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Vornado Realty Trust (VNO) Q3 2018 Earnings Conference Call Transcript

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Vornado Realty Trust  (NYSE: VNO)
Q3 2018 Earnings Conference Call
Oct. 30, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Vornado Realty Trust Third Quarter 2018 Earnings Call. My name is Paulette, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Cathy Creswell, Director of Investor Relations. You may begin.

Catherine Creswell -- Director, Investor Relations

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

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

I will now turn the call over to Steven Roth.

Steven Roth -- Chairman and Chief Executive Officer

Thanks, Cathy. Good morning, everyone. If I may let me start by bragging a little bit. Our leasing numbers continue to be the best in the business. Year-to-date for three quarters across the entire business including New York Office, Retail, theMART and 555 California Street, our leasing activity totals over 2 million square feet and 179 leases with outstanding mark-to-markets of 33.8% GAAP and 24.1% cash. Thanks to Glen, and our best in the business leasing team.

Yesterday, we posted third quarter numbers. Here's the math. FFO as adjusted was $0.97 per share even with the prior year's third quarter. Our GAAP basis financial results for this quarter were negatively affected by $4.5 million, largely from non-cash straight-line rent receivable write-offs. These GAAP accounting items did not affect our cash basis results. Remember, we run the business on cash numbers.

Our third quarter cash basis FFO as adjusted was $0.95 per share as compared to $0.89 per share for the prior year's third quarter, up a strong 6.7%. This quarter's companywide cash basis NOI was $340.9 million, up 2.7% from the third quarter of 2017. Adjusting for the sale of our half interest in the 666 Fifth Avenue Office Condominium, the increase was an even greater 3.8%. More about 666 in a minute.

Cash basis same-store NOI increased by 4.3%, comprised of New York Office was up 5.1%; Retail was up 4.2%, benefiting by a $4.9 million one-time real estate tax abatement catch up, with the total New York segment up 3.9%; theMART was up 2.2%; and 555 California Street was up 19.9%. This quarter's leasing activity was robust which David will cover in a minute.

Our Office business continues to perform very well. I'll say again what I've said for the last several quarters. We are experiencing robust demand from all manner of industries in all of our sub-markets. Our tenants are optimistic, aggressive, growing and upbeat about New York.

Everybody knows that I think our Penn Plaza assets are our main event. I have even called Penn Plaza the Promised Land. Our transformation here will begin with Penn One and Penn Two, where we will create a two building 4.4 million square foot campus right on top of Penn Station. It will include a three block Grand Plaza along Seventh Avenue covered by a giant new bustle across the entire 400-foot frontage of Penn Two.

This bustle will extend 70 feet from the building and will be 45 feet above the street. It will serve a dual purpose. It will be striking, creating a huge covered plaza in front of our Penn Two and the main entrance to Penn Station, and bring the neighborhood into the modern age, and at the same time, it will create a 140,000 square feet of very valuable new two 20 foot-high best-in-class creative space. Images of this design will be posted on our website tomorrow under the call sign www.vno.com/portfolio/development.

The scale of our campus here allows us to provide our tenants with the best -- with the biggest and best unparalleled amenity package, even a giant leap forward from what many of you seen we have done at theMART. Also in Penn Plaza, we are well under way at Farley to deliver in 2020 the best creative space in Manhattan. We will be announcing later today that we are increasing our ownership in Farley.

And there's much more to come in the Penn district. These assets are at the heart of the new New York adjacent to the Hudson Yards and Manhattan West developments and sit literally on top of the busiest transportation hub in North America. And don't forget the adjacencies to Macy's, the biggest department store in the country, and Madison Square Garden.

Speaking of theMART, David will tell you about a huge art projection we launched last month. A rotating group of artists will design images projected over the entire facade of the building. This is really innovative and exciting stuff, a must-see in Chicago. Our objective here is to increase the franchise value and renown of this iconic 3.7 million square foot building.

Times Square is the best performance retail sub-market in Manhattan. The highlight of the quarter was our September 24 acquisition from Host Hotels of the 46% interest in 1535 Broadway retail condominium that we did not already own. The original transaction provided that we would become the 100% owner through a put/call arrangement, based on a pre-negotiated formula. This acquisition satisfies the put/call arrangement. We now own 100% of the retail which is 100% leased to T-Mobile, Invicta, Swatch, Levi's, Sephora, as well as the largest digital sign in New York. This project has now completed as a first year cash-on-cash yield of 8.5%, obviously very accretive and value creating.

Also our Retail continues to be soft, albeit there is increased retailer activity and tours. At the beginning of the year, we guided that our 2018 retail cash NOI will not go below $304 million. We are now comfortable that retail cash NOI on a recurring basis will be at least $315 million.

We have begun closings at our 220 Central Park South supertall condominium project. Closings will continue throughout 2019 as we climb up the building. We are approaching 85% sold. Here is a factoid for you. In the 1,000-foot tower, we built 27 large full floor apartments, of which 26 are under contract. The press is telling us that the condo market in New York is soft or even worse than that. That may well be for some, but I point out that we went to contract on two large full floor apartments just this month leaving only one out of 27 left. 220 Central Park South has exceeded all expectations as well into record-setting territory.

It's old news now, but we didn't cover the sale of our interest in 666 Fifth Avenue Office on last quarter's call, but here it goes. Sometime ago, we made a decision and announced that we prefer to sell out our 666 Office rather than participate in a five-year capital-eating renovation. As previously announced, the sale was completed on August 3. We received proceeds of $120 million plus $57 million from loan repayments. The financial statement gain here was $122 million and the tax gain was $244 million. We wish our former partners and our new partners all success.

Capital markets are pretty much unchanged over the last year or so. The office investment sales market remains healthy, but disciplined, with volume up 20% year-over-year. The smaller the deal size, the easier to execute. Pricing for large core Manhattan assets is stable though bidding pools are thin, and is taking longer to execute these sales. There is continuous -- there is continued strong demand in pricing in particular for assets in the west and south of Manhattan. While foreign capital continues to be active, more of the activity this year is being driven by US-based capital sources.

Debt markets for New York assets remain as liquid and strong as we have seen. While the base rate for 10-year treasury at LIBOR is up about 75 basis points this year, tightening spreads have offset about a third of this increase. We can at least 50 and maybe as much as double that number of debt funds that have been formed since the beginning of the cycle. We're all competing aggressively on a rate and loan to value basis for both whole loans and mezzanine positions.

We have a highly liquid fortress balance sheet with $3.5 (ph) billion in immediate liquidity, measured leverage and well-staggered maturities. And this doesn't count a couple of million dollars to come from 220 closings and non-core asset sales.

Now, to my partner, David.

David R. Greenbaum -- President, New York Division

Steve, thank you. Good morning, everyone. The New York City economy remains strong. We now have 35 consecutive quarters of private sector job growth truly an extraordinary run. September marked the 12th consecutive month that New York City unemployment remained below 4.5%, the longest such period on record.

While office-using employment has been flat this year, the city have seen more than 22,000 new healthcare positions, which are not captured in office using employment. In our own portfolio we have Columbia University at 1290 Avenue of the Americas with 123,000 feet; Memorial Sloan Kettering at 650 Madison with 100,000 feet; and NYU Langone at One Park Avenue with a total of 630,000 square feet, of which 150,000 was growth this year.

Over the last two quarters, new leasing activity in Manhattan reached 18.6 million square feet with strongest two quarter total on record. Overall asking rents held firm at almost $73 a foot, while Class A rents in Manhattan and Midtown remain robust at $83 a foot.

With year-over-year financial services sector's earnings growth of 24%, the fire sector in fact is now on fire with 53% of Manhattan's third quarter leasing activity. The two dominant themes in the market remain the growth of co-working tenancies and the flight to new and renovated product.

Let me now turn to our own performance in the third quarter where we executed 23 office leases totaling 312,000 square feet, driving occupancy up 70 basis points to 97.3%. Our average starting rent for the quarter was just over $67 a foot. Of course starting rents obviously fluctuate quarter-to-quarter based on the mix of buildings and space leased. The key statistic is the mark-to-market increase and our mark-to-markets remain very strong, an increase of 26.5% GAAP and 11.8% cash. Our Office business in New York saw a same-store NOI growth of 1.2% GAAP and 5.1% cash.

Among significantly leases in the quarter was our headquarters deal at 909 Third Avenue with Sard Verbinnen, a large and important strategic communications firm that took 65,000 feet. Another important transaction took place at 330 West 34th Street where AIC owned HomeAdvisor expanded, doubling its footprint to 90,000 square feet and bringing 330 West to 100% occupancy completing the redevelopment of this asset.

At Penn One, we leased 82,000 square feet with 80% of that activity representing the movement of tenants from Penn Two. As you know, prior to year-end, we will commence our significant renovation program at Penn One that will transform this 2.6 million square foot asset with an expanded double height lobby, one acre of upgraded plazas, co-working and conflicting facilities, a robust amenity package with full offerings and tenant services spanning the entire second and third floors.

At Penn Two, we are now finalizing plans for a dramatic renovation and expansion of this existing 1.6 million square foot asset located directly on top of Penn Station, turning the two buildings Penn One and Penn Two into what will be a 4.4 million square foot campus. Penn Two project will include a full recladding of the facade, new mechanical systems, and new tenant entry sequence adjacent to Plaza 33 all integrated with a full amenity package, and as Steve mentioned, the addition of a striking four-story bustle that will transform both the existing building and the public realm.

In connection with this redevelopment, we will be vacating Penn Two up to the 10th floor, and we have begun relocating number of the tenants from Penn Two into Penn One. We anticipate starting physical work in Penn Two in the first quarter of 2020.

The government continue to focus on the transportation of Penn Station and the area around it. Just last month, Governor Cuomo made a speech that included several significant announcements. With the construction of the new Moynihan Train Hall on time and to be delivered in 2020, the Governor reiterated his intent to upgrade the Long Island Rail Road Concourse beneath 33rd Street, doubling the width of the most congested corridor in the station.

As a reminder, we own the retail on the north side of this concourse which is under One Penn Plaza. The Governor also announced the plan to transform the temporary Plaza in 33rd Street into a permanent Plaza including a new station entrance as well as announcing that the state would undertake a collaborative planning effort to the entire neighborhood.

We, of course, applaud all these initiatives, and the area's local representatives as importantly are doing the same. In a recent address, City Council Speaker, Corey Johnson, whose district includes Penn Plaza, strongly endorsed a new planning framework to increase density in the districts, improve all public spaces and transform the station. It is clear that momentum for major change in the district is accelerating.

In other development activity, we have substantially completed 512 West 22nd Street, where we are in active negotiations with prospective tenants, and have also substantially completed 606 Broadway, where we have leases out for both the office and retail space in the building.

Looking ahead, our leasing pipeline remains active at over 700,000 square feet, including 200,000 square feet of leases out and in active negotiation. Our remaining 2,000 expirations totaled just over 300,000 square feet and our 2019 expirations are a modest 675,000 feet.

Let me now turn to our street retail business. For the quarter, we signed 10 retail leases totaling 104,000 square feet including a 78,000 square foot renewal with Old Navy on 34th Street. Similar to our strategy, earlier this year, with Forever 21 at 435 Seventh Avenue, we elected to renew Old Navy short-term for five years and eliminated any further tenant renewal options. This positions us to take advantage of rent growth as our transformation of the district proceeds as well as maintaining our development options for the site.

With retailers drawn to the neighborhood's extraordinary foot traffic, we also signed new leases with shoe store Naturalizer at 7 West 34th Street, Starbucks at 330 West 34th Street, and Fast Casual food purveyor Dig Inn at Eleven Penn Plaza.

Our retail mark-to-market for the quarter were negative 40% GAAP and positive 36.3% cash. It is counterintuitive to have a large GAAP negative and a large cash positive. Let me explain. While the Old Navy renewal was at a significantly higher cash rent, which drove the strong cash mark-to-market FAS 141 purchase price accounting required us at acquisition of this asset to mark the rent up to the then market which is now proved to be too high producing the negative GAAP number.

If you back out the Old Navy lease, our mark-to-markets were up 13.9% on a GAAP basis and 10% on a cash basis. Our retail occupancy stands at 96.6%, up 30 basis points from the second quarter. Same-store NOI growth for our retail business was up positive 2.9% GAAP and 4.2% cash.

Turning to theMART in Chicago, we had good activity on the former Google's (ph) space, a 132,000 square foot block spread across portions of the fourth and fifth floors that we just got back in the third quarter. This is a growth opportunity as the rent on the former Google's space were significantly below market at less than $32 per square foot. During discussions with an existing MART tenant seeking to expand as well as with a TAMI tenant in our New York portfolio that also has submitted a proposal for a portion of the space.

For the quarter, we signed nine showroom leases and three retail leases including an Amazon Go store, all totaling 28,000 square feet at an average starting rent of $57.92 per square foot. The mark-to-market increase for the quarter was positive 14.4% GAAP and 1.9% cash.

As Steve mentioned, on September 29, we launched our permanent exhibition of Art on theMART. More than 32,000 Chicagoans defended on Wacker Drive to see the inaugural display of the works of four digital artists which will continue five nights a week for two hours 10 months of the year.

With twice the clarity of a 4K Ultra HD TV, this 2.5-acre campus is simply extraordinary. Mayor Rahm Emanuel called the display "A visionary project that brings Chicago's legacy of public art and iconic architecture into the future". As the largest permanent art installation in the United States, city officials expect the display to become as much of a Chicago staple as the Anish Kapoor been at Millennium Park and the Picasso at Daley Center Plaza.

From our perspective, the art display strengthens the franchise value of theMART and cements its position as nothing less than the most important office building in Chicago. For the third quarter at theMART, our GAAP same-store NOI performance dropped 3.8% primarily due to the July 31 (inaudible) departure while cash same-store was up 2.2%.

Let me conclude with San Francisco where our 555 California Street complex remains the most iconic office location in the city. As I told you in the last call, in the early days of this quarter, we signed a 15-year lease with the spaces concept of Regus IWG to the entirety of the former banking Hall the Cube at 345 Montgomery. We are making good progress on this $45 million redevelopment, transforming it from the old banking hall into a 78,000 square-foot modern co-working environment that we will deliver next summer. We have largely completed the abatement and demolition activities and are now progressing with the main structural elements that support the expanded and additional floors.

In the tower at 555, we signed three leases totaling over 82,000 feet including a two-floor 10-year renewal with UBS and a full floor expansion with Bank of America bringing its occupancy in the complex to almost 330,000 feet. With average starting rents over $91 a foot, our mark-to-markets were very strong at 30.4% GAAP and 10.4% cash. Same-store NOI growth in the third quarter also remained very strong at 17.2% GAAP and 19.9% cash.

We look forward to showing off this flagship asset next week during NAREIT, and hope you will join us with the festivities on the Plaza of 555 California on Tuesday evening. I'm also pleased to announce that Vornado earned NAREIT's 2018 Leader in the Light award. This is the ninth consecutive year, we've been recognized as the highest scoring diversified REIT. Contributing to our success and earning the Leader of the Light award was Vornado's highest standing from the global real estate sustainability benchmark was referred to as GRESB.

In 2018, Vornado is the number three among all listed real estate companies in the United States and placed in the top 6% of 847 GRESB respondents worldwide.

For the business as a whole in the third quarter, our same-store NOI growth was positive 0.9% GAAP and 4.3% cash. Across our portfolio, we leased 604,000 square feet in the quarter at mark-to-markets of 20.6% GAAP and 13% cash. We have the right assets in the right sub-markets along with significant embedded value and well positioned development and redevelopment opportunities.

Now, back to Steve.

Steven Roth -- Chairman and Chief Executive Officer

Thanks, David. We're delighted to take your questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from Jamie Feldman from Bank of America. Please go ahead.

James Feldman -- Bank of America Merrill Lynch -- Analyst

Great. Thank you, and good morning. Steve, I want to go back to one of your initial comments which was robust demand across many industries across many sub-markets. There is clearly concerns of things slowing out there. I just wanted to get your thoughts, and kind of where you think -- how it feels, and where we are in the cycle? And any concerns you do have about where we might be in the real estate cycle?

Steven Roth -- Chairman and Chief Executive Officer

Jamie, hi, good morning. First of all, we're always concerned. We live our life by being concerned. That's part of the job. I'll give you a quick overview, and turn it over to David for more detail. What we're seeing is that in the better buildings in the better submarkets, there is robust demand, and in fact, even increasing rents. If you are not in the right sub-markets or if you have tired buildings, you are seeing a totally different New York. But the New York that we operated in looks very robust to us. David, what do you think?

David R. Greenbaum -- President, New York Division

Jamie, I'll give you one statistic that I find interesting, and that is year-to-date in New York, we have leased a little less than 1.4 million square feet, 1.347 million square feet. Of that 600-plus-thousand square feet was all growth by existing tenants. It's Facebook, it's NYU Langone, it's HomeAdvisor, it's AlixPartners. So, we are still seeing tenants increasing their footprints, looking for more space. As I was coming upstairs for this call, I heard Glen and one of his leasing guys talking about the action that they've got in terms of proposals that we're working on for our building. So, I will tell you generally the environment for good buildings, well-located, as I mentioned, one of the major themes is renovated buildings, and well-located buildings in the right districts, we've got a lot of action.

Steven Roth -- Chairman and Chief Executive Officer

Jamie, I'll add to that, and say this, we are very, very attentive to a change in the demographic trends that have made New York so great. So, central part of New York is its enormous infrastructure of talent, headquarters, business, arts, restaurants, et cetera. I would be remiss if I don't mention theater because that's my family business. And the inflow of talent into New York continues unabated, and we watch it very carefully. People would want to be in New York, they want to be in the right spot, and so we think that New York continues to have an enormous future and we watch it very carefully.

James Feldman -- Bank of America Merrill Lynch -- Analyst

Okay. Thank you. And then just a follow-up for me. You talked about being in the right sub-markets. Can you talk about the decision to increase your ownership of the Farley Building? And then as you think about One Penn, Two Penn, just any early conversations with tenants in terms of interests in the renovated space, I guess, especially, at Two Penn, and what they might be looking for?

Steven Roth -- Chairman and Chief Executive Officer

Yeah. We love Farley. We think Farley is an extraordinary property. It is -- we learned a lesson. Last summer, we went out to Silicon Valley to call on our customers. And we're talking about the Facebooks and the Googles and the big boys. They have out in the valley their preferences. They have campuses which are horizontal, not vertical. So, what we have in Farley is a horizontal campus. It's a double wide block. It's the largest footprint in town. It's right on -- it's adjacent to the train station. We think that we are in the midst of creating a very, very, very exciting project. We love it. And naturally, we want to own as much of it as we can, and so we saw eye to eye with our friends and our partners and related, and we will be announcing later on today that we're increasing our ownership. So, there's that.

What was the second half of your question, sir?

James Feldman -- Bank of America Merrill Lynch -- Analyst

Just tenant demand for some of the -- you talked you're going to lay out plans for the Two Penn renovation. Just what kind of discussions you're having with tenants that might be interested in that space or the Farley Building space?

Steven Roth -- Chairman and Chief Executive Officer

We have tenants who want to talk to us about those properties. The tenants who are in the neighborhood, the tenants who are in the buildings now are very interested in perpetuating their occupancy, and we have outsiders. Everybody that we have shown our plan to in the brokerage marketplace is beyond excited. It's transformative, it's a very exciting prospect of what we're doing. Quite frankly, we are holding off a little bit, OK, because we are -- this is not the right time for us to go to lease. So, the answer is we are confident in the demand, we have gotten enormous support from the real estate community, and we couldn't be more optimistic about what we're doing.

David, you have anything to add?

David R. Greenbaum -- President, New York Division

Jamie, just listen, I'll add just one other quick point, and that is Glen Weiss and Tom and leasing guys are just beginning to introduce what we're doing in the Penn district to the marketplace. We are having meetings with the brokerage houses with the key brokers that we all do business with. It is, as Steve said, an enormous vow to the brokers when they begin to focus on the scale of what we're doing, the transformation of what we're doing.

Everybody recognizes that Seventh Avenue, the Penn district will be the epicenter of the New York, as we look out five and 10 years from now. It is at the busiest transportation hub of North America. And I will tell you the packages that we are doing in the building in terms of the amenity packages for the tenants, we think we will be doing something that will be truly transformative, and the brokers understand we really deliver on everything that we say we're going to do. So, it's in a really very early days to talk about any specific tenants or space.

Steven Roth -- Chairman and Chief Executive Officer

We're also excited about posting on our website a handful of images of what we're doing. So that when you take a look at those, you can get a feel for our level -- for why we are so enthusiastic about what we're doing.

James Feldman -- Bank of America Merrill Lynch -- Analyst

Thanks.

Steven Roth -- Chairman and Chief Executive Officer

Okay. All right. Thank you.

Operator

Our next question comes from Steve Sakwa from Evercore ISI. Please go ahead.

Steve Sakwa -- Evercore ISI -- Analyst

Thanks. Good morning. Steve, in your opening comments, you really didn't talk about sort of return of capital or how you may use kind of the growing cash balance that you've currently got plus the money coming in from 220 over the next year. Can you just sort of speak to that and how you plan to use that and help try and close the NAV discounts?

Steven Roth -- Chairman and Chief Executive Officer

We are an extremely liquid, well-financed real estate business. We have great financial resources. Those resources are growing and that's by our intent. We look at every single deal that comes along in the marketplace, and we have decided that we can't make money at the offering prices of most of the deals. So, we've been very selective. We're in business to make money for our shareholders. So, rather than just -- we don't follow the policy well, but just look at the marketplace and take the best deal that's available, because the best deal that's available may not work.

So the answer is that we have pushed away in the current part of the cycle. There will be opportunities. The opportunities will be extraordinary, and you have to have dry powder to take advantage of those opportunities. So, what I'm really saying is not yet. In the interim, the cash that we have will be used to pay down debt, et cetera. So, as an example, we bought for -- I think it was $442 million from Host Marriott, the half of the 1535 Broadway block that we didn't own. We bought that for cash. We now have an asset that has a value of well over $1 billion that we own free and clear, no financing audit whatsoever.

So, if you remember when we put out that press release a couple of months ago that transaction is doubly accretive. It's accretive because of the earnings, but it's even more -- because of the rents, but it's even more accretive because we used 2% cash to buy it. So, the answer to your question is not yet. Liquidity is good. We will pay down debt selectively which also increases our liquidity. And so there you have it. This is the primary cycle when it's the right time to be selective in acquisition and to build liquidity.

Steve Sakwa -- Evercore ISI -- Analyst

And just to kind of follow up, were buyback sort of not part of that equation at this point?

Steven Roth -- Chairman and Chief Executive Officer

The answer to that is that I think you know my feeling about buybacks. I was very clear about it in the letter -- in my annual letter, my last annual letter. If we thought that buybacks would increase shareholder value, we would do it. Okay? There is no sign that buybacks attempting to put your finger on the die creates long-term shareholder value unless they are done by a company that has a recurring cash flow, and they are done continuously over long, long periods of time. That doesn't fit our profile. So, we'll see. On the other hand...

Steve Sakwa -- Evercore ISI -- Analyst

Okay. Can I just ask quickly on street retail. I mean, you certainly had a more positive...

Steven Roth -- Chairman and Chief Executive Officer

Steve, hang on for a minute. The other thing is you should know that we are not cavalier about buybacks. We cover it at every board meeting, we discuss it and rediscuss it. So we are not close-minded, we just think that we are practical. What was your question about street retail?

Steve Sakwa -- Evercore ISI -- Analyst

Sorry, I just wanted to circle out, your commentary was a bit more positive this quarter than last quarter, certainly raising the number from $304 million to $315 million. I guess I'm just finding out, was that largely due to the Old Navy deal sort of getting completed and that risk being taken off the table? I'm just trying to gauge kind of where your temperature is on street retail today versus say three months ago?

Steven Roth -- Chairman and Chief Executive Officer

Well, I'd love to call the bottom, but maybe I'm not that smart or maybe I'm not that stupid. The street retail business continues to be soft. Our business continues to be strong because of very strong leases in place, and the best properties in the business. And all that we're saying is that the cautious number that we put out $309 million that reduced to $304 million because of reclassification of, I think, it was 770 Broadway retail. That number -- we are going to receive that number. And I just wanted to make sure that you and all your colleagues knew that as soon as we did. So -- and we think the number in 2019 will be even a little bit better. Okay? But the total retail continues to be bottom fishing and cautious.

Steve Sakwa -- Evercore ISI -- Analyst

Okay. Thanks very much.

Steven Roth -- Chairman and Chief Executive Officer

Thanks, Steve.

Operator

Our next question comes from Manny Korchman from Citi. Please go ahead.

Michael Bilerman -- Citigroup -- Analyst

It's Michael Bilerman here with Manny. Just a couple of quick questions. Steve, on Moynihan, I assume related shares your enthusiasm about the demand and the prospects given how successful Hudson Yards has been. So, what gives them the desire to want to sell additional interest to you? And maybe just talk a little bit about the math surrounding your purchase, I don't know if it was an option that you called or whether it was a negotiation.

Steven Roth -- Chairman and Chief Executive Officer

So, I lovingly called you Mr. Yada yada yada this morning. You get it? You get my meaning?

Michael Bilerman -- Citigroup -- Analyst

I got it.

Steven Roth -- Chairman and Chief Executive Officer

Okay. So, look, related loves the asset and the neighborhood as well as we do, but they're in a different business. Okay? They are in a business where basically they invest, they have third-party capital, and they're in it for a profit. What we did was we -- they sold us for the money. So we paid them what we thought was an appropriate uptick from our basis to make them happy to sell and make us very happy to buy. So, it's very simple. They're in a very different business model than we are. They're in the business to create assets, create value, and then harvest that value. We're in the same business, but we're much longer-term than they are. So they love the asset, we love the asset, and off we go. We'll put out a press release at the close of business today.

Michael Bilerman -- Citigroup -- Analyst

And then just thinking about the cash that's going to be coming in over the next couple of years, and congratulations on starting the sales, process the official closings at 220. How should we think about both the cash that comes in from 220 against the loan that you had for the construction costs, I don't know, if that has to be paid down initially versus taking the cash? And then secondly, how we should think about the $1 billion of non-core sales? What is the current process that's in place there and how should we think about that cash coming in?

Steven Roth -- Chairman and Chief Executive Officer

Michael, that's a very good question. With respect to -- we used the $750 million term loan to partially finance the development of 220 Central Park South, which as I think you and everybody is beginning to see is one hell of a brilliant deal. As the closings of that -- as we climb up the building and we close apartments, that will liquidate that investment or that will liquidate the loans. We will use the proceeds to roll into financing Moynihan. Okay?

So, as you can see, that term loan is 100 basis points over LIBOR. It gives us the lowest -- it gives us the lowest cost of capital in the universe, and so that cost of capital which benefit us at 220 we will now be rolled into Moynihan. With respect to the other half of your question, I will refer you to exactly what I said to Steve Sakwa a couple of second ago -- a couple of minutes ago.

Michael Bilerman -- Citigroup -- Analyst

Okay. And then in terms of the yada yada yada, is there any update on sort of everything being on the table and anything on strategic alternatives in terms of spinning off street retail, contributing assets to our fund. Is there anything new on that front?

Steven Roth -- Chairman and Chief Executive Officer

Michael, we think we've done more than anybody else over the recent years to create value and to focus our company. I would just call into the attention that our Washington's -- our Washington, we call -- I call them, spin child. So it's a spin-off which we think is -- we continue to think as the child of ours. JBG Smith, which is performing very well. So, we're actually pretty excited about what we have done. We are still -- they are still on the table, other kinds of structuring and restructuring which will create shareholder value, OK. We will have more to say about that, but we have nothing to say about it today.

Michael Bilerman -- Citigroup -- Analyst

Okay. Great. Thanks, Steve, for your time.

Steven Roth -- Chairman and Chief Executive Officer

Thanks, Michael.

Operator

Our next question comes from John Kim from BMO Capital Markets. Please go ahead.

John Kim -- BMO Capital Markets -- Analyst

Thank you. On 220 Central Park South, you spent a lot of capital time and effort on the building, even earned potentially $1 billion in cash profit which is about a year-and-a-half of FFO. But from a reported earnings perspective, it's going to basically shelf at zero, I think. And in fact, it's actually been an earnings drag over the last few years. I realize it's in your NAVs and all of our NAVs, but I am questioning if that's the correct way to state your earnings given it is cash profit?

Steven Roth -- Chairman and Chief Executive Officer

I think, I'd say, I am a little startled. I think that your question implies that maybe we shouldn't have done 220 and sacrificed that $1 billion. But with respect to the accounting details of your question, I want to turn it over to Joe.

Joseph Macnow -- Executive Vice President, Chief Financial Officer and Chief Administrative Officer

Hey, John, it's Joe. How are you? John, the profit on 220 will fall through FFO. It's non-depreciable real estate, and accordingly under the NARIET definition of FFO, the gains on the sale of that land parcel is now fully developed, will show up in FFO. We're going to treat it as not part of recurring FFO, but only as part of FFO as adjusted because it's not recurring. But there will be $1 billion of income flowing through the income statement and $1 billion of cash generated. As Steve said that was after paying off the $750 million, it was also after paying of the $950 million first mortgage. That's a $1.7 billion of debt. You can do the math to understand what the gross proceeds are.

Steven Roth -- Chairman and Chief Executive Officer

I think, John, your question implies that it is a one -- and I'll say, it is a one-timer, there's no doubt. And there is -- it's possible in fact maybe even likely that a one-timer, even a massive one-timer like this gets no credit in our trading price of our stock. If that's the case, so be it. But we will benefit by having a very significant increase in our cash at the end of this -- at the end of this project.

John Kim -- BMO Capital Markets -- Analyst

I just wanted to clarify, it will be included in NAREIT FFO, but when you do FFO as adjusted, will you be taking it out, so therefore it's more of a normalized figure without CPS?

Steven Roth -- Chairman and Chief Executive Officer

No, the opposite. Will it be as part, yes, exactly what you said. It was part of NAREIT FFO, but FFO as adjusted which in our mind is a recurring type of number we'll exclude it.

John Kim -- BMO Capital Markets -- Analyst

Okay. So I'm just saying, I think a lot of investors will focus on your reported number, which is the as adjusted, so to look like there's no earnings coming from it when in fact, it is hugely profitable?

Steven Roth -- Chairman and Chief Executive Officer

Well, I think that a number of the people on this call focus on both. The as adjusted because that's the number that gets reported bottom line, but as well as the recurring number which won't include it, it will include it rather.

Joseph Macnow -- Executive Vice President, Chief Financial Officer and Chief Administrative Officer

Yes. John, I'll give investors a little bit more credit than that. I mean, I think the project is smashingly successful, it creates an enormous amount of value and that will be recognized. I think investors are smarter than maybe we're giving them credit for.

Steven Roth -- Chairman and Chief Executive Officer

The bottom line is in our NAV, we have a $1 billion for value creation from that asset. That's the right way to think of it. Shareholders have been reached a $1 billion, $5 a share.

Joseph Macnow -- Executive Vice President, Chief Financial Officer and Chief Administrative Officer

Okay.

John Kim -- BMO Capital Markets -- Analyst

Okay. On your dispositions of your commercial assets, you've recorded a $141 million net gain which is a GAAP figure. I'm wondering if you could disclose what the cash gain was on those sales?

Steven Roth -- Chairman and Chief Executive Officer

Joe, that's yours.

Joseph Macnow -- Executive Vice President, Chief Financial Officer and Chief Administrative Officer

I'm sorry, I didn't understand the question.

John Kim -- BMO Capital Markets -- Analyst

The asset sales that you had during the quarter recorded -- you had recorded $141 million of gain which is a GAAP figure. I think you also disclosed what the taxable figure was, but I was just wondering what the cash figure was if you have that?

Joseph Macnow -- Executive Vice President, Chief Financial Officer and Chief Administrative Officer

The cash figure was $120 million on the sale of the building, $7 million coming from the collection of our share of the mortgage in excess of our basis on the mortgage.

John Kim -- BMO Capital Markets -- Analyst

Was there another one lasted than that?

Joseph Macnow -- Executive Vice President, Chief Financial Officer and Chief Administrative Officer

Yeah, there was, but really tiny. That's the lion's share of the gains.

Steven Roth -- Chairman and Chief Executive Officer

So the answer is that the cash is directionally the same as the GAAP.

Joseph Macnow -- Executive Vice President, Chief Financial Officer and Chief Administrative Officer

Right. Exactly, right.

John Kim -- BMO Capital Markets -- Analyst

Got it. Okay. Thank you.

Steven Roth -- Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Vikram Malhotra from Morgan Stanley. Please go ahead.

Vikram Malhotra -- Morgan Stanley -- Analyst

Thanks for taking the question. So just on the street retail numbers coming in better than you originally anticipated. Can you kind of maybe walk us through what may have surprised to the upside? I know in your original number, you did bake in any renewal from expiration. So did you see -- did you see better trends in terms of renewing or was there something specific about any of the assets?

Steven Roth -- Chairman and Chief Executive Officer

I can tell you I'm surrounded by seven accounting geniuses, so one of you geniuses will have to handle that one.

Joseph Macnow -- Executive Vice President, Chief Financial Officer and Chief Administrative Officer

Well, first of all, there was a discussion of a tax abatement and a piece of it being non-recurring in Steve's remarks a piece of it was recurring. We didn't count on that in the $304 million. And as we always do when we project something, we take the worst case basis. To the past two quarters, we've been saying that the $304 million seem low, Steve said, it's even stronger in the last quarter. But the individual items that make it up are basically very conservative in the $304 million. And some things went our way. We didn't have credit losses that we anticipated and a few other things like that.

Steven Roth -- Chairman and Chief Executive Officer

Vikram, the difference between $304 million and $315 million is -- it's a couple of percentage points. So these are small movements. We will offline, do a reconciliation, and get a hold of you.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay. Can I just specifically ask about any update on Massimo Dutti, and the three assets -- the three expirations at Madison that I believe were expiring this quarter?

Steven Roth -- Chairman and Chief Executive Officer

All of those will go empty before we fill them. So they will all have a period where they will be vacant.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay.

Steven Roth -- Chairman and Chief Executive Officer

And that's in our projections.

Vikram Malhotra -- Morgan Stanley -- Analyst

So the three assets and the three stores at Madison with -- were they expiring this third quarter or they will expire in the fourth quarter?

Steven Roth -- Chairman and Chief Executive Officer

The expiration of six -- when is the expiration?

Vikram Malhotra -- Morgan Stanley -- Analyst

The Westbury.

Steven Roth -- Chairman and Chief Executive Officer

Well, the Westbury, when is the Westbury expiration?

Joseph Macnow -- Executive Vice President, Chief Financial Officer and Chief Administrative Officer

Vikram, we are doing a couple of short-term renewals for a couple of the tenants at the Westbury, which will take those expirations out to the early part of next year.

Vikram Malhotra -- Morgan Stanley -- Analyst

Oh, God, Okay. That helps. And then just last question --

Steven Roth -- Chairman and Chief Executive Officer

Hang on, Vikram. On the Westbury which is a pretty interesting exciting asset when the building, when the tenants move out, we are going to renovate the building, we're going to clean the facade, we're going to light at landscape, and we're going to make improvements to it and then go out and remarket the property.

Vikram Malhotra -- Morgan Stanley -- Analyst

Got it. Okay. And then just last question given sort of potential redevelop of future assets and the moving parts at Penn, maybe Steve, if you could give us just thoughts around the WeWork model, or may be creating a bigger partnership with WeWork at any of the assets. Would they fit into any of the bigger plans?

And then just last question given sort of potential redevelopment of future assets and the moving parts at Penn maybe Steve if you could give us just thoughts around the rework model maybe creating a bigger partnership with work at any of the assets. Would they fit into any of the bigger plan?

Steven Roth -- Chairman and Chief Executive Officer

The answer is yes, and yes.

Vikram Malhotra -- Morgan Stanley -- Analyst

And any specific in terms of types of assets or any thoughts on like size-wise or what would you consider assets in terms of good partnership with them?

Steven Roth -- Chairman and Chief Executive Officer

I really can't get into any detail. We are -- we talked to WeWork. They're friends of ours. We think that they have a very interesting business model and we aspire to do business with them. With respect to talking about specific assets, I think that's inappropriate.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay. Thank you.

Operator

Our next question comes from John Guinee from Stifel. Please go ahead.

John Guinee -- Stifel, Nicolaus & Company -- Analyst

Great. First for Steve, I'm not going to ask you how much it cost to bring Jerry Seinfeld to California because that's such a cool event. But any thoughts on the mid-terms next week? And is New York City still evoked in Amazon HQ2, I can't recall?

Steven Roth -- Chairman and Chief Executive Officer

With respect to Jerry Seinfeld, we own what we think is the best building in California. We think NAREIT comes to California (inaudible) does it gives us something like that in San Francisco. And we thought about it long and hard, we really want to celebrate this great asset by inviting the real estate community, and to tour it, taste it, walk around and feel it. And so that they can appreciate -- they can appreciate the assets the way we do. So we just thought that Jerry Seinfeld who we know has done some things for me before would be a draw. So what we're really doing is, we're incentivizing the real estate community to come see our assets that come see Jerry at the same time. So we think, it's valuable dollars spent. And are you coming or not? I don't remember.

John Guinee -- Stifel, Nicolaus & Company -- Analyst

We're conflicted with you much as we'd love to. How about the mid-terms and how about Amazon HQ2?

Steven Roth -- Chairman and Chief Executive Officer

Okay. Well, to my knowledge, I don't know anything about HQ2 more than anybody else does, but to my knowledge, the activity level between HQ2 and the New York city is not high. With respect to the mid-terms, I have nothing whatsoever to say.

John Guinee -- Stifel, Nicolaus & Company -- Analyst

Okay. And then, David just a big picture Penn Plaza One, Penn Plaza Two, Farley, the Long Island Railroad Concourse, the 33rd Street Plaza, when should that be completely finished buttoned up all the construction done. Look 100% complete, is that 2023, 2026, what's the timeframe just so we can get our arms around?

Joseph Macnow -- Executive Vice President, Chief Financial Officer and Chief Administrative Officer

Penn One, as we told you is starting now, and we told you that that's a project that's probably around the two-year project. The Long Island Rail Road Concourse realistically, we think that is work likely that could start some time in the next 12 months or 18 months, and also is manageable in terms of the duration.

I think the outside date for what you're talking about realistically is the total redevelopment of Penn Two. It's a massive job that as I indicated in my remarks is going to require us to vacate the lower 10 floors of the building. The major tenant, as we've said in the past in that building where lease comes up in the April of 2020. So realistically that project will commence sometime in the early part of 2020. It will be a project scope of somewhere and we're really in the process right now of finalizing costs and timing of that project. But realistically, it's a project that will take 24 months to 30 months.

Steven Roth -- Chairman and Chief Executive Officer

John I would give you another cut on that answer. I think that in 2021, there will be so much activity and so much construction going on in the Penn district that everybody will be begin -- will understand for sure exactly what we're doing and exactly the values we are creating.

John Guinee -- Stifel, Nicolaus & Company -- Analyst

And then when does Hotel Pennsylvania kick-in and how about Manhattan Mall?

Steven Roth -- Chairman and Chief Executive Officer

What was first question?

John Guinee -- Stifel, Nicolaus & Company -- Analyst

When does Penn and Manhattan Mall kick-in?

Steven Roth -- Chairman and Chief Executive Officer

Manhattan Mall is a parking lot, is a holding action for expansion. So that's going to be the last thing to happen. The Hotel Pennsylvania has been through different cycles of opportunities which have not yet panned out. So that is also inventory, and we expect that the value of the Hotel Pennsylvania land will increase geometrically as we get moving on what's going on across the street.

John Guinee -- Stifel, Nicolaus & Company -- Analyst

Great. Thank you very much.

Steven Roth -- Chairman and Chief Executive Officer

Thanks, John.

Operator

Our next question comes from Daniel Santos from Sandler O'Neill. Please go ahead.

Alexander Goldfarb -- Sandler O'Neill + Partners -- Analyst

Hey, good morning. It's actually Alex Goldfarb on for Dan. So just two questions for you, the first one is as we look at 2019, last year you guys provided some thoughts on things that we should look for as far as either NOI moving in or out or one-timers. Is there anything that you can provide as we think about 2019? I don't know if it's maybe recapturing the Kmarts or anything that could be impacting our numbers that we may not see just by looking at the financials based on lease roll or some of that maybe swap, burn off, et cetera?

Steven Roth -- Chairman and Chief Executive Officer

Alex, as you know, we don't give guidance and so I can't really, it's not appropriate to answer that question. And Joe, do you have anything to add?

Joseph Macnow -- Executive Vice President, Chief Financial Officer and Chief Administrative Officer

No, but if Alex is asking, are there things like recapturing the portion of the Kmart at 770, we're not prepare to stay if they're all going to be in 2019. Somehow this company always finds one of these hidden jewels, to capitalize on.

Alexander Goldfarb -- Sandler O'Neill + Partners -- Analyst

Okay. That's helpful. And then the second question is for Steve, in the recent local press in New York, there has been some conversation about commercial rent control and New York City Council has been debating it. Do you have any views on the potential that this could become enacted in some way shape or form, or your view is that enough of the key people in New York understand the ramifications of this, and therefore it won't pass the way it hasn't for the 30 years that's been discussed?

Steven Roth -- Chairman and Chief Executive Officer

Well, this is not a new idea, and as you said it has not -- it has not passed muster for decades and decades. But I'm very sympathetic to political leadership being sensitive to empty storefronts and what have you. And that's a level that I'm unbelievably sympathetic. The idea of is -- really it's not a valid idea. The concept that landlords are to blame for the empty storefronts because the rents are too high. That doesn't hold the water.

Now, there's lots of different things that are going on in the retail business especially affecting the local kinds of tenants that the political leadership are focusing on. The increase in the minimum wage has had a very, very, very serious effect on profitability. Restaurants can't make it a center. That's a very huge cost to them. The increase in real estate taxes is a huge cost. The decline in their margins the pressure of the trend in retailing toward Amazon and that is an enormous number of headwinds affecting these smaller local businesses.

Now the rent is not one, and the reason I say the rent is not one because the landlords aren't totally stupid. Our business is keeping the income coming in and keeping our spaces full. So you can be sure that universally across the city and all properties, the rents will go to the clearing price to fill up the space. So that will happen because market dynamics not because of a misguided piece of legislation. I would remind you that we're on the same side because the most important drivers of the financial health of the city are individual income taxes and property tax. So, that's what I think. I think that I'm sensitive to the issue. I think getting new stores for reoccupied is important for the health of the city, but I think this legislation is misguided.

Alexander Goldfarb -- Sandler O'Neill + Partners -- Analyst

Okay. Thank you, Steve.

Steven Roth -- Chairman and Chief Executive Officer

Thanks, Alex.

Operator

Our next question comes from Nick Yulico from Scotiabank. Please go ahead.

Nick Yulico -- Scotiabank -- Analyst

Okay. Thank you. So going back to this $315 million of NOI now expected in retail, how do we square that up with page 12 of the supplemental, which shows you have you know $244 million for the first nine months of this year, which would imply something like $70 million in the fourth quarter, which is down from the $85 million in the third quarter. Is there -- what's kind of driving that down in the fourth quarter? Am I missing something?

Steven Roth -- Chairman and Chief Executive Officer

Joe I hope is going to answer that, Nick.

Joseph Macnow -- Executive Vice President, Chief Financial Officer and Chief Administrative Officer

Yes, because that requires a little reconciliation on our part. I think I'd prefer to do that offline with you after the meeting.

Nick Yulico -- Scotiabank -- Analyst

No problem. Yeah, appreciate it. And then just second --

Joseph Macnow -- Executive Vice President, Chief Financial Officer and Chief Administrative Officer

I will tell you, we'll reconcile --

Nick Yulico -- Scotiabank -- Analyst

Okay. Appreciate it. Just one other question is, how should we think about interest expenses as you are heading into next year. You have some capitalized interest benefit that probably goes away, I assume as the condos are sold and removed from construction in progress, and at the same time you're paying off debt, so just trying to get a feel for how -- some of the moving parts on interest expense for next year? Thanks.

Joseph Macnow -- Executive Vice President, Chief Financial Officer and Chief Administrative Officer

I would not expect capitalized interest to go down in 2019 versus 2018. We're still at the tail end of the expenditures for 220. Other projects are further along. I would remind you that the interest expense you saw in the past coming from the capital lease is 1535 Broadway, which was like $12 million a year. That will disappear as a result of the acquisition.

Nick Yulico -- Scotiabank -- Analyst

Okay. Thank you everyone.

Operator

Thank you. We're showing no further questions. I will now turn the call back to Steven Roth for closing comments.

Steven Roth -- Chairman and Chief Executive Officer

Thank you very much. We're very pleased with this quarter. We look forward to seeing you on the fourth quarter earnings call, which is scheduled for Tuesday, February 12, 2019, and we look forward to seeing many of you at NAREIT in San Francisco next week. Thank you very much. Have a good day.

Operator

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

Duration: 65 minutes

Call participants:

Catherine Creswell -- Director, Investor Relations

Steven Roth -- Chairman and Chief Executive Officer

David R. Greenbaum -- President, New York Division

James Feldman -- Bank of America Merrill Lynch -- Analyst

Steve Sakwa -- Evercore ISI -- Analyst

Michael Bilerman -- Citigroup -- Analyst

John Kim -- BMO Capital Markets -- Analyst

Joseph Macnow -- Executive Vice President, Chief Financial Officer and Chief Administrative Officer

Vikram Malhotra -- Morgan Stanley -- Analyst

John Guinee -- Stifel, Nicolaus & Company -- Analyst

Alexander Goldfarb -- Sandler O'Neill + Partners -- Analyst

Nick Yulico -- Scotiabank -- Analyst

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