Earnings Call Transcript - VNO Q4 2023

Operator, Operator

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

Steve Borenstein, Senior President and Corporate Counsel

Welcome to Vornado Realty Trust fourth quarter earnings call. Yesterday afternoon, we issued our fourth quarter earnings release and filed our annual report on Form 10-K with the Securities and Exchange Commission. These documents as well as our supplemental financial information packages are available on our website, www.vno.com, under the Investor Relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-K and financial supplement. Please be aware that statements made during this call may be deemed forward-looking statements and actual results can differ materially from these statements due to a variety of risks, uncertainties and other factors. Please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2023, for more information regarding these risks and uncertainties. The call may include time-sensitive information that may be accurate only as of today's date. The company does not undertake a duty to update any forward-looking statements. On the call today from management for our opening comments are Steven Roth, Chairman and Chief Executive Officer; and Michael Franco, President and Chief Financial Officer. Our senior team is also present and available for questions. I will now turn the call over to Steven Roth.

Steven Roth, Chairman and CEO

Thank you, Steve and good morning, everyone. We ended the year on a high note with a good fourth quarter. The quarter and the year were right on target. Although as expected, our results were negatively affected by the dramatic increase in interest rates. This will carry through next year but I expect will reverse as interest rates decrease. It's important to note that our business has continued to perform well. Michael will review the quarter and the year with you in a moment. This year, our New York City office leasing team won the gold medal. In the fourth quarter, we leased 840,000 square feet. For the full year, we leased 2.1 million square feet. Average bidding rents for the quarter and the year were record-breaking at $100 and $99 per square foot, respectively. In more gold medal achievements for the year, we leased 1.2 million square feet at over $100 per square foot rents. The office leasing market is on the foothills of recovery, but the capital markets still remain challenged and are tightening slightly as we speak. Foreclosures and givebacks are still ahead, and therefore, so are the opportunities. As Michael and I mentioned on the last few calls, retail in New York City has bottomed and is recovering rapidly. While rents have a way to go to reach peak pricing from 5 years ago, we feel very good about the activity level and strength of the retail recovery. And there's more significant retail news. In 2 blockbuster deals announced in December, major global luxury retailers have purchased properties on Upper Fifth Avenue for their own use as stores. One deal was $835 million and the other was $963 million. So in round numbers, that's about $900 million for a half block front on Upper Fifth Avenue. We now have the most important retailers in the world investing aggressively in real estate for their own use on the most significant retail street in our country. This is only happening in the most important world cities: New York, London, Paris. We take this mark very personally because we own 52% in our retail joint venture, representing a 26% market share of available Upper Fifth Avenue in 4 half blocks of similar AAA quality. I'm sure you can all do the math here. We also own in that same joint venture, the 2 best full blocks. So that would be 4 half blocks in Times Square and we have the largest signed business in town. It's been a long ride and we are about 90% complete with the renovation of the double block-wide PENN 2 and the surrounding areas. The huge positive in front of PENN 2, combined with the 33rd Street Promenade and the 33rd Street setback have created an enormous open public space which will be quite logistic. Directly near 7th Avenue, the hotel PENN is now down to the ground, creating our PENN15 site. All of this combined is certainly a game changer. If you are a shareholder of Vornado or are interested in Vornado, this is an immediate must-see. The world turns in funny ways that creates opportunity. The apocalypse is now passing, having handily survived the e-commerce challenge. But now we face a CBD office apocalypse involving the work-from-home trend and the total disinvestment in office by the capital markets. Ultimately, the major cities of America will continue to grow and thrive with New York, our hometown leading that charge. All these workers will gather in offices with their colleagues rather than be alone at home at a kitchen table. In the end, the supply-demand equation will come into balance, realizing a landlord's market through a complete cut-off of new supply. You can't build anything in these frozen capital markets, and in New York, there is the evaporation of relevance of approximately 100 million square feet of old, obsolete, unrentable space. This cycle is not over yet. There remain challenges, but for forward-looking investors, the time is now. My colleagues and I at Vornado are optimistic and excited. Now I'll hand it over to Michael.

Michael Franco, President and CFO

Thank you, Steve and good morning, everyone. Though 2023 was a challenging year, our core retail businesses proved to be resilient. Our overall New York business same-store cash NOI was up a healthy 2.8% for the year and up 2% in the fourth quarter compared to last year. Comparable FFO as adjusted was $2.61 per share for the year, down $0.54 from 2022 and largely due to increased interest expense, which aligns with expectations that we previously communicated. Fourth quarter comparable FFO as adjusted was $0.63 per share compared to $0.72 per share for last year's fourth quarter, a decrease of $0.09. Overall, the core business was flat, and the entire decrease in the quarter was driven by increased G&A and lower FFO from sold properties. We recorded $73 million of non-cash impairment charges during the fourth quarter, primarily related to joint venture assets that we intend to exit in the next few years. It's essential to note that in accordance with NAREIT's FFO definition, this impairment charge is not included in FFO. Looking ahead to 2024, while forecasting remains challenging in the current economic environment, we expect our 2024 comparable FFO to continue to be impacted by higher interest rates and be down from 2023, which seems to be reflected in the market. We project a roughly $0.30 impact from higher net interest expense due to extending hedges at higher rates on our variable debt. Additionally, there will be a drag on earnings as we turnover certain spaces, primarily at 1290 Avenue of the Americas, 770 Broadway, and 280 Park Avenue. This is temporary as we have already leased up a significant portion of this space, but the GAAP earnings from these leases won't begin until 2024. We expect 2024 to represent the trough in our earnings and for earnings to increase meaningfully as rates trend down and as income from the lease up of PENN and other vacancies grows. Regarding the leasing markets, New York is clearly leading the charge nationally as the city continues to experience strong employment growth. 2023 leasing in Manhattan ended strongly, and as we enter 2024, market conditions are more favorable than in any year since the pandemic began in March 2020, supporting a continued recovery in the Class A office market. The economy remains healthy, with most employers back in the office at least 3 to 4 days per week. Competitive sublease space is tightening, and the market for higher-end space is improving, driven by a decline in the new development pipeline. As companies gain greater clarity on their space needs, tenant demand is growing, leading to more leasing transactions. With new supply diminishing, tenants are increasingly focused on the highest quality redeveloped Class A buildings like those at PENN Station and Grand Central Station as they seek to attract and retain talent. Activity in the best buildings has been robust with vacancy rates below 10% and rents are rising. Our best-in-class portfolio has significantly benefited from this trend, and as Steve mentioned earlier, the statistics demonstrate that we consistently outperform the marketplace. In 2023, we leased 2.1 million square feet at average starting rents of the industry-leading $99 per square foot, with 1.2 million square feet at triple-digit starting rents. Importantly, we have made significant progress in addressing our upcoming vacancies and tenant roll at some of our most important assets, with leases signed with key clients. Additionally, we've maintained strong momentum at PENN 1, with another 300,000 square feet of deals, highlighted by new leases with Samsung and Cannacord Genuity. Since we started our redevelopment efforts in the Penn District, we have leased over 2.5 million square feet of office space at average starting rents of $94 per square foot, a significant increase from what these buildings achieved previously. Our fourth quarter activity led the overall market's leasing volume uptick as we completed 17 leases comprising 840,000 square feet at starting rents of $100 per square foot. Even with our robust close to 2023, our leasing pipeline heading into 2024 remains strong. We currently have almost 300,000 square feet of leases in negotiation and another 2 million square feet in our pipeline at various stages of negotiation, including a balanced mix of new and renewal deals. Turning to the capital markets: While the financing markets for office remain very challenging as banks continue to deal with problem loans, we are starting to see some stability with the Federal Reserve potentially cutting rates in 2024. Fixed income investors are optimistic regarding high-quality office, and unsecured bond spreads for office have tightened significantly over the past couple of quarters. That being said, we are still far from a healthy mortgage financing market in office, and most office loans will need to be restructured or extended as they are not refinanceable at their current levels. More broadly, lenders have no appetite for construction financing across most property types, which should suppress new supply. Conversely, the financing market for retail is now wide open since the sector has bottomed out. As always, we maintain our focus on retaining balance sheet strength. Even in this challenging financing environment, our balance sheet remains in very good shape with strong liquidity. We are actively collaborating with our lenders and making good progress in extending the maturities on our loans due this year. Our current liquidity is $3.2 billion, consisting of $1.3 billion of cash and restricted cash, along with $1.9 billion undrawn under a $2.5 billion revolving credit facility. With that, I'll turn it over to the operator for Q&A.

Operator, Operator

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

Steve Sakwa, Analyst

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

Glen Weiss, Analyst

Steve, it's Glen. So of the pipeline that we mentioned in the opening remarks, there is a good spread in there, including PENN1 and PENN2. Activity continues to strengthen at both properties. The reception at PENN 2 has been excellent; tour volume is off the charts. Everyone thinks this project is something they've never seen before. The pipeline does include activity at both PENN 2 and PENN 1. As it relates to the expirations that we are facing in '24, we have tackled these challenges very well thus far. At 1290, we've already leased more than 50% of the space that was expiring in '24. At 280 Park, we released over 200,000 square feet of the 275,000 square feet expiring in '24 and '25 and secured PJT, which was expiring in '26. At 770 Broadway, we continue to be in the market with that building, and we expect that building to perform well, given its great location and structure.

Steve Sakwa, Analyst

Just a quick follow-up. Are you saying 770 has a Meta expiration?

Glen Weiss, Analyst

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

Steven Roth, Chairman and CEO

At risk, Meta.

Glen Weiss, Analyst

Yes. After that expiration, Steve, we'll have another 500,000 square feet long term in the building.

Steve Sakwa, Analyst

Okay, great. And then just on the second question, I noticed that you pushed out the stabilization of PENN 2 by a year, which certainly makes sense just given the challenging market today, but you guys also kept the yield unchanged. So can you kind of help us think through that? And I guess, from an accounting perspective, if leasing doesn't occur this year somewhat soon, does that begin to create a potential earnings drag in '25 just from the lack of ability to continue to capitalize costs on that project?

Michael Franco, President and CFO

Steve, it's Michael. The answer with respect to stabilization is that we did push it out to '26. It's taken a little longer to get going on take-up there. But as Glen just referenced, the reaction has been outstanding as we approach delivery. We expect that to pick up. That being said, we are trying to be realistic as well, so we pushed it out. The yield is based on the $750 million cost, which does not include carry. This is based on NOI of the original cost. Regarding any potential drag beyond '25, it's possible if it isn't fully leased, but we feel good about the pipeline and what we currently have.

Operator, Operator

The next question comes from Michael Griffin of Citi.

Michael Griffin, Analyst

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

Steven Roth, Chairman and CEO

There are 3 opportunities: buying back our stock is the first one in terms of capital allocation. The second is repaying debt and deleveraging a little bit. The third is acquiring new assets. We are only interested in acquiring new assets at distressed prices. As I've mentioned, foreclosures and the givebacks have not really accelerated, but opportunities are still ahead. I don't have any comments on what we might do. Our number one priority is the debt that is nearing expiry, and after that, we will focus on assets. We will react opportunistically to the stock price over time.

Michael Griffin, Analyst

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

Steven Roth, Chairman and CEO

The interesting thing is that some of the industry papers often get it right. But in this case, they got it wrong. The facts are that the $60 number was a net number. So if you gross it up, it's about $100 a foot. It indicates it's a little less than $100 a foot but in the low $90s.

Operator, Operator

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

Camille Bonnel, Analyst

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

Glen Weiss, Analyst

It's Glen. Our retention rate was strong. The leasing that we've accomplished, the renewals have gone better than we initially thought at the beginning of '23. In our pipeline, we have good activity with forward lease expirations. Decision-makers of these tenants with upcoming expirations are now coming to us earlier than they have in the past few years because there are fewer quality blocks of space available to them. I would say definitively that our renewal program is stronger than it had been. We're in very good discussions with many of our tenants going forward, and I think that is reflected in our leasing activity numbers, particularly with the volume we had during '23 and what we're observing in '24 already.

Steven Roth, Chairman and CEO

You make a good point. I think you mentioned that with the lack of supply, the dynamics that are going to lead the office market to become increasingly healthy soon: you can't build anything in this capital market. New supply coming into the market will be limited. The supply of buildings built in the last cycle will be absorbed. The next trend is that tenants appear to want high-quality buildings that are either brand new or have been completely retrofitted.

Camille Bonnel, Analyst

I appreciate the color. Given retail seems to be a bright spot in your portfolio, can you also talk about how your leasing pipeline is looking for that side of the business?

Michael Franco, President and CFO

Sure. I appreciate you recognizing that retail is a bright spot. It appears investors wrote it off, especially with everything happening in the marketplace, forgetting that we still own the most and highest quality retail in New York City, as Steve highlighted in his opening remarks. These are scarce properties, and I believe their value is being recognized. We've had activity across the board on all our spaces with vacancy or rollovers. Tenant interest has been high, sometimes with multiple tenants competing for these spaces. And rents are clearly rebounding. So I would just say, stay tuned. We're optimistic about what's coming down the pipeline based on our current negotiations.

Steven Roth, Chairman and CEO

There is definitely a finite supply of high-quality retail space, which is what the marketplace desires. Also, I've introduced a new financial metric for retail called the half block price. We have several half blocks in the best locations.

Camille Bonnel, Analyst

I appreciate that. Lastly, on the G&A side, you've managed to control those costs quite well since the pandemic, but it did increase last year due to some additional stock expense. Is this a recurring event going forward? Are there key considerations for '24 that will keep your G&A at current or higher levels, especially with less capitalized interest from your development program now that PENN 1 is excluded?

Michael Franco, President and CFO

No, capital will remain comparable. G&A expenses will decrease as some of that burden was a one-time event. What we've implemented in June is heavily tied to stock performance over the next 3 to 4 years. If shareholders do well, then the employees will do well. The expense was elevated in '23 and is expected to normalize as we move into this year.

Steven Roth, Chairman and CEO

How many years are we writing off the expense for the compensation plan? So it's over a 4-year period. The G&A will benefit significantly as that expense rolls off. There will be reductions in earnings due to turnover and expirations from tenants during the early months. Those spaces will fill and income will be restored, leading to temporary reductions in our earnings, which will absolutely reverse.

Operator, Operator

The next question comes from John Kim of BMO.

John Kim, Analyst

Given all your commentary on street retail and its recovery and that pricing has been strong, will you be looking to sell into this strength? Or do you think market rents will improve further, or is this really to inform us to update our estimates?

Steven Roth, Chairman and CEO

Hi, John. First off, we are enjoying the bounce-back in retail. Retail faced threats from e-commerce, which have diminished, and now retailers have become the focus. We believe that the asset prices we own have decreased dramatically from the lowest point. We may take advantage of these prices by selling assets from time to time. We've already sold a portion of assets we considered non-core. We may sell more and we are convinced that rents will increase; the homages won't reach their peak pricing from 5 years ago, but there will certainly be growth from here.

John Kim, Analyst

Okay. Do you think you'll receive the same pricing you got originally when you formed that joint venture? Essentially, pricing on the assets might have reached a certain level.

Michael Franco, President and CFO

John, it's speculation. If we analyze what the pricing that our product is achieving, coupled with Steve’s observations of half block pricing, the analysis we conduct on our portfolio and estimate its worth doesn’t seem far-fetched to suggest that we're returning or exceeding those values. Importantly, two of the top retailers in the world are asserting that Fifth Avenue is crucial to them, signaling a desire to occupy that space permanently and that they are willing to pay a premium for it. This may spark interest from other retailers wanting to have a presence there as well. Yes, the impairment that you mentioned involves a few smaller office assets in joint venture; not retail. Retail has seen its worst. We're discussing some office assets we plan to exit over the next 2 to 3 years, and the impairment is handled differently for joint ventures compared to wholly owned assets. It's a small number.

Steven Roth, Chairman and CEO

There's no doubt that in this cycle, values have dropped; when interest rates shift from 3.5% to 8%, it's clear that it has a profound impact on value. I genuinely feel pleased that our impairments were not as significant as they could have been.

John Kim, Analyst

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

Steven Roth, Chairman and CEO

That's correct. Thank you.

Operator, Operator

The next question comes from Dylan Burzinski of Green Street.

Dylan Burzinski, Analyst

Okay. Just 2 quick ones on occupancy for both the office and retail sides. It seems that for New York office, occupancy should bottom out throughout 2024. And since you've already leased some of the move-outs, it should see a recovery as we look further into 2025 and beyond. Is that a fair characterization?

Glen Weiss, Analyst

It's Glen. I think that's accurate. You may see it dip over the coming quarters as we discussed, but based on the pipeline, it should rebound quickly thereafter.

Michael Franco, President and CFO

Yes, likely flat for '24 overall.

Steven Roth, Chairman and CEO

Just a note on occupancy. The market occupancy is in the high teens. Our occupancy is hovering around 90%; historically, our normal occupancy is slightly over 95%. The difference between 96% and 100% accounts for a structural vacancy; you never achieve 100% on a portfolio of over 20 million square feet. Therefore, our performance of around 90% is commendable in a soft market. When we ramp space as the market normalizes, transitioning from 90% to 96% represents a substantial earnings boost.

Dylan Burzinski, Analyst

That leads into my next question on the retail side of things. Presently, your disclosures indicate occupancy is in the high 70s, where pre-COVID you were mid-90s. How do we assess the recovery there in light of your leasing pipeline?

Steven Roth, Chairman and CEO

The retail occupancy figures are somewhat skewed. It includes the Manhattan Mall, JCPenney, and their current status because they have held us down— that accounts for around 11 points of occupancy. The other part involves some slow billing on the Ninth Avenue property. Once we adjust for that, we're probably in the mid-80s range.

Operator, Operator

The next question comes from Vikram Malhotra of Mizuho.

Vikram Malhotra, Analyst

Just to revisit your point about FFO likely hitting the trough in '24. Can you clarify, regarding the Meta lease at 770, is it clear that the 200,000-square-foot expiration indicates a move-out, while the rest is a long-term agreement?

Glen Weiss, Analyst

The remaining Meta 500,000 square feet is long-term. That is correct.

Michael Franco, President and CFO

Right. The 200,000 square feet is simply one component this year. Beyond that, we don't provide guidance; there are multiple variables to consider. Hence while we can quantify specific situations, they only present part of the picture. Overall, we expect it to have a negative impact, but the extent will depend on portfolio dynamics.

Vikram Malhotra, Analyst

So I assume, given the move-outs and the interest rate impact, occupancy will decline. You're suggesting that lease rates will eventually rebound as mentioned, alongside incremental leasing helping to increase FFO in '25?

Michael Franco, President and CFO

Yes, that's a fair assessment. Leasing up PENN and addressing other vacated spaces will contribute positively moving forward. Your overall summary is accurate.

Steven Roth, Chairman and CEO

I agree that's accurate. To summarize, interest rates have risen and impacted our performance negatively, but they will decline— not to zero, but will decline. This sets up future growth in our earnings. Alongside this, we can expect our occupancy to increase from 90% toward our typical levels, which significantly boosts earnings. Plus, as we further stabilize PENN and other spaces, the income from those developments is likely to surpass $100 million, presenting substantial opportunities ahead.

Vikram Malhotra, Analyst

Noted. Lastly, regarding your discussions around external growth opportunities, while FFO growth is crucial, when assessing executive long-term incentive plans moving forward, what might be a couple of metrics the next 5 years could emphasize compared to the last 5?

Steven Roth, Chairman and CEO

That's quite a sophisticated inquiry, and I appreciate it. As a New York-centric company, I don't foresee us expanding into regions where we lack that depth and knowledge. Therefore, we will often stay focused on New York. We previously explored an opportunity in Washington but chose to establish it as a separate entity, and we possess experience in several geographies. However, I expect our main operations to remain New York-centric. While we may take on more residential projects, especially with the ongoing development in the Penn District, I cannot predict the future direction over the next 5 years; we aim to be a robust office company and the importance of the Penn District will be central to that vision.

Operator, Operator

The next question comes from Alexander Goldfarb of Piper Sandler.

Alexander Goldfarb, Analyst

Good morning, Steve and Michael. Steve, in your compensation plan implemented around 350 Park at year-end, as noted, middle of last year concerned you adjusted your comp plan with the stocks underperformance and we understood why. By year-end, the 350 plan surprised us, especially considering shareholders would have to wait until year-end for dividend determinations for 2024. Can you clarify our understanding of the comp plan for a development project without results for another decade where current earnings are declining yet shareholders have to wait for dividends?

Steven Roth, Chairman and CEO

Sure, Alex. Let's address the dividend matters first. We've received considerable feedback from shareholders and analysts stating that our decision regarding the dividend was appropriate. While we may right-size it, continuing to pay a line is not the most efficient capital use right now. Most feedback I received supported this strategy.

Alexander Goldfarb, Analyst

Okay. Just clarify your point.

Steven Roth, Chairman and CEO

Let's visit the development fee compensation plan. This has been in consideration for a while. Our objectives include retention, reward, and motivation for our most valuable employees. Any payout linked to this plan comes from joint venture development projects. We haven’t done many of these, and this is probably our first major one. We are incentivizing development in the Penn District entirely; payoffs from the plan depend solely on outside development fees. This system aims to align our interests with shareholders since our performance is directly tied to joint ventures. While this plan is in place, it remains minor in scope compared to peers. We've found our compensation remains comparatively lower, and this is a measure to implement performance-based comp, a small element separate from traditional stock-based compensation. It emphasizes outcomes from viable joint ventures we've historically shied away from; we think it's a sound choice; it helps stabilize our talent pool through strong incentives.

Alexander Goldfarb, Analyst

But if it's minimal, it seems like a part of annual compensation—just an extra reward for your job performance. Why is it a standalone initiative?

Steven Roth, Chairman and CEO

I would like to agree, but we need to remember that any payments are contingent upon Board review, with multiple factors taken into account on their end. That said, it’s been structured thoroughly.

Glen Weiss, Analyst

On PENN 2, I understand you brought in an additional broker alongside your original one to help with marketing. Given the success at PENN 1, what prompted this change for PENN 2, and is there a repositioning for different tenants or anything you've learned in this process? So we did not switch brokers—Cushman & Wakefield has added value to my team. As you know, that doesn't happen often, but we made this decision to broaden our market approach both locally and nationally. The team previously handled leasing at Manhattan West, so it enhances our abilities by collaborating with external resources. The Vornado team continues to manage PENN 1, so this is an additional measure for PENN 2, ensuring we leave no stone unturned.

Steven Roth, Chairman and CEO

I'm confident that the strong team we have, including Glen and the rest, has the capabilities to execute effectively. But we believe in utilizing all available resources, enhancing our prospecting for the best outcomes.

Operator, Operator

The next question comes from Keith Libero of Goldman Sachs.

Julien Blouin, Analyst

This is Julien Blouin on for Caitlin. Steve, regarding the dividend, could you provide some expenses for 2024? Is the fourth quarter dividend going to be at the minimum required taxable income level?

Steven Roth, Chairman and CEO

We have a general idea about our 2024 taxable income, but it isn’t a figure suitable for public disclosure just yet. As for dividends, our Board currently aims to pay out the minimum because that's the most practical financial strategy at this moment. Significant factors will influence any potential gains on asset sales, as all our assets possess low bases. If we execute a sale in 2024, expect it to drive dividends more than anything else.

Julien Blouin, Analyst

That's very clear. On PENN 1, you previously estimated that the ground lease renewal might lower than the $26 million expectation due to changing market circumstances. Is that still accurate, and could you share the latest on that process?

Steven Roth, Chairman and CEO

Yes, I believe the figure will indeed come in lower than expected, but we're in an arbitration process to determine the actual value, so we cannot speculate beyond that.

Operator, Operator

The next question comes from Nick Yulico of Scotiabank.

Nick Yulico, Analyst

First, is there any clarity on the projected future NOI for PENN 1, as you provided in a previous disclosure? How does any of that translate into dividends for this year?

Michael Franco, President and CFO

Nick, it's Michael. I don't have precise figures at the moment. The answer is that some of that income will arrive in '24, but this is an evolving situation that takes time. As you know, we're gradually capturing this revenue through leasing, and total benefits span out over the next years. Our confidence in our findings remains strong.

Steven Roth, Chairman and CEO

Let me add a few thoughts. While everyone fixates on the initial yield of an asset, projecting revenue over a longer horizon offers a better understanding of financial viability. We believe that the Penn District development combined with other prime Manhattan projects like Manhattan West and Hudson Yards will yield vastly desirable and profitable spaces in the future. Additionally, Grand Central is at the cross-section of Park Avenue, which is highly strategic. We're aligning key assets with significant transit routes to optimize value generation.

Nick Yulico, Analyst

I'd appreciate clarity on your mention of PENN 1 and PENN 2. Currently, your reports give occupancy metrics only, and we’re eager to understand lease rates for both assets or gauge how much of the leasing pipeline progresses as you approach stabilization.

Steven Roth, Chairman and CEO

In terms of leasing specifics, PENN 1 is on a multi-year program; initially, we’ve got over 200 tenants, and we continue this process steadily. To date, we've leased a considerable amount of space at PENN 1, and we're successfully cycling through tenants as their leases expire over the next few years. This year, we’ve secured leasing for over 8,000 square feet at rents exceeding 90%, and we’re seeing strong activity within our pipeline. Similarly, at PENN 2, we also have deals coming through; stay tuned for announcements in the coming months as we progress into Q1 and Q2 of '24.

Michael Franco, President and CFO

To provide more context, Nick, for PENN 2, we have about $1.2 million to lease. With PENN 1, we probably handled about half of the total square footage thus far. Over the next three years, we'll see a noticeable increase of around $200 million in NOI from these two assets, made feasible through effective leasing and strategic management; capitalized interest will play a role here too, potentially generating a net capitalized interest of about $150 million.

Operator, Operator

The next question comes from Anthony Paolone of JPMorgan.

Anthony Paolone, Analyst

I just have one question. Michael, earlier you mentioned that debt markets are currently open for retail. Does this create opportunities for you to recover your prep interest in the joint venture in the near term?

Michael Franco, President and CFO

Tony, the markets opening up is promising. We’re starting to explore these options, but we need further leasing accomplished at a few of our retail locations first. Assets like 689 Fifth and the former JCPenney location require additional leasing stability before we can make claims for capital in those developments. Although it felt unattainable previously, this new potential is promising as leasing improves.

Steven Roth, Chairman and CEO

From a cautious perspective, the markets being open suggests lenders are willing to extend loans, but at a high cost—around 90%. This indicates borrowing aggressively at this moment isn’t advisable unless absolutely necessary. Therefore, while we academically approach this, it’s unlikely we’ll aggressively refinance at these inflated interest rates. Adding some context about our balance sheet, we have ample cash reserves, which we deem strategic capital. At some stage, we expect to view the preferred as a liquidity source, but not at 8% rates. We have substantial funds available that we can leverage effectively, especially as we engage with features like PENN 1, PENN 2, and the Hotel Penn site, all without debt currently. This represents a considerable source of financial flexibility for us.

Operator, Operator

Next question comes from Ronald Kamdem of Morgan Stanley.

Ronald Kamdem, Analyst

Great. I have just one question. Looking at the 10-K, you provide really insightful details regarding your anticipated maturity levels in the office portfolio. It appears to indicate flat or over 30% for retail. This is insightful. However, when linking these re-leasing figures to potential same-store NOI results, have you thought about how the estimated results could come in given your forecast on occupancy dipping later this year before rebounding? Are you able to communicate any broad expectations around same-store NOI?

Michael Franco, President and CFO

It will likely appear somewhat lower overall. Yet, this is dependent on various external factors, and while hard to provide detailed guidance, it's fair to anticipate office volumes will likely remain flat but with sustained renewal efforts as we strategize moving forward.

Operator, Operator

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

Steve Sakwa, Analyst

Just two quick follow-ups. Michael, I think on the G&A, you and Steve provided some color but I just wanted to confirm; are you indicating in '24 that you believe the G&A will be flattish against '23, or are you expecting it to actually decline?

Michael Franco, President and CFO

The expectation is that G&A will decrease, particularly as that one-time item isn’t recurring. So, yes, we anticipate it will be lower.

Steve Sakwa, Analyst

Just to clarify, that one-time expense is truly the only significant item coming off the '23 total?

Michael Franco, President and CFO

Yes, there are additional minor accelerated items that we aren’t expecting to recur. But overall, we are addressing roughly a $10 million reduction in the '24 versus '23 number.

Steve Sakwa, Analyst

Great, and then just a second follow-up. I believe there is a significant refinancing in the works with your partner at 280 Park Avenue. Could you provide any color on that, especially noting it might have entered special servicing?

Michael Franco, President and CFO

I won't go into too much detail as we’re still working through the process. Yes, it is indeed a CMBS loan entering special servicing. Our partnership is making good progress on this, and we expect to reach favorable terms and outcomes. That's still a work in progress, and we aim for an attractive resolution soon.

Operator, Operator

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

Steven Roth, Chairman and CEO

Thank you, everybody. We appreciate your interest in our company. We learn from you every call. This was an interesting call. We'll see you at the next call.

Michael Franco, President and CFO

The next call is on May 7. Have a good day.

Operator, Operator

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