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Edited Transcript of VNO earnings conference call or presentation 1-May-18 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2018 Vornado Realty Trust and Alexander's Inc Earnings Call

NEW YORK May 3, 2018 (Thomson StreetEvents) -- Edited Transcript of Vornado Realty Trust earnings conference call or presentation Tuesday, May 1, 2018 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, IR

* David R. Greenbaum

Vornado Realty Trust - President of New York Division

* Joseph Macnow

Vornado Realty Trust - Executive VP, CFO & Chief Administrative Officer

* 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

* Joseph Edward Reagan

Green Street Advisors, LLC, Research Division - Senior Analyst

* Michael Bilerman

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

* Nicholas Yulico

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst- REIT's

* Stephen Thomas Sakwa

Evercore ISI, 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 Vornado Realty Trust First Quarter 2018 Earnings Call. My name is Adrianne, and I'll be your operator for today's call. This call is being recorded for replay purposes. (Operator Instructions) I'll now turn the call over to Ms. Cathy Creswell, Director of Investor Relations. Please go ahead.

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

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Welcome to Vornado Realty Trust First Quarter Earnings Call. Yesterday afternoon, we issued our first quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents as well as our supplemental financial information package are available on our website, www.vno.com, under the Investor Relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q and financial supplement.

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

On the call today from management for our opening comments are: Steven Roth; Chairman of the Board and Chief Executive Officer; and David Greenbaum, President of the New York Division. Also in the room are Michael Franco, Vice President and Chief Investment Officer; Joseph Macnow, Executive Vice President, Chief Financial Officer and Chief Administrative Officer; Mark Hudspeth, Executive Vice President and Head of Capital Markets; Matt Iocco, Executive Vice President and Chief Accounting Officer; and Tom Sanelli, Executive Vice President and Chief Financial Officer, New York Division.

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 industry-leading first quarter financial results were very strong. In fact, since all of our New York brethren have already reported, I can say definitively that Vornado's first quarter financial results were by far the best in town, with many of our business metrics outperforming by a wide margin.

FFO as adjusted was $0.91 per share as compared to $0.84 per share for the prior year's first quarter, an 8.3% increase. On a cash basis, FFO as adjusted was $0.89 per share as compared to $0.81 per share for the prior year's first quarter, an even greater 9.9% increase.

This quarter's cash basis NOI was $349 million, up 4.5% from the first quarter of 2017.

Cash basis same-store NOI increases were as follows: New York segment up 5.6%, with office up 8.1% and retail essentially flat, up 0.2%; theMART, up 10.0%; and 555 California Street, up 13.3%.

Our office business continues to perform very well, while retail continues to be soft. I know that Wall Street is down on New York. We don't see it. In fact, we see just the opposite. We are experiencing robust demand from all matter of industries in all of our submarkets. Our tenants are optimistic, aggressive, growing and upbeat about New York.

Notwithstanding our superior financial performance this quarter, we still expect the year to be flat GAAP although nicely positive cash. We also reaffirm our previous guidance that retail cash NOI will not go below $304 million.

We are pleased with the performance of our spinoffs, JBG SMITH Properties and Urban Edge Properties. These companies will perform better on a stand-alone basis. We are also pleased with our over $6 billion of recent asset sales, which would likely command a lower price if sold today.

Now turning to the investment sales market. The office investment sales market has picked up smartly, although bidding pools are still not deep. Highest-quality assets continue to trade at strong pricing levels. Investor interest in pricing for assets south and west in Manhattan is particularly strong. Overall investment demand is fairly well balanced between domestic and foreign capital.

There continues to be scant sales activity in the retail sector due to both a lack of quality product on offer and understandable investor skittishness. Pricing is clearly off for everything except prime well-leased assets.

Debt markets for New York assets remain as liquid and strong as we have seen, with all markets wide open. Although rates are up, spreads remain tight, keeping all main coupons at attractive levels.

We have a highly liquid fortress balance sheet with $4 billion of liquidity, reasonable leverage and well staggered debt maturities.

Now to Dave.

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David R. Greenbaum, Vornado Realty Trust - President of New York Division [4]

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Steve, thank you. Good morning, everyone. Finally, a warm sunny spring day in New York.

Employment trends in New York continue to be very positive. The office sector employment number for 2017 has been revised upwards significantly by some 40% by the Bureau of Labor Statistics, adding 8,000 jobs -- office sector jobs -- to a total of 28,000 jobs for the year.

What appeared to be a very good year now looks even better. Job growth in the first quarter of 2018 continues to be healthy, and the city continues to fire on all cylinders, with multiple sectors serving as engines of growth. The quarter's 2 stunning announcements by JPMorgan and Google, reflect the continued strength of the 2 most important engines, financial services and technology.

The overall leasing market in Manhattan turned in another solid quarter. Manhattan absorption was a positive 1.2 million square feet, bringing the vacancy rate down to 8.8%.

Turning now to our own performance in our New York Office portfolio. We leased 424,000 square feet in 26 transactions at average starting rents of $82.07. Same-store growth for our New York Office portfolio was strong during the quarter, positive 6.6% on a GAAP basis and 8.1% cash. The broad diversity of our larger leases for the quarter is a reflection of the overall health of the New York economy. The expansion of a tech tenant at 770 Broadway by 77,000 square feet, the renewal of a financial services tenants for 76,000 square feet at 280 Park, the expansion of a health care company by 53,000 square feet at One Park and a renewal expansion with an apparel company for 84,000 square feet at 100 West 33rd Street.

The balance of our activity was with midsized tenants that represent the sweet spot of our diverse portfolio. The mark-to-markets in our office business were a positive 62.5% GAAP and 50.3% cash. Even if you exclude a single lease at 770 Broadway, which was multiples of the old Kmart rent of $33.50 per square foot, the mark-to-markets for the quarter were still a very strong positive 20.2% GAAP and 12.5% cash.

At 96.8% occupancy, our office portfolio with over 1,300 tenants remains substantially full. The single largest block of space currently available is 89,000 square feet. Of our remaining 2018 lease expirations of 576,000 square feet and our 2019 lease expirations of only 691,000 square feet, 40% is concentrated in Penn One and Penn Two, where we remain aggressively focused on advancing our redevelopment efforts, which will commence later this year as we combine these buildings into a 4.3 million square foot complex that can offer best-in-class amenities along unmatched access to transportation.

Our leasing machine remains very active with over 400,000 square feet of leases in active negotiation and an additional 1.2 million square feet in the pipeline.

On the development front, we've been very busy. We will soon deliver 61 Ninth to Aetna as its sublease efforts advance. In the second quarter, we will also complete 512 West 22nd Street along the High Line. The building looks great. You should go see it. And we have robust leasing interest across all floors at triple-digit rents.

We expect to complete our boutique SoHo new development at 606 Broadway in the fourth quarter, and we're working on a lease for all of the office space in the building, again, at triple-digit rents.

And of course, there's the Farley Building, where extraordinary progress is being made on the dramatic Moynihan Train Hall. This includes the installation of new escalators and advanced work on the 2 monumental skylights.

We're also moving forward with a private development work, which will include 730,000 rentable square feet of office space and 120,000 square feet of train hall retail, all to be delivered by 2020.

We are seeing great interest in this space, and as you may have read in The Wall Street Journal, part of our leasing effort is directed at the life sciences industry.

Many of the major pharmaceutical and other life science companies are headquartered in suburban New Jersey office parks. As these companies think about how to compete for millennial and post-millennial employees, they're thinking hard about expanding in Manhattan, and where better to do that than directly on top of the expanded Penn Station, which also will be directly accessible through Amtrak and the Northeast corridor from Washington to Boston and Cambridge.

We're confident that the future of the life sciences industry in New York is on the West Side. Our life science leasing effort also dovetails with city and state programs to grow this industry. Stay tuned.

I will now turn briefly to our best-in-class street retail business, where our same-store performance for the quarter was down 1.3% on a GAAP basis and up 0.2% cash. The overall retail market remains relatively weak, but a number of successful retailers are choosing strategically to relocate and build new stores. Those moves have accrued to the benefit of our portfolio. Witness Sephora and Levi's at our 1535 Broadway and Times Square, and now Forever 21, which is relocating along 34th Street, 1.5 blocks west on the corner of Seventh Avenue across the street from both Macy's and Penn Station. The submarkets with the highest footfall and greatest visibility continue to generate the greatest interest from retailers, and that includes Times Square and Penn Plaza.

For the quarter, we signed 7 retail leases totaling 77,000 square feet, all of which were in the Penn Plaza District. While we're pleased with the 43,000-square-foot Forever 21 lease, as expected, the reduction in rent relative to the former H&M lease for that space resulted in negative mark-to-markets in our retail business of 12.3% GAAP and 20.1% cash.

However, if you isolate that lease out, our remaining retail leases produced positive mark-to-markets of 19.2% GAAP and 4.9% cash. Again, all of those leases were in the Penn Plaza District.

This rent growth shows the resilience of our Penn Plaza retail portfolio, thanks to the unmatched foot traffic. We limited the Forever 21 lease to just a 5-year term, positioning us to take advantage of rent growth as our transformation of the district proceeds as well as maintaining our development options for this site.

At theMART in Chicago, this 3.7 million square foot asset literally is full, with an occupancy now at 99.1%. We signed a 40,000-square-foot lease expansion with a tech tenant, which now occupies 149,000 square feet. For the quarter, on a total of 119,000 square feet of leasing activity at average starting rents of $50.39, our mark-to-markets were positive 36.6% GAAP and 28% cash, thanks to our growth at theMART with 3.4% GAAP and 10% cash. And this strong growth should continue as we bring to market the former Publicis space, which expires later this summer, a 132,000-square-foot block that is well below market.

Finally, turning to 555 California Street, in the first quarter, we completed 89,000 square feet of leasing activity and finalized the lease up of the redeveloped adjacent historic 315 Montgomery building.

Next door, our redevelopment of the iconic Cube, the old BofA banking hall, is underway and we're trading paper on a triple net lease for the entire 77,000-square-foot building at this iconic San Francisco corner.

For the quarter, our same-store growth for the 3-building 1.8 million square foot complex was 12.3% GAAP and 13.3% cash.

Let me just conclude by saying the New York economy continues to grow and with it the demand for office space. We remain full. We have a robust development and redevelopment pipeline, all of which is in the perfect submarkets.

Let me turn the call back to Steve.

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

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Thank you, David. We're happy to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question is from Michael Bilerman from 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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Steve, I was wondering if you could talk about Penn Plaza, the promised land, as you noted in your Chairman's letter. But talk about it from the perspective of the potential capital over time to develop and redevelopment -- redevelop against the backdrop of your comments that the public market is more challenged. From a real estate perspective, it hasn't grown. A lot of people want to invest in private relative to public. How do you sort of see the public market being able to fund that development and redevelopment within Vornado?

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

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I will define that as a 7-part question. So let me see, where to start. So first of all, Vornado has been rewarded for its contrarian and early investment in Penn Plaza enormously. Our basis in most of the assets in Penn Plaza, and I'm talking about millions and millions of feet, is about $200 a foot. And I don't know what the buildings would sell for today. Pick a number, say $900 a foot. You all can do the multiplication. $700 a foot times all that square footage is an enormous value -- is an enormous value creation. That's the first thing. The second is that Penn Plaza had always been, years ago, the cheapest submarket in town, okay? That's going to change, and it's going to change monumentally. But the timing of Penn Plaza was not yesterday, was not the day before. It's really now and the day after today. And by that, I mean Penn Plaza is ripe in lots of different ways. It's ripe for rent growth, it's ripe for tenant demand, it's ripe for tenant demand. Now we have plans that we've already announced to spend $200 million on One Penn Plaza, which we have already announced, we believe, will drive market rents up $20 a foot. So $20 a foot, that's over time. But the leases turn over a 5-year cycle in One Penn Plaza, or as David calls it now, Penn One. So if you take a look at the math, so $20 a foot times 2.5 million -- 2.6 million square foot building is roughly $50 million. And $50 million, you can value net $200 to accomplish the transformation of the building. That's a $4 a share increase in value, okay, on a $200 million investment at the increment. Obviously, $200 million is an investment that Vornado can handle very, very easily with no capital raise, no selling shares, no dilution, and no [hawkers]. On 2 Penn, we have various different plans, but it looks like we're going to go to Plan B. Now let's talk about that for a second. I think you could characterize Penn Station, now I'm talking about the underground now, we own the overground, but not the underground, obviously. So the underground at Penn Station is probably -- Joe, what's a good word? Reviled? Yes, that's too tough. Okay. So the Penn Station is probably one of the most disrespected pieces of infrastructure for something that is the most important and busiest transportation hub in North America. So from an aesthetic point of view, an operational point of view, what have you, it's not something that we're proud of, okay? It's not something that the community is proud of, okay? So 10 years ago, as you might remember, Vornado and the related companies at Madison Square Garden all got together, and actually we signed agreements -- so this was not a dream, this was a reality, a potential reality -- to move Madison Square Garden to the Farley Building, which would allow for a total transformation of the -- which would daylight the station, remove the building that was on top of it and allow for a total transformation of Penn Station in every way. That would have been the government's responsibility. Now we invested years in that plan. When it became pretty obvious that the public sector was not going to get -- was not going to be able to do it or get their act together, that plan dissolved. Now while we were working on that plan, we were the subject of a fair amount of community criticism. It was a landmark -- the Farley Building was a landmark building, lots of other things and it's not necessary to go into, all of which were very small and I might even say petty, okay? When the proposal was withdrawn and it wouldn't happen, the amount of remorse on the part of the entire community, government officials, The New York Times, et cetera, was astonishing, okay? Now fast forward to today. Vornado has initiated a plan, which granted, is very ambitious, to basically, I said this in my letter and I assume this is one of the things you're interested in, to raise -- to take down Penn Two, take down Two Penn Plaza and build back -- unlock the 5 million square feet of air rights that are trapped on top of Madison Square Garden, daylight the train station and build a very significant, maybe even 2 large buildings. That would involve, at the increment of -- incremental taxes, real estate taxes, et cetera, which would have allowed a pilot to be created, which is a financing scheme, which would have given the government a very substantial amount of money, billions of dollars, to transform Penn Station, okay? It looks as if -- now one of the things that we needed was we needed some help, as you can imagine, because it was a fairly massive undertaking and an enormous public good. It does not appear that, that plan is going to go forward or that it's feasible for lots of different reasons, although we're ready and willing to do it. So if that's the case and if that plan is not going to go forward, we are going to go quickly to Plan B. Plan B is taking Penn Two, which is a 1.6 million square foot building, skinning it, putting on a new skin, which will allow for basically floor to ceiling glass, et cetera, new lobbies, entirely new arrival, new mechanical systems, et cetera, plus adding how many feet, David?

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David R. Greenbaum, Vornado Realty Trust - President of New York Division [4]

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Better part of the 300,000 square feet.

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

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Adding the better part of 300,000 square feet in a bustle, which would, sort of like a doughnut, encompass the lower floors of that building, okay? That is a much more modest proposal than we had -- than I just talked about. And we're going to go to it, and we're going to go to it quickly. That will involve a sum of money. We have not even announced yet the plans, what the capital spend, what the returns on that, but they are certainly well within the ability of Vornado to finance totally off our balance sheet today with no dilution, no investors, et cetera. And so that will also be a plan that we'll start in a couple of years, I guess, and finish in a couple of more years. Hang on, I'm not done yet, okay? I apologize, but I'm not done yet.

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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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No, that's fine.

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

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Obviously, after a long pursuit, we (inaudible) have designated the developers, and actually, we bought a long-term lease hold on the Moynihan Building, and that's under heavy construction now. We will create in there 700,000-odd square feet of what I believe and we believe will be the best creative office space in town, plus 120,000 square feet of trade and retail. Across the street, I think I wrote about what our thinking was on Penn Plaza. We had numerous other sites, but we are very excited about it. Now it's not impossible that development, and I think, by the way, Penn One and Penn Two, the development and the spending there is extremely modest in relation to the returns and the results. But the rest of it is going to -- is pretty decent -- I mean, if we tear down the Hotel Pennsylvania, that's a big project. So it's not impossible that the public markets don't like development, and it's also not impossible that we might do something about that. What that might be? Well, we might split up into a development company and an income company. I just don't know. It's very premature. Let me say one thing about development. This is turning out to be a longer answer than our prepared remarks, and I apologize for that.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [8]

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It's okay.

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

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So we're very proud of the 2 children that we've born over the last couple of years, Urban Edge and JBG SMITH. Now JBG SMITH is interesting because it's attracting a fair amount of attention recently over the HQ2 situation. Nobody knows how that's going to turn out, except I guess, one man knows how it's going to turn out. Now the thing -- and I've said this publicly. The exciting thing about JBG SMITH is that it has 18 million square feet of development rights in the best submarkets on the best land already paid for inside their investment. The one thing that HQ2 is doing is it's highlighting for the investing public and the real estate public the scale, size and quality of the development opportunities that it has because if this (inaudible) for HQ2, that's certainly a validation. So JBG SMITH is going to be a development company, and they're going to build 18 million square feet of brand-new, perfectly designed, perfectly located amenity-rich product, and we know one thing as we learned when we did the Bartlett down there that this new product trumps old product every day. So that's sort of what's going on in Penn Station, Michael.

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Operator [10]

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And the next question comes from Jamie Feldman from Bank of America.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [11]

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I guess, sticking with the Chairman's letter, we get a lot of questions here on Footnote 5, which talks about potentially seeding a core fund or funds with Vornado's highly sought-after assets. And then Joe's thoughts to maybe you should separate retail into a separate entity. I know you kind of touched on that in the last answer, but could you provide more color on your thoughts regarding those 2 ideas?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [12]

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So I mean, look, let's start with the obvious. The elephant in the room is that the office companies and all of our brethren are selling at a very substantial discount to NAV. Everybody is complaining about it. Every CEO that I know that I talked to is complaining about it. Our shareholders are complaining about it. Everybody is complaining about it. Now in my letter, I tried to comment about my thoughts about that. So what I started out with is that -- let's just think about the REIT model for a second. So in the REIT model, we have an industry that has grown from [Timco's] IPO to today to $1 trillion of equity and probably something like $2 trillion of assets. Well, that's enormous growth, and that's a very big industry. But it only has a 10% market share of the commercial properties that it could own. And that 10% market share has not grown for years and years and years and years. So the obvious is that 90% of investors that want to own commercial real estate office buildings, shopping centers, hotels, et cetera, do own them in a non-REIT format. So that's a very interesting starting point, okay? The second starting point is that the public stock fluctuates, and right now, we are at a discount to NAV, which doesn't feel as good. And that's going to change over time. Believe me, the cycle -- prices are going to cycle, for sure. But right now there's a very large -- there's a discount and it's chronic, okay? So the observation is that public shareholders are willing to pay $0.75 or $0.80 on the value of a real estate asset. Investors, pension funds, LP's, et cetera, 90% of the investors in the world are happy to pay par or even 102%, 103% of par, okay? And they have long 20-, 30-year, points of view. So obviously, I and everybody else that I talked to who are in the management side of things are not happy. So what are we doing about it? Well, the first thing is that in our industry, one guy is buying back stock; 2 or 3 or 4 -- one guy -- 2 or 3 or 4 others of our brethren are basically running their businesses, okay? Now we are, I think, neither of those, without getting into stock buybacks, maybe we'll do that later. But we have been, I think we're the only publicly-traded real estate company that has been mixing up our a mix of assets. So over the years, we have sold out of the Americold business, making a double-digit return. We've sold out of the Mart business, making a double-digit return, but that's a misnomer because out of the Mart business we got the Mart building in Chicago, and so that's probably the single best real estate investment in the last 20 years, so the numbers are extraordinary. We also spun off Urban Edge. We also spun off JBG SMITH, okay? So we are doing things. We are mixing up our businesses. Now, it's pretty obvious that what I believe is the softness in retail is what is hurting our stock the most, okay? A lot of people say it's me, okay? Well, I take full credit for that and maybe a lot of people think that I should -- the problem is I haven't appointed a successor or the board hasn't appointed a successor yet, okay, that may well be. But I can tell you that in my opinion, the softness of retail is the biggest issue in Vornado right now. So I think Joe's suggestion, which he made years ago and I sort of hung out there as an idea, is that if we separated the strip retail, if we separated Washington, we separated Washington for 2 reasons: the first was that it was not performing well and it was trading our stock down; and the second is we thought it would perform much better with a world-class management team as a stand-alone company. So why don't we do the same with retail? I would tell you, I am dying to find out what retail would trade at from a transparency point of view as an isolated business. So anyway, so that's a thought and we are considering it, okay? I said in the letter, we're not done yet, and we will leave no stone unturned to create value -- shareholder value. And I meant it. Now with respect to the comments about seeding a core fund, if you just go through the math and you go through what I said and what you all know about the industry, obviously, our assets in the hands of a core fund with a different investor group would be worth a lot more than they are today. We'll see.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [13]

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And just a quick follow-up. I mean, do you think there's economies of scale of having retail and office together in New York?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [14]

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I think there's economies of scale of having the same management team run it.

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Operator [15]

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And the next question comes from Steve Sakwa from Evercore ISI.

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Stephen Thomas Sakwa, Evercore ISI, Research Division - Senior MD & Senior Equity Research Analyst [16]

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A couple of my questions were asked and answered, but I guess, just a couple of quick things, Steve. Just 220 Central Park South, I know that we're kind of getting closer to completion on that asset. I was just wondering if you could help us think through kind of the rest of the capital spend. And then maybe when should we start to think about closings and capital coming back to Vornado. And then secondly, if you could just touch a little bit more on the retail and kind of maybe what your expectations are for just kind of trends and leasing spreads over the balance of this year and into 2019.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [17]

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So 220 Central Park South is proceeding at pace. It is aesthetically and financially the best project that's ever been done in New York and, therefore, in the whole country. The numbers are terrific. But it looks like it's terrific. If you have nothing to do one afternoon, give a call and I'll have somebody to take you through. We will begin closings in the end of the fourth quarter this year. We are not releasing information for competitive reasons, and I think that's absolutely the right thing to do. The only information that we have released is 2 pieces. The first is I have said repeatedly that our sales are well beyond -- well in excess of our costs, so we're well into profit already. And the second is if you look at the NAV that we published in the fourth quarter materials, there's a number that projects what we expect the cash build from 220 to be. What was your other question, Steve, about retail?

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Stephen Thomas Sakwa, Evercore ISI, Research Division - Senior MD & Senior Equity Research Analyst [18]

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Yes, I just wanted to get -- I mean, obviously, you've had some roll-downs this quarter, but you said if you back out the one lease, they were marginally positive. Just -- and without giving maybe specifics, what do you sort of think that rollover will sort of look like on the balance of leasing coming due this year and maybe into 2019 to help people sort of think through sort of the downside or maybe we're getting close to the bottom here? How should we just be thinking about those rollovers over the next 18 months?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [19]

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The only things that matters is 3 things, Steve. Number one, the locations that we have and the quality of this retail is the best in the world. There will always be a Fifth Avenue, there will always be a Times Square, okay? The second thing is that our income is protected by long-term leases on Fifth Avenue and our Times Square property from high-quality tenants. And the third is that we have said repeatedly that our projections show and we are guiding that our income will not go below $304 million cash from retail. So there's going to be people going out, people coming in, and that's the bottom that I see, okay? With respect to the details of it, I'm not in a position to give you that.

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Operator [20]

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And the next question comes from Vikram Malhotra from Morgan Stanley.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [21]

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Two quick questions. Just first on retail. So I understand sort of the $304 million of floor. Am I correct in assuming if we look in the next year, given the Sephora, Levi's lease, some of that leasing you did this quarter, we should expect a nice bump in that cash number next year?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [22]

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Joe, help.

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Joseph Macnow, Vornado Realty Trust - Executive VP, CFO & Chief Administrative Officer [23]

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I think he's asking about '19. We expect it to be positive, but we're not guiding to that just yet.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [24]

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Okay. And then just on the noncore sales, and maybe 2 quarters ago, you outlined a bunch of noncore assets that you would start to look to sell would generate in excess of $1 billion. Can you maybe just give us an update sort of on plans there and timing?

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

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Generally speaking, we are in the markets and active on about half of that, okay? The remainder of it is some publicly secure -- which doesn't include any of the public securities, by the way. The remainder of those assets are the public securities that we have chosen not to execute on, or that have time delays such as assets -- such as loans which have a maturity the end of this year, the end of next year or whatever, or something like Lexington -- not Lexington, Penn [REITs], which we have tax protection, as you probably all know. So we're in the market with half of those, and it's going to be slower going. This is not just a single trade. But we expect that cash to come in over the next year or 2.

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Operator [26]

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The next question comes from Daniel Santos 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 [27]

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It's actually Alex on for Dan. So one, I appreciate your succession comments that you discussed earlier. My 2 questions are on the development side. Penn Station certainly there's been no shortage of political noise around the project from between the governor and the mayor. You outlined a pretty bold redevelopment plan in the Chairman's letter with sort of options for doing more for that part of town. How much of your undertaking meets the governor and the mayor to play ball? Or everything that you outlined you can undertake on your own without those 2 having to reconcile their differences there?

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

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As you would expect, we must plan the business to be able to function on our own. So we own the overground or -- we own the real estate aboveground. Our plans are to execute our development plans with no assistance from the governments or what have you, okay? We don't need that, just like any other location. However, since Penn Plaza is a unique area and the Penn Station situation is very interesting and very important from a community point of view, a political point of view and a business point of view, there are potentially other things that we could do to improve the situation, okay? So while we pursue those, we also pursue Plan B, okay? If I had to handicap it, my guess is Plan B is going to be more actionable than Plan A.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [29]

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Okay. And then the second is in your letter, you also mentioned what JPMorgan is doing, the redevelopment of their 270 Park. You for years are talking about Manhattan tilting west and tilting to the south. Does what Jamie is doing at 270 affect how you think about future reinvestment for the company?

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

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No. We have multiple children. We have multiple assets on Park Avenue, et cetera, and we love all our children equally. I think what Jamie did was stunning and courageous, and I think it speaks volumes to a, the fact that Park Avenue is still Park Avenue; and b, that 50-year-old buildings don't work for high-tech companies like their bank, okay? So what we think is -- the most important thing is that there is -- this doesn't affect demand on the West Side. There's still enormous demand on the West Side at very substantial rents. The difference is that a teardown on Park Avenue -- and we think we have at 350 Park we have the single best example or the best opportunity, requires rents, which are very substantial and quite a bit higher than the West Side. So each of those districts and submarkets will function. And I think with what's going on in New York, both of those -- both the Midtown, the traditional midtown submarkets and the new emerging West Side markets will both thrive enormously.

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Operator [31]

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And our next question comes from Nick Yulico from UBS.

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Nicholas Yulico, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst- REIT's [32]

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Just want to go back to the Forever 21 lease. David, I think when you said that it was a 5-year term and you thought that was attractive since Penn Station area gets revitalized, you'd be able to roll that lease in 5 years. But what I'm wondering is whether you actually had retailer interest in a longer term lease because I think there's the perception out there that retailers continue to go for shorter-term deals.

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David R. Greenbaum, Vornado Realty Trust - President of New York Division [33]

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Forever 21, Nick, in fact, their preference would have been to do a longer-term lease. We were the ones who, when we started the conversation with them, told them that we want to limit it to 5 years. And that's for 2 reasons as I mentioned, in my prepared remarks. One, because as the district continues to improve, we see continued growth in that marketplace. And two, that building, that piece of land on 34th Street, which runs through the 33rd Street, we also own another piece on that block and several others, we see someday is a potential development site.

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Nicholas Yulico, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst- REIT's [34]

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Okay, that's helpful. And just following up on that deal. It looks like the roll-down there alone on that lease was -- could have been 35%, 40% on a cash basis. I mean, how should we think about the risk of another roll-down of that size on the next couple of years based on your lease expiration schedule or any retailers that you might be willing to get as early in any of your buildings?

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David R. Greenbaum, Vornado Realty Trust - President of New York Division [35]

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It's going to depend realistically space by space in the portfolio, just as the balance of the spaces that came up for this quarter, all of which were in the Penn Plaza District, had roll-ups. We've told you in the past, we see a number of roll-ups in the portfolio, including space in the Penn Plaza District, including space on Fifth Avenue. We see some of the spaces that are coming up over the next couple of years, where there may be some roll-downs primarily on Madison Avenue.

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

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So look, first of all, we've said that the income is not going to go below $304 million, okay? That contemplates the roll-downs that we expect and the roll-ups that we expect and the vacancies that we expect and the move-out that we expect, okay? That's projected out for a period of time. That's the first thing. The second thing is that there are plenty of under-market rents in our portfolio. So for example, just take Kmart. So we have probably, I don't know, 300,000 feet of Kmart left at $33.50 a foot, and I think we showed you at 770 what can happen with that space. So there will be roll-downs. There will be move-outs. We're prepared for them. This is a business which has $1.5 billion of NOI, and a $2 million or $3 million of roll-down here and there is part of the business. We are confident on our $304 million number, and we're also confident in the quality of the real estate that we have. This is going to cycle out. Everything will be fine.

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Operator [37]

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And the next question comes from Joseph Reagan from Green Street Advisors.

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [38]

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You mentioned cash same-store NOI growth this year would be nicely positive, which seems more upbeat than the kind of flattish comments you've provided on the last call. So I guess, has something changed? Was that a comment for New York City specifically? And then I think you put up 5% to 6% for the New York business this past quarter, so just wondering if that -- we should expect that to decelerate over the rest of the year or kind of how to think about that.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [39]

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So we strive to be respectable. Do you get it?

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [40]

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Not following you exactly.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [41]

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That's the way you described our earnings in your 2-sentence remarks of overnight, okay, which we kind of chuckled over because we thought that our earnings was spectacular, and spectacular is a better word than respectable.

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [42]

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Fair enough.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [43]

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I think that the way we have described -- look, we took a whopping for the word flattish in the last call. Now we were trying to tell our investors what to expect. And I think that was -- a lot of people thought that was an inarticulate way to do it, and we agreed. So we tried to improve it a little bit by saying GAAP -- we expect GAAP to be flat, although cash to be up. What did I say? Nicely, smartly, okay? So we're not defining nicely or smartly because we don't give guidance, but we're trying to put parameters around it. We believe that notwithstanding the blow-out quarter we had in the first quarter, the balance of the year will end up at the end of the year with flat GAAP.

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [44]

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Okay. And that applies to the New York specifically business?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [45]

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No, no, no. That's the entire business. That's the entire business. Some pluses, some minuses, all of which are out there. New York Office continues to roll along in very good shape.

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [46]

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Okay. I appreciate that. And looking out to 2019, any retail move-outs you're expecting at this point?

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

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I don't think I have that information at my fingertips right now. We have one move-out in the Fifth Avenue complex, and that's the Massimo Dutti Zara store at 689 Fifth Avenue, which we believe is under market. But other than that, in Penn Plaza -- I'm sorry, not Penn Plaza, in Times Square and in Fifth Avenue, the answer is no other than that one Zara store. In Penn Plaza and the rest of the place, there are small move-outs and small move-ins all over the place. It's a large portfolio.

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [48]

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Okay, that's helpful. And then there's one more from me. Steve, you mentioned earlier on the call about potentially splitting up into a development company and an income company. Can you just elaborate on that a little bit and how you think about splitting up assets between those 2 entities? I mean, would there be just a pure development company potentially?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [49]

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Joseph, I really can't, and I'll tell you. But I do make the observation, and you guys are the archetypes of this, that the public market doesn't like development, okay, for lots of different reasons, all of which are right but they're not right, okay? And so we believe that in Penn Plaza, we have to do development because that's the nature of the asset. JBG SMITH has to do development because that's the nature of the whole land that they have. So what I'm saying basically is that development is not a business that can be measured quarter-to-quarter, but the objective of it is to end up with a series of brand-new, perfectly designed, perfectly located buildings. So basically, it's important. Now if the public markets don't like development and we're going to end up with a stock price that's going to be dinged for a long period of time because we have to do development, that doesn't make intellectual sense. So we'll have to figure that out. So all I'm saying is, is that's something that we're aware of and it's something that in our counsel rooms, we are hard at work on what the next steps are to close the gap for Vornado.

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Operator [50]

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And the next question comes from John Guinee from Stifel.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [51]

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Wow, this has been intellectually very stimulating. By the way, there's this one guy down at Baltimore who just loves development, okay? Question, if you woke up tomorrow and found out that you were a stock, not a collection of real estate assets, and NAV was not a valuation metric and was never going to be a valuation metric anymore and we're all going to be about cash flow and cash flow growth, how would you run your business differently?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [52]

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You've outsmarted me with that question. I don't know. I don't think we would run it any differently. In other words, we're in the value creation business through the media of real estate. And I don't think we would run it any differently.

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Operator [53]

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And the next question comes from Michael Bilerman from Citi.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [54]

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Steve, I just had a follow-up. As you think about the variety of options that you're sort of looking at on the call, this development versus income company, splitting at retail, seeding a core fund or funds with your assets, when you step back, how does sort of the privatization, given all the private capital that's out there, or a strategic public-to-public merger, which has been increasing of late in the REIT sector, how do those options sit alongside these other opportunities that you're examining?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [55]

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Michael, of course, they are on the blackboard. And of course, they are -- as we do, we consider all the options, but I have no comment beyond that.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [56]

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And then just on this core fund idea, I guess how does that creates value for Vornado shareholder other than emulating the fact that the assets have an NAV value beyond? How does putting them into a fund and then that fund going out and acquiring assets at market prices, how does that ultimately derive value in your view for Vornado shareholders?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [57]

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Michael, I'm not prepared to answer that. I'm not prepared to get into the complicated workings of an answer to that question here.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [58]

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I'm just -- maybe I wasn't sure how that idea sort of would be executed, whether it's in a private format or whether it's similar to the fund that you created coming out of the recession, where you went out and bought assets. But instead of putting cash in, you'd put your assets in for your equity stake. I just wasn't sure whether that was contemplated in the public vehicle or a private vehicle. That was where I was going with it.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [59]

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This is all premature. These are glimmers of value-creation ideas, and I can't get into a debate or a dialogue with you about execution details.

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Operator [60]

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And the next question comes from Jed Reagan from Green Street Advisors.

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [61]

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Just a quick follow-up as well. In the shareholder letter and then again earlier, Steve, you talked about the potential of ground-up development at Two Penn Plaza using transferred air rights, which sounds like maybe that's the less likely scenario at this point. But can you just talk a little bit about the ownership of those air rights and the mechanism by which Vornado could obtain them if you decided to go with that, I guess Plan A?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [62]

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The air rights are -- Two Penn Plaza and Madison Square Garden are on a single tax lot. In fact, when you go into Madison Square Garden, we manufacture the chilled water for their air conditioning system, so we're compadres. When the original deal was created, and I say this sort of tearfully, the original grand limestone Penn Station was torn down, which by the way, as we all know, was the reason that the landmark laws were instituted in New York. In any event, so at that point, there was an agreement to split the air rights on that block, and that agreement has been modified a couple of times over the years, and it still exists. So we own the air rights together with Madison Square Garden in a proportion that is something we're not going to get into today, but it's not totally even but it's not far from even. But in addition, there are -- the air rights are qualified for a transit bonus, which constitutes probably about 1.5 million, 2 million square feet of size.

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David R. Greenbaum, Vornado Realty Trust - President of New York Division [63]

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A little over 2 million, 2.5 million maybe.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [64]

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So basically, the 5 million square feet of air rights that I speak about, 3 million of them are owned by we and Madison Square Garden, and then 2 million of them would come by virtue of transit bonuses, which would have a modest cost because you put -- the private party puts up the money to improve the transit within the neighborhood. So that's the math.

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [65]

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How do you guys account for that in your internal NAV, if at all, the one you publish periodically?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [66]

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Zero. Air rights have -- they may have a theoretical value to some people, but to me, they only have value when they're actionable.

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [67]

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Right. That makes sense. And just one other one. You talked about life science and Farley potentially going that direction. Could that add to the cost of the project? And how could it expect -- maybe impact expected economics? And would that necessitate bringing in another partner?

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David R. Greenbaum, Vornado Realty Trust - President of New York Division [68]

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Jed, it's David. No, there will be no reason to bring in another partner into this transaction. We obviously are exploring a life science industry and are walking a number of those tenants to the building, in fact, next month, actually later this month, in May. We, of course, also are talking to what I will call the traditional tech companies that fully appreciate and understand the unique nature of this piece of space. As we look at the building, if you think about the asset, it is effectively a 67-story building that is lying on its side as a 5-story building. That gives you an idea of the extraordinary footprints that this building can provide a tenant. As well most importantly, the indoor/outdoor space, the roof space on this building can provide the better part of 2 acres of roof space, again, similar to what we learned when were out in Silicon Valley. In terms of the incremental costs for doing life science, we basically budgeted those costs. We're not going to get into that today on the call. There are some incremental costs in terms of venting and air systems, but obviously, that's all only going to make sense to the extent the life science tenants are in fact to pay rents higher than some of the traditional tenants that we see for this space. Based off of those, our market knowledge being the Cambridge market and other areas, the life science tenants in fact seem to be paying significant, significant premiums for that space.

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

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There are a couple of REITs that specialize in that product type. There's 1 or 2 that have that product type buried into larger companies. Our observation is the math on that product type is satisfactory to even better than satisfactory, and it's even better than conventional office. So the answer to that is that we've accounted for all of that. We have not before had assets that we thought were attractive to that industry. We now have and we're pretty excited about it actually. In terms of -- you said something about bringing in a partner, we have no need nor interest in bringing in a partner.

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [70]

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Would you build in the flexibility to go -- to convert it to lab even if you did go with the tech -- pure tech tenant?

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

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The answer to that is, I don't know.

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Operator [72]

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That concludes the question-and-answer session. I'll now turn the call back over to Steve Roth for final remarks.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [73]

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Thank you, everybody. We have a pretty -- we're proud of this quarter, and we're happy to share all of our thoughts however broad they may be with you. And we look forward to the next call in 3 months. Thanks, everybody.

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Operator [74]

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