Good morning, and welcome to the Vornado Realty Trust Second Quarter 2021 Earnings Call. My name is Hilda, and I will be your operator for today's call. This call is being recorded for replay purposes. Our speakers will address your questions at the end of the presentation during the question-and-answer session. [Operator Instructions] I will now turn the call over to Ms. Cathy Creswell, Director of Investor Relations. Please go ahead.

Thank you. Welcome to Vornado Realty Truck Second Quarter Earnings Call. Yesterday afternoon, we issued our second quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents as well as our supplemental financial information package are available on our website, www.vno.com, under the Investor Relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q and financial supplement. Please be aware that statements made during this call may be deemed forward-looking statements, and actual results may differ materially from these statements due to a variety of risks, uncertainties and other factors. Please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2020, for more information regarding these risks and uncertainties. The call may include time-sensitive information that may be accurate only as of today's date. The company does not undertake a duty to update any forward-looking statements. On the call today from management for our opening comments are Steven Roth, Chairman and Chief Executive Officer; and Michael Franco, President and Chief Financial Officer. Our senior team is also present and available for questions. I will now turn the call over to Steven Roth.

Thank you, Cathy, and good morning, everyone. 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 2-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…

Thank you, Steve, and good morning, everyone. 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. We have provided a quarter-over-quarter bridge for you in our earnings release on Page 5 and in our financial supplement on Page 7. 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, [ claim ]. 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. Company-wide 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%.…

[Operator Instructions] We have a question from Steve Sakwa from Evercore ISI.

I guess, Steve, first on the retail figures that you threw out, I'm just curious, where does the re-tenanting of the JCPenney's box and Manhattan Mall sort of fit into that?

There's no credit in those guidance number for any new -- for any occupancy in that space yet.

And do you have any updated thoughts on just sort of the timing behind that or sort of any sort of initial thoughts on what you want to do with that space?

The answer is we have thoughts. We have a few things that we're working on nothing imminent. And I think that, that's all I really have to say about that today. Obviously, the rent that JCPenney was paying us is not realistic in today's market. And I wouldn't expect that space to be leased in the short term.

Okay. And then maybe, Michael, you talked about good activity you're seeing at kind of both PENN 1 and PENN 2. Could you just maybe give us without getting too specific, but can you kind of just give us a flavor for those discussions and what maybe your expectations are in terms of kind of leasing up PENN 2 in particular?

Glen, why don't you take that?

Sure. Steve, it's Glen. So we are busier every day at both buildings, PENN 1 and PENN 2. PENN 1, we have multiple lease negotiates happening now. As you know, there's no real big blocks there, but we certainly are putting full floors together, and the attraction to the redevelopment has been remarkable. The new lobbies opened now, which has only accelerated the activity. People are getting a great, now physical feel to how great the asset will be. It feels like a brand-new building. At PENN 2, we have daily presentations at the Experience Center. We have RFPs in the door on certain blocks. We are feeling great about it. By the way, we're not rushing on it because we know that it's going to be better as the construction unfurls. It's early, but we're certainly in the market. We're in deal-making mode, but we're not rushing.

Steve, I would just add my two cents. I mean, the proof of the pudding is that we're in the market. Glen and his team is in the market every day with this space, talking to the brokerage community and to prospective tenants. The reaction has been nothing short of astonishing. We had never seen it in our careers in terms of the reception as to what's happening, first of all, the whole West Side and second of all, the unique program that we're putting together. So we are extremely enthusiastic our strategy, as Glen said, is to let a little time pass until we're not in a rush because we have a level of -- the most important thing that I said with respect to the PENN is we are so convicted and we are so enthusiastic, and we are centering to the marketplace that at the very outset, we are now raising prices. So you can take a lot from that.

Great.

By the way, you should put on your construction boots and come over and see us.

The next question comes from Manny Korchman from Citi.

It's actually Michael Bilerman here with Manny. Steve, you made a comment, I hope you're well, but you made a comment in your opening remarks about a Fortune 500 company looking at, I think you said 300,000 square feet. It was going to house about 2,800 employees. And then upon further review, they increased their space needs by 30% for the same number of employees. I think your firm tends to have a little bit lower or smaller of a lease size in terms of leasing. Obviously, you have a number of bigger tenants, but an average lease size of smaller than 300. How are those medium-sized tenants thinking about their space? So how -- how often does the situation come up where someone's willing that want to take more space? And how are they thinking about the total cost of that to get to that point?

Glen is probably more qualified to answer than I am, but I'll give you my thoughts. Number one, you have to remember that real estate cost for these tenants is one of the smallest line items in their P&L. So there are different management teams, different perspectives, okay? So we went through the WeWork experience, where the whole economics were driving the space per capita -- the square footage per capita down from what was 250 square feet per capita before, down to as low as a stupid number like 60 okay? Well, that doesn't work. So a lot of this has to do with what the management's philosophy is as to how they're going to treat their employees. So number one, from a health point of view, that dictates more space per capita. And in terms of real estate is a recruiting tool, especially in New York. So a lot of that has to do with the management's vision as to what they want the space to look like and feel like and what kind of experience they want their employees to have. So what I'm saying is just to take a [ row ] well, obviously, if 10 people out of 100 are going to work from home, they need 10% less space, that's not true. And so I think it's all over the lot, but what I'm saying is there's a feeling in the marketplace and in the analyst community that it's a certainty that COVID -- that work from home, which was lower square footage requirements by the tenants, that's not true. Some yes, many no. Glen, you have additional thoughts?

Yes. I mean one thing that we talked about on -- in Michael's remarks is flight to quality. So number one, a lot of the deal making with new tenants are an upgrade to the better buildings with the better landlords and the better locations. With that, we're seeing space plans for a review every day in these buildings. And there's been no dimunition in terms of space, in terms desk sharing, et cetera, and it's exactly reflective of what Steve said. I mean that's exactly what's going on out there on the ground.

Now just to add to that, one of the things we're seeing from all the space planners with whom we deal with all of them every day is management teams want more communal space, more hangout space, more conference space, et cetera. So it's not just the particular cubicle or desk or office where an individual sits, it's the entire package. And I don't believe, in most cases, that's going down. In fact, in many cases, it may even go up.

And Steve, how do you think it plays out? Because I would say most of the commentary that you're talking about is consistent when we talk to the senior management teams of corporations, CEOs, CFOs when we talk to the real estate landlords. But when you survey the actual employees across the United States, they tell a different story, right? They want immense flexibility. How can that not at the tails, there will be exceptions, but the bulk of the curve would suggest that a vast majority of employees have a different view of how they want to work going forward than how their employers. How does that tension ultimately get resolved?

Well, Michael, you can bet on the employer -- employees. I'm going to bet on the employers, okay? I think it gets resolved in different, different ways. Different firms will do different things. But basically, I believe in the office as the principal driver of commerce. And I believe the office will continue to be the core of a business where creativity decisions, et cetera, are made. And I think if -- I use the phrase at a kitchen table, I don't think the kitchen tables are going to beat out the office. Right now, there's a very strange phenomenon, and that is folks who're out in the [ hampers ] getting full pay and enjoying it. That's not going to continue from more than another quarter or 2 or 3. So at some point, the people who pay the paychecks are going to insist that they're their gang, their team, their thinkers, their creators are back in the office where they can see them, touch and feel them and interact. Now there will always be some work from home or work from anywhere or whatever. There always has. Nobody works a 52-week full 5-day week in the office. Everybody has some whatever time where they're not in the office. But I believe as this plays out, the employer's desire to have their staff in the office will carry the day.

Okay. And then just a second question, just in terms of the spin-off. Can you just give a little bit more color in terms of where you stand today, when we should expect some filings? And secondarily, whether you are at least exploring private alternatives, just given the public market still is shunning office stocks. And so is there an opportunity to use private capital or an alternative nonpublic structure to get to where you want to be?

The answer is sure. We explore all alternatives in terms of creating value every day. We are in midstream with respect to the legal and banking, et cetera, activity to create the what I call is a separate tradable public security. That's the way I like to look at it because I think our shareholders deserve to have the ability to invest in either a -- menu A or menu B. With respect to the high probability is that, that transaction, as contemplated, will be completed. You'll know we're not going to predict when we're going to file papers at the current time. If some other kind of transaction surfaces, we will, of course, study that and consider that. As of now, there are no alternative transactions that we're considering, and we're on full speed ahead for the -- the separately tradable security. And by the way this is the [ slide ]? And Michael, I couldn't be more enthusiastic about this idea about the opportunity, okay? We are fully -- we have full conviction about the PENN District. We think what we're doing is something which is going to be totally unique and one of the most important developments in the real estate industry country wide. And I think that the strategy is a superb strategy. Thanks.

Our next question comes from John Kim from BMO.

Steve, you mentioned the PENN asking rents are trending higher. Can you provide any color on that as far as the dollar amounts or percentage? And should we be expecting the development yields?

John, I'm sorry, I didn't hear you.

That's okay. You talked about the PENN asking rents increasing. I was wondering if you could provide some more color on that, either the dollar amount or the percentage increase? And also, if we should expect development yield to also increase or should that be offset by higher cost or higher TIs?

With respect to the asking rents, I mean, I think that those are published, aren't they? No -- so they're not published. So we're not going to get into a conversation with them. But I can tell you that our conviction is so strong that we are raising our asking prices. which obviously, if construction costs are stable, will raise yields. I believe that the numbers that we have in our supplement in terms of rents and yields are the lowest that they could possibly be extremely conservative. And we expect over time, if we do our job right and we will, and we create the kind of atmosphere that we have created at the Bloomberg Tower, for example, or 220 Central Park South with superbly conceived space for our occupiers, the rents will go to a premium to the rest of the market. We're just at the beginning of this adventure.

Okay. Maybe this is a question for Michael, but we're still a few years away from the PENN redevelopment being stabilized. But can you just remind us of your capitalized interest policy, if there are floors that are unleased, do you expense those immediately? Or do you capitalize on leased floors until stabilization until they'll be [ stuffed ].

I mean, they're out of service, then we're capitalizing that interest, right? We bring them back service, then we stop that policy. So obviously, PENN 2 is out of service and that we've laid those numbers out in the supplement. PENN 1 today is all in service. So I think that's -- I think it's pretty straightforward, John.

Our next question comes from Jamie Feldman from Bank of America.

Steve, I want to go back to your comments on Big Tech being very active. Can you just maybe quantify or just help us understand, I mean, we obviously saw a lot of Big Tech leasing over the last few years. Just how large that pipeline really looks? And where they may be going? And how long you think it might take to actually see some of these leases come together?

That's a question for Glen.

So as you know, we have all the big tech. We have Facebook, Apple, Amazon, Google. We're obviously in touch with them often, as you would expect. And they're all in mode thinking about expansion in New York as we sit on this phone call. I'm not going to get into specifics on our discussions or what their plans are, but I could tell you the engines are on again and they're revved up to start searching for more space and as their hiring paces continue. So just I would be watching for that action as this year goes on.

Jamie, I don't think it's surprising. I mean, I sense surprise in your voice. But I mean if all you have to do is look at the earnings growth and what's being produced by big tech, by medium tech, fintech. These companies are growing at significant rates, even despite their size. The law of large numbers sort of is, historically, it's been difficult to do. So -- and they need people, engineers, sales, et cetera, to continue to grow their business, whether it's laterally or additionally vertically in what they're doing already. And so whether it's big tech, medium tech, New York has continued to be a market of choice, for the reason Steve outlined. But these companies, they probably had a 4-month pause in 2020. They're going gangbusters right now in terms of the earnings growth, and they need people to continue to drive that going forward.

And beyond that, the big tech has a limited capital. I mean, if you look at their balance sheet and their cash reserves and their stocks, et cetera, they have a limited capital and the cost of their capital is basically 0, and they have a limited ambition to innovate and grow and invent and they are not shy of spending and investing. So obviously, they are favorite clients of ours, and there's a reason for that. They believe in New York. They love the size of New York, the scale of New York, the ability to open up space and hire 3,000 engineers in 1 year. They can't do that hardly any place else, they love the education and very importantly and interestingly, they love the diversity of the population.

How should we think about the space they just leased? I guess, do they already feel like it's -- they have enough heads to fill those seats? Or it's just all about the 10-year view at this point and get what you can while you can?

I don't know. Look, anecdotally, one of our big tech customers complained recently that in a certain city, not New York, they're having trouble filling the seats. And they're upset about that. We have not heard that in New York. New York has a large workforce and they're very happy with it. So if you think about it, if -- in the last 1.5 years or so, there was about 3 million square feet of big tech lease, something like that. So if you take a 200 square foot per capita, what is that 4,500 employees. So the numbers are large. And the beauty of New York is it has the scale to satisfy their aspirations. So the answer is they're growing, they're hiring, and they're going to continue to do that.

Okay. And then secondly, you talked about occupancy bottoming, rents bottoming. I mean can you give us a sense of where you think the occupancy trajectory goes for New York office?

I mean, Jamie, I don't know we want to give you a specific projections, it'll be off by 10, 20 basis points here or there. But this is clearly the bottom of it. It's just a matter, I mean, again, we talked about pipeline, it is significant, much higher than it was last quarter, and I'd say significant on an absolute basis. And it just depends on when Glen and his team finalized the leases, right? So the number could be 2 points higher, it could be 1 point higher at the end of the year. It just depends on time. But I think the punchline is we've reached the bottom. We see meaningful improvement based on what's in the queue. And whether it happens this quarter, next quarter, the following quarter, the trend line will be up.

I'll give you my opinion as to where this goes. If you look at our occupancy rates over a 20-year period, we are almost always at 97% or maybe even a pinch higher, okay? Every once in a while, over that 10-year cycle, we dipped down a little bit. And there's generally reasons for that. In this case, we have a building and transition at 350 Park Avenue. We have a building in transition and 85 Tenth Avenue. And in both those instances, we are talking to enough prospects that fill double the amount of space that is vacant there or more. So my expectation is we are going to go back to the 97-plus percent occupancy rate that we always carry. It's just a matter of whether it takes a year or 2 years. That's where we're going.

Our next question comes from Alexander Goldfarb from Piper Sandler.

So two questions. And actually, Steve, you just sort of recasted the question I was going to ask. I was going to ask you if you still believe in Manhattan tilting to the South and the West, given the resurgence of Midtown, Grand Central. Obviously, you guys bought One Park. But to Jamie's question, you just talked about 350 Park enough tenants to double the demand. So I guess, wrapping up because I'd like to ask about 350, do you see Midtown, the Grand Central market returning as the dominant submarket? Or do you still believe that New York is still tilting to the South and to the West?

I like the phrase that I invented some years ago, the predictive phrase that New York is tilting. I think that's still the case. Notwithstanding, New York is a great mysterious, wonderful place, okay? So Park Avenue South, which is what's what we call that So Midtown South is a smaller, but very highly sought after submarket. There's not going to be any new construction in there. And it's a very -- it's a great submarket with lots of culture, lots of texture, and lots of grit. And's it will do just fine. I think would you characterize 770 Broadway as part of that market?

Yes.

So I think we own the premier building in that submarket 770 Broadway, which is now the home of Wegmans and of course, Facebook. So now let's go to conventional Midtown. Park Avenue has been a stepchild for a while. It's gotten older and tighter and that is now changing aggressively. Park Avenue is going to reclaim its role as the great boulevard of commerce in the world. So we have JPMorgan Chase tearing down a building and rebuilding it with a stupendous headquarters building, which we're familiar with because they're using Norman Foster. So we have -- and their plans have been published. We own the adjacent building to that, 280 Park Avenue, which we're very enthusiastic about. There are 2 other potential -- there's another brand new Foster building up at 55th Street. There's 2 more teardowns and rebuilds that are going to happen in Park Avenue. So Park Avenue is going to become what it always should be and that's a premier boulevard of commerce. So all of these parts in the city is not going to be segregated into 1 or 2 submarkets, all submarkets are going to do well. We believe that on a relative basis, the Midtown West market, the PENN District market will do on a relative basis better than the others and will grow faster than the others and we'll have higher demand than the others. And the statistics, as I said, about market share, if you look at how much leasing is done in each district compared to how large a district is, the PENN District wins that race. But everything in New York is going to thrive, except for the really c*** buildings, and there are plenty of them.

And Steve, you still feel confident on your bet on Penn Station winning the race over Grand Central even after the opening of East Side Access, which East Side Access obviously would be great for 280, great for 350 and your other neighboring buildings, but you still -- you don't think East Side access will eat into your Penn Station?

No. I think it's -- I think the -- look, you can look at all kinds of negative issues. Penn Station has always been the transportation hub of this region for 100 years, okay? All of the networks and all the spiderweb of transportation from the 380 degrees come into Penn Station, and that's the way it's designed. Now obviously, there's going to be -- Grand Central, is not nothing, and -- but it will be fine. There will be plenty of business in Penn Station. I'm not in a relative race with Grand Central. Grand Central is going to be fine. We think Penn Station is going to be a little [indiscernible] and that's okay with me.

No, that's fine. And then the question for Michael.

By the way. Hang on, hang on, Alex.

Sure, sure, Steve.

There's an enormous amount of public capital that is being invested in Penn now. I'm sure you've seen the Moynihan improvement, which is, of course, ours all the adjacent real estate to retail, et cetera. And I'm sure you couldn't be more aware of the Gateway project, which is a massive infrastructure project. And I'm sure you're also aware of the plans to expand Penn Station's trackage which means capacity to the South, which is -- I mean these are huge infrastructure projects, which have 10-year projects and take tens and tens of billions of dollars. And I can tell you that the government's focus is on Penn. So we believe in Penn. And that doesn't mean that Grand Central isn't going to thrive as well. It will, and we hope it will.

Okay. The next question is for Michael. On second quarter, you guys handily beat the Street estimates. And I'm just sort of curious, in that second quarter number, and Steve, you mentioned guidance, I didn't see guidance, but maybe I just missed it, the lack of coffee. Michael, is there -- what is onetime in the second quarter? And what is sort of sustainable stuff? So as we think about that $0.80 number, how much of that is a go-forward number? And how much of that was just sort of either onetime rent collections or onetime true-ups or whatever that would not repeat?

I think $0.80, obviously, includes the gains from 220. So look at [ comparable ], which is $0.59, which is up $0.13 from last year. Obviously, that benefited from not having a recurrence of the straight-line write-offs, principally from [ pennies ] in New York Company. But we had rent commencement at several assets, which were positive. So as we've said, the run rate which basically [ closed from fourth ] were a little bit better or bit worse depending overall -- yes, is consistent, Alex. And so I think it's -- I think that's the right thing to model for the remainder of the year. Obviously, the trend lines are getting a little better. But as we sit here today, we're not prognosticating doing better than that yet. But I think the short answer is not withstanding those straight-line write-offs, there were enough other positives that picked up on those things. So on a run rate basis, I think that's all a pretty good number.

Okay. And then I think there was a piece of paper that went over the mic. You said run rate something about fourth quarter, but that it was muddled. Did you cite the things?

No. My comment was when we started the year, we said the fourth quarter of '20 was a decent run rate for the entire year of 2021, and we still think that's the case.

Our next question comes from Vikram Malhotra from Morgan Stanley.

Maybe just first on all the leasing activity that you've done over the last, call it, 12 months or so. Can you give us a rough estimate of the NOI contribution from leases signed but not commenced?

We don't have those numbers at our fingertips, Vikram. We'll have to come back on that.

Okay. No worries. And I wanted to dig into just comments about the [ A/B divide ] the class A or quality versus more tired building. And Steve, I guess I wanted to get a sense of how you see that divide playing out in terms of rents and TIs. And specifically for the Vornado portfolio, I'm sure it's a very small proportion. But if you were to guesstimate sort of what proportion today would you need to spend incremental CapEx dollars to kind of get them up to speed in that divide?

I think what you're saying is, how -- do we have any B buildings? And if so, how much is going to cost to fix them?

Yes.

The answer is we have none. And maybe we have 1 little space here, 1 little space there, but it's so de minimis, I can't even put a number on. We've been on a program -- we've been on a program that started with David Greenbaum and Glen, 15 years ago to reposition all of our inventory so that it's first class and a surrogate for new. Now when I say reposition, I mean, lobbies, physical appearance, mechanical systems, elevators, tech service, et cetera. So we don't have any buildings that we're not proud of.

Okay. Great. And then just, sorry, one clarification on the [ 2023 street ] retail initial number that you provided. That obviously includes rent bumps, but does it include a specific occupancy for the street retail portfolio? Or is that just existing portfolio and rents converting to cash?

Where's Tom?

So it includes leasing up some vacant space that we have today, Vikram, and it also includes the Farley retail, which would be something that we don't have in-service today.

But it's a very small amount of the Farley retail. So it's -- if you include the Farley retail, that would mean it's not really a same-store number because we're adding a new space. The amount of almost the vast majority of it -- the vast majority of it, the huge majority of it is basically same-store [indiscernible].

Our next caller is Nick Yulico from Scotiabank.

This is Josh Burr on with Nick. So I know it's hard to estimate, but based on what you're hearing from your tenants about returning to the office after Labor Day, what's your expectation for office utilization after Labor Day? And what would you consider to be a bull case scenario?

I think I said in my remarks that one, I, for one -- I can't answer that question. All of the conference calls that I have listened to is all of my pals have come up with a number and very strong conviction about this is going to happen by a certain date, I have no idea. There is no magic date. But I think I said in my remarks and I'll say it again is that it may take a quarter, it may take 2 quarters, whatever it is, we believe, from talking to our tenants that normal work headcount, normal work population and normal theme will return. And I just can't predict nor does it make sense to try to predict when that will happen exactly. I believe that New York will turn to its robust bustling self somewhere in the shorter term.

Okay. And then you mentioned that you're betting on the employers rather than employees when you're figuring out the return to office. So I'm curious, what do you think about the Department of Justice ruling that businesses can mandate vaccinations for their employees? And how do you think that impacts the return to office?

I think that's a very complicated question, which goes to both law and ethics. And I think each company is going to have to -- I mean, basically, the extension of that is if you're not vaccinated, you're fired. Now that's a very interesting situation. I don't -- I really don't want to get into what our policy will be with respect to our important employees whom we cherish or what the market is going to do. I don't think that's a question for me.

We have a question from Daniel Ismail from Green Street.

Just going back to rent, you mentioned raising rents at PENN District a couple of times. I'm just curious, on a net effective basis, are those rents back to pre-COVID levels? Or is there still some discounts?

In the PENN District, we're coming off $50 and $60 rents. So and I think our guidance in our supplement is somewhere in the $90 number with -- so obviously, we are budgeting in PENN 1 and PENN 2, which is the better part of 4.5 million fee, that there's going to be a $30 a foot uptick. And that's what justifies the expenditure -- the capital expenditure and also that creates the nucleus of our district. We believe that we will achieve those budgeted numbers and more so. So I think that's your answer is we're not pre-COVID numbers. We're actually -- it's not relevant because the pre-COVID number is the old building, we're talking about the new buildings.

I would just add to Steve's comment, Dan, and I think where you're going to is our expectations for PENN, if you look at our aspirations, pre-COVID, right, they are equal or higher than where they were, right? And I think the comments on raising rents reflect the market's reception to those. And so we are more bullish today than we were if you go back Pre-COVID.

Yes. Let's talk about it a little bit. Our strategy is that we have a unique, huge 6, 8, 10 block collection of assets and property that surrounds the most important transit hub in the city actually in the country. Our strategy is that we know from the -- we're developers. We're not just owners with developers. Our strategy in creating assets and redeveloping our assets is that quality is something that the market is willing to pay for and appreciates. So if you look at 2 very prominent examples of what we have done as a business, the Bloomberg building, which we did -- which I did some years ago is extraordinary. It's 15 years into it, and it still is cutting age in terms of the user experience in that building. By the way, a lot of that has to do with Mike himself who as a very -- the interior designs are extraordinary. Go to 220 Central Block South where we have achieved something that nobody ever thought could possibly be achieved based upon the quality of the offering that we have given. If you go into the 2 PENN lobby, which just opened 2 weeks ago -- I'm sorry, the 1 PENN lobby, and it's only half opened, whatever you could begin to see what the environment that we're creating, which we think is unique, and we know because of brokers, tourers and occupier stores already that the marketplace respects understands what we have done. So we think that, that has an enormous effect our ability to develop, our vision to develop on the value of the assets that we are creating. There's more. We also believe in multiple buildings and clusters of buildings so that we can offer the tenant a uniqueness that you can't get by going into a single building. I've said this before, and I'd like to say it again. A 300,000-foot tenant and a 600,000-foot building is dead, if that tenant wants another 100,000 square feet, he's going to have to move out or move 5 blocks away. In our complex, which will eventually grow to 10 million, 12 million, maybe even 15 million feet, that 300,000 square foot tenant, Glen will always be able to provide that tenant with what he needs in our complex. So the cluster of buildings interconnected above ground and below ground is what creates the district, creates the uniqueness and we believe will command a premium in the marketplace.

Appreciate all the color, Steve. And just maybe taking a step back, bigger picture for New York, you mentioned a few times the difference between higher-quality and lower-quality office building and mentioned New York has a fair share of older Class B properties. What do you think happens to those office buildings? Do they get redeveloped? And do they stay office buildings? What is the long-term view for those properties?

I think the first part of that answer is it depends entirely upon the owner. So if the owner is a single owner or whatever, without the resources of the organization, the vision and the capital, the building is going to stay a c*** building, and it will find its own market at much lower rents. And of course, that owner may or may not be able to provide TIs and may or may not be able to keep the building in good repair. So a lot of it depends upon the order and there's that. If the owner is a sophisticated firm and a large owner of multiple buildings, eventually, over time, the buildings will be teared down and there'll be new buildings or whatever or they will take the buildings and make them so that they are fit to be leased at decent rents below the Class A umbrella. So if you get a halfway decent building with a sophisticated capable owner with an organization and a capital base, there will always be a low discount rent market for those buildings. So that's a complicated thing, I don't know. But great locations and the great pieces of land underneath those B and C buildings will over time -- and I'm talking about 20 years be bought up by developers and will be teardowns. There will not be a huge number of those. There'll be 1 or 2 of those every couple of years.

Mr. Ismail, does that answer your question?

It does. Thanks, Steve.

We have no further questions at this time. I will turn the call over to Mr. Steven Roth for final remarks.

Well, thank you, everybody. We -- our whole management team is in the conference room in person on this call. We enjoy these calls. We learn from them, both in terms of our preparation for the call and the questions that you all ask. So we thank you for that. I'll say again what I said in the beginning of the call was we wish everybody good health, stay vigilant, get vaccinated, and we will see you for the next quarter call. Thanks very much.

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