Vornado Realty Trust

NYSE:VNO

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and welcome to the Vornado Realty Trust Third Quarter 2024 Earnings Call. [Operator Instructions]. Please note, this event is being recorded.

I would now like to turn the over to Stephen Borenstein, Senior Vice President and Corporate Counsel. Please go ahead.

[Steven Borenstein, executive]

Welcome to Vornado Realty Trust third quarter earnings call. Yesterday afternoon, we issued our third quarter earnings release and filed our quarterly report on 10-Q with the Securities and Exchange Commission. These documents as well as our supplemental financial information packages 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 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, 2023, for more information regarding these risks and uncertainties.

The call may include time-sensitive information 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 remarks 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.

[Steven Roth, executive]

Thank you, Steve, and good morning, everyone. Today is Election Day in America and extra importance since this is a once and 4-year presidential election. Today is arguably the single most important day in the calendar of democracy. Early voting participation seems to indicate that this year's turnout will be record, and that's -- great.

And I've said now to the business. I've been saying in the past few quarters that the office looking market in Manhattan is at the foothills of recovery, and I think that's becoming more and more apparent. While Manhattan has over 400 million square feet of water space, we competed a much smaller, safe 180 million square foot market of the Class A better buildings, where demand is strong and vacancies are rapidly evaporated.

Looking at Park Avenue and Sixth Avenue now with 7% to 9% Class A vacancy, which is the very definition of a landlord's market. And the -- on the cake is that there is no sign of the additional supply on the horizon. There hasn't been a major new office start in 5 years because of the building and the cost of capital make it totally uneconomic to build. History is a guide, no new supply, always we get the land market. As Michael and Glen will comment in a moment, our rents are going up. I'm extremely optimistic and the stock market seems to be great.

Year-to-date, we have leased 2.5 million square feet of -- 2.5 million square feet company-wide, including 2.1 million square feet in Manhattan. As Michael and Glen will cover activity is robust, and I am confident that we will sign between 3.5 million and 3.8 million square feet -- leases this year, which would rank #2 in our -- on the last call, we made mention of the deal 770 Broadway. I'm pleased to report we have agreed to a transaction with NYU for 770 Broadway. And while you would master lease the higher 1.1 million square office component, which excludes the -- lines with an option purchase in the 30th year and the second lease year.

Master Lease will provide for an upfront payment of prepaid rent sufficient to pay off our $700 million loan on the property as well as an annual rent over the lease term. Both parties have signed a detailed letter of intent and expect to execute final binding figures shortly. I expect the closing and rent commencement would occur in January. We are delighted to expand our relationship with NYU.

Our liquidity is a strong $2.6 billion, with $1 billion of cash on balance sheet. Our bill is shortly be augmented by over $1 billion from the unit close sale, NYU prepaid rent and the redemption for cash of over $500 million of our street retail preferred from proceeds of -- in-process 1535 Broadway financing. Note that between unit close and 1535, we will have redeemed about half of the preferred. We will pay our $450 million January '25 bonds in January. We have well enough cash on balance sheet to complete our lead program for PENN1 and PENN2. And remember, we have no debt on Farley, PENN1 and PENN2.

Regarding our 350 Park Avenue site, arguably the very best site on Park Avenue. We are well along with the normal Forster architectural firm and completing the design of [ 0.8 ] million square foot tower. And we will build with Citadel, who will be our major tenant and with Ken Griffin as our 60% profit. At PENN15, the former Hotel Penn site, at 33rd Street at [ 7th Avenue ] directly across the PENN2 is now down to grade and ready for development. I believe this site in the [ Hoboken ] Penn District and directly connected to best station. It's the single best right available in booming website and Manhattan.

We own 1 asset in San Francisco, roughly 1.5 million square foot 555 California Street. In the city of tech buildings, which are struggling with city-wide vacancy at 36% and declining rents. This dominant financial services building. Its format is quite remarkable. This year, we released 443,000 square feet at average starting rents of $110. Occupancy in the tower 98.7%, and we haven't lost a single large tenant in all of the of -- vision.

We have a history of owning the very best retail sites, with Fifth Avenue in Times Square and bringing exciting retailers down REIT H&M. We announced this quarter an important deal to 345 Montgomery in Penn District on 34th Street. This will be their flagship store in America.

At -- the Federal Reserve who seems to a down inflation and engineered a soft landing. Having said that, the now borrowing rates remain stubbornly high and not accretive to real estate values. And capital to refinance maturing loans are overlevered asset is simply not available other than from the incumbent lender. But through it all, the con is growing and our occupiers are expanding, and that's a very good thing.

731 Lexington Avenue, Bloomberg Headquarters Tower, is owned by Alexander Inc., of which [ Renee's ] external manager and 1/3 owner. In the first quarter, we extended the Bloomberg [ detroit ] in the third quarter, we financed the maturing loan on the Bloomberg H2 building. And has paid the loan down by $100 million to $400 million from cash on its balance sheet. The low LTV $200 million loan was rated all AAAs, enabling us to achieve a 5% interest rate by far the lowest we have heard of in this cycle. The AAA rating, together with the quality of the credit and the quality of the building, led to the offering being 8x oversubscribed. This refinancing will save us $17 million a year.

We are open to buy in the acquisitions market with very selective on the hunt for good assets at distressed prices. No business as usual here. In the cycle, lenders seem to be working out that troubled overleveraged problems with their existing borrowers with few high-quality distressed assets coming to market. Having said that, this quarter, we did acquire a $50 million loan in the fall, very interesting midtown site. We will keep on it.

While our business is substantially better and improving, we tend to be rigorous with cash management. We will likely pay approximately the same dividend last year, $0.68. In a single [ than ] paid in December. We expect to carry over to next year the same dividend policy of a single dividend payable at year-end. This has been understood and endorsed by our main shareholders. I expect as conditions normalize, so will our dividend.

Lastly, if you are an individual investor, you must tour our Penn District, and I do mean must, and I do mean tour, not just drive by. If you last visited 6 months ago, you must visit [ a get ], it's changed that much that quickly. The building architecture of PENN1 and PENN2 into the size, extent and quality of the amenities and the plazas and public spaces have all received universal claim from common data brokers and occupiers. This was a team effort led by our senior leaders, Glen Weiss, Barry Langer, who deserved the [ gold awards ]. We are on budget here at achieving higher rents than projected, and so we will expect the returns shown on our financial statement to a group.

Now over to Michael to cover our financials in the market.

[Michael Franco, executive]

Thank you, Steve, and good morning, everyone. As expected, the financial results for the quarter were down last year due to items that we previously forecasted. Third quarter comparable FFO as adjusted was $0.52 per share compared to $0.66 per share for last year's third quarter. This speaks primarily attributable to lower NOI from known move-outs largely at 770 Broadway, 1290 Avenue of the Americas and 280 Park Avenue and higher net interest expense, both of which we have previously discussed. We have provided a quarter-to-quarter bridge in our earnings release and in our financial supplement. Our outlook for comparable FFO for 2024 hasn't changed in the past couple of quarters. That being said, with the pending lease at 770 Broadway, we already have approximately 75% of the aforementioned vacant space from the move-out spoken.

Now turning to leasing. The tide has clearly shifted in the New York Class A office market. Leasing activity is strong and gaining momentum, and availabilities are declining, particularly for large blocks of space. Manhattan's leasing volume during the first 3 quarters of 2024 totaled 23.1 million square feet, and it looks like full year activity will surpass 30 million square feet for the first time in 5 years.

Strong demand for Class A space near transit, coped with limited quality blocks of space is resulting in rents rising and concessions beginning to tick down. For Midtown vacancy for the building as defined by CBRE is down to around 10%, with Park Avenue around 7% and Sixth Avenue at 9%. The headquarter deals are also back with more mega transactions greater than 700,000 square feet signed this year than any year since 2019. During the third quarter, 10 leases of 100,000 square feet of [ Grand Central ], with little availability in the new Trophy product, tenants have been keenly focused on what remains available in recently redeveloped buildings, which have undergone extent transformations. PENN2 is perfectly positioned to this large tenant demand.

Turning now to our portfolio. In the third quarter, we leased approximately 740,000 square feet of office space across our 3 [ partners ]. In our New York business, we have now leased more than 2 million square feet in 68 transactions during the first 9 months -- of 2024 average starting line of $112 per square foot.

And during the third quarter in our New York office book, we completed 454,000 square feet of leasing across 18 transactions at starting rents of $2 per square foot. We closed on a 27,000 square foot renewal with Google at 85 Tenth Avenue, solidifying this property as one of Midtown South Bank -- and an important piece of Google Meatpacking District campus and reaffirm the long-term commitments in New York.

We have a unique window in the tech sector activity given our leading position as landlords to the big 4 technology companies in New York as well as many others. And as we indicated on our last call, sector demand is coming back strong in New York and more in the works in our portfolio, particularly in Penn.

At PENN1, we leased 70,000 square feet at an average starting rent of $119 per square foot, led by our 55,000 square foot new headquarters leased with Roivant Sciences. These are historic rents for this building and district and validate our original redevelopment thesis. As we commenced the transformation of PENN1, we have now completed more than 1 million feet of leasing at [ $92 ] per square foot, with a significant mark-to-market increase. We are well on our way to achieving our original aspiration as the Penn District campus continues to attract new tenants from across the city at ever bring -- recent rents. Our market lead amenity-rich offerings coupled with our complete transformation of the entire neighborhood has put our properties in the leasing bulls eye for tenants seeking a quality space.

Our reported New York office cash mark-to-market for the quarter were negative 7%. But that's not the real story. This is because several of the leases signed at PENN1 during the quarter, but for a space that has been baked for more than 9 months and therefore, not considered both second-generation relet space, used to calculate our reported mark-to-market statistics. Additionally, the quarter included a 297,000 square foot lease, 148,000 feet of share, where we exchanged improvement allowance for a reduction in rent.

As indicated on Page 17 of our financial supplement, if you were to include these leasing transactions and our cash mark-to-market statistics, the negative 7% would be a positive 17.9%. Including the lease at 770 Broadway, which Steve mentioned, our New York pipeline is robust and consists of 2.8 million square feet of leases in various stages of negotiation. This includes multiple tenant headquarter deals at our transformed PENN2. We currently finish 2024 with almost 3.8 million square feet leased across our portfolio, which would be our highest volume since 2014 and then our highest average starting rents ever.

Our current office occupancy is [ $0.875 ] down from 89.3% last quarter primarily due to the previously announced Medline expiration at 770 Broadway. The easiest money we can make is filling up our occupancies. As occupancy rises, our earnings go up. With pending full building master lease at 770, our office occupancy increases by 30 basis points to 90.8%. Depending on the timing of maturities of these transactions, our office occupancy will likely decrease in first quarter 2025 as the vacant space at PENN2 is placed into service. We anticipate this decrease will be temporary, and as PENN2 stabilizes, we get to the [ 90 grades ].

Turning to San Francisco at 555 California, we closed a 46,000 square foot renewal expansion deal with Wells Fargo during the quarter, and we currently have renewals out for another 283,000 square feet. Our leasing program at 555 is by far outpacing the entire market as leading financial services companies can be attracted to the property's premier quality into our new 555 work life amenity program similar to what we have done in New York. While tenant concessions are up here, too, every one of our renewal room has been positive mark-to-market or flat in an otherwise weak San Francisco office, demonstrating the unique cash -- this trophy property.

At the Mart in Chicago, we closed on 15 leases during the quarter, totaling 239,000 square feet headlined by an important expansion and renewal of Medline, a worldwide leader in the health care industry for 161,000 square feet. Medline's enormous growth in Chicago is particularly noteworthy and the transaction is a major right spot for both us and the overall market. The mark continues to outperform the market and attract top-tier tenants, driven by our strong debt-free sponsorship and recent amenity additions, which have reaffirmed its leading position in the marketplace.

Turning to the capital markets now. While the financing markets remain changing for office, we are beginning to see some encouraging signs. While banks remain out of the market, the CMBS market has reopened for Class A city office buildings as evidenced by our recent $400 million financing on 731 Lexington office at 5.04%. The lowest rate achieved for CMBS office financing post-COVID and the $3.5 billion financing for [ Ross ] Center and $750 million financing for 277 Park Avenue. And there are several billion dollars more in the pipeline. These financings show investors are once again constructive on office and assets can get financed in size, albeit on conservative metrics and loan structures.

With short dates finally coming down and the SOFR-curve projected to come down significantly over the next year. Both the financing markets and borrowing rates should continue to improve, and value should follow. The investment sales market is also beginning to perk up. There have been a number of older obsolete buildings sold the residential conversion, which will take supply out of the market. And the first Class A buildings sold this cycle, 799 Broadway was recently put under contract at a [ 5% ] cap rate for $255 million or $1,400 per square foot, which is strong pricing.

Our balance sheet is in excellent condition with strong liquidity of $2.6 billion, including $1 billion of cash and cash and $1.6 billion undrawn and our $2.17 billion revolving credit facilities. We have taken care of our significant 2024 maturities and are making good progress on our 2025 maturities.

Despite the success we've had recently in 10-year loans with existing lenders, while refinancing our loans in the midst of this more challenging environment. We do still have a handful of credits that are overlevered. Most of these assets do not contribute to our FFO right now and have a little no equity value. We will maintain our discipline and unless these loans are restructured on terms that allow us to put the assets on down footing, similar to what we previously negotiated at Bay Park and St. Regis retail, we will not invest any more capital in these sells, the nonrecourse nature of these loans are -- for this option.

With that, I'll turn it over to the operator for Q&A.

[Operator]

[Operator Instructions]. Our first question comes from John Kim with BMO Capital Markets.

[John Kim, analyst]

Steve, you mentioned the leasing activity that you've done year-to-date, 2.5 million square feet. And what you anticipate for the remainder of the year, which sort of imply other $1 million to $1.3 million. Does that include the NYU lease or is that separate?

[Steven Roth, executive]

Yes, it does.

[John Kim, analyst]

Okay. Can you provide any more details on that when the lease or occupancy starts at 770 Broadway? And I know it's a structured deal with the upfront payments and the purchase option. But how does the overall rents compare to the $115 that's in place today?

[Steven Roth, executive]

Well, the upfront prepaid rent is significant. And therefore, there's a small tail of value that rent will cover. So it's substantially lower. It's not $100 a foot. But when you take into account the prepaid rent and capitalize that as a value the rent is approximately the number you have in your mind.

[John Kim, analyst]

And when does occupancy start?

[Steven Roth, executive]

Say that again?

[John Kim, analyst]

The occupancy of the building, when does that contribute to [ FFO ].

[Steven Roth, executive]

The closing will -- is expected to be in January. The rent will commence in January. The funds will transfer in January. So that's the action will be completed. The papers will be signed imminently. The closing will be in January.

[John Kim, analyst]

Great. And my second question, I know I asked multiple questions in the first time. But second question is on the March. You had increased leasing and occupancy went up. The rents have come down compared to where it was last quarter. Is that your strategy going forward is to kind of build up occupancy with reduced rents?

[Steven Roth, executive]

The key to the bar is, first of all, it's an extraordinary building. Second of all, the Chicago market is soft to very soft. The most important strategic point in the mark is now unencumbered and free and clear. So it's one of the very, very few buildings in Chicago that is well capitalized. It's the strongest financial building in the Chicago area, and that gives us an enormous amount of strategic flexibility. So we will rent in opportunistically as deals that we think are attractive come along. We are performing better than any other building in the market as the struggled market improves as it will, we will wrap up the leasing.

[Operator]

The next question comes from Steve Sakwa with Evercore ISI.

[Steve Sakwa, analyst]

Maybe just following up on John's question on just leasing. If we strip out the NYU lease, it sounds like there's a couple of hundred thousand to maybe 400,000 feet of other leasing. Can you maybe just speak to the pipeline and the activity that you're seeing at PENN2 today? Has that pipeline changed at all? And what's your confidence level of getting some leases signed in to before the end of the year?

[Glen Weiss, executive]

Steve, it's Glen. So there's actually a lot more leases out over 1 billion while you deal, 600,000, 700,000 feet of paper, we have leases in negotiation. All of which I closed during the fourth quarter, number one. Number two, as it relates to the PENN2 pipeline, it is robust with very -- many, many important transactions. We expect to go to lease 2 or 3 of those during 4Q. We are in full swing as -- less of less blocks are available in the market, particularly in this type of quality at this location with the amenity program we put together. We're now in the fifth year and more to come.

[Michael Franco, executive]

I just want to add both John's comments in your comments implied there's not that much more leasing when you add in what we've done year-to-date and why you -- I think the math you guys are doing is inaccurate, right? I think both Steve and I commented, we expect to as much as $3.8 million, which signed -- and that's in New York, right? We've signed about [ 2 to 1 ] year-to-date through 3 quarters. So if you take that NYU, as Glen said, there's another 600,000 plus in papers and the pipelines deeper beyond that. So I think you hear a level of enthusiasm and confidence from us that is sort of as high as it's been a long time given the activity we have.

[Steve Sakwa, analyst]

Maybe second question. Steve, I think test quarter after the Uniqlo sale, you mentioned you may explore some other street retail sales. Just kind of where are you on that front? And has your thinking changed at all? And has the appetite from some of the luxury retailers changed at all?

[Steven Roth, executive]

The appetite continues to be spun. We have no news to report in that regard. But I think the interesting thing is that -- and I said it in the script, that by the end of this year or into January, we will have monetized half of the $1.8 billion retail preferred at par. So if you remember back a year or so ago, analysts were predicting that the preferred was -- were substantially live on par. So the big story this quarter is the balance sheet. So we're monetizing the balance sheet. Our cash balances by more than $1 billion very shortly. We will pay off $450 million of our bonds. And we will end up, for example, the NYU deal reduces our debt by $700 million. So when you put it all together, Michael, what's the math?

[Michael Franco, executive]

I think we'll end up paying off a little over $1.1 billion of debt and increased cash on our balance sheet, north of $600 million.

[Steven Roth, executive]

So that's very substantial. So we're definitely in finding mode. With respect to selling more of the retail, which was, I think, your main question, there is activity. The retail values have been validated multiple times, and we will react opportunistically to opportunities as they come along.

[Operator]

And the next question comes from Floris Van Dijkum with Compass Point.

[Floris Gerbrand van Dijkum, analyst]

Following up on Steve's question in detail. I don't think there was a lease that was executed in the third quarter on your retail portion. Can you talk a little bit about the demand for retail? I know you talked about -- Primark coming to the Penn District. Also, what are the plans on your big Macy's stores. Is that a long-term project? Or is there anything more near term coming for that space?

[Michael Franco, executive]

Floris, I would tell you, I think you've heard this from us the last few quarters, right, the demand from retailers is up pretty significantly from the lows. We see to see good demand across the portfolio. We're hard at work. Obviously, leasing Penn, I think bringing Primark to the district is a big win. They're excited. We're excited. We're in discussions on other retailers to bring into the district, which will continue to enhance the district. So we're very pleased about that.

Times Square has seen a big pickup in activity. We had a lot of discussions going there with respect to our 1540 asset. And as we look at the pipeline, there's pretty good activity across the board. We have some vacancies, the rollover, I should say, coming up on Fifth Avenue in the next couple of years, and there's dialogue there too, but that's not as imminent. But I would say, again, interest is up, activity up, importantly, rents is firmed and retailers are doing the sales that give them confidence to transact. So these deals take a while the big commitments, particularly on the 2 main blocks or submarkets, I should say -- fifth in Times Square, but the interest level continues to be there.

[Steven Roth, executive]

I would add that the Primark deal is -- it's a big deal coming into the Penn District. It's a favorable store. It will do great business. It's a flagship. It's a big deal. The occupancy numbers that we published for retail are actually the story behind that is, I think we published that our occupancy is -- what's up?

[Unknown Executive]

It's 77%, 78%.

[Steven Roth, executive]

Okay. But that includes the more vacancies. And if you take those out, then you get to very close to 90%. So actually, we're pretty well leased in comparison -- above the market occupancies. And the way I look at it, we're really 90% leased in the retail, not 78%. So that's the way I look at the retail. As Michael said, there is strong demand in retail retailers certainly in much better shape than it was a couple of years ago.

[Michael Franco, executive]

As respect to a year ago, I believe, let me clarify. You mentioned Macy's. We don't have...

[Floris Gerbrand van Dijkum, analyst]

I meant the Manhattan Mall, of course, I apologize.

[Steven Roth, executive]

We think we hedged that out.

[Michael Franco, executive]

Thanks for it. So Steve alluded to that, the occupancy. We have continued to put tenants in that space. Right now, we actually have Netflix doing a Squid Games pop up, which I hear is quite popular, and we'll continue to do that. On that space, which is big, a bit more complex. The math doesn't work to do any new permanent today. And I think that's probably going to be the case for some time. So I wouldn't wait up sit with night assuming that's going to get done in the next few months. That's going to be -- we're thinking through some broader plans there, and that's a little bit more atypical space.

[Floris Gerbrand van Dijkum, analyst]

Great. Maybe a follow-up question. Your stock is trading an implied cap rate of around 6%. How do you think about raising equity and what needs to happen for you to be willing to do that at this point? Particularly as you think about your potential investment opportunities out there well?

[Steven Roth, executive]

That's a fascinating question. First of all, we are very well capitalized. I think I said 3 or 4 minutes ago that we're bringing $1 billion of new cash in or paying down our debt. Our balance sheet is extremely strong, and we have all of the firepower that we think we need for the foreseeable future. Our capital requirements complete our lease-up in PENN1 and PENN2 and across the board are already in cash on our balance sheet without doing any more financing. We have the lion's share of our assets in PENN1 and PENN2 and Farley, where we have met are all unfinanced. So we're extremely liquid and will [indiscernible].

The cap rate that you mentioned is interesting. But when I do the math, I look at what the business looks like when we leasing, and we get back to the 96%, 97% occupancy that we have traditionally had. We will get there for sure. They take a year, may take 2 years. So I look at the business with all of that income coming in. And if you look at that, we really don't need any -- we really don't need any equity. So for the moment, we have no plans of issuing equity. We are being pounded by banks who wanted right of ticket and sell stock for us, but we're really not something that we think is strategically and won't wait for the moment. If opportunities present themselves, which are super accretive and not dilutive to our current shareholders, we will sit on that. But we're not in the business of diluting our shareholders.

[Operator]

And the next question comes from Dylan Burzinski with Green Street Capital.

[Dylan Burzinski, analyst]

And I appreciate your comments on after the 1535 transaction closes on monetizing half of the preferred equity in retail JV. But just are there any other transactions? Or should we expect you guys to monetize the remaining half of that preferred equity position over the near term? Or do you guys feel like most of the sort of the low-hanging fruit there is passed after this most recent announcement?

[Steven Roth, executive]

Well, we're actually very pleased with the first half of monetizing that preferred at par. We have no current plans to attack the second half that's opportunistically, and we'll see how things go. As I said pretty extensively a moment ago, we are in a very strong capital position. And we feel that we have been equity, although we have the opportunity to raise more equity if we wanted it or need it, but we don't think at the moment we want it or do we think we need it. So the preferred is -- the other half of the preferred is something that we're very happy holding. As the markets turn the income coming in on that preferred now exceeds the rate of interest that we could earn on short-term debt. So we're pretty okay with it.

[Dylan Burzinski, analyst]

And then just maybe one more, if I can. On the B note acquisition, the $50 million, I mean, curious, can you kind of talk about your guys' plans there? And I know the note is currently in default along with the A note at the property. I mean, is there a plan to sort of go after this? And if so, can you kind of just talk about it a little bit more?

[Steven Roth, executive]

I wish I could, but it's really not appropriate. So first of all, it's a very small investment. Second of all, it is interesting, and you'll all learn more about that in the next quarters. It has multiple different alternative ways that this thing go. It will possibly result, maybe even likely result in litigation, and it's just -- it's a very interesting thing, a very interesting site, and it's really not appropriate to talk about it at this call.

[Operator]

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

[Alexander Goldfarb, analyst]

And Steve, as one of those analysts was questioning on the preferred, good to hear that you've made progress paying it off at par. So kudos to you and the team. 2 questions. First, just following up on the preferred -- sorry, on the B note purchase. Given it's potentially litigation was in default, can you provide any perspective on buying it at par versus discount, it would seem based on what you've described that it should be a position that would trade at a discount. But clearly, there's a rationale. So maybe you could just help us understand to what you can discuss?

[Steven Roth, executive]

Well, thank you for the compliment, Alex. That's a very nice. Thank you. We appreciate it. With respect to the B note. I'm really not going to say any more than we have. Obviously, I'm a famously difficult buyer. And we paid par because we thought it was -- we were getting value and we were getting a position in the asset. So other than that, I don't have anything to add.

[Alexander Goldfarb, analyst]

Okay. The second question is, Steve, based on how you described 555 California, and you and others have described Park Avenue. It seems like the internal office submarkets have been the leaders coming out of the pandemic and remain very strong. Just curious, years ago, you talked about Manhattan tilting to the south and to the west. And yet right now, everyone is blocking back to assets like 555 for Park Avenue. Can you just discuss if you think that perhaps going forward, future VNO investment is going to focus more on the traditional submarkets and less on the new frontiers or you think that this is just for the mean time. And as the cycle recovers, those new frontier markets will once again have their place.

[Steven Roth, executive]

Alex, I wouldn't call the west side of Manhattan when you take Hudson Yards and Manhattan West and the Penn District, that's a new frontier. That's now become a very established neighborhood. The demand from blue chip, double blue chip, triple glue chip who's established and validated. And so I think the way I look at Manhattan is the traditional Midtown market and then there's the newer there I say, better West Side market, which is actually booming. So I think we don't really own a lot of stuff in the middle. But I think I have no problem with the west side. I think the west side is great. If you're calling that new frontier. I don't think it's new frontier. I think it's very established by now.

[Alexander Goldfarb, analyst]

Right thinking more like meatpacking, Chelsea, that area?

[Michael Franco, executive]

Alex, I think one of the dynamics that has happened in the last 3, 4 months, actually, is that the market's broadened back out again. So Park Avenue is Park Avenue achieving historically higher rents, which is fantastic. We benefit from that, and we're excited about what's to come there with 350 Park. But if you look at our pipeline, it's broad. I think it's broadened out actually quite meaningfully. There's been a real uptick there. And I think that's what you're seeing broad-based strength in the market. So I think that's an encouraging sign for the marketplace. We have activity across all of our assets. And so Meatpacking Chelsea, all those assets, not top-grade assets are seeing activity. So Google just reviewed at 85 Tenth. So I don't think I would call those submarkets dead by any stretch of the imagination. I think they're stronger than they've been in a while.

[Steven Roth, executive]

Those markets really are smaller buildings, smaller tenant markets. But for example, we own buildings -- we own a couple of buildings in the Chelsea market. The rents are $150 a foot. The rents are higher there than they are at Park Avenue. So New York is, as Michael said, broadening out, tenants want to go into various submarkets and they're all pretty good.

[Operator]

And the next question comes from Jeff Spector with Bank of America.

[Jeffrey Spector, analyst]

Congratulations on the quarter. just listening to the call, you've discussed -- you've laid out a lot of drivers of growth. And I'm just thinking about 2025. I know you have a deep team. I mean where are the priorities for 2025? And where do you see best time spent for opportunities?

[Steven Roth, executive]

Michael, do you want to take a shot at that?

[Michael Franco, executive]

Good morning, Jeff, and good to have you back on the front lines with us. So in terms of priorities, I think the #1 priority continues to be, like we've invested significant capital in Penn. I don't know if you've been there initially, but it is transformed. It looks phenomenal. And now it's a leasing game.

And you heard in the opening remarks, you heard Glen talk about the equity being significant there. We just have to execute, right? We have to lease up PENN2. We have to continue to turn over PENN1. And if we do that, I'm confident we will, you're going to see significant growth coming out of Penn. And I think you're going to see us continue to push rents up there. So that is the easiest earnings growth we can generate, we're going to.

Second is filling our vacancies elsewhere, which we're in the process of doing piece by piece, we have good activity across Manhattan. We have the Mart as Glen talked about, is a little more challenging market-wise, but the team is working hard there. And I think what we've done in 555 with points in process on is really, I think, breathtaking, honestly, if you focus on the stats.

So Penn is going to balance the vacancies. It's continued to manage our balance sheet effectively. I think we've done a very good job of working through our maturity over the last 2, 3 years, including some of our challenging situations. We need to continue doing that. And then we've got a whole host of opportunities that are internal that we've got the seeds plan and we have to take the next step on -- 350 Park, whether that's other opportunities in Penn. We have a few assets internally that beyond that, that are potentially repurpose or redeveloped assets that we are working on right now in terms of economics and when may be the right time there.

And then lastly is we're controlling the market for external opportunities. And I think one of the disappointing things has been that there have been low-quality office opportunities, and most of those are getting repurposed to other uses, but there really have been very little in the way of high-quality distressed office assets. So we continue to control -- there will be some, but I don't think it's going to be a flood gates. And so we would like to be active at doing things on that front. But we have a lot internally that we can execute on that will grow the value of this company significantly over the next several years. Some are going to take longer to realize, given their development opportunities, but we think they're pretty unique.

[Steven Roth, executive]

I think you can say -- and I'm happy to say that our single focus is in creating value, being financially disciplined and getting our stock price up to where we think the value is and where it should be. In order to do that, we need to keep leasing. We need to keep improving our balance sheet and need to focus on calling out assets that we don't want, tenant -- cash and continue to work on the assets, the very significant and great asset pool that we have in creating more value out of that fixing asset pool. Hopefully, we'll find external opportunities but we have enough internal so that we can be very busy and create very significant increased values. But actually, I'm all about the stock price.

[Jeffrey Spector, analyst]

Very helpful. And my second question, can you expand on your initial comments, Dave, you mentioned it's a landlords market. I understand that technically, you're right, between demand supply in your market, it's a fair comment, I guess, from a New York City office market standpoint, when we -- brokers or others, right? We think about tenant allowances in free rent and more equilibrium there, more equilibrium in the market where, let's say, for the landlord, you'd be contributing less tenant allowances free rent. I mean, how do you think about that? And can you maybe just expand on that comment a little bit?

[Steven Roth, executive]

A good model is the retail industry over the last 5 or 6 or 7 years. So if you go back 5 or 6 years ago, Retail was toxic. Full retailers was toxic, whether it was malls or Fifth Avenue or the streets of any city, the feeling in the marketplace was that the Internet shopping was -- demolish all physical brick-and-mortar shopping and the stocks got crushed. The value got the attitude of about retail was, I mean, just toxic.

The office industry has gone through very much the same thing over the last 3 or 4 years. COVID, work from home. Nobody is going to ever get out of there. Kitchen, get off the kitchen table of the company office. Well, all of that turns out to -- it's all passing and passing very aggressively.

So there's 2 things or 3 things going on. Number one, it's been established now that people are coming back to work and people want to come back to work and people want to be in the big cities. The second thing is that the environment has basically shut down new supply. It's totally uneconomic. The cost of building has risen significantly and the cost of capital has risen significantly, and it's sort of like -- money is not free anymore. Money is expensive. So building a new construction and new supply has shut down. Those are 2 very, very constructive things for our market.

You can see if you look at Park Avenue, you look at Sixth Avenue and you look even at the west side of Manhattan, at the supply and the other thing is the market is bifurcated. There's 200 million square feet of -- you can see a space in New York and is 200 million or 180 million square feet of space -- at a space in New York. The customers that we deal with, only they want to be in the better space. That space is limited and the supply of that space, the vacancy in that space is evaporating very quickly.

So for example, Park Avenue rents went from $80 a foot to $130 a foot almost overnight as supply shrinks. So that's a definition of a landlord market. No supply, vacancies are evaporating and significant demand.

The other thing is, and I made mention in this -- in my opening remarks about the Fed, there was speculation where we're going to have a recession. There has been no recession. There has been a soft landing, and our customers are enthusiastic and expanding and that's a good thing. So most of our customers are enthusiastic about their space and they want more space and they want better space. That's the landlords market.

[Operator]

The next question comes from Michael Griffin with Citi.

[Michael Griffin, analyst]

Maybe going back to PENN2 leasing pipeline. I know historically that submarket has been more focused on tech and media tenants. But just given maybe the limited availability that we've seen in more traditional financial services markets like Park and Sixth. Is it fair to say that there is an increasing share of that leasing pipeline that's driven by financial services or some of those more traditional office space takers?

[Glen Weiss, executive]

Absolutely correct. So all types of industry sector tenants are coming to Penn, both PENN1 and PENN2, they're flooding in. law firms, financial, entertainment, tech, consulting, private equity hedge bonds. We're seeing a plethora activity from everybody and it's a game changer. I think partly that's due to the lack of quality stay available in the market, generally, but more importantly to what we've done with these buildings and what this neighborhood now feels like. It's powerful. They're all coming in and astounded by what we've done, and they feel like Penn is Westside, part of Manhattan West, part of Hudson Yards. We're in a part of a new West site. And not only that, we're -- doorstep run on top of transportation, which gives us a leg up on everybody else. So it's all in the full year and as John point with what you said about tenant side, for sure.

[Michael Griffin, analyst]

Thanks, Glen. I appreciate the color there. And then, Steve, I just want to go back to your comments on trying to pivot to acquisitions and external growth and going on offense in 2025. seems like you have the balance sheet prime to do that. But as you look at your opportunity set, is it more kind of on the distressed debt side? Would you prefer to purchase assets outright? And then can you give us a sense of what you might be underwriting to in terms of return hurdles or from an IRR perspective, that would be great.

[Michael Franco, executive]

It's Michael. We are little opportunist, whether it comes through the debt or outright asset purchase, we're open to both. It's obviously easier to buy the assets outright than having to work through the debt. But in some cases, that the opportunity is through the debt. And I think a lot will be debt driven, whether it's lens that collectively get together and want to short sell an asset or they want to sell a position. So we're looking at a number of opportunities like that.

Look, I think that as we think about deploying capital, this is not a growth for growth's sake, right, where, as Steve said, we're trying to do things that are going to increase the value of the enterprise over time. And so our capital is precious and we want to deploy the capital in a very attractive way. So I'm not going to give you a specific return target, but these are not core buys that we're trying to focus. We're trying to generate very attractive returns that can generate very attractive multiples over time. And so I would think that sort of value-added opportunistic so that dynamic is at play here. And that's probably as specific as I can get each deal has its own dynamics, but we're not looking to put out money to put out money. We want to make some serious profit if we deploy the capital.

[Operator]

And the next question comes from Ronald Kamdem with Morgan Stanley.

[Ronald Kamdem, analyst]

Just 2 quick ones. So just one on the I think you made some comments about occupancy dipping in 1Q '25, but potentially ending at sort of 93% at the end of next year, if I heard that correctly. Just curious what we should think about in terms of just the impact of same-store NOI. Any sort of comments on that would be helpful.

[Michael Franco, executive]

I think difficult to give you that prediction right now. We're going through our budgets now. A lot of the stuff is timing driven. And I know that can give you sort of this quarter versus that quarter, that are, I think you know sort of the end goal based on we talked about in terms of the near term and just hard to give you that visibility today.

[Ronald Kamdem, analyst]

Okay. Great. My second question, just going back to the cash flow statement, it looks like a good cash from operating quarter and so forth. Just how are you guys thinking about cash conversion as sort of the business recover? Is there any that we should be mindful of, whether it's CapEx spending or anything else like that as you're thinking about maximizing free cash flow as the business recovers. Thank you.

[Michael Franco, executive]

I mean, look, our objective, our general approach is to be fairly rigorous with how we invest our capital, right? And that includes on our existing asset base. So we are deploying the capital where we see an appropriate return if we don't see that opportunity. And I referenced that in my remarks, we don't see an opportunity on an asset that is -- has too much debt or until -- it is rework. I'm not going to do that. And I think we've demonstrated that in the past. So we're going to continue to be rigorous, capital is precious, notwithstanding the strength of the balance sheet. And we hope that as we transition into the landlords market, we will start to see concessions trend down some. I don't think it's going to drop to where it was years ago because with inflation, the cost of build-out space is higher. But we do think in the best submarkets that there will be an opportunity to start tightening that a bit.

[Operator]

And the next question comes from Caitlin Burrows with Goldman Sachs.

[Caitlin Burrows, analyst]

Thanks for the comments earlier on the expected '24 dividend and the policy for '25. I guess I know the dividend is a Board decision, but could you give some maybe on what it would take to bring back the quarter dividend?

[Steven Roth, executive]

What we did was totally based upon conserving cash and protecting our balance sheet, that was the genesis of the dividend policy that we adopted, lower dividend, curve the cash pay once at the end of the year. We canvas are a very significant work of our shareholders about that strategy. And universally, they endorsed it, protecting the balance sheet being the principal thing to do with it. The business cycle changes and the availability of capital, and we get by the more normal times, we will then likely convert to a normal dividend policy along what we had in the past. So this is not necessarily a permanent strategy. It's an interim strategy that protects the balance sheet, which was very well received by our constituents.

[Caitlin Burrows, analyst]

Got it. Okay. And then maybe just on PENN2, given the leasing you've already done and knowing it takes time for users to move in and contribute to rent and could you give any detail on your expectation for PENN2 build up in 2025, like maybe the path to recognizing that 9.5% yield?

[Michael Franco, executive]

I don't think you're going to see much in '25 just because the leases Glen is working on now, this really won't start by the time the build-out occurs, that income really wonder kicking in until '26. So I think you'll see a lot of activity over the course of the remainder of this year, next year. But I don't think it's actually hitting earnings. I think it's going to be really as we start getting into '26.

[Operator]

And the next question comes from Nick Yulico with Scotiabank.

[Nicholas Yulico, analyst]

Just wanted to go back to PENN1. And I guess 2 questions there is on the leasing that was done, the 70,000 square feet, which was at higher rent than prior leases. I think some of that was benefit from higher floor space, but can you just talk about like the rent there versus how we should think about additional rents still to come?

[Glen Weiss, executive]

It's Glen Weiss. So we continue to increase rents at PENN1. If you think about our started rents quarter-to-quarter since we unleashed on the redevelopment, they continue to rise in a pretty strong way. So yes, one of the deals we made this past quarter was in the upper stack of the building at a huge win. And that now will allow us to drag along the rest of the building where we've increased rents throughout.

Similarly PENN2, we've been very focused on our rental quotes increasing our quote there as well. So as we had predicted when we said fourth on this whole Penn District transformation a few years ago, we had said rents will rise as the district gets better, better and better as the new tenants move in, as the -- strengthens and it's exactly what's happening. So we expect that trend to continue as we go into '25, much of our activity we talked about in the pipeline, the PENN1 and PENN2 and other Penn District holdings additionally. So we think the best is yet to come and we're really excited about it.

[Michael Franco, executive]

Like we always said, we have leased 1 million feet post redevelopment. And therefore, we still have another 1.3 million, 1.4 million to go, right? So I think that gives you a sense of the magnitude of the opportunity. Now that's unlike PENN2, which is a lease-up -- execution, right? This is going to occur over the next several years, not all at once. And so I think there's a continued meaningful mark-to-market opportunity there, and that's what that would continuing to rise, which if we start factoring in the rents that Glen just did on PENN1 this past quarter, that's even more sniff. So this is that we think is going to continue to deliver for us over time, given we've done in the district.

[Nicholas Yulico, analyst]

Okay. Second question is just in terms of -- I know there's been a lot of talk on the call about occupancy improving. And then, Michael, you're also talking about some of the impact for the PENN2 leasing is more of 2026 impact. But as we're thinking about '25. I know you've said in the past to capitalize interest burn-off issue you have to deal with. How should we think about earnings growth next year? And at some point, if there's a feel for when you're getting to sort of the bottom in terms of FFO and you'd start to see some FFO growth based on the occupancy growth?

[Michael Franco, executive]

Yes. Look, I think we said in the last quarter or so that a lot of the activity that we're executing on now, we're really going to get the benefit of starting in '26. I think that continues to be the case, right? So this pipeline that we're working on, there are some things that will hit, a little bit more immediately, and we're sort of running that through the system right now to see the impact. But a lot of this activity will really kick in '26 and you'll start seeing material growth in that year and thereafter.

So '25, well try to give you a little bit more color as we get closer to next year as we refine the budget to what we're doing. But I think we've sort of said next year was going to continue to be somewhat flat to this year. The move-outs and the backfilling, the timing doesn't sync up in terms of when that comes online. So there's things that are moving around. On the positive side, like we're effectively hedged, rates are starting to come down certainly in the short term. But I don't think we'll start to see material impact on that as well until '26 because you are fairly hedged, though. So I can't give you a precision because we're still working through it. And as you know, we don't give guidance. But I think this is a general matter. I think the comments we've said in the last 3, 4 months about being not too dissimilar from this year, I think still holds with respect to '25.

[Operator]

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

[Steven Roth, executive]

Thanks, everybody. It's election day. And so tonight, it's going to be very exciting, I think. Those of you who have not seen the Penn District recently and I mean very recently please call, we're very proud of what we've accomplished there and we're dying to take you through and expose to these assets, which we think going -- are performing very well and will perform better. So if you want to or give us a call, and we'll see you in the next quarter. Thanks very much.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.