Good morning, and welcome to the Vornado Realty Trust First Quarter 2024 Earnings Call. My name is MJ, and I will be your operator for today's call. This call is being recorded for replay purposes. I would now like to turn the call over to Steven Borenstein, Executive Vice President and Corporation Counsel. Please go ahead.

Welcome to Vornado Realty Trust's first quarter earnings call. Yesterday afternoon, we issued our first quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents, as well as our supplemental financial information packages, are available on our website, www.vno.com, under the Investor Relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q, and financial supplement. 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've been busy. Let's start with Bloomberg. As a reminder, 731 Lexington Avenue, the mixed-use tower whose 950,000 square foot office condo is Bloomberg's global headquarters is owned by Alexander's, a separately traded public REIT. Vornado owns 32.4% of Alexander's. The background facts are: Bloomberg lease expires in February 2029, and $500 million of debt on the office condo is due next month, June 2024. Yesterday, we announced that we renewed and extended the Bloomberg lease for an 11-year term to begin in February 2029 and take us through February 2040. So 16 years of term from now. As you can imagine, a redeveloper in town tried to poach Bloomberg, and of course, they looked at every opportunity as they must. We are delighted that they chose to stay with 731 Lexington. By the way, the building is as much Mike's creation as mine. He had significant input into the design of the original building. The design of the building and Bloomberg's internal fit-out are on par with what we would have built today. But of course, now they don't need to. The terms of the lease were filled out in yesterday's SEC filings, tenant concessions in the form of tenant improvements and free rent have been established, and the net rent will be the subject of an appraisal in 2029 with then rent adjusted up or down no more than 10% either way based on the rent market conditions. We're in the process of refinancing this asset, but I must say, I am not excited about paying today's market rate of 7% or even 8% for debt with all the trappings of leasing reserves, cash suites as such, which are admittedly protective of the lender, but don't do much for our equity value. As we speak, my personal favorite is to pay the debt down and maybe even pay the debt off. We shall see. Now let's focus on our credit lines. Traditionally, we've had two separate but similar credit lines with staggered maturities. One credit line for $1.25 billion has been renewed through 2027, and the renewal of the second credit line was finalized last Friday at a reduced amount of $915 million, with a term extended to April 2029. As expected in these times, several banks dropped out. We use our credit lines very sparingly, generally for short-term requirements with a known source of repayment and rarely have we exceeded 25% drawdowns. Now to 280 Park Avenue. We own 50% of 280 Park Avenue. Since our joint venture partner has already reported, I'm guessing you are all pretty much up to date on the details. What we did here was extend the maturity of the senior loan for four years, keeping the rate constant with no pay down, but posting significant cash reserves for future leasing. Several analysts have commented that the loan and the equity value pretty much cancel out, and that fact allowed us to discount the mezzanine loan at $0.50 on the dollar, realizing a $31.3 million gain at share, which we will recognize in the second quarter. This is not yet a big win, but it does create a cheap warrant on a wonderful asset located in Prime Park Avenue where there is already a very low 7% vacancy and a shortage of space. We think it's a first-class bet. By the way, we are leasing very well here. We continue to protect our balance sheet with interest rate caps and swaps, but when a 3% loan matures into a 7% market, there really is no place to hide. We continue to prospect for good real estate in distress, where our best-in-class operating platform can be helpful to the lender. We expect these opportunities to accelerate. The gold rush on the part of the luxury brands to own, control, and dominate the very best locations is accelerating, and the knock-on effect on prime New York City retail space is palpable. It should be noted that in New York, we have much more prime retail space than anyone else by a wide margin. Some commentators have noted that the Fifth Avenue and Times Square values seem to have recovered to the pricing of our retail joint venture sale from five years ago; it would seem so. I continue to strongly believe in the contrarian bull case I made in my annual shareholders' letter that basically with frozen supply, i.e., no new developer office starts and none on the horizon, tenant requirements picking up, and vacancies shrinking, I couldn't be more optimistic about the future. And also note that while the New York market has a huge 422 million square feet, when you cancel out the non-prime space, we really only compete in a much smaller 177 million square foot market. Great things are happening in our PENN District. Come by and take a look. Our team here at Vornado couldn't be more optimistic.

Thank you, Steve, and good morning, everyone. As expected, the financial results for the quarter were down from last year due to items that we previously forecasted. First quarter comparable FFO as adjusted was $0.55 per share compared to $0.60 per share for last year's first quarter, a decrease of $0.05. This decrease is primarily driven by lower NOI from higher net interest expense and no move-outs, partially offset by lower general and administrative expense. We have provided a quarter-over-quarter bridge in our earnings release in our financial supplement. However, from New York business, same-store cash NOI was down 5.1%, primarily due to the aforementioned expirations. As we indicated in our last earnings call, we expect our 2024 comparable FFO to be down from 2023 comparable FFO of $2.61 per share, primarily due to higher projected net interest expense of about $0.30 per share and the impact of known vacancies at certain of our properties, primarily at 1290 Avenue of the Americas, 770 Broadway, and 280 Park Avenue. We anticipate the impact of these expirations in 2024 to be roughly $0.25 to $0.30 per share. We expect this impact to be temporary as we have already leased up a good chunk of this space, but the GAAP earnings from these leases won't begin until sometime in 2025. We then expect earnings to increase as income from the lease-up of PENN and other vacancies comes online and as rates trend down. Now turning to leasing markets. The New York office market continues to show signs of strengthening. While first quarter office leasing in New York took a bit of a breather from the strong year-end, there is a healthy backlog of activity with a number of large deals in the works. Overall, tenant space requirements continue to trend upward, sublease space continues to fall, best-in-class renovated and amenitized product located in transit hubs continues to dominate leasing, and the new supply pipeline is close to zero. These dynamics set the table for continued improvement and conditions in the upper tier of the market, which we are already experiencing in our best-of-class portfolio. Overall, asking rents are stable, even rising in the top-tier properties, but concessions remain stubbornly high across all submarkets. The financial services and legal sectors are continuing to drive the leasing activity as both are in growth mode. We are also seeing the first signs of life in the tech sector again after a couple of years of being on pause or downsizing. Our experience is when they grow, they tend to lease big chunks of space. The Midtown and new West side markets are outperforming as leasing activity in Midtown is strong, not only on Park Avenue but also on Sixth Avenue, in the Fifth Avenue, Madison Avenue Corridor. On the West side, tenant demand continues at pace. If you walk from Seventh Avenue to the Hudson River, you will see why. Turning now to our leasing activity. After completing a slew of large leases in December 2023 and finishing last year with a market-leading 2.1 million square feet of deals, we expect that a more muted first quarter of completed transactions given where our deal pipeline stood in the negotiation process. In the first quarter, we leased 291,000 square feet at a healthy $89 per square foot, reflecting the overall quality and premium locations of our properties. The highlight of the quarter was our 125,000 square foot headquarters lease with Major League Soccer at the new PENN 2. MLS had been in the market for some time, looking mainly in the Midtown core until late in their process when they toured PENN 2 and were wowed by what we've done with the building in the district. The project is now complete and really shows terrifically. Our new town hall event space is open. By the way, we hosted our first event just two weeks ago attended by 300 people. The rooftop, pavilion, and park are truly spectacular. Tenants are responding positively to everything that we've done and what's still to come. We have a significant pipeline at PENN 2 and are busy negotiating proposals with tenants across a variety of industry sectors. In addition to the significant Bloomberg lease renewal of almost 1 million square feet we just completed, our leasing pipeline is strong with 370,000 feet of leases in negotiation and another 2.5 million feet of proposals out on the street in different stages. Much of this activity is not only addressing current vacancy but also forward-looking expirations. As discussed on the fourth quarter call, when we foreshadowed an occupancy decline due to the known Q1 move-outs at properties such as 1296 Avenue and 280 Park, we are pleased to report that we have already taken care of half of the 2024 and 2025 expirations in these properties with more activity on the horizon. Turning to retail. The retail leasing market continues to recover. As we discussed in our last call, Prada's and Kering's blockbuster retail deals on Fifth Avenue that occurred in December demonstrated their long-term commitment to Manhattan and has further energized the market, and there are other potential sales rumored to be in the works. Vacancy rates are now below prepandemic 2019 levels in most Manhattan submarkets, and retailers are willing to pay top dollar for the best locations. Our retail leasing activity has picked up meaningfully in the last couple of quarters with almost all our assets seeing significant interest. As evidence of the rebound this quarter, in addition to signing many leases in the PENN District, we completed an important long-term renewal at one of our Times Square assets at the highest annual dollar rent we've achieved in our portfolio since pre-COVID, over $15 million per year. Turning to the capital markets now. While the financing markets still remain challenging, we are starting to see some stability for high-quality products. The CMBS market has begun to selectively reopen for office lending at conservative metrics on quality assets with long weighted average lease term. Unsecured bond spreads for office continue to tighten. The market is much more open for high-quality retail. That being said, coupons are still high. Banks remain on the sidelines and generally in workout mode, and there's more pain to come for all lenders given the volume of office maturities in the next few years. This will create opportunities for us. We have been and continue to be very active on the capital markets front. In addition to the recent extensions on 280 Park and 435 Seventh, we are also in the process of extending our other 2024 maturities, which we expect to complete soon. Finally and importantly, as Steve mentioned, just a few days ago, we finalized the recast of our revolver that was scheduled to mature in 2026 for $915 million. Completing this refinancing solidified a key portion of our liquidity through 2029 and gives us significant runway to deal with any challenges over the next few years. It also highlights the continued support of our key banks in this challenging environment. Our balance sheet remains in very good shape with strong liquidity. Pro forma for the new revolver size, our current liquidity is a strong $2.7 billion, including $1.1 billion of cash and restricted cash and $1.6 billion undrawn under our $2.17 billion revolving credit facilities.

Today's first question comes from Steve Sakwa with Evercore ISI.

Michael, I was wondering if you could just follow up a little bit on the comments you made about the pipeline? And just maybe help us think through how much of that 2.5 million square feet is maybe earmarked for our PENN 2 in the development? And how much is geared for, I guess, future rollovers? And how much is geared to kind of current vacancy in the portfolio?

Glen, do you want to take the lead on that?

Certainly. I would say it's a very balanced mix of what you described. We're experiencing an increase in proposals for PENN, both PENN 1 and PENN 2, following our Major League Soccer lease. We're also seeing tenants with upcoming expirations reaching out to us for early renewals, similar to what we did with Bloomberg this week. Additionally, much of the pipeline is focused on addressing expirations at buildings where we currently have available space. Overall, it's a healthy mix across the portfolio, including PENN and others.

Okay. As a follow-up, Michael, I want to clarify some of the information you provided about the earnings impact from lost occupancy this year. Just to be clear, if you're accounting for the $0.30 decrease due to interest expense and now you're estimating a $0.25 to $0.30 decrease from the known vacate, some of which has been released and might rebound in '25 and beyond, it seems you’re indicating a total drag of about $0.60 this year as we look towards '24, with other potential positive offsets that could raise that figure a bit above the $2 level.

Yes. In terms of the details, I think that's accurate. We discussed interest last quarter and reaffirmed the $0.30 this quarter. The known vacates are estimated between $0.25 and $0.30, and as we've mentioned, we have already backfilled a lot of that at 1290 and 280. We are actively working on many projects. There are factors that could certainly improve that number, but our goal today is to provide a more cautious perspective. I can’t predict the exact outcome, but if you assume the worst case scenario of $0.30 plus the $0.25 to $0.30, you could expect a range of $0.55 to $0.60. That seems like a reasonable baseline. Our aim is to exceed that, but there is still a lot of uncertainty.

Steve, let me just tack on, on that for a second. So I mean, the numbers that you mentioned that and that Michael just mentioned, they're accurate for this year. Let's build from there and see what the company's future looks like on an almost certain basis. So if you start with re-renting the vacancies and we get back from whatever we are now to our normal 96%, 97%, 98% occupancy, that adds a big number to our earnings. When 2 PENN comes online, that's another $100 million, give or take, of earnings that comes online that is brand new. If interest rates settle down into some kind of stabilized number, that also improves earnings enormously. So the company has the earnings potential of being, we think, pretty spectacular. And that's what we're shooting for. So we're looking at it not on a one-month or quarter basis; we're looking at what the company's earning power would be, pick a number, two or three years out, okay? And we are extremely excited about that.

The next question is from John Kim with BMO Capital Markets.

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

I believe it's both, John. We have some of the best products available in both categories. We've engaged in more tech leasing than any other landlord in the city, and we have all the major players in our portfolio. Therefore, I expect that if the tech sector rebounds, we will capture more than our fair share. The tech sector has been quite inactive for the past 18 to 24 months, either on hold or, in some cases, reducing their space. However, in the last 90 days, we have seen a noticeable increase, which started small but is now showing more significant demands. We anticipate that some of these will lead to actual activity, and we are quite hopeful about that sector reviving. On the retail side, I'm sure you're aware, based on our previous discussions, that we own the best retail locations in the city. If you want to be on Fifth Avenue, especially with the limited availability, we are the primary choice in Times Square. The activity levels in both these submarkets have increased significantly; retailers are feeling confident and are keenly observing Manhattan's resurgence, as reflected in their sales figures. The announcements from Prada and Kering have undoubtedly attracted global attention and make other retailers reconsider their strategies, both in leasing and acquisitions. There have been rumors of additional transactions, but I believe the retail purchases are far from over. Given our portfolio, we are in an ideal position and expect to be actively involved in that market.

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

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

And can you confirm the starting rent for Citadel is reported at $35 million?

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

The next question is from Michael Griffin with Citi.

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

Glen, do you want to hit that?

Yes, yes, sure. It's Glen. I would tell you, no matter the submarket on new leases, tenant improvements are somewhere between $140 and $150 a foot, and free rent is somewhere in the 13-month to 15-month range. I think as it relates to submarket specific, it's really about the rent. So in some of the submarkets, we are seeing an uptick in rent where supply is tightening, as you would expect.

Got you. That's helpful. And then maybe just some color on lease expirations this year. It looks like there's a big one in the second quarter, about 3% of the overall rent. The space rent there right now seems pretty high. What's the likelihood of renewing or backfilling the space? Or is this one of those known move-outs that you described earlier?

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

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

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

The next question is from Floris Van Dijkum with Compass Point.

I want to focus on the market and get Steve and Michael's insights on the opportunities that may arise when $200 billion in office loans mature next year, along with another $100 billion the following year. What do you anticipate will happen with those loans, many of which may not be refinanced? How do you see Vornado positioning itself in this scenario? Is there a possibility for you to acquire some of those assets? Could this outlook contribute to the optimism Steve has expressed regarding the next couple of years?

So like, I think in terms of the debt rolling over, which is significant over the next two years, as we all know, the capital markets are not there to support refinancing the vast majority of that. And so I think what happens there is going to take one of a few forms. It depends on the quality of the asset, the sponsor of the asset, and what its future looks like. And we've seen some examples where the older obsolete buildings where debt rolls doesn't have a future as an office building or certainly with that sponsor and the lenders have taken it back or there's been a consensual sale of some of those assets, something like a 1740 Broadway would be a recent example. So I think we'll see a fair amount of that on some of those older buildings. Then there's a category where they just over-leverage where there is a future. And again, I think the lender will assess whether the sponsor has the wherewithal and the capability to either re-tenant or support the asset. In some cases, they will, in many cases, they won't. We're talking to the lenders about that. And I think they'll look for solutions, right? I think lenders in general know that taking back assets and operating them certainly in the office space is not a winning strategy. Value deteriorates fairly quickly. Tenants don't want to go into those buildings. So we do think there's going to be opportunity to work with existing lenders, be a solutions provider. We have a leading operating platform. We expect to deploy capital there. And I think it could be in either one of those buckets. It could be buildings that with our capabilities can be leased back up, stabilize, the value could be created, or it can be assets that can be repurposed from office to residential potentially. So the answer is we are actively looking. We expect to play in that. And I think we're still at the beginning stages.

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

Yes. I mean, look, I think our objective of deploying cash is not to invest in real estate that is going to generate core returns, right? And this is an opportunity that is, by the way, not for the faint of heart, right? I mean, you're taking risk, and you want to get rewarded for that. So the returns need to be attractive. So yes, I think the stabilized yields depend a little bit on the nature of the asset and where you think ultimate cap rates settle out for particular assets. But no question that the required yield are in the neighborhood that you mentioned.

Great. Maybe one follow-up regarding your retail segment, specifically your Fifth Avenue location, which you highlighted as unique. What do you believe market rents are at this point? I know your occupancy rate in the Times Square joint venture is around 92%, but if you were to negotiate rent today for Fifth Avenue, what would you estimate market rents to be for that space?

There have been a few transactions we signed, probably last year, indicating that rents at that time were in the mid- to high $2,000 per square foot range. While there may have been a low point in the $1,000 to $1,500 range, I believe we're now back to the mid-2s, potentially even low 3s, depending on the specific circumstances. For luxury spaces, given their scarcity, rents could be even higher. Fifth Avenue is a unique market, and it's challenging to generalize; it’s a very rare asset class. In the right situation, rents can approach peak levels, but for less desirable assets, achieving that might be more difficult. Overall, I believe rents have rebounded significantly and continue to rise. The recent lease we signed in Times Square supports this trend, and we anticipate that it will carry on.

The next question comes from Dylan Burzinski with Green Street.

I want to revisit the acquisition topic. Given the current scarcity of debt financing, is there any interest in approaching this from a debt standpoint or potentially considering a loan-to-own strategy? Or are you primarily focusing on equity options at this time?

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

Got it. As you consider opportunities, are you focused solely on office spaces, or do you also see potential in other retail areas?

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

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

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

The next question comes from Alexander Goldfarb with Piper Sandler.

I have two questions. First, Michael, it's great to hear about the recovery in street retail rents; it's been quite a journey. The first question is for Steve regarding the Bloomberg lease. When we look at the quarterly report, the rents mentioned seem to be a sliding scale that will be addressed in future negotiations. So, it's not a fixed rent that simply increases; rather, that's the range for the upcoming discussions, correct?

Alex, you published information indicating a 25% discount in the rent, which I believe is incorrect. The deal is structured such that the basic rent for that building is primarily net. Out of the 950,000 square feet, only about 50,000 square feet is growth, while the remaining 900,000 square feet is net, so we can consider it a net lease. There is a rent increase scheduled between now and 2029. At the end of 2029, the net rent will be $98 per square foot, which translates to over $150 when grossed up. That serves as our starting point. Importantly, we are renewing and extending this lease five years prior to its expiration, which means we must consider the uncertainty of the future and potential contingencies. We have determined the tenant concessions, tenant improvements, and leasing commissions associated with this arrangement, all of which are frozen. The starting rent is also fixed. From here, a market-based appraisal will indicate the appropriate market rate at the end of the lease term in 2029, factoring in the previously established tenant concessions. However, it's crucial to note that the rent cannot exceed 10% above the $98 per square foot net or fall below 10%. This agreement provides clarity on the minimum rent, which will be determined as fair market rent. Both tenant and landlord view this as a fair and wise approach to managing future rent expectations. There is no part of this deal that anticipates any reduction in the rent; rather, it will be resolved through market arbitration.

Steve, thank you, and I apologize for the mistake. Your clarification is that the rent that is mentioned...

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

So basically, the way the rent is characterized now is that the $29 million per quarter is considered gross, while the rents that are pending for the terms are now net. It seems that's where my confusion arose. Is that correct?

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

Okay, great. The next question is about the rents for this year in relation to Steve Sakwa's inquiry. Michael, you initially indicated that the rents were down by $0.25 to $0.30. It now appears to be down by $0.55 due to further lease terminations. Was there something unexpected that caused this, or did I misunderstand? I just want to clarify whether there were unforeseen issues or what is driving the greater impact on earnings this year.

Yes, there may have been some confusion regarding this. In the last call, we mentioned it was early in the year and provided clarity on the interest reduction, which was largely determined by hedges that were set to expire. We knew the timing of those expirations, and we also noted that there would be an impact from the known move-outs, which we specified. However, with many more move-outs occurring, we didn't detail the impact of those numbers at that time. We are now providing that quantification for everyone's benefit in this call. There are no surprises; we are just trying to clarify things more as we are now in May compared to where we were previously. Looking ahead, more changes may occur, and the overall number could decrease. Currently, we recognize a specific set of properties, particularly 1290, 770, and 280, that significantly affect our situation. We've discussed re-leasing these properties extensively, and many deals have been announced. Our aim is to provide more precise information beyond the general statements we made last quarter.

The next question is from Michael Lewis with Truist Securities.

I'm going to follow up on the question regarding the re-leasing activity related to some of the known move-outs. I could estimate an occupancy rate based on that $0.25 impact. Could you provide details on how much square footage is associated with the known move-outs this year and how much of that square footage has already been addressed?

Do anyone want to take that or shall I take that?

So the bulk of the number is at 280 Park, 770 Broadway, and 1290 Avenue Americas. At 1290 and 280, we've taken care of as Michael said in his remarks, 51% of the role, so call it 500,000 of 1 million feet. And as we said at 770 Broadway, we have Meta rolling in June. Along with the current vacancy, we have pipeline activity on that space. So that's how we're approaching the big ones that are in that occupancy number. So as we've taken into account our pipeline of deals, as we take into account our expirations going through '24, we may see more of a dip in occupancy. And as we complete transactions during the next six to nine months, we expect that occupancy to then climb back as we get into 2025.

And then my second question is about THE MART. So occupancy dips down to 77.6% in the most recent quarter; prepandemic, that was always 95% to 100%. Could you maybe talk a little bit about kind of the roadmap there? And what you think stabilized occupancy or given that there's obviously some volatility with that asset. What may be like a stabilized kind of revenue figure might look like for THE MART?

So I'll start; Glen, you jump in. Like the Chicago market is obviously challenging right now, probably one of the more challenging ones in the country. But we do have decent activity on the asset. I would say that alluding to some of the prior questions, there's quite a bit of distress in Chicago office. Many landlords do not have the wherewithal to lease our assets given the debt situation there. We have an asset that has no debt on it, and so I think the sponsorship, the strength is well known by the brokers and the tenants, and I think that's helping us. We just finished what we call MART 2.0, which is the second stage of amenities that we have put in, business conferencing, etc. And again, the reaction has been positive. So the market is tough; cannot dismiss that. But I think we're seeing more than our fair share there. I think that's going to take probably three years to get back to stabilized occupancy realistically, maybe it's two. But I think when the income fully comes online, it's probably in the neighborhood. And our objective is to get it back into the 90s percent occupied, get a 95-plus percent and get the income back up to that $90 million to $100 million cash NOI basis. So there's a fair amount of growth to come there. But the market is, as I said, challenging right now.

The next question is from Caitlin Burrows with Goldman Sachs.

This is Julien on for Caitlin. One quick one. Can you comment on whether the leasing spreads in the quarter benefited from the PENN District leasing? And what that leasing spread might have been ex-PENN leases?

Yes. I think the answer is that the spreads, PENN 2 is Major League Soccer with the big lease in this quarter. That's a new lease, first generation. So didn't affect the spread.

It's good to understand. Regarding the debt covenant, it seems that interest coverage and fixed charge coverage have tightened somewhat this quarter. While I recognize that long term, the metric will improve due to the occupancy gain you mentioned from PENN District NOI, and it appears you also have some sales in progress. Could you provide insight into the anticipated trajectory for the upcoming quarters, especially considering the significant swap expiration at 555 Cal?

Yes, you're correct. The main impact this quarter was primarily due to the swap increase on PENN 11 this year. If I recall correctly, it was 17 basis points; unfortunately, it won't last indefinitely. That was the significant factor this quarter, along with a few other items. Looking ahead to the second quarter, you are right about 555. We have implemented another swap that will result in an increase. Moving forward, we still have adequate cushion in our covenants; fixed charge will become tighter over the next few quarters, but we maintain a buffer there. As income begins to flow in from some of these leases, that figure will increase again, although it will be somewhat constrained due to the 555 swap rate hike.

The next question is from Nick Yulico with Scotiabank.

I wanted to revisit the $0.25 to $0.30 impact from vacancy this year, which totals approximately $55 million to $60 million in net operating income compared to your total net operating income share of $1.14 billion last year. This indicates a roughly 5% loss in net operating income based on that calculation. I'm curious if there are additional factors at play beyond the vacancy impact you've mentioned. When I examine your report, it shows that 5% of your rent is expiring in New York this fourth quarter, but not all of it is expiring. Therefore, the 5% loss in net operating income seems somewhat elevated compared to the expirations this year.

There may have been one tenant that expired on December 31 last year. In summary, that's about it. The majority involves 1296, 280 Park, and 770, which account for that number. There are some positives and negatives, but those are the three main contributors. We went through a period with known move-outs, and we are in the process of backfilling those as we mentioned. That's the situation, and it occurred at various stages from December 31 until the last one, which is Meta, happening in the middle of this year.

The next question is a follow-up from Michael Lewis with Truist.

I have one more question. You sold two condo units at 220 Central Park South for about $32 million. Are the remaining four units similar in value, around $16 million each? I'm curious if you have a penthouse left or if there are smaller units available.

No. The remaining four units are smaller, lower view impaired, so they're much less valuable. Basically, that job is sold out.

The next question is a follow-up from Alexander Goldfarb with Piper Sandler.

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

Yes, the answer is yes, of course. There are a couple of things to consider. First, the building you're looking to convert has a price around $200 per foot or slightly below that. These are very distressed office buildings. I want to emphasize that they are indeed distressed. This pricing and the economics don't really allow for paying much more, perhaps just a little bit more, but likely not. Secondly, given these economics, the target buildings are in the B and C category of the office market. When these buildings are removed from the conventional office market, they don’t affect the prime A market because the tenants interested in A space generally don't consider them. So, as an industry, we will certainly be able to convert a decent number of buildings. It will make a difference in the residential market and the demand for residential space, but only a slight impact on the conventional Class A market. We are examining this closely; it's an intriguing opportunity, and we are pursuing it. However, I'm not entirely convinced that the returns on capital will meet some expectations. Nonetheless, we are looking into it quite vigorously.

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

Thank you all very much for joining us this morning. We always gain valuable insights from these calls, and we appreciate that. We are excited about the upcoming quarter and the future, and we look forward to seeing you in the next earnings call. Thank you.

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