John Kim: And Michael, you mentioned an impairment that you’ve taken this quarter ready to joint venture assets you’re looking to exit. Is it this retail joint venture that you’re discussing? Or there other assets? And if so which ones are they?
Michael Franco: Yes, not the retail. Retail, the worst is past us as we’ve said. Now these were just a handful of smaller — really — all office assets they’re in joint venture, the accounting treatment is you, guys, should know well by now, given the [indiscernible] accounting treatment, the impairment methodology is much different from joint ventures than for wholly owned assets and this is a handful of assets that we intend to exit over the next 2 to 3 years and that results in a different accounting approach and thus the impairment. It’s an accounting connection with the ultimate proceeds will be realized TBD. But again, it relates to a handful of smaller assets.
Steven Roth: But there is no doubt that in this cycle, values have fallen. So when interest rates go from 3.5% to 8% that has an enormous effect on value. And so therefore, I’m very pleased that the impairments were as small as they were actually.
John Kim: And just to confirm, this does not include 1290 or 555 Cal?
Steven Roth: That’s correct. Thank you.
Operator: The next question comes from Dylan Burzinski of Green Street.
Dylan Burzinski: Okay. Just 2 quick ones on occupancy for both the office and retail side of things. So it sounds like for New York office, that occupancy should bottom throughout 2024. And as you guys have already leased up some of the move-outs that it should see a pretty swift recovery as we look out in 2025 and beyond? Is that sort of a fair characterization?
Glen Weiss: It’s Glen. I think that’s fair. I think you’ll see it dip over the coming quarters based on what we talked about earlier. And based on the pipeline, we’ll come right back up. I think it’s fair would you characterize it.
Michael Franco: Yes, probably flattish for ’24 overall.
Steven Roth: Just the one in — just a word about occupancy. So the market occupancy is in the high teens. So our occupancy is, give or take, around 90%; other is out in 90% [ph] if you look back over our history, our normal occupancy is a hair over 95%, 96% they call it in — the difference between 96% and 100% is kind of like structural vacancy, you never get to 100% on a large over 20 million square foot portfolio. So our occupancy is really the difference between our occupancy is really the difference between 96% and 90% [ph], let’s say, 6% — which we think is — we can do better, we will do better but we think that’s pretty good performance in a soft market. Now the next thing is that when we ramped up the space as the markets revert to normal, from 90% to 96%, that’s a very significant increase in our earnings. So we have that in front of us for sure.
Dylan Burzinski: Great. And I think that kind of sort of leads into my next question is on the retail side of things. As we look at the portfolio today, I think in your disclosure, you, guys, say occupancies high 70s, pre-COVID you were mid-90s. I guess just how do we think about the recovery there given some of the comments that you, guys, laid out regarding the leasing pipeline?
Steven Roth: Well, the retail occupancy is really sort of an anomaly. It includes the Manhattan Mall, JCPenney who made a couple of years ago. And that’s 11 points of occupancy. Is that right? And what’s the next what’s the second one?
Dylan Burzinski: Yes, partly the retail there.
Steven Roth: And then finally, we have slow billing on the Ninth Avenue saw so between those two, we’re somewhere in the probably mid-80s.
Operator: The next question comes from Vikram Malhotra of Mizuho.
Vikram Malhotra: Just I wanted to just go back to your comment about FFO troughing in ’24. So just 2 clarifications to what you’ve said first was The Facebook lease 770, is it — was it clear that the 200-or-so square foot expiring there a move out but then the rest is there long term, number one? And number two, could we just roughly quantify the move-outs you mentioned, what is the FFO impact this year to that?
Glen Weiss: On the first question, the remaining meta 500,000 feet is long term. That’s correct.
Michael Franco: Right. So the 200,000 [ph] is just one component this year. And the remainder, Vikram but we don’t give guidance, right? There’s a number of ins and outs, Yes, you can just quantify the specific 3 situations we mentioned but there’s other things that are going on as well. So I don’t want to isolate and say on these 3, this is the impact because that doesn’t give the full picture. Net-net, we expect it to be negative how big we have to see what transpires across the whole portfolio.
Vikram Malhotra: And so I guess just a second question to clarify. You’re basically saying with the move outs with the interest rate impact, et cetera, ins and outs. Therefore, we’ll go occupancy will dip. You’re assuming the lease rate will eventually come back is what I’m assuming you’re referring to and then the impact of all that leasing will help ’25 recover FFO, right? Is that fair? Is any other big moving piece to that equation?
Michael Franco: No, I think that’s fair. Obviously, look, as we lease up Penn which in some of the other vacancy that Steve mentioned, not just natural turnover, it’s going to power that as well. But I think your general comment is accurate.
Steven Roth: I agree it is accurate. So to summarize. Interest rates have gone up and have been painful. They will go down. They’re not going to go down all the way to zero but they will go down. And so that’s only to increase our earnings from here. Our occupancy is going to climb from, say, 90% to whatever. And so that’s going to increase our earnings. And then the big thing is over the next 2 years, to Penn will rent the income from that will come online. Now that’s probably over $100 million. So these are fairly substantial numbers. But so overall, you’re 100% correct. Thank you.
Vikram Malhotra: Okay, great. And then, Steve, just last one. You mentioned external growth opportunities at some point, obviously paying delevering. I’m assuming FFO growth is important. But so if you look to maybe as the Board and yourself, we look to award executive LTIPs going forward. What are maybe 1 or 2 of the top metrics that could be different the next 5 years versus the last 5 years in terms of gauging those LTIP awards.
Steven Roth: I don’t know how to answer that but we don’t give guidance for the next quarter and it’s very difficult to predict what’s going to happen over the next 5 years. But a couple — talk around that very sophisticated question, Vikram. We are a New York-centric company. I don’t imagine that we will open up a new beach in where we don’t have the same kind of depth of experience, knowledge and franchise that we have. So basically, what New York company, my guess is, that’s something that I’m not contemplating comes up, we will stay a New York company. Now we opened up a beachhead in Washington some years ago, spun that off into a separate company. which I think is a terrific opportunity. And then we had a large northeastern shopping center company which we also — so we have experience with different geographies.
But my guess is that the main company will continue to be New York-centric. The likelihood is we will continue to be a large aggressive office company. But I think I’ve said this before, we will not make acquisitions of conventional office at full pricing. We will only be a buyer at — I don’t want to call it distress, if that’s the right word, Michael. Okay, at distressed prices for office building. And we will only buy the finest of building. We have some residential. I’d like to do a little bit more of that. And then what we will develop in the Penn District is an extraordinarily important part of our company and maybe arguably the most important development in the country as we go forward. That you can’t build anything in district today because of the frozen capital markets.
You cannot do it the math doesn’t work. But as that begins, we will consider residential building and developing residential in that marketplace and we might even sell a piece of it, land through a residential developer. So we can’t predict what’s going ahead to happen. In 5 years, we will be New York-centric. We will be minor and office company and the Penn District will be really important 5 years from now.
Operator: The next question comes from Alexander Goldfarb of Piper Sandler.
Alexander Goldfarb: Good morning, Steve and Michael. Steve, just talking about the comp plan that you guys put in place around 350 Park at the year-end. Obviously, in the middle of last year, the stocks were on their back and you guys revised your comp plan understandably just given how the stock was depressed and I think we all understood that. At the end of the year, though, the 350 comp plan definitely surprised and especially that shareholders have to wait until the end of this year to figure out their dividend for 2024, the sub — the 350 suburb side. So can you just walk through how we should think about that comp plan for a development project that doesn’t deliver for another decade while you’re talking about earnings still going down this year and shareholders having to wait another year for the dividend. Just want to understand that, especially in light of the midyear update that you, guys, did for the senior executives and upper generation last summer.
Steven Roth: Sure. Alex. The — let me go backwards first. Your comment about the dividend. We have had an enormous number of incomings from shareholders, analysts, et cetera, an industry, Peter [ph], saying what we did with the dividend was correct. And to continue to pay, by the way, we will rightsize the dividend but they continue to pay an overlay of dividend, et cetera, this capital markets is just not the most efficient use of capital. So you seem to be on the other than that, I can tell you that most of your friends and peers are, I think that what we did was the correct or [indiscernible] now I knew some of how we would have varied. So now that’s going [ph].
Alexander Goldfarb: Clarify I was there [ph].
Steven Roth: Well, I’m not going to get into that. Now let’s talk about the development fee comp plan. So this is something that we’ve been thinking about a long time. So the first thing is its objective is retention, reward to increase automation and to our most important employees. Retention, reward, motivation and in fit [ph]. So the first thing is that anything that is paying out on that comp plan comes from joint venture development projects. Now we don’t do a lot of those. It is probably in my memory, the first one. We did — we did 220, 100%. So we don’t do — and we own the Penn District 100% so this doesn’t come into being until there is a joint venture partner that pays a development fee. Now I talked about incentives and motivation.
We think that it’s retention, shoulder to shoulder with our shareholders that we do this kind of investing. And we think it’s also a shoulder to shoulder with our shareholders that we bring in outside third-party capital to us which has become most of our peers in the industry are using outside capital. We haven’t done that in the past. So we want to do that in the future. So that’s the beginning of it. By the way, it’s a very small plan. We don’t expect it to be substantial in any way. And as we look at it and as we review, our senior management compensation and even down the line, we find that our compensation is lower than almost all of our peers. So this is a way to have performance-based comp, a small amount — a small amount, by the way.
