Vornado Realty Trust 2026 Q2 Earnings Call

Yesterday afternoon, we issued our second quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents, as well as our supplemental financial information package, are available on our website www.vno.com under the investor relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q and financial supplements. 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, 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 opening comments are Steven Roth, Chairman and Chief Executive Officer, and Michael Franco, President and Chief Financial Officer. Our senior team is also present and available for questions. I will now turn the call over to Steven Roth.

Thank you, Steve, and good morning, everyone. We had another strong quarter with comparable FFO of $0.67, beating analyst consensus by $0.10 or 17.5%. Michael will review it all shortly. First, let me cover what we are seeing on the ground. New York is clearly the best, strongest, and most important real estate market in the country, and the most resilient. We are a Manhattan centric office and street retail company with best in class assets which are benefiting from these dynamics. The stock market seems to appreciate this, given our stock price performance year-to-date, and over the past 2 years and the past 3 years has been the best in our peer group. There is more to come. I believe our stock is still stupid cheap. For example, Green Street shows us at a 23% NAV discount, much deeper than our peers.

The landlord's market that we've been predicting for the past many quarters is here. It is broad-based and it is strengthening. Office leasing volume in Manhattan is at its highest level in 25 years. Tenants are expanding all over the city. Available space and sublease space continues to evaporate. Office to residential conversions continue to remove square footage from the office inventory. There is a serious shortage of large block availability. Vacancies in the 180 million sq ft Class A better building market in which we compete is now down to 6.2%, clearly a landlord's market. There is limited new supply on the horizon. Remember, new supply takes as long as 5 years to deliver and requires upwards of $300 rent to pencil. To add to all that, interest rates are rising. As a result of all this good stuff, rents are going up.

I couldn't be more constructive. In New York, tenant demand spans across all industries. Law firms alone leased 2.3 million sq ft this quarter. Legal tech and media accounted for eight of the top 10 leases signed. This isn't one industry having a moment. All of our clients are growing. Interestingly, a real estate platform that tracks these kinds of things recently reported that AI companies are now leasing more space in New York than in San Francisco. All good. At Vornado, our singular focus is on executing our plan to deliver the highest growth in our sector based on our lineup of high-quality assets and in process projects. Here is our 2026 scorecard. During the first half of 2026, we leased 978,000 sq ft overall.

For Manhattan office, we leased 659,000 sq ft at $105 per sq ft average starting rents, with mark-to-markets of positive 9.5% GAAP and positive 7.1% cash. I would note that these mark-to-market stats do not include our leasing activity at PENN Two. We are following our transformation. We are achieving rents that are just about double the old rents. This is as good a place as any to take a victory lap for what we have accomplished at PENN One and PENN Two, financially, physically, and aesthetically. Think about it. At PENN One, broadly speaking, we invested $200 per sq ft to achieve a $50 a foot uptick in rents, which when all gets said and done, is a 25% return. Rents at PENN are now well above our underwriting and are now the best value in town. Plenty of room to grow here.

Our physical transformation is stunning and game-changing and award-winning. Please go take a look. During the second quarter in Manhattan, we executed 29 office deals totaling 328,000 sq ft at industry leading $107 per sq ft average starting rent, with mark-to-markets of positive 7.7% GAAP and positive 5.0% cash. This quarter's leasing volume included 181,000 sq ft in the PENN District and 167,000 sq ft in our other Manhattan assets. We are now consistently achieving triple digit average starting rents. I suggest that mark-to-markets is a squishy metric which depends entirely upon which leases are included in the calculation and their rent. It's pretty random. Rather, I submit it is better to look at starting rents for new leases as a much more fine-tuned metric, which would allow for better comparisons of buildings to buildings and companies to companies.

I confess to talking my book here, since our starting rents have led the N.Y. office public peers for years now. In the Penn District at Penn Two, we have 67,000 sq ft of leases out for signature, and we expect to be fully leased here down to dribs and drabs by year-end. At Penn One, we have 246,000 sq ft of leases out for signature at an average mark-to-market of a whopping 44%. Company-wide, we are projecting third quarter mark-to-markets of over 20%. I guess you could call this all sort guidance. With all of this activity, we continue to review our pricing here on a biweekly basis. Importantly, given that roughly 10% of the space at Penn One rolls each year, we expect continued strong growth from Penn One as we keep marching old rents up to market.

We continue to be delighted with our two most recent acquisitions, 623 Fifth Avenue and Park Avenue Plaza. Thanks to Harrison for giving us a shout-out for these two deals on his call. 623 Fifth Avenue is our spectacularly well located, and by that I mean in the center of everything, 383,000 sq ft asset which sits on top of Saks Fifth Avenue, that we are redeveloping to be the 220 Central Park South version of boutique office space. We are off to a great start here, receiving outstanding reaction from brokers and tenants. We are about to execute our first lease for two floors with a financial services firm at rents consistent with our underwriting. Of note, even at this early stage, market demand is telling us to increase our asking rents above original underwriting.

As you know, we recently acquired a half interest partnering with Fisher Brothers at Park Avenue Plaza, a 1.2 million sq ft tower on 53rd Street. The deal was at a valuation of $950 a foot, which for prime Park Avenue is a third of replacement cost. This asset, taking advantage of the in-place 2.9% mortgage loan with six years of term remaining, is a coupon clipper at 8% cash on cash. The way I look at this, we are earning double the risk-free bond rate from risk-free Park Avenue AAA real estate. Better yet, the in-place leases at Park Avenue Plaza are at, give or take, half current market. We expect very substantial capital appreciation here to go hand in hand with above-market current earnings.

Our market-leading signage business in the two most important and highest traffic locations in Manhattan, Times Square and the Penn District, continues to grow at a healthy rate. We love this business. It's capital light and has been growing at 5% per year. We intend to add more signage in the Penn District, where we control almost all of the real estate around Penn Station and Madison Square Garden. If you drive or walk past Park Avenue at 52nd Street, you will see that our 350 Park Avenue site is now under construction, actually under demolition. We intend to shortly exercise our investment option to participate in this deal at our maximum ownership percentage of 36%, alongside Ken Griffin as our 60% partner and with Citadel as our 1 million sq ft anchor tenant. Several commentators and analysts have suggested that we take the money and run. No, no. That would be incredibly shortsighted.

In our business, there is no better place to invest than prime Park Avenue with a million square foot tenant and a 60% partner already committed. We are contributing our existing land and 65-year-old building at a $900 million valuation. We have the balance sheet resources to support this deal and all of our other financial requirements as well. We have a $3.3 billion construction loan ready to go. I think $3.3 billion may be a record. The partnership, and by that I mean all partners, is contemplating selling down a 25% interest at a price which will give us an appropriate profit and also give the buyers an appropriate profit. We expect the joint venture closing will take place in September. We are extremely excited and bullish about the potential returns from this project.

The brokers and tenant community is buzzing. We are already getting incomings for available space, all of which is new space from 600 feet to 1,000 feet, from clients seeking the very best and for whom our delivery date fits their needs. At Vornado, management of our balance sheet is the highest priority. Michael and his team have worked very hard to get our debt ratio down into the sevens. We keep dry powder for offense and liquidity for defense in all cycles. We are in conversations to sell two non-essential assets, which would very substantially increase our liquidity profile. Here is the status of our stock buyback program. This quarter, we repurchased 1.8 million shares at $29.92 per share. Since we have started buying back shares in 2023, we have repurchased 8 million shares at $26.61 per share.