Q2 2020 Vornado Realty Trust and Alexander's Inc Earnings Call

[music] good morning, and welcome to the Board you don't Realty Trust 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.

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 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 web site W.W.

<unk> Dot via no dotcom under the Investor Relations section in these documents and during today's call. We will discuss certain non-GAAP financial measures reconciliations of these measures 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 may be deemed forward looking statements and actual results may differ materially from these statements due to a variety of risks uncertainties and other factors.

Please refer to our filings with the Securities Exchange Commission, including our annual report on form 10-K for the year ended December 31st 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 me.

Include time sensitive information that may be accurate only as of today's date. The company does not undertake no 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, Michael Franco precedent 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 and healthy.

Yesterday after the close we announced the very important 730000 square foot lease with Facebook AD out Farley building.

We normally don't go for the drama or timing deals with earnings call, but this one just worked out that's like.

This deal has been in the works for Awhile and there's not been a secret in the marketplace people speculating will even a great culprit companies such as Facebook committed in the middle of the pad that 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.

We now know 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 unique place to do business with unlimited highly educated workforce, New York continues to be the place to be.

<unk> is a unique properly property like not another 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's further value.

Today, it's our plants to redevelop by 7 million square feet Appendices holdings into the Bulls eye location in New York.

They took the facebooks commitment here expands our long standing relationship with them at our 770 Broadway property with a at least 500 700, that's 57000 square feet.

Facebook is now a lot just headed by both revenue and square footage.

Kudos to glad wife's ideal captive at the very Lanka, who led construction that development sport.

[noise], So 20 Central Park South is the most successful residential development ever.

We are 92% sold or under contract and we are now reaping the financial rewards from 220 billion Sakes financial engines feeding our liquidity and financial strength year to date through July we have closed on 13, you only for net proceeds of $598 billion all of this during the whole crisis from inception.

In July we have closed 67 units for net proceeds of $2.42 billion.

We expect closings in the balance of the it will bring it out additional 496, but yes, that's gross.

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 now $4.3 billion.

Consistent with my comments it my shareholder letter in April that we would be more aggressive and selling assets given the persistent discount and 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 screen, which has to be a cop five in the nation Trophy at 12 91 of the Premier buildings are they happened here in the Americas.

We understand that this is a Korean book, that's some believe the capital markets are frozen and that was not the lifetime.

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 could have various different outcomes. As an example, we could simply refer that we have indication so upsizing the 5.5 California's before.

550 billion to as much as 1.5 trillion such has been the increasing value of this asset during our ownership.

This process will play out over the next few Bucks.

Now the topic does your rent collections and the second quarter.

We we collected.

93% of office rents.

98%, including agreed to rectify world, 72% of retail rents, 78%, including agreed to deferral and 88% on a combined basis, 94%, including deferrals.

Trend for July looked like 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 dividend accompanied by mandates pays out by dividend all of its taxable there.

Our attention is to have a school that.

A couple of dividends that increases with our growth.

We believe that dividend is sort of secret but.

But not more sacred that our balance sheet, our financial strength and our liquid.

While we certainly have the where with all the continued over pay the dividend forever.

Management Board believes 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, our city will be slow.

Residential neighborhoods have decent activity at speak traffic.

The Kenyans all our commercial bold, but 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 at these quiet screen.

Most office tenants that plan I coming back to scale after labor day, or even until year end.

At truth be told if 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 where are we want to work for home or whatever forever.

Which would of course have a negative effect on office the bad FX I.

I don't believe it and I'm betting 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.

Happened and office buildings.

That's actually that's my view on work for Paul 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 ever FFO as adjusted was 55 cents per share compared to 91 cents or last year's second quarter decreased 30 success.

The decrease was reconcile for you in our earnings release on page five and our financial supplement AJ.

I will cover our house 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 $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 business in the guy.

The JC Penney in New York and comedy Bankruptcies, where the lion's share in the write offs in the quarter.

Very good $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 is.

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 predict down $9 million per month or $27 million for the quarter, that's 13 cents.

When 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 noncash impairment loss on our investment fifth Avenue in times square retail transaction. This comes a little more of the year. After we recognized that 2.5 $6000 net gain on April 2019 transfer to 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 Mall assays.

Now turning to leasing markets.

Given the uncertainty of the trajectory of the pandemic as might be expected.

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.

Of Afrikaners of office as our updates renewed their leases right an 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 assigned several new major cannot 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 selling 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 fully capitalize 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 opening new 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 retailers in more than the prices.

For the city reality for construction in mid June our development efforts have resumed in the past history.

As far already we are targeting a December opening moynihan train all along with some limited retail use and first delivery of office space in January 2021.

Retail demand is strong year, given the expected fairly fast track.

Our early morning pencil on a center point of our vision to transform and industry, New epicenter of New York.

We will be delivering pretax cutting edge next generation health and wellness environments amenities and services unmatched anywhere.

Even during the shutdown the reaction from the brokers community in multiple perspective tasks 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 industry projects or death rates are being funded off our balance sheet, including reaffirmation proceeds to 20 side 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.

Sorry third 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 commuters.

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 real estate.

Real estate financing markets are beginning to heal.

Lenders are still in free cash flow.

We selected 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.

With the fed poppy liquidity in the system and planning to remain accommodative until the economy recovers interest rates are likely to remain low for as long as the I can say.

The should make the yield our assets long duration leases will 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.

Yes, Sir.

Hundreds of years cities have endured a central gathering places for work, leading culture and the 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 Q.

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 signed 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 that Star then one on your Touchtone phone and our first question on line comes from Steve Sakwa.

From.

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 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 rethink 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 plan in the district, so that step one step two is it has been a long.

The long hole.

It's a bought deal to big deal.

Hi third parties.

By the wing 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 game at Markel. This piece of property the 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 for that 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.

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 Thats. The 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 and 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.

The book because that Facebook deal, which is 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.

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 and what might all go into that.

You know I can't be it much was what specific.

The JC Penney I think we made the statement.

Yes, we don't have bought the pick with JC Penney they paid us.

I think the exact numbers $194 million at rents over the last 10 or 11, so so.

They don't know us anything.

They have been petering for a while it so the bankruptcy was absolutely expected.

The 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.

But.

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 coincided slide that requirement.

We have enormous loading facilities and the ability to get handled trucks on and off the streets, so, but 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 do not believe that you should expect that we're going to be pick out we're going to relate the space quickly.

This will be a long slow slide.

Great. Thanks very much.

Thank you. Our next question on mine comes from Manny Korchman from Citi. Please go ahead.

Hi, Michael Bilerman here with Manny.

Steve in your commentary you said it was great time to be looking through the fog and putting capital to work.

Wanted to know how you think about that from a four NATO perspective, and you think about the Facebook deal now being official.

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.

Venture will next cycle like I guess, what are you thinking about in terms of putting incremental capital to work.

Michael Hi, how are you Percival 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 less building basically take say.

A multibillion dollar asset out of risk puts it into it to secure.

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 enormous amount of additional capital so.

If you'll pardon the expression where were loaded okay. We store, we didn't see that pandemic coming but we saw at the end up a boring expansions 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 to sweat closings. It to 20 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, but continue to augment our liquidity okay.

[music].

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 Farley building to two penta, one Penn 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 think is the single best developing site, but b that is it bay I couldn't resist getting the plug ins.

So so the issue is that.

Hotel Penn in order to.

Execute on that you have to pay par in other words, you have to build the building.

View, 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 right 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 both couple 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 unencumbered and one Penn Plaza is slow down a lot it's not encumbered.

Capital plan for those buildings is complete Farley.

Do I developed plan is I don't know pick a number being half 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 the street trace will bode it.

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.

Use the word look through the five intentionally so we are alert we are active Pat we are very.

Our interest in.

And.

And growing our business at a 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.

And people lenders are appropriately cautious okay.

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.

Box so to speak will begin to start the lift and it will become an aggressive borrowers pocket.

And you put these you put our balance sheet together borrows 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 that you've had overnight.

Theres, 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 Sterling Tapper right on 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 the city can rebound.

That's the best.

That's a combination of the but 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 Dave it'd be who were mentally okay.

And so I don't want to put it to site, but b that as it say look.

New York is the world.

And it has always been it has been the world City plus for essentially now it's got this enormous infrastructure of all the cultural things all the business things all the tablets et cetera.

Even though.

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 but the the size of their workforce you take the.

After hours activities in those cities.

There is a group of.

It's a small subset of people who want to live there.

But it can't competitive New York I mean, remember New York has eight professional sports teams.

As to two hockey to football two basketball to baseball Nobody's got anything like that so and that's just one little exit So New York has this enormous built it 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.

I hate to hold the situation.

I hate to homeless situation I hit a lot of that things about it I am not a big fans of the funding the police.

Et cetera, but in the and New York will win the date.

Thanks for the time.

I would just add too as you 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 we think about not only facebooks commitment, but I referenced in my comments today is rumored press always a couple of these things you have major companies from various different industries that are.

Looking beyond this.

Short term period, which is short term going to have a vaccine orders therapeutics.

It looks like near term.

So the health issues going to come off the table, we're going to get back 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 access.

And now they are focused on that Youre right and scale and so I think now this is not us just buying the sky. These are major comedies.

That are that our global leaders that are going to continue to be the winners that are reaffirming.

And they're committed to the are not to mention what we've done our own 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 770 Broadway.

What their longer term plans are there.

Glenn Glenn cut that one.

Hi, Jamie it's Glenn how are you.

So the thoroughly transaction is not at all connected to the 770 lease number one.

Number two Facebook loves seven seven days by the fact, they are 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 at 770, some seven years ago.

Okay, Jamie I'm I would add that.

Facebook has talked to us about.

Growing in that building and taking the entire building so and those conversations are Gibbs at Keybanc.

Okay, Great and then as you think about I mean, now that Farley done.

Can you talk about the conversations.

Around 10 to I mean, what does that.

The demand look like.

You've got some time before that project, but just.

Certainly next step to the plate.

It sure is so the first thing 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 four plus began square foot campus and on top of Penn station, which is I submit an unbelievably scarce asset and valuable.

The the.

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.

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 I said last quarter's call compensation has.

As expected got into pause not gone away gone into force okay.

The major tenant in that building now is somebody called Madison Square Garden.

And in that building for decades.

That building is adjacent to their business.

So thats really.

To Penn has been the home Madison Square garden throw more while so.

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 is set up I mean, it has got universal.

Flaws of that so we're 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 absent pad, which is an interesting combination.

Okay.

Add their boss basically said that.

Going through the renderings in the presentation that east thought that the design 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 JBT bargain group and they would only take one.

[laughter].

Yeah, Hey, Glenn is good but he can't so you can't cells based price [laughter] I don't know they they went though 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.

So I decided that tenant that Glenn it pockets here for both repair Hey, Alex Alex Alex Alex.

First I should say is hey, Glenn and David Congratulations on the Facebook deal Thats. The first thank you should say.

Okay that was I could face time, you My question left and it says in Red ink, Steve Dash. Congrats on Facebook. So that's that's there that was going to give you a plug for talking due to Steve Schwarzman your body about angry threefifty, but sounds like blend is also trying to.

Belmond Penn station, so look forward to that as well.

At that level 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 completions.

[laughter].

So first to bill 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 residential.

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 555 at 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 you have Trump and they're all the people who love to right critical things of them. So it seemed like any transaction run that risk of headline.

So how do you think about.

Parting with the two building given that they really do provide great and alike that help with the as you redevelop Dietrich do threefifty et cetera.

And then also speak the political feet of everyone would get picks whatever right.

But somehow.

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 in 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 doesn't he doesn't have anything to say about the decisions that we make and so that's why.

Sepsis don't draw the conclusion that wasn't necessarily sell the building. Okay. We have lots of different as 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 as mature buildings I havent available for more advantageous opportunities.

So.

I played out the books as you sell the worst the first thank 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 outlook or should we go at capital out of 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.

We'll 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.

Add I'd, rather have the capital that is that the buildings.

And that's my answer to your question.

Okay. They are they are some of the best building. So hopefully other two way for you guys I'll update you on it the point of it is there some of the best buildings in the country.

Okay. The second question is on the Street retail odd you took the impairment which is non cash obviously reflect as Michael said that the degradation in value from a year ago, how does that 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 to the models as well.

So.

Well I would refer to is that just go back and because I read all the reports just for Everybodys.

Preferred is.

Preferred was originally proxy for senior mortgage.

Right and so.

Is it sits on five 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 seven assets.

Available to service the preferred.

But again that is the the first lien position on assets.

Well the LTV is is higher than the transaction.

The value still.

Well above the preferred so and again.

To remind you.

There was a there was a period of time, where we usually have passed before you think about.

I mean that are for.

Which we have not yet so.

And then last summer I would say is not all are not right. So as five separate assets. It can be reviewed all part.

As we elect.

Over time so.

As we sit here today and on.

Many of those assets.

We have meaningful terminals leases.

And.

Outage that.

Frank on many of those.

Re rent that today those numbers would be would be lower but we have we have term right. We don't know the future holding the on five six years over the market is stabilized recovered may not back to see.

We're not we're not a vibrant market and in our biggest sale that we and review the preferred and.

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 the 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 looked upon the preferred as a financial asset not as a real asset. So I don't look upon the preferred as real estate I looked upon as financial that's number one number two.

I look upon it.

Not impaired on our balance sheet, if we thought it was pad we would have been paired it.

If we so we look upon it as being a good financial assets number three is we look upon it as a source of future liquidity.

Sure a certain time frame pass, which is not very launch coming at should we 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.

Yes.

Okay.

Thank you operator, I think obviously.

Yes, so sorry, we have just 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 you answered Steve talked with question.

On the yield at X Farley.

I mean, we attack.

It depends on the Facebook leaf within your original underwriting parameters.

The you'll get a come down primarily because the retail or is that the combination of the retail and the Facebook.

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.

Banality.

Theres starting point.

It's good job.

Congrats.

I am not dramatically the Facebook Twitter Facebook leave has the Facebook Lee has nothing to do with it there's no optionality. So the Facebook lease has set spreads for the term.

So now with respect of 174000 foot the split is going to asset.

The 174004 leases with one tenant they exercise the five year renewal option.

The rent is the greater of market or the tenant then ran the rent get set next fall of 21.

Just a five year option of this space.

Hi for permission yes.

So what we had but we had was the conundrum that we had was that this was at least that 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 two the square footage that was released but we could not put it into the mark to markets because we don't know what the renters.

I.

By 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 a David.

So.

When a tenant exercises a renewal option.

The good clause says that the tenant owns this space than has exercised and has confirmed and additional extension period, whether its five or 10 years.

With the rent to be reset based upon that end markets. The best clause says.

The 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, we're going to figure out the rent.

Next year, and it's not less than what the rents.

To tenants currently paying.

So this was originally in the lease would not.

Hi, good related.

O'clock. This is an old old lease where the tenant exercised an extension option correct.

Great. Thank you pick up quickly.

Good luck.

Thank you. Our next question on my comes from Vikram Malhotra from Morgan Stanley. Please go ahead.

Thanks for taking the questions and congrats on getting far new buttoned up.

First just on retail can you help bridge sort of the occupancy loss sequentially from the 92 I think the low eightys.

This quarter.

Okay.

Yes.

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 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 because it was primarily JC Penney and our finance Gamble offline, we will give you the details or build it up for you.

Okay sounds good and then just second on street retail again.

Can you give us a standstill, but 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 may be up for renewal and with those expiration maybe any guidepost thats, how we should think about kind of speech retailer NOI.

Okay.

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 the specific headwinds in our disclosure that expire over the next 18 months.

Joe now.

No.

No.

All right. So that's a question vikram that I'm not going to be able to I'm not going to be able to give you the guidance that you've asked for I apologize.

Okay, No worries if I can just squeeze one more in.

You're answering your correctly you correctly predicted many years ago, Manhattan kind of moving moving south and West and obviously there has been a lot of developing and progress just youre hi, higher level taught whether its covert related or new types of demand, our new types of tenants coming into Manhattan, Duke.

Do you foresee any changes.

In Manhattan, whether it's with lease structure has a full working or maybe a little bit more suburban so big big pharma, maybe thinking about suburban and any kind of highlight 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 in 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.

Rebutted of River is sought after.

Yes.

Is the debt drift why is find places to live with good restaurants had a good experience. Okay. So we have where people live is.

Not that.

This positive with respect to office development.

Now I would remind you that long island city is one the to.

Train stops away from.

Almost every office building in the city at Brooklyn is one to two subway stops, which is like 10 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.

Finance Center.

At the new West side.

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 that people aware ties go to the Plaza district, but people felt 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 company's footwear 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 instances of that the the service company that took 61 night from US was that.

Many of the tenants that are in Hudson yards today, our traditional firms banks et cetera, who wants to attract a different profile of worker.

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 compete very very well with the website 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. At economics are really important add where people want to work. So right now is the perfect storm website at <unk>.

And I guess I'm talking IPO.

Okay, 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.

Okay.

Makes sense. Thank you.

Yes, Sir.

Thank you.

Our next question on my 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 that actually a negative.

And your same store NOI or you are you or you and when you talk about cash NOI or you excluding.

The impacted as 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 background. This is John.

Steve gave you the percentages of collections and deferrals.

That trend.

Dollars.

$48 million uncollected in the quarter of which we defer 21 million.

We also abated threemillion and we set up reserves for $9 million on collectible.

12 million reduces AFFO and FFO as adjusted.

Cash basis in Hawaii, and all the other metrics.

We also went on a cash basis for revenue recognition to 56% almost 9 million of all of the monthly rent not collected.

Through the reading writing off of the 36 million of straight line rents, which has the effect.

Putting those tenants on the cash basis.

Going forward more than half overruns not collected in the second quarter are now on a cash basis.

Well covert 19 has given rise to a much higher level of rents not collected the we use 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 et cetera et cetera.

And those numbers are in Vienna worn numbers deferrals deferrals are treated as cash collected.

For cash basis, AFFO, but not the write offs knock the abatements.

Eccentric structure.

So do you want to anything to them.

Let me I'd add is that.

The retail Joe referenced in terms of bad debt reserves and Scott.

The impact of the forever 21 bankruptcy, but the other aspects in terms of being down is really driven by their businesses that I referenced earlier.

Clearing fees signage Raj income trade shows and those drivers.

Again, which.

Returns to normal we expect us to return ethanol.

I want to add one thing Joe use the word abate mentioned I think you mentioned $3 million or something like that.

You know, we want to be very carefully or abatements, our anathema to us.

We.

We are.

Collecting our rents we are doing had 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 disk that 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.

Why we do it it's not the policy the companies do it we do with only very very rarely and owning and special circumstances. So what we what we've been doing is collecting cash rents.

On occasion also up fairly small number giving tenants a deferral so that we work with us today.

And.

A collection of that deferral into five in the following yet which is a very short term loan, but abatements I know it I don't want anybody to get the idea that the abatement business, we are not at the base business.

Thanks.

Okay. Thank you have that was helpful. Just.

Second question is going back to Facebook deal.

Did you make any changes to the existing lease it at 770 Broadway.

Glenn we did not correct.

We did not no changes.

Okay. Thank you everyone.

But by the way, but 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.

Can 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.

The refinancing trends 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.

A big expose ourselves to whatever financial opportunities might be there and then we will select what is best for us it's not a prompt you hadn't make decisions.

Right might make a final decision about which have to go down because you're evaluating what the best outcome. This returning 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, we can think about what a refinancing option could could bring in.

The answer is.

Not as much and maybe not even maybe though windier as much.

And then okay that into fault the reason, but at a twofold number one by pipeline, California.

As a very low loan to value mortgage on it 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 not be anywhere near as robust as well.

Okay and then what are the things you talked about in near term letter and helps on the proxy with the whole element of tracking stock where does that ship within all of the strategic priorities today.

It's still very it's still very very much on the table and we'll 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 could 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 glut.

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 going about this health crisis is probably not the perfect.

So right that or 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 in the team are doing well.

Yes, Thanks, Mike a nice to talk to you.

Yes.

Thank you. Our final question comes from Daniel Ismail from Green Street Advisors. Please go ahead.

Great. Thank you.

Given the Facebook lease and other leasing got done this quarter or you could share any noticeable changes and utilization.

Possible.

Trying to be densification by tenants.

Glenn David.

Okay.

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 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 we finalize this quarter.

I have seen no real change in terms of tenants thinking as it relates to space utilization.

Relate to their density there communal spaces, there 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 that I could pinpoint for you too.

I guess, it's David I would just at a couple of other content.

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.

As a major reworking of their spaces.

So you know Daniel realistically, it's way too early to understand exactly how people are going to change their space.

Lastly, on an immediate basis for the tenants who are in occupancy.

Our social distancing its quote every other office every other workstation.

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.

Who is 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, so I'd 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 an accounting treatments.

I think for diagnosis, 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 dive today right your liquidating selling assets today.

Normalized basis, right, where those assets going to.

The value that so.

I was higher than what a few years ago, we still feel.

Yes.

Growth.

Great. Thanks, a lot.

No other questions at this time.

So there are no quite no further questions. So thank you all we appreciate everybody joining us. This morning, we stay safe and healthy we look forward to seeing you still a third quarter 2020 earnings goal will be on Wednesday November four.

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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