Alexander’s (ALX) CEO Steven Roth on Q3 2020 Results – Earnings Call Transcript


Alexander’s, Inc. (NYSE:ALX) Q3 2020 Earnings Conference Call November 4, 2020 10:00 AM ET

Company Participants

Cathy Creswell – Director of Investor Relations

Steven Roth – Chairman and Chief Executive Officer

Michael Franco – President

Haim Chera – Executive Vice President and Head of Retail

Glen Weiss – Executive Vice President Office Leasing and Co-Head of Real Estate

Joseph Macnow – Executive Vice President, Chief Financial Officer and Chief Administrative Officer

Conference Call Participants

Manny Korchman – Citi

Jamie Feldman – Bank of America

Steve Sakwa – Evercore ISI

Alexander Goldfarb – Piper Sandler

John Kim – BMO Capital Markets

Josh Brown – Scotiabank

Nick Yulico – Scotiabank

Rick Skidmore – Goldman Sachs

Daniel Ismail – Green Street

Vikram Malhotra – Morgan Stanley

Michael Bilerman – Citi

Steve Sakwa – Evercore ISI

Operator

Good morning and welcome to the Vornado 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. [Operator Instructions]

I will now turn the call over to Ms. Cathy Creswell, Director of Investor Relations. Please go ahead.

Cathy Creswell

Thank you. Welcome to Vornado Realty Trust third quarter earnings call. While Vornado 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 Steven 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 Steven Roth.

Steven Roth

Thank you, Cathy, 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 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 teams. There is a tension between the very serious COVID health risks 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 would be a 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 have 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 the investor caution, it does not look like we’re going to achieve our original top ten placing objective. Nevertheless, 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 hundred-foot skylight will be opening to the public at year-end, only weeks away.

At our adjacent Farley building, we will be delivering Facebook 730,000 square feet at phases beginning in the first quarter of 2021. Our transformation and redevelopment of the 2.5 million square foot PENN 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 PENN 1’s 1.8 million square foot sister PENN 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 4 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, we are highly confident that each of our businesses will rebound the pre-COVID levels.

Now to Michael.

Michael Franco

Thank you, Steve. Good morning everyone. I too hope you all are safe and healthy. I first will cover our financial results and then run in with a few comments on the Lakeview Capital Markets. Our earnings for this quarter reflect a number of items, most of which were known or should have been better than expected. Third quarter FFO as adjusted was $0.59 per share compared to $0.89 for last year’s third quarter, a decrease of $0.30. This decrease is reconciled for you in our earnings release on Page 5 and on 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. $0.11 from the temporary decline in income of what we call our variable businesses, which include the Hotel Pennsylvania, theMART’s trade shows, signage and BMS, which Steve had laid out for you in our first quarter earnings call, $0.11 from retail bankruptcies, namely J. C. Penney and Toys “R” US and tenant account receivables write-offs, $0.07 from non-cash straight line rent layoffs and $0.03 from Penn District space out of service. We ended the quarter with New York office occupancy at 95.8% and New York retail occupancy at 79.9%, the decline primarily due to pandemic.

While the headline same-store NOI numbers are negative on their phase, it’s worth drilling down in New York. New York segment’s third quarter cash basis same-store NOI was down 9%, but when you exclude retail, the temporary loss of income resulting from the pandemic from our variable businesses and excluding residential in our share Alexander’s. 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 tenants. And as Steve said on last quarter’s call when the pandemic recedes and employee return to their offices and tourist 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. Consumer 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 safe with that in the office. We expect modest new leasing activity through year end with renewals dominating the activity. This dynamic likely won’t change as our companies return [indiscernible] city and really focused on growth and future space needs post-pandemic.

Some of these spaces rising and thus conditions will likely get worse before they get better. Fortunately, we have the wherewithal to meet the market returns. The New York our office buildings remains full at 95.8% occupancy and importantly, as the market recovers from the COVID pandemic, our New York office expiries for the end of 2022 average at very low 4% per year with a weighted average expiring rent of only $79.22 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-end and year-out future capital requirements. Both of these leases are also sterling credits and reflect the strength and diversity of the industry in New York with tech and healthcare being two of the fastest growing.

In total, we were 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, are at very healthy 26.2% and 7.7% respectively. We have 220,000 square feet of leases in negotiations and another 850,000 square feet in the New York pipeline, all the healthy mix above new and renewal leases. In San Francisco in the quarter, we executed 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 renewables will produce strong mark-to-markets in rent deferrals.

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 screen 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 for both new and renewal aggregating an additional 50,000 square feet, indicating the retail has recognized that New York City is still a 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. The 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’s going to be an iconic landmark to the city serving commuters and residents for the next century. PENN 1 is progressing on plan with completion of the entire project expected in 2022 and PENN 2 will soon follow. The new 33rd Street Long Island Railroad entrance will also open on schedule in December, further enhancing the experience for tge commuters. The district transformation is well underway. And when all of our redevelopments 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, the latest construction images, enjoying the progress we’re making on these projects. I know it can be hard for people to look beyond the current difficult uncertain environment. But in one year, there will be thousands of new creative and talented employees of two of the tech giants populating 1 million square feet in our district and the knock on effects will be significant both for office and retail assets.

We’re already seeing high retail interest in the district falling into these announcements. As 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 they’ll of course do 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 of PENN 11 demonstrates the financing markets for office that are now wide open and constructive with capital available at record low rates for high-quality, well leased buildings and strong sponsors like [indiscernible]. The reason refinancing of Alexander’s apartment complex and the reason quotes we’ve received for other properties further validated 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 this favorable markets to turn out our debt 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.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question online comes from Manny Korchman from Citi. Please go ahead.

Manny Korchman

Hi, good morning everyone. Michael, just wondering to ask on the Farley retail leases, have those discussions changed much in this COVID environment? Or tenants just as excited to go into an asset like at that location? And maybe more specifically, if you could discuss rents and TIs and the metrics that go into those.

Michael Franco

Manny, I’ll start and Steven or Haim could join in. The interest is really not wavered at all. I think tenants recognized, as I said, the uniqueness of the asset and the number of people that are going to be going through there, going west every day to Hudson Yards and Manhattan West going to our assets and throughout the city. And so, the industry really has been updated throughout the pandemic. And so, all the tenants were in a dialogue with those who progressed. The leases we’ve signed outlays in process, the rents are unchanged. There may be a little bit more TI on a few deals respectively, but overall I would tell you it’s pretty consistent.

Steven Roth

I have a slightly more constructive take on it. I’ve nicknamed that this project, the funnel, because really what happens is that all of the population of Hudson Yards and all of the population of that Manhattan West, which are huge developments with huge office populations immediately and contiguous 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, but retailers understand that and see that and it’s clear as a bell.

Actually, it’s the single best retail opportunity in this 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 two tech giants in a million feet surrounding this and on top of it. So we are extremely constructive about this space. Haim, do you want to add anything?

Haim Chera

I agree. Probably, the first of sunshine in the cloudy retail environment and we have nothing, but high hopes for the productivity when that opened and we’re extremely optimistic about it.

Steven Roth

That is 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 and much more grand, which will be on the MTAs guide and taking a little bit control and ownership of the south side of that topical. So we will own both sides and that’s also another – it’s a hundred odd million dollar project, so it’s not huge, but it’s another very exciting addition to our portfolio in the Penn District.

Manny Korchman

Great. Thanks for all that. I 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 New York & Company where the tenants having their own struggles, and we might just not be thinking about potential on move outs or give-backs.

Steven Roth

What do you think Glen?

Glen Weiss

Good morning, it’s Glen. Now, we feel really good about our role, really modest role over the next few years about 1.6 million feet, nothing of large block size other than New York & Company and we got some space that 512 West 22nd downtown of 40 Fulton, but nothing of large consequence. And then 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 expirations in the next two years.

Manny Korchman

And Glen, could you share any potential updates or prospects for The Home Depot space that’s going to be vacating ALX?

Steven Roth

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 how much will – and they want to know how much we would pay them? So the answer is that we don’t – that space is under leased 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 have financially protected for the next five years.

Manny Korchman

Thanks, Steve.

Operator

Thank you. Our next question online comes from Jamie Feldman from Bank of America. Please go ahead.

Jamie Feldman

Thank you. Good morning. So, I guess, turning to the election, certainly it looks like the democratic sweep is off the table here. And with that concerns that a big fiscal stimulus to help some of the – New York City or San Francisco off the table as well. I just want to get your thoughts on that comment. And then just for New York specifically, what risks do you think this proposes to the future of the city and its ability to recover?

Steven Roth

That’s a big question. We – 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 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 – 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 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 – the city and state governments all around the country have to have balanced budgets. So they will have to close the budget deficits. 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 that the Democrat side made, which is that they will redo – they will reverse the Trump tax plan and reverse the SALT, I see that is being a very, very, very hard lift. So I don’t know where that will go. Nonetheless, there is slightly an imperative for these cities and States to have to get their budgets under tighter control together with some kinds of assistance. So I don’t think that gives you much more information than you already had.

Jamie Feldman

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 to keep the city healthy?

Steven Roth

The answer is that the thing that I worry about much about both is stupid legislation such as happened in Albany at the beginning of, I guess it was last year about 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. However, the budgets can’t afford it to go down. So that’s a – the tensions in all of this stuff are pretty enormous and they will play out over the next six months or a year.

Jamie Feldman

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 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?

Steven Roth

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. So – but it will take the retail real estate that we own, which is brilliant in its quality will suffer lower values at lower rents because that’s the market and it will take time for this to shift through.

Operator

Thank you. Our next question online comes from Steve Sakwa from Evercore ISI. Please go ahead.

Steve Sakwa

Thanks. Good morning. I guess, Glen 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 we could talk a little bit about what the tenants are telling you, what sort of space requirements or space density they’re kind of planning? Of that 850, how much of that’s new versus renewal? And again, finally just get a sense for how tenants are thinking about new space versus old space and how they’re planning it?

Glen Weiss

Sure. Good morning, Steve. It’s Glen. 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 tenants. And we’ve got a lease out of about 100,000 feet with a non-profit tenant, which will be new space in this town. We just got a proposal over the weekend for 45,000 feet with an entertainment firm, new tenant, more in proposal stages with 300,000 foot tenant in Midtown planting a new state. And we also have an existing large tech company looking to grow again by another 60,000 and 120,000 feet.

So we’re certainly seeing a great mix of activity. In terms of 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 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 early to the space design, but I think that to be determined to be continued dialogue. But certainly, 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.

Steve Sakwa

Okay…

Steven Roth

Steve, I don’t trust anything that anybody tells me right now. So, for example, let’s go back at the history, go back to 9/11. And so, when the tragedy of 9/11 happened, everybody said that that we – nobody has gone to rent a 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 the 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 businesses feeling that there will be marginal work from home and the office will be the main place where work creates creativity, growth and businesses conducted.

Steve Sakwa

Thanks. Glen, maybe just to continue on the leasing, is there any comments you can make about sort of net effective rent changes you’ve seen maybe over the last six months? I realized, 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 effective 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.

Glen Weiss

Yes. I mean, as 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 deal making. I mean, certainly there is going to be an adjustment to rent TIs, et cetera. I’m not smart enough to predict exactly what those are going to be, but then when everyone gets back in their seats, we see demand again, we see [indiscernible] again a little bit much better, feel a bit. I think right now the deal is you’re hearing about on the street and TIs are certainly up, I think rents have generally held steady to-date as one of 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, when we get into normal deal mode.

Michael Franco

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, the deal making is down as you would expect in some senses, it’s surprising, it’s active as it is even most people are not in their cities. But people have to come back and get to normal functioning environment. So in this period of time, they’re going to be additional concession sure. That depends feel that 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. And I think you’ll start to get a better sense as to what reps are you going do. And I wouldn’t extrapolate too much on it.

Operator

Thank you. Our next question in the line comes from Alexander Goldfarb from Piper Sandler. Please go ahead.

Alexander Goldfarb

Hey, good morning, Steve. And certainly an interesting day out today. So two questions here. The first is just going back to Jamie’s question. When you look at the political landscape of New York, there’s definitely been disconnect, I mean, you’ve been in New York a long time. You remember the 70s, how the business community rally together with the city to rebuild New York. This time around that dynamic does not seem to be in the cards. The mayor is definitely staked out of you. The governor seems to oscillate one time he’s against us, 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 to not really realize the impact that people like you who are paying real estate taxes and trying to generate growth for the city, how it’s not helping.

Steven Roth

Let me turn the question around, okay. Politicians are politicians, I’m not going to – 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, is that New York is absolutely the greatest city in New York. And it’s one of the three or four greater city in the country. And one of the three or four great cities in the world, there will always be a New York. It will ebb and flow a little bit, it’ll go through cycles, but there’s always the dominant place – the dominant city in New York.

I keep saying, New York, I’m sorry, in the country. And its infrastructure is 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 word, pejorative word, steal 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 and 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 favour which is the slant, I think in your question that seems to me to be a time to buy assets and to buy stocks, okay. So New York is going to go – 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, we’ll win the day. But this is a unique time because the assets are really, really cheap.

Alexander Goldfarb

Okay, which leads to the second quarter, you know my favourite. The 555 and 1290, I guess you said earlier on that the pricing discussions may not have been exactly what you guys had hoped for clearly a great cash flow assets especially even more important today. So what are your latest thoughts on those assets? Are you still leaning towards – which way are you sort of leaning? Is it a recapitalization of the pair? Or you think you may outright sell? Or now it’s just keep as is with no change on the financial?

Steven Roth

The answer to that question is yes.

Alexander Goldfarb

Thank you, Steve. Is there anything more that you can add?

Steven Roth

Look the answer is that obviously these are important assets. Obviously, they will command acceptable values. It may not be the top, top fixed value, but they will command acceptable values. And the liquefying of the value of those assets is an important thing in our future plan. We have said we’re looking at multiple different options. And the answer to your question is yes.

Alexander Goldfarb

Okay. Thank you, Steve.

Operator

Thank you.

Steven Roth

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.

Alexander Goldfarb

Okay. Yes, I understand that and I appreciate your view. So, thank you Steve.

Steven Roth

Yes, sir.

Operator

Thank you. Our next question online comes from John Kim from BMO Capital Markets. Please go ahead.

John Kim

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?

Michael Franco

Look, I think that John, you just look at the trend line and when companies either may bring the workers back, or when theaters may open, I think that’s a reasonable assessment. Obviously, we’re in a fluid environment, but I think the latter half of 2021 is a reasonable assessment. So that obviously means put priorities down and therefore retail sales down. But retailers are adapting, the ones that were very weak have already gone out, not to say there can’t be some more casualties, but I think that when you take out the restaurants, I think by and large we have pretty good credit in the balance of our portfolio. S0, as I said, we are notwithstanding that environment.

We signed one lease on Madison Avenue. We’re in negotiation on another. So retailers are – and then Steven, who led the 731, and then there’s some other assets as well. Retailers are kicking the tires, right? The strong retailers had balance sheets, they take the other style, 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 have at least the markets to return, everybody does, the New York will come back.

As soon as people can travel again, I know we’re going to be right back to 60 million tourists, but I think it’s going to come back pretty quickly, right? There’s pent-up demand in 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 that’s my view. I don’t know if you want to add anything high into that, but I think we are well-positioned in terms of our assets on a relative basis.

John Kim

Can I ask a similar questions as far as the timing if its trade shows reopening at theMART? Would it also be a second half 2021 timeframe?

Michael Franco

Yes.

Steven Roth

Yes.

Michael Franco

And big trade shows [indiscernible] which normally is June, we’ve pushed out to September, and we did that a few months ago just a conservative yield, give it time, our tenants are anxious for that show to happen and they’re planning, they’re excited about it. And so we feel like that’ll happen as important show, so again, that as well as Armory Show in the third quarter of 2021.

John Kim

I could squeeze one more question in. Is the 850,000 square foot leasing pipeline, does that include the large anchor at PENN 1 that you discussed in the last call?

Steven Roth

I think you’re referring to PENN 2 maybe. The answer is no.

John Kim

Okay. Thank you.

Steven Roth

Yes. Thank you.

Operator

Thank you. Our next question online comes from Nick Yulico from Scotiabank. Please go ahead.

Josh Brown

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? I did design that space any definitely because of COVID. I think can you just talk about the TIs that were given on that deal? And how that compares with TIs historically?

Steven Roth

No, that’s something that we’re not going to get into.

Josh Brown

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 Haim 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 you benefit from those?

Steven Roth

The answer Josh is that, there are, as you would expect the worst assets go bad the quickest, right? So if you look at what happened in the prior number of years, right. Retailers fly at it really across the city, and there was leasing done and then rents pushed and I would call it fringe locations, right. Well, this is a result of not just this, but even having before this, right, that started to contract over the last couple of years and those locations were impacted and the owners that had debt on those assets, they either lost or they’re going to lose those assets.

And 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 – even 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 that we’ve had called some lenders saying like, well you guys are the experts, can you help us out in certain assets for the right situations, we’re going to play off those. But I would say today we’ve not seen anything of scale or a quality that fits our bill, but they they’re going to come earlier.

Michael Franco

The law of the jungle is that the bigger they are, the harder they fall. So the categories of assets that are in distress or the top three are condos in New York, retail anywhere and hotels. So you think about it for a second. The condos are – the buyers have gotten into hibernation and the prices are in free fall. The hotel business, most of the hotels are shutdown, so they have zero revenue and we know what’s going on in retail. So the opportunities will be at 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 greater 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 distress markets like this. And so, we’re very alert. We see everything that comes by. We have the financial capacity to act and we’re sort of like reasonably excited about what the opportunities might be, but they will take – could be well into next year before they really start to mature.

Nick Yulico

Hi, guys. It’s Nick. Just a quick question on the sequential change in cash NOI for the New York office segment, which you’re listing the Q, I forget if it’s in this up or not, but they did have a write-off of a tenant receivable, but what else drove that sequential decline in office in cash NOI this quarter in New York?

Steven Roth

I’m going to turn that over to Joe and Tom. If you don’t have at your finger tips maybe we can handle this offline.

Joseph Macnow

Nick, it’s Joe. Good morning. I would prefer to do this offline, Nick, and so we can really get you a precise answer. Needless to say, the third quarter had accounts receivable reserves more than 2.5 times the second quarter. So that’s an element that we closed, but we would prefer to get you a more precise buildup.

Nick Yulico

Okay. Sure thing. Thank you.

Operator

Thank you. Our next question online comes from Rick Skidmore from Goldman Sachs. Please go ahead.

Rick Skidmore

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.

Steven Roth

I’ll tell you what our experiences first just we get into years of 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 – we’re talking up our book, we are in office business, we want to be in the office, we want our people in the office and we want to get back to a normal work. So we agree with that. The thing that we don’t agree with is what we’ve done is – and that most of these folks have gone back 100%. What we’ve not done has 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 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 shying – they will not open their offices up by eating, and they very much respect what their employees perceive as being a health risk and 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. There are the nuances to it like child care and schools and other stuff.

But the main thing 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 of 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 in, 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, 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, et cetera at all of the protocols that actually, 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, they come back et cetera. And basically, so that’s what we are able to do right now. Right now, we’re in a waiting game, waiting for the medical profession to solve this problem.

Rick Skidmore

Thank you.

Steven Roth

By the way and I said this in my remarks. As you view I and all of our colleagues, as we talked to our friends, we talked 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 get – to be able to go out the restaurants. Everybody wants to get back to normalcy. So the population wants the 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 dimensioned in months, not in years.

Rick Skidmore

Thanks for the color.

Steven Roth

But also, you can be assured of one thing, okay. Our teams talk to our tenants very frequently, at least weekly.

Operator

Thank you. Our next question online comes from Daniel Ismail from Green Street. Please go ahead.

Daniel Ismail

Great. Thank you. Steve, just 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 perhaps 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 for in your current development pipeline to expand in that area?

Steven Roth

Daniel, the question was funny. I think you said, what about life sciences? The answer is that I don’t know. We obviously were 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 hotspots around the country that obviously Cambridge, obviously California. It’s a business that we’re interested in. And it’s a business that we would look for and actually point and are looking for an entry point.

To buy in to 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, et cetera. So all I can say is something that we’re aware of. It’s something that we’re looking at. It’s not easy to enter. And there, we don’t believe that they will be a distress opportunity in that segment.

Daniel Ismail

Is there any current plans, you’re looking at PENN1 or PENN2 for a life science component?

Steven Roth

What was your question?

Michael Franco

Question about PENN1 and PENN2.

Steven Roth

Yes. Probably not. There are other buildings – 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 if it’s actually more efficient to do ground up development rather their retrofit. PENN1 and PENN2 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.

Daniel Ismail

Okay. And just a quick follow-up. The Signage business is a relatively small portion of your overall business. Any thoughts in terms of how are the signage business? So, I was just hoping if you can provide a few comments on potential recovery to pre-COVID levels in that segment?

Steven Roth

What was the question?

Michael Franco

Pre-COVID level…

Steven Roth

Yes. The question was – Signage business, small business but some guidance on that recovery pre-COVID levels. I mean, again, it’s a business certainly at Times Square, obviously we on Wednesday, we did before the retail JV but it was a business driven in that area where you need to know eyeballs, right. And so with tourism down, the advertisers have pulled back. But as soon as they come back, it’s a variable business. I expect that to turn right back on. The signs we had in the PENN district, 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 it a slice and dice where you’re selling incremental Signage. I think as soon as – as soon as, quite everything else. As soon as the tourism is back, workers are back, I think you’re going to see that return to a pre-crisis levels.

Michael Franco

Daniel, we don’t look at the Signage business as dabble or an unimportant business, okay. It’s an important business. We have a – we believe we have the largest position of size in town. We have a very, very, 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.

Daniel Ismail

Great. Thanks everyone.

Operator

Thank you. Our next question in line comes from Vikram Malhotra from Morgan Stanley. Please go ahead.

Vikram Malhotra

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, then the maximal space specifically in light of one of your peers recently signing a deal there for what I understand it’s probably in the low-2,000 at grade in terms of rent? Maybe just give us a sense of the potential prospects and where do you see rents shaking out at grade on Fifth Avenue?

Steven Roth

Retail rents on Fifth Avenue will certainly be in correction territory from top tick peak rents that we saw a few years ago. The Harry Winston comp in the paramount space we view is a positive. We currently have Harry Winston in our St. Regis asset. They have a 15-year term with us. That was always intended to held one of their other brands that temporarily halt Harry Winston. So we see them moving across 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.

Vikram Malhotra

Okay. Great. And then just I apologize if you’ve covered this, but any updates on the ground leave at PENN specifically, and can you talk about just prospects that PENN2 specifically sort of large anchor tenants?

Steven Roth

The ground lease reappraisal at one PENN we’ve 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 two PENN, we’ve had said before and in fact, I think the question came up earlier; there is a large lease that we have pending. It actually has happened to be with Madison Square Garden for the Headquarters space. They had been tenants in that building for forever. The building obviously is on top of Madison Square Garden, and that lease is appropriately at pause because Madison Square Garden is basically – business is shutdown until this is over. So we are very constructive and very enthusiastic about the prospects of PENN2 and PENN1 for multiple reasons.

Number one, we think the location is absolutely bull’s eye. We think that the amenity packages and the – 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 plan and two plan to the marketplace to unbelievable enthusiastic acceptance.

Vikram Malhotra

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, given co-working and we work, it was hot, and then it wasn’t. And then you’ve had potential for more work from home on the margin. I’m just wondering, do you foresee any changes in office lease structures, whether it’s a 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?

Steven Roth

It might – 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. So, right now we have, I don’t know, better part of 1,000 tenants with a very significant $1 billion plus cash flow. And so that’s very predictive and very secure. We’re very happy about it.

If the business goes to month-to-month leases, that’s impossible. So for we work when you’re renting out a 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 a 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’d 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-builds, 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 a space for a tenant and invest the capital. So that would be the small insignificant segment of the office population. That’s not our business.

Operator

Thank you. Our next question on line comes from Manny Korchman [Citi]. Please go ahead.

Michael Bilerman

Hey, it’s Michael Bilerman here with Manny. Good morning, Steve. I was wondering if we can just kind of go back to…

Steven Roth

No, just good morning, Michael.

Michael Bilerman

It was just a good morning. Okay. I wanted to come back to sort of the office discussion and frame it the following way. I agree with your sentiments on office and return to the office. I myself had 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 save shareholders from a lot of losses. Why wouldn’t be office space market go like what’s happened to the malls, right. And you go back and everyone said, people want to experience the mall. They want to feel the clothes before they buy them. But then there was an alternative driven by technology that allowed us not to do that anymore. And so I guess, why are you in the belief that what happened to malls won’t happen too often?

Steven Roth

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?

Michael Bilerman

Yes, no. And that’s why I’m asking the market is, I don’t – I agree with you on the future of office, but the market is telling us a different thing.

Steven Roth

The answer is that that’s something that we talk about every day. It’s obviously it was obviously unthinkable that hundreds of billions of dollars of more values could be destroyed, but look – but looking 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.

Michael Bilerman

And the succinct answer is to why you believe that office won’t follow the trend of malls is?

Steven Roth

The answer is, 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 – 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’ll 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, I don’t know how you manage that. Well, I think if you’re a manager, you want your team in the office where you can interact with them, et cetera. So, I think the human condition is different. The human condition it speaks to collegial work in groups in debate, which basically is in office.

Now, obviously that’s going to get nipped around the edges that I can’t tell how much. None of this would have happened, whether or not the technology like Zoom, okay? So, technology enabled our business, your business to be able to react to this shutdown by working from home, but keeping the railroads running on time. So, that’s an amazing thing. But this is the human condition. So, it’s not impossible that there will be a day here, a day there of working from home. But 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 a value.

Now, let’s get back to what that means. I think that it means the better assets and 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 have – has to be aware of and it has to be – as the focus on daily.

Michael Bilerman

Right. Well, I appreciate those comments. And then my second question, Steve, just to come 555, and 1290 in one of the responses you said that it 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 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 just, I’m just want to better understand why those two assets are so important to your future plans in terms of the liquification of them?

Steven Roth

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. Okay. It’s as simple as that, but a lot of it depends upon the structure. A lot of it depends upon the details of sell them all, sell apart. We continue to manage them. We do a joint venture, or we just refinanced them. Okay. 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, is that there will be better places to put that cash for growth and create shareholder value creation then those assets over a five or a 10-year old. 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 to dump it, while we resisted that dump it went up in value by $1 billion. So maybe it’s time has come.

Michael Bilerman

Perfect. Thanks, Steve.

Steven Roth

Yes, sir.

Operator

Thank you. And our last question comes from Steve Sakwa from Evercore ISI. Please go ahead.

Steve Sakwa

Thanks. Just two quick follow-ups. I noticed that operating expenses kind of noticeably between Q2 and Q3, I assume that part of the building’s reopening, would you say Q3 is a reasonable run rate kind of looking forward until utilization rates go up materially?

Michael Franco

Yes. I think just about operating expenses.

Steven Roth

Operating expenses. Okay, good.

Michael Franco

Yes, I think that’s fair, Steve.

Steve Sakwa

Okay. Thanks. And then, I did notice a large kind of one-time gain. I think it was in management and leasing fees or something like $11 million and any, I assume that’s a one-time gain on some leasing activity, but thoughts around that would be great? Thank you.

Michael Franco

Sorry, Steve, say that again. I can’t hear you.

Joseph Macnow

Michael, its Joe. Let me handle that one. Yes, you showed 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.

Steve Sakwa

Okay. All right. Thanks Joe.

Operator

Thank you. We have no further questions at this time.

Steven Roth

Well, thank you everybody for joining. This is a very, very interesting time. I’m going to go back and watch the television and see what’s going on in the election. We wish you all well, stay healthy and please get back to the office, get back to work. We really need everybody in the office. Thanks so much. Have great day.

Operator

And thank you, ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.

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