美國沃那多房產 (VNO) 2015 Q3 法說會逐字稿

Good morning and welcome to the Vornado Realty Trust third-quarter 2015 earnings call. My name is Yolanda and I'll be your operator for today's call.

(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 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 New York Division; Mitchell Schear, President of the Washington, DC Division; and Stephen Theriot, Chief Financial Officer. Also in the room are Michael Franco, Executive Vice President and Chief Investment Officer; and Joseph Macnow, Executive Vice President and Chief Administrative Officer.

I will now turn the call over to Steven Roth.

Thank you, Cathy, good morning, everyone, welcome to Vornado's third-quarter call. Business in New York continues to be terrific, really terrific. We are enjoying robust demand from all manner of tenants, led by Financial Services and creatives in all of our sub-markets and at record rents, which are now 25% higher than expiring rents. Ditto for our largest investment class, Manhattan Street retail business, where we recently signed a blockbuster 64,000 square foot, 16-year lease with Victoria's Secret at 640 Fifth Avenue.

Our upper Fifth Avenue portfolio now includes Victoria's Secret, the Swatch Group for its luxury brands, including Harry Winston, Uniqlo, Hollister, Ferragamo, MAC Cosmetics, Massimo Dutti, and Topshop. We are brilliantly positioned on Fifth Avenue and on Madison Avenue, Times Square, SoHo, Penn Plaza, and in Union Square as well.

Our street retail strategy is to focus on the very highest traffic locations. We will leave the commodity product, even in Manhattan, to others.

Our efforts at Penn Plaza continue to gain momentum. The temporary closure of 33rd Street earned rave reviews with one newspaper, calling the Plaza an oasis in Midtown -- Penn Plaza is our big kahuna. 220 Central Park South continues to perform at record-breaking levels.

As we have said, Washington has bottomed and is starting to come back -- in fact, that is now the consensus view. As Steve Theriot will tell you shortly, we are revising our EBITDA guidance for Washington for the full 2015 year to be behind last year by $3.5 million. We have previously projected Washington's EBITDA to be flat.

In Chicago, we completed an important 15-year lease with ConAgra for 168,000 square feet at theMart. This space will become ConAgra's new corporate headquarters. This execution continues to validate our value creation strategy for this 3.6 million square foot iconic property at the bullseye of Chicago's River North sub-market.

On the acquisitions front, we have been, and continue to be, very selective. In July we acquired 260 11th Avenue, a 235,000 square foot office property leased to the City of New York through 2021, together with a continuous 10,000 square-foot parking lot and additional air rights. This 44,000 square foot site is located on 11th Avenue from 26th Street to 27th Street, directly across from the Starrett-Lehigh Building.

With 260 11th Avenue, 85 Tenth Avenue, 61 Ninth Avenue, and 512 West 22nd Street, we will be one of the largest owners in the important and supply constrained West Chelsea office market. As I have said before, rents across all sub-markets in Manhattan are converging and we expect rents in these buildings to be on a par with traditional Midtown sub-markets to the north. As to dispositions, in October, we entered into an agreement to sell our lease holdings interest in 20 Broad Street.

The property is contiguous to the New York Stock Exchange, who is also the major tenant occupying 80% of the building. As expected, the modern-day New York Stock Exchange did not need to renew this lease. Accordingly, we sold our leasehold to a residential converter.

The aggregate consideration for the sale of the leasehold and the nine-month early termination of the New York Stock Exchange leases $200 million, or $423 per square foot. Total income from this transaction is approximately $156 million. The sale is expected to be completed in the fourth-quarter.

In September, we completed the sale of 1750 Pennsylvania Avenue Northwest, a 278,000 square foot office building in Washington, DC, for $182 million, or $650 per square foot. This resulted in a financial statement gain of $102 million.

The tax gain was deferred as part of a lifetime exchange for the acquisition of the Old Navy store on 34th Street, in the middle of Penn Plaza. We are managing 1750 Penn on behalf of the new owner.

In August, we sold our 50% interest in the Monmouth Mall in Eatontown, New Jersey, to our joint venture partner at a value of $229 million. Proceeds to us were $38 million and resulted in a financial statement gain of $33 million in the third quarter. With this disposition we have essentially completed our exit of the mall and strip shopping center business.

As for operations, we had a very strong third-quarter and I'm very pleased with our financial results. Our third-quarter comparable FFO was $1.24 per share, 14.8% higher than last year's third quarter. As Steve Theriot will tell you shortly, excluding income in last year's third quarter from asset sales, and excluding income from mark to market fair value adjustments of our real estate funds, both of which really shouldn't be included in FFO, comparable FFO per share, essentially that of our core business, would have increased a whopping 23%.

Company-wide in the quarter we leased 1,459,000 square feet and 125 transactions. In Manhattan we leased 509,000 square feet of office space with positive mark to markets of 25.4% GAAP and 24.7% cash. Let me leave you with one final thought about the franchise value of our business.

Vornado and its Management team are one of only a very small handful of firms who have the track record, [talent], relationships, and trust in the marketplace to lease, acquire, develop, finance, and manage million-square-foot towers and Fifth Avenue retail. It's a complicated business, rookies need not apply.

Now I turn it off to Steve Theriot for financial results.

Thank you, Steve. Yesterday we reported third-quarter comparable FFO of $1.24 per share, up from $1.08 per share in the prior year's third-quarter, a very strong 14.8% increase.

Our core performance is clouded by the inclusion of gains from asset sales and mark to market fair value adjustments of our real estate fund, without which our comparable FFO would have increased 23%. Not surprising, most of the 23% of growth comes from our very strong New York business. Total FFO for the third quarter was $1.25 per share compared to $1.15 per share in the prior year's third quarter.

Non-comparable FFO items in the quarter are income of a scant $949,000, or $0.01 per share, compared to income of $13.2 million, or $0.07 per share for the third quarter of last year. Please see our press release or the overview and MD&A on page 38 of our Form 10-Q for a detailed summary of non-comparable items.

Third-quarter comparable EBITDA was $392.2 million, ahead of last year's third quarter by 7.8%. Excluding the effects of the fund, our comparable EBITDA increased by 12.2%. Our New York business produced $282.4 million of comparable EBITDA for the quarter, ahead of last year's third quarter by $13.7 million, or 15.4%, driven by the redeveloped properties coming back into service, primarily 7 West 34th Street, 330 West 34th, and the Marriott Marquis retail space at 1535 Broadway, and acquisitions, primarily the Saint Regis retail, 150 West 34th Street, and the Center Building.

Our Washington business produced $78.7 million of comparable EBITDA for the quarter, behind last year's third quarter by $3.4 million. As Steve said earlier, we have revised our Washington EBITDA guidance, and expect that Washington's comparable EBITDA for the full-year 2015 will be approximately $3.5 million or 1.1% less than 2014. The decline from 2014 comes equally from lower occupancy at Skyline and lower lease termination fee income.

Now turning to capital markets. In July, we completed a $580 million refinancing of 100 West 33rd Street, the 1.1 million square foot property, comprised of 851,000 square feet of office space, and the 256,000 square foot Manhattan mall. The loan is interest only at LIBOR-plus 1.65%, and matures in July 2020. We realized net proceeds here of $242 million.

In September, we upsized the loan on our to 220 Central Park South development project by $350 million to $950 million. The interest rate on the loan is now LIBOR-plus 200 basis points and the final maturity is in 2020. In connection with the upsizing we've terminated a much more expensive $500 million standby mezzanine loan commitment and paid the $15 million contractual termination fee.

A few days ago, we entered into a senior unsecured delayed-draw term loan facility in the maximum amount of $750 million. The facility matures in October 2018, with two one-year extension options. The interest rate of the facility is LIBOR-plus 115 basis points, with a fee of 20 basis points per annum on the unused portion. At closing, we drew $187.5 million.

With this term loan facility and the upsizing of our 220 Central Park South development loan, we have the funds in place to complete the construction of 220 Central Park South and our Bartlett residential complex in Pentagon City. This $750 million facility is in addition to our $2.5 billion undrawn revolving credit facilities. As of today, we have $3.5 billion in liquidity, comprised of $1 billion of cash, restricted cash, and marketable securities, and $2.5 billion undrawn on our $2.5 billion revolving credit facilities.

You will note that we do not include the $750 million new term loan facility in our liquidity capacity because this facility is matched to fund our 220 Central Park South development and will self liquidate with the proceeds of the condominium sales. We expect to reach our $2 billion cash target by year-end.

Our debt to enterprise value is 35.4%. Excluding the financing for our 220 Central Park South condominium development project, our total debt to EBITDA ratio is 7.1 times, and our fixed rate debt accounted for 79% of consolidated debt with a weighted average rate of 4.34% and a weighted average term of 4.9 years. Our floating rate debt accounted for 21% of consolidated debt with a weighted average rate of 2.01% and a weighted average term of 5.5 years.

I will now turn the call over to David Greenbaum to cover our New York business.

Steve, thank you, and good morning to all.

We continue to be very constructive on the New York marketplace. Manhattan closed the third quarter once again with positive absorption, higher asking rents and declining availability rates. At 9.7%, Manhattan availability is now at the lowest level since the third quarter of 2008, more than 300 basis points below the Great Recession high of 12.8%.

Importantly, in New York we continue to experience strong employment growth for office-using tenants, with the US Bureau of Labor Statistics projecting 33,400 new office-using jobs for 2015, and a similar number of jobs for 2016. As I said on last quarter's call, in addition to the continuing employment growth in the TAMI, technology, advertising, media and information sector, which has been driving economic growth for several years now, the FIRE tenants, financial services, insurance, and real estate, recently have become very active in the leasing market. We now have dual engines driving the strong job growth in the city.

Turning now to our own portfolio, in the third quarter, we completed 43 office-leasing transactions, totaling 509,000 square feet at an average starting rent of $79.80. This continues our strong leasing trends year-to-date, 1,666,000 square feet of total leasing activity year-to-date at very robust average starting rents of $80.09. And mark to market for the third quarter were 25.4% GAAP and 24.7% cash.

As expected, and as I have discussed on our last two calls, our third quarter occupancy dipped slightly by 40 basis points to 96.2%, reflecting space that we got back at 888 Seventh Avenue, as well as the expiration of the STWB space at 90 Park Avenue. At 90 Park Avenue, our redevelopment program is nearing completion and in the third quarter, we completed two leases in the mid-rise of the building with rents starting in the mid-$80s. Taking account of both our redevelopment program at 90 Park, as well as the strength in the current marketplace, these rents are some $25 a foot higher than just two years ago.

At 888 Seventh Avenue, we got back five floors in the tower, a total of 100,000 square feet, and we have already leased two of the floors at rents over $100 per square foot with mark to markets of 35%. With the world awash in liquidity, business for the New York-based boutique financial service firms is booming.

In the third quarter, we signed a total of seven leases aggregating 69,000 square feet at starting rents over $100 per square foot. In fact, year-to-date, 24% of our total leasing activity, 400,000 square feet out of the 1.7 million square foot leased, has been at average starting rents of $108 per square foot, a total of 19 leases in six of our trophy buildings: 650 Madison Avenue, 888 Seventh Avenue, 350 Park Avenue, 280 Park Avenue, 640 Fifth Avenue, and 770 Broadway.

Turning now to our street retail business, in the third quarter we completed four retail leases. At 640 Fifth Avenue, we elected not to renew H&M when their lease expired in January of this year, and to maintain the cash flow at the property, we immediately brought in a temp tenant for this space.

We searched for the right tenant for this iconic location on Fifth Avenue at 51st Street and in September we signed a 16-year lease with Victoria's Secret for a 64,000 square foot flagship store at 640 Fifth Avenue. The store, which is expected to open in November of 2016, will have 78 feet of frontage on Fifth Avenue, and 9,350 square feet on the grade, with three selling levels, additional storage, and support space.

The mark to market on the lease is 196% GAAP, a 3 multiple, and 130% cash, a 2.3 multiple. Importantly, we also retained a store of some 3,200 square feet with 25 feet of frontage, which we currently are in the market to lease. With the additional lease up of this store, the combined GAAP mark to market on the entire space will be over a 3.5 multiple.

On our last call, I discussed the two record-breaking leases we completed with the Swatch group for its luxury brands, including Harry Winston, at our premier Saint Regis retail property on Fifth Avenue at 55th Street. The in-place leases with Bottega Veneta and De Beers were scheduled to expire in 2016 and 2019. Since the last call we have accelerated the timing of the Swatch delivery by moving Bottega Veneta to a temporary store at 650 Madison Avenue and entering into an early termination agreement with De Beers.

Think about it. Between the two Swatch group leases at the Saint Regis, and now our flagship deal with Victoria's Secret at 640 Fifth Avenue, we have completed all three of the major leases on prime, upper Fifth Avenue this year, truly a testament to the extraordinary quality of our street retail assets and our leasing team.

Excluding the Hotel Pennsylvania, our same-store numbers for the New York business for the third quarter are a tepid positive 2.2% GAAP and 0.5% cash and not reflective of the real growth in our operating results. Last quarter, there were some negative comments on our same-store results. So let's spend a minute and talk about it.

This year same-store results reflect both the dip in occupancy in our New York office portfolio, to 96.2%, as well as the retail space at 640 Fifth Avenue, which we will not be delivering to Victoria's Secret until early next year, and the space we recently took back from Crate and Barrel at 650 Madison Avenue. This year's real growth has come from placing our redevelopment properties, 7 West 34th Street, 330 West 34th Street, 280 Park Avenue, and 1535 Broadway back into service. However, that real growth is not a component of our same-store results for reporting purposes.

Historically, we have been an industry leader in same-store results and we fully expect to be back there next year with high single-digit same-store numbers. Let me just say, all is good in our New York business. Comparable EBITDA of our New York business is up $37.7 million, up 15.4% this quarter, over last year's third quarter.

Let me now turn to theMart at the epicenter of the River North market in Chicago, where we had a tremendous quarter leasing 398,000 square feet of office space with mark to markets of 47.4% GAAP and 34.8% cash. The highlights for the quarter include a 15-year lease with ConAgra Foods for 116,000 square feet, which will be relocating its corporate headquarters to theMart from Omaha, Nebraska. Other significant leasing in the quarter included a 45,000 square foot lease with another Fortune 100 company moving to downtown Chicago from the suburbs, a 72,000 square foot expansion with Yelp, bringing its total occupancy in the building to over 130,000 square feet, and a 41,000 square-foot expansion with a prominent technology incubator, 1871, bringing its occupancy to a total of 118,000 square feet.

I want to pause for a moment here and focus on theMart. Just a few years ago, we embarked on a program to re-imagine this iconic asset. At the time, the 3.5 million-square-foot building was predominantly an industry building with showrooms and trade shows occupying over 70% of the building.

What makes the building so attractive to office users is its unique and huge footprint of 200,000 square feet per floor. To give you some perspective here, each floor is over 4.5 acres. In July 2012, we signed the Motorola Mobility Google lease for 600,000 square feet, which required us to downsize or relocate over 140 showroom tenants to produce the contiguous space.

We have since added PayPal, Yelp, Matter, a bioscience incubator, two expansions with 1871, and now this quarter, ConAgra, and another Fortune 100 company. Today, the building measures 3.65 million square feet, and the showroom industry, which originally occupied 70% of the building has been downsized to just over 40% of the space. The remaining four showroom industries are healthy and high-performing.

The contract furnishings industry with the NeoCon tradeshow, the home furnishings industry, casual and outdoor furniture, and Luxe Home, the kitchen and bath industry. We have taken the EBITDA of this iconic asset from just over $50 million a few years ago to $80 million next year, with plenty of room to grow. Our internal budgets take the EBITDA of the asset to triple digits over the next couple of years.

If you're in Chicago, our team would love to take you on a tour of the building to showcase both our innovative tenant spaces, as well as the next step in the reinvention of theMart which is now in construction, a grand affair with stadium seating for our tenants to congregate, including a presentation venue which brings new life to the first two floors of the building, as well as trend-setting food options and a re-imagined food hall. These state-of-the-art amenities add to theMart's attraction to all class of tenants, the tech guys, as well as corporate America.

In San Francisco, at our 1.8 million square foot 555 California Street property, we completed three leases in the third quarter for a total of 45,000 square feet, including two market-leading leases at approximately $100 per square foot starting rents, and 18,000 square foot relocation with a financial services tenant, and a 23,000 square foot renewal and expansion with a mobile video game company for the entire 52nd floor. I will conclude my remarks where I began.

We are very, very constructive on the New York marketplace. Our pipeline of office and retail leases is robust. We continue to realize very strong mark to markets and the acceptance of our redevelopment projects by both the brokerage and the tenant community has been nothing short of spectacular.

Thank you. And with that I'll turn the call over to Mitchell.

Thank you, David and good morning everyone. In Washington, the economic recovery is on solid footing and most indicators are trending positive. The unemployment rate is 4.3%, which is down from 5.3% a year ago, and below the national average of 5.1%.

According to the Bureau of Labor Statistics, 53,300 jobs were added between September 2014 and September 2015, with the vast majority driven by the private sector. And over 20,000 of these jobs were in office-using professional services, a positive indicator for office space demand and absorption.

The brokerage report headlines are also expressing confidence about the DC office market. The headline of JLL's third-quarter report on DC reads -- broad-based recovery taking hold across the region. The report goes on to say that as of the end of the third quarter, Crystal City led all DC sub-markets in terms of overall gains.

Most of the absorption cited in JLL's report is Vornado space. Notwithstanding an improved quarter of absorption, we continue to see higher than normal vacancies in the Washington office market that will take time to absorb before we gain real traction. But the consensus is that Washington has bottomed out, and is indeed now in recovery mode.

Within our Washington portfolio in the quarter, we leased 449,000 square feet of office and retail space in 61 transactions, bringing our year-to-date total leasing to 1,642,000 square feet, in 172 transactions. In Q3, we completed several notable transactions in downtown Washington. We completed the sale of 1750 Pennsylvania Avenue, the 278,000 square foot mid-block office building, for $182 million, recognizing the gain of approximately $102 million.

Over the past few years, through effective repositioning and releasing, we have maximized the value of this asset. This was the right time to sell and recycle our capital. We continue to manage the building on behalf of the new owners.

We signed a 58,000 square foot lease with the US Treasury's Office of Inspector General at the Bowen building at 875 15th Street. Through this transaction, we resolved most of an upcoming vacancy well ahead of the current tenant's lease expiration.

We also completed a 26,000 square foot lease expansion at 2101 L Street with the commercial brokerage firm DTZ, to support their recent merger with Cushman and Wakefield. Our building has become Cushman and Wakefield's Washington headquarters, where they now lease a total of 59,000 square feet. As an aside, we also own Cushman and Wakefield's New York headquarters at 1290 Avenue of the Americas.

And we're finishing up a lease expansion with WeWork for an additional 39,000 square feet to accommodate their continuing growth at 1875 Connecticut Avenue. Including this space, they will now lease 122,000 square feet on three floors. At the end of Q3, our overall downtown DC portfolio, with 11 buildings and about 3.2 million square feet, is well leased at 93% occupied.

Also in DC, we are moving full speed ahead with our new 335,000 square foot state-of-the-art trophy office building at 1700 M, where we plan to harvest value from within our existing portfolio. We are now vacating and this spring will demolish two obsolete buildings to make way for our new freestanding corner building in the heart of the central business district. Construction of the new 1700 M building will begin in the second quarter of 2016, and we expect to deliver in late 2018.

In Crystal City, we continue to make steady progress. In the third quarter, we completed 194,000 square feet of office leases, and thus far for the year we have signed over 1 million square feet in Crystal City. Our office occupancy in Crystal City is now 89.2%, up 400 basis points so far this year.

We continue to add our creative community through new tenants and destination amenities that appeal especially to our growing urban millennial demographic. In September, we signed a 16,500 square-foot lease with ByteCubed, a company that supports federal government innovation by connecting defense agencies to new tech companies who are utilizing predictive analytics and other high-tech solutions. Earth Treks is opening a popular new indoor rock climbing concept that combines adventure sports with fitness classes, with 35,000 square feet of climbing surface, the new facility will be in the top three or four on the East Coast in terms of climbing wall size.

And last week, global startup incubator and seed fund 1776 celebrated the grand opening of their new campus in Crystal City with a week-long series of events and workshops, drawing hundreds of entrepreneurs, corporate innovators, political officials, and thought leaders. Their focus in Crystal City is on connecting their extensive startup community to agencies and major corporations, especially in areas of defense, aerospace, and cyber.

Our third-quarter TIs and leasing commissions were 13.5% of initial rents, or $6.12 per square foot per annum, which is consistent with market conditions. For Q3 2015 versus Q3 2014, we reported same-store EBITDA of negative 4.5% on a GAAP basis and negative 9.4% on a cash basis. Overall occupancy, including residential and Skyline, was down 10 basis points from Q2, to 84.7%, but up 150 basis points from Q3 2014.

Office occupancy, including Skyline was down 20 basis points from Q2 to 82.2%, but up 200 basis points from Q3 2014. All of our occupancy numbers have been restated to reflect the sale of 1750 Pennsylvania Avenue, which dinged our office occupancy numbers by about 30 basis points given its high occupancy on sale of 97.4%. Our office occupancy in Crystal City is now 89.2%, up 400 basis points so far this year.

Skyline's occupancy is now 51%, down from Q2's 53.5%, an obvious continuing drag on our overall performance. Without Skyline, our overall occupancy, including residential is now 91.2%, up 210 basis points from Q3 2014, and our office occupancy without Skyline is 89.8%, up 290 basis points. On the residential side, we own 2,400 apartments in Georgetown and Arlington, with a third-quarter occupancy of 95.3%.

In total, we own 15.4 million square feet of existing and developable footage in Crystal City and Pentagon City, a huge swath of value-creating opportunity on the shores of the Potomac. Our team is in high gear on several key development projects.

Our new 699-unit Bartlett apartment project and Whole Foods is topped off and on track to be delivered in mid-2016 and we will begin pre-leasing and marketing early next year. Now, towering above all other neighboring buildings, at 23 stories, it's already a skyline maker.

At the very beginning of 2016, we will open WeWork's new innovative residential concept in Crystal City. We have repurposed an obsolete office building to include more than 200 new collaborative living community-style apartments, as well as two floors of WeWork space. WeWork will add an important layer to the Crystal City fabric and we're excited to welcome them here.

Elsewhere in Crystal City, we have filed for approvals for the redevelopment of the building that will be vacated by the US Marshals. Rebranded as 1770 Crystal Drive, this is a 270,000 square foot prime building in a bullseye location that we recaptured by moving the US Marshals down the street to our recent lease. This was a strategic move to generate more value from the repositioning of an existing older asset.

Located on Crystal Drive, right at the Metro, the building will go out of service next year as we improve it with a new skin, new lobby, new systems, and new spaces for delivery at the end of 2017. In addition, 1770 Crystal Drive will be surrounded by new destination restaurants and entertainment, all heightening the urban experience of Crystal City. We have tremendous value in DC that will be unlocked by re-leasing our vacant space as well as harvesting our robust development pipeline.

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

Thank you. We will now begin the question-and-answer session. (Operator Instructions)

Manny Korchman, Citigroup.

It's Michael Bilerman here with Manny. Steve, I'm curious on the $2 billion cash target, I think that was the first time I actually heard it referred to as a target, I assume that takes $1 billion today, adds the $750 million loan and the $20 million broad sales? And I'm just curious, as you think about a $2 billion target, 6% of your gross asset value, $10 a share, about 10% of your stock price, how should we think about that? Is that something that you want to just keep as a standing balance? Is that something you want to use? When are you going to use it? How should we think about getting to a $2 billion cash target?

Michael, so, our history of managing this business has always been to be highly liquid, to take advantage of opportunities and value in the marketplace. We had said before multiple times, over the course of the recent history that we think that the easy money has been made. We think that pricing of assets in the marketplace are high. We're not calling it top.

We're not saying that they're not going to go higher, but clearly, we're at an interesting inflection point in terms of values. We've also said that we believe that, for a company of our size, it's prudent to have large cash reserves as large liquidity reserves to take advantage of opportunities. And so, what we're doing is I think I said last quarter or two quarters ago, this is the time when the smart guys go to cash, start building cash, rather.

And I think a couple of my brethren in the industry jumped on top of that and said, well, gee, I agree with that. So our financial strategy is to be highly liquid and to increase our liquidity as the market and prices get higher, so that we are prepared for the other side of that mountain. And that's basically what we're doing.

Is there anything --

Michael, it's Joe. I think you said that $2 billion includes the $750 million. It does not. It includes $187 million we borrowed, but it does not include the balance.

So what makes up the differential between $2 million and adding $20 million broad for $200 million and the $187 million? What makes of the differential?

Financings and other things that are in process now, that hopefully will be completed by year-end.

Any sales, or is that just financings?

Yes and yes.

Okay. Thank you.

Steve Sakwa, Evercore ISI.

Steve, I was hoping you could comment on the progress at 220 Central Park South. I know the disclosure changed a little bit in the 10-Q and I was just hoping you could update us on the sales activity there.

Sure. Let me talk a little bit about 220 Central Park South. Last quarter, we disclosed a fair amount of competitive information about sales, progress, et cetera. We did that, not to establish a disclosure policy, but in recognition of the fact that our accountants determined that we had to recognize a deferred tax asset, and recognize it into income last quarter and it was a fairly sizable number, and the reason for that was our spectacular progress in sales of 220; and therefore, that that would be highly likely that that deferred tax asset would be used. So the disclosure last quarter was interesting and important, but not necessarily a policy.

So having said that, let me give you a little news as to where we are now. The 220 Central Park South project continues to be the premier market-leading development in the super luxury class. We're up to the ninth floor in construction. We've sold more than 50%. I think the number is accurately in the 53% or 54% of our projected sellout.

Our margins are superb and are holding with each sale, and so that's that. We have sold 14 units above $50 million in price point, several of which are in much higher price points, record breaking price points. Interestingly enough, and this is new information, this is not a home to offshore flight capital. 45% of the buyers are New Yorkers for their principal residence. And another 30%-odd, totaling 70%, are Americans living in other cities other than New York.

Now let's talk about the product itself. By design, the product is intended to be the best project that has ever been delivered. The cost of the project are on a salable square foot basis, $5000 a foot. So it's costing us $5000 a foot to manufacture this asset. This is on a sellable foot basis. $1500 a foot is land and $3500 a foot is in hard and soft and financial cost at other than land costs.

The quality of the product is shown by a couple of statistics. For example, the building has the largest loss factor of any building of its type, intentionally, so that the amenity packages and what have you are extraordinary and are catered to this marketplace. The size of the amenity package and what have you in the lobbies and multiple lobbies and multiple buildings and the motor court and the garage and all the rest of it, the pools, and the rest of the amenity package, so there's a double whammy. Number one, the square footage has to be built. Number two, the costs of those items is, obviously, multiples of what basically an empty apartment costs.

So that's the update. We continue to be beyond thrilled with the performance of this asset. It continues to be the market leader. And those are the facts.

Okay. Thank you for that detail. Maybe one for David Greenbaum, I can appreciate your comments about the strength of the market and maybe the small financial service firms. We've obviously seen some large restructurings going on at places like Deutsche Bank and Barclays and new CEOs coming in.

We've also had some layoffs in some other larger investment banks. I'm just curious, as those companies continue to shrink and deal with Dodd Frank and other regulatory issues, can the market continue to work, and do you expect that those companies to perhaps give back space to the market over the next couple of years?

Since the quote, Great Recession, we've obviously seen, Steve, no growth by what you're referring to as the big bulge banks. And certainly it's not my expectation that we're going to see any significant growth there. I do believe that a lot of these banks already have gone through significant downsizing/rightsizings.

So do I expect that the banks are going to be giving back significant space going forward? I think the space they're giving back to the extent they are going to relocate, and move to a new corporate headquarters, that space may well be in the context of new efficiencies in the marketplace and the way people are utilizing space differently. But for the banks that are in place, we're certainly not seeing any significant space givebacks by those institutions.

Steve, think about it this way. The Manhattan office market is thriving. Okay? If I was more promotional, which I'm not, I would say it was on fire or whatever. The New York marketplace is thriving. It's extremely constructive.

And it is doing that and growing based upon tech, media, and all different financial services, excluding the bulge bracket banks. So we're doing great even though that segment of the marketplace, which has traditionally been the market leader, is now has now become the market follower. Okay? If you can imagine three, four, five years from now, if that would happen to turn, what might happen to Manhattan? So all I'm saying is we're doing fine without the big bulge bracket financials growing.

Now, from our point of view, we have intentionally structured the mix of our portfolio, if you go through our assets, asset by asset, around that. So we do not have 1 million-foot banks in our portfolio, intentionally. And so if you look at our portfolio, we are -- our prime targets and customers are the smaller boutique financials, the tech guys, the media guys, the retailer guys, other kinds of things. So we're actually very constructive on that and notwithstanding your appropriate comments about the big banks staying in place, or even shrinking. And we're also very pleased with where we are, asset by asset in our portfolio.

Okay. Thanks very much.

Jamie Feldman, Bank of America.

I was hoping we could stick with Mitchell and talk a little bit about the depth of the recovery we're seeing in DC or coming off the bottom. So you had quoted JLL saying we are recovering, but maybe talk more about what sub-markets are seeing the most demand and what the leasing pipeline looks like? And we're hearing that GSA is starting to get a little bit more active, as are the law firms. So can you provide more color?

Sure. So I think what we're seeing as I said and as JLL said, the issues that we struggled with over the prior couple years, have worked themselves through the system and we're pointing in the right direction. How steep the slope is or will be, I think it's impossible to predict at this point.

We're still seeing the kind of vacancies and competition for spaces, but we're starting to see green shoots and as you said, you see some activity from the government. We've got a two-year budget deal in place. That kind of budget deal ends up giving us certainty in the marketplace for people to move.

And I think that we're cycling through some of the contractions that we've seen both in the government and the contractor side. As a matter of fact, we're starting to see some contractor growth in different segments, not just in defense, but in other areas as well. So in terms of specific sub-markets, I think what you're going to continue to see is downtown will probably outperform, the close in Metro centric sub-markets like Crystal City, Rosalin, Boston Corridor will start to pick up and will probably outperform some of the other markets, as well.

Okay. Can you quantify the depth of the leasing demand and tenants out there?

I don't think you can really specifically put any quantities of numbers. I think that at the end of the day, if you're going to see positive absorption, it simply means that we're, obviously, filling more seats than are being vacated and exactly how fast and how quickly that's going to go, I think it's really impossible to predict.

Okay. All right. Thank you.

Tony Paolone, JPMorgan.

Just on the DC market, you gave us the high single-digit same-store results for New York next year. Can you maybe give us some color on that for DC, given everything you just said and bringing down this year a little bit?

As has been our policy for the last three years, I guess, we have given guidance on what we expect Washington's performance to be. We will not release that guidance until our fourth-quarter call in February.

Okay. And then on the balance sheet, if I look out to the rest of this year, you've got some preps back to be called and next year you've got $1.4 billion worth of GAAP and you talked about this $2 billion of cash you want to run with. Can you maybe tie together what you plan to do with the collapse in debt next year, given the high cash balance and how that ties together?

Say the question again please?

I think if you're going to have to $2 billion of cash, and you've got debt next year coming due, it seems like above market rates and some preps stuff that becomes callable later this year, can you get a sense as to how you plan on either taking those out or refinancing them or what you want to do there on the balance sheet?

Next year's maturities are $318 million on 888 Seventh Avenue, which is in the market to refinance now. By the way, 888 Seventh Avenue finance loan is a 5.7% rate, that's in the market to be refinanced now at, obviously, a substantially lower rate. Ditto 770 Broadway. We have $353 million that comes due next year at 5.65%, that's in the market to be refinanced now again at a very substantially lower rate.

There is a 6.14% financing on the Boeing Building in Washington for $115 million. That will be refinanced again at a substantially lower rate. And the granddaddy of all is a $550 million loan at 5.57% on the merchandise mart. That will be refinanced at a much lower rate and with much higher proceeds.

Probably three quarters of the loans that I just read off the spreadsheet are in the market to be financed now. Each of them represents earnings improvement opportunities, because the rates are legacy rates that will be substantially improved upon.

And is there excess cash? Is that what's getting you to the $2 billion?

We expect there will be a fair amount of excess cash. In addition, okay, we have not financed the Saint Regis, which was a very large $700 million purchase and we're in the market to finance that now at a very attractive rate, as well as Seven West 34th Street, the Amazon Building, which is free and clear, which will be financed.

So our balance sheet is beyond liquid, has extraordinarily high levels of unfinanced assets, and that's the keeping of our balance sheet in this condition, liquid, and is important to us so we think we're in grand shape.

Okay. Thank you.

John Guinee, Stifel.

Couple questions.

Just out of curiosity, it looked like your total incremental budget on 220 Central Park South went up $300 million, which is $630 on a zone square footage and about $730 on a salable square footage. Any idea what caused it to go up at that magnitude? The buildout allowances or something?

No. The answer is three things. A, most of it is catch-up and that catching up the budget, which we probably should have done three months ago or longer, which we didn't. So a lot of it is just catch-up is the first thing.

Second thing, a lot of it is missed budgeting. A lot of it is expansion of the program. Adding costs, which is we're delivering more product, better product, higher finishes, et cetera.

And the last is the construction market in New York is inflating aggressively and costs are rising. And even more important than that is there are an enormous number of cranes in the sky, which are exceeding the capacity of the construction industry to deliver services. So there are a handful of contractors who are expert in each trade and those guys are running out of capacity, so there is a bidding premium to get timely delivery of products and services.

Got you. Okay. And Mitchell for you --

It's a whole potpourri of reasons.

Okay. Mitchell, it looks to us as if the GSA is going to be freeing up or in the market with a lot of RFPs. The bad news is it's all about price, and the bad news is it's usually a space contraction, but the good news is there will be a lot of velocity, which should serve Crystal City well.

Do you have any sense for the magnitude of RFPs that are going to come out in the next two or three years beyond obviously, TSA, Department of Justice, Marshalls, National Park Service, et cetera? Is it 1 million square feet a year? Is it 3 million square feet a year of RFPs that come out from the GSA?

So the amount of GSA expiries, plus the amount of GSA leases that are either in short-term basis or in holdover, is a pretty significant number. And you'll see over the next two to three to four years a tremendous amount of GSA activity. How much of it translates, as you say into relocations, we really do not have very many expirations of GSA in our own portfolio over that five-year period. So it really leaves us in a favorable position to absorb some of those requirements.

We'll take a look at them. I think you're going to see many of them in the 50,000 square foot range, as you said, as compared to wholesale agency relocations. But I do think that that bodes well in terms of our strategic location for GSA, and Crystal City in particular.

Is a significant over a three- to five-year period in total a million square feet or 20 million square feet?

No, no. You're seeing multiple, multiple millions of rollovers. How many of those translate into relocations is another story. But you are looking in not single millions, but in multiple millions, 5 millions and 10 millions.

Great. Thank you.

John Bejjani, Green Street Advisors.

Steve, I'm sure you saw the large portfolio sale and special dividend that Equity Res announced recently and the market's positive response to the news. I know you said you're happy owning all assets in your portfolio right now, but given the discount to add some value of Vornado stock, any thoughts regarding larger scale dispositions today?

I don't think that's something we can get into.

Okay. David --

I think the following. As a philosophy, I think we have shown over the last number of years, that we're really not linked to anything, that we really are simplifying and restructuring the business along product lines, exiting certain businesses. We've sold or spun or disposed of $8.5 billion of assets over the last very short period of time and really, I think simplified our business and clarified our core business and strengthened it.

As we go through our assets, I think what Sam did was basically, he had a whole pot of assets that he didn't want. And so he was making a strategic decision that he was going to focus in urban high-rise in the coastal markets. So we've sort of done that already, so we don't have a large strategic imperative in front of us. Having said that, from time to time, we do sell assets and in fact we have in the marketplace right now, a New York asset that happens to be Seven West 34th Street that we think we've done our job, we bought the only asset for somewhere in the low single-digit hundreds of millions of dollars. We think the value is $500 million more than that, so anyway, we do have that asset in the marketplace to harvest value.

So those are examples. So I think strategically we're in pretty good shape, maybe even very good shape. We think about what you mentioned all the time and we just don't have any announcement to make now.

Okay. Thanks for that. David, quick clarifying question on the 640 Fifth Avenue lease. I think you said a cash releasing spread of a bit over 100%, I think Steve previously mentioned the possibility of quadrupling rents there. Have street retail rents moved relative to what you previously thought you'd achieve or is this delta just a comparability issue?

I'll handle that and David can counterpunch. David in his remarks said that the Mark To Market for the Victoria's Secret lease was X, that we retain a 25-footer adjacent to it, which is part of the asset. When we lease that and we're in the marketplace to lease that now obviously, the two of them combined will result in a 3.5 X multiple of the previous tenant's rent. So while that's not four multiple, I apologize for that, but 3.5 is pretty damn good. And so you have anything to add?

No, that's exactly right. As you look at the combined leasing of the entire space, we've retained an extraordinarily prime store right next to Victoria's Secret.

Okay. Great. That's helpful. David, just one last question. You cited stats on the leasing contribution of TAMI tenants to the New York market. Can you give us a sense as to how much of your office portfolio and leasing demand is coming from TAMI versus fire today?

As you look across the city, TAMI is actually generating citywide today in the probably low 30s, 34%, 35% of total leasing velocity, as compared to what I'll call the traditional fire sector, which was and has been in the mid-20% range. We've seen the fire sector become more active this year citywide again, with what I'll call the boutique financial services firms, a number of deals, which, obviously, we've done in our own portfolio, Fiduciary Trust, Harvest Partners, Medley Capital, a number of other deals. I think as we look at demand in our own portfolio today, we are seeing it in all sectors.

I will tell you we're seeing some extraordinary situations where we have two TAMI tenants, two tech tenants, both of which effectively are looking to grow in one of our buildings, where somehow I wish I could take the building and add another million square feet to it. So we really are seeing a very strong growth as Steve said, very constructive in the tenants that are attracted to our portfolio generally around the marketplace.

Great. Thanks.

Ross Nussbaum, UBS.

Steve, I'm curious, back in the doldrums of late August, early September when the stock was around $85, why did Vornado elect not to repurchase shares at that level? I'm assuming it was well below what you thought the Company was worth.

The answer to that is that we preferred to keep the liquidity and not lever up our balance sheet for the marginal increase in per-share value that could be created by a stock buyback. So the stock is $85, and so you have to pay a premium if you want to buy anything in size, and if you split that over the remaining shares, the number doesn't move the needle. And I think the Boston properties team was asked a similar question yesterday the day before, and gave a similar answer.

I appreciate that.

I don't know if it was right, by the way.

It helps understand your thinking at least.

Going back to my letter to shareholders this year, I think it was this year, there was an extensive section, not only on street retail and not only on comparing the increases in market rents for office by sub-market and retail by sub-market in Manhattan, there was an extensive section on share issuance and share buybacks and what have you. And I think in there, I said that if you go back to the early days, we did the largest cap shrink buyback in the history of the New York Stock Exchange.

We bought back 65% of the Company, when the stock was selling at huge 50% and 40% of what it was worth. So if you use $1 billion of liquidity to buy back stock in one of these big companies and you pick up $0.40 or $0.50 a share, it's my judgment and the judgment of our board that the use of that liquidity in return for that marginal uptick in NAV, or per-share values, is not sufficient when you may very well be at the wrong time of the cycle to sink your liquidity in.

Appreciate that. If I could go back to 220 Central Park South for a minute, in the 10-Q, the cost went up this quarter to $1.3 billion from $1.2 billion in Q2. Can you comment on what drove that $300 million sequential increase, and then separately, just comment a little about what we should be expecting, or maybe assuming for an all in tax rate on your gains, given what happened with the deferred tax asset last quarter?

I think I answered that exact question about what happened with the $300 million for John Guinee two seconds ago. Basically, I think I answered it.

I thought you were talking about another asset. On the tax asset?

Now, what's the tax rate going to be?

Complicated. Very complicated.

That's not an answer.

The TRS that the condo is in has tax NOLs, federal tax NOLs. That's what generated the deferred tax assets being talked about. So after you net those and you have other intercompany charges supplementing the actual course of construction, the tax rate's going to be 15%.

15? 1-5?

15% on 100%?

15% on a gain.

100% of the gain? So let me supplementally respond to that. If you take the gain, which is X, and we're not going to predict what the gain is. But if you take the gain of X, it will be divided into three or four different buckets. One bucket is there are loss carryforwards, which will protect a certain portion of the gain.

So that has a tax rate of zero, although from an opportunity cost point of view, you're using up an NOL. Then there are other parts of the gain, which basically are affected by intercompany transactions and charges. So that will also reduce the gain by X amount. The remaining gain will be fully taxed at the corporate tax rate of what are they? 35%? So what Joe is doing on the fly is he saying if you take 50% at 35%, and it's sort of like 100% and 15% or something basically like that. So that's my way of trying to also give a complicated answer to a complicated question.

Okay. I'll try to ask a final simple one. 666 Fifth. At what point do you think you're going to be able to talk definitively to the market about some of the plans that the press are reporting in terms of a retail mall with hotel and condo?

We don't know. Basically, 666 Fifth Avenue, go take a drive and take a look. It's a magnificent asset, brilliantly located on Fifth Avenue, right in the heart of Fifth Avenue. It's a full block front, it's a massive asset. Vornado owns 100% of the retail frontage, except for the Zara store, which Zara owns, and 50% of the office building together with a joint venture partner.

It's pretty obvious that the dirt or the ground unencumbered would be worth more than the building is worth. And so at the highest and best use for this property, if it was not encumbered by a building, would be a series of mixed uses which are different than what exists there now. And so the partnership is trying to figure all that out, understand what our options are, and understand what the optimum business plan for that is.

Ryan Peterson, Sandler O'Neill.

Sorry. I meant to remove myself from the queue. I'm all set. Thank you.

Brad Burke, Goldman Sachs.

Just another one on 220 Central Park South in terms of the timing. Looks like you have over $1 billion left to spend. I think you're still targeting completion by the end of next year. It just seems like a lot of capital to get out the door, particularly when you look at how much you've been deploying over the last couple quarters. So I wanted to get an update on what we should be thinking about in terms of timing and whether there's a risk that we might see the timing slip.

The timing is not going to slip. Your timing is a little bit too early. There's two and a quarter years left to go.

Two and a quarter until completion?

Two and a quarter from now to completion.

Got it. Okay. And then just on floating rate --

Hang on. Just go back for a minute. Let me just restate again our financing plans for that asset. We had a $600 million project-specific loan from Bank of China on the asset. We upsized that and reduced the interest rate, by the way, to 200 basis points over LIBOR. We upsized that by $350 million to $950 million.

We then had arranged some time ago, a $500 million mezz loan, which was at an interest rate of hovering just close to double digits. So it was expensive, which is the appropriate rate in the marketplace. We replaced that, paid a contractual $15 million termination fee, because it was a standby mezz loan, and then we replaced that with almost a special-purpose term bank loan facility. Now, that term bank loan is in addition to our regular $2.5 million of revolvers, which are currently undrawn.

We described that term bank loan as a delayed draw term bank loan and we've never seen those words anywhere. So we sort of invented them and the reason we invented them was so that you all could understand that we will take that money down over time as we need it to build the 220 job. So the way we look upon this, that $750 million piece of finance is in addition to our regular balance sheet and is basically directed at the financing of 220 East Central Park South and the Bartlett down in northern Virginia. So that's our capital plan and we've obviously brought our cost of capital down very significantly by doing all that.

Okay. That's helpful and actually is a segue to my next question. Just thinking about total floating rate debt exposure. You're up about over $1 billion from last year. And to your point, that will probably increase as you continue to fund your construction at 220. But then you also have a lot of refinancing activity coming up, so I was just hoping for an update on how you're thinking about your total level of floating rate debt, what you think is a total appropriate level.

The answer is I don't know that we have any guidelines. We understand that people like the certainty of fixed rate debt. I can tell you that fixed rate debt is as risky as floating rate debt, maybe even more risky, because A, it's much more expensive and B, it has lockouts so that it has large penalties if you want to pay it off. And so we believe, my personal feeling is that interest rates will be lower for longer. I've been making that call for years and years, although I'm not an economist and it's not my job to make that call.

My job is to protect our balance sheet and our Company and you all. And so we think we do that. So we have a very low level of debt. We have a huge massive amount of liquidity. And so we feel that we can handle easily 20% floating rate debt and our capital structure and what have you. And so, we sort of broke through that.

The most important part of our balance sheet statistic is the debt level. The second most important part of our balance sheet metrics is the liquidity level. The third most important is our allotted maturities. And then the last is the floating rate to fixed rate mix.

And Brad, one of the things you want to think about as it relates to the fixed and floating is we look at the financing related to the 220 project as being matched to that project because it's going to be self-liquidated from the sale of the condos. And so, when I gave our liquidity statistics, we back out the 220 financing and doing those statistics and we think that's the best way to look at our capital structure.

Sure. You would still have the exposure to higher floating rates over the next two and a quarter years I suppose?

Correct.

Derek van Dijkum, Credit Suisse.

It's actually Ian Weissman here with Derek. Just a quick question on the Penn Station sub-market. You picked up another asset on 34th Street. I think you have the corner now on Eighth Avenue. Maybe you could just talk about plans for that site over time and maybe just give us an idea on a broader or master plan for Penn Station overall? Thank you.

As we said many times, the Penn Station market, the Penn Plaza marketplace is the big kahuna for Vornado. We have a very large investment there. We invested early. We have a huge profit already on our investment in the very, very large numbers. And so we're very pleased with where we are.

The timing of this sub-market is perfect now, the perfect storm, whereas Penn Plaza was always the cheapest sub-market in Manhattan, and by the way it still is.

The confluence of the events surrounding Penn Plaza is nothing short of extraordinary and validates our investment strategy. And so, I have said before, the island of Manhattan is tilting to the West and tilting to the South, and I think that's now become the consensus view. I've also said that the sub-markets, the pricing of office space and the various sub-markets is flattening, meaning it's converging, meaning that the hierarchy from the Plaza district being the highest rent down and working lower as you go south, is starting to evaporate. And $100 rents are in Chelsea, and as well as on Park Avenue.

So we think that the opportunity, both for retail and even more for office in the Penn Plaza district is extraordinary, and by the way, we're full there. We've been full there every month for the last 15 years. What's the highest rents we're getting there on Penn Plaza, David?

Mid-sixties.

So rents are creeping up from low 50s to mid-50s to at the top bracket in the mid-60s. And so our job there is to improve our buildings, improve the streetscape, improve the food offerings, improve the retail offerings, and most of all, improve the physical plants of our office buildings so that the market rents in this market can climb to similar to where it is in the surrounding sub-markets, which could easily be $10, $20 or even $30 a foot higher over time. And so that's our objective. And we're busy working on that. We have nothing specific to announce now, but we hope to before too long.

Okay.

One more thing, I'm sorry to keep going on this. Recently, we just completed a three-month trial where we closed, together with the Department of Transportation and the City of New York officials, we closed 33 Street, pretty extraordinary when you think about it, taking the easterly half of 33rd Street and turning it into a public plaza, and taking the western half of 33rd Street and putting it into service for both our 2.5 million-square-foot building on one side and Madison Square Garden on the other. So that was a very successful closure. We look forward to become permanent next year, and so we're off and running.

That's helpful. Just as my follow-up question, just thoughts on a potential or possible spin of the DC portfolio ala Urban Edge?

We have nothing to report on that, although we, and I said this in my letter, we have not eliminated any possibility. Everything continues to be on the table.

Thank you very much.

Vincent Chao, Scotiabank.

Just curious, we've talked a lot about the TAMI tenants in New York City and just curious, you had mobile gaming lease in San Francisco that you did in the quarter. Any notable change in the discussions there, tech tenor in San Francisco?

Listen, there's been a lot of chatter in the marketplace that with some VC capital potentially drying up, and the IPO marketplace not being as open as it was, that we're seeing some pullback in terms of the tech tenancy in the San Francisco market. Our own experience, candidly, has been that, while there's been a lot of chatter and discussion about this, we're still seeing very good vibrancy in the marketplace.

We are doing some work right now at the adjacent building 2555 California Complex, the 315 Montgomery, and the 345 Montgomery buildings, which we think are very attractive to the TAMI types and tech types of tenancy. And again we're seeing very good growth in the marketplace there. Rents in San Francisco have been going up at a clip of around 10%, or even higher on an annual basis over the last number of years. We're seeing good growth and good demand.

Okay. Thanks for that. And just a question on the investment side and your build up of liquidity. I know we've been talking about that for quite a long time, just being the right time to build some cash here. But just curious if there's been any notable early warning signs, something that's changed in the markets from your perspective, or if it's just still consistent with what you've been talking about for the last several quarters?

Trees don't grow to the sky, and the easy money clearly has been made. Pricing is very aggressive. I don't know which way interest rates are going, but people seem to think they're going up. I don't know which way cap rates are going, but people seem to think they can't go much lower. And so it seems that this is the time to begin to think about preparing for the next cycle. If you're in a position like we are, running a company like ours, and you don't start thinking like that, you're not being responsible.

Okay. Thank you.

Sumit Sharma, Morgan Stanley.

Van sends his apologies; he's not able to attend. Quick question about theMart. We're at 60% almost or slightly above for the office mix, up from 50% last year. I think you once mentioned that soft goal of about 60% of office mix. I was wondering if there's any room for greater office mix beyond this point over this stage. I guess, said differently, what are the other avenues for harvesting value in that property?

Our target as we've said in the past has been to transform this asset so that the mix of the building today is about 60% office. As I said earlier in my remarks, the remaining showroom tenancies in the building are high-performing businesses that today are healthy, vibrant, and pay rents in showroom buildings where tenants generally, to be congregated with any building within a class of showrooms, is going to be paying premium rents.

So today, I will tell you we think that mix that we're trying to get to of about 60% feels right to the extent the businesses are dislocated in the future, similar to what we saw in the giftware business, where that business basically was changed by reason of obviously the Internet electronics. We'll obviously be able to capitalize on that. The other piece of the building I will say is there is a number of what I'll refer to as old office tenants in the building, still with very low rents, where we see the ability significantly to capitalize on those tendencies as they come up and bring in what we refer to as higher tenancies, whether it's corporate America coming from the outside or TAMI types of tenancies who are attracted to the unique floor plates, the unique building.

When you think about theMart building, it's enormous. It's 3.6 million square feet net rentable; the gross number is over 4 million square feet. So it's an enormous asset and it has these unbelievably unique and in high demand 200,000 square foot floor plates. It's in a spectacular spot at the bullseye of River North. It's basically almost trite to say it, it's corny to say it, it's almost an irreplaceable asset. It's got high ceilings, it's got everything you could want. It's got heavy loading, it's got everything you could want in terms of a massive asset like this.

So it was suffering under basically for a bunch of Ma/Pa showrooms that went in business, out of business, had bad debts, all kinds of things. So what David and his teams have done is morphed it so that we're changing the mix to very stable industry showroom tenants who need to be in this oligopolistic monopolistic building if they want to be in that industry. And to a cadre of very important, Fortune 100 tenants, who are both principally in tech, but also in other industries, insurance and what have you.

So that does two things. As David said in his remarks, the income goes from $50 million to $80 million next year and it's going to triple digits. And most important of all in terms of value creating, the cap rate goes from I don't know, what the showroom tenant goes for, a showroom building is going to sell for? Eight cap rate down to a five cap rate? And maybe even a sub five cap rate? So as the income goes up and the cap rate goes down, the value creation is enormous. So we're very pleased with that asset.

Great. Thank you so much for the color. I know that it's 90 minutes and we're drawing close to the end of the hour, so I want to be sensitive. If I would be permitted to ask another question, or I could queue up again later.

Shoot.

Okay. So I know the San Francisco question has been asked, but wondering specifically about your partnerships or alliances, whatever you want to call them with incubators such as weWork, Matter, or fractional leasers like Regis, especially in the San Francisco market. Given the news about the tech IPO and all that stuff, is there a change in your view or conservatism or concern around this at all?

555 California Street, the so-called Bank of America building, is the dominant building in San Francisco, with all due respect to the new Salesforce tower building, it's the dominant building. It has the best roster of financial services tenants of any building anywhere in the United States, including in Manhattan. It is an iconic building. It has long-term values and we're thrilled to own it for the long-term. Now, we might sell it, but then again we might not. It is not on the for-sale list today and we believe that the building is a great building. We believe it's best days are certainly in front of it.

Manny Korchman, Citigroup.

Just wondering, on 220 Central Park South, could you share what your gross sales goal is and also the total salable square footage in that project? But the salable square footage is 396,000 square feet. I will decline to give those proprietary numbers for competitive reasons. Thanks.

And we have no further questions.

I'm going to just make one comment as an end comment. We note the negative comments that we've been getting this quarter and last quarter, which specifically relates to same-store, a lower than our normal industry-leading same-store number. There are lots of reasons for that. It's annoying to us also. But the numbers are what the numbers are, and it relates principally to small ticks in occupancy changes, which are really pretty insignificant and to buildings coming into service and coming out of service.

So I would just give you one statistic and that is that if you take four buildings that were out of service and that have come into service, Seven West 34th Street, 330 West 33rd Street, 280 Park Avenue, and 1535 Broadway, those three buildings, which have come into service during different parts of the calendar this year, will have $44 million of income this year throughout the year, obviously loaded more towards the end of the year than the beginning of the year, because they came into service over the course of the year. And those buildings are not in same-store pool, they're out of the same-store pool, obviously correctly because of the accounting policies.

Next year, those four buildings are budgeted to have $114 million of income, of which $70 million will be same-store next year. So we expect our next year same-store, in addition to these buildings and in addition to others, to be off the charts and so we apologize for the weaker than normal same-store this year, we are very sensitive, we consider all of this to be our report card. We love being at the head of the class. We are sorry that the number is a low number, and it's going to get a lot better, I mean, a lot better; enormously better next year. So that's all I have to say.

So thank you all for participating. This was a long call. Our policy on these calls is to take every question in the queue until the queue is exhausted. And I think that's probably the most transparent and the best policy we can have. So thank you for participating.

Next year, the fourth-quarter call, will be on Wednesday, February 17. February 17, which is a Wednesday. And our queue will be published on the 16th, which is a Tuesday, of February. So thank you all very much. We'll talk to you then. Have a great day.

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