Good morning, and welcome to the Vornado Realty Trust Third Quarter 2017 Earnings Call. My name is Adrian, and I'll be your operator for today's call. This call is being recorded for replay purposes. [Operator Instructions] I'll now turn the call over to Ms. Cathy Creswell, Director of Investor Relations. Please go ahead.

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

Thank you, Cathy. Good morning, everyone. Welcome to Vornado's third quarter 2017 call. I will start with our third quarter financial results, which were truly outstanding and industry-leading. Please note that this is the first quarter that we are reporting the New York-centric Vornado RemainCo without Washington. GAAP FFO, as adjusted for comparability for the quarter was $0.99 per share compared to $0.93 per share last year, a very strong 6.5% increase. Cash FFO as adjusted for the quarter was $0.87 per share compared to $0.70 per share last year, a truly outstanding 24.3% increase. Our same-store metrics are also outstanding, and industry leading. Our New York segment EBITDA was positive 5% GAAP and positive 13.8% cash. theMART in Chicago was positive 11.3% GAAP, and positive 17.0% cash. 555 California was positive 1.7% GAAP and positive 13.2% cash. This quarter's outperformance validates our strategy of de-conglomerating and focusing on RemainCo's New York-centric business. And if past performance matters and I think it does, Vornado RemainCo has been the leader among all of the blue chip peers in same-store NOI growth since 2006. Please see Page 13 of our September 2017 deck on our website. This is one of my favorite charts. David will dive in shortly here with some of the highlights. New York office leased 452,000 square feet, 405,000 square feet a share with record-breaking average rents falling at $83 per foot and that's outstanding. Mark-to-markets were 11.9% GAAP and 11.2% cash. We are full at 97% occupancy, up 30 basis points from last year. Demand for office space in New York is robust coming from all manner of users. We invest in our buildings. They are redeveloped and modernized, well-positioned to attract tenants across all market sectors. A few years ago, I coined the phrase "The island of…

Steve, thank you, and good morning to everyone. As in our last few calls, I'll start by offering some thoughts on the market and then dive deeper into our third quarter activity. Let me first start with the critical employment measure we track. Office using employment which had 14,000 new jobs through the third quarter is well within the range we like to see of 10,000 to 15,000 annually that we estimate is needed to absorb the new supply coming online over the next 5 years. The story for this year continues to be one of the strong growth in professional and business services as well as a resurgence in financial services employment, which in the third quarter, finally reached its pre-financial crisis level. Some of these jobs were offset by a very modest decline in tammy jobs. That is not to say however that tech employment in the city is dropping. All signs point to continued growth in technology positions within non-tech companies. As I discussed last quarter, when it comes to pursuing talent, both new and old industries are converging on the same group of people driving century-old companies such as Aetna, Allstate and ConAgra to creative class buildings that can better attract talented young professionals. A recent report by the State Controller estimates that out of 240,000 technology jobs in New York City, over 46% or 112,000 jobs are tech jobs in traditional companies from retail to healthcare to insurance and to banking, and there is reason to anticipate continued strong growth in the years ahead, including with the recent opening of the Cornell Tech campus on Roosevelt Island. That's just one of an array of city, state and university efforts that are underway. On the market leasing front, performance has been robust through the third quarter.…

Thank you, David. Good morning, everyone. I'll remind you that on July 17th of this year, we completed the spin-off of our Washington business and accordingly, our third quarter comparable results of Vornado RemainCo without Washington. Washington results have been reclassified to discontinued operations and are included in non-comparable items for all periods presented, along with the $53.6 million of transaction costs in the quarter. Another non-comparable item in the third quarter was $44.5 million non-cash impairment on our shares in Pennsylvania REIT. We received Pennsylvania REIT's operating partnership units as part of the proceeds when we sold them to Springfield Mall in March 2015. I'll reemphasize what Steve and David said: FFO as adjusted for comparability up 6.5% is very strong; cash FFO as adjusted for comparability up 24.3%; the industry-leading same-store EBITDA and NOI metrics; the very positive leasing mark-to-market; and occupancy in the high 90s of percent; all translate into a truly outstanding results for this quarter of Vornado RemainCo. In our continuous effort to improve our reporting to shareholders, this quarter supplement includes additional information regarding our disclosure of trailing 12 months pro forma cash NOI on Page 9. Specifically, we're providing a summary by quarter of [ $83.7 million ] of incremental revenue from signed leases commences as well as the $37.8 million GAAP equivalent. We also disclosed the $89.2 million of capital remaining to be spent related to this incremental revenue. Now, turning to financing activity. On July 19th, our 25% owned joint venture that owns 330 Madison Avenue, an 845,000 square foot Manhattan office building, completed a $500 million refinancing. The 7-year interest-only loan matures in August 2024 and has a fixed rate of 3.425%. The property was previously encumbered by a $150 million mortgage at LIBOR plus 1.30%. We realized net proceeds…

Thank you. We're happy to take your questions.

[Operator Instructions] And our first question comes from Manny from Citi.

Hi, it's Michael Bilerman here with Manny from Citi. Steve, in your opening comments you talked about -- I think you said $1 billion of proceeds from potential sales over the next several years, and I just wanted to get a little bit more clarity in terms of gross versus net to the company and what are some of the big pieces that would comprise that $1 billion of proceeds?

I think your question is, what's in the $1 billion. Okay, is that your question, Michael?

Yes, it is the billion-dollar question.

Okay. So we've got some stocks which are going to be for sale, I mean they are Lexington, Penn REIT, Urban Edge, et cetera. So we've got -- it could be the better part of $0.5 billion of common stocks. We have several assets, which were not contributed to the JBG Smith spin-off which are in the Washington market and basically are not in our core. So those amount to whatever. We have some debt positions that are coming due. We have a shopping center that we still retain that will be sold, et cetera. So when you add it all up, it comes to significantly more than a -- well not significantly, more than $1 billion, number 1. Number 2, these sales will come over, some of them have some tax protection, some of them have some other reasons, lockouts because of spin-off regulations, et cetera. But over the next several years, we will realize over $1 billion from that. And what's more, that doesn't include the expected proceeds from the completion of 220 Central Park South which will be as well, a very significant number.

And then just secondly, David talked about starting One Penn redevelopment next summer with a lot of other things that you're going to do you. Can you talk a little bit more about sort of the total budget for that plan and whether there's anything you're waiting for from city or state to go forward and do that next summer or is there other parts of the Penn Plaza redevelopment that you would want to open before you get some of that funding from different government agencies?

The One Penn redevelopment does requires some actions by City Planning. We expect to have those actions in place in the second half of next year, although we do expect, in fact, to commence the redevelopment program even in advance of those final approvals. Steve, do you want to comment about the budget at this point in time?

Yes. Well, let me just tack on to what David said. The city planning approvals that we need are magisterial, they really involve [indiscernible]

The conversion of Plaza space into -- so we're jiggering that around a little bit to the benefit of, we think the public in the building. If we, for some untoward reason which won't happen, but if it did happen that we don't get that approval, we still have a major redevelopment and improvement of that asset that we'll proceed. So we look at it as basically unconditional. With respect to the budget, we have not published it yet and we will likely publish it maybe in the -- when we report fourth quarter.

Great. And Steve, it's great that you're back better than ever.

Thank you. By the way -- thank you very much, Michael. By the way, with respect to One Penn, One Penn is a massive asset, it's 2.6 million square feet of rentable space. It dominates the district. We are now achieving $70 starting rents. So the asset is -- it's an important asset, it sits right on top of the train station and we have very, very, very high aspirations for the future growth of this asset.

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

I know you gave some stats on leasing spreads for street retail, but I guess, as you think through the leases you've signed and the potential lease you have in the works at Times Square, can you talk through kind of what the same-store outlook looks like over the next few years, given that it sounds like things are pretty much buttoned-up?

You're talking about retail or office or both?

Street retail.

Okay. Street retail is soft. We said that, this is the second year now. One might say it's a challenging environment for street retail. If we could hold street retail level until this cycle ends, that would be doing very well and we think we will. Now we have -- so we go into this period with the following weapons, okay. Number one, we have an extremely low basis in this great street retail portfolio. So we have flexibility to be competitive that other competitors don't. Number 2, we have very, very low debt on this portfolio. If you take our flagship assets which are our Fifth Avenue assets and our Time Square assets and you put them together, we don't have $1 billion of debt, we have somewhere around $800-some-odd-million of debt on that which is against the portfolio that is 5 or 6 times more valuable than that. So maybe we have below 20% debt on these assets. So those 2 things; low basis, low debt puts us in a very competitive position. Next; these assets are the very best assets in the marketplace and these are the assets that retailers need to have, so that also makes us very competitive. Next, we have long-term leases on all of the Fifth Avenue and Times Square assets. We are leased-up for a term -- I mean, we don't -- that we have 1 expiry in the next 5 years as I think we said, and this is all with very, very great retailers and very good credits. Almost all of those leases have upticks in them, and I think we published recently that we have -- if you look at our portfolio, there are $8 million of -- is that GAAP or NOI?

NOI

We have $8 million of cash bumps in our retail portfolio which will protect the portfolio to some degree. Now there are going to be lease rolled outs. They will be insubstantial and in relation to the multi-hundred million dollars, I mean, over $300 million of income coming in, they will be insubstantial. We will compete, we will keep our portfolio full. We think we are in a very, very strong position.

Okay, that's helpful. And then I guess as you're thinking about the future, I mean where would you say rents are versus the peak in the key sub-markets?

I mean that's a very difficult -- this is a very thin market, Jamie, where there are very few tenants trolling and there are very few deals that are being made, okay. I can tell you that the 2 leases that we talked about in Times Square, the Sephora lease and the unnamed lease which we expect to be signed very, very shortly; they are within spitting distance of the top pick, okay. And they are fair rents, they are rents at which the retailers can make a lot of money. And so what I'm saying is, they're within spitting distance of the top pick. We believe that -- well that may not be atypical. In other words, if you have to look for the clearing price when there are no tenants out there that could be very bloody. That does not have any characterization of our portfolio.

Okay. And then just last, any thoughts on the WeWork-Lord& Taylor deal and what it means for either your 34th Street assets or retailer or office in the city?

I think I wrote about WeWork in my last year's letter. We know these folks, we know them well. We think what they're doing is unbelievably impressive. I won't comment on valuations, but I think that we welcome them to the neighborhood, we're happy to have them. And we think they'll improve them. I think that obviously, this was a financially-driven transaction that recapitalizes Lord& Taylor and so I think that's good. The fact that Lord& Taylor will be closing -- shrinking down to 25% of their previous store or maybe even closing it entirely is of no moment whatsoever to us.

And our next question comes from John Guinee from Stifel.

Okay. Steve, assets are better than new and the CEO is better than new. Congratulations. Question.

Is that a well wish? Thank you.

That is a well wish. Hey Joe, looks to me like your run rate on your G&A is about $140 million; BXP is around $111 million, SL Green is about $100 million and that includes a fairly vibrant DPE business which probably cost them about $20 million in a year. What do you think about your G&A in '18 given that NAV discounts matter less and cash flow matters more?

We have to re-concentrate our efforts on reducing G&A. I will tell you that we plan to publish in the supplemental, an analysis of G&A which gives you a better shot of understanding. We still supply services to Urban Edge that shows as fee income and G&A. We supply a lot of services to JBT Smith that shows fee income and G&A. We service Alexander's, that fee income and G&A. So we want to do a better job of portraying to you the real, real net rate of G&A, but that is high and we have to work on it and we're committed to work on it.

Right. And then the second question, tax issues on your LXP stock, your Urban Edge stock, the Penn REIT stock; are you able to sell these without incurring a tax hit or are these all going to be taxable transactions?

LXP is, we have basis that is about 80% of the market price. So there will be a small -- there will be a small, if I would say 20% of the sale proceeds will be taxable. So that's step one. On Urban Edge, what's our basis in urban edge?

No tax on Urban Edge.

I'm just looking at it Urban Edge -- It looks like Urban Edge, we have basis for 50% of the market value and 50% will be taxable. And the last one Penn REIT; Penn REIT, I think is tax protective for a unknown -- what?

No tax, so...

So, it is tax protect -- we can't sell it. We have a lock out on sale until an individual passes. What's the tax basis on Penn REIT?

We won't have taxable income allocated to us from the sale of Penn REIT. So, when Steve gave you the $1 billion number before, that was cash retained by Vornado. There are some taxable gains, most of which you just heard Steve talk about, that in the absence of the other capital loss carryovers, would be distributions to shareholders. But the $1 billion he talked about, was cash we retained.

John let me say that might lead another way and Joe is absolutely correct, these assets are slightly different than most of our buildings in our portfolio and that is, is that they -- we are able to sell most of these assets, maybe even all of these assets and retain almost all of the proceeds.

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

Thank you and congrats Steve as well for being back well and healthy. Just a follow-up on the street retail business. In your opinion, I mean you've laid out well kind of the bigger, broader challenges with retail and how the Vornado portfolio is different. In your view, where are we in the correction? Said another way, we've seen rents come down, at least asking rents as reported by the Real Estate Board of New York. Where are we in that correction? What are you monitoring and is there any signs in certain submarkets that things are turning?

Yes, there are bottom fishers that are coming into the market, I'm talking about tenants. There are -- there is a pick-up in activity, I am not willing to call a bottom.

Okay. And then, just as a follow-up, sort of your comments on the redevelopment of Penn Plaza, can you give us some color on and maybe that includes Farley as well. Can you give us some color on the types of conversations you're having with prospective tenants? Let's say, the Amazon headquarter deal does not come through, are you having conversations or at least initial discussions with large -- with users that may need a large amount of space, and is there demand for that type of space in the Penn Plaza area?

The answer to that is there is demand. We are in conversations, but they're really not -- we're not in a position to talk about any -- speculate on any of that.

And our next question comes from Steve Sakwa from Evercore.

I guess, David, just on the office side, can you just maybe talk about the discussions you're having with tenants kind of on the 2018-2019 and kind of where is the sort of sense of urgency to kind of do deals or tenants coming in early trying to get renewals done and just sort of what is that dynamic looks like today?

Steve, good morning. Listen, our portfolio is a real multi-tenant portfolio. What I said earlier, it is the single largest piece of vacant space. We have this 70,000 square feet in the entire portfolio. So, as you look at the expirations that we have coming up over the next couple of years, much of it is tenants that have 5000 feet, 10,000 feet, 30,000 feet. These are regular discussions that we have with tenants all the time. We are in active dialog right now with tenants in the portfolio as well as some new tenants of -- somewhere in the 440,000, 450,000 square feet and we have proposals out going back and forth in addition to that of the better part of 800,000, 900,000 square feet. Realistically it's what I'll call the normal blocking and tackling. The question that Vikram had asked about some of the big fish hunting, that realistically relates today to what we have in the Farley building. And as I have said on this call and on the prior call, as you begin to witness and understand the grandeur of this extraordinarily full block building, the truly unique nature of these footprints, while we can deliver 250,000 feet of floor, it is extraordinarily attractive to the creative types of tenants. I'll give you just kind of one data point and that is in early August, the entire senior team here went to the West Coast and we spent the better part of 2, 3 days visiting some of our tenants and customers as well as other companies just to understand the nature of what these campuses are in Silicon Valley. And you go to Facebook and you see a new Frank Gehry building, which is a one-story building, parking at the base, a 450,000 square foot footprint. As you think about that, that's 10 acres with a park on top. You go to Apple's headquarters, it's 820,000 square feet per floor with a park effectively in the middle of the ring. And you see this over and over again when you go to Samsung, Nvidia and other tenants. So what we think is truly unique about the Farley building is the ability to deliver truly a horizontal campus in New York with what I said earlier, some great roof deck space in the heart of the city with views all around. But most of our business, what we do every day, what Glenn does every day, it's really going after the tenants that are less than a 100,000 square feet in terms of what our normal tenancy is.

Steve, it's actually -- as you would expect, as it always is, demand is different submarket to submarket and there are some markets that we are focused on are tight of supply as opposed to some of the other submarkets.

Okay. And then I guess, Steve, I know that the $1 billion you talked about is over a multi-year period. So maybe a little bit premature to sort of think about uses of capital, but how do you sort of think about those uses of capital today? Is it geared for share buybacks? Is it geared for redevelopment, acquisitions? I mean, how would you sort of prioritize the use of capital?

I agree with you, it is premature.

Okay. And then I guess just last question and I realize it's early on the whole Amazon H2Q. Just as you sort of think about the requirements that they laid out, New York needs many of them that you talked about, but maybe housing and affordability of housing is kind of the issue. I mean do you sort of have any sense as to kind of how those priority stack up and how do you think New York stacks up relative to some of those other cities?

Oh Lord, I think that the process that Amazon has embarked on is truly unique, I don't think we've ever seen anything like this before. We've got brother fighting against brother out there with all these different cities. There's 200-and-some-odd different applicants. So I mean we can't begin to predict the result and we can't even predict -- begin to predict who are the final 5 or 10 is going to be. Having said that, New York is obviously, everybody knows, is a high cost area. I won't comment about how business-friendly it is, we think it's very business-friendly. We think transportation is amazing. We think the quality of the workforce is unparalleled. We think that there are not only our options, but there are other options that could satisfy and even delight Amazon, but in terms of where that comes out, Steve, I don't know.

And next question comes from Alexander Goldfarb with Sandler O'Neill.

Certainly Steve, good to have you back on the call in full vigor. Two questions; first, how much does resolution of Toys play into your $1 billion I guess of cash retention as far as -- when you guys look at the different stock possessions and other assets that you may sell. How much of it is tied to whatever happens with Toys both here and whatever happens with their Asia division versus both the $1 billion of sales and Toys are two separate discussions?

I think your question is how much was the potential of a $400 million tax write-off coming from Toys shield the $1 billion, okay. And the answer is Joe.

The $1 billion is the portion we retain without any utilization of a Toys write-off and none of it comes from Toys. It's all from assets other than Toys.

But in terms of Toys being used as a shield to retain that $1 billion, the answer is, that's icing on the cake. We haven't use that at all in our internal budgets.

Okay. So then, as a follow-up to that, so if you -- when hopefully Toys is resolved, does that mean we should think about an additional amount of dispositions or you would use that shield for something else?

Once again, I can't predict that, okay. I just can't predict that. We sell assets from time to time for lots of different reasons, either we think we've gotten to the level of maturity where we have created the value that we can that they are not in our core. For other miscellaneous reasons why we don't want to either to take a large profit or because we no longer think they're useful or they're no longer growing or we don't no longer want them. And in a rare instance where even once in a while where we've made a mistake, we don't really do get into sales based upon tax reasons, which I'll do it based upon real estate business reasons. But Toys --potential of a Toys shield, that shield going forward is just icing on the cake. As you can remember, we have a very big business. We've done $15 million or $17 million of transactions in the last recent years. So this $400 million tax shield, which will be -- on a capital gain basis, be in the hundreds of millions of dollars of tax savings, it's really -- it doesn't -- this is not -- this will be the tail wagging the dog, okay.

Okay. That's helpful. And then Joe, second question. You guys have -- obviously good reaction to stock today, you guys are putting out a lot of releases on all the impacts over the past quarter that affect this quarter. When we think about that $38 million of GAAP equivalent NOI that's going to come online over the next, presumably a year, year-and-a-half. How should we think about that heading into next year, does all of it come in next year? Do some leak into 2019?

Timing of the NOI increases.

The GAAP NOIs?

Joe is looking through some papers.

The NOI comes in $29 million fourth quarter of this year, $45 million next year, $8 million the year after. We gave it by quarter on Page 9 of the supplement. The EBITDA equivalent is $10 million in Q4 of this year, $19 million in 2018, $8.5 million in 2019. Again, given by quarter on Page 9 of the supplement.

And Joe that's GAAP or cash, because I'm thinking about FFO.

The second set of numbers I gave you is GAAP. The first set of numbers I gave you was NOI cash. The first set of numbers totaled $84 million. The second set of numbers totaled $38 million. $38 million is the GAAP; $84 million is the cash.

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

Hey, good morning guys. Steve, first of all, very glad to hear you're feeling a lot better. I guess along those lines, has your thinking changed at all in terms of your day-to-day involvement with the company going forward and maybe if you can talk at all about the approach or timeline in terms of succession planning, if that's evolving at all in your mind or at the Board level?

Well, obviously it's top of mind -- in my mind than at the Board level. I mean obviously I'm on the [ back line ] I may even be on the back half of the bad time. Having said that, the Board is very involved in the future -- the management team and the future management team of this company, as am I. Having said that, over the last number of years, we have totally transformed this business. We have done and restructured it, which we think has benefited enormously to the corpus. That's something that I think the Board thought that I was the best candidate -- I was the best person to do. And we still have more to do. So I'm not quite done yet and we still have more to do. Having said that, you can be assured that we have a robust succession plan and I don't think we -- I have anything more than to say than that.

Okay, thank you for that. Separately, you guys provided some helpful cost details on the Farley project in the supplemental. Just wondering if you're in a position to provide a stabilized yield expectation for that project?

Not really. Our aspirations are high. We think it's the best piece of real estate in that genre in town. So our aspirations are very high. We think that the downside also yields a very acceptable return. We're not really ready to make predictions, which the real estate market will use and so it's just -- let us do our thing. We think we do it better than anybody, let us do our thing.

Sure, okay. And maybe just last one. Appreciate the color on the One Penn timeline, can you offer any kind of timeline expectation for the Two Penn redevelopment at this point?

The answer to that is, the Two Penn development -- redevelopment will either be simple or complex. And so right now, we can't -- it's inappropriate for us to give any information on Two Penn to right now.

Our next question comes from Nick Yulico from UBS.

Thanks. Just a question about 666 Fifth, what are your latest thoughts there on how that plan may evolve?

That's an evolving plan. That's the first step. The second is it's a very, very, very attractive piece of real estate. I've said this many times before, it's overleveraged, which is an issue. Our position -- we look upon our position in that, but we own -- we own a 100% of the retail at the bottom of the building on Fifth Avenue. We own 50% of the office building. We think the asset is brilliantly well located.

See, the retail is unencumbered, right? You met the...

No the retail is not that [Audio Gap] the office building is over leveraged, okay. The retail has leverage on it too, but proportionate leverage, okay. So our position in that building, and we look upon it as if it's a mezzanine warrant, where we have a relatively modest amount of capital in there for our 50% position in any event. There have been rumors in the marketplace, more than rumors, they have been published in the marketplace about tearing the building down and doing all manner of fairly grand development scheme. It's likely that those are not feasible, and so it's likely that the building will revert to an office building. And so we're working on that we're working on capital plans, we're working on venture arrangements et cetera. So it's a work in process.

Okay. And so, is that a situation where you would like to increase your ownership in a building rather than look to sell off your existing stake?

I said, last year or so, maybe even longer than that, that we were likely a seller into the grand scheme. The grand scheme has gone away, and I don't want to speculate on whether we are a buyer or a seller or increasing our position in that -- in the deal. This building and our venture are the subject of current discussions and let's leave it at that.

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

Thanks everybody, and I appreciate very much your well-wishes with respect to my health which is -- I'm fine, thanks.

Thank you, ladies and gentlemen.