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Edited Transcript of VNO earnings conference call or presentation 30-Apr-19 2:00pm GMT

Q1 2019 Vornado Realty Trust and Alexander's Inc Earnings Call

NEW YORK May 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Vornado Realty Trust earnings conference call or presentation Tuesday, April 30, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Catherine C. Creswell

Vornado Realty Trust - Director of IR

* David R. Greenbaum

Vornado Realty Trust - Vice Chairman

* Glen J. Weiss

Vornado Realty Trust - Executive VP of Office Leasing & Co-Head of Real Estate

* Michael J. Franco

Vornado Realty Trust - President

* Steven Roth

Vornado Realty Trust - Chairman of the Board & CEO

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Conference Call Participants

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* Alexander David Goldfarb

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst

* James Colin Feldman

BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst

* John William Guinee

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Michael Bilerman

Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research

* Michael Robert Lewis

SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst

* Nicholas Philip Yulico

Scotiabank Global Banking and Markets, Research Division - Analyst

* Piljung Kim

BMO Capital Markets Equity Research - Senior Real Estate Analyst

* Stephen Thomas Sakwa

Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst

* Vikram Malhotra

Morgan Stanley, Research Division - VP

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Presentation

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Operator [1]

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Good morning, and welcome to the Vornado Realty Trust First Quarter 2019 Earnings Call. My name is Michelle, and I will be your operator for today's conference. This call is being recorded for replay purposes. (Operator Instructions) I will now turn the call over to Mrs. Cathy Creswell, Director of Investor Relations. Please go ahead, ma'am.

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Catherine C. Creswell, Vornado Realty Trust - Director of IR [2]

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Thank you. Welcome to Vornado Realty Trust First Quarter Earnings Call. We issued our first quarter earnings release yesterday 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; and Michael Franco, President.

I will now turn the call over to Steven Roth.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [3]

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Thank you, Cathy. Good morning, everyone. Our earnings were released yesterday morning in error instead of our normal practice of after market close. Our web hosting service provider pushed the wrong button during a test. While they were only live for a minute, New York Stock Exchange protocol in such cases is to stop trading pending the issuer full release, which we accomplished midmorning. This is annoying, but I guess you can say, no harm, no foul.

So now to business. My annual letter to shareholders was released on April 5 and amended on April 18, 13 days later to update for our Retail deal and that Haim Chera who was joining. In my letter, we announced important leadership changes. Michael Franco was appointed President of Vornado. Michael has been an important part of our management since 2011, most recently serving as Chief Investment Officer, where he has been lead for acquisitions, dispositions and financing and has been involved in all important decisions and strategies.

David Greenbaum, who has been my partner as President of The New York Division since joining us in 1997 as part of the Mendik acquisition has decided to cut back, spent half his time in Arizona and half in New York while continuing his leadership as Vice Chairman. David will join the board this year when we add an additional independent trustee.

We have promoted David's 2 most important lieutenants, Glen Weiss, our Head of Office Leasing; and Barry Langer, our Head of Development to the positions of -- to the position of Co-Heads of Real Estate. Glen has been with us since the 1997 Mendik acquisition and Barry has been with us since 2003.

We are delighted to promote Michael and to promote Glen and Barry. These are promotions from within our organization. Each of these talented leaders is proven, is the best in the business and is ready to step up. They have been with us for a combined 46 years. We know them well.

One might say that the big deal in the quarter was our blockbuster Retail deal. To me, as big a deal was our recruiting Haim Chera to head our Retail business. In my mind, Haim is hands-down the best retail executive there is. In addition to running our existing portfolio, the disruption in Retail will present enormous opportunities for those with talent and capital. We have both in full measure. We are excited about the opportunities that lie ahead.

My personal observations about David, Michael, Glen, Barry and Haim are in my letter. Biographical information is available on our website at www.vno.com. I might say it's truly amazing how deep and talented our management team is. It's a joy for me to work with them every day.

In the quarter, we did some housecleaning. We sold our shares of Lexington Realty Trust and Urban Edge Properties for $276 million resulting in a financial statement gain of $78 million. We used the proceeds from these sales together with existing cash to retire our $400 million principal amount of 5% senior unsecured notes, which were scheduled to mature in January 2022.

Now to our Retail deal. As you already know, we created a joint venture and transferred a 45.4% common equity interest in 7 assets on Upper Fifth Avenue and Times Square to a group of international investors at valuation of $5.556 billion. Taken together, our press release, 8-K filings and the disclosure in my amended shareholder letter represent in my mind some of the most comprehensive disclosure I have seen about a deal. Reading your notes and talking to investors, we are very pleased that almost everyone got it.

The 4.5% cap rate is spot on with our published NAV. A few were surprised that we got such a robust bid for these retail assets. They shouldn't have been surprised. As we have been saying time and time again, the very best quality assets such as these are always in high demand by institutional and foreign capital.

The deal value at share was $5.327 billion as against our economic basis of $2.873 billion and a tax basis of $1.561 billion. Everyone can do the math.

Two questions were most frequently asked, explain the $1.828 billion of preferred equity and second, what's the appropriate cap rate for the remaining retail assets that are not part of the joint venture. Our partners desired 50% leverage and that suited us just fine. The deal we structured would perfectly accomplished all of our goals involve leaving a $450 million mortgage loan in place, putting on a new $500 million mortgage loan, which we will guarantee and $1.828 billion new preferred equity at 5 unencumbered properties, which we will hold on balance sheet.

Now many may think of real estate preferred equity as deeply subordinated junk at the bottom of a too complicated capital structure. This preferred is completely the opposite. It has the first claim to the cash flow and the value of each of 5 great unencumbered assets. It represents approximately 50% of the value of each of these assets. It has a due date of never, a fixed coupon of 4.25% for the first 5 years, increasing to 4.75% for the next 5 years and formulated thereafter.

It can be borrowed against, sold or redeemed to create liquidity. The coupon is, say, 50 basis points rich to equivalent debt, which is a good thing and, by the way, such debt was readily available, and 200 basis points rich to what we would have earned on cash, and that's a very good thing.

Our remaining retail assets are each in their best submarkets. Many have below-market rents, à la 4 Union Square and the Kmarts and many are in transition, and some have a sprinkling of vacancy. My guess is, when we publish our year-end NAV, the cap rate on these assets may be even lower than 4.5%. We will see.

As I said, the deal is spot on with our published NAV and about $7 per share accretive to our stock price. Think of it this way: we started with $5.3 billion of assets, subject to $860 million of debt or $4.5 billion of equity at NAV, which was valued in the marketplace at, you pick the number, say, a 30% discount or a $1.35 billion dig.

We ended up with $1.2 billion of cash and $1.828 billion of preferred equity or $3 billion of financial assets plus 51% of the common equity and the continuing upside in the properties. All in all, we are much, much better off.

We will recognize a $2.6 billion financial statement gain in the second quarter. The tax gain is estimated to be $735 million. The math in my letter indicates that there will likely be a capital gain distribution at year-end.

Michael Franco quarterbacked our execution team on this deal. He and his team did a superb job. To sum it up and even if I'm being a little repetitive, we think the execution of this deal was outstanding, done in a very tax-efficient manner and validates the enormous value we have created in our retail assets.

We are delighted with this transaction, and we look forward to working with our new partners who are sophisticated, long-term investors who appreciate the true value of our assets more than the public markets do.

Lastly, in response to a few incoming questions, I want to comment on the green new deal bill that was recently passed in New York City. And, by the way, we expect similar legislation in all major U.S. cities. While the exact specifics still need to be written, we are supportive of policies that mitigate climate change and benefit the environment. We believe in sustainable policies as do our investors and our tenants we're acquiring.

We have a long-held strategy of continuously improving, reducing our own carbon footprint and encouraging our tenants to do the same. We are a six-time ENERGY STAR Partner of the Year. We have over 26 million square feet of LEED certified buildings and have been named Leader in the Light by NAREIT for 9 years in a row.

With respect to the bills' penalties and, by the way, they are penalties, not a tax. We are well ahead of the curve and thing the impact on our portfolio will be de minimis in 2024 when the first carbon emission cap goes into effect. Through proactive energy efficiency measures, we have already reduced our consumption by 20% since 2005.

Now let's go to Michael Franco, my colleague of the last 8 years and now, Vornado's newly minted President. Congratulations, Michael.

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Michael J. Franco, Vornado Realty Trust - President [4]

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Thanks, Steve, and good morning, everyone. I'm honored and excited to take on my new role and look forward to working with all of you more closely. Let me start with a few comments on our first quarter financial results before giving some thoughts on the markets and our portfolio.

FFO as adjusted for the first quarter was lower than the first quarter of the prior year, principally from the previously announced $16.2 million of noncash stock-based compensation expense resulting from the accelerated vesting of certain restrictive stock awards, which will be completely offset by lower expense in future periods.

These results don't reflect the underlying strength of our business, though. In fact, cash basis FFO as adjusted was $0.93 compared to $0.89 for the prior year's first quarter, up a solid 4.5%. We also reported a company-wide cash basis same-store NOI increase of 3% for the first quarter, broken down as follows: the total New York segment was up 2.6% with New York office up 4.4% and Retail up 1.2%. TheMART was up 0.9%, impacted by the Publicis vacancy, which you will hear in a minute, will be a big plus; and 555 California Street was up 15%.

In our April 15 press release, we covered the details of the noncomparable items in the quarter, which includes a $131 million or $0.64 per share after-tax net gain on unit closings at 220 Central Park South. To date, we have closed on 25 units for net proceeds of $693 million. Closings will continue throughout 2019 and 2020.

Let me turn now to the New York market. The New York City economy continues to be strong with sustained job growth driving strong tenant demand for office space. In the first quarter, the city added 12,000 office using jobs, or 2/3 of what was created all of last year and a pace well ahead -- well above, I should say, what's needed to absorb the new supply coming online.

As a result, tenant demand remains very strong in all submarkets with more than 8 million square feet of lease transactions completed during the first quarter. Demand is largely being fueled by the financial services and TAMI sectors. In the case of tech tenants, there seems to be a continued appetite for expansion space from companies already here as well as a continued in-migration of new companies that want to avail themselves of the town and New York City.

Flight to quality is a theme today as tenants are flocking to redevelop in newly constructed buildings. More than ever companies are focused on their office space as a means of employee recruitment and retention. We are continuing to benefit from this theme in our redeveloped Midtown portfolio and this bodes very well for what we are doing at Farley and plan to do in the Penn district overall.

In the first quarter, our leasing team completed almost 400,000 square feet of office leases in 28 separate transactions in New York at an average starting rent of $76 per square foot. Our mark-to-market rents were positive 1.8% cash and 0.9% GAAP. If adjusted for 1 significant negative mark-to-market on a lease at 90 Park Avenue where we came off an expiring above-market triple digit rent, these numbers would have been positive 6.5% cash and 4.5% GAAP. We are substantially full at 97% occupancy.

On the development front, we continue to make significant progress. Construction of the Moynihan Train Hall in the Farley Building continues full speed ahead. Interest from both office and retail tenants is picking up despite the heavy construction nature of the site as they begin to appreciate uniqueness of this asset.

At PENN1, the sidewalk bridges are now up as we have started the façade portion of our transformation. I want to emphasize a point that Steve made in his annual letter. The net proceeds from 220 will fund the Penn district redevelopment plan for Farley, PENN1 and PENN2 with little or no new debt. Once completed and leased out, these developments will be highly accretive to future earnings and value.

And earlier this month, we received the unanimous approval from the New York City Landmarks Commission for our redevelopment of 260 Eleventh Avenue designed by the world renowned architect, Lord Richard Rogers. It is directly across the street from Starrett-Lehigh and a couple of blocks south of Hudson Yards. This approximately 350,000-square-foot building will uniquely combine historic and new buildings and feature the best of Roger's signature design elements, creating exactly what creative class tenants are looking for today.

At the Martin, Chicago, we are making good progress on backfilling the 132,000-square-foot Publicis space. We completed a 36,000-square-foot lease with ANGI Homeservices, also a tenant of ours in New York at a positive 33% GAAP and 27% cash mark-to-market. We anticipate a similar increase on the remaining portion where we also have very good action.

We also signed 25 showroom leases totaling 123,000 square feet at a $47 average starting rent. At our 555 California Street complex in San Francisco, we are literally full at 100% occupancy. During the quarter, we completed a 56,000-square-foot renewal with Bank of America at the historic 315 Montgomery Street building at a positive 69% GAAP and 38% cash mark-to-market.

We are also pleased to announce the opening of The Vault, our new restaurant at 555 California Street, which will be another great amenity servicing our trophy tenant roster.

Finally, turning to our New York Street Retail business. There continues to be a flight to quality here too with tenants seeking out the best high-traffic locations. We are very well positioned here. In the first quarter, we executed 7 transactions totaling 49,000 square feet, highlighted by renewal transactions with Madewell at 484 Broadway in SoHo and Citibank at 731 Lexington Avenue.

We achieved mark-to-markets of positive 2.2% GAAP and negative 8.5% cash. Our overall Retail portfolio stands at 97.1% occupied. Lastly, a few comments on the capital markets. In terms of the office investment sales market, this year started slowly, likely driven by the fourth quarter stock market volatility. However, activity picked up towards the end of the first quarter as more product came to market.

There continues to be sustained interest from private capital in New York City, particularly from foreign capital, as evidenced by some of the large transactions that have taken place thus far. Buyers remain disciplined but appear more confident about investing with the Fed now on hold.

Pricing has stayed fairly constant with cap rates in the mid- to high 4s for quality product. In terms of the debt markets, they continue to remain very liquid for New York City assets with all-in rates still low by historical standards. The markets have settled down after a burst of volatility in the fourth quarter with spreads tightening thus far this year. We continue to be active in extending our maturities and taking advantage of the current market.

With that, I'll turn it over to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first caller in the queue comes from Manny Korchman with CTI (sic) [Citi].

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [2]

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It's Michael Bilerman from Citi here with Manny. I wanted to ask a question just about the cash hoard and a little bit on the sources and uses of that cash. As I go through it, you obviously have a lot of cash coming in from the condo sale for 220. You now have another $1.2 billion from this outstanding Retail deal that you completed (inaudible) this quarter. You have another $1.8 billion to come if you redeem the preferred in a few years from putting mortgage debt on the properties. And that's on top of almost $1 billion of existing cash on the balance sheet. So it's a lot of money. And then you also have all the liquidity from your credit lines and what is already a low leverage balance sheet. So maybe you can just walk through some of the main uses of that cash. And I know, Steve, you've talked about that if you ever did a buyback, it would have to be significant. So given all this liquidity and the fact that your stock is stuck in the 60s, which is I know frustrating for you as well as us and investors, would you consider like a Dutch tender or something else with all of this immense amount of cash and liquidity that you've built up?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [3]

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Michael, I think in the beginning of your remarks 3 over 4 minutes ago, you said -- your question from you was you said the outstanding Retail deal. Did you say that?

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [4]

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I did say that.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [5]

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Good. So first thing I want to do is focus on that, and I thank you for saying that. Now let's go to your question. With respect to cash, we have already used $400-odd million of the retail proceeds to pay down debt. We have a certain amount of it reserved for what will likely -- as I said, will likely be a special capital gains dividend. And then we are enjoying the proceeds of 220 as they come in and using that to pay down debt, and we still have a little way to go on that. And then we have these enormously exciting things that we're going to be doing at Penn Plaza, which will -- which we are able to do entirely funded off balance sheet with no new debt and almost all of that cash that we will be investing in Penn Plaza has really almost no cost of capital. So therefore, all of the earnings that we will generate in Penn Plaza over the next years will be incremental and accretive. So that's our current plan.

In addition to that, we have always been opportunistic. We have always been aggressive investors where we see opportunity. And so we do have dry powder to use to see opportunity -- use it as opportunities arise and they will come. The next thing is we will use some of our financial strength to do something in terms of reorganizing, redoing our basic corporate structure and the answer is that is not impossible either. So we are very, very happy with our balance sheet. We are -- we work hard on it. We are very happy with our financial strength. We consider it one of the very unique things about our business and we just keep going.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [6]

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That's helpful. And just as a follow-up, as you talked about the retail sale, you talked about the discount that was in your stock, likely that discount was accentuated by the retail investments. At the same time, you talked about hiring Haim and talking about the disruption in Retail that will present opportunities to use -- I assume what you're talking about is to make investments. So I guess how do you balance being able to sell something to monetize something that the Street wasn't giving you value for and then turning around and potentially increasing your exposure back into the retail space?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [7]

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I think it's perfectly logical and actually follows in the pattern of what we've been doing all over the years. So the fact of the matter is, first, let's start this way. Haim Chera is a rainmaker, okay? Now we have experience with rainmakers. We -- I recruited Mike Fascitelli 20-odd years ago from Goldman Sachs. He was -- that worked out. He was a rainmaker. That worked out great, okay? We put together the JBG Smith business where basically if you want to look at it this way, we basically recruited Matt Kelly and his team in the rainmaking business to take and shepherd our assets and that worked out better than great. By the way, just as an aside, there -- when we did all that, everybody thought that Crystal City was a drag. Nobody had any confidence in it except Matt Kelly. So now we have 2 people who have confidence in it: Matt Kelly and Mr. Amazon. So we're doing great down there. And so Haim is in the -- follows in the succession of rainmakers, we -- I've been trying to get him for years and years. And why do we need him? Number one, we have $7-odd billion or $8 billion, I don't know the exact number, of retail assets on our balance sheet now. They deserve the most aggressive, best, most talented management, that's a lot of capital and we -- and those assets need to be -- what's the word? Those assets need to be shepherded and cared for with the highest talent. The second is, is that we think that the disruption that is in process now, I don't know what inning we're in, but will get worse and worse and the Retail industry going forward will present enormous opportunities, as I've said multiple times with those who have both talent and capital. You have to have both to be able to play. So we're just getting ready for that and the Retail is a business that we've been in all our lives. It's a business that we consider ourselves experts in. We consider Haim Chera to be even more expert than we are. And so this is not a business that we're exiting. We're not afraid of it. We think we are running full -- we will run full tilt into the fire, and we think that the opportunities are going to be quite extraordinary.

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Michael J. Franco, Vornado Realty Trust - President [8]

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Now if you think about what we did on the Retail business and on the sale, right? We recycled capital from assets that were -- that we had added tremendous value to over the last several years. We've leased up and they have duration of leases, they are stabilized and mature and monetized that, right? So the goal is to invest in situations where we can earn significant returns, and we think with Haim's addition, that is more likely.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [9]

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I mean, as I said in my prepared remarks, we turn those assets into basically $3 billion of cash and a financial instrument which creates enormous liquidity as we need it, and in the meanwhile, we're earning very, very acceptable returns while we are waiting. So that was the essence of what we did there. We...

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [10]

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And tax efficient?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [11]

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What's that?

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [12]

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And tax efficient?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [13]

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Monumentally tax efficiently -- efficient. Okay.

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Operator [14]

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And our next caller -- our next question in the queue comes from Steve Sakwa with Evercore.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [15]

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Steve, if you go back to your Chairman's letter several years ago, you outlined a number of things that you could or would like to do and many of those have been accomplished. I'm just curious kind of as you look at this big retail transaction, are there other things like that, that you would like to accomplish or feel like you need to do in order to continue to close the NAV gap?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [16]

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Yes.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [17]

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Okay. Any just sort of a commentary on timing or how you sort of think that may unfold over the next 6, 12, 18 months?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [18]

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No. Listen, Steve, the letter that I write each year is something that is -- it's a joy to write it, it takes an awful lot of energy. As you can see from the letter, I write every word myself with 400 grammarians overlooking -- looking over my shoulders and 10 lawyers. But nonetheless, I write every word myself. Now in the letter, I have historically not been bashful in saying what I thought and not been bashful in musing about what I think is wrong and what I think is right and what we might do, underline the word might, okay? Last year, several of our investors scolded me, which I guess I take scolding pretty well. I don't know. And basically, their point was don't muse about what potential strategies might be. You either do it or shut up, okay? And so in the last letter, I basically shut up, okay? Taking advice from some of my good friends out there. And so we have obviously not finished what we need to do. We had done an enormous amount. I think one of our analysts was commenting about the Retail deal putting in a long list of what we had done over the last years and even I was a little impressed. So we've done an enormous amount. We have more work to do. We're not going to front run that work. We're not going to muse. We're not going to speculate. When we do something -- just like this Retail deal, when we do something, we're going to announce it in full measure with full transparency, but we're not going to speculate.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [19]

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Okay and then, I guess, the follow-up question, kind of a two-parter, but just could you or Glen or Michael maybe just talk a little bit about the demand at Farley and how you see that unfolding and maybe the timetable behind that? And then when do you think we'll get a bit more detail on the 2 PENN redevelopment project?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [20]

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So David's here, but you don't want him. So we'll go to Glen. By the way, Steve, we're having fun sort of with the transition of bringing the young bucks up and the old guys sort of packing up, and so we're having a lot of fun watching all this happen right now. Glen?

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Glen J. Weiss, Vornado Realty Trust - Executive VP of Office Leasing & Co-Head of Real Estate [21]

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Steve, activity at Farley is picking up in a great way right now. The project's coming along really well. Tenants can really start to feel and taste what we're doing. There is nothing like it in the market. The unique nature of the campus is very, very different from anything else. Tours have picked up. We have some negotiations going on. We feel great about it. We don't deliver the space to tenants for more than a year from now. We feel very good about the demand, mainly from the TAMI sector at present.

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Michael J. Franco, Vornado Realty Trust - President [22]

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The only thing I'd add to that Steve is on the Retail side, right? Given the...

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [23]

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Here you go.

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Michael J. Franco, Vornado Realty Trust - President [24]

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The volume of people that are going to be coursing through that asset every day, either going west to Manhattan West and Hudson Yards, which this is the gateway to that or East to our assets is significant and the retailers have already figured that out. So we've gotten significant interest there. We're going to curate that the right way, but we're extremely bullish about that.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [25]

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With respect to detailed numbers on Penn Plaza, we're not ready yet to disclose exact numbers and we -- when we feel that we are ready and basically when we start, we will make a very fulsome disclosure, but we're not ready yet.

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Operator [26]

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

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [27]

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I guess sticking with the Chairman's letter, Steve, you had commented on your thoughts on the drag from redeveloping 2 PENN or PENN2. But as you think about getting Farley leased up and the earnings impact, I assume that will mitigate a bunch of that drag. Can you guys just help us understand how to think through the kind of ins and outs of the portfolio and even on earnings with some of these moving pieces and that comment in the Chairman's letter specifically?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [28]

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Well, what I said in the Chairman's letter was that public markets and our analysts seem to frown on development done in a public company. We think that, that is not correct. We think that when you do develop it, several things happen: number one, you get a brand-new building; number two is you get in the first iteration of leasing for 10 or 15 years, you have very low or no CapEx, and you get a purpose. So anyway, the long and the short of it is, that there is there huge advantages to development. We have done lots of development. We have a large capability of that and made enormous amounts -- enormous profits on development over the years. Look at the Bloomberg building, look at 220, et cetera, look at what we're going to be doing in Penn Plaza. So there's that. What I said in my letter was, just to recollect, that I find it kind of astonishing that people will ding our stock when we are on a program to take $60 rents and turn them into $90 rents. We would think that, that would be something that would be great stuff, so that's what I said. Now with respect to your comments, what you're really asking for is a guidance road map, which, as you know, we do not give guidance. I offer you to call Joe Macnow and you see if you can persuade him to tell you things that he probably will not tell you, but you could give him a try. But with respect to the details of how you model this going in, that going out and what have you, that's not our style, we have not done that. But talk to Joe, see how far you get.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [29]

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Okay. And then I guess just following up on an earlier question, so you made a comment saying you may use cash to...

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [30]

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Jamie, I hope that helps. Sorry, what's next?

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [31]

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It does help. I mean, I assume I'm correct though thinking that Farley mitigates some of that NOI loss.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [32]

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Sure.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [33]

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Okay. I will follow up offline.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [34]

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And Farley -- and hopefully Farley will come onboard at the front end of what we're doing in Penn Plaza. I just want to reiterate something that my partner -- my newly minted partner Michael said, okay? The thing that's amazing about Farley is it's the only real -- well, there's 1 or 2 others, but it's really the only real horizontal campus that I know of in town. That makes it totally unique and that makes it the kind of product that our preferred creative tenants love. The Retail is truly extraordinary. If you just look at it and walk around, all of the pedestrian traffic, and the pedestrian traffic will be enormous, going from Penn Station to their workplace at Manhattan West or at Hudson Yards has to basically come through the retail portion of Farley. So we expect that it will be -- it's a tremendous opportunity. We're really excited about it.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [35]

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Is the Retail portion actually potentially coming in better than your initial underwriting?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [36]

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Yes.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [37]

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Is demand better than you thought, pricing better than your thought?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [38]

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Well, I don't know. We're pretty aggressive in what we thought, but the answer is yes. By the way -- Jamie, I'll tell you -- Jamie, hang on, I'll tell you one thing. We own a lot of retail all over town, and we own the best assets in each of their submarkets. The single best performer in town right now is train station retail that we own. Next.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [39]

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Okay. Just a follow-up from an earlier question, you had said maybe you'll use some of the cash to redo your basic corporate structure. I'm just curious what you meant by that.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [40]

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I'm not going to speculate any more than that.

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Operator [41]

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

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [42]

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I had a couple of questions on the outstanding Retail deal as Michael described it. But the decision making on redeeming the preferred, can you just discuss what that's like? Because it seems like it would be advantageous for the JV to refinance that. But on your end, maybe depending on your use of proceeds.

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Michael J. Franco, Vornado Realty Trust - President [43]

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I can't tell if your question is what's the mechanism to redeem, is that what you're getting at?

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [44]

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Yes, the mechanism and the potential timing.

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Michael J. Franco, Vornado Realty Trust - President [45]

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Timing, we don't want to speculate on, but in the not-too-distant future, we can redeem those. And really it's at Vornado's discretion. So the joint venture can refinance that with third-party debt, and we can ensure that, that happens when we'd like for it to happen. So I think the important thing is that is we need that capital for our own purposes, we feel good about sequencing that to redeem that capital. But that won't happen immediately.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [46]

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Okay. And then Steve, in your prepared remarks, you seemed more definitive on a special dividend from the deal, more definitive than you were in the Chairman's letter it seems like. But I was just wondering if you're considering that position to defer any of the taxable gain.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [47]

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The answer is that -- I think in my prepared remarks, I used -- well, I said likely in -- this morning. So the answer is that if you do the math, there will likely be a capital gain dividend at year-end. I'm not predicting how much it will be. I just don't know. We have other activity that will be completed between now and year-end, which I doubt would create losses, which would eliminate the need for a dividend. So we think that there will be a dividend and stay tuned. With respect to what Michael said in answering your question about the preferred, we look upon it as a great, great instrument, sound from a risk point of view, secured by -- well secured is not the right word. But against assets where it is the only encumbrance, where we can sell it, we can borrow against it and we can redeem it, so it's a very flexible instrument. The only timing constraints are tax-driven. So we're pretty -- we think it's pretty -- and, by the way, it's simple. And I hope that helps.

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Operator [48]

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The next question in the queue comes from Vikram Malhotra with Morgan Stanley.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [49]

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And I guess I'd reiterate a very good execution, especially with the preferred and great pricing on the Retail deal. So just on Retail, just two specific questions on sort of Fifth Avenue and Madison. Can you talk about prospects for the Massimo space both in terms of types of tenants that may be looking and what you could -- what we could potentially see or what's sort of reasonable in terms of rent expectations. And then just second on -- once again on Madison, can you remind us. I believe the Westbury assets were going to be taken out for redevelopment. Can you give us more color on those plans?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [50]

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The Massimo Dutti store will -- we have activity on it. We are not in -- we are not close to a deal, but we have activity on it. It's obviously a great location. Pricing is not what it would have been 3 years ago, by the way, but our job is to be realistic and to hit the market price. And so that's my comment about -- with one further thing, by the way, I expect that the store will go vacant before we actually fill it. So there will be a period of -- there will be a downtime period before the new tenant, whoever that maybe, comes in. Joe or Matt, what's the status of Westbury with respect to out-of-service or in-service.

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Unidentified Company Representative, [51]

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We're going to spend some money there. We're going to take it out-of-service when we do that.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [52]

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It has been taken out-of-service, yes?

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Unidentified Company Representative, [53]

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Now that the last of tenants are out, it's out-of-service.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [54]

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So Vik, the answer is, -- I'm sorry. It's either out-of-service now or will be shortly out-of-service, and I can't get a straight answer out of my guys, [Richard]. I've got a straight answer, it's out-of-service.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [55]

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It's out of service, okay. I'll follow-up on that. And just on the office side, last quarter, I think there were some comments around sort of what mark-to-market could look like on the office side. I know obviously some of -- there's some movements around with Penn, et cetera., but I believe the comment was you do expect high single-digit or low double-digit sort of on the renewal spreads, and I know, excluding the 1 asset, it was about 6%. Can you give us a sense sort of for the remaining balance of the year, is there any specific asset, anything we should be watchful in the quarter? Do you still expect the rent spreads to come in that sort of high single-digit range?

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David R. Greenbaum, Vornado Realty Trust - Vice Chairman [56]

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Vikram, it's David Greenbaum. How are you? Listen, the reality is every quarter, the mark-to-market is going to be dependent upon the actual space that's coming up. We do have a couple of leases here at 888 Seventh Avenue, which are vintage 2008 leases coming off of some very, very high rents. So even if we achieve, which we think we will, rents well into the triple digits, there may be some mark-to-markets that are negative. So it's all going to depend upon the particular space that's coming up at any point in time, but they are obviously just as there was in this quarter, there are a couple of outliers where we will see some downward adjustments.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [57]

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Okay. So the full -- is this quarter sort of a good reflection of where the full year should shake out, not ignoring the quarter-to-quarter moves?

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David R. Greenbaum, Vornado Realty Trust - Vice Chairman [58]

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Again, I think all I can say realistically is, it's going to depend upon the mix of space that we are leasing every quarter.

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Operator [59]

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The next question in the queue comes from John Guinee with Stifel.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [60]

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Great. Steve, wonderful job. Promise me that you and Joe are never leaving.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [61]

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I don't know whether that's a compliment, John, or a cynical comment, but I'll take it as a compliment.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [62]

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It is, it is. Look forward, take the green bill and look past 2024 and look to 2029 because you've got to obviously develop to meet that anticipated standard. What does that do to your project costs on something like PENN1 or PENN2 or Farley? Does it cost you an extra $5 a square foot or $50 a square foot or $500 a foot? Or is it not feasible to, well, redevelop some of these buildings? What's the big picture there over the long term?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [63]

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I think, John -- thanks for the question. I think the big picture is, is we don't anticipate that in real course anything more than our current plans are -- what we're doing -- what our current budgets are. These buildings whether they're new, whether they're massive transformations and renovations, are being done to the highest standards of engineering and efficiency that we can do now. So we've already got that in the budget. So at the margin, everybody in our industry that's paying attention understands what these issues are and is designing and building towards them. So we don't think that there will be almost any incremental course other than some new technology, new software or new stuff that is not available now and that we don't know of that we might adopt later on, okay? So I mean, this green initiative is being anticipated by the leaders in our industry, we and our colleagues, and so we're -- we think we're ahead of the curve.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [64]

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Great, okay. And then the second question, it's pretty easy to get up to $2.5 billion or $3 billion for the Penn district campus when you add up Farley, PENN1, PENN2, the Concourse, maybe Manhattan Mall. Is that the kind of number we should look at, $2.5 billion to $3 billion? And is that a 5-year process or a 10-year process?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [65]

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Let me find -- I add slower than you do.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [66]

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Page 24.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [67]

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I don't read that fast either. What number did you say?

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [68]

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Well, you have another $560 million to spend on Farley, another $200 million on PENN1. You figure PENN2, 1.5 million to 2 million square feet at another $600 or $800 a square foot.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [69]

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Look, I think you're in the right ZIP Code, but I think you're probably on the high side. And I think that's fine. I mean, obviously, we have the capital. Not only do we have the capital, but we think as we invest the capital, we will be getting a tremendous bang for our buck there.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [70]

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We all hope so.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [71]

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By the way, one last thing, we don't look upon this as a 10-year spend. We look upon it as a 5-year spend at the outside.

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Operator [72]

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

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [73]

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So two questions. The first is just on the transfer tax. In the disclosures for both companies, you guys said it, unfortunately, you lost the appeal. It sounds like from reading the text that all the money that you had to pay was paid -- already paid last year. But going forward, do you think that this changes anything with regards to building transactions or this was -- these 2 instances were just very specific to these 2 instances?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [74]

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Alex, the answer is yes. We paid the money plus the interest, et cetera. I think 3, 4, 5 quarters ago, I don't remember when. Took the expense and we're done with this. So that the appeal -- we lost the appeal, what can I say? But it has no financial impact at all other than maybe it hurts our feelings a little bit. The legislation that the industry follows on this and we followed is somewhat complicated. The city has been trying to get the state to change that legislation in their favor for years and that has not happened. And so we strictly follow the rules that are in the legislation. I think it's -- I think that the case that we lost, which is about 2 or 3 transfers, had special circumstances, which I don't think should be precedent setting. So there you have it.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [75]

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Okay. That's helpful. And then going to the Chairman's letter, you devoted a fair amount to some of the recent political stuff going on. Amazon getting basically shot down effectively. You talked about the green new deal, but it certainly has created some -- a lot of discussion in the press as far as some of your competitors who have modern buildings that would meet all the lead certifications and yet because they're high intensity 24/7, they still end up getting penalized. Do any of these things, when you guys were talking to your street retail institutional partners to set up that JV and maybe some of your other institutions, is anyone talking about changing the way they look at New York assets investing in because of whether it's the Amazon or potential for commercial rent control or the green energy initiatives? Has that changed the way people underwrite assets in New York? Or people just view that as normal part of doing business in any big, major urban center?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [76]

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I'll begin on that and then I'll hand it over to Michael. I'm not aware of any major disruption or repricing in the marketplace as a result of carbon footprint, et cetera. I think the marketplace, both on the investing side, the tenant side and the owner side is all pretty much expecting of that and has been planning for it. So I think that it's important. Obviously we all have to go into modernity, we all have to do this. This is not like a hostile tax or imposition, we consider it to be just normal practice. So there's that. With respect to threatened rent control, I think that's a whole different kettle of fish, much more threatening and would be extremely negative and would not be -- would be the opposite of enlightened legislation. And I think people are beginning to become the focus on that. Now obviously, that's much more in the residential area than it is in the commercial areas. There was some stuff about retail rent control or something like that. In reaction to the empty storefronts around town, I think that the political leadership, at least I hope they have, has realized that it's not the landlords who are the bad guys. The landlords are anxious to rent the space and are realistic in what the rents have to be to attract tenants. So it's part of the disruption in retail, it's not -- so those are my comments. Michael, hang on for a minute. Hang on for a minute.

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Michael J. Franco, Vornado Realty Trust - President [77]

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I'd add just a couple of things, Alex. Just picking up on the multi first and then back to office. I think on the -- if you look at sales year-to-date, multifamily sales are down significantly, and I think it's directly reflective of the concern over those laws changing in June. So there's a possibility, real possibility that there will be some changes that are going to be negative, and I think it's going to impact a number of assets. It may well create opportunity coming out of that, but I think that -- I think generally investors are holding off on assets that could be affected by those laws and it could impact development going forward too, which is a concern. On the office side, I agree with Steve, I don't think it's impacted investors thus far. And I think with respect to higher quality assets where they're either generally compliant or the impact will be minimal and with a modest amount of capital to comply, I don't think it will be significant. But I do think there will be buildings that are -- that have not been owned and operated by owners that have taken steps thus far, where those buildings maybe from a capital requirement or operating standpoint may see an impact, and so that again could great opportunity, but I think there'll be any impact on value for some of those assets. But on this -- on the assets that are trading traditional Class A assets, I don't think it's been an issue, and we're not seeing investors focus on that.

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Operator [78]

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And the next question in the queue comes from Michael Lewis with SunTrust.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [79]

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I wanted to ask about 61 Ninth Avenue. Right around the time your release came out, it was in the news that Yext signed a 12-year deal there, with rent set...

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [80]

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Michael, I can't hear you. (technical difficulty)

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [81]

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I'm sorry. Can you hear me now?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [82]

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Better, yes.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [83]

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Sorry about that. I wanted to ask about 61 Ninth Avenue. So right around the time you reported, it was in the news that Yext signed a 12-year deal there. The rent, I felt, was high, but I think below what Aetna was going to pay. I was just wondering if the details on the transaction are accurate and if you could talk a little about that.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [84]

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Glen?

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Glen J. Weiss, Vornado Realty Trust - Executive VP of Office Leasing & Co-Head of Real Estate [85]

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Michael, it's Glen Weiss. So the deal is they subleased, Aetna to Yext. We simply consented to the sublease. The deal is for the term of the Aetna-CVS lease. We have Aetna-CVS credit locked down for the term. The deal is a slight discount to the head rent that Aetna is paying us. Yext is a fast coming -- up-and-coming technology company. They loved the building. Their CEO is excited to go there, and I think the quickness by which Aetna was able to get the space rent out in the sublet market shows that the quality is what we built there and the location.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [86]

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I see. So any difference in the rent is going to be eaten by CVS?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [87]

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Correct.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [88]

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Okay. And then my second question is kind of a follow-up on CVS...

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [89]

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Hang on, hang on, hang on, Michael. Michael, hang on. The difference in the rent is not significant and that validates the original location of the deal that we did. So this doesn't affect us at all, but it sort of validates what we did.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [90]

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I see. Understood. My second question is a follow-up on a previous question about rent spreads, so a 10-year lease that's expiring now was signed in 2009, which was a big drop in rents that year. So we're right at the point of shifting from leases signed at the last peak to those signed in the Great Recession. So I'm kind of just curious if you're starting to see better mark-to-market opportunities in the portfolio or if maybe I'm overstating this phenomenon, kind of curious on your thoughts there.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [91]

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Yes. David?

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David R. Greenbaum, Vornado Realty Trust - Vice Chairman [92]

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Michael, I think the comment I would make is you're probably a year or so off because the reality is the leases that are coming up now likely were signed in late '07, '08 with some free rent with a 10- or 12-year term. So we -- I think the comment I made earlier is we are seeing some leases come up near term that effectively were signed at the peak of the market. I fully agree with you that as we look out a couple years, we will see much of that reverse as we begin to see some of the leases that were signed in the weaker market place post the "Great Recession." I will also tell you that while I said earlier that there are some outliers that are significant negatives, there are a number of outliers that are significant, significant positives as you always expect in a real multitenant portfolio. But in terms of generally the timing, directionally what you're saying is correct. I think your timing may be a year or so off.

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Operator [93]

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And the last question in the queue comes from Nick Yulico with Scotiabank.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [94]

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Just a couple of questions. Just going back to Farley. Can you just talk more about the types of buildings you're competing with? I think the floor plates at Farley are over 100,000 square feet so it's kind of a unique product. Also should we think that this is more likely to be a single-tenant building, let's say, a tech campus rather than a multitenant building?

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Glen J. Weiss, Vornado Realty Trust - Executive VP of Office Leasing & Co-Head of Real Estate [95]

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The floors are big. They range from 100,000 to 300,000. There will be big tenants in the building. Will that be 1 tenant, 2 tenants, we're not sure yet, but it's a big tenant building. We're competing with the new construction near us, we're competing with some stuff in Midtown South. We're competing with whatever big blocks are available in the market. But as we said before, we think our advantage here is the uniqueness of this product versus anything else that we may be competing with.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [96]

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The only thing I might add -- the only thing I might add, Nick, is that the way we have designed this building is a building that will have 3 totally distinct cores in the building. So while as Glen said, it will be a large tenant building effectively as you think of the asset, the way this thing is designed, it could be 3 buildings within a building giving 3 separate tenants major branding presence, major identity or effectively, they have in a sense, their own entry, their own lobby, their own elevator core, which was the way specifically we designed the building to deal with both the annex space as well as the Eighth Avenue ring floors.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [97]

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That's helpful. Just last question is on G&A. You promoted some people in the organization. You hired new Head of Retail, which you described as a rainmaker, so I can't imagine that's a cheap hire. How much should we think about G&A? Is it going up from all these leadership changes?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [98]

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Yes. G&A is going up.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [99]

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And I mean, any sort of preview about how we can think about that?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [100]

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Not really, not yet. But G&A is going up, that's correct.

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Operator [101]

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There are no further questions in the queue, sir. I'll turn the call back over to Mr. Steven Roth for closing remarks.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [102]

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Thank you, everybody. This has been a very busy period, personnel changes, retail deals and what have you, so we're active. And I think you can get from all of our remarks that with respect to our stock price, with respect to our balance sheet, et cetera, we're not done yet in terms of producing value. So thank you, and we'll see you next quarter.

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Operator [103]

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