Q2 2021 Vornado Realty Trust and Alexander's Inc Earnings Call
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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 in 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 maybe accurate only as of today's date. The company does not undertake a duty to us.
Any forward looking statements.
On the call today from management for our opening for us.
<unk>, Steven Roth, Chairman, and Chief Executive Officer, and Michael Franco President and Chief Financial Officer, Our senior team. That's 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.
The body 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 new York finish.
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 at higher and higher rents condos.
Condo sales, which had stalled during COVID-19 or no active, albeit at a discounted pricing, except I'm proud to say at our 220 Central Bloc sales were re sales are at a premium to <unk>.
But on condo demand is coming from folks who live and work in New York and Thats, a very good side.
At 220 Central Bloc sales, where we are basically sold out resale pricing is up and Thats an understatement. A recent spectacular 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 team are very busy by the way Big tick is now very active looking for more space in 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, who dropped out of the market during COVID-19 has come back to the market.
They were originally looking for 300000 square feet the house 2800 employees.
Post Covid after extensive study on space planning. They know these and are seeking for 400000 square feet, a 30% increase to house the same 2800 employees.
In both instances theyre projected in office occupancy is the same 60%.
The fact that this occupier needs, 30% more space post Covid is contrary to all analysts expectations.
That is the fact and we are hearing the same for many although not all but many of our tenants that they will need more space not list 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 that tenant work is going full bore.
The west side of the seventh Avenue, along the 3 blocks stretching from 31st Street to 34th Street is now a massive construction site, where we are transforming the for 4 million square foot Penn 1 and Penn 2 into the nucleus of our cutting edge connected campus.
But for the 34th Street Penn with lobby just opened at our unrivaled 3 level amenity offerings will be completed at year end.
A full building tenant soon transformation, including the bustle and re skilling is 98% for without on budget and off to a fast start.
Couldn't be more excited.
Our 14000 square foot sales center on the seventh for more of a pen 1 has now opened to rave reviews from brokers as occupiers.
It's busy.
It is the sales office is designed as a dealmaking conference in presentation Center with multiple building models and videos to tell our story at a clear persuasive and unique way.
After working with Glenn and Josh on 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 every year the west side is punching way above its weight measured by high end growing leasing share market share of leases side.
And a sign of our confidence in the markets enthusiasm even at this early day, we are raising our asking rents.
We will shortly begin demolition of the hotel, Pennsylvania to create the best development site in town.
We expect demolition and shutdown cost to be about $150 million, which you should look at as land cost our book basis. In this property today is $203 million.
And we're midstream on the process to make the unique high growth Penn District, a separate investable public securities.
Our best in the business team leaders in the Penn District, or Glen Weiss leasing Barry language development and David for development construction.
Michael will cover our operating results for the 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 have a much lower direct vacancy rate of 11%.
Last quarter, 88% of new leasing activity in Midtown wasn't class a products.
It's clear that the market is voting for new and repositioned assets as you would expect as you would expect class a assets command higher pricing on that class B in fact, 1 third higher.
Obviously this is the place to be and you should know 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 Kenyans where office utilization is now approximately 23%.
Remember it's August the vacation months.
The largest employers in Manhattan have 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 the tenants employees will be a negative for us.
I for 1 I'm unable to predict whether it will take a month or a quarter for office buildings to be back.
Full up on the canyons to be teaming again, there is no magic date, all that Matt is that it will happen soon enough.
Last week, we announced the weapons the premier grocer in the northeast region is opening its first store in Manhattan at 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 in home delivery will be from 2 home delivery.
We will be investing $13 million in Ti leasing commissions on free rent in 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 in 1 Park Avenue net.
Transaction that values the building at $870 million based.
Based on the in place floating rate loans, we project 18 million <unk> <unk> per share first year accretion.
Last summer we bought we brought 555, California Street, the market for sales and unable to achieve fair value. We withdrew understandable at the height of Covid with travel restrictions and so forth.
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.
The interest carry on the new floating rate loans is almost exactly the same as the old much smaller fixed rate loans.
So 1 might say the $460 million is free money.
Ironically I believe continued continuing to own this outstanding assets with a superb accretive financing is actually a better outcome.
In New York replacement cost is rising price on cost is rising quickly over the best over the past for many decades replacement cost with a dip here on there has risen relentlessly and if passed this program.
Past is prologue replacement cost will have that will be continuing to rise as far as the eye 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.
He was updated guidance for our retail business for 2021 we guided cash NOI of 135 billion and now halfway through the year, we expect to do a little bit.
But.
For 2022, we guided cash NOI of $160 million, which we affirm for.
2023, we announced new cash NOI guidance of net list of $175 million.
You should know that as expected swatch exercised its termination option for a portion of their space at St Regis, which is effective March 22003.
With a $9 million termination fee.
The Swatch, Harry Winston still remain on the lease through its June 2031 expiry.
The guidance.
Above 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 in 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 in space.
Our case occupancy rates and.
And pricing have bottomed.
Finally, we have a great talented leasing development and operations team all thanks to them.
Thank you now for Michael.
Thank you Steven good morning, everyone I.
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 for last year's second quarter, an increase of 13.
We have provided a quarter over quarter bridge for you in our earnings release on page 5 and in 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 in the prior period, primarily Jcpenney in New York <unk> Company.
<unk> <unk> from lower G&A, resulting from our overhead reduction program and <unk> from interest expense savings and the start of improvement in our variable business businesses, primarily from BMS Queen.
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 for the 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 in 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 second quarter.
Our core New York Office business was up 3.2%.
Blending in 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 its own protected by long term leases with credit tenants.
Our retail same store cash NOI was down 6%, primarily due to jcpenney lease rejections on 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 outs of 350 Park Avenue 80, 510th Avenue as well as a $25.7 day Avenue coming back into service with.
With the activity we have on our pipeline this quarter should represent the bottom for 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 in New York City has picked up each successive months for the <unk>.
<unk> rates high companies are now fully focused on the return to the office with many returning during the summer and a majority expected back soon after labor day.
Predictably, the overall sentiment and New York continues to improve as companies return in the office market continues to heal.
The second quarter leasing volume in 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.
Importantly office using employment in the city continues to strengthen.
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 for longer terms and asking rents and concessions have stabilized.
In fact, as Steve alluded to we have recently increased our asking rents in 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 on these transactions was a strong $85 per square foot.
The leasing highlights for the quarter was 100000 square feet at Penn 1 for.
Further validating the market's resounding reception to our redevelopment of this property.
The largest transaction was annuities with Empire health choice for 72000 square feet.
Our main competition here with newly constructed buildings in both downtown and Midtown.
Our new dramatic lobbies implies is 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, including 180000 square feet on new leasing at 80.510th Avenue.
As well as an additional 1.6 million square feet in various stages of discussion.
This includes discussions with several large users newly interest and intent to after seeing our vision of the experience.
Our activity is a balanced combination of new and renewal deals.
With the majority of our activity with companies from a financial technology and advertising sectors.
Our office explorations of very modest for the remainder of 2021 and 2022 with only 976000 square feet expiring in total representing 70, representing.
7% of the portfolio.
150000 of this square footage is in Penn 1 and Penn 2.
As we look toward our 2023 explorations of 1.9 million square feet of which 350000 is in Penn 1 and 2 we are of course already in dialogue and trading paper with many of these companies and anticipate announcing important transactions by year.
Now turning to the Mart in Chicago for the office market is also showing signs of life and tenant demand is returning coming 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 March we completed a 91000 square for long term office renewals at $18.71, Chicago's Premier technology incubator for entrepreneurs and have an additional 80000 square feet of new deals on negotiations.
2 weeks ago, we produced our first trade show with a March since there were 2000 Twenty's prepaying debt.
The show in partnership with International Casual Furniture Association featured the largest manufacturers of outdoor furniture on the country.
Tennant's 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 in October the largest show in North America focus on commercial design. So.
So we don't expect the tenants to reach 2019 levels this year.
In San Francisco at 505, we are finalizing a couple of small strong leases in 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 in buildings and we are taking advantage of the low oil on coupons. It bears repeating that in May we Upsized, Our 555, California Street loans from $533 million for $1.2 billion with no additional interest cost.
We also reentered the unsecured debt market for the 2 tranche $750 million Green bond offering at 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 the loan on the market 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 from to $1.75 billion Undrawn under our $2.75 billion.
Revolving credit facilities.
That I will turn it over the operator for Q&A.
Thank you we will now begin the question and answer session.
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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.
Curious where does the re <unk> of the Jcpenney box in Manhattan mall sort of fit into that.
There is no credit in those.
In those guidance numbers 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 for what we have.
A few things that were working on nothing imminent.
And I think that's all I really have to say about debt today.
Obviously, the rent that Jcpenney was paying us is not realistic in today's market.
I wouldn't expect that space to be leased in 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 in.
What maybe your expectations are in terms of kind of leasing up 10, 2 in particular.
I want to take that sure good morning, Steve It's Glenn.
So we are busier.
Every day at both buildings Penn 1 Penn 2.
Penn 1 we have multiple lease negotiations happening now as you know there is no real big blocks, there, but we certainly are putting full force together and the attraction to the redevelopment has been remarkable 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 that the experience center, we have rfps in the door on certain blocks, we are feeling great about it.
By the way, 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 in the market we're in.
Making mode, but we're not rushing.
Steve I would just add my 2 cents.
I mean, the proof of the pudding is that we are in the market Glenn and his team is in the market every day with this space.
Talking to the brokerage community to perspective prospective tenants. The reaction has been nothing short of the Spanish Inc.
As seen in our.
In our careers in terms of the reception for as to what's happening first of all the whole west side and second of all the unique.
Graham that we're putting together.
So we are extremely enthusiastic our strategy is low.
It is too.
Let a little time pass.
And so we're not in a rush.
Because we have a level the most important thing that I said with respect to Japan is we are so convicted.
And we are so enthusiastic and we are sensitive to the marketplace debt 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.
No you should put on your construction book growth has 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 have you made a comment in your opening remarks about a fortune 500 company looking at I think you said 300000 square feet.
How 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 obviously you have a number of bigger tenants.
But on average lease size is smaller than the 300, how are those medium sized tenants.
Thinking about their space and if so how.
How often does this situation come up where someone's willing to add 1 more.
I'll take more space and how are they thinking about the total cost of debt.
Just to get to that point.
Glenn is probably more qualified to answer.
Answer than than 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.
Their P&L.
So book.
There are different management teams different perspective, okay. So we went through the rework experience, where the whole economics were driving the space per square foot per.
The.
Space per capita the square footage per capita down from what was 250 square feet per capita before down to as low as a stupid number like.
Okay, well that doesn't work so a lot of this has to do with what the management's philosophy as to how they're going to treat their employees number 1 from a health point of view that dictates more space per for.
Per capita.
Yes.
Yes.
In terms of real estate as a recruiting tool, especially in New York. So a lot of that has to do with the management's 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, <unk> going to work from on the nearly 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 debt COVID-19.
The work from home will force lower square footage requirements by the tenants.
It's not true some yes, many know Glenn you will have additional thoughts.
Yes, I mean, 1 thing that we've talked about on the.
On Michael's remarks, as flight to quality as the number 1 a lot of the dealmaking with new tenants are dependent on the upgrade to the better buildings with the better landlords in the bedroom location.
With that we are seeing space plans for a review every day in these buildings.
There has been no dimunition in terms of space in terms of debt sharing et cetera, and it's exactly reflects the book what Steve said I mean, that's exactly what's going on out there on the growth.
Now 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.
Is management teams want more.
Communal space more hangout space more conference space et cetera.
So it's not just for particular cubical or desk or office, where a individual sits it's the entire package I don't believe in most cases thats going down in fact in many cases it may even go up.
Thank you for how do you think it plays out because I would say most of the commentary that you are 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.
They tell a different story right.
On.
And then for flexibility how can that not at all.
The tail there'll be exceptions, but the bulk of the curve would suggest that.
On the vast majority of employees have a different view of how they want to work going forward and how their employers how does that tension ultimately get resolved.
Well, Michael you can bet on the employer 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.
I believe in the office is the principal driver of Commerce.
And I believe 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 is going to be that the office.
Right now.
There is a very strange phenomenon and that is as folks are out in the hamptons getting full pay.
And enjoying it that's not going to continue for.
For more than another quarter or 2 or 3.
Alright, so on.
At some point.
The people who pay their paychecks are going to insist that their debt. There is that they are getting their team. Their stinkers day creators are back in the office, where they can see them touch them feel.
Now there will always be.
Some work from home or work from anywhere on whatever Theyre always has nobody works a 52 week full 5 per day weekend everybody.
Everybody has some.
Whatever time, where they're not in the office.
I believe that this plays out the employer's desire to have their staff and the office will will will carry the day.
Okay.
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 private alternatives just given the public market still.
As shunning office stocks.
So is there an opportunity to use private capital or an alternative.
Non public structure to get to where do you want to be.
The answer is sure.
We explore all work for 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 in either a menu a menu.
With respect to.
There's a high probability is that debt transactions 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, Inc.
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.
But separately tradable securities.
Okay. Thank you.
And by the way this line.
Sure.
Michael I couldnt be more enthusiastic about this idea about the opportunity. Okay. We are fully convinced that we have full conviction about the Penn District, We think what we're doing is something which is going to be totally unique and 1 of the most important developments in the real estate industry country wise.
And I think that the strategy is.
As for.
Deferred strategy. Thanks.
Thank you. Our next question comes from John Kim from BMO.
Please proceed.
Yes.
Thanks, Good morning.
Steve you mentioned, depending on asking rents are trending higher can you provide any color on that as far as the dollar amount or a percentage.
And should we be.
Yields.
Yes.
John I am sorry, I Didnt hear you.
No that's okay.
You talked about the patent asking rents increasing I was wondering if you could provide some more color on that either the dollar amount or percentage increase.
And also if we should expect on the deal to also increase or should that be offset by higher costs for higher Ti.
With respect on the asking rents.
I think that those are published RFA.
They are there.
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 in our supplement in terms of rents at yields.
Are the lowest that they could possibly be extremely conservative and we expect over time, if we do our job right and we will.
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 for Michael but.
We're still a few years away from.
The Penn redevelopment being.
Being stabilized, but can you just remind us of your capitalized interest policy.
Sure.
Or is it are on lease do you expense those immediately or do you capitalize on leased on these floors until stabilization until there'll be stops.
I mean, if they're out of service and we're capitalizing the debt.
Debt interest rate, we bring them back in service then we stopped that policy. So.
Obviously <unk> is out of service.
I think we've laid those numbers out in the supplement.
N..1 today is all in service.
So I think that I think.
It's pretty straightforward.
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, just how large that pipeline really look.
And where they may be going and how long you think it might take to actually see some of these leases come together.
That's a question for Glenn Hi, Jeremy.
We have all how.
How're you doing we have all the big Tech, we have Facebook Apple Amazon Google.
Obviously in touch with them often as you would expect.
And they are all on mode.
Expansion in New York as we sit on this phone call on that.
Not going to get into specifics on our discussions on what their plans are but I can tell you. The engines are on again on their worth up to start searching for more space and there are hiring pieces continue.
So just I would be <unk>.
Watching for that action as this year goes on.
Amy I don't think it's surprising.
Since surprised on your voice, but I mean, all you have to do is look at the earnings growth on what what's being produced by Big Tech by medium Tech.
On a fintech.
These companies are growing at significant rates, even despite their size.
The law of large numbers sort of as you know historically.
Eric we 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 theyre 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 had a 4 month pause in 2020.
Going gangbusters right now in terms of the earnings growth and they need people to continue 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 the stocks et cetera, They have unlimited capital.
And the cost of debt capital is basically zero.
And they have a limited ambition to innovate and grow and event and they are not shy on spending and investing so on.
Obviously, they are favorite clients of ours.
And there's a reason for that day.
They believe in New York.
They love the size of New York for scale of New York, the ability to open up space on hire 3000 engineers in 1 year, you can't do that hardly any place else.
They love.
Education.
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.
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 book.
Anecdotally 1 of our big Tech customers.
<unk>.
Recently that in a certain city, New York, having trouble filling the seats.
And they are upset about that we have not heard that in New York, New York has a large workforce.
And they are very happy with it.
So if you think about it.
<unk>.
In the last year, the half or so it was 1.3 billion square feet of Big Tech lease something like that.
So if you take.
A 200 square foot per.
For capital what is that 2500 employees. So the numbers are large and the beauty of the New York is it has the scale to satisfy their aspirations.
So the answer is theyre growing theyre hiring.
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.
On the Jimmy like I don't know if we wanted to give you a specific projections.
Be off by.
10 to 20 basis points here or there, but this is clearly the bottom line.
It's just a matter I mean again, we talked about pipeline it is significant much.
Much higher than it was last quarter.
I would say significant on an absolute basis and it just depends on when Glenn and his team finalized the lease.
So.
The number could be it.
It could be 2 points higher it could be 1 point higher at the end of the year 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 score 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%, maybe even on a pinch higher okay.
Once in a while over that 10 year cycle, we dipped down a little bit.
And is generally reasons for that.
This case.
Have a building in transition at 350 Park Avenue.
Have a building in transition.
On 80, 510th Avenue.
And both of those instances we are talking to.
No.
Not prospects.
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.
Okay.
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 the question I was going to ask I was going to ask you. If you still believe in Manhattan tilting to the south on 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 enough tenants to double the demand. So I guess wrapping up because you know I'd like to ask about $3.52, you see Midtown Grand Central market, returning as the dominant sub market.
Or do you still believe debt.
Mid debt, 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 that didn't book is tilting.
I think thats still the case, notwithstanding New York is a great.
Mysterious wonderful place okay.
<unk>.
Park Avenue South.
Which is what we call that district, Midtown South so Midtown south.
A smaller but very highly sought after submarkets.
It can be any new construction there.
And it could vary.
<unk> sub market with lots of cultural muscle fixture of our grid.
And it will do just fine.
<unk>.
I think would you characterize some 70 Broadway as part of our market share. So I think we own the premier building in that Submarket 770, Broadway, which is now the home of Wegmans and of course.
This book.
So now let's go to.
Conventional Midtown Park Avenue.
Has been a step channel for a while.
Over a tighter and that is now changing aggressively park Avenue is going to reclaim its role as the great Boulevard of Comverse for the World. So we have JP Morgan Chase tearing down a building and rebuilding it with a stupendous headquarters building.
Which were familiar with because they're using normal for us, but so we have on their plans have been accomplished we own the adjacent building for that 280 Park Avenue.
We're very enthusiastic about there are 2 other potential.
Another brand new for Us for building up at 40, 50 <unk> Street to.
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 Boulevard Congress. So all of these for the city is not going to be segregated into 1 or 2 submarkets. All submarkets are going to do well, we believe that on a relative basis.
Sure.
Midtown West.
Market depends the Penn District market, we will do on a relative basis better than the others.
And we will grow faster than the others and we will have higher demand for the others on the statistics as I said about market share. If you look at how much leasing is done each district of bad debt.
How large a district is the Penn district wins net rate, but everything in New York is going to thrive except for the really crop buildings and there are plenty of debt.
And Steve you still feel confident on your on your bet on Penn station on winning the race over Grand Central even after the opening of east side access, which he said access obviously would be great for $2.88 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 book.
Look.
Yeah.
You can look at all kinds of negative issues.
Penn station.
Penn station has always been.
The transportation hub of this region for <unk>.
<unk> years.
All of the networks.
Yes.
And all of the spiderweb of transportation from.
The 300 agreements.
Come into Penn station and Thats the way its designed now obviously theres going to be.
Our Grand Central Theres nothing.
And but.
It will be fine there will be plenty of plenty of business in Penn station.
In a relative race with Grand Central Grand Central, but it's going to be fine.
Think penetration is going to be a little.
Okay.
Okay.
And then the question for Michael.
Yes.
By the way.
Hang on hang on hang on hours by the first.
Firstly, if there isn't it.
Thomas amount of public capital that is being invested in pattern now.
I'm sure you've seen the <unk>.
On the end improvement, which is of course ours all the adjacent.
On the retail et cetera, and I am showing you couldnt be more aware of the Gateway project, which is the massive infrastructure project and I am sure Youre also aware of the plans to expand Penn station package at which means capacity to the south.
These are huge infrastructure projects, which are 10 year projects and take 10% of billions of dollars.
I can tell your debt.
The government's focus is on <unk>.
So we believe in pen.
That doesn't mean that grand central isn't going to drive as well.
And we hope it will.
Okay.
The next question is from Michael on second quarter, you guys handily beat the street estimates and I'm just sort of curious in that second quarter number and Steve you mentioned guidance I did see guidance, but maybe I just missed it lack of coffee.
Michael is there.
What is 1 time in the second quarter and what is.
Sort of sustainable steps, so as we think about that 80% number how much of that is the go forward number on how much of that was just sort of either 1 time rent collections are 1 time true ups or whatever that would not repeat.
I think well.
Any sense, obviously includes the gains from 220, so let's look at clinical growth.
<unk>.
Which is up.
13% from last year, obviously that benefited from not having a recurrence of the straight line write offs principally from Penny from New York Company.
But we had rent commencement at several assets, which were positive so.
As we've said the run rate.
Basically flows from force, we're a little bit better will go worse opinion.
Overall.
Is consistent out.
And so I think Thats I think thats 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 line 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 pay for that went over to Mike you said run rate something about fourth quarter, but that it was muddled.
Did you cite Inc.
Yes.
So and then on my.
My comment was.
When we started the year, we said that the fourth quarter of 'twenty was a decent run rate for.
For the entire year of 2021, and we still think Thats the case.
Okay. That's good.
Listen 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.
Okay.
Yes.
We don't have those numbers at our fingertips Vectren will have to come back on that.
Okay, No worries and I wanted to dig into.
Just comments about the EV day by you to thoughtfully on quality vs.
More tired building.
And Steve I guess I wanted to get a sense of how you see that device playing out in terms of.
Rents and <unk> and specifically for the vornado portfolio on towards the very small proportion.
But if you were to guesstimate sort of what proportion today would you need to spend Inc.
<unk> capex dollars to kind of get them up to speed and debt <unk> device.
I think what Youre, saying is.
How do we have any b buildings and.
If so how much is it going to fix that for the answer is we have none.
And.
Maybe we have 1 little space here, 1 of those spaces, but it's so de Minimis I can't even put a number on.
And for now on a program we've been on a program that started with David Greenbaum and Glenn.
15 years ago.
Reposition all of our inventory so that its first class.
And.
On a surrogate for new now when I say reposition I mean lobbies physical appearance mechanical systems elevators.
Kicked on tech.
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 fee for each retail initial number that you provided debt.
Obviously include.
Rent bumps rent bumps, but does it include a specific occupancy for the street retail portfolio or is that just existing portfolio income and 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 in service today, but it's a very small amount of the following retail so it's.
If you include the pharmacy retail that would mean, it's not really a same store number because we're adding a 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.
Please turn on okay, great. Thanks, so much.
Thank you Youre welcome.
Okay.
Thank you.
Our next caller is net.
<unk> <unk> from Scotia Bank.
Thanks. This is jesper on the neck.
It's hard to estimate but based on what Youre hearing from your tenants about returns on 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 my my my Pals have all come up with a number of 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.
Is that it.
It may take.
A quarter it may take 2 quarters whenever it is we believe from talking to our tenants debt.
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.
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.
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 for return to office.
Yes.
I think thats, a very complicated question, which goes to both law and ethics.
And.
I think each company is going to have to.
Basically the extension of that is if youre not vaccinated you're fired.
That's a very interesting situation.
I really don't want to get into what our policy will be with respect for our.
<unk> employees.
Cherish.
Or what the market is going to do I don't think that's a question for me.
Alright. Thanks.
Thank you we have a question from Daniel Ismail from Green Street. Please proceed.
Great. Thank you I'm, just thinking back to rents.
Mentioned raising rents upon district, a couple of times I'm, just curious on a net effective basis.
Are those rents from faster pre COVID-19 levels or is there still some discounts.
Okay.
In the Penn District, we are coming off $50.60 rents.
So and I think our.
Our guidance in our supplement is spot on.
We're 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 per 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 is not relevant because the pre COVID-19 number is the old building, we're talking about the new buildings I would just add to Steve's comment I think we're going to have as our expectations for Pat.
If you look on our aspirations pre COVID-19 rates they are.
Equal or higher than where they were right and I think the comments on raising rents reflect the market's reception to those and so.
We're more bullish today than we were if you'd go back pre COVID-19, 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.
That surrounds.
Most of the checkpoint in transit hub in the city as accurately as in the country.
Our strategy is that we know from the.
We're developers where not just.
Owners with developers, our strategy and creating assets.
And redevelop our assets is is that quality.
Is something that the market is willing to pay for and I. Appreciate it. So 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 it's 15 years into it and it still is cutting age in terms of the user experience and that building by the way a lot of that has to do with Mike himself.
Has a very strict the interior designers.
Extraordinary go to 220 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 been on it. If you go into the 2 Penn lobby, which just opened 2 weeks ago I'm, sorry, the <unk> 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 respects.
That is 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're creating there is more we also believe in multiple buildings.
And clusters of buildings.
So that we can offer the tenants.
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.
A 300000 per tenant and a 600000 foot building is debt if that tenant wants another 100000 square feet. He is going to have to move out to move 5 blocks away.
And our complex, which was eventually grow to 10.12, maybe even 15 million feet that 300000 square foot tenant Glen will always be able to provide that tenant with what he needs.
In our complex so the cluster of buildings interconnected above cloud Brown and below ground is what creates the district creates the uniqueness and we believe will command a premium in the marketplace.
Great. That's all I can share to overpower it Steve.
And just maybe taking a step back bigger picture for for New York, You mentioned a few times.
The difference between high quality and lower quality office buildings.
I mentioned, New York has.
Fair share on older property property, what do you think happens to those office buildings.
Do they get Redeveloped do they stay on buildings, what is the launch of <unk> for those other properties.
I think the first.
Part of that answer is it depends entirely upon the owner.
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 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 in good repair.
Lot of it depends upon for the owner.
AD.
Is that if the owner is a sophisticated.
Firm on a large owner of multiple buildings eventually over time, the buildings will be teardowns, and there'll be new buildings or whatever or they will take the buildings and make them something that they are fit to be leased at decent rents below the class a umbrella.
So if you get a F.
Halfway decent building with a sophisticated capable motor with an organization and the capital base there will always be.
A low discount rent market for those buildings. So it's.
That's a complicated thing I don't know the great locations.
And the great pieces of land underneath those D&C buildings will over time I'm talking about 20 years be bought up by developers and will be teardowns, there will not be a huge number of those.
There'll be 1 or 2 of those every.
Couple of years.
Okay.
Yeah go ahead go ahead operator.
Sure.
Does that answer your question.
Hey, Doug Thanks, Steven.
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.
In person on this call.
We enjoyed these calls we learn from them both in terms of our preparation for the call and the questions that you. All asked so we think given that I'll say again, what I said in the beginning of the call was we wish everybody good health.
<unk> village it get backs related.
And we will see you for the next quarter call. Thanks very much.
Thank you ladies and gentlemen, this concludes today's conference.
For your participation you may now disconnect.
[music].
Okay.
Okay.
[music].