Q3 2020 Vornado Realty Trust and Alexander's Inc Earnings Call
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I'll now turn the call over to Ms., Cathy Creswell director of Investor Relations. Please go ahead.
Thank you well.
Luckily can where NATO Realty Trust third quarter earnings call, while their NATO typically whole good earnings call. The morning, after releasing earnings todays call witness to accommodate noting in the presidential and national elections yesterday on Monday afternoon, We issued our third quarter earnings release and filed our quarterly report on form 10-Q.
Securities and Exchange Commission these documents as well as supplemental financial information package are available on our website www Dot B N O dotcom under the Investor Relations section in these documents and during today's call, we will discuss certain non-GAAP financial measures.
These measures to the most directly comparable GAAP measures are included in our earnings release form 10-Q and financial supplement.
Please be aware that statements made during this call may be deemed forward looking statements and actual results may differ materially from these statements due to a variety of risks uncertainties and other factors. Please refer to our filings with the Securities and Exchange Commission, including our annual report on form 10-K for the year ended December 30.
For 2019, and our quarterly report on form 10-Q for the quarter ended September 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. The company does not undertake a duty to update any forward looking.
[laughter].
On the call today from management for our opening comments aren't even Roth, Chairman and Chief Executive Officer, and Michael Franco President and our senior team as president at present and available for questions I will now turn the call over to Steven Roth.
Thank you Kathy and good morning, everyone I hope all of you a safe and healthy.
Yesterday was election day in America arguably the most important a single day in the calendar of our great democracy.
Our nation is deeply divided and this election appears to be a historical cliff anchor the TV analysts are calling it a nail biter.
Whatever the final outcome of this election. It is our hope that we will unite as a country and pursuit of American values at prosperity.
Before Michael gets into the business review and the numbers, let me make a few comments.
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These are anything but normal times actually the COVID-19 pandemic is a once in 100 year event.
Definitely level in New York and all other American city, just a fraction of normal.
For example office building occupancy in New York is currently in the teens.
There is a tension between the very serious cold at health risk and related government protocols as locks Dallas.
Everyone's desire to get back to work get back to school get back to their favorite restaurants and get back to normalcy.
That's for sure normal sales were up will retire it's just a matter of how long it will take.
And I believe return to normalcy will be the order of the day is months not in years.
The city generally feels normal that resonate in the residential areas, whether it be tribeca or the village on the upper east or upper West side.
Commercial areas, however, feel quiet and that obviously negatively affects restaurants and retail.
Most importantly, we are hearing from all our tests that zoom fatigue is real productivity is valid Ceos want their employees back in the office, but again that will take some time.
We are very proud of our corporate teams, who are working really hard and doing a brilliant job of keeping the trains running on time.
We are especially proud of our building teams, who have executed our industry, leading protocols and sanitation to make our buildings ready and sales for our tenants.
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Current liquidity is a strong 3.67 billion.
Including 1.49 billion of cash and restricted cash of 2.18 billion Undrawn under our two 2.75 billion revolving credit facilities.
During the quarter, we repaid 500 million on our revolver that we had drawn in the spring at the outset of the pad Devon.
With respect to the closely watched metric of rent collections in the third quarter recollections, excluding deferrals approved 500 basis points to 93% driven.
Driven by a significant pickup in retail collections during the quarter details of third quarter collections are we collected 95% of offered Rep office rents, 97%, including agreed to deferrals, we collect that 82% of retail Reds, 85%, including deferrals, which amounts.
The 93% on a combined basis, 95%, including deferrals.
Year to date, we have deferred $30.9 million at rent had abated $8.8 million.
Rents, which we have agreed to defer a generally scheduled to be repaid over the course of the next year.
We continue marketing flat flat flat, California Street at 12 by the Avenue. The Americas. There is active interest from investors and widespread appreciation for the quality of these assets.
But given investor caution it does not look like we're going to achieve our original top tick placing objective. Nevertheless, we continue to actively pursue a transaction involving these assets, which may take the bulk of the sale, a partial sale or joint venture or refinancing.
Okay.
In the Penn District, the Moynihan train, a little and extension of Penn station with its Majestic hundred foot Skylife, we'll be opening to the public at year end only weeks away.
And our adjacent falling building, we will be delivering Facebook 730000 square feet in phases, beginning in the first quarter of 2021.
Our transformation the redevelopment of the two.
Lastly, as square foot pad, one with its unique and outstanding amenity package will be completed in phases with the north lobby opening to tenants in the third quarter of next year and the remainder of the project in early twenties 22.
And Penn was 1.8 million square foot sister had to his next deadline.
Remember as these large important Penn district projects come online they will deliver very very significant earnings.
220 Central Park, South is unquestionably the most successful residential development ever and it continues to perform this.
This year through September and then the teeth of the coal the crisis, we closed 30 units and suites.
For net proceeds of $939 million and that includes 19 closings in the third quarter for $591 million.
From inception through September 30, we have closed 95 units and sweet.
For net proceeds of $2.76 billion.
In October after quarter end, we closed another four units for net proceeds of $105 million.
Now now if I may a word of caution.
And this should be obvious.
We are in the midst of a once in a century pandemic every medical scientists worldwide is working 24 said, but on Dairypure exit vaccines.
So it is our hope that we can win the battle with this disease in months not years, our financial results as well as our payers are suffering.
But its important to appreciate the todays quarterly results on our reaction to a short term crisis and certainly not predictive of the future.
As I have said several times, we expect normal seek to begin to return in months not years, and we are highly confident that each of our businesses will rebound to pre covance levels.
Now to Michael.
Thank you Steve good morning.
I do hope you all have seen healthy.
Hi, first I will cover our financial results and then end with a few comments on leasing capital markets.
Our earnings for this quarter reflect a number of items most of which were non or should have been.
Yes.
Third quarter EPS FFO as adjusted was 59 cents per share compared to 89 cents for last years third quarter. The decrease of Thirtys EPS. This decrease is reconciled for you in our earnings release on page five and our financial supplement on page seven.
The decrease was driven by a few items most of which are either temporary our non cash one time write offs 11 cents from the temporary decline in what we call our businesses, which include the hotel, Pennsylvania remarks trade shows signage in Dms, which Steve you laid out for you our first quarter earnings call.
11, assess retailer bankruptcies, namely JC Penney, Topshop and 10 accounts receivables write offs.
Seven cents noncash straight line rent layoffs, and three cents from industrial space out of service.
We ended the quarter with New York office occupancy at 95.8% and the art retail occupancy of 79.9% the decline primarily.
While the headline same store NOI numbers are negative on their face it's worth drilling down there.
The our segments third quarter cash basis same store NOI was down 9%, but.
But when you exclude retail the temporary loss of income, resulting from the pandemic our variable businesses, excluding residential our share of Alexander's our core New York Office business actually was a positive 1.5%.
The big takeaway here is that our core office business, including New York, Chicago, and San Francisco, representing over 80% of the company is performing well protected by long term leases with credit EPS and as Steve said on last quarter's call.
I'm doing some size wise return to their offices tourists return we are confident our variable businesses returns prior operating levels.
Now turning to the leasing markets.
Not surprisingly as you would expect in this co environment. The leasing market basically remains on pause tour volume has picked up and we do see more tenant activity in the market. However companies are continuing to take a wait and see approach and are focused primarily on getting their employees safely back to the office we.
We expect modest new leasing activity through year end with renewals diving activity.
This dynamic likely want change so companies returns both in the city and really focused on growth and future space. These posts.
So he space is rising and thus conditions will likely get worse before they get better.
Fortunately, we have the wherewithal to reach target yes.
The New York Office buildings remain all to 95.8% occupancy.
And importantly, as the market recovers from the covert pandemic, our New York Office X. rays through the end of 2022 average or very low 4% per year with a weighted average expiring rents of only $75.22 per square foot.
Portends well for the stability of our cash flow.
Notwithstanding the slow market due to code we did complete two very large important leases this quarter. So.
730000 square foot Facebook leases are rebuilding which we discussed on our last call and the 633000 square foot renewal within what you have on Park Avenue.
These leases solidify both buildings for the long term with almost no year end year out future capital requirements both.
Both these leases are also a sterling credits and reflect the strength and diversity of industry in New York.
Hi Tech and healthcare the two of the fastest growing.
In total we leased 1 million 450 that 53000 square feet in the quarter at an initial ramp $92.74 per square foot.
The second generation GAAP and cash Mark to market increases if you exclude the Facebook lease.
Very healthy, 26.2% and 7.7% respectively.
We have 220000 square feet of leases in negotiations and another 850000 square feet and then the our pipeline.
All the healthy mix of both new and renewal leases.
In San Francisco in the quarter, we executed a renewal with one of our major financial services tenants for 90000 square feet and are finalizing another major renewal of a company that has been building for both.
These renewals and produce strong mark to market some rest environment.
The retail environment remains difficult.
Exacerbated by the slow return of office workers and residents in the city and the lack of tours.
Tourism is not expected to return to lease the latter part of 2021.
Further strain on retail sales.
Growing retail vacancies combined with a lack of tenants in the market will continue to put downward pressure on retail EPS. Despite.
Despite this difficult environment, we executed 25000 square feet in the quarter, including a lease with our money on Madison Avenue and have leases out both new and renewal aggregating an additional 50000 square feet indicated resource retailers recognize New York City is still the key market they want to be.
Adjusted to own assets in the right locations, which we do and be realistic on rents may deals, which we are.
The arts ecosystem will come back they will take time.
On the development side as Steve said, the Moynihan train Hall will deliver next month and it is a dramatic public space is going to be iconic landmark the city serving commuters in residential the next century.
And one is progressing on plan with completion of the entire project expected in 2022.
M will soon follow.
The new 30, Threerd Street Mylan rail most railroad entrance will also opened on schedule in December further as experienced in years.
The district transformation is well underway and when all of our redevelopment and streetscape improvements are completed it is going to be the place in the city where companies want to be.
I'd only or relocated on top of the most important trend hub in the region, but we will be delivering for Tas class a space supported by an unmatched combination.
Next generation health and wellness environments amenities and services.
Please go to our website glass construction images join the progress we're making on these projects.
I know it can be hard for people to look beyond the current difficult uncertain environment.
In one year, we have thousands of new creative and talented employees to a tech Giants populating 1 million square feet in our business.
And the knock on effects will be using it both for office and retail assets.
We're already seeing high retailer interest in the district following news announcements as borrowing we have signed 11 retail leases have many other letters of intent process as tennis recognize the uniqueness of this space and the volume of foot traffic, though of course through their daily.
As always Redevelopments are completed and new leases check yet they will indeed generate large accretive accretive earnings.
Turning to capital markets now our recent refinancing power 11 demonstrate the financing markets for office are now wide open and constructive with capital available at record low rates for high quality well these buildings and strong sponsors lightweight.
The recent refinancing Alexander's apartment complex and the recent calls we receive for other properties further validate this within the market will only continue to become more attractive over the next 12 to 18 months as lenders become more active and compete for business will continue to take advantage of this favorable markets to term out our debt low rates and remain.
Focused on making sure our balance sheet skewed built to weather any environment 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 queue. Please press the pound sign of what the hash key if you are using a speakerphone you may need to pick up the handset first before passing the numbers once again for any questions on the line.
Star then one on your Touchtone phone and we're standing by for questions.
Question on line comes from Manny Korchman from Citi. Please go ahead.
Hey, good morning, everyone.
Michael just wondering on the Farley retail leases have those discussions changed much and thats coven environment or tenants just as excited too.
To go into an asset like that about that location and maybe more specifically.
Perfectly if you could discuss ransom T.I.s.
And the metrics that go into that.
Yes, ill start and Steve Hi, Joanne.
The interest is really not wavered at all.
As recognize as I said, the uniqueness of the asset and the number of people. They are going through their going West every day to Hudson yards, and Manhattan west going into our assets.
Sales of Citi.
So.
Our interest really has not abated throughout the panda.
And so all the tests are done dialogue with those in progress.
The.
Leases Weve signed LOI is in process.
It's Ron change that.
Maybe a little bit more t. eye on a few deals you know prospectively, but overall I would tell you is pretty.
It's pretty consistent.
I have a slightly.
More constructive take on it.
I've nicknamed that this project funnel.
Because really what happens is.
That all of the population of Hudson yards.
And all of the population of.
That hatton with.
Which are huge developments with huge office populations.
Immediately and contiguous to us to the west half the funnel through this retail card up to get to the trades I get that.
Get the computing.
Subways and trade so.
So we expect.
That they will be enormous activity the retailers understand that and see that it's clear as a bell and actually it's the it's the single best retail opportunity at this in the city right now by a factor of two or three other retailers understand that so.
We we have that.
Reduced our asking prices and if anything has this thing gets closer to delivery.
As you know as Michael said, we have these these two tech giants and begin seat surrounding this on top of it so were extremely constructive about this space.
I know you want to add anything.
Thanks.
I agree.
Partly as a first the sunshine in a cloudy retail environment, and we have nothing but high hopes for the productivity when that open and we're extremely optimistic about it.
That is a corollary project in the in in the the tree.
Train operation and that is the long Island railroad concourse, where we own the north side, which is.
And one.
We are.
Almost finished with a deal to basically expand the concourse.
Make it much wider and much higher much more grad, which will be on the.
EBITDA is the high.
And.
Taking over control and ownership of the south side of that capital. So we will on both sides and Thats also another it's a 100 odd million dollar projects. So it's not huge but it's another very exciting addition to our portfolio in the Penn District.
Great. Thanks for all that.
Relative to your lease expirations are light.
I mean future here, but are there any other large spaces that you're watching maybe something similar New York and company where are the tenants having your own struggles and we might just not be thinking about potential on move outs or get backs.
What do you think Len good morning, Scott.
No we feel really good about our role really modest roll over the next two years about 1.6 million feet nothing.
Nothing of a large block side other than New York and company.
We got some space that ABT seven 512, west 22nd does have 40 volt in but nothing of large consequence.
And then all of those assets, we're actually seeing much better activity right now than we had been call. It two or three months ago. So we feel really good about the exploration for the next two years.
And Glenn could you share any potential updates or prospects for the home depot space, that's going to be vacating remarks.
Well.
The.
The home depot lease goes through 2025 years.
And we have approached them multiple times about.
Recapturing the space.
And we had an interesting conversation.
A few short years ago about how much would you pay us to get to give us back the space and how much love that they want to know how much we would pay that so the answer is is that we don't.
That space is and they are leased to 2025. It is not something that we are concerned about today.
However, we have incomings on that space from the from several important retail tenants, whom you would.
Hoping you would expect so we get to we can't tell how that will play out, but we have financially protected for the next five years.
Thanks, Steve.
Thank you. Our next question on line comes from Jamie Feldman from Bank of America. Please go ahead.
Thank you hi, good morning, sorry.
So I guess turning to the election, certainly it looks like the Democratic sweep is off the table here.
With that concerns that a big fiscal stimulus to help some of the New York City or San Francisco.
Off the table as well I just wanted to get your thoughts on.
That comment and then just for New York, specifically, what risk do you think this proposed as to the future.
The city in its ability to recover.
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That's a big question, most probably if I were smarter than I am why would duck.
But I'll tell you what I think.
I think.
I mean this election is a stark I mean, we can't predict what's going to happen.
But I think pretty clearly the sleep is off the table and I think thats, though from my point of view and probably from.
Most folks point of view, a very very good.
Now I have been approached by all of the New York political leaders to talk to washing does.
Try to twist office to get help for.
For some of the but the huge budget problems that New York as as well as all of the big cities in the country.
So.
That obviously has that happened and obviously the.
The standoff between and the government about.
This I guess, it's the third fiscal stimulus.
Plan and the standoff is basically the fight is over.
What some would say is bailouts for the big cities and states versus not so anyway.
Clearly.
The change in government, if we have a change in government is going to change the dynamics of that yes.
If there's a different president that will change the dynamics greatly although it won't be easy because if the sales continues to be in Republican hands.
The most important part of this thing is is that Bible up the city and state governments all around the country have to have balanced budgets. So they will have to close the budget deficits.
The there's a certain group of folks in Washington that would like to see the these.
These states and cities reduce their budgets and get their budgets in light with the revenues there.
There's another group of folks out there who would like to continue to spend at the level that they had been spending at close the deficit by by assistance from Washington, How this plays out is probably going to be some kind of a combination of both but it will play out.
The promise that.
That.
The Democrats side made which is that they will reduce that they will reverse the tax the Trump tax plan and reverse the salt.
I see that as being a very very very hot lift so I don't know where that will go.
Nonetheless.
There is a.
There's likely an imperative for these cities and states to have to get their budgets under tighter control together with some kind of assistance.
So I don't think that gives you much more information that you already had.
That's helpful. So, let's say New York does have to cut the budget I mean, what do you worry about most as a real estate landlord and.
Yes to to keep the city healthy.
The answer is that the thing that I worry about budget about boast is stupid legislation.
Such as happened in Albany at the beginning of books I guess last year about they did with the with the residential assets add an unsustainable.
Next increases.
Now the interesting thing about it is the real estate tax increases because that's the that's the most controllable that the most variable of the.
Of the menu of taxation that they have.
The bad news of real estate that in certain sectors. For example, retail asset value add hotel asset that you have clearly gone down.
So clearly one would expect that the real estate taxes related to those assets will go down.
However.
The budgets can afford it to go down so thats a bit that attentions and all of this stuff are pretty enormous and they will play out over the next six months or a year.
Okay. Thank you and then as you guys made the comment earlier about the right real estate or the right position real estate will come out of this okay.
Apply to retail as well I mean, how do you think.
You look at your portfolio like what do you think the winners and losers are going to be coming out of the pandemic termed a locations.
I think we have the best quality locations that there are anywhere.
And that may even be certainly in the country and maybe even in the world So but.
But it will take.
The reason the retail real estate that we own which is great.
Bridget its quality.
Will suffer lower values as lower Reds, because thats the market.
And it will take time for this to all its a shift through.
Okay.
Thank you. Our next question on line comes from Steve Sakwa from Evercore ISI. Please go ahead.
Thanks, Good morning, I guess Glen or Michael maybe if you could talk a little bit about the leasing numbers that you threw out I think you said you had 220000.
The pipeline of 800, and I was wondering if you could talk a little bit about.
What the tenants are telling you what sort of space requirements source based entity, there kind of flattening of.
That fit the new versus renewal and and again trying to just get a sense for how tenants are thinking about new space versus old space and how they're planning it.
Sure Good morning, Steve It's gone.
So the pipeline is active its basically a 50 50 mix of new deals and renewals I'll give you feel of the type of tenants.
We have a lease out of about 100000 feet would a nonprofit tenant which will be new space in Midtown. We just got a proposal over the weekend for 45000 fee would an entertainment from new tenant.
Morin proposal stages with a 300000 foot tenant in Midtown planting in new state and we also have an existing large tech company looking to grow again by another 60 to 120000 feet. So we're certainly seeing a great mix of activity.
In terms of density program design I think it's way too early to see it most of the tenants are looking past the pandemic sand themselves you know how do we want our space to fit out assuming the pandemic has come and gone. So I have not seen a real change in strategy as early as this.
Space design, but.
But I think thats a to be determined to be continued dialogue, but certainly makes sense right. Now is if you have the right speed and quality buildings people. There is a real flight to quality more than ever and Thats why were seeing the activity were seeing arena.
Okay, you know.
Jim you know.
I'll tell you honestly overstated I think I'm, sorry, no I.
I don't trust any thing that anybody tells me right now.
So for example, lets go back at the history go back to 911, and so were not when the tragedy of 911 happened everybody said that we nobody is going to read.
View space up at a high heightened the buildings because of the 911 tragedy and experience.
Well that lasted about two or three years and now that the abuse base has reverted to the norm, which is by far by far the most valuable space.
So.
It will take time for all this the shift out of there is a tension now between office work at work from home.
Some.
Surveys of some of the employees say one thing that survey of all the Ceos say other things in the end, it's our firm's feeling or our business is feeling that.
They will be marginal work from home.
And they office will be the the main place where work, creating three creativity gross.
Business is conducted.
Thanks, Glenn maybe just continuing on the on the leasing is there any comments you can make about sort of net effective rent changes that you've seen maybe over the last six months I realize it's not all in eight friends, but I think you mentioned in some of the deals you know T.I.s rebelling up so maybe just talk about that.
Change in net effective rents and how much more might that drift lower.
Sounds like leasing will remain slow for the next couple of quarters, maybe into the back half of next year.
Yes, Michael said in his remarks, I mean, it is definitely slower on terms of activity.
I don't think we yet know at all where rents are going where concessions are going until really people come back to the office. The uncertainty clears, we get into normalcy and we get back into real Dealmaking, I mean, certainly there's going to be an adjustment to rent the items et cetera, I'm not smart enough to predict exactly when those are going to be then when everyone.
Back in their seats, we see demand and we see Bill may begin, we'll have a much better feel a bit.
I think right now the deals you're hearing about on the street and T. I agree certainly up I think rents are generally sales held steady with Dave it's more the concession packages.
I think it's way too early sales, Steve to predict anything until well into next year when people started coming back and we get into normal deal mode.
They were not were not really on a normal function you Mark right, where we are in this.
This unique period, where companies are not back in their offices and so the dealmaking is down as you would expect some senses is actually surprising is active as it is given most people are not.
Just cities.
But.
You have to come back to normal functioning environment. So in this period of time, you know, they're going be additional concessions sure right.
Extracted or the downwards want to make deals I think when when there is a return to work you get a fully functioning market I think you'll start to get a better sense of where rents are going to do and I wouldn't extrapolate too much utilized slot.
Thank you. Our next question on line comes from Alexander Goldfarb from Piper Sandler. Please go ahead.
Oh, Hey, good morning, good morning, Steve.
Certainly an interesting day out today.
222 questions here.
The first is just going back to Jamie's question.
You know when you look at the political landscape of New York.
There's definitely been a disconnect I mean, you've been in New York, a long time, you remember the seventies.
How the business community rallied together with the city to rebuild New York. This time around that dynamic does not seem to be in the cards are the mayor definitely speak got to view the governor seem to.
Oscillate, one hockey's against that.
But do you get a sense that with what's happening in New York and the need to create a better central business district environment, how people feel good about coming back to the office.
Feel that the politicians are finally understanding what they need to do or is your sense that they think they're still going to be some bailout and therefore, they can play to whatever political base that they have not really realize the impact that people like you were paying real estate taxes and trying to generate growth for the city, how it's not helping.
Okay.
Let me turn the question around okay.
Politicians are politicians Mecca that.
The.
They.
Hopefully work for the business community.
They also work for the population and the voters.
And.
They don't necessarily always make decisions and have policies that.
We agree with.
But when I look at is that New York is.
No.
Yes, absolutely the greatest city is.
New York and it's one of the three or four at radio city in the country and one of the three or four great cities in the World. There will always be in New York, It will ebb and flow a little bit.
It will go through cycles, but it is always you know.
The dominant place the dominant city in New York.
Sales and do I'm, sorry in the country.
Infrastructure is just is.
So massive that can't be replicated the EPS.
The structure in terms of his talent in terms of its culture in terms of its business community in terms of of.
What have you.
The interesting thing is that as it cycles. If you will have the opportunity to buy assets.
At very low prices per pound.
And let me use the word projected of words steel assets at very low price. That's the type the jump on it. So if you look at our stock price and those at the stock price of our peers and yield.
Tariff related how much per square foot the stock price represented.
And the building the assets that are behind the stock price.
The the value is great. So, it's it's sort of oxy Veronica.
As New York gets a little bit out of favor.
Which is the the.
The Slant I think into a question the that seems to me to be a time to buy assets as the buy stocks. Okay. So New York is going to go to your New York has a headwind.
The political situation in the OCC is going to change there's going to be an election.
The reality of the budget the reality of the importance of the business community the reality of the importance of having a growing.
Tax base.
Well, we will win the day.
And you know, but this is a unique time because the assets are really really cheap.
Okay, which leads to the second question.
Favorite.
By five and 12 90 Cookie said early on that the pricing discussion may not have been exactly what you guys had hoped for clearly a great cash flow assets actually even more important today.
What are your latest thoughts on those assets are you still you know.
Leading towards which way you sort of leaning it's a recapitalization.
Out of the of the despair or you think you may outright sale or now it's just.
Keypads is with no change on the finance.
The answer that question is yes.
Yes.
Thank you Steve.
Anything more that you cannot.
The answer it look the answer is is that obviously these are important assets obviously they will.
Command.
So acceptable that use it may not be the top top tick value, but they will command acceptable bad news.
And the.
The liquid the liquefying of the value of those assets is an important thing and our future plans. We have said we met we're looking at multiple different options and the answer to your question is yes.
Okay. Thank you Steve.
But but let me let me just let me let me just add.
Alex Let me just add on to that what I'm, saying is that you've written that you would prefer us to take the mark that the buildings Ulster bucket and Upsells and keep the cash flow. Okay. That's not our preferred strategy right now.
Okay Yeah.
I understand that I appreciate your view so thank you Steve.
Yes, Sir.
Thank you. Our next question on line comes from John Kim from BMO Capital markets. Please go ahead.
Thanks. Good morning, Michael You mentioned that you don't expect tourism to come back into the sales into the next year I'm wondering what that mean fired.
Not only retail occupancy run collection and abatements next year.
Look I think that John I mean, just look at.
The trend line and when companies either by brand or workers back or when theaters nail and I think thats a reasonable assessment.
Lastly, in our fluid environment in the latter half of 20 was reasonable assessment. So that obviously means but traffic is down there or retail sales down.
But in the retailers are adapting.
The one that we're very we have already.
Gone out so there can be.
Some more casualties, but.
I think that when you take out restaurants, not a biologically a pretty good credit.
Balance of our portfolio so.
And as I said, we are notwithstanding that environment.
We signed one lease on Madison Avenue and we're in negotiations on another so retailers are and Steve will have the 731 and then there's some other assets as well as our retailers are kicking the tires right the strong retailers.
Balance sheets.
They take the other side, which is this is an opportunity right rents are down we can now get the best basins.
At attractive prices, we can make money.
When the markets return they have all these markets are in charge everybody does that VR will come back in as soon as people travel again.
And ill give you right back 60 million tourists, but I think it's going to come back pretty quickly as pent up demand this country to experience.
Culture sports et cetera, and so tourism is going to film in my opinion. The ARPU is going to be one of the prime beneficiaries and obviously the retailers are going to benefit from that so.
So.
That's my view out you want to add to the high end of that but.
I think we are well positioned in terms of our assets on a relative basis.
Can I ask similar question as far as the timings, which trade sales reopening at the Mark would it also be if I can.
I can have 21 timeframe.
Yes, yes, so maybe the big trade show the oak on.
Which normally is June weve pushed out this September and we did that few months ago. So conservative view.
Give it time, our tenants are anxious for that show to happen.
They're planning they're excited about it so.
We feel like that will happen is important show and so yes that.
As well as the Armory show the third quarter of 21.
If I could squeeze one more question then is.
Is the 850000 square foot leasing pipeline does not include the large anchor.
That.
One that you discussed last call.
I think you're referring to pen to maybe have answers now.
Okay. Thank you.
Yes, yes.
Thank you.
Our next question on line comes from Nick Yulico from Scotia Bank. Please go ahead.
Thanks. Good morning. This is Josh Brown with Nick do you have any insight into details behind what the Buildout of barley, ultimately look like for Facebook and their design that space any differently because the co. Ben I think can you just talk about the T.I.s ever given on that deal and how that compares historically.
No that's something that we're not going to get into.
And then I guess, okay looking at retail how are you guys thinking about the retail business today versus when you got the JV deal. When you brought up a month so the disruption in retail present, some really good opportunities. So are you seeing any opportunity today and how can forney don't benefit from us.
No the answer.
Is that.
There are as you would expect.
Worst assets go bad.
Quest right so.
It would have no prior number of years right retailers why added.
Really throughout the city.
And it was leasing done in rents question.
I would call fringe locations right well as a result of not just us, but even happening before this right that started the contract.
Over the last couple of years ago locations were impacted and.
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Owners that had debt on those assets.
They have either lost or they're going to lose those assets many.
Many cases those are not going to be interesting I think our focus has always been on.
Prime Prime High Street retail that is going to be demand, even in even more difficult environments. As we're talking about with our portfolio right. Now. So we do think that there will be opportunities.
And then they come to our lenders like we've had calls from lender, saying what you guys are the experts can you help us out on certain assets.
The right situations, you know, we're going to play out for us.
But I would say to date, we have not seen any scale or a quality that fits our bill, but they're going to come.
The the law the jungle is that.
The bigger they are the hot the harder they fall so the categories of assets.
That are in distress.
Our.
The top three are condos in New York.
Retail anywhere.
At hotels, so you think about it for a second.
The condos are the buyers have got into hibernation and the prices our EPS bring four.
The are the hotel business most of the hotels are shutdown. So they get zero revenue and we know what's going on at retail so the opportunities will be at our coming.
And they will come as Michael said, they will start coming from low and foreclosures.
And those are the categories of assets that will be the most distressed.
It will be I think difficult to find a greater office building that you could buy that used to be worth 1000 miles of what that you can buy for $500 of book. So we are definitely in the financial condition to be acquirers.
Part of our business strategy is to be acquirers and in distressed markets like this.
And so we're very alert we see everything that goes by we are we have the financial capacity to act of and.
Were sort of like like like.
Reasonably excited about what the opportunities might be but they will take could be well into next year before they really start to mature.
Hey, guys. Its Nick just sorry, just a quick question on the.
The sequential change in cash NOI for the New York Office segment, which I know you list in the queue I forget if its going to separate out but you did have a write off of a tenant receivables what else drove that sequential decline in office.
Yes, cash NOI this quarter and New York.
Yes, it's going to turn that over to Joe and Tom.
Tom.
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If you don't have an edge if you don't have as your fingertips, maybe we can handle this offline.
Nick I would Joe.
Good morning, I would prefer to do this off line. Nick So we can really get you a precise answer.
Needless to say.
The third quarter had accounts receivable reserves more than two and more than two and a half times the first quarter the second quarter.
So thats an element that we've had new loans.
We need to we would prefer to get you were more precise buildup.
Okay sure. Thanks, Thank you.
Thank you. Our next question comes from Rick Skidmore from Goldman Sachs. Please go ahead.
Thank you good morning, Steve you mentioned, the Ceos, seeing zoom fatigue, and lost productivity et cetera regarding working from home.
What if anything can the office landlords do to help accelerate that returned to office and what are the CEO, saying about plans to bring their people back or is it just waiting for a vaccine and the virus to fade. Thank you.
You know I'll tell you I'll tell you what our experience is first just to give it to you give us some context.
So.
Most of our work out.
Our.
Peer companies have.
Basically returns so office work.
Hundred presented the companies and they have done it by edict.
And their attitude is at my additive as well as as we're talking about we're talking of our book we are in the office business, we want to be in the office, we want our people in the office and we want to get back to normal work.
So we agree with that.
The thing that we don't agree with is what we've done is is that most of these folks had bought back 100%. What we thought got done is gone back and team. So we have a we have a.
An ATM and a big team so that we have half the population and the office.
Our week eight and the other half and we'd be so that we keep the densities down a little bit.
But the most important thing is that we have.
In respect for our employees, we have basically said that if you are uncomfortable with the health risk of returning to the normal office environment.
Cetera led by all means please continue to work for both now we're not going to let that go on forever.
What were finding when we talk to the large Ceos is that they vary very much are up.
Our shying away they will not they will not open there often is up by unit and they very much respect what their their employees.
Perceive as being a health risk.
Thats something that we have that we have to live with right now so there's a sensitivity to the risk out there and the employees point of view.
There's other nuances to it like childcare its goals and.
And on this up but the main thing is is I find it very difficult at all of the Ceos that I talk to the sales so at employee come on back towards even though you were a little bit afraid of that there is a health risk in doing that so.
So really the resolution of this will be when the medical.
Industry at the the one thing about what has happened in.
In this situation.
And I know the people in Washington want to take credit for this but actually it's probably just.
Just a normal workings of.
Capitalism every single medical professional and scientists in the World. This working 24 seven on this on this project Thats never happened before so what we are hearing anecdotally is that there will be.
Vaccines, and therapeutics, which will come out.
As I said I've said bill.
In months not in years that will turn the tide, so it's very difficult to.
Change behavior and get people to come back to work until they are comfortable and most Ceos are just not going to do that so the answer is is that.
We think this is basically a medical situation, it's a health crisis and that has to be resolved before we can really get back to normalcy now what are we doing what were doing is were close communication with our tenants it daily and weekly.
We are finding out what it is that they want we are preparing our buildings at terms of.
Air filtration.
And.
Temperature checks and sanitation et cetera, and all of the protocols and actually.
You know all the major landlords are basically adopting the same programs, which has become industry standard and so.
Our our tenants know that our buildings are top of the line are ready to receive them, but they come back up et cetera, basically so.
Thats, what we are able to do right now we're in a waiting game waiting for the waiting for the medical profession to solve this problem.
Thank you.
By the way by the way.
And I said this in my remarks.
You view at high at all of our colleagues as we talk to our friends, we talk to our associates et cetera.
Everybody is chomping at the bit everybody wants to get back to work everybody wants to get back to school everybody wants to get that to be able to go out the rest lets everybody wants to get back to normalcy. So there is that.
The population once the return.
Hesitancy is that there continues to be a health risk if you read the press and.
And you watch the TV.
So it's very prevalent it's very difficult to say well there is no health risk don't worry about it up because it is so prevalent. So the answer is this is something that will take time and my hope and believe is it will be dimension didnt months not in years.
Thanks for the color.
But also I guess, maybe a short one thing okay. Our teams talk to our tenants.
Very frequently at least weekly.
Thank you. Our next question on line comes from Daniel smell.
From Green Street. Please go ahead.
Great. Thank you.
Steve going back to hearing your comments about looking for assets in the stress one area.
Right from the office sector has been white side.
But it's fair to say that lifetime value.
York City are likely not to be restructuring best dose would likely not be on your targeted acquisitions and then to follow up on is there any opportunity for in your current development pipeline to expand in that area.
Yes, Daniel if thats the.
The question was one of the I think you said what about what about life Sciences.
The answer is is that I don't know, we obviously were aware of the life Sciences segment.
We have.
Sort of experiment and then put our big toe into it a little bit.
It's an attractive.
Segment.
If it's actually a small segment in New York There are other hot spots around the country that obviously, Cambridge, obviously, California.
It's a business that we're interested in.
And it's a business that we would look for an entry point.
And are looking for an entry point to buy just the bite into the life Sciences industry at the stress is something Thats just not available now so.
So basically we have lots of assets.
New York is that potential.
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Location for a large large and important cluster of likes of life science assets.
Have the universities, we have the talent et cetera. So all I can say is it's something that we're aware of its something that we are looking at its not easy the end there.
And there we don't believe that they will be a distress.
Opportunity in that in that segment.
Is there any.
Current plans are looking at Penn one or two for a life science component.
Well, it's a quick lesson.
Okay.
Probably not.
There are other buildings there are other buildings that are better suited to that and actually most of the success. In this industry is done by ground up development that are suited for that use so if it's actually more efficient to do ground up development rather than retrofit.
Penn wanted penta would not be candidates for a retrofit other buildings in that.
Penn District would be much better candidates, but the ideal thing would be to do wrapped up development.
Okay and just.
A quick follow up to the finance business is a relatively small portion of your overall business.
Any thoughts on the women's apparel.
Baggage business.
So I was hoping if you can provide a few comments on.
Potential recovery to accrete token level.
In that segment, which what was the question.
Yes quite good question was you have a little color here, you as signage business small business, but some guidance on the recovery prepayment levels I mean again, it's a it's a.
Yes, it's a business certainly in times square, obviously, we unless we do.
The retail JV, but.
Yes business driven in that area.
Were you the eyeballs right and so with tourism down.
The EPS as items of.
It pulled back but as soon as they come back it's a variable business I expect that the turn right back on.
The size, we have independent Rick.
Got it and.
And even in times square I've got a number of long term leases with that I'm, referring more to the.
We call the slice and dice, where you're selling incremental signage I think as soon as soon as like anything else now assumes the tourism back orders are back you're going to see that in a return to pre crisis levels.
Well, we don't look at the signage business as a as a dabble or an unimportant business. Okay. It's a it's an important business.
We have a.
We believe we have the largest position.
Of size in town, we have a.
Very very very competent organization to handle that business, which is namely the.
The interaction between.
Yes, and the and the advertisers.
We think that our our scale in that business is a very large.
Advantaged and we think that our scale in the.
In times square and the Penn District is also a very large.
Advantage so were enthusiastic about the business.
It's important to us.
It's top of mind.
We think we had the best business in town and we are certain that it will.
Rebound when things get back to normal.
Great. Thanks.
Thank you. Our next question on line comes from Vikram Malhotra from Morgan Stanley. Please go ahead.
Thanks for taking the question just maybe.
Just on street retail.
Can you specifically talk about prospects and potential for kind of your vacancies on fifth Avenue them to maximum speed specifically in light of one your one of your peers rescinded signing a deal there.
What I understand it's probably in the low 2000 that grade in terms of rent.
Maybe just give us gives a sense of the potential prospects and where do you see rent shaking out head grade on fifth Avenue.
Retail rent on fifth Avenue, we will certainly be in correction territory from top tick peak rents that we saw a few years ago.
The Harry Winston comp in the Paramount space, We view as a positive we currently how's Harry Winston and our Saint Regis at that they had a 15 year term with up that was always intended to how one of their other brand to temporarily hold Harry Winston.
We see that moving across street to their original home.
As a positive for fifth Avenue.
Not sure of the comp that you quoting because I don't think it was published but that might indicate.
Some were in the neighborhood of where the correction could be today.
Okay, Great and then just I apologize if you covered this but.
Any any update on the ground lease that Ben.
Specifically in and can you talk about just prospects have been too specifically.
Sort of large anchor tenants.
The ground lease.
Okay.
Reappraisal at.
One Penn we've announced is in 2023.
Yes.
I think obviously.
Well I don't want to comment on what it might be although I will say that clearly it's going in.
Constructive direction for us.
The prospects for two Penn.
We have said before and it in fact I think the question came up earlier.
There is a.
Large lease that we have.
Pending it actually has happened to be with Madison Square garden for their headquarters space. They had been tenants in that building for ever.
Of the building obviously is on top of Madison Square Garden and that lease is appropriately it pause.
Because.
Madison Square Garden is basically the business is shutdown.
Bill this is over.
So we are very constructive and very enthusiastic about the prospects of at too.
And the other one for multiple reasons number one we think the location is absolutely.
The Bulls eye, we think that the amenity packages and the.
What we're doing with the buildings and the transformation to buildings will be unique of.
Best in class by far unbelievably eye opening.
Glenn and his team have exposed our plans for what that to bed to the marketplace. So unbelievable enthusiastic acceptance.
Okay, Great and then just last one if I may.
Steve you've obviously talked a lot about how new York is changed over the years.
And I'm just wondering.
Given co working and we work it was talked and then it was then.
And not you've had potential for more work from home on the margin I'm. Just wondering do you foresee any change other than office lease structures, whether it's.
Tomorrow or.
T.I.E. solar farms or anything in the office lease structure as a result of some of these gone its cyclical then potentially secular changes.
Okay.
It might I pay of one one thing that we've learned from this pandemic.
Leases are a wonderful thing long term contracts.
Between.
Well capitalized parties are a wonderful thing they're very protective so.
Right now we have.
No better part of a thousand tenants.
As a very significant billion.
Billion dollar plus cash flow.
And so thats very productive and very secure we are very happy about it.
If the business goes to month to month leases.
That's impossible.
So far we work when you are renting out dead space by the desk as opposed to by the floor or buy the building by the square foot.
Thats, okay, but when you deal with a tad as Glenn does every day of the week Rose 200000, 500000 feet or even more those tenants me stability they need to be able to.
Hi.
I have.
Space that they can occupy out a long term basis, where they can invest capital and they could have stability we need the same thing so in the large tenant business.
I think the long term lease commitment will be.
The rule of the day now in smaller tenants and whether they be 3000 to 5000 or 2000 or whatever it might be first of all that's not the segment of the market that we.
That we.
Traded although we do have some of that obviously and those leases.
Can go into anything that the tenant wants so there.
When we do those leases we have pre builds we build the space out and the Ted can take the space move out whatever so a competitive advantage to that is a landlord as the capital strength to be able to do a short term lease to be able to fit out space for its head of investor capital, So that would be but that would be in us.
Small insignificant segment of the office population, that's not our business.
Thank you. Our next question on line comes from Manny Korchman. Please go ahead.
Hey, its Michael Bilerman here with Manny Good morning, Steve.
I was wondering let me just come back to us.
Yep.
Yeah, No just good morning, Michael.
Let's just good morning, Okay.
I wanted to come back to the sort of the office discussion and frame it the following way and I agree with your sentiment on offer to return to the office I myself have been back in the office.
Feel a lot better than than living at work.
No, but I want you to compare to the mall business, which you accurately got out before things got really really bad and save shareholders from a lot of losses.
Why wouldn't the office space market go like what's happened to the malls right and you go back and everyone said people want to experience the malls they want to feel the close before they buy them. But then there was an alternative driven by technology that allowed us not to do that anymore.
And so I.
I guess why are you in the belief that what happened to malls wont happen too often.
That's it may ask the question.
There is a school of thought.
That says that work from home.
His two office values as Amazon is to retail values.
Understand what I'm, saying, yes.
Yes, no and that's why I'm asking that the market is I don't I agree with you on the future of office, but the market is telling us a different thanks.
The answer is that that's something that we talk about every day.
It's obviously it was obviously unthinkable.
That hundreds of billions of dollars of more values could be destroyed, but look, but lo and behold it has happened.
It's obviously unthinkable that all the automobile companies could go broke but along comes Tesla.
So we are very respectful of the question that you asked and we think about it daily.
And the succinct answer as to why you believe that offsets will follow the trend of malls.
The answer is is that I believe that.
If you work from your kitchen table.
And your kids are crawling its your feet.
And you are not with your colleagues.
That's not a great that's.
Thats not a great outcome.
If you are.
Vicious and want to get ahead, you can't get ahead.
From your kitchen table, you have to be in the office with your colleagues. If you are a manager and you have 20 people in your department that work for you.
I think if they are each had their kitchen table I mean, I don't know how you manage that.
I think if you're managing your watcher team.
In the office way you can we can interact with et cetera, So I think the human condition.
Is different the human condition be speaks to collegial work in groups in Beit, which basically is in office now obviously, that's going to get NIPT around the around the edges I can't tell how much of none of this would have happened whether or not the technology like sue.
Okay. So technology enabled our business your business to be able to react to this shutdown by working from home, but keeping the railroads running on time so.
So thats an amazing thing.
But.
Yes, the human condition. So it's not impossible that there will be a day here a day there of working from all but not impossible that certain groups will work from home up it's possible that things will change, but the core I still believe the core.
We'll be of.
Now, let's get back to what that means.
I think that means the better assets and the better locations.
We'll thrive.
I think that it means that the commodity lower quality assets in office locations will struggle.
So that's what I think on the other hand, there is uncertainty in this situation that a management team.
Has to have.
Has to be aware of it has to be as the focus on.
Daily.
Right.
I appreciate those comments and then my second question, Steve just to come back to 555 and 12 90.
And one of the responses you you said that.
Very important it's important to liquefy those assets to your future plans.
I was wondering if you can just sort of unpack that a little bit about why liquefying get either in the refining joint venture or an outright sale.
It is important to your plans or is it a portfolio repositioning.
Your size is it to get the mark at sort of good pricing.
On those assets is the cash that you want to take out.
And so just im just want to better understand why those two assets are so important to your future plans in terms of the liquification of them.
I think I think the word importance as yours I don't think I said input.
Look.
We have identified those assets as assets that we would like to.
Swap for cash Okay, it's as simple as that but lot of it depends upon the structure a lot of it depends upon the details of cell small cell apart. We continue to manage them, we do a joint venture or we just refinancing okay, but we have an enormous amount of equity in those assets and we want to reclaim those assets.
We want to reclaim that equity now when we had the cash it's a different decision as to what we do in our World view is is that there will be better places to put that cash to our growth and create shareholder value creation, then those assets over a five or 10 year hold okay.
That's all.
By the way I would remind you that.
My analysts over the last 10 years have been pounding the to sell 555, because it's the only growth.
Dump it while we resisted that dump it went up in value by a billion dollars. So maybe its time has come.
Perfect all right. Thanks you.
Yes, Sir.
Thank you and our last question comes from Steve Sakwa from Evercore ISI. Please go ahead.
Thanks, just two quick follow ups I noticed that operating expenses kind of notice the.
Between Q2, and Q3 I assume that part.
Part of the buildings reopening.
You take Q3 as a reasonable run rate looking forward until utilization rate go up materially.
Yes.
Just on.
Operating expense operating expense looking good.
Yes, I think Thats fair Steve.
Okay. Thanks, and then I did notice a large kind of onetime gain I think it was in management and leasing fees. It was something like $11 million as any I assume that's a onetime gain on some leasing activity but.
Right that would be great. Thank you.
So actually finished.
And again and that going there.
Michael It's Joe let me handle that one yet few 300 in the fee income section the but it gets eliminated in the minority interest section, so really didnt benefit on them why one penny.
Okay, all right. Thank you Chelsea isn't.
Thank you we have no further questions at this time.
Well. Thank you everybody for joining this is a very very interesting time.
I'm going to go back and watch the television and see whats going on than the election.
We wish you all well stay healthy and.
Please get back to the office get back to work, we really need everybody in the office. Thanks, So much have a great day.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for rotating you may now disconnect.
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