VNO - NYSE

Good morning, and welcome to the Vornado Realty Trust Second Quarter 2025 Earnings Call. My name is Michael, and I will be your operator for today's call. This call is being recorded for replay purposes. [Operator Instructions]. I will now turn the call over to Mr. Steve Borenstein, Executive Vice President and Corporation Counsel. Please go ahead.

Welcome to Vornado Realty Trust 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.vno.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 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 10-K for the year ended December 31, 2024, 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 statements. On the call today from management for our 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. Let me start by expressing our sorrow about the tragic and senseless shootings at 345 Park Avenue last week. Our deep condolences go out to the victims, families and friends. We have many friends in that building and ownership and occupiers, and we stand with them as they deal with this terrible tragedy. To continue, here at Vornado, our business continues to be strong, is getting stronger, and I remain incredibly enthusiastic about our future prospects. Our stock performance leads the office sector, have increased 42% over the trailing 12 months, almost double the S&P 500. I was quite surprised that, broadly speaking, every other office REIT, whether East Coast or West Coast, including all the other New York office specialists, were negative during that period. We had an excellent quarter, and Michael will cover the results shortly. By excellent, I mean leasing, balance sheet and PENN, all excellent. Let me once again discuss what we see on the ground and our business strategy. We are 90% New York-centric company. Actually, we are a 90% Prime Pitch Manhattan-centric company. We do own a single large building in Chicago, THE MART, and a single complex at 555 California Street, the #1 building in San Francisco. These 2 assets may be on the for-sale list for the right deal at the right time. Manhattan is universally claimed to be the strongest real estate market in the country, and I mean the strongest by far. While Manhattan may have nearly 420 million square feet of office space, we actually compete in a much smaller 180 million square foot Class A better building market. Our clients are expanding, demand is strong and broad-based, and here's the punchline. Available space continues to evaporate quickly. Replacement cost for a Class A tower in Manhattan has risen to, call it, [ $250 ] per square foot. With interest rates at 6% or 6-plus percent, rents in the $200s are now commonplace. Think about it, $100 rents were rare only a few years ago. I believe this math is telling us there will only be a trickle of new supply for the foreseeable future, at least through the end of the decade. Remember, it takes 5 years from start to deliver a new build tower in New York. And that trickle of supply, however, unlikely will undoubtedly be spoken for and not create speculative space available to the market. Taken together, all this is the very definition of a landlords market. With tight availability in Class A better buildings in the Manhattan and [ Westlight Corridor ]. And no new supply coming for the rest of the decade, I believe the next few years have the potential to be one of the strongest periods of rental growth we've seen in decades, and it's already started. That said, logically and for certain, values will increase as well. Here is our industry-leading leasing scorecard. During the first half of 2025, we leased 2.7 million square feet overall, of which 2.2 million square feet was Manhattan office. That includes the 1.1 million square foot master lease with NYU at 770 Broadway, the largest New York office lease since 2019, which, by the way, absorbed 500,000 square feet of vacancy at that property. The remaining 1.1 million square feet of leasing during the first half was at $97 per square foot average starting rents with mark-to-markets of plus 10.7% GAAP and plus 7.7% cash. During the second quarter in Manhattan, we executed 27 deals totaling 1.5 million square feet, including NYU. Excluding NYU, the remaining 400,000 square feet of Manhattan office leasing for the quarter was at $101 per square foot starting rents, with mark-to- markets of plus 11.8% GAAP and plus 8.7% cash. We continue to achieve the highest average rents in the city. This quarter leasing was 190,000 square feet in PENN and 210,000 square feet in our other Manhattan assets. Importantly, our leasing this quarter included 12 transactions for 183,000 square feet at PENN 1 at an average starting rent of $101 per square foot, bringing occupancy here to 91%. Here's an interesting factoid. Since the start of physical development, we have leased 1.6 million square feet at PENN 1 at average rents of $94. At PENN, we are handily exceeding both our initial underwriting and our increased underwriting. Here's another way to look at it. Looking towards the future. Everyone is modeling large increases in Vornado's earnings as leases at PENN 1 and PENN 2 come online as they should. This is all based on rents of, say, $100 per square foot. But our neighbors to the West are achieving $150 per square foot and over time, so will we. Think about it, PENN 1, PENN 2 and Farley together comprise 5 million square feet. So the math says every $10 a foot uptick in rent yields $50 million to the bottom line. And what's more, when the uptick, i.e., market rents get to $150-plus a square foot of 5 million square feet, that's an increment of $250 million per year. Same- store asset appreciation over time is the ticket to success in the property business. Tenants are expanding in the PENN District. As an example, in the last quarter, Samsung doubled its space at PENN 1. And since its first 220,000 square foot lease signed in 2020, our major tech tenant at PENN 11 has expanded 3 more times, now occupying 460,000 square feet in that building. Last week, after the quarter ended and not included in the leasing statistics, we announced a 203,000 square foot headquarters lease at PENN 2 with Verizon Communications, one of the world's leading telecommunications companies. Verizon now joins other top- tier tenants, Madison Square Garden, Major League Soccer and Universal Music Group at PENN 2. We are, of course, delighted to welcome Verizon. Verizon's choice of PENN and their enthusiasm for their new home can best be described by lifting a quote from their press release by one of their senior executives: "new York City isn't just where we work, it's who we are. Our employees deserve a workplace that is just as vibrant as our culture. PENN 2 is more than an office. It's a space designed to bring us together to collaborate, to celebrate, to think boldly, to build the future side-by-side." The Verizon folks get it. This is a very important deal and continues to validate the product. This is a very important deal. Occupancy at PENN 2 is now 62%, and we have multiple deals in the OnDeck circle, which will keep our occupancy marching upward. The PENN District, our 3-block long city within the city continues to amaze and impress tenants and stakeholders. We sit at top the nexus of Pennsylvania Station and the New York City subway system adjacent to our good neighbors to the West Manhattan West and Hudson Yards. The 3 of us combined represent the new booming West side of Manhattan. At PENN, we are creating a campus of multiple interconnected buildings under ownership. We're delivering exactly as we said we would, and there is much more to come. As a starter, we are well along in the development process for a 475-unit rental residential project on our 34th Street site, caddy-corner to the Moynihan Train Hall. Next, we are going to transform as much as 700 front feet of [indiscernible] retail on both sides of Seventh Avenue along 34th Street into attractive, modern and exciting retail offerings. The gateway to PENN is Seventh Avenue at 34th Street. This stretch across the street from Macy's used to be a top 3 location and returning to top 3 is our goal. As I said before, the PENN District will be a growth engine for our company for years to come with rising rents and future development projects, including the PENN 15 site and potential residential opportunities. We also continue to add to our already impressive food offerings in the district with our newest restaurants at Dynamo Room, which opened last month to great reviews, and we will open at Farley in the fall. And our rooftop park at PENN 2 called, The Perch, named -- The Perch, is the best spot in the city for view, food, gathering or just chilling. Come see PENN for yourself. I invite you to come to PENN District any time, but especially at Happy Hour, where you will see every seat in every restaurant and amenity, whether it's indoors or outdoors filled with happy employees of our tenants. Our unmatched amenity package of 180,000 square feet is surely doing its job in spades to attract and delight our tenants. Our New York office leasing pipeline is robust with a total of 560,000 square feet of leases signed or in negotiations, setting up the third quarter, plus more than 1 million square feet in various stages of proposal. As we announced on our last call, after 2 years of intense deliberations, the arbitration panel issued its ruling on the PENN 1 ground lease rent reset. The PENN 1 ground lease has fully extended, goes to 2098. Days ago, our ground lessor filed an 11th hour Hail Mary Motion in New York County Supreme Court to vacate the rent reset panel ground rent determination. We believe the motion is entirely without merit and intend to vigorously oppose it. We also completed the following financing transactions as we continue to bolster our liquidity and handle our debt maturities. In April, we completed a $450 million financing of 1535 Broadway using $407 million of net proceeds to partially redeem our retail JV equity on the asset. The preferred equity outstanding balance is now $1.079 billion, down from $1.828 billion. In June, we completed a 5-year $675 million refinancing of Independence Plaza, a joint venture in which we own a 50.1% ownership interest. In July, we completed a 5-year $450 million refinancing of PENN 11, paying down this previous loan by $50 million. We have meaningfully delevered our balance sheet over the past couple of quarters. Since the beginning of the year, we have generated $1.5 billion of net proceeds from sales, financings and the NYU deal, paid down $965 million of debt and increased our cash by $540 million. Our cash balances are now $1.36 billion, and together with our undrawn credit lines of $1.56 billion, we have immediate liquidity of $2.9 billion. Our net debt-to-EBITDA metric has improved by 1.4 turns to 7.2x from 8.6x. And our fixed charge coverage ratio, as expected, is steadily rising. Please see Page 23 of our financial supplement for details. Finally, we remain very excited about the redevelopment of 350 Park Avenue at Citadel -- with Citadel as our anchor tenant and Ken Griffin as our 60% partner. The process to create this grand Foster and Partners designed 1.8 million square foot tower on the best side of Park Avenue has begun and this new building will stand out as being truly best-in-class. DDs are complete, i.e., the building is basically designed and CDs are progressing. Last month, the City Planning Commission voted to approve the project, and we expect the final new look approval from the City Council this fall. Citadel is currently building out their interim swing space, which will allow us to commence demolition of the existing 350 Park Avenue building in spring. Thank you all for listening. And now over to Michael to cover our financials.

Thank you, Steve, and good morning, everyone. Second quarter comparable FFO was $0.56 per share, which beat analyst consensus of $0.53 per share and essentially flat compared to last year's second quarter. We had lower net interest income from retail preferred repayments and lower NOI from asset sales, offset by lower real estate taxes at THE MART net of tenant reimbursements. We have provided a quarter-over-quarter bridge on Page 2 of our earnings release on Page 6 of our financial supplement. In addition, our cash NOI is lower this quarter, primarily due to the previously discussed onetime PENN 1 ground rent true-up payment made in April and free rent associated with recently commenced leases from backfilling the previously announced known move-outs. On our last earnings call, we said that we expected 2025 comparable FFO to be essentially flat compared to 2024 comparable FFO of $2.26 per share. This is still a good assumption as we sit here today. As previously discussed, we still expect the full positive impact of the lease-up of PENN 1 and PENN 2 in 2027, resulting in significant earnings growth by 2027. New York office occupancy increased this quarter to 86.7% from 84.4% last quarter, primarily due to the full building master lease at 770 Broadway. As we continue to execute on our leasing pipeline, we anticipate that our occupancy will increase into the low 90s over the next year or so. Lastly, the financing markets are liquid, and we have been active in refinancing our 2025 maturities. On top of the recent Independence Plaza and PENN 11 refinancings, we have several others in the works. The investment sales market is also picking up as the financing markets recover and as confidence in New York City's recovery grows. With that, I'll turn it over to the operator for Q&A.

[Operator Instructions] Steve Sakwa from Evercore ISI is on the line with the question.

Steve, I guess I wanted to tie 2 comments together. You said PENN 2 was 62% occupied with multiple deals in the on-deck circle. Then you talked about the LOIs of 560,000 feet plus $1 million of proposals. So can you just maybe help us understand how much of that sort of pending activity is geared towards PENN 2 and how much is for the rest of the New York City portfolio?

Glen, do you want to take that?

Executive VP of Office Leasing & Co-Head of Real Estate Sure. Steve, it's Glen. So of the 560,000 feet, those are leases out in negotiation. The Verizon lease is included in the 560,000 feet. In our pipeline, we have about 1.4 million feet in the pipeline in various lease proposal stages and about 50% of that is at PENN 2. That's the breakdown.

Great. And then for my follow-up, Steve, you made some comments early on about THE MART and 555 California sort of being for sale at the right price. And I feel like that's maybe a little bit of a shift or change in your thinking. So maybe could you just expound upon that? And is your goal to really sort of get back to being just kind of a pure New York City company in the shorter versus longer term?

We've worked very hard to focus the company, stick to knitting and focus on the financials and our stock price. So our mission is to increase our stock price. That's our sole mission. We think that those 2 assets are valuable. We think one of them is free and clear. The other one has some financing on it. We think that 555 California is the single best asset in San Francisco. San Francisco has -- is in a recovery phase now, which we think is going to be very dramatic. So as I said, those 2 assets, we will sell for the right price at the time. They're not sacred. By the way, nothing is sacred. So we look upon them as a financial asset and we will do what we think is the best financial outcome for the company.

And your next question comes from Floris Van Dijkum with Ladenberg Thalmann.

Maybe if you can talk a little bit about your signed-not-open pipeline. You talked about your occupancy -- your leased occupancy being around, I think 85.2% in New York. What's the physical occupancy? And i.e., what is -- how much rent is coming online over the next presumably 12 -- 12 months by the time that becomes activated?

Floris, it's Michael. Welcome back, and congrats on your new position. In terms of the signed, but not commenced, we're going to have to come back to you on that number. I don't want to give you a guesstimate and SWAG. We'll have to come back on that. But obviously, with Verizon signing, the occupancy number will continue to migrate up close to 88%. Obviously, there's ins and outs. We continue to believe that we'll be north of 90% as we get into next year and that income generally, and I think we've made consistent on this point will, from an FFO standpoint, kick in heavily in 2027, right? So '26 continues to be a year where we have the leases signed, but they don't kick in. '27, I think you're going to see a significant increase. And that, I think, is consistent we say, in the last couple of quarters. But in terms of specific dollars, I have to come back to you.

And maybe if I can ask one follow-up. I was sort of -- Steve, you piqued my interest about the upside potential in your PENN District. I think in the past, you've talked about sort of stabilized NOI at around [ 3.25% ]. How do you see that changing? Or how much has that changed over the past 6 months based on market rents going higher and obviously, your lease activity at PENN 2 in particular?

Floris, I couldn't be more enthusiastic about what we're doing at PENN and what PENN's value accretion to the company will be over time. So right now, we are leasing PENN 1 and PENN 2. And the -- we predicted that the market rents would be -- that we would achieve $100 of rent. We're achieving that, and we're achieving more. So we're doing better than our underwriting. But the interesting thing is that our neighbors are getting $150 a foot and more. So we believe that over time, we will also in PENN 1, PENN 2 and whatever other buildings we build, we'll be able to achieve rents that will be approximately maybe just a pinch below those buildings. So if you think about it, if you look at real estate as a -- not as a quarter to the quarter business, but on a 5-year planning cycle or something like that, if the market rents in PENN go up on the 5 million square feet that we already have by $10 a foot, that increment is $50 million to the bottom line. That's $0.20 a share. That's a fairly big number. If they should go up by $50 a foot from $100 to $150 million, over time, the company will realize a $250 million increase in its income. Now there's going to be some expenses -- some minor expenses about that. Real estate taxes will go up marginally, but the numbers are very big. So what I'm saying is the best part of the real estate business is great assets over time. And we believe that the buildings that we now have are under market so that as the market appreciates and as the market comes to our buildings, these buildings will get more and more valuable each year.

So Steve, as you think about that, is there a possibility that the PENN District could generate maybe up to $400 million of NOI in 5 years' time?

Easily. By the way, and that would be -- that's with no new construction, no new buildings. The existing inventory that we have now, we're just saying it's going to go up by $100 million over 3 or 4 years? Sure.

And your next question comes from John Kim with BMO Capital Markets.

I know there's a few different occupancy numbers out there, but just focusing on your occupancy stats on Page 32. New York occupancy went up to 85.2%, which is a sequential improvement, which is great. But it is lower than the 86.2% that you noted post the NYU lease last quarter. So I was wondering what the headwinds were this quarter that brought that down 100 basis points or so?

John, I think a couple of things. One is, I think that's an area in New York number office in retail. I think the office numbers are generally consistent with what we said. There's a little bit of timing and Verizon got signed a few days after the quarter. So obviously, if that happened before, we would have been above even where we said last time. So a little bit of timing. I think the biggest impact there was retail. We had 2 Forever 21 leases at 1540 and 435 Seventh, where they were paying a low rent. Company obviously went bankrupt again, and they vacated those stores and that knocked off, I think, about 10 percentage points off the retail occupancy, which in total took us to the average number you see there. So there wasn't a lot of rent coming out of either one of those stores. There are, frankly, placeholders, particularly at PENN until we had a really sort of redeveloped the whole stretch that Steve alluded to in his remarks. But from an occupancy standpoint, I think that was the biggest driver.

And then on 555 Cal and THE MART, Steve, you talked about potentially selling this. I wanted to see if you had any more commentary on timing, if this is something that could be listed in the next 12 months? And how should we think about use of proceeds between developments, acquisitions and reduction of debt. We did notice that you provided a new disclosure on net debt to EBITDA. So I'm wondering if that's a KPI going forward as far as maintaining or lowering net debt EBITDA?

On the first question, we are not listing those buildings in the next year or whatever. If we sell those buildings, it will probably be an opportunistic incoming where somebody wants them. But what I'm saying is that we're not actively marketing the buildings and we have no prediction on timing, but they are available if the deal is correct and the timing is correct. The other half of your question was what, sir?

Yes. So again, to Steve's point, nothing is imminent. But for the right price, we'll transact. And at the time, we'll assess the best way to utilize that capital, whether it's to pay down debt, whether it's to deploy those into development, et cetera. I appreciate you recognizing the good work we've done on the leverage front. We're proud of that. We've worked hard to get our leverage debt down. We think we're now quickly moving ahead of the class there. And so we want to continue that. So -- but when something is more right, then we'll assess exactly how we utilize those proceeds.

I want to tack on to what Michael said. One of the very important things that happened over the last short period of time is the improvement in our balance sheet, taking our leverage ratio down by 1.4 turns is a really big thing, rebuilding our cash balances, having lots of availability and having a very strong balance sheet is one of the important things that we do. And I'm very proud of what has -- what the team has accomplished over the last period of time. I think it's a really big thing.

And our next question comes from Dylan Burzinski with Green Street.

Just can you sort of talk about just -- I know you guys talked about how strong leasing pipeline is. Obviously, you mentioned occupancy will continue to increase in the low 90s sometime next year. But can you guys talk about just the ability to push net effective rents in that environment and strong backdrop?

Yes. Why don't I start, Glen, jump in here. If you look at the current environment in the marketplace, whether it's Park Avenue, Sixth Avenue, et cetera, vacancy rates are generally under 10% for Class A buildings, probably Park Avenue under 5. In general, citywide in Midtown and the West side, very tight. And I think in terms of large blocks of space, I think there's less than a handful of a couple of hundred thousand feet or larger, PENN 2 being one of those, and I think widely viewed as the best of those. So Steve talked about we're in a landlords market, and we certainly feel that. I think tenants feel that. There's a strong demand in the marketplace. You have a number of tenants that are focused on expiries in 3 years out. They're worried about whether they're going to be able to either consolidate in a single location, have enough expansion space, et cetera. So the dynamics have shifted. And we are, I would say, on a weekly basis, evaluating our space and trying to determine how much we can push rents, and we're going to continue to push rents, I think, across the board. We've done it aggressively on Park. We're doing it in other buildings in Midtown, and we're doing in PENN. I think what you're hearing and what you're seeing in terms of the stat is they continued movement to push up rents there, where I think we started at PENN 1 in the mid $80s, maybe $90 and now we're achieving rents north of $100. We're going to continue to push those same on PENN 2. So we're pretty optimistic in terms of what's going to happen to rental growth just given the lack of quality space available and the demand side we're seeing. So I think we have the potential to see growth rates we haven't seen in quite some time, and we're going to push. We're going to find the resistance level as we move out here.

That's helpful. And then I guess one last one for me. Are you guys able to talk about the A note and B note investments you guys did?

It's on a site in Midtown. It's a note that we've legged into in 2 phases. It's a high-quality site, and it can go either way, where on one hand, we might just collect the coupon and earn a reasonable return. Relatively, we could earn in cash. And alternatively, it could be an opportunity to own the asset and capitalizing the opportunity there. So it could go either way, but we just view it as it's a high- quality asset. We're happy if we earn the return and may leverage into a broader opportunity, and that's as much as we can say right now.

And your next question comes from Seth Bergey with Citi.

I think on the last call, you spoke to kind of hitting the 80% target for PENN 2 by year-end. I guess, just given the recent leasing activity, and it sounds like [indiscernible] $1.4 billion development pipeline is kind of on leases out on PENN 2. Do you think you could kind of exceed that target?

I doubt it.

Executive VP of Office Leasing & Co-Head of Real Estate Hi, it's Glen.

Glen, I said I doubt it. The question is, can we exceed any percent? And I'm saying I doubt it. Go ahead, Glen.

Executive VP of Office Leasing & Co-Head of Real Estate I mean look, we're feeling very good about where we are at PENN 2. We'll feel we'll get there. I will say we're being patient. We're being smart. I might even say we're being a little choosy in terms of our credit profile, our tenant mix, and we do keep looking at our pricing and increasing it. So we're not rushing just the lease space. That's not what we do. So while we think we'll get there, we're being careful and smart about our strategy. We're in it for the long term, not for the short-term statistics.

Well said, Glen.

And your next question comes from Alexander Goldfarb with Piper Sandler.

And congrats to you guys on the Verizon deal. So that was nice to say. Glen, you partially answered my question on the leasing ex NYU. It sounds like you guys are choosier on the types of deals that you're doing, especially in this market. But what stood out in the quarter is ex NYU, the average lease term was just 6.8 years, which given CBD leasing would expect that longer. So can you just give us a little bit more color? Clearly, you're on for big whale of deals, but on the smaller deals, can you just give a context of the types of tenants and space and tenure. Because again, we would expect deals to be longer than averaging 6.8 years?

Executive VP of Office Leasing & Co-Head of Real Estate Yes, of course, Alex. So I look at it -- for the full year, the half year thus far, our average is 12 years on 1.1 million feet of leasing outside of NYU, of course. For the quarter, it's an outlier this quarter. It was a mix of large renewals that were less than 10 years with a lot of prebuilt deals at PENN 1 and other buildings that are multi-tenant like the Fuller Building and others. So it was an odd mix of leasing this quarter. I certainly would not say there will be a trend of this type of average lease term, particularly, you know us and you know our averages are normally at least 10 years. It's an outlier and I'm not concerned at all.

Okay. The second question is Steve. I appreciate your comments on the cash balance for Vornado. But when we look at Alexander's, it seems to be the inverse in the sense of the dividend over payment, the cash needs for the Bloomberg in 2029 replacing Home Depot. So can you just help us understand the dividend over payment relative to the cash balance relative to how we should think about Alexander's on a go-forward basis?

This is a Vornado call. I think it's inappropriate to get into Alexander's. We had this conversation last quarter, as I remember, there are things going on at Alexander's that you don't know about. And as a result of that, I quibble with your analysis. Alexander's is going to be just fine.

Okay. I appreciate that, Steve.

Just to clarify just a little bit more. I mean there are some assets that are going to be sold at Alexander's, which will, how do I say it, probably surprised you greatly. And It's not the biggest.

I like surprises. So I appreciate your time, Steve.

And your next question comes from Jana Galan with Bank of America.

Maybe just following up on the retail leasing environment. Can you talk a little bit more about the timing around the vision for the 34th Street quarter and then the potential timing of backfilling the Forever 21 space?

Thanks. This is a long-term activity. We have held that space off -- well, first of all, let's talk about the quality of the real estate. 34th Street over the years has been one of the top 2 or 3 shopping streets in Manhattan. The subway stations are the second busiest and the third busiest in the entire system. The footfall is amazing. The traffic is getting -- accelerating now with all of the office buildings that have been built in the district. And when you look at the transportation system, the transportation system really is at Seventh Avenue and 33rd Street and Sixth Avenue and 33rd Street. So all of the buildings to the West, the people in order to get into the transportation system basically come East into our neighborhood. So we're very enthusiastic about the quality of the retail. The Street has gotten, there I say, shabby. We had held lots of space, maybe even all the space off the market waiting for the right timing. The timing is now. So what I said was that we're going to take -- it looks like it's 700 front feet. 700 front feet is basically 3.5 blocks. Nobody has that kind of concentration under one ownership. So we're very excited about the opportunity. With respect to when the Forever 21 space gets released, it may be reconfigured, and I really can't predict what the timing is going to be. It will undoubtedly be a different building, and it will take some time and be patient with us. But what's going to happen is going to be a great result.

Great, Steve. A question for Michael. Thank you for the comments on the comparable FFO for this year versus last. But can you help us think about kind of the revenue ramp at the end of the year. Just trying to help us kind of think about the full impact of PENN 1 and PENN 2 being in 2027, but kind of how will that trend quarter-to-quarter?

It sounds like you're asking for guidance, Jana, which we don't give. I think it will build over those quarters, but it's going to be -- as we think about both PENN 1 and Penn 2, it's going to be more back ended there. But I don't think -- and start going little more towards fourth quarter this year and into next year. But I think most of it is going to happen in 2027 from a run rate standpoint. So I don't want to give you a '26 prediction here today. We haven't done our budgets yet. Obviously, the market's moving positively. We'll see where we end up. But I think most of that will hit -- can be a pretty steep growth from '26 to '27.

And your next question comes from Vikram Malhotra with Mizuho.

Michael, I guess I wanted to just get some more color on that last few comments. So you obviously talked about the '27 growth. We're not looking for a number for '26, but just -- are there any big moving pieces we should be aware of as we model this out, like anything that is really, I guess, depressed '26? Or is it just a step function change as we go into it from '26 to '27?

I think it's largely just step function. I don't think it's anything unusual. I mean, look, we have space releasing up really across the board, both in New York, some space in California, Chicago. We've got activity on the retail area that will kick in as well. So I think generally across the board, nothing unusual, but largely, as I said, just given timing of when we signed those leases, step-in heavily in '27.

Okay. So no big move outs or like interest expense, I guess, any swaps or anything expiring that like pressure '26 relative to '25 before we get a step-up in '27?

No, I mean, look, it's -- in terms of move-up, I mean we're in the leasing business, right? And there's going to be a certain amount of tenants that move out, certain amount you keep, certain amount that grow, certain contract. I think we're more in the grow than contract right now. But currently, there's always some level of move-out. So in New York office, you're going to have, we'll just have to see what sort of comes about over the course of the next year. I will say on the interest expense side, and I think you talked about this on the last quarter. I think we're generally on the downhill trajectory on that. We had been fairly well hedged. We're now, a, between delevering the balance sheet. I think we're generally rolling over assets, I would say, flat in terms of interest, maybe a little bit down, a little bit up, but generally flat, but with less debt. The interest expense is coming down. So -- and if short-term rates come down, that will help a little bit more. So I think we're on the backside on the interest front.

Think about -- hang on for a minute. Think about it from the big picture point of view. We operate our business -- 90% of our business in the single best market in the country by far. We are in the best building category, which is a smaller market than the entirety. It's 180 million square foot market. The vacancies in that market, our customers are expanding. Our customers are doing well. The demand for space is robust, aggressive in the market that we serve. Vacancies are evaporating. The markets are getting tighter. So that all augurs through a better business and shareholder value creation. So that's where we are.

Okay. I just wanted to clarify. So I guess, Steve, you mentioned San Francisco likely to come back very, very -- I guess, I don't know if it was a word ferocious and then obviously, New York doing very well. I'm just wondering, like does this create an opportunity for Vornado to use some capital to buy assets, invest in debt? I know you're paying down debt, but just like what are the investment opportunities today for Vornado?

The answer is capital allocation is probably the single most important thing that we have to do, and we are going to be very rigorous and very disciplined in what we do. We look at everything that comes up and we invest cautiously, and we invest aggressively when we think there's something that creates real shareholder value. So I don't have anything in the way of predictions for you other than the fact that we are very responsible in our capital allocation.

Your next question comes from Caitlin Burrows with Goldman Sachs.

Earlier, somebody asked about net effective rents, and you talked about pushing rents across New York City. I guess, on the tenant improvement and leasing commission side, you show it as a percent of initial rent, and it's up in New York City for the second -- sorry, for 2Q and the first half to like 12% to 13% of initial rent. So I was wondering, would you say that 2025 outcome as a result of something in particular? Or is that just the reality of leasing today? And what will it take for that to change?

I don't know that the -- yes, go ahead, Glen.

Executive VP of Office Leasing & Co-Head of Real Estate I was just going to say, look, the TI's have stabilized -- haven't come down yet, but we are seeing free rent come down, which is not in that percentage. But we expect as things tighten that the TIs will eventually come down, but free rent certainly is starting to come down in our deal making with rents rising. So I think that's a great start to the net effect of story strengthening for owners like us for sure.

Got it. Okay. And then I was wondering if you could just give any update on your dividend thoughts as it relates either to 2025 or just broadly in having a quarterly dividend reinstated?

Caitlin, so on the dividend front, obviously, that's a Board decision. And we'll meet with the Board, discuss it with the Board as we get at year-end. I would say a couple of things, though. Given the positive trends in the business, and where taxable income is expected to be, and there's still things that could move it around in a number of different ways, including some -- you've seen us sell a couple of small assets, et cetera. But I would say, as we get towards year-end, our expectation given the trends are, at a minimum, we think we'll pay as much as we paid last year, which was $0.74 a share. So that's for 2025. And again, we'll get with the Board at year-end. I think as we look out, and I think Steve made this comment maybe a couple of quarters ago as the environment heals, we'll look towards more of a regular dividend. I think that's something we'll also look hard at a year-end and get back to a more normalized quarterly dividend. Whether that results in any different outcome in terms of a total, I can't comment on that. But I think certainly, as we enter this year, no less than last year to the expectation. And again, given the positive trends, we think that the dividend will start growing over time, particularly as we get into that 2027, a significant increase in earnings.

Your next question comes from Ronald Kamdem with Morgan Stanley.

I just got 2 quick ones. Just on the -- going back to the same-store NOI and some of the callouts, just wondering if any high-level thoughts as you sort of anniversary this period in '26 or '27. Just any sort of color on where that same-store could look like or how we should think about it without asking for guidance?

I think that -- in NOI, you have a lot going on because, obviously, 770 comes out in there now. We obviously paid off the debt, too. But look, I think as we get to particularly next year, we'll start seeing positive same-store NOI and beyond. I can't give you the percentages yet. But again, just given the leasing pipeline, we expect that, that will be the case.

Makes sense. And then my second question, just some updated thoughts. I mean, I think the Hotel PENN Land site, some of the activity on sort of Fifth Avenue and retail monetization. Just curious if you can give us a pulse on those assets and how you're thinking through about potential monetization there or what you're hearing?

The PENN 15 site is, I believe, the single best site in the West New York market. Obviously, it will require a new build. A new build now is, as I've said in my prepared remarks, the escalation and cost of the new builds is fairly dramatic. So we will -- we're trolling to our tenants. We see every large requirement that comes along. And when the right tenant comes along, we will make a deal and develop the land. The timing on that is uncertain, but it certainly will not be imminent or quick.

Our next question comes from Brendan Lynch with Barclays.

As you guys mentioned, the San Francisco showing broad improvement in demand. Can you give us an update on the progress for renewing or re-leasing some of the upcoming expirations at 555 California?

Glen, do you want to take that?

Executive VP of Office Leasing & Co-Head of Real Estate So I was just in San Francisco a few days ago. Things are markedly improved. The streets feel good, safer, cleaner, buildings are busier. And the good news is leasing is starting to pick up and improve. It feels a lot like New York, I'd say, probably 18 months ago or so where things are starting to happen in a positive way. The beat is better. The brokers are smiling a little bit all of a sudden. So it all feels good. We've just completed a huge run of leasing there about 600,000 feet. We have some vacancy to contend with right now, 100,000 feet bits in parts. And we have a couple of tenants moving on next year. We have action on everything. Our tour volume is great, almost daily in the building. Everyone is coming through and the building continues to outperform everybody by a long shot. The best tenants with the highest rents are all coming to 555. We feel great about our prospects. But overall, the market seems to be coming on now. The Mayor has done an excellent job improving the environment, working well with landlords like us and with our tenant base. So we feel like things are signaling to improvement and strength.

Great. That's helpful. And maybe more broadly on the demand picture. Our checks with brokers have suggested that a lot of the demand that they've seen in recent quarters has reflected real-time needs and urgency among tenants versus more traditional longer- term capacity planning needs that would have been more of a characteristic of the past cycles. Have you seen any shift in recent quarters and how the tenant base is approaching their need for space in terms of real-time needs versus longer-term planning?

Glen, that's yours.

Executive VP of Office Leasing & Co-Head of Real Estate So Verizon is a perfect example. It's a deal that started percolating to us in mid-June and closed at the end of July. That's fast. We love that. Tenant decided to move their headquarters, acted quickly, concisely, perfectly and smoothly. So that's something we see. We have other activity at PENN 2, PENN 1 and elsewhere in the portfolio similar, where tenants are now coming quickly. It's not as much of our lease expires in 2 years or 3 years or 4 years. It's the action that we like, a landlords market type of action. And a lot of it is both relocation and expansion. There's a lot of expansion, particularly in New York right now, where we're seeing signs of growth and people are acting very quickly. And even in some cases, we have tenants now battling for space throughout the portfolio. So I think your comment is on queue in terms of what we're seeing.

And your next question is a follow-up from Alexander Goldfarb with Piper Sandler.

Glen and Steve, I just want to go back. Steve, you mentioned $100 in place. I think it was in place in PENN that could go to $150. If you guys get the same rents as your neighbors to the west. But I thought the new deals that you were signing were in sort of the $120, $130 range. I thought that's where the new deals are commanding. So maybe I'm wrong, but maybe you can just provide a little perspective versus what are in-place rents at the PENN 1, PENN 2 versus where you guys are signing rents. As I said, I thought your signed rents had been moving up steadily?

Glen, do you want to handle that for a minute?

Executive VP of Office Leasing & Co-Head of Real Estate Certainly, we're moving steadily up. As Michael said, we were in the $80s and the $90s, now in the $100. That's on average. We, of course, have seen deals well into the $100s, the $110s, the $120s, the $130s. So we are certainly seeing month-to-month improvement in rising rates. We expect that to continue. So our average rents have risen quarter-to-quarter. And then we're seeing deals well into the $100s now. You're correct, Alex.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Steve Roth for any closing remarks.

Thank you for joining us today, everybody. And we continue to be very excited about a lot of things. We're very excited about PENN obviously. We're very, very proud of what we've done with our balance sheet over the last couple of quarters and business is actually pretty terrific. We'll see you next quarter. Thank you.