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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to the Vornado Realty Trust First Quarter 2018 Earnings Call. My name is Adrianne and I'll be your operator for today's call. This call is being recorded for replay purposes. All lines are in a listen-only mode. Speakers will address your questions at the end of the presentation during the question-and-answer session. [Operator Instructions]
I'll now turn the call over to Ms. Cathy Creswell, Director of Investor Relations. Please go ahead.
Welcome to Vornado Realty Trust's first quarter earnings call. Yesterday afternoon, we issued our first quarter earnings release and filed our Quarterly Report on Form 10-Q with the Securities and Exchange Commission. These documents as well as our supplemental financial information package are available on our website, www.vno.com under the Investor Relations section.
In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q and financial supplement.
Please be aware that statements made during this call may be deemed forward-looking statements and actual results may differ materially from these statements due to a variety of risks, uncertainties and other factors. Please refer to our filings with the Securities and Exchange Commission, including our Form 10-K for more information regarding these risks and uncertainties. The call may include time sensitive information that maybe accurate only as of today's date. The Company does not undertake a duty to update any forward-looking statements.
On the call today from management for our opening comments are Steven Roth, Chairman of the Board and Chief Executive Officer; and David Greenbaum, President of the New York Division. Also in the room are Michael Franco, Executive Vice President and Chief Investment Officer; Joseph Macnow, Executive Vice President, Chief Financial Officer & Chief Administrative Officer; Mark Hudspeth, Executive Vice President and Head of Capital Markets; Matt Iocco, Executive Vice President and Chief Accounting Officer; and Tom Sanelli, Executive Vice President and Chief Financial Officer, New York Division.
I will now turn the call over to Steven Roth.
Thank you, Cathy. Good morning, everyone. Our industry leading first quarter, financial results were very strong. In fact, since all of our New York brethren have already reported, I can say definitively that Vornado’s first quarter financial results were by farther the best in town with many of our business metrics outperforming by a wide margin. FFO was adjusted with $0.91 per share as compared to $0.84 per share for the prior year’s first quarter and 8.3% increase.
On a cash basis, FFO was adjusted with $0.89 per share as compared to $0.81 per share for the prior year’s first quarter at even greater 9.9% increase. This quarter's cash basis NOI was 349 million, up 4.5% from the first quarter of 2017. Cash basis same-store NOI increases whereas follows. New York segment up 5.6% with office up 8.1% and retail essentially flat to 0.2%, the mark of 10.0 and 555 California Street up 13.3%.
Our office business continues to perform very well while retail continues to soft. I know that Wall Street is down on New York. We don’t see -- in fact, we see just the office. We are experiencing robust demand from all matter of industries in all of our submarkets. Our tenants are optimistic, aggressive, growing and up keyed about New York. Notwithstanding our superior financial performance, this quarter we still expect the year to be flat gap although nicely positive cash.
We also reaffirm our previous guidance that retail cash NOI will not go below $304 million. We are pleased with the performance of our spin-offs JBG Smith Properties and Urban Edge Properties. These companies will perform better on a standalone basis. We are also pleased with our over $6 billion of recent asset sales, which would likely command a lower price if sold today.
Now turning to the investment sales market. The office investment sales market has picked up smartly although bidding pools are still not the highest quality assets continue to trade at strong pricing level. Investor interest and pricing for asset South and West in Manhattan is particularly strong. Overall, investor demand is fairly well balanced between domestic and foreign capital. There continues to be scanned sales activity in the retail sector due to both a lack of quality product on offer and understandable investor skittishness.
Pricing is clearly up for everything except prime well leased assets. Debt markets for New York assets remain as liquid and strong as we have seen with all markets wide open. Although rates are up, spreads remain tight, keeping all in coupons at attractive levels. We have a highly liquid fortress balance sheet with $4 billion of liquidity, reasonable leverage and well staggered debt maturities.
Now to Dave.
Steve, thank you. Good morning everyone. Finally, a warm sunny spring day in New York. Employment trends in New York continue to be very positive. The office sector employment number for 2017 has been revised upward significantly by some 40% by the Bureau of Labor Statistics, adding 8,000 jobs, office sector jobs to a total of 28,000 jobs for the year. But appear to be a very good year now looks even better.
Job growth in the first quarter of 2018 continues to be healthy and the city continues to fire on all cylinders with multiple sectors serving as engines of growth. The quarter's two stunning announcements by J.P. Morgan and Google reflect the continued strength of the two most important engines, financial services and technology. The overall leasing market in Manhattan turned in another solid quarter. Manhattan absorption was a positive 1.2 million square feet, brining the vacancy rates down to 8.8%.
Turing now to our own performance in our New York office portfolio release 424,000 square feet in 26 transactions at average starting rents of $82.07. Same-store growth for our New York office portfolio was strong during the quarter, positive 6.6% on a GAAP basis and 8.1% cash. The broad diversity of our larger leases for the quarter is a reflection of the overall health of the New York economy.
The expansion of a tech tenant of 770 Broadway by 77,000 square feet, the renewal of the financial services tenants for 76,000 square feet at 280 Park, the expansion of the healthcare company by 53,000 square feet at One Park, and a renewal expansion within apparel Company for 84,000 square feet at a 100 West 33rd Street.
The balance of our activity was with midsized tenants that represent the sweet spot of our diverse portfolio. The mark-to-markets in our office business were a positive 62.5% GAAP and 50.3% cash. Even if you exclude a single lease of 770 Broadway, which was multiples of the old Kmart rent of $33.50 per square foot. The mark-to-markets for the quarter was still a very strong positive 20.2% GAAP and 12.5% cash.
At 96.8% occupancy, our office portfolio was over 1,300 tenants remain substantially full. The single largest block of space currently available is 89,000 square feet. Of our remaining 2018 lease exploration of 576,000 square feet and our 2019 lease exploration of only 691,000 square feet, 40% is concentrated in Penn One and Penn Two, where we remain aggressively focus on advancing our redevelopment efforts, which will commence later this year, as we combined these buildings into a 4.3 million square foot complex that it can offered best-in-class amenities along unmatched access to transportation.
Our leasing machine remains very active with over 400,000 square feet of leases and active negotiation and an additional 1.2 million square feet in the pipeline. On the development front, we have been very busy. We will soon deliver 61 Ninth Aetna as its sublease effort advance. In the second quarter, we will also complete 512 West 22nd Street along the High Line. The building looks great. You should go see it and we have robust leasing interest across all floors at triple-digit rents.
We expect to complete our boutique SOHO new development at 606 Broadway in the fourth quarter and we are working on a lease for all of the office space in the building again at triple-digit rent. And of course, there is a Farley Building where extraordinary progress is being made on the dramatic Moynihan Train Hall, which includes the installation of new escalators and advanced work on the two monumental skylights.
We are also moving forward with the private development work, which will include 730 rentable -- 730,000 rentable square feet of office space and a 120,000 square feet of Train Hall retail, all to be delivered by 2020. We are seeing great interest in this space and if you may have read in the Wall Street Journal, part of our leasing effort is directed at the life sciences industry. Many of the major pharmaceutical another life science companies are headquartered in Suburban New Jersey at Office Park.
As these companies think about how to compete for millennial and post-millennial employees, they are thinking hard about expanding in Manhattan and where better to do that and directly on top of the expanded Penn Station, which also will be directly accessible to Amtrak and the Northeast corridor from Washington to Boston and Cambridge. We’re confident that the future of the life sciences industry in New York is on the west side. Our life science leasing effort also dovetails with city and state programs to grow this industry, stay tuned.
Let me now turn briefly to our best-in-class Street retail business where our same-store performance for the quarter was down 1.3% on GAAP basis and up 0.2% cash. The overall retail market remains relatively weak, but a number of successful retailers are choosing strategically to relocate and build new stores. Those moves have accrued to the benefit of our portfolio, witnessed Sephora and Levi’s at our 1535 Broadway in Times Square and now Forever 21, which is relocating along 34 Street, a block and half west on the corner of Seventh Avenue across the street from both Macy's and Penn Station.
The submarkets with a highest footfall and greatest visibility continue to generate the greatest interest for retailers and that includes Time Square and Penn Plaza. For the quarter, we signed seven retail leases totaling 77,000 square feet, all of which were in the Penn Plaza district. While we’re pleased with the 43,000 square foot Forever 21 lease, as we expected the reduction in rents relative to the former H&M lease for that space resulted in negative mark-to-market in our retail business of 12.3% GAAP and 20.1% cash.
However, if you isolate that lease out, our remaining retail leases produced positive mark-to-market of 19.2% GAAP and 4.9% cash. Again, all of those leases were in the Penn Plaza district. This rent growth shows the resilience at our Penn Plaza retail portfolio, thanks to the unmatched foot traffic. We've eliminated the Forever 21 lease to just a five year term, positioning us to take advantage of rent growth as our transformation of the district proceeds as well as maintaining our development options for the site.
At theMART in Chicago, this 3.7 million square foot asset literally is full with an occupancy now at 99.1%. We signed a 40,000 square foot lease expansion with the tech tenant, which now occupies 149,000 square feet. For the quarter, on a total of 119,000 square feet of leasing activity at average starting rents of $50.39, our mark-to-markets were positive, 36.6% GAAP and 28% cash. Same-store growth at theMART was 3.4% GAAP and 10% cash. And this strong growth should continue as we bring to market the former Publicis space which expires later this summer, a 132,000 square foot block that is well below market.
Finally, turning to 555 California Street, in the first quarter we completed 89,000 square feet of leasing activity and finalized the lease up of the redeveloped adjacent historic 315 Montgomery building. Next store, a redevelopment of the iconic cube, the old BoA Banking Hall is underway and we are trading paper on a triple-net lease for the entire 77,000 square foot building at this iconic San Francisco corner. For the quarter, our same-store growth for the three building 1.8 million square foot complex was 12.3% GAAP and 13.3% cash.
Let me just conclude by saying, the New York economy continues to grow and with its demand for office space. We remain full. We have a robust development and redevelopment pipeline, all of which is in the perfect submarket.
Let me turn the call back to Steve.
Thank you, David. We are happy to take questions.
Thank you. We'll now begin the question-and-answer session. [Operator Instructions] Our next question is from Michael Bilerman from Citi. Please go ahead.
Steve, I was wondering if you could talk about Penn Plaza, the promise land as you noted in your churns later, but talk about from a perspective of the potential capital overtime to develop and redevelopment, the developed, against the backdrop of your comments that the public market has been more challenged from a realty perspective and hasn’t grown a lot of people want to invest in private relative to public. How do you sort of see the public markets being able to fund that development and redevelopment within Vornado?
So, first of all, Vornado has been rewarded for its contrary and early investment in Penn Plaza enormously. Our basis and most of the assets in Penn Plaza when I am talking about millions and millions of feet is about $200 a foot, and I don't know what the buildings would sell for today, pick a number, say 900 hours a foot, you all can do the multiplication, $700 a foot times all that square footage is an enormous value creation. That's the first thing.
The second is that Penn plaza had always been years ago the cheapest submarket in town. That's going to change and it's going to change monumentally, but the timing of Penn Plaza was not yesterday, was not the day before. It's really now and the day after today. And by that I mean, Penn Plaza is right and lots of different ways, right for rent growth, its right for tenant demand, it' right for tenant demand now.
We have plans that we've already announced to spend 200 million on one Penn Plaza, which we have already announced. We believe will drive market rents up $20 a foot. So $20 a foot that's overtime, but the leases turnover over the five years cycle in one Penn Plaza or as David calls it now Penn One, so if you take a look at the math to $20 a foot kind of just 2.5 million -- 2.6 million square foot building is roughly $50 million and $50 million you can value.
Let net $200 to accomplish the transformation of the building that's a $4 a share increase in value, okay. On a $200 million invest at the increment. Obviously $200 million is an investment that Vornado can handle very, very easily with the no capital raise, no selling shares, no dilution and no partners. On Two Penn, we have various different plans, but it looks like we’re going to go to Plan B.
Now let’s talk about that for a second. I think you could characterize, Penn Station, now I am talking about the underground now. We are on the over ground but not the underground obviously. So, the underground of Penn Station is probably -- Joe, what’s the good word, reviled? That's too tough, told you about. Okay. So, the Penn Station is probably one of the most disrespected pieces of infrastructure, for something that is the most important and busiest transportation hub in North America.
So from aesthetic point of view and operational point of view what have you -- it's not something that we are proud of, okay, but not something that the community is proud of, okay. So 10 years ago as you might remember, Vornado, the related companies at Madison Square Garden all got together and actually we signed agreement. So this was not a dream, this was a reality, a potential reality.
So move Madison Square Garden to the Farley Building which wouldn't allow for a total transformation of the -- which with daylight the station remove the building that was on top of it and allow for a total transformation of Penn Station in every way that would be -- that would have been the government's responsibility.
Now, we invested years in that plan when it became pretty obvious that a public sector, was not going to get -- was not going to be able to do it or get their act together that plan dissolved. Now while we were working on that plan, we were the subject of a fair amount of community criticism, it was a landmark that the Farley Building was a landmark building, lots of other things that is not necessarily go into, all of which were very small and I might even say penny, okay.
When the proposal was withdrawn and it wouldn’t happen, the amount of remorse on the part of the entire community, government officials, the New York Times et cetera was astonishing, okay. Now fast-forward to today, Vornado has initiated a plan which granted is a very ambitious to basically, I said in my letter and I assume this is one of the things you're interested in, to raise the tick down Penn Two, tick down Two Penn Plaza and build that unlike the 5 million square feet of air rights that are trapped on top of Madison Square Garden, daylight the Train station and build a very significant maybe even two large buildings.
That would involve at the increment of -- incremental taxes, real estate taxes, et cetera which would have allowed a pirate to be created, which is a financing scheme, which would have given the government a very substantial amount of money, billions of dollars to transform Penn station, okay. It looks as if, now one of the things that we needed was we needed some help as you could imagine because it was a fairly massive undertaking and an enormous public good. It does not appear that that plan is going to go forward or that it’s feasible for lots of different reasons although we are ready and willing to do it.
So if that’s the case and if that land is not going to go forward, we are going to go quickly to Plan B. Plan B is taking Penn Two, which is a 1.6 million square foot building, skinning it, putting on a new skin which will allow for basically floor to ceiling glass, et cetera. New lobbies, entirely new arrival, new mechanical systems, et cetera, plus adding how many feet, David?
Better part of 300,000 square feet.
Plus adding the better part of 300,000 square feet in a bustle, which would sort of like a doughnut encompassed the lower floors of that building, okay. That is a much more modest proposal than we had that I just talked about. And it's -- we're going to go to it and we're going to go to it quickly. That will involve a sum of money we haven’t even announced yet the plans -- the capital spend or the returns for that on that -- but they are certainly well within the ability of Vornado to finance, totally off our balance sheet today with, no dilution, no investors, et cetera. And so that will also be a plan that will start in a couple of years, I guess, and finish in a couple of more years.
Great. Thank you.
Hang on. I'm not done yet, okay. I apologize, but I’m not done yet. Obviously, after a long pursuit, we implemented and designated the developers that actually we bought a long-term leasehold on the Plan Building and that's under heavy construction, now we will create in their 700,000 odd -- basically 700,000 odd square feet, but what I believe and we believe will be the best creative office space in town plus a 120,000 square feet of train retail. Going across the Street, I think I wrote about what our thinking was on Penn Plaza, and we had numerous other sites, so we're very excited about it.
Now, it’s not impossible that development and I think by the way Penn One and Penn Two, the development and the spending there is extremely modest in relation to the returns and results, but the rest of it is going to -- is pretty go decent -- I mean if we tear down the Hotel Pennsylvania that's a big project. So it's not impossible that the public markets don't like developing. And it's also not impossible that we might do something about that, what might that see, well, we make split up into a development company and an income company. I just don't know it's very premature.
Let me say one thing about development. This is turning out to be a longer answer than our prepared remarks and I apologize for that. So, we're very proud of the two children that we born over the last couple of years, Urban Edge and JBG Smith. Now the JBG Smith is interesting because it's attracting a fair amount of attention recently over the HQ2 situation. Nobody knows how that's going to turnout except I guess one man, those how that's good for now. Now I think and I've said this couple of times, the key to, the exciting thing about JBG Smith is that it has 18 million square feet of development rights in the best markets on the best land already paintwork inside their inside their investment.
The one thing that HQ2 is doing is that highlighting for the investing public and the real-estate public the scale, size and quality of the development opportunities that it has because it is leading contender for HQ2 that's certainly a validation. So JBG Smith is going through the development company and they are going to build 18 million square feet of brand-new, perfectly designed perfectly located amenity rich pattern. And we know one thing as we learn when we did the backward brokerage down there that this new product, trumps old product every day, so that sort of what's going on at Penn Station, Michael.
And the next question comes from Jamie Feldman from Bank of America. Please go ahead.
I guess speaking with the Chairman's letter. We get a lot of questions here on footnote 5 which talks about potentially seeding a core fund of funds with Vornado's highly sought after assets. And then Joe starts that maybe you should separate retail into a separate entity. I know you kind of touched on that in the last answer, but could you provide more color on your thoughts regarding those two ideas?
So let's start with the obvious, the opinion of the room is that the office companies and all of our brethren are selling at a very substantial discount NAV. Everybody is complaining about it. Every CEO that I know that I talked to is complaining about it. Our shareholders are complaining about it. Everybody is complaining about it. Now in my letter I tried to comment about my thoughts about that.
So what I started out with this is, is that let's just think about the REIT model for a second. So in the REIT model, we have an industry that has grown from Kimco's IPO to today to a trillion dollars of equity, and probably something like $2 trillion of assets. Well, that's enormous growth and that's a very big industry, but it only has a 10% market share of the commercial properties that it could owe and that 10% market share has not grown for years and years and years and years.
So the obvious is, is that 90% of investors that one own commercial real-estate office building, shopping centers, hotels etcetera to own them in a non-REIT format. So that's a very interesting starting point, okay. The second starting point is that public, now the stock floods away, and right now we are at a discount NAV, which doesn’t feel as good, but and that’s going to change over time. Believe me, the recycle -- prices are going to cycle for sure, but right now there is a very large discount and it's quite okay.
So, the observation is that public shareholders are willing to pay $0.75 or $0.80 on the value of a real estate asset, investors, pension funds, LPs etcetera, 90% of the investors in the world are happy to pay par or even a 102% or 103% of par, and they have long 20, 30 year points of yield. So obviously I and everybody else that I talked to in the management side of things are not happy. So what are we doing about it, well first thing is that in our industry one guy will find back stock, two, or three or four -- one day -- two or three or four others when are basically running their businesses, okay.
Now we are I think neither of those without getting into stock buyback, maybe we'll do that later. But we have been -- I think we’re the only public traded real estate Company that has been mixing up or mix of assets. So over the years we had sold out of the medical business making a double-digit return, we sold out of the mark business, making a double-digit return but that’s the misnomer because out of the mark business we got theMart building in Chicago and so that’s probably the single best real estate, best - last 20 years, so the numbers are extraordinary.
We also spun off Urban Edge. We also spun off JBG Smith, okay. So we are doing things, we are mixing up our businesses. Now it's pretty obvious that what I believe is softness in retail is what is hurting our stock books, lot of people say it's me, okay. Well I take full credit for that and maybe a lot of people think that you why should the problem is I haven’t appointed a success or the board hasn’t appointed a success yet, okay. That may will be -- what I can tell you that in my opinion, the softness at retail is the biggest issue in Vornado right now.
So I think Joe suggesting, which he made years ago and I sort of hung out there as an idea is that if we separated the strip retail and we separated Washington, we separated Washington for two reasons the first was that it was not performing well and it was trading our stock down and the second is we thought it would perform much better with a world-class management team as a standalone company. So why we don’t we do the same with retail. I will tell you, I am dying to find out what retail would trade at from a transparency point of view as an isolated business.
So anyway, so that's the thought and we are considering it, okay, I said in the letter, we are not done yet and we will be most done on churn that create value, shareholder value at. Now with respect to comment about, seeding a core fund, if you just go through the math and you go for what I say and given what you will know that the industry obviously our assets in the hands of a core fund with a different investment loop would be worth a lot more than they are today. We’ll see. Thanks for the questions.
And just a quick follow-up, I mean, do you think there's economies of scale of having retail and office together in New York?
I think there's economies of scale of having the same management team we're on it.
And our next question comes from Steve Sakwa of Evercore ISI.
Couple of my questions were asked and answered. But I guess just a couple of quick things, Steve. Just to 220 Central Park South, I know they were kind of getting closer to completion on that asset. Now I was just wondering, if you could help us think through kind of the rest of the capital spend and then maybe when should we start to think about closings in capital coming back to Vornado? And then secondly, if you could just touch a little bit more on the retail and kind of maybe what your expectations are for just kind of trends in leasing spreads over the balance of this year and in the 2019?
Steve, how are you? We have only a few apartments left, can I sell you one?
Sure. I’ll come to talk to you later.
Okay, good. All right, so 220 Central Park South is proceeding apace, it is aesthetically and financially the best project that ever been done in New York and probably -- in New York and therefore in the whole country. The numbers are terrific and what it looks like a terrific, now you have nothing to do one after none -- give a call and I'll have somebody take you through. We will begin closings in the end of the fourth quarter of this year. We are not releasing information for competitive reasons and I think that's absolutely the right thing to do. The only information that we have released is two pieces. The first is I have said repeatedly that our sales are will be -- well in excess of our costs. So we’re into -- we’re well into profit already. And the second is, if you look at the NAV that we published in the fourth quarter materials is a number that projects what we expect the cash build from 220 to be. What was your other question, Steve, about retails?
Yes. I just wanted to get, I mean obviously you had some roll downs this quarter, but you said if you back out the one lease. They were marginally positive, just without giving maybe specifics. What do you sort of think that rollover would sort of look like on the balance of lease income to this year and maybe in the 2019 and how people sort of think through sort of the downside or maybe we're getting closer to bottom here? How should we just be thinking about those rollovers over the next say, 18 months?
The only thing that matters is three things, Steve. Number one, the locations that we have and the quality of this retail is the best in the world. There will always be a Fifth Avenue. There will always be a Time Square, okay. The second thing is that our income is protected by long-term leases on our Fifth Avenue and our Time Square property from high quality tenants. And the third is that, we have said repeatedly that our projections show and we are guiding that our income will not go below $304 million cash from retail. So, there's going to be people going out, people coming in and that's the bottom that I see, okay. With respect to the details of it, I'm not a position to give you that.
And your next question comes from Vikram Malhotra. Please go ahead -- from Morgan Stanley.
Two quick questions. Just first one retail. So I understand sort of the 3 million or 4 million of floor. Am I correct in assuming if we look into next year, given this is Sephora, Levi's lease, some of the leasing you did this quarter. We should expect a nice pump in that cash number next year.
Joe, help?
I think he is asking about 19, we expect it to be positive, but we are not guiding to that just yet.
Okay, and then just on the non-core sales and maybe two quarters ago you outlined a bunch of non-core assets that you would start to look to sell, would generate an excess of billion dollars. Can you maybe just give us an update sort of on plans there and timing?
Generally speaking, we are in the markets and active on about half of that, okay. The remainder of it is some public security which doesn’t include any of the public securities by the way. The remainder of that those assets are either public securities that we have chosen not to execute on or that have time delays such as assets, such as loans which have the maturity data at the end of this year or at the end of next year or whatever, or something like Lexington -- not Lexington, NAREIT, which we have tax protection as you probably all know. So, we are in the market and half of those and it's going to be slower going. This is not just a single trade. So, we expect that cash to come in over the next year or two.
And the next question comes from Daniel Santos from Sandler O'Neill. Please go ahead.
It's actually Alex on for Dan. So, one, I appreciate your success and comments that you discussed earlier. My two questions are on the development side, Penn Station certainly, there has been no shortage of political noise around the project from between the governor or the mayor. You've outlined a pretty bold redevelopment plan in the chairman's letter with sort of options for doing more for that part of talent. How much of your undertaking is needs the governor and the mayor to play ball? Or everything that you outlined you can undertake on your own without those two having to reconcile their differences there?
As you would expect we must plan the business to be able to function on our own. So, we own the up ground -- we own over ground -- we own the real-estate above ground. Our plans are to execute our development plans with no assistance from the governments or what have you, okay. We don’t need that just like any of the location. However, since Penn Plaza is a unique area and the Penn Station situation is very interesting and very important from a community point of view or political play view and a business point of view, there are potentially other things that we could do improve the situation, okay. So while we pursue those, we also pursue Plan B, okay. If I had a handicap it my guess is Plan B is going to be more actionable then Plan A.
Okay and the second is in your letter, you also mentioned what JP Morgan is doing, the redevelopment of their 270 Park. You for years talking about Manhattan tilting west and tilting to the south. Does what Jamie is doing at 270 affect how you think about future reinvestment for the Company?
No, we have multiple children, we have multiple assets on Park Avenue et cetera and we love all our children equally. I think what Jamie did was stunning and courageous, and I think it speaks volumes do A, the fact that Park Avenue is still Park Avenue. And B, that 50 old buildings don’t work for high tech build companies like they are bank, okay.
So what we think is the most important thing is that there is just doesn’t affect demand on the west side. There is still enormous amount on the west side at very substantial rents. The difference is, is that a tear down on Park Avenue and we think we have at 350 Park, we have the single bid. That’s example or the best opportunity requires rents which are very substantial and quite a bit higher than the west side. So each of those districts and submarkets will function, and I think with what’s going on in New York both of those -- both the mid-talent, the traditional mid-talent sub-market and a new merging west side markets will both drive enormously.
And the next question comes from Nick Yulico of UBS.
Just want to go back to the Forever 21 lease. David, I think when you said that, it was a five year term and you thought that was attractive since the Penn Station area gets revitalized. You would be able to roll that lease in five years. But what I am wondering is whether you actually had retailer interest in a longer term lease because I think there is as a perception out there that retailers continue to go for shorter term deals?
Forever 21, Nick, in fact their preference would have been to do a longer term lease. We were the one who and we started the conversation with them, told them that we want to eliminate to five years and that’s for two reasons. As I mentioned in my prepared remarks; one, because the District continues to improve, we see continued growth in that marketplace; and two, that building and that piece of land on 34 Street which run through the 33rd Street, we also own another piece on that block and several others, we see someday as a potential development side.
And just following up on that deal, it looks like that the roll down there alone on that lease was that could have been 35%, 40% on a cash basis. I mean how should we think about the risk of another roll down of that size on the next couple of years based on your lease exploration schedule or any retailers that you might be willing to get us early in your buildings?
I mean it's going to depend realistically space by space in the portfolio. Just as the balance of the space is that came up for this quarter all which were in the Penn Plaza District had roll ups. We told you in the past, we see a number of roll ups in the portfolio including space in the Penn Plaza District, including space on Fifth Avenue. We see some of the spaces that are coming up over the next couple of years where they maybe some roll downs primarily on Madison Avenue.
So look, first of all we’ve said that the income is not going to go below $304 million, okay. That contemplates the roll downs that we expect, the roll ups that we expect and the vacancies that we expect and the move outs that we expect, okay. That's projected out for a period of time. That's the first thing. The second thing is, there are plenty of under market rents in our portfolio, so, for example, just take Kmart. So we have probably, I don’t know 300,000 feet of Kmart left at $30.50 a foot and I think we showed you at 770, what can happen in that space.
So there will be roll downs, there will be move outs. We’re prepared for them. This is a business which has $1.5 billion of NOI and $2 million or $3 million roll down here is part of the business. We’re confident in our $304 million number and we're also confident in the quality of the real estate that we have. This is going to cycle out. Everything will be fine.
And the next question comes from Jed Reagan from Green Street Advisors.
You mentioned cash same-store NOI growth this year would be nicely positive, which seems more upbeat than the kind of flattish comments you provided on the last call, and -- so I guess, has something changed? Was that a comment for New York City specifically? And then I think you put up 5% to 6% for the New York business this past quarter, so just wondering if that we should expect that to decelerate over the rest of the year kind of how to think about that?
So we strive to be respectable. Do you get it?
Not following you exactly.
That’s the way you described our earnings in your $0.02 remarks overnight, okay, so which we kind of chuckled over because we thought that our earnings was spectacular and now if the spectaculars are better for than respectable.
Fair enough.
I think that the way we have described that we took a whopping for the word, flattish, in the last call. Now, we were trying to tell our investors what to expect, and I think that was lot of people thought that was an inarticulate way to do it and we agreed. So, we tried to improve it a little bit by saying, GAAP and we expect GAAP to be flat, although cash to be up, when I say nicely smartly, okay? So, we're not defining nicely or smartly because we don’t give guidance, but we’re trying to put parameters around, but we believe that notwithstanding the blow out quarter we had in the first quarter, the balance of the year will end up at the end of the year with the flat GAAP.
Okay. And that applies to New York, specifically business?
No, no. That’s the entire business -- that’s the entire business, one pluses, one minuses, all of which that are out there. New York office continues to roll along in very good shape.
And looking at out to 2019, any retail move outs your expecting at this point?
No, I don’t think I have that information at my finger tips right now. We have one move out in the Fifth Avenue complex and that's the maximum duties as our store at 689 Fifth Avenue, which we believe is under market. But other than that in Penn Plaza -- I am sorry not in Penn Plaza, in Time Square and in Fifth Avenue, the answer is no other than that one is Arab store. In Penn Plaza and the rest of the place, there are small move outs and small moves in to all over the place, it's a large portfolio.
And there is one more from me. Steve, you mentioned early on the call about potentially splitting up into your development company and income company. Can you just elaborate on that a little bit and how you think about putting up assets between those two entities? I mean, would there be just a pure development company potentially?
Jed, I really can't and I'll tell you though, but I do make the observations, and you guys are the architects of this that the public market doesn’t like development, okay. For lots of different reasons all of which are right, but they are not right. And so we believe that in Penn Plaza, we have to do development because that's the nature of the assets. JBG Smith has to do development because that's a nature of the more land that they have.
So what I'm saying basically is that developing is not a business that can be measured quarter-to-quarter, but the objective of it is to end up with a series of brand new perfectly designed, perfectly located building. So it's basically it's important.
Now if the public markets don’t like development and we are going to end up with a stock price that's going to be dinged for a long period of time because we have to do development that doesn’t make intellectuals a sense. So we'll have to just figure that out. So all I'm saying is that something that we are aware of and it's something that our counsel loans, we are hard at work on what the next steps are to close the gap for Vornado.
Our next question comes from the line of John Guinee from Stifel. Please go ahead.
This has been intellectually very stimulating. By the way there is just one guy down at Baltimore who just loves development, okay. Question, if you woke up tomorrow and found out that you were a stock not a collection of real-estate assets, and NAV was not evaluation metric and was never going to be evaluation metric anymore, and it all going to be about cash flow and cash flow growth. How would you run your business differently?
You've outsmarted with that question. I don't know. I don’t think we would run it any differently. Another words, we are in the value creation business through the media of real-estate, and I don’t think we would run it any difficultly.
Our next question comes from the line of Michael Bilerman from Citi. Please go ahead.
Steve, it's a follow-up. As you have to think about the variety of options that you sort of look at out on the call at this development and income companies splitting at retails, seeding a core fund or funds with your assets. When you step back, how does sort of a privatization given all of the private capital is out there? Or a strategic public-to-public merger which has been increasing of late in the REIT sector, how do those options sit alongside these other opportunities that you are examining?
Michael, of course, they are on the blackboard and of course they are -- as we do, we consider all the options, but I have no comment beyond that.
And then just on this core fund idea, I guess how does that create value for Vornado shareholders other than emulating the fact that the assets have an NAV value beyond how does putting them into a fund and then that fund going out and acquiring assets at market prices? How does that ultimately derive value in your view for Vornado shareholders?
Michael, I am not prepared to answer that -- I am not prepared to get into the complicated workings of an answer to that question here.
Just maybe I wasn’t sure how the that idea sort of would be executed, whether it’s the net private format or whether it's similar to the fund that you created, coming out of the recession or you went out and bought assets, but instead of putting cash in, you’ve put your assets in for your equity. I just wasn’t sure whether that was contemplated in the public vehicle or a private vehicle, where else going with it?
This is all premature. These are glimmers of value creation ideas and I can’t get into a debate or dialogue with you about execution detail.
And your next question from Jed Reagan from Green Street Advisors.
Hey guys just a quick follow-up as well. In the shareholder letter than again earlier Steve you talked about the potential ground-up development at Two Penn Plaza using transferred air rights, which sounds like maybe that’s the likely scenario at this point. But can you just talk a little bit about the ownership of those air rights and maybe the mechanism by which Vornado could obtain them, if you decide to go with that, I guess Plan A?
The air rights on Two Penn Plaza and Madison Square Garden are a single tax swap, in fact when you go into Madison Square Garden we manufactured the chilled water for their air conditioning system, so, we’re compadres. When the original deal was created and I say this sort of carefully, the original grand Limestone Penn Station was torn down, which by the way as we all know was the reason that’s the landmark laws were instituted in New York in any event.
So at that point, there was an agreement to split the air rights on that block and that agreement has been modified a couple of times over the years and it still exists. So we owned the air rights together with Madison Square Garden and a proportion that is something we’re not going to get into today, but it's not -- totally not totally even but it's not that far from even. But in addition there are -- those air rights are qualified for a transit bonus which consist probably about 1.5 million, 2 million square feet otherwise little over 2 I think.
Little over 2 million.
So basically of the 5 million square feet of air rights that I speak about, 3 million of them are owned by Lee and Madison Square Garden. And then 2 million of them would come by virtue of transit bonuses, which would have a modest cost because the private party puts up the money to improve the transit in the neighborhood. So that’s the math.
How do you guys account for that in your internal NAV, if at all that the one you’ve published periodically?
Zero.
Okay.
Air rights have -- they may have a theoretical value to some people. But to me, they only have value when they’re actionable.
Right, that makes sense. And just one other one and you talked about the life science at Farley potentially go in that direction. Could that add to the cost of the project? And how could it expect may be impact expected economics? And would that necessitate bring in another partner?
Jed, good morning. It’s David. No, there is -- there will be no reason to bring in another partner into this transaction. We obviously are exploring life science industry and are walking a number of those tenants through building, in fact, the next month, actually later this month in May. We, of course, also are talking to what I will call the traditional tech companies that fully appreciate and understand the unique nature of this piece of space.
As we look at the building, you think about the asset, it is effectively a 67 storey building that is lying on its side as a five storey building. I mean an idea of the extraordinary footprints that this building can provide to tenant as well most importantly, the indoor/outdoor space, the roof space on this building can provide the better part of two acres of roof space, again, similar to what we learned when were out in Silicon Valley.
In terms of the incremental costs for doing life science, we've basically budgeted those cost, we're not going to get into that today on the call. There are some incremental costs in terms of venting and air systems. But obviously that's all only going to make sense to the extent the life science tenants are in fact to pay rents higher than some of the traditional tenants that we see for this space. Based off of our market knowledge being the Cambridge market and other areas, the life science tenants in fact seem to be paying significant premiums for that space.
There are a couple of REITs that specializes in that product type. There's one or two that has that product type varied into larger companies. Our observation is the math on that product type is satisfactory to even better than satisfactory, and it’s even better than conventional office. So the answer to that is that we've accounted for all that. We have not before even before had assets that we thought were attractive to that industry. We now have and we're pretty excited about that actually. In terms of you said something about bringing in a partner, we have no need nor interest in bringing in a partner.
Would you built in the flexibility to go to convert it to lab even if you did go with your tech tenant?
The answer to that is, I don’t know.
Thank you. That concludes the question-and-answer session. I would now turn the call back over to Steve Roth for final remarks.
Thank you everybody. We are pretty proud of this quarter and we are happy to share all of our thoughts however broad they may be with you, and we look forward to next call in three months. Thanks everybody.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.