Vornado Realty Trust

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 stars and one on your touch-down phone. I will now turn the call over to Mr. Steve Borenstein, Executive Vice President and Corporate Counsel. Please go ahead.

Welcome to Vernado Realty Trust second quarter earnings call. Yesterday afternoon, we issued our second quarter earnings release and filed our quarterly report on form 10Q with the Securities and Exchange Commission. These documents, as well as our supplemental financial information packages, are available on our website, .vno.com, under the investor relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliation 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, 2023. For more information regarding these risks and uncertainties, the call may include time-sensitive information that may be accurate only as of today's date. The company does not undertake a duty to update any forward-looking statement. On the call today from management for our opening comments are Stephen Ross, 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 Stephen Ross.

Thank you, Steve, and good morning, everyone. Our business is on plan and continuing to improve month by month. Our primary focus is always on leasing, and I can report that PEN2 is extremely active. And further, that in the overall portfolio, more than two-thirds of the recent vacancies have already been spoken for. Our focus continues to be on enhancing our liquidity, reducing leverage, and of course, taking advantage of opportunities created by the current market dislocation. New York City is as crowded as ever, and that's a good thing. As I predicted over the past couple of years, working at the kitchen table wasn't an existential threat. We're now seeing building utilization percentages in the 70s, and that's just about normal. Tenants are expanding and growing and actively searching for space. We actually compete in a market of over 200 million square feet, and in many of the prime sub-markets, good space is being eaten up and rents are rising. It may be that the most important dynamic in our market is that it is almost economically impossible to build new, thereby cutting off new supplies. There hasn't been a new office building of size started in New York in the last five years. If history is a guide, when supply shuts down, it quickly leads to a landlord's market. As Michael will cover in a moment, we are off to a very strong start in our leasing this year. The Bloomberg renewal and extension of their 947,000 square feet at 731 Lexington Avenue, creating 16 years of term is the highlight, and we have good activity at all of our assets. As I said, at Penn II with the lobbies, common spaces, amenities, and plazas now complete, we're seeing a significant uptick in tour activity, and our pipeline at Penn is strong. Prospective tenants are really appreciating our transformation, and that Penn is really an extension of the New West side from Hudson Yards to Manhattan West to Penn. The public space surrounding Penn I and Penn II is transformational, and I encourage all of you to go out and check it out. The district is really bustling with our new food and beverage offerings. We could not be more optimistic. I mentioned on the last call that we've been working on several large monetization transactions. We announced the first one yesterday, the sale of our portion of Uniqlo's Fifth Avenue flagship to Uniqlo for $350 million. This asset is in our retail joint venture, 52% of which is owned by us. Uniqlo is also acquiring the upper two floors of their store from the office owner. This transaction continues the theme of Fifth Avenue users purchasing their space. Uniqlo's lease was set to expire in April, 2026. And perpetuating their control of this high volume, prominent Fifth Avenue store was paramount to the tenant. My bet is this won't be the last user purchase on Fifth Avenue. As you will recall, we recapitalized this asset at a .5% cap rate as part of our street retail joint venture in 2019. The sale to Uniqlo is at a .2% cap rate on in-place NOI. And the cap rate on the mark to market rent is in the mid to high 3% range. The sale is expected to close in the first quarter 2025. Importantly, all net proceeds will go towards repaying our preferred equity on this asset. There are a few other transactions in our pipeline to repatriate portions of the remaining 1.5 billion of preferred equity, all of which will substantially increase our liquidity. The second transaction I'll quickly comment on, which has been rumored in the market, relates to 770 Broadway. We have reached a handshake deal with a user for a long-term master lease of the entire 1.1 million square foot office component. We will retain the 92,000 square foot Wegmans Market. After a difficult four or so years, market dynamics are now reversing and growing constructive. There is no new supply on the horizon. Tenants are growing and expanding and searching for space. And New York continues to be the single best market in the nation. And importantly, our Penn District is finally showing brilliantly. The word about the elephant in the room. The activity in the government bond and stock markets over the last three days is confirmation that the Federal Reserve fight against inflation has succeeded and likely foretells a significant reversal of interest rates. All this will have significant positive impact on our numbers and our values. Now over to Michael to cover our financials and the market.

Thank you, Steve, and good morning, everyone. Our overall second quarter FFO was 76 cents per share. This includes 19 cents of non-comparable items, mostly our share of the gain from the discounted net extinguishment related to the refinancing at 280 Park Avenue in gains from additional 220 Central Park South unit sales. Second quarter comparable FFO as adjusted was 57 cents per share compared to 72 cents per share for last year's second quarter. This decrease was attributable to the known items we previously discussed and consisted of 7 cents of low rental I from known move outs, net of rent commencements, seven cents of termination income in 2023 from a former tenant at 345 Montgomery Street in San Francisco and three cents of higher net interest expense partially offset by two cents of higher NOI from signage and the net impact of other items. We have provided a quarter over quarter bridge in our earnings release in our financial supplement. On our last earnings call, we stated that 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 and the temporary impact of known vacancies at certain of our properties, primarily at 1290 Avenue of the Americas, 770 Broadway and 280 Park Avenue of roughly 25 to 30 cents per share. This is still a good assumption as these items are expected to have a larger impact during the second half of the year. We already have commitments for about two thirds of the aforementioned vacant space, assuming the 770 Broadway transaction is finalized, but the gap earnings from these leases won't begin to the latter part of 2025. Thereafter, we expect earnings to increase as income and the lease up of Penn and other vacancies comes online and as rates trend down, partially offset by the reduction of capitalized interest. Now turning to leasing markets. The overall tone of the New York office leasing market continues to be upbeat as we enter the second half of the year, particularly in Midtown. Private sector employment has reached a historic high, reinforcing that New York remains the leading magnet for town in the US. Tenant demand for Class A properties is strong, outpacing 2023 and the mix of leasing is well balanced between financial services, legal and technology companies. Given the lack of available quality blocks of space in Midtown Manhattan, a dearth of new supply for the foreseeable future, slowing sublease additions and office conversions gaining momentum, many industry analysts are predicting a tightening of vacancy rates across the city in well-capitalized Class A properties as we head into the second half of 2024 and into 2025. A spike in rental rates, much like what we have seen on Park Avenue and the new West Side, should naturally follow. All this bodes well for Borneo's best in class collection of high quality repositioned assets within New York's most coveted sub-markets on the new West Side, Park Avenue and Sixth Avenue. Our 2024 leasing activity reinforces the tenant demand for top of market properties near transit and which provide the type of space and amenities companies desire for employee retention, recruitment and flexibility remain strong. During the first two quarters, we leased a total of 1.6 million square feet at market leading average rents of $130 per square foot. This includes our second quarter lease renewal of Bloomberg for the global headquarters at 731 Lexington Avenue where they will continue to occupy all 947,000 square feet of office space in the building. Excluding the Bloomberg renewal, our transaction volume for the first half of 2024 is 666,000 square feet at starting rents of $95 per square foot with a cash mark to market of 9.1%. During the second quarter, we completed many important leases throughout the portfolio in addition to Bloomberg, including 11 leases at Penn One totaling 123,000 square feet and an average starting rent of $95 per square foot. The transformation of Penn One with its unmanaged amenity program continues to attract tenants from all industry sectors who were previously occupying space in other city sub-markets and at rents above our original underwriting. We continue to attract leading financial services companies to 280 Park where this quarter we completed a long-term transaction with Elliott Management for 149,000 square feet in the base of the building. The addition of Elliott to our tenant roster where they joined PJT Partners, GIC, and Terry's and Invest Corp cemented to the park as one of Manhattan's premier financial services properties. Importantly, we have now leased 225,000 square feet of space at 280 during 2024 at an average starting rent of $124 per square foot. Looking forward, our pipeline is roughly 2.6 million square feet, which consists of 1.6 million feet of leases and negotiation and well more than 1 million square feet in some stage of proposal negotiation. The pipeline consists of substantial activity at Penn Two where we have seen a significant pickup and tenant tour activity and proposals during the second quarter following the recent completion of the project, the opening of our new pedestrian park at Plaza 33 and completion of our expansive district-wide new sidewalk program. Our total pipeline of deals is a 50-50 mix of new tenant deals vying for our current vacancies and important renewals as we continue to work -in-hand with our tenants expiring during the next few years. In San Francisco at 555 California Street, we completed a 10-year lease renewal with Jones Bay for 62,000 square feet and are currently finalizing a 46,000 square foot renewal expansion with one of our leading financial services tenants in the building. Additionally, we are in late stage letters of intent where several of our major tenants comprising a total of 250,000 square feet with upcoming lease expirations in 2025 and 2026. All these deals have positive -to-markets on the rents, reflecting 555's trophy nature. Finally, in Chicago at the mark, we completed a long-term expansion and renewal lease in July with one of our major tenants, which tripled in size to 160,000 square feet. While the Chicago market is challenging, we are benefiting significantly from the quality of our asset with our market-leading work-life amenity program and rock-solid sponsorship and have a strong pipeline. Turning to the capital markets now. While the financing markets are mainly remain challenging for office and banks remain out of the market, we are beginning to see some early signs of improvement with the CNBS market open again for selective high-quality assets and even ones that are less straightforward. Rates are beginning to moderate and the SOFR forward curve is projected to come down meaningfully over the next year, which should help borrowing rates. We continue to be very active on the capital markets front. In June, we refinanced the loan at 645th Avenue in our street retail, JB, eliminating the $500 million recourse obligation to the company. While the rate is higher than we'd like, this financing demonstrates that the markets are open again for high-quality retail and office assets. At 731 Lexington Avenue, with the Bloomberg renewal now complete, we're in the process of refinancing this loan as well. We will have then taken care of all of our significant 2024 maturities and are in the process of addressing our 2025 maturities. Our balance sheet remains in very good shape with strong liquidity of $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.

Thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touch-down phone. If you wish to be removed from the queue, please press star then two. If you're using the 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 touch-down phone. Each caller will be allowed to ask one question and a follow-up question before we move on to the next caller. Today's first question comes from Steve Sackwatt with Evercore ISI. Please go ahead.

Yes, thanks, good morning. Steve, you certainly piqued my interest with your 770 Broadway comments. I'm just not sure I fully understand, I guess, kind of the transaction and discussion, because I know that building is about 80% occupied today with a couple of different tenants, so I'm just not exactly sure if this new tenant subleases the space from the old tenant or just kind of how that, I guess I didn't really quite understand the whole transaction that's pending.

Steve, I wish I could help you, but I've said all 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 gonna say is that there's an important transaction in process. Sorry.

Okay, maybe switching gears to the two-pen, and I guess, Michael, the pipeline you talked about sounds quite strong. Can you maybe just provide a little bit more color on the types of tenants that you're speaking to, and are these tenants that are, I guess, currently already in the marketplace and more or at least exploration-driven, or are these kind of new requirements in the market looking at two-pen?

Hi, Steve, it's Glenn. How are you? So it's a mix of both tenants expiring soon and some tenants expiring in the outer years, but I'll tell you, at pen two, we have tenants applying 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 interest from all types of sectors on all the space. We're in different sorts of paper negotiation with all these tenants, so we're seeing very, very strong activity as we sit here. Similarly, at pen one, we've leased about 155,000 feet at pen one this year. At rents that are well above where we thought we'd wind up there, and the types of tenants keep coming in. We've a lease out right now with a major pharmaceutical company for two floors, and we have other activity coming in at pen one. And with that, we're also seeing great activity around the district at pen 11 and some of the other properties. So I would tell you, we're really on all cylinders now in pen. 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.

Okay, thanks.

Thank you. And our next question today comes from John Kim at BMO Capital Markets. Please go ahead.

Thank you. On the Enochlo sale, can you just talk about the earnings impact? I think you sold at the great price per square foot, but I think your preferred gets redeemed, so it might be slightly diluted in the near term. And also you still own five assets on Fifth Avenue in that prime corridor between 51st and 55th Street. Is $20,000 per square foot the right way to value the remaining retail? And do you plan to monetize any further assets there?

Well, there's a lot in that, John. So I'll try to remember everything you ask. 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's 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 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 per grade square foot. So I think that's a more representative metric for Fifth Avenue retail in terms of the grade screen. So you have to sort of look asset by asset. But with every user sale, and we've now seen three major sales, and I think we alluded to the last couple calls, we expected there would be some, obviously we knew this one wouldn't work, but I don't think you've seen the last, as Steve said. 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 wanna 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, I think that was your first question. So all the proceeds will go to repay our preferred. We're only at four and three quarters in that today. The entire amount, if you remember the original instruction of the transaction, the preferred was a proxy for first mortgage financing, and it allowed us to defer any gain there. 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 say at a minimum, it'll 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 six and a half percent in terms of where it is today. So I think I covered everything you asked, but if not, tell me.

You covered it all, thank you. And then my second question is on PEN2 and the timing of MSG moving into that space, as well as the capitalized interest. If you could just remind us of your capitalized interest policy, when do you start expensing the interest on that project?

Sure, John, it's time. MSG, we actually delivered some of that space, a portion of that 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. And then obviously 25 will be a full year of MSG on a gap basis. As it relates to capitalized interest, as we indicated in Michael's prepared remarks and previous calls, capitalized interest will roll down in 2025, but most of that will be offset by additional gap revenue as it relates to some of the large leasing we did this past year with Lundy & Gay, things folding and others.

And you do that floor by floor as it's delivered or

the

entire building at once?

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

Okay, thank you.

Thank you. And our next question today comes from Flores Van Dycom with CompassPoint. Please go ahead.

Hey, good morning guys. Thanks for taking my question. Obviously very interesting and bullish news on Fifth Avenue. I also noticed that your rent spreads on your retail portfolio were positive by the tune of around 13%. Maybe if you could talk a little bit more about some of the upside potential. Is that what you're seeing in terms of leasing activity? And also obviously now that Uniglo owns its space, there's less space to lease and it's pretty good in the upper Fifth Avenue corridor. What are your expectations for market rental growth and lease spreads in your portfolio over the next year or so?

Good morning Flores. On your first question, in terms of retail activity, I think we've talked about this on the last call, a couple 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, it 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 Penn as well as in Times Square where we have space that obviously we've redeveloped in Penn that we've delivered or delivering and then backfilling some of the space, 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. You know, 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. Every space is so particular in terms of where users wanna 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 roll coming up on fifth near term. So I don't know that really, the near term opportunities 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.

Thanks, Michael. And maybe my follow-up is, if you could talk a little bit about your plans for the 450 million of unsecured debt that matures, I think, in January of 25. You said you're in the market looking at some of those things. Is the idea to refinance that or will you pay that off with cash? Or if you can talk a little bit about your thinking about that.

Yeah. Like as we sit here today, plan is to pay it off. We've got significant cash 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 attuned to the markets and what's going on with rates trending down, with spreads tightening. We obviously look at the various financing markets to see where those are. 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.

Thanks, Michael.

Yes.

Thank you. And the next question today comes from Camille Bonnell with Bank of America. Please go ahead. Good morning.

Glenn, I wanted to follow up on the leasing side, giving your comments around the improving outlook. Was the handshake deal on 770 Broadway included in the pipeline from last quarter or did it more recently emerge? Outside of the 770 Broadway discussions, curious to get your thoughts on what activity are you seeing specifically around the large office users?

Hi, the 770 transaction was included within Michael's remarks in terms of the pipeline. In terms of overall activity, and 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, 20, 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'll tell you that the market is as well mixed as it's been in a long time. Different size tenants, different genre 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 spades throughout the country.

And for my follow-up, I was wondering if we can get your latest thoughts on how taxable income is trending. Just following the pickup in dispositions this year, are we likely to see more distributions paid out or is it still uncertain given the known move-outs? Thank you.

Still uncertain, Camille. As we get further on in the year, depending on what ultimately ends up closing, not closing, et cetera, then we'll have a better sense. We have a decent

sense and they can go a number of different directions still.

Thank you. Thank you. And our next question today comes from Michael Griffin with Citi. Please go ahead.

Great, thanks. Wondering if you can give us a sense of how concessions have been trending. I noticed it was, I think, notably lower this quarter, probably driven by the Bloomberg extension. But have you seen the concession environment improve at all or is it pretty steady relative to recent quarters?

Hi, Michael, it's Glenn. 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 sub-districts in our portfolio. We're seeing positive signs in terms of net effective rents in some of our properties. So look, the hope is as the market tightens, we could bring the TI's and pre-rents down. But certainly they've stabilized now for a bunch of quarters as we've been stating on these calls.

Thanks, Glenn, appreciate that. And then Steve, just on your kind of macro comments about the interest rate environment and the feds kind of fighting its inflation, obviously I think lower interest rates are better for office overall, but just given the chatter that we've heard recently around recessionary fears, I guess how do you balance the more favorable outlook for interest rates mixed with what could be a recessionary scenario that would probably negatively impact the office sector?

The biggest driver and our biggest cost is the cost of capital. So the real estate industry has always thrived at increased in value in the interest rate cycle as interest rates are trending down. The expectation of most market players is that 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.

Great, that's it for me. Thanks for the time. Thank you.

Our next question today comes from Dylan Brzezinski with GreenStream. Please go ahead.

Hi guys, thanks for taking the question. Excuse me. I appreciate the comments on street retail activity picking up, but I guess as we look at the portfolio today, I think you ended the quarter call it high 70% occupancy, which is still well below where it was. Pre-COVID, I guess as you guys think about that business moving forward, I mean, is there, do you guys envision that eventually getting back to where it was pre-COVID, or do you sort of envision an environment where things are improving, but you still don't necessarily see a recovery back to this pre-COVID level? Dylan,

good morning. Look, I think the number you referenced on the occupancy I think we gotta put a big asterisk next to that, which is it's really that lower number is driven by Manhattan bull, right? So JCPenney went bankrupt, 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, not necessarily wanting to lock it up long-term, certainly with a tenant that's not paying a 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 our Talisa 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 they're working on. So the answer is, bottom line is yes, we think that number is gonna get back up to levels we were at historically, but keep in mind, there's 10 points that's sort of frictional vacancy right now, structural vacancy that is due to Manhattan mall.

Thank you. And our next question today comes from Connor Mitchell,

Piper Sandler. Please go ahead.

Hey, good morning. Thanks for taking my question. So there's been a lot of talk about the high street retail and how the whole environment is rebounding in terms of that area. We've seen it from rents coming back, retailers requiring spaces or leasing. But just thinking about one rent in particular, the rent that we're seeing is going to be there's been articles in, I think it was June or July, about Sephora recently negotiating their rents down by two thirds on Madison. So I guess I'm just wondering if you guys can help us think about the juxtaposition between some of the metrics we've seen recently, your comments, and then some specific transactions

such as the Sephora one.

Go ahead and hand it.

You know, on this Sephora deal, you mentioned a 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 and what's going on in that corridor.

Connor, I might add onto that 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. 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 generally north of $1,000 a square foot. So retail that is non-prime prime is when it's coming out older rents. That has not seen the same level of recovery as recovering, but it's not seen the same level of recovery as prime fifth, prime time square, and that prime stretch of 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. It's 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.

Very helpful, appreciate the color. And then maybe just one more quick one. You get to a lot of financing activity, activity of the quarter, obviously. And then 645th was refinanced at a fixed rate of 750. Just curious if that's a good rate that we should think about for some upcoming maturity such as 731 Lex or any others moving forward.

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 in the long-term lease that the market is going through. 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.

Thank you.

And our next question today comes from Ronald Campbell with Morgan Stanley,

please go ahead. Hello, Mr. Campbell, your line is open, perhaps

you're muted.

Yep, can you hear me now? Yes. Okay, great. Just two quick ones from me. Going back to the 2.6 million square feet pipeline, can you break out how much of that relates to Penn 2 and the two floors that you mentioned on Penn 1 that's out for lease, is that on vacant space?

The Penn 1 dealmaking 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 a plethora of deals brewing as we speak in different parts of negotiations, but rather than I'll get into the very much detail of how many feet is what at this point.

Sure thing. If I could just sneak in a quick one, can you just give us a little bit of a summary of any sort of comment on any updated plans for the former Hotel Penn site, given all the leasing activity you're seeing on Penn 1 and Penn 2?

You know, it's,

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

Thanks so much, that's it for me. Thank you.

And our next question today comes from Caitlin Burrows at Goldman Sachs. Please go ahead.

Hi, good morning. Earlier you mentioned how the leases you were doing at 555 California all had positive mark to market. So I guess, could you talk about that a little bit more? How long do you think those positive spreads at 555 can last for? And I guess given the occupancy there, how would you characterize market rents there? Like, do you have the ability to push more or to what extent does vacancy in the market or sub-market limit the pricing side?

Look, 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. So, you know, this building is really insulated from the overall market and what you're seeing statistically in the city. You know, without getting into much detail on the negotiations we have going on with our tenants, you know, we're seeing a lot of strength. We're even seeing growth in the deals, expansion with these tenants. So, you know, what's gonna happen in the future in terms of these rents? I mean, look, the rents at our building have historically, you know, kept going up. We feel very good about the rental rates we're achieving right now. You know, we're ahead of the market. We expect to continue to be ahead of the market as we move forward on.

Okay, got it. And then back in the prepared remarks, you gave some color on the outlook to 25, I think suggesting that with the leasing that's been completed and PEN2 coming online, that late 25 could see maybe an improvement in earnings, I guess first, is that the right takeaway? But then B, when you think about all of the moving parts, are there additional 2025 large lease expirations we should be aware of and do you have any insight into those tenants' thoughts at this point?

We have a modest expiration schedule in 2025. We're obviously speaking to all the tenants expiring during that period. But I think, you know, 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.

Okay, thanks.

Thank you. And our next question today comes from Tony Pallone with JP Morgan. Please go

ahead. Yeah, thanks. The person in AC you mentioned, the 666, said it was one of seven that you have a duty

to. Pardon the interruption here, Mr. Pallone, your line is coming in very poorly. I'm gonna disconnect your line, or I'm gonna move on from you. If you can dial back in, we can get you right back into the queue. Our next question today comes from Nick Uliko with Scotiabank. Please go ahead.

Thanks, yeah, I know you talked about, you know, some of the leasing underway already for this year. I guess, can you give us a feel for, you know, how occupancy might trend for the back half of the year in the office portfolio?

Yeah, you know, we're at about 89.3 today. You know, we know that's going to trend down a bit, you know, next quarter or so, just given that Metta is vacating 275,000 square feet at 770 Broadway. Obviously, if we complete the 770 deal, as you alluded to, that's gonna have a significant positive impact. But in terms of near term, you know, certainly gonna go to that next quarter. We have a bunch of things in the queue. You know, I think we end up the year basically where we're at, you know, now, you know, could it be 20, 30 basis points lower, higher? Sure, I mean, you know, it all depends on timing, right? But I think it's just in terms of where we end this year, I think that's a decent, you know, number. And, you know, there's some things in the works that could take that number up, you know, a couple hundred basis points. But again, it's all time. But I think just in terms of near term, next quarter to hopefully that gives you what you wanted.

Yeah, that's helpful, thanks. And then just going back to Penn too, can you give us a feel for, you know, maybe types of tenants, you know, looking at the space and from the standpoint of, you know, or is it tenants that would be new to that sub market, anything else you could just talk about about whether these are, you know, lease expiration driven, you were trying to sort of capture some market share there.

Hi, it's Glenn. So as I said earlier, you know, it's a very, very good mix of all different industry sector type tenants, technology, fashion, legal, media, academia. It's a very good mix. And yet there are new entrants to the district. And really that's all due, you know, to the really great product that we're now delivering. And even more so, you know, the new streetscapes, all the new retail 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.

All right,

thank you. I think one thing I would just add, Nick, I think we talk about this, I think it's important, right? The access to transit, which we sit on top of, is just critical, right? And we are the most connected sub market. And when you look at some of the tenants and where they are attracting their employees from, you know, that access is just critically important. So, you know, it's, you know, obviously it's what has been full historically, but now I don't know whether you've been over to the district and seen it 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're excited in Glenn's voice and it's why the pipeline is built so significantly.

Thanks.

Thank you. And our next question today is a follow-up from John from BMO Capital Markets. Please go ahead.

Thank you. I just wanted to get back to 770 Broadway and understand you're under a confidentiality agreement, but just to help us understand the market dynamics and demand a little bit better, can you share what industry the tenant or user is in, whether or not it's a tech user, and if this includes expansionary space in Manhattan?

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

Okay, but it is a lease, right? Not a sale.

I'd reiterate

what Steve just

said. I think, I said that's all we're gonna say and I'll say that again. Thank you. Sorry.

That gives you a reason to tune in for the next couple of calls,

John. Thank you. And our next question today comes from Dylan Brzezinski with Green Street. Please go ahead.

Steve, I think in your prepared remarks, you mentioned potential or potential transactions to repatriate more portions of the preferred equity in the Times Square joint venture. Are you able to share any details as to what this is? Is this potential sales, other recapitalizations?

Both of those are in play. So the answer is, first of all, we'll end up with about a billion and a half of preferred after the Uniclose sale completes. First of all, the instrument is dollar good, supported by a very valuable collateral. Second, the fleet, that is a source of liquidity for us either through sales or refinancing, both of which we are in process of working on for portions of that billion and a half.

And then, I don't think you guys touched on this yet, but the curious appetite for share repurchases given where the shares are today. So what was

the question? Share repurchase appetite. You know, I was very excited in the teens. There is incredible value still, but in the source, with respect to our capital allocation, at the price of the shares today, that's not our primary objective. We have debt to handle, we have other capital allocation priorities. So as of right now, the program is dormant.

Thank you. And our next question today comes from Brendan Lynch with Barclays, please go ahead.

Great, thank you for taking my question. If I recall correctly, a few quarters ago, you engaged an expanded group of brokers to pull in demand to the Penn District from other markets around the country. Can you discuss how that initiative is contributing to leasing year to date and how it's impacting the pipeline now?

We brought in Kush and Wakefield at the beginning of this year. They've been a very good add to our team. It's certainly strengthened our outreach across the country, as you suggest, and in the city. So we've been very pleased with them and their additive performance to our group.

Great, thank you. That was my only question.

Thank you. And our next question comes from Steve Sackwell with Overcore ISI, please go ahead.

Yeah, thanks. Just one follow-up. I think last quarter, you guys had talked about earnings, probably bottoming in 24 and then moving higher in 25. I know there's a lot of moving pieces and interest rates will play a big factor. Is that still the case or is it possible that, maybe with timing of leases at two Penn and capitalization burning off that earnings are going to be earnings could still be down next year with more of an inflection point late in 25 into 26?

Steve, it's honestly,

it's early to give you much visibility there. I think our comments still hold, but as you can tell from Uniclo, 770 other things, there's a lot of moving pieces going on right now. 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. And this includes our question and answer session. I'd like to turn the call back over to Steven Roth for closing remarks.

Thank you all for participating. I think you could tell from the call, the questions, and the numbers that we published, 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'll give you a reason for why Glenn's tenant activity is increasing geometrically. Thanks very much.

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