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spk03: Good morning and welcome to the Barnetto Realty Trust first quarter 2024 earnings call. My name is MJ and I will be your office.
spk07: 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 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 suites, 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 a 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 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 pay down, 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 MES loan at 50 cents 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. And also note that while the New York market has a huge 422 million square feet, when you cancel out the non-prime We really only compete in a much smaller 177 million square foot market. Great things are happening in our Penn District. Come by and take a look. Our team here at Renato couldn't be more optimistic. Now over to Michael.
spk04: 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 is 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. Overall, New York business same-store cash NOI was down 5.1 percent, 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 30 cents per share in 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 25 to 30 cents per share. We expect this impact to be temporary as we have already leased up a good chunk of this space. But the gap 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 Best-in-class renovated and amenitized product located in transit hubs continues to dominate leasing, and the 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-of-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 from the tech sector again after a couple years of being on pause or downsizing. And our experience is when they grow, they tend to lease big chunks of space. The Midtown and new Westside markets are outperforming as leasing activity in Midtown is strong, not only on Park Avenue, but also on 6th Avenue and the 5th Avenue-Madison Avenue corridor. On the west side, tenant demand continues apace. If you walk from 7th 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 square feet 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 square feet at a healthy $89 per square foot, reflecting the overall quality and premium locations of our properties. The highlight of the quarter was our 125,000 square foot headquarters lease with Major League Soccer at the new Penn II. MLS had been in the market for some time, looking mainly in the Midtown core, until late in their process when they toured Penn II 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 PEM2 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 square feet we just completed, our leasing pipeline is strong, with 370,000 feet of leases in negotiation and another 2.5 million feet 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, we foreshadowed an occupancy decline due to the known Q1 move-outs at properties such as 1296th Avenue and 280th 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 in our last call, Prada's and Caring'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 and 435 Seventh, we're 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.
spk03: Thank you very much. We will now begin the question and answer session. If you have a question, please press star, then 1 on your touch-tone phone. If you wish to be removed from the queue, please press star, then 2. 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 Squaw with Evercore ISI. Please go ahead.
spk05: 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 square feet is maybe earmarked for PEN2 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?
spk04: Good morning, Steve. Glenn, you want to take the lead on that?
spk09: Sure. Hi, Steve. It's Glenn. 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 PEN, both PEN 1 and PEN 2, coming off the heels of our Major League Soccer lease. We're seeing outbound expiration tenants coming to us to early renew. just like we did with Bloomberg this week. And in addition, much of the pipeline is attacking exploration at the buildings where we have space available today. So I'd say it's a healthy mix across the portfolio, Penn and otherwise.
spk05: Okay, thanks. And as a follow-up, Michael, just to, I guess, go back to some of the information you provided on, I guess, the earnings drag from the lost 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 to $0.30 hit from the known vacate, some of which I know has been released and will rebound maybe in $0.25 and beyond, You're kind of suggesting that there's sort of a $0.60 drag this year, as we think about 24, and then other positive offsets that might sort of take that number a little bit up from, say, the $2 level.
spk04: 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. The 25 to 30 cents are sort of the known vacates. And as we've mentioned, we've backfilled a lot of that already at 1290 and 280. 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 going to come out. But I think if you say, look, let's take So the worst case, you know, the $0.30 plus the $0.25 to $0.30, you know, gets you down $0.55 to $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.
spk05: Great. Thanks.
spk07: That's it for me. Steve, let me just tack on on that for a second. So, I mean, the numbers that you mentioned 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 96, 97, 98% occupancy, that adds a big number to our earnings. When 2PEN 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 stabilized 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 a 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. And we are extremely excited about that.
spk03: Thank you. The next question is from John Kim with BMO Capital Markets. Please go ahead. I got the two.
spk12: 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 Vernado involved in either one of those two?
spk04: I think it's both, John. 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 in our portfolio, so we maintain an active dialogue with all those players. I would expect that if the tech sector becomes active again, you know, we're going to 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. And, you know, we've seen the last 90 days a real pickup there. It 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 quite optimistic about that sector turning on again. On the retail side, I think you know better than anybody, given the discussions we've had in the past, we own the best retail in the city. So if you want to be on Fifth Avenue, particularly given the shrinking amount of availability that can be leased, You know, we're the first, you know, second, third call, Times Square. We're on 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 reflected. And, 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 obviously given our portfolio, you know, we are fertile ground. So we expect to be in the mix there.
spk12: Okay, my follow-up is on 350 Park Avenue. The leasing environment and the interest rate environment or the outlook has changed a lot in the past year and a half since you struck the deal. What is the likelihood that either Citadel or you exercise your options at this point?
spk07: 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.
spk12: And can you confirm the starting rent for Citadel is reported at $35 million?
spk07: No, sir, we can't. It's a formulaic rent, which depends upon what the cost of financing is at the time we go into the financing market.
spk12: Gotcha. Okay. Thank you.
spk03: Thank you. The next question is from Michael Griffin with Citi. Please go ahead.
spk11: Great, thanks. Michael, I wanted to go back to your comments around concessions being stubbornly high. I imagine that's the case for the market overall, but if you look at maybe better off submarkets like Park Avenue or even some of your properties on the west side, the Penn District, how are you seeing concessions there, given that the environment seems to have improved? Glenn, you want to hit that?
spk09: Yeah, sure. Hi, it's Glenn. I would tell you no matter the sub-market on new leases, you know, TIs are somewhere between $140,000, $150,000 a foot. And, you know, free rent is somewhere in the, you know, 13, 15-month range. I think as it relates to sub-market specific, it's really about the rent. So in some of the sub-markets, we are seeing an uptick in rent. where supply is tightening as you would expect.
spk11: Gotcha. 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?
spk09: 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.
spk11: And in terms of potential of backfilling or renewing the space, what's demand looking like on it?
spk09: We have action on the space. That's part of our pipeline that we described. We feel very good about the assets. and very good about backfilling that space. It's the most unique asset in Midtown South. We feel good about it. Great. That's it for me. Thanks for the time.
spk03: Thank you. The next question is from Floris Van Diekem with CompassPoint. Please go ahead.
spk02: 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 representing itself, I think, when the $200 billion of office loans mature over the next, 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 Vornado cause some of the bullishness in Steve's tone on the outlook for the next two years?
spk04: Good morning, Flores. So, like, 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, going to 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 whether the sponsor has the wherewithal and the capability to either re-tenant or support the asset, and in some cases they will, in many cases they won't. We're talking to the lenders about that, and I think they'll look for solutions. 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 going to 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, the 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.
spk02: And I know it's early in terms of what transactions would look like, but presumably for you to utilize part of your significant cash wards, 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 7% plus financing rate that you would have to pay today if you were to
spk04: theoretically get assets is that the right way to think about it your your return i think so eight or ten plus yeah i mean look i think our our objective of deploying cash is not to you know invest in you know uh real estate is going to generate core returns right and this is an opportunity that is um uh by the way not for the faint of heart right i mean you're taking risk um 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 yields are in the neighborhood that you mentioned.
spk02: Great. Maybe one follow-up in terms of... your retail segment, again, 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 on Fifth Avenue, where would you say market rents are for that space?
spk04: You know, I think it's, you know, there's been a couple transactions that we signed probably, I guess, last year. You know, and that would indicate that, you know, rents at the time were in the mid to high $2,000 per square foot, 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 twos, maybe even low threes, depending on the situation. And I think for luxury, given there's such a scarcity, it could be higher. So, you know, at Pip 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.
spk03: Thank you. The next question comes from Dylan Berzinski with Green Street. Please go ahead.
spk10: Hi, guys. Thanks for taking the question. I guess just sort of going back to 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?
spk07: The easiest way to buy a building is through the debt. So that's obviously target number one.
spk10: Got it. And then as you guys think about opportunities, are you guys purely focused on office, or are there other retail opportunities that you guys think would also make sense?
spk07: We're open to buy office, obviously, and retail, obviously. So those are the two areas that we specialize in.
spk10: And then I guess just a broader capital allocation question. I know in the past you guys have floated 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?
spk07: We have, I think, basically four fairly significant stale transactions that are in various stages of conversation right now as we speak.
spk03: Thank you very much. The next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.
spk00: Hey, good morning and thank you. So, two questions here. And first, Michael, good to hear about the rebound in street retail rents. That's Really amazing what a journey it's been. So the first question is, Steve, on the Bloomberg lease, so when we read the queue, 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 the one rent and then it slides up to the next. That's the range that the negotiation will be in.
spk07: 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 deal is structured is the basic rent on that building is basically net. There's a very small portion, maybe 50,000 feet out of the 950,000 feet that's gross. 900,000 feet 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 foot, which grosses up to well into the 150s of dollars a foot. So that's the starting point. We established, first of all, we recognized that we are renewing and extending a lease five years before the lease expires. And so you have to take effect of the unknown future and the contingency. So what we did there was we established what the tenant confessions, TI's and leasing commissions were. Those are frozen. The starting and 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 rule at the then expiry of the lease in 2029, taking into account the already established tenant concession. But the color is so 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 a fair rent in the then market, which we think was a very clever, by the way, both tenant and landlord think 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. It will be an arbitration based on the market.
spk00: Steve, thank you. And I apologize for getting that incorrect. That was my apologies. So your clarification is that the rent that cited it.
spk07: Wait a second. I accept your apology. Thank you. That's very generous of you.
spk00: Well, I made it. So basically, in the way that rent is characterized now is the $29 million a quarter is characterized as gross, whereas the rents that are in the queue for the terms are are now net, and it sounds like that's the confusion that I had on my end. Is that correct?
spk07: I won't get into why you were confused. I'm just happy that you admit that you were confused.
spk00: Great. The next question is on the rents for this year to Steve Sack was questioned, Michael. You mentioned that originally it was down 25 to 30 cents. Now it seems to be down 55 cents 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?
spk04: Yeah, yeah. Maybe a little bit more confusion there, Alex. So on the last call, you know, we talked about it. It was early in the year. I gave clarity on the interest. production because, you know, a lot of that was baked in with hedges that were going to roll off. We knew where those were going to 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 going to 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've talked about, you know, releasing a lot of that, and a lot of those deals have been announced. Just trying to get more precision to just the general statement we made last quarter.
spk03: Thank you. The next question is from Michael Lewis with Truist Securities. Please go ahead.
spk08: Great. Thank you. I'm just going to follow up on that question about the releasing activity on some of the known move outs. So I could probably triangulate an occupancy rate on that 25 cent 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?
spk04: Anyone take that or take that?
spk09: The bulk of the number is at a 280 park, 770 Broadway and 1290 Avenue Americas. At 1290 and 280, we've taken care of As Michael said in his remarks, 51% of the rolls, they'll call it 500,000 of a million feet. And as we said, it's 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, As we take into account our pipeline of deals, as we take into account our expiration going through 24, you know, we may see more of a dip in occupancy. And 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. Okay, great.
spk08: Thanks. And then my second question is about the MARC. You know, occupancy dipped down to 77.6% in the most recent quarter. You know, pre-pandemic, that was always, you know, 95 to 100. Could you maybe talk a little bit about kind of the roadmap there and, you know, what you think stabilized occupancy 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 market?
spk04: So I'll start, then you jump in. The Chicago market is obviously challenging right now, probably one of the more challenging ones in the country. But we do have decent activity on the asset. I would say that, alluding to some of the prior questions, there's quite a bit of distress in Chicago office. Many landlords do not have the have the wherewithal to lease their assets given the debt situation there. 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. We just finished what we call Mark 2.0, which is the second stage of amenities that we've put in, fitness, conferencing, et cetera. And again, the reaction, that's been positive. So the 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 going to 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 in line, it's probably in the neighborhood. And our objective is to get it back into the 90s percent occupy, you know, get a 95 plus percent and get the income back up to that 90 to 100 million dollar cash in a live basis. So there's a fair amount of growth to come there. But, you know, the market is, as I said, challenging right now.
spk03: Thank you. The next question is from Caitlin Burrows with Goldman Sachs. Please go ahead.
spk01: Hi, this is Julian on for Caitlin. Thanks for taking the question. One quick one. Can you comment on whether the leasing spreads in the quarter benefited from the Penn District leasing and what that leasing spread might have been ex-Penn leases?
spk04: Yeah, I think the answer is that You know, the spread, you know, Penn, too, was the major league soccer with the big lease in this quarter. You know, that's a new lease, first generation. So it didn't affect the spread.
spk01: Okay, good to know. And then a second one, on the debt covenant, it looked like interest coverage and fixed charge coverage tied the bid in the quarter. I know longer term the metric is going to, 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?
spk04: Yeah, no, you're accurate. I think the impact this quarter was predominantly the – you know, the big item was the swap increase on 10-11, which we were coming up, 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 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, your accurate 5-5-5, you know, we put in place another swap. That would kick in, you know, an increase. So, As we look forward, we continue to have sufficient cushion in our covenants. Fixed charge will tighten up over the next couple of quarters, but we still have sufficient buffer there. And then as the income comes online from some of these leases, that number will grow again. But it will tighten up a little bit based on the 555 swap rate increases.
spk03: Thank you. The next question is from Nick Ulico with Scotiabank. Please go ahead.
spk06: Thank you. I just wanted to go back to the $0.25, $0.30 impact this year from vacancy. So I guess that adds up to about $55, $60 million of NOI versus your total NOI share last year of $1.14 billion. So it's somewhat like a 5% you know, NOI loss on that math. That's correct. So I guess I'm just wondering, you know, how does that, you know, is 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. So, The 5% on a wine loss number seems a little bit high relative to what your expirations were this year.
spk04: You know, there may have been one tenant that expired December 31st last year. But 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, 6, 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 back on those as we discussed. But that's it. You know, and it just occurred at various stages, everywhere from December 31st, you know, through probably the last one is, you know, Meadow, which is in the middle of this year.
spk06: Okay, thanks. And I just want to be clear on the way to think about occupancy. And Michael, last quarter when you're talking about sort of a flattish occupancy this year, does that mean that by the time we get to the fourth quarter of this year, it's 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.
spk04: Yeah, I would say by the end of the year. And again, it depends on timing of certain things. And, you know, I don't know that I can play it 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, 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, down now, it's going to trend down a little 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're going to pick that up. So, we'll see where it comes out in total. I think as we look at trend line, it will, you know, it'll, you know, we think it increased meaningfully over time. You know, we are going to bring PIN 2 into the numbers next year. You know, depending on where we are from the 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 evaluate it, you know, as we get closer.
spk03: Thank you. The next question is a follow-up from Michael Lewis with Truist. Please go ahead.
spk08: Yeah, thanks. I just have one more. You know, you sold two 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.
spk07: No, the remaining four units are smaller, lower units. view impaired, so they're much less valuable. Basically, that job is basically sold out.
spk08: Perfect. Thanks.
spk03: Thank you. The next question is a follow-up from Alexander Goldfarb with Piper Sandler. Please go ahead.
spk00: 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.
spk07: Alex, Good morning again. 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 some $200 a foot. So these are really distressed office buildings. 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 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.
spk03: Thank you very much. There are no further questions at this time.
spk07: 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.
spk03: Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect your lines.
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