Good morning, welcome to the Vornado Realty Trust Q4 2019 earnings call. My name is Brandon, 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. At that time, please press star one on your touch-tone phone. I will now turn the call over to Ms. Cathy Criswell, Director of Investor Relations. Please go ahead.
Thank you. Welcome to Vornado Realty Trust Q4 earnings call. Yesterday afternoon, we issued our Q4 earnings release and filed our annual report on Form 10-K 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-K, 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-K, 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 statement. On the call today from management for our opening comments is Michael Franco, President. In addition, Steven Roth and our senior team are present and available for your questions. I will now turn the call over to Michael Franco.
Thank you, Cathy, 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% occupancy.
We recapitalized our Fifth Avenue and Times Square retail assets on a very attractive basis in a $5.5 billion transaction. We paid a $1.95 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 and our portfolio, and in particular, the PENN District, let me review our Q4 and full year financial results.
Q4 FFO, as adjusted, was $0.89 per share, flat to last year's Q4. 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 had given in the Q3. As we've previously indicated, our financial results for 2019 were lower than 2018, explained as follows.
Of the $0.24 reduction, $0.25 is due to over $3.2 billion of asset sales, $0.09 is due to a one-time non-cash stock-based compensation expense, and $0.04 is due to lost income from retail and 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 N.Y., Chicago, and San Francisco, our office and retail leasing teams completed 215 leases comprising 1.7 million sq ft at starting rents of $90.45 per sq ft 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 Q4 cash basis same store NOI increased by 6.6%, broken down as follows. The N.Y. office was up 3.4%, street retail was down 2.2%, THE MART was up 100%, benefiting from a one-time $12 million accrual of real estate tax expense last year due to the triennial reassessment of the property, and 555 California Street was up 4.1%. Our non-comparable items in the Q4 included the $173.7 million after-tax net gain on unit closings at 220 Central Park South.
To date, we have closed on 65 units for net proceeds of $1.82 billion, including 17 units for $565.9 million in the Q4. 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 for $400 million.
We expect to receive over $1 billion from closings in 2020, and as we've said previously, all the net proceeds will be redeveloped into the PENN District redevelopment that's underway, turning this capital into highly accretive earnings and driving strong future growth.
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 and $0.33 per share. Of this $0.28 reduction at the midpoint, $0.16 is due to the full year impact of asset sales. $0.09 is due to taking additional assets out of service for redevelopment, primarily in the PENN District, at PENN 2, the retail at the LIRR Concourse, and the Kmart space at PENN 1. And $0.08 is due to lost income from the full year effect of 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. The recently announced large future office commitments from major companies in the city point to continued strong job growth. Leasing volume citywide in 2019 totaled 43 million sq ft, the highest activity in 20 years.
TAMI tenants continued their strong demand, accounting for one-third of all activity during the year, with the tech sector alone leasing 7.5 million sq ft. 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's growth is 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 billion, increasing New York City's 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 from the tech sector in the future. The flight to quality trend from tenants for new construction and redeveloped space accelerated during 2019. According to JLL's annual trophy building report, more than 20%, or 8.8 million sq ft of the citywide leasing activity from New York 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 west side. According to a Cushman & Wakefield year-end report, asking rents for Class A product in the PENN District sub-market, which includes Hudson Yards and Manhattan West, reached a historic $109 per square foot. A very good sign for our 5.2 million square feet currently in redevelopment in 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 at Farley and our 850,000 square feet of office and retail space at 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 brand-new entrance to Penn Station on Plaza33 where work has begun, and the scaffolding in the LIRR Concourse where redevelopment will shortly commence. In total, there's over $5 billion currently being invested in the district and its infrastructure between Vornado's $2.2 billion and the government's $3 billion.
During the Q4, we bought out Kmart's 141,000 sq ft lease at PENN 1, which had another 16 years to run, for a $34 million payment, of which $10 million is expected to be reimbursed. Steve and Eddie have been wrangling about this for years and years, and we think we timed the buyout at exactly the right time and gathered 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 PENN 1, the adjacent plaza, and the LIRR 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 PENN 2 into two separate spaces at PENN 11 and PENN 1, totaling 78,000 sq ft. This deal was the last piece of space we needed to get back to execute the redevelopment plan at PENN 2.
Moreover, the starting rent with Information Builders at PENN 1 is in the mid-90s per sq ft, reflecting the market's confidence in the district's transformation and of this extraordinary development that 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 on 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 sub-market in the city. We're going to be delivering Farley, PENN 1, and PENN 2 totaling 5.2 million sq ft near term, with an ability for tenants to grow with us over time on our massive campus located right on top of transportation. We're confident, as our plans become reality, that office tenants will truly appreciate the unique and differentiated product we're delivering.
In this regard, we remain on track with the two large leases we mentioned on last quarter's call, and there's good activity from a variety of important tenants behind this. 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 in lease negotiations on over 50% of the Farley concourse and are in active negotiations for the majority of the space on the main level. We are working on a variety of deals to curate the district with all sorts of offerings, food and beverage, coffee, fitness, co-working, conferencing, retail, and so forth, to service our tenant base. Earnings are, of course, negatively impacted in the short term, earnings will significantly increase as we turn the $60 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 525,000 sq ft expiring during 2020, after taking the previously announced and broad health space comprising 566,000 sq ft at PENN 2 out of service. Our office leasing activity is extremely strong, with more than 1.6 million sq ft of leases in final documentation and an additional 1.8 million sq ft in the pipeline.
During 2019, we completed 102 office transactions for 987,000 sq ft at starting rents of $82.17 per sq ft, with positive mark-to-markets of 4.6% cash and 5.5% GAAP. Approximately 20% of our total leasing activity in 2019 was at triple digits at average starting rents of $120 per sq ft. In terms of the Q4, we leased 173,000 sq ft at an average starting rent of $101 per sq ft.
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 sq ft of second-generation space and driven by the rent reduction of one short-term renewal at 350 Park Avenue.
This is the single best development site on Park Avenue and likely Midtown. We will be keeping renewals short-term here in order to line up this site for a possible new development. Leasing highlights during the Q4 included a headquarters lease at our new 512 West 22nd Street with NRG for 41,000 sq ft. At THE MART in Chicago during 2019, we completed 62 leases comprising 286,000 sq ft at average starting rents of $49.43 per sq ft.
During the Q4, we completed 50,000 sq ft of showroom deals at starting rents of $51 per sq ft. 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 both 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. At our 1.8 million sq ft 555 California Street campus, we remain full and are enjoying the benefits.
During the Q4, we finalized a lease renewal with one of our full-floor law firm tenants in the bottom third of the tower at a starting rent of $94 per sq ft, a 72.5% positive cash mark-to-market. We are also in renewal negotiations with two of our major tenants in the tower of the building, with each transaction at rents 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 from retailers, a trend that benefits our portfolio. The best street 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 sq ft 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 sq ft , highlighted by very important 10-year leases with two LVMH brands at 595 Madison Avenue, better known as the Fuller Building. Fendi and Berluti leased a total of 16,850 sq f t here, reflecting the building's bull's eye location at the corner of 57th Street and Madison Avenue. A portion of this space was formerly occupied by Coach, and a portion was vacant. Kudos to Haim for sourcing the LVMH deal.
Our retail occupancy remains high at 94.5% as we continue to source tenants for this best-in-class portfolio. Rents 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 sq ft lease with Sephora at Four 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 Forever 21 was paying on the entire space, and we still have an additional 9,700 sq ft 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's lease expired. We don't yet know what will happen with the other two Forever 21 leases we have. If we get them back, these assets are in premier locations, and while it might 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 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 neutrality.
We are well-positioned to comply with recent climate laws, as evidenced by our being ENERGY STAR Partner of the Year for the seven 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 respondents. In addition to the many awards for sustainability we win each year, I am specifically proud of our team for being cited as the industry model with our innovative approach to furnishing our audited ESG report to the Securities and Exchange Commission.
We continue to maintain a fortress balance sheet with measured leverage and an abundance of liquidity today and growing. After the $400 million special dividend was paid last month, our liquidity is $3.8 billion, comprised of $1.2 billion in cash and restricted cash and $2.175 billion undrawn on our revolving credit facility.
To conclude, we feel very good about our overall business. We own great assets in great locations in great cities and know how to keep these properties full with best-in-class tenants and market-leading rents.
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 economy and climate for businesses to grow and succeed while they find the best talent in the country here. With that, I'll turn it over to the operator for Q&A.
Thank you. We'll now begin the question-and-answer session. If you have a question, please press star one on your telephone keypad. If you'd like to be removed from the queue, please press the pound sign or the hash key. If you're on a speakerphone, please pick up your handset first before dialing. Once again, if you have a question, please dial star one on your telephone keypad. From Citi, we have Manny Korchman. Please go ahead.
Hey, good morning. 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. Maybe if we can just take each of them. You talked about the space coming out of service being the $0.09, the $19 million 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 re-leasing that space. On the retail side, that $16 million or so 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 Macnow. I want to take the second part of that question. On the $0.16 from asset sales, half of that, almost half of that comes from the retail JV. The balance comes from sales of 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 one, we sold this, we're putting this here, and we're going to get back NOR.
Michael, in terms of the retail bankruptcies, right, which is Topshop and Forever 21, obviously 608 is permanently gone. The asset in Soho, the probable plan there is to convert the upper floors to office, and so that will undergo a redevelopment. Best case is that won't come online. It certainly won't come online in 2020. Best case, it'll be some point next year but a gain, nothing certain there. 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.
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 now the b est case, that's going to come on sometime in 2021 w ith the usual free rent period, et cetera, I think it's the best case that would be towards the latter part of Forever 21 but a gain, there's nothing that is imminent on those. We're aware that both those leases either could come back or we'll proactively take those back, and we're out of marketing space.
Michael, it's Joe Macnow again. That explanation of the possible Forever 21 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 if those two leases come back.
Okay. If you think about, you were running basically $0.89 of adjusted FFO in the Q3 and Q4, right? 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're talking about for 2020.
Michael, it's Joe Macnow again. I'm not prepared to address that question fully, but some of the items are really one-timers t here was lease cancellation income in the Q4 that was $0.02. There was a straight-line write-off that we anticipated on Penn Plaza that got deferred to 2020 t hat 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 more items like that that Manny and our team or you and our team can do well for.
Michael, the other thing is the out of service that we cite, right? That's all incremental alright, t hat is Kmart. It's a number of little things, frankly, between PENN 1, PENN 2, that with further evolution or development plans, is incremental out of service. Obviously, there was the sale of the [Unintelligible]. There's a number of items that are not run rate from the Q4.
Right. No, I think that was part of my first question, and I'll get off after this, that $19 million 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 a s you spend money in lease of 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 Matthew Iocco. If you look at the top part of that page, we do provide the incremental cash yields and the stabilization year we expect to begin to achieve those cash yields.
Right. Some of that will come in in 2021, 2022. It will be phased. It's just looking at incremental each year. Anyways, 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 PENN 2, but can you just kind of help frame some of the discussions and the timing? I know you talked about a pretty big pipeline of LOIs and just kind of help us sort of think through some of the timing at Farley and PENN 2 on some of the leasing.
Then some of the commentary you made in the Form 10-K 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 sounded like there's about a 20% mark to market. Can you just maybe flush out some of the bigger leasing?
Sure. I'll start and Glen 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. On the normal course, our expectation would be that we would start finalizing some important leases probably in the next quarter. In terms of PENN 2, we're just showcasing that product now t hat's a major redevelopment.
Obviously, we referenced the one lease last quarter, again, which remains on track. These are major headquarters leases and going through the normal process right now. I think, again, making very good progress. I think next quarter you'll start to see some real announcements G lenn, 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, it's a function of two things, right? What are the in-place rents in terms of what's expiring and where are we taking those to? Given what we're doing in the PENN District, we've talked about taking the rents from the $60s into the $90s and $100 plus range. That's starting to be reflected in what we're doing, in that number.
Hi, Steve, it's Glenn. We mentioned in the remarks, we have 1.6 million feet of leasing. Those are in documentation, leases are out, that includes the deals you're referring to in PENN. We're certainly on track w e feel very good about where we are, there's more activity to come. As it relates to the overall business, if you think about it, we're 97% full in 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 redeveloped those buildings over the last five, six, seven years. During that period of time, we've leased on average 2. 5 million feet a year in those buildings, the major tenants continue to expand.
With the 888 Seventh Avenue's, the 90 Park Avenue's, the 1290 Avenue of the Americas', we're seeing great activity from within the buildings and from outside. Overall, we have a lot of leases out. We have a lot of other action. We feel great about where we're sitting right now.
Okay, I guess second question is just, 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 wild cards that we should be thinking about that could potentially hurt earnings this year or even into next year? 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 21 situation, Steve, right? to the extent that that is not, those leases are not affirmed, then there could be a $0.05 ding on a temporary basis. Right? th at's the most near term in sight. Other things, obviously, there's always risk of tenant bankruptcies, et cetera. The numbers we gave you is what is in our purview today, and obviously there's some positives as well.
We clearly think that 2020 is the bottom, and we'll start to see strong growth thereafter. From a real estate standpoint, you said it yourselves, the steps we're taking in terms of taking the asset out of service or additional asset out of service, is the right thing for our redevelopment plans, right? That's gonna create significant value, 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 gonna 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 2021, the strong growth in 2021?
Jamie, look, you're starting to pressure us into guidance there. I mean, the reality is, look, I don't know if we can take that offline.
We're certainly Farley.
Start to perform-
FFO.
The reality, Jamie, is it's a really, every part of the business, particularly the office business, has growth. 555, New York business, et cetera. We're not going to mention point by point, but that is the deal. 770, Facebook is fully rent-paying at that point.
Jamie, it's Joe. While 2019 had many depressions of earnings from asset sales, we've gone through that. We don't anticipate that reoccurring, which of course lets the growth in the core business not be masked by other dispositions, et cetera, et cetera.
Okay, that's all. Yeah, I was just trying to figure out the largest moving pieces. 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 that we're prepared to do that on this call, Jamie.
Okay. All right. I guess my last question. You in the past have talked about a $200 million run rate for retail NOI. It sounds like that's come down on Forever 21, maybe the Kmart space. Just for an apples-to-apples comparison, how does that look today? and based on what you've outlined?
I don't know that. I remember you asking me last quarter. I don't know that that really has changed, right? I think last quarter, we said it was gonna be low $200 million. We said that that was before taking in and out the LIRR Concourse, right? That also was before the Kmart buyout. Obviously with those two, they take it below that number. Those are proactive things we're doing as opposed to impact from the tenancy. Forever 21, as we talked about, could be on both leases or go away temporarily. Could be a $10 million ding. I think it was generally in the number that we cited to you last quarter.
Jamie, a little more color. Last year's reported number, 2019's reported number was $267.7. The retail sale will adversely affect that by $25.6 in 2020, that wasn't in 2019. Other sales will affect that negatively by almost $3 million. Out of service at Penn Station will affect that negatively by $6 million. There are other tenant items, Forever 21, Topshop, et cetera. Our math still is in the low 200s.
Before the concourse in Kmart adjustment.
Yes, before the concourse.
Okay. Just to confirm the guidance you gave is, that assumes that Forever 21 leases are cut in half but not go to zero, and there's an additional $0.05 if they go to zero. 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, a couple of quarters ago, you mentioned that 2019 would be the trough year for earnings, and now you're coming out with -9.5% for 2020. Looking back two quarters ago, you already knew about the retail joint venture, the Topshop store closings, the PENN 2 redevelopment. I'm trying to understand what was new over the last six months besides Forever 21 and the Kmart early termination.
Well, John, it's Joe Macnow . 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 things that affected that. It's over, we're confident from what Michael told you, that 2020 will be the trough year, that the growth in 2021 will be substantial. Again, if you'd like to go into greater detail, let's do that offline, but not monopolize this call with that type of detail.
Sure. Okay. You updated your NAV. Now your stock is trading at a 32% discount to it. Wouldn't a buyback, I know you've talked about it in the past, but wouldn't a buyback help offset some of this dilution and it would have been a lever or could be a lever to offset earnings dilution going forward?
John, look, we recognize we're at a meaningful discount. The market seems to ignore our NAV we put out, and maybe even the analyst NAVs. Look, 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 try to narrow that gap.
First of all, to grow NAV, which is what we're trying to do through our PENN District redevelopments but s econdly, to close that gap. We've shown an ability to execute within the creative transactions and we are continuing to look at that. Obviously, a buyback is one way. I don't know if it's as significant in terms of maybe some of the others 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? You have free cash flow that is significant. You're trading at a big discount. You have some earnings dilution, which is near term. If this is not the right time, then when would it be?
John, it's a matter of using that capital for that or other things, and we continue to have significant opportunities to invest in our business. We've outlined the three initial redevelopments from the PENN District that are substantially accretive. There are opportunities behind that where our capital, we want to have available to continue to execute on our redevelopment in the whole district w e're attacking the first 5 million square feet today, but there's significant amounts to do beyond that. Right now, we want to have that capital available for that or other purposes.
One last from me.
We think that's more accretive in terms of NAV creation, John, than a buyback for that same amount of capital based on our analysis.
Your earnings decline is more than offset by condo sales at 220 Central Park South, which you don't include in your normalized FFO. Did you have a $200 million increase in your estimated proceeds? Looking at the 10-K, it still looks like you have $1 billion in after-tax profits maintained.
John, it's Joe again. I saw some confusion from some people on that point w e published in this NAV $1.2 billion, but we didn't say that's the profit on the job, w hat we described it as is the incremental value from estimated future proceeds net. The net is net, of course, 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 billion the $1.2 billion plus $200 million of taxes for $1 billion but, t his is the timing of cash coming into Vornado.
If you look at the 10-K, you'll see we've already gotten $1.8 billion from the project. That $1.8 billion plus this $1.2 billion represents $3 billion, which is the after-tax cash coming from both the profits of $1 billion and recouping the original investment of $2 billion, and the cost to do the job. No, we have not increased the sales estimate by $200 million.
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 million for the Kmart space, about 141,000 sq ft, what do you put in 141,000 sq ft 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 $240 a foot I think is taking the aggregate amount, which is a value, as opposed to an annual rent. I think Kmart was paying us around $60 a foot, maybe a touch less.
Yeah.
I think that's the more relevant comparison. We think in terms of that space, is there demand? Is there use for that? absolutely i mean, that is a bull's-eye 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.
Based on our preliminary discussions with a couple of large format users that wouldn't necessarily take it all because we don't want one tenant to take it all, given how we're going to incorporate the redevelopment. There's absolutely going to be strong demand for that space at good numbers.
Okay. Just a few quick questions. When do you think you're going to get the hit for the PENN 1 ground lease, and is $0.20 a share a good number? Second, 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. Third, 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. PENN 1 ground lease, I think you asked about the impact there. That's something we've talked about on the last call or two. We're not prepared to give an estimate as to what that could be. That's almost three years away in terms of that reset. 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 and o bviously, it's going to be up from today's number, not something we want to prognosticate, particularly as we don't want to negotiate in public with our ground lessor. 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 there, but not dependent on gateway per se.
Manhattan Mall and Hotel Pennsylvania.
Look, right now, Manhattan Mall is the office building's full. We've got a great tenant who continues to love the building. That's performing well t he retail, we're effectively keeping on shorter-term arrangements. That asset is cash flowing quite significantly, and that's the plan for the near future. Hotel Penn, we've talked about in 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 city.
Obviously, we'll see what market conditions are at the time, but that's the next logical place to build a new building a t some point, Manhattan Mall, could be expansion for that, but that's years and years away n ot 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.
Oh, hey good morning there. Just a few quick questions here. Just on first, on the guidance, or we'll put guidance in quotes that you guys talked about for the impact to 2020. That includes the benefit of presumably stopping the ground rent payment on the Topshop Fifth Avenue store?
Correct.
Okay. As you guys have laid out the roadmap for the Penn Station.
Hey, Alex, just to clarify, net there's diminution from that.
Alex, that's not in comparable FFO. 608 Fifth Avenue is not in comparable FFO, and when that lease is rejected some months from today, there'll be a $70 million income item, non-cash income item. That's not in comparable FFO, so that's not in what Michael referred to in his discussion.
Okay. Joe, that's helpful. 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. It's a little more front-ended.
Okay. Then finally.
Alex, it's David. Good morning.
Morning.
I guess what I'd add to that is, our objective is to turn this building into a mid to high nineties building on average if not higher. To the extent we can get tenants out of this building, our objective effectively is to do so t hat's something that Glenn and team have been working on to accelerate over the last number of months.
David, that's helpful. The final question is, you guys clearly are not an earnings story y ou're an NAV story. On the last call, Michael you talked about Hotel Penn, that it's not time yet. You guys are sitting on 350 Park, I hear comments from the brokerage community i was just talking to a guy over the weekend who was saying that they can't find space under $120 a foot in Plaza District.
At what point do rents on Park Avenue make sense where you can redevelop on Park Avenue? 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 line that site up for a new development. We'll make that decision as we get closer to that time based on market conditions and so forth. The feedback from the brokerage community is that is the best site in town and would command the highest rents.
I think we may have even referenced in the past, we have been approached by significant users for either all or a meaningful portion of a new building on the site. 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. If you just think about the timing, we have leases that run through really beginning of 2024, Glenn?
End of 2023.
End of 2023. That's the earliest that we could begin to take the building down. New delivery wouldn't be until 2027 or 2028. 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 tenancies and then executing on it. I think if we had the building today, could we command the rents to achieve the yield necessary to develop? 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.
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 w e can build probably the best boutique building, that's a 1 million sq ft boutique building on that site on our own. Or we can combine with Rudin, who's behind us, and build close to a 2 million sq ft building.
The answer is as we continue to move down the tracks here in terms of timing on our leases and whatnot, his building, BlackRock's moving around out to 2023 as well, so they line up for that, so we can put them together but w e'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. The answer is, too early to tell which direction it could go but either is possible.
Thank you, Michael.
From Morgan Stanley, we have Vikram Malhotra. Please go ahead.
Thanks for taking the questions. Just on expirations on the office and retail side, we know obviously of the big move out in Penn here, but you've also kind of alluded to a 20% mark-to-market in your 10-K. 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 mark-to-market, but there's a big expiration in Q4 of 2020 c an you remind us what that is?
On 2020, our expirations total approximately 525,000f t. That's after we take McGraw-Hill out of service, which is a 560,000sq ft lease, which expires at the end of March. On the mark-to-market, we're coming off $70 rents. We think that goes 20% to a, call it, mid-$80s number. Remember, quarter- to- quarter, these numbers fluctuate t here's no rule of thumb, obviously.
As we look out on our leasing projections, the spaces that are coming up for expiration, 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.
Again, 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.
That includes the $500 million that you highlighted, but potentially other leases, and that's 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.
On the retail side.
On retail, which, as you said, is more flattish. That's, again, no big leases p robably half of that is in the PENN District, which given everything we're doing there, we feel good about. Some of that may frankly intentionally take a little longer there to get the right mix of tenants. Again, no big leases, fairly diversified set of expiries.
Okay, not even in Q4 It just seemed like there was a large chunk in Q4 2020, but maybe just building off of that i n 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, 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. 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 the strong balance sheets who have profitable business lines. 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.
Haim, if I can just ask you, if I remember correctly, in your vacancy, rents there were well below market. Just given the broader vacancies on Fifth Avenue, it seems like asking is still kind of above $2,500 or $2,800 a foot w hat 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 w hat's a more sustainable level?
I believe the sustainable rents are not where peak rents have hit on Fifth Avenue. There were leases signed in the $4,000-$5,000 a square foot range at peak. I do believe it's down significantly from there in terms of affordability. 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 a half a dozen brands that have more than $100 million 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. Just last clarification, the stabilization that you've outlined for Farley 2022, I know you said that you're pretty confident of lease up w e'll hear more news. Just from a modeling perspective to kind of get to that 2022 stabilization, when do you have to get the leases done? or what's sort of in the model that we have to get leasing done to achieve that stabilization before maybe it gets pushed out into 2023?
I was going to say the next three months or so.
Okay, you would need to get a lease done in the next three months. Before you
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, w e feel good about the numbers that we have out there.
Okay, thanks. I'll follow up offline. Thank you.
From Green Street Advisors, we have Danny Ismail. Please go ahead.
Great. Thank you. Just given all the moving pieces, can you speak to how leverage will trend in 2020 on a debt to EBITDA basis?
Danny, we couldn't hear your question. Could you 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, Dan. 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.
Then, maybe just for the New York office portfolio outside of Penn Plaza, can you frame how you guys are seeing net effect of rent growth in 2020? Are you guys expecting something more in line with inflation or something above that?
We're seeing rents still strong. Rents in Midtown are at all-time highs right now, hovering around $8 a foot. We feel good about the portfolio, the strength of the buildings with which we're leasing right now. We feel that rents are still going up in most sub-markets, including in many of our buildings. Again, it's case by case as we lease up. Again, we don't have a lot of space to come in that core portfolio that I talked about earlier.
If you had to ballpark where in-place rent sits outside of your PENN District office portfolio in Manhattan, can you frame how far below market those rents would be?
Danny, I don't want to give you a number on the phone t hat'd be a guess as opposed to a precision. I'm comfortable saying the in-place rents are below the market rents. Again, don't want to quantify how much t hat'd be a little off the cuff.
I think going back to your first question, we're seeing, I think we talked in the opening remarks, is if you have redeveloped your buildings, you have new buildings, we are seeing real rental growth there, right? Then in 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, Meatpacking, you're continuing to see above that. I think the trends have remained fairly consistent, although I think Midtown has been a little stronger in the last four to five months than it was in the middle part of last year.
That's helpful. Thanks.
Thank you. 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, 5 May , and look forward to your participation again. Take care, and thanks.
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.