple tenants for those spaces. And rents are clearly rebounding. So I would just sort of say, stay tuned. We're optimistic in terms of what's coming down the pipe based on what we're working on right now.

There is definitely a finite supply of the highest quality retail space, which is what the marketplace wants. And then I hope you noticed, I have a new financial metric for retail, which is called half block price. And we got a lot of half blocks in the best place.

I appreciate that. And just finally, on the G&A side, you've managed to control those costs quite well since the pandemic but it did pick up last year due to some additional stock expense. Is this a reoccurring event going forward? And are there any key considerations for '24 that will keep your G&A at the current or higher levels? Just for instance, less capitalized interest from your development program now that PENN 1 is out of the pool.

No, capitalized interest will remain similar. Some of the general and administrative costs will decrease since they were related to a one-time event. However, what you're referring to is the compensation plans we established to retain our talent in a challenging environment. We implemented these plans in June, which are entirely tied to stock performance over the next three to four years. If shareholders perform well, employees will benefit as well. This expense was higher in 2023, but I believe it will start to normalize as we move into this year.

Tom, how many years are we writing off the expense for the comp plan?

So it's 4 years.

So, say it again...

Accelerated.

The expense we are writing off from the equity compensation plan issued in June will span over four years. As this rolls off, our general and administrative costs will see significant benefits soon. As I mentioned earlier, it’s like climbing a mountain and then coming down the other side. The increase in interest rates has negatively impacted our earnings to a considerable extent, but this trend is expected to reverse when the government starts lowering rates, which will happen. Additionally, Michael mentioned that our earnings will be affected by turnover, separate from the lease expirations. However, these spaces will be filled, and income will follow. Therefore, these reductions in our earnings are temporary and will definitely recover.

The next question comes from John Kim of BMO.

Given your insights on the recovery of street retail and the strong pricing, are you considering taking advantage of this momentum to sell? Do you believe market rents will continue to improve, or should we just update our estimates based on this situation?

Hi, John. Well, the first thing is we're enjoying the bounce back from the retail. I mean, retail had a target on its back threatened by e-commerce, et cetera. And that has all evaporated and now retail has become the vogue. We believe that the asset prices of the assets that we own has increased dramatically from the bottom. And we may take advantage of those prices by selling assets from year-to-year, from here every once in a while. We've already sold a chunk of assets that we really thought were not part of our core. So we've sold some, we may well sell some more and we're absolutely convinced that rents are going to rise. Will they rise to the peak pricing that they were 5 years ago? Probably not but they're certainly going to rise from here.

Okay. Do you think you'll get the same pricing you got originally when you established that joint venture? In other words, have its pricing and assets reached peak level from...?

We're delighted with the pricing that we were able to achieve in our last joint venture. We're not going to speculate on what the pricing will be.

John, that's speculation. If you consider the prices that Prada and Kering paid and Steve mentioned the half blocks, analyzing what our portfolio could be worth makes it reasonable to suggest that we might return to those levels. Who knows what will happen over time. However, the key point is that two of the most significant retailers in the world have expressed that Fifth Avenue is crucial to them. They want to be there for the long term and are willing to pay a substantial price for that presence. Historically, there tends to be a momentum where other retailers follow suit, considering their positions on Fifth Avenue. Therefore, it isn't far-fetched to believe these won't be the last two transactions that take place on Fifth.

And Michael, you mentioned an impairment that you've taken this quarter related to joint venture assets you're looking to exit. Is it this retail joint venture that you're discussing? Are there other assets? And if so, which ones are they?

Yes, not the retail. The worst is behind us, as we mentioned. These are just a few smaller assets, primarily office properties, and they are in joint ventures. As you should be aware by now, given the recent retail developments, the accounting treatment and impairment methodology differ significantly between joint ventures and wholly owned assets. We plan to divest this small number of assets over the next two to three years, which leads to a different accounting approach and therefore the impairment. This is an accounting standard, and the ultimate proceeds are yet to be determined. However, it pertains to just a few smaller assets.

But there is no doubt that in this cycle, values have fallen. So when interest rates go from 3.5% to 8% that has an enormous effect on value. And so therefore, I'm very pleased that the impairments were as small as they were actually.

And just to confirm, this does not include 1290 or 555 Cal?

No.

That's correct.

The next question comes from Dylan Burzinski of Green Street.

I have two quick questions regarding occupancy for both the office and retail sectors. It seems that for New York office, occupancy is expected to reach its lowest point throughout 2024. Additionally, since some of the move-outs have already been leased, we should anticipate a fairly rapid recovery as we move into 2025 and beyond. Would you agree with that assessment?

It's Glen. I think that's fair. I think you'll see it dip over the coming quarters based on what we talked about earlier. And based on the pipeline, we'll come right back up. I think it's fair what you characterize it. Yes.

Probably flattish for '24 though overall.

I want to provide an update on occupancy. Currently, the market occupancy is in the high teens, while our occupancy is around 90%, perhaps slightly below that. Historically, our typical occupancy has been just over 95%, roughly 96%. The gap between 96% and 100% can be attributed to structural vacancy, as it's challenging to reach 100% with a large portfolio exceeding 20 million square feet. Thus, our vacancy rate reflects the difference between 96% and 90%, which is about 6%. We believe we can improve this, and while we will strive to do better, we consider this a solid performance given the current soft market. Moving forward, as market conditions normalize and our occupancy increases from 90%, we expect a significant boost to our earnings. This is definitely something we look forward to.

Great. And I think that kind of sort of leads into my next question, is on the retail side of things. As we look at the portfolio today, I think in your disclosure, you guys say, occupancy is high 70s, pre-COVID you were mid-90s. I guess just, how do we think about the recovery there given some of the comments that you guys laid out regarding the leasing pipeline?

The retail occupancy is somewhat unusual. It includes the Manhattan Mall and JCPenney, which vacated a couple of years ago. That's an 11-point occupancy. Is that correct? What’s the next one, Tom?

We have Farley, the retail there.

And then Farley, we have something on the Ninth Avenue side, so between those two, we're probably in the mid-80s.

The next question comes from Vikram Malhotra of Mizuho.

I want to revisit your comment about FFO reaching a low point in 2024. I have two clarifications regarding what you said. First, concerning the Facebook lease, is it clear that the approximately 200,000 square feet that is expiring will be vacated, while the remaining space will continue to be occupied long-term? Second, could you provide a rough estimate of the move-outs you mentioned and the FFO impact for this year?

On the first question, the remaining Meta 500,000 feet is long term. That's correct.

The 270,000 feet represents just one aspect for this year. As for the rest, we don't provide guidance since there are various factors at play. While you can quantify the specific three situations we discussed, there are other elements involved too. I don't want to focus solely on those three to determine the impact because that wouldn't present the complete picture. Overall, we anticipate a negative outcome. The extent of that impact will depend on developments across the entire portfolio.

I have a follow-up question for clarification. Are you saying that due to the move-outs and the effect of interest rates, you expect occupancy to decline? Are you suggesting that lease rates will eventually rebound, which would then aid in the recovery of FFO in 2025? Is that accurate? Is there anything else significant to consider in this situation?

No, I think that's fair. As we lease up PENN and some of the other vacancies that Steve mentioned, which aren't just due to natural turnover, it's going to support that as well. But I believe your general comment is accurate.

I agree that’s correct. To summarize, interest rates have increased, which has been challenging, but they will decrease. They won't drop to zero, but they will go down, leading to an increase in our earnings. Our occupancy is expected to rise from around 90% to a higher level, which will also boost our earnings. Additionally, within the next two years, 2 PENN will start generating rental income, which will likely exceed $100 million. These figures are significant. Overall, you are entirely right.

Okay. Great. And then, Steve, just one last question. You mentioned external growth opportunities and the importance of deleveraging. I'm assuming FFO growth is a priority. So as you and the Board consider awarding executives long-term incentive plans going forward, what might be one or two of the key metrics that could differ over the next five years compared to the last five years in assessing those LTIP awards?

I can't provide a specific answer to that. We typically do not offer guidance for the next quarter, and forecasting over the next five years is quite challenging. To address your complex question, Vikram, we are primarily focused on New York. I don't foresee us expanding into new areas unless we can replicate our existing depth of knowledge and experience. Essentially, we are a New York-based company, and unless unexpected circumstances arise, I anticipate we will remain so. We did establish a presence in Washington some time ago, which we eventually separated into its own company and I believe it presents a great opportunity. Additionally, we spun off a major shopping center company in the Northeast. While we do have experience in various regions, I expect our main operations to remain centered in New York. It is likely that we will continue to be a significant office company. I have mentioned previously that we will avoid acquiring conventional office spaces at full prices. Our approach will be to purchase at reduced prices for the finest office buildings. We have some residential properties and I would like to expand that sector a bit more. Our plans for development in the PENN District are critical to our future and could be the most significant project in the country going forward. However, current capital market conditions prevent any development in the PENN District as the financial viability is not there. Once the market improves, we will explore residential building and possibly partner with a residential developer to sell some land. While we can't predict the future, I believe that in five years, we will continue to be New York-focused, predominantly an office company, and the PENN District will play a crucial role.

The next question comes from Alexander Goldfarb of Piper Sandler.

Steve, regarding the compensation plan you implemented for 350 Park at the year-end, I noticed that last year the stock was struggling, and you revised the compensation plan in response to that situation, which we all understood. However, the comp plan for 350 came as a surprise, especially since shareholders will have to wait until the end of this year to determine their dividend for 2024. Could you explain how we should approach that compensation plan for a development project that won’t generate returns for another decade, particularly as earnings are declining this year and shareholders are waiting for their dividends? I want to better understand this, especially considering the update you provided for senior executives last summer.

Sure. Let me start by addressing your comment about the dividend. We have received a significant amount of feedback from shareholders, analysts, and industry peers suggesting that our approach to the dividend was the right decision. While we will adjust the dividend to a more appropriate level, we believe continuing to pay a higher dividend in the current capital markets is not the most effective use of our capital. It appears your perspective differs from that of many of your colleagues, who largely support our decision. Now, regarding the development fee compensation plan, this is something we've been considering for quite some time. The main goals are to retain and reward our most valuable employees, increase motivation, and provide incentives. The payouts from this plan will come from joint venture development projects, which we don't engage in frequently. For instance, our 350 Park project was one of our first ventures, and the PENN District is fully owned by us. The compensation will only be triggered by development fees from joint venture partners. We view this initiative as working in tandem with our shareholders, especially given that many industry peers now utilize outside capital, which we haven't pursued in the past but aim to do going forward. Although the scope of this plan is quite small and we do not expect it to have a significant impact, we have found that our overall compensation is lower than most of our peers. This plan is intended to provide performance-based compensation, separate from stock-based income which we cannot control due to stock price fluctuations. Eligibility for payouts depends strictly on third-party development fees, not on fees from our own ventures. We believe this approach aligns well with our interests and may have benefited from better communication. We did not adequately socialize this development compensation plan, presuming its small scale would be understood by shareholders. I acknowledge my error here, as we should have communicated our intentions more clearly. I find it disappointing to receive any negative feedback regarding this decision; however, I stand by it. I believe it is a fair way to reward our team, who, particularly at senior levels, are undercompensated for the demanding work involved in large projects in New York City, which often require nights and weekends. Our team deserves recognition for their hard work and commitment.

Steve but to that point, if it's a small amount, it would seem like something that's just part of the annual comp committee, like, hey, you, guys, did a great job, as part of your bonus for your 2023 or 2024, we're rewarding. So if it's a small number, it doesn't seem like that much of an incremental incentive. And two, it just seems like ordinary course that management is expected to do to drive value for shareholders and would be part of their regular course compensation. It's not clear why it would be a stand-alone.

I don't want to fully agree with you, but I would prefer if you agreed with me instead. However, no compensation plan is approved without going through the compensation committee of the Board, which considers all circumstances. So that's the situation.

The next question comes from Glen Weiss.

So we did not switch brokers. The Cushman & Wakefield team is additive to my team. Something we do not do often, as you know but here we decided to do it to cover the entire market, both regionally, locally and nationally. We brought in a great team. The team had just done all leasing over in Manhattan West, so it's additive, not a switch. PENN 1 remains the Vornado team and that was the reasoning for doing the PENN 2, add Cushman & Wakefield but no switch, no change, normal course of business.

Alex, I'm confident that the gold medal team of Glen and the rest of his team in-house has the strength and the ability, the franchise to do the job. But we're in the no stone unturned business. And so we thought that adding Cushman to have that extra look into the marketplace was a good piece of insurance and it's working out.

The next question comes from Caitlin Burrows of Goldman Sachs.

This is Julien Blouin on for Caitlin. Steve, regarding the dividend and adding to Alex's question, last quarter, you provided a really helpful breakdown of your 2023 expected taxable income. I was wondering if you could provide the same for 2024. And should we assume that the fourth quarter dividend will be again at sort of the minimum required taxable income level?

The answer to that is that we have a broad idea of what the 2024 taxable income will be, as you would expect. But it is not a number that we are comfortable enough with disclosing publicly. So that's the first one. The second point is, at this time, it's a financial policy of our Board to pay out the minimum dividend because from a capital allocation point of view, that's the right decision. We have had, as I said before, numerous investors, shareholders, analysts, peers tell us that's the right decision. The dividend, the most interesting part of the dividend, however, will likely be gains on asset sales because all of our assets have very low basis. So if we choose to sell an asset or 2 or 3 or 4, in '24, that will determine more than anything, what the dividend would be.

That's really helpful. And then maybe switching gears. To PENN 1, the ground lease renewal. I think you mentioned at the beginning of last year, that you thought the final number could come in lower than the original $26 million estimate just based on evolving sort of market conditions. Is that still your expectation? And I guess what is the latest update on that process?

I believe that’s my expectation, but there is someone on the other side who disagrees. We are currently in the arbitration process to determine the final number, and we cannot make any speculations on that.

The next question comes from Nick Yulico of Scotiabank.

I have a question regarding PENN 1. Based on the incremental yield you provided last quarter, I understand it's now in a more stabilized pool. It seems that there was a total of $59 million in future NOI, which I assume is on a cash basis. Could you clarify if any of that has already been captured and how we should consider the impact of that, if any benefits are expected for this year?

Nick, it's Michael. I can't provide the exact numbers right now. Some of it is expected in '24, but this is a rolling program that will continue into next year as well. Clearly, there's vacancy that will come online as it gets leased. So part of that is accounted for already. I can assure you that it’s not included in the development yields anymore. This project is completed. We're confident about meeting and hopefully exceeding the figures from our last publication. We can regroup to discuss specifics, but some of that will be in '24 and will roll in over the next one or two years as well.

I would like to share a couple of thoughts. Firstly, it's common for us to concentrate on the initial yield of an asset, but it's also valuable to consider its potential revenue generation over the next 3, 5, or even 7 years. For instance, we have confidence in the PENN District and the western part of Manhattan. When you combine PENN District with Manhattan West and Hudson Yards, it creates a very attractive neighborhood. We believe these assets will provide a satisfactory return immediately and will continue to appreciate as we hold them over time. Additionally, there are discussions about the importance of Penn Station versus Grand Central. Clearly, Grand Central's location at the foot of Park Avenue makes it more significant. Park Avenue is widely regarded as a major business corridor in the country, if not the world. We also have several assets along Park Avenue. It's noteworthy that New Jersey Transit only services Penn Station, and New Jersey is the fastest growing suburb of New York. We are very pleased with our position.

Okay. Just second question is on PENN 1 and PENN 2. You guys give only the occupancy numbers in South. And I'm just wondering if there's any way that you can give us a feel for like a leased rate for those assets or even think about how much of the leasing you've achieved so far of what your ultimate plan is on getting to these stabilized cash yields you talk about for the projects.

So much you're going to do regarding PENN 1.

As Michael mentioned, PENN 1 is a multi-year initiative. When we began this project, there were over 200 tenants in the property, which we are transitioning over the next five to seven years. We have successfully leased a significant amount of space in PENN 1 to date and continue to cycle through as lease expirations occur annually. This has proven to be very successful. We have leased over a substantial amount of space this year, with occupancy rates above 90%, and we have numerous opportunities in the pipeline. Similarly, regarding PENN 2, we have ongoing deal developments at PENN 2 as we speak. You can expect updates on this activity as we move into the first and second quarters of 2024.

Okay. Yes. And I appreciate all the commentary on the re-leasing. It's just honestly a little bit hard to understand where you guys are at in terms of the re-leasing of those projects? And at what point you're getting the NOI benefit because there's no like bridge provided anymore about the rolling out and the rolling in of NOI. So it's honestly very difficult to quantify what the benefit to the company is going to be over the next couple of years.

I would say, Nick, let's go through it. For PENN 2, we have about $1.4 million to lease up. PENN 1 is mostly taken care of; I would estimate that we've handled about half of the square footage so far, leaving another million to market. Between these two assets, over the next three years, we expect an additional $200 million in net operating income from them, possibly a bit less from Farley regarding the remaining retail. However, the majority will come from PENN 1 and PENN 2. That translates to a net of about $150 million in capitalized interest. This is as clear as I can state it; whether I'm slightly off on timing, that's the scale of the expected impact, and it's going to happen.

Great. I appreciate that extra commentary, Michael.

The next question comes from Anthony Paolone of JPMorgan.

I just have one. Michael, if I got your comment right earlier, I think you mentioned debt markets are pretty open right now for retail. And so I was wondering if that creates any opportunities for you all to get paid back on your prep interest in the JV in the near term at all.

Tony, we're pleased that the markets are opening, and we're beginning to assess the situation. However, we still need to focus on leasing a couple of those assets, such as the locations at 689 or Fifth and the former space at 1540. We have made progress in stabilizing two or three of the assets, but now it's emerging as a possibility rather than being off the table. As the markets continue to improve, we are absolutely focused on this and are collecting data to explore it further. However, we need to handle the leasing aspect first, and there's also a limitation on the scale of what can be processed at once. Our goal is to gradually recover that capital when opportunities arise.

I view the situation differently. The markets are currently open, meaning lenders are willing to lend at 8%. However, that rate is too high for us, making it not a viable option. This is not the right time to borrow aggressively unless absolutely necessary. From an academic perspective, it would be surprising to see our company aggressively refinance preferred shares or anything else at these interest rates. Regarding our liquidity, we have a significant cash reserve, and we see the preferred shares as a potential source of liquidity, but only if interest rates were lower than 8%. If necessary, this represents a liquidity source of $1.8 billion. Additionally, it's important to note that Penn Plaza is debt-free, along with PENN 1, PENN 2, Farley, and Hotel Penn site. Therefore, we have a substantial liquidity source, which we find quite interesting.

The next question comes from Ronald Kamdem of Morgan Stanley.

Great. I have just one question as well. I was reviewing the 10-K and noticed the detailed information in the footnotes regarding your expectations for releasing some of the maturities on the office portfolio. It appears that the office is stable, while the retail seems to be above 30%, which I found insightful. I'm trying to connect the dots between those re-leasing spreads. Earlier in the call, we discussed the possibility of occupancy declining in the latter part of the year before it rebounds. Could you help us tie that together into a same-store NOI figure? I understand you don't provide guidance, but could you share some general thoughts on how we should consider same-store NOI? Is it expected to remain flat, or might it slightly decline? How should we piece all of this together?

It's likely somewhat lower on the whole, but it really depends on the circumstances and timing. It’s difficult to provide much more specific guidance. Overall, your estimation of the office situation being flat on average seems reasonable. However, as Glen and his team have shown in the past, we will advance several leases that are set to expire and address those. So, it's challenging to pinpoint that number.

The next question is a follow-up from Steve Sakwa of Evercore ISI.

I have two quick follow-up questions. Michael, regarding G&A, you and Steve shared some insights. Can you clarify if you expect G&A to remain flat in 2024 compared to 2023, or do you anticipate a decrease in 2024 relative to 2023?

Well, it's going to come down. The developments we're done are not going to be there, right? I mean that was a last year item, that's not going to reoccur, this item, so that's going down. So the answer is yes, we think it will be down.

Okay. But just basically stripping that out, that's really the only kind of one-timer that would sort of come off the '23 number?

Yes, there are some items that were accelerated which won’t happen again due to historical vesting for certain individuals. So, overall, we anticipate that the development fee, which is around $10 million, will be removed in 2024.

Okay. Great. And then just a second follow-up regarding the refinancing you are working on with your partner at 280 Park Avenue. Could you provide any details about the situation, particularly if it has involved special servicing? I assume that was part of the process for getting that loan refinanced, so any insights or commentary you could share on that refinancing would be appreciated.

Sure. I'm not going to say too much given we're still in the middle of the process but it is a CMBS loan, going into special servicing, is part of the process of working that out. And we and our partner are making good progress on that and we expect to get to a successful resolution with terms that we think are attractive. So more to come shortly there. But we've been hard at work for the last 6, 9 months. The CMBS loans are painful, complicated, given the way they're set up. But you have the right sponsorship and I think they recognize that. So we're getting closer to the finish line.

That concludes today's question-and-answer session. I would like to turn the conference back over to Steven Roth for any closing remarks.

Thank you, everyone. We appreciate your interest in our company. We learn from you with every call. This was an interesting call, and we will see you at the next one. When is the next call?

May 7.

On May 7. Have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.