Alexander's Inc (ALX) 2018 Q4 法說會逐字稿

Good morning, and welcome to the Vornado Realty Trust Fourth Quarter 2018 Earnings Call. My name is Michelle, and I will be your operator for today's conference. This call is being recorded for replay purposes. (Operator Instructions) I would now turn the call over to Ms. Cathy Creswell, Director of Investor Relations. Please go ahead, ma'am.

Thank you. Welcome to Vornado Realty Trust 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 our supplemental financial information package are available on our website, www.vno.com, under the Investor Relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-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 statements.

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

I will now turn the call over to Steven Roth.

Thank you, Cathy, and good morning, everyone. 2018 was a good year. Here are some highlights. Our recent activity for the year across the entire business, including New York, theMART, 555 California Street and retail totaled over 2.6 million square feet and 230 leases with industry-leading mark-to-markets of 25.6% GAAP and 18.4% cash. At year-end, office occupancy across the board was 97% and retail occupancy was 97.3%. These numbers in the very high 90s are typical of our performance year in and year out over the past 20 years, thanks to Glen and on best of the business leasing team.

We've begun closings at our 220 Central Park South condominium project. In the fourth quarter, we closed 11 units aggregating $222 million with a $67.3 million after-tax gain. And we have already closed in just the first 5 weeks of this year another $290 million. Closings will continue throughout 2019 as we climb up the building. And the last of the 27 large full floor apartments in the tower is now committed and under contract. I'm guessing that this is the most successful project ever anywhere.

We increased our ownership in the Moynihan train hall project from 50% to 95%. We are in full-blown construction here and in 2020, we will deliver the best creative space in Manhattan. We love this asset. It is the link between our Penn Plaza neighborhood and Hudson Yards. It is a double wide block with 150,000-square-foot floor place and high ceiling. It is a horizontal campus and an iconic landmark building much like the horizontal campuses favored by our fine tenants in the West. It is a truly unique asset.

In the Penn district, we are underway to transform Penn One and Penn Two to create a 2-building 4.4 million square foot campus right on top of Penn Plaza. We will include a 3-block Grand Plaza along Seventh Avenue covered by a giant new bustle across the entire 400-feet of Penn Two. This bustle will extend 70-feet out from the building and will be 50 feet above the street. It will serve a dual purpose. It will be striking, creating a huge covered plaza in front of our 1.8 million square foot Penn Two and the main entrance at the Penn Station. It will bring the neighborhood into the modern age. And at the same time, we will create 140,000-square-foot of very valuable new best-in-class creative space. The scale of our campus here will allow us to provide our tenants with the biggest and best unparalleled amenity package, even a giant step forward from what many of you have seen that we have done at theMART..

Considering our redevelopment plans and everything that's happening around us, we expect that incremental $30 uplift in rents here. This financial reward is the main event.

So putting 220 Central South Park and the Penn District together, big picture, our financial plan is to redeploy the proceeds of 220 Central Park South sales into CapEx of Farley, Penn One and Penn Two. Give or take, we expect to finance all these CapEx entirely, probably with no or very little new debt. Given that the only cost of the capital coming out of 2020 Central Park Southeast is the accounting item capitalized interest, which in round numbers is about $25 million, this will be enormously accretive.

As is our custom, we published management estimate of NAV in the fourth quarter supplement. Please see Page 22 of the supplement. Our spot NAV is $97 per share versus $96 per share a year ago. Demand here reflects an increase in office NOI, partially offset by an increase in the cap rate on street retail to 4.5% from 4.25%, which we believe more accurately reflects current market conditions.

Last month, we increased our quarterly dividends to $0.66 per share at annual rate of $2.64, a 4.8% increase, this after a 7.7% increase the year before. Based on yesterday's closing price, the dividend yield is 3.8%. It is very encouraging that Amazon shows New York for half of H Q2, and that Google, Disney, Facebook and many others continue to expand and expand again, and again, making New York their second home. By the way, the other half of H Q2 is going to Crystal City, Virginia. On land, we contributed to our JBG SMITH spin-off, validating investments we made years ago. This is a really big deal. Kudos to Matt and the JBG SMITH team.

Here's an interesting tidbit that bodes really well for the future of New York. As David will tell you in a minute, a research piece just came out with the fact that New York has grown to be the leading tech city in this year's index overtaking San Francisco. The point here is that New York has been steadily growing and creative class workforce and creative employers and creative infrastructure.

Now I'd like to cover the financial matter. Financial results for the full year are as follows. Net income was $2.01 per share compared to $0.85 for 2017. Total FFO was $3.82 compared to $3.75 for 2017. FFO as adjusted was $3.76 compared to $3.73 for 2017, consistent with our comments at the beginning of the year that 2018 would be flat. 2018 cash basis FFO as adjusted was $3.73 compared to $3.48 for 2017, up a strong 7.2%. Company-wide cash basis NOI for 2018 was $1.338 billion compared to $1.315 billion for 2017. 2018 cash basis, thanks to our NOI increased 3.9% as follows. New York Office was up 7.5%. Retail was essentially flat down 0.2%. The total New York segment was up 4.3%. Retail produced $324.2 million of cash NOI in 2018, well ahead of the $304 million minimum we guided in the beginning of the year, which we increased to $315 million minimum in the third quarter. theMART was down a funky 6.5% as a result of a fourth quarter $12.1 million additional real estate tax accrual. This is essentially a timing mismatch between the GAAP required expense accrual in 2018 and actual payment, which we will make in 2019, which is when we will build our tenants and collect approximately 80% in reimbursement income. Excluding this mismatch, the would have been positive 8.8%.

At 555 California Street, same-store was up 18.1%.

For the fourth quarter results are as follows. Net income was $0.53 compared to $0.40 in the prior year's fourth quarter. Total FFO was $1.10 compared to $0.80 from the prior year's fourth quarter. FFO as adjusted, which excludes nonrecurring items was $0.90 compared to $0.98 in the prior year's fourth quarter. FFO as adjusted for this quarter was negatively impacted by the following items. $12.1 million or $0.06 from the already mentioned additional real estate tax accrual at theMART. $10.5 million or $0.05 from expected retail vacancies and lower income from a few short-term deals. And $6.2 million or $0.03 from expected vacancy as 94 Park Avenue and theMART space out of service at Penn Two and 825 7th Avenue at lower office termination fees. Of course, there were many positives, which partially offset these items. And this is all the normal ebb and flow of our business.

We run the business for cash and cash numbers for the quarter. Cash basis FFO as adjusted was $0.91 compared to $0.90 from the prior year's fourth quarter. This quarter's company-wide cash basis NOI was $324 million compared to $342.3 million in the prior year's fourth quarter. This decrease is primarily due to the additional $12.1 million tax accrual at theMART in the fourth quarter and the sale of our interest in 666 Fifth Avenue in August. Cash basis same-store NOI decreased by 1.7%. This flattish number masked a very healthy business. Here are the details. New York office was up a sound 5.8%, retail was down an anticipated 4.1% based on schedule lease expiries and reduced rents on short-term renewals. The total New York segment was up 1.9%.

TheMART same-store number is so heavily skewed by the real estate tax mismatch that the number is not meaningful. Excluding this mismatch, theMART same-store would have been positive 2.7%.

And 555 California Street was up a very healthy 15.8%.

Our office business continues to perform very well. We continue to experience robust demand from all matter industries in all of our submarkets. As I have said before, our tenants are optimistic, aggressive, growing and upbeat about New York.

Retail continues to be soft, albeit we are finding sales volumes are leveling and there's increased retailer activity and tours. The 2 strongest retail submarkets in town is Times Square and Penn Station where we are the largest owner with the best assets. And here, I want to make a plug for the 120,000 square feet of retail we have developed -- we are developing at Moynihan Train Hall at Penn Station. In addition to teeming streets and the existing traffic in the nation's busiest train station, all the pedestrian traffic to and from Hudson Yards and Manhattan West will funnel through us. As you would expect, we have tremendous retail interest in this unique space. David will give you more facts and details in a minute.

Turning now to investment sales. After a slow start after 2018, the investment sales market strengthened over the course of the year ending strongly. Investor appetite for New York city office continues to be healthy but disciplined with a good mix of domestic and foreign capital sources easily replacing declining activity from China. Demand for assets in the West and South of Manhattan and for smaller assets continue to be strongest, but investor interest is also active in Midtown. Pricing has stayed fairly constant with cap rates in the mid-4s.

The market has suffered from a shortage of available quality product on offer. And with a fair amount coming out of 2019, should get off to a strong start.

The debt market continues to be constructive, very strong in the first 3 quarters of 2018, but similarly caution and and volatility in the fourth quarter. All-in borrowing rates remained low by historical standards. Its interesting to note that for us, secured nonrecourse financing, which is our main stage, is now cheaper than unsecured public market full recourse financing by 25 basis points for sure and maybe even more. We have a highly liquid fortress balance sheet with $3.3 million in immediate liquidity, measured leverage and well staggered debt maturities. And this doesn't count a couple of billion dollars to come from 220 closings and noncore asset sales.

Thank you. Now to David.

Steve, thank you. Good morning, everyone. 2018 was a historic year in Manhattan. We leased a total of 42.2 million square feet, the most active year in 2 decades, including 61 leases of 100,000 square feet or greater with 20 of those deals greater than 250,000 square feet. This enormous rise in activity is due to continued strong job growth in New York from private sector employment both private sector employment at 3.98 million jobs and office-using employment at 1.4 million jobs are at all-time highs.

Manhattan's overall average asking rent ended the year a record $76 per square foot with Class A Midtown rents north of $80 per square foot. The overall availability rate remains steady and actually went down in Midtown, even in the face of the delivery of some 2 million square feet of new construction.

Financial service tenants continued to be a strong player in the Midtown market, accounting for 41% of all leasing activity.

Large tenants continue to be attracted to new and redeveloped products, which captured significantly almost 2/3 of the year's leasing activity. The landmark announcements made by JPMorgan Chase to develop a new corporate headquarters on Park Avenue, Google's commitment to a campus on Hudson Square, Disney's announcement to build a new headquarters also in Hudson Square, Deutsche Bank's commitment to Midtown, Pfizer's commitment to Hudson Yards and finally, Amazon's selection for (inaudible) City for half of its second headquarters location, all reflect upon the great strength of this city.

Just last week, [Saddles], the international brokerage house, issued its Annual Global Tech city Report. Saddles concluded that New York ranked first as the world's foremost center for tech through to its deep talent pool, providing the business environment, lifestyle and quality of urban infrastructure to position New York as the attractive location for both start-ups and multinationals alike. Our portfolio of redeveloped assets has experienced the benefit of this enhanced demands from tenants and Farley, Penn One and Penn Two are up next.

Reflective of the strong overall marketplace in New York, as well as in River North Chicago and San Francisco, Vornado's portfolio across all 3 cities delivered very strong results. For the year 2018, our leasing teams completed 230 leases, a total of 2.5 million square feet of activity and exceptionally strong mark-to-markets across the board of 25.6% GAAP and 18.4% cash.

Focusing on our New York Office portfolio. For the year, our team completed 113 office leases, totaling over 1.8 million square feet at an average starting rents of $79 per square foot with strong, strong mark-to-markets of 33.7% GAAP and 22.7% cash.

We remain (inaudible) reviewing occupancy at 97.2% and a very modest 625,000 square feet expiring during 2019 with approximately half of the expiring space coming from to be redeveloped Penn One and Penn Two campus.

Tenants in New York are growing. 38% of our activity in 2018 was with tenants new to and expanding in New York City. Real, real growth in the city. Looking at the last 3 years, our leasing performance in the portfolio totaled almost 6 million square feet at an average starting rent of $76.50 per square foot, underscoring the very high quality of our offerings and the strong profile of the tenants in our buildings.

During 2018, our trophy assets also continued to shine, highlighted by 11 triple-digit transactions, totaling 445,000 square feet, comprising fully 1/4 of our total annual activity at an average starting rent of $109 per square foot.

Our New York Office 2018 same-store results show robust growth of 7.5% cash and 4% GAAP.

Now turning to the fourth quarter. We executed on 479,000 square feet across 27 transactions at an average starting rent of $73 per square foot and positive mark-to-markets of 6.9% GAAP and 1.2% cash. Same-store growth during the quarter was a strong 5.8% cash, while GAAP was essentially flat.

Notable fourth quarter leases included: A new headquarters for [Sublease International] at 650 Madison Avenue, an entire 38,000-square-foot second floor with its luxury residential brokerage house will take account -- will take advantage of this building's premier location, great branding opportunities and abundant outdoor space. This space previously was retail space, which we now have converted to office, taking advantage of the highest and best use for this space, similar to what we did with Kmart's third floor at 770 Broadway.

In the fourth quarter, we also relocated CICC, one of China's leading investment banking firms from our 350 Park Avenue into 20,000 square feet at 280 Park Avenue where they will double in size and the [Interpublic] group expanded again, at 100 West 33rd Street by 44,000 square feet, bringing IPG's total footprint there to 662,000 square feet.

As we took off 2019, we're seeing very active demand in the market with lease and negotiations totaling 460,000 square feet across all submarkets and another 600,000 square feet of deals in the pipeline. At 1290 Avenue of the Americas in 90 Park Avenue, 2 of our completely redeveloped buildings, we have seen multiple tenants beating on the blocks of space available at our sweet spot in the market in the $80 to $90 per square foot range.

Now turning to our office development and redevelopment pipeline where we remain very active. We recently completed and brought to market the new build 170,000-square-foot office building at 512 West 22nd Street directly on the High Line where we are an active dialogue with multiple tenants. Notably, these discussions are mainly with boutiques financial services tenants looking for a new home in Chelsea. As we have said in the past, the geographic boundaries for tenants in Manhattan to continue to expand as demand for this type of product in this district is at an all-time high. Rents in Midtown South for these products have now surpassed Midtown's asking rents.

Construction progress at Farley continues where you can now really get a good sense of the grandeur of the new Trahan Hall. The train hall's [mid-block] skylight, 1 of the 2 signature skylights is now complete with skylight's 50-feet above the [mid-block] all that will include our retail, restaurants and one of our 3 office lobbies. The work on our office (inaudible) program has commenced with initial delivery anticipated by mid-2020. We are seeing great office and retail interest in the projects from all industry types as we're representing revision of this horizontal campus to brokers and tenants on almost a daily basis.

Penn One is the tone setter for the new Penn district neighborhood where will create a hospitality rich communal workplace for our districtwide tenants from the lobby to the second and even to the third floor. Physical work has commenced both our facade restoration and elevator modernization programs have begun. We have completed the necessary arrangements to relocate office and retail tenants at the base of the building, which will allow us to begin the real construction work on this transformational project once these tenants move this coming summer.

At Penn Two, we are finalizing our plans and permits with construction to commence during the first quarter of 2020. Here, we have completed the necessary tenant relocations to make way for this fill building capital program delivering 1.8 million square feet of unique modernized office space, along with all new retail offerings, outdoor plazas and multiple amenities, which will also serve our tenants districtwide.

Collectively, the projects we are undertaking at Farley, Penn One and Penn Two are the catalysts to our recreation of the Penn district neighborhood in the epicenter of the new, New York. I encourage you to take a look at our Penn district plans, which are now posted on our website at www.vno.com.

Now turning to our flagship New York retail portfolio. For the year, we leased a total of 255,000 square feet. Same-store results were flat year-over-year, negative 2.2% GAAP and negative 0.2% cash. Retail portfolio occupancy stands at a strong 97.3%.

During the fourth quarter, we completed 9 retail leases, comprising 26,000 square feet with positive mark-to-markets of 3% GAAP and 1.1% cash. Notable deals included a lease with HSBC Bank at our new 606 Broadway in SoHo, Wells Fargo's lease of the entire retail box at 968 Third Avenue, and the announcement of [Ballas Point] breweries first New York location at 330 West 34th Street. Ballast Point will bring their West Coast craft brewery and restaurant concept to the Penn district so they will have an in-door restaurant experience on 34th Street and an outdoor garden for its patrons on 33rd Street, directly across the street from what will be the main entrance through our future Farley building office occupants.

We also completed a lease for a new flagship location with Krispy Kreme at the Crowne Plaza Hotel at the corner of 48th Street and Broadway, which will include a 4,500-square-foot retail component as well as a large exterior digital signage presence.

At the theMART in Chicago, 2018 results reflect continued strong leasing performance at the 3.7 million square foot campus. We completed 243,000 square feet of leases for the year, comprised mainly a variety of showroom tenants at very strong starting rents of $53.50 per square foot.

During the fourth quarter, we completed 46,000 square feet of showroom deals at an average starting rent of $61 per square foot with positive mark-to-markets of 8.7% GAAP and 3.2% cash. We currently have no office lease out for 36,000 square feet with a well-known technology company and have multiple other prospects the remaining space vacated last year by Publicis on floors 4 and 5.

In San Francisco, we completed a stellar year at our 555 California Street campus, taking full advantage of this marketplace with a demand for space continues to surge amidst limited availability. Our same-store results for the year were a very strong 14.9% GAAP and 18.1% cash. In 2018, we leased 249,000 square feet at an average starting rent of $89 per square foot, resulting in very healthy mark-to-markets of 34.3% GAAP and 13.4% cash. We are now at 100% occupancy.

At 350 in Montgomery, we do have a renewal lease in negotiation for 56,000 square feet, which we expect to close during the next few weeks.

And our 345 Montgomery redevelopment work is in full force with concrete work substantially complete and steel work having begun.

We remain on time with respect our delivery of the building to Regis spaces by the end of the third quarter of this year.

We are very pleased with our overall 2018 company-wide results and continue to see strength in all 3 of our markets. These leases are a credit to the quality of our portfolio, and the dedication and teamwork of all of our enormously talented professionals. Back to Steve.

Ready for Q&A.

(Operator Instructions) The first question in the queue comes from Steve Sakwa from Evercore.

Steve, you and David both kind of mentioned Amazon situation. I know there's a number of different press reports out there about maybe the city having some issues coming to terms with Amazon on the Long Island City project. And I'm just wondering what that sort of signals as it relates to kind of new business coming here and kind of any thoughts you have around that bill, may be getting consummated?

That's a hot potato. First of all, folks like Google and Facebook and on and on and on, have no trouble expanding, growing, relocating, locating in New York through the conventional way of dealing with basically as-of-right real property. Amazon chose to take a different path, and that's fine. I would say, it's my personal opinion that if -- that the deal that the governor of New York and the mayor of New York made with Amazon was a terrific deal for the city and terrific deal for us. I mean, huge company with an enormous number of important high-paying jobs, et cetera. If the political climate in New York blows this deal, it would be the stupidest damn thing I've ever seen. And that's what I think. Now we know we have, as I said before, obviously, we are heavily involved, and I'm the Chairman of the Company, the Crystal City company, which is welcoming. So I think may be some of the folks in New York should take much more welcoming savvy point of view on this deal.

Okay. My second question, as it relates to kind of the buy out at Farley, I think your overall cost in that deal might be sort of around $1,100 a square foot. I'm just wondering if you could sort of talk about your expectations sort of the leasing at Farley, timing and remind us what your expectations are for return on that project.

We take Farley building as a horizontal campus in New York. It's totally unique in terms of the space that we will be delivering. We have told you in the past that we think rent at this building are triple-digit numbers. And by the way, as you think about rents in this city generally, when I mentioned earlier some 44 million or 42 million square feet of activity for the year, some 4.2 million square feet across the city last year was leased at over $100 rents. So these triple-digit rents as it relates to redeveloped and new construction clearly have become the norm. We think again, our building is differentiated in a significant way from substantially all of the new vertical products. We remain in discussion with a number of tenants for the space. As I said, the space will be delivered for tenants to begin billed out sometime by the middle of next year. Very excited about the fact we now own 95% of these acid.

Our financial plan here, Steve, is we're basically going to build this deal with cash, cash coming out of 220 so that our cost of capital here is the lowest in the lowest possible to be. And we have enthusiastic, very enthusiastic reactions from the brokers community and the tenant community and as we -- I said and David both said, we love this one.

Okay. And, I guess, my last question, just around the uplift you talked about I guess, at two Penn and may be the uplift at One Penn, I know you quoted a $30 per square foot figure. Can you just kind of help us think through how you're sort of framing that out or thinking about the uplift and sort of the rent differential that you would expect there to be between some of the new product that Manhattan West and Hudson Yards and maybe ultimately your finished project that at One and Two Penn?

Well, I think it's pretty simple. The in-place rents are high 50s, low-60s. On average with current leasing being a little bit higher than that, but the average in the buildings are those numbers. We think the finished product will be worth in the marketplace let's say pick a number $90 a foot, so that's $30 uplift. Now out of that uplift has become a marginal increase in expenses, The cleaning doesn't get to be any higher or the operating doesn't happen -- taxes may go up a little bit. So basically, that's a fairly pure number. And we're pretty excited about it. We determined what we believe the future market -- remember this is trending now for a couple of years. We determined what we believe the future market will be based upon what we see all around us, what new building -- newbuilds are going for, what other phase is going for and the fact that we have the best location on top of Penn Station. And we have experienced in transforming these buildings both in theMART and in New York had many different locations and we have history and transformation yields in terms of tenant demand and pricing. So that's how -- that's our best judgment. And we're pretty certain we are right.

The next question in the queue comes from Manny Parchman from Citi.

Maybe if you can just stick to Farley for one more second. In the past, you discussed a potential life science component there and build that to support of that. It now sounds like you are squarely's focused on more a traditional, if you will, tech tenant. am I reading that correctly?

Yes, may be. We're in equal opportunity landlord. Where there's an important tenant at the proper pricing comes in with strong tenant, we're very happy to welcome, everybody with open arms. So we have some interest from science tenants, we have more interest from creative class tenants. We'll have interest from some fairly significant financial firms. So once again, this is not a special-purpose building. It's a building designed to service the entire market.

In terms of street retail transaction activity has been a little bit lighter. What gives you the confidence that cap rates haven't moved up more than the 25 basis points that you (inaudible) the cap rates in your NAV analysis? And maybe with that, can you talk about the potential new legislation related to tax?

The cap rates we put on this year's NAV is our best estimate of what the marketplace is. So it's a very safe marketplace but these great scarce unique assets, trend pricing that is, we believe, we hit it right on the butt, okay? The second question was what about legislation, Manny?

On the retail vacancy tax, that's getting proposed, I guess, from the umpteenth time.

Well, I think the key thing there is the umpteenth time. Everybody is concerned about the fact that there are lots of vacancies on the streets of New York, it's not good for anybody. It's especially not good for the landlords, okay? So I don't understand why the politicians, we talk to these folks all the time. I don't understand why the politicians don't recognize the fact that if landlords want the service more than they want the space filled up. And so obviously, the landlords that are professional will go to in the clearing price for the space. So I think it's extremely, what's the word, it's a bad idea both in concept and in execution. And I don't make predictions, but I'm fairly confident that it will go -- it will pass by. Just (inaudible), and I'm thinking -- going back to what Steve said that just I'm pretty confident that Amazon deal will get completed.

The next question in the queue comes from Jamie Feldman with Bank of America Merrill Lynch.

It sounds like you'll have a lot of move ins and move outs in the portfolio for the rest of the year and even as you're kind of getting ready for the Two Penn redevelopment and emptying out that building. Are you able to give us more color on what same-store NOI could look like, what earnings could look like, just some bit of a guide as we kind of as you get the portfolio ready for those big changes?

You're talking about guidance and as you know, we don't give guidance. We do guide for what we think are extraordinary things. For example, when the [Patent] office has moved out, when was it, the BRAC, when we had all of that dislocation in Washington, a better part of 10 years ago, we did guide for that because we thought it was something that was still very difficult to predict that everybody was focused on. Last year, we did guide to what the minimum, retail cash NOI would be, and I'm happy to say we missed it by $20 million to the positive side. So having said that, so we get -- will think about your question because it's a question. I will tell you one thing. I for one, as an operator, don't understand how folks think about this. When we empty out a slug of space that's paying us $55 a foot to transform the building and 2 years later, 18 months later, we let that space for $90 a foot, we think that that's a huge asset, and that's a very important part of our business and our colleagues as well. So what I'm really saying is that I wish you folks would look upon the fact that we are going to kick out $50 tenants and move in $90 tenants as a huge uptick in shareholder value. We hear what you're saying about guiding and everything, we'll think about it. But that's not -- that's not the normal way we run our business.

Okay, that's a fair point. I mean, I think it's more just about setting expectations and I don't think anyone disagrees that it's the right thing to do to kick out tenants and redevelop the buildings. It's more just th e market is a sense of what to expect as we're heading in the quarter -- quarterly earnings this year, each quarter. And then moving on, I know Manny just done cap rate. Can you just talk generally about your thoughts on the '19 transaction market. You said you've got office will probably pick up in terms of volumes, maybe what's on the market and what do you think cap rates will look like?

Michael Franco is here who's our Chief Investment Officer. I'm going to let him in for that question.

So Jamie, good morning. Like I did -- I think after a pause coming out of there, there's a number of things in the market, some new product like the condo, interest of 30 Hudson Yards, you've got some other called Midtown buildings, may be a lesser quality coming out of LAX. But I think the sweet spot is going to continue to be that under $300 million to $400 million size where a lot of deals were last year, but we also have some bigger deals coming up, whether it's (inaudible) putting out or some of the other assets in the [Garment] district. So it looks like near term, there's probably $5 billion to $6 billion of office product that is recently hit our will hit in the next 30 days. I think it's probably higher quality than what we saw for the bulk of last year, and we'll see how it plays out. But I think the investor interest at least from what we're seeing, hearing is active and I think just trying investors perceive value in Midtown as well just sort of on the price per square foot standpoint where most of the assets are trading for $1,000 a foot or less which is we're seeing now with some of the new builds that are going out of $2,000 a foot or north, that's a pretty attractive basis. So the market feels like it's picking up in terms of quality and I think we'll see investor interest reflect that.

I would put my two cents in, I agree with what Michael said. I think first thing is that buildings had been pricing now at $1,000 a foot in that neighborhood, a pinch more or a pinch less for years now. The investing marketplace has gotten used to that number and considers it to be fair value as I do. So there is no sticker shock and people are getting used to the pricing of what first-class Manhattan office buildings trade for. So I think that there's a very deep market of investors who want to invest in New York. I think it's basically the strongest market in the world. We know what's going on in London, we know what's going on in Europe, I mean, Tokyo is doing great, that's a whole different and general fish. So what I'm saying is we think New York gets way more than its fair share. We think pricing used to the pricing, and we're anticipating a strong investment sales investment market next year.

And then finally, Steve, you had mentioned a source of capital, noncore asset sales. Are you thinking more operating buildings or maybe you've seen a decent move in some of the REIT stocks, some of the equities you guys are holding?

All of that is on the for sale list. I'm not going to predict timing and I'm not going to which specific assets, but I mean we were pretty transparent in what we intend to do to realize over $1 billion of sales. Those -- it's pretty obvious what we're doing in terms of timing, those sales with our CapEx needs, et cetera. So that will all roll out over time.

The next question in the queue comes from Allen Kaminski from Morgan Stanley.

Just on the street retail, given what we saw happen with rents in 2018, do you guys have any thoughts on where you could see street retail rents bottom and start to inflect positively? And also, whether or Vornado is considering taking advantage of any distress you're seeing in the market?

We love distress, Adam. We can't wait for some distress. We have the capital base, the appetite and most importantly, the expertise to be interested in growing in this asset class at fair prices or even a little bit below fair prices. So there's that. We're not seeing a lot of that. We are beginning to see the first inkling of assets going back to lenders now, and so that's the beginning of that cycle. With respect to rents, the biggest problem on rents are that there are fewer tenants throwing the marketplace looking for space. So we don't yet know what the bottom price is. If you follow this market as most other markets, it will take a while, maybe a year, maybe 2 years, for some of these vacancies to be cleaned up by bottom fishers and then the market will level and start to grow again. So we have the enviable position of not really having -- whe we have a vacancy, we have a vacancy there. But in terms of the massive (inaudible) portfolio it's under leased, the long-term with good tenants, and so we're fine.

All right, that's very helpful. And then just one more on street retail. I know the Massimo Dutti and Westbury expiration got pushed out a little bit. Can you just talk about the latest update on those leases and then what the impact will be to street retail NOI in 2019?

Once again, that's a guidance question. I don't think the lease was pushed outs. So I don't think that -- and the neighboring (inaudible) lease has goes in the 20s, 24, I think. We have people cruising the Massimo Dutti space, we have nothing to report yet.

The next question in the queue comes from Alexander Goldfarb from Sandler O'Neill.

Steve, I appreciate your comment on guidance. So I guess, let me try to ask it this way. If you look over this year next -- well, Steve you got to try, right? Every New Yorker has got to try. If you look over earning this year, next, obviously theMART had you guys created values, the taxes went up, you'll recoup part of that but still that's a net headwind. Penn Two is going to come up offline I think next year, so that's NOI that will come off in the near term obviously you guys will boost rents and grow it eventually. But you then have the queue, the 555 that will get filled and produced NOI. So just with all the different pieces that are coming and going, including some of the street retail vacancy -- I mean street retailing that you talked about before, directionally, do you see this year to next that net NOI will be growing, stay flat or reduced just with all the different moving parts? I think to Jamie's question, earnings have been flat the past few years. So just trying to get a sense for how directionally people are thinking about because I think we all agree you're creating value at the NAV and property level but just from an FFO, that part stays flat.

Oh boy. I don't want you to hold me to this, but I would just say directionally, if you think flat, that would be a good thought, okay? So there's -- I mean, the business is -- some people referred to it as noise. I referred to it as the normal ebb and flow of our business, tenants move in, tenants move out, rents go up, rents go down, whatever, okay? So if you take it all together, the office business in 3 different jurisdictions, arguably, the best building in San Francisco, arguably, the best financial asset in Chicago and our New York business and our retail business, overall, I think it'll mold together as flat, but that's not a guide and don't hold me to it, okay?

Okay. And then the second question is just bigger picture, I guess, this morning or yesterday, [Silversteen] said you may go spec, downtown obviously Brookfield talked about going spec on the far West Side. Do you view this as marketing cluster like trying to drum up business, or are you concerned that we can suddenly have another supply wave where we're just sort of working through the previous few years of supply delivery, which is pressured rents in New York?

Hey, these are major, major people. They don't bluster, okay? They bull(expletive) a little bit, but they don't bluster. So you got to remember that both of these firms are firms that deal with promoted third-party capital, okay? So what they're -- my guess is, is I haven't talked to either of them about these, is if they can get an investor who has the appetite, they build the building. Why not, okay? So I think that's totally possible and whatever. It's a large appetite of investor capital for buildings or even for development in brilliantly located spots like Park Avenue, for example. So I have no idea what Larry and Rick are going to do and they're both seasoned guys. Rick Scott, fund money that he has discretions over, he can build it if he wants to. Larry will raise third-party capital if he can and we'll see what happens.

But you're not concerned about another supply side of sort of blood pressure rents though, it doesn't sound like?

A building here, a building there, a building in the next place, these building -- they all take 5, 7 years to create. They're like (inaudible) they will not have a dramatic influence on the 400 million square foot New York City office business. The last time that this happened was in the early -- in the 80s, in the early 80s where there was zoning change and then the entrepreneurial developers, there was a rush to beat the zoning change and 20 million or 30 million square feet was created in one slug. That is not happening now and will not happen now. By the way, as an aside, okay, we love the new buildings. I mean, we're pretty good at. We have built the Bloomberg building, built (inaudible) we know how to do it. It's part of our skill set. But our main business is in the core of properties that we own now. And if somebody's going to build a new building and get $120 a foot rents for it, that creates the absolutely wonderful price umbrella that we function under in the $8,000, $8,500, $9,000, $9,500 range, okay, so that's all fine.

The next question in the queue comes from John Kim from BMO Capital Markets.

Just want to follow up last question. Given Manhattan West directly competes with Penn Plaza, does that potentially change the time line of the redevelopment of Penn Two?

Absolutely not. Absolutely not. Penn Two, we're going as fast as we can on Penn Two. We're going to deliver the product as quickly as we can. We think it's unique product and I think that's all fine. The more people that are in our neighborhood in first class property with first-class tenants, the better it is for the entire neighborhood, us included. So we don't look upon them as a competitor. We look upon them as a colleague and as a good neighbor.

Okay. With your NAV at $97, can I just ask what your updated views on the share buyback given you now traded at 28% discounts? And I don't know if you saw this morning but (inaudible) just announced $2 billion buyback program during the call.

No, I didn't see that. Our view on the buyback are the same as we have communicated over the last year or so.

Which is you look at it, but it's lower around the priority list?

The answer is that our views would change if somebody were to do a buyback that was successful. So that hasn't happened yet, and so we'll watch and learn, keep our money on our jeans, and we'll see. So the answer is as of right now, a buyback -- our thinking about buyback is pretty much the same as it's been over the last year or so.

Okay. And then a final question, this might be for Joe, but at 220 Central Park South, you had on your balance sheet County units ready for sale at $99 million, and that's lower than what you've already closed in January. So I'm wondering if it's a good indicator of what you plan to close on over the next quarter going forward?

I think in Steve's remarks, he commented that through the first 5 weeks in January, it was another $290 million. We anticipate substantial additional closings in the remainder of 2019. And quarter-by-quarter, there will be more reclassified for accounting rigors into that category, that's your question. But yes, we expect substantially more closings. Remember, for all of the 4-floor apartments had been sold for the remainder of 2019.

(inaudible) accounting convention is that when an apartment gets a TCO, a temporary certificate of occupancy,it gets reclassified into, on the balance sheet, as apartments available for sale. So that the number that you're looking at is got not nothing to do with sales, nothing to do with the future, financial activity, it has entirely to do with how many apartments in what order we have gotten COs on.

It's a number as of the end of the year, not a number into 2019 -- that will grow into 2019.

Our plan is -- we get TCOs on the apartment serially as we go through right before we sell them. I hope that helps.

Yes. Is there a good run rate that we should be modeling in, is it $200 million to $300 million per quarter?

No. We haven't given the information by quarter. And to take that noise out of earnings we've shown it as noncomparable because again, it is one time, albeit 3 -- over $3 billion in total. But no, we haven't given that by quarter and I don't think we intend to.

It's going to roll out over the next year, okay, pretty simply. Whether it's another $100 million or $200 million more, one quarter or less one quarter, doesn't matter. It's going to go out and be sold over the next year.

The next question comes from Nick Yulico with Scotiabank.

A couple of questions. First on how we should think about -- you talked about taht $25 million of capitalized interest from 220 Central Park South. I think the plan is to pay down debt from the sales of the condos, which would lower your interest expense but then you're also losing that capitalized interest benefit over time. So can you just give us feel for how we should think about that impact to your interest expense over the next year?

Well, hi, it's Joe. Good morning. We've said publicly that we're going to pay down the construction first mortgage, which was originally in the amount of $950 million at year-end was a little over $700 million. Today, it's a little over $400 million. And that the balance of the proceeds are going to be used, as Steve said earlier, to fund the needs of Penn One, Penn Two, Farley, the entire pipeline of what we had in development. We've shown you in the NAV $1 billion, that's not, and somebody wrote in one of the report that an increase from the prior year quarter is really the same number, and that comes from the $3. $3.2 billion] of sales proceeds, $200 million of taxes is $3 billion, of course, the job was $2 billion, that's $1 billion. So I think that's where we are.

Okay. I'm just trying to think about interest, which is at its highest level for your company last year as kind of the benefit for interest expense and how does that change going forward as 220 Central Park goes away versus you spending on your at new redevelopments.

Simply put, our financial plan is this, the first sale that come out of 220 is going to pay down a secured loan of $950 million, which is now in the course and will quickly go to 0. So that eliminates the interest expense for that loan. And by the way, that loan is the lowest cost of capital in the industry. Then, all of the capital that comes out after that, which is going to be the better part of a couple of billion dollars, okay, will go into CapEx or other purposes. So when you think about it, I mean, we're going to be building these buildings with no interest cost and therefore, the (inaudible) of those buildings will be higher, the accretion to our P&L will be very substantial.

Okay. And then just going back to the retail segment. Can you -- I know we had the benefit of this year from Levi's, Sephora, Forever 21 lease commencements. As you offset that, you do have some of that move out, Massimo Dutti and then the expiration this year. I think there are also some temporary occupancy renewal item at Westbury. So do you mind just giving us a feel for the expirations and the move outs, the temporary occupancy issue, I mean, how much of an offset that is to your -- the benefits you are getting from lease commencements and lease escalations in the portfolio?

I mean, that's a detailed guidance question again. Basically, the beginning of last year, we said that our retail cash NOI would not go below $304 million, okay? That number was adjusted to $309 million because we bought back some of the retail -- or it was the other way around, $309 million, we bought back some of the Kmart space in favor of Facebook, so that number went from $309 million to $304 million. In midyear, last year, we said that, that minimum number, this is the minimum guidance that we gave last year for retail, would be no less than $315 million cash NOI, okay? We came in the year at $324 million, okay? So we're happy about that. It's too sensitive a number to really give you something off the top of my head. But once again, were guesstimating that the retail business cash will be flattish this year.

The next question in queue comes from Jamie Feldman from Bank of America Merrill Lynch.

I just had a quick follow, I don't want to prolong your call, but in the foot -- on the 10-K, on Page 31, you have a footnote talking about where you think you can get rents leased or kind of renewals done in 2019. And it looks like on office you're looking at about an 11% leasing spread. It looks like on -- to retail, you're looking at positive depending on where it is in that range, but generally positive. I just wanted to get your thoughts on are you seeing rent growth? Is this kind of flat -- a look at market rents being flat? I just want to get your thoughts on where market rents are going and is there any way to tie this into kind of leasing spreads for the year, that will be helpful?

First of all, my congratulation for (inaudible) that information out. I think that's genius. Joe, what are you guys seeing?

I was just going over with David that what Jamie is referring to is the office expiries in 2019 have an average embedded rent of $65.58, and Jamie took the midpoint of our guidance for what that will relet at and that was $73. So he did the math and said it's 11%, mark-to-market. That's what...

Jamie, I think the important point there is this the number that's published effectively is only relevant with respect to the 600,000 and something square feet that's actually expiring next year. So it's not reflective of mark-to-markets across the portfolio. It's not reflective of where we think rents are across the portfolio, or specifically looking at the space that's coming up over the course of the next few and, in fact, that space is coming up -- comes in at Two Penn Plaza, which in fact, is going to go out of service.

Okay. And then just...

Jamie, your observation that next year's numbers will benefit from an expiries at a low number, in the mid-60s as opposed $10 or $20 higher than that is a valid observation. So we do expect to have a low double-digit mark-to-market in 2019.

Okay. And then just general sense of rent growth in the market?

(inaudible) a little higher? Go ahead, Jamie.

Sorry, just general sense of rent growth, I mean would you say rents are rising or still generally flat?

I'll come back to what I said a little bit earlier, Jamie. And that is well if you look at a single spot number and say Manhattan rents generally over the last year, went up 3%, 4%, 5%, whatever the number is, again I think the key is and we've emphasized in any number of our calls, is looking at the subdistricts in the city where we've seen the highest rent growth. So I mentioned Midtown South, which obviously include their West Chelsea assets, asking rents in Midtown South have increased dramatically over the last couple of years. The same thing is true obviously, in Hudson Yards and in Manhattan West where rents started out several years back in the mid-70s, and those numbers today are in the triple digits. The most telling thing is I said earlier is what we're seeing today is triple-digit rents are no longer a sticker shock to tenants as it relates to new product and redevelop products. So generally, I'd say we're seeing a bifurcation in the marketplace between buildings that are older buildings, not redeveloped where rents are flat and maybe even trending down a bit to the redeveloped products and new buildings where we are seeing rent increasing. And then the other thing I would add to all this is from a concession point of view, we see concessions that basically have leveled off at this point in time, all encouraging from a net effective rent point of view.

Okay. All right. And I have to be honest here, I have a client who's even smarter than I am that pointed out to me, but full disclosure.

That's all very interesting, I'm happy to give you the credit.

The next question in the queue comes from [Daniel] from Green Street Advisors.

Just a quick one for me. On NAV page, it looks like you raised the cap rate for residential by about 50 bps. Can you provide any more color on that? And is that speaking to sweetness in the resi market in New York?

We're not that smart to know whether it's exactly this or that or the other. We just thought 3.5 was a very aggressive number. It's a small number in our portfolio, doesn't affect the NAV substantially. And we thought the better part of conservatism and the better part of valor was to take it up a notch. I'm sure that the residential gang would fight me and say the numbers really 3.5 or 3 or 2.5 or whatever it is but we're comfortable with 4. And from our point of view, it doesn't make any difference whether it's 3.5 or 4 in terms of the shareholder value of the company. But we have limited market knowledge to support that. We have some, but I mean we're not going to die on our sort over that number.

The next question in queue acute comes from Manny with Citi.

It's Michael Bilerman here with Manny. Steve, last July...

Hi, Michael, I was wondering where you're hanging.

I'm hanging. You made a comment last July when talking about the NAV discount that you have fluctuate between being frustrated and being pissed and you said, we can quote you on it so I'm quoting you on it. The NAV went up over the course of the year, right? You've been executing and getting additional office, NOI, lease has started and a number of other value-creating activities. And so I'm just wondering at what point should the market expect any sort of future ways of narrowing this gap, I've talked about the share buyback being not something that you'd want to entertain because others haven't been successful at it in your mind. But when should we expect something else that may occur, if anything?

Once again, as I said before, we think we've done more in terms of restructuring our business, of focusing our business, spinning off this, spinning off that, selling noncore assets, et cetera, anybody in the entire -- and once again, we still think the stock is significant under value. And we continue to work hard on it. We can't really tell you and we're not going to speculate and we're not going to even hint anymore to what we might do. We decided to do something, that's when we will announce it.

Do you feel like the timing -- the time to do something is getting shorter given what's going on in the marketplace that you'd want to make a decision about what route to go to narrow this Gap that arguably, you've been frustrated with. It's not something that's new and I totally agree with you of all the value-creating things the company is that over the last number of years to highlight that value and increase that value. I just don't know whether you feel like time is getting short to want to take advantage in the marketplace that may be changing.

What do you mean by take advantage and what do you mean by may be changing?

Well, I don't know. I think there's a lot of uncertainty out in the global marketplace, and you don't want to be a situation where you can get to that NAV in the event have a soft economic environment or there some other external event that occurs?

I think that would be the opposite of what you just said. You're hinting that we may have a recession and the stock market may go down. That would be the time that we would want to avoid buying stock at this price if you think it's going to go lower. I don't know. I mean, I'm not...

Well, I'm not saying stop -- stock buyback. I can see that your view on that, that may not be the route to go. I'm thinking more broadly strategic in terms of liquefying additional assets, may be doing additional spins or spin offs. Doing some other may be type of sales transactions to narrow the gap between what you believe is $97 and the stock that's in the 70s.

The answer to that is yes. I mean, we appreciate your advice. Believe me, that's something we focused on every minute of every day. And I've been cautioned by some of -- not to speculate, not even to hint that what we might do so shut up and do it and that that's what we're going to do.

And look forward to seeing what comes out. I appreciate it.

And the last question in the queue comes from Steve Sakwa from Evercore.

Just a follow up. David, you had kind of touched on this. Just in terms of like that TI leasing commissions, they're running a little over 12% in New York. I'm just curious how you sort of see that number trending over the next year or so? I mean, the fence are up, you see CapEx in TI leasing commissions kind of being flat so that number can go down or do you see that 12% holding steady?

Leasing commissions realistically are a function of a percentage of the rents. So leasing commissions realistically are going to track directly as it released rents. So unless I'm missing something, I want our leasing commissions to be generally as high as they can be because it's going to reflect significant rent growth. So I think the only variable relates to TI allowance and as I said, I think those numbers have plateaued.

We have no further questions in the queue at this time. So I will now turn the call back over to Mr. Steven Roth for any closing remarks.

Thanks, everybody. I just wanted to emphasize one thing, which is in my remarks, I said that our financial plan is to take the very significant billions coming out of 220 Central Park South, which has a 0 cost of capital and putting it into our developments, which will be enormously accretive. We're very excited about our future prospects and growth. And all of our conversations about 220 has focused only on One Penn, Two Penn and Farley and not all the other assets. So anyway, we're very enthusiastic. We look forward to talking with you again, next quarter.

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