Executive Summary / Key Takeaways

• NYC Office Market at Tipping Point: Vornado operates in a 180 million square foot Class A "better building" submarket where vacancy has collapsed to 6.2% in Midtown core, replacement costs exceed $2,500 per square foot, and new supply is frozen through decade-end—creating the strongest landlord's market in nearly two decades with rents rapidly moving from $100s to $200s per square foot.

• PENN District Reaching Critical Mass: The 5 million square foot "city within a city" has crossed an inflection point with PENN 2 at 78% occupancy (targeting low-90s) and average starting rents of $112 per square foot, while neighbors command $150+. The lease-up alone will generate $125 million of incremental NOI, with management budgeting for potential $250 million annual upside as market rents converge.

• Strategic Asset Recycling Strengthens Foundation: Vornado generated $1.5 billion in 2025 from asset sales, financings, and the NYU master lease, using proceeds to deleverage (net debt/EBITDA improved from 8.6x to 7.3x), redeem $857 million of preferred equity, and build $2.6 billion in immediate liquidity—creating firepower for opportunistic acquisitions while peers remain capital-constrained.

• Major Accretive Transactions De-Risk Story: The 770 Broadway master lease with NYU delivered an $803 million gain, is accretive by $25 million annually, and absorbed 500,000 square feet of vacancy; the $218 million acquisition of 75%-vacant 623 Fifth Avenue offers a path to double-digit yields at half new-build cost by year-end 2027.

• Valuation Disconnect Despite Leading Performance: While VNO's stock rose 36% in 2023 and 49% in 2024, it trades at just 5.51x operating cash flow and 1.37x book value—significant discounts to the 14.12% ROE and 2.09% dividend yield, with management explicitly stating the stock "trades at a huge discount" relative to asset values.

Setting the Scene: The Making of a Landlord's Market

Vornado Realty Trust, operating as a fully-integrated UPREIT through Vornado Realty L.P. where it serves as the sole general partner with 91.5% ownership, has spent decades assembling what is now the preeminent Manhattan office and retail portfolio. The company's strategy has always been simple yet difficult to replicate: concentrate on irreplaceable assets in the nation's most supply-constrained market. This focus means Vornado competes not in Manhattan's entire 420 million square foot office market, but in a much narrower 180 million square foot Class A "better building" submarket where location, quality, and amenities create permanent differentiation.

The current market dynamics represent a fundamental shift from the past decade's tenant-friendly environment. Replacement cost for a Class A tower has risen to approximately $2,500 per square foot, while interest rates at 6-7% make financing new construction prohibitively expensive. The result is a supply pipeline that management describes as "only a trickle for the foreseeable future, at least through the end of the decade." With Manhattan office leasing activity on pace to exceed 40 million square feet for the first time since 2019, and Midtown core better building vacancy down to just 6.2%, the market has completed its rotation to a landlord's market. This enables Vornado to push rents aggressively—already moving from the rare $100 per square foot deals of a few years ago to $200+ commonplace today—while facing virtually no competitive new supply.

Vornado's portfolio positioning exploits this dynamic perfectly. The company owns the largest cluster of premier signage in Times Square and the PENN District, providing perpetual control and the highest margins in the business because the signs are attached to buildings it owns. This isn't just a revenue stream; it's a competitive moat that no rival can replicate without acquiring the underlying real estate. Similarly, the company's achievement of 100% LEED certification across its entire in-service office portfolio—the first in the nation—creates tangible pricing power as tenants increasingly demand sustainability credentials.

Strategic Differentiation: Beyond Location to Execution

While prime Manhattan locations form Vornado's foundation, the company's true differentiation lies in its ability to transform and activate assets through development expertise and strategic capital allocation. The PENN District exemplifies this capability. What began as a collection of aging buildings around Pennsylvania Station is becoming a 5 million square foot integrated campus with best-in-class amenities, direct access to the region's largest transit hub, and a tenant roster that now includes Verizon Communications (VZ), Universal Music Group, Madison Square Garden (MSGE), and Major League Soccer.

The transformation's economics are compelling. PENN 2 has leased over 1.3 million square feet since inception at average starting rents of $112 per square foot, handily exceeding initial underwriting. PENN 1 has leased 1.6 million square feet at $94 per square foot average rents. Management's commentary reveals the strategic insight: "Everyone is modeling large increases in Vornado's earnings as leases at PENN 1 and PENN 2 come online as they should. This is all based on rents of, say, $100 per square foot. But our neighbors to the West are achieving $150 per square foot and over time, so will we." The math is straightforward—every $10 per square foot increase on 5 million square feet yields $50 million in incremental NOI, and if market rents reach $150+, that's $250 million annually.

The 623 Fifth Avenue acquisition demonstrates Vornado's contrarian execution capability. Purchased for $218 million ($570 per square foot) in September 2025, the 383,000 square foot building is 75% vacant—a feature, not a bug. As management explains, "We will not be penalized by a gaggle of low-rent, longer-term obsolete leases and will not have to wait 5 to 7 to 10 years for them to roll off." The redevelopment into an "elite boutique office building" with delivery by year-end 2027 will cost approximately $1,200 per square foot all-in, roughly half new-build cost, targeting a 9% yield on cost that management is "pushing to crack double digits." This transaction highlights Vornado's ability to acquire mispriced assets in a rising market and create value through development expertise that peers lack.

Strategic asset recycling has become a core competency. The January 2025 sale of a portion of 666 Fifth Avenue to UNIQLO for $350 million ($20,000 per square foot) generated $342 million in net proceeds used to redeem preferred equity and recognize a $76 million gain. The $450 million financing of 1535 Broadway in April 2025 allowed redemption of another $407 million of retail JV preferred equity. Combined with the NYU transaction, these moves have improved the net debt-to-EBITDA ratio from 8.6x to 7.3x, with management expecting continued improvement as PENN District income comes online. This deleveraging provides optionality while office REIT peers struggle with balance sheet constraints.

Financial Performance: Evidence of Strategy Working

Vornado's financial results provide clear evidence that the strategy is executing. For the nine months ended September 30, 2025, same-store GAAP NOI in the New York segment increased 4.5%, while the Other segment (primarily THE MART and 555 California Street) saw same-store GAAP NOI rise 19.9% at THE MART and 4% at 555 California Street. These gains reflect both market strength and active asset management.

The New York segment's revenue grew 1.34% in Q3 2025 to $367.3 million, with NOI at share of $228.5 million. While same-store cash NOI declined 7.4% for the quarter and 6.2% year-to-date, management correctly notes this is "hit by free rent from a significant amount of leasing in recent quarters as well as the adjustment in cash rent related to the PENN 1 ground lease." The GAAP numbers are more relevant for earnings because they smooth these temporary effects. Indeed, New York office occupancy increased to 88.4% in Q3 2025 from 86.7% in Q2, primarily due to leasing activity at PENN 2, with management anticipating occupancy "into the low 90s over the next year."

The Other segment demonstrates Vornado's ability to create value even in challenged markets. At 555 California Street, described as "arguably the best building in town," Vornado signed 224,000 square feet of leases in Q3 2025 at triple-digit average rents with 15% mark-to-market. Management believes San Francisco is in recovery, and the building's consistent outperformance validates the strategy of owning premier assets in gateway markets. THE MART in Chicago shows similar resilience with 10.4% same-store GAAP NOI growth in Q3.

Consolidated results reflect both operational improvement and strategic transactions. Net income attributable to common shareholders for the nine months ended September 30, 2025, was $842.25 million, a dramatic increase from $7.07 million in the prior year, driven by the $803.25 million gain on the NYU sales-type lease , a $76.16 million gain on the UNIQLO sale, and a $17.24 million reversal of previously accrued PENN 1 rent expense. FFO attributable to common shareholders plus assumed conversions increased to $373.48 million ($1.86 per diluted share) from $352.91 million ($1.79 per diluted share) prior year, with Q3 FFO at $117.37 million ($0.58 per diluted share) versus $99.26 million ($0.50 per diluted share) in Q3 2024.

The balance sheet transformation is equally important. As of September 30, 2025, Vornado had $2.6 billion in immediate liquidity, consisting of $1.2 billion in cash and restricted cash plus $1.4 billion available under its $2.2 billion revolving credit facilities. Net cash provided by operating activities for the nine months was $1.11 billion, significantly boosted by the $901.41 million prepaid lease payment from NYU. Since the beginning of 2025, Vornado has generated $1.5 billion in net proceeds from sales, financings, and the NYU deal, using $900 million to pay down debt and increasing cash by $500 million.

Interest expense is trending favorably, decreasing $16.45 million in Q3 and $21.58 million year-to-date due to lower average debt balances, reduced amortization of interest rate cap premiums, and lower average interest rates. Management believes the company is "on the downhill trajectory" for interest expense, with delevering and asset rollovers generally keeping rates flat but with less debt outstanding.

Outlook and Guidance: 2027 Inflection Point

Management has provided unusually clear guidance on the earnings trajectory. For 2025, comparable FFO is expected to be "essentially flat" compared to 2024's $2.26 per share, primarily due to the burn-off of capitalized interest at PENN 2 and non-core asset sales. For 2026, management expects comparable FFO to be "flattish" compared to 2025 as the company takes income offline to effectuate the 34th and Seventh Avenue retail redevelopment. However, 2027 is explicitly identified as "the inflection year" with "significant earnings growth" as the full positive impact of PENN 1 and PENN 2 lease-up takes effect.

This guidance frames the investment decision around a visible catalyst. The $125 million of incremental NOI from PENN 2 lease-up and $50 million from retail vacancies will "generate incremental NOI of $125 million and $50 million respectively over the next several years." Management notes that while NOI for PENN 2 is budgeted to increase by $125 million, FFO is budgeted to increase by $95 million, "the difference being capital interest." This transparency allows investors to model the earnings power as occupancy moves from the current 78% to the targeted low-90s.

The development pipeline provides additional growth visibility. The 350 Park Avenue project—a 1.8 million square foot Foster & Partners-designed tower with Citadel as anchor tenant and Ken Griffin as 60% partner—remains on schedule with demolition commencing March 2026. The 475-unit residential building on the 34th Street site in the PENN District will begin construction in 2026. Pier 94, a 266,000 square foot purpose-built studio campus on Manhattan's West Side, will deliver by year-end 2025. Each project is designed to achieve yields on cost of 9% or better, well above Vornado's cost of capital.

Management's leasing guidance is equally bullish. "We expect our 2025 leasing volume for Manhattan office to be our highest in over a decade and our second highest year on record." With over 1.1 million square feet of leases in negotiation and various stages of proposal, the pipeline supports occupancy reaching the low-90s "over the next year or so." Each percentage point of occupancy on Vornado's 20+ million square foot New York portfolio translates to millions in incremental NOI.

Risks and Asymmetries: What Could Break the Thesis

The most material near-term risk is the PENN 1 ground lease litigation. In October 2025, a court vacated the arbitration panel's determination that annual rent should be $15 million for the 25-year period beginning June 17, 2023. If the ground lessor prevails, the annual rent will be $20.22 million, a $5.2 million annual increase, and the determination would be retroactive to June 2023. Management believes the motion is "entirely without merit and intends to vigorously oppose it," but the risk remains real. The company had been accruing $26.2 million annually and reversed $17.2 million in Q3 2025; a final determination at $20.2 million would increase annual expense by $11 million versus the arbitration award.

The 650 Madison Avenue default represents a known but contained risk. The joint venture (20.1% Vornado interest) received a notice of default on its $800 million mortgage loan in October 2025. Vornado had previously written off its entire investment to zero in Q4 2022, so there is no additional financial exposure, but it highlights the risk of concentrated office investments. As Steven Roth noted, "Bad stuff happens every once in a while, even to us."

Alexanders, Inc. (ALX) presents a more complex risk. Vornado owns 32.4% of Alexanders' common equity, valued at $387.86 million as of September 30, 2025, $334.27 million above carrying value. Alexanders did not repay its $300 million mortgage loan on 731 Lexington Avenue by the extended October 3, 2025 maturity and is discussing restructuring. While Vornado's exposure is limited to its equity investment, management believes "Alexander's stock is substantially undervalued relative to its assets" and has indicated "we will have to do something about that," suggesting potential future capital allocation implications.

Concentration risk remains Vornado's primary vulnerability. The company is "90% New York-centric" and "a 90% Prime Pitch Manhattan-centric company." While this concentration creates pricing power in the current landlord's market, it also means any structural shift in office demand—whether from remote work, economic downturn, or changes in tenant preferences—would impact Vornado more severely than diversified peers like Boston Properties (BXP). Management's view that "work from home was a scare" that "would not last" has proven correct thus far, but this assumption remains a key risk.

Interest rate risk is material and acknowledged by management. "One negative is that short-term rates after coming down 100 basis points last year look likely to remain around current levels for the foreseeable future, keeping borrowing costs high." While Vornado has reduced interest expense through deleveraging and refinancings, the company remains sensitive to rate movements, with $2.2 billion in revolving credit facilities and significant debt outstanding.

Valuation Context: Discount to Asset Value and Earnings Power

At $34.82 per share, Vornado trades at a significant discount to its underlying asset value and future earnings power. The stock trades at 5.51x operating cash flow and 1.37x book value, metrics that appear low for a company with 14.12% ROE and a 2.09% dividend yield. Management has explicitly stated that the stock "trades at a huge discount" and has authorized a $200 million share repurchase plan, with $170.86 million remaining available as of September 30, 2025.

Comparing Vornado to office REIT peers reveals the valuation gap. SL Green (SLG) trades at 28.70x operating cash flow with a 0.61% ROE and 7.07% dividend yield, reflecting its higher leverage and lower profitability. Boston Properties trades at 10.04x operating cash flow with negative ROE of -1.88% but a higher 3.97% dividend yield. Empire State Realty Trust (ESRT) trades at 7.56x operating cash flow with 3.35% ROE. Vornado's 5.51x OCF multiple is the lowest among this peer group, despite having the highest ROE at 14.12%.

The valuation disconnect becomes more apparent when considering the earnings inflection. If Vornado achieves the $125 million incremental NOI from PENN 2 lease-up and $50 million from retail redevelopment, that $175 million annual increase would translate to approximately $0.87 per share of additional FFO (based on 201 million diluted shares). At a 15x FFO multiple—reasonable for a landlord's market environment—that alone would justify a $13 per share increase in stock price, or 37% upside from current levels, before considering any additional rent growth or development completions.

The 623 Fifth Avenue acquisition provides another valuation anchor. Management's target of 9-10% yield on cost implies $20-22 million of annual NOI from the $218 million investment. If achieved, this would represent immediate value creation, as comparable boutique office buildings in Midtown trade at 4-5% cap rates, suggesting the stabilized asset could be worth $400-500 million, nearly double the investment.

Conclusion: A Confluence of Catalysts

Vornado stands at the intersection of three powerful forces: a structural shift to a landlord's market in Manhattan, the critical mass of its PENN District transformation, and a balance sheet strengthened through strategic asset recycling. This confluence creates a compelling risk/reward profile where near-term FFO flatness masks significant earnings power that will emerge in 2027 and beyond.

The investment thesis hinges on two variables: the pace of PENN District lease-up and the resolution of the PENN 1 ground lease litigation. If occupancy reaches the low-90s as management projects, the $125 million of incremental NOI will begin flowing in 2026 and reach full run-rate by 2027, driving the "significant earnings growth" management has promised. If the ground lease litigation resolves favorably at $15 million annual rent rather than $20.2 million, that would preserve $5 million annually and validate management's legal strategy.

The downside is protected by Vornado's $2.6 billion liquidity, 100% LEED-certified portfolio, and irreplaceable locations. While concentration in Manhattan office creates vulnerability to structural demand shifts, the supply-demand dynamics—6.2% vacancy, $2,500+ replacement costs, and no new construction—suggest this risk is mitigated for the foreseeable future. The stock's valuation at 5.51x operating cash flow and 1.37x book provides a margin of safety while investors wait for the earnings inflection.

For investors willing to look through near-term FFO flatness to the 2027 inflection point, Vornado offers exposure to a landlord's market with a management team that has demonstrated superior asset selection, development execution, and capital allocation. The market's focus on temporary headwinds—free rent periods, ground lease litigation, and interest rate concerns—has created an opportunity to acquire a premier Manhattan office portfolio at a discount to both replacement cost and future earnings power.