Earnings Call Transcript - VNO Q3 2020

Operator, 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. 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.

Catherine Creswell, Director of Investor Relations

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, Chairman and CEO

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, it is our hope that we will unite as a country in pursuit of American values and prosperity. Before Michael gets into the business review and the numbers, let me make a few comments. These are anything but normal times. Actually, the COVID-19 pandemic is a once in 100-year event. The activity level in New York and all other American cities is a fraction of normal. For example, office building occupancy in New York is currently in the teens. There is a tension between the very serious COVID health risk and related government protocols and lockdowns. And everyone's desire to get back to work, get back to school, get back to their favorite restaurants and get back to normalcy. And for sure, normalcy will return. It's just a matter of how long it will take. And I believe return to normalcy will be the order of the day in months, not in years. The city generally feels normal in the residential areas, whether it be Tribeca or the Village or the Upper East or Upper West Side. The commercial areas, however, feel quiet. And that obviously negatively affects restaurants and retail. Most importantly, we are hearing from all our tenants that Zoom fatigue is real, productivity is now, and CEOs want their employees back in the office. But again, that will take some time. We are very proud of our corporate teams who are working really hard and doing a brilliant job of keeping the trains running on time. And we are especially proud of our building teams who have executed our industry-leading protocols and enhanced sanitation to make our buildings ready and safe for our tenants. Current liquidity is a strong $3.67 billion, including $1.49 billion of cash and restricted cash and $2.18 billion undrawn under our $2.75 billion revolving credit facilities. During the quarter, we repaid $500 million on our revolver that we had drawn in the spring at the outset of the pandemic. With respect to the closely watched metric of rent collections. In the third quarter, rent collections, excluding deferrals, improved 500 basis points to 93% driven by a significant pickup in retail collections during the quarter. Details of third quarter collections are: we collected 95% of office rents, 97%, including agreed to deferrals; we collected 82% of retail rents, 85%, including deferrals, which amounts to 93% on a combined basis, 95%, including deferrals; year-to-date, we have deferred $30.9 million in rent and abated $8.8 million, with rents that we have agreed to defer generally scheduled to be repaid over the course of the next year. We continue marketing 555 California Street and 1290 Avenue of the Americas. There is active interest from investors and widespread appreciation for the quality of these assets. But given investor caution, it does not look like we're going to achieve our original top tick pricing objective. 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 and extension of Penn Station with its majestic 100-foot skylight will be opening to the public at year-end only weeks away. At our adjacent building, we will be delivering Facebook 730,000 square feet in phases beginning in the first quarter of 2021. Our transformation and redevelopment of the 0.5 million square foot PENN1, 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 PENN1's 1.8 million square foot sister, PENN2 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. And we are highly confident that each of our businesses will rebound to pre-COVID levels. Now to Michael.

Michael Franco, President

Thank you, Steve. Good morning, everyone. I too hope you all are safe and healthy. I first will cover our financial results and then go into a few comments on lease capital markets. Our earnings for this quarter reflect a number of items, most of which were known or should have been anticipated. 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 noncash one-time write-offs: $0.11 from the temporary decline in income of what we call our variable businesses, which include the Hotel Pennsylvania, the Marks Trade Shows, Signage and BMS, which Steve had laid out for you in our first quarter earnings call. $0.11 for retailer bankruptcies, namely JCPenney and Topshop, and tenant account receivables write-offs; $0.07 from noncash straight-line rent write-offs; 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 is primarily due to the pandemic. While the headline same-store NOI numbers are negative on their face, 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 and our share of equity, 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. As Steve said on last quarter's call, on the pandemic to subside and employees return to their offices and tourists return, we are confident that our variable businesses will return to prior operating levels. Now turning to the leasing markets. Not surprisingly, as you would expect in this COVID environment, the leasing market basically remains on pause. Tour volume has ticked up, and we do see more tenant activity in the market. However, companies are continuing to take a wait-and-see approach and are focused primarily on getting their employees safely back to the office. We expect modest new leasing activity through year-end with renewals dominating the activity. This dynamic likely won't change until companies return fully to the city and really focus on growth and future space needs post-pandemic. Some of the space is rising, and thus conditions will likely get worse before they get better. Fortunately, we have the wherewithal to navigate through these market trends. In New York, our office buildings remain full at 95.8% occupancy. Importantly, as the market recovers from the COVID pandemic, our New York office expirations for the end of 2022 average a 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 2 very large important leases this quarter. The 730,000 square foot Facebook lease at the Harley Building, which we discussed on our last call, and the 633,000 square foot renewal with NYU at One Park. These leases solidify both buildings for the long term, with almost no year-in and year-out future capital requirements. Both of these leases are also sterling credits and reflect the strength and diversity of the industry in New York, with tech and healthcare being 2 of the fastest growing. In total, we leased 1.453 million square feet in the quarter at an initial rent of $92.74 per square foot. The second-generation gap and cash mark-to-market increases, which exclude the Facebook lease, were a very healthy 26.2% and 7.7%, respectively. We have 220,000 square feet of leases in negotiations and another 850,000 square feet in the newer pipeline, all a healthy mix of both new and renewal leases. In San Francisco, in the quarter, we executed a renewal with one of our major financial services tenants for its 90,000 square feet and are finalizing another major renewal with a company that has been in the building forever. Both of these renewals will produce strong mark-to-markets on the renewals. The retail environment remained difficult, exacerbated by the slow return of office workers and residents in the city and the lack of tourists. Tourism is not expected to return until at least the latter part of 2021, putting further strain on retail sales. Growing retail vacancies, combined with the plight of tenants in the market, will continue to put downward pressure on retail rents. Despite this difficult environment, we executed 25,000 square feet in the quarter, including a lease with Armani on Madison Avenue and have leases out both new and renewed, aggregating an additional 50,000 square feet, indicating that retailers recognize that New York City is still a key market where they want to be. We 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 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. There's going to be an iconic landmark for the city, serving commuters and residents for the next century. PENN1 is progressing on plan with completion of the entire project expected in 2022, and PENN2 will soon follow. The new 33rd Street Long Island Rail Road Entrance will also open on schedule in December, further enhancing the experience for the years to come. The district transformation is well underway and when all of our redevelopment and streetscape improvements are completed, it is going to be a 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 to see the latest construction images and join the progress we're making on these projects. I know it can be hard for people to look beyond the current difficult and uncertain environment, but in 1 year, there will be thousands of new creative and talented employees of 2 of the tech giants populating 1 million square feet in our buildings, and the knock-on effects will be significant, both for our office and retail assets. We're already seeing high retail interest in the district following these lease announcements. At Harley, we have signed 11 retail leases and have many other letters of intent in process as tenants recognize the uniqueness of the space and the volume of foot traffic that will course through there daily. As all these redevelopments are completed and new leases kick in, they will indeed generate large accretive earnings. Turning to the capital markets now, our recent refinancing of PENN11 demonstrates that the financing markets for office are now wide open and constructive, with capital available at record low rates for high-quality, well-leased buildings and strong sponsorship. The recent refinancing of Alexander's apartment complex and the quotes we've received for other properties further validate this. Within the market, we'll only continue to become more attractive over the next 12 to 18 months as lenders become more active and compete for business. We'll continue to take advantage of the favorable market to term out our debt at low rates and remain focused on making sure our balance sheet, which could build to weather any environment. With that, I'll turn it over to operator for Q&A.

Operator, Operator

Our first question online comes from Emmanuel Korchman from Citi.

Emmanuel Korchman, Analyst

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

Michael Franco, President

Yes. Manny, I'll start and then Steve can join in. The interest has really not wavered at all. I think as 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 in Manhattan West, going to our assets and throughout the city. And so the interest really has been unabated throughout the pandemic. And so all the tenants are still in dialogue with us. The leases we've signed, the LOIs in process, the rents are unchanged. There may be a little bit more TI on a few deals, respectively. But overall, I would tell you it's pretty consistent.

Steven Roth, Chairman and CEO

I have a more positive perspective on this. I've named this project 'the funnel' because a large population from Hudson Yards and Manhattan West, which are significant developments with substantial office populations, will need to pass through this retail corridor to access the trains and commuting subways. We anticipate considerable activity as a result. Retailers recognize this and are aware of the potential. This is currently the best retail opportunity in the city by a significant margin, and retailers are aware of that. Therefore, we have not lowered our asking prices. In fact, as this project nears completion, and considering the presence of two tech giants and one million square feet nearby, we are very optimistic about this space. Do you have anything to add?

Unidentified Company Representative, Company Representative

I agree. Farley is a first of sunshine in the cloudy retail environment, and we have nothing but high hopes for the productivity when that opens, and we're extremely optimistic about it.

Steven Roth, Chairman and CEO

There is an additional project related to the train operation, specifically the Long Island Rail Road Concourse, where we manage the North side, located in PENN1. We are nearing the completion of a deal to expand the concourse, making it significantly wider, taller, and more modern on the MTA side, while also gaining control and ownership of the south side of that concourse. This means we will own both sides. It's also a $100 million project, which may not be massive, but it represents another exciting enhancement to our portfolio in the Penn District.

Emmanuel Korchman, Analyst

Great. Realize that your lease expirations are light in the upcoming future here, but are there any other large spaces that you're watching, maybe something similar to New York and company where the tenants are having their own struggles, and we might just not be thinking about potential on move-outs or give-backs?

Steven Roth, Chairman and CEO

Will you take, Glen?

Glen Weiss, Executive

It's Glen. Now we feel really good about our really modest role over the next 2 years, about 1.6 million feet. Nothing of large block size other than New York and company. And we got some space at 887512 West 22nd Downtown 40 Fulton, but nothing of large consequence. And in all of those assets, we're actually seeing much better activity right now than we had been, call it 2 or 3 months ago. So we feel really good about the expirations for the next 2 years.

Emmanuel Korchman, Analyst

And Glen, could you share any potential updates or prospects for the Home Depot space they will be vacating on max?

Glen Weiss, Executive

The Home Depot lease extends until 2025. We have reached out to them several times about the possibility of recapturing the space. A few years ago, we had a discussion about what they would pay us to give back the space, and they were also interested in knowing what we would compensate them. The current situation is that the lease runs until 2025, and it is not an immediate concern for us. Nonetheless, we have received interest from several notable retail tenants regarding that space. We are unsure how that will develop, but we are financially secure for the next five years.

Operator, Operator

Our next question on the line comes from Jamie Feldman from Bank of America.

James Feldman, Analyst

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 like 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 risk do you think this proposes to the future of the city and its ability to recover?

Steven Roth, Chairman and CEO

That's a significant question, and if I were smarter, I might avoid it. However, here’s my perspective. This election is historic, and while we can’t predict the outcome, it’s clear that a sweep is not in the cards, which I believe is a positive development for most people. I've been approached by various political leaders in New York to talk to Washington about the urgent budget issues facing New York and other major cities. Unfortunately, there hasn't been any progress on this front. The standoff in the government concerns what some view as bailouts for cities and states, and a change in government would likely alter the situation significantly. If a new president is elected, it will affect the dynamics, especially if the Senate remains under Republican control. Importantly, city and state governments across the nation must maintain balanced budgets and address their budget deficits. Some in Washington want states and cities to align their budgets with their revenues, while others advocate for continued spending supported by federal assistance. The resolution will likely be a mix of both approaches. The Democrats have promised to reverse the Trump tax plan and the SALT deduction, but I find that highly challenging. Regardless, cities and states will need to bring their budgets under tighter control alongside some form of support. I don't have much more information to offer beyond that.

James Feldman, Analyst

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 in keeping the city healthy?

Steven Roth, Chairman and CEO

The answer is that the thing that I worry about most is stupid legislation such as happened in 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 bad news 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 tension in all of this stuff is pretty enormous, and they will play out over the next 6 months or a year.

James Feldman, Analyst

Okay. And then as you guys made the comment earlier about the right real estate or the right positioned 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? What do you think the winners and losers are going to be coming out of the pandemic in terms of locations?

Steven Roth, Chairman and CEO

I believe we have the highest quality locations available, possibly the best in the country and maybe even globally. However, the retail real estate we own, which is exceptionally well-located, will see decreased values and lower rents due to market conditions. It will take time for these changes to unfold.

Operator, Operator

Our next question on the line comes from Steve Sakwa from Evercore ISI.

Stephen Sakwa, Analyst

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. I'm just wondering if you could talk a little bit about what the tenants are telling you, what sort of space requirements or space densities that they are planning. Of that 850, how much of that new versus renewal? And again, trying to just get a sense for how tenants are thinking about new space versus old space and how they're planning it?

Glen Weiss, Executive

Sure. 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. We get a lease out of about 100,000 feet with a nonprofit tenant, which will be new space in Midtown. We just got a proposal over the weekend for 45,000 feet with an entertainment firm, new tenant. We're proposal stages with a 300,000-foot tenant in Midtown, looking for a new space. We also have an existing large tech company looking to grow again by another 60,000 to 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 that the pandemic can come and gone? So I have not seen a real change in strategy as it relates to space design. But I think that's to be determined, to be continued dialogue. But certainly, my sense right now is, if you have the right space and quality buildings, people are in a real flight to quality more than ever, and that's why we're seeing the activity we're seeing right now.

Steven Roth, Chairman and CEO

Jim, I'll tell you honestly. 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. When the tragedy of 9/11 happened, everybody said that nobody is going to rent view space up in the height of the buildings because of the 9/11 tragedy and experience. Well, that lasted about 2 or 3 years. Now that view space has reverted to the norm, which is by far the most valuable space. So it will take time for all this to shift out. There is a tension now between office work and work from home. Some surveys of some of the employees say one thing, while the survey of all the CEOs say other things. In the end, it's our firm's feeling that there will be marginal work from home and the office will be the main place where work, creativity, growth, and business is conducted.

Stephen Sakwa, Analyst

Glen, maybe just to continue on the leasing. Are there any comments you can make about sort of net effect of rent changes that you've seen maybe over the last 6 months? I realize it's not all in face 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.

Steven Roth, Chairman and CEO

Yes. I mean Michael said in his remarks, it is definitely slower in terms of activity. I don't think we yet know at all where rents are going or where concessions are going. And so 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's going to be an adjustment to rent, TIs, etc. I'm not smart enough to predict exactly where those are going to be. I think when everyone gets back in their seats, we see demand again. We see deal making again, all the much better feel a bit. I think right now, the deals you're hearing about on the street and TIs are certainly up. I think rents have generally held steady to date. That's more the concession packages. But I think it's way too early still, Steve, to predict anything until - well into next year when people start coming back, and we get into a normal deal mode.

Michael Franco, President

Steve, we're not really on a normal functioning market, right? We're in this unique period where companies are not back in their offices. So the deal-making is down. As you would expect, in some sense, it's actually surprising. It's as active as it is, even most people are not in the cities. But so people have to come back to a normal functioning environment. In this period of time, there are going to be additional concessions shared, right? That depends feel like they get either extracted or are they landlords want to make the deals. But I think when there's a return to work, if you get a fully functioning market, I think you'll start to get a better sense of what rents are going to do. And I wouldn't extrapolate too much either way what's going on here.

Operator, Operator

Our next question online comes from Alexander Goldfarb from Piper Sandler.

Alexander Goldfarb, Analyst

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 a disconnect. I mean you've been in New York a long time. You remember the '70s, when the business community rallied together with the city to rebuild New York. This time around, that dynamic does not seem to be in the cards. The mayor has definitely stayed out of view. The governor seems to oscillate at times, being against it, and other times 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 potential 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 spaces they have and not really realize the impact of people like you who are paying real estate taxes and trying to generate growth for the city, how it's not helping?

Steven Roth, Chairman and CEO

Let me turn the question around, okay? Politicians are politicians. They hopefully work for the business community. They also work for the population and the voters. They don’t necessarily always make decisions and have policies that we agree with. But what I look at is that New York is absolutely the greatest city in the world, and it's one of the 3 or 4 great cities in the country. There will always be a New York. It will ease slow a little bit and it will go through cycles. But it is always the dominant place, the dominant city in the country. Its infrastructure is just so massive, it can't be replicated. The infrastructure in terms of its talent, in terms of its culture, in terms of its business community. The interesting thing is that as it cycles, if you have the opportunity to buy assets at very low prices per pound, and let me use the most important word: 'steel' assets at very low prices, that's the time to jump on in. Look at our stock price and the stock price of our peers, and you interpolate how much per square foot the stock price represents, the building, the assets that are behind the stock price. The value is great. So it's sort of oxymoronic. As New York gets a little bit out of favor, which is the slant, I think, in your question, that seems to me that we have time to buy assets and to buy stocks. So New York is going to go through a headwind. The political situation in New York is going to change. There's going to be an election. The reality of the budget, the reality of the importance of the business community, the reality of the importance of having a growing tax base will win the day. But this is a unique time because the assets are really, really cheap.

Alexander Goldfarb, Analyst

Okay. This brings me to my second question about the 555 and 1290. I believe you mentioned earlier that the pricing discussions didn't quite meet your expectations. These are clearly valuable cash flow assets, and they hold even more significance today. What are your current thoughts on these assets? Are you leaning toward recapitalizing the pair, considering an outright sale, or just keeping everything as is without any changes to the financing?

Steven Roth, Chairman and CEO

The answer to that question is, yes.

Alexander Goldfarb, Analyst

Steve, is there anything more that you can add?

Steven Roth, Chairman and CEO

The answer - look, the answer is that, obviously, these are important assets. Obviously, they will command acceptable values. It may not be the top, top tick value, but they will command acceptable values. And the liquid - 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. But let me just - 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.

Operator, Operator

Our next question on the line comes from John Kim from BMO Capital Markets.

Piljung Kim, Analyst

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, President

Look, I think that, John, if we just look at the trend line and when companies either may bring their workers back or when theaters may open, I think that's a reasonable assessment. And obviously, in a fluid environment, but I think the latter part of '21 is a reasonable assessment. So that obviously means foot traffic is down and therefore, retail sales are 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 we have pretty good credit in the balance of our portfolio. And as I said, we are notwithstanding that environment. We signed 1 lease on Madison Avenue. We're in negotiations on another. So retailers there and stable over the 731 and then there are some other assets as well. Retailers are taking the tires, right? The strong retailers they have balance sheets. They take the other side, which is this is an opportunity, right? Rents are down. We can now get the best basis at attractive prices. We can make money when the markets return. They have to believe the markets that return, everybody does. New York will come back. As soon as people can travel again, I don't know if we're going to write 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, etc. 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 hind to that. But I think we are well positioned in terms of our assets on a relative basis.

Piljung Kim, Analyst

Can I ask a similar question as far as the timing of its trade shows reopening at the market? Would it also be a second half '21 time frame?

Michael Franco, President

Yes. Yes. So the big trade show is real estate, which normally is June, we pushed out to September, and we did that a few months ago. Just to a conservative view, give a time. Our tenants are anxious for that show to happen, and they're planning, they're excited about it. So we feel like that will happen. It's an important show. And so again, that as well as you already showed the third quarter of '21.

Piljung Kim, Analyst

If I could squeeze one more question in. Is the 850,000 square foot leasing pipeline, does that include the large anchor at PENN1 that you discussed in the last call?

Michael Franco, President

I think you're referring to PENN2 maybe. And the answer is, no.

Operator, Operator

Our next question on the line comes from Nick Yulico from Scotiabank.

Josh Brown, Analyst

This is Josh Brown with Nick. Do you have any insight into details behind what the build-out at Farley ultimately will look like for Facebook? Are they designing that space any differently because of COVID? I think you could just talk about the TIs that were given on that deal and how that compares with TIs historically?

Steven Roth, Chairman and CEO

No. That's something that we're not going to get into.

Josh Brown, Analyst

Looking at retail, how are you considering the retail business today compared to when you established the joint venture? When you brought HIMA into the fold and mentioned that the disruption in retail would create some valuable opportunities, are you seeing any of those opportunities now? How can the business benefit from them?

Michael Franco, President

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. Retail was flying high really throughout the city, and there was leasing done and rents pushed, and I would call it fringe locations, right? Well, as a result of not just this, but even happening before this, right? That started to contract over the last couple of years, our locations were impacted. And the owners that had debt on those assets. They have either lost or they're going to lose those assets. In many cases, those are not going to be interesting. I think our focus has always been on prime, prime, high street retail that there's going to be demand even more difficult environment 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 calls and lenders saying, look, 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 to date, we've not seen anything of scale or quality that fits our bill. But they're going to come.

Steven Roth, Chairman and CEO

The larger they are, the harder they fall. The most distressed categories of assets are condos in New York, retail in any location, and hotels. Think about it for a moment. The condo buyers have gone silent, and prices are plummeting. Most hotels are closed, resulting in zero revenue. We know the challenges in retail. Opportunities will arise, starting with loan foreclosures, and these categories will see the most distress. It will be challenging to find a top-tier office building that was once worth $1,000 a foot, now available for $500 a foot. We are certainly in a position to acquire such assets. Part of our strategy is to pursue acquisitions in distressed markets like this. We are attentive and monitor all opportunities. We have the financial capacity to act and are quite optimistic about the potential opportunities, although it may be well into next year before they truly begin to emerge.

Nick Yulico, Analyst

It's Nick. I have a quick question about the sequential change in cash NOI for the New York office segment, which I know you mentioned in the Q. I can't remember if it's in the supplemental information or not. You did have a write-off of a tenant receivable, but what other factors contributed to the sequential decline in office cash NOI this quarter in New York?

Steven Roth, Chairman and CEO

I will now pass it over to Joe and Tom. If you don't have the details, we can discuss this later.

Joseph Macnow, Executive

Joe here. I would prefer to discuss this offline with you, Nick, to provide a more accurate answer. It's important to mention that the third quarter saw accounts receivable reserves that were more than 2.5 times those in the first quarter. This is a detail we need to disclose, but I would like to give you a more precise breakdown later.

Operator, Operator

Our next question from the line comes from Rick Skidmore from Goldman Sachs.

Richard Skidmore, Analyst

Steve, you mentioned the CEOs seeing Zoom fatigue and loss productivity, etc., 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?

Steven Roth, Chairman and CEO

I'll share our experience to provide some context. Most of our competitor companies have fully returned to office work, with all making this decision through directives. Our stance aligns with theirs in that we are in the office business and want our employees back in the office to restore normal operations. However, we approach this differently; while they have all returned to the office, we have implemented a team-based rotation. We have divided our workforce into an A team and a B team, which limits the number of employees in the office at any one time. Importantly, we have made it clear that if any employee feels uneasy about the health risks associated with returning to the office, they are welcome to continue working from home. This policy won't last indefinitely. Conversations with many CEOs reveal a reluctance to open their offices without considering employee concerns about health risks, which we must navigate currently. There is an awareness of various factors at play, including childcare and other responsibilities. For studios, it is challenging to instruct employees to return to the office if they harbor health concerns. The resolution of this situation depends largely on the medical field's progress. The unique circumstance we find ourselves in has resulted in a global effort within the medical community, with professionals working tirelessly on this issue. Preliminary reports suggest that vaccines and treatments may be available sooner rather than later. Until employees feel safe, it is difficult to encourage them to come back, and most CEOs are aware of this. Thus, we believe this is fundamentally a health issue that needs addressing before we can fully return to normal. As for our response, we maintain close communication with our tenants on a daily and weekly basis to understand their needs. We are also enhancing our buildings with improved air filtration, temperature screenings, sanitation, and other protocols. Major landlords are implementing similar standards, ensuring our buildings meet industry benchmarks for safety. Tenants can be assured that our facilities are prepared for their return. Currently, we are in a waiting phase, relying on the medical community to resolve these challenges. Additionally, it's clear that many people, including our colleagues, are eager to return to work, school, and regular activities like dining out. There is a strong desire for normalcy, but the ongoing health risks complicate this wish. The message is complicated by the widespread coverage of health concerns in the media, making it tough to dismiss these worries.

Operator, Operator

Our next question on line comes from Daniel Ismail from Green Street.

Daniel Ismail, Analyst

Great. Steve, referring to your earlier comments about seeking distressed assets, one growing area in the office sector has been life science. Would you agree that life science values in New York City are probably not under distress, and as a result, they may not be part of your targeted acquisitions? Additionally, is there any chance for expansion in that area within your current development pipeline?

Steven Roth, Chairman and CEO

Daniel, the question was funny. I think you said what about life sciences. The answer is that I don't know. We obviously, we're aware of the life sciences segment. We have sort of experimented in it, put our big toe into it a little bit. It's an attractive segment. It's actually a small segment in New York. There are other 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 an entry point and are looking for an entry point. To buy into the life sciences industry at distress is something that's just not available now. So basically, we have lots of assets. New York is a potential location for a large and important cluster of life science assets. We have the universities. We have the talent, etc. All I can say is, it's something that we're aware of. It's something that we're looking at. It's not easy to enter, and we don't believe that there will be a distressed opportunity in that segment.

Daniel Ismail, Analyst

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

Steven Roth, Chairman and CEO

Yes, probably not. There are buildings that are better suited to that. Actually, most of the success in this industry is done by ground-up development that are suited for that use. It's actually more efficient to do ground-up development rather than retrofit. PENN1 and PENN2 would not be candidates for a retrofit, other buildings that in the Penn District would be much better candidates, but the ideal thing would be to do ground-up development.

Daniel Ismail, Analyst

Okay. I have a quick follow-up. The signage business is a relatively small portion of your overall operations. Do you have any thoughts on how the signage business might recover to pre-COVID levels?

Michael Franco, President

What was the question?

Steven Roth, Chairman and CEO

The signage business.

Michael Franco, President

Yes. The question was about the signage business, which is relatively small, and guidance on its recovery to pre-COVID levels. It is particularly relevant in Times Square, where we have less presence than before our retail joint venture. This area requires significant wall space and, with reduced tourism, advertisers have scaled back. However, I anticipate that this segment will rebound quickly once tourism returns. We have multiple long-term leases in the Penn District and Times Square. I am specifically referring to the aspect of selling additional signage. I believe that once tourism and workers return, we will see a return to pre-crisis levels.

Steven Roth, Chairman and CEO

Daniel, we don't look at the signage business as a dabble or an unimportant business, okay? It's an important business. We believe we have the largest position of signs in town. We have a very, very, very competent organization to handle that business, which is namely the interaction between us and any 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 up on mind. We think we have the best business in town, and we are certain that it will rebound when things get back to normal.

Operator, Operator

Our next question on line comes from Vikram Malhotra from Morgan Stanley.

Vikram Malhotra, Analyst

Just maybe first on street retail. Can you specifically talk about the prospects and potential for kind of your vacancies on Fifth Avenue, the Masimo space, specifically in light of one of your peers recently signing a deal there. For what I understand, it's probably in the low 2,000s at grade in terms of rents. Maybe just give us the sense of the potential prospects, and where do you see rents shaking out at grade on Fifth Avenue?

Michael Franco, President

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 coming into the Paramount space; we view as a positive. We currently have Harry Winston in our St. Regis asset. They had a 15-year term with us. That was always intended to house one of their other brands and temporarily hold Harry Winston. So we see them moving across 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.

Operator, Operator

Okay. Great. And then just - I apologize if you covered this, but any update on the ground lease at Penn, specifically? And can you talk about just prospects at PENN2 specifically sort of large anchor tenants?

Steven Roth, Chairman and CEO

The ground lease reappraisal at 1 Penn is set for 2023. While I don't want to speculate on the specific outcomes, it's clear that the situation is moving in a positive direction for us. Regarding 2 Penn, we've mentioned before that there is a significant pending lease with Madison Square Garden for their headquarters. They have been tenants in that building for a long time, and since the building is situated directly above Madison Square Garden, that lease is currently on hold due to the shutdown of their operations. We are very optimistic about the potential of both PENN1 and PENN2 for several reasons. Firstly, we believe the location is ideal. Secondly, we think the amenity packages and the transformations we're implementing in both buildings will be unique and leading in the industry. Glen and his team have shared our plans for 1 Penn and 2 Penn with the market, and the response has been extremely enthusiastic.

Vikram Malhotra, Analyst

Okay, great. And then just one last question, Steve, you’ve mentioned how New York has evolved over the years. Considering the rise of co-working and WeWork, which was quite popular, along with the possibility of more remote work, do you expect any adjustments in office lease structures, such as terms, tenant improvements, or modifications, due to these cyclical and possibly long-term changes?

Steven Roth, Chairman and CEO

I'd say one thing that we've learned from this pandemic is that leases are a wonderful thing. Long-term contracts between well-capitalized parties are a wonderful thing. They're very protective. Most of our tenants are high-quality companies. Very long-term commitments, and we feel very good about those. Most of that will not really change. In terms of the smaller tenant experience, it's fair to say that a lot more changes have been managed in a shorter-term and more flexible manner. But again, our impression is that the high-quality long-term deals will prevail and a very strong resilient market will emerge.

Operator, Operator

Our next question on line comes from Manny Kortman.

Michael Bilerman, Analyst

It's Michael Billerman here with Manny. I wanted to revisit the discussion about the office environment. I agree with your views on returning to the office. Personally, I have been back in the office and feel much better than working from home. However, I'd like you to compare the situation to the mall business, which you wisely exited before it deteriorated further, thus protecting shareholders from significant losses. Why wouldn't the office space market face a similar fate as the malls? Initially, people believed that consumers wanted the mall experience to shop for items in person, but then technology provided an alternative that made that experience less necessary. So, why do you think what happened to malls won't happen to office spaces?

Steven Roth, Chairman and CEO

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. Do you understand what I'm saying?

Michael Bilerman, Analyst

Yes. No. And that's why I'm asking. The market is, I don't agree with you on the future of office. But the market is telling us a different thing.

Steven Roth, Chairman and CEO

The answer is that we discuss this every day. It was unimaginable that hundreds of billions of dollars in mall values could be lost, but it has happened. It seemed impossible that all automobile companies could fail, but then Tesla emerged. We take your question seriously and reflect on it daily.

Michael Bilerman, Analyst

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

Steven Roth, Chairman and CEO

I believe that working from home, especially in a distracting environment like a kitchen table with children around, is not an ideal situation. For those who are ambitious and want to progress in their careers, being in the office with colleagues is essential. It's challenging for a manager to oversee a team of 20 people if they are all working from home. Managers benefit from having their teams in the office for better interaction. The human condition favors collaborative work in offices, although there may be some flexibility in the future. The advancement of technology like Zoom has allowed businesses to adapt during shutdowns, enabling them to keep operations running smoothly. While occasional remote work may happen, the fundamental value of office work remains important. This means that higher-quality assets in prime locations will continue to do well, while lower-quality assets in less desirable areas will face challenges. There is uncertainty in the current situation that management must remain cognizant of and address daily.

Operator, Operator

Our next question comes from Michael Bilerman.

Michael Bilerman, Analyst

I appreciate those comments. My second question is about 555 and 1290. You mentioned that it's important to liquefy those assets for your future plans. Can you elaborate on why liquefying them through refinancing, joint ventures, or outright sales is crucial? Is it related to a portfolio repositioning strategy, achieving good pricing for those assets, or extracting cash? I want to understand why these two assets hold significant importance for your future plans regarding their liquefaction.

Steven Roth, Chairman and CEO

I don't think I used the word important. We have identified those assets as ones we would like to exchange for cash. It's straightforward. Much of it relies on the structure and the specifics of whether to sell everything or just part of it. We continue to manage them, potentially through joint ventures or refinancing. We have significant equity in those assets, and we intend to reclaim that equity. Once we have the cash, the decision on what to do with them changes. Our perspective is that there will be more advantageous places to invest that cash for growth and to enhance shareholder value compared to holding those assets over a 5 or 10-year period. Additionally, my analysts have been urging me for the past decade to sell 555, but while we held off on that sale, its value increased by $1 billion. Perhaps its time has finally arrived.

Operator, Operator

And our last question comes from Steve Sakwa from Evercore ISI.

Stephen Sakwa, Analyst

I have two quick follow-ups. I noticed that operating expenses changed noticeably between Q2 and Q3. I assume that this is related to the reopening of the building. Would you say that Q3 is a reasonable run rate to consider looking ahead until utilization rates increase significantly?

Michael Franco, President

Yes.

Steven Roth, Chairman and CEO

We just talk about...

Michael Franco, President

Operating expenses.

Stephen Sakwa, Analyst

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

Michael Franco, President

So actually, could you repeat that at the end?

Joseph Macnow, Executive

I can hear. Michael, it's Joe. Let me handle that one. Yes, you started in the fee income section, Steve, but it gets eliminated in the minority interest section. So really, it didn't benefit the bottom line $0.01.

Operator, Operator

We have no further questions at this time.

Steven Roth, Chairman and CEO

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 a great day.

Operator, Operator

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