Vornado Realty Trust Q2 2024 Earnings Call Transcript

Steve, I wish I could help you, but I've said one that I'm going to say on that topic. It's an important transaction. We're under a confidentiality agreement and so that's all I'm going to say is that there's an [Indecipherable] transaction in process. Sorry.

Hi, Steve, it's Glenn. How are you? And so it's a mix of both tenants expiring soon and some tenants expiring in the outer years. But I'll tell you at PENN 2, we have tenants buying for the same space right now both in the podium and in the tower. We have technology interests, fashion interests, financial interests, legal interests, academia interests, media, we have interests from all types of sectors on all the space. We're in different sorts of paper negotiations with all these tenants. So we're seeing very, very strong activity as we sit here.

Similarly, at PENN 1, we've leased about 155,000 feet at PENN1 this year at rents that are well above where we thought we wind up there and the types of tenants keep coming in. We release out right now with a major pharmaceutical company for two floors and we have other activity coming into PENN 1. And with that, we're also seeing great activity around the district at PENN 11 and some of the other properties. And so I would tell you, we're really on all cylinders now in PENN. When you walk the streets, it's really spectacular. Everything is looking great, the reception is better, better, and better as each day passes. So we're super-excited about what's to come.

Well, there's a lot in that, John. [Speech Overlap] And if I forget, remind me, but thank you. And I think you've been a steadfast believer in retail the whole time which we appreciate. Look, it's obviously a transaction we're quite pleased about. We think it's an outstanding execution. And I think if you look at the valuation and Steve talked about the cap rates and the value, the income is actually up a little bit from 2019 transaction. That would effectively tell you that the retail value that we sold in 2019 is sort of back to those levels.

So if you take the preferred and the -- just where the value of the equity was marked at the time, that's about $16 a share, which I don't think our stock price continues to reflect at all. So eventually people will appreciate the valuation of Fifth Avenue. But on the per square foot, 20,000 is -- that's the entire space. I think the most important thing to focus on when you're looking at Fifth Avenue retail is what's the amount of frontage, what's the amount of ground floor square footage. And when you take out a small allocation for the second floor given the rents are obviously quite a bit less, it's about $50,000 a square foot for grade square feet. So I think that's a more representative metric for Fifth Avenue retail in terms of the grade square feet. So you have to sort of look asset-by-asset.

With every user sale and we've now seen three major sales and I think we alluded over the last couple of calls, we expect that there would be some -- obviously, we knew this one was in the works, but I don't think you've seen the last, as Steve said. Yeah, each sale creates more scarcity in terms of what's remaining on Fifth, which should drive both rental rates as well as valuations for those that want to keep buying. So we're pleased that we own a significant portion of the frontage still. We still own north of 20% of the Prime Upper Fifth Avenue frontage and so that puts us in a good place.

Let's talk about the earnings impact, which I think was -- I think that was your first question. So all the proceeds will go to repay are preferred. We're only about four and three-quarters in that today. The entire amount, if you remember, we originally structured the transaction, the preferred was a proxy for first mortgage financing and it allowed us to defer any gain there. And when we refinance the preferred, that gain continues to get deferred when it gets actually paid off that triggers the gain. So the entire 340 will be gained, it likely will close next year. And depending on what other transactions we have in terms of losses and we already have some that have been monetized, we'll be able to keep some or all that cash. We think we'll be able to keep a significant portion of that cash if not all of it. And so I would tell you at a minimum, it will be a push in terms of earnings and hopefully, it will be accretive to the tune of a few million dollars. If you assume we redeploy that, if nothing else, just to pay off debt, let's call it 6.5% in terms of where it is today. So I think I covered everything you asked, but if not, tell me.

Sure. John, it's Tom. MSG, we actually delivered some of their space, a portion of the space six months early. So in our second quarter results, you're seeing the impact of that. It gets fully delivered by the fourth quarter. So our fourth quarter will be a full quarter of MSG rent at the new rent. And then obviously, '25, it will be a full year of MSG on a GAAP basis. As it relates to capitalized interest, as we indicated in Michael's prepared remarks and on previous calls, capitalized interest will roll down in 2025, but most of that will be offset by additional GAAP revenue as it relates to some of the large leasing we did this past year with [Technical Issues].

It's going to be a portion of the building because as we had some open development going on, some of that interest will continue to capitalize in 2025.

Good morning, Floris. On your first question, in terms of retail activity, I think we've talked about this on the last call, a couple of calls in terms of just the general market dynamics where the retailers are more active, and we're seeing continued recovery there, both in terms of rents improving and vacancy rates declining, and that certainly continues. I think if you look at our activity this quarter wasn't very meaningful, but it tends to be a little lumpy. But as I look forward at our pipeline, it's quite active. We probably have close to 160,000 feet in lease negotiations right now and probably another 150,000 feet of deals in various stages of letters of intent.

So a lot of activity, I would say that's principally focused in pen as well as in Times Square, where we have space that, obviously, we've redeveloped and PENN that we've delivered or delivered and then backfilling some of the spaces, particularly 1540 Broadway. So that's where the activity is. And I would say the rents are at pretty healthy levels relative to historical, particularly in Times Square. Fifth Avenue, we have one vacancy that comes up later this year. There is activity there. It's hard to extrapolate exactly just because there's not a tremendous amount of vacancy and every space is so particular in terms of where users want to be and how much space they want and whatnot. But rents are -- I think it recovered pretty significantly there.

So again, we see continued momentum. I think in terms of near term, we don't have a lot of roles coming up on fifth near term. So I don't know that really -- the near term is to mark that either way is really relevant. There's duration on most of those leases other than that one small lease that's coming up at the end of the year.

Yeah. Look, as we sit here today, our plan is to pay it off. And we've got significant pressure on hand. Obviously, given the announcements in the last 24 hours, we've got more cash coming in. So that's the plan, like as you would expect, we are tuned to the markets and what's going on with rates trending down with spreads tightening and we obviously look at the Barrick financing markets to see where those are and that presents an alternative that's compelling. And we're pleased with the direction of that. But as we sit here today, plan is to pay it off.

Yeah, hi. The 770 transaction was included within Michael's remarks, in terms of the pipeline. In terms of overall activity, we're really seeing activity throughout the portfolio really everywhere right now. If I look at the list of the action, the leases out, and the proposals in, we're really seeing it very well spread out for all the buildings. And the one thing I would note is the bread-and-butter tenants, the 10,000, 20,000, 30,000-foot types are really coming into the market more so now than they have in a while. And we're seeing that a lot of the properties, particularly in PENN and in Midtown. So I'd tell you that the market is as well mixed as it's been in a long time, different sized tenants, different genres of tenants. So we're really seeing a very good consistent mix which is helping the market helping the volume. And as you can see in a lot of the reports, New York is clearly leading that charge by space throughout the country.

Still uncertain, Camille. As we get further on the year depending on what ultimately ends up closing, not closing, et cetera, then we'll have a -- we'll have a better sense. We have a decent sense and they can go in a number of different directions still.

Hi, Michael. It's Glenn. So concessions have stabilized. They're stubbornly high, but they've stabilized. They have not gone up in some time. That's now being somewhat offset by higher rents in certain properties in certain subdistricts in our portfolio. So that we're seeing positive signs in terms of net effective rents in some of our properties. And so look, the hope is as the market tightens, we could bring the TIs and free rents down, but certainly, they've stabilized now for a bunch of quarters as we've been stating on these calls.

The biggest driver and the biggest -- our biggest cost is the cost of capital. So the real estate industry has always thrived and increased in value as -- in the interest rate cycle as interest rates are trending down. The expectation of most market players is that we're in -- we're on the other side of the interest rate cycle and interest rates will be coming down. We are certainly not planning the business for interest rates to go down to the zero levels that they were, but hopefully, they will stabilize at a normalized level and we'll see how it works out.

Thank you.

Yeah, good morning. Look, I think the -- the number you referenced on the occupancy, I think we got to put a big asterisk next to that, which is it's really -- that lower number is driven by Manhattan. So JCPenney went bankrupt and vacated that store, and that caused about 10 points of occupancy decline there. Now, we've been given everything else we're doing in PENN evaluating what to do with that space and not necessarily wanting to lock it up long-term, certainly with a tenant that's not paying rent that we think is appropriate and recognizing that everything we're doing in the district is going to accrue to that asset over time.

So we've done a number of temp deals. In fact, we have one with Netflix that's opening right now and that's probably the plan. We don't actually -- when we do that, we don't take that into occupancy. In fact, maybe we should have taken that service because by and large, it's really not a focus of ours to lease a long-term unless we get a robust rent. So if you take Manhattan Mall out, that 77, if you will, goes to like 87 and we've got the other vacancy that we're working on. So the answer is the bottom line is yes. We think that number is going to get back up to levels we were at historically but keep in mind, there's 10 points that sort of frictional vacancy rate and our structural vacancy that is due to Manhattan Mall.

On the Sephora deal, you mentioned at 520 Madison, I wouldn't call that a market transaction. It was a very short-term deal. I believe it was only for one or two years at the most. So I wouldn't take into account as it relates to the market of what's going on in that corridor.

I might add-on to that. I think when you define high street, I don't know that I would characterize 520 Madison as high street. Yes, it's Madison Avenue, but that's not the prime stretch of Madison Avenue. Prime stretch of Madison Avenue is 57th to probably 64th, which is where you see rents that are jumping north of $1,000 a square foot. So retail that is not prime prime is coming off older rents, that has not seen the same level of recovery. It's recovering, but it's not seen the same level of recovery as Prime Fit, Prime Times Square, and that Prime stretch in Madison. So both the short-term nature as well as, and we've always talked about this, the Prime High Street is really scarce and you have to focus on what that means different than any other set of blocks in the city. And I think the beauty of our retail is it is all Prime High Street.

Yeah. That's probably -- as we sit here today, that's probably 50 basis points higher than it would be if we did it today, just given what's happened in the 10-year or in the future in the five years. So obviously, the base rate matters, spreads matter, et cetera. But 731, I think you'll see gets done much tighter than that, reflected the long-term lease that we executed last quarter. And I think it's asset-dependent. But I think in general, the markets continue to heal, I think you'll see those rates trend down to some extent just by the fact that base rates are down.

Yeah.

The PENN 1 deal-making is on vacant space. I really don't want to get into much more detail than I have already on PENN 2, but a good amount of the pipeline is PENN 2 with the plethora of deals brewing as we speak in different parts of negotiations, but rather not get into the very much detail of how many feet is what at this point.

It's -- look, I think as we've talked about in the past, the cost of construction financing, lack of availability makes it difficult to build right now. So like it's a prime site, arguably the best site left in the city, but its day has not come yet.

I think what we're seeing at 555 is that it is the best building in San Francisco. Our tenants have all remained. Our rents have held very strong and so this building is really insulated from the overall market and what you're seeing statistically in the city. Without getting into much detail on the negotiations we have going on with our tenants, we're seeing a lot of strength. We're even seeing growth in the deals expansion with these tenants. So what's going to happen in the future in terms of these rents, I mean, look, the rents at our building have historically kept going up. We feel very good about the rental rates we're achieving right now. We're ahead of the market. We expect to continue to be ahead of the market as we move more down.

We have a modest expiration schedule in '25. We're obviously speaking to all the tenants expiring during that period. But I think generally speaking, between 280, 770, and 1290, we've seen the real tide of expirations now. And as we go to '25 and forward, we're seeing a calming of those big expirations.

Yeah. We're at about 893 today. We know that's going to trend down a bit next quarter. So just given that Meta is vacating 275,000 square feet at 770 Broadway. Obviously, if we complete the 770 deal as Steve alluded to, that's going to have a significant positive impact. But in terms of near term, certainly going to go next quarter, we have a bunch of things in the queue. I think we end up the year basically where we're at now, could it be 20 basis points, 30 basis points lower, higher, sure?

I mean, it all depends on timing, but I think just in terms of where we end this year, I think that's a decent number and there's some things in the work that could take that number up a couple of hundred basis points. But again, it's all timing. But I think just in terms of near term, next quarter or two, hopefully, that gives you what you wanted.

Hi, it's Glen. So as I said earlier, a very, very good mix of all different industry sector type tenants, technology, fashion legal, media, academia, it's a very good mix. And yes, there are new entrants to the district. And really, that's all due to the really great product that we're now delivering and even more so, the new streetscape, all the new reads that we've embedded on the street. So it's all positive in terms of new entrants, new types of sectors, et cetera, that's really the mix of the action.

I think one thing I would just add, Nick. I think when we talk about this, I think it's important, right, the access to transit, which we sit on top of is just critical. And we are the most connected submarket. And when you look at some of the tenants and where they are attracting their employees from, that access is just critically important. So obviously, it's what PENN has been full historically, but now I don't know whether you've been over to the district and seem done. I really encourage everybody to do so. But it's a wow and when you combine that with the transit, I think it's now -- I think it's why you hear the excitement in Glenn's voice and it's why the pipeline is built so significantly.

I'm very sorry, but we can't say anything more than we've already said.

I'd reiterate with Steve I think, I've said -- that's all we're going to say, and I'll say that again. Thank you.

It gives you a reason to tune the for the next couple of calls, John.

So both of those are in play. So the answer is, first of all, that we'll end up with about $1.5 billion of preferred after the Uniqlo sale completes are -- is a -- first of all, the instrument is dollar good, supported by very valuable collateral. Secondly, that it is a source of liquidity for us either through sales or refinancing, both of which we are in the process of working on for portions of that $1.5 billion.

So what was the question?

So I was very excited in the teams there is incredible value still. But in the source with respect of our capital allocation at the price of the shares today, that's not our primary objective. We have sped handle, we have other capital allocation priorities. So right as of right now, the program is dormant.

We brought in Cushman & Wakefield at the beginning of this year. They've been a very good add to our team. It certainly strengthens our outreach across the country is used to get and in the city. So we've been very pleased with them and their additive performance to our crew.

Yeah. Steve, it's -- honestly, it's early to give you much visibility there. I mean I think our comments still hold. But as you can tell from unit quote things, there's a lot of moving pieces going on right now. And that's -- and those are the only things we've talked about. So I just think it's too preliminary to give you that view because based on some of those things, it may impact whatever I tell you now. So I think that's a good working assumption, and we just have to wait as we get closer towards the end of the year.

Thank you all for participating. I think you could tell from the call, the questions, and the numbers that we published, there's a large emphasis on leasing. Leasing is very, very, very healthy in New York. And we feel that we're on the foothills of a very, very good market and we're very excited. The PENN project especially is number one on our hit parade. And if you all haven't been down there recently, you should go down, take a walk around, see what's going on, what we've done and that will give you a reason for why tenant activity is excreting geometrically. Thanks very much.