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Vornado Realty Trust (NYSE:VNO)
Q4 2019 Earnings Call
Feb 19, 2020, 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 Fourth Quarter 2019 Earnings Call. My name is Brandon and I'll be your operator for today. 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.

Cathy Creswell -- Director, Investor Relations

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

In these documents and during today's call we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-K, and financial supplements.

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 your questions. I will now turn the call over to Michael Franco.

Michael J. Franco -- President

Thank you, Cathy, and good morning, everyone. Overall, we look back at 2019 as an important and successful year setting the stage for the next phase of the company's growth. In addition to keeping our buildings full at very healthy rents, we're at 96.5% occupancy. We recapitalized our Fifth Avenue and Times Square retail assets on very attractive basis in a $5.5 billion transaction, and we paid a $1.95 per share special dividend last month related to the transaction. Most importantly, we advanced the redevelopment of the Penn District, positioning the company to capitalize on the enormous opportunity we have on the west side of Manhattan. More on this in a moment.

Before giving some thoughts on the markets and our portfolio and in particular the Penn District, let me review our fourth quarter and full-year financial results. Fourth quarter FFO as adjusted was $0.89 per share, flat to last year's fourth quarter. Full-year 2019 FFO as adjusted was $3.49 per share compared to $3.73 per share for 2018. These results are $0.09 ahead of the guidance we'd given in the third quarter.

As we previously indicated, our financial results for 2018 were lower than 2018 explained as follows; of the $0.24 reduction, $0.25 is due to over $3.2 billion of asset sales, $0.09 is due to a one-time non-cash stock-based compensation expense, and $0.04 is due to lost income from retailer bankruptcies, all of which aggregated to a $0.38 reduction, which was partially offset by growth in our core business and interest savings.

Overall, our core business continues to be strong. For the year, across New York, Chicago, and San Francisco, our office and retail leasing teams completed 215 leases, comprising 1.7 million square feet at starting rent of $90.45 per square foot at positive mark-to-markets of 14% GAAP and 8.8% cash. Please see page 18 in the supplement for further detail.

Cash basis same-store NOI companywide is up 3.6%. Companywide our fourth quarter cash basis same-store NOI increased by 6.6% broken down as follows; New York Office was up 3.4%, Retail was down 2%, theMART was up 100% benefiting from a one-time $12 million accrual of real estate tax expense last year due to triennial reassessment of the property, and 555 California Street was up 4.1%.

Our non-comparable items in the fourth quarter included the $173.7 million after-tax net gain on unit closings at 220 Central Park South. To date, we have closed on 65 units for a net proceeds of $1.82 billion, including 17 units for $565.9 million in the fourth quarter. We are now 91% sold in the face of a very soft luxury condo market, a testament to the building being the best ever built in New York City. And our sales continued strong.

Since the beginning of 2019, we have executed contracts for $400 million. We expect to receive over $1 billion from closings in 2020, and as we've said previously, all the net proceeds will be redeveloped into the Penn District redevelopments under way, turning this capital into highly accretive earnings and driving strong future growth.

Now turning to 2020, which will be an inflection point for us as we invest heavily in the Penn District to create enormous future value. Given the full-year effect of our substantial asset sales and our development activity as we continue to invest in the Penn District, we thought it appropriate to provide some greater visibility into our projection for 2020. We currently estimate the 2020 FFO, as adjusted, will be lower than 2019 by between $0.23 and $0.33 per share. Of this $0.28 reduction at the midpoint, $0.16 was due to the full-year impact of asset sales, $0.09 is due to taking additional assets out of service for redevelopment primarily in the Penn District, at PENN2, The Retail at the IRR concourse, and the Kmart space at PENN1, and $0.08 is due to lost income and the full-year effect of 2019 retailer bankruptcies, all of which aggregate to a $0.33 reduction, which is partially offset by growth in the core business.

Let me now turn to the New York market. The Manhattan office market continues to fire on all cylinders, fueled by strong job growth and unabated tenant demand for office space, particularly for landlords with new or redeveloped product [Phonetic]. The city added 19,000 office-using jobs during the year, bringing office-using employment to an all-time high of 1,470,000 jobs. And the recently announced large future office commitments from major companies in the city point to continued strong job growth.

Leasing volume citywide in 2019 totaled 43 million square feet, the highest activity in 20 years. [Indecipherable] tenants continued their strong demand accounting for one-third of all activity during the year, with the tech sector alone leasing 7.5 million square feet. This sector has become a dominant powerhouse in New York as tech companies are attracted by the city's dynamic economy, deep and diverse talent base, and leading universities.

While the big tech companies like Facebook, Google, and Amazon continue to expand their sizable presence, the city [Indecipherable] also being driven by long-established traditional industries powering more and more technology workers to support their businesses. Importantly in 2019, venture capital investment in New York companies surpassed $17 billion, increasing New York City's share of total VC investment in US to an all-time high of 20%, up from 11% in 2018. These investments pave the way for continued growth in the tech sector in the future.

The flight to quality trends in tenants for new construction and redeveloped space accelerated during 2019. According to JLL's [Indecipherable] Building Report more than 20%, or 8.8 million square feet, of the citywide leasing activity in New York was signed at triple-digit starting rents, a record number. Interestingly, 60% of this triple-digit activity was with TAMI tenants, mainly concentrated on the west side. According to a Cushman & Wakefield year-end report, asking rents for Class A product in the Penn District submarket, which includes Hudson Yards and Manhattan West, reached a historic $109 per square foot, a very good sign for our 5.2 million square feet currently in redevelopment in the district.

As a company, we are heavily focused on the transformation and repositioning of our Penn District holdings as a new epicenter of New York. Our redevelopments are now in full construction mode. 2020 will mark an important step in the district's transformation as the majestic Moynihan Train Hall at Farley and our 850,000 square feet of office and retail space at Farley will be substantially completed at yearend. As you walk around the district today, you see the incredible amount of activity under way. The redevelopments of Farley, PENN1, PENN2, the grand new entrance to Penn Station on Plaza 33 where work has begun and the scaffolding in the IRR concourse where redevelopment will shortly commence. In total, there is over $5 billion currently being invested in the district and its infrastructure between Vornado's $2.2 billion and the government's $3 billion.

During the fourth quarter, we bought out Kmart's 141,000 square foot lease at PENN1, which had another 16 years to run, for a $34 million payment, of which $10 million is expected to be reimbursed. Steven [Indecipherable] about this for years and years, and we think we timed the buyout at exactly the right time and got at a fair price. Despite the nominal short-term FFO loss from Kmart's rent, this was a big win for us and allows us to immediately integrate this space into our overall redevelopment plan for PENN1, the adjacent plaza in the LIRR concourse, and [Indecipherable] space with high-quality retailers [Indecipherable]. Overall, a big uptick for the neighborhood.

During January, we executed a relocation transaction with the Information Builders, which will move them from the tower of PENN2 into separate spaces at PENN11 and PENN1 totaling 78,000 square feet. This deal was the last piece of space we needed to get back to execute the redevelopment at PENN2. Moreover, the starting rent with Information Builders at PENN1 is in the mid-$90s per square foot, reflecting the market's confidence in the district's transformation and as this extraordinary development begins to take shape.

In addition, as I'm sure most of you saw, the Governor made a major announcement in January, expressing the State's intention to further modernize and expand track capacity at Penn Station through the creation of the Empire Station Complex with an expanded terminal in a block south of PENN2 increasing train capacity by approximately 40%. This announcement represents another validation of Penn Station/Empire Station as the key transportation hub in the region, and a further commitment from the government to invest in the area. The government expects ridership at Penn Station to double in the next 10 to 15 years. The state intends to fund this expansion through the creation of a new district, which encompasses our Penn District holdings and by capturing future increases in tax revenues from new developments in the designated district. We look forward to working with the state, city, and other important stakeholders to help realize the Governor's very important vision.

With the explosion of tech demand in New York City, particularly on the west side, our Penn District assets are very well positioned to be at the center of this activity. It's in the hottest submarket in the city. We're going to be delivering Farley, PENN1 and PENN2 totaling 5.2 million square feet near term with an ability for tenants to grow with us over time in our massive campus located right on top of transportation. We're confident as our plans become reality that office tenants will truly appreciate the unique and differentiated product we're delivering.

In this regard, we remain on track with the two large leases we mentioned on last quarter's call, and there is good activity from a variety of important tenants behind this. On the retail side, the interest in Farley has been outstanding, as retailers come to understand the significant foot traffic they will course through Farley and the district every day. We're in lease negotiations on over 50% of the Farley concourse and are in active negotiations for the majority of the space in the main level. More broadly, we're working on a variety of deals to curate the district with all sorts of offerings; food and beverage, coffee, fitness, co-working, conferencing, retail, and so forth to service our tenant base. While earnings are, of course, negatively impacted in the short-term, earnings will significantly increase as we turn the $60s per square foot office rents currently into place into mid-$90s and higher as we deliver and lease the redeveloped space.

Overall, our New York Office portfolio is in great shape, 97% occupancy with a very manageable 525,000 square foot expiring during 2020, after taking the previously announced [Indecipherable] space comprising 566,000 square foot at PENN2 out of service. Our office leasing activity is extremely strong with more than 1.6 million square foot of leases in final documentation and an additional 1.8 million square feet in the pipeline.

During 2018, we completed 102 office transactions for 987,000 square feet at starting rents of $82.17 per square foot with positive mark-to-markets of 4.6 cash and 5.5% GAAP. Approximately 20% of our total leasing activity in 2019 was in triple-digits at average starting rents of $120 per square foot. In terms of the fourth quarter, we leased 173,000 square feet at an average starting rent $101 per square foot. While we had a negative 5.2% cash and 3.5% GAAP mark-to-markets for the quarter, it is worth noting, this was based on only 54,000 square feet of second-generation space and driven by the rent reduction, one short-term renewal at 350 Park Avenue. This is the single best development site on Park Avenue and likely midtown, and we will be keeping renewals short-term here in order to line up this site to a possible new development.

Leasing highlights during the fourth quarter included a headquarters lease at our new 512 West 22nd Street with Next Jump Media of 41,000 square feet. At theMART in Chicago during 2019, we completed 62 leases comprising 286,000 square feet at average starting rents of $49.43 per square foot. During the fourth quarter, we completed a 50,000 square feet of showroom deals at starting rent of $51 per square foot. Occupancy stood at 94.6% at year-end. We have very good activity in our available office space here and are in numerous discussions with both new and existing tenants throughout the building.

In San Francisco the market remains on fire and it is hard for tenants to find quality available space. At our 1.8 million square foot 555 California Street campus, we remain full and are enjoying the benefits. During the fourth quarter, we finalized a lease renewal with one of our full-floor law firm tenants in the bottom third of the tower at a starting rent of $94 per square foot, a 72.5% positive cash mark-to-market. We are also in renewal negotiations with two of our major tenants in the tower of the building with each transaction at rents well into the triple digits.

Turning now to our New York Street Retail business. Overall while rents are down, activity is up from a year ago and there continues to be a flight to quality from retailers, a trend that benefits our portfolio. At best high street retail is not dead, but rents do need to be economic for retailers to commit. In a very difficult retail environment, we completed 39 retail leases with 238,000 square feet during the year, with GAAP and cash positive mark-to-markets of 12.9% and 9.8%, respectively.

In the fourth quarter, we completed 16 leases comprising 94,000 square feet highlighted by very important 10 new leases with two LVMH brand at 595 Madison Avenue, better known as the Fuller Building. Fendi and Berluti Leased a total of 16,850 square feet here reflecting the building's bull's-eye location, at the corner of 57 Street and Madison Avenue. A portion of this space was formerly occupied by Coach [Indecipherable]. Kudos to Haim for sourcing the LVMH detail.

Our retail occupancy remains high at 94.5% as we continue to source tenants for this best-in-class portfolio. Rents this quarter rolled up on cash mark-to-market basis by 11.3% and were flat on a GAAP basis. In addition, we're pleased to report that last week we signed an 8,000 square foot lease with Sephora at 4 Union Square South, which fills most of the space vacated by Forever 21 last year. Between the reasonable [Indecipherable] expansion and new Sephora deal, we have now surpassed the total rent Forever 21 was paying on entire space and we still have an additional 9,700 square foot leasing opportunity. Taken as a whole once fully released, we project an approximate 40% mark-to-market increase and a much better growth profile. As a testament to the uniqueness of our Union Square asset, we released the space 96 days after Forever 21's lease expired. We don't yet know what will happen with the other two Forever 21 leases we have. But if we get them back, these assets are in premier locations, and while it might take longer, we are confident we'll release them successfully just as we did Union Square.

Finally a comment on sustainability. We have always prioritized reduction of our carbon footprint and mitigation of our contribution to climate change. We are in lockstep with our investors, tenants, employees and communities. We have reduced by 25% our same-store energy consumption in the last 10 years and are committed to furthering our progress though continued energy retrofits, smart building technology and meaningful engagement with our tenants. We will also include renewable energy as an important step in our process toward carbon-neutrality. We are well positioned to comply with recent climate laws as evidenced by our being ENERGY STAR Partner of the Year for seventh time and Nareit Leader in the Light Awards recipients for the tenth year in a row, and a top performer among all Global Real Estate Sustainability Benchmark respondents. In addition to the many awards for sustainability we win each year, I am specifically proud of our team for being cited as the industry model with our innovative approach to furnishing our audited ESG report to the Securities and Exchange Commission.

We continue to maintain a fortress balance sheet with measured leverage and an abundance of liquidity [Indecipherable]. After the $400 million special dividends paid last month, our liquidity is $3.8 billion comprised of $1.2 billion in cash and restricted cash and $2.175 billion undrawn or revolving credit facility.

To conclude, we feel very good about our overall business. We own great assets in great locations in great cities and know how to keep these properties full with best-in-class tenants and market-leading rents. Moreover, we have outstanding and unique development skills that allow us to create significant value. We will continue to take full advantage of New York's strong [Technical Issues] climate for businesses to grow and succeed while they find the best talent in the country here.

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

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And from Citi, we have Manny Korchman. Please go ahead.

Michael Bilerman -- Citigroup, Inc. -- Analyst

Hey, good morning. It's Michael Bilerman here with Manny. Michael, I wanted to just go through some of the numbers you threw out in terms of the headwinds that are affecting 2020 and maybe if we can just take each of them. You talk about the space coming out of service being the $0.09 the 19 million that's in the supplemental on page 31. Can you give us some color in terms of when you expect income to start flowing back because that chart, at least in the supplemental, doesn't have the positive effect of releasing that space? And then on the Retail side, that $16 million or so, that $0.08, what is prospects of that income flowing in at some point in 2020 versus later on, just as we think about the ramp as we get back?

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

Michael Bilerman, it's Joe Macnow. I want to take the second part of that question on the $0.16 from asset sales. Half of that -- almost half of that comes from the retail JV. The balance comes from sales of 330 Madison, 3040 M Street, PREIT, UE, LXP. That stuff is not coming back, other than being reinvested -- the cash being reinvested in the Penn District. It's not a one-for-one we solve this with putting this here and we're going to get back NOI.

Michael J. Franco -- President

Michael, in terms of the retail bankruptcies, right, which is Topshop and Forever 21, obviously, 608 is permanently gone. The asset in SoHo, the probable plan there is to convert that upper floor -- the upper floors to office. And so that will undergo a redevelopment. And so best case is that won't come online [Indecipherable] come online 2020. Best case would be some point next year. But again, nothing certain there. And then Forever 21, we have a deal in place today with them. The numbers we cited reflect the reduced leases. We'll see what happens as they come out of bankruptcy now. And to the extent that those leases are not accepted or to the extent that we proactively take that space back after the year, again that income is not going to come on in 2020. Best case, that's going to come on sometime 2021. And with usual free rent period, etc., I think it's the best case that would be toward the latter part of '21. But again, there's nothing that is imminent on those. We're aware of that. Both those leases either could come back or we'll proactively take those back, and we're out marketing the space.

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

Michael, it's Joe Macnow again. That explanation of the possible Forever 21 two leases coming back is what gave rise to the range of $0.23 to the midpoint of 2018. That $0.05 represents the exposure of those two leases come back.

Michael Bilerman -- Citigroup, Inc. -- Analyst

Okay. And then if you think about -- I mean you were running basically $0.89 of adjusted FFO in the third quarter and fourth quarter, right, so annualizing out to $3.56 for the year relative to the $3.49 for the full year. Arguably the last two quarters should have the dilution from the asset sales. Certainly on the retail side, some of the stock investments already baked into that number and arguably it has some of the retail loss as well. So I'm trying to reconcile those two things where you had been reporting a quarterly number of $0.89, $3.56 annualized, which should already take into account some of this $0.28 of added dilutions that we're talking about for 2020.

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

So, Michael, it's Joe Macnow again. I'm not prepared to address that question fully, but some of the items are really one-timers. There was lease cancellation income in the fourth quarter that was $0.02. There was a straight line write-off that we anticipated on Penn Plaza that got deferred to 2020. That was another $0.02. So $0.89 is up $0.02 and 2020 is going to be down $0.02. Those two items are a $0.06 swing from annualizing the fourth quarter. And there has to be many, many more items like that that Manny and our team or you and our team can do offline.

Michael J. Franco -- President

Michael, the other thing is the out of service that we cite, right, that's all incremental, right. So that is Kmart. It's a number of little things frankly between PENN1, PENN2 that with further evolution or development plans, right, is incremental out of service. Obviously there was a sale of a PREIT share. So there's a number of items that are not run rate from the fourth quarter.

Michael Bilerman -- Citigroup, Inc. -- Analyst

Right. No, and I think that was part of my first question, and I'll get off after this, that $19 million of reduction for the stuff coming out of service. Trying to understand when some of the income will flow back into the company, I guess, trying to understand that aspect of it. [Indecipherable] spend money and looking for space, what type of disclosure are you going to provide? You've provided on slide 31 the stuff that comes out. I guess at what point are we going to get some stuff about it coming back in?

Matthew Iocco -- Executive Vice President-Chief Accounting Officer

Well, I think also on page 31, Michael, it's Matt Iocco. If you look at the top part of that page. we do provide the incremental cash yields and the stabilization year we expect to begin to achieve those cash yields.

Michael Bilerman -- Citigroup, Inc. -- Analyst

Right. But some of that will come in in '21-'22 -- like it will be phased in. And so just looking at that incrementally each year [Indecipherable]. I'll yield the floor. Thank you.

Operator

From Evercore ISI, we have Steve Sakwa. Please go ahead.

Stephen Sakwa -- Evercore ISI International Ltd. -- Analyst

Thanks, good morning. I guess, Michael or Steve, I know you're not going to provide a lot of details around some of the big pending leases at Farley and PENN2, but can you just kind of help frame some of the discussions and the timing and I know you talked about a pretty big pipeline of LOIs, and just kind of help us sort of think through some of the timing at Farley and PENN2 on some of the leasing?

And then some of the commentary you made in the 10-K about kind of the mark-to-markets that you're seeing on the office component. I realize it's not a lot of square footage. But it sounded like there was about a 20% mark-to-market. So can you just maybe flush out some of the bigger leasing?

Michael J. Franco -- President

Sure, I'll start and Glen can jump in as well. Look, in general, Steve, obviously there's been press speculation about a couple of major leases that are in the works, and we're not going to comment on specific names. I think in my intro remarks I said those remain on track. And on the normal course, our expectation would be that we would start finalizing some important leases probably in the next quarter.

In terms of PENN2, we are just showcasing that product now. It's a major redevelopment. Obviously we referenced the one lease last quarter, again, which remains on track. And these are major headquarter leases and going through the normal process right now. I think we are making very good progress. I think next quarter you'll start to see some real announcements. Glen, you want to talk more broadly on the pipeline?

The only thing I'd say, Steve, on mark-to-market is that, again, one of the big thesis is we are taking [Indecipherable], right. What are the in-place rents in terms of what's expiring and where we're taking this to? And given what we're doing in the Penn District, we've talked about taking the rents from the $60s into the $90s and $100-plus range and that's starting to be reflected in what we're doing in those -- in that number.

Glen Weiss -- Executive Vice President-Office Leasing and Co-Head of Real Estate

Hi, Steve. It's Glen. We mentioned in the remarks we have 1.6 million feet of leasing. So, those are in documentation. So leases are out and that includes the deals you're referring to in Penn. We're certainly on track. We feel very good about where we are and then there is more activity to come.

As it relates to the overall business, if you think about it, we're 97% full in the core portfolio. We keep filling up space with our existing tenants. I mean our buildings are in fantastic shape. The core portfolio we've redeveloped those buildings over the last five, six, seven years. During that period of time, we leased on average 2.5 million feet a year in those buildings and the major tenants continue to expand. So it would be [Indecipherable]. We're seeing great activity from within the building than from outside. And so overall, we have a lot of leases out. We have a lot of other actions. So we feel great about where we're sitting right now.

Stephen Sakwa -- Evercore ISI International Ltd. -- Analyst

Okay. And then I guess, second question is just look, I realize the company is not really driven by short-term earnings and really is doing the right thing for the real estate. But clearly coming up with effectively guidance that's well below the Street is a little bit shocking to people, the magnitude. I'm just curious as you sort of laid out some of the issues and I realize you can't contemplate everything, are there any other potential wildcards that we should be thinking about that could potentially hurt earnings this year or even into next year, or at this point have most of the big things been flushed out and from here earnings bottom in '20 and start to rebound in '21 and beyond.

Michael J. Franco -- President

Joe referenced the Forever 21's situation, Steve, right. So to the extent that that is not -- the leases are not firmed, then there could be a $0.05 ding on a temporary basis, right. That's the most near-term insight. Other things obviously there's always risk of tenant bankruptcies, etc., but we don't -- the numbers we gave you is what is in our purview today, and obviously there are some positives as well. But we clearly think that 2020 is the bottom and we'll start to see strong growth thereafter.

And as we said, look, from a real estate standpoint, you said it yourself. The steps we're taking in terms of taking the assets out of service or additional assets out of service the right thing for our redevelopment plans, right. And so that's going to create significant value, getting the Kmart, making some modifications on some other things we're doing in the district which impacts the out of service. But those are the right business decisions, right. It's going to create value, notwithstanding it has a short-term impact on our rents.

Stephen Sakwa -- Evercore ISI International Ltd. -- Analyst

Okay, thanks.

Operator

From Bank of America, we have Jamie Feldman. Please go ahead.

James Feldman -- BofA Securities, Inc. -- Analyst

Great, thank you. I guess, Michael, just to go back to your last comment. You said 2020 is the bottom and we'll start to see strong growth thereafter. Can you just talk through the drivers of the growth in '21, the strong growth in '21?

Michael J. Franco -- President

Jamie, look, there are certain pressures into guidance there. I mean the reality is, we can take that offline --

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

Certainly Farley coming into [Indecipherable] FFO that's --

Michael J. Franco -- President

Coming online. But reality, Jamie, is that really every part of the business, particularly the Office business has grown by 5, New York business, etc. I can dimension point by point, but that is the deal. 770 Facebook is fully rent paying at that point.

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

And Jamie, it's Joe. While 2019 has many depressions of earnings from asset sales, dot-dot-dot, we've gone through that. We don't anticipate that reoccurring, which of course led to the growth in the core business not being matched by other dispositions, etc. etc.

James Feldman -- BofA Securities, Inc. -- Analyst

Okay, that's helpful. Yeah, I was just trying to figure out the largest moving pieces. Sounds like you listed them for '21. I guess, thinking about the core, can you talk about a same-store growth rate that kind of looks through all the noise for '20?

Michael J. Franco -- President

I don't know we're prepared to do that on this call, Jamie.

James Feldman -- BofA Securities, Inc. -- Analyst

Okay. All right, then I guess my last question, you in the past have talked about a $200 million run rate for retail NOI. It sounds like that's come down on Forever 21, maybe the Kmart space. How does -- just for an apples-to-apples comparison, how does that look today and based on what you've outlined?

Michael J. Franco -- President

Yeah, I don't know that what we -- and I remember you asking last quarter, I don't know that really has changed, right. I think last quarter we said it was going to be low-$200 million and we said that that was before taking [Indecipherable] LIRR concourse, right. That also is before the Kmart buyout. So obviously with those two, they take it below that number, but those are proactive things we're doing as opposed to impact from tenancy. So Forever 21, as we talked about, could be on both leases go away temporarily. It could be a $10 million gain. But I think it was generally in the number that we cited to you last quarter.

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

So, Jamie, a little more color. Last year's reported number -- '19 reported number was $267.7 million. The retail sale will adversely affect that by 25.6 [Indecipherable] that wasn't in '19. Other sales will affect that negatively by almost $3 million. Out of service at Penn Station will affect that negatively by $6 million. Then there are other tenant items, Forever 21, Topshop, etc., etc., but our math still is in the low-$200 millions.

Michael J. Franco -- President

Before the Concourse and Kmart adjustment.

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

Yes, before the concourse.

James Feldman -- BofA Securities, Inc. -- Analyst

Okay. And then just to confirm the "guidance" you gave is, that assumes that Forever 21 leases are cut in half but not to go to zero and there's an additional $0.05 if they go to zero. Is that correct?

Michael J. Franco -- President

That's correct, Jamie.

James Feldman -- BofA Securities, Inc. -- Analyst

Okay. All right, thank you.

Operator

From BMO, we have John Kim. Please go ahead.

John Kim -- BMO Capital Markets-Canada -- Analyst

Thanks. Not to belabor the point, but a couple quarters ago you mentioned that this would be -- 2019 will be the trough year for earnings, and now you're coming out with negative 9.5% for '20. But looking back two quarters ago, you already knew about the retail joint venture, the Topshop store closings, the PENN2 redevelopments. So I'm trying to understand what was new over last six months, besides Forever 21 and the Kmart early termination?

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

Well, John, it's Joe Macnow. A number of moving parts affected that. We took signage out of service in the Penn District. We didn't anticipate doing when we gave that first set of guidance. We moved leasing assumptions from '19 to '20. There are numerous, numerous things that affected that. But it's over, we're confident -- from what Michael told you that '20 will be the trough year, that the growth in '21 will be substantial, and again, if you'd like to go into greater, greater detail, let's do that offline, but not monopolize this call with that type of detail.

John Kim -- BMO Capital Markets-Canada -- Analyst

Sure, OK. And then you updated your NAV. Now your stock is trading at 30% discount to it. Wouldn't a buyback -- I know you've talked about in the past, but wouldn't a buyback help offset some of this dilution, and it would have been a lever or it could be a lever for soften the earnings dilution going forward?

Michael J. Franco -- President

John, we recognize we're at a meaningful discount, though the market seems to ignore any of the -- we put out and maybe even the analysts [Indecipherable]. And look, it's something that we have evaluated. We continue to evaluate, and it's not a course of action that we're prepared to embark on today. We are, just as we've done in the past, we consistently look at ways to kind of narrow that gap and first of all to grow NAV, which is what we're trying to do through our Penn District redevelopments. But secondly to close that gap. We've shown an ability to execute with accretive transactions and we are continuing to look at that. Obviously, a buyback is one way. I don't know if it's as significant in terms of [Indecipherable] we've done in the past, but not something that we have felt is the appropriate use of capital.

John Kim -- BMO Capital Markets-Canada -- Analyst

I guess what would be the appropriate time to use it? I mean you have free cash flow that is significant. You're trading at a big discount. You have some earnings dilution which is near term. I mean if this is not the right time then when it is?

Michael J. Franco -- President

John, it's a matter of using that capital for that or other things, and we continue to have significant opportunities to invest in our business. We've outlined the three initial redevelopments from the Penn District that are substantially accretive. And there are opportunities behind that where our capital we want to have available to continue to execute on our redevelopment in the whole district. We're attacking the first 5 million square feet today, but there is significant amounts to do beyond that, and right now, we want to have that capital available for that or other purposes.

John Kim -- BMO Capital Markets-Canada -- Analyst

One last for me --

Michael J. Franco -- President

We think that's more accretive. We think that's more accretive in terms of NAV creation, John, than buybacks for that same amount of capital based on our analysis.

John Kim -- BMO Capital Markets-Canada -- Analyst

Your earnings decline is more than offset by condo sales at 220 Central Park South, which you don't include in your normalized FFO. But did you have a $200 million increase in your estimated proceeds, because looking at the 10-K, it still looks like you have a $1 billion in after-tax profits maintained?

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

John, it's Joe again. I saw some confusion from some people on that point. We published in this NAV $1.2 billion, but we didn't say that's the profit on the job. What we described it as is the incremental value from estimated future proceeds net. The net is, net of cost to complete the job which are winding down and net of taxes to be paid. Our estimate of profit, which is what you are talking about, hasn't changed from the $1 billion. $1.2 billion was $200 million of taxes for $1 billion out. But this is a timing of cash coming into Vornado. If you look at the 10-K, you'll see we've already gotten $1.8 billion from the project. That $1.8 billion plus this $1.2 billion represents $3 billion, which is the after-tax cash coming from both the profits of $1 billion and recouping the original investment of $2 billion and the cost to do the job. So no, we have not increased the sales estimate by $200 million.

John Kim -- BMO Capital Markets-Canada -- Analyst

Okay, thank you.

Operator

From Stifel, we have John Guinee. Please go ahead.

John Guinee -- Stifel, Nicolaus & Co., Inc. -- Analyst

Wow. A lot of moving pieces. Just curious if you look at paying $34 million for the Kmart space about 141,000 square feet. What do you put in 141,000 square feet of ginormous floor plates and that's about $240 a foot? Does that imply that the retail there is worth $240 a foot?

Michael J. Franco -- President

John, your $240 a foot I think is taking the aggregate amount, which is a value, right, as opposed to annual rent. I think Kmart was paying us around $60 a foot, maybe a touch less. So I think that's a more relevant comparison. But we think in terms of that space, is there demand [Indecipherable]? Absolutely. That is a bull's eye location right in the heart of the district that now having Kmart back, which was effectively shut off to the Plaza on 33rd Street, we can integrate that, have it facing both 34th and 33rd Street. And based on our preliminary discussions with a couple of large format users that wouldn't necessarily take it all because we don't want one tenant to take it all given how we're going to incorporate and redevelop it. There's absolutely going to be strong demand for that space [Indecipherable].

John Guinee -- Stifel, Nicolaus & Co., Inc. -- Analyst

Okay. And then just a few quick questions. When do you think you're going to get the hit for the PENN1 ground lease, and is $0.20 a share a good number? Second, does the train capacity that the Governor is thinking 40%, is that with or without a new tunnel, which I'm not sure what the status is of the tunnel? And then third, what are you guys thinking about Manhattan Mall and Hotel Pennsylvania because we're always under the assumption that that is pretty soon thereafter?

Michael J. Franco -- President

Okay. Let me see if I can take those in order, John. PENN1 ground lease, I think you asked about the impact there. That's something we've talked about on the last call or two. We're not prepared to give an estimate as to what that can be, right. That's almost three years away in terms of that reset, and there's a lot of factors that go into that reset, whether it's negotiated or arbitrated, there's still a fair amount of time. Obviously it's going to be up from today's number, but not something we want to prognosticate, particularly as we don't want to negotiate in public with our ground lessor.

In terms of the track capacity, the 40%, that's is not dependent on a new tunnel. That's effectively adding the new terminal to the south and allowing additional trains to basically dead-end coming from the New Jersey side, but not dependent on gateway per se.

John Guinee -- Stifel, Nicolaus & Co., Inc. -- Analyst

And then Manhattan Mall and Hotel Pennsylvania.

Michael J. Franco -- President

Look, right now, Manhattan Mall is -- the office building's full and we've got a great tenant who continues to love the building, so that's performing well. The retail we're effectively keeping on shorter-term arrangements, but that asset is cash flowing quite significantly, and that's the plan for near future. [Indecipherable] we've talked about in the past that as we finish the redevelopments of Farley PENN1 and PENN2 and the district transformation becomes evident, Hotel Penn we think is going to be the best development sites in city. So obviously we'll see what market conditions are at the time. But that's the next logical place to build a new building. And at some point, Manhattan Mall could be expansion for that, but that's years and years away, not anywhere -- anytime soon in terms of altering what that asset is.

John Guinee -- Stifel, Nicolaus & Co., Inc. -- Analyst

Great, thank you.

Michael J. Franco -- President

Thank you.

Operator

From Piper Sandler, we have Alexander Goldfarb. Please go ahead.

Alexander Goldfarb -- Piper Sandler & Co. -- Analyst

Hey, good morning there. Just a few quick questions here. Just first on the guidance, or we'll put guidance in quotes. You guys talked about for the impact to 2020, that includes the benefit of stopping the -- presumably stopping the ground rent payment on the Topshop Fifth Avenue store?

Michael J. Franco -- President

Correct.

Alexander Goldfarb -- Piper Sandler & Co. -- Analyst

Okay. Okay. And then as you guys have laid out the roadmap for the Penn Station --

Michael J. Franco -- President

Alex, just to clarify. Net-net, right, there's dimunition from that.

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

But Alex, that's not in comparable FFO. 608 Fifth Avenue is not in comparable FFO. And when that lease is rejected some months from today, there'll be a $70 million income items -- non-cash income item. But that's not in comparable FFO. So that's not -- and what Michael referred to in his discussion.

Alexander Goldfarb -- Piper Sandler & Co. -- Analyst

Okay. Joe, that's helpful. And as far as the roadmap that you guys provided on the Penn Station and PENN2 impact, is that consistent with what you guys had originally penciled or has that impact grown as you guys have gotten more involved and have seen what you could do there?

Michael J. Franco -- President

That -- the numbers are a bit accelerated, Alex, as we've seen -- as we begin to execute on the plan. So it's a little more front-ended.

Alexander Goldfarb -- Piper Sandler & Co. -- Analyst

Okay. And then finally --

David R. Greenbaum -- Vice Chairman

Alex. It's David. Good morning.

Alexander Goldfarb -- Piper Sandler & Co. -- Analyst

Good morning, David.

David R. Greenbaum -- Vice Chairman

I guess morning I'd add to that is our objective is to turn this building into a mid- to high-$90s building on average, if not higher. So to the extent we can get tenants out of this building, our objective effectively is to do so. So that's something that Glen and team have been working on to accelerate over the last number of months.

Alexander Goldfarb -- Piper Sandler & Co. -- Analyst

David, that's helpful. And then the final question is, you guys clearly are not an earning story. You're an NAV story. On the last call, Michael, you talked about Hotel Penn that it's not time yet. You guys are sitting on 350 Park, and I hear comments in the broker community, I was just talking to a guy, [Indecipherable] who was saying that they can't find space under $120 a foot in Plaza District. At what point do rents on Park Avenue make sense where you can redevelop on Park Avenue, or is the construction cost delta just that far that for those of us thinking about value creation for you guys at 350, it's going to be years out because the math simply doesn't work now or in the foreseeable future. When does the math work?

Michael J. Franco -- President

Alex, look, as I said in my opening comments, we are beginning to take the steps in order to align that site up for new development. Now we'll make that decision as we get closer to that time based on market conditions and so forth, but the feedback from the brokers community is that that is the best site in town and would be -- would command the highest rents. And so I think we may have even referenced in the past, we have been approached by significant users for an either all or a [Indecipherable] a portion of the new building on the site. So that is -- in terms of economics, I think it's not a matter if it's working today. It's a matter of can you actually begin the development. And so if you just think about the timing, we have leases that run through really beginning of 2024, Glen?

Glen Weiss -- Executive Vice President-Office Leasing and Co-Head of Real Estate

End of '23.

Michael J. Franco -- President

End of '23. And so that's the earliest that we could begin to take the building down. And so new delivery wouldn't be until '27 or '28. And so it's a significant opportunity, but it's going to take some time in order to bring it to fruition, both in terms of lining up tenancies and then executing on it. So I think if we had the building today could we command a rent to achieve yield necessarily to develop? The answer is we think quite possibly. To build a brand new building that's perfect in that location we think today would command rents that would make that work.

Alexander Goldfarb -- Piper Sandler & Co. -- Analyst

And that would be the JV with Rudin?

Michael J. Franco -- President

The answer is it can go either way, Alex. We can build on our own. We don't need Rudin to build there. We can build a -- probably the best boutique building -- 1 million square foot boutique building on that site on our own, or we can combine with Rudin who is behind this and build close to a 2 million square foot building. So the answer is, as we continue to move down the tracks here in terms of timing on our leases and what not, this building Blackrock's moving around out to 2023 as well, so they line up for that so we can put them together. But we'll evaluate based on tenant discussions and obviously a tenant for the whole combined building would require a significant pre-lease, which there's interest in. So the answer it's too early to tell which direction it can go, but it is possible.

Alexander Goldfarb -- Piper Sandler & Co. -- Analyst

Thank you, Michael.

Michael J. Franco -- President

Thank you.

Operator

From Morgan Stanley, we have Vikram Malhotra. Please go ahead.

Vikram Malhotra -- Morgan Stanley & Co. LLC -- Analyst

Thanks for taking the questions. On the -- just on expirations on the Office and Retail side. We know obviously of the big move out in Penn here, but you've also kind of alluded to a 20% mark to market in your 10-K. Can you kind of outline what's driving that view? And any other major leases that are expiring in 2020 that should be aware about on the office side.

And then on the Retail side, I think it's more flattish mark to market, but there is a big expiration in 4Q of '20. Can you remind us what that is?

David R. Greenbaum -- Vice Chairman

2020 our expiration totaled approximately 525,000 feet. We take McGraw-Hill out of service, which is a 560,000 foot lease, which expires at the end of March. On the mark-to-market, we're coming off $70 rents. We think that goes 20% to a call it mid-$80s number. Remember quarter to quarter these numbers fluctuate. There is no rule of thumb obviously, but as we look at on our leasing projections, the spaces that are coming up for expiration, plus all the activity that we've been talking about this morning, we feel the mid-$80s number coming off this $70 rent is in the ballpark of what we're going to hit.

Michael J. Franco -- President

And again that's -- Vikram not to speak necessarily to timing, right. The timing on those new leases may not necessarily occur in 2020, but that's our expectation in terms of where on average they will get marked to, right. As retail --

Vikram Malhotra -- Morgan Stanley & Co. LLC -- Analyst

Got it. So that includes the 500 that you highlighted, but potentially other leases, and you're just -- that's sort of a broad statement saying we're in general coming off of $70 rents and we think overall we can get to 20% mark-to-market, including kind of new leases?

Michael J. Franco -- President

Correct.

Vikram Malhotra -- Morgan Stanley & Co. LLC -- Analyst

And then on Retail --

Michael J. Franco -- President

Yeah. And then on retail, which as you said is more flattish. That's again no big leases. Probably half of that is in the Penn District, which given everything we're doing there, we feel good about. Then they -- some of that may be take -- frankly intentionally take a little longer there to get the right mix of tenants, but again that's a fairly -- no big leases. Fairly diversified set of expiries.

Vikram Malhotra -- Morgan Stanley & Co. LLC -- Analyst

Okay. So not even in 4Q. It just seemed like there was a large chunk in 4Q 2020. But maybe just building off of that, and 5th Avenue over the last call it 12 or 18 months. There have been a number of vacancies over there. I'm just sort of wondering what does this mean for -- in your view, what does this mean for sort of upper Fifth rent per foot sustainability and specifically the ability to lease up your vacancy there?

Haim Chera -- Executive Vice President-Head of Retail

Hi, this is Haim. On Fifth Avenue, we have one vacancy on upper Fifth Avenue. We love our corner. We have a great property. It sits on the 50-yard line on the luxury side of Fifth Avenue. And while it's too early to call a rebound in luxury leasing, we do have a lot of confidence in the quality of our asset and the positive momentum that we feel is going on today and luxury retail among the strong brands with a strong balance sheet who have profitable business lines. So early to call a rebound, but still confident in the quality of what we have. We happen to dominate the best-in-class retail assets, and we have confidence in that.

Vikram Malhotra -- Morgan Stanley & Co. LLC -- Analyst

And Haim, if I can just ask you just on the -- if I remember correctly, in your vacancy rents there were well below market, but just given the broader vacancies on Fifth Avenue, it seems like asking is still kind of above $2,500 or $2,800 a foot. But like what is the true sustainable per-foot trade, if you were to just take sort of a longer-term view? I'm not looking for your specific mark to market but just that the upper Fifth area, what's a more sustainable level?

Haim Chera -- Executive Vice President-Head of Retail

I believe the sustainable rents are not where peak rents have hit on Fifth Avenue. The lease is signed in the $4,000 to $5,000 a square foot range at peak. I do believe it's down significantly from there in terms of affordability. But there are brands with significant margins and huge balance sheet that can do a lot of business in the market. There is still well over half a dozen brands that have more than $100 million in sales on Fifth Avenue and those are the customers that we'll look for a sustainable rents in the range of what you're talking about.

Vikram Malhotra -- Morgan Stanley & Co. LLC -- Analyst

Okay. And then just last clarification. The stabilization that you've outlined for Farley '22, I know you said that you're pretty confident of lease-up, we'll hear more news, but just from a modeling perspective to kind of get to that '22 stabilization. Like what sort of -- when do you have to get the leases done or what's sort of in the model that we have to get leasing done to achieve that stabilization before maybe it gets pushed out into '23?

Michael J. Franco -- President

Yeah, I was going to say the next three months or so.

Haim Chera -- Executive Vice President-Head of Retail

Yeah. Vikram, as we talked about, as we said, the Office lease is on track and the Retail leasing, which I described in the opening remarks, we are in active negotiation on the leases on the bulk of the concourse and much of the main floor. So we feel good about the numbers that we have out there.

Vikram Malhotra -- Morgan Stanley & Co. LLC -- Analyst

Okay, thanks. I'll follow up offline. Thank you.

Operator

And from Green Street Advisors, we have Dan Ismail. Please go ahead.

Daniel Ismail -- Green Street Advisors LLC -- Analyst

Great, thank you. Just given all the moving pieces, can you speak to how leverage will trend in '20 on a debt to EBITDA basis?

Michael J. Franco -- President

Daniel, we couldn't hear your question. Could you repeat it please?

Daniel Ismail -- Green Street Advisors LLC -- Analyst

Sure. Just given all the moving pieces, can you speak to how leverage will trend in '20 on a debt-to-EBITDA basis?

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

This is Joe gain. We don't anticipate leverage rising in ' 20, if that was your question. There is no reason. I mean, we're sitting on an awful lot of cash. There's no reason really to increase leverage.

Daniel Ismail -- Green Street Advisors LLC -- Analyst

And then maybe just for the New York Office portfolio outside of Penn Plaza, can you frame how you guys are seeing net effective rent growth in '20? Should we -- are you guys expecting something more in line with inflation or something above that?

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

We're seeing rents still strong. Rents in midtown are at all-time highs right now hovering $80 a foot. We feel good about the portfolio, the strength of the buildings with which we're leasing right now. So we feel that rents are still going up in most submarkets, including in many of our buildings. But again, it's case by case as we lease out. And again, we don't have a lot of space to come in that core portfolio as I talked about earlier.

Daniel Ismail -- Green Street Advisors LLC -- Analyst

And if you had to ballpark where in-place rent sit outside of your Penn District Office portfolio in Manhattan, can you frame how far below market those rents will be at?

Michael J. Franco -- President

And Dan, I don't want to give you a number on its own here [Indecipherable] to a precision. But I'm comfortable saying there the in-place rents below the market rents. But again, don't want to quantify how much. That would be -- that would be a little off the cuff, I think going back to your first question. We're seeing -- and I talked in the opening remarks is that if you have redeveloped your building, you have new building, we are see seeing real rental growth there, right. In the Penn District we are seeing significant rental growth given the transformation of the area of the assets. And then in the -- so the normal course traditional midtown assets, I think that's probably a little more 3%, 4% type growth, again I would say probably on west side with Chelsea Meatpack you're continuing to see above that. So I think the trends have remained fairly consistent, although I think midtown has been a little stronger in the last four to five months than it was middle part of last year.

Daniel Ismail -- Green Street Advisors LLC -- Analyst

That's helpful. Thanks.

Operator

Thank you. And we'll now turn it back to Michael Franco for closing comments.

Michael J. Franco -- President

Thank you, everybody, for joining our call today. We look forward to seeing many of our investors at the Citi Conference in Florida next month. Our first quarter earnings call will be Tuesday, May 5, and look forward to your participation again. Take care and thank you.

Operator

[Operator Closing Remarks]

Duration: 66 minutes

Call participants:

Cathy Creswell -- Director, Investor Relations

Michael J. Franco -- President

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

Matthew Iocco -- Executive Vice President-Chief Accounting Officer

Glen Weiss -- Executive Vice President-Office Leasing and Co-Head of Real Estate

David R. Greenbaum -- Vice Chairman

Haim Chera -- Executive Vice President-Head of Retail

Michael Bilerman -- Citigroup, Inc. -- Analyst

Stephen Sakwa -- Evercore ISI International Ltd. -- Analyst

James Feldman -- BofA Securities, Inc. -- Analyst

John Kim -- BMO Capital Markets-Canada -- Analyst

John Guinee -- Stifel, Nicolaus & Co., Inc. -- Analyst

Alexander Goldfarb -- Piper Sandler & Co. -- Analyst

Vikram Malhotra -- Morgan Stanley & Co. LLC -- Analyst

Daniel Ismail -- Green Street Advisors LLC -- Analyst

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