VORNADO REALTY TRUST Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Office Leasing Market: Manhattan Class A office market is a landlord's market with strong demand, low vacancies (7% on Park Avenue, 9% on Sixth Avenue), and no new supply expected. Leased 2.5 million square feet company-wide year-to-date, including 2.1 million in Manhattan, with expectation to sign 3.5-3.8 million square feet in Manhattan leases this year.
• 770 Broadway Deal: Agreed to a master lease with NYU for 1.1 million square feet, with upfront payment to pay off $700 million loan and annual net rent, expected to close in January.
• Liquidity and Balance Sheet: Strong liquidity of $2.6 billion, including $1 billion cash. Will receive over $1 billion from Uniqlo sale, NYU prepaid rent, and redemption of street retail preferred. Will pay off $450 million bonds in January.
• PENN DISTRICT Developments: PENN 1 and PENN 2 developments are progressing, with PENN 2 well-positioned to capture large tenant demand. 350 Park Avenue design with Norman Foster near completion. PENN 15 site ready for development.
• Retail: Strong demand for retail, with Primark coming to PENN DISTRICT, and retail occupancy excluding Manhattan Mall vacancies at close to 90%.

Segment Performance

• New York Office: Year-to-date, leased over 2 million square feet in 68 transactions at an average starting rent of $112 per square foot. Third quarter leasing included 454,000 square feet across 18 transactions at $92 per square foot. Closed a 297,000 square foot renewal with Google at 85 10th Avenue. Leased 70,000 square feet at PENN 1 with an average starting rent of $119 per square foot.
• San Francisco: 555 California Street leased 443,000 square feet this year at an average starting rent of $110. Closed a 46,000 square foot renewal and expansion deal at Wells Fargo, with renewals out for another 283,000 square feet.
• Chicago: theMART closed 15 leases totaling 239,000 square feet, including an expansion and renewal of Medline for 161,000 square feet.

Guidance

• Leasing Volume: Expect to finish 2024 with almost 3.8 million square feet leased across portfolio, highest volumes since 2014 and highest average starting rent ever.
• Occupancy: Office occupancy currently 87.5%, expected to increase with pending 770 Broadway lease to 90.8%, though may decrease temporarily in Q1 2025 due to PENN 2 space, but expected to stabilize in 93% range.
• Financing and Debt: Will pay off $450 million bonds in January, reduce debt by $700 million with NYU deal, and increase cash balances significantly.

Risks

• Overleveraged Assets: Some assets are overleveraged with little to no equity value, and will not invest more capital unless loans are restructured.
• Market Uncertainties: Continued high borrowing rates and limited availability of capital for refinancing overleveraged assets.
• Leasing Timing: Temporary decrease in occupancy in Q1 2025 due to PENN 2 space placement, though expected to be temporary.

Question and Answer

Q: John Kim asks about remaining leasing activity and NYU lease details.

A: Steven Roth says it includes NYU, occupancy starts in January, rent is substantially lower than current but capitalized value is significant.

Q: Steve Sakwa asks about street retail sales and luxury retailers.

A: Steven Roth says appetite is strong, no news to report, but half of retail preferred will be monetized by year end or January.

Q: Dylan Burzinski asks about monetizing remaining retail preferred and B-Note acquisition.

A: Steven Roth says no current plans for second half of retail preferred, B-Note is small investment with potential litigation, not appropriate to discuss further.

Q: Alexander Goldfarb asks about future investment focus.

A: Steven Roth and Michael Franco say West Side of Manhattan is established, future investment will focus on existing strong submarkets and internal opportunities.

Q: Jeff Spector asks about 2025 priorities and office market landlord's market.

A: Michael Franco says priority is leasing up PENN 2 and 1, filling vacancies, managing balance sheet, and trolling for external opportunities; landlord's market due to limited supply, high demand, and no new construction.

Q: Michael Griffin asks about PENN 2 leasing pipeline and industry sectors.

A: Glen Weiss says all industry sectors are leasing at PENN, including financial, tech, law firms, etc.

Q: Ronald Kamdem asks about occupancy impact on NOI and cash conversion.

A: Michael Franco says difficult to predict timing, capital is deployed rigorously, concessions may trend down in best submarkets.

Q: Caitlin Burrows asks about dividend policy and PENN 2 earnings impact.

A: Steven Roth says dividend policy is interim to protect balance sheet, PENN 2 income will start hitting earnings in 2026.

Q: Nick Yulico asks about PENN 1 rents and 2025 earnings growth.

A: Glen Weiss and Michael Franco say rents at PENN 1 are rising, PENN 1 has 1 million feet leased post-redevelopment with more to go, 2025 earnings growth may be flat to current year with impact from 2026.