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Vornado Realty Trust
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Good morning, and welcome to the Vornado Realty Trust Fourth Quarter 2019 Earnings Call. My name is Brandon and I will be your operator for today. This call is being recorded for replay purposes. All lines are in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question-and-answer session. [Operator Instructions]
I will now turn the call over to Ms. Cathy Creswell, Director of Investor Relations. Please go ahead.
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 supplements.
Please be aware the 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 risk, uncertainties and other factors. Please refer to our filings with the Securities and Exchange Commission including our form 10-K 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 duties to update any forward-looking statements.
On the call today from management for our opening comments is Michael Franco, president, in addition Steven Roth and our senior team are present and available for your questions. I will now turn the call over to Michael Franco.
Thank You Cathy and good morning everyone. Overall, we look back at 2019 as an important and successful year, setting the stage for the next phase of the company's growth. In addition to keeping our buildings full at very healthy rates here in 96.5% occupancy. We recapitalized our Fifth Avenue and Times Square retail assets on a very attractive basis $5.5 billion transaction. We've hit a $1.95 per share special dividend last month the latest transaction.
Most importantly, we advanced the redevelopment of Penn District, positioning the company to capitalize on the enormous opportunity we have on the west side of Manhattan. More on this in a moment.
Before giving some thoughts on the markets in our portfolio and in particular the Penn District, let me review our fourth quarter and full-year financial results. Fourth quarter FFO as adjusted with $0.89 per share flat to last year's fourth quarter. Full-year 2019 FFO as adjusted was $3.49 per share compared to $3.73 per share of 2018. These results are $0.09 ahead of the guidance we've given in the third quarter.
As we've previously indicated, our financial results for 2019 were lower than 2018 explained as follows. Of the $0.24 reduction $0.25 is due over $3.2 billion of assets sales, $0.09 is due to one-time non-cash stock based compensation expense and $0.04 is due to lost income from retail bankruptcies; all of which aggregate to a $0.38 reduction which was partially offset by growth in our core business and interest savings.
Overall our core business continues to be strong. For the year across New York, Chicago and San Francisco, our office in retail leasing teams completed 215 leases comprising 1.7 million square feet at starting rent of $90.45 per square foot. A positive mark-to-market of 14% GAAP and 8.8% cash.
Please see Page 80 in the supplement for further detail. Cash basis the same store NOI company-wide is up 3.6%. Company-wide our fourth quarter cash basis same-store NOI increased by 6.6% broken down as follows. New York office was up 3.4%, Street retail was down 2.2%, theMART was up 100% benefiting from a one-time $12 million accrual real-estate tax expense last year due to triennial reassessment of the property and 555 California Street was up 4.1%.
Our non comparable items in the fourth quarter included the $173.7 million after tax net gain on unit closings at 220 Central Park South. To date, we have closed on 65 units for net proceeds of $1.82 billion including 17 units for $565.9 million in the fourth quarter. We are now 91% sold in the face of a very soft luxury condo market; a testament the building being the best ever built in New York City and our sales continued strong.
Since the beginning of 2019 we had executed contracts of $400 million. We expect to receive over $1 billion from closings in 2020 and as we've said previously all the net proceeds will be redeveloped into the Penn District redevelopments underway; turning this capital into highly accretive earnings and driving strong future growth.
Now turning to 2020, which will be an inflection point for us as we invest heavily in the Penn District to create an enormous user value. Given the full-year affect our substantial asset sales and our development activity as we continue to invest in the Penn District, we thought it appropriate to provide some greater visibility into our projection for 2020.
We currently estimate the 2020 FFO as adjusted, it will be lower than 2019 by between $0.23 and $0.33 per share. Of this $0.28 reduction as the midpoint, $0.16 is due to the full-year impact of asset sales. $0.09 is due to taking additional assets out of service for redevelopment primarily in the Penn District at PENN2 the retail at the LIRR concourse and the Kmart space at PENN1. And $0.08 is due to lost income from the full-year effective 2019 retailer bankruptcies; all of which aggregate to $0.33 reduction which is partially offset by growth in the core business.
Let me now turn to the New York market. The Manhattan office market continues to fire on all cylinders fueled by strong job growth an unabated tenant demand for office space particularly for landlords with new or redeveloped product. The city added 19,000 office using jobs during the year bringing office using employment to an all-time high of 1,470,000 jobs and the recently announced large future office commitments for major companies in the city point to continued strong job growth.
Leasing volumes citywide in 2019 totaled 43 million square feet; the highest activity in 20 years. Japanese tenants continued their strong demand accounting for one-third of all activity during the year with the tech sector alone leasing 7.5 million square feet. This sector has become a dominant powerhouse in New York. The tech companies are attracted by the city's dynamic economy, deep and diverse talent base and leading universities.
While the big tech companies like Facebook, Google and Amazon continue to expand the sizeable presence. The city’s role was also being driven by long-established traditional industries powering more-and-more technology workers to support their businesses.
Importantly, in 2018 Venture capital investment in New York companies surpassed $17 billion increasing New York City share total VC investment in the U.S. to an all-time high at 20%, up from a 11% in 2018. These investments pave the way for continued growth from the tech sector in the future. The flight to quality trends and tenants for new construction and redevelop space accelerated during 2019. According to JLLs in non-trophy building report more than 20% or 8.8 million square feet of this city-wide leasing activity was signed the triple digits starting rents a record number.
Interestingly 60% of this triple digit activity was with Tami tenants mainly concentrated on the west side. According to our Cushman & Wakefield year-end report, asking rents are Class A product in the PENN districts sub market which includes Hudson Yards and Manhattan West reached a historic $109 per square foot a very good sign for our 5.2 million square feet currently in new development in the district.
As a company, we are heavily focused on the transformational repositioning to our PENN district Holdings as a new epicenter at New York. Our redevelopments are now in full construction mode. 2020 will mark an important step in the district's transformation as majestic Moynihan Train Hall And Farley and our 850 square feet of office and retail space and Farley will be substantially completed at year-end.
As you walk around the district today, you see the incredible amount of activity underway; three developments of Farley, PENN1 and PENN2; the grand new entrance to PENN Station on Plaza 33 the work has begun; and the scaffolding in the LIRR concourse the redevelopment will shortly commence. In total, there's over $5 billion currently being invested in the district in its infrastructure between Vornado's $2.2 billion and the government's $3 billion.
During the fourth quarter, we bought out Kmart's 141,000 square foot lease at PENN1 which had another 16 years to run for a $34 million payment for which 10 million is expected to be reimbursed. Steve and Eddie had been ringing me about this for years and years and we think we've time to buy out at exactly the right time and gather at a fair price.
Despite the nominal short-term FFO loss from Kmart's rent this was a big win for us and allowed us to ameliorately integrate this space into our overall redevelopment plan for PENN1 adjacent Plaza and the LIRR concourse and to populate this space with high quality retailers and offices; overall a big uptick for the neighborhood. During January, we executed a relocation transaction with the Information Builders, which will move them from the Tower of PENN2 in two separate spaces at PENN11 and PENN1 totaling 78,000 square feet.
This deal was the last piece of space we needed to get back to execute redevelopment plan at PENN2.
Moreover, the stunning ramp with Information Builders at PENN1 is in the mid 90s per square foot reflecting the markets confidence in the district's transformation and in this extraordinary development will begin to take shape. In addition, as I'm sure most of you saw the Governor made a major announcement in January expressing the state's intention to further modernize and expand track capacity at PENN Station through the creation of the Empire Station complex with an expanded terminal on the block south of PENN 2.
The increasing train capacity by approximately 40%. This announcement represents another validation of PENN Station / Empire Station at the key transportation hub in the region and a further commitment from the government's investing the area. The government expects ridership at PENN Station to double in the next 10 to 15 years.
The state intends the front end expansion through the creation of a new district which encompasses our PENN district holdings and by capturing future increases and tax revenues from new developments in this designated district. We look forward to working with the state, city and other important stakeholders to help realize the governor's very important vision.
With the explosion of tech demand in New York City particularly on the west side our PENN district assets are very well positioned to be at the center of this activity. It's in a hottest sub market in the city. We're going to be delivering Farley, PENN1 and PENN2 totaling 5.2 million square feet near-term with an ability for tenant to grow with us over time on a massive campus located right on top of transportation.
We're confident as our plans become reality that office tenants will truly appreciate unique and differentiated product we're delivering. In this regard we remain on track with the two large leases we mentioned in last quarter's call and there's good activity from a variety of important tenants behind us.
On the retail side the interest in Farley has been outstanding as retailers come to understand and significant to the traffic they will course the route Farley in the district every day. We are in lease negotiations on over 50% of the Farley concourse and are in active negotiations with the majority of the space in the main level.
More broadly we are working on a variety of deals to curate the district with all sorts of offerings; food and beverage, coffee, fitness, co-working, conferencing, retail and so forth to service our account base while earnings are of course negatively impacted in the short term, earnings will significantly increase as we turn the 60s per square foot office rents currently into place into mid 90s and higher as we deliver at least the redeveloped space.
Overall, our New York office portfolio is in great shape. 97% occupancy with a very manageable 525,000 square feet expiring during 2020 after taking the previously announced in Broyhill space comprising 566,000 square feet at PENN2 out of service. Our office leasing activity is extremely strong with more than 1.6 million square feet leases and final documentation and an additional 1.8 million square feet in the pipeline.
During 2019, we completed a 102 office transactions for 987,000 square feet at starting rents at $82.17 per square foot with positive mark-to-markets of 4.6% cash and 5.5% GAAP. Approximately 20% of our total leasing activity in 2019 with the triple digits an average starting rents of $120 per square foot.
In terms of the fourth-quarter we leased 173,000 square feet at an average starting around $101 per square foot. While we had negative 5.2% cash and 3.5% GAAP mark-to-markets for the quarter, it is worth noting this was based on only 54,000 square feet second generation space and driven by the rent reduction of one short-term renewable at 350 Park Avenue.
This is the single best development site on Park Avenue and likely Midtown and we will be keeping renewable short-term here in order to line up this site for a possible new development. Leasing highlights during the fourth quarter include a headquarters lease at our new 512 West 22nd Street the next-gen media 41,000 square feet.
At theMART in Chicago during 2019, we completed 62 leases comprising 286,000 square feet at average starting rents of $49.43 per square foot. During the fourth quarter, we completed 50,000 square feet of showroom deals at starting rent of $51 per square foot. Arkansas stood 94.6% at year end. We have very good activity on our available office space here and our numerous discussions with both new and existing tenants throughout the building.
In San Francisco, the market remains on fire and it is hard for tenant to find quality of available space. At our 1.8 million square foot 555 California Street campus we remain full and enjoying the benefits. During the fourth quarter we finalize the lease renewal with one of our full quarter law firm tents in the bottom third of the tower at starting around $94 per square foot a 72.5% positive cash mark to market.
We are also in renewal negotiations with two of our major tenants in the tower of the building with each transaction that rents well into the triple digits.
Turning now to our New York Street retail business. Overall our rents are down activity is up from a year ago and there continues to be a flight to quality for retailers; a trend that benefits our portfolio. The best high tier retail is not dead. The rents do need to be economic for retailers to admit. In a very difficult retail environment, we completed 39 retail leases with 238,000 square feet during the year.
With GAAP and cash positive mark-to-markets of 12.9% and 9.8% respectively. In the fourth quarter, we completed 16 leases comprising 94,000 square feet highlighted by very important 10 year leases with two LVMH brand 595 Madison Avenue better known as The Fuller Building. Fendi and Berluti leased a total of 16,850 square feet here reflecting the building bull's eye location at the corner of 57th Street at Madison Avenue.
A portion of this space was formerly occupied by Coach and a portion was vacant. Kudos to Haim for sourcing the LVMH deal. Our retail occupancy remains high at 94.5% as we continue to source tenants for this best-in-class portfolio. Rents this quarter rolled up on a cash mark-to-market basis by 11.3% and were flat on the GAAP basis.
In addition, we are pleased to report that lastly we signed an 8,000 square foot lease with Sephora at for Union Square South which filled most of the space vacated by Forever 21 last year. Between the recent whole foods expansion, and this is a floor deal, we have now surpassed the total rent Forever 21 was paying entire space and we still have an additional 9700 square foot leasing opportunity.
Taken as a whole once fully released, we project an approximate 40% mark-to-market increase; a much better credit profile. As a testament to the uniqueness of our Union Square asset, we released the space 96 days after Forever 21 lease expired. We don't yet know what will happen with the other two Forever 21 leases we have but we get them back these assets are in premiere locations we will all might take longer we are confident we will release them successfully just as we did Union Square.
Finally, accounting on sustainability. We have always prioritized reduction of our carbon footprint and mitigation of our contribution to climate change. And we are in long step with our investors, tenants, employees and communities. We have reduced by 25% our same-store energy consumption in the last 10-years and are committed to furthering our progress through continued energy retrofits, smart building technology and meaningful engagement with our tenants.
We will also include renewable energy as an important step in our process towards carbon neutral. We are well positioned to comply with recent client laws as evidenced by our being Energy Star Partner of the Year for seven times and Nareit's Leader in the Light Award recipient for the 10th year in a row and a top performer among all global real-estate sustainability benchmark respondents.
In addition to the many awards for sustainability we win each year I am specifically proud of our team for being cited at the industry model with our innovative approach to furnishing our audited ESG report in the Security Exchange Commission. We continue to maintain a focused balance sheet with measured leverage and an abundance of liquidity today and belong.
After the $400 million special dividends paid last month, our liquidity is $3.8 billion comprised of $1.2 billion in cash and restricted cash and $2.175 billion undrawn or revolver credit facility. To conclude, we feel very good about our overall business. We own great assets in great locations in great cities and know how to keep these properties full with best-in-class tenants and market-leading mass.
Moreover, we have outstanding and unique development skills that allow us to create a significant value. We will continue to take full advantage and New York strong -- decline of our businesses to grow and succeed for the kind of best talent in the country here. With that I'll turn it over the operator for Q&A.
Thank you. We will have to get in the question-and-answer session. [Operator Instructions] And from Citi we have Manny Korchman. Please go ahead.
Hey, good morning. It's Michael Bilerman here with Manny. And Michael, I want to just go through some of the numbers you threw out in terms of the headwinds that are affecting 2020. And maybe if we can just take each of them. You talked about the space coming out of service being the $0.09 the 19 million that's in the supplemental on Page 31.
Can you give us some color in terms of when you expect the income to start flowing back? Does this start at least in the supplemental doesn't have the positive effect of releasing that space. And then on the retail side at 16 or so million at $0.08, what is the prospects of that income flowing in at some point in 2020 versus later on just as we think about the ramp as we get back?
Michael Bilerman, its Joe Macnow. I want to take the second part of that question. On the $0.16 from asset sales, half of that little almost half that comes from the retail JV. The balance comes from sales of 330 Madison 3040 M Street, Creek UE LXP, that stuff is not coming back other than being reinvested the cash being reinvested in the PENN District. It's not a one-for-one, we sold this we're putting this here and we're going to get back NOI.
Michael, in terms of the retail bankruptcies which is Topshop and Forever 21 obviously 608 is permanently gone. The asset in SOHO, the problem plan there is to convert that upper floors to office and so that will undergo a redevelopment. And so, best cases that won't come on line general time 2020 and best case with some point next year but again nothing certain there.
And then Forever 21, we have a deal in place today with them. The numbers we cited reflect the reduced leases. We'll see what happens as they come out of bankruptcy now and to the extent that those leases are not accepted or to the extent that we proactively take that space back after the year. And again, that income is not going to come on in 2020 the best case that's going to become on sometime 2021 with usual free rent period, et cetera.
I think at the best case that would be towards the latter part of '21. But again, there's nothing that is in and on those. We're aware that both those leases either could come back or proactively take those back and we're out in marketing space.
Michael, it's Joe Macnow again. That explanation of the possible Forever 21 two lease is coming back is what gave rise to the range of $0.23 to the midpoint of $0.28; that $0.05 represents the exposure of those two leases come back.
Okay. And then, when you think about I mean you were running basically $0.89 of adjusted FFO in third and fourth quarter, right? So, annualizing out to 356 for the year relative to the 349 for the full-year. Arguably, the last two quarters should have the dilution from the asset sales certainly on the retail side from the stock investments already baked in to that number and arguably have some of the retail loss as well.
So, I'm trying to reconcile those two things where you had been reporting a quarterly number of $0.89, 356 annualized which should already take into account some of this $0.28 of added dilution that we're talking about for 2020.
So Michael, it's Joe Macnow again. I'm not prepared to address that question fully but some of the items are really one-timers. There was lease cancellation income in the fourth quarter that was $0.02. There was a straight line right off that we anticipated on 10 clauses that got deferred to 2020; that was another $0.02. So $0.89 is up $0.02 and 2020 is going to be down $0.02.
Those two items are $0.06 swing from annualizing the fourth quarter and there has to be many more items like that that Manny and our team or you and our team our team can do work on.
Michael, the other thing is the out-of-service that we cited, that's all incremental. So, that is Kmart it shifted up, it's a number of buildings frankly between PENN1, PENN2 that with further evolution or development plans is incremental out of service. Obviously, there was a sale of a pre-share, so there is a number of items that are not run rate from the fourth quarter.
Right. No and I think that's was part of my first question and I'll get off after this. That 19 million of reduction for the stuff coming out of service trying to understand when some of the income will flow back into the company. I guess trying to understand that aspect of it, why don’t you spend money in little space. What type of disclosure are you going provide? You've provided on Slide 31 the stuff that comes out, I guess what point are we going to get some stuff about it coming back in?
Well, I think also on Page 31, Michael, it's Matt Iocco. If you look at the top part of that page, we do provide the incremental cash yields and the stabilization year we expect to begin to achieve those cash yields.
Right. But some of that will come in in '21, '22, '23, like it will be phased and I mean so just looking at that incrementally each year sometimes. I'll yield the floor. Thank you.
From Evercore ISI, we have Steve Sakwa. Please go ahead.
Thanks, good morning. I guess Michael or Steve -- I know you're not going to provide a lot of details around some of the big pending leases at Farley and PENN2 but can you just kind of help frame some of the discussions and the timing? And I know you talked about a pretty big pipeline of LOIs and just kind of help us sort of think through some of the timing at Farley and to PENN on some of the leasing.
And then, some of the commentary you made in the 10-K about kind of the mark-to-markets that you're seeing on the office component. I realize it's not a lot of square footage but it sound like there's about a 20% mark-to-market. So, can you just maybe flush out some of the bigger leasing?
Sure. I will start and Glen can jump in as well. Look in general, Steve, obviously there has been press speculation about a couple of major leases that are in the works and we're not going to comment on specific names. I think in my intro remarks I said those remain on track. And on the normal course, our expectation would be that we would start finalizing some important leases probably in the next quarter.
In terms of PENN2, we're just showcasing that product now; that's a major redevelopment. Obviously referenced the one lease last quarter again which remains on track and these are major headquarters leases and going through the normal process right now and again making very good progress. I think next quarter you'll start to see some real announcements. Or and you want to talk more broadly on the pipeline, the only outside Steve on mark-to-market is that again one of the big basis is we are taking -- can't confuse it, right, what are the invoice rents and due to what's expiring, where are we taking this to and given what we're doing in the Penn District.
We've talked about taking the rents from 60s into the 90s and 100-plus range and that's starting to be reflected in what we're doing in those, in that number.
Alright Steve, it's Roth. We mentioned in this in the remarks that we're a 1.6 million feet of LEED. Those are in documentation, so leases are out and that include the Gilder that Vornado Realty [ph] had. We're certainly on track, we feel very good about where we are and there's more activity to come. As it relates to the overall business, if you think about it, we're 97% totaling the core portfolio. We keep rig, filling up space with our existing tenants and our buildings are in fantastic shape.
I mean, the core portfolio we redeveloped those buildings over the last five, six, seven years. They had triggered final lease on average 2.5 million per year in those buildings. And the major tenants continue to expand. And so, the 888 Seventh that I report the 1290s were seeing great activity for both in the building then from outside.
And so, overall we have a lot of leases out, we have a lot of other action. So, we don’t worry about where we're sitting right now.
Okay. And then I guess second question is just look, I realize it the company is not really driven by short-term earnings and really is doing the right thing for the real-estate. But clearly coming up with effectively guidance that's well below the street is a little bit shocking to people; the magnitude.
I'm just curious as you sort of laid out some of the issues and then I realized you can't contemplate everything, are there any other potential wildcards that we should be thinking about that could potentially hurt earnings this year or even into next year. Or at this point have most of the big things been flushed out and from here earning bottom in '20 and start to rebound in '21 and beyond?
I mean, Joe referenced the Forever 21 situations safe, right. So, they expanded that as not the leases are not the front. Then there could be a $0.05 being on temporary basis. And that's the most near term in sight. Other things obviously there's always rick of bankruptcies et cetera.
But we don’t -- the numbers we gave you is what is in our preview, they have a situation positive as well. But we clearly think the 2020 is the bottom and we'll start to see strong growth thereafter. And as we said from a real-estate standpoint, you said sales, the steps we're taking in terms of taking the asset as service or additional asset as service, the right thing for our redevelopment plans.
Right, and so that's going to create significant value and getting the Kmart, making some modifications on some other things we're doing district would impact the other service. Those are identical positions, right, and create value, now withstanding a short-term impact on earnings.
Okay, thanks.
From Bank of America, we have Jamie Feldman. Please go ahead.
Great, thank you. I guess Michael, just to go back to your last comment, you said 2020 is the bottom and we'll start to see strong growth thereafter. Can you just talk through the drivers or the growth in '21, the strong growth in '21?
Yes Jamie, look you're starting pressures into guidance there. I mean, the reality is like we'll will, I don’t think we can take that offline.
Certainly, far becoming into FFO.
Starts to perform.
But the reality Jamie is it's a really every part of the business particularly the office business has grew up, 555 New York business, et cetera. I could have mentioned point-by-point but that really is a deal. So, and suddenly Facebook is fully rent banging that point.
And Jamie, it's Joe. And while 2019 had many depressions of earnings from asset sales dot dot, we've gone through that, we don’t anticipate that recurring which of course lets the growth in the core business not be messed by other dispositions etc.
Okay, that's how. Yes, I was just trying to figure out the largest moving pieces, it sounds like you listed them for '21. I guess thinking about the core, can you talk about a same-store growth rate that kind of looks through all the noise for '20?
Yes, I don’t know if we're prepared to do that on this call, Jamie.
Okay. And then, I guess my last question. You in the past you've talked about a $200 million run rate for retail NOI. It sounds like that's come down on Forever 21 and maybe the Kmart space. How does that, just for an apples-to-apples comparison, how does that look today and based on what you've outlined?
I don't know that what we -- I don’t know you're asking last quarter. I don’t know that that really has change, alright. I think last quarter and then we said it was going to be a low-200. And we said that that was before taking any of the IR account course. Right, that also is for the Kmart buyer.
And so, honestly with those two, they're taking below that number but those are proactive things we're doing as opposed to an impact from tenants see. So, Forever 21 as we talked about was could be on off leases are go away temporarily. Could be $10 million thing but I knew is generally in the number that we decided to take last quarter.
So Jamie, a little more color. Last year’s reported number '19s reported number was 267.7. The retail sale will adversely affect that by 25.6 in '20 that wasn’t in '19. Office sales were affected negatively by almost $3 million. Added service at PENN station will effect that negatively by $6 million than there are other tenant items for '21, Topshop et cetera.
Our mid still is in the low-200s.
Before the concourse and came on adjusting.
Yes, before the concourse.
Okay. And then just to confirm the quote-on-quote guidance you gave, is that assume that Forever 21 leases are cutting half but not go zero in as an additional $0.05 if they go zero. Is that correct?
That's correct, Jamie.
Okay. Alright, thank you.
Thank you.
From BMO we have John Kim. Please go ahead.
Thanks. Not to de-lever the point but a couple of quarters ago you mentioned that this would be 2019 would be the trophy of earnings and now you're coming out with -99% for '20. But looking back two quarters ago, you already knew about the retail joint venture, the Topshop's door closing, the PENN2 redevelopment.
So, I'm trying to understand what was new over the last six months besides Forever 21 and the Kmart early termination?
Well John, its Joe Macnow. A number of moving parts affected that. We took Signage out of alright surface in the Penn District. We didn’t anticipate doing when we gave that first set of guidance. We moved leasing assumptions from '19 to '20. There are numerous things that affect the lag. But it's over, we're confident from what Michael told you that '20 will be the trophy year that the growth in '21 will be substantial.
And again if you like going to greater detail, let's do that offline but not monopolize this call with that type of future.
Sure, okay. And then you updated your any of the now your stock is trading with 32% discount to it. Wouldn’t a buyback, I know you've talked about in the past, but wouldn’t a buyback help offset some of the solution in and would have been a lever or could be a lever for fast at earning solution going forward?
John, look we recognize we're in need for discount and the market seems to ignore any they will play out and maybe be honest that it is. And that was something that we have evaluated, we continue to evaluate. It's not the course of action and no preparing background today. And we are this as we've done in the past, we consistently look at ways to kind of narrow that gap.
And first of all to grow NAV which is what we're trying to do through our Penn distributed elements but secondly to close that gap. And we've showing an ability to execute in accretive transactions and we are continuing to look at that.
Obviously a buyback is either one way I don’t know if that's significant in terms of obviously the other we've done in the past but there are not something that we have felt as the appropriate use of capital here.
I guess, what would be the appropriate time that you've there. I mean, you have free cash flow that are significant, you're trading at a big discount and have some earning solution which is near term, I mean if this is not the right time then when it'd be?
John, say -- it’s a matter of using that account or for that or other things and we continue to have significant opportunities to invest in our business and we outlined three additional redevelopments from Penn District that are substantially accretive.
And opportunities behind that where our capital everyone have available to continue to execute of our redevelopment on the whole district where we're protecting the first 05 million square feet. Today but there is significant amounts to do beyond that and right now we want to have that capital available for that or other purposes.
One last from me.
You need to think that's -- I think that's more accretive, where we got some more accretive in terms of any the creation, John, then you buyback that saying knock it out based on our analysis.
Your earnings decline is more than offset by it sale kind of let's say the 220 Central Park South which you don’t include in your normalized FFO. But did you have a $200 million increase in your estimated proceeds because looking at the 10-K still looks like you have a $1 billion in after-tax profit maintained.
John, it's Joe again. I saw some confusion from some people on that point. We published in this NAV $1.2 billion but we didn’t say that's the profit on the job but we described that I had is the incremental value for estimated future proceeds net the net it, net of course to complete the job which I'm winding down and net of taxes to be paid.
Our estimate of profit which is what you were talking about hasn’t changed from the $1 billion. The $1.2 billion was $200 million of taxes for a $1 billion. But this is the timing of cash coming into Vornado, if you look at the 10-K you'll see we've already gotten $1.8 billion from the project.
That $1.8 billion Trust is $1.2 billion represents $3 billion which is the after tax cash coming from both the profit of a $1 billion and recouping your original investment for $2 billion and the cost to do the job.
So no, we have not increased the sale estimate by $200 million.
Okay, thank you.
From Stifel, we have John Guinee. Please go ahead.
Wow, a lot of moving pieces. Just curious, if you look at paying $34 million for the Kmart space about a 141,000 square feet. What do you put in a 141,000 square feet of ginormous floor plates and that’s about 240 of the foot. Does that imply that the retail there is work 240 of foot?
John, your 240 a foot I think is paying a heavy good amount which is a value, right, it was annual rent I think came out of paying us around $60 per foot again touch less. So, like that the more relevant comparison. But we think in terms of that space that is a demand is to use that up, absolutely.
And that is a whole by location right in the heart of the district and that now had in Kmart back which was effectively shut off to the plaza on 33rd Street, we can integrate that have that facing both 34th Street and 33rd Street. And based on our preliminary discussions with a couple of large format users that wouldn’t take it all because we don't want 110 to take it all given how we're going to incorporate redevelopment. There's absolutely going to be strong demand for that space and the numbers.
Thanks and then just a few quick questions. When do you think you're going to get the hit for the PENN1 ground lease and this is $0.20 a share a good number? Second does the train capacity that the governor is thinking 40% is that with or without a new tunnel which I'm not sure what the status is of the tunnel and then third what are you guys thinking about Manhattan Mall and Hotel Pennsylvania because we're always under the assumption that is pretty soon thereafter?
Okay. Let me see if I can take those in order John. PENN1 ground lease I think you asked about the impact there and that's something you put on last call or two we're not prepared to give an estimate as to what that can be. That's almost three years away in terms of that we reset and there's a lot of factors that go into that reset whether it's negotiated or arbitrated and there's still a fair amount of time. Obviously it's going to be up from today's number but not something we want to prognosticate particularly as we don't want to negotiate in public with our ground for sure. In terms of the track of past the 40% that's not dependent on a new tunnel and that's effectively adding the new terminal to the South and allowing additional trains to basically dead end coming from the New Jersey side there but not dependent on gateway per se.
And then Manhattan mall and Hotel Pennsylvania.
Look right now Manhattan mall is the office building is full and we've got a great tenant who continues to love the building. So that's performed well. The retail were effectively keeping on shorter term arrangements but that asset is cash flowing quite significantly and that's the plan for near future but [indiscernible] PENN, we’ve talked about in the past that as we finish the redevelopments of Farley PENN1 and PENN2 and the district transformation becomes evident in a hotel PENN we think is going to be the best development site to the city. So obviously to a market conditions are fine but that's the next logical place to build a new building and at some point Manhattan mall it could be expansion for that but that's years and years away way not anywhere anytime soon in terms of altering what that asset is.
Great. Thank you.
Thank you.
From Piper Sandler we have Alexander Goldfarb. Please go ahead.
Hey good morning there. Just a few quick questions here. Just on first on the guidance or we'll put guidance enclose you guys talked about to the impacted 2020 that includes the benefit of stopping the where presumably stopping the ground rent payment on the Topshop Fifth Avenue store?
Correct.
Okay and then as you guys have laid out the roadmap for the PENN station --
But Alex that's not a comparable FFO. 608 Fifth Avenue is not in comparable FFO and when that lease is rejected some months from today there will be a $70 million income item -- non-cash income items but that's not in comparable FFO. So that's not what Michael referred to in his discussion.
Okay. Thanks. Joe that's helpful. And as far as the road map that you guys provided on the PENN Station and PENN2 impact, is that consistent with what you guys had originally penciled or has that impact grown as you guys have gotten more involved and have seen what you could do there?
The numbers are a bit accelerated Alex as we've seen, as we begin to execute on plan. So it's a little more front ended.
Okay. And then finally.
Alex it's David. Good morning. I guess I'd add to that is our objective is to turn this building into a mid to high 90s building on average if not higher. So to the extent we can get tenants out of this building, our objective effectively is to do so, so that's something that Glen and team has been working on to accelerate over the last number of months.
David that's helpful. Then the final question is you guys clearly are not an earning story you're NAV story. On the last call Michael you talked about Hotel PENN that it's not time yet you guys are sitting on 350 Park and I hear comments and the brokers to me I was just talking to a guy open who was saying that they can find space under 120 a foot in Plaza District. At what point do rents on Park Avenue make sense where you can redevelop on Park Avenue or is the construction cost Delta just that far that for those of us thinking about value creation for you guys at 350, it's going to be years out because the math simply doesn't work now or in the foreseeable future? When does the math work?
Look as I said in my opening comments we are beginning to take the steps in order to line that side up for a new development. Now we'll make that decision as we get closer to that time based on market conditions and so forth but the feedback from the brokerage community is that that is the best site in town and would command highest rents and so we maybe even reference in the past we have been approached by significant users for either all or a need a proportion of new building on site.
So that is in terms of the economics, I think it's not a matter of it working today, it's a matter of can you actually give the developer and so you just think about the timing we have leases that run through really begin to 2024, 23 and so that's the earliest that we could begin to take the building down, so new delivery wouldn't be until ‘27 or ‘28 and so it's a significant opportunity but it's going to take some time in order to bring it to fruition both in terms of lining up the tendencies and then execute. So I think that we had a building today we command the rents to achieve the yield necessary, the answer is we think we didn't quite possibly to build a brand-new building that's perfect in that location, we need today with command rents that would make that work.
And that would be the JV with Rudin?
The answer is it can go either way Alex. We can build on our own. We don't need Rudin to build there. We can build a probably best boutique building million square foot boutique building on that site on our own or we can combine with Rudin behind this and build close to a 2 million square foot building and so the answer is as we continue to move down the tracks here in terms of timing our leases and whatnot it's building black rocks moving around out in 2023 as well so they line up for that. So we can put them together but we'll evaluate based on PENN discussions and obviously a tenant for the whole combined building would require a significant pre-lease which there is interest in. So the answer is, it’s too early to tell which direction it can go but either is possible.
Thank you Michael.
From Morgan Stanley we have Vikram Malhotra. Please go ahead.
Thanks for taking the questions. On the distant explorations in on the office and retail side we now received the big move out in PENN here but you've also kind of alluded to a 20% mark to market in your 10-K, can you kind of outline what's driving that you and any other major leases that are expiring in 2020 that should be aware about on the office side and on the retail side I think it's more flattish mark to market but there's a big expression in 4Q of 20. Can you remind us what that is?
On 2020 our expiration for approximately [525,000] feet as we take [indiscernible] and service which is a [560,000] [indiscernible], which expires at the end of March. On the mark to market we're coming up $70 rents we think that goes 20% to what's called as mid 80s number remember a quarter-to-quarter these numbers fluctuate. There's no rule of thumb obviously but as we look at our leasing projection the spaces that are coming up for preparation plus all the activity that we've been talking about this morning we feel the mid 80s number coming off the $70 rent is in the ballpark of what we're going to hit.
And again that's not to speak necessary at a time right. So is the timing on those new leases may necessarily occurred in 2020 but that's our expectation in terms of where on average they will get marked to.
So that includes the 500 that that you highlighted but potentially other leases and you're just that sort of a broad statement saying but in general coming off of $70 rents and we think overall we can get a 20% mark to market including kind of new leases?
Correct.
And then on the –
Yes. On the retail that you said is more flattish. That's again no big leases. Probably half of that is in the Penn District which given everything we're doing there we feel good about some of that maybe take frankly, intentionally, they were a little longer there to get the right mix of tenants but again that's a fairly no big lease this fairly diversified set of expertise.
Okay. So not even in 4Q just seemed like there was a large junk in 4Q 2020 but if maybe just building off of that and Fifth Avenue over the last call at 12 or 18 months there have been a number of vacancies over there. I'm just sort of wondering what does this mean for, in your view what does this mean for sort of upper fifth rent per foot sustainability and specifically the ability to lease up your vacancy there?
Hi, this is Haim, on Fifth Avenue we have one vacancy on upper Fifth Avenue. We love our corner. We have a great property. It sits on the 50-yard line on the luxury side of Fifth Avenue and while it's too early to call a rebound in luxury leasing we do have a lot of confidence in the quality of our assets and the positive momentum that we feel going on today in luxury retail among the strong brands with the strong balance sheets who have profitable business lines. So early to call a rebound but still confident in the quality of what we have. We happen to dominate the best-in-class retail assets and we have confidence in that.
And Haim, if I can just ask you just on the if I remember correctly in your vacancy rents there were well below market but just given the broader vacancies on Fifth Avenue it seems like asking is still kind of above 2500 or 2800 foot but like what is the true sustainable or foot rate if you were to just take sort of a longer term view. I'm not looking for your specific marker market but just that upper fifth area what's a more sustainable level?
I believe the sustainable rents are not where peak rents have hit on Fifth Avenue. The releases signed in the $4000 to $5000 a square foot range at peak. I do believe it's down significantly from there in terms of affordability but there are brands with significant margins and huge balance sheets that can do a lot of business in the market. There are still well over half a dozen brands that have more than 100 million in sales on Fifth Avenue and those are the customers that will look for sustainable rents in the range of what you're talking about.
Okay. And then just last clarification the stabilization that you've outlined for Farley 22 I know you said that you're pretty confident of lease out we'll hear more news but just from a modeling perspective to kind of get to that 22 stabilization like what sort of, when do you have to get the leasers down or what sort of in the model that we have to get leasing done to achieve that stabilization before maybe it gets pushed out into ‘23?
I was just going to say the next three months or so.
Okay. So you would need to get a lease done in the next three months before you --
Vikram as we talked about, we said the office lease is on track and the retail leasing which I described in the opening remarks and we are in active negotiation on the leases on the bulk of the concourse and much of the main floor. So we feel good about the numbers we get out there.
Okay. Thanks. I love to follow up offline. Thank you.
From Green Street Advisors we have Daniel Ismail. Please go ahead.
Great. Thank you. Just given all the moving pieces can you speak to how leverage will trends in 20 on a debt to EBITDA basis?
We couldn't hear your question. Can you repeat it please?
Sure. Just given all the moving pieces can you speak to how leverage will trends in ‘20 on a debt to EBITDA basis?
This is Joe. Hi Dan, we don't anticipate leverage rising in ’20, if that was your question? There's no reason I mean we're sitting on an awful lot of cash. There is no reason really to increase leverage.
And then maybe just for the New York office portfolio outside of PENN Plaza can you frame how you guys are seeing that effective rent growth in ‘20? Should we -- are you guys expecting something more in line with inflation or something about that?
We're seeing rent still strong, rent in Midtown are all-time highs right now hover around [$80] a foot. We feel good about the portfolio, the strength of the buildings which we're leasing right now. So we feel like rents are still going up in most submarkets, including many of our buildings but again it's case-by-case as we lease up and then again we don't have a lot of space to come in that core portfolio to the top earlier.
And if you have a ballpark where in place rents fits outside of your Penn District office portfolio in Manhattan, can you frame how far below market those rents would be?
Dan I don't want to give you number on the phone here. That would be close to precision but I am comfortable saying there in place rents are below the market rents but again don't want to quantify how much that did be that'd be a little off-the-cut. I think going back to your first question we're seeing -- and I can tag in the opening remarks is that you have redevelop, rebuild you have new builds. We are in [indiscernible] real rental growth there right? In the Penn District we are seeing significant railroad given the transformation of maybe area of the access and then in the sort of normal course traditional Midtown assets that's probably a little more 3%-4% type growth. Again just I would say all the way on the West Side with Chelsea and meat packing, you're continuing to see above that. So I think the trend that remained fairly consistent already Midtown has been a little stronger in the last four or five months than it was in the last year.
That's helpful. Thanks.
Thank you and I'll turn it back to Michael Franco for closing comments.
Thank you everybody for joining our call today. We look forward to seeing many of our investors at the City Conference in Florida next month. Our first quarter earnings call will be Tuesday May, 5 and look forward to your participation again. Take care and thanks.
Thank you. Ladies and gentlemen this concludes today's conference. Thank you for joining. You may now disconnect.