Good morning, and welcome to the Vornado Realty Trust First Quarter 2024 Earnings Call. My name is MJ and I will be your operator for today's call. This call is being recorded for replay purposes. [Operator Instructions] I would now like to turn the call over to Steven Borenstein, Executive Vice President and Corporation Counsel. Please go ahead.

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 10-Q with the Securities and Exchange Commission. These documents as well as our supplemental financial information packages 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 supplement. 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, 2023, 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 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've been busy. Let's start with Bloomberg. As a reminder, 731 Lexington Avenue, the mixed-use tower, whose 950,000 square foot office condo is Bloomberg's global headquarters is owned by Alexander's, a separately traded public REIT. Vornado owns 32.4% of Alexander's. The background facts are: Bloomberg lease expires in February 2029, and $500 million of debt on the office condo is due next month June 2024. Yesterday, we announced that we renewed and extended the Bloomberg lease for an 11-year term to begin in February 2029 and take us through February 2040. So 16 years of term from now. As you can imagine, a redeveloper in town tried to poach Bloomberg. And of course, they looked at every opportunity as they must. We are delighted that they chose to stay with 731 Lexington. By the way, the building is as much Mike's creation as mine. He had significant input into the design of the original building. The design of the building in Bloomberg's internal fit-out are on par with what we would have built today. But of course, now they don't need to. The terms of the lease was filled out in yesterday's SEC filings, tenant concessions in the form of TIs and free rent have been established and the net rent will be the subject of an appraisal in 2029 with then rent adjusted up or down no more than 10% either way based on the rent market conditions. We're in the process of refinancing this asset, but I must say, I am not excited about paying today's market rate of 7% or even 8% for debt with all the trappings of leasing reserves, cash suites as such, which are admittedly protective of the lender, but don't do much for our equity value.…

Thank you, Steve, and good morning, everyone. As expected, the financial results for the quarter were down from last year due to items that we previously forecasted. First quarter comparable FFO as adjusted was $0.55 per share compared to $0.60 per share for last year's first quarter, a decrease of $0.05. This decrease is primarily driven by lower NOI from higher net interest expense and no move outs, partially offset by lower G&A expense. We have provided a quarter-over-quarter bridge in our earnings release in our financial supplement. However, from New York business, same-store cash NOI was down 5.1%, primarily due to the aforementioned expirations. As we indicated in our last earnings call, we expect our 2024 comparable FFO to be down from 2023 comparable FFO of $2.61 per share, primarily due to higher projected net interest expense of about $0.30 per share and the impact of known vacancies at certain of our properties, primarily at 1290 Avenue of the Americas, 770 Broadway, 280 Park Avenue. We anticipate the impact of these expirations in 2024 to be roughly $0.25 to $0.30 per share. We expect this impact to be temporary as we have already leased up a good chunk of this space but the GAAP earnings from these leases won't begin until sometime in 2025. We then expect earnings to increase as income from the lease-up of PENN and other vacancies comes online and as rates trend down. Now turning to leasing markets. The New York office market continues to show signs of strengthening. While first quarter office leasing in New York took a bit of a breather from the strong year-end, there is a healthy backlog of activity with a number of large deals in the works. Overall, tenant space requirements continue to trend upward, sublease space continues to…

[Operator Instructions] Today's first question comes from Steve Sakwa with Evercore ISI.

Michael, I was wondering if you could just follow up a little bit on the comments you made about the pipeline? And just maybe help us think through how much of that 2.5 million square feet is maybe earmarked for our PENN 2 in the development? And how much is geared for, I guess, future rollovers? And how much is geared to kind of current vacancy in the portfolio?

Glen, do you want to take the lead on that?

Sure. So I would say it's a very, very balanced mix of what you just described. We're seeing a surge in proposals coming in on PENN -- both PENN 1 and PENN 2 coming off the heels of our Major League Soccer lease. We're seeing expirations -- outbound expirations tenants coming to us to early renew just like we did with Bloomberg this week. And in addition, much of the pipeline is attacking expiration at the buildings where we have space available today. I'd say it's a healthy mix across the portfolio, PENN and otherwise.

Okay. And as a follow-up, Michael, just to -- I guess go back to some of the information you provided on kind of -- I guess, the earnings drag from the lost occupancy this year. Just to be clear, if you took the $0.30 hit from the interest expense and now you're sort of quantifying this $0.25 to $0.30 hit from the known vacate, some of which I know has been released and will rebound maybe in '25 and beyond. You're kind of suggesting that there's sort of $0.60 drag this year as we think about '24 and then other positive offsets that might sort of take that number a little bit up from, say, the $2 level?

Yes. So look, in terms of your sort of detail there. I think that's accurate, right? We talked about interest last quarter and sort of reaffirmed the $0.30 this quarter. The $0.25 to $0.30 are sort of the known vacates and as we've mentioned, we've backfilled a lot of that already at 1290 and 280. Like we have a lot that we're working on. There's some things that could certainly make that number more positive. But I think we're trying to give you the downside version today. And so I can't tell you where exactly it's going to come out. But I think if you say, look, let's take sort of worst case, the $0.30 plus the [ 25 to 30 ] gets you down $0.55 to $0.60. I think that's a good baseline. And our objective is to beat that, but there's still a lot moving around.

Steve, let me just tack on, on that for a second. So I mean, the numbers that you mentioned that and that Michael just mentioned, they're accurate for this year. Let's build from there and see what the company's future looks like on an almost certain basis. So if you start with re-renting the vacancies and we get back from whatever we are now to our normal 96%, 97%, 98% occupancy, that adds a big number to our earnings. When 2 PENN comes online, that's another $100 million give or take of earnings that comes online that is brand new. If interest rates settle down into some kind of stabilized number, that also improves earnings enormously. So the company has the earnings potential of being, we think, pretty spectacular. And that's what we're shooting for. So we're looking at it not 1 month on quarter basis, we're looking at what the company's earning power would be pick a number 2, 3 years out, okay? And we are extremely excited about that.

The next question is from John Kim with BMO Capital Markets.

Michael, in your prepared remarks, you talked about tech sector coming back to the market in Manhattan and also referenced retailers potentially looking to purchase their flagship stores similar to Prada. Is your commentary more of a market commentary? Or do you see Vornado involved in either one of those 2?

I think it's both, John. I mean we've got some of the best product in town in both categories. I think we've done more tech leasing than any other landlord in the city. We have all the big 4 in our portfolio. So we maintain an active dialogue with all those players. So I would expect that if the tech sector becomes active again, we're going to get more than our fair share. And in terms of the pipeline, I think the tech sector was pretty dormant for the last 18, 24 months, either on pause or in some cases, downsizing space. And we've seen in the last 90 days, a real pickup there, started small and now we're seeing some more significant requirements. So we do think some of those will convert to activity, and we're quite optimistic about that sector turning on again. On the retail side, I think you know better than anybody, given the discussions we've had in the past. We own the best retail in the city. So if you want to be on Fifth Avenue, particularly given the shrinking amount of availability, that's -- can be leased. We're the first, second, third call Times Square. We own both sides [indiscernible]. So activity level has picked up significantly in both those submarkets, the animal spirits are alive and well amongst retailers. They see the Manhattan is thriving again, their sales numbers reflected and Prada and Kering's announcements obviously garner worldwide attention. And I think make every other retailer question, what are we doing, right, both from a leasing standpoint and buying standpoint. There's obviously been other transactions rumored but I don't think you've seen the last of the retail purchases. And obviously, given our portfolio, we're fertile ground. So we expect to be in the mix there.

Okay. And my follow-up is on 350 Park Avenue. The leasing environment and the interest rate environment or the outlook has changed a lot in the past 1.5 years since you struck the deal. What is the likelihood that either Citadel or you exercise your options at this point?

There's always a likelihood. But right now, we're on full steam ahead to build a world-class headquarters for Citadel. We've started the public approval process. And it's a couple of year process to design the building, complete the drawings, get through the public approval process and obviously, we will reappraise the financial markets at that time. Citadel's growing. They want the space. They're committed to the deal as are we.

And can you confirm the starting rent for Citadel is reported at $35 million?

No, sir, we can't. It's a formulaic rent, which depends upon what the cost of financing is at the time that we -- at the time we go into the financing market.

The next question is from Michael Griffin with Citi.

Michael, I wanted to go back to your comments around concessions being stubbornly high. I imagine that's the case for the market overall. But if you look at maybe better off submarkets like Park Avenue or even some of your properties on the West side, the PENN District, how are you seeing concessions there given that the environment seems to have improved?

Glen, do you want to hit that?

Yes. Yes, sure. it's Glen. I would tell you no matter the submarket on new leases, TIs there's somewhere between $140, $150 a foot and free rent is somewhere in the 13-month, 15-month range. I think as it relates to submarket specific, it's really about the rent. So in some of the submarkets, we are seeing an uptick in rent where supply is tightening as you would expect.

Got you. That's helpful. And then maybe just some color on lease expirations this year. It looks like there's a big one in the second quarter, about 3% of the overall rent. The space rent there right now seems pretty high. What's the likelihood of renewing or backfilling the space? Or is this one of those known move-outs that you described earlier?

It's the Meta space that comes back to us in June that we spoke about on our last earnings call. That's the least you're pertaining to.

And in terms of potential of backfilling or new in the space, what's demand looking like on it?

We have action on this space. That's part of our pipeline that we've described. We feel very good about the asset and very good about backfilling that space. It's the most unique asset in Midtown South, we feel good about it.

The next question is from Floris Van Dijkum with Compass Point.

Rather than get into the details on the leasing, which obviously is very important as well. But I wanted to ask a question on sort of the market and get Steve and Michael's view on the opportunity that's going to be presenting itself, I think, when the $200 billion of office loans mature over the next -- actually, in '24 as well as the other $100 billion next year. What do you see happening with some of those obviously are unlikely to be refinanced. And so where do you see Vornado in that situation? Do you have -- can you play a role in maybe buying some assets? And maybe does that hope -- cause some of the bullishness in Steve's tone on the outlook for the next 2 years?

So like, I think in terms of the debt rolling over, which is significant over the next 2 years, as we all know, the capital markets are not there to support refinancing the vast majority of that. And so I think what happens there is going to take one of a few forms. It depends on the quality asset, the sponsor of the asset and what its future looks like. And we've seen some examples where the older obsolete buildings, where debt rolls doesn't have a future is an office building or certainly with that sponsor and the lenders have taken it back or there's been a consensual sale of some of those assets, something like a 1740 Broadway would be a recent example. So I think we'll see a fair amount of that on some of those older buildings. Then there's a category where they just over leverage where there is a future. And again, I think the lender will assess whether the sponsor has the wherewithal and the capability to either re-tenant or support the asset. And in some cases, they will, in many cases, they won't. We're talking to the lenders about that. And I think they'll look for solutions, right? I think lenders in general know that taking back assets and operating them certainly in the office space is not a winning strategy. Value deteriorates fairly quickly. Tenants don't want to go into those buildings. So we do think there's going to be opportunity to work with existing lenders, be a solutions provider. We have a leading operating platform. We expect to deploy capital there. And I think it could be in either one of those buckets. It could be buildings that are -- that with our capabilities can be leased back up, stabilize, the value could be created or it can be assets that can be repurposed from office to residential potentially. So the answer is we are actively looking. We expect to play in that. And I think we're still at the beginning stages.

And I know it's early in terms of what transactions would look like. But presumably, for you to utilize part of your significant cash awards, which again sets you apart from some of your peers, you would have to have, I would imagine, returns that are in excess of the 7% plus financing rates that you would have to pay today if you were to theoretically get assets. Is that the right way to think about it? Your returns...

Yes. I mean, look, I think our objective of deploying cash is not to invest in real estate is going to generate core returns, right? And this is an opportunity that is by the way, not for the faint of heart, right? I mean, you're taking risk and you want to get rewarded for that. So the returns need to be attractive. So yes, I think the stabilized yields, I think it depends a little bit on the nature of the asset and where you think ultimate cap rates settle out for particular assets. But no question that the required yield are in the neighborhood that you mentioned.

Great. Maybe one follow-up in terms of your retail segment, again, particularly your Fifth Avenue, which is, again, as you highlight, unique. Where do you think market rents are today? And I know you have -- 92%, I think, is your occupancy rate in your Time Square JV, sorry your Fifth Avenue in Times Square JV, but if you were to sign rent today in -- on Fifth Avenue, where would you say market rents are for that space?

I think it's -- there's been a couple of transactions that we signed probably, I guess, last year. And now it indicates that rents at the time were in the mid- to high $2,000 per square foot, right? Now maybe there was a tick or a bottom in the $1,000, $1,500 neighborhood, but I think realistically, it's back into that mid-2s, maybe even low 3s, depending on the situation. And I think for luxury, given there's such a scarcity it could be higher. So Fifth Avenue, it's hard to paint a broad brush. It's a very scarce asset class. And for the right situation, you can command rents that not too far off the peak. For the wrong asset with retailers don't think it configures well, you can achieve that. So look, I think rents have recovered quite a bit. They're continuing to recover. Obviously, the Times Square lease we signed recently, I think, is evidence of that. And so we expect that to continue.

The next question comes from Dylan Burzinski with Green Street.

I guess just sort of going back to the acquisition point. Is there any desire to -- given the lack of debt financing available out there, just sort of go into it from a debt perspective and possibly from a loan to own? Or is this purely as you guys are looking at things more so looking at things on the equity side today?

The easiest way to buy a building is through the debt. So that's obviously target #1.

Got it. And then as you guys think about opportunities, is this purely -- are you guys purely focused on office? Or are there other retail opportunities that you guys think would also make sense?

We're open to buy office, obviously, and retail, obviously. So those are the 2 areas that we specialize in.

And then I guess just a broader capital allocation question. I know in the past, you guys have floated opportunistically selling assets. I guess, is that still on the table? Or are you guys now more focused on sort of going out and acquiring assets and growing the company on an external growth basis?

We have, I think, basically 4 fairly significant sale transactions that are in various stages of conversation right now as we speak.

The next question comes from Alexander Goldfarb with Piper Sandler.

So 2 questions here. And first, Michael, good to hear about the rebound in street retail rents. That's really amazing what a journey it's been. So the first question is Steve, on the Bloomberg lease, so when we read the Q, the rents that are cited in there are basically a sliding scale that a negotiation in the future will address. So it's not as though we take that the one rent and then it slides up to the next. It's -- that's the range that the negotiation will be in?

Alex, you still published something that said there was a 25% discount in the rent. I don't know how you got that math and that's incorrect. So the way the deal is structured is, the basic rent on that building is basically net. There's a very small portion, maybe 50,000 feet out of the 950,000 feet that's growth. But 900,000 feet of it is net. So let's call it a net lease. The lease has a bump between now and 2029. And so when we get to the end of 2029, where we basically start, the net rent is $98 a foot, which grosses up to well into the $150 a foot. So that's the starting point. Now we established -- first of all, you recognize that we are renewing and extending a lease 5 years before the mature -- before the lease expires. And so you have to take -- affect the future -- unknown future and the contingency. So what we did there was we established what the tenant concessions, TIs and leasing commissions for, those are frozen. The starting rent is frozen. And then from that, there is a market-based appraisal as to what the proper market rate would be if we did [indiscernible] then expiry of the lease in 2029, taking into account the already established tenant concession. But the color is though that it can't be more than 10% more than the $98 a foot net or 10% less. So we have certainty on the bottom is what the rent would be and it will be established as the fair rent in the [ zen ] market, which we think was a very clever. By the way, both tenant landlord think was a fair deal and a clever way of handling the future. There's nothing in this deal whatsoever that contemplates any reduction in the rent. It will be a arbitration on the market.

Steve, thank you, and I apologize for getting that incorrect. That was -- my apologies. So your clarification is that the rent that's cited it...

Wait a second, I accept your apology. That's very generous of you.

Well, [ I mean it ]. So basically, the way the rent is characterized now is the $29 million a quarter is characterized as gross, whereas the rents that are in the queue for the terms are now net. And it sounds like that's the confusion that I had on my end. Is that correct?

I won't get into why you were confused. I'm just happy that you admit that you were confused.

Okay, Great. The next question is on the rents for this year to Steve Sakwa's question, Michael, you mentioned that originally it was down $0.25 to $0.30. Now it seems to be down $0.55 based on further lease move-outs, what have you. Was there some stuff that fell out of bed that was unexpected? Or what -- or did I not hear correctly? I just want to understand like was there stuff that came up and surprised? Or what drove -- what's driving the additional earnings impact this year?

Yes, yes. Maybe a little bit more confusion there, Alex. On the last call, we talked about that it was early in the year. I gave clarity on the interest reduction because a lot of that was baked in with hedges that were going to roll off. We knew those where those are going to roll off to. And we mentioned that there would be an impact from the known move-outs, right? And cited what those were. But obviously, there's a lot moving out. So it was -- we didn't quantify what the impact of those numbers were. We're quantifying that for everybody's benefit on this call. So I don't think -- no surprises, right, just trying to put a little more precision on it now that we're in May as opposed to where we were. And look, there's going to be more that moves around and that number could be less. But I think in terms of where we sit today, we have a known set between particularly 1290, 770, 280 that drive the bulk of that. Obviously, we've talked about re-leasing a lot of that and a lot of those deals have been announced. But just trying to get more precision to just the general statement we made last quarter.

The next question is from Michael Lewis with Truist Securities.

I'm just going to follow up on that question about the re-leasing activity on some of the known move-outs. So I could probably triangulate an occupancy rate on that $0.25 drag. But could you share -- maybe just share how much square footage is related to known move-outs this year? And how much of that square footage you've already addressed?

Do anyone want to take that or I take that?

So the bulk of the number is at 280 Park, 770 Broadway and 1290 Avenue Americas. At 1290 and 280, we've taken care of as Michael said in his remarks, 51% of the role, so call it 500,000 of 1 million feet. And as we said at 770 Broadway, we have Meta rolling in June. Along with the current vacancy, we have pipeline activity on that space. So that's how we're approaching the big ones that are in that occupancy number. So as we've taken into account our pipeline of deals, as we take into account our expirations going through '24, we may see more of a dip in occupancy. And as we complete transactions during the next 6 to 9 months, we expect that occupancy to then climb back as we get into 2025.

And then my second question is about THE MART. So occupancy dips down to 77.6% in the most recent quarter, prepandemic, that was always 95% to 100%. Could you maybe talk a little bit about kind of the road map there? And what you think stabilized occupancy or given that there's obviously some volatility with that asset. What may be like a stabilized kind of revenue figure might look like for THE MART?

So I'll start, Glen, you jump in. Like the Chicago market is obviously challenging right now, probably one of the more challenging ones in the country. But we do have decent activity on the asset. I would say that alluding to some of the prior questions, there's quite a bit of distress in Chicago office. Many landlords do not have the wherewithal to lease our assets given the debt situation there. We have an asset that has no debt on it. And so I think the sponsorship, the strength is well known by the brokers and the tenants, and I think that's helping us. We just finished what we call MART 2.0, which is the second stage of amenities that we have put in business conferencing, et cetera. And again, the reaction has been positive. So the market is tough, cannot dismiss that. But I think we're seeing more than our fair share there. And I think that's going to take probably 3 years to get back to stabilized occupancy realistically, maybe it's 2. But I think when the income fully comes online, it's probably in the neighborhood. And our objective is to get it back into the 90s percent occupied, get a 95-plus percent and get the income back up to that $90 million to $100 million cash NOI basis. So there's a fair amount of growth to come there. But the market is, as I said, challenging right now.

The next question is from Caitlin Burrows with Goldman Sachs.

This is Julien on for Caitlin. One quick one. Can you comment on whether the leasing spreads in the quarter benefited from the PENN District leasing? And what that leasing spread might have been ex-PENN leases?

Yes. I think the answer is that the spreads, PENN 2 is majorly soccer with the big lease in this quarter. That's a new lease, first generation. So didn't affect the spread.

Okay. Good to know. And then a second one on the debt covenant, it looked like interest coverage and fixed charge coverage tightened a bit in the quarter. I know longer term, the metric is going to benefit from the occupancy gain you've talked about from PENN District NOI. And it also sounds like you have some sales underway. But can you give us a sense of maybe the trajectory over the coming quarters given the fact that -- I know there's that sort of big swap expiration at 555 Cal?

Yes. No, you're accurate. I think the impact this quarter was predominantly -- the big item was the swap increase on PENN 11 this year coming up. I think if I go from recollection, I think it was 17 basis points, though, too bad that couldn't go forever. But that was the material item this quarter, a couple of other things as well. But that was a big one. Next quarter, second quarter, if you will, you're accurate 555. We put in place another swap that would kick in an increase. So as we look forward, we continue to have sufficient cushion in our covenants, fixed charge will tighten up over the next couple of quarters, but we still have [ vision ] buffer there. And then as the income comes online from some of these leases that number will grow again. But it will tighten up a little bit based on the 555 swap rate increase.

The next question is from Nick Yulico with Scotiabank.

I just wanted to go back to the $0.25, $0.30 impact this year from vacancy. So I guess that adds up to about $55 million, $60 million of NOI versus your total NOI share last year of $1.14 billion. So it's somewhere like a 5% NOI loss on that math, that's correct. So I guess I'm just wondering, how does that -- are there other moving parts here besides just some of the vacancy impact you talked about? Because if I look at your supplement, in the fourth quarter, you had 5% of your rent expiring in New York, and you're obviously not all expiring. So the 5% NOI loss number seems a little bit high relative to what your expirations were this year.

There may be one tenant that expired December 31 last year. But like I think in a nutshell, that's it. I mean it's pure and simple. The vast majority of it is 1296, 280 Park and 770 and you get to that sort of number. I mean there's a little bit of positives, a little bit of negatives, but those are the 3 main drivers. So we just -- we came through a period where there were some known move-outs, and we're backfilling those as we discussed. But that's it. And it just occurred at various stages everywhere from December 31 through probably the last one is Meta, which is in the middle of this year.

Okay. And then I just wanted to be clear on the way to think about occupancy and Michael, last quarter when you're talking about sort of a flattish occupancy this year. Does that mean that by the time we get to the fourth quarter of this year, it's a sort of a flat year-over-year occupancy? I'm assuming it's not a sort of average occupancy for the year that would be flat year-over-year based on that.

Yes. Yes. I would say by the end of the year, I mean, again, it depends on timing of certain things. And I don't know that I can [ pay you ] with precision. This will happen by the fourth quarter as opposed to January, what not. But we think rough numbers will end up there. So -- but we'll see, there's still -- we're still in the first half of the year, and we just have to see how it plays out. But I think like occupancy, it's down now. It's going to trend down a little bit more, given, for example, the Meta move-out in June, but we have some other things in the works that we can pick that up. So we'll see where it comes out in total. I think as we look at the front line, it will -- we think it increased meaningfully over time. We are going to bring PENN 2 into the numbers next year. Depending on where we are from a leasing standpoint there, that number could bring the average down. But obviously, that's sort of an extraneous event being added to the denominator. So we'll evaluate it as we get closer.

The next question is a follow-up from Michael Lewis with Truist.

I just have one more. You sold 2 condo units at 220 Central Park South for about $32 million. Are the remaining 4 units similar in value, roughly $16 million a unit? I don't know if you have -- maybe you have a penthouse left or you have smaller units. I was just wondering about that.

No. The remaining 4 units are smaller, lower view impaired, so they're much less valuable. Basically, that job is basically sold out.

The next question is a follow-up from Alexander Goldfarb with Piper Sandler.

Thank you. Steve, with the new office to conversion incentives, does this open the door for you to contemplate either assets from the existing portfolio or perhaps assets that are -- that you've always eyed is would be great for conversion and seem to maybe have a motivated owner who would be willing. Just seems like the incentive package that they passed is pretty lucrative for office landlords to convert.

Alex, yes, the answer is yes, of course. So there's a couple of things. First of all, the building that you're going to be converting, the target building has the price somewhere in the neighborhood of [ some $200 a foot or sub-$200 a foot ]. So these are really distressed office building. They're not -- they're distressed office building. Let me leave it at that. So the pricing and the economics really don't allow you to pay more, maybe even a pinch more, but probably not. So that's step number one. Step number 2 is, is that obviously, if those are the economics and those are the target building, these are the B and C buildings in the office market. So when those buildings are taken out of the conventional office market, they really don't tell the prime A market because the tenants that we deal is who are interested in A space don't really ever look at that. So the answer is, is that we will be able to, as an industry, convert a decent number of buildings. It will make a dent -- not a big dent, but a dent in the residential market and the demand for residential space. But it will have a marginal effect on the conventional Class A open market. But clearly, we're looking at that. It's an interesting activity and it's something that we will look at. I'm not 100% sure that the returns on capital are going to be what some people think they are. But anyway, we are looking at it pretty aggressively.

Thank you very much. There are no further questions at this time.

Okay. Thank you all very much. We appreciate you joining us this morning, and we will be anxious to -- we always learn from these calls, and so thank you for that. We are excited about the next -- the quarter and the future, and we'll see you in the next earnings call. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect your lines.