Good morning, and welcome to the Vornado 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. During the question and answer session, if you have a question, please press star then one on your touchtone phone. Please note that this conference is being recorded. I will now turn the call over to Ms. Catherine Creswell. Ma'am, you may begin.
Thank you. Welcome to Vornado Realty Trust third quarter earnings call. Yesterday afternoon, we issued our third quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents, as well as our supplemental financial information package, are available on our website, www.vno.com, under the investor relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q, and financial 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-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 statements. 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 questions. I will now turn the call over to Michael Franco.
Thank you, Cathy. Good morning, everyone. Overall, our business is in great shape. Our buildings are full, and we continue to hone in on the significant opportunity that we have with the redevelopment of the Penn District. Let me review our third quarter financial results before giving some thoughts on the markets and our portfolio, and in particular, the Penn District. Third quarter FFO, as adjusted, was $0.89 per share, $0.07 lower than last year's third quarter. As I discussed on last quarter's call, these results were impacted primarily by reduced income related to the over $3.1 billion 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 Fifth Avenue and 478 Broadway.
In August, we delivered the required nine-month notice to the ground lessor at 608 Fifth Avenue that we will terminate the lease in May 2020. This permanently reduces FFO by approximately $10 million annually and [NICS] or 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. 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 Seventh Avenue. They have a third 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 us here. Forever 21's annual rent on 1540 Broadway and 435 Seventh Avenue totals approximately $20 million a year. While the bankruptcy process is fluid and is still in its early stages, we have reached a tentative agreement with Forever 21 to shorten their leases and 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 first 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.
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 $178.8 million of net gains on sale of real estate, primarily related to the July sale of our 25% interest in 330 Madison, where we made eight times our investment. Two, the $109 million after-tax net gain on unit closings at 220 Central Park South. To date, we have closed on 48 units for net proceeds of $1.25 billion, including 14 units for $349 million this quarter. We continue to sign new contracts for the few remaining units as well. Remember that we paid off the remainder of the $950 million loan on this asset in July.
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. Company-wide, our third quarter cash basis same-store NOI increased by 1%, broken down as follows: New York Office and Street Retail were both up 1%, The Mart was down 1%, and 555 California Street was up 17.7%. For the first nine 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 and delivery of premium office product, performed strongly during the third quarter 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 million square feet of new leases have been signed in New York during the first three quarters of 2019, with many large deals in process expected to close in the fourth 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 from 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 first nine months, on pace with 2018, with nine-month office sector jobs increasing about 18,000 as compared to 20,000 for all of 2018, and certainly at a pace strong enough to continue absorbing the new supply coming online.
There are currently 65 tenants actively looking for 100,000 sq ft or more, totaling 16 million sq ft 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 5.2 million sq ft of combined redevelopments at Farley, Penn One, and Penn Two. We are experiencing robust interest in all three projects as prospective tenants begin to appreciate the magnitude of our district transformation. Tenants 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 accessible 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 Penn 2, we are negotiating a lease with a 400,000 sq ft headquarters tenant, and there's more in the works beyond this, all at rents at or above our underwriting. All our activities will benefit from the significant public sector projects being built in our district, including the new Moynihan Train Hall, which will be delivered in 2020, the expanded LIRR Concourse running from seventh to eighth Avenues by the end of 2021, and a soaring new station entrance at 33rd Street and Plaza 33. Against the backdrop of this district transformation, we are placemaking 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 million sq ft 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 sq ft, while our 2020 expirations are a modest total of 1,055,000 sq ft, with 760,000 sq ft of this amount expiring at Penn One and Penn Two. Please remember, this includes 565,000 sq ft at Penn Two, 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 Penn Two at the end of next year to approximately 1 million 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 builds. During the third quarter, our leasing team completed 25 leases totaling 197,000 square feet in New York at over $80 per square foot starting rents, with very strong second generation positive mark-to-markets of 22.7% cash and 28.5% GAAP. We have now completed 814,000 square feet of leases during the first three 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 sq ft at triple digits, which we expect to sign in the fourth quarter. 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 sq ft at 330 West 34th Street in the Penn District. The starting rent per square foot 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, and we are as busy as ever with 3 million sq ft of deals in different stages of negotiations, including our strong momentum at Farley and Penn Two. Moving to Chicago now.
At the Mart, 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% GAAP. This included an expansion lease with Allstate for 17,500 square feet, taking 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 renewals with several important tenants totaling 180,000 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 second generation space here, which were a spectacular 39.3% cash and 64.5% 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 coworking 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 Penn One and Penn Two.
This space will provide our tenants swing space, coworking 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 slow and assets prone to negative surprises, a la Topshop and Forever 21. Retail occupancy was 95.9% at quarter end. In the third quarter, in spite of the challenging leasing environment, we executed nine leases for 26,000 square feet of retail space, achieving positive mark-to-markets of 6.2% cash and 15.6% GAAP on second generation space. During the first 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 São Paulo and Rio since 1949. This will be their first 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 opening in the first half of 2020. 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 $3.36 billion, comprised of $1.28 billion in cash, restricted cash and securities, and $2.08 billion 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 over the operator for Q&A.
Thank you so much, sir. We will now begin the question-and-answer session. If you have a question, please press star then one on your touch-tone phone. If you wish to be removed from the queue, you may press the pound sign or the hash key. If you're using your speakerphone, you may need to pick up on your handset first before pressing the numbers. We respectfully ask that you limit your questions to one question and one follow-up question. Once again, if you do have a question, please press star then one on your touch-tone phone. 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 District corridor versus looking elsewhere in the city?
Glen.
Hi, Manny. It's Glen Weiss. We're 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. I'll tell you, it's a balance of tenants from within Midtown core and from tenants looking to continue expanding the city.
Thanks, Glen. 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. I think the deal that we struck, and is being finalized now, works for both parties. I think importantly, it 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. If you think about the locations individually, 1540 Broadway is arguably the best location in the city right now. From a street retail perspective, Times Square is the strongest marketplace. Tenant sales are holding up the best. We have the block front on one side of the bow tie that is a premium location.
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 7th Avenue, that was always a short-term deal. It was a five-year deal intended to get us through the period when we're ready to redevelop the entire block. 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. Again, there's a bigger picture on 435.
Thanks, everyone.
The next question in the queue comes from Nicholas Yulico with Scotiabank. Your line is open.
Thanks. I just wanted to ask, you talked about Topshop, Forever 21. I just wanted to be clear, are these impacts that are only starting to hit NOI in the fourth quarter? Just trying to kind of bridge what you reported in the third quarter versus these impacts.
Hi, Nick. It's Joe. Nick, the Topshop started to affect us in Q3, in Q2 even. Forever 21 starts to affect in Q3.
I guess, I'm sorry if I missed this, if you went through it, but I'm just trying to understand how when we're thinking about that 340 kind of soft number for the year on FFO, what are some of the items in the fourth quarter that create that drag versus what you reported in the third quarter?
Nick, when we had the second quarter call, we said that the sales items and the other items we discussed that reduced NOI going forward, if you apply them to these six-month numbers, you get $340. The third 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 $8.2 million of that reduction. 330 Madison, $1.4 million. The sale of Lexington shares, $3.3 million. The sale of Urban Edge, $1.9 million. The delta between the dividend on PREIT and our share of their earnings, another $1 million. Then there were other items that make $0.07 or the delta in $15 million. All of those items continue in Q4.
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 Farley. 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 a sense for on getting the building leased? 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. 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 five of them. The interest has been high. We're not prepared to comment on when a deal might get done in terms of that deal. Even if we sign a lease near term, the cash flow is not going to start probably until beginning of 2022. 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 retail has been significant as well.
We have to let it play out, but I think what we put in the second quarter numbers 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 ISI. Your line is open.
Thanks. I guess, Michael, when you look through kind of the retail tenant list, some of these things are kind of popping up that maybe you weren't expecting. Just how do you sort of look at the watchlist 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. Generally, we watch everybody. Six, nine months ago, Forever 21 was struggling, we didn't necessarily expect them to file bankruptcy. I don't think there's necessarily anybody that we look at that we view as in the same position today. We're constantly watching what may happen with different retailers. There's risk in the sector. We do have, I think on average, about eight years weighted average term on our leases in retail. We continue to view that durability as a real strength. There's no specific names that I would mention, everybody is mainly focused on.
Okay, maybe just a question for Glen. 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. 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's very good, Steve. We're seeing a lot of tenants, number one, 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 development in Penn specifically. 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 think the activity really across all sub-markets, whether it's 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's healthy.
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 Glen. During the quarter, particularly this quarter, we had a bulk of our leasing via our turnkey program. We built space for tenants. Those leases had relatively short-term at around seven years on average on that leasing. The way we look at the turnkeys, 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. That's why you see that elevated 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. I know you guys kind of confirmed the 340 for FFO, but I think on the last call, you talked about a low 200 range for street retail. Are you still comfortable with that outlook, or has that changed?
Morning, Jamie. That is the number that Steve referenced on the last call. Look, I think that number may still be fine. There are some things in flux. Obviously, Forever 21, we have a handshake deal, and until that's done and we see how that plays out, both of them generally as a company and that specific arrangement, that can have an impact. We sold a couple of assets, including 340M, for example, that comes out of that number. The last thing I would say is that we're now projecting to take the retail in the Long Island Railroad Concourse out of service next year for a couple of years while we redevelop the concourse. When that comes back, we're going to have additional retail square footage, which we think is going to be in very high demand based on that retail today.
The income will be higher, but we're going to lose $12 million per year temporarily. Yeah, there's a couple of things that are moving around. Again, some of those temporarily. We need to see how Forever 21 plays out. I think the general number that Steve outlined on the last call still appears fine.
I thought I heard you say you're in talks for a 400,000 square foot headquarter deal at Two Penn. Can you talk more about that potential lease? 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.
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. It's a deal we like a lot, and we're going to try to close it in the next few months.
Okay. Finally for me, I know you had said you're 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. If the tenants you're talking to do end up moving to the West Side, what do you think the outlook is for more traditional Midtown and market conditions there?
I could speak in terms of our portfolio, Jamie, in Midtown. We are still seeing expansions in the buildings in Midtown, whether it's a 1290, a 90 Park, a 280 Park, an 888 Seventh Avenue. We are seeing expansions throughout our Midtown portfolio. We, in our portfolio, have not lost a tenant to the new developments on the West Side. I can't really specifically speak about others losing their tenants migrating there. We're seeing expansion still healthy within our portfolio in the Midtown district.
The other thing I'd add, Jamie, is that, and I think we've talked about this now on a few calls. Is that in order to compete effectively in this marketplace, your buildings have to be modern from infrastructure standpoint, technology standpoint, amenities standpoint. 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. 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. When 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, at healthy rents, and strong tenancy.
I think where you're going to see some impact is from those landlords that have either inferior locations or functionally obsolescent assets, where some of the move-outs are going to occur beginning in two, three, four years.
Okay, thank you. The next question comes from John Kim with BMO. Your line is open. Please proceed.
Thank you. A question on the Forever 21 rent cut. Is your expectation that you will re-lease that space at a meaningfully higher rent, or is their new rent really reflective for the market?
John, I had a little trouble hearing you at the end there. Just repeat the question, please.
Sure. Do you foresee re-leasing the space of Forever 21 at a higher rent, or is their new rent really reflective of where market rates are today?
In between. Yeah, I would say, let's take them individually, right? On 1540 Broadway, our expectation is, as I said, given the quality of that space, that we should be able to achieve a higher rent than what the deal is with them. 435 Seventh was a temporary deal. If we went to lease that long term, that rent would absolutely be higher. Again, we want to keep flexibility there. We're balancing flexibility with how much rent we're going to get. 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. Michael, you mentioned 65 tenants potentially looking for up to 16 million square feet, in Manhattan. Do you have any commentary on how much of that is new demand versus just musical chairs?
All right. It's Glen. It's a mix of type of tenant, whether demand's 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 of 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 most people didn't see the magnitude that was going to occur this year. 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. We continue to see in-migration 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 of 220 Central Park South? 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%?
John, morning. I'll let Joe answer the after-tax proceeds on 220. Okay.
We'll start with that, John. Hi, how are you? It's Joe.
Good.
John, we have-
Where's Steve?
Excuse me?
Where's Steve?
Sitting next to me.
Good.
We have $1.9 billion in future sales, the lion's share of which is under contract. There's another 100,000 of taxes against that $1.9 billion, and another 100,000, of course, to complete the project against that $1.9 billion. Net of all costs, net of all taxes from this point forward, we'll be receiving $1.7 billion, ±, from the remaining closings of the sales at 220. John, you'll all be in the newspapers tomorrow. Your other question, John, or the rest of your question. On the retail preferred, we have not said specifically in the past when that can be refinanced, and I think we continue to not want to state that. There's some tax sensitivities to that. We will, in due time, be able to refinance and redeem that retail preferred. 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, 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. This is their home. I don't think it's unusual for companies, particularly banks, to move back office personnel outside of New York, whether that's into New Jersey or into other cities. I think this is along those lines. I haven't heard any announcements on percentages of headcounts, whatnot. We'll all have to sort of read that news. There's ebbs and flows in the city in terms of companies and how they grow and manage their headcount. 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.
Good morning. Two questions. First, you guys obviously talked a lot about the big tech demand this year that surprised the market. At the same time, SL Green is busy contemplating redeveloping 1 Madison. You guys have The Farley, but at the same time, you have the former Hotel Pennsylvania. Is there sufficient demand in the market where you guys would start to, I don't know if it's dust off the old plans, 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?
Morning, Alex. Look, we are unbelievably excited about the Hotel Penn site. We think that that site, we are done transforming Seventh Avenue with Penn One and Penn Two. We think it's going to be the best development site in the city. The time is not here yet. We're going to finish developing Penn One and Penn Two. We think that follows that after the fact. You're guesstimating what demand's going to look like in two, three, four years, no one can effectively do that. The plan we have for that is going to be unique. We think that will appeal to all sorts of tenants. Tech or otherwise.
Okay. 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 was paying. It would almost sound like rents for street retail are 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. 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 your average street retail lease would reprice.
I think we've talked about, frankly, for the last at least two years that the street retail rent, I think Steve was early in saying it, that the market has been correcting, right? The retail demand is down, and therefore rents have followed. I think it's probably been most significant in Madison Avenue and in SoHo. Again, deals that were signed at high water marks are seeing those rents come down. Madison could be down certainly well more than $1,000, and certainly below $1,000 today. The market has been correcting. Have we bottomed? The answer is in some sub-markets, we're close, and maybe a couple of others, not necessarily yet. I think it's case by case, right? Depends on when the lease was signed. We have many leases that are still below market, and we have obviously some that are above market.
Depends on what the vintage of those leases were, and obviously when those leases roll, can't predict where the market will be at that time. In some cases, the asset, there may be a better use. Topshop SoHo, that was entirely retail. If 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 interest already. I think it depends on the asset, depends on the sub-market. Clearly, rents have been corrected.
Thank you.
Thank you.
The next question in the queue comes from Vikram Malhotra from Morgan Stanley. Your line is open. Please proceed.
Thanks for taking my call. I have two questions. 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. Nothing to report there. I think Madison is a little bit different, where Madison is slow. There's no sugarcoating it. The demand on Madison is probably the lowest of any sub-market in the city. It's going to continue to take some time to fill out.
Okay, great. 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 four Q 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. So far we've talked about Forever 21. We've said that the rent at share is $20 million, 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. 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 Penn 1 and Penn 2 to support our development plans, including the LIRR, lower expectations from Hotel 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.
Yeah, Vikram, I would just add to what Joe said, though, which is notwithstanding, may not be a bounce back year. 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. That's going to take some time to kick in, but it's going to be meaningful when it does. Obviously, we published the information on the first three redevelopments last quarter. We feel good about that. It's going to require a little patience, but the growth is going to come quite meaningfully.
No, that's great. I just want to just clarify just on the 340, Joe, the run rate. Is that 340 still intact for the reported full year, or 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 post the call. Thank you.
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 sq ft 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? 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 Penn 1 or Penn 2 and other buildings. 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?
Look, Mike, I think we'll announce it when the lease is actually signed. I think that's the general deal. We have good dialogue going on the assets right now, but the actual detail will come when we finalize the lease.
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.
Yeah. Just when it's signed, Michael.
In this case, the $400,000 is signed, and you're just going through.
No. 400,000, we're negotiating the lease.
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 at Penn 2?
Michael, look, I think you're trying to pin down on exactly where we are. I think there's really nothing more to say. 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. Until they're done, nothing's done. Anything beyond what we mentioned specifically is, again, still just active dialogue or negotiation and not ready to be reported.
Right. It's very exciting to hear about the Penn 2 lease. I was just trying to understand the sort of policies that you have in terms of disclosing it. That was really more what I was trying to get at.
We're excited too, Michael. You got to wait a little bit.
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 220, doing the Farley buyout, all a variety of long list. Where is your head today in terms of further potential sales? Most obvious would be something on the office side, either New York or outside of New York, either in a joint venture or 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 one, everything's on the table as it has been for the last number of years. Number two, we are certainly not done yet. Number three is we definitely are not satisfied with our stock price at all. 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 five years, you and your brethren have been begging me to sell San Francisco. In the last five years, it has gone up in value for over $1 billion since we continue to hold it. Everything's on the table. We're not done yet. We're actually surprised by our stock price, but Mr. Market speaks, and we're not done yet.
Joe, just in terms of 220, the $1.7 billion, does that also include the money you have in the building? Effectively, we should think about $1.7 billion of cash?
Michael, Joe spoke a little bit out of turn, trying to be very thorough. The answer is that we have published numbers which show that the sellout in that building is about $3.3 billion, and the cost of that building is about $2 billion. Okay? You can do the math from there. The important thing is that we paid off the indebtedness. All of the closings that come in the future go into our treasury and go to finance Penn Plaza. We've announced that we have closed $1.2 or $3 billion. You can deduct that from the sellout, and you can do the math.
Michael, my math was consistent with what Steve said.
Okay. You can't go backwards now. One of the reasons, I've been accused of being secretive with respect to that property. That's really not the case. We have a very important clientele. I think the word discreet is more important. The residential real estate market is a very gossipy market, so information that gets into that market is not helpful.
Okay, sir, the next question in the queue comes from Daniel Ismail with Green Street Advisors. Your line is open. Please proceed.
Good morning, guys. Just a quick question on New York City office cap rates. Given the movement in the 10-year and some of the sales that we've seen in New York, where we stand today, earlier this year, you guys put a four and a half cap rate on your office holdings. Do you think we've drifted higher or lower since that time?
I don't know that I would change it, Daniel. 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 is bringing capital further into real estate as a general matter. I think that a number of the capital sources we talk to view New York as there's value here, right? Cap rates probably widened a bit over the last year or so. Given where the tenure is, you can finance on a reasonable leverage basis, generally below 4% right now. That's a very attractive cash-on-cash yield.
As the hedging costs have come in for a number of the capital sources abroad, 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. 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. We'll revisit that as we get closer to when we publish it. I think today directionally is not far off.
Daniel, you guys have been hustling that New York is overpriced. I'm not sure we agree with that. 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. 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, ruthlessly accurate, correct number to the penny. It's a range. The volume is down. Pricing is pretty much holding on specific assets. We think that you're a little bit too pessimistic on your thinking about New York. Maybe even significantly too pessimistic.
All right. That's fair. Maybe just a quick follow-up on Penn One and Penn Two 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 wanting to capture some of the upside in flexible leasing and keep sort of that tenant experience in-house?
You want to take that one?
Hi, it's Glen. We think in Penn it's important to create the flex space for our portfolio, for our tenants. Particularly at Penn One, it's a big building, 2.5 million 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. We think in Penn, doing the coworking, the flex space is going to be a huge benefit for us and our tenants. Of course, with that, we do expect it to be a profitable operation, which is why we've decided to do it at Penn One.
Look, Daniel, this is part of the centerpiece of the Penn District. We want to control exactly what goes on here, curate it exactly how we want, and create the right environment. 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. When you think about when you lease to a coworking operator, you're generally providing the bulk of the TIs and getting a lease, and maybe you get a little upside, but you're not getting a lot of credit, and you have a capped upside. 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. For us, it's a pretty straightforward answer.
Makes sense. Thanks, guys.
By the way, that's always been the plan.
Thank you. 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 coworking or just tenant behavior or discussions?
I haven't seen any change, Jamie. No change.
Obviously WeWork's not signing new leases there.
Well, I guess just the attitude towards coworking and flex leasing. It certainly seems like the cycle seems a lot more talked about, and tenants seem more interested.
Look, I think the way that people work, how they may 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. My own view would be that there's been this big discussion of shift toward enterprise from these coworking companies, particularly WeWork. I think those large enterprises are going to focus even harder on who their landlord is. I think that accrues to the traditional landlords quite a bit, like us. The desk-by-desk and small companies, I think coworking will continue to be an alternative for a number of those. I do think that this shifts the tenor back a little bit.
Thank you, sir.
Thank you.
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 12th and 13th. Our next earnings call for our fourth quarter earnings will be on Wednesday, February 19, 2020, and we'll 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.