Q2 2020 Vornado Realty Trust and Alexander's Inc Earnings Call
[music] good morning, and welcome to the Board you don't Realty Trust's second quarter 2020 earnings call. My name is Richard and I'll be your operator for today's call. This call is being recorded for replay purposes. All lines are in listen only mode. Our speakers will address your questions at the end of the presentation.
During the question answer session at that time. Please press Star then one on your Touchtone phone. We also ask that you. Please limit your questions to one question and one follow up question only I'm not trying to calibrate Ms. Cathy Creswell director of Investor Relations. Please go ahead.
Thank you welcome to Vornado Realty Trust's second quarter earnings call yesterday afternoon, we issued our second 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 package are available on our website W.
<unk> dot the I know dot com under the Investor Relations section, Indeed documents and during today's call. We will discuss certain non-GAAP financial measures reconciliations of these measures should 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 maybe 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 annual report on form 10-K for the year ended December.
30, part 2019, and our quarterly report on form 10-Q, but the quarter ended June Thirtyth 2020 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 our senior team is president and available for questions I will now turn the call over to Steven Roth.
Thanks, Cathy and good morning, everyone I hope all of your continue like the safe to say safe at Hill.
Yesterday after the close we announced a very important to 730000 square foot lease with Facebook and our Farley building.
We normally don't go for the drama or timing deals with earnings call, but that's what just worked out that's like.
This deal has been in the works for a while and it's not been a secret in the marketplace people speculating.
Ill, even a great cup brick companies such as Facebook committed in the middle of the pet prices.
Well they commit the physical assets it might have all the work from home stuff.
Well they continue to expand in New York and effect doubling down.
No no the answer these questions is yes.
This commitment is a dramatic statement from one of the most important global tech companies that even in the midst of a pandemic commerce must continue.
This deal reinforces New York City is a great new place to do business with unlimited highly educated workforce, New York continues to be the place to be.
While we use they need properly property like mother in New York occupies a double wide block. It is actually part of the Penn station complex the busiest transportation hub in the nation across the street from Madison Square Garden, you'll get the picture. Most importantly, this deal further validates the west side of Manhattan, as a place to be and it further value.
That's our plants to redevelop by 7 million square feet Appendices holdings into the Bulls eye location in New York.
Facebook Facebooks commitment here expands our longstanding relationship with them at our Sevenseventy Broadway property with at least 500 757000 square feet.
Facebook is now a lot just headed by both revenue and square footage.
Who knows the Glenn wife's ideal captive at the battery Lanka, who led construction development sport.
[noise], So 20 Central Park, South as most successful residential development ever.
We are 92% sold or under contract and we are now reaping the financial rewards from 220. It is a financial engines feeding our liquidity and financial strength year to date through July we have closed on 13 units for net proceeds of $598 billion. All of this during the whole crisis from inception through.
In July we have closed 67 units for net proceeds of $2.42 billion.
We expect closings in the balance of the year will bring it out additional 196 figure that goes.
Our current liquidity is $3.8 billion, including 2.1 billion of cash unrestricted cash and almost one point.
1.74 billion Undrawn under our 2 billion EUR 752.7, quite there yet revolving credit facilities.
And the 496 million coming in from 220.
Oh, we might say our liquidity is this year about $4.3 billion.
Consistent with my comments it my shareholder letter in April that we would be more aggressive in selling assets given the persistent discount in our share price.
And that many and that in many instances, we would rather have the cash than the building.
In June we announced that we were going to market to recapitalize, two large highly high quality assets.
Well I plan to California Street, which has to be a top five in the nation propylene and 12 91 of the Premier buildings are they haven't UTI Barrick.
We understand that this is a contrarian book as some believe the capital markets are frozen and that was not the right time.
We disagree.
Well this increasingly awash with liquidity and they really are no great assets in the marketplace to compete.
And then the market will speak we're early in the process, we have been talking to investors for about a month.
Interest in these high quality assets is quite strong.
This process is fluid I could have various different outcomes as an example, we could simply refinance.
We have indication so upsizing the 5.5, California's before going from 550 billion to as much as 1.5 trick.
Its has been the increasing value of this asset during our ownership.
This process will play out over the next few months.
Now the topic does your rent collections in the second quarter.
And we collected.
93% of office rent.
The 8%, including agreed to read deferrals.
72% of retail rents, 78%, including agreed to deferral and 88% on a combined basis, 94%, including deferrals the trend for July look.
Well I collections is consistent with if not a bit better that the second quarter.
Red, which we have agreed to defer are generally schedule to be repaid over the course of the next year.
Quarterly earnings are important very important.
But my hope is that you are not focused on the very short term or on the volatility caused by a passing crisis.
Our game is one by creating value out two to five years and sometimes even longer.
I submit to you that this is undoubtedly a great time to be looking through the fog.
At putting capital to work.
Now about our common dividends are covered by mandates pays out by dividend all of its taxable or.
Our attention is the habit schools and predictable dividends that increases with our growth.
We believe the dividend is sort of secrets, but.
But not more sacred that our balance sheet, our financial strength and our liquid.
While we certainly have the wherewithal to continue to overpay the dividend forever.
Management and board believed that is that in this crisis period, a dividend should mirror our technical work.
Accordingly last Thursday, the board concluded to rightsize, the dividend to 53 cents per quarter.
By the way I'm, not a big fan of paying dividends and stock.
Truth be told recovering in the nation I mean, our city will be slow.
Residential neighborhoods have decent activity I speak traffic.
The kenyans or commercial boulevards, not so much with office building census, about 8% Street traffic is very light as you would imagine it's really tough to be in the retail or restaurant business and these quiet streets.
Most office tenants that plan coming back to scale after labor day, or even until year end.
And truth be told they even take a couple of years for New York ecosystem Tourism sports concerts Broadway views games restaurants, nightlife et cetera, the return to normal levels.
The headline of the days that everyone War work for home or almost were reward for home or whatever forever.
Which would of course have a negative effect on office the bad FX I.
I don't believe it had a bidding against that there will always be some work from home, even a little bit more now than we have sort of et cetera.
But in the end culture productivity collaboration innovation at talent.
Happen and office buildings.
That's actually that's my view on work from home now over to Michael who will talk about our our earnings add about up about the markets.
Okay.
Thank you see good morning, everyone I do hope you are all safe and healthy.
Jami Charmings earnings for this quarter reflect a number of items all of which were known or should have been not unexpected.
Second quarter FFO as adjusted was 55 cents per share compared to 91 cents or last year second quarter decreased 30 success.
The decrease was reconcile for you in our earnings release on page five and our financial supplement on page eight.
I will cover I hope so.
First you have some bankruptcies, which was not which should not be a surprise in this environment.
In particular, JC penney's, which has been on the brain for years now.
We have no on the bigger patterns over the past 11 years that is $200 million in Manhattan Mall, and we do have a $20 million wholesale here.
We have activity in interest for this property it could be for retail or can you be for last mile distribution hottest as as Scott.
The JC Penney in New York and comedy Bankruptcies, where the lion's share in the write offs in the quarter, which aggregated $45.1 million or 22 cents per share was $36.3 million was for non cash write offs receivables arising from the straight lining in France and $8.8 million was for that as.
[music].
Second as we had specifically guided on our first quarter call. We call are very businesses, which include hotel, Pennsylvania, the as clean signage and trade shows came as we had predicted down $9 million per month or $27 million for the quarter, that's 13 cents.
I would like returns to normal or almost model. We expect these days is the snap back to prior financial performance.
Cutting through these items so our core office business was essentially flat.
Noncomp noncomparable items in the second quarter to slow the press release on July Twond.
A little color on the largest one.
We recognized a $305.9 million non cash impairment loss on our investment fifth Avenue in times square retail transaction. This comes a little more of the year. After we recognized at 2.5 $6000 net gain on April 2019 transferred the joint venture and related GAAP requires.
Our retained interest in these assets the off price, which was fair value.
This should also not be a surprise in the general feeling is that these assets are worth less today than they were that.
We ended the quarter of New York occupancy at 96.4% and New York retail at 83.6% handling JC Penney at Manhattan Wallace base.
Now turning to leasing markets.
Given the uncertainty of the trajectory of the pandemic as might be expected.
As limited, albeit some new leasing activity throughout our three markets as most companies, taking a wait and see posture suing the impact their business and employees ultimately will be.
The vast preponderance of office as our updates renewed their leases.
Approved organization spend money building out new space.
He said tours have picked up a bit in New York in the past few weeks, we are signed several new major tenant requirements.
Evidenced as CEO still view the off is integral to operating businesses and New York City as these unique reservoir talent.
In addition, certain large companies in our portfolio as part of the renewal discussions at the outset crisis has now taken back up they focus again on future.
But as the baby Santa space on a launch our basis.
But the emphasize appointed Steve made earlier the trend of users wanting to be invest product with the most modern amenities healthys environments will only accelerate coming out of the sale prices.
Importantly, as the market recovers and covert pandemic.
Our office X rays through the end of 2022, a modest and portend well for stability of our cash flow amounting to only 1.8 million square feet or 10% our portfolio and averaged only 4% per year at a weighted average expiring rent of only $76.52 per square foot.
The retail environment is very difficult and this crisis is accelerating shake out, but we clearly have last retailers.
Penny Neiman Marcus J crew Brooks brothers and so on.
We've taken our shortcuts just like all the other retail landlords.
Most retailers are focused on survivor and fewer focus on overview stores.
Few strong healthy LENSAR as evidenced by our recent deal and target on the upper East side.
Ultimately retailers these physical locations and the best locations, including High Street in Manhattan will survive and thrive.
Take some time be painful getting the other side.
For sure, though at our current stock price Where's the retail has been more than the prices.
For the city reality for construction in mid June our development efforts have resumed in the past history.
As far early we are targeting a December opening moynihan train all along with some limited retail loans and first delivery of office space in January 2021.
Retail demand is strong year, given the expected fairly fast track.
Our early and one in pencil on a centerpoint of our vision to transform and industry new epicenter of anywhere.
We will be delivering pretax cutting edge next generation health and wellness environments amenities and services on National Harbor.
During the shutdown the reaction from the brokers community in multiple perspective tenants to our path to bustle design has bounced Stan.
We are confident this is exactly what tenants want to see emerging postcode world.
As we've said before these three large industrial projects or death rates are being funded off our balance sheet.
Quoting reaffirmation proceeds to 27 parks outflows.
As these projects are completed and lease up they will generate large accretive arms.
Beyond our developments broader district improvements continue to progress also.
30, Threerd Street, one on railroad entrance is almost complete on scheduled to open. This December adding another signature elements of the district and improving experience for computers.
Turning the capital markets. They basically been on hold for the past few months as lenders and investors assess the viruses impact on the economy in real estate.
Real estate financing markets are beginning to heal.
Lenders are still in free cash mode and highly selective in what they finance.
Spreads are wider in terms more conservative go into base rates down all in coupons are still very attractive.
As always the second ill answer the focus on high quality assets and sponsors what should we benefit from.
We think over the next 12 18 months, we'll start to become a borrower market rates at historic lows.
The fed poppy liquidity in the system and planning to remain upon his until the economy recovers interest rates are likely to remain low for as long as the I can say.
The should make the yield on assets long duration leases increasingly attractive to investors, particularly in relation to fixed income spring them off the sidelines, maybe even resulting cap rate compression given the spread tractors.
Lastly, our management team has been paying a lot literally about future says nothing uncertain, but for hundreds of years cities have endured a central gathering places for work living culture.
Cradles and creativity innovation. We believe this will continue to case, New York is a world city and notwithstanding a few bumps along the way you art will continue to drive.
With that I'll turn it over the operator.
Thank you we will now begin the question and answer session. If you have a question. Please press Star then one on your Touchtone phone if you wish to be removed from the Q. Please press the pound sign for the Haskins, if you're using a speaker phone you may need to pick up the handset first before pressing the numbers once again for any questions on the line.
Thats starting in one on your Touchtone phone and our first question of mine comes from Steve Sakwa.
Evercore. Please go ahead Sir.
Thanks, Good morning.
Michael or Steve I didn't know if you could maybe just address in general how the economics on Facebook lease might have changed.
Over the past nine months or religious lease has been in negotiation for quite some time. So I know you lap the yield unchanged in the supplemental but anything that you could talk about on rental rate to our concession packages are kind of how that might have evolved over the course of time would be helpful. Thanks.
Thanks, Steve how are you.
Thanks.
Yes.
Good good field, so listen we think this up Facebook deal is a is a.
Monumental.
Whilst though.
Both for the city in the middle of the part that make it also towards the west side of the arc and most of wall for Vornados plans in the district. So Thats step one step two is has been a long.
The long hole.
It's a bought deal to big deal.
Hi, there parties.
By the wins or Facebook.
At all during the entire period of time, we will both parties were committed to the deal at working working hard with various team is to complete the deal what was a very complicated transaction.
Now the Facebook the Folly building as I think you know I hope you know is a very very very differentiated different deep at Markel. This piece of property with double block wide, which means it.
It's a low rise campus, it's a vertical campus and the floors are enormous.
Yes.
Team has made a trip out too.
After the West coast.
A couple of some years ago, and we learned a lot one of the things that we learned was the way. These tech companies like civil works they like to work its large campuses they like large flaws they like low rise building.
Add they like amenities for their employees for example, they have restaurants, they have workouts there or have they have dry cleaning operations so that their employees.
Take care there for us they placed fab.
We have bicycle storage.
Everything that you can pick up and that's something that the pen district, we will provide and thus.
While the building will provide.
The deal as was.
We don't we have a policy.
Not talking about the specifics of the business terms of deals with our clients.
Their privacy is at port.
We disclosed what's appropriate to be disclosed that docs ad.
The the or they will be certain disclosure in our docs about this deal as well.
Having said that the deal is within the parameters of our original underwriting.
To be honest there was there was a little bit of given take at the end as a result of the environment.
But it's absolutely within the parameters so our underwriting with respect to the disclosure in our.
We will re underwrite re underwrite.
These numbers every week or every month, we will re underwrite the numbers publish.
New an updated numbers in our 10-K at the at the end of it the remember there's two components for the positive.
While the building there's that Facebook deal, which has now fixed and then as the retail component of it which is 120000 square feet of very important retail and yes, I'm sure. You know that there is enormous comfortable and so desperate traffic that will come through the fall rebuilding.
Manhattan West from Hudson yards that get to Penn station.
All of that retail bundles through all of those that the pedestrian traffic.
Munich traffic at.
Funnels through the retail portion of the Farley building. So we're extremely excited about that.
And we we are working on the rent.
So we will not re underwrite this deal until we have four visibility aircraft for the retail rents and that won't be until after the first of the or the 10-K.
Okay. Thanks for that color there.
I guess do a pretty second question just to kind of follow up on the JC Penney.
I can't remember if you're my goal that sort of just talked about last mile distribution as being potential option. I mean, just can you help us sort of think through that needs and the timing and.
You know, how you might sort of perceive a whole redevelopment in and what might all go into that.
You know I kept the it much was what specific.
The JC Penney I think we made the statement.
Yes, we don't have a ball topic with JC Penney they paid us.
I think that exact numbers $194 million at rents over the last 10 or 11. So so.
They don't know us anything.
Okay.
They've been petering for a while it so their bankruptcy was absolutely expected.
This space that they occupy is brilliantly located in the middle of the island it could be for a retailer.
It could also be as I think it was it Michael script. It could also be for a distribution last mile.
Let Ben.
Last mile distribution Center now that's the hottest business in the country right now.
And the Scarcest Scarcest product is in the dense metropolitan areas of which New York is the density is to get space, which could satisfied that requirement with.
We have enormous loading facilities.
The ability to get pedal trucks on and off the streets. So the JC Penney store, which is the department store, which has a very large.
Shipping and receiving component, which we have the ability to enlarge is such a piece of piece of real estate that might qualify for that so as you can imagine we're going to be talking to everybody.
I will not believe that you should expect that we're going to be pick up we're going to relate space quickly. This will be a long slow slog.
Great. Thanks very much.
And thank you. Our next question on mine comes from Manny Korchman from Citi. Please go ahead.
Hi, Michael Bilerman here with Manny.
And your commentary you said it was the great time to be looking through the fog and putting capital to work.
I wanted to know how you think about that from a tornado perspective, and you think about the Facebook deal now being official.
The progress you've made on pen one intend to would you be more aggressive in let's say take down hotel Penn.
To position yourself for the eventual next cycle like I guess, what are you thinking about in terms of putting incremental capital to work.
Michael Hi, how are you first of all we're in great shape, Okay. We have a.
We have an enormous amount of liquidity on our balance sheet that liquidity is growing.
Thus far the building basically takes a.
Multi billion dollar asset out of risk puts it into it to secure do a secure financial assets.
We have two very large buildings that we are talking about recapitalizing.
Which will generate if our if our plan is successful at an enormous amount of additional capital so.
Pardon the expression where were loaded okay. We store, we didn't see that pandemic coming but we saw at the end of a boring expansion coming and so we prepared for this.
So the first thing is our balance sheet is in great shape, and we are doing things such as closing two sweating their clothes exit sweating Central Park, south such as the Farley lease such as the.
The 5.5 12 by the buildings, which are in the marketplace that we're doing things that continue to augment our liquidity okay.
The of the.
Your comment specifically went to the hotel Penn.
I don't really have much to say about that except that.
As we continue to March.
To March along from the file the building to two penta, one pad et cetera. The hotel the hotel Penn is arguably one of the top two or three development sites that are available by the way.
350 Park Avenue many of the people in the marketplace that is the single best development site, but b that is at Bay I couldn't resist getting the plug ins.
So so but the issue is that.
Hotel Penn what it too.
Execute on that you have to pay par in other words, you have to build the building.
The land has a certain value add you're paying par for that okay. It's not impossible.
That in this cycle.
Which I think is going to be a soft cycle for the for awhile.
That our capital will be able to attract a transaction or other transaction, where we will be able to buy great assets at less than par.
So we have we have all the capital we need for our development project.
Development program.
I will remind you, which I think we've told you a multiple times over the course of the last period that the fall. The building has no debt on it its unencumbered two Penn Plaza has no debt. It's on the Talbert, one Penn Plaza, its though dead on its unencumbered.
Capital plans, but those buildings is complete Farley.
Do I developed plan is I don't know pick a number be at an AFE dollars, which we have sitting on our balance sheet ready to go. So we can complete all that with no debt. So we are depart the street discrete trace we have voted.
We are we are we believe we've been we've been through this.
Five or six or seven cycles. The time to invest is when things look a little bleed and I used the word look through the fog intentionally. So we are alert we are active and we are very well.
We are interested in.
And.
In growing our business at taking advantage of the marketplace. The other thing by the way as an aside and I think Michael said. This is we've been through this multiple times the capital markets right now are.
What I call them they are sticky.
They're not fluid.
Lenders are appropriately concerns in future is uncertain.
Add people lenders are appropriately cautious okay.
Can you go what run this out a year a year and a half and that will change there's a flood of liquidity.
The.
The chaos and the fog so to speak will begin to start the lift and it will become an aggressive borrowers pocket.
That you put these you put our balance sheet together.
Those pocket low interest rates et cetera. This is a good good time to be at our business.
Yes.
The second question was just thinking about your commentary around New York and.
You just talked about being soft for while in your prepared remarks, you talked about the ecosystem in New York returning to normal in a couple of years.
And you think about putting aside the announcement obviously Facebook.
You had overnight.
There is obviously a lot of retail vacancy a lot of crime. There has already been pre pandemic an exodus of.
Very wealthy people out of the Tri state area.
Certainly tapper icon political Jones with Kuperman.
We have a political situation in New York City that is.
Not very sustainable we have the density issue.
What gives you the confidence that we can city can rebound.
That's a that's a that's a combination of a metaphysical question and a political question. So first of all.
You said in in your question, putting Facebook aside well I don't want to put Facebook aside it's a monumental huge deal and I couldn't be proud of the accomplishment I couldn't be more proud of led and Barry and our teams.
And I couldn't be more proud of David and be who were mentally okay.
And so I don't want to put into side, but b that as it say look.
New York is the worlds.
And as always but it has been a world city pause for a century now it's got this enormous infrastructure of all the cultural things all the business things all the talent et cetera and.
Even though.
[music].
Every once in a while we tried to screw it up it ends up but New York comes out of it better shape I don't want to make a political comment about the current management of the city.
I think everybody has their own opinions about that we understand that.
But new York will the infrastructure in New York will win the day. It always has always will.
Now I'd love.
You know.
Nashville, Austin et cetera that great City circle.
When you take the size of this those cities and you take that the the size of their workforce you take the after hours activities in those cities.
It is a group.
It's a small subset of people who want to live there, but it can't compared in the or I mean remit, but New York has eight professional sports teams.
It has to two hockey to football two basketball to baseball Nobody's got anything like that so and that's just one digital inks and some New York has this enormous build infrastructure and our feeling is is that it will.
It will it will continue to flourish.
There's some things that are wrong with New York now.
The whole the situation.
I hate to homeless situation I hit a lot of that things about it I am not a big fan to be funding the police.
Et cetera, but in the and New York will win the day.
Thanks for the time.
I will use that as Steve said that.
But the other day in addition to all the.
Infrastructure to view, our heads right as a.
Pool of talent that is levy.
And so you think about.
Books commitment, but I referenced in my comments today is rumored press always a couple of reasons.
You have major companies from various different industries that are.
Looking beyond this.
Short term period, which is short sir you're going to have a vaccine or as a therapeutics.
It looks like near term.
So the health issues going to come off the table when you get back in business.
And these companies, which are significant and extremely important.
Well respected.
They are looking out and saying where do I want to continue to grow my business long term, where can I accepted.
And now they are focused on that you are right and scale and so I think.
Not us just buying the sky these are major comedies.
That are that our global leaders that I want to continue to be the winners that are reaffirming.
And they're committed to the you are not to mention when we've done our normal district with Facebook App.
Thank you.
Thank you. Our next question on line comes from.
Jamie Feldman from Bank of America. Please go ahead.
Great. Thank you. Good morning, I can you talk about the implication to the Facebook deal and Sevenseventy Broadway.
What their longer term plans are there.
Glenn Glenn pick that one.
Hi, Jamie it's Glenn how are you.
So before early transaction is not at all connected to the 770 lease number one.
Number two Facebook loves seven seven days by Refrac Theyre building more floors as we said on this phone call. This morning, I'm. So there's no connection from one deal to the other.
If anything I think the probably transaction reflects the very strong relationship between the companies, which has grown from our initial deal down in 770, some seven years ago.
Okay, Jamie I'm, Dave I would add that.
Facebook has talked to us about.
Rowing in that building and taking the entire building so and those conversations are Gibson.
Okay, Great and then as you think about I mean, now that Farley done.
Can you talk about the conversations you around and too I mean, what does that depth of demand look like.
I know you've got some time before that project, but just.
Certainly next step to the plate.
It sure is so the first thing is is that.
Sure you have but I ask you again.
Take a look at our website at where we have a fairly.
Large picture book of what we're going to be doing at two patent what it's going to look like what the amenities are.
What the services, we're going to bring to our tenants and by the way we look upon add to it and what as a campus.
Because those two buildings will be interconnected so we have.
Basically a four plus began square foot campus and on top of Penn station, which is I submit an unbelievably scarce asset and valuable.
Okay.
The development plan for two Penn is too long, it's the better part of three years.
But thats what it takes so we have lots of.
I am in terms of the leasing.
We are going to basically Glenn is basically going to stay out of the markets for the next year.
We're not even going to entertaining.
Well, if something comes along maybe yes, but basically our intention is to not start the lease it for a year.
When the market can begin to see some.
Bentek a better.
Better visibility as to what the product will look like.
Now there was some conversation.
That.
In past calls, where we said we had a.
Hey.
400000 foot anchor tenant to whom we were talking that.
Last quarter's call at compensation has.
As as expected got into pause not gone away gone into force okay.
The major tenant in that building now is a company called Madison Square Garden.
And in that building for decades.
That building is adjacent to their business.
So that's really.
Two part has been home Madison Square Garden drove more while so.
You could put two at two together, but the.
That's that's status report on that.
The other thing by the way is the design of the building with the bustle, creating the overhang, creating bill the prominence creating the entrance to Penn station et cetera, I mean, it has got universal.
Flaws of that so we are pleased about that.
There is a.
A elephant company that's in the marketplace that is looking by the way happens to be looking at both Threefifty Park Avenue at some pad, which is an interesting combination of locations.
Add their boss basically said that.
Going through the renderings in the presentation that he still at that the decide and the bustle.
Were extraordinary piece of architecture, and we agree with that.
Okay. Thanks for the color and you're saying that kind of looking at three for the bargain they would only take one.
[laughter].
Hey, Glenn is good but the cancer you can't cells based price [laughter].
No they would only take one [laughter].
Hi, Thank you.
Thank you thanks Jeremy.
Okay.
Thank you. Our next question on line comes from Alexander Goldfarb from Piper Sandler. Please go ahead.
Hey, good morning, Steve.
[music].
So I am I decide that tenant that Glenn is talking to your per boat repair Hey, Alex Alex Alex The first thing I should say is hey, Glenn and David Congratulations on the Facebook deal. That's the first thank you should say.
Okay that was I could face time, you my question less and it says in Red ink, Steve Dash. Congrats on Facebook. So that's that's there that was going to give you a lot for talkin due to Steve Schwarzman your body about anchoring threefifty, but sounds like blend is also trying to.
Belmond Penn station, so look forward to that as well.
At that level, well well well.
First of all I'll pass the congrats off the Glenn and David second of all don't make that conclusion, it's not a good conclusion.
Go ahead.
No we have the analyst community would never make bad conclusions.
[laughter].
So first to fill in mid point, I mean, Steve and and Michael you could have New York returned to more of the communities, where New York Office works, but the presidential.
Turning to a lower price point that certainly conceivable that you can add the to work in concert.
But the two questions our first going to five by five in 12 90.
You guys do more development your portfolio.
So the two buildings you would expose the overall pheno do more of a developer.
Built risk et cetera, and they are tremendous buildings that I'm sure the cap rates are probably.
Over the past few months. In addition, obviously of Trump and they're all the people who love to right critical things of them. So it seemed like any transactions run that risk of headline risk. So how do you think about.
Parting with the two building given that they really do provide great and a light that help.
As you redevelop and featuring do 350 et cetera.
And then also speak the political feet of everyone could get picks whatever bright.
How you know there's a there's something there.
Oh boy.
So.
Let me try to take that in pieces first of all I pay zero attention to what you call the political risk.
We are the 70% partner and those buildings. The docs are rock solid we make all the decisions and so there's no.
And that by the way has been tested in the courts.
So with respect to the fact that there is a part there is the building who is.
He does it.
It doesn't have anything to say about the decisions that we make and so thats fly.
Sepsis as don't draw the conclusion that we're going to necessarily sell the building. Okay. We have lots of different.
I said it in my prepared remarks, it's a fluid situation. There are lots of options. We will pursue all the options. Our objective is to take capital out of.
Out of the mature buildings at habit available for more advantageous opportunities.
So.
I played out the books as you sell the worst stuff first and you saved the best up the last so in our council rooms with there. We have talked about are those the right buildings to begin to draw a capital out of or should we go at capital out of.
Other buildings or what have you.
It was our judgment.
Collectively I think.
I was on the side of this that in this very sloppy market.
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It would take an extraordinary building to get investors' attention and to get a price or a value that would that's appropriate so.
We have we have.
Multiple billions of dollars of equity and these buildings.
I'd, rather have the capital that I.
Buildings.
And that's my answer to your question.
Okay. They are they are some of the best building. So hopefully other to way for you guys I'll update you on it.
The point of it is they have some of the best buildings in the country.
Okay.
My question is on the Street retail odd you took the impairment which is non cash obviously reflect as Michael said the degradation in value from a year ago. How does this impact the preferred and more to the point I realize that the absolute are still good but do you think about ultimately trying to liquidate the preferred or when the leases roll that our underlying.
The preferred how that how the billion eight is is potentially impacted so do you think you can get all your money out or when the leases roll even if they roll where current rents are is that preferred still money good.
Michael why don't you handle that one.
Good morning Alice.
Thanks for the models as well.
So.
But I would refer to is that just go back and.
We had all reports just for everybody.
Preferred is.
Preferred was originally proxy for senior mortgage.
Right and so.
Is it sits on.
I have to seven assets in the venture and it is.
Personally position right at the time of the.
The transaction zero to little bit less than 50% LTV on those assets. So there's no dead products on those assets.
All the cash flow from all set of assets.
They are able to service the preferred.
But again that is the the first lien position on assets and while the LTV is is higher than the transaction.
The values still.
Well above the preferred so and again.
To remind you.
There was a there was a period of time, where we didn't let pass before you think about.
We met or for.
Which we have not yet so.
And then last summer I would say is now and not so as five separate assets it can be redeemed or art.
As we elect.
Time so.
As we sit here today and on.
Many of those assets.
We have.
Equal terminals leases.
And.
Outage that.
Frank on many of those.
You had to rewrite that today those numbers would be would be lower but we have we have term right. We don't know the future holes in the beyond five six years over the market is stabilized recovered may not back to be but.
We're not we're not a vibrant market and in our belief is still that we can review has occurred and I'd maybe different for asset.
Okay. So Michael the first.
Let me jump, let me jump in on top of that for a second.
So the first thing is preferred was structured.
Bye bye our teams.
In a very important vary somewhat complicated transaction, where we sold or.
Transferred 50% about.
Of our major high Street retail assets. So the preferred served a very important purpose.
I look upon the preferred as a financial asset not as a real asset. So I don't look upon the preferred as real estate I look upon it.
Last number one number two.
I looked upon it.
Not impaired off balance sheet, if we thought it was a pad we would have been paired it.
If we so we look upon it as being a good financial asset number three is we look upon it as a source of future liquidity should.
Should a certain time frame passed which is not very long it's coming.
Should we just should we decide that we wanted to end up liquefying that so it's a financial asset not real estate. It's it's good.
It's good and it's a source of future liquidity.
Steve Thank you and Michael Thank you.
Yes.
Yes.
Okay.
And thank you operator, I think obviously.
Yes, yes, I'm, sorry, we obtained John Kim on the line from BMO. Please go ahead.
Thank you Glen and David Congrats basically.
I wanted to clarify your answer to exactly correct.
I wanted to clarify your answered it's the fact that question.
On the yield at X Farley.
Being real fast and.
The same kind of Facebook leaves with within your original underwriting parameters.
The you'll get to come down primarily because the retail or is that the combination of the retail and the Facebook with.
I don't think to meet the answer is I'm not going to comment on that.
The yield will come down if it comes down at all marginally okay. So.
The asset is within the tolerance of our underwriting.
Okay and my second question was on the the leases signed this quarter 174000 square feet, where the rents. It with stated will be determined next year at fair market value.
Thats specific to one lease or multiple leases.
And that's Facebook at the same optionality.
They are starting point.
It's quite John.
So I.
I am not dramatic led the Facebook Twitter Facebook leave has the Facebook Lee has nothing to do with it there's no optionality there. So the Facebook lease has set spreads for the term.
So now with respect of 174000 foot the split is going to assets.
The 174004 leases with one tenant they exercised a five year renewal option.
The rent is the greater of market or the tenant then ran the rent gets set next fall of 21.
Just a five year option of this space.
For provision yes.
So what we had but we had was the conundrum that we had was that this was at least there was exercised so it rightfully goes into the count of how much space, we leased in the quarter.
But we had an unknown and.
Rent to beat the terminal in the future by a process. So we had to put it into the into these it should be square footage that was leased but we could not put it into the mark to markets because we don't know what the renters.
And I.
The way. This is we've been doing this for a long time. This is I think let David this the first time I've ever seen this situation.
Yeah, Let me just to add a word Steve it's David.
So.
When a tenant exercises a renewal option.
The good clause says that the tenant owns this space and has exercised it and has confirmed in additional extension period, whether its five or 10 years.
With the rent to be reset based upon that end markets. The best clause says.
Bad rent will never be less than the rent that the tenant previously was pain and that's in fact with the clauses here.
So.
Yes.
Tenant owns the space and we're going to figure out the rent.
Next year, and it's not less than what the rents.
Attendance currently paying.
So this was originally in the lease would not covered related.
O'clock. This is an old old lease where the tenant exercised an extension option correct.
Great. Thank you for clarifying.
Thanks, a lot.
Thank you. Our next question Mike comes from Vikram Malhotra from Morgan Stanley. Please go ahead.
Thanks for taking the questions and congrats on getting pardon me buttoned up.
First just on retail can you help bridge sort of the occupancy lost sequentially from the 92 I think the low eightys.
This quarter.
Okay.
That was.
J.C. Penney.
Principally JC Penney Vikram this is Joe.
We took JC penney because they rejected their lease out of the occupancy.
And what was the balance.
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Joe Joe did state JC Penney represent the entirety of the decline.
Hi, I don't know Steve Tom.
You have been handy.
So I hate with time.
Yes, good Vic from because it was primarily JC Penney and our finance Gamble off line will give you the details and build it up for you.
Okay sounds good and then just second on street retail again.
Can you give us the standpoint, I think over the next 12 or 18 months you do have a not a huge amount, but but some exploration can you give us a sense of any larger tenants that maybe up for renewal and with those expiration maybe any guide for us. That's how we should think about kind of mix between Illinois.
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I think you're asking for guidance spectrum, which you know that we don't do.
Having said that.
Do we have a list of these specific headwinds in our disclosure that expire over the next 18 months.
Joe now.
No.
No.
All right. So that's a question victim that I'm not going to be able to I'm not going to be able to give you. The guidance that you best for I apologize.
Okay, No worries and if I can just squeeze one more in.
You're answering it correctly you correctly predicted many years ago, Manhattan kind of moving moving south and west and obviously, there's been a lot of developing in progress just youre hi, higher level taught whether it's covered related or new types of demand our new types of tenants coming into Manhattan do you.
Do you foresee any changes.
You know in Manhattan, whether it's with lease structure has a full working or maybe a little bit more suburban so big big firms, maybe thinking about suburban and any kind of pilot high level talked if we look out over the next five years.
No. That's a very very very sophisticated question, which obviously, we in our in running our business. We think about every single day.
So a couple of things.
Years ago.
There was only one sub market in the city, where where people would live and that was the upper east side.
Everything else was a bit.
So the process of being a miss the the other places whether it be southwest the wherever where a lot cheaper and so younger people started to move to those cheaper neighborhoods.
Became gentrified and Lo and Behold now after 20 years of movement. The upper East side is the cheapest submarket in the city.
And what have you so things change right now we have the advantage in the city, where every submarket from rebutted of River is sought after.
Yes.
Is the Gendrive fight is find places to live with good restaurants had a good experience okay. So.
Where people live is.
That.
Dispositive with respect to office development now I would remind you that long island city is one to.
Trading stops away from.
Almost every office building in the city at Brooklyn is one to two subway stops, which is like and 12 15 minutes away from almost every office building.
So that's the way cities work.
Now what we've seen is that.
He is sort of split during.
Where the traditional businesses picked up the Plaza District at Park Avenue is becoming more and more of a.
And and center.
At the new West side.
At Chelsea add that meet this region has become more and more of what creative sat there and the way I'd describe it most of the type is the people that we had ties go to the Plaza district, but people thought with ties go to the west side.
And like I sort of see that sort of continuing.
The big thing that I see is that every company. They even the companies that were ties, especially the companies that were ties want to attract a younger more creative workforce.
And in order to do that many of them are considering leaving their traditional.
Locations and moving to the south and the west.
So I mean as many it says that the the insurance company that took 61 night from US was that a many of the tenants that are in Hudson yards today, our traditional firms banks et cetera, who wants to attract a different profile of work.
And so that continues now the other thing is is that.
Economics are important.
And as the website flourishes and gets to be higher price points at higher price points. Other places will flourish as well. So now what's happened is park Avenue can compete very very well with the west side on price.
So I mean, that's the way I see it.
But I'm really saying is that I think where people live.
Begin to lead the marketplace.
Economics are really important add where people want to work. So right now is the perfect storm website at <unk>.
And I guess appointing IPO.
I think I'm talking my book, just a little bit I'm talking my book, just a little bit because I really believe it.
Makes sense. Thank you.
Yes, Sir.
Thank you.
Our next question on line comes from Nick Yulico from Scotia Bank. Please go ahead.
Thanks, just turning to your cash same store in Hawaii and in the quarter was down 6%.
In New York City can you just talk a little bit more about what drove that despite.
Ill Manhattan, Mauling any other issues and I just wanted to be clear in terms of.
The deferrals that you're giving is that is that actually a negative.
In your same store NOI or you are you already and when you talk about cash NOI or you excluding the impact of this Charles when you're talking about cash NOI.
I'll now as Nick.
I'll ask I'll ask Joe and Michael to answer that one.
So Nick let me give you a little backgrounds journals, Steve gave you the percentages of collections and deferrals.
That translates into us dollars.
$48 million uncollected in the quarter.
Which we defer 21 million.
We also abated Threemillion and we've set up reserves for 9 million is on collectible that 12 million reduces AFFO and FFO as adjusted.
And cash basis in Hawaii, and while the other metrics.
We also went on a cash basis for revenue recognition.
The 56% almost 9 million.
All of the monthly rent not collected.
Through the reading writing off of the 36 million of straight line rents, which has the effect or putting those tenants on the cash basis.
So going forward more than half overruns not collected in the second quarter are now want to cash basis.
Well covert 19 has given rise to a much higher level of wrench not collected the we used to.
It's still relatively small when a company our SaaS with 1.7 billion of annual rents and additional revenues coming from hotels, and BMS Accenture et cetera.
And those numbers are in Vienna worn numbers now deferrals.
Referrals are treated as cash collected for cash basis AFFO.
Not the write offs not the abatements.
Accenture exposure.
Michael do you want to anything to them.
On the I'd add is that.
Retail Joe referenced in terms of bad debt reserves.
Yes.
The impact of the for 21 bankruptcy.
But the other aspects in terms of being down is really driven by the variable businesses.
Yes.
Lower clearing fees signage Raj income trade shows and those drivers.
Again, which might return to normal we expect us to return.
I want to add one thing Joe use the word abate mentioned I think you mentioned $3 million or something like that.
No, we don't want to be very carefully or abatements, our adapt to us.
We.
We are.
Collecting our rents we are doing a very good job collecting our rich.
It's interesting the way the better companies in the industry all coming into the bout the same percentages and what have you.
It is the rarest of rare things that we will agree to would abate.
As you can tell the number of abatements that Joe. This is Joe just disclosed to you as a very small number up the each of those very few abatements has a very specific reason why is it.
We do it it's not the policy the company to do it we do with only very very rarely at owning and special circumstances. So what we what we've been doing is collecting cash risks.
On occasion also up fairly small number giving tenants a deferral so that we work with us today.
And.
A collection of that deferral is.
Following which is a very short term loan, but abatements already no no and I don't want anybody to get the idea that were at the abatement business. We are not at the base business.
Thanks.
Okay. Thank you, yes that was helpful. Just.
Second question is going back to.
Facebook deal.
Did you make any changes to the existing leases at 770 Broadway.
Glenn we did not correct.
We did not no changes.
Okay. Thank you everyone.
But by the way there seems to be a feeling amongst one or two of your that how can Facebook take all the space and go maybe they've got extra space and maybe that extra basis 770.
Broadway that is absolutely not true.
Next question operator.
Thank you. Our next question on line comes from Manny Korchman from Citi. Please go ahead.
It's Michael Bilerman back with many.
Stephen you talked about 555 in 12, 90, but not making decision which path to go back down the refinancing sale, maybe additional bringing additional investor on the refinancing friends I mentioned on Michael Michael Michael Hole that we didn't say not making a decision. What we said was that we were in the marketplace.
Two.
Be expose ourselves to whatever financial opportunities might be there and then we will select what is best for US. It's route of pumps that you had make decision.
Right and then make a final decision about which have to go down because you're evaluating what the best outcome is referring to shareholders, which is perfect.
Exactly right to it but you Didnt mentioned on the refinancing of high five potentially pulling in a billion and a half.
Total proceeds relative to the 550 existing mortgage.
What would that be on 12 nine do you have you gotten a similar indicative quote so at least in our mind you can think about what a refinancing option could could bring in.
The answer is.
Not as much and maybe not even maybe nowhere near as much.
And then okay with that in two fold the reason, but at a twofold number 1555, California.
As a very low loan to value mortgage audit that okay. So therefore it stands to reason if one were going to refinance it be the proceeds would be very robust. The 12. The 12 90 building has a.
As an appropriate low and audit and therefore, the refinancing proceeds would that be anywhere near as robust as well.
Okay and then what are the things you talked about near terms letter and also the proxy with the whole element of a tracking stock where does that fit within all of the strategic priorities today.
It's still very it's still very very much on the table and.
Go back again.
The Genesis of that is is that.
To separate out the different components or at least two different components of our company. So that investors can choose what they wanted to invest whether they wanted to invest in the long term high growth.
Marvelous.
Potential of the Penn Plaza District, the pen district, or whether they wanted to with.
So.
Yes, our also wonderful, but more stable steady as they go office product.
And so the answer is still very much on the table.
And.
We will see but this is in the in the in the throws of this financial crisis. This is probably not to this health crisis. This is probably not the perfect.
So right that's not that's not something that we're going to spring next month.
Okay. That's what I wanted to sort of get a picture if I appreciate the time and I hope you and the team are doing well.
Yeah, Thanks, Mike a nice to talk to you.
Yes.
Thank you. Our final question comes from Daniel its mill from Green Street Advisors. Please go ahead.
Great. Thank you.
Given the Facebook lease and other leasing got done this quarter are you concerned noticeable changes and utilization.
Possible.
Trying to be densification by tenants.
Glenn David.
We're talking we're talking to our attendance you know often you know through this since March.
Many many conversations are revolved around what our tenants going to build what the design going to be I don't think from a long term aspect any of the tenants really know yet what they're going to do long term.
And I think there and what kind of holding pattern in terms of how space will be utilized you know as they go forward with life as it relates to some of the deals weve finalized this quarter.
I have seen no real change in terms of tenants thinking as it relates the space utilization as it relates to their density there communal spaces. They are hanging out spaces for their employees their food and beverage operations et cetera. So I'd say up to this point, we've seen no real change and I could pinpoint for you too.
I guess, if David I would just at a couple of other comments.
And that is.
As Michael mentioned in his script, we are engaged now in some active dialogues with some tenants in renewal discussions.
And in some of those cases, the tenants are thinking about doing.
Some major reworking of there's spaces.
So you know Daniel realistically, it's way too early to understand exactly how people are going to change their space.
Obviously, an immediate basis for the tenants who are an occupancy.
They are social distancing its quote every other office every other workstation.
But the long term trends.
In terms of health and wellness I think it's something realistically, it's going to evolve.
And.
My guess is that we are not going to see a dramatic reversal of densification, but I think what we are going to see is certainly.
Densification that we've seen over this last cycle.
It was going to plateau, and maybe even begin to reverse a bit as people focus on new space usage over the next five and 10 years.
Great and just on the street retail right down the 10-Q site say four and a half cap rate and assessing sales value should we read that as a proxy for your thoughts on market cap rates or is this just accounting treatments.
I think for Daniel This is Michael I think for.
Premier assets, we still think that that is.
The cost.
Yes.
Somewhat accounting driven in terms of the methodology, how you get the impairments but.
It's a long term do it yourself I spot eyes today, right liquidator selling assets today.
Normalized basis, right, where those assets going to be value that so.
As I was higher than what of years ago, we still feel.
Approach.
Great. Thanks, a lot.
No other questions at this time.
So there are no quite though for the question. So thank you all we appreciate everybody joining us. This morning, we stay safe and healthy we look forward to seeing you still our third quarter 2020 earnings both will be on Wednesday November 4th.
The day after election day, So I guess, we'll have some interesting stuff to talk about we look forward to your participation again, please take good care thanks very much.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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