Executive Summary / Key Takeaways

• Vornado Realty Trust is strategically positioned to capitalize on the tightening Class A office market in New York City, leveraging its premier assets, particularly within the transforming PENN District, and benefiting from a lack of new supply.
• Recent significant transactions, including the UNIQLO sale, 1535 Broadway refinancing, and the 770 Broadway master lease with NYU, have substantially strengthened the balance sheet, reducing debt by over $900 million and increasing liquidity to $3 billion.
• Leasing activity remains robust across the portfolio, with strong demand for high-quality space driving rising rents and improving occupancy, notably at PENN 1 and PENN 2, which are expected to be significant future earnings drivers.
• Management expects 2025 comparable FFO to be essentially flat year-over-year, with significant earnings growth projected for 2027 as the lease-up of redeveloped assets, especially in the PENN District, reaches full impact.
• Vornado differentiates itself through its focus on prime locations and industry-leading sustainability initiatives, positioning it favorably against competitors in attracting tenants and enhancing operational efficiency.

The Shifting Landscape of Urban Real Estate

Vornado Realty Trust operates as a fully-integrated real estate investment trust primarily focused on owning, managing, and developing premier office and retail properties in the New York City metropolitan area, with additional key assets in San Francisco and Chicago. The company utilizes an umbrella partnership REIT (UPREIT) structure, with Vornado Realty L.P. holding the majority of the assets and conducting business operations under Vornado's management. This structure has facilitated strategic transactions and growth over the company's history, allowing flexibility in capital management and property ownership.

The current real estate cycle is marked by a significant bifurcation in the office market. While overall vacancy rates may appear high, demand is increasingly concentrated in Class A, "better buildings," particularly those located near transit hubs and offering modern amenities. This segment, estimated at 180-188 million square feet in Manhattan, is experiencing rapidly declining availability. A critical factor shaping this environment is the near-total halt in new office construction in New York City over the past five years, driven by prohibitively high building costs (doubling in the last 6-7 years) and elevated interest rates. This lack of new supply, coupled with ongoing office-to-residential conversions removing approximately 13 million square feet from the market, is creating a "landlord's market" where rents are expected to rise aggressively.

Vornado competes directly with other major office REITs like SL Green Realty (SLG) and Boston Properties (BXP) in these core urban markets. While SLG holds a larger market share in NYC and BXP benefits from geographic diversification, Vornado distinguishes itself through its concentration in prime locations and a strong emphasis on sustainability. Indirect competition comes from sectors like data centers, represented by players like Digital Realty (DLR) and Equinix (EQIX), which offer tech-focused real estate solutions, although Vornado's core business remains distinct.

Technological Edge and Sustainability Leadership

Vornado has made significant strides in differentiating its portfolio through technological integration and sustainability initiatives, particularly within its core assets. A key achievement is becoming the first major real estate owner in the nation to achieve 100% LEED certification across its entire 24.8 million square foot in-service portfolio, with over 95% certified LEED Gold or Platinum. This commitment is not merely symbolic; it translates into tangible, quantifiable benefits.

LEED-certified buildings are designed for improved environmental and human health, leading to enhanced operational efficiency. While specific portfolio-wide quantitative metrics on energy savings or cost reductions from LEED certification were not publicly detailed, the strategic intent is clear: these features contribute to lower operating expenses compared to less efficient buildings. This operational advantage directly impacts profitability. Furthermore, sustainability is increasingly a factor in tenant decision-making, potentially allowing Vornado to attract environmentally conscious tenants and command higher rental premiums, thus enhancing its competitive moat against peers who may lag in this area.

The company's focus on technology extends to its major redevelopment projects. The PENN District, for instance, received the first-ever U.S. certification and Platinum rating globally from ModeScore, a sustainability assessment tool, recognizing the transformation into a greener, more accessible, and connected hub. This highlights the integration of modern building technologies and design principles aimed at creating high-quality, efficient, and attractive workspaces that meet evolving tenant demands. While Vornado is not a technology company in the same vein as data center REITs, its strategic investment in building technology and sustainability enhances the value and competitiveness of its physical assets in a market where efficiency and environmental credentials are increasingly important.

Strategic Transformation and Portfolio Focus

Vornado's strategy is currently centered on maximizing the value of its core urban portfolio, with the transformation of the PENN District serving as the paramount initiative. This multi-year project aims to create a vibrant "city within a city" around Penn Station, leveraging its unparalleled transit connectivity. Key components include the redevelopment of PENN 1 and PENN 2, the Farley Building (housing Meta (META)), and the future development of the PENN 15 site (former Hotel Penn).

The PENN District redevelopment is progressing, with PENN 2 now placed into service and experiencing significant leasing activity. Management reports strong interest from a diverse range of tenants across various sectors, including technology, finance, legal, and media. Recent major leases, such as the 337,000 square foot deal with Universal Music Group (UMG) at PENN 2 (bringing it to ~50% leased) and leases totaling 153,000 square feet at PENN 1 (including renewals and new tenants), demonstrate the market's positive reception to the transformed product. Rents achieved in the district are reported to be rising and exceeding original underwriting, with management expressing confidence in achieving rents comparable to neighboring, newer developments in the future.

Beyond the PENN District, Vornado continues to execute strategic transactions across its portfolio. The recently completed master lease with NYU for 1.08 million square feet at 770 Broadway is a significant deal that absorbs a large block of vacancy and is expected to be accretive to earnings. In San Francisco, 555 California Street continues to outperform its market, attracting and retaining major financial services tenants with positive mark-to-markets on renewals and expansions. At theMART in Chicago, the property continues to attract top-tier tenants despite a soft market, benefiting from its strong positioning and recent amenity upgrades. The company is also advancing the development process for a new tower at 350 Park Avenue in a joint venture, aiming to create a best-in-class headquarters building on a premier site.

Financial Performance and Balance Sheet Strength

Vornado's recent financial performance reflects both the challenges of the market transition and the benefits of strategic asset management and leasing success. For the three months ended March 31, 2025, net income attributable to common shareholders saw a significant increase to $86.84 million, or $0.43 per diluted share, compared to a net loss in the prior year period. This improvement was largely driven by non-recurring items, including a $76.16 million gain from the UNIQLO sale and a $17.24 million reversal of previously accrued PENN 1 ground rent expense.

Comparable FFO, a key metric for REITs, increased in Q1 2025 compared to Q1 2024, although period-over-period comparisons were impacted by specific items. For the full year 2024, comparable FFO was lower than 2023, primarily due to higher net interest expense and the temporary impact of known tenant move-outs, but results were better than initially anticipated. Segment performance in Q1 2025 showed growth in both the New York and Other segments' NOI at share, with notable same-store NOI increases at THE MART (9.7%) and 555 California Street (5.2%).

A central theme in Vornado's recent activity is the strengthening of its balance sheet and enhancement of liquidity. Through strategic dispositions and refinancings, the company has significantly reduced debt and increased its cash position. The net proceeds from the UNIQLO sale were used to partially redeem retail JV preferred equity and repay $450 million in senior unsecured notes. The prepaid lease payment from the 770 Broadway master lease was used to repay the property's $700 million mortgage loan. The 1535 Broadway refinancing further reduced the retail JV preferred equity. These actions, combined with existing capacity on revolving credit facilities, have boosted liquidity to $3 billion as of early May 2025, providing substantial financial flexibility.

Outlook, Risks, and Competitive Positioning

Management's outlook for 2025 comparable FFO is essentially flat compared to 2024, an improvement from earlier expectations, partly due to the favorable PENN 1 ground rent determination. The significant earnings growth is anticipated in 2027, coinciding with the expected full impact from the lease-up and stabilization of the PENN District assets. The lease-up of PENN 2 and retail vacancies alone are projected to generate substantial incremental NOI and FFO in the coming years. Occupancy in the New York office portfolio saw a temporary dip in Q1 2025 as PENN 2 was placed in service but is expected to recover into the low-90s over the next year or so, ultimately reaching the mid-90s as PENN 1 and PENN 2 fully lease up.

Despite the positive outlook, risks remain. Macroeconomic volatility, including potential tariffs, could impact the business environment. Fluctuations in interest rates continue to affect borrowing costs and property valuations, although management sees signs of rates potentially trending down. The ongoing litigation regarding the PENN 1 ground lease reset could result in higher rent payments if the fee owner prevails. Guarantees on certain joint venture obligations and potential issues with historic tax credit arrangements for the Farley Project also present risks. Furthermore, the company acknowledges having certain overleveraged assets where it may choose not to invest further capital unless loan terms are restructured, leveraging the non-recourse nature of the debt.

In the competitive landscape, Vornado's focus on owning and developing high-quality, sustainable assets in prime urban locations positions it favorably. Its LEED certification and investments in modern building technology provide a tangible advantage in attracting tenants seeking efficient and environmentally responsible space. While competitors like SLG and BXP are also active in the Class A market, Vornado's specific concentration and significant investment in the PENN District offer a unique growth catalyst. Against data center REITs, Vornado's strength lies in traditional urban office and retail, a segment with different demand drivers but benefiting from the broader trend of companies prioritizing physical presence in key cities for talent attraction. The company's strengthened balance sheet provides resilience and the capacity to pursue opportunistic acquisitions if distressed high-quality assets become available.

Conclusion

Vornado Realty Trust is executing a focused strategy centered on its premier urban portfolio, particularly the transformative PENN District. Despite recent market headwinds that impacted earnings, the company has significantly bolstered its financial position through strategic asset sales and refinancings, resulting in enhanced liquidity and reduced debt. The investment thesis hinges on the successful lease-up of its redeveloped assets, capitalizing on the favorable supply-demand dynamics in the Class A New York City office market, which is characterized by limited new supply and increasing tenant demand for quality space. While near-term earnings are expected to remain relatively flat, the outlook for significant growth in 2027 is compelling, driven by the anticipated full income contribution from the PENN District stabilization. Vornado's commitment to sustainability and its concentration in irreplaceable urban locations provide key competitive advantages as it navigates the evolving real estate landscape and works to unlock further value for shareholders.