Earnings Call Transcript
VORNADO REALTY TRUST (VNO)
Earnings Call Transcript - VNO Q1 2025
Operator, Operator
Good morning, and welcome to the Vornado Realty Trust First Quarter 2025 Earnings Call. My name is Nick 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. I will now turn the call over to Mr. Steve Borenstein, Executive Vice President and Corporate Counsel. Please go ahead.
Steve Borenstein, Executive Vice President and Corporate Counsel
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, 2024, 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.
Steven Roth, Chairman and Chief Executive Officer
Thank you, Steve, and good morning, everyone. Well, the macro environment in which we operate is certainly different today than when we last spoke three months ago. On their calls, a couple of office CEOs didn't think all this would affect their businesses too much, but it will affect our customers, clients, and tenants. So of course, this would affect all of us somewhat. I know nothing more than you all do, but the way I see it, the objectives of the tariffs are to introduce symmetry and fairness, but even more so to generate a new revenue stream for the federal government, which at say, a 10% tariff is large enough to make a big dent in putting our federal budget deficit under control. And notwithstanding the tactics, reducing government flow has to be a good thing and will also reduce the deficit. I am agnostic. Whatever the outcome, I believe the best bet is that this global kerfuffle will be resolved, settled, and over much more quickly than you think. The basic dynamics that I outlined in my recent annual shareholders letter that make us so enthusiastic about the future of our business still hold. Our stock performance is at the head of the office class, having increased 49% in 2024 after having increased 36% in 2023. And while year-end is down 12%, we are down less than the other CBD office companies. Manhattan continues to be the best real estate market in the country, especially so for office, but also for apartments and retail. With a 180 million square foot Class A better building market in which we compete, demand continues to be robust. Available space is evaporating quickly, and with the cost of a new build, i.e., replacement cost at say $2,500 per square foot and interest rates of 6% to 7%, no new supply is on the horizon. All this is the very definition of the landlord's market. We've seen this all play out in past cycles and the story has always been the same. The supply and demand dynamics will push rents higher and existing better buildings will increase in value quite substantially, all good, very good. Here at Vornado, our teams have been very busy building liquidity, and doing leases and deals. In January, we completed the UNIQLO sale at 666 Fifth Avenue at a record-breaking $20,000 per square foot. We used the $342 million of net proceeds from the sale to partially redeem our retail JV preferred equity on the asset. So $342 million cash to Vornado. We used this cash to pay at maturity our 3.5%, $450 million unsecured bonds. Next, last month, we completed a $450 million financing at 1535 Broadway and used the $407 million of debt proceeds to partially redeem our retail JV equity on the asset. So $407 million cash to Vornado, which increased our cash balance. This financing was done in a very choppy market with skill and relationships by our capital markets team, so all thanks to them. Next, on April 22, we received a favorable ruling on the PENN 1 ground lease rent reset arbitration. The PENN 1 determined that the annual ground rent payable for the 25-year period beginning June 17, 2023, will be $15 million. There is pending litigation and the panel's decision provides that if the fee owner prevails in a final judgment, the annual rent for the 25-year term will be $20.2 billion retroactive to June 17 through 2023. For GAAP, we have been accruing $26.2 billion per annum of down rent and therefore, as a result of the panel determination, we reversed $17.2 billion of previously over-accrued rent expense in the first quarter. Of note, commencing in the first quarter of 2025, we are now paying $15 million annual rent, and so our GAAP earnings will increase by $11 million annually. By the way, this PENN 1 ground lease, as fully extended, goes to 2098. Next, in March, we finalized a major 337,000 square foot lease in PENN 2 with Universal Music Group, two of the world's leading music companies, think Taylor Swift and her friends. This important deal brings an exciting tenant to the Penn District and takes the building to approximately 50% leased, more leasing at PENN 2 will follow. Next, yesterday, we finally announced the completion of an important deal with NYU at 770 Broadway, completing a master lease for 1.1 million square feet on an as-is triple net basis for a 70-year lease term. Under the terms of the lease, a rental agreement under Section 467 of the Internal Revenue Code, NYU made a prepaid rent payment of $935 million and will also make annual lease payments of $9.3 million during the lease term. NYU has an option to purchase the leased premises in 2055, and at the end of the lease term in 2095. NYU will assume the existing office leases and related tenant income at the property. We used a portion of the prepaid rent payment to repay the $700 million mortgage loan, which previously encumbered the property, and $200 million to increase our cash balances. Though this transaction is a lease, the GAAP, which can be a little wacky, treats it as a sale. As such, we will recognize the GAAP financial statement gains of approximately $800 million in the second quarter. We will retain the Wegmans retail condo, which will produce $4.7 billion in income this year. The NYU lease absorbs 500,000 square feet currently vacated at the asset. Overall, the transaction is accretive by $25 million annually if we pro forma leasing the vacancy at market rents with related capital spends, downtime, and free rent, it would have been a pro forma push as you might expect. We are delighted to expand our relationship with NYU and congratulate NYU Board Chair, Evan Chester, and President, Linda Mills, and their team. We are excited about their ambitions for this project. As I have said before, this is all very good for NYU and is very good for New York. NYU's press release issued yesterday is available at www.nyu.edu. All told, so far this year, as a result of the above activity, we reduced our debt by $915 million, increased our cash by $500 million, and our retail JV preferred equities, which is an asset on our balance sheet, which began the year at $1,828 million is now down to $1,079 million. Our cash balances are now $1.4 billion. Together with our undrawn credit lines of $1.6 billion, we have a median liquidity of $3 billion. The above transactions will increase GAAP earnings by approximately $36 million, $25 million from the NYU transaction and $11 million from the PENN 1 ground rent reset result. Tom, that would be Tom Sanelli, who all of you know, in a more complete analysis, including debt repayments and the loss of preferred income, calculates $30 million of accretion. I'm happy to defer this half. In a moment, Michael will review the quarter and the financials, but here are a few headlines of a very good first quarter. Comparable FFO is $0.63, increased by $0.08 versus last year's first quarter and is $0.09 higher than annual consensus. Our overall GAAP same-store NOI is up 3.5%, released 1,039,000 square feet overall, of which 709,000 square feet was New York office at $95 starting rents with mark-to-market with 6.5% cash and 9.5% GAAP and an average lease term of 14.7 years. In addition to the 337,000 square foot lease with Universal Music at PENN 2, we leased 153,000 square feet at PENN 1. We completed leases totaling 222,000 square feet at our 555 California Road Office Tower in San Francisco at $120 starting rents. 555 continues to be the preferred financial services headquarters in San Francisco, and even in this historically soft market, 555 continues to outperform. It is proving that it is the best building in San Francisco. We are big fans of the new San Francisco Mayor Dan Lurie. A really increasing pipeline is a robust 2 million square feet. As I said in my annual shareholder letter released on April 8, the lease-up of PENN 2 and the lease-up of our retail vacancies alone will generate incremental NOI of $125 million and $50 million respectively over the next several years. Tom here is Tom again, specifies that while NOI for PENN 2 is budgeted to increase by $125 million, FFO is budgeted to increase by $95 million, the difference being capital interest. By the way, these are big numbers, and with PENN 2 built and ready, this $125 million a year is as close to a short thing as there is. The Penn District, that three-block long city within a city, continues to blossom and receive outstanding reviews. We sit on top of Penn Station, adjacent to our good neighbors to the West Manhattan for 100 yards. The three of us combined are what I call the new booming west side of Manhattan. One of our analysts calls the Penn District one of the largest mixed-use projects in the country. Even as it may, the Penn District will be a growth engine for our company for years to come. As I said in my annual letter, we raised market rents in the Penn District from $50 to $100. Our neighbors to the west are achieving rents of over $150 and I predict that we will do the same in due time. You can all do the math as to what an incremental $50 on 12.3 million square feet will do to our earnings and values. 350 Park Avenue, the Citadel as our anchor tenant and Ken Griffin as our subsequent partner, has begun the development process to create a grand 1.8 million square foot headquarters tower on the best site on Park Avenue. The new building will stand out as being truly the best-in-class. And we have several other assets for sale in the market. We recently filed our very comprehensive sustainability report, which can be found on the sustainability page of our website. But it was the first in the nation to achieve 100% certification across our entire portfolio of service buildings. The many awards we have achieved can also be found on the sustainability page of our website, kudos to Lauren Moss and her team. Finally, one other observation I would make is that the majority of our secured loans reflect current market rates, while others are still living on their low-rate loans. As I have said before, there is really no protection against loans that mature into a rising rate market. Now to Michael.
Michael Franco, President and Chief Financial Officer
Thank you, Steve, and good morning, everyone. First quarter comparable FFO was $0.63 per share, compared to $0.55 per share for last year's first quarter, an increase of $0.08. The increase was primarily due to the impact of positive ground rent reset determination at PENN 1, higher signage NOI, and higher NOI from rent commitments, partially offset by the impact of known move-outs and lower interest and investment income. We have provided a quarter-over-quarter bridge on Page 2 of our earnings release and on Page 5 of our financial supplement. On our last earnings call, we said that we expected 2025 comparable FFO to be slightly lower than 2024 comparable FFO of $2.26 per share. As a result of the lower than originally estimated PENN 1 ground rent, we now expect 2025 comparable FFO to be essentially flat compared to last year. Looking beyond that, we expect the lease-up of PENN 1 and PENN 2 to occur with full positive impact in 2027, resulting in significant earnings growth by 2027. Turning to occupancy. As expected, our New York office occupancy decreased this quarter to 84.4% from 88.8% last quarter, which as previously mentioned is primarily the result of PENN 2 being placed fully into service. However, with the full building master lease at 770 Broadway now completed, our current office occupancy has increased to 87.4%, and we anticipate it will tick up over the next year or so into the low-90s. The New York office leasing market maintains strong momentum during the first quarter with the strongest quarterly volume since fourth quarter 2019. Availability in the best Class A market continues to shrink and with only 500,000 square feet of new construction set to deliver during the next several years and 13 million square feet of office to residential conversions in the process or announced, we expect the market to continue to tighten, which sets the stage for strong rental rate growth. While we are, of course, mindful of companies potentially becoming more cautious in their decision-making, given the current market volatility, we do not believe it will impact most tenants' ultimate decisions to lease space, and we remain very constructive on the market and the deal pipeline across our portfolio. The recent major commitments by NYU at 770 Broadway, Deloitte at Hudson Yards, and Amazon at 522 Fifth Avenue are perfect examples. During the first quarter, our leasing activity once again led the marketplace. We completed 31 transactions totaling 709,000 square feet, an average starting rent of $95 per square foot and 6.5% positive mark-to-market. Our activity was highlighted by the largest new lease done in the market in the quarter. Universal Music Group's 337,000 square foot lease at our new PENN 2 anchoring the base of the building on floors four through seven. We are delighted with this transaction and look forward to Universal creating a world-class office and studio production headquarters in the Penn District. The transaction strongly reflects the overall quality of the project's new modern high-quality workspace and continued attraction to our robust work-life amenity program across the Penn District campus. Leasing at PENN 1 continues at a healthy pace as we leased 163,000 square feet here during the quarter, including a 61,000 square foot lease renewal of Cisco along with a 36,000 square foot relocation with UnitedHealthcare and a new lease with Dish Network’s for 27,000 square feet. Our deal pipeline at PENN 1 and PENN 2 is very strong, with a variety of new transactions already in lease documentation for a deepened letter of intent. Excluding the just completed master lease with NYU at 770 Broadway, our New York pipeline consists of 2 million square feet of leases in negotiations at various stages of proposal. In San Francisco at 555 California Street, we completed two large headquarters renewal and expansion deals with Dodge & Cox and Goldman Sachs, both at positive cash mark-to-market. 555 continues to strongly outperform the market as we have leased 657,000 square feet in 2022. 555 is the city's flagship office tower with world-class tenants and is brilliantly leased in a market that has been one of the more challenging in the country coming out of the pandemic. The market, though, is finally showing signs of improvement. The new mayor is off to a great start. We are confident that he will help restore the city’s health and vibrancy. Lastly, turning to the capital markets. During the first quarter, the CMBS market was wide open for large high-quality assets such as ours, with spreads continuing to tighten. Since the President announced his new tariff policy on April 2, there's been significant volatility in the financing markets with spreads widening out and new issuances being delayed. Despite this volatility, we were able to complete our 1535 Broadway financing. We expect the market to settle near-term and high-quality issuers and assets will continue to have access to it. We are hard at work on refinancing or extending our upcoming maturities, with many in process. With that, I'll turn it over to the operator for Q&A.
Operator, Operator
Thank you. We will now begin the question-and-answer session. Your first question today will come from Steve Sakwa with Evercore ISI. Please go ahead.
Steve Sakwa, Analyst
Thanks. Good morning. Michael, I was wondering if you could just maybe break down that 2 million square foot, I guess lease negotiation between PENN 1, PENN 2 and then the balance of the portfolio. I guess, I wanted to just maybe circle back to Steve's comment last quarter about PENN 2 being 80% leased and just trying to understand the volume of activity that you've got, particularly at PENN 2.
Michael Franco, President and Chief Financial Officer
Good morning, Steve. Why don't you start off, and then I’ll squeeze in.
Glen Weiss, Executive Vice President
Hi Steve, it's Glen Weiss. So the 2 million pipeline, about 50% is PENN 1, PENN 2 to start off. There's a lot of great activity at PENN 2. We finished, obviously, Universal. We got more to come, and PENN 1 continues to flood with new tenants, and at the same time, as all this is going on, we continue to take rents upwards by the week. So PENN is really in fifth gear. It's a big part of the pipeline, not all the pipeline. The portfolio overall is performing very well right now. So we're feeling very, very good about where we are along all of our portfolio.
Steve Sakwa, Analyst
And just, I guess, confidence level around kind of getting to that 80% mark by the end of the year at PENN 2.
Michael Franco, President and Chief Financial Officer
I mean, Steve, look, what I would say is as we sit here today, we still feel good about it, right? Whether it happens by the end of the year, first quarter or whatnot, I think as Steve said in his opening remark, we're going to lease the building, right? We're generally going to hit the numbers that we laid out. There's a significant uptick. And whether it happens in quarter four or earlier quarter later, from our perspective, it's not going to have a meaningful impact. So we're going to get there. The rents that we're going to achieve, as we published last quarter, are higher. Glen started a pre-build program at PENN 2. The rents we're achieving there are spectacular. We may do a little bit more of it. And so I wouldn't get focused on whether it happens exactly by year. But yes, we sit here today; our confidence level is the same as it was last winter.
Glen Weiss, Executive Vice President
We lower our spot here. If you think about it, Steve, there's a dwindling supply of quality blocks in the market, and we show nothing like what we did at PENN 2. So we think even with more patience, the rents will keep rising; the quality of tenants will keep getting better. And so we're feeling better and better as we go here overall.
Steve Sakwa, Analyst
Okay. And maybe just a follow-up to, I think Steve made a comment. I don't know if I caught all of it about 350 Park. I just can't remember what your decision to fully go or no go on that project is. And just can you remind us kind of the milestones and maybe achievements that you need to see or want to see in the market to ultimately make that decision?
Steven Roth, Chairman and Chief Executive Officer
Steve, good morning. Our disclosure on the details that you just asked about is very robust, go back and read the 10-K and the press release. I think that will be the best way to do it.
Operator, Operator
And your next question today will come from Dylan Burzinski with Green Street. Please go ahead.
Dylan Burzinski, Analyst
Hi guys, thanks for taking the question, and congrats on closing the NYU transaction. I guess, Steve, I think you mentioned now after all the transactions closed, you have about $1.4 billion of cash on the balance sheet. I guess, can you guys just talk about some of those proceeds might be earmarked for?
Michael Franco, President and Chief Financial Officer
Sure. Good morning, Dylan. First of all, I want to commend you on your report you published. I think you nailed 770 better than anybody. So kudos to you and the team. In terms of the cash, like we're…
Steven Roth, Chairman and Chief Executive Officer
What that means is that he likes a report. Go ahead.
Michael Franco, President and Chief Financial Officer
So in terms of the cash, we're obviously pleased with what we've done. We've done quite a bit. These are our large substantial transactions. If you think about it, we've been able to delever the balance sheet meaningfully and yet still have that significant cash balance, right? So we're in a very good spot. What are our plans, right? In an environment like this where there's clearly a little bit more volatility, having more cash adds, we hope and expect that's going to lead to some opportunity to pull some of that cash into investments, we're looking. At the same time, we have some higher cost debt that we might either pay down or pay off. So I think you'll see a combination of a) leaving in cash as is our history to make sure we have an appropriate buffer for anything. Two, tackle some of the debt, and then three, is hopefully deploy that into new opportunities we see.
Steven Roth, Chairman and Chief Executive Officer
Taking it a little bit further, we are loading in cash to pay off an unsecured bond that comes due in a year and a fraction. We are loading in cash because we are going to have a robust development program over 350 Park at the Penn District and perhaps more other sites that we control. And so the cash is a good thing, and we're going to be using it to grow the company.
Dylan Burzinski, Analyst
That's helpful, and appreciate the comments on our report from last night. I guess, just maybe one other follow-up, obviously, you guys have done a successful job monetizing some of the press and selling some of the assets within the retail joint venture. I guess, I think last quarter you guys alluded to having additional dispositions or looking to go out and execute additional dispositions. I guess can you kind of talk about just the appetite of some of these luxury retailers and the desire to want to continue to own the real estate versus lease the real estate?
Steven Roth, Chairman and Chief Executive Officer
So I think I said this in my letter. I advertised in a very subtle way that some of the buildings that are outside of New York might be for sale at the right price. That continues to be true. These are a couple of very large assets. So we'll see how that works. In Manhattan, we have a couple of non-core buildings that are in the for-sale market now, and I think, as I said in my letter, there are no sacred cows. So the other thing is we have shown a willingness to sell some of these important retail assets when we get a buyer that is willing to pay an appropriate price. That continues to be the case. The interesting thing is it's not just the retailers that are buying these assets. Like for example, Amazon is coming in and buying significant assets in Midtown Manhattan for, I guess, their HQ3 or whatever it might be. So there are lots of examples of some of these larger companies, which are switching their strategy from leasing to buying, and that's a good thing. We know that that's aggressively happening in New York. I'm not aware of whether that's true in the rest of the country, but for New York and for the New York real estate market, that's a very good thing.
Dylan Burzinski, Analyst
Great. Appreciate the color and congrats team, thanks.
Operator, Operator
And your next question today will come from John Kim with BMO Capital Markets. Please go ahead.
John Kim, Analyst
Can I just follow-up on real estate valuations? We've seen high street retail kind of go back to 2019 levels on the assets that you're looking to potentially sell, whether in New York or outside. And including 555 Cal, are we going to go back to 2019 valuations or exceed them?
Steven Roth, Chairman and Chief Executive Officer
Sure.
Michael Franco, President and Chief Financial Officer
I want to add to what Steve mentioned. If you review our actions so far, it's clear that none of these assets were actively on the market. We are being strategically opportunistic in our approach to identify the right counterparties, which remains our general strategy. The capital markets are improving in terms of sales, but it's essential to identify the appropriate buyers or investors. This cycle has reaffirmed that valuable assets attract high prices. The best assets will always be valued highly. They may go out of favor for a while, but with patience and resilience, they will rebound. This has certainly been evident in street retail, and I expect the same for financing related to New York office properties, as well as for premier assets in San Francisco. The best assets will consistently remain the best.
Steven Roth, Chairman and Chief Executive Officer
My succinct one-word answer: sure. Really, to interpret that was that we are not going to sell great assets at distressed prices that came from COVID or whatever. So the benchmark is pre-COVID which is 2019, and these assets have recovered; they are recovering and they will command increasing prices over time.
John Kim, Analyst
That's great color. Thank you. On the leasing pipeline, which increased pretty significantly from last quarter. Can you describe how much of that is on your in-service portfolio or leases that could drive occupancy within the next couple of years versus maybe 350 Park or an early renewal that won't drive SSL?
Glen Weiss, Executive Vice President
A very significant portion of the pipeline will increase occupancy without a doubt. So a lot of it’s absorption, a lot of new deals, a lot of expansion, there's a lot of expansion in New York in our properties right now. So a lot of our significant activity will absorb vacant space over the next 9 to 12 months without a doubt.
Steven Roth, Chairman and Chief Executive Officer
This is the first time on this call that the word occupancy came up. So will somebody cover occupancy? Because the occupancy number that we reported is aberrantly low, and let's see if we can get an accurate portrayal of what our expected occupancy is into this call.
Michael Franco, President and Chief Financial Officer
So John, to follow Steve's comment, I think we had telegraphed this the last couple quarters that our occupancy was going to go down, and we brought PENN 2 in service, which we did fully this quarter, right? So we published 84.4%. We talked about pro forma what it is when you add in 770, which goes to 87.4%. And then I said in my remarks that we expect it to be 90% plus in the next 12 months or so. And obviously, a lot of that's driven by PENN 2. I think as we look more broadly in New York, if we lease up PENN 1 and PENN 2 or when we lease up PENN 1 and PENN 2 fully, and let's say that, that happens in the next 24 months and a couple of things here and there, we're going to be at about 94% occupancy. So I can't tell you exactly when that's going to happen. But if you just think about, if we execute on PENN 1, PENN 2, a little bit of space, 1290, 280, we're going to be at that 94% level, and we love that position, right? So from our standpoint in terms of driving growth, we have our best assets that have some holes in them today. There are fewer options in the market. We've just deployed a significant amount of capital in these assets. Glen talked about how the rents are rising not just in the market, but specifically at these assets. And so that's all going to translate into growth. And I think as we've said in the last couple calls, that really kicks in in 2027. So we feel good about the position, and I think from an occupancy standpoint, we always ran the business at around 95%, 96%. And I think when we get a couple years out, our expectation is we're going to get back there.
Glen Weiss, Executive Vice President
The most significant thing to keep in your mind is that as occupancy rises, earnings rise, and they rise significantly. And so that's a very interesting factor.
John Kim, Analyst
Yes, good stuff. Thank you.
Glen Weiss, Executive Vice President
Yes.
Operator, Operator
And your next question today will come from Floris van Dijkum with Compass Point. Please go ahead.
Floris van Dijkum, Analyst
Hey, good morning, everyone. Thank you for taking my question. I wanted to revisit your comment about the Penn District being one of the most valuable mixed-use projects in the country.
Steven Roth, Chairman and Chief Executive Officer
Who said that?
Floris van Dijkum, Analyst
I don't know. Somebody mentioned that, and hopefully that caught your attention. One of the impressive aspects is the $300 million of NOI once PENN 1 and PENN 2 are stabilized. Can you discuss something we noticed this quarter, which I expect will continue for the next few quarters, regarding the GAAP? There seems to be about a $20 million gap between GAAP NOI and cash NOI, likely due to free rents in PENN 2 as it comes online before generating actual cash. How long is that situation expected to last? At what point do you anticipate cash NOI outpacing your GAAP NOI moving forward?
Glen Weiss, Executive Vice President
Yes, I think Floris, that's a great question. I think we should probably take it offline. Most of that is going to happen in the later years, as Michael indicated. We start seeing 2027 earnings really pop. So that's probably the years you're going to see, but that's something that we probably should take offline in more detail.
Floris van Dijkum, Analyst
Great. And then the other thing, and again, I think you guys sometimes do yourself a disservice by being as transparent as well, transparent in some ways as you are with the occupancy in particular. Have you ever thought about showing what your core occupancy is or in-line or in-service properties? Because obviously, you've got a couple of assets that you're keeping vacant right now, particularly in your retail portfolio, which impact your stated occupancy level significantly.
Steven Roth, Chairman and Chief Executive Officer
We have thought about that, Floris, but your comment now makes us think a little bit harder about whether we should do that because we have kept certain assets offline and continue to do that pending either redevelopment or maybe in a case or two a workout. So that's a fair comment.
Floris van Dijkum, Analyst
Thanks, guys. That's it for me.
Steven Roth, Chairman and Chief Executive Officer
Thank you.
Operator, Operator
And your next question today will come from Alexander Goldfarb with Piper Sandler. Please go ahead.
Alexander Goldfarb, Analyst
Hey, good morning, down there. Steve, question for you. Looking at the Deloitte deal, pretty impressive 800,000 square feet to anchor a new development. How does the math behind that project compare to what you guys would need for PENN 15? And just trying to understand if we're getting closer, where a $2 million plus project can pencil or if the market is still limited to call it million two type developments.
Steven Roth, Chairman and Chief Executive Officer
Good morning, Alex. Before we get into that, you wrote a piece on Alexander's that came out, I think yesterday.
Alexander Goldfarb, Analyst
Yes, yesterday.
Steven Roth, Chairman and Chief Executive Officer
And so I think you're the only person that I know covers it. But in any event, let me help you by saying, correcting you in two things. Number one, we will not, let me emphasize the word not, use our cash to pay down the 731 retail loan. We're not doing that.
Alexander Goldfarb, Analyst
Okay. We'll note that. We will note that.
Steven Roth, Chairman and Chief Executive Officer
And the second thing is, we are not merging Alexander's into Vornado, okay? So once we get the Oscar, we get beyond that. Look, we were showing the Deloitte deal as was all of the developers in town. We think we have the best vacant piece of land on the west side of Manhattan. I've said frequently that I think it's the second best piece of land in town, the first best being our Park Avenue site. And so the deal that was made was a very aggressive deal for the tenant. The pricing was very tight. We're not as to say no to a deal that doesn't give us the financial results that we think our shareholders are entitled to. So we're getting there, and we're on the foothills of a landlord bull market, and we think that values prices as transactions are going to go up. We think the number of new builds will be very scarce. And so we think we're in a pretty good spot. We are patient; if you just look at what happens with the Alexander's deal, which was a long time ago, but nonetheless, we let the deal pass by until we did the deal with Bloomberg, which turned out to be extraordinary. So we're getting there, and we're very happy with our position.
Alexander Goldfarb, Analyst
Okay.
Steven Roth, Chairman and Chief Executive Officer
By the way, the interesting thing is that a lot of this comes from our financial strength. So we can be relatively patient because of our financial state. So the PENN 15 lot has no debt on it. The PENN 1 building has no debt on it. The PENN 2 building has no debt on it. The Farley Meta building has no debt on it. So that's a pretty good spot to be in. And we're basically a secured lender is the way we structure our business. Those assets have no debt, and that's a great place to be.
Alexander Goldfarb, Analyst
Okay. So let me ask you, you wrote a Chairman's letter, as you always do. You talked about the attractiveness of apartment developments in part because of the smaller size. However, if you look at some of the legislation that Albany has passed, it makes the math tougher if you do tax incentive deals, the bigger the projects. So as you think about our apartment potential, are you thinking about it on as-of-right sites? Or are you thinking about smaller scale projects? Or how are you thinking about apartments fitting in as you expand your thoughts on development and harvesting your different sites? Are these existing sites, new sites, your thoughts?
Steven Roth, Chairman and Chief Executive Officer
When considering our city at PENN, it's important to look at both office and apartment sectors, as we primarily focus on office space. We appreciate the current positive trends in the office market, but historically, apartments have generated more value than office space. The office market tends to be more volatile over time, while the apartment market is generally more stable. However, the political landscape surrounding apartment development can be quite complex. We do plan to develop some apartments in the Penn District, but it won't be a project strictly focused on apartments.
Alexander Goldfarb, Analyst
Thank you, Steve.
Steven Roth, Chairman and Chief Executive Officer
Thank you, Alex. And remember, we're not paying off that both of cash.
Operator, Operator
And your next question today will come from Jana Galan with Bank of America. Please go ahead.
Jana Galan, Analyst
Thank you. Good morning, and congrats on a strong start to the year. It seems like a recent big trend in New York City is of a kind of owner-occupiers, both in office and retail. And I was just curious if you could kind of comment on what you're seeing in particular with some of the dispositions you may be looking to do.
Steven Roth, Chairman and Chief Executive Officer
I think we covered a lot of that. Mike, I'll give it another shot.
Michael Franco, President and Chief Financial Officer
Thanks, Jana. I appreciate your comment. I think you're noticing the trend of owner-occupiers in retail. We've discussed over the past year where this activity began, such as with Prada, Caring, and UNIQLO, and interest in that area remains strong. This is particularly evident on Fifth Avenue, and we’ve seen notable movements recently, like Ralph Lauren’s significant investment in Soho and Dyson's presence there as well. These retailers are expressing a desire to establish permanent locations in prime spots such as Fifth Avenue, SoHo, Madison Avenue, and Times Square, which are key areas in Manhattan. Their sales volumes in Manhattan far exceed what they achieve elsewhere in the U.S. and globally, prompting them to aim for long-term ownership rather than dealing with the Vornado's of the world every decade or so. They're willing to invest significantly to secure this permanence, which is beneficial for us, as we've seen additional income from these trends. If we encounter the right opportunities, we will engage in transactions. Retailers are definitely active in this segment. On the office side, there's been some owner-user activity as well. It's important to recognize what drives this. As Steve pointed out, we haven't observed this level of activity in other areas. It's primarily because talent is drawn to New York, influencing every asset class. Alex, regarding your question about the math involved, it holds for these larger sites. Despite your comment about the 99, the numbers do work because rents are rising. New York City faces a significant housing shortage that won't be resolved in the next ten years. Therefore, anyone developing apartments is likely to succeed. Talent wants to be here, and employers can easily bring their teams into the office. Young people are eager to come here, and companies are standing their ground. Many of these businesses can borrow at lower rates than typical real estate sectors, and they're utilizing that capital effectively. For example, Amazon has made substantial commitments recently; they want to grow here and are actively using their resources because of their long-term vision, investing significantly in their assets. Similarly, NYU opted not to purchase the building from us but chose to lease it long-term to recoup the capital they will invest. This gives them control over the asset for the long term. While we may not see this sort of deal every week, it's unlikely to be the last one, as companies with substantial capital can deploy it efficiently, which is a positive outcome.
Jana Galan, Analyst
Thank you.
Operator, Operator
And your next question today will come from Seth Bergey with Citi. Please go ahead.
Seth Bergey, Analyst
Hi, thanks for taking my question. I guess, it sounds like demand has improved. Your leasing pipeline has grown, what types of behavior are you seeing change from tenants? Like are you seeing any improvement on concessions or early renewal activity, in addition to the rent growth that you're seeing?
Glen Weiss, Executive Vice President
Hi, it's Glen. Certainly, we're seeing rent growth. That's the first discussion. Rents are going up, and tenants realize rents are going up. Number two, we are starting to see a reduction in the free rent packages. On the TIs have suddenly stayed basically at the same levels. So I would say rents are improving and free rents are starting to come down. As part of early renewals, we're definitely seeing people come to us earlier now because they're concerned about where the market is going to go more and more towards the landlords market. So we have some larger deals in this pipeline as it relates to early renewals for sure. But I'll tell you, the one takeaway I would tell you is expansion. The expansions in New York, there's the expansions going on all over the market in every submarket, and definitely in our portfolio. So a lot of growth in New York, and not just financials, you are seeing tech now grow, the law firm's growth, consulting firms grow, media, entertainment, like the Universal deal. So I mean that's basic around what you're asking.
Seth Bergey, Analyst
Thank you, that was useful. For a follow-up, I wanted to revisit your comments regarding the capital requirements of office buildings compared to apartments. It seems there are advantages and disadvantages to both asset types, but does that influence your long-term investment strategy for the portfolio?
Michael Franco, President and Chief Financial Officer
Look, I think it orients to you want to own high-quality buildings, the highest-quality buildings, right? Because those are the buildings that are experiencing the demand where you can push rents the most, where you're going to start to tighten some of the concessions. You're seeing that play out now, and we think that's going to continue to play out. So the capital is not going to be avoided, right? Even if TIs go down a little bit every time you turn these spaces over every 10 to 15 years of a tenant lease, there's going to be meaningful capital requirements there. So in order for that to be an appropriate investment, rents have to rise, and that orients towards the higher-quality buildings. So I think what we've tried to do in the last several years is reshape our portfolio, sell assets that we viewed as not best positioned for the future and have a portfolio that we think is well-positioned for that. And we 100% there? No, but we're pretty close. And we feel good about it. And so I think that's where you have to be investing to modernize our assets. We're in the right locations. I think your portfolio has to be oriented that way to succeed given the capital requirements.
Steven Roth, Chairman and Chief Executive Officer
We anticipate an increase in rents and expect to see some free rent as the market tightens. However, we do not foresee an increase in cash tenant improvements, as tenants are investing significantly more to develop their spaces. Therefore, while base rents and free rent will improve, cash TIs are unlikely to. Regarding our development mix, our main focus is on office space, but in the Penn District, we will also incorporate a notable number of apartments. We don't plan to buy existing apartment buildings; although we have explored some options, we would prefer to develop apartments rather than purchase them.
Seth Bergey, Analyst
Great. Thank you.
Steven Roth, Chairman and Chief Executive Officer
Thank you.
Operator, Operator
And your next question today will come from Anthony Paolone with JPMorgan. Please go ahead.
Anthony Paolone, Analyst
Yes, thanks. So I guess, just following-up to some of these questions around Penn District and apartments versus office. I mean, what do you think is the next project that Vornado pursues in the Penn District? Like is it apartments because it's smaller versus PENN 15? Or how should we think about that? And also in the same vein, your thoughts on the federal government getting involved with the planning of Penn Station and how that might impact you?
Steven Roth, Chairman and Chief Executive Officer
We're not getting pregame what we're doing by announcing today what the mix of a public. We'll do that when we actually start to do something, that's a real project; we'll notify the market. We've already said that we are focused on doing a small apartment project on Eighth Avenue and 34th Street on a piece of land we own there. So that's in the works. Otherwise, we will announce development starts when they start. With respect to the question about the federal government getting involved in PENN, we think that's great. I'm going to turn that over to Barry because he likes to talk about that. Go ahead, Barry.
Barry Langer, Chief Operating Officer
Good morning. As you're aware, we've spent a lot of time over the last several years working on several public-private partnerships, making Penn Station better, whether or not that's the Moynihan Train Hall or the Walnut River 33 Street consoles for a couple of new entrants as we work with the government building on Seventh Avenue. Anyone that wants to keep investing in Penn Station and continuing the good work we've done to continue to make the Penn Station that we support.
Steven Roth, Chairman and Chief Executive Officer
So that. By the way, when was the last time that you walked through the Penn District?
Anthony Paolone, Analyst
Last weekend.
Steven Roth, Chairman and Chief Executive Officer
I think you'll agree that the Penn District, once seen as a messy area, has significantly changed. What we've done on Seventh Avenue, the improvements to the buildings, and the enhancements to the sidewalk and Moynihan Train Hall are impressive. The train hall is remarkable, as is the Long Island Railroad concourse. The Penn District today looks much better than it did five years ago, and we're very proud of these changes. We're open to any assistance to improve the below-ground areas, as we primarily own the above-ground properties, while the governments and railroads control the underground spaces. Anyone interested in helping us with that is welcome.
Anthony Paolone, Analyst
Okay. Thanks. And then just a quick follow-up. I may have missed this. It might be in the queue, but just what is the remaining par value for the preps that you have in the Fifth Avenue JV now and the yield on that?
Steven Roth, Chairman and Chief Executive Officer
It's about $150 million in round numbers. And the yield on that is about 5.5 million?
Michael Franco, President and Chief Financial Officer
It probably blends to about 5%, Tony. It's about 5%, so Steve.
Anthony Paolone, Analyst
Okay. Thank you.
Steven Roth, Chairman and Chief Executive Officer
Yes.
Operator, Operator
And your final question today will come from Caitlin Burrows with Goldman Sachs. Please go ahead.
Caitlin Burrows, Analyst
Hi, good morning. Maybe first, I feel like it's been talked about it a couple of different ways. But you mentioned in the prepared remarks at the very beginning, how you didn't think the uncertainty in the macro would impact leasing. So I was just wondering if you could talk about that a little bit more, kind of what gives you that confidence? And any more specific detail you can give on like trends through 1Q and April and now into May.
Glen Weiss, Executive Vice President
We have not seen an impact on our leasing as of yet. But of course, we're mindful of it. We're getting our deals done, and we'd be irresponsible of us not to be thinking about it and paying attention to it. But thus far, we've had no impact yet on the leasing.
Michael Franco, President and Chief Financial Officer
Caitlin, to build on what Glen mentioned, if you examine the recent announcements from Amazon, Deloitte, and NYU made in the past few weeks, it's clear that companies and tenants are aware of the situation and making decisions accordingly. While not every deal will move forward, there is a tendency to acknowledge the current volatility. As Steve noted earlier, we expect this to stabilize soon. For retailers sourcing products internationally, the impact on their business is more pronounced, and they are likely to pause until they understand the implications. We have noticed some effects from certain players, but Glen captured it accurately: so far, the impact has been limited, although we remain vigilant.
Caitlin Burrows, Analyst
Got it. Okay. And then you guys did talk about how of this kind of NOI and earnings will come on over the next couple of years, and you have great visibility, but that there will also be some refi headwinds. So I was just wondering, as it relates to maybe even the remaining 2025 and early 2026 maturities, if there's any guide post? Or how do you think about the amount of refi headwinds that it could be? Like would you assume similar spreads that are in place or those go up as well? Anything on that topic.
Michael Franco, President and Chief Financial Officer
Yes, the team is diligently working on maturing projects. We're optimistic about the pricing from around 45 days ago, although there has been some variation since then. The market remains favorable for execution, and we have several initiatives underway that we aim to complete this quarter. Overall, we are confident in our ability to execute. Regarding pricing and amounts, I believe, generally reflecting market conditions, many of these can be refinanced at par. The decision to do so will depend on pricing as we get closer to the time. The market supports the proceeds level, particularly given the initial high leverage. We'll evaluate assets individually. In some instances, we may be able to refinance close to current levels, while in others, such as Independence Plaza, we will see an increase in rates since we are coming off a 4.25% fixed rate loan and current treasury rates are at 4%. In some cases, the rates may remain relatively flat. However, this is already factored into our guidance for this year and the following years. We will monitor market conditions at the time of pricing these assets in the upcoming quarters. In total, we anticipate a slight increase in interest rates, but nothing significant.
Caitlin Burrows, Analyst
Thank you.
Operator, Operator
And our next question today will come from Ronald Kamdem with Morgan Stanley. Please go ahead.
Ronald Kamdem, Analyst
Hey, just two quick ones. The first is just the occupancy trajectory was really helpful. Just wondering if we could sort of take that a step further, should we be expecting sort of the same-store NOI and so forth to also be sort of accelerating through to 2027 or are there sort of other considerations? Thanks.
Michael Franco, President and Chief Financial Officer
Yes, I believe that by 2027, we will see a gradual improvement this year. However, I don't expect to see significant changes just yet. As the assets become leased up, we can anticipate a similar trend moving forward.
Ronald Kamdem, Analyst
Great. And then my second one is just on capital allocation, if you could just remind us what sort of the waterfall is now between development, redevelopment, buying back stock and so forth? And any update on sort of the Hotel Penn site and potential sale. Thanks.
Michael Franco, President and Chief Financial Officer
We examine all opportunities and determine where to best allocate our capital. Naturally, we want to avoid depleting our realized dollars. Development is a lengthy process, so some initiatives we're discussing today may take time to materialize, with capital spending not occurring for several years as we ramp up. Regarding stock buybacks, this is not our primary focus right now; we still see good value in that area, but it was more pronounced back when our program began in the teens. Currently, our main emphasis is on investing in our existing business, whether through new developments or paying down some debt. We are also exploring some external opportunities, though it's difficult to predict which, if any, will advance at this moment.
Ronald Kamdem, Analyst
Thank you.
Operator, Operator
And your next question today will come from Nick Yulico with Scotiabank. Please go ahead.
Nick Yulico, Analyst
Hi, thanks. Just going back to the NYU transaction. I think you said it's accretive by $25 million annually. So paying off the mortgage, it looks like is a $35 million benefit. So can you just walk us through what's the offset from that? And then also on the NOI side, how we should think about if there's any difference on the cash versus GAAP treatment going forward there?
Thomas Sanelli, Chief Financial Officer
Sure. So I think you're 35, you're including the swap that we have that's at the corporate level. So we're moving that swap. So if you exclude the swap with the interest expense on that asset is $47 million. The current NOI is around $49.50. So that gets you the current NOI at about flat. When you look forward and you include the payment that we're going to get from NYU plus the Wegmans deal, plus the interest on the 200-plus that we're retaining. That gets you to about $29 million, that's the $25 million, $26 million Steve referenced in the prepared remarks.
Nick Yulico, Analyst
Okay. Thanks. That's very helpful. Just second question is on, I think you gave the lease number for PENN 2 at around 50%. Is it possible to get the lease number for PENN 1? I know it's 88% occupied. Is the lease number higher than that?
Glen Weiss, Executive Vice President
It's the same number.
Nick Yulico, Analyst
Great. Thank you.
Alexander Goldfarb, Analyst
Hey, thank you for taking the follow-up. Steve, I realize you're probably not going to give the intimate details of the ground rent litigation. But from a big-picture perspective, the arbitration panel agreed to $15 million, but now there's litigation pursuing $20 million. From a big-picture perspective, can you help us understand how this works? I would have thought the arbitration panel was the final determinant.
Steven Roth, Chairman and Chief Executive Officer
The arbitration is ongoing, and the litigation will continue through appeals for an uncertain period. We believe we are in a strong position. The arbitration panel addressed the situation where either the landlord or the tenant wins. The $15 million is the base case; if we win the litigation, we will receive $15 million for 25 years, but if we lose, it will increase to $20 million. Overall, we're in a solid position, as the values have been set regardless of the litigation's outcome.
Alexander Goldfarb, Analyst
Okay. That's helpful. Thank you.
Operator, Operator
That concludes our question-and-answer session. I would like to turn the conference back over to Steven Roth for any closing remarks.
Steven Roth, Chairman and Chief Executive Officer
Thank you, everyone. We've had a very engaging discussion this morning. The first quarter was quite active and productive with many positive developments. We look forward to seeing you at the next call, whenever that may be.
Steve Borenstein, Executive Vice President and Corporate Counsel
August 5.
Steven Roth, Chairman and Chief Executive Officer
The next call is August 5, so we look forward to that. Have a good summer so far.
Operator, Operator
Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.