Vornado Realty Trust (VNO) Q3 2016 Earnings Report, Transcript and Summary

Good morning, and welcome to the Vornado Realty Trust Third Quarter 2016 Earnings Call. My name is Karen, and I will 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 Third Quarter Earnings Call. Yesterday afternoon, we issued our third quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. We also issued a press release and investor presentation regarding the spin-off and merger of our Washington, D.C. business with The JBG Companies. These documents as well as our supplemental financial information package are available on our website, www.vno.com. 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 for management for our opening comments are: Steven Roth, Chairman of the Board and Chief Executive Officer; David Greenbaum, President of the New York division; Michael Franco, Executive Vice President and Chief Investment Officer; and Stephen Theriot, Chief Financial Officer. Also in the room are Mitchell Schear, President of the Washington, D.C. division; and Joseph Macnow, Executive Vice President and Chief Administrative Officer. Matt Kelly, Managing Director of The JBG Companies and the Chief Executive Officer designate of JBG SMITH Properties, is also with us. I will now turn the call over to Steven Roth.

Thanks, Cathy. Good morning, everyone. Welcome to Vornado's third quarter call. Before we begin, I'd like you all to know that our mega 64,000-square-foot Victoria's Secret flagship on Fifth Avenue opened a few days ago. I invite everyone to go take a look. It is an amazing retail emporium and the newest jewel in our high street retail crown. We have a lot to talk about this morning. Here's how we will organize the call. First, David will cover our flagship New York business, which after Washington spins out, is as the bankers call it, RemainCo. Next, CFO Steve Theriot will cover our financial results and capital markets activity. Then I will discuss the transformative transaction we announced last evening, the spin merge of our Washington, D.C. business with JBG. Then Chief Investment Officer, Michael Franco, will take you through highlights of the Investor deck we posted last night. And finally, Matt Kelly, a Managing Partner of JBG and Chief Executive Officer designate of the combined businesses with us here today. Welcome, Matt. He will then clean up and give you his comments before we go to Q&A. Okay? Let's get started with David Greenbaum.

Steve, thank you, and good morning, everyone. With the Washington D.C. news today, I'll be brief in my prepared remarks and happy to take any questions when we get to Q&A. A few observations on the market in New York. As I've said before, the most important metric we look at are employment numbers, in particular, office using jobs. Private sector employment is up about 80,000 jobs for the trailing 12 months and at 3,773,000 jobs is at an all-time high. Office using employment is also up 14,000 jobs year-over-year and had 1,373,000 jobs, again, it is an all-time high. While this rate of growth for office sector jobs is less than the 35,000 average annual increase over the past 6 years since the recovery kicked in, we are still seeing good office job growth later in the cycle, increasing at a bit over 1% per annum. Most of the brokerage houses have reported modestly increasing space availability levels, both for the quarter and the year-to-date of about 50 basis points. No big deal. Asking rents remain at/or near-record levels and leasing activity for the first 9 months at over 27 million square feet is up about 4% from last year and on par with 10-year averages. What we have seen is a shifting of tenant demand away from commoditized buildings, which are not leasing well to new and updated buildings, which are seeing good activity as tenants seek more modern and efficient space. We anticipated this trend early, having completed 6.5 million square feet of high-quality building repositionings in the last 4 years alone. Our fleet is in great shape. Let me now turn to the quarter beginning with our office portfolio. As expected, our occupancy at the end of the third quarter fell slightly by 50 basis points to 95.5%, primarily as a result of the U.S. Customs Service vacating nearly 150,000 square feet at One Penn Plaza for a long planned return to the World Trade Center. We have already leased about 50,000 square feet of that space and have a strong pipeline to fill out the remainder. For the quarter, we leased 335,000 square feet in 40 transactions at average starting rents of $68.11, representing mark-to-market of 7.1% GAAP and 6.2% cash. About 40% of leasing activity was in Penn Plaza. Let me remind you that this reduced level of activity is a reflection of the fact that during the past 3 years: 2013, '14 and '15, we leased the better part of 9 million square feet handling our major future expirations. A couple of examples. In 11 Penn Plaza, we entered into long-term renewals with AMC Network and Macy's for an aggregate of 975,000 square feet. At Two Penn Plaza, we renewed MSG for 325,000 square feet. And where we knew we would have space coming back to us, we completed headquarters leases with Neuberger Berman for over 400,000 square feet in 1290 Sixth Avenue and with Amazon for 470,000 square feet at 7 West 34th Street, all space that was otherwise coming back to us in the 2017, 2018 period of time. We remain basically full and our expirations are modest with just 113,000 square feet of leases expiring for the balance of this year and only 600,000 square feet in all of 2017, with no one tenant representing more than 75,000 square feet. We have a robust pipeline including more than 560,000 square feet of leases in negotiation and another 700,000 square feet in active discussions. Last month, a joint venture of Vornado and the related companies, a natural marriage teaming up the largest owners in Penn Plaza and Hudson Yards, was designated by New York State to redevelop the historic McKim, Mead & White-designed Farley Post Office building. The building will include a new Moynihan train hall serving Long Island Railroad and Amtrak passengers, which will be constructed by Skanska. As Governor Cuomo described last month, the great -- the train hall will be a grand civic space at 250,000 square feet, larger than the main hall at Grand Central, the train hall will increase the floor space for the commuting public by over 50%. Over 90 feet above the main train passenger level there'll be a grand skylight supported by historic trusses to allow light to stream into the train hall. The Vornado-related joint venture will acquire approximately 850,000 rentable square feet in the building to be developed into creative office space and ancillary train hall retail for an upfront payment of $230 million. The Farley building adds to our growing portfolio of new office developments on the Westside, including 61 Ninth, 512 West 22nd Street, 260 Eleventh and 85 Tenth Avenue. The interior of the original Farley building, a postal facility, was built as a warehouse with great 17-plus foot floor-to-floor ceiling heights and floor place averaging over 200,000 rentable square feet. It has the same spectacular bones as our 770 Broadway here in New York and theMART in Chicago, both of which have proven to be best-in-class creative space for a creative office class tenants such as Facebook and Google. We are confident that this building also will contribute to the ongoing repositioning of our Penn Plaza portfolio as a hub for high-quality TAMI tenants seeking to locate via the most important transportation hub in New York. Governor Cuomo and his team deserve enormous credit for advancing this important project. We are proud to have been designated and look forward to working with the state and the railroads to deliver the governor's vision of a grand gateway to New York City. Turning now to our premier street retail portfolio. During the third quarter, we leased 7,500 square feet with strong positive mark-to-market's of 69.2% GAAP and 53.4% cash. Occupancy ticked up 180 basis points to 96.7%. Ed Hogan, who runs our retail leasing machine in New York, would tell you that over the last couple of months, we have seen retail leasing activity increase with the entry of some new tenants into the market and interest from cosmetics tenants, intimate apparel and food retailers. As Steve mentioned, we invite you to visit our 640 Fifth Avenue property, where just last week, Victoria's Secret opened their 4 levels stunning new 64,000-square-foot flagship store. To enable to Victoria's Secret to complete its fit out and open for the important holiday season, we completely restacked and repositioned the former H&M space in record time working 3 shifts a day and delivering the space to Victoria's Secret in February. At the adjacent 3,000-square-foot store with 25 feet of frontage on Fifth Avenue, Nespresso last week opened a pop-up store for the holiday season, and we have a long-term lease out for the space with a tenant, which will open its first flagship retail store in New York. At theMART in Chicago, same-store numbers for the third quarter were a very strong positive 12.4% GAAP and 5.5% cash. Great tenants continue to be attracted to the innovation-focused space at theMART, and we're proud of the quality of the 2 tenants we added in the third quarter, Kellogg and Caterpillar. Adding these household names to an already blue-chip roster continues to reinforce the preeminence of this unique asset. We leased 20,000 square feet of office space, at average starting rents of $47.46, representing mark-to-market's of 58.2% cash. These leases brought our occupancy up by 40 basis points to 98.2%. In San Francisco, at our 1.8 million-square-foot 555 California Street, we leased 72,000 square feet this quarter, including a 54,000-square-foot renewal lease with McKinsey & Company. With average starting rents of around $90 per square feet, we believe the building's position as the premier office building in San Francisco is clear. Our amenity-rich redevelopment of the concourse level should be completed around year-end, and we're also making very good progress with potential tenants for the former Bank of America banking hall that we call the Cube. Overall, for the New York division, we had a very strong quarter with a same-store increase of 4.9% GAAP and 9.6% cash or an even stronger 6.5% cap and 11.7% cash, excluding The Hotel Pennsylvania, which really tells a truer history. The hotel business in New York continues to feel the impact of oversupply in the market on both occupancy and pricing. And with that, I'll turn the call over to Steve Theriot.

Thank you, David. Good morning, everyone. Net income for the third quarter of 2016 was $0.35 per share as compared to $1.05 per share for the third quarter of 2015. Net income for the third quarter of 2015 included net gains on sale of real estate of $136.2 million or $0.72 per share. After adjusting for net gains and other items that affect comparability in both periods, adjusted net income per diluted share for the third quarter is $0.39 or $0.02 above the prior year's third quarter. FFO, as adjusted, which we formerly called comparable FFO, was $1.24 per share for the third quarter or $0.03 above the prior year's third quarter. See Page 39 of our Form 10-Q for a reconciliation of FFO and FFO as adjusted. Our Fed ratio exceeded 100% in the first and second quarters and is 95.5% for the third quarter. Our Fed ratio will continue to remain elevated for the balance of 2016 as a result of the capital outlays for tenant improvements and landlord's work related to the bulge of leasing activity in the last 2 years ahead of the commencement of the incremental cash rental revenue. We expect our fed ratio will return to its normal loss level in the mid-80s by the end of 2017. As David noted, our New York business had a strong quarter with same-store increases of 4.9% GAAP and 9.6% cash. Excluding Hotel Pennsylvania, it is an even stronger 6.5% GAAP and 11.7% cash. On to our Washington business. As noted on Page 48 of our Form 10-Q, we reaffirmed our guidance for our New York business for the full year 2016, I'm sorry, Washington -- our Washington business for the full 2016. Within that guidance, we expect to be at the midpoint of our guidance for core operations of flat to up $4 million. The leasing pace at the Bartlett is running at an incredible 60 units per month. Since we opened the rental office in June of this year, we have leased over 65% of the units of this 699 unit project, a big testament to the quality of the development and the competitiveness of the product. We have leased 455 units and the rental office just opened 5 months ago -- just incredible. We leased 177,000 square feet of office space in Washington, excluding Skyline, with mark-to-markets of negative 4.8% GAAP and negative 10.3% cash. Quarter end occupancy of the Washington portfolio, excluding Skyline, was 91.1%, down 20 basis points from the second quarter. Now to capital markets activity in the quarter. We completed a 5-year, $675 million refinancing of theMART at a 2.7% fixed rate. This loan replaces the 5.75% $555 million mortgage that was scheduled to mature in December. We redeemed all of the outstanding 6.875% series J preferred shares at par or 400 -- $246.3 million in the aggregate, which will result in savings of $17 million or $0.08 per share per year. We have virtually no remaining consolidated debt maturities in 2016 and our 2017 maturities are $360 million. Our share of partially owned entities debt maturities is $33 million for the remainder of 2016 and $89 million for 2017. Excluding Skyline and the financing for our 220 Central Park South project, which will self-liquidate as signed contracts close, our consolidated debt metrics are: fixed rate debt accounted for 74% of debt with a weighted average rate of 3.81% and a weighted average term of 4.7 years; and floating rate debt accounted for 26% of debt with a weighted average interest rate of 2.23% and a weighted average term of 4.9 years. Debt-to-enterprise value was 26%. Debt, net of cash to EBITDA is 5.5x, including our share of partially owned entities debt other than Toys "R" Us debt net of cash to EBITDA is 6.4x. In closing, Vornado has a fortress balance sheet with modest leverage and well staggered debt maturities. We have $4.1 billion of 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. I will now turn the call back to Steve.

Thanks, Steve. From here on, my remarks followed by Michael and Matt will focus on Washington and the spin of this transaction. A few years ago, in response to a chronically undervalued stock price and, admittedly, too complex and diffused collection of assets and businesses, we began a program to simplify and focus the company, all with an objective of daylighting our treasure trove of assets and creating value. As I said at that time, everything was on the table and that we would leave no stone unturned. We have since exited business lines and none core investments, gotten out of the mall business, sold-out of the showroom business, retaining, of course, the giant 3.7 million square foot Chicago Mart building. We spun off our shopping center business into Urban Edge Properties. All told, this activity totaled $9.1 billion. Of course, along the way, we acquired and developed assets into our core, all the while upgrading the mix and quality of our portfolio. Last evening, we announced another major milestone. The spinning off of our Washington, D.C. business and simultaneous merger with The JBG Companies and what is known in the trade as a tax-free spin merge transaction or technically, a Reverse Morris Trust. A little history here: we acquired our Washington business in 2002 at the right time in the cycle and at a great price. We have since built it through acquisition and development to be the largest owner in the region. In 2011, we suffered a double whammy when the Department of Defense and related contractors began vacating what would total 2.5 million square feet under the BRAC statute just as the Washington office market was softening. At the nadir, we suffered a $70 million hit to annual income. Even though our flagship New York business powered through and its growth well exceeded the hit from Washington, our stock price has suffered. What to do? For various reasons, selling the Washington business was not an option, nor did we want to sell it at the bottom. Some would say that by not selling, we are actually buying and that's sort of true. We do like the Washington market place, and we do like our assets in Washington, especially at that price. So no sell but we did believe the best strategy was to separate Washington and New York for reasons that I will speak about in a minute. The tax-free spin-off was the perfect solution. Spinning our Washington business as-is would have been just an okay execution but combining it with the market leader, JBG, would be a blockbuster. At that point, we initiated an approach to JBG and began a courtship. 3 things happened: one, we got to know each other very well; two, the JBG gang began to appreciate that the permanent capital and scale of the public company format maybe an even better business model than their private fund model; and three, I decided at that time not to proceed. I simply couldn't get comfortable with serving 2 masters, their private limited partners and our public shareholders. This time around, we have it exactly correct. There will be no new funds and the existing funds will run off. We all, management, the board and shareholders will all worship at the altar of stock price, standing shoulder-to-shoulder. JBG having caught the bug pursued an IPO, pursued a merger with several other already public candidates and finally made a deal with NYRT, which I believe everyone on the call is probably familiar with. Maybe the JBG guys stubbed their toes on the NYRT deal, maybe not, whatever. There were lessons learned there and these guys are very fast learners. But I can assure you that the JBG team are great real estaters and great moneymakers and after all, that's what I'm after. I cannot emphasize enough the capability of the 150 person JBG team. This is the real price in this deal. Key business terms and important information regarding our JBG SMITH transaction are available in the press release and investor presentation on our website at www.vno.com. A couple of points before Michael takes you through the investor deck. Vornado shareholders are expected to own approximately 74% of the combined company. JBG limited partners are expected to own approximately 20% and JB [sic] [ JBG ] management is expected to own approximately 6%, all of those percentages being subject to closing adjustments. The combined company will be led by JBG's senior management team. Critically, management's interest will be perfectly aligned with shareholders' interest. They will be huge equity holders of restricted stock and units with appropriate vesting and lock-up periods. Management will certainly be eating its own cooking. We very carefully selected, which JBG assets would be included, always with an eye towards future growth. Valuations were determined fairly and absolutely symmetrically. JBG SMITH Board of Trustees will consist of 12 members, a majority of whom will be independent. Vornado and JBG will each designate 6 trustees. I will be Chairman of the Board. Matt Kelly will be Chief Executive Officer and a member of the board. We expect to file our Form-10 in December, and we expect to complete the distribution and combination in the second quarter of 2017. Vornado's board has already approved the transaction and JBG's investors have consented. This is a great deal for Vornado. This is a great deal for Vornado and its shareholders. It was very carefully constructed. It is transformative and it accomplishes many of our most important goals. It creates 2 highly focused pure plays each with its own stock price, which I view as a report card. And each of the 2 will be the largest and the leader in its market. Investors will be free to invest in New York or Washington or both as they choose, no bundling here. The main event for us is our flagship New York business, which is more than 4 times the size of Washington. Separating Washington from New York will daylight New York's treasured trove of assets and superior financial performance. Importantly, it is the big fix for Washington. JBG SMITH will be the market leading powerhouse with unrivaled portfolio of substantial growth opportunities. In fact, I believe the new JBG SMITH has the potential to be the fastest growing real estate company in the country and the math works. At its simplest, pure-play New York, unburdened by Washington, has to trade much better. And Washington with JBG management has to perform and trade much better. I'll say it again. At its simplest, pure New York unburdened by Washington, has to trade much better, and Washington, with JBG management, has to perform and trade much better. Simply stated, that's why this is a great deal. Now I'll turn it over to Michael who will take you through the investor presentation.

Thanks, Steve, for the introduction, and good morning, everyone. Turning now to the slide deck we posted on our website last night. There's a lot of detail in there. We won't review all of it on this call, but I'm going to take you through the highlights. Starting on Page 1. I want to start by reiterating that this transaction is a continuation of the strategy Vornado began several years ago to simplify and focus our business. When all is said and done, we will have driven significant shareholder value by creating 3 best-in-class, pure-play, publicly traded REITs. Urban Edge with its growth-oriented focus and portfolio of retail assets and high barrier centers, a highly focused New York City-centric Vornado with premier office assets and the only publicly investable, high street retail portfolio of significant scale and JBG SMITH, which will be the largest, pure-play and soon-to-be powerhouse Washington, D.C. real estate company. Page 2 provides an overview of the transaction. Vornado is spinning off its Washington, D.C. business and JBG is merging in its operating company and a portfolio of selected assets. It's a marriage of the 2 largest and most well-respected real estate organization from the D.C. market, the product of which will be the market-leading pure-play D.C. real estate company. The combined transaction value is $8.4 billion. Much likely to set up Urban Edge, JBG SMITH will be well-capitalized with substantial liquidity and a strong balance sheet designed to execute on its business plan. As Steve said earlier, Vornado shareholders are expected to own approximately 74%, JBG's current limited partners, approximately 20% and JBG management, approximately 6%. We'll talk more about how we derived these percentages in a moment. And as we'll review shortly, we've taken steps to totally align the interest of JBG SMITH management and its shareholders. In addition, while this deal was motivated by strategic considerations about the opportunities in Washington, D.C. there will be significant cost synergies totaling about $35 million before accounting for public company costs from combining complementary portfolios and platforms. Creating an overhead cost structure inline with best-in-class peers. As for Vornado RemainCo, it will be the premier, pure-play New York city real estate company. We expect to be aggregate of Vornado RemainCo and JBG SMITH dividends will be at least equal to Vornado's current dividend. Finally, we expect this transaction to close in the second quarter of 2017. Page 3 shows you the statistics and makeup of the combined portfolio from this transaction. The asset quality and our urban infill concentration of the 79 asset operating portfolio and almost 20 million-square-foot development pipeline will stand head and shoulders above its competitors. The combined portfolio is diversified in terms of property asset classes and also geographies in the Metro D.C. region, where we'll have a significant presence in the best submarkets: Downtown D.C, Crystal City, Pentagon City, Rosslyn, Reston and Bethesda. JBG SMITH will be in an excellent position to drive outsized returns and value over time with its unmatched portfolio. Steve covered the strategic rationale for the transaction at the outset, so let's move to Page 5. This page provides an overview of the thought and strategy that went into selecting the JBG assets to merge with the Vornado/Charles E. Smith portfolio and position the combined company for outsized growth. We strategically selected the best assets from the larger JBG pool of assets to complement the Vornado D.C. portfolio. Our objective was to create a combined portfolio with the unique profile by selecting strategic, high quality assets, both operating and land, with high-growth potential that reinforce key attributes, including: one, critical mass in core and Metro-served markets; two, concentrations in complementary submarkets, particularly in mixed-use environments; three, it enhanced diversification; and four, strong value-add opportunities. And we deliberately excluded assets that did not fit these objectives such as those in non-Metro-served areas, highly leveraged GSA-leased buildings, near-term sale candidates and hotels, condominiums and townhouses. These assets will be sold as part of the natural wind down of legacy JBG funds. Now let's move to the methodology we used to value the assets to be merged and the resulting ownership levels, which are the subject of Page 6. We rigorously underwrote and reviewed comps on each other's assets to arrive at fair market values for each side. As Steve said, asset pricing was done fairly and symmetrically with the net result being an implied weighted average cap rate of 5.1% on each sides operating assets. For the nonoperating assets, including under construction, development and land assets, we used a consistent return on cost and per pound methodology. Finally, to arrive at a value for each management company, we used a combination of valuation approaches, including multiples on precedent transactions and DCF analysis. The result is that Vornado's management company is being contributed at $80 million and JBG's companies being contributed at $335 million. A reflection of the fact that JBG generates 4 to 5 times more in third-party fees than Vornado D.C.'s management company. The bottom line is that Vornado shareholders are expected to own approximately 74% of the new company and JBG's management and LPs will own 26%. Moving on to Page 7. It was critical to us that the transaction ensured total alignment of management interests with those of JBG SMITH shareholders. As Steve mentioned earlier, JBG SMITH will not raise new private investment funds. The JBG legacy funds are fully invested, no longer in acquisition mode and will be wound down. The only thing that matters is the shareholders. Importantly, the vast majority of the management team's net worth will be tied up in JBG SMITH stock. JBG management own approximately 6% of the combined company, putting it in the top decile of the companies. Of the JBG management company shares, 50% will vest immediately and be locked up for 3 years and 50% will vest over month's 31 to 60 and be locked up until the end of the fifth year. The management team will not receive promotes on contributed assets but will continue receiving promotes they're entitled to on legacy fund assets as the funds are wound down. Finally, we are also instituting a $100 million formation equity grant award for a broad group of JBG SMITH employees that is entirely performance-based to align interest deeper into the organization. To be clear, this award only becomes in the money if the stock goes up and is only worth $100 million if the stock doubles. Let me move on to process and timing on Page 8. We expect to file the Form 10 by the end of this year. We'll complete the transaction in the second quarter of 2017, subject to the receipt of customary third-party consents in Hart–Scott–Rodino. There's no shareholder vote required on the Vornado side and JBG has already received all their investor approvals for the transaction, so closing is just a matter of time. The pro rata distribution ratio for Vornado shareholders will be 1:2, so investors will receive 1 share of JBG SMITH for every 2 shares of Vornado stock they own. Vornado will provide interim support services in areas such as IT, tax and SEC reporting pursuant to a transition services agreement. Before turning over it to Matt, to discuss the prospects for JBG SMITH, let's first take a quick look at the post-spin Vornado. Pages 9 through 17 cover Vornado RemainCo, which is really the main event. With the separation of D.C, Vornado RemainCo will be the premier pure-play New York City REIT with a portfolio of irreplaceable, best-in-class office and high street retail assets in one of the best markets in the world and one where we're a clear leader. Upon completion of this transaction, 99% of our EBITDA, will come from our core New York real estate segment, including theMART and the 555 California. New York City, will itself account for 88% of our EBITDA after the spin-off, up from 70% today. All-in-all, it's a world-class business. Having divested noncore assets and now with this latest step, we hope investors will be better able to appreciate what a powerhouse our New York business is. We don't have time to cover every page in this section but the images and financial figures clearly demonstrate what a unique collection of assets we have, one we've spent years curating and which cannot be replicated. In addition, the figure shows the impressive growth our New York business has historically delivered both on an absolute basis and relative to our peers. The metrics are industry-leading. So to sum up, as a New York City focused pure-play with a fortress balance sheet, attractive growth opportunities and a deep and experienced management team with a proven track record, Vornado will be well-positioned to further enhance shareholder value. Now let me turn the floor over to Matt Kelly to walk you through JBG SMITH Properties.

Thanks, Michael and Steve, and thanks to you, all, for joining the call. I'm Matt Kelly, and I'll be the CEO of JBG SMITH Properties. For those who don't know us, JBG is a vertically integrated operating platform that is focused exclusively on the D.C. market for over 5 decades. We're known for our creative dealmaking and capital allocation skills and for our deep bench of development and value-creation expertise across product types. While our D.C. market experience and office, residential and retail is unrivaled, we have been trendsetters in our market by mixing uses and projects that deliver the amenities and features that tenants demand. Concentrating in passive growth locations with Metro access and deep retail potential have been key drivers of our success. We've been the most active player in the Washington market, and we are the definition of a local sharpshooter. We know our market block by block and see virtually every opportunity in the market. Since 2000, we have acquired over 19 million square feet and have developed almost 18 million square feet of cross-sell product types. Our team has worked together for an average of 20 years and our leadership spans multiple generations. We have delivered top tier results for our investors with a leveraged ROR of over 23% on $3.7 billion of equity deployed in over 250 investments across 9 discretionary funds. None of our funds have lost money even those that we initiated at the high point of the last cycle. As shown on Page 20, the JBG team will form the senior-most leadership of this combined company. Most of us have spent our entire careers at JBG and have worked together managing capital on behalf of some of the best-known university endowments and foundations in the world. Before closing, we will hire a CFO from outside the company with a focus on public market experience. In addition to the JBG team, Mitchell Schear will join our executive committee, and Jim Creedon, Patrick Tyrrell and Laurie Kramer of Vornado will serve in key EVP positions in the new company. As we combine the operating teams of both companies, we will be focused on efficiency, minimizing risk and combining the best from 2 great teams. The Washington Post rated JBG the #1 ranked large company to work for in our market across all industries and we intend for JBG SMITH to continue in that tradition of first class management and execution. Our team will have strong alignment with investors. We will own roughly 6% of the new company and our investment will represent the vast majority of the net worth of this team. Let's move to Page 21 and talk about the combined company and why we're so excited about this opportunity. JBG SMITH will be the largest player in our market with some of the best existing assets and a market-leading development pipeline. We will be a powerhouse of a company with unmatched scale and access to growth opportunities. Our proven track record of delivering on mixed-use value creation and infill locations could not be a better match for an opportunity like Crystal City. What many have seen as a challenged office portfolio in a tough market, we see as an opportunity to pick off low-hanging fruit and position Crystal City as a vibrant amenity-rich destination within Washington. Combine this with the best-in-class balance sheet and the momentum of recovery in our market and we couldn't be more excited to get to work executing our vision for this new company. Before I move on to the highlights of the company and the portfolio, a word about process. What I cover today will be high level. Prior to launch, we will follow-up with a deep dive roadshow to give investors much more granular information and an opportunity to meet us face-to-face. As you can see on Page 22, including assets under construction and near term starts, JBG SMITH will own 14 million square feet of commercial space and almost 6,000 apartment units making us the market-leading player in Washington with some of the best assets in the market. On Page 23, you'll see that combining our portfolios comes with minimal overlap and creates an ownership profile concentrated in the complementary collection of the most sought after submarkets in the area. Over 98% of the portfolio is within half a mile of a planned or existing Metro station. These assets, existing construction and future development have taken years. In some cases, well over a decade to assemble, entitle, design and execute. No other player in our market has access to a growth pipeline like this. With a strong balance sheet and a proven track record of execution, we believe we can turn that into strong income growth and value creation. Before we talk about future opportunities, I'll spend a minute on the existing portfolio and development assets that have recently delivered or commenced construction, which is summarized on Page 24. The combined portfolio has free rent burn-off and signed but not yet commenced leases totaling 590,000 square feet of occupancy. The combined company has 5 recently delivered apartment buildings totaling over 1,400 units at our share with average occupancy of 72% as of September 30. All 5 are on top of or next to a brand-new or planned grocery store and many have additional adjacent small stores. All are Metro-served and benefit from a rich base of amenities. As you can see on Page 25, we have 4 trophy quality assets currently under construction totaling over 820,000 square feet. Three of these are commercial assets, including CEB Tower in Rosslyn and retail projects adjacent to Reston Town Center and Bethesda row. these assets are 63% preleased with most of the balance of the leased-up consisting of 8 of the top 10 floors of CEB Tower, arguably the best building in the submarket with unobstructive views of the D.C. Mall and monumental core. The fourth asset is a trophy apartment building facing the main entrance to National's Park that will sit amidst a new retail heavy entertainment district between the stadium and the Navy Yard Metro Station. All of these projects are fully capitalized. Pages 26 and 27 cover our development pipeline, which includes a range of projects in various states of readiness for construction. Our near-term pipeline consists of 7 projects, of which 5 are mixed-use and 2 are standalone CBD trophy office buildings. By value and scale, roughly half our office and the balance, multifamily and retail. All of these projects are entitled, designed and substantially ready to commence construction. We expect that most, if not all of the retail and apartment projects will proceed in the short term. Based on current office market conditions, our bias is to patiently pursue preleases before going vertical, and we are currently following that strategy with the office asset listed here. We also intend to capitalize this company in a manner that will enable us to pursue all of these projects while also maintaining a strong balance sheet. On Page 27, we've laid out a summary of the balance of the future development pipeline of this company. At over 17 million square feet, this is the largest treasure trove of growth opportunities you'll find in any company in our market. This pipeline will enable us to double the size of this company through assets entirely under our control today. I want to be clear on something here. We will not be levering this company to go hog-wild on development. We may be new to the public markets, but we are not new to capital allocation and the avoidance of risk. I'll cover that a little more when we talk about the balance sheet but first I want to address Crystal City specifically. Crystal City is one of the most compelling opportunities in this company's portfolio. Its challenges were tailor-made for our toolkit of deep development expertise, retail experience and our placemaking-driven approach. It has everything going for it, including Metro, critical mass, proximity to key demand drivers, views and great access not to mention, a jurisdiction with great schools and low taxes but it lacks a critical mass of amenities. Its existing amenities are compromised, underground retail with not enough anchor space and it lacks sufficient residential density to be a vibrant 24-hour place. The fix for these deficiencies is exactly the sort of thing we're best at creating and it's the skill set we've perfected throughout our 55-year history. When we've done this elsewhere, it has taken us years to assemble the critical mass to change a neighborhood. With Crystal City, the concentrated ownership is there Day 1. All that it requires is the right plan and sufficient time to implement it. We talked a lot about placemaking and changing neighborhoods and to some, this sounds like renovating dozens of assets and spending billions of dollars. That's not what we're talking about and that is not what Crystal City needs. Any great neighborhood needs a well-executed retail heart. What we've done on Page 28 is to overlay the size of all of Crystal City on 3 of the most vibrant high-rent districts in our market, one of which we primarily created the Shaw Logan Circle neighborhood of Northwest D.C. As you can see here, and zoomed in on Page 29, the heart of these neighborhoods is typically a very -- is typically very small, just a few blocks. This heart has multiple anchors, plenty of services, banks, dry cleaners et cetera, but it also has a carefully curated mix of amenity retail. Local shops, maker shops, streetscape, parking, green space et cetera. It also has enough residential to be a place worth visiting after work hours. If it's truly special it will have 1 or more destination anchors often entertainment-based. The point is that repositioning a large concentration of asset like Crystal City does not require the renovation of the entire place. To the contrary, it only requires the right execution of a relatively small subset of the neighborhood requiring far less capital. Done right, that well-planned heart can drive outside occupancy and rent growth in all of the neighboring uses. The age of building stock, on Page 28, is included to demonstrate that while all of these submarkets have older building stock than Crystal City, they all rent at a premium because they are great amenitized vibrant places. That's the missing ingredient. We'll have much more detail on our plans for Crystal City down the road, but I want to repeat that it is one of the elements of this new company that we're most excited about. Now let's talk about capitalization on Page 30. We intend to launch this company with substantial liquidity and a strong balance sheet with deep capacity to fund future growth without over leveraging the company. In addition to a very manageable debt maturity profile, we will have an appropriately sized credit facility for access to immediate capital and flexibility but our debt financing strategy will not rely on corporate debt. Long-term financing will be done on a nonrecourse basis at the asset level. We will also be aggressive about identifying opportunities to recycle within the portfolio by selling or joint venturing selected assets whose market value exceeds replacement costs and deploying that capital into newer higher growth, internal investments and potential acquisitions. Finally, on Page 31, a word about our market. Washington's office market has had a rough run for almost a decade. In the office market, our average 5-year net absorption was negative 250,000 square feet versus a 20-year average of positive 3.3 million square feet. Although many private sector players rightsized after sequestration and BRAC, the wreckage in the office market has taken a long time to recover. With much of that tenant rightsizing behind us, and most recently, our best job growth year in a decade, we believe that Washington is poised to grow in the coming years where much of the rest of the country has began to flatten out or even soften. This counter cyclicality is not a typical for our market. We further believe that growth will be concentrated in the places that offer what tenants and consumers want: vibrant retail, services, amenities, walkability and transit. On the apartment side having the highest median household income in the country and a lower rent share of wallet than other Gateway cities supports much of the strong apartment absorption we've seen in spite of high levels of supply. When for-sale housing is added to the mix, our total housing units have actually been in line with demand. So this outcome has not been surprising. All of these trends lead us to conclude that Washington has a healthy base, from which to grow in the coming years, especially in infill submarkets that offer what tenants demand. As I said before, we look forward to meeting with investors prior to launch to provide a deep dive review of the portfolio and our strategy. We're very excited about this opportunity and we believe this powerhouse of the company will be an incredible platform to deliver strong shareholder value over time. Now I will turn it back to Steve to wrap up.

Okay. Thanks, Michael. Thanks, Matt. Thanks, Steve, to everybody. I have a few shout outs before we go to questions. To Bobby Kogod who is the patriarch of our Washington business, to my friend Mitchell Schear, who is a prince among men; to our Chief Investment Officer, Michael Franco, who was Superman, executing this complex deal; and to Michael Glosserman, Rob Stewart and Matt Kelly, my new partners at JBG. I will be Matt Kelly's biggest cheerleader. With that, we'd like to go to questions. This was a record, 55 minutes.

[Operator Instructions] Our first question comes from Manny Korchman from Citi.

It's Michael Bilerman here with Manny. Yes, just question on sort of the balance sheet strategy for JBG SMITH. You start today with about $2.4 billion of debt, call it, mid-30s, leveraged to the existing operating assets, about 7x, debt-to-EBITDA, there is some footnotes talking about incremental cash being put in the entity, I wasn't sure at what sort of levels. But maybe talk a little bit about where that balance sheet needs to be from a leverage and debt-to-EBITDA perspective, especially given the amount of future development opportunity.

Michael, it's Michael Franco. I think, first of all, your calc is NOI, not EBITDA. So from an EBITDA perspective, I think it starts lower than that. Secondly, the intent here, much like we do at Urban Edge is to set this company up for success and so as we finalize the plans near term particularly on what development et cetera will be, we plan to put the right amount of cash here. So our expectation is that this thing will be somewhere in the low to mid-6s at the outset. But still to be finalized. I would say, that needs to be refined and it's too early to put a specific number on it. But we have to guess today, it's a working assumption I think is appropriate.

Michael, let me give you an overall philosophy as we have been talking internally with Matt and his partners at JBG and Michael and our team. So first of all, this company will function well within the parameters of acceptable public company debt levels, okay? We know exactly what those are. We've been doing it for 40 years. And so the company will be capitalized well with -- and will function and operate well within normal tolerances for a public company, number one. Number two, just like we did with Urban Edge and as we always do, we will set forth our program for execution of development and whatever, and the company will be capitalized at the get-go with cash balances and revolving credit lines and et cetera, some -- and some unencumbered assets as well, so that it will be able to aggressively execute on its business plan. Number three, in the early years, the company will not seek an investment-grade rating. It will be -- it will finance at the project level with nonrecourse debt. And so basically, that's the plan.

Great. And just a follow-up in terms of...

And we will get much specific -- Matt and his team, and we will get much more specific about that as we get closer to launch. There will be perfect transparency on the balance sheet.

And then just in terms of corporate governance at RemainCo, at Vornado, one of the things that's come up over the years was the split of the Chairman and CEO roles. And I'm curious how you think about that now that there's more, at least, insight to where the entity is going overall. I assume there's 2 ways, either you become Chairman and someone else becomes CEO, or someone else becomes Chairman and you stay CEO. Can you give us a little bit of color in terms of how you're thinking heading into next year?

First off, in terms of succession, I mean, Jeff Olson has succeeded me in a chunk of our portfolio. And now Matt Kelly is succeeding me on another chunk of our portfolio. So I think we're making progress in that regard. You're asking something that is not answerable at the current time.

And our next question comes from Anthony Paolone from JPMorgan.

Congratulations on the announcement.

Thank you.

Steve, I was just wondering if -- Steve Roth, if you could talk a little bit about the post-spin Vornado and how you see sort of the priorities and what we should be thinking about in the investment community as it relates to things like the Post Office project, other initiatives in New York, and also just general financial communications. I mean, not to overshadow the third quarter, but I think this is the third quarter this year you guys missed numbers. And so just wondering how you think about how the post-spin Vornado looks to investors.

Well, the first thing is, is that we believe, and I think everybody believes, that Vornado's stock sells at a discount, maybe even a substantial discount to NAV, if that's a measuring stick. So interestingly, when we spun off Urban Edge, which probably would -- when it's inside, buried inside Vornado, it trades at a discount; outside of Vornado, it sells -- it trades at a premium because the assets and the management are worth it. We expect exactly the same thing to happen with JBG Smith. So as it gets isolated and as it becomes its own company and as it [indiscernible], we expect investors to appraise it and give it a price which is, dare I say, better than the price that we think it's awarded buried in Vornado. Now as we do this and as we start to skinny down the company, Vornado RemainCo, or Vornado New York, becomes much more transparent, much more visible. And we believe investors will focus on that and will reward it with appropriate pricing. The assets of Vornado in our mind are unique, extraordinary and very valuable. And so the objective of our program is to: a, get JBG Smith, the best management team in the marketplace, have that business perform wonderfully and grow and be recognized by investors for its merits. And the same with Vornado New York. Vornado New York will aggressively pursue all of the projects we have and continue to grow and flourish in New York.

Do you think post the spin, your organization, the Vornado organization, remains sort of as-is in terms of leadership and everybody's involvement day-to-day? Or do you think that will change at some point as well?

First of all, we think that Vornado New York, if we want to call it this, has an unbelievably talented, gifted and deep organization. Having said that, organizations always change.

And our next question comes from Steve Sakwa from Evercore ISI.

I guess I just wanted to kind of go back to Page 6 on some of the valuation. I think the operating assets are relatively straightforward. I don't know if this is for Steve Roth, Steve Theriot or Matt or a combination, but I guess I'm trying to get a better handle on how you guys really thought about the platform and management company value. I guess I'm trying to really understand the 8x multiple on -- for the JBG value. And if I'm thinking about that, is that kind of taking the funds and the income that will come to, effectively, the new company over the next 7 or 8 years? As those funds wind down, there's basically nothing left at the end of that fun life. And I guess I'm just trying to get a better handle on how that valuation was kind of arrived at.

I'm happy to answer that question. First of all, it was done very carefully. Second, basically, we had advisers on this transaction, and we pursued in depth what the comps were and what the values were and what the market was. So JBG, in its current state, has a EBITDA somewhere in the mid-40s. That's after all expenses or what have you. That's what's come to the bottom line of the current JBG. We are -- our advisers and our exploration into the comps is, is that these companies trade for between 9x and 10x. So If you take a midpoint on that, that means the -- -- let's say, call it, $45 million of EBITDA coming out of JBG would be worth somewhere, $400 million, maybe a little bit higher. And the reason I say maybe a little bit higher is because it's the premier company in its marketplace, and it would probably sell for a premium. So if the JBG partners were to sell this company in its current incarnation, as a going concern, we think the market value of that is somewhere between $400 million and $450 million, step one. Step two is, that's approximately the number or in a range of what we were talking about when we engaged with JBG a couple of years ago, and that's even less than the number that the -- was negotiated in the famous or infamous NYRT transaction. So let's have, say bad [ph]. So our number was $335 million. That's not in cash. That is in script. And so the value of that, that was -- and what happens is they are going to be getting a percentage of the company in shares, and those shares will fluctuate. So if they fluctuate down -- at what they fluctuate? Whatever. Now we also valued our management company at $80 million. I can tell you that our management company has 0 EBITDA. So the way we looked at it, we paid a -- the Vornado shareholder paid a net $335 million less $80 million or $255 million for the JBG platform. The whole shooting match: the team, all their employees and what have you. Now I've already talked about what the going concern value of JBG was. Let's talk about what the value would be to us. Well, to us, the net was for $255 million. And we've already said that we're going to run off -- we're not going to do any more funds, and we're going to run off of the assets that were excluded. Those assets that are excluded have a fee stream which is pretty substantial, and the discounted value of that is somewhere between $175 million, maybe even up to $200 million, depending upon the discount rate you use. So now we get that our $335 million goes down to $255 million because of the value of our management company and then goes down to -- let's use a number of $175 million, $180 million. So it goes down to $60 million, $70 million is the net cost of this whole platform to us. But that's not the end of the story. By combining the JBG platform and the Vornado existing platform, there are synergies. Those synergies are, we believe, gross $35-ish million, maybe a little more, maybe a little less. And then that doesn't -- if you have to deduct from that the cost of being a separate public company, which we're guesstimating at, call it, somewhere between $12 million, $15 million. So maybe -- Michael is telling he thinks it's less. But let's say -- so maybe we think the net synergies of combining the 2 companies are, pick a number, $20 million to $25 million less than it would be, okay? Well, that has a value and is very favorable compared to the net $60 million, $70 million price of buying this platform. So that's the math, which is you can tell, I think from Mike's fairly detailed remarks, was very carefully analyzed and thought about. Now let's go to the last point. Would you rather own the company with JBG combined, that would be worth less, let's say, $50 million -- it's a $0.25 of Vornado share, $0.25. Would you rather have the combined company with its assets, its opportunities in the future and the leading management platform in the marketplace, even if it cost you a $0.25 or $0.30 to do that? And the answer is, of course you would, okay? So I think, Steve, that's a long-winded answer to your question.

No, no. I think that's helpful as you kind of think about it. It sounds like the multiple's a lot lower than sort of 8x when you kind a net out the value that was put on Vornado, so I think that helps a bit. I guess -- the land bank is obviously very large, and I guess, Matt, you spoke a little bit about being sort of prudent. I mean, at 17 million feet, I guess, how do you just sort of think about development relative to the size of the company? Because it's obviously about 13% of the value of the combined company sitting in a land bank today.

Yes, I think a couple of relevant points. And thanks for the question, Steve. The land bank is unlevered. And so there is no gun to our head with respect to timing and how and when we capitalize on those various opportunities. When we make the rounds with a much more deep dive roadshow, we will get into specifics as to what -- projects that are soon to start and how we've made the capital allocation decisions. But generally speaking, we respond to market conditions. As I said earlier, being called a developer I think sometimes is a bad word in this business because there are a lot of folks out there who gotten it wrong, who have done too much, too fast, don't pay attention to supply and demand and overbuild. That has not been our history. That is, I think, one of the primary reasons why we have outperformed and over delivered. And as we think about development, it's primarily rooted on what will add value and strength to the portfolio over time and what is most responsive to market conditions, not just market conditions today, but as we look out 2, 3, 4, 5 years and where we see supply and demand trends going, what will play into those trends and what would be the most valuable assets to own long term.

Steve, the land back is extremely important to us, okay. We have a land bank, they have a land bank. If you look at the 2 opportunities, they are extraordinary. They -- the land that we -- I don't look at the land as land. I look at it as future buildings, okay? And I look at those future buildings as profit opportunity. So first of all, the locations of all of these opportunities are the best in the Washington region by far. So we have -- first of all, it's big, really big. Second of all, it's in the best submarkets in depth. The third thing is, is that this is an opportunity to create new buildings at outsized returns, which are substantially better than you could buy a similar building in a similar location on a return basis, which means that there is a profit to a big profit in this land as you develop it over time. Now there's a trend going on in the world today. A, new buildings are much more valuable than old buildings. B, there's obsolescence in real estate. So that when you're building a new building, you can make it state of the art, what the customer wants, whether it's an office building or a residential building. And three, the capital, maintenance capital for a new building is like almost 0 for the first 10 years or so as opposed to an older building. So this portfolio of opportunity, we look upon it as opportunity, is one of the things that makes this a unique investment opportunity.

Just 2 more quick questions. Matt, I guess the JBG kind of combined company is going to be fully wedded to just Washington, D.C. Or could we see any kind of geographic expansion over time?

We're going to be laser-focused on Washington, as we have been. We have a lot of opportunity in that market. And as Steve just articulated with respect to not only the land bank, but the existing assets and the upside that we see there. And that is going to be our focus.

Okay. And then Steve, I don't want you to feel left out about big Vornado. So just in terms of kind of the allocation between office and street retail, street retail is almost 1/3 of the remaining Vornado. How do you sort of think about that number in just light of the retail environment today? And might we see that number go down? Would you sort of think about selling some of these mature assets? Or should investors sort of think that that number stays relatively high?

First of all, before I get into that, that's your fourth question in the series, by the way, my friend.

I'm finished after that.

I understand, I understand. But now you'll be back. I want to say in response to -- Matt's just answered your question about being laser-focused on in Washington. I want to say amen to that answer. With respect to Vornado, we have no formulaic compositions or -- that drive our investment philosophy. We react to marketplaces, we react to opportunities. So we have unique skills in what we do. We have unique skills in retail. We have, by far and away, the largest portfolio. We have unique skills in office, in repositioning office, et cetera. We also have a pretty damn good skills in residential as well. And so we will run the business and grow the business as the opportunities present themselves. Similarly, that's my answer to your question about will we sell. We have a record of selling and we have a record of selling aggressively into strong markets. We've -- I just mentioned before, we divested 900 billion of stuff over the last couple of years. So we are aware of the markets, and we will act accordingly.

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

First question is for Matt. And certainly, welcome to public land. Given that you guys are, by background, are private. Now you get to see all the fun that public REITs go through. How do you think about making the transition, both from an investment side where you -- before, you guys had sort of free rein, you could be opportunistic and do what you want to do versus a public format that seems to like sort of a set standard or a template for the company to invest in and then continue at that. And then also on the disclosures side, conference calls, proxy, quarterly earnings and all that, how do you guys view making the transition, just given that it seems like all of JBG is sort of taking over for the new entity?

Thanks for the question, Alex. I'll take the last part first, and then I'll go in reverse order. As far as reporting and everything you just described, well, yes, we have been private. We have not been a private sole proprietor with a single investor the way I think a lot of our developer competitors in the market are structured. We have hundreds of investors. We have 9 funds. We do regular quarterly reporting. We are very transparent. We spend a lot of time with our investors. We communicate in a copious fashion. And that's not going to change. We will be supplementing the team with folks who have deep public market expertise in the areas that you described because it's critical that we get that right. And we will. The first part of your question with respect to flexibility, I think there is a misperception that somehow, you can't be nimble if you're in the public markets or that you can't take advantage of opportunities, perhaps, in the same way you might do in private markets. I just don't buy that. I think good real estate decisions are good real estate decisions, whether you're public or private. And I think one of the things of that we have demonstrated in our history, as we have moved from being a syndicator to a fund manager to a fund manager with lots of joint venture relationships and other things, that in fact, no matter what your capital structure and your legal structure and your ownership structure is, you can still attack and pursue aggressively the best real estate decisions and take advantage of the best opportunities in the market. And that's exactly what we intend to do because that is a big part of our success, and that's not going to be changing, even though our structure will be.

Okay. And then as a second question, just as you guys look at D.C., you mentioned that you want to do development, but obviously, do it in a prudent way so that you don't O.D. on it. At the same time, the portfolio still has the same issues of rental roll down or filling vacancy that the legacy VNO portfolio had done there. So if you think about some of the challenges that REITs have gone through recently, where you've either had companies with large-scale developments that's diluted earnings; or every year, it seems like leases are going to come, but now we have to wait till the following year, how do you sort of think about managing The Street's expectations for earnings growth or NAV growth? And in terms of that it's not people having to wait for the next year for things to come, but that as you execute your plan, you just sort of show tangible growth in the current year, as well as pointing to -- people towards the value creation in the outer years?

Well, I think a lot of this is -- there are 2 parts to what drives your question, I think. Part of it is just the market and how does the market behave and what is going on in the market? And second is where are we positioned within that and how do we manage expectations? I think as it relates to that, the market is the market. Where we are invested, we believe, in -- this company is in the best places within that market: the submarkets that will outperform and have consistently outperformed. As it relates to managing expectations, we have historically always made an effort to underpromise and overdeliver. And we understand the importance of avoiding surprises. We understand the importance of, frankly, not overpromising. And as you said at the very beginning of your question, we are going to be very prudent as to what we develop and when we develop it. But when you talk about existing assets and their performance, you really can't talk about that separate and distinct from new developments because a lot of what we do, and in particular, if you look at Crystal City, a lot of what we will do is predicated on improving that as a place. And delivering new and different uses to Crystal City, retail and residential, in particular, that will turn it into a different place that we believe will actually have as big an impact with respect to the value and the income potential of those new deliveries, as it will on the existing inventory of office supply in that submarket.

And our next question comes from John Guinee from Stifel.

Steve, that was one of the best explanations for paying $335 million for a platform I have ever heard. So I guess my question for Matt is why'd you give it away?

I was thinking the same thing...

[indiscernible] that's a segue to my serious question. My serious question is, in order to get your partners to sign off on the numbers, it was a 5.1% cap for the JBG portfolio and then it was also a 5.1% cap for the Vornado portfolio. I kind of get the numbers for JBG, that number doesn't really surprise me. But a 5.1% cap for the Vornado portfolio is a little surprising. Can Michael or Steve go into a little depth as to the intricacies of that? Maybe what the stabilized valuation is of the Vornado portfolio?

Michael?

John, by intimation, you thought that number or the cap rate should be higher? Is that your question?

That's just a guess, yes.

So you're complimenting us in a roundabout way?

Yes. Quid pro quo, I think. Yes.

Well, I thank you. Look, you know what? What I would say is, and we put this sheet out there because we knew all of you would be interested in it. But the reality is this is 1 page reflected in an intensive 60-day effort on both sides. I think, frankly, to settle on one number is -- almost does a disservice to the process. The reality is that, that is the by-product of all the work product. And we had a downtown portfolio that's better than JBG's and it's a lower cap rate than that; and Crystal City is more capital-intensive, it's higher. So it just so happened, coincidentally, that's where it came out. And I really mean that. You have a buildup of what your assets go in. Obviously, we'd spent a lot of time crafting which assets we pulled in because we want this company built for success, but it's somewhat coincidental that they end up with the same number. The methodology was consistent in terms of district-to-district and submarket-to-submarket, and it just so happened to end up there. I think we probably have a little more capital intensity on our assets, given Crystal City, than JBG does. And so therefore, they probably have a bit more embedded growth on the other assets. But look, I think the bottomline is you're dealing with 2 parties that are highly sophisticated, that are tough negotiators. We've both been successful for our investors investing. And you would expect, when you get 2 groups like that together, that there's going to be a fierce analysis done on both sides to get to our right place. And that's where we ended up.

Okay. And then Matt, just an easy one for you. I think you've got a pretty big position in Reston contiguous to Reston Town Center, which is arguably the most successful suburban submarket in the greater D.C. area. Can you talk a little bit about what you own out in the -- along the tollway?

Yes, so what's been included here -- and we will get into a lot more detail about these, each specific asset portfolio, and hopefully have an opportunity to tour folks through some of these things. But what's been included here is basically a concentration on 2 nodes within the greater Reston submarket. One is the -- at the site of the Wiehle Avenue Metro stop. And that's a mixed-use project, retail-heavy, grocery-anchored, lots of apartments, right in the strike zone of what we do. And then the one you just described, which is the Summit office buildings in Reston Town Center West, RTC West, which some of you may recognize. That was a former Reston Executive Center, which we actually acquired from Vornado. That is not only an existing office building, but you'll see in the presentation, it is also one of the new development projects. That is an asset where we are delivering retail, the RTC West retail on Page 25, it's about 40,000 square feet of ground-floor, small-store retail that is designed to amenitize those buildings. That asset sits right in between Boston properties, Reston Town Center and the exit platform to the new under construction Metro station. And so it is right in the footpath connecting those 2, and that retail, we believe, will be phenomenally successful. It has already been successful in enabling us to lease that building. This is against the backdrop of Northern Virginia suburban office. It's enabled us to lease that building with the retail only roughly half preleased and not yet delivered, to lease that building fully and at rents that exceed where they were when we acquired it by 20%. That's against the backdrop of a market that has been flat and that has, as you heard me articulate earlier, had negative net absorption. And so that is a micro case study of the power of amenities and the power of retail. And that's even before the Metro has shown up.

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

A couple of housekeeping questions. Will JBG Smith have a de-staggered board? And does the company plan to opt out of Vuda [ph]?

The company's governance will be set up almost exactly the way we set up Urban Edge. So it will begin with a staggered board with a commitment to de-stagger in 3 years. It will go to majority voting. It will not opt out of Vuda [ph].

Why not de-stagger from the outset?

We just think, first of all, the investors really were very sympathetic and understood what we did at Urban Edge and what we're doing here. When you borne a company, we don't know what the trading price is, we don't know what the dynamics are. These are very important companies to protect in their early years. So we just thought that the company needed, as infant does, and as an adolescent does, the company needed protection in its early years. But investors know that there is a commitment that it will go to conventional governance shortly.

Okay. And in terms of the $100 million performance-based formation award, can you lay out the hurdles required to earn that? And are the share price targets relative to peers or absolute?

[indiscernible] option, yes. Appreciation [indiscernible].

The answer to that is they're basically options. And so the hurdles are the stock price has to go up. And basically, we are advised, and this was also researched extensively, that this is normal for an IPO kind of a situation, which is this is sort of an IPO kind of situation. And we think that we want the management to be incentivized. We think this is standard practice and appropriate.

Okay. But just to be clear, that's on an absolute share appreciation. Not relative to peers.

That's correct. They're standard options.

And Jed, and Michael said in his remarks, the $100 million number only -- that's only relevant if the stock doubles, you get $200 million. It's not something that will have a $100 million of value, but only -- by virtue of time passing or anything else. That only happens if and when the stock doubles. If it triples, it's worth more. But it's an option.

That's just the face amount of stock that the option will control. The accounting cost of that is somewhere around 15%, give or take.

Sure, okay, that's helpful. And just last one, if I may. Obviously, the main focus today is the D.C. spin, but just looking ahead to see, is there kind of a final chapter or simplification? Be it separation of the New York City office and street retail business? Are those 2 property types that'd be synergistic in your view?

Oh God, you're asking a monumental question. Let me answer it this way, okay? We are committed to creating shareholder value. We have evidenced that over the last short number of years by doing the strategic move after strategic move after strategic move, okay? The start -- the market will tell us what they think of JBG Smith and what they think of RemainCo New York, and then we will act accordingly.

And our next question comes from Nick Yulico from UBS.

Just one question on G&A. The only mention there, I saw here was at -- and you talked about $35 million of synergies. Can you go through some of that math? Because it looks like Vornado had $25 million of D.C. G&A last year. So how did you get to $35 million of synergies?

We're not going to get into the detail of that currently. The Vornado number's, I think, larger than that. What we did was -- and this is very preliminary and it will be subject to obviously more granular work as we get closer to the launch. We took the 2 organizations, understood the overlap, understood redundancies and made estimates, guesstimates as to what the synergies would be, as happens in every merger. Now this is interesting because the 2 businesses and the 2 organizations are in the same geography, which makes it a little bit more prone to efficiencies.

Okay. So what is it then, as we think about pro forma Vornado? I mean, what is the amount of G&A that is going to go away after the spin's completed?

Once again, that's not something that we are not ready to talk about yet.

Okay. But I mean, should we just assume -- is it fair to assume most of it? I mean, you do report G&A for your the D.C. segment. I mean, how should we think about this?

What I'm saying to you is postpone your thinking about it until we actually get into the details later on in the process, okay? But obviously, there's 3 pieces of G&A. There's the JBG G&A that's coming in, there's the Vornado local Washington G&A that's going in to SpinCo, and then there's remainder Vornado G&A, which obviously, has to be reduced because of the exit of the Washington company. All 3 of those will be subject to great study, and we'll be communicating more about that later.

Okay, it would just be helpful to get that information since you guys are citing $35 million of synergies.

Okie-doke.

Our next question comes from Vikram Malhotra from Morgan Stanley.

Congrats, guys. I know that you must have put in a lot of work into this, so congrats for getting it done.

Thank you very much.

Just 2 quick questions. Just focusing on New York and remaining Vornado. Over the last, call it, 2 or 3 weeks, some of your peers have talked about decelerating trends. Seems to be sentiment, whether it's the investor community or even brokers, seems to have changed a bit on New York. So would love to get your thoughts and maybe a bit more granularity on how you view the market, even if by segment.

I'm going to ask David to answer that.

Thanks. Listen, as I said in my remarks, we have continued to see good leasing activity in the city. In fact, above trends from last year. And on average, basically, with kind of 10-year trends. In terms of rents, we have continued to see rents remain stable. I think some of our competitors have said, and I'll echo it, that we've seen moderately increasing concessions. Some of that relates to, in fact, construction cost, so the cost of building space has escalated significantly. So with that, some of the TI packages, in fact, have increased. And then I think most importantly, what I would emphasize is that what we're seeing in New York is a continuing of very, very good diversification of trends in terms of the nature of [indiscernible]. So I'll go back and I'll tell you, back in 1990, as we looked at office sector jobs, 1 out of every 2 office sector jobs at the time was financial services-related. As we look at the city today, that number today is less than 1 out of every 3. So although there's been a lot published about the lack of growth in financial services, in fact, to some extent, a continuing slight loss in financial services jobs, the reality is, as you look at the overall health of the city and the diversification of job growth, I think it's as good as we've ever seen. I also will just reemphasize what I said, and that is we are in a mature recovery. We have seen office sector job come down from the peak that we saw over the 2011 to basically '14, '15 period of time. But on a trailing 12-month basis, we're still seeing very good office sector job growth, somewhere around 14,000, 15,000 jobs, which translates into about 2 million, 2.5 million square feet of absorption. So continuing trends, I will tell you we are continuing to see pretty good growth.

Okay, great. And a quick clarification on the same-store EBITDA growth in New York. Roughly how much of the 9% or 9.5% was a contribution from [indiscernible]?

Vikram, you're fading out. Can you say that again, please?

Just a quick clarification on the same-store EBITDA growth in New York. Roughly how much of the 9.5% was from free rent burn?

How much of the 9.5% was from free rent burn?

None.

The 9.5% that we talked about -- what we said is for the 3 months, the GAAP number was 9.6%, and the cash number was 11.7% for the quarter. So I'm not sure I understand the question exactly.

I was just asking if the cash number, because you had laid out a pathway, over the next year or so, there is incremental bump -- or incremental cash NOI coming online. So I was just wanting to...

Yes, the 11.7%, which is what we had projected, as we had advised you guys over the last year, related to the bulge of leasing activity that we concluded in the '14 and '15 year period of time. And yes, a significant piece of that obviously relates to the burn off of free rent as it relates to the cash number.

This is Joe. The 9.6%, which is the GAAP number, has no burn-off in free rent because that commenced rent at the time free rent period began.

Yes. No. That helps, yes, I was just clarifying on the cash number. So I may have got the number mixed up. But that's helpful.

And our next question comes from Manny Korchman from Citi.

Matt, just can you give us, at least at this point, what you think about the timing and the process of selling down the JBG assets that are not going to fit into the new entity?

Yes. From a timing perspective, we believe that process will unfold. That's a matter of years, not months. It's probably somewhere in the 3- to 5-year time frame. There will be a number of assets that are currently being held for sale that will be sold in the next 12 to 24 months. Obviously, a lot of that's dependent upon market conditions and buyers in the market. But that is a very concerted effort on our part as we manage to the business plan to the assets in those funds. It's not a -- they are in wind down mode. It's not a fire sale. We're not doing that. We are managing those assets for the benefit of investors that continue to hold those interests. And these are finite-life funds. These are not long-term hold vehicles. And as assets reach the point in their business plan where it makes sense to sell them, that's exactly what we will do.

And are there assets in there that need more than just management? Are there redevelopments or anything else like that, that stayed in that -- the not ongoing pool, I guess, is the right way to think about it, that's going to take up any significant management or other peoples' time?

We will go through that in more detail when we do a deeper dive. But I can say that the vast majority of the assets left out are fairly low-maintenance assets. There inevitably will be a couple that were not good strategic fits either because they were not in submarkets that are consistent with the strategy of JBG Smith, that may have new development opportunities. Whether or not we pursue those is a question mark. We may sell them or recap them. But generally speaking, what has been left out is a fairly low-maintenance basket of assets. A lot of -- the biggest assets are long-term, flat, highly leveraged, fully leased, GSA buildings that will not be going into the company. Those will be sold over time. Those require very little to no actual maintenance, and they do, of course, pay. They will be paying fees for the services we provide to the REIT.

And last one for me. You guys have alluded to coming out with more information a couple of times in a road show. Is that something that you can be ready for NAREIT in a couple of weeks? Or is that going come following up?

It's going to come much closer to the launch date, which is the second quarter.

And our final question comes from Jed Reagan from Green Street Advisors.

Just a couple of follow-ons about the development pipeline. How would JBG Smith fund the pipeline over time if the equity cost of capital wasn't attractive? And to Matt, just of the $17 million or so of development rights in the future pipeline, how much of that is as a right? Or have you already received formal entitlements for?

Sorry, Jed. On your last question, how much of what is as of right?

The land. How much of it is entitled?

Oh, of the $17 million. I don't have an exact percentage for you as to what's ready to go on the $17 million right now. I would try to articulate that in the near-term development pipeline. All of that is ready to go. There is a large proportion of the $17 million that is matter of right, which is to say that it is consistent with underlying zoning. But in many of the jurisdictions in Washington, in order to be able to pull a building permit, you have to do a lot of work and get something closer to the start line. Some of those assets are, some of them are not. We will go through in detail and bucket those things so that investors will have a lot of transparency as to what's in that. On your first question about how we will capitalize assets, we intend to be stingy with the equity of this company. And only when we are trading at what we think are very attractive values, ideally premiums to net asset value, will issuing equity even be considered a possibility for us. When it comes to flexibility and how we finance things, there are a number of assets in this portfolio, that, if we believe we can recycle within the portfolio by selling assets at values that dramatically exceed replacement costs, we will do that and deploy that capital into net new value creation opportunities, in particular where the yields on costs are high. And when we look at yields on costs, we don't look at yield on cost from the standpoint of incremental cost only. We look at yields on costs from the standpoint of what is our land actually worth and what is the yield on cost for the new project inclusive of that land value. Because if that doesn't pencil, then it points more toward simply selling your land. And that's a well-trodden path for us as far as the thought process. When it comes to capital sources, I've talked about project-level leverage, nonrecourse asset-level financing. We also have, by virtue of our third-party capital business, a ton of relationships that we have cultivated over decades of prospective joint venture partners. Many of them will be much happier that we are in a permanent capital structure than in a finite life vehicle. Because many of the best partners out there want a partner who will hang around with them potentially forever if that's the plan and not have an artificial arbitrary exit date imposed upon them by virtue of a fund life. Those partners are folks that can be selectively resources and capital providers, often at times when the REIT markets are not the most efficient source of capital, to fund new opportunities. We will have to weigh that against how much of an asset we want to own, how much of the vig do we want to own in a project versus how much do we want to share with an investment partner. And frankly, are we getting enough out of the deal with that partner to warrant doing that. But that analysis is one that is -- really forms a bedrock of how and when we have decided to do everything that we've done throughout our history. And that won't be changing in this new construct.

Okay. Appreciate that. And I'm sorry if I missed it. Have you quoted the expected transaction cost for this deal? Or is it too early to put that out there?

Too early. We will get to that as well.

Okay. And then lastly, maybe for David or Steve. Did you quote the timing for the Farley development work commencing? And when that could kind of get to the finish line?

We have been designated by the state of New York, as I said. We would expect the deal to close some time next year. And realistically, construction would then begin, I would say, some time in '18. But we'll have to get back to you with some more concrete dates as we get closer to the closing.

But we do know one thing. The -- our -- Skanska, our construction partner on the deal is the end date, the delivery date for the station will be in 2020. So this is a major construction project vis-à-vis the train station. Well, I think that's our last question. So I thank everybody for participating. We think that this has been a -- it's been very long call, but we think we had a lot to talk about. We're very excited about JBG Smith. Thank you, everybody.

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