Earnings Call Transcript - VNO Q3 2024

Operator, Operator

Good day. And welcome to the Vornado Realty Trust Third Quarter 2024 Earnings Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Steven Borenstein, Senior Vice President and Corporate Counsel. Please go ahead.

Steven Borenstein, Senior Vice President and Corporate 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 packages, are available on our website, www.vno.com, under the Investor Relations section. In these documents and during today’s call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q, and financial supplement. Please be aware that statements made during this call may be deemed forward-looking statements and actual results may differ materially from these statements due to a variety of risks, uncertainties, and other factors. Please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2023, for more information regarding these risks and uncertainties. The call may include time-sensitive information that may be accurate only as of today’s date. The company does not undertake a duty to update any forward-looking statement. On the call today for 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, Steven. Good morning, everyone. Today is election day in America and extra important since this is a once-in-four-year presidential election. Election day is arguably the single most important day in the calendar of our democracy. Early voting participation seems to indicate that this year’s turnout will be a record and that’s great. Enough said. Now to business. I’ve been saying for the past few quarters that the office leasing market in Manhattan is at the foothills of recovery and I think that’s becoming more and more apparent. While Manhattan has over 400 million square feet of office space, we compete in a much smaller, say, 180 million square foot market of the Class A better buildings, where demand is strong and vacancies are rapidly evaporating. Look at Park Avenue and Sixth Avenue now with 7% and 9% Class A vacancy, which is the very definition of a landlord’s market. And the icing on the cake is that there is no sign of additional office supply on the horizon. There hasn’t been a major new office start in five years. The cost of building and the cost of capital make it totally uneconomic to build. The mystery is a guide. No new supply always begets a landlord’s market. As Michael and Glen will comment in a moment, our rents are going up. I am extremely optimistic and the stock market seems to agree. Year-to-date, we have leased 2.5 million square feet company-wide, including 2.1 million square feet in Manhattan. As Michael and Glen will cover, activity is robust, and I am confident that we will sign between 3.5 million square feet and 3.8 million square feet of Manhattan leases this year, which would rank number two in our history. On the last call, we made mention of a deal with 770 Broadway. I am pleased to report we have agreed to a transaction with NYU for 770 Broadway. NYU will master lease the entire 1.1 million square foot office component, which excludes the residence, with an option to purchase in the 30th year and the 70th year. The master lease will provide for an upfront payment of prepaid rent sufficient to pay off our $700 million loan on the property, as well as an annual net rent over the lease term. Both parties have signed a detailed letter of intent and expect to execute final binding papers shortly. I expect the closing and rent commencement to occur in January. We are delighted to expand our relationship with NYU. Our liquidity is a strong $2.6 billion, with $1 billion of cash on the balance sheet. Our cash will shortly be augmented by over $1 billion from the Uniqlo sale, NYU prepaid rent, and the redemption for cash of over $500 million of our street retail preferred for proceeds of an in-process 1535 Broadway financing. Note that between Uniqlo and 1535, we will have redeemed about half of the preferreds. We will pay off our $450 million January 2025 bonds in January. We have well more than enough cash on the balance sheet to complete our leasing program for PENN 1 and PENN 2. And remember, we have no debt on Farley PENN 1 and PENN 2. Regarding our 350 Park Avenue site, arguably the very best site on Park Avenue, we are well along with the Norman Foster architectural firm in completing the design of the 1.8 million square foot tower that we will build with Citadel, who will be our major tenant and with Ken Griffin as our 60% partner. At PENN 15, the former Hotel Penn site, at 33rd Street and Seventh Avenue, directly across from PENN 2, is now down to grade and ready for development. I believe this site, in the heart of our PENN DISTRICT and directly connected to Penn Station, is the single best site available in the booming West Side of Manhattan. We own one asset in San Francisco, the trophy 1.5 million square foot 555 California Street. In a city of tech buildings, which are struggling with a city-wide vacancy of 36% and declining rents, this dominant financial services building's performance is quite remarkable. This year, we will lease 443,000 square feet at an average starting rent of $110. Occupancy in the tower is 98.7%, and we haven’t lost a single large tenant in all of the years of our ownership. We have a history of owning the very best retail sites, such as Fifth Avenue and Times Square, and bringing exciting retailers to town, such as H&M. We announced this quarter an important deal to bring Primark to THE PENN DISTRICT on 34th Street. This will be their flagship store in America. Hats off to the Federal Reserve, who seem to have beaten down inflation and engineered a soft landing. Having said that, for now, borrowing rates remain stubbornly high and not accretive to real estate value. Capital to refinance maturing loans on overleveraged assets is simply not available other than from the incumbent lender. But through it all, the economy is growing and our occupiers are expanding, and that’s a very good thing. 731 Lexington Avenue, the Bloomberg Headquarters Tower, is owned by Alexander’s Inc., of which Vornado is External Manager and one-third owner. In the first quarter, we extended the Bloomberg lease to 2040. In the third quarter, we financed the maturing loan on the Bloomberg H2 building. Alexander’s paid the loan down by $100 million to $400 million from cash on its balance sheet. The low LTV $400 million loan was rated all AAAs, enabling us to achieve a 5% interest rate, the lowest we have heard of in this cycle. The AAA rating, together with the quality of the credit and the quality of the building, led to the offering being eight times oversubscribed. District refinancing will save Alexander $17 million a year. We are open to buy in the acquisitions market, but very selective on the hunt for good assets at distressed prices. No business as usual here. In this cycle, lenders seem to be working out their troubled overleveraged problems with their existing borrowers, with few high-quality distressed assets coming to market. Having said that, this quarter we did acquire a $50 million loan, in default, on a very interesting midtown site. We will keep hunting. While our business is substantially better and improving, we continue to be rigorous with cash management. We will likely pay approximately the same dividend as last year, $0.68, in a single dividend paid in December. We expect to carry over to next year this same dividend policy, with a single dividend payable at year end. This strategy has been understood and endorsed by our major shareholders. I expect, as conditions normalize, so will our dividends. Lastly, if you are a Vornado investor, you must tour our PENN DISTRICT. And I do mean must. And I do mean tour, not just drive by. If you last visited six months ago, you must visit again. It’s changed that much, that quickly. The building architecture of PENN 1 and PENN 2, the size, extent and quality of the amenities, and the plazas and public spaces have all received universal acclaim from commentators, brokers, and occupiers alike. This was a team effort led by our senior leaders, Glen Weiss and Barry Langer, who deserve the Gold Star Award. We are on budget here and achieving higher rates than projected, and so we expect the returns shown on our financial statements to improve. Now over to Michael to cover our financials and the market.

Michael Franco, President and Chief Financial Officer

Thank you, Steve, and good morning, everyone. As expected, the financial results for the quarter were down from last year due to items that we previously forecasted. Third quarter comparable FFO as adjusted was $0.52 per share, compared to $0.66 per share for last year’s third quarter. This decrease was primarily attributable to lower NOI from known move-outs, largely at 770 Broadway, 1290 Avenue of the Americas, and 280 Park Avenue, and higher net interest expense, both of which we have previously discussed. We have provided a quarter-over-quarter bridge in our earnings release and in our financial supplement. Our outlook for comparable FFO for 2024 hasn’t changed in the past couple of quarters. That being said, with the pending lease at 770 Broadway, we already have approximately 75% of the aforementioned vacant space from the move-outs spoken for. Now turning to leasing markets. The tide has clearly shifted in the New York Class A office market. Leasing activity is strong and gaining momentum, and availabilities are declining, particularly for large blocks of space. Manhattan’s leasing volume during the first three quarters of 2024 totaled 23.1 million square feet and it looks like full-year activity will surpass 30 million square feet for the first time in five years. Strong demand for Class A space near transit, coupled with limited quality blocks of space, is resulting in rents rising and concessions beginning to tick down. For Midtown, vacancy for the better buildings, as defined by CBRE, is down to around 10%, with Park Avenue around 7% and Sixth Avenue at 9%. The headquarter deals are also back, with more mega transactions greater than 700,000 square feet signed this year than any year since 2019. During the third quarter, 10 leases of 100,000 square feet or greater were signed. With little availability in the new trophy product, tenants have been keenly focused on what remains available in recently redeveloped buildings, which have undergone extensive transformations. PENN 2 is perfectly positioned to capture this large tenant demand. Turning now to our portfolio. In the third quarter, we leased approximately 740,000 square feet of office space across our three markets. In our New York business, we have now leased more than 2 million square feet in 68 transactions during the first nine months of 2024 at an average starting rent of $112 per square foot. And during the third quarter in our New York office portfolio, we completed 454,000 square feet of leasing across 18 transactions at starting rents of $92 per square foot. We closed on a 297,000 square foot renewal with Google at 85 10th Avenue, solidifying this property as one of Midtown South’s best and an important piece of Google’s Meatpacking District campus, reaffirming their long-term commitment to New York. We have a unique window into tech sector activity, given our leading position as landlord to the big four technology companies in New York, as well as many others. And as we indicated in our last call, tech sector demand is coming back strong in New York and we have more in the works in our portfolio, particularly in Penn. At PENN 1, we leased 70,000 square feet at an average starting rent of $119 per square foot, led by our 55,000 square foot new headquarters lease with Roivant Sciences. These are historic rents for this building and THE PENN DISTRICT, and validate our original redevelopment thesis. Since we commenced the transformation of PENN 1, we have now completed more than 1 million square feet of leasing at $92 per square foot, with a significant mark-to-market increase. We are well on our way to achieving our original aspirations as THE PENN DISTRICT campus continues to attract new tenants from across the city at ever-increasing rents. Our market-leading, amenity-rich offerings, coupled with our complete transformation of the entire neighborhood, has put our properties in the leasing bullseye for tenants seeking high-quality space. Our reported New York office cash mark-to-market for the quarter was a negative 7%, but that’s not the real story. This is because several of the leases signed at PENN 1 during the quarter are for space that has been vacant for more than nine months, and therefore is not considered, quote, second-generation relet space, used to calculate our reported mark-to-market statistics. Additionally, the quarter included a 297,000 square foot lease, where we exchanged a tenant improvement allowance for a reduction in rent. As indicated on Page 17 of our financial supplement, if you were to include these leasing transactions in our cash mark-to-market statistics, the negative 7% would be a positive 17.9%. Including the lease at 770 Broadway, which Steve mentioned, New York's pipeline is robust and consists of 2.8 million square feet of leases in various stages of negotiation. This includes multiple tenant headquarter deals at our transformed PENN 2. We currently project to finish 2024 with almost 3.8 million square feet leased across our portfolio, which would be our highest volumes in 2014 and then our highest average starting rent ever. Our current office occupancy is 87.5%, down from 89.3% last quarter, primarily due to the previously announced Meta expiration at 770 Broadway. The easiest money we can make is filling up our empty spaces. As occupancy rises, our earnings will go up. With a pending full building master lease at 770, our office occupancy increases by 330 basis points to 90.8%. Depending on the timing of future lease transactions, our office occupancy will likely decrease in the first quarter of 2025, as the vacant space at PENN 2 is placed into service. We anticipate that this decrease will be temporary, and as PENN 2 stabilizes, we will get to the 93%. Turning to San Francisco, at 555 California, we closed a 46,000 square foot renewal and expansion deal at Wells Fargo during the quarter and currently have renewals out for another 283,000 square feet. Our leasing program at 555 is by far outpacing the entire market as leading financial services companies continue to be attracted to the property’s premier quality and our new 555 work-life amenity program, similar to what we have done in New York. While tenant concessions are up here too, every one of our renewal rentals has been a positive mark-to-market or flat in an otherwise weak San Francisco office market, demonstrating the unique cachet of this trophy property. At theMART in Chicago, we closed on 15 leases during the quarter, totaling 239,000 square feet, headlined by an important expansion and renewal of Medline, a worldwide leader in the healthcare industry, for 161,000 square feet. Medline’s enormous growth in Chicago is particularly noteworthy and the transaction is a major bright spot for both us and the overall market. theMART continues to outperform the market and attract top-tier tenants, driven by our strong debt-free sponsorship and recent amenity additions, which have reaffirmed its leading position in the marketplace. Turning to the capital markets now. While the financing markets remain challenging for office, we are beginning to see some encouraging signs. While banks remain out of the market, the CMBS market has reopened for Class A New York City office buildings, as evidenced by our recent $400 million financing on 731 Lex office at 5.04%, the lowest rate achieved for CMBS office financing post-COVID and the $3.5 billion financing for Rock Center and $750 million financing for 277 Park Avenue. And there are several billion dollars more in the pipeline. These financings show investors are once again constructive on office, and assets can get financed in sizes, albeit on conservative metrics and loan structures. With short-term rates finally coming down, and the SOFR forward curve projected to come down significantly over the next year, both the financing markets and borrowing rates should continue to improve and value should follow. The investment sales market is also beginning to perk up. There have been a number of older obsolete buildings sold to residential converters, which will take supply out of the market. The first Class A building sold this cycle, 799 Broadway, was recently put under contract at a 5% cap rate for $255 million or $1,400 per square foot, which is strong pricing. Our balance sheet is in excellent condition, with strong liquidity of $2.6 billion, including $1 billion of cash and restricted cash and $1.6 billion undrawn under our $2.17 billion revolving credit facilities. We have taken care of all of our significant 2024 maturities and are making good progress on our 2025 maturities. Despite the success we’ve had recently in extending our loans with existing lenders or refinancing our loans in the midst of this more challenging environment, we do still have a handful of assets that are overleveraged. Most of these assets do not contribute to our FFO right now and have little to no equity value. We will maintain our discipline, and unless these loans are restructured on terms that allow us to put the assets on sound footing, similar to what we’ve previously negotiated at 280 Park and St. Regis retail, we will not invest any more capital in these settings. The non-recourse nature of these loans provides us with this option. With that, I’ll turn it over to the Operator for Q&A.

Operator, Operator

Our first question comes from John Kim with BMO Capital Markets. Please go ahead.

John Kim, Analyst

Good morning. Steve, you mentioned the leasing activity that you’ve done year-to-date, 2.5 million square feet and what do you anticipate for the remainder of the year, which sort of implies another million to 1.3 million? Does that include the NYU lease or is that separate?

Steven Roth, Chairman and Chief Executive Officer

Yes. It does.

John Kim, Analyst

Okay. Can you provide any more details on that, when the lease or occupancy starts at 770 Broadway? And I know it’s a structured deal with the upfront payment and the purchase option, but how does the overall rent compare to the $115 that’s in place today?

Steven Roth, Chairman and Chief Executive Officer

Well, the upfront prepaid rent is significant, and therefore, there’s a small tail of value that the rent will cover. So it’s substantially lower. It’s not $100 a foot. But when you take into account the prepaid rent and capitalize that as a value, the rent is approximately the number you have in your mind.

John Kim, Analyst

And when does occupancy start?

Steven Roth, Chairman and Chief Executive Officer

Say that again?

John Kim, Analyst

The occupancy of the building. When does that contribute to FFO?

Steven Roth, Chairman and Chief Executive Officer

The closing is expected to be in January. The rent will commence in January. The funds will transfer in January. So the action will be completed. The papers will be signed imminently. The closing will be in January.

John Kim, Analyst

Great. Thanks. And my second question, I know I asked multiple questions the first time, but the second question is on theMART. You had increased leasing and the occupancy went up. The rents have come down compared to where it was last quarter. Is that your strategy going forward is to kind of build up occupancy with reduced rents?

Steven Roth, Chairman and Chief Executive Officer

The key to theMART is, first of all, it’s an extraordinary building. Second of all, the Chicago market is soft, very soft. The most important strategic point in theMART is now unencumbered and free and clear. So it’s one of the very, very few buildings in Chicago that is well capitalized. It’s the strongest financial building in the Chicago area and that gives us an enormous amount of strategic flexibility. So we will rent the building opportunistically as deals that we think are attractive come along. We’re performing better than any other building in the market. As the Chicago market improves, as it will, we will ramp up the leasing.

Operator, Operator

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

Steve Sakwa, Analyst

Yeah. Thanks. Good morning. Maybe just following up on John’s question on just leasing, if we strip out the NYU lease, that sounds like there’s a couple hundred thousand to maybe 400,000 feet of other leasing. Can you maybe just speak to the pipeline and the activity that you’re seeing at PENN 2 today? Has that pipeline changed at all and what’s your confidence level of getting some leases signed at PENN 2 before the end of the year? Thanks.

Glen Weiss, Senior Leader

Hi, Steve. It’s Glen. So there’s actually a lot more leases out over and above the NYU deal, 600,000, 700,000 feet of paper. We have leases in negotiation, all of which I expect to close during the fourth quarter, number one. Number two, it’s early to the PENN 2 pipeline. It is robust with many important transactions. We expect to lease two or three of those during 4Q. We are in full swing, as less and less blocks are available in the market, particularly of this type of quality at this location. With the amenity program we’ve put together, we’re now in the fifth year and more to come.

Michael Franco, President and Chief Financial Officer

I just want to add, both John’s comments and even your comments, implied there’s not that much more leasing when you add in what we’ve done year-to-date adding NYU. I think the math you guys are doing is inaccurate, right? I mean, both Steve and I commented we expect to do as much as 3.8 million, and we’ve signed, and that’s in New York, right? We’ve signed about two to one year-to-date through three quarters. So if you take out NYU, as Glen said, there’s another 600,000 plus in papers in the pipeline deeper beyond that. So I think you’re hearing a level of enthusiasm and confidence from us that is sort of as high as it’s been in a long time, given the activity we have.

Steve Sakwa, Analyst

Great. Thanks for that clarification, Michael. Maybe a second question, Steve. I think last quarter, after the Uniqlo sale, you mentioned you may explore some other street retail sales. Just kind of where are you on that front and has your thinking changed at all, and has the appetite from some of the luxury retailers changed at all?

Steven Roth, Chairman and Chief Executive Officer

The appetite continues to be strong. We have no news to report in that regard. But I think the interesting thing is that, and I said it in the script, that by the end of this year or into January, we will have monetized half of the $1.8 billion retail preferred at par. So if you remember back a year or so ago, analysts were predicting that the preferred was worth substantially less than par. So the big story this quarter is the balance sheet. So we’re monetizing the balance sheet. We will increase our cash balances by more than $1 billion very shortly. We will pay off $450 million of our bonds and we will end up, for example, the NYU deal reduces our debt by $700 million. So when you put it all together, Michael, what’s the math?

Michael Franco, President and Chief Financial Officer

I think we’ll end up paying off a little over $1.1 billion of debt and increased cash on our balance sheet north of $600 million.

Steven Roth, Chairman and Chief Executive Officer

So that’s very substantial. So we’re definitely in fighting mode. With respect to selling more of the retail, which was, I think, your main question, there is activity. The retail values have been validated multiple times and we will react opportunistically to opportunities as they come along.

Operator, Operator

And the next question comes from Floris van Dijkum with Compass Point. Please go ahead.

Floris van Dijkum, Analyst

Good morning, everyone. To follow up on Steve's question regarding retail, I don’t believe any leases were signed in the third quarter for your retail section. Could you elaborate on the demand for retail? I know you mentioned Primark opening in THE PENN DISTRICT. Additionally, what are the plans for your large Macy’s store? Is this a long-term project or is there anything coming up in the near term for that space?

Glen Weiss, Senior Leader

Floris, good morning. I would tell you, and I think you’ve heard this from us the last few quarters, right? The demand from retailers is up pretty significantly from the lows. We continue to see good demand across the portfolio. We’re hard at work, obviously, leasing Penn. I think bringing Primark to the district is a big win. They’re excited. We’re excited. We’re in discussions with other retailers to bring into the district, which will continue to enhance the district. So we’re very pleased about that. Times Square has seen a big pickup in activity. We have a lot of discussions going there with respect to our 1540 asset. And as we look at the pipeline, there’s pretty good activity across the board. We have some vacancies, the rollover, I should say, coming up on Fifth Avenue in the next couple of years, and there’s dialogue there, too, but that’s not as imminent. But I would say, again, interest is up, activity is up. Importantly, rents affirmed and retailers are doing the sales that give them confidence to transact. So, these deals take a while. These are big commitments, particularly on the two main blocks or submarkets, I should say, of Fifth and Times Square, but the interest level continues to be there.

Steven Roth, Chairman and Chief Executive Officer

I would add that the Primark deal is a big deal. Coming into THE PENN DISTRICT, it’s a payable store. It will do great business. It’s a flagship. It’s a significant deal. The occupancy numbers that we publish for retail are actually the story behind that is I think we published that our occupancy is what, Tom?

Tom Sanelli, Finance Team

It’s 77%, 78%.

Steven Roth, Chairman and Chief Executive Officer

Okay. But that includes the vacancies at Manhattan Mall. If you exclude those, we’re very close to 90% leased. In fact, we’re doing quite well in terms of leasing compared to market occupancy rates. I believe we’re actually 90% leased in retail, not 78%. There is strong demand in retail, and it’s in much better shape than it was a couple of years ago.

Michael Franco, President and Chief Financial Officer

Floris, with respect to your, I believe, well, let me clarify. You mentioned Macy’s. We don’t have a Macy’s.

Floris van Dijkum, Analyst

Yeah. I meant the Manhattan Mall, of course. I apologize.

Michael Franco, President and Chief Financial Officer

Yeah. You misspoke.

Steven Roth, Chairman and Chief Executive Officer

So, I think Steve mentioned the occupancy situation. We have been placing temporary tenants in that space. Currently, we have Netflix hosting a Squid Games pop-up, which is quite popular, and we will continue that. However, for that larger and more complex space, the financials don’t allow for any permanent solution right now. I believe this lack of a permanent solution will continue for a while, so I wouldn’t expect any changes in the next few months. We are considering some broader plans for that atypical space.

Floris van Dijkum, Analyst

Great. Maybe a follow-up question. Your stock is trading at an implied cap rate of around 6%. How do you think about raising equity and what needs to happen for you to be willing to do that at this point, particularly as you think about your potential investment opportunities out there as well?

Steven Roth, Chairman and Chief Executive Officer

That’s a fascinating question. First of all, we are very well capitalized. I think I said, three or four minutes ago that we’re bringing a $1 billion of new cash in. We’re paying down our debt. Our balance sheet is extremely strong and we have all the firepower that we think we need for the foreseeable future. Our capital requirements to complete our lease up at PENN 1 and PENN 2 and across the board are already in cash on our balance sheet without doing any more financing. We have the lion’s share of our assets in Penn, PENN 1, PENN 2 and Farley, where we have Meta, are all unfinanced, so we’re extremely liquid and well capitalized. The cap rate that you mentioned is interesting, but when I do the math, I look at what the business looks like when we complete leasing and we get back to the 96%, 97% occupancy that we have traditionally had. We will get there for sure. It may take a year. It may take two years. So I look at the business with all of that income coming in, and if you look at that, we really don’t need any equity. So for the moment, we have no plans of issuing equity, although we are being pounded by bankers who want to write a ticket and sell stock to us, but it’s really not something that we think is strategically important for the moment. If opportunities present themselves, which are super accretive and not dilutive to our current shareholders, we will consider that, but we’re not in the business of diluting our shareholders.

Operator, Operator

And the next question comes from Dylan Burzinski with Green Street Capital. Please go ahead.

Dylan Burzinski, Analyst

Hi, guys. Thanks for taking the question and I appreciate your comments on after the 1535 transaction closes on monetizing half of the preferred equity in the street retail JV. But I guess are there any other transactions or should we expect for you guys to monetize the remaining half of that preferred equity position over the near-term or do you guys feel like most of the low-hanging fruit there is coming to pass after this most recent announcement?

Steven Roth, Chairman and Chief Executive Officer

We are quite satisfied with the progress made in the first half of monetizing that preferred at par. Currently, we have no plans to address the second half; it will depend on future opportunities. As I mentioned earlier, we are in a robust capital position and have considerable equity. While we have the option to raise additional equity if necessary, we believe we neither want nor need it at this time. We are content to hold onto the remaining portion of the preferred. As market conditions change, the income generated from that preferred now surpasses the interest rate we could achieve from short-term debt, so we are comfortable with our position.

Dylan Burzinski, Analyst

Thanks for the detail, Steve, and then just maybe one more if I can. On the B-Note acquisition, the $50 million, I mean, curious, can you kind of talk about your guys’ plans there? I know the note is currently in default along with the A-Note at the property. I mean, is there plans to sort of go after this, and if so, can you kind of just talk about it a little bit more?

Steven Roth, Chairman and Chief Executive Officer

I wish I could, but it’s really not appropriate. So first of all, it’s a very small investment. Second of all, it is interesting and you’ll all learn more about that over the next quarters. It has multiple different alternative ways that this thing could go. It will possibly result, maybe even likely result in litigation, and it’s a very interesting site, and it’s really not appropriate to talk about it at this call.

Dylan Burzinski, Analyst

Okay. Makes sense. Thanks again.

Operator, Operator

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

Alexander Goldfarb, Analyst

Good morning. And Steve, as one of those analysts who was questioning on the preferred, good to hear that you’ve made progress paying it off at par, so kudos to you and the team. Two questions. First, just following up on the preferred, sorry, on the B-Note purchase, given its potential litigation and was in default, can you provide any perspective on buying it at par versus discount? It would seem, based on what you’ve described, that it should be a position that would trade at a discount, but clearly there’s a rationale, so maybe you could just help us understand to what you can discuss?

Steven Roth, Chairman and Chief Executive Officer

Well, thank you for the compliment, Alex. That’s very nice. Thank you. We appreciate it. With respect to the B-Note, I’m really not going to say any more than we have. Obviously, I’m a famously difficult buyer and we paid par because we thought we were getting value and we were getting a position in the asset. So other than that, I don’t have anything to add.

Alexander Goldfarb, Analyst

Okay. The second question is, Steve, based on how you described 555 California and you and others have described Park Avenue, it seems like the traditional office submarkets have been the leaders coming out of the pandemic and remain very strong. Just curious, years ago, you talked about Manhattan tilting to the South and to the West, and yet right now everyone’s flocking back to assets like 555 or Park Avenue. Can you just discuss if you think that perhaps going forward, future VNO investment is going to focus more on the traditional submarkets and less on the new frontiers or you think that this is just a moment in time and as the cycle recovers, those new frontier markets will once again have their place?

Steven Roth, Chairman and Chief Executive Officer

Alex, I wouldn’t call the West Side of Manhattan when you take Hudson Yards and Manhattan West and THE PENN DISTRICT as a new frontier. That’s now become a very established neighborhood. The demand from blue-chip, double blue-chip, triple blue-chip tenants is established and validated. And so I think that the way I look at Manhattan, there’s the traditional Midtown market and then there’s the newer, dare I say, better West Side market, which is actually booming. So I think, we don’t really own a lot of stuff in the middle, but I think I have no problem with the West Side. I think the West Side is great if you’re calling that new frontier. I don’t think it’s a new frontier. I think it’s very established by now.

Michael Franco, President and Chief Financial Officer

Alex, I think one of the dynamics that has happened in the last three months or four months, actually, is that the market’s broadened back out again. So like Park Avenue is achieving historically high rents, which is fantastic. We benefit from that and we’re excited about what’s to come there with 350 Park. But if you look at our pipeline, it’s broadened out. I think it’s broadened out actually quite meaningfully. There’s been a real uptick there, and I think, yes, we are seeing broad-based strength in the market. So I think that’s an encouraging sign for the marketplace. We have activity across all of our assets. And so, Meatpacking, Chelsea, all those assets, not just ours, top-grade assets are seeing activity. So, Google just renewed 85 10th. So I don’t think I would call those sub-markets dead by any stretch of the imagination. I think they’re stronger than they’ve been in a while.

Steven Roth, Chairman and Chief Executive Officer

Those markets really consist of smaller buildings and smaller tenant markets. For instance, we own a few properties in the Chelsea market where the rents are $150 a foot. Those rents are higher than those at Park Avenue. So, as Michael mentioned, New York is expanding. Tenants are looking to move into various submarkets, and they are all performing quite well.

Alexander Goldfarb, Analyst

Good color. Thank you.

Operator, Operator

And the next question comes from Jeff Spector with Bank of America. Please go ahead.

Jeff Spector, Analyst

Great. Thank you and congratulations on the quarter. Just listening to the call, you’ve discussed a lot of drivers of growth and I’m just thinking about 2025. I know you have a deep team. I mean, where are the priorities for 2025 and where do you see the best time spent for opportunities?

Steven Roth, Chairman and Chief Executive Officer

Michael, you want to take a shot at that?

Michael Franco, President and Chief Financial Officer

Sure. Good morning, Jeff, and good to have you back on the front lines with us. So in terms of priorities, I think, the number one priority continues to be, like we’ve invested significant capital in Penn. I don’t know if you’ve been there recently, but it has transformed. It looks phenomenal and now it’s a leasing game. And you heard in the opening remarks, you heard Glen talk about the activity being significant there. We just have to execute, right? We have to lease up PENN 2. We have to continue to turn over PENN 1, and if we do that, and I’m confident we will, you’re going to see significant growth coming out of Penn, and I think you’re going to see us continue to push rents up there. So, that is the easiest earnings growth we can generate. We’re going to, second, it’s filling our vacancies elsewhere, which we’re in the process of doing piece-by-piece. We have good activity across Manhattan. theMART Glen talked about, it’s a little more challenging market-wise, but the team is working hard there, and I think what we’ve done in 555, with funds in process on, is really, I think, breathtaking, honestly, if you focus on the stats. So, Penn is filling the balance of the vacancies. It’s continuing to manage our balance sheet effectively. I think we’ve done a very good job of working through our maturity over the last two years, three years including some are challenging situations. We need to continue doing that. And then, we’ve got a whole host of opportunities that are internal that we’ve got the seeds planted and we have to take the next step on. Whether that’s 350 Park, whether that’s other opportunities in Penn. We have a few assets internally, but beyond that, that are potentially repurposed or redevelopment assets that we are working on right now in terms of economics and when may be the right time there. And then, lastly is, we’re trolling the market for external opportunities and I think one of the disappointing things has been that there have been low-quality office opportunities, and most of those are getting repurposed to other uses, but there really have been very little in the way of high-quality distressed office assets. So, we continue to troll, right? There will be some, but I don’t think it’s going to be floodgates. And so, we would like to be active at doing things on that front. But we have a lot internally that we can execute on that will grow the value of this company significantly over the next several years. Some are going to take longer to realize given their development opportunities, but we think they’re pretty unique.

Steven Roth, Chairman and Chief Executive Officer

I think you can say and I’m happy to say that our single focus is in creating value, being financially disciplined and getting our stock price up to where we think the value is and where it should be. In order to do that, we need to keep leasing, we need to keep improving our balance sheet and we need to focus on calling out assets that we don’t want and turning them into cash and continuing to work on the assets, the very significant and great asset pool that we have and creating more value out of that existing asset pool. Hopefully, we’ll find external opportunities, but we have enough internal so that we can be very busy and create very significant increased values. But actually, I’m all about the stock price.

Jeff Spector, Analyst

Thank you, that's very helpful. For my second question, could you elaborate on your earlier remark, Steve? You mentioned that it's a landlord’s market. While I see that you are correct regarding the balance between demand and supply in your market, I'm looking at the New York City office market. When speaking with brokers and others, we consider aspects like tenant allowances and free rent, and the potential for more balance in the market. For landlords, this could mean providing fewer tenant allowances or free rent. How do you view this situation, and could you provide more insight into your comments? Thank you.

Steven Roth, Chairman and Chief Executive Officer

Thank you. A good comparison is the retail industry over the past five to seven years. Five or six years ago, retail was in a bad place, with a toxic atmosphere surrounding malls, Fifth Avenue, and city streets. The common belief was that online shopping would wipe out physical retail, causing stock values to plummet and creating a negative perception of the industry. The office sector has experienced a similar downturn in the last few years due to COVID, the rise of remote work, and the notion that no one would return to the office. However, that belief is changing rapidly. There are a couple of key points to consider. First, it is clear now that people want to return to work and to urban areas. Second, the market has essentially halted new supply due to the skyrocketing costs of construction and capital, making building financially unfeasible. This is beneficial for our market. Looking at locations like Park Avenue and Sixth Avenue in Manhattan, we see a significant reduction in available supply. Additionally, the market is divided; there is a considerable amount of lower-quality space in New York compared to a limited amount of desirable A-quality space. Our clients are primarily seeking out this better-quality space, which is becoming increasingly scarce. For instance, rents on Park Avenue have surged from $80 to $130 per foot almost instantly as availability diminishes. This situation defines a landlord's market, characterized by a lack of supply, dwindling vacancies, and strong demand. Lastly, despite previous concerns about a potential recession, we have not experienced one and are instead seeing a soft landing. Our customers are excited and looking to expand, which is a positive sign. Most of them are pleased with their current spaces and are interested in acquiring more and better-quality spaces, reinforcing the landlord's market dynamics.

Operator, Operator

And the next question comes from Michael Griffin with Citi. Please go ahead.

Michael Griffin, Analyst

Great. Thanks. Maybe going back to the PENN 2 leasing pipeline, I know historically that submarket’s been more focused on tech and media tenants, but just given maybe the limited availability that we’ve seen in more traditional financial services markets like Park and Sixth, is it fair to say that there’s an increasing share of that leasing pipeline that’s driven by financial services or some of those more traditional office space takers?

Glen Weiss, Senior Leader

Absolutely correct. So all types of industry sector tenants are coming to Penn, both PENN 1 and PENN 2. They’re flooding in. Law firms, financial, entertainment, tech, consulting, private equity, hedge funds, we’re seeing a plethora of activity from everybody and it’s a game changer. I think partly that’s due to the lack of quality space available in the market generally, but more importantly to what we’ve done with these buildings and what this neighborhood now feels like. It’s powerful. They’re all coming in astounded by what we’ve done and they feel like Penn is part of this West Side, part of Manhattan West, part of Hudson Yards. We’re now part of the new West Side. And not only that, we’re at the doorstep right on top of transportation, which gives us a leg up on everybody else. So it’s all in full gear and you’re on point with what you said about Penn side for sure.

Michael Griffin, Analyst

Thanks, Glen. Appreciate the color there. And then, Steve, I just want to go back to your comments on trying to pivot to acquisitions and external growth and going on offense in 2025. It seems like you have the balance sheet primed to do that. But as you look at your opportunity set, is it more kind of on the distressed debt side? Would you prefer to purchase assets outright? And then can you give us a sense of what you might be underwriting to in terms of return hurdles or from an IRR perspective? That would be great.

Michael Franco, President and Chief Financial Officer

Griffin, it’s Michael. We are open to both debt opportunities and outright asset purchases. Buying assets outright is generally easier than dealing with debt, but sometimes the best opportunities come from the debt side. A lot of our strategy will be debt-driven, whether that involves lenders wanting to short sell an asset or sell a position. We are exploring various opportunities in that area. As we consider deploying capital, our focus isn’t on growth for its own sake. As Steve mentioned, we aim to pursue actions that will enhance the enterprise's value over time. Our capital is valuable, and we want to invest it wisely. While I can’t specify a particular return target, our focus is not on core purchases. We are aiming for attractive returns that can lead to strong multiples over time. The focus on value-added opportunistic dynamics will come into play here, and that's about as detailed as I can be. Each opportunity has its unique factors, but we’re not looking to invest just for the sake of investing; our goal is to achieve meaningful profits from our capital deployment.

Operator, Operator

And the next question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.

Ronald Kamdem, Analyst

Hey. I have two quick questions. The first one is about the possibility of occupancy declining in the first quarter of 2025, potentially ending at around 93% by the end of next year, if I heard that right. I'm interested in understanding how this might affect same-store NOI, so any insights you could provide would be appreciated.

Michael Franco, President and Chief Financial Officer

Ronald, good morning. I think it’s difficult to give you that prediction right now. We’re going through our budgets now. A lot of this stuff is timing-driven and I don’t know that we can give you sort of this quarter versus that quarter, et cetera. I think you know sort of the end goal based on what we talked about in terms of at least the near-term and just hard to give you that visibility today.

Ronald Kamdem, Analyst

Okay. Great. I guess my second question, just going back to the cash flow statement, looks like a good cash from operating quarter and so forth. Just how are you guys thinking about cash conversion as sort of the business recovers? Is there anything that we should be mindful of, whether it’s CapEx spending or anything else like that as you’re thinking about maximizing free cash flow as the business recovers? Thanks.

Michael Franco, President and Chief Financial Officer

I mean, look, our objective, our general approach is to be fairly rigorous with how we invest our capital, right, and that includes on our existing asset base. So, we are deploying the capital where we see an appropriate return. If we don’t see that opportunity and I referenced that in my remarks, if we don’t see an opportunity on an asset that has too much debt or until that debt is reworked, we’re not going to do that and I think we’ve demonstrated that in the past. So we’re going to continue to be rigorous. Capital is precious notwithstanding the strength of the balance sheet. And we hope that as we transition into the landlord’s market, we will start to see concessions trend down some. I don’t think it’s going to drop to where it was years ago because with inflation, the cost to build that space is higher. But we do think in the best submarkets that there will be an opportunity to start tightening that a bit.

Operator, Operator

And the next question comes from Caitlin Burrows with Goldman Sachs. Please go ahead.

Caitlin Burrows, Analyst

Hi. Good morning, everyone. Thanks for the comments earlier on the expected 2024 dividend and the policy for 2025. I guess I know the dividend’s a Board decision, but could you give some discussion maybe on what it would take to bring back the quarterly dividend?

Steven Roth, Chairman and Chief Executive Officer

What we did was totally based upon conserving cash and protecting our balance sheet. That was the genesis of the dividend policy that we adopted. Lower dividend, conserve the cash, pay it once at the end of the year. We canvassed a very significant number of our shareholders about that strategy, and universally they endorsed it, protecting the balance sheet being the principal thing to do. As the business cycle changes and the availability of capital and we get back into more normal times, we will then likely convert to a normal dividend policy a la what we had in the past. So this is not necessarily a permanent strategy. It’s an interim strategy to protect the balance sheet, which was very well received by our constituents.

Caitlin Burrows, Analyst

Got it. Okay. And then maybe just on PENN 2, given the leasing you’ve already done and knowing it takes time for users to move in and contribute to rent and FFO, could you give any detail on your expectation for PENN 2 buildup in 2025, like, maybe the path to recognizing that 9.5% yield?

Michael Franco, President and Chief Financial Officer

I don’t think you’re going to see much in 2025 just because the leases Glen’s working on now, those really won’t start by the time the build-out occurs. That income really won’t start kicking in until 2026. So, I think you’ll see a lot of activity over the course of the remainder of this year, next year. But I don’t think in terms of it actually hitting earnings, I think it’s going to be really as we start getting into 2026.

Operator, Operator

And the next question comes from Nick Yulico with Scotiabank. Please go ahead.

Nick Yulico, Analyst

Thanks. Just wanted to go back to PENN 1. And I guess two questions there is on the leasing that was done, the 70,000 square feet, which was at higher rent than prior leases, I think some of that was benefit from higher floor space. But can you just talk about the rent there versus how we should think about the additional rents still to come?

Glen Weiss, Senior Leader

Hi. It’s Glen Weiss. Nick, how are you? So we continue to increase the rent at PENN 1. If you think about our starting rents quarter-to-quarter since we unleashed on the redevelopment, they continue to rise in a pretty strong way. So, yes, one of the deals we made this past quarter was in the upper stack of the building at a huge rent and that’s now allowed us to drag along the rest of the building where we’ve increased rents throughout. Similarly, at PENN 2, we’ve been very focused on our rental quotes. We’ve been increasing our quotes there as well. So as we had predicted when we set forth on this whole PENN DISTRICT transformation a few years ago, we had said rents would rise as the district gets better and better as the new tenants move in, as the action strengthens. That’s exactly what’s happening. So we expect that trend to continue. As we go into 2025, much of our activity we talked about in the pipeline is at PENN 1 and PENN 2 and other PENN DISTRICT holdings additionally. So we think the best is yet to come and we’re really excited about it.

Michael Franco, President and Chief Financial Officer

We said we have leased a million feet post-redevelopment and therefore we still have another 1.3 million, 1.4 million to go, right? So I think that gives you a sense of the magnitude of the opportunity there. Now that’s unlike PENN 2 which is a lease-up execution, right? This is going to occur over the next several years, not all at once and so we think there’s a continued meaningful mark-to-market opportunity there and that’s without rents continuing to rise necessarily which if we start factoring in the rents that Glen just did on PENN 1 this past quarter, that’s even more significant. So this is an asset that we think is going to continue to deliver for us over time given what we’ve done in the district.

Nick Yulico, Analyst

Okay. Thanks, Glen.

Michael Franco, President and Chief Financial Officer

We have indicated in the past quarter that much of the activity we are currently engaged in will yield benefits starting in 2026. This remains true. Our pipeline includes some initiatives that may achieve results a bit sooner, and we are assessing their impact now. However, a significant portion of this work will take effect in 2026, leading to noticeable growth in that year and beyond. In 2025, we intend to provide more detailed insights as we approach next year and refine our budget. We have noted that next year is expected to remain relatively stable compared to this year. The timing of move-outs and backfilling does not align, affecting when these factors will contribute. There are positive developments, as we are effectively hedged and short-term rates are decreasing. Nonetheless, we do not anticipate seeing substantial effects until 2026 due to our hedging strategy. While I cannot provide precise figures as we are still analyzing the situation and do not issue guidance, I believe our previous comments over the last few months regarding 2025 remain accurate.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Steven Roth for any closing remarks.

Steven Roth, Chairman and Chief Executive Officer

Thanks everybody. It’s election day. And so tonight’s going to be very exciting, I think. Those of you who have not seen THE PENN DISTRICT recently, and I mean very recently, please call. We’re very proud of what we’ve accomplished there and we’re dying to take you through and expose you to these assets, which we think are performing very well and will perform better. So if you want a tour, give us a call and we’ll see you at the next quarter. Thanks very much.

Operator, Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.