Alexander's Inc (ALX) 2013 Q2 法說會逐字稿

Welcome to Q2, 2013 Vornado Realty Trust earnings release. My name is Vanessa, I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded, and I will now turn the call over to Kathy Creswell, Director of Investor Relations. You may begin.

Thank you. Welcome to Vornado Realty Trust Second Order Earnings Call. Yesterday afternoon, we issued our second quarter earnings release and found our quarterly report on form 10-Q what 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 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 the statements due to a variety of risks, uncertainties and other factors.

Please refer to our filings with the Securities in Exchange Commission, including our annual report on Form 10-K, for more information regarding these risks and uncertainties. The call may clue time-sensitive information that will 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 of the Board and Chief Executive Officer; David Greenbaum, President of the New York division;Mitchell Schear, Resident of the Washington DC division; Joseph Macnow, Chief Administrative Officer in Stephen Theriot, Chief Financial Officer. Also in the room are Wendy Silverstein and Michael Franco, Executive Vice-Presidents, Co-heads of Acquisitions and Capital Markets. I will now turn the call over to it Steven Roth.

Thanks, Kathy. Good morning, everyone. Welcome Vornado's second quarter earnings call. I would like to begin by reiterating our commitment to our strategy of simplifying and focusing the business. We are making very good progress and steady progress in that regard and we will continue to do so.

As I have said several times recently, in this market we will buy carefully, and this year sell more than we buy. We will be net sellers this year. We will continue to focus internally where we have much to do and a lot of to harvest. We will build cash reserves to further fortify our fortress balance sheet and to it take advantage of opportunities that will undoubtedly present themselves in the future.

Our cash position today is $1.1 billion with over $2.4 billion available on our $2.5 billion of revolvers. Overall, our current liquidity position today is $1 million better than it was at the start of the year. We had a super second quarter, and I am very pleased with our financial results. Our second quarter comparable FFO 22.6% plus, better than last year's second quarter.

Our preview, what David and Mitchell are going to share with you in a few minutes. Leasing in New York is extremely active, and I believe steadily marching towards the tipping point to a landlord's market. Our New York business continues to put industry-leading metrics.

I guess that the loss of income from the [BRAC-related] vacancies in Washington is the eye of the storm for our Company. As Mitchell will tell you in a few minutes, we use the Patent Trade Office move out, a decade ago, to totally transform Crystal City, and we will do it againTruth be known, I am a little -- it is going a little slower than I would like.

We have an enormous profit in our Washington business. At the value that I believe the stock market values Washington, I would be a buyer rather than a seller of that business all day long. At the very core leasing is our business. Company-wide, we leased 1.33 million square feet in the quarter -- in the second quarter in -- with174 transactions with positive mark-to-market of 6.0% cash and 11.9% GAAP.

In the first half we leased 3.46 million square feet in 349 separate transactions with positive mark-to-market of 6.8% cash and 15.4%. As to dispositions, so far, in 2013 we have sold $1.2 billion of non-core assets, resulting in an aggregate net gain of $297 million.

This on top of $1.7 billionof non-core assets sold in 2012, which produced it a aggregate net gain of $454 million. In the second quarter alone, we to closed on the sale of 12 assets with proceeds of $586 million in net gain of the $5 million.

Specifically, (inaudible) $241 million, the plant in San Jose California for $203 million, the Philadelphia Market Street retail property for $60 million. Our 50% interest in the Downtown Crossing Boston site for $45 million, and 8 other retail assets for $37 million. So far, in the third quarter, we have closed on the sale of Shops On Lake in Pasadena for $34 million, and another small non-core strip shopping center. We are under contract to sell the Hall and Park land for the $65 million, and we are currently in the market with another $500 million plus of assets.

We continue to focus on the value creating opportunities we have internally, such as the redevelopment of the 725,000 square foot 330 West 34th Street building, which is coming out of service to be repositioned for creative class and technology tenants,the Marriott Marquis retail signage project in Times Square, which is going into construction in the fourth quarter. The Springfield Mall renovation, which is under construction and on schedule for a holiday 2014 opening.

The transformation of 280 Park Avenue at 48th Street, which is also under construction and will be completed, new, full-block Grand Lobby, and all in the third quarter of 2014. The 699 unit residential project with Whole Foods at its base in Pentagon City, which will go into construction in the fourth quarter, and the Hotel Pennsylvania, and 220 Central Park Southside, and, of course, Toys, JCPenney and LXP. We are excited about a couple of important internal harvesting transactions that are now getting very, very close.

It is my view that we are in an economy that is now growing, and which will inevitably pick up steam. With us today is Stephen Theriot, our new Chief Financial Officer, in the saddle for 73 days, now. Steve comes from us from Deloitte and Touche, where he did a five-year rotation a few years ago [with] our audit partners, so we know him very well.

Steve has a deep institutional knowledge of our Company and our people, all the technical skills and great judgment. He will represent us very effectively with our shareholders, analyst, financial counter parties and clients. You will all get to meet him, personally, in the very near future. And of course,, Joe Macnow is also with us in the room today. Now, I'll turn to over to Steve to cover our financials.

Thank you, Steve. Before I dive into the highlights of a real strong quarter, I want to say how pleased it I am to be part of the great team here at Vornado, it is an honor to lead the world class financial organization built by Joe Macnow. I look afford to meeting all of you who own our shares and who follow our Company.

Turning to the quarter, yesterday, we reported comparable funds from the operation of $1.30 per share versus a $1.06 for the prior year's second quarter, a 22.6% increase. Total FFO was $1.25 versus $0.89 for the prior year's second quarter, a 40.4% increase. Please, see our press release, or the overview on MDMA on page 42 of our Form 10-Q for a summary of the noncomparable items.

Comparable EBITDA was $418.6 million, ahead of last year's second quarter by $40.9 million or 10.8%. Our New York division, our largest business, produced $235.7 million of comparable EBITDA, which is $28.2 million, or 13.6% ahead of last year's second quarter. Our Washington business produced $84.8 million of comparable EBITDA, which is $6.1 million behind last year's second quarter, primarily due to the effects of BRAC move outs and a sluggish leasing environment in Washington.

Washington's comparable year to date EBITDA is $15.8 million behind last year that's first six months, and is above the range of EBITDA diminution of $5 million to $15 million we had previously projected for the full year. We expect a reduction in Washington's EBITDA in the first half of the year, and the expected further reduction in the third quarter will be partially offset by increase the in the fourth quarter. We estimate Washington's full-year 2013 EBITDA will be about approximately $10 million to $15 million lower than 2012.

Our strips and malls business produced $53.9 million of comparable EBITDA this quarter, which is $1.6 million ahead of last year's second quarter. Excluding $1.5 million of nonrecurring expenses in the current quarter, the strips in malls were $3.1 million, or a very strong 5.8% ahead of last year's second quarter.

Our New York and Washington businesses, together with the retail properties, account for approximately 90% of our company's EBITDA. Our remaining comparable EBITDA comes from 3.5 million square foot merchandise mart property anchored by Motorola Mobility-Google, and the one point 8,000,000 square foot 555 California Street office complex in San Francisco, as well as our real estate fund.

Let me spend a minute on noncomparable items, which aggregated to a loss of $10.8 million this quarter, as compared to a loss of $34.4 million in the same quarter last year. It's a short list of items. We recorded a negative $25.1 millionof noncash, noncomparable, FFO this quarter, representing our share of the loss of the seasonal Toys business.

As we noted in our 2012 annual report, based on current conditions our accounting is asymmetrical recognizing our share of Toys noncash losses, but as of now, not recognizing our share of noncash income. This will have the effect- reducing our GAAP carrying value. The mark-to-market of our JCPenney position produced $9.1 million of noncomparable income this quarter, based on the June 30 closing price of JCPenney's common stock.

Finally, the $8.1 million profit on the redemption in May of all the outstanding Series D15 preferred units that had an aggregate face amount of $45 million is also included in noncomparable items. With that I will turn it over to David Greenbaum to our cover our New York business.

Steve, welcome aboard and thank you. Good morning to everyone. I'm going to begin today with a brief overview of what we are seeing here in the New York market place. I think one of the brokerage houses in its latest monthly report, got it precisely right.

Over the past three months, the market, as they said, has been quote, "warming up."Manhattan office leasing activity increased significantly in the second quarter to 6.7 million square feet, with leasing activity for the first half of the year 11% higher than the first half of 2012. The Midtown submarket, in particular, has warmed up the most with leasing activity 17.6% higher than last year.

Despite many large blocks coming to the market, absorption in Midtown in the second quarter was flat to positive, reversing some of the negative 1 million square feet in the first quarter. We are finding there is good depth to the market with tenants, including financial services, media, technology, advertising and law firms, all active in the market in closing transactions.

Creative class tenants and technology firms continue to be the driving force behind Midtown South activity, including, most notably, the 100,000 square foot lease we signed with Facebook in our 770 Broadway. More on that later in my remarks. Value space continues to be a strong market theme, and in a positive sign we have seen a reduction in sublease space.

Midtown class A sublease space now is at its lowest level in a year. For example at our 2 million square 1296 Avenue, where (inaudible) 300,000-plus square feet on the sublease market at very aggressive pricing, the speed with which with they were able to sublease the space and the quality of the tenants that took the Morgan Stanley, Sirius XM Radio and Remy Martin, reflected both the aggressive pricing, but also, importantly, it the quality of the transformation we undertook at this asset.

With the cheapest sublease base clearing the market, we should begin to see some upward pressure on rents. We are also seeing a strong pickup in high-end space. In our own portfolio in the second quarter, we signed three leases at 280 Park Avenue, one in the Tower for 30,000 square feet at starting rents at $115 plus, and two in the base of the building for a total of 100,000 square feet at starting rents in the $90s.

We have four $100-plus leases out in the Tower of 350 Park Avenue, and we have very good activity in the Tower at 330 Madison Avenue. In the second quarter, we signed 45 leases for a total of 546,000 square feet of activity, taking our leasing year to date to 1,455,000 square feet. Importantly, of the 546,000 square feet leased in this quarter, some 250,000 square feet, 45% -- 46% of our activity came from tenants new to or expanding in New York. That's a great sign, real growth in our market place.

Our average starting rent this quarter was a healthy $68.76 with very strong positive mark-to-markets of 15.8% GAAP, and 10.2% cash. The average lease term was 7.3 years, and TI's and leasing commissions were 10.4% of starting rents. At quarter end, our occupancy rate declined by a scant 10 basis points to 95.9%.

We have recovered more than that over just this past week, having signed a lease with media technology company, Rocket Fuel, filling 50,000 square feet of vacant see at 100 West 33rd Street. The second quarter leasing activity was highlighted by our 100,000 square foot lease with Facebook, at 770 Broadway, the head quarters for both AOL and it J. Crew. I'm really proud of my leasing team getting this deal done.

After an extensive search, including several new builds, Facebook leased the entire 8th floor and a portion of the 7th floor, which were previously occupied by Nielsen. The deal was complicated, and an example of what we do every day to create value in the portfolio. The overall transaction involved five different tenants, 16 legal documents and was finalized in 23 days.

Let me give you a flavor. Nielsen had two years remaining on its lease and came us with a proposed subtenant for one of its floors at 50% of Nielsen's rent. We knew that Facebook was out in the market place looking for space in Midtown South, and immediately, reached out to Facebook to pitch the space. We agreed upon deal terms with Facebook within a week of our first meeting at the building.

We then entered into a recapture transaction with Nielsen, for not only the one floor they had come to us with, but also a second floor. In the end, we turned the Nielsen $52 rent into a new Facebook $72 rent, while Nielsen will pay us approximately $4.5 million to be released from his lease obligation.

We also made a short-term deal for 60,000 square feet of the remaining space on the 7th floor with I Five Games, which allows for perfect expansion space for Facebook. Facebook's west coast brokers took notice of how we executed on this complicated deal, and it was the same brokers who, in fact, brought us Rocket Fuel, the 50,000 square foot lease we just completed at 100 West 33rd Street.

Other highlights of the quarter included tech lease and health care lease, both at One Penn Plaza, with Symantec and Value Options taking about 45,000 square feet and rinsed north of $60 a foot. Symantec moved from the Grand Central submarket, continuing the tech migration to Penn Plaza. Also, at 909 3rd Avenue, the Interpublic Group continued to expand taking another 10,000 square feet, adding to their existing 221,000.

Our office expirations for the remainder of 2013 are quite modest, with only 188,000 square feet expiring, which excludes the 238,000 square feet expiring at 330 West 34th Street, we will be repositioning the entire 725,000 square foot building for creative class and technology tenants that are migrating to Penn Plaza. For 2014, we have some 1 million square feet expiring. I must say that our pipeline of potential tenants is very, very active.

We are in serious dialogue with new tenants, as well as tenants in our portfolio seeking expansion space, for a total of about 750,000 square feet, and additionally we are working on over 1 million square feet of renewals. Let me turn now to Manhattan Street Retail. Rents in all of the two corridors where we are owners continued to rise significantly. 5 Avenue, Madison Avenue, Times Square, Penn Station and Soho.

With our upcoming lease expirations at both 640 5th Avenue and 608 5th Avenue, we can expect remarkable rent increases at these properties. At the Marriott Marquis full block front, at 1535 Broadway, 45th to 46th Streets directly across from our 1540 Broadway Forever 21 property, we will commence the redevelopment of both the retail and signage program in the fourth quarter of this year. New York's record 52 million annual visitors continued to boost performance at the Hotel Pennsylvania.

Second quarter occupancy was essentially full at 97.5% resulting in a 7% increase in respect rent par compared to the second quarter of last year. Building Turning to the 3.5 million square foot Chicago Merchandise Mart Building, this quarter we leased 98,000 feet, including a 32,000 square foot expansion by Motorola-Google which number leases 605,000 square feet at the Mark. Occupancy at the Mart building is now 95.5%.

Let me conclude my remarks by summarizing the entire New York division. We had a very strong quarter. Our key performance metrics are industry leading with office mark-to-market rent increases of 15.8% GAAP, and same-store EBITDA increases for the overall division of 8.8% cash and 4.4% GAAP.

Isolating just the New York office business, our same-store EBITDA, at that point, increased 10.4% cash and 5.4% GAAP. Let me turn over the call now to Mitchell to review Washington.

Thanks, David, and good morning everybody. I will start with a quick overview of the second quarter, and then talk more broadly about the market and how we think about our business, specifically. For the second quarter, we leased about what we did in the first quarter, 275,000 square feet in 47 transactions, at a healthy average starting rent of $43.10.

We generated a GAAP mark-to-market of positive 2.8%, and our cash mark-to-market was down by 1.1%. Overall, our occupancy was down 20 basis points from the first quarter to 83.6%, which is penalized by Skyline's 54.8% occupancy. Excluding Skyline, our overall occupancy was a better 89.2%.

Our tenant improvements and leasing commissions for leases signed in the quarter were 12.8% of starting rents, 80 basis points higher than in 2012, which is a trend in the DC market today. In Crystal City in the second quarter, we leased 108,000 square feet in 18 deals at a very respectable initial rent of $44.10, generating a GAAP mark-to-market a positive 3.8%, and a cash mark-to-market of positive 0.5 percent

Our 2400 unit apartment business in Arlington and Georgetown is 97.1% occupied, and second quarter EBITDA is 3.8% ahead of last year's second quarter. Now let me turn to what we hear, read, and what we see firsthand in the market place. The Washington economy is beginning to show some signs of recovery.

Economists are projecting solid job growth in the professional and business services sector of about 20% between 2013 and 2017. We are encouraged by those projections. While the current real estate market in the Washington area continues to be tepid, it we have begun to see positive absorption, albeit slight, in the first half of 2013 in contrast to the negative absorption for all of 2012.

Much of the activity we are seeing is of the musical chairs variety, with tenants moving to get a better deal. In some cases actually expanding, and in other cases still finding ways to get more efficient and use less space than before. Our belief is that the DC economy -- as DC economy continues to recover, and as the projected new jobs emerge, the office market will follow with real absorption and declining vacancies. We still expect that the balance of 2013 will be sluggish, with activity beginning to pick up in 2014.

It is important to remember that Washington is still Washington. We are one of the top markets in the country. We have the most educated work force in the country, where 47.5% have a bachelors or an advanced degree. And we have a growing private sector, and along with that we have high paying jobs, strong housing, and low unemployment at 5.6%.

We have dealt with large moveouts before, and we have always come out better in the end. Each time we have made vast improvements to Crystal City, overall. We have repositioned buildings. We have added amenities, changed the tenant base, and ultimately created more value. In the last ten years, Crystal City rents have increased by more than 30%.

Our unbelievable location next to the airport on the shores of the Potomac river remains just that, an unbelievable location. In Skyline, as has been [rumored] in the press, very shortly we expect to sign a 182,700 square foot new lease with the United States Fish in Wildlife Services, who will move into Skyline Technology Center in mid 2014. This building was fully vacated by BRAC in late 2011.

This hotly contested lease with highly competitive terms will be one of the largest leases to be signed in an existing building in northern Virginia this year. With this lease, we will have taken care of over 54% of the 2 million square feet of BRAC space that has expired to date, and we will reduce remaining BRAC exposure by 12%, portfolio-wide, and increase our occupancy at the Skyline Complex by 6.9% to 61.7%.

Fish and Wildlife will join Analytic Services, who moved into 88,000 square feet earlier this year. We are applying the same focus to all of our BRAC impacted space. We are finding more than ever that speed matters. An example of our speed to market happened 1777 North Kent Street in Rosslyn, which sits in a prime location directly across the Potomac River from the Kennedy Center.

In late January of this year, the Department of Defense moved out of the entirety of the building. By June, we completed a full renovation, new lobby, new systems, et cetera, and by July, we moved the corporate executive board into 108,000 square feet. So within 180 days, this BRAC building was back in action with a new type of tenant and some of the best views in Washington.

Over 150 brokers were recently there to see the renovation, and those views from the top floors of the building, which are still available. In addition to executing new leases we are retaining our tenants. We just signed a major lease renewal with the global law firm, Sidley Austin, four 289,000 square feet at the Investment Building.

This is a property that we manage-lease and own a 5% interest, in partnership with Institutional Investors, advised by JPMorgan. Sidley's lease was set to expire in 2016, but we extended them through mid-2031 in a slightly expanded square footage envelope.

In a market where law firms are shrinking and generally moving into new spaces, Sidley will use swing space in our building, while they renovate in place to make the space work better for them now and well into the future. Leasing is the main event for me and our entire team. We recently hired Bruce Paschal, hands down, the best landlord broker in the DC area.

Bruce will partner with Jim [Creeden, who worked closely with me for ten years, to strengthen our already powerful leasing team. Bruce has 25 years experience with CBRE, and in 2012 he was one of the top 25 CBRE brokers, worldwide. He has a big presence in the Washington leasing community, and he's extremely well respected and extraordinarily talented. Bruce started last week and has hit the ground running.

It's important to mention that we recently received government approval to build a 699 unit residential project in Pentagon City with the Whole Foods (inaudible). This new project sits on land that we already own free and clear, and is the first of three side-by-side projects that will ultimately total 2100 units. The location is unbeatable. It's a mere 5 iron from Simon's Pentagon City Mall, which, by the way, we own a 7.5% interest in.

We expect to deliver the first apartments in mid 2016, and project an incremental yield of 7-plus percent on the estimated $235 million we will spend for this project. Washington is a strong rental apartment market, especially for high quality, amenity rich, transit served urban product, all of which are the attributes of this new project. I would like to thank you, and now turn it over to Joe Macnow.

Thank you, Mitchell. Let me first touch on our strip shopping centers and malls, both of which had a strong quarter. Strip shopping center occupancy was 94.1% at quarter end, up 20 basis points from the first quarter, and 20 basis points from last year's second quarter.

Occupancy at the malls was 93.5%, again up 20% and 20 basis points from the first quarter, and 40 basis points from last year's that's second quarter. We leased 256,000 square feet at the strip shopping centers with a positive mark-to-market of 18% GAAP, and 10.3% cash We leased 135,000 square feet at the malls with a positive mark-to-market of 11.1% GAAP, and 6.3% cash.

The combination of solid trade area incomes, strategic high barrier to entry locations and strong anchors continues to drive leasing at both the strips and the mall. At Springfield Town Center, as Steve mentioned, our major mall redevelopment northern certificate Virginia, construction is on schedule for a late 2014 opening and it is leasing well.

Turning to capital markets, as of today, we have $3.5 billion in liquidity, comprised of $1.1 billion of cash, $2.4 billion of undrawn revolving credit facilities, overall, $1 billion better than at the start of last year. $1 billion better than 12/31/12. Our consolidated debts to enterprise value is 36.4%, and are consolidated debt to EBITDA is seven times. In June, we completed a $550 million refinancing of the Independence Plaza, with an initial complex in Tribeca, and which we own a 50% interest. This interest-only loan is at 3.48% and has a five-year term.

The net proceeds of $219 million, after repaying the existing $323 million mortgage and closing costs, were distributed to the partners of which our share was hundred and $37 million. During the second quarter, it we redeemed all of our outstanding 6 7/8% Series D-15 preferred units for four $36.9 million, or an $8.1 million discount, which as Steve Theriot mentioned, is a component of FFO.

We also repaid $149 million of mortgages, which had a weighted average interest rate of 6.69%, and were scheduled to mature later this year, on the Broadway Mall, 2231 Crystal Drive and 1225 Clark Street. We used existing cash, which is earning nil, to repay these loans, adding these properties to our highly, high quality unencumbered asset pool and saving $10 million of interest annually.

We continue to negotiate with the Special Services to restructure the terms of the Skyline mortgage loan, which has a June 30 balance of $725.6 million, including accrued deferred interest of $47.6 million. Our debt mix is balanced with 86.5% fixed rate with a weighted average of rate of 5.04%, at 13.5% floating, with a weighted average interest rate of 2.35%.

Of our $10 million of consolidated debt, $1.4 billion unsecured, $84 million is outstanding under the -- our $2.5 billion of revolving credit agreements, and the balance consists of non recourse mortgage loans. Our debt maturities are well laddered with only $177 million maturing in the remainder of this year, and $236 million maturing next year.

We remain committed to maintain a strong investment grade rating. We receive ratings affirmations with stable outlooks in from both Fitch, BBB in June, and Moody's Baa2 in July. At this time, I will turn the call over to the operator for Q&A.

And thank you. We will begin the question-and-answer session at this time. (Operator Instructions). Our first question comes from Steve Sakwa with ISI Group.

Thanks. Good morning. I don't know if this is for Joe or for Mitchell, but obviously you guys are making progress with this Fish and Wildlife deal. I guess I'm trying to take that comment in the leasing that you are doing down there with Joe's it comment about the special servicing. I notice that many you guys also broke out some of the leasing stats kind of [ex-Skyline]. And I guess I'm trying to put together how do you lease and market a project that is still in special servicing,and how do you guys think about the economics if you don't really know kind of what the debt restructuring looks like.

Steve, it's Steve. How are you?

Good.

I noticed you were the first one on the queue, by the way, this morning. We do know what the negotiation with the negotiation with the second -- the special service will end up in. We have been -- Wendy Silverstein who is here in the room has been working on it for quite some time now. It's fairly baked. It's just not ready for publication because the deal isn't completely finalized, but we do know.

The arrangement will allow us to infuse the capital that's necessary to release that building in, approximately, the middle of the capital stack of the loan where we think we have a secure interest. The long and the short it is after analysis, it's fairly clear to our management team that we would rather renegotiate the loan -- by the way the lender would also rather have us stay in and operate the property and lease up the property that there will be more value created than, so to speak, giving back the keys right now. So that's where we are.

Do you have a sense, Steve, for where when that are will become public?

Wendy, what do you think?

Two to three months to do the documents.

Speculating. Wendy says two to three months to do the documents but that's sort of speculating. We have a good relationship with the special services, and we have been in dialogue with them for a fairly long time. We have a handshake on the structure of the deal, and we believe we will conclude that deal.

Okay. And then just to kind of follow up on Springfield Mall. I don't know if that's for Joe or for Mitchell. Could you guys just give us maybe an update on kind of the progress what you spent to date? Kind of where you are on the leasing, and how do we think about the return on that asset maybe by 2015?

My guys are looking at me. I'll answer that question also. The leasing it is progressing well. The -- we divide the leasing and to three categories. Mall shops is one category. The restaurant offering, which is very important for this property and for all major regional malls is the second, and then mini-anchors, such as Dick's, the theater, et cetera, is the third.

We are well along with the mini-anchorsWe are almost completed with the restaurant offerings, and we are well more than 50% committed for the mall shop section of 450,000 square feet. Most importantly, with respect to the mall shops section, we are either signed or in lease draft with a dozen very important lead tenants, which are the core to a successful mall.

So we are more than satisfied with the leasing progress. In terms of returns, I think that was also in your question, Steve, our pro forma is that on the incremental money that we will be investing, which is I think what's our last disclosed number, 230?

225.

I have 230 in my head. Joe says 225 and I'm sure he's right. We are budgeting a low double digit return. Okay. So on the increment. So that's pretty satisfactory. On the, if you combine that number with the [sum] course of our previous investment in the land, together with its carry, that number goes down to give or take 6%.

Thank you.

Thank you.

And our next question comes from Michael Bilerman with Citi.

Good morning, Josh. Eddie is on with me. Steve, you mentioned in your opening comments that based on the value, that the stock market is valuing DC, adding your stock price, that you would be a buyer rather than a seller of that business all day long. And so I'm curious, just with the extremely strong execution on the asset sales front, the enormous liquidity that you have today that is only expected to grow in the future, should we expect that, as Chairman of the Board and CEO of the Company, that you recommend the Company the go down the road of a share repurchase program, because I'm assuming DC is not the only misvalued piece of the Company that you perceive in the Company.

We consider a share of purchases, I won't say at every board meeting but at many board meetings, and we have not, heretofore, decided to launch a share repurchase program. By the way, thank you for your acknowledging. We are happy with our asset disposition program. It will continue apace. We are happy with our cash position, and it will also continue to grow.

And Josh has a follow-up.

Hi Josh. Josh?

Michael? Just to confirm, your line is still open.

Why don't we go to the next question, and Josh and Michael can ring back in when they wish?

Thank you. Our next question comes from Anthony Paolone with JPMorgan.

Hi. Thanks. Good morning. You mentioned about $500 million-plus in the in sort of the forward pipeline of asset sales. Can you get a little more specific, and give us some sense of either assets or the nature of what's in the hopper there?

You know, I don't think so, Anthony. They are principally retail assets. A couple of them are troubled. A couple of them are terrific, but out of our main core geography. But I don't really want, at this point, to get into the details of the -- which assets they are or what our price expectations are. But we will complete this cycle, and then we will fill in with another cycle right on top of it.

When you mean this cycle, do you mean sort of the next couple quarters.

When we have more assets to sell.

Okay. And just another question. Your 2014 and 2015 lease expirations get a little bit heavier than maybe the last couple of years. Can you comment on where the current mark-to-market stands?I know there is a hefty one in the retail area, but just more broadly provide some color on that.

Wow, I couldn't do that. Can anybody else in the room do that? So, as I understand your question, Anthony, is what's the mark-to-market in the current mark-to-market in the lease expirations in 2014 and 2015. We will have to get back to you with that. I can only tell you with respect to the retail acquisitions, I think David, what was the word you used, remarkable, pretty remarkable, correct?

Remarkable, a couple of these This Avenue [assets], they are remarkable.

So anyway, Anthony, unembarrassed. I can't give you that off my head. Nobody else in the room can, either. We will get back to you.

Maybe asked a slightly different way. That In New York, for instance, your quarterly spreads were pretty good. They were positive. Is that fairly indicative where the portfolio stands, right now, if market rents were to flatline or was this an anomaly?

Let me reword your question in another way. If we were to [arguendo] empty the portfolio and re-rent it, we have a positive mark-to-market on the entire portfolio. Certainly, in New York office, and, remarkably, New York retail. With respect to Washington, as you have seen from the numbers, even though leasing is sluggish and soft, the pricing is holding up. So, I would say that in Washington, as well, in the current market as we see it, we have at least a push on the mark-to-market for the entire portfolio.

Okay. Thank you.

And on the non-Manhattan retail, we also have, you know, fairly decent, probably give or take 10% or so, mark-to-market on all that. By the way, the interesting thing about the -- you can't really do that on strips and malls because a lot of that is anchor tenants with very long term leases, though. It's a very theoretical calculation. We can't real really get our hands on those assets, normally speaking.

Okay. Thank you.

Thank you.

And our next question comes from Michael Knott with Green Street Advisers.

Hi, everybody. Steve or David, I'm curious your thoughts on what's required, or how much further we have to go until we reach the tipping in New York where it does become a landlord's market. How close are we?

I'll answer and then David will answer. My answer is about 200 to 300 basis points more in the vacancy rate, going down into had the high single digits from the low double digits.

Yes, I think that's a fair comment. And as you look at availability around the city right now, it's in kind of the low double digitals, about 12%, which is the vacancy was available space. Space that's available over if the next 12 months. I think we need some decent absorption to get those numbers down it into the 9% range, plus/minus, at which point in time we begin to see much more strength in the market. As I said, to me a positive sign this past quarter was pushing out as I call it sometimes, [barfing] out some of the sublease space at cheap pricing, which just clears the market enabling the direct base to achieve and really float to market pricing.

Michael, let's look at it a slightly different way. There's not one homogeneous market for space in Manhattan. There are multiple, as you know, multiple submarkets and geographies, and then there's also multiple types of space. So for example, the tech type market places which are downtown Midtown South, Park Avenue South, et cetera, are basically full with rents which are rising. Would you say rapidly or just rising David?

I would say, at this point in time, probably rising. There was an enormous rise in rents at this point in time. Them are still rising but they are probably not as --

So, that type of space, for example, our 770 Broadway Building, and others of our building, are now coming in and punishing into Penn Plaza is until short supply, has already benefited from a supply/demand imbalance and has already risen and is continuing to rise. As David said in his remarks, high-end space in Midtown and the Plaza District, Park Avenue District, et cetera is in -- is also in short supply.

Those kinds of users are growing. They are doing very well. Their demand for space. And we are enjoying that. For example at 280 Park Avenue, which we own in partnership with SL Green, and I think either Mark or [Durrell] said this on their call, our strategy there is likely to lease that space out, floor by floor, or two floors at a time, to smaller -- not large, but to smaller space using financial services and there is good demand for that.

If there is a softness in the market place, it's in the big blocks. And so we have the dynamics of the new builds over at Hudson Yards in Wall Street, and down at the World Trade Center. And so three, 500,000 foot blocks are a totally different kind of demand, and softer than what I have just mentioned, and we don't -- I don't think we have one of those. So we are in pretty good shape, and anyway, so the -- what I'm trying to say is the market can't be looked like as a homogeneous. You have to take it apart, geography by geography, and user group by user group. I hope that answers.

Yes. Thanks. That's helpful. And then the second question would just be curious if there's been any update upon 220 Central Park South, or any comment on press reports about your involvement in 650 Madison?

Those are two different questions. Let me do 220 Central Park South, first. So, as we have said many times, we have -- it's a wonderful site in the front row of with Park Avenue views et cetera, the most sought after space. The space that has benefited from apartment selling at $5000, $6000, $7000, $8000, and even higher a square foot. Interestingly, the Park Lane went under contract -- was it two weeks ago? I think it was at $650 million for that site. It's a tear down, and if you add the cost of vacating the building, and the cost of the demolition, it's more like $750 million, which equates to $3,000 a zoning square foot.

And interestingly, our basis in our site, which is now 326,000 square feet, is a thousand dollars a foot. So we think we have a -- I think the word of the day is remarkable, so I'll use that word again, a remarkable profit in just the landWith respect to the other issues of that site, we don't have, I don't have anything more to say about the other issues of that site. With respect to the other issues with that site, we don't have -- I don't have anything more to say about the other issues at that site. With respect to 650 Madison, that was your second question, Michael?

Yes, that's right.

It's a fine property. It's a fairly modern building as opposed to the Park -- Madison Avenue buildings, which have a different kind of context. This a modernish kind of building. It's on Madison between, the full block front between 59th and 60th. It's a fine asset in a fine location. Recently, we and Oxford Properties, an affiliate of the Ontario Pension Fund, joined two existing partners in the general partnership. So we have a quarter of the general partnership, as does the other three partners. Our investment is $12.5 million. We , are in the process of putting together the capital structure for this deal so I would say it's actually premature for me to say anything more about it now.

Okay. Thanks.

Thank you.

Our next question comes from John Guinee with Stifel Nicolaus.

Great. Okay. Two questions. One, first great shout out on Jim Creeden, excellent guy. I'm sure he will do a wonderful job at Crystal City. First, for David Greenbaum, what's interesting to me about the Facebook lease, and the Google lease, is neither of these buildings are, particularly, state-of-the-art. A lot of columns, very inefficient. What causes someone like Google and Facebook to go into these kind of buildings and pay pretty healthy rents?

You know, you have to, John, kind of focus on the culture of these firms. You know, it's -- I'm sitting here today with my tie on, and these guys, I don't think they have seen anyone with a tie in a long time. So, I think when they walk into these properties, the idea of going into a glass new build, which, in fact, Facebook considered real hard down in Midtown South, ultimately the decision, you know, they made was even though, you know, in a sense the floor plate may be somewhat or efficient than an older building i.e. it has fewer columns.

From in their view it's not the culture that they are all about. The building that we own is a hundred-plus year old building. It's a former department store. would building it's a it formatter department store. , We did a renovation of that building about 15 years ago, and when you walk into the lobby, I would tell you when tenants look at it they say, "Wow, this thing is great." In fact I don't think we would do anything differently in terms of the renovation that we did 15 years ago, today.

You know, the floor plates are very large. The ceiling heights are great. The windows are big. So, you know, the light and air coming into the building is great. And, you know, these guys love to be on a big horizontal footprint. Google, obviously, did that here in New York. We did the same thing with Google in Motorola in River North at the mart. They love these big floor plate buildings. Whether that enables them to take their skateboards around the floor, or, obviously, have the ability to have people interact all day, which is what that culture is all about. I mean you will find when you walk into the space that much of it is going to be open space. We are excited to see the Facebook space. In fact, it's going to be a Frank Geary design.

John, let me jump on and add to what David said. Don't think for a moment that because these buildings are not brand new, steel and glass buildings, that they are anything other than state-of-the-art in all of their services, all -- for example, in all of our buildings the elevators are the same as you would have in a brand new building, the mechanical systems,the internet service, the emergency generation of power, et cetera. So that the only thing that is different than a 770 Broadway, which is the Wanamaker Department Store that David just described that Facebook selected is that it is a masonry building, which has some texture and some culture to it as opposed to a steel and glass building.

, Okay. And then as a follow-up question a little more serious is I went through your out of service. It is almost 3 million square feet. 813,000 square feet in Crystal City, Rosslyn, 170,000 square feet. Springfield mall 724,000 square feet, which you addressed. The strips in Northern Jersey, six strips, 887,000 square feet. 330 West 34th Street, 258,000 square feet. There is probably a lot of value there. Do you lay that out anywhere where people can get a sense for your current book versus anticipated further investment versus stabilized yield?

Joe?

John, hi, it's Joe Macnow. I'm sorry to say we don't make it easy for you to put a real value on that, but your observation of how much is out of service and will soon, hopefully, be income producing. Certainly, it will be in Springfield, and David commented on 330. There is tremendous value there, and we will consider and discuss now, putting together something to let you have a better opportunity. But that list, Jon, just shows we -- our Company is a large company. We have lots of internal value that we are creating and so, you know, this is -- it's keeping us busy.

Great. Thank you.

Thank you.

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

Great, thank you. I guess going back to DC, here. Looking at the 10-Q and the updated outlook for 2013 versus 2012. Is it safe to assume that you guys are thinking that 3Q 2013 is now bottom for DC, and it goes up from here, or is there a better way to think about it?And then also have you changed at all your investment expectations of the dollars you expect to work in that market?

Mitchell?

The answer with respect to the market price is that I think that yes, we think that the third quarter will, in fact, be the -- will be the trough, and then we do expect to see positive movement, and some of the positive movement that you will see in terms of EBITDA is really already in place, and it is recycling from where we were at a point a year ago. So it is not really speculative, at all. So, we will see the EBITDA grow based on contracts, and we expect to see the occupancies grow as we continue to lease up.

We are going to be leasing up now at a greater rate, because we have really seen the preponderance of all of the vacancies from BRAC, etc., come mostly upon us, so I think we will now sort of generally lease upward from that point. In terms of investment activity, I think that we are committed to our long-term program. We think we have got some great redevelopment opportunities and some great locations, whether it is on the office or the residential side and at the right time we will continue that program and put those projects forward.

Jamie, it's Steve. I will jump in on that, as well. From my point of view, and this is from headquarters point of view as opposed to in the field, so you can take it for what it is worth. We are clearly bouncing along the bottom in Washington and in our Washington business. The issue really is what is the duration to get back to stabilized occupancy and get the lost income back. Also, from my point of view, it is going slower than I would have hoped, as I said in my prepared remarks. It won't be a year, but I don't think it will be three years either so there you have it.

With respect to capital allocation, it is interesting. We have an open to buy in Washington if we could find something that was a bargain, okay. In addition to our development pipeline, which is extremely robust, as Mitchell said, we are starting a 700 unit apartment project now, in addition to all of the development that we are doing in Washington, and repositioning of our existing assets we do have an open to buy new assets if we can find something that was -- I don't want to say it crudely, if we find something where we had fair value, sort of cheap. Okay?

Notwithstanding the fact that the leasing market in Washington is slower than we would like, we really have had trouble finding investment opportunities down there. Said another way, for low lease buildings in Washington, the investment demand is still extremely robust. Joe, you were going to add something?

Yeah, I --Jamie, I wanted to put some math on that. If you would take the EBITDA from 2012 third and fourth quarters, that would total $169.5 million for the Washington segment. If you would take this quarter that we just finished, Q2 of 2013, that is $84.8 million of EBITDA. As long as it doesn't go down, the remaining two quarters would be at a running rate of $169.6 million, equivalent to last year's two quarters. Needless to say, because we projected between $10 million and $15 million, we expect this year's numbers to go up a little bit but not a whole lot from the running rate we now have.

Great. That's very helpful. And I guess as you are thinking about 2014 and the leases signed, do you have a sense of what the baked in number for EBITDA already?

The question is based upon our existing pipeline of completed leases, what is the EBITDA in 2014 going to be? You are not going to project that.

No, not yet.

Okay. All right, thank.

Thank you. Thank you, Jamie.

Our next question from Alexander Goldfarb with Sandler O'Neill.

Good morning. Two project specific questions for you. The first is down at Independence Plaza, just sort of curious given the long-term upside potential in that asset, just sort of curious why you sold down a bit of your position?

That was a commitment that we had made when we bought into it, originally.

Is there any more commitment to sell any more down, or is that the -- this was the --

No, no, no, no. We are very happy.

Okay. Second question --

We are very happy with that investment, but you that was a commitment that we had made that was a commitment. And we --

Okay. That sounds fine. My second question is switching to Alexander's, just a little more color on the apartment tower, you know, quick you know sort of your expected rents?In our numbers it looked like you may need $2,800 a unit to get sort of a 6% return, which seems a little high end for that market. But just a bit more color, what your thoughts are of where rents are for that property and sort of who the target is?

I think your numbers are pretty close. We are projecting a slightly sub $40 gross rent which would yield a return on cost of, approximately, something slightly more than 6%, which is pretty good in the apartment business.

And you think that market will support that?

We do.

Okay. Thank you.

Thanks, Alexander.

And your next question is a follow-up question from Michael Bilerman with Citi.

Michael? Josh?

Your line is now open. Perhaps, you've muted on your end.

Steve, it is Josh Attie. Can you hear me?

Hi, Josh.

Sorry about that. Could you talk about Puerto Rico? How much occupancy you expect to lose at that asset and when, and then also what the strategy is in the debt negotiations?

Well, it is a little awkward because it is in negotiation. Basically, the Montehiedra assets has deteriorated. It is a -- it's actually a well located asset and an attractive asset, but it is under the gun of a couple of competitors that are hurting it. And so the income has deteriorated to the point where we found it prudent to seek relief from the special services. Our strategy there is if we can't conclude a successful negotiation with the special servicer, and Wendy is -- had the perfect score on all over the years so far -- she's is not smiling at me; I'm putting her under the gun.

In any event, our strategy is to add capital to that asset and convert it to an outlet center. We have great experience doing that in the enormously successful Bergen Mall in Bergen County, New Jersey. And towards that end we have just concluded a deal with Nike for an outlet store in that center, which is the bell cow of the industry so that bodes well for our strategy. So we will add capital and redevelop and transform that asset into what we think will be very successful if we can reach a successful transaction with the special services. Notwithstanding all of that, this is not going to be a great, great home run, financially, either way.

Thanks. Just so that we can model the earnings properly, how much -- you mentioned an occupancy decline and tenants coming out. How much of an occupancy decline to you expect, and when should we expect that to happen?

I need somebody else to help me out with that.

We have to get back to you Josh, we will.

Okay. Thank you.

Our next question comes from Vance Edleman with Morgan Stanley.

Hi. Thanks. Good morning. A question for Mitchell on Crystal City. The transition from government to private tenants, if you want to look at it that way, maybe just remind us of the current mix, and then where you would expect it to be in, say, a year's time?

Sure, I think if you just look back, historically, before we went through the last the re-leasing of the Patent in Trademark Office space, which was about 2 million square feet, and we were at about 85% government and government contractor, and about 15% other. One As a result of that re-leasing, the numbers shifted to two-thirds/one-third, so two thirds government, government contractor and one third other. So, I think that now, with government space coming available, we are probably expecting that mix will either stay at that number or slightly increase with more private sector users as, opposed to the government and government contractors.

Or said differently, I think we still believe that the government sees Crystal City as a good market. The contractors see it as a good market, not just defense contractors but contractors to other agencies, in terms of its great location. And then we are also seeing increase of other users, whether it is groups that are 501(c)(3) nonprofits. Whether it is some technology companies, et cetera, et cetera. I think there is a whole mix of private sector that we will expect to see re-lease the space that we have there, as well.

Okay. Makes sense. Thanks for that. Back on New York City office and focusing in on the high-end versus the lower end dynamic, both of which you want to target, do you see even more strength at the low end that you would expect to expand upwards, or are the trend across the range?

I think what we have seen is probably the greatest increases in pricing, in fact, is probably at the low -- in fact has been at the low end product. You know, we feel very good about the space we are going to be introducing to the market at 330 West 34th Street, as I talked about earlier. And I will just remind you that we are going to be undertaking a similar program at 7 West 34th Street, which we are converting from a building that has had mart tenants to an office building.

We are taking back much of that building, effective January 1, with the balance of the building coming back to office over the next two years. I think that space, which I consider to be relatively competitive space, probably is the space that is the most active in the marketplace for buildings that, as Steve characterized, have the infrastructure done in the buildings and can deliver absolutely modern space to tech media types of tenants.

Okay. Very helpful, thank you.

And as we both, David and I have both said, we are very constructive on the pricing of that kind of space and we have -- that is the sweet spot of our Company.

Great. Thanks.

And thank you. Our next question comes from Ross Nussbaum with UBS.

Hi, Ross.

Pardon me, Ross, perhaps your line is muted on your end. You may now ask your question. Your line is open.

Looks like we lost him, operator. Let's move on. I don't want to (inaudible).

He'll come back.

Sorry. Our next question comes from David Harris with Imperial Capital.

Hey. Good morning. Let me try and fill the (inaudible) void here. Steve, a question for you. If we think about like 12 months hence, do you think cap rates for your portfolio and the sort of properties that you would be interested this acquiring would be interested in acquiring would be the same or higher or lower than where we are today?

I think, David, I hope cap rates for our properties would be lower, but the cap for what we want to acquire are going to be higher?

Right. And in the real world, Steve?

Cap rates, traditionally, are extremely sluggish. People think that when interest rates move, that cap (inaudible) rates are going to move similarly, they do not. And sellers are very reluctant to deal with future -- to deal with the adversity of higher interest rates or what have you. So, I think that, and by the way, the market for acquisitions is very challenging if you are buyer, and very, very accommodating if you are seller. And acquisitions market for the best properties is being the buyers are underwriting and discounting fairly significant rent improvement and rent rises in the future.

So, I can't and I don't think it is appropriate for me to try to predict my stock price or my cap rate. We are not terribly optimistic that cap rates are going to rise and give us, in the short-term, a robust acquisitions market that we can feed on. I, for one, think that -- don't think that interest rates are going to run away here. I don't think that they are going to rise to 5% or the treasury is going to rise to 5%. I don't think the short rates are going to rise significantly for the next year or two.

And I think that, you know, we are benefiting from a worldwide synchronized -- I think I said it in my letter, central bankers are Santa Claus, and I think they are still in the Santa Claus mode. So, I don't particularly forecast any significant trade change in cap rates over, I think, a year as a time arises.

Mike DeMarco just recently left. Are you filling the void or does it, in any way, represent an interruption to your sales activities?

No, the opposite. Mike is a good guy. He was with us for a short number of years. His most recent assignment was to handle the sale process of the -- most of the merchandise mart assets, and as well, he was the team captain on selling the two big balls that we sold at the end of last year and the beginning of this year, albeit that was such a significant transaction the entire senior team, including me and Mike and everybody, you know, we were really involved in that. Mike completed his task and then it was time for him to move on. We have staff headed by our existing senior management team. Michael Franco, Wendy Silverstein, etc., plus all of our platform had to get into these things, so we have plenty of buyers and we have plenty of sellers. Mike is a good guy. I think he's got a good new position and his task with us was finished.

Okay. Thank you.

And our next question comes from Vincent Chao with Deutsche Bank.

Hi, my question has been answered. Thanks.

Thank you.

Our next question comes from Michael Knott with Green Street Advisers.

Hi, Michael. Welcome back.

Hi, thank you. Steve, I think earlier in the call you made a comment in your prepared remarks about some harvesting that was on the horizon. Is there any more color on that or was that part of the $500 million of sales you have out in the market or was that referring to something else?

No. That was referring to a couple of other situations, which are large and important and David -- we're going to go back to David's remarkable word, which we are not -- we just can't preannounce. We are hopeful that we will conclude these deals shortly, but we can't really speculate about them.

Okay. That sounds interesting, thanks.

Fun. But when we do they will be turn.

All right. Well, we'll look forward to that. Just one other question if I could. Curious on the decision to extend redevelopment capital on 300 West 34th, and curious if it is an offensive decision, because Penn Station -- Penn Plaza is doing so well, or whether it as defensive move ahead of Hudson Yards coming online in the next several years and presenting additional competition for the West?

David, do you want to do that?

We look at it as an offensive situation. It's a building that has been the headquarters for a city government agency for upwards now of twenty plus years. The city finally took this agency. We have been trying to get the agency out of the building, in fact, over the last decade. The agency is now finally moving to Brooklyn. We saw this as an opportunity to basically take this asset and regressively and proactively attract the kind of tenants that we think are attracted today to Penn Plaza. As I said, the migrating tenants, which really are the tech and media tenants. We are excited about this opportunity.

You mentioned Hudson Yards, so let me jump on that for a second. Actually, what is going on at Hudson Yards, as you know, we are friendly with the developer. We are partners with the developer, and we know their team very well as they know ours. The Hudson Yards situation is an enormous plus for our Company. The activity that Hudson yard has created as -- what they are doing is they are basically in front of every large tenant in the city of New York, in an attempt to move them to Hudson Yards, and their new build and so that activity has created a shift in market perception as to the west side of Manhattan, which as we said many times, before the city government and the planning community of New York has focused that as the next growth area.

Pardon me, as the next growth area. Since Penn Plaza is basically the same location as Hudson Yards, except they are on the river, outboard, son of the Canary Wharf kind of a thing. And we are in board on top of Penn Station, and adjacent to the, you know, the enormous and most important department store in America, Macy's et cetera, so we benefit enormously from the activity that is being created around Hudson Yards.

And we are rooting mightily for its success. Next point is their price point, right now, is $30 above our price point. Okay? That gives us a huge umbrella under which to operate, and we are experiencing their price point is sucking our price point up, which is very good. The next part of it is they are catering to the 300,000, 500,000, 700,000-foot customers. We do not. We cater to the 50,000 foot and 100,000 customers. So all things about Hudson Yards, we think, accrues to our benefit. And as I said we rooting for them enormously.

Thanks.

And the 330 West 34th Street is just another bow -- arrow in our quiver of supplying product into a growing and dynamic tech media and general marketplace.

Is there going to be additional projects like that in the rest of the Penn Plaza concentration, or is that sort of a unique situation?

The answer is that internally in our planning sessions, we aspired to add capital to Penn Plaza, because we think that may very well be the single most important place and the single most profitable place that we can invest capital to drive that marketplace where we are the dominant owner and to drive rents in that marketplace and to deliver better product to our customers. So, the answer to that is yes. We are excited about the prospects of improving and adding capital to that district.

Our next question comes from Michael Bilerman with Citi. Oh, I'm so sorry. Our next question comes from Ross Nussbaum with UBS.

Hi, I'm back.

Hi, Ross.

Thanks guys. Steve, hopefully I didn't miss this. Is there any thought of putting the San Francisco assets on the market given that -- I guess, is it a core market still for you guys given your limited exposure there?

We have no -- we've said this publicly before. We have in current intention to expand in San Francisco, and so I think that answers the second question. And the third question is, you know, it's a great -- I mean it's -- to answer your other question it is a grand asset. It stands majestically in the skyline. We know there has been some movement in the tech, as in New York, by the way, the tech marketplace is moving away, but you the Bank of America building is still the Bank of America building. And while I'm not going to say it is for sale; I'm not the going to say it is not for sale.

Okay. I know that Mike DeMarco left you a little earlier this year to go over to Cantor Fitzgerald. How have you shuffled up his prior responsibilities in light of, I guess, Fascitelli's departure, as well. How have things sort of reshuffled in the executive ranks because of it, because of the -- DeMarco left.

I think, as I said before, we have Michael Franco and Wendy Silverstein, the co-heads of Acquisition and Capital Market Group, are responsible, as they were, by the way, when Mike was here, for the sales process. And by the way, the sales of important assets around here gets everybody involved, including David, if it's a David asset, Mitchell, the resale people. Everybody gets involved, the financial people. Everybody gets (inaudible) everybody gets involved in important sales.

All right. If I could sneak in a quickie here. On Toys "R" Us --

What I'm saying is we don't want for management talent around here. I think that -- you know, I don't want to boast about it, but I think we have the best senior management team in the business.

Appreciate it. On Toys, given how strong the environment has been of late for demand for big boxes, and there is clearly a lack of is supply in that business today, have you guys rethought whether it makes sense that some of those Toy stores are worth more dead than alive? Is that a conversation that is getting revisited?

The answer to that is, yes, but it is a much more complex question than that. How you extricate those boxes? The first question is how you do you extricate those box boxes and still maintain a viable toy business. The second is how do you extricate those boxes -- the first question is how do you extricate those boxes and still maintain a viable toy store, the second is how do you extricate them from the capital structure, et cetera. I assume that you are talking about is sale leasebacks as opposed to just closing the stores around selling them out, because that is not in our thinking right now. But the answer is --

Right. I mean finding a way to monetize it in terms of real estate.

The answer is we think about that all the time.

Anything imminent in your mind or it's sort of an ongoing thought?

The -- it is an ongoing thought, which we don't have anything to say about right now.

Thanks, Steve.

And our next question comes from Michael Bilerman with Citi.

Yards Great. Just want to come back to Penn Plaza and sort of -- Steve your comments on Hudson Yards. Putting the hotel redevelopment, Hotel Penn redevelopment, aside, have you brushed off any sort of your plans to build new in that market given, A, your competitive position next to transit versus (inaudible) is trying to do at Hudson Yards, and what Brookfield is trying to do 9th Avenue?

I think we have -- how many -- what is the footage that we own there, now?

About 8,000,000 feet.

, And we've already decided We have more than 8 million, somewhere between 8 million feet and 9 million feet, extant, at a basis, which would knock your socks off, okay. Our primary focus is to create value and increase the value and increase the income et cetera, in the existing product. The new builds, we've decided -- we've already announced that we've already decided that it doesn't make any economic sense, currently, to take down the hotel Pennsylvania and build an office building.

We have, from time to time, including, you know, recently considered taking out the hotel and put apartments, which is really the highest and best use for every square inch of new development in Manhattan anywhere. Our primary focus is on our existing buildings and we are -- we have no imminent announcement of a new build in the Penn Plaza District.

The $3.4 million of acquisition related costs, how much of that is 650 Madison versus other transactions?

Michael, after all of the fees related to underwriting buildings, 650 will be part of it, absolutely, but there are others.

But those are dead deal costs.

Not dead deal costs. They are deal costs.

They are deal costs. Okay.

All deal costs get expense [net]. (Inaudible)

Okay. You all do capitalize it, anymore.

No more capitalizing.

Can you be more specific as to what that $3.4 million is?

No. I have to get back. Michael, if you want more detail, I'll have to get back to you.

No, just it seems like just given your comments about the acquisition market and pricing being a seller, I guess $3.4 million seemed like a big number. And I recognize the cap structure. I mean that's in the 650 Madison; it's still moving around, but $12.4 million is not a lot of capital. $3.4 million, relative to that seems like a lot, so I'm just trying to put things together and really understand the Company's sort of what you are really doing on the acquisition front and how active you want to be and where you are spending the money.

The fact is that 650 Madison would be a minor part of the $3.5 million or $3.4 million, number one. Number two is we look at everything as we have to, as you would expect us to. The answer is we are going to get the detail of that number and get back to you.

Okay. Thank you very much.

Okay. Thank you.

And we have time for two more questions. We will have questions from John Guinee and Alexander Goldfarb. Our first question comes from John Guinee with Stifel Nicolaus.

One follow-up here. Your comment on Hudson Yards is very, very interesting. Talk about your current thoughts on lower Manhattan, because thereisn't enough demand for both Hudson Yards and lower Manhattan, I don't think, but tell me if we are wrong on that?

David, do you want to take a shot at that.

I guess the general comment I would make first is that as you at the stock of New York, the 400 million square feet, you know, we are effectively at the same size we were in this city some 20 years ago compared to any other market around the country, John. Yes. We are going to have new builds downtown. Looks like Larry is, in fact, going to start one more building. I guess that was announced when he announced his deal with Group M, which could add another two million square feet downtown. But I think overall the factor you have to take count of is, yes, the buildings downtown do have tax subsidies. Steve Ross and the guys at Hudson Yards, basically, what they are doing is seeking tenants and they will only build the building when they have substantial pre-leasing.

I think the market will be able to absorb both, but David's point is that neither developer, whether it is the Hudson Yards, or the World Trade Center site, are going to build without tenants and financing. So, I mean you know but look the other thing is I think we tried to emphasize this on this call our sweet spot is not the tenant that is susceptible to go to move into a 700,000-foot new build at either Hudson Yards or World Trade Center. We are in a different business, and we are intending to be a different business. And so we don't -- the buildings will come, obviously. When a 600,000-foot tenant is sucked out of the existing Time-Warner Center, or whatever, it has some effect on the marketplace. We don't think it is going to be a deep and troubling effect.

Great. Thank you.

That And by the way, what I did say was we are rooting for the Hudson Yards, because that is in our neighborhood and that will have a -- as the 5 million square feet or 6 million square feet or seven million square feet of office buildings they are going to build over there over the next five or ten years fill up, the overflow and the activity that it creates in our neighborhood, two blocks away, will be enormous. I love Larry, but I'm rooting for Larry Silverstein a little less than I am rooting for Steve. That is going to get into the newspaper. Next.

Our last question comes from Alexander Goldfarb with Sandler O'Neill.

Thank you. Steve you sort of answered my original question on the tax subsidies as far as competition for Penn Plaza, but sort of bigger picture. If the tax incentives that the far West Side and Downtown have received allow them to build new build for charging $70 type rents, does that mean that developers going forward are always going to demand for new construction like with the Midtown zoning around Grand Central that new developers anywhere get tax incentives as has the city sort of opened that Pandora's Box, or do you think the city will be able to get back to tenants willing to pay the $100 for non subsidized development?

The city has a history of being extremely difficult in terms of giving one off tax subsidy for this tenant or that tenant. And in fact, over the last ten or 15 years, the city has seen tenants bluff, and then tenants even move and still not yielded. So, these two developments, the World Trade Center and the Hudson Yards project, are both I believe unique large important political imperatives to get the city to have a stock of new and growing product.

Similarly, what is happening around Grand Central is sort of similar. In fact, you know, we were involved in sponsoring that, when in my letter three or four years ago, I wrote that this was the idea that Park Avenue was, we thought -- we think, we New Yorker's think Park Avenue is the principal business thoroughfare in the world, but it is getting old and tired. So, the long and the short of it is I don't think at this portends that there will be new buildings going up all over the place with tax deals.

In fact, I think the opposite. I think the city will continue its policy of focusing the tax incentives in the particular the outlying areas. And both of those areas are outlying. I would find it difficult for us to go in and say we want to build a new building on 6th Avenue and get a tax deal.

Okay. Thank you.

And that was our final question. I will now turn the call over to Steven Roth for closing remarks.

Thank you all very much. We enjoyed your questions. And they are important, they make us think. We had a great quarter. We are proud of our financial results. We -- some of the questions indicate the Company still is too complex and our strategy of simplifying and focusing the Company continues the pace. We are happy for your attendance and we will look for you three months from now. We had a great quarter and our strategy of simplifying and focusing the Company continues apace. So, we are happy for your attendance. We look for you three months from now. We had a great quarter, and our simplification and focus program continues aggressively. Thanks very much.

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