Vornado Realty Trust (VNO) Q2 2014 Earnings Report, Transcript and Summary

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

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

Thank you, Cathy. Good morning, everyone. Welcome to Vornado's second quarter call. I want to begin by again reiterating our commitment to simplify and focusing our business, and we have made remarkable progress in that regard. We had a strong second quarter, and I'm very pleased with our financial results. Our second quarter comparable FFO was $1.44 per share, 13.4% higher than last year's second quarter. We filed the Form 10 for the retail strips and mall spinoff with the SEC as planned in June and expect to complete the spinoff subject to SEC approval as of the end of this year. We are excited about SpinCo's prospects. A new era begins with Jeff Olson, Chairman and CEO, SpinCo, officially comes on board on September 1. Now the recent acquisitions. In June, we invested $22.7 million to increase our ownership in One Park Avenue from 55% -- to 55% from 46.5% through a joint venture with the Canadian Pension Plan Investment Board, which increased its ownership interest to 45%. One Park Avenue was a 20-story, 941,000-square-foot office building located on the full eastern block front of Park Avenue between 32nd and 33rd Streets in Midtown South, the hottest submarket in the town. The history here is that we acquired 46.5% in 2011 when our real estate fund acquired a 64.7% interest, and we co-invested with the fund for a direct 30.3% interest. In connection with that initial acquisition, we negotiated a new long-term lease with NYU Langone Medical Center, the building's major tenant, expanding its base from 180,000 square feet to 370,000 square feet. Today, NYU Langone occupies 458,000 square feet. Vornado's IRR from this investment was 25.0% during the fund's holding period. Our new investment here was made at a basis of $595 per square foot. Recently, we entered into an agreement to acquire the retail condominium of the St. Regis Hotel and the adjacent retail townhouse. The property has 100 feet of frontage on Fifth Avenue on the Southeast corner of 55th Street in the heart of the area of Fifth Avenue, favored by the world's luxury retailers. We also own 689 Fifth Avenue on the same block. The St. Regis property is bookended to the south by the brand-new Valentino flagship, which opened days ago, and it's a wow, and to the north by the new 40,000-square-foot Polo flagship, which will open the end of this month. This property has a 17,100-square-foot lease with the Gucci division of Kering for its Bottega Veneta brand through January 2016 and a 7,600-square-foot lease with LVMH for its DeBeers brand through January 2019. The purchase price for the property is approximately $700 million, and our GAAP yield is estimated at over 4%. We will own between 67% and 80%, and our partner, Crown Acquisitions, will own the balance. The final ownership percentages will be based on the amount of debt financing put on the property and Crown's short-term option to invest additional capital. The purchase is expected to close by early fourth quarter of this year, subject to customary closing conditions. Also in July, we made 3 other investments. First, the joint venture in which we are a 50% partner entered into a 99-year ground lease for 61 Ninth Avenue on the Southwest corner of Ninth Avenue and 15th Street in the heart of the Meatpacking District adjacent to the Apple Store and Chelsea Market and across from 111 Eighth Avenue, Google's 3 million-square-foot New York headquarters building. This will be a ground up new build. The venture plans are to construct an office and retail building of approximately 130,000 square feet. Total development costs are estimated to be approximately $125 million. Second, we acquired the land under our 715 Lexington Avenue retail property for $63 million. And third, we acquired a small retail property on Canal Street for $16.4 million. There has been a lot of hubbub lately about Manhattan Street Retail. This asset class is now drawing a lot of attention, and some of our industry brethren are now jumping on the bandwagon that we have been on for the last 15 years. This asset class has been and continues to be the best performing of all retail asset classes, benefiting from increases in tenant sales, rapidly rising rents, rabid investor interest and, most importantly, extremely limited supply, read extreme scarcity. Our largest and best-in-class Manhattan Street Retail portfolio consists of 2.8 million square feet in 63 properties, with EBITDA of over $310 million per year and growing. To demonstrate the uniqueness of this asset class, Green Street uses a 3.6% cap rate to value our Manhattan Street Retail assets, which is 100 basis points lower than the rate they use to value the best mall portfolio and 80 basis points lower than the rate they use to value the best office portfolio in Midtown Manhattan. In the private market, Manhattan Street Retail assets, depending on exact location and specifics of lease encumbrances, can even trade at sub-3% cap rates. By the way, Green Street has Vornado's NAV at $116 and $0.25 per share. Now to dispositions. In July, we completed the sale of Beverly Connection for $260 million. In addition, our fund and its 50% partner agreed to sell the 313,000-square-foot shops at Georgetown Park for $272.5 million. This large multi-level failed in-town mall in the heart of Georgetown was totally transformed by our development and leasing teams. The IRR on Vornado's share of this investment is 45%. Further, we are selling 2 small retail assets for $15.1 million. Excluding the Springfield Town Center, which will be transferred to PREIT for $465 million, we currently have about $900 million on the for sale list. This includes 20 non-Manhattan retailer assets that are not going into SpinCo and 1740 Broadway, a stabilized, unencumbered office building, which will be -- the proceeds of which will be recycled into other assets through 1031 exchanges. As CFO, Steve Theriot, will tell you in a moment, we have $4.1 billion in liquidity, comprised of $1.7 billion of cash, restricted cash and marketable securities, and $2.4 billion undrawn under our $2.5 billion revolving credit facilities. Our pipeline of internal value-creating opportunities is robust, including our supertall 220 Central Park South residential condominium tower, which is now well along in excavation of foundations; our massive retail and signage transformation at the Marriott Marquis in 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 feet of redevelopments at 330 West 34th Street and 7 West 34th market, which are targeted to the creative class market; the transformation of the 1.2 million-square-foot 280 Park Avenue; the 44,000-square-foot Topshop 4-level flagship at 608 Fifth Avenue at 49th Street; our 699-unit residential project in Pentagon City, with Whole Foods at the base; the 1.4 million-square-foot Springfield Mall total redevelopment, which is on schedule for a holiday -- actually, October 17 opening this year; the redevelopment of Wayne Towne Center in Wayne, New Jersey. And all this is in addition to our plans in the Penn Plaza District. Now to leasing. Company-wide in the quarter, we leased 2,130,000 square feet and 154 transactions, with positive mark-to-markets of 6.7% cash and 14.2% GAAP. We leased 1,222,000 square feet in New York alone, 2.2 million square feet in New York year-to-date. We continue to be very constructive on the New York Office market, submarket by submarket. As I have said before, the island of Manhattan is tilting slightly to the south and to the west, greatly inuring to the benefit of the Penn Plaza District, where we are the dominant owner with over 9 million square feet of office and retail and the Hotel Pennsylvania. Our New York business continues to put up very strong industry-leading metrics. Our Washington business, where we have recently seen a slight uptick in activity, continues to bounce along the bottom. We will be competitive and aggressive here to retain tenants and fill vacant space. As I have said before, we believe there is no value in our share price for the vacancy in Washington. As such, we anticipate very significant value creation as we lease up the space. To sum up, I am very pleased with both our operating performance and our progress on simplification and focusing the business. Now I will turn it over to Steve Theriot to cover more details of our financial results.

Thank you, Steve. Yesterday, we reported second quarter comparable FFO of $1.44 per share, up from $1.27 in the prior year second quarter, a 13.4% increase. Second quarter comparable EBITDA was $450 million. Our New York business produced $251.3 million of comparable EBITDA for the quarter, ahead of last year second quarter by 7.8%, primarily driven by a very strong same-store increase of 5.2% and property acquisitions. Our Washington business produced $84.9 million of comparable EBITDA for the quarter, essentially flat to last year. As we dimensioned on the last quarter's call, we expect Washington's 2014 comparable EBITDA to be approximately $10 million to $15 million lower than 2013. More than offsetting the expected decline in comparable EBITDA, we expect to realize a reduction in interest expense of $16 million in 2014, in addition to the $3 million realized in 2013 from the restructuring of the Skyline mortgage loan. Net-net, we expect our Washington segment's contribution to comparable FFO to be $1 million to $6 million ahead of last year. Our retail strips and malls business produced $50 million of comparable EBITDA for the quarter and generated a same-store EBITDA increase of 1.8% GAAP and 3.1% on a cash basis over last year's second quarter. We leased 231,000 square feet at the strip centers, with a positive mark-to-market of 14% GAAP and 8.9% cash. We leased 54% -- or 54,000 square feet at the malls, with a positive mark-to-market of 5.6% on both a GAAP and cash basis. Occupancy for the strip centers was 93.7% at quarter end, down 20 basis points on a sequential basis from the first quarter. Occupancy for the malls was 95.4%, down 30 basis points from the first quarter. Total second quarter FFO was $1.15 per share as compared to $1.25 per share in the prior year second quarter. Noncomparable items this quarter were a negative $55 million or $0.29 per share of loss compared to negative $4 million or $0.02 per share of loss for the second quarter of last year. This year's second quarter noncomparable items included negative FFO from Toys of $51.9 million, $5.6 million of definitive costs in connection with the refinancing of 909 Third Avenue -- I'm sorry, $4.1 million of acquisition and transition costs, partially offset by $2.2 million of FFO from discontinued operations. The carrying amount of our investment in Toys is down to $26 million at quarter end. Please see our press release for an -- or the overview and MD&A on Page 36 of our Form 10-Q for a complete summary of noncomparable items. Again, this quarter, let me take a moment to explain the change in our total revenues line. While it looks like total revenues decreased for the 6 months ended June 30, on a comparable basis, total revenues increased $50.5 million or 4% over the prior year when adjusted to exclude last year's onetime $59.6 million from the Stop & Shop litigation; $24.5 million from Independence Plaza, which was de-consolidated in last year's second quarter; and fees of $29.1 million from the Cleveland Medical Mart development project, which we sold. Our second quarter revenues were also up 4% after adjusting for Independence Plaza and the Cleveland Medical Mart. Now turning to capital markets. As Steve mentioned, we have $4.1 billion in liquidity, comprised of $1.7 billion of cash, restricted cash and marketable securities, and $2.4 billion undrawn under our $2.5 billion of revolving credit facilities. We will utilize some of our cash to repay debt. We intend to repay in October the $445 million of outstanding 7 7/8% senior unsecured notes due 2039. We also intend to repay our $500 million of 4 1/4% unsecured notes due April 2015, when they first become freely prepayable in January 2015. These 2 repayments alone will generate incremental FFO of $0.28 per share per year. In April, we completed a $350 million refinancing of 909 Third Avenue. This interest-only loan is at 3.91% fixed and matures in May 2021. We realized net proceeds of $145 million after repaying the existing 4.65%, a $193 million mortgage defeasance and 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 95 basis points, currently 1.1%, and has a final maturity in March 2021. The proceeds of the new loan will be used to repay the existing $312 million, 5.33% fixed rate loan. In June, we completed a green bond offering of $450 million of 2.5% senior unsecured notes due June 30, 2019. The notes were priced at a 90-basis-point spread over the benchmark treasury. Finally, in July, we completed $130 million refinancing of the Las Catalinas Mall in Puerto Rico. The 10-year fixed rate loan bears interest at 4.43% and amortizes based on a 30-year schedule beginning in year 6. Our consolidated debt-to-enterprise value is 34.4%, and our consolidated debt-to-EBITDA is 7.1x. Our debt mix is balanced with fixed rate debt accounting for 87% of the total, with the weighted average rate of 4.56% and a weighted average term of 6.5 years; and floating rate debt accounting for 13% of the total, with the current weighted average interest rate of 2.25% and a weighted average term of 4.1 years. We have no remaining 2014 maturities. And after giving effect to the repayment of our 4 1/4% senior unsecured notes in January, our 2015 maturities totaled just $245.8 million. And with that, I'll turn it over to David Greenbaum to cover our New York business.

Steve, thank you. Good morning, everyone. Before I return to our results for the quarter, as usual, I'm going to spend a minute just talking about the market. At a macro level, we seem to be witnessing an inflection point in the business climate. With growing confidence, businesses have begun to shift their focus from the cost-cutting mindset of the last several years to a renewed focus on growing top line numbers. In past cycles, when we've seen that shift occurring, the pace of job growth has accelerated. New York City office sector employment, currently expanding at about 2% per annum, has now reached 1,276,000 jobs, which is just 20,000 jobs shy of the all-time peak reached in 2001. Anecdotally, in our own portfolio, real office job growth has been evident with our statistics. Over the last 2 years, consistently, 20-plus percent of the space we have leased each quarter has been with tenants new to the New York market or existing tenants expanding their footprint in New York City. This job growth has largely been achieved without the benefit of the traditional drivers of growth, financial services and law firms. Tech, creative and professional services, in particular, have fueled much of the growth in the office using employment, which highlights the continued diversification of New York's economy. Consistent with our investment thesis, and as we have discussed again and again, a key secular trend we are continuing to see is an accelerating dominance of the great urban centers in the country, New York, Washington, San Francisco, Chicago. Tenants aggressively are gravitating to the urban cores in order to recruit and retain the best and the brightest of the millennial generation, which values the 24/7 live, work, play environment of these great cities. A recent job statistic highlights this point. Over the past decade, since 2004, of the 550,000 jobs that have been created in the New York metropolitan area, substantially all 515,000 were in New York City, with only 35,000 jobs created in the suburbs. Manhattan leasing velocity has continued to accelerate with a total of 17.8 million square feet leased year-to-date. Net absorption of 2.5 million square feet has pushed the Manhattan vacancy rate down to about 10.7%, while overall asking rents over the past 12 months have continued to rise modestly. In a meeting last week with one of the most senior brokerage teams in New York, their take on the market was that we are just at the beginning of a period of significant rent growth. Let me now turn to Vornado's performance for the quarter. We topped our first quarter activity with another exceptionally productive quarter, 1,222,000 square feet of office leasing activity in the second quarter in 46 transactions, with an average lease term of 11.6 years. Total leasing for the first half of 2014 is some 2.2 million square feet, virtually all of our activities for last year. In the first 6 months of the year, we completed 25%, 10 of the top 40 largest leasing transactions in Manhattan as reported by Crain's. Of the 1.2 million square feet we leased this quarter, 58% of our activity was with tenants new to our portfolio and existing tenants expanding. The balance, 42%, was renewal. The activity was well-balanced throughout the portfolio, not concentrated in any 1 submarket. Our average starting rent was a healthy $69.43, with very strong positive mark-to-markets of 19.1% GAAP and 10.4% cash. Second quarter occupancy was 97.3%, up 40 basis points from the first quarter. We are full. There are several highlights in our second quarter leasing activity. The largest lease of the quarter was a 355,000-square-foot lease with Neuberger Berman at 1290 Avenue of the Americas that we announced on the last call. Neuberger Berman leased entire floors 22 to 29 and 38 to 43 for 22 years, taking the space currently occupied by Morrison & Foerster, as well as the space leased to Warner Music. At 1290, we also completed a 58,000-square-foot lease expansion with AXA. As you may remember, last year, AXA subleased some 300,000 square feet of the 400,000 square feet they leased at 1290. Consistent with the macro trend I discussed earlier of companies shifting their focus to top line growth, AXA now recognizing that its New York business is in a growth mode came back to us and leased 58,000 square feet. At 90 Park Avenue, on the last call, I announced the start of a building capital program, including new mechanical systems, state-of-the-art elevators and a total lobby transformation. In the second quarter, we completed an 80,000 -- 83,000-square-foot renewal and expansion with the law firm Foley & Lardner. Combined with 102,000-square-foot lease with FactSet Systems in the first quarter and a couple of smaller deals, we have now leased nearly 40% of the 450,000 square feet of leases scheduled to expire over the next 2 years at substantially higher rents. In Midtown South, at our 1.1 million-square-foot 770 Broadway located between 8th and 9th Streets, J.Crew once again expanded, taking 80,000 square feet the entire 15th floor and now leases 455,000 square feet in this cutting-edge creative hub. Facebook also expanded for the second time this year, adding 39,000 square feet on the second floor and now leases a total of 196,000 square feet. Tenants really appreciate the bones of this well-located building in Midtown South, with great light and air, high ceilings, large footplates -- floor plates and state-of-the-art infrastructure. Let me turn now to Penn Plaza. Speaking at a recent conference, one of the city's leading brokers echoed Steve Roth's sentiment on the market saying, and I quote, "The epicenter of Manhattan is moving West, South and even Downtown, with TAMI tenants driving the shift in demand." We completed a large deal in Penn Plaza this quarter with our friends at Madison Square Garden. MSG renewed its 312,000 square feet of leases at Two Penn Plaza and Eleven Penn Plaza across the street, committing to these properties through 2024. At our 735,000-square-foot 330 West 34th Street redevelopment, just last week, and not included in the Q2 numbers, we signed 2 important leases for a total of 158,000 square feet, 1 with Deutsche advertising coming out of 111 Eighth Avenue, the Google building for the entire 13th and 14th floors at 330 West, and the other with Yodle, an online marketing company, for the entire 16th, 17th and 18th floors. Activity at 330 West 34th Street and 7 West 34th Street is really good, and we're excited by the market's reaction to our building transformation programs. Our Penn Plaza portfolio continues to be full, with our occupancy at 97.2%. At 280 Park Avenue, our joint venture with SL Green, we expect to deliver the mid-block jewel box atrium in October, complementing the full block Park Avenue lobby. Just last week, again, not included in the Q2 numbers, we completed a 39,000-square-foot new lease with Taconic Capital Advisors and also shook hands on a 30,000-square-foot expansion with one of our existing full floor 50,000-square-foot tenants. Over the past year, we aggressively have been working on future office lease expirations. Expirations for the remainder of 2014 are quite modest, with only 308,000 square feet expiring. For 2015, we are now down to approximately 1 million square feet of expiring space, having already leased 1.2 million square feet of the 2015 expirations. In our Manhattan Street Retail portfolio, we completed 6 retail leases in the quarter, totaling 20,000 -- 23,000 square feet, with mark-to-markets of 57.2% GAAP and 30.4% cash. As I mentioned on the last call, the long-term lease renewal with Coach at 595 Madison Avenue, The Fuller Building, on the corner of 57th Street. This quarter, we also delivered possession to Topshop-Topman at 608 Fifth Avenue for its 44,000-square-foot, 4-level flagship. Topshop is now completing its interior fit-out for the fall opening, which Steve mentioned. In San Francisco, we continued the strong activity at our 1.8 million-square-foot 555 California Street. This massive granite building dominates the skyline, and it's the best office building in San Francisco. In the second quarter, we signed 3 leases totaling 88,000 square feet, the highlight of which was a 76,000-square-foot lease with Fenwick & West, a leading law firm that represents companies in the technology and life science sectors. And just last week, we signed a renewal expansion with Dodge & Cox for 112,000 square feet. Year-to-date, we have completed over 315,000 square feet of leasing at 555 California. At the 3.5 million-square-foot Chicago Mart building located to the -- at the center of the hot River North market, we completed 111,000 square feet of leasing this quarter. We have rebranded this great iconic asset, the Mart, dropping merchandise from the name. Continuing the evolution of the Mart into a home for technology-based office tenants, in the quarter, we signed a 59,000-square-foot lease with Braintree, which was acquired last year by the PayPal division of eBay. And we are now in final lease drafts with 2 additional tech tenants for a total of 76,000 square feet. The Mart is a buzz of activity. To conclude my remarks, let me summarize the entire New York division. We once again had a very strong quarter, our key performance metrics, industry-leading, with same-store EBITDA increases for the overall division of 6.9% cash and 5.2% GAAP. Isolating just the New York office business, our same-store EBITDA increased 7% cash and 5% GAAP. Let me just conclude by noting that while our New York portfolio effectively is full, we look forward to the positive impact our redevelopment activities at 330 West 34th Street, 7 West 34th Street, 280 Park Avenue and the Marriott retail and signage block front at 1535 Broadway will have on our operations as all of this space is placed back into service in 2015 and '16. Now I'll turn over the call to Mitchell Schear to cover Washington.

Thank you, David, and good morning, everyone. We're pleased with our second quarter results and encouraged by the uptick in activity that we're seeing and working. We are being competitive and aggressive to retain tenants and fill vacant space. In the quarter, we completed 401,000 square feet of office and retail leases in 53 transactions. Including the first quarter, thus far, in 2014, we have signed leases for 766,000 square feet of office and retail space in 115 transactions. Overall, office leases signed in the second quarter generated a GAAP mark-to-market of negative 4.0% and a cash mark-to-market of negative 9%. We don't love these metrics, but it's what we expected in today's competitive leasing market in Washington. Our total occupancy, including residential, was up slightly by 20 basis points from Q1 to 83.5%, which is weighed down by Skyline's 58.5% occupancy. Excluding Skyline, our overall occupancy increased by 20 basis points to 88.3%, and our office-only occupancy increased by 10 basis points to 85.8%. Our residential business continues to be very strong with a 98% occupancy for Q2, a 120-basis-point improvement from Q1. We own more than 2,400 apartments in highly sought after urban locations, including Crystal City, Pentagon City, Rosslyn and Georgetown. Quarter-over-quarter, we've reported flattish same-store EBITDA of negative 1.7% cash and negative 1.8% GAAP. As always, we are in the leasing business, and we're making headway on our BRAC vacancy. Since the close of Q1, we leased an additional 158,000 square feet of BRAC space. To date, we've resolved 1.3 million square feet or 63% of our BRAC space and in Crystal City alone, almost 1 million square feet or 71% of our BRAC impacted space. At 201 12th Street in Crystal City, where we had one of our largest concentrations of BRAC, which is 221,000 square feet, we have executed leases for 80% of that space or 177,000 square feet. These include a lease signed in Q2 with L-3 Communications, a defense technology firm, for 30,500 square feet; also, a new lease with GSA signed in July for 25,000 square feet; and a lease signed just last week with a new GSA tenant coming to Crystal City, the Department of Labor, for 75,000 square feet. We've also made progress at 251 18th Street, another BRAC-impacted building. We've recently made deals with 2 associations totaling 25,500 square feet, both new to Crystal City and coming from Downtown D.C. Our proximity to Capitol Hill and National Airport makes us an ideal location for associations and nonprofit organizations. On our last call, I discussed 4 transformative moves to attract the growing demographic of creative and tech clusters to Crystal City. Each of these initiatives has generated a steady stream of interest, and they are increasing activity for us as we had hoped. In July, we received approval from Arlington County for our new project with WeWork to build a residential building. We're on a fast path to a mid-2015 opening of 252 community-style units with an imaginative design and connected to dynamic shared social spaces. WeWork will bring the same sense of community and opportunities for collaboration to residential as their office concept. The $50 million Crystal Tech fund is now home to 8 growth technology companies. Events and programs at the Crystal Tech space have attracted over 1,500 entrepreneurs and tech influencers. TechShop has signed up nearly 600 members since their opening in April. With activity and classes held days, evenings and weekends, TechShop is a street activator and a magnet for entrepreneurs and creatives. Our DesignLab attracted over 2,500 people and has generated significant interest from brokers, tenants and the media. The suites are leasing well, and plans for DesignLab 2 are underway, with 10 new suites ready later this year. In summary, we are ticking along as we expected in 2014. We remain excited about our opportunities to create value by leasing up our vacancy and harvesting our vast development pipeline on the shores of Potomac. Thank you very much. And I will now turn the call over to the operator for questions and answers.

[Operator Instructions] Our first question comes from Michael Bilerman.

Steve, I was wondering if you can talk a little bit about -- on street retail, you talked about the hubbub of activity and Vornado being in the business in the city for over 15 years. I'm curious sort of your view as you think about street retail and the scarcity of space in other key geographies, whether it be London in Bond and Regent Street, Ginza in Tokyo, Champs-Élysées in Paris. How sort of would you approach or would you even approach taking what has been a success here for you to other markets?

Michael, we've thought about that, and obviously, we have not invested anyplace other than our great street retail business in New York. In order to invest in other cities, there's a couple of things that we need. First of all, we would need troops on the ground. We would need local knowledge. We would -- these are very, very, very -- I don't want to say tricky. These are very sensitive markets. Every block is different. Every -- whether it's on one side of the street or the other side of the street, is different. So I don't think anybody dares invest in a foreign land. And by the way, Chicago is a little foreign if we don't have a major intellectual knowledge of the marketplaces. So we have thought about it and do 2 caveats for that. Number one, we would have to really be assured that we know these markets sufficiently, intimately to invest. And by that I mean not just relying solely, not just being dumb money with local partners. The second is, is there would have to be a good entry point, where there is some distress in the marketplace, where there is some -- I mean, it would not be a wise thing for our shareholders, for us to start going into foreign markets at what looks like they are very high prices.

Okay. And then just as a follow-up, just on D.C. EBITDA. You talked about the...

Michael, by the way, if there was a publicly traded real estate company, which had dominant holdings in 3 or 4 of these -- dominant retail holdings, very focused retail holdings in 3 or 4 of these great markets, it would be an extremely, extremely important and sought after investment.

I don't know if that -- if you're saying that in a way that there's something to come, but I'll just store that for future.

No, I'm not trying to be provocative. What I'm just saying is, is that these are totally unique assets, and each of these 4 or 5 or 6 great cities share similar characteristics in terms of customer, in terms of tenants' desire to be there, in terms of the sophistication of the shopping customer, the amount of tourism, the wealth, et cetera. And so, I mean, don't read anything more into what I'm saying.

Okay. And just a follow-up, just on -- in terms of D.C. EBITDA. You talked about the slight uptick in activity. There's a sequential increase, albeit modest, in EBITDA. And I'm just curious how that ties to what seems to be a reiterated forecast of D.C. EBITDA being down $10 million to $15 million. You are only down $2 million year-to-date. It doesn't seem that the comps get too difficult in the back half of the year just given when the vacancy occurred. And it doesn't seem that the role is that bad in the back half. And so I just didn't know if there was something else that we're missing.

I don't think there's anything else that you're missing. I mean, we're certainly not declaring victory. We are not changing our guidance. We are optimistic that we will do slightly better than our guidance, but we think it's going to be a little rougher in the second half than in the first half. So you are right to have identified that $2 million. We talked about it at great length over the last days. And we think we will likely do better than the low end of our guidance but not as much better as the $2 million we seem to indicate.

Our next question is from John Bejjani.

Mitchell, a couple of D.C. questions. The 9% down cash re-leasing spread seems to be a step backward versus recent quarters. Is this an anomalous data point tied to a couple of leases? Or is the cost of business heading higher? And secondly, how does your leasing progress so far this year compared against your occupancy expectations at the start of the year?

Sure. Thank you, John. So with respect to the mark-to-market numbers, I think you just have to look at each quarter and you have to look at the particular spaces that came back and the particular leases that got done. There happened to have been a couple of leases in the Crystal Gateways, where we've been aggressive in terms of leasing space, a couple of leases out in Reston. So I think that I wouldn't make anything broader than just the numbers that they've come across for the quarter. And in terms of our leasing projections, I think that we are consistent with what our expectations were at the beginning of the year. And I think in the first 2 quarters, they've been consistent with our expectations and expect the rest of the year to be the same as we've expected as well.

John, let me add on to what Mitchell said. Basically, we have a fair amount of empty space in the Washington marketplace. Our competitors or brethren or whatever you want to call the rest of the marketplace also has empty space. We -- from a policy point of view, we will be competitive, okay? We will not let our competitors take away our tenants, and we will fight for each piece of business. So the fact that rents are going down a little bit, that's to be expected, it's planned and it's part of our business strategy of being aggressive.

Great. Steve, I guess, can you update us on the status of the 640 Fifth release. I think last quarter, you suggested this mother of all rollovers is ready to give birth.

Well, the answer is bad things happen every once in a while. We had worked on a deal, a single tenant deal for 640 Fifth Avenue, which is a large tenant -- larger than 40,000 square feet. We've worked on it for well over a year. We were in the final stages of completing the deal, and the deal disappeared. So that happens every once in a while. And we are now in the process of working on multiple tenants for that space. We are moving along. We're in the process. We have nothing to say now about it. We expect to be -- we expect we are -- we don't expect, we are certain that the economics of dividing the space will be the same as the economics that would have been achieved with a single larger user, albeit it's going to take a little more time because we were waylaid, we were -- how do I say it? We were jilted, okay? So there you have it. But nonetheless, the mother of all, in terms of the economics, will be the same, albeit we'll have to wait a little bit longer for it.

Our next question comes from Steve Sakwa.

Steve, as you think about allocating capital into street retail versus the other businesses, do you have a lower return hurdle that you think might need to be achieved in order to allocate capital? Or do you think about IRRs in the street retail at the same way you think about office?

Steve, make no mistake about it. We invest in street retail for 2 main reasons, one is to make money and the second one is to make money. So I've read some comments that somebody said, some of these street retail deals are small. Well, the answer to that is a 5,000-square-foot space on Fifth Avenue is probably equivalent to 400,000 square feet of office space on Fifth Avenue. So the math -- the numbers in terms of square footage may be small, but the numbers in terms of income and the numbers in terms of the capital values of that income are equivalent to large office buildings. So the answer is we really, when we invest, we really look at the potential value of an asset over a 5-year and maybe even a 7-year and maybe even a 10-year hold. And we invest in -- we try to underwrite what will happen to the value of that asset in the income stream over a fairly decent period of time, not 1 quarter or 2 quarters. And we have found, if you go through the experience of our portfolio that over time, we have made a lot of -- an enormous amount of money on our offices investments. We have made even more money on our retail investments. So the answer is we don't have any favorite child. We're in it for the money. We're in it for the capital appreciation. And that's the way we allocate capital.

Okay. Maybe a question for David. As you kind of look at the back half of '14, and the, I guess, the minimal rolls that you have now coming up at about a million feet, what do you think the lease spreads might be kind of over the next 18 months on the space to roll over?

As Mitchell has said, it's obviously all dependent upon the space that comes up. But I think, consistently, as we've seen over the last couple of years, our lease spreads for both a cash and a GAAP have been in the -- running around the high-single digits to low-double digits to, in some cases, even high-double digits, as they were this quarter. So I think as we're looking at our lease rolls over the next year or so with a market that I feel pretty good about, we think those numbers should be achievable over the next period of time.

I guess you don't see them necessarily accelerating given the fact you're 97% occupied?

When you say accelerating, the mark-to-market at any piece of space is not going to accelerate, obviously. I think where we're going to see some significant growth in the portfolio over the next couple of years, as we -- as I mentioned in my remarks, as we bring properties that are currently out of service, 7 West, 330 West, 280, 1535, that's going to have a material impact on my business.

Our next question comes from Alexander Goldfarb. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: First question is on a number of these transactions that you guys have done, especially on the street retail, the new transactions, you've entered in with JVs, whether it's you have a St. Regis or in the Meatpacking District. Just sort of curious, is this trying to maximizing the capital as far as earning management fees or promotes? Or is this because there's such intense competition that you just say, hey, let's partner up, rather than killing ourselves over just bidding up deals to crazy prices? Because certainly, you guys have the capital wherewithal to pull off these deals. So curious, a number of these that have JVs with them?

Alexander, each one is different. We -- let's take the 2 specific examples that you mentioned. The St. Regis deal, we partnered -- our partner had control over the deal. So it was not a -- we didn't partner for capital. We have, obviously, more capital than our partner does in this particular -- so he had control over the deal. So he brought the deal to us to -- and that's why he's in the deal. And he provided a great service. And so that's that. In the Ninth Avenue deal in the Meatpacking, we partnered with another investor, who will be the developer of the property for lots of different reasons, who brings along some adjacent air rights as well. So those are -- both of those 2 specifics, neither one of them were capital-based. They were both strategy-based and sourcing-based. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay, that's helpful. And then the second question is, in the conversation about foreign lands, just something a little bit closer and across an old time bridge, your thoughts on Brooklyn. Is that an area that we should think about you guys expanding into or are your views of that market -- or is your view that there's enough opportunity in Manhattan that you don't need to cross the river?

The answer to that is all of the above. There is certainly enough opportunity in Manhattan to keep us and our capital busy. We believe the returns in Manhattan are greater than they are almost anywhere else in the world. Brooklyn is certainly attractive. We have looked at a few things in Brooklyn. We may well invest in Brooklyn. I think that most of the easy money in Brooklyn has been achieved already because values have already risen very significantly. But Brooklyn is the real McCoy, and we have no current things to announce or plans in Brooklyn, but it wouldn't surprise, I don't think anybody, if we made a -- if we invested here, if we allocated some capital to Brooklyn.

Our next question comes from Jamie Feldman.

As you guys are talking about the center of gravity in Manhattan shifting to the south and to the west, I was hoping to get your thoughts on midtown longer-term? What do you guys think happens in the market as we do start to see some of these large leases move downtown or to the Hudson Yards? And should we read into your sale of 1740 Broadway as a longer-term view on the market?

Jamie, it's David. I think -- listen, my view is midtown is not going away. We've had some very good activity in Midtown. And there obviously are some big blocks of space that are currently on the market in midtown, and there are a couple of big blocks that are going to come on this space in midtown, the Conde space, the Time Inc. space. But I will tell you, for well-located buildings in midtown that still are at transportation, and most importantly, for buildings that have been maintained to state-of-the-art standards, similar to what we recently achieved at 1290 Sixth Avenue, we continue to see some very good activity from tenants in midtown. And long-term, I think, Sixth Avenue, Park Avenue, Fifth Avenue are going to be just fine. We obviously are seeing, though, as you mentioned, the branching out of the island, which seems to be a long-term secular trend.

So let me add on to what David said. I've said frequently and quite publicly that the island of Manhattan seems to be tilting to the south and to the west. I do not believe that, that is a short-term cyclical trend. I think it is a secular trend. I think that we are finding that tenants are actually surprisingly willing to go to places on Manhattan Island that they would not have thought about 15 years ago. That is motivated by multiple things. It's motivated by the fact that price is cheaper when you get out of the very tight midtown plaza district submarkets. And it's also motivated by the fact that their employees want to work in different kinds of environments, depending upon whether it's a banking firm with -- where everybody wears a formal attire, whether it's a creative firm. A comment about pricing is it has been, I think, surprising to everybody, and I've said this also formerly, that pricing seems to have leveled out. The hierarchy of submarkets in Manhattan is leveling. So it used to be that the plaza district got the highest rents in town by far, then Park Avenue, then Sixth Avenue all the way down to downtown districts. We now get similar rents on Park Avenue versus, say, 770 Broadway. So we have to be cognizant of that. We have to service our tenants. And one of the reasons that we are doing 61 Ninth Avenue, which is a deal which is small, and we only have half of the deal, is to service that kinds of tenants that we're now talking about. And we're underwriting rents on that particular spectacular location in the Meatpacking District, which are certainly similar to Park Avenue rents. So we think it's a secular trend. We think we have to participate in it. We do think, however, that Midtown is not going away, and it will be vibrant and sought-after forever. The analogy that we talk about internally frequently is London, where you have Canary Wharf, you have the city and then you have the West End. So all of those submarkets are somewhat analogous to New York. And if you look at London, the traditional markets, the scarce markets, which would be analogous, let's say, to Park Avenue, are still the most sought-after. By the way, you talked about 1740. Our -- putting 1740 up for sale is a recognition that, that is an asset that we have held for a long time. We have an enormous potential profit, and I'm talking about enormous, maybe a 4 or 5 bagger. And we believe that that's a stable asset that will be sought-after by investors. And from our shareholders' point of view, that capital is better off recycled into assets which will grow at a different rate.

Okay, yes, very helpful. And then, I guess, a question for Steve Theriot. You guys have commented that $4.1 billion of liquidity. Can you just walk us through how much of that is already allocated? You guys provided a long list of projects in process. How should we be thinking about sources and uses?

Well, I think we do have a lot of liquidity. When we look at our current cash, as we said, where we've got some -- or some repayments that are coming up that we think will be very accretive to us, including the repayment of debt, which is going to be $945 million. We're going to have to put $200 million into St. Regis to close that transaction after our partner makes their contributions and the debts put on that deal. But beyond those significant commitments, we think the 220 Central Park is more or less going to self-finance. And so those are the big deployments that are currently on the near-term horizon.

Jamie, our internal budget is that fairly large cash balance will run down to the lower billion, maybe even $500 million, $600 million, $700 million because of the uses that are allocated against that. So Steve said there's $950 million of debt repayment, then there's CapEx, which will not be financed, et cetera. So that cash balance will be very effectively utilized in allocating capital to our business.

Our next question comes from John Guinee. John W. Guinee - Stifel, Nicolaus & Company, Incorporated, Research Division: Just a few curiosity questions. Steve, Ninth Avenue development comes out to about $600 -- I'm sorry, comes out to $960 a square foot. Did you gross up your ground lease on that number or is it $960 excluding any attribution for land value?

That's correct. John W. Guinee - Stifel, Nicolaus & Company, Incorporated, Research Division: $961 excluding land?

Yes. John W. Guinee - Stifel, Nicolaus & Company, Incorporated, Research Division: Wow, okay. And then 715 Lexington, you bought the...

By the way, John, that's only a projection, which is we always err on the safe side. So we'll do a little better than that, and we'll let you know when it's over. John W. Guinee - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. 715 Lexington, $630 million for the -- $63 million for the land, what did you pay on a per foot basis? And what's the sort of implied cap in terms of getting rid of the ground lease payment?

I don't have those numbers at my fingertips. The deal was initiated by a third-party bid to the owner of the land, who -- so it was a real live bid. We had a ROFO, which we struggled a little bit because the price is high, but in the end, we exercised it. The computation that led the cap rate for the land payments, saving payment, is important, but it's not the main thing that we looked at. The land lease had a turn in the 30s of years, which is very short. So we had the prospects of losing that asset. 30 years is probably long to some people on the phone, but it's not long to a real estate investor. And so what we did, the calculation was -- first of all, we had to match a price. The calculation that we made was twofold. First, what was the building when we combined the 2 estates, our leasehold with the ground, the fee interest be worth. And we divided up the interest of the leasehold and the fee estate, and it turned out that we thought that while the cap rate on the $63 million land was very low that there was value, for sure, in the ground. The second part of it is, is that we own the building contiguous to it to the east, 150 East 58th Street, where we have very significant, which is across the street from the Bloomberg Tower, directly across the street by the way, where we have redevelopment opportunities. And then we also are in contact with our neighbors to the south for redevelopment opportunities. So this quarter is the keystone, and we wish we would have bought it cheaper, but that's the thinking that went into that transaction. John W. Guinee - Stifel, Nicolaus & Company, Incorporated, Research Division: You bring up a great point. One of your other public peers just sold their -- or sold a leasehold -- sold a fee position, I'm sorry. Is there some investors out there who are aggressively trying to buy the ground positions on various assets in New York right now?

The answer to that is yes. I mean, ground positions are extremely dear. They sell for extremely low returns, and they're very valuable. I think the thing that you're alluding to was basically that was more of a financing than a piece of real estate. John W. Guinee - Stifel, Nicolaus & Company, Incorporated, Research Division: Got you, okay. All right. And then just a question for both David and for Mitchell. If you took your -- David, if you took your mark-to-markets and your CapEx expended for New York, and you took out 770 Broadway, what would it look like? And then the same sort of question for Mitchell is if you looked at Crystal City and maybe Skyline versus the CBD, what would your negative 4, negative 9s look like for each of the submarkets within DC?

I'm not sure that we -- there's a lot of papers being shuffled around here, John. I'm not sure that we have the exact number. John W. Guinee - Stifel, Nicolaus & Company, Incorporated, Research Division: Steve, you can just give us sort of some general and whether it's widely divergent or somewhat similar between the 2 markets. And if you say with the authority, we'll all believe you.

No, we're not going to do that. We're going to tell you this, which are the transparent facts. I don't think we have the facts sufficient to give it to you on the call. We'll get to you offline.

Our next question comes from Ross Nussbaum.

Steve, given the progress you've made on the simplification front, assuming the pending strip center's been, I guess, completed, in your mind, are you finished and the rest of what needs to be done is just a little bit of blocking and tackling?

John -- I hope I'm not finished, Ross. The answer to that is you're asking about succession and when did they throw me out of here?

No, no, no. Actually, no. I mean, well, that's part of it, but...

Well, okay, then I'll give you an assessment about...

Is the company where you want it in terms of...

I'll give you the [indiscernible], and you're asking for 2 things, okay. How well so are we going to transform the company, which is, I guess, the guts of the question. And the second thing is when are they going to throw me out of here, okay. So let me take the first, first. We are, and I think we have shown a willingness to do what it takes to optimize shareholder value. So we try to run the company and think as if we were owners, not as if we were managers. And we try to run the company to create lasting shareholder value. The transformative events that we have done over the last, say, 3 years, which is selling certain assets, selling businesses, focusing -- acquiring in a very focused way, et cetera, have had -- we're very happy with the results. There are some other transformative, potential activities that we are considering. And we have nothing to report on that. We said, somebody asked me a call ago or 2 calls ago, are we going to split off and spin off street retail. Are we going to spin off or sell the Mart? Are we going to spin off or sell 555 California? So since we are a company and a management and a board that seems to be focused on creating value and doing things which are extraordinary-type transactions, then the people who follow us and invest with us want to know what we're going to do. That's the essence of what your question is. So we have said we are thinking about all of those things. We have nothing to report, but everything, as I've said, a couple of years ago, in my letter, everything is on the table to create a focused company, which is -- improves shareholder value. So having said that, we -- I guess, what I think we've done is we've done some of the easy, obvious things, the things that we may do in the future, which by the way, I caveat to you, likely we will not, okay? So we think we have more studying to do. We're not done yet. When we're done, I'm certainly going to be the first one to tell you. The second part of it is that I am -- who I am, I am the age, I am. And the board and I are obviously considering what happens after me. And this is an extremely important thing for me personally, and for the company. And there's no rush on it, but it's certainly something that we talk about and think about all the time, which is our responsibility.

Okay, I appreciate all of that. The follow-up, and I don't know if John Guinee was getting to this, I lost track of his last question. Do you guys have a ballpark of what the mark-to-market is on your New York street retail rents?

I think we do, but I don't think we've disclosed that, and it's more like a guess. The other thing is that with the street retail rents, there's 2 mark-to-markets. There's -- I mean, we can put on a spreadsheet what the contract rent is for each of the 60 odd assets we own versus what the market is. But the other thing is, these rents trend. And so the most interesting number is what might the rents trend to 3 years from now, 5 years from now, et cetera. So we have a ballpark number. It's not something that we formalize. It's not something that we publish. But it's actually very attractive, and we think that this is, as I've said many times, we think that this is an extraordinary business, okay. You know what? I'm going to use your question, which is really not to the point, but there's an interesting thing that I want to get into your thinking. The Wall Street Journal yesterday published an article on Page A18 about Valentino's new flagship that they opened on Fifth Avenue. And as I said in my remarks, that is contiguous to the south of the St. Regis investment that we just made. And then contiguous on the north side is the new 40,000-square-foot public store anyway. So a gentleman by the name of Stefano Sassi, who's the CEO of Valentino, in this article said the following. "Fifth Avenue is the center of the world. Having a store here is a key message to the market." He also said that, the flagship store on Fifth Avenue sends the message Valentino was very ambitious about development. It's a very strong statement, though. What I'm saying basically is these street retail assets in some of these very, very scarcest of locations are unbelievably irreplaceable, high-demand assets. And while -- so I've said enough.

Our next question is from Brad Burke.

I was hoping that you could expand on your plans at Penn Plaza, particularly as we see some of your bigger redevelopment projects wrap up. I assume that this is going to become a bigger area of focus. So I wanted to get an update on what you're thinking about at Hotel Penn, and also what you're thinking about in Penn Plaza, outside of Hotel Penn?

Thanks for the question, Brad. A couple of things. We are in a great spot in Penn Plaza. We are unbelievably happy and excited about it from many different perspectives, and let's focus for the moment on just wealth creation and value. So we have enormous holdings. We are full. As David said, we're over 97%. We have been over -- in our office holdings there. We have been over 97% for the last 15 years, including in recessionary times. We are the low-cost producer. And by the way, as I've said repeatedly, the tilting of the island to the south and the west enormously benefits the Penn Plaza district in many different ways. So the average rents in Penn Plaza are what now, David, $55?

Maybe a tad higher, Steve.

Okay. So just a tad higher than $55 a foot, which really in this marketplace makes the current Penn Plaza rent dynamics, office rent dynamics, the low-cost producer, which is not a bad place to be in. We believe that based upon the geography of Manhattan and what's going on in terms of our customers, meaning the tenants, the marketplace -- we should be able to achieve market rents in Penn Plaza of $65, $75 and then $85 a foot. There's no reason that those numbers can't be achieved over time. Now just as I mentioned that, take the midpoint of the numbers that I just threw, I'll say $20 a foot, times the better part of 8 million square feet of office space, that's $160 million a year of potential revenue which goes right to the bottom line, with the exception of a small amount that will be -- as the rents go up, the real estate taxes will go up a little bit. So that's a very, very large number. If you put any kind of a cap rate on that, that creates billions and billions of dollars of shareholder value. Now in order to achieve those kinds of ambitions, we have to "transform that neighborhood." We have to change the neighborhood. We are hard at work. And by the way, I have said -- I think I've said it in my letter this year, the big kahuna in this company will be the success that we are able to achieve in transforming the Penn Plaza district and in achieving higher market rents for the assets that we have accumulated there, okay? So we're hard at work doing that. And it will require world-class sport in terms of architecture and design, which we are up to our eyeballs in. It will require not insignificant dollars of investment, all of which we are involved in and prepared to do. Now the Hotel Pennsylvania is a different kettle of fish. As you may remember, we have an approval to build a better part of a 3 million square foot financial services-oriented tower on that property, which was designed for a huge financial services customer that we had a deal with, that went away in the great recession. So we have an enormous entitlement, including ULURP the full process, et cetera, which is sitting on our shelves. We abandoned that because it seemed highly unlikely that we would be able to land such a tenant, and we have been focusing in the recent past on renovating the hotel. By the way, we are in the pretty good position where we have a hotel which generates a significant amount of EBITDA, which is a holding action for what we may do with that asset in the future. And we have lately been getting some very interesting intriguing incomings as to office tenants that might want that site. So we are going down 2 paths. One path is the renovation of the hotel, which will drive more income and improve the neighborhood, and the second is putting our big toe into the marketplace to explore the opportunity to land a major anchor tenant for the site and the Penn Plaza district. So we are up to our eyeballs in it. We don't have anything specific that we're going to -- that we're able to go to public with yet. This is not a short-term endeavor. It's 3 or 4 square blocks of the City of New York in a very, very, very crowded district on top of the busiest train station in North America, et cetera. So we're excited about it. And other than that, I don't have a whole lot that I can tell you.

Okay. So we should be thinking about the $250 million to $300 million you've talked about for the Hotel Penn is being on hold at this point until you figure out what you want to do, if anything, for 15 Penn Plaza, which -- assume that's what you're still calling at?

Well, the answer to that is yes, but you can also think that we will investment multiples of that number in the district and in the surrounds and in the office buildings that we own there. So the capital that we, and the improvements that we're going to make in that district will go well beyond just the Hotel Pennsylvania. They will go into every asset that we own there.

Okay, that's interesting. I appreciate it. And just a quick one on 220, it looks like the expected costs increased by about $150 million. So curious what's driving that, and then also wondering how we should think about your exposure to future cost increases, whether you've been able to lock in most of those costs at this point?

The answer to that is if the cost increases are limited to the number that you said, I would sign my name to it right now. New York is extremely busy and construction costs have risen, and the price of construction is up and going up. We are -- we have locked in I would probably say no more than 25% of our financial exposure there. So we continue to be exposed to cost increases, although we have a very seasoned, very professional team on this. And so we think we have a fairly good handle on costs, but these are -- but we may err. Now just to put it in perspective, okay, we don't gloat. And there's a golf race called premature gloating, which we think is a terrible thing. But this project will be, we strive to have it be the best apartment house built in, in town. We are -- we have a very, very, very good cost basis. And if construction costs jiggle around a small number, I'm certainly not one to say $50 million is a small number. We can tolerate that kind of exposure.

Our next question comes from Vincent Chao.

I just wanted to go back to the commentary regarding the expectation in DC that the back half will be a little bit rougher. It does sound like you're tracking a little bit ahead of plan. Just curious of what was driving that comment. Is it sort of the outlook for the job environment there getting a little bit worse in the back half or there's some renewals -- or I'm sorry, some rollover in the broader market that might be pressuring trends there?

The quick answer is that we have a negative comp in a $5 million one-timer in the third quarter last year, which will skew the numbers to what we said in the -- 20 minutes ago in the commentary. That's the quick answer.

Okay, got it. Okay. And then just curious on the one park sale out of the real estate fund and into the new JV. Just curious what the rationale is behind selling out of the fund at this point. And I believe that was a marketed deal. I was just curious what the demand looked like for that asset?

It was a fully marketed deal. There was significant demand. We, at the price that was the market price, we prefer to continue with the investment. CPP made a similar judgment. The other investors in the fund decided to exit at that number, which was their business model, and everybody was happy. It was a fully marketed deal, and the transfer price was the final market price that was arrived at.

Our next question comes from Vance Edelson.

I wanted to take a slightly different angle on questions about pricing for New York office as it relates to the pricing hierarchy, as you called it, and specifically, how that plays into the 10.4% cash rent increase. Are you aware of numerous leases being signed north of 20%, say, perhaps to the south and west, and others are still negative, bringing the average to 10%? Just trying to get a feel for how tight the New York market is.

Vance, listen, obviously, we've had some large pops in 770 Broadway. But as we look at our portfolio in general, 90 Park Avenue, which we're redeveloping, we think we've got some very strong mark-to-markets. And generally, around the portfolio, I think the number that we've been given you, somewhere around 10%, is the number that we feel very good about.

Okay, that's helpful. And then maybe...

I would add to that. With what we've said and the color that we've given you about the submarkets in Manhattan, obviously, the lower -- the historically lower rent submarkets will have higher mark-to-markets in the current environment, where tenants are willing, and by the way, where the markets are tighter, and where tenants, or where the market rents and tenants are paying above their traditional lower rents in those submarkets. So if you say -- if you take my thesis that rents in the island of Manhattan are sort of leveling or flat, then obviously, where the market used to be $40 a foot now getting $70 a foot, those are going to have more attractive mark-to-markets, okay?

Yes, it makes sense, that's very helpful. And then maybe for Mitchell back on DC, over a 0.5 million square feet expiring in the March quarter next year, which makes it by far the heaviest near-term quarter. So could you give us a feel for how much of a challenge in you're expecting in re-leasing that space and maintaining pricing in the mid-40s? Are you counting on any significant market improvement by then? And how much effort is already being put into those expirations?

So I think if you just look more broadly at the balance of '14 and '15 as opposed to just focusing on a specific quarter, I think as we look at what's coming up in the balance of 2014, we've got roughly something north of half of what we've got coming up that's accounted for. And as we look ahead into 2015, we're obviously busy working on all of those deals. But I think we're just going to take it quarter by quarter, hope that we gain some more traction and pick up a little more demand, then we'll see how it plays out.

Our next question is from Michael Bilerman.

I had 2 quick follow-ups, just one on the gain for 1740, just given how substantial that will be given a depreciated cost basis in the low 100 millions. I think in the opening comments, you talked about having identified other assets. Are those deals that you've already announced or those are future acquisitions that are unannounced?

Michael, what I specifically said is that the gain will be used for 1031s. I didn't say we had identified anything.

And have those 1031s -- can any of the deals that you recently did, can you use any of those or that will be, I guess, in the future? And how should we think about the level of gain that would need to be protected?

Well, the answer to that is I'm not going to speculate as to the level of gain. I mean, how big is the building, David?

A little over 600,000 square feet.

So it's over 600,000 square feet. You multiply it by whatever per foot number you think might be achievable, and subtract the low 100s basis, and you can come up with your own gain. It's big. The -- we have not yet -- we have not -- first of all, we're not going to count our chickens. We're not going to spend the money that we don't have. That's important. The second thing is we have not yet internally, amongst our management, identified swap candidates into that building, okay? We're going to certainly be very active in looking at them and working out the jigsaw puzzle over the next months.

I guess, would you consider a special dividend or is that not part of the equation?

The answer is, of course, we've done that in past, multiple times. And of course, we would consider it. And let's see how it goes. If we get acquisition candidates to swap into that we think are best -- are good investments for the company, we'll do them. If we don't, we may either not sell the building or we may sell the building and use a -- and do a special dividend. So the whole menu of options are available. Nothing has been decided..

Again, and just lastly, on just 220, and I recognized you're not scoffing at a $150 million cost increase, and the embedded gain in that project is still substantial. But is there any color that you can give on that $150 million relative to what was $850 million previously of estimated additional costs? You're looking at something that's up almost 20%. Is there certain categories that when you redid the budget over the past quarter, that materially changed that?

I think most of it is -- my accounting department is a poor construction estimator, okay. So I think a lot of it has to do with mis-budgeting. And the second part of it is that we have -- so there's 3 things, some mis-budgeting, some not insignificant cost increases in the marketplace, okay. But remember, when we budget, we do trend the budgets. And so we miss that number. And then the third number -- the third is that we have intentionally increased the cost of the building by increasing the quality of the product that we are going to offer into the marketplace, and that is not insubstantial.

So I guess then, is that partly into higher price that you estimate and a higher gain on the back? And how much of the $150 million can you recover?

Yes, but just like we did in the Bloomberg Tower, I mean, we don't do for sale apartments other than once every decade. So the last decade, we did the Bloomberg, and we intentionally made the product better and reaped the reward of that. That is -- we're doing that as well. And these are all pretty small numbers when you're thinking about something that could be a multibillion dollar sellout.

Our final question comes from John Guinee. John W. Guinee - Stifel, Nicolaus & Company, Incorporated, Research Division: Mr. Bilerman brought up a good question I hadn't thought about is, you can easily tax protect things like 1740 Broadway. Can you tax protect the gain on condominium sales in any way, shape or form? And if not, what's your tax rate expected?

The answer to that is that I have racked up not insubstantial bill with lawyers and advisers to try to figure out a proper and appropriate tax situation for that very large asset, including a spinoff of it, okay? So we've gone through lots of different hoops. Then the answer is we pay our taxes, and we're proud to. The second part of your question was what, John? John W. Guinee - Stifel, Nicolaus & Company, Incorporated, Research Division: Well, what would be the tax rate on the gain?

The asset and the development and the income is going into a TRS, which is the way it has to be done. And so the TRS is a fully taxed corporation, and we pay corporate tax rates in that TRS, together with New York City and state taxes. John W. Guinee - Stifel, Nicolaus & Company, Incorporated, Research Division: But what, Steve, what would that total? Is that a 20% on gain or is it 50% on gain?

That's ordinary -- It's Joe, John. That's ordinary income. It's about a 42% effective rate. Remember then that the after-tax dividend to shareholders is tax to capital gains rates.

There are no further questions at this time. I will now turn the call back over to Steven Roth.

Thank you all very much. We appreciate the dialogue. We always learn from your questions. We have a couple of offline follow-ups, which I think we've noted down, and we'll get back to those questioners, and we'll see you next quarter. Have a good remainder of the summer.

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