Q3 2019 Earnings Call
My name is Michelle and I will be your operator for today's conference.
At this time, all participants are they listen only mode.
Later, we'll conduct a question answer session and during the question and answer session. If you have a question.
Please press Star then one on your touched on.
Please note that this conference is being recorded I would now I'll turn the call ever to Ms., Cathy Creswell, Ma'am you may begin.
Thank you.
Sure NATO Realty Trust third quarter earnings call yesterday afternoon, we issued our third quarter earnings release about 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 dot dot com.
Investor Relations section indeed documented during today's call, we loved 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 Exchange Commission, including our Form 10-K for more information regarding these risks and uncertainties.
The call May include time sensitive information that may be accurate only as of today see the company does not undertake no duty to update any forward looking statements.
On the call today for management for our opening comments are yeah, Michael Franco President In addition, Steven Roth and our senior team, our president and available for questions I will now turn the call over to Michael Franco.
Thank you Kathy and good morning, everyone.
Overall, our business is in great shape. Our buildings are full we can see it.
A significant opportunity that we have with the redevelopment industry.
Let me review, our third quarter financial results before giving some thoughts on the markets and our portfolio and in particular the transistors.
Third quarter as if the Justin was 89 cents per share seven cents lower than last year's third quarter as I discussed on last quarter's call. These results were impacted primarily by reducing costs related to the over 3.1 billion asset sales, we completed year to date.
In the lost income from the Topshop and Forever 21 bankers.
Last quarter I also discuss the impact of Topshop is closing a six away fifth Avenue for 78.
In August we delivered the required nine months' notice to the groundless or six wait for that.
We will terminate beliefs and May 20 Twond.
Probably reduces abaco by approximately $10 million annually and mix or any idea by roughly one dollar per share. This ground lease. It only 40 years left on it was not economic for us to hold onto.
Now to Forever 21, which we mentioned last quarter was restructured yet.
As you know they filed for chapter 11 bankruptcy protection at the end of September .
There are 10 to 15 40 dry waiting for 35 seventh Avenue.
Third lease with us at Ford Union Square, which expires next month, and we chose not to renew them.
We have already released a portion of space the whole foods as part of their expansion.
Lease out with another important tenant for an additional portion vote at higher rents and what forever 20 ones payments.
Forever 20 ones in annual rent on 50, 40 Broadway and for 35 seventh Avenue totals approximately 20 million a share.
Well the bankruptcy process is fluid and it's still in its early stages. We've reached a tentative agreement with forever 21 to shorten their leases and retain them in those two locations for a little less than half of their current rent with us having the right to recapture the spaces at any time in the first year.
Neighboring us to secure long term centralized spaces.
Both of these assets are in final locations, we're confident there long term potential.
So to summarize either where these items, we remain on track to meet the approximate $3.40 per share in comparable EPS up over 2019.
Referenced in last quarter's call.
Our noncomparable items. This quarter included a couple of large gains one the $178.8 million net gains on sale real estate, primarily related to the July sales were 25% interest in Threethirty Madison, We made eight times our investment.
And 209 billion dollar after tax net gain on unit closer to 20 Central Park South.
Today, we have closed on 48 units for net proceeds of $1.25 billion, including 14 units for $349 million this quarter.
We continue to sign new contracts with a few remain units as well.
Remember that we paid off the remainder of the $950 million alone this asset in July .
So those closings continue through 20, Twond, we were three enrollment proceeds, which importantly will be redeployed into depend district redevelopment turning this capital into highly accretive earnings and propelling our future growth.
Companywide, our third quarter cash basis same store NOI decreased by 1% broken down as follows the our office industry retail broke up 1% marvelous down 1% in five of five California Street was up 17.7%.
For the first nine months cash same store NOI across the business was up 2.7%.
Let me now turning to the New York market.
The New York Office market, which continues to be fueled by positive job growth and delivery of premium office products performed strongly during the third quarter 2019.
Leasing activity across the city Hermes buyer, driven mainly by technology financial centers for the asking rents at record highs for the market overall.
25 million square feet, a new leases have been signed in New York during the first three quarters of 2019 with many large deals in process expected to close in fourth quarter.
Talents wants to be in New York, and therefore comedies are migrating to and expanding in the city, creating tremendous competition for top talent.
Nowhere is this more evidence than with the dramatic demand from the Big Tech companies exactly this view their real estate as one of the key drivers recruiting the best and brightest out to their teams.
Private sector jobs decreased 53000 in the first nine months on pace with 2018.
Nine month office sector jobs, decreasing about 18000 as compared to 20000 for all of 2018, and certainly not to pay strong enough to continue absorbing the new supply coming on line.
There are currently 65 tenants actively what the for 100000 square feet or more totaling 16 million square feet potential exit activity.
This demand is coming from all embassies, oh industry sectors from companies already in the city as well those seeking the first home here.
Our development in the end district is seeing the benefits of this demand as we are in full year on a 5.2 million square feet, a combined redevelopment as Farley and wanting pencil.
We are experiencing robust interest in all three projects as prospective tenants begins to appreciate the magnitude of our district transformation.
<unk> responding very favorably to the unique nature of our amenities space offerings and design elements and each property that will serve today's workforce at the most successful location directly on top of the most important transportation hub in region.
Finally, as one of the kinds of we have great activity on space.
At Penn Sue we are negotiating a lease with a 400000 square foot headquarter staff.
And there's more in the works beyond this all at rents at or above our underwriting.
Our activities will benefit from the significant public sector projects being built in our district, including the new Grand Moynihan train Hall, which will be delivered in 2020.
Spanta they'll IR concourse running from seven to eight ABS is by the end of 2021 and a soaring to station entrance that 30, Threerd Street implies a 33.
Against the backdrop of this district transformation. We're Placemaking. These tire district and are hard at work negotiating deals to curate the district with new food and beverage outlets by leading operators coffee spots fitness offerings and other retailers to service our tenants. These additions will dramatically to answer offering and dry.
I have greater demand rental rates within our 10 billion square foot district portfolio.
Our goal simple is to make depend district and are holding specifically vigo to location for tens and say.
More broadly our New York office portfolio is in great shape, you can see us to perform well, we're substantially fall with occupancy ending the quarter 96.8%.
Our remaining 2019 expirations are only 85000 square feet.
Our 2020 expirations are modest so one building 55000 square feet with 760000 square feet of this amount expiring and wanted to pencil.
Please remember this includes 565000 square feet attempt to which will be taken out of service in 2020 as this development kicks into high gear. This will bring the total Addus service at Penn two at the end of next year to approximately 1 million square feet.
Basically we're repositioning the buildings for mid Sixtys per square foot rents to the ninetys and need to move the old tenants out more to accommodate the though.
During the third quarter, our leasing team completed 25 leases totaling 197000 square feet in New York at over $80 per square foot, starting rents with very strong second generation positive mark to markets of 22.7% cash and 28.5%.
Yeah.
We have now completed 840000 square feet of leases during the first three quarters in 2019 at a healthy average starting that's all $79 per square foot.
In the quarter, we signed our first lease at our Newbuilding 512, West 22nd Street on high line.
One of media for 20000 square feet at a triple digit ramp.
We also have an additional lease out here for 43000 square feet, a triple digits, which we expect to sign in the fourth quarter.
Additionally, during the quarter, we finalized the relocation expansion deal with an existing tenant in our portfolio, which will be moving from mid town. The 28000 square feet at 330, West 34th Street independence.
Starting rent per square foot here is in the high is a record for this building, which is clearly benefiting as tenants recognize was coming with depend district transformation.
Overall and dialogue across our entire portfolio is very strong, whereas busiest at over 3 million square foot up deals in different stages of negotiations, including a strong momentum is fairly entail.
Moving to Chicago now.
At the Mark during the quarter, we executed 45000 square feet of leases at an average starting rent of over $48 per square foot with positive mark to markets of 6.7% cash and 14.9% gap.
This is this included an expansion lease with Allstate or 17500 square feet basing the total footprint to 120000 square feet occupancy here as a 95%.
In San Francisco market continues to be hitting on all cylinders.
With our campus here at 100% occupancy, we're taking advantage of extreme tightness in the market and are now discussing with renewals with several important tenants totaling 180000 square feet, well advanced or explorations during the quarter released 50000 square feet, including a 42000 square foot renewal expand.
Okay.
An existing tenants Threefifteen Montgomery's tree.
Starting rent of $97 per square foot.
Please note our positive mark to markets on second generation space here, which were a spectacular 39.3% cash 64.5% gap.
Before turning our retail business, let me comment on we work.
There's been some speculation that press that we and several other landlords have meaningful exposure to we were.
Quite the opposite is true in our case, we have we work as a tenant and only one location six six Broadway America, 15000 square feet and share.
Okay. Appreciate some of the creativity that we were brought to the office business, we chose to lease our space to end users better credit over the past few years.
Notwithstanding this we do think the co working provides an important service and the real estate ecosystem, and we will be providing flex space as part of our overall offering for tenants at Penn One penny to the space will provide our 10 swing space co working space meeting and social space is food and more we will brand this space under the Vornado name.
And importantly retained the bulk of the upside.
Turning now to our New York Street retail business overall, the retail market continues to be challenging with leasing velocity slow and assets from the negative surprises.
Topshop and forever 21.
Retail occupancy was 95.9% at quarter end.
In the third quarter Inspite of the challenging leasing environment, we executed nine leases for 20 626000 square feet of retail space, achieving positive mark to markets of 6.2 cash and 50.6% gap of second generation States.
During the first week of October .
We finalized their replacement lease for the short lived former Fourseasons restaurant to 80 Park Avenue with the famous best in class Maisano Hotel in restaurant growth.
For some of its been a symbol of quality fine dining and excellence in Sao Paulo and Rio since 1949. This will be there first New York restaurant, and we'll focus on classic aside it was a similar to those they operate in Brazil.
So I will deliver the best in fine Downs in Midtown Manhattan, granting atmosphere style sophistication on energy.
We think this will further enhance the quality of our tenant experience at 280 Park and are excited for their openings in the first half of 2020.
We continue to maintain a fortress balance sheet with reasonable leverage and an abundance of liquidity today and growing over the next few years. Our current liquidity is 3.36 billion comprised of $1.28 billion in cash restricted cash and securities and $2.08 billion Undrawn revolving.
Facilities.
Lastly, I want to remind you that based on taxable gains from our asset sales year to date. We are currently anticipating paying out of special dividend of approximately $1.90 cents per share this year.
That I'll turn it over the operator fuel.
Thanks.
Thanks, So much Sir we will now begin the question and answer session.
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The first question the Q comes from Manny Korchman with Citi. Your line is open. Please proceed.
Hey, good morning, everyone.
If you think about the leasing pipeline you talked about independent district, and you dissect that how many of those tenants are looking.
To to make a move or stay within sort of the Hudson yards.
That was.
And district court or versus looking elsewhere in the city.
Hi, Matt it's been wise.
We're seeing you know it real balance of activity both from tenants in Midtown South Park Avenue 10, six revenue tenants looking at all of our projects.
In addition, we've a lot of activity from the tech sector.
Ever growing brand Maintech guides are all looking at the projects as well. So I'd tell you the balance of tenants from within Midtown core and from tenants looking to continue expanding city.
Thanks, Glenn and then on the honest Forever 21 comment you made.
How did you think about sort of giving them that rent relief.
And the impact that would have on both the leasing and other tenants psychology.
Ben obviously.
Yes, it was a negative surprise right in the sense, we had term on the lease and all of sudden they filed and so you have to deal with real time situation and.
I think the deal that we struck as being finalized now.
Works for both parties, but I think importantly.
Yes keeps us space occupied paying rent and allows us the flexibility to go troll for tenants.
And fine as the likely by this phase one time. So you think about locations individually at 54, a broad way is arguably the best locations right now right from the Street retail perspective time square the strongest marketplace.
Yes tenant sales are holding up the best.
And we have.
The block front.
On one side of the boat side that as a premium locations. So with appropriate time, we will find a replacement tenant a great there.
And are confident about what we're going to achieve.
For 35 seventh Avenue right and that was always a short term deal is a five year deal incented to get us through the period, when we're ready to redevelop entire block and so this continues to preserve that procure it is I wouldn't get replaced them. If we want if not we'll keep an implied but again there is a bigger picture on for 35.
Thanks, everyone.
And the next question and the Kids comes from Nick You look Ho with Scotiabank. Your line is open.
Thanks, Yeah I just wanted to ask about you talked about Topshop forever 21, nice I just wanted to be clear these impacts that are only.
Starting to hit in Hawaii, and the fourth quarter, just trying to kind of bridge what your four in the third quarter versus a these impacts.
Hi, Nick it's Joe.
Next the Topshop started to affect us in Q3 in Q2 weeks and.
Forever 21 starts to effect in Q3.
Okay. So I guess I'm, sorry, sorry, if I if I missed this if you went through up I'm just trying to understand how we're always thinking about that 340 kind of soft number for the year on AFFO. What are some of the items in the fourth quarter to that create that drag versus what you reported in the third quarter.
So no one when we had the second quarter coal.
We said that the sale of items and the other items, we discussed that reduced.
And award going forward.
If you apply them to the six month numbers you get to report.
The third quarter last year was 96 cents. This year at 89, that's the diminution of seven cents that really comes primarily from sales.
Specifically the retail JV is 8.2 million of that reduction.
Three started Madison.
1.4 million the sale of Lexington share 3.3 million.
The sale of urban edge 1.9 million the delta between the dividend on pre and our share of the earnings another million and then there were other items.
That makes seven cents or.
The Delta there and a $9 million $15 billion, though all of those items continue in Q4.
With that and now even the forever 21 effect.
Q4, which we Didnt know, we talked about the 340, other pluses and minuses leave us comfortable at reporting.
[noise]. Okay. That's helpful. Thanks, just just one last question on four we I mean, you have a lot of interest in the building for all we've heard some press reports on it.
Give a sense for [laughter] on on getting the building leased and then in terms of the yield that you given there in the supplemental I don't think that's been update and while we've heard you've kind of been pushing rents in the building so is that.
As it is there upside to that yield in the building.
Like I think has been a lot of press speculation about Farley and there's quite a bit of interest in the asset.
I think as we've talked about on prior calls, it's a totally unique asset, which we had five of them.
And so.
The interest has been high engine that we're not prepared to comment on when a deal might get on terms of that deal.
But.
Even if we signed a lease near term cash flow is not going to start.
Probably in sale.
Beginning of 22 so.
The interest as high I think the yield that we published in the last quarter was our best assessment as to where we'll end up we're not prepared to make any adjustments that.
Obviously, we had some sense based on some dialogue at that time and I think the interest in the retail fund significant as well. So we have to let it play out but I think we've put in the third third second quarter numbers.
Was that continues to be our best guesses as to where yields will end up.
Thank you. The next question comes from Steve Sakwa with Evercore. Your line is open.
Thanks, I guess, Mike when you look like when you look through kind of the retail tenant list. So many things are kind of popping up that maybe you weren't expecting just what like how do you sort of look at the watch list today.
The other potential tenants, maybe without naming specifics are you sort of worried about moving into 2020 at this point.
Flex the.
The retail market is soft.
Tenants performances are now if they were two years ago and so generally.
We watch everybody.
Six nine months ago.
Forever 21, striving, but we didnt so expecting the file bankruptcy so.
There is NESA anybody that we look at the we view as in the same position today.
But we're constantly watching what may happen with different retailers.
And so there's risk in the sector. We do have I think on average about eight years weighted average term I'll leases in retail.
And we continue to view that durability is a real strength.
And so not a specific names that I would mention but everybody everybody as my refocus on.
Okay, and then maybe just a question for Glenn I mean, I realize you guys don't have a lot of space coming due that Michael outlined but just sort of what does the tenant psychology today.
As tenants or thinking about their 2021, maybe 22 expirations and you know are you seeing more tenants coming to you sooner in order to lock in deals I mean, just sort of what does that dynamic today.
I think the tenor of the markets very good Steve.
We're seeing a lot of tenants number one expanding in the portfolio.
Lot of tenants looking for new space in the portfolio, we do see tenants, who have expiring leases forward or looking at our developments in Penn specifically I'm. So I would tell you I think the market overall is healthy.
The tenant demand is strong and the tenant there is still very active across all the sub markets.
I would just asked it was like I think I think if we look at the.
We look at the pipeline.
We were Chatham here few days I think the activity really across all Submarkets, Midtown Midtown South and district.
We have good action across the board and I think thats reflective of.
The fact that tenants are growing.
And the markets help.
And then just lastly could you just comment on the T.I. leasing commissions I think it looked a bit elevated on a couple of areas I think in New York. It looked a bit high I was just wondering if that was a specific deal or kind of what you're seeing on the concession front.
Tom It's Glenn.
During the quarter, particularly this quarter, we had a bulk of our leasing via our turnkey program. So weve built space for tenants those leases had relatively short term at around seven years on average our that leasing and the way we look at the Turnkeys, we build them today, we lease them for the terms and then.
It's definitely a great value when the next generation of the leasing of those spaces. So that's why do you see that elevated number this quarter.
Yes.
Thank you. The next question comes from Jamie Feldman with Bank of America. Your line is open. Please proceed.
Great. Thanks, and good morning. So I know you guys guide kind of confirmed that 340 for fall, but I think on last call you talked about a low 200 range for street retail you feel comfortable with that I'll like or is that changed.
Good morning, Jamie.
That is the number that Steve referenced on the last call.
Like I think that number.
There will be fine.
But there are some things influx obviously.
Forever 21, we have a handshake deal until that's done and we see how that plays out.
Generally as a company and that specific.
Arrangement.
That can have an impact.
Yes, we sold a couple of assets.
Including 340 and for example that comes out of that number.
Lastly, I would say is that.
Yeah. We are we're now projecting that take the retail.
On railroad concourse out of service.
Next year for a couple of years, while redevelop the concourse. So when that comes back we're going to add additional retail square footage.
Which we think is going to be in very high demand based on that retail today.
And the income will be higher, but we're going to lose $12 million per year temporarily. So yes, there's a couple things that are moving around.
Again.
Some of those temporarily we didn't see out forever 21 plays out, but I think the general number that's the you've outlined the last call still appears fine.
Okay. Thank you.
And then I kind of where do you say you're in talk for a 400000 square foot headquarter deal at two pen.
Can you talk.
More about that potential eastern and just timing.
400000 square foot block, how that would fit into that.
To the building and how we think about the ins and outs over the next couple of years if that hit.
Well you know leases out we expect the at least the gets on the next few months.
The tenant would start their construction once we've deliberately redevelop building to them.
So it took the deal with new we like a lot.
And then we're going to try to close in the next few months.
Okay.
Then finally from me just I know you had said you're seeing expansion.
Pretty healthy market conditions can you just talk about your view of kind of traditional midtown versus Midtown west sounds like a lot of the activities Midtown west, but if the tenant you're talking to do end up moving to the West side, you know what do you. What do you think the outlook is for more traditional Midtown.
And market conditions there.
And I can speak in terms of our portfolio Jamie in Midtown and we are still seeing expansions in the in the buildings in Midtown whether it's a 12 bindi a 90 park it to 80 Park and 87, so we're seeing expansion so right our Midtown portfolio.
We in our portfolio have not lost the tenant to the new developments on the website.
So I can really specifically speak about others, losing their 10 migrating there, but we're seeing expansions still healthy within our portfolio in the mid town district.
Really I'd add Jamie is that.
I think we've talked about this now on a few calls.
Is that in order to compete effectively in this marketplace. You are building is after the modern.
NIM to structure standpoint technology standpoint, manatees standpoint, and we got ahead of that starting many years ago all of our buildings in Midtown.
I've been renovated.
We attracted.
Top flight tends to anchor those redevelopment and so when you look at our assets.
Notwithstanding the activity levels, which are healthy on them generally put to bed for a while theres not one so you look at the leasing activity last quarter. This quarter next quarter, we alluded to.
There's not a lot a role because we did the work, but those buildings to bad.
At healthy rents and and strong, Tennessee, So I think where you're going to see some some impact is not landlords that have either inferior locations or functionally obsolescent assets.
You know where some of the move outs are going to occur in 234 years.
Thank you. The next question comes from John Kim with BMO. Your line is open. Please proceed.
Thank you a question on the Forever 21 run.
And your expectation that you will release that stays and then meaningfully higher rent.
Or is there are new rent.
John .
Well the trouble hearing that the on there.
This repeat the question was.
Sure do you do you foresee releasing this space.
Over 21 at higher rents or is there new ran really reflective of where market rates are today.
In between.
I would say.
Let's take them individually right on 15 40 Broadway in our expectation is as I said, given the quality that space.
Yeah that we should be able to achieve a higher rent and what the dealers with them.
And for 35, seven was a temporary deal.
When police that long term that rent will absolutely be higher but again, we want to keep flexibility there and so we're balancing flexibility with how much route we're going to yet and so frankly.
You guys care quarter to quarter with the rent is there we don't really care what the rent is the next four and a half years as we can see Anna put our plans together for that block.
Okay.
Okay. Michael you mentioned 65 tenants potentially looking for up to 60 million square feet.
In Manhattan.
You have any commentary on how much of that is new demand versus just the musical chairs.
No it's Glenn.
Although it's a mix.
Mix of type of 10, whether the man's expansion relocation.
It's a mixed bag across all the industry sectors across all the submarkets.
What did that started pinpoint one particular flavor of activity within that subset.
But what about jobs on the one thing I'd, probably the one thing I would add is.
You see that.
Really I think in space. This year right is the the growth from the tech companies, which.
I don't think.
Most people didn't see the magnitude that was going to occur this year and there continues to be dialogue on those are major impacts.
The tend to happen.
I think with much greater seasonal or the other leasing from traditional test so.
We continue to see in migration once those tenants get here.
Their expansion has been.
Leasing yet.
Great. Thank you.
The next question comes from John Guy.
Yes with Stifel. Your line is open. Please proceed.
Great.
You have two sources and uses questions first up can you remind us again when you have access to the preferred equity from the retail deal you did earlier this year and then what you expect to be the remaining after tax proceeds at 220 Central Park South.
And then the next the sources and uses is up.
How do you think the JP Morgan news ultimately plays out.
Does this result in a stable head to head count and New York City or is it down 20%.
So John warning.
Let Joe answer the after tax proceeds on.
On our two point.
Okay, well start with that John Hi, already as Joe.
Joe we write one.
Excuse me.
Where Steve.
Sitting next to me.
We have 1.9 billion.
In future sales, the lion share which is under contract.
There's another 100000, the taxes against that 1.9 billion.
And another 100000 of cost to complete the project against that 1.9 billion.
So net of all costs net of oil taxes from this point forward will be receiving $1.7 billion plus minus from the remaining sales closings of the sales at 220.
So John just on your all over the newspapers Tomorrow.
You are.
Question, John Resi price on the retail preferred.
We have not said specifically in the past when that can be refinanced and I think we continue to.
So not want to.
The state that there's some tax sensitivities that but.
We will.
In the.
And do time deal to refinance and redeem that that retail preferred.
But thank you for point out that is another significant source of capital we will have access to.
In a few years.
That terms or the JP Morgan announcement like I think the most important thing too.
To to remember is they are building a significant.
Look last headquarters on Park Avenue, right now and have.
Re committed to New York city through doing that.
So this is their home and I don't think it's unusual for companies ticket the banks to move back office personnel outside New York, whether thats into new Jersey or into other cities and so I think this is this is a along those lines.
But I haven't heard any announcements on those percentages of headcount whatnot Hill, all have to sort of read that news, but you know there's ebbs and flows.
In the city in terms of.
Companies and how they grow and manage their head count and I think JP Morgan.
Great.
We mission Steve Thank you.
Uh huh.
Yes.
The next person the Q comes from Alexander Goldfarb with Sandler O'neill. Your line is open Sir.
Hey, good morning, good morning.
So two questions.
First you guys, obviously talked a lot about the big Tech demand this year that comprise the market.
And at the same time.
Slug is is busy contemplating redeveloping one Madison you guys have the Farley, but at the same time you have the forever I Hotel, Pennsylvania. So are there is there's sufficient demand in the market, where you guys would start to I didn't know if the dust off the old plans, maybe reconceived, but where that project start to be a.
Dumped it may actually come to fruition, given the tech demand the city location.
Good morning Us.
But we are unbelievably excited about the hotel Centseight, we think that that site. We are done transforming seventh Avenue with.
10, one until we think it's going to be.
Development sites in the say.
So, but now it's time is not there yet.
We're going to finish developing kind of one and so.
And we think that solves that after the fact.
So you're guesstimate and what demands going to look like and.
234 years.
No and it can effectively do that but we think it's going on the plan. We have for that is going to be unique we think that will appeal to all sorts of pets.
Okay.
Okay and then the second question is just going back to the questions on on retail rents.
Topshop you mentioned a cut to run.
The Ikea replacement for the fears out and Regal Park is a cut from what's yours is paying so it almost sounds like rents for street retail are there either coming down dramatically or these were special circumstances, where they were so far above where the market had moved or maybe it's just the amount of space to maybe you can just give a little.
More color on that on the dramatic cuts there we're seeing in these locations versus where you think you know sort of generic your generic your average street retail lease a would would reprice.
Like I think we've talked about a friend because the last at least two years it.
You know the street retail rents and Steve was really a.
He was early and saying it and that the market has been correct right. The retail demand is down.
If where rents and followed.
Yes, I think it's probably been most significant and Madison Avenue and and so.
And again deals that were signed that high watermarks you are seeing as.
Those rents come down so.
Madison could be down.
Certainly well north of a thousand.
And certainly below that lower thousand today. So yeah. The market has been correcting that we've bottomed.
The answer is in some submarket that were close and as a couple was not necessarily yet.
But I think its case by case right depends on one of the lease was signed.
We have many leases that are still below market. We have obviously some that are above market depends on what the vintage of those leases where it obviously when those leases roll.
Can't predict where the market will be at that time, but in some cases, you know the asset maybe a better you. So topshop so that was entirely retail.
Today, the best answer maybe that the ground force days as retail on the upper floors become office.
The income is not that different.
Now that office space with across the Street address we think is going to be very attractive than we have interest already so I think it depends on the asset depends on submarket.
But clearly.
Rents have been corrected.
Thank you.
And the next question in the queue comes from victim drop from Morgan Stanley . Your line is open. Please proceed.
Thanks for taking I've I've two questions. So just one following up on street retail any update on the Massimo space or the the medicine assets.
Hi, good morning bedroom.
You know nothing really to report.
On on either one of those.
We have some tenants dialog going on fifth Avenue.
But.
Nothing is imminent.
Retailers continue to be cautious.
And our concerns about making large commitments, which fifth Avenue generally is so.
Nothing to report there I think Madison Theres, a little bit different where you know Madison is slow.
There's no sure the demand on Madison is probably.
The lowest of any submarket.
In the city.
And so it's going to can see it takes some time to fill out.
Okay, Great and just if I just wanted to clarify on the 340 in the run rate going into next year.
George should we is viewing that therefore the festival in Fourq you is closer to 80 cents to hit that 340, and you said I anticipate regrouping.
One of those losses heading into 2020.
Hi, good from look so far we've talked about forever 21.
We've said that the rent at share.
His 20 million and that's going to be diminished by at least half.
We talked about the long Island railroad conquest coming out of service next year.
Neither one of those things were included when we talked about the.
2020 versus 29 team now as you know, we don't give guidance, but that being said.
As a result of that negative effect of forever 21 additional out of service at 10, one and tend to to support our development plans, including L.R.R.
Lower expectation from hotel, Pennsylvania.
We no longer believe that 2020 will be a substantial bounce back year, it's gonna have to wait a little longer.
Okay, that's what our funnel offline. Thank you.
Yes, I can but I I would just add to what Joe said, though which is you though.
Notwithstanding and I'd be a bounce back year and I know.
You and others are very focused on next few quarters and I think as we look at our business.
Our Big road benches and district and.
We have tremendous confidence in what we're doing their early reception has been.
Very positive and so.
That's going to take some time to kick in but it's going to be meaningful and it does and obviously, we publish the information on the first three redevelopment last quarter.
And so we feel good about so it's going to require little patients, but the growth is going to come quite meaningfully.
No that's great and I just wanted to just clarify just on the 340, Joe the run rate is that 340 still intact for the reported full year or that was that a run rate sort of number.
No. That's that's the number we expect to publish at the end of this year for calendar 2019.
Okay great.
I'll follow up what's the color. Thank you.
And the next question into Q comes from Manny Korchman with Citi. Your line is open.
Hey, it's Michael Bilerman with many of the just a few follow up questions.
Michael You mentioned that 400000 square foot headquarters lease and.
I don't have Glenn or David or yourself want to answer this but I guess it when do you sort of disclose that information to the street I got to assume in your comment that there was a lot more in the war.
I assume that set Farley and maybe other stuff at Penn one or two and other buildings. So I guess at what point in the negotiation do you feel comfortable making a statement like you did about a significant.
Value, creating leaks like going you mentioned.
What Mike I think we'll we'll we'll announce that when the leases actually side.
I think thats the general.
We have good dialogue going on assets right now, but the actual actual a detailed come finalize lease.
But I guess in this case just leave it out for signature I.
It gets you talked about on the call it out for signature I just didn't know at what point in the process, let's say at least at Farley would be at what point, you would be talking about that yelp and about about about real.
Yes, just just wanted Simon.
So in this case, the 400000 assigned and you're just going through now for 400000. There is no we're negotiating though these.
So I guess in the other leases that you're negotiating how sizable are those and where do they stand in the process relative to this 400000.
Two.
I go look I think you're trying to pin down on exactly where we are this and then I think it really nothing more to say right at a high level I think what we've said is.
Is that all that we're prepared to say right now.
At least get signed we'll announce those you'll know about those but until that Don nothing's done and.
And.
Beyond what we what we mentioned specifically is again still just active dialogue in negotiation not not ready for to be airport.
Right I look at it's very exciting to here.
Tend to lease I was just trying to understand sort of policies that you have in terms of disclosing it that was really more I was trying to get out where we're excited to Michael.
But.
You got to wait a little bit.
And maybe a question for Steve are you know you've not been shy about where your shares trade relative to the inherent value of the asset base and you've been extraordinarily aggressive over the last six years at simplifying a lot of the complexity.
Spin merge sale.
Completing the construction at Btwenty finally buyout all variety along with.
I guess Where's your head today in terms of a further sort of potential sales and most obvious would be something on the office side, either New Yorker outside of New York.
Either in a joint venture out right.
Or is all the focus right now on Penn Plaza on the redevelopment efforts.
All of the above Oh, I'll say, a couple of things number one.
Everything's on the table as it has been for.
For the last the number of years, but until we are certainly not done yet number three is definitely.
Satisfied with our stock price at all.
And just I would like to throw it back to you for example.
You said asset sales outside of New York, I guess, you're referring to.
San Francisco, Chicago, I remind you that for the last five years, you and your brethren have been babies cells, San Francisco and at the last five years. It has gone up in fact over.
Over a billion dollars since we continue to hold it.
So everything's on the table that's done yet.
And.
You know were actually.
Surprised by our stock price, but.
Mr market speaks.
We're not done yet.
Just in terms of to 20.
The 1.7 billion.
Is that also include the basis. The money you have in the building. So it's effectively we should think about delays seven of Catchmarks Dr., Michael Michael Michael just just talk a little bit out of the term of.
Back to be very very thorough the answer is that we have published numbers would show that the sell out in that building is about $3.3 billion.
And the cost of that building is about $2 billion. Okay. So you can do the math from there.
The important thing is is that all up we paid off the.
David This so all of the closings that come from in the future go until our Treasury and go to for the Penn Plaza. So we have announced that we saw we have closed 1.2 or $3 billion you can deduct that from the sell out you can do the math.
[noise] American line that was consistent with what Steve said okay.
You can't go back without [laughter].
One of the reason, we but I've been accused of being secretive with respect to that property.
That's really not the case, we have a very important clientele and I think the word discrete is more important.
The residential real estate market is a very gossipy market. So.
Nation that gets into that market is not helpful.
Okay. Sir the next question the Q comes from Daniel its now with Green Street Advisors. Your line is open. Please proceed.
Yep.
Good morning, guys. Just a quick question on New York City office cap rates given the movement in the 10 year and from a sales that we seen in New York.
Where we stand today.
Earlier. This you guys put afford a half a cap rate on your office buildings do think we drifted higher or lower.
At that time.
I don't know that would change that Daniel but obviously and we do a once a year, we'll revisit the time see where the markets are and what what what we're hearing from capital sources.
Yeah, I do think that the.
That you know the fact that interest rates have.
Trended back down and appear to be stabilizing at lower levels.
I think is.
Brean capital further into real estate as a general matter and I think that number the capital sources, we talk to.
I think viewed New York as as as they did this value here right. So cap rates, probably widened a bit over the last year. So.
And given where the tenure is you can finance.
On a reasonable leverage basis generally below 4% right now so that's a very attractive cash on cash yield.
So as the hedging costs have come in for a number the capital sources abroad that are of that.
As an important issue I.
I think you think you're seeing capital sources refocus a bit not just in the U.S., but on New York as potentially a value play given dies and frankly pretty flat, maybe even a little bit down last year. So you know there's a lot that goes into what we published not just where the market is but you know.
Yeah.
How much growth is in a particular asset or vacancy or whatnot. So we'll revisit that you know as we get closer to when we publish it.
But I think today directionally is not far off.
Good Day Hill, you guys have been hustling that New York is over price.
I'm not sure we agree with that.
So if you look at comps.
So pretty much support the cap rates that we have been using.
The bottom yield of.
Of activity in the capital markets has definitely been decline I guess, the declining a little over the country over the world. So it's a very specific asset by asset calculation now. The end 18 calculation is not intended to be Nord cannot possibly be a rigorously mueslis ruthlessly.
Accurate correct number to the petty it's a range.
So.
The volume is down.
Pricing is pretty much holding off specific assets.
And we think that you are a little bit too pessimistic on your thinking about that youre.
Hey.
More than.
Maybe of a significantly too pessimistic.
All right, but that's fair or maybe just a quick follow up on a pad one and two based on some earlier comments.
You mentioned wanting to do the flex space there yourself.
Is that a result of any of the turmoil, we've seen that we work and wanting to reduce operator risk or is that a conscious decision to capture some of the upside.
Flexible leasing and keep sort of that tenant experience in house.
Okay.
Hi, it's Glenn we think in hand, it's important to create the.
The flex space for our portfolio for our tenants, particularly at Penn won the bid build until one ethylene fees more than 200 tenants are in the building, we're always seeing tenants needing agile space, whether its swing space expansion space short term bandaid space for whatever.
The reason so we've taken pen.
Doing the co working to flex space is going to be huge benefit for us in our tenants and of course with that we do expect it to be are profitable operation, which is why we decided to do would add pen one.
Again, there when you when you think about like this this is.
This is this is part of the centerpiece of the pen district, we want to control exactly what goes on your curated exactly how the one created rate environment.
And so yeah, we're going as they might better to do that than ourselves.
Even though the years and what we've done and so.
And when you think about when you wish to a a co working operator union generally providing the bulk of it to you guys and getting a lease and maybe you get little upside, but you're not getting a lot of credit and you have a capped upside so here.
Yeah, we're going invested capital exactly Lou on it.
And create the right environment and capture the bulk of the upside.
And so you know for us, it's a pretty straightforward answer.
Makes sense thanks, guys.
And then by that's all that's always been the plan.
Thank you and the next question the Q comes from Jamie Feldman with Bank of America. Your line is open.
Thanks, just a quick follow up on that last question I mean have you what I know what hasn't been that long, but what changes have you seen in the market since we were pulled their IPO.
In terms of demand for co working or just you know tenant behavior or discussion.
I haven't seen any change Jamie no change.
Obviously makes no sign movies.
Well I guess, just said the attitude towards co working and flex leasing I mean, it certainly seems like.
The product.
The cycle seems a lot more I talked about and.
Tenancy more interested.
Like I think its like I think the way the people work.
Hey may use that space I think thats here to stay.
One of these into offering that.
Type of space.
Depend district.
I do think my own view would be.
That.
There's been this big discussion of shift toward enterprise.
From these co working companies, particularly we work and I think those large enterprises are going to focus even harder on who the landlord is so I think that accrues to the traditional landlords.
Quite a bit like us and so you know the best buy Baskin small.
Small companies and I think I'd be co working on continue to be.
And alternative for a number those but but I do think that the shifts the tenor back a little bit.
Thank you Sir.
Question to this time I will turn the call over to Mr., Michael Franco for any closing remarks.
[laughter].
Thank you everybody for joining the call we look forward to saying many of our investors out at the memory conference in Los Angeles on November 12, and 13.
And our next earnings call for our fourth quarter earnings will be on Wednesday February 19, 2020, and we'll look forward to your participation again take care.
Thank you ladies and gentlemen. This concludes today's teleconference. Thank you for participating you may now disconnect.
Okay.
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