Vornado Realty Trust - Earnings Call - Q2 2025

Executive Summary

• GAAP EPS of $3.70 was driven by the $803.2M gain on the NYU 770 Broadway sales-type lease; comparable FFO was $0.56, beating the $0.53 analyst consensus referenced by management, while revenues declined year over year and missed Wall Street consensus on S&P Global, reflecting timing and one-off effects.
• Leasing momentum and pricing power continued: 1.48M SF signed in New York office with GAAP mark-to-market of +11.8% and cash +8.7%; PENN 2 reached 62% occupancy and secured Verizon’s ~200K SF, 19-year HQ lease after the quarter.
• Balance sheet strengthened: liquidity rose to $2.9B, net debt/EBITDAre (as adjusted) improved to 7.2x; management completed $675M Independence Plaza and $450M PENN 11 refinancings, and repaid $450M senior notes in January.
• Dividend outlook: the board continues the single annual common dividend policy; management expects at least $0.74 for FY25, with consideration to reinstating quarterly dividends as earnings inflect toward 2027 on PENN lease-up.

What Went Well and What Went Wrong

What Went Well

• NYU master lease at 770 Broadway (1.076M SF) eliminated ~500K SF vacancy and produced an $803.2M GAAP gain; prepaid rent of $935M and annual payments of $9.281M; $700M mortgage repaid.
• Leasing/pricing strength: Q2 New York office leasing at $101.44/SF initial rent, +11.8% GAAP and +8.7% cash relet mark-to-market; PENN 1 activity robust and PENN 2 signed marquee tenants with management expecting sustained rent push in a landlord’s market.
• Deleveraging and liquidity: liquidity increased to $2.923B; net debt/EBITDAre improved to 7.2x; refinancings (Independence Plaza, PENN 11) extended maturities on attractive structures.
  Quote: “Taken together all this is the very definition of a landlord’s market… we have the potential to see growth rates we haven't seen in quite some time and we're going to push [rents]”.

What Went Wrong

• Revenues fell 2% YoY and 4% sequential; cash NOI declined due to an April PENN 1 ground rent true-up payment and free-rent on recently commenced leases.
• Retail occupancy dropped (~7 pp impact) after two Forever 21 store closures, weighing on New York retail occupancy to 67.7%.
• FAD was negative in Q2 (-$6.6M) as recurring TIs/LCs and capital spend accelerated with lease-up; recurring TIs/LCs were $104.2M in the quarter.
  Analyst concern: timing of PENN 2 reaching ~80% by year-end shifted to “patient/choosy” approach on tenant mix and price, tempering the near-term occupancy ramp.

Transcript

Speaker 4

Good morning and welcome to the Vornado Realty Trust Second Quarter 2025 earnings call. My name is Michael, and I will be your operator for today's call. This call is being recorded for replay purposes. 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 touch-tone phone. I will now turn the call over to Mr. Steven Borenstein, Executive Vice President and Corporation Counsel. Please go ahead.

Speaker 2

Welcome to Vornado Realty Trust Second Quarter earnings call. Yesterday afternoon, we issued our Second Quarter earnings release and filed our quarterly report on the Form 10Q with the Securities and Exchange Commission. These documents, as well as our supplemental financial information package, are available on our website, www.vno.com, under the Investor Relations section. In these documents, and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10Q, 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 10K for the year ended December 31, 2024, for more information regarding these risks and uncertainties. The call may include time-sensitive information that may be accurate only as of today's date. The company does not undertake a duty to update any forward-looking statements. On the call today 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.

Speaker 0

Thank you, Steve, and good morning, everyone. Let me start by expressing our sorrow about the tragic and senseless shootings at 345 Park Avenue last week. Our deep condolences go out to the victims' families and friends. We have many friends in that building and ownership and occupiers, and we stand with them as they deal with this terrible tragedy. To continue, here in Vornado, our business continues to be strong, is getting stronger, and I remain incredibly enthusiastic about our future prospects. Our stock performance leaves the office sector, has increased 42% over the trailing 12 months, almost double the S&P 500. I was quite surprised that, broadly speaking, every other office REIT, whether East Coast or West Coast, including all the other New York office specialists, were negative during that period. We had an excellent quarter, and Michael will cover the results shortly.

By excellent, I mean leasing, balance sheet, and FFO all excellent. Let me once again discuss what we see on the ground and our business strategy. We are a 90% New York-centric company. Actually, we are a 90% prime-pitch Manhattan-centric company. We own a single large building in Chicago, the Mart, and a single complex at 555 California Street, the number one building in San Francisco. These two assets may be on the for-sale list for the right deal at the right time. Manhattan is universally claimed to be the strongest real estate market in the country, and I mean the strongest by far. While Manhattan may have nearly 420 million square feet of office space, we actually compete in a much smaller 180 million square foot Class A better building market. Our clients are expanding, demand is strong and broad-based, and here's the punchline.

Available space continues to evaporate quickly. Replacement costs for a Class A tower in Manhattan have risen to, call it, $2,500 per square foot. With interest rates at 6% or 6% plus, rents in the $200s are now commonplace. Think about it, $100 rents were rare only a few years ago. I believe this math is telling us there will only be a trickle of new supply for the foreseeable future, at least through the end of the decade. Remember, it takes five years from start to deliver a new build tower in New York. That trickle of supply, however unlikely, will undoubtedly be spoken for and not create speculative space available to the market. Taken together, all this is the very definition of a landlord's market.

With tight availability and Class A better buildings in Manhattan and West Side, and no new supply coming for the rest of the decade, I believe the next few years have the potential to be one of the strongest periods of rental growth we've seen in decades. It's already started. That said, logically, and for certain, values will increase as well. Here is our industry-leading leasing scorecard. During the first half of 2025, we leased 2.7 million square feet overall, of which 2.2 million square feet was Manhattan office. That includes the 1.1 million square foot master lease in flight at 770 Broadway, the largest office lease since 2019, which, by the way, absorbed 500,000 square feet of vacancy at that property.

The remaining 1.1 million square feet of leasing during the first half was at $97 per square foot average starting rents, with mark-to-markets of +10.7% GAAP and +7.7% cash. During the second quarter in Manhattan, we executed 27 deals, totaling 1.5 million square feet, including NYU. Excluding NYU, the remaining 400,000 square feet of Manhattan office leasing for the quarter was at $101 per square foot starting rents, with mark-to-markets of +11.8% GAAP and +8.7% cash. We continue to achieve the highest average rents in the city. This quarter leasing was 190,000 square feet in Penn and 210,000 square feet in our other Manhattan assets. Importantly, our leasing this quarter included 12 transactions for 183,000 square feet at Penn 1, at an average starting rent of $101 per square foot, bringing occupancy here to 91%. Here's an interesting factoid.

Since the start of physical development, we have leased 1.6 million square feet at Penn 1, at average rents of $94. At Penn, we are handily exceeding both our initial underwriting and our increased underwriting. Here's another way to look at it. Looking towards the future, everyone is modeling large increases in Vornado's areas as leases at Penn 1 and Penn 2 come online, as they should. This is all based on rents of, say, $100 per square foot. Our neighbors to the west are achieving $150 per square foot, and over time, so will we. Think about it. Penn 1, Penn 2, and Farley together comprise 5 million square feet. The math says every $10 a foot uptick in rent yields $50 million to the bottom line.

What's more, when the uptick, i.e., market rents get to $150 per square foot of 5 million square feet, that's an increment of $250 million per year. Same store asset appreciation over time is the ticket to success in the property business. Tenants are expanding in the Penn District. As an example, in the last quarter, Samsung doubled its space at Penn 1, and since its first 220,000 square foot lease signed in 2020, a major tech tenant at Penn 1 has expanded three more times, now occupying 460,000 square feet in that building. Last week, after the quarter ended and not included in the leasing statistics, we announced the 203,000 square foot headquarters lease at Penn 2 with Verizon Communications, one of the world's leading telecommunications companies. Verizon now joins other top tenants, Madison Square Garden, Major League Soccer, and Universal Music Group at Penn 2.

We are, of course, delighted to welcome Verizon. Verizon's choice of Penn and their enthusiasm for their new home can best be described by lifting a quote from their press release by one of their senior executives. Quote, "New York City isn't just where we work, it's who we are. Our employees deserve a workplace that is just as vibrant as our culture. Penn 2 is more than an office. It's a space designed to bring us together, to collaborate, to celebrate, to think boldly, to build the future side by side." The Verizon folks get it. This is a very important deal and continues to validate the product. This is a very important deal. Occupancy at Penn 2 is now 62%, and we have multiple deals in the on-deck circle, which will keep our occupancy marching upward.

The Penn District, our three-block-long city within a city, continues to amaze and impress tenants and stakeholders. We sit atop the nexus of Pennsylvania Station and the New York City subway system, adjacent to our good neighbors to the west, Manhattan West and Hudson Yards. The three of us combined represent the new booming west side of Manhattan. At Penn, we are creating a campus of multiple interconnected buildings under one ownership. We're delivering exactly as we said we would, and there is much more to come. As a starter, we are well along in the development process for a 475-unit rental residential project on our 34th Street site, catty-cornered to the Moynihan Train Hall. Next, we are going to transform as much as 700 front feet of tired old retail on both sides of 7th Avenue, along 34th Street, into attractive, modern, and exciting retail offerings.

The gateway to Penn is 7th Avenue at 34th Street. This stretch across the street from Macy's used to be a top three location, and returning to top three is our goal. As I said before, the Penn District will be a growth engine for companies for years to come, with rising rents and future development projects, including the Penn 15 site and potential residential opportunities. We also continue to add to our already impressive food offerings in the district with our newest restaurant, the Dynamo Room, which opened last month to great reviews. Avril will open at Farley in the fall. Our rooftop park at Penn 2, called The Perch, is the best spot in the city for view, food, gathering, or just chilling. Come see Penn for yourself.

I invite you to come to Penn District anytime, especially at happy hour, where you will see every seat at every restaurant and amenity, whether it's indoors or outdoors, filled with happy employees of our tenants. Our unmatched amenity package of 180,000 square feet is surely doing its job in spades to attract and delight our tenants. Our New York office leasing pipeline is robust, with a total of 560,000 square feet of leases signed or in negotiations, setting up the third quarter, plus more than 1 million square feet in various stages of proposal. As we announced on our last call, after two years of intense deliberation, the arbitration panel issued its ruling on the Penn 1 ground lease rent reset. The Penn 1 ground lease, as fully extended, goes to 2098.

Days ago, a ground lessor filed an 11th-hour Hail Mary motion in New York County Supreme Court to vacate the rent reset panel ground rent determination. We believe the motion is entirely without merit and intend to vigorously oppose it. We also completed the following financing transactions as we continue to bolster our liquidity and handle our debt maturities. In April, we completed a $450 million financing to 1535 Broadway, using $407 million of net proceeds to partially redeem our retail JV equity on the asset. The preferred equity outstanding balance is now $1.079 billion, down from $1.828 billion. In June, we completed a five-year $675 million refinancing of Independence Plaza, a joint venture in which we own a 50.1% ownership interest. In July, we completed a five-year $450 million refinancing of Penn 11, paying down this previous loan by $50 million.

We have meaningfully delevered our balance sheet over the past couple of quarters. Since the beginning of the year, we have generated $1.5 billion of net proceeds from sale, financings, and the NYU deal, paid down $965 million of debt, and increased our cash by $504 million. Our cash balances are now $1.36 billion, and together with our undrawn credit lines of $1.56 billion, we have immediate liquidity of $2.9 billion. Our net debt to EBITDA metric has improved by 1.4 turns, that's 7.2 times from 8.6 times. Our fixed charge coverage ratio, as expected, is steadily rising. Please see page 23 of our financial supplement for details. Finally, we remain very excited about the redevelopment of 350 Park Avenue with Citadel as our anchor tenant and Ken Griffin as our 60% partner.

The process to create this grand, Foster and Partners-designed 1.8 million square foot tower on the west side of Park Avenue has begun, and this new building will stand out as being truly best in class. DDs are complete, i.e., the building is basically designed, and CVs are progressing. Last month, the City Planning Commission voted to approve the project, and we expect the final ULURP approval from the City Council this fall. Citadel is currently building out their interim swing space, which will allow us to commence demolition of the existing 350 Park Avenue building in spring. Thank you all for listening, and now over to Michael to cover our financials.

Speaker 4

Thank you, Steve, and good morning, everyone. Second quarter comparable FFO was $0.56 per share, which beat analyst consensus of $0.53 per share and is essentially flat compared to last year's second quarter. We had lower net interest income from retail preferred repayments and lower NOI from asset sales, offset by lower real estate taxes at the Mart, net of tax and reimbursements. We have provided a quarter-over-quarter bridge on page two of our earnings release and on page six of our financial supplement. In addition, our cash NOI is lower this quarter, primarily due to the previously discussed one-time Penn 1 ground rent true-up payment made in April and free rent associated with recently commenced leases from backfilling the previously known move-outs. On our last earnings call, we said that we expected 2025 comparable FFO to be essentially flat compared to 2024 comparable FFO, $2.26 per share.

This is still a good assumption as we sit here today. As previously discussed, we still expect the full positive impact of the lease up of Penn 1 and Penn 2 in 2027, resulting in significant earnings growth by 2027. New York office occupancy increased this quarter to 86.7% from 84.4% last quarter, primarily due to the full building master lease at 770 Broadway. As we continue to execute on our leasing pipeline, we anticipate that our occupancy will increase into the low 90% range over the next year or so. Lastly, the financing markets are liquid, and we have been active in refinancing our 2025 maturities. On top of the recent Independence Plaza and Penn 11 refinancings, we have several others in the works. The investment sales market is also picking up as the financing markets recover and as confidence in New York City's recovery grows.

With that, I'll turn it over to the operator for Q&A. Thank you. We will now begin the question and answer session. If you have a question, please press star, then one on your touch-tone phone. If you wish to be removed from the queue, please press star, then two. If you are using a speaker phone, 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 touch-tone phone. Each caller will be allowed to ask a question and a follow-up question before we move on to the next caller. Steve Sakwa from Evercore ISI is on the line with a question. Please go ahead.

Yes, thanks. Good morning. Steve, I guess I wanted to tie two comments together. You said, you know, Penn 2 was 62% occupied with, you know, multiple deals in the on-deck circle. You talked about the LOIs of 560,000 feet plus $1 million of proposals. Can you just maybe help us understand how much of that sort of pending activity is geared towards Penn 2 and how much is for the rest of the New York City portfolio?

Speaker 0

Glen, you want to take that?

Speaker 1

Sure. Good morning, Steve. It's Glen. Of the 560,000 feet, those are leases out in negotiation. The Verizon lease is included in the 560,000. In our pipeline, we have about 1.4 million feet in the pipeline in various lease proposal stages, and about 50% of that is at Penn 2. That's the breakdown.

Great. For my follow-up, Steve, you made some comments early on about the Mart and 555 California sort of being for sale at the right price. I feel like that's maybe a little bit of a shift or change in your thinking. Could you just expound upon that? Is your goal to really sort of get back to being just kind of a pure New York City company in the shorter versus longer term?

Speaker 0

Steve, hi. How are you? We've worked very hard to focus the company, stick to our meeting, and focus on the financials and our stock price. Our mission is to increase our stock price. That's our sole mission. We think that those two assets are valuable. We think one of them is free and clear. The other one has some financing on it. We think that 555 California is the single best asset in San Francisco. San Francisco is in a recovery phase now, which we think is going to be very dramatic. As I said, those two assets we will sell for the right price at the right time. They're not sacred. By the way, nothing is sacred. We look upon them as a financial asset, and we will do what we think is the best financial outcome for the company.

Great. Thank you.

Speaker 4

Your next question comes from Floris van Dijkum with Ladenburg Thalmann. Please go ahead.

Speaker 1

Hey, thanks, guys. Maybe if you can talk a little bit about your signed not open pipeline. You talked about your occupancy, your leased occupancy being around, I think, 85.2% in New York. What's the physical occupancy? I.e., how much rent is coming online over the next, presumably, 12 months by the time that becomes activated?

Speaker 4

Floris, good morning. It's Michael. Welcome back, and congrats on your new position. In terms of the signed but not commenced, we're going to have to come back to you on that number. I don't want to give you a guesstimate and swag. We'll have to come back on that. Obviously, with Verizon signed, the occupancy number will continue to migrate up close to 88%. There are ins and outs. We continue to believe that we'll be north of 90% as we get into next year. That income generally, and I think we've been consistent on this point, will, from an FFO standpoint, kick in heavily in 2027. 2026 continues to be a year where we have the lease that's signed, but they don't kick in. In 2027, I think you're going to see a significant increase.

That, I think, is consistent with what we said the last couple of quarters. In terms of specific dollars, I have to come back to you on that.

Speaker 1

Thanks, Michael. Maybe if I can ask one follow-up. Steve, you piqued my interest about the upside potential in your Penn District. I think in the past, you've talked about stabilized NOI at around $325 million. How do you see that changing, or how much has that changed over the past six months based on market rents going higher and obviously your lease activity at Penn 2 in particular?

Speaker 0

Floris, hi. I couldn't be more enthusiastic about what we're doing at Penn and what Penn's value appreciation to the company will be over time. Right now, we are leasing Penn 1 and Penn 2. We predicted that the market rents would be that we would achieve $100 of rent. We're achieving that, and we're achieving more. We're doing better than our underwriting. The interesting thing is that our neighbors are getting $150 a foot and more. We believe that over time, we will also in Penn 1, Penn 2, and whatever other buildings we build, be able to achieve rents that will be approximately maybe just a pinch below those buildings.

If you think about it, if you look at real estate not as a quarter-for-quarter business, but on a five-year planning cycle or something like that, if the market rents in Penn go up on the 5 million square feet that we already have by $10 a foot, that increment is $50 million to the bottom line. That's $0.20 a share. That's a fairly big number. If they should go up by $50 a foot from $100 to $150, over time, the company will realize a $250 million increase in its income. There are going to be some expenses, some minor expenses about that. Real estate taxes will go up marginally, but the numbers are very big. What I'm saying is the best part of the real estate business is great assets over time.

We believe that the buildings that we now have are undermarket so that as the market appreciates and as the market comes to our buildings, these buildings will get more and more valuable each year.

Speaker 1

Steve, as you think about that, is there a possibility that the Penn District could generate maybe up to $400 million of NOI in five years' time?

Speaker 0

Easily. Easily. By the way, that would be with no new construction, no new building. The existing inventory that we have now, what you're saying is going to go up by $100 million over three or four years? Sure.

Speaker 1

Thanks.

Speaker 4

Your next question comes from John Kim with BMO Capital Markets. Please go ahead.

Good morning. I know there's a few different occupancy numbers out there, but just focusing on your occupancy stats on page 32, New York occupancy went up 85% to 85.2%, which is a sequential improvement, which is great. It is lower than the 86.2% that you noted post the NYU lease last quarter. I was wondering what the headwinds were this quarter that brought that down 100 basis points or so.

Yeah, I think, John, good morning. I think a couple of things. One is I think that's an area of New York non-rural office and retail. I think the office numbers are generally consistent with what we said. It's a little bit of timing, and Verizon got signed a few days after the quarter. Obviously, if that had happened before, we'd have been above even what we said last time. A little bit of timing. I think the biggest impact there was retail. We had two Forever 21 leases at 1540 and 4357 where they were paying low rent. The company obviously went bankrupt again, and they vacated those stores. That knocked off, I think, about 7% off the retail occupancy, which in total took us to the area number you see there. It wasn't a lot of rent coming out of either one of those stores.

They were frankly placeholders, particularly at Penn, until we really sort of redeveloped that whole stretch as Steve alluded to in his remarks. From an occupancy standpoint, I think that was the biggest driver.

On 555 California Street and the Mart, Steve, you talked about potentially selling this. I wanted to see if you had any more commentary on timing, if this is something that could be listed in the next 12 months. How should we think about use of proceeds between developments, acquisitions, and reduction of debt? We did notice that you provided new disclosure on net debt to EBITDA. I'm wondering if that's a KPI going forward as far as maintaining or lowering net debt to EBITDA.

Speaker 0

On the first question, we are not listing those buildings in the next year or whatever. If we sell those buildings, it will probably be an opportunistic incoming where somebody wants them. What I'm saying is that we're not actively marketing the buildings, and we have no prediction on timing. They are available if the deal is correct and the timing is correct. The other half of your question was what, sir?

Use of proceeds. Use the leverage of the price.

Speaker 4

Thanks, John. Yeah. To Steve's point, nothing is imminent. For the right price, we'll transact. At the time, we'll assess the best way to utilize that capital, whether it's to pay down debt, whether it's to deploy those into development, etc. I appreciate you recognizing the good work we've done on the leverage front. We're proud of that. We've worked hard to get our leverage debt down. We think we're now quickly moving to the head of the class there, and we want to continue that. When something is more ripe, then we'll assess exactly how we'll utilize those proceeds.

Speaker 0

I want to tack on to what Michael said. One of the very important things that happened over the last short period of time is the improvement in our balance sheet. Taking our leverage ratio down by 1.4 turns is a really big thing. Rebuilding our cash balances, having lots of availability, and having a very strong balance sheet is one of the important things that we do. I'm very proud of what the team has accomplished over the last period of time. I think it's a really big step.

Speaker 4

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

Hi, guys. Thanks for taking the question. Can you sort of talk about just the, I know you guys talked about how strong the leasing pipeline is. Obviously, you mentioned occupancy will continue to increase into the low 90% sometime next year. Can you guys talk about just the ability to push net effective rent in that environment and strong backdrop?

Yeah. Why don't I start? Glen, jump in here. If you look at the current environment in the marketplace, whether it's Park Avenue, 6th Avenue, etc., the vacancy rates are generally under 10% for Class A buildings, probably Park Avenue under 5%. In general, citywide, in Midtown, the West Side, very tight. I think in terms of large blocks of space, there's less than a handful of a couple hundred thousand feet or larger, Penn 2 being one of those, and I think widely viewed as the best of those. Steve talked about we're a landlord's market, and we certainly feel that. I think tenants feel that. There's strong demand in the marketplace. A number of tenants are focused on expiry as the number of years out. They're worried about whether they're going to be able to either consolidate in a single location, have enough expansion space, etc.

The dynamics have shifted. We are, I would say, on a weekly basis, evaluating our space and trying to determine how much we can push rents. We're going to continue to push rents, I think, across the board. We've done it aggressively on Park. We're doing it in other buildings in Midtown. We're doing it in Penn. What you're hearing and what you're seeing in terms of the stats is a continued movement to push up rents there, where I think we started at Penn 1 in the mid-80s, maybe $90, and now we're achieving rents north of $100. We're going to continue to push those same on Penn 2. We're pretty optimistic in terms of what's going to happen to rental rate growth, just given the lack of quality space available and the demand side we're seeing.

I think we have the potential to see growth rates we haven't seen in quite some time. We're going to push. We're going to find the resistance level as we move out here.

That's helpful. I guess one last one from me. Are you guys able to talk about the A-node and B-node investments that you guys did?

You know, it's on a site in Midtown. It's a node that we've liked in two phases. It's a high-quality site, and it can go either way. On one hand, we might just collect the coupon and earn a reasonable return, relative to what we could earn in cash. Alternatively, it could be an opportunity to own the asset and capitalize on the opportunity there. It could go either way. We just viewed it as a high-quality asset. We're happy if we earn the return and may leverage into a broader opportunity. That's as much as we can say right now.

Appreciate it.

Okay. Your next question comes from Seth Bergey with Citi. Please go ahead.

Hi. Thanks for taking my question. I think on the last call, you spoke to kind of hitting the 80% target for Penn 2 by year-end. I guess just given the recent leasing activity, and it sounds like half the $1.4 billion development pipeline is kind of on leases out on Penn 2. Do you think you could kind of exceed that target?

Speaker 0

I doubt it.

Speaker 1

All right. It's Glen.

Speaker 0

No, Glen, I said I doubt it. The question is, can we exceed 80%? I'm saying I doubt it. Go ahead, Glen.

Speaker 1

I mean, look, we're feeling very good about where we are at Penn 2. We feel we'll get there. I will say we're being patient. We're being smart. I might even say we're being a little choosy in terms of our credit profile, our tenant mix. We do keep looking at our price and increasing it. We're not rushing just to lease space. That's not what we do. While we think we'll get there, we're being careful and smart about our strategy. We're in it for the long term, not for the short-term statistics.

Speaker 0

Said, Glen.

Speaker 4

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

Hey, good morning. Congrats to you guys on the Verizon deal. That was nice to see. Glen, you partially answered my question on the leasing ex-NYU. It sounds like you guys are choosier on the types of deals that you're doing, especially in this market. What stood out in the quarter is ex-NYU, the average lease term was just 6.8 years, which given, you know, CBD leasing would expect that longer. Can you just give us a little bit more color? Clearly, you're on for big whale of deals. On the smaller deals, can you just give a context of the types of tenants and space and tenure? Because again, would expect deals to be longer than averaging 6.8 years.

Speaker 1

Yeah, of course. Hi, Alex. I look at it, you know, for the full year, the half year thus far, our average is 12 years on 1.1 million feet of leasing outside of NYU, of course. For the quarter, it's an outlier this quarter. It was a mix of large renewals that were less than 10 years with a lot of pre-build deals at Penn 1 and other buildings that are multi-tenant, like the Fuller Building and others. It was an odd mix of leasing this quarter. I certainly would not say there will be a trend of this type of average lease term, particularly you know us and you know our averages are normally at least 10 years. It's an outlier, and I'm not concerned at all.

Speaker 4

Okay. The second question is, Steve, I appreciate your comments on the cash balance for Vornado, but when we look at Alexander's, it seems to be the inverse in the sense of the dividend overpayment, the cash needs for the Bloomberg in 2029 replacing Home Depot. Can you just help us understand the dividend overpayment relative to the cash balance relative to how we should think about Alexander's on a go-forward basis?

Speaker 0

This is a Vornado call. I think it's inappropriate to get into Alexander's. We had this conversation last quarter, as I remember. There are things going on at Alexander's that you don't know about. As a result of that, I quibble with your analysis. Alexander's is going to be just fine.

Speaker 4

Okay. I appreciate that, Steve. Thank you.

Speaker 0

Just to clarify it a little bit more, there are some assets that are going to be sold at Alexander's, which will, how do I say it, probably surprise you greatly. It's not the big.

Speaker 4

I like surprises, so I appreciate your time, Steve. Thank you.

Speaker 0

Thank you.

Speaker 4

Your next question comes from Jana Galan with Bank of America. Please go ahead.

Thank you. Good morning. Maybe just following up on the retail leasing environment, can you talk a little bit more about the timing around the vision for the 34th Street corridor, and then the potential timing of backfilling the Forever 21 space?

Speaker 0

Hi, thanks. You know, this is a long-term activity. We have held that space off the market. First of all, let's talk about the quality of the real estate. 34th Street over the years has been one of the top two or three shopping streets in Manhattan. The subway stations are the second busiest and the third busiest in the entire system. The footfall is amazing. The traffic is getting accelerating now with all of the office buildings that have been built in the district. When you look at the transportation system, the transportation system really is at 7th Avenue and 33rd Street and 6th Avenue and 33rd Street. All of the buildings to the west, the people, in order to get into the transportation system, basically come east into our neighborhood. We are very enthusiastic about the quality of the retail. The street has gotten, dare I say, shabby.

We have held lots of space, maybe even all the space off the market, waiting for the right timing. The timing is now. What I said was that we're going to take, it looks like it's 700 front feet. 700 front feet is basically three and a half blocks. Nobody has that kind of concentration under one ownership. We are very excited about the opportunity. With respect to when the Forever 21 space gets released, it may be reconfigured, and I really can't predict what the timing is going to be. It will undoubtedly be a different building, and it will take some time and be patient with us. What's going to happen is going to be a great result.

Great. Thank you, Steve. Question for Michael. Thank you for the comments on the comparable FFO for this year versus last. Can you help us think about kind of the revenue ramp at the end of the year? Just trying to help us kind of think about the full impact of Penn 1 and Penn 2 being in 2027, but kind of how will that trend quarter to quarter?

Speaker 4

Sounds like you're asking for guidance from that, which we don't give. I think it will build over those quarters. It's going to be, you know, as we think about both Penn 1 and Penn 2, it's going to be more back-ended there. I don't think, I'll just start going a little more towards fourth quarter this year and then into next year. I think most of it's going to happen in 2027 from a run rate standpoint. I don't want to give you a 2026 prediction here today. We haven't done our budgets yet. Obviously, the market's moving positively. We'll see where we end up. I think most of that will hit, you know, it's going to be a pretty steep growth from 2026 to 2027.

Great. Thank you.

Your next question comes from Vikram Alhotra with Mizuho. Please go ahead.

Thanks so much for doing the question. Michael, I guess I wanted to just get some more color on that last few comments. You obviously talked about the 2027 growth. We're not looking for a number for 2026, but just are there any big moving pieces we should be aware of as we model this out? Like anything that'll really, I guess, depress 2026, or is it just a step-function change as we go into it from 2026 to 2027?

I think it's largely just step-function. I don't think it's anything unusual for me. We have space releasing up really across the board, both in New York, some space in California, Chicago. We got activity on the retail area that'll kick in as well. I think generally across the board, nothing unusual, but largely, as I said, just given timing of when we signed those leases, stepping heavily into 2027.

Okay. No big move-outs or like interest expense, I guess, any swaps or anything expiring that pressure 2026 relative to 2025 before we get a step-function increase in 2027?

No, I mean, look, it's, you know, in terms of move-out, I mean, we're in the leasing business, right? There's going to be a certain amount of tenants that move out, a certain amount you keep, a certain amount that grow, a certain contract. I think we're more in the grow than contract right now. Inherently, there's always some level of move-out. In New York office, you're going to have, we'll just have to see what sort of comes about over the course of the next year. I will say on the interest expense side, and I think we talked about this on the last quarter, I think we're generally on the downhill trajectory on that. We hit a bit fairly well hedged. We're now, A, between delevering the balance sheet. I think we're generally rolling over assets.

I would say flat in terms of interest, maybe a little bit down, maybe a little bit up, but generally flat, but with less debt, the interest expense is coming down. If short-term rates come down, that'll help a little bit more. I think we're on the backside on the interest front.

Speaker 0

Okay, Nick, hang on for a minute. Think about it from the big picture point of view. We operate our business, 90% of our business, in the single best market in the country by far. We are in the best building category, which is a smaller market than the entirety. It's a 180 million square foot market. The vacancies in that market, our customers are expanding. Our customers are doing well. The demand for space is robust, aggressive in the market that we serve. Vacancies are evaporating. The markets are getting tighter. That all augurs through a better business and shareholder value creation. That's where we are.

Okay. I just wanted to clarify. I guess, Steve, you mentioned, you know, San Francisco liked to come back very, very, I guess, I don't know if it was the word ferocious, and then obviously New York doing very well. I'm just wondering, does this create an opportunity for Vornado to use some capital, you know, to buy assets, invest in debt? I know you're paying down debt, but just, what are the investment opportunities today for Vornado?

The answer is capital allocation is probably the single most important thing that we have to do. We are going to be very vigorous and very disciplined in what we do. We look at everything that comes up, and we invest cautiously, and we invest aggressively when we think there's something that creates real shareholder value. I don't have anything in the way of predictions for you other than the fact that we are very responsible in our capital allocation.

Speaker 4

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

Hi, good morning. Earlier, somebody asked about net effective rents, and you talked about pushing rents across New York City. I guess on the tenant improvement and leasing commission side, you show it as a % of initial rent, and it's up in New York City for the second quarter and the first half to like 12 to 13% of initial rent. I was wondering, would you say that 2025 outcome is a result of something in particular, or is that just the reality of leasing today, and what will it take for that to change?

Speaker 0

I don't know that the, yeah, go ahead, Glen.

Speaker 1

I was just going to say that, look, the TIs have stabilized, haven't come down yet, but we are seeing free rent come down, which is not in that %. We expect, as things tighten, that the TIs will eventually come down. Free rent certainly is starting to come down in our deal-making with rents rising. I think that's a great start to the net effective story strengthening for owners like us, for sure.

Got it. Okay. I was wondering if you could just give any update on your dividend thoughts as it relates either to 2025 or just broadly in having a quarterly dividend reinstated.

Speaker 4

Good morning, Caitlin. On the dividend front, obviously, that's a board decision, and we'll meet with the board, discuss it with the board as we get at year-end. I would say a couple of things, though. Given the positive trends in the business, and where taxable income is expected to be, there's still things that could move it around in a number of different ways, including, you've seen us sell a couple of small assets, etc. As we get towards year-end, our expectation, given the trends, is, at a minimum, we think we'll pay as much as we paid last year, which was $0.74 a share. That's for 2025. Again, we'll get with the board at year-end. I think as we look out, and I think Steve made this comment maybe a couple of quarters ago, as the environment heals, we'll look towards more of a regular dividend.

I think that some will also look hard at year-end and get back to our more normalized quarterly dividend. Whether that results in any different outcome, and there's a total, I can't comment on that. I think certainly as we enter this year, no less than last year to the expectation. Again, given the positive trends, we think that the dividend will start growing over time, particularly as we get into that 2027 significant increase in earnings.

Thanks.

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

Hey, I just got two quick ones. Just on the going back to the same store NOI and some of the callouts, just wondering if any high-level thoughts as you sort of anniversary this period in 2026 or 2027, just any sort of color on where that same store, you know, could look like or how we should think about it without asking for guidance.

I think that, in NOI, you got a lot going on because obviously 717 comes out in there now. We obviously paid off the debt too. Look, I think as we get to particularly next year, we'll start seeing positive same store NOI and beyond. I can't give you the % yet. Again, just given the leasing pipeline, we expect that that'll be the case.

Makes sense. My second question, just some updated thoughts. I think the Hotel Penn land site, some of the activity on sort of 5th Avenue and retail monetization. Just curious if you can give us a pulse on those assets and how you're thinking through about potential monetization there or what you're hearing. Thanks.

Speaker 0

The 1015 site is, I believe, the single best site in the West New York market. Obviously, it will require a new build. A new build now is, as I've said in my prepared remarks, the escalation in cost of the new build is fairly dramatic. We are trolling for tenants. We talk, we see every large requirement that comes along. When the right tenant comes along, we will make a deal and develop the land. The timing on that is uncertain, but it certainly will not be imminent or quick.

Speaker 4

The next question comes from Brandon Lynch with Barclays. Please go ahead.

Great. Thanks for taking my question. As you guys mentioned, San Francisco is showing a broad sense of improvement in demand. Can you give us an update on progress for renewing or releasing some of the upcoming expirations at 555 California?

Glen, you want to take that?

Speaker 0

Sure. I'm sorry. Just in San Francisco a few days ago, things are markedly improved. The streets feel good, safer, cleaner. Buildings are busier. The good news is leasing is starting to take up and improve. It feels a lot like New York, I'd say, probably 18 months ago or so, where things are starting to happen in a positive way. The beat is better. The brokers are smiling a little bit all of a sudden. It all feels good. We've just completed a huge run of leasing there, about 600,000 feet. We have some vacancy to contend with right now, 100,000 feet in bits and parts. We have a couple tenants moving on next year. We have action on everything. Our tour volume is great, almost daily in the building. Everyone is coming through. The building continues to outperform everybody by a long shot.

The best tenants with the highest rents are all coming to 555 California Street. We feel great about our prospects, but overall, the market seems to be coming on now. The mayor's done an excellent job improving the environment, working well with landlords like us and with our tenant base. We feel like things are signaling to improvement and strength.

Great. Thanks. That's helpful. Maybe more broadly on the demand picture, our checks with brokers have suggested that a lot of the demand that they've seen in recent quarters has reflected real-time needs and urgency among tenants versus the more traditional longer-term capacity planning needs that would have been more of a characteristic of the past cycles. Have you seen any shift in recent quarters in how the tenant base is approaching their need for space in terms of real-time needs versus longer-term planning?

Glen, that's great.

Speaker 1

Sure, it's Glen. Verizon's a perfect example. It's a deal that started percolating to us in mid-June and closed at the end of July. That's fast. We love that. Tenant decided to move their headquarters, acted quickly, concisely, perfectly, and smoothly. That's something we see. We have other activity at Penn 2, Penn 1, and elsewhere in the portfolio is similar, where tenants are now coming quickly. It's not as much of our lease expires in two years or three years or four years. It's the action that we like, a landlord's market type of action. A lot of it is both relocation and expansion. There's a lot of expansion, particularly in New York right now, where we're seeing signs of growth and people are acting very quickly. Even in some cases, we have tenants now battling for space throughout the portfolio.

I think your comment is on cue in terms of what we're seeing.

Great. Thanks, Glen.

Speaker 4

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

Hey, and thank you. Glen and Steve, I just want to go back. Steve, you mentioned $100 in place. I think it was in place in Penn that could go to $150 if you guys get the same rents as your neighbors to the west. I thought the new deals that you were signing were in sort of the $120, $130 range. I thought that's where the new deals are commanding. Maybe I'm wrong, but maybe you can just provide a little perspective versus what are in-place rents at Penn 1, Penn 2 versus where you guys are signing rents. As I said, I thought your signed rents had been moving up steadily.

Speaker 0

Glen, you want to handle that for a minute?

Speaker 1

Certainly, we're moving steadily up. As Michael said, we were in the 80s and the 90s, now in the 100s. That's on average. We, of course, have seen deals well into the 100s, the 110s, the 120s, the 130s. We are certainly seeing month-to-month improvement, rising rates, and we expect that to continue. Our average rents have risen quarter to quarter, and we're seeing deals well into the 100s now. You're correct, Alex.

Okay, cool. Thank you. Thank you.

Speaker 4

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

Speaker 0

Thank you for joining us today, everybody. We continue to be very excited about a lot of things. We're very excited about Penn, obviously. We're very, very proud of what we've done with our balance sheet over the last couple of quarters. The business is actually pretty terrific. We'll see you next quarter. Thank you.

Speaker 4

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