Alexander's - Q1 2024

Transcript

Operator (participant)

Good morning, and welcome to the Vornado Realty Trust first quarter 2024 earnings call. My name is MJ, and I will be your operator for today's call. This call is being recorded for replay purposes. All lines are in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question-and-answer session. At that time, please press star, then one on your touchtone phone. I would now like to turn the call over to Steven Borenstein, Executive Vice President and Corporation Counsel. Please go ahead.

Steven Borenstein (EVP and Corporation Counsel)

Welcome to Vornado Realty Trust first quarter earnings call. Yesterday afternoon, we issued our first quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents, as well as our supplemental financial information packages, are available on our website, www.vno.com, under the Investor Relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q, and financial supplement. Please be aware that statements made during this call may be deemed forward-looking statements, and actual results may differ materially from these statements due to a variety of risks, uncertainties, and other factors.

Please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 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 from management for our opening comments are Steven Roth, Chairman and Chief Executive Officer, and Michael Franco, President and Chief Financial Officer. Our senior team is also present and available for questions. I will now turn the call over to Steven Roth.

Steven Roth (Chairman and CEO)

Thank you, Steven. Good morning, everyone. We've been busy. Let's start with Bloomberg. As a reminder, 731 Lexington Avenue, the mixed-use tower, whose 950,000 sq ft office condo is Bloomberg's global headquarters, is owned by Alexander's, a separately traded public REIT. Vornado owns 32.4% of Alexander's. The background facts are: Bloomberg lease expires in February 2029, $500 million of debt on the office condo is due next month, June 2024. Yesterday, we announced that we renewed and extended the Bloomberg lease for an 11-year term to begin in February 2029 and take us through February 2040, so 16 years of term from now. As you can imagine, every developer in town tried to poach Bloomberg, and of course, they looked at every opportunity as they must.

We are delighted that they chose to stay with 731 Lexington. By the way, the Bloomberg... The building is as much Mike's creation as mine. He had significant input into the design of the original building. The design of the building and Bloomberg's internal fit-out are on a par with what we would have built today, but of course, now they don't need to. The terms of the lease are spelled out in yesterday's SEC filings. Tenant concessions in the form of TIs and free rent have been established, and the net rent will be the subject of an appraisal in 2029, with the then rent adjusted up or down no more than 10% either way, based on the then market conditions.

We're in the process of refinancing this asset, but I must say I am not excited about paying today's market rate of 7% or even 8% for debt, with all the trappings of leasing reserves, cash sweeps, and such, which are admittedly protective of the lender but don't do much for our equity value. As we speak, my personal favorite is to pay the debt down and maybe even pay the debt off. We shall see. Now let's focus on our credit lines. Traditionally, we've had two separate but similar credit lines with staggered maturities. One credit line for $1.25 billion has been renewed through 2027, and the renewal of the second credit line was finalized last Friday at a reduced amount of $915 million, with the term extended to April 2029. As expected in these times, several banks dropped out.

We use our credit lines very sparingly, generally for short-term requirements with a known source of repayment, and rarely, rarely have we exceeded 25% drawdowns. Now to 280 Park Avenue. We own 50% of 280 Park Avenue. Since our joint venture partner has already reported, I'm guessing you are all pretty much up to date on the details. What we did here was extend the maturity of the senior loan for four years, keeping the rate constant with no paydown, but posting significant cash reserves for future leasing. Several analysts have commented that the loan and the equity value pretty much cancel out, and that fact allowed us to DPO the mezz loan at $0.50 on the dollar, realizing a $31.3 million gain at share, which we will recognize in the second quarter.

This is not yet a big win, but it does create a cheap warrant on a wonderful asset located in prime Park Avenue, where there is already a very low 7% vacancy and a shortage of space. We think it's a first-class bet. By the way, we are leasing very well here. We continue to protect our balance sheet with interest rate caps and swaps, but when a 3% loan matures into a 7% market, there really is no place to hide. We continue to prospect for good real estate in distress, where our best-in-class operating platform can be helpful to the lender. We expect these opportunities to accelerate. The gold rush on the part of the luxury brands to own, control, and dominate the very best locations is accelerating, and the knock-on effect on prime New York City retail space is palpable.

It should be noted that in New York, we have much more prime retail space than anyone else by a wide margin. Some commentators have noted that the Fifth Avenue and Times Square values seem to have recovered to the pricing of our retail JV sale five years ago. It would seem so. I continue to strongly believe the contrarian bull case I made in my annual shareholders' letter, that basically with frozen supply, i.e., no new developer office starts and none on the horizon, tenant requirements picking up and vacancies shrinking, I couldn't be more optimistic about the future. Also note that while the New York market has a huge 422 million sq ft, when you cancel out the non-prime space, we really only compete in a much smaller 177 million sq ft market.

Great things are happening in our PENN District. Come by and take a look. Our team here at Vornado couldn't be more optimistic. Now, over to Michael.

Michael Franco (President and CFO)

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. First quarter comparable FFO, as adjusted, was $0.55 per share, compared to $0.60 per share for last year's first quarter, a decrease of $0.05. This decrease was primarily driven by lower NOI from higher net interest expense and no move-outs, partially offset by lower G&A expense. We have provided a quarter-over-quarter bridge in our earnings release in our financial supplement. Our overall New York business, same store cash NOI, was down 5.1%, primarily due to the aforementioned expirations.

As we indicated on our last earnings call, we expect our 2024 comparable FFO to be down from 2023 comparable FFO of $2.61 per share, primarily due to higher projected net interest expense of about $0.30 per share and the impact of known vacancies at certain of our properties, primarily at 1290 Avenue of the Americas, 770 Broadway, and 280 Park Avenue. We anticipate the impact of these expirations in 2024 to be roughly $0.25-$0.30 per share. We expect this impact to be temporary, as we have already leased up a good chunk of this space, but the GAAP earnings from these leases won't begin until sometime in 2025. We then expect earnings to increase as income from the lease up of PENN and other vacancies comes online and as rates trend down.

Now turning to leasing markets. The New York office market continues to show signs of strengthening. While first quarter office leasing in New York took a bit of a breather from the strong year-end, there is a healthy backlog of activity with a number of large deals in the works. Overall, tenant space requirements continue to trend upward, sublease space continues to fall, best-in-class renovated and amenitized product located in transit hubs continues to dominate leasing, and the new supply pipeline, new supply pipeline is close to zero. These dynamics set the table for continued improvement in conditions in the upper tier of the market, which we are already experiencing in our best-in-class portfolio. Overall, asking rents are stable, even rising in the top-tier properties, but concessions remain stubbornly high across all submarkets.

The financial services and legal sectors are continuing to drive the leasing activity, as both are in growth mode. We are also seeing the first signs of life in the tech sector again, after a couple of years of being on pause or downsizing. Our experience is, when they grow, they tend to lease big chunks of space. The Midtown and New West Side markets are outperforming, as leasing activity in Midtown is strong, not only on Park Avenue, but also on Sixth Avenue and the Fifth Avenue, Madison Avenue corridor. On the West Side, tenant demand continues apace. If you walk from Seventh Avenue to the Hudson River, you will see why. Turning now to our leasing activity.

After completing a slew of large leases in December 2023 and finishing last year with a market-leading 2.1 million sq ft of deals, we expected a more muted first quarter of completed transactions, given where our deal pipeline stood in the negotiation process. In the first quarter, we leased 291,000 sq ft at a healthy $89 per sq ft, reflecting the overall quality and premium locations of our properties. The highlight of the quarter was our 125,000 sq ft headquarters lease with Major League Soccer at the new PENN 2. MLS had been in the market for some time, looking mainly in the Midtown core, until late in their process, when they toured PENN 2 and were wowed by what we've done with the building and the district. The project is now complete and really shows terrifically.

Our new town hall event space is open. By the way, we hosted our first event just two weeks ago, attended by 300 people, and the rooftop pavilion and park are truly spectacular. Tenants are responding positively to everything that we've done and what's still to come. We have a significant pipeline at PENN 2 and are busy negotiating proposals with tenants across a variety of industry sectors. In addition to the significant Bloomberg lease renewal of almost 1 million sq ft we just completed, our leasing pipeline is strong, with 370,000 sq ft of leases in negotiation and another 2.5 million sq ft of proposals out on the street in different stages. Much of this activity is not only addressing current vacancy, but also forward-looking expirations.

As discussed on the fourth quarter call, when we foreshadowed an occupancy decline due to the known Q1 move-outs at properties such as 1290 Sixth Avenue and 280 Park. We are pleased to report that we have already taken care of half of the 2024 and 2025 expirations in these properties, with more activity on the horizon at each. Turning to retail. The retail leasing market continues to recover. As we discussed on our last call, Prada's and Kering's blockbuster retail deals on Fifth Avenue that occurred in December, demonstrated their long-term commitment to Manhattan and has further energized the market, and there are other potential sales rumored to be in the works. Vacancy rates are now below pre-pandemic 2019 levels in most Manhattan submarkets, and retailers are willing to pay top dollar for the best locations.

Our retail leasing activity has picked up meaningfully in the last couple of quarters, with almost all our assets seeing significant interest. As evidence of the rebound, this quarter, in addition to signing many leases in the PENN District, we completed an important long-term renewal at one of our Times Square assets at the highest annual dollar rent we've achieved in our portfolio since pre-COVID, over $15 million per year. Turning to the capital markets now. While the financing markets still remain challenging, we are starting to see some stability for high-quality product. The CMBS market has begun to selectively reopen for office, lending at conservative metrics on quality assets with long weighted average lease term. Unsecured bond spreads for office continue to tighten. The market is much more open for high-quality retail. That being said, coupons are still high.

Banks remain on the sidelines and generally in workout mode, and there's more pain to come for all lenders, given the volume of office maturities in the next few years. This will create opportunities for us. We have been and continue to be very active on the capital markets front. In addition to the recent extensions on 280 Park Avenue and 435 Seventh Avenue, we are also in the process of extending our other 2024 maturities, which we expect to complete soon. Finally, and importantly, as Steve mentioned, just a few days ago, we finalized the recast of our revolver that was scheduled to mature in 2026 for $915 million. Completing this refinancing solidified a key portion of our liquidity through 2029 and gives us significant runway to deal with any challenges over the next few years.

It also highlights the continued support of our key banks in this challenging environment. We thank them for their support. Our balance sheet remains in very good shape with strong liquidity. Pro forma for the new revolver size, our current liquidity is a strong $2.7 billion, including $1.1 billion of cash and restricted cash, and $1.6 billion undrawn under our $2.17 billion revolving credit facilities. With that, I'll turn it over to the operator for Q&A.

Operator (participant)

Thank you very much. We will now begin the question-and-answer session. If you have a question, please press star, then one on your touchtone phone. If you wish to be removed from the queue, please press star, then two. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then one on your touchtone phone. Each caller will be allowed to ask a question and a follow-up before we move on to the next caller. Today's first question comes from Steve Sakwa with Evercore ISI. Please go ahead.

Steve Sakwa (Senior Managing Director)

Yes. Hi, good morning. Michael, I was wondering if you could just follow up a little bit on the comments you made about the pipeline and just maybe help us think through, you know, how much of that 2.5 million sq ft is maybe earmarked for, PENN 2 and the development, and how much is geared for, I guess, future rollovers and how much is geared to kind of current vacancy in the portfolio?

Michael Franco (President and CFO)

Good morning, Steve. Glen, you want to take the lead on that?

Glen Weiss (EVP of Office Leasing and Co-Head of Real Estate)

Sure. Hi, Steve. It's Glen. How are you doing? So I would say it's a very, very balanced mix of what you just described. We're seeing a surge in proposals coming in on PENN, both PENN 1 and PENN 2, coming off the heels of our Major League Soccer lease. We're seeing expirations, outbound expirations, tenants coming to us to early renew, just like we did with Bloomberg this week. And in addition, much of the pipeline is attacking expirations at the buildings where we have space available today. So I'd say it's a healthy mix across the portfolio, PENN and otherwise.

Steve Sakwa (Senior Managing Director)

Okay, thanks. And as a follow-up, Michael, just to, I guess, go back to some of the information you provided on, kind of, I guess, the earnings drag from the lost, you know, occupancy this year. Just to be clear, if you took the $0.30 hit from the interest expense, and now you're sort of quantifying this $0.25-$0.30 hit from the known vacates, some of which I know has been released and will rebound maybe in 2025 and beyond, you're kind of suggesting that there's sort of a $0.60 drag this year, as we think about 2024, and then are there other positive offsets that might sort of take that number a little bit up from, say, the $2 level?

Michael Franco (President and CFO)

Yeah. So look, in terms of your sort of detail there, I think that's accurate, right? We talked about interest last quarter and sort of reaffirmed the $0.30 this quarter. Yeah, the $0.25-$0.30 are sort of the known vacates.

... and as we've mentioned, you know, we've backfilled a lot of that already at 1290 and 280. Like, we have a lot that we're working on. There's some things that could certainly make that number more positive, but I think we're trying to give you the downside version today. And so I can't tell you where exactly it's gonna come out, but I think if you say, look, let's take sort of worst case, you know, the $0.30 plus the $0.25-$0.30, you know, gets you down $0.55-$0.60. I think that's a good baseline. And, you know, our objective is to beat that, but, you know, there's still a lot moving around.

Steve Sakwa (Senior Managing Director)

Great, thanks. That's it for me.

Steven Roth (Chairman and CEO)

Hey, Steve, Steve, let me just tack on, on that for a second. So, I mean, the numbers that you mentioned and that, and that Michael just mentioned are, you know, accurate for this year. Let's build from there and see what the company's future looks like on an almost certain basis. So if you start with re-renting the vacancies, and we get back from whatever we are now to our normal, you know, 96%-98% occupancy, that adds a big number to our earnings. When 1 PENN-2 PENN comes online, that's another $100 million, give or take, of earnings that comes online that is brand new. If interest rates settle down into some kind of civilized number, that also improves earnings enormously.

So the company has the earnings potential of being, you know, we think, pretty spectacular, and that's what we're shooting for. So we're looking at it not on, you know, one month or one quarter basis, we're looking at what the company's earning power would be, pick a number, two, three years out, okay? And we are extremely excited about that.

Operator (participant)

Thank you. The next question is from John Kim with BMO Capital Markets. Please go ahead.

John Kim (U.S. Real Estate Analyst)

Thank you. Michael, in your prepared remarks, you talked about tech sector coming back to the market in Manhattan and also referenced retailers potentially looking to purchase their flagship stores, similar to Prada. Is your commentary more of a market commentary, or do you see Vornado involved in either one of those two?

Michael Franco (President and CFO)

I mean, look, I think it's both, John. I mean, we've got, you know, we've got some of the best product in town in both categories. I think we've done more tech leasing than any other landlord in the city. We have all the Big Four, you know, in our portfolio, so we maintain, you know, an active dialogue with all those players. So, I would expect that if the tech sector becomes active again, you know, we're gonna get more than our fair share. And, you know, in terms of the pipeline, you know, I think the tech sector was, you know, pretty dormant for the last 18-24 months, either on pause or in some cases, you know, downsizing space.

You know, we've seen in the last 90 days, a real pickup there. Started small, and now we're seeing some more significant requirements. So, we do think some of those will convert to activity, and we're, you know, quite optimistic about that sector turning on again. You know, on the retail side, you know, I think you know better than anybody, given the discussions we've had in the past, we own, you know, the best retail in the city. So if you want to be on Fifth Avenue, particularly given the shrinking amount of availability, that's, you know, can be leased, you know, we're the first, you know, second, third call, Times Square, we own both sides of the bow tie. So activity level has picked up significantly in both those submarkets.

You know, the animal spirits are alive and well, amongst retailers. They see that Manhattan is thriving again. Their sales numbers reflect it. You know, Prada and Kering's announcements, obviously, garner worldwide attention and, you know, I think make every other retailer question: What are we doing, right? Both from a leasing standpoint and buying standpoint. There's obviously been other transactions rumored, but, I don't think you've seen the last of the retailer purchases and, and obviously, given our portfolio, you know, we are, we're fertile ground, so, we expect to be in the mix there.

John Kim (U.S. Real Estate Analyst)

Okay. My follow-up is on 350 Park Avenue. The leasing environment and interest rate environment or the outlook has changed a lot in the past year and a half since you since you struck the deal. What is the likelihood that either Citadel or, or you, exercise your options at this point?

Steven Roth (Chairman and CEO)

There's always a likelihood, but right now, we're on full steam ahead to build a world-class headquarters for Citadel. We've started the public approval process, and it's a couple of year process to design the building, complete the drawings, get through the public approval process, and obviously, we will reappraise the financial markets at that time. Citadel's growing. They want the space. They're committed to the deal, as are we.

John Kim (U.S. Real Estate Analyst)

Can you confirm the starting rent for Citadel is reported at $35 million?

Steven Roth (Chairman and CEO)

No, sir, we can't.

... It's a formulaic rent, which depends upon what the cost of financing is at the time that we go into the financing market.

John Kim (U.S. Real Estate Analyst)

Got you. Okay. Thank you.

Operator (participant)

Thank you. The next question is from Michael Griffin with Citi. Please go ahead.

Michael Griffin (Senior Equity Research Analyst)

Great. Thanks. Michael, I wanted to go back to your comments around concessions being stubbornly high. You know, I imagine that's the case for the market overall, but if you look at, you know, maybe better off submarkets like Park Avenue or even some of your properties, you know, on the west side of the PENN District, how are you seeing concessions there, you know, given that the environment seems to have improved?

Michael Franco (President and CFO)

Glen, you want to hit that?

Glen Weiss (EVP of Office Leasing and Co-Head of Real Estate)

Yeah. Yeah, sure. Hi, it's Glen. I would tell you, no matter the submarket on new leases, you know, TIs are somewhere between $140-$150 a foot, and, you know, free rent is somewhere in the, you know, 13-15-month range. I think as it relates to submarket specific, it's really about the rent. So in some of the submarkets, we are seeing an uptick in rent where supply is tightening, as you would expect.

Michael Griffin (Senior Equity Research Analyst)

Got you. That's helpful. And then maybe just some color on lease expirations this year. It looks like there's a big one. In the second quarter, about 3% of the overall rent, the space rent there right now seems pretty high. What's the likelihood of renewing or backfilling the space, or is this one of those known move-outs that you described earlier?

Glen Weiss (EVP of Office Leasing and Co-Head of Real Estate)

It's the Meta space that comes back to us in June that we spoke about on our last earnings call. That's the lease you're pertaining to.

Michael Griffin (Senior Equity Research Analyst)

In terms of potential of backfilling or renewing the space, what's demand looking like on it?

Glen Weiss (EVP of Office Leasing and Co-Head of Real Estate)

We have action on the space. That's just part of our pipeline that we've described. We feel very good about the asset and very good about backfilling that space. It's, you know, it's the most unique asset in Midtown South. We feel good about it.

Michael Griffin (Senior Equity Research Analyst)

Great. That's it for me. Thanks for the time.

Operator (participant)

Thank you.

Michael Franco (President and CFO)

Thanks.

Operator (participant)

The next question is from Floris van Dijkum with Compass Point. Please go ahead.

Floris van Dijkum (Managing Director)

Thanks for taking my question. Rather than get into the details on the leasing, which obviously is very important as well, but I wanted to ask a question on sort of the market and get Steve and Michael's view on the opportunity that's going to be presenting itself, I think when, you know, the $200 billion of office loans mature over the next, you know, actually in 2024, as well as the other $100 billion next year. What do you see happening with, you know, some of those obviously are unlikely to be refinanced. And so where do you see Vornado in that situation? Can you play a role in maybe buying some assets?

And maybe does that help cause some of the bullishness in Steve's tone on the outlook for the next two years?

Michael Franco (President and CFO)

Good morning, Floris. So look, I think in terms of the debt rolling over, which is significant over the next few years, as we all know, the capital markets are not there to support, you know, refinancing the vast majority of that. And so I think, you know, what happens there is, you know, gonna take, you know, one of a few forms. It depends on the quality asset, the sponsor of the asset, and what its future looks like. And we've seen some examples where, you know, the older obsolete buildings where debt rolls, doesn't have a future as an office building, or certainly with that sponsor, and the lenders have taken it back, or there's been a consensual, sale of some of those assets. Something like a 1740 Broadway would be a recent example.

So I think we'll see a fair amount of that on, some of those older buildings. Then there's a category where it's just over-leveraged, where there is a future. And again, I think the lender will assess, you know, whether the sponsor has the wherewithal, and the capability to, you know, either re-tenant or, or support the asset. And in some cases, they will, in many cases, they won't. You know, we're talking to the lenders about that, and I think they'll look for solutions, right? I think, I think, I think lenders in general know that taking back assets and operating them, certainly in the office space, is not a winning strategy. Value deteriorates fairly quickly. Tenants don't want to go into those buildings. So, we do think there's gonna be opportunity to work with existing lenders, be a solutions provider.

You know, we have a leading operating platform. We expect to deploy capital there. And I think it could be in either one of those buckets. It could be buildings that are, you know, that with our capabilities, can be leased back up, stabilized, and value could be created, or it could be assets that can be repurposed from, you know, office to residential, potentially. So the answer is, we are actively looking. We expect to play in that, and, you know, I think we're still at the beginning stages.

Floris van Dijkum (Managing Director)

And I know it's early in terms of, you know, what transactions would look like, but presumably for you to utilize part of your significant cash hoards, which again, sets you apart from some of your peers, you would have to have, I would imagine, returns that are in excess of the, you know, 7%+ financing rate that you would have to pay today if you were to theoretically get assets. Is that the right way to think about it? Your return hurdles are probably worse, 8%+?

Michael Franco (President and CFO)

Yeah, I mean, look, I think that our objective of deploying cash is not to, you know, invest in, you know, real estate is going to generate core returns, right? I mean, this is an opportunity that is, by the way, not for the faint of heart, right? I mean, you're taking risk, and you want to get rewarded for that. So, you know, the returns need to be, you know, attractive. So yes, I think the stabilized yields, I think it depends a little bit on the nature of the asset and where you think ultimate cap rates settle out for particular assets. But, no question that the required yield in the neighborhood that you mentioned.

Floris van Dijkum (Managing Director)

Great. Maybe one follow-up. In terms of your retail segment, again, you know, particularly your Fifth Avenue, which is, again, as you highlight, unique, where do you think market rents are today? And I know you have 92%, I think, is your occupancy rate in your Times Square JV, sorry, your Fifth Avenue and Times Square JV. But if you were to sign rent today in, on Fifth Avenue, where would you say market rents are for that, for that space?

Michael Franco (President and CFO)

You know, I think it's, you know, there's been a couple transactions that we signed, probably, I guess, last year. You know, that would indicate that, you know, rents at the time were in the mid- to high $2,000 per sq ft, right? Now, maybe there was a tick or a bottom in the $1,000, $1,500 neighborhood, but I think realistically, it's back into that mid-2s, maybe even low 3s, depending on the situation. I think for luxury, given there's such a scarcity, it could be higher. You know, it, Fifth Avenue, you know, it's hard to paint a broad brush. It's a very scarce asset class, and for the right situation, you know, you can command rents that, you know, not too far off the peak.

For the wrong asset, you know, where the retailers don't think it configures well, you know, you can't achieve that. So look, I think rents have recovered quite a bit. They're continuing to recover. Obviously, the Times Square lease we signed recently, I think is evidence of that. And so, you know, we expect that to continue.

Operator (participant)

Thank you. The next question comes from Dylan Burzinski with Green Street. Please go ahead.

Dylan Burzinski (Analyst)

Hi, guys. Thanks for taking the question. I guess just sort of going back to, you know, the acquisition point, is there any desire to... given the lack of debt financing available out there, to sort of go into it from a debt perspective and possibly from a loan-to-own? Or is this purely, as you guys are looking at things, more so looking at things on the equity side today?

Steven Roth (Chairman and CEO)

The easiest way to buy a building is through the debt. So that's obviously target number one.

Dylan Burzinski (Analyst)

Got it. And then, as you guys think about opportunities, is this purely, are you guys purely focused on office, or are there other retail opportunities that you guys think would also make sense?

Steven Roth (Chairman and CEO)

We're open to buy office, obviously, and retail, obviously. So those are the two areas that we specialize in.

Dylan Burzinski (Analyst)

And then I guess just a broader capital allocation question. I know in the past, you guys have floated, you know, opportunistically selling assets. I guess, is that still on the table, or are you guys now more focused on sort of going out and acquiring assets and growing the company on an external growth basis?

Steven Roth (Chairman and CEO)

We have, I think, basically four fairly significant sale transactions that are in various stages of conversation right now as we speak.

Operator (participant)

Thank you very much. The next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

Alexander Goldfarb (Managing Director)

Hey, good morning, and thank you. So a few, two questions here. And first, Michael, good to hear about the rebound in street retail rents. It's really amazing, what a journey it's been. So the first question is, Steve, on the Bloomberg lease, so when we read the 10-Q, the rents that are cited in there are basically a sliding scale that a negotiation in the future will address. So it's not as though we take that, the one rent, and then it slides up to the, to the next. It's, it's... That's the range that the negotiation will be in?

Steven Roth (Chairman and CEO)

Alex, you published something that said there was a 25% discount in the rent. I don't know how you got that math, and that's incorrect. So the way the, pardon me, the way the deal is structured is, the basic rent on that building is basically net. There's a very small portion, maybe 50,000 sq ft out of the 950,000 sq ft, that's gross, but 900,000 sq ft of it is net. So let's call it a net lease. The lease has a bump between now and 2029, and so when we get to the end of 2029, where we basically start, the net rent is $98 a sq ft, which grosses up to well into the 150s of dollars a sq ft. So that's the starting point.

Now, we established, first of all, you recognize that we are renewing and extending a lease five years before the maturity, before the lease expires. And so you have to take effect of the future and the unknown future and the contingencies. So what we did there, was we established what the tenant concessions, TI's, and leasing commissions were. Those are frozen. The starting rent is frozen, and then from there, there is a market-based appraisal as to what the proper market rate would be if we did the renewal at the then expiry of the lease in 2029, taking into account the already established tenant concession. But the color is though, that it can't be more than 10% more than the $98 a foot net or 10% less.

So we have certainty on the bottom as to what the rent would be, and it will be established as the fair rent in the then market, which we think was a very clever... By the way, both tenant and landlord think it was a fair deal and a clever way of handling the future. There's nothing in this deal whatsoever that contemplates any reduction in the rent.

Alexander Goldfarb (Managing Director)

Okay.

Steven Roth (Chairman and CEO)

It will be an arbitration based on the market.

Alexander Goldfarb (Managing Director)

Steve, thank you, and I apologize for getting that incorrect. That was my apologies. So your clarification is that the rent that's cited-

Steven Roth (Chairman and CEO)

Wait, wait, wait, wait a second. Wait, wait a second. I accept your apology. Thank you. That's very generous of you.

Alexander Goldfarb (Managing Director)

Well, so basically, in the way the rent is characterized now, is the $29 million a quarter characterized as gross, whereas the rents that are in the queue for the terms are now net, and it sounds like that's the confusion that I had on my end. Is that correct?

Steven Roth (Chairman and CEO)

I won't get into why you were confused. I'm just happy that you admit that you were confused.

Alexander Goldfarb (Managing Director)

Great. The next question is on the rents for this year to Steve Sakwa's question, Michael. You mentioned that originally it was down $0.25-$0.30. Now it seems to be down $0.55 based on further lease move-outs, what have you. Was there some stuff that fell out of bed that was unexpected, or did I not hear correctly? I just want to understand, like, was there stuff that came up and surprised, or what's driving the additional earnings impact this year?

Michael Franco (President and CFO)

Yeah, yeah. Maybe a little bit more confusion there, Alex. So-

Alexander Goldfarb (Managing Director)

That's why I-

Michael Franco (President and CFO)

On the last call, on the last call, you know, we talked about it. It was early in the year. I gave clarity on the interest reduction, because, you know, a lot of that was baked in with the hedges that were gonna roll off. We knew those, where those were gonna roll off to. And we mentioned that there would be an impact from the known move-outs, right? And cited what those were. But, obviously, there's a lot moving out. So it was, you know, we didn't quantify what the impact of those numbers were. We're quantifying that for everybody's benefit on this call. So I don't think... no surprises, right? Just trying to put a little more precision on it now that we're in May, as opposed to where we were.

And, you know, look, there's gonna be more that moves around, and that number, you know, could be less. But, I think in terms of, you know, where we sit today, you know, we have a known set between, you know, particularly 1290, 770, 280, that drive the bulk of that. Obviously, we talked about, you know, re-leasing a lot of that, and a lot of those deals have been announced, but just trying to get more precision to just the general statement we made last quarter.

Operator (participant)

Thank you. The next question is from Michael Lewis with Truist Securities. Please go ahead.

Michael Lewis (Managing Director and Equity Research Analyst)

Great, thank you. I'm just gonna follow up on that question about the re-leasing activity on some of the known move-outs. So I could probably triangulate an occupancy rate on that $0.25 drag. But could you share, you know, maybe just share how much square footage is related to known move-outs this year, and how much of that square footage you've already addressed?

Michael Franco (President and CFO)

Glen, you want to take that, or you want me to take that?

Glen Weiss (EVP of Office Leasing and Co-Head of Real Estate)

So the bulk of the number is at 280 Park Avenue, 770 Broadway, and 1290 Avenue of the Americas. At 1290 Avenue of the Americas and 280 Park Avenue, we've taken care of, as Michael said in his remarks, 51% of the sq ft, so call it 500,000 of 1 million sq ft. And as we said, at 770 Broadway, we have Meta rolling in June. Along with the current vacancy, we have pipeline activity on that space. So that's how we're, you know, approaching the big ones that are in that occupancy number. So, you know, as we take into account our pipeline of deals, as we take into account our expirations going through 2024, you know, we may see more of a dip in occupancy.

As we complete transactions during the next, you know, six to nine months, we expect that occupancy to then climb back as we get into 2025.

Michael Lewis (Managing Director and Equity Research Analyst)

... Okay, great. Thanks. And then, my second question is about THE MART. So, you know, occupancy dipped down to 77.6% in the, in the most recent quarter. You know, pre-pandemic, that was always, you know, 95%-100%. Could you maybe talk a little bit about kind of the roadmap there and, you know, what you think stabilized occupancy or, or, you know, given that there's obviously some volatility at that asset, what maybe like a stabilized kind of revenue figure might look like, for THE MART?

Michael Franco (President and CFO)

So, I'll start, then you jump in. Like, the Chicago market is obviously, you know, challenging right now, probably one of the more challenging ones in the country. But, you know, we do have decent activity on the asset. I would say that, you know, alluding to some of the prior questions, you know, there's quite a bit of distress in Chicago office. Many landlords do not have the wherewithal to lease their assets, given the debt situation there. You know, we have an asset that has no debt on it, and so I think the sponsorship, the strength is well known by the brokers and the tenants, and I think that's helping us.

You know, we just finished what we call Mart 2.0, which is the second stage of amenities that we've put in, fitness, conferencing, et cetera. And again, the reaction to that's been positive. So, like, market's tough, you know, cannot dismiss that. But, you know, I think we're seeing more than our fair share there, and I think that's gonna take, you know, probably three years to get back to stabilized occupancy realistically. Maybe it's two, but I think when the income fully comes online, it's probably in the neighborhood, and our objective is to get it back into the 90s% occupied, you know, get it 95%+, and get the income back up to that $90 million-$100 million cash NOI basis. So there's a fair amount of growth to come there.

But, you know, the market is, as I said, you know, challenging right now.

Operator (participant)

Thank you. The next question is from Caitlin Burrows with Goldman Sachs. Please go ahead.

Speaker 13

Hi, this is Julian on for Caitlin. Thanks for, thanks for taking the question. So one quick one. Can you comment on whether the leasing spreads in the quarter were benefited from the PENN District leasing, and what those—what that leasing spread might have been ex PENN leases?

Michael Franco (President and CFO)

Yeah, I think, I think the answer is that, you know, the spread, you know, PENN 2 is Major League Soccer with the big lease in this quarter. You know, that's a new lease, first generation, so didn't affect the spread.

Speaker 13

Okay, good to know. And then a second one on the debt covenant, it looked like interest coverage and fixed charge coverage tightened a bit in the quarter. I know longer term, the metric is gonna, you know, benefit from the occupancy gain you talked about from PENN District NOI, and it also sounds like you have some sales underway. But can you give us a sense of maybe the trajectory over the coming quarters, given the fact that I know there's that sort of big swap expiration at 555 Cal?

Michael Franco (President and CFO)

Yeah. No, you're accurate. You know, I think the impact this quarter was predominantly the you know, the big item was the swap increase on PENN 11, which we were coming off, I think, if I go from recollection, I think it was 17 basis points. So, you know, too bad that couldn't go forever, but, you know, that, that was the material item this quarter, a couple other things as well, but that was the big one. You know, next quarter, second quarter, if you will, you're accurate, 555. You know, we put in place another swap that will kick in, you know, an increase. So, you know, as we look forward, you know, we continue to have sufficient cushion, you know, in our covenants.

Fixed charge will tighten up, you know, over the next couple of quarters, but, you know, we still have, you know, sufficient buffer there. And then as the income comes online from some of these leases, you know, that number will grow again. But it will tighten up a little bit based on the 5.55 swap rate increase.

Operator (participant)

Thank you. The next question is from Nick Yulico with Scotiabank. Please go ahead.

Nick Yulico (Managing Director)

Thank you. I just wanted to go back to the, you know, the $0.25-$0.30 impact this year, from, you know, vacancy. So I guess, you know, that adds up to about $55-$60 million of NOI versus, you know, your total NOI at share last year of $1.14 billion. So it's somewhat like a 5%, you know, NOI loss, on that math, if that's correct. So I guess I'm just wondering, you know, how, how does that... You know, are there other moving parts here besides just, you know, some of the vacancy impact you talked about? Because if I look at your supplement, you know, in the fourth quarter, you had 5% of, you know, your rent expiring in New York, and, you know, you're obviously not all expiring.

The 5% NOI loss number seems a little bit, you know, high relative to what your expirations were this year.

Michael Franco (President and CFO)

You know, there may be one tenant that expired December 31st last year, but, like, I think in a nutshell, that's it, you know? I mean, it's pure and simple... You know, the vast majority of it is 1290 Sixth, 280 Park, and 770. You know, and you get to that sort of number. I mean, there's a little bit of positives, a little bit of negatives, but, you know, those are the three main drivers. So, you know, we just came through a period where there was some known move-outs, and, you know, we're backfilling those as we discussed.

But that's it, you know, and they just occurred at various stages, everywhere from December 31st, you know, through probably the last one is, you know, Meta, which is in the middle of this year.

Speaker 13

Okay, thanks. Then I just wanted to be clear on, you know, the way to think about occupancy, and Michael, last quarter, when you were talking about sort of a flattish occupancy this year, does that mean that, you know, by the time we get to the fourth quarter of this year, it's a, you know, sort of a flat year-over-year occupancy? I'm assuming it's not a sort of average occupancy for the year that would be flat year-over-year based on that.

Michael Franco (President and CFO)

Yeah. Yeah, I would say, you know, by the end of the year, I mean, again, it depends on timing of certain things, and, you know, I don't know that I can tell you with precision, you know, this will happen, you know, by the fourth quarter as opposed to January or whatnot. But, you know, we think, you know, rough numbers, it'll end up there. So, but we'll see. You know, it's, there's still, we're still, you know, in the first half of the year, and we just have to see how it plays out. But I think, like, occupancy, you know, it's down now. It's gonna trend down a little bit more, given, you know, for example, the Meta move-out, you know, in June.

But we have some other things in the works that, you know, we can pick that up. So we'll, we'll see where it comes out in total. I think as we look at the trend line, it will, you know, it'll, it'll, you know, we think increase meaningfully over time. You know, we are gonna bring PENN 2 into the numbers next year. You know, depending on where we are from a leasing standpoint there, you know, that number could bring the average down, but obviously, that's sort of an extraneous event that's being added to the denominator. So we'll, we'll evaluate it, you know, as we, as we get closer.

Operator (participant)

Thank you. The next question is a follow-up from Michael Lewis with Truist. Please go ahead.

Michael Lewis (Managing Director and Equity Research Analyst)

Yeah, thanks. I just have one more. You know, you sold 2 condo units at 220 Central Park South for about $32 million. Are the remaining four units similar in value, roughly $16 million a unit? I don't know if you have... You know, maybe you have a penthouse left, or you have smaller units. I was just wondering about that.

Steven Roth (Chairman and CEO)

No, the remaining four units are smaller, lower, view-impaired, so they're much less valuable.

Michael Lewis (Managing Director and Equity Research Analyst)

Okay, got it.

Steven Roth (Chairman and CEO)

Basically-

Michael Lewis (Managing Director and Equity Research Analyst)

Thank you.

Steven Roth (Chairman and CEO)

That job is basically sold out.

Michael Lewis (Managing Director and Equity Research Analyst)

Perfect. Thanks.

Operator (participant)

Thank you. The next question is a follow-up from Alexander Goldfarb with Piper Sandler. Please go ahead.

Alexander Goldfarb (Managing Director)

Thank you. Steve, with the new office-to-conversion incentives, does this open a door for you to contemplate either assets from the existing portfolio or perhaps, you know, assets that are, you know, that you've always eyed as would be great for conversion and seem to maybe have a motivated owner who would be willing? Just seems like the incentive package that they passed is pretty lucrative for office landlords to convert.

Steven Roth (Chairman and CEO)

Alex, good morning again. Yes, the answer is yes, of course. So there's a couple of things. First of all, the building that you're going to be converting, the target building, has to price somewhere in the neighborhood of some $200 a foot or sub-$200 a foot. So these are really distressed office buildings. They're not these, you know, they're distressed office buildings. Let me leave it at that. So the pricing and the economics really don't allow you to pay more, maybe even a pinch more, but probably not. So that's step number one. Step number two is that obviously, if those are the economics, and those are the target buildings, these are the B and C buildings in the office market.

So when those buildings are taken out of the conventional office market, they really don't help the prime A market, because the tenants that we deal with, who are interested in A space, don't really ever look at that. So the answer is that we will be able to, as an industry, convert a decent number of buildings. It will make a dent, not a big dent, but a dent in the residential market and the demand for residential space. But it'll have a marginal effect on the conventional Class A office market. But clearly, we're looking at that. It's an interesting activity, and it's something that we will look at.

I'm not 100% sure that the returns on capital are going to be what some people think they are, but anyway, we are looking at it pretty aggressively.

Operator (participant)

Thank you very much. There are no further questions at this time.

Steven Roth (Chairman and CEO)

Okay. Thank you all very much. We appreciate your joining us this morning, and we will be anxious to... We always learn from these calls, and so thank you for that. We are excited about the next quarter and the future, and we'll see you at the next earnings call. Thank you.

Operator (participant)

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