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spk06: Good morning, and welcome to the Bornado Realty Trust third quarter 2020 earnings call. My name is Richard, and I'll be your operator for today's call. This call is being recorded for replay purposes. All lines are in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question and answer session. At that time, please press star, then 1 on your touch-tone phone. I will now turn the call over to Ms. Kathy Cresswell, Director of Investor Relations. Please go ahead.
spk00: Thank you. Welcome to Vernado Realty Trust third quarter earnings call. While Vernado typically holds its earnings call the morning after releasing earnings, today's call was moved to accommodate voting in the presidential and national elections yesterday. On Monday 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 supplement. Please be aware that statements made during this call may be deemed forward-looking statements, and actual results may differ materially from these statements due to a variety of risks, uncertainties, and other factors. Please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2019, and our quarterly report on Form 10-Q for the quarter ended September 30, 2020, for more information regarding these risks and uncertainties. The call may include time-sensitive information that may be accurate only as of today's date. The company does not undertake a duty to update any forward-looking statements. On the call today from management for our opening comments are Stephen Roth, Chairman and Chief Executive Officer, and Michael Franco, President. And our senior team is present and available for questions. I will now turn the call over to Stephen Roth.
spk10: Thank you, Kathy, and good morning, everyone. I hope all of you are safe and healthy. Yesterday was Election Day in America, arguably the most important single day in the calendar of our great democracy. Our nation is deeply divided, and this election appears to be a historical cliffhanger. The TV analysts are calling it a nail-biter. Whatever the final outcome of this election, it is our hope that we will unite as a country in pursuit of American values and prosperity. Before Michael gets into the business review and the numbers, let me make a few comments. These are anything but normal times. Actually, the COVID-19 pandemic is a once in a hundred year event. The activity level in New York and all other American cities is a fraction of normal. For example, office building occupancy in New York is currently in the teens. There is a tension between the very serious COVID health risk and related government protocols and lockdowns. And everyone's desire to get back to work, get back to school, get back to their favorite restaurants, and get back to normalcy. And for sure, normalcy will return. It's just a matter of how long it will take. And I believe return to normalcy will be the order of the day in months, not in years. The city generally feels normal in the residential areas, whether it be Tribeca or the Village or the Upper East or Upper West Side. The commercial areas, however, feel quiet, and that obviously negatively affects restaurants and retail. Most importantly, we are hearing from all our tenants that Zoom fatigue is real, productivity is down, and CEOs want their employees back in the office. But again, that will take some time. We are very proud of our corporate teams who are working really hard and doing a brilliant job of keeping the trains running on time. And we are especially proud of our building teams who have executed our industry-leading protocols and enhanced sanitation to make our buildings ready and safe for our tenants. Current liquidity is a strong 3.67 billion, including 1.49 billion of cash and restricted cash, and $2.18 billion undrawn under our $2.75 billion revolving credit facilities. During the quarter, we repaid $500 million on our revolver that we had drawn in the spring at the outset of the pandemic. With respect to the closely watched metric of rent collections, in the third quarter, rent collections excluding deferrals improved 500 basis points to 93%, driven by a significant pickup in retail collections during the quarter. Details of third quarter collections are, we collected 95% of office rents, 97% including agreed to deferrals. We collected 82% of retail rents, 85% including deferrals, which amounts to 93% on a combined basis, 95% including deferrals. Year to date, we have deferred $30.9 million in rent and abated $8.8 million Rents which we have agreed to defer are generally scheduled to be repaid over the course of the next year. We continue marketing 555 California Street and 1290 Avenue of the Americas. There is active interest from investors and widespread appreciation for the quality of these assets. But given investor caution, it does not look like we're going to achieve our original top-tick pricing objective. We continue to actively pursue a transaction involving these assets, which may take the form of a sale, a partial sale, a joint venture, or a refinancing. In the Penn District, the Moynihan Train Hall, an extension of Penn Station with its majestic 100-foot skylight, will be opening to the public at year end only weeks away. At our adjacent Farley Building, we will be delivering Facebook's 730,000 square feet in phases beginning in the first quarter of 2021. Our transformation and redevelopment of the 2.5 million square foot Pen 1, with its unique and outstanding amenity package, will be completed in phases, with the north lobby opening to tenants in the third quarter of next year and the remainder of the project in early 2022. And Pen 1's 1.8 million square foot sister, Pen 2, is next in line. Remember, as these large, important Penn District projects come online, they will deliver very, very significant earnings. 220 Central Park South is unquestionably the most successful residential development ever, and it continues to perform. This year through September, and in the teeth of the COVID crisis, we closed 30 units and suites for net proceeds of $939 million, and that includes 19 closings in the third quarter for $591 million. From inception through September 30, we have closed 95 units and suites for net proceeds of $2.76 billion. In October, after quarter end, we closed another four units for net proceeds of $105 million. Now, if I may, a word of caution And this should be obvious. We are in the midst of a once-in-a-century pandemic. Every medical scientist worldwide is working 24-7 on therapeutics and vaccines. So it is our hope that we can win the battle with this disease in months, not years. Our financial results, as well as our peers, are suffering. But it's important to appreciate that today's quarterly results are a reaction to a short-term crisis and are certainly not predictive of the future. As I have said several times, we expect normalcy to begin to return in months, not years, and we are highly confident that each of our businesses will rebound to pre-COVID levels. Now to Michael.
spk13: Thank you, Steve. Good morning, everyone. I, too, hope you all are safe and healthy. I first will cover our financial results and then end with a few comments on the leasing and capital markets. Our earnings for this quarter reflect a number of items. most of which were known or should have been known than expected. Third quarter FFO, as adjusted, was 59 cents per share, compared to 89 cents for last year's third quarter, a decrease of 30 cents. This decrease is reconciled for you in our earnings release on page 5 and in our financial supplement on page 7. The decrease was driven by a few items, most of which are either temporary or non-cash one-time write-offs. 11 cents from the temporary decline in income what we call our variable businesses, which include the Hotel Pennsylvania, the Marks Trade Shows, signage, and BMS, which Steve had laid out for you in our first quarter on his call. 11 cents for retailer bankruptcies, namely JCPenney's and Topshop, and 10 in the account receivables write-offs. 7 cents from non-cash straight-line rent write-offs, and 3 cents from 10 districts phased out of service. We ended the quarter with New York office occupancy at 95.8%, and New York retail occupancy at 79.9%, with a decline primarily adjacent to that. While the headline same-store NLI numbers are negative on their face, it's worth drilling down on New York. New York segment's third quarter cash basis same-store NLI was down 9%. But when you exclude retail, the temporary loss of income resulting from the pandemic from our variable businesses, and excluding residential and our shared Alexanders, Our core New York office business actually was a positive 1.5%. The big takeaway here is that our core office business, including New York, Chicago, and San Francisco, representing over 80% of the company, is performing well, protected by long-term leases with credit debts. And as Steve said on last quarter's call, when the pandemic subsides and employees return to their offices and tourists return, we are confident that our variable businesses will return to prior operating levels. Now turning to the leasing markets. Not surprisingly, as you would expect in this COVID environment, the leasing market basically remains on pause. Tour volume has ticked up, and we do see more tenant activity in the market. However, companies are continuing to take a wait-and-see approach and are focused primarily on getting their employees safely back to the office. We expect modest new leasing activity through year-end, with renewals dominating the activity. This dynamic likely won't change of companies returning full to the city and really focused on growth and future space needs post-pandemic. Subway space is rising, and thus conditions will likely get worse before they get better. Fortunately, we have the wherewithal to meet the market for tenants. In New York, our office buildings remain full at 95.8%. And importantly, as the market recovers from the COVID pandemic, our New York office expiries for the end of 2022 average of very low, 4% per year, with a weighted average expiring rent of only $75.22 per square foot, which portends well for the stability of our cash flow. Notwithstanding the slow market due to COVID, we did complete two very large, important leases this quarter, the $730,000 square foot Facebook lease at the Farley Building, which we discussed on our last call, and the $633,000 square foot renewal at NYU at One Park Avenue. These leases solidify both buildings for the long term with almost no year-in and year-out future capital requirements. Both of these leases are also with sterling credits and reflect the strength and diversity of industry in New York, with tech and healthcare being two of the fastest growing. In total, we leased 1,453,000 square feet in the quarter at an initial rent of $92.74 per square foot. The second generation gap in cash mark-to-market increases, which exclude the Facebook lease, were a very healthy 26.2% and 7.7% respectively. We have 220,000 square feet of leases and negotiations and another 850,000 square feet in the New York pipeline. All the healthy mix of both new and renewal leases. In San Francisco, in the quarter, we executed a renewal with one of our major financial services tenants, for its 90,000 square feet and are finalizing another major renewal with a company that has been in the building forever. Both of these renewals will produce strong market markets when the rents are finalized. The retail environment remains difficult, exacerbated by the slow return of office workers and residents to the city and the lack of tourists. Tourism is not expected to return until at least the latter part of 2021, putting further strain on retail sales. Growing retail vacancies, combined with a lack of tenants in the market, will continue to put downward pressure on retail rents. Despite this difficult environment, we executed 25,000 square feet in the quarter, including a lease with Armani on Madison Avenue, and have leases out, both new and renewal, aggregating an additional 50,000 square feet, indicating that retailers recognize that New York City is still the key market where they want to be. You just need to own assets in the right locations, which we do, and be realistic on rents to make deals, which we are. New York's ecosystem will come back, but it will take time. On the development side, as Steve said, the Moynihan Train Hall will deliver next month, and it is a dramatic public space. It is going to be an iconic landmark for the city, serving commuters and residents for the next century. Pen 1 is progressing on plan, with completion of the entire project expected in 2022, and Pen 2 will soon follow. The new 33rd Street Long Island Railroad entrance will also open on schedule in December, further enhancing the experience for commuters. The district transformation is well underway, and when all of our redevelopment and streetscape improvements are completed, it is going to be the place in the city where companies want to be. Not only are we located on top of the most important transit hub in the region, but we will be delivering for tenants Class A space supported by an unmatched combination of next-generation health and wellness environments, amenities, and services. Please go to our website for the latest construction images showing the progress we're making on these projects. I know it can be hard for people to look beyond the current difficult and uncertain environment. But in one year, there will be thousands of new creative and talented employees of two of the tech giants populating one million square feet in our district. And the knock-on effects will be significant, both for our office and retail assets. We're already seeing high retail interest in the district following these lease announcements. At Farley, we have signed 11 retail leases and have many other letters of intent in process, as tenants recognize the uniqueness of the space and the volume of foot traffic that will course through there daily. As all these redevelopments are completed and new leases kick in, they will indeed generate large accretive earnings. Turning to the capital markets now. Our recent refinancing at Penn 11 demonstrates that the financing markets for office are now wide open and constructive, with capital available at record low rates for high-quality, well-leased buildings and strong sponsors like Tornado. The recent refinancing of Alexander's apartment complex and the recent quotes we've received for other properties further validate this. Within the market, we'll only continue to become more attractive over the next 12 to 18 months as lenders become more active and compete for business. We'll continue to take advantage of the favorable market to turn out our debt at low rates and remain focused on making sure our balance sheet is built to weather any environment. With that, I'll turn it over to the operator for Q&A.
spk06: Thank you. We will now begin the question and answer session. If you have a question, please press star then 1 on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, for any questions on the line, that's star then one on your touch-tone phone, and we're standing by for questions. Our first question online comes from Manny Corkman from Citi. Please go ahead.
spk09: Hey, good morning, everyone. Michael, just wondering, on the Farley retail leases, have those discussions changed much in this COVID environment, or are tenants just as excited to go into an asset like that at that location? And maybe more specifically, if you could discuss rents and TIs and the metrics that go into those.
spk13: May I? I'll start, and Steve or Jaime can join in. The interest is really not wavered at all. I think tenants recognize, as I said, the uniqueness of the asset and the number of people that are going to be going through there. you know, going west every day to Hudson Yards and Manhattan West, going to our assets and throughout the city. And so, you know, the interest really has been unabated throughout the pandemic. And so, you know, all the tenants we've been in dialogue with, those that progressed, the leases we've signed, the LOIs in process, the rents are unchanged. There may be a little bit more TI on a few deals, you know, prospectively, but Overall, I would tell you it's pretty consistent.
spk10: I have a slightly more constructive take on it. I've nicknamed this project the funnel because really what happens is that all of the population of Hudson Yards and all of the population of Manhattan West which are huge developments with huge office populations, immediately and continuous to us to the west, have to funnel through this retail corridor to get to the trains and get to the commuting subways and trains. So we expect that there will be enormous activity The retailers understand that and see that, and it's clear as a bell, and actually it's the single best retail opportunity in the city right now by a factor of two or three, and the retailers understand that. So we haven't reduced our asking prices, and if anything, as this thing gets closer to delivery, and as Michael said, we have these these two tech giants at a million feet surrounding this and on top of it. So we're extremely constructive about this space. Heidi, you want to add anything?
spk07: I agree. Farley is a burst of sunshine in a cloudy retail environment, and we have nothing but high hopes for the productivity when that opens, and we're extremely optimistic about it.
spk10: Now there's a corollary project in the train operation, and that is the Long Island Railroad concourse, where we own the north side, which is in Penn 1. We are almost finished with a deal to basically expand the concourse. make it much wider, much higher, much more grand, which will be on the MTA's dime, and taking over control and ownership of the south side of that concourse. So we will own both sides, and that's also another, it's a $100 million project, so it's not huge, but it's another very exciting addition to our portfolio in the Penn District.
spk09: Great, thanks for all that. Realize that your lease expirations are light in the upcoming future here, but are there any other large spaces that you're watching, maybe something similar to a New York company where the tenant's having their own struggles and we might just not be thinking about potential move-outs or give-backs?
spk17: What do you think, Glenn? Good morning, it's Glenn. Now, we feel really good about our role, really modest role over the next two years, about 1.6 million feet. Nothing of large block size other than New York and Company. We got some space at 8887 512 West 22nd, downtown of 40 Fulton, but nothing of large consequence. And in all of those assets, we're actually seeing much better activity right now than we had been, call it, two or three months ago. So we feel really good about the expiration for the next two years.
spk09: And Glenn, could you share any potential updates or prospects for the Home Depot space that's going to be vacating on Lex?
spk10: Well, the Home Depot lease goes through 2025. And we have approached them multiple times about recapturing the space. And we had an interesting conversation a few short years ago about how much would you pay us to give us back the space and they want to know how much we would pay them. So the answer is that that space is under lease to 2025 and it is not something that we are concerned about today. However, we have incomings on that space from several important retail tenants whom you would expect. So we can't tell how that will play out, but we're financially protected for the next five years.
spk09: Thanks, Steve.
spk06: Thank you. Our next question online comes from Jamie Feldman from Bank of America. Please go ahead.
spk01: Thank you. Good morning. So I guess, you know, turning to the election, certainly it looks like the Democratic sweep is off the table here. And with that, you know, concerns that a big fiscal stimulus to help, you know, some of the New York City or San Francisco off the table as well. I just want to get your thoughts on, you know, that comment. And then just for New York specifically, you know, what risks do you think this proposes to the future of the city and its ability to recover?
spk10: So that's a big question, which probably if I was smarter than I am, I would duck. But I'll tell you what I think. I think, I mean, this election is historic. I mean, we can't predict what's going to happen. But I think pretty clearly the sweep is off the table. And I think that's, you know, from my point of view and probably from most folks' point of view, a very, very good thing. Now, I have been approached by all of the New York political leaders to talk to Washington, to try to twist arms to get help for some of the huge budget problems that New York has, as well as all of the big cities in the country. So that obviously has not happened, and obviously the the standoff between in the government about this, I guess it's the third fiscal stimulus plan. And the standoff is basically the fight is over what some would say is bailouts for the big cities and states versus not. So anyway, clearly the change in government, if we have a change in government, is going to change the dynamics of that. If there's a different president, that will change the dynamics greatly, although it won't be easy because if the Senate continues to be in Republican hands. The most important part of this thing is that by law, the city and state governments all around the country have to have balanced budgets. So they will have to close the budget deficit. There's a certain group of folks in Washington that would like to see these states and cities reduce their budgets and get their budgets in line with their revenues. There's another group of folks down there who would like to continue to spend at the level that they have been spending and close the deficits by assistance from Washington. How this plays out is probably going to be some kind of a combination of both, but it will play out. The promise that the Democrat side made, which is that they will reverse the Trump tax plan and reverse the SALT, I see that as being a very, very, very hard lift, so I don't know where that'll go. Nonetheless, there is a... there's likely an imperative for these cities and states to have to get their budgets under tighter control together with some kind of assistance so I don't think that gives you much more information than you already had now that's helpful so let's say New York does have to cut the budget I mean what do you worry about most as a real estate landlord and you know to keep the city healthy um The answer is that the thing that I worry about most is stupid legislation, such as happened in Albany at the beginning of, I guess it was last year, with the residential assets and unsustainable tax increases. Now, the interesting thing about it is the real estate tax increases because that's the most controllable and the most variable of the menu of taxation that they have. The values of real estate in certain sectors, for example, retail asset value and hotel asset value have clearly gone down. So clearly one would expect that the real estate taxes related to those assets will go down. the budgets can't afford it to go down. So the tensions in all of this stuff are pretty enormous, and they will play out over the next six months or a year.
spk01: Okay. Thank you. And then as you guys made the comment earlier about the right real estate or the right position real estate will come out of this okay, does that apply to retail as well? I mean, how do you think, you know, you look at your portfolio, like what do you think the winners and losers are going to be coming out of the pandemic in terms of locations?
spk10: I think we have the best quality locations that there are anywhere. And that may even be certainly in the country and maybe even in the world. But it will take the retail real estate that we own, which is brilliant in its quality, will suffer lower values and lower rents because that's the market. And it will take time for this to all shift through.
spk06: Thank you. Our next question on the line comes from Steve Sagla from Evercore ISI. Please go ahead.
spk16: Thanks. Good morning. I guess, Glenn or Michael, maybe if you could talk a little bit about the leasing numbers that you threw out. I think you said you had $220,000 with a pipeline of $850,000. I'm just wondering if you could talk a little bit about what the tenants are telling you, what sort of space requirements or space densities they're kind of planning, you know, of that E50, how much of that's new versus renewal? And, again, trying to just get a sense for how tenants are thinking about, you know, new space versus old space and how they're planning it.
spk17: Sure.
spk16: Hi.
spk17: Good morning, Steve. It's Glenn. So the pipeline is active. It's basically a 50-50 mix of new deals and renewals. I'll give you a feel of the type of tenancy. And we have a lease out of about 100,000 feet with a nonprofit tenant, which will be new space in Midtown. We just got a proposal over the weekend for 45,000 feet with an entertainment firm, new tenant. We're in proposal stages with a 300,000-foot tenant in Midtown, planting a new stake. And we also have an existing large tech company looking to grow again by another 60 to 120,000 feet. So we're certainly seeing a great mix of activity. In terms of, you know, density program design, I think it's way too early to see it. Most of these tenants are looking past the pandemic, saying to themselves, you know, how do we want our space to fit out, assuming the pandemic has come and gone? So I have not seen a real change in strategies related to space design. But I think that's a to-be-determined, to-be-continued dialogue. But certainly, you know, my sense right now is if you have the right space and quality buildings, people, there's a real flight to quality more than ever, and that's why we're seeing the activity we're seeing right now.
spk10: Okay. You know, hang on, Jamie. You know, I'll tell you honestly. Oh, Steve. Steve, I'm sorry. You know... I don't trust anything that anybody tells me right now. So for example, let's go back in the history, go back to 9-11. And so when the tragedy of 9-11 happened, everybody said that nobody is going to rent view space up in the height of the buildings because of the 9-11 tragedy and experience. Well, that lasted about two or three years. And now that view space has reverted to the norm, which is by far the most valuable space. So it will take time for all this to shift out. There is a tension now between office work and work from home. The surveys of some of the employees say one thing. The survey of all the CEOs say other things. In the end, it's our firm's feeling, our business's feeling, that there will be marginal work from home and the office will be the main place where work, creativity, growth, and business is conducted.
spk16: Thanks. Glenn, maybe just to continue on the leasing, is there any comments you could make about sort of net effect of rent changes that you've seen maybe over the last six months? I realize it's not all in base rents, but I think you mentioned in some of the deals TIs were going up. So maybe just talk about the change in net effect of rents and how much more might that drift lower. It sounds like leasing will remain slow for the next couple of quarters, maybe into the back half of next year.
spk17: Yeah, Michael said in his remarks, I mean, it is definitely slower in terms of activity. I don't think we yet know at all where rents are going, where concessions are going, until really people come back to the office, the uncertainty clears, we get into normalcy, and we get back into real dealmaking. I mean, certainly there's going to be an adjustment to rents, TIs, et cetera. I'm not smart enough to predict exactly what those are going to be. I think when everyone gets back in their seats, we see demand again. We see dealmaking again. We'll have a much better feel of it. I think right now the deals you're hearing about on the street and TIs are certainly up. I think rents have generally held steady to date. It's more the concession packages. But I think it's way too early still, Steve, to predict anything until well into next year when people start coming back and we get into normal deal mode.
spk13: Steve, we're not really in a normal functioning market, right? We're in this unique period where companies are not back in their offices. And so, you know, the deal-making is down, as you would expect. In some senses, it's actually surprising. It's as active as it is, even though most people are not in their cities. But people have to come back to a normal functioning environment. So in this period of time, you know, they're going to be additional concessions, sure, right? That depends if they can either extract it or the landlords want to make the deals. But I think when there's a return to work, you get a fully functioning market, you know, I think you'll start to get a better sense as to what rents are going to do. And I wouldn't extrapolate too much. You know, either way would be fine.
spk06: Thank you. Our next question line comes from Alexander Goldfarb from Piper Sandler. Please go ahead.
spk12: Oh, hey. Good morning. Morning, Steve. And certainly an interesting day out today. So two questions here. The first is just going back to Jamie's question. You know, when you look at the political landscape of New York, there's definitely been a disconnect. I mean, you've been in New York a long time. You remember the 70s. how the business community rallied together with the city to rebuild New York. This time around, that dynamic does not seem to be in the cards. The mayor has definitely staked out of view. The governor seems to oscillate. One time he's against this, and the other time he's trying to promote. But do you get a sense that with what's happening in New York and the need to create a better central business district environment to help people feel good about coming back to the office, do you feel that the politicians are finally understanding what they need to do? Or is your sense that they think there's still going to be some bailout and therefore they can play to whatever political basis they have and not really realize the impact that people like you who are paying real estate taxes and trying to generate growth for the city, you know, how it's not helping.
spk10: Let me turn the question around. Okay. Politicians are politicians. They hopefully work for the business community. They also work for the population and the voters, and they don't necessarily always make decisions and have policies that we agree with. But what I look at is that New York is absolutely the greatest city in New York, and it's one of the three or four, not the greatest city in the country, and one of the three or four great cities in the world. They will always be in New York. It will ebb and flow a little bit, it'll go through cycles, but it is always... you know, the dominant place, the dominant city in New York. I keep saying in New York, I'm sorry, in the country. And its infrastructure is just, you know, it's just so massive it can't be replicated. And the infrastructure in terms of its talent, in terms of its culture, in terms of its business community, in terms of what have you. The interesting thing is is that as it cycles, if you have the opportunity to buy assets, at very low prices per pound, and let me use the pejorative word, steel assets, at very low prices, that's the time to jump on it. So if you look at our stock price and the stock price of our peers, and you interpolate how much per square foot the stock price represents in the building, the assets that are behind the stock price, The value is great. So it's sort of oxymoronic. As New York gets a little bit out of favor, which is the slant, I think, in your question, that seems to me to be the time to buy assets and to buy stocks. So New York has a headwind. The political situation in New York is going to change. There's going to be an election. The reality of the budget, the reality of the importance of the business community, the reality of the importance of having a growing tax base will, you know, will win the day. And, you know, but this is a unique time because the assets are really, really cheap.
spk12: Okay, which leads to the second question, you know, my favorite. The 555 and 1290. think you said early on that the pricing discussions may not have been you know exactly what you guys had hoped for clearly great cash flow assets especially even more important today so what are your latest thoughts on those assets are you still you know leaning towards you know which way you sort of leaning is it a recapitalization uh of of the of the of the pair or you think you may outright sell or now it's just you know keep as is with no change on the financials
spk10: The answer to that question is yes.
spk12: Thank you. Steve, is there anything more that you can add?
spk10: The answer is that, obviously, these are important assets. Obviously, they will command acceptable values. It may not be the top, top tick value, but they will command acceptable values. the liquifying of the value of those assets is an important thing in our future planning. We have said we're looking at multiple different options, and the answer to your question is yes.
spk12: Okay. Thank you, Steve.
spk10: Thank you. Alex, let me just add on to that. What I'm saying is that you've written that you would prefer us to take the buildings off the market and not sell them and keep the cash flow, okay? That's not our preferred strategy right now.
spk12: Okay, yeah, I understand that, and I appreciate your view, so thank you, Steve. Yes, sir.
spk06: Thank you. Our next question online comes from John Kim from BMO Capital Markets. Please go ahead.
spk05: Thanks. Good morning. Michael, you mentioned that you don't expect tourism to come back into the city until the latter half of next year. I'm wondering what that means as far as not only retail occupancy, but rent collections and abatements next year.
spk13: Look, I think that, you know, John, I mean, just look at the trend line and when companies, you know, either may bring their workers back or when theaters may open. You know, I think that's a reasonable assessment. Obviously, you know, we're in a fluid environment, but I think the latter half of 21 is a reasonable assessment. So, you know, that obviously means foot traffic is down, therefore retail sales are down. But, you know, retailers are adapting. You know, the ones that were very weak have already, you know, gone out. Not to say there can't be, you know, some more casualties. But, you know, I think that, you know, when you take out the restaurants, balance of our portfolio. So, you know, and as I said, you know, we are not withstanding that environment. You know, we signed one lease on Madison Avenue. We're in negotiations on another. So retailers are, and, you know, Steve will live to 731, and then there's some other assets as well. You know, retailers are kicking the tires again, right? The strong retailers that have balance sheets, you know, they take the other side, which is this is an opportunity, right? Rents are down. We can now get the best basis. at attractive prices. We can make money when the markets return. They haven't believed the markets are in turn. Everybody does. New York will come back as soon as people can travel again. I don't know if we're going to be right back to 60 million tourists, but I think it's going to come back pretty quickly. Just pen up the man of this country to experience culture, sports, et cetera. And so tourism is going to boom, in my opinion, New York is going to be one of the prime beneficiaries, and obviously the retailers are going to benefit from that. So, you know, that's my view. I don't know if you want to add anything high into that, but, you know, I think we are well-positioned in terms of our assets on a relative basis.
spk05: Can I ask a similar question as far as the timing of the trade shows reopening at the mark? Would it also be a second-half, 21 time frame?
spk13: Yes. So the big trade show is Neocon, which normally is June. We pushed out to September. We did that a few months ago just to a conservative view, give it time. Our tenants are anxious for that show to happen. They're planning. They're excited about it. And so we feel like that will happen. It's an important show. And so, again, that as well as your honorary show, the third quarter of 2021.
spk05: I could squeeze one more question in. Does the 850,000 square foot leasing pipeline, does that include the large anchor at PEN1 that you discussed in the last call?
spk13: I think you're referring to PEN2 maybe. The answer is no.
spk05: Thank you.
spk17: Yep, thank you.
spk06: Thank you. Our next question on the line comes from Nick Ulico from Scotiabank. Please go ahead.
spk08: Thanks. Good morning. This is Josh Brown with Nick. Do you have any insight into details behind what the build out at Farley ultimately look like for Facebook? Are they designing that space any differently because of COVID? I think, could you just talk about the TI's that were given on that deal and how that compares with TI's historically?
spk10: Uh, no, that's something that we're not going to get into.
spk08: Um, and then I guess, okay, looking at retail, How are you guys thinking about the retail business today versus when you guys did the JV deal? When you brought Jaime on, you said that the disruption in retail would present some really good opportunities. So are you seeing any of those opportunities today, and how can Borneo benefit from those?
spk13: The answer, Josh, is that there are, as you would expect, what happened in the prior number of years, right? Retail, there was supply added really throughout the city and there was leasing done and rents pushed, you know, in I would call it fringe locations, right? Well, as a result of not just this but even happening before this, right, that started to contract over the last couple years and those locations were impacted and, you know, the owners that had debt on those assets, they have either lost or they're going to lose those assets. In many cases, those are not going to be interesting. I think our focus has always been on prime, prime high-street retail that there's going to be demand even in more difficult environments as we're talking about with our portfolio right now. So we do think that there will be opportunities. And that may come in the form of lenders. We've had calls from lenders saying, you guys are the experts, can you help us out on certain assets? For the right situations, we're going to play on this. But I would say to date, we've not seen anything of scale or quality that fits our bill. But they're going to come and argue.
spk10: The law of the jungle is that the bigger they are, the harder they fall. The categories of assets that are in distress are the top three are condos in New York, retail anywhere, and hotels. So you think about it for a second. The condos are, you know, the buyers have gone into hibernation and the prices are in free fall. the hotel business, most of the hotels are shut down so they have zero revenue and we know what's going on in retail. So the opportunities will be and are coming and they will come, as Michael said, they will start coming from loan foreclosures and those are the categories of assets that will be the most distressed. It will be I think difficult to find a great office building that you could buy that used to be worth $1,000 a foot that you can buy for $500 a foot. So we are definitely in the financial condition to be acquirers. Part of our business strategy is to be acquirers in distressed markets like this. And so we're very alert. We see everything that comes by. We are, we have the financial capacity to act, uh, and, uh, we're sort of like, like, like, uh, uh, reasonably excited about what the opportunities might be, but they will take, you know, could be well into next year before they really start to mature.
spk03: Uh, Hey guys, it's Nick. Just, sorry. I just had a, just a quick question on, um, you know, the sequential change in cash and alive for the New York office segment. Rich, I know you're listening to the queue. I forget if it's in the sub or not, but you did have a write-off of a tenant receivable, but what else drove that sequential decline in office cash NLI this quarter in New York?
spk10: I'm going to turn that over to Joe and Tom. If you don't have it at your fingertips, maybe we can handle this offline.
spk19: Nick, I would, Joe, good morning. I would prefer to do this offline, Nick, so we can really get you a precise answer. Needless to say, the third quarter had council seeable reserves more than two and a half times the second quarter. So that's an element that we've proposed. But we would prefer to get you a more precise buildup.
spk03: Okay, sure thing. Thank you.
spk06: Thank you. Our next question comes from Rick Skidmore from Goldman Sachs. Please go ahead.
spk11: Thank you. Good morning. Steve, you mentioned the CEOs seeing Zoom fatigue and lost productivity, et cetera, regarding working from home. What, if anything, can the office landlords do to help accelerate that return to office, and what are the CEOs saying about plans to bring their people back or is it just waiting for a vaccine and the virus to fade? Thank you.
spk10: You know, I'll tell you what our experience is first just to give it some context. So most of our peer companies have basically returned to office work 100% of the companies, and they have done it by eating. And their attitude is, and my attitude as well, is we're talking up our book, we are in the office business, we want to be in the office, we want our people in the office, and we want to get back to normal work. So we agree with that. The thing that we don't agree with is what we've done is is that most of these folks have gone back 100%. What we've done is gone back in teams. So we have an A team and a B team so that we have half the population in the office on week A and the other half in week B so that we keep the densities down a little bit. But the most important thing is that we have, in respect for our employees, We have basically said that if you are uncomfortable with the health risk of returning to the normal office environment or et cetera, then by all means, please continue to work from home. Now, we're not going to let that go on forever. What we're finding when we talk to the large CEOs is that they very, very much are concerned are shying away, they will not open their offices up by edict, and they very much respect what their employees perceive as being a health risk. That's something that we have to live with right now. So there's a sensitivity to the risk out there and the employee's point of view. You know, there's other nuances to it like childcare and schools and other stuff, but the main thing is is I find it very difficult at all of the CEOs that I talk to to say to an employee, come on back to work even though you're a little bit afraid that there's a health risk in doing that. So really the resolution of this will be when the medical industry and the one thing about what has happened in this situation And I know the people in Washington want to take credit for this, but actually it's probably just the normal workings of capitalism. Every single medical professional and scientist in the world is working 24-7 on this project. That's never happened before. So what we're hearing anecdotally is that there will be vaccines and therapeutics which will come out as I said before, in months, not in years. That will turn the tide. So it's very difficult to change behavior and get people to come back to work until they are comfortable, and most CEOs are just not going to do that. So the answer is that we think this is basically a medical situation. It's a health crisis. And that has to be resolved before we can really get back to normalcy. Now, what are we doing? What we're doing is we're in close communication with our tenants daily and weekly. We are finding out what it is that they want. We are preparing our buildings in terms of air filtration and temperature checks and sanitation, etc., And all of the protocols, and actually, you know, all the major landlords are basically adopting the same programs, which has become industry standard. And so our tenants know that our buildings are top of the line, are ready to receive them when they come back, et cetera. And basically, so that's what we are able to do. Right now we're in a waiting game, waiting for the medical profession to solve this problem.
spk11: Thank you.
spk10: By the way, and I said this in my remarks, as you, you, and I, and all of our colleagues, as we talk to our friends, we talk to our associates, et cetera, everybody is chomping at the bit. Everybody wants to get back to work. Everybody wants to get back to school. Everybody wants to be able to go out to restaurants. Everybody wants to get back to normalcy. So the population wants to return. The hesitancy is that there continues to be a health risk. If you read the press and you watch the TV, it's very prevalent. It's very difficult to say, well, there is no health risk. Don't worry about it. because it's so prevalent. So the answer is this is something that will take time, and my hope and belief is it will be mentioned in months, not in years.
spk11: Thanks for the color.
spk10: But also, you can be sure of one thing, okay? Our teams talk to our tenants very frequently, at least weekly.
spk06: Thank you. Our next question line comes from Daniel Ismail. from Green Street. Please go ahead.
spk04: Great. Thank you. Steve, going back to your earlier comments about looking for assets in distress, one area of growth in the office sector has been life science. Is it fair to say that life science values in New York City are likely not under distress and thus those would likely not be on your targeted acquisition list? And then as a follow-up, Is there any opportunity in your current development pipeline to expand in that area?
spk10: Daniel, the question was fuzzy. I think you said, what about life sciences? The answer is that I don't know. Obviously, we're aware of the life sciences segment. We have sort of experimented in it, put our big toe into it a little bit. It's an attractive segment. It's actually a small segment in New York. There are other hot spots around the country. They're obviously Cambridge, obviously California. It's a business that we're interested in, and it's a business that we would look for an entry point and are looking for an entry point. To buy into the life sciences industry at distress is something that's just not available now. So basically, we have lots of assets. New York is a potential location for a large, large and important cluster of life science assets. We have the universities, we have the talent, etc., So all I can say is it's something that we're aware of. It's something that we're looking at. It's not easy to enter. And we don't believe that there will be a distressed opportunity in that segment.
spk04: Is there any current plans looking at PEN1 or PEN2 for a lifetime component?
spk13: What was the question?
spk10: Yeah, probably not. There are other buildings that are better suited to that. And actually, most of the success in this industry is done by ground-up development that are suited for that use. So it's actually more efficient to do ground-up development rather than retrofit. Pen 1 and Pen 2 would not be candidates for a retrofit. Other buildings in the Penn District would be much better candidates, but the ideal thing would be to do ground-up development.
spk04: Okay. And just a quick follow-up is that the signage business is a relatively small portion of your overall business. Any thoughts in terms of how the signage business? So I was just hoping if you can provide a few comments on, you know, potential, you know, a recovery to pre-COVID levels in that segment.
spk10: What was the question?
spk13: Yeah, the question was, you're having a little trouble here. You tiny business, small business, but some guidance on recovery pre-COVID models. I mean, again, it's a, you know, it's a business certainly in Times Square. Obviously, we own less than we did, you know, before the retail JV, but, you know, it's a business driven in that area where you need, you know, eyeballs, right? And so with tourism down, you know, the advertisers have, you know, pulled back. But as soon as they come back, you know, it's a variable business. I expect that to turn right back on. You know, the signage we have in the Penn District, you know, we've got, even in Times Square, we've got a number of long-term leases with that. I'm referring more to the, we call the slice and dice, where you're selling increments of signage. I think as soon as, you know, like everything else, as soon as the tourism's back, workers are back, I think you're going to see that in a return to pre-crisis levels.
spk10: Daniel, we don't look at the signage business as a dabble or an unimportant business. It's an important business. We believe we have the largest position of signs in town. We have a very competent organization to handle that business, which is mainly the interaction between us and the advertisers. We think that our scale in the business is a very large advantage, and we think that our scale in Times Square and the Penn District is also a very large advantage. So we're enthusiastic about the business. It's important to us. It's top of mind. We think we have the best business in town, and we are certain that it will rebound when things get back to normal.
spk04: Great. Thanks, everyone.
spk06: Thank you. Our next question line comes from Vic from Malhotra, from Morgan Stanley. Please go ahead.
spk18: Thanks for taking the question. Just maybe first on street retail, can you specifically talk about prospects and potential for kind of your vacancies on Fifth Avenue, the Massimo space specifically, in light of one of your peers recently signing a deal there for what I understand it's probably in the low 2000s at grade in terms of rent. Maybe just give the sense of the potential prospects and Where do you see rents shaking out at grade on Fifth Avenue?
spk07: Retail rents on Fifth Avenue will certainly be in correction territory from top-pick rents that we saw a few years ago. The Harry Winston Comp. In the Paramount space, we view as a positive. We currently house Harry Winston in our St. Regis asset. They have a 15-year term with us that was always intended to house one of their other brands and temporarily hold Harry Winston. So we see them moving across the street to their original home as a positive for Fifth Avenue. I'm not sure of the comp that you're quoting because I don't think it was published. But that might indicate somewhere in the neighborhood of where the correction could be today.
spk18: Okay, great. And then just, I apologize if you covered this, but any updates on the ground leaves at Penn specifically? And can you talk about just prospects at Penn to specifically, you know, sort of large anchor tenants?
spk10: The ground lease reappraisal at OnePen we have announced is in 2023. I think obviously, well, I don't want to comment on what it might be, although I will say that clearly it's going in a constructive direction for us. The prospects for 2-PEN, you know, we have said before, and in fact I think the question came up earlier, there is a large lease that we have pending. It actually happens to be with Madison Square Garden for their headquarters space. They have been tenants in that building forever. The building obviously is on top of Madison Square Garden. And that lease is appropriately in pause because Madison Square Garden is basically, their business is shut down until this is over. So we are very constructive and very enthusiastic about the prospects of PEN2 and PEN1 for multiple reasons. Number one, we think the location is absolutely bullseye. We think that the amenity packages and what we're doing with the buildings and the transformation of the buildings will be unique, best in class by far, unbelievably eye-opening. Glenn and his team have exposed our plans for one pen and two pens to the marketplace to unbelievable enthusiastic acceptance.
spk18: Okay, great. And then just last one, if I may. Steve, you've obviously talked a lot about how New York has changed over the years. And I'm just wondering, you know, given co-working and WeWork, it was hot and then it wasn't. And now you've had potential for more work from home on the margin. I'm just wondering, do you foresee any changes in office lead structures, whether it's term or TIs or bumps or anything? in the office lease structure as a result of some of these, call it cyclical and potentially secular changes?
spk10: One thing that we've learned from this pandemic, leases are a wonderful thing. Long-term contracts between well-capitalized parties are a wonderful thing. They're very protective. Right now we have, I don't know, better part of 1,000 tenants with a very significant billion-dollar-plus cash flow, and so that's very productive and very secure, and we're very happy about it. If the business goes to month-to-month leases, that's impossible. So for WeWork, when you're renting out space by the desk as opposed to by the floor or by the building or by the square foot. That's okay. But when you deal with a tenant, as Glenn does every day of the week, who's 200,000 feet or 500,000 feet or even more, those tenants need stability. They need to be able to have space that they can occupy on a long-term basis where they can invest capital in and they can have stability. We need the same thing. So in the large tenant business, I think the long-term lease commitment will be the rule of the day. Now, in smaller tenants, and whether they be 3,000 or 5,000 or 2,000 or whatever it might be, first of all, that's not the segment of the market that we trade in, although we do have some of that, obviously. And those leases can go into anything that the tenant wants. So there, when we do those leases, we have pre-bills, we build the space out, and the tenant can take the space, move out, whatever. So a competitive advantage to that is a landlord who has the capital strength to be able to do a short-term lease, to be able to fit out space for a tenant and invest the capital So that would be, but that would be the small, insignificant segment of the office population. That's not our business.
spk06: Thank you. Our next question online comes from Manny Corkman. Please go ahead.
spk02: Hey, it's Michael Billingman here with Manny. Good morning, Steve. I was wondering if we can just come back to, yep.
spk10: Yeah, no, just good morning, Michael.
spk02: Oh, it was just a good morning. Okay. I wanted to come back to sort of the office discussion and frame it the following way. And I agree with your sentiment on office or return to the office. I myself have been back in the office and feel a lot better than living at work. But I want you to compare it to the mall business, which you accurately got out before things got really, really bad and saved shareholders from a lot of losses. why wouldn't the office space market go like what's happened to the malls? Right. And you go back and everyone said, Oh, people want to experience the mall. They want to feel the clothes before they buy them. But then there was an alternative, you know, driven by technology that allowed us not to do that anymore. Um, and so I guess, why are you in the belief that what happened to malls won't happen to offices?
spk10: That's a nasty question. There is a school of thought that says that work from home is to office values as Amazon is to retail values. You understand what I'm saying?
spk02: Yeah, no, and that's why I'm asking the market. I agree with you on the future of office, but the market is telling us a different thing.
spk10: The answer is that that's something that we talk about every day. It was obviously unthinkable that hundreds of billions of dollars of moral values could be destroyed, but lo and behold, it has happened. It's obviously unthinkable that all the automobile companies could go broke, but along comes Tesla. So we are very respectful of the question that you ask, and we think about it daily.
spk02: And the succinct answer as to why you believe that office won't follow the trend of malls is?
spk10: The answer is that I believe that if you work from your kitchen table, and your kids are crawling at your feet, and you are not with your colleagues, that's not a great outcome. If you are ambitious and want to get ahead, you can't get ahead from your kitchen table. You have to be in the office with your colleagues. If you are a manager and you have 20 people in your department that work for you, I think if they're each at their kitchen table, I mean, you know, I don't know how you manage that. I think if you're a manager, you want your team, you know, in the office where you can interact with them, et cetera. So I think the human condition is different. The human condition speaks to collegial work in groups, which basically is in office. Now obviously that's going to get nipped around the edges and I can't tell how much. None of this would have happened were there not the technology like Zoom. So technology enabled our business, your business, to be able to react to this shutdown by working from home and keeping the railroads running on time. So that's an amazing thing. There's the human condition. So it's not impossible that there will be a day here, a day there of working from home. It's not impossible that certain groups will work from home. It's not impossible that things will change. But the core, I still believe the core will be of value. Now, let's get back to what that means. I think that means the better assets in the better locations will thrive. I think that it means that the commodity lower quality assets in off locations will struggle. So that's what I think. On the other hand, there is uncertainty in this situation that a management team has to be aware of and has to focus on daily.
spk02: Right. Well, I appreciate those comments. And then my second question, Steve, is just to come back to 555 and 1290. In one of the responses, you said that it's very important or it's important to liquefy those assets to your future plans. And I was wondering if you can just sort of unpack that a little bit about why liquefying it either in a refi, a joint venture, or an outright sale is important to your plans. Is it a portfolio repositioning exercise? Is it to get the mark at sort of good pricing on those assets? Is it the cash that you want to take out? And so I just want to better understand why those two assets are so important to your future plans in terms of the liquification of them.
spk10: I think the word important is yours. I don't think I said important. Look, we have identified those assets as assets that we would like to swap for cash. It's as simple as that. A lot of it depends upon the structure. A lot of it depends upon the details of sell them all, sell them apart. We continue to manage them. We do a joint venture or we just refinance them. But we have an enormous amount of equity in those assets and we want to reclaim those assets. We want to reclaim that equity. Now when we have the cash, it's a different decision as to what we do with them. Our worldview is that there will be better places to put that cash for growth and shareholder value creation than those assets over a 5 or a 10-year hold. Okay? That's all. By the way, I would remind you that my analysts over the last 10 years have been pounding me to sell 555 because it's the only, you know, to dump it. While we resisted that dump, it went up in value by a billion dollars. So maybe it's time has come.
spk06: Perfect. Thanks, Steve.
spk10: Yes, sir.
spk06: Thank you. And our last question comes from Steve Sakula from Evercore ISI. Please go ahead.
spk16: Thanks. Just two quick follow-ups. I noticed that operating expenses kind of noticeably between Q2 and Q3. I assume that's part of the building's reopening process. Would you say Q3 is a reasonable run rate kind of looking forward until utilization rates go up materially?
spk13: Yes. Operating expenses. Operating expenses. Okay, good. Yeah, I think that's fair, Stephen.
spk16: Okay, thanks. And then I did notice a large kind of one-time gain. I think it was in management and leasing fees. It was something like $11 million. I assume that's a one-time gain on some leasing activity, but thoughts around that would be great.
spk19: Thank you. Michael, it's Joe. Let me handle that one. Yes, you saw it in the fee income section, Steve, but it gets eliminated in the minority interest section. So really it didn't benefit bottom line one penny. Okay. All right. Thanks, Joe.
spk06: And thank you. We have no further questions at this time.
spk10: Well, thank you everybody for, uh, for joining. Um, this is a very, very interesting time. Um, I'm going to go back and watch the television and see what's going on in the election. Uh, we wish you all well, stay healthy and, um, Please get back to the office. Get back to work. We really need everybody in the office. Thanks so much. Have a great day.
spk06: And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
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