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. At that time, please press star then one on your touchtone phone. We also ask that you please limit your questions to one question and one follow-up question only. I'll now turn the call over to Ms. Cathy Creswell, Director of Investor Relations. Please go ahead.
Thank you. Welcome to Vornado Realty Trust second quarter earnings call. Yesterday afternoon, we issued our second quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents, as well as our supplemental financial information package, are available on our website, www.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 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 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.
Thanks, Cathy, 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 sq ft lease with Facebook at our Farley Building. We normally don't go for the drama of timing deals with earnings call, but this one just worked out that way. This deal has been in the works for a while and has not been a secret in the marketplace. People have been speculating, will even a great company such as Facebook commit to 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 million sq ft of PENN DISTRICT holdings into the bull's eye location in New York.
Facebook's commitment here expands our long-standing relationship with them at our 770 Broadway property, where they lease 757,000 sq ft. Facebook is now our largest tenant by both revenue and sq ft. Kudos to Glen Weiss, our deal captain, and to Barry Langer, who led construction and development support. 220 Central Park South is the most successful residential development ever. We are 92% sold or under contract, and we are now reaping the financial rewards from 220. 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 million. All of this during the health crisis. From inception through July, we have closed 67 units for net proceeds of $2.42 billion. We expect closings in the balance of the year will bring in an additional $496 million in net proceeds.
Our current liquidity is $3.8 billion, including $2.1 billion of cash and restricted cash and almost $1.74 billion undrawn under our $2.75 billion revolving credit facilities. Adding in the $496 million coming in from 220, we might say our liquidity is this year now $4.3 billion. 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 in many instances we would rather have the cash than the buildings, in June, we announced that we were going to market to recapitalize two large, high-quality assets, 555 California Street, which has to be a top five 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. 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 mortgage from the existing $550 million to as much as $1.5 billion. 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 du jour.
Rent collections in the second quarter, we collected 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 second 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. 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 two to five years and sometimes even longer. I submit to you that this is undoubtedly a great time to be looking through the fog and putting capital to work. 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 taxable earnings. 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 the 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. Truth be told, it may even take a couple of years for New York's ecosystem, tourism, sports, concerts, Broadway, museums, restaurants, nightlife, et cetera, 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 values. 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, et cetera. In the end, culture, productivity, collaboration, innovation, and talent happen in office buildings.
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. Second quarter FFO, as adjusted, was $0.55 per share, compared to $0.91 for last year's second quarter, a decrease of $0.36. This decrease was reconciled for you in our earnings release on page five and in our financial supplement on page eight. A little color on a couple of these items, 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 Penney's. Over the past 11 years, they have paid us $200 million in rent in the Manhattan Mall.
We do have a $20 million hole to fill here. We have activity and interest for this property. It could be for retail, or it could even be for last-mile distribution, the hottest business in the country. The JCPenney and New York & Company bankruptcies were the lion's share of the write-offs in the quarter, which aggregated $45.1 million, or $0.22 per share, of which $36.3 million was for non-cash write-offs of receivables arising from the straight-lining of rents, and $8.8 million was for bad debts. Second, as we had specifically guided on our first quarter call, we call our variable businesses, which include Hotel Pennsylvania, BMS, signage, and trade shows, came in as we had predicted, down $9 million per month or $27 million 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 were disclosed in a press release on July 20. A little color on the largest one. We recognized a $305.9 million non-cash impairment loss on our investment in Fifth Avenue and Times Square Retail Joint Venture. This comes a little more than a year after we recognized a $2.56 billion 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 space . 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 three markets, as most companies take a wait- and- see posture to see what the impact of their business and employees ultimately will be. The vast preponderance of office tenants are opting to renew their leases rather than uproot their 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, and New York City as a deep and unique reservoir of talent. In addition, certain large companies in our portfolio that had paused their renewal discussions at the onset 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. To emphasize a point that Steve made earlier, the trend of users wanting to be in the best product with 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 1.8 million sq ft or 10% of our portfolio, an average of only 4% per year at a weighted average expiring rent of only $76.53 per sq ft . The retail environment is very difficult. This crisis is accelerating the shakeout of the weak and poorly capitalized retailers, JCPenney, Neiman Marcus, J. Crew, Brooks Brothers, and so on. We've taken our share of hits just like all the other retail landlords. Most retailers are focused on survival. Few are focused on opening new stores. 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 and be painful getting to the other side. For sure, though, at our current stock price, the worst of retail has been more than fully priced in. 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 Train Hall, along with some limited retail openings and first delivery of office space in January 2021. Retail demand is strong here, given the expected daily foot traffic.
Farley, PENN 1 , and PENN 2 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 unmatched anywhere. Even during the shutdown, the reaction from the brokerage community and multiple prospective tenants to our PENN 2 bustle 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 three 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 closings. 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 Rail Road 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's impact on the economy and real estate. The real estate financing markets are beginning to heal, though lenders are still in triage mode and highly selective in what they finance. Spreads are wider and terms more conservative, though 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 12-18 months, it will start to become a borrower's market with rates at 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 with 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 hundreds of years, cities have endured as the central gathering places for work, living, and culture, and 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&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, that's star then one on your touchtone phone. Our first question on the line comes from Steve Sakwa from Evercore. Please go ahead, sir.
Thanks. Good morning. Michael or Steve, I didn't know if you could maybe just address in general how the economics on the Facebook lease might have changed over the past nine months. I realize this lease has been in negotiation for quite some time. I know you left the yield unchanged in the supplemental, but anything that you could talk about on rental rates or concession packages or kind of how that might have evolved over the course of time would be helpful. Thanks.
Thanks, Steve. Hi, how are you?
Good, thanks.
Good. Good for you. 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. That's step one. Step two 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. Both parties were committed to the deal and working hard with various teams to complete the deal in what was a very complicated transaction. The Facebook, the Farley Building, as I think you know, I hope you know, is a very differentiated, different, 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. We learned a lot from that. 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 dry cleaning operations 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. 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-K at the end of the year. Remember, there's two 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 sq ft of very important retail.
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 the pedestrian traffic and commuter traffic funnels through the retail portion of the Farley Building. We're extremely excited about that. We are working on the rents, we will not re-underwrite this deal until we have more visibility in terms of the retail rents, that won't be until after the first of the year in the 10-K.
Okay. Thanks for that color.
Yeah.
I guess just to, for the second question, just to kind of follow up on the JCPenney . I can't remember if it was you or Michael that sort of just talked about last-mile distribution as being potential option. 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 JCPenney, I think we made the statement that we don't have a bone to pick with JCPenney. They paid us, I think the exact number is $194 million 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 last-mile distribution center. Now, that's the hottest business in the country right now.
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. 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. 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 relet the space quickly. This will be a long, slow slog.
Great. Thanks very much.
Thank you. Our next question online comes from Manny Korchman from Citi. Please go ahead.
Hey, 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. I wanted to know how you think about that from a Vornado perspective, and you think about the Facebook deal now being official, the progress you've made on PENN 1 and PENN 2 , would you be more aggressive in, let's say, take down Hotel Pennsylvania 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 multi-billion dollar asset out of risk and puts it into a secure financial asset. We have two very large buildings that we are talking about recapitalizing, which will generate, if our plan is successful, an enormous amount of additional capital. If you pardon the expression, we're loaded. Okay? We didn't see the pandemic coming, but we saw the end of a long expansion coming, and so we prepared for this. The first thing is our balance sheet is in great shape, and we are doing things such as closings at 220 Central Park South, such as the Farley lease, such as the 555 1290 buildings, which are in the marketplace now.
We're doing things that continue to augment our liquidity. Okay. Your comment specifically went to the Hotel Pennsylvania. I don't really have much to say about that except that, as we continue to march along from the Farley Building to PENN 2 to PENN 1 , et cetera, the Hotel Pennsylvania is arguably one of the top two or three development sites that are available in the city. By the way, at 350 Park Avenue, many of the people in the marketplace think it's the single best development site. Be that as it may, I couldn't resist getting the plug in. The issue is that Hotel Pennsylvania, in order to execute on that, you have to pay par. In other words, you have to build a building, and 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.
Right.
We have all the capital we need for our 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. PENN 2 Plaza has no debt on it. It's unencumbered. PENN 1 Plaza has no debt on it. It's unencumbered. The capital plan for those buildings is complete Farley, and PENN 2 development plan is, I don't know, pick a number, $1.5 billion, which we have sitting on our balance sheet ready to go. We can complete all that with no debt. We are, to pardon the street phrase, we're loaded.
Right.
We believe we've been through this five or six or seven cycles. The time to invest is when things look a little bleak. I use the word look through the fog intentionally. We are alert, we are active, and we are interested in growing our business and taking advantage of the marketplace. The other thing, by the way, as an aside, 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 are sticky. They're not fluid. Lenders are appropriately concerned. The future is uncertain. Lenders are appropriately cautious. Okay. You go and run this out a year, a year and a half, 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. You put our balance sheet together, a borrower's market, low interest rates, et cetera. This is a good time to be in our business.
Yeah. The second question was just thinking about your commentary around New York. 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. 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 an exodus of very wealthy people out of the tri-state area. Mr. LeFrak, Tepper, 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 the city can rebound?
First of all, you said in your question, putting Facebook aside. I don't want to put Facebook aside. It's a monumental, huge deal, and I couldn't be prouder of the accomplishment. I couldn't be more proud of Glen and Barry and our teams, and I couldn't be more proud of David and me who are meddling. I don't want to put it aside, but leave that as it's safe. New York is the world city. 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, et cetera. 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. The infrastructure in New York will win the day. It always has and it always will. I love Nashville, Austin, et cetera. 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's a small subset of people who want to live there, but it can't compare to New York. Remember, New York has eight professional sports teams. It has two hockey, two football, two basketball, two baseball. Nobody's got anything like that. That's just one little instance. 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, et cetera. 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, it has a pool of talent that is totally unique. 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 a set of therapeutics it looks like near term. The health issue is going to come off the table. We're going to get back to business. 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 talent?" They are focused on New York and in scale. 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 and Apple.
Thank you.
Thank you. Our next question online comes from Jamie Feldman from Bank of America. Please go ahead.
Great. Thank you. Good morning. Can you talk about the implications of the Facebook deal on 770 Broadway, and what their longer term plans are there?
Glen, take that one.
Hi, Jamie, it's Glen. How are you? The Farley transaction is not at all connected to the 770 lease, number one. Number two, Facebook loves 770. As a matter of fact, they're building more floors as we sit on this phone call this morning. 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 then at 770 some seven years ago.
Okay.
Jamie, I would add that Facebook has talked to us about growing in that building and taking the entire building, and those conversations are continuing.
Okay, great. As you think about, now that Farley's done, can you talk about the conversations around PENN 2? What does that depth of demand look like? I know you've got some time before that project's completed, but just, that's certainly next up to the plate.
Yeah, it sure is. 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 PENN 2, what it's going to look like, what the amenities are, what the services we're going to bring to our tenants. By the way, we look upon PENN 2 and PENN 1 as a campus, because those two buildings will be interconnected. We have basically a 4+ million sq ft campus on top of Penn Station, which is, I submit, an unbelievably scarce asset and valuable. The development plan for PENN 2 is too long. It's the better part of three years. That's what it takes. We have lots of time in terms of the leasing.
Glen is basically going to stay out of the market for the next year. We're not even going to entertain. Well, if something comes along, maybe yes. Basically, our intention is to not start to lease it for a year, when the market can begin to see some better visibility as to what the product will look like. Now, there was some conversation in past calls where we said that we had a 400,000 sq ft anchor tenant to whom we were talking, that I said in last quarter's call, that conversation has, as expected, gone into pause. Not gone 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. PENN 2 has been the home of Madison Square Garden for a long while.
You can put two and two together, 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, et cetera. It has gotten universal applause, 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 350 Park Avenue and PENN 2, which is an interesting combination of locations. Their boss basically said that, going through the renderings and the presentation, that he thought that the design and the bustle were extraordinary piece of architecture, and we agree with that.
Okay. Thanks for the color. You're saying the tenant looking at 350 Park and PENN 2, they would only take one? They're not
Hey, Glen is good, but he can't sell space twice.
All right.
No, they would only take one.
All right. Thank you.
Thank you. Thanks, Jamie.
Thank you. Our next question online comes from Alexander Goldfarb from Piper Sandler. Please go ahead.
Hey, good morning, Steve. This tenant that Glen is talking to for both three.
Hey, Alex. The first thing you should say is, "Hey, Glen and David, congratulations on this Facebook deal." That's the first thing you should say.
Okay. I could FaceTime you my question list, and it says in red ink, "Steve - congrats on Facebook." That's there. Next, I was going to give you a plug for talking to Steve Schwarzman, your buddy, about anchoring 350, but sounds like Glen is also trying to sell him on Penn Station. Look forward to that as well.
Whoa. First of all, I'll pass the congrats off to Glen and David. Second of all, don't make that conclusion. It's not a good conclusion. Go ahead.
As you know, we in the analyst community would never make bad conclusions. First, to Bilerman's point, Steven 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 two work in concert. The two questions are, first, going to 555 and 1290, as you guys do more development, your portfolio, if you sell these two buildings, you would expose the overall VNO to more of a develop, build, risk, et cetera, 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 there are all the people who love to write critical things of him.
It would seem like any transactions run that risk of headline risk. How do you think about parting with these two buildings, given that they really do provide great NOI that helps as you redevelop Penn Station, do 350, et cetera, and then also take the political heat of everyone who nitpicks whatever price you pick, that somehow there's something there?
Oh, boy. Let me try to take that in pieces. First of all, I pay zero attention to what you call the political risk. We are the 70% partner in those buildings. The docs are rock solid. We make all the decisions. That, by the way, has been tested in the courts. With respect to the fact that there is a partner in the building, he doesn't have anything to say about the decisions that we make, that's fine. Step two 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.
The book says you sell the worst stuff first, and you save the best stuff for last. 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's appropriate. We have multiple billions of dollars of equity in these buildings, and I'd rather have the capital than the buildings, and that's my answer to your question.
They are some of the best buildings, so hopefully there's a way 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? More to the point, I realize that the cash flows are still good, but as you think about ultimately trying to liquidate the preferred, or when the leases roll that are underlying the preferred, how the $1.8 billion is potentially impacted. 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 tov as well. What I would say on the preferred is just go back and, because I read all the reports, just so everybody's clear on what the preferred is. The preferred was originally proxy for senior mortgage debt . Right? It sits on five of the seven assets in the venture, and it is in that first lien position. Right? At the time of the transaction, 0 to a little bit less than 50% LTV on those assets. 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. Again, that is the first lien position on the asset. While the LTV is higher than the time of transaction, the value is still well above the preferred.
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. The last of what I would say is it's not all or none, right? It's five separate assets that can be redeemed in whole and in part, as we elect over time. As we sit here today and on many of those assets, we have meaningful term on those leases. We acknowledge that, frankly, on many of those, if you had to re-rent that today, those numbers would be lower. We have term, right? We don't know what the future holds beyond five, six years. Hopefully, the market is stabilized, recovered, maybe not back to peak, but we're in a vibrant market.
Our belief is still that we can redeem the preferred, and the timing may be different per asset.
Okay. Michael, the first point is.
Yeah.
Thank you.
Let me jump in on top of that for a second. The first thing is the preferred was structured by our teams in a very important, somewhat complicated transaction where we sold or transferred 50% of our major high street retail assets. The preferred served a very important purpose. I look upon the preferred as a financial asset, not as a real asset. I don't look upon the preferred as real estate. I look upon it as a financial asset, number one. Number two, I look upon it as being not impaired on our balance sheet. If we thought it was impaired, we would have impaired it. We look upon it as being a good financial asset. Number three is we look upon it as a source of future liquidity.
Should a certain time frame pass, which is not very long coming, and should we decide that we wanted to end up liquefying that. It's a financial asset, not real estate. It's good, and it's a source of future liquidity.
Steve, thank you, and Michael, thank you.
Thank you, Alex.
Thank you. Our next question on the line.
Operator.
Yeah. Sorry. We have John Kim on the line from BMO Capital Markets. Please go ahead.
Thank you. Glen and David, congrats on the Facebook lease. Steve, I wanted to clarify your answer to Steve Sakwa's question on the yields at Farley being reassessed and, yet at the same time, the Facebook lease was within your 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?
The answer is, I'm not going to comment on that. The yield will come down, if it comes down at all, marginally. Okay? The asset is within the tolerance of our underwriting.
Okay. My second question was on the leases signed this quarter, 174,000 sq ft , 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 rent?
It's Glen, John. Go ahead.
Hang on for a minute, Glen.
Go ahead.
The Facebook lease has nothing to do with it. There's no optionality. The Facebook lease has set rents for the term. Now with respect to the 174,000 sq ft lease, Glen's going to answer.
The 174,000, the lease is with one tenant. They exercised a five-year renewal option. The rent is the greater of market or the tenant's then rent. The rent gets set next fall of 2021. Just a five-year option of the space.
Which was a contractual provision.
Yes.
What we had was, the conundrum that we had was that this was a lease that was exercised. It rightfully goes into the count of how much space we leased in the quarter. We had an unknown and a rent to be determined in the future by a process. We had to put it into the square footage that was leased, but we could not put it into the markets because we don't know what the rent is. By the way, we've been doing this for a long time. This is, I think, Glen, David, this is the first time I've ever seen this situation.
Yeah, let me just add a word, Steve. It's David. 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 five 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. The tenant owns the space, and we're going to figure out the rent next year, and it's not less than what the rent that the tenant's currently paying.
This was originally in the lease and not a COVID-related clause.
This is an old lease where the tenant exercised an extension option. Correct.
Great. Thank you for clarifying. Thanks a lot.
Thank you. Our next question on the line comes from Vikram Malhotra from Morgan Stanley. Please go ahead.
Thanks for taking the questions. Congrats on getting Farley buttoned up. First, just on retail, can you help us bridge sort of the occupancy loss sequentially from the 90% to, I think, the low 80% this quarter?
That was JCPenney and Vikram.
JCPenney. Principally JCPenney, Vikram. This is Joe. We took JCPenney because they rejected their lease out of the occupancy.
What was the balance?
Hold on. Joe, did JCPenney represent the entirety of the decline?
I don't know, Steve. Tom, you have it handy?
You know what-
JCPenney was prime-
Vikram, it was primarily JCPenney, and our finance team offline will give you the details and build it up for you.
Okay. Sounds good. Just second on street retail again, can you give us a sense, I think over the next 12 or 18 months, you do have a, not a huge amount, but some expiration. Can you give us a sense of any larger tenants that may be up for renewal? With those expirations, maybe any guideposts as to how we should think about kind of street 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. 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. If I can just squeeze one more in.
Yes, sir.
Steve, you correctly predicted many years ago, Manhattan kind of moving south and west, 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 as we look out over the next five years?
That's a very sophisticated question, which obviously we, in running our business, we think about every single day. A couple of things. Years ago, there was only one sub-market in the city where people would live, and that was the Upper East Side. Everything else was a mess. In the process of being a mess, the other places, whether it be south or west or wherever, were a lot cheaper. 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 sub-market in the city, and what have you. Things change. Right now, we have the advantage in the city where every sub-market from river to river is sought after, has been gentrified, is fine places to live with good restaurants and a good experience. Okay?
Where people live is not that dispositive with respect to office development. I would remind you that Long Island City is one to two train stops away from almost every office building in the city, and Brooklyn is one to two subway stops, which is like 10, 12, 15 minutes away from almost every office building in the city. That's the way cities work. What we've seen is that the city is sort of splintering, where the traditional business district, the Plaza District at Park Avenue, is becoming more and more of a finance center. The new West Side and Chelsea and this region has become more and more of a creative center. 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 West Side.
I sort of see that sort of continuing. The big thing that I see is that every company, even the companies that wear ties, especially the companies that wear ties, want to attract a younger, more creative workforce. In order to do that, many of them are considering leaving their traditional locations and moving to the South and the West. There's many instances of that. The insurance company that took 61 Ninth from us was that. Many of the tenants that are in Hudson Yards today are traditional firms, banks, et cetera, who want to attract a different profile of worker. That continues. The other thing is that economics are important, and as the West Side flourishes and gets to be higher price points and higher price points, other places will flourish as well.
Now what's happened is Park Avenue can compete very well with the West Side on price. 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. Right now is the perfect storm for the West Side of Manhattan. I guess I'm talking my book.
Okay, thank you.
Vikram, 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 online 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% in New York City. Can you just talk a little bit more about what drove that besides Manhattan Mall and any other issues? I just wanted to be clear in terms of the deferrals that you're giving, is that actually a negative in your same- store NOI? When you talk about cash NOI, are you excluding the impact of the deferrals when you're talking about cash NOI?
Nick, this is Joe.
I'll ask Joe and Michael to answer that one.
Nick, let me give you a little background. This is Joe. Steven gave you the % of collections and deferrals. That translates into dollars, $48 million uncollected in the quarter, of which we deferred $21 million. We also abated $3 million, and we set up reserves for $9 million as uncollectible. That $12 million 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 million, of all of the monthly rent not collected through the writing off of the $36 million of straight- line rents, which has the effect of putting those tenants on a cash basis. Going forward, more than half of all the rents not collected in the second quarter are now on a cash basis.
While COVID-19 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 $1.7 billion of annual rents and additional revenues coming from hotels and BMS, et cetera. 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, et cetera. 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. The other aspects in terms of it being down is really driven by the variable businesses that I referenced earlier, whether that's lower 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 million 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. As you can tell, the number of abatements that Joe just disclosed to you is a very small number. Each of those very few abatements has a very specific reason why we do it. It's not the policy of the company to do it. We do it only very rarely and only in special circumstances.
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. 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 770 Broadway?
Glen, we did not, correct?
We did not. No changes.
Okay. Thank you, everyone.
By the way, there seems to be a feeling amongst one or two 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 online comes from Manny Korchman from Citi. Please go ahead.
It's Michael Bilerman back with Manny. Steven, when you talked about 555 and 1290 about not making decision which path to go down, i.e., refinancing, sale, maybe bringing additional investor.
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 making a decision.
Right. You didn't make a final decision about which path to go down because you're evaluating what the best outcome is for Vornado shareholders, which is perfectly fine.
Exactly right.
Right. You did mention on the refinancing of 555 potentially pulling in $1.5 billion of total proceeds relative to the $550 existing mortgage. What would that be on 1290? 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 nowhere near as much. The reason for that is twofold. Number one, 555 California has a very low loan-to-value mortgage on it now. Okay. Therefore, it stands to reason if one were going to refinance it, 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. One of the things you talked about in your terms letter and it was also in the proxy, was the whole element of a tracking stock. Where does that sit within all of the strategic priorities today?
It's still very much on the table. We will go back again. The genesis of that is that to separate out the different components, or at least two different components of our company, so that investors could choose what they wanted to invest, whether they wanted to invest in the long-term, high growth, marvelous potential of the Penn District, or whether they wanted to invest in our also wonderful but more stable and steady-as-they-go office product. The answer is, it's still very much on the table. We will see. In the throes of this financial crisis, or not, this health crisis, this is probably not the perfect timing.
Right.
That's 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.
Yeah. 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 a possible trend of dedensification by tenants?
Glen, David?
Yeah. We're talking to our tenants often through this since March. Many conversations have 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. I think everyone's 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, et cetera. I would say up to this point, we've seen no real change that I could pinpoint for you, too.
I guess it's David. I would just 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. In some of those cases, the tenants are thinking about doing some major reworking of their spaces. 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 quote, every other office, every other workstation.
The long-term trends, in terms of health and wellness, I think it's something realistically, it's going to evolve and my guess is that we are not going to see a dramatic reversal of densification, but I think what we are going to see is certainly 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 five and 10 years.
Great. Just on the street retail write-down, the 10-Q cites a 4.5% cap rate in assessing fair value. Should we read that as a proxy for your thoughts on market cap rates, or is this just an accounting treatment?
This is Michael. I think for premier assets, we still think that that's possible. It's somewhat accounting driven in terms of the methodology of how you get to the impairments. It's what they long-term view. It's not a spot value today, right? You're liquidating, you're selling assets today, but on a normalized basis, right? Where are those assets going to be valued at? It's obviously higher than it was a few years ago, but we still feel appropriate today.
Great. Thanks, everyone.
There are no more further questions at this time.
There are no further questions. Thank you, all. We appreciate everybody joining us this morning. Please stay safe and healthy. We look forward to seeing you soon. Our third quarter 2020 earnings call will be on Wednesday, November 4th, the day after election day. I guess we'll have some interesting stuff to talk about. We look forward to your participation. Again, please take good care. Thanks very much.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.