Vornado Realty Trust

Good morning and welcome to the Vornado Realty Trust second quarter 2026 earnings call. My name is Betsy and I will be your operator for today's call. This call is being recorded for replay purposes. All lines are in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question and answer session. At that time, please press star then 1 on your touchtone phone. I will now turn the call over to Mr. Steve Borenstein, Executive Vice President and Corporation Counsel. Please go ahead.

Welcome to Bernado Realty Trust's second quarter earnings call. Yesterday afternoon, we issued our second quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents, as well as our supplemental financial information package, are available on our website, www.bno.com, under the Investor Relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, form 10-Q, and financial supplements. Please be aware that statements made during this call may be deemed forward-looking statements and actual results may differ materially from these statements due to a variety of risks, uncertainties, and other factors. Please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2025, for more information regarding these risks and uncertainties. The call means those time-sensitive information that may be accurate only as of today's date. on the call today from management for opening comments are Steven Roth, Chairman and Chief Executive Officer, and Michael Franco, President and Chief Financial Officer. Our senior team is also present and available for questions. I will now turn the call over to Steven Roth.

Thank you, Steve, and good morning, everyone. We had another strong quarter with comparable FFO of 67 cents meeting analysts' consensus. by 10 cents or 17.5%. Michael will review it all shortly. But first, let me cover what we are seeing on the ground. New York is clearly the best, strongest, and most important real estate market in the country and the most resilient. We are a Manhattan-centric office and street retail company with best-of-class assets which are benefiting from these dynamics. The stock market seems to appreciate this given our stock price performance year-to-date and over the past two years and the past three years has been the best in our peer group. And there is more to come. I believe our stock is still stupid cheap. For example, Greenfield shows up at a 23% NAB discount, much cheaper than our peers. The landlord's market that we've been predicting for the past many quarters this year is broad-based and it is strengthening. Office leasing volume in Manhattan is at its highest level in 25 years. Tenants are expanding all over the city, Available space and suddenly space continues to evaporate and office to residential conversions continue to remove square footage from the office inventory. There is a serious shortage of large block availability. Vacancies in the 180 million square foot class A better building market in which we compete is now down to 6.2%. Clearly a landless market. There is limited new supply on the horizon. And remember, new supply takes as long as five years to deliver. and requires upwards of $300 rent to pencil. At the ankle of that, interest rates are rising. As a result of all this good stuff, rents are going up, I couldn't be more constructive. In New York, tenant demand spans across all industries. Law firms alone lease 2.3 million square feet this quarter. Legal tech and media account for eight of the top ten leases signed. This isn't one industry having a moment. All of our clients are growing. Interestingly, A real estate platform that tracks these kinds of things recently reported that AI companies are now leasing more space in New York than in San Francisco. So, all good. At Renato, our singular focus is on executing our plans to deliver the highest growth in our sector based on our lineup of high-quality assets and in-process projects. Here is our 2026 scorecard. During the first half of 2026, we leased $978,000 square feet overall. For Manhattan office, we leased 659,000 square feet at $105 per square foot average starting rents, with mark-to-markets of positive 9.5% cap and positive 7.1% cash. I would note that these mark-to-market stats do not include our leasing activity at MEN2. We are following our transformation. We are achieving rents that are just about double the old rents. This is as good a place as any to take a victory lap for what we have accomplished at Penn 1 and Penn 2, financially, physically, and aesthetically. Think about it. At Penn 1, broadly speaking, we invested $200 per square foot to achieve a $50 a foot uptick in rents, which, when all gets said and done, is a 25% return. Rents at Penn are now well above our underwriting and are now the best value in town. So, plenty of room to grow here. Our physical transformation is stunning. and game-changing and award-winning. Please go take a look. During the second quarter in Manhattan, we executed 29 office deals totaling 348,000 square feet at industry-leading $107 per square foot average starting rent. We've marked the markets a positive 7.7% gap and positive 5.0% cash. This quarter's leasing volume included 181,000 square feet in the Penn District, and 167,000 that meet in our other half-passes. We are now consistently achieving triple-digit average starting rents. I suggest that Mark the Markets is a squishy metric which depends entirely upon which leases are included in the calculation and their rent. And so it's pretty random. Rather, I submitted it's better to look at starting rents for new leases as a much more fine-tuned metric which would allow for better comparisons with buildings to buildings and companies to companies. I can best do talking my book here since our starting ranks have led the New York office public peers for years now. In the Penn District, at Penn 2, we have 67,000 square feet of leases out for signature and we expect to be fully leased here down to dribs and drabs by year end. At Penn 1, we have 246,000 square feet of leases out for signature and an average mark-to-market of a whopping 44%. Company-wide, we are projecting third quarter mark-to-markets of over 20%. I guess you could call this oral salt guidance. With all of this activity, we continue to review our pricing here on a bi-weekly basis. Importantly, given that roughly 10% of the space of PEN1 rolls each year, we expect continuous strong growth from PEN1 as we keep marching old rents up the market. We continue to be delighted with our two most recent acquisitions, 623 Fifth Avenue and Park Avenue Plaza. Thanks to Harrison for giving us a shout-out for these two deals on his call. 623 Fifth Avenue is our spectacularly well-located, and by that I mean in the center of everything, 383,000 square foot asset which sits on top of Saks Fifth Avenue that we are redeveloping to be the 220 Central Park South version of boutique office space. We are off to a great start here, receiving outstanding reaction from brokers and tenants. We are about to execute our first lease of the two floors with a financial services firm that rents consistent with our operating. Of note, even at this early stage, market demand is telling us to increase our asking rents above original underwriting. As you know, we recently acquired a half-interest partnering with Fissure Boats at Park Avenue Plaza, a 1.2 million square foot tower on 5030. The deal was at a valuation of $950 a foot, which for Prime Park Avenue is a third of replacement costs. This asset, taking advantage of the in-place 2.9% mortgage loan with six years of term remaining, is a coupon clipper at 8% cash on cash. So the way I look at this, we are earning double the risk-free bond rate from risk-free Park Avenue AAA real estate. The end-place leases at Park Avenue Plaza are at, give or take, half current market, so we expect very substantial capital appreciation here to go hand-in-hand with above-market current earnings. Our market-leading signage business of the two most important and highest traffic locations in Manhattan, Times Square, and the Penn District continues to grow at a healthy rate. We love this business. It's capitalized and has been growing at 5% per year. We intend to add more signage in the Penn District where we control almost all of the real estate around Penn Station and Madison Square Garden. If you drive or walk past Park Avenue at 52nd Street, you will see that our 350 Park Avenue site is now under construction, actually under demolition. We intend to shortly exercise our investment option to participate in this deal at our maximum ownership percentage of 35%. alongside Ken Griffin as our 60% partner and the Citadel as our 1 million square foot anchor tenant. Several commentators and analysts have suggested that we take the money and run. No, no, no. That would be incredibly short-sighted. In our business, there is no better place to invest than Prime Park Avenue with a million square foot tenant and a 60% partner already committed. We are contributing our existing land and 65-year-old building at a $900 million valuation. We have the balance sheet resources to support this deal and all of our other financial requirements as well. We have a $3.3 billion construction loan ready to go. I think $3.3 billion may be a record. The partnership, and by that I mean all partners, is contemplating selling down at 25% interest at a price which will give us an appropriate profit and also give the buyers an appropriate profit. The expected joint venture closing will take place in September. We are extremely excited and bullish about the potential returns from this project. The brokers and tenant community is buzzing, and we are already getting incoming to available space, all of which is new space from 600 feet to 1,000 feet, from clients seeking the very best and for whom our delivery date fits their needs. At Trenado, management of our balance sheet is the highest priority. Michael and his team have worked very hard to get our debt ratio down into the sevens. We are in conversation to sell two non-essential assets which would very substantially increase our liquidity profile. Here is the status of our stock buyback program. This quarter we repurchased 1.8 million shares at $29.92 per share. Since we have started buying back shares in 2023, we have repurchased 8 million shares at $26.61 per share. We will continue to take advantage of the stock as the opportunity presents itself. Just for kicks, on a final and interesting note, I recently heard an interview with Taylor Sheridan, the screenwriter, director, producer, and actor best known for creating the passionately successful Yellowstone Universe. I confess that I'm addicted to his stuff. Here's what he said about New York. Quote, I leaping love New York. It's the first place I've lived after Chicago. It's a phenomenal city and it's a city that I feel is much tougher. It endures a bad politician or two and you can't tank it. New York shakes off this stuff like a case of bad dreams and keeps going. It doesn't matter the industry if you're in New York. If you're successful here, if you're a bricklayer, You're one of the best friggin' bricklayers on the planet because there are 8 million people convening for your job. You have just mandate excellence of everybody in every way and in every field. End quote. By the way, when somebody asks who doesn't know me what I do for a living, I say I'm a bricklayer. Now, Austin Michael.

Thank you, Steve, and good morning, everyone. Second quarter, Conroe FFO with 67 cents per share. and last year's second quarter, an increase of 11 cents. This significant increase was primarily due to higher FFO resulting from rent commencements at Penn 1 and Penn 2, the impact from the NYU master lease at 770 Broadway being in the prior year, and higher NOI from signage revenue, partially offset by higher net interest expense. We have provided a quarter-over-quarter bridge on page 2 of our earnings release and on page 6 of our financial supplements. Our core office and retail businesses are performing increasingly well and are now beginning to reflect the growth from leasing out Penn as well as our other vacancies. Our New York office same-store NOI was up 13.7% for GAAP and 11.9% for cash. Our New York retail same-store NOI was up 7.3% for GAAP and 5.7% for cash. And our New York business overall was up 11.9% for GAAP and 6.2% for cash. We now clearly expect full year 2026 comfortable FFO to be higher than 2025, with second quarter comfortable FFO being a decent average run rate for the rest of the year. As previously indicated, we expect there to be significant earnings growth in 2027, as the positive impact from the lease-up of PIN 1, PIN 2, and other vacancies continues to take effect, as well as the positive impact of the recent acquisition of Park Avenue Plaza. Turning to occupancy. New York office occupancy increased 60 basis points this quarter to 92.2% from last quarter, and up significantly from the trough of 84.4% in the first quarter of 2025. This significant pickup is reflective of the successful execution of our plans and the Manhattan Class A office market dynamics that we've been talking about over the past couple of years. Our New York office pipeline is robust. and has over 2.2 million square feet of leases in negotiation in various stages of proposal, including the 1 million square foot Citadel lease at 350 Park Avenue and over 500,000 square feet in the Penn District. Based on our strong leasing pipeline, we anticipate that our occupancy will grow to north of 93% by year end, with further gains thereafter. Demand for our retail assets also continues to pick up. We are seeing new retailers, including many international ones, enter the market, as well as retailers in prime locations looking to renew their spaces early so as not to lose them upon expiry. Finally, turning to our balance sheet, our liquidity remains strong at $2 billion which is comprised of cash of $789 million and our undrawn credit lines of $1.2 billion. We hope to bolster this further with the asset sales Steve referenced earlier. 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 1 on your touchtone 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 1 on your touchtone phone. Each caller will be allowed to ask a question and a follow-up question before we move on to the next caller. The first question today comes from Floris van Dijkum with Lattenburg. Please go ahead.

Hey, thanks guys. You know, obviously we're starting to see some growth which is very encouraging. Macy, could you talk a little bit about the gap between lease and economic occupancy today and where your peak physical or economic occupancy was in the past and how much more of a runway there is?

Michael? Good morning, Forrest. So, you know, historically, you know, we ran at, you know, 95, 96% occupancy on a physical basis. I think maybe touched a little bit higher occasion, but I would say that was a pretty consistent run rate. You know, today we're at a little over 92%. You know, we expect that we'll get back to our historical run rate in the next couple of years. You know, given the pace of the market, it could happen, you know, sooner than that. So, We're pretty confident about that. From an economic perspective, just given the sign that commenced leases, obviously that number is lower. I think on a, let's call it on a gap basis, which probably relates most to record earnings, we're probably 83%, 84% relative to the 92.2%. So physically, we should get back into the mid-90s and obviously on a on a GAAP basis. You know, that'll close up if those leases come online.

Of course, I'll put a little more meat on that. Our signed but not in occupancy and not in our earnings number, the revenue side of that rents are $180 million, which is probably somewhere around $150 million, a little bit more than that of FFO. So that'll give you the number as to where we stand now. And that number, obviously, signs me through haven't commenced yet, so that's in the bag.

Thanks, Steve. Thanks, Michael. My follow-up question, and this is more of a broad question because if you do the math, the rents required to make 350 Park Avenue pencil out suggests that you're going to rent that building at around $350 a square foot. What kind of impact will having these really, really high-end properties do to adjacent or nearby buildings? I'm thinking also potentially about the potential upside of your recent acquisition at Park Avenue Plaza.

The rent on the new buildings, your number is approximately correct, will create an umbrella at all of the older buildings which have in-place rent of less than that. Park Avenue Plaza has rent of about a third of what you just mentioned. It will all suck them all up. So that what's going to happen is the combination of scarcity The combination of everybody in New York expanding and looking for space and the fact that there's a scarcity of new supply and the combination of construction costs, interest rates, etc. require a very high rent for a new building. That'll cause the great, the well-located older buildings to go up in value enormously. and obviously that's the reason we bought Park Avenue Plaza.

The next question comes from Alexander Goldfarb with Piper Sandler.

Please go ahead. Hey, morning Steve and thank you for the update on 350. I guess a question there around rent. A few quarters ago, we were talking about sort of 250 gross to make New Deals Pencil. I think when we talked about 1015, now you're talking about 300, 350 to make New Deals Pencil. And clearly at 350, you have legacy basis. So the increase in rents to make deals pencil, is that sort of on a new market basis, meaning if you were to buy land today and given where interest rates are, or what's caused, you know, sort of the target construction rents to go from sort of the 250 we talked a few quarters ago to now sort of the 3 to 350?

Oh, boy, complicated. I'm not sure I understand the question, but... None of these numbers are written in stone, Alex. I mean, they're sort of like ranges. The market doesn't really need 350 a foot to start a new building. The market and our competitors would find a new building somewhere in the probably mid to high threes. I'm sorry, mid to high twos. And what the market is doing is giving a bargain rent to the anchor tenant with hopes and aspirations that the follow-on smaller tenants at higher rates will make the whole thing pencil. But in the whole, you know, you think about it, if a new building on Park Avenue costs $3,000 a foot, you can do the math.

Okay. And then the second question for Glen, you know, year-to-date, you've done about 660 square feet gross in New York. You know, there are a lot of tenants that are talking about early renewals. Can you talk about the level of conversation and, you know, presumably there's some acceleration in the back half or just what we should expect as far as leasing goes, you know, compared to the 660 so far?

So, as Michael said in our script remarks, putting aside Citadel, we have about a million two in our pipeline. Deirdre Maddock, and we're in a lot of discussions in that regard, but we're being careful and smart about it.

The next question comes from Dylan Brzezinski with Green Street. Please go ahead.

Hi, guys. Good morning. Thanks for taking the question. Steve, maybe going back to your comment that the outset of your prepared remarks talking about how the stock remains cheap, how it remains well below sort of our NAD estimate, can you kind of just talk about I think you alluded to in the past just being interested in taking assets to market and testing where private market banks are at. Can I just talk about that? Is that still something you guys are interested in? Maybe obviously using those funds to continue to take advantage of the disconnect between where shares are at today and where you guys perceive value to be.

I think what you're saying is that we should sell buildings at the private market value and buy stock, which is Green Street's formula for success. We sort of believe in that. We sort of also believe that our buildings are going to appreciate value. We are actually in conversations with selling two buildings. the proceeds of which would be a very significant cash amount and which accomplishes our financial objectives in the short term. The history in New York has been that almost every time you sell a building in almost any cycle, you've been wrong. And that goes for our street retail assets and our office assets. So we do have a handful of assets that we are happy to sell and want to sell. We have a couple of assets that we are actively in conversations to sell and we're very happy owning the rest of them until at some point they become more valuable and then maybe we would sell them. With respect to our stock, we still think our stock is extremely cheap. As you know, the NAV calculations are basically based upon what is in place now and what assets we own now that doesn't give any credit for what will happen in the future with any of our I mean for example there's no credit for the 350 Park Avenue deal and the profit that will undoubtedly come from that or the Park Avenue Plaza uptick in rents or the 623 The NAV number is a static number which is backwards looking. When we sit in our council room, we look at that number very hard, but we also look at the future value. And so that's my answer, sir.

No, that's very helpful. I appreciate that commentary, Steve. And then maybe just one on, I think it was announced yesterday that Snap was subways in some of Verizon's space. Is that... Are you guys involved in that at all? I know when Verizon starts to at least rents are probably higher today than where Verizon's lease is at. So is that an upside that you guys are able to get or is that sort of solely Verizon's economics?

We didn't participate in that deal. That was a deal between Verizon and the subnet. We did, however, decline our recapture option, choosing instead to... keep the Verizon credit.

The next question comes from Steve Sacqua with Evercore ISI. Please go ahead.

Yeah, thanks. Good morning. I think on the last couple of calls you guys have talked about this kind of 40 cent FFO uplift in 27. I know you don't give formal guidance but There was a bridge there just given the strong signed but not occupied pipeline. Obviously, you've had good growth in Q2 and talking about a good second half. I guess, does that 40 cent number still apply or has some of that FFO maybe shifted into 26 and it dampens the growth a little bit into 27? 20, Steve.

We're not going to get too much into guidance. We don't give it. If you remember... We made that comment. I think we started off talking about the year being flattish relative to last year. Obviously, we're significantly outperforming that. But, you know, the 40 cents was relative to that flattish comment. So, you know, I think we were at 235 last year, 40 cents on top of that, you know, 275, you know. So, some of the growth is occurring earlier this year than we expected. At the same time, we still think we have meaningful growth next year. So, You know, our comment on sort of significant growth still to come in 27 remains intact. You know, some of that 40 cents, you know, got started flowing through this year, but certainly relative to where we started beginning of the year is still intact. And, you know, given the dynamics, hopefully it'll be in excess of that.

Great, that's my follow-up. Steve, I guess your comments around doing a JV at $350,000 is interesting given the Citadel lease. I guess, how did you sort of weigh doing that JV now versus leasing that building up further and doing something down the road given that it's not being delivered for four to five years?

We made a decision to do the deal with Ken Griffin and Citadel years ago. And our deal with Ken was signed probably, I don't know, three years ago, something like that. So this is just the continuation of that path, which was decided three years ago. During that time, between now and then, Barry and his team and the Citadel team have designed the buildings with the Forster Partners architectural firm and done the drawings and we're now under construction. So these decisions were made three years ago, maybe even four years ago.

The next question comes from Jana Gallen with Bank of America. Please go ahead.

By the way, before I get into that, let me finish the last question. If you do the math, and we do the math, we really groove on math around here. If you do the math, notwithstanding the fact that there is a time delay from the time that you demolish the old building and give up the income on the old building to the time you get the new building, the new building which will have rents in the stratosphere so to speak which is the market which is required are substantially enormously more profitable than keeping the old 65 year old building dumping money into that building because in 10 years that's going to be a 75 year old building and you know what that means so anyway decision really was not that difficult to make to demolish and build a new building I'm sorry now to the next question

The next question comes from Jana Gallen with Bank of America. Please go ahead.

Thank you. Good morning and congrats on the quarter. The retail leasing had a nice pickup, but the lease term I noticed was pretty short. Curious if that's just a strategy to do more short-term activation as you plan some of the larger retail redevelopment or if something else drew of that.

Morning, Jenna. I would say generally it was just, sorry. In general, we have a number of short-term deals, some in-place tenants that we extended, some short-term deals that we don't want to lock up the space. We continue to view the market as getting stronger, and so we don't want to commit to space long-term until we get to an appropriate level. In some cases, tenants need more time to make decisions on you know, how long they want to commit for, et cetera. So a mix of those. But I think, you know, most of those, as we said, short-term in nature.

Thank you. And then maybe just I noticed the Pier 94 occupancy drop quarter of quarter. Anything you can share that or prospects for, you know, new leasing there?

It's glad I'll take this one. So the occupancy is already up into the high 80s by the end of July. So we had a couple vacates at the end of June, which is why you see the number you're seeing, and we're already back up to where we were with a lot more activity in the pipeline.

I mean, Glen, why don't you just comment on the user's experience and reaction to the period?

Yeah, I mean, the activity has been excellent. The users are all, you know, top of class, head of class, you know, Google, Netflix, Paramount, Apple, all the names we want. And as they go on and on, the experience has been A+. The reports back from them have been excellent. So we're feeling very good as we head into the second half of this year and the 27 that, you know, really great things are going to happen and the project's really the best in town. and certainly the users coming in are recognizing that as they use it.

You have to remember this asset which we are partners with Blackstone and Hudson Pacific is kind of analogous to a long stay hotel. So this is not a office building which has 10, 20 and 30 year leases. The tenants that come into this building and use it as a production facility for shows that are in process. So that can be, you know, three months or a year or what have you. So the occupancy will fluctuate. But we do feel we have a unique asset. It's the only asset in Manhattan. It's very well located, and it's being extremely well received, even at these early stages, by all of the, might I say, all of the big boys.

The next question comes from Anthony Poloni with JPMorgan. Please go ahead.

Yeah, thanks. On 350 Park, you mentioned going to the maximum 36% stake in the project. Can you talk about what that means in terms of any incremental outlays for Gornado or just, you know, how that works?

Michael. Good morning, Tony. So we'll lay out all the details when we close the venture in terms of cost, financing, et cetera. Steve referenced the construction financing that we've lined up. We're contributing our land in at the $900 million value. And so incremental capital requirements from us over time are in the $350 million neighborhood. That doesn't really start for... and, you know, probably two and a half, maybe even three years in any significant scale, given that, you know, Ken has to true up his equity with ours and then the bank wants to get money out. You know, we like that environment. The banks want to start putting money out. So our equity is back-ended and really won't come, I would say, needfully until 2029 and then there.

and then just on in terms of just you mentioned I think Steve just that kind of a project putting on an umbrella over the rest of the assets around there over time and it seems like your base is going to probably be over 3,000 bucks a foot and the presumption is you lease it up and it's worth you know I guess something worth of 4,000 plus a square foot How do you think about just that gap between a number like that and buying something around the corner effectively at $950 a foot? Is that dispersion? Does it make sense? I get the difference in age and asset, but is carried land just as interesting an investment at this point than the bet at $4,000 plus a foot on a pro forma stabilized basis?

Yeah. We would buy 100% of Park Avenue at $1,000 a foot if we could.

You're making the case for exactly what Steve said earlier, right? That that dispersion is very wide. Buildings like Park Avenue Plaza, if the market continues to hold its strength, and we know there's not going to be a lot of supply, those buildings have to appreciate significance. and, you know, we own many of those buildings, which is why we're bullish on our stock and the value that we have and where it's going. So, 100%. You know, rents have to rise there, values have to depreciate neatly because they're basically trading a land value in a lot of cases.

But don't get the impression that the people who are paying $250 or $75 or $300 a foot are stupid. They are not stupid. They are the most important and largest and major companies in the country. It is a difference in the value of a brand new building in its design and its function. But the answer is it's not the difference between $100 a foot and $300 a foot. So the $100 a foot buildings are going to go up in value substantially, but not to the same rental rate as a new building would command.

The next question comes from Vikram Malhotra with Mizuho. Please go ahead.

Morning. I guess this first question, given the strength in the future direction in terms of FFO and the pickup you mentioned, some of it is coming in 26. I'm wondering if you can just maybe give us a little bit more color on how that translates into cash earnings, like relative to this year's T.I. Bill, you know, what could the, you know, T.I. and instant capex bill look like for next year, this high level? And related to that, any sense of where we are in terms of T.I.s coming in after the market has strengthened?

I'll hit the first one. Glen can hit the second. I think in terms of, you know, T.I.s this year versus next year, I mean, again, given we're in that lease-up mode, you know, given, frankly, when the tenants call for the money, and all the numbers right in front of me, but I think it's pretty comparable year over year. So not meaningfully different enough. I think in 28 is when that starts to tail down is where big leasing goes. But again, it depends on when tenants call for the money. It tends to be a little later than when we normally expect. So that's my commentary on the capital side. Glen, you want to just talk about PI Trends?

Hi, Vikram. So we're seeing concessions come down. Rents are going up. We're tightening concessions. I've had a couple calls in a row now, free rents coming down, and we're now seeing tightening on the TIs. Certainly anything we're terming now has a cap on the tenant fund. So overall, I would tell you all the metrics are trending absolutely in the landlord's direction, which is very good for us. and we continue that you know we expect that to continue as we go as the market continues to get better and better.

Thanks and then maybe just a bigger broader question you know clearly New York is at a place where we're all talking you know upside to rents and mark to market positive San Fran is still sort of in maybe perhaps occupancy recovery mode I'm just wondering future capital allocation for Bernardo if you were putting new capital today like how do you differentiate and set sort of opportunities in New York versus San Fran? Like where should we expect, you know, kind of a better risk reward at this point?

You know, we love San Francisco. It's a recovery market. The interesting thing about it is we own the best building in San Francisco, differentiated. It's not a tech building per se, although we do have a few tech tenants. It's a financial services building. all of the major financial services players are in that building and notwithstanding the fact that vacancies grew to very high numbers in San Francisco and rents plummeted that building 555 California the rents went up and occupancy stayed by and large pretty high now with respect to New York and capital allocation I mean look at what we've done in the past as a prelude to what we'll do in the future. We have invested in two or three new acquisitions. We invest in our existing buildings by leasing them up in the TI and in keeping them modern and pristine and ahead of the market. We invest in our buildings in terms of amenities. We invest in our stock. So we're investing in new acquisitions, our existing assets, our common stock, and, of course, the Penn District. So we have a very full plate.

But at the same time, bringing down leverage while doing that.

Yeah, how did you do that?

A little slight of hand now. Assets, sales, et cetera. And we're growing income.

By the way, our budgets show... that after the bubble, the good bubble of this very large leasing period is over and the free rent burns off and the TIs are paid, our financials become extraordinary, our positive cash flow becomes, well, our cash flow becomes positive and grows fairly significantly. So there's a one or two year period and then there's a very, very, very, very, we're very, very constructive about our company in the future years. That's why when I say we look at the future NAV at harder even than we look at the current NAV.

The next question comes from Seth Berge with Citi. Please go ahead.

Thanks for taking the question. Just wanted to circle back on 350 Park Avenue. You mentioned the partial sale. Could you broadly talk about, given kind of the improvement in New York fundamentals, what the buyer pool looks like for that? What type of money is interested in investing in New York office today?

Hang on. Michael's going to start with what we had. I think you asked about the mention that I made that we were contemplating selling down 25% of the ownership of the building and inviting a new group of investors to come into the asset now. And so what's your question about that?

Yeah, just are you seeing, is it core money that's interested in office, opportunistic, sovereign? Just talk about kind of the interest from the different buyer pools in New York office real estate.

We're basically targeting high net worth family offices. And it would be a club deal, not a... It would be a club deal, people investing hundreds of millions or maybe $200 million, not a billion. That's our current target.

Great. And then maybe just to follow up, with kind of the new pedicure tax in New York, are you seeing any impact on that for high street retail, do you think?

not at all we don't expect that that's going to affect shopping or tourism or domestic spending or whatever so the answer to that is not at all by the way we're not really in that business I mean we don't have a current condo job under construction although we have developed the most successful one in history that's in the past and that's sold out by the way We do hear from the marketplace that the tax has affected the interest of buyers in the over $10 million category. But that's not firsthand. That's second and third hand from just gossip that I'm hearing from the marketplace.

The next question comes from Ronald Camden with Morgan Stanley. Please go ahead.

Hey, great. Just two quick ones. One, and this came up earlier, just on high level, I think you touched on just maintaining leverage. You've tested sort of CapEx. I was just wondering if you could just put a point on it in terms of like what the model says leverage looks like as sort of EBITDA comes on, as well as what the CapEx trajectory looks like. Thanks.

Michael. Morning, Ronald. From the Quick reading of your report, sounds like we have a fairly wide disparity on any of you book viewpoints. CapEx, you know, I think I said earlier, I think it's going to be fairly consistent this year to next year just as the, you know, large amount of leases, particularly at PIN 2 and the remainder of PIN 1, you know, get funded. even a lot of leases they get signed this year that won't get funded until next year and maybe even slobbers over a little bit to the 28 but I think fairly consistent year over year and on the leverage side I think we'll continue to trend down into the 7s over the course of this year and as the income comes online in the out years obviously there's a lot that's going to happen between now and then but that number could go sub 7 I think it probably will go sub 7 absentee and other investing, you know, et cetera.

Great, helpful. And then I think you mentioned sort of two non-essential sales. I was just wondering, I think in the past, whether it was Hotel Pen or some of the retail assets, just any thoughts on transacting on those. Thanks so much.

No, it's not Hotel Pen. Hotel 10 doesn't exist anymore, by the way. It's a piece of land which we consider to be the best development site in the west side of Manhattan. And that's not for sale.

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

Hi, good morning. Maybe a follow-up to that last one just on the planned asset sales, whatever they may be, as we try to figure out the impact of them, those two properties. Would you say they're more in the non-core bucket, i.e. potentially higher cap rate, or in the bucket of crystallizing private market valuations, i.e. lower cap rate or some combination?

One and one.

Got it, okay. And you mentioned earlier that part of the intent is then you can keep that dry powder for offense. I guess, could you talk about your outlook for those opportunities to come up? I realize you don't have a crystal ball, but is there a reason to think that more acquisition opportunities could continue to come up or is it too hard to tell at this point?

You know, the answer is we react to everything that's available in the marketplace and we move quickly to acquire an asset that we like. The assets that we like have to be basically in our core. They have to be on the best location. They have to be part of the 180 billion square feet that we feel is our target market. The market in which our clients want to rent space. And they have to be money makers. So When we see it, we act. And we can't predict. We don't have a crystal ball, but we do know that there are cycles. There are cycles in when to invest heavily, and there are cycles in when to put the pullback. And so, you know, we've been doing this for a long time, and that's our outlook on acquisitions. By the way, the other side of that is that trees don't run with the sky. We do have business cycles. I don't know whether we're going to have another recession or downturn. I guess we will. It's been a long time since we've had a downturn. but there will be a downturn in the future and we have to be prepared for it. Now, you can't prepare for it. When the downturn starts, it's too late. You have to be prepared for it ahead and so that's what we try to do and we always try to do. And keeping a very strong balance sheet with a ton of cash is part of our long-time business strategy.

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

Hey, thanks for taking my questions. Steve, in the past you've mentioned that you're open to selling 555 California in the mart. Can you give us an update on where your considerations currently stand and are those the two assets that you referenced earlier about being for sale?

those two assets are not the two assets might be one of them but I can tell you that right now 555 California is a strong recovery market and Glen has done a spectacular job of leasing this market at the top pick prices in San Francisco you know in the high 100s of dollars a foot in the tower so that asset has plenty of room to go and is extremely strong so that asset is only for sale at the right time and at the right price.

Any commentary on the mark?

No.

Okay. Dave, just another topic on signage. Is there a limit to how much signage you can add to the Penn District? And I see that signage is up 5% year over year. Is that mostly volume or are you pushing price more aggressively?

I'll start and then Michael can finish. Basically, the thing that differentiates our signage business is that our signs go with the buildings that we own. So we are almost all of the people in this sector, the signage companies, they rent space to put their signs. We don't. We own the space. Our margins obviously are much higher. and since we own the prime space in Times Square and we own everything in the Penn District where there's enormous traffic both from Madison Square Garden and the retail at Macy's and Penn Station so we own those assets and so as we continue to develop in the Penn District we will build more buildings. We're now totally changing The entrance to the Penn District is on 7th Avenue and 34th Street. So we're building, we're going to tear down the older buildings. We're going to build new buildings. Those are signage opportunities. We're going to build a tower on 1015. That's another signage opportunity, etc. So the answer is that we love the business. It's asset-like. It goes along with our, new signs go along with our new development.

Just to pack on, Brendan, yes, volume or price, both. You know, the pricing has continued to go up year over year for the last several years. And, you know, part of what we do, you know, by having, you know, digital signs is, you know, we slice and dice those and we, it's like revenue management, right? We're optimizing how many slots we can sell. and how much we can sell those for. So, you know, we have both dynamics working, which is helping to propel the business. And you saw that come through this quarter.

The next question comes from Steve Sakwa with Evercore ISI. Please go ahead.

Yeah, thanks. Just one quick follow-up. On that S&O pipeline number that you gave of $180 million, is there a way to bifurcate that between what's – You know, PEN2 and what's the rest of the portfolio?

I knew you weren't going to let us off so easy, Steve. I had a numbers question. You know, I would say I'm going to guess here because I don't have the exact numbers in front of me. Obviously, like PEN2 is a huge, you know, development that we're completing and that income is coming online. So if I had to guess, I would say probably 60% of it is PEN2. Rough cut.

That gets better to be right. Yeah, I think it's pretty close.

There are no further questions at this time.

Okay, well, thank you, everybody. We're happy with this quarter. We hope you all appreciate it. And we're even more happy with our future prospects. So, having said that, thank you all for attending, and we'll see you next quarter.

This concludes today's conference. Thank you for your participation. You may now disconnect.