Good morning, and welcome to the Vornality Realty Trust Third Quarter 2019 Earnings Call. My name is Michelle, and I will be your operator for today's conference. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded.
I will now turn the call over to Ms. Cathy Creswell. Ma'am, you may begin. Thank you.
Welcome to the Renato Realty Trust's 3rd quarter earnings call. Yesterday afternoon, we issued our Q3 earnings release and filed our quarterly report on Form 10 Q with the Securities and Exchange Commission. These documents as well as our supplemental financial information package are available on our website, www. Vno.com under the Investor Relations section. In these documents and during today's call, we will discuss certain non GAAP financial measures.
Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10 Q and financial supplements. 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 are is Michael Franco, President. In addition, Steven Roth and our senior team are President and available for questions. I will now turn the call over to Michael Franco.
Thank you, Kathy, and good morning, everyone. Overall, our business is in great shape. Our buildings are full. We continue to hone in on the significant opportunity that we have with the redevelopment of the Penn District. Let me review our Q3 financial results before giving some thoughts on the markets and our portfolio and in particular the Penn District.
3rd quarter FFO as adjusted was $0.89 per share, $0.07 lower than last year's Q3. As I discussed on last quarter's call, these results were impacted by reduced income related to the over $3,100,000,000 of asset sales we've completed year to date and the lost income from the TopShop and Forever 21 Bankruptcies. Last quarter, I also discussed the impact of Topshop's closing at 608 5th Avenue and 478 Broadway. In August, we delivered the required 9 month notice to the groundlessor at 608 5th Avenue that we will terminate the lease in May 2020. This permanently reduces FFO by approximately $10,000,000 annually and mix our NAV by roughly $1 per share.
This ground lease had only 14 years left on it and was not economic for us to hold on to. Now to Forever 21, which we mentioned last quarter was a restructuring candidate. As you know, they filed for Chapter 11 bankruptcy protection at the end of September. They are a tenant at 1540 Broadway and 435 7th Avenue. They have a 3rd lease with us at 4 Union Square, which expires next month, and we chose not to renew them.
We have already re leased a portion of that space to Whole Foods as part of their expansion and have a lease out with another important tenant for an additional portion, both at higher rents than what Forever 21 was paying this year. Forever 21's annual rent on 1540 Broadway and 435 7th Avenue totals approximately $20,000,000 at share. While the bankruptcy process is fluid and is still in its early stages, we have reached a tenant agreement with Forever 21 to shorten their leases retain them in those two locations for a little less than half of their current rent, with us having the right to recapture the spaces at any time after the 1st year, enabling us to secure long term tenants for the spaces. Both of these assets are in prime locations, and we are confident of their long term potential. So to summarize, even with these items, we remain on track to meet the approximate $3.40 per share in comparable FFO for 2019 that we referenced in last quarter's call.
Our non comparable items this quarter included a couple of large gains. One, the $178,800,000 of net gains on sale of real estate, primarily related to the July sale of our 25% interest in 3.30 Madison, where we made 8 times our investment and 2, the $109,000,000 after tax net gain on unit closings at 220 Central Park South. To date, we have closed on 48 units for net proceeds of $1,250,000,000 including 14 units for $349,000,000 this quarter. And we continue to sign new contracts for the few remaining units as well. Remember that we paid off the remainder of the 9 $50,000,000 loan on this asset in July.
So as closings continue through 2020, we retain all net proceeds, which importantly will be redeployed into the Penn District redevelopments, turning this capital into highly accretive earnings and propelling our future growth. Companywide, our 3rd quarter cash basis same store NOI increased by 1%, broken down as follows: New York office and street retail were both up 1%, the mall was down 1% and 555 California Street was up 17.7%. For the 1st 9 months, cash same store NOI across the business was up 2.7%. Let me now turn to the New York market. The New York office market, which continues to be fueled by positive job growth the Lepreya premium office product, performed strongly during the Q3 of 2019.
Leasing activity across the city remains vibrant, driven mainly by technology and financial tenants, with asking rents at record highs for the market overall. More than 25,000,000 square feet of new leases have been signed in New York during the 1st 3 quarters of 2019, with many large deals in process expected to close in the 4th quarter. Talent wants to be in New York, and therefore, companies are migrating to and expanding in the city, creating tremendous competition for top talent. Nowhere is this more evident than with the dramatic demand in the big tech companies. Executives view their real estate as one of the key drivers to recruiting the best and brightest talent to their teams.
Private sector jobs increased 53,000 in the 1st 9 months on pace with 9 month office sector jobs increasing about 18,000 as compared to 20,000 for all of 2018, 18 and certainly at a pace strong enough to continue absorbing the new supply coming online. There are currently 65 tenants actively looking for 100 1,000 square feet or more, totaling 16,000,000 square feet of potential activity. This demand is coming from all industry sectors from companies already in the city as well as those seeking their first home here. Our development in the Penn District is seeing the benefits of this demand as we are in full gear on our 5,200,000 square feet of combined redevelopments at Farley, PENN1 and PENN2. We are experiencing robust interest in all three projects as prospective tenants begin to appreciate the magnitude of our district transformation.
Pennants are responding very favorably to the unique nature of our amenities, space offerings and design elements at each property that will serve today's workforce at the most successful location directly on top of the most important transportation hub in the region. Farley is one of a kind and we have great activity on the space. At PENN2, we are negotiating a lease with a 400,000 square foot headquarters and there's more in the works beyond this, all at ranks at or above our underwriting. All our activities will benefit from the significant public sector projects being built in our district, including the new Grand Moynihan Train Hall, which will be delivered in 2020. The expanded LIR Concourse running from 7 to 8th Avenges by the end of 2021 and a soaring new station entrance at 33rd Street in Plaza 33.
Against the backdrop of this district transformation, we are place making the entire district and are hard at work negotiating deals to curate the district with new food and beverage outlets by leading operators, coffee spots, fitness offerings and other retailers to service our tenants. These additions will dramatically enhance our offering and drive greater demand in rental rates within our 10,000,000 square foot district portfolio. Our goal simply is to make the Penn District and our holdings specifically the go to location for tenants in the city. More broadly, our New York office portfolio is in great shape and continues to perform well. We are substantially full with occupancy ending the quarter at 96.8%.
Our remaining 2019 expirations are only 85,000 square feet, while our 2020 expirations are a modest total of 1,055,000 square feet with 760,000 square feet of this amount expiring at PENN 1 and PENN2. Please remember this includes 565,000 square feet of PENN2, which will be taken out of service in 2020 as this development kicks into high gear. This will bring the total out of service at PENN2 at the end of next year to approximately 1,000,000 square feet. Basically, we're repositioning the buildings from mid-60s per square foot rents to the 90s and need to move the old tenants out in order to accommodate the buildings. During the Q3, our leasing team completed 25 leases totaling 197,000 Square Feet in New York at over $80 per square foot stocking rents, with very strong second generation positive mark to markets of 22.7 percent cash and 28.5 percent GAAP.
We have now completed 814,000 square feet of leases during the 1st 3 quarters of 2019 at a healthy average starting rents of almost $79 per square foot. In the quarter, we signed our first lease at our new build at 512 West 22nd Street on the High Line with WarnerMedia for 20,000 square feet at a triple digit rent. We also have an additional lease out here for 43,000 square feet at triple digits, which we expect to sign the Q4. Additionally, during the quarter, we finalized a relocation expansion deal with an existing tenant in our portfolio, which will be moving from Midtown to 28,000 Square Feet at 330 West 34th Street in the Penn District. The starting rent per square here is in the high 80s, a record for this building, which is clearly benefiting as tenants recognize what's coming with
the Penn District
transformation. Overall, tenant dialogue across our entire portfolio is very strong. We're as busy as ever with 3,000,000 square foot of deals in different stages of negotiations, including our strong momentum at Farley and Pentium. Moving to Chicago now. At the March during the quarter, we executed 45,000 square feet of leases at an average starting rent of over $48 per square foot, with positive mark to markets of 6.7% cash and 14.9 percent GAAP.
This included an expansion lease with Allstate for 17,500 Square Feet, raising the total footprint to 120,000 Square Feet. Occupancy here is at 95%. In San Francisco, the market continues to be hitting on all cylinders. With our campus here at 100% occupancy, we are taking advantage of the extreme tightness in the market and are now discussing with renewals with several important tenants totaling 100 and 80,000 square feet well in advance of their expirations. During the quarter, we leased 50,000 square feet, including a 42,000 square foot renewal expansion with an existing tenant in 315 Montgomery Street at a starting rent of $97 per square foot.
Please note our positive mark to markets on 2nd generation space here, which were a spectacular 39.3% cash 64.5 percent GAAP. Before turning to our retail business, let me comment on WeWork. There's been some speculation in the press that we and several other landlords have meaningful exposure to WeWork, when quite the opposite is true in our case. We have WeWork as a tenant in only one location, 606 Broadway, a mere 15,000 square feet at share. While we appreciate some of the creativity that WeWork brought to the office business, we chose to lease our space to end users with better credit over the past few years.
Notwithstanding this, we do think that co working provides an important service in the real estate ecosystem and we will be providing flex space as part of our overall offering for tenants at PENN1 and PENN2. This space will provide our tenants swing space, co working space, meeting and social spaces, food and more. We will brand this space under the Vornado name and importantly retain the bulk of the upside. Turning now to our New York Street retail business. Overall, the retail market continues to be challenging, with leasing velocity is slow and assets prone to negative surprises, a la Topshop and Forever 20 1.
Retail occupancy was 95.9 percent at quarter end. In the 3rd quarter, in spite of the challenging leasing environment, we executed 9 leases for 26,000 square feet of retail space, achieving positive mark to market of 6.2% cash and 15.6% GAAP of 2nd generation space. During the 1st week of October, we finalized a replacement lease for the short lived former Four Seasons restaurant at 280 Park Avenue with the famous best in class Fasano Hotel and Restaurant Group. Fasano has been a symbol of quality fine dining and excellence in Sao Paulo and Rio since 1949. This will be their 1st New York restaurant and will focus on classic Italian cuisine similar to those they operate in Brazil.
Fasano will deliver the best in fine dining to Midtown Manhattan, while creating an atmosphere of style, sophistication and energy. We think this will further enhance the quality of our tenant experience at 280 Park and are excited for their openings in the first half of twenty twenty. We continue to maintain a fortress balance sheet with reasonable leverage and an abundance of liquidity today and growing over the next few years. Our current liquidity is $3,360,000,000 comprised of $1,280,000,000 in cash, restricted cash and securities and $2,080,000,000 undrawn on our revolving credit facilities. Lastly, I want to remind you that based on taxable gains from our asset sales year to date, we are currently anticipating paying out a special dividend of approximately $1.90 per share this year.
With that, I'll turn it over to the operator for Q and A.
Thank you so much, sir. We will now begin the question and The first question in the queue comes from Manny Korchman with Citi. Your line is open. Please proceed.
Hey, good morning, everyone. If you think about the leasing pipeline you talked about in the Penn District and you dissect that, how many of those tenants are looking to make a move or stay within sort of the Hudson Yards, Manhattan West, Penn Districts Corridor versus looking elsewhere in the city?
Hi, Manny. It's Glenn Weiss. We are seeing a real balance of activity both from tenants in Midtown, Park Avenue tenants, Sixth Avenue tenants looking at all of our projects. In addition, we have a lot of activity from the tech sector. The ever growing brand name tech guys are all looking at the projects as well.
So I'll tell you it's a balance of tenants from within Midtown core and from tenants looking to continue to expand in the city.
Thanks, Glenn. And then on the Forever 21 comments that you made, how did you think about sort of giving them that rent relief and the impact that would have on both leasing and other tenant psychology?
Look Manny, obviously, it was a negative surprise, right, in the sense of we had term on the lease and all of a sudden they filed. And so you have to deal with a real time situation. And I think the deal that we struck is being finalized now. It works for both parties. But I think importantly, keeps the space occupied, paying rent and allows us the flexibility to go troll for tenants and find tenants that will occupy that space long term.
So if you think about the locations individually, 1540 Broadway is arguably the best location in the city right now, right? From a street retail perspective, Times Square is the strongest marketplace. Tenant sales are holding up the best. And have the block front on one side of the bowtie that is a premium location. So with appropriate time, we will find a replacement tenant, a great tenant there and are confident about what we're going to achieve.
On 435 Seventh Avenue, right, that was always a short term deal. It was a 5 year deal intended to get us through the period when we're ready to redevelop the entire block. And so this continues to preserve that for a period of time. We can go replace them if we want. If not, we'll keep it in play.
But again, there's a bigger picture on 435.
Thanks, everyone.
And the next question in the queue comes from Nate Yulico with Scotiabank. Your line is open.
Thanks. I just wanted to ask about you talked about Topshop Forever 21. I just wanted to be clear, are these impacts that are only starting to hit NOI in the 4th quarter, just trying to kind of bridge what you reported in the Q3 versus these impacts?
Hi, Nick, it's Joe. Nick, the Topshop started to affect us in Q3 in Q2 even. Forever 2021 starts to affect in Q3.
Okay. So I guess, sorry if I missed this if you went through, but I'm just trying to understand how when we're thinking about that $340,000,000 kind of soft number for the year on FFO, what are some of the items in the Q4 that create that drag versus what you reported in the Q3?
So Nick, when we had the Q2 call, we said that the sales items and the other items we discussed that reduced NOI going forward, If you apply them to the 6 month numbers, you will get 3 points. The 3rd quarter last year was $0.96 this year it's $0.89 That's a diminution of $0.07 that really comes primarily from sales. Specifically, the retail JV is $8,200,000 dollars of that reduction 330 Madison, dollars 1,400,000 the sale of Lexington shares, dollars 3,300,000 the sale of Urban Edge, dollars 1,900,000 the delta between the dividend on PREIT and our share of their earnings, another $1,000,000 And then there were other items that make $0.07 or the delta in $15,000,000 All of those items continue in Q4. And with that, and now with even the Forever 21 effect in Q4, which we didn't know when we talked about the 340, Other pluses and minuses leave us comfortable at 340.
Okay, that's helpful. Thanks. Just one last question on Faroe. I mean, you have a lot of interest in the building from what we've heard, there's been some press reports on it.
Can you just give us a
sense for how you're thinking on getting the building leased? And then in terms of the yield that you're giving there in the supplemental, I don't think that's been updated in a while. We've heard you've kind of been pushing rents in the building. So is that is there upside to that yield in the building?
Look, I think there has been a lot of press speculation about Farley and there's quite a bit of interest in the asset. I think as we've talked about on prior calls, it's a totally unique asset. We wish we had 5 of them. And so the interest has been high. We're not prepared to comment on when a deal might get done in terms of that deal.
But even if we sign a lease near term, the cash flow is not going to start probably until beginning of 2022. So the interest is high. I think the yield that we published in the last quarter was our best assessment as to where it would end up. We're not prepared to make any adjustments to that. Obviously, we had some sense based on some dialogue at that time.
And I
think the interest in the retail has been significant as well. So we have to
let it play out.
But I think when we put in the Q2 numbers, was continues to be our best guess as to where the yields will end up.
Thank you. The next question comes from Steve Sakwa with Evercore. Your line is open.
Thanks. I guess, Mike, when you look Michael, when you look through kind of the retail tenant list, some of these things are kind of popping up that maybe you were expecting. Just what like how do you sort of look at the watch list today? What other potential tenants maybe without naming specifics are you sort of worried about moving into 2020 at this point?
Look, Steve, the retail market is soft. Tenants' performances are not what they were a few years ago. And so generally, we watch everybody. 6, 9 months ago, Forever 21 was struggling, but we didn't necessarily expect them to file bankruptcy. So I don't think there's necessarily anybody that we look at that we view as in the same position today.
But we're constantly watching what may happen with different So there's risk in the sector. We do have, I think, on average, about 8 years weighted average term on our leases in retail. And we continue to view that durability as a real strength. So there's no other specific names that I would mention, but everybody is mainly focused on.
Okay. And then maybe just a question for Glenn. I mean, I realize you guys don't have a lot of space coming due that Michael outlined. But just sort of what is the tenant psychology today as tenants are thinking about their 2020, 2021, maybe 2022 expirations? And are you seeing more tenants coming to you sooner in order to lock in deals?
I mean, just sort of what is that dynamic today?
I think the tenor of the market is very good, Steve. We are seeing a lot of tenants, number 1, expanding in the portfolio. A lot of tenants looking for new space in the portfolio. We do see tenants who have expiring leases forward who are looking at our developments in Penn specifically. So I would tell you, I think the market overall is healthy.
The tenant demand is strong, and the tenants are still very active across all the sub markets.
I would just add, Steve, look, I think as we look at the pipeline, we were chatting here a few days ago. I mean, I think the activity really across all submarkets, whether it's Midtown, Midtown South, Penn District, we have good action across the board, and I think that's reflective of the fact that the tenants are growing and the market is healthy.
And then just lastly, could you just comment on the TI leasing commissions? I think it looked a bit elevated on a couple of areas. I think in New York, it looked a bit high. I was just wondering if that was a specific deal or kind of what you're seeing on the concession front?
It's Glenn. During the quarter, particularly this quarter, we had a bulk of our leasing via our turnkey program. So we built space for tenants. Those leases had relatively short term at around 7 years on average on that leasing. The way we look at the turnkey is we build them today, we lease them for the term and there's definitely a great value in the next generation of the leasing of those spaces.
So that's why you see that LOE to TI number this quarter.
Thank you. The next question comes from Jamie Feldman with Bank of America. Your line is open. Please proceed.
Great. Thanks and good morning. So I know you guys kind of confirmed the $340,000,000 for FFO, but I think on the last call, you talked about a low $200,000,000 range for street retail. Are you still comfortable with that, Alex? Or has that changed?
Good morning, Jamie. That is the number that Steve referenced on the last call. Like I think that number may still be fine. But there are some things in flux. Obviously, Forever 21, we have a Handshake deal.
And until that's done, we see how that plays out. But with them generally as a company in that specific arrangement, that can have an impact. We sold a couple of assets, including 340M, for example, that comes out of that number. And the last thing I would say is that we are now projecting to take the retail and the Long Island Railroad Concourse out of service next year for a couple of years while we redevelop the concourse. And so when that comes back, we're going to add additional retail square footage, which we think is going to be in very high demand based on that retail today, and the income will be higher.
But we're going to lose $12,000,000 per year temporarily. So there's a couple of things that are moving around. Again, some of those temporarily, we didn't see how Forever 2021 plays out. But I think the general number that Steve outlined in the last call still appears fine.
Okay. Thank you. Then I thought I heard you say you're in talks for a 400,000 square foot headquarter deal at 2 Penn. Can you talk more about that potential lease? And then just timing, like a 400,000 square foot block, how that would fit into the building and how we think about the ins and outs over the next couple of years if that
hits? You know the lease is out. We expect the lease to get signed in the next few months. The tenant would start their construction once we deliver the redeveloped building to them. So it's a deal we like a lot, and we're going to try to close it in the next few months.
Okay. And then finally for me, just I know you had said you are seeing expansions, pretty healthy market conditions. Can you just talk about your view of kind of traditional Midtown versus Midtown West? It sounds like a lot of the activity is Midtown West. But if the tenants you're talking to do end up moving the Westside, what do you think the outlook is for more traditional Midtown and market conditions there?
I mean, I could speak in terms of our portfolio, Jamie, in Midtown, and we are still seeing expansions in the buildings in Midtown, whether it's a 1290, a 90 Park, a 280 Park, an 8887. So we are seeing expansions throughout our Midtown portfolio. We, in our portfolio, have not lost the tenant to the new developments on the Westside. So I can't really specifically speak about others losing their tenants migrating there. But we're seeing expansion still healthy within our portfolio in the Midtown district.
The only thing I'd add, Jamie, is that, I think we've talked about this now on a few calls, is that in order to compete effectively in this market place, your buildings have to be modern from an infrastructure standpoint, technology standpoint, amenity standpoint. And we got ahead of that starting many years ago. All of our buildings in Midtown have been renovated. We attracted top flight tenants to anchor those redevelopments. And so when you look at our assets, notwithstanding the activity levels, which are healthy on them, they're generally put to bed for a while, right?
There's not so you look at the leasing activity last quarter, this quarter, next quarter we alluded to, there's not a lot of roll because we did the work, put those buildings to bed, add healthy rents and strong tenancies. So I think where you're going to see some impact is from those landlords that have either inferior locations or functionally where some of the move outs are going to occur beginning in 2, 3, 4 years.
Thank you. The next question comes from John Kim with BMO. Your line is open. Please proceed.
Thank you. A question on the February 'twenty one rent cut. Is your expectation that you will release that space at a meaningfully higher rent? Or is there new rent for the Q4 of March?
John, I had a little trouble hearing you at the end there. Just repeat the question, please.
Sure. Do you foresee releasing the space of Forever 21 at a higher rent? Or is there new rents really reflective of where market rates are today?
No, I would say, let's take them individually, right? On 1540 Broadway, our And 435,7 was a temporary deal. And 435.7 was a temporary deal. If we went to lease that long term, the rent would absolutely be higher. But again, we want to keep flexibility there.
And so we're balancing flexibility with how much rent we're going to get. And so frankly, I know you guys care quarter to quarter what the rent is there. We don't really care what the rent is for the next four and a half years as we continue to put our plans together for that block.
Okay. And Michael, you mentioned 65 tenants potentially looking for up to 16,000,000 square feet in Manhattan. Do you have any commentary on how much of that is new demand versus just musical chairs?
It's Glenn. It's a mix of type of tenant, whether demand is expansion, relocation. It's a mixed bag across all the industry sectors, across all the sub markets. I wouldn't necessarily pinpoint one particular flavor activity within that subset.
But what about John, the
one thing I would add is you see that really, I think, in space this year, right, is the growth from the tech companies, which I don't think most people didn't see the magnitude that was going to occur this year and there continues to be dialogue on. Those are major impacts that tend to happen, I think, with much greater speed than a lot of the other leasing from traditional tenants. So we continue to see a migration. And once those tenants get here, their expansion has been pretty significant.
Great. Thank you.
The next question in the queue comes from John Guinee. He is with Stifel. Your line is open. Please proceed.
Great. Two sources and uses questions. First, can you remind us again when you have access to the preferred equity from the retail deal you did earlier this year? And then what you expect to be the remaining after tax proceeds at 220 Central Park South? And then the next sources and uses is, how do you think the JPMorgan news ultimately plays out?
Does this result in a stable headcount in New York City or is it down 20%?
So John, good morning. I'll let Joe answer the after tax proceeds on 2.20.
Okay. We'll start with that, John. Hi, how are you? It's Joe. Good.
John, we have one
excuse me? Where is Steve? Sitting next to me.
Good. Good.
We have $1,900,000,000 in future sales, the lion's share of which is under contract. There's another $100,000 of taxes against that $1,900,000,000 and another $100,000 of cost to complete the project against that $1,900,000,000 So net of all costs, net of all taxes from this point forward, we'll be receiving $1,700,000,000 plusminus from the remaining sales, closings of the sales at 220. So John, just on your
specifically in the past when that can be refinanced. And I think we continue to not want to to state that. There's some tax sensitivities to that. But we will, in due time, be able to refinance and redeem that retail preferred. But thank you for pointing that out.
That is another significant source of capital we will have access to in a few years. In terms of the JPMorgan announcement, like I think the most important thing to remember is that they are building a significant world class headquarters on Park Avenue right now and have recommitted to New York City through doing that. So this is their home. I don't think it's unusual for companies to get the banks to move back office personnel outside of New York, whether that's into New Jersey or into other cities. And so I think this is along those lines.
But I haven't heard any announcements on percentages of headcounts, whatnot. We'll have to sort of read that news. But there's ebbs and flows in the city in terms of companies and how they grow and manage their headcount. And I think JPMorgan
is just doing that.
Great. We miss you, Steve. Thank you.
The next person in the queue comes from Alexander Goldfarb with Sandler O'Neill. Your line is open, sir.
Hey, good morning. Good morning. So two questions. First, you guys obviously talked a lot about the big tech demand this year that surprised the market. And at the same time, Slug is busy contemplating redeveloping One Madison.
You guys have the Farley, but at the same time, you have the Forever Hotel Pennsylvania. So are there is there sufficient demand in the market where you guys would start to, I don't know if it's dust off the old plants, maybe reconceive, but where that project starts to be something that may actually come to fruition given the tech demand in the city and its location?
Good morning, Alex. Look, we are unbelievably excited about the Hotel Penn site. We think that, that site we are done transforming Seventh Avenue with PENN1 and PENN2. We think it's going to be the best development site in the city. So but the time is not here yet.
We're going to finish developing PENN1 and PENN2. And we think that follows that after the fact. So you're guesstimating what demand is going to look like in 2, 3, 4 years knowing and it can effectively do that. But we think it's going the plan we have for that is going to be unique. We think that will appeal to all sorts of tenants, tech or business.
Okay. And then the second question is just going back to the questions on retail rents. Topshop, you mentioned a cut to rents. The IKEA replacement for the Sears out in Rego Park is a cut from what Sears is paying. So it would almost sound like rents for street retail are they're either coming down dramatically or these were special circumstances where they were so far above where the market had moved or maybe it's just the amount of space.
So maybe you can just give a little bit more color on the dramatic cuts that we're seeing in these locations versus where you think sort of generic your generic your average street retail lease would reprice?
Look, I think we've talked about frankly for the last at least 2 years, the street retail brands. I think Steve was really I think he was early in saying it and that the market has been correct, right? The retailer demand is down and therefore rents followed. I think it's probably been most significant significant in Madison Avenue and SoHo. And again, deals that were signed at high watermark are seeing those rents come down.
So Madison could be down certainly well north of 1,000 and certainly below that below 1,000 a day. So yes, the market has been correcting. Have we bottomed? The answer is in some submarkets that we're close and maybe a couple of others not necessarily yet. But I think it's case by case, right?
It depends on when the lease was signed. We have many leases that are still below market. We have obviously some that are above market. It depends on what the vintage of those leases were. And obviously, when those leases roll, we can't predict where the market will be at that time.
But in some cases, the asset may be a better use. So Top Shot SoHo, that was entirely retail. Today, the best answer may be that the ground floor stays as retail and the upper floors become office and the income is not that different. That office space with a Crosby Street address, we think is going to be very attractive and we have already. So I think it depends on the asset, depends on the submarket.
But clearly, rents have been corrected.
Thank you.
And the next question in the queue comes from Vikram Holthotra from Morgan Stanley. Your line is open. Please proceed.
Thanks for taking. I have two questions. So just one following up on Street Retail. Any update on the Massimo space or the Madison assets?
Good morning, Vikram. Nothing really to report on either one of those. We have some tenant dialogue going on Fifth Avenue, but nothing is imminent. Retailers continue to be cautious and are conservative on making large commitments, which Fifth Avenue generally is. So nothing to report there.
I think Madison is a little bit different where Madison is slow. There's no sure coming. The demand on Madison is probably the lowest of any submarket in the city. And so it's going to continue to take some time to fill out.
Okay, great. And I just want to clarify on the 3.40% and the run rate going into next year. Joe, should we assume that therefore the FFO in 4Q is closer to $0.80 to hit that $3.40 And do you still anticipate recouping a lot of those losses heading into 2020?
Hi, Vikram. Look, so far we've talked about Forever 2021. We've said that the rent at share is $20,000,000 and that's going to be diminished by at least half. We talked about the Long Island Railroad Concourse coming out of service next year. Neither one of those things were included when we talked about the 2020 versus 2019.
Now as you know, we don't give guidance. But that being said, as a result of that negative effect of Forever 21, additional out of service at PENN1 and PENN2 to support our development plans, including the LIRR, lower expectations from Hotho, Pennsylvania, we no longer believe that 2020 will be a substantial bounce back year. It's going
to have to wait a
little longer.
Okay, that's helpful.
I'll follow offline. Thank you.
Yes. Vikram, I would just add to what Joe said though, which is, notwithstanding, it may not be a bounce back year. And I know you and others are very focused on the next few quarters. I think as we look at our business, our big growth engine is Penn District. And we have tremendous confidence in what we're doing there.
The early reception has been very positive. And so that's going to take some time to kick in, but it's going to be meaningful when it does. And obviously, we published the information on the first three redevelopments last quarter. And so we feel good about that. So it's going to require a little patience, but the growth is going to come quite meaningfully.
That's great. And I just wanted to just clarify just on the 3 $40,000,000 Joe, the run rate. Is that $340,000,000 still intact for the reported full year? Or is that was that a run rate sort of number?
No, that's the number we expect to publish at the end of this year for calendar 2019.
Okay, great. I'll follow-up post the call. Thank you.
And the next question in the queue comes from Manny Korchman with Citi. Your line is open.
Hey, it's Michael Bilerman with Manny. Just a few follow-up questions. Michael, you mentioned that 400,000 square foot headquarters lease and I don't know if Glen or David or yourself want to answer this, but I guess when do you sort of disclose that information to The Street? Because I got to assume in your comment that there was a lot more in the works. And I assume that's at Farley and maybe other stuff at PENN1 or PENN2 and other buildings.
So I guess at what point in the negotiation do you feel comfortable making a statement like you did about a significant value creating lease like the one you mentioned?
Mike, I think we'll announce it when the lease is actually signed. I think that's the general view. We have good dialogue going on the assets right now, but the actual detail will come when we finalize the lease.
But I guess, in this case, this lease is out for I guess you talked about it on the call, it's out for signature. I just didn't know at what point in the process, let's say, a lease at Farley would be and at what point you would be talking about that in the open about real?
Yes. Just when it's signed, Michael.
So in this case, the $400,000 is signed and you're just going through the No.
Dollars 400,000 there is we're negotiating the lease.
So I guess in the other leases that you're negotiating, how sizable are those and where do they stand in the process relative to this 400,000 that at PENN2?
Michael, look, I think you're trying to pin down on exactly where we are. I mean, I think there's really nothing more to say, right? I think high level, I think what we've said is sort of all that we're prepared to say right now. When the leases get signed, we'll announce those. You'll know about those.
But until they're done, nothing's done. And anything beyond what we mentioned specifically is, again, still just active dialogue or negotiation, not ready for it to be reported.
Right. And look, it's very exciting to hear about the PENN2 lease. I was just trying to understand the sort of policies that you have in terms of disclosing it. That was really more I
was trying to get out. We're excited too, Michael. But you got to wait a little bit.
And maybe a question for Steve. You've not been shy about where your shares trade relative to the inherent value of the asset base and you've been extraordinarily aggressive over the last 6 years at simplifying a lot of the complexity, spins, merge, sales, completing the construction at 320, doing the file buyout all, variety of long list. I guess, where is your head today in terms of further sort of potential sales? And most obvious would be something on the office side, either New York or outside of New York, either in a joint venture outright, or is all the focus right now on Penn Plaza and the redevelopment efforts?
All of the above.
I'll say a couple of things. Number 1, everything is on the table as it has been for the last number of years. Number 2, we are certainly not done yet. Number 3 is we definitely are not satisfied with our stock price at all. And just I would like to throw it back to you, for example, you said asset sales outside of New York, and I guess you're referring to San Francisco or Chicago.
I would remind you that for the last 5 years, you and your brethren have been begging me to sell San Francisco. And in the last 5 years, it has gone up in value for over $1,000,000,000 since we continue to hold it. So everything is on the table. We're not done yet. And we're actually surprised by our stock price, but if the market speaks and we're not done yet.
Joe, just in terms of 220, the $1,700,000,000 does that also include the basis, the money that you have in the building? So effectively, we should think about $1,700,000,000 of cash or
is there other Michael, Joe spoke a little bit out of turn, trying to be very, very thorough. The answer is that we have published numbers which show that the sellout in that building is about $3,300,000,000 and the cost of that building is about $2,000,000,000 okay? So you can do the math from there. The important thing is that all of we paid off the indebtedness, so all of the closings that come from in the future go into our treasury and go to Finance Penn Plaza. So we've announced that we have closed $1,200,000,000 or $3,000,000,000 You can deduct that from the sell out.
You can do the math.
And Michael, my math was consistent with what Steve said.
Okay. You can't go back with that. One of the reasons, we've been I've been accused of being secretive with respect to that property. That's really not the case. We have a very important clientele, and think the word discrete is more important.
The residential real estate market is a very gossipy market. So information that gets into that market is not helpful.
The next question in the queue comes from Daniel Ismail with Green Street Advisors.
Good morning, guys. Just a quick question on New York City office cap rates. Given the movement in the tenure and some of the sales that we've seen in New York, where we stand today, earlier this you guys put a 4.5 cap rate on your off holdings. Do you think we've adjusted higher or lower since that time?
I don't know that that would change it, Daniel. But obviously, we do it once a year. We'll revisit the time and see where the markets are and what we're hearing from capital sources. I do think that the fact that interest rates have trended back down and appear to be stabilizing at lower levels, I think is bringing capital further into real estate as a general matter. And I think that a number of the capital sources we talk to, I think, view New York as there's value here, right?
So cap rates probably widened a bit over the last year or so. And given where the 10 year is, can finance on a reasonable leverage basis generally below 4% right now. So that's a very attractive cash on cash yield. And so as the hedging costs have come in for a number of the capital sources abroad that are that's an important issue. I think you're seeing capital sources refocus a bit, not just in the U.
S, but on New York as potentially a value play, given value has been frankly pretty flat, maybe even a little bit down in the last few years. So there's a lot that goes into what we publish, not just where the market is, but how much growth is in a particular asset or vacancy or whatnot. So we'll revisit that as we get closer to when we publish it. But I think today directionally is not far
off. Okay.
Daniel, you guys have been hustling that New York is overpriced. I'm not sure we agree with that. So if you look at comps, the comps pretty much support the cap rates that we have been using. The volume of activity in the capital markets has definitely been declining. It's been declining all over the country and all over the world.
So it's a very specific asset by asset calculation. Now the NAV calculation is not intended to be nor can it possibly be a rigorously ruthless accurate correct number to the penny. It's a range. And so the volume is down. Pricing is pretty much holding on specific assets.
And we think that you're a little bit too pessimistic on your thinking PENN1 and PENN2 based
on
some earlier comments. Quick follow-up on PENN1 and PENN2 based on some earlier comments. You mentioned wanting to do the flex space there yourself. Is that a result of any of the turmoil we've seen at WeWork and wanting to reduce operator risk? Or is that a conscious decision of what to capture some of the upside in flexible leasing and keep sort of that tenant experience in house?
Hi, it's Glenn. You know, we think in Penn, it's important to create the flex space for our portfolio for our tenants, particularly at Penn 1, the big building, 2,500,000 feet, more than 200 tenants are in the building. We're always seeing tenants needing agile space, whether it's swing space, expansion space, short term Band Aid space for whatever reason. So we think in Penn, doing the co working, the flex space is going to be a huge benefit for us and our tenants. And of course, with that, we do expect it to be profitable operation, which is why we've decided to do it at PENN1.
Daniel, when you think about this is part of the centerpiece of the PENN district. We want to control exactly what goes on here, curate exactly how we want to create the right environment. And so we don't think there's anybody better to do that than ourselves. I think we've proven that over the years in what we've done. And so and when you think about when you lease to a co working operator, you're generally providing the bulk of the TIs and getting a lease and maybe get a little upside.
But you're not getting a lot of credit and you have a capped upside. So here, we're going to invest the capital exactly the way we want it and create the right environment and capture the bulk of the upside. And so for us, it's a pretty straightforward answer.
Makes sense. Thanks, guys.
And then by the way, that's always been the plan.
Thank you. And the next question in the queue comes from Jamie Feldman with Bank of America. Your line is open.
Thanks. Just a quick follow-up on that last question. I know it hasn't been that long, but what changes have you seen in the market since WeWork pulled their IPO in terms of demand for co working or just tenant behavior or discussions?
I haven't seen any change, Jamie. No change.
Well, I guess just the attitude towards co working and flex leasing, I mean, it certainly seems like the product seems a lot more talked about and tenancy more interested?
Look, I think it's like I think the way that people work, hey, I'm going to use that space, I think that's here to stay. It's one of the reasons we're offering that type of space in the Penn District. I do think my own view would be that there's been this big discussion of shift toward enterprise from these co working companies, particularly WeWork. And I think those large enterprises are going to focus even harder on who their landlord is. So I think that accrues to the traditional landlords quite a bit like us.
And so the desk by desk in small companies, I think co working will continue to be an alternative for a number of those. But I do think that this shifts the tenor back a little bit.
Thank you, sir. We have no further questions at this time. I will turn the call over to Mr. Michael Franco for any closing remarks.
Thank you everybody for joining the call. We look forward to seeing many of our investors out at the NAREIT Conference in Los Angeles on November 12 13. And our next earnings call for our Q4 earnings will be on Wednesday, February 19, 2020. And we look forward to your participation again. Take care.
Thank you, ladies and gentlemen. This concludes today's teleconference. Thank you for participating. You may now disconnect.