Earnings Call Transcript
Alexanders Inc (ALX)
Earnings Call Transcript - ALX Q1 2020
Operator, Operator
Good morning, and welcome to the Vornado Realty Trust First Quarter 2020 Earnings Call. My name is Sidney, and I will be your operator for today's call. This call is being recorded for replay purposes. I will now turn the call over to Ms. Cathy Creswell, Director of Investor Relations. Please go ahead.
Cathy Creswell, Director of Investor Relations
Thank you. Welcome to Vornado Realty Trust's first quarter earnings call. Yesterday afternoon, we issued our first 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 March 31, 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 intend 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 on the call and available for questions. I will now turn the call over to Steven Roth.
Steven Roth, Chairman and Chief Executive Officer
Thank you, Cathy, and good morning, everyone. Before we begin, I ask for a moment of silence in honor of the lives that have been lost during this COVID-19 pandemic, including Haim's beloved father and my dear friend, Stanley Chera. We now find ourselves in almost total shutdown, a never before situation. Life as we know it is upside down, people are hurting, businesses are hurting, and the future is uncertain. At Vornado, as our first priority, we are following strict protocols and taking all measures to protect our employees, our tenants and our communities. We pray for the health and safety of all, and we commend and admire the talent and courage of our health care providers. In their honor, the Crown of 731 Lexington Avenue, our Bloomberg Tower, is now flying scrubs blue, as is our block-long Times Square sign and also the light projection on the MART. Our entire organization is working remotely and doing a remarkable job keeping the trains running and on time. They have our thanks. Our office buildings remain open, safe and sanitized with a rightsized operating staff. Building census is currently less than 5%. All but essential retail is closed, giving a lethal blow to some in an already challenged industry. We have taken the following operating steps to reduce expenses and preserve cash. We have placed 1,800 employees on temporary furlough, including 1,300 employees of BMS, our wholly owned subsidiary, which provides cleaning, security and engineering services to our properties; 400 employees at the Hotel Pennsylvania and 100 of our corporate staff. We have deferred certain capital projects to the tune of $125 million. We have closed the Hotel Pennsylvania temporarily. Effective April 1, 2020, for the remainder of the year, our executive officers will waive portions of their annual base salary, beginning with my 50% reduction and scaling down from there, and each member of our Board of Trustees will forgo their annual cash retainers. Now, let's talk a little about the math of this COVID-19 situation as it affects our business. I see it in three parts. First, we expect a $9 million average monthly income reduction from: one, the Hotel Pennsylvania being closed; two, the MART's canceled trade shows; three, reduced revenue from BMS cleaning services; four, reduced income from our garages; and five, reduced third-party spot signage rentals. All of these businesses are variable depending upon economic activity as opposed to fixed price leases. They represent only 6% of our overall revenue, and all of these businesses will rebound to prior levels when life returns to normal. Second, our rental revenue stream is supported by over 1,000 office leases with an average lease term of eight years and over 300 retail leases with an average lease term of 6.5 years. This year, total annual rent due from all tenants is over $1.7 billion or $142 million per month. As is normal, we have collected virtually all rent due from January through March. For April, we collected 90% of office rents and 53% of retail rents, or a combined 83%. Interestingly, of the unpaid office rents and coincidentally of the unpaid retail rents, almost 2/3 is due from creditworthy tenants. So in April, we have uncollected rents of almost $24 million, and that's calculated at 17% times $142 million, which will become a receivable on our balance sheet, in effect, a loan to our tenants. We have $302 million of tenant security deposits protecting bad debts, of which $51 million is from tenants who have not yet paid April's rent. As you would imagine, we are in discussion with almost every one of our tenants. We are confident that we will ultimately collect most of this receivable. By way of further information for the first four days of May, we have collected 53% of office and retail rents, which is very slightly ahead of the first four days of April. Here's the punchline of my first two points as they affect valuation. If April's run rate were to continue for, say, an entire 12-month year, and we surely hope it will be shorter than that, the cost or earnings gain from the variable businesses I mentioned plus from our educated guesses to what bad debts might be is a one-time cost of around $1 per share, and that would be for a total 12 months. This does not give any credit for security deposits. And my third point is the larger issue affecting valuation. What will our world be like when COVID-19 passes? We each estimate or guesstimate what tenant demand, rents and building values will be. How many tenants will not survive and how many retail tenants will seek bankruptcy? The stock market has voted by taking the price of our stock down $25 or $5 billion. I think this is a gross exaggeration. Our current liquidity is $3.4 billion, including $1.7 billion of cash and restricted cash and almost $1.7 billion undrawn under our $2.75 billion revolving credit facilities. In addition, we are scheduled to receive $750 million from 220 Central Park South closings from May through the balance of this year. So you might say our liquidity is really over $4 billion. Interestingly, since the heat of the crisis in mid-March and through April, we closed as scheduled five units for net proceeds of $210 million. We remain committed to our redevelopment and capital plans for the Penn District, Farley, PENN1 and PENN2. These projects are the center point of our Penn District vision, the new epicenter of New York, where we will be delivering for tenants cutting-edge, next-generation amenities and services unmatched anywhere. Each project is progressing, albeit at a somewhat slower pace due to government-mandated construction restrictions. As we have said before, these three large Penn District projects are debt-free and are being funded off our balance sheet and from the aforementioned proceeds from 220 Central Park South closings. No debt, no joint ventures, and Vornado shareholders keep 100% of the upside. We have built Vornado to weather the storm and importantly to flourish as it passes. We have a cycle-tested management team. We are always laser-focused on our balance sheet and liquidity and in recent years have been aggressively selling and spending assets, aggregating over $19 billion, moving away from top tech acquisitions and moving away from stock buybacks. As cycles go, all of a sudden, it is now surely a better time to buy than to sell. The next few years should present great advantages for investors. So, you might say I am ringing the bell. Here is a thought for you. We invest not for quarterly returns, but for two, three and even five years, and we hope you do too. Buying right and the passage of time and patience yield outsized rewards. I'll now turn it over to Michael Franco for our first quarter financial results.
Michael Franco, President
Thank you, Steve, and good morning, everyone. I hope you're all safe and healthy. As we expected, our first quarter FFO, as adjusted, was $0.72 per share compared to $0.79 for last year's first quarter. First quarter cash basis same-store NOI performance was as follows; New York office was up 2.1%, street retail was down 1.9%. theMART was down 11.8% resulting from the cancellation and postponement of trade shows due to the pandemic, but positive 2% excluding trade shows, and 555 California Street was up 3.7%. New York office occupancy stood at 96.9% at quarter end. In the quarter, we leased 311,000 square feet of office space at a very healthy initial rent of $90.47 per square foot. The GAAP and cash mark-to-markets on second-generation space were negative 3.3% and positive 0.8%, respectively, negatively affected by a short-term renewal and expansion with Citadel at 350 Park Avenue as we line that building up for a potential ground-up development to start in three years. Without this one lease, the GAAP and cash mark-to-markets would have been positive 5.2% and 10.7%, respectively. New York Retail occupancy stood at 94.9% at quarter end. In the quarter, we leased 15,000 square feet of retail space at an initial rent of $416.36 per square foot. The GAAP and cash mark-to-markets were positive 126.6% and 104.6%, respectively, driven by our lease with Sephora Union Square. At theMART, occupancy was 91.9% at quarter end. In the quarter, we leased 231,000 square feet at an initial rent of $47.31 per square foot, including an important long-term renewal with PayPal for 148,000 square feet. The GAAP and cash mark-to-markets were positive 2.6% and negative 1.2%, respectively. At 555 California Street, we reached full occupancy at 99.8% at quarter end. In the quarter, we leased a small 6,000 square foot unit at an initial rent of $117 per square foot with GAAP and cash mark-to-markets of 44.5% and 29.7%, respectively. As to our New York office pipeline, leases that were already in progress pre COVID-19 are moving forward. They amount to 1.7 million square feet. Our first quarter non-comparable items consisted primarily of a $59.9 million after-tax net gain on unit closings at 220 Central Park South, partially offset by $56.2 million at share of write-downs from our real estate fund and $7.3 million of credit losses on loans receivable resulting from the adoption of the new CECL GAAP accounting standard. We have three loans receivable totaling $52 million, consisting of two partnership loans and a purchase money mezz loan provided to facilitate a sale in 2014. We have no loan book. Now, back to Steve to wrap up our opening remarks.
Steven Roth, Chairman and Chief Executive Officer
Thanks, Michael. New leasing activity in New York and just about everywhere has slowed to a trickle. The next year or so will be very challenging, a lost year, a tragedy of this. But we must look to the other side. COVID-19 will have an end date. When we get there, I am actually quite optimistic. Farley will be generating income and PENN1 and PENN2 will be coming to life. These will generate large accretive earnings for us. Further, our New York office expiries for the next three years will trend well for both stability and growth. Amounting to only 1.9 million square feet for the three years or 12% of our portfolio, an average of only 4% per year at a weighted average expiring rent of only $74. Now, a word about our common dividend. We pay out at least 100% of our taxable income. A few days ago, our Board declared a regular quarterly dividend of $0.60 per share payable on May 22. So far this year, we have paid two quarterly dividends amounting to $252 million. We do expect our dividend to exceed funds this year. Without telegraphing any intention, we will, as we must, reevaluate our third and fourth quarter dividend based upon financial and economic conditions at that time and our then estimate of taxable income. Here are some final thoughts for you, actually a plug for New York. We continue to believe in New York and all it has to offer. Its large and highly educated workforce, eight professional sports teams, concerts, Lincoln Center, Carnegie Hall, Broadway, great museums, great restaurants and nightlife, the best hospitals and universities, and of course, the largest concentration of Fortune 500 headquarters, the world's banking center, the world's media center and now a growing tech center; you get the message. New York's human infrastructure is unparalleled, and New York is the business capital of the world, and New York has always come back bigger and better from every crisis. While we are now working from home, we do not believe working from home will become a trend that will impair office demand and property values. The socialization and collaboration of the traditional office is the winning ticket. Also I believe the densification trend has bottomed, the victim of lots of things and now including social distancing. In sum, we are respectful of the severity of the current situation and cautious for the next couple of years. We are actually optimistic after that and excited about Vornado's business prospects. Lastly, we look forward to welcoming our tenants as they return to our buildings. Our operations teams are hard at work preparing protocols to ensure the health and safety of our tenants, their visitors as well as our staff. Gaston Silva and Lisa Vogel are our team leaders here. With that, operator, we're happy to take questions.
Operator, Operator
Our first question comes from Jamie Feldman with Bank of America. Your line is open.
James Feldman, Analyst
Great, thank you and good morning. Steve, I want to go back to your comment that you're ringing the bell, finally it might be a good time to start buying. Can you talk through your thoughts on what you might expect to see, what the landscape looks like in terms of troubled balance sheets and competitors? And also how you think about capital availability to fund big acquisitions?
Steven Roth, Chairman and Chief Executive Officer
I didn't understand what you meant about competitors and competitive what do you mean by that?
James Feldman, Analyst
Well, where you just might see some distress in types of opportunities.
Steven Roth, Chairman and Chief Executive Officer
Look, obviously, there has been a sea change, actually, it's a global sea change in the economies of the world and we can we do expect, and we can already see that there is a fair amount of disruption and distress out there. I'd say before we push away from uptick prices, this cycle may very well give us the opportunity to buy at fair prices and maybe even good prices, okay? So our antenna is very alert. We are very enthusiastic about the prospects of growing and expanding externally. And it's very high on our radar screen. We feel that we have the financial capacity to partake. So I can't predict where it's going to go. I can't predict what we're going to invest in. But I can say that we are anxious about the potential opportunities going forward. And by the way, this is a totally different environment than we have perceived as a management team for the last number of three, four years.
James Feldman, Analyst
Okay. And then, just when you think about your liquidity and balance sheet, I mean, how do you think about how much you'd want to keep for the long-term funding, the Penn Plaza redevelopment? It just seems like there's a lot of different needs over the next several years, and if there's big opportunities out there, how do you think about what you would use to fund?
Steven Roth, Chairman and Chief Executive Officer
The answer is, we think our balance sheet is in very good shape. We have access to all different phases of the capital markets. And we think that our internal capital requirements for the next number of years are fully funded already, and we think we have capacity.
Michael Franco, President
Jamie, I would just add that, look, we have significant capital, as Steve said, for the opportunities we've already identified internally. But we also constantly have capital partners seeking to do things with us, and many have reached out as soon as this crisis hit. So if there are large opportunities, we want to avail ourselves of capital beyond their balance sheet. We're confident we're going to have the capital to do so.
James Feldman, Analyst
And then, would you only consider New York City office? Would you look at retail or things outside of the metro region?
Steven Roth, Chairman and Chief Executive Officer
We're going to look for value. We're not going to and we're going to look for value that is down the right down the middle of the road to our skill set. So we know what our skills are, and we're not going to invest in Argentina, and we're not going to invest in a steel company. We're going in what we know how to do. If it's and it doesn't necessarily have to be in the four corners of Manhattan.
James Feldman, Analyst
Okay, all right, thank you.
Operator, Operator
And our next question comes from the line of Manny Korchman with Citi. Your line is open.
Michael Bilerman, Analyst
It's Michael Bilerman. And my condolences to Haim and his family. Steve, as you think about the investing of capital and you talk about the stock market being a gross exaggeration in terms of the stock being driven down $25, five billion, how do you line up the external growth in terms of putting new capital to new deals versus your own company, either in the stock or buying out venture partners' interest in some of your assets?
Steven Roth, Chairman and Chief Executive Officer
How are you? Where are you, by the way?
Michael Bilerman, Analyst
We are at Upstate New York.
Steven Roth, Chairman and Chief Executive Officer
Stay safe. Look, this is the old buyback question, I think. And again and again, I think I've been very clear in my thinking about that and been very transparent in our company's thinking to you. And that is that if we buy back stock, first of all, we since we don't have a recurring, we don't have recurring earnings to continuously do that, it actually will sap our capital capacity. We believe that the amount of wealth creation and the accretion that we can make to our NAV by buying back a chunk of stock is insignificant in relation to what we can do with a similar amount of capital investing in different situations. For example, and we've said this publicly, and I think we even published it. The returns that we expect to make on One Penn or Two Penn based upon the capital that we have to commit exceeds by a multiple that which we might earn that which we might create additional accretive NAV in buying back our stock. So we are not mindless of our stock and we look at it continuously. We talk about it at every quarterly board meeting. And right now, that's not number one on our hit parade. And by the way, we're actually not pleased that we pushed away from the recommendations of many people that we buy back our stocks $30 higher.
Michael Bilerman, Analyst
Going to the external growth in terms of where you may invest. And I remember it was I don't know if it was last year's letter, or maybe it was a year before, maybe a year before that, you talked about diversification from the perspective of the company in sort of addressing the New York centric. And you basically said, investors can make their own diversification choices by buying different companies, where we don't think being a New York centric company that's what we are. And so, I guess from your perspective of looking for value and you wouldn't be confined to the four corners of New York, I guess, why not why go and further be present elsewhere.
Steven Roth, Chairman and Chief Executive Officer
We are a New York company. We are a tried-and-true New York company. There is no doubt about that. We think we have the best skill set of any New York operator, and there are plenty of opportunities in New York. One would even say, enormous opportunity in New York. So our first, second and third priority will be to invest in what we know and where we know and where we have a powerful franchise. Having said that, we will not preclude other things. So if you go back a long time ago, we were a New Jersey-centric company in strip shopping centers, and we made the better part of $10 billion by sailing across the river and doing something that's different. So, we are absolutely a New York-centric company. Our number one, two and three priorities is New York. The prospects that we will invest outside of New York are low, and it would only be for an absolutely extraordinary, breathtaking opportunity, and there may be one.
Michael Bilerman, Analyst
Thank you. Will re-queue.
Operator, Operator
Thank you. And our following question comes from the line of John Kim with BMO Capital Markets. Your line is open.
Piljung Kim, Analyst
I think, Steve, you mentioned that leasing has slowed to a trickle. And I'm wondering if that includes any leasing activity at Penn Plaza and Farley?
Steven Roth, Chairman and Chief Executive Officer
So as you would expect, this is an extremely disruptive, confusing, paralyzing time for everybody, including our tenants and our customers. Our tenants and our customers fall into basically two broad categories. There are those that are basically shut down, where they have no revenue and they have no visibility into how long it is going to be and what the other ramifications are, including financial ramifications. There are others of our clients that are thriving in this period, including the FAANG. So basically, now getting to Penn Plaza. We've talked about two big leases in that area in the past. One of them is for a large block of space at Two Penn with an incumbent tenant who basically is devoted to that building and has been forever and for obvious reasons. They basically are in pause waiting for their business to open up, which is absolutely understandable, and David and I and Glenn are sympathetic with that. Not going away, but in pause. There's another large tenant that has been rumored to be that we've been in dialogue with, and that conversation is going forward aggressively and hopefully maybe even almost complete.
Piljung Kim, Analyst
Are either of those tenants co-working? What are your views on co-working?
Steven Roth, Chairman and Chief Executive Officer
No, no. For sure, no.
Piljung Kim, Analyst
Can I just ask one more? Of the 6% of non-office and retail revenue that has been impacted, how much of this do you expect to recover in the second half of the year? It sounds like trade shows are off the table. But I'm just wondering about hotels, parking and cleaning services.
Steven Roth, Chairman and Chief Executive Officer
Well, I mean, with a less than 5% census, you can't have a full cleaning crew in the buildings. That makes no sense. The cleaning crews and the revenues from that will return based upon the tenancies that are returning. The garages, the same thing. The trade shows will likely be missed this year and we'll pick them up next year. But basically, all of that, what I call variable business, will rebound back to where it was shortly after this is open. There will be a ramp-up period, but this all of those businesses will definitely rebound.
Piljung Kim, Analyst
Thank you.
Steven Roth, Chairman and Chief Executive Officer
Thanks.
Operator, Operator
Thank you. Our next question will come from the line of Alexander Goldfarb with Piper Sandler O'Neill. Your line is open.
Alexander Goldfarb, Analyst
Echoing Michael Bilerman's comments. Condolences to Haim and his family. And then, Steve, thank you for addressing the dividend upfront. Appreciate it. So two questions for you. The first, happy to hear about 350...
Steven Roth, Chairman and Chief Executive Officer
Alex, I hope you think I was clear on the dividend.
Alexander Goldfarb, Analyst
Yes, you were unambiguous. You were clear. So one, obviously, good to hear about 350 Park, that you guys are considering it. On the capital side, which has been one of the hallmarks of you guys with the balance sheet, your comments in the press release about 220 Central Park South, potential for delays that could disrupt closings. And then also thinking broadly about the $2 billion street retail preferred. So one, risk on 220; and second, on the $2 billion preferred for the street retail, is there a risk that, that is somehow impaired? Or that's not the $2 billion of liquidity that we originally thought it was last year, but it could be something less than, which means as you guys think about funding these projects, that may not be the source of liquidity that we thought it was.
Steven Roth, Chairman and Chief Executive Officer
Thanks, Alex. First on 220, I was pretty careful to communicate to you all that notwithstanding the pandemic, since the middle of March, we closed actually five units on schedule for $200 million. So we do not expect in fact, we are even more certain than that, that the scheduled closings for the remainder of the year, somewhere in the neighborhood of $750 million, will come off on schedule. The only little wrinkle in that is that we from a construction point of view, we have to finish punch list and minor work in those apartments, maybe 30 days per apartment. And so right now, we don't have access to those apartments because of governmental-mandated work stoppages, but that's going to come back pretty soon. So we are very confident that all of those closings will occur approximately on schedule and will give us the better part of $700-odd million this year. With respect to the retail preferred, which I think is $1.8 billion, we have never used that in public or in private as a source of capital for any of our investment opportunities or our ambitions or whatever. So we have looked upon that as just an asset on our books, which will generate now you remember that this was a highly structured tax-driven deal that we did probably, I don't think quite a year ago. And that $1.8 billion of preferred, if we were to sell it, triggers a 100% tax. So, basically, it's an asset on our books. It's a liquid asset on our books. We have never in our plans we have never had in our plans to sell it or to use it for augment our capital.
Alexander Goldfarb, Analyst
And then, second question. Steve, from your initial conversations with tenants, what are they saying is the crucial thing for them to sort of reopen their office? Is it solving mass transit? Is it providing PPE for their employees? What is it that obviously, New York's harder hit, what are the key items that tenants are telling you, we need to solve these issues before we can start to have reopen the buildings and get employees back into New York?
Steven Roth, Chairman and Chief Executive Officer
That's a good question, Alex. And that sounds like something for Glenn and David.
David Greenbaum, Executive
Alex, good morning, it's David. Listen, I think everybody recognizes that this is a physical and a psychological issue. So as we have continued to speak to our major tenants during the building shutdown process, I think as the world begins to reopen, it's going to be a very gradual process. Tenants are anticipating a return initially in the 10% to 20% range, ramping up over time. I think you talked about we talked earlier about garages. I think we're going to be seeing fewer people using mass transit. People are going to be driving in. And I think initially, when we open up, most people are either going to be walking to work, bicycling to work or driving to work. So it is going to be a process that's going to take some time. But as we see this unfolding, we are hopeful that it's going to be a gradual process as people become acclimated coming back to work, which I don't know about everybody else on the phone, but we are all, all anxious to get going.
Steven Roth, Chairman and Chief Executive Officer
Alex, look, this will have an end date. So the COVID pandemic crisis will have an end date. Now the end date will be when there is a therapeutic and maybe even a vaccine. So as I understand it, a therapeutic treats if you get infected, a vaccine prevents you from getting it at all. But every medical scientist in the world is working 24 hours a day on this problem, and hopefully there will be a medical solution at some finite period. In between, when there is still risk of infection and there is still there will be, we will just crawl back to regular behavior and regular behavior will be disrupted, the subways are going to be disrupted, baseball is going to be disrupted. So I can't predict what's going to happen, but I do know that in some finite period of time, we will very quickly revert back like a rubber band back to normal.
Alexander Goldfarb, Analyst
Well, not having to take the 5:30 A.M. train is certainly a help. So there is, at least there's something there. Anyway, listen.
Operator, Operator
Thank you. And our next question comes from the line of John Guinee with Stifel. Your line is open.
John Guinee, Analyst
First, very sad to hear about the furlough of over 1,800 people. And I want to congratulate you on a brilliant execution of selling 50% of your retail about a year ago. Thinking about Hotel Pennsylvania and the Manhattan Mall, I know those have been on the redevelopment page for a long time. Is there any thought to just using this opportunity to decommission both of them and demolish them sooner or later?
Steven Roth, Chairman and Chief Executive Officer
First of all, thanks for your comments about the furloughing. The facts of the matter are under the new unemployment insurance, augmented by the PPP Federal program, almost everybody that was on the furlough list is getting the same or maybe even more in terms of wages than before. So we did this with a great deal of sensitivity and care for our employee group, and this was done not to hurt anybody. In fact, we cut the furlough list off where we thought that people would not be able to get recompensed by the government programs. So I thank you for your sympathies, but we did this very carefully with a great deal of feeling and care for our folks. The Hotel Pennsylvania has been an enigma for a long time. It's obviously a parking lot for a development site. We've closed it in the pandemic because the occupancy rates went down to low teens, single digits. So it was uneconomic. We have thought internally about using this and just never reopening it. And that might happen, but I doubt it. So that's step 1. The Manhattan Mall is really a building with two components to it in one building. There is a large office building on top of it, which is fully let and performing well. And then there is a mediocre retail a couple of floors below it. So you can't really you could shut down the retail, but you can't really demolish it because of the office building up above. So in our development plans, the first and by the way, as you know, the Manhattan mall backs up to the Hotel Pennsylvania. So that's one giant, giant block that would support three million, four million square feet, maybe even more of development. So the first that's going to go is the Hotel Pennsylvania at some future date, and the Manhattan wall is way, way in the future.
John Guinee, Analyst
Second question, I think everybody is a big believer in the resiliency of New York. But the last the number of issues New York has had, you had mayors by the name of Giuliani and Bloomberg there. Now you've got an incredibly different political environment. Can you talk about that current political environment, how that changes? And how that helps or hurts the resiliency of New York?
Steven Roth, Chairman and Chief Executive Officer
John, that's a good question. And we think about this a lot, obviously. For all the issues that New York has, which is a political the political leadership and a political orientation, which is extremely liberal and left-leaning, homeless issues, other things like that, the best real estate city in the country right now is San Francisco. In each point, San Francisco is worse than New York. It's further left leaning, the homeless situation is worse, etc. So the political situation is important, but it's not definitive. It's not depository. So we think New York's resilience will continue. We think New York's infrastructure in terms of human infrastructure, cultural infrastructure, business infrastructure, finance, etcetera, is extraordinary, the best in the world, and we believe in its resilience. I would love to get Mr. Bloomberg, I'm his landlord, so we know each other very well. I'd love to get him back, but that's not going to happen.
John Guinee, Analyst
Great, thank you.
Operator, Operator
Thank you. And our next question comes from the line of Vikram Malhotra. Your line is open.
Unidentified Analyst, Analyst
My condolences to Haim's family as well. I hope everyone else is well and safe. Steve, maybe just a higher-level question. I know you've addressed this in prior questions. But you said many years ago that New York was sort of moving to South and West, given sort of Hudson Yards and other developments. If you were to just sort of have a high-level view of what work from home could do to the office market, maybe New York or more broadly, what would that be?
Steven Roth, Chairman and Chief Executive Officer
We think about that all the time. It's a very important question. In fact, I gave that question a couple of sentences at the end of my prepared remarks. So here's the way I see it. At the margin, there will be I mean now that we've experienced this at the by the way, we talked to all of our tenants, we even talked to all of our employees, there's a very small majority, which I guess includes Alex, and that prefer to be working at home. Most people are dying to get out of home into the office. So the difference is that working from home, you're in isolation. And the only benefit that I can see of working from home is you save the commute. And I guess, depending upon who you are and where you live, that could be an important thing. But in all other regards, in terms of the socialism sociality, the collegiality, the interaction, the creativity, the office wins is the winning ticket in every regard. If you are ambitious and want to get ahead and you work from home, you're not getting ahead. If you're in the office and you are performing with all of your colleagues, then you can get ahead. If you are a leader of a team of people, and they all work in they all work from home, and you can't have been in contact with them, it's an almost impossible job. So we find, in terms of controlling your employees and controlling, we find there's enormous number of benefits to the traditional work at home traditional office. I mean it's lasted for 1,000 years, it will continue. At the margin, there will be a little bit of an incremental nick. This is kind of like a trend; there are trends, they happen all the time in relation to crisis, and then they go back. The reaction to 9/11 was nobody wanted to rent space in the upper reaches of buildings because it was dangerous. And now the only space that the space that's the most valuable is the upper reaches of the buildings; so this will pass. At the margin, there are some people who want to work from home, continue to spend the day in their pajamas and continue to have their kids running around, but I don't think that's a trend that is going to impair the macro demand for office buildings nor impair values. I mean, for example, let's think about the densification. The densification in REIT, it went to a certain level and it went from whatever to, I don't know, now maybe the average densification is 160 feet or 170 feet, something like that. WeWork, again, trying to take it down to 60 feet. That didn't work. So anyway, that's where I am. I think the office is the right ticket.
Unidentified Analyst, Analyst
That makes sense. And then just on street retail, given sort of, again, the social distancing, maybe higher e-commerce penetration as a result of this. Can you give us your thoughts on sort of pricing power, meaning kind of rents holding up over the long-term on sort of your core upper fifth markets, Madison, etcetera, and for Haim, specifically, any thoughts on sort of what - where taking rents could shake out over the very near-term in these core markets?
Steven Roth, Chairman and Chief Executive Officer
Vikram, that's another good question. Look, I'll give you a perverse thing, which is a secret. I don't want this to get any to go around. I have said and I have written and you got to remember, we made the early call on the secular decline of retail five years ago or six years ago, and everybody laughed at us. And here we are. I have written that there are two huge problems with retail. The most important is that there are maybe two to three times as many square feet of retail space in the country as there should be. So I think, as I do the math, there's 50 square feet per capita, or I think the number should be like less than 20. So - and then, I said that it would take, I don't know, 15 years for that excess space to work off and evaporate. So in a perverse way, and maybe this pandemic is going to get us into alignment much more quickly. So we'll see. I don't think that the retail that the physical retail store is dead, but I do think it's certainly injured. I can't really give you math as to what's going to happen in the very short-term to rents. I can only tell you that they are down and they're going to and they are I have a negative outlook for rents over the short-term. Over the medium-term, I think there will be some adjustment for great property. I think great property will always be in demand. And I think Haim will tell you. Haim, will we ever get to the peak pricing that there was three years ago on fifth Avenue?
Haim Chera, Executive
I don't believe so.
Steven Roth, Chairman and Chief Executive Officer
And that is our firm view.
Unidentified Analyst, Analyst
Okay. Just last clarification; the 53% rent collection seems pretty strong given where we are in May. Can you clarify, is that 53% on average across office, retail, parking etcetera? Or could you just break that up between office and retail?
Steven Roth, Chairman and Chief Executive Officer
It is 53% on average. It's obviously much higher for office and lower for retail.
Michael Franco, President
Steve, let's just clarify, that from the 53%, what is retail? It's just retail.
Steven Roth, Chairman and Chief Executive Officer
No, no. I think Vikram, I think your question was for May collection, not the April.
Unidentified Analyst, Analyst
For May, yes. For May, specifically.
Steven Roth, Chairman and Chief Executive Officer
Okay. So the math is it's in the 20s for retail right now, which is tracking exactly what happened in April, and it's in the 60s for office with a weighted average of 53%. And I think that the exact math is, I think David told me this, this morning, that our collections in May are running $1 million, which is significantly insignificant, better in May than in April.
Unidentified Analyst, Analyst
Great, thank you.
Operator, Operator
Thank you. And our next question comes from the line of Manny Korchman with Citi. Your line is open.
Manny Korchman, Analyst
Maybe one for Glen. Glen, with the path to sort of coming back into the office and company is targeting what sounds like 50% for the near term, if you will, how do they think about either leasing or renewing renewal decisions in that context? So if you sort of, you're planning for half your workforce to be in, you don't know how long that will last, how do you make any kind of leasing decision in that environment?
Glen Weiss, Executive
Look, I think the answer is for the first, call it, six months, plus or minus, the market's going to be quiet as it relates to new leasing decisions, meaning people moving out of their existing building, we're expanding within their existing building. Renewals keep going because we have expiring leases and people need their leases. So we are in discussions on a lot of renewals. And with that being said, there is some action. We've been receiving some proposals during this shutdown for people looking to change their life and move to another building within our portfolio. But generally, I would tell you, during the ramp-up of getting back in, you're going to see slow demand for new deals and expansions.
Manny Korchman, Analyst
And I guess, more so from the question of those decisions more sort of from a focus level, how are they going to think about the number of square feet per person when the person counts are just so drastically off? I guess it's a question of how do they even think about how much space they need?
Glen Weiss, Executive
I think it's too soon to say. No one knows. I mean, we're going to get back into the buildings between the summer and the winter. I think things have to settle back in. We get back to normal, so to speak, and then people see how their table is set. I think right now, it'll not be fair to project how people are going to look at how much space they need, how many chairs they're going to fit per foot, etc. I just think nobody knows until we get back and people get settled back into their offices during the year.
Steven Roth, Chairman and Chief Executive Officer
Manny, the large tenants that I speak to, and I try to speak to as many as I can frequently. They are looking past this period. They don't really, they're really not focusing hard on saying, "Oh, my God, what a great thing, I can save 7,000 square feet of office space." That's not in their top of mind. What they're trying to do is get their businesses back. And they really basically, the ones I speak to, they want all their employees back. They want all the desks full, and they want to go back to where they were six months ago. And with respect to is by the way with respect to deals, by the way, Glen and David will tell you this, this is not a good time for a tenant to be making a deal other than a renewal or other than an important space need that it has. And it's not a good time for us to be bargaining with the tenant. So everything is going to come back to normal at some period, hopefully, within a year from now, and then we'll get back to business.
Manny Korchman, Analyst
And then, maybe flipping to street retail in a similar context. A lot of the larger deals we saw were probably more showroom in nature than a productive retail environment, and a lot of that was based on tourism and the like. I guess, do you guys think about a sentiment shift or a psychological shift among shoppers, where they're not going to go shopping as a pastime and so that showroom or flagship concept becomes harder to pitch to a retail tenant?
Steven Roth, Chairman and Chief Executive Officer
Haim?
Haim Chera, Executive
So I actually think the street retail format will prove to be more resilient and more important to the ecosystem of connecting with the consumer. I think e-commerce will continue to grow and gain market share. But I also think that street retail will prove more resilient than other physical retail formats, like the mall.
Steven Roth, Chairman and Chief Executive Officer
I think there could be counter-intuitively, I think there could be an opposite. My wife is a shopper, and she is very frustrated. She can't wait to get out and walk up and down Madison Avenue, walk up and down Fifth Avenue. So I think that there will be a when this opens up and the population, which has been shut down, they want to go out, they want to shop, they want to go to restaurants, they want to have their life back. So, I think this is not as dire as some of the commentaries I've read.
Michael Franco, President
I think they all just really want haircuts, but Michael has a couple of follow-ups.
Manny Korchman, Analyst
I had just two follow-ups.
Steven Roth, Chairman and Chief Executive Officer
And Manny, when you get your haircut, take one from me, please.
Manny Korchman, Analyst
Sure. I had two follow-ups. One was just on the density question, which I think part of the move to having much more dense populations was the cost of things. It allowed the tenants to be able to afford the rents paid because they were able to jam more people into more seats. How does that equation change in terms of you as a landlord being able to get the returns that you need and the tenant's affordability to act as they now have to take more space to fit the same number of people?
Steven Roth, Chairman and Chief Executive Officer
David, do you want to try that?
David Greenbaum, Executive
Again, I think we're focused, as it relates to that question, you're focused on a period of time, which is today. So today, people are talking about social distancing. Today, they're not talking about it. It's been mandated by the public authorities. So obviously, today, in an office, you couldn't bring back 100% of your workers, you couldn't fit them within the office and properly socially distanced. But as people, I think, Michael, are looking at long-term decisions for themselves. I think people are recognizing that, ultimately, it may take six months, 12 months or two years. We don't really know, as Steve said. Ultimately, we're going to have to find an antidote to the virus. When that happens, I think what we're going to be seeing substantially is effectively going back to much like we were. People are going to want to come to offices, as Steve said. And as it relates to some of the density that we've seen, nobody ever believed that we were going to get to 60 feet a person as some of the co-working companies had aspirations to densify. But in terms of what today is in our portfolio, the way we've seen both financial services, technology, other service companies in terms of changing the use of their space, do we expect that is going to radically, radically change long-term? I think our view is that we don't think so today.
Manny Korchman, Analyst
And then just a follow-up on the retail joint venture. Given the fact that only 50% of the tenants have paid rent, how does the cash flow distributions work within the venture to be able to afford paying the 4.5% on the preferred on your preferred security in that venture? What's the cash flow waterfall today with only 50% of rent paying tenants?
Steven Roth, Chairman and Chief Executive Officer
Michael?
Michael Franco, President
Yes. So look, the way the preferred is structured is that, as you know, we have two third-party pieces of debt on the portfolio as well on the venture. All the cash is effectively aggregated for purposes of paying the preferred. And so at the current time, there's sufficient cash to pay the preferred. To the extent that cash collections fall off at a point, that's not the case, and that will that never will accrue. But as of today, the preferred is being paid, and we think it will continue to be paid for the near term. But all if there's a deficit in one and there's excess in the other, then that cash is sort of aggregated across the different instruments.
Steven Roth, Chairman and Chief Executive Officer
I mean, the answer is that the preferred gets first call on the income. But the percentage of rent collection in the JV assets was approximately 60%, and that swung negatively by one big very creditworthy tenant who decided not to pay, which we will undoubtedly collect. So it's not as bad as you think the numbers are.
Manny Korchman, Analyst
Right. So there's more cash coming into the venture than it would be for the portfolio overall?
Steven Roth, Chairman and Chief Executive Officer
Let's hope.
Operator, Operator
Thank you. And our last question comes from the line of Steve Sakwa from Evercore ISI. Your line is open.
Steve Sakwa, Analyst
Most of my questions have been asked. But I guess I had one question just on some of the newer developments, like Farley and the work you're doing at Two Penn. What sort of changes do you need to make in order to deal with sort of the issues at hand today? And how costly might those changes be and kind of the design for the base building, maybe thinking about the elevators and some of the stuff that might take place on the floor, the air handlers and all that kind of stuff?
Steven Roth, Chairman and Chief Executive Officer
Who wants to handle that?
David Greenbaum, Executive
So Steve, thanks for the question. First, I would tell you is we've designed these buildings as what I will call forward, forward-thinking buildings. In terms of the air handling systems, in terms of the filtration systems, all of this pre-COVID was being engineered state-of-the-art in terms of having the ability to use the highest-rated MERV filters. There are other technologies that potentially are available. Some of them have not even yet been tested in the United States. There is an ionization type of technology as it relates to having the air flow through tubes. It's not enormously costly. In fact, it is relatively efficient. It's something that we're currently looking at. But first, we're working with, obviously, our engineering experts, thinking about the potential technologies like that. In terms of touchless entry systems, we have facial recognition systems in the portfolio. We have the ability to walk in the portfolio with your iPhone to get access through turnstiles, similar for visitors. So again, the types of systems that people are thinking about, in fact, our systems that pre-COVID, we have thought about the buildings themselves are being designed realistically for the next generation. And then the nature of the spaces, the communal spaces that we have designed in the building, obviously today, would not comply with social distancing. But again, we are designing these buildings not for the next 6, 12 or 18 months, we're designing these buildings for the long-term, and there is really no change that we would make to any of the communal spaces from a long-term perspective, whether it's the auditorium space, that's great space in PENN2, the Grand Stair in PENN1. These are spaces that we think tenants long-term will continue to want in the buildings. We think that the buildings have been designed spot on for the future.
Steve Sakwa, Analyst
And just a follow-up, Dave. Would that include things like large conference rooms? Or I know there was a point in time you were looking at large gym for kind of the Two Penn buildings. Do things like that still work in your mind today longer term? I know they don't short-term, but...
David Greenbaum, Executive
Yes. And, yes.
Operator, Operator
Thank you. And I'm not showing any further questions at this time. I would like to turn the call back to your speakers.
Steven Roth, Chairman and Chief Executive Officer
Thank you. Thank you, everybody. We're grateful for everybody joining us this morning. Please don't get too comfortable working from home, Alex, that's isn't you. We need you back in the office and paying rent in our buildings. Please stay healthy and safe. Our second-quarter earnings call will be on Tuesday, August 4, and we look forward to your participation again. Take care, stay healthy.
Operator, Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.