Vornado Realty (NYSE:VNO) held its first-quarter earnings conference call on Tuesday. Below is the complete transcript from the call.
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The full earnings call is available at https://edge.media-server.com/mmc/p/iv6i4ys9/
Summary
Vornado Realty reported a decrease in first-quarter comparable FFO to $0.52 per share from $0.63 last year, attributing the decline to various factors including higher interest expenses.
The company announced the acquisition of a 49% interest in Park Avenue Plaza, a Class A office building, expecting the transaction to be approximately $0.10 accretive on a full-year basis.
Vornado Realty anticipates continued growth in the New York office market, projecting significant earnings growth in 2027 as leasing activities at Penn1 and Penn2 take effect.
Management highlighted strong leasing activity, with average starting rents in Manhattan at $103 per square foot and a robust pipeline of over 1 million square feet of leases in negotiation.
The company actively engages in share buybacks and recently authorized an additional $300 million buyback program.
There were significant discussions about the potential development of 350 Park Avenue, with Citadel as a key anchor tenant.
Vornado Realty's liquidity position remains strong with $2.6 billion, comprising cash and undrawn credit lines.
Full Transcript
OPERATOR
Good morning and welcome to the Vornado Realty Trust first quarter 2026 earnings call. My name is Rocco and I will be your operator for today's call. This call is being recorded for replay purposes. All lines are in a listen only mode. Our speakers will address your questions at the end of the presentation during the question and answer session. At that time, please press star then one on your touchtone phone. I will now turn the call over to Mr. Steve Borenstein, executive Vice President and Corporation Counsel. Please go ahead.
Steve Borenstein (Executive Vice President and Corporation Counsel)
Welcome to Vornado Realty Trust's first quarter earnings call. Yesterday afternoon we issued our first quarter earnings release and filed our quarterly report on Form 10Q with the Securities and Exchange Commission. These documents as well as our supplemental financial information package are available on our website www.vno.com under the Investor Relations section. In these documents and during today's call we will discuss certain non GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our Earnings Release Form 10Q and Financial Supplement. Please be aware that statements made during this call may contain forward looking statements and actual results may differ materially from these statements due to a variety of risks, uncertainties and other factors. Please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2025 for more information regarding these risks and uncertainties. The call 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 remarks are Steven Roth, Chairman and Chief Executive Officer and Michael Frankel, 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 (Chairman and Chief Executive Officer)
Thank you Steve and good morning everyone. Business at Vornado continues to be excellent and it's getting better and better. We are riding the wave of a strengthening, long lasting landlord's market and New York is by far and away the strongest real estate market in the country. Michael will get into the details shortly, but today I have different fish to fry and and I will ask the first question Question: What do you make of the spat between Mayor Mondavi and Ken Griffin and how will it affect your 350 Park Avenue development? Answer Let me begin by saying that I do not and cannot speak for Ken, but I do unambiguously stand with him. And notwithstanding the mistakes and bad form of the recent video that went viral we are pulling for Mayor Mondavi to succeed. Let me establish my credentials. Vornado is a New York company and I am a New Yorker, born in Brooklyn and attended DeWitt Clinton Public High School in the Bronx. Both Vernado and I are lucky to be New Yorkers. My daughter and three granddaughters live in the Bronx and my son and his family live in Brooklyn. My wife of 56 years and I live and work in Manhattan. We follow the rules and we pay our fair share. Vornado will pay $560 million in real estate taxes this year and I'm pretty sure that's in the top three. And that doesn't begin to count the personal income taxes that I and our Grenado population pay to the city and state of New York. We work our asses off. We are not boastful. We are very proud of our lifetime of achievements. We are the company that is investing billions to transform the Penn District. New York is a union town and we are a union shop employing thousands of hard working New Yorkers in our buildings and on our construction sites. The ugly unnecessary video stunt is personal to Ken and sort of personal to me too. You see, Vornado and I are the developers of both 220 Central Park south residential building and the 350 Park Avenue Citadel Tower. We are all shocked that our young mayor would pull this stunt in front of Kent's home and single them out for ridicule. This was both irresponsible and dangerous. As I said, Vornado is the owner of the 65 year old building on Park Avenue on the Park Avenue blockfront that will be raised to make way for the Citadel New York headquarters tower which will employ thousands further cementing New York as the financial capital of the world and pay significant taxes and on and on. This building is being designed by the same Foster and Partners architectural team that designed JPMorgan Chase's new headquarters down the block. This is now the if we move forward project. Now, a project of this scale takes years and we have already worked with two prior city administrations, both of whom have recognized the benefits and have been enthusiastically welcoming and supporting and supporting. As evidenced by the rare unanimous ULIP approval for this project. Demolition began literally days ago and we at Tornado are ready to go. I must say that I consider the phrase tax the rich, quote tax the rich when spit out with anger and contempt by politicians both here and across the country to be just as hateful as some disgusting racial slurs. And even the phrase from the river to the sea. What these poll pauls seem to Be saying is that the rich are evil or the enemy or the targets, or maybe even just suckers. But the rich whom the politicians are targeting started at nothing, are the epitome of the American dream. They are our largest employers and largest philanthropists. And it is the 1% that pay 50% of New York's income taxes. They are at the top of the great American economic pyramid for a reason. They should be praised and thanked. Ken, our partner and friend, is the best of the best. So where are we now? As we discussed last quarter, Ken exercised his option to enter our development joint venture and build a new 1.9 million square foot tower with Citadel as the anchor tenant. We have until the middle of July to sign decide whether to participate with Ken in the venture or to sell to him. It's a good bet that we will go all in. This fence cannot be mended by a short, terse, insincere private apology. What I beg my mayor to do is to begin every day being business welcoming and business friendly as his first priority. That's the only way to get the growth and financial wherewithal to accomplish his programs, some of which I must say are interesting and valid. Public safety, schools, child care, clean street housing, affordability, homeless programs, et cetera. The election is over. Now is the time for hard work and management, not showboating. New York is an enormous enterprise with a city budget of $120 billion and a state budget of $250 billion. If there is a 5 or $10 billion budget shortfall, surely that can be found. That money can be found by managing rather than by taxing. It is interesting to note that high tax New York spends more than double per capita. Double per capita than low tax or no tax, Florida or Texas. There is a lesson here. Maybe something good can come out of this blunder. Maybe we can draft Kent to become active and lead an effort to educate New York voters and to elect right minded candidates. Ken can do it. He's the one who could galvanize the entire business community. Here's an interesting fact to it. Members of the partnerships in New York city alone employ 1 million voters. Hundreds of our business leaders would line up to support Ken. I would be first in that line. I was taught and I believe that. I believe in an America where after an election, all sides get behind us and support the winning candidate for the greater good. Our mayor is young, smart and energetic. With a little tweak here and a little tweak there, his leadership could make this great city even greater. He will learn over time that growing a tax base is a winner and raising taxes is a loser. I will say it again. He will learn over time that a growing tax base is a winner and raising taxes is a loser. And that's a hard working 1% are allies, not enemies. Let's learn from this mistake and move upward. Turning to Vornado, we now have a lineup of assets and in process projects which I am confident will deliver the highest growth in our industry. Executing on all this is now our singular focus. In this year 2026, we will complete the heavy lifting of leasing at Penn1 and Penn2. As Michael and Tom have already been saying quarter after quarter. Our published numbers will reflect all this by the end of 2026 and going into 2027. As part of our focus on enhancing our portfolio and making great deals, we announced last week the acquisition of a 49% interest in Park Avenue Plaza, a 1.2 million square foot class A office building along the prime stretch of Park Avenue. This asset is directly across the street from our 350 Park Avenue project. The building is 99% occupied by blue chip tenants with an 11 year weighted average lease term and rents that are 40% to 50% below market. Prime Park Avenue AAA assets rarely trade and we believe we made an excellent purchase. We're buying the asset at $950 per square foot which is 65 to 70% discount to replacement cost and we are inheriting a fixed rate, a sub 3% loan through 2031 to leverage off an enhanced return. We expect the transaction to be approximately $0.10 accretive on a full year basis. In the first year we are happy to be partnering with the Fisher family who own the other 51% of the assets. We have a long relationship with the Fisher family. They are a first class operator who think much like we do with Park Avenue Plaza. Our recent acquisition of 623 Fifth Ave and the pending development of 350 Park Ave, we will be adding, call it 2 million square feet at share of the very highest quality prime assets to our portfolio at Very Accretive economics. Speaking of 623 Fifth Avenue, our 383,000 square foot asset which we are redeveloping to be the premier boutique office building in Manhattan. We are far along in our design and planning. We are receiving outstanding reaction from the market and already have active tenant interest at or above our underwriting. Demand for our retail assets is robust and accelerated.
Michael Frankel (President and Chief Financial Officer)
We have a handful of assets for sale in the market. I covered share buybacks in my recently posted shareholders Letter to date, under our $200 million share buyback program, we have repurchased 7 million common shares at an average of $25.80 per share, totaling $180 million. Last week our board authorized an additional $300 million buyback program. Now to Michael thank you Steve and Good morning everyone. First quarter Comparable FFO was $0.52 per share compared to $0.63 per share for last year's first quarter. This decrease is consistent with our comments from the prior quarters and is primarily due to the reversal of previously accrued Penn one ground rent expense in the prior year's first quarter and higher net interest expense partially offset by higher FFO resulting from the execution of the NYU master lease at 770 in the prior year and strong income growth at Penn 1 and Penn 2. We have provided a quarter over quarter bridge on page two of our earnings release and on page six of our financial supplement. We now expect full year 2026 comparable FFO to be slightly higher than 2025, ramping up each quarter due to gap rents coming online, lower interest expense after our June 2026 bonds repaid, and some seasonality relating to our signage business. As previously indicated, we expect there to be significant earnings growth in 2027 as the positive impact from 10:1 and Penn2 lease up takes effect, as well as the positive impact of the recent acquisition of Park Avenue plus Turning to Leasing the Manhattan office market is head and shoulders the best in the country and is off to its strongest start to
OPERATOR
a year in over a decade. Manhattan leasing volume reached nearly 12 million square feet, the highest first quarter level since 2014. There is a significant supply demand imbalance in the 180 million class, a better building market in which we compete as the availability rate in the prime submarkets in Midtown and the west side has tightened significantly and there is little new supply coming for the foreseeable future given the significant cost and duration to build. This is all resulting in tenants competing for space and rents rising aggressively. The landlord's market we have been long predicting is very much here, while the macro environment we operate in today has gotten even more complicated since our last call and the geopolitical volatility is as high as we've seen in some time. The US Economy just continues to chug along as does New York's. While there is a risk that the Middle east conflict lasts much longer and has a greater economic impact, to date we have not seen any change in tenant behavior. Moreover, while there has been a lot of AI fear mongering out there and while we are respectful to risk, we believe it is overblown. Over the past 50 years, office using jobs have continually evolved based on new technology from the computer revolution of the 1980s when personal computers and word processors were introduced to the 2000s when the Internet transformed workflows and the way we communicate to now with AI improving efficiencies and increasing productivity. In every example, office using jobs were not reduced but they shifted from clerical based functions to knowledge based roles and each new revolution spurred productivity and economic growth. With new businesses and net positive jobs created, there will be winners and losers, but by industry, by job function and by geography. But make no mistake, New York and San Francisco will be winners as the intellectual and innovation capitals of the country where talent will continue to aggregate and in the best buildings At Vornado we are coming off our second best leasing year in our company's history where we leased 3.7 million square feet with 960,000 square feet of New York office in the fourth quarter. Business continues to be very good and the momentum from last year has continued during the first quarter of 2026. In the first quarter released 426,000 square feet of office space overall, including 311,000 square feet in New York. Our metrics were very strong. Average starting rents in Manhattan were $103 per square foot with mark to markets a positive 11.7% GAAP and positive 9.7% cash and an average lease term of nine years. Our new York office pipeline is robust and has over 1 million square feet of leases in negotiation and various stages of proposal. Turning to the capital markets, the financing markets continue to be strong and liquid for Class A New York office assets, though pricing has widened a bit given the current geopolitical environment. The investment sales market continues to heat up as well, with a broadening set of buyers keenly focused on New York City. We are very active in the capital markets in the first quarter, most of which we covered on the last call. Given we've dealt with almost all of our 2026 and 2027 maturities, we don't have any significant financings we need to complete for the next 18 months. We do still have a few loans that we need to work through at lenders over the next two to three years. Finally, our liquidity remains strong at $2.6 billion, which is comprised of cash of $1.2 billion and our undrawn credit lines of $1.4 billion. With that, I'll turn it over to the operator for Q and A thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touchtone phone. If you wish to be removed from the queue, please Press Star then 2. If you are using the speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star than one on your touchtone phone. Each caller will be allowed to ask a question and a follow up question before we move on to the next caller. This first question comes from Steve Sacwa at Evercore isi. Please go ahead.
Steve Sacwa
Yeah, thanks. Good morning, Steve. Thanks for your opening comments on the city and the administration. I guess maybe going to Michael's commentary on just the pipeline and the million feet. I didn't know if Michael or Glenn could maybe expound a little bit on how much of that is for upcoming lease expirations, how much of that is for kind of vacancy within the portfolio. And I guess most of that's probably in New York, but maybe discuss kind of The New York vs. Chicago vs. San Francisco demand trends.
Glenn
Hi Steve, it's Glenn. How you doing? So you know, our pipeline is extremely well balanced. Of the million feet, it's right down the middle. 50% new expansion, 50% renewal. The other thing I'll note is on renewals due to the lack of quality space available in the market, we're seeing many of our tenants coming to us early on renewals since they can find quality alternatives, which is a key indicator of a rising landlord's market as it relates city to city. San Francisco is coming on very strong. While we have some vacancy, as you see from the first quarter numbers, we have tremendous activity on all the vacancy. Our deals in the tower at 555 are now north of 160. A foot volume in San Francisco overall is strengthening week to week and certainly everyone out there is feeling a lot better. And deals are happening in a very rhythmic pace. Chicago is starting to come on, demand is improving, the deals are tough, but there's certainly tenants coming new to the market and we're seeing a lot more torn proposals coming into March as we go into the second quarter and into the summer.
Steve Sacwa
Great, thanks. And then maybe just as a follow up, we did notice that in terms of lease commencements, the Verizon lease kind of had a little bit of a change in status. And I'm just wondering if you could maybe talk about kind of what their, I guess ultimate status is with the building and did that lease kind of start earlier and is that a benefit to the 26 earnings growth.
OPERATOR
Steve, it's Thomson Elliott. I'll take the first part of it. And I guess, Glenn, you could talk about the status. So because Verizon told us they're not going to build out their space and they put in the sublet market, gap allows us to start revenue recognition early. So you'll see that flow through all of 2026. It started in the first quarter. On the leasing front, the block of space is excellent. It's 200,000ft and includes 30,000ft of outdoor space. We're in a great position. We have a Horizon public parent guarantee for the entire league to begin with. So great credit. We continue to show this space, as does Verizon. There's very good action. And whatever the outcome, Vornado is in a great spot as it relates to that position. Thank you. And our next question today comes from John Kim at BMO Capital Markets. Please go ahead.
John Kim (Equity Analyst)
Thank you, Steve. Really appreciate your opening remarks and really provide a lot of clarity on how you're thinking about moving forward. But I wanted to ask you about your statement that you're all in at 350 Park. Are you all in even if Citadel will not commit to the building? And how should we think about the put option we have in SpaceOeye? I didn't hear the last part. How should we think about. How should we think about the put options, as you said, John? Yeah, that's right. Is that something that you'll let pass or is that something that could be. The date could be extended?
Steven Roth (Chairman and Chief Executive Officer)
The answer is that can exercise to go ahead. We have until the summer to decide whether we are a participant or a seller. And I expect that we will take all of that time, which is the smart and correct thing for us to do. There are still some documents and other details to be ironed out, but my remark was that I said where I expect we will be all in. I do expect we will be all in, but that's not a legal commitment at this time yet.
John Kim (Equity Analyst)
And that's all in with or without Citadel's commitment.
Steven Roth (Chairman and Chief Executive Officer)
No, the answer is the question is, is it all in, regardless of whether Citadel is committed or not from a lease standpoint? No. No. Citadel has to be committed. They will be committed. So, I mean, this whole deal is based upon the fact that Citizen will be the anchor tenant, taking no less than 850,000 square feet, although we expect more. And Ken Griffin is the 60% partner. We are a 36% partner and the Rudin family is a 4% partner. That's the state of play this whole thing Ken has committed to start. This whole thing will all come together and become very clear in the mid summer.
John Kim (Equity Analyst)
Okay, thank you. And then I wanted to ask about the $200 million of signed leases not commenced figure that you provided last quarter. If there's an update to that figure in terms of dollar volume timing and if there's any offsets through known move outs during that time frame.
Michael Frankel (President and Chief Financial Officer)
Good morning John. I would say the number is still in that general neighborhood. It's probably a touch larger today, but it's generally in the same ballpark. And I think in terms of thinking about it, probably 10 to 12% comes in per quarter over the next couple years. From a pacing standpoint, there are some offsets, whether it's expiry's vacancies, et cetera. I think Steve on the last call sort of said from a modeling standpoint, assume $0.40 a share flows through to the bottom line. So we're going to stick with that for now. But that will give you a sense in terms of the pacing of that 200 ish million dollars and that started this.
OPERATOR
Thank you. Our next question today comes from Floris Van Dykem with Lynn Ladenburg. Please go ahead.
Floris Van Dykem (Equity Analyst)
Hey, thanks guys. Appreciate some more color on that large S and O pipeline. Could you maybe just expand on that a little bit? What percentage of that S and O pipeline is in the Penn District and how much of your does it include retail leases? You've done some leasing on Upper fifth Avenue in particular. Maybe if you give us a little bit more color. The Penn District versus other areas in your portfolio. Morning Flores. That number is pretty much all office, so I can't give you the retail number as we sit here right now. Obviously the lease with Meta is a big positive. And in terms of the 200 in terms of Penn versus others, I would say it's probably 2/3 Penn, which should not be surprising given the lease up of Penn2 and the balance in Penn1. And maybe my follow up question as it relates to your Park Avenue Plaza acquisition, I mean what caused that deal to happen? Why did the Fisher brothers, I guess sell out? It looks like it's like a 6, 7 yield on cost if I'm not mistaken, to get to the 10 cent accretion. That seems pretty attractive. Is that a cash yield or is that a gap yield? How much of a mark to market? How much more growth in terms of earnings do you expect to get from that property going forward?
Michael Frankel (President and Chief Financial Officer)
All right, let me see if I can remember everything you Asked here. Flores. Look, we're thrilled about the acquisition. These types of assets don't trade very often on Park Avenue. It's certainly one of the best assets on Park Avenue. And in terms of the yields on
OPERATOR
a cash basis, given the in place debt, it's, you know, roughly 8% on a cash basis, it's, you know, well in the double digits. And as Steve said in his remarks, you know, rents are, you know, well below market here, you know, probably at least $50 per square foot below market. So, you know, over time, you know, things are not static. There's action with tenants. We'll capture that and that, you know, and that's without rents growing. So if rents grow further, that gap should widen. So we're excited. By the way, the Fishers did not sell out. They remain, they still hold their 51. And I think their track record of performance on the asset is stellar. It's a blue chip set of tenants. They're leased long term. They're quite effective at signing long term leases with high quality tenants. And that's reflected in this asset. And the tenants, some which we spoke to about their experience couldn't have raved any more about the quality of the asset. And they have grown over time there. So we're excited about the asset. We think there's tremendous value to be created over time. And so I think I addressed all your comments, questions. Thank you. Our next question today comes from Alexander Goldfarb at Piper Sandler. Please go ahead.
Alexander Goldfarb (Equity Analyst)
Hey, good morning down there. And Steve. Yeah, echoing. Appreciate your comments up front. Just crazy. But thank you for your statements. Michael, just following up on Flores question. The two items in the 26 guidance, one, the 10 cent accretion for Park Avenue, is that the GAAP impact or that the cash, just as we think about ffo. And then the second part of that guidance question is there was an item about the mass Release changing at 350 and just want to know how that impacts the earnings for this year. That's my first question.
Michael Frankel (President and Chief Financial Officer)
Park Avenue implies that the 10 cent is a full year run rate. So obviously we're not going to have that for 26. That's a GAAP number. And on the 350 the change there was done given Citadel wanted to kick off the development, they wanted to vacate. We couldn't start demolition without defeating the old CMBS loan. And so that loan was defeated, as you saw in our queue. The master lease was modified. There were a number of changes made in the documents and so that was A negative to 26 earnings, which, you know, when we talked about it, given our comments, Alex, the deal always contemplated that when Citadel vacated the building so that the building would be demolished, that the rent would be reduced or even go away. The earnings ding by that reduction, much of it will be made up by capitalizing interest, et cetera. So while the earnings, what exactly is going to happen? So in 2026, you know, for the next few months, until we decide whether we're going into the JV, there's a wash. There's no earnings coming out of 350 mark. Once we make that decision, assuming we go into the jv, we're going to start capitalizing interest and costs. And so you'll start seeing will that equal, exceed or be less than the 36 figures. It initially be a little less and then it eventually over 27, 28, 29 basically equates to what we were getting for five or six months. There's a negative ding given the master lease. But again, that's previously communicated. Alex, does that satisfy you? Alex?
Alexander Goldfarb (Equity Analyst)
That's awesome. Second question, Steve, is big picture with regard to Citadel and the whole tension with the mayor. Back in 2019, Amazon wanted to open in Queens. They were rebuffed. But I don't recall this amount of instant negativity and political nervousness today. It's clearly escalated a lot quicker. What do you think has changed? Certainly politics have become more left, more progressive here, but why do you think, Ken, this time the politicians seem to be much more eager to make everyone be happy versus Amazon. The city and the state seemed happy. It wasn't even a ripple when Amazon walked from Queens. It doesn't seem that. What's the difference now versus then?
Steven Roth (Chairman and Chief Executive Officer)
Gee, I don't know. But you're correct that the body politics doesn't seem to have any remorse about losing Amazon. On the other hand, the body politics think that the digital team is important, an enormous contributor and there is a significant feeling amongst the political leadership and the business leadership that this was a mistake which I described as a blunder. And you know, this is something that should be repaired and we'll see where it goes.
OPERATOR
Thank you. Our next question today comes from Dylan Brzezinski at Green Street. Please go ahead.
Dylan Brzezinski
Hi guys. Thanks for taking the question. Michael, I think you mentioned that pricing has widened given some capital markets, volatility associated with the war in Iran. Curious. If you can just provide more color on that and then maybe if you can sort of flavor in some commentary around. I think last quarter you guys mentioned looking to put assets in the market. Just sort of any sort of color you can provide on sort of how those processes are going on. The financing markets. Financing markets were incredibly strong in the last year. Beginning of this year, as tight as spreads as we had seen in some time. Given the volatility, it's backed off a little bit. There's still depth in the market. Deals still can get done, particularly for high quality assets. I wouldn't call it a huge impact, but the reality is, look, Treasuries are probably up 30 basis points or so and spreads have widened out a little bit. So that makes the borrowing costs a little lighter, but not wildly different. This is still a very functioning marketplace for high quality assets, but off maybe 40, 50 basis points in total. I'm glad we did what we did when we did it. So we're not really dealing in today's markets. But again, you can get deals done. On the asset sales side, I think Steve referenced we're working on some asset sales and that is true. And when we have some ready to announce, we'll announce. But the answer is we got a few things that are meaningful in the pipeline. We're in active discussions with potential buyers. I would say the interest in New York City, as I said in my remarks, continues to expand. In terms of the type of buyer, I think there is consensus on New York being head and shoulders. Best market assets are, rents are rising, assets are at a discount to replacement costs. There's a recognition there's not a lot of supply coming. And so I think global capital has a lot of comfort in it. I think one of the things we're hearing from capital sources around the world is the US remains the safest, most liquid market, particularly given everything going on around the world. I think you're going to continue to see capital emanate from other parts of the world to come into the U.S. i mean, new York City is going to get a heavily disproportionate share of that. So that's what we're seeing. And when we have specifics to announce, we'll announce it. But we're encouraged by of what we're working on. And then just on the rent growth piece, I think several quarters ago I asked 20, 25% rent growth, if you saw that over the next five years, what were your thoughts would be on that? Steve, I think you mentioned while that's good, that would be disappointing given everything you're seeing on the supply and demand imbalance, especially for high quality office. Can you just talk about how far rent growth could go in your mind and has your thoughts around that 25% cumulative rent growth figure changed at all?
Michael Frankel (President and Chief Financial Officer)
I think we'd still be disappointed in that, Dylan. You know, look, as I think we've said in the last couple of calls, right, the backdrop for office is as favorable as it's been in, you know, a long, long time. And it's very difficult to add supply here, which at some point we're going to need. So there's going to be a building a year, maybe as we get into the next decade, but that's very little. At the same time, we have supply coming out of the bottom end of the market. So the fundamentals are great. Companies, as we've said, continue to want to grow here. We're seeing still significant activity from the financial sector, service sector, law firms, accounting firms. Frankly, AI has picked up more recently. So I think all that results in rents continuing to rise. So I don't know that it makes sense to give you a prediction, but we'd be disappointed at 25% over five years. I don't know.
OPERATOR
You want to add any comments on what you're seeing? I mean, look, rent sensitivity is not even high on the list right now. Tenants want to be in the best buildings with the best landlords. And if you think about our leasing performance, $100 a foot has become the norm for us because of the quality of our product over the past eight, nine quarters. Our average starting rent is $100 a foot. That's a great trend. So as we go on here and the way we're shaping the portfolio, with the addition of 623 Park Avenue Plaza, the new 350 park, we think rents are going to continue to spike. And the way we're balanced on the west side and now Park Avenue, we're really excited about that. We think we're in perfect position for what's to come on rents and tenant demand. Thank you. Our next question today comes from Yana Gallen with Bank of America. Please go ahead.
Yana Gallen (Equity Analyst)
Good morning. Thank you. And congrats on the strong start to the year. Michael, appreciate your comments on the 2026 FFO now expected to exceed 20. Just curious if that's primarily from the Park Avenue plaza closing in 2q or also from 1q being slightly ahead and carrying throughout the year.
Michael Frankel (President and Chief Financial Officer)
I'd say it's the latter.
Yana Gallen (Equity Analyst)
Great. And Then maybe on 555California, if you could give some update on kind of demand leasing and rents there. And are AI tenants becoming a bigger part of the pipeline there? And in the new York pipeline as well.
Glenn
Glenn, how are you? So rents in San Francisco are rising a lot. As I said earlier, our rents in the tower have now gone north of $160 a foot for substantial leases, 50,000ft and greater, not small deals. So we are leading the market by far at 555cal. We're also seeing a lot of really good activity at 315 Montgomery in the campus with more technology, AI type tenants. So certainly that activity we're seeing at our project at our complex as well. But other than tech and AI, financial services is growing in San Francisco, something we've kept a very keen eye on as well as law firms. So it isn't just AI, although it's helping a lot as the state improves. But the other industry sectors are really coming on strong and the city overall feels great. I was out there a few months ago, walking the street, meeting with people. It's really feeling good out there and people are already positive again in San Francisco.
OPERATOR
Thank you. Our next question today comes from Anthony Palone with JP Morgan. Please go ahead.
Anthony Palone (Equity Analyst)
Great, thanks. You talked about having some assets out in the market for sale, but if we think about just whether it's 350 54th street and then 5th Avenue, some of these projects that are going to be in the pipeline, how are you thinking about just your pro rata leverage level over the next couple of years and whether there's going to likely be a bigger disposition program or whether you think you'll just use project financing, take on a bit more leverage?
Michael Frankel (President and Chief Financial Officer)
Morning, Tony. You know, we've got, you know, the capital earmarked for all these opportunities, you know, in our cash forecast, you know, we've got, we've got some asset sales in the works that like, we obviously have a lot going on between these investments that we've made recently. You know, 6 Park Avenue Plaza, the buybacks, some of the future developments, I would say about the future developments, something like a 350. The bulk of our equity is coming from our land contribution. So any incremental capital is really not required from Vornado for probably close to three years. So we've got ample time to plan for that and so forth. So when you look at our sort of capital needs, if you will, over the next few years, it's fairly well laddered. But at the same time, as we execute hopefully on some of these asset sales, that's going to give us some additional firepower, frankly, beyond just what we're talking about in terms of these developments.
Steven Roth (Chairman and Chief Executive Officer)
If you look at our history with respect to capital planning, we have three or four things that we have historically done. Number one, we generally hold billion dollar plus cash balances. The second is that we almost always pre fund well in advance of our capital needs. So for example, we loaded in, I don't know, 2, $2.5 billion of capital two years before we started the Penn One and Penn Two development. So that notwithstanding the fact that the capital market got a little bit rough and volatile when we were actually building, we had the capital on our balance sheet. So that's what you can look at for what we do. The other thing is that we like to operate with lower rather than higher debt levels for the obvious reason. The last is that our philosophy is that we like non recourse project level debt as opposed to unsecured credit, which basically makes the entire corpus, I guess you could say personally liable. So we like non recourse project level debt which is the majority of the way we finance our business.
Anthony Palone (Equity Analyst)
Okay, got it. And then just follow up question on the leasing side. I think there's about 600,000 square feet in the fourth quarter that comes up. Is there anything larger in there? That's a known vacate. I just can't remember if there's any big deals in that mix to watch out for.
Glenn
It's Glen Heights. There's two larger tenants expiring in the second half of this year and we believe both will renew their leases. And we feel good about our expiration for the remainder of 26. And as you would expect, we're all over the 27, 28 expirations as well. But 26, we're pretty well taken care of. We feel good about what's going to happen.
OPERATOR
Thank you. Our next question today comes from Victor Malhotra with Mizuho. Please go ahead.
Steven Roth (Chairman and Chief Executive Officer)
Thanks for taking the questions. I guess. First one, given all the kind of activity you've had with all the Penn assets, any update on Hotel Penn and Manhattan Mall in terms of users monetization, etc. No update. Okay. And then just on the earnings side, you mentioned 2027 SFO. Nice pickup. I'm wondering, you know, two things. One, are there any offsets we should be thinking about for 27? And then in particularly FAD, given the ramp in FFO, I'm assuming there's still going to be elevated TI into 27. So should we think about FAD? Really perhaps picking up only in 28? Thanks. Yeah. Good morning, Vikram. Hey, Vikram. I would make one comment. Okay. I can't wait for the free rent to burn off. That's when this business will get to be real fun and will generate substantial positive cash. That happens over the next year or two. I can't wait for that now. Go ahead, Michael. By the way, Glenn, take note of what I say.
Michael Frankel (President and Chief Financial Officer)
So on the fad side, Vikram, your comment is right. There'll be continued elevated tis this year, next year, even on deals they've committed this year, tenants don't call those for a while. So that'll go into next year and then 28. We expect to see that drop materially and cash flow be much higher. So I think your general direction is accurate. On the earnings side, there's always ins there's always offsets. I can't tell you specifically what those are, but in the history of Vornado, I think we've given you as much guidance as we can give you with respect to next year in terms of what the bottom line is going to be.
OPERATOR
Thank you. Our next question today comes from Nick Ulico at Scotiabank. Please go ahead.
Michael Frankel (President and Chief Financial Officer)
I just wanted to go back to 350 park and just be clear on a couple things. One, in terms of the new 16 million annual rent versus the old rent, did that already happen in the first quarter? Is that a second quarter accounting impact? And then I also want to be clear on that new rent that's being paid. What is the maturity on that lease? Is that concurrent with the debt? The new mortgage that matures next year, or does it extend beyond that? Good morning, Nick. So on your first question, new rent started. I mean, there are a few days in March where it started, but, you know, by and large it'll be second quarter. So I don't know, maybe there were 15 days in the first quarter where the new rent was reflected. The new rent is coterminous with the execution of the new mortgage. So I don't know what that date is, but it's a couple of weeks or three weeks ago, whatever. Yeah. So that new lease runs until early 27. And, you know, your question is, you know, why is that? Because, you know, there will be a resolution one way or the other. Either the venture will be formed, we'll put the asset, you know, something will happen prior to that maturity. Okay, so the rent, that new rent only, is only in place until the point at which the mortgage matures. There's no, there's no rent being paid beyond that date under the new agreement. Correct. But there'll be, there'll be a, you know, there'll be a resolution. Door A or board B before that, which, you know, the rent gone away anyway.
Nick Ulico (Equity Analyst)
There's no, there's no building. There's no building for the tenant to pay rent for.
Michael Frankel (President and Chief Financial Officer)
I just wanted to be clear on that. And then I guess second question is, you know, obviously, I mean, you've talked a lot about, you've given some of the breadcrumbs on 2027.
Nick Ulico (Equity Analyst)
How to think about that.
Michael Frankel (President and Chief Financial Officer)
You know, it is also 2027. FFO is a piece of the executive comp, per the proxy plan. So I guess I'm just wondering, like, if you. Any new thoughts on this, Steve, about finally giving earnings guidance? You're at the point now where the tide is turning. You're being measured by that from a comp standpoint. Why not give formal FFO guidance at some point?
Steven Roth (Chairman and Chief Executive Officer)
Oh, Lord, how do I answer that question? The two sides of it is that we have a simple business which has complexity and the numbers are moving. It's very. I mean, we find it that it's sort of difficult to guide and counterproductive. So Warren Buffett, who's not a friend of mine, but an acquaintance of mine, he didn't guide for his whole career, so that's one thing. And the big bank guy, he doesn't guide either. So. But all of our competitors seem to be able to guide. So what's wrong with us? But right now we have no plan to guide other than the snippets that we put in these calls here and there, which I think, I hope you all find helpful. Now, what I think you're saying is that if our earnings are going to explode up with, why don't we just take a pat on the back for that and guide to that. So that's something that I'm going to put under my pillow and think about because that sounds like maybe it's a good idea. But as of right now, our policy is we selectively and in a limited way guide, but we don't give full guidance. And I think you can probably guess that that's going to continue for the, you know, for the future. Tom, what do you think? Tom's saying he's happy he doesn't have the guide.
OPERATOR
Thank you. And our next question today comes from Seth Berge at Citi. Please go ahead.
Seth Berge (Equity Analyst)
Hi. Thanks for taking my question. In the annual shareholder letter, you kind of referenced the no sacred cows policy. Again, it sounds like the New York office, transmarket is improving. You mentioned possible kind of inflows given it's a liquid market in the US is just safety. How do you kind of think about potential asset sales? Should we think about those being more non core dispositions or any core asset sales that you're kind of thinking about?
Kyle
Summarize the question for me as Kyle, you mentioned your letter to no sacred cows. Is that just New York or is that some other assets we should think about? Non core dispositions?
Steven Roth (Chairman and Chief Executive Officer)
I mean, I don't want to shock you, but basically I'm in it for the money. And so therefore there are no sacred cows. There are assets that are critical to the business. There are assets that are important to the business. There are assets that we love more than other assets. But based upon price economics and business strategy, there are no sacred cows. Now what does that mean? There's a handful of assets that we actually have already determined that we don't want in the business mix, and those assets are for sale. Our intensity, if that's a word, to liquidate those assets rises and falls with the market. But over a short period of time, there's a handful of assets that will not be part of our portfolio. Now, getting to the rest of it, there are assets that we hold near and dear, that we think are very valuable, that we underwrite as being much more valuable than apparently the stock market underwrites it. Even those assets, if I think Sam Zell said the phrase a godfather bid, if some very aggressive bid came in for one of those important assets, we would execute on that because that would be the right thing to do. That's the right thing for the management to do, and more importantly, it's the right thing for the shareholders to do. So there are no sacred assets. There are prices that are critical. But in terms of whether we would execute on selling something, it's all a function of what the price is.
Seth Berge (Equity Analyst)
Great. Thank you. And then for my second question, I guess, how do you think about kind of incremental potential acquisitions versus accelerating the share buyback and balancing that versus your current leverage levels?
Steven Roth (Chairman and Chief Executive Officer)
So there's three things inherent in that question. There's acquisitions versus stock acquisitions and leverage levels. So the answer to that is that we think. No, let me rephrase that. We are certain that we can basically do all three. We are certain that we can buy selectively important assets that come up in the bullseye location of our heartland. We are certain that we have the capital to buy back our stock in a measured way, and we are also certain that that we are able to keep our leverage to a measured and under control level. So we think we can do all of that. And we have some things that are in process that will augment all of that. So our two most recent acquisitions of 623 Fifth Ave which we think, I mean I've written about that and we think is a terrific deal and the Park Avenue Plaza acquisition that we just announced a couple of weeks ago, we think is an equally terrific deal and we think buying back Our stock at $30 a share is a terrific deal as well. So we're doing all of that and I hope that answers your question.
OPERATOR
Thank you. Our next question today comes from Caitlin Burroughs at Goldman Sachs. Please go ahead.
Caitlin Burroughs (Equity Analyst)
Maybe just on the pricing side, I realize the reported leasing spreads are only on a subset of second generations based. So first I was just wondering if you can go through your expectation today of portfolio mark to market across New York, San Francisco and the mart and then also whether you expect that portion that gets included in the spreads to increase as in like could downtime become smaller?
Glenn
Good morning, it's Glenn. So on the question of mark to markets, we expect to continue the performance we've had over the past couple of years, which are positive, positive and positive. During the last two years we've only had 1/4 negative which we like and we expect to continue. Many have been in the double digit positives. We expect free rent to continue to reduce and even tis are starting to come down. So we're working hard on that piece, of course. And San Francisco is the same. With the rents we're achieving, the mark to markets will continue to improve. Chicago, as I said, is still most challenging. Although demand is picking up, rents are staying firm. Concessions are high in Chicago. Those have yet to break downwards. But demand is certainly improving.
Steven Roth (Chairman and Chief Executive Officer)
Think about just economics 101 or macroeconomics focusing on New York for the moment. I mean we've said and I've written about that we compete in a subset of better building class A space which is a under 200 million feet. So the fact that there may be 400 million feet in New York is irrelevant because we really compete in a market which is about half that size. The availability of space in that market is evaporating very quickly. I mean somebody used the analogy of an ice cube in a microwave. We are getting, I mean we know that because we are a key factor in the market. We know that because the incoming calls from brokers looking for space for their clients are starting to get more anxious and even more desperate. So as the availability of space shrinks, obviously the price goes up. Now there's something else going on which is equally important. And that is the cost of a new building has gone from whatever to somewhere around, pick a number, $2,500 a foot interest rate and the cost of capital has gone from 0 or 2% to 5, 6 and 7%. So the rents that have to be achieved to make a new building economic are well into the $200 a foot and even touching $300 a foot, that's never happened before. So obviously rents on older buildings, which are still great buildings and great locations, are going up because of scarcity and because of the cost of new supply coming on the market. So this is just basic economics 101. The next part of it is that I believe, and my team can speak for themselves, I believe that we are in a long, long, long term landlord's market where these dynamics will continue. Why is that? Because there's nothing in the short term that can change that other than if interest rates dip down to 2% or something like that, which you can make your own judgment whether that might or might not happen. So if that happens, basically I'm not in a big rush to rent space at today's prices because I think tomorrow's prices are going to be higher and maybe even a fair, a lot higher. Thanks.
Caitlin Burroughs (Equity Analyst)
I guess, maybe just to follow up on that last point, I know leasing volume in the first quarter was relatively low, so would you just say that that's lumpy? Is it more about that you're not in a rush because rents could be rising or something else?
Steven Roth (Chairman and Chief Executive Officer)
Glenn is in the business of renting space as quickly and aggressively and as hungry as he can be. So if there is any fall off in volume, it's not because I directed Glenn to get out of the market. Glenn's in the market every day working his ass off. Thank you, Glenn.
OPERATOR
Thank you. Our next question today comes from Ronald Camden at Morgan Stanley. Please go ahead.
Ronald Camden (Equity Analyst)
Can't respond to that?
Michael Frankel (President and Chief Financial Officer)
No. Hey, if you want to respond, I could wait. Go ahead, Ronald, go ahead.
Steven Roth (Chairman and Chief Executive Officer)
Okay, great. Just two quick ones and thanks for taking the questions. Just number one, I think last call, you talked about some guideposts for occupancy over the next 12 to 18 months and thinking sort of mid-90s on a lease basis. Just wondering if you could provide any update both on a leased and on a physical occupied basis, what that occupancy target to look like over the next 12 to 18 months. Again, thanks.
Michael Frankel (President and Chief Financial Officer)
We've historically run our portfolio in the mid to high 90s and we expect to get back there. So that probably is over a couple year. Period. But that's again, given all the dynamics that Steve alluded to and we've talked about in the market and the lack of space availability that's going to happen. So Obviously leasing up 10 is a key part of that. But I think one of the analysts picked up this quarter that our occupancy actually went up 70 basis points, not the 40 because we took 350 park out of service. So that's what we expect to get. I can't tell you exactly what core it's going to be, but over the next couple years or so that's where we expect to get back to.
Steven Roth (Chairman and Chief Executive Officer)
But there's a couple of things to focus on. There is a couple of buildings that we are not renting. Why is that? Because they are over leveraged and underwater and it's uneconomic for us to rent bases in those buildings which really they're
Michael Frankel (President and Chief Financial Officer)
almost owned by the banks.
Steven Roth (Chairman and Chief Executive Officer)
And if we put ti into those buildings, it's basically burning money. So if you take those few and we have chosen, I don't know whether this is a good decision or not.
Michael Frankel (President and Chief Financial Officer)
We've chosen to leave those in the
Steven Roth (Chairman and Chief Executive Officer)
aggregate statistics where some of the folks in our industry have taken those buildings out of the numbers which makes their occupancy higher. So if you take those numbers out, those buildings out of our numbers, our occupancy goes to what, 94, something like that? 95. 94. So we know that number, although we don't publish that number. And maybe we should. Although right now I'm publishing that number. So that's the, the second thing is that I look upon in a landlord's market like this, I look upon vacancy and available space as an asset because as we rent that space and we will with 100% certainty, that will grow our earnings. So when you think about investing, maybe the best company to invest, invest in is the company that does have available space in this market as opposed to a company that has space already rented. You can make out of that, whatever you will. Thanks.
Michael Frankel (President and Chief Financial Officer)
Really helpful color. And then my second one, if I may was just a lot of the footnotes in the supplement just on, I guess on pen1. Any idea when that litigation will be? Just in terms of timing, obviously can't comment either way. But just in terms of timing, is that something that can be done this year? And also the change in retail from the base of the office buildings being put in the office segment. Just the thinking there. Thanks.
Steven Roth (Chairman and Chief Executive Officer)
I'll take the litigation. I have absolutely no comment on anything having to do with that litigation other than I'm optimistic. Tom, what about the rebuild?
Michael Frankel (President and Chief Financial Officer)
Yeah, so we didn't change our segment reporting. Obviously we have two segments, New York and other. This is a sub segment. Ronald. What we did here is we tried to align the sub segment more on how we view the assets. So we grouped all the retail assets together and the office assets. So the base of 1290 retail is now included in office as opposed to being in retail. And any ancillary office space that's in a retail building is obviously in the retail subsegment and it's all disclosed obviously in the supplement. And we give you the exact buildings that are in each subsegment so you can follow along. I think this is the better way of looking at it as opposed to
Steven Roth (Chairman and Chief Executive Officer)
the way we would do in the previous one.
Michael Frankel (President and Chief Financial Officer)
Thank you. Our next question today comes from Brendan lynch at Barclays. Please go ahead.
Brendan Lynch (Equity Analyst)
Great. Good morning. Thanks for taking my questions. First one on Sunset Pier Studio, is there any interest in the current short term tenants in converting to longer term leases? Just an update on that.
Glenn
Hi, it's Glenn. There's great interest in Sunset and the studios. We're leased right now. Place is great. Unbelievably great. I would say best in the great. In our great location. We have very good activity. Long term folks looking, short term folks looking. So we expect to continue to fill up the project once this year's leases expire. But it's off the charts. The reception's been a plus. We expect to do really good things there on the leasing.
Steven Roth (Chairman and Chief Executive Officer)
But in direct answer to your question, I would definitely prefer to be in the long term leasing business with that asset rather than month by month leasing in that asset. So the answer is the ownership of that asset prefers to be in the long term leasing if the market gives us that opportunity.
Brendan Lynch (Equity Analyst)
Okay, thank you, that's helpful. And then a follow up on the verizon space at 10 2. Can you just walk us through if they find a subtenant versus you finding a tenant and how we should think about potential termination fees and any accounting around the ti's that you might still be responsible for if it's just a sublease instead of a cancellation and new lease.
Steven Roth (Chairman and Chief Executive Officer)
Glenn prefers that. I don't talk about. Go ahead.
Glenn
As I said earlier, we're in great spot no matter how it comes out out and we will only be opportunistic to make money on the space. We have a very good lease position and we'll see how it plays out. But that's as much as I think I want to talk about it for now.
Steven Roth (Chairman and Chief Executive Officer)
What do we have? It's basically a 19 or a 20 year lease. So we have a long term lease with a super credit. That lease will, we will never terminate that lease under any conditions. So the only thing that might happen is around the dynamics of a subtenant coming in because Horizon wants to reduce their liability. But we don't have anything to say other than that long term credit lease is not something that we are going to terminate or monkey with.
OPERATOR
Thank you. There are no further questions at this time. So I'd like to hand it back to Stephen Roth for any closing remarks.
Steven Roth (Chairman and Chief Executive Officer)
Thank you all very much.
OPERATOR
I mean, I think the team and I are delighted with our activity over the last three, four, six months. We are excited. We think we and I did make the statement in my remarks this morning that I am certain that over the next year or two we will have the highest growth performance of any company in our sector. And we're excited about that. We've got a lot of great stuff going on and thank you for participating. We'll see you next quarter. Thank you.
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