Alexander's Inc (ALX) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Vornado Realty Trust Fourth Quarter 2017 Earnings Call. My name is Nicole, and I will be your operator for today's call. This call is being recorded for replay purposes. (Operator Instructions) I will now turn the call over to Ms. Cathy Creswell, Director of Investor Relations. Please go ahead.

Thank you. Welcome to Vornado Realty Trust's Fourth Quarter Earnings Call. Yesterday afternoon, we issued our fourth quarter earnings release and filed our annual report on Form 10-K with the Securities and Exchange Commission. These documents as well as the supplemental financial information package are available on our website, www.vno.com, under the Investor Relations section.

In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-K and financial supplement.

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

On the call today from our management for our opening comments are: Steven Roth, Chairman of the Board and Chief Executive Officer; David Greenbaum, President of the New York division; and Joseph Macnow, Executive Vice President, Chief Financial Officer and Chief Administrative Officer. Also in the room are Michael Franco, Executive Vice President and Chief Investment Officer; Mark Hudspeth, Executive Vice President and Head of Capital Markets; and Matt Iocco, Executive Vice President and Chief Accounting Officer.

I will now turn the call over to Steven Roth.

Thank you, Cathy. Good morning, everyone. Well, volatility seems to be back in a big way, taking stocks down meaningfully, especially in our space. I have been saying for the past couple of years that the easy money has been made for this cycle; asset prices are high; it's a better time to sell than it is to buy; and most importantly, now is the time in the cycle when the smart guys build cash.

We did build cash and we did sell assets and we did give birth to 2 new important and focused companies through spin-off -- through spins. We pushed away from acquisitions at top take prices, we have identified another $1 billion of assets to be sold and cash will further increase meaningfully from 220 Central Park South closings beginning in 2019. We are in great shape for whatever is to come, whether it be defense or opportunity.

Our office business is performing well, while Retail continues to be soft, and accordingly, we expect 2018 to be a flattish year.

Here are a few operational highlights for the fourth quarter. David will, of course, do a complete review in a moment.

We are full. New York Office occupancy was 97.1%, up 10 basis points from the third quarter. We are also full at theMART, and we are working on a lease at the Cube, which will bring us to full at 555 California Street in San Francisco.

New York Office starting rents were at near record, $76 per square foot for the fourth quarter. And they were a record $79 per square foot for the year.

New York Office mark-to-markets were 7.3% GAAP and 6.9% cash on 319,000 square feet of leasing for the quarter.

Cycles are a way of life, and right now, the market seems to be down on New York. I can tell you we don't see it. Demand for office space in New York continues to be robust, coming from all manner of users in all submarkets. The hottest submarkets in town run from Hudson Yards to Penn Plaza and extend south to Chelsea and Meatpacking. For those who say there is no rent growth in New York, I suggest you take a very close look at these submarkets. And Fifth Avenue will always be Fifth Avenue.

New York is the financial capital of the world and the media capital and the marketing and advertising capital and the legal and accounting capital, you get the message. And New York has the second-highest concentration of tech employees, only to Silicon Valley. As to new supply, we believe job growth will be sufficient to absorb it.

I would comment that Google's purchase of the 1.2 million square foot Chelsea Market announced last week, which brings their ownership to over 4 million square feet in New York, further validates New York as a talent center and further reinforces the importance of the West Side. All great companies must have a major presence in New York. And I can't help but mention that we own 2 buildings right across the street from Google.

Last week and to be recorded in our first quarter 2018 office leasing activity, we completed an important lease with Facebook at 770 Broadway for an additional 78,000 square feet, the entire third floor. That brings them to a total of 513,000 square feet in the building. What made this deal unique is that we bought back the floor from Kmart, who had 18 years remaining on their lease at $33.50 per square foot. This is the first deal we have done with Sears-Kmart and Kmart still has 82,000 square feet at 770 Broadway and 141,000 square feet at One Penn Plaza at the same low rents.

Now to recap. In the fourth quarter, retail occupancy was 96.9%, up 120 basis points from last quarter. Retail mark-to-markets were 66.6% GAAP and 54.6% cash on a total of 39,000 square feet of leasing.

With all due respect to GAAP accounting, assets are valued, bought and sold on cash numbers, and we run the business on cash numbers. Fourth quarter total cash NOI -- total cash basis NOI was $342.3 million, up 7.4% from the fourth quarter of 2016. New York segment cash basis same-store NOI was up 7.0%. theMART cash basis same-store NOI was up 13.7%. And 555 California Street cash basis same-store NOI was up 32.4%.

As Joe will discuss in a few minutes, we reaffirm the guidance I first provided in my April 2017 annual letter to shareholders that retail cash basis NOI will not go below $309 million.

As is our custom, we publish management's estimate of NAV once a year in the fourth quarter supplement. Please see Page 10. Adjusting for a $23 reduction from our July 2017 spin-off of Washington, our updated spot NAV is $96 per share, down from $112 per share a year ago. The primary reasons for this are: first, we are no longer capitalizing the incremental NOI from signed leases not yet commenced. This resulted in a $6 reduction. While the substantial amount of cash and GAAP incremental NOI from signed leases has not changed, we do not think it's appropriate to add the pluses without recognizing the minuses.

Second, a $5 reduction resulting from increasing the cap rate on street retail 50 basis points to 4.25% -- pardon me, from 3.75% from 4.25% -- to 4.25% from 3.75%, which we believe more accurately reflects current market conditions.

And third, a $5 reduction resulting primarily from recognizing and capitalizing a market management expense, adjusting 220 Central Park South value for dividends paid and marking to market Alexander's, Urban Edge and PREIT stock prices.

On January 17, 2018, we increased our quarterly dividend to $0.63 per share at an annual rate of $2.52, a 7.7% increase. Please note this is RemainCo's dividend adjusted for the Washington spin. In the last 2 years, we have raised our dividend 3x by 29%. Based on yesterday's closing price, the dividend yield is 3.7%.

Now turning to the investment sales market. Office investment sales activity slowed meaningfully in 2017. Bidding pools are thin, although average price per pound and average cap rate have held up well. Pricing for the few A assets that have come to market was strong and demand in pricing for assets South and West in Manhattan is very strong and record-setting, consistent with tenant demand. Overall, buyers remain disciplined given where we are in the cycle.

In the retail sector, there continues to be little sales activity due to the lack of quality product brought to market and investors' skittishness, and maybe those should be in reverse order.

Debt markets for New York remain solid -- remain as liquid and strong as we have seen, with all markets wide open. In the face of rising rates, spreads have continued to tighten, keeping all-in coupons attractive.

To sum it up, I'm very pleased with both our operating performance and our financial performance.

Before I turn it over to David, I want to clear something up. Two weeks ago, a couple of media outlets speculated incorrectly that I might be opposed to the Gateway tunnel project based on a two-cents e-mail that I had sent to Transportation Secretary Elaine Chao back in August. So I just want to state the following for the record.

Like everyone I know in the business in civic communities of New York and New Jersey, I believe that Gateway is far and away the most important infrastructure project in our region and one of the most critical for our nation. I am also confident that the federal government and both states' political leaders will devise an equitable core sharing agreement that gets this project built, which undoubtedly will involve substantial federal participation.

David.

Steve, thank you and good morning to all. I will begin, as I usually do, with my thoughts on the New York real estate market over the past 12 months.

2017 was a breakthrough year for the financial services sector. Employment grew by 13,000 jobs, the largest annual increase in over a decade. As a result, financial services employment ended the year at a level last seen back in 2000. Importantly, much of this growth took place prior to the passage of the recent tax bill and with deregulation still a work-in-progress, and we believe we are in the early innings of significant growth in the financial services sector employment.

Just look at the recent announcements. Bank of America leased the entirety of 1100 Avenue of the Americas and MasterCard took all of 150 Fifth Avenue. And there are now reports of JPMorgan Chase's potential expansion by 400,000 square feet at 390 Madison Avenue after committing earlier last year to 430,000 square feet at 5 Manhattan West.

Much of the growth in financial services employment is attributable not to traditional banking and insurance roles, but rather to so-called Fintech. This convergence of tech and nontech is why I do not put much stock in the reported decrease of 9,000 TAMI jobs in 2017. I noted last quarter that the state controller estimates that nearly 50% of technology jobs in New York City are found in traditional sectors, from retail to health care and from insurance to banking. We believe that tech remains strong and the reported decline in TAMI employment is offset in a significant way by tech jobs in traditional sectors.

Overall for the year, office-using employment grew by 20,000 jobs in 2017 and is now up by 173,000 jobs in the last 5 years. With these continuing strong employment numbers, our market experienced strong leasing velocity over the past 12 months. Total Manhattan office leasing reached almost 40 million square feet in 2017, the highest level in 15 years. The story of 2017 was also the importance of large leases with an all-time high of 22 deals greater than 250,000 square feet. In addition, there were 27 new relocation leases larger than 100,000 square feet, more than 40% of which were in the Penn Plaza West Side submarket.

Tenants, and in particular large tenants, continued to demonstrate a preference for new product and for high-quality redevelopment. Class A product captured more than 68% of the total leasing volume, the largest share since 1995.

With the continuing strong job growth, the market should be able to absorb the new office supply coming online, and that is particularly true where, as we as many observers believe, the trend toward densification is slowing as employers continue to invest in larger, amenatized shared spaces to foster collaboration and employee retention.

Overall, Manhattan vacancy at year-end 2017 was 8.9%, an improvement of 40 basis points over the prior year. While overall Manhattan asking rents generally were flat as the island of Manhattan continues to tilt to the south and to the west, we have seen significant rent growth in the new growing neighborhoods, with rents in West Chelsea now well above rents on Park Avenue.

With the backdrop of a robust market, let me now turn to Vornado's performance over the past year. In 2017, we leased nearly 1.9 million square feet of office space in 139 separate transactions across our New York Office portfolio. We achieved a high watermark average starting rent of $79 per square foot, with strong mark-to-markets of 12.8% GAAP and 9.9% cash.

Almost 30% of our 1.9 million square feet of 2017 leasing activity represented real growth by tenants in New York, both tenants expanding as well as tenants moving into the city for the first time. This included names such as Bertelsmann, HomeAdvisor IAC, Facebook, Google, Glencore, United Talent Agency, Guggenheim Partners and Cushman & Wakefield.

Financial services and FIRE tenants represented the largest share of our 2017 leasing activity, about 45% in total. Behind that number is an extraordinary diversity of companies and industries, from banks to hedge funds and from insurers to private equity investors, including Wells Fargo, Lone Star/Hudson Advisors, Fidelity, Morgan Stanley, Principal Global Investors and Whitebox Advisors.

TAMI tenants represented the second-largest share of our activity at about 27%, with tenants including EMC, automotiveMastermind and Google.

And just last week, as Steve mentioned, Facebook expanded yet again at 770 Broadway, this time leasing the entire 78,000 square foot third floor previously leased by Kmart.

We had another strong year in our trophy assets. Our team completed 17 deals in 7 of our buildings at or above $100 a foot more than any other owner. These 17 leases with an average starting rent of $117 per foot total 363,000 square feet, 20% of our total activity.

It's worth noting that whereas, market-wise, substantially all of the trophy leasing activity took place in new buildings. All of our transactions, other than 61 Ninth, were in our redeveloped assets: 90 Park, 280 Park, 350 Park, 650 Madison, 770 Broadway and at our headquarters at 888 Seventh Avenue.

We have proven our ability to reposition existing buildings to compete with the best in new construction. At One Penn, during 2017, we leased 340,000 square feet across 39 separate transactions, including a new headquarters leased with Siemens Mobility for 34,000 square feet. The average starting rent at One Penn was nearly $69 a foot, the highest average rent ever achieved. And that is before we kick off a major redevelopment later this year, with a new double-height glass lobby, upgrades to storefronts and public plazas, the addition of social and amenity spaces on the first and second floors, new destination dispatch elevators and a new entrance into Penn Station.

Our goal is to transform the building, which will now be rebranded as Penn One, as we have the rest of our fleet and to generate commensurate top-level rents.

We remain focused on the 4.2 million square foot One and Two Penn duo and the surrounding district. The public sector also is focused on the Penn Plaza neighborhood. As I mentioned last quarter, the district was front and center in the city's proposal to Amazon. And Governor Cuomo has reiterated his intention to transform Penn Station that sits at its heart. Our senior team continues to engage actively with our partners in government.

Let me now turn briefly to the fourth quarter, which as I stated in our last call, would be relatively quiet given that we had little large block vacancy and only modest rollover.

During the quarter, we executed 34 leases, totaling 319,000 square feet, with average starting rents of $76 a foot and positive mark-to-markets of 7.3% GAAP and 6.9% cash. Our year-end occupancy stood at 97.1%, up 80 basis points over the past year.

Same-store growth during the fourth quarter was a robust 4.6% on a GAAP basis and an excellent 8.9% cash. This caps the year in which our office same-store numbers for 2017 were up 3.7% GAAP, and an even better 11.5% cash.

Over the past 5 years, since the start of 2013, mark-to-markets in our office portfolio have averaged 17.9% GAAP and 12.8% cash. These are industry-leading levels and is our same-store performance over the same period. Since 2013, we have average same-store growth of 4.7% GAAP and 7.6% cash.

Our leasing team has been active in the first quarter of 2018, with more than 400,000 square feet of leases either signed year-to-date or in negotiation and an additional 900,000 square feet in the pipeline, including a sizable number of new and expansion deals.

Now let me spend a minute updating you about our development and redevelopment efforts, which will drive future leasing. At 61 Ninth Avenue in the red-hot Meatpacking District, last October, Starbucks commenced the build-out of the East Coast's first reserve roastery and tasting room, a giant 20,000-square foot experiential retail space.

In the second quarter of this year, we will deliver the remainder of the building, 145,000 square feet, to Aetna, which looks like it has changed its plan in the wake of its pending $68 billion merger with CVS. Our 13-year lease is a fully binding obligation, and it is our understanding that Aetna currently intends to sublease the space.

Also in the second quarter and just a few blocks north, we will complete another ground-up best-in-class boutique office building at 512 West 22nd Street, directly on the High Line. With the building nearing completion, tenant interest has increased dramatically. 512 West 22 is a building we have always expected will be a multi-tenant building. In fact, as we had expected, at 61 Ninth prior to Aetna coming along, where tenants will need to see the completed building to fully appreciate its unique spaces with outdoor terraces on each floor. Our full leasing effort will begin this spring.

In the third quarter, we will complete 606 Broadway in the heart of SoHo.

And next up for our growing roster of boutique properties will be 260 Eleventh Avenue, where we are on track to complete the landmarks process in the first half of this year so that we can begin the Richard Rogers design transformation of the historic Otis Elevator building.

To augment our redevelopment, just last week, we acquired 537 West 26th Street, the contiguous property to the east of 260 Eleventh Avenue, a grand historic building with large column free spaces and roofs peaking at 29 feet.

Last, but certainly not least, the redevelopment of the (inaudible) Farley Building is well underway as Skanska's construction of the new Moynihan Train Hall is on schedule. The existing skylights in the building have been demolished, with new skylights deal deliveries beginning this month. The future train hall construction is moving swiftly and the 850,000 square feet of office and retail space is not far behind, with delivery on track for the second half of 2020.

And remember, all of this development activity, plus our repositioning of One Penn, is taking place in the neighborhood that employers and employees prefer and where rents are growing the fastest.

Turning now to our retail portfolio, let me say a few words about the market. While e-commerce penetration continues to grow in New York, as in every city, in New York, we're the beneficiary of 62 million annual tourists. As they shop here, they are increasingly encountering successful brick-and-mortar outlets of leading online brands such as Amazon, Warby Parker and Bonobos. In the wake of these strong early experiments, this multichannel approach is likely to grow.

As tenants continue to test the market before making long-term commitments, short-term deals and pop-up opportunities are becoming more prevalent. In November, we launched the very successful SJP shoe store with Sarah Jessica Parker at our 640 Fifth Avenue on 52nd Street. With strong early performance before Christmas, we're working to refresh the store for another launch and another run of this store this spring.

In a challenging retail leasing environment, we continue to see a flight to the highest-quality submarkets of markets that we are in: Times Square, Upper Fifth Avenue.

In 2017, our retail team leased 126,000 square feet across 17 transactions, with strong mark-to-markets of 26.5% GAAP and 25.4% cash. This included leases with creditworthy tenants such as Amazon, Citibank, JPMorgan Chase, Fidelity Investments, Levi's and Sephora. Our retail occupancy ended the year at 96.9%.

1535 Broadway, in the very heart of Times Square, exemplifies the strength of our portfolio. If you watched the ball drop on New Year's Eve, you saw the dominating presence of our 4K LED screen, the world's largest. Retailers also have recognized the unique visibility of this block front, and later this year, we will welcome the new flagship stores from both Sephora and Levi's to this property, which is now fully leased with a top-notch roster that also includes T-Mobile and Swatch Group U.S.A.

Over on Fifth Avenue, at the end of last year, Dyson opened a spectacular new emporium at 640 Fifth Avenue. And at 731 Lexington in the former Le Cirque space, we will introduce the first U.S. restaurant of the award-winning Hutong from the U.K.-based Aqua Restaurant Group. That lease is 1 of 4 fourth quarter transactions totaling 39,000 square feet at mark-to-markets of 66.6% GAAP and 54.6% cash.

For the quarter, our retail same-store performance was flattish at a negative 1.4% GAAP and a positive 3.2% cash. For the year, retail same-store numbers were again a flattish negative 0.3% GAAP and a strong positive 11.3% cash.

I'm now going to turn to theMART. In 2017, at theMART, we signed 71 leases for a total of 345,000 square feet at an average starting rent of $47.60 with positive mark-to-markets of 26% GAAP and 16.6% cash.

Last quarter, I mentioned that we were in the process of taking back an additional 40,000 square feet of showroom space on the ninth floor to create more best-in-class office space. We've now signed an LOI for all of this space with an existing tenant at theMART and are now in lease documentation.

This summer, Publicis, a tenant on the fourth and fifth floors, will vacate its 132,000 square feet and when its lease expires in July. This represents an opportunity for us with the Publicis lease well below the current market for this iconic asset.

Our same-store growth at theMART for the fourth quarter was 7.1% GAAP and 13.7% cash, and for the full year, it was 4.2% GAAP and 7.6% cash.

Looking back over the last 5 years since 2013, our market-to-markets at theMART are 22.5% GAAP and 14.4% cash. And during that 5-year period of time, we've averaged a remarkable annual 8.8% on a same-store GAAP basis positive and a 9.1% cash. Staggering numbers.

In San Francisco, our 1.8 million square foot 3-building complex includes the iconic 555 California Street Tower, as well as the historic building at 315 Montgomery and the former Bank of America Banking Hall at 345 Montgomery.

Let me first spend a moment on what we've accomplished at 315 Montgomery Street, where BofA originally leased the entire 235,000 square-foot building at fully escalated rents of $43 a foot. We embarked on a lobby redesign to update the building and appeal to TAMI tenants. The redesign preserved the building's historic features, while installing modern elements, such as a glass-entry portal, exterior lighting programming and destination dispatch elevators with new cabs.

We completed the project in July of last year. Fast-forward today, with a lease we just signed last week, and a second lease that is out for signature, the entire building will have been fully released at an average starting rent of $63, an increase of nearly 50% on a cash basis.

Next up is 345 Montgomery, on one of San Francisco's most iconic corners, where we have secured government approval to kick off a redevelopment of what we call the Cube. SOM has designed creative office space with a large atrium that will offer a tenant a distinct branding opportunity in the center of San Francisco's Financial District. We have signed a letter of intent for a net lease of the entire 64,000 square-foot building.

The highlight of our fourth quarter in San Francisco was a 30,000-square foot expansion and renewal with Kirkland & Ellis, bringing their total tenancy to 150,000 square feet, while extending the lease to 2030. For the fourth quarter in San Francisco, our mark-to-markets were positive 26.7% GAAP and 11.5% cash.

For the year in San Francisco, we signed 10 office leases for a total of 285,000 square feet, at an average starting rent north of $88 per foot, at strong mark-to-markets of 24.2% GAAP and 11.1% cash.

In total, across all of our retail and office properties in New York, Chicago and San Francisco, for the year end 2017, we leased over 2.6 million square feet at a blended average starting rent of $86.90 across all asset classes and at positive mark-to-markets of 13% GAAP and 9.8% cash.

We remain proud of our industry-leading numbers, and as I have said before, these numbers are a credit both to the quality of our portfolio and to the hard work of our enormously talented professionals. Joe?

Thank you, David. Good morning, everyone. Fourth quarter total FFO was $0.80 per share compared to $4.20 in the prior year's fourth quarter. Please see our earnings release, Form 10-K or our financial supplement for details of the items that affect comparability.

Fourth quarter FFO as adjusted for comparability was $0.98 per share compared to $1.02 in the prior year's fourth quarter, a decline of $0.04 or $5.7 million, primarily due to the following: first, as previously disclosed in December of 2016, we received $192 million in repayment of our accreted mezzanine loan on 85 Tenth Avenue and also received a 49.9% equity interest in the property for $1. Fourth quarter FFO from our 49.9% equity interest was $6.4 million less than the FFO in 2016's fourth quarter from the mezzanine loan.

Second, a $5.8 million increase in interest expense, inclusive of our share of partially owned entities, comprised of $3.1 million from $356 million of higher average debt balances; $2.1 million from higher floating rate; $2.5 million of additional rent expense at 1535 Broadway, which is treated as interest on the capital lease accounting, partially offset by $900,000 of interest savings from a lower average rate on our fixed-rate debt.

Third, due to a change in New York State's tax TRS filing methodology, which permitted combined tax returns for the TRSs, that resulted in refunds of taxes previously expensed; and in 2016, therefore, reduced 2016's tax expense by $5.5 million, which, of course, did not reoccur in 2017. Partially offsetting this was $10.9 million of higher same-store net operating income as a result of strong performance, which I will discuss next, and $1.1 million increase in nonsame-store income, primarily from a straight-line write-off in 2016's fourth quarter.

New York's fourth quarter same-store NOI increased by $8.2 million or 2.8% on a GAAP basis and increased by $18.2 million or 7% on a cash basis. theMART and 555 California Street produced a weighted average same-store NOI increase of 8.1% on a GAAP basis and increased by 19.4% on a cash basis.

Now to our results for the full year.

FFO as adjusted for the year was $3.73 per share compared to $3.59 per share for 2016, an increase of $0.14 or a strong 3.9%. On a cash basis, 2017 FFO as adjusted was $3.39 per share compared to $3.6 per share for 2016, an increase of $0.33 or a very strong 10.8%.

New York's full year '17 same-store NOI increased by $29.5 million or 2.7% on a GAAP basis and increased by an extraordinary $108.2 million or 11.3% on a cash basis.

Our other segment produced a same store NOI increase of $5.1 million or 3.5% on a GAAP basis and increased by $19.1 million or 15.2% on a cash basis.

Now let me spend a minute focusing on 2018. We expect retail's 2018 cash NOI to be at the low end of the guidance that Steve mentioned, close to $309 million, due to the following: a $9 million reduction in rent from H&M at 435 Seventh Avenue, who we extended on a temporary basis; a $16 million reduction from other retail tenant expiries in 2018, none of which are in the Upper Fifth Avenue or Times Square properties, partially offset by $8 million of contractual rent step-ups and $7 million from new leases commencing in 2018 or full year in 2018 versus a partial year in 2017, including Dyson at 640 Fifth Avenue, which commenced in September of 2017 and the Starbucks Roastery at 61 Ninth Avenue, which will commence in June 2018.

For the purposes of what I've just given you, it's a worst-case scenario, and we don't assume any new leasings in the retail portfolio.

We are projecting 2018 interest expense, including our share of partially owned entities, to be approximately $16 million or $0.08 per share, higher than the 2017, primarily due to a $15 million increase from estimated higher average floating rate.

As a result of these items, we expect 2018 NOI, and therefore FFO, on a comparable basis, to be flattish.

Now to capital markets activity. We were very active in the fourth quarter. On October 17, we extended 1 of our 2 $1.25 billion unsecured revolving credit facilities from November '18 to January 2022, with 2 6-month extension options. This was oversubscribed and very well-executed. The interest rate on the extended facility was lowered from LIBOR plus 105 to LIBOR plus 100. The interest rate and facility fees are now the same as our other $1.25 billion revolving credit facility, which matures in February 2021 with 2 6-month extension options.

On December 27, 2017, we redeemed our $450 million 2.5% senior unsecured notes due 2019. We refinanced these notes with $450 million of 7-year, 3.5% senior unsecured notes to January 15, 2025. The notes were sold at 99.596% of their face amount to produce a yield of 3.565%. In connection therewith, we expensed $4.8 million of debt prepayment costs and unamortized deferred financing costs on the debt we retired, which is treated as a noncomparable item.

Also in December 2017, we've called for redemption our $200 million 6 5/8% Series G preferred share and our $270 million 6 5/8% Series I preferred shares, a total of $470 million. We funded these redemptions with a new issue of $319.5 million of 5.25% Series M perpetual preferred shares, with net proceeds of $309.6 million and supplemented that with $160 million of cash.

Since we called for the redemption of the Series G and I preferred shares in December, they were classified as a liability on our December 31, 2017, balance sheet as opposed to being included in shareholders' equity. Upon their redemption in January 2018, we expensed the $14.5 million of issuance cost, which will be included in our financial results for the first quarter ended March 31, 2018, and treated as a noncomparable item.

As of today, we have no 2018 consolidated debt maturities, and our share of partially owned entities 2018 maturities is [$422 million], the largest of which is $276 million at share for Independence Plaza, the 3-tower, 1,327-unit rental residential complex in Tribeca in which we own a 50.1% interest.

Excluding the financing on our 220 Central Park South project, which will self-liquidate as signed contracts close, our consolidated debt metrics are: fixed rate debt accounted for 78% of debt with a weighted average rate of 3.72% and a weighted average term of 4.3 years; and floating rate debt accounted for 22% of debt, with a weighted average interest rate of 3.21% and a weighted average term of 3.3 years.

Debt-to-enterprise value is 27.3% based on last night's closing stock price. Consolidated debt, net of cash to EBITDA is 5.8x. Including our share of partially owned entities net debt, excluding the nonrecourse debt of 666 Fifth Avenue and Toys "R" Us debt, net of cash to EBITDA, is 6.9x.

I would like to point out that in response to stakeholders' requests, our fourth quarter financial statements contain additional NOI disclosures, which are also in our financial supplement on Pages 16 through 18. As Steve mentioned, our supplement also contains our updated annual NAV on Pages 10 and 11.

One word on the NAV. Needless to say, 220 Central Park South is a component of that NAV. We have used $900 million for the estimated after-tax profit coming from that job. That has not changed. If you go to last year it's the same $900 million.

We update that based upon the transfer pricing portion of Vornado's regular dividend, cash dividend to shareholders, which is represented by fees and interest charged to 220 Central Park South. Last year, 12/31/16 in our NAV, that was $100 million. In this year's NAV, that's $250 million. The correct number for that should be $175 million this year. As we had in our press release when we announced dividend, there's approximately $0.36 of transfer pricing included in the 2017 dividend or $75 million.

The other $75 million increased our tax basis and was used to determine the after-tax gain that we started with of $900 million. On the website, we're going to correct that.

In closing, Vornado continues to maintain a fortress balance sheet with reasonable leverage, well-staggered debt maturity. We have $4.1 billion in liquidity, comprised of $1.06 billion of cash, restricted cash and marketable securities and our undrawn $2.5 billion revolving credit facility.

I'll now turn the call back to Steven.

Thank you, David. Thank you, Joe. We're happy to take your questions.

(Operator Instructions) Our first question comes from Vikram Malhotra from Morgan Stanley.

Wanted to just check on Penn One. Any other details you can provide on potential spend, incremental return, just timing?

David?

We are finalizing our drawings in connection with the work that we're doing to Penn One. That work, as I said, is in the final stages. The budget should be available in the next 3 to 6 months, at which point in time, we'll disclose those budgets fully as we do with all of our major capital projects.

Okay. And then just one clarification on the retail comment. Steve, I think you mentioned the NOI will not drop below, I think, $309 million. So just wanted to get your sense of -- is that sort of a comment on '18 and '19, meaning $309 million this year could be the low point?

The answer is yes. Yes, Vikram. I want to go back to One Penn for a minute. One Penn is a 2.6 million, maybe 2.7 million square foot building in the very heart of Penn Plaza. It's a -- it sits right adjacent to and has direct access into Penn Station. It's a formidable (inaudible) has spectacular views.

The plan that we have to upgrade, modernize it and redevelop it is pretty spectacular. It has $73 in-place rents. We believe that there is huge opportunity for rent growth in that asset, and we couldn't be more enthusiastic about it. We think when we combine the -- as David called it the duo of One Penn and Two Penn -- did I say -- I said $63 in-place rents.

You said $73.

$73.

I'm sorry. David is correcting me and slapping me a little bit. The in-place rents in One Penn are $63 a foot, which leaves enormous room for uptick there, so we couldn't be more enthusiastic about it. And similarly, when we accomplish the connection of One Penn and Two Penn into a 4-odd million square foot complex where we can afford to do extraordinarily significant amenity packages and food operations, we're very enthusiastic about this.

Okay. Got it. And just to clarify, when you -- so you'll give us details potentially over the next 3 to 6 months. And I -- just sort of high level, should we think about this as sort of a 1-year project, a 2-year project? Just big picture, how should we think about this?

Yes. It's a couple of year project. Our teams are in the process of completing the design book drawings. They're taking the bids. And as soon as we have the cost estimates that we're comfortable with, we will, of course, make that information available.

And our next question comes from Jamie Feldman from Bank of America Merrill Lynch.

I guess, sticking with Penn Plaza. As you think about Two Penn, what needs to be in place for you to come up with some plans there, and whether it's thinking about leases expiring there? Or what happens with Gateway or any kind of Penn Station redevelopment? How long should we be thinking until you can get some clarity there?

Two Penn, actually, sits right atop of the train station. So the first point, Jamie, is that the Gateway project, which is a huge, enormously important project, but a very long-term project, has no bearing whatsoever in our plans for Two Penn or the Penn Plaza District. So that's step one.

Step two is, is that there's lots of stuff going on with Two Penn and our planning and different alternatives, which is premature to talk about now. But whichever way they come out, we think that they're incredibly exciting.

Okay. That's helpful. And then I guess back to Joe's comments on the outlook for retail in 2018. I think you said you assume no additional leasing in the portfolio. So if you were -- okay. So -- I mean, just to handicap, like, if you were to get some leasing done, like, what's the drag there from no additional leasing as opposed to probably a more reasonable outcome, which is some renewals?

Well, Jamie, not only is there no leasing, but there's a credit loss built in of multimillions of dollars that typically we haven't incurred. So what we're telling you is $309 million, $310 million is the low end. It could go up $5 million, $10 million.

And our next question comes from Michael Lewis with SunTrust.

Joe, at the end of your comments, you were -- you gave some detail on Central Park South. Maybe I'm slow, I just want to make sure I'm clear on this. It looks like the budget for that project went up about $150 million.

I don't know if it's safe to assume you still think the sellout's going to be about $3.2 billion. Could you just help me bridge that? How there's still -- with those numbers, there's still $900 million after the debt and taxes and everything?

Well, so far your...

Jamie, the budget to produce the project went up, but so did the revenues go up -- the budgeted revenues go up and so did a reduction in the tax rate of the TRS go down. So net-net, we think that the profit estimates that were originally made continue to hold.

Okay. I understand.

By the way, we're pretty far along. The job is probably 70%, 80% built. The job is well sold. And so we have very good visibility into the numbers.

Great. My second question. I know you get asked every quarter about 666 Fifth. There was a change this quarter kind of in how you've categorized that. So I guess -- it sounds like you think the future of the office component is as office.

I was wondering if there -- if you think there is material equity value in your interest. Or is this a case where you think that the plans that were presented don't really create value and now maybe you just give this back?

First of all, I mean -- there's no new news on 666 Fifth Avenue. I said a call or two ago, in response to a question, that it's complicated situation with lots of moving parts. And I said, at the end of my remarks a call or two ago, that this was the rare instance where we may be sellers.

And the market and the press picked that up as saying that we were sellers. That is true and in our financials that were just published, we basically just formalized that fact, okay? So that's step one. Step two is that we have a relatively small investment in the property, which we expect to get back. But -- yes.

Our next question comes from Michael Bilerman from Citi Financial.

It's Michael Bilerman. I'm here with Manny Korchman. Steve, in your opening comments, you talked about being in great shape for either defense or opportunity. So what are you looking at to know whether you should start spending some of this $2 billion cash hoard and take advantage of opportunity? Or accelerate being on defense and selling more assets or stakes in assets because of what you see as the environment?

Michael, we see every deal that goes down, which has any relation to what our sweet spot is. And, believe me, if we saw a deal that penciled, we would pull the trigger.

So one of the things that I use in order to gauge how a cycle is going is the pencil. So assets -- we just are not a buyer of assets at the offered prices today, okay? So we would rather keep our powder dry. So there's -- that's where we are.

I mean, we look at everything and we are very, very, very disciplined in investing. By the way, we expect there to be more opportunities in the future, as there always is.

Maybe a question for Joe or David. You spoke about the retail move-outs, if you will, or stresses on NOI. Is there anything in the office bucket that we should expect to come up versus -- that would offset the contractual NOI that we spoke about on previous calls?

We have, well, call it, Jamie, the normal turnover -- I'm sorry, Michael. We have the normal turnover in the office portfolio. So we do expect we're going to have a couple of move-outs. We also -- I mentioned Publicis in Chicago. Publicis also is a tenant at One Penn, which is going to be moving out toward the latter part of this year, but it's been normal ins and outs.

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

Steve, in your comments, you talked about $1 billion of assets to be sold. And I know that at least 1 or 2 quarters ago, you had identified another bucket of $1 billion of assets, including some of the stakes you have in public companies. I'm just curious, is this the same $1 billion you referenced in the past? Or is this a different $1 billion of assets?

I think it's the same, Michael, (sic) [Steve] and I think it was last quarter that we referenced it. I'd love to get that second billion, but it's not there. So this is in the way of clean-up and hang on -- okay. So this is in the way of clean-up. And so that -- as I said, this will take a couple of years to liquidate those assets. So in addition, as I said in my remark, at 220 Central Park South, as closings begin in 2019, we expect that also to augment our cash balances pretty significantly.

Okay. And I guess as a follow-up, maybe, to Michael's question about kind of how to deploy capital with the stock down in the kind of mid-60s here and your NAV at $96. I mean, how do you just sort of think about share repurchases as a way to play offense and take advantage of opportunities where you don't like, I guess, deals in the marketplace? How do you sort of weigh your own on stock price here?

Steve, that's a very good question. We look at buybacks all the time. We look at it at the management level. We look at it at every board meeting. So a buyback now would be accretive to NAV by a relatively smallish number. But it would -- it would basically require reducing our balance sheet by a fairly significant number. So for example, if we did a buyback of $500 million or $1 billion, that cash is gone and you get an accretion fee NAV of a number which is, say, $1 a share, give or take, a little bit. So currently, our board has basically -- our board, basically, believes that we'd rather keep that $1 billion of dry powder than increase it a very marginal amount -- increase our NAV by a marginal amount. So that's step one. Although we know how to do buybacks, we have done buybacks, they're not off the table. They're on the -- in fact, they're on the table every meeting. The second thing is, and we've discussed this with our bankers and other experts, there is no real evidence that a smallish buyback -- and for us a smallish buyback would be, like for example, $1 billion, actually increases stock price. So the answer to that is -- the answer to that is that right now, we are not in the buyback business although we may in the future.

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

Maybe just sticking with capital deployment here. Could you just remind us, sort of, what your current thinking is on the return expectations for the developments in the in-progress pipeline and specifically maybe push some of the new ones that were added this quarter?

I'm sorry, Vincent. Could you say that again? Returns on the development pipeline. And what was the tail end of your...

Just in particular, the ones that were added to the pipeline this quarter.

You broke up again. Could you...

Sorry. Just been having some handset problems here. But...

So as a policy, we do not publish return expectation in the beginning of a project, because the numbers are subject to moving around too much. We do have a very strong confidence in the cost side of the development, but lesser in the income side. And our history has been that we almost always exceed our expectations on the income side. So the answer is, is that when we get visibility into the numbers, we publish them. And we don't like to publish speculative numbers.

Okay. And then maybe a different question here. Just in terms of the NAV, you alluded to the 50 basis point increase in the cap rate for the retail portfolio as well as some challenges facing you at the market today. I guess as you think about that, the new cap rate assumption, do you think there's more risk to that going higher or lower at this point?

That's speculation. I mean, I think -- we are in the truth-telling business. And we thought that it was absolutely appropriate to raise the cap rate for retail to reflect what we believe is the market. And we think that, that's the right number today. That number could go down, it could go up or it could stay the same. That's too speculative for me.

And our next question comes from John Guinee from Stifel.

First, Joe, you had mentioned, I think, flat year-over-year FFO. It was -- I correct in understanding that? And then could you talk about what your basis is? Are you looking at your FFO as a $0.98 fourth quarter run rate x4? Or what are you looking at as your '17 number?

Well, John, we did give annual FFO. We did give fourth -- all adjusted for comparability, we did give fourth quarter at $0.98 a share. We've said flattish, but we're not going to say more than that. Flattish.

So flattish off of 3 73 for...

Yes.

Yes? Okay. So we should look at, essentially, 2018 FFO in the 3 73 range?

Flattish.

Okay. Great. Second, David Greenbaum, I don't know why I haven't noticed this before. I'm looking at Page 32 full year and your GAAP rents are $74 and your cash rents are $76 on your second-generation relet space, which is highly unusual to have cash be higher than GAAP. That implies a rent roll down over the course of the year. Is that an accurate way to think about it?

John, we're scrambling, my -- our team is scrambling to find that page and give you an answer. What I prefer to do is let them contemplate the answer and get back to you offline.

Our next question comes from Nick Yulico from UBS.

Just going back to the street retail portfolio, can you give us a feel for where in-place rents are today versus market? Specifically, I guess, going back to your cap rate assumption of $4.25, is that reflective of a portfolio where rents are at market?

The answer to your first question, there are some pluses and some minuses. There are some -- I mean, it's a large portfolio; by far, the largest in the city. There are many leases that are below market, there are some leases that are above market. I don't -- I'm not (inaudible) with what the net would be, number one. Number two is, is that the cap rate is a number -- by the way, NAVs are imprecise numbers. The NAV or the cap rate, the new cap rate of $4.25 is applied to the income, to the current income stream. It doesn't apply above-market rents, it doesn't apply below-market rents.

Right. I guess I was just wondering if that cap rate is reflective of where values would be for a portfolio where rents are at market.

Yes, I think so. I think so.

Okay. Just second question is on G&A. Last call, there was some talk about you're reconcentrating efforts on reducing G&A. And there you said you might provide an analysis on this. I didn't see anything new on that topic. Can you just give us some detail on how you're thinking about where you could reduce G&A this year? And how -- what we should assume, maybe, for 2018 G&A?

Nick, let's just talk about G&A for a moment. It's a complicated analysis because each company has different accounting processes. So in our company, the expense is in the G&A line, but there's $20 million a year, $5 million a quarter of income that comes in from the transitional services agreements and other fees for the 2 spins, et cetera. So the published number of our G&A, really, when you look at it, you should reduce that by $20 million. So that's step one. Step two is, we look at our sister companies all the time. And one of them has $15 million of G&A that they push into the operating line. Another one of them has lots of capitalized G&A and what have you. So when you take that all together, the G&A of all the companies that are in very similar businesses are pretty much right on top of each other. Notwithstanding that, we are going to make a major push in zero-based budgeting on our G&A. And hopefully, we will get some returns out of that.

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

Steve, two questions. So the first one is, the $1 billion of dispositions that you outlined, if we assume, sort of like a 5% to 7% earnings yield on those assets, that's like $50 million to $70 million. How do you think about replacing that on an FFO basis in a way that it's tangible for folks to see the earnings growth of the company versus the NAV stuff that you've done, which is less tangible from a public stock perspective?

The number is closer to 5%. It may be even a little bit below 5%, number one. Number two is, we are focusing our efforts on the assets that really have low yield or no yield. And then the second is, is that the trick is to reinvest the capital. And by the way, the $1 billion that we project is after taxes, so we retain that. So the idea is, is to reinvest that capital into assets which are core and which have higher return expectations.

Okay. And then just the second is, the perennial question is on succession. The CFO search is almost coming up on a year. And obviously, there's talk for who would replace you. Are there certain things that you're, at this point, looking to achieve before we hear something new on the CFO? Or is your view figure out what you want to do as CEO before coming out with the CFO?

I mean, I think those are all cogent thoughts which have -- each of which has validity. So first of all, I'm clearly on the back nine. I'm clearly not going to go forever, and I may even be on the back half of the back nine. So with respect to me, our board focuses on that every meeting. We have a succession plan in place, if I were to be hit by a truck or whatever. And so that's enough about me. There still is a fair amount to be done. And there's no news other than what I just said about me. With respect to the CFO search, that's actually pretty interesting. We have had a very good reception in the marketplace that people really think that this is a great job and a great opportunity. So we've seen a lot of very nice, very capable people. Interestingly enough, we have some very nice and capable people here. And we've learned in the search that our old worrier, Joe Macnow, is probably the #1 candidate, except he's a little bit over the hill, too. So it's not a priority because we have a great staff both in our premise operation and in Joe. And as other things involved, we don't have any news to report on that other than what I (inaudible).

Our next question comes from Jed Reagan from Green Street Advisors.

Joe, I think I heard you say that you expect portfolio cash same-store NOI growth would also be flattish this year versus last year. Is that accurate?

I'm sorry, Jed. The portfolio of cash, did you say?

Yes. Cash same-store NOI growth to be flattish '18 versus '17. Was that right? Did I hear that?

Yes. Yes. When you take in that retail going down, flattish.

Okay. That's helpful. And just a clarification to follow up on a question earlier on 666 Fifth office condo. In terms of deciding not to hold the asset longer term, just curious if you can talk a little bit about why you made that decision and what kind of time horizon you're looking at for potentially exiting your position there.

The decision asset-by-asset is complicated. We basically believe that the returns and the structure and the time is such that we would rather exit than stick it out. Pretty much as simple as that.

Is that a 12-month type of horizon or 3 years or...

I can't predict the timing. I can't predict what we want -- we'd like to have as the eventual outcome.

Got it. That's helpful. And then one more, if I may. So the stock's been, obviously, trading at a pretty significant NAV discount for some time now. And that discount's increased a little bit here recently. I guess, can you talk about your strategy for closing that NAV gap? I mean, do you see this as just a moment in time with the market, kind of, bearish on New York City? Are you looking to change courses at all to respond to those discounts?

That's the $64 question, isn't it? So over the last number -- the first thing is, is that our observation is, is that we are not alone in the discount penalty box that all the companies in our industry segment and in other industry segments also have the same situation. And so there are a few industry segments that are selling at NAV or above. Office is not one of them, neither is retail. So that's the first observation, Jed. The second observation is, is that if you look back in history and not that far back, we have moved heaven and earth to close that discount and to recognize shareholder value. We have sold over $5 billion of assets. We have simplified. We have spun Urban Edge. We have spun JBG Smith. So a total of $15 billion of transactions in there -- in that. And so we think we have done a heroic job and more than anybody else that has done. And we acknowledge and admit with great unhappiness that it has not yet affected RemainCo's performance, okay? So having said all of that, we think we're resourceful. We have lots of other ideas. As I said some years ago, everything continues to be on the table and it will be on the table. And closing that gap or getting our shares to reflect fair value is the #1 priority in the day-to-day running of our business.

Our next question comes from Michael Bilerman from Citi Financial.

Just had a couple of quick follow-ups. Just in terms of the NAV, and I recognize, Steve, you said you don't want to -- you don't think it's appropriate to add to the pluses without recognizing the minuses. I guess two things in relation to that. The first is, you guys are using full year 2017 NOI in the calculation. And just thinking about where in-place is today, it's almost 3.5% higher using 4Q annualized, which would probably be another -- almost $4 a share in NAV. So I guess, how do you think about using a historical trailing 12 versus spot? And then the second part is, in removing the schedule of the pluses, the signed leases, can you give some details in terms of what has been signed that is going to commence, so at least we have that in our mindset from previous disclosure?

Michael, NAV is a very, very imprecise calculation. Everybody does their own version of NAV. You do, the analysts do, our investors do, and we do. So we have put out a NAV, which we believe is very, very conservative. And we think it's important that we be -- we do that. We are using a trailing number, an actual number, not a forward number. We're not making any projections as to income, which is not commenced yet. We're not offsetting that. We are not taking any reductions in income that may happen from move out or vacancies, and what have you. So we're happy with where we are. We spent a great deal of time thinking about it. With respect to some other things, basically, most NAVs that the market participants use don't have a management fee in for running the assets. So we thought that, that was a little quirky, so we put it in. So we're not unhappy with it. We think if we wanted to get the NAV up another $5 or $7 or $8 a share, we surely could, okay? But as of right now, we think the conservative road is the road to go. By the way, the stock doesn't seem to care what the NAV is anyway.

No. That's a separate question. But okay, I should know whether it was -- how you thought about in-place, signed, current versus a trailing number. You've obviously had a lot of growth over the course of the year as a lot of that leasing took place. And so I just didn't know whether it was a discussion point.

Michael, all that's true, but we found that it was intellectually barren to put in the pluses without speculating as to what the minuses would be. And we ended up just saying, okay, just leave them both out. Michael, let me just -- so what we're doing is, we're basically taking the trailing, actual hard number right of our docs and using that as a road map, which we think is an okay way to go.

Okay. And then, Joe, I just want to come back to this NOI. You talk a lot about flattish. I understand the retail this year was $324 million, the bottom end of $309 million for '18. Fourth quarter, you're actually at $333 million annualized, but we'll put that aside. I'm more interested on the office side of the business. The schedule that you had in the prior stock on Page 9 still had about $36 million of signed leases, incremental NOI that was on the comp. And so I'm -- I don't know why the office business would be effectively flattish.

Michael, we expect the -- first of all, we don't give guidance as you know, okay? We are starting to leak some statistics around the edge, but we don't give guidance. We expect the office business to perform well next year and to grow. We expect the retail business to decline slightly, okay? So when you put those two together, we think the operating part of our businesses will have decent numbers next year. When you go below the line to interest and other things, we end up with the conclusion that give or take, we're going to be flattish. Now flattish is a word that we have coined, and we're going to -- what's the word when you get a -- we're going to copyright that word. So that's where we are. We expect the office business to perform well. We expect New York to perform very well. The retail business will decline a little bit. And that's where we are.

Well, my two cents would be, you give the bottom line answer, I think we would appreciate all the components in terms of NOI, acquisitions, disposition, timing, capital markets activities, debt, equity, development spend, development timing, G&A. You gave us interest expense and a top line number and then a bottom line flattish number. And I guess just -- go all the way or not basically. I guess that's more of a comment than a question.

Thank you. You've got a lot of work to do.

And our next question comes from Jamie Feldman from Bank of America Merrill Lynch.

Just a follow-up for David. You had talked about the leasing pipeline. I think you said 900,000 square feet and 400,000, I think, you said got done in the first quarter. Can you just talk more about the composition of that 900,000? And is it more kind of 34th Street area? Is it more Midtown? So just we have a sense and the types of tenants.

The mix of the tenants that we're continuing to see just as we had a wide dispersion throughout all of 2017 with the fire sector having come back. We're seeing the TAMI tenants, the fire tenants, we're even seeing the medical institutions in New York that are expanding into office space, all being players for space over in terms of the pipeline. And in terms of where the activity is dispersed, the reality, Jamie, is it's basically all over the portfolio. What I said is there's about 400,000 square feet that's either been signed or in lease negotiation. The balance of the space that we talked about, the 900,000 square feet is pipelines in which case, we're in the early stages of some lease discussions. I mean, for example, in the last 2 weeks, we've actually received a couple of proposals for 512 West 22nd Street, the new build on the High Line, each of which were about 50,000 square feet. So we are seeing activity, really, everywhere in the portfolio, Jamie. And again, broad spectrum in terms of tenant types.

Okay. And then just back to Joe on the interest expense comment. Can you just repeat what you did say about what interest expense will look like in '18? And then just the earning volatility or sensitivity to higher rates in '18 and '19?

Well, I think we've been pretty conservative in our estimate. When I gave you that $15 million, that took LIBOR over 2% at the end of next year. And that's what's built into our model.

We have no further questions at this time. I would like to turn it back over to the host for final remarks.

Thanks, everybody, very much. Our next -- our first quarter 2018 call is scheduled for 10:00 on Tuesday, May 1. We'll see everybody then, and thank you. Have a good day.

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