Good morning, and welcome to the Vornado Realty Trust Second Quarter 2020 Earnings Call. My name is Richard, and I'll be your operator for today's call. This call is being recorded for replay purposes. All lines are in a listen only mode. Our speakers will address your questions at the end of the presentation during the question and answer session.
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's 2nd quarter earnings call. Yesterday afternoon, we issued our 2nd quarter earnings release and filed our quarterly report on Form 10Q with the Securities and Exchange Commission. These documents as 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 10Q 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 ks for the year ended December 31, 2019, and our quarterly report on Form 10 Q for the quarter ended June 30, 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 Stephen Roth, Chairman and Chief Executive Officer and Michael Franco, President. And our senior team is present and available for questions. I will now turn the call over to Steven Roth.
Thanks, Kathy, and good morning, everyone. I hope all of you are continuing to stay safe and healthy. Yesterday, after the close, we announced a very important 730,000 square foot lease with Facebook at our Farley building. We normally don't go for the drama of speculating. Will even a great contract People have been speculating.
Will even a great company such as Facebook commit to it in the middle of the pandemic crisis? Will they commit to physical assets in light of all the work from home stuff? Will they continue to expand in New York, in effect, doubling down? We now know the answer to these questions is yes. This commitment is a dramatic statement from one of the most important global tech companies that even in the midst of a pandemic, commerce must continue.
This deal reinforces New York City as a great and unique place to do business with an unlimited highly educated workforce. New York continues to be the place to be. Farley is a unique property like none other in New York. It occupies a double wide block. It is actually part of the Penn Station complex, the busiest transportation hub in the nation.
Across the street from Madison Square Garden, you get the picture. Most importantly, this deal further validates the West Side of Manhattan as the place to be, and it further validates our plans to redevelop our 10,000,000 square feet of 10 district holdings into the Bullseye location in New York. Facebook's commitment here expands our long standing relationship with them at our 770 Broadway property with a lease 750 7,000 square feet. Facebook is now our largest tenant by both revenue and square footage. Kudos to Glenn Weiss, our deal captain, and to Barry Langer, who led construction and development support.
220 Central Park South is the most from 2/20. It is a financial engine feeding our liquidity and financial strength. Year to date through July, we have closed on 13 units for net proceeds of $598,000,000 all of this during the health crisis. From inception through July, we have closed 67 units for net proceeds of $2,420,000,000 We expect closings in the balance of the year will bring in an additional $496,000,000,000 in net proceeds. Our current liquidity is $3,800,000,000 including $2,100,000,000 of cash and restricted cash and almost $1,740,000,000 undrawn under our $2,750,000,000 revolving credit facilities.
Adding in the $496,000,000 coming in from 2 20, we might say our liquidity is this year now $4,300,000,000 Consistent with my comments in my shareholder letter in April that we would be more aggressive in selling assets given the persistent discount in our share price and that many and that in many instances, we would rather have the cash than the buildings. In June, we announced that we were going to market to recapitalize 2 large, high quality assets, 555 California Street, which has to be a top 5 in the nation trophy and 1290, one of the premier buildings on Avenue of the Americas. We understand that this is a contrarian move as some believe the capital markets are frozen and now is not the right time. We disagree. The world is increasingly awash with liquidity and there really are no great assets in the marketplace to compete.
In the end, the market will speak. We are early in the process. We have been talking to investors for about a month and interest in these high quality assets is quite strong. This process is fluid and could have various different outcomes. As an example, we could simply refinance.
We have indications of upsizing the 555 California Street Morgan from the existing $550,000,000 to as much as $1,500,000,000 Such has been the increasing value of this asset during our ownership. This process will play out over the next few months. Now to the topic de jure, rent collections in the 2nd quarter recollected. 93% of office rents 98% including agreed to rent deferrals 72% of retail rents 78% including agreed to deferrals and 88% on a combined basis, 94% including deferrals. The trend for July collections is consistent with, if not a bit better than, the 2nd quarter.
Rents which we have agreed to defer are generally scheduled to be repaid over the course of the next year. Quarterly earnings are important, very important, but my hope is that you not focus on the very short term or on the volatility caused by a passing crisis. Our game is won by creating value out 2 to 5 years and sometimes even longer. I submit to you that this is undoubtedly a great time to be through the fog and putting capital to work. Now about our common dividend.
Our company by mandate pays out by dividend all of its taxable earnings. Our intention is to have a smooth and predictable dividend that increases with our growth. We believe the dividend is sort of sacred, but not more sacred than our balance sheet, our financial strength and our liquidity. While we certainly have the wherewithal to continue to overpay the dividend forever, our management and Board believe that in this crisis period, our dividend should mirror our tax alert. Accordingly, last Thursday, the Board concluded to right size the dividend to $0.53 per quarter.
By the way, I'm not a big fan of paying dividends in stock. Truth be told, recovering in the nation and in our city will be slow. Residential neighborhoods have decent activity and street traffic. The canyons of our commercial boulevards, not so much. With office building census about 8%, street traffic is very light.
As you would imagine, it's really tough to be in a retail or restaurant business in these quiet streets. Most office tenants do not plan on coming back in scale until Labor Day or even until year end. And truth be told, it may even take a couple of years for New York's ecosystem, tourism, sports, concerts, Broadway, museums, restaurants, nightlife, etcetera, to return to normal levels. The headline of the day is that everyone will work from home or almost everyone will work from home or whatever forever, which would, of course, have a negative effect on office demand and faxes. I don't believe it, and I'm betting against it.
There will always be some work from home, even a little bit more now that we have Zoom, etcetera. But in the end, culture, productivity, collaboration, innovation and talent happen in office buildings. That's actually that's my view on work from home. Now over to Michael, who will talk about our earnings and about the markets.
Thank you, Steve. Good morning, everyone. I too hope you are all safe and healthy. Jumping to our earnings. Our earnings for this quarter reflect a number of items, all of which were known or should have been known and expected.
2nd quarter FFO, as adjusted, was 0 point a decrease of $0.36 This decrease was reconciled for you in our earnings release on Page 5 and in our financial supplement on Page 8. A little color on a couple of these plans though.
First, we've had some
bankruptcies, which should not be a surprise in this environment, In particular, JCPenney's, which has been on the brink for years now. We have no bone to pick with Pennies. Over the past 11 years, they have paid us $200,000,000 in rent in Manhattan Mall. But we do have a $20,000,000 hold to fill here. We have activity and interest for this property.
It could be for retail
it could even be for last mile distribution, the hottest business in the country. The J. C. Penney and New York and Company bankruptcies were the lion's share of the write offs in the quarter, which aggregated $45,100,000 or $0.22 per share, of which $36,300,000 was for non cash write offs of receivables arising from the straight lining of rents and $8,800,000 was for bad debts. 2nd, as we had specifically guided on our Q1 call, we call our variable businesses, which include Hotel Pennsylvania, D and S Cleaning, signage and trade shows, came in as we had predicted, down $9,000,000 per month or $27,000,000 for the quarter, that's $0.13 When life returns to normal or almost normal, we expect these businesses to snap back to prior financial performance.
Cutting through these items, though, our core office business was essentially flat. Non comparable items in the second quarter the press release on July 20, a little color on the largest one. We recognized a $305,900,000 non cash impairment loss on our investment in the Fifth Avenue and Times Square Retail Joint Venture. This comes a little more than a year after we recognized a 2.56 $1,000,000,000 net gain on the April 2019 transfer to the joint venture, and related GAAP required write up of our retained interest in these assets to the deal price, which was fair value. This should also not be a surprise since the general feeling is that these assets are worth less today than they were then.
We ended the quarter with New York occupancy at 96.4% and New York retail at 83.6%, handling JCPenney at Manhattan Mall Estate. Now turning to the leasing markets. Given the uncertainty of the trajectory of the pandemic, as might be expected, there's limited, albeit some, new leasing activity throughout our 3 markets, as most companies take a wait and see posture to what the impact of their business and employees ultimately will be. The vast reponderative office tenants are opting to renew their leases rather than uproot the organizations
and
spend money building out new space. That being said, tours have picked up a bit in New York in the past few weeks, and we are responding to several new major tenant requirements, evidence that CEOs still view the office as integral to operating their businesses in New York City as a deep and unique reservoir of talent. In addition, certain large companies in our portfolio that have paused their renewal discussions at the outset of the crisis have now picked them back up as they focus again on the future and have the confidence that they need the same amount of space on a long term basis. But to emphasize the point that Steve made earlier, the trend of users wanting to be in the best product the most modern amenities and healthiest environments will only accelerate coming out of this health crisis. Importantly, as the market recovers from the COVID pandemic, our New York office expiries through the end of 2022 are modest and portend well for stability of our cash flow, amounting to only 1,800,000 square feet or 10% of our portfolio, an average of only 4% per year at a weighted average expiring rent of only $76.53 per square foot.
The retail environment is very difficult, and this crisis is accelerating the shakeout of the weak and poorly capitalized retailers, JCPenney, Neiman Marcus, J. Crew, Brooks Brothers and so on. We have taken our share of hits just like all the other retail landlords. Most retailers are focused on survival and few are focused on opening new stores. Though a few strong and healthy ones are, as evidenced by our recent deal with Target on the Upper East Side.
Ultimately, retailers need physical locations and the best locations, including the high streets of Manhattan, will survive and thrive, but it will take some time to be painful getting to the other side. For sure though, at our current stock price, the worst the retail has been more than fully priced in. With the city reopening to price down. With the city reopening
for construction
in mid June,
our development efforts have resumed in the Penn District. At Farley, we are targeting a December opening of the Moynihan limited retail openings and 1st delivery of office space in January 2021. Retail demand is strong here given the expected daily foot traffic. Farley, PENN1 and PENN2 are the center point of our vision to transform the Penn District, the new epicenter of New York, where we will be delivering for tenants cutting edge, next generation health and wellness environments, amenities and services
on National Grid.
Even during the shutdown, the reaction from the brokerage community and multiple prospective tenants to our PEM-two vessel design has been outstanding. And We are confident this is exactly what tenants want as we emerge in the post COVID world. As we have said before, these 3 large Penn District projects are debt free and are being funded off of our balance sheet, including the aforementioned proceeds from 220 Central Park South Closes. As these projects are completed and leased up, they will generate large accretive earnings. Beyond our developments, broader district improvements continue to progress also.
The 33rd Street Long Island Railroad entrance is almost complete and on schedule to open this December, adding another signature element to the district and improving the experience for commuters. Turning to the capital markets. They've basically been on hold for the past few months as lenders and investors assess the virus' impact on the economy in real estate. The real estate financing markets are beginning to yield, though lenders are still in triage mode and highly selective in what they finance. Spreads are wider and terms more conservative.
So with the base rates down, all in coupons are still very attractive. As always, the spigot opens with a focus on high quality assets and sponsors, which we benefit from. We think over the next 12 to 18 months, it will start to become a borrower's market to break that historic lows. With the Fed pumping liquidity in the system and planning to remain accommodative until the economy recovers, interest rates are likely to remain low for as long as the eye can see. This should make the yield on assets of long duration leases look increasingly attractive to investors, particularly in relation to fixed income, spurring them off the sidelines and maybe even result in cap rate compression given the spread of treasuries.
Lastly, our management team has been thinking a lot lately about the future of cities. Nothing is certain, but for 100 of years, cities have endured as a central gathering places for work, living and culture in the cradles of creativity and innovation. We believe this will continue to be the case. New York is a world city and notwithstanding a few bumps along the way, New York will continue to thrive. With that, I'll turn it over to the operator for Q and
A. Thank you. We will now begin the question and answer Evercore. Please go ahead, sir.
Thanks. Good morning. Michael or Steve, I didn't know if you could maybe just address in general how the economics on Facebook lease might have changed over the past 9 months. I realize this lease has been in negotiation for quite some time. So I know you left the yield unchanged in the supplemental, but anything that you could talk about on rental rates or concession packages or how that might have evolved over the course of time would be helpful.
Thanks.
Thanks, Steve. Hi, how are you? Good. Good for you. So listen, we think this Facebook deal is a monumental milestone, both for the city in the middle of the pandemic and also for the west side of New York and most of all for Vornado's plans in the Penn District.
So that's step 1. Step 2 is, it has been a long haul. It's an important deal. It's a big deal. Neither parties, neither we or Facebook, flinched at all during the entire period of time.
We were both parties were committed to the deal and working hard with various teams to complete the deal in what was a very complicated transaction. Now the Facebook the Farley Building, as I think you know, I hope you know, is a very, very, very unique and marvelous piece of property. It's a double block wide, which means it's a low rise campus, it's a vertical campus and the floors are enormous. Our teams made a trip out to the West Coast a couple of summers ago, and we learned a lot from that. And one of the things that we learned was the way these tech companies like to work.
They like to work in large campuses. They like large floors. They like low rise buildings. And they like amenities for their employees. For example, they have restaurants, they have workouts, they have orders, they have dry cleaning operations so that their employees to take care of their employees.
They have bicycle storage. They have everything that you can think of. And that's something that the Penn District will provide and the Farley Building will provide. The deal as was we have a policy of not talking about the specifics of the business terms of deals with our clients. Their privacy is important.
We disclose what's appropriate to be disclosed in our docs and there will be certain disclosure in our docs about this deal as well. Having said that, the deal is within the parameters of our original underwriting. To be honest, there was a little bit of give and take in the end as a result of the environment, but it's absolutely within the parameters of our underwriting. With respect to the disclosure in our docs, We will re underwrite we don't re underwrite these numbers every week or every month. We will re underwrite the numbers and publish new and updated numbers in our 10 ks at the end of the year.
Remember, there's 2 components to the Farley Building. There's the Facebook deal, which is now fixed. And then there's the retail component of it, which is 120,000 square feet of very important retail. And I'm sure you know that there's an enormous confluence of pedestrian traffic that will come through the Farley Building from Manhattan West, from Hudson Yards to get to Penn Station. All of that retail funnels through all of the pedestrian traffic and commuted traffic and funnels through the retail portion of the Farley building.
So we're extremely excited about that. And we are working on the rents. And so we will not re underwrite this deal until we have more visibility in terms of the retail rents and that won't be until after the 1st of the year in the 10 ks.
Okay. Thanks for that color. I guess just to for the second question, just to kind of follow-up on the JCPenney's. I can't remember if it was you or Michael that sort of just talked about last mile distribution as being potential option. I mean, just can you help us sort of think through that space and the timing and how you might sort of perceive a whole redevelopment and what might all go into that?
I can't be much more specific. The J. C. Penney, I think we made the statement that we don't have a bond to pick with JCPenney. They paid us, I think the exact number is $194,000,000 in rent over the last 10 or 11 years.
So they don't owe us anything. They've been teetering for a while and so their bankruptcy was absolutely expected. The space that they occupy is brilliantly located in the middle of the island. It could be for a retailer. It could also be as I think it was in Michael's script, it could also be for a distribution last mile distribution center.
Now that's the hottest business in the country right now. And the scarcest product is in the dense metropolitan areas of which New York is the densest is to get space which can satisfy that requirement with enormous loading facilities and the ability to get panel trucks on and off the streets. So the JCPenney store, which is a department store, which has a very large shipping and receiving component, which we have the ability to enlarge is such a piece of real estate that might qualify for that. So as you can imagine, we're going to be talking to everybody. I do not believe that you should expect that we're going to be we're going to relay the space quickly.
This will be a long, slow slog.
Our next question online comes from Manny Korchman from Citi. Please go ahead.
It's Michael Bilerman here with Manny. Steve, in your commentary, you said it was a great time to be looking through the fog and putting capital to work. And I wanted to know how you think about that from a tornado perspective. And you think about the Facebook deal now being official, the progress you've made on PENN1 and PENN2, would you be more aggressive in, let's say, take down Hotel Penn to position yourself for the eventual next cycle? I guess, what are you thinking about in terms of putting incremental capital to work?
Michael, hi, how are you? First of all, we're in great shape, okay? We have an enormous amount of liquidity on our balance sheet. That liquidity is growing. The Farley building basically takes a multibillion dollar asset out of risk and puts it into secure into a secure financial asset.
We have 2 very large buildings that we are talking about recapitalizing, which will generate, if our plan is successful, an enormous amount of additional capital. So if you pardon the expression, we're loaded, okay? We saw we didn't see the pandemic coming, but we saw the end of a long expansion coming. And so we prepared for this. So the first thing is our balance sheet is in great shape and we are doing things such as closing to closings at 220 Central Park South, such as the Farley lease, such as the 5551290 buildings which are in the marketplace now.
We're doing things to continue to augment our liquidity, okay? Your comment specifically went to the Hotel Penn. I don't really have much to say about that, except that as we continue to march along from the Farley Building to 2 pens or 1 pen, etcetera. The Hotel Pen is arguably one of the top 2 or 3 development sites that are available in the city. By the way, 350 Park Avenue, many of the people in the marketplace think is the single best development site.
But be that as it may, I couldn't resist getting the plug in. So the issue is that Hotel 10, in order to execute on that, you have to pay par. In other words, you have to build a building and view the land has a certain value and you're paying par for that, okay? It's not impossible that in this cycle, which I think is going to be a soft cycle for a while, that our capital will be able to attract a transaction or other transaction where we will be able to buy great assets at less than par. So we have all the capital we need for our development project development program.
I will remind you, which I think we've told you multiple times over the course of the last period, that the Farley building has no debt on it, it's unencumbered. 2 Penn Plaza has no debt on it, it's unencumbered. And 1 Penn Plaza is no debt on it, it's unencumbered. The capital plan for those buildings is complete Farley and do our development plan is, I don't know, pick a number $1,500,000,000 which we have sitting on our balance sheet ready to go. So we can complete all that with no debt.
So we are to pardon the street phrase, we're loaded. And we believe we've been through this 5 or 6 or 7 cycles. The time to invest is when things look a little bleak. And I use the word look through the fog intentionally. So we are alert, we are active and we are very we are interested in growing our business and taking advantage of the marketplace.
The other thing, by the way, as an aside, and I think Michael said this is, we've been through this multiple times. The capital markets right now are, what would I call them, they're sticky. They're not fluid. Lenders are appropriately You go run this out a year, a year and a half and that will all change. There's a flood of liquidity, the chaos and the fog, so to speak, will begin to start to lift and it will become an aggressive borrower's market.
And you put these you put our balance sheet together, borrower's market, low interest rates, etcetera, this is a good, good time to be in our business.
The second question was just thinking about your commentary around New York and you just talked about being soft for a while. In your prepared remarks, you talked about the ecosystem in New York returning to normal in a couple of years. And you think about putting aside the announcement, obviously, of Facebook that you had overnight, there's obviously a lot of retail vacancy, a lot of crime. There has already been pre pandemic and exitances, very wealthy people out of the tri state area, Sterling McCapper, Icahn, Paul Tudor Jones, Cooperman. We have a political situation in New York City that is not very sustainable.
We have the density issue. What gives you the confidence that we can that the city can rebound?
That's a combination of a metaphysical question and a political question. So first of all, you said in your question, putting Facebook aside. Well, I don't want to put Facebook aside. It's a monumental or huge deal. And I couldn't be proud of the accomplishment.
I couldn't be more proud of Glenn and Barry and our teams. And I couldn't be more proud of David and me who are meddling, okay. And so I don't want to put it aside, but leave that as I say, look, New York is the world city. And it has always been it has been the world city for a century now. It's got this enormous infrastructure of all the cultural things, all the business things, all the talent, etcetera.
And even though every once in a while, we try to screw it up, it ends up that New York comes out of it in better shape. I don't want to make a political comment about the current management of the city. I think everybody has their own opinions about that. We understand that. But New York will the infrastructure in New York will win the day.
It always has and it always will. Now I love Nashville, Austin, etcetera. They're great cities, okay? When you take the size of those cities and you take the size of their workforce, you take the after hours activities in those cities, there is a group of them, there's a small subset of people who want to live there, but it can't compare to New York. I mean, remember, New York has 8 professional sports teams.
It has 2 hockey, 2 football, 2 basketball, 2 baseball, nobody's got anything like that. So and that's just one little instance. So New York has this enormous built in infrastructure and our feeling is that it will continue to flourish. There's some things that are wrong with New York now. I hate the homeless situation.
I hate a lot of the things about it. I'm not a big fan of defunding the police, etcetera. But in the end, New York will win the day. Thanks for the time, Steve. I
would just add to what Steve said that, look, at the end of the day, in addition to all the infrastructure that New York has, right, it has a pool of talent that is totally unique. And so when you think about not only Facebook's commitment, but I referenced in my comments, and I think there's been some rumored press on at least a couple of these things. You have major companies from various different industries that are looking beyond this short term period, which it is short term. We're going to have a vaccine or set up therapeutics, it looks like near term. So the health issue is going to come off the table when you get back to business.
And these companies, which are significant and extremely important, well respected, they're looking out and saying, where do I want to continue to grow my business long term? Where can I access the town? And they are focused on New York, right, and in scale. And so I think this is not us just pie in the sky. These are major companies that are global leaders that are going to continue to be the winners that are reaffirming their commitment to New York, not to mention what we've done in our own little district with Facebook app.
Thank you.
Our next question online comes from Jamie Feldman from Bank of America.
Can you talk about the implications of the Facebook deal on 770 Broadway and what their longer term plans are there?
Glenn, take that one.
Hi, Jeremy, it's Glenn. How are you? So the Farley transaction is not at all connected to the 770 lease, number 1. Number 2, Facebook loves 770. As a matter of fact, they're building more floors as we said in this phone call this morning.
So there's no connection from one deal to the other. If anything, I think the Farley transaction reflects the very strong relationship between the companies, which has grown from our initial deal down at $770,000,000 some 7 years ago.
Okay.
Jamie, I would add that Facebook has talked to us about growing in that building and taking the entire building. So and those conversations are continuing.
Okay, great. And then as you think about I mean, now that Farley is done, can you talk about the conversations around PENN2? II? I mean, what does that depth of demand look like? I know you've got some time before that project completed, but just that's certainly next up to the plate.
Yes, it sure is. So the first thing is that I'm sure you have, but I ask you again, take a look at our website where we have a fairly large picture book of what we're going to be doing at 2 Penn, what it's going to look like, what the amenities are, what the services we're going to bring to our tenants. And by the way, we look upon PENN2 and PENN1 as a campus, because those two buildings will be interconnected. So we have basically a 4 +1000000000 square foot campus in on top of Penn Station, which is, I submit, an unbelievably scarce asset and valuable. The development plan for 2 Penn is too long.
It's the better part of 3 years. But that's what it takes. So we have lots of time in terms of the leasing. Glenn is basically going to stay out of the market for the next year. We're not even going to entertain well, something comes along, maybe yes.
But basically, our intention is to not start to lease it for a year when the market can begin to see some of a better visibility as to what the product will look like. Now there was some conversation that in past calls where we said that we had a 400,000 foot anchor tenant to whom we were talking. That, as I said in the last quarter's call, that conversation away, gone into pause, okay? The major tenant in that building now is somebody called Madison Square Garden. They've been in that building for decades.
That building is adjacent to their business. And so that's really 2 Penn has been the home of Madison Square Garden for a long while. So you can put 2 and 2 together, but the and that's the status report on that. The other thing, by the way, is the design of the building with the bustle creating the overhang, creating the prominence, creating the entrance to Penn Station, etcetera. I mean, it has gotten universal applause, and so we're pleased about that.
There is an elephant company that's in the marketplace that is looking by the way, happens to be looking at both 315 Park Avenue and Zoopan, which is an interesting combination of locations. And their boss basically said that going through the renderings and the presentation that he thought that the design and the bustle and the were extraordinary piece of architecture and we agree with that.
Okay. Thanks for the color. And you're saying the tenant looking at 350 Park and Kupend, they would only take 1?
They're not going to make it. Hey, Glenn is good, but he can't sell space twice. No, they would only take 1.
Thank you. Our next question online comes from Alexander Goldfarb from Piper Sandler. Please go ahead.
Hey, good morning, Steve. So this tenant that Glenn is talking to for both 3 years. Hey, Alex, Alex, Alex,
the first thing you should say is, hey, Glenn and David, congratulations on this Facebook deal. That's the first thing you should say.
Okay. That was I could FaceTime you my question list and it says in red ink, Steve, congrats on Facebook. So that's there. Next, I was going to give you a plug for talking to Steve Schwartzman, your buddy about anchoring 350, but sounds like Glenn is also trying to sell them on Penn Station. So look forward to that as well.
First of all, I'll pass the congrats off to Glenn and David. 2nd of all, don't make that conclusion. It's not a good conclusion.
Okay. As you know, we and the analyst community would never make bad conclusions. So first, to Bilerman's point, I mean, Steve and Michael, you could have New York return to more of the Commuter Days, where New York office works, but the residential returns to a lower price point. That's certainly conceivable that you can have the 2 work in concert. But the two questions are, 1st, going to 555 and 1290, as you guys do more development, your portfolio, if you sell these 2 buildings, you would expose the overall bino to more of a developed built risk etcetera.
And they are tremendous buildings that I'm sure the cap rates have probably compressed over the past few months. In addition, obviously, you have Trump and they're all the people who love to write critical things of him. So it seemed like any transactions run that risk of headline risk. So how do you think about parting with these two buildings, given that they really do provide great NOI that helps with the as you redevelop Penn Station, Duke 350, etcetera? And then also take the political heat of everyone who nitpicks whatever price you pick that somehow there's something there?
Oh, boy. So let me try to take that in pieces. First of all, I pay zero solid. We make all the decisions. And so there's and that, by the way, has been tested in the courts.
So with respect to the fact that there is a partner in the building who is he doesn't have anything to say about the decisions that we make, and so that's fine. Step 2 is don't draw the conclusion that we're going to necessarily sell the buildings, okay? We have lots of different as I said in my prepared remarks, it's a fluid situation. There are lots of options. We will pursue all the options.
Our objective is to take capital out of mature buildings and have it available for more advantageous opportunities. So, 5, 5, 5, now the book says, you sell the worst stuff first and you save the best stuff for last. So in our council rooms, we have talked about, are those the right buildings to begin to draw capital out of or should we draw capital out of other buildings and what have you. It was our judgment collectively, I think I was on the side of this, that in this very sloppy market, it would take an extraordinary building to get investors' attention and to get a price or a value that would that's appropriate. So we have multiple 1,000,000,000 of dollars of equity in these buildings.
And I'd rather the capitals than the buildings and that's my answer to your question.
Okay. They are some of the best buildings. So hopefully, others wait for you guys to stay in it.
The point of it is they are some of the best buildings in the country.
Okay. The second question is on the street retail, you took the impairment, which is non cash, obviously reflects, as Michael said, the degradation of value from a year ago. How does this impact the preferred? And more to the point, I realize that the cash flows are still good. But if you think about ultimately trying to liquidate the preferred or when the leases roll that are underlying the preferred, how the $1,800,000,000 is potentially impacted.
So do you think you can get all your money out or when the leases roll, even if they roll where current rents are, is that preferred still money good?
Michael, why don't you handle that one?
Good morning, Alex. Thanks for the mazel stuff as well. So what I would say on the preferred is just let's just go back and because I read all the reports just for so everybody is clear on what the preferred is. The preferred was originally a proxy for senior mortgage debt, right? And so it is it sits on 5 of the 7 assets in the venture, and it is in that 1st lien position, right?
And at the time of the transaction, 0 to a little bit less than 50 percent LTV on those assets. So there's no debt in front of us on those assets. All the cash flow from all 7 assets is available to service the preferred. But again, that is the 1st lien position on the asset. And while the LTV is higher than the time of the transaction, the value is still well above the preferred.
So and again, to remind you, there was a period of time where we needed to let pass before we could think about redeeming that preferred, which we have not yet hit. So and then lastly, I would say is, it's not all or none, right? So it's 5 separate assets that can be redeemed in whole and in part as we elect over time. So as we sit here today and on many of those assets, we have meaningful term on those leases. And we acknowledge that, frankly, on many of those, if you had to re rent that today, those numbers would be lower.
But we have term, right? We don't know what the future holds beyond 5, 6 years. Hopefully, the market has stabilized, recovered, maybe not back to peak, but we're in a vibrant market. And our belief is still that we can redeem the preferred and the timing may be different per asset.
Okay. So Michael, the first one is what you
Let me jump in on top of that for a second. So the first thing is the preferred was structured by our teams in a very important, very somewhat complicated transaction where we sold or transferred 50% of our major high street retail assets. So the preferred served a very important purpose. I look upon the preferred as a financial asset, not as a real asset. So I don't look upon the preferred as real estate.
I look upon it as a financial asset, number 1. Number 2, I look upon it as being not impaired on our balance sheet. If we thought it was impaired, we would have impaired it. So we look upon it as being a good financial asset. Number 3 is, we look upon it as a source of future liquidity.
Should a certain time frame pass, which is not very long in coming. And should we decide that we wanted to end up liquefying that. So it's a financial asset, not real estate. It's good. It's good.
And it's a source of future liquidity.
Steve, thank you. And Michael, thank you.
And thank you.
Operator, the next question on the line. Yes.
Yes. So sorry. We have John Kim on the line from BMO. Please go ahead. Thank you.
Glenn and David, congrats on the Facebook, please. Steve, I wanted to clarify your answer to Steve Sacco's question. I wanted to clarify your answer to Steve Sacco's question on the yield at Farley being reassessed and at the same time the Facebook lease was within the original underwriting parameters. Is the yield going to come down primarily because of retail or is it the combination of the retail and the Facebook lease?
I don't think the answer is I'm not going to comment on that. The yield will come down if it comes down at all marginally, okay? So the asset is within the tolerance of our underwriting.
Okay. And my second question was on the leases signed this quarter, 174,000 square feet, where the rents, it was stated, will be determined next year at fair market value. Was that specific to one lease or multiple leases? And does Facebook have the same optionality on their starting line?
It's Glenn, John. Go ahead.
Hang on for a minute, Glenn. The Facebook lease has nothing to do with it. There's no optionality. The Facebook lease has set rents for the term. So now with respect to the 174,000 foot lease, Glenn is going to answer.
The 174,000 foot leases with 1 tenant, they exercise a 5 year renewal option. The rent is the greater of market or the tenants then rent, the rent gets set next fall of 2021, just a 5 year option of the space.
It was a contractual provision.
Yes.
So what we had was the conundrum that we had was that this was a lease that was exercised. So it rightfully goes into the count of how much space we leased in the quarter. But we had an unknown rent to be determined in the future by a process. So we had to put it into the square footage that was leased, but we could not put it into the mark to market because we don't know what the rent is. And by the way, this is we've been doing this for a long time.
This is, I think, Glenn, David, this is the first time I've ever seen this situation.
Yes. Let me just add a word, Steve. It's David. So when a tenant exercises a renewal option, the good clause says that the tenant owns the space and has exercised it and has confirmed an additional extension period, whether it's 5 or 10 years, with the rent to be reset based upon the then market. The best clause says that rent will never be less than the rent that the tenant previously was paying.
That's in fact what the clause is here. So tenant owns this space, and we're going to figure out the rent next year, and it's not less than what the rents that the tenants currently paying.
So this was originally in the lease and not a COVID related clause?
This is an old, old lease where the tenant exercised an extension option.
Correct.
Thank you. Our next question online comes from Vikram Malhotra from Morgan Stanley. Please go ahead.
Thanks for taking the questions and congrats on getting Farley buttoned up. First, just on retail, can you help us bridge sort of the occupancy loss sequentially from the 90s to I think the low 80s this quarter?
That was JCPenney. JCPenney.
Principally, JCPenney. Vikram, this is Joe. We took J. C. Penney because they rejected their lease out of the occupancy.
And what was the balance?
Joe, did J. C. Penney represent the entirety of the contract? I
don't know, Steve. Tom, you have it handy?
Vikram, it was primarily JCPenney and our finance team offline will give you the details and build it up for you.
Okay, sounds good. And then just second on street retail again, can you give us a sense over the I think over the next 12 or 18 months, you do have not a huge amount, but some expiration. Can you give us a sense of any larger tenants that may be up for renewal? And with those exploration, maybe any guide for us as to how we should think about kind of sweet retail NOI?
I think you're asking for guidance, Vikram, which you know that we don't do. Having said that, do we have a list of the specific tenants in our disclosure that expire over the next 18 months? No. Joe? No.
No. All right. So that's a question, Vikram, that I'm not going to be able to give you the guidance that you've asked for. I apologize. Okay.
No worries. And then if I
can just squeeze one more in. Steve, you correctly predicted many years ago Manhattan kind of moving south and west and obviously there's been a lot of development and progress. Just your higher level thoughts, whether it's COVID related or new types of demand or new types of tenants coming into Manhattan, do you foresee any changes in Manhattan, whether it's with lease structures or co working or maybe a little bit more so big firms maybe thinking about suburban? And any kind of high level thoughts if we look out over the next 5 years?
That's a very, very, very sophisticated question, which obviously we in running our business, we think about every single day. So a couple of things. Years ago, there was only one submarket in the city where people would live and that was the Upper East Side. Everything else was a mess. So in the process of being a mess, the other places, whether it be south or west or wherever, were a lot cheaper.
And so younger people started to move to those cheaper neighborhoods. They became gentrified and lo and behold now after 20 years of movement, the Upper East Side is the cheapest submarket in the city and what have you. So things change. Right now, we have the advantage in the city where every submarket from river to river is sought after, is been gentrified, is find places to live with good restaurants and a good experience, okay? So where people live is not that dispositive with respect to office development.
Now I would remind you that Long Island City is 1 to 2 train stops away from almost every office building in the city. And Brooklyn is 1 to 2 subway stops, which is like 10, 12, 15 minutes away from almost every office building in the city. So that's the way cities work. Now what we've seen is that the city is sort of splintering where the traditional business district of the Plaza District at Park Avenue is becoming more and more of a finance center. And the new Westside and Chelsea and that this region has become more and more of a creative center.
And the way I describe it most of the time is the people that wear ties go to the Plaza District, the people who don't wear ties go to the Westside. And I sort of see that sort of continuing. The big thing that I see is that every company, whether they even the companies that wear ties, especially the companies that wear ties, want to attract a younger, more creative workforce. And in order to do that, many of them are considering leaving their traditional locations and moving to the South and the West. So, I mean, there's many instances of that.
The insurance company that took 61 Nights from us was that. Many of the tenants that are in Hudson Yards today are traditional firms, banks, etcetera, who want to attract a different profile of worker. And so that continues. Now the other thing is that economics are important. And as the Westside flourishes and gets to be higher price points and higher price points, other places will flourish as well.
So now what's happened is, Park Avenue can compete very, very well with the Westside on price. So I mean, that's the way I see it. What I'm really saying is that I think where people live begin to lead the marketplace and economics are really important and where people want to work. So right now is the perfect storm for West Side of Manhattan. And I guess I'm talking
my book just
is it from I think I'm talking my book just a little bit. I'm talking my book just a little bit because I really believe it.
Makes sense. Thank you.
Yes, sir.
Thank you. Our next question on line comes from Nick Yulico from Scotiabank. Please go ahead. Thanks. Just turning to your cash same store NOI in the quarter, it was down about 6 percent in New York City.
Can you just talk a little bit about what drove that besides
Manhattan Mall and any other issues. And I just want to be clear in terms of the deferrals that you're giving. Is that actually a negative in your same store NOI? And when you talk about cash NOI, are you excluding the impact of these totals when you're talking about cash NOI?
Nick, this is Joe. I'll ask Joe and Michael to answer that one.
So Nick, let me give you a little background. This is Joe. Steve gave you the percentages of collections and deferrals, that translates into dollars of $48,000,000 uncollected in the quarter, of which we deferred $21,000,000 We also abated $3,000,000 and we set up reserves for $9,000,000 as uncollectible. That $12,000,000 reduces FFO and FFO as adjusted and cash basis NOI and all the other metrics. We also went on a cash basis for revenue recognition for 56% or almost $9,000,000 of all of the monthly rent not collected through the writing off of the $36,000,000 of straight line rents, which has the effect of putting those tenants on a cash basis.
So going forward, more than half of all the rents not collected in the second quarter are now on a cash basis. While COVID-nineteen has given rise to a much higher level of rents not collected than we're used to. It's still relatively small on a company our size with $1,700,000,000 of annual rents and additional revenues coming from hotels and DMS, etcetera, etcetera. And those numbers are in the NOI numbers. Now deferrals are treated as cash collected for cash basis FFO, but not the write offs, not the abatements, etcetera, etcetera.
Michael, do you want to add anything to that?
The only thing I'd add, Nick, is that the retail Joe referenced in terms of the bad debt reserves, and it's got the impact of the Forever 21 bankruptcy. But the other aspects in terms of it being down is really driven by the variable businesses that I referenced cleaning fees, signage, garage income, trade shows, those are the drivers. Again, when life returns to normal, we expect those to return to normal.
I want to add one thing. Joe used the word abatements and I think he mentioned $3,000,000 or something like that. We want to be very careful here. Abatements are anathema to us. We are collecting our rents.
We are doing a very good job of collecting our rents. It's interesting the way the better companies in the industry are all coming in at about the same percentages and what have you. It is the rarest of rare things that we will agree to an abatement. And as you can tell, the number of abatements that
Joe just disclosed to you is a very small number. Each of the
why we do it. It's not the policy of the company to do it. We do it only very, very rarely and only in special circumstances. So what we've been doing is collecting cash rents on occasion, also a fairly small number, giving tenants a deferral so that we work with our tenants and with a collection of that deferral in the following year, which is a very short term loan. But abatements are a no no and I don't want anybody to get the idea that we're in the abatement business.
We are not in the abatement business. Thanks.
Okay. Thank you. That was helpful. Just second question is going back to the Facebook deal. Did you make any changes to the existing lease at 70 Broadway?
Glenn, we did not, correct?
We did not. No changes.
Okay. Thank you, everyone.
By the way, there seems to be a feeling amongst 1 or 2 of you all that how can Facebook take all this space? And maybe they've got extra space and maybe that extra space is 770 Broadway. That is absolutely not true. Next question, operator.
Thank you. Our next question on line comes from Manny Korchman from Citi. Please go ahead.
It's Michael Bilerman back with Manny. You talked about 555 and 1290 about not making decision which path to go down, I. E. Refinancing sale, maybe additional bringing additional investor. On the refinancing front you mentioned
Michael, Michael, Michael, Michael, hold it. No, we didn't say not making a decision. What we said was that we were in the marketplace to expose ourselves to whatever financial opportunities might be there and then we will select what is best for us. It's not a problem. So you had to make a final
decision about which path to go now because you're evaluating what the best outcome is for Vornado shareholders, which is perfect.
Exactly right.
Right. So but you did mention on the refinancing of 555 potentially pulling in $1,500,000,000 of total proceeds relative to the 5.50 existing mortgage, what would that be on twelve ninety? Have you gotten a similar indicative quote? So at least in our mind, we can think about what a refinancing option could bring in.
The answer is not as much and maybe not even maybe nowhere near as much. And the reason for that is twofold. Number 1, 555 California has a very low loan to value mortgage on it now, okay? So therefore, it stands to reason if one were going to refinance the proceeds would be very robust. The 1290 building has an appropriate loan on it and therefore the refinancing proceeds would not be anywhere near as robust as 555.
Okay. And then one of the things you talked about in your terms letter and also in the proxy was the whole element of attracting stock. Where does that sit within all of the strategic priorities today?
It's still very, very much on the table. And we'll go back again. The genesis of that is that to separate out the different components or at least 2 different components of our company, so that investors could choose what they wanted to invest, whether they wanted to invest in the long term high growth marvelous potential of the Penn District or whether they wanted to invest in our also wonderful but more stable and steady as they go office product. And so the answer is it's still very much on the table and we will see. But this is in the throes of this financial crisis.
This is probably or not for this health crisis, this is probably not the perfect timing. So that is not something that we're going to spring next month.
Okay. That's what I wanted to sort of get
a picture of. I appreciate
the time, and I hope you and the team are
doing well.
Yes. Thanks, Michael. Nice to talk to you.
Thank you. Our final question comes from Daniel Ismail from Green Street Advisors. Please go ahead. Great. Thank you.
Given the Facebook lease and other leasing you guys got done this quarter, are you able to share any noticeable changes in utilization and possible trend of de densification by tenants?
Glenn, David?
We are talking to our tenants often through this since March. Many, many conversations are revolved around what are tenants going to build, what's the design going to be. I don't think from a long term aspect, any of the tenants really know yet what they're going to do long term. And I think Aaron was kind of in a holding pattern in terms of how space will be utilized as they go forward with life. As it relates to some of the deals we finalized this quarter, I have seen no real change in terms of tenants' thinking as it relates to space utilization, as it relates to their density, their communal spaces, their hangout spaces for their employees, their food and beverage operations, etcetera.
So I would say up to this point, we've seen no real change that I could pinpoint for you 2.
I guess, it's David. I would just add a couple of other comments. And that is, as Michael mentioned in his script, we are engaged now in some active dialogues with some tenants in renewal discussions. And in some of those cases, the tenants are thinking about doing some major reworking of their spaces. So Daniel, realistically, it's way too early to understand exactly how people are going to change their space.
Obviously, on an immediate basis for the tenants who are in occupancy, they are social distancing. It's every other office, every other workstation. But the long term trends in terms of health and wellness, I think it's something realistically, it's going to evolve. And my guess is that we are not going to see a dramatic reversal of densification, but I think what we are going to see is certainly the densification that we've seen over this last cycle is going to plateau and maybe even begin to reverse a bit as people focus on their space usage over the next 5 10 years.
Great. And just on the street retail write down, the 10 Q cites a 4.5% cap rate in assessing share value. Should we read that as a proxy for your thoughts on market cap rates or is this just an accounting treatment?
I think for Daniel, this is Michael. I think for Premier assets, we still think that, that is possible. It's somewhat accounting driven in terms of the methodology of how you get to the impairments, but it's what they long term view. It's not as if you're selling spot value today, right? You're liquidating or selling assets today, but on a normalized basis, right, where are those assets going to devalue that.
So it's obviously higher than it was a few years ago, but we still feel appropriate today.
Great. Thanks everyone. There are no further questions at this time.
So there are no further questions. So thank you all. We appreciate everybody joining us this morning. Please stay safe and healthy. We look forward to seeing you soon.
Our Q3 2020 earnings call will be on Wednesday, November 4, the day after Election Day. So I guess we'll have some interesting stuff to talk about. We look forward to your participation again. Please take good care. Thanks very much.
And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.