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Text: 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.
The call may include time-sensitive information that may be accurate only as of today's date.
On the call today from management for our opening comments are Steven Roth, chairman and chief executive officer; and Michael Franco, president and chief financial officer.
I hope everyone is healthy, continues to be vigilant and gets vaccinated.
Let me say it again.
Everybody, please get vaccinated.
I'll start by sharing a few things that are happening on the ground, which I hope you all find interesting.
The U.S. economy is resilient, it's growing.
I might even say is booming, and so is New York.
Financial, tech and almost all industries are achieving record results.
In New York, apartment occupancy, which had dropped to as low as 70% during COVID, is now rapidly climbing back with record numbers of new leases being signed each week at higher and higher rents.
Condo sales, which had stalled during COVID, are now active, albeit at discounted pricing, except I'm proud to say that our 220 Central Park South where resales are at a premium.
This apartment and condo demand is coming from folks who live and work in New York, and that's a very good sign.
At 220 Central Park South, where we are basically sold out, resale pricing is up, and that's an understatement.
A recent spectacular example, which is now public, is a two-floor 12,000 square foot resale that traded at a record-breaking $13,000 per square foot, think about that.
Our New York office division is now experiencing record incoming RFPs and requests for tours, including from many large and important occupiers who had been on the sidelines during COVID.
Glen and his team are very busy.
By the way, big tech is now very active looking for more space in New York to take advantage of New York's large, highly educated and diverse workforce.
Here's an interesting fact, a Fortune 100 occupier household name who dropped out of the market during COVID has come back to market.
They were originally looking for 300,000 square feet to house 2,800 employees.
Post-COVID, after extensive study and space planning, they now need and are seeking 400,000 square feet, a 30% increase to house the same 2,800 employees.
In both instances, their projected in-office occupancy is the same 60%.
The fact that this occupier needs 30% more space post-COVID is contrary to all analyst expectations, but that is the fact.
And we are hearing the same from many, although not all, but many of our tenants that they will need more space, not less post-COVID.
One of our analysts and a friend recently wrote that our company suffers from PENN fatigue.
It took us over a decade to assemble our vast PENN District hoardings, but as the same goes, this is our time.
Here's where we stand.
At Farley, we have delivered to Facebook all of their 730,000 square feet.
Their tenant work is going full bore.
The West Side of Seventh Avenue, along the three blocks stretching from 31st Street to 34th Street, is now a massive construction site, where we are transforming the 4.4 million square foot PENN one and PENN 2 into the nucleus of our cutting-edge connected campus.
The 34th Street PENN 1 lobby just opened, and our unrivaled three-level amenity offering will be completed at year-end.
Our full building PENN 2 transformation, including the bustle and reskinning, is 98% bought out on budget and off to a fair start.
We couldn't be more excited.
Our 14,000 square foot sales center the Seventh Floor of PENN 1 is now open to rate reviews from brokers and occupiers.
After working with Glen and Josh in the sales center, the market is understanding our ambitious plans to make the PENN District, the crown jewel of the west side of the new New York.
By the way, every quarter and every year, the West side is punching way above its weight, measured by high and growing leasing share -- market share of leases signed.
Aside from our confidence and the market's enthusiasm, even at this early date, we are raising our PENN asking rents.
We will shortly begin demolition of the Hotel Pennsylvania to create the best development site in town.
We expect demolition and shutdown costs to be about $150 million, which you should look at as land cost.
Our book basis in this property today is $203 million.
And we are midstream in the process to make the unique high-growth PENN District a separate investable public security.
Our best in the business team leaders in the PENN District are Glen Weiss Leasing, Barry Langer Development and Dave Bendelman Construction.
Michael will cover our operating results in a moment, but I can say that, overall, leasing and occupancy statistics in New York tell a misleading story.
While overall availability is 18%, assets newly built or repositioned since 2000 have a much lower direct vacancy rate of 11%.
Last quarter, 88% of new leasing activity in Midtown was a Class A product.
It's clear that the market is voting for new and repositioned assets As you would expect, Class A assets command higher pricing than Class B, in fact, one-third higher.
Obviously, this is the place to be and you should know that substantially all of our assets are repositioned and in this competitive set.
New York is coming back to life.
Residential neighborhoods are bustling, less so the commercial canyons where office utilization is now approximately 23%.
Remember, it's August, the vacation month.
The largest employers in Manhattan have mandated a return to work by Labor Day or shortly thereafter, some with full staff in office and others with a flexible program allowing some work from home.
As I have said before, I do not believe that the office will be threatened by the kitchen table.
And I do not believe that even one or two work from home days per week by some number of a tenant's employees will be a negative to us.
I, for one, I'm unable to predict whether it will take a month or a quarter for office buildings to be back to full up and the canyons to be teeming again.
There is no magic date.
All that matters is that it will happen soon enough.
Last week, we announced that Wegmans, the premier grocer in the Northeast region, is opening its first store in Manhattan at our 770 Broadway replacing Kmart.
And you can bet that we will do several more Manhattan deals with Wegmans.
The fact that Wegmans is coming is creating excitement with it at last count, 43 print and broadcast press articles celebrating the announcement.
Here is an interesting fact to it.
Wegmans expects that as much as 50% of its volume will be from in-home delivery -- appropriately from to home delivery.
We will be investing $13 million in TIs, leasing commissions and free rent in this long-term lease with a 65% GAAP mark-to-market increase over Kmart's rent.
This quarter, we announced that we exercised a ROFO to acquire our partner's 45% interest in One Park Avenue in a transaction that values the building at $870 million.
Based on the in-place floating rate loan, we project $18 million, $0.09 cents per share first-year accretion.
Last summer, we brought 555 California Street to market for sale and are unable to achieve fair value, we withdrew, understandable at the height of COVID with travel restrictions and so forth.
At that time, we said we will refinance and this past quarter, we did to the tune of $1.2 billion, netting us approximately $467 million at share.
We can just carry on the new floating rate loan is almost exactly the same as the old much smaller fixed-rate loan.
So one might say the $460 million is free money.
Ironically, I believe, continuing to own this outstanding asset with this superb accretive financing is actually a better outcome.
In New York replacement cost is rising quickly over the past many decades, replacement costs with a dip here and there has risen relentlessly.
And if past this is pro-log, replacement costs will undoubtedly continue to rise as far as the eye can see.
Replacement cost has always been a key predictor of future value a rising umbrella lifting all similar real estate values.
And New York is the poster child of this phenomenon.
Here is updated guidance for our retail business.
For 2021, we guided cash NOI of $135 million.
And now halfway through the year, we expect to do a little bit.
For 2022, we guided cash NOI of $160 million, which we affirm.
For 2023, we announced new cash NOI guidance of not less than $175 million.
You should know that, as expected, Swatch exercised the termination option for a portion of their space at St. Regis, which is effective March 2023 with a $9 million termination fee.
The Swatch owned Harry Winston store will remain under lease through its June 2031 expiry.
The guidance above takes account of the Swatch termination.
If I were a betting man, and I guess in some ways, I am, I would bet that we have already put in the bottom in New York that the worst of the best stuff is behind us and that New York will get better and better and so will New York real estate in space.
In our case, occupancy rate, TIs and pricing have bottomed.
I will start with our second-quarter financial results and end with a few comments on the leasing and capital markets.
Second-quarter comparable FFO as adjusted was $0.69 per share compared to $0.56 for last year's second quarter, an increase of $0.13.
The increase was driven by the following items.
$0.09 from tenant-related activities, including commencement of certain lease expansions and nonrecurrent or straight-line rent write-offs impacting the prior period, primarily JCPenney and New York & Company.
$0.02 from lower G&A resulting from our overhead reduction program and $0.02 from interest expense savings and the start of improvement in our variable businesses, primarily from BMS cleaning.
Our second-quarter comparable results are consistent with the fourth-quarter run rate we discussed at the beginning of the year as is our overall expectation for the full year.
Speaking of our variable businesses, we are beginning to see signs of recovery with a return to normalcy.
BMS is nearing pre-pandemic levels.
Signage is starting to pick up with healthy bookings in the second half of the year.
Our garages are picking up as well and should be fully back in 2022.
And finally, we have a number of trade shows scheduled for the fourth quarter.
Other than Hotel Penn's income, we expect to recover most of the income from our variable businesses by year-end 2022 with the balance in 2023.
Companywide same-store cash NOI for the second quarter increased by 0.5% over the prior-year second quarter.
Our core New York office business was up 3.2%.
Blending in Chicago and San Francisco, our office business overall was up 2%.
Consistent with prior quarters, our core office business, representing over 85% of the company, continues to hold its own, protected by long-term leases with credit tenants.
Our retail same-store cash NOI was down 6%, primarily due to JCPenney's lease rejection in July 2020.
But excluding the impact of JCPenney's lease rejection, the same-store cash NOI for the remaining retail business was up 9.8%.
Our office occupancy ended the quarter at 91.1%, down 2 percentage points from the first quarter.
This was expected and driven by long expected move-out at 350 Park Avenue and 85 Tenth Avenue as well as 825 Seventh Avenue coming back into service.
With the activity we have in our pipeline, this quarter should represent the bottom of our office occupancy, and it should improve quarter by quarter from here.
Retail occupancy was up slightly to 77.3%.
Now, turning to the leasing markets.
Since our last call, the pace of office leasing activity in New York City has picked up each successive month.
With the vaccination rates high, companies are now fully focused on their return to the office with many returning during the summer and a majority expected back soon after Labor Day.
Predictably, the overall sentiment in New York continues to improve as company's return and the office market continues to heal.
During the second quarter, leasing volume in Manhattan was its highest since the onset of the pandemic.
And office tour activity has now exceeded pre-pandemic levels with more than 11 million square feet of active tenant requirements.
Importantly, office-using employment in the city continues to strengthen.
With more than 100,000 jobs now recovered, we're at 92% of the pre-pandemic peak.
While leasing volume during the first half of 2021 was dominated by small to medium-sized transactions, driven by well-capitalized financial services and technology tenants, we are now seeing pent-up demand from larger occupiers across all industry types as many have formally entered the market.
There are additional signals that the market continues to fought.
Tenants are now entering into leases for longer terms and asking rents in concessions have stabilized.
And in fact, as Steve alluded to, we have recently increased our asking rents in our top-tier assets, reflecting the strong demand for best-in-class assets.
During the second quarter, we signed 33 leases, totaling 322,000 square feet with two-thirds coming from new companies joining our high-quality portfolio across the city.
The average starting rent of these transactions was a strong $85 per square foot.
The leasing highlight for the quarter was 100,000 square feet at PENN 1, further validating the market's resounding reception to our redevelopment of this property.
The largest transaction was a new lease with Empire Healthchoice for 72,000 square feet.
Our main competition here was newly constructed buildings in both Downtown and Midtown, our new dramatic lobbies in Plaza's best-in-class campus amenity program and premier access to transportation from the data.
Looking toward the second half of 2021, our leasing pipeline has grown significantly since last quarter with more than 1 million square feet of leases in active negotiation, including 180,000 square feet of new leasing at 85 Tenth Avenue, as well as an additional 1.6 million square feet in various stages of discussion.
This includes discussions with several large users newly interested in PENN 2 after seeing our vision at the Experience Center.
Our activity is a balanced combination of new and renewal deals with the majority of our activity with companies in the financial, technology and advertising sectors.
Our office expirations are very modest for the remainder of 2021 and 2022, with only 976,000 square feet expiring in total, representing 7% of the portfolio, and 150,000 of this square footage is in PENN 1 and PENN 2.
As we look toward our 2023 expirations of 1.9 million square feet, of which 350,000 is in PENN 1 and PENN 2, we are, of course, already in dialogue and trading paper with many of these companies and anticipate announcing important transactions by year-end.
Now, turning to theMART in Chicago, where the office market is also showing signs of life, and tenant demand is returning coming out of the pandemic.
While short-term renewal leasing dominated the market during 2020, activity has picked up with almost 1 million square feet of new leasing completed during the second quarter, though concessions are unusually high.
At theMART, we completed a 91,000 square foot long-term office renewal with 1871.
Chicago's premier technology incubator for entrepreneurs and have an additional 80,000 square feet of new deals in negotiation.
Two weeks ago, we produced our first trade show at theMART since February 2020 pre-pandemic.
This show in partnership with International Casual Furniture Association featured the largest manufacturers of outdoor furniture in the country.
Attendance was 10% higher than the same show produced pre-pandemic 2019, and feedback from exhibitors and attendees was very positive.
We have eight upcoming trade shows calendared during the remainder of 2021, including NeoCon in October, the largest show in North America focused on commercial design, though we don't expect the tenants to reach 2019 levels this year.
In San Francisco at 555, we are finalizing a couple of small, strong leases in our fall other than the cube.
Turning to the capital markets now.
The financing markets are wide open and aggressive for high-quality office companies and buildings, and we are taking advantage of the low all-in coupons.
It bears repeating that in May, we upsized our 555 California Street loan from $533 million to $1.2 billion with no additional interest costs.
We also reentered the unsecured debt market for the two tranche $750 million green bond offering at a blended yield of 2.77%.
There was robust demand for our paper, underscoring investor support for our franchise and belief in New York City.
We paid off the loan on theMART with the proceeds and added the remainder to our treasury.
Finally, our current liquidity is a strong $4.492 billion, including $2.317 billion of cash and restricted cash and $2.175 billion undrawn under our $2.75 billion revolving credit facilities.

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qtrly ffo per share adjusting for items $0.69.

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