Vornado Realty Trust

NYSE:VNO

Earnings Call Analysis

Positive Leasing Momentum Amid Finance Challenges

Despite a tough office financing market, our company showcased strong leasing activity in the fourth quarter, with 840,000 square feet at $100 per square foot. The redevelopment in PENN District achieved over 2.5 million square feet in leases at $94 per square foot. Our liquidity remains strong at $3.2 billion. We're addressing 2024 expirations effectively, having re-leased significant portions of expiring spaces. Stabilization of PENN 2 has been delayed to 2026, though yield remains consistent as take-up is expected to increase. Strategically, we're evaluating distressed asset purchases, prioritizing debt management, and remaining open to opportunistically buying back our stock.

Vornado Realty Trust Boasts a Strong Finish to a Challenging Year

Despite a year characterized by surging interest rates and economic headwinds, Vornado Realty Trust capped off 2023 with a robust fourth quarter that met their expectations. The company's resilience was mostly evident in its core office and retail segments, particularly in New York where same-store cash Net Operating Income (NOI) increased by 2.8% for the year and 2% for the quarter. They also reported Funds From Operations (FFO) as adjusted of $2.61 per share for the year, which, although lower by $0.54 from 2022, was in line with their forecasted figures due to the higher interest expenses.

New York City Office and Retail Markets: A Time for Optimism

Vornado's New York City office leasing team had a particularly standout year, leasing a record 2.1 million square feet at an average of $99 per square foot—illustrating a significant momentum in this sector despite a still-recovering market. Retail in New York also showed positive signs of a strong comeback after hitting a low. Notably, New York's retail sector has shown promising signs of robust recovery, with significant transactions occurring along Upper Fifth Avenue, signaling investor confidence in the market's potential. The successful leasing activities and high-profile retail deals point towards a promising future for the retail landscape in spite of rents not yet reaching their peak from five years prior.

The Future Shaped by Redevelopment and Strategic Investments

Vornado emphasized the transformative impact of their redevelopment projects, particularly around the Penn Station area, including the nearly completed PENN 2 and the creation of public spaces which promise to redefine the commercial landscape of the region. Additionally, strategic asset positioning, such as owning a significant share of retail properties along Upper Fifth Avenue and Times Square, places Vornado in a strong spot to capitalize on the market recovery. This strategic positioning, paired with the decline in new developments, has resulted in lower vacancy rates and higher rents in top-quality properties, boding well for the company's outlook.

Acknowledging Temporary Setbacks and Projecting a Brighter Tomorrow

Looking ahead to 2024, Vornado remains cautious yet optimistic. The CFO acknowledged that while increased interest rates will continue to impact their FFO—projecting it to be lower by approximately $0.30 per share due to higher net interest expenses—this is anticipated to be the low point. The earnings are expected to significantly increase thereafter as the rates decline and profits from the recent leases and other vacancies are realized. The office market appears to be reviving as office workers return, and this trajectory is likely to usher in a landlord's market after a period of adversity.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning and welcome to the Vornado Realty Trust Fourth Quarter 2023 Earnings Call. My name is Andrea 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, Senior President and Corporate Counsel. Please go ahead.

[Steven Borenstein, executive]

Welcome to Vornado Realty Trust Fourth Quarter Earnings Call. Yesterday afternoon, we issued our fourth quarter earnings release and filed our annual report on Form 10-K 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 release, Form 10-K 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 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.

[Steven Roth, executive]

Thank you, Steve and good morning, everyone. We ended the year on a high note with a good fourth quarter. The quarter and the year were right on target. Although as expected, our results were negatively affected by the dramatic increase in interest rates. This will carry through next year but I expect will reverse as interest rates recede. It's important to note that our business has continued to perform well. Michael will review the quarter and the year with you in a moment.

This year, our New York City office leasing team won the Gold Medal. In the fourth quarter, we leased 840,000 square feet. For the full year, we leased 2.1 million square feet. Average starting rents for the quarter and the year were record-breaking at $100 and $99 per square foot, respectively. In more gold medal stuff, for the year, we leased 1.2 million square feet at over $100 a square foot rents. The office leasing market is on the foothills of recovery but the capital markets still remain challenged and are even tightening -- and even tightening slightly as we speak. Foreclosures and givebacks are still in front of us and, therefore, so is the opportunity.

As Michael and I have said on the last few calls, retail in New York City has bottomed and is recovering rapidly. While rents have a way to go to reach peak pricing of 5 years ago, we feel very good about the activity level and strength of the retail recovery. And there's more big retail news. In 2 blockbuster deals announced in December, major global luxury retailers, Prada and Kering bought prime Upper Fifth Avenue properties for their own use as stores. One deal was $835 million and the other was $963 million. So in round numbers, call it about $900 million for a half block front on Upper Fifth Avenue. So we now have the most important retailers in the world investing aggressively in real estate for their own use on the most important retail street in our country. This is only happening in the most important world cities, New York, London, Paris.

Now we take this mark very personally because we own in our retail joint venture, so 52% our share, a 26% market share of available Upper Fifth Avenue in 4 blocks -- half blocks -- in 4 half blocks of similar AAA quality. I'm sure you can all do the math here. We also own in that same joint venture, the 2 best full blocks. So that would be 4 half blocks in Times Square and we have the largest sign business in town.

It's been a long ride and we announced just about completed construction of our renovation of the double block-wide PENN 2 and we are about 90% complete with the surrounding plazas. The huge plazas in front of PENN 2, combined with the 33rd Street promenade and the 33rd Street setback at PENN 1 have created an enormous open public space, which I might say will be quite majestic. Directly across Seventh Avenue, the Hotel Penn is now down to the ground, creating our PENN 15 site. All this, taken together is for sure a game changer. If you are a shareholder of Vornado or are interested in Vornado, this is an immediate must go see.

The world turns in funny ways and creates opportunity. The retail apocalypse is now passing, having handily survived the e-commerce attack. But now we have a CBD office apocalypse involving the work from home threat and the total blacklisting of office in the capital markets. In the end, the major cities of America will continue to grow and thrive, with New York, our hometown leading that. Office workers will gather in offices with their colleagues rather than be alone at home at their kitchen table. And in the end, the supply-demand equation will come into balance and bring on a landlords' market [indiscernible] by a total cutoff of new supply. You can't build anything in these frozen capital markets and in New York, the evaporation or irrelevance of, say, 100 million square feet of old, obsolete, unrentable space. This cycle is not over yet. There remain challenges but for forward-looking investors, the time is now.

My colleagues and I at Vornado are optimistic and excited. Now over to Michael.

[Michael Franco, executive]

Thank you, Steve and good morning, everyone. Though 2023 was a challenging year, our core office and retail businesses proved to be resilient. Our overall New York business same-store cash NOI was up a healthy 2.8% for the year and was up 2% in the fourth quarter compared to last year. Comparable FFO as adjusted was $2.61 per share for the year, down $0.54 from 2022, largely due to increased interest expense, which is in line with the expectations that we previously communicated.

Fourth quarter comparable FFO as adjusted was $0.63 per share compared to $0.72 per share for last year's fourth quarter, a decrease of $0.09. Overall, the core business was flat and the entire decrease in the quarter was driven by increased G&A and lower FFO from sold properties. We have provided a quarter-over-quarter bridge in our earnings release and in our financial supplement.

We recorded $73 million of noncash impairment charges during the fourth quarter, primarily related to joint venture assets that we intend to exit in the next few years. It should be noted that in accordance with NAREIT's FFO definition, this impairment charge is not included in FFO.

Now turning to 2024. While forecasting remains challenging in the current economic environment, we expect our 2024 comparable FFO to continue to be impacted by higher interest rates and be down from 2023, which already seems to be in the market. We project a roughly $0.30 impact from higher net interest expense due to extending hedges at higher rates on our variable debt. Additionally, there will be a ding to earnings as we turn over certain spaces. Primarily at 1290 Avenue of the Americas, 770 Broadway and 280 Park Avenue. This is temporary as we have already leased up a good chunk of this space but the GAAP earnings in these leases won't begin in 2024.

We expect 2024 will represent the trough in our earnings and for earnings to increase meaningly from there as rates trend down and as income from the lease up of PENN and other vacancies come online.

Now turning to the leasing markets. New York is clearly leading the leasing charge nationally as the city continues to experience strong employment growth. 2023 leasing in Manhattan ended on a strong note. And as we enter 2024, market conditions are more favorable than any year since the pandemic ensued in March 2020, providing support for the continued recovery in Class A office market. The economy is healthy, most employers are back in the office, at least 3 to 4 days per week. Competitive sublease space is thinning and the market for higher-end space is tightening, fueled by a decline in the new development pipeline. Now that companies have greater clarity on their space needs, tenant demand is growing, which is translating into more leasing transactions.

With new supply evaporating, tenants are increasingly focused on the highest quality redeveloped Class A buildings near Penn Station and Grand Central Station, as they seek to attract and retain talent. Activity in the best buildings has been strong with vacancy at less than 10% and rents rising. Our best-in-class portfolio has been a major beneficiary of this trend, the stats bear out this, that we consistently outperform the marketplace, as Steve mentioned earlier.

In 2023, we leased 2.1 million square feet and average starting rents of industry-leading $99 per square foot with 1.2 million feet at triple-digit starting rents. Importantly, we made significant strides in addressing our upcoming vacancy in tenant roll at some of our most important assets with leases with the following important customers. Citadel at 350 Park Avenue, PJT Partners and GIC at 280 Park Avenue, King & Spalding, Selendy Gay and Cushman & Wakefield at 1290 Avenue of the Americas and Shopify at 85 Tenth Avenue.

Additionally, at PENN 1, we maintained strong momentum with another 300,000 square feet of deals, highlighted by new leases with Samsung and Canaccord Genuity. Just as a reminder, since we started our redevelopment efforts in the PENN District, we have leased over 2.5 million square feet of office at average starting rents of $94 per square foot, a significant increase on what these buildings achieved previously.

Our fourth quarter activity led the overall market's leasing volume upturn as we completed 17 leases comprising 840,000 feet at starting rents of $100 per square foot. Even with our very strong close to 2023, our leasing pipeline heading into 2024 is robust. We currently have almost 300,000 feet of leases in negotiation with another 2 million feet in our pipeline at different stages of negotiation, including a balanced mix of new and renewal deals.

Turning to the capital markets now. While the financing markets for office remain very challenging as banks continue to deal with problem loans, we are starting to see some stability with the Fed potentially cutting rates in 2024. Fixed income investors are constructive again on high-quality office and unsecured bond spreads for office have tightened significantly over the past couple of quarters.

That being said, we are still away from a healthy mortgage financing market in office. And most office loans will have to be restructured or extended as they aren't refinanceable at their current levels. More broadly, lenders have no appetite for construction financing across most property types which should keep a lid on new supply. Conversely, the financing market for retail is now wide open, now that the sector has bottomed.

As always, we continue to remain focused on maintaining balance sheet strength. Even in this challenging financing environment, our balance sheet remains in very good shape with strong liquidity. We are actively working with our lenders and making good progress pushing out the maturities on our loans, which mature this year. Our current liquidity is a strong $3.2 billion, including $1.3 billion of cash and restricted cash and $1.9 billion undrawn under a $2.5 billion revolving credit facilities.

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

[Operator]

[Operator Instructions]. And our first question comes from Steve Sakwa of Evercore ISI.

[Steve Sakwa, analyst]

I guess first question for Michael or maybe Glen, just kind of on that, I guess, pipeline, the 2 million square feet that you talked about, could you maybe tell us a little bit how much of that is for kind of the existing portfolio, how much of that is for the development such as PENN 2? And in that discussion, can you just talk about the upcoming expirations in '24? Are there any large known move-outs this year that you might know about that you could share with us?

[Glen Weiss, executive]

Steve, it's Glen. So of the pipeline that we mentioned in the opening remarks, there is a good spread in there, that's including PENN 1 and PENN 2. So activity continues to strengthen at both properties. The reception at PENN 2 has been better than excellent, tour volume is off the charts. Everyone thinks this thing is a wow, nothing they've ever seen. So the pipeline does include activity at both PENN 2 and PENN 1.

As it relates to the bulge in '24 the expirations that we were facing, we've attacked it, I think, very well thus far. At 1290, we've already leased more than 50% of the space that was expiring in '24 between [indiscernible] and Equitable. At 280 Park, we re-leased over 200,000 feet of the 275,000 feet expiring 24 and '25 and put away PJT, which was expiring in '26. On 770 Broadway, we continue to be in the market with -- now that building, of course, is more of a big tech, big media building but we expect that building to perform as we move along here, given its great location and great bones.

[Steve Sakwa, analyst]

Just a quick follow-up. Are you saying 770, does that have a Meta expiration that...?

[Glen Weiss, executive]

It does. It is a Meta expiration of 275,000 feet in June of this year.

[Unknown Executive]

Of what's left, the rest is Meta.

[Glen Weiss, executive]

Yes. So, Meta, after the expiration, Steve, we'll have another 500,000 feet long term in the building.

[Steve Sakwa, analyst]

Okay. Great. And then just on the second question, I noticed that you pushed out the stabilization of PENN 2 by a year, which certainly makes sense just given the challenging market today. But you guys, also kept the -- I guess you kept the yield unchanged. So just can you kind of help us think through that? And I guess, from an accounting perspective, if leasing doesn't occur this year somewhat soon, does that begin to create a potential earnings drag in '25 just from the lack of ability to continue to capitalize costs on that project?

[Michael Franco, executive]

Steve, it's Michael. The answer with respect to stabilization is, we did push it out to '26. It's taken a little longer to get going on take-up there. But as Glen just referenced, the reaction as it's gotten to delivery here has been outstanding. So we expect that to pick up. But that being said, we're trying to be realistic as well and so we pushed it out. The yield is based on the [ $759 million ] odd cost, does not include carry. So that's base NOI over the original cost. So that's a simple math for you. We feel it'll drag beyond '25, if it's not done, I guess, potentially but we feel good about the pipeline and what we have baked in right now.

[Operator]

The next question comes from Michael Griffin of Citi.

[Michael Griffin, analyst]

Steve, I know in your opening remarks, you talked about the stressed opportunities you're seeing out there in the market. Can you maybe quantify kind of what those opportunities could be? And when you look at kind of capital allocation priorities, would it make sense to take advantage of those, maybe relative to buying back your stock or starting new developments?

[Steven Roth, executive]

There are 3 opportunities, buying back our stock is the first one or usage of capital allocation. The second is paying off debt and deleveraging a little bit. And the third is offensively acquiring new assets. We are only interested in acquiring new assets at distressed prices. And I think as I've said, the foreclosures and the givebacks have not really -- have been at an accelerating -- accelerated pace, so the opportunities are still in front of us. I don't have any comments as to what we might do. But I think our #1 priority is the debt that we need to -- the debt expiries. And then after that, we go on the assets. The stock, we will react opportunistically to the stock price over time.

[Michael Griffin, analyst]

Great. And then I was wondering if you could comment on the recent news about a rent reduction from a tenant at 650 Madison. I know you only own 20% of this building but is there a worry that we should extrapolate this in terms of kind of future rent roll and maybe a sign of things to come from a leasing and rent perspective?

[Steven Roth, executive]

The interesting thing is, some of the industry papers, they always get it right. But this case, they got it dead wrong. I think the facts are that the $60 number was a net number. So if you gross it up, it's about $100 a foot. Glen is telling me, it's a little less than $100 a foot but -- so it's in the low $90s, I guess.

[Operator]

The next question comes from Camille Bonnel of Bank of America.

[Jing Xian Tan, analyst]

Can you talk a bit more to the retention levels of the overall portfolio in 2023? How did it track versus your expectations? And with the lack of new supply on the horizon, do you think this will pick up in '24?

[Glen Weiss, executive]

It's Glen. Our retention rate was strong. As I mentioned, the leasing that we've gotten done, the renewals, that thing went better than we originally had thought at the beginning of '23. And in our pipeline that we referenced, we have very good activity on forward lease expirations. We're definitely finding that CEOs, the decision makers of these tenants who are expiring forward, are now coming to us earlier than they have been over the past few years because there's less and less quality blocks of space available to them. So I would say definitively, the renewal program is stronger than it had been. We're in very good talks with many of our tenants going forward and I think it's showing in our leasing activity numbers, especially with the volume we had during '23 and what we're now seeing in '24 already.

[Steven Roth, executive]

You make a good point. I think you said with the lack of supply. So the dynamics which are going to cause the office market, they get very, very healthy, pretty soon or you can't build anything in this capital market. So there will be no new supply coming on stream. The supply of buildings that were built in the last cycle over the last number of years, that space is all being eaten up. And the next trend is that tenants seem to want high-quality buildings, which are either brand new or buildings which have been completely retrofitted, which is -- and so the older buildings, and I think I said the stock of those are somewhere around 100 million to 150 million square feet. Those are just obsolete and irrelevant and will evaporate. So what we're dealing with is not a 400 million square foot marketplace, we're dealing with something which is somewhere in the high 200 million square foot, which is a totally different supply-demand equation.

[Jing Xian Tan, analyst]

Appreciate the color there. And given retail seems to be a bit of a bright spot in your portfolio, can you also talk about how your leasing pipeline is looking for that side of the business?

[Michael Franco, executive]

Sure. I appreciate you recognizing that retail is a bright spot. I think it feels like investors wrote it off and with everything that's happened in the marketplace, forgotten that we still own the most and the highest quality retail in New York City, as Steve alluded to in his opening remarks. So these are scarce property assets. I think the value is being recognized. We've talked about the last couple of quarters and it continues in our leasing pipeline. We got activity across the board, really on all the spaces. Where there's vacancy or rollover occurring, we have tenant activity, in some cases, multiple tenants for those spaces. And rents are clearly rebounding. So I would just sort of say, stay tuned. We're optimistic in terms of what's coming down the pipe based on what we're working on right now.

[Steven Roth, executive]

There is definitely a finite supply of the highest quality retail space, which is what the marketplace wants. And then I hope you noticed, I have a new financial metric for retail, which is called half block price. And we got a lot of half blocks in the best place.

[Jing Xian Tan, analyst]

I appreciate that. And just finally, on the G&A side, you've managed to control those costs quite well since the pandemic but it did pick up last year due to some additional stock expense. Is this a reoccurring event going forward? And are there any key considerations for '24 that will keep your G&A at the current or higher levels? Just for instance, less capitalized interest from your development program now that PENN 1 is out of the pool.

[Michael Franco, executive]

No, capitalized interest will be comparable. G&A, some of that will roll off given that was a onetime event. But I think what you're referencing generally is the compensation plans put in place which we felt important to retain our talent in a difficult environment. And so we implemented those, 1 in June, heavily tied to -- entirely tied to stock performance over the next 3, 4 years. And if the shareholders do quite well, then the employees will do quite well. So that expense was elevated in '23. And that will start to, I think, normalize as we get into this year.

[Steven Roth, executive]

Tom, how many years are we writing off the expense for the comp plan?

[Thomas Sanelli, executive]

So it's 4 years [indiscernible] accelerated.

[Steven Roth, executive]

So, say it again...

[Thomas Sanelli, executive]

[indiscernible] accelerated.

[Steven Roth, executive]

So the expense we're writing off the equity comp plan that we issued in June is over a 4-year period. So the G&A will benefit enormously shortly as that rolls off. And I think I said in my remarks, you climb the mountain and then you go to the other side of the mountain. So the rise in interest rates had penalized our earnings, actually pretty substantially. That is going to reverse somewhere as the government begins to reduce rates, which they will. And then similarly, well, I guess that's the big -- but those are the 2 -- that's the big thing.

Now similarly, Michael said that our earnings were going to be hit or dinged, I think, was his word, by turnover independent from the [indiscernible] and expiry -- lease expiry of that. Once again, those spaces will fill up, income will come on board. So these are temporary reductions in our earnings which will absolutely reverse.

[Operator]

The next question comes from John Kim of BMO.

[John Kim, analyst]

Given all your commentary on street retail and how it's recovered, the pricing has been very strong. Are you going to be looking to sell into this strength? Or do you think market rents are going to improve? Or is this really just telling us to update our -- and the estimates?

[Steven Roth, executive]

Hi, John. Well, the first thing is we're enjoying the bounce back from the retail. I mean, retail had a target on its back threatened by e-commerce, et cetera. And that has all evaporated and now retail has become the vogue. We believe that the asset prices of the assets that we own has increased dramatically from the bottom. And we may take advantage of those prices by selling assets from year-to-year, from here every once in a while. We've already sold a chunk of assets that we really thought were not part of our core. So we've sold some, we may well sell some more and we're absolutely convinced that rents are going to rise. Will they rise to the peak pricing that they were 5 years ago? Probably not but they're certainly going to rise from here.

[John Kim, analyst]

Okay. Do you think you'll get the same pricing you got originally when you established that joint venture? In other words, have its pricing and assets reached peak level from...?

[Steven Roth, executive]

We're delighted with the pricing that we were able to achieve in our last joint venture. We're not going to speculate on what the pricing will be.

[Michael Franco, executive]

John, it's -- that's speculation. I think if you look at the pricing that Prada and Kering paid and Steve talked about the half blocks. And you analyze what our portfolio could be worth, then it's not a stretch to say that we're back at those levels or will get back to those levels, right? Now -- and who knows over time.

But I think what you're seeing is, I think the most important thing is, you have 2 of the most important retailers in the world who are saying Fifth Avenue is critically important to us. We want to be there forever. We are prepared to pay a meaningful price to be there. And I think the history of these things is, the animal spirits get going. You don't think that other retailers are behind them saying, maybe we need to make sure we have a place on Fifth and secure our position. So I don't think it's a stretch to think that these aren't the last 2 transactions that occur on Fifth.

[John Kim, analyst]

And Michael, you mentioned an impairment that you've taken this quarter related to joint venture assets you're looking to exit. Is it this retail joint venture that you're discussing? Are there other assets? And if so, which ones are they?

[Michael Franco, executive]

Yes, not the retail. Retail, the worst is past us, as we've said. Now these were just a handful of smaller -- generally, they're really all office assets, they're in joint venture. The accounting treatment, as you guys should know well by now, given the Street retail events, the accounting treatment, the impairment methodology is much different from joint ventures than for wholly owned assets. And this is a handful of assets that we intend to exit over the next 2 to 3 years and that results in a different accounting approach and thus the impairment. It's an accounting convention, what the ultimate proceeds will be realized, TBD. But again, it relates to a handful of smaller assets.

[Steven Roth, executive]

But there is no doubt that in this cycle, values have fallen. So when interest rates go from 3.5% to 8% that has an enormous effect on value. And so therefore, I'm very pleased that the impairments were as small as they were actually.

[John Kim, analyst]

And just to confirm, this does not include 1290 or 555 Cal?

[Michael Franco, executive]

No.

[Steven Roth, executive]

That's correct.

[Operator]

The next question comes from Dylan Burzinski of Green Street.

[Dylan Burzinski, analyst]

Okay. Just 2 quick ones on occupancy for both the office and retail side of things. So it sounds like for New York office, that occupancy should bottom throughout 2024. And as you guys have started -- already leased up some of the move-outs that -- it should see a pretty swift recovery as we look out into 2025 and beyond? Is that sort of a fair characterization?

[Glen Weiss, executive]

It's Glen. I think that's fair. I think you'll see it dip over the coming quarters based on what we talked about earlier. And based on the pipeline, we'll come right back up. I think it's fair what you characterize it. Yes.

[Michael Franco, executive]

Probably flattish for '24 though overall.

[Steven Roth, executive]

Just a word there on -- hang on, hang on, just a word about occupancy. So the market occupancy is in the high teens. So our occupancy is, give or take, around 90% [indiscernible] south of 90%. If you look back over our history, our normal occupancy is a hair over 95%, 96%, they call it 96%. The difference between 96% and 100% is kind of like structural vacancy, you never get to 100% on a large over 20 million square foot portfolio. So our occupancy is really the difference between -- our vacancy is really the difference between 96% and 90%, let's say 6%, which we think is -- we can do better, we will do better but we think that's pretty good performance in a soft market. Now the next thing is that when we ramped up the space, as the markets revert to normal, from 90% to 96%, that's a very significant increase in our earnings. So we have that in front of us for sure.

[Dylan Burzinski, analyst]

Great. And I think that kind of sort of leads into my next question, is on the retail side of things. As we look at the portfolio today, I think in your disclosure, you guys say, occupancy is high 70s, pre-COVID you were mid-90s. I guess just, how do we think about the recovery there given some of the comments that you guys laid out regarding the leasing pipeline?

[Steven Roth, executive]

Well, the retail occupancy is really sort of an anomaly. It includes the Manhattan Mall, JCPenney [indiscernible], who vacated made a couple of years ago. And that's 11 points of occupancy. Is that right? And what's the next -- what's the second one, Tom?

[Thomas Sanelli, executive]

We have Farley, the retail there.

[Steven Roth, executive]

And then Farley, we have [indiscernible] on the Ninth Avenue side, so between those 2, we're somewhere in the probably mid-80s.

[Operator]

The next question comes from Vikram Malhotra of Mizuho.

[Vikram Malhotra, analyst]

Just, I want to just go back to your comment about FFO troughing in '24. So just 2 clarifications to what you've said first was the Facebook lease, 770, is it -- was it clear that the 200,000 or so square foot expiring, they're going move out but then the rest is there long term, #1. And #2, could we just roughly quantify the move-outs you mentioned, what is the FFO impact this year to that?

[Glen Weiss, executive]

On the first question, the remaining Meta 500,000 feet is long term. That's correct.

[Michael Franco, executive]

Right. So the -- yes, so the 270,000 feet is just one component this year. And the remainder, Vikram -- but we don't give guidance, right? There's a number of ins and outs. Yes, you can just quantify the specific 3 situations we mentioned but there's other things that are going on as well. So I don't want to isolate and say, on these 3, this is the impact because that doesn't give the full picture. Net-net, we expect it to be negative. How big? We have to see what transpires across the whole portfolio.

[Vikram Malhotra, analyst]

And so I guess just a second question is to clarify. You're basically saying with the move outs, with the interest rate impact, et cetera, the ins and outs, you think FFO will go -- occupancy will dip. You're assuming the least rate will eventually come back, is what I'm assuming you're referring to. And then the impact of all that leasing will help '25 recover FFO wise. Is that fair? Is there any other big moving piece to that equation?

[Michael Franco, executive]

No, I think that's fair. Obviously, look, as we leased up Penn, which is -- which and some of the other vacancy that Steve mentioned that's not just natural turnover, it's going to power that as well. But I think your general comment is accurate.

[Steven Roth, executive]

I agree it's accurate. So to summarize. Interest rates have gone up and have been painful. They will go down. They're not going to go down all the way to 0 but they will go down. And so that's going to increase our earnings from here.

Our occupancy is going to climb from, say, 90% to whatever. And so that's going to increase our earnings. And then the big thing is, over the next 2 years, 2 PENN will rent, the income from that will come online. Now that's probably over $100 million. So these are fairly substantial numbers. But -- so overall, you're 100% correct.

[Vikram Malhotra, analyst]

Okay. Great. And then, Steve, just last one. You mentioned external growth opportunities at some point, obviously paying -- delevering. I'm assuming FFO growth is important. But -- so if you look to maybe as the Board and yourself, you look -- we look to award executives LTIPs going forward, what are maybe 1 or 2 of the top metrics that could be different the next 5 years versus the last 5 years in terms of gauging those LTIP awards.

[Steven Roth, executive]

I don't know how to answer that. We don't give guidance for next quarter and it's very difficult to predict what's going to happen over the next 5 years. But a couple of -- to talk around that very sophisticated question, Vikram. We are a New York-centric company. I don't imagine that we will open up a new beachhead where we don't have the same kind of depth of experience, knowledge and franchise that we have. So basically, we're a New York company, my guess is, is that unless something but I'm not contemplating comes up, we will stay a New York company.

Now we opened up a beachhead in Washington some years ago, spun that off into a separate company, which I think is a terrific opportunity. And then we had a large Northeastern shopping center company, which we also spun off. So we have experience with different geographies. But my guess is that the main company will continue to be New York-centric.

The likelihood is, we will continue to be a large aggressive office company. But I think I've said this before, we will not make acquisitions of conventional office at full pricing. We will only be a buyer at -- I don't want to call it distress, what's the right word, Michael? Okay, at distressed prices for office buildings. And we will only buy the finest office buildings.

We have some residential. I'd like to do a little bit more of that. And then what we will develop in the PENN District is an extraordinarily important part of our company and maybe arguably the most important development in the country as we go forward. But you can't build anything in PENN District today because of the frozen capital markets. You cannot do it. The math doesn't work. But as that begins to thaw, we will consider residential -- building and developing residential in that marketplace. And we might even sell a piece of land through a residential developer. So we can't predict what's going ahead to happen. But in 5 years, we will be New York-centric. We will be majority an office company and the PENN District will be really important 5 years from now.

[Operator]

The next question comes from Alexander Goldfarb of Piper Sandler.

[Alexander Goldfarb, analyst]

Steve, just talking about the comp plan that you guys put in place around 350 Park at the year-end. Obviously, in the middle of last year, the stocks were on their back and you guys revised your comp plan, understandably just given how the stock was depressed and I think we all understood that.

At the end of the year, though, the 350 comp plan definitely surprised and especially that shareholders have to wait till the end of this year to figure out their dividend for 2024, the stub -- the [indiscernible] stub aside. So can you just walk through how we should think about that comp plan for a development project that doesn't deliver for another decade while you're talking about earnings still going down this year and shareholders having to wait another year for the dividend. Just want to understand that, especially in light of the midyear update that you guys did for the senior executives and upper generation last summer.

[Steven Roth, executive]

Sure. Alex, the -- let me go backwards first. Your comment about the dividend. We have had an enormous number of incomings from shareholders, analysts, et cetera and industry peers, saying what we did with the dividend was correct. And to continue to pay, by the way, we will rightsize the dividend but to continue to pay and overpay a dividend, et cetera, in this capital markets is just not the most efficient use of capital. So you seem to be on the other side of that. I can tell you that most of your friends and peers are -- think that what we did was the correct thing. Pardon me. Now let's talk about the development fee comp plan. So this is something that we've been thinking about a long time. So the first thing is, its objective is retention, reward, to increase motivation and to incent our most important employees. Retention, reward, motivation and incent.

So the first thing is that anything that is paying out on that comp plan comes from joint venture development projects. Now we don't do a lot of those. 350 Park is probably in my memory, the first one. We did -- we did 220, 100%. So we don't do a lot -- and we own the PENN District is 100%. So this doesn't come into being until there is a joint venture partner that pays a development fee.

Now I talked about incentives and motivation. We think that it's, shoulder to shoulder with our shareholders that we do this kind of investing. And we think it's also shoulder to shoulder with our shareholders that we bring in outside third-party capital, the funds, which has become -- most of our peers in the industry are using outside capital. We haven't done that in the past. So we want to do that in the future. So that's the beginning of it. By the way, it's a very small plan. We don't expect it to be substantial in any way. And as we look at it and as we review our senior management compensation and even down the line, we find that our compensation is lower than almost all of our peers.

So this is a way to have performance-based comp, a small amount of -- a small amount, by the way. And this is other than stock-based comp because we can't control the stock price. But we can control our performance in joint ventures. It's only payable out of third-party development fees, not development fees that Vornado would be paying. And we think it's highly appropriate. We probably made a mistake. We did a good job of socializing the June comp plan. We sort of didn't do it with this development comp plan because we thought it was very small. We thought shareholders would get it. And frankly, I made a mistake. We should have told our shareholder base what we were going to do.

I myself have -- hang on, I myself, I'm extremely unhappy to get any negative comments about that. And -- but there it is. We think it's right. We think it's a good way of comping our people. We don't -- I think our people are underpaid, certainly at the highest level and at the highest level. And by the way, doing a 2 million square foot building in New York City is backbreaking work. It's nights, it's weekends, it's backbreaking work. And we think that the team deserves it.

[Alexander Goldfarb, analyst]

Steve but to that point, if it's a small amount, it would seem like something that's just part of the annual comp committee, like, hey, you, guys, did a great job, as part of your bonus for your 2023 or 2024, we're rewarding. So if it's a small number, it doesn't seem like that much of an incremental incentive. And two, it just seems like ordinary course that management is expected to do to drive value for shareholders and would be part of their regular course compensation. It's not clear why it would be a stand-alone.

[Steven Roth, executive]

Obviously, I don't want to agree with you. But this is -- I would like to agree with you. I would like you to agree with me but I'd like you to agree with me, rather than me agree with you. But anyway, the -- no compensation plan is paid unless it goes through the comp committee of the Board and they take all circumstances into account. So there you have it.

[Alexander Goldfarb, analyst]

Okay. Let me switch. Glen, on PENN 2, I believe you guys switched brokers from your original one to a new one. Just curious, the progress that you guys had on PENN 1 seemed pretty good. You toured us last year of the project, it certainly seemed to impress what you guys have done with PENN 1. It seemed like leasing was going well. What happened with PENN 2 that you found it necessary to switch brokers and is that sort of a repositioning of the asset, different tenants? Or was there something else that you learned through the process that caused you to switch brokers on PENN 2?

[Glen Weiss, executive]

So we did not switch brokers. The Cushman & Wakefield team is additive to my team. Something we do not do often, as you know but here we decided to do it to cover the entire market, both regionally, locally and nationally. We brought in a great team. The team had just done all leasing over in Manhattan West, so it's additive, not a switch. PENN 1 remains the Vornado team and that was the reasoning for doing the PENN 2, add Cushman & Wakefield but no switch, no change, normal course of business.

[Steven Roth, executive]

Alex, I'm confident that the gold medal team of Glen and the rest of his team in-house has the strength and the ability, the franchise to do the job. But we're in the no stone unturned business. And so we thought that adding Cushman to have that extra look into the marketplace was a good piece of insurance and it's working out.

[Operator]

The next question comes from Caitlin Burrows of Goldman Sachs.

[Julien Blouin, analyst]

This is Julien Blouin on for Caitlin. Steve, regarding the dividend and adding to Alex's question, last quarter, you provided a really helpful breakdown of your 2023 expected taxable income. I was wondering if you could provide the same for 2024. And should we assume that the fourth quarter dividend will be again at sort of the minimum required taxable income level?

[Steven Roth, executive]

The answer to that is that we have a broad idea of what the 2024 taxable income will be, as you would expect. But it is not a number that we are comfortable enough with disclosing publicly. So that's the first one.

The second point is, at this time, it's a financial policy of our Board to pay out the minimum dividend because from a capital allocation point of view, that's the right decision. We have had, as I said before, numerous investors, shareholders, analysts, peers tell us that's the right decision. The dividend, the most interesting part of the dividend, however, will likely be gains on asset sales because all of our assets have very low basis. So if we choose to sell an asset or 2 or 3 or 4, in '24, that will determine more than anything, what the dividend would be.

[Julien Blouin, analyst]

That's really helpful. And then maybe switching gears. To PENN 1, the ground lease renewal. I think you mentioned at the beginning of last year, that you thought the final number could come in lower than the original $26 million estimate just based on evolving sort of market conditions. Is that still your expectation? And I guess what is the latest update on that process?

[Steven Roth, executive]

Well, that's absolutely my expectation but there's somebody on the other side that disagrees with that. So we're in the middle of the process -- the arbitration process to determine what the number will be. And that's something we can't speculate on.

[Operator]

The next question comes from Nick Yulico of Scotiabank.

[Nicholas Yulico, analyst]

Just first, a question on PENN 1, based on the incremental yield you gave last quarter in the sup, I know it's now in the, I guess, more stabilized pool. But it looks like there was eventually $59 million of future NOI, I assume they're on a cash basis. Can you just let us know like how -- any of that's already been captured yet and just how to think about the impact of any of that, if there's any of that benefit assumed for this year?

[Michael Franco, executive]

Nick, it's Michael. I can't give you the exact numbers off hand. The answer is some of that is back in '24 but this is a rolling program and so it will continue to come in next year as well. Obviously, there's vacancy there. As that gets leased up, that will come online as well.

So the answer is some of that's there. I can tell you is and it's not in the development yields anymore. This project is done. But our -- the last one we had published, we're confident in terms of hitting that and hopefully exceeding it. But we can sort of circle up and get to more specifics. But some of that's in '24 but it will roll in over the next 1 year or 2 years as well.

[Steven Roth, executive]

I'd like to make a couple of comments. The first is that all of us focus on what the initial yield is on an asset. I think it's a very interesting exercise to say what can that asset produce in terms of revenue 3, 5, 7 years out. So we believe, for example, in the PENN District, we believe in the west side of Manhattan. We believe that when you combine PENN District with Manhattan West and Hudson Yards, I mean that's a hell of a neighborhood, highly sought after and whatever. So we believe that these assets will return a very satisfactory return at the get-go and will grow from there as we continue to own them over the next period of time. So there's that.

We also believe that -- I mean there's some question about which is more important, Penn or Grand Central? Well, the answer is obviously, Grand Central is at the foot of Park Avenue. So that's very important. And I think everybody considers Park Avenue to be the principal business boulevard in the country, maybe even in the world. We have a representation of multiple assets on Park Avenue too. But it's interesting to note that New Jersey Transit comes into only Penn Station. And New Jersey is the fastest growing suburb of New York. So we are very, very happy with our position.

[Nicholas Yulico, analyst]

Okay. Just second question is on PENN 1 and PENN 2. You, guys, give only the occupancy numbers in South. And I'm just wondering if there's any way that you can give us a feel for like a leased rate for those assets or even think about how much of the leasing you've achieved so far of what your ultimate plan is on getting to these stabilized cash yields you talk about for the projects.

[Unknown Executive]

So much you're going to do -- how much PENN 1 [indiscernible]

[Glen Weiss, executive]

I mean, as Michael said, PENN 1 is a multiyear program. When we set out on the project, there were over 200 tenants in the property, which we're rolling over the next, call it, 5, 6, 7 years. We've leased a considerable amount of space in PENN 1 to date and we continue to cycle through as these tenants expire year-to-year. And it's been very successful. We've leased over [indiscernible] feet this year, it rents north of 90% and we have a lot of action in the pipeline now. Similarly, at PENN 2, we talked about the pipeline. We have deals coming to fore at PENN 2 as we speak. And you could stay tuned on that activity as we roll into the first, second quarter of '24.

[Nicholas Yulico, analyst]

Okay. Yes. And I appreciate all the commentary on the re-leasing. It's just honestly a little bit hard to understand where you guys are at in terms of the re-leasing of those projects? And at what point you're getting the NOI benefit because there's no like bridge provided anymore about the rolling out and the rolling in of NOI. So it's honestly very difficult to quantify what the benefit to the company is going to be over the next couple of years.

[Michael Franco, executive]

I would say, Nick, let's go through it, right? PENN 2, we've got [ $1.4 million ] to lease up, okay? PENN 1, we've probably taken care of. I'm going to rough guess about half the square footage to date, right? So there's probably another 1 million to go in terms of rolling that up to market -- that to market, right? Between those 2 assets, in a short period of time and let's call it -- let's use the asset, 3 years, right? There's going to be an incremental $200 million that comes from -- in NOI that comes from those assets, maybe a little less from Farley too, in terms of remaining retail. But the bulk of that is PENN 1, PENN 2. That's probably a net of capitalized interest, another $150 million, right? So that's as crisp as I can give it to you, whether I'm a little bit early or a bit late on the timing, that's the magnitude and it's going to happen.

[Nicholas Yulico, analyst]

Great. I appreciate that extra commentary, Michael.

[Operator]

The next question comes from Anthony Paolone of JPMorgan.

[Anthony Paolone, analyst]

I just have one. Michael, if I got your comment right earlier, I think you mentioned debt markets are pretty open right now for retail. And so I was wondering if that creates any opportunities for you all to get paid back on your [ prep ] interest in the JV in the near term at all.

[Michael Franco, executive]

Tony, the -- we're pleased that the markets are opening. And the answer is, we're starting to look at it. But -- we've got some leasing to do on a couple of those assets as well, right? If you think about a 689 or Fifth or the old space at 1540. So there's a little bit of leasing as we had accomplished, stabilized 2 or 3 of the assets. But as opposed to something that was sort of not on the table as a possibility, I think it's emerging as a possibility. And as the markets continue to improve, the answer is, we are absolutely focused on it. And we're sort of gathering data and looking at it. But it's one of those things where we got to do leasing. There's also a size limitation in terms of how much you can put through the system. But our goal is to repatriate that capital over time when that -- when the opportunity is emerging.

[Steven Roth, executive]

I look at it differently. The markets are open, which really means that lenders are prepared to give you money at 8%. That's not open to me because the cost of that capital is just too high. And it will -- this is not the time to be aggressively borrowing unless you absolutely need it. So the answer is, we look at it from an academic point of view but it would be very surprising to see our company aggressively refinance the preferred or anything else at these interest rates.

Now just a minute about our liquidity. We have a big amount in cash. We consider at some point in time that the preferred is a source of liquidity. Not at 8% but lower. But if we had to, it's a source of liquidity and that's $1.8 billion. And the next is, remember that Penn Plaza has no debt on it. So we've got PENN 1 debt-free, PENN 2 debt-free, Farley debt-free and Hotel Penn site debt-free. So we have an enormous source of liquidity which we think is pretty interesting.

[Operator]

The next question comes from Ronald Kamdem of Morgan Stanley.

[Ronald Kamdem, analyst]

Great. Just one for me as well. I was just looking at the 10-K, in the footnote you put some really helpful details about where you expect to release some of the maturities on the office portfolio. I think it looks like flat or in some of the retail at sort of over 30%, which I thought was helpful. But trying to connect the dots between those re-leasing spreads. I think we talked earlier on the call about occupancy potentially dipping in the first -- back part of the year before picking up, can you put that all together for us and into a same-store NOI number? I know you don't give guidance but is there some broad strokes that we should be thinking about same-store NOI? Is it flat? Is it slightly down? How should we think about those pieces?

[Michael Franco, executive]

It's probably a little bit down in the aggregate. But again, it depends a little bit on what basis and when happens. So hard to give you any more guidance than that. But I think your overall characterization in the office on an average basis, flat is probably accurate. But as Glen and his team has a history of doing -- we'll pull forward a number of leases that are going to roll and deal with those. So it's sort of hard to give you that number.

[Operator]

The next question is a follow-up from Steve Sakwa of Evercore ISI.

[Steve Sakwa, analyst]

Just 2 quick follow-ups. Michael, I think on the G&A, you and Steve had provided some color. But I just wanted to -- so are you saying that in '24, you think that G&A will be flattish with '23 or it actually comes down in '24 versus '23?

[Michael Franco, executive]

Well, it's going to come down. The developments we're done are not going to be there, right? I mean that was a last year item, that's not going to reoccur, this item, so that's going down. So the answer is yes, we think it will be down.

[Steve Sakwa, analyst]

Okay. But just basically stripping that out, that's really the only kind of one-timer that would sort of come off the '23 number?

[Michael Franco, executive]

Yes. There's a little more in terms of things that were accelerated that aren't going to reoccur just based on historical vesting for certain people. But -- so the answer is, net-net, between development fee that -- I don't know, is Tom, we're talking $10 million or so, that neighborhood, probably somewhere in the neighborhood that comes off, of course, in '24.

[Steve Sakwa, analyst]

Okay. Great. And then just second follow-up, just on -- I think you've got a big refinancing that you're working on with your partner at 280 Park Avenue. Just any kind of color, I think, that might have gone into special servicing. I assume that, that was maybe part of the mechanics of getting that loan refinanced. But just any color or commentary you could provide on that refinancing would be great.

[Michael Franco, executive]

Sure. I'm not going to say too much given we're still in the middle of the process but it is a CMBS loan, going into special servicing, is part of the process of working that out. And we and our partner are making good progress on that and we expect to get to a successful resolution with terms that we think are attractive. So more to come shortly there. But we've been hard at work for the last 6, 9 months. The CMBS loans are painful, complicated, given the way they're set up. But you have the right sponsorship and I think they recognize that. So we're getting closer to the finish line.

[Operator]

That concludes today's question-and-answer session. I would like to turn the conference back over to Steven Roth for any closing remarks.

[Steven Roth, executive]

Thank you, everybody. We appreciate your interest in our company. We learn from you every call. This was an interesting call. And we -- it's snowing -- and we'll see you at the next call. When is the next call?

[Unknown Executive]

May 7.

[Steven Roth, executive]

On May 7. Have a good day.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.