Vornado Realty Trust (VNO) Q2 2026 Earnings Call Transcript

Good morning, and welcome to the Vornado Realty Trust Second Quarter 2026 Earnings Call. My name is Betsy, and I will be your operator for today's call. This call is being recorded for replay purposes. All lines are in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question-and-answer session. At that time, please press star, then one on your touch-tone phone. I will now turn the call over to Mr. Steve Borenstein, Executive Vice President and Corporation Counsel. Please go ahead.

Welcome to Bernardo Realty Trust's second quarter earnings call. Yesterday afternoon, we issued our second 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 package, 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 supplements. 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, 2025, 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 opening comments are Stephen Ross, 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 Stephen Ross.

Thank you, Steve, and good morning, everyone. We had another strong quarter with comparable FFO of 67 cents, leading analysts' consensus by 10 cents or 17.5%. Michael will review it all shortly. But first, let me cover what we are seeing on the ground. New York is clearly the best, strongest, and most important real estate market in the country and the most resilient. We are a Manhattan-centric office and street retail company with best-in-class assets which are benefiting from these dynamics. The stock market seems to appreciate this given our stock price performance year-to-date and over the past two years and the past three years has been the best in our peer group. And there is more to come. I believe our stock is still stupid cheap. For example, Green Street shows us at a 23% NAB discount, much deeper than our peers. The landlord's market that we've been predicting for the past many quarters is here. It is broad-based and it is strengthening. Altars leasing volume in Manhattan is at its highest level in 25 years. Tenants are expanding all over the city. Available space and sublease space continues to evaporate. And altars to residential conversions continue to remove square footage from the altars inventory. There is a serious shortage of large block availability. Vacancies in the 180 million square foot class A better building market in which we compete is now down to 6.2%, clearly a landlord's market. There is limited new supply on the horizon, and remember, new supply takes as long as five years to deliver and requires upwards of $300 rent to petrol. And to add to all that, interest rates are rising. As a result of all this good stuff, rents are going up. I couldn't be more constructive. in new york tenant demand spans across all industries law firms alone least 2.3 million square feet this quarter legal tech and media accounted for eight of the top 10 leases signed this isn't one industry having a moment all of our clients are growing interestingly a real estate platform that tracks these kinds of things recently reported that ai companies are now leasing more space in New York than in San Francisco. So, all good. At Grenado, our singular focus is on executing our plan to deliver the highest growth in our sector based on our lineup of high-quality assets and in-process projects. Here is our 2026 scorecard. During the first half of 2026, we leased 978,000 square feet overall. For a Manhattan office, we leased 659,000 square feet at $105.00, with mark-to-markets of positive 9.5% gap and positive 7.1% cash. I would note that these mark-to-market stats do not include our leasing activity at PEN2. We are following our transformation. We are achieving rents that are just about double the old rents. This is as good a place as any to take a victory lap for what we have accomplished at Penn 1 and Penn 2, financially, physically, and aesthetically. Think about it. At Penn 1, broadly speaking, we invested $200 per square foot to achieve a $50 a foot uptick in rents, which, when all gets said and done, is a 25% return. Rents at Penn are now well above our underwriting and are now the best value in town. So plenty of room to grow here. Our physical transformation is stunning and game-changing and award-winning. Please go take a look. During the second quarter in Manhattan, we executed 29 office deals totaling 328,000 square feet at industry-leading $107 per square foot average starting rent, with marked the markets of positive 7.7% gap and positive 5.0% cash. This quarter's leasing volume included 181,000 square feet in the Penn District and 167,000 square feet in our other Manhattan absence. We are now consistently achieving triple-digit average starting rents. I suggest that mark-to-markets is a squishy metric, which depends entirely upon which leases are included in the calculation and their rents. And so it's pretty random. Rather, I submit it is better to look at starting rents for new leases as a much more fine-tuned metric, which would allow for better comparisons of buildings to buildings and companies to companies. I can best do talking my book here, since our starting rents have led the New York office public peers for years now. In the Penn District, at Penn II, we have 67,000 square feet of leases out for signature, and we expect to be fully leased here, down to dribs and grams by year end. At Penn I, we have 246,000 square feet of leases out for signature, and an average mark-to-market of a whopping 44%. Company-wide, we are projecting third-quarter mark-to-markets of over 20%. I guess you could call this all-sort guidance. With all of this activity, we continue to review our pricing here on a bi-weekly basis. Importantly, given that roughly 10% of the space at Penn 1 rolls each year, we expect continuous score growth from Penn 1 as we keep marching old reds up to market. We continue to be delighted with our two most recent acquisitions, to 623 Fifth Avenue and Park Avenue Plaza. Thanks to Harrison for giving us a shout-out for these two deals on his call. 623 Fifth Avenue is our spectacularly well-located, and by that I mean in the center of everything, 383,000-squit-foot assets, which sits on top of Saks Fifth Avenue that we are redeveloping to be the 220 Central Park South version of boutique office space. We are off to a great start here, receiving outstanding reaction from brokers and tenants. We are about to execute our first lease for two floors with a financial services firm at rents consistent with our underwriting. Of note, even at this early stage, market demand is telling us to increase our asking rents above original underwriting. As you know, we recently acquired a half interest partnering with Fizzer Brothers at Park Avenue Plaza, a 1.2 million square foot tower on 53rd Street. The deal was at a valuation of $950 a foot, which for Prime Park Avenue is a third of replacement costs. This asset taking advantage of the in-place 2.9% mortgage loan with six years of term remaining is a coupon clipper at 8% cash on cash. So the way I look at this, we are earning double the risk-free bond rate from risk-free Park Avenue AAA real estate. Better yet, the in-place leases at Park Avenue Plaza are at, give or take, half-current market. So we expect very substantial capital appreciation here to go hand-in-hand with above-market current earnings. Our market-leading signage business in the two most important and highest traffic locations in Manhattan, Times Square, and the Penn District continues to grow at a healthy rate. We love this business. It's capital-like and has been growing at 5% per year. We intend to add more signage in the Penn District where we control almost all of the real estate around Penn Station and Madison Square Garden. If you drive a walk past Park Avenue at 52nd Street, you will see that our 350 Park Avenue site is now under construction, actually under demolition. We intend to shortly exercise our investment option to participate in this deal at our maximum ownership percentage of 36%, alongside Ken Griffin as our 60% partner and with Citadel as our 1 million square foot anchor tenant. Several commentators and analysts have suggested that we take the money and run. No, no, no. That would be incredibly short-sighted. In our business, there is no better place to invest than Prime Park Avenue with a billion square foot tenant at a 60%. We are contributing to our existing land and 65-year-old building at a $900 million valuation. We have the balance sheet resources to support this deal and all of our other financial requirements as well. We have a $3.3 billion construction loan ready to go. I think $3.3 billion may be a record. The partnership, and by that I mean all partners, is contemplating selling down at 25% interest at a price which will give us an appropriate profit and also give the buyers an appropriate profit. We expect the joint venture closing will take place in September. We are extremely excited and bullish about the potential returns from this project. The brokerage and tenant community is buzzing, and we are already getting incoming to available space, all of which is new space from 600 feet to 1,000 feet, from clients seeking the very best and for whom our delivery date fits their needs. At Frenado, management of our balance sheet is the highest priority. Michael and his team have worked very hard to get our debt ratio down into the sevens. We keep dry powder for offense and liquidity for defense in all cycles. We are in conversation to sell two non-essential assets which would very substantially increase our liquidity. Here is the status of our stock buyback program. This quarter, we repurchased 1.8 million shares at $29.92 per share. Since we have started buying back shares in 2023, we have repurchased 8 million shares at $26.61 per share. We will continue to take advantage of the stock as the opportunity presents itself. Just for kicks, on a final and interesting note, I recently heard an interview with Taylor Shetterman, the screenwriter, director, producer, and actor best known for creating the massively successful Yellowstone universe. I confess that I'm addicted to his stuff. Here's what he said about New York. Quote, I leaping love New York. It's the first place I lived after Chicago. It's a phenomenal city, and it's a city that I feel is much tougher. It endures a bad politician or two, and you can't tank it. New York just shakes off this stuff like a case of bad sleeves and keeps going. It doesn't matter the industry you're in in New York. If you're successful here, if you're a bricklayer, you're one of the best frigging bricklayers on the planet because there are 8 million people competing for your job. New York just mandates excellence of everybody in every way and in every field. End quote. By the way, when somebody asks who doesn't know me, what I do for a living, I say I'm a bricklayer. Now, Austin Michael.

Thank you, Steve, and good morning, everyone. Second quarter comparable FFO was $0.67 per share, compared to $0.56 per share for last year's second quarter, an increase of $0.11. This significant increase was primarily due to higher FFO resulting from rent commencements at Pen 1 and Pen 2. the impact from the NYU master lease at 770 Broadway being in the prior year, and higher NOI from signage revenue, partially offset by higher net interest expense. We have provided a quarter-over-quarter bridge on page two of our earnings release, and on page six of our core office and retail businesses are performing increasingly well and are now beginning to reflect the growth from leasing up Penn as well as our other vacancies. Our New York office same-store NOI was up 13.7% for GAAP and 11.9% for cash. Our New York retail same-story NLI was up 7.3% for GAAP and 5.7% for cash, and our New York business overall was up 11.9% for GAAP and 6.2% for cash. We now clearly expect full-year 2026 Comparable FFO to be higher than 2025, with second-quarter Comparable FFO being a decent average run rate for the rest of the year. As previously indicated, We expect there to be significant earnings growth in 2027, as the positive impact from the lease-up of PIN 1, PIN 2, and our other vacancies continues to take effect, as well as the positive impact of the recent acquisition of Park Avenue Plus. Turning to occupancy, New York office occupancy increased 60 basis points this quarter to 92.2% from last quarter, and up significantly from the trough of 84.4% in the first quarter of 2025. This significant pickup is reflective of the successful execution of our plans and the Manhattan Class A office market dynamics that we've been talking about over the past couple of years. Our New York office pipeline is robust and has over 2.2 million square feet of leases in negotiation and various stages of proposal, including the 1 million square foot Citadel lease at 350 Park Avenue and over 500,000 square feet in the Penn District. Based on our strong leasing pipeline, we anticipate that our occupancy will grow to north of 93% by year-end with further gains thereafter. Demand for our retail assets also continues to pick up. We are seeing new retailers, including many international ones, enter the market, as well as retailers in prime locations looking to renew their spaces early so as not to lose them upon expiry. Finally, turning to our balance sheet, our liquidity remains strong at $2 billion, which is comprised of cash of $789 million and our undrawn credit lines of $1.2 billion. We hope to bolster this further with the asset sales Steve referenced earlier. With that, I'll turn it over to the operator for Q&A.

We will now begin the question and answer session. If you have a question, please press star, then 1 on your touchtone phone. If you wish to be removed from the queue, please press star, then 2. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then one on your touchtone phone. Each caller will be allowed to ask a question and a follow-up question before we move on to the next caller. The first question today comes from Floris Van Dykum with Latenberg. Please go ahead.

Hey, thanks, guys. Because, you know, obviously we're starting to see some growth, which is very encouraging. Maybe could you talk a little bit about the gap between lease and economic occupancy today and where your peak physical or economic occupancy was in the past and how much more of a runway there is?

Michael. Good morning, Flores. um so you know historically um you know we ran uh at you know 95 96 occupancy on a physical basis um i think maybe touched a little bit higher occasion but i would say that was a pretty consistent run rate you know today we're at a little over 92 percent uh you know we expect that we'll get back to our historical run rate in the next couple years uh you know given the pace the market it could happen you know sooner than that so uh we're pretty confident about that uh from a you know economic perspective just given the um you know the the sign not commenced leases obviously that number is lower i think on a let's call on a gap basis which probably relates most directed earnings were probably 83 84 percent uh relative to the you know 92.2 so physically you You know, we should get back into the mid-90s, and obviously on a gap basis, you know, that will close up as those leases come online.

Flores, I'll put a little more meat on that. Our signed but not occupancy and not in our earnings number, the revenue side of that rents are $180 million, which is probably somewhere around $100 million. That will give you the number.

Thanks, Steve. Thanks, Michael. My follow-up question, and this is more of a broad question, because if you do the math, you know, the rents required to make, you know, 350 Park Avenue, you know, pencil out, you know, suggest that you're going to rent that building at around $350 a square foot. What kind of impacts will having these really, really high-end properties do to adjacent or nearby buildings? I'm thinking also potentially about the potential upside of your recent acquisition at Park Avenue Plaza.

The rents on the new buildings, your number is approximately correct. create an umbrella, and all of the older buildings which have in-place rents of less than that, and Park Avenue Plaza has rents of about a third of what you just mentioned, it will all suck them all up. So that what's going to happen is the combination of scarcity, the combination of everybody in New York expanding and looking for space, and the fact that there's a scarcity of And construction costs, interest rates, et cetera, require a very high rent for a new building. That'll cause, obviously, that's the reason we bought Park Avenue Plaza.

The next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

Hey, morning, Steve. And thank you for the update on 350. I guess a question there around rents. You know, while a few quarters ago we were talking about sort of $250 gross to make new deals pencil, I think when we talked about, you know, PEN15, now you're talking about $300, $350 to make new deals pencil, and clearly at $350 you have legacy basis. So the increase in rent to make deals pencil, is that sort of on a new market basis, meaning if you were to buy land today and given where interest rates are, or what's caused, you know, sort of the target construction rents to go from sort of the $250, we talked a few quarters ago, to now sort of the $3 to $350?

Boy, complicated. I'm not sure I understand it. None of these numbers are written in stone, Alex. I mean, they're sort of like ranges. The market doesn't really need $3.50 a foot to start a new building. The market and our competitors would start a new building somewhere in the probably mid to high threes, mid to high twos. What the market is doing is giving a bargain rent to the anchor tenant with hopes and aspirations that the follow-on smaller tenants at higher rents will make the whole thing pencil. But in the whole, you know, you think about it, if a new building on Park Avenue costs $3,000 a foot, you could do the math.

And then the second question for Glenn, you know, year-to-date, you've done about 660 square feet gross in New York. You know, there are a lot of tenants that are talking about early renewals. Can you talk about the level of conversation and, you know, presumably there's some acceleration in the back half or just what we should expect as far as leasing goes compared to the 660 so far?

So as Michael said in our script remarks, putting aside Citadel, we have about $1.2 million in our pipeline, which is a really strong mix of new expansion renewal. And we're strategic about renewals. We're not going to do a renewal unless we like the terms. So while we're talking to a lot of tenants expiring next year, the year after, et cetera, as the market continues to quicken in strength and pace, and as we feel better and better every week with what's happening, we're being very careful in terms of locking in too quickly. But our tenants generally want to stay, and we're in a lot of discussions in that regard, but we're being careful and smart about it.

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

Good morning. Thanks for taking the question. Steve, maybe going back to your comments at the outset of your prepared remarks, talking about how the stock remains cheap, how it remains well below sort of our NAD estimate, can you kind of just talk about, I think you alluded to in the past, just being interested in taking assets to market and testing where private market bins are at. Can I just talk about that? Is that still something you guys are interested in? Maybe, you know, obviously using those funds to continue to take advantage of the disconnect between where shares are at today and where you guys perceive value to be.

What you're saying is that we should sell buildings. We sort of believe in that. We sort of also believe that, Julie, in conversations with selling to the proceeds of which would be a very significant cash amount. History in New York, every time you sell a building in almost any cycle, you've been more retail assets. So we do have a handful of assets conversations.

No, that's very helpful. I appreciate that commentary, Steve. And then maybe just one on, you know, I think it was announced yesterday that Snap was subleasing some of Verizon's space. Is that, are you guys involved in that at all? I know when Verizon struck that lease, rents are probably higher today than where Verizon's lease is at. So is there any upside that you guys are able to get or is that sort of solely Verizon's Verizon's economics.

We didn't participate in that deal. That was a deal between Verizon and the... We did, however, decline our recapture option, choosing instead to...

The next question comes from Steve Sakwa with Evercore ISI. Please go ahead.

Yeah, thanks. Good morning. I think on the last couple of calls, you guys have talked about this kind of 40-cent FFO uplift in 27. I know you don't give formal guidance, but there was a bridge there just given the strong signed but not occupied pipeline. Obviously, you've had good growth in Q2 and talking about a good second half. I guess, does that 40 cent number still apply or has some of that FFO maybe shifted into 26 and it dampens the growth a little bit into 27?

20, Steve. We're not going to get too much into guidance given we don't give it you know if you remember uh we made that comment i think we started off uh talking about the year being flattish relative to last year obviously we're significantly outperforming that but uh you know the 40 cents was uh relative to that flattish comment so you know i think we were 235 last year 40 cents on top of that you know 275 you know so some of the growth is occurring earlier this year we expect at the same time we still think we have meaningful growth next year. So, you know, our comment on sort of significant growth still to come in 27 remains intact. You know, some of that 40 cents, you know, got started flowing through this year, but certainly relative to where we have the beginning of the year is still intact. And, you know, given the dynamics, hopefully be in excess of that.

Great. There's my To follow up, Steve, I guess your comments around doing a JV at, you know, $350 is interesting, given, you know, the Citadel lease. I guess, how did you sort of weigh doing that JV now versus, you know, leasing that building up further and doing something down the road, given that it's, you know, not being delivered for, you know, four to five years?

We made a decision to do the deal, Ken Griffin and Citadel, years ago. The deal with Ken was signed probably, I don't know, three years ago, something like that. So this is just the continuation of that path, which was decided three years ago. During that time, between now and then, Barry and his team and the Citadel team have designed the building with the Foster Partners architectural firm. These decisions were made three years ago, maybe even four years ago.

The next question comes from Jana Gallen with Bank of America. Please go ahead.

By the way, before I get into that, let me finish the last question a little bit. If you do the math, and we do the math, really groove on math, notwithstanding the fact that there is a time delay from and give up the new building, enormously year old building, dumping money into that building, because in 10 years that's going to be a 75-year-old.

It really was not. comes from Jana Gallin with Bank of America. Please go ahead.

Thank you. Good morning and congrats on the quarter. The retail leasing had a nice pickup, but the lease term I noticed was pretty short. Curious if that's just a strategy to do more short-term activation as you plan some of the larger retail redevelopment, or if something else drew of that.

Morning, Jana. I would say in general it was just in general a number of short-term deals some in-place tenants that we extended some short-term deals that we don't want to lock up the space we continue to view the market as getting stronger and so we don't want to commit to space long-term until we get to an appropriate level and in some cases tenants need more time to make decisions on how long they want to commit for etc. So a mix of those but I think, you know, most of those, as we said, short-term in nature.

And then maybe just I noticed the Pier 94 occupancy drop quarter of a quarter. Anything you can share that or prospects for, you know, new leasing there?

It's glad I'll take this one. So the occupancy is already up into the high 80s by the end of July. So we had a couple vacates at the end of June, which is why you see the number you're seeing and already back up to where we were with a lot more activity in the pipeline.

I mean, Glenn, why don't you just comment on the user's experience and reaction?

Yeah, I mean, the activity has been excellent. The users are all, you know, top of class, head of class, you know, Google, Netflix, Paramount, Apple, all the names we want. And as they go on and on, the experience has been A+. Plus, the reports back from them have been excellent, so we're feeling very good as we head into the second half of this year, into 27, that really great things are going to happen. The project's really the best in town, and certainly the users coming in are recognizing that as they use it.

You have to remember this asset, which we are partners with Blackstone and Hudson Pacific, is kind of analogous to a long-stay hotel. So this is not an office building which has 10-, 20-, and 30-year leases. The tenants that come into this building and use it as a production facility for shows that are in process, so that can be, you know, three months or a year or what have you, so the occupancy will fluctuate. But we do feel we have a unique asset. It's the only asset in Manhattan. It's very well located, and it's being extremely well received, even at these early stages, by all of the, might I say, all of the big boys.

The next question comes from Anthony Poloni with J.P. Morgan. Please go ahead.

Yeah, thanks. On 350 Park, you mentioned going to the maximum 36% stake in the project. Can you talk about what that means in terms of any incremental outweighs for Vornado or just how that works?

Michael. Good morning, Tony. So, like, we'll lay out all the details when we close the venture in terms of cost, you know, financing, et cetera. You know, Steve referenced the construction financing that we've lined up. You know, we're contributing our land in at the $900 million value. and so you know incremental capital requirements from us over time are in the three 350 million dollar neighborhood that doesn't really start for uh you know probably two and a half maybe even three years in any significant scale given that um you know ken has to true up his equity with ours and then the bank uh wants to get money out you know we like that environment and the banks want to start putting money out. So our equity is back-ended and really won't come, I would say, meaningfully until 2029 and then thereafter.

And then just in terms of just you mentioned, I think, Steve, just that kind of a project putting an umbrella over the rest of the assets around there over time. And it seems like your base is going to probably be over $3,000 a foot, and the presumption is you lease it up and it's worth, I guess, something north of fourth. thousand plus a square foot. How do you think about just that gap between a number like that and buying something around the corner effectively at 950 a foot? Is that dispersion? Does it make sense? I get the difference in age and asset, but is carried land just as interesting an investment at this point than the bet at four plus thousand dollars a foot on a pro forma a stabilized basis.

We would buy 100% of Park Avenue at $1,000 a foot if we could.

Now, Tony, you're making the case for exactly what Steve said earlier, right, that that dispersion is very wide, that buildings like Park Avenue Plaza, if the market continues to hold its strength, and we know there's not going to be a lot of supply, those buildings have to appreciate significantly. And we own many of those buildings, which is why we're bullish on our stock and the value that we have and where it's going. So 100%. You know, rents have to rise there. Values have to appreciate meaningfully because they're basically creating a land value in a lot of cases.

But don't get the impression that the people who are paying $250 or $75 or $300 a foot are stupid. They are not stupid. They are the most important and largest and major companies in the country. there is a difference in the value of a brand-new building in its design and its function. But the answer is it's not the difference between $100 a foot and $300 a foot. So the $100 a foot buildings are going to go up in value substantially, but not the same rental rate as a new building would command.

This question comes from Vikram Malhotra with Mizuho.

Please go ahead. morning congrats on a strong quarter um i guess this first question given the strength in the you know future direction in terms of ffo and the pickup you mentioned some of it as though 20 incoming in 26 i'm wondering if you can just maybe give us a little bit more color on how that translates into cash earnings like relative to this year's ti bill uh you know what could the you know ti maintenance capex bill look like for next year just high level and related to that Any sense of where we are in terms of TIs coming in after the market is strengthened?

I'll hit the first one. Glenn can hit the second. I think in terms of, you know, TIs this year versus next year, I mean, again, given we're in that lease-up mode, you know, given, frankly, when the tenants call for the money, I know the number's right in front of me, but I think it's pretty comparable year over year. So not meaningfully different enough that I would change. I think in 28 is when that starts to, you know, tail down. But again, it depends on when tenants call for the money. It tends to be a little bit later than when we normally expect. So that's my commentary on the capital side. Glenn, you want to just talk about TI trends?

Hi, Vikram. So we're seeing concessions come down. Rents are going up. We're tightening concessions. I had sent on a couple calls in a row now, free rents coming down. and we're now seeing tightening on the TIs. Certainly anything we're turn-keying now has a cap on the tenant fund. So overall, I would tell you all the metrics are trending absolutely in the landlord's direction, which is very good for us. And we continue that. We expect that to continue as we go, as the market continues to get better and better.

Thanks. And then maybe just a bigger, broader question. You know, clearly New York is at a place where we're all talking, you know, upside to rents and mark to market positive. San Fran is still sort of in maybe perhaps occupancy recovery mode. I'm just wondering future capital allocation for Vernado, if you were putting in new capital today, like how do you differentiate and assess sort of opportunities in New York versus San Fran? Like where should we expect, you know, kind of a better risk reward at this point?

You know, we love San Francisco. It's a recovery market. The interesting thing about it is we own the best building in San Francisco, differentiated. It's not a tech building per se, although we do have a few tech tenants.

It's a financial services building.

All of the major financial services players are in, notwithstanding the fact that vacancies grew to very high, so when rents plummeted, that building, 555 California, the rents went up and occupancy stayed pretty high. Now, with respect to New York and capital allocation, I mean, look at what we've done in the past as a prelude to what we'll do in the future. We have invested in two or three new acquisitions. We invest in our existing buildings by leasing them up in the TI and in keeping them modern, and we invest in our buildings in terms of amenities, new acquisitions, our existing assets. We have a...

Bringing down leverage while doing that.

Yeah, how did you do that?

Asset sales, et cetera, and we're growing income.

By the way, our budgets show the good bubble is over and the free rent burns off and the TIs are paid, our financials become extraordinary. Our positive care is fairly significant.

This question comes from Seth Berge with Citi. Please go ahead.

Hi, thanks for taking my question. I just wanted to circle back on 350 Park Avenue. You mentioned the partial sale. Could you probably talk about, given kind of the improvement in New York fundamentals, what the buyer pool looks like for that, what type of money is interested in investing in New York office today.

Michael, I think you asked about the mention that I made that we were contemplating selling down 25% of the ownership of the building and inviting a new group of investors to come into the asset now. So what's your question about that?

Yeah, just are you seeing, is it core money that's interested in office, opportunistic, sovereign? Just talk about kind of the interest from the different buyer pools in New York office real estate.

We're basically targeting high net worth. It would be a club deal, not a – So it would be a club deal, people investing $100 million or maybe $200 million, not a billion. That's our current target.

Great. And then maybe just to follow up, with kind of the new pita tier tax in New York, are you seeing any impact on that for high street retail leasing?

Not at all. We don't expect that that's going to affect shopping or tourism or domestic spending or whatever. So the answer to that is not at all. By the way, we're not really in that business. I mean, we don't have a current condo job under construction, a successful one in history, and that's sold out, by the way. We do hear from the marketplace the interest of buyers. That's not firsthand.

That second and third hand question comes from Ronald Camden with Morgan Stanley. Please go ahead.

Hey, great. Just two quick ones. One, and this came up earlier, just on high level, I think you've touched on just maintaining leverage. You've touched on sort of CapEx. I was just wondering if you could just put a point on it in terms of, like, what the model says leverage looks like as sort of EVA.com's on, as well as what the CapEx trajectory looks like.

Quick reading your report. Sounds like we have a fairly wide disparity on any of you both viewpoints. CapEx, you know, I think I said earlier, I think it's going to be fairly consistent this year to next year, just as the, you know, large amount of leases, particularly at PEN 2 and the remainder of PEN 1, you know, get funded. You know, even a lot of leases that get signed this year, that won't get funded until next year, and maybe even slobbers over a little bit to 28. But I think fairly consistent year over year. And on the leverage side, you know, I think we'll continue to trend down into the sevens over the course of this year. And as the income comes online in the out years, obviously, there's a lot that's going to happen between now and then. But that number could go sub seven. I think it probably will go sub seven absent investing, you know, et cetera.

Great, helpful. And then I think you mentioned sort of two non-essential sales. I was just wondering, I think in the past, whether it was Hotel Pen or some of the retail assets, just any thoughts on transacting on those? Thanks so much.

No, it's not Hotel Pen. Hotel Pen doesn't exist anymore, by the way. It's a piece of land, which we consider being the best development site in the west side, and that's not for sale.

The next question comes from Caitlin Burroughs with Goldman Sachs. Please go ahead.

Maybe a follow-up to that last one just on the planned asset sales, whatever they may be, as we try to figure out the impact of them, those two properties. Would you say they're more in the non-core bucket, i.e. potentially higher cap rate, or in the bucket of crystallizing private market valuations, i.e. lower cap rate, or some combination?

One and one.

Got it. And you mentioned earlier that part of the intent is then you can keep that dry powder for offense. I guess, could you talk about your outlook for those opportunities to come up? I realize you don't have a crystal ball, but is there reason to think that more acquisition opportunities could continue to come up, or is it too hard to tell at this point?

You know, the answer is we react to everything that's available in the marketplace, and we acquire an asset that we like. Our assets, the assets that we like have to be basically in our core. They have to be the best location. They have to be part of the 180 billion square feet that we feel is our target market, the market in which our clients want to rent space. And they have to be moneymakers. So when we see it, we act. And we can't predict, we don't have a crystal ball, but we do know that there are cycles. There are cycles that went to invest heavily, and there are cycles that went to pull back. We've been doing this for a long time. And our outlook on, by the way, the other side of that is that trees don't grow up in the sky. We do have business cycles. I don't know whether we're going to have another. another recession or downturn. I guess we will. Since we've had a, there will be a downturn in the future and we have to be prepared for it. Now, you can't prepare for it. When the downturn starts, it's too late. You have to be prepared for it ahead. And so that's what we try to do. And we've had keeping a very strong balance sheet with a ton of cash, long time.

This question comes from Brendan Lynch with Barclays. Please go ahead.

Great. Thanks for taking my questions. Steve, in the past, you mentioned that you're open to selling 555 California in the Mart. Can you give us an update on where your considerations currently stand, and are those the two assets that you referenced earlier about being for sale?

Those two assets are not the two assets. It might be one of them. but i can tell you that right now 555 california is a strong recovery market and glenn has done a spectacular job of leasing this market at the toxic prices in san francisco you know in the high 100s of dollars a foot in the tower so that asset has plenty of room to go only for saying any commentary on the mark um they've just another topic uh on signage uh is there a limit to how

much signage you can add to the Penn District, and I see that signage is up 5%, is that mostly volume, or are you pushing price more?

I'll start, and then Michael can finish. Basically, the thing that differentiates our signage business is that our signs go with the buildings that we own. People in this sector, the signage companies, they rent space. We own the space. In the prime space, those are signage opportunities. We're going to build a power on PEN-15. That's another sign. New signs go along with our...

Just to tack on, Brendan, yeah, it's all going to go up year over year for the last several years. And, you know, part of what we do, you know, by having, you know, digital signs is, you know, we slice and dice those and we, it's like revenue management, right? We're optimizing how many slots we can sell and how much we can sell those for. So, dynamic's working, which is helping to propel the business, and you saw that come through this quarter.

The next question comes from Steve Sakwa with Evercore ISI. Please go ahead.

Yeah, thanks. Just one quick follow-up. On that S&O pipeline number that you gave of $180 million, is there a way to bifurcate that between what's, you know, PEN2 and what's the rest of the portfolio?

I knew you weren't going to let us off so easy, Steve, without a numbers question. I would say I'm going to guess here because I don't have the exact numbers in front of me. Obviously, like PENTU is a huge development that we're completing and that income is coming online. So if I had to guess, I would say probably 60% of it is PENTU. Rough cut.

That guess better be right. Yeah, I think it's pretty close.

There are no further questions at this time.

Okay. Well, thank you, everybody. We're happy with this quarter. We hope you all appreciate it. And we're even more happy with our future prospects. So having said that, thank you all for attending, and we'll see you next quarter.

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