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Vornado Realty Trust  (NYSE:VNO)
Q3 2019 Earnings Call
Oct. 29, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Vornado Realty Trust Third Quarter 2019 Earnings Call. My name is Michelle and I will be your operator for today's conference. [Operator Instructions]

I will now turn the call over to Ms. Cathy Creswell. Ma'am, you may begin.

Catherine Creswell -- Director, Investor Relations

Thank you. Welcome to Vornado Realty Trust third quarter earnings call. Yesterday afternoon, we issued our third quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents as well as our supplemental financial information package are available on our website www.vno.com under the Investor Relations section.

In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q, and financial supplement. Please be aware that statements made during this call may be deemed forward-looking statements and actual results may differ materially from these statements due to a variety of risks, uncertainties, and other factors.

Please refer to our filings with the Securities and Exchange Commission including our Form 10-K for more information regarding these risks and uncertainties. The call may include time-sensitive information that may be accurate only as of today's date. The Company does not undertake a duty to update any forward-looking statements. On the call today from management for our opening comments is Michael Franco, President. In addition, Steven Roth and our senior team are present and available for questions.

I will now turn the call over to Michael Franco.

Michael J. Franco -- President

Thank you, Cathy and good morning, everyone. Overall, our business is in great shape. Our buildings are full and we continue to hone in on the significant opportunity that we have with the redevelopment of the Penn District. Let me review our third quarter financial results before giving some thoughts on the markets and our portfolio and in particular, the Penn District. Third quarter FFO as adjusted was $0.89 per share, $0.07 lower than last year's third quarter. As I discussed on last quarter's call, these results were impacted primarily by reduced income related to the over $3.1 billion of asset sales we completed year-to-date and the lost income from the Topshop and Forever 21 bankruptcies. Last quarter, I also discussed the impact of Topshop's closing at 608 Fifth Avenue and 478 Broadway. In August, we delivered the required nine month notice to the ground lessor at 608 Fifth Avenue that we will terminate the lease in May 2020. This permanently reduces FFO by approximately $10 million annually and lifts our NAV by roughly $1 per share. This ground lease had only 14 years [Phonetic] left on it and was non-economic for us to hold on to.

Now to Forever 21, which we mentioned last quarter was a restructuring candidate. As you know, they filed for Chapter 11 bankruptcy protection at the end of September. They are a tenant at 1540 Broadway and 435 Seventh Avenue. They have a third lease with us at 4 Union Square, which expires next month and we chose not to renew them. We have already released a portion of that space to Whole Foods as part of their expansion and have a lease-out with another important tenant for an additional portion, both at higher rents than what Forever 21 was paying us here. Forever 21's annual rent on 1540 Broadway and 435 Seventh Avenue totals approximately $20 million next year [Phonetic]. While the bankruptcy process is fluid and is still in its early stages, we have reached a tenant agreement with Forever 21 to shorten their leases and retain them in those two locations for a little less than half of their current rent, with us having the right to recapture the spaces at any time after the first year enabling us to secure long-term potential spaces. Both of these assets are in prime locations and we are confident of their long-term potential.

So to summarize, even with these items, we remain on track to meet the approximate $3.40 per share and comparable FFO for 2019 that we referenced in last quarter's call.

Our non-comparable items this quarter included a couple of large gains. One, the $178.8 million of net gains on sale of real estate, primarily related to the July sale of our 25% interest in 330 Madison that we made 8 times our investment. And, two, the $109 million after-tax net gain on unit closings at 220 Central Park South. To-date, we have closed on 48 units for net proceeds of $1.25 billion, including 14 units for $349 million this quarter. And we continue to sign new contracts for the few remaining units as well. Remember that we paid off the remainder of the $950 million loan on this asset in July. So as closings continue through 2020, we retain all net proceeds which importantly will be redeployed into the Penn District redevelopments, turning this capital into highly accretive earnings and propelling our future growth.

Companywide, our third quarter cash basis same-store NOI increased by 1%, broken down as follows. New York office and Street retail, both up 1%, theMART was down 1%, and 555 California Street was up 17.7%. For the first nine months, cash same-store NOI across the business was up 2.7%.

Let me now turn to the New York market. The New York office market, which continues to be fueled by positive job growth and delivery of premium office product, performed strongly during the third quarter of 2019. Leasing activity across the city remains vibrant, driven mainly by technology and financial tenants with asking rents at record highs for the market overall. More than 25 million square feet of new leases have been signed in New York during the first three quarters of 2019 with many large deals and process expected to close in the fourth quarter. Talent wants to be in New York and therefore companies are migrating to and expanding in the city, creating tremendous competition for top talent. Nowhere is this more evident than with the dramatic demand in the big tech companies. Executives view the real estate as one of the key drivers to recruiting the best and brightest talent to their teams. Private sector jobs increased 53,000 in the first nine months on pace with 2018, with nine month office sector jobs increasing about 18,000 as compared to 20,000 for all of 2018 and certainly had a pace strong enough to continue absorbing the new supply coming online. There are currently 65 tenants actively looking for 100,000 square feet or more, totaling 16 million square feet of potential activity. This demand is coming from all industry sectors from companies already in the city as well as those seeking their first home here.

Our development in the Penn District is seeing the benefits of this demand as we are into full gear on our 5.2 million square feet of combined redevelopments at Farley, PENN1, and PENN2. We are experiencing robust interest in all three projects as prospective tenants begin to appreciate the magnitude of our district transformation. Tenants are responding very favorably to the unique nature of our amenities, space offerings, and design elements at each property that will serve today's workforce at the most accessible location directly on top of the most important transportation hub in the region. Farley is one of a kind and we have great activity on the space. At PENN2, we are negotiating a lease with a 400,000 square foot headquarters tenant. And there is more in the works beyond this, all at rents at or above our underwriting. All our activities will benefit from the significant public sector projects being built in our district, including the new Grand Moynihan Train Hall which will be delivered in 2020. The expanded LIRR Concourse is running from Seventh to Eight Avenues by the end of 2021 and a soaring new station entrance at 33rd Street in Plaza 33.

Against the backdrop of this district transformation, we are poised to make an entire district and are hard at work negotiating deals securing the district with new food and beverage outlets by leading operators, coffee spots, fitness offerings, and other retailers to service our tenants. These additions will dramatically enhance our offering and drive greater demand in rental rates within our 10 million square foot district portfolio. Our goal simply is to make the Penn District and our holding specifically, the go to location for tenants in the city.

More broadly, our New York office portfolio is in great shape and you can see us to perform well. We are substantially full with occupancy ending the quarter at 96.8%. Our remaining 2019 expirations are only 85,000 square feet, while our 2020 expirations are a modest total of 1,055,000 square feet, with 760,000 square feet of this amount expiring at PENN1 and PENN2. Please remember, this includes 565,000 square feet of PENN2 which will be taken out of service in 2020 as this development kicks into high gear. This will bring the total out of service at PENN2 at the end of next year to approximately 1 million square feet. Basically, we are repositioning the buildings for mid $60s per square foot rents to the $90s and need to move the old tenants out in order to accommodate the buildings.

During the third quarter, our leasing team completed 25 leases totaling 197,000 square feet in New York at over $80 per square foot starting rents, with very strong second-generation positive mark-to-markets of 22.7% cash and 28.5% GAAP. We have now completed 814,000 square feet of leases during the first three quarters of 2019 at a healthy average starting rent of $79 per square foot.

In the quarter, we signed our first lease at our newbuild at 512 West 22nd Street on the High Line with Warner Media for 20,000 square feet at a triple-digit rent. We also have an additional lease out here for 43,000 square feet at triple-digits, which we expect to sign in the fourth quarter. Additionally, during the quarter, we finalized a relocation expansion deal with an existing tenant in our portfolio, which we will be moving from Midtown to 28,000 square feet at 330 West 34th Street in the Penn District. The starting rent per square foot here is in the high $80s, a record for this building, which is clearly benefiting as tenants recognized was coming with the Penn District transformation. Overall, tenant dialog across our entire portfolio is very strong. We are as busy as ever with 3 million square foot of deals in different stages of negotiations, including our strong momentum at Farley and PENN2.

Moving to Chicago now. At theMART, during the quarter, we executed 45,000 square feet of leases at an average starting rent of over $48 per square foot, with positive mark-to-markets of 6.7% cash and 14.9% GAAP. This included an expansion lease with Allstate for 17,500 square feet, taking the total footprint to 120,000 square feet. Occupancy here is at 95%.

In San Francisco, the market continues to be hitting on all cylinders. With our campus here at 100% occupancy, we are taking advantage of the extreme tightness in the market and are now discussing renewals with several important tenants totaling 180,000 square feet well in advance of their expirations. During the quarter, we leased 50,000 square feet including a 42,000 square foot renewal expansion with an existing tenant in 315 Montgomery Street at a starting rent of $97 per square foot. Please note, our positive mark-to-markets on second-generation space here was for a spectacular 39.3% cash and 64.5% GAAP.

Before turning to our Retail business, let me comment on WeWork. There has been some speculation in the press that we and several other landlords had meaningful exposure to WeWork and quite the opposite is true in our case. We have WeWork as a tenant in only one location, 606 Broadway, a mere 15,000 square feet at share. While we appreciate some of the creativity that WeWork brought to the office business, we chose to lease our space to end users with better credit over the past few years.

Notwithstanding this, we do think that co-working provides an important service in the real estate ecosystem and we will be providing flex space as part of our overall offering for tenants at PENN1 and PENN2. This space will provide our tenants swing space, co-working space, meeting, and social spaces, food and more. We will brand this space under the Vornado name and importantly retain the bulk of the upside.

Turning now to our New York Street Retail business. Overall, the retail market continues to be challenging with leasing velocity slow and assets prone to negative surprises, a la Topshop and Forever 21. Retail occupancy was 95.9% at quarter end. In the third quarter, in spite of the challenging leasing environment, we executed nine leases for 26,000 square feet of retail space, achieving positive mark-to-markets of 6.2% cash and 15.6% GAAP of second generation space.

During the first week of October, we finalized a replacement lease for the short-lived former 4 Seasons restaurant at 280 Park Avenue, with the famous best-in-class Fasano Hotel and Restaurant Group. Fasano has been a symbol of quality fine-dining and excellent in Sao Paulo and Rio since 1949. This will be their first New York restaurant and will focus on classic Italian cuisine similar to those they operate in Brazil. Fasano will deliver the best in fine-dining to Midtown Manhattan, while creating atmosphere of style, sophistication, and energy. We think this will further enhance the quality of our tenant experience at 280 Park and are excited for their openings in the first half of 2020.

We continue to maintain a fortress balance sheet with reasonable leverage and an abundance of liquidity to-date and growing over the next few years. Our current liquidity is $3.36 billion, comprised of $1.28 billion in cash, restricted cash, and securities and $2.08 billion undrawn on our revolving credit facilities.

Lastly, I want to remind you that based on taxable gains from our asset sales year-to-date, we are currently anticipating paying out a special dividend of approximately $1.19 per share this year.

With that, I'll turn it over to the operator for Q&A.

Questions and Answers:

Operator

Thank you so much, sir. We will now begin the question-and-answer session. [Operator Instructions] The first question in the queue comes from Manny Korchman with Citi. Your line is open. Please proceed.

Manny Korchman -- Citi -- Analyst

Hey. Good morning, everyone. If you think about the leasing pipeline, you talked about in the Penn District and you dissect that. How many of those tenants are looking to make a move or stay within sort of the Hudson Yards, Manhattan West, Penn District corridor versus looking elsewhere in the city?

Glen Weiss -- Executive Vice President, Office Leasing, Co-Head Of Real Estate

Hi, Matt, it's Glen Weiss. We're seeing a real balance of activity both from tenants in Midtown, Park Avenue tenants, Sixth Avenue tenants looking at all of our projects. In addition, we have a lot of activity from the tech sector, the ever-growing, brimming tech guys are all looking at the projects as well. So I'll tell you, it's a balance of tenants from within Midtown core and from tenants looking to continue to expand in the city.

Manny Korchman -- Citi -- Analyst

Thanks, Glen. And then on the Forever 21 comments that you made, how did you think about sort of giving them that rent relief and the impact that would have on both leasing and other tenant psychology?

Michael J. Franco -- President

Look, Manny, obviously, it was a negative surprise, in the sense, we had term on the lease and all of a sudden they filed and so you have to deal with a real-time situation. And I think the deal that we struck, it's being finalized now. It works for both parties, but I think importantly, it keeps the space occupied, paying rent, and allows us the flexibility to go troll [Phonetic] for tenants and find tenants that will occupy that space long-term. So if you think about the locations individually, 1540 Broadway is arguably the best location in the city right now. From the street retail perspective, Times Square is the strongest marketplace. Tenant sales are holding up the best and we have the water-front on the one side of the boat side that is a premium location.

So with appropriate time, we will find a replacement tenant, a great tenant there and are confident about what we're going to achieve. On 435 Seventh Avenue, right, that was always a short-term deal. It was a five-year deal, intended to get us through the period when we're ready to redevelop the entire block. And so this continues to preserve that for a period of time. We can go and replace them if we want. If not, we'll keep it in play. But again, there is a bigger picture on 435.

Manny Korchman -- Citi -- Analyst

Thanks everyone.

Operator

Thank you. And the next question in the queue comes from Nick Yulico with Scotiabank. Your line is open.

Nick Yulico -- Scotiabank -- Analyst

Thanks. I just wanted to ask about -- you talked about Topshop, Forever 21, I just wanted to be clear. Are these impacts that are only starting to hit NOI in the fourth quarter? Just trying to kind of bridge what you reported in the third quarter versus these impacts?

Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer

Hi, Nick, it's Joe. Nick, the Topshop started to affect us in Q3 -- in Q2 even. Forever 21 starts to affect in Q3.

Nick Yulico -- Scotiabank -- Analyst

Okay. So I guess, I'm sorry if I missed this, if you went through. But I'm just trying to understand how -- when we're thinking about that $3.40 kind of soft number for the year on FFO, what are some of the items in the fourth quarter that create that drag versus what you reported in the third quarter?

Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer

So, Nick, when we had the second quarter call, we said that the sale of items and the other items we discussed that reduced NOI going forward, if you apply them to the six month numbers, you get $3.40. The third quarter last year was $0.96, this year it's $0.89, that's a diminution of $0.07 that really comes primarily from sales, specifically the retail JV is $8.2 million of that reduction, 330 Madison, 1.4 million, the sale of Lexington shares 3.3 million, the sale of Urban Edge 1.9 million, the delta between the dividend on pre and our share of their earnings $1 million, and then there were other items that makes $0.07 or the delta and $9 million -- $15 million. So, all of those items continue in Q4. And with that, and now with even the Forever 21 effect in Q4, which we didn't know when we talked about the $3.40, other pluses and minuses leave us comfortable at $3.40.

Nick Yulico -- Scotiabank -- Analyst

Okay. That's helpful. Thanks. Just one last question on Farley. I mean, you have a lot of interest in the building from what we've heard, there's some press reports on it. Can you just give us a sense [Technical Issues] on getting the building leased? And then in terms of the yield that you have given there in the supplemental, I don't think that's been updated in a while. We've heard you've kind of been pushing rents in the building. So is that -- is there upside to that yield in the building?

Michael J. Franco -- President

Look, I think, there has been a lot of press speculation about Farley and there's quite a bit of interest in the asset. And I think as we've talked about on prior calls, it's a totally unique asset [Indecipherable]. And so the interest has been high. We're not prepared to comment on when a deal might get done in terms of that deal, but even if we signed a lease near-term, the cash flow is not going to start probably until beginning of '22.

So the interest is high. I think the yield that we published in the last quarter was our best assessment as to where we'd end up. We're not prepared to make any adjustments to that. And obviously, we had some sense based on some dialog at that time. And I think the interest in the retail has been significant as well. So we have to let it play out, but I think we put the third -- second quarter numbers was -- continues to be our best guess as to where yields will end up.

Operator

Thank you. The next question comes from Steve Sakwa with Evercore. Your line is open.

Steve Sakwa -- Evercore ISI -- Analyst

Thanks. I guess, Mike, when you look -- Michael, when you look through kind of the retail tenant list, some of these things are kind of popping up that maybe you weren't expecting. Just what -- like how do you sort of look at the watchlist today? What other potential tenants maybe without naming specifics are you sort of worried about moving into 2020 at this point?

Michael J. Franco -- President

Look, Steve, the retail market is soft. Tenants performances are not what they were a few years ago. And so generally we watch everybody. Six, nine months ago Forever 21 was struggling but we didn't necessarily expect them to file bankruptcy. So I don't think there's necessarily anybody that we look at, that we view as in the same position today. But we're constantly watching what may happen with different retailers. So there's risk in the sector. We do have, I think, on average about eight years weighted average term on our leases in retail and we continue to view that durability as a real strength. And so no other specific names that I would mention, but everybody is mainly focused on.

Steve Sakwa -- Evercore ISI -- Analyst

Okay. And then maybe just a question for Glen. I mean, I realize you guys don't have a lot of space coming due that Michael outlined. But just sort of what is the tenant psychology today as tenants sort of thinking about their '20, '21 maybe '22 expirations and are you seeing more tenants coming to you sooner in order to lock in deals? I mean, just sort of what is that dynamic today?

Glen Weiss -- Executive Vice President, Office Leasing, Co-Head Of Real Estate

I think the tenor of the market is very good, Steve. We're seeing a lot of tenants, number one, expanding in the portfolio. A lot of tenants looking for new space in the portfolio. We do see tenants who have expiring leases forward, who are looking at our developments in Penn specifically. And so I would tell you, I think the market overall is healthy. The tenant demand is strong and the tenants are still very active across all the sub-markets.

Michael J. Franco -- President

Yeah, I would just add, Steve. Look, I think if we look at the -- as we look at the pipeline, we were chatting here a few days ago and I think, the activity really across all sub-markets, so it's Midtown, Midtown South, Penn District, we have good action across the board and I think that's reflective of the fact that the tenants are growing and the market is healthy.

Steve Sakwa -- Evercore ISI -- Analyst

And then just lastly, could you just comment on the TI leasing commissions? I think it looked a bit elevated on a couple of areas. I think in New York, it looked a bit high. I was just wondering if that was a specific deal or kind of what you're seeing on the concession front?

Glen Weiss -- Executive Vice President, Office Leasing, Co-Head Of Real Estate

It's Glen. During the quarter, particularly this quarter, we had a bulk of our leasing via our turnkey program. So we built space for tenants. Those leases had relatively short-term at around seven years on average are now leasing. And the way we look at the turnkeys, we build them today, we lease them for the term and there is definitely a great value in the next generation of the leasing of those spaces. So that's why you see that elevated TI number this quarter.

Operator

Thank you. The next question comes from Jamie Feldman with Bank of America. Your line is open. Please proceed.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Great. Thanks and good morning. So I know you guys kind of confirmed the $3.40 for FFO, but I think on the last call you talked about a low 200 range for Street Retail. Are you still comfortable with that outlook or has that changed?

Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer

Good morning, Jamie. That is the number that Steve referenced in the last call. Look, I think that number may still be fine, but there are some things in flux. Obviously, Forever 21, we had a handshake deal and until that's done, and we see how that plays out, we owe them generally as a company in that specific arrangement, that can have an impact. We sold a couple of assets, including 340M [Phonetic] for example, that comes out of that number. I mean, the last thing I would say is that, we are now projecting to take the retail and -- on Long Island Railroad Concourse out of service next year for a couple of years as well as redevelop a concourse. And so when that comes back, we're going to add additional retail square footage, which we think is going to be in very high demand based on that retail today and the income will be higher but we're going to lose $12 million per year temporarily. So yeah, there's a couple of things that are moving around. Again, some of those temporarily. We need to see how Forever 21 plays out, but I think the general number that Steve outlined in last call still appears fine.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Okay, thank you. And then I thought I heard you say you're in talks for a 400,000 square foot headquarter deal at 2PENN. Can you talk more about that potential lease? And then just timing, like a 400,000 square foot block, how that would fit into the building and how we think about the ins and outs over the next couple of years if that hits?

Glen Weiss -- Executive Vice President, Office Leasing, Co-Head Of Real Estate

The lease is out, we expect the lease to get signed in the next few months, The tenant would start their construction once we deliver the redeveloped building to them. So it's a deal we like a lot and we're going to try to close it in the next few months.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Okay. And then finally for me, just I know you had said, you are seeing expansions pretty healthy market conditions. Can you just talk about your view of kind of traditional Midtown versus Midtown West? It sounds like a lot of the activity is Midtown West, but if the tenants you're talking to do end up moving to the West side, what do you think the outlook is for more traditional Midtown and market conditions there?

Glen Weiss -- Executive Vice President, Office Leasing, Co-Head Of Real Estate

I could speak in terms of our portfolio, Jamie, in Midtown and we are still seeing expansions in the buildings in Midtown whether it's a 1290 -- a 90 Park, a 280 Park, an 887, so we are seeing expansions toward our Midtown portfolio. We, in our portfolio have not lost the tenant to the new developments on the West Side. So I can't really specifically speak about others losing their tenant migrating there. But we're seeing expansion is still healthy within our portfolio in the Midtown District.

Michael J. Franco -- President

And the other thing I would add, Jamie is that I think, we've talked about this now on a few calls, is that in order to compete effectively in this marketplace, your buildings have to be modern from an infrastructure standpoint, technology standpoint, amenity standpoint. And we got ahead of that, starting many years ago, all of our buildings in Midtown has been renovated. We attracted top-flight tenants to anchor those redevelopments. And so when you look at our assets, notwithstanding the activity levels, which are healthy on them, they are generally put to bed for a while like there's not -- and so when you look at the leasing activity in the last quarter, this quarter, next quarter we alluded to, there's not a lot of role, because we did the work, put those buildings to bed, had healthy rents and strong tenancies. So I think where you're going to see some impact is from those landlords that have either inferior locations or functionally obsolescent assets where some of the move-outs are going to occur beginning in two years, three years, four years.

Operator

Thank you. The next question comes from John Kim with BMO. Your line is open, please proceed.

John Kim -- BMO. -- Analyst

Thank you. A question on the Forever 21 rent cut. Is your expectation that you will release that space at a meaningfully higher rent or is there new rents for the [Technical Issues]

Michael J. Franco -- President

John, I had a little trouble hearing you at the end there. Just repeat the question, please.

John Kim -- BMO. -- Analyst

Sure. Do you foresee releasing the space of Forever 21 at the higher rents or is there new rents really reflective of where market rates are today?

Michael J. Franco -- President

I would say -- let's take them individually right. On 1540 Broadway, our expectation as I said, given the quality of that space that we should be able to achieve a higher rent than what the deal is with them. And 435 Seventh Avenue was a temporary deal. If we went to lease that long-term that rent would absolutely be higher, but again, we want to keep flexibility there. And so we're balancing flexibility with how much rent we're going to getting. So frankly, I know, you guys care quarter-to-quarter with the rent is there, we don't really care what the rent is for the next 4.5 years there as we can continue to put our plan together for that block.

John Kim -- BMO. -- Analyst

Okay. And Michael, you mentioned 65 tenants potentially looking for up to 16 million square feet in Manhattan. Do you have any commentary on how much of that is new demand versus just musical chairs?

Glen Weiss -- Executive Vice President, Office Leasing, Co-Head Of Real Estate

It's Glen. I would -- it's a mix. It's a mix of type of tenant whether demand, the expansion, relocation, it's a mixed bag across all the industry sectors across all the sub-markets. I wouldn't necessarily pinpoint one particular flavor of activity within that subset.

John Kim -- BMO. -- Analyst

But what about...

Michael J. Franco -- President

John, the one thing I would add is, when you see that -- really I think in space this year is the growth from the tech companies which I don't think -- most people didn't see the magnitude that was going to occur this year and there continues to be dialog on. Those are major impacts that tend to happen and I think with much greater speed in all the other leasing, some traditional tenants. So, we continue to see a migration and once those tenants get here, their expansion has been pretty significant.

John Kim -- BMO. -- Analyst

Great. Thank you.

Operator

The next question in the queue comes from John Guinee is with Stifel. Your line is open. Please proceed.

John Guinee -- Stifel -- Analyst

Great. Two sources and uses questions. First, can you remind us again when you have access to the preferred equity from the retail deal you did earlier this year? And then what do you expect to be the remaining after-tax proceeds of 220 Central Park South? And then the next sources and uses is, how do you think the JPMorgan news ultimately plays out? Does this result in a stable headcount in New York City or is it down 20%?

Michael J. Franco -- President

So, John, good morning. I'll let Joe answer the after-tax proceeds on two points.

Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer

Okay. We'll start with that John. Hi, how are you? It's Joe.

John Guinee -- Stifel -- Analyst

Where's Steve?

Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer

Excuse me?

John Guinee -- Stifel -- Analyst

Where's Steve?

Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer

Sitting next to me.

John Guinee -- Stifel -- Analyst

Good.

Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer

We have $1.9 billion in future sales, a lion's share of which is under the contract. There is another $100,000 of taxes against that $1.9 billion and another $100,000 of cost to complete the project against that $1.9 billion. So, net of all cost, net of all taxes from this point forward will be receiving $1.7 billion plus, minus from the remaining sales -- closings of the sales at 220.

Michael J. Franco -- President

So, John, just on your other question, John. So on the retail preferred, we have not said specifically in the past when that can be refinanced. And I think, we continue to not want to state that, there is some tax sensitivities to that, but we will in the -- in due time be able to refinance and redeem that retail preferred. But thank you for pointing out, that is another significant source of capital we will have access to in a few years.

Now, in terms of the JPMorgan announcement, look, I think the most important thing to remember is that they are building a significant world-class headquarters on Park Avenue right now and have recommitted to New York City through doing that. So this is their home. I don't think it's unusual for companies, particularly the banks to move back-office personnel outside of New York whether that's into New Jersey or into other cities. And so I think this is one of those lines. But I haven't heard any announcements on the percentage of the headcount whatnot, we will all have to sort of read that news, but there is ebbs and flows in the city in terms of companies and how they grow and manage their headcount. And I think JPMorgan is just doing that.

John Guinee -- Stifel -- Analyst

Great. We miss you Steve. Thank you.

Operator

The next person in the queue comes from Alexander Goldfarb with Sandler O'Neill. Your line is open, sir.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Hey, good morning. So two questions. First, you guys obviously talked a lot about the big tech demand this year that surprised the market. And at the same time, slug is busy contemplating redeveloping 1 Madison. You guys have the Farley, but at the same time, you have the Forever Hotel Pennsylvania. So are there -- is there sufficient demand in the market where you guys would start to, I don't know, if it dusts off the old plans, maybe reconceive, but where that project starts to be something that may actually come to fruition given the tech demand in the city and its location?

Michael J. Franco -- President

Good morning, Alex. Look, we are unbelievably excited about the Hotel Pennsy. We think that that site, we are done transforming Seventh Avenue with PENN1 and PENN2. We think it's going to be the development site from the city. So, but the time is not here yet. We're going to finish developing PENN1 and PENN2. And we think that follows that after the fact. So you're guesstimating what demand is going to look like in two years, three years, four years knowing and it can effectively do that, but we think it's going and the plan we have for that is going to be unique. We think that will appeal to all sorts of tenants tech or [Technical Issues]

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Okay. And then the second question is, just going back to the questions on retail rents, Topshop, you mentioned a cut to rent, the IKEA replacement for the Sears out in Rego Park is a cut from what Sears is paying. So, it would almost sound like rents for street retail are -- they are either coming down dramatically or these were special circumstances where they were so far above where the market had moved or maybe it's just the amount of space. So maybe you can just give a little bit more color on the dramatic cuts that we're seeing in these locations versus where you think sort of your generic, your average street retail lease would reprice?

Michael J. Franco -- President

Look, I think we've talked about, frankly, to the last at least two years that the street retail rent when Steve was really -- I think he was early in saying it and that the market has been correct. The retailer demand is down and therefore rents followed. I think it's probably been most significant in Madison Avenue and SoHo. And again deals that were signed at high watermarks are seeing those rents come down. So, Madison, it could be down certainly well north of the 1,000 and certainly below that, below 1,000 today.

So the market has been correcting and we bottomed. The answer is, in some sub-markets that were close and maybe a couple of others not necessarily at. But I think it's case by case, it depends on when the lease was signed. We have many leases that are still below market. We have obviously some that are above market. It depends on what the advantages of those leases were and obviously when those leases roll, you can't predict where the market will be at that time.

But -- and in some cases the asset, there may be a better use, so Topshop SoHo that was entirely retail. Today, the best answer may be that the ground floors stays as retail and the upper floors become office and the income is not that different. That office space with across the street address we think is going to be very attractive and we have interest already. So I think it depends on the asset, it depends on the sub-market. But clearly rents have been corrected.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Thank you.

Operator

And the next question in the queue comes from Vikram Malhotra from Morgan Stanley. Your line is open. Please proceed.

Vikram Malhotra -- Morgan Stanley -- Analyst

Thanks for taking. I have two questions. So just one following up on street retail. Any update on the Massimo space or the Madison assets?

Michael J. Franco -- President

Good morning, Vikram. Nothing really to report on either one of those. We have some tenant dialog going on Fifth Avenue, but nothing is imminent. Retailers continue to be cautious and are conservative about making large commitments, which Fifth Avenue generally is. So nothing to report there. I think Madison is a little bit different where -- Madison is slow. There is no sure calling it. The demand on Madison is probably the lowest of any sub-market in the city. And so it's going to continue to take some time to fill up.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay, great. And I just wanted to clarify on the $3.40 and the run rate going into next year. Joe, should we assume that, therefore the FFO in 4Q is closer to $0.80 to hit that $3.40 and do you still anticipate recouping a lot of those losses heading into 2020?

Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer

Hi, Vikram. Look, so far we've talked about Forever 21, we've said that the rent at share is $20 million and that's going to be diminished by at least half. We talked about the Long Island Railroad Concourse coming out of service next year. Either one of those things weren't included when we talked about the 2020 versus 2019. Now, as you know, we don't give guidance, but that being said, as a result of that negative effect of Forever 21, additional line of service at PENN1 and PENN2 to support our development plans including the LIRR, lower expectations from Hotel Pennsylvania, we no longer believe that 2020 will be a substantial bounce back year. It's going to have to wait a little longer.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay, that's helpful. I'll follow-up offline. Thank you.

Michael J. Franco -- President

Yeah, Vikram. I would just add to what Joe said, though, which is, notwithstanding and that will be a bounce back year and I know you and others are very focused on the next few quarters. I think as we look at our business, our big growth engine is Penn District and we have tremendous confidence in what we're doing there, the early reception has been very positive. And so that's going to take some time to kick in, but it's going to be meaningful when it does and obviously we published the information on the first redevelopments last quarter. And so we feel good about that. So it's going to require little patience. But the growth is going to come quite meaningfully.

Vikram Malhotra -- Morgan Stanley -- Analyst

No, that's great. And I just wanted to just clarify, just on the $3.40, Joe, the run rate, is that $3.40 still intact for the reported full year or was that a run rate sort of number?

Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer

No, that's the number we expect to publish at the end of this year, for calendar 2019.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay, great. I'll follow-up post the call. Thank you.

Operator

And the next question in the queue comes from Manny Korchman with Citi. Your line is open.

Michael Bilerman -- Citi -- Analyst

Hey, it's Michael Bilerman with Manny. Just a few follow-up questions. Michael, you mentioned that 400,000 square foot headquarters lease and I don't know if Glen or David or yourself want to answer this. But I guess when do you sort of disclose that information to the Street? So I got to assume in your comment that there was a lot more in the works. I know you assume that's a Farley and maybe other stuff at PENN1 or PENN2 and other buildings. So I guess, at what point in the negotiation do you feel comfortable making a statement like you did about a significant value-creating lease like the one you mentioned?

Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer

Look, Mike, I think we'll announce that when the lease is actually signed. I think that's the general deal. We have good dialog going on the assets right now, but the actual detail will come when we finalize the lease.

Michael Bilerman -- Citi -- Analyst

Well, I guess, in this case this lease is out for -- I guess you talked about it on the call. It's out for signature, I just didn't know at what point in the process, let's say, at least at Farley would be -- at what point you would be talking about that -- in the open about real?

Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer

Yeah, just wanted to sign, Michael.

Michael Bilerman -- Citi -- Analyst

So, in this case, the 400,000 is signed and you're just going through the...

Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer

400,000 there is -- we are negotiating the lease.

Michael Bilerman -- Citi -- Analyst

So, I guess, in the other leases that you're negotiating, how sizable are those and where do they stand in the process relative to this 400,000 PENN2?

Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer

Michael, look, I think you're trying to pin down on exactly where we are at this. I mean, I think there is really nothing more to say. I think, higher level, I think what we said is sort of all we're prepared to say right now, when the leases get signed, we'll announce those, you will know about those. But until they've done, nothing is done and I think beyond what we mentioned specifically is again still just active dialog or negotiation, not ready for to be reported.

Michael Bilerman -- Citi -- Analyst

Right. Look, it's very exciting to hear about the PENN2 lease. I was just trying to understand sort of the policies that you have in terms of disclosing it and that was more of I was just trying to get out?

Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer

We're excited too, Michael, but you got to wait a little bit.

Michael Bilerman -- Citi -- Analyst

Maybe a question for Steve. You've not been shy about where your shares trade relative to the inherent value of the asset base and you've been extraordinarily aggressive over the last six years at simplifying a lot of the complexity, spins, merge, sales, completing the construction at 220, doing the Farley buyout, all variety of long list. I guess where is your head today in terms of further sort of potential sales, most obvious would be something on the office side either New York or outside of New York either in a joint venture or outright or is all the focus right now on Penn Plaza and the redevelopment efforts?

Steven Roth -- Chief Executive Officer

All of the above. I'll say a couple of things. Number one, everything is on the table as it has been for the last number of years. Number two, we are certainly not done yet. Number three is, we definitely are not satisfied with our stock price at all. And just I would like to throw it back to you, for example, you said asset sales outside of New York and I guess you're referring to San Francisco and Chicago. I will remind you that for the last five years you and your brethren have been begging me to sell San Francisco and in the last five years, it has gone up in value for over $1 billion since we continued to hold it. So everything's on the table, we are not done yet. And we're actually surprised by our stock price, but just the market speaks and we're not done yet.

Michael Bilerman -- Citi -- Analyst

Joe, just in terms of 220, the $1.7 billion, does that also include the basis, the money you have in the building, so it's effectively we should think about $1.7 billion [Phonetic] of cash or is there...

Steven Roth -- Chief Executive Officer

Michael, Joe spoke a little bit out of the term trying to be very, very thorough. The answer is that we have published numbers, which show that the sell-out net building is about $3.3 billion and the cost of that building is about $2 billion. So you can do the math from there. The important thing is that all of the -- we paid off the indebtedness, so all of the closings that come from -- in the future, go into our treasury and go into finance Penn Plaza. So, we've announced that we have closed $1.2 billion or $3 billion, you can deduct that from the sell-out, you can do the math.

Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer

Michael, my math was consistent with what Steve said.

Michael Bilerman -- Citi -- Analyst

Okay, buy you can't go back with that. One of the reasons we've been -- I've been accused of being secretive with respect to that property. That's really not the case. We have a very important clientele and I think the word discrete is more important. The residential real estate market is a very gossipy market. So information that gets into that market is not helpful.

Operator

Okay. So the next question in the queue comes from Daniel Ismail with Green Street Advisors. Your line is open. Please proceed.

Daniel Ismail -- Green Street Advisors -- Analyst

Good morning, guys. Just a quick question on New York City office cap rates. Given the movement and the tenure and some of the sales that we've seen in New York, where we stand today, earlier this year you guys put up 4.5% cap rate on your office buildings. Do you think we've drifted higher or lower since that time?

Michael J. Franco -- President

I don't know that I would change it, Daniel, but obviously, we do it once a year, we'll revisit the time to see where the markets are and what we're hearing from capital sources. I do think that the fact that interest rates have trended back down and appear to be stabilizing at lower levels, I think is bringing capital further into real estate as a general matter, and I think that a number of the capital sources we talk to, I think view New York as there is value here. So, cap rates probably widened a bit over the last year or so. And given where the tenure is, you can finance on a reasonable leverage basis generally below 4% right now. So it's a very attractive cash-on-cash yield.

And so and as the hedging costs have come in for a number of the capital sources abroad that are -- that's an important issue. I think you're seeing capital sources refocus a bit, not just in the US, but on New York as potentially a value play given value has been frankly pretty flat, maybe even a little bit down in the last few years. So there is a lot that goes into what we published, not just where the market is, but how much growth is in a particular asset or vacancy or whatnot. So we'll revisit that as we get closer to when we publish it. But I think today directionally, it's not far off.

Steven Roth -- Chief Executive Officer

Daniel, you guys have been hustling that New York is over-priced. I'm not sure we agree with that. So if you look at comps, the comps pretty much support the cap rates that we have been using. The volume of activity in the capital markets has definitely been declining, it's been declining all over the country and all over the world. So it's a very specific asset by asset calculation. Now, the NAV calculation is not intended to be nor can it possibly be a rigorously ruthless -- ruthlessly accurate correct number to the penny, it's a range. And so the volume is down, pricing is pretty much holding on specific assets. And we think that you are a little bit too pessimistic on your thinking about the New York. Maybe even more than -- maybe even significantly too pessimistic.

Daniel Ismail -- Green Street Advisors -- Analyst

All right, that's fair. Maybe just a quick follow-up on PENN1 and PENN2 based on some earlier comments. You mentioned wanting to do the flex space there yourself. Is that a result of any of the turmoil we've seen at WeWork and wanting to reduce operator risk or is that a conscious decision of wanting to capture some of the upside in flexible leasing and keep sort of that tenant experience in-house?

Glen Weiss -- Executive Vice President, Office Leasing, Co-Head Of Real Estate

It's Glen. We think in PENN, it's important to create the flex space for our portfolio for our tenants. Particularly at PENN1, the big building 2.5 million feet, more than 200 tenants are in the building, we're always seeing tenants needing agile space, whether it's swing space, expansion space, short-term band-aid space for whatever reason. So we've taken PENN doing the co-working, the flex space is going to be a huge benefit for us and our tenants. And of course, with that, we do expect it to be a profitable operation, which is why we've decided to do it, add PENN1 .

Michael J. Franco -- President

Dan, when you think about -- this is part of the centerpiece of the Penn District. We want to control exactly what goes on here, create exactly how they want to create the right environment. And so we don't think there's anybody better to do that than ourselves. I think that we've proven that over the years in what we've done. And so -- and when you think about when you lease to a co-working operator, you are generally providing the bulk of the TIs and getting a lease and maybe get a little upside, but you're not getting a lot of credit and you have a capped upside. So here we're going to invest the capital exactly where we wanted and create the right environment and capture the bulk of the upside. And so for us, it's a pretty straightforward answer.

Daniel Ismail -- Green Street Advisors -- Analyst

It makes sense. Thanks guys.

Michael J. Franco -- President

And that's always been the plan.

Operator

Thank you. And the next question in the queue comes from Jamie Feldman with Bank of America. Your line is open.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Thanks. Just a quick follow-up on that last question. I mean, have you -- what -- I know it hasn't been that long, but what changes have you seen in the market since WeWork pulled their IPO in terms of demand for co-working or just tenant behavior or discussions?

Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer

I haven't seen any change Jamie. No change.

Michael J. Franco -- President

And obviously WeWork has not singed the leases here.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Well, I guess just the attitude toward co-working and flex leasing. I mean, it certainly seems like the product -- this cycle seems a lot more talked about in -- and tenancy more interested?

Michael J. Franco -- President

Look, I think it's -- look, I think the way that people work how they may use that space, I think that's here to stay. It's one of the reasons we are offering that type of space in the Penn District. I do think -- our view would be that there has been this big discussion of shift toward enterprise from this co-working companies, particularly WeWork and I think those large enterprises are going to focus even harder on who their landlord is. So I think that accrues to the traditional landlords quite a bit like us. And so the desk-by-desk and small companies, I think co-work will continue to be an alternative for a number of those. But I do think that this shifts the tenant back a little bit.

Catherine Creswell -- Director, Investor Relations

Thank you.

Operator

Thank you, sir. We have no further questions at this time. I will turn the call over to Mr. Michael Franco for any closing remarks.

Michael J. Franco -- President

Thank you, everybody for joining the call. We look forward to seeing many of our investors out at the Nareit Conference in Los Angeles on November 12th and November 13th. And our next earnings call for our fourth quarter earnings will be on Wednesday, February 19, 2020 and we'll look forward to your participation again. Take care.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Catherine Creswell -- Director, Investor Relations

Michael J. Franco -- President

Manny Korchman -- Citi -- Analyst

Glen Weiss -- Executive Vice President, Office Leasing, Co-Head Of Real Estate

Nick Yulico -- Scotiabank -- Analyst

Joseph Macnow -- Executive Vice President, Chief Financial Officer, Chief Administrative Officer

Steve Sakwa -- Evercore ISI -- Analyst

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

John Kim -- BMO. -- Analyst

John Guinee -- Stifel -- Analyst

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Vikram Malhotra -- Morgan Stanley -- Analyst

Michael Bilerman -- Citi -- Analyst

Steven Roth -- Chief Executive Officer

Daniel Ismail -- Green Street Advisors -- Analyst

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