Alexander's Inc (ALX) 2016 Q2 法說會逐字稿

Good morning and welcome to the Vornado Realty Trust second-quarter 2016 earnings call. My name is Brandon and I will be your operator for today. This call is being recorded for replay purposes. All lines are in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question-and-answer session. (Operator Instructions).

I will now turn the call over to Miss Cathy Creswell, Director of Investor Relations. Please go ahead.

Thank you. Welcome to Vornado Realty Trust's second-quarter earnings call.

Yesterday afternoon, we issued our second-quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents as well as our supplemental financial information package are available on our website, www.vno.com, under the Investor Relations section.

In today's 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 supplements.

Please be aware that statements made during this call may be deemed forward-looking statements and actual results may differ materially from these statements due to a variety of risks, uncertainties and other factors. Please refer to our filings with the Securities and Exchange Commission, including our Form 10-K, for more information regarding these risks and uncertainties.

The call may include time sensitive information that may be accurate only as of today's date. The Company does not undertake a duty to update any forward-looking statements.

On the call today for 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, President of the Washington DC division, and Stephen Theriot, Chief Financial Officer. Also in the room are Michael Franco, Executive Vice President and Chief Investment Officer, and Joseph Macnow, Executive Vice President and Chief Administrative Officer.

I will now turn the call over to Steven Roth.

Thank you Cathy. Good morning everyone. Welcome to Vornado's second-quarter call.

Our New York business had a very strong second quarter. Business continues to be good, very good actually, except for the hotel business which continues to head south, our hotel Pennsylvania included, suffering from gross oversupply and a little Airbnb.

We continue to participate in the bidding process for [Foley] and Penn Station. Our vast holdings in the Penn Plaza district at the very center of the new West Side are the next big thing, actually really big thing, for our Company.

We continue down the path of separating the Washington business. Development in progress in New York continues on pace. Our 220 Central Park South residential tower is selling well and is now up to the 57th floor and rising at the rate of one floor every four days. Our 60,000 square foot Victoria's Secret flagship on Fifth Avenue is building towards a November opening. Construction of 61 Ninth Avenue, which will be the new home of a 20,000 square foot Starbucks roastery, is in the foundation phase. Our Highline project at 512 W. 22nd Street is also underway, and at 606 Broadway construction has begun. In Washington at Pentagon City, the Whole Foods and the 699 unit Bartlett have opened, achieving an extraordinary 45% lease up in just the first two months, way ahead of our underwriting.

Down the block in Crystal City, WeWork, WeLive has also opened, achieving 80% occupancy of the two-thirds of the units that are open. The success of Bartlett validates our plan to emphasize residential new builds on our nearby vacant land inventory and on select sites created by teardowns of older office buildings in Crystal City.

Over time, we will develop over 2,600 additional units in Pentagon City, and over 3,000 units in Crystal City. We will put into production 577 units adjacent to the Bartlett immediately. So in Crystal City, Pentagon City, our business plan is residential-heavy and newbuild-heavy, all while we continue to grow our office income.

A word about the financing and transaction markets. After a period of volatility in the first quarter, the financing markets have settled down. We are in a borrower's market for strong sponsors like us.

The one category that has gotten tougher, however, is the construction loan market where availability has become limited and pricing has gapped out. Sponsorship is essential here. This is curtailing the supply of new condos, new hotels and speculative development in New York, which is good for us, and may even create opportunities for us.

In the transactions market, after a record-breaking year in 2015, volumes are down roughly 25% year-over-year. This is driven by a variety of factors -- volatility in the first quarter, shortage of high-quality product, high prices all around, and concern over fundamentals.

Pricing remains strong for high-quality office retail and multifamily product though bidding pools have somewhat thinned. Capital continues to aggressively pursue New York which is viewed as the safest, most vibrant and liquid market in the US and perhaps the world. We expect this to continue and believe this trend is only in the early innings. We also think Brexit will likely push additional capital to New York.

A couple of comps are worth pointing out. 1250 Broadway, a 721,000 square foot B office building at 32nd and Broadway a couple of blocks from our Penn Plaza holdings, went under contract to a private foreign family for $565 million, $800 per square foot, a 2.3% going in cap rate and low 5% stabilized yield. This makes us feel very good about what we own nearby as our buildings are much better located and much higher quality.

As a retail comp, 155 Mercer Street, a retail condo in Soho occupied by Dolce & Gabbana, recently went under contract to a private investor group for $90 million, a 2.6% stabilized cap rate.

Finally, pricing in San Francisco continues to set records. 505 Howard Street, a 291,000 square foot new building near Transbay Center just went under contract for north of $1,200 per square foot. As the owner of the best building in San Francisco, 555 California Street, we certainly like this valuation mark.

In May we completed -- in May we completed a $300 million financing of 7 W. 34th Street, a 477,000 square foot Manhattan office building leased to Amazon, and subsequently sold a 47% ownership interest in the property to the Korea Post Sovereign Wealth Fund. The sale was based on a property value of approximately $561 million, or $1,176 per square foot. We receive net proceeds of $127 million from the sale and realized a net gain of $202.7 million, of which $159.5 million was recognized in the second quarter and $43.2 million has been deferred until the loan has been repaid. The tax gain was $90 million. We continue to manage and lease the property.

Now to leasing. Company-wide, in the second quarter, we leased 1.025 million square feet in 97 transactions. In New York, we leased 544,000 square feet of office space, including 259,000 square feet in Manhattan, and 285,000 square feet in Long Island City. The average starting rent in Manhattan was $81.67 with positive mark to markets of 18.2% GAAP and 11.1% cash. Starting rent for Long Island City was $40.10 with positive mark to markets of 34.8% GAAP and 31.4% cash.

In Washington we, leased 369,000 square feet. The mark to markets, excluding Skyline, were flattish at negative 1.5% GAAP and 3.0% cash.

Yesterday, we called for a redemption of our 6 7/8 Series J preferred shares in the principal amount of $246.6 million at a redemption price of par plus accrued. This will be funded out of cash balances and will result in an annual increase in FFO of $17 million or $0.08 per share.

With that, I will now turn it over to Steve Theriot to cover our financial results and financing activities.

Thank you Steve. Good morning everyone. Net income for the second quarter was $1.16 per share as compared to $0.87 per share for the second quarter of 2015. Adjusted FFO, which we formerly called comparable FFO, for the second quarter was $1.23 per share as compared to $1.26 per share for the second quarter of 2015.

As we previewed on last quarter's call, this year's second quarter has some accounting noise which masks the quarter's large comparable growth, so let me take you through the math. In our New York business, the quarter's results include $7.9 million of non-cash reduction of GAAP rent from the write-off of straight-line rent receivables triggered by our early termination of New York office leases, primarily J.Crew and Structure Tone at 770 Broadway, Rocket Fuel at 100 W. 33rd Street, and Capital One at 90 Park Avenue, which enabled us to sign new replacement leases for these spaces with mark to markets of over 20% GAAP and cash. While this non-cash write-off of straight-line rent receivable reduces our GAAP earnings in 2016, the new replacement leases are accretive from an economic perspective and will benefit future period earnings.

Further, when comparing this quarter's results to the prior-year second quarter, remember that the prior-year second quarter included $5.4 million of non-cash income from the acceleration of FAS 141 below-market leases related to our early termination of the Crate & Barrel lease at 650 Madison, again to clear out space for higher-paying tenants.

In addition, as David will explain shortly, the Hotel Pennsylvania's results were behind last year's comparable quarter by $5.1 million. The punchline is that these items negatively affect the quarterly comparison of growth of our New York core earnings by $18.4 million, or $0.09 per share. Excluding these items, New York's earnings grew by $28.2 million, or 11.1%.

We reaffirm our guidance that adjusted EBITDA from our Washington business for the full year of 2016 will be $7 million to $11 million lower than 2015.

Let me comment on our FAD ratio, which exceeded 100% for the quarter and will continue to remain elevated for the balance of 2016 as capital outlays for tenant improvements and landlord's work related to the bulge of leasing activity we completed in the last two years is occurring ahead of the commencement of the $216.5 million of cash rental revenue from this leasing activity as described in our Form 8-K dated June 7, 2016.

Now, turning to capital markets, in the quarter, in addition to the $300 million financing of 7 W. 34th Street that Steve mentioned, we completed a $273 million refinancing of the Warner Building, a 621,000 square foot Washington DC office building in which we have a 55% ownership interest. The loan matures in June 2023, has a fixed rate of 3.65%, is interest only for the first two years and amortizes based on a 30-year schedule beginning in year three. The property was previously encumbered by a 6.26% $293 million mortgage.

Also in the quarter, at 280 Park Avenue, the 1.25 million square-foot Manhattan office building we owned in a joint venture, we completed a $900 million refinancing. The three-year loan with four one-year options is interest only at LIBOR plus 2%, 2.45% at June 30, 2016. The property was previously encumbered by a 6.35% $725 million mortgage.

We continue to negotiate with the special servicer of the $675 million mortgage on the Skyline properties in Bailey's Crossroads, Virginia. The lone is recourse only to these Skyline properties. In the second quarter, cash flow became insufficient to service the debt and we ceased making debt service payments. The loan is in default, causing the loan to be due and payable and subject to an incremental default rate of interest.

For the three and six months ended June 30, 2016, we accrued $2.7 million of default interest expense. Excluding Skyline, our remaining 2016 consolidated debt maturities are $593.6 million, consisting primarily of the $550 million, 5.57% Mart loan which matures in December. This loan is in the market for refinancing as we speak.

Our share of partially owned entities 2016 debt maturities is $75.6 million. Excluding Skyline and the financing of our 220 Central Park South project which will self-liquidate as signed contracts close, our consolidated debt metrics are fixed-rate debt accounted for 73% of debt with a weighted average rate of 4.1% and a weighted average term of 4.6 years, and floating-rate debt accounted for 27% of debt with a weighted average interest rate of 2.17% and a weighted average term of 5.2 years. Debt to enterprise value was 24%. Debt net of cash to EBITDA is 5.2 times. Including our share of partially owned entities debt other than Toys "R" Us, debt net of cash to EBITDA is 6.2 times.

In closing, Vornado has a fortress balance sheet with modest leverage and our maturities are well-staggered. We have $4.3 billion in liquidity comprised of $1.9 billion of cash, restricted cash and marketable securities, and $2.4 billion undrawn under our $2.5 billion revolving credit facilities.

I will now turn the call over to David Greenbaum.

Steve, thank you. I want to begin my remarks this morning by offering a few observations on the current market and what it means for Vornado. We have lived through an unusually volatile first half of this year, a China slowdown and a surprise Brexit vote. Despite the disruptive potential of these two events, the stock market has been resilient. While many of the headlines we have seen have described the real estate markets as "moving sideways", the reality of what we have been seeing on the ground is that pricing has held strong and activity has remained robust.

Leasing through the first six months of the year in the city totaled 19.5 million square feet, comparable to 10-year averages, although activity was largely driven by renewals. Importantly, sublease vacancy at 1.6% is the lowest it has been in eight years.

On prior calls, we have talked about the important diversification of the New York marketplace with the growth of the TAMI sector making the city less reliant on their traditional financial services sector. Interestingly, this year, we've seen tremendous demand from the education sector as well as the healthcare sector, which has taken traditional office space for medical offices and outpatient services.

Just recently, NYU Langone leased an entire building on East 41st Street. This building, which is less than 15 years old, had been occupied by a prominent law firm.

While not typically considered a large occupier of office space, over the last five years, some 8 million square feet has been released by the combined healthcare and education sectors, and we at Vornado have a significant share of those operations. With Columbia University doctors at 1290 Avenue of the Americas, NYU Langone at One Park Avenue, and Memorial Sloan-Kettering at 650 Madison Avenue, a total of 700,000 square feet of healthcare operations.

Ultimately, the key to our market is jobs, specifically office using jobs. For the first six months of the year, the city added 37,000 private sector jobs to an all-time high. At 5%, the city's unemployment rate is at the lowest level since April 2007.

Office sector jobs did reflect some weakness in May and June with a net loss of approximately 15,000 jobs, but these numbers may reflect noise attributable to the Verizon strike. Two months do not make a trend, and we will continue to monitor these numbers closely.

Our portfolio is in great shape and it is incredibly well positioned. On the office side, we have eight trophy buildings that command $100 plus rents. We have a growing concentration on Manhattan's West Side, including Penn Plaza and Chelsea, where tenants increasingly want to be. We have completed a string of major building redevelopments over the last three years totaling 6.5 million square feet, ensuring that our assets remain up-to-date and attractive to tenants across all market sectors.

And we now have significant additional growth opportunities associated with the redevelopment in our huge Penn Plaza portfolio. One Penn Plaza and Two Penn Plaza alone represent over 4 million square feet.

On the street retail side, our flagship portfolio is concentrated on the best high streets, Upper Fifth Avenue, the Bow Tie in Times Square, Madison Avenue, Soho and 34th Street.

Let me now turn to the quarter, beginning with our office portfolio. Our occupancy at the end of the second quarter ticked down slightly by 40 basis points to 96%. In a multitenant portfolio with over 1,000 tenants, we remain basically full.

During the second quarter, we completed 544,000 square feet of leasing activity in 28 transactions. About 50% of our leasing activity, some 259,000 square feet, was in Manhattan at starting rents of $81.67, representing mark to markets of 18.2% GAAP and 11.1% cash. This includes the 123,000 square-foot lease with the law firm of Alston & Bird at 90 Park Avenue, which joins PWC, FactSet and Foley & Lardner as the anchor tenants in this recently redeveloped asset.

The balance of our leasing activity this quarter, some 285,000 square feet, was attributable to the renewal of two leases with local governmental agencies at the Center Building in Long Island City. These leases, at starting rents north of $40 per square foot, reflect the rapidly changing Long Island City landscape, representing mark to markets of 34.8% GAAP and 31.4% cash. With these leases in place, the yield on our investment in this building is now 7% with significant additional upside still be realized upon the re-leasing of the balance of this 470,000 square-foot asset.

For the first six months of the year, we closed six of Crain's list of the top Manhattan office leases, a total of 775,000 square feet. PWC and Alston & Bird at 90 Park Avenue, Facebook and AOL Verizon at 770 Broadway, Bloomberg at 731 Lexington Avenue, and Level 3 Communications at 85 10th Avenue.

I spoke earlier of the quality of our New York portfolio. You continue to see that in our ability to make more than our fair share of deals of $100 plus per square foot. In the second quarter, we signed three such leases, a total of 34,500 square feet at average starting rents of $143 per foot. Year-to-date, we have signed nine triple digit leases for a total of 375,000 square feet.

In our retail portfolio, during the second quarter, we completed 55,000 square feet of leasing activity in 10 transactions with positive mark to markets of 21.3% GAAP and 11.5% cash. This includes a new home for the Four Seasons Restaurant at 280 Park Avenue, which we own in joint venture. After an extensive city-wide search, the Four Seasons selected 280 Park Avenue as the perfect location to reinvent this global icon after nearly six decades at the Seagram's building. The new restaurant when it opens in late 2017 will complement our recently completed $150 million redevelopment program, a clear sign of our success in repositioning 280 Park Avenue.

At 692 Broadway, AOL signed a 10,000 square-foot lease for a new experiential concept (technical difficulty) space for the Huffington Post Live Interview Series. And at 11 Penn Plaza, MSG Networks renewed some [60,000] of studio space on the ground floor and lower level. Our largest and best in class retail portfolio produced same-store results for the quarter of a positive 13.6% on a GAAP basis and 10.2% cash.

Let me now turn to theMART in Chicago. In June, we completed a $40 million renovation of the communal areas on both the ground and the second floors. It's a wow. Our introduction of a 50-foot wide grand stair spanning over 5,000 square feet, which also serves as a 200 plus seat amphitheater for meetings and special events, a shared lounge at the top of the stairs, an outdoor green space, and a giant food hall, all have received rave reviews from our tenants. And they complete the building's transition from showroom space to what Crain Chicago calls a top destination for technology tenants and the Chicago Tribune referred to as a magnet for companies seeking an urban Millennial talent pool. And we are not done yet. Reflecting the scale of this unique asset at 3.6 million square feet and its daily population of over 25,000, as well as a transit stop directly into the building, we are now exploring opening up a retail artisanal market featuring local specialty food offerings. I would encourage you to visit our website at VNO.com and click onto theMART to see the images of this transformation, or even better yet, ask Cathy Creswell to arrange a tour for you on your next visit to Chicago.

ConAgra and Allstate have now moved into the building with Beam Suntory to follow in the fall.

For the first six months of this year, we have achieved average starting rents in the building of $50.83 per square foot on 89,000 square feet of leasing activity. We are substantially full with occupancy at 97.8%, and we are continuing the transformation of this asset by converting at year-end an additional 80,000 square feet of tradeshow space on the eighth floor to additional office space. The March same-store numbers for the second quarter were a very strong positive 13% GAAP and 8.4% cash.

Turning now to San Francisco, in the second quarter, Bank of America expanded its presence in 555 California Street to house their West Coast executive office. And just last week, after the end of the quarter, we closed a renewal lease of 50,000 square feet across two floors with McKinsey & Company, the renowned consulting firm, which is one of our long-standing tenants. With average starting rents north of $90 per square foot, we believe these two tenants on top of the best tenant roster in town reaffirm the building's status as the premier office building in San Francisco. But we don't take that status for granted, and we have kicked off a redevelopment program and redesign of the concourse level amenities in the 1.8 million square foot 555 California complex. This will include upgrades to tenant amenity spaces, and of course multiple new food offerings. The occupancy in the complex now stands at 92.1%, reflecting the space that we recently got back when BofA vacated its original banking cube. We are now working on plans for an adaptive reuse for what we call the Cube and are in active dialogue with tenants seeking an iconic presence as part of the streetscape of San Francisco.

Overall, for the New York division, we had a very strong quarter with same-store increases of 6.9% GAAP (technical difficulty) [7.9%] cash. These same-store numbers include the results of the Hotel Pennsylvania where, as Steve mentioned, business has been very weak, reflecting the downcycle in the New York hotel business. If you exclude the Hotel Pennsylvania, our New York same-store numbers for the second quarter were a robust positive 9.2% GAAP and 8.5% cash.

To conclude my remarks, let me say we remain very constructive on the New York marketplace. With a highly diversified multitenant portfolio, lease expirations are quite modest for the balance of this year at 350,000 square feet and modest next year as we look out with 800,000 square feet of expiries with no one tenant representing more than 120,000 square feet. All of this reflects our aggressive leasing program where, over the last 2.5 years, we have leased 7.5 million square feet. And our pipeline of activity remains strong with over 1 million square feet of leases in active dialogue.

Thank you. I'll now turn the call over to Mitchell Schear to cover Washington.

Thank you David and good morning everybody. I'll begin with a few comments on the DC market.

The Washington DC metropolitan area economy is continuing its positive direction. Nearly 72,000 jobs were added in the 12 months ending April 2016. Importantly for our business, 24% of that growth is being driven by office using professional and business services, including tech-related and stem sectors.

Unemployment in the DC region has continued downward, is now at a very low 3.5% for the region as compared to 4.7% for the country. In the second quarter, both downtown DC and Northern Virginia absorption picked up with 370,000 square feet in northern Virginia and 526,000 square feet in DC. Year-to-date, the numbers are showing slow but steady absorption.

In residential, the DC metro area is experiencing modest positive absorption. Notwithstanding the positive economic backdrop, the real estate market continues to bounce along the bottom.

Let me review our second-quarter leasing and occupancy metrics, and please note all of these exclude Skyline properties. We completed 326,000 square feet of office and retail leases in 39 transactions. Mark to markets were flattish, negative 1.5% GAAP, and negative 3% cash. Overall occupancy was 91.3%, down 80 basis points from 92.1% in the first quarter. Office occupancy decreased 89.2% from 90.6% in the first quarter. The primary driver of the lower occupancy is two GSA tenants who vacated, both of which we expected. We are seeing activity from smaller tenants, 5,000 to 20,000 square feet. And finally, residential occupancy increased by 120 basis points to 98.2%.

In our Crystal City and Pentagon city residential business, it was a very active quarter. In June, we opened The Bartlett, our new 699 unit apartment building in Pentagon City. Located directly atop a new 40,000 square foot Whole Foods, this 23-storey building has unbeatable views of the Washington skyline, and the best residential amenity package in the Metropolitan DC area. When surveyed, 67% of our residents report that they selected The Bartlett due to our extensive amenity package consisting of 40,000 square feet of indoor and outdoor space validating our intense focus on the tenant experience.

The market response to The Bartlett thus far has been terrific. Our first renters moved in on June 2, and through yesterday, we had leased 314 units. That's 45% of the building already. With this velocity and rents that are higher than we projected, we are very pleased with our performance to date.

Meanwhile, in Crystal City, WeWork opened its first location in northern Virginia in our building at 2221 S. Clark Street. Here we transformed an older office building into a WeWork community that combines 216 community style apartments with their proven co-working office space. This collaborative living approach has attracted a whole new crowd to the streets of Crystal City and it's invigorating. The leasing activity has been strong with 80% of the units occupied that have opened to date. We are pleased to be WeWork's partner in this venture.

The Bartlett and WeLive bring our residential portfolio to over 3,300 units. Our properties are all metro served in Georgetown and close in Arlington. We like this business in these locations and plan to continue our expansion.

As Steve mentioned, in July, we received approval to develop the next phase of the Metropolitan Park block, a new 577 unit apartment project right next to the Bartlett. The building will feature contemporary style architecture coupled with Vornado's signature premium amenities and 10,000 square feet of additional retail. It will stand 22 stories tall, and like The Bartlett, will have commanding views of DC. We plan to start construction at the beginning of next year. Including this new project, we can build almost 5,600 additional apartments in Crystal City and Pentagon City on vacant land that we already own, and on a few sites created by a few select teardowns of aging office buildings.

In downtown DC, at the corner of 17th and M Streets, we are emptying the final tenants to make way for our new 335,000 square foot Trophy office building 1700 M Street. Our plan is to begin demolition within the next 90 days and build a new garage and foundation back to grade while actively marketing the building. With the garage and foundation complete, this will put us in an excellent position competitively to go vertical when the time is right.

I thank you and I will now turn the call over to the operator for Q&A.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Manny Korchman, Citi.

It's Michael Bilerman with Manny. Steve, in your opening remarks, you said you continue down a path of separation for the DC business. I'm wondering if you can just expand on that a little bit. How much of that is solely spinning off the business as is versus potentially exploring other structures in terms of sale, joint ventures, mergers? I guess is it spin or go, or is other things still being discussed?

Good morning. I don't think that I have very much more to say that I have said. We are continuing down the path. We have not been bashful and saying over the last number of quarters that we thought that this was a very good idea for both businesses. And we've said frequently publicly the reasons why we think that's true. All that continues, and we continue down that path.

With respect to the other part of your question about conversations that we might or might not be having with other people, etc., I don't think I have anything more to say about that.

And then my follow up is just in terms of balance sheet management. You called the preferreds or at least one of the series of preferreds. I guess what's your view on the remaining -- you still have another $1 billion of this stuff outstanding, call it around a 6% yield. Do you think about the return you're getting on almost $2 billion of cash pretty much nothing, versus the cost of debt today, whether it be 10-year, or even 30-year debt. I guess why not take out the whole stack of preferreds. And I can remember 15, 20 years ago you used to quip that preferreds had a maturity date of never. But it just seems like a pretty high cost to be paying for that money where there's alternatives today. So maybe just talk about the remaining preferreds and your thoughts on cap structure?

I like your memory with a due date of never. I remember that. By the way, that is still true.

I think your comments are valid. We have always, for as long as I've run this Company, which is decades, had a slug of $1 billion plus of preferred, which has a due date of never. And the reason for that was it creates stability, and is -- it creates -- it's better than debt and better than common stock.

Now, today, we are in a period where -- and by the way, the other thing about this perpetual preferred is that it's asymmetrical in its call arrangements, because the issuer can call after five years without penalty, which is we think an asymmetrical feature in our favor. So, we have called the first one. We will pay for it out of cash balances. That will increase our distributable earnings by $17 million, and we think that's fine. We have reviewed the balance of that preferred stack, and obviously we are thinking about our options. Our options are do-nothing, leave those various series in place, pay them off, which would then change the complexion of our liquidity a little bit, or maybe even more than a little bit, or refinance them at lower rates as perpetual preferred. My guess is that the current rate for Vornado's credit in that market is about 5.25%, maybe even a pinch below that. So those are the options. We are considering them, but we have nothing to say about that at the current time.

Thank you.

Jamie Feldman, Bank of America.

Thank you. Good morning. So you had commented also Penn Plaza and Moynihan Station being a big part of the Company's future. Can you just give us an update on where you stand today in terms of maybe the bid for Moynihan and just an update on plans and timing and spending?

Good morning Jamie. The answer is obviously the Penn Plaza district is, I've said this before, kind of is the big kahuna. We have vast holdings there. And interestingly, as the island of Manhattan tilts to the west and tilts to the south, we find ourselves in the bull's-eye of the new West Side of Manhattan with great opportunity. So if you just looked at our office buildings there, with the current in-place rent versus what the rents might be in the future, we have a very, very, very good economic situation.

With respect to the bidding process of Moynihan and Foley and Penn Station, this is a government procurement process which is being run very carefully by the government. We really cannot and do not have anything to say about that process other than we are an aggressive participant.

With respect to the timing of that, we can't predict it. And with respect to the capital that will be required to transform Penn Plaza, we are aggressively anxious to get underway as quickly as we can. We have the capital, we have the plans, and we have the property. Most importantly, we have the property. So I think that that pretty much covers it. Whatever happens in that district with respect to the bidding process, the district is transformed forever by the tilt toward the west side of Manhattan that's going on in the marketplace.

Okay. Thank you. And then a follow-up, just to follow up on -- you mentioned in 2017 there's no lease expiring more than I think 125,000 square feet. Can you maybe dovetail that with your latest NOI bridge? I think the $200 million of New York NOI, I assume that's moved a little since your NAREIT presentation based on leasing in the second quarter. Maybe just tell us where that stands and how to think about expirations for next year.

David, do you want to handle that one?

The NOI bridge, Jamie, which we talked about on our last call, realistically was attributable to the bulge of leasing activity that we had completed over the last couple of years, which I talked about, the 7.5 million square feet, including the activity realistically in the first quarter or the PWC lease as well as Alston & Bird. The Alston & Bird lease which we just signed was actually a 2018 expiration which we forward-leased.

So as I look out in terms of basically the call it 4% vacancy that we have in the portfolio and the relatively modest amount of expirations that we have coming up for the balance of this year and into next, we've got call it 1.1 million square feet, 1.2 million square feet, of lease expiries coming up over the next 18 months. We are in dialogue right now with probably about half of that space in terms of tenant renewals, and similarly in terms of vacant space or space that we expect to get back, for example we know, in the second half of this year, we are going to be getting back space from U.S. Customs, which is a tenant that moved into our building after the catastrophe of 9/11. It is moving back into World Trade Center downtown. We've got very good activity. So I don't think, Steve, unless we want to say anything specifically about the bridge, I don't think there's anything material to talk about in terms of that number.

Yes, sure. I would just add a couple of things. The huge what we call bulge of leasing, 7.5 million square feet, that we did over the last couple of years has accomplished several things. Number one, it basically ensured the income of the Company for years in the future.

Second, the leasing was done at higher rents, which ensures a really huge growth. I mean we mentioned that in an 8-K I think a couple of months ago, which is I think $216 million, something like that number. And so we ensured -- the bulge of leasing we accomplished over the last couple of years ensures the income and the rising income in the future of the Company for years to come.

Just to follow-up on the bridge that we did in at June 7 8-K and we used at the REIT week meetings, when we remeasured our forecast data as of the end of Q2, we were on track with the information that we had presented previously. And so it's moving according to what we would have expected, which isn't surprising given that it's all contractual.

Okay, thanks. That's very helpful.

Alexander Goldfarb, Sandler O'Neill.

Good morning, good morning there. Steve, just on the DC decision, one of the things you guys had outlined was that DC and New York have divergent capital needs and different return thresholds, and therefore it would be difficult for DC to get adequate funding relative to the potential of New York investment. So if the decision is made to not go forward with DC, and yet DC has a lot more resi, a lot more development in it, how do we reconcile that sort of concept that DC would need more capital, and yet the return seem to be better in New York?

Good morning. I sort of challenge your basic assumption. The capital that is going to be invested in DC will be invested for --a t fine profits and find returns. So, I'll give you an example. We are thrilled with this Bartlett. If you all haven't all seen it, you ought to make a trip down there and take a look. So it's the largest scale apartment building, the largest amenity package, and the most well-received I think done in the Washington district in years and years and years.

From a math point of view, we created that building at a give or take a [$7 million], and the value of that building, if you value the marketplace for a first-class apartment, at new, brand-new product, is X. If you divide those two numbers, there is a very satisfactory return on that capital. And by the way, we built that building free and clear. We didn't use any debt to build that building.

So the long and the short of it is, and I think I said in my prepared remarks that we want to get as many of those Bartlett buildings, we want to build the next one immediately, the one after that quickly, and more and more and more. So we think that's a very interesting business. And we are excited about it. So we have the ingredients to make that happen.

Most importantly, we have the very scarce, very important land holdings in and around Pentagon City, and in Crystal City. So, if you don't have the land, you are not going anywhere. The second thing is we have the capital to do this development. Third is the return expectations are actually terrific, very satisfactory. And we have the management team that has proven the ability to develop these assets. So we are extremely optimistic about development in and around Crystal City and Pentagon City. I don't think I was bashful in my opening remarks.

Now, I look at this all differently. If we do separate -- and by the way, we have sort of -- that's the path that we are going on. So if we do complete that, I have full intention of holding my shares in Vornado and holding my shares in Washington Co. or whatever you want to call it. So I look upon it as if it is just moving from one pocket to the other. It will be well-capitalized with enough capital -- I'm talking about Washington Co. or the spinco, to complete its development and complete its mission. And there you have it. I don't think it's an either/or. I think that our Company will do both. If we separate the businesses, the new business will be capitalized to complete its development mission for sure.

Okay, that's helpful, Steve. Then second question is just on a project-specific basis, 606 Broadway, $3,000 a foot for office-retail combo. Can you just give us a little bit more color as far as maybe rent expectations or what's driving -- there was land cost that was high -- but what's sort of driving it? Obviously, it's a desirable purchase for what you guys spent, but clearly it's not your typical office retail development.

That's true. First of all, we love the spot. We love the exposure. It's kind of like a Hollywood front. It's all front and very little depth. So, it's an extremely visible, it's an extremely visible asset and a very important part of Manhattan. So there's that. It's actually small, the knock on this deal is why internally when we talk about it, it's small, small for us. But nonetheless we thought that the asset was of such a quality that we wanted to take a shot, and we did. So it's expensive per square foot. We are optimistic that the rents will justify -- by the way, at the lower end of return thresholds, this is not going to be a [4%] banger. But we like the prominence of the asset. It's small, which is a negative. We think it will generate rents that will justify the high cost, but we just can't predict the rents now. It's too early. We are just getting started.

But you would think it would sort of be mid-single digits or higher than that?

It will be higher than mid, but certainly not double digits.

Thank you Steve.

Steve Sakwa, Evercore ISI.

Thanks. Good morning. You talked about some of the pricing comps, whether it be in New York or in San Francisco. And I'm just curious how you are sort of thinking about kind of acquisitions and dispositions at this point in the cycle and whether you want to husband more capital, make special dividends back to shareholders or just kind of stay pat as it is right now.

That's a huge omnibus question. Let me see if I can tackle it in pieces.

First off, we are very, very happy with where we are, where we stand right now. We worked very hard for the last three or four years to get here. So our debt is very low. When Steve Theriot went through some of the statistics, he just said casually our debt is 25%. Well, 25% is extraordinarily low. Our debt ratios are great. Our liquidity is superb, the best in the business. And so we are very pleased with that position. Having said that, evidenced by our calling a series of preferreds yesterday, that we think that it's not inappropriate to pay off high 6% securities with cash that's earning nil, which will augment and increase our earnings. It doesn't affect us from an NAV point of view, but it certainly increases our earnings.

In terms of acquisitions and dispositions, I've said over the last better part of a year and a half, maybe even longer, that pricing in the marketplace is high, that the easy money has been made, and that we look upon acquisitions with great care and scrutiny. And that continues to be the case.

There has been no decline in pricing for first quality assets that we seek. There has been some disruption in the hotel market. There hasn't been a hotel sold in Manhattan this year to date, and the reason is the hotel business, as we've discussed already, is very soft. Obviously the condo -- not obviously, but factually, the condo market is also soft, or not our condo of course, but other people's condos. That's sort of a joke. It's really not a joke. It's really factual.

And so we are not aggressively interested in buying at the prices that are currently -- that first-class properties are currently offered. And so I think that's where we are. Now, these markets, although they can change, we are ready for whatever happens. And I think there you have it, my friend.

Okay. And I don't know if you or David would care to do just a quick maybe recap on street retailers. There's obviously lots of concern kind of in the marketplace just over sort of the street retail business in general and kind where rents are and some of the softness that we are seeing kind of on the lower part of Fifth. But maybe in just a quick nutshell, can you kind of go around Manhattan and sort of tell us how things are today?

Sure. As I've said for way more than a year now, rents in Manhattan have gotten too high. So our job is to be realistic. We are not in the hope business; we are in the realistic business. And so we believe rents have gotten to the point where they are too high and retailers are not comfortable paying those rents. So that's one.

The second part of it is our retail portfolio is pretty full, very full actually. We completed the last two big deals in town, the Victoria's Secret huge mega-deal on Fifth Avenue, and the Swatch mega-deal on Upper Fifth as well. So we are very pleased with our positioning. The quality of our assets is the best in town by far.

Now let's go around the horn. The liquidity or the depth of the retail market has gotten very thin. So four years ago or five years ago, there might have been three or four or more retailers bidding for a particular prime space on a prime street. Right now, there's barely one or two. And they're difficult to close because people, retailers are concerned. Retailers are concerned about their own business models, and less concerned about expansion. So the market is slow. Retail rents or asking rents are too high. We are aware of that, and obviously we're in the business of being realistic and making deals. And I think the soft markets are where the volumes on the streets are not doing well. So Madison Avenue is soft. Lower Fifth is very soft. Upper Fifth is -- the volumes are fine, but the number of tenants that want to pay the rents are scarce. Times Square continues to be I believe the strongest, in my opinion, the strong us market in the city. Soho and Broadway are soft-ish. 34th Street is doing fine. So, I think that's going around the horn.

Great. Thanks.

John Guinee, Stifel.

Great, thank you very much. Two questions, one I guess for Mitchell. You mentioned something sort of interesting about tearing down Crystal City buildings. You've got 21 buildings there, about 7 million square feet. Which ones, or can you give us a general sense as to what would be torn down and why?

And then the next question is big picture. Steve and Steve, etc., you guys have done a fabulous job trying to help the Street understand future economics, a 7% return on The Bartlett, $216 million NOI bridge. I think foremost on a lot of people's minds is how they actually quantify what's going on at Penn Station. When would you be in a position to do that, and what magnitude are we talking about in terms of total dollars committed?

That's a mouthful. Mitchell, do you want to handle the teardowns at Crystal City for a second, and I'll counterpunch and we'll get into the rest of John's question.

Sure. Good morning. In Crystal City, there really -- if we just focus on two particular assets, we have a vacant asset on Crystal Drive with what we used to refer to as Mall Three, and we also have a building, Plaza Five, on 23rd Street. Those buildings aggregate about 0.5 million square feet. Those buildings are currently basically empty and ready for redevelopment. So, if you take those buildings and look at what we can build as a result of the Crystal City sector plan, we have almost 2 million square feet on that 500,000 plus square feet of what's built at the moment. And each of those sites could handle ultimately up to 1,000 apartment units. So I think we think it makes all good economic sense, it makes all good sense with respect to place making, and adding these apartments in terms of what the overall mix would be.

Great. Thank you.

Let me give you a little bit more on that same topic. So, what we are going to do is take the oldest buildings, so the oldest buildings are 40 years old, something like that, office buildings. And we have worked with the government powers that be so that in general we can take down an older building and rebuild a building which is 150% the size of that, or something like that.

So the financial analysis goes like this. Do you take this 40-year-old building or whatever, and throw a significant amount of capital into that building to let it with the understanding that that capital will have to be amortized over, pick a number, a 10-year lease, and at the end of that 10-year lease, that 40-year-old building is now 50 years old. So that's one column of numbers and concepts.

The second column is do you take it down, build a brand-new residential building, which will have -- which in today's environment has the lowest exiting cap rate or value rate, and that's just a matter of math. And we believe that the math shows that the teardown of the oldest buildings in favor of brand-new first-class residential product is a very, very profitable and good trade. In addition to that, when you get thousands of units in a tight cluster, you get a community, and that creates more value. And we know how to create that community and amenitize it and make it so that people will consider this a very, very fine place to live, thinking about where it is, where it's located to where jobs are, the metro access of it. And by the way, it is a very short walk to Pentagon City Mall, which is one of the top 10 malls in the country, and the Whole Foods, etc. So, we believe that there is a -- we believe in the future of Crystal City, Pentagon City and these assets. We believe in it greatly. Now, having said all that, I forgot the second question.

Just the magnitude of what you're doing at Penn Station is just stunning, 4 million square feet at One and Two Penn, probably tear down Hotel Pennsylvania, the skirt, all sorts of ancillary assets that you own there, Penn Station and everything else. Is this $2 billion or $20 billion in capital committed over how many years -- what sort of return on cost?

So listen. As excited as I am about what I just said about Pentagon City and Crystal City, I'm even more excited about Penn Station. So really when you think about it, you have to take it into bite-size pieces.

First is the change in the submarket and the reorientation of the market's preferences for geography in Manhattan. So we think we've got the bull's-eye. So, we've got $1 billion Macy's and Madison Square Garden and we sit on top of the station. We don't sit four blocks away and you have to walk to it in the rain. We sit on top of it. So the basic -- and by the way, the basis that we have in our buildings is -- go back in history when we started putting together the assemblage 15 years ago, our basis is pretty extraordinary. So you have all that as a backdrop.

Now, the way we look at it, let's take -- and spread it into bite-size pieces. So take One Penn and Two Penn, which together are 4 million plus square feet. The average rents are published. You know what they are. The first digit is a 5. And we believe that, notwithstanding anything else, we can transform those buildings in this marketplace so that the average starting rent will be higher. I don't want to get into math now, but higher than what they are now, maybe even quite substantially higher. So that's a capital program, and we are going to do that, and that's actually the number one priority of what we're about.

And then there's peripheral development. The retail opportunities are unique and extraordinary. And then we've got some big stuff like the Hotel Penn, which we have I think very intelligently delayed up until now, and so there you have it. What we do is we leg into the project piece by piece.

Now, with respect to the overall amount of capital that we will be committing to this district, it's 8 million, 9 million feet. It's huge. It's enormous. It all has very large paybacks. And the most important part of it is Vornado is a fortress financially and has the capital ability to finance all this.

So I'm not ready to put out any numbers. I'm only able right now to talk about the concept, and I can't tell you how excited we are about this opportunity, and we are pretty excited about Crystal City and Pentagon City too.

Great, thank you.

Jed Reagan, Green Street Advisors.

Can you talk a little bit more about the overall tempo of sales demand at 220 Central Park South? And I think you mentioned on the last call that you were negotiating two important deals. Is there any update on how those have progressed?

They've progressed to signature. So, 220 Central Park South is a very public project. The residential market, so everything that I say gets into the newspapers and whatever. So we don't really have a lot to say about 220 Central Park South other than, A, it's selling fabulously well. There's never been a project in New York that has sold as well. There was a slowdown in the marketplace for five or six months. That slowdown ended a couple of months ago. We are getting good traffic. The traffic that we are getting are extremely qualified buyers. The project is heavily skewed towards New Yorkers and Americans. And we couldn't be more delighted. The project is exceeding our expectations, both in terms of sales velocity and numerical performance.

Okay. That's helpful. Thanks. And on the residential development plans in Crystal City and Pentagon City, how are you guys thinking about the competitive supply picture in the area, and is there enough demand to absorb what you guys and others are doing?

Mitchell?

So, I think that if you look at what's happening with The Bartlett, we said that, in a very short period of time, we've leased 45% of the building. So, we think that a heavy amentized building, you give somebody a really efficient plus or minus 700 square-foot one-bedroom apartment and you give them a tremendous amount of amenities in the building, we think that's a real formula for success and there's real market demand for that. Having said that, in the Pentagon/Crystal City market, we really control a substantial amount of the development pipeline. There are some other projects, there are some other units, but not a significant amount over the pipeline period that we are thinking about. So we have the opportunity to both build the quality product, measure the demand, meet the demand and also modulate the supply as we see it. So, we are very comfortable with our position and with our program at this point.

I'm going to be a little bit more aggressive in answering. So, at 220 Central Park South, which you seem to be especially interested in, we have the best site, we have the best project, we have the best design, etc., but, as importantly, we bring a 2% cost of capital to that project. We are competing against people up and down the block, in fact all over the place, that are paying 12% and 15% for money. As you can imagine, it's not a fair fight.

In Crystal City and Pentagon City, my thinking is not dissimilar to that. We own great land parcels, and so I look upon that right now as being a sub-cost. We have the capital to build and develop. And this is different than office buildings. If you put up a 300,000, 400,000, 500,000 square foot spec office building and you catch a weak market, the building either stays vacant for year after year after year -- by the way there's dozens of examples of that in the Washington region -- or you have to take the price down to a number which locks in a huge loss. Residential development is different than that, and that is for a very marginal reduction in the monthly rate, you can get to -- you can rent and you can get absorption. So it's a totally different business.

Now, the other thing that's interesting is that, in the office side of life, you sign a long-term lease and you're locked into that price, good or bad, for a very long time. In the residential business, the rents fluctuate with the market and so, over time, you are able to get what the market thinks is the fair rent. So they are very different. We will be aggressive in building on the land that we already own there. That's our business plan.

Sure, okay. And then just last one, a housekeeping item. On the $200-plus million of cash revenue you've laid out for the next couple of years, do you have a breakout of that revenue between the current same-store pool and the non-same-store pool?

I don't.

It's substantially all same-store.

Okay. Thank you.

Which is another way of saying that we expect our same-store numbers on a cash basis to rise aggressively.

Thanks guys.

We have a couple more questions please.

Nick Yulico, UBS.

Thanks. I just had one question, just on the accounting for the 220 Central Park South project. So I know a year ago you reversed the valuation allowance on the deferred tax asset because you were confident in generating enough income from selling the project to realize a tax asset. So hypothetically let's say the world got tougher, sales pace slowed or what have you, how should we think about how much cushion is there so you wouldn't have to put the valuation allowance back on and create an expense against your FFO?

We are all looking at each other trying to --. We have NOLs in the taxable REIT subsidiary in which we are doing the development, which is what the reversal of the deferred valuation allowance relates to. But if you look at where pricing is today based on the contracts that are in place today, we think there's a very, very low risk that we will be reversing or putting back a valuation allowance on those deferred tax assets. It's very low risk.

Okay. That's all I had. Thanks guys.

Manny Korchman, Citi.

I had two quick follow-ups. One, Steve, you've talk about the street retail business being a global business. And I'm just curious. With Brexit, does that mean you take a look at London but potentially pick off some assets over there, or is that a nonstarter?

I go to London a couple of times a year.

I know that. Would you go shopping for Vornado though?

The answer is that we have no current plans to invest in London.

And then you made a comment in your opening remarks talking about construction loans and how -- the difficulty in that market and that it may present opportunities for Vornado. I was wondering if you can just sort of expand a little bit on what you would deem opportunities. Do you see yourself as a lender? Do you see yourselves as being able to pick up projects where someone can't get financing and sort of taking over the construction? And in that vein, I guess what property types would you be willing to do these activities? Is it condo, is it multi, is it retail, or just traditional office?

We have the full array of skill sets in here. We have a monster fortress balance sheet for capital. We have the best operating platform in the business. We have the best leasing teams in the business. We have the best construction and development teams in the business. So we have the full array of skills and strengths needed to function in good markets and in bad markets.

We run our business and have run it for decades so that we are strongest when the market gets the weakest, because that's the time when -- that's the best time to invest. Having said that, it's pretty obvious what our preferences are. Our preferences are to be an equity player as opposed to a lender. Our preferences are to be in the income producing property business as opposed to one the time for sale condo business. We are doing to 220 Central Park South now. The last one we did was a dozen years ago on top of the Bloomberg. So this is not a regular business for us.

So our preference is to be an owner rather than a lender. Our preference is to be an equity holder rather than a seller. The product types that we are expert in are obviously office and retail. So those are the two -- that's where our two main interests are.

We also have a residential portfolio in Manhattan which is performing quite well, and that is a business with the correct entry point that we would invest in although we don't have anywhere near the scale in that business that we have in office and in retail. So, having said that, we are open for business every day. And we have a history over the years of making some of our very best deals when there is some level of distress or disruption. In the lending market, people get over-leveraged, etc., so we are very alert and looking for that as we speak.

And maybe while I have you, just one quick last one. You've made massive strategy simplification of the Company and significant strides in terms of disclosure. Having these quarterly calls is a massive step in providing the Street with updates. I'm curious of thoughts in terms of potentially have evolved on providing earnings guidance. With the Company being much more simplified in terms of items, is that something that's on the table or you just will never sort of do this or guide the Street in terms of earnings?

I don't want to speculate on that. I read Warren Buffett's position. I read the very interesting Treatise on Governance that came out a couple of weeks ago by some industry leaders both -- on the investment side. There's two sides and three sides of that issue. And I don't want to get -- I don't want to comment on it because obviously we talk about it a little bit inside, not a lot, a little bit. But I really don't want to speculate as to whether we -- even what we think about it.

We are not unhappy with where we are. I appreciate your comment that we have made massive strides in simplification in disclosure, etc. And we agree with you, and I think I will just leave it at that.

I'm just thinking about -- you've had a couple o quarters now where the earnings have missed the Street and there's very good rational reasons to point those out. I just wonder if there was a little bit more specifics in terms of what was coming that everyone knew you wouldn't get an adverse market reaction to the results.

Yes, I can't tell you how -- I agree with you, we get ourselves into -- the last couple of quarters, we missed the Street, but we never told the Street anything, so the Street is missing itself. So that's the first thing.

I can tell you that I really am not nuts about the beat a penny raise a penny culture. And we try to avoid that. I understand what you are saying. We have thought about it, as I said, a little bit. I don't have anything more to say about it.

Okay. Good. Thanks.

We will now turn it back to Steven Roth for closing remarks.

Thank you everybody. We learn from these calls and we appreciate the dialogue, and we will be back on I guess next quarter, which is when?

November 1.

November 1. So we will see everybody before then I'm sure, but we will be back on the phone with you all November 1. Thank you.

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