美國沃那多房產 (VNO) 2012 Q3 法說會逐字稿

Good morning, and welcome to the Vornado Realty Trust third-quarter 2012 earnings call. My name is Christine, 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 third-quarter earnings call. Yesterday afternoon, we issued our third-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. The reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q and financial supplement.

Please be aware that statements made during this call may be deemed forward-looking statements and actual results may differ materially from 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. 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; David Greenbaum, President of the New York Division; Mitchell Schear, President of the Washington, DC Division; and Joseph Macnow, Chief Financial Officer. In addition, Steven Roth, Chairman of the Board, will be present for the duration of the call.

I will now turn the call over to Michael Fascitelli.

Thanks, Cathy. Good morning, and welcome to our third-quarter earnings call. We are happy you are all joining us today and appreciate your time and attention.

After my opening remarks, David Greenbaum will talk about our New York business, and Mitchell Schear will talk about our Washington business, followed by Joe Macnow, who will provide a financial overview of the quarter and then we will answer your questions. We will end at 11 o'clock.

Before getting started, I would like to acknowledge the devastation the Northeast suffered from Hurricane Sandy. This tragedy, which cost over 100 lives thus far and tens of billions of property damage, affected our home bases in New York and Washington, particularly New York, which was hardest hit. I am pleased to report that we suffered no personal injuries and only minor property damage. I want to thank all of our people for the incredible job they did and express our best wishes to all those affected by the hurricane as they recover.

David and Mitchell will comment further, particularly David, on the specifics for their businesses.

Overall, I am quite satisfied with our third-quarter results, which were $0.01 better than last year's third quarter in spite of the downward pressure coming from BRAC in Washington, DC, an old story. It's interesting to note that if Washington would have been level this year to last, we would have had comparable FFO performance over the prior year's quarter of 7%.

The Washington office market is sluggish, and the New York office market, lacking support from the financial service industry, is locked in neutral. However, it is clear from our financial results that our New York portfolio is outperforming the market, and our Washington portfolio is outperforming the projections we provided in our public filings. David and Mitchell will expand on this in a few minutes.

Let me update you on asset sales, part of our program to simplify and to recycle capital into our core portfolio of high-quality office and retail assets. In the third quarter, we closed on the previously announced sales of the Washington Design Center, Washington Office Center, the Canadian Trade Show business and Dorchester, a non-core strip shopping center. Total proceeds from these sales were at $323 million, with a third-quarter net gain of $149 million.

Importantly, in the fourth quarter, we announced the sale of two malls for $1.25 billion, the Green Acres Mall and Alexander's Kings Plaza Mall, which were both sold to the Macerich Company. When completed, these transactions will produce substantial proceeds and gains, and Joe will provide further detail in a few minutes on the specifics of these gains and distributions.

We also announced the sale of Reston Executive, a three-building suburban office complex in Fairfax County, Virginia for $126 million, resulting in a net gain of $35 million. We sold the building on Market Street in Philadelphia which is part of The Gallery at Market East for $60 million, resulting in a gain of $35 million. We expect to close both these deals in the fourth quarter.

In addition, we expect to close in the fourth quarter the previously announced sale of the Boston Design Center for approximately $72 million.

Lastly, we sold our equity investment in (inaudible) to Brookfield Asset Management for $28 million. We will continue to hold $25 million of Verde 4.75% 2018 debentures.

In summary, this year we produced $2.3 billion of asset sales with a net gain of $674 million and expect to pay out a special long-term capital gain dividend of $202 million, or $1.02 per share, for Vornado's share of Kings Plaza.

We intend to do a tax-deferred like-kind exchange with the sale proceeds of Green Acres and others.

We will continue to dispose of non-core assets. We just acquired a 25% participation in $475 million first mortgage and mezzanine loans on 701 Seventh Avenue, a retail redevelopment property in Times Square where we already have two dominant properties in that market. The yield today is 11%, which will increase [after selling off] a senior position.

We will continue to invest in our existing assets and development opportunities. Given the current environment, our strategy for acquisitions will be measured and focused on continuing to expand our leading New York City street retail platform and upgrading our high-quality office property platform. Let me now turn the call over to David to discuss the New York business.

Thank you, Michael, and good morning to all. Before I turn to the results for the quarter, I do want to spend a minute talking about what we've been going through here in New York City over the past several days. We have contingency plans for almost all occurrences, and last Friday, as we begin to receive dire warnings, we implemented our emergency management procedures, coordinating all of our personnel to have round-the-clock coverage in all of our buildings. Our engineers, porters, security guards and property management professionals all were hunkered down during the storm, some of them still today in buildings which are dark, literally living in the buildings, sleeping in shifts on cots.

I'm enormously proud of our team for securing all of our buildings during the storm and for communicating on a real-time basis updates to all of our tenants.

Most of our buildings did not lose power and have remained open throughout. Other than one small building directly in one of the flood zones downtown, which will take about a week to bring back, all of the buildings that lost power should be up and running as soon as Con Edison completes the repairs to its network, which we hope will take place this weekend.

Now let me turn to the quarter. While the overall market in New York is tepid, we've had a strong quarter. We leased over 500,000 square feet of office space in the third quarter, which took our office occupancy up 50 basis points to 95.8%. The highlights of our leasing activity this quarter are two headquarters consolidation deals, one in financial services and one in advertising.

At 350 Park, we leased 103,000 square feet to M&T Bank in a renewal and expansion transaction which allowed M&T to consolidate its Wilmington Trust division, which it recently acquired into 350 Park Avenue. To produce the expansion space for M&T in this complicated deal, we terminated two leases early and also renegotiated two other leases.

At 909 Third Avenue, we leased 220,000 square feet to IPG, the Interpublic Group, which allowed IPG to consolidate offices from four different locations into our building. For IPG, we created a headquarters environment, including dedicated lobby space and elevators, branding, and a great outdoor terrace space. To make this deal, we leveraged our existing relationship with IPG, which is also our lead tenant at 100 West 33rd St, where IPG occupies over 400,000 square feet.

These two large transactions plus another 22 leases signed in the quarter had an average starting rent of $58.74 per square foot, with a positive mark to market of 8.9% cash and 5% GAAP.

Many of the flash analyst reports which I read last night commented on our CapEx. Our average TIs were elevated this quarter at $56.92 per square foot. That is because 75% of this quarter's leasing activity was new and expansion deals versus 30%, which was the case in the first half of the year.

Our year-to-date office leasing activity is a robust 1.5 million square feet, which includes some 620,000 square feet of leasing in our Penn Plaza office portfolio.

The Midtown South submarket, with its tight availability, has been expanding to include Penn Plaza. In fact, Penn Plaza recently was reported to have the lowest Class A vacancy rate in midtown at sub-5%. This has allowed us to begin to push Penn Plaza office rents, and at 1 Penn Plaza we recently have completed several deals over $60 per square foot.

For our entire 19.6 million square foot office portfolio, we have a relatively modest amount of upcoming lease expirations, with 156,000 square feet expiring in the balance of this year and 673,000 square feet expiring in 2013. This amount of upcoming expirations has been substantially reduced as a result of our aggressive forward leasing over the last several quarters.

Let me now spend a minute talking about some market dynamics. Since last summer, the market effectively has been at equilibrium, with the Manhattan vacancy rate hovering just under 10%. Our occupancy at 95.8% continues to outperform the market, as we do quarter in and quarter out.

Renewals this year have made up the bulk of the transactions in the market, enabling tenants to avoid capital expenditures. In fact, it Midtown, there have only been three major relocation deals year to date over 100,000 square feet. The IPG lease I mentioned earlier is one of those three deals.

Uncertainty in the regulatory environment has also led the financial institutions to remain on the sidelines. However, our diversified portfolio of over 1200 tenants is not reliant on any one industry. Take a look at the list of the major tenants in our New York segment property table in the financial supplement, and you will see what I mean.

In years past, view space in the tower of a building was the first to go. With affordability being the theme of today, that trend seems to have reversed somewhat, as tenants are focusing on the base of buildings, both for the value prospect and the flexibility larger floor plates provide for open-space planning. This bodes well for the re-leasing of the former Citibank space at 666 Fifth Avenue. While you likely have read that Citi has moved out of this space, we will continue to receive rent through the lease expiration two years hence, giving us considerable time to re-lease this space.

Regarding trophy space, which includes our buildings at 640 Fifth Avenue, 888 Seventh Avenue, 280 Park Avenue and 350 Park Avenue, while the market is not yet back to the premium seen before the financial crisis, there have been 27 transactions over $100 per square foot year-to-date. I'm pleased to say that three of those $100-plus deals have been in our own portfolio and we have two more in the hopper.

We have a long track record of transforming buildings to create value, having done it time and again -- 770 Broadway, 1740 Broadway, 640 Fifth Avenue and 888 Seventh Avenue, to just name a few. Earlier this year, we completed the total redevelopment of our 330 Madison Avenue property, capped by over 400,000 square feet of leasing activity, including headquarters transactions with Guggenheim Partners and Jones Lang LaSalle.

At 280 Park Avenue, the transformation is now underway with our joint venture partner, SL Green. Designed by Kohn Pedersen Fox, the building will feature a new double-height lobby spanning the entire Park Avenue block front and a winter garden interconnecting both buildings, surrounded by new plazas. The receptivity to the overall redevelopment plan from the brokerage and tenant communities has been very positive. And while we are fielding lease inquiries, our experience in the many buildings we have redeveloped is that while the renderings are great, what the tenant community and brokers really appreciate is the quality of the redevelopment when they start to see it completed.

We have one other major transformation well underway at 1290 Avenue of the Americas, where we are dramatically upgrading the scale and character of the lobby, storefront and elevators to match the stature of this 2-plus-million-square-foot corporate headquarters building. This project is currently under construction, with completion scheduled for the first quarter of 2013. The change already is dramatic. I'd encourage you to go take a look.

Turning now to our Manhattan street retail portfolio, where we own the dominant 2.3-million-square-foot retail platform, we leased 183,000 square feet of retail space year-to-date, with positive mark to markets of 19.4% cash and 27.2% GAAP.

The retail market is very strong, driven by the continued growth in tourism, which is expected to reach 52 million visitors this year. New York continues to be the gateway market for global retailers, including, for example, Massimo Dutti, one of Zara's brands, which opened its first store in the United States at our 689 Fifth Avenue property last month.

Retail rents are now well above their all-time highs, approaching $3000 per square foot on Fifth Avenue and $2000 per square foot in Times Square. In Times Square, last week Microsoft opened a pop-up store at our 1540 Broadway property for the global launch of its new Surface tablet computer. Sales here have exceeded Microsoft's expectations, which again demonstrates the strength of the Times Square market. Both Massimo Dutti and Microsoft deals speak to the exceptional quality of our Manhattan street retail portfolio.

We continue to have great growth prospects in this portfolio, with extremely well located assets, with in-place rents averaging 30% under market. And by the way, many individual assets are multiples of that. We couldn't be more excited about the prospects for the development of the full block front of retail signage at Marriott Marquis, which is directly across from 1540 Broadway, the two best sites by far in Times Square.

For the entire New York division, which is a total of 25.5 million square feet, we had a good quarter, with positive same-store of 0.7% cash and 0.3% GAAP. If you exclude the Hotel Penn, which was weak this quarter, along with the rest of the New York hotel market, the same-store increase is positive 1.9% cash and 1.3% GAAP.

Now let me turn it back over to Mike.

Thanks, David. Let me turn it over to Mitchell Schear now to discuss our Washington business.

Thanks, Mike, and good morning to everybody. While we in Washington largely dodged Sandy, I have an incredibly competent team on the ground that was fully prepared for the worst. Our colleagues in New York bore the brunt of it and really did a yeoman's job during this crisis.

As you may know, our Washington portfolio is approximately 20 million square feet, concentrated in Washington, DC and Arlington, Virginia, directly across the Potomac River in Crystal City, Pentagon City and Rosslyn. Our footprint is about twice the size of any of our peers.

I want to start by contextualizing the Washington Metro market in general. Currently, market demand is soft, but not as soft as many believe, as tenants await election results and clarity on the budget crisis. There is leasing activity in the market. In 2012, the gross leasing activity is expected to be about 32 million square feet, which is actually on par with the 15-year average. There is a lot of churn, but not yet enough absorption to eat into vacancies, especially in this peak BRAC year.

Through three quarters of this year, there was negative absorption of about 2.5 million square feet in the market. Rents are holding steady, but concessions are up to attract tenants. Limited supply over the next several years will help to stabilize the market, but we don't really expect the market to gain significant traction until 2014.

Within our Washington portfolio, our year-to-date leasing velocity has been brisk, over 1.6 million square feet so far, well ahead of our projection for the full year. We are attracting good activity and consistently executing more than our fair share of deals at good rents. In fact, we have signed six new leases, each one of them over 50,000 square feet as compared to one new lease over 25,000 square feet in all of 2011.

In the third quarter specifically, we leased 435,000 square feet at very good average initial rents of $44.02 per square foot, and this is versus 389,000 square feet leased in the same quarter last year. The GAAP mark to market was 13.8%, and the cash mark to market was 8.9%.

Of the total 435,000 square feet leased this quarter, government leases accounted for 170,000 square feet, and the private sector leased 265,000 square feet. So despite a slow leasing environment in Washington, we continue to win business.

To start off the fourth quarter, we just executed a lease for 108,000 square feet to the Corporate Executive Board in one of our buildings that is about to be renovated in Rosslyn. With this lease, we have now resolved 871,000 square feet or roughly 36% of the 2.4 million square feet of Department of Defense lease expirations resulting from BRAC. This includes our plan to demolish the existing 350,000-square-foot 1851 South Bell building to rebuild a new, state-of-the-art 700,000-square-foot office tower at 1900 Crystal Drive. We received final full approvals from Arlington County for this project in September.

Almost all of the BRAC relocations have now taken place, and we are looking ahead. In our 20 million-square-foot portfolio, lease expirations in 2013 are below our average, with a very manageable 940,000 square feet expiring. Re-leasing the remainder of the BRAC space is a function of time, and we will emerge stronger when complete.

We had a similar experience in 2004 and 2005 when the Patent and Trademark Office relocated. But in the end, we benefited by re-leasing to a more diverse population of tenants and by increasing rents by over 30%. We are confident the same will be true this time, too.

For the entire Washington, DC division, same-store EBITDA for the quarter was down 6.9% on a GAAP basis and 9.2% on a cash basis due to BRAC. Overall occupancy is 84%.

Our residential portfolio, which consists of 2424 units in Arlington and DC, representing approximately 12% of the business, is over 97% occupied and had a quarterly same-store EBITDA increase of 8.5%.

Finally, we are delighted to welcome Nike to Georgetown with the opening last week of their new flagship 31,000-square-foot store at our 3040 M Street property.

Now I'd like to turn it back over to Mike. Thank you.

Thanks, Mitchell. I wanted to cover a few things, retail, non-New York City retail and the Mart and talk a minute about sustainability.

Our retail strips and mall team continued to perform. In the quarter, we had an 8.8% GAAP mark to market and occupancy was 93.4%. While the shakeouts in the supermarket industry and the closings and downsizings associated with Best Buy and others are a concern, this nationwide trend is less important to us because of the concentration of assets we have in the densely-populated high barrier to entry, affluent tri-state area.

Our Mart segment is much smaller and leaner now and the numbers show it. Occupancy is up 11.6% to 94.2% as a result of the Motorola Mobility/Google lease and EBITDA improved by 1.1 million to 13.7 million. The commitment of Motorola Mobility/Google at the Merchandise Mart is having the ripple effect we thought it would have. We also benefited from restacking the showroom tenants in the building in a very efficient way.

Let's talk sustainability. We've been working very hard on this front. Our commitment to sustainability is highlighted in our annual sustainability report, available on our website and reprinted in Steve's Chairman letter. We think sustainability is not only good business and it is morally responsible and works (inaudible) profits in the end.

Most recently, we are proud to rank number one in Newsweeks green rankings of our entire industry, and we were 87th among America's 500 largest publicly-traded companies and 500 largest companies internationally. That is quite an achievement.

By the end of 2012, we will have LEED-certified over 30 million feet in our portfolio, more than any other single owner nationwide. We are a leader in energy management and submetering, and our efforts have resulted in significant reductions in energy consumption throughout our portfolio.

In summary, we are very excited about the future of our great assets and businesses, which are run by a very talented management team. We will continue to make Vornado a simpler company, improving the portfolio and recycle capital and increase asset quality. I'd like to turn it over to Joe Macnow for the financial review.

Thank you, Michael. Yesterday, we reported comparable funds from operations of $1.14 per share versus $1.13 per share in the prior year's third quarter. Total funds from operations was $1.34 per share versus $1.05 per share in the prior year's third quarter.

First Call was $1.17 per share, as some analysts factor noncomparable items into their estimates and others do not.

Our noncomparable items in this quarter consisted of a $19.7 million after-tax gain on the sale of the Canadian Trade Shows; $12.5 million of FFO from discontinued operations; an $11.7 million gain on redemption of preferred units; $4.3 million of income from the mark to market of the JCPenney derivative position; partially offset by a $7 million Verde impairment and other costs.

As Mike indicated, we announced the sale of Green Acres Mall for $500 million to the Macerich Company. Net proceeds from this sale will be $185 million, after repaying the existing loan and closing costs. The gain for financial statement purposes will be approximately $195 million. The tax gain will be approximately $304 million, and is expected to be deferred as part of a like kind exchange. The Green Acre sale is expected to be complete in the first quarter of 2013 and is conditioned on the closing of the Kings Plaza Mall.

Alexander's, our 32.4% owned affiliate, also announced the sale of Kings Plaza Mall for $751 million to Macerich. Net proceeds to Alexander's from this sale will be $481 million, after repaying the existing loan and closing costs. Alexander's gain for financial statement purposes will be approximately $603 million, of which Vornado's 32.4% share will be approximately $181 million, after adjusting for certain acquisition costs in Alexander's stock. Alexander's tax gain will be approximately $625 million, which is expected to be paid out to shareholders as a special long-term capital gain dividend this year. Vornado's share of the dividend is approximately $202 million or $1.02 per Vornado share, and is also expected to be paid out this year to Vornado's shareholders as a special long-term capital gain dividend.

The Kings Plaza sale is expected to be completed this quarter.

We have over $2.7 billion in liquidity in September 30. Our consolidated debt to enterprise value is 36.8%, and our consolidated debt to EBITDA is 6.6 times.

In capital market transactions this quarter, we issued $300 million of 5.7% preferred shares and redeemed $255 million of preferred shares and preferred units with a weighted average dividend cost of 6.9%. This results in $3.1 million lower annual dividend cost to us and the $11.7 million gain in noncomparable items I just mentioned.

We refinanced two properties for aggregate proceeds of $248 million with a weighted average term of 10 years, which resulted in $49 million of net proceeds. The weighted average interest rate of the new loans is 3.3% compared to 2.3% weighted average interest rate on the maturing loans. That is as a result of going from floating rate to fixed rate on one of those loans in the amount of $150 million; now the new loan has a 12-year term fixed rate.

We also unencumbered two properties by repaying $151 million outstanding balance on the mortgage loans, which added weighted average interest rate of 5.4%. Of course, the source of that was our overnight cash balances, which earned zero.

Importantly, we expect to complete the refinancing of 1290 Avenue of the Americas in the fourth quarter in a single-asset CMBS for close to $1 billion, replacing the $409 million mortgage that now exists on the property and with a much lower interest rate. We also expect to finance the acquisition of 666 Fifth Avenue retail with a $390 million mortgage.

We are highly confident that the $721 million of remaining 2013 maturities will be refinanced at favorable rates, as well.

At this time, I'd like to turn it over for Q&A.

(Operator Instructions) George Auerbach, ISI Group.

Mitchell, with the BRAC moveouts largely behind you and the DC portfolio around 81% leased on the office side, how should we think about the timeline to get that portfolio back to kind of the 90% occupied range? Is that sort of a three to four year target, or should we expect a bit of a longer lease-up, given some of the uncertainty we see.

Even with my hearing aids, I had trouble hearing you. Can you talk a little louder?

Yes, sorry about that. Just asking Mitchell about the DC occupancy levels. Clearly, you are sort of at a bottom now with the BRAC moveouts behind you. How should we think about getting the portfolio back to 90% occupancy? Is that sort of a three to four year timeline or should that be a bit longer, given the uncertainty in DC?

As I said earlier, I think that our expectations for 2013 are relatively modest, and we expect to see traction in the marketplace starting in 2014. So I would say that we are looking at a couple-year period once we get into 2014 to really regain closer to our stabilized occupancies.

Thanks, and Mike, you've had a successful year selling assets in 2012. I guess thinking about 2013, how do you see the pipeline of sales? How should we think about the level of potential proceeds? And what would you put at the top of the list of your wish to sell list?

I think, George, we are going to continue to sell assets as we move into 2013. There is still a considerable number of assets that we want to sell and we will sell over a period of time.

I don't want to specify exactly the order in which assets are going to be handled, but I think we will continue to do it in a very measured and orderly way. And we will then look at each asset. As we did in the case of Kings Plaza Mall, we distributed that money. In the case of Green Acres, we are doing a like kind exchange, depending on its tax and its basis how to handle that.

The acquisition market is a competitive market. We are only going to buy assets there where we think we are getting very good long-term rate of return on an adjusted basis that meets our hurdle rate.

So it is a process, which I think we did a very good job so far, and we are going to continue to do that. And as we do that, we will obviously update you on the specifics in the quarterly calls and obviously in the filings.

I will say this, that we do have a great effort that every asset that we sell obviously improves the quality of the portfolio or anything that we would buy. So that is one of the recycling themes that we will continue to emphasize.

Michael Bilerman, Citi.

Just sticking with that point, Mike, is there anything keyed up today? Obviously, the malls went through a big process and had unbelievable execution on those sales. I'm just curious, as we think about the more near-term next few quarters, is there anything sort of actively being marketed for sale, and just so we understand the magnitude of potential near-term dispositions?

Thanks, Michael. I take it you liked the execution on that by that question, so thank you. I think that we have the plant still on the market for sale. And obviously, we have several other assets right behind that that are coming to the market, totaling approximately $400 million to $500 million. And we will continue to do that as we go through the fourth quarter and obviously into next year. These deals won't close in the fourth quarter, of course.

And then each asset -- just like we sold the asset in Philadelphia, which was not core, we will continue to sell assets here and there that we think don't think fit the geographies, that don't fit the profile of what we want to go forward with. So it is a process that we will generate a considerable amount further proceeds from, but I don't -- Michael, I think as we go through, those are the two most immediate ones that we have on the market.

Just -- you said, Steve, was there -- I don't know if Steve is taking questions, but I had a follow up just for Steve in terms of the rezoning on the East Side. It was something, Steve, you had talked about two letters ago. Obviously, there has been some progress on that front. I'm just curious your take on where things stand today, and what Vornado's key opportunities would be in that potential rezoning.

Obviously, since I initiated the idea several years ago and reiterated it in a second letter, we think it is a good idea. We think it is extremely important just to focus for a moment on Park Avenue, which I guess we in New York consider to be the number one corporate thoroughfare in the world, actually. That it have the kind of economic incentives that developers need to tear down obsolete buildings and build new buildings. So actually, we are very pleased that the powers that be are working on it.

The Bloomberg administration is in its twilight years. They are trying to rush a plan through, and we hope they succeed and we think it will be good for New York.

Thank you.

Anthony Paolone, JPMorgan.

Last quarter, you said New York City rents were rising modestly. And so I was just wondering if financial services kind of stays in this bit of arrested state, do you think there is the risk that as lower Manhattan product comes online next year, we can take a step backwards, or do you think there is enough absorption in other industries to kind of keep that modest growth going?

I'll let David take a shot at that one.

I think generally what we are seeing in the market is basic equilibrium. The expectation is that the actual availability/vacancy rates downtown, as some of the new product, the World Trade Center and some of the buildings where tenants will be relocating downtown to Midtown, that we are going to be seeing some much higher vacancy rates downtown.

I think generally, though, what we are seeing still to date is continuing job growth in New York. Year to date, we've had about 30,000, 40,000 -- I think the number is about 43,000 office sector jobs. Actually met yesterday with one of the brokerage houses and their kind of chief economist, and the projections for 2013 are continuing job growth with actually acceleration as we get into 2014, 2015. So I think next year is going to be relatively flat. I think as we get out to 2014 and 2015, I feel better about some growth in rents.

Okay. And then just another question -- maybe this is for Joe. As you guys pay a special here, sell some retail, which generally tends to have less CapEx than say office, how should we think about the dividend and AFFO or FAD on a go-forward basis, as you get some pressure from those things perhaps? And also, you will have in the next few years some lease-up of DC, which will probably bump up CapEx, I would imagine.

Fortunately, some of that asset disposition lack of FFO and taxable income going forward is offset by growth in our other businesses. So the Board tries to get the dividend to be somewhere close to recurring taxable income, and I think that will continue. And I don't think there is much upward pressure on taxable income in 2013, but there is certainly no downward pressure on it either.

Jamie Feldman, Bank of America Merrill Lynch.

I'm hoping you guys can talk a little bit more about your latest thoughts on JCPenney, kind of where do you think we are in the restructuring plan and what is your appetite for investment going forward.

This is Steve. Everybody is looking at me for that answer. So Jamie, hi. First of all, we remain committed to the investment. JCPenney will report their quarter a week from today, next Friday. Management is executing a plan of enormous change on that business, enormous change this year, which is the transition year. It is a difficult year. It is actually no secret that is proving out to be more difficult than the management team thought.

The second year recycles and begins in 90 days on February 1, 2013. We remain committed to the investment. We believe that the transformation and the creation of a unique retailer, and what Ron Johnson calls a specialty department store, has the prospects of being enormously successful. This is a tough period; we understand that. But we remain committed to the investment. Thanks.

So are there certain benchmarks or kind of goals you want to see hit by a certain amount of time? How do you judge when it is time to get out?

I really can't answer that question. Obviously, the business is complicated. Obviously, we monitor the performance very carefully. I and other large investors are on the Board there, and I really can't say anything more about that, Jamie.

All right. Thank you.

Chris Caton, Morgan Stanley.

David, thanks for your commentary on New York. I was hoping you could revisit the retail. You mentioned rents, I think, are at peak levels. Can you talk about that dynamic a bit? How have they trended over the past year or two, and to what extent has that been driven by the strength in retail sales? And to an extent is that a desire by retailers to have a flagship store and accept a higher occupancy cost? Do you think the rents can continue to experience kind of outsized growth?

I think the three markets where we've really seen some significant growth in rents over the last year plus are on Fifth Avenue. And Fifth Avenue effectively really is two segments, from about 51st Street north and south 51st to 42nd Street, Madison Avenue, and then Times Square, of course.

We've probably seen the single largest increase in rents on Fifth Avenue and the corridor from 42nd to 51st Street, seeing rents effectively over the last year approximately double to a tad in excess of that. As I said earlier, on upper Fifth Avenue, we have really seen rents approaching $3000 a foot, and that was in fact validated with the deal that we did at 689 Fifth Avenue with MAC earlier this year.

And again, on Madison Avenue, we've seen extraordinary strength in the market. We have closed a number of deals at 11 East 68th Street, again at rents at and above $1000 a foot.

I think as you look at some of the sales numbers, I guess the comment I'll make is Time Square is an extraordinary market because it is almost a 24/7 market. As we've looked at some of our retailers, some of them have approached sales per square foot of $6,000, $7,000 and $8,000 a foot on some small stores. So I don't think these things are just, quote, advertisements and branding. I think companies today and especially a number of the fast retailers that do their own production, these stores really are making money for them.

I would just comment also that SoHo has had a pretty good run in rents also. If you look at retail, as David said in his comments, we have great, well-located assets with a lot of rollover that will produce substantial mark-to-market gains.

And even if there is a pause in these rents at this level, up at this level, there's going to be enormous mark to market. And demand for these assets are worldwide from the tenants, as David mentioned. And also, the shoppers are worldwide in terms of tourism around the world, as well as tourism within the United States.

So we expect these markets to be very good long term. There won't be a straight line up. There may be a pause as the market absorbs these new rental levels, but then you will see more tenants trying to drive that. So we are very bullish on this over the long term.

Thanks for that. And the follow up is on that mark to market. As you look at some of the renewals or expirations you get over the next few years, to what extent do you expect the tenants to renew in place and to what extent do you think you need to rebuild out this space?

It varies by case. I think -- take 640 Fifth Avenue, which H&M was their original flagship store, where the rent would have gone up substantially multiples. They chose to relocate to a cheaper site and reduce -- and start an increase of existing ramp, but not the size of that.

And we will backfill that space with tenants that will generate substantial multiples of what they were paying.

But it is case-by-case. Some tenants will renew, some tenants will downsize and renew, some tenants will seek more value-oriented locations. But it is hard to make a generalization. But you want the space to be desired by multiple people so you could push to rent to either the existing tenant or tenants that might come in to occupy that.

The only thing -- it's David -- I might add to that is at 640, with H&M having announced the relocation, it actually is a great opportunity for us. That lease comes up in 2015. We are out there now marketing the space. We expect actually if we want we can get our hands on it probably sometime around the middle of next year.

Alex Goldfarb, Sandler O'Neill.

Thank you. It's actually Andrew Schaffer here. First, I just want to get some additional color on your investment host and how the 5.2% return was arrived at, versus the usual developer 8%-plus hurdle.

Of course, you might expect that was a negotiation. And you are right, there is a lease that gives us effective control over the retail redevelopment at the base, and that lease calls for annual payments of $12.5 million a year, plus a share of the growth in cash flow that comes from the redevelopment that we do.

But the underlying -- and Marriott has an ability to put it to us after the retail has made a separate condominium from the hotel, and we have a right to take it from them in a certain number of years.

(inaudible -- microphone inaccessible)

Alex, were you able to hear that?

It's actually Andrew, and I cannot hear that.

Okay, what Steve said was that the 5.2% was calculated based upon the existing cash flow. If it was a market price deal, the first digit would have been a four, maybe even a three, with a high second digit.

So we have a capital lease of $240 million. We have a capital lease liability for the same amount on the balance sheet. The income statement won't have any effect until it gets out of development, and that's about the summary.

I want to just comment -- I know you guys focus on the going-in yields in any of these deals, and it's not unimportant, but it isn't how we look at things.

We look at the overall return we can create over a period of time. And sometimes we are buying well below market leases that would justify a much lower cap rate, that we could turn in a period of years into a much higher yield. So the 5.2% doesn't really relate to the overall cost of capital of 8%. It is really what the asset could perform and generate over a period of time.

So whether it is the Marriott deal or whether it is another deal, we look at that over a period -- of a holding period which could be as long as five to 10 years or longer, and then that has to meet that -- clear that hurdle of our cost of capital.

Yes, it definitely makes sense. I was just trying to get a better understanding of the negotiation.

Secondly, I just wanted to get a better understanding of what would it take in relation to Kings Plaza sale for you to take or exercise your right to get the $30 million in stock from Macerich, NFS, just completely rated for tax purposes.

Yes, yes.

Oh. All right. That was simple. All right. Thank you very much.

Michael Knott, Green Street Advisors.

Mike, I assume it is fair to say that Vornado expects to remain a net seller next year. But on the investment side of the coin, just curious where you may see the best opportunities today.

I'm not going to speculate. We are certainly going to sell assets, and if we found great acquisitions, we would proceed with those.

We've been focusing on the core markets that we're in. We are focusing on the street retail in New York, as David mentioned before, simply for value-added opportunities that may come with some re-leasing down the road or redevelopment down the road. I think that's a good example of that -- there's a process to go through adding additional space, really working that asset over a period of time, to try to create, as Joe mentioned, a 5.2 existing income going substantially up.

So street retail in New York with value-added components is particularly a focus. We are looking at a lot of office buildings. I think there is an escalating volume of office deals coming to the market as we go into the fourth quarter and into next year, bigger deals that might provide some opportunity.

Obviously, if there is a lease rollover at some of those, that will take place down the road. That could affect the -- obviously, pricing could affect the [maturing] potential.

And then in DC, we haven't seen much distress in asset sales despite a negatively viewed market. If we saw a (inaudible), we have obviously been a net seller in DC, and we look at all these markets to try to find a deal that fits our parameters.

So I would say the acquisition market is not easy to find deals right now that meet that criteria, because there is more money and more demand for it than I think the deals volume right now suggests. So we will continue to look at it and whether we will be a net seller or not, we will continue to sell, remains to be seen.

Thanks. And then if I can ask one other question, if we have time. Just curious on Toys "R" Us, would you give a quick comment maybe on your thoughts on prospects for the business heading into the holiday period? And then with respect to a holding period, should we continue to assume that we are probably looking at maybe 2014 as maybe the soonest exit you could probably do from that business, from that investment?

Yes, we are right in the -- I'll comment on the first part of that question first -- we are right in the middle of obviously the beginning of the holiday season, which has been a little bit disrupted this week by the massive problems in the Northeast. But our hopes are good for the season. I'm not going to comment specifically; we are in that period right now on the numbers.

But obviously, we will have a better view of that post-Christmas. And the opportunities, as I said previously, and all the sponsors are looking for a very good exit at the right time. So I would think that 2013 and 2014 will be a focus on how we monetize that investment.

Thank you. That's all the time we have for questions. I will now turn the call back over to Michael Fascitelli.

I want to thank you all for tuning in and giving us your attention and time. We know this is a particularly difficult time for many of you with offices in New York, and maybe even you are not in your offices in New York. And we always appreciate your comments and we appreciate your questions and we look forward to our third conference call, coming up hopefully without the circumstances we've had in the first two. So we'll see you all later. Thank you.

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