Q2 2021 Vornado Realty Trust and Alexander's Inc Earnings Call

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And your lives.

Good morning, and welcome to the Vornado Realty Trust second quarter 2021 earnings call. My name is Hilda and I will be your operator for today's call.

This call is being recorded for replay purposes. All lines are in a listen only mode. Our speakers will address your questions at the end of the presentation. During the question and answer session at that time. Please press Star and then 1 on your Touchtone phone.

I will now turn the call over to 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 website www dot dot.

Com under the Investor Relations section and these documents and during today's call. We will discuss certain non-GAAP financial measures reconciliations of these measures to the most directly comparable GAAP measures are included on our earnings release form 10-Q and financial supplement.

Please be aware that statements made during this call maybe deemed forward looking statements and actual results may differ materially from these statements due to a variety of risks uncertainties and other factors.

Please refer to our filings with the Securities and Exchange Commission, including our annual report on form 10-K for the year ended December 31, 2020 for more information regarding these risks and uncertainties. The call may include time sensitive information that may be accurate only as of today's date. The company does not undertake and beauty to up.

Any forward looking statements.

On the call today from management for our opening and that's all.

<unk>, Steven Roth, Chairman, and Chief Executive Officer, and Michael Franco President and Chief Financial Officer. Our senior team is also president and available for questions I will now turn the call over to Steven Roth.

Thank you Kathy and good morning, everyone. I hope everyone is healthy and continues to be vigilant and gets vaccinated.

Let me say it again, everybody please get vaccinated.

I'll start by sharing a few things that are happening on the ground, which I hope you all find interesting.

The U S economy is resilient is growing I might even say is booming and so as they are.

Financial Tech and almost all of the industries that are achieving record results in New York apartment occupancy, which had dropped to as low as 70%. During COVID-19 is now rapidly climbing back with record numbers of new leases being signed each week and higher and higher rents.

Condo sales, which had stalled during COVID-19 are now active, albeit at discounted pricing, except I'm proud to say at our 220 Central Bloc sales were re sales are at a premium to <unk>.

And our condo demand is coming from folks, who live and work and New York and Thats a very good side.

At 220 Central Park, South where we are basically sold out resale pricing is up and Thats an understatement. A recent spectacular and example, which is now public is it to flow a 12000 square foot resales that traded at a record breaking $13000 per square foot.

Think about that.

Our New York Office Division is now experiencing record incoming rfps and request for tours, including for many large and important occupiers, who had been on the sidelines during COVID-19.

Glen and his and his team are very busy by the way Big tick is now very active looking for more space and the off to take advantage of new York's large highly educated and diverse workforce.

Here's an interesting set of Fortune 100, Occupier household day, and who dropped out of the market during COVID-19 has come back to market.

They were originally looking for 300000 square feet the house 2800 employees.

Post Covid after extensive study and space planning. They know these and are seeking 400000 square feet, a 30% increase to house the same 2800 employees.

And both instances theyre projected and office occupancy is the same 60%.

The fact that this occupier needs, 30% more space post Covid is contrary to all analysts expectations, but that is the fact and we are hearing the same from many although not all but many of our tenants that they will need more space not lifts post COVID-19.

1 of our analysts and our friend recently wrote that our company suffers from Penn fatigue true it took us over a decade to assemble our vast Penn District holdings, but as the saying goes this is our time.

Here's where we stand.

And probably we have delivered to Facebook all of their 730000 square feet tenant work is going full bore.

The west side of seventh Avenue and longer 3 blocks stretching from 31, 3% to 34th Street is now a massive construction site, where we are transforming the $4.4 million square foot Penn 1 and Penn 2 into the nucleus of our cutting edge connected campus.

But for the third and fourth Street Penn with lobby, just opened and our unrivaled 3 level amenity offerings will be completed at year end.

A full building tenant suite transformation includes the bustle and re skilling is 98% without on budget and off to a fast start.

We couldnt be more excited.

Our 14000 square foot sales center on the seventh floor of a pen 1 has now opened to rave reviews from brokers and occupiers.

Busy.

It is the sales office is designed as a dealmaking conference and presentation center with multiple building models and videos and tell our story and a clear persuasive and unique way.

They're working with Glenn and Josh and the sales center the market is understanding our ambitious plans to make the Penn District, the crown jewel of the west side of the New New York.

By the way every quarter and every year the west side is punching way above its weight measured by high and growing leasing share market share of leasing side.

And a sign of our confidence and the market's enthusiasm even at this early day, we are raising our Penn and asking rents.

We will shortly begin demolition of the hotel, Pennsylvania to create the best development site in town.

We expect demolition and shutdown costs to be about $150 million, which you should look at as land cost our book basis and this property today is $203 million.

And we are midstream and the process to make the unique high growth Penn District, a separate investable public securities.

Our best and the business team leaders and the Penn District, or Glen Weiss leasing Barry language development, and Dave and development construction.

Michael will cover our operating results and a moment, but I can say that overall leasing and occupancy districts in New York tell a misleading story.

While overall availability is 18% assets newly built were repositioned since 2000 and has a much lower direct vacancy rate of 11%.

Last quarter, 88% of new leasing activity and Mr wasn't class a products.

And it's clear that the market is voting from new and repositioned assets. As you would expect as you would expect class a assets command higher pricing and then class B and in fact, 1 third higher.

Obviously this is the place to be and you should note that substantially all of our assets repositioned and in this competitive set.

New York is coming back to life residential neighborhoods are bustling less so the commercial canyons, where office utilization is now approximately 23%.

Remember it's August the vacation months, the largest employers and Manhattan mandated returned to work by Labor day or shortly thereafter, some with full staff and office and others with a flexible program, allowing some work from home.

As I have said before I do not believe that the office will be threatened by the kitchen table.

And I do not believe that even 1 or 2 work from home days per week by some number of tenants employees will be a negative to us.

And I for 1 of them and able to predict whether it will take a month or a quarter for office buildings to be back to full up and the canyons to be team and again there is no magic date OLED, Matt is that it will happen soon enough.

Last week, we announced and weapons the Premier grocer and the northeast region is opening its first store in Manhattan, and our 770 Broadway replacing table.

And you can bet that we will do several more Manhattan deals with Reg price.

The fact that wegmans is coming is creating excitement with it at last count 43 print and broadcast press articles celebrating the announced.

Here's an interesting factoid wegmans expects that as much as 50% of its volume will be from and home delivery will be from 2 home delivery.

We will be investing $13 million and Ti leasing commissions and free rent and this long term lease with a 65% GAAP mark to market increase overcame on threat.

This quarter, we announced that we exercised a ROFO to acquire our partner's, 45% interest and 1 Park Avenue and the.

Transaction that values, the building and $870 million.

Just on the in place floating rate loan, we project 18 million <unk> <unk> per share first year accretion.

Last summer, we bought we brought 555, California Street to market for sale and unable to achieve fair value and we withdrew understandable at the height of Covid with travel restrictions and so forth.

And at that time, we said, we refinanced and this past quarter, we did to the tune of $1.2 billion, netting us approximately $467 million at share.

And you can just carry on the new floating rate loan is almost exactly the same as the old much smaller fixed rate loan. So 1 might say the $460 million as free body.

Ironically, I believe continue and continuing to own this outstanding asset with a superb accretive financing is actually a better outcome.

And New York replacement cost is rising price and cost is rising quickly over the best over the past many decades replacement cost with a dip here and there has risen and relentlessly and.

And if passed this program.

Past is prologue replacement cost, we will have that will be continuing to rise as far as the I can see.

Replacement cost has always been a key predictor of future value a rising umbrella lifting all similar real estate values.

And New York is the poster child of this phenomenon.

Here is updated guidance for our retail business with 2021 we guided cash NOI of 135 billion and now halfway through the year, we expect to do a little bit.

'twenty 'twenty, 2 we guided cash NOI of $160 million, which reaffirm.

For 2023, we announced new cash NOI guidance of not list and $175 million.

You should know that.

As expected swatch exercise this termination option for a portion of their space and St Regis, which is effective March 22003.

And with a $9 million termination fees.

And the Swatch, Harry Winston and so will remain on the lease through its June 2031 expiry.

The guidance.

<unk> takes account of the swatch termination.

If I were a betting man and I guess in some ways I am I would bet that we have already put in the bottom and New York that the worst of the best stuff is behind US and net New York will get better and better and so we'll be on real estate and space and.

And our case occupancy rate.

And pricing has bottomed.

Finally, we have a great talented leasing development and operations team all thanks to them.

Thank you now to Michael.

Thank you Steven and good morning, everyone I.

And I will start with our second quarter financial results and then with a few comments on our leasing and capital markets.

Second quarter comparable <unk> as adjusted was <unk> 69 per share compared to <unk> 56 from last year's second quarter and an increase of 13.

We have provided a quarter over quarter bridge for you and our earnings release on page 5 and and our financial supplement on page 7 the increase was.

Driven by the following items.

<unk> from tenant related activities, including commencement of certain lease expansions and non recurrence.

Straight line rent write offs impact and the prior period, primarily Jcpenney and New York and company.

<unk> <unk> from lower G&A, resulting from our overhead reduction program and <unk> from interest expense savings and the start of improvement and our variable business businesses, primarily from BMS cleaning.

Our second quarter comparable results are consistent with the fourth quarter run rate, we discussed at the beginning of the year as is our overall expectation from a full year.

Speaking of our variable businesses, we're beginning to see signs of recovery with a return to normalcy.

<unk> is nearing pre pandemic levels signage is starting to pick up with healthy bookings and the second half of the year, our garages are picking up as well and should be fully back in 2022, and finally, we have a number of trade shows scheduled for the fourth quarter.

Other than hotel pens income, we expect to recover most of the income from our variable businesses by year end 2022 with the balance in 2023.

Companywide same store cash NOI for the second quarter increased by 5.5% over the prior year's second quarter.

Our core and New York Office business was up 3.2%.

Blending and Chicago and San Francisco, Our office business overall was up 2% consistent with prior quarters, our core office business, representing over 85% of the company continues to hold at zone protected by long term leases with credit tenant.

Our retail same store cash NOI was down 6%.

Primarily due to Jcpenney lease rejections and July 2020.

But excluding the impact of JC penney's lease rejection, the same store cash NOI for the remaining retail business was up 9.8%.

Our office occupancy ended the quarter at 91, 1% down 2 percentage points from the first quarter.

This was expected and driven by long expected move out the 350 Park Avenue and 80, 510th Avenue as well as a $25.7 day revenue coming back into service with.

With the activity we have on our pipeline this quarter should represent the bottom floor office occupancy and it should improve quarter by quarter from here.

Retail occupancy was up slightly to 77, 3%.

Now turning to the leasing markets since our last call the pace of office leasing activity and New York City has picked up each successive months.

Vaccination rates high companies are now fully focused on the return to the office with many returning during the summer and a majority of expected back soon after labor day.

Predictably, the overall sentiment and New York continues to improve as companies return and the office market continues to heal.

And the second quarter leasing volume and Manhattan was its highest since the onset of the pandemic and office tour activity has now exceeded pre pandemic levels with more than 11 million square feet of active tenant requirements.

And importantly office using employment and the city continues to strengthen.

And with more than 100000 jobs now recovered we are at 92% of the pre pandemic peak.

While leasing volume during the first half of 2021 was dominated by small to medium sized transactions driven by well capitalized financial services and technology tenants. We are now seeing pent up demand from larger occupiers across all industry types as many have formally entered the market.

There are additional signals that the market continues to soar tenants are now entering into leases with longer terms and asking rents and concessions have stabilized and.

In fact, as Steve alluded to we have recently increased our asking rents and our top tier assets, reflecting the strong demand for best in class assets.

During the second quarter, we signed 33 leases totaling 322000 square feet with 2 thirds coming from new companies, joining our high credit quality portfolio across the city.

The average starting rent of these transactions was a strong $85 per square foot.

The leasing highlight for the quarter was 100000 square feet at Penn 1 and <unk>.

Further validating the market's resounding reception to our redevelopment of this property.

The largest transaction was a new lease with Empire health choice for 72000 square feet. Our main competition here with newly constructed buildings and both downtown and Midtown on.

New dramatic lobbies and pluses and best in class campus amenity program and Premier access to transportation 1 of the day here.

Looking towards the second half of 2021, our leasing pipeline has grown significantly since last quarter with more than 1 million square feet of leases in active negotiation.

<unk> 180000 square feet, and new leasing and 80.510th Avenue.

As well as an additional $1.6 million square feet and various stages of discussion.

This includes discussions with several large users newly interest and intent to after seeing our vision of the experienced zone.

Our activity is a balanced combination of new and renewal deals with.

But the majority of our activity with companies and from a financial technology and advertising sectors.

Our office explorations and very modest for the remainder of 2021 and 2022 with only 976000 square feet expiring and total representing 70 representing 7%.

And out of the portfolio and a 150000 and this square Footages and Penn 1 and Penn 2.

As we look toward our 2023 explorations of 1.9 million square feet of which 350000 and Penn 1 and 2 we are of course already and dialogue and trading paper with many of these companies and anticipate announcing important transactions by year.

Now turning to the Mark and Chicago, where the office market is also showing signs of life and tenant demand is returning coming in and out of the pandemic.

While short term renewal leasing dominated the market. During 2020 activity has picked up with almost 1 billion square feet of new leasing completed during the second quarter low concessions are unusually high.

At the Mart, we completed and 91000 square foot long term office renewals and $18.71, Chicago's Premier technology incubator for entrepreneurs and have an additional 80000 square feet of new deals and negotiation.

2 weeks ago, we produced our first trade show at the margins there were 2020 pre pandemic.

The show and partnership with International Casual Furniture Association featured the largest manufacturers of outdoor furniture on the country and <unk>.

<unk> was 10% higher than the same show produced pre pandemic 2019, and feedback from exhibitors and attendees was very positive.

We have 8 upcoming trade shows calendar during the remainder of 2021, including Neocon on October the largest Joe and North America focus on commercial design.

So we don't expect the tenants to reach 2019 levels this year.

And San Francisco and 555, we are finalizing a couple of small strong leases and our full other than the queue.

Turning to the capital markets now the financing markets are wide open and aggressive for high quality office companies and buildings and we are taking advantage of the low on coupons. It bears repeating that in May we upsized, our 505, California's stream on from $533 million to $1.2 billion with no additional interest cost.

We also reentered the unsecured debt market from the 2 tranche $750 million Green bond offering and a blended yield of 277% there was robust demand for our paper underscoring investor support for our franchise and believe from New York City, We paid off a loan on tomorrow with the proceeds and added the remainder through our treasury.

Finally, our current liquidity is as strong for 49, 2 billion, including $2.317 billion of cash and restricted cash and to $1.75 billion Undrawn under our $2.75 billion revolving.

Credit facilities.

That I will turn it over to the operator for Q&A.

Thank you we will now begin the question and answer session.

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Each caller will be allowed to ask a question and a follow up question before we move on to the next caller.

We have a question from Steven Kwok from Evercore ISI.

Thanks for all the detail I guess the first on the retail figures that you threw out.

And I'm, just curious where does the re tenant in the Jcpenney box and Manhattan mall sort of fit into that.

There is no credit in those.

And as guidance number for any new for any occupancy in that space yet.

And do you have any updated thoughts on just sort of the timing behind that or sort of any sort of initial thoughts on what you want to do with that space.

The answer is we have so we have a few things that were working on nothing imminent.

And I think that's all I really have to say about that today.

Obviously, the rent that Jcpenney was paying us is not realistic and today's market.

And I wouldn't expect that space to be leased and the short term.

Okay. Thanks, and then maybe Michael.

You talked about good activity youre seeing it kind of both Penn 1 and Penn 2.

Could you just maybe give us without getting too specific but can you kind of just give us a flavor for those discussions and.

And what maybe your expectations are in terms of kind of leasing up tend to in particular.

I want to take that sure good morning, Steve It's Glenn.

So we are busier.

Good day at both buildings Penn 1 Penn 2 Penn.

And 1 we have multiple lease negotiations happening now as you know there is no real big blocks, there, but we certainly are putting full floors together and the attraction to the redevelopment has been remarkable the new lobbies open now which has only accelerated the activity people are getting a great now.

Physical field, how great it will be it feels like a brand new building at 10.2.

We have daily presentations at the experience center, we have rfps and the door on certain blocks.

We are feeling great about it.

And we're not rushing on it because we know that it's going to be better as the construction on <unk>. It's early on but we're certainly and the market.

And dealmaking mode, but we're not rushing.

Steve I would just and my 2 cents.

On the proof of the pudding is that we are in the market Glenn and his team and the market every day with this space.

Talking to the brokerage community and 2%.

Active tenants the reaction has been nothing short of the sponsorship.

And our.

And our careers in terms of the receptions as to what's happening first of all of our whole west side and second of all the unique program that we're putting together.

So we are extremely enthusiastic our strategy is.

It is too.

Let a little time pass.

And so we're not and the rush.

Because we have a level on the most important thing that I said with respect to this pad is we are so convicted and.

And we are so enthusiastic and we are sensitive and the marketplace that at the very outset, we are now raising prices.

So you could you can take a lot from that.

Great. Thank you by the way.

And you should put on your construction book boosted come over and see us.

I'll take you up on that thanks.

Thank you the net.

Question comes from Manny Korchman from Citi. Please proceed.

Hey, good morning, its actually Michael Bilerman here with Manny.

Steve you made a comment on pure well, but and you've made a comment on your opening remarks about a fortune 500 company looking at I think you said 300000 square feet.

And how is about 2800 employees and then upon further review they increase their space needs by 30% for the same number of employees.

I think your firm tends to have a little bit lower or smaller of a lease size in terms of leasing and obviously you have a number of bigger tenant.

But on the average lease size is smaller than the 300, how are those medium sized tenant.

Thinking about their space and if so how.

And how often does this situation come up where someone's willing to add 1 more.

And I'll take more space and how are they thinking about the total cost of that.

And just to get to that point.

Glenn is probably more qualified to answer.

And so and then I am but I'll give you my thoughts number 1.

You have to remember that real estate costs for these tenants is 1 of the smallest line items in there and there.

Their P&L.

So.

There are different management teams different perspective, okay. So we went through those we work experience where the whole economics were driving the space per square foot.

The.

Space per cap and of the square footage per capita down from what was 250 square feet per capita before down to as low as a stupid number like 6 okay, well that doesn't work. So a lot of this has to do with what the management philosophy as to how they are going to treat their employees. So number 1 from.

Health point of view that dictates more space per per capita.

Yes.

And in terms of real estate as a recruiting tool, especially in New York. So a lot of that has to do with the management vision as to what they want their space to look like and feel like and what kinds of experience. They want their employees to have so what I'm, saying is just to take a road well, obviously if 10.

People out of 100 and going to work from home that didn't need 10% less space that's not true.

And so I think it's all over the lot, but what im saying is theres, a feeling in the marketplace and the analyst community.

It's a certainty that COVID-19 will.

The work from home will force lower square footage requirements by by the tenant that's not true. Some yes. Many know Glen you have additional thoughts.

Yes, I mean, 1 thing that we've talked about on that and my.

Those remarks as flight to quality and the number 1 a lot of the dealmaking with new tenants or tenant and upgrade to the better buildings with the better landlords and the better location.

With that we are seeing space plans for a review every day in these buildings and.

There has been no day munition in terms of space in terms of desk chair and et cetera, and it's.

Accurately reflect the book, what Steve said, I mean, thats exactly whats going on out there on the <unk>.

No.

Just to add to that 1 other things we're seeing from all the space planners with whom we deal with all of them every day.

<unk> management teams and want more.

Communal space more hangout space more conference space et cetera.

So it's not just low particulate cubical or desk or office, where a and individuals.

Entire package and I don't know.

Believe in most.

<unk>, that's going down and in fact in many cases it may even go up.

And how do you think it plays out because I would say most of the commentary that you're talking about is consistent when we talk to senior management teams of corporations.

CFO those when we talk to the real estate landlords, but when you survey the actual employees across the United States.

And they tell a different story right they want.

And then flexibility how can that not.

At the tail there'll be exceptions, but the bulk of the curve would suggest that.

The vast majority of employees have a different view of how they want to work going forward and how they are in full years, how does that pension and ultimately get resolved.

Well, Michael and you can bet on the employers and employees I'm going to bet on the employers. Okay. I think it gets resolved and different different ways different trends will do different things, but basically.

And I believe and the office is the principal driver of Congress.

And I believe and the office will continue to be.

The core of a business.

Where creativity decisions et cetera are made and I think if I use the phrase the kitchen table I don't think the kitchen table and we're going to be that the office.

And right now there is a very strange phenomenon and that is as folks are out and the hamptons getting full pay and enjoying it and that's not going to continue.

More than another quarter or 2 or 3.

Alright so.

And at some point.

The people who pay their paychecks are going to insist that they're that there that they are getting their team. Their stinkers day creators are back and the office, where they can see them touch them feel.

Correct.

And we'll always be.

And some work from home and work from anywhere on whatever they're always has nobody works a 52 week full 5 day week and the officer everybody.

Everybody has some.

And whatever time, whether or not and the office.

And I believe that this plays out the employer's desire to have their staff and the office will will will carry the day.

Okay and then.

The second question just in terms of the spin off can you just give a little bit more color in terms of where you stand today. When we should expect from filings and secondarily, whether you are at least exploring and private alternatives just given the public markets still.

As shunning office stocks and so.

So is there an opportunity to use private capital or an alternative.

Non public structure to get to where you want to be.

The answer is sure.

We explore all alternatives in terms of creating value every day.

We are.

Midstream.

With respect to the.

The legal and banking et cetera activity to create the.

What I call is a separate tradable public securities. That's the way I like to look at it because I think our shareholders deserve to have the ability to invest and either a menu a menu.

With respect to.

There's a high probability is that that transaction as contemplated will be completed.

You'll know.

We're not going to predict when we're going to file papers.

At the current time.

Other kinds of transactions surfaces.

We will of course.

Study that and consider that as of now they're on.

Our non alternative transactions that we're considering and we're on full speed ahead for the.

Separately tradable securities.

Okay. Thank you.

And by the way price business.

Sure.

Michael I couldnt be more enthusiastic about this idea about the opportunity. Okay. We are fully booked and we have full conviction about the Penn District, and we think what we're doing is something which is going to be totally unique and 1 of the most important developments and the real estate industry countrywide.

And I think that the strategy is.

And as.

Superb strategy.

Thanks.

Thank you. Our next question comes from John Kim from BMO.

Please proceed.

Yes.

Thanks, Good morning.

Steve You mentioned the pen asking rents are trending higher can you provide any color on that as far as the dollar amount or percentage.

And should we view the development yields.

Yes.

John I am sorry, I Didnt hear you.

No that's okay.

You talked about depending on asking rents increasing I was wondering if you could provide some more color on that either the dollar amount or percentage increase and.

And also if we should expect to them and to also increase or should that be offset by higher cost or higher ti.

With respect on the asking rents.

I think that those are published RFA.

Good.

Sure.

They are not published so we're not going to get into a conversation with them, but I can tell you that our conviction is so strong that we are raising our asking prices, which obviously if construction costs are stable will raise yields.

<unk>.

I believe that.

That's the numbers that we have and our supplement in terms of rents at yields.

Are the lowest that they could possibly be extremely conservative and we expect over time.

We do our job right and we will.

And we create the kind of atmosphere that we have created at the Bloomberg Tower. For example, our 220 central blocks out with superbly can see.

Our space for our occupiers the rents will go to a premium to the rest of the market.

We're just at the beginning of this of this adventure.

Okay.

Maybe this is a question from Michael but.

And we're still a few years away from.

And the Penn redevelopment being.

Being stabilized, but can you just remind us of your capitalized interest policy.

Sure.

Floors that are on the east do you expense those immediately or do you capitalize on leased on each floor is until stabilization and until there'll be stops.

And if they're out of service and we're capitalizing the.

Net interest rate and rebrand back and service then we stop that policy. So.

Obviously <unk> is out of service and.

I think we've laid those numbers out in the supplement.

And 1 day is all in service.

So I think thats.

It's pretty straightforward zone.

Okay, great. Thank you.

Thank you. Our next question comes from Jamie Feldman from Bank of America. Please proceed.

Thanks, and good morning, everyone, Steve I want to go back to your comments on Big Tech being very active.

Can you just maybe quantify or just help us understand I mean, we obviously saw a lot of big Tech leasing over the last few years.

How large that pipeline really looks.

And where they may be going and how long do you think it might take to actually see some of these leases come together.

And that's a question for Glen.

Jeremy.

And lastly, we have.

We have all the big Tech, we have Facebook, Apple Amazon and Google.

Obviously in touch with them often as you would expect and.

Theyre, all and mode thinking about expansion and New York as we sit on this phone call and I'm not going to get into specifics on our discussions on what their plans are but I can tell you. The engines are on again and they're worth up to start searching for more space and as there are hiring paces continue.

So just I would be watching for that action is this year. It goes on and Jamie I don't think it's surprising.

Surprise and your voice, but I mean, all you have to do is look at the earnings growth and what what's being produced by Big Tech by medium Tech.

And the Fintech.

These companies are growing significantly.

Significant rates, even despite their size.

And what the law of large numbers sort of as you know historically, that's been difficult to do so.

And they need people engineers sales et cetera to continue to grow their business, whether it's laterally or additionally, vertically and what they are doing already.

And so whether it's big Tech medium Tech New York has continued to be a market of choice for the reasons Steve outlined.

But these companies.

They probably at a 4 month pause and 2020.

They are going gangbusters right now in terms of the earnings growth and they need people look and see how to drive that going forward.

And beyond that.

The.

Big Tech has.

Limited capital.

I mean, if you look at their balance sheets, and net cash reserves and stocks et cetera, They have unlimited capital and.

On the cost of that capital is basically zero.

And they have a limited ambition to innovate and grow and and Vince and they are not shy on spending and investing.

<unk>.

Obviously, they are favorite clients of ours.

And there's a reason for that day.

They believe and New York.

They love the size of New York and scale of New York, the ability to open up space and hire 3000 engineers and 1 year, we can't do that hardly any place else.

And they love the <unk>.

Education and <unk>.

And importantly, and interestingly they love the diversity of the population.

Thank you.

How should we think about this basically just lease I guess they already feel like it is.

And they have enough heads to fill those seats or.

It's just all about the 10 year view at this point and get what you can while you can.

I don't know look.

Anecdotally 1 of our big Tech customers.

Complained.

Recently that in a certain city not in New York, having trouble.

On the seats.

And they are upset about that we have not heard that and New York, New York has a large workforce and they are.

Very happy with it.

So if you think about it.

And the last.

Year on the half or so it was about 3 million square feet.

Check lease something like that.

So if you take a.

200 square foot curve.

Capital, what does that 4500 employees.

The numbers are large and the beauty and New York is it has the scale to satisfy their aspirations.

So the answer is theyre growing theyre hiring and.

And they are going to continue to do that.

Okay. Thank you and then secondly.

You talked about occupancy bottomed bottoming rents bottoming I mean can you give us a sense of where you think the occupancy trajectory goes for New York Office.

And then Jamie and I don't know if you want to give you a specific projections and b.

True.

And 20 basis points here and there, but this is clearly the bottom line.

Just a matter I mean again, we talked about pipeline it is significant.

Much higher than it was last quarter.

And I'd say significant on an absolute basis and it just depends on when Glenn and his team finalized the lease right. So.

The number could be it.

It could be 2 points higher it could be 1 point higher at the end of the year. It just depends on time, but I think the punch line is we raised the bottom.

See meaningful improvement based on whats in the queue and whether it happens this quarter net core of the following quarter.

<unk> line will be up on.

I'll give you my.

Opinion as to where this goes if you look at our occupancy rates over a 20 year period.

We are almost always at 97% or maybe even on a pinch higher okay.

Free once in a while over that 10 year cycle, we dipped down a little bit.

And there is generally reasons for that.

This case.

Have a building and transition at 350 Park Avenue.

Have a building and transition.

And 80.510th Avenue.

And both of those instances we are talking to.

Enough.

And that prospects.

It's still double the amount of space that is vacant there or more so my expectation is we are going to go back to the 97 plus percent occupancy rate right that we always carry it's just a matter of whether it takes a year or 2 years, that's where we're going.

Okay, great. Thanks for everyone's thought.

Thank you. Our next question comes from Alexander Goldfarb from Piper Sandler.

Good morning.

Thank you good morning, Steve Good morning, Michael.

So 2 questions and actually Steve you just.

Just sort of recast and the question I was going to ask I was going to ask you. If you still believe in Manhattan, and tilting to the south and the west given the resurgence of Midtown Grand Central Obviously, you guys bought 1 park, but to Jamie's question you just.

Talked about 350 park and Thats tenants to double the demand. So I guess wrapping up because you know I'd like to ask about $3.52, you see Midtown the Grand Central market, returning as the dominant sub market.

Do you still believe that.

Mid that New York is still tilting to the south and to the and to the west.

I like the phrase that I invented some years ago that predictive trades.

Totally.

I think thats still the case, notwithstanding New York is a great Miss.

<unk> wonderful place okay.

And so.

Park Avenue South.

Which is what we call the district, Midtown South so Midtown south.

A smaller but very highly sought after stock market.

And there is not going to be any new construction there and.

And then for Gary.

It's a great sub market with lots of culture, and lots of extra and lots of grid.

And it will do just fine.

I think would you characterize some 70 Broadway as part of our market share. So I think we own the premier building and that Submarket 770, Broadway, which is now the home of Wegmans and of course Facebook.

So now let's go to.

Conventional Midtown Park Avenue.

Has been a stepchild for a while.

Over and tighter and.

That is now changing aggressively park Avenue is going to reclaim its role as the great Boulevard of Commerce and the world. So we have JP Morgan Chase tearing down a building and rebuilding it with a stupendous headquarters building, which we're familiar with because they're using normal force.

And so we have and their plans to publish we own the adjacent building to that 280 Park Avenue.

And which we're very enthusiastic about there are 2 other potential.

And there is another brand new force the building up at 40.

50 <unk> Street.

2 more teardowns and rebuilds that are going to happen Park Avenue.

Park Avenue is going to become what it always should be at that day, 3 and their full of other partners. So all of these what the city is not going to be segregated into 1 or 2 submarkets all submarkets and go to do well, we believe that on a relative basis.

And.

And in Midtown West.

Market depends the Penn District market, we will do on a relative basis better than the others.

And we will grow faster and the others and we will have higher demands and the others and the statistics as I said about market share. If you look at how much leasing is done and each district compared to our margin district is up.

And district wins that range, but everything and New York is going to thrive except for the really crop buildings and there are plenty of them.

And Steve you still feel confident on your on your bet on Penn station and winning the race over Grand Central even after the opening of east side access, which Eastside access obviously would be great for $2.83 for $3.50, and your other neighboring buildings, but you still think east side access will eat into Penn station.

No I think it's I think I think the look.

Yeah.

You can look and all kinds of negative issues.

On station.

Penn station has always been.

The transportation hub of this region.

100 years, Okay all other.

<unk> networks.

Hi.

And all the spiderweb of transportation from.

The 300 agreements.

And 2 Penn station and Thats the way its designed now obviously theres going to be.

And central there's not nothing.

And but.

It will be fine there will be plenty of there'll be plenty of business and Penn station.

And a relative race with Grand Central and Grand Central and it's going to be fine. We think penetration is going to be a little.

Okay.

Okay.

And then the question from Michael.

And.

And I don't by the way.

Hang on hang on hang on Alice Baidu core first if there isn't it is and then.

Enormous amount of public capital that is being invested and patent now.

And I'm sure you've seen the Moynihan improvement, which is of course ours all the adjacent.

I think the retail et cetera, and I'm sure.

Sure you couldnt be more aware of the Gateway project, which is the massive infrastructure project and on.

Im sure Youre also aware of the plans to expand Penn station package at <unk>.

Which means capacity to the south which is I mean, these are huge infrastructure projects, which are 10 year projects and take 10% of billions of dollars and.

I can tell you that.

The government's focus is on pet.

So we believe and Penn and.

That doesn't mean that grand central and isn't going to drive as well.

And we hope it will.

Okay.

Next question is from Michael on second quarter, you guys Handedly beat the Street estimates and I'm, just sort of curious in that second quarter number and Steve you back to the guidance I did see guidance, but maybe I just missed it lack of coffee.

Michael is there.

And what is 1 time and the second quarter and what is.

And sort of sustainable steps. So as we think about that 80% number how much of that is the go forward number and how much of that was just sort of either 1 time rent collections are 1 time true ups, so whatever that would not repeat.

I think well.

Any sense, obviously includes the gains from 220, so let's look at clinical growth.

And <unk>.

Which is up.

13% from last year, obviously that benefited from not having the occurrence of the straight line write offs principally from tenant in New York and company.

But we had rent commencement at several assets, which were positive so yes.

As we've said.

The run rate.

Basically flows from force, we're a little bit better will go worse.

And overall.

And is consistent out.

And so I think it's I think that's the right thing to model for the remainder of the year. Obviously the trend lines are getting a little better but as we sit here today.

We're not we're not prognosticating doing better than that yet.

But I think I think.

The short answer is notwithstanding Australia and write offs there were enough other positives that picked up on those things. So on a run rate basis, I think thats all pretty good numbers.

And then.

There was a piece of paper that went over the Mike you said run rate something about fourth quarter, but it was muddled.

Did you say you're targeting.

Yes.

So and then on my.

And my comment was.

And when we started the year with the fourth quarter of 'twenty was a decent run rate and for the entire year of 2021, and we still think Thats the case.

Okay.

And thank you.

Thank you.

Thank you. Our next question comes from Vikram Malhotra from Morgan Stanley.

Thanks, so much good morning, everyone.

Maybe just first on all the leasing activity that you've done over the last call. It 12 months or so can you give us a rough estimate of the NOI contribution from leases signed but not commenced.

We don't have those numbers at our fingertips, Vectren and we'll have to come back on that.

Okay, no worries and.

I wanted to dig into.

Just comments about the AAV, Dubai, if not be on quality versus.

More tired building and.

And Steve I guess I wanted to get a sense of how you see that divide playing out in terms of.

Rents and <unk> and specifically for the vornado portfolio and towards the very small proportion.

But if you were to guesstimate sort of what proportion today would you need to spend.

<unk> capex dollars to kind of get them up to speed and that <unk>.

Right.

I think what Youre, saying is.

How do we have any b buildings and.

And if so how much is going to fix that and the answer is we have none.

And and.

And maybe we have 1 little space 1 of those places there, but it's so de Minimis I can't even put a number on.

And then on a program we've been on a program and that started with David Greenbaum and Glenn.

15 years ago.

And <unk>.

Reposition all of our inventory so that its first class.

And <unk> and.

Surrogate for new and when I say reposition lobbies physical appearance and mechanical systems elevators.

Kicked on tech.

On service et cetera. So we don't have any buildings that we're not proud of.

Okay, Great and then just sorry, 1 clarification on the 2.

2020 free speech retail initial number that you provided and that obviously includes.

Rent bumps and rent bumps, but does it include a specific occupancy for the street retail portfolio or is that just existing portfolio and cash rents converting to cash.

With Tom.

So it includes leasing up some vacant space that we have today Vikram and it also includes the Farley retail, which would be something that we don't have and service today, but it's a very small amount of the faulty retail so it's.

If you include the primary retail that would mean, it's not really a same store number because we're adding and new space.

The amount of.

Almost the vast majority of it.

The vast majority of it the huge majority of it is basically same store sales.

Please turn on okay, great. Thanks, so much.

Thank you Youre welcome.

Yes.

Thank you.

Our next caller is net.

Uli <unk> from Scotia Bank.

Thanks, This is Josh Brown and NEC.

It's hard to estimate but based on what Youre hearing from your tenants about returning to the office after labor day, what's your expectation for office utilization after labor day, and what would you consider to be a bull case scenario.

I think I said in my remarks spreads.

I for 1.

I can't answer that question.

All of the conference calls that I've listened. So is all of by my Pals have all come up with a number and very strong conviction about this is going to happen by a certain date I have no idea there is no magic date.

Well I think I said in my remarks, and I'll say it again and.

Is that it may take.

On a quarter it may take 2 quarters whenever it is we believe from talking to our tenants.

Normal work.

Our head count normal work population and normalcy will return and I, just can't predict nor does it make sense to try to predict.

When that will happen exactly I believe that New York will turn towards robust bustling sales somewhere in the shorter term.

Okay, and then you mentioned that you are betting on the employers rather than employees when you're figuring out the return to office. So I'm curious what do you think about the department of Justice ruling that businesses can mandate vaccinations for their employees and how do you think that impacts the return to office.

I think thats, a very complicated question, which goes to both low and ethics.

And.

I think each company is going to have.

Basically the extension of that is if youre not vaccinated you're fired.

That's a very interesting situation.

And I really don't want to get into what our policy will be with respect to the hour.

And.

Employee so we cherish.

Or what the market is going to do I don't think Thats a question from me.

Okay. Thanks.

Thank you we have a question from Daniel Ismail from Green Street. Please proceed.

Great. Thank you.

And back to rents.

You mentioned raising rents upon district, and a couple of times I'm just curious on a net effective basis are those rents and faster pre COVID-19 levels or is there still some discounts.

And the Penn District, we are coming off 50 and $60 rents.

So and I think our.

Our guidance and our <unk>.

<unk> and somewhere in the $90 number.

So obviously, we are budgeting and Penn 1 and Penn 2 which is the better part of $4.5 million feet that theres going to be a $30 a foot uptick.

And that's what justifies the expenditure of the capital expenditure and also that creates the nucleus of our district.

We believe that we will achieve those budgeted numbers and more so.

So I think Thats your answers were not pre COVID-19 numbers were actually it's not relevant because the pre COVID-19 number.

And the old building, we're talking about the new buildings I would just add to Steve's comment Dan and I think we're going to as our expectations for Pat.

If you look on our aspirations free COVID-19 right. They are.

<unk> are higher than where they were right and I think the comments on raising rents reflect the market's reception to those and so.

We are more bullish today than we were if you'd go back free Covid, let's talk about it a little bit.

Our strategy is that we have a unique.

Huge.

6.810 block.

A collection of assets a property.

And that surrounds.

The most of and checkpoint and transit hub and the city actually and in the country.

Our strategy is that we know from the web.

Developers and we're not just.

Owners with developers and our strategy and creating assets and.

And redevelop our assets is is that quality.

Is something that the market is willing to pay for and appreciates.

If you look at 2 very prominent examples of what we have done as a business the Bloomberg building.

Which we did which I did some years ago is extraordinary and it's 15 years into it and it still is cutting edge in terms of the user experience and that building by the way a lot of that has to do with Mike and sell through.

Very stripe and <unk>.

And design.

Extraordinary go to 2000, and central Bloc sales, where we have achieved something that nobody ever thought could possibly be achieve based upon the quality of the offering that we have given if you go into the 2 Penn and lobby, which just opened 2 weeks ago I'm, sorry, the 1 pet lobby and its only half open.

Whatever you could begin to see what the environment that we're creating which we think is unique and we know because the brokers tours and occupiers stores already that the marketplace and respects.

Understands what we have done so we think that that has an enormous effect.

Our ability to develop our vision to develop.

On the value of the assets that we are creating theres more.

We also believe in multiple buildings.

And clusters of buildings.

So that we can offer the tenant.

And.

Uniqueness that he can't get by going into a single building I've said this before and I would like to say it again.

On a 300000 foot tenant and a 600000 foot building is dead.

That tenant and what's another 100000 square feet and he is going to have to move out to move 5 blocks away and <unk>.

Our complex, which was eventually grow to 10.12, maybe even 15 million and seeing that 300000 square foot tenant Glenn will always be able to provide that tenant with what he needs.

And our complex so the cluster of buildings interconnected above ground and below ground is what creates the district creates the uniqueness and we believe will command a premium and the marketplace.

Great. That's all I can say the other probably Steve.

And just maybe taking a step back bigger picture for 4 New York You mentioned a few times the.

And the difference between higher quality and lower quality office buildings.

And mentioned New York has.

Our fair share of older property property.

You think happens to those office buildings.

Do they get Redeveloped and do they stay on buildings 1 of the launch of <unk> for those other properties.

I think the first.

Part of that answer is it depends entirely upon the owner.

So if the owner is a single owner or a.

Or whatever without the resources of the organization divisions on the capital the building is going to stay.

A crap building and.

And it will find its own market at much lower rents.

And of course that owner may or may not be able to provide ti's and may or may not be able to keep the building and good repair and so a lot.

It depends upon on the owner.

And.

Is that if the owner is a sophisticated.

Firm and a large owner of multiple buildings eventually over time, the buildings will be tear downs and there'll be new buildings or whatever or they will take the buildings and make them. So that they are fit to be leased at decent Reds below the class a umbrella.

Sure.

If you get a.

Halfway decent building with a sophisticated capable owner with an organization and the capital base. They will always be a low discount rental market for those buildings. So that's it.

Complicated thing I don't know the great locations.

And the great pieces of land underneath those b and C buildings will over time and I'm talking about 20 years be bought up by developers and will be teardowns.

And will not be a huge number of those.

There'll be 1 or 2 of those every couple of years.

Okay I understand.

Yes.

Yes go ahead go ahead operator.

And.

Does that answer your question.

Hey, Doug Thanks, Steve.

Thank you.

No further questions at this time I will turn the call over to Mr. Steven Roth for final remarks.

Well, thank you everybody.

<unk>.

Our whole management team is in the conference room.

And in person on this call.

We enjoyed these calls we learn from them both in terms of preparation for the core and the questions that you all ask so we thank you for that I'll say again, what I said and the beginning of the core was we wish everybody good health.

And they villager get vaccinated.

And we will see you for the next quarter call. Thanks very much.

Thank you ladies and gentlemen, this concludes today's conference.

And for your participation you may now disconnect.

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And.

And.

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