Vornado Realty Trust (VNO) Q1 2014 Earnings Report, Transcript and Summary

Good morning, and welcome to the Vornado Realty Trust First Quarter 2014 Earnings Call. My name is Vivian, and I'll be your operator for today's call. This call is being recorded for replay purposes. [Operator Instructions] I will now turn the call over to Ms. Cathy Creswell, Director of Investor Relations. Please go ahead.

Thank you. Welcome to Vornado Realty Trust 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 Wendy Silverstein and Michael Franco, Executive Vice Presidents, Co-Heads of Acquisitions and Capital Markets; and Joseph Macnow, Executive Vice President, Finance and Chief Administrative Officer. I'll now turn the call over to Steven Roth.

Thank you, Cathy. Good morning, everyone. Welcome to Vornado's first quarter call. Let me start by saying that we remain committed to simplifying and focusing our business, and that we have made remarkable progress in that regard. It has been only 3 weeks since of the release of my annual letter to shareholders, and our announcement and call relating to the spinoff of our shopping center business. So my opening remarks this morning will be brief. We intend to file the Form-10 registration statement for SpinCo by the end of the second quarter, and expect the SpinCo -- the SpinCo spinoff to be completed by the end of 2014. In the first quarter, we had $819 million of sales activity. We sold Broadway Mall for $94 million. We announced an agreement to transfer the redeveloped Springfield Town Center to Pennsylvania Real Estate Investment Trust for $465 million, comprised of $340 million of cash, $125 million of PREIT Operating Partnership units. We also announced an agreement to sell Beverly Connection for $260 million. We currently have about $400 million in the market for sale, including 20 small non-Manhattan retail assets that don't fit in SpinCo, and our share of One Park Avenue and Georgetown Park. As of today, we have $4 billion in liquidity, comprised of $1.6 billion of cash, restricted cash and marketable securities, and $2.4 billion of undrawn under our revolving credit facility. These amounts don’t include the proceeds of the pending or perspective sales I just mentioned. Our financial capacity will allow us to take advantage of whatever external opportunities present themselves. In the short-term, we will use $445 million of cash to repay our 7% and 7.88% senior unsecured notes due in 2039, which are initially callable in October 2014. This debt repayment alone will increase FFO by $0.18 per share. Our pipeline of internal value creating opportunities is extremely robust. I will just kickoff here, those projects that are currently in construction are now in construction. David will cover the New York projects in slightly more detail in his remarks. Under construction. Our super tall 220 Central Park South residential condominium tower. Our massive retail and signage transformation of the Marriott Marquis site at the bull's-eye of the Times Square Bow Tie, across the street from our 1540 Broadway full block retail and signage. Our 1.1 million square-foot redevelopments at 330 West 34th Street and 7 West 34th Street, which are targeted to the creative class market. The transformation of the 1.2 million square-foot 280 Park Avenue, of which we own 15%. The 44,000 square-foot Top Shop 4 level flagship at 608 Fifth Avenue. Our 699 unit residential project in Pentagon City, which has Whole Foods at its base. The 1.4 million square-foot Springfield Mall total redevelopment, which is on schedule for holiday opening to this year. The redevelopment of Wayne Town Center in Wayne, New Jersey. This is a very significant construction redevelopment program, indeed, and this list doesn't include any of the opportunities in the Penn Plaza District. Now to leasing. Company-wide in the quarter, we leased 1,746 thousand square feet in 144 transactions with positive mark-to-markets of 7.9% cash and 12.6% GAAP. In the quarter, we leased 947,000 square feet in Manhattan alone -- 947,000 square feet in Manhattan alone. Turning to operations. We had a strong first quarter, I'm very pleased with our financial results. In our first quarter, comparable FFO was $1.20 per share, 6.2% higher than last year's first quarter. Our New York business continues to put up very strong industry-leading metrics. Our Washington business continues to bump along the bottom. Recently we have seen an uptick in activity. As I've said before, we believe there is no value in our share price for the vacancy in Washington. As such, we anticipate tremendous value creation as we lease up this space. To sum it up, I'm very pleased with both our operating performance and our progress on simplification and focusing the business. Now I turn it over to Steve Theriot, CFO, to cover our financial results.

Thank you, Steve. Yesterday we reported first quarter comparable FFO of a $1.20 per share, up from a $1.13 in the prior year's first quarter, a 6.2% increase. First quarter comparable EBITDA was $397.2 million. Starting with New York. Our New York business produced $233.8 million of comparable EBITDA for the quarter, ahead of last year's first quarter of 8.7%, primarily driven by a very strong same-store increase of 6.2% in property acquisitions. Our Washington business produced $84.1 million of comparable EBITDA for the quarter behind last year's first quarter by just $2.2 million. As we did mention on last quarter's call, we expect Washington's 2014 comparable EBITDA to be approximately $10 million to $15 million behind 2013. While we were expecting a slight increase in occupancy in Washington during 2014, the lag between the signing of the leases we expect and the contribution to our earnings from these leases will push the full effect of the expected leasing activity to 2015. In addition, more than offsetting the expected reduction in comparable EBITDA, during 2014 we will realize an interest expense reduction of $16 million from the restructuring of the Skyline mortgage loan. In summary, while we expect comparable EBITDA from our Washington segment to be $10 million to $15 million behind last year, we expect that contribution to comparable FFO to be $1 million to $6 million ahead of last year. Our retail strips and malls business produced $52.2 million of comparable EBITDA for the quarter, ahead of last year's first quarter by 2.8%. We leased 233,000 square feet at the strip shopping centers, with a positive marked-to-market of 9.4% GAAP and 3.1% cash. We leased 25,000 square feet at the malls, with a positive marked-to-market of 14.7% GAAP and 5.3% cash. Occupancy at the strip centers was 93.9% at quarter end, down 40 basis points on a sequential basis from the fourth quarter, and down 30 basis points from the 2013's first quarter. Occupancy for the malls was 95.7%, down 20 basis points from the fourth quarter, and up 80 basis points from 2013's first quarter. Total first quarter FFO was $1.31 per share, as compared to $1.08 per share in the prior year's first quarter. Noncomparable items in this quarter, were positive $20.2 million, or $0.11 per share of income, compared to negative $9.8 million, or $0.05 per share of loss for the first quarter of last year. This year's first quarter noncomparable items included $9.6 million of net gains on the sale of a land parcel and residential condominiums, $9.3 million for our share of Toys FFO and $4.1 million of FFO from discontinued operations. The $9.3 million of Toys FFO represents management fees and real property depreciation, as we completely offset our $75.2 million share of Toy's equity in earnings with a $75.2 million impairment loss. To continue to carry our investment in Toys at $80 million estimate of fair value. In the last year's first quarter, we similarly impaired our share of Toys' earnings. Please see our press release or the overview in MD&A on Page 33 of our Form 10-Q for a complete summary of noncomparable items. Let we take a moment to explain the change in our total revenues line. While it looks like total revenues decreased for the quarter, like-for-like, total revenues actually increased $28 million, or 4.4% over the prior year's first quarter, when adjusted to exclude last year's onetime, $59.6 million of income from the Stop & Shop litigation, $14.4 million of revenue from Independence Plaza, which was de-consolidated in last year's second quarter, and $12.1 million of fees from the Cleveland Medical Mart development project, which we sold. Now turning to capital to markets. In January, we completed a $600 million loan secured by our 220 Central Park South development site. The loan bears interest at LIBOR plus 2.75% and has the final maturity of January 2019. In April, we completed a $350 million refinancing of 909 Third Avenue. With interest only loan is at 9. -- I'm sorry, is at 3.91% fixed and matures in May 2021. We realized net proceeds of $145 million after repaying the existing 5.64%, $193 million mortgage, defeasance costs and other closing costs. We also completed a $300 million refinancing of the office portion of 731 Lexington Avenue, owned by Alexander's, our 32.4% affiliate. The interest only loan is at LIBOR plus 0.95%, currently 1.10%. It has a final maturity of March 2021. The proceeds of the new loan were used to repay the existing $312 million, 5.33% fixed rate loan and closing cost. Our consolidated debt-to-enterprise value is 34.5%, and our consolidated debt-to-EBITDA is 6.9x. Our debt mix is balanced with fixed-rate debt accounting for 86% of the total, with a weighted average rate of 4.73%, and weighted average term of 6.6 years. Our floated rate debt -- floating-rate debt accounted for 14% of the total, with a current weighted average interest rate of 2.47% and a weighted average term of 4.3 years. Our 2014 maturities are just $133.7 million, and our 2015 maturities are $941 million, including $500 million of 4.25% senior unsecured notes due April 2015. As Steve mentioned, we intend to repay the $445 million of 7% and 7.88% senior unsecured notes due 2039, which were initially callable in October 2014. This repayment alone will generate incremental FFO of $0.18 per share per year. Each of the rating agencies has reaffirmed our ratings, subsequent to the -- to our announcement of the retail spend transaction. And with that, I'll turn it over to David Greenbaum to cover our New York business.

Thank you, Steve. Good morning, everyone. Before I turn to our results for the quarter, I'll spend a minute on the market. Since year end, leasing velocity has continued to accelerate. In fact, absorption in the first quarter was the highest quarterly total we've seen in the past 10 years from 1.5 million square feet of positive absorption. Let me highlight several of the headlines from the various market reports produced by the brokerage community, that sum up our view of the market. One request states, "the Manhattan office market keeps on motoring." While another brokerage advices its tenants, "a brisk beginning to the year means fewer options and rising rents." Let me now focus on our performance for the first quarter. We had an exceptionally productive first quarter with 947,000 square feet of office leasing in 45 transactions, with an average term of 11.7 years. This 947,000 square feet is for the first quarter only, and does not include the 355,000 square-foot Neuberger Berman lease we announced just last week. Activities was well balanced throughout the portfolio, not concentrated in any one submarket. Of the 947,000 square feet, 45% of their activity was new tenants or expansions by existing tenants, and 55% was renewals. First quarter office occupancy was 96.9%, up 30 basis points from the fourth quarter. Basically, we are full. Our average starting rent this quarter was a healthy $62.39 with very strong positive mark-to-markets of 18.2% GAAP and 14.8% cash. The first quarter leasing activity included a 102,000 square-foot lease renewal at 90 Park Avenue with FactSet Research Systems, the financial analytical software company. I have not spent any time on prior calls discussing this 41-story, 932,000 square foot tower, the entire block front between 39th and 40th streets on the West side of Park Avenue. 90 Park Avenue was originally known as the Sterling Winthrop pharmaceuticals building. Sterling Winthrop, which is now a subsidiary of Bare Pharmaceuticals, was the lead tenant in the building when we acquired it in 1987, occupying over 50% of the building. Over the years, Bare has subleased much of its space. With 450,000 square feet of scheduled lease expirations over the next 2 years, 2015 and 2016, we've commenced a capital program to reposition the building, similar to what we recently completed a 1290 Avenue of the Americas. Our plans for this building include new mechanical systems, modernized elevators, and a total lobby transformation. We're excited to have kicked off our leasing program with FactSet, and have very good activity here. In Midtown South, at 1.1 million square-foot 770 Broadway, located between 8th and 9th Street, Facebook expanded by 58,000 square feet just weeks after moving into their new premises, and now leases a total of 160,000 square feet with Creative Hub, which is the headquarters of J. Crew, AOL, and Facebook. And we're now working with Facebook to produce even more space for their growth. Tenants love this building. In Penn Plaza this quarter, we completed some really important transactions. Old tech, a term I recently heard on CNBC, has also been active. At our 2.5 million square-foot One Penn Plaza, technology giant Cisco recommitted long-term, with an 80,000 square-foot renewal for its New York headquarters, and ADP also renewed its 32,000 square-foot New York headquarters' lease. At our 330 West 34th Street redevelopment, we kicked off the leasing program with a 178,000 square-foot headquarters lease with New York and company, which will be occupying 4 full floors in the building. We have a lease out now with a technology tenant for another 80,000 square feet. Activity at both 330 West and 7 West 34th street is high, and we are pleased with the market's reaction to our building transformation programs. Our entire $7.5 million square-foot Penn Plaza portfolio continues to be full, with our occupancy at 97.3%. At 650 Madison Avenue, the 600,000 square-foot trophy office and retail asset we acquired a 21. -- a 20.1% interest in last fall. We continued making triple digit deals. In our first quarter, we completed one lease and subsequent to the end of the quarter, we completed a second lease for a total of 32,000 square feet. All average rents of $150 per square foot. And finally, and importantly, just last week, obviously, after the end of the first quarter, we announced that Capstone of our 2.1 million square-foot 1290 Avenue of the Americas transformation. Neuberger Berman, one of the leading investment managers, has committed to 355,000 square feet. Entire floors 22 to 29 and 38 to 43 for 20 years, taking the space currently occupied by Morrison & Forester, as well as the space leased to Warner Music through 2017. To produce this space for Neuberger Berman, we entered into a surrender agreement with Warner Music, which will be paying an $11.7 million lease termination fee. The marked-to-market on the Neuberger Berman lease is a positive 12.3% GAAP and 6.6% cash. When originally constructed in 1963, 1290 was known as the Sperry Rain building, then Axa Financial center and it's now Neuberger Berman building, primely [ph] located on Sixth Avenue's Corporate Row. Since our acquisition of 1290 Avenue of the Americas in 2007, we have now leased over 1.5 million square feet in this 2.1 million square-foot building, raising rents by some $22 per square foot, or 40% higher in growing the NOI from below $60 millions to north of $100 million stabilized. Let me now turn to our Manhattan Street retail, where we completed in April, a long-term lease renewal with Coach at 595 Madison Avenue, on the corner at 57th Street. We achieved very strong mark-to-markets of 83.1% GAAP and 44.2% cash for this 11,500 square-foot, 3-level flagship lease to Coach. In the first quarter we completed 3 small retail leases totaling 11,000 square feet with marked-to-markets of 44.3% cash and 7% GAAP. As Steve mentioned, we have development and redevelopment projects underway, all over our New York portfolio. At 220 Central Park South, excavation for a luxury condominium tower is now down 30 feet, well into rock. The Bow Tie of Times Square at 1535 Broadway at Marriott site, with the steel we have already erected, we could begin to visualize the enormity of the full block 8-story high LED screen we're constructing. At 7 West 34th and 330 West 34th Street, you can poke your head into lobbies and witness the transformation of these buildings into 1.1 million square feet of tech creative space. At 280 Park Avenue, our joint venture with SL Green, the mid-box dual box atrium, we will be delivering this fall to complement the full block Park Avenue lobby. At 608 Fifth Avenue, we're delivering possession next week to Topshop-Topman, with 44,000 square-foot, 4 level flagship. At 689 Fifth Avenue, working together with the Landmarks Preservation Commission, we are restoring the base of the building to its original limestone grandeur. And for our Alexander's affiliate, tower crane is up and concrete is now being poured for the 300 units rental apartment tower being constructed on top of the Rego Park new shopping center. We expect to top out in the fall and begin leasing apartments next spring. I invite you to drive around the city and see all this activity firsthand. I spent some time on our last call discussing the strong activity we've had at our 1.8 million square-foot 555 California Street. This massive granite building dominates the Skyline and is the best office building in San Francisco. In the first quarter, we signed 4 leases totaling 114,000 square feet, the highlight of which was a 49,000 square-foot lease with Microsoft, which will be moving its San Francisco office into the second and third floors. The second floor has 27-foot ceilings allowing Microsoft to establish a unique presence visible from the street. We also signed a 30,000 square-foot lease renewal with Wells Fargo and a 28,000 square-foot lease with Regis. At the 3.5 million square-foot Chicago Mark building, located at the center of the hot River North submarket, we completed 31,000 square feet of leasing this quarter. Motorola, Google also completed moving to 600,000 square feet of space in the building. And on April 22, celebrated by hosting a ribbon cutting reception with Mayor Rahm Emanuel, delivering the key note remarks. And its space is really cool, really transformative. A combination of R&D, lab, tech and office space to Motorola's over 2,000 employees. Images of Motorola's space are now posted on the link on our home page at www.vno.com. And just last night, we teed up for execution an additional 60,000 square-foot lease with a major technology tenant, which we expect to sign in the next couple of days, continuing the transformation of our iconic Mart building into a hub for tech office tenants. This building is a buzz of activity. To conclude my remarks, let me summarize the entire New York division. It had a very strong quarter. Our key performance metrics are industry-leading with same-store EBITDA increases for the overall division of 6.2% GAAP and 10.1% cash. Isolating just the New York Office business, our same-store EBITDA increased 7.8% GAAP and 10.4% cash. And I am now going to turn the call over to Mitchell to cover Washington.

Thank you, David. Good morning, everyone. We're pleased with our first quarter results. We've seen an uptick in activity, and we continue to think we'll see meaningful traction in the later part of this year and into the next. We completed 365,000 square feet of office and retail leases in 62 separate transactions. Overall, office leases signed in the first quarter generated a GAAP marked-to-market of positive 3.9% and a cash mark-to-market of negative 3.1%. Our total occupancy, including residential, was down slightly by 10 basis points from Q4 to 83.3%, which is way down by Skyline's 58.7% occupancy. Excluding skyline, our overall occupancy actually increased by 40 basis points to 88.1% and office -- office only occupancy increased by 30 basis points to 85.7%. Quarter-over-quarter, we reported flattish same-store EBITDA changes equal to positive 0.5% cash and negative 2.5% GAAP. In addition to our 365,000 square feet of office leasing, we signed a lease this quarter with WeWork to repurpose a 165,000 square-foot vacant office building in Crystal City into their exacting new residential concept. By the middle of next year, they will open 250 community style residential units, with an imaginative design and dynamic shared social space. We believe this concept will attract a whole new dynamic demographic to Crystal City, complementing our tech creative cost initiatives, that I will elaborate on shortly. Crystal City is an irreplaceable location. It is contiguous to DC on the shores of the Potomac with superb transportation and excellent views. With its live-work-play infrastructure, we see enormous potential for Crystal City to become a new hub for the tech and creative community. These smart millennials are in high demand by employers and infuse fresh energy into neighborhoods. On the last call, I introduced several transformative moves to attract this important growing demographic to Crystal City. Over the past 60 days, we put several things into motion. First, in mid-March we launched our design lab at 251 18th Street. We created 6 prebuilt office suites for lease, each designed by a different architect, specifically for creative companies. Marketed as a showcase for office innovation, design lab drew over 1,500 people in its first 30 days and has generated great press. Already several of those suites are leased, and we started planning for design lab 2. In April we launched Crystal Tech, the home of a new $50 million technology fund. Crystal Tech has joined the creative community in 2 ways. First, the fund is headed by 500 Startup's founder, Paul Singh, a global expert in the venture capital and tech world. The fund is investing in high growth post seed companies who are co-locating Crystal City. Six different tech companies have already moved in. The idea is over time, they will take root, track others and mature here. In addition, events for the tech community are being hosted regularly in the space by Tech Cocktail, a well-known tech media company that acts as the magnet for bringing together the millennials. On our opening night, hundreds of entrepreneurs packed into Crystal City. Also in April, TechShop opened their new 22,000 square-foot prototyping studio in Crystal City. This studio provides tools, equipment, technology and classes for inventors, engineers and entrepreneurs. These openings, along with the bringing WeWork to Crystal City, are generating just a kind of action we are seeking, and we believe these initiatives will help drive tenants and users to Crystal City. In addition, Crystal City continues to attract associations and nonprofitable organizations. The combination of our proximity to Capitol Hill, adjacency to Reagan National and an abundance of hotels has made Crystal City a location of choice for this sector. Today Crystal City is home to over 20 major associations and nonprofits. In the first quarter we completed new and extension leases in Crystal City with several associations, including a new lease with American Public Power Association for 22,700 square feet, an extension and expansion of the Food Marketing Institute to now 44,200 square feet and an extension and expansion of communities in schools to now 16,500 square feet. In April, MSI, an international development consulting firm, moved from Washington, DC into their new 51,000 square-foot space in Crystal City. Our residential portfolio continues to deliver strong results with 96.8% occupancy. We own more than 2,400 apartments, clustered in very desirable urban submarkets in Crystal City, Pentagon city, Rosslyn and Georgetown. In summary, as we lease up and change we will create value. We will lease our vacancy, an effort that is continuing. We are actively transforming Crystal City into a new hub for tech and creative. We're place making here and this is happening now. And we look forward to harvesting our $7 million square-foot pipeline of new development, some of which is underway right now in Pentagon City. We are currently excavating a 2-acre site, the first step in the construction of our 700 unit apartment delivery in the middle of 2015. We're excited about our many internal opportunities to create value. Thank you very much. And I will now turn the call over to the operator for Q&A.

[Operator Instructions] Michael Knott from Green Street Advisors is on the line with a question.

Steve, question for you on New York retail, or David. I think, Steve in your annual letter you said you're working on the mother of all rollovers. I would suspect that you are talking about 645 Fifth Avenue and also we saw in e-mail trade rag the other day a speculation about the first $4,000 per foot rent. Just curious if there is any progress that you can report on that lease.

The mother of all rollovers is trying to drive up to the hospital and get into the delivery room. So we have nothing yet to report, Michael. But we love that property.

Okay. And then, I guess, just moving to DC, Mitchel, curious if you're still thinking that you're going to end the year higher on occupancy. And then also, I guess for Steve Theriot, I'm wondering, if you guys have sort of the equivalent for your DC guidance for this year on a cash EBITDA basis, since it was picked up this quarter that was slightly positive surprise for me. And I'm just curious if the down guidance on EBITDA for the share, if you have sort of the equivalent on a cash basis.

Michael, this is Mitchell. I would continue to believe that based on the activity we have, we will in fact end the year in a positive position from where we are.

And to answer the question, Michael, about do we have a comparable cash EBITDA forecast or guidance for the year, we've not issued -- we're not planning to issue other guidance beyond the GAAP EBITDA guidance.

Michael -- Michael, let me go back to your first point about the mother of all retail rollovers. So just as I mentioned a little bit of math for you, that building has 10,000 square feet on the grade in the H&M space. And another scant 2,000 feet adjacent to it, and which is occupied by Citibank. So it's a scant 12,000 square feet. So you could put a dimension on what market rents are and prime, prime, prime Fifth Avenue, and then say it has a 3 as the first number. And the incumbency in there is less than probably somewhere in the $7 billion net rent number. So this is going to be at market rents, 4 or more times -- 400% or more times marked to market. And those are -- so we have been in our short-term future, something that we're extremely excited about it. It's an enormously important property. And here we go.

Michael Bilerman from Citi is online with a question.

Steve, you talked about the significant amount of liquidity that you have today. Certainly, you can include all the liquidity in cash that still want to come up next 12 months from the deals you've already executed. And I'm just curious, how you think, I know you've talked about tendering for the debt that comes due later this year. And how do you think about the investment and putting that cash to work now that you've made tremendous progress on the certification.

Michael, first of all we love cash. We love liquidity. We love to have the liquidity when markets are in chaos or when markets are allowing giving us bargains. We are rigorous. We are disciplined. We are not going to spend cash because we have it. So we have -- we have learned over the 40 years that we've been doing this that you have to act counter-cyclically, meaning you have to raise cash when money is easy, as it is now, and spend it when money is tight and nobody else has it. So with respect to investing, I've said over the last year or 2, that investing is difficult, prices are high. It's a better market for selling than it is for investing. And I have said over the recent past that we will be a net seller as we have been. We do not fear holding cash, in fact we like it. Having said that, somehow or other, we always manage to scrape together the better part of a billion dollars even in a snowy year, even when prices are high of opportunistic investments, which we think fit into our portfolio. So the answer is to your question, which I think is a very good one, we are not adverse to holding cash. We think that, that creates an enormous strategic advantage to our firm, number one. Number two is that we will be very rigorous and we will be very disciplined in investing. Number three, we think that there will be better times for investing, meeting better values in the future. We can't proportion when that is. And having said all that, we are a very large and important party in the New York and Washington markets. We see every deal and we manage to, in this market, get a few, but we don't really want to get every deal because we think it's not the best optimum buying time.

And then just a follow-up for David Greenbaum, so your signage income keeps on going up as you move to the LED lighting. You're up about $12 million last year, up almost $3 million in the first quarter. I'm just curious how big of a business that has become for you, if you think about $730 million of New York NOI. How much does signage now represent and how much further can that number go? And is there a big capital investment that goes along with the change to LED where effectively you're getting increased NOI, but you're having to put some capital for it?

Michael, I'll handle the beginning of that, and David can come in and correct me. First of all, most of the signs that we -- first of all, we love the signage business, okay, we love it. We think it's a very unique and very important business. Second, most of the signs that we own are throw-ins, if you can use that word, to the real estate assets that we own. So they're augmentary to that. On occasion we have brought some signs, but very, very rarely. On occasion, certainly in the Marriott deal, the signage was important in the value, but the -- it was really a tag along, it wasn't the main determinant of the value, although that sign would be incredible. And we did make a payment to buy back the long-term contract to a signage operator in that deal. The signs do require a capital investment. We are anxious to make that investment, and the payback on that investment is -- on those capital investments are less than 2 years. So having said all that, now David, you can go ahead.

The only thing I'll add Michael is, as Steve said, substantially, the substantial portion of the sign business, effectively is keyed into the retailers. So that is called "recurring income". There are a couple of signs at 1540 Broadway that came online, which is the reason for the increase, but that's the recurring increase. A small portion of the business is attributable to effectively selling slots on the LEDs and that business is a little bit more seasonal. We did well in the first quarter because we were able to take advantage of the Super Bowl opportunity at 1540 at the Bow Tie in Times Square.

Michael, think about it for a second. The signs have value. This street signs have value in the highest traffic locations. So that if you're in a low traffic location, they have less value. So where we traffic is in Times Square and in Penn Station, the 2 highest traffic locations in the city. And so definitionally, the signs have enormous value. And as David said, most of the signage income comes from retailers, who'll make package deals where we rent them space and we rent the sign to them above their store around their store or whatever on a long-term basis. So the fact that we have a thriving signage business is indicative of the fact that we have a thriving street retail business that connects to it.

I asked the question on a positive light, because it is growing.

I'm trying to -- we're trying to tell you that the strategy of it and how we see the business.

Alex Goldfarb from Sandler O'Neill is online with a question. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: I guess, continuing on the street retail theme, if you could just talk a little bit about Topshop and if we should expect it -- almost sounds like the income we should expect to -- you guys start recognizing income this year or maybe give some perspective on that? In addition, the Marriott retail, there's a bunch of more capital to spend but in the Q talks about all -- everything completes at the end of this year. So if you can just help us give our framework for how we should think about the NOI coming online over the next year or 2, as well as, I guess, it's a follow-up on Michael's question. How we should think about trying to guestimate what a 300 foot wide 6-story Times Square LED sign, what kind of NOI that's going to throw up?

Okay. Let me see if I can catch your questions in order. I am going to ask David on the technical -- our financial guys to chime in. The Topshop lease will -- we are turning over space to them next week. In fact, the British owner of Topshop will be in our office this afternoon. And the -- so when will we begin rent commencement for that.

When we turn over the space next week.

And also the GAAP rent will commence next week. Cash rent will commence when they open, and they will open right around Halloween and maybe, so either Halloween or a week later. I can tell you that this is an unbelievably interesting and important fashion tenant. If you've been in any of the stores, and I hope you had been, and so they're pretty theatrical, and there is going to be, to use a phrase that I've used recently, the mother of all Halloween parties in connection with that opening. With respect to Marriott, Marriott is proceeding the pace for a, probably, end of October beginning of November completion of the sign, which we're very excited about. And the retail leasing is proceeding. We are shifting through offers and deals now. We do not that expect to have it 100% occupied or actually even near that at the opening, but it will be -- it will lease extraordinarily -- extraordinarily well. We're getting a great reception from the market place. In terms of the mentioning, what the incomes are from those transactions, I think, that's not something that we normally disclose store-by-store or asset-by-asset. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: I just have one follow-up question, actually. We have one colleague on our floor, who's very excited for the Topshop to open, it's just about a block away. But I think in the opening comments, it was either Steve or Mitch who mentioned about DC picking up next year that there is lot of leasing activity this year, where we won't see the benefit until next year. And again, if you could just sort of help us quantify how much pickup is going to be, we should look forward to you next year, clearly, we've all been waiting for Crystal City and Skyline to turnaround. So any bit of positive incremental is big, it's just trying to get everyone's perspective. Is it going to be a little bit, and we need to wait longer or is there some material stuff coming that could make it seem as though, we'll start to read better things about the DC portfolio.

Alex, we're not prepared to give the guidance beyond what we have already given, which is where -- we're kind of skimpy on guidance, as you know. We don't think that there is a boom coming in next year. We think that there will be a gradual and slow uptick in activity. There is activity, but the market is extremely competitive. So we continue to be conservative in what we are budgeting, going forward through this year and next year.

Steve Sakwa from ISI Group is online with a question.

David, I just wonder, if you could expand a little bit more on the New York City leasing momentum. And maybe just talk a little bit about the submarkets where you're seeing the best rent kind of Penn Station versus Grand Central versus the Plaza District? And how that might be impacting kind of the rents that you're thinking about for the 2 redevelopments on 34th Street?

Generally, I'll tell you, we're seeing very good action in New York, as they say in my pipeline in terms of leases that we're working on for Q2, Q3. Very active. We've already chipped away significantly at our 15 expirations, I think, if -- we were talking a year ago, originally our 2015 expirations were north of 2 million square feet, 2.1 million, 2.2 million square feet. That's now down to somewhere a little over 1 million square feet. So again, aggressively we're working on that. And in terms of where we're seeing some real strengths, the high, high-end of the market, we're seeing very good activity, witness some of the deals that we've done at 280, 350 park, 280 park. We have 650 Madison Avenue, of course. But we've got space that's coming back to us next year at our little jewel box, 640 Fifth Avenue. We're excited to see some of those leases rollover. Generally I would tell you, at 7 West 34th Street and 330 West 34th Street, we are seeing there, again, very good activity and we're getting more aggressive in terms of what our expectations are for market rents for that space. So what we're doing generally across the portfolio, I would tell you, is reevaluating all of our rents. And we, right now, as part of that revaluation are looking at picking those rents up somewhat significantly. I would tell you, to have pockets of space in Penn Plaza and other creative type of space that we have around the portfolio, we've seen rent increases compared to where we are today from a year ago, probably a good 10% and 15%, and again, looking at taking those rents up a notch again.

Okay. And I guess, second question, maybe to direct to Steve. I mean, you guys have obviously done a very good job pruning the portfolio and raising cash. I'm just wondering, given the strong appetite for core assets from overseas buyers where they're willing to accept maybe returns as low as 6%, and maybe even sub-6 in some markets. How do you think about potentially pruning some of the core assets in Washington and New York?

The answer to that is that we get incomings weekly. The assets that we have, which are core and are in our New York and Washington portfolio are extremely in demand and in high demand, and we consider what to, whether to hold or to sell, et cetera, all the time. We are extremely confident that the majority of the assets that we have in Manhattan and in Washington have growth in front of them. And the way we look at it, Steve, is that would we rather have the cash or would we rather have the assets. So the answer is that we have not yet begun to prune anything, really anything substantially in New York or Washington. And we may very well sell a few assets, selectively, but not wholesale.

James Feldman from Bank of America is online with a question.

I guess going back to the Street retail portfolio, what are your latest thoughts on current mark-to-market across all of the assets?

I don't really know, and I don't really think I can hazard a guess. I mean, the increase in rents over the last 10 years has been startling. The increase in rents in the markets that we're in has over the last 5 years, has been double startling or startling to the second power or the fourth power. And so we have a very, very substantial increase. And we benefit, by the way, from having amassed most of our portfolio before the rents rose, so that we have low basis and most of our incumbent tenants are at very low risk. So I don't really know what that number is. I mean, we budgeted out 3 or 4 years, and I don't really want to hazard a guess. I think we should do that as a product -- as a project, Joe. Anyway, so I really can't -- I can't really respond to the good question, it's a good question. But I can tell you it's enormous.

Okay. And then I guess, thinking about the Neuberger release, can you talk a little bit about how many pieces like that are still in the market? And then, just the Neuberger decision specifically how they ended up at Sixth Avenue, what else they're considering and what we can read through to how maybe Midtown is holding in there versus Hudson Yards and downtown and some of the other options out there?

Jamie, as you imagine a lease like this is going to be hotly, hotly contested in the marketplace. Neuberger had any number of options. They looked at new construction. They looked at multiple buildings on Sixth Avenue. I would tell you that when Neuberger first came to the building and recognized the transformation that we had undertaking in redeveloping this asset, I'd like to say they fell in love with it, and I think they did. I think the key to a lease like that was the major transformation we had undertaken in this building. And that means not only the cosmetic aspects, the lobby transformation, but all the mechanical infrastructure, which really has made a building like 1296 Avenue competitive with a brand-new asset in terms of the backup generation, power, HVAC and all the requirements that are critical for tenants in the marketplace. So hotly contested transaction. And candidly we were up against, as I said, really everybody in New York in getting this deal, we're thrilled with it.

I just want to add one thing and that's a flunk for the Neuberger Berman management team and of course our management team. This is a major, major financial services money-management firm, really important, very well-known in the marketplace. They made a decision to consider real estate options. And one of which, of course, was to stay at a building that they've been in for 20 or 30 years. They were thorough, they were rapid, they were decisive, they were demanding, of course, once they made decisions, they moved very quickly. So some of the deals we make are torture, some of the deals we make are -- they're all tough but are a pleasure, and dealing with their team was a pleasure. And we're delighted to have them. And we think, of course, obviously they made the right choice. David and his team did a spectacular job in lassoing this tenant.

I guess, how many leases like that would you say are still out there? Major, very large leases that are trying to decide between the thing on the east side maybe going to West side, what's the depth of demand right now?

There are many number of large tenants that are running around. What we did see in the first quarter, which is encouraging, is that a significant number of these first quarter leases, large leases were, in fact, relocations not tenants just staying in place. So tenants are recognizing the need to update their space. Neuberger Berman, for example, is going to be reevaluating all of its space needs, as it looks to its next 20 years in the future. I think, generally, the very positive thing that we're seeing in the marketplace, in fact, we discussed this yesterday with one of the research houses, one of the brokerage firms, is that tenants once again in this cycle are beginning to recognize the way they grow their businesses by focusing on the topline. The way they focus on the topline is with their personnel. So I think we're out of that portion of the cycle where tenants are only looking at cutting expenses. Tenants are looking to the future, are looking to some health in the economy, and most importantly, are looking to where they should be putting their people over the next 20 years. So we are seeing some very good activity in the marketplace with tenants considering alternatives.

Brad Burke from Goldman Sachs is online with a question.

Obviously, a lot of progress in the quarter, getting focused on New York office and retail in Washington office. But should we still thinking about California and Chicago as being long-term markets at this point, be as they -- I realize you've made, you're at an interesting point in the cycle for Merchandise Mart, but you made a lot progress at 555 California. I don't know if this is something that you could find itself in the on deck circle at any point for dispositions?

These are -- to focus on those 2 assets, these are enormous assets. So we have 1.8 million square feet in at 555 California, which you know is the Bank of America building. It is the dominant, largest, tallest building in California, until Morris finishes up his Transbay building. And it's a great asset. It's been a -- real estate can't be done in the office, it has to be done in the field. And So David and I were out there recently. We try to go on out, it's just a great asset. So we believe that San Francisco is an extremely hot, aggressive market. We are realizing very, very positive marked-to-markets income increased out of that building. And we currently have no plans other than to realize the rental income in that building and realize the growth and enjoy it. Similarly, in Chicago, we own one asset there, it's another one asset town, but it's an enormous asset. It's a 3.5 million square-foot building, that we are totally transforming from a showroom building to an office building and to a tech creative type office building. It happens to be situated in the hottest submarket in town and when you think about it from a value creation point of view, that building will get a double or a triple whammy. The -- we will realize very substantial rent income growth there as we transition, and we will realize a value, a cap rate improvement, which you can just guess as to what a showroom with 5,000-foot, hundreds and hundreds of 5,000-foot, 4,000-foot showrooms than it gets, versus a building that has Google and the like. So both of these buildings have -- we have value creation too, in front of us. Very substantial value creation and these buildings are not on the for sale list.

Okay. That's helpful. And then, actually just one on the weather, which is something that we've heard about impacting costs in the first quarter. I was wondering whether this was something that was meaningful for your portfolio. I mean, do you still had good same-store numbers in New York, but I don't know if this would have been meaningfully higher if we had a more normal year for weather.

I grew up in the retail business, and I was -- I learned early on that anybody that uses the weather as an excuse is not a good -- not a good manager. So I'm not aware of anything. Do you have something in there, Mark?

No. Virtually, all of our retail leases -- the substantial portion our New York leases are best releases, so more snow removal, of course, which we certainly had, will be offset by accruals due from tenants.

Let me put it this way. It's an interesting question. It would be an insubstantial number. For sure, the freezing winter that New York had, had to cause our energy and heating bills to go up. And why don't we take the project, as we mentioned that, okay. And for sure, our snow removal costs for our shopping centers went up. But I can tell you that it's not something that I'm aware of. Maybe I should be, but it's not. So if I'm not aware of it, it was insubstantial. We'll get that number together.

John Guinee from Stifel is on the line with a question. John W. Guinee - Stifel, Nicolaus & Company, Incorporated, Research Division: Great. We have zillions of questions, but let me just give a couple. First, David, I'm a huge fan of Manhattan, et cetera. But I'm actually a little bit surprised on the Neuberger Berman lease, that is up 12% on GAAP and 6% on cash. Can you talk a little bit more about the underlying details there, because I expected you had to write a big TI check. I got to believe there's a big leasing commission in there. You've outlined a lot of money you're putting into the base building. Can you talk about the upfront capital you're going to incur on that lease? And then also, talk maybe about how the expensed stock changes? And what is actually happened on a net rent basis for the space?

John, we don't get into details of leases like that on individual tenants, rather we report in the aggregate. I can tell you that the lease was a market TI package and that the rent is market or maybe just executive market or maybe just a hair above market for this space that this customer has taken. So we're happy with the deal. We think it's a market deal, and whatever. Now if you look at the building overall, okay, David mentioned in his remarks that over the short-term ownership period that we've had we've relet 1.5 million square feet of this 2.1 million-square-foot building. This is an enormous building. We've taken the income level from a running rate of $60 million, when we bought it, to over $100 million today. And if you wanted to just do a little exercise, just for kicks, put a market cap rate on that $100 million plus income stream and that will give you a rough idea of what the building is worth and what it's worth per square foot. So we have a very, very substantial financial performance in the building as a whole, okay. Very, very acceptable. John W. Guinee - Stifel, Nicolaus & Company, Incorporated, Research Division: Right. Okay. And then sort of, multipart.

John, John. In numbers, this is a multibillion dollar building. John W. Guinee - Stifel, Nicolaus & Company, Incorporated, Research Division: Big numbers, okay. And then my sort of a multipart second question, with all the asset sales, any taxable gain or special dividend issues? Second, we've known that -- noticed that your mezz loan portfolio is running off. Is that temporary or you're getting out of that business? Third, can you give us a quick update on Hotel Pennsylvania? And fourth, if we were trying to value Crystal City on an as is basis standalone do you think the number is 200 a foot, 300 a foot, 400 a foot, just any thoughts on that?

Okay. Millions of questions. Thank you. Let’s start. What was the first one again? John W. Guinee - Stifel, Nicolaus & Company, Incorporated, Research Division: But they're quick answers. Taxable gain issues, special dividend issues, given all of the asset sales.

I'm sad to tell you that our JCPenney situation created a capital loss carryforward so that retrospect, we have recognized gains on other sales, which will be washed out against that. So I don't anticipate a capital gain special dividend this year, although we are realizing substantial capital gains. Second question? What's that?

Mezz loan portfolio.

Yes, your observation is correct. We are letting our mezz loan portfolio run down. We're letting it run down for a couple of reasons. Number one, we've been busy as beavers in the big picture of focusing our big, huge, enormous $30 billion businesses. So that's step one. Step two is, is that the mezz loan business is a very interesting business. There are a handful of -- a small handful of specialty brands companies that do it. And to my knowledge, there's maybe 1 or -- I don't know, maybe more than 1, but I'm only aware of 1 REIT that really does the business other than ourselves. When you think about it for a second, it's really -- we believe in creating NAV as opposed to income. Both are important, but let's just focus. We believe our stock price trades on NAV. And if you -- mezz loans or a lending business inside a REIT is properly priced at book, so if you have a $100 million and you have it on cash, it will be valued at $100 million. Or if you have $100 million and you put it into a loan, it's valued similarly at par. So I think, recently, days ago, one of the analysts, I think Green Street, said that they were going to assign a 5% premium to book our mezz loan portfolio. So you can take that conclusion, we're not a 100% sure that the energy and risk that goes into mezz loans, it gets reflected in our stock price, and we're all about creating value for our shareholders and ourselves as shareholders. Most importantly, having said that, most importantly, we love to do -- to get into do loans and mezz loans or buy loans when the markets are really soft and you can buy loans at a discount, which has a shot at creating real estate at a discount. So once again, we're all about cyclicality. We're all about judging when do we -- what market timing is. And so we are building cash. When the markets get weak and we can buy other people's loans at discounts, you will be sure we will reenter that business with both feet. Having said all that, I think that the guys that do the business now are doing -- do a great job. They have a big business and it's all very terrific. But I think the strategy of the way we want to run our business and when we want it timed, we're in the real estate business. We want to buy loans to create real estate. Next question? John W. Guinee - Stifel, Nicolaus & Company, Incorporated, Research Division: Hotel Pennsylvania status, and then also if someone was looking at just value on Crystal City on a standalone as is basis, is the number $200, $300, $400 a square-foot?

I'm not going to get into that question. I mean, if I gave you an answer to that question, they'd probably throw me in jail. So you're going to have to value Crystal City on your own. I can tell you, and I've said this multiple times over the last year or more, the way I do the math in our stock -- and that's very important to me. As I've said before, that's our report card. That's really -- we work all day to get a good report card. I do not believe that there is any value at all in our share trading price for the Crystal City vacancy. So the answer to that is, is that I believe the public market value of Crystal City, which has low value for the vacancy, okay, and skepticism for the balance of it, is less than the private market value. But we have no intention of selling that asset. We have every intention of working our ass off and leasing up that space and getting the value. With respect to the Hotel Pennsylvania, the Hotel Pennsylvania is a, as I said I think in my letter that was released 3 weeks ago, the big kahuna in our company -- and by the way, we have lots of enormous value creation things that we're working on, including marking up our retail portfolio and the developments that we kicked off and what have you, et cetera. The big kahuna is the Penn Plaza District, which has lots of extraordinary things going for it. So we have the busiest train station in North America in the middle of our holdings. We have the biggest and most highest volume department store, that's Macy's, in the world, in the middle of our holdings. We have Madison Square Garden in the middle of our holdings. We have the catwalk on the streets, et cetera. Retail rents have climbed to $1,000 a foot on the street, et cetera. So but most importantly, Penn Plaza District is the home of the better part of 8 million square feet of office space that we own. And so the big value creation is that office space is now in demand. As David has said over and over again, we are full and have been full down there at a 97% average occupancy for 15 years. We have a similar occupancy today. So the big kahuna is to get the average rents to move up in that district, which is what we're all about. And we will invest significant capital dollars and rehabilitate the streets, the buildings, et cetera to do that. The Hotel Penn is an integral part of that, and we're in the throes of the decision-making process. We've been slow, we've been tardy, all for good reasons. And you can -- you will begin to see significant stuff happening in the Hotel Penn and the Penn Plaza District over the next years. I'm going to say, this is a 2, 3, 4 year project that we're about to embark upon. We would benefit enormously, as I've said before, from what Vornado is doing in Hudson Yards and we have benefited enormously from the shift in the geography of Manhattan's sliding -- tilting slightly to the South and significantly to the West. So state zones there, we're really excited. This is the big kahuna, which, once again, also has the no value whatsoever in our stock.

Vance Edelson from Morgan Stanley is on the line with a question.

Just back on the street-level retail, you've mentioned the enormous potential, and I know it's tough to gauge, but when you think about the ability to raise rents even further, do you think the best locations that already have the most impressive rents, is that where the best upside is? Or does your gut tell you that really needs to plateau some and perhaps there's more upside from the lower-rent locations that might follow in the footsteps of the more expensive properties? Is that what really moves the needle from here, or is it both?

That's a very interesting question, which we ask ourselves daily and weekly. The rule of the jungle is the best gets better more quickly than mediocre gets good. So if you think about any investing, buying securities, buying property, buying art, whatever it might be, you always buy the best. So the way we do it is it's a very, very -- a very, very -- business isn't that complicated. When you buy a retail asset, you know what the sales volume of the incumbent tenant is doing, and you can gauge what the rent potential of that asset is from that. So our job is to buy under rented and raise the rents, buy in great places where there's enormous traffic. So we know what the sales volumes are, we can work on the streets, we see the traffic on the streets, okay? So having said all that, so we believe in the future of the dominant shopping streets, our neighborhoods in New York are, going from North to South, Madison Avenue, Fifth Avenue, Times Square, 34th Street, 14th Street and SoHo. Those are the neighborhoods which where all the traffic are -- where all the traffic is, and that's where we try to invest. Now we have been toying with the idea of saying, with a company of our size, we should have some R&D, like every major non-real estate company has. So what would R&D be? R&D would be, for us, taking a measured amount of capital, not a lot, but not insubstantial, and looking for the cutting next edge, which we do all the time. So having said that, we're really happy with investing in the tried and proven neighborhoods.

Okay. And then, I know you are excited about 220 Central Park South. So I just wanted to give you a chance to discuss it a little further. Could you remind us of the proposed construction schedule? Are you already getting any early indications of interest in the condos about when can you realistically think about pre-leasing? Could that be something for us to look forward to in 2015?

So first of all, we are really excited about this. This is the best for sale apartment project in New York. It is in the front-row, directly on Central Park. It's adjacent to the Columbus Circle neighborhood, which has had enormous improvements. And so this is the real McCoy. We have -- it's been a struggle, but it's been a joyous and worthwhile struggle. And so we've been at it for 8 years. We are, as David said and I said, we are under massive construction. We have, I think, 6 pieces of equipment in this little -- in this hole which is getting deeper and deeper and bigger and bigger. So the answer is that we have enjoyed a significant uplift in our basis as to what the market value of the land is. I would mention that has easily 2.5x our basis. So that puts us into a very, very attractive financial position. We had chosen to finance the land basically at approximately what our basis is. So you all know that, that's been disclosed. You all know that arithmetic. We have gotten a very significant, very significant number of incomings about people who want to see, understand and purchase in the building; nothing binding, of course. We expect that we will be in full blast sales of the selling of the project, probably in the first quarter of next year. And we expect the building to take about 3 years or perhaps a smidge longer to complete. We're really excited about it. If you give me a call, I'd like to sell you a very expensive apartment.

I'll look into it.

Ross Nussbaum from UBS is now on the line.

Can you talk a little bit more about the WeWork lease down in Crystal City from a number of different perspectives? I guess, first is, to my understanding, this will be the first residential buildout that they have done. Historically, they've done all these collaborative office situations. So just talk a little bit about your comfort in their executing on that. And then, second, just the economics of this lease, because the rent is perhaps lower than what I would, frankly, expect office space would lease for in Crystal City. So should we be thinking about this from the standpoint of being a little bit of a loss leader in terms of what the end game is in Crystal City?

You're 100% correct. It is -- if you put down a pro forma as to what an office building might lease for versus this, you're 100% correct. It looks kind of like a loss leader. But let me tell you the way our management team looks at this. Number one, this is a scant 2% of our inventory down there. Number two, it's transformative. It's really important that we get this kind of clientele coursing through Crystal City. We believe we have been dancing with the WeWork management team for several years now. We believe these are -- these folks are extraordinarily gifted. They have great ideas, great execution. We believe -- you're right, this is going to be their launch of an residential WeLive [ph] kind of a project. We believe it will attract the same demographic as the WeWork project -- the WeWork office counter party. And we think it's an essential to our strategy of changing slightly or even more than slightly, the major complexion and -- of Crystal City's demographic, and it's essential in place making. So having said all that, now, think about it. 165,000 foot building. It's a higher building. It's a building we would have had to put enormous capital in to convert to an office building. And it would have been at the end of the Q and maybe it wouldn't have rented for 3 or 4 or 5 years, okay? But we think that this is an enlightened transaction, which is important. I can tell you that Mitchell Schear is the proponent of all this, and he believes in it and our whole team believes in it.

And will the rent gross or net at $25 a foot lease?

That is a -- let me just think about that for a minute. That is a net lease.

Right. So there will be some additional expenses on top of that to get to the full service equivalent.

Okay. My second question is, just on the simplification front. This hasn’t really been talked a lot about in the past, but can you talk about the timeline for monetizing the real estate fund. What's the endgame there?

Michael and Wendy are in the room to run the funds for us. The first 2 assets are in the market now. I think in my remarks, I said that one part, which is the fund asset, is in the market now. And Georgetown Park, which is the largest single hunk of retail in Georgetown in the Washington, DC district, is also in the market now. So as we feel that the assets in the fund are ripe and are ready to market, I mean, our business in the fund is to sell them and realize the proceeds, okay? So the first 2 are in the market now.

Okay. And lastly, is there a world in which Alexander's is going to be a part of Vornado, or should we stop having those silly thoughts?

No. I wouldn't call it silly, but I said there is no world that, that would happen, I don't think.

There's no world where -- I'm trying to get through double negative there. So you're saying it is still a possibility?

I had a problem in my college application, 800-Math, 0-English, okay? So let me try it again, there is no -- there is no way that I would foresee that Alexander's and Vornado would combine.

David Harris from Imperial Capital is on the line with a question.

Just one question for Steve Theriot. You're capitalizing cost at about 40 -- an annual rate of about $0.40 a year. I'm just thinking, if that -- is that a good go-forward number? In particular, could you sort of talk about how much capital costs are being capitalized with regard to the spinout properties and also things that we know are going to go away, like Springfield Town Center?

Well, David, the amount of capitalized cost interest and taxes is going to be variable based on the amount of development that we've got going in any one point in time. And so at 220 Central Park and as Springfield Mall got into development, big -- the capital -- for GAAP purposes, the basic instruments, we've got a capitalized interest, was significant. That will be lumpy as those projects come out of development as Springfield Mall come -- goes online holiday season this year. So that's going to be a lumpy number and won't -- it's hard to say if there's going to be a constant run rate for that. I'm not sure if that's exactly what you were getting at David?

Well, let me take it to Steve and ask a question with regard to setting the dividend. Steve, when you and the Board consider setting the dividend, do you just ignore the capitalized costs or do you take them into account?

We take in -- we are -- our dividend is guided, first and foremost, by taxable income, okay, which is a different calculation. It's not exact calculation.

David, it's Joe. That does include, of course -- taxable income does include charging projects and development with interest. And typically, between 5% and 6% on the asset value -- not the equity value, the asset value is what we're capitalizing. So at Springfield, if a job is $250 million, 10% is $12.5 million -- 5% is $12.5 million a year...

Yes, I'm just thinking -- I don’t want to prolong the conversation, but the -- I'm just thinking in terms of your consideration of what's the real cash flow cover on the dividend that you and the Board might set? Is that inclusive of the capitalized cost or exclusive of the capitalized cost? Or are you saying you don't look at that at all because you're looking at taxable income as your first point of reference.

Yes, that's correct. And then to the extent that we pay interest, that's a tax reduction, okay? So the fact that we capitalize it in our GAAP statement doesn't really have very much effect on our taxable financial statements. So the answer is, is that our taxable income would be reduced by the interest that we pay on a cash basis, which is so that the answer is, is we do take into effect the capitalized interest, yes, as a deduction to capitalized -- to taxable income.

And remind me, have you made any commitments with regard to the common dividend as we go forward beyond the split?

We have said in the material that we put out and in the call that the combined dividend from the -- SpinCo and RemainCo Will not be less than the dividend that is the currently being paid by Vornado.

Our last question comes from Michael Bilerman from Citi.

Mitchell, just on the space taking out for redevelopment in Crystal City, so that went up by 45,000 square feet sequentially. I already thought 221 South Clark, the WeWork lease, was already in that, so I didn't know what caused that increase, about 48,000 square feet?

You're -- so if you take the total square footage of the building, the building in through March of 2014 was half occupied. So the balance of the building was taken out. I think the square footage that you're then specifically referring to, about half of that was related to BRAC lease, and half of it was non-BRAC space. Does that answer your question?

So going from 340 to 393 was the fact that the leases hadn't rolled yet at the end of 2013, and as those leases rolled, it was taken out for redevelopment.

That's correct.

Is there any more -- out of the balance of the 1.2 million square feet to be resolved, is any more moving up to the redevelopment piece?

We don't anticipate any other space being moved into that redevelopment category.

And then just sticking with Mitchell, we talked a lot about this uptick in activity, and you went through all the significant tech initiatives that you have going on, and the WeWork stuff. Is there anything else? And you talked about the associations. Is there anything else from -- because the leases pending really didn't shift that much in terms of sort of pipeline of leasing that could support other than the things that you had discussed. Is there anything -- any other color in terms of these negotiations that support that comment about uptick in activity and that you really see this end of year pick up?

So what I would say is, if you think of the legs of the Crystal City stool, there really are a number of them. So you'll still see government activity as one of the demand drivers, notwithstanding all that we've read and heard about government, there will be government activity. There will be government contractor activity. So if you think of that as a second leg. If you think of the third leg, as we talked about, there's a variety of the non-for-profits and some of the value-driven tenants, Crystal City becomes an incredibly great value proposition to some space in downtown Washington or some of the other submarket. And then if you add the new layer that we've been discussing in terms of some of the creative types as well as the tech types, we think that there is demand from that sector, and we're sort of adding another layer to the whole puzzle. But at the end of the day, I think we'll see activity come from a variety of those sectors.

But Michael, those are the things that Mitchell and the team are doing to attract tenants and to make Crystal City the more -- place making in Crystal City and what have you. But more directly to your question, there are more showings, there are more inquiries, there is more life, there's more activity, including a couple of fairly large 0.5 million square foot folks that are cruising around looking to either buy or to rent. So there is activity, whereas 2 years ago, there was almost -- the phone didn't ring. Now the phone is ringing.

Great. And then, Steve, just last question for you. In early March, you announced the Springfield transaction with PREIT. It was structured with big upfront cash payment and then stock or units from a tax perspective. Since doing that deal, PREIT stock has come off about $2. It's sitting $1.50 below the collared price of $18.50 that you had struck to provide security for Vornado shareholders given the fact that the deal was struck at $20, but you protected your shareholders down to $18.50. I'm just curious, you're going to be a 10% holder of PREIT. The market reaction to that transaction has wiped off almost $140 million of market cap to them. And I'm just curious, it's a great deal for Vornado, but you're also a shareholder. I'm just trying to figure out how you think about it today and...

I'll tell you how we think about it. So first thing is, is that if we were not exiting the mall business, which we are, we would not have sold this asset, okay? So we have high aspirations for this asset. We like the asset. And as I said, we would not be selling this asset other than the fact that we really are exiting the mall business for lots of different reasons, okay? So that's step one. Step two is, is that, I think I said a little while ago on the call, you really have to kick the tires and see the real estate and walk the real estate to appreciate what it is. And so, I myself was in Springfield exactly 1 week ago last Tuesday. I was sort of work -- I worked the asset and spent several hours down there. It is spectacular. It is a huge asset. It has great bones. The esthetics of it are terrific. The design of it is terrific. It's a big, impressive, imposing asset in a very underserved niche in the Washington market and we believe we'll do extremely well. So that's the second. So it's a real McCoy. The third part of the asset is that the first run of leasing of the asset -- by the way, we took this asset down to the steel, and we moved half of the steel around. We left the anchor standing. The other thing to note is if when you go down there and inspect the asset, which I hope you all do, you will see that Vornado over-built this asset. We spent I think, knowledgeably, I'm going to guess $15 million more on this asset than I think a normal developer would have done. By the way, we did the same thing with the Bloomberg, and you see how that worked out. We're doing the same thing with 220 Central Park South, and you see how that works out. So creating great physical assets is really important. So anyway. So -- the mark -- we believe that the income on stabilization will be in the high-20s, and based upon the purchased price that PREIT is paying this asset, that translates to a scant 6%. I don't know whether 5.5%, 5.7%, 5.8%. I don't know what that will be on stabilization, okay? We believe, Vornado believes, that this asset will stabilize on the second roll, which happens in the seventh, eighth, ninth, 10th year at the better part of $40 million if it performs in the midrange of what our expectation is, which will turn out to be an 8-plus cap on what the purchase price is. And so we believe that there is an enormous potential profit in this asset for Mr. and Mrs. PREIT. Furthermore, there's 3 million square feet of peripheral development entitlements in this property, which are not right now, but will be right somewhere over the 10 year cycle. So we think -- I mean, look, we are -- we're happy to sell it. We sold it with our eyes open. We think that we made a fair sale. We think the buyer made a fair buy, all things considered. And so we think that the market is -- the market's always right. But we're actually quite surprised that the reaction in the market to -- in PREIT's stock. We expect the transaction to close. If it closes and we're below the collar, we will suffer a relatively modest loss of a $1 a share or whatever it might be. We're happy -- we're not happy, but we'll do that. That's what the deal is. So the long and the short of it now, From PREIT's point of view, they have 3 or 4 or 5 different options, okay? The first option is they can tough it out and try to continue to run their business and try to explain to their investors why they made the transaction or why they think it's good for their company. And by the way, I was on the asset on site Tuesday, I understand that the day before, that's a week ago, Monday, the CEO of PREIT was there with 3 of his investors, touring the asset as well. And that's his job and I think that's the right thing. So that's the first thing. The second thing they can do is take your suggestion in PREIT's last call, Michael, and default and leave them with the $46 million deposit and walk away. If that happens from -- by the way, we have no expectation that, that would happen. That would not be a good thing for anybody. If that happens, we will be fine. We'll figure that out, okay, although we don't expect that to happen at all. The third thing is, is they can take an investor into that -- into the Springfield asset, which is a possibility. The next thing they can do is they can say, "Well, gee, this is kind of silly. Let's buyback some stock." So they have lots of different things that they can do. And I'm pretty confident that they're very alert, very attentive, and thinking about this very hard. Vornado is supportive of the deal. Vornado is happy to own the $125 million stake in their company. And Vornado is supportive of PREIT. I think that's the end of the queue? As is our policy, we run the queue out until everybody is finished. And so we thank you, all, for your participation on our first quarter call. This was a robust call. We look forward to your participation on our second quarter earnings call, which is on Tuesday, August 5. Do we have a time for that call?

10:00 a.m.

At 10:00 a.m. So we'll see you all -- many of you before, but if not, we'll be back on the phone on August 5. Thank you, all, very much.

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