Good morning, and welcome to the Vornado Realty Trust Third Quarter 2020 Earnings Call. My name is Richard, and I'll be your operator for today's call. This call is being recorded for replay purposes. [Operator Instructions]. I will now turn the call over to Ms. Cathy Creswell, Director of Investor Relations. Please go ahead.

Thank you. Welcome to Vornado Realty Trust Third Quarter Earnings Call. While Vornado typically holds its earnings call the morning after releasing earnings, today's call was moved to accommodate voting in the presidential and national elections yesterday. On Monday afternoon, we issued our third quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents as well as our supplemental financial information package are available on our website, www.vno.com, under the Investor Relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q and financial supplement. Please be aware that statements made during this call may be deemed forward-looking statements, and actual results may differ materially from these statements due to a variety of risks, uncertainties and other factors. Please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2019, and our quarterly report on Form 10-Q for the quarter ended September 30, 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 our senior team is present and available for questions. I will now turn the call over to Steven Roth.

Thank you, Cathy, and good morning, everyone. I hope all of you are safe and healthy. Yesterday was election day in America, arguably the most important single day in the calendar of our great democracy. Our nation is deeply divided, and this election appears to be a historical cliffhanger. The TV analysts are calling it a nail biter. Whatever the final outcome of this election, it is our hope that we will unite as a country in pursuit of American values and prosperity. Before Michael gets into the business review and the numbers, let me make a few comments. These are anything but normal times. Actually, the COVID-19 pandemic is a once in 100-year event. The activity level in New York and all other American cities is a fraction of normal. For example, office building occupancy in New Yok is currently in the teams. There is a tension between the very serious COVID health risk and related government protocols and lockdowns. And everyone's desire to get back to work, get back to school, get back to their favorite restaurants and get back to normalcy. And for sure, normalcy will return. It's just a matter of how long it will take. And I believe return to normalcy will be the order of the day in months, not in years. The city generally feels normal in the residential areas, whether it be Tribeca or the village or the Upper East or Upper West side. The commercial areas, however, feel quiet. And that obviously negatively affects restaurants and retail. Most importantly, we are hearing from all our tenants that Zoom fatigue is real, productivity is now, and CEOs want their employees back in the office. But again, that will take some time. We are very proud of our corporate teams who are working…

Thank you, Steve. Good morning, everyone. I too hope you all are safe and healthy. I first will cover our financial results and then went in with a few comments on lease capital markets. Our earnings for this quarter reflect a number of items, most of which were known or should have been [indiscernible] expected. Third quarter FFO as adjusted was $0.59 per share compared to $0.89 for last year's third quarter, a decrease of $0.30. This decrease is reconciled for you in our earnings release on Page 5 and on our financial supplement on Page 7. The decrease was driven by a few items, most of which are either temporary or noncash onetime write-offs, $0.11 from the temporary decline in income of what we call our variable businesses, which include the Hotel Pennsylvania, the Marks Trade Shows, Signage and BMS, which Steve had laid out for you in our first quarter earnings call. $0.11 for retailer bankruptcies, namely JCPenney and Topshop and tenant account receivables writeoff, $0.07 from noncash straight-line rent write-offs and $0.03 from Penn District space out of service. We ended the quarter with New York office occupancy at 95.8% and New York retail occupancy at 79.9%. The decline primarily due to pandemic. While the headline same-store NOI numbers are negative on their face, it's worth drilling down in New York. New York segment's third quarter cash basis same-store NOI was down 9%. But when you exclude retail, the temporary loss of income resulting from the pandemic from our variable businesses. And excluding residential and our share [indiscernible], our core New York office business actually was a positive 1.5%. The big takeaway here is that our core office business, including New York, Chicago and San Francisco, representing over 80% of the company is performing well, protected by…

[Operator Instructions]. Our first question online comes from Emmanuel Korchman from Citi.

Michael, just wondering on the Farley retail leases, have those discussions changed much in this COVID environment or tenants just as excited to go into an asset like that at that location? And maybe more specifically, if you could discuss rents and TIs and the metrics that go into those?

Yes. Manny, I'll start and then Steve can join in. The interest is really not wavered at all. I think as recognized, as I said, the uniqueness of the asset and the number of people that are going to be going through there, going west every day to Hudson Yards in Manhattan West, going to our assets and throughout the city. And so the interest really has been unabated throughout the pandemic. And so all the tenants are will then dialogue with those have progressed, the leases we've signed, the LOIs in process, the rents are unchanged. There may be a little bit more TI on a few deals, respectively. But overall, I would tell you, it's pretty consistent.

I have a slightly more constructive take on it. I've nicknamed that this project is the funnel. Because really, what happens is that all of the population of Hudson Yards and all of the population of Manhattan West, which are huge developments with huge office populations, immediately and contiguous to us to the West, has to funnel through this retail corridor to get to the trains and get to the commuting subways and trains. So we expect that there will be enormous activity. The retailers understand that and see that, and it's clear as a bell. And actually, it's the single best retail opportunity in the city right now by a factor of 2 or 3, and the retailers understand that. So we haven't reduced our asking prices. And if anything, as this thing gets closer to delivery. And as Michael said, we have these 2 tech giants and 1 million feet surrounding this and on top of it. So we are extremely constructive about this space. [Indiscernible], do you want to add anything?

I agree. Farley is a first of Sunshine in the cloudy retail environment, and we have nothing about high hopes for the productivity when that opens, and we're extremely optimistic about it.

Now there's a corollary project in the train operation, and that is the Long Island Rail Road Concourse, where we own the North side, which is in PENN1. We are almost finished with a deal to basically expand the concourse, make it much wider, much higher, much more brand, which will be on the MDA side. And taking over control and ownership of the south side of that concourse. So we will own both sides. And that's also another -- it's $100 million project. So it's not huge, but it's another very exciting addition to our portfolio in the Penn District.

Great. Realize that your lease expirations are light in the upcoming future here, but are there any other large spaces that you're watching, maybe something similar New York and company where the tenants having their own struggles, and we might just not be thinking about potential on move outs or give backs?

Will you take, Glen?

It's Glen. Now we feel really good about our role, really modest role over the next 2 years, about 1.6 million feet. Nothing of large block size other than New York and company. And we got some space at 887512 West 22nd Downtown 40 Fulton, but nothing of a large consequence. And in all of those assets, we're actually seeing much better activity right now than we had been, call it 2 or 3 months ago. So we feel really good about the expirations for the next 2 years.

And Glen, could you share any potential updates or prospects for the Home Depot space this can be vacating on max?

Well, the Home Depot lease goes through 2025. And we have approached them multiple times about recapturing the space. And we had an interesting conversation a few short years ago about how much would you pay us to give us back the space on how much will -- and they want to know how much we would pay them. So the answer is that we don't -- that space is under lease through 2025, and it is not something that we are concerned about today. However, we have incomings on that space from several important retail tenants whom you would who you would expect. So we can't tell how that will play out of. But we have -- we're financially protected for the next 5 years.

Our next question on the line comes from Jamie Feldman from Bank of America.

So I guess turning to the election. Certainly, it looks like the Democratic sweep is off the table here, and with that concerns that a big fiscal stimulus to help some of the like New York City or San Francisco off the table as well. I just want to get your thoughts on that comment. And then just for New York specifically, what risk do you think this proposes to the future of the city and its ability to recover?

That's a big question, which probably if I was smarter than I am, I would duck. But I'll tell you what I think. I think I mean this election is historic. I mean we can't predict what's going to happen. But I think pretty clearly, the sweep is off the table. And I think that's from my point of view and probably for most folk's point of view, a very, very good thing. Now I have been approached by all of the New York political leaders to talk to Washington to try to twist arms to get help for some of the huge budget problems that New York has as well as all of the big cities in the country. So that obviously has not happened. And obviously, the standoff between and the government about this -- I guess it's the third fiscal stimulus plan. And the standoff is basically the fight is over what -- some would say is bailouts for the big cities and states versus not. So anyway clearly, the change in government -- if we have a change in government, it's going to change the dynamics of that. If there's a different president, that will change the dynamics greatly. Although it won't be easy because if the Senate continues to be in Republican hands. The most important part of this thing is that by more, the city and state governments all around the country have to have balanced budgets. So they will have to close the budget deficits. There's a certain group of folks in Washington that would like to see these states and cities reduce their budgets and get their budgets in line with their revenues. There's another group of folks down there who would like to continue to spend at the level that they have been spending and close the deficits by assistance from Washington. How this plays out is probably going to be some kind of a combination of both, but it will play out. The promise that the Democrat side made, which is that they will reverse the Trump tax plan and reverse the salt. I see that as being a very, very, very hard lift. So I don't know where that will go. Nonetheless, there is a -- there's likely an imperative for these cities and states that have to get their budgets under tighter control, together with some kind of assistance. So I don't think that gives you much more information than you already had.

That's helpful. So let's say New York does have to cut the budget. I mean, what do you worry about most as a real estate landlord and to keep the city healthy?

The answer is that the thing that I worry about much -- about most is stupid legislation such as happened in albeit at the beginning of, I guess, it was last year about the -- with the residential assets and unsustainable tax increases. Now the interesting thing about it is the real estate tax increases because that's the most controllable and the most variable of the menu of taxation that they have. The bad news of real estate in certain sectors, for example, retail, asset value and hotel asset value have clearly gone down. So clearly, one would expect that the real estate taxes related to those assets will go down. However, the budgets can't afford it to go down. So that's a -- tension in all of this stuff are pretty enormous, and they will play out over the next 6 months or a year.

Okay. And then as you guys made the comment earlier about the right real estate or the right positioned real estate will come out of this okay. Does that apply to retail as well? I mean, how do you think you look at your portfolio? Like what do you think the winners and losers are going to be coming out of the pandemic in terms of locations?

I think we have the best quality locations that there are anywhere, and that may even be certainly in the country and maybe even in the world. So -- but it will take the -- the retail real estate that we own, which is brilliant in its quality, will suffer lower values at lower rents because that's the market. And it will take time for this to shift through.

Our next question on the line comes from Steve Sakwa from Evercore ISI.

I guess, Glen or Michael, maybe if you could talk a little bit about the leasing numbers that you threw out. I think you said you had 220,000 with a pipeline of 850. I'm just wondering if you could talk a little bit about what the tenants are telling you, what sort of space requirements or space densities that are kind of planning. Of that 850 , how much of that's new versus renewal? And again, trying to just get a sense for how tenants are thinking about new space versus old space and how they're planning it?

Sure. Steve, it's Glen. So the pipeline is active. It's basically a 50-50 mix of new deals and renewals. I'll give you a feel of the type of tenants. And we get a lease out of about 100,000 feet with a nonprofit tenant, which will be new space in Midtown. We just got a proposal over the weekend for 45,000 feet with an entertainment firm, new tenant. We're proposal stages with a 300,000-foot tenant in Midtown, planting a new space. And we also have an existing large tech company looking to grow again by another 60,000 to 120,000 feet. So we're certainly seeing a great mix of activity. In terms of density program design, I think it's way too early to see it. Most of these tenants are looking past the pandemic, saying to themselves, how do we want our space to fit out, assuming that pandemic can come and gone. So I have not seen a real change in strategy as it relates to space design. But I think that's a -- to be determined, to be continued dialogue. But certainly, my sense right now is, if you have the right space and quality buildings, people is a real flight to quality more than ever, and that's why we're seeing the activity we're seeing right now.

Jim, I'll tell you honestly. Oh Steve, I'm sorry. I don't trust anything that anybody tells me right now. So for example, let's go back at the history, go back to 9/11. And so we're not -- when the tragedy of 9/11 happened, everybody said that we -- nobody is going to rent view space up in the height of the buildings because of the 9/11 tragedy and experience. Well, that lasted about 2 or 3 years. And now that view space has reverted to the norm, which is by far, the most valuable space. So it will take time for all this to shift out. There is a tension now between office work and work from home. Some -- the surveys of some of the employees say one thing, the survey of all the CEOs, say, other things. In the end, it's our firm's feeling, our businesses feeling that there will be marginal work from home and the office will be the main place where work, creativity, growth and business is conducted.

Glen, maybe just to continue on the leasing. Is there any comments you can make about sort of net effect of rent changes that you've seen maybe over the last 6 months? I realize it's not all in face rents, but I think you mentioned in some of the deals, TIs were going up. So maybe just talk about the change in net effective rents, and how much more might that drift lower? It sounds like leasing will remain slow for the next couple of quarters, maybe into the back half of next year.

Yes. I mean Michael said in his remarks, I mean, it is definitely slower in terms of activity. I don't think we yet know at all where rents are going, where concessions are going. And so really, people come back to the office, the uncertainty clears. We get into normalcy and we get back into real deal making. I mean certainly, there's going to be an adjustment to rent, TIs, et cetera. I'm not smart enough to predict exactly where those are going to be. I think when everyone gets back in their seats, we see demand again. We see deal making again all the much better feel a bit. I think right now, the deals you're hearing about on the Street and TIs are certainly up. I think rents have generally held steady to date that's more the concession packages. But I think it's way too early still, Steve, to predict anything until -- well into next year when people start coming back and we get into a normal deal mode.

Steve, we're not really on a normal functioning market, right? We're in this unique period where companies are not back in their offices. And so the deal-making is down, as you would expect, in some sense, it's actually surprising. It's as active as it is, even most people are not in the cities. But -- so you people have to come back to a normal functioning environment. So in this period of time, they're going to be additional concessions share, right? That depends feel like they get either extracted or are they landlords want to make the deals. But I think when there's a return to work, if you get a fully functioning market, I think you'll start to get a better sense of what rents are going to do. And I wouldn't extrapolate too much either way what's going on here.

Our next question on line comes from Alexander Goldfarb from Piper Sandler.

So two questions here. The first is just going back to Jamie's question. When you look at the political landscape of New York, there's definitely been a disconnect. I mean you've been in New York a long time. You remember the '70s, have the business community rallied together with the city to rebuild New York. This time around, that dynamic does not seem to be in the cards. The mayors definitely stayed out of view. The governor seems to oscillate once a time, he's against it, and the other time he's trying to promote. But do you get a sense that with what's happening in New York and the need to create a better potential business district environment to help people feel good about coming back to the office. Do you feel that the politicians are finally understanding what they need to do? Or is your sense that they think there's still going to be some bailout, and therefore, they can play to whatever political spaces they have and not really realize the impact of people like you who are paying real estate taxes and trying to generate growth for the city, how it's not helping?

Let me turn the question around, okay? Politicians are politicians. I'm not going to -- that -- they hopefully work for the business community. They also work for the population and the voters. And they don't necessarily always make decisions and have policies that we agree with. But what I look at is that New York is -- it's absolutely the greatest city in New York, and it's one of the 3 or 4 -- the greatest city in the country, and one of the 3 or 4 great cities in the world. There will always be a New York. It will ease slow a little bit. It will go through cycles. But it is always the dominant place, the dominant city in New York -- and I keep saying in New York, in the country. And it's infrastructure is just so massive. It can't be replicated. The infrastructure in terms of its talent, in terms of its culture, in terms of its business community in terms of what have you. The interesting thing is, is that as it cycles, if you have the opportunity to buy assets at very low prices per pound, and let me use the word majority word steel assets at very low price, that's the time to jump on in. So if you look at our stock price and those -- and the stock price of our peers, and you interpolate how much per square foot the stock price represents in the building, the assets that are behind the stock price. The value is great. So it's sort of oxymoronic. As New York gets a little bit out of favor, which is the slant, I think, in your question. The -- that seems to me that we have time to buy assets and to buy stocks, okay? So New York is going to go through. New York has a headwind. The political situation in New York is going to change. There's going to be an election. The reality of the budget, the reality of the importance of the business community, the reality of the importance of having a growing tax base will win the day. And -- but this is a unique time because the assets are really, really cheap.

Okay. Which leads to the second question, as you know, my favorite, the 555 and 1290, I think you said earlier on that the pricing discussions may not have been exactly what you guys had hoped for, clearly, great cash flow assets, actually even more important today. So what are your latest thoughts on those assets? Are you still leaning towards -- which way are you sort of leaning? Is it a recapitalization of the pair? Or you think you may outright sell? Or now it's just keep as is with no change on the financing?

The answer to that question is, yes.

Steve, is there anything more that you can add?

The answer -- look, the answer is that, obviously, these are important assets. Obviously, they will command acceptable values. It may not be the top, top tick value, but they will command acceptable values. And the liquid -- the liquefying of the value of those assets is an important thing in our future plan. We have said, we're looking at multiple different options. And the answer to your question is, yes. But let me just -- Alex, let me just add on to that. What I'm saying is that you've written that you would prefer us to take the buildings off the market and not sell them, and keep the cash flow, okay? That's not our preferred strategy right now.

Our next question on the line comes from John Kim from BMO Capital Markets.

Michael, you mentioned that you don't expect tourism to come back into the city until the latter half of next year. I'm wondering what that means as far as not only retail occupancy, but rent collections and abatements next year?

Look, I think that, John, if we just look at the trend line and when companies either may bring their workers back or when theaters may open, I think that's a reasonable assessment. And obviously, in a fluid environment, but I think the latter of '21 is a reasonable assessment. So that obviously means foot traffic is down, and therefore, retail sales are down. But retailers are adapting. The ones that were very weak have already gone out. Not to say, there can't be some more casualties. But I think that when you take out the restaurants, I think, by and large, we have pretty good credit in the balance of our portfolio. So -- and as I said, we are notwithstanding that environment. We signed 1 lease on Madison Avenue. We're in negotiations on another. So retailers there and stable over the 731 and then there's some other assets as well. Retailers are taking the tires, right? The strong retailers, they have balance sheets. They take the other side, which is this is an opportunity, right? Rents are down. We can now get the best basis at attractive prices. We can make money when the markets return. They have to leave the markets that return, everybody does, and New York will come back. As soon as people can travel again, I don't know if we're going to write-back to 60 million tourists, but I think it's going to come back pretty quickly, right? There's pent-up demand in this country to experience culture, sports, et cetera. And so tourism is going to boom, in my opinion. New York is going to be one of the prime beneficiaries. And obviously, the retailers are going to benefit from that. So that's my view. I don't know if you want to add anything hind to that. But I think we are well positioned in terms of our assets on a relative basis.

Can I ask a similar question as far as the timing of its trade shows reopening at the mark? Would it also be a second half '21 time frame?

Yes. Yes. So the big trade show is real time, which normally is June, we pushed out to September, and we did that a few months ago. Just to a conservative view, give a time. Our tenants are anxious for that show to happen, and they're planning, they're excited about it. And so we feel like that will happen. It's an important show. And so again, that as well as you already showed the third quarter of '21.

If I could squeeze one more question in. Is the 850,000 square foot leasing pipeline, does that include the large anchor at PENN1 that you discussed in the last call?

I think you're referring to PENN2 maybe. And the answer is, no.

Our next question on the line comes from Nick Yulico from Scotiabank.

This is Josh Brown with Nick. Do you have any insight into details behind what the build-out at Farley ultimately will look like for Facebook? Are they designing that space any differently because of COVID? I think could you just talk about the TIs that were given on that deal and how that compares with TIs historically?

No. That's something that we're not going to get into.

And then, I guess, okay, looking at retail, how are you guys thinking about the retail business today versus when you guys did the JV deal? When you brought HIMA and you said the disruption in retail would present some really good opportunities. So are you seeing any of those opportunities today? And how can [indiscernible] benefit on those?

The answer, Josh, is that there are -- as you would expect, the worst assets go bad the quickest, right? So if you look at what happened in the prior number of years, right. Retail was fly added really throughout the city, and there was leasing done and rents pushed, and I would call it fringe locations, right? Well, as a result of not just this, but even happening before this, right? That started to contract over the last couple of years, our locations were impacted. And the owners that had debt on those assets. They have either lost or they're going to lose those assets. In many cases, those are not going to be interesting. I think our focus has always been on prime, prime, high street retail that there's going to be demand even more difficult environment as we're talking about with our portfolio right now. So we do think that there will be opportunities. And that may come in the form of lenders that we've had calls and lenders saying, look, you guys are the experts, can you help us out in certain assets for the right situations, we're going to play off those. But I would say to date, we've not seen anything of scale or quality that fits our bill. But they're going to come [indiscernible].

The law of the jungle is that the bigger they are, the harder they fall. So the categories of assets that are in distress are -- the top 3 are condos in New York, retail anywhere and hotels. So you think about it for a second. The condos are -- the buyers have gone into hibernation, and the prices are in free fall. The hotel business -- most of the hotels are shut down, so they get 0 revenue. And we know what's going on in retail. So the opportunities will be at our coming, and they will come. As Michael said, they will start coming from loan foreclosures. And those are the categories of assets that will be the most distressed. It will be, I think, difficult to find a greater office building that you could buy that used to be worth $1,000 a foot that you can buy from $500 a foot. So we are definitely in the financial condition to be acquirers. Part of our business strategy is to be acquirers in distressed markets like this. And so we're very alert. We see everything that comes by. We are -- we have the financial capacity to act. And we're sort of like reasonably excited about what the opportunities might be, but they will take -- could be well into next year before they really start to mature.

It's Nick. Sorry, I just had just a quick question on the sequential change in cash NOI for the New York office segment, which I know you list in the Q -- I forget if it's in the sup or not. But hey, you did have a write-off of a tenant receivable, but what else drove that sequential decline in office, cash NOI this quarter in New York?

Going to turn that over to Joe and Tom. You don't have -- you don't have any -- if you don't have your fingertips maybe we can handle this off-line.

Nick, I would -- it's Joe. I would prefer to do this off line, Nick, so we can really get you a precise answer. Needless to say, the third quarter had accounts receivable reserves, more than 2.5x the first quarter -- the second quarter. So that's an element that we need to disclose. But we would prefer to get you a more precise buildup.

Our next question from the line comes from Rick Skidmore from Goldman Sachs.

Steve, you mentioned the CEOs seeing Zoom fatigue and loss productivity, et cetera, regarding working from home. What if anything can the office landlords do to help accelerate that return to office? And what are the CEOs saying about plans to bring their people back? Or is it just waiting for a vaccine and the virus to fade?

I'll tell you what our experience is first, just to give it to -- to give it some context. So most of our peer companies have basically returned to office work, 100% of the companies. And they have done it by edict. And their attitude is and my attitude as well is, we're talking up our book. We are in the office business. We want to be in the office. We want our people in the office and we want to get back to normal work. So we agree with that. The thing that we don't agree with is what we've done is -- and most of these folks have gone back 100%. What we've talk has gone back in teams. So we have an A team and a B team so that we have half the population in the office on week A and the other half in week B. So that we keep the densities down a little bit. But the most important thing is that we have -- in respect for our employees, we have basically said that if you are uncomfortable with the health risk of returning to the normal office environment or et cetera. Then by all means, please continue to work from home. Now we're not going to let that go on forever. What we're finding when we talk to the large CEOs is that they very, very much are shying away. They will not open their offices up by edict. And they very much respect what their employees perceive as being a health risk and that's something that we have to live with right now. So there's a sensitivity to the risk out there and the employee's point of view. There's other nuances to it like childcare and screens and other stuff. But…

Our next question on line comes from Daniel Ismail from Green Street.

Great. Steve, going back to your earlier comments about looking for assets in distress. One area of growth in the office sector has been life science. Is it fair to say that life science values in New York City are likely not under distress, and thus, those would likely not be on your targeted acquisition was? And then as a follow-up, is there any opportunity for -- in your current development pipeline to expand in that area?

Daniel, the question was funny. I think you said what about life sciences. The answer is that I don't know. We -- obviously, we're aware of the life sciences segment. We have sort of experimented in it, put our big toe in to it a little bit. It's an attractive segment. It's actually a small segment in New York. There are other hotspots around the country that, obviously, Cambridge, obviously, California. It's a business that we're interested in, and it's a business that we would look for an entry point and are looking for an entry point. To buy this -- to buy into the life sciences industry at distress is something that's just not available now. So basically, we have lots of assets. New York is a potential location for a large, large and important cluster of life science assets. We have the universities. We have the talent, et cetera. So all I can say is, it's something that we're aware of. It's something that we're looking at. It's not easy to enter. And there -- we don't believe that there will be a distressed opportunity in that segment.

Is there any current plans looking at PENN1 or PENN2 for a life science component?

What's the question?

Looking at PENN1 or PENN2?

Yes, probably not. There are building there are other buildings that are better suited to that. And actually, most of the success in this industry is done by ground-up development that are suited for that use. So it's actually more efficient to do ground-up development rather than retrofit. PENN1 and PENN2 would not be candidates for a retrofit, other buildings that in the Penn District would be much better candidates but the ideal thing would be to do ground-up development.

Okay. And just a quick follow-up. The signage business is a relatively small portion of your overall business. Any thoughts in terms of how -- the signage business. So I was just hoping if you can provide a few comments on potential recovery to pre-COVID levels in that sector?

What was the question?

Pre-COVID levels.

Yes. The question was you were having a little to hear you as signage business, a small business, but some guidance on recovery pre-COVID levels. I mean, again, it's a it's a business. Certainly, in Times Square. Obviously, we own lest we did before the retail JV. But it's business driven in that area where you need high walls, right? And so with tourism down, the advertisers have pulled back. But as soon as they come back, it's a variable business. I expect that to turn rate back on. The signage we have in the Penn District, we've got -- and by UNN and in Times Square, we've got a number of long-term leases with that. I'm referring more to the -- we call the slice and dice where you're selling incremental signage. I think as soon as -- like everything else, and as soon as the tourisms back, workers are back, I think you're going to see that return to free price lows.

Daniel, we don't look at the signage business as a dabble or an unimportant business, okay? It's an important business. We have a -- we believe we have the largest position of signs in town. We have a very, very, very competent organization to handle that business, which is namely the interaction between us and the any advertisers. We think that our scale in the business is a very large advantage, and we think that our scale in the -- in Times Square and the Penn District, is also a very large advantage. So we're enthusiastic about the business. It's important to us. It's up in mind. we think we have the best business in town and we are certain that it will rebound when things get back to normal.

Our next question on line comes from Vikram Malhotra from Morgan Stanley.

Just maybe first on Street retail. Can you specifically talk about the prospects and potential for kind of your vacancies on Fifth Avenue, the Masimo space, specifically in light of one of your peers recently signing a deal there. For what I understand, it's probably in the low 2,000s at grade in terms of rents. Maybe just give us the sense of the potential prospects, and where do you see rents shaking out at grade on Fifth Avenue?

Retail rents on Fifth Avenue will certainly be in correction territory from top tick peak rents that we saw a few years ago. The Harry Winston come in the Paramount space; we view as a positive. We currently have Harry Winston in our St. Regis asset. They had a 15-year term with us. That was always intended to house one of their other brands and temporarily hold Harry Winston. So we see them moving across street to their original home as a positive for Fifth Avenue. I'm not sure of the comp that you're quoting because I don't think it was published, but that might indicate somewhere in the neighborhood of where the correction could be today.

Okay. Great. And then just -- I apologize if you covered this, but any update on the ground lease at Penn, specifically? And can you talk about just prospects at PENN2 specifically sort of large anchor tenants?

The ground lease reappraisal at 1 Penn we've announced is in 2023. I think, obviously -- well, I don't want to comment on what it might be, although, I will say that, clearly, it's going in a constructive direction for us. The prospects for 2 Penn, we've had said before. And in fact, I think the question came up earlier, there is a large lease that we have pending, that actually happens to be with Madison Square Garden for their headquarters space. They have been tenants in that building forever. The building, obviously, is on top of Madison Square Garden. And that lease is appropriately at pause because Madison Square Garden is basically -- the business is shutdown until this is over. So we are very constructive and very enthusiastic about the prospects of PENN2 and PENN1 for multiple reasons. Number one, we think the location is absolutely bull's eye. We think that the amenity packages and the -- what we're doing with the buildings and the transformation of the buildings will be unique, best-in-class by far, unbelievably eye opening. Glen and his team have exposed our plans for 1 Penn and 2 Penn for the marketplace to unbelievably enthusiastic acceptance.

Okay. Great. And then just last one, if I may. Steve, you've obviously talked a lot about how New York has changed over the years. And I'm just wondering, given co-working and WeWork, it was hot, and it was in -- and then you've had potential for more work from home on the margin. I'm just wondering, do you foresee any changes in office lease structures, whether it's term or TIs or pumps or anything in the office lease structure as a result of some of these, call it, cyclical and potentially secular changes?

I'd say one thing that we've learned from this pandemic, leases are a wonderful thing. Long-term contracts between well-capitalized parties are a wonderful thing. They're very protective. So right now, we have, I don't know, better part of 1,000 tenants with a very significant $1 billion-plus cash flow. And so that's very predictive and very secure, and we're very happy about it. If the business goes to month-to-month leases, that's impossible. So for WeWork, when you're renting out a space by the desk as opposed to buying a floor or by the building or by the square foot. That's okay. But when you deal with a tenant, as Glen does every day of the week, who's 200,000 feet or 500,000 feet or even more. Those tenants need stability. They need to be able to have space that they can occupy on a long-term basis where they can invest capital in and they can have stability. We need the same thing. So in the large tenant business, I think the long-term lease commitment will be the rule of the day. Now in smaller tenants, and whether they be 3,000 or 5,000 or 2,000 or whatever it might be. First of all, that's not the segment of the market that we trade in, although we do have some of that, obviously. And those leases can go into anything that the tenant wants. So there, when we do those leases, we have prebuilds, we build the space out and the tenant to take this space, move out whatever. So a competitive advantage to that is a landlord who has the capital strength to be able to do a short-term lease, to be able to fit-out space for a tenant to invested capital. So that would be -- but that would be the small insignificant segment of the office population. That's not our business.

Our next question on the line comes from Manny Kortman.

It's Michael Billerman here with Manny. I was wondering if you can just come back to -- yes? I wanted to come back to sort of the office discussion. And frame it the following way. And I agree with your sentiments on office or returning to the office. I myself have been back in the office and feel a lot better than living at work. But I want you to compare it to the mall business, which you accurately got out before things got really, really bad and save shareholders from a lot of losses. Why wouldn't the office space market go like what's happened to the malls, right? And you go back and everyone said, oh, people want to experience the malls. They want to feel the close before they buy them, but then there was an alternative driven by technology that allowed us not to do that anymore. And so I guess, why are you in the belief that what happened to malls will happen to office?

That's a nasty question. There is a school of thought that says that work from home is to office values as Amazon is to retail values. Do you understand what I'm saying?

Yes. No. And that's why I'm asking. The market is, I don't -- I agree with you on the future of office. But the market is telling us a different thing.

The answer is that, that's something that we talk about every day. It's obviously -- it was obviously unthinkable that hundreds of billions of dollars of mall values could be destroyed, but look -- but low and behold, it has happened. It's obviously unthinkable that all the automobile companies could go broke, but along comes Tesla. So we are very respectful of the question that you ask, and we think about it daily.

And the succinct answer as to why you believe that office won't follow the trend of malls is?

The answer is that I believe that if you work from your kitchen table, and your kids are crawling at your feet. And you are not with your colleagues. That's not a great outcome. If you are ambitious and want to get ahead, you can't get ahead from your kitchen table. You have to be in the office with your colleagues. If you are a manager and you have 20 people in your department that work for you, I think if they're each at their kitchen table, I mean I don't know how you manage that. I think if you're a manager, you want your team in the office where you can interact with them, et cetera. So I think the human condition is different. The human condition speaks to collegial work in groups in -- as they were basically is in offices. Now obviously, that's going to get nipped around the edges that I can't tell how much. None of this would have happened, whether or not the technology like Zoom, okay? So technology enabled our business, your business to be able to react to this shutdown by working from home and keeping the railroads running on time. So that's an amazing thing. But there's the human condition. So it's not impossible that there will be a day here and day there. They're working from home. It's not impossible that certain groups will work from home. It's not impossible that things will change. But the core, I still believe the core will be of value. Now let's get back to what that means. I think that means the better assets and the better locations will thrive. I think that it means that the commodity lower quality assets in off locations will struggle. So that's what I think. On the other hand, there is uncertainty in this situation that a management team has to have -- has to be aware of and has to be -- has to focus on daily.

Right. I appreciate those comments. And then my second question, Steve, just to come back to 555 and 1290. In one of the responses, you said that it's very important -- or it's important to liquefy those assets to your future plans. And I was wondering if you can just sort of unpack that a little bit about why liquefying it either in the refi, joint venture or an outright sale is important to your plans? Is it a portfolio repositioning exercise? Is it to get the mark at sort of good pricing on those assets? Is it the cash that you want to take out? And so just -- I just want to better understand why those 2 assets are so important to your future plans in terms of the liquefaction of them?

I think the word important is you -- I don't think I said important. Look, we have identified those assets as assets that we would like to swap for cash, okay? It's as simple as that. A lot of it depends upon the structure, a lot of it depends upon the details of -- sell them all, sell the part. We continue to manage them. We do a joint venture or we just refinance them, okay? But we have an enormous amount of equity in those assets, and we want to reclaim those assets. We want to reclaim that equity. Now when we have the cash, it's a different decision as to what we do with them. Our world view is that there will be better places to put that cash for growth and shareholder value creation than those assets over a 5 or a 10-year hold, okay? That's all. By the way, I would remind you that my analysts over the last 10 years have been pounding me to sell 555 because it's the only -- to dump it. While we resisted that dump, it went up in value by $1 billion. So maybe its time has come.

And our last question comes from Steve Sakwa from Evercore ISI.

Just two quick follow-ups. I noticed that operating expenses [indiscernible] kind of noticeably between Q2 and Q3. I assume that that's part of the building is reopening. Would you say, Q3 is a reasonable run rate kind of looking forward until utilization rates go up materially?

Yes.

We just talk about...

Operating expenses.

Operating expense. Yes. Okay. Good.

Yes, I think that's fair, Steve.

Okay. And then I did notice a large kind of onetime gain. I think it was in management and leasing fees. It was something like $11 million. And I assume that's a onetime gain on some leasing activity, but any thoughts around that would be great?

So actually -- say again at the end.

I can hear. Michael, it's Joe. Let me handle that one. Yes, you started in the fee income section, Steve, but it gets eliminated in the minority interest section. So really, it didn't benefit bottom line $0.01.

We have no further questions at this time.

Well, thank you, everybody, for joining. This is a very, very interesting time. I'm going to go back and watch the television and see what's going on in the election. We wish you all well, stay healthy. And please get back to the office, get back to work. We really need everybody in the office. Thanks so much. Have a great day.

And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.