Good morning, and welcome to the Vornado Realty Trust Third Quarter 2020 Earnings Call. My name is Richard, and I'll be your operator for today's call. This call is being recorded for replay purposes. All lines are in 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 then one 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 third quarter earnings call. While Vornado typically holds its earnings call the morning after releasing earnings, today's call was moved to accommodate voting in the presidential and national elections yesterday. On Monday afternoon, we issued our third quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents, as well as our supplemental financial information package, are available on our website, www.vno.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 in our earnings release, Form 10-Q, and financial supplement.
Please be aware that statements made during this call may be deemed forward-looking statements, and actual results may differ materially from these statements due to a variety of risks, uncertainties, and other factors. Please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31st, 2019, and our quarterly report on Form 10-Q for the quarter ended September 30th, 2020, for more information regarding these risks and uncertainties. The call may include time-sensitive information that may be accurate only as of today's date. The company does not undertake a duty to update any forward-looking statements. On the call today from management for our opening comments are Steven Roth, Chairman and Chief Executive Officer, and Michael Franco, President. Our senior team is present and available for questions. I will now turn the call over to Steven Roth.
Thank you, Cathy, and good morning, everyone. I hope all of you are safe and healthy. Yesterday was election day in America, arguably the most important single day in the calendar of our great democracy. Our nation is deeply divided. This election appears to be an historical cliffhanger. The TV analysts are calling it a nail biter. Whatever the final outcome of this election, it is our hope that we will unite as a country in pursuit of American values and prosperity. Before Michael gets into the business review and the numbers, let me make a few comments. These are anything but normal times. Actually, the COVID-19 pandemic is a once in 100-year event. The activity level in New York and all other American cities is a fraction of normal. For example, office building occupancy in New York is currently in the teams.
There is a tension between the very serious COVID health risk and related government protocols and lockdowns, everyone's desire to get back to work, get back to school, get back to their favorite restaurants, and get back to normalcy. For sure, normalcy will return. It's just a matter of how long it will take. I believe return to normalcy will be the order of the day in months, not in years. The city generally feels normal in the residential areas, whether it be Tribeca or the Village or the Upper East or Upper West Side. The commercial areas, however, feel quiet, and that obviously negatively affects restaurants and retail. Most importantly, we are hearing from all our tenants that Zoom fatigue is real, productivity is down, and CEOs want their employees back in the office. Again, that will take some time.
We are very proud of our corporate teams who are working really hard and doing a brilliant job of keeping the trains running on time. We are especially proud of our building teams who have executed our industry-leading protocols and enhanced sanitation to make our buildings ready and safe for our tenants. Current liquidity is a strong $3.67 billion, including $1.49 billion of cash and restricted cash and $2.18 billion undrawn under our $2.75 billion revolving credit facilities. During the quarter, we repaid $500 million on our revolver that we had drawn in the spring at the outset of the pandemic. With respect to the closely watched metric of rent collections, in the third quarter, rent collections excluding deferrals improved 500 basis points to 93%, driven by a significant pickup in retail collections during the quarter.
Details of third quarter collections are we collected 95% of office rents, 97% including agreed to deferrals. We collected 82% of retail rents, 85% including deferrals, which amounts to 93% on a combined basis, 95% including deferrals. Year to date, we have deferred $30.9 million in rent and abated $8.8 million. Rents which we have agreed to defer are generally scheduled to be repaid over the course of the next year. We continue marketing 555 California Street and 1290 Avenue of the Americas. There is active interest from investors and widespread appreciation for the quality of these assets. Given investor caution, it does not look like we're going to achieve our original top tick pricing objective. Nevertheless, we continue to actively pursue a transaction involving these assets, which may take the form of a sale, a partial sale, a joint venture, or a refinancing.
In the Penn District, the Moynihan Train Hall, an extension of Penn Station with its majestic 100-foot skylight, will be open to the public at year-end, only weeks away. At our adjacent Farley building, we will be delivering Facebook's 730,000 sq ft in phases beginning in the first quarter of 2021. Our transformation and redevelopment of the 2.5 million sq ft PENN 1, with its unique and outstanding amenity package, will be completed in phases, with the north lobby opening to tenants in the third quarter of next year and the remainder of the project in early 2022. PENN 1's 1.8 million sq ft sister, PENN 2, is next in line. Remember, as these large, important Penn District projects come online, they will deliver very significant earnings. 220 Central Park South is unquestionably the most successful residential development ever, and it continues to perform.
This year through September, and in the teeth of the COVID crisis, we closed 30 units and suites for net proceeds of $939 million, and that includes 19 closings in the third quarter for $591 million. From inception through September 30, we have closed 95 units and suites for net proceeds of $2.76 billion. In October, after quarter end, we closed another four units for net proceeds of $105 million. Now If I may, a word of caution, and this should be obvious. We are in the midst of a once-in-a-century pandemic. Every medical scientist worldwide is working 24/7 on therapeutics and vaccines. It is our hope that we can win the battle with this disease in months, not years.
Our financial results, as well as our peers, are suffering, but it's important to appreciate that today's quarterly results are a reaction to a short-term crisis and are certainly not predictive of the future. As I have said several times, we expect normalcy to begin to return in months, not years, and we are highly confident that each of our businesses will rebound to pre-COVID levels. Now to Michael.
Thank you, Steven. Good morning, everyone. I too hope you all are safe and healthy. I first will cover our financial results and then we'll end with a few comments on the leasing and capital markets. Our earnings for this quarter reflect a number of items, most of which were known or should have been known and expected. Third quarter FFO, as adjusted, was $0.59 per share, compared to $0.89 for last year's third quarter, a decrease of $0.30. This decrease is reconciled for you in our earnings release on page five and in our financial supplement on page seven. The decrease was driven by a few items, most of which are either temporary or non-cash one-time write-offs.
$0.11 from the temporary decline in income of what we call our variable businesses, which include the Hotel Pennsylvania, the Marts & Tradeshows, Signage, and BMS, which Steve had laid out for you on our first quarter earnings call. $0.11 from retailer bankruptcies, namely JCPenney and Topshop, and tenant account receivables write-offs, $0.07 from non-cash straight-line rent write-offs, and $0.03 from Penn District space out of service. We ended the quarter with New York office occupancy at 95.8% and New York retail occupancy at 79.9%, the decline primarily JCPenney related. While the headline same-store NOI numbers are negative on their face, it's worth drilling down on New York. New York segment's third quarter cash basis same-store NOI was down 9%.
When you exclude retail, the temporary loss of income resulting from the pandemic from our variable businesses and excluding residential and our share of Alexander's, our core New York office business actually was a positive 1.5%. The big takeaway here is that our core office business, including New York, Chicago, and San Francisco, representing over 80% of the company, is performing well, protected by long-term leases with credit tenants. As Steve said on last quarter's call, when the pandemic subsides and employees return to their offices and tourists return, we are confident that our variable businesses will return to prior operating levels. Now turning to the leasing markets. Not surprisingly, as you would expect in this COVID environment, the leasing market basically remains on pause. Tour volume has ticked up, and we do see more tenant activity in the market.
Companies are continuing to take a wait-and-see approach and are focused primarily on getting their employees safely back to the office. We expect modest new leasing activity through year-end, with renewals dominating the activity. This dynamic likely won't change until companies return in full to the city and really focus on growth and future space needs post-pandemic. Sublet space is rising, thus conditions will likely get worse before they get better. Fortunately, we have the wherewithal to meet the market's demands. In New York our office buildings remain full at 95.8% occupancy. Importantly, as the market recovers from the COVID pandemic, our New York office expiries through the end of 2022 average a very low 4% per year, with a weighted average expiring rent of only $75.22 per sq ft, which portends well for the stability of our cash flow.
Notwithstanding the slow market due to COVID, we did complete two very large important leases this quarter. The 730,000 sq ft Facebook lease at the Farley Building, which we discussed on our last call, and the 633,000 sq ft renewal with NYU at One Park Avenue. These leases solidify both buildings for the long term with almost no year in and year out future capital requirements. Both these leases are also with sterling credits and reflect the strength and diversity of industry in New York, with tech and healthcare being two of the fastest growing. In total, we leased 1,453,000 sq ft in the quarter at an initial rent of $92.74 per square foot. The second generation GAAP and cash mark-to-market increases, which exclude the Facebook lease, were a very healthy 26.2% and 7.7% respectively.
We have 220,000 sq ft of leases in negotiations and another 850,000 sq ft in the near pipeline, all a healthy mix of both new and renewal leases. In San Francisco, in the quarter, we executed a renewal with one of our major financial services tenants for its 90,000 sq ft and are finalizing another major renewal with a company that has been in the building forever. Both of these renewals will produce strong mark-to-markets when the rents are finalized. The retail environment remains difficult, exacerbated by the slow return of office workers and residents to the city and the lack of tourists. Tourism is not expected to return until at least the latter part of 2021, putting further strain on retail sales. Growing retail vacancies, combined with a lack of tenants in the market, will continue to put downward pressure on retail rents.
Despite this difficult environment, we executed 25,000 sq ft in the quarter, including a lease with Armani on Madison Avenue, and have leases out, both new and renewal, aggregating an additional 50,000 sq ft, indicating that retailers recognize that New York City is still a key market where they want to be. You just need to own assets in the right locations, which we do, and be realistic on rents to make deals, which we are. New York's ecosystem will come back, but it will take time. On the development side, as Steve said, the Moynihan Train Hall will deliver next month, and it is a dramatic public space. It is going to be an iconic landmark for the city, serving commuters and residents for the next century. PENN 1 is progressing on plan with completion of the entire project expected in 2022, and PENN 2 will soon follow.
The new 33rd Street Long Island Rail Road entrance will also open on schedule in December, further enhancing the experience for commuters. The district transformation is well underway, and when all of our redevelopment and streetscape improvements are completed, it is going to be the place in the city where companies want to be. Not only are we located on top of the most important transit hub in the region, but we will be delivering for tenants Class A space supported by an unmatched combination of next generation health and wellness environments, amenities, and services. Please go to our website for the latest construction images showing the progress that we're making on these projects. I know it can be hard for people to look beyond the current difficult, uncertain environment.
In one year, there will be thousands of new creative and talented employees of two of the tech giants populating 1 million sq ft in our district, and the knock-on effects will be significant, both for our office and retail assets. We're already seeing high retail interest in the district following these lease announcements. At Farley, we have signed 11 retail leases and have many other letters of intent in process as tenants recognize the uniqueness of the space and the volume of foot traffic that will course through there daily. As all these redevelopments are completed and new leases kick in, they will indeed generate large accretive earnings. Turning to the capital markets now.
Our recent refinancing of PENN 11 demonstrates that the financing markets for office are now wide open and constructive, with capital available at record low rates for high quality, well-leased buildings and strong sponsors like Vornado. The recent refinancing of Alexander's apartment complex and the recent quotes we've received for other properties further validate this. The market will only continue to become more attractive over the next 12-18 months as lenders become more active and compete for business. We'll continue to take advantage of this favorable market to term out our debt at low rates and remain focused on making sure our balance sheet is built to weather any environment. With that, I'll turn it over to the operator for Q&A.
Thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, for any questions on the line, hit star then one on your touchtone phone and we're standing by for questions. Our first question online comes from Manny Korchman from Citi. Please go ahead.
Hey, good morning, everyone. Michael, just wondering on the Farley retail leases, have those discussions changed much in this COVID environment, or are tenants just as excited to go into an asset like that at that location? Maybe more specifically, if you could discuss rents and TIs and the metrics that go into those.
Yeah, Manny, I'll start and Steve or Haim can join in. The interest has really not wavered at all. I think tenants recognize, as I said, the uniqueness of the asset and the number of people that are going to be going through there, going west every day to Hudson Yards and Manhattan West, going to our assets and throughout the city. The interest really has been unabated throughout the pandemic. All the tenants we've been in dialogue with, those have progressed. The leases we've signed, the LOIs in process, the rents are unchanged. There may be a little bit more TI on a few deals, respectively. Overall, I would tell you it's pretty consistent.
I have a slightly more constructive take on it. I've nicknamed this project The Funnel, because really what happens is that all of the population of Hudson Yards and all of the population of Manhattan West, which are huge developments with huge office populations, immediately and contiguous to us to the west, have to funnel through this retail corridor to get to the trains and get to the commuting subways and trains. We expect that there will be enormous activity. The retailers understand that and see that, and it's clear as a bell, and actually, it's the single best retail opportunity in the city right now by a factor of two or three, and the retailers understand that. We haven't reduced our asking prices.
If anything, as this thing gets closer to delivery and, as Michael said, we have these two tech giants and 1 million feet surrounding this and on top of it. We're extremely constructive about this space. Hymie, you want to add anything?
I agree. Farley is a burst of sunshine in a cloudy retail environment, and we have nothing but high hopes for the productivity when that opens, and we're extremely optimistic about it.
There's a corollary project in the train operation, and that is the Long Island Rail Road Concourse, where we own the north side, which is in PENN 1. We are almost finished with a deal to basically expand the concourse, make it much wider, much higher, much more grand, which will be on the MTA's dime, and taking over control and ownership of the south side of that concourse. We will own both sides. It's a $100-odd million project, so it's not huge, but it's another very exciting addition to our portfolio in the Penn District.
Great. Thanks for all that. Realize that your lease expirations are light in the upcoming future here, but are there any other large spaces that you're watching? Maybe something similar to New York & Company, where the tenant's having their own struggles, and we might just not be thinking about potential move-outs or give-backs.
What do you think, Glen?
Good morning. It's Glen. No, we feel really good about our role. Really modest role over the next two years, about 1.6 million ft. Nothing of large block size other than New York & Company. We got some space at 888 7th, 512 West 22nd, downtown at 40 Fulton, nothing of large consequence. In all of those assets, we're actually seeing much better activity right now than we had been calling two or three months ago. We feel really good about the expirations the next two years.
Glen, could you share any potential updates or prospects for The Home Depot space that's going to be vacating on Lex?
Well, the Home Depot lease goes through 2025. We have approached them multiple times about recapturing the space. We had an interesting conversation a few short years ago about how much would you pay us to give us back the space, and they want to know how much we would pay them. The answer is that space is under lease to 2025, and it is not something that we are concerned about today. However, we have incomings on that space from several important retail tenants whom you would expect. We can't tell how that will play out, but we're financially protected for the next five years.
Thanks, Steve.
Thank you. Our next question online comes from Jamie Feldman from Bank of America. Please go ahead.
Thank you. Good morning. I guess, turning to the election, certainly it looks like the Democratic sweep is off the table here. With that, concerns that a big fiscal stimulus to help some of the, like New York City or San Francisco, off the table as well. I just want to get your thoughts on that comment. Then just for New York specifically, what risk do you think this proposes to the future of the city and its ability to recover?
That's a big question, which probably if I was smarter than I am, I would duck. I'll tell you what I think. I think this election is historic. We can't predict what's going to happen. I think pretty clearly the sweep is off the table, and I think that's, from my point of view and probably from most folks' point of view, a very good thing. I have been approached by all of the New York political leaders to talk to Washington to try to twist arms to get help for some of the huge budget problems that New York has, as well as all of the big cities in the country. That obviously has not happened. Obviously the standoff between, in the government about, I guess it's the third fiscal stimulus plan.
The standoff is basically, the fight is over what some would say is bailouts for the big cities and states versus not. Anyway, clearly, the change in government, if we have a change in government, is going to change the dynamics of that. If there's a different president, that will change the dynamics greatly, although it won't be easy, because if the Senate continues to be in Republican hands. The most important part of this thing is that by law, the city and state governments all around the country have to have balanced budgets. They will have to close the budget deficits. There's a certain group of folks in Washington that would like to see these states and cities reduce their budgets and get their budgets in line with their revenues.
There's another group of folks down there who would like to continue to spend at the level that they have been spending and close the deficits by assistance from Washington. How this plays out is probably going to be some kind of a combination of both, but it will play out. The promise that the Democrat side made, which is that they will reverse the Trump tax plan and reverse the SALT. I see that as being a very, very, very hard lift. I don't know where that'll go. Nonetheless, there's likely an imperative for these cities and states to have to get their budgets under tighter control together with some kind of assistance. I don't think that gives you much more information than you already had.
No, that's helpful. Let's say New York does have to cut the budget. What do you worry about most as a real estate landlord, and to keep the city healthy?
The answer is that the thing that I worry about most is stupid legislation, such as happened in Albany in the beginning of, I guess it was last year, with the residential assets, and unsustainable tax increases. The interesting thing about it is, the real estate tax increases, because that's the most controllable and the most variable of the menu of taxation that they have. The values of real estate in certain sectors, for example, retail asset value and hotel asset value, have clearly gone down. Clearly one would expect that the real estate taxes related to those assets will go down. However, the budgets can't afford it to go down. The tensions in all of this stuff are pretty enormous, and they will play out over the next six months or a year.
Okay. Thank you. As you guys made the comment earlier about the right real estate or the right positioned real estate will come out of this okay. Does that apply to retail as well? You look at your portfolio, what do you think the winners and losers are going to be coming out of the pandemic in terms of locations?
I think we have the best quality locations that there are anywhere. That may even be certainly in the country and maybe even in the world. The retail real estate that we own, which is brilliant in its quality, will suffer lower values and lower rents because that's the market. It will take time for this to all shift through.
Thank you. Our next question on the line comes from Steve Sakwa from Evercore ISI. Please go ahead.
Thanks. Good morning. I guess Glen or Michael, maybe if you could talk a little bit about the leasing numbers that you threw out. I think you said you had 220,000 with a pipeline of 850. I'm just wondering if you could talk a little bit about what the tenants are telling you, what sort of space requirements or space densities they're planning. Of that 850, how much of that's new versus renewal, and again, trying to just get a sense for how tenants are thinking about new space versus old space and how they're planning it.
Sure. Good morning, Steve. It's Glen. The pipeline is active. It's basically a 50/50 mix of new deals and renewals. I'll give you a feel of the type of tenants. We got a lease out of about 100,000 ft with a nonprofit tenant, which will be new space in Midtown. We just got a proposal over the weekend for 45,000 ft with an entertainment firm, new tenant. We're in proposal stages with a 300,000-foot tenant in Midtown, planting a new stake. We also have an existing large tech company looking to grow again by another 60,000-120,000 ft. We're certainly seeing a great mix of activity.
In terms of density program design, I think it's way too early to see it. Most of these tenants are looking past the pandemic, saying to themselves, "How do we want our space to fit out?" Assuming the pandemic has come and gone. I have not seen a real change in strategies related to space design. I think that's a to-be-determined, to-be-continued dialogue. Certainly, my sense right now is if you have the right space and quality buildings, people, there's a real flight to quality more than ever, and that's why we're seeing the activity we're seeing right now.
Okay. Hang on, Jamie. I'll tell you honestly. Oh, Steve. I'm sorry. I don't trust anything that anybody tells me right now. For example, let's go back at the history, go back to 9/11. When the tragedy of 9/11 happened, everybody said that nobody is going to rent view space up in the height of the buildings because of the 9/11 tragedy and experience. Well, that lasted about two or three years. Now that view space has reverted to the norm, which is by far the most valuable space. It will take time for all this to sift out. There is a tension now between office work and work from home. The surveys of some of the employees say one thing, the survey of all the CEOs say other things.
In the end, it's our firm's feeling, our business' feeling, that there will be marginal work from home, and the office will be the main place where work, creativity, growth, and business is conducted.
Thanks. Glen, maybe just to continue on the leasing, is there any comments you can make about sort of net effect of rent changes that you've seen maybe over the last six months? I realize it's not all in phase rents, but I think you mentioned in some of the deals, TIs were going up. Maybe just talk about the change in net effect of rents and how much more might that drift lower. It sounds like leasing will remain slow for the next couple of quarters, maybe into the back half of next year.
Yeah. As Michael said in his remarks, it is definitely slower in terms of activity. I don't think we yet know at all where rents are going, where concessions are going until really people come back to the office, the uncertainty clears, we get into normalcy, and we get back into real deal making. Certainly there's going to be an adjustment to rent, TIs, et cetera. I'm not smart enough to predict exactly what those are going to be. I think when everyone gets back in their seats, we see demand again, we see deal making again, we'll have a much better feel of it. I think right now the deals you're hearing about on the street, and TIs are certainly up. I think rents have generally held steady to date. It's more the concession packages.
I think it's way too early still, Steve, to predict anything until well into next year when people start coming back, and we get into normal deal mode.
Steve, we're not really in a normal functioning market, right? We're in this unique period where companies are not back in their offices. The deal making is down as you would expect. In some senses, it's actually surprising it's as active as it is given most people are not in their cities. If people have to come back, you got to get to a normal functioning environment. In this period of time, there are going to be additional concessions, sure. Right? As the tenants feel like they can either extract it or the landlords want to make the deals. I think when there's a return to work and you get a fully functioning market, I think you'll start to get a better sense as to what rents are going to do, and I wouldn't extrapolate too much either way what's going on right now.
Thank you. Our next question line comes from Alexander Goldfarb from Piper Sandler. Please go ahead.
Oh, hey. Good morning. Morning, Steve. Certainly an interesting day out today. Two questions here. The first is just going back to Jamie's question. When you look at the political landscape of New York, there's definitely been a disconnect. You've been in New York a long time. You remember the '70s, how the business community rallied together with the city to rebuild New York. This time around, that dynamic does not seem to be in the cards. The mayor has definitely staked out a view. The governor seems to oscillate. One time he's against it, and the other time he's trying to promote.
Do you get a sense that with what's happening in New York and the need to create a better central business district environment to help people feel good about coming back to the office, do you feel that the politicians are finally understanding what they need to do? Or is your sense that they think there's still going to be some bailout, and therefore, they can play to whatever political bases they have and not really realize the impact that people like you who are paying real estate taxes and trying to generate growth for the city, how it's not helping?
Let me turn the question around. Okay? Politicians are politicians. They hopefully work for the business community. They also work for the population and the voters. They don't necessarily always make decisions and have policies that we agree with. What I look at is that New York is absolutely the greatest city in New York, and it's one of the three or four greatest cities in the country, and one of the three or four great cities in the world. There will always be a New York. It will ebb and flow a little bit. It'll go through cycles, but it is always the dominant place, the dominant city in New York. I keep saying in New York, I'm sorry, in the country. Its infrastructure is just so massive, it can't be replicated.
The infrastructure in terms of its talent, in terms of its culture, in terms of its business community, in terms of what have you. The interesting thing is that as it cycles, if you have the opportunity to buy assets at very low prices per pound, and let me use the pejorative word, steel assets, at very low price, that's the time to jump on it. If you look at our stock price and the stock price of our peers, and you interpolate how much per square foot the stock price represents in the building, the assets that are behind the stock price, the value is great. It's sort of oxymoronic. As New York gets a little bit out of favor, which is the slant I think in your question, that seems to me to be the time to buy assets and to buy stocks. Okay?
So New York is gonna go, has a headwind. The political situation in New York is going to change. There's going to be an election. The reality of the budget, the reality of the importance of the business community, the reality of the importance of having a growing tax base will win the day. This is a unique time because the assets are really, really cheap.
Which leads to the second question, as you know, my favorite. With 555 and 1290, I think you said early on that the pricing discussions may not have been exactly what you guys had hoped for. Great cash flow assets, especially even more important today. What are your latest thoughts on those assets? Which way are you sort of leaning? Is it a recapitalization of the pair, or you think you may outright sell, or now it's just keep as is with no change on the financing?
The answer to that question is yes.
Thank you, Steve. Is there anything more that you can add?
Look, the answer is that obviously these are important assets. Obviously, they will command acceptable values. It may not be the top tick value, but they will command acceptable values. The liquefying of the value of those assets is an important thing in our future planning. We have said we're looking at multiple different options, and the answer to your question is yes.
Okay. Thank you, Steve.
But let me just- Alex, let me just add on to that. What I'm saying is that you've written that you would prefer us to take the buildings off the market and not sell them and keep the cash flow, okay? That's not our preferred strategy right now.
Okay. Yeah, I understand that, and I appreciate your view. Thank you, Steve.
Yes, sir.
Thank you. Our next question online comes from John Kim from BMO Capital Markets. Please go ahead.
Thanks. Good morning. Michael, you mentioned that you don't expect tourism to come back into the city until the latter half of next year. I'm wondering what that means as far as not only retail occupancy, but rent collections and abatements next year?
Look, I think that, John, if you just look at the trend line and when companies either may bring their workers back or when theaters may open, I think that's a reasonable assessment. Obviously, we're in a fluid environment. I think the latter half of 2021 is a reasonable assessment. That obviously means foot traffic is down, therefore retail sales are down. Retailers are adapting. The ones that were very weak have already gone out. Not to say there can't be some more casualties. I think that when you take out the restaurants, I think by and large, we have pretty good credit in the balance of our portfolio. As I said, notwithstanding that environment, we signed one lease on Madison Avenue. We're in negotiations on another. So Retailers are there and Steven alluded to 731. There's some other assets as well.
Retailers are kicking the tires again, right? The strong retailers that have balance sheets they take the other side, which is this is an opportunity, right? Rents are down. We can now get the best spaces at attractive prices. We can make money when the markets return. They have a belief the markets are going to return. Everybody does, that New York will come back as soon as people can travel again. I don't know if we're going to be right back to 60 million tourists, but I think it's going to come back pretty quickly, right? There's pent-up demand in this country to experience culture, sports, et cetera. Tourism is going to boom, in my opinion. New York is going to be one of the prime beneficiaries, obviously the retailers are going to benefit from that. That's my view.
I don't know if you want to add anything, Haim, to that, but I think we are well positioned in terms of our assets on a relative basis.
Can I ask a similar question as far as the timing of the trade shows reopening at the Mart? Would it also be a second half 2021 timeframe?
Yes.
Yep.
Yeah. The big trade show is NeoCon, which normally is June. We've pushed out to September. We did that a few months ago, just took a conservative view. Give it time. Our tenants are anxious for that show to happen. They're planning, they're excited about it, and so we feel like that'll happen. It's an important show. Again, that as well as The Armory Show, the third quarter of 2021.
If I could squeeze one more question in. Does the 850,000 sq ft leasing pipeline include the large anchor at PENN 1 that you discussed on last call?
I think you're referring to PENN 2, maybe. The answer's no.
Okay. Thank you.
Yep. Thank you.
Thank you. Our next question online comes from Nick Yulico from Scotiabank. Please go ahead.
Thanks. Good morning. This is Josh Brown with Nick. Do you have any insight into details behind what the build-out at Farley ultimately will look like for Facebook? Have they designed that space any differently because of COVID? Then could you just talk about the TIs that were given on that deal and how that compares with TIs historically?
No, that's something that we're not going to get into.
I guess, okay, looking at retail, how are you guys thinking about the retail business today versus when you guys did the JV deal? When you brought Haim on, you said the disruption in retail would present some really good opportunities. Are you seeing any of those opportunities today, and how can Vornado benefit from those?
The answer, Josh, is that there are, as you would expect, the worst assets go bad the quickest, right? If you look at what happened in the prior number of years, retail, there was supply added really throughout the city. There was leasing done and rents pushed in, I would call it fringe locations, right? Well, as a result of not just this, but even happening before this, that started to contract over the last couple years. Those locations were impacted, and the owners that had debt on those assets have either lost or they're going to lose those assets. In many cases those are not going to be interesting. I think our focus has always been on prime high street retail, that there's going to be demand even in more difficult environments as we're talking about with our portfolio right now.
We do think that there will be opportunities, and that may come in the form of lenders. We've had calls from lenders saying, "You guys are the experts. Can you help us out on certain assets?" For the right situations we're going to play on those. I would say to date, we've not seen anything of scale or of quality that fits our bill. They're going to come in our view.
The law of the jungle is that the bigger they are, the harder they fall. The categories of assets that are in distress, the top three are condos in New York, retail anywhere, and hotels. You think about it for a second. The condos are the buyers have gone into hibernation, and the prices are in free fall. The hotel business, most of the hotels are shut down, so they have zero revenue, and we know what's going on in retail. The opportunities will be, and are coming, and they will come, as Michael said, they will start coming from loan foreclosures. Those are the categories of assets that will be the most distressed. It will be, I think, difficult to find a great office building that you could buy that used to be worth $1,000 a foot that you can buy for $500 a foot.
We are definitely in the financial condition to be acquirers. Part of our business strategy is to be acquirers in distressed markets like this. We're very alert. We see everything that comes by. We have the financial capacity to act, and we're sort of reasonably excited about what the opportunities might be, but they could be well into next year before they really start to mature.
Hey guys, it's Nick. Just sorry, I just had a quick question on the sequential change in cash NOI for the New York office segment, which I know you listed in the Q. I forget if it's in the sup or not, but you did have a write-off of a tenant receivable, but what else drove that sequential decline in office cash NOI this quarter in New York?
Going to turn that over to Joe and Tom. If you don't have it at your fingertips, maybe we can handle this offline.
Nick, it's Joe. Good morning. I would prefer to do this offline, Nick. We can really get you a precise answer. Needless to say, the third quarter had accounts receivable reserves more than two and a half times the second quarter. That's an element that we've disclosed.
We need you.
We would prefer to get you a more precise buildup.
Okay. Sure thing. Thank you.
Steve.
Thank you. Our next question line comes from Richard Skidmore from Goldman Sachs. Please go ahead.
Thank you. Good morning. Steve, you mentioned the CEOs seeing Zoom fatigue and lost productivity, et cetera, regarding working from home. What, if anything, can the office landlords do to help accelerate that return to office, and what are the CEOs saying about plans to bring their people back, or is it just waiting for a vaccine and the virus to fade? Thank you.
I'll tell you what our experience is first, just to give it some context. Most of our peer companies have basically returned to office work, 100% of the companies, and they have done it by edict. Their attitude is, and my attitude as well is, we're talking up our book. We are in the office business. We want to be in the office. We want our people in the office, and we want to get back to normal work. We agree with that. The thing that we don't agree with is what we've done is, and most of these folks have gone back 100%.
What we've done is gone back in teams, so we have an A team and a B team, so that we have half the population in the office on week A, and the other half in week B, so that we keep the densities down a little bit. The most important thing is that we have, in respect for our employees, we have basically said that if you are uncomfortable with the health risk of returning to the normal office environment or et cetera, then by all means, please continue to work from home. Now, we're not going to let that go on forever. What we're finding when we talk to the large CEOs is that they very much are shying away. They will not open their offices up by edict, they very much respect what their employees perceive as being a health risk.
That's something that we have to live with right now. There's a sensitivity to the risk out there and the employee's point of view. There's other nuances to it, like childcare and schools and other stuff. The main thing is, I find it very difficult, and all of the CEOs that I talk to say to an employee, "Come on back to work, even though you're a little bit afraid that there's a health risk in doing that." Really, the resolution of this will be when the medical industry. The one thing about what has happened in this situation, and I know the people in Washington want to take credit for this, but actually it's probably just the normal workings of capitalism. Every single medical professional and scientist in the world is working 24/7 on this project. That's never happened before.
What we're hearing anecdotally is that there will be vaccines and therapeutics which will come out in, as I said before, in months, not in years. That will turn the tide. It's very difficult to change behavior and get people to come back to work until they are comfortable, and most CEOs are just not going to do that. The answer is that we think this is basically a medical situation. It's a health crisis, and that has to be resolved before we can really get back to normalcy. What are we doing? What we're doing is we're in close communication with our tenants daily and weekly. We are finding out what it is that they want. We are preparing our buildings in terms of air filtration and temperature checks and sanitation, et cetera, and all of the protocols.
Actually, all the major landlords are basically adopting the same programs, which has become industry standard. Our tenants know that our buildings are top of the line, are ready to receive them when they come back, et cetera. Basically, that's what we are able to do. Right now, we're in a waiting game, waiting for the medical profession to solve this problem.
Thank you.
By the way, I said this in my remarks. As you and I and all of our colleagues, as we talk to all our friends, we talk to our associates, et cetera. Everybody is chomping at the bit. Everybody wants to get back to work. Everybody wants to get back to school. Everybody wants to be able to go out to restaurants. Everybody wants to get back to normalcy. The population wants to return. The hesitancy is that there continues to be a health risk. If you read the press and you watch the TV, it's very prevalent. It's very difficult to say, "Well, there is no health risk. Don't worry about it." Because it's so prevalent. The answer is, this is something that will take time, and my hope and belief is it will be dimensioned in months, not in years.
Thanks for the color.
Also, you can be assured of one thing, okay? Our teams talk to our tenants very frequently, at least weekly.
Thank you. Our next question line comes from Daniel Ismail from Green Street. Please go ahead.
Great. Thank you. Steve, going back to your earlier comments about looking for assets in distress, one area of growth in the office sector has been life science. Is it fair to say that life science values in New York City are likely not under distress, and thus those would likely not be on your targeted acquisition list? As a follow-up, is there any opportunity for, in your current development pipeline, to expand in that area?
Daniel, the question was fuzzy. I think you said, what about life sciences? The answer is that I don't know. Obviously, we're aware of the life sciences segment. We have sort of experimented in it, put our big toe into it a little bit. It's an attractive segment. It's actually a small segment in New York. There are other hotspots around the country. Obviously Cambridge, obviously California. It's a business that we're interested in, and it's a business that we would look for an entry point, and are looking for an entry point. To buy into the life sciences industry at distress is something that's just not available now. Basically, we have lots of assets. New York is a potential location for a large and important cluster of life science assets. We have the universities, we have the talent, et cetera.
All I can say is it's something that we're aware of. It's something that we're looking at. It's not easy to enter. We don't believe that there will be a distressed opportunity in that segment.
Is there any current plans looking at PENN 1 or PENN 2 for a life science component?
What was the question?
Do you have less than an opportunity at PENN 1 and PENN 2?
Yeah, probably not. There are other buildings that are better suited to that, and actually, most of the success in this industry is done by ground-up development that are suited for that use. It's actually more efficient to do ground-up development rather than retrofit. PENN 1 and PENN 2 would not be candidates for a retrofit. Other buildings in the Penn District would be much better candidates, but the ideal thing would be to do ground-up development.
Okay. Just a quick follow-up is the signage business is a relatively small portion of your overall business. Any thoughts in terms of how?
Which business?
Signage.
The signage business. I was just hoping if you can provide a few comments on potential of recovery to pre-COVID levels in that segment.
What was the question?
Pre-COVID levels.
Yeah. The question was, we were having a little trouble hearing you. It's signage business, small business, but some guidance on recovery pre-COVID levels. Again, it's a business certainly in Times Square. Obviously, we own less than we did before the retail JV. It's a business driven in that area, where you need eyeballs, right? With tourism down, the advertisers have pulled back. As soon as they come back, it's a variable business. I expect that to turn right back on. The signage we have in the Penn District, and probably even in Times Square, we've got a number of long-term leases with that. I'm referring more to the, we call the slice and dice, where you're selling increments of signage. I think it's like everything else.
As soon as the tourism's back, workers are back, I think you're going to see that return to pre-crisis levels. Daniel, we don't look at the signage business as a dabble or an unimportant business, okay? It's an important business. We believe we have the largest position of signs in town. We have a very competent organization to handle that business, which is mainly the interaction between us and the advertisers. We think that our scale in the business is a very large advantage, and we think that our scale in Times Square and the Penn District is also a very large advantage. We're enthusiastic about the business. It's important to us. It's top of mind. We think we have the best business in town, and we are certain that it will rebound when things get back to normal.
Great. Thanks, everyone.
Thank you. Our next question online comes from Vikram Malhotra from Morgan Stanley. Please go ahead.
Thanks for taking the question. Just maybe first on street retail, can you specifically talk about prospects and potential for kind of your vacancies on Fifth Avenue, the Paramount space specifically, in light of one of your peers recently signing a deal there for, what I understand it's probably in the low $2,000s at grade in terms of rents. Maybe just give the sense of the potential prospects, and where do you see rents shaking out at grade on Fifth Avenue?
Retail rents on Fifth Avenue will certainly be in correction territory from top tick peak rents that we saw a few years ago. The Harry Winston comp in the Paramount space we view as a positive. We currently house Harry Winston in our St. Regis asset. They have a 15-year term with us that was always intended to house one of their other brands and temporarily hold Harry Winston. We see them moving across street to their original home as a positive for Fifth Avenue. I'm not sure of the comp that you're quoting, because I don't think it was published. That might indicate somewhere in the neighborhood of where the correction could be today.
Okay, great. I apologize if you covered this, but any updates on the ground lease at Penn specifically, and can you talk about just prospects at Penn to specifically sort of large anchor tenants?
The ground lease reappraisal at One Penn, we've announced, is in 2023. I think obviously I don't want to comment on what it might be, although I will say that clearly it's going in a constructive direction for us. The prospects for Two Penn, we have said before, and in fact, I think the question came up earlier, there is a large lease that we have pending that actually happens to be with Madison Square Garden for their headquarters space. They have been tenants in that building forever. The building obviously is on top of Madison Square Garden. That lease is appropriately in pause because Madison Square Garden is basically, their business is shut down until this is over. We are very constructive and very enthusiastic about the prospects of Penn 2, and Penn 1, for multiple reasons. Number one, we think the location is absolutely bullseye.
We think that the amenity packages, and what we're doing with the buildings and the transformation of the buildings will be unique, best in class by far, unbelievably eye-opening. Glen and his team have exposed our plans for One Penn and Two Penn to the marketplace to unbelievable enthusiastic acceptance.
Okay, great. Then just last one, if I may. Steve, you've obviously talked a lot about how New York has changed over the years, and I'm just wondering, given co-working and WeWork, it was hot and then it wasn't, and now you've had potential for more work from home on the margin. I'm just wondering, do you foresee any changes in office lease structures, whether it's term or TIs or bumps or anything in the office lease structure as a result of some of these, call it cyclical and potentially secular changes?
It might. I tell you, one thing that we've learned from this pandemic, leases are a wonderful thing. Long-term contracts between well-capitalized parties are a wonderful thing. They're very protective. Right now we have, I don't know, better part of 1,000 tenants with a very significant $1 billion-plus cash flow. . That's very protective and very secure, and we're very happy about it. If the business goes to month-to-month leases, that's impossible. So For WeWork, when you're renting out a space by the desk as opposed to by the floor or by the building or by the square foot, that's okay. When you deal with a tenant, as Glen does every day of the week, who's 200,000 feet or 500,000 feet or even more, those tenants need stability.
They need to be able to have space that they can occupy on a long-term basis where they can invest capital in and they can have stability. We need the same thing. In the large tenant business, I think the long-term lease commitment will be the rule of the day. In smaller tenants, whether they be 3,000 or 5,000 or 2,000 or whatever it might be, first of all, that's not the segment of the market that we trade in, although we do have some of that, obviously. Those leases can go into anything that the tenant wants. There, when we do those leases, we have pre-builds, we build the space out, and the tenant can take the space, move out, whatever.
A competitive advantage to that is a landlord who has the capital strength to be able to do a short-term lease, to be able to fit out space for a tenant and invest the capital. That would be the small, insignificant segment of the office population. That's not our business.
Thank you. Our next question online comes from Manny Korchman. Please go ahead.
Hey, it's Michael Bilerman here with Manny. Good morning, Steve. I was wondering if we can just come back to.
Good morning.
Yep.
Yeah. No, just good morning, Michael.
It was just a good morning. Okay. I wanted to come back to sort of the office discussion and frame it the following way, and I agree with your sentiments on office or return to the office. I myself have been back in the office and feel a lot better than living at work. I want you to compare it to the mall business, which you accurately got out before things got really, really bad and saved shareholders from a lot of losses. Why wouldn't the office space market go like what's happened to the malls, right? You go back and everyone said, "Oh, people want to experience the mall. They want to feel the clothes before they buy them." Then there was an alternative driven by technology that allowed us not to do that anymore.
I guess, why are you in the belief that what happened to malls won't happen to office?
That's a nasty question. There is a school of thought that says that work from home is to office values as Amazon is to retail values. You understand what I'm saying?
Yeah, no, and that's why I'm asking. I agree with you on the future of office, but the market is telling us a different thing.
The answer is that's something that we talk about every day. It was obviously unthinkable that hundreds of billions of dollars of mall values could be destroyed, but lo and behold, it has happened. It's obviously unthinkable that all the automobile companies could go broke, but along comes Tesla. We are very respectful of the question that you ask, and we think about it daily.
The succinct answer as to why you believe that office won't follow the trend of malls is?
The answer is that I believe that, if you work from your kitchen table, and your kids are crawling at your feet, and you are not with your colleagues, that's not a great outcome. If you are ambitious and want to get ahead, you can't get ahead from your kitchen table. You have to be in the office with your colleagues. If you are a manager and you have 20 people in your department that work for you, I think, if they're each at their kitchen table, I don't know how you manage that. I think if you're a manager, you want your team in the office where you can interact with them, et cetera. I think the human condition is different. The human condition speaks to collegial work in groups which basically is in offices.
Obviously, that's going to get nipped around the edges, and I can't tell how much. None of this would have happened were there not the technology like Zoom. Okay. Technology enabled our business, your business, to be able to react to this shutdown by working from home and keeping the railroads running on time. That's an amazing thing. There's the human condition. It's not impossible that there will be a day here, a day there of working from home. It's not impossible that certain groups will work from home. It's not impossible that things will change. The core, I still believe the core will be of value. Let's get back to what that means. I think that means the better assets in the better locations will thrive. I think that it means that the commodity lower quality assets in off locations will struggle.
That's what I think. On the other hand, there is uncertainty in this situation that a management team has to be aware of and has to focus on daily.
Right. Well, I appreciate those comments. My second question, Steve, is just to come back to 555 and 1290. In one of the responses, you said that it's very important or it's important to liquefy those assets to your future plans. I was wondering if you can just sort of unpack that a little bit about why liquefying it, either in a refi, a joint venture, or an outright sale is important to your plans. Is it a portfolio repositioning exercise? Is it to get the mark at sort of good pricing on those assets? Is it the cash that you want to take out? I just want to better understand why those two assets are so important to your future plans in terms of the liquefaction of them.
I think the word important is yours. I don't think I said important. Look, we have identified those assets as assets that we would like to swap for cash. Okay? It's as simple as that. A lot of it depends upon the structure. A lot of it depends upon the details of sell them all, sell them apart. We continue to manage them. We do a joint venture, or we just refinance them. Okay? We have an enormous amount of equity in those assets, and we want to reclaim those assets. We want to reclaim that equity. Now when we have the cash, it's a different decision as to what we do with them. Our worldview is that there will be better places to put that cash for growth and shareholder value creation than those assets over a five or a 10-year hold. Okay? That's all.
By the way, I would remind you that my analysts over the last 10 years have been pounding me to sell 555 because it's the only To dump it. While we resisted that dump, it went up in value by $1 billion. Maybe its time has come.
Perfect. All right. Thanks, Steve.
Yes, sir.
Thank you. Our last question comes from Steve Sakwa from Evercore ISI. Please go ahead.
Thanks. Just two quick follow-ups. I noticed that operating expenses jumped kind of noticeably between Q2 and Q3. I assume that that's part of the buildings reopening. Would you say Q3 is a reasonable run rate kind of looking forward until utilization rates go up materially?
Yes.
You're talking about?
Operating expenses.
Operating expenses.
Yeah.
Okay, good.
Yeah, I think that's fair, Steve.
Okay, thanks. I did notice a large kind of one-time gain. I think it was in management and leasing fees. It was something like $11 million. I assume that's a one-time gain on some leasing activity, but any thoughts around that would be great. Thank you.
Was it?
Sorry, Steve, say that again at the end. I couldn't hear you.
Michael, it's Joe. Let me handle that one. Yes, you saw it in the fee income section, Steve, but it gets eliminated in the minority interest section. Really it didn't benefit bottom line one penny.
Okay. All right. Thanks, Joe.
See you, Steve.
Thank you. We have no further questions at this time.
Well, thank you everybody for joining. This is a very interesting time. I'm going to go back and watch the television and see what's going on in the election. We wish you all well. Stay healthy and, please get back to the office, get back to work. We really need everybody in the office. Thanks so much. Have a great day.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.