Earnings Call Transcript - VNO Q4 2020

Operator, Operator

Good morning, and welcome to the Vornado Realty Trust Fourth Quarter 2020 Earnings Call. My name is Karen, I'll be your operator for today's call. This call is being recorded for replay purposes. All lines are in a listen-only mode. Our speakers will address your questions at the end of the presentation, during the question-and-answer session. 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 fourth quarter earnings call. Yesterday afternoon, we issued our fourth quarter earnings release and filed our annual report on Form 10-K 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-K 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, 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 Chief Financial Officer. 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 continue to be safe and healthy. Before Michael gets into the business review in the numbers, let me make a few comments. Notwithstanding that this is a new year, 2021 still feels a lot like 2020. The COVID pandemic remains a significant health risk, normal life continues to be disrupted, gatherings and travel are still restricted and office building occupancy remains quite low. But there is light at the end of this long tunnel. Scientists and pharmaceuticals around the world have worked at warp speed. And with the rollout of various vaccines expected to accelerate in the coming months, we expect New York to begin to rebound with office workers and tourists returning in the second half. While New York's recovery will take time, the city remains a magnet for talent, as evidenced by leading companies renewing their leases and making large new space commitments even during the pandemic. For all the talk about working from home, I continue to believe that our natural human social inclinations, and the pent-up demand to interact, gather and experience all the city has to offer will carry the day. When life returns to normalcy, the many positives of having employees working in the same space, together with their colleagues will become self-evident. In the end, I believe that working at home in one’s kitchen, alone, day after day, week after week is not a long-term proposition. We have a new administration in Washington, which is committed to push through significant additional stimulus, and New York will certainly get its fair share. These dollars and the potential to modify or partially reverse those challenging austerity measures will greatly benefit New York and other large cities. Despite 2020 being one of the most challenging years in our lifetime, we have made significant progress to position Vornado for future growth. In 2020, we closed $1 billion of apartments at 220 Central Park South, which was added to our cash balances and enhanced our financial strength. Remember, we are building Farley and PENN1 off our balance sheet without debt. In December 2020, the grand new Moynihan Train Hall opened to the public to rave reviews, further cementing PENN as the Transportation Center of New York, and our Penn district as the bull's eye. Vornado was honored to be a major participant in the Moynihan public-private partnership. In 2020, at the height of the pandemic, we completed our lease with Facebook for all 730,000 square feet of the office portion at Farley. This lease was the largest office lease in New York last year. The first phase of Facebook's space was delivered in January, and the remainder will be delivered later this year. The new Long Island Rail Road 33rd Street Entrants situated between PENN1 and PENN2 also opened in December. Its design is futuristic, unique, and exciting, and that is intentional. In December, we finalized our agreement with the MTA to develop the Long Island Rail Road Concourse. The retail stores on the North side of the Concourse are ours and season our PENN1 footprint. This project will double the width of the Concourse, relieve overcrowding, raise the ceiling to a grand 18 feet, and create vastly improved Concourse for the hundreds of thousands of commuters who use it each day. Construction is now underway and our retail has been taken out of service. As part of the deal here, we will gain long-term control of an additional 22,000 square feet of retail on the South side of the Concourse. So we now have all the retail along both sides of the heavily trafficked Long Island Rail Road Concourse. By the way, in normal times Penn Station is teeming with traffic and our retail stores do exceptionally well here. In 2021, we will deliver in phases our redevelopment of the 2.6 million square foot PENN1. This game changer will include 200,000 square feet of amenities, the likes of which are unparalleled in New York. We are targeting a summertime opening of the 34th Street Lobby, with full completion shortly thereafter. Also this year, our dramatic redevelopment of the 1.8 million square foot PENN2 will be in full swing. Sitting here today, we are more confident than ever in our design and programming of the 4.4 million square foot campus at the combined PENN1 and PENN2. With unique and outstanding architectural design and amenities, sitting on top of New York's main transportation hub, with Apple and Facebook tenancies and others in our adjacent buildings, and with the governor's plan for significant additional investment in the PENN Station area, we couldn't be more excited. To showcase our vision for the district, we have just opened our new Penn district experience center, which is a fancy word for a sales center, located on the seventh floor at PENN1, appropriately in the heart of the action. This 12,000 square foot marketing center is the best I've ever seen. It will be the venue for our regional development teams to present and showcase our projects to the brokerage community and prospective tenants. Early comments from brokers and tenants have been remarkably enthusiastic. When gatherings are again permitted, we look forward to hosting all of you. In the meantime, please visit our website for the latest images of our plans for the Penn district. We update our development yields once a year and have done so for the Penn District on Page 31 of our supplement filed last evening. Overall, the projected yields on these projects have declined modestly from 8.3% to 8.0%. Let me explain. Farley declined 100 basis points, largely from additional tenant incentives we granted Facebook to close the deal during the pandemic. We also are budgeting additional tenant incentives for retailers at Farley, given the environment. It was heroic to close the Facebook lease in the middle of the pandemic, and it is an outstanding deal that we are proud of. Facebook loves Farley, its scale, its location, its architecture, and its expansive work environment. At PENN1, we increased the budget to include the Long Island Rail Road Concourse redevelopment, as I just mentioned, as well as sustainability initiatives that we have added to the scope at PENN1. We are replacing all single-pane glazing with new state-of-the-art triple-pane, high energy performance windows, which will dramatically improve energy loss, sound infiltration, and tenant comfort. We are also increasing the scope of PENN1 to include an electrification program to enable the building to access more clean, renewable energy. These initiatives should command higher rents, but to be conservative we haven't adjusted for that in the budget. At PENN2, the returns actually increased as we scrubbed the numbers with respect to expense and tax assumptions. As Farley, PENN1, and PENN2 come online, they will deliver very significant incremental earnings. As you will notice, we did not publish an NAV estimate this year, as we had for the past several years. I foreshadowed this in my shareholders letter last April, as every analyst does their own estimate anyway, and the market didn't seem to be placing much value on ours. As previously announced in the fourth quarter, we implemented a program to reduce our G&A by $35 million, while difficult this was the right thing to do. In connection with this, two of our beloved long-tenured executives, David Greenbaum and Joe Macnow, stepped back at year-end from day-to-day roles and became Senior Advisors. Vornado was indebted to them, and we thank them for their immense contributions. Glen Weiss and Barry Langer, our longstanding heads of leasing and development, now have leadership roles as Co-Heads of real estate. They have been functioning as Co-Heads for over a year now, and are successors to David. Michael Franco has taken on the additional role of CFO, succeeding Joe. And Tom Sanelli has been appointed Chief Administrative Officer, stepping up from CFO of the New York Office Division, taking on additional responsibilities of our financial divisions. This is all a continuation of our leadership transition that we began in April, 2019. I am confident that our talented next generation of leaders are seasoned, proven and up to the task. The word about ESG, we continue to be an industry leader on sustainability. ESG remains our highest priority for all of us at Vornado, and is further supported with oversight from our board. The risks related to climate change are imminent, and we are determined to reduce our carbon footprint. We lead by example through Vision 2030, our 10-year plan to make our buildings carbon neutral, which starts with our commitment to reducing our energy consumption 50% below a 2009 base year. I would note that since 2009, we achieved a 24% energy reduction over the 10-year period through 2019. We have a seat at the table with climate policymakers at city, state, and federal levels to advise not only on what role buildings must play in climate change mitigation, but even more importantly, on how to execute. We've also led with robust disclosure of our ESG data, with early adoption of SASB standards, release of our EEO data, and climate scenario analysis according to the recommendations of the Task Force on climate-related financial disclosures with TCFD. Our 2020 ESG report will be released in tandem with my shareholders letter in April. I finish with a shout out and a thank you to our amazing and talented Vornado people, to our leasing teams who did the Facebook and NYU deals, which by the way were the two largest deals in 2020, to our development teams responsible for Farley, PENN1, and PENN2, and more, and to our operations teams who follow all protocols and have our buildings sanitized and ready to welcome our tenants home. You are all A+ as the head of the class, and we say thank you. Now to Michael.

Michael Franco, President and CFO

Thank you, Steve, and good morning, everyone. I too hope you're all safe and healthy. I'll first cover our financial results and end with a few comments on the leasing and capital markets. Fourth quarter FFO as adjusted was $0.66 per share, compared to $0.89 for last year's fourth quarter, a decrease of $0.23. This decrease is reconciled for you in our earnings release on Page 5, and then our financial supplement on Page 7. It was driven by a few items, roughly one half, which is $0.12 from our variable businesses still being offline, roughly 20%, which is $0.05 from taking Penn District space out of service, and the balance from the J.C. Penney lease rejection at Manhattan Mall and other tenant issues, offset by some interest savings. None of these items are new news and are right in line with our statements over the past couple of quarters. Furthermore, most of these are temporary and the income will return over time. On January 29, we issued a press release summarizing fourth quarter non-comparable items for both net income and FFO. The biggest item was a $236.3 million non-cash impairment loss, relating primarily to wholly-owned retail properties, as required by GAAP accounting. With respect to rent collections, in the fourth quarter rent collections excluding deferrals improved 200 basis points to 95%, driven by a significant pick-up in retail collections. The breakdown shows we collected 97% of office rents, and 88% of retail rents, excluding deferrals. January and February collections are running at the same level. While the aggregate headline same-store cash NOI numbers are negative on their face, our core New York office business actually saw a positive 1.4%. When you blend in Chicago and San Francisco, our overall office business was essentially flat at negative 0.4%. The big takeaway here is that our core office business, representing over 80% of the company, is continuing to perform well in this challenging environment, protected by long-term leases with credit tenants. Let me also comment on our retail cash basis NOI. If you annualize fourth quarter retail cash basis NOI of $34.3 million, as shown on Page 50 of the supplement, you get $137 million. That's a good run rate number to use for 2021. Please don't consider this guidance, but given the potential NOI, leasing of vacant space, and the properties under development, we expect this number to grow from here, absent any further tenant bankruptcies. Finally, a number of you asked for the breakdown of our previously announced $35 million overhead reduction program by period for modeling purposes. Again, while we do not give guidance, here it is. 2020's G&A, as published yesterday was $159 million, excluding the onetime costs associated with the overhead reduction program. 2021 G&A is budgeted at $141 million, an $18 million reduction. 2022 will benefit from a further reduction of $9 million, and thereafter by a reduction of $1.6 million. The total of these reductions is $28.6 million. In addition, there are $6.4 million of reductions budgeted for 2021 that did not flow through G&A, through lower operating expenses and capitalized payroll. While 2020 was a difficult year, we have planted the seeds for significant growth once the city begins to return to normal level of activity. In addition to the savings we will realize from a $35 million overhead reduction program we executed in December, we expect significant growth from the return of our variable businesses and the Farley building fully coming online in 2022, followed by the redeveloped PENN1 and PENN2 and reduced interest costs as we roll over our debt. Now turning to leasing markets. 2020 office leasing activity and metrics were greatly impacted by the pandemic across all three of our markets. Total leasing volume across Manhattan was the lowest since 2000, while new leasing activity was at an all-time record low at 12.3 million square feet. Negative net absorption during the year, driven by sublease space being put on the market, led to an increase in the overall availability rate. This sublease space will certainly present a near-term challenge to stabilizing net effective rents. While taking rents have come down in a measured way, concessions have spiked, though we believe they have generally stabilized, as landlords are doing what they need to do to be competitive in this environment to fill space. We've seen this before and predict the downdraft and then the recovery if one is willing to look out a year or two. During 2020, with post-COVID leasing activity down dramatically, we still leased 2.2 million square feet in 54 separate leasing transactions in the year. Our initial rents were strong at $89.33 per square foot, and the average term of these leases was 14.4 years. Mark-to-market was a positive 4.6% cash. Most notably, as Steve mentioned, we executed the two largest leases in Manhattan during 2020. The 730,000 square foot Facebook lease at Farley, and NYU's long-term renewal of 633,000 square feet at our One Park Avenue. Our 336,000 square foot lease with Apple at PENN11 and 120,000 square foot lease with Citadel at 350 Park also highlighted a solid leasing year. In the fourth quarter, we completed 16 office leases comprised of 163,000 square feet. We signed a new office lease with LVMH for 24,000 square feet at 595 Madison Avenue, to go along with their flagship Fendi and Berluti retail leases at the building, further reinforcing this bullseye location. We also signed 64,000 square feet of deals at PENN1, including an important 24,000 square foot renewal with Wells Fargo. Initial cash rents for the quarter were $75.55 per square foot, and cash mark-to-market was a positive 0.5%. We ended the year with New York office occupancy at 93.4%. We are feeling more optimistic given what we're seeing in the first six weeks of 2021. Tour volume is up. We are seeing more tenant proposals coming into lease space, particularly in the financial services sector, and companies are looking to take advantage of current market conditions. Importantly, as large companies begin to plan for their employees' return to the office, they are also beginning to focus on their future lease expirations and interviewing brokers, as first steps in the process. We know of at least four companies with large space needs and the need to plan ahead, which held interviews during January in this regard. Additionally, as the initial shock of COVID wears off, companies are beginning to look forward, and most of the paused negotiations in our portfolio are restarting. Notwithstanding some of the positive signs, we anticipate leasing activity will remain slow for the first half of 2021. It is obvious that flight to quality is accelerating as tenants not only are seeking the best available product, namely redeveloped and new construction, but more than ever, want to do business with the strongest landlords. We are certainly getting more than our fair share of the deals that are out there. Our leasing team is very active in the market and has a pulse on town activity, all of which is reflected in our pipeline. We have some 300,000 square feet of leases out in negotiation. These include a 55,000 square foot lease with a tech company at 1290 Avenue of the Americas, a 33,000 square foot lease expansion with a financial services company at 888 7th Avenue, and a 75,000 square foot lease out with a nationally recognized non-profit at 825 7th Avenue. Beyond this, we have an additional 1 million square feet in discussions, the majority of which is with tenants who would be new to our portfolio. As we have said in the past, our office expirations during 2021 and 2022 are very modest, helping us mitigate against more challenging near-term conditions. In each of 2021 and 2022, we have less than 5% of our space rolling, 742,000 square feet of leases expiring in 2021, and 726,000 square feet in 2022, of which 352,000 square feet during that two-year period is at the newly redeveloped PENN1. Turning now to Chicago and the MART. In the Chicago market, new leasing continues to be slow, while short-term renewals are dominating activity. We are, of course, in dialogue with many of our expiring tenants, including a 44,000 square foot renewal, which we expect to be signed in the next few days. During 2020, we completed a 10-year renewal through 2032 for 148,000 square feet with PayPal, and signed 49 showroom leases comprising 190,000 square feet, at very strong starting rents of almost $55 per square foot, including 52,000 square feet in the fourth quarter. Turning to San Francisco, 555 California Street continues to outperform in the market. We recently completed four renewal transactions, reflecting the market resiliency of this best-in-class asset, and reinforcing its status as the Premier building in the city. Impressively, during the period of our 14-year ownership, we have never lost a major tenant in this building. Goldman Sachs renewed its entire 90,000 square foot lease; the mark-to-market on this renewal was 58.7%. Meanwhile, Bank of America committed long-term to the building by extending their current lease term by an additional 10-years to bring this expiration to 2035. The bank will consolidate all of its San Francisco offices into its existing 247,000 square feet at 555, returning to its original home. This was the largest lease done in San Francisco in 2020. It is important to note we have no leases expiring in San Francisco in 2021, and only 48,000 square feet expiring in 2022, where we are in advanced discussions with these tenants to renew. Turning to retail now, the retail environment remains challenging and rents continue to be under pressure. Retailers have little visibility on sales given the uncertainty over timing of tourists and office workers returning, and thus most remain reluctant to commit to new space. The retailers are starting to explore again in space. There continues to be a flight to quality with retailers upgrading their locations or accessing high foot traffic locations that were previously unavailable. As evidenced by our lease this quarter with Christofle at 595 Madison where they will join Fendi and Berluti. Demand for the retail at Farley remains strong with particular interest in the food hall. We have now signed 14 leases and have another eight out for signature. We ended the year with New York retail occupancy at 78.8%, the decline primarily J.C. Penney-related. Turning to capital markets now, the real estate financing markets continue to improve with spreads tightening back to pre-pandemic levels for high quality office. All-in coupons are now at historically low levels. We are actively working on a number of refinancings and expect that we will turn out these loans at lower rates from the current. Finally, our current liquidity is a strong $3.91 billion, including $1.73 billion of cash and restricted cash, and $2.18 billion undrawn under our $2.75 billion revolving credit facilities. With that, I'll turn it over to the operator for Q&A.

Operator, Operator

Thank you. We will now begin the question-and-answer session. And we do have our first question from Manny Korchman from Citi.

Manny Korchman, Analyst

Hey, good morning, everyone. Michael, you talked about your expirations in '21 and '22, I think you said 325,000 square feet at PENN1. How much of that is captured in the mark-to-market footnote that you provided there that goes from $81 to $75 to $85? And especially on the PENN1 piece, pre-pandemic you spoke to a lot higher of a roll up there. Are your roll up expectations still in line with your previous comments?

Michael Franco, President and CFO

Let me take the second question first, and then I'll go after the first and Glen will jump in here. I think our expectations remain the same, Manny. Our confidence in the product, as Steve referenced, given what brokers received, particularly in the experience center, is growing as we continue to evolve the amenity package. We think even more so coming out of this right. This is what tenants want: work, live, play in that environment. So our expectations remain the same for both PENN1 and PENN2. Regarding the roll ups, I think that reflects that comment in your question in terms of that 352,000 square feet on PENN1. No difference in expectations and the roll ups. It's a mix of what rolls over year-by-year in terms of that square footage, and what the range of rents is, as well as what the detail is, but it's the best guess in terms of what those particular spaces may roll over forward, excluding PENN1. Glen, do you want to add anything?

Glen Weiss, Co-Head of Real Estate

Manny, it's Glen. I would tell you as it relates to the roll-up at the building, we're being very careful because we know the product we're delivering is going to be fantastic. The reception in the market has been spectacular, even as we work through the pandemic. So we're not going to jump to deals if we don't like the deals as early as for our initial underwriting. I will tell you we have a ton of action on the building from a bunch of small tenants to tenants as large as 70,000 and 80,000 square feet. So we feel very good about where this is going and where the rents are going on this asset.

Manny Korchman, Analyst

Thanks. Reflecting on your comments and the release last night, you mentioned a return to trade shows in 2021. How confident are you about that and what is the approximate timing? Will it happen at some point in 2021 or will it significantly impact income?

Michael Franco, President and CFO

Our calendar currently indicates that trade shows will begin returning in August. Our major show, NeoCon, is scheduled for the first week of October. So we're planning for those events as we speak.

Manny Korchman, Analyst

Thanks, everyone.

Operator, Operator

And we do have our next question from Steve Sakwa from Evercore.

Steve Sakwa, Analyst

Thanks. Good morning. Steve, I don't know if you can say much about the asset sales you brought to market last year at 1290 and 555. And just sort of the refinancing expectations. I realize the sales market was challenged last year. But I would have thought a refinancing of that would have been perhaps easier just given the low leverage level. So, just any comments that you could sort of make on those assets and how you’re sort of looking at those in 2021?

Steven Roth, Chairman and CEO

Sure. Hi, Steve. So first of all, I was disappointed in the reception on behalf of buyers for those assets. We found that buyers were in two groups: those who were bottom fishers, which we were not interested in, and the conventional long-term institutional investors who were tentative. They couldn't travel, they couldn't see the product. As a result, we weren't getting the kind of reception that I had anticipated. We did the appropriate thing and took them off the market. These are great buildings that should and will command premium pricing and deserve premium pricing. Regarding refinancing the buildings, that's basically a layup. 555 is extremely under-leveraged, probably somewhere in the neighborhood of 25% of market value or even lower. Thus, we are gearing up to refinance that now. It has not yet been decided how much we will refinance that building for, but refinancing that building is in process and will not be a problem at all.

Michael Franco, President and CFO

Steve, 1290 doesn't mature until later next year, right? So our plan would not be to refinance that yet anyway?

Steven Roth, Chairman and CEO

The takeaway is that we were not happy with the sale market reception. The refinancing of those buildings is in process, and will not be a problem at all.

Steve Sakwa, Analyst

Okay. And I guess my follow up, Michael, you talked about a number of tenants in the market today, and maybe you or Glen could just sort of speak to, I guess what I'm really looking for is space planning, how companies are thinking about densities and particularly for new deals, which I think give everybody a blank slate to think about their footprints. What are you seeing from tenants today that are looking at new space? How are they configuring it? What do the densities look like? And what does that portend for rollovers on other deals moving forward?

Steven Roth, Chairman and CEO

Yes. That's Glen's question.

Glen Weiss, Co-Head of Real Estate

Hey, Steve, it's Glen. The first thing I would tell you is we're seeing a very large uptick in our presentations to big tenants coming out of the woodwork, lots for this year. We've had five different presentations for large headquarter tenants in the last two weeks. So you're starting to see people come out and start to see things and the reception has been excellent on our PENN project and 350 Park, number one. Number two, as it relates to tenants' plans, we've been reviewing that in a very focused way. We've seen no change to what tenants were doing pre-pandemic to what we see them doing now during the pandemic for future occupancy. So I do not see a change at all. I think the one thing people are focused on is product type; as we keep saying quarter to quarter, people are more and more focused on the best buildings, related to redevelopment or new builds. Most importantly, even more recently, is the landlord that they're going to marry with as it relates to services, amenities, infrastructure, sustainability, and everything people care about as we work through this cycle. But in terms of your specific questions, we've not seen the change in planning from a space design standpoint.

Steven Roth, Chairman and CEO

Steve, the history of wellness is that in the old days, it used to be 250 or even 300 square feet per employee. Then along came Adam Neumann at WeWork, and he tried to jam it down to 60 square feet per capita, which was his marketing effort. That's why his base was cheaper, he put more heads into the same amount of space. Both extremes are absurd, so we see it settling in somewhere in between. We were on the phone yesterday with the senior team who I think does probably more of this space design than anybody else, and they confirmed what Glen is seeing in the marketplace. People have already gone through space planning, which is less formal, less rigid than the old fashion, offices lighting the perimeter windows. One thing we are seeing is that there's a reluctance on the part of people to share offices or desks with other people. That seems to indicate in a funny way that the concept of hoteling and hot desks is not going to be as popular going forward. Overall, there's more activity and the space planning activity is pretty much the same as it was before all this started.

Steve Sakwa, Analyst

Great. Thanks.

Operator, Operator

And we do have our next question from Jamie Feldman from Bank of America.

Jamie Feldman, Analyst

Great. Thank you, and good morning. Steve, I want to go back to your comments about fiscal stimulus and how you think New York City might benefit. Can you just talk about generally what you think could be coming and how that will impact the local economy? And then also, I mean, we've seen plans from the governor on Midtown West, and even conversions of vacant office buildings to maybe residential. Just want to get your thoughts on kind of all those topics and how you think that might impact the market and Vornado going forward? Thank you.

Steven Roth, Chairman and CEO

Good morning, Jamie. How are you? The world has changed radically. We now have a Biden White House, and we have Chuck Schumer, the majority leader in the Senate, who I remind you is Brooklyn born and bred, and a friend. We believe that there is an enormous trend now towards fiscal stimulus, towards supporting obviously the people who have been harmed by the COVID pandemic, to keep the major cities in this country well-lubricated with finance and money because they've been hurt enormously. We are expecting lots of government assistance to be supported by the new political regime, including the majority leader who is all-powerful. Now, the governor, who is the master builder of our generation, has put football. He loves Penn and considers it to be the economic and transportation center of the universe. In his state of the state speeches, you can see them very vividly. His program for the west side is lots of work in PENN, both aesthetic and logistical, including expanding track capacity of PENN by acquiring and developing the 780 Block which is the block that continues to the South. That expansion involves adding eight tracks. The plan is to build several million feet on top of the new expanded eight-track expansion. We are pretty enthusiastic about all that, I would say very enthusiastic. Obviously, we think we have the bullseye location so we couldn't be more excited about it. The unknown was the campaign promises that they would reverse the Trump Acts Bill. I think that’s very beneficial for New York residents and big city residents. I don’t think that’s as big a slam dunk as the stimulus dollars that will come in. That being said, I think New York will do just fine without it.

Jamie Feldman, Analyst

Great. Thank you for the thoughts. And then, how do you think about Vornado’s participation in expanding Midtown West? I know the port authority is on the docket for renovations. Do you see a lot more growth in your development pipeline or ability to get active in these projects?

Steven Roth, Chairman and CEO

We understand public-private partnerships. So we were the major private partner in the Moynihan development program. We’re pre-familiar with this and very intimate with the government and state teams that handle those kinds of projects. As I sit here right now, I don’t think the bus terminal is for us. I remind you we have 10 million square feet of future development in our neighborhood across the street and down the block, and around the bend. So, we have our hands full with what we already own in terms of doing those projects. We will look at other opportunities as well, but right now our plate is full, our growth potential is huge, and if something else comes along in our neighborhood, of course, we will consider it.

Jamie Feldman, Analyst

Okay. Thanks a lot.

Steven Roth, Chairman and CEO

I would expect, and history shows this to be a fact, that when it comes to the government seeking a private partner, we’re the first call. We've been involved in all of these initiatives, so the question is how aggressive are we at answering that call.

Jamie Feldman, Analyst

Do you see the Midtown West plan competing with, I guess, you can develop more to the East, somewhere like Manhattan Mall? It sounds like this is farther West than North. How do you think about just the interplay between those two, like your current land baying versus where it sounds like the governor wants to expand?

Steven Roth, Chairman and CEO

Most of the stuff that the government is working on is infrastructure. The plan there is to build only a few million feet on top of the expanded eight tracks. Those buildings are interesting, but they’re 15 years away. So, we'll worry about them when the time comes. We believe in mass, we believe in gathering, we believe in clustering. What we're doing with PENN 1 and PENN 2 demonstrates that having 4.5 million feet in one cluster interconnected, underground and overground, where we can share amenities and provide space for tenants needing expansion is infinitely more valuable than four separate one-million square foot buildings spread around the neighborhood. So, we believe clustering creates value for the entire neighborhood, so it’s okay with us if someone builds a building on the river.

Jamie Feldman, Analyst

Okay. Thanks again.

Operator, Operator

And we do have our next question from Michael Lewis from Truist Securities.

Michael Lewis, Analyst

Thank you. I wanted to come back to Steve Sakwa’s question about the mortgages coming due. You also have 909 3rd in the market this year and then 770 Broadway next year. Should we just assume those are all straightforward refinancings? And then as far as 555 California and 1290, do you think the presence of your 30% partner hurt the reception of those assets in the market? And maybe that needs to be addressed to get full value or do you think that didn't have much to do with it?

Steven Roth, Chairman and CEO

This is an interesting and controversial topic. Many people like him while others do not. As I remember the count, it is roughly 74 million people who liked him and 81 million people who did not. From our point of view, he is our partner. We purchased these buildings in 2007; he was not a politician then but rather a business person like us. His role in these buildings is totally passive and he's okay with that, and I'm delighted with that. Some people’s opinions affect the reception negatively, and that’s true. However, it is not a sufficient issue to trouble us at all.

Michael Lewis, Analyst

Okay. Understood.

Barry Langer, Co-Head of Real Estate

There was something else in the question.

Michael Franco, President and CFO

Regarding your second part, Michael, on the other mortgages, I would say they’re all straightforward refinancings. A couple are well down the road right now, including 909. Again, the markets have recovered significantly; I think you'll see the rates come down on the assets that are rolling over near-term, and then we'll start focusing on the mark right after that 770 matures next year. So, all of these are sort of normal course business given the strength of the markets. We're going to push a lot through the system here near-term.

Steven Roth, Chairman and CEO

What Michael just said is a point to emphasize and dwell on for a moment. Interest rates are at lifetime lows. The markets are extremely receptive. The markets are clamoring for product and we have product. Each of us has our opinion as to whether interest rates are staying where they are, will go lower, or rise. And I don't think it's relevant to delve into that right now; they're plenty low enough. Our mission is to enhance our balance sheet by refinancing at lower interest rates, and also terming out where we can. This is the best time to finance our product, perhaps in my career, and we’re taking advantage of it in a very aggressive but measured way.

Michael Lewis, Analyst

Thanks. And then for my second question, Steve, you did a good job explaining the changes in the development yields for that portfolio. I just wanted to ask, since you have provided development yields in your supplemental, should we think of it more as a range around those yields given cost changes a little bit this time? Is the leasing environment next time what you think is the likely range of outcomes? Is it a narrow range around those spot yields, or do you feel comfortable with those? Or is it a wider range given we're in a pretty uncertain environment right now?

Steven Roth, Chairman and CEO

Budgets are budgets; they're not set in stone, they're not guaranteed, they're not actual numbers. They’re budgets. We do take these budgets very seriously, and we spend a considerable amount of time on them. There are reams of data that support the four or five numbers that finally get published in our supplement. We are confident in the numbers that we have presented. But you need to remember they are budgets. We are on the conservative side of life on this, and we do not expect them to change. Obviously, they can change a little here and there. They have the opportunity to change positively or negatively. However, these are our budgets, they are well thought through, and we’re confident in them.

Michael Lewis, Analyst

Okay. Thank you.

Operator, Operator

We do have our next question from Alexander Goldfarb from Piper Sandler.

Alexander Goldfarb, Analyst

Thank you. Good morning, Steve. Good morning, Michael. So just quick clarification, hopefully, you don’t think we have the question for this. But in your response to Michael Lewis's question on 555 and 1290, it sounds like we should take from your response to him that the refinancing of 555 and any normal course leasing that sort of stuff, that nothing has been impacted by the fallout from January 6th. So basically, your ability to refinance, lease, all that stuff is on track. There's nothing that we should concern ourselves with. I just wanted to confirm that in your response to Michael Lewis?

Steven Roth, Chairman and CEO

Your statement is a little too positive. Obviously, we wish, like every American wishes, that January 6th has not happened. That’s not a good thing. The events that occurred last week are similarly a concern. However, we have some great buildings, great tenants in these buildings, and those assets speak for themselves. This is business; business is business. We will run and finance the buildings without any issue, and everything will be fine.

Alexander Goldfarb, Analyst

Okay. So then it accounts for my first question, Steve. You guys have always promoted your environment.

Steven Roth, Chairman and CEO

By the way, Alex, there was a big article a couple of weeks ago in the Wall Street Journal, which I read. It was an interesting article, much of which was actually news to me. Go ahead.

Alexander Goldfarb, Analyst

You guys have always been a leader in environmental sustainability, energy efficiency, etc. In your latest release on the Penn development, however, the cost increased by $125 million, partly for Farley retail and partly for sustainability. I'm curious what's driving this increase in cost? Is this something that investors now have to think about regarding impact to returns? What you guys were doing was already making the buildings quite green. Are there mandates that are far in excess that you're not getting a payback on? I just want a bit more color on that, because that definitely jumped out from your updated schedule.

Steven Roth, Chairman and CEO

I would rephrase your question. Since you guys are such leaders in sustainability, why were these two items—the triple-pane glazing and the electrification— not included in the original budget? I don’t have real answer for that. We decided, as we went along in planning the building, that we wanted to put in triple-pane glazing. I believe the triple-pane glazing is the first of its kind in New York, is it not? By the way, it's all over Europe; it's almost mandatory in Europe. It's not done in New York construction and development, so we spent a great deal of time researching it and did everything, and we decided that it was worth the uptick in budget to bring the building into the 21st and 22nd century regarding its glazing. Electrification is also pretty simple. All buildings are going to go all-electric because of the carbon footprint in the future. We believe these things speak for themselves, and we take pride in our sustainability efforts. The team that does our sustainability is acknowledged to be the best team around. You are correct, but I don't want you to think that this was an afterthought or add-on or mistake. We assured that the buildings were as tenant-friendly and carbon-friendly as they could possibly be.

Alexander Goldfarb, Analyst

Okay. And then the second question, Steve, for Michael is the all-favorite. I know you guys don’t do guidance, and the fun of covering VNO is the modeling aspect. But is the fourth quarter of this year a good run rate? Are there some big move-outs or roll-downs that we should be thinking about impacting the 2021 numbers?

Michael Franco, President and CFO

You're talking about Vornado overall or just the retail?

Alexander Goldfarb, Analyst

No, overall, Michael, overall. I mean obviously, there are a lot of moving parts, but just anything big that we should think about or you would say, hey, Alex, fourth quarter FFO 66 number ex-items—that's probably a pretty good number to think about.

Michael Franco, President and CFO

Look, I think a couple of 30,000-foot comments. I think it's a decent number to use as a run rate. Keep in mind, first quarter 2021 was down from 2020, because first quarter 2020 was a pre-COVID quarter. With the variable businesses being offline, the first quarter being the last quarter that rolls through. But on a run rate basis, I think your comment is appropriate.

Alexander Goldfarb, Analyst

Okay. Thank you.

Operator, Operator

And we do have our next question from Anthony Paolone from JPMorgan.

Anthony Paolone, Analyst

Okay. Thank you. My first question relates to the retail joint venture in your $1.8 billion. Can you talk about your plans to potentially redeem that this year? If I recall, I think there was like a two-year tax matter that prompted you to maybe wait before you get that money back.

Steven Roth, Chairman and CEO

What that is, is there’s a two-year blackout under the tax provisions. After the two years, we can refinance it. We can't redeem it or pay it off, we can refinance it, because if we turned it into liquidity, that would trigger the $1.8 billion tax that was deferred. The preferred either stays there or we can sell it. As long as it stays there, or we can refinance it with debt, which is a different proposition. But there's nothing imminent in our plans to transact with respect to that preferred right now.

Anthony Paolone, Analyst

Okay. Is it a debt market there for those types of assets today?

Steven Roth, Chairman and CEO

The debt market would be less hospitable than I would like it to be because of the turmoil in the retail industry, notwithstanding the fact that we have long-term leases on most of those assets. The mark-to-market on those properties is unfavorable, and the debt market— I mean, we could do something in there, but the debt market is not as favorable as we would like it to be.

Anthony Paolone, Analyst

Okay. And then just a second quick one, hopefully. I think in prior years in the K you'd give a budget for the year ahead on CapEx for things like TIs, commissions, maintenance, CapEx. I may have missed it, but do you have that for '21?

Steven Roth, Chairman and CEO

Hang on, our finance team is scrambling.

Tom Sanelli, Chief Administrative Officer

It's in the 10-K. We can get you the page number.

Anthony Paolone, Analyst

That's fine. I may have missed it, then. Appreciate it.

Operator, Operator

And we do have our next question from John Kim from BMO Capital Markets.

John Kim, Analyst

Thanks. Good morning. There's been some news of sublease space in your portfolio, whether it's Yelp or the MART or Apple taking some of the Macy's space. Can you provide to us how much space in your portfolio is up for sublease, and preferably by market?

Glen Weiss, Co-Head of Real Estate

Hi, John, it’s Glen Weiss. Apple was actually a direct lease where we took Macy's out, so that was a positive. As it relates to sublease space in the portfolio, the only big one that we're aware of is PWC at 90 Park considering doing something with that block. Otherwise, it's a bunch of smaller tenants who have been thinking about putting space on.

Steven Roth, Chairman and CEO

What's the term on the PWC block?

Glen Weiss, Co-Head of Real Estate

The PWC lease goes until 2033. So obviously, we have great credit on that lease long-term, so it's not a concern for us. Macy's is subleasing the remaining piece of their space, which is the space we didn't have Apple take. Generally speaking, as it relates to our portfolio, not a lot of major overhang in that question.

Steven Roth, Chairman and CEO

Sublease space is interesting. If there's a great deal of sublease space in the market, tenants who are willing to take significant discounts to clear the space obviously affects the entire market. If we have a tenant subleasing in one of our buildings, that’s interesting. If we have a longer term then we, as landlords, have no risk. If it’s shorter-term, the marketability of the sublease space depends upon the new tenant coming in dealing with us, at which point we have an advantage. The sublease space at our building, generally speaking, is an opportunity for us and an advantage. However, too much sublease in everybody else's buildings where tenants are ready to take much lower prices distorts the market and ultimately hurts it. We have been through this in every cycle, and the definition of recovery is when the sublease space starts to clear, or the tenant decides they need the space rather than get rid of it. So, the sublease space is worth watching; it's very important. At times, it is an issue and challenge; at times, it's an advantage and opportunity.

Michael Franco, President and CFO

As it relates to the mark, you asked about Beam and Yelp. Beam announced the move of their executive office to Manhattan. However, that does not impact their sublease from Motorola, Google, the MART. They have 113,000 feet there; that's a long-term deal until '28. We've spoken to them recently, and they will remain in that space, and there's no plans to put that space on the market. As for Yelp, they have about 130,000 feet; their lease has another three years remaining. They have announced their intention to try to sublease about half that space. We'll see how successful they are, and see if we can take advantage of that situation as they go through their process; we'll see what happens.

John Kim, Analyst

Okay. Thanks for that. My second question is on your expectation for FFO this year. As a follow-up to Alex's question, what are you expecting as far as the timing of reopening of your variable businesses? Are you expecting to provide any more write-offs or deferrals and abatements next year? It didn't seem like it moved that much as far as deferrals and abatements this past quarter. But if you could provide any color on some of these FFO items, that would be great.

Michael Franco, President and CFO

Good morning, John. You are discussing the tenant side in relation to abatements and deferrals.

John Kim, Analyst

Yes.

Michael Franco, President and CFO

I think we did a good job of vetting what tenants were still at risk on the second or third quarter, in particular the third quarter, in terms of really assessing after several months of discussions which tenants would be unable to continue paying or not make it. The number fell dramatically in the fourth quarter, and we feel like we've generally dealt with it. Anything can still happen, but there's nothing we see on the horizon that is going to result in material impact there. On variable businesses, we're generally not expecting a ramp-up until the second half of the year, tracking as Steve said, when do office workers come back, when do tourists return—that’ll be the third or fourth quarter. Thus, garage income, BMS, which are directly related to tenant occupancies and the flow of buildings will also return in the latter half of the year. That won't be sudden; it will take time to ramp up.

John Kim, Analyst

And are there any more thoughts about providing FFO guidance, just given you're not providing your NAV estimate anymore?

Michael Franco, President and CFO

That was the first question I got asked by a number of people when I assumed Joe's role, which is a difficult task to fill. Joe did a phenomenal job in a lot of areas, and that’s a path we’re going to continue. We have no plans to provide guidance. Starting in the middle of COVID would not be the wisest move. But there are no plans to do that.

John Kim, Analyst

Okay. Thank you.

Operator, Operator

And we do have our next question from Vikram Malhotra from Morgan Stanley.

Vikram Malhotra, Analyst

Thanks for taking the question. Two questions: first on street retail. Wondering if you can give us a bit more on the puts and takes. You referenced sort of 4Q as being a good run rate. But given the bumps in the portfolio and the lease-up opportunities you referenced, I'm just wondering what could keep the NOI flat for the year? And related to that, are there any lumpy expirations we should know about over the next 12 to 18 months?

Michael Franco, President and CFO

I think that in 2021, as I said, it's a pretty good run rate. Remember, we will start coming later in the year with leases that we've signed that will start kicking in, whether that's Fendi at 595 Madison, Sephora at Union Square, and so forth. You have leases kicking in, some rent bumps, and frankly not a lot of expiries this year. I think even next year I would say nothing that’s material. None of the high streets like 5th Avenue or Times Square are rolling in 2021 or '22. We've had a couple issues related to 1540 in terms of bankruptcies, and that’s already made its way through the numbers. That's why I referenced that run rate number, plus the rent steps, so there's enough coming online due to built-in contractual bumps that even if we have a few roll-outs, which again, are not material for any one particular property, minimal will stay flat before beginning to grow from the lease-up of vacant properties as well as developments.

Vikram Malhotra, Analyst

Okay, got it. And then just a bigger picture question, maybe for Steven, and you might address this in your annual letter. But if you could give us a sense of how you're thinking about bigger picture strategic moves, whether it's spin-offs or buybacks or bigger JVs or anything like that? Just given where we are, I know we are still in the pandemic, but given all the growth drivers you've outlined on a multi-year basis for both retail and office, just wondering how you're thinking about bigger strategic moves.

Steven Roth, Chairman and CEO

We have nothing to announce or talk about right now. All of that will be addressed in my letter. We've certainly talked about potentially separating the PENN district. I said last year that perhaps a tracking stock is still on the table. There are other things we are contemplating, but we have nothing to talk about right now.

Vikram Malhotra, Analyst

Okay. Thanks.

Operator, Operator

And we have no further questions at this time. I will now turn the call over to CEO, Steve Roth.

Steven Roth, Chairman and CEO

Thanks, everybody. We appreciate you joining us this morning. Please stay safe and healthy. Our first quarter 2021 earnings call will be on Tuesday, May 4th. We will see you then if not before. Thanks very much.

Operator, Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may now disconnect.