美國沃那多房產 (VNO) 2012 Q2 法說會逐字稿

Good afternoon and welcome to the Vornado Realty Trust second quarter 2012 earnings call. My name is Ellen and I will be your operator for today's call. This call is being recorded for replay purposes. All lines are in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question-and-answer session.

(Operator Instructions)

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

Thank you. Welcome to Vornado Realty Trust's inaugural quarterly earnings call. Yesterday afternoon we issued our second-quarter earnings release and filed our Form 10-Q with the Securities and Exchange Commission. These documents as well as our supplemental financial information package are available on our website, www.VNO.com under the Investor Relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q, and financial supplements. Please be aware that statements made during this call may be deemed forward-looking statements and actual results may differ materially from these statements due to a variety of risks, uncertainties, and other factors.

Please refer to our filings with the Securities and Exchange Commission including our annual report on 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, August 7, 2012. The Company does not undertake a duty to update any forward-looking statements. On the call today from management for our opening comments are Michael Fascitelli, President and Chief Executive Officer, and Joseph Macnow, Chief Financial Officer. In addition, Steven Roth, Chairman of the Board, David Greenbaum, President of the New York Division, and Mitchell Schear, President of the Washington, DC Division are here to answer questions during the question-and-answer session. I will now turn the call over to Michael Fascitelli.

Thanks, Cathy. Good afternoon and welcome to our first earnings call. There's quite a few on the phone. We are happy and delighted that you all are joining us today. We appreciate your time and attention. After my prepared remarks, Joe Macnow, our Chief Financial Officer, will provide a financial overview, and then we will answer your questions. We will end at approximately 2 PM.

It has been a very productive quarter for us, and we are making significant progress on the We Will statements made in Steve's shareholders letter. We have made substantial progress on simplifying the Company and are committed to continue this. I'd like to remind everyone that 80% of our earnings come from our New York and Washington office and retail holdings where we have great platforms and great management teams.

Let's start out by talking about asset sales. As we said in the past we are exiting the mart business. In the second quarter we sold or contracted to sell four Mart assets for $228 million -- the LA Mart, the Boston Design Center, the Washington Design Center, and the Canadian Trade Show business. As a reminder, in the first quarter, we completed the sale of 350 West Mart Center for coincidently $228 million. In the second quarter we also sold the Washington Office Center which is contiguous to the Washington Design Center and six non-core retail properties. The total proceeds from second-quarter sales are $500 million with a net gain of $177 million. Together with sales in the first quarter, total proceeds are $821 million, with a net gain of $232 million.

In the second half of the year, we are contemplating the sale of over another $1 billion dollars of assets including beginning the mall disposition program and continuing the pruning of our strip center portfolio. We are currently marketing Green Acres Regional Mall and Kings Plaza Regional Mall as well as a 650,000 square foot power strip center known as The Plant in San Jose, California, to name a few.

Let me now talk about acquisitions. In the second quarter, we focused on street retail which I'd like to review. First we contracted to buy 114,000 square foot retail condominiums at 666 Fifth Avenue for $707 million at a 4.5% going in cash cap rate and a 5.6% GAAP cap rate. This deal is expected to close in the fourth quarter. As you probably know, we acquired a co-controlling 49% interest in the 666 office condominium in December of 2011. Second, we announced last week that we had entered into a lease with Host Hotels and Resorts under which we will redevelop the retail and signage components of the New York Marriott Marquis Times Square hotel. This lease gives us effective control of the retail site and contains options based on cash flow which, if exercised, will lead to our ownership and reward us for our redevelopment efforts. The property is located in the bow tie in the heart of Times Square and spans the entire block from 45th Street to 46th Street on Broadway directly across from our iconic 1540 Broadway retail property, formerly the home of the famous Virgin Records store and sign. Host Hotels and Resorts saw how we transformed that property where we added Disney and Forever 21 flagship stores that created a full block front of state-of-the-art dynamic LED signage. When they sought expertise they ran a competitive process and chose us.

At the Marriott Marquis site, we plan to spend as much as $140 million to redevelop and substantially expand the existing retail space including converting the below grade parking garage into retail and creating 6-story high, 300 feet wide block-front dynamic LED signs. 666 Fifth Avenue and the Marriott Marquis retail are the bull's-eye locations in the two best retail areas in Manhattan -- Fifth Avenue and Times Square. Both have tremendous presence and tenant demand and we are really excited about these opportunities.

Our real estate fund acquired a 167,000-square-foot retail property, the western anchor of the Lincoln Road shopping district in Miami Beach for $132 million. The Lincoln Road retail corridor and our property specifically have many of the same characteristics as our Manhattan street retail assets. In addition, the fund acquired a 112,000-square-foot office building in Santa Monica for $62 million. The fund is more than halfway through investing it's $800 million of committed capital. When taken with the potential promote our economic interest is higher than our 25% equity interest.

Now let's talk about our core businesses. New York and Washington office and retail represent 80% of our earnings and growing. Our New York office assets totaled 19.5 million square feet, substantially all in midtown. Our recent office acquisitions have been concentrated on Fifth Avenue and Park Avenue. We have a highly diversified office tenant base with over 1,200 tenants. No one tenant is more than 3.3% of the New York revenues. Our office leasing activity in the first half of this year was a robust 987,000 square feet. We have modest lease expirations with 267,000 square feet expiring in the second half of 2012, and 760,000 square feet expiring in 2013. We believe the office market has slowed since the first half of 2011 and the financial services sector is soft. We are experiencing good growth for media, technology, education, and healthcare providers. Of our first half leasing, 22% represented tenants expanding or new to the marketplace. Real growth. While only 1% represented contractions. That may be surprising to you, but it's the facts.

New York is still growing, albeit at a slower pace, which when coupled with very limited new supply should allow rents to continue to modestly rise. Our Manhattan street retail leasing in the first half was also a robust 174,000 square feet. Rents for New York City street retail are now well above their all-time highs and we continue to have great growth prospects with in-place rents 30% under market. New York has experienced record-breaking tourism with over 50 million visitors last year, a big plus for our retail assets. At 2.2 million square feet before the 666 and Marriott retail transactions, we owned the largest street retail platform in New York City. Retail feet in New York are expensive and very valuable.

Let me list some of our tenants and locations. H&M at 640 Fifth Avenue, Coach at 595 Madison Avenue, Joe Fresh at 510 Fifth Avenue, Top Shop in Soho, plus our stores around Bloomingdale's, and in the Macy's/Penn Plaza district and up and down Fifth and Madison Avenues and at Union Square. Great locations, great stores. In just the next couple of years, one of our best leases on Fifth Avenue expires. Re-leasing here could produce an annual increase in rent of more than $20 million. We had this experience earlier this year at 689 Fifth where the rent doubled to $2700 per foot.

As we look at New York City asset values, sub-5% cap rates may seem low, but in fact they may make imminent sense. The spread between office cap rates and US treasuries is historically high, and absolute treasuries and borrowing costs are historically low. The safety and resiliency of New York City continues to draw significant investor interest in this volatile world. Even though office rents are still 20% below peak, asset values have recovered to near peak levels.

Turning to Washington, we are the largest office owner with a portfolio that totals almost 20 million square feet. The Washington market is soft, but perception here is worse than reality. This is the nation's capital, home of the United States government, which statistically are the most educated workforce in the country. Companies continue to find Washington attractive for relocation and expansion and capital continues to actively seek properties in the market. We really like this market and our assets here over the long-term. Washington today is experiencing the perfect storm. BRAC, the GSA trying to be more efficient, a presidential election, and a budget standoff creating uncertainty. But we expect that moderate growth and limited supply over the next several years will stabilize the market.

We are leasing space at good rents and getting more than our fair share of the leasing activity in the market. During the quarter we leased over 181,000 square feet of space in Crystal City, at initial rents of $42.30 per foot. In addition at Howrey's former space at the Warner building, five leases have been signed totaling 117,000 square feet, leaving 210,000 square feet remaining. Even at Skyline, we leased 129,000 square feet. As we outlined in our 10-Q, of the 2.4 million square feet of Department of Defense lease expiration, resulting from BRAC, to date we have resolved 818,000 square feet or 1/3 of the total, including demolishing the existing 350,000 square feet at 1851 South Bell, to rebuild a new state-of-the-art 700,000 square foot office tower renamed 1900 Crystal Drive to be delivered in 2016. Rising 150 feet above the current skyline, 1900 Crystal Drive will have a halo effect on all of Crystal City.

Regarding the re-leasing of the DOD space, we are ahead of where we thought we would be at this time and Joe Macnow will expand on this when he comments. We will continue to update you quarterly on our progress. Regarding our 112 asset, 15.4 million square foot shopping center portfolio, we leased 874,000 square feet during the first half of the year. Our strip portfolio's metrics compare favorably to the best portfolios in this asset class. We will continue to prune this portfolio, concentrating initially on selling centers outside the tri-state area and make it even better.

Regarding our mall portfolio, occupancy increased as did tenant sales in the first half of 2012. Although we are not a national mall operator, our malls have very high productivity. We recently announced a 572,000 square foot lease at the Chicago Merchandise Mart with Motorola Mobility, owned by Google. Motorola Mobility is moving its corporate and world headquarters to the Mart, bringing with it 3,000 high-tech employees. We are delighted with this transaction. It's a win-win-win. The CEO of Motorola Mobility, Dennis Woodside said, quote, "You walk into that building and there's energy," end quote. And Rahm Emanuel, the Mayor of Chicago said, quote, "We've never had a place where all the intellectual capital can come," end quote.

This transaction increases the office component of the building to approximately 50%, right sizing the mix of office space and showroom space. The lease is expected to commence in early 2013. The successful completion of this important lease was a joint effort between our New York and Mart leasing teams. After the disposition of the Mart properties, the Mart segment is now trimmed down to 3.5 million square feet. With the Merchandise Mart building in Chicago, and its domestic trades show operations and the development of the Cleveland Medical Mart and Convention Center which we will operate for Cuyahoga County. Seven West 34th Street in New York, presently in the Mart segment will be converted to an office building in 2014 and moved to the New York segment.

In conclusion, Steve and I believe we have a great business, great assets, and great people. We will continue our strategy of pruning and recycling assets to increase the overall quality of our portfolio. We will continue to make Vornado a simpler company. Most of our efforts will be directed internally, capitalizing on our non-income-producing assets, our redevelopment assets, and our development opportunities. Now I'd like to turn over to Joe Macnow for the financial review.

Thank you, Michael. Yesterday we reported comparable funds from operations of $1.13 per share versus $1.15 for the prior year second quarter. Total funds from operations was $0.89 per share, versus $1.27 for the prior year second quarter. First call was at $0.95 per share, and some analysts factor in non-comparable items into their estimates and others do not. We have over $2.6 billion in liquidity and as always, our investment-grade balance sheet is very strong. Two measures of its strength are a 39.2% consolidated debt to enterprise value and a consolidated debt to EBITDA ratio of 6.7 times.

In capital market transactions this year, we have completed five real estate financings, aggregating $871 million, and a weighted average interest rate of 3.31%, with a weighted average term of 6.2 years. In April, we called and repaid $500 million of exchangeable senior debentures. In July, we announced the redemption of $255 million of preferred securities with a weighted average dividend cost of 6.9%, funded by our recent issuance of $300 million of 5.7% redeemable preferred shares. These linked preferred issuances and redemptions will result in a $3.1 million lower annual dividend cost and an $11.7 million gain in the third quarter of this year.

In addition, we still have $732 million more preferred securities, which we could currently redeem with similar economics. We have virtually no debt maturing during the remainder of 2012, and we are working on 2013 debt maturities. At today's interest rates, spreads, and debt yields, the $700 million of fixed rate 2013 debt maturities with a weighted average interest rate of 6.02% represent a potential reduction of annual interest of over $14 million, or $0.07 per share, when they are refinanced. Our New York segment same-store EBITDA was up 2.9% over the prior year's quarter. We leased 474,000 square feet of office space at an average initial rent of $64.50 per square foot, of which 191,000 square feet was second-generation at $70.39 per square foot resulting in a 7.4% GAAP mark to market and a 4.5% cash mark to market.

We leased 140,000 square feet of retail space at an average initial rent of $68.83 per square foot, resulting in a 3.7% GAAP mark to market and a 3.2% cash mark to market. This included 93,000 square foot lease at Union Square bringing occupancy back to 100% and a 32,000 square foot lease at 1540 Broadway, on the third and fourth floors giving us back 2,000 square feet of prime retail space on grade and 2,000 square feet one level above grade. New York segment occupancy was 95.4%, down 70 basis points from the first quarter as a result of Bank of America vacating 180,000 square feet at 100 West 33rd Street. New York street retail EBITDA was $45 million compared to $47 million in the prior year's quarter as a result of $2.8 million of income in the prior year's quarter from the acceleration of FAS 141 income from the termination of the lease at 1540 Broadway and the vacating of the Gap store at 1135 3rd Avenue.

Our Washington, DC segment same-store EBITDA was down 8.1% from the prior year's quarter primarily due to the impact of BRAC. We leased 526,000 square feet at an average initial rent of $36.66 per square foot, resulting in a 70 basis point GAAP mark to market and a negative 4.2% cash mark to market. These results include the renewal of the National Institute of Health 127,000 square foot lease in Bethesda, Maryland, at $32.39 per square foot, compared to $43.18 per square foot of expiring rent. Excluding this renewal, average initial rents were $38.00 per square foot and the GAAP and cash mark to markets were 7.2% and 4.1% respectively. Mike said at Skyline we leased 129,000 square feet. The average initial rent here was $32.20, with a 14% mark to market. Occupancy in the total Washington segment was 85.9%, down 140 basis points from the first quarter.

Based on better than projected leasing, for the first six months of the year, we are currently estimating that 2012 EBITDA from continuing operations for the Washington segment will be better than our previous estimate by $5 million as outlined on Page 49 of the Form 10-Q. Our retail strips and mall segment team leased 384,000 square feet with mark to market GAAP and cash spreads above 20%, almost all of which occurred in the strips. Retail segment occupancy was 93.5%, up 30 basis points from the first quarter. The trimmed down Merchandise Mart EBITDA in the second quarter was $17.6 million. That's on a continuing operations basis. A $2.9 million improvement versus last year's second-quarter including a 10.5% same-store increase. At this time I'd like to turn the call over to the operator for Q&A.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Steve Sakwa, ISI Group.

Mike, I wanted to see if you could clarify -- you said in the second half of the year, you're looking to potentially sell up to $1 billion. I think you said malls and strips and you mentioned Green Acres, Kings Plaza, and the Plant. You didn't mention Monmouth and I thought I that was part of the three malls that you were looking to sell. So I was just wondering if you could clarify those comments and are there any other types of investments that are included in their such as Lexington or some of the other smaller non-core investments you have or is that truly just some of the core real estate?

Hi, Steve. Thanks for the question. We're going about the sale of the assets in a very measured way, an orderly way. The first two we talked about in the malls were Green Acres and Kings Plaza. Monmouth is on the list and I think would be subsequently dealt with as well as the malls in Puerto Rico. And so it's a process of obviously putting the properties on the market in a very, very orderly way.

As far as others -- those are only a few of the things up for sale, we're also looking at other strip centers and some more assets that we hope to dispose of. I mentioned $1 billion; we've already achieved $821 million of the $1 billion and I said there's another $1 billion probably to come. So we expect that if all that's successful this year and we'll certainly exceed the $1 billion we talked about and whether we will get to a full billion dollars after we add that $800 million -- we're not certain. But we'll make a big dent. Will be closer to $2 billion than $1 billion.

Okay. A follow-up, maybe bigger picture for you or for Steve, for a number of years, you were a little reticent to make a lot of acquisitions. I think the return hurdles just weren't there and you were a little uncertain about the environment. In the last maybe couple of months you guys have gotten much more aggressive on the deal side. I'm just wondering if you can talk what changed in your philosophy, either return hurdles, underwriting, capital markets, what's making you get more aggressive now versus say, six or nine months ago?

I won't characterize whether we were aggressive before or not. The deals we've done whether it's 666 [retail] (corrected by company after the call) or 280 Park Avenue, or the Marriott deal we just talked about, were very largely value-added deals, which had to have, in most cases substantial re-leasing done, or substantial development too or redevelopment. And those returns we are manufacturing are better than buying stabilized assets that don't have that characteristic. Not the kind of returns as I said we hope to aspire to. But gaining maybe 100, 150 basis points we think on a stabilized basis by dealing with those kinds of situations.

666 was an asset that I think we thought was a terrific asset that wouldn't fit high-value added for the short term because it was well leased and yielded as I mentioned a 4.5% [cash] (corrected by company after the call) cap rate or 5.6% on a GAAP basis. But we do think long-term those leases are under market, decently under market and we have a substantial opportunity upon their roll or sooner to do something with that property and it's just a great location.

So we are right on our strategy of sticking to a really focused geography with really world-class franchise assets. And for that we think the returns we are getting are appropriate. We're not getting rich, certainly not an acquisition environment where you can steal things.

Joshua Attie, Citi.

It's actually Michael Bilerman here with Josh. Mike, towards the end of your comments you talked about focusing internally and focusing on the non-producing assets, redevelopment, development opportunities. Steve in his letter talked about this $1 billion trove of non-income-producing assets. Maybe you can dive a little bit deeper about what the timeframe is, what the components of that $1 billion are and how you're going to harvest that.

And then maybe talk about the capital needed for the redevelopment and development -- I think obviously some of the big projects being 1900 Crystal, 220 Central Park South, and Springfield Mall. But just talk a little bit about what we could expect in terms of deployment from that combined with the non-income-producing?

Joe will take it a shot at that question.

Well, Michael, you've enumerated the major items included in the $1 billion. Of course at Springfield Mall, you're well aware that that development is proceeding. We intend to break ground next year.

220 Central Park South, which, David, you might want to comment on --

220, Michael, we think is a great, great residential site. In fact, probably the best in Manhattan with unobstructed views of the Park. It's been a process. It's taken us about five years to vacate that property in terms of the residential tenants but we have now started demolition of this property.

We've got enormous financial aspirations for this development. The timing of this thing remains a little bit uncertain. We're involved in a bit of a tussle with a neighboring property owner but I will tell you we will keep you advised of this from time to time. What's interesting about that one is our site is directly, directly in front of his site, and we feel very good about where we are in the process with demolition having commenced.

Thank you, David. Of course none of the assets that we've talked about so far or the others that I'm going to enumerate have any leverage on them. And two more in Washington, that's 1900 Crystal Drive, which Mike commented on in his opening remarks, and then the 20 acres of land in Pentagon City, so Mitchell Schear is going to comment on both of those.

Sure. Thank you, Joe. In Crystal City, 1900 Crystal Drive, as Mike mentioned in his opening remarks, we are finalizing our plans, finalizing our approvals and are excited that this will be an opportunity for us to create an asset class that we haven't had heretofore in Crystal City. And 150 feet taller than any asset that we own in Crystal City looking right in at the nation's capital.

So our plans will continue. We'll move ahead and by the time we deliver that building in 2016, we're very comfortable in terms of where that will be from a market positioning standpoint given the current condition of leasing activity in DC at the moment.

And then with respect to the Pentagon City assets, if you think of them in two tranches, we have apartment assets totaling about 2,100 apartment opportunity units and we are proceeding full speed ahead to get approvals on about 700 units at this point in time. And once we have our final approvals in place, we are likely to move ahead and build that building as well.

Then with respect to the other 10 acres, we are in the final stages of getting a master plan approved with the County of Arlington. And we expect to have those approvals within the next 12 months or so and then we'll take stock and decide when the right time would be to proceed with that project.

Of course, Michael, 1900 Crystal is only the first of the planned reformation of Crystal City taking it from 8 million square feet to 12 million square feet under that increased density plan that Arlington County gave us to deal with the economic effects of BRAC. Mitchell already has his second building plans underway.

And there are another 20 smaller assets, but we will take up the rest of Q&A with that if we go into it. I hope that answered your question, Michael.

Just as a follow-up, how much -- the predominance of that $1 billion are a lot of these potential development projects, how should we think about the future capital in aggregate? So there's obviously yield on the $1 billion as you bring these developments and bring them to service and with an additional capital to get them there.

I think, Michael, each asset is different. Springfield Mall is over $200 million of incremental capital. Central Park South will be over $400 million of incremental capital. But these are not financed.

And we will look at each asset whether we finance it in the construction market, whether we would -- incremental, the returns on these assets are quite attractive with the total cost and they're really attractive on incremental basis. So we're going to look as we do at all capital markets and assess the best way to finance these. But the total financing, the total amount of money varies by asset and it will be a decent number overall, but we have lots of options to finance the existing assets and obviously the improvements.

Jeff Spector, Bank of America Merrill Lynch.

I'm here with Jamie Feldman. Our first question, Mike, thinking about your script, you very carefully selected the word simplification, simpler Company. I think that's for us the first time we've heard you say that. Obviously there was the outline in the annual report, but can you talk about that versus let's say using the word transformation of the Company?

I think it's a gradual process. I mean, we have assets that we think that we can recycle and sell right now that, better other people see it and we can take the cash and do better things with them. We have also assets that we think are less liquid that would take a longer time to get out of. But we want to obviously maximize the value out of them.

So it's a process and transformation sounds like we're going to blow everything up. And I think it's an orderly process, a transition where we can get the maximum value and we can also be reinvesting in the areas where we said, street retail, New York City, Washington, and high-quality assets and improving the asset quality of the Company. So it's a very deliberate strategy over a period of time.

Thank you. And this is Jamie with a follow-up. Focusing back on Washington, can you give us a sense of the current leasing pipeline? And as we look forward to 2013 maybe an expectation of how much lower -- I know you've given guidance for what 2012 EBITDA would look like with an improved outlook this quarter but how should we be thinking about 2013 and when EBITDA hits bottom?

Let Mitchell start on that and then Joe can chime in.

I think as we said in both Mike and Joe's comments, we've been carefully focused on what our EBITDA production would be. And we've modified our expectations for 2012 in a slightly positive direction as we monitor each of the leases that are expiring in each of the different submarkets. And I think as we are projecting forward, into 2013, we're looking at a relatively flattish year for 2013 because our expectation has been for years, since the BRAC legislation was passed back in 2005 that it would take us a couple years.

And given other market conditions, we're really looking at a leasing market for the balance of 2012 and 2013 that will be fairly steady in the fairly low end of the continuum. And then we start seeing a pickup in the 2014 timeframe. And given that there are very limited starts and given the kind of economy that Washington is, we anticipate that we'll start seeing solid pick up in 2014.

Joe, you wanted to mention the --

As Steve put in the Chairman's letter, we expect that the re-tenanting and backfilling of the BRAC vacancy in Crystal City and Skyline could cost as much as $1.50 per share and with 200 million shares, that's $300 million in round numbers. Approximately half coming from diminished cash flows -- and you know what our estimate is this year -- next year, flattish to maybe a little better, the year after, certainly better. And another $150 million coming from the TI's at $75 a foot on 2 million square feet exclusive of 1900 South Bell, which is being redeveloped.

Anthony Paolone, JPMorgan.

Michael, I appreciate the comment about the simplification being a process. I was wondering if you could go through things like JCPenney, LNR, Toys, even 555 California and even strip centers for that matter that aren't part of New York, DC, or street retail that you mentioned as being core. And just, are those long-term holds as part of the simplification process and they're just not coming up now? Or how do they fit in?

Anthony -- thanks for the question. I think -- what would be your definition of long-term? Obviously the strip center pruning is going on as we speak. We are in the market to sell a big one and several smaller ones. We have the same thing going on with some of the malls.

And that will obviously simplify the Company geographically. We are really looking at outlying geographical areas, looking at some of the single-tenant assets, et cetera.

There's a certain group of assets like you mentioned LNR that is -- when we bought LNR we had a 26% interest in it. It was adjunct to our real estate business. Quite frankly, it has been a terrific investment exceeding all of our expectations. I think that we had $22 million of income in the first half of the year, which is over a 30% return on our investment. I think 35% to be exact.

So we are enjoying great results, but right now the owners are exploring strategic alternatives so that's got its own timeframe. Each of these is a little different. Probably the most longer-term assets to deal with are JCPenney and Toys, which I think will be on a longer-term schedule. I think as I said before, we're doing this in a very measured way and we think at the end of this year we'll be simpler, more focused, have generated a lot of cash from asset sales. And at the end of next year we'll be even further simplified, further focused, and have generated a lot more cash at that point.

As a follow-up, as you go through this simplification and you go down this path, I guess a two-part question. One, do you think you have the team in place? And two, what does G&A look like pro forma, all this -- it's kind of run towards the top of the pack historically.

I think we have a great team in place. Most of our effort on the teams are in the operating businesses of Washington and New York, which we think are great. We have a very good team in the retail business.

And, obviously as you shrink the asset base, we plan to shrink the G&A. And as certain pieces go -- clearly and obviously in our Mart disposition program, we've already reduced G&A significantly in that and we will further upon the sale of these assets.

So G&A does not shrink dollar for dollar as you sell assets. It doesn't shrink quite the same rate but we think we'll be able to shrink the G&A. And we think we'll be able to still maintain great operating teams to run the assets we have. And quite frankly, retain our people to dispose of the assets we want to dispose of and to buy the assets we want to buy. Joe, do you want to add to that?

We announced in prior 10K's and 10Q's that the mart business has already gone through a reduction in force, a quite substantial reduction in force, 25%. In fact, that's one of the reconciling items between first quarter and second quarter G&A, because the G&A is lower in the second quarter for a number of reasons. But one reason is certainly over $1 million coming from that reduction in force. And that process will continue as these assets continue to be disposed of.

Michael Knott, Green Street.

Question about office. Just curious how you thought about buying one small office in West LA, and then sort of related to Tony's question, how do you also think about continuing to own 555 California Street in San Francisco? And related to both of those, should we consider Vornado to be in the running to buy either or both Northern or Southern California EOP portfolios whenever Blackstone decides to sell those?

I'll start off and I'm going to ask David to comment. We've considered 555 to be a core holding. Not a superfluous asset; it's a very large asset and arguably one of the best assets in San Francisco or California.

The asset in Santa Monica is a value-added play the Fund owns. It has to lease that up, get it to its naturally steady-state income and then obviously the Fund is in the business to sell things at that point. So that would be a candidate for disposal once the value added component is done.

And we are trimming assets in California like The Plant as I mentioned. But the office market in California, whether you were asking about the Blackstone for that or for other assets at Blackstone, we think is one of many acquisitions we've looked at. And I don't really want to speculate on how that will be sold, if that will be sold, or when it will be sold. Obviously, if they're selling assets that we're interested in, we would look at that.

Dave, do you want to comment more about 555?

As it relates to 555, I guess I would just say that 555 is one of the great buildings in the entire country. In fact when I describe it, I think of it as the General Motors building of the West Coast. It's on an entire block, it's got a plaza, it's got enormous presence in the city, and probably has the best tenant roster in the city.

And obviously, recently we've re-upped with Goldman, with Morgan, with KKR, with some of the other great names. We think there's some real upside in this building going forward. The rents in the building today are somewhere in the mid-$50s and as Mike says, it's a building, candidly, I'm proud to be a caretaker of.

You guys if we look at our program for dispositions or -- that is not on the list of assets that we talk about in the near term or any of the numbers that we talk about in terms of the sales objectives.

Okay. Thanks. And my last question would be, can you give us some rough ballpark guidelines in terms of what you're thinking on expected returns on your development pipeline versus maybe the Times Square retail redevelopment project at Marriott Marquis?

Joe is shaking his head at me.(laughter) Joe is nodding no, Michael. But for you, you want to know what the projected the yields are on assets like Springfield Mall or what are you trying to get at?

-- profile looks like on those types of projects versus maybe Times Square.

The Times Square deal is a development deal. We looked at making multiples of the money we invest. Hopefully, we stabilize at a much higher yield on cost, which produces a big gain because of the implied cap rate at that point.

Lots of things have to happen between now and that, so I think it's premature to speculate on those exact numbers. We'll give you an update as we get closer and the development plan gets finalized there. We obviously are going in there not for a smidgen edge but really creating multiples on our invested capital.

Certainly on Times Square, our third-quarter 10-Q will cover that transaction much more granularly than the press release did, and you'll be able to piece together a reasonable expectation from the third-quarter 10-Q.

I would say any standard we have, whether it's an acquisition, or a development, or what we do a lot of is redevelopment, we look at where we will stabilize the return on cost, unlevered. And obviously then we look at the leverage return to the extent there is leverage, but we really look at what can we create and how does that look relative to our other opportunities and investments? And then obviously how much money we could create if you then potentially either valued or sold the assets.

1540 probably would be a good example of that. It took a while. We got Virgin out. We had it re-leased to Disney and Forever 21, we redid the signs. So it took five or six years, I don't know the exact timeframe. But we created a huge amount of value because of the yield on that asset is substantially higher than the value we could sell it at. So each asset is a separate case and I'll be happy to go into more detail with you on these assets as they get closer to that point.

Ross Nussbaum, UBS.

Mike, can you talk about the decision to sell Kings Plaza? Why not Rego Park now? Why was Kings Plaza put ahead of Rego, and to what extent does the potential sale of Kings Plaza facilitate or accelerate a reorganization or a folding in of Alexander's?

I don't think the sale of Kings Plaza at all facilitates the folding in of Alexander's. I don't think you should factor that in or assume that at all.

I think that as far as the Rego Park, right now we have some terrific assets that I think are kind of quasi-mall-like because they're so big but they're also strip centers in that, they don't have a lot of common area. Or even when they do like Bergen Mall, they're functioning more in the middle of a mall versus a strip, but they're gigantic. Bergen Mall, Rego Park, even The Plant asset we talked about is a multi-hundred million dollar assets. They're not your typical neighborhood grocery center which is $40 million, $50 million, or even $80 million.

We're not focusing on those in our first wave of dispositions. We're focusing on those malls we characterize in our strip center business and they will continue to be characterized, they are not the focus of dispositions.

Is a re-org of Alexander's on the table at this point or should we assume that that entity will continue to exist for the foreseeable future?

If I were you, I would continue to assume it exists until it doesn't exist anymore. Okay? It's stable and there's only one -- it's got a couple of -- one more redevelopment opportunity. But pretty much the Alexander's assets have been developed, obviously the Bloomberg building and now Rego Park, too, the substantial part of that redevelopment activity has occurred. Still some opportunity there, but I think you should assume it continues to be a separate company.

Chris Caton, Morgan Stanley.

Could you spend a minute and speak to the tax implications of all the asset sales and how you see taxable income trending over the next two years?

I'll start then I'll ask Joe. Thank God, there'll be a lot of taxable gains.

Many of these assets have low basis or substantial gains, even ones we acquired that were not the original assets such as The Plant. There are a couple of alternatives for that. Either there will be like-kind exchanges done, or those gains will be paid out as special dividends. So, I'm not going to speculate on which ones because they vary, but Joe can give you his point of view on that.

Chris, let me just clarify a couple things. If Alexander's sells Kings Plaza, and chooses not to do a like kind exchange, then Vornado will receive one-third of the taxable income from that transaction, which is large, and that will retain its nature as a long-term capital gain to Vornado and Vornado will in turn, distribute that as a long-term capital gain dividend to its shareholders. On the other hand, Green Acres could be used as a like kind exchange, no guarantee but we have made acquisitions and you've seen some of those already, which would fit with Green Acres in a like kind exchange environment.

I'd like to comment that each sale has to stand on its own for what we think how that works, and each acquisition has to stand on its own in terms of its worthiness to be added to the portfolio. And, then if a like kind exchange make sense, that's a second order of analysis that we do. To the extent that they do fit, great. If they don't, that's also good.

Thank you. And then the follow-up we've talked about residential in a few different spots here on condos and for rent construction. How big a role could apartments just for-rent long-term play in your portfolio across either New York or DC?

So, Chris, the question is, Mitchell Schear already has a sizable for-rent business in Washington. How much bigger can our existing inventory let that business grow to and then similar question in New York? Is that where you're going with that?

You have it right.

Do you want to take that, Mitchell on the DC portfolio?

Sure. I think that we were able to find some assets in DC that we thought were of exceptional value and were under managed and bought that residential property and have taken the EBITDA from $15 million to $25 million annually. We also repositioned two assets in DC so we have a 2,400 unit business today; it represents in the neighborhood of 10% of our overall portfolio.

And I think with our primarily DC and Arlington focus and Arlington for development in particular, sort of, by definition, the neighborhoods of Crystal City and Pentagon City and Rosslyn are mixed-use areas. So I think that we think that those are to do office in concert with for-rent apartments is a good thing. It works well and I think the math works. So I think you'll see us add some units over time, but I don't think you'll ever expect to see the predominant business in that market at all.

I would say we like the rental business in New York and in DC. We have selectively done some acquisitions there; we did a joint venture with Stellar Management on Independence Plaza in New York. We think it will be a terrific deal. Mitchell talked about that in DC, most of that coming out of development opportunities.

So we like the rental business. We do not look for the condo business, look at that as a growth part or any part of what we do.

Occasionally you get a site like 220 Central Park South that David mentioned, which may be the best site in New York for condos where they're selling condos right around the corner at $5,000 to $6,000 a foot which is not on maybe as good of a site and all of a sudden you have a land basis of $1000 or maybe $1500 a foot. And the only thing that makes sense is condos. You can't do rentals there but you have enormous financial gain or something like that. With the exception of something like that, I see just rentals and I see it being very gradual and very measured.

Alexander Goldfarb, Sandler O'Neill.

Just two questions. The first is on Skyline. There was an article out giving the appraisal as $300 million, the property's got debt of $680 million. You guys outlined in total BRAC an impact of $300 million, maybe $80 million of that or so is Skyline.

Just want to understand better why you guys would not hand the keys back on Skyline. Just curious, is it tax protection? Is it just trying to control that northern suburban Virginia market so that you're not having Skyline compete against Crystal City?

I can't comment on the appraisal. I think that was done for the servicer. You are correct that we have the $678 million face amount on the mortgage. And the worst-case scenario is we give the property back. That's not out of the question.

But if we can reach an agreement with the servicer, that gets a better long-term solution for us, and then that would take into effect a lot of things. First and foremost, can we make the money at the new basis that we would invest new capital at. And if we can't, then that would be a different path. We're going to be very economic on that and obviously look at that as to whether the servicer and us do that.

We have put in a relatively modest $4 million in the forbearance agreement with the servicer to fund the capital for the lease that Joe and I mentioned before. And that comes out through cash flow before interest is paid. So we feel that capital is very safe. We'll get a return on that.

So I think we're going to look at that as an economic opportunity and we know the property well and we'll go from there. We don't know what kind of solution will ultimately come out of that at this point.

Can you comment if there's any lingering tax protection?

There is a tax issue in that deal because, obviously the base is much lower. But I'm not going to comment beyond that.

John Guinee, Stifel Nicholas.

You'll generate a lot of cash. You've talked about acquisitions, you've talked about development, you've talked about special dividends. At this price, are you a buyer of your own shares on a share buyback program?

We don't speculate on share buybacks. And obviously, that's something the Board would have to vote on and we would have to announce. So the least I'm going to do is tell you guys to speculate on share buybacks on this call.

We constantly look at the value of our shares. We're not very happy with the value that we're trading below the net asset value, but we're not going to comment on share buybacks.

Great. Thank you very much.

You're welcome, John.

David Harris, Imperial Capital.

Not so difficult or painful.

The dentist isn't either. (laughter)

We're getting close to the end anyway. Your dividend today is 27% below the level it was at the peak at the end of the fourth quarter. Could you talk about the prospects for getting back to where you were and maybe growth beyond that? And I missed the reference, Joe I think made, to net taxable income perhaps being a component of that story.

Joe can comment on that and maybe clarify that net taxable income comment.

Hi, David. Our second quarter payout ratio, FAD payout ratio, as was published in our supplemental, was 81% and for the first half, it's 87%. So we certainly have ample cash generation to take care of the existing dividend, even a higher dividend.

But the Board as a policy has chosen to pay out 100% of taxable income, and because of the diminution in the Washington taxable income coming from BRAC, we're comfortable with where the dividend is right now on a recurring basis. Of course that's going to grow as Washington re-tenants up in 2013 and 2014 and grow handsomely as well as New York growing. And that has nothing to do with the special dividends we talked about on Kings Plaza or other assets.

Okay. Do I get a second bite?

Sure.

Okay. If I think New York office market I think of financial services shrinking backwards, social media stepping up. You've obviously been successful with the social media tenant in Chicago, at the Mart. Does it require a sort of change in leasing strategy to attract that type of tenant compared to the traditional office users in the marketplace?

I'm going to ask David to address that question. But I just want to point out it took nearly an hour to get to a question on the New York office market, which we find kind of interesting, given that maybe you guys get filled up with all the other people reporting on New York. But I'll ask David comment on New York market and specifically your question, David.

What I would tell you is we have a significant presence in that market in New York already. As I think you know, we acquired it way back when, 1998, 770 Broadway, which in fact we think is probably one of the best buildings in the Midtown South marketplace. That building is a building that has given to us and we think is one that will keep giving. AOL and J. Crew are two of the major tenants in that building today. We've got great relationships with them.

Nielsen, which has a lease coming up in 2015, we think that's a real opportunity for us. They are in the process of considering putting their space on the sublease market. We've also in that market acquired about a year ago, One Park Avenue. And of course did a deal last year, a major lease with NYU, with their Langone Institute.

As you look at Chicago, the Google deal, obviously we're thrilled with that lease. We have now taken the Mart building up from about 82% to a little over 95% occupancy with that deal. As Mike said, we basically have in a sense right-sized the showroom business, taking it down to about 50% with 50% of the building being office.

And most importantly, that building is really becoming a tech hub building as the mayor of Chicago even indicated. Motorola Google is joining Razorfish, Allscripts, 1871, which is another deal that we did with a Pritzker funded incubator for tech companies. So as we look at the market, what is interesting to me is while we've seen relatively sluggish leasing activity, certainly from the financials, we realistically have continued and always will try to get ahead of the curve in terms of our leasing activity.

Last year we had an enormous year of over 3 million square feet of leasing. Year to date, we've done about 1 million square feet. And again, as we look at our expirations over the next year, year and a half, really quite modest with all of our activity. As we look at all the large deals we've done year-to-date, they've really been in every industry. We had a couple deals in technology, we had a couple financial services, insurance, law, accounting, fashion, advertising. So we've seen realistically pretty good growth around the entire sector excluding financial services.

Ladies and gentlemen, it is after 2.00 p.m. So we will now limit the questions to one question per caller. Michael Bilerman, Joshua Attie, Citi.

It's a speed round. This is great.

You get a second bite at the apple.

This is like the bonus round now. (laughter) So I wanted to ask quickly about JCPenney and I think, Steve was on the line. Steve, I don't know if you can comment maybe on the turnaround progress to date.

And then it looks like you will fund most of the derivative position in terms of that 4.8 million shares and taking your full ownership up. But maybe talk a little bit about that holding and how you think that progress is going?

Michael, that's a difficult question because I'm a Director of the Company. As you know. JCPenney will report their second quarter and have their own earnings call I think on Friday morning. So having said that, we've done retail investments of this nature a dozen times before over the last large number of years, quite successfully by the way.

The JCPenney investment is an investment that we're committed to. We have an enormous amount of confidence in Ron Johnson and his team. Ron is not bashful in explaining to the public and the investing public his ideas. If you go onto the JCPenney website, all of his presentations are on their website and all of his strategy is there, quite graphically and very understandably.

I think it's a little bit unfortunate that the launch of this very innovative and we think, very, very exciting retail concept, was a little shaky in the communication of Ron's pricing strategy to the customer. And they are in the middle of making some very important and proper mid-course corrections right now.

So we are in this investment. We have confidence in the management team. We think the idea is an exciting one.

We think that the investment opportunity is hugely symmetrically in the favor of reward versus the risk. And we are rooting -- we're probably the biggest rooters in the land on this one. So I think that we're in this thing for the long haul.

Tom Truxillo, Bank of America.

Just a follow-up to that question, given your comments on JCPenney, would you guys be interested in investing more capital into that given where the stock price is? Does it provide you a better opportunity to add more?

The answer to that is -- I'm not going to comment on it. I can just say that we have a standstill with the Company which limits the amount of total number of shares that we can acquire. That was entered into the better part of a year ago. I don't really remember the exact number. It's maybe 3% more, I'm guessing but I'm directionally correct. We have chosen not to make that additional investment then. We have not made it heretofore. And I'm not going to speculate about whether we would or won't do that. I don't think that's proper.

Jeff Spector, Bank of America Merrill Lynch.

I just want to follow-up on New York City retail and the acquisitions and the pricing. The international tourist has been a big part of the story here in New York and obviously Lincoln Road. The last few years we've seen a little bit of a pull-back in New York City. We're not that worried about the Latin American customer and Lincoln Road, but how are you thinking about pricing and going forward on some of these most recent acquisitions? Any concern here?

Well, I think I mentioned that New York's got 50 million plus or minus visitors. I think the stats that I've seen and David can comment, about 10 million or so of those were international and the rest are domestic. So, a lot of that market is driven by the domestic tourist.

Obviously international tourism, you have to be concerned what's going on in Europe. But we're seeing more from Asia and more from Latin America and Brazil, et cetera. Particularly in Florida you see that big influence in the Brazilian tourists. So it's something to be watchful of. I think ultimately sales volumes mean a lot and the volumes of these stores get driven by lots of different factors including the tourism. So it's something to keep an eye on. We obviously bought thinking that we bought below market rents and existing market rents and hopefully any diminution of volume would only affect the future rents growth not what we have in place. So I think it's something to keep an eye on. We feel pretty strongly it's got a very broad-based and pretty good about the future there.

Alexander Goldfarb, Sandler O'Neill.

How did you get two questions in, Alexander?

I did star one into the speed round, as Michael called it. Just a final question on Toys R Us. As we think about your investment there, is an IPO the only exit or only option or, is the private market, for selling your stake to another entity, is that a potential?

The answer is yes. I mean, we went into Toys with two of the best LBO firms in the business, Bain and KKR. And I think LBO firms are Private Equity Firms more properly stated. They go in, improve the business, and they basically exit the business. And traditionally that's done either through an IPO or sale of the company or partial sale of the company.

So we've done a pretty good job improving the business in terms of taking EBITDA from $750 million to $1.1 billion, plus or minus. And all the partners and the Management would like to see some kind of liquidity event. Whether the liquidity event is public or private is depending on what the markets are. So, it would certainly be in the realm of possibility to do that. I'm not going to predict what the outcome might be, but look at all outcomes as a possibility.

That is the end of the question-and-answer session for today. I'll turn it back to Michael Fascitelli for closing comments.

Thank you all for participating and for listening to our first earnings call. We also welcome your feedback on what we can do in future calls better for you and more specifically for you. And we look forward to your participation in our next one which will be our third quarter conference call. I don't know what the date is, but I can tell you, Joe probably does. (laughter) Anyway, thank you all. Good-bye.

Ladies and gentlemen, this concludes Vornado Realty Trust's second-quarter 2012 earnings call. Thank you for your participation. You may now disconnect.