Good morning and welcome to the Vornado Realty Trust First Quarter 2021 Earnings Call. My name is Vanessa and I will be your operator for today's call. This call is being recorded for replay purposes. All lines are in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question-and-answer session.

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

Thank you. Welcome to Vornado Realty Trust first quarter earnings call. Yesterday afternoon, we issued our first quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission.

These documents as well as our supplemental financial information package are available on our website, www.vno.com, under the Investor Relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures.

Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q and financial supplement.

Please be aware that statements made during this call may be deemed forward-looking statements, and actual results may differ materially from these statements due to a variety of risks, uncertainties and other factors.

Please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 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 also present and available for questions.

I will now turn the call over to Steven Roth..

Thank you, Cathy, and good morning to everyone. I hope all of you continue to be safe and healthy, and that you're all vaccinated or on your way to being vaccinated. We are full speed ahead on the Penn District and are confident of its success.

Farley is well along, we delivered half of Facebook 730,000 square feet on January 1st, and we will deliver the second half on June 1st just one month from now. At PENN1 we will deliver the 34th Street lobby in July, the buildings enormous amenity package in October and the 33rd Street lobby at year-end.

And PENN2 and the Long Island Railroad Concourse developments are now on the full-scale construction. This transformation will take over a couple of years to complete.

The decision to permanently close the Hotel Pennsylvania will allow us to get this site ready for development in less than two years from now, which is perfect timing for the next phase of our Penn District mega project. I believe that the Hotel Penn site will be the best development site in town.

Notwithstanding that, we will be delivering for tenants the most robust and unique amenitized offering in the city, with the added convenience of being directly on top of New York's main transportation hub. Our strategy here is the price PENN1 and PENN2, below our neighbors to the west, under their price umbrella.

Since we are coming off $60 rents, this will be an outstanding outcome. Over time, as we continue to remix the Penn District, I fully expect rents will aggressively rise to the premium that they deserve. Over the summer and to the early fall, New York will be reopening and returning to normal.

All of our tenants are telling us that they are anxious to bring their employees back to the office and we are anxious to welcome them back. We remain strong in our belief that working from the office will be the preferred mode of work for the companies and their employees post-pandemic.

The kitchen table may be a place for some, but I continue to believe the urban office is the work place of the future. As I have said, I believe we will come out of this difficult year in an economic boom, fueled by a tsunami of government stimulus of which New York is a very major beneficiary.

The financial sector is now booming, tech is now booming, healthcare is now booming, retailers like Walmart, Target and Home Depot are now booming, and there is enormous pent-up demand from consumers. If we're going to travel, we need tourists returning to New York and spend on all manner of goods and services.

This is beginning to happen all across the country. Importantly, the major tech companies are telling us that they intend to continue growing their office footprints in New York and that New York's deep and diverse talent pool is unrivaled anywhere. As you can tell, we are very bullish on New York. Finally, a word about ESG.

We filed our 2020 ESG report on Form-8K on April 12th. We continue to demonstrate our leadership here and we are proud of the many awards and recognitions we have received. This is an important topic that we believe it. Please do take a look at this important report. Now, over to Michael for comments on our numbers and our businesses..

Thank you, Steve. Good morning, everyone. I do hope you're all safe and healthy and look forward to seeing you again in person soon. Let me start with our first quarter financial results and I'll end with a few comments on the leasing and capital markets.

First quarter comparable FFO as adjusted was $0.65 per share, compared to $0.77 for last year's first quarter, a decrease of $0.12 primarily due to the effects of the COVID shutdown. One change you will note is that the Hotel Pennsylvania results were moved to non-comparable given our decision to permanently close the hotel.

The decrease this quarter is reconciled for you in our earnings release on Page 4 and in our financial supplement on Page 6.

It was driven by the following items; $0.04 from our variable businesses, trade show, signage, garages and BMS still being offline, $0.07 from tenant vacancies and bad debts, primarily the JCPenney in New York and company lease rejections last year, $0.03 from Penn District space taken out of service, $0.03 from Macy's lease cancellation income in last year's first quarter, partially offset by $0.05 from G&A and interest savings.

These items are not new news and are right in line with our statements over the past few quarters. Most of these are temporary and the income will return over time.

Furthermore, the first quarter results are consistent with the sequential fourth quarter run rate we discussed last quarter, adjusted for the accelerated vesting of equity awards for retirement age executives [ph] in the first quarter.

With respect to rent collections in the first quarter, overall rent collections were 96%, a continued improvement from the prior quarters. We collected 97% of office rents and 90% of retail rents. April collections ran at the same level.

While the aggregate headline same store cash NOI numbers for the first quarter are negative on their face, excluding the variable businesses, our core New York office business actually was positive 3.9%. Lending in Chicago and San Francisco, our office business overall was a positive 1.9%.

The big takeaway here is that our core office business, representing over 80% of the company, is continuing to hold its own in this challenging environment, protected by long-term leases with credit debts. And while the retail same-store numbers are down, overall retail NOI is flat quarter-over-quarter, again consistent with our recent guidance.

Finally, we have plan to seize for significant growth as the pandemic recedes and the city returns to normal level of activity.

In addition to the savings we will realize from the previously announced overhead reduction program, we expect significant growth with return of our variable businesses from the Farley Building fully coming online in 2022, followed by the delivery of PENN1 and PENN2, and reduced interest costs as we roll over our debt.

One of the analysts even predicted that Vornado will have the highest growth rate in our sector over the next several years. Now turning to the leasing markets, we are seeing improved conditions in the office leasing market with the pace of activity up nicely in the past 60 days.

The phones are ringing, tour volume is up, proposals are coming in and leases are being signed, with the flight to quality trend accelerating. According to the brokerage houses, leasing volume is certainly out versus 2020 numbers. The first quarter had the most activity of any since the fourth quarter 2019 with most of the action recurring in Midtown.

At the same time, we are realistic and recognize that availability across all sub-markets remains high. But an encouraging sign, sublease space has recently come down some, almost 600,000square feet of sublease space has been removed from the market by occupiers who plan to re-occupy the space.

Moreover, a substantial portion of the sublease inventories challenged space, either physically, by way of the over-tenant having poor credit quality or term constraint. Roughly a quarter the sublease space in the market today has less than three years of terminating.

During the first quarter, we completed 12 office leases totaling 208,000 square feet. The two largest leases of the quarter were both new to our portfolio.

Young Adult Institute for 74,000 square feet at 825 7th Ave, the new state-of-the-art schooling facility, and FuboTV Inc., a new world content streaming platform coming off their successful IPO launch, for 55,000 square feet in the base of 1290 Avenue of the Americas. Both of these leases represent an expansion from their prior locations.

We are currently negotiating paper on 300,000 square feet of which 200,000square feet is with new tenants. And in addition, we have a growing pipeline of 1.4 million square feet which is up meaningfully from recent quarters. Last year, we completed the two largest leases in the year, Facebook and NYU.

The current sweet spot for deal-making in the market is with small to midsize firms looking to relocate into new or redeveloped assets.

Remember, all of our spaces redeveloped or in the Penn District, which is under redevelop, this dynamic matches up well with our current vacancy where our largest available blocks are only 180,000square feet at 330 West 34th Street and 117,000square feet at share and 85 10th Avenue As a reminder, our office expirations in 2021, 2022 are very modest, with less than 5% of our space rolling each year and a portion of this in PENN1.

Our leasing team is now in full stride in the Penn District, with multiple presentations, tours and meetings each day with brokers and tenants across all industry types. Using our new Penn District experience center to showcase and PENN1, PENN2 and our grand plans for the Penn District really brings everything to life.

The reception to our vision for the district and our best-in-market differentiated project offerings have been nothing short of phenomenal. Turning now to Chicago and San Francisco. In Chicago, we are also seeing more activity in the market.

During the first quarter, we completed 85,000square feet of leases, including a 45,000square feet office renewal, along with 18 showroom transactions totaling 40 thousand square feet, of which 15 were renewals. We currently have a 90,000square feet renewal leasing negotiation and a pipeline of 500,000square feet showing real interest in the property.

Importantly, we will be restarting the trade show business in October of this year with the NeoCon Show beginning to bring back that income stream. In San Francisco, 555 California continues to be in a league of its own.

Coming off the heels of our recent large renewals with both Bank of America and Goldman Sachs, in April, we executed a lease renewal with KKR in the triple digits for its 50,000square feet in the tower. Our occupancy here is 98% with minimal expirations until 2023. Turning to retail now.

Retail leasing in the York City is beginning to come out of a period of inactivity to a phase where retailers who are succeeding and even thriving are now looking for opportunity. All current leasing activity is very price-driven.

The tourist-driven higher rent markets of 5th Avenue and Times Square have seen the least activity, as retailers remain on pause until there is greater visibility or when the 60 plus million tourists will return. During the quarter, we completed 11 retail leases for 46,000square feet.

These included two long-term renewals at 129 Avenue of the Americas, including a lease with JPMorgan Chase for a flagship branch and a 7-year extension with the luxury retailer Tod's at 650 Madison Avenue.

Our leasing also included another six leases signed at the Farley Concourse where demand remains strong, and we are in negotiations with tenants to fill the balance of the Concourse space. Overall, we are upbeat about the future of our markets, our leading position in them and our prospects for creating value. Turning to the capital markets now.

First, let me congratulate Jan LaChapelle on her promotion to Executive Vice President, Head of Capital Markets. The real estate financing markets continue to improve, with both the CMBS market wide open and banks beginning to land again a high-quality office.

Spreads and all-in coupons are at very attractive levels, as evidenced by our recent strong refinancings at One Park and 909 3rd Avenue, both of which were at significantly reduced rates.

The unsecured market for real estate companies also continues to be very strong and it is likely that we may shift over time to more balanced approach between unsecured and secured debt.

Finally, our current liquidity is a strong $3.94 billion, including $7.76 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 the operator for Q&A..

[Operator Instructions] And we have our first question from Steve Sakwa with Evercore ISI..

Yes, thanks. Good morning. Michael. I was wondering if you could just spend a little more time on leasing, you gave a lot detail there, maybe talk about the terms that you're seeing in terms of TI free rent and then length of lease that tenants are sort of looking forward today in the market..

Steve, can you just repeat? You cut out for about 10 seconds..

Sorry, the question was really around lease term, TI, leasing commissions, free rent.

How are you seeing some of the impacts, not just in face rent, but some of the concessionary items and then, what are tenants looking for from a length of lease term?.

First thing I'd tell you is that lease term; we're seeing a lot of long-term lease commitments. 10 years, 15 years, we actually completed a lease this quarter for 30 years with this [indiscernible]. So we're seeing lease terms long, we're seeing commitments for sure, we've seen no change in that as we go quarter to quarter.

TIs are elevated and free rents are elevated, net effectives are up, but I think they stabilized at this point. But right now, if you want to lease space to meet the market, you have to give the TIs to fill this space and that's what we're doing, but they have stabilized over the past, I'd say two to three months, for sure..

Okay. And maybe as a follow-up, I don't know if this is for Michael or somebody else, I know there has been some discussion around the refinancing of 555 California and there was an article recently about a north of a $1 billion new mortgage there.

To the extent that you did refinance at that level, how do you think about the excess proceeds, and what would that be used for?.

I don't think we're going to comment on that, other than just to tell you that, generally speaking, where there's smoke, there's fire. We won't comment on anything about that transaction at the care site [ph]..

Okay, thanks, that's it from me..

Thank you. We have our next question from Manny Korchman with Citi. Please proceed..

Hey, everyone. Good morning.

Just wondering how progressed the conversations are with tenants at Penn, both for the large blocks available at the current Penn buildings, as well as the PENN15 and if that drove your decision to take the hotel offline and move forward with the larger redevelopment there?.

Hi, it's Glen. I'll tell you we're in this experience at PENN1 multiple times a day showing all the projects, I will tell you the action at PENN1 from a leasing standpoint is absolutely on fire, we do not have any real large blocks there, but in the tower, we have some single and two-floor deals happening at rents that are at our underwriting.

So we're performing very well there. The reception has been excellent. We are also beginning to showcase PENN2 into the market. Also daily a lot of great presentations that are incoming but we're going to go slow with PENN2.

So we've just started up on the physical construction and as this thing keeps going on a construction standpoint and the tenants can see it physically, it will just get better and better in terms of the incomings in people's reception.

And yes, on PENN15, we are beginning to show people our plans, the announcement of knocking on the Hotel Penn has brought a lot of incoming calls and emails, we're starting to talk to folks about 10-15 as well as we get into it..

Thanks, Glen.

And I don't know if this one's for you or for Michael, but if we think about the occupancy trajectory through the rest of the year here, do you anticipate that this is sort of the bottom for New York City office occupancy or vacancy, or do you think there is a little bit more to come from a net absorption perspective?.

I don't have the exact numbers in front of me, Manny; I can play and move around a bit here or there. I think we're pretty close to the bottom, again, I'm not going to say take a little bit, but I think we're basically there..

Manny, anecdotally, I would tell you that Glen told me that several of the brokerage houses have told their folks and their clients to get into the market now, that this is the bottom and that they expect a turn from a tenant markets to a landlord market over the next six months. So that's anecdotal information, but it's important information..

And thank you. Our next question comes from John Kim with BMO Capital Markets. Please proceed..

Thank you. The announcements in the news flow of New York City reopening is very fluid and even this morning Goldman Sachs announced plans to come back next month.

Are there any more details that you could share as far as what's happening in your portfolio today, as far as more details on the proposals? What do you expect to be signed as far as leases in the second and third quarter, and potentially also traffic and your street retail portfolio?.

I'll take the office, it's Glen. Michael remarked in the script, in his opening remarks, our pipeline is robust, we have an over 300,000 feet of leases in negotiation. We have another 1.4 million feet of deals that are in discussion.

I'll tell you things are picking up a lot, not a little, so tenants are coming out of the woodwork, many are looking for new space to better quality products. So we're seeing a huge uptick in office leasing activity as we sit here right now. In terms of the utilization in the building, that's also uptick in week to week.

On a percentage basis, we're now a mid-teens at all of the buildings. Most of our tenants are telling us returning starting in June through Labor Day, but certainly the narrative is unwinding quickly. We're feeling it, we're seeing it and we're hearing it..

In retail, we are seeing a major uptick in conversation, that's primarily due to the fact that the survivors of the pandemic in retail have actually been driving; New York City is probably the last on the list to be opportunistic if it's the rest of the country has been booming.

The New York City suffering from the lack of our 60 million tourists being in the street but the smart retailers are now in the market being opportunistic. And I don't think New York retail has ever offered a better value than its offering today in terms of the prime spaces at better rents..

That's very helpful. Thank you.

My second question is on the tracking stock that Steve, you mentioned in the Chairman's letter, are there any more details you could share at this time as far as the timing, whether or not you plan to raise capital through it, and will you be stripping out the financials of the Penn redevelopments from Vornado going forward?.

I really don't think it's appropriate to comment on this. We are working very hard on it; it's a very, very exciting project that we're very excited about. We're targeting hopefully year-end.

Other than that, I don't think it would be premature to get into any details, but I'll give you a little bit of what our thinking is and, by the way, a tracking stock is something that has been used very successfully by folks like John Malone at Liberty and sidekick; Greg, [ph], Barry Diller, for example.

And generally, when it's used is where you have a business inside of your core which is different and which has a different rate of growth and different characteristics.

And so, we feel that the Penn district mega project that we have is different than our core assets and so, we feel that investors would benefit enormously by being able to invest in the Penn District and its characteristics. By the way, do remember it's a development company, for better or for worse and our core assets.

So the differentiating aspects of the Penn district is at what we consider to be the epicenter of New York, it's directly on top of the major transportation hub, which means all of the subways and all of the railroads, all of them come into that hope and that's an extraordinary statement because you can get in and out of that station no matter where you are in the New York City region on one ride.

The most important part of it is, and by the way, it's enormous, when you look at the number of assets and the scale of the assets and the number of blocks that we accomplished it's enormous.

The most interesting part of it, I think from my point of view and Glen's point of view is, it's a cluster of buildings that are interconnected generally underground.

So what that means is that a tenant who has 300,000square feet requirement, and I've written about this, who comes into a 500,000 building is locked in, there is no place to go, but a 300,000square feet tenant in our 5 million growing to 10 billion, growing to 50 million square foot complex has enormous opportunities to grow should they want to in the same building or in adjacent buildings.

So I believe that a strategy which involves cluster of buildings in the campus, which also will allow for an enormous series of amenities, that somebody who has even a giant million-foot building can afford to do, makes us totally unique.

We are seeing very much the same thing down in Northern Virginia where our SpinCo JVG Smith [ph] has this enormous concentration of buildings and land et cetera, in the Crystal City complex that Renato contributed to that company when we bid the Spin in 2017.

We've now attracted Amazon HQ2 there mainly because of the concentration of assets that we have, and obviously because it's a great labor market. The same is true of our New York Penn District.

So what we're trying to do and the objective is to take businesses which are different, meaning the Penn district is different than a corner office building on even Park Avenue and allows investors to have the choice. So we're very excited about it.

It's a very important work in process and more details will be coming as we advance it and when we announce it. I think somebody said in their reports last night that it was not well-received by investors, which is troublesome to me because that's totally contrary to my feelings about it and our company's feelings about it.

And so, if that's the case, then we have some work to do to talk to our investors and make everybody understand exactly what we're thinking about, but we couldn't be more excited. And I think that's it for now..

When you list some of the key attributes invested in Vornado, arguably Penn District will come up as number one.

So have you gotten feedback that this really isn't that different to the reason to invest in the company?.

I don't understand the question, John..

Your point that you're stripping out something that's different, where in reality it's just a redevelopment of the existing assets that is the key reason investment renewed today.

I'm just wondering why you think it's different?.

Well, I can say what I said for the last five minutes over again. But the answer is, and it's totally different in many, many different ways. It's real estate, but it's totally different.

The other thing is, when you think about stock performance, we don't think that our stock could go with or without - we're getting no credit in the Vornado stock and trading price for the Penn District of basically anything else.

So what will happen is that we think that the corpus of Vornado, the price of Vornado will be unaffected, or maybe even rise hopefully, whereas the Penn District stock will get to its true value, but we don't agree with you, we think it's totally different..

And we have our next question from Alexander Goldfarb with Piper Sandler. Please go ahead..

Hey, good morning, Steve, morning, Michael. So I'm going to take a different tack with my question this quarter. So I'm going to focus on to what I perceive to be positive in your portfolio. Steve, in your Chairman's letter, you outlined your Netflix spending, and the fact that studios are now on your radar.

It would seem that the JCPenney space at Manhattan Mall and the Penn district redevelopment, both of those assets have huge loading dock, huge amounts of potential space that they can be carved out, and obviously being in the city is incredibly convenient for studios versus people having to truck out to Queens or some of the outer boroughs.

What are your thoughts on converting either of those two assets or some of your other existing that has those sorts of attributes to studios?.

This all began with the two things; number one, all of it should become network - Netflix addicts.

And number two, we have incomings from entities that are in the sound stage business or that need sound stages, and so what's happened is that the streaming business and the entertainment business has become an unbelievably powerful, dynamically growing business and is consolidating.

And so, the companies that are in that business are huge financial entities and they all have a handling and even a strong desire to be in New York. Apparently, there is a significant, mainly even dominant concentration of talent in New York.

And so, it's really basically they say in three places, New York, Southern California, and I guess one of the European cities. But the point being is that there is a tremendous amount of unserved demand. And so we're responding to incomings, and we have assets that could service that demand.

Now, I could make a way too aggressive statement that says the Penn District could become Hollywood East, so I don't take that to the bank by the way, but there is a great deal of interest in some of our assets that we are working on. Nothing imminent, we just responding to where we see pockets of unique demands in the marketplace..

Look, that's good. Obviously, it's something new and it would seem to be something that's good to repurpose, especially large blocks of space that have come back to you..

And we feel we have assets that could be adapted to those kinds of uses..

The second question, Steve, going back to Penn station, you guys for over two decades have been talking about Penn Station.

We all know the issues about the streetscape and the neighborhood and the desire to see that improve, when you look at Grand Central that area is already there, Eastside Access is clearly going to sites in a way a huge chunk of Long Island commuters and you guys have 350 Park.

It would seem that 350 is almost the better site than Hotel Penn, just given that the neighborhood is already there, and there are a lot more people being excited by the commuter hub and you have East Side access coming in the next few years.

So what are your thoughts on accelerating 350 and where does that fit in your pipeline as you guys are flat market anchoring a Hotel Penn versus getting tenants to anchor at 350?.

We are an equal opportunity employer, wherever the tenants want to go, that's where we want to put them. Obviously, we have an enormous amount of respect for our 350 Park Avenue asset, it's a great asset and it's kind of like bite-sized.

It's a 500,000square feet asset, it's obviously a candidate for tear down and rebuild, but in tear down and rebuild is a combination and we can grow the site too, by the way, as the speculated in the press.

So we could grow it so that it's more than 2 million square foot building if we wanted to just focus on our own site without growing it, which would be a million square foot building.

That is an immense financial undertaking which would require record breaths [ph] which we have talked to several tenants about, and we may do that, but the likelihood is we will not do that.

The more likely outcome is that we will rent up the existing 350 Park Avenue at very favorable rents and so it would like postpone it for a cycle, and retain the option of doing a new build on it or continuing to rent the existing building the over time.

So it's more likely that we will not do a tear down on that site and rent it out for one more cycle, and focus our efforts on the Penn Station district.

That's the more likely outcome, although we couldn't be more delighted, by the way, if we decided that we wanted to sell that asset with all of its optionality, in terms of the new build or whatever, we think we can get an extraordinary price for it, but that's not something that's high on our agenda right now..

We have our next question from James Feldman with Bank of America. Please proceed..

Thank you and good morning. Steve, I want to go back to a comment you made at the onset of the call where you said major tech companies plan to continue growing their office footprint in New York City.

Can you talk more about exactly what you're seeing? I think our understanding is that a lot of the big leases have been signed, but I'm curious if there is a lot more behind it..

The answer is, I'm really not going to comment on our confidential conversations with our customers whom we cherish and we respect that confidentiality. We deal with all of these folks, we obviously have them all in our portfolio, all the way from Facebook to Apple to Amazon, et cetera.

We can only tell you that this is first-hand information, they love New York and for most of these folks, New York is the second largest outpost and center. What they love about New York is, first of all, their employees love New York. There is a very, very large and, very importantly, a diverse workforce and that's very important to these clients.

So, they have their fingers on the pulse of New York, they follow the real estate in New York as closely as we do, they all have very professional real estate organizations that we are in contact with frequently, almost daily, so the answer is that I stand by my statement.

They are very aggressively interested in New York, their interest in New York continues unabated. And we think that's a very exciting thing. By the way, their interest in New York is basically almost exclusively to the west side of New York. That's where their employees want to be and that's where their culture says they want to be.

So we think we're very well-positioned for that. And we think that bodes very well for the future of New York and for the future of Vornado..

If you think about the tech business, you'd start with the big four or five, it's stunning the earnings that they posted, the growth rates they continued to have and the aspirations that they continued to have, then you had an entire segment of companies that have now either gone public and gradually to point where they're mid-cap companies in companies in New York.

These companies have got significant ambition. They need people to execute on those ambitions, they need to be in person, huge amount of engineering talent, collaborations acquired, etcetera. And so, both from our own tenants and others that are in the market that are community [ph] expand.

Others that we just bought, for example, FuboTV just went public into our portfolio. These companies have significant aspirations on growing their business. And as Steve said, New York is a central aspect of that, and I think that's very positive for this marketplace..

Michael brings up a very important point, and that is, the newbies and the aspirants who are high growth people, they want to be in the same cluster and in the same neighborhood as the established huge tech tenants are.

And what Glen likes the best about the new tenants is they are enormous growers and they look to locate in buildings which have the potential, where they can add 50,000 feet and 100,000 feet. When we started with Facebook 7, 8 years ago, they started with couple of hundred thousand feet and then they grew to 700,000 feet over 3 to 4-year period.

That's the kind of client that Glen loves and that's a kind of occupancy that we see..

Thank you. That's very helpful.

The 1.4 million square feet of pipeline, how would you divide that up by those types of growing tech tenants versus kind of upgrade relocations, or if there is any other meaningful category you split that into?.

I'll tell you, Jamie, very diverse industry sector mix and a very good mix of renewal, important renewal transactions as we look towards our explorations in next three to four years, along with very good new tenant activity, a lot in the Penn district but also throughout our other assets.

So it's a very healthy mix of new renewals, some expansions and really every type of industry sector. The one industry that's really leading the charge right now is a financial tenant, they're busy as I've ever seen it, so our financial oriented buildings are really busy.

We have backup yields on deals that [indiscernible], they are leading the charge but in terms of the mix, we feel really good about really covering everyone out there right now in that pipeline we talked about..

Can you quantify how much of that is renewals of the 14 [ph]?.

I'd rather not get into the exact mix of the numbers..

Okay, that's fair. And then, another question for you, Steve. You had commented on the boom, I'm just curious what your thoughts are on the benefit to New York City from the Biden plan and the outcome.

I know it's still early but mayoral race, what should we be thinking about either the risk or the rewards based on who is in the game?.

So let's see.

Your question is how will New York benefit from the boom, and then, what's going on with the mayoral races? Is that correct?.

Well, just what are your thoughts on the Biden plan and how you think that really good trickle through to New York? And then, how should we be thinking about either the risks are the benefits from the mayoral race?.

All right. So first of all, I think it's pretty clear the country is in a boom. The only thing that I am uncomfortable talking about it is that the consensus feeling amongst almost everybody, so consensus is something to be concerned about.

Normally, I'd like to be on the other side of that, but it is the consensus, that is also what I believe and I think it's happening.

You go to other places around the country which have not been as shut down as New York, it's happening now, you go to Texas, et cetera, when they have been more lenient in the restrictions, you go into a Target store and the shelves are empty, you go into some of the luxury retailers across the country and the shelves are empty, but the demand is amazing.

They can't build that of houses, et cetera. So I think that's pretty clear, the Biden's policies together with the fact that the majority leader of the Senate is from New York.

There is a significant and fair, by the way, in terms of if you look at distribution of these programs across the nation, there is a significant amount of financial benefit that's coming to New York in terms of the stimulus package, first in terms of closing the budget deficits for the city and state, which is a universal program across the country, but it's good that we are getting it and other benefits to our population.

So we think that the stimulus will be an enormous benefit to New York, I think that's proving out. With respect to the mayoral race, that's a different kettle of fish, the oddity about politics in New York is that more than 2/3, more than 75% of the registered voters are Democrat in the city, and so, therefore, the mayoral race is not the election.

It's the primary, so almost invariably whoever wins the Democratic primary is elected mayor in the general election. There is double-digit number of candidates but interestingly, there is really no candidate which has a defining lead. We also have ranked choice voting for the first time. So nobody really quite knows how that works.

So the first two or three or four leading candidates are certainly all in the race. I'm hopeful that the candidates will all believe in a couple of principles that I think we believe in.

First, that the quality of life is, if not the single biggest issue, the biggest issue and that is safe streets, clean streets, for example, the homeless situation has to be handled, and so quality of life issues are very important, they're number one on my list.

On my list, the second is that we need to be a growing city with employment growing, which I think everybody subscribes to, which means we have to be a business-friendly city. And so, every once in a while, we have flunked on that, the Amazon disaster a couple of years ago in Long Island City is suddenly that number one example of that.

So the quality of life, safe cities, the homeless situation, being business-friendly are my number one and two. We then have income inequality, racial inequality. We have to be a fair city.

And so, those are the major issues, I think, in the campaign, and I believe that the three or four candidates who look like they have the best chance of being elected are all well-qualified with respect to that.

I think one of the very interesting things about elections is that this is a time when the political leadership or the political experts actually to the population. And I think that the message that I just said, and I think is the universal message that's going from the voters to the politicians.

It may be some groups of voters, they say income inequality and racial inequality is more important, others may say business-friendly and quality of life, but those four major points are the issues, I think, in our city and every other great city probably in the world right now.

And I'm very hopeful that we will get a mayor one of the two, three, four leading candidates that will be well-qualified in that regard..

And thank you. Our next question is from Vikram Malhotra with Morgan Stanley..

Thanks so much for taking the question. Good morning, everyone. Maybe just first one, Steve you talked, obviously there is a lot of activity on the development front and future development. I'm just wondering, in the past you've made comments about the right time to buy, and I know the stress has not been plentiful.

But given the bullish view on office over a multi-year period, can you maybe walk us through how you're thinking about value added opportunities in the New York area?.

As I think you have heard today and over the years, we are extremely bullish on New York, we are, as they say loaded up on New York, and we think we like our position.

I am disappointed that there has not been in this period unique opportunities to add value by buying distressed which is something that we have been able to do in past cycles, but that's not the way this has worked out. So this is kind of been a weird period.

We've gone through a recession, a COVID-caused recession, it really didn't hurt our main businesses in terms of our occupancies, but it did nick our income by $200 million because certain our businesses were shut down, like signage and garages, et cetera.

On the other hand, interest and the other benefit of that is, interest rates are historically low, chronically low and looks like they're going to be low forever, which is something I think we have to be a little bit thoughtful about before we subscribe to that.

But there really hasn't been very much in terms of distress that we've been able to buy what we've been looking very hard, so I'm disappointed in that.

But what is I do believe that the best opportunity that we have is toward capital in our business by far and away is investing in the Penn District, which I think if one has a five and even the 10-year view, is going to be one of the great investments and one of the great developments out there? So that's my view..

Okay, thank you. Two more real quick ones. Just on street retail and particularly the vacancies on 5th Avenue.

Can you maybe talk to us about where are we specifically on 5th, and just a more premium corridor, where are we in terms of rent levels that are low enough to attract retailers to really come back and start signing leases? Just wondering how do you start to fill up some of the vacancy that you have in the portfolio?.

As Haim said a couple of minutes ago, this is a market cycle that we've been through many times, I think we can almost predict how these cycles go.

By the way, this is a very difficult cycle because in addition to everything else, we have the secular change from brick-and-mortar retailer to Internet shopping, which is a secular change which sort of makes the cycle much steeper. Nonetheless, it's the cycle. So there's lots of vacancy.

The first thing that happens is that the vacancies are scooped up by a group of tenants who realize the value and who have business models that can operate and thrive with reasonable risk.

When the vacancy is thought to get to be absorbed, the rents rise and during the whole process the highest quality space commands the highest rents and the highest demand, so that's beginning to happen now, and as Haim said a few months ago, the retailers that have thrived are beginning to recognize that this is the bottom, and have beginning to recognize that they want to add, even in New York, aggressively add at this price point the unique important sites.

So an example of that is that we did a deal with Fendi on Madison Avenue and 57 Street recently, we extended the lease with Tod's on Madison Avenue and 60 Street recently and there is multiple other examples of that. So what's going to happen is I wouldn't focus on the spot rents today, that's meaningless.

That's the rent that rent will disappear in a year.

And so, what's happening is the smart players, the players that have a business model that works are beginning to absorb a good space and that will cause the market to shift and, in a year, or 18 months or so, you will see a totally different market and in three years from now, you'll see a monumentally different market, which will be thriving with much higher rents..

And then, just one quick clarification on Facebook.

Can you maybe remind us the GAAP contribution that's there this year, is some of that already recognized in the numbers? And just how does that ramp over the next 6 to 12 months?.

We're not going to comment on the details of the Facebook lease, other than to say we are so pleased with our relationship and they are pleased with us.

The most recent deal that we did with Facebook, with 730,000 square foot is a very height of the pandemic to give you a feel for the courage that it takes for even somebody Facebook scale to sign a lease multi-multi multi-hundred million dollar financial commitment.

In the summer if you remember the Facebook lease which covers 730,000 square feet in hand and Farley is totally unique space that we believe and I think they believe is unique across the country for where it is in the City of New York and the scale of it being a low-rise with 150,000 square foot floor price.

So we anecdotally talk to their, some of their occupiers their engineers, they are very excited, they can't wait to get into this space. And other than that we're not going to comment on the financial details..

Thank you..

We have our next question from Daniel Ismail with Green Street..

Great, thank you. Glenn, I believe you mentioned the stabilization and office concessions. I was just curious, is that a reference to concessions maintaining their current level or a return to pre-COVID announce..

For now I'm reference is stabilizing, as a during pandemic not pre, we're not back to pre-for sure, the goal is to get back to pre-we're not there yet, but they have stopped rising, for sure.

So I'm talking about in the current environment during the pandemic then, the same comment about markets, the market has the tightened up a little bit when the market tightens up the concessions will tighten up as well..

Got it.

And then just a quick question from me on PENN, any update on the ground lease at PENN 1?.

No..

Got it. And then a bigger picture question on a few of the non-office assets, you mentioned in the annual letter, how do you view non-office opportunities like studios, gaming, et cetera as a percentage of the overall company.

How big can some of these non-office opportunities be?.

That's an unanswerable question. The reason I put that in there was, I think that our shareholders had, we'd would like to know some of the things that are working below the surface even though they may not be that imminent. So for example, gaming is an interesting thing.

There are everybody that follows, New York knows that there are three gaming licenses that yet to be issued in the New York in the New York enabling legislation and that they are targeted for down state and there's been a fair amount of news about that recently where so people who are following not our company but following the basic flow of stuff in New York knows about this.

Now those three licenses are scheduled to be released in 2023 but there has been a great deal of speculation and press that that may be accelerated earlier because the budget deficits et cetera. The urgency maybe also had a little bit because these federal government's close those deficit but who knows.

So we have probably the largest portfolio and we have been receiving multiple incoming from the gaming industry operators who we will be applying for those licenses and competing for those licenses.

And so the inquiries that we have gotten have been from Manhattan [ph] properties and it turns out that is consensus that our potential assets are probably the best, we have multiple assets and they're probably the best suited for this kind of activity.

So now, I mean we realize that there is in the enabling legislation, which was passed four or five or six years ago. There is a prohibition against gaming in Manhattan. So that's sort of the disconnect and why are the operators coming in multiple inquiries about our assets when there is a prohibition.

So the market is sort of saying, well, maybe that prohibition doesn't make a lot of sense, et cetera. So when you think about, and this is going to be three licenses issue, it does make sense that one would be, two would be [indiscernible] region.

One would be to the Westchester region and then there is a third well and as I wrote about this short was doesn't make a lot of sense for that third license to be issued in direct competition then one on Long Island, one I wish. And that leaves Manhattan, which may be the golden goose in terms of getting revenue for our school systems.

So it's impossible to predict how this comes out, we have multiple assets that are of high interest to these folks. This is a complicated political process and all I can say is, with a satisfying incoming interest. And we'll see where that goes but you can discount that the zero in your spreadsheet.

Although if it did happen, it would be financially interesting. We have no, no, no interest is being in the gaming industry or being an operator or anything like that. We are a real estate vendor. That's what we do. With respect of the soundstage business is exactly the same story. We are a real estate vendor.

We are not going Hollywood, although I think some of us would like to have a bit part somewhere whatever and we are responding to incomings from an industry, which is the streaming industry which is unbelievably hot, they have a great deal of interest in being in Manhattan because that's where the talent is.

So these are ideas, which I put into the letter, because I think our shareholders are entitled to know some of the things that are going on in the background. These will undoubtedly not become large parts of our business, but who knows.

Just to remember I said, look at PENN - the PENN issue [ph] could become Hollywood East it won't for sure, but it's an interesting thing to sort of fantasize about..

Daniel all these that Steve referenced are, I think to me the key point for you guys shareholders et cetera is our job of to maximize the value of our assets and we look under every rock how to do that.

And you got the streaming business which is booming, Steve just talked about the gaming dynamics and so our objective, every day, we come to work is how do we maximize the value of our assets and look every different direction and so anything we may do here would be accretive to what we have today and that's what we do on every asset.

Right, a lot can be repurposed but some things can be..

Great. I appreciate the color. And then a very quick follow-up if I may, you mentioned the budget deficit, Steve.

Is there any potential given the fiscal concerns to potentially getting further density at or around and to start?.

There is a GPP a general positive plan, which was introduced by the state Economic Development Commission which would take the assets that circle PENN Station. And supply more densities than that is a pending initiatives, which has been promulgated by the state and there are two things sort of involved in that.

The first is, is that everybody, everybody is in favor of improving PENN Station from a logistics point of view, from a traffic point of view, from a usability point of view and from an esthetic point of view. And so the state government and the railroads are actively involved in multiple attempts to do that, which involves public money.

In addition, it's a totally accepted land planning principle that the most density in any city should be at and surrounding the transit hub and that's us. So that's in process now, it's going through community common periods, et cetera. And so, you know there is a lot going on in that regard..

Great. Thanks everyone..

And thank you. We have our last question in queue. It is from Alexander Goldfarb with Piper Sandler..

Hey, thank you. Thank you, Steve. I just want to go back, you mentioned about temptation and the Merrill. I think it was Jamie, who asked about the Merrell situation but when you look to all the, just past 4 billion in taxes on the wealthy which are really the business leaders and those are the people who are leaving.

At the same time salt repeal doesn't look likely.

So Steve, how do you, do you think about temptation, and you mentioned that there is some pushback on the tracking stock, how do you think about, you're putting billions of dollars of investment into the PENN Station area when Albany seems to be couple of with the Amazon, we asked a few years ago seems to almost be encouraging people to relocate.

How do you sort of reconcile the tail?.

My children want me to go to Puerto Rico. Look, New York there will always be in New York, New York will always be great, New York will always be a high tax place to live and it will be, it will continue to be the center of commerce and New York continue to be the business capital of the United States.

Now I agree with you that the folks in various governments, by the way the price they come out of Washington in terms of taxation, [indiscernible] may be a second runner here, but the point of it is that the loss of some very high earners, who are at retirement age by the way is something that is happening.

It's happening all around the country it's more, it's happening more aggressively in California by the way and California folks they flee to the Texas and New York folks to Florida.

What I'm saying basically is the backbone of New York is not 20 or 30 hedge fund trillionaires, billionaires who are going to Florida are aware of are the backbone of New York is the 300,000; 500,000; 100,000 even $1 million earning management people in their prime and their '40s who are raising families, et cetera, whose jobs can, who are not the heads of the businesses and live anywhere.

Whose jobs and future depends upon being in the New York where they can do three times better than they can do anywhere else. As long as that holds, New York will be fine. And as we see it people like JPMorgan Chase building the new headquarters buildings, etcetera.

The businesses that are, I'm not talking about the entrepreneurs who can live anywhere and there are a very small number of people, although they are very financially and forth, the mass of the talent that New York has pretty much is staying in New York, has to stay in New York, wants to stay in New York, loves to live in New York and has to live in New York because that's where these unique jobs are..

Yeah, but. Steve, when you look at New York share of GDP it was 11% two decades ago, now it's down to 7.

So it's clear that the economic growth elsewhere is outpacing and that's just seems to be something where New York depends on its historic laurels, that seems to be the biggest script here?.

Well, the answer to that is that New York is not growing as fast as some of these other smaller places are growing, but it's certainly not contracting and we still think there will be a demand for our product. I'm going to set you up and get you a date to go [indiscernible] and talk to all my friends and all because I think you have a lot to say..

That's why we like writing it in print. Listen, Steve. Thank you..

Thanks, Alex..

Thank you. We have no further questions in queue. I will now turn the call over to Mr. Steven Roth for closing remarks..

Thanks, everybody. We appreciate your participation. We appreciate your interesting and provocative questions and we certainly appreciate your interest in our company.

When is the next quarterly call?.

Tuesday, August 3..

So, we will see you. If we don't see you before and we're dying to see you in person; we're dying to see you in person and break bread with you and talk about all of the interesting things that are going on. And our next quarterly call is Tuesday, August 3 at 10 o'clock. We'll see you then. Thank you..

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