Alexander's, Inc. (ALX) Q1 2016 Earnings Report, Transcript and Summary

Good morning and welcome to the Vornado Realty Trust First Quarter 2016 Earnings Call. My name is Vanessa, and I'll be your operator for today's call. This call is being recorded for replay purposes. All lines are in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question-and-answer session. [Operator Instructions] I will now turn the call over to Ms. Cathy Creswell, Director of Investor Relations.

Thank you. Welcome to Vornado Realty Trust's first quarter earnings call. Yesterday afternoon, we issued our first quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents, as well as our supplemental financial information package, are available on our website, www.vno.com, under the Investor Relations section. In these documents, and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly-comparable GAAP measures are included in our earnings release, Form 10-Q and financial supplement. Please be aware that statements made during this call may be deemed forward-looking statements, and actual results may differ materially from these statements due to a variety of risks, uncertainties and other factors. Please refer to our filings with the Securities and Exchange Commission, including our Form 10-K, for more information regarding these risks and uncertainties. The call may include time-sensitive information that may be accurate only as of today's date. The company does not undertake a duty to update any forward-looking statements. On the call today from management for our opening comments are Steven Roth, Chairman of the Board and Chief Executive Officer; David Greenbaum, President of the New York Division; Mitchell Schear, President of the Washington DC Division; and Stephen Theriot, Chief Financial Officer. Also in the room are Michael Franco, Executive Vice President and Chief Investment Officer and Joseph Macnow, Executive Vice President and Chief Administrative Officer. I will now turn the call over to Steven Roth.

Thank you, Cathy. Good morning, everyone. Welcome to Vornado's first quarter call. At Vornado, we have a treasure trove of great assets such as the Bank of America Tower in Francisco, the 3.7 billion square foot Mart in Chicago, all of our office, residential and development properties in Washington, a couple of billion dollars of cash and much more. But the main event here at Vornado was our New York office and our dominant New York street retail business, and that business has industry-leading asset quality, is performing at very high levels and is growing like crazy. The growth here is organic and most profitable kind, coming from our existing assets where taxes and operating expenses are already baked in, so that substantially all of each dollar of incremental revenue falls right to the bottom line. And this growth requires us to spend only TIs and leasing commissions of say $100 per square foot, which is a small fraction of the capital required to buy or build in New York, which might cost $1,000 or $1,500 or even $2,000 per square foot. And none of this growth is yet transparent to the market. So here is the math. Over the past two years we did 7.1 million square feet at share of leasing in New York at the Mart and at 555 California Street, which is 2.3 million square feet higher than our two-year average. As of today from this leasing, we have $200 million plus of incremental additive cash NOI on deck, not yet in our numbers, which will be recognized between now and 2018 as follows; $41 million in the remainder of this year, $120 million in 2017 and another $39 million in 2018 or from signed leases, which have not yet commenced paying cash rent. The breakdown is $123 million from New York office, $57 million from New York Street retail, and $20 million from the Mart and 555 California Street. These are not projections, all of this is from signed leases from tenants such as PWC at 90 Park Avenue, Neuberger Berman at 1290 Avenue, the Americas, Facebook at AOL, Verizon at 770 Broadway, Amazon at 7 West 34th Street, Macy's at 11 Penn Footlocker and Structuretone at 330 West 34th Street, Victoria's Secret at 640 Fifth Avenue, Swatch/Harry Winston at Saint Regis, Conagra at the Mart, and many, many others. The equipment GAAP increment that has yet to come into income over that period is $83 million. As you know, GAAP rent recognition commences earlier than cash rent recognition due to free rent periods. Importantly, because NAV, the principal measure of value is calculated based on cash NOI this additional $200 million increment will increase our NAV by a very meaningful $20 to $25 per share, depending upon the cap rate one uses. For those of you who are in the modeling business, our internal budgets show 2017 cash NOI from our New York office and Street retail, plus the Mart and 555 California is about 1.1 billion give or take. As a point of reference, 2015 was $900 million, that’s $1.1 billion in 2017 versus $900 million already booked in the 2015. You should note that we will of course have leases that will expire during these periods and other leasing activity, which could positively or negatively affect both NOI and EBITDA. Now to the quarter; our comparable FFO was $1.08 per share for the first quarter compared to $1.07 for last year's first quarter. Our New York business produced $14.9 million of comparable EBITDA growth or $0.08 per share even after being penalized by $5.1 million non-cash write off of straight-line rent receivable from early lease terminations we initiated to make way for replacement leases at 20 plus mark-to-markets. Excluding that straight-line write off, growth was $20 million or $0.10 per share. The New York business produced a 5.5% same-store increase. Focusing on the entire company, the way we look at it, the Washington business declined by an expected $5 million of which negative $2.1 million is from increasing vacancy at skyline and properties taken out of service and negative $2.9 million is from the core, all on track with our guidance. The fair value earnings of our real estate fund declined by $5.2 million quarter-over-quarter, as you know the fund is in harvest phase and continues to shrink, all on plan. And we are carrying $1.9 billion of cash, $900 million more than the prior-year's quarter and that has a quarterly opportunity cost of say $0.05 per share. Adjusting for these items, our pro forma comparable FFO per share would have been $0.10 higher, a 9.3% increase from the prior year's quarter. Now to other business; on April 22, a little over a week ago we submitted two comprehensive proposals in response to the states RFP and RFEI, one of the Farley building in partnership with the related companies at Skanska and a second on our own for Penn station. We welcome Governor Cuomo's spotlight on Penn station and the Penn Plaza district. We were the early mover in Penn Plaza, we have accumulated 9 million square feet here in the very heart of Manhattan’s New West side, and as I have said repeatedly, Penn Plaza is Vornado’s big kahuna. At 220 Central Park South, our for-sale condo project traffic has picked up in the sales room. Benefiting from the rising building now being very clearly visible from Central Park and the calming of the global financial markets. We continue to explore separating the Washington business, and we have begun a process to dispose of the skyline properties, which are subject to a $678 million mortgage loan. At our request, loan has been transferred to the special service. Consequently, based on our shortening estimated holding – shortened estimated holding period, we recognized the $160.7 million non-cash impairment loss in this quarter. Now to leasing, companywide in the first quarter we leased 1,403,000 square feet in 106 separate transactions. In New York, we leased 737,000 square feet of office space at starting rents of $84.32, and positive mark-to-markets of 32.6% GAAP and 28.2% cash. Business in New York is really. And asset pricing in New York continues to set records. Here are two examples hot off the press; first, the 50 front foot Valentino flagship on Upper Fifth Avenue, midblock between 54th and 55th Streets on the east side, has just got the contractor to a European high net worth individual. We hear the prices $525 million well through the $480 million asking price, which equates to $11.3 million per retail front foot. Vornado owns the balance of this block. Both sides of the mid-block Valentino property including both quarters consisting of the St. Regis retail's 100 front feet and 689 Fifth Avenue with 50 front feet, which gives us a total of 150 front feet on this super premium block, which I guess based upon the comp is now worth for sure well over $1.5 billion. This sale certainly validates Upper Fifth Avenue values. Two years ago in my annual letter to shareholders pages 14 and 15 if you would like to look it up, I provided to a numerical tour of Upper Fifth Avenue values. We own 20% of the retail frontage on Upper Fifth including stores for Victoria's Secret, Ferragamo, Swatch, Harry Winston, MAC Cosmetics, Massimo, Duty, Uniglow, Hollister, et cetera. The second recent sale of note, the Sony building, 550 Madison Avenue at 56th Street, coincidentally just behind the St. Regis has also just gone to contract to a high net worth Middle Eastern family for $1,800 a foot. The seller abandoned plans for a residential conversion, the building will be delivered vacant intended for high-end office use. These two noteworthy sales both involving high net worth individuals, not countries, not sovereign wealth funds, not pension plans or the like, further validate the strength of New York, the enormous liquidity in the marketplace, and the global appeal of prime New York real estate as a store of value. It's important to note that these two assets are very high quality. And by the way, I can't resist the plug; our portfolio is filled with assets of equivalent quality. This is proxy season, our annual shareholders meeting is May 19th. This year we have modernized our governance to conform the best practices. Special thanks to Candace Beinecke, our corporate governance committee chair who has lead the charge here and has now taken on the additional responsibility of lead trustee. Thank you to Candace. To sum it up, business is really good. We’re excited to be putting up growth numbers from our on-deck leases and our highest priorities are to resolve Washington and to dig in, and get to work in Penn Plaza. Now, over to Steve Theriot.

Thank you, Steve. Steve covered our financial results, so I will limit my comments to a couple of times. I want to highlight two items that will affect the quarterly comparison of our New York business growth and comparable FFO for the remainder of 2016. First; in the second, third and fourth quarters of 2015, we recognized $27 million of non-cash, non-recurring income from the acceleration of FAS 141 below market leases related to our early termination of the leases at the St. Regis retail property and the Crate & Barrel lease at 650 Maddison. Second; during the remainder of 2016, we will write-off straight-line rent receivable balances totaling $9.7 million, triggered by early termination of leases with J. Crew in Rockefeller, which enabled us to sign new replacement leases for that space with mark to markets of plus 20% GAAP and cash. While the write off of straight-line rent receivable balances will reduce EBITDA in 2016, the new replacement leases are accretive from an economic perspective increasing future EBITDA. Together, these two non-cash adjustments to recapture and re-let space at much higher rents will negatively affect the quarterly comparison of our growth in our New York businesses comparable EBITDA and FFO in the second quarter of 2016 by $11.3 million, the third quarter by $12.5 million and the fourth quarter by $12.9 million. We reaffirm our guidance the comparable EBITDA from our Washington business for the full year 2016 will be $7 million to $11 million lower than 2015. Now turning to capital markets; in March, we completed a $300 million refinancing of One Park Avenue, a 947,000 square foot Manhattan office building in which we own 55% interest. The five your loan is interest only at LIBOR plus 1.75%, we realized net proceeds of approximately $45 million. The property was previously encumbered by 4.99% fixed rate $250 million loan. In February, we completed a $700 million refinancing of 770 Broadway, a 1,158,000 square foot Manhattan office building. The five your loan is interest only at LIBOR plus 1.75%, which was swapped for 4.5 years to a fixed rate of 2.56%. We realized net proceeds of approximately $330 million. The property was previously encumbered by 5.65% fixed rate $353 million loan. Our remaining 2016 consolidated debt maturities are $709 million, consisting primarily of the $550 million mart loan, which matures in December 2016. Our share partially owned entities 2016 debt maturities is $697 million, consisting primarily of $361 million at 280 Park Avenue and $161 million at the Warner building. We are well along on these refinancings and expect to close the Warner building refinancing in a couple of days. Excluding the financing of our 220 Central Park South project, which will self-liquidate from signed sales contracts, our consolidated debt metrics are; fixed rate debt accounted for 77% with a weighted average debt of 3.99% and a weighted average term of 4.8 years and floating-rate debt accounted for 23% of debt with a weighted average interest rate of 2.18%, and a weighted average term of 5.1 years. Debt to enterprise value is 31%. Debt-to-EBITDA ratio is 7.5 times. Pro forma, excluding debt related to skyline, which was recently transferred to the special servicer and using say $1 billion of excess cash to reduce debt, our pro forma consolidated debt to EBITDA ratio strengthens to 6.3 times. In addition, including our share of partially owned entities debt, excluding Toys "R" Us, our pro forma total debt to EBITDA ratio calculated on the same basis increases to 7.0 times from 6.3 times. In closing, Vornado has a fortress balance sheet with modest leverage and our maturities are well staggered. We have as of today $4.4 billion in liquidity comprised of $1.9 billion of cash, restricted cash and marketable securities, and $2.5 billion undrawn under our $2.5 billion revolving credit facilities. I'll now turn the call over to David Greenbaum to cover our New York business.

Steve, thank you and good morning to all. On our year-end call just 10 weeks ago, we took a deep dive into Manhattan leasing environment and focused on private sector employment, as well as office using employment, both of which ended 2015 at all-time record highs. In the first quarter, the Manhattan leasing market continued to perform well as the city’s highly diversified economy continues to create tenant demand across all industries and submarkets. Despite global volatility, the overall leasing market remains resilient with first quarter leasing volume of better than $8 million square feet, which included 10 large block transactions comprised of a balanced mix of financial services, TAMI and professional business services tendencies. Asking rents in Midtown continue to increase quarter-over-quarter having now eclipsed the $80 per square foot mark. The overall availability rate continues to hover around 10%, importantly which includes sublet availability, which is now down to a nominal 1.5%, representing the lowest rate since the first quarter of 2008. New York City’s job growth continues to be solid in the first quarter of 2016 with total private sector employment growth of 24,200 jobs including 7,100 office using jobs both on par with the strong job creation we realized in 2015. And by the way these are actual reported job growth numbers, not seasonally adjusted. As the Wall Street Journal recently reported, company's flock to cities with top talent and New York continues to be a top magnet for top talent. I'll repeat what I said last quarter, business has been and remains very good. Let me now turn to our office portfolio. During the first quarter, we completed 737,000 square feet of leasing activity in 36 transactions. This quarter’s average starting rents reached $84.32 per square foot with very strong positive mark to markets of 32.6% GAAP and 28.2% cash. I might add that even if you exclude one large lease extension we executed this quarter, our starting rents would still be over $79 per square foot and our mark to markets would be over 30% GAAP and 28% cash. Our quarter ending office occupancy was 96.4%, we remain full. And reflecting on the City's continuing healthy job growth, I would note that of the 737,000 square feet we leased in the first quarter fully 41% of the activity was comprised of tenants expanding their footprint in New York, in our case attributable to two significant leases I'll talk about in a minute; PWC PricewaterhouseCoopers and Facebook. In anticipation of the scheduled expiration of the space formerly occupied by big pharma companies Sterling Winthrop and Santa Fe at 90 Park Avenue. During 2015, we completed a significant $70 million redevelopment of the building, which has been extremely well received by the marketplace. As we reposition and transform buildings in our portfolio, time and time again we successfully have attracted large credit headquarters tenants; Neuberger Berman at 1296 Avenue, Guggenheim in 330 Madison Avenue, Amazon in 7 West 34th Street, PJT Partners and Franklin Templeton Investments at 280 Park Avenue, Footlocker and Deutsche Advertising in 330 West 34th Street, Facebook and AOL Verizon in 770 Broadway, and on and on. And this quarter's leasing highlight was our 241,000 square foot headquarters lease with PwC at 90 Park Avenue. PwC is the largest professional services firm in the world and this new lease is pure expansion for PwC creating a campus like environment for its New York workforce in close proximity to its present office at 300 Madison Avenue. This was a competitive deal and we are delighted that PwC has selected 90 Park Avenue as its second headquarters location in New York. The transformation at 90 Park Avenue has totally modernized the infrastructure of this asset, as well as dramatically reimagining the aesthetic of the building to attract both the millennial generation, I'll note here that 80% of PwC's New York workforce are millennials, as well as the more traditional financial services tenants. In this 950,000 square-foot Class A property, in the past year we have leased 540,000 square feet and have an additional lease out for signature of another 120,000 square feet, bringing the building to 93% occupancy, all at robust mark to markets of 25% GAAP and 20% cash. We have now secured three major tenants in the building; PwC, FactSet and national law firm Foley and Lardner, along with a concentration of boutique financial services tenants will occupy the midrise and tower of the building including Nuveen, EverBank, Agon and the Guggenheim Foundation. Speaking to the quality of our New York portfolio; in the quarter, we continued to outperform the market as it relates to deals of $100 per square foot or greater. We executed six leases this quarter totaling 340,000 square feet with starting rents averaging $116 per square foot. Driving these numbers, level III renewed a 60,000 square-foot lease at 85 10th Avenue; Facebook added another 80,000 square feet at our 770 Broadway, where we were able to recapture a below market lease in order to satisfy Facebook's ever-growing need for space, and Bloomberg extended its lease in the tower office floors at 731 Lexington Avenue to 2029, to be coterminous with its 700,000 square foot main lease. In our retail portfolio, during the first quarter, we completed 38,000 square feet of leasing activity in seven transactions. The highlight of the quarter was our 20,000 square foot lease with Starbucks for its new roastery and tasting room concept, which will be Starbucks largest outlet in the world, modeled on the concept store that the beauty in the company's hometown of Seattle two years ago. Even we were surprised by the worldwide business press this lease received. Looking for the perfect location to open the second outpost of its high-end brand, Starbucks after an extensive process selected our development site at 61 9th Avenue at 15th Street because of its close proximity to the Chelsea market, Google's offices, the Apple Store in the High Line. We broke ground on the 61 9th development just a few weeks ago, and we will be delivering the iconic 170,000 square foot building designed by Rafael Vinoly by the end of the next year. The balance of our retail activity for the quarter was a series of small leases with positive mark to markets of 15.8% GAAP and 5% cash. I’m now going to turn to our activity in Penn Plaza, where our efforts to reposition our massive holdings continued to pick up momentum this quarter. In our last call we told you that we were optimistic that after our temporary experiment last year, we would receive approval to close a portion of 33rd Street between One Penn and two Penn Plaza year-round. In March, the community board voted unanimously to approve the closure and the city has now given us the green light to close the street indefinitely starting this summer. This is an important opportunity to improve the public realm in this area. In addition to improving the public realm, we will invest in our holdings to upgrade them for today's tenants. In Steve's annual Chairman’s letter he included a link to renderings of Bjarke Ingel's design for two Penn called the skirt. Our intent here is to transform a good 48-year-old building with its punched windows into a modern age building with new floor-to-ceiling glass curtain wall. The main event here is the massive undulating canopy. In spots it will be 85 feet high and extend out 65 feet, which is been inspired by the iconic photograph of Marilyn Monroe standing over a subway grate. This feature will provide grand entrances for Penn station, Madison Square Garden and our two Penn Plaza office building. We believe that this design will become world famous, and in fact a symbol of New York. Our transformation of the area is in the early stages, but you can already see the potential. Our starting rent in one Penn Plaza for the quarter for nine leases, a mix of renewals and new leases covering 51,000 square feet was over $71 per square foot, good but still well below what we believe the building can achieve given its unmatched access to transportation and its location from the center of Manhattans New West side. Pret A Manger announced publicly that its location on the north side of the Long Island Railroad Concorde in Penn station is its best-performing store in the country on a sales per square foot basis, we own that retail on the north side, where we also just signed a lease with Shake Shack and Magnolia Bakery recently opened. Finally, as Steve mentioned, April 22nd was the due date for the State’s request for submissions for both the transformation of the Farley Building and Penn Station itself, that morning Vornado submitted comprehensive proposals for both. And we believe complain important role in the transformation of this area into the Gateway that New York deserves, a new empire state station complex. We welcome governor Cuomo’s focus on this area and know that with his involvement great things are possible. Let me now turn to the Mart in Chicago where our redevelopment of the communal areas on both the ground and the second floors is well underway with an anticipated completion this June. This transformation includes a grand stair connecting tenants and visitors from the ground-floor entry of the building off River Drive up to a new food and beverage experience, overlooking the Chicago River along with our new urban food hall on the second floor, which is within steps of the most active transit line in the city of Chicago, which directly empties tenants and visitors into the Mart. Continuing the trend of major corporations moving their headquarters into downtown Chicago from the suburbs, Beam Suntory the spirits company completed a 113,000 square foot sublease from Motorola Mobility, adding another great brand name to our tenant roster. While we did not execute any significant direct leases in the first quarter taking account of our very active 750,000 square feet of leasing activity in 2015, the Mart same-store numbers for the first quarter were a positive 11.3% GAAP and 25.1% cash. A word about the hotel business in New York; while both domestic and international tourism remain strong, the hotel industry is in a down cycle, the victim of gross oversupply. The results of our hotel Pennsylvania have been weak. We continue to look at this hotel as a parking lot for future development as part of our overall Penn Plaza strategy. As I look at our entire business excluding the hotel Pennsylvania, our New York same-store numbers for the first quarter were a positive 6% GAAP. As we noted on our year-end call, we anticipated that same-store growth in our New York business would be back to our historic and consistently strong levels as in fact reflected in this quarter's number. While the cash same-store for the first quarter as expected was only a positive 1.7%, as the year continues and free rent periods burn off, we expect to realize cash same-store growth approaching double digit numbers in the second half of this year, and we will continue to see that strong cash same-store growth continue into 2017 as the massive amount of leasing we completed during 2014 and 2015 in both our office portfolio and our Street retail business cycles into our cash NOI. To conclude my remarks the entire New York business had very strong quarter; strong same-store increase, strong leasing volume, strong average starting rent, strong and new credit worthy tenants, and strong occupancy levels. Our 1.2 million square foot pipeline of leasing activity is robust with 475,000 square feet of leases and documentation, and an additional 750,000 square feet of proposals we are negotiating. We are very constructive on the New York marketplace. Thank you. And with that, I’ll turn the call over to Mitchell to cover Washington.

Thank you David, and good morning everybody. In Washington the story continues to be about recovery. In 2015, Washington added 68,000 jobs and the projection is about the same for this year. We seem to be on track thus far with 25,000 jobs added in the first quarter. The region's economy has diversified with job growth focused in professional services, IT, associations and advocacy groups, security tech, and cyber and biotech. We should see this job growth translate into more robust office demand as the market continues to recover. The above average job growth is pushing the unemployment rate down to extremely low levels now at 4.1% for the region. We believe that Washington our nation's capital is a forever market that will continue to strengthen. In the first quarter of 2016, we completed 579,000 square feet of office and retail leases in 43 transactions. Office leases signed in the first quarter were flattish, generating a GAAP mark to market of negative 3.9% and a cash mark to market of negative 2.5%. Our first quarter TIs and leasing commissions were 7.8% of initial rents or $3.01 per square foot per annum, down from Q4, which was 11.5% or $5.06 per square foot per annum. Our overall occupancy was flat at 84.8%, our office only occupancy excluding Skyline increased by 60 basis points to 90.6%, Skyline declined to 47.4%, our residential occupancy increased by 70 basis points to 96.8%. In downtown Washington DC, where we own approximately 3.2 million square feet of office space in 11 buildings, there are now 96.8% leased, there are several highlights. At the Warner Building, where we own 55% in a joint venture, we are finalizing our refinancing. We’ve largely re-leased, the 600,000 square foot landmark currently to 88% to a great roster of high-quality tenants that include Baker Botts, General Electric, Facebook, Hewlett-Packard, Apco Worldwide, Cooley, EMD Serrano and The One Campaign. Last week treasury's office of Inspector General moved into our Boeing Building at 875 15th Street occupying 58,400 square feet. Here we have a prestigious agency who required a quality building close to the main treasury building two blocks away, to move coincided precisely with the expiration of the previous tenant. At the corner of 17th and M Streets, we are emptying tenants at the contiguous 1726 M Street and 1150 17th Street buildings to make way for our new 335,000 square foot trophy office building 1700 M Street. Our plan is to begin demolition of these outdated buildings within the next 90 days and build a new garage and foundation back to grade, while actively marketing the building. With the garage and foundation complete, this will put us in an excellent competitive position to go vertical when the time is right. Across the Potomac, we are also continuing to make progress in Crystal City. We are actively replacing BRAC tenants with a wide array of associations and advocacy groups, professional services and creative companies. Our efforts to revitalize and energize neighborhood are at full speed and taking shape. A full-page New York Times story that ran on Wednesday, April 20th gave a good sense of the creative authentic community that's growing in Crystal City. WeWork recently opened its first location in northern Virginia in our building at 2221 South Clark Street in Crystal City. Here we transformed an obsolete office building into a WeWork community that combines for the first time their exciting new residential concept with their proven co-working office space. The office space on the top two floors of the building and it’s now 85% occupied after only three month. The balance of the building includes WeLive, 216 new collaborative living community style apartments that officially opened yesterday to great response and press. This morning, a Washington Post story describe the new WeLive as a fresh take on what apartment life should be like. WeLive is bringing a whole new crowd to Crystal City and we are delighted to partner with them. In adjacent Pentagon City, we've begun pre-leasing our new 699 unit apartment project, the Bartlett. We’re seeing strong activity resulting in 125 units already leased at better than budgeted rents. We look forward to the first tenant move-ins in June. Located directly atop a new Whole Foods, this 23 story building has great views of DC and the best residential amenity package in town. In addition to finishing and opening WeLive in the Bartlett, we’re putting the final touches on our design for 1770 Crystal Drive. 1770 Crystal Drive is a 270,000 square foot building in the bulls eye location that we recaptured when we extended the US Marshalls and moved them down the street to another building of ours. Located right at the Metro, the existing building will go out of service next year, as we fully redevelop it with a new skin, new lobby, new system and the top floor conference center for delivery in 2018. It will be our first good as new office product in Crystal City in a long time. We’re excited about it and expecting great things from it. We will surround it with restaurants and entertainment adding to the street vitality and heightening the urban experience of Crystal City. And finally, we have a tremendous 8 million plus square foot development pipeline on land that we own outright for significant value creation. Included in that number is our 7.5 acre parcel in Rosalynn, which we own in a joint venture, arguably the best beachfront location in all of the Washington region. In March, we received long-sought entitlement approval to build 2.5 million square feet of new office residential hotel and retail, clearly a big step forward in realizing the value from this irreplaceable site. I'd like to thank you very much, and I'll turn the call over to the operator for our Q&A.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And we have our first question from Manny Korchman with Citigroup.

Good morning everyone. Steve, appreciate the color on the $1.1 billion of NOI in 2017. But you seem to have overlooked DC when you were giving those numbers. Are we reading too much into it that DC will be out of Vornado my then, or were you just waiting to talk about it later on your scripts?

I wouldn’t read anything into it, we were focusing on our New York segment, which is clearly the dominant segment in our business, notwithstanding that we have said repeatedly and hinted that we are studying, analyzing, and separating Washington. So while we are not announcing that and it may or may not happen, you can read into that whatever you care to.

Great. And then David, how do you think about the new supply coming on in New York, especially with Sony coming back in that sort of nearer-term than people expected? Do you think we are about to head to a place where there is just too much supply?

Manny, good morning. I guess the first thing I would say is New York is a big city. So as you think of the supply coming into the marketplace, 15 million, 18 million square feet on an absolute number sounds like a very large number, but as a percentage of the overall stock, what we're looking at is increasing the stock by in the 3%, 4% kind of range, which is going to be coming online over the next really four-ish plus years. So as we look at historical absorption in the New York City marketplace, in a good year, we certainly can absorb 4 million, 5 square feet and in some great years we can absorb 8 million and 10 million square feet. I think the math is basically and we've actually done some work here with some econometric types, that provided the job growth stays relatively positive, and when I say relatively positive the job growth has been somewhere in the, kind of 2.5% to 3% growth range for office sector jobs. If that number moderates to the 1.5% to 2% range, I think we’re going to be just fine as it relates to the absorption of that space. Steve, do you want to add anything else to that?

Well, clearly a lot of it has to do with the state of the economy at the time, clearly a lot of it has to do with the price points in question, and also the geography. So Sony building is coming back, we know what they pay for the building, we know – by the way we know the buyer and they’re very nice, obviously competent and very, very well capitalized family. So we know what they pay to the building, we know what the downtime TI leasing commission fit up, et cetera will be, so they are obviously, and we know the quality of the building, they are obviously going to be targeting a very, very high rental market where they will be catering to one and two floor elite kinds of companies, so there is that. There is a couple of – there is a new building on Park Avenue, which is famously going after the very, very, very highest rents. There's another building kicking around in the Grand Central area, which is also going to go, compete for – at very, very high rents. So those are in – that's all fine. I care more about the Hudson Yards Cup competition, which is in the mid-80s and of dollars a foot, and so that competes with the general marketplace. And so I think that's fine, that will be gone and then everything will be fine. So I relish competition that comes at $150 a foot because that gives us a tremendous opportunity to compete at much lower prices and be extremely successful. And so that's my comment. The other thing is that each building competes for its tenants in a different geography, and each building has a different culture. So there you have it. Obviously we will get through this, we will absorb it, we will thrive, and a lot of it has to do with what the world looks like as these buildings get a little bit closer.

Thanks so much guys.

Thank you. Our next question comes from Jamie Feldman with Bank of America.

Great. Thank you and good morning. So can you help us think about – you just submitted your bid for Moynihan Station. You talked about 8 million square feet plus a potential development in DC; I know that will take some time. You gave a lot of good color this quarter in the supplemental on the development pipeline. Can you help frame how people should think about the capital needs of both the DC platform and the New York platform in the next couple of years?

Our plans are not specific enough in Penn Plaza to be able to do that Jamie, and I don't want to go – I don't want to go from the hip on that because it’s important. Obviously we will be spending hundreds and hundreds of millions of dollars in Penn Plaza to accomplish our objectives there, but until we are prepared to make full disclosure of what our plans are in a very reasonable way, I'm not going to speculate.

Okay. And then what about on the DC side?

In the DC side, as we – once again, as we start our projects we will publish the budgets and the expected yields, just like we did with the Bartlett for example.

Okay, thank you.

Thank you.

Thank you. Our next question comes from Ross Nussbaum with UBS.

Thanks. It's Nick Yulico here with Ross. I just want to make sure I understood the commentary about the New York City, the impact from straight-line FAS 141. So a lot of this impact I guess happened in the first quarter because you booked income last year from FAS 141, so it went down in the first quarter. And then when you talked about the close to $10 million straight-line write-off balance, does that happen all in the second quarter or is that spread through the rest of the year?

Yeah, Nick. The 141 acceleration that was recorded in the prior year was concentrated in the second half of the year, was the heaviest in the third and the – or the third and fourth quarters of last year. It is non-recurring in its nature, so on a relative basis it won’t recur in 2016. As it relates to the straight-line write-offs, there was $5.1 million in the first quarter and that there will be another $9.7 million as we go through this year that the heaviest amount of that will be in the second quarter, but it will – the way that that accounting works is that the straight-line balance is related to the early terminated leases, is accelerated over the shortened remaining lease term for those tenants, and so it’s causing us to have to immediately write off the straight-line balances, but there will be another $9.7 million, the heaviest slog of that will be in the second quarter of this year.

Is that the kind of information you were looking for?

Yes, that's helpful. Thanks. And David, could you just talk a little bit more about the leases that you had that are in documentation or under negotiation today? How much of that is renewals? I think you may have had a law firm tenant you are working with in 90 Park. And how much is expansionary space like you just had with the PWC lease?

Of the 1.2 million square feet that we really have in our pipeline, and as I said off that about 0.5 million is actually in lease documentation with the balance another 700,000 square feet in the pipeline. In the aggregate it's probably about 50% renewal and 50% new deals. I think of the deals that we actually have in active lease documentation, which we fully expect to get closed in the second quarter, I think that's going to be probably a little bit more heavily weighted toward actual renewals where we’re working on a couple of renewals; one, some space that’s coming up in early 2017, and then as I mentioned a law firm who actually comes up in the 2018. Is that helpful?

Yeah, thanks David.

Thank you. Our next question comes from Alex Goldfarb with Sandler O'Neill.

Good morning. First, Steve, thank you for the NOI roadmap. Just as part of that, can you just talk about, one, I think you mentioned $83 million of GAAP, but can you just – how we should think about – if that $83 million was this year or was that something else? And then second is while you have the $200 million of NOI that you laid out, what should we think about as far as move-outs that would offset that amount over the next – this year and next?

With respect to the timing of how the $83 million of GAAP, that is yet to be recognized feeds it, I don’t have that. Steve, do you or Joe have it?

We do, we do. Alex, it’s Joe. That’s approximately $53 million this year and $31 million next year.

So it’s $53 million in 2016, and how much?

$31 million in 2017.

And $31 million in 2017, okay.

We round it down, Alex, it’s really $84 million.

Okay. And then what should we be thinking about as far as lease move-outs that would offset the $200 million?

Well, the answer to that is, none. Now, let me explain that to you. The $200 million of cash NOI that is yet to being recognized in our books okay is totally additive, so there is no move-outs that will offset that. However, that’s only for that segment of our portfolio, so we will have the balance of the portfolio normal move-outs, normal move-in and normal turnover, okay. So if the presentation that I made in my opening remarks is that all things being equal and steady-state, we have to $200 million of additive cash NOI that will feed as I mentioned so much this year, so much in 2017 – a little bit, and a little tail in 2018.

Okay, that's helpful, Steve. And then the second is as far as the potential DC spinout, if you could just comment, it sounds like you are not willing to give timing yet. But if you could just give a comment as far as if it were to occur, what you would see the balance sheet structure as far as leverage and then what the cash position of that entity would be. Obviously it sounds like there's still a lot of redevelopment going on both in Crystal City as well as the Rosslyn site you discussed.

That’s a great question. First of all, with respect to timing. As we – when we make our decision, we’re willing to do it in a – as we did with Urban Edge, and by the way we have a history in doing this, we have done it before. So we are sort of experienced hands at this. So we will do it with measured speed, so that’s step one. Step two is, is that as we did with Urban Edge it was properly capitalized, it had fine assets, it had enough money and enough capital and credit on it – in its, and the need to complete its mission, it had a well-defined mission, it had basically inherited our management team plus the addition of one very, very talented CEO that we recruited on the outside, and then he added CFO et cetera. So the business will be – if as and when we make that decision and launch, it will be set up for success; from a balance sheet point of view, from a capital plan point of view, from a team point of view.

Okay, great. Thank you.

Thank you. Our next question comes from Steve Sakwa with Evercore ISI.

Thanks. I guess, Steve, to follow-up on that question, I understand the Urban Edge spinout and the rationale behind it was kind of a small part of the portfolio that didn't get a lot of attention. But the DC portfolio is pretty large. And I guess I'm just trying to understand maybe what opportunities are not being taken fully advantage of down in DC with this division being part of the Company. And trying to just understand what it may do differently if it were a stand-alone entity.

The answer to that is, hi Steve how are you? If we do separate Washington, it will be for the reasons that we already enunciated? And that is to have a focused management team on a – with a very specific mission in Washington, which may or may not involve capital partners et cetera, and will have its own tray – its own report card, mainly its own stock price. And basically be able – have its own board and be able to make its own decisions. So we’re capitalist, we believe in, we believe in incentive, we believe in report cards et cetera. So we think that the Washington business, not that much unlike the Urban Edge business will benefit enormously from being its own, being its own man and woman, so to speak. We also believe that the New York business will benefit by being a focused New York business so that global investors can invest in the New York platform, the New York assets and our New York activities separately from Washington or shopping centers or whatever. So that's what our objectives would be, there was nothing, there are significant things that will be accomplished in our mind by investors being able to choose Washington or New York as opposed to having to take both of them in the current structure.

Okay. And then I guess a follow-up on this $200 million just to try make sure I understand. So Steve, all of this activity is already done and taken place, and therefore I'm assuming it's already out of the lease expiration schedules. And therefore, as we are trying to look at the upside from leasing, this income is effectively there but not part of that schedule. Are you looking at different disclosures going forward on how we monitor these figures? Because they are obviously going to be sort of a constantly changing set of numbers. And it seems like there's income, but it's missing and it's not part of the rollover schedule, unless I'm mistaken on that point.

Hang on, you said this is already done, well, so it is done and it isn’t done. The leases are signed, the income that will come from those leases is already baked, but they had not yet our financials because either they were in free rent period or they haven't been delivered or whatever. So that they are in the bag, I call them they’re in the on deck circle, all that income is absolutely legally bound, but it’s just – it’s a matter of timing and delivery and free rent burn off et cetera, and it’s huge, one of the – it’s huge when you about it. So it comes on top of a $900 million base. And so in terms of disclosure, I don't know – I really don't know, we will have to sit down and figure out what more if anything than we just said today and in what format we will increase our disclosure, we think our disclosure is not bad, so I can’t answer that question right now. I’m sputtering; I can’t answer it right now.

Okay. I’ll follow-up off-line. Thanks.

Okie, dokie. Thank you.

Thank you. Our next question comes from Michael Lewis with SunTrust.

Hi, thank you. So I appreciate the enhanced development disclosure in the supplemental. I just have a question about how it's working. So if I use – on page 30, if I look at 512 West 52nd, for example, I believe that's a $235 million development. And so I see the CIP is $8 million, the incremental budget is $72 million. How do I get those numbers to add up? And should I assume that this is all your share on this page as well?

Okay. I now have that schedule in front of me. What’s the…

I'm using 512 West 52nd as an example but – because I think that project last quarter of two quarters ago, you said that was a $235 million project. And right here you are showing $8 million of CIP, $72 million of incremental budget. I'm just wondering how all the costs are accounted for here.

What we’re trying to show is, and the numbers here, as far as the budget and the amounts that are construction progress and line costs, those are at our shares, so these are all our share numbers.

Okay. So that gets me closer.

The $235 million is a 100% for the development. That’s the full cost at 100%.The numbers here that show here are our share.

Our share, that’s correct.

So that gets closer.

And it excludes land.

Excludes land, okay. My second question is about – you guys noted how you got your proposal in for Penn Station and the post office. I think all the proposals were due last week, if I'm correct. And so I'm wondering if you know what the timetable is for a developer to be chosen. And then if it is you, what are the next steps and how quickly do you move on something?

We really can’t answer that question. We are in the government’s hand. So we have submitted our proposals on the due date and we do not know the process that the reviewers and selectors will adopt and what their timetable is. So we just don't know. Until I know more, I don't think it's wise to speculate.

Okay. Sounds about right for the government. Thanks.

I didn’t say that, you did. I am in full suck-up mode.

Thank you.

Thank you. Our next question comes from Jed Reagan with Green Street Advisors.

Good morning guys. In terms of 220 Central Park South, can you discuss your expectations for the amount of time and it might take to sell the remaining condos and at what kind of price point relative to units that have already been sold?

Morning, Jed. Our enthusiasm for 220 Central Park South and the quality of the project, the market reception of the product is not diminished at all. There was a low in the market over the end of last year in the first couple of months of this year, I guess in response to general fatigue, too many other projects coming on board extreme worldwide global financial volatility and I think the most interesting of which is we’re not delivering for two and half years. So, the project is off to a roaring start. The marketplace accepts it as being the Class A plus project and so that's the status now. In the recent weeks, we have had a significant uptick in traffic through our sales room as I said in my prepared remarks and we are now negotiating two very important deals. The pricing of the project will – we have no expectation that the pricing of the project will diminish more than – by the way I could go up from the in-place contract that have already been signed. In terms of timing, since we basically have our course of the project and we have two and a half years to go to delivery, we are optimistic that we will have either the entire project or almost the entire project totally sold before we deliver.

Okay. Thanks for that. And just to be clear that the budget for that project is still in line with last quarter?

Yeah.

Okay. Thank you. And in terms of the valuation environment, are you seeing signs of cap rates changing for lower quality or value-add assets either on the office or retail side of things? And are you seeing the mix or depth of bidding times changing?

I’ll let Michael Franco our CIO will answer that and then pipe in.

Okay. In general I would say the first quarter was less active than last year, but for our segments office retails, I think activity is down, I don’t think pricing has changed. I think Steve highlighted two premium quality assets and I think as we’ve said in the last call expectation was the capital environment for high-quality assets was going to remain very favorable and it does. Capital continues to be very interested in New York and the pricing for assets like that -- reflects that, but the value-added asset, they have not been a many examples yet although, I think the watch tower trade, as an example it’s not closed yet, but it's under contract and I think that pricing was very full, not reflecting a capital markets impact. So I think pricing for office and retail generally continues to be strong even when there is value add components.

Jed, from my point of view, I see a reduction in the pace of activity at all price points, which is not unusual, these things fluctuate. I see if anything a scarcity of highest quality product, a scarcity of highest quality product, I know the incomings that we get from global investors interested in partnering, buying et cetera at the highest quality is increasing rather than decreasing. And the incomings are now coming from very, very far and wide geographies including; Asia, the Middle East, Europe et cetera, and domestically by the way, and Canada obviously. So, I think in terms of the highest quality, if anything the demand looks like its increasing. In terms of lower quality, we don't focus there, so I am not that concerned about it, but I can tell you that a lot of that is debt driven stuff with the entrepreneurial sponsors and buyers and sellers, and the debt markets that drives that kind of speculation is getting very skittish. So the availability of wild and woolly debt to finance that kind of stuff is withdrawing a little bit or maybe even a lot, so that’s obviously affecting that activity level. So where I am is in New York and New York is in a class of its own by the way. In New York at the highest quality of anything I see an increase in demand and no diminution in pricing.

Got it. That’s very helpful. Thanks.

Thank you. Our next comes from John Guinee with Stifel.

Great. Thank you very much. One of the things that we like about Empire is we can back in, and we figure that Empire State Realty Trust, we think is valued at about $660 a square foot for the Manhattan office. We think SL Green is valued at about $760 a square foot for the Manhattan office. Do you have any sense for when you look at Vornado at the current share price, what you would ascribe to a per square foot value of the DC office or the High Street retail or the Manhattan office?

Do we have any idea, sure, I can tell you that it’s substantially higher than the numbers that you just mentioned, but we’re not in the business of speculating or that – I have my concept of values and you do yours.

Oaky. But you don't look at $100 a share and come up with the way it looks like people are valuing our Manhattan office at $500 versus $1,000 a foot right now?

Sure, John. I had a fairly long page in my annual shareholders’ letter this year which was titled I think public real estate is cheap. I think that was the title of that section if I remember and it was basically a discussion about NAV versus share prices for our company and the other New York folks and our colleagues in New York. So what we do is we basically are an NAV focused management, we believe that NAV is the roadmap of value and that is the most accurate predictor of what the value of the companies are. NAV is based upon what it’s in the private market values and a cap rate. And so we do our work and you do yours and all of the folks on the phone do their so we think that the NAV is the roadmap and we have been very clear in saying – any by the way, a lot of our colleagues in New York have been equally as clear in saying that we think that the NAVs are substantially above the stock prices. Now the punch line to my opening remarks today about the $200 million of cash NOI that is in the bag from signed leases that will flow into our financials over the next short period of time is that that creates $20 or $25 a share of NAV. Now Empire is a friend of mine, but Vornado is Vornado and so $25 a share is $5 billion of incremental increase value. Now a lot of the analysts who do this kind of math have some forward number, which is more than the number of $900 million that I mentioned today, but clearly the vast majority of that $20 to $25 a share is not yet in anybody's numbers. So, the long and the short of it is that we are NAV oriented. We do our NAVs, you do yours, and we think the lessons are that the stock sells were much less than the NAVs, in our case, very substantially less. Now, as I’ve said before and I think I said this in the letter, I am a lifelong public company executive. So I worship to the God of the stock market, and the stock market says, you know, the stock market is a weighing machine and that's my answer.

Great, great. And just a question for David. David, if you're looking at Hotel Pennsylvania as a parking lot, and if you were able to build today, do you have any sense, excluding land, what it would cost you to do a couple of million square foot office building? Is it $600 a foot or $1,000 a foot above the land costs?

I think taking out land cost and if assuming you're talking about in office development, and obviously you could do residential, you can do resi and hotel, but it’s on an office basis, I think all in including hard costs, soft costs, TIs leasing commissions, construction costs, that number is north of $1,000 a foot for a major $2.5 million square foot tower to develop today in New York.

Say it again?

The number I said Steve was well North of $1,000 a foot, probably could be $1200 or even $1300 or $1400 a foot as you're looking at developing a two and a half plus million square foot tower.

I agree.

Great. Thank you.

Thank you. Our next question comes from Brad Burke with Goldman Sachs.

Good morning, guys. Just a two part question on the New York same-store. Last quarter you indicated that you expect well over 5% same-store growth in New York, but it would be backend loaded. So first, is that a cash or a GAAP number? And second, does that still seem like a reasonable goal for same-store for the full year?

I think the cash number reflective of – again what Steve talked about as you cycle in both GAAP and cash, the cash number is going to be significantly higher than the GAAP number. The cash number I think what I said was we would expect by the end of this year to be approaching double-digit growth and that we would be looking at similar growth into 2017. I think the GAAP number that we had this quarter of about 6% is what we're going to be looking at the balance of this year and into a next year.

Brad, it’s Joe Macnow. Let me pick up on David's 6% GAAP and make sure that there is a little – less chance of confusion. So, if David's business is doing $250 million a quarter and you expect that a 6% GAAP same-store, you would expect the comparable quarter in '16 to be $15 million higher than a $250 million quarter in 2050. David stands by that. That is what is. What Steve Theriot told you was that 2016 third quarter or second quarter, let’s take the one coming up will have a negative comparison of $11.3 million from that $50 million caused by non-cash income in 2015's quarters and expense in 2016's quarter. So I know that earlier Nick asked that question and Steve Theriot answered it, I thought about giving an example than, but this is a better timing. So, is that clear to you Brad, and everybody else.

I can't speak for everyone else. It's clear to me.

You can speak for everyone else. Goldman Sachs is Goldman Sachs.

All right. Everyone is on the same page.

I can only tell you I prefer cash numbers, they’re much simpler. Next question?

We are done.

Okay. So I think unless anybody else cares to ask a question. I think the queue is empty now. Is that correct?

That is correct.

So we thank you very much. We appreciate your – this was a little bit less of a marathon than last quarter. We appreciate your joining our call. We appreciate your interest in our company. We’ll see everybody and I guess in June in New York. Thank you all very much.

Thank you. Ladies and gentlemen, this concludes today’s conference. We thank you for your participating. You may now disconnect.