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Edited Transcript of VNO earnings conference call or presentation 29-Oct-19 2:00pm GMT

Q3 2019 Vornado Realty Trust and Alexander's Inc Earnings Call

NEW YORK Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Vornado Realty Trust earnings conference call or presentation Tuesday, October 29, 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

* Glen J. Weiss

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

* Joseph Macnow

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

* 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

* Daniel Ismail

Green Street Advisors, LLC, Research Division - Analyst of Office

* Emmanuel Korchman

Citigroup Inc, Research Division - VP and Senior 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

* 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 Third Quarter 2019 Earnings Call. My name is Michelle, and I will be your operator for today's conference. (Operator Instructions) Please note that this conference is being recorded. I would now turn the call over to Ms. Cathy Creswell. Ma'am, you may begin.

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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 third quarter earnings call.

Yesterday afternoon, we issued our third quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents as well as our supplemental financial information package are available on our website, www.vno.com, under the Investor Relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q and financial supplement. Please be aware that statements made during this call may be deemed forward-looking statements, and actual results may differ materially from these statements due to a variety of risks, uncertainties and other factors. Please refer to our filings with the Securities and Exchange Commission, including our Form 10-K, for more information regarding these risks and uncertainties. The call may include time-sensitive information that may be accurate only as of today's date. The company does not undertake a duty to update any forward-looking statements.

On the call today from management for our opening comments are -- is Michael Franco, President. In addition, Steven Roth and our senior team are present and available for questions.

I will now turn the call over to Michael Franco.

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Michael J. Franco, Vornado Realty Trust - President [3]

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Thank you, Cathy, and good morning, everyone.

Overall our business is in great shape. Our buildings are full, and we continue to home in on a significant opportunity that we have with the redevelopment of Penn District.

Let me review our third quarter financial results, before giving some thoughts on the markets and our portfolio and in particular, the Penn District.

Third quarter FFO as adjusted was $0.89 per share, $0.07 lower than last year's third quarter. And as discussed on last quarter's call, these results were impacted primarily by reduced income related to the over $3.1 billion asset sales we completed year-to-date. And the lost income from Topshop and Forever 21 bankruptcies.

Last quarter, I also discussed the impact of Topshop's closing at 608 Fifth Avenue and 478 Broadway. In August, we delivered the required 9-month notice to the ground lessor at 608 Fifth Avenue and we will terminate the lease in May 2020. This primarily reduces FFO by approximately $10 million annually and [mix our NAV] by roughly by $1 per share. This ground lease had only 14 years left on it, and it was not economic for us to hold on to.

Now to Forever 21, which we mentioned last quarter was a restructuring candidate. As you know, they filed for Chapter 11 bankruptcy protection at the end of September. They are a tenant of 1540 Broadway and 435 Seventh Avenue. They have a third lease with us at 4 Union Square which expires next month, and we chose not to renew them. We have already released a portion of that space to Whole Foods as part of their expansion and have a lease-out with another important tenant for an additional portion, both at higher rents than what Forever 21 is paying this year. Forever 21's annual rent on 1540 Broadway and 435 Seventh Avenue totals to approximately $20 million this year. While the bankruptcy process is fluid and is still in its early stages, we have reached a [tenant] agreement with Forever 21, that shortened their leases and repayment in those 2 locations for a little less than half of their current rent, with us having the right to recapture the spaces at any time after the first year, enabling us to secure long-term [potential] spaces. Both of these assets are in prime locations and we are confident of their long-term potential.

So to summarize, even with these items, we remain on track to meet the approximate $3.40 per share the comparable FFO for 2019 that we referenced in last quarter's call.

Our noncomparable items this quarter included a couple of large gains. One, the $178.8 million of net gains on sale of real estate, primarily related to the July sale of our 25% interest in 330 Madison, where we made 8x our investment; and two, $109 million after-tax net gain on unit closings at 220 Central Park South. To date, we have closed on 48 units for net proceeds of $1.25 billion, including 14 units for $349 million this quarter. And we continue to sign new contracts with a few remaining units as well. Remember, that we paid off the remainder of the $950 million loan on this asset in July. So as closings continue through 2020, we retain all net proceeds, which importantly, will be redeployed into the Penn District redevelopments, turning this capital into highly accretive earnings and propelling our future growth.

Company-wide, our third quarter cash basis same-store NOI increased by 1%, broken down as follows. New York Office and Street Retail both up 1%, theMART was down 1%, and 555 California Street was up 17.7%. For the first 9 months, cash same-store NOI across the business was up 2.7%.

Let me now turn to the New York market. The New York Office market, which continues to be fueled by positive job growth and delivery of premium office [product,] performed strongly during the third quarter of 2019. Leasing activity across the city remains vibrant, driven mainly by technology and financial tenants with asking rents at record highs in the market overall. More than 25 million square feet of new leases have been signed in New York during the first 3 quarters of 2019 with many large deals in process expected to close in fourth quarter. Talent wants to be in New York and therefore, companies are migrating to and expanding the city, creating tremendous competition for top talent. Nowhere is this more evident than with the dramatic demand from the big tech companies. Executives view their real estate as one of the key drivers to recruiting best and brightest talent to their teams.

Private sector jobs decreased 53,000 in the first 9 months, on pace with 2018, with 9-month office sector jobs increasing about 18,000 as compared to 20,000 for all of 2018. And certainly, at a pace strong enough to continue absorbing municipal icon [in line] .

There are currently 65 tenants actively looking for 100,000 square feet or more, totaling 16 million square feet potential activity. This demand is coming from all [industry] all industry sectors from companies already in the city as well are those seeking their first [tenancy] here.

Our development in the Penn District is seeing the benefits of this demand as we are in full gear on our 5.2 million square feet of combined redevelopments at Farley, PENN1 and PENN2. We are experiencing robust interest in all 3 projects as prospective tenants begin to appreciate the magnitude of our district transformation. Tenants are responding very favorably to the unique nature of our amenities, space offerings and design elements at each property that will serve today's workforce as the most accessible location directly on top of the most important transportation hub in the region. Farley is one-of-a-kind and we have great activity on this space.

At PENN2, we are negotiating a lease with a 400,000-square foot headquarter's tenant. And there's more at work beyond this, all at rents at or above our underwriting. All our activities will benefit from the significant public sector projects being built in our district, including the new grand Moynihan Train Hall, which will be delivered in 2020; the expanded LIRR Concourse running from Seventh to Eighth Avenues by the end of 2021, and a soaring new station entrance at 33rd Street and Plaza33.

Against the backdrop of this district transformation, we are place making the entire district and are hard at work negotiating deals, securing the district with new food and beverage outlets by leading operators, coffee spots, business offerings and other retail as to service our tenants.

These additions will dramatically enhance our offering and drive greater demand in rental rates within our 10-million-square foot district portfolio. Our goal simply is to make the Penn District and our holding specifically the go-to location for tenants in the city.

More broadly, our New York Office portfolio is in great shape and you can see it's performed well. We are substantially full with occupancy ending the quarter at 96.8%. Our remaining 2019 expirations are only 85,000 square feet, while our 2020 expirations are a modest total of 1,055,000 square feet with 760,000 square feet of this amount expiring at PENN1 and PENN2. Please remember this includes 565,000 square feet at PENN2, which will be taken out of service in 2020 as this development kicks into high gear. This will bring the total out-of-service at PENN2 at the end of next year to approximately 1 million square feet. Basically, we're repositioning the buildings for mid-60s per square foot rents to the 90s and need to move the old tenants out in order to accommodate the buildings.

During the third quarter, our leasing team completed 25 leases, totaling 197,000 square feet in New York at over $80 per square foot starting rents, with very strong second generation positive mark-to-markets of 22.7% cash and 28.5% GAAP. We have now completed 814,000 square feet of leases during first 3 quarters of 2019 at a healthy average starting rents of only $79 per square foot.

In the quarter, we signed our first lease at our new build at 512 West 22nd Street on the High Line with for Warner Media for 20,000 square feet at a triple-digit rent. We also have an additional lease out here for 43,000 square feet of triple digits which we expect to sign in the fourth quarter. Additionally, during the quarter, we finalized a relocation expansion deal with an existing tenant in our portfolio, which will be moving from Midtown to 28,000 square feet at 330 West 34th Street in the Penn District. The starting rent per square foot here is in the high 80s, a record for this building which is clearly benefiting as tenants recognized what's coming with the Penn District transformation. Overall, tenant dialogue across our entire portfolio is very strong, we are as busy as ever with 3 million square foot of deals in different stages of negotiations including a strong momentum at Farley and PENN2.

Moving to Chicago now. At theMART, during the quarter, we executed 45,000 square feet of leases at an average starting rent of over $48 per square foot with positive mark-to-markets of 6.7% cash and 14.9% GAAP. This included an expansion lease with All State for 17,500 square feet [making] the total footprint to 120,000 square feet. Occupancy here is at 95%.

In San Francisco, the market continues to be hitting on all cylinders. With our campus here at 100% occupancy, we are taking advantage of the extreme tightness in the market and are now discussing renewals with several important tenants totaling 180,000 square feet, well in advance of their expirations. During the quarter, we leased 50,000 square feet, including a 42,000-square foot renewal expansion with an existing tenant in 315 Montgomery Street at a starting rent of $97 per square foot. Please note our positive mark-to-markets on second generation space here, which were a spectacular 39.3% cash and 64.5% GAAP.

Before turning our Retail business, let me comment on WeWork. There's been some speculations in the press that we, and several other landlords got meaningful exposure to WeWork when quite the opposite is true in our case. We have WeWork as a tenant in only one location, 606 Broadway, a mere 15,000 square feet a share. While we appreciate some of the creativity that Wework brought to the office business, we chose to lease our space to end-users with better credit over the past few years. Notwithstanding this, we do think that co-working will provide an important service in the real estate ecosystem and we will be providing flex spaces as part of our overall offering for tenants at PENN1 and PENN2. This space will provide our tenant [swing] space, co-working space, meeting and social spaces, food and more. We will brand this space under the Vornado name, and importantly, retain the bulk of the upside.

Turning now to our New York [Street] Retail business. Overall, the retail market continues to be challenging, with leasing velocity slow and assets prone to negative surprises à la Topshop and Forever 21. Retail occupancy was 95.9% at quarter end. In the third quarter, in spite of a challenging leasing environment, we executed 9 leases for 26,000 square feet of retail space, achieving positive mark-to-market of 6.2% cash and 15.6% GAAP on second generation space.

During the first week of October, we finalized their replacement lease for the short-lived former Four Seasons restaurant 280 Park Avenue with the famous best-in-class Fasano Hotel and Restaurant group. Fasano has been a symbol of quality fine dining and excellence in São Paulo and Rio since 1949. This will be their first New York restaurant and will focus on classic Italian cuisine, similar to those they operate in Brazil. Fasano will deliver the best in fine dine to Midtown Manhattan, while creating atmosphere of style, sophistication and energy. We think this will further enhance the quality of our tenant experience at 280 Park and are excited for their openings in the first half of 2020.

We continue to maintain a [fortress] balance sheet with reasonable leverage and an abundance of liquidity today and growing over the next few years. Our current liquidity is $3.36 billion, comprised of $1.28 billion in cash, restricted cash and securities, and $2.08 billion undrawn on our revolving credit facilities. Lastly, I want to remind you that based on taxable gains from our asset sales year-to-date, we are currently anticipating paying out a special dividend of approximately $1.90 per share this year.

With that, I'll turn 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 question in the queue comes from Manny Korchman from Citi.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [2]

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If you think about the leasing pipeline you talked about in the Penn District and you dissect that, how many of those tenants are looking to make a move or stay within sort of the Hudson Yards, Manhattan West, Penn District corridor versus looking elsewhere in the city?

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Michael J. Franco, Vornado Realty Trust - President [3]

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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 [4]

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It's Glen Weiss. We're seeing a real balance of activity both from tenants in Midtown, Park Avenue tenants, Sixth Avenue tenants looking at all of our projects. In addition, we have a lot of activity from the tech sector, the ever growing, [brimming] tech guys are looking at the projects as well. So I'll tell you, it's a balance of tenants from within Midtown core and from tenants looking to continue expanding in the city.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [5]

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Okay. And then on the Forever 21 comment that you made, how did you think about sort of giving them that rent relief and the impact that would have on both [a] leasing and other tenant psychology?

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Michael J. Franco, Vornado Realty Trust - President [6]

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Obviously it's a negative surprise, right in the sense of -- we had term on the lease and all of a sudden, they filed and so, yes, [we had to deal with a real kind of] situation. And I think the deal that we struck that has been finalized now, works for both parties. But I think importantly, it keeps the space occupied, paying rent and allows us the flexibility to go troll for tenants and find tenants that will occupy their space, long term. So if you think about the locations individually, at 1540 Broadway is arguably, the best location in the city right now, right? From a Street Retail perspective, Times Square is the strongest marketplace, tenant sales are holding up the best, and we have the [waterfront] at one side of the [boat side] that is a premium location. So with appropriate time, we will find a replacement tenant and a great tenant there and are confident that, [that we can achieve] .

On 435 Seventh Avenue, right, there was always a short-term deal, it was a 5-year deal, intended to get us approved until the period when we're ready to redevelop the entire block, and so this continues to preserve that for a period of time -- we can get replacement if we want -- if not we can keep it in play, but again, there's a bigger picture on 435.

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Operator [7]

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And the next 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 [8]

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I just wanted to ask about -- you talked about Topshop, Forever 21. I just want to be clear, are these impacts that are only starting to hit NOI in the fourth quarter? Just trying to kind of bridge what you report in the third quarter versus these impacts.

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Joseph Macnow, Vornado Realty Trust - Executive VP, CFO & Chief Administrative Officer [9]

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Nick, it's Joe. Nick the Topshop started to affect us in Q3 -- in Q2, even. Forever 21 starts to affect in Q3.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [10]

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Okay. So I guess, I'm sorry, if I missed this, if you went through it, but I'm just trying to understand how -- when we're thinking about that 3 40 kind of soft number for the year on FFO, what are some of the items in the fourth quarter that create that drag versus what you reported in the third quarter?

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Joseph Macnow, Vornado Realty Trust - Executive VP, CFO & Chief Administrative Officer [11]

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So Nick, when we have the second quarter call, we said that the sales items and the other items we discussed that reduced NOI going forward, if you apply them to the 6-month numbers, you will get 3 40. The third quarter, last year, was $0.96. This year, it's $0.89. That diminishing of $0.07 that really comes, primarily from sales, specifically the retail JV is $8.2 million of that reduction; 330 Madison, $1.4 million; the sale of Lexington share, $3.3 million; the sale of Urban Edge, $1.9 million. The delta between the dividend on pre- and our shares of their earnings, another million, and then there were other items that makes $0.07 or the [delta and] $9 million -- $15 million. So all those items continue in Q4. And with that, and now with even the Forever 21 effect in Q4, which we didn't normally talk about the 3 40, other pluses and minuses leave us comfortable at 3 40.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [12]

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Okay. That's helpful. Just one last question on Farley. I mean, you have a lot of interest in the building, from what we heard, there's been some press reports on it. Can you just give a sense (inaudible) on getting the building leased?

And then in terms of of the yield that you're giving there in the supplemental, I don't think that's been updated in a while. We've heard you've kind of been pushing rents in the building. So is that -- is there upside to that yield in the building?

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Michael J. Franco, Vornado Realty Trust - President [13]

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Look, I think there has been a lot of press speculation about Farley and there's quite a bit of interest in the asset. I think as we've talked about on prior calls, it's a totally [unique] asset, wish we had 5 of them, and so the interest has been high. We're not prepared to comment on when a deal might get done in terms of that deal. But even if we sign a lease in the near term, the cash flow is not going to start probably until beginning of '22. So the interest is high, I think the yield that we published in the last quarter was our best assessment as to where it will end up. We're not prepared to make any adjustments to that. Obviously, we have some sense based on some dialogue at that time and I think the interest in the retail is significant as well. So we have to let it play out. But I think what we put in the third -- second quarter numbers was -- continues to be our best guess as to where yields will end up.

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Operator [14]

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The next question 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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I guess, Mike, Michael, when you look through kind of the retail tenant list, some of these things are kind of popping up that maybe you weren't expecting. Just -- what -- like, how do you sort of look at the watchlist today? What other potential tenants, maybe without naming specifics, are you sort of worried about moving into 2020 at this point?

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Michael J. Franco, Vornado Realty Trust - President [16]

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Look Steve, the retail market is soft. Tenants' performances are not what they were a few years ago and so generally, we watch everybody. 6, 9 months ago, Forever 21 was struggling but we didn't initially expect them to file bankruptcy. So, I don't think there's necessarily anybody that we look at that we would view as in the same position today, but we're constantly watching what may happen with different retailers. So there's risk in the sector. We do have, I think, on average, about 8 years weighted average term on our leases in retail and we continue to view that durability as a real strength. And so no specific names that I would mention, but everybody [is mainly focused on] .

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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. And then may be just a question for Glen. I mean, you guys realized don't have a lot of space coming due that Michael outlined. But just sort of is the tenant psychology today as tenants are thinking about their '20, '21 may be '22 expirations. And are you seeing more tenants coming to you sooner in order to lock in deals? I mean, just sort of what is that dynamic today?

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Glen J. Weiss, Vornado Realty Trust - Executive VP of Office Leasing & Co-Head of Real Estate [18]

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I think the tenure of the market very good, Steve. We're seeing a lot of tenants, #1, expanding in the portfolio. A lot of tenants looking for new space in the portfolio. We do see tenants who have expiring leases forward who are looking at our development in Penn specifically. And so I would tell you, I think the market overall is healthy, the tenant demand is strong and the tenants are still very active across all the submarkets.

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Michael J. Franco, Vornado Realty Trust - President [19]

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I would just add, Steve. Look, I think, as we look at the pipeline, we're chatting here a few days ago, and I think the activity really across all submarkets, whether it Midtown, Midtown South, Penn District, we have good action across-the-board and I think that's reflective of the fact that the tenants are growing and the market is healthy.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [20]

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And then just lastly, could you just comment on the TI leasing commissions. I think it looked a bit elevated on a couple of areas. I think in New York, it looked a bit high. I was just wondering if that was a specific deal or kind of what you're seeing on the concession front?

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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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It's Glen. During the quarter, particularly, this quarter, we had the bulk of our leasing via our turnkey program, so we built space for tenants. Those leases had relatively short term at around 7 years on average, on our leasing. And the way we look at the turnkey is we build them today, we lease them for the term and there's definitely a great value in the next generation of the leasing of those spaces. So that's why you see that elevated TI number this quarter.

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Operator [22]

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The next question comes from Jamie Feldman with Bank of America.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [23]

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So I know you guys kind of confirmed the 3 40 for FFO, but I think on the last call you talked about a low-200 range for street retail. Are you still comfortable with that outlook? Or is that changed?

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Joseph Macnow, Vornado Realty Trust - Executive VP, CFO & Chief Administrative Officer [24]

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Jamie, that is the number that Steve referenced on the last call. Look, I think that number may still be fine, but there are some things in flux. Obviously, Forever 21, we had a handshake deal. Until that's done we will see how that plays out, [both in general as a company] and that specific arrangement, that can have an impact. Yes, we sold a couple of assets, including [340M] , for example, that comes out of that number.

I think the last thing I would say is that, we are -- we're now projecting to take the retail on the Rail Road Concourse out of service next year for a couple of years, while we redevelop the concourse. And so when that comes back, we're going to have additional retail square footage, which we think is going to be in very high demand based on that retail today and the income will be higher, but we're going to lose $12 million per year temporarily. So there's a couple of things that are moving around, again, some of those temporarily, we will see how Forever 21 plays out. But I think the general number that Steve outlined on the last call still appears fine.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [25]

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Okay. And then I thought I heard you say, you're in talks for 400,000-square foot headquarter deal at 2 Penn. Can you talk more about that potential lease? And then just timing, like a 400,000-square foot block, how that would fit into the building and how would we think about the ins and outs over the next couple of years, if that hits?

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Glen J. Weiss, Vornado Realty Trust - Executive VP of Office Leasing & Co-Head of Real Estate [26]

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The lease is out, we expect the lease to get signed in the next few months. The tenant would start their construction once we deliver the redeveloped building to them. So it's a deal -- it's a deal we like a lot and we're going to try to close in the next few months.

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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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Okay. And then finally, from me, just I know you had said you're seeing expansions, pretty healthy market conditions. Can you just talk about your view of kind of traditional Midtown versus Midtown West. It sounds like a lot of the activity is Midtown West, but if the tenants you're talking to, do end up moving to the West side, what do you think the outlook is for more traditional Midtown and market conditions there?

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Glen J. Weiss, Vornado Realty Trust - Executive VP of Office Leasing & Co-Head of Real Estate [28]

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If I can speak in terms of our portfolio, Jamie, in Midtown, and we are still seeing expansions in the buildings in Midtown whether it's at 1290, 90 Park, at 280 Park and 887. So we are seeing expansions [toward] our Midtown portfolio. We, in our portfolio, have not lost the tenant to the new developments on the West side. So I can't really specifically speak about others losing their tenants, migrating there, but we're seeing expansion still healthy within our portfolio in the Midtown district.

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Michael J. Franco, Vornado Realty Trust - President [29]

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Yes. The only thing I'll add, Jamie, is that I think we've talked about this now on a few calls, is that in order to compete effectively in this marketplace, your buildings have to be modern from an infrastructure standpoint, technology standpoint amenity standpoint and we've got ahead of that, starting many years ago. All of our buildings in Midtown have been renovated. We attracted top [slice] tenants to anchor those redevelopments. And so when you look at our assets, notwithstanding the activity levels which are healthy on them, their generally put to bed for a while. So you look at the leasing activity in the last quarter, this quarter, next quarter, we alluded to, there's not a lot of roll because we did the work, put those buildings to bed at healthy rents and strong tenants. So I think where you're going to see some impact is from the landlords that have either inferior locations or functionally obsolescent assets, where some of the move outs are going to occur beginning in 2, 3, 4 years.

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Operator [30]

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The next question comes from John Kim with BMO.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [31]

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A question on Forever 21 rent cut. Is your expectation that you will re-lease that space at a meaningfully higher rent? Or is there new rents for the respected [indiscernible]?

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Michael J. Franco, Vornado Realty Trust - President [32]

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A little trouble hearing you at the end there. Just repeat the question, please?

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [33]

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Sure. Do you foresee releasing the space of Forever 21, at higher rents? Or are the new rents really reflective of where the market base are today?

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Michael J. Franco, Vornado Realty Trust - President [34]

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No. I would the say let's take them individually, right? On 1540 Broadway, our expectation is, as I said, given the quality of that space that we should be able to achieve a higher rent than what the deal is with them. And 435 Seventh was a temporary deal. If we went and leased that the long term, that rent will absolutely be higher. But again, we want to keep flexibility there. And so we're balancing flexibility with how much rent we're going to get. And so frankly, I know you guys care quarter-to-quarter what the rent is there. We don't really care what the rent is in the next -- 4.5 years, as we continue to put our plan together for that block.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [35]

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Okay. Michael, you mentioned 65 tenants potentially looking for up to 60 million square feet in Manhattan. Do you have any commentary on how much of that is new demand versus just musical chairs?

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Glen J. Weiss, Vornado Realty Trust - Executive VP of Office Leasing & Co-Head of Real Estate [36]

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It's Glen. It's a mix of type of tenant whether demands expansion, relocation, it's a mixed bag across all the industry sectors, across all the submarkets. I wouldn't necessarily pinpoint one particular flavor of activity within that subset.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [37]

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But what about...

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Michael J. Franco, Vornado Realty Trust - President [38]

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John, one thing I would add is you see that really, I think the space [issue] right is the growth from the tech companies, which I don't think -- most people didn't see the magnitude, that was going to occur this year and [you can see the dialogue] going on it. Those are major impacts that tend to happen, and I think with much greater speed than a lot of the other leasing [attritional tenants] . So we continue to see a migration [and] once those tenants get here, their expansion has been pretty significant.

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Operator [39]

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

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [40]

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Two sources and uses questions. First, can you remind us, again, when you have access to the preferred equity from the retail deal you did earlier this year, and then what you expect to be the remaining after-tax proceeds at 220 Central Park South?

And then the next sources and uses is, how do you think the JPMorgan news ultimately plays out? Does this result in a stable headcount in New York City, or is it down 20%?

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Michael J. Franco, Vornado Realty Trust - President [41]

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So John, I'll let Joe answer the after-tax proceeds on demand on 220.

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Joseph Macnow, Vornado Realty Trust - Executive VP, CFO & Chief Administrative Officer [42]

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Okay. We'll start with that, John. It's Joe -- excuse me?

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [43]

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Where's Steve?

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Joseph Macnow, Vornado Realty Trust - Executive VP, CFO & Chief Administrative Officer [44]

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Sitting next to me.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [45]

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Good.

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Joseph Macnow, Vornado Realty Trust - Executive VP, CFO & Chief Administrative Officer [46]

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We have $1.9 billion in future sale, the lion's share of which is under contract. There's another $100,000 of taxes against that $1.9 billion, and another $100,000 of cost to complete the project against that $1.9 billion. So net of all cost, net of all of taxes from this point forward, we'll be receiving $1.7 billion plus/minus from the remaining sales -- closings of the sales at 220.

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Michael J. Franco, Vornado Realty Trust - President [47]

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So John, just on your.

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Unidentified Company Representative, [48]

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You're all over the newspapers tomorrow.

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Michael J. Franco, Vornado Realty Trust - President [49]

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Your other question, John, so on the retail preferred, we have not said specifically in the past when that can be refinanced and I think we continue to not want to state that -- there's some tax sensitivities to that but we will, in due time, be able to refinance and redeem that retail preferred. But thank you for pointing that out. That is another significant source of capital that we will have access to in a few years.

Yes, in terms of the JPMorgan announcement. I think the most important thing to remember is that they're building a significant world class headquarters on Park Avenue right now and have recommitted to New York City for doing that. So this is their home. I don't think it's unusual for a company [to look at] the banks to move back-office personnel outside of New York whether that's into New Jersey or into other cities, and so I think this is along those lines. But I haven't heard any announcements on the percentage of the headcount, what not. We all have to sort of to read that news, but there's ebbs and flows in the city in terms of companies and how they grow and manage their headcount. I think JPMorgan is just doing that.

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Operator [50]

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The next person 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 [51]

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So 2 questions. First, you guys obviously talked a lot about the big tech demand this year that surprised the market run and, at the same time, [slog] is busy contemplating redeveloping 1 Madison. You guys have the Farley, but at the same time you have the forever Hotel Pennsylvania. So are there -- is there sufficient demand in the market where you guys would start to, I don't know, if it's dust off the old plans may be reconceive, but where that project starts to be something that may actually come to fruition, given the tech demand in the city and its location?

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Michael J. Franco, Vornado Realty Trust - President [52]

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We are -- undoubtedly excited about the Hotel Penn site. We think that's a -- we are done transforming Seventh Avenue with PENN1 and PENN2. We think it's going to be the best development site in the city. But time is not here yet. We're going to finish developing PENN1 and PENN2, and we think that follows that after the fact. So you're guesstimating what demand is going to look like in 2, 3, 4 years, [knowing and you can] effectively do that. But we think it's going -- on the plan we have for that is going to be unique. We think that will appeal to all sorts of tenants, tech or otherwise.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [53]

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Okay. And then the second question, just going back to the questions on retail rents. Topshop, you mentioned a cut to rent, the IKEA replacement for Sears out in Rego Park is a cut from what Sears was paying. So it would almost sound like rents for street retail are -- they're either coming down dramatically or these were special circumstances where they were so far above where the market had moved or maybe it's just the amount of space. So maybe you can just give a little bit more color on the dramatic cuts that we're seeing in these locations versus where you think sort of generic -- your generic, your average street retail lease would reprice?

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Michael J. Franco, Vornado Realty Trust - President [54]

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Look, I think we've talked about frankly, the last, at least, 2 years that street retail rents and Steve was really -- I think, he was early in saying it, and that the market has been corrected, right? The retailer demand is down and therefore rents followed. I think it's probably been most significant in Madison Avenue and SoHo. And again, the deals that were signed at high watermarks we're seeing those rents come down. So the Madison could be down certainly well north of $1,000 and certainly, below that lower $1,000 of today. So the market has been correcting and did we bottom? The answer is in some submarkets, we're close and maybe a couple others, not necessarily yet. But I think it's case by case, right? It depends on when the lease was signed. We have many leases that are still below market. We have obviously some that are above market. Depends on what the [advantage of] those leases were. And obviously, when those leases roll, can't predict where the market will be at that time.

But in some cases, the asset maybe better used. So Topshop, SoHo, that was entirely retail. Today, the best answer may be that the ground floor stays as retail and the upper floors become office and the income is not that different. We have office space at the Crosby street address, we think it is going to be very attractive and we had interest already. So I think it depends on the asset, depends on the submarket but, clearly, rents have been corrected.

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Operator [55]

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

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Vikram Malhotra, Morgan Stanley, Research Division - VP [56]

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I have 2 questions. So just one following up on street retail. Any update on the Massimo space or the Madison assets?

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Michael J. Franco, Vornado Realty Trust - President [57]

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Nothing really to report on either one of those. We have some tenant dialogue going on Fifth Avenue but nothing is imminent. Retailers continue to be cautious and are concerned about making large commitments, which Fifth Avenue generally is. So nothing to report there. I think Madison is a little bit different where Madison is slow. There's no share going. The demand on Madison is probably the lowest of any submarkets in the city. And so that's going to continue to take some time to fill up.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [58]

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Okay. Great. And just, I just want to clarify on the 3 40 and the run rate going into next year. Joe, should we assume that therefore the FFO in 4Q is closer to $0.80 to hit that 3 40? And do you still anticipate recouping a lot of those losses heading into 2020?

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Joseph Macnow, Vornado Realty Trust - Executive VP, CFO & Chief Administrative Officer [59]

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Look, so far, we've talked about Forever 21. We've said that the rent at share is $20 million, and that's going to be diminished by at least half. We talked about the Long Island Rail Road Concourse coming out of service next year. Neither one of those things were included when we talked about the 2020 versus 2019. Now, as you know, we don't give guidance. But that being said, as a result of that negative effect of Forever 21, additional added service at PENN1 and PENN2 to support our development plans, including LIRR lower expectation from Hotel Pennsylvania. We no longer believe that 2020 will be a substantial bounce back year. So you're going to wait a little longer.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [60]

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Okay. That's helpful. I'll follow offline.

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Michael J. Franco, Vornado Realty Trust - President [61]

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Vikram, I would just add to what Joe said though, which is, notwithstanding, may not be a bounce back year. And I know, you and others are very focused on next few quarters. I think as we look at our business, our big growth engine is Penn District, and we have tremendous confidence in what we're doing there. The early reception has been very positive. And so that's going to take some time to kick in. But it's going to be meaningful when it does. And obviously we published the information on the first few redevelopments last quarter. And so we feel good about this. So it's going to require a little patience, but the growth is going to come quite meaningfully.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [62]

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No, that's great. And I just want to just clarify, just on the 3 40, Joe, the run rate. Is that 3 40 still intact for the reported full year? Or is that -- was that a run rate sort of number?

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Joseph Macnow, Vornado Realty Trust - Executive VP, CFO & Chief Administrative Officer [63]

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No. That's the number we expect to publish at the end of this year for calendar 2019.

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Operator [64]

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And the next question in the queue comes from Manny Korchman with Citi

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [65]

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It's Michael Bilerman with Manny. Just a few follow-up questions. Michael, you mentioned that 400,000 square foot headquarters lease and I don't know if Glen or David or yourself want to answer this, but I guess -- when do you sort of disclose that information to The Street? Because I got to assume in your comment that there was a lot more in the works. And I would assume that Farley and may be other stuff at PENN1 or PENN2 and other buildings. So I guess at what point in the negotiation do you feel comfortable making a statement like you did about a significant value-creating lease like the one you mentioned?

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Michael J. Franco, Vornado Realty Trust - President [66]

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Look, Mike, we'll announce that when the lease is actually signed, I think that's the general view. We have good dialogue going on the assets right now. But the actual detail will come with the finalized lease.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [67]

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But I guess, in this case, this lease is out for -- I guess you can't talk about on the call, it's held for signature, I just didn't know at what point in the process, let's say, a lease at Farley would be and at what point you would be talking about that yields and about real?

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Michael J. Franco, Vornado Realty Trust - President [68]

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Yes. Just when it's signed, Michael.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [69]

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So in this case, the 400,000 is signed and you're just going through...

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Michael J. Franco, Vornado Realty Trust - President [70]

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No. 400,000 there is we're negotiating the lease.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [71]

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So I guess, in the other leases that you're negotiating, how sizable are those and where do they stand in the process, relative to this 400,000 at PENN2?

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Michael J. Franco, Vornado Realty Trust - President [72]

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I think Michael, look, I think you're trying to pin down on exactly where we are on this. I mean, I think, they're really nothing more to say, right? I think higher level, I think what we've said is, it's sort of all that we're prepared to say right now. When the leases get signed, we'll announce those. You'll know about those. But until we're done, nothing's done. And beyond what we mentioned specifically is again, still just active dialogue and negotiation, not ready to be reported.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [73]

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Right. It's very exciting to hear about the PENN2 lease. I was just trying to understand the sort of policies that you have in terms of disclosing it. And that was more of trying to get out...

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Michael J. Franco, Vornado Realty Trust - President [74]

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We're very excited too, Michael. But you got to wait a little bit.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [75]

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Okay. May be a question for Steve. You've not been shy about where your shares trade relative to the inherent value of the asset base and you've been extraordinarily aggressive over the last 6 years at simplifying a lot of the complexity in merge, sales, completing the construction at 220, doing the Farley buy-out and all a variety, a long list. I guess, where is your head today in terms of further sort of potential sales, and most obvious would be something on the office side, either New York or outside of New York, either in a joint venture or outright, or is all the focus right now on Penn Plaza and the redevelopment efforts?

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

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All of the above. I'll say a couple of things. #1, everything's on the table as it has been for the last number of years. #2, we are certainly not done yet. #3 is we definitely are not satisfied with our stock price at all. And just I would like to throw it back to you, for example, you said asset sales outside of New York and, I guess, you're referring to San Francisco or Chicago. I will remind you that for the last 5 years, you and your brethren have been begging me to sell San Francisco. And in the 5 years it had gone up in value for over $1 billion, since we continued to hold it. So everything's on the table. We're not done yet. And we're actually surprised by our stock price but this is how the market speaks, and we're not done yet.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [77]

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Joe, just in terms of 220, the $1.7 billion, is that also include the basis -- the money that you have in the building. So it's effectively, we should think about [indiscernible] cash...

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [78]

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Michael, Michael. Joe spoke a little bit out of turn, trying to be very, very thorough. The answer is that we have published numbers which show that the sellout in that building is about $3.3 billion and the cost of that building is about $2 billion, okay. So you can do the math from there. The important thing is that all of -- we paid off the indebtedness. So all of the closings that come in the future go into our treasury and go to finance Penn Plaza. So we've announced that we have closed $1.2 billion or $1.3 billion, you can deduct that from the sellout. You can do the math.

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Joseph Macnow, Vornado Realty Trust - Executive VP, CFO & Chief Administrative Officer [79]

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My math was consistent with what Steve said. Okay. But you can't go backwards now.

One of the reasons -- I've been accused of being secretive with respect to that property. That's really not the case. We have a very important clientele. And I think the word discrete is more important. The residential real estate market is a very gossipy market. So information that gets into that market is not helpful.

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Operator [80]

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The next question in the queue comes from Daniel Ismail with Green Street Advisors.

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Daniel Ismail, Green Street Advisors, LLC, Research Division - Analyst of Office [81]

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Just a quick question on New York city office cap rates. Given the movement in the 10-year [is more sales that] we've seen in New York. Where we stand today, earlier did you guys put a 4.5 cap rate on your office holdings. Do you think we drifted higher or lower since that time?

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Michael J. Franco, Vornado Realty Trust - President [82]

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I don't know that I would change it, Daniel. But obviously, we go a once a year, where we visit the [Times] and see where the markets are and what we hearing from capital sources. I do think that the fact that interest rates have trended back down, and appear to be stabilizing at lower levels, I think is bringing capital further into real estate is a general matter and I think that a number of capital sources we talked to, I think we view New York as there's value here, right. So cap rates probably widened a bit over the last year or so. And given where the tenure is and you can finance on a reasonable leverage basis generally below 4% right now, so that's a very attractive cash on cash yield. And so as the hedging cost have come in for a number of the capital sources abroad that are -- that's an important issue. I think you're seeing capital sources refocus a bit, not just in the U.S. but on New York as potentially a value play, given value has been frankly pretty flat moving a little bit down in the last few years. So there's a lot that goes into what we publish. Not just where the market is but how much growth is in a particular asset or vacancy or whatnot. So we'll revisit that as we get closer to when we publish it. But I think today directionally it's not far off.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [83]

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And you guys have been hustling that New York is overpriced. I'm not sure we agree to that. So if you look at comps, the comps pretty much support the cap rates that we have been using. The volume of activity in the capital markets has definitely been declining. It's been declining all over the country and all over the world. So it's a very specific asset-by-asset calculation.

Now the NAV calculation is not intended to be nor can it possibly be rigorously ruthless, ruthlessly accurate correct number to the penny. It's a range. And so the volume is down. Pricing is pretty much holding on specific assets. And we think that you're a little bit too pessimistic on your thinking about New York. May be even more than -- may be even significantly too pessimistic.

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Daniel Ismail, Green Street Advisors, LLC, Research Division - Analyst of Office [84]

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All right. That's fair. May be just a quick follow-up on PENN1 and PENN2 based on some earlier comments. You mentioned wanting to give the flex space there yourself. Is that a result of any of the turmoil we've seen at Wework and wanting to reduce operator risk? Or is that a cost efficient [light] to capture some of the [upside in flux] what we're seeing and keep sort of that tenant [appearance] in-house?

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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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It's Glen. We think in Penn, it's important to create the flex space for our portfolio, for our tenants, particularly at PENN1, the big building, 2.5 million feet, more than 200 tenants are in the building, we're always seeing tenants needing agile space, whether it's swing space, expansion space, short-term band-aid space for whatever reason. So we think in Penn, doing the co-working, the flex space is going to be a huge benefit for us and our tenants. And, of course, with that, we do expect that to be a profitable operation, which is why we decided to do it at PENN1.

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Michael J. Franco, Vornado Realty Trust - President [86]

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And then when you think about -- this is probably the centerpiece of the Penn District. We want to control exactly what goes on here, create it exactly how we want it [increase rate buy] . And so there is no one better to do that than ourselves. I think we've proven that over the years in what we've done. And so -- and when you think about, when you lease to a co-working operator, you're generally providing the bulk of the TIs and getting a lease and then you'll get a little of the upside but you're not getting lot of credit and you have a capped upside. So here, we're going to invest the capital exactly the way we want it and create the right environment and capture the bulk of the upside, and so for us, it's a pretty straightforward answer. And that's always been the plan.

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Operator [87]

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

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [88]

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Just a quick follow-up on that last question. I mean, have you -- what -- I know it hasn't been that long, but what changes have you seen in the market since WeWork pulled their IPO in terms of demand for co-working or just tenant behavior or discussions?

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

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I haven't seen any change Jamie, no change.

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Michael J. Franco, Vornado Realty Trust - President [90]

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And obviously we signed new leases in.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [91]

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Well, I guess just the attitude towards co-working and flex leasing. It's certainly seems like -- the product, this cycle seems a lot more talked about and tenancy more interested.

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Michael J. Franco, Vornado Realty Trust - President [92]

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Look, I think it's, the way that people work, how am I going to use that space, I think that's here to stay. It's one of the reasons we're offering that type of space in the Penn District. I do think, how [hungry] would be that there's been this big discussion of shift toward enterprise from these co-working companies, particularly WeWork. And I think those large enterprises are going to focus even harder on who their landlord is. So I think that [accrues to] the traditional landlords quite a bit like us. And so the desk-by-desk and small companies, I think co-working will continue to be an alternative for a number of those. But I do think that the shift will tender back a little bit.

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Operator [93]

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We have no further question at this time. I will turn the call over to Mr. Michael Franco for any closing remarks.

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Michael J. Franco, Vornado Realty Trust - President [94]

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Thank you, everybody, for joining the call. We look forward to seeing many of our investors out at the NAREIT conference in Los Angeles on November 12 and 13. And our next earnings call for our fourth quarter earnings will be on Wednesday, February 19, 2020. And we look forward to your participation, again. Take care.

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Operator [95]

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