Good morning, and welcome to the Vornado Realty Trust First Quarter 2020 Earnings Call. My name is Sidney, and I will be your operator for today's call. This call is being recorded for replay purposes. [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's first quarter earnings call. Yesterday afternoon, we issued our first quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission.

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

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

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

Please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2019 and our quarterly report on Form 10-Q for the quarter ended March 31, 2020 for more information regarding these risks and uncertainties.

The call may include time-sensitive information that may be accurate only as of today's date. The company does not [Technical Difficulty] to update any forward-looking statements. On the call today from management for our opening comments are Steven Roth, Chairman and Chief Executive Officer; and Michael Franco, President.

And our senior team is on the call and available for questions. I will now turn the call over to Steven Roth..

one, the Hotel Pennsylvania being closed; 2, theMART's canceled trade shows; 3, reduced revenue from BMS cleaning services; 4, reduced income from our garages; and 5, reduced third party spot signage rentals. All of these businesses are variable depending upon economic activity as opposed to fixed price leases.

They represent only 6% of our overall revenue, and all of these businesses will rebound to prior levels when life returns to normal. Second, our rental revenue stream is supported by over 1,000 office leases with an average lease term of 8 years and over 300 retail leases with an average lease term of 6.5 years.

This year, total annual rent due from all tenants is over $1.7 billion or $142 million per month. As is normal, we have collected virtually all rent due from January through March. For April, we collected 90% of office rents and 53% of retail rents, or a combined 83%.

Interestingly, of the unpaid office rents and coincidentally of the unpaid retail rents, almost 2/3 is due from creditworthy tenants. So in April, we have uncollected rents of almost $24 million, and that's calculated at 17% times $142 million, which will become a receivable on our balance sheet, in effect, a loan to our tenants.

We have $302 million of tenant security deposits protecting bad debts, of which $51 million is from tenants who have not yet paid April's rent. As you would imagine, we are in discussion with almost every one of our tenants. We are confident that we will ultimately collect most of this receivable.

By way of further information for the first 4 days of May, we have collected 53% of office and retail rents, which is very slightly ahead of the first 4 days of April. Here's the punchline of my first 2 points as they affect valuation.

If April's run rate were to continue for, say, an entire 12-month year, and we surely hope it will be shorter than that, the cost or earnings [indiscernible] from the variable businesses I mentioned plus from our educated guesses to what bad debts might be is a onetime cost of around $1 per share, and that would be for a total 12 months.

This does not give any credit for security deposits. And my third point is the larger issue affecting valuation. What will our world be like when COVID-19 passes? We each estimate or guesstimate what will be tenant demand, rents and building values. How many tenants will not survive and how many retail tenants will seek bankruptcy.

The stock market has voted by taking the price of our stock down $25 or $5 billion. I think this is a gross exaggeration. Our current liquidity is $3.4 billion, including $1.7 billion of cash and restricted cash and almost $1.7 billion undrawn under our $2.75 billion revolving credit facilities.

In addition, we are scheduled to receive $750 million from 220 Central Park South closings from May through the balance of this year. So you might say our liquidity is really over $4 billion. Interestingly, since the heat of the crisis in mid-March and through April, we closed as scheduled 5 units for net proceeds of $210 million.

We remain committed to our redevelopment and capital plans for the Penn District, Farley, PENN1 and PENN2. These projects are the center point of our Penn District vision, the new epicenter of New York, where we will be delivering for tenants cutting-edge, next-generation amenities and services unmatched anywhere.

Each project is progressing, albeit at a somewhat slower pace due to government-mandated construction restrictions. As we have said before, these 3 large Penn District projects are debt-free and are being funded off our balance sheet and from the aforementioned proceeds from 220 Central Park South closings.

No debt, no joint ventures, and Vornado shareholders keep 100% of the upside. We have built Vornado to weather the storm and importantly to flourish as it passes. We have a cycle-tested management team.

We are always laser-focused on our balance sheet and liquidity and in recent years have been aggressively selling and spending assets, aggregating over $19 billion, pushing away from top tech acquisitions and pushing away from stock buybacks. As cycles go, all of a sudden, it is now surely a better time to buy than to sell.

The next few years should be great advantages for investors. So you might say I am ringing the bell. Here is a thought for you. We invest not for quarterly returns, but for 2, 3 and even 5 years, and we hope you do too. Buying right and the passage of time and patience, we get outsized rewards.

I'll now turn it over to Michael Franco for our first quarter financial results..

New York office was up 2.1%, street retail was down 1.9%. theMART was down 11.8% resulting from the cancellation and postponement of trade shows due to the pandemic, but positive 2% excluding trade shows, and 555 California Street was up 3.7%. New York office occupancy stood at 96.9% at quarter end.

In the quarter, we leased 311,000 square feet of office space at a very healthy initial rent of $90.47 per square foot.

The GAAP and cash mark-to-markets on second-generation space were negative 3.3% and positive 0.8%, respectively, negatively affected by a short-term renewal and expansion with Citadel at 350 Park Avenue as we line up that building for a potential ground-up development to start in 3 years.

Without this one lease, the GAAP and cash mark-to-markets would have been positive 5.2% and 10.7%, respectively. New York Retail occupancy stood at 94.9% at quarter end. In the quarter, we leased 15,000 square feet of retail space and an initial rent of $416.36 per square foot.

The GAAP and cash mark-to-markets were positive 126.6% and 104.6%, respectively, driven by our lease with Sephora Union Square. At theMART, occupancy was 91.9% at quarter end. In the quarter, we leased 231,000 square feet at an initial rent of $47.31 per square foot, including an important long-term renewal with PayPal for 148,000 square feet.

The GAAP and cash mark-to-markets were positive 2.6% and negative 1.2%, respectively. At 555 California Street, we are full at 99.8% occupancy at quarter end. In the quarter, we leased a small 6,000 square foot unit at an initial rent of $117 per square foot with GAAP and cash mark-to-markets of 44.5% and 29.7%, respectively.

As to our New York office pipeline, leases that were already in progress pre COVID-19 are moving forward. They amount to 1.7 million square feet.

Our first quarter noncomparable items consisted primarily of a $59.9 million after-tax net gain on unit closings at 220 Central Park South, partially offset by $56.2 million at share of write-downs from our real estate fund and $7.3 million of credit losses on loans receivable resulting from the adoption of the new CECL GAAP accounting standard.

We have 3 loans receivable totaling $52 million, consisting of 2 partnership loans and a purchase money mezz loan provided to facilitate a sale in 2014. We have no loan book. Now back to Steve to wrap up our opening remarks..

Thanks, Michael. New leasing activity in New York and just about everywhere has slowed to a trickle. Next year or so will be very challenging, a lost year, a tragic of this. But we must look to the other side. COVID-19 will have an end date. When we get there, I am actually quite optimistic.

Farley will be generating income and PENN1 and PENN2 will be coming to life. These will generate large accretive earnings for us. Further, our New York office expiries for the next 3 years will trend well for both stability and growth.

Amounting to only 1.9 million square feet for the 3 years or 12% of our portfolio, an average of only 4% per year at a weighted average expiring rent of only $74. Now a word about our common dividend. We pay out at least 100% of our taxable income. A few days ago, our Board declared a regular quarterly dividend of $0.60 per share payable on May 22.

So far this year, we have paid 2.66 quarterly dividends amounting to $252 million. We do expect our dividend to exceed fed this year. Without telegraphing any intention, we will, as we must, reevaluate our third and fourth quarter dividend based upon financial and economic conditions at that time and our then estimate of taxable income.

Here are some final thoughts for you, actually a plug for New York. We continue to believe in New York, and all it has to offer.

Its large and highly educated workforce, 8 professional sports teams, concerts, Lincoln Center, Carnegie Hall, Broadway, great museums, great restaurants and nightlife, the best hospitals and universities, and of course, the largest concentration of Fortune 500 headquarters, the world's banking center, the world's media center and now a growing tech center.

You get the message. New York's human infrastructure is unparalleled, and New York is the business capital of the world, and New York has always come back bigger and better from every crisis. While we are now working from home, we do not believe working from home will become a trend that will impair office demand and property values.

The socialization and collaboration of the traditional office is the winning ticket. Also I believe the densification trend has bottomed, the victim of lots of things and now including social distancing. In sum, we are respectful of the severity of the current situation and cautious for the next couple of years.

We are actually optimistic after that and excited about Vornado's business prospects. Lastly, we look forward to welcoming our tenants as they return to our buildings. Our operations teams are hard at work preparing protocols to ensure the health and safety of our tenants, their visitors as well as our staff.

Gaston Silva and Lisa Vogel are our team leaders here. With that, operator, we're happy to take questions..

[Operator Instructions]. Our first question comes from Jamie Feldman with Bank of America..

Steve, I want to go back to your comment that you're ringing the bell, finally it might be a good time to start buying.

Can you talk through your thoughts on what you might expect to see, what the landscape looks like in terms of troubled balance sheets and competitors? And also how you think about capital availability to fund big acquisitions?.

I didn't understand what you meant about competitors and competitive -- what do you mean by that?.

Well, where you just might see some distress in types of opportunities..

Look, obviously, there has been a sea change in the -- actually, it's a global sea change in the economies of the world and we can -- we do expect, and we can already see that there is a fair amount of disruption and distress out there.

I'd say before we push away from uptick prices, this cycle may very well give us the opportunity to buy at fair prices and maybe even good prices, okay? So our antenna is very alert. We are very actually enthusiastic about the prospects of growing and expanding externally. And it's very high on our radar stream.

We feel that we have the financial capacity to partake. So I can't predict where it's going to go. I can't predict what we're going to invest in. But I can say that we are anxious about the potential opportunities going forward.

And by the way, this is a totally different environment than we have perceived as a management team for the last number of 3, 4 years..

Okay.

And then just when you think about your liquidity and balance sheet, I mean, how do you think about how much you'd want to keep for the long-term funding, the Penn Plaza redevelopment? It just seems like there's a lot of different needs over the next several years, and if there's big opportunities out there, how do you think about what you would use to fund?.

The answer is, we think our balance sheet is in very good shape. We have access to all different phases of the capital markets. And we think that our internal capital requirements for the next number of years are fully funded already, and we think we have capacity..

Jamie, I would just add that, look, we have significant capital, as Steve said, for the opportunities we've already identified internally. But we also -- we constantly have capital partners seeking to do things with us, and many have reached out as soon as this crisis hits.

So if there are large opportunities, we want to avail ourselves of capital beyond their balance sheet. We're confident we're going to have the capital to do so..

And then would you only consider New York City office? Would you look at retail or things outside of the metro region?.

We're going to look for value. We're not going to -- and we're going to look for value that is down the -- right down the middle of the road to our skill set. So we know what our skills are, and we're not going to invest in Argentina, and we're not going to invest in a steel company. We're going in what we know how to do.

If it's -- and it doesn't necessarily have to be in the 4 corners of Manhattan..

And our next question comes from the line of Manny Korchman with Citi..

It's Michael Bilerman. And my condolences to Haim and his family.

Steve, as you think about the investing of capital and you talk about the stock market being a gross exaggeration in terms of the stock being driven down $25, 5 billion, how do you line up the external growth in terms of putting new capital to new deals versus your own company, either in the stock or buying out venture partners' interest in some of your assets?.

How are you? Where are you, by the way?.

We are Upstate New York..

Stay safe. Look, this is the old buyback question, I think. And again and again, I think I've been very clear in my thinking about that and been very transparent in our company's thinking to you.

And that is that if we buy back stock, first of all, we -- since we don't have a recurring -- we don't have recurring earnings to continuously do that, it actually will sap our capital capacity.

We believe that the amount of wealth creation and the accretion that we can make to our NAV by buying back a chunk of stock is insignificant in relation to what we can do with a similar amount of capital investing in different situations. For example, and we've said this publicly, and I think we even published it.

The returns that we expect to make on One Penn or Two Penn based upon the capital that we have to commit exceeds by a multiple that which we might earn -- that which we might create additional -- accretive NAV in buying back our stock. So we are not mindless of our stock. And we look at it continuously.

We talk about it at every quarterly board meeting. And right now, that's not #1 on our hit parade. And by the way, we're actually not pleased that we pushed away from the recommendations of many people that we buy back our stocks $30 higher..

Going to the external growth in terms of where you may invest. And I remember it was -- I don't know if it was last year's letter, or maybe it was a year before, maybe a year before that, you talked about diversification from the perspective of the company in sort of addressing the New York centric.

And you basically said, investors can make their own diversification choices by buying different companies, where we don't think being a New York centric company that's what we are.

And so I guess from your perspective of looking for value and you wouldn't be confined to the four corners of New York, I guess, why not -- why go and further be present elsewhere..

We are a New York company. We are a tried-and-true New York company. There is no doubt about that. We think we have the best skill set of any New York operator, and there are plenty of opportunities in New York. One would even say, enormous opportunity in New York.

So our first, second and third priority will be to invest in what we know and where we know and where we have a powerful franchise. Having said that, we will not preclude other things.

So if you go back a long time ago, we were a New Jersey-centric company in strip shopping centers, and we made the better part of $10 billion by sailing across the river and doing something that's different. So we are absolutely a New York-centric company. Our #1, 2 and 3 priorities is New York.

The prospects that we will invest outside of New York are low, and it would only be for an absolutely extraordinary breathtaking opportunity, and there may be one..

And our following question comes from the line of John Kim with BMO Capital Markets..

I think, Steve, you mentioned that leasing has slowed to a trickle.

And I'm wondering if that includes any leasing activity at Penn Plaza and Farley?.

So as you would expect, this is an extremely disruptive, confusing, paralyzing time for everybody, including our tenants and our customers. Our tenants and our customers fall into basically 2 broad categories.

There are those that are basically shut down, where they have no revenue and they have no visibility into how long it is going to be and what the other ramifications are, including financial ramifications. There are others of our clients that are thriving in this period, including the FAANG. So basically, now getting to Penn Plaza.

We've talked about 2 big leases in that area in the past. One of them is for a large block of space at Two Penn with an incumbent tenant who basically is devoted to that building and has been forever and for obvious reasons.

They basically are in pause waiting for their business to open up, which is absolutely understandable, and David and I and Glenn are sympathetic with that. Not going away, but in pause.

There's another large tenant that has been rumored to be -- that we've been in dialogue with and that conversation is going forward aggressively and hopefully maybe even almost complete..

Are either of those tenants co-working? What are your views on co-working?.

No, no, no. For sure, no..

Can I just ask 1 more. Of the 6% of nonoffice and retail revenue that has been impacted, how much of this do you expect to recover in the second half of the year? It sounds like trade shows are off the table. But I'm just wondering about hotels, parking and cleaning services..

Well, I mean, with a less than 5% census, you can't have a full cleaning crew in the buildings. That makes no sense. The cleaning crews and the revenues from that will return based upon the tenancies that are returning. The garages, the same thing. The trade shows will be probably missed this year and we'll pick them up next year.

But basically, all of that, what I call variable business, will rebound back to where it was as shortly after this is open. There will be a ramp-up period, but this -- all of those businesses will definitely rebound..

Our next question will come from the line of Alexander Goldfarb with Piper Sandler O'Neill..

Echoing Michael Bilerman's comments. Condolences to Haim and his family. And then, Steve, thank you for addressing the dividend upfront. Appreciate it. So 2 questions for you. The first, happy to hear about 350....

Alex, I hope you think I was clear on the dividend..

Yes. Yes. You were unambiguous. You were clear. So one, obviously, good to hear about 350 Park, that you guys are considering it. On the capital side, which has been one of the hallmarks of you guys with the balance sheet, your comments in the press release about 220 Central Park South, potential for delays that could disrupt closings.

And then also thinking broadly about the $2 billion street retail preferred.

So one, risk on 220; and second, on the $2 billion preferred for the street retail, is there a risk that, that is somehow impaired? Or that's not the $2 billion of liquidity that we originally thought it was last year, but it could be something less than, which means as you guys think about funding these projects, that may not be the source of liquidity that we thought it was..

Thanks, Alex. First on 220, I was pretty careful to communicate to you all that notwithstanding the pandemic, since the middle of March, we closed actually 5 units on schedule for $200 million.

So we do not expect -- in fact, we are even more certain than that, that the scheduled closings for the remainder of the year, somewhere in the neighborhood of $750 million, will come off on schedule.

The only little wrinkle in that is that we -- from a construction point of view, we have to finish punch list and minor work in those apartments, maybe 30 days per apartment. And so right now, we don't have access to those apartments because of governmental-mandated work stoppages, but that's going to come back pretty soon.

So we are very confident that all of those closings will occur approximately on schedule and will give us the better part of $700-odd million this year.

With respect to the retail preferred, which I think is $1.8 billion, we have never used that in public or in private as a source of capital for any of our investment opportunities or our ambitions or whatever.

So we have looked upon that as just an asset on our books, which will generate -- now you remember that this was a highly structured tax-driven deal that we did probably, I don't think quite a year ago. And that $1.8 billion of preferred, if we were to sell it, triggers a 100% tax. So basically it's an asset on our books.

It's a liquid asset on our books. We have never in our plans -- we have never had in our plans to sell it or to use it for augment our capital..

And then second question, Steve.

From your initial conversations with tenants, what are they saying is the crucial thing for them to sort of reopen their office? Is it solving mass transit? Is it providing PPE for their employees? What is it that -- obviously, New York's harder hit, what are the key items that tenants are telling you, we need to solve these issues before we can start to have reopen the buildings and get employees back into New York..

That's a good question, Alex. And that sounds like something for Glenn and David..

Alex, good morning, it's David. Listen, I think everybody recognizes that this is a physical and a psychological issue. So as you -- as we have continued to speak to our major tenants during the building shutdown process, I think as the world begins to reopen, it's going to be a very gradual process.

Tenants are anticipating a return initially in the 10% to 20% range, ramping up over time. I think you talked about -- we talked earlier about garages. I think we're going to be seeing fewer people using mass transit. People are going to be driving in.

And I think initially, when we open up, most people are either going to be walking to work, bicycling to work or driving to work. So it is going to be a process that's going to take some time.

But as we see this unfolding, we are hopeful that it's going to be a gradual process as people become acclimated coming back to work, which I don't know about everybody else on the phone, but we are all, all anxious to get going..

Alex, look, this will have an end date. So the COVID pandemic crisis will have an end date. Now the end date will be when there is a therapeutic and maybe even a vaccine. So as I understand it, a therapeutic treats if you get infected, a vaccine prevents you from getting it at all.

But every medical scientist in the world is working 24 hours a day on this problem, and hopefully there will be a medical solution at some finite period. In between, when there is still risk of infection and there is still -- there will be -- we will just crawl back to regular behavior. And regular behavior will be disrupted.

The subways are going to be disrupted. Baseball is going to be disrupted. So I can't predict what's going to happen, but I do know that in some finite period of time, we will very quickly revert back like a rubber band back to normal..

Well, not having to take the 5:30 a.m. train is certainly a help. So there is, at least there's something there. Anyway, listen..

So by that, I take it, you're going to continue to work from home..

It will be me and David on the same town, but yes, it's much more efficient. It is much more efficient..

And our next question comes from the line of John Guinee with Stifel..

First, very sad to hear about the furlough of over 1,800 people. And I want to congratulate you on a brilliant execution of selling 50% of your retail about a year ago. Thinking about Hotel Pennsylvania and the Manhattan Mall, I know those have been on the redevelopment page for a long time.

Is there any thought to just using this opportunity to decommission both of them and demolish them sooner or later?.

First of all, thanks for your comments about the furloughing. The facts of the matter are under the new unemployment insurance, augmented by the PPP Federal program, almost everybody that was on the furlough list is getting the same or maybe even more in terms of wages than before.

So we did this with a great deal of sensitivity and care for our employee group, and this was done not to hurt anybody. In fact, we cut the furlough list off where we thought that people would not be able to get recompensed by the government programs.

So I thank you for your sympathies, but we did this very carefully with a great deal of feeling and care for our folks. The Hotel Pennsylvania has been an enigma for a long time. It's obviously a parking lot for a development site. We've closed it in the pandemic because the occupancy rates went down to low teens, single digits. So it was uneconomic.

We have thought internally about using this and just never reopening it. And that might happen, but I doubt it. So that's step 1. The Manhattan Mall, the Manhattan Mall is really a building with 2 components to it in 1 building. There is a large office building on top of it, which is fully let and performing well.

And then there is a mediocre retail a couple of floors below it. So you can't really -- you could shut down the retail, but you can't really demolish it because of the office building up above. So in our development plans, the first -- and by the way, as you know, the Manhattan mall backs up to the Hotel Pennsylvania.

So that's 1 giant, giant block that would support 3 million, 4 million square feet, maybe even more of development. So the first that's going to go is the Hotel Pennsylvania at some future date, and the Manhattan wall is way, way in the future..

Second question, I think everybody is a big believer in the resiliency of New York. But the last -- the number of issues New York has had, you had mayors by the name of Giuliani and Bloomberg there. Now you've got an incredibly different political environment.

Can you talk about that current political environment, how that changes? And how that helps or hurts the resiliency of New York?.

John, that's a good question. And we think about this a lot, obviously. For all the issues that New York has, which is a political -- the political leadership and a political orientation, which is extremely liberal and left leaning, homeless issues, other things like that, the best real estate city in the country right now is San Francisco.

In each point San Francisco is worse than New York. It's further left leaning, homeless situation is worse, et cetera. So the political situation is important, but it's not definitive. It's not depository. So we think New York's resilience will continue.

We think New York's infrastructure in terms of human infrastructure, cultural infrastructure, business infrastructure, finance, et cetera, is extraordinary, the best in the world, and we do -- and we believe in its resilience. I would love to get Mr. Bloomberg -- I'm his landlord, so we know each other very well.

I'd love to get him back, but that's not going to happen..

And our next question comes from the line of Vikram Malhotra..

My condolences to Haim's family as well. I hope everyone else is well and safe. Steve, maybe just a higher-level question. I know you've addressed this in prior questions. But you said many years ago that New York was sort of moving to South and West, given sort of Hudson Yards and other developments.

If you were to just sort of have a high-level view of what work from home could do to the office market, maybe New York or more broadly, what would that be?.

We think about that all the time. It's a very important question. In fact, I gave that question a couple of sentences at the end of my prepared remarks. So here's the way I see it.

At the margin, there will be -- I mean now that we've experienced this at the -- by the way, we talked to all of our tenants, we even talked to all of our employees, there's a very small majority, which I guess includes Alex, and -- that prefer to be working at home. Most people are dying to get out of home into the office.

So the difference is that working from home, you're in isolation. And the only benefit that I can see of working from home is you save the commute. And I guess, depending upon who you are and where you live, that could be an important thing.

But in all other regards, in terms of the socialism -- sociality, the collegiality, the interaction, the creativity, the office wins is the winning ticket in every regard. If you are ambitious and want to get ahead and you work from home, you're not getting ahead.

If you're in the office and you are performing with all of your colleagues, then you can get ahead. If you are a leader of a team of people, and they all work in -- they all work from home, and you can't have -- be in contact with them, it's an almost impossible job.

So we find, in terms of controlling your employees and controlling, we find there's enormous number of benefits to the traditional work at home -- traditional office. I mean it's lasted for 1,000 years, it will continue. At the margin, there will be a little bit of an incremental nick. This is kind of like a trend. There are trends.

They happen all the time in relation to crisis, and then they go back. The reaction to 9/11 was nobody wanted to rent space in the upper reaches of buildings because it was dangerous. And now the only space that -- the space that's the most valuable is the upper reaches of the buildings. So this will pass.

At the margin, there are some people who want to work from home, continue to spend the day in their pajamas and continue to have their kids running around, but I don't think that's a trend that is going to a payer -- the macro demand for office buildings nor in payer values. I mean, for example, let's think about the densification.

The densification in REIT, it went to a certain level and it went from whatever to, I don't know, now maybe the average densification is 160 feet or 170 feet, something like that. WeWork, again, trying to take it down to 60 feet. And that was the justification for their pricing. That didn't work. So anyway, that's where I am.

I think the office is the right ticket..

That makes sense. And then just on street retail, given sort of, again, sort of the social distancing, maybe higher e-commerce penetration as a result of this.

Can you give us your thoughts on sort of pricing power, meaning kind of rents holding up over the long-term on sort of your core upper fifth markets, Madison, et cetera, and for Haim, specifically, any thoughts on sort of what -- were taking rents could shake out over the very near-term in these core markets?.

Vikram, that's another good question. Look, I'll give you a perverse thing, which is a secret. I don't want this to get any -- to go around. I have said and I have written -- and you got to remember, we made the early call on the secular decline of retail 5 years ago or 6 years ago, and everybody laughed at us. And here we are.

I have written that there are 2 huge problems with retail. The most important is that there are maybe 2 to 3 times as many square feet of retail space in the country as there should be. So I think, as I do the math, there's 50 square feet per capita, or I think the number should be like less than 20.

So -- and then I said that it would take, I don't know, 15 years for that excess space to work off and evaporate. So in a perverse way, and maybe this pandemic is going to get us into alignment much more quickly. So we'll see. I don't think that the retail -- that the physical retail store is dead, but I do think it's certainly injured.

I can't really give you math as to what's going to happen in the very short-term to rents. I can only tell you that they are down and they're going to -- and they are -- I have a negative outlook for rents over the short-term. Over the medium-term, I think there will be some adjustment for great property.

I think great property will always be in demand. And I think Haim will tell you.

Haim, will we ever get to the peak pricing that there was 3 years ago on fifth Avenue?.

I don't believe so..

And that is our firm view..

Okay. Just last clarification. The 53% rent collection seems pretty strong given where we are in May.

Can you clarify, is that 53% on average across office, retail, parking, et cetera? Or could you just break that up between office and retail?.

It is 53% on average. It's obviously much higher for office and lower for retail..

Steve, let's just clarify, that from the 53%, what is retail? It's just retail..

No, no, no. I think -- Vikram, I think your question was for May collection, not the April..

For May, yes. For May, specifically..

Okay. So the math is it's in the 20s for retail right now, which is tracking exactly what happened in April, and it's in the 60s for office with a weighted average of 53%.

And I think that the exact math is, I think David told me this, this morning, that our collections in May are running $1 million, which is significantly insignificant, better in May than in April..

And our next question comes from the line of Manny Korchman with Citi..

Maybe one for Glen.

Glen, with the path to sort of coming back into the office and company is targeting what sounds like 50% for the far near term, if you will, how do they think about either leasing or renewing -- renewal decisions in that context? So if you sort of -- you're planning for half your workforce to be in, you don't know how long that will last, how do you make any kind of leasing decision in that environment?.

Look, I think the answer is for the first, call it, 6 months, plus or minus, the market's going to be quiet as it relates to new leasing decisions, meaning people moving out of their existing building, we're expanding within their existing building. Renewals keep going because we have expiring leases and people need their leases.

So we are in discussions on a lot of renewals. And with that being said, there is some action. We've been receiving some proposals during this shutdown for people looking to change their life and move to another building within our portfolio.

But generally, I would tell you, during the ramp-up of getting back in, you're going to see slow demand for new deals and expansions..

And I guess, more so from the question of those decisions more sort of from a focus level, how are they going to think about the number of square feet per person when the person counts are just so drastically off? I guess it's a question of how do they even think about how much space they need?.

I think it's too soon to say. No one knows. I mean, we're going to get back into the buildings between the summer and the winter. I think things have to settle back in. We get back to normal, so to speak, and then people see how their table is set.

I think right now, it'll not be fair to project how people are going to look at how much space they need, how many chairs they're going to fit per foot, et cetera. I just think nobody knows until we get back and people get settled back into their offices during the year..

Manny, the large tenants that I speak to, and I try to speak to as many as I can frequently. They are looking past this period. They don't really -- they're really not focusing hard on saying, "Oh, my God, what a great thing, I can save 7,000 square feet of office space." That's not in their top of mind.

What they're trying to do is get their businesses back. And they really -- basically, the ones I speak to, they want all their employees back. They want all the desks full, and they want to go back to where they were 6 months ago.

And with respect to is by the way -- with respect to deals, by the way, Glen and David will tell you this, this is not a good time for a tenant to be making a deal other than a renewal or other than an important space need that it has. And it's not a good time for us to be bargaining with the tenant.

So everything is going to come back to normal at some period, hopefully, within a year from now, and then we'll get back to business..

And then maybe flipping to street retail in a similar context. A lot of the larger deals we saw were probably more showroom in nature than a productive retail environment, and a lot of that was based on tourism and the like.

I guess, do you guys think about a sentiment shift or a psychological shift among shoppers, where they're not going to go shopping as a past time and so that showroom or flagship concept becomes harder to pitch to a retail tenant?.

Haim?.

So I actually think the street retail format will prove to be more resilient and more important to the ecosystem of connecting with the consumer. I think e-commerce will continue to grow and gain market share. But I also think that street retail will prove more resilient than other physical retail formats, like the mall..

I think there could be -- counterintuitively, I think there could be an opposite. My wife is a shopper, and she is very frustrated. She can't wait to get out and walk up and down Madison Avenue, walk up and down Fifth Avenue.

So I think that there will be a -- when this opens up and the population, which has been shut down, they want to go out, they want to shop, they want to go to restaurants, they want to have their life back. So I think this is not as dire as some of the commentaries I've read..

I think they all just really want haircuts, but Michael has a couple of follow-ups..

I had just two follow-ups..

And Manny, when you get your haircut, take one from me, please..

Sure. I had two follow-ups. One was just on the density question, which I think part of the move to having much more dense populations was the cost of things. It allowed the tenants to be able to afford the rents paid because they were able to jam more people into more seats.

How does that equation change in terms of you as a landlord being able to get the returns that you need and the tenant's affordability to act as they now have to take more space to fit the same number of people?.

David, do you want to try that?.

Again, I think we're focused, as it relates to that question, you're focused on a period of time, which is today. So today, people are talking about social distancing. Today, people -- they're not talking about it. It's been mandated by the public authorities.

So obviously, today, in an office, you couldn't bring back 100% of your workers, you couldn't fit them within the office and properly socially distanced. But as people, I think, Michael, are looking at long-term decisions for themselves. I think people are recognizing that, ultimately, it may take 6 months, 12 months or 2 years.

We don't really know, as Steve said. Ultimately, we're going to have to find an antidote to the virus. When that happens, I think what we're going to be seeing substantially is effectively going back to much like we were. People are going to want to come to offices, as Steve said.

And as it relates to some of the density that we've seen, nobody ever believed that we were going to get to 60 feet a person as some of the co-working companies had aspirations to densify.

But in terms of what today is in our portfolio, the way we've seen both financial services, technology, other service companies in terms of changing the use of their space, do we expect that is going to radically, radically change long term? I think our view of that is, we don't think so today..

And then just a follow-up on the retail joint venture.

Given the fact that only 50% of the tenants have paid rent, how does the cash flow distributions work within the venture to be able to afford paying the 4.5% on the preferred -- on your preferred security in that venture? What's the cash flow waterfall today with only 50% of rent paying tenants?.

Michael?.

Yes. So look, the way the preferred is structured is that, as you know, we have 2 third-party pieces of debt on the portfolio as well on the venture. All the cash is effectively aggregated for purposes of paying the preferred. And so at the current time, there's sufficient cash to pay the preferred.

To the extent that cash collections fall off at a point, that's not the case, and that will -- that never will accrue. But as of today, the preferred is being paid, and we think it continue to be paid for the near term.

But all -- if there's a deficit in one and there's excess in the other, then that cash is sort of aggregated across the different instruments..

I mean, the answer is that the preferred gets first call on the income. But the percentage of rent collection in the JV assets was approximately 60%, and that swung negatively by one big very creditworthy tenant who decided not to pay, which we will undoubtedly collect. So it's not as bad as you think the numbers are..

Right.

So there's more cash coming into the venture than it would be for the portfolio overall?.

Let's hope..

And our next question comes from the line of Steve Sakwa from Evercore ISI..

Most of my questions have been asked. But I guess I had one question just on some of the newer developments, like Farley and the work you're doing at Two Penn.

What sort of changes do you need to make in order to deal with sort of the issues at hand today? And how costly might those changes be and kind of the design for the base building, maybe thinking about the elevators and some of the stuff that might take place on the floor, the air handlers and all that kind of stuff?.

Who wants to handle that?.

I could take a shot okay..

Okay, please do..

Go ahead, David..

So Steve, thanks for the question. First, I would tell you is we've designed these buildings as what I will call forward, forward-thinking buildings. In terms of the air handling systems, in terms of the filtration systems, all of this pre-COVID was being engineered state-of-the-art in terms of having the ability to use the highest-rated MERV filters.

There are other technologies that potentially are available. Some of them have not even yet been tested in the United States. There is an ionization type of technology as it relates to having the air flow through tubes. It's not enormously costly. In fact, it is relatively efficient. It's something that we're currently looking at.

But first, we're working with, obviously, our engineering experts, thinking about the potential technologies like that. In terms of touchless entry systems, we have facial recognition systems in the portfolio. We have the ability to walk in the portfolio with your iPhone to get access through turnstiles, similar for visitors.

So again, the types of systems that people are thinking about, in fact, our systems that pre-COVID, we have thought about the buildings themselves are being designed realistically for the next generation.

And then the nature of the spaces, the communal spaces that we have designed in the building, obviously today, would not comply with social distancing.

But again, we are designing these buildings not for the next 6, 12 or 18 months, we're designing these buildings for the long-term, and there is really no change that we would make to any of the communal spaces from a long-term perspective, whether it's the auditorium space, that's great space in PENN2, the Grand Stair in PENN1.

These are spaces that we think tenants long-term will continue to want in the buildings. We think that the buildings have been designed right spot-on for the future..

And just a follow-up, Dave. Would that include things like large conference rooms? Or I know there was a point in time you were looking at large gym for kind of the Two Penn buildings. Do things like that still work in your mind today longer term? I know they don't short-term, but....

Yes and yes..

And our next question comes from Jamie Feldman with Bank of America..

So I'd like to get your latest thoughts on long-term tenant credit quality, especially in retail coming out of this. We've seen now headlines of several bankruptcies coming through in the last week or so. Just what -- I know we'll get through this and things will get back to normal.

But how do you now feel about the tenant credit default risk? And then, I guess, any changes to your reserve balance? I know you don't give guidance, but to the extent that that's changed at all..

The question is as to our thinking about retail credit, Jamie?.

Just risk that more of your retailers may go bankrupt or even some of your small businesses may go bankrupt, making it through this and how have you reserve for it?.

Well, the answer is that I think -- I've read most of the transcripts of all of the gang that have had the conference call so far. I think we're the only one that raised the point of a bad debt reserve in our remarks. So we -- periodically, we will see -- this is a new thing for us and everybody.

This is the first time we have ever had accounts receivable of any moment.

So when you have accounts receivable, you have to go down into the weeds and figure out what our debt reserve will be, which we -- I think I gave an inkling of what our thinking was in my prepared remarks when I got to the $1 a foot for 12 months might be the cost of COVID so far. So we don't have anything to say about a debt reserve yet.

When we publish our financial statements, we will, of course..

But I guess, taking a step back, just kind of your view of whether it's your retail tenant base or even some of your office tenant base that may not make it through this downturn.

How have your views changed from, say, a quarter ago?.

Well, I mean, the history is, is that there are tenants who drop out every time that there is a severe economic traction. This may be the poster child to that. Because not only is there an economic contraction, but there's a total shutdown. So I mean, we are expecting failures on the part of some of our customers, and that's part of the business.

So I can't quantify it. We have a watch list, as you would imagine. And so -- but that will all come out in the wash over the next months and year..

And our next question comes from the line of John Guinee with Stifel..

Just a follow-up. I know, Steve, Michael, you guys have been pretty negative on co-working.

If you look at WeWork in particular, how long do you see them in business? Indefinitely or is there end insight?.

Michael?.

I was going to say as long as SoftBank funds them..

I don't think that, that's a bad thing to say..

I mean, I think that's the reality, John. Their ability to survive is dependent on SoftBank's willingness to fund those deficits, which will probably be more significant near-term given this crisis. So I don't know. Look, I think as Steve said a little while ago, their business model was driven by high density.

Tenants actually were paying more per square foot than the normal tenant in a traditional landlord lease. But they were packing them in more densely. So that's obviously a challenge now. They're also paying for flexibility. And so obviously, there are elements that are attractive for certain types of users, particularly small users.

But like I think in terms of their willingness to survive and to thrive, I personally view it as inned out and I don't know whether it's beyond a couple of years, which is sort of their runway. But I don't want to prognosticate. I don't know their balance sheet in detail, but I think it's a highly challenged business..

John, let me give you a share of my thoughts, if I might. So the co-working business would have been just an evolutionary sort of nonevent were it not for the huge loaded market value that WeWork seem to develop. So if WeWork was -- had a market -- in the venture markets had value of $500 million, nobody would have paid attention.

The fact that they ended up with some $60 billion or some whatever the crazy number was, that got everybody's attention. So WeWork model contributed a couple of things, which I think might be here to stay. The first is their short-term lease or no lease, which gives total flexibility to a user.

So that's a very interesting thing, and we've talked about that a lot. And that will be important to some people. The second thing is they developed a culture of informality, beer kegs and ping-pong tables and what have you.

And if you look at the interior design industry for the conventional office space, a lot of their innovations have been adopted like conventional tenants because that's the way young people sort of want to work. So those 2 things, the culture of work and the tenure of the financial commitment are 2 things that I think are going to play.

The third thing is that when you made -- when you use WeWork space, you walked into existing desks and you took them as is. You didn't have to go through a 6-month period of hiring an architect and building out space. I think that's also a very attractive thing. The rest of it, I think, is all a load of hogwash..

Good. Okay. Second question, maybe I haven't been in tune. But this is the first I've heard about a ground-up redevelopment of 350 Park.

Can you talk about the size and the scope and the timing of that?.

Who wants to take that on?.

I'm happy to do it, Steve. John, I think we've referenced it once or twice previously. We have an existing 570,000-foot office building. And with the Midtown East rezoning district, we have the ability to tear that building down and with the acquisition of air rights that are available to build a brand-new 1 million square foot building.

We also have the option to combine with our neighbor to the West and build a combined 1.7 million, 1.8 million square foot building, which again has expanded from the combined existing buildings. So there's the ability, and those air rights are available and cost-effective.

And so we have a location that is preeminent and arguably the best in the city. We've had tenant inquiry previously, looking for headquarters locations and danced with the tenant probably about 18 months ago. We continue to have interest in the site from others as Glen and team have spent time educating the brokers on the possibilities there.

And we have the ability to build what we think is one of the best office buildings in the world in one of the preeminent locations. So it's a building that has garnered interest. And given the ability to upsize it, it is potentially economic if the market is there.

And from a timing standpoint, one of the things we've done over the last several years is line up the leases, so that we have that option, knowing that the Midtown East district was being finalized.

So Glen and all his leases has put in place demo clauses, including in the most recent one with Citadel, so that we have the option that all the leases are lined up to tear the building down. And so that's the effect, it's that we have an opportunity in the next 3 years or so to create what is a first-class building in a preeminent location..

John, we're in a very interesting position in that situation. Number one, as Michael said, I think we have the single best location in West.

Number two is we have the flexibility to either, a, stay where we are, which is a 40-year-old whatever office building, which is perfectly serviceable and has a value of X; or we can tear it down and build a brand new soup to nuts building that Michael said, 1 million feet, or we can combine with our neighbor, Michael said to the West, I would say, to the rear because I am always a little bit more difficult than Michael and build a much bigger building.

So the marketplace will tell us what to do based upon tenancies and inquiries and what have you. And I want to emphasize one other thing that Michael said. He said that we danced with a very major financial services company to do, he said, the entire block and build a headquarters for them, which merely far down the line, but never materialized..

Do you have a no-observatory pledge on that development?.

I give you my word, there will be no observatory. Unless you think we should have an observatory..

No comment..

And our next question comes from the line of Anthony Paolone..

I was wondering if we can go back. I may have missed this. But in the first quarter, you had $284 million of cash NOI.

Can you maybe put some brackets around just what the drawdown to that could look like in the next few quarters from parking, signage, hotel, shows at theMART or move-outs, not so much the deferrals, but just the other things and where that goes?.

Joe, if you would, please?.

Anthony. Yes, Steve did in his prepared remarks say that those elements of our business, which are variable, the Hotel Penn, the trade shows, the packing, signage are run rate of $9 million a month..

And so do you think those basically go away in the next few quarters? Or....

They're closed today. The Hotel Penn is closed. The trade shows for the remainder of this year are not going to happen. Signage is at a standstill. So for sure, as long as COVID goes on, they're going to be that effect..

Tony, it's important to make this distinction. The $9 million a month that Joe mentioned, is -- the way we look at it is a one-time hit because this is going to spring back when the economy opens up and businesses open up and the COVID begins to open up.

So basically, this is not as if you have empty space that will be -- it's not as if it's a permanent long-term diminution in our values.

So the way we've dimensioned it is, if you take what our guess of bad debts might be for this -- for the coming 12 months, if it lasts that long, and we hope it doesn't, and what the diminution might be for these variable businesses, it might amount to a $1 a foot -- $1 a share or $200 million one-time hit..

Okay. I understand. And then, sorry, I have to repeat this, but I don't know if I was just clear as maybe others on the dividend.

But what is the plan for the rest of this year on the dividend?.

Tony, I think I said in my remarks pretty clearly that we paid the first 2 quarterly dividends. We paid the second -- we declared the second quarter 3 or 4 days ago. So that's $250-odd million of dividends for the first half.

With respect to the third quarter and fourth quarter, we will look at them in light of the economy, market conditions, the world, our expectations of the future, and most importantly, in light of our taxable income..

So that means you may have not paid them in normal course as you have been?.

No, no. Tony, that's -- you're putting words in my mouth. I said very clearly, I think at least I tried to be clear, without giving any indication as to where we might go, these are the parameters of the decision. It's all I said..

Okay. So there was no clear decision.

It's just brackets around how you think about it?.

This is a Board decision, which has to be made at the time, okay? So we can't possibly have any -- we can't possibly forecast that now. The other thing is we have the financial capacity to do basically anything that we want to, and we will do a combination of that plus what's prudent financially for the business..

Okay. And then just last question. Just the idea of opportunities arising on the investment front. What would constitute an interesting opportunity in terms of the economics? I noticed in the Q, you changed IRRs and cap rates that you estimate value to fund with, and I think you moved cap rates up by 200 basis points and IRRs by 450 basis points.

Is that kind of the order of magnitude or was that just accounting matter? Just trying to get color on what would put something in the strike zone for you..

Michael?.

Yes. I think, Tony, on the latter point, I think that was primarily accounting driven. And keep in mind, on the fund, the largest asset is a hotel. And so obviously, that's the most stressed category. And I think cap rates, discount rates have gone up there.

So look, I think in terms of opportunities, look, I think first of all, it's still early days, right? I mean, the opportunity, not unlike the last crisis, the public markets react the quickest, some of the CMBS bonds trade-off. Frankly, the Fed stepping in has helped to stabilize, I think, bond market quite a bit and the stocks have come back some.

But on the private markets, it takes longer. A lot of lenders are forbearing right now and working with borrowers to just allow them to sort of stabilize during this time frame.

But when you get to the other side of that, either projects that were being developed that maybe we got into a situation in another city that the developer had -- was out of balance on their capital ratios, maybe the lease-up assumptions. But we're looking for value.

And where we can buy discounts to replacement cost, high-quality assets where we can apply our skills and make some real money. That's the essence of it. You sort of know when you see it. We're out looking both at debt and assets. But I would characterize it as still early days..

That's correct. It's absolutely early days in terms of this acquisition cycle to the extent that there is an acquisition cycle. But clearly the playing field is much more attractive for acquisitions today than it was 3 months ago..

Our last question comes from the line of Daniel Ismail..

Just a big picture question here. New York City's budget is clearly on your under stream, like many others across the nation, which might have several ramifications for landlords in the market.

Are there any near and long-term opportunities or threats emerging as cities look to fix their fiscal situation?.

Well, Danny, that's the question. Look, the next thing that's going to rear its ugly head is the fiscal condition of every single one of the 50 states, and every single one of the 100 largest cities in the United States. Every single one of those governmental entities is in, in a disastrous fiscal situation.

In New York state, the governor has announced that there's $15 billion hole this year and over three years, it will be $61 billion in terms of just the projection. And every other one of the big states are in similar conditions. New York City and New York state are not isolated.

So the only place that they can plug that hole is either, a, by cutting expenses radically or by going hand-in-mouth to the federal government. Because the federal government is the only government in the country that can have a deficit budget. The other guys have to balance their budget somehow.

So I think the majority leader of the Senate made a statement 2, 3 weeks ago that got national attention, that said, let them go bankrupt. And I was appalled at that. I mean, I just -- oh my God. But really, what he was saying, if you give him his due was that there has to be something for these governments to start to get their budgets under control.

There has to be some pressure. So I don't know what's going to happen. I believe that the biggest single fight in the next -- in the presidential election, which is almost upon us, is whether the federal government is going to spend $2 trillion to fix this. So we'll see. But clearly, I don't believe that they're going to go crazy and raise taxes.

I don't believe they're going to do anything. The only way out is for the federal government to come to the rescue. And God only knows what conditions the federal governments are going to put on that rescue money, and that will depend a lot upon the outcome of the election..

Okay.

So you're not anticipating any, say, rezoning of areas in New York, additional air rights, speeding up permitting processes, anything like that, at least in the near term?.

I think that will happen, but that will take -- if they change the zoning, it takes 5 years to make anything happen..

Sure. And then just lastly for me. The projected cash yield on the in-process development pipeline didn't change quarter-over-quarter.

Is it still your anticipation that for the redevelopments and developments in your pipeline still hitting those pre-COVID development brands?.

The answer is yes, with two caveats. Number one, we believe that leases in process will conclude, which was the basis for those projections when we put them out last year. Now there's 2 variables to those.

The first is if Barry does a superman job and gets the advice better, so that we build for less, which is absolutely a possibility in this environment. And that's a plug I'm giving to Barry. And the second is what the rents will be.

We just don't know yet, okay? So we will adjust them when we get -- we will adjust our projections when we get visibility, but we're not going to react precipitously to a change to a newspaper article this next or week or the week after..

And our last question comes from Steve Sakwa..

Just one follow-up. I know you don't have that much debt coming due this year, but you are, I think, north of $2 billion of mortgage debt coming due next year.

And I'm just curious if there are things you can do kind of this year to take advantage of the low rates and perhaps credit spreads narrowing over the next 6 months? And how early can you get to some of that debt and kind of lock it away?.

Michael?.

Steve, we are always out ahead at trying to refinance our debt. And so we're working on those already in the process of both refinancing and extending some of those, so like -- that we agree with. There's an opportunity given that both LIBOR and the 10-year treasury are down dramatically.

And even though spreads may have gapped out, all-in borrowing costs are quite attractive. And we think there are opportunities, particularly if you look at something like the 555 California, we're paying north of 5%. Clearly, that -- we're going to bring that down. So the answer is we're on it, Steve. We're comfortable.

And I would point out that the assets or the loans that are maturing next year happen to be on some of our premium office assets, low loan to values and highest debt yields. And so we're confident in those refinancing executions..

And I'm not showing any further questions at this time. I would like to turn the call back to your speakers..

Thank you. Thank you, everybody. We're grateful for everybody joining us this morning. Please don't get too comfortable working from home, Alex, that's isn't you. We need you back in the office and paying rent in our buildings. Please stay healthy and safe.

Our second quarter earnings call will be on Tuesday, August 4, and we look forward to your participation again. Take care. Stay healthy..

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect..