Earnings Call Transcript
VORNADO REALTY TRUST (VNO)
Earnings Call Transcript - VNO Q2 2025
Operator, Operator
Good morning, and welcome to the Vornado Realty Trust Second Quarter 2025 Earnings Call. My name is Michael, 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, Executive Vice President and Corporation Counsel. Please go ahead.
Steven J. Borenstein, Executive Vice President and Corporation Counsel
Welcome to Vornado Realty Trust second quarter earnings call. Yesterday afternoon, we issued our second quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents as well as our supplemental financial information package are available on our website, www.vno.com, under the Investor Relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q and financial 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. Let me start by expressing our sorrow about the tragic and senseless shootings at 345 Park Avenue last week. Our deep condolences go out to the victims, families and friends. We have many friends in that building and ownership and occupiers, and we stand with them as they deal with this terrible tragedy. To continue, here at Vornado, our business continues to be strong, is getting stronger, and I remain incredibly enthusiastic about our future prospects. Our stock performance leads the office sector, having increased 42% over the trailing 12 months, almost double the S&P 500. I was quite surprised that, broadly speaking, every other office REIT, whether East Coast or West Coast, including all the other New York office specialists, were negative during that period. We had an excellent quarter, and Michael will cover the results shortly. By excellent, I mean leasing, balance sheet and PENN, all excellent. Let me once again discuss what we see on the ground and our business strategy. We are a 90% New York-centric company. Actually, we are a 90% Prime Pitch Manhattan-centric company. We do own a single large building in Chicago, THE MART, and a single complex at 555 California Street, the #1 building in San Francisco. These 2 assets may be on the for-sale list for the right deal at the right time. Manhattan is universally claimed to be the strongest real estate market in the country, and I mean the strongest by far. While Manhattan may have nearly 420 million square feet of office space, we actually compete in a much smaller 180 million square foot Class A better building market. Our clients are expanding, demand is strong and broad-based, and here's the punchline. Available space continues to evaporate quickly. Replacement cost for a Class A tower in Manhattan has risen to, call it, $250 per square foot. With interest rates at 6% or 6-plus percent, rents in the $200s are now commonplace. Think about it, $100 rents were rare only a few years ago. I believe this math is telling us there will only be a trickle of new supply for the foreseeable future, at least through the end of the decade. Remember, it takes 5 years from start to deliver a new build tower in New York. And that trickle of supply, however unlikely, will undoubtedly be spoken for and will not create speculative space available to the market. Taken together, all this is the very definition of a landlords market. With tight availability in Class A better buildings in Manhattan and the Westlight Corridor. And no new supply coming for the rest of the decade, I believe the next few years have the potential to be one of the strongest periods of rental growth we've seen in decades, and it's already started. That said, logically and for certain, values will increase as well. Here is our industry-leading leasing scorecard. During the first half of 2025, we leased 2.7 million square feet overall, of which 2.2 million square feet was Manhattan office. That includes the 1.1 million square foot master lease with NYU at 770 Broadway, the largest New York office lease since 2019, which, by the way, absorbed 500,000 square feet of vacancy at that property. The remaining 1.1 million square feet of leasing during the first half was at $97 per square foot average starting rents with mark-to-markets of plus 10.7% GAAP and plus 7.7% cash. During the second quarter in Manhattan, we executed 27 deals totaling 1.5 million square feet, including NYU. Excluding NYU, the remaining 400,000 square feet of Manhattan office leasing for the quarter was at $101 per square foot starting rents, with mark-to-markets of plus 11.8% GAAP and plus 8.7% cash. We continue to achieve the highest average rents in the city. This quarter leasing was 190,000 square feet in PENN and 210,000 square feet in our other Manhattan assets. Importantly, our leasing this quarter included 12 transactions for 183,000 square feet at PENN 1 at an average starting rent of $101 per square foot, bringing occupancy here to 91%. Here's an interesting factoid. Since the start of physical development, we have leased 1.6 million square feet at PENN 1 at average rents of $94. At PENN, we are handily exceeding both our initial underwriting and our increased underwriting. Here's another way to look at it. Looking towards the future. Everyone is modeling large increases in Vornado's earnings as leases at PENN 1 and PENN 2 come online as they should. This is all based on rents of, say, $100 per square foot. But our neighbors to the West are achieving $150 per square foot and over time, so will we. Think about it, PENN 1, PENN 2 and Farley together comprise 5 million square feet. So the math says every $10 a foot uptick in rent yields $50 million to the bottom line. And what's more, when the uptick, i.e., market rents get to $150-plus a square foot of 5 million square feet, that's an increment of $250 million per year. Same-store asset appreciation over time is the ticket to success in the property business. Tenants are expanding in the PENN District. As an example, in the last quarter, Samsung doubled its space at PENN 1. And since its first 220,000 square foot lease signed in 2020, our major tech tenant at PENN 11 has expanded 3 more times, now occupying 460,000 square feet in that building. Last week, after the quarter ended and not included in the leasing statistics, we announced a 203,000 square foot headquarters lease at PENN 2 with Verizon Communications, one of the world's leading telecommunications companies. Verizon now joins other top-tier tenants, Madison Square Garden, Major League Soccer, and Universal Music Group at PENN 2. We are, of course, delighted to welcome Verizon. Verizon's choice of PENN and their enthusiasm for their new home can best be described by lifting a quote from their press release by one of their senior executives: 'New York City isn't just where we work, it's who we are. Our employees deserve a workplace that is just as vibrant as our culture. PENN 2 is more than an office. It's a space designed to bring us together to collaborate, to celebrate, to think boldly, to build the future side-by-side.' The Verizon folks get it. This is a very important deal and continues to validate the product. This is a very important deal. Occupancy at PENN 2 is now 62%, and we have multiple deals in the OnDeck circle, which will keep our occupancy marching upward. The PENN District, our 3-block long city within the city, continues to amaze and impress tenants and stakeholders. We sit at the top of the nexus of Pennsylvania Station and the New York City subway system adjacent to our good neighbors to the West, Manhattan West and Hudson Yards. The three of us combined represent the new booming West side of Manhattan. At PENN, we are creating a campus of multiple interconnected buildings under ownership. We're delivering exactly as we said we would, and there is much more to come. As a starter, we are well along in the development process for a 475-unit rental residential project on our 34th Street site, caddy-corner to the Moynihan Train Hall. Next, we are going to transform as much as 700 front feet of retail on both sides of Seventh Avenue along 34th Street into attractive, modern and exciting retail offerings. The gateway to PENN is Seventh Avenue at 34th Street. This stretch, across the street from Macy's, used to be a top 3 location, and returning to the top 3 is our goal. As I said before, the PENN District will be a growth engine for our company for years to come with rising rents and future development projects, including the PENN 15 site and potential residential opportunities. We also continue to add to our already impressive food offerings in the district with our newest restaurants at Dynamo Room, which opened last month to great reviews, and we will open at Farley in the fall. And our rooftop park at PENN 2, called The Perch, is the best spot in the city for view, food, gathering or just relaxing. Come see PENN for yourself. I invite you to come to the PENN District any time, but especially at Happy Hour, where you will see every seat in every restaurant and amenity, whether indoors or outdoors, filled with happy employees of our tenants. Our unmatched amenity package of 180,000 square feet is surely doing its job in spades to attract and delight our tenants. Our New York office leasing pipeline is robust with a total of 560,000 square feet of leases signed or in negotiations, setting up the third quarter, plus more than 1 million square feet in various stages of proposal. As we announced on our last call, after 2 years of intense deliberations, the arbitration panel issued its ruling on the PENN 1 ground lease rent reset. The PENN 1 ground lease has fully extended, goes to 2098. Days ago, our ground lessor filed an 11th hour Hail Mary Motion in New York County Supreme Court to vacate the rent reset panel ground rent determination. We believe the motion is entirely without merit and intend to vigorously oppose it. We also completed the following financing transactions as we continue to bolster our liquidity and handle our debt maturities. In April, we completed a $450 million financing of 1535 Broadway using $407 million of net proceeds to partially redeem our retail joint venture equity on the asset. The preferred equity outstanding balance is now $1.079 billion, down from $1.828 billion. In June, we completed a 5-year $675 million refinancing of Independence Plaza, a joint venture in which we own a 50.1% ownership interest. In July, we completed a 5-year $450 million refinancing of PENN 11, paying down this previous loan by $50 million. We have meaningfully delevered our balance sheet over the past couple of quarters. Since the beginning of the year, we have generated $1.5 billion of net proceeds from sales, financings, and the NYU deal, paid down $965 million of debt and increased our cash by $540 million. Our cash balances are now $1.36 billion, and together with our undrawn credit lines of $1.56 billion, we have immediate liquidity of $2.9 billion. Our net debt-to-EBITDA metric has improved by 1.4 turns to 7.2x from 8.6x. And our fixed charge coverage ratio, as expected, is steadily rising. Please see Page 23 of our financial supplement for details. Finally, we remain very excited about the redevelopment of 350 Park Avenue with Citadel as our anchor tenant and Ken Griffin as our 60% partner. The process to create this grand Foster and Partners designed 1.8 million square foot tower on the best side of Park Avenue has begun, and this new building will stand out as being truly best-in-class. Due diligence is complete, i.e., the building is basically designed and construction documents are progressing. Last month, the City Planning Commission voted to approve the project, and we expect the final new look approval from the City Council this fall. Citadel is currently building out their interim swing space, which will allow us to commence demolition of the existing 350 Park Avenue building in spring. Thank you all for listening. And now over to Michael to cover our financials.
Michael J. Franco, President and Chief Financial Officer
Thank you, Steve, and good morning, everyone. Second quarter comparable FFO was $0.56 per share, which beat analyst consensus of $0.53 per share and was essentially flat compared to last year's second quarter. We had lower net interest income from retail preferred repayments and lower NOI from asset sales, offset by lower real estate taxes at THE MART net of tenant reimbursements. We have provided a quarter-over-quarter bridge on Page 2 of our earnings release on Page 6 of our financial supplement. In addition, our cash NOI is lower this quarter, primarily due to the previously discussed one-time PENN 1 ground rent true-up payment made in April and free rent associated with recently commenced leases from backfilling the previously announced known move-outs. On our last earnings call, we said that we expected 2025 comparable FFO to be essentially flat compared to 2024 comparable FFO of $2.26 per share. This is still a good assumption as we sit here today. As previously discussed, we still expect the full positive impact of the lease-up of PENN 1 and PENN 2 in 2027, resulting in significant earnings growth by 2027. New York office occupancy increased this quarter to 86.7% from 84.4% last quarter, primarily due to the full building master lease at 770 Broadway. As we continue to execute on our leasing pipeline, we anticipate that our occupancy will increase into the low 90s over the next year or so. Lastly, the financing markets are liquid, and we have been active in refinancing our 2025 maturities. On top of the recent Independence Plaza and PENN 11 refinancings, we have several others in the works.
Operator, Operator
Steve Sakwa from Evercore ISI is on the line with a question.
Stephen Thomas Sakwa, Analyst
Steve, I guess I wanted to tie 2 comments together. You said PENN 2 was 62% occupied with multiple deals in the on-deck circle. Then you talked about the letters of intent for 560,000 feet plus 1 million square feet of proposals. So can you just maybe help us understand how much of that pending activity is geared toward PENN 2 and how much is for the rest of the New York City portfolio?
Steven Roth, Chairman and Chief Executive Officer
Glen, do you want to take that?
Glen J. Weiss, Executive Vice President of Office Leasing & Co-Head of Real Estate
Sure. Steve, it's Glen. So of the 560,000 feet, those are leases out in negotiation. The Verizon lease is included in the 560,000 feet. In our pipeline, we have about 1.4 million feet in the pipeline in various lease proposal stages, and about 50% of that is at PENN 2. That's the breakdown.
Stephen Thomas Sakwa, Analyst
Great. And then for my follow-up, Steve, you made some comments early on about THE MART and 555 California sort of being for sale at the right price. And I feel like that's maybe a little bit of a shift or change in your thinking. So maybe could you just expand upon that? And is your goal to really sort of get back to being just kind of a pure New York City company in the shorter versus longer term?
Steven Roth, Chairman and Chief Executive Officer
We have put significant effort into focusing the company on our core strengths and monitoring our financials and stock price. Our primary goal is to increase our stock price, as we believe these two assets hold substantial value. One asset is fully owned, while the other has some financing attached. We consider 555 California to be the top asset in San Francisco, which is currently in a recovery phase that we anticipate will be quite notable. As mentioned, we are open to selling these two assets if the price and timing are right. None of our assets are off-limits; we view them as financial assets, and we will pursue the best financial outcomes for the company.
Operator, Operator
And your next question comes from Floris Van Dijkum with Ladenberg Thalmann.
Floris Gerbrand Hendrik Van Dijkum, Analyst
Could you provide some details about your signed-but-not-open pipeline? You mentioned that your leased occupancy in New York is approximately 85.2%. What is the actual physical occupancy? Additionally, how much rent is expected to come online in the next 12 months as these spaces become activated?
Michael J. Franco, President and Chief Financial Officer
Floris, it's Michael. Welcome back, and congrats on your new position. In terms of the signed, but not commenced, we're going to have to come back to you on that number. I don't want to give you a guesstimate and SWAG. We'll have to come back on that. But obviously, with Verizon signing, the occupancy number will continue to migrate up close to 88%. Obviously, there's ins and outs. We continue to believe that we'll be north of 90% as we get into next year and that income generally, and I think we've made consistent on this point, will, from an FFO standpoint, kick in heavily in 2027, right? So '26 continues to be a year where we have the leases signed, but they don't kick in. '27, I think you're going to see a significant increase. And that, I think, is consistent with what we said in the last couple of quarters. But in terms of specific dollars, I have to come back to you.
Floris Gerbrand Hendrik Van Dijkum, Analyst
If I could ask a follow-up, Steve, you sparked my interest regarding the upside potential in your PENN District. In the past, you've mentioned a stabilized NOI of around 3.25%. How do you think that outlook has changed? Specifically, how much has it shifted over the last 6 months considering the increase in market rents and your lease activity at PENN 2?
Steven Roth, Chairman and Chief Executive Officer
Floris, I am very excited about our activities at PENN and the long-term value it will bring to the company. Currently, we are leasing PENN 1 and PENN 2, and we anticipated achieving $100 in rent, which we are not only meeting but exceeding. Interestingly, neighboring properties are getting $150 per square foot and more. Thus, we believe that over time, we will also achieve rents in PENN 1, PENN 2, and any additional buildings we construct that will be slightly below those figures. If we view real estate on a five-year planning horizon rather than just quarterly, an increase of $10 per square foot in market rents across our existing 5 million square feet would contribute an extra $50 million to our bottom line, translating to $0.20 per share. Should the rents rise by $50 per foot, from $100 to $150, the company could see a $250 million increase in income over time. While there will be some minor expenses, like a slight increase in real estate taxes, the overall numbers are significant. Essentially, the strength of the real estate business lies in owning valuable assets over time, and we believe our current properties are undervalued, meaning they will grow increasingly valuable as market conditions improve.
Floris Gerbrand Hendrik Van Dijkum, Analyst
So Steve, as you think about that, is there a possibility that the PENN District could generate maybe up to $400 million of NOI in 5 years' time?
Steven Roth, Chairman and Chief Executive Officer
Easily. That would be with no new construction or new buildings. We're just saying that the existing inventory we have will increase by $100 million over the next 3 or 4 years.
Operator, Operator
And your next question comes from John Kim with BMO Capital Markets.
John P. Kim, Analyst
I know there are a few different occupancy numbers out there, but just focusing on your occupancy stats on Page 32. New York occupancy went up to 85.2%, which is a sequential improvement, which is great. But it is lower than the 86.2% that you noted post the NYU lease last quarter. So I was wondering what the headwinds were this quarter that brought that down 100 basis points or so?
Michael J. Franco, President and Chief Financial Officer
John, I think a couple of things. One is, I think that's an area in New York number office in retail. I think the office numbers are generally consistent with what we said. There's a little bit of timing and Verizon got signed a few days after the quarter. So obviously, if that happened before, we would have been above even where we said last time. So a little bit of timing. I think the biggest impact there was retail. We had 2 Forever 21 leases at 1540 and 435 Seventh, where they were paying a low rent. The company obviously went bankrupt again, and they vacated those stores, and that knocked off, I think, about 10 percentage points off the retail occupancy, which in total took us to the average number you see there. So there wasn't a lot of rent coming out of either one of those stores. There are, frankly, placeholders, particularly at PENN until we had a really sort of redeveloped the whole stretch that Steve alluded to in his remarks. But from an occupancy standpoint, I think that was the biggest driver.
John P. Kim, Analyst
And then on 555 Cal and THE MART, Steve, you talked about potentially selling this. I wanted to see if you had any more commentary on timing, if this is something that could be listed in the next 12 months? And how should we think about the use of proceeds between developments, acquisitions, and reduction of debt? We did notice that you provided a new disclosure on net debt to EBITDA. So I'm wondering if that's a KPI going forward as far as maintaining or lowering net debt EBITDA?
Steven Roth, Chairman and Chief Executive Officer
On the first question, we are not listing those buildings in the next year or whatever. If we sell those buildings, it will probably be an opportunistic incoming where somebody wants them. But what I'm saying is that we're not actively marketing the buildings, and we have no prediction on timing, but they are available if the deal is correct and the timing is correct. The other half of your question was what, sir?
Michael J. Franco, President and Chief Financial Officer
Yes, to Steve's point, nothing is imminent. However, if the right price comes along, we will consider a transaction. At that time, we will evaluate the best way to use the capital, whether that means paying down debt or investing in development, among other options. I appreciate your acknowledgment of our efforts to reduce leverage. We are proud of the progress we have made in lowering our debt and believe we are advancing ahead of our peers in this regard. We aim to maintain this momentum. When the right opportunity arises, we will decide how to best utilize the proceeds.
Steven Roth, Chairman and Chief Executive Officer
I want to tack on to what Michael said. One of the very important things that happened over the last short period of time is the improvement in our balance sheet, taking our leverage ratio down by 1.4 turns is a really big thing, rebuilding our cash balances, having lots of availability and having a very strong balance sheet is one of the important things that we do. And I'm very proud of what the team has accomplished over the last period of time. I think it's a really big thing.
Operator, Operator
And our next question comes from Dylan Burzinski with Green Street.
Dylan Robert Burzinski, Analyst
Can you discuss your strong leasing pipeline? You mentioned that occupancy is expected to rise into the low 90s next year. How do you see your ability to increase net effective rents in that context and with such a strong backdrop?
Michael J. Franco, President and Chief Financial Officer
Yes. Why don't I start, Glen, jump in here. If you look at the current environment in the marketplace, whether it's Park Avenue, Sixth Avenue, etc., vacancy rates are generally under 10% for Class A buildings, probably Park Avenue under 5. In general, citywide in Midtown and the West side, very tight. And I think in terms of large blocks of space, I think there's less than a handful of a couple of hundred thousand feet or larger, PENN 2 being one of those, and I think widely viewed as the best of those. So Steve talked about we're in a landlords market, and we certainly feel that. I think tenants feel that. There's a strong demand in the marketplace. You have a number of tenants that are focused on expiries in 3 years out. They're worried about whether they're going to be able to either consolidate in a single location, have enough expansion space, etc. So the dynamics have shifted. And we are, I would say, on a weekly basis, evaluating our space and trying to determine how much we can push rents, and we're going to continue to push rents, I think, across the board. We've done it aggressively on Park. We're doing it in other buildings in Midtown, and we're doing it in PENN. I think what you're hearing and what you're seeing in terms of the stat is they continued movement to push up rents there, where I think we started at PENN 1 in the mid $80s, maybe $90, and now we're achieving rents north of $100. We're going to continue to push those same on PENN 2. So we're pretty optimistic in terms of what's going to happen to rental growth just given the lack of quality space available and the demand side we're seeing. So I think we have the potential to see growth rates we haven't seen in quite some time, and we're going to push. We're going to find the resistance level as we move out here.
Dylan Robert Burzinski, Analyst
That's helpful. And then I guess one last one for me. Are you guys able to talk about the A note and B note investments you guys did?
Michael J. Franco, President and Chief Financial Officer
It's on a site in Midtown. It's a note that we've legged into in 2 phases. It's a high-quality site, and it can go either way, where on one hand, we might just collect the coupon and earn a reasonable return. Relatively, we could earn in cash. And alternatively, it could be an opportunity to own the asset and capitalize on the opportunity there. So it could go either way, but we just view it as it's a high-quality asset. We're happy if we earn the return and may leverage into a broader opportunity, and that's as much as we can say right now.
Operator, Operator
And your next question comes from Seth Bergey with Citi.
Seth Eugene Bergey, Analyst
I recall that during the last call, you mentioned reaching the 80% target for PENN 2 by the end of the year. Considering the recent leasing activity and the $1.4 billion development pipeline involving leases for PENN 2, do you believe it's possible to surpass that target?
Steven Roth, Chairman and Chief Executive Officer
I doubt it.
Glen J. Weiss, Executive Vice President of Office Leasing & Co-Head of Real Estate
Hi, it's Glen. I mean look, we're feeling very good about where we are at PENN 2. We'll feel we'll get there. I will say we're being patient. We're being smart. I might even say we're being a little choosy in terms of our credit profile, our tenant mix, and we do keep looking at our pricing and increasing it. So we're not rushing to just lease space. That's not what we do. So while we think we'll get there, we're being careful and smart about our strategy. We're in it for the long term, not for the short-term statistics.
Steven Roth, Chairman and Chief Executive Officer
Well said, Glen.
Operator, Operator
And your next question comes from Alexander Goldfarb with Piper Sandler.
Alexander David Goldfarb, Analyst
And congrats to you guys on the Verizon deal. So that was nice to say. Glen, you partially answered my question on the leasing ex NYU. It sounds like you guys are choosier on the types of deals that you're doing, especially in this market. But what stood out in the quarter is ex NYU, the average lease term was just 6.8 years, which given CBD leasing would expect that longer. So can you just give us a little bit more color? Clearly, you're on for big whale of deals, but on the smaller deals, can you just give a context of the types of tenants and space and tenure? Because again, we would expect deals to be longer than averaging 6.8 years?
Glen J. Weiss, Executive Vice President of Office Leasing & Co-Head of Real Estate
Yes, Alex. For the full year so far, our average lease term is 12 years based on 1.1 million square feet leased outside of NYU. This quarter was unusual due to a combination of large renewals averaging less than 10 years and a number of prebuilt deals at PENN 1 and other multi-tenant buildings like the Fuller Building. The leasing mix this quarter was atypical, and I want to emphasize that this should not be seen as a trend. Generally, our average lease terms are usually at least 10 years. This quarter is an outlier, and I’m not worried about it.
Alexander David Goldfarb, Analyst
Okay. The second question is Steve. I appreciate your comments on the cash balance for Vornado. But when we look at Alexander's, it seems to be the inverse in the sense of the dividend over payment, the cash needs for the Bloomberg in 2029 replacing Home Depot. So can you just help us understand the dividend over payment relative to the cash balance relative to how we should think about Alexander's on a go-forward basis?
Steven Roth, Chairman and Chief Executive Officer
This is a Vornado call. I think it's inappropriate to get into Alexander's. We had this conversation last quarter, as I remember. There are things going on at Alexander's that you don't know about. And as a result of that, I quibble with your analysis. Alexander's is going to be just fine.
Alexander David Goldfarb, Analyst
Okay. I appreciate that, Steve.
Steven Roth, Chairman and Chief Executive Officer
Just to clarify just a little bit more. I mean there are some assets that are going to be sold at Alexander's, which will, how do I say it, probably surprise you greatly. And it's not the biggest.
Operator, Operator
And your next question comes from Jana Galan with Bank of America.
Jana Galan, Analyst
Maybe just following up on the retail leasing environment. Can you talk a little bit more about the timing around the vision for the 34th Street quarter and then the potential timing of backfilling the Forever 21 space?
Steven Roth, Chairman and Chief Executive Officer
Thank you. This is a long-term goal. We have been holding that space off the market to ensure we find the right moment. First, let's discuss the quality of the real estate. Over the years, 34th Street has consistently ranked among the top two or three shopping streets in Manhattan. The subway stations here are the second and third busiest in the entire system, with impressive foot traffic. The activity is increasing now with the new office buildings that have been developed in the area. When we examine the transportation network, it is centered at Seventh Avenue and 33rd Street as well as Sixth Avenue and 33rd Street. Therefore, people from the buildings to the west enter our neighborhood to access the transportation system. We are very optimistic about the quality of retail in this area. However, the street has become somewhat worn. We have been retaining a significant amount of space, possibly all of it, until the timing is right, and that time is now. We plan to utilize approximately 700 front feet, which is roughly 3.5 blocks. Such a concentration of space under single ownership is rare, and we are thrilled about the opportunity. Regarding the release of the Forever 21 space, it might undergo reconfiguration, and I cannot provide a precise timeline for that. It will certainly be a different building and will require some time, so we ask for your patience. What is to come will be a fantastic outcome.
Jana Galan, Analyst
Great, Steve. A question for Michael. Thank you for the comments on the comparable FFO for this year versus last. But can you help us think about kind of the revenue ramp at the end of the year? Just trying to help us kind of think about the full impact of PENN 1 and PENN 2 being in 2027, but kind of how will that trend quarter-to-quarter?
Michael J. Franco, President and Chief Financial Officer
It seems you're looking for guidance, Jana, which we don't provide. I believe growth will develop over the upcoming quarters, particularly for PENN 1 and PENN 2, but most of that impact will be realized later on. I'm leaning toward discussing the fourth quarter of this year and next year, though I anticipate that much of the growth will occur in 2027 from a run rate perspective. I'm not ready to make predictions for 2026 at this point as we have yet to finalize our budgets. The market is showing positive trends, and we will see how things unfold. However, I expect there could be significant growth between 2026 and 2027.
Operator, Operator
And your next question comes from Vikram Malhotra with Mizuho.
Vikram L. Malhotra, Analyst
Michael, I guess I wanted to just get some more color on that last few comments. So you obviously talked about the '27 growth. We're not looking for a number for '26, but just — are there any big moving pieces we should be aware of as we model this out, like anything that is really, I guess, depressed '26? Or is it just a step function change as we go into it from '26 to '27?
Michael J. Franco, President and Chief Financial Officer
I think it's largely just a step function. I don't think it's anything unusual. I mean, look, we have space releasing up really across the board, both in New York, some space in California, Chicago. We've got activity in the retail area that will kick in as well. So I think generally across the board, nothing unusual, but largely, as I said, just given timing of when we signed those leases, step-in heavily in '27.
Vikram L. Malhotra, Analyst
Okay. So no big move outs or like interest expense, I guess, any swaps or anything expiring that pressure '26 relative to '25 before we get a step-up in '27?
Michael J. Franco, President and Chief Financial Officer
In terms of move-outs, we are in the leasing business, so there will always be some tenants that move out, some that we retain, and some that grow. Currently, it seems we are more focused on growth rather than contracts. There will always be some level of move-out, particularly in New York offices, and we will need to see what develops over the next year. Regarding interest expenses, I believe we are on a downward trend. We have been well-hedged and are in the process of deleveraging our balance sheet. We are generally seeing flat interest rates, maybe slightly varying, but with less debt, our interest expenses are decreasing. If short-term rates decline, that will provide additional relief. Overall, I think we are improving on the interest front.
Steven Roth, Chairman and Chief Executive Officer
From a broader perspective, we conduct 90% of our business in the top market in the country. We focus on the best building category, which is a smaller segment of the overall market, approximately 180 million square feet. Vacancies in this niche are decreasing as our customers are expanding and thriving. The demand for space remains strong and competitive in our market, leading to tighter vacancies. This all points to improvements in our business and increased value for shareholders. That’s our current position.
Vikram L. Malhotra, Analyst
I just wanted to clarify. Steve, you mentioned that San Francisco is likely to come back very strongly, and New York is performing well. I'm curious if this presents an opportunity for Vornado to use some capital to acquire assets or invest in debt. I know you're paying down debt, but what are the current investment opportunities for Vornado?
Steven Roth, Chairman and Chief Executive Officer
The answer is capital allocation is probably the single most important thing that we have to do, and we are going to be very rigorous and very disciplined in what we do. We look at everything that comes up, and we invest cautiously, and we invest aggressively when we think there's something that creates real shareholder value. So I don't have anything in the way of predictions for you other than the fact that we are very responsible in our capital allocation.
Operator, Operator
Your next question comes from Caitlin Burrows with Goldman Sachs.
Caitlin Burrows, Analyst
Earlier, someone inquired about net effective rents, and you mentioned increasing rents throughout New York City. Regarding tenant improvements and leasing commissions, you indicated that it represents a percentage of initial rent, which has risen in New York City for the second quarter and the first half to about 12% to 13% of the initial rent. I was curious if this trend for 2025 is due to any specific reason, or if it's simply a reflection of the current leasing environment. Additionally, what would need to occur for this situation to change?
Steven Roth, Chairman and Chief Executive Officer
I don't know that the yes, go ahead, Glen.
Glen J. Weiss, Executive Vice President of Office Leasing & Co-Head of Real Estate
The tenant improvements have stabilized and haven't reduced yet, but we are observing a decline in free rent, which isn’t reflected in that percentage. We anticipate that as conditions tighten, tenant improvements will eventually decrease, but free rent is definitely beginning to diminish in our deal-making as rents rise. I believe this is a positive development for strengthening the net effective story for owners like us.
Caitlin Burrows, Analyst
Got it. Okay. And then I was wondering if you could just give any update on your dividend thoughts as it relates either to 2025 or just broadly in having a quarterly dividend reinstated?
Michael J. Franco, President and Chief Financial Officer
Caitlin, regarding the dividend, that decision ultimately rests with the Board. We will meet with the Board to discuss it as we approach year-end. However, I want to highlight a few points. Given the positive trends in our business and the expected taxable income, there are still factors that could influence the final decision, such as the sale of a couple of small assets. As we move closer to year-end, our expectation is that we will at least match last year's dividend of $0.74 per share for 2025. Again, we will review this with the Board at year-end. Looking forward, as the environment improves, we aim to return to a more regular dividend structure. This will be something we evaluate at year-end, and while I cannot guarantee any changes in total outcomes, we expect to maintain at least the same level as last year. With the positive trends, we believe the dividend will start to increase gradually, especially as we approach 2027, when we anticipate a significant rise in earnings.
Operator, Operator
And your next question comes from Ronald Kamdem with Morgan Stanley.
Ronald Kamdem, Analyst
I have two quick questions. Regarding the same-store NOI and related comments, do you have any high-level insights as we approach this period in 2026 or 2027? Could you provide any thoughts on what that same-store performance might look like or how we should consider it without requesting specific guidance?
Michael J. Franco, President and Chief Financial Officer
I think that in NOI, there is a lot happening because 770 is now included. We have also paid off the debt. Looking ahead, especially next year, we anticipate seeing positive same-store NOI and more. I can't provide the percentages at this time, but based on the leasing pipeline, we expect that to be the case.
Ronald Kamdem, Analyst
Makes sense. And then my second question, just some updated thoughts. I mean, I think the Hotel PENN Land site, some of the activity on sort of Fifth Avenue and retail monetization. Just curious if you can give us a pulse on those assets and how you're thinking through about potential monetization there or what you're hearing?
Steven Roth, Chairman and Chief Executive Officer
The PENN 15 site is, in my opinion, the top site in the West New York market. It will, of course, need a new build. As I mentioned in my remarks, the costs associated with new builds have increased significantly. We are actively engaging with our tenants and monitoring all large requirements that arise. When the right tenant is identified, we will proceed with a deal and develop the land. However, the timing for this is unclear, and it is unlikely to happen quickly.
Operator, Operator
Our next question comes from Brendan Lynch with Barclays.
Brendan James Lynch, Analyst
As you guys mentioned, San Francisco showing broad improvement in demand. Can you give us an update on the progress for renewing or re-leasing some of the upcoming expirations at 555 California?
Michael J. Franco, President and Chief Financial Officer
Glen, do you want to take that?
Glen J. Weiss, Executive Vice President of Office Leasing & Co-Head of Real Estate
So I was just in San Francisco a few days ago. Things are markedly improved. The streets feel good, safer, cleaner, buildings are busier. And the good news is leasing is starting to pick up and improve. It feels a lot like New York, I'd say, probably 18 months ago or so where things are starting to happen in a positive way. The beat is better. The brokers are smiling a little bit all of a sudden. So it all feels good. We've just completed a huge run of leasing there about 600,000 feet. We have some vacancy to contend with right now, 100,000 feet bits in parts. And we have a couple of tenants moving on next year. We have action on everything. Our tour volume is great, almost daily in the building. Everyone is coming through and the building continues to outperform everybody by a long shot. The best tenants with the highest rents are all coming to 555. We feel great about our prospects. But overall, the market seems to be coming on now. The Mayor has done an excellent job improving the environment, working well with landlords like us and with our tenant base. So we feel like things are signaling to improvement and strength.
Brendan James Lynch, Analyst
Great. That's helpful. And maybe more broadly on the demand picture. Our checks with brokers have suggested that a lot of the demand that they've seen in recent quarters has reflected real-time needs and urgency among tenants versus more traditional longer-term capacity planning needs that would have been more of a characteristic of the past cycles. Have you seen any shift in recent quarters in how the tenant base is approaching their need for space in terms of real-time needs versus longer-term planning?
Steven Roth, Chairman and Chief Executive Officer
Glen, that's yours.
Glen J. Weiss, Executive Vice President of Office Leasing & Co-Head of Real Estate
So Verizon is a perfect example. It's a deal that started percolating to us in mid-June and closed at the end of July. That's fast. We love that. Tenant decided to move their headquarters, acted quickly, concisely, perfectly, and smoothly. So that's something we see. We have other activity at PENN 2, PENN 1, and elsewhere in the portfolio similar, where tenants are now coming quickly. It's not as much of our lease expiries in 2 years or 3 years or 4 years. It's the action that we like, a landlords market type of action. And a lot of it is both relocation and expansion. There's a lot of expansion, particularly in New York right now, where we're seeing signs of growth and people are acting very quickly. And even in some cases, we have tenants now battling for space throughout the portfolio. So I think your comment is on cue in terms of what we're seeing.
Operator, Operator
And your next question is a follow-up from Alexander Goldfarb with Piper Sandler.
Alexander David Goldfarb, Analyst
Glen and Steve, I just want to go back. Steve, you mentioned $100 in place. I think it was in place in PENN that could go to $150. If you guys get the same rents as your neighbors to the west. But I thought the new deals that you were signing were in sort of the $120, $130 range. I thought that's where the new deals are commanding. So maybe I'm wrong, but maybe you can just provide a little perspective versus what are in-place rents at the PENN 1, PENN 2 versus where you guys are signing rents. As I said, I thought your signed rents had been moving up steadily?
Steven Roth, Chairman and Chief Executive Officer
Glen, do you want to handle that for a minute?
Glen J. Weiss, Executive Vice President of Office Leasing & Co-Head of Real Estate
Certainly, we're moving steadily up. As Michael said, we were in the $80s and the $90s, now in the $100. That's on average. We, of course, have seen deals well into the $100s, the $110s, the $120s, and the $130s. So we are certainly seeing month-to-month improvement in rising rates. We expect that to continue. So our average rents have risen quarter-to-quarter. And then we're seeing deals well into the $100s now. You're correct, Alex.
Operator, Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Steve Roth for any closing remarks.
Steven Roth, Chairman and Chief Executive Officer
Thank you for joining us today, everybody. And we continue to be very excited about a lot of things. We're very excited about PENN, obviously. We're very, very proud of what we've done with our balance sheet over the last couple of quarters, and business is actually pretty terrific. We'll see you next quarter. Thank you.
Operator, Operator
Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.