Vornado Realty Trust
NYSE:VNO
| US |
|
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
| US |
|
Estee Lauder Companies Inc
NYSE:EL
|
Consumer products
|
| US |
|
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
| US |
|
Church & Dwight Co Inc
NYSE:CHD
|
Consumer products
|
| US |
|
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
| US |
|
American Express Co
NYSE:AXP
|
Financial Services
|
| US |
|
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
| US |
|
Visa Inc
NYSE:V
|
Technology
|
| CN |
|
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
| US |
|
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
| US |
|
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
| US |
|
Coca-Cola Co
NYSE:KO
|
Beverages
|
| US |
|
Target Corp
NYSE:TGT
|
Retail
|
| US |
|
Walt Disney Co
NYSE:DIS
|
Media
|
| US |
|
Mueller Industries Inc
NYSE:MLI
|
Machinery
|
| US |
|
PayPal Holdings Inc
NASDAQ:PYPL
|
Technology
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
21.65
45.76
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
|
|
Johnson & Johnson
NYSE:JNJ
|
US |
|
|
Estee Lauder Companies Inc
NYSE:EL
|
US |
|
|
Exxon Mobil Corp
NYSE:XOM
|
US |
|
|
Church & Dwight Co Inc
NYSE:CHD
|
US |
|
|
Pfizer Inc
NYSE:PFE
|
US |
|
|
American Express Co
NYSE:AXP
|
US |
|
|
Nike Inc
NYSE:NKE
|
US |
|
|
Visa Inc
NYSE:V
|
US |
|
|
Alibaba Group Holding Ltd
NYSE:BABA
|
CN |
|
|
3M Co
NYSE:MMM
|
US |
|
|
JPMorgan Chase & Co
NYSE:JPM
|
US |
|
|
Coca-Cola Co
NYSE:KO
|
US |
|
|
Target Corp
NYSE:TGT
|
US |
|
|
Walt Disney Co
NYSE:DIS
|
US |
|
|
Mueller Industries Inc
NYSE:MLI
|
US |
|
|
PayPal Holdings Inc
NASDAQ:PYPL
|
US |
This alert will be permanently deleted.
Vornado Realty Trust
You don't have any saved screeners yet
Good morning, and welcome to the Vornado Realty Trust First Quarter 2019 Earnings Call. My name is Michelle and I will be your on operator for today's conference. This call is being recorded for replay purposes. [Operator Instructions] I will now turn the call over to Mrs. Cathy Creswell, Director of Investor Relations. Please go ahead, ma'am.
Thank you. Welcome to Vornado Realty Trust first quarter earnings call. We issued our first quarter earnings release yesterday 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 the 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; and Michael Franco, President. I will now turn the call over to Steven Roth.
Thank you, Cathy. Good morning, everyone. Our earnings were released yesterday morning in error instead of our normal practice of aftermarket close. Our web hosting service provide pushed the wrong button during a test. While they were only live for a minute New York Stock Exchange protocol in such cases to stop trading pending the issue full release which was established midmorning. This is annoying but I guess you can say no harm no foul.
So now to business. My annual letter to shareholders was released on April five and amended on April 18th 13 days later to update for our retail deal and Haim Chera's joining. In my letter, we announced important leadership changes. Michael Franco was pointed President for Vornado. Michael has been an important part of our management since 2011 most recently serving as Chief Investment Officer where he has been leading for acquisitions, dispositions and financing and has been involved in all important decisions and strategies.
David Greenbaum, who has been my partner as President of The New York Division since joining us since 1997 as part of the Mendik acquisition has decided to cut back, spent half his time in Arizona and half in New York while continuing leadership as Vice Chairman. David will join the board this year when we add an additional independent trustee.
We have promoted David's two most important lieutenants Glen Weiss our head of office leasing; and Barry Langer our head of development to the positions of -- to the positions of coheads of real estate. Glen has been with us since the 1997 Mendik acquisition and Barry has been with us since 2003. We are delighted to promote Michael and to promote Glen and Barry. These are promotions from within our organization. Each of these talented leaders is proven, is the best in the business and is ready to step up. They have been with us for a combined 46 years. We know them well.
One might say that the big deal in the quarter was our blockbuster retail deal. To me as bigger deal was our recruiting Haim Chera to head our retail business. In my mind, Haim is handsdown the best retail executive there is, in addition to running our existing portfolio the disruption in retail will present an enormous opportunities for those with talent and capital. We have both in full measure. We are excited about the opportunities that lie ahead.
My personal observations about David, Michael, Glen, Barry and Haim are in my letter. Biographical information is available in our website at www.vno.com. I might say it's truly amazing how deep and talented our management team is. It's a joy for me to work with me every day.
In the quarter, we did some housecleaning. We sold our shares of Lexington Realty Trust and Urban Edge Properties for $276 million resulting in a financial statement gain of $78 million. We used the proceeds from these sales together with existing cash to retire our 400 million principal amount or 5% senior secured unsecured notes which were scheduled to mature in January 2022.
Now to our retail deal. As you already know, we created a joint venture and transferred a 45.4% common equity interest in seven assets on Upper Fifth Avenue and Times Square to a group of international investors at a evaluation of $5.556 billion. Taken together, our press release 8-K filings and the disclosure in my amended shareholder letter represented in my mind some of the most comprehensive disclosure I have seen about a deal. Reading your notes and talking to investors we are very pleased that almost everyone got it. The 4.5% cap rate is spot on with our published NAV. A few were surprised that we have such a robust bid for these retail assets. They shouldn't have been surprised. As we have been saying time and time again the very best quality assets such as these are always in high demand by institutional and foreign capital. The deal value at share was $5.327 billion as against our economic basis of $2.873 billion and a tax basis of $1.561 billion. Everyone can do the math.
Two questions were most frequently asked explain the $1.828 billion of preferred equity and second what's the appropriate cap rate for the remaining retail assets that are not part of the joint venture. Our partners desired 50% leverage and that suited us just fine. The deal was structured with perfectly accomplished all of our goals involve leaving a $450 million mortgage loan in place putting on a new $500 million mortgage loan which we will guarantee and $1.828 billion a new preferred equity at five unencumbered properties which we will hold on balance sheet.
Now many may think of real estate preferred equity as deeply subordinated junk at the bottom of a too complicated capital structure. This preferred is completely the opposite. It has the first claim to the cash flow and the value of each of five great unencumbered assets. It represents approximately 50% of the value of each of these assets. It has a due date of never a fixed coupon of 4.25% in the first five years increasing to 4.75% for the next five years and formulated thereafter. It can be borrowed against sold or redeemed to create liquidity. The coupon is a 50 basis points rich to the equivalent debt which is a good thing and by the way such debt was readily available. And 200 basis points rich to what we would have earned on cash and that's a very good thing.
Our remaining retail assets are each in their best submarkets. Many have below-market rents, Union Square and the Kmarts and many are in transition and some have a sprinkling of vacancy. My guess is when we publish our year-end NAV the cap rate on these assets may be even lower than 4.5%. We will see.
As I said the deal is spot on with our published NAV at about $7 per share accretive to our stock price. Think of it this way. We started with $5.3 billion of assets subject to $860 million of debt or $4.5 billion of equity at NAV which was valued on the marketplace at you pick the number say as 30% discount or $1.35 billion debt. We ended up with $1.2 billion of cash and $1.828 billion of preferred equity or $3 billion of financial assets plus 51% of the common equity and the continuing upside in the property. All-in-all we are much much better off. We will recognize a $2.6 billion financial statement gain in the second quarter. The tax gain is estimated to be $735 million. The math in my letter indicates that there will likely be a capital gain distribution at year-end. Michael Franco quarterbacked our execution team on this deal. He and his team did a superb job.
To sum it up and even if I'm being a little repetitive, we think the execution of this deal is outstanding, done in a very tax-efficient manner and validates the enormous value we have created in our retail assets. We are delighted with this transaction and we look forward to working with our new partners who are sophisticated long-term investors who appreciate the true value of our assets more than the public markets do.
Lastly, in response to a few incoming questions I want to comment on the green new deal build that was recently passed in New York City. And by the way, we expect similar legislation in all major U.S. cities. While the exact specifics still need to be written, we are supportive of policies that mitigate climate change and benefit the environment. We believe in sustainable policies as do our investors and our tenants requiring. We have a long-held strategy of the continuously improving reducing our own carbon footprint and encouraging our tenants to do the same. We are a six-time Energy Star partner of the year we have over 26 million square feet of LEED certified buildings and have been named Leader in the Light by NAREIT for nine years in a row.
With respect to the bills penalties and by the way they are penalties not a tax, we are well ahead of the curve and thing the impact on our portfolio will be de minimis in 2024 when the first carbon emission cap goes into effect. Through proactive energy and efficiency measures we have already reduced our consumption by 20% since 2005.
Now let's go to Michael Franco, my colleague of the last eight years and now Vornado's newly minted President. Congratulations, Michael.
Thanks Steve, and good morning everyone. I'm honored and excited to take on my new role. I look forward to working with all of you more closely. Let me start with a few comments on our first quarter financial results before giving some thoughts on the markets and our portfolio. FFO as adjusted for the first quarter was lower than the first quarter of the prior year principally from the previously announced $16.2 million of noncash stock-based compensation expense resulting from the accelerated vesting of certain restrictive stock awards, which will be completely offset by lower expense in future periods. These results don't reflect the underlying strength of our business though. In fact, cash basis FFO as adjusted was $0.93 compared to $0.89 for the prior year's first quarter up a solid 4.5%.
We also reported a company-wide cash basis same-store NOI increase of 3% for the first quarter broken down as follows. The total New York segment was up 2.6% with New York office up 4.4% and retail up 1.2%; the market was up 0.9% impacted by the Publicis vacancy which you will hear in a minute will be a big plus; and 555 California Street was up 15%.
In our April 15th press release, we covered the details of the noncomparable items in the quarter which includes a $131 million or $0.64 per share cash after tax net gain on unit closings at 220 Central Park South. To date, we have closed on 25 units for net proceeds of $693 million. Closings will continue throughout 2019 and 2020.
Let me turn now to the New York market. The New York City economy continues to be strong with sustained job growth driving strong tenant demand for office space. In the first quarter, the city added 12000 office using jobs or two-thirds of what was created all of last year and it pace well ahead -- well above I should say what's needed to absorb the new supply coming online. As a result, tenant demand remains very strong in all submarkets with more than eight million square feet of lease transactions completed during the first quarter.
The demand is largely being fueled by the financial services and TAMI sectors. In the case of tech tenants, there seems to be a continued appetite for expansion space from companies already here as well as a continued in migration new companies that want to avail themselves of the talent of New York City. Flight to quality is a theme today as tenants are flocking to redevelop newly constructed buildings.
More than ever, companies are focused on new office space as a means of employee recruitment and retention. We are continuing to benefit from this theme in redeveloped midtown portfolio and this bodes very well for what we are doing at Farley and plan to do in the PENN district overall. In the first quarter, our leasing team completed almost 400,000 square feet of office leases and 28 separate transactions in New York at an average starting rent of $76 per square foot. Our mark-to-market rents were positive 1.8% cash and 0.9% GAAP.
If adjusted for one significant negative mark-to-market on a lease at 90 Park Avenue, where we came off and expiring above-market triple digit rent these numbers would have been positive 6.5% cash and 4.5% GAAP. We have substantially fallen 97% occupancy.
On the development front, we continue to make significant progress. Construction of the Moynihan Train Hall in the Farley Building continues full speed ahead. Interest from both office and retail tenants is picking up despite the heavy construction nature of the site as they begin to appreciate the uniqueness of this asset. At PENN1, the sidewalk bridges are now up as we have started the facade portion of our transformation.
I want to emphasize a point that Steve made in his annual letter. The net proceeds from 220 will fund the PENN distributed element plan for Farley, PENN1 and PENN2 with little or no new debt. Once completed the lease stop, these developments will be highly accretive to future earnings and value.
And earlier this month, we received the unanimous approval from the New York City Landmarks Commission for a redevelopment of 260 11th Avenue designed by the world-renowned architect Lord Richard Rogers. It is directly across the street from Starrett-Lehigh and a couple of blocks south of Hudson Yards. This approximately 350,000 square foot building will uniquely combine historic and new buildings and feature the best of Roger's signature design elements creating exactly what creative class tenants you are looking for today.
At theMART, Chicago we are making good progress on backfilling the 132,000 square foot Publicis space. We completed a 36000 square foot lease with ANGI Home Services also a tenant of ours in New York at a positive 33% GAAP and 27% cash mark-to-market. We anticipate a similar increase on our remaining portion where we also have very good action. We also signed 25 showroom leases totaling 123,000 square feet at a $47 average starting rent.
At our 555 California Street complex in San Francisco, we are literally full at a 100% occupancy. During the quarter, we completed a 56000 square-foot renewal with Bank of America at the historic 315 Montgomery Street building at a positive 69% GAAP and 38% cash mark-to-market. We are also pleased to announce the opening of the Vault our new restaurant at 555 California Street which will be another great amenities servicing our trophy tenant roster.
Finally, turning to our New York Street Retail business. There continues to be a flight to quality here too with tenant seeking out the best high-traffic locations. We are very well positioned here. In the first quarter, we executed seven transactions totaling 49000 square feet highlighted by renewal transactions with made well at 484 Broadway in SoHo and Citibank at 731 Lexington Avenue. We achieved mark-to-markets of positive 2.2% GAAP and negative 8.5% cash. Our overall retail portfolio stands at 97.1% occupied.
Lastly, a few comments on the capital markets. In terms of the office investment sales market this year started slowly likely driven by the fourth quarter stock market volatility. However, activity picked up towards the end of the first quarter as more product came to market. There continues to be sustained interest from private capital in New York City particularly from foreign capital as evidenced by some of the large transactions that have taken place thus far. Buyers remained disciplined but appear more confident about investing with the Fed now on hold. Pricing has stayed fairly constant with cap rates in the mid-to-high 4s for quality product.
In terms of the debt markets, they continue to be very liquid for New York City assets with all-in rates still low by historical standards. The markets have settled down after a burst volatility in the fourth quarter with spreads tightening thus far this year. We continue to be active in extending our majorities and taking advantage of the current market. With that I'll turn it over to the operator for Q&A.
Thank you. [Operator Instructions] We get the first caller in the queue comes from Manny Korchman with Citi. Your line is open please.
Hey, it's Michael Bilerman from Citi here with Manny. I wanted to ask a question just about the cash hoard and little bit on the forces and uses of that cash. As I go through you obviously a lot of cash coming in from the condo sale for 220. You now have another $1.2 billion from this outstanding retail deal that you completed during this quarter. You had another $1.8 billion to come as you deem preferred in the few years from putting mortgage debt on the properties. And that's on top of almost $1 billion of existing cash on the balance sheet. So it's a lot of money.
And then you also have all the liquidity from your credit lines and what is already a low leverage balance sheet. So maybe you can just walk through some of the main uses of that cash. And I know Steve you've talked about that if you ever did a buyback it has to be significant. So given all this liquidity and the fact that your stock in the 60s which is I know frustrating for you as well as investors would you consider a Dutch tender or something else with all of this immense amount of cash and liquidity that you've built up?
Good morning, Michael. I think in the beginning of your remarks three or four minutes ago you said or your question -- you said the outstanding retail deal. Did you say that?
I did say that.
Good. So first thing I want to do is focus on that and I thank you for saying that. Now let's go to your question. With respect to cash, we have already used $400 odd million of the retail proceeds to pay down debt. We have a certain amount of it reserved for what will likely as I said will likely be a special capital gains dividend. And then we are enjoying the proceeds of 220 as they come in and using that to pay down debt and we still have a little way to go on that. And then we have these enormously exciting things that we're going to be doing at Penn Plaza which will -- which we are able to do entirely funded off balance sheet with no new debt and almost all of that cash that we will be investing in Penn Plaza has really almost no cost of capital.
So therefore, all of the earnings that we will generate in Penn Plaza over the next years will be incremental and accretive. So that's our current plan. In addition to that we have always been opportunistic. We have always been aggressive investors where we see opportunity and so we do have dry powder to use to see opportunity -- use it as opportunities arise and they will come. The next thing is, is we'll use some of our financial strength to do something in terms of reorganizing redoing our basic corporate structure and the answer is that is not impossible either. So we are very very happy with our balance sheet. We work hard on it. We are very happy with our financial strength. We consider it one of the very unique things about our business and we just keep going.
That's helpful. And just as a follow-up as you talk about the retail sale you talked about the discount that was in your stock likely that discount was accentuated by the retail investment. At the same time you talked about hiring Haim and talking about the disruption in retail that will present opportunities to use -- I assume what you're talking about is to make investments so. I guess how do you balance being able to sell something in montage something that the Street giving you value for and then turning around and them potentially increasing your exposure back into the retail space?
I think it's perfectly logical and actually follows in the pattern of what we've been doing all over the years. So the fact of the matter is first let's start this way. Haim Chera is a rainmaker, okay? Now we have experienced with rainmakers. I recruited Mike Fascitelli 20-odd years ago from Goldman Sachs. He was -- that worked out. He was a rainmaker. That worked out great, okay? We put together the JBG Smith business where basically -- if you want to look at it this way, we basically recruited Matt Kelly and his team in the rainmaking business to take at shepherd our assets and that worked out better than great.
By the way, just as an aside there -- when we did all that everybody thought that Crystal City was a drag. Nobody had any confidence in it except Matt Kelly. So now we have two people we have confidence in: Matt Kelly and Mr. Amazon. So we're doing great down there. And so Haim is in the -- follows in the successes of rainmakers. I've been trying to get him for years and years. And why do we need him? Number one we have $7 billion-odd or $8 billion I don't know the exact number of retail assets on our balance sheet. Now they deserve the most aggressive best most talented management that's a lot of capital and we and those assets need to be what's the word? Those assets need to be shepherded and cared for with the highest talent.
The second is, is that we think that the disruption that is in process now I don't know what inning we're in but we'll get worse and worse in the retail industry going forward will present enormous opportunities as I've said multiple times with those who have both talented capital. You have to have both to be able to play. So we're just getting ready for that and the retail is a business that we've been in all our lives. It's a business that we consider ourselves in experts in. We consider Haim Chera to be even more expert than we are. So this is not a business that we're exiting. We're not afraid of it. We think we are running full. We will run full tilt into the fire and we think that the opportunities are going to be quite extraordinary.
Great. Can you just ….
If you think that we did on the retail business and on the retail sale right? We recycled capital from assets that were -- that we had added tremendous value to the last several years. We've leased up and have durational leases there stabilized mature and monetize that right? So the goal is to invest in situations where we can earn significant returns and we think with Haim's addition that that is more likely.
Great.
I mean as I said in my prepared remarks, we turn those assets in to basically $3 billion of cash at a financial instrument which creates an enormous liquidity as we need it and then mean while we're earning very very acceptable returns while we are waiting. So that was the essence of what we did there. We...
And tax efficient?
What's that?
And Tax efficient
Monumentally tax efficient. Okay.
Thank you.
Thank you.
And our next caller.
Thank you. Our next question to queue comes from Steve Sakwa with Evercore. Your line is open.
Thanks. Good morning. Steve, if you go back to your Chairman's letter several years ago you outlined the number of things said -- you could or would you like to do many of those have been accomplished. I'm just curious kind of as you look at this big retail transaction are there are other things like that that you would like to accomplish or feel like you need to do in order to continue to close the NAV gap?
Yes.
Okay. Any just sort of commentary on timing or how you sort of think that may unfold over the next 6, 12, 18 months?
No. Listen, Steve, the letter that I write each year is something that is -- it's a joy to write it. It takes an awful lot of energy as you can see from the letter I write. I write every word myself with 400 [indiscernible] looking over my shoulders and [indiscernible]. But nonetheless I write every word myself. Now in the letter I have historically not been bashful in saying what I thought and not been bashful in using about what I think is wrong and what I think is right and what we might do underline the word might. Okay? Last year several of our investors scolded me which I guess I take scolding pretty well. I don't know. And basically, their point was don't muse what about potential strategies you might be. You either do it or shut up okay? And so, in the last letter I basically shut up, okay? Taking advice from some of my good friends out there. And so, we have obviously not finished what we need to do. We had done an enormous amount. I think one of our analyst were commenting about the retail deal putting a long list of what we have done over the last years and even I was a little impressed. So we've done an enormous amount. We have more work to do. We're not going to front run that work. We're not going to amuse. We're not going to speculate when we do something just like this retail deal when we do something, we're going to announce it in full measure with full transparency but we're not going to speculate.
Okay. And I guess the follow-up question kind of a two-parter but could you or Glen or Michael maybe just talk a little bit about the demand at Farley and how you see that unfolding and maybe the timetable behind that? And what do you think we'll get a bit more detail on the two PENN redevelopment project? Thank you.
So David is here but you don't want him. So we'll go to Glen.
Hi, Steve.
By the way, Steve we're having fun sort of the transition of bringing the young bucks up and the old guy sort of packing up and so we're having a lot of fun watching all this happen right now. Glen?
Good morning, Steve. Activity is probably sticking up in a great way right now. The projects coming along really well. Tenants can really start to feel and taste what we're doing. There is nothing like it in the market. The unique nature of the campus is very, very different from anything else. Tours have picked up. We have some negotiations going on. We feel great about it. We don't deliver space to tenants for more than a year from now. We feel very good about the demand mainly from the TAMI sector at present.
The only thing I'd add to that Steve is on the retail side, right? Given the...
David, here you go.
The volume of people that are going to be coursing through that asset everyday either going West to Manhattan West and Hudson Yards which is the gateway to that or used to our assets is significant and the retailers have already figured that out. So we've gotten significant interest there. We're going to curate that the right way but we're extremely bullish about that.
With respect to detailed numbers on Penn Plaza we're not ready yet to disclose exact numbers and when we feel that we are ready and basically when we start we will take a very full some disclosure but we're not ready yet.
Okay. Thank you.
Thanks, Steve.
And the next question in the queue comes from Jamie Feldman with Bank of America, Merrill Lynch. Please proceed.
Thank you, and good morning. I guess sticking with the Chairman's letter Steve you had commented on your thoughts on the drag from redeveloping two PENN or PENN2. But as you think about getting Farley leased up and the earnings impact I assume that will mitigate a bunch of that drag. Can you guys just help us understand how to think through the kind of ins and outs of the portfolio and even on earnings with some of these moving pieces and then comment in the Chairman's letter specifically?
Well, what I said in the Chairman's letter was that public markets and our analysts seem to frown on development done in a public company. We think that that is not correct. We think that when you do develop it several things happen. Number one, you get a brand-new building; number two, is you get in the first iteration of leasing for 10 and 15 years you have very low or no CapEx and you get a purpose or any way the long and short of it is there is there are huge advantages to development. We have done lots of development. We have a large capability of that and made enormous amounts -- enormous profits on development over the years. Look at the Bloomberg building look at 220 et cetera, look at what we're going to be doing in Penn Plaza. So there's that.
What I said in my letter was just to recollect that I find it kind of astonishing that people will deem our stock when we are on a program to take $60 rents and turn them into $90 rents. We would think that would be something that would be great stuff so that's what I said. Now with respect to your comments what you're really asking for is a guidance road map which as you know we do not give guidance. I offer you to call Joe Macnow and you see if you can persuade him to tell you things that he probably will not tell you, but you could give him a try. But with respect to the details of how you model this going in that going up or what have you that's not our style and we have not done that, but talk to Joe see how far you get.
Okay. And then I guess just following up on an earlier question so you made a comment saying you may use cash.
James, I hope that helps. What's next?
It does help. I mean I assume I'm correct though thinking Farley mitigate some of that NOI loss.
Sure.
Okay. I will follow up offline.
And Farley -- and hopefully Farley will come on onboard at the front end of what we're doing in Penn Plaza. I just want to reiterate something that my partner -- my newly minted partner Michael said okay? The thing that's amazing about Farley is it's the only real -- well, as there's one or two others but it's the only real horizontal campus that I know of in cap. That makes it totally unique and that makes it the kind of product that our preferred creative tenants love. The retail is truly extraordinary. If you just look at it and walk around all of the pedestrian traffic and the pedestrian traffic will be enormous going from Penn Station to their workplace at Manhattan West or at Hudson Yards has to basically come through for the retail portion of Farley so we expect that it will be is a tremendous opportunity. We're really excited about it.
These are retail portion actually potentially coming in better than your initial underwriting?
Yes.
Better than you thought pricing better than your thought?
I don't know we're pretty aggressive on what we thought but the answer is yes.
Okay. And then for my follow-up on ….
By the way and Jamie I'll tell you -- Jamie, hang on I'll tell you one thing. We are a lot of retail all over town and we own the best assets in each of the submarkets. The single best performer in town right now is train station retail that we own. Next.
Okay. Just a follow-up from an earlier question you had said may be some of the cash to redo your basic corporate structure. I'm just curious what you meant by that.
I'm not going to speculate any more than that.
Okay. Alright, thank you.
Thank you, sir.
The next question in the queue comes from John Kim with BMO Capital Markets. Your line is open. Please proceed.
Thank you. I had a couple of questions on the outstanding retail deal as Michael described it. But the decision-making on redeeming the preferred can you just discuss what that's like? Because it seems like they have been stages for the JV to refinance that. But on your end maybe depending on your use of proceeds.
I can't tell if your question is what's the mechanism to redeem is that what you're getting at?
Yes the mechanism and the potential timing.
Timing we don't want to speculate on but in the not-too-distant future we can redeem those. And really it's at Vornado's discretion. So the joint venture can refinance that with third-party debt and we can ensure that that happens when we like for it to happen. So I think the important thing is that as we need that capital for our own purposes we feel good about sequencing that to redeem that capital. But that won't happen immediately.
Okay. And then Steve in your prepared remarks you seem more definitive on the special dividends from the deal more definitive than you were in the Chairman's letter it seems like. But I was just wondering if you're considering at position to defer any of the taxable gain.
The answer is that I think it in my prepared remarks I used well I said likely in this morning. So the answer is is that if you do the math there will likely be a capital gain dividend at year-end. I'm not predicting how much it will be. I just don't know. We have other activity that will be completed between now and year-end which I doubt would create losses which would eliminate the need for dividend. So we think that there will be a dividend and stay tuned.
With respect to what Michael said and answering your question about the preferred we look upon as a great, great instrument sound from a risk point of view secured by secure is not the right word. But against asset rate is the only encumbrance of where we can sell it we can borrow against it and we can redeem it so it's a very flexible instrument. The only timing constraints are tax-driven. So we're pretty we think it's pretty -- and by the way it's simple. I hope that helps. And I hope that helps.
Thank you.
The next question in the queue comes from Vikram Malhotra with Morgan Stanley. Your line is open.
Thanks. And I guess I'd reiterate a very good execution especially with the preferred and great pricing on the retail deal. So just on retail just two specific questions on sort of Fifth Avenue and Madison. Can you talk about prospects for the Massimo space both in terms of types of tenants that may be looking and what you could -- what we could potentially see or what sort are reasonable in terms of rent expectations. And then just second on Madison can you remind us. I believe that the Westbury assets were going to be taken out for redevelopment. Can you give us more color on those plans?
The Massimo Dutti store will -- we have activity on it. We are not in -- we are not close to a deal but we have activity on it. It's obviously a great location. Pricing is not what it would have been three years ago by the way but our job is to be realistic and to hit the market price. And so that's my comment about -- with one further thing by the way I expect that the store will go vacant before we actually feel it. So there will be a period of -- there will be a downtime period before the new tenant whoever that maybe comes in. Joe or Matt what's the status of with Westbury with respect to our service or in-service.
We're going to spend some money there. We're going to take out of service when we do that.
It's -- out of service yes?
Now that the loss of the tenants are out it's out of service.
So Vik the answer is is -- I'm sorry. It's either out of service now or will be shortly out of service and I can't get a straight answer out of my guys that's it. I've got a straight answer.
It's out of service, okay. I'll follow-up on that. And just on the office side last quarter I think there was some comments around sort of what mark-to-market could look like on the office side. I know obviously some of -- there is some movements around with PENN et cetera, but I believe the comment was do you expect high single-digit or low double-digit sort of renewal spreads and I know excluding the one asset it was about 6%. Can you give us a sense sort of for the remaining balance of the year is there any specific also anything we should be watchful in the quarter? Do you still expect the rent spreads to come in that sort of high single-digit range?
Vikram, its David Greenbaum. How are you? Listen the reality is every quarter our mark-to-market is going to be dependent upon the actual space that's coming up. We do have a couple of leases here at 888 Seventh Avenue which are vintage 2008 leases coming off some very, very high rents. So even if we achieve which we think we will rents well into the triple digits there may be some mark-to-markets that are negative. So it's all going to depend upon our particular space that's coming up at any point in time but they are obviously just as there was in this quarter there are a couple of outliers where we will see some downward adjustments.
Okay. So the -- is this quarter sort of a good reflection of where the full year should check out, not ignoring the quarter-to-quarter moves?
Well, again I think all I can say realistically is is going to depend upon the mix of space that we are leasing every quarter.
Okay. Thank you.
Thank you. The next question in the queue comes from John Guinee with Stifel. Your line is open. Please proceed.
Great. Steve wonderful job. Promise me that you and Joe are never leaving.
I don't know whether that's a compliment John or a cynical comment but they'll take it as a compliment.
It is. It is. Look forward take the green bill and look past 2024 and look to 2029 because you've got to obviously develop to meet that anticipated standard. What does that do to your project costs on something like PENN1 or PENN2 or Farley? Is it cost to you an extra $5 a square foot or $50 a square foot or $500 a foot? Or is it not feasible to well redevelop some of these buildings? What's the big picture there over the long-term?
I think John -- thanks for the question. I think the big picture is is we don't anticipate that records anything more than our first plans are what we're doing -- what our current budgets are. These buildings are -- whether they're new or whether they're massive transformation renovations are being done to the highest standards of engineering and efficiency that we can do now. So we've already got that in the more just. So at the margin everybody in our industry is paying attention.
Understand what these issues are and is designing and building towards them. So we don't think that there will be almost any incremental course other than some new technology new software or new stuff that is not available now that we don't know of that we might adopt later on okay? So it's -- this green initiative is being anticipated by the leaders in our industry we and our colleagues and so we're we think we're ahead of the curve.
Great, okay. And then the second question it's pretty easy to get up to $2.5 billion or $3 billion for the Penn district campus when you add up Farley. PENN1 PENN2 the CONCORs maybe Manhattan Mall. Is that the kind of number we should look at $2.5 billion to $3 billion? And is that a 5-year process or 10-year process?
Let me find -- I add slower than you do.
Page 24.
I don't read that fast either. What number did you say?
Well, you have another 560 to spend on Farley another 200 on PENN1. You figure PENN2 1.5 million to two million square feet and another $600 or $800 a square foot.
Look I think you're in the right ZIP Code but I think you're probably on the high side.
Okay. On course.
And I think that's fine. I mean obviously we have the capital.
Okay. Good. Thank you.
Not only do we have the capital but we think as we invest the capital we will be getting a tremendous bang for our buck there.
We all hope so. Thank you.
And by the way one last thing we don't look upon that as a 10-year spend. We look upon it as a 5-year spend at the outside.
Okay, great. Thanks.
Thank you. The next question in the queue comes from Alexander Goldfarb with Sandler O'Neill. Please proceed sir.
Hey, good morning, Steve.
Good morning, Alex.
Hey, morning. So two questions. The first is just on the transfer tax. In the disclosures for both companies you guys said it unfortunately lost the appeal. It sounds like from reading the tax that you all the money that you had to pay was paid -- already paid last year. But going forward do you think that this changes anything with regards to building transactions or this was -- these two instances were just very specific to these two instances?
Good morning, Alex. The answer is yes. We paid the money plus the interest et cetera. I think three four or five quarters ago I don't remember when. Took the expense and we’re done with this. So that the appeal -- we lost the appeal what can I say? But it has no financial impact at all other than maybe hurts our feelings a little bit. The legislation that the industry follows on and we followed is somewhat complicated. The city has been trying to get the state to change that legislation in their favor for years and that does not happen. So we strictly follow the rules that are in the legislation. I think it's -- like think that case that we lost which is about two or three transfers had special circumstances which I don't think should be present in setting. So there you have it.
Okay. That's helpful. And then going to the Chairman's letter you devoted a fair amount of the recent political stuff going on. Amazon getting basically shut down effective lay. You talked about the green new deal but it certainly has created some -- a lot of discussion in the press as far as some of your competitors who have modern buildings that would meet all the lead certifications and yet because their high intensity 24/7 they still end up getting penalized.
Do any of these things when you guys were talking to your street retail institutional partners to set up that JV and maybe some of your other institutions. I mean is anyone talking about changing the way they look at New York assets investing in because of whether it's the Amazon or potential for commercial rent control or the green energy initiatives? Has that changed the way people underwrite assets in New York? Or people just view that as normal part of doing business in any big major urban center?
I'll begin on that and then I'll hand it over to Michael. I'm not aware of any major disruption or repricing in the marketplace as a result of carbon footprint et cetera. I think the marketplace both on the investor side the tenant side and the owner side is all pretty much expecting that and has been planning for it. So I think that it's important obviously we all have to go into modernity we all have to do this. This is not like a hospital tax or in position we consider it to be just normal practice. So there's that.
With respect to threatened rent control I think that's whole different cattle to fish much more threatening and would be extremely negative and would not be -- would be the opposite of enlightened legislation. And I think people are beginning to become the focus on that. Now obviously that's much more in the residential area than it is in the commercial area. It was some stuff about retail rent control or something like that. In reaction to the empty storefronts around town I think that the political leadership at least I hope they have has realized that it's not the landlords were the bad guys the landlords are anxious to let the space and are realistic in what the rents have to be to attract tenants. So it's part of the disruption in retail. So those are my comments. Michael, hang on for a minute.
Just a couple of things to add. Just picking up on the multi first and then back to office. I think on the -- if you look at sales year-to-date multifamily sales are down significantly and I think it's directly reflective of the concern over those laws changing in June. So there's a possibility real possibility that there will be some changes that are going to be negative and I think it's going to impact a number of assets may well create opportunity coming out of that but I think that -- I think generally investors are holding off on assets that could be affected by those laws and it could impact development going forward too which is a concern.
On the OpEx side I agree with Steve I don't think its impacted investors thus far. And I think with respect to higher quality assets where they're either generally compliance or the impact of will be minimal and with a modest amount of capital to comply I don't think it will be significant but I do think there will be buildings that are -- that have not been owned and operated by owners that have taken steps thus far where those buildings from a capital requirement or operating standpoint may see an impact and so that again could create opportunity but I think there'll be any impact on value for some of those assets. But on this -- on the assets that are trading traditional Class A assets I don't think it's been an issue and we're not seeing investors focus on that.
Okay. Thanks Mike.
Thank you. And the next question in the queue comes from Michael Lewis with SunTrust. Your line is open. Please proceed.
Great. Thank you. I wanted to ask about 61th Ninth Avenue. Right around the time your release came out there was in the news that 12-year deal there. With rents that...
Michael I can't hear you.
Sorry about that. I wanted to ask about 61 Ninth Avenue. So right around the time you reported it was in the news that you have to sign a 12-year deal there. Our rents was high -- but I think below is going to pay I was just wondering if the details on those transaction are accurate and if you could talk a little about that.
Glen.
Hi, Mike, it's Glen Weiss. So the deal is a sublease at. We simply consented to the sublease. The deal is for the term of Aetna CVS. We have Aetna CVS credit lockdown for the term. The deal is a slight discount to the head rent that Aetna is paying us yet there was a fast coming up-and-coming technology company. They love the building. Their CEO is excited to go there and I think the quickness by which Aetna was at the space read off in the sublet market shows the quality of what we built there and the location.
I see. So any difference in the rent is going to be by CVS?
Correct.
Okay. And then my second question is kind of a follow-up on a previous question….
Michael, Michael hang on. The difference in the rent is not significant and that validates the original location the deal that we did. So this doesn't affect us at all but it sort of validates what we did.
I see. Understood. My second question as a follow-up on a previous question about rent spreads so a 10-year lease that's expiring now was signed in 2009 which was a big drop in rents that year. So we're right at the point of shifting from leases signed to the last peak to those signed in great recession. So I'm kind of just curious if you're starting to see that our mark-to-market opportunities in the portfolio or if maybe I'm overstating this phenomenon kind of curious on your thoughts there.
Yes. David?
Michael, I think the comment I would make is probably a year or so off because the reality is leases right now were likely were signed in late '07-'08 with some free rent with a 10 or 12-year term. So we -- I think the comment I made earlier is we are seeing some leases come up near term that effectively were signed at the peak of the market. I fully agree with you that as we look out a couple of years we will see much of that reverse as we begin to see some of the leases that were signed in the weaker market place post the great recession. I will also tell you that while I said earlier that there are some outliers that are significant negatives there are number of outliers that are significant significant positives. As you always expecting a real multitenant portfolio. But in terms of gender generally the timing directionally what you're saying is correct. I think your timing may be a year or so off.
Okay. Great. That’s helpful. Thank you.
Thank you. And the last question in the queue comes from Nick Yulico with Scotiabank. Your line is open. Please proceed.
Thanks. Just a couple of questions. Just going back to Farley. Can you just talk more about the types of buildings you're competing with? And I think the floor at Farley over 100,000 square feet so it's kind of a unique product. Should we think that this is more likely to be a single tenant building let's say at the campus rather than a multitenant building?
The floor is big. They range from 100,000 to 300,000 there will be big tenants in the building. Will that be one tenant two tenant we're not sure yet but it's a big-tenant building. We're competing with the new construction near us. We're competing with some stuff in the midtown South. We're competing with whatever big box are available in the market. But as we said before we think our advantage here is the uniqueness of this product versus anything else that we may be competing with.
The only thing I might add Nick is that the way we have designed this building is a building that will have three totally distinct cores in the building. So while as Glen said it will be a large tenant building effectively as you think of the asset the greatest thing is design that could be three buildings within a building having three separate tenants major branding presence major identity or effectively they have a sense their own entry their own lobby their own elevator core which was the way specifically we design the building to deal with both the Annex space as well as the 8th Avenue ring floors.
That's helpful. Just last question is on G&A. You promoted some people in the organization. You the new header retail which you described as a rainmaker so I can't imagine that's a cheap higher -- how much should we think about G&A? Is it going up from all these leadership changes?
Yes. G&A is going up.
And I mean any sort of preview be about how we can think about that?
Not really, not yet. But G&A is going up that's correct.
Thank you.
There are no further questions in the queue sir. I'll turn the call back over to Mr. Steven Roth for closing remarks.
Thank you, everybody. This is been a very busy period personnel changes retail deals and what have you so we're active. And I think you can get from all of our remarks with respect to the stock price with respect to our balance sheet, et cetera, we're not done yet in terms of producing value. So thank you and we'll see you next quarter.
Thank you, ladies and gentlemen. This concludes today's teleconference. Thank you for participating. You may now disconnect.