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

Q2 2019 Vornado Realty Trust and Alexander's Inc Earnings Call

NEW YORK Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Vornado Realty Trust earnings conference call or presentation Tuesday, July 30, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barry S. Langer

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

* Catherine C. Creswell

Vornado Realty Trust - Director of IR

* David R. Greenbaum

Vornado Realty Trust - Vice Chairman

* 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 Second Quarter 2019 Earnings Call. My name is Michelle and I will be your operator for today's conference. This call is being recorded for playback purposes. (Operator Instructions)

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

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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 second quarter earnings call.

Yesterday afternoon, we issued our second 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 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.

Let me start with a few comments on our second quarter financial results before giving some thoughts on the markets and our portfolio and the important new disclosure we provided on our Penn District redevelopments in our earnings release and supplement.

While FFO as adjusted on a GAAP basis for the second quarter was $0.91 per share, $0.07 lower than last year's second quarter, cash basis FFO was up 2.1%, reflecting the underlying strength of our core business with strong same-store results, which I will review shortly.

Let me explain the GAAP numbers as they contain a little noise. First, this year so far, we have sold assets which aggregated almost $3 billion. Notably, the 45.4% stake in our Upper Fifth Avenue and Times Square assets and our stock interest in Lexington Realty Trust and Urban Edge Properties. Even though these sales were applauded by all and they were done at NAV and should have been accretive to our share price, earnings go down as a result. As an aside, we were surprised and disappointed by the stock market's ho-hum reaction.

FFO decreased by $10 million or $0.05 per share in the second quarter due to these sales, partially offset by $5 million or $0.02 per share of interest savings from the retirement of the 5% $400 million unsecured notes, so that accounts for a $0.03 per share net decrease.

Next, FFO was reduced by almost $0.02 per share from the non-cash impact of onetime equity award issued to the new leadership group net of the savings from the accelerated vesting of restrictive stock awards in the first quarter.

We also had a couple of retail tenant issues impact our second quarter results. At the end of June, Topshop closed all its U.S. stores, including our 2 locations at 608 Fifth Avenue and 478 Broadway, following the Topshop U.S. retail operating entity being placed in U.K. administration and the commencement by the U.K. administrators of a Chapter 15 case in New York. While we were paid rent to the end of June, we wrote off the straight-line rent balances associated with this tenant. The increase in the straight-line write-offs in this year's second quarter over last year's second quarter amounted to $9.9 million or $0.05 per share, which is included in both same-store NOI and comparable FFO results, primarily attributable to Topshop at Broadway.

We treated as noncomparable the write-off at 608 Fifth Avenue of the straight-line rent and the right of use asset at this location. Under the new lease accounting standard, on January 1 of this year, we recorded as an asset the present value of the rents we pay under this 14-year nonrecourse building and ground lease. We have the right to cancel this nonrecourse ground lease.

In terms of the bottom line impact of Topshop, upon such cancellation of the ground lease at 608 Fifth Avenue, we will no longer have the asset. And in such event, FFO will be permanently reduced by $10 million per year, which will nick our NAV by roughly $1 per share.

At 478 Broadway, FFO will be temporarily reduced by $8 million per year from the vacancy. This is great space which we will release in the ordinary course. We may convert some of the upper floors to office given the attractiveness of this bull's eye location in SoHo to creative types.

So to summarize, the aggregate of all these items that affected second quarter comparable results was a $0.10 per share decrease. This was partially offset by $0.03 of growth in the core business, which I will cover in a minute.

In our July 12 press release, we covered the details of the noncomparable items in the quarter, which includes a $2.559 billion net gain on the retail joint venture, the previously discussed noncash charge on 608 Fifth Avenue which was $77.2 million, and an $88.9 million after-tax net gain on unit closings at 220 Central Park South.

Speaking of 220 Central Park South, sales continue apace. To date, we have closed on 38 units for net proceeds of $1.03 billion, and earlier this month, paid off the remainder of the $950 million loan. The property is now debt-free. Closings will continue throughout 2019 and 2020. And importantly from here, we will retain all future net proceeds, which will be redeployed primarily into the Penn District redevelopments, turning this capital into highly accretive ratings.

On July 11, just after the close of the second quarter, we sold our interest -- our 25% interest in 330 Madison Avenue to our partner at a $900 million valuation, netting us approximately $100 million after our share of the mortgage. This asset was the subject of a buy-sell. And at the pricing offered, we concluded it was a better sale than a buy. Over our 20-year hold period, we made 8x our investment. And by the way, we have quite a few like this. The taxable gain related to this sale coming on top of the big retail deal will increase the special dividend requirement at year-end, which, as of now, looks like it will be approximately $1.75 per share.

To give you some visibility into comparable FFO for the second half of the year, the aforementioned asset sales after the unsecured note repayment will reduce FFO by approximately $21 million or $0.10 per share and the lost rent from Topshop will reduce FFO by approximately $13 million or $0.06 per share. We expect 2019 will represent a trough year for comparable FFO per share.

As we continually say, cash NOI is the most important metric in our business. That's how real estate is traditionally valued. Company-wide, our second quarter cash basis same-store NOI increased by a healthy 4.3%, broken down as follows: New York office was up 3.3%; Street retail was up 4.2%; theMART was up 15.5%; and 555 California Street was up 12.9%.

Let me now turn to the New York market. New York's deep pool of talent and the fact that they want to live and work here, coupled with record venture capital investment, has led to enormous technology sector employment growth of 80% since 2009. This has played an important role in attracting large tech tenants to the city and continues to feed their insatiable appetite to grow their footprints in Manhattan. These tenant finally want to be in New York, they need to be in New York. Just think of the names in the last 90 days who have either committed or are actively looking for space. It's a Who's Who. In fact, almost all the well-managed companies in every other industry are copying this template in their efforts to attract the best talent.

As a result, the New York City economy continues to enjoy sustained job growth, driving strong tenant demand for office space. Private sector jobs increased 54,000 in the first 6 months as compared to 76,000 for all of 2018, with 6-month office sector jobs increasing 12,000 as compared to 20,000 again for all of 2018.

Overall, our office portfolio is in great shape and continues to perform well. Occupancy stands at 96.7%, with only 132,000 square feet of remaining expirations in 2019.

Our Midtown portfolio, which has been completely modernized and redeveloped for the long term, remains very resilient and highly sought after by tenants. In the second quarter, our leasing team completed 221,000 square feet of office leases and 29 separate transactions in New York at a very healthy average starting rent of $83.54 per square foot. Our mark-to-market rents were positive 3.3% cash and 5.9% GAAP.

While the first half leasing activity of 617,000 square feet is on the wider side for us historically, realistically, our portfolio is substantially full. But there is more to the story. We have a robust leasing pipeline, with more than 2 million square feet of deals in various stages of negotiation. We are experiencing strong leasing activity across all submarkets from tenants in all industry sectors. We have our first leases out at the recently delivered 512 West 22nd Street, including 1 with a leading media company, all at triple-digit rents.

Now turning to the next major driver of growth and value creation in our business, the Penn District. First and most importantly, yesterday, we published on Page 8 of our earnings release and Page 30 of our supplement the projected costs and returns for the Farley Building, PENN1 and PENN2 redevelopments. In total, these 3 projects comprised 5.2 million square feet, consisting of an 845,000 square foot new build at Farley and 4.3 million square feet of renovated and new space at PENN1 and PENN2. The redevelopments will be transformative for these buildings and for the district overall. Please see our latest renderings and videos of these projects on our website.

We are projecting to spend $2.2 billion to redevelop these assets, along with other district-wide improvements, of which we have spent $514 million to date. We project these redevelopments will generate $183 million of incremental cash NOI on stabilization, a very strong 8.3% initial stabilized yield on costs. This is before ground lease rent reset on PENN1 in 2023, which will be comfortably absorbed by that asset's increased NOI.

Overall, we expect to replace $60 plus per square foot office rents at PENN1 and PENN2, with $90 plus per square foot rents and expect to achieve triple-digit rents at Farley. These redevelopments will begin to contribute to earnings in 2022 and accelerate over time as the projects are finished and leased up. As we have mentioned previously, the capital for these projects will be funded from the net proceeds of 220 Central Park South without the need for any new debt, which will be very accretive to earnings. We expect that this will put our earnings growth at the head of the pack. Notably, the projected returns in these projects do not include the knock on effects on all of our other existing assets in the Penn District and the multiple additional development opportunities we control. All will clearly benefit enormously.

As the Penn District transformation takes hold, we believe that the Hotel Pennsylvania will be one of the best development sites in the city. Once redeveloped, we are confident the Penn District, which is located directly on top of all major transportation serving the city and region, will become the heart of the new West Side where companies will plant their flag in order to attract and retain talent by creating new workplace environments in our buildings.

Looking towards 2020, our lease expiration stands at 1.1 million square feet, with 560,000 of this amount coming at PENN2, primarily McGraw-Hill, which will be taken out of service as this redevelopment kicks into high gear. It is here at PENN1 and PENN2 where we are creating a unique campus and we'll be providing today's workforce with the office of tomorrow. The scale of our 4.3 million square foot campus at these buildings enables us to provide our tenants with an unrivaled amenity package. These buildings will operate and feel much like a full service hotel, with fitness and wellness centers, abundant conferencing facilities, large town hall spaces, food and beverage facilities as well as many communal spaces to work alongside colleagues.

Anticipating our redevelopment program, during the second quarter, we signed a 38,000 square foot lease at PENN1 with a Fortune 200 company at a starting rent of $93 per square foot, a sign of things to come. This is a first-generation lease. If this lease would have been included in our mark-to-markets, the mark-to-market for New York Office would have been approximately 20% on a cash basis. In addition, both at Farley and PENN2, we are deep in negotiations with multiple large users for anchor spaces, all in the triple digits. All of this validates the unique nature of what we're delivering here and our underwritten pricing for space in the new Penn District.

In addition to the capital we are spending in the Penn District, the government is also investing an estimated $3 billion on various infrastructure improvements, including the Moynihan Train Hall, the West End Concourse, 34th Street subway station improvements and the new 33rd Street train station entrance. In addition, we have entered into a memorandum of understanding with New York State to redevelop the Long Island Rail Road Concourse under PENN1. This redevelopment will tie together Seventh and Eighth Avenues underground, dramatically widen the corridor and raise the ceiling height, allow natural light into the Concourse and substantially improve the user experience. Overall, we couldn't be more excited about what we're doing here.

At theMART in Chicago, occupancy was 94.8% at quarter end. We have strong leasing activity, with term sheets in negotiation for much of the 125,000 square feet of vacant space on floors 4 and 5, in addition to discussions with 2 large tenants regarding early renewals fueled by their expansion needs.

During the quarter, we completed 30,000 square feet of showroom leases at an average starting rent of $63.83 per square foot. Our mark-to-market rents were positive 6% cash and 14.9% GAAP.

At our 555 California Street complex in San Francisco, we are 100% leased. During the quarter, we completed a 30,000 square foot renewal with one of our blue-chip financial services tenants at an initial starting rent of $86 per square foot. Our mark-to-market rents were positive 12.8% cash and 32.2% GAAP. As an aside, we believe rents at 555 California Street are under market by say 25%, which will result in continued strong growth over the next few years as leases roll.

Finally, 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. I will also point out Forever 21 has hired restructuring advisers and is working with the mall owners to provide rent relief to help stabilize the company. They are a continuing tenant of ours at 1540 Broadway and 435 Seventh Avenue. Their lease at 4 Union Square expires this November and we chose not to renew them. We have released a portion to Whole Foods for an expansion of its store and are actively negotiating to release the balance of their space at higher rents. 435 Seventh Avenue is a new 5-year lease where they recently opened. At 1540 Broadway, we will likely participate with the mall owners for rent relief in some small measure.

Retail occupancy was 94.7% at quarter end, down from 97.1% last quarter, all due to Topshop and the Four Seasons restaurant. In the second quarter, we leased a total of 70,000 square feet of retail space, achieving mark-to-markets of 18.7% cash and 44.4% GAAP. The highlight was the significant 20-year 61,000 square foot renewal and expansion with Whole Foods at 4 Union Square South, the premier asset in that submarket. They are enlarging and remodeling this high volume store.

To conclude, we continue to maintain a fortress balance sheet with reasonable leverage and an abundance of liquidity today and growing over the next 2 years. Our current liquidity is $3.77 billion, comprised of $1.1 billion in cash, restricted cash and securities and $2.6 billion undrawn on our revolving credit facilities.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first caller in the queue is from Manny Korchman with Citi.

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

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Michael, I think you mentioned that 2019 would be a trough year for FFO, just given the bigger move-outs like McGraw-Hill and some of the retail vacancies that are going to come into the year. Can you walk us through why 2020 wouldn't dip versus '19?

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

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Joe?

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Joseph Macnow, Vornado Realty Trust - Executive VP, CFO & Chief Administrative Officer [4]

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Manny, it's Joe. Our forecast shows a substantial recruitment of this year's diminution next year. So when you did that pencil to paper and took Michael's one-timers that affect the rest of this year, that puts our comparable FFO in the 1 40s, somewhere -- I'm sorry, 3 40s, somewhere around there. Our projections are next year notwithstanding that a bigger piece of 2 PENN will be out of service is greater than that and don't forget we have 2 of the other West Side assets coming back into the service. We have growth in the core business. We have steps. We have many pluses offsetting those minuses.

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

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And then on Farley, it looks like the costs sort of on a pro forma basis ticked up versus where you had them the last time you talked about cost. Can you tell us what's going into that project that is maybe taking a little bit more money to get done?

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

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So Manny, look, we probably could have done a little bit better given the road map here, but I think the short answer is that the costs we publish now include the initial land contribution of $230 million, plus the amount we paid related, which was, I think, $41.5 million. So when you take the previous costs, which when you grossed up, was $800 million, plus the $230 million, plus related, et cetera, you essentially get back to the number we publish now. There are some minor scope changes, but net-net, you're pretty close with all those additions.

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Operator [7]

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The next question is from Steve Sakwa with Evercore ISI.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [8]

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I guess I wanted to first touch on kind of the ground lease at 1 PENN. I know you probably can't get into a lot of detail. But could you -- just whatever you can sort of tell us me about maybe what you're paying today and maybe how we think about the fair market value reset. And then are there any other ground leases in the next, say, 10 or 15 years that have any kind of renewals or resets that we should be aware of?

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

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The current rent at 1 PENN is $2.5 million. The reset is in '23. The term of that lease goes all the way out to 2098, so it is a true -- truly a long-term control over the land. It's a fairly standard fair market value reset, and we don't really have very much else to say about the -- where we will end up. One thing is that if you look at 1 PENN as an asset, the income is, in round numbers, the better part of $100 million today. We project that, that income is going to go up by another $40 million, $50 million-odd as a result of the redevelopment and neighborhood improvements. So somewhere around the reset date, the income will be on that building somewhere around $140 million, $150 million, maybe a pinch less, maybe a pinch more. So that, that asset can easily and comfortably withstand an increase in the land package.

We have 3 other ground leases that I can recall. We have 1 at 330 West 34th Street, which has a reset coming up in 2000 and -- in 2020, which will be -- it's a small asset, so whatever the rent reset might be, it's going to be immaterial. We have another one at 888 Seventh Avenue, which comes out for a reset at the end of the decade, of 2028, late in the 2020s. And we have a third ground lease at 909 Third Avenue which has an expiry of when, David?

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David R. Greenbaum, Vornado Realty Trust - Vice Chairman [10]

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2063. Flat.

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

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2063. And that is flat from now, there are no resets whatever. And the rent is an extraordinarily low and favorable number.

One comment about the ground lease reset process. There are plenty of these kicking around. And the recent resets over the last year or 2 have been, in my mind, pretty stupid. I mean you just take the Barney's reset and take a look at that, that has basically -- the numbers had no reality and basically will bankrupt Mr. Barney's. So we believe that there will be more reality in the reset process coming -- going forward. The issue that really caused the issue and the problem is that retail rents went crazy and therefore, land for retail became extremely inflated, hyperinflated, a bubble. And similarly, the condo market went crazy and that was a bubble. Those -- we expect those 2 bubbles are coming out of the market. So we can -- so the answer is, is that we believe that the resets will be more realistic, but whatever they happen to be, we can handle economically easily. And I think that's a pretty fulsome explanation, Steve.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [12]

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Okay. And then I guess the second question, just to kind of circle back on kind of McGraw-Hill and some of the move-outs. As we think about 2 PENN going into kind of redevelopment, you're showing about 1.3 million square feet in service of the kind of 1.6 million. Outside of the McGraw-Hill space coming off-line, is there really any other space in that building that needs to come off-line for you to effectuate this redevelopment?

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

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Joe, you have an answer for that one?

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Joseph Macnow, Vornado Realty Trust - Executive VP, CFO & Chief Administrative Officer [14]

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So Steve, your view, without getting too specific, we did disclose almost 300,000 square feet out of service today. We project that will go up to about 0.5 million feet at the end of this year. It will go up in 2020 as more of the building is taken out of service. Approximately 2/3 of the building will be taken out of service at peak. And then, of course, start to come back in as the offices are filled, the top 2 floors are rented, et cetera, et cetera.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [15]

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So -- but look, Steve, I know you can't do this because I know modeling is the essence of what you do. But I would ask you to look at the real estate business that we're in from a different point of view, okay? We will be taking this building and we will be transforming the building from $60 rents to $90 and $100 rents, okay? We will be taking the building which has -- is long of tooth and bringing it into the modern age and making it be one of the most competitive buildings in terms of a work environment for our tenants, okay? We believe that this will be extremely -- an extremely profitable activity. And I'm not even getting into how it will help to transform the entire neighborhood. It's an enormous undertaking. The building has 400-odd feet of frontage on Seventh Avenue from 31st Street to 33rd Street, all of which will look totally different when we complete it. You've seen the pictures. I'm sure you've seen the pictures.

So this will be -- in the interim, while we do our work, it will have a slight dilution, but the objective is, is to convert $60 space to $90 space which will be extremely accretive to earnings and NAV when we complete this in just a few years.

So I know that you have to be extremely interested and model what happens month by month and quarter by quarter. Our perspective is on the endgame as to what the product will look like when they're done and how it will increase our earnings and our NAV.

Furthermore, the market is -- has been -- the market, the tenants and brokers community have been extensively exposed to the product and they love it. And the example of which is, is that we are going to lease now with the first very large anchor tenant at a triple-digit number. So the building will be a success, it is a success and just while you have to model, take a look at the long view, okay? Thank you.

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Operator [16]

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

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [17]

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I was just hoping to dig a little deeper into your yield assumptions. Can you just talk about kind of what gives you comfort on those rents and what the leasing pipeline looks like in detail for these projects?

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

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We have -- Michael did a great job. Michael, thank you. I thank you for multiple reasons, okay? First, you did a great job, and second of all, I didn't do it. So Michael said in his remarks that we have executed a lease with a Fortune 200 company, so a large important company at PENN2 at $93...

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

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PENN1. PENN1.

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

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I'm sorry, at PENN1, pardon me. At PENN1 for $93 a foot. Now obviously, that's a significant gap from the market value or the perceived market value of the building today. The reason for that is, is that this tenant and the community believe in what we're doing and is willing to pay a fair price. So we believe the market price for the buildings with -- as we lease it up now and as we complete our redevelopment, is well into the 90s, okay? So think about where it is. Okay? We are in the West side of New York, which is the hottest area of New York. And we're directly on top of the transportation network. So we have that as a -- for a skeptic, we have that as a validation.

In PENN2, we have as validation that we are going to lease with an anchor tenant at a triple-digit number. With respect to Farley, we are in the market. I think one of the analysts wrote in a report that I read overnight that his -- while we haven't announced any leasing at Farley, his broker checks indicate that there is intense activity on the building. That is correct. The activity is at triple digits. And that's all -- I think that's all we have to say about these important negotiations going on in Farley.

So we have our view. We have the market's view. We have lead tenants executing leases at our underwritten numbers. By the way, there's nothing that says that we won't exceed our underwriting.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [21]

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Okay. Could you talk about operating expenses in those buildings and whether they'll change post renovation?

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

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Somebody has going to have to do that other than me.

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Michael J. Franco, Vornado Realty Trust - President [23]

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I mean, I think, Jamie, our general view is that -- not meaningfully, right? There's -- we're obviously expanding and dramatically enhancing the plazas, et cetera. So at PENN1, there's probably a little bit additional increase from an OpEx standpoint. Obviously, taxes go up in proportion with rents. But from an OpEx standpoint, I think the answer is not meaningfully other than maybe a little bit on PENN1.

Obviously, taxes go up in proportion with rents. But from an OpEx standpoint, I think the answer is not meaningfully other than maybe a little bit on PENN1.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [24]

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Let me handle the question slightly differently.

The increase in space rent that we are underwriting, almost all of it will drop to the bottom. What will not drop is a marginal increase in taxes and the maintenance expense of the building will remain basically the same. The building is the building. The cleaning is the cleaning. The common area is in the common area. So we believe that almost all of, call it, 90% or whatever of the increase in space rent will go to -- will drop the FFO.

By the way, that's an important comment. I say drop the FFO because there will be no interest against any of this incremental increase in income because we are funding it with cash coming in from 220 and other places off our balance sheet with no new debt between them, which is an extraordinary thing.

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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. Do I get another or that counted as my second?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [26]

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What's that?

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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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Do I get another question or that counted as my second?

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

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Yes, sir.

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

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So can you just talk about, anyway, Topshop bankruptcy? Just some thoughts on credit risk in the retail portfolio going forward?

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

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Well. Well, the first thing is that somebody asked the question about what, whether -- who's on our watch list, and the answer is everybody is on our watch list. So that's the way we run the business. The second thing is, by and large, almost all of the retailers that we do business with are large and important creditworthy companies. The issue is not their creditworthiness, although Topshop was obviously an issue. And Forever 21, by the way, is a little shaky. But the issue really is like what happens when the leases expire. So the answer is that we have -- we have a few retailers, of course, as everybody does. But by and large, the credit of the portfolio is pretty cool.

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Operator [31]

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

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [32]

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On the incremental cash yield of 8.3% at Penn, can you clarify what -- how you calculate that number? Is it new rent over incremental cost, or is it the incremental rent over the incremental cost?

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Michael J. Franco, Vornado Realty Trust - President [33]

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It's basically the -- Farley is a new build, right? So that's NOI over the budget. And then for the balance, it's the incremental NOI over the costs to be spent.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [34]

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Okay. So the numerator would be the $30 difference in rents between 60 and 90 that is right over there?

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Michael J. Franco, Vornado Realty Trust - President [35]

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That's right. That's right. (inaudible) is decent, right? It's -- the incremental rents multiplied by the square footage. Obviously, we're adding some square footage at PENN2 with the addition of the bustle and then converting some of the top 2 floors from mechanical to office. But excepting that, it's the incremental rent with a slight leakage for taxes and OpEx.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [36]

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Okay, great. And can you also describe what is in the $100 million of districtwide improvements? Are those investments in your assets or is that infrastructure cost basically?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [37]

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Principally common area in between the buildings, the -- putting plazas and plinths in the common areas and not inside the building. So it's principally exterior work. It includes safety bollards, it includes some other miscellaneous improvements in -- connecting the building.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [38]

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Has that increased more than you expected or was that within budget?

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

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This is the first time that we had published anything about this. And it was -- we thought it was appropriate to list it in the budgeting that we released, but we can't allocate it and we didn't allocate it to any specific building. We didn't allocate a return on it either, so we just put it in together as part of the net -- as part of the neighborhood block.

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Joseph Macnow, Vornado Realty Trust - Executive VP, CFO & Chief Administrative Officer [40]

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And of course, John, it's Joe. We gave you the yield on the total cost inclusive of that.

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Operator [41]

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

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Vikram Malhotra, Morgan Stanley, Research Division - VP [42]

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So just around Street retail, you had cash NOI of about $66 million this quarter. And if I adjust for the full quarterly impact of the JV, it's probably closer to the $60 million, maybe low $60 million. Given sort of all the moveouts you mentioned and the potential moving pieces, including Forever 21, how should we think about a run rate heading into 2020? I know you've given some -- you had given disclosure earlier. But just now, post the JV in the numbers, how should we think about the run rate even if there's a range you can provide that will be helpful going into '20.

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

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Vikram, give me the question again, please.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [44]

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Your Street retail cash NOI was $66 million this quarter. But if I adjust for the full quarter because the JV occurred in April, mid-April. So if I adjust for that, I think your cash NOI should be closer to the low $60 million range. But if we look forward, you talked about Topshop, Forever 21 potentially, just looking at ...

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

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Okay. I got it, got it. Thank you. So let me give you some numbers, which may -- which I think is a direct -- a very direct answer to your question. Last year, we gave guidance on the retail income. We started out with a $304 million number. We then raised it to $309 million as a result of some space at 770 Broadway coming out of the Kmart store, and another retail lease that was converted from the retail segment and the office segments. So we then got up to $309 million. In midyear, we -- is it the other way around?

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

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Yes. Please it's the other way around.

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

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Oh, gosh.

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Joseph Macnow, Vornado Realty Trust - Executive VP, CFO & Chief Administrative Officer [48]

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Ah-- there is not a way.

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

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So we started out with $309 million. We reduced it to $304 million because we took space out of the retail segment into the office segment. We then raised it to $315 million on performance during the year. And we ended up the year at $324 million on performance. So that's the starting point. Okay?

The retail JV, which we believe was a monumentally -- a monumental deal, a superb execution and very important, okay, will reduce the running rate NOI of the retail segment by $84 million. And that basically is simplistically taking the income that was included in that venture and saying we lose 45% of it. Now that's not an economically good number because that is offset by the proceeds, the cash that we got and the huge preferred dividend that we're getting, et cetera. So but that is just -- if you just look at the retail segment, that's our number. The Topshop, so that's an $84 million deduct. The Topshop, the 2 stores in Topshop that left, will nick the income stream by a running -- or an annual running rate of $17 million. So if you take those $324 million, which was the actual, less $84 million, which is the loss of the 45% of the JV retail, less $17 million for the 2 Topshops, you get to a $223 million number, okay? I'm not comfortable with that number, but I am comfortable with something in the low 200s. So that's where we think that, that will go. Now understand this is only the retail segment. It doesn't account for several ins and outs on the financial side of our balance sheet, et cetera, so that the economic number is actually much higher. But anyway, that's the way -- that's where we see it. Hang on, Vikram, Joe is going to (inaudible) -- prove my answer.

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Joseph Macnow, Vornado Realty Trust - Executive VP, CFO & Chief Administrative Officer [50]

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Two things. When you look at Steve's Chairman letter as it was amended, he talked about $109 million if $84 million is the retail piece of that.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [51]

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Yes, the retail. Got it. And then the $223 million that may be adjusted. I mean I'm assuming there is no assumption there for potentially the -- per the Massimo space or any other of the -- like the Madison Avenue assets. This $223 million, just as the math that you gave, there's no other assumption behind those two ...

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

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Vikram, when I went to $223 million, and I said I'm not comfortable with that number yet, but I'm low comfortable in the low 200s...

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Vikram Malhotra, Morgan Stanley, Research Division - VP [53]

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Low -- okay, got it.

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

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That, in my mind, for move ins, moveouts and other things that may happen, which will affect it but not in a significant amount.

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

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Got it. Okay. And then just a bigger picture question. Okay. Just a bigger picture question. You sort of mentioned -- or I think maybe Michael mentioned, you were disappointed with sort of the ho-hum sort of reaction to the retail JV which was indeed very good execution. I'm just sort of thinking bigger picture either similar to -- are you thinking about similar structures on the office side or tactically, strategically anything else just to kind of start to close this NAV gap? I know you have a lot operationally going on. But just more strategically, anything else you can sort of offer in terms of thoughts around closing the NAV gap?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [56]

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Obviously, we were extremely disappointed with the reaction to the retail there, which we thought was a spectacular deal and a spectacular execution in a challenging market. And obviously we continue to work away at all -- many different alternatives to create value. Nothing that we are prepared to discuss today or hint that or get into.

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

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Okay. And no changes on the buyback in your -- from your perspective on a buyback?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [58]

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Since you mentioned it, let's spend a second on buyback. So I wrote extensively about it in my shareholder's letter 18 months ago. And there's a paragraph in there on Page 30 -- 23 of that letter that if you have a mind, go back and reread it. But basically, what it says is that buybacks are very useful if you have -- if they are funded out of a recurring stream of earnings on which you can continuously do it. And there's lots of Fortune 500 companies that -- are in continuous buyback mode, but they are doing out of retained earnings, recurring retained earnings. We don't have that. So we have to do it out of -- basically off of our balance sheet by selling assets or whatever.

So -- and I think I said in my letter that if we did a $1 billion buyback, it would increase our NAV by maybe -- for the remaining shareholders by maybe $1.5 or some such number, and that our management or our Board would rather have the $1 billion that the $1.5 NAV increase when we're already selling at some huge number below NAV. But now there's a better way to look at it. Okay? So when I said if we used -- if we took cash off our balance sheet or we sold an asset or whatever it is when we bought back our shares, my math is, is that for every $1 billion that we would do it, we would increase NAV to the remaining shareholders by $1.5. But we're not doing that. We may do it, but we're not doing that. What we are doing is we're going to spend $1 billion at an 18.3% return on our own assets, and that doesn't take the knock-on effect of the value we will create on the building sets around the buildings that we are redeveloping at Penn Plaza.

Now if you take that math, if you can invest the $1 billion at 8%, that generates $80 million of income. At a 4.5% cap rate, that's $1.7 billion of value creation. That $1.7 billion, divided by 200-odd million shares, is rounded $9 a share. So would you rather invest $1 billion in buying back your stock, where by the way the $1 billion goes away, you lose the liquidity and you increase your NAV by $1.5, or would you rather invest it in the buildings where you will be creating $9 a share for the remaining shareholders of NAV? I don't think that's a difficult question.

Now what's more, when we get done with this, we will have a Farley with no debt whatsoever, we will have One Penn with no debt whatsoever and Two Penn with debt of about $500 million, which is debt that is on there now and we're not going to increase. So with those 3 buildings alone, there are multiple billions of dollars of additional liquidity available to the company for whatever corporate purpose we have.

So we think that our -- we're on the right track here. We're not inflexible.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [59]

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Fair enough, thanks. Fair enough, that's fair.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [60]

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Hang on, hang on. I'm not done yet. Okay? We're not inflexible and we think we get what we try to learn. One of our pals is doing a buyback, okay? Very committed to it, okay? It hasn't worked yet. But if it -- it has and when it does work, we will learn from that, okay? But as of right now, we would rather invest a couple of billion dollars on our own assets and create $150-odd million of new earnings rather than buying back our stock. That's where we are.

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Operator [61]

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

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

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Thank you for all the information on Penn Station, Penn District campus. I'm convinced it's going to be a spectacular product. Steve, why would anybody want to be in Hudson Yards or Manhattan West if they can be at Penn Station?

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Michael J. Franco, Vornado Realty Trust - President [63]

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Welcome to the team, John.

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

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John, that's not a serious question. But the answer to that is, first of all, look, my pal, Steve Ross did a great job, and Jeff and the boys, they did a great job at Hudson Yards. I mean all of our friends that are in developing in our neighborhood, we're all friends. It all plays off each other. It all makes the entire district of the west side of Manhattan better, okay? So I'm not sure that we would be able to -- no, I am sure. I am sure that we would not be able to create the value that we are going to create at our Penn Plaza assets had not Hudson Yards preceded us. So that's just one.

By the way, John, since I got you, you wrote something on June 12, and normally I'm not about what you write, okay? But this one I'm going to read out loud because I love you, okay? You said on June 12, "expect Phase 1 of Penn Plaza to be extremely well done, sparing no expense to create a transformative environment and a landmark on the west side. We expect the finished product to be completely different than the current landscape. The costs and return on costs -- the costs and return on costs are as of now unknown, but now you'll know them, by the way." So anyway, thank you for that. We appreciate your support.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [65]

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Can I ask one more question?

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

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No. I'm going to stop while I'm at it. Go ahead.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [67]

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Okay. So Farley, $1,220 a square foot. If you take out the land and the payment to relaid it about $900 a foot. Manhattan, what I understand, x the land, newbuild is about $1,200 to $1,300 a foot. But your budget for PENN2 is only $416 a foot. And it seems to me just kind of difficult to demo down to the frame, beef up the steel, all new skin, couple of hundred thousand square feet of new space, elevators, MEP, TI, lease and commission, soft costs for $416 a foot, seems like a really low number. Is that fair?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [68]

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No, it's not a low number. It's an accurate number. So let me give you (inaudible) -- hang on. I'm looking for something here in a big stack of paper. So here is our budget, okay? So the $750 million, now remember that doesn't include Farley because we're basically funding it with cash, okay? So our budget, in the round numbers is, that we're going to be creating 90,000 square feet, call it 100,000 square feet of new space in the bustle and at the top of the building where we're converting mechanical space into a highly leasable and triple-digit rent space. And adding round numbers, there's a couple of hundred million dollars, okay? We're going to skin the building. We're not taking it down to the frame, we're going to take portions of the frame off and reimage it. We're going to skin the building and put a new beautiful glass front on it. And that in round numbers is $200 million in our budget. That budget also includes the heating and convectors at the glass -- or at the perimeter of the building, okay? So there's $200 million to create new space, which is income-producing and return space, and there's a good return on that, $200 million to do the basics, curtain wall project. And then the balance of the $350 million is for lobbies, elevators, new bathrooms, new corridors, et cetera, and the new amenity space. So we -- you've been yelling at me for quarter after quarter after quarter for not having costs in the -- not having made our cost projections and our budgets public. And the reason for that is that it's a big project. We've been working on it. We're trying to get them accurate, and this is our best guess as to what those numbers are, okay? By the way, a significant portion of this job is already in construction drawings and already bought, okay? And when you drive by it you'll see that the first mockup of what this enormous bustle, which projects 45 feet off the plaza and 75 feet off the ground, which includes the better part of a couple of hundred thousand square feet of new space, is already mocked up so we can get -- you can get a feel for it. So this is our budget. We're happy with our budget.

By the way, one last thing. To be totally clear, the budget includes TIs and leasing commissions for the new bustle created space, okay? It does not include TI and leasing commissions in the normal course where we rent in all of the other space in the building, which we think is an appropriate way to do the cost of accounting. Thanks. I love what you wrote on June 12, John. Thanks.

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Operator [69]

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And the next question comes from Nick Yulico with Scotiabank.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [70]

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Just wanted to go back to Farley. We have heard that there's good interest in the building's high floors. And even if I look at your website right now, the fifth floor is not showing as being available. And earlier this month, the fourth floor wasn't showing as being available, though it is now. I mean is it fair to say that these 2 floors are spoken for?

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

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We have nothing more to say about Farley other than what we've already said, okay? We have activity. It does us no good to speculate on what these important negotiations are -- that are ongoing now. It does us no good to speculate on that in this venue.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [72]

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Okay. And then going back to 110, I think you gave the annual rent on the ground lease being $2.5 million. Can you give us the formula about how that works? Is it a percentage of the value of the land on a fair market value reset? I mean for some other companies, you've seen it -- more buildings, it could be 4% to 5% of land value. What's the formula calculation here?

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

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I think we've disclosed the -- what we are prepared to disclose at the present time. The current rent is $2.5 million. It's a normal fair market value reset. It happens in 2023.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [74]

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Yes, I guess -- I mean the reason I asked is if you actually do assume it's 4.5% of land value, then it looks like the land value is about -- it's less than $50 a foot, which seems pretty low and would require -- you could be facing a -- as you've mentioned your supplemental and material reset on the ground lease. So I think it would be pretty helpful for us to understand how that could work so we could think about the ultimate yield on the project.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [75]

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Well, the answer is it will be material, and -- but we are not prepared to speculate. This is a reset which is subject to arbitration 4 years from now. It's impossible to predict what the land values will be 4 years from now. I have already said in my comments 10, 15 minutes ago, we strongly believe that the land value is coming in and coming our way. And I really don't want to say anything more about it.

But I will say one last thing. In the last comments I've made about that, I said that the income of this building is going to go up to the sunny side of $150 million a year. Whatever the land resets to will be a material number, but it will not be significant in the scheme of the huge income coming in from this great building.

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Operator [76]

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

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [77]

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So 2 questions. First Steve, yes, sort of a 2-part on Penn. You talked about the $100 million of, just say, sort of catchall development. So sort of curious, one, I don't know who the landowner is, I don't know if it's the MTA. But I'm assuming that, that $100 million captures whatever public mandated improvements, whether it's subway or train or whatever. I'm assuming that, that $100 million includes that in that budget.

And then two, I still -- maybe I missed it earlier, but I don't think that you guys have quantified the NOI that's going to come off-line when you start work on PENN1 and PENN2 just as we think about our 2020 earnings.

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

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The first is that the $100 million of neighborhood improvements really is improvements. It does include improving the street that we have closed in between the 2 buildings. But the rest of them basically is capital that we are spending on behalf of our building, okay?

There's another project that's in the works, which will enhance our situation in the underground in Penn Station, which is not yet ready for a disclosure, and that'll probably come out next quarter and the quarter after. It's not a big deal, but it's -- it's incrementally better and better and better.

With respect to what comes off-line, what comes online, et cetera, and the timing of it quarter by quarter, we do not give guidance. And we have not basically said, other than some brief remarks that Joe made, about what is going to happen in terms of the details of that. I did make what I consider to be an important comment half an hour ago that says I know that you have the model, I know it's important. But the big picture here is that over a short period of development time, we're going to transform up a neighborhood, we are going to add all the surrounding land that we have assets that we own, and we are going to take a $60 building and take it into the 90s. That's the big picture, okay? We have not given guidance about quarter by quarter results, okay? Quarter by quarter -- in service, out of service, et cetera.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [79]

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Okay. And then the second question is on the Topshop on Fifth Avenue. You guys wrote off the value of your improvements for that ground lease position just based on, sort, of the market value being equivalent to what the ground rent is, which I believe you guys said is $5.5 million. So just sort of curious, just given that, that rent seems really low especially given what your neighbors signed with Puma across the street. Just sort of curious more about how you made the determination that the ground rent effectively represents market value. I don't know maybe it's counting all the fit out that you have to do or maybe it's the length of time left on that ground lease that drives it, just more than the actual -- what the actual street retail rents would be there.

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

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Alex, it's all of the above. First of all, we have not said that we are abandoning the ground lease. That may cause -- it's an option that we have in the future. That's, that one. The accounting is that there is a liability and an asset for this right to use, is that the terminology...

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Joseph Macnow, Vornado Realty Trust - Executive VP, CFO & Chief Administrative Officer [81]

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Right of.

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

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Right of use. And so we wrote off the asset, right of use. We retained the liability. If as -- and when we cancel the nonrecourse lease, that will be -- that liability will be taken as the income and extinguished. So that's the accounting. In terms of the business side of it, the way we do the math, if you take the ground rent payments and the expenses of operating the building, and you take the expensive income that comes from the small office portion, and what we might get from the market vis-à-vis a retail, the building is pushed to slightly underwater. If you then take the fact that there's a 14-year ground lease, and you will have to amortize the tenant improvements, it becomes underwater more. And if you take the fact that the ground lease goes up by its terms, I know that $2 million to $3 million a year shortly, then the build from the -- on the whole when you get done with the math, there's even negative economics or no economics. And the likelihood is this is not something that we want to spend our energy and time on.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [83]

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Okay. Now you -- with the 14 years left, you answered the question.

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Operator [84]

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Our 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 [85]

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Just 2 quick ones on Penn Plaza. I appreciate all the new disclosure. But can you give an update on the refresher on the air rights that you own in Penn Plaza and these ability, and perhaps the ability to monetize those air rights in the future?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [86]

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There's plenty of air rights. We own lots of them. There's air rights that are on top of Madison Square Garden that we own a share of. There's air rights on top of the landmark Farley Building that we have -- are we contracted to move those? That we have access to. We don't have legal access, but we have access to. So there's plenty of air rights, okay? And then they are ready to put. And so we have multiple sites that we have -- that are in the future, the most interesting one of which is obviously the Hotel Pennsylvania, which has a current rural approval for a 2.8 million square foot?

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Barry S. Langer, Vornado Realty Trust - Executive VP of Development & Co-Head of Real Estate [87]

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2.8 rent.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [88]

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What?

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Barry S. Langer, Vornado Realty Trust - Executive VP of Development & Co-Head of Real Estate [89]

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2.8 rentable.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [90]

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Okay. That’s been bullshit. For 2.8 million square feet, which would be a tear down and a rebuild, et cetera. And then we have multiple other sites in the neighborhood. So there is not a shortage of air rights. We own plenty of them. And there are plenty of them available to be repurchased and moved from different government sources and private owners.

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Daniel Ismail, Green Street Advisors, LLC, Research Division - Analyst of Office [91]

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And can you remind us like how many air rights you directly own currently?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [92]

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I don't think so. I don't have that in my head. So we will have to get back to you. But I don't think it's a material calculation.

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Daniel Ismail, Green Street Advisors, LLC, Research Division - Analyst of Office [93]

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Okay. And just one on the redevelopment of Penn Plaza. With the new green New York building standards, did that cause any material uplift in total costs? And will the new redevelopments be in compliance with the new standards?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [94]

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Barry?

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Barry S. Langer, Vornado Realty Trust - Executive VP of Development & Co-Head of Real Estate [95]

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There's not a material increase in cost today. And yes, the new developments will be in compliance with those standards.

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

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So the answer is there is not a compliance. There is a goal of -- let's say emission standard, and if you do not meet the goal there are penalties. So actually, there's not a binary comply or don't comply. What there is, is that the assets will be measured for their emission. And based upon that result, there will be a penalty tax, if you will. The interesting thing about it, and we said this I think on the last call, and that is that we believe that we are already in substantial compliance with the 2024 requirements. So ones that come at the end of the decade are more strenuous. We -- but if we maintain our current position, the tax would be de minimis for noncompliance.

Now there's 2 things that are going on with respect to the regulation. And by the way this is in New York, but it's going to go universal across the whole country and probably the world as well. But first is that 80% or 85% of the energy usage from our buildings is under the control of our tenants, not under the control of the landlord. So therefore -- and we've been talking to the government authorities about this, but more needs to be modified so that it gives incentives to the tenants to comply. And that will happen over time.

The second is even more important. The -- to the extent that alternative sources of energy are going to go into the creation of electricity, a transmission of it from where it's created down into New York City and other major cities, that will cause the carbon footprint to decrease substantially, okay? So there's all of that kind of stuff that's going on.

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Operator [97]

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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 [98]

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Mike Bilerman up with Manny. Michael or Joe, just to think about the sources and uses from a, just timing perspective. You think about you had $1 billion today, another $1 billion coming in from 220, the $100 million that closed post quarter from 330 Madison, and then the eventual $1.8 billion redemption of the preferred a couple of years out. You've outlined $1.7 billion, which is quite helpful to have the costs and the returns. That incremental $1.7 billion that needs to go out the door, plus another $360 million for the dividend towards the end of the year. How should we think about the timing of that $2 billion going out? And then the drawdown of cash and the influx of cash just as we think about the ins and outs going on.

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Joseph Macnow, Vornado Realty Trust - Executive VP, CFO & Chief Administrative Officer [99]

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Michael, it's Joe. That's a pretty complicated question to do by phone. But at least I want to clarify one thing. You said $1 billion on -- coming in from 220. That's $2 billion, not $1 billion. $2 billion.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [100]

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Well, of net -- net of the debt that you're going to repay. $1 billion of net cash.

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Joseph Macnow, Vornado Realty Trust - Executive VP, CFO & Chief Administrative Officer [101]

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No. there's no -- that whole $950 million is 0 today. And from that point forward, we get $2 billion: $1 billion of profit, $1 billion of our cost that we put into the project recouped in the sales process. The right number for you to take off is $2 billion.

Now our NAV shows it properly, but the incremental cash coming to the company is $2 billion against $1.7 billion that you've accurately portrayed [needs] in the 3 projects in the Penn Plaza and Penn District area in the catalog. Of course, the capital needs, if we were to do the Hotel Penn would be much, much larger, or any of the other add-ons that we hadn't talked about, like the question on the air rights felt would.

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Michael J. Franco, Vornado Realty Trust - President [102]

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I don't know if you were -- I mean we can come back to you with a little more specificity on timing of the outflows. Obviously, Farley is well underway. PENN2 will be generally, let's call it, '20 through '22, and PENN1 over a couple of year period beginning next year. But I think that the most -- what I think you're trying to get, and I think the most important point is, that cash will be in the door before that money has to be spent, right? So 220, I think we said on today, Joe, correct me if I'm wrong, $1.1 billion of liquidity as of quarter end, right? That number will go well north of $2 billion by year-end, Michael. And so when you look at the...

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Joseph Macnow, Vornado Realty Trust - Executive VP, CFO & Chief Administrative Officer [103]

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After the dividend.

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Michael J. Franco, Vornado Realty Trust - President [104]

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Post the special dividend. That's exactly right. So net of the special dividend, it will still be well north of $2 billion, right? So that gives you a sense of the amount of money that's going to flow out of 220 the balance of this year. And so as we look at the ins and outs, right, all the money will be in the door in advance of needing to spend the $1.7 billion that's laid out in the supplement. All right. And that's what I'll need to tuck in the retail preferred ever, et cetera, the money will be in the door.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [105]

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Right, which gives you even more liquidity as you start thinking about the $1.8 billion preferred, but then also the refinancings that occur in 2020. And I don't know if you want to talk about 11 Penn and maybe 888 Seventh, whether as you think about upsizing those mortgages or you're thinking about using cash to repay and distribute leverage further. How should we start thinking about incremental cash that could -- that could potentially come from that, or use of cash?

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [106]

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Michael, I don't -- the answer is, first of all, with respect to 220, the sellout, published sellout is 3 -- maybe $3.25 billion, okay? We've sold $1 billion so far. That means there is $2-odd billion coming out of that with no debt requirements, that all comes into our treasury, okay? That's step 1.

Step 2 is our internal budget shows that our -- that we are able to spend, as it comes due over the next number of years, the $1.7 billion incremental that's going into PENN1, PENN2 and Farley. And at the same time our cash balances will fund it out of -- off our balance sheet with no new debt and our cash balances will grow, okay?

With respect to our balance sheet, we have been showing pro formas to you all. That shows that our debt ratios are -- actually if you pro forma for what's happening with certainty, our debt ratios are low and going lower and we're very comfortable with that. We have an enormous opportunity on our balance sheet and we have an enormous queue of unfinanced assets and even underfinanced assets that we can increase our liquidity for. So for example, I mean the right strategy we are principally a secured vendor, okay? We do that for lots of reasons that I have written about, which have to do with nonrecourse debt and safety and whatever. And we have -- we're actually encasing an internal conversation about this now. We have -- rather than encumber a new asset, which is currently unencumbered, and we have $10 billion or $15 billion of those, we would rather increase the debt on an underlevered asset, which is encumbered. So all of that are terms that we consider, but right now we have (inaudible) in a spectacular financial condition and we're very happy with where we stand. And we are delighted to be able to deliver PENN1, PENN2 and Farley off our balance sheet with no debt.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [107]

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Yes. Last question. Michael, in your prepared remarks, I think you made the comment it's better to be a seller than a buyer. Is there anything else that's less than the disposition program today? Any other cleanup? And anything else that you're contemplating from that perspective?

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Michael J. Franco, Vornado Realty Trust - President [108]

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The answer is yes, Michael. We've got -- there's still a few cleanup items from the original $1 billion Steve referenced, I don't know, 18 months ago what not, small one of which we just put under contract. But $70 million, we've got 2, 3 others in the works as well. So we're finishing that original $1 billion of non-core assets. Team is hard at work on those.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [109]

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It's interesting. First of all, the community has been suggesting that we sell our non-New York City assets out there in what I'd call the suburbs of New York, mainly The Martin, Chicago; the 555 California Street in San Francisco for years now. But the fact of the matter is that those two are 2 of our best assets with the highest growth trajectory. And when we have sold 555 California 3, 4 years ago when there was a big drumbeat to do it, we would have undervalued the asset by $500 million, $700 million at least. I think Michael said in his remarks that, that asset is underrated by, pick a number, 25%, and so whatever. So we -- those 2 assets are not on the for-sale list today.

The other thing is that I think one of the analysts wrote with some assets you dilute earnings. You -- and so if you take our retail sale, we sold it at NAV, we sold it at a number which we thought, and the market I think thought was a very strong execution. But nonetheless, you are selling the income to the buyer and you are losing that income, so it's dilutive income. So there is a tension between selling assets when you dilute your income and your analyst want to take your stock down for that. So it's a complicated thing.

Let me add a little take onto that, Michael, and that is that it's good to have cash, but cash doesn't appreciate, okay? Assets appreciate. So if you have well-chosen assets that have a great future, they can appreciate. So -- I mean that's just sort of a little bit about that. But you can be sure we look at every assets and every -- at every asset and every piece of debt in the company at least once a month.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [110]

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Yes. It was helpful to get your thoughts regarding using cash on the buyback versus investing it in new as well as redeveloped assets and harvesting net value. It definitely sounds as though there's additional cash coming in and we'll continue to look for ways that the balance sheet and that cash can be used to drive value for existing and new shareholders.

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Steven Roth, Vornado Realty Trust - Chairman of the Board & CEO [111]

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Yes, and we too. Look, we're investing the money and creating $9 of value versus $1.5 on $4 billion is a no-brainer, right. The point that you're making is that, that's not our only cash. We've got more assets, we've got more financial flexibility. We couldn't be more well aware of that. Thank you for pointing it out.

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Operator [112]

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And gentlemen, there are no further questions at this time.

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Michael J. Franco, Vornado Realty Trust - President [113]

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Great. Thank you, everybody, for listening, participating on our call today. We look forward to your participation on our third quarter earnings call, which will be on Tuesday, October 29th. Enjoy the rest of the summer as well. Thank you.

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Operator [114]

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