Earnings Call Transcript - VNO Q3 2025

Operator, Operator

Good morning, and welcome to the Vornado Realty Trust Third Quarter of 2025 Earnings Call. My name is Joe, and I will be your operator on today's call. This call is being recorded for replay purposes. I will now turn the call over to Mr. Steve Borenstein, Executive Vice President and Corporation Counsel. Please go ahead.

Steven Borenstein, Executive Vice President and Corporation Counsel

Welcome to Vornado Realty Trust Third Quarter Earnings Call. Yesterday afternoon, we issued our third quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents, as well as our supplemental financial information package, are available on our website, www.vno.com, under the Investor Relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q and financial supplements. Please be aware that statements made during this call may be deemed forward-looking statements, and actual results may differ materially from these statements due to a variety of risks, uncertainties, and other factors. Please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 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 Mike 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. Today is Election Day in America. The experience of having the entire population voting on a single day, which is the first Tuesday in November, has been somewhat diminished by early voting and mail-in ballots. Nevertheless, today is election day, a vital symbol of our American democracy. We all understand that elections are important. The election in New York City, particularly with the potential for a socialist Democrat Mayor, has garnered significant attention. We acknowledge that affordability has emerged as a crucial issue, especially regarding the cost and availability of housing. I'm optimistic and believe that everything will ultimately turn out well. Regarding the potential mayoral candidacy of Mamdani, we have not observed any decline in demand from our customers; in fact, it’s quite the opposite, and we haven’t seen any warning signals from the stock market. Now, moving on to our business. Here at Vornado, we are in good shape—really good and getting stronger. Our performance continues to surpass both the national office landscape and our peers in New York. The market seems to acknowledge this, as our stock has doubled in the last two years. The reasons for this are clear: firstly, we operate in New York; secondly, our leasing and market performance statistics lead the industry; thirdly, our balance sheet is strong. Our net debt-to-EBITDA ratio is at 7.3x, and we have immediate liquidity of $2.6 billion; and fourthly, we are focused on our core competencies. We are committed to our business; we have our PENN District, effectively a city within a city; we are actively developing the 350 Park Avenue project; we have several hundred million dollars in anticipated annual growth in the coming years; and finally, we boast a remarkable portfolio of office and retail assets. We experienced another strong quarter. Michael will discuss our earnings shortly, and Glen is here for any questions regarding our leasing activities. Now, let me share what we're observing on the ground, in addition to some of our recent actions and achievements. As journalist Peter Grant recently stated, New York City's office market is experiencing its most significant boom in nearly two decades, outpacing the rest of the U.S. The transition from a tenant's market to a landlord's market in the 180 million square foot Class A better building sector we compete in, which we have anticipated, is now becoming a reality and is being acknowledged by our skeptical analysts and the media. As reported, Midtown's core better building vacancy rate has fallen to 6.2%. As previously mentioned, we are a company primarily focused on premium Manhattan locations. Tenant demand is strong; companies are expanding. Demand spans a wide range of industries, and available space in premium buildings continues to diminish rapidly. Manhattan's office leasing activity is on track to exceed 40 million square feet for the year, marking the first time since 2019. Office demand is filling across all submarkets; sublet availability is quickly decreasing, and we are on the brink of significant, possibly even surging, rent growth. By “on the brink,” I mean that we are just starting to see the best developments and that the best is yet to come. Naturally, deal activity and property values will follow. Here’s our top-tier leasing performance overview. We anticipate that our 2025 leasing volume for Manhattan office will reach our highest level in over a decade and will be the second highest on record. Please review our leasing statistics and market performance; our results are leading the industry. In the first nine months of 2025, Vornado leased 3.7 million square feet overall, of which 2.8 million square feet was in Manhattan office, leading the market not only in leasing volume during this period but also in achieving the highest starting rents in the city and impressive market performance metrics. Excluding the 1.1 million square foot master lease with NYU at 770 Broadway, the remaining 1.7 million square feet leased during the first nine months had an average starting rent of $99 per square foot, with market performances of plus 11.9% GAAP and plus 8.3% cash. This includes over 1 million square feet leased at PENN 1 and PENN 2. In the third quarter, we executed 21 New York office leases totaling 594,000 square feet at an impressive average starting rent of $103 per square foot. The market performances for the quarter were plus 15.7% GAAP and plus 10.4% cash, with an average lease term exceeding 12 years. Michael and Glen will detail specific tenants and leases shortly. In the PENN District, at PENN 2, our leasing for this quarter totaled 325,000 square feet with an average starting rent of $112 per foot. In October, after the quarter ended and not included in those leasing statistics, we finalized two additional large leases totaling 188,000 square feet. We have now leased over 1.3 million square feet at PENN 2 since the project's inception, reaching 78% occupancy and comfortably on track to meet and exceed our year-end target of 80%. Based on signed leases and current activities regarding the remaining space, we plan to raise our projected incremental cash yield of 10.2% by year-end. At PENN 1, we leased 37,000 square feet during the quarter at an average starting rent of $100 per foot. Since initiating physical redevelopment at PENN 1, we have leased 1.6 million square feet there at average starting rents of $94. At PENN, we are significantly outperforming both our initial expectations and our revised estimates. It’s clear that the tipping point for the PENN District, our three-block-long city within a city, is now behind us. Tenants and brokers are impressed by our transformation, reflected in our leasing activity. We are strategically positioned above Pennsylvania Station and the New York City subway system, right next to our friendly neighbors to the West—Manhattan West and Hudson Yards. Together, we represent the thriving new West Side of Manhattan. As I’ve emphasized, the PENN District will drive our company's growth for years ahead, accompanied by rising rents and future development. At our PENN 15 location, we are responding to proposals for substantial space blocks. We are also advancing in the planning stages for a 475-unit residential rental building at our own 34th Street location, which is directly across from Moynihan Train Hall. We aim to commence construction next year. It’s time to revitalize the previously outdated retail spaces we inherited along Seventh Avenue and 34th Street into contemporary, appealing retail offerings. This transformation will significantly impact the entrance to our PENN District. We continue to enhance our already impressive food offerings with our new restaurant, Avra, located at the corner of 33rd Street and 9th Avenue in the Farley Building, which opened to enthusiastic crowds and positive reviews. The restaurant’s location is fantastic, right in the heart of the new West Side, effectively tying everything together. Our New York City office leasing pipeline remains strong, with over 1.1 million square feet of leases currently in negotiation and at various proposal stages. We are growing in Manhattan and doing so intelligently. In September, we added to our premium real estate portfolio with the acquisition of 623 Fifth Avenue. This building, originally constructed to high standards by Swiss Bank Corporation, is located atop the flagship Saks Fifth Avenue store, resembling a trophy on a podium. Therefore, our lowest floor is on the 11th level, 175 feet in the air, featuring 25 column-free floors of 15,000 square feet above. The location is exceptional, situated almost a block west of JPMorgan Chase's new headquarters and our 280 Park Avenue. Our 623 Fifth Avenue features unique light, air, and views, being set back from Fifth Avenue on the east side of the Saks landmark, with the Cathedral to the north and the Channel Gardens and ice-skating rink of Rockefeller Center to the west. A distinctive aspect of this deal is that the building is 75% vacant, with the few remaining tenants on relatively short leases. Ironically, having a vacant building is advantageous. We will not be burdened by a multitude of low-rent, long-term obsolete leases, allowing us to proceed without the typical waiting period of 5 to 10 years for those leases to expire. We plan to redevelop this building into a premier boutique office space, akin to the 220 Central Park South of office buildings. We anticipate delivering the space by the end of 2027, in just two years—much quicker than the typical timeline for new constructions, and importantly, at half the cost. Here’s the breakdown: we acquired the building for $218 million, equating to $570 per foot. We will invest an additional $600 per foot in the redevelopment, making it roughly $1,200 per foot for the final product, which will be just as impressive as a new build but at half the cost. Our team is budgeting a 9% yield on cost for this project. I am aiming to achieve yields above double digits. There is high demand for and a shortage of this type of product, and we are extremely enthusiastic. Our 1.8 million square foot 350 Park Avenue new build, with Citadel as our anchor tenant and Ken Griffin as our 60% partner, remains on schedule. The City Council has unanimously approved the final year, and yes, I did say unanimously. We will begin demolition in March 2026. We are very optimistic about the prospects for this Forrester Partners-designed, best-in-class 1.8 million square foot tower, which has also piqued the interest of the brokerage and tenant communities. We are already receiving inquiries for speculative space from clients who are looking for the best timing for their needs. The Manhattan retail market continues to show increasing strength, and the most desirable spaces are again in high demand. Tenants are recognizing that rents are on the rise and availability is decreasing on prime streets, leading them to approach landlords for early renewals to secure their locations. Importantly, we are achieving rents that are consistent with historical highs at our Times Square properties. As the largest owner of signage in New York City, with a unique cluster of premier signs in Times Square and the PENN District, this segment of our business continues to thrive. Revenue from signage in 2025 is projected to be our highest ever. It's important to note that all of our sites are connected to buildings we own, giving us perpetual control, a distinctive competitive advantage, and the highest profit margins in the industry. A few weeks ago, there was news regarding a loan on 650 Madison Avenue going into default, which I should address. We were part of a group of institutional investors that acquired the 600,000 square foot building in 2013, supported by an $800 million nonrecourse mortgage. The primary strategy was to take advantage of below-market retail rents and improve the retail tenant mix. However, what has been termed the retail apocalypse—the fear that e-commerce would drastically reduce physical retail spaces—has not proved accurate, especially following the pandemic. Three years ago, in 2022, we recognized the asset's impairment and wrote it down entirely. Sometimes setbacks occur, even for us. Recently, a court ruling vacated the arbitration panel's decision regarding a ground lease rent reset, which was surprising and disappointing. We remain hopeful that this will be overturned on appeal. Finally, regarding San Francisco, our 555 California complex, which is arguably the best building in the city, continues to lead the market. In this quarter, we signed leases totaling 224,000 square feet at average rents in the triple digits, with a 15% mark-to-market increase. This includes a lease with UPenn's Wharton School for the Cube. We predicted a recovery in San Francisco two to three years ago, recognizing it as a key hub for the world's greatest technology and innovation centers, and we are witnessing that recovery now. Thank you all. Now, I’ll hand it over to Michael.

Michael Franco, President and Chief Financial Officer

Thank you, Steve, and good morning, everyone. We had a very strong quarter as office demand in New York City remains robust. Third quarter comparable FFO was $0.57 per share, compared to $0.52 per share for last year's third quarter, meeting analyst consensus by $0.02. This increase was primarily due to higher FFO resulting from the NYU master lease at 770 Broadway and higher NOI from our signage business, partially offset by lower NOI due to asset sales and capitalized interest beginning to burn off the PENN 2. We have provided a quarter-over-quarter bridge on Page 2 of our earnings release, and on Page 6 of our financial supplement. Same-store GAAP NOI for our New York business overall was up 9.1% for the quarter while same for cash NOI was down 7.4%. Let me explain. GAAP, which smooths everything, is more relevant to earnings given the cash number is hit by a free rent from a significant amount of leasing in recent quarters as well as the adjustment in cash rent related to the PENN 1 ground lease. Given all our activities to date this year, we now expect 2025 comparable FFO to be slightly higher compared to 2024 accountable FFO. While we are still in the process of finalizing our 2026 budget, as we've previously said, we expect 2026 comparable FFO to be flattish compared to 2025 as we are anticipating some noncore asset sales and taking income offline to effectuate the 34 and Seventh retail redevelopment. As we indicated on our previous calls, we expect 2027 to be the inflection year, and there will be significant earnings growth in 2027 as the full positive impact of PENN 1 and PENN 2 lease-up takes effect. New York office occupancy increased this quarter to 88.4% from 86.7% last quarter, primarily due to leasing activity at PENN 2, comprised of a 200,000 square foot headquarters leased with Verizon and new leases signed with FGS Global in Pernod Ricard. If you factor in the additional 188,000 square feet recently signed PENN 2, occupancy increases further. We continue to execute on our leasing pipeline and still anticipate that our occupancy will increase into the low 90s over the next year or so. While our retail occupancy also improved this quarter based on leases we signed, you will note a further jump in occupancy resulting from taking the retail in Manhattan Mall out of service this quarter. Turning to the capital markets. The financing markets for New York City assets are liquid, with CMBS spreads hovering at year-to-date lows, and even the banks are beginning to selectively return to lending on higher-quality assets. The unsecured bond market remains robust and has become much more constructive for office credits, with new issue spreads over 200 basis points tighter and all-in yields over 300 basis points lower than 2023. In the past quarter, we have been active in refinancing our near-term maturities, and we have several other deals in the works. The investment sales market has also heated up significantly in the past few months, as indicated by the many recent deal executions. The market is active for quality product, irrespective of size, and there is ample liquidity in the debt capital markets to facilitate deals getting done. Capital sources of all types are beginning to return to investing in New York City office, given the strong leasing fundamentals. As we have previously discussed, focusing on delevering the balance sheet has been a priority for us. Since the beginning of the year, we have generated $1.5 billion in net proceeds from sales, financings and the NYU deal, paid down $900 million in debt and increased our cash by $500 million. Our cash balances are now $1.15 billion. And together with our undrawn credit lines of $1.44 billion, we have immediate liquidity of $2.6 billion. Our net debt-to-EBITDA metric has improved to 7.3x from 8.6x at the start of the year, and our fixed charge coverage ratio, as expected, is steadily rising. We expect these ratios will continue to improve as income from PENN 1 and PENN 2 comes online. Please see Page 23 of our financial supplement for detail. With that, I'll turn it over to the operator for Q&A. Thank you.

Operator, Operator

And up first, Stephen Sakwa from Evercore ISI is on the line with the question. Please proceed.

Stephen Sakwa, Analyst

I don't know, Glen, maybe you could just start. It obviously sounds very promising, given the activity levels at PENN 2. I guess I'm curious, how are you sort of changing the leasing strategy with, I guess, only 20% of the building left? How are you thinking about tenants in the pipeline? And maybe talk about how rents are changing for the remaining space.

Glen Weiss, Leasing Officer

Hi, Steve. So rents have changed. You heard the script, average rent is quarter over $112 a foot at PENN 2. So the rents keep moving up, up and up. We keep repricing the space almost on a daily basis. In terms of the remaining space, it's a lot of single floors, mainly in the tower. So we feel really good about that, confident in our approach. We have a lot of deals in the works right now. As we've said in the script, we expect to be at or above our 80% goal by the end of the year. And if you look at the tenant roster, the credit profile is excellent, and the mix of industry sectors is really good. So we're pleased, and we expect to continue that strategically.

Stephen Sakwa, Analyst

Okay. And then maybe as a follow-up, Steve, on your comments around 623, how do you sort of approach the leasing of that building? Is that something that you'd sort of start to pre-lease? Or do you kind of wait until early '27 until there's more of a product to show people? I mean, how do you sort of think about the timing of that and the rents for that building?

Steven Roth, Chairman and Chief Executive Officer

Steve, we're going to do that pretty much the same as we did 220 Central Park South. At 220 Central Park, what we did was we had complete designs, and they were spectacular, knockout designs, even as we started construction, and we did an awful amount of selling of 220 from those designs. We're going to do very much the same at 623 Fifth Avenue. So we're going to get it designed. Our objectives are to make it the most interesting, high-end boutique office in the city. And once we get that done, then we'll go into the market with very high aspirations.

Floris Gerbrand Van Dijkum, Analyst

Michael, maybe this is for you. I was trying to get a sense of what is your current signed, not open pipeline in terms of basis points and then also in terms of dollar value, if you can give us a sense of the scope of rents that are going to come online over the next 2 years?

Michael Franco, President and Chief Financial Officer

Floris, I'm not quite following your point about the basis points. I believe Steve mentioned in his opening remarks that there are a couple of hundred million dollars essentially secured over the next few years. We examined our signed, not commenced figure, which reflects that. We've discussed the timeline for when most of this will come in, primarily in 2027. There will be some next year, but the majority is set for 2027, extending into 2028. Steve's reference to a couple of hundred million dollars serves as a reliable estimate.

Floris Gerbrand Van Dijkum, Analyst

Just to make sure, a couple of hundred million, is that $200 million? Or is that $300 million?

Michael Franco, President and Chief Financial Officer

Floris, we're still finalizing. Let's use more than 200 right now, okay, in terms of the over the next 2 years or so.

Floris Gerbrand Van Dijkum, Analyst

Okay. Fair enough. But in terms of percentage, do you have the percent difference between what's occupied and what's actually leased right now?

Michael Franco, President and Chief Financial Officer

You're talking from a physical versus what's on the line, I mean, I think the occupancy numbers, we believe, what's reflective of actually what's been signed, right? So those are signed leases. Not all those tenants are in place yet. I can't tell you what the physical is relative to that. We have to come back to you on that. That GAAP rent has not started yet on many of those leases.

Floris Gerbrand Van Dijkum, Analyst

I understand there is over $200 million coming online. My follow-up question is about the billboards business, which you mentioned is at a record high. Can you discuss the opportunities you have in the PENN District? I believe you don't own 100% of that area, unlike Times Square where you have a joint venture. How much potential do you see for expansion there?

Michael Franco, President and Chief Financial Officer

We own all the signs in the PENN District, which is unique compared to Times Square, where we are part of a retail joint venture. At PENN, we have nearly complete control over the signage, allowing us various marketing options. We can offer individual sign placements or full district takeovers for specified times, optimizing our income potential. Historically, signage revenue tends to grow around 4% to 5% annually, and the payback period for new signs is relatively quick, typically within 12 to 18 months. We anticipate continued organic growth due to this consistent increase in revenue. There is also potential for additional signage as we develop more buildings in the district, although this will take time. Some signage will return next year, but this will balance out with ongoing sign replacements. Overall, it's a healthy business with steady growth over time.

Steven Roth, Chairman and Chief Executive Officer

In my remarks, I aimed to highlight the strategic advantage we hold in this business. Firstly, we own the clusterings at the optimal locations around Times Square and the PENN Station area. Our ownership of the buildings, along with the attached signs, means we avoid expensive lease agreements and the associated renewal risks. Essentially, we maintain perpetual control over this inventory. This ownership also leads to the highest profit margins because we have the best signs in the most desirable districts, making this a significant strategic asset. At Times Square, we possess the top two blocks, known as the bow tie, with the finest signs. Furthermore, in the PENN Station area, I believe we have only begun to tap into the potential for additional signage that we can develop there.

John Kim, Analyst

I wanted to go on the commentary of flattish earnings in '26, which I think you foreshadowed a little bit last quarter, but it seems like it will be impacted by noncore asset sales. So I was wondering if you could talk about the timing and the dollar amount of the dispositions. And also, what you think the trajectory of occupancy will be next year? I know, Steve, you mentioned in the past that it could go to the mid-90% range, and I was wondering how next year shapes up?

Michael Franco, President and Chief Financial Officer

John, I hope you're doing well. Regarding the flat performance in 2026, we've been quite consistent about our expectations for that year and 2027 over the last few quarters. I can't provide specific numbers on the magnitude of noncore sales because various factors could influence that. However, I would estimate it to be at least in the range of $250 million to $300 million, possibly even higher. The timing of these sales will depend on when we execute them. Unfortunately, I can’t offer more specific details because we are working with different counterparties, and some projects are still in the planning stages. By mid-year, I anticipate much of this will be finalized. Historically, we have executed on many of our plans, and I believe we’ll see that happen again. As for occupancy rates, looking at Glen's pipeline, I believe there’s a good chance we'll reach 90% within the next quarter or two. Beyond that, we expect to continue increasing occupancy, aiming to return to historical levels of around 94% or higher in the coming years. That's about as much detail as I can provide at this time.

John Kim, Analyst

Okay. And then my follow-up is, any insight you can provide on the PENN Station transformation project? How involved Vornado will be as part of it, if there's any impact to commercial development opportunities going forward? And any views on whether or not MSG will relocate?

Steven Roth, Chairman and Chief Executive Officer

It is very unlikely that MSG will relocate. Regarding the PENN Station project, we fully support any initiatives that enhance PENN Station and the surrounding district to make them better, more user-friendly, and transformative. Continuous improvements are essential for us, and the government's involvement with a substantial budget is a positive development. We will participate in the process with one of the bidding groups, especially concerning the retail space we occupy in the station and its vicinity. Barry, do you have any additional comments on that?

Barry Langer, Executive Vice President

No.

Steven Roth, Chairman and Chief Executive Officer

Thank you. We are strong supporters of the process aimed at improving PENN Station.

Dylan Burzinski, Analyst

I guess just sort of given the significant demand backdrop that you guys are seeing, obviously continuing to push rents across the PENN District. I know one of your peers, when they reported earnings, talked about, call it, a 20% to 25% cumulative net effective rent growth expectations over the next 4 to 5 years. So just wondering if you can sort of put any of your thoughts around that? I mean, are you guys expecting significant rent spikes as space continues to get tight, especially for the quality of you guys in the portfolio?

Michael Franco, President and Chief Financial Officer

I think 20% to 25% over 4 to 5 years, I think we'd be disappointed if it's not quite a bit more than that. You look at all the dynamics...

Steven Roth, Chairman and Chief Executive Officer

I agree. When you consider the current market dynamics, it's one of the most favorable environments we've seen in decades. There's limited supply and strong, broad-based demand, with companies expanding. The vacancy rate, especially for high-quality buildings in Midtown, is just around 6%, which is nearly frictional, particularly for larger spaces. This situation is likely to lead to two outcomes. First, I expect that renewal probabilities will increase over the next 2 to 3 years since many companies won't have alternative locations to move to. Additionally, with the market favoring landlords, rental rates are likely to rise. Historically, rent can increase by 15% to 20% in a year during such cycles. While I’m not saying that will necessarily happen, the chance of rates increasing is considerably higher than the opposite scenario.

Dylan Burzinski, Analyst

That's helpful commentary. I really appreciate that. Maybe just one more, if I could. You guys mentioned noncore asset sales. And I know you guys don't necessarily give a number. But as you guys sort of think about redeployment of that proceeds, I mean, is it likely to go into asset acquisitions? Are you going to hold it to delever? Just sort of curious, plans with that capital that you guys expect to come in next year.

Michael Franco, President and Chief Financial Officer

Got it. I think it could go into a number of places, Dylan. Like if you look at what we've done to date, whether it's noncore, general asset sale, which has been quite significant; we've delevered the balance sheet meaningfully. At the same time, we made a, we think, a very attractive acquisition. And that's not something that we program, right? We don't sit around here in our counsel room saying we're going to buy x amount for a year. If we find the right opportunity, we'll act on it. If not, we're perfectly content to bide our time until the right thing comes along. So I would tell you that, as we look at capital, we're going to continue to strengthen the balance sheet. And if we find something compelling externally, obviously, we'll look at that. We have some internal capabilities or requirements in terms of, we've talked about developing the residential. We've got 350 Park in the near future. So we have a number of users. And by the way, and I'll let Steve jump in here as well, I mean our stock still, we think, trades at a huge discount. So I think everything is on the table.

Alexander Goldfarb, Analyst

So two questions. You definitely piqued my interest in PENN 15 that their conversations ongoing. Would you say that the tenants that you're speaking to are willing to pay the rents necessary for you guys to go forward on an economic basis? Or are they not quite there at where rents would need to be?

Steven Roth, Chairman and Chief Executive Officer

Oh God, I don't know how to answer that. Clearly, there are a significant number of anchor-type tenants who are in the marketplace that are looking for new builds. We're not the only opportunity; there are other opportunities. All of us need approximately similar risks to have an economic new build. And the tenants that we're talking to, they understand the math, their advisers and brokers understand the math. So the rents are available; it's just a matter of making a deal, having the tenant select the site, etc.

Alexander Goldfarb, Analyst

Okay. And then the second question is...

Steven Roth, Chairman and Chief Executive Officer

What I'm saying is this is not just kicking the tires. This is serious business.

Alexander Goldfarb, Analyst

No, no. That I understand. It's just the size of the building, like these are big rent checks. It's not like at the Saks tower or some of the boutique buildings that are being undertaken. I mean, 2 million-plus square feet, those are big rent checks. So that's why it's just impressive that tenants are willing to actually engage because that's a serious rent, as I say. The second question is on the litigation on the PENN, the courts can drag things out forever, people appeal, appeal, and lawyers love to run up the meter. So the two-part question on this is, one, are you guys booking the economic impact based on sort of the most punitive? And second is that when you say that the yields on the PENN District have improved is that at what you think the ground rent should be or at the sort of the worst-case scenario in the ground rent?

Steven Roth, Chairman and Chief Executive Officer

Well, the first thing is the PENN 2 yields have clearly increased dramatically. The PENN 1 yield, we're pretty happy with what we projected. With respect to the litigation, what had been a known number is now subject to some uncertainty. In our minds, we have parameters around that. We are booking a number which we think is a realistic number. And we will see. But with respect to this litigation, I don't really have a lot to say about it.

Jana Galan, Analyst

Maybe another one on dispositions. Following up on your prior comments on the willingness to maybe part with 555 California or the mark, anything you can share on the amount of incoming interest and/or valuation? Or given the improvements in San Francisco, are you thinking differently strategically about those assets?

Steven Roth, Chairman and Chief Executive Officer

Not really. I thought we were pretty clear in sort of, how would I say it, suddenly advertising those 2 assets last quarter. We don't have very much to talk about in terms of specific pricing or bad news or whatever. I can tell you that we think that the 555 California complex in California is the eighth wonder of the world. As you can see from our remarks and our documents, the leasing there is extraordinary. Even going back a year or 2 in a chaotic declining market, the rents that we were able to get for that unique best-in-the-marketplace building were rising. So we think that, that's a great asset. We're delighted to own it. And for the right price, we're delighted to sell it. And I think I'm pretty well-known as not being an easy seller. With respect to Chicago, that's a different story. The market there is not as strong. And opportunistically, we'll see what happens.

Jana Galan, Analyst

And then just in terms of developing future residential, just curious, your thoughts around for-sale versus for-rent components, given kind of different changes going on in New York City.

Steven Roth, Chairman and Chief Executive Officer

We have multiple pieces of land that we could build either office or residential. We do the math and the analytics as to which is more favorable constantly. We are putting our big toe. Actually, we're putting our whole foot up to our ankles into doing a 475-unit rental project, rental project, not for-sale project, at the corner of 34th Street and eighth Avenue. We think it's a very good site. It's caddy-corner to the Moynihan Train Hall. And it also benefits from all of the renewal that we're doing in the neighborhood. So we're excited about that. And we'll see how that goes, and we'll make decisions going forward.

Seth Bergey, Analyst

You mentioned in the opening script, easily exceed the 80% and the 1.1 million square foot leasing pipeline, I believe. How has that leasing pipeline kind of split between PENN 2 and other leasing? And kind of where do you think that 80% could kind of land by year-end?

Glen Weiss, Leasing Officer

It's Glen. So the 80% is specific to PENN 2, just want to make sure you're clear on that. As it relates to the pipeline, it's generally 50-50 in PENN District versus others in our pipeline right now, which is generally the balance we've been able to achieve quarter-to-quarter as we've been on this big leasing run over the past bunch of quarters, so basically 50-50.

Seth Bergey, Analyst

Okay. And then as a follow-up, you mentioned that it's highly unlikely or impossible for MSG to relocate. How do you kind of see the permitting process playing out just with your knowledge of how that process works in New York? And then, do you see that kind of creating any additional opportunities for Vornado kind of outside of the PENN 2 station transformation?

Michael Franco, President and Chief Financial Officer

I think Steve mentioned that the government has issued a Request for Proposal and will select a group to redevelop and complete the remaining improvements at PENN Station. We anticipate a retail component will be included, which interests us. However, our primary focus, as Steve noted, is supporting the project getting completed, as this will benefit our holdings in the area. They've issued the RFP, and we’ve been informed they aim to start the project by the end of 2027. I expect it will take a couple of years to finish, but we’ll see if that timeline holds; that’s the information we have at this point.

Michael Lewis, Analyst

So I apologize, I'm going to ask a question that was asked earlier, but ask it a little differently. The New York portfolio is 87.5% occupied. So I take that to mean there's a tenant in there paying rent. How much of the New York portfolio is leased? Is it close to 90% of the space that's leased? Is it less than that? Is it more than that?

Michael Franco, President and Chief Financial Officer

No, the occupancy figure we gave you is what is leased.

Michael Lewis, Analyst

I understand. Has there been any change in the free rent period for leases already signed that won't begin paying rent until 2027? That seems like a long time to me, but considering your history with long leases, it might not be unusual. Has there been any movement regarding free rent or other concessions?

Glen Weiss, Leasing Officer

It's Glen. So there's a movement in two ways in that regard. One is downtime is less. So companies are making decisions much more quickly than they were previously, which is important. And then once that happens, the free rent periods are declining. So I would say, downtime is lower and free rent is lower. As it relates to your comment, you're right, a lot of our leasing has been 15 to 20-year deals, which is why you're seeing free rents longer than you might have otherwise on 5 to 10-year leasing. But certainly, on balance, downtime, free rents are coming down as the market improves.

Michael Lewis, Analyst

Okay. So good to see that moving in the right direction, as you might expect. And then lastly for me, this is a small one. But in going from NAREIT FFO to FFO as adjusted, I saw there was 6.7 million of other, looks like gains that were backed out. I was just curious, it's a few pennies, but I was wondering if there was anything interesting or notable in that 6.7 million of other that was deducted and get into your core FFO?

Steven Roth, Chairman and Chief Executive Officer

Yes. It's made up of several items. I can get you to lift offline if that's something you want me to follow up on.

Michael Lewis, Analyst

No, that's okay. If there was nothing material that stood out. I was just curious.

Vikram Malhotra, Analyst

I guess just maybe, Michael, if you can just remind us, you've talked a lot about the flattish FFO, but do you mind just going over some of the big sort of building blocks you've shared in the latest on those just as we think about kind of the big puts and takes that get you to flat for next year?

Michael Franco, President and Chief Financial Officer

Yes, I mentioned a few points. We are going to take some income offline. Steve mentioned the retail redevelopment on 34th and 7th, where we will temporarily remove some signage to rebuild one of the signs, which we believe will yield greater returns once it is back up, but this will likely affect us for about four months next year. We also discussed some asset sales that will generate funds from operations, and we expect those to be completed in the first half of the year, at the latest by the end of the year. All of this will influence our funds from operations. At the same time, there are positive factors that will keep us somewhat flat. Significant growth is anticipated in 2027, where we have secured considerable income. We are aware of everything related to PENN 2, but most developments outside of MSG won't move forward significantly until late 2026 and into 2027. Therefore, while we expect substantial growth in 2027, we won't gain the benefits on a GAAP basis in 2026. The same applies to several other vacancies; we've successfully completed developments at 1290 and 280, among others, but much of that impact won't be realized until the end of 2026 or 2027.

Ronald Kamdem, Analyst

Just two quick ones. Sticking on the 2026, if I can ask about same-store NOI, I mean, I think on the cash basis, it sounds like there was a reset this year, there's some free rent. Presumably, some of that burned off in '26, maybe a lot in '27. So just mechanically same-store NOI, is it somewhat positive next year and then really positive in '27? Or how do we think about that?

Michael Franco, President and Chief Financial Officer

So you're talking about the cash front?

Ronald Kamdem, Analyst

On a cash basis, yes.

Michael Franco, President and Chief Financial Officer

I think like GAAP, we still think of continuing positive cash, just given the timing of the free rent, whatnot, I think it towards the end of '26 that, that will turn positive and then obviously, significantly so in '27.

Ronald Kamdem, Analyst

Great. My second question is about the dispositions. Can you discuss the Hotel PENN land site and any plans for retail monetization? What is the level of interest and how are you approaching those opportunities?

Michael Franco, President and Chief Financial Officer

We do not have any plans to sell the Hotel PENN site that Steve mentioned earlier. This property is a long-term hold, and it's very well located across from our core assets, PENN 1 and PENN 2. On the retail side, we recently sold the UNIQLO store, but interest from retailers looking to acquire assets remains strong. We are seeing good activity across our retail portfolio, and there's been a noticeable increase in demand in Times Square. We've been quite active in PENN, and tenants are responding positively to the improvements we've made at PENN 1 and PENN 2, which sets the stage for our redevelopment project on 34th and Seventh. Retailers understand the market dynamics, which is why many are opting to renew their leases early, and some are even considering purchasing their current spaces or looking for new ones. While the market has been somewhat sporadic in terms of activity, we expect to see continued transactions in retail, and we are open to participating in those opportunities, provided we receive the right value. So, stay tuned for potential developments in the future.

Steven Roth, Chairman and Chief Executive Officer

While we're discussing retail on 34th Street, I want to provide some additional insights. The area on both sides of Seventh Avenue and extending down to 33rd Street is mainly filled with the retail space that we have inherited, which I referred to as lovingly junk in my remarks. We are currently working on canceling all those leases and will redevelop that space into modern and appealing retail options, specifically tailored for our office tenants and the market. Historically, the corner of 34th Street and Seventh Avenue has been one of the busiest subway stations in the city. Not long ago, 34th Street was the second most popular shopping street in the city, but it has declined over time. We plan to revitalize it, and we believe this is a manageable task. Macy's, located across the street, has fluctuated in sales close to $1 billion, while maintaining its status as the highest-volume department store in the United States. We are confident in the value of the real estate, despite its current state of decline. Our goal is to rejuvenate this area, which serves as the gateway to our entire PENN district, and we believe this will significantly enhance the overall value of the PENN District. Please excuse my brief promotion of this initiative.

Brendan Lynch, Analyst

Just one question for me. A follow-up on the PENN axis project and bringing Metro North into PENN specifically, it's been delayed. It seems there is a coordination issue between Amtrak and MTA. To what extent are you involved with the various government agencies? And is there any prospect of getting that project timeline back on track for completion prior to the current 2030 target or even preventing it from slipping further?

Steven Roth, Chairman and Chief Executive Officer

Barry and I will take that question. And then Michael and I will add it. So as you can imagine, we're intimately involved with the MTA through all of the work around PENN Station; a great partnership there. If you speak directly to the MTA, what you'll hear is that they plan on running service on Metro North starting in 2027 utilizing the existing 2 tracks that already connect PENN Station straight up to Westchester to Boston. The part that was delayed is the construction of the 4 new stations in the Bronx and adding 2 new tracks, which allows them to run Express service. So we expect that service will begin in 2027 on the New Haven line in the PENN Station.

Operator, Operator

At this time, there are no further questions remaining in queue.

Steven Roth, Chairman and Chief Executive Officer

Thank you, everybody. We actually are very proud of the results that we delivered this quarter in terms of the scale of our leasing and the price, the rental rates and the value creation. The occupancy is easily going to be over 80% this year in PENN 2, and we think we had a great quarter. We are very proud of our balance sheet activity, and we love the 623 Fifth Avenue acquisition. So with that advertisement, we'll sign off. And we are excited to talk to you again episodically and also in the fourth quarter. Thank you.

Operator, Operator

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