Good morning, and welcome to the Vornado Realty Trust Fourth Quarter 2019 Earnings Call. My name is Brandon, and I'll be your operator for today. 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. Kathy Creswell, Director of Investor Relations. Please go ahead.
Thank you. Welcome to Vornado Realty Trust 4th quarter earnings call. Yesterday afternoon, we issued our 4th quarter earnings release and filed our annual report on Form 10 ks 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 ks 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 Form 10 ks 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 is Michael Franco, President. In addition, Stephen Ross and our senior team are present and available for your questions. I will now turn the call over to Michael Franco.
Thank you, Kathy, and good morning, everyone. Overall, we look back at 2019 as an important and successful year, setting the stage for the next phase of the company's growth. In addition to keeping our buildings full at very healthy rents, we are at 96.5 percent occupancy. Recapitalized our Fifth Avenue and Times Square retail assets on a very attractive basis and a $5,500,000,000 transaction. We paid 1.9 $5 per share special dividend last month related to this transaction.
Most importantly, we advanced the redevelopment of the Penn District, positioning the company to capitalize on the enormous opportunity we have on the west side of Manhattan. More on this in a moment. Before giving some thoughts on the markets in our portfolio, and in particular, the Penn District, let me review our 4th quarter and full year financial results. 4th quarter FFO as adjusted was $0.89 per share, flat to last year's 4th Full year 2019 FFO as adjusted was $3.49 per share compared to $3.73 per share for 2018. These results are $0.09 ahead of the guidance we've given in the Q3.
As we've previously indicated, financial results for 2019 were lower than 2018, explained as follows. Of the $0.24 reduction, dollars 0.25 is due to over $3,200,000,000 of asset sales, dollars 0.09 is due to a one time non cash stock based compensation expense and $0.04 is due to lost income from retail bankruptcies, all of which aggregate to a $0.38 reduction, which was partially offset by growth in our core business and interest savings. Overall, our core business continues to be strong. For the year, across New York, Chicago and San Francisco, our office and retail leasing teams completed 215 leases, comprising 1,700,000 square feet at starting rents of 90.45 dollars per square foot, at positive mark to markets of 14% GAAP and 8.8% cash. Please see Page 18 in the supplement for further detail.
Cash basis same store NOI company wide was up 3.6%. Company wide, our 4th quarter cash basis same store NOI increased by 6.6%, broken down as follows: New York office was up 3.4%, street retail was down 2.2 percent the market was up 100%, benefiting from a one time The market was up 100%, benefiting from a one time $12,000,000 accrual of real estate tax expense last year due to the triennial reassessment of the property and 555 California Street was up 4 0.1%. Our non comparable items in the 4th quarter included the $173,700,000 after tax net gain on unit closings at 220 Central Park South. To date, we have closed on 65 units for net proceeds of 1 $820,000,000 including 17 units for $565,900,000 in the 4th quarter. We are now 91% sold in the face of a very soft luxury condo market, a testament to the building being the best ever built in New York City.
And our sales continue strong. Since the beginning of 2019, we have executed contracts of $400,000,000 We expect to receive over $1,000,000,000 from closings in 2020. And as we've said previously, all the net proceeds will be redeveloped into the Penn District redevelopments underway, turning this capital into highly accretive earnings and driving strong future growth. Now turning to 2020, which will be an inflection point for us as we invest heavily in the Penn District to create enormous future value. Given the full year effect of our substantial asset sales and our development activity as we continue to invest in the Penn District, we thought it appropriate to provide some greater visibility into our projection for 2020.
We currently estimate that 2020 FFO as adjusted will be lower than 2019 by between $0.23 $0.33 per share. Of this $0.28 reduction at the midpoint, $0.16 is due to the full year impact of asset sales. Dollars 0.09 is due to taking additional assets out of service for redevelopment, primarily in the Penn District at PENN2, the retail at the LIR Concourse and the Kmart space at PENN1. And $0.08 is due to lost income from the full year effective 2019 retailer bankruptcies, all of which aggregate to a $0.33 reduction, which is partially offset by growth in the core business. Let me now turn to the New York market.
The Manhattan office market continues to fire on all cylinders, fueled by strong job growth and unabated tenant demand for office space, particularly for landlords with new or redeveloped product. The city added 19,000 office using jobs during the year, bringing office using employment to an all time high of 1,470,000 jobs. And the recently announced large future ops commitments from major companies in the city point to continued strong job growth. Leasing volume citywide in 2019 totaled 43,000,000 square feet, the highest activity in 20 years. TAMI tenants continue their strong demand, accounting for 1 third of all activity during the year, with the tech sector alone leasing 7,500,000 square feet.
This sector has become a dominant powerhouse in New York as tech companies are attracted by the city's dynamic economy, deep and diverse talent base and leading universities. While the big tech companies like Facebook, Google and Amazon continue to expand their sizable presence, The city of growth was also being driven by long established traditional industries, hiring more and more technology workers to support their businesses. Importantly, in 2019, venture capital investment in New York Companies surpassed $17,000,000,000 increasing New York City share of total VC investment in the U. S. To an all time high of 20%, up from 11% in 2018.
These investments pave the way for continued growth in the tech sector in the future. The flight to quality trends in tenants for new construction and redeveloped space accelerated during 2019. According to JLL's annual trophy building report, more than 20% or 8,800,000 square feet of the city wide leasing activity was signed to triple digit starting rents, a record number. Interestingly, 60% of this triple digit activity was with TAMI tenants, mainly concentrated on the Westside. According to Acushnet Wakefield year end report, asking rents for Class A product in the Penn District submarket, which includes Hudson Yards in Manhattan West, reached a historic $109 per square foot, a very good sign for our 5,200,000 square feet currently in redeveloping the district.
As a company, we are heavily focused on the transformational repositioning of our Penn District Holdings as a new epicenter of New York. Our redevelopments are now in full construction mode. 2020 will mark an important step in the district's transformation as the majestic Moynihan Train Hall in Farley and our 850,000 square feet of office and retail space in Farley will be substantially completed at year end. As you walk around the district today, you see the incredible amount of activity underway. The redevelopments of Farley, Penn 1 and Penn 2, the grand new entrance to Penn Station on Plaza 33 where work has begun and the scaffolding in the LIRR concourse where redevelopment will shortly commence.
In total, there's over $5,000,000,000 currently being invested in the district and its infrastructure between Vornado's $2,200,000,000 and the government's $3,000,000,000 During the Q4, we bought out Kmart's 141,000 square foot lease at PENN1, which had another 16 years to run for a $34,000,000 payment, of which $10,000,000 is expected to be reimbursed. Steve and Eddie have been wrangling about this for years years, and we think we timed the buyout at exactly the right time and gathered at a fair price. Despite the nominal short term FFO loss from Kmart's rent, this was a big win for us and allows us to immediately integrate this space into our overall redevelopment plan for PENN1, the adjacent Plaza and the LIR concourse and to populate the space with high quality retailers much sooner. Overall, a big uptick for the neighborhood. During January, we executed a relocation transaction with Information Builders, which will move them from the tower of PENN2 into 2 separate spaces at PENN11 and PENN1, totaling 78,000 square feet.
This deal was the last piece of space we needed to get back to execute the redevelopment plan at PENN2. Moreover, the starting ramp with information builders at PENN1 is in the mid-90s per square foot, reflecting the market's confidence in the district's transformation and in this extraordinary redevelopment as it begins to take shape. In addition, as I'm sure most of you saw, the governor made a major announcement in January, expressing the state's intention to further modernize and expand track capacity at Penn Station through the creation of the Empire Station complex with an expanded terminal in the block south of Penn 2, increasing train capacity by approximately 40%. This announcement represents another validation of Penn Station Empire Station as the key transportation hub in the region and a further commitment from the government to invest in the area. The government expects ridership at Penn Station to double in the next 10 to 15 years.
The state intends to fund this expansion through the creation of a new district, which encompasses our Penn District Holdings and by capturing future increases in tax revenues from new developments in this designated district. We look forward to working with the state, city and other important stakeholders to help realize the Governor's very important vision. With the explosion of tech demand in New York City, particularly on the West side, our Penn District assets are very well positioned to be at the center of this activity. It's in the hottest submarket in city. We're going to be delivering Farley, Panel 1 and PENN2, totaling 5,200,000 square feet near term with an ability for PENN to grow with us over
time in a
massive campus located right on top of transportation. We're confident as our plans become reality that office tenants will fully appreciate the unique and differentiated product we're delivering. In this regard, we remain on track with the 2 large leases we mentioned on last quarter's call, and there's good activity from a variety of important tenants behind us. On the retail side, the interest in Farley has been outstanding. As retailers come to understand the significant foot traffic that will course through Farley in the district every day.
We are at least negotiations on over 50% of the Farley concourse and are in active negotiations for the majority of the space in the main level. More broadly, we are working on a variety of deals to curate the district with all sorts of offerings, food and beverage, coffee, co working, conferencing, retail and so forth to service our temp base. While earnings are of course negatively impacted in the short term, earnings will significantly increase as we turn the 60s per square foot office rents currently in place into mid-90s and higher as we deliver and lease the redeveloped space. Overall, our New York office portfolio is in great shape. 97% occupancy with a very manageable five 125,000 square feet expiring during 2020 after taking the previously announced and provide space comprising 566,000 square feet of 8,000,000 square feet in the pipeline.
During 2019, we completed 102 office transactions for 987,000 square feet at starting rents of $82.17 per square foot, with positive mark to markets of 4.6 cash and 5 0.5 percent GAAP. Approximately 20% of our total leasing activity in 2019 was the triple digits at average starting rents of 100 and $20 per square foot. In terms of the 4th quarter, we leased 173,000 square feet at an average starting rent of $101 per square foot. While we had negative 5.2% cash and 3.5% GAAP mark to markets for the quarter. It is worth noting this was based on only 54,000 square feet of 2nd generation space and driven by the rent reduction of 1 short term renewal at 315 Park Avenue.
This is the single best development site on Park Avenue and likely Midtown and we will be keeping renewals short term here in order to line up this site for a possible new development. Leasing highlights during the 4th quarter included a headquarters lease at our new 512 West 22nd Street with NextGen Media for 41,000 Square Feet. At the March in Chicago during 2019, we completed 62 leases comprising 286,000 Square feet at average starting rents of $49.43 per square foot. During the Q4, we completed 50,000 feet of showroom deals at sterling rents of $51 per square foot. Occupancy stood at 94.6% at year end.
We have very good activity on our available office space here and are in numerous discussions with those new and existing tenants throughout the building. In San Francisco, the market remains on fire and it is hard for tenants to find quality available space. Our 1,800,000 Square Foot 5x5 California Street Campus, we remain full and are enjoying the benefits. During the Q4, we finalized a lease renewal with 1 of our full floor law firm tenants in the bottom third of the tower at a starting rent of $94 per square foot, a 72.5% positive cash mark to market. We are also negotiations with 2 of our major tenants in the tower of the building with each transaction that ramps well into the triple digits.
Turning now to our New York Street retail business. Overall, while rents are down, activity is up from a year ago and there continues to be a flight to quality for retailers, a trend that benefits our portfolio. The best high share retail is not dead, but rents do need to be economic for retailers to commit. In a very difficult retail environment, we completed 39 retail leases with 238,000 square feet during the year, with GAAP and cash positive mark to markets of 12.9% and 9.8%, respectively. In the Q4, we completed 16 leases comprising 94,000 square feet, highlighted by very important 10 year leases with 2 LDMH brands at 595 Madison Avenue, better known as the Fuller Building.
Fendi and Verludi leased a total of 16,850 square feet here, reflecting the building's bull's eye location at the corner of 57th Street and Madison Avenue. A portion of this space was formally 5% as we continue to source tenants for this best in class portfolio. Rent this quarter rolled up on a cash mark to market basis by 11.3% and were flat on a GAAP basis. In addition, we are pleased to report that last week, we signed an 8,000 square foot lease with Sephora at 4 Union Square South, which fills most of the space vacated by Forever 21 last year. Between the recent Whole Foods expansion and new Sephora deal, we have now surpassed the total rent for Forever 21 was paying on the entire space, and we still have an additional 9,700 square foot leasing opportunity.
Taken as a whole once fully re leased, we project an approximate 40% mark to market increase and a much better credit profile. As a testament to the uniqueness of our Union Square asset, we re leased the space 96 days after Forever 21 lease expired. We don't yet know what will happen with the other 2 Forever 21 leases we have. But if we get them back, these assets are in premier locations and while take longer,
we are
confident we'll re lease them successfully just as we did Union Square. Finally, a comment on sustainability. We have always prioritized reduction of our carbon footprint and mitigation of our contribution to climate change. And we are in lockstep with our investors, tenants, employees and communities. We have reduced by 25% our same store energy consumption in the last 10 years and are committed to furthering our progress through through continued energy retrofits, smart building technology and meaningful engagement with our tenants.
We will also include renewable energy as an important step in our process towards carbon neutral. We are well positioned to comply with recent climate laws, as evidenced by our being Energy Star Partner of the Year for 7th time, a NAREIT leader in the Light Award recipient for the 10th year in a row, and a top performer among all global real estate sustainability benchmark response. In addition to the many awards for sustainability we win each year, I am specifically proud of our team for being excited as the industry model with our innovative approach to furnishing our audited ESG reports to the Securities and Exchange Commission. We continue to maintain a fortress balance sheet with measured leverage and an abundance of liquidity today in Europe. After the $400,000,000 special dividend was paid last month, our liquidity is $3,800,000,000 comprised of $1,200,000,000 in cash $2,175,000,000 undrawn on our revolving credit facility.
To conclude, we feel very good about our overall business. We own great assets in great locations and in great cities and know how to keep these properties full with best in class tents and market leadingness. Moreover, we have outstanding and unique development skills that allow us to create significant value. We will continue to take full advantage of New York's strong development and climate for businesses to grow and succeed while they find the best talent in the country. With that, I'll turn it over to the operator for Q and A.
Thank you.
And from Citi, we have Manny Korchman.
It's Michael Bilerman here with Manny. Michael, I want to just go through some of the numbers you threw out in terms of the headwinds that are affecting 2020. And maybe if we can just take each of them. You talked about the space coming out of service being the $0.09 the $19,000,000 that's in the supplemental on Page 31. Can you give us some color in terms of when you expect income to start flowing back?
Because the chart, at least in the supplemental, doesn't have the positive effect of releasing that space? And then on the retail side, that $16 or so 1,000,000 at $0.08 What is the prospects of that income flowing in at some point in 2020 versus later on, just as we think about the ramp as we get back?
Michael Bilerman, it's Joe Mack now. I want to take the second part of that question on the 0.1 0 point 330 Madison, 3040 M Street, Creek, UE, LXP. That stuff is not coming back other than being reinvested, the cash being reinvested in the Penn District. It's not a one for 1. We sold this.
We are putting this here and we are going to get back NOI.
Michael, in terms of the retail bankruptcies, right, which is top shop in Forever 21, obviously, 608 is permanently gone. The asset in SoHo, the probable plan there is to convert that upper floor the upper floors to office. And so that will undergo a redevelopment. And so best case is that won't come online. It generally won't come online in 2020.
Best case will be some point next year. But again, nothing certain there. And then Forever 21, we have a deal in place today with them. The numbers we cited reflect the reduced leases. We'll see what happens as they come out of bankruptcy now.
And to the extent that those leases are not accepted or to the extent that we proactively take that space back after the year, Again, that income is not going to come on in 2020. Best case, that's going to come on sometime in 2021. The usual free rent period, etcetera, I think at the best case, that would be towards the latter part of the 20. But again, there's nothing that is imminent on those. We're aware that both those leases either either could come back or will proactively take those back and we're out of marketing space.
Michael, it's Joe Mack Mackin again.
That
explanation of the possible Forever 2021-two leases coming back is what gave rise to the range of $0.23 to the midpoint of $0.28 That $0.05 represents the exposure of those 2 leases come back.
Okay. And then as you think about, I mean, you were running basically $0.89 of adjusted FFO in the 3rd Q4, right? So annualizing out to $3.56 for the year relative to the $3.49 for the full year. Arguably, the last two quarters should have the dilution from the asset sales, certainly on the retail side, from the stock investments already baked into that number and arguably has some of the retail loss as well. So I'm trying to reconcile those two things where you had been reporting a quarterly number of $0.89 $3.56 annualized, which should already take into account some of this $0.28 of added dilution that we are talking about for 2020?
So, Michael, it's Joe Mackinac again. I am not prepared to address that question fully, but some of the items are really one timers. There was lease cancellation income in the 4th quarter that was $0.02 $2 There was a straight line write off that we anticipated on Penn Plaza that got deferred to 2020. That was another $0.02 So $0.89 is up $0.02 and 2020 is going to be down $0.02 Those two items are a $0.06 swing from annualizing the Q4 and there has to be many, many more items like that, that Manny and our team or you and our team can do offline.
Michael, the other thing is the out of service that we saw, right, that's all incremental, right? So that is Kmart. It's a number of little things, frankly, between PENN1, PENN2 that with further evolution in our development plans, right, is incremental out of service. Obviously, there was a sale of the Pre Share. So there's a number of items that are not run rate from the Q4.
Right. No, and I think that's was part of my first question, and I'll get off after this, that $19,000,000 of reduction for the stuff coming out of service, trying to understand when some of the income will flow back into the company. I guess trying to understand that aspect of it. Right as you spend money and lease the space, what type of disclosure are you going to provide? You've provided on Slide 31 the stuff that comes out.
I guess at what point are we going to get some stuff about it coming back in?
Well, I
think also on Page 31, Michael, it's not a local. If you look at the top part of that page, we do provide the incremental cash yields and stabilization year, we expect to begin to achieve those cash yields.
Right. But some of that will come in, in 'twenty 1, 2022, 2022, like it will be phased. And so it's just looking at that incrementally each year. So I'll yield the floor. Thank
you.
From Evercore ISI, we have Steve Sakwa. Please go ahead.
Thanks. Good morning. I guess, Michael or Steve, I know you're not going to provide a lot of details around some of the big pending leases at Farley and PENN2, but can you just kind of help frame some of the discussions and the timing at Farley and 2 Penn on some of the leasing. And then some of the commentary you made in the 10 ks about kind of the mark to markets that you're seeing on the office component. I realize it's not a lot of square footage, but it sounds like there's about a 20% mark to market.
So can you just maybe flush out some of the bigger leasing?
Sure. I'll start and Glenn can jump in as well. Look, in general, Steve, obviously, there's been some press speculation about a couple of major leases that are in the works. And we're not going to comment on specific names. I think in my intro remarks, I said those remain on track.
And on the normal course, our expectation will be that we will start finalizing some important leases probably in the next quarter. In terms of PENN2, we are just showcasing that product now. That's a major redevelopment. I would say we referenced the one lease last quarter, again, which remains on track. And these are major headquarters leases and going through the normal process right now.
And progress. I think next quarter, you'll start to see some real announcements.
Glenn, do
you want to talk more broadly on the pipeline? The only thing I'd say, Steve, on mark to market is that, again, one of the big thesis is we are taking it's a function of 2 of it, right? What are the in place rents in terms of what's expiring and where are we taking those to? And given what we're doing in the Penn District, we've talked about taking the rents from the 60s into the 90s 100 plus range. And that's starting to be reflected in what we're doing in those in that number.
Hi, Steve. It's Budd. We mentioned in the remarks, we have 1,600,000 feet of leases. Those are in documentation. So leases are out and that includes the deals you're referring to in Penn.
We're certainly on track. We feel very good about where we are and there's more activity to come. As it relates to the overall business, if you think about it, we're 97% folding the core portfolio. We keep filling up space with our existing tenants. I mean, our buildings are in fantastic shape.
I mean, the core portfolio, we redevelop those buildings over the last 5, 6, 7 years. During that period of time, at least on average 2,500,000 feet a year in those buildings, and the major tenants continue to expand. So with the 888-sevens, the 90 parks, the 1290s, we're seeing great activity from within the buildings and from outside. And so overall, we have a lot of leases out. We have a lot of other action.
So we feel great about where we're sitting right now.
Okay. And then I guess second question is, look, I realize that the company is not really driven by short term earnings and really is doing the right thing for the real estate. But clearly, coming up with effectively guidance that's well below the street is a little bit shocking to people, the magnitude. I'm just curious as you sort of laid out some of the issues, and I realize you can't contemplate everything. Are there any other potential wildcards that we should be thinking about that could potentially hurt earnings this year or even into next year?
Or at this point, have most of the big things been flushed out? And from here, earnings bottom in 2020 and start to rebound in 2021 and beyond?
Joe referenced the Forever 2021 situation, Steve, right? So the extent that that is not the leases are not affirmed, then there could be a $0.05 thing on a temporary basis. That's the most near term insight. Other things, obviously, there's always risk of purview today. And obviously, there's some positives as well.
But we clearly think that 2020 is the bottom and we'll start to see strong growth thereafter. And as we settle up from a real estate you said it ourselves, the steps we're taking in terms of taking the assets out of service or additional assets out of service, the right thing for our redevelopment plans, right? And so that's going to create significant value in getting the Kmart, making some modifications on some other things we're doing in the district, which impacts the out of service. Those are the right business decisions, right?
It's going to
create value, notwithstanding it has a short term impact on earnings.
Okay, thanks.
From Bank of America, we have Jamie Feldman. Please go ahead.
Great. Thank you. I guess, Michael, just to go back to your last comment, you said 2020 is the bottom and we'll start to see strong growth thereafter. Can you just talk through the drivers of the growth in 'twenty one, the strong growth in 'twenty one?
Jamie, look, you're starting to pressure us into guidance there. I mean, the reality is, we can take that offline.
Certainly, probably coming into the Start to perform.
But the reality, Jamie, is it's a really every part of the business, particularly office business has growth, 5x5, New York Business, etcetera. We're not going to mention point by point, but that is the deal. $770,000,000 Facebook is fully rent paying at that point.
And Jamie, it's Joe. While 2019 had many depressions of earnings from asset sales, we have gone through that. We don't anticipate that re occurring, which of course lets the growth in the core business not be masked by other dispositions, etcetera, etcetera.
Okay. That's helpful. Yes, I was just trying to figure out the largest moving pieces. It sounds like you listed them for 2021. I guess thinking about the core, can you talk about a same store growth rate that kind of looks through all the noise for 2020?
I don't know we're prepared to do that on this call, Jean.
Okay. All right. Then I guess my last question, you in the past have talked about a $200,000,000 run rate for retail NOI. It sounds like that's come down on Forever 2021, maybe the K space. How does just for an apples to apples comparison, how does that look today and based on what you've outlined?
I don't know that what we I remember you asking last quarter. I don't know that that really has changed, right. I think last quarter, we said it was going to be low 200. And we said that that was before taking any out the LA out of concourse, right? That also was before the Kmart buyout.
So obviously, with those take it below that number, but those are proactive things we're doing as opposed to impact from the tenancy. So Forever 21, as we talked about, was could be on both leases are go away temporarily, It could be a $10,000,000 ding, but I think it was generally in the number that we cited to you last quarter.
So Jamie, a little more color. Last year's reported number, 'nineteen's reported number was 260 7.7. The retail sale will adversely affect that by 25.6 percent of 'twenty percent that wasn't in 'nineteen. Other sales will affect that negatively by almost $3,000,000 out of service at Penn Station will affect that negatively by $6,000,000 Then there are other tenant items, Forever 21, Topshop, etcetera, etcetera. But our math still is in the low 200s.
Before the concourse came on, Justin?
Yes, before the concourse.
Okay. And then just to confirm the guidance you gave is that assumes that Forever 2021 leases are cut in half but not go to 0 and there's an additional $0.05 if they go to 0. Is that correct?
That's correct, Jamie.
Okay. All right. Thank you.
From BMO, we have John Kim. Please go ahead.
Thanks. Not to belabor the point, but a couple of quarters ago, you mentioned that this would be 2019 would be the trough year for earnings and now you're coming out with 9.5% for 2020. But looking back 2 quarters ago, you already knew about the retail joint ventures, the top shop store closings, the PENN2 redevelopment. So I'm trying to understand what was new over the last 6 months besides Forever 21 and the Kmart early termination?
Well, John, it's Joe Mack now. A number of moving parts affected that. We took signage out of service in the Penn District. We didn't anticipate doing when we gave that first set of guidance. We moved leasing assumptions from 2019 to 2020.
There are numerous, numerous things that affected that. But it's over. We are confident from what Michael told you that 'twenty will be the trough year, that the growth in 'twenty one will be substantial. And again, if you'd like to go into greater, greater detail, let's do that offline, but not monopolize this call with that type of detail.
And then you updated your NAV, now your stock is trading at 32% discount to it. Wouldn't a buyback I know you've talked about in the past, but wouldn't a buyback help offset some of this dilution and it would have been a lever or it could be a lever for to offset earnings dilution going forward?
John, look, we recognize we're at meaningful discount, though the market seems to ignore any of the put out and maybe even the analyst in any of these. And like it's something that we have evaluated, we continue to evaluate. It's not the course of action that we're prepared to embark on today. We are just as we've done in the past. We consistently look at ways to kind of narrow that gap.
First of all, to grow NAP, which is what we're trying to do through our pen distribution redevelopments. But secondly, to close that gap, And we've shown an ability to execute within accretive transactions, and we are continuing to look at that. Obviously, a buyback is one way. I don't know if that's significant in terms of, I think, as we've done in the past, but not something that we have felt is the appropriate use of capital yet.
I guess what would be the appropriate time to use it? I mean, you have free cash flow that is significant. You're trading at a big discount. You have some earnings dilution, which is near term. I mean if this is not the right time, then when would it be?
Jon said, it's a matter of using that capital for that or other things that we continue to have significant opportunities to invest in our business. We've outlined the 3 initial redevelopments from the Penn District that are substantially accretive. And there are opportunities behind that where our capital we want to have available to continue to execute on our redevelopment in the whole district. We're attacking the first 5,000,000 square feet today, but there's significant amounts to do beyond that. And right now, we want to have that capital available for that or for other purposes.
One last one for me.
I think that's more accretive in terms of creation, John, than a buyback to that same amount of capital based on our analysis.
Your earnings decline is more than offset by condo sales of 220 Central Park South, which you don't include in your normalized FFO. But did you have a $200,000,000 increase in your estimated proceeds? Because looking at the 10 ks, it still looks like you have $1,000,000,000 in after tax profits maintained?
John, it's Joe again. I saw some confusion from some people on that point. We published in this NAV $1,200,000,000 but we didn't say that's the profit on the job. What we described it as is the incremental value of estimated future proceeds net. The net is net of cost to complete the job, which I'm winding down and net of taxes to be paid.
Our estimate of profit, which is what you're talking about, hasn't changed from the $1,000,000,000 to $1,200,000,000 plus $200,000,000 of taxes for $1,000,000,000 But this is the timing of cash coming into Vornado. If you look at the 10 ks, you will see we have already gotten $1,800,000,000 from the project. That $1,800,000,000 plus this 1,200,000,000 dollars represents $3,000,000,000 which is the after tax cash coming from both the profits of $1,000,000,000 and recouping the original investment of $2,000,000,000 and the cost to do the job. So no, we have not increased the sales estimate by $200,000,000
Okay. Thank you.
From Stifel, we have John Guinee. Please go ahead.
Wow, a lot of moving pieces. Just curious, if you look at paying $34,000,000 for the Kmart space, about 141,000 square feet, what do you put in 141,000 square feet of ginormous floor plates? And that's about 240 a foot. Does that imply that the retail there is worth 240 a foot?
John, your 2.40 a foot, I think, is taking the aggregate amount, which is a value, right, as opposed to an annual rent. I think Kmart was paying us around $60 a foot and a touch less. So I think that's the more relevant comparison. But we think in terms of that space, is there demand as they use of that? Absolutely.
I mean, that is a bulldog location right in the heart of the district. And that now having Kmart back, which was effectively shut off to the plaza on 33rd Street, we can integrate that and have it facing both 34th and 33rd Street. And based on our preliminary discussions with a couple of large format users that wouldn't necessarily take it all because we don't want 1 tenant to take it all given how we're going to incorporate in redevelopment. There's absolutely going to be strong demand for that space as it comes.
Okay. And then just a few quick questions.
When do you think you're going to get the hit for the Penn One ground lease and is $0.20 a share a good number? 2nd, does the train capacity that the governor is thinking 40%, is that with or without a new tunnel, which I'm not sure what the status is of the tunnel? And then 3rd, what are you guys thinking about Manhattan Mall and Hotel Pennsylvania because we're always under the assumption that, that is pretty soon thereafter.
Okay. Let me see if I can take those in order, John. PENN1 Gramalise, I think you asked about the impact there. That's something we've talked about in the last call or 2. We're not prepared to give an estimate as to what that can be, right?
That's almost 3 years away in terms of debt reset. And there's a lot of factors that go into that reset, whether it's negotiated or arbitrated. There's still a fair amount of time. Obviously, it's going to be up from today's number, but not something I want to prognosticate, particularly as we don't want to negotiate in public with our groundlessor. In terms of the track capacity, the 40% that's not dependent on a new tunnel that's effectively adding a new terminal to the south and allowing additional trains to basically dead end coming from the New Jersey side, but not dependent on gateway per se.
And then Manhattan Mall and Hotel Pennsylvania?
Look, right now, Manhattan Mall is the office building is full and we've got a great tenant who continues to love the building. So that's performing well. The retail, we're effectively keeping on shorter term arrangements. But that asset is cash flowing quite significantly, and that's the plan for the near future. So it's all Penn we've talked about the past that as we finish the redevelopments of Farley PENN 1 and PENN 2 and the district transformation becomes evident, Hotel Penn, we think is going to be the best development site in the that's the next logical place
to build
a new
building. And at some point, that's the next logical place to build a new building. And at some point, Manhattan Mall could be expansion for that, but that's years years away, not anywhere anytime soon in terms of altering what that asset is. Great.
Thank you.
Thank you.
From Piper Sandler, we have Alexander Goldfarb. Please go ahead.
Hey, good morning there. Just a few quick questions here. Just on first, or we'll put guidance in quotes. You guys talked about the impact to 2020. That includes the benefit of stopping or presumably stopping the ground rent payment on the Topshop Fifth Avenue store?
Correct.
Okay. And then as you guys have laid out the roadmap for the Penn State
Hey, Alex, just to clarify, net net, right, there's a diminution from that.
But Alex, that's not in comparable FFO. 6085th Avenue is not in comparable FFO. And when that lease is rejected at some months from today, there will be a $70,000,000 income item, non cash income item. But that's not in comparable FFO. So that's not in what Michael referred to in his discussion.
Okay. Thanks, Joe. That's helpful. And as far as the roadmap that you guys provided on the Penn Station and Penn 2 impact, Is that consistent with what you guys had originally penciled or has that impact grown as you guys have gotten more involved and have seen what you could do
there? The numbers are a bit accelerated, Alex, as we've seen as we begin to execute on the plan. So it's a little more front end.
Okay. And then finally
Alex,
it's David. Good morning.
I guess I'd add to that is, our objective is to turn this building into a mid to high 90s building on average, if not higher. So to the extent we can get tenants out of this building, our objective effectively is to do so. So that's something that Glenn and team have been working on to accelerate over the last number of months.
David, that's helpful. And then the final question is you guys clearly are not an earnings story, you're an NAV story. On the last call, Michael, you talked about Hotel 10 that it's not time yet. You guys are sitting on 350 Park. And I hear comments from the brokers.
I mean, I was just talking to a guy over the weekend who was saying that they can't find space under 1 120 a foot in Plaza District. At what point do rents on Park Avenue make sense where you can redevelop on Park Avenue? Or is the construction cost delta just that far that for those of us thinking about value creation for you guys at 350, it's going to be years out because the math simply doesn't work now or in the foreseeable future. When does the math work?
Alex, look, as I said in my opening comments, we are beginning to take the steps in order to align that site up for a new development. Now we'll make that decision as we get closer to that time based on market conditions and so forth. But the feedback from the And so I think we may even reference in the past, we have been approached by significant users for either all or a meaningful portion of a new building on-site. So that is in terms of the economics, I think it's not a matter of it working today. It's a matter of can you actually begin to develop.
And so if you just think about the timing, we have leases that run through really beginning of 2024, Glenn? End of into 'twenty three. And so that's the earliest that we could begin to take the building down. So new delivery wouldn't be until 27 or 28. And so it's a significant opportunity, but it's going to take some time in order to bring it to fruition, both in terms of lining up the tendencies and then executing on it.
So I think if we had the building today, could we command the rents to achieve the yield necessary to help? The answer is we think quite possibly to build a brand new building that's perfect in that location. We think today would command rents that would make that work.
And that would be the JV with Rudin?
The answer is it could go either way, Alex. We can build on our own. We don't need Rudin to build there. We build a probably the best boutique building, that's 1,000,000 square foot boutique building on that site on our own. Or we can combine with Roden who's behind us and build close to a 2,000,000 square foot building.
So the answer is, as we continue to move down the tracks here in terms of timing on our leases and whatnot. His building BlackRock is moving around out in 2023 as well. So they line up for that. So we can put them together. But we'll evaluate based on tenant discussions.
And obviously, a tenant for the whole combined building would require a significant pre lease, which there's interest in. So the answer is, too early to tell which direction it can go, but either is possible.
Thank you, Michael.
Thank you.
From Morgan Stanley, we have Vikram Malhotra. Please go ahead.
Thanks for taking the questions. On the just on expirations in on the office and retail side, we obviously have the big move out in Penn here, but you've also kind of alluded to a 20% mark to market in your 10 ks. Can you kind of outline what's driving that view and any other major leases that are expiring in 2020 that we should be aware about on the office side. And on the retail side, I think it's more flattish to market, but there's a big expiration in 4Q of 2020. Can you remind us what that is?
On 2020, our exploration totaled approximately 525,000 feet. That's the capital we take from overall health care out of service, which is a 560,000 facilities, which expires at the end of March. On the mark to market, we're coming off $70 rents. We think that goes 20% to, let's call it, mid-80s number. Remember, quarter to quarter, these numbers fluctuate.
There's no rule of thumb, obviously. But as we look out on our leasing projections, the spaces that are coming up for exploration, plus all the activity that we've been talking about this morning, we feel the mid-80s number coming off the $70 rent is in the ballpark of what we're going to hit.
And again, that's Vikram, that's not to speak necessarily to timing, right? In other words, the timing on those new leases may not necessarily occur in 2020, but that's our expectation in terms of where on average they will get marked to, right. As retail leases So that
includes the 5 $100,000,000 that you highlighted, but potentially other leases. And you're just that sort of a broad statement saying, in general, coming off of $70 rents, and we think overall we can get a 20% mark to market including kind of new leases.
Correct. And then on retail? And on retail, which as you said is more flattish, that's again no big leases, probably half of that is in the Penn District, which given everything we're doing there, we feel good about that may some of that may be take may frankly intentionally take a little longer there to get the right mix of tenants. But again, that's
a fairly no
big leases, a diversified set of expiries.
Okay. So not even in 4Q, it just seemed like there was a large junk in 4Q 2020. But maybe just building off of that, in Fifth Avenue, over the last, call it, 12 or 18 months, there have been a number of vacancies over there. I'm just sort of wondering what does this mean for in your view what does this mean for sort of upper fifth rent per foot sustainability and specifically the ability to lease up your vacancy there?
Hi, this is Haim. On Fifth Avenue, we have one vacancy on Upper Fifth Avenue. We love our corner. We have a great property. It sits on the 50 yard line on the luxury side of Fifth Avenue.
And while it's too early to call a rebound in luxury leasing, we do have a lot of confidence in the quality of our asset and the positive momentum that we feel is going on today in luxury retail among the strong brands with a strong balance sheet who have profitable business lines. So early to call a rebound, but still confident in the quality of what we have. We happen to dominate the best in class retail assets, and we have confidence in that.
And Jaime, if I can just ask you, just on the if I remember correctly, in your vacancy rents there were well below market, but just given the broader vacancies on Fifth Avenue, it seems like asking is still kind of above 2,500 or 2,800 a foot. But like what is the true sustainable per foot rate if you were to just take sort of a longer term view? I'm not looking for your specific mark to market, but just that upper fifth area, what's a more sustainable level?
I believe the sustainable rents are not where peak rents have hit on Fifth Avenue. The lease is signed in the $4,000 to $5,000 a square foot range at peak. I do believe it's down significantly from there in terms of affordability. But there are brands with significant margins and huge balance sheets that can do a lot of business in the market. There are still well over half a dozen brands that have more than $100,000,000 in sales on Fifth Avenue.
And those are the customers that will look for sustainable rents in the range of what you're talking about.
Okay. And then just last clarification, the stabilization that you've outlined for Farley '22, I know you said that you're pretty confident of Liza will hear more news. But just from a modeling perspective to kind of get to that 'twenty two stabilization, like what sort of when do you have to get the leases done or what sort of in the model that we have to get leasing done to achieve that stabilization before maybe it gets pushed out into 2023?
Yes,
I was going to say in the next 3 months or so.
Okay. So you would need to get a lease done in the next 3 months before you Yes.
Vikram, as we talked about, as we said, the office lease is on track and the retail leasing, which I described in the opening remarks, we are in active negotiation on the leases on the bulk of the concourse and much of the main floor. So we feel good about the numbers that we have out there.
Okay, thanks. I'll follow-up offline. Thank you.
And from Green Street Advisors, we have Dan Ismail. Please go ahead.
Great, thank you. Just given all the moving pieces, can you speak to how leverage will trend in 'twenty on a debt to EBITDA basis?
Daniel, we couldn't hear your question. If you could repeat it, please.
Sure. Just given all the moving pieces, can you speak to how leverage will trend in 2020 on a debt to EBITDA basis?
This is Joe again. We don't anticipate leverage rising in 2020, if that was your question. There's no reason. I mean, we're sitting on an awful lot of cash. There's no reason really to increase leverage.
And then maybe just for the New York office portfolio outside of Penn Plaza. Can you frame how you guys are seeing net effect rent growth in 2020? Should we are you guys expecting something more in line with inflation or something above that?
We are seeing rents still strong. Rent in Midtown are all time highs right now hovering $8 a foot. We feel a bit about the portfolio, the strength of the buildings with which we're leasing right now. So we feel that rents are still going up in most submarkets, including many of our buildings. But again, it's case by case as we lease up.
And again, we don't have a lot of space to come in that core portfolio that I talked about earlier.
And if
you have a ballpark, where in place rents sits outside of your Penn District office portfolio in Manhattan, can you frame how far below market those fronts would be?
And Dana, I don't want to give you a number on the phone here. It'd be a guess as opposed to a precision. But I'm comfortable saying there, the in place rents are below the market rents. But again, don't want to quantify how much that would be a little off the cuff. I think going back to your first question, we're seeing and I think you talked in the opening remarks is that you have redeveloped your building, you have new buildings, we are seeing real rental there, right?
In the Penn District, we are seeing significant rental growth given the transformation of the area of the assets. And then the sort of normal course traditional midtown assets, I think that's probably a little more 3%, 4% type growth. Again, I would say all the way on the West side with Chelsea, meat pack, you're continuing to see above that. So I think the trends have remained fairly consistent, although I think Midtown has been a little stronger in the last 4 to 5 months than it was in the middle part of last year.
That's helpful. Thanks.
Thank you. And we'll now turn it back to Michael Franco for closing comments.
Thank you, everybody, for joining our call today. We look forward to seeing many of our investors at the Citi Conference in Florida next month. Our Q1 earnings call will be Tuesday, May 5, and look forward to your participation again. Take care and