美國沃那多房產 (VNO) 2014 Q1 法說會逐字稿

Good morning and welcome to the Vornado Realty Trust first-quarter 2014 earnings call. My name is Vivian and I will be your operator for today's call. This call is being recorded for replay purposes. (Operator Instructions).

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

Thank you. Welcome to Vornado Realty Trust's first-quarter earnings call. Yesterday afternoon we issued our first-quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents as well as our supplemental financial information package are available on our website, www.VNO.com, under the investor relations section.

In 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 supplement.

Please be aware that statements made during this call may be deemed forward-looking statements and actual results may differ materially from these statements due to a variety of risks, uncertainties and other factors. Please refer to our filings with the Securities and Exchange Commission including our Form 10-K for more information regarding these risks and uncertainties. The call may include time-sensitive information that may be accurate only as of today's date. The Company does not undertake a duty to update any forward-looking statements.

On the call today from management for our opening comments are Steven Roth, Chairman of the Board and Chief Executive Officer; David Greenbaum, President of the New York Division; Mitchell Schear, President of the Washington DC Division; and Stephen Theriot, Chief Financial Officer. Also in the room are Wendy Silverstein and Michael Franco, Executive Vice Presidents, co-Heads of Acquisitions and Capital Markets, and Joseph Macnow, Executive Vice President, Finance and Chief Administrative Officer.

I will now turn the call over to Steven Roth.

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

Let me start by saying that we remain committed to simplifying and focusing our business and that we have made remarkable progress in that regard.

It has been only three weeks since the release of my annual letter to shareholders and our announcement and call relating to the spin-off of our shopping center business so my opening remarks this morning will be brief.

We intend to file the Form 10 registration statement for SpinCo by the end of the second quarter and expect the SpinCo spin-off to be completed by the end of 2014.

In the first quarter, we had $819 million of sales activity. We sold Broadway Mall for $94 million. We announced an agreement to transfer the redeveloped Springfield Town Center to Pennsylvania Real Estate Investment Trust for $465 million, comprised of $340 million of cash and $125 million of free operating partnership units. We also announced an agreement to sell Beverly Connection for $260 million.

We currently have about $400 million in the market for sale including 20 small non-Manhattan retail assets that don't fit in SpinCo and our share of 1 Park Avenue and Georgetown Park.

As of today we have $4 billion in liquidity comprised of $1.6 billion of cash, restricted cash and marketable securities, and $2.4 billion of undrawn under our revolving credit facilities. These amounts don't include the proceeds of the pending or prospective sales I just mentioned.

Our financial capacity will allow us to take advantage of whatever external opportunities present themselves.

In the short term, we will use $445 million of cash to repay our 7 7/8 senior unsecured notes due in 2039 which are initially callable in October 2014. This debt repayment alone will increase FFO by $0.18 per share.

Our pipeline of internal value creating opportunities is extremely robust. I will just tick off here those projects that are currently in construction, are now in construction. David will cover the New York projects in slightly more detail in his remarks.

Under construction, our super tall 220 Central Park South residential condominium tower; our massive retail and signage transformation of the Marriott Marquis site at the Bull's-Eye of the Times Square Bow Tie, across the street from our 1540 Broadway full blocks retail and signage; our 1.1 million square foot redevelopment at 330 W. 34th St. and 7 W. 34th St. which are targeted to the creative class market; the transformation of the 1.2 million square foot 280 Park Avenue of which we own 50%; the 44,000 square foot Top Shop four-level flagship at 608 Fifth Avenue; o Our 699 unit residential project in Pentagon City which has Whole Foods as its base; the 1.4 million square foot Springfield Mall total redevelopment which is on schedule for a holiday opening this year; the redevelopment of Wayne Town Center in Wayne, New Jersey.

This is a very significant construction redevelopment program indeed and this list doesn't include any of our opportunities in the Penn Plaza District.

Now to leasing. Companywide in the quarter we least 1.746 million square feet in 144 transactions with positive mark to markets of 7.9% cash and 12.6% GAAP. In the quarter, we least 947,000 square feet in Manhattan alone, 947,000 square feet in Manhattan alone.

Turning to operations, we had a strong first quarter and I very pleased with our financial results. And our first-quarter comparable FFO was $1.20 per share, 6.2% higher than last year's first quarter. Our New York business continues to put up very strong industry-leading metrics.

Our Washington business continues to bump along the bottom. Recently we have seen an uptick in activity. As I have said before, we believe there is no value in our share price for the vacancy in Washington as such, we anticipate tremendous value creation as we lease up this space.

To sum it up, I am very pleased with both our operating performance and our progress on simplification and focusing the business.

Now I would like to turn it over to Steve Theriot, CFO, to cover our financial results.

Thank you, Steve. Yesterday we reported first-quarter comparable FFO of $1.20 per share, up from $1.13 in the prior year's first quarter, a 6.2% increase. First-quarter comparable EBITDA was $397.2 million.

Starting with New York, our New York business produced $233.8 million of comparable EBITDA for the quarter ahead of last year's first quarter by 8.7% primarily driven by a very strong same-store increase of 6.2% in property acquisitions.

Our Washington business produced $84.1 million of comparable EBITDA for the quarter behind last year's first quarter by just $2.2 million. As we dimensioned on last quarter's call, we expect Washington's 2014 comparable EBITDA to be approximately $10 million to $15 million behind 2013. While we are expecting a slight increase in occupancy in Washington during 2014, the lag between the signing of the leases we expect and the contribution to our earnings from these leases will push the full effect of the expected leasing activity to 2015.

In addition, more than offsetting the expected reduction in comparable EBITDA, during 2014 we will realize an interest expense reduction of $16 million from the restructuring of the Skyline mortgage loan.

In summary, while we expect comparable EBITDA from our Washington segment to be $10 million to $15 million behind last year, we expect its contribution to comparable FFO to be $1 million to $6 million ahead of last year.

Our retail strips and malls business produced $52.2 million of comparable EBITDA for the quarter, ahead of last year's first quarter by 2.8%. We leased 233,000 square feet at the strip shopping centers with a positive mark to market of 9.4% GAAP and 3.1% cash. We leased 25,000 square feet at the malls with a positive mark to market of 14.7% GAAP and 5.3% cash.

Occupancy at the strip centers was 93.9% at quarter end, down 40 basis points on a sequential basis from the fourth quarter and down 30 basis points from 2013's first quarter. Occupancy for the malls was 95.7%, down 20 basis points from the fourth quarter and up 80 basis points from 2013's first quarter.

Total first-quarter FFO was $1.31 per share as compared to $1.08 per share in the prior year's first quarter. On comparable items in this quarter were positive $20.2 million or $0.11 per share of income compared to negative $9.8 million or $0.05 per share of loss for the first quarter of last year. This year's first quarter non-comparable items included $9.6 million of net gains on the sale of a land parcel and residential condominiums; $9.3 million for our share of Toys FFO; and $4.1 million of FFO from discontinued operations. The $9.3 million of Toys FFO represents management fees and real property depreciation as we completely offset our $75.2 million share of Toys equity and earnings with a $75.2 million impairment loss to continue to carry our investment in Toys at its $80 million estimate of fair value.

In last year's first quarter, we similarly impaired our share of Toys' earnings. Please see our press release or the overview and MD&A on page 33 of our Form 10-Q for a complete summary of non-comparable items.

Let me take a moment to explain the change in our total revenues line. While it looks like total revenues decreased for the quarter, like-for-like total revenues actually increased $28 million or 4.4% over the prior year's first quarter when adjusted to exclude last year's one-time $59.6 million of income from the Stop & Shop litigation, $14.4 million of revenue from Independence Plaza, which was deconsolidated in last year's second quarter, and $12.1 million of fees from the Cleveland Medical Mart development project which we sold.

Now turning to capital markets. In January, we completed a $600 million loan secured by our 220 Central Park South development site. The loan bears interest at LIBOR plus 2.75% and has a final maturity of January 2019. In April, we completed a $350 million refinancing of 909 Third Avenue. This interest only loan is at 3.91% fixed and matures in May 2021.

We realized net proceeds of $145 million after repaying the existing 5.64% $193 million mortgage defeasance costs and other closing costs. We also completed a $300 million refinancing of the office portion of 731 Lexington Avenue owned by Alexander's, our 32.4% affiliate. The interest-only loan is at LIBOR plus 0.95% currently 1.01% and has a final maturity of March 2021. The proceeds of the new loan were used to repay the existing $312 million 5.33% fixed rate loan and closing costs.

Our consolidated debt to enterprise value is 34.5% and our consolidated debt to EBITDA is 6.9 times. Our debt mix is balanced with fixed rate debt accounting for 86% of the total with a weighted average rate of 4.73% and a weighted average term of 6.6 years. Our floating rate debt accounted for 14% of the total with a current weighted average interest rate of 2.47% and a weighted average term of 4.3 years.

Our 2014 maturities are just $133.7 million and our 2015 maturities are $941 million including $500 million of 4.25% senior unsecured notes due April 2015.

As Steve mentioned, we intend to repay the $445 million of 7 7/8% senior unsecured notes due 2039 which are initially callable in October 2014. This repayment alone will generate incremental FFO of $0.18 per share per year. Each of the rating agencies has reaffirmed our ratings subsequent to our announcement of the retail spend transaction.

With that, I will turn it over to David Greenbaum to cover our New York business.

Thank you, Steve. Good morning, everyone. Before I turn to our results for the quarter, I will spend a minute on the market.

Since year-end, leasing velocity has continued to accelerate. In fact, absorption in the first quarter was the highest quarterly total we have seen in the past 10 years from 1.5 million square feet of positive absorption. Let me highlight several of the headlines from the various market reports produced by the brokerage community that sum up our view of the market.

One report states "the Manhattan office market keeps on motoring." While another brokerage advises its tenants, "A brisk beginning to the year means fewer options and rising rents."

Let me now focus on our performance for the first quarter. We had an exceptionally productive first quarter with 947,000 square feet of office leasing in 45 transactions with an average term of 11.7 years. This 947,000 square feet is for the first quarter only and does not include the 355,000 square foot Neuberger Berman lease we announced just last week.

Activity was well balanced throughout the portfolio, not concentrated in any one submarket. Of the 947,000 square feet, 45% of the activity was new tenants or expansion by existing tenants and 55% was renewals.

First-quarter office occupancy was 96.9%, up 30 basis points from the fourth quarter. Basically we are full. Our average starting rent this quarter was a healthy $62.39 with very strong positive mark to markets of 18.2% GAAP and 14.8% cash.

The first-quarter leasing activity included a 102,000 square foot lease renewal at 90 Park Ave. with FactSet Research Systems, a financial analytical software company. I've not spent any time on prior calls discussing this 41-story 932,000 square foot tower, the entire block front between 39th and 40th Streets on the west side of Park Avenue.

90 Park Avenue was originally known as the Sterling Winthrop Pharmaceuticals building. Sterling Winthrop which is now a subsidiary of Bayer Pharmaceuticals was the lead tenant in the building when we acquired it in 1997 occupying over 50% of the building. Over the years Bayer has subleased much of its space. With 450,000 square feet of scheduled lease expirations over the next two years, 2015 and 2016, we have commenced a capital program to reposition the building similar to what we recently completed at 1290 Avenue of the Americas.

Our plans for this building include new mechanical systems, modernized elevators and a total lobby transformation. We are excited to have kicked off our leasing program with FactSet and have very good activity here.

In Midtown South at our 1.1 million square foot 770 Broadway located between 8th and 9th Streets, Facebook expanded by 58,000 square feet just weeks after moving into their new premises and now leases a total of 160,000 square feet in this creative hub which is the headquarters of J. Crew, AOL and Facebook. And we are now working with Facebook to produce even more space for their growth. Tenants love this building.

In Penn Plaza this quarter, we completed some really important transactions. Old tech, a term I recently heard on CNBC, has also been active. At our 2.5 million square foot 1 Penn Plaza, technology giant Cisco recommitted long-term with an 80,000 square foot renewal for its New York headquarters and ADP also renewed its 32,000 square foot New York headquarters lease.

At our 330 W. 34th St. redevelopment, we kicked off the leasing program with a 178,000 square foot headquarters lease with New York & Company which will be occupying four full floors in the building. We have a lease out now with a technology tenant for another 80,000 square feet. Activity at both 330 W. and 7 W. 34th Street is high and we are pleased with the market's reaction to our building transformation programs. Our entire 7.5 million square foot Penn Plaza portfolio continues to be full with our occupancy at 97.3%.

At 650 Madison Ave 600,000 square foot Trophy office and retail asset we acquired a 20.1% interest in last fall, we continued making triple digit deals. In our first quarter, we completed one lease and subsequent to the end of the quarter, we completed a second lease for a total of 32,000 square feet all at average rents of $150 per square foot.

Finally and importantly just last week, obviously after the end of the first quarter, we announced the capstone of our 2.1 million square foot 1290 Avenue of the Americas transformation. Neuberger Berman, one of the leading investment managers has committed to 355,000 square feet, entire floors 22 to 29 and 38 to 43 for 20 years taking the space currently occupied by Morrison and Forster as well as a space lease to Warner Music through 2017.

To produce this space for Neuberger Berman, we entered into a surrender agreement with Warner Music which will be paying an $11.7 million lease termination fee. The mark to market on the Neuberger Berman lease is a positive 12.3% GAAP and 6.6% cash. When originally constructed in 1963, 1290 was known as the Sperry Rand Building, then AXA Financial Center, and it is now the Neuberger Berman building proudly located on Sixth Avenue's Corporate Row.

Since our acquisition of 1290 Avenue of the Americas in 2007, we have now leased over 1.5 million square feet in this 2.1 million square foot building raising rents by some $22 per square foot or 40% higher and growing the NOI from the low $60 millions to north of $100 million stabilized.

Let me now turn to our Manhattan Street retail where we completed in April a long-term lease renewal with Coach at 595 Madison Avenue on the corner of 57th Street. We achieved very strong mark to markets of 83.1% GAAP and 44.2% cash for this 11,500 square foot three-level flagship lease to Coach.

In the first quarter, we completed three small retail leases totaling 11,000 square feet with mark to markets of 44.3% cash and 7% GAAP.

As Steve mentioned, we have development and redevelopment projects underway all over our New York portfolio. At 220 Central Park South, excavation for a luxury condominium tower is now down 30 feet well into rock. The Bow Tie at Times Square at 1535 Broadway, the Marriott site, with the steel we have already erected you can begin to visualize the enormity of the full block eight-story high LED screen we are constructing.

At 7 W. 34th and 330 W. 34th St. you can poke your head into the lobbies and witness the transformation of these buildings into 1.1 million square feet of tech creative space.

At 280 Park Avenue, our joint venture with SL Green, the mid-box dual block atrium we will be delivering this fall will complement the full block Park Avenue lobby.

At 608 Fifth Avenue, we are delivering possession next week to Topshop Topman for its 44,000 square foot four-level flagship. At 689 Fifth Avenue, working together with the Landmarks Preservation Commission, we are restoring the base of the building to its original limestone grandeur.

For our Alexander's affiliate, tower crane is up and concrete is now being poured for the 300 unit rental apartment tower being constructed on top of the Rego Park new shopping center. We expect to top out in the fall and begin leasing apartments next spring. I invite you to drive around the city and see all of this activity firsthand.

I spent some time on our last call discussing the strong activity we have had at our 1.8 million square foot 555 California Street. This massive granite building dominates the skyline and is the best office building in San Francisco. In the first quarter, we signed four leases totaling 114,000 square feet, the highlight of which was a 49,000 square foot lease with Microsoft which will be moving its San Francisco office into the second and third floors.

The second floor has 27-foot ceilings allowing Microsoft to establish a unique presence visible from the street. We also signed a 30,000 square foot lease renewal with Wells Fargo and a 28,000 square foot lease with Regis.

At the 3.5 million square foot Chicago Mart Building located at the center of the hot River North submarket, we completed 31,000 square feet of leasing this quarter. Motorola, Google also completed, move into its 600,000 square feet of space in the building and on April 22 celebrated by hosting a ribbon cutting reception with Mayor Rahm Emanuel delivering the keynote remarks. This space is really cool, really transformative, a combination of R&D, lab, tech and office space for Motorola's over 2000 employees. Images of Motorola's space are now posted on the link on our homepage at www.VNO.com.

Just last night we teed up for execution an additional 60,000 square foot lease with a major technology tenant which we expect to sign in the next couple of days continuing the transformation of our iconic Mart building into a hub for tech office tenants. This building is a buzz of activity.

To conclude my remarks, let me summarize the entire New York division. We had a very strong quarter. Our key performance metrics are industry-leading with same-store EBITDA increases for the overall division of 6.2% GAAP and 10.1% cash. Isolating just the New York office business, our same store EBITDA increased 7.8% GAAP and 10.4% cash.

I am now going to turn the call over to Mitchell to cover Washington.

Thank you, David. Good morning, everyone. We are pleased with our first-quarter results. We have seen an uptick in activity and we continue to think we will see meaningful traction in the latter part of this year and into the next. We completed 365,000 square feet of office and retail leases in 62 separate transactions. Overall, office leases signed in the first quarter generated a GAAP mark to market of positive 3.9% and a cash mark to market of negative 3.1%.

Our total occupancy including residential was down slightly by 10 basis points from Q4 to 83.3% which is weighed down by Skyline's 58.7% occupancy.

Excluding Skylines, our overall occupancy actually increased by 40 basis points to 88.1% and office-only occupancy increased by 30 basis points to 85.7%. Quarter over quarter, we reported flattish same-store EBITDA changes equal to positive 0.5% cash and negative 2.5% GAAP.

In addition to our 365,000 square feet of office leasing, we signed a lease this quarter with WeWork to repurpose a 165,000 square foot vacant office building in Crystal City into their exciting new residential concept. By the middle of next year, they will open 250 community style residential units with imaginative design and dynamic shared social spaces. We believe this concept will attract a whole new dynamic demographic to Crystal City complementing our tech creative class initiative that I will elaborate on shortly.

Crystal City is an irreplaceable location. It is contiguous to DC on the shores of the Potomac with superb transportation and excellent views. With its live-work-play infrastructure, we see enormous potential for Crystal City to become a new hub for the tech and creative community. These smart millennials are in high demand by employers and infuse fresh energy into neighborhoods.

Of the last call I introduced several transformative moves to attract this important growing demographic to Crystal City. Over the past 60 days, we have put several things into motion. First, in mid-March we launched our Design Lab at 251 18th Street. We created six prebuilt office suites for these, each designed by a different architect, specifically for creative companies. Marketed as a showcase for office innovation, Design Lab drew over 1500 people in its first 30 days and has generated great press. Already several of those suites are in lease and we have started planning for Design Lab 2.

In April, we launched Crystal Tech, the home of a new $50 million technology fund. Crystal Tech is joining the creative community in two ways. First, the fund is headed by 500 Startups' founder, Paul Singh, a global expert in the venture capital and tech world. The fund is investing in high growth, post seed companies who are co-locating in Crystal City. Six different tech companies have already moved in. The idea is over time they will take root, attract others and mature here.

In addition, events for the tech community are being hosted regularly in the space by Tech Cocktail, a well-known tech media company that acts as a magnet for bringing together the millennials. On our opening night, hundreds of entrepreneurs packed into Crystal City.

Also in April, TechShop opened their new 22,000 square foot prototyping studio in Crystal City. The studio provides tools, equipment, technology and classes for inventors, engineers and entrepreneurs. These openings along with the bringing WeWork to Crystal City are generating just the kind of action we are seeking and we believe these initiatives will help drive tenants and users to Crystal City.

In addition, Crystal City continues to attract associations and nonprofit organizations. The combination of our proximity to Capitol Hill, adjacency to Reagan National and an abundance of hotels has made Crystal City the location of choice for this sector. Today Crystal City is home to over 20 major associations and nonprofits.

In the first quarter, we completed new and extension leases in Crystal City with several associations including a new lease with American Public Power Association for 22,700 square feet, an extension and expansion of The Food Marketing Institute to now 44,200 square feet, and an extension and expansion of communities and schools to now 16,500 square feet.

In April, MSI, an international development consulting firm, moved from Washington DC into their new 51,000 square foot space in Crystal City.

Our residential portfolio continues to deliver strong results with 96.8% occupancy. We own more than 2400 apartments clustered in very desirable urban submarkets in Crystal City, Pentagon City, Rosslyn and Georgetown.

In summary as we lease up and change, we will create value. We will lease our vacancy and effort to this continuously. We are actively transforming Crystal City into a new hub for tech and creative. We are place making here and this is happening now.

We look forward to harvesting our 7 million square foot pipeline of new development, some of which is underway right now in Pentagon city. We are currently excavating a two-acre site, the first step in the construction of our 700 unit apartment for delivery in the middle of 2016. We are excited about our many internal opportunities to create value.

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

(Operator Instructions). Michael Knott, Green Street Advisors.

Steve, a question for you on New York retail or David. I think Steve, in your annual letter you said you were working on the mother of all rollovers. I would suspect you are talking about 645th Avenue. And also we saw in email trade rag the other day a speculation about the first $4000 per foot rent. Just curious if there is any progress you can report on that lease?

The mother of all rollovers is trying to drive up to the hospital and get into the delivery room. So we have nothing yet to report, Michael. But we love that property.

Okay. And then I guess just moving to DC. Mitchell, curious if you are still thinking that you are going to end the year higher on occupancy? Also I guess for Steve Theriot, I am wondering if you guys have the equivalent to your DC guidance for this year on a cash EBITDA basis since it ticked up this quarter. That was a slightly positive surprise for me and I'm just curious if the down guidance on EBITDA for this year if you have the equivalent on a cash basis?

Michael, good morning. This is Mitchell. I would continue to believe that based on the activity we have, we will in fact end the year in a positive position from where we are.

To answer the question, Michael, about do we have a comparable cash EBITDA forecast or guidance for the year, we have not issued and we are not planning to issue other guidance beyond the GAAP EBITDA guidance.

Okay, thanks.

Michael, let me go back to your first point about the mother of all retail rollovers.

So just to dimension a little bit of math for you, that building has 10,000 square feet on the grade in the H&M space and another scant 2000 feet adjacent to it which is occupied by Citibank. So it is a scant 12,000 square feet. So you could put a dimension on what market rents are in prime, prime, prime Fifth Avenue and let's say it has a 3 as the first number and the incumbency in there is less than probably somewhere in the $7 billion net rent number. So this is going to be at market rents a 4 or more times -- 400% or more times mark to market and so we have in our short-term future something that we are extremely excited about. It is an enormously important property and here we go.

Thanks for that color. I appreciate that.

Michael Bilerman, Citi.

Good morning. Steve, you talked about the significant amount of liquidity that you have today which doesn't even include all the liquidity and cash that is still on the come over the next 12 months from the deals that you have already executed. And I am just curious how you think -- I know you talked about tendering for the debt that comes due later this year -- but how do you think about the investment and putting that cash to work now that you have made tremendous progress on the simplification?

Michael, first of all, we love cash. We love liquidity. We love to have the liquidity when markets are in chaos or when markets are giving us bargains. We are rigorous, we are disciplined. We are not going to spend cash because we have it. So we have learned over the 40 years that we have been doing this that you have to act counter-cyclically meaning you have to raise cash when money is easy as it is now and spend it when money is tight and nobody else has it.

So with respect to investing, I have said over the last year or two that investing is difficult, prices are high. It is a better market for selling than it is for investing. And I have said over the recent past that we will be a net seller as we have been.

We do not fear holding cash. In fact, we like it. Having said that, somehow or other we always manage to scrape together the better part of $1 billion even in a slow year, even when prices are high of opportunistic investments which we think fit into our portfolio.

So the answer is to your question which I think is a very good one, we are not adverse to holding cash. We think that that creates an enormous strategic advantage to our firm, number one. Number two, we will be very rigorous and we will be very disciplined in investing. Number three, we think that there will be better times for investing meaning better values in the future. We can't proportion when that is and having said all of that, we are a very large and important party in the New York and Washington markets.

We see every deal and we manage to in this market, get a few but we don't really want to get every deal because we think it is not the best optimum buying time.

Thank you for that. Then just a follow-up for David Greenbaum. So your signage income keeps on going up as you move to the LED lighting. You are up about $12 million last year, up almost $3 million in the first quarter. I am just curious how big of a business that has become for you if you think about $730 million of New York NOI, how much does signage now represent and how much further can that number go? And is there a big capital investment that goes along with the change to LED where effectively you are getting increased NOI but you are having to put some capital for it?

Michael, I will handle the beginning of that and David can come in and correct me.

First of all, most of the signs that we --first of all, we love the signage business, we love it. We think it is a very unique and very important business. Second, most of the signs that we own are throw-ins if you can use that word to the real estate assets that we own so they are augmentary to that.

On occasion we have bought some signs but very, very rarely. On occasion, certainly in the Marriott deal, the signage was important in the value but it was really a tagalong. It wasn't the main determinant of the value although that sign will be incredible and we did make a payment to buy back a long-term contract to a signage operator in that deal.

The signs do require a capital investment. We are anxious to make that investment and the payback on that investment -- on those capital investments are less than two years. So having said all of that, now David, you can correct me.

The only thing I would add, Michael, is as Steve said, the substantial portion of the signage business effectively is keyed into the retailer so that is "recurring income". There are a couple of signs at 1540 Broadway that "came online" which is the reason for the increase but that is a recurring increase.

A small portion of the business is attributable to effectively selling slots on the LEDs and that business is a little bit more seasonal. We did well in the first quarter because we were able to take advantage of the Super Bowl opportunity at 1540 and the Bow Tie in Times Square.

Michael, think about it for a second. The signs have value, the street signs have value in the highest traffic locations so that if you are in a low traffic location, they have less value. So where we traffic is in Times Square and in Penn Station, the two highest traffic locations in the city and so definitionally, the signs have enormous value. And as David said, most of these signage income comes from retailers who make package deals where we rent them space and we rent the sign to them above their store or around their store or whatever on a long-term basis.

So the fact that we have a thriving signage business is indicative of the fact that we have a thriving street retail business that connects to it.

Right. No, I asked the question in a positive light. It is growing (multiple speakers)

We are trying to tell you that the strategy of it and how we see the business.

Okay, thank you.

Alex Goldfarb, Sandler O'Neill.

Yes, good morning. I guess continuing on the street retail theme, so if you could just talk a little bit about Topshop and if we should expect -- it almost sounds like the income we should expect to -- you guys to start recognizing income this year but maybe give some perspective on that.

In addition, the Marriott retail, there is a bunch more capital to spend but in the Q talks about everything completes at the end of this year. So if you can just help us give a framework for how we should think about the NOI coming online over the next year or two? As well as I guess following up on Michael's question, how we should think about trying to guesstimate what a 300 foot wide six-story Times Square LED sign, what kind of NOI that is going to throw off?

Let me see if I can catch your questions in order and I'm going to ask David and the technical -- our financial guys to chime in.

The Topshop lease, we are turning over space to them next week. In fact, the British owner of Topshop will be in our office this afternoon and so when we will begin rent commencement for that?

When we turn over the space next week.

So the GAAP rent will commence next week. Cash rent will commence when they open and they will open right around Halloween so either Halloween or a week later. I can tell you that this is an unbelievably interesting and important fashion tenant. If you have been in any of the stores and I hope you have been, and so they are pretty theatrical and there is going to be -- to use a phrase that I have used recently -- the mother of all Halloween parties in connection with that opening.

With respect to Marriott, Marriott is proceeding at pace for a probably end of October, beginning of November completion of the sign which we are very excited about and the retail leasing is proceeding. We are sifting through offers and deals now. We do not expect to have it 100% occupied or actually even near that at the opening but it will lease extraordinarily well. We are getting a great reception from the marketplace.

In terms of dimensioning what the incomes are from those transactions, I think that is not something that we normally disclose store by store or asset by asset. What did I miss, Alex?

You didn't. I just have one follow-up question and actually we have one colleague on our floor who is very excited for the Topshop to open because he is about a block away. But I think in the opening comments it was either Steve or Mitch who mentioned about DC picking up next year, that there is a lot of leasing activity this year where we won't see the benefit until next year.

Again, if you could just help us quantify how much pickup is going to be, you know, we should look forward to next year. Clearly, we have all been waiting for Crystal City and Skyline to turn around, so any bit of positive incremental is big. It is just trying to get everyone's perspective; is it going to be a little bit and we need to wait longer, or is there some material stuff coming that could make it seem as though we will start to read better things about the DC portfolio?

Alex, we are not prepared to give guidance beyond what we have already given, which is we are kind of skimpy on guidance as you know. We don't think that there is a boom coming next year. We think that there will be a gradual and slow uptick in activity. There is activity, but the market is extremely competitive.

So we continue to be conservative in what we are budgeting going forward through this year and next year.

Thank you, Steve.

Thanks, Alex.

Steve Sakwa, ISI Group.

Thanks, good morning. David, I just wondered if you could expound a little bit more on the New York City leasing momentum and maybe just talk a little bit about the submarkets where you are seeing the best strength, kind of Penn Station versus Grand Central versus the Plaza District, and how that might be impacting the rents that you are thinking about for the two redevelopments on 34th Street?

Generally, I will tell you we are seeing very good action in New York, as they say, in my pipeline in terms of leases that we are working on for Q2, Q3, very active. We have already chipped away significantly at our 15 expirations. I think if we were talking a year ago, originally our 2015 expirations were North of 2 million square feet -- 2.1 million, 2.2 million square feet. That is now down to somewhere a little over 1 million square feet. So again, aggressively working on that.

In terms of where we are seeing some real strength, the high, high end of the market we are seeing very good activity, witnessed some of the deals that we have done at 280, 350 Park, 280 Park. We have 650 Madison Avenue of course. We have got space that is coming back to us next year at our little jewel box, 640 5th Avenue. We are excited to see some of those leases roll over.

Generally I will tell you at 7 W. 34th St. and 330 W. 34th St., we are seeing there again very good activity and we are getting more aggressive in terms of what our expectations are for market rents for that space.

So what we are doing generally across the portfolio I will tell you is reevaluating all of our rents and we right now as part of that reevaluation, are looking at taking those rents up somewhat significantly. I will tell you for pockets of space in Penn Plaza and other creative type of space that we have around the portfolio we have seen rent increases compared to where we are today from a year ago of probably a good 10% and 15% and again looking at taking those rents up a notch again.

Okay. And I guess second question maybe to direct to Steve. You guys have obviously done a very good job pruning the portfolio and raising cash. I am just wondering given the strong appetite for core assets from overseas buyers where they are willing to accept maybe returns as low as 6% and maybe even sub 6% in some markets, how do you think about potentially pruning some of the core assets in Washington and New York?

The answer to that is that we get incomings weekly for the assets that we have which are core and in our New York and Washington portfolio are extremely -- are in demand and in high demand and we consider whether to hold or to sell, etc. all the time.

We are extremely confident that the majority of the assets that we have in Manhattan and in Washington have growth in front of them. The way we look at it, Steve, is that would we rather have the cash or would we rather have the asset. So the answer is that we have not yet begun to prune anything really anything substantially in New York and Washington and we may very well sell a few assets selectively but not wholesale.

Okay, thanks.

James Feldman, Bank of America.

Great, thank you. I guess going back to the street retail portfolio, what are your latest thoughts on current mark to market across all of the assets?

You know, I don't really know and I don't really think I can hazard a guess. The increase in rents over the last 10 years has been startling. The increase in rents in the markets that we are in over the last five years has been double startling or startling to the second power or the fourth power. And so we have a very, very substantial increase and we benefit by the way from having amassed most of our portfolio before the rents rose so that we have a low basis and most of our incumbent tenants are at very low rents.

So I don't really know what that number is. We budget it out three or four years and I don't really want to hazard a guess. Maybe we should do that as a project, Joe.

Anyway so I can't really respond to the question, it is a good question but I can tell you it is enormous.

Okay. And then I guess thinking about the Neuberger lease, can you talk a little bit about how many leases like that are still in the market and then just in Neuberger's decision specifically how they ended up on Sixth Avenue, what else they were considering and what we can read through to how maybe Midtown is holding in there versus the Hudson Yards and downtown and some of the other options out there?

Jamie, as you imagine, a lease like this is going to be hotly, hotly contested in the marketplace. Neuberger had any number of options. They looked at new construction, they looked at multiple buildings on Sixth Avenue. I will tell you that when Neuberger first came to the building and recognized the transformation that we had undertaken in redeveloping this asset I would like to say they fell in love with it and I think they did.

I think the key to a lease like that was the major transformation we had undertaken in this building and that means not only the cosmetic aspects, the lobby transformation but all the mechanical infrastructure which really has made a building like 12 96th Avenue competitive with a brand-new asset in terms of backup generation, power, HVAC and all of the requirements that are critical for tenants in the marketplace.

So a hotly contested transaction and candidly we were up against as I said really everybody in New York in getting this deal. We are thrilled with it.

I just want to add one thing and that is a plug for the Neuberger management team and of course our management team. This is a major, major financial services money management firm. Really important, very well known in the marketplace. They made a decision to consider real estate options and one of which of course was to stay in the building that they had been in for 20 or 30 years. They were thorough, they were rapid, they were decisive, they were demanding of course. Once they made decisions they moved very quickly.

So some of the deals we make are torture, some of the deals we make are -- they are all tough but are a pleasure and dealing with their team was a pleasure. We are delighted to have them and we think of course obviously they made the right choice.

David and his team did a spectacular job in lassoing this tenant.

Okay, thank you for the color. I guess how many leases like that would you say are still out there, like major, very large leases that are trying to decide between staying on the East side and maybe going to the West side? What is the depth of demand right now?

There are any number of large tenants that are running around. What we did see in the first quarter which is encouraging is that a significant number of these first-quarter leases, large leases were in fact relocations, not tenants just staying in place. So tenants are recognizing the need to update their space.

Neuberger Berman for example is going to be reevaluating all of its space needs as it looks to its next 20 years in the future. I think generally the very positive thing that we are seeing in the marketplace in fact we discussed this yesterday with one of the research houses and one of the brokerage firms is that tenants once again in this cycle are beginning to recognize the way they grow their business is by focusing on the top line. The way they focus on the top line is with their personnel so I think out of that portion of the cycle where tenants are only looking at cutting expenses, tenants are looking to the future, are looking to some health in the economy and most importantly, are looking to where they should be putting their people over next 20 years.

So we are seeing some very good activity in the marketplace with tenants considering alternatives.

Okay, great. Thank you.

Brad Burke, Goldman Sachs.

Good morning, everyone. Obviously a lot of progress in the quarter getting focused on the New York office and retail and Washington office but should we still be thinking about California and Chicago as being long-term markets at this point? I realize you have made -- you are at an interesting point in the cycle for Merchandise Mart but you have made a lot of progress at 555 California. I don't know if this is something that could find itself in the on deck circle at any point for dispositions?

To focus on those two assets, these are enormous assets so we have 1.8 million square feet at 555 California that used to be known as the Bank of America building. It is the dominant largest, tallest building in California until (inaudible) finishes up his Transbay Building and it is a great asset. Real estate can't be done in the office, it has to be done in the field. And so David and I were out there recently. It is just a great asset.

So we believe that San Francisco is an extremely hot, aggressive market. We are realizing very, very positive mark to markets and income increase out of that building. We currently have no plans other than to realize the rental income in that building and realize the growth and enjoy it.

Similarly in Chicago, we own one asset there. It is another one asset town but it is an enormous asset, it is a 3.5 million square foot building that we are totally transforming from a show room building to an office building and to a tech creative type office building. It happens to be situated in the hottest submarket in town and when you think about it from a value creation point of view, that building will get a double or a triple whammy.

We will realize very substantial rent income growth there as we transition and we will realize a value, a cap rate improvement which you can just guess as to what a show room that's 5000 foot -- hundreds and hundreds of 5000 foot, 4000 foot showrooms are going to get versus a building that has Google and the like.

So both of these buildings we have value creation in front of us, very substantial value creation and these buildings are not on the for-sale list.

Okay, that is helpful. Actually just one on the weather which is something that we have heard about impacting costs in the first quarter. I was just wondering whether this was something that was meaningful for your portfolio but you still had good same-store numbers in New York but I don't know if this would have been meaningfully higher if we had a more normal year for weather?

I grew up in the retail business and I learned early on that anybody that uses the weather as an excuse is not a good manager so I'm not aware of anything. Do you have something in the --

Virtually all of our retail leases, a substantial portion of our New York leases are (inaudible) releases so more snow removal costs which we certainly had will be offset by accruals due from tenants.

Let me put it this way, it is an interesting question. It would be a substantial number. For sure the freezing winter that New York had had to cause our energy and heating bills to go up and why don't we take a project to dimension that okay. And for sure our snow removal costs for our shopping centers went up but I can tell you that it is not something that I am aware of. Maybe I should be but it is not so if I am not aware of it, it was in substantial. We will get that number together.

Sounds good. Thank you.

John Guinee, Stifel.

We have zillions of questions but let me just give a couple. First, David, as I am a huge fan of Manhattan, etc., but I'm actually a little bit surprised on the Neuberger Berman lease that is up 12 on GAAP and 6 on cash. Can you talk a little bit more about the underlying details there because I'd expect that you had to write a big TI check. I've got to believe that there is a big leasing commission in there. You have outlined a lot of money you are putting into the base building.

Can you talk about the upfront capital you are going to incur on that lease? And then also talk maybe about how the expense stock changes and what has actually happened on a net rent basis for the space?

John, we don't get into details of leases like that on individual tenants. Rather, we report in the aggregate. I can tell you that the lease was a market TI package and that the rent is market or maybe just a hair above market for the space that this customer has taken.

So we are happy with the deal. We think it is a market deal and whatever. Now if you look at the building overall, David mentioned in his remarks that over the short-term ownership period that we have had, we have relet 1.5 million square feet of this 2.1 million square foot building so this is an enormous building. We have taken the income level from a running rate of $60 million when we bought it to over $100 million today.

And if you wanted to just do a little exercise just for kicks, put a market cap rate on that $100 million plus income stream and that will give you a rough idea of what the building is worth and what it is worth per square foot. So we have a very, very substantial financial performance in the building as a whole, very, very accessible.

Great. Okay and then sort of a multi-part (multiple speakers)

John, big numbers. This is a multibillion-dollar building.

Big numbers, okay. Then my sort of a multi-part second question, with all the asset sales, any taxable gain or special dividend issues?

Second, we have noticed that your mezzanine loan portfolio is running off, is that temporary or are you getting out of that business?

Third, can you give us a quick update on Hotel Pennsylvania? And fourth, if we were trying to value Crystal City on an as is basis standalone, do you think the number is 200 a foot, 300 a foot, 400 a foot, just any thoughts on that?

Okay. Millions of questions. Thank you. Let's start -- what was the first one again?

But they are quick answers. Taxable gain issues, special dividend issues given all of the asset sales?

I am sad to tell you that our JCPenney's situation created a capital loss carryforward so that we have recognized gains on other sales which will be washed out against that so I don't anticipate a capital gain special dividend this year although we are realizing substantial capital gains.

Second question. (multiple speakers) Your observation is correct. We are letting our mezzanine loan portfolio run down. We are letting it run down for a couple of reasons. Number one, we have been busy as beavers in the big picture of focusing our big, huge enormous $30 billion businesses. So that is step one.

Step two is that the mezz loan business is a very interesting business. There are a small handful of specialty finance companies that do it and to my knowledge, there is maybe one or maybe more than one but I am only aware of one REIT that really does the business other than ourselves.

When you think about it for a second, it is really -- we believe in creating NAV as opposed to income, both are important but let's just focus we believe our stock price trades on NAV and if mezzanine loans or a lending business inside a REIT is probably priced at book so if you have $100 million and you have it on cash, it will be valued at $100 million or if you have $100 million and you can put it into a loan, it is valued similarly at par.

So I think recently, days ago one of the analysts, I think Green Street said that they were going to assign a 5% premium to book on a mezzanine loan portfolio. So you can take that conclusion. We are not 100% sure that the energy and risk that goes into mezzanine loans gets reflected in our stock price and we are all about creating value for our shareholders and ourselves as shareholders.

Most importantly having said that, most importantly, we love to get into to do loans and mezzanine loans or buy loans when the markets are really soft and you can buys loans at a discount which has a shot at creating real estate at a discount. So once again, we are all about cyclicality. We are all about judging when do we -- what market timing is. So we are building cash when the markets get weak and we can buy other people's loans at discounts, you will be sure we will reenter that business with both feet.

Having said all that, I think that the guys that do the business now do a great job. They have a big business and it is all very terrific but the strategy of the way we want to run our business and the way we want to -- we are in the real estate business we want to buy loans to create real estate. Next question?

Hotel Pennsylvania status and then also if someone was looking at just value in Crystal City on a standalone as is basis, is the number $200, $300, $400 a square foot?

I am not going to get into that question. If I gave you an answer to that question, they would probably throw me in jail so you are going to have to value Crystal City on your own. I can tell you and I've said this multiple times over the last year or more, the way I do the math in our stock and you know that is very important to me as I have said before, that is our report card, that is really we work all day to get a good report card. I do not believe that there is any value at all in our share trading price for the Crystal City vacancy.

So the answer to that is is that I believe the public market value of Crystal City which has no value for the vacancy and skepticism for the balance of it is less than the private market value. But we have no intention of selling that asset, we have every intention of working our ass off and leasing up that space and getting the value.

With respect to the Hotel Pennsylvania, Hotel Pennsylvania is as I said I think in my letter that was released three weeks ago, the big Kahuna in our Company and by the way, we have lots of enormous value creation things that we are working on including marking up our retail portfolio and the developments that we ticked off and what have you, etc. The big Kahuna is the Penn Plaza District which has lots of extraordinary things going for it. So we have the busiest train station in North America in the middle of our holdings. We have the biggest and most highest volume department store, that is Macy's, in the world in the middle of our holdings.

We have Madison Square Garden in the middle of our holdings. You can't walk on the streets, etc. retail rents have climbed to $1000 a foot on the street, etc. So but most importantly, the Penn Plaza district is the home of the better part of 8 million square feet of office space that we own and so the big value creation is that office space is now in demand as David has said over and over again, we are full and have been full down there at a 97% average occupancy for 15 years.

We have a similar occupancy today so the big Kahuna is to get the average rents to move up in that district which is what we are all about and we will invest significant capital dollars and rehabilitate the streets, the buildings, etc. to do that. The Hotel Penn is an integral part of that and we are in the throes of the decision-making process.

We have been slow, we have been tardy all for good reason and you will begin to see significant stuff happening in the hotel Penn and the Penn Plaza District over the next years, I'm going to say this is a two, three, four year project that we are in about to embark upon. We have benefited enormously as I said before from what (inaudible) is doing in Hudson yards and we have benefited enormously from the shift in the geography of Manhattan sliding, tilting slightly to the South and significantly to the West.

So stay tuned. We are really excited. This is the big Kahuna which once again also has no value whatsoever in our stock.

Thank you.

Vance Edelson, Morgan Stanley.

Terrific, thanks. Just back on the street-level retail, you have mentioned the enormous potential and I know it is tough to gauge but when you think about the ability to raise rents even further, do you think the best locations that already have the most impressive rents, is that where the best upside is or does your gut tell you that really needs to plateau some and perhaps there is more upside from the lower rent locations that might follow in the footsteps of the more expensive properties? Is that what really moves the needle from here or is it both?

You know, that is a very interesting question which we ask ourselves daily and weekly. The rule of the jungle is the best gets better more quickly than mediocre get good. So if you think about any investing, buying securities, buying properties, buying art, whatever it might be, you always buy the best. So the way we do it is it is a very, very interesting -- this just isn't that complicated.

When you buy a retail asset, you know what the sales volume of the incumbent tenant is doing and you can gauge what the rent protect potential of that asset is from that and so our job is to buy under rented and raise the rents, buy in great places where there is enormous traffic. So we know what the sales volumes are, we can walk on the streets, we see the traffic on the streets.

So having said all of that, we believe in the future of the dominant shopping streets and neighborhoods in New York are going from north to south -- Madison Avenue, Fifth Avenue, Times Square, 34th Street, 14th Street and Soho. Those are the neighborhoods where all of the traffic is and that is where we try to invest.

Now we have been toying with the idea of saying a company of our size, we should have some R&D like every major non-real estate company has. So what would R&D be? R&D would be for us taking a measured amount of capital, not a lot but not insubstantial and looking for the cutting next edge which we do all of the time. So having said that, we are really happy with investing in the tried and true proven neighborhoods.

Okay, thanks for that. Then I know you are excited about 220 Central Park South. I just want to give you a chance to discuss it a little further. Could you remind us of the proposed construction schedule. Are you already getting any early indications of interest in the condos about when can you realistically think about pre-leasing? Could that be something for us to look forward to in 2015?

First of all, I am really excited about this, this is the best for sale apartment project in New York. It is in the front row directly on Central Park. It is adjacent to the Columbus Circle neighborhood which has had enormous improvements and so this is the Real McCoy.

We have -- it has been a struggle but it has been a joyous and worthwhile struggle and so we have been at it for eight years. As David said and I said, we are under massive construction. We had six pieces of equipment in this hole which is getting deeper and deeper and bigger and bigger. So the answer is that we have enjoyed a significant uplift in our basis as to what the market value of the land is. I would dimension that as easily 2.5 times our basis so that puts us into a very, very attractive financial position.

We have chosen to finance the land basically at approximately what our basis is. So you all know that has been disclosed, you all know that arithmetic. We have gotten a very significant, very significant number of incomings about people who want to see, understand and purchase in the building, nothing binding of course. We expect that we will be in full blast sales of the selling of the project probably in the first quarter of next year and we expect the building to take about three years or perhaps a pinch longer to complete.

Okay, that is great. Thanks, Steve.

I'm really excited about it. If you give me a call I would like to sell you a very expensive apartment.

I will look into it. Thanks.

Ross Nussbaum, UBS.

Good morning, guys. Can you talk a little bit more about the WeWork lease down in Crystal City from a number of different perspectives? I guess first is to my understanding this will be the first residential build out that they have done historically. They have done all these collaborative office situations. So just talk a little bit about your comfort in their executing on that.

And then second, just the economics of this lease because the rent is perhaps lower than what I would frankly expect office space would lease for in Crystal City. So should we be thinking about this from the standpoint of being a little bit of a loss leader in terms of what the end game is in Crystal City?

You are 100% correct. It is -- if you put down a pro forma as to what an office building might lease for versus this, you are 100% correct. It looks kind of like a loss leader but let me tell you the way our management team looks at this.

Number one, this is a scant 2% of our inventory down there. Number two, it is transformative. It is really important that we get this kind of clientele coursing through Crystal City. We believe we have been dancing with the WeWork management team for several years now. We believe these folks are extraordinarily gifted, they have great ideas, great execution. We believe you are right, this is going to be their launch of a residential we live kind of a project.

We believe it will attract the same demographic as the WeWork project, the WeWork office counterparty and we think it is an essential to our strategy of changing slightly or even more than slightly the major complexion of Crystal City's demographic and essential in place making.

So having said all that, (inaudible). Think about it, it's 165,000 foot building. It is a tired building. It is a building we would have had to put enormous capital into to convert to an office building and it would have been at the end of the Q and maybe it wouldn't have rented for three or four or five years. Okay? So we think that this is an enlightened transaction which is important. I can tell you that Mitchell Schear is the proponent of all of this and he believes in it and our whole team believes in it.

Was the rent gross or net at $25 a foot lease?

That is a -- let me just think about that for a minute. That is a net lease.

There will be some additional expenses on top of that to get to the full service equivalent.

Okay. My second question is just on the simplification front. This hasn't really been talked a lot about in the past but can you talk about the timeline for monetizing the real estate fund? What is the end game there?

Michael and Wendy are in the room who run the fund for us. The first two assets are in the market now. I think in my remarks I said that one part, which is the fund asset is in the market now. And Georgetown Park, which is the largest single hunk of retail in Georgetown in the Washington DC District is also in the market now. So as we feel that the assets in the fund are right and are ready to market -- I mean our business in the fund is to sell them and realize the proceeds. The first two are in the market now.

And lastly, is there a world in which Alexander's is going to be part of Vornado or should we stop having those silly thoughts?

No, I wouldn't call it silly but there is no world that that would happen I don't think.

There is no world -- I'm trying to get through the double negative there. So you are saying it is still a possibility?

I had a problem in my college application 800 math, zero English. So let me try it again. There is no way that I would foresee that Alexander's and Vornado would combine.

Thank you.

David Harris, Imperial Capital.

Good morning, all. Thanks for taking my question. Just one question for Steve Theriot. You are capitalizing costs at about an annual rate of about $0.40 a year. I'm just thinking is that a good go forward number? In particular, could you talk about how much capital costs are being capitalized with regard to the spin out properties and also things that we know are going to go away like Springfield Town Center?

David, you know, the amount of capitalized costs, interest and taxes is going to be variable based on the amount of development we have got going in any one point in time. So as 220 Central Park and as Springfield Mall got into development, the capital -- for GAAP purposes, the base against which we've got to capitalize interest was significant. That will be lumpy as those projects come out of development as Springfield Mall goes online in the holiday season this year. So that is going to be a lumpy number and it is hard to say there is going to be a constant run rate for that. I am not sure if that is exactly what you were getting at, David.

Let me take it to Steve and ask a question with regard to setting the dividend. Steve, when you and the Board consider setting the dividend, do you just ignore the capitalized costs or do you take them into account?

Our dividend is guided first and foremost by taxable income which is a different calculation, it is not an exact calculation.

David, it is Joe. That does include of course taxable income does include charging projects in development with interest and you know typically between 5% and 6% on the asset value, not the equity value, the asset value is what we are capitalizing. So Springfield, if the job is $250 million, at 10%, it is -- at 5%, it is $12.5 million a year.

I don't want to prolong the conversation but I am just thinking in terms of your consideration of what is the real cash flow cover on the dividend that you and the Board might set. Is that inclusive of the capitalized costs or exclusive of the capitalized costs or are you saying you don't look at that at all because you are looking at taxable income as you (inaudible) reference?

That is correct, to the extent that we pay interest, that is a tax deduction. The fact that we capitalize it in our GAAP statement doesn't really have very much effect on our taxable financial statement. So the answer is that our taxable income would be reduced by the interest that we pay on a cash basis which is so that the answer is we do take into effect the capitalized interest, yes. As a deduction to the taxable income.

And remind me. Have you made any commitment with regard to the common dividend as we go forward beyond the split?

We have said in the material that we put out and in the call that the combined dividend from SpinCo and Remainder Co will not be less than the dividend that is currently being paid by Vornado.

Okay, very good. Thank you.

Michael Bilerman, Citi.

Thanks for taking the follow-up. Mitchell, just on the space taken out for redevelopment at Crystal City. So that went up by 45,000 square feet sequentially. I already thought 221 S. Clark, the WeWork lease was already in that. So I didn't know what caused that increase, about 48,000 square feet.

So if you take the total square footage of the building, the building through March of 2014 was half occupied so the balance of the building was taken out. I think the square footage that you are then specifically referring to, about half of that was related to BRAC lease and half of it was non-BRAC space. Does that answer your question?

So going from 348 to 393 was the fact that the leases hadn't rolled yet at the end of 2013 and as those leases rolled, it was taken out for redevelopment?

That's correct.

Is there any more out of the balance of the 1.2 million square feet to be resolved, is any more moving up to the redevelopment piece?

We don't anticipate any other space being moved into that redevelopment category.

And then just sticking with Mitchell, we talked a lot about [sub-ticking] activity and you went through all of the significant tech initiatives that you have going on and the WeWork stuff. Is there anything else -- and you talked about the associations. Is there anything else from -- because the leases pending really didn't shift that much in terms of pipeline of leasing that could support other than the things that you had discussed. Is there any other color in terms of those negotiations that support that comment about upticking activity and that you really sort of see this end of year pick up?

What I would say is if you think of the legs of the Crystal City stool, there really are a number of them so you will still see government activity as one of the demand drivers notwithstanding all that we have read and heard about government. There will be government activity, there will be government contractor activity. So if you think of that a second leg, if you think of the third leg as we talked about, a variety of the non-for-profit and some of the value driven tenants, Crystal City becomes an incredibly great value proposition to some space in downtown Washington or some of the other submarkets.

And then if you add the new layer that we have been discussing in terms of some of the creative sites as well as the tech sites, we think that there is demand from that sector and we are sort of adding another layer to the whole puzzle. So at the end of the day, I think we will see activity come from a variety of those sectors.

But Michael, those are the things that Mitchell and his team are doing to attract tenants and to make Crystal City more a place making in Crystal City and what have you. But more directly to your question there are more showings, there are more inquiries, there is more life, there is more activity including a couple of fairly large 500,000 square foot folks that are cruising around looking to either buy or to rent. So there is activity whereas two years ago there was almost -- the phone didn't ring, now the phone is ringing.

Great. Steve, just last question for you. In early March, you announced the Springfield transaction with PREIT, with structured a big upfront cash payment and then stock or units from a tax perspective. Since doing that deal, PREIT's stock has come off about $2.00. It is sitting $1.50 below the collared price of $18.50 that you had struck to provide security for Vornado shareholders given the fact that the deal was struck at $20 but you protected your shareholders down to $18.50.

I am just curious as you are going to be a 10% holder of PREIT -- the market reaction to that transaction has wiped off almost $140 million of market cap to them and I am just curious, it is a great deal for Vornado but you are also a shareholder. I'm just trying to figure out how you think about it today and --?

I tell you how we think about it. The first thing is is that if we were not exiting the mall business, which we are, we would not have sold this asset. So we have high aspiration for this asset. We like the asset and as I said, we would not be selling this asset other than the fact that we really are exiting the mall business for lots of different reasons. So that is step one.

Step two is that as I think I said a little while ago on the call, we really have to kick the tires and see the real estate and walk the real estate to appreciate what it is. And so I myself was in Springfield exactly one week ago last Tuesday, sort of -- I walked the asset and spent several hours down there. It is spectacular, it is a huge asset. It has great bones. The aesthetics of it are terrific, the design is terrific. It is a big impressive imposing asset in a very underserved niche in the Washington market and we believe it will do extremely well. So that is the second. So it is the Real McCoy.

The third part of the asset is that the first run of leasing of the asset -- by the way, we took this asset down to the steel and we moved half of the steel around. We left the anchor standing. The other thing to note is when you go down there and inspect the asset which I hope you all do, you will see that Vornado overbuilt this asset. We spent I think note knowledgeably -- I am going to guess $15 million more on this asset than I think a normal developer would have done. By the way, we did the same thing with the Bloomberg building and you see how that worked out. We are doing the same thing with 220 Central Park South. And you see how that works out.

So creating great physical assets is really important so anyway, so we believe that the income on stabilization will be in the high 20s and based upon the purchase price that is paying for this asset, that translates to a scant 6% -- I don't whether it is 5.5%, 5.7%, 5.8%, I don't know what that would be on stabilization.

We believe, Vornado believes that this asset will stabilize on the second roll which happens in the seventh to eighth to ninth, tenth year at the better part of $40 million if it performs in the midrange of what our expectation is which would turn out to be an 8 plus cap on what the purchase price is. And so we believe that there is an enormous potential profit in this asset for Mr. and Mrs. PREIT.

Furthermore there is 3 million square feet of peripheral development entitled in this property which are not right now but will be right somewhere over the 10-year cycle.

So we think -- I mean look, we are happy to have sold it. We sold it with our eyes open. We think that we made a fair sale. We think the buyer made a fair buy all things considered and so we think that the market is always right. But we are actually quite surprised at the reaction in the market through the -- in PREIT's stock. We expect the transaction to close. If it closes and we are below the collar, we will suffer a relatively modest loss of $1 a share or whatever it might be.

We are happy -- we are not happy but we will do that. That is what the deal is. So the long and the short of it is now from PREIT's point of view, they have three or four or five different options. The first option is they can tough it out and try to continue to run their business and try to explain to their investors why they made the transaction and why they think this is good for their Company. And by the way, I was on asset -- on site Tuesday. I understand the day before that is a week ago Monday, the CEO of PREIT was there with three of his investors touring the asset as well and that is his job and I think that is the right thing. That is the first thing.

The second thing they can do is take your suggestion and PREIT's call last call, Michael and default, and leave me with the $46 million deposit and walk away. If that happens by the way, we have no expectation that that would happen that would not be a good thing for anybody. If that happens, we will be fine. We will figure that out. Although we don't expect that to happen at all.

The third thing is they can take an investor into the Springfield asset which is a possibility. The next thing they can do is they can say well gee, this is kind of silly. Let's buy back some stock so they have lots of different things that they can do and I am pretty confident that they are very alert, very attentive and thinking about this very hard.

Vornado is supportive of the deal. Vornado is happy to own the $125 million stake in their company and Vornado is supportive of PREIT.

Thanks for the amount of color. Good afternoon.

I think that is the end of the queue. As is our policy, we run the queue out until everybody is finished. And so we thank you all for your participation on our first-quarter call. This was a robust call. We look forward to your participation on our second-quarter earnings call which is on Tuesday, August 5. Do we have a time for that call?

10 AM.

At 10 AM. So we will see many of you before but if not, we will be back on the phone on August 5. Thank you all very much.

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